Q2 2023 Jackson Financial Inc Earnings Call
Good morning, everyone and welcome to today's conference go talk to Jackson Financial Inc. Q2, 23 earnings call. My name is Ellen and I'll be coordinating the Cooper today at the end of todays presentation there'll be an opportunity to ask a question if you'd like to ask a question. Please press star followed by one.
<unk> on your telephone keypad to join the question Chi.
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I would now like to cool technical write back to Liz Werne head of Investor relations to begin.
Please go ahead your nephew about Hey, good morning, everyone and welcome to Jackson second quarter earnings call. Today's remarks may contain forward looking statements, which are subject to risks and uncertainties. These statements are not guarantees of future performance or events and are based upon management's current expectations Jackson's filings with the SEC provide details on important factors that in.
May cause actual results or events to differ materially except as required by law Jackson is under no obligation to update any forward looking statements if circumstances or management's estimates or opinions should change today's remarks also refer to certain non-GAAP financial measures. The reconciliation of those measures to the most comparable U S GAAP figures.
As included in our earnings release financial supplement and earnings presentation, all of which are available on the Investor Relations website at investors <unk> Jackson Dot com.
Joining us today, our CEO , Laura pre scorn, our CFO Marcia, Washington, our head of asset liability management, and Chief Actuary seeds in Europe , our president of Jackson National Life distributors, Scott Rowe mine, and President and Chief Investment Officer, a P. P M. Craig Smith.
At this time I'll turn the call over to our CEO Laura pre score.
Thank you Liz.
Good morning, everyone and welcome to our second quarter 2023 earnings call.
During today's call, we'll provide an update on our quarterly results and outlook on achieving our financial targets, including our capital return goals.
September of this year will Mark Jackson second anniversary as an independent company.
Over these last two years, we have consistently returned capital to shareholders every quarter.
In the second quarter, we continued to build upon our proven track record by returning $100 million through dividends and share repurchases.
In addition to our earnings release, we announced board approval for a third quarter common dividend of 62 cents per share.
By the time, we reach our upcoming anniversary in mid September we expect to exceed $1 billion in capital returned to shareholders, representing nearly 40% of our initial market capitalization.
Looking ahead.
We remain committed to delivering on our 2023 capital return target of $450 million to $550 million as we continue to focus on capital generation and long term financial strength.
Based on our progress through the first six months of the year, we are reiterating our 2023 key financial targets.
We ended the second quarter with an RBC ratio up from the prior quarter and within our target range of 425% to 500%.
We took actions during the quarter to optimize required capital at the operating company selling.
Selling certain limited partnership assets from Jackson National Life Insurance company.
To Jackson Financial Inc, and.
Marcia will provide more detail on this transaction later in the call.
We maintained a strong holding company position with nearly $1 $5 billion in assets.
This includes cash and highly liquid assets of nearly $1 billion with additional liquidity expected over time from the sale of limited partnership assets, along with future operating company dividends.
We are pleased with our current holding company position, which allows us to meet our November debt maturity and our current year capital return target.
And provides a strong asset base as we head into 2024.
As discussed in the first quarter statutory reserving and capital requirements are subject to flooring at the cash surrender value or CSB and the economics of our business are not recognized through our capital position.
We are actively engaged with our Michigan regulator and are optimistic we will develop a long term reserves and capital a solution that will better reflect the economics of our business and facilitate more efficient risk management.
Turning to our second quarter results.
Net income was $1.2 billion, reflecting the benefit of a rising equity market and higher interest rates.
Adjusted operating earnings were $3 34 per share an increase from the prior quarter due to the rising equity market and a 4% increase in average annuity account values.
We remain confident in credit quality across our investment portfolio and have updated the enhanced disclosures provided last quarter with particular emphasis on commercial real estate.
We updated the internal valuation of our entire loan portfolio for current property fundamentals and cap rates.
The loan to value of the portfolio has increased but remains below 55%.
You will see commercial office exposure below 2% of our overall investment portfolio consisting entirely of first mortgage loans rated at the two highest rating levels, Sam one and see them too.
Our conservative underwriting and high quality investment portfolio remain a core strength of our business.
Retail annuity sales totaled $3 $1 billion for the quarter and have been stable the last few quarters.
Variable annuity sales were flat from the first quarter, while reiland sales gained momentum.
Fixed annuity sales remain relatively modest as our pricing reflects our prudent investment approach.
We remain focused on offering products and solutions that meet the long term retirement needs of financial professionals and their clients.
Our most recent enhancement to the Jackson market link Pro Riley suite reflects product innovations that have been embraced by the market.
<unk> sales reached $540 million in the quarter up from the first quarter and still climbing.
We set a record for wireless sales in the month of July and continue to benefit from our distribution strength as we grow in this space.
Our increasing success in the Reiland market has made a positive contribution to our distribution expansion and diversification strategy.
We've added over 3200 relationships with new or re engaged advisers since introducing this suite of products in October of 2021.
This includes nearly 1200 relationships in the second quarter alone.
Following the launch of our enhanced <unk> suite in early June .
We also benefit from a broader consumer demographic as the average age of Orion policyholder is five years younger than our traditional variable annuity buyer.
Overall, the awareness of annuities as a retirement solution continues to grow and we saw increased evidence of this trend in the recently released committee of annuity insurers survey conducted by the Gallup organization and Matthew Greenwald and associates.
87% of individual annuity owners agree annuities are an effective way to save for retirement.
These surveys not only heightened awareness of the value of annuities. They serve as a tool for key stakeholders in Washington, when developing retirement related legislation and regulatory policies.
In July .
Our leadership was once again highlighted in Barron's annual 100, best Annuities Guide.
Jackson had four products featured across three categories. This year, including our elite access advisory too and perspective to variable annuity products and our Jackson market Link Pro <unk> suite, which was highlighted three times as a leading product providing valuable market protection for policyholders.
Yeah.
Overall, I remain pleased with our momentum towards our strategic and operational goals during the second quarter.
We continue to maintain a strong balance sheet and remain committed to achieving our 2023 key financial targets.
Our focus on product innovation led to the successful rollout of an enhanced Riley suite and an expanding distribution network.
As a leader in the annuity industry, we will continue to serve financial professionals and their clients needs for reliable retirement savings and protected income solutions and remain steadfast in our commitment to sustainable growth and long term value creation for all of our stakeholders.
I'll now turn it over to Marcia to review our numbers for the quarter in greater detail.
Thank you Laura I'll begin with our second quarter results summary on slide six.
Our adjusted operating earnings of $283 million are up from this year's first quarter as the benefits of higher equity markets are coming through fee income, but earnings are down from the prior year's second quarter as described on the slide.
Similarly, our second quarter adjusted book value attributable to common shareholders was up from the first quarter due to nonoperating net hedging gains and healthy adjusted operating earnings.
We've once again included additional general account investment portfolio details in the appendix of our earnings presentation that provide breakdowns on both U S GAAP and statutory basis, excluding the assets reinsured to third parties, our funds withheld assets.
The information in the appendix provides helpful insight into our highly rated and diversified commercial mortgage loan office portfolio.
As you can see Jackson remains conservatively positioned with only 1% exposure to below investment grade securities on a statutory basis, excluding funds withheld assets.
Slide seven outlines the notable items included in adjusted operating earnings for the second quarter.
Results from limited partnership investments, which report on a one quarter lag were $23 million lower in the current quarter than they would have been had returns matched our long term expectation.
Similarly in the second quarter of 2022 limited partnership income was also modestly below the long term expectation, creating a comparative pre tax negative impact of $12 million.
The current quarter also included a $25 million pre tax allowance for reinsurance losses with no similar items in the prior year's second quarter, bringing.
Bringing the total year over year, comparative pretax impact to negative $37 million.
In addition to the notable items the second quarter of 2023 benefited from a lower effective tax rate as compared to the prior year's quarter.
Second quarter 2022, pre tax operating earnings were higher than the current year quarter.
Meaning that in the case of tax benefits that were similar on a dollar basis. In these two periods. The current period had a larger reduction to the effective tax rate.
Adjusted for both the notable items and the tax rate difference earnings per share were $3.54 for the current quarter compared to $4.52 in the prior year's second quarter.
This reflects the previously flagged increase N V a fixed option crediting rates due to the regulatory minimum requirement as well as the change in income from operating derivatives, resulting from higher short term interest rates.
Once again, we saw positive sequential trends as the earnings per share excluding notables in the first quarter of this year was $3 18.
Slide eight illustrates the reconciliation of our first quarter pre tax adjusted operating earnings of $305 million to pretax income attributable to Jackson financial of $1.5 billion.
Net income includes some changes in liability values under GAAP accounting that will not align with our hedging assets before.
We focus our hedging on the economics of the business as well as the statutory capital position and choose to accept the resulting GAAP nonoperating volatility.
For example, the market risk benefit or MRV calculations reflect the impact of interest rates from both the changes in the discounting of future cash flows, which we consider in our hedging.
As well as the impact of rates on assumed future equity market returns, which we do not explicitly hedge.
Because of this dynamic movements in interest rates will have a larger MRV impact than the associated hedging assets.
This means that when interest rates rise you would expect the net hedge result to be a positive.
And when interest rates decline you would expect it to be negative all else being equal.
As shown in the table the total guaranteed benefits and hedging results. Our net hedge result was a gain of $1 $1 billion in the second quarter start.
Starting from the left side of the waterfall chart, you see a robust guaranteed benefit fee stream of $781 million in the 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.
Consistent with our practice I'll guarantee fees are presented in nonoperating income to align with the hedging and liability movements.
There was a $1 9 billion dollar loss on freestanding derivatives, primarily the result of losses on equity and interest rate hedges in the quarter, where the S&P had a total return of nearly 9% and interest rates were up across the yield curve.
Movements in net MRV liability provided a $2 6 billion gain that more than offset the freestanding derivative movements due in large part to these same equity market and interest rate increases.
Unlike the statutory framework the GAAP reserves for variable annuity benefits do not have a minimum requirement and can become negative switching from a liability to an asset position.
This happened during the second quarter as the strong economic profile of our in force book led to a market risk benefit net asset of approximately $1 5 billion.
Non operating results also include $118 million of gains 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 accumulated other comprehensive income or a OCI in the funds withheld account related to reinsurance, 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.
Our segment results start on slide nine with retail annuities variable annuity sales are down industry wide compared to a year ago, but for Jackson's VA sales have stabilized over the past three quarters, and we remain an industry leader in that market.
Our total annuity sales are supported by Raila fixed and fixed indexed annuity sales, which are up meaningfully from the second quarter of 2022.
Overall sales without lifetime benefits as a percentage of our total retail sales increased to 43% in the second quarter of this year up from 38% in the second quarter of last 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 and raila and other spread products translated to nearly $600 million of non VA net flow in the second quarter of 2023.
In addition to partially offsetting that outflows in variable annuities. These net flows provide valuable economic diversification and capital efficiency benefits.
Importantly, our overall sales mix remains efficient from the standpoint of new business strain.
Looking at pretax adjusted operating earnings for our retail annuity segment on slide 10, although we are down from the prior year second quarter, we show positive underlying trends as demonstrated by the AUM growth in all of our annuity product categories.
Higher equity markets are benefiting our variable annuity count value and strong net flows are driving growth and raila fixed and fixed index annuity account values.
Furthermore, the positive momentum Laura mentioned for our enhanced roller suite positions us well for the future as we enter the third quarter.
Our other operating segments are shown on slide 11 for our institutional segment sales for the first quarter totaled $304 million in account values were $8 $9 billion.
Sales outpaced surrenders in the current quarter and pre tax adjusted operating earnings were essentially flat from the prior year.
Lastly, our closed life and annuity block segment was also relatively stable compared to the prior year.
Under <unk>, we will now have some additional volatility in this segment due to the quarterly experience update for future policy benefits. While this figure can be positive or negative in any given quarter. We would expect it to net to a small number over time you can see this in our financial supplement where the last five quarters ranged from a loss.
$16 million to a gain of $36 million and on accumulative basis totaled to a gain of only $15 million.
Slide 12 summarizes our second quarter capital position.
As Laura mentioned, we returned $100 million to our shareholders in the second quarter and remain committed to reaching our full year capital return target of $450 million to $550 million.
We were active in share buybacks during the second quarter, which totaled $1 4 million shares or $47 million.
As of the end of the second quarter, we had $439 million remaining on our share repurchase authorization.
Our variable annuity book continues to be in a very favorable position as measured by the projected cash flows of the block, which was further improved by the equity market and rate movements in the second quarter.
As we've discussed in the past this has led to a flooring out of statutory reserves at the cash surrender value minimum reserve, which can create an asymmetry between these reserves and hedging assets.
We experienced flooring during the second quarter as equity markets and interest rates rose, which drove losses on hedges with minimal offset by reserves released.
The strong future cash flows embedded in the book still remain however, statutory rules limit the ability to reflect the full economic value in our current results due to the conservatism in the CSP floor.
This flooring impact contrasts with the large reduction in our <unk> liability in the quarter, which as discussed earlier flipped into an asset position as there is no minimum floor concept and GAAP accounting.
In the quarter, we saw a further negative impact attack of approximately $400 million due to an increase in non admitted deferred tax assets, which now total $2 billion.
The RBC ratio benefited from a reduction in required capital our cow that resulted from higher equity markets higher interest rates and the sale of limited partnership assets from Jackson National Life Insurance company to J F I.
Earlier in the year, we decided to take actions to manage our limited partnership exposure down to a level more in line with our investment mix prior to our funds withheld reinsurance agreement.
We have taken this approach multiple times in the past to manage our limited partnership exposure given the strong underlying returns and have been successful with the execution.
We expect to sell these investments in coming quarters, but given the excess liquidity at the holding company level, we utilized our financial flexibility by moving these investments out of GNL IC, allowing for more efficient investing at the operating company.
Unlike previous quarters, where the CSV floor effect was most impactful to reserves as 2023 progressed, we began to materially experience flooring within our required capital level as well.
As of the end of June almost all of the 10000 scenarios used in VM 21 were floored at the cash surrender value, which is further into the tail than we have ever experienced.
This impacted statutory results because we increasingly had very little reserves or required capital to release.
However, this also means that we were building latent capital not just within Tac, but in the RBC ratio as well.
As of the end of the second quarter, we had cushion for potential declines in equity markets and interest rates that limits the corresponding increases in reserves and required capital.
This cushion along with the significant downside protection from our hedge portfolio.
Positions us well for stress scenarios.
As we discussed last quarter when dealing with the CSC floor, we can protect the upside exposure in the book through call options.
As markets continue to rise during the second quarter. These positions became increasingly more in the money providing substantial payoffs to help protect our tech in RBC ratio.
This money in this in the call option portfolio at the end of the second quarter gives us an improved RBC profile for further upside moves in equity markets. During the second half of the year should they occur.
During the second quarter, our hedge spend was within the guarantee fees collected this continues to be a tailwind going into the third quarter due to higher levels of interest rates as well as lower levels of volatility compared to much of the first half of 2023.
This has allowed us to purchase options at more favorable prices and with longer durations.
Our holding company asset position at the end of the first quarter was nearly $1 $5 billion, including nearly 1 billion of cash and highly liquid assets, which continues to be well in excess of our minimum buffer.
This was supported by our preferred issuance during the first quarter that helped to effectively pre fund our $600 million senior debt maturity coming in November , which we intend to retire at that time.
Following that retirement, we have no debt maturities until 2027.
I will now turn it back over to Laura for closing remarks.
Thanks Marcia.
As noted we've been highly engaged with our Michigan based insurance regulator regarding statutory reserve and capital requirements related to the cash surrender value floor.
We're seeking a long term solution that will provide greater visibility into the profitability and strong cash flows of our variable annuity business.
We look forward to continued progress and expect to provide you with future updates.
I continue to be proud of the Jackson team the performance of our business and our balanced approach to capital management.
A recent recognition in barron's and the positive reception to our recent Riley suite enhancements reflect this teams industry, leading distribution exceptional service and ongoing product innovation.
These core capabilities allow us to meet the needs of our distribution partners and their clients and deliver value to all stakeholders.
To our associates.
Thank you for your efforts and thank you for your unwavering dedication to helping people achieve financial freedom. So they can live the lives they want in retirement.
I'll now open it up for questions.
Thank you we will now enter all Q&A session.
A reminder, if you'd like to ask a question. Please press star followed by one on your telephone keypad. During our question queue. When comparing to ask your question. Please ensure that Youll device is a me too likely.
Our first question comes from Tom Gallagher from Evercore ISI.
Your line is now wait them. Please go ahead.
Yeah.
Good morning, FERC first question just to follow up on the go forward.
The markets continue to strengthen.
The mentioned that the call options.
Further on the money.
Would you expect.
If we add a repeat of two Q3, Q stronger equity markets et cetera, with the Florida reserves.
Wouldn't be much RBC decline.
Or would you still have some moderate level of RBC decline just considering.
What youre projecting.
Good morning, Tom Thanks for the question. This is Marcia here.
I think we have gotten ourselves.
So far into the tail that we had a nodal.
Responsiveness and the reserves and required capital that has meant that we call options and that protection has been very helpful to us as we completed the second quarter and position ourselves for the third quarter. So I think that that's correct.
Equity markets continue to climb.
We do have that call protection in place to help protect.
Our RBC position as we go forward.
Okay. Thanks, and then.
My follow up is just on the discussion with the Michigan regulator, but just wanted to get a sense for what are you I assume that some kind of negotiation, but what is your wish list because I look at the positive GAAP reserves, meaning it's in that asset now.
I think its several billion.
Non admitted asset and a DTA that I think you said was $2 billion.
We would be with the wishlist b to get all of that added back to attack because if you did I would assume your RBC might double or something like that.
What's kind of a realistic outcome what are you aiming to accomplish.
Is it fully aligned the economics, where you can.
With the movement in reserves looks more like gap or what do you think it's going to be some.
<unk> version of that.
Tom I think they are.
Rather than a wish list in terms of what form it takes so I'll just sort of start with what is our aim here. So we are looking for.
A solution that allows for better alignment between the movement in our liabilities and our assets.
And the key reason for that is sort of two outcomes and thinking of these as you know.
Important benefits on a go forward basis first is that that would allow us to make sure that our hedging is actually much more focused on the economic risks and that we're having to do less non economic hedging.
Against the framework element within the statutory framework being the cash surrender value floor. So I think that would create the opportunity for more efficient hedging, which is a great outcome in terms of the ability to.
Use a lesser amount or spend a lesser amount of the fees we collect.
For that purpose.
And then the second benefit going forward is that we're looking for something that I think will allow for the economics of our business to be more clearly recognized and reflected in our financial results. So that we just have more intuitive results for.
Anyone who is looking from the outside and try to understand how things are moving and why they are moving in the direction that they are so that's really our goal is looking for an opportunity to not have that sort of artificial floor in our reserves in a way that creates all of the sort of noise in understanding the results as well as creates the need for some non economic.
Hedging expense.
And the path to get there probably are many.
Those are the things that were kind of in discussion with at this point.
And sorry, one more if I could slip it in one would you expect to have this resolved one way or the other do you think it would be by the end of this year by the time you file your stat filings for 2023.
And this is this is laura.
At this point.
We're particularly focused on solutions that are durable over the long term and there is.
Even with being engaged with the regulators at this point there is a process that we have to work through.
So we don't have anything definitive to share at this time, we continue to push toward that long term solution.
Yeah.
Specced in forward to giving.
Future updates and additional disclosures.
Okay. Thanks.
Thank you. Our next question comes from Ryan Krueger from Stifel. Ryan. Your line is now eight then please proceed.
Hey, Thanks. Good morning, My first question is.
Can you quantify.
Yes, there was the required the requirement for variable annuity reserves to be Florida cash surrender value.
The magnitude of the impact that that would be in other words how much.
How much lower would your reserves fee or how far how much higher would your capital dynamic did that currently exist.
Sure Ryan this is Marcia.
It's a it's a little complicated because they're both an impact the cash value floor kind of creates an impact both on the reserves and the required capital.
So if there are no far whatsoever, there would be.
Definitely a lot much lower reserve requirement.
Accompanying that would be some higher increase in required capital. So today, there's the floor kind of impacts both the numerator and denominator.
The easiest thing to sort of point to as a just a context item is just looking at our <unk>.
Reserve for the benefit.
GAAP the MRP liability, which is actually currently in an asset position of about $1 7 billion.
Gives you a feel for.
The reserves related to.
Benefits on a more something thats, a little bit more economically responses.
Basis of accounting.
The other complication around casualty floor for stat is that it is.
Policy full policy calculation based contract and Ryder. So it's not a direct comparison apples to apples to the guaranteed benefit reserve on.
GAAP, but I think it's a good point.
Point of context, and just general view of the kind of magnitude that would be significant.
Yes.
Thanks, and then on the <unk>.
Alternative asset sales to the holding company Jeff.
The expectation on the timing of.
Now selling those assets to third parties and.
Yes.
As already been a process that's underway to do so.
Yeah. The processes has begun and our expectation is that we would have that sale before the end of the year.
Got it thank you.
Thank you as a reminder, if you'd like to ask the question. Please press star followed by one on your kind of thing he put.
Our next question comes from sneak match from Jefferies.
Your line is now open. Please go ahead.
Thank you could.
Could you help us with the quarter over quarter decline in required capital I'm, just curious like how much of it was driven by the equity markets being higher versus how much of it was driven by the lower capital requirements on the LP sale and maybe Relatedly. If you hadn't done the LP sale would you have still been in that.
$425 to 500% RBC.
Sure.
Sure Smedes. This is Marcia so maybe start with the second one first.
Without the LP sale, we would estimate our RBC would've been approximately at the lower end of the range.
When we look when we look at the movement in Macau over the quarter the majority of it.
Majority of it was due to market conditions, a strong equity performance and can move up in interest rate and.
A small much smaller piece would have been.
Ponant related to the <unk> sale.
Yeah.
Okay got it and then I guess on the Michigan thing can you give us a sense for how long you've been talking to them about this issue is this something that you know.
You started this year or has it been sort of an ongoing conversation just any color there would be helpful.
We've been looking at the issue itself and considering options for quite a while about something that began in the latter part of last year for our own internal analysis.
The discussions with our regulator has been this year.
We did some of our own work first to kind of bring forward.
<unk>.
Just the results of that so we can begin the conversation with some context for them, but the conversations with dish had been more this year and are ongoing.
Got it Okay, and then maybe just a bigger picture question when we talk about RBC.
This really wide range, which is I think a wider than most companies even VA companies use and we're always trying to estimate kind of where you land within that range.
It feels like there is some reluctance on your part to be more specific I will provide more specificity on the components of RBC, even though we get a lot of that information from your peers and so I just maybe wanted to understand.
Why you take the approach that you've taken clearly it has an impact on the stock. It's very important I think some additional specificity would be helpful. But I wanted to just get your logic behind that thanks.
Well I think it's essentially kind of connected with how you started the fact that that we have the wider range in place.
A function of the fact that we recognize that there is.
Likely to be quarter by quarter volatility in the ratio. So we set a range that was wide enough to be able to absorb that volatility.
And leave us within a range that we're comfortable operating in.
In that range.
So I think.
With the acknowledgment that there is volatility poorly in the RBC.
We're looking at the business on a longer term basis, we're looking at the fundamentals of the economic.
Future of the business and the cash flows that come off a bit and some of the quarterly volatility is driven by some unique elements in the statutory framework and we have just.
Felt that.
Some amount of focus on the detailed movements in a way detract a little bit from some of the larger messaging around.
The fundamentals and so we've just.
Because we want to look at it in a larger range of that way and we felt that that was an appropriate way to kind of communicated externally.
Yes, I mean for what it's worth I would encourage you to maybe think about <unk>.
Providing a little bit more specificity I think the long term view makes sense, 100%, but my guess is most companies have the same view of the business.
But just more color sensitivities that kind of thing I think would be very helpful. Thanks.
Thanks, I appreciate the feedback.
Yes.
Yes.
Thank you. Our next question comes from Alex Scott from Goldman Sachs. Alex Your line is <unk>. Please go ahead.
Hi, first question I had is on the RBC and comments you made on.
Yes.
98, I mean, it sounded like even in.
The tail scenarios.
That your Florida out of the surrender value I mean, that's.
That's sort of surprising just given.
Yes.
<unk> is supposed to be worst 2% of scenarios I would think that'd be a nasty enough outcome that the guarantee would have some value beyond just the surrender value on the policies.
Relatedly.
Understanding as the SAIC is considering changing that model that's producing those scenarios.
And that Theres been some field testing going on so I was just interested if you guys had participated in that field testing. If you think that will still be the case under.
Our new model.
Introduces more reval.
And it was what you're communicating basically suggestive of Youre really youre not having to hold a whole lot of capital against the VA is at all right now because.
That dynamic with with none of the scenarios, putting new beyond the surrender floor.
Sure.
Well I guess, yes.
Go back to where I started.
That's correct.
Phenomenon that we saw in the second quarter in particular with the continued rise in interest rates, coupled with the higher interest rate or excuse me.
Continued drive in equities, coupled with the higher level of interest rates that were in is favorable.
Favorable market condition kind of package that we haven't necessarily seen in quite the same form.
21 came into play given that last year when rates went up equities were down so those were kind of working against each other in that sense and so I think the natural outcome of current conditions would be that the flooring with push further out into the tail of the distribution and so you're right most of the.
Most of our full.
The scenarios that are Florida now so the flooring is not just within the reserves, but sort of deeply into that.
Wired capital Cte 98 tail as you were saying.
And.
Just again to kind of contrast, with what we were saying earlier.
On a GAAP basis totally different methodology of course, but there we are in an asset position. So I think it's not surprising.
To me are the consistency and sort of how you think about that that if we.
We work.
We work floored out.
That you would in theory.
<unk> seen reductions in our liability requirements similar to what Youre seeing in gap, but that just is something that doesn't doesn't work given the cash value floor and.
Youre right in that there is not a lot of required capital being held against it but.
On the flip side of that we're holding much higher reserves for holding reserves at the cash surrender value than what would really be imply by a cash value based.
A principles based framework, that's really just looking at the protection of the cash flows and as you say looking at those.
In the context of tail scenarios.
When it comes to the work that the FDIC is doing on the scenario generator. We are involved in that we've been very engaged in that work and have.
Participated all along with all of the NTIC efforts around VA reform.
To participate in field studies are engaged in industry groups and the likes so we're watching that carefully.
Little unclear yet exactly what the form of the final changes might take I think.
There's been some evolution in that project has moved forward or move through time.
A little too early to say exactly where that's going to go but I think you're right in saying that there is.
Intentional and there is.
Some more lower rate scenarios.
Probably in response to kind of the low rate environment that we were in historically and now kind of art in as much but.
There wouldn't be an intentional focus on more low rate scenarios.
And potentially a recalibration of the equity scenarios as well, but that's still taking shape. So it's too early to kind of.
Think about impacts or understand what the.
Final landscape will look like there.
Got it that's all very helpful.
Yes.
Maybe if I step away from some of these RBC dynamics and accounting.
Go back to your comments.
Your economic view of the cash projections is obviously benefit a lot from from higher equities and higher rates I think thats something that we haven't really had any disclosure on since around the time.
You all became a standalone public company so yes.
Interested I mean can you provide any detail around that can you help us think through what that looks like now and.
If that's the way to look at the true economics, it would be beneficial for us to understand where it's at maybe help us give a value of the company properly outside of some of these.
Headaches on an RBC with Cerner for us and so forth.
Sure Yes.
The disclosures that we put out initially and in our form 10.
Primary one I think that folks ask about it though the five year projection of distributable cash flow of course that is in our statutory framework.
So it would reflect any of the limitations or.
Unique aspects of statutory.
Accounting in that so what we have been.
Looking at it.
While we definitely want to.
Provide as much insight and help others get the greatest amount of insight into the business. We do think that the best time to update those will be just after we get our solution in place with respect to the cash valley floor. So we have a clearer picture of how.
We think capital will emerge as we move forward under that under that solution I think that'll be a lot more meaningful and it will be in a good opportunity to.
To refresh that information.
Got it okay, well stay tuned thank you.
Sure.
Thank you there are no further questions on the lines I would now like to hand back to load our preschool for any closing comments.
Thank you your participation interest are appreciated we thank you for joining us this morning.
Sure.
That concludes today's conference call everybody. Thank you very much for joining you may now disconnect. Your lines open up the rest of a good day.
Good morning take care.
That concludes.
Today's conference call everybody. Thank you very much for joining.