Good morning, and thank you for attending today's Jackson Financial First Quarter '22 Earnings Call. My name is Austin, and I'll be your moderator for today. [Operator Instructions]. I would now like to pass the conference over to our host, Liz Werner, Head of Investor Relations. Liz, you may proceed.

Good morning, everyone. Before we start, we remind you that today's presentation may include forward-looking statements, which are not guarantees of future performance or outcome. A number of important factors, including the risks, uncertainties and assumptions discussed in risk factors, management's discussion and analysis of financial conditions and results of operations and business financial goals in the company's 2021 Form 10-K could cause actual results and outcomes to differ materially from those reflected in the forward-looking statements. In this presentation, management will refer to certain non-GAAP measures, which management believes provide useful information in 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's CEO, Laura Prieskorn; our CFO, Marcia Wadsten; and our Vice Chair, Chad Myers.

Good morning, and welcome to our first quarter earnings call. This morning, we'll review our first quarter performance, reiterate our financial targets and speak to current market trends. This quarter, Jackson once again demonstrated its ability to navigate volatile markets from the business and capital management standpoint. Our solid operating results reflect the underlying profitability of our healthy in-force annuity book and our ability to deliver sales growth in choppy market through product and distribution diversification. Adjusted pretax operating earnings, excluding notable items were $463 million for the first quarter, up from the first quarter of 2021. Overall sales increased over the year ago quarter as lower variable annuity sales were offset by an increase in institutional sales, coupled with growth in 2 of our newer product initiatives, RILA and Defined Contribution. Total Retail Annuity assets of $242 billion were up slightly from the first quarter of 2021, but down 7% since year-end due to poor equity market performance in this year's first quarter. In addition to the equity market volatility experienced during the quarter, we saw a dramatic increase in interest rates. While higher interest rates are a clear long-term economic benefit to our business through lower hedging costs, this can cause a near-term headwind for our statutory RBC positions, which Marcia will explain in more detail. Over the course of the first quarter, we once again took advantage of multiple paths to returning capital and returned a total of $192 million to our shareholders. This consisted of $52 million in shareholder dividends and a $140 million in share repurchases, representing approximately 4% of Jackson's outstanding shares, including a $28 million repurchase from Apollo. We remain active buyers of our shares and view Jackson's shares as attractively valued. We are on track to reach our targeted capital return of…

Thank you, Laura. Turning to our results on Slide 5. Our adjusted operating earnings were down from the prior year's quarter. This is due to higher DAC amortization resulting from lower comparative separate account return, lower limited partnership income and higher expenses. As a reminder, we believe Jackson has taken a conservative approach to the treatment of guaranteed fees within our definition of adjusted operating earnings, as all guaranteed fees are moved below the line with no assumed profit on guaranteed benefits included in adjusted operating earnings. In the first quarter, adjusted operating earnings combined with positive nonoperating income resulted in a growing book value even after returning $192 million to shareholders in the quarter. Slide 6 outlines the notable items included in adjusted operating earnings for the first quarter starting with a market-driven acceleration of DAC amortization. As we previously highlighted, the amortization of DAC is a key item for our results given our annuity focused balance sheet and operating DAC amortization has multiple components. For clarity, our financial supplement reports these components as core amortization, which is driven primarily by our pre-debt gross profits of period, and any market-related acceleration or deceleration which results from the pattern of separate account returns over time as well as the DAC impact from our annual assumption review, which occurred in the fourth quarter. In the first quarter of 2022, there was market-driven acceleration of DAC amortization, resulting in $81 million increase in DAC expense in the quarter on a pretax basis. This was primarily due to a negative 6.2% separate account return in that period, which was below the assumed returns. In contrast, in the first quarter of 2021, there was a deceleration of amortization, resulting in a pretax $30 million reduction in DAC expense primarily due to a 4.6% separate…

Thank you, Marcia. While current market volatility presents challenges that impacted this quarter's results and has continued into the second quarter, our experience managing through many different market environments has prepared us for today. We remain committed to maintaining profitable growth, meeting our capital return targets and delivering value to shareholders. At this time, we'd like to open up the call for Q&A and turn it over to the operator.

[Operator Instructions]. Our first question is with Thomas Gallagher of Evercore.

First question is more of a mark-to-market expectation for hedging as we think about 2Q. I heard everything you said about Q1 and the differential with what happened to interest rates and the floored-out reserves. But if I look at, at least so far what's happened quarter-to-date into 2Q, I would imagine the equity hedge gain component would outweigh the interest rate negative mark, just looking at this, the magnitude of the equity market decline, and I would expect that whole issue with floored out reserves would actually become a positive in 2Q. First question, does that sound directionally right? And second one, if that is right, could you share with us some kind of sensitivity in sizing of if there is expected to be an RBC gain in 2Q?

Thank you for the question. I'll turn it over to Marcia to get us started.

Sure, Tom. So I think kind of what you outlined make some sense there in the sense that we would expect with the markets down, that would benefit us on the hedging perspective from our equity hedge position, whereas the continued increase in rates for -- so far into the second quarter would continue to kind of repeat some of what we saw in the first quarter around negative marks on interest rate hedges. On balance, that probably does favor the equity position results in terms of what that would do to the tax position. I note that there's also going to be impacts from equity movement and interest rate movements in the period or depending upon how the big quarter lands. But so far in the second quarter anyway, that will flow through to the required capital calculation as well. So there, you may see some, again, sort of weight towards the equity movement in terms of an increase in the required capital requirement on a net basis. It would be partially offset by benefits from higher rates, but the flooring doesn't have as much of an impact as that far into the tail. So the effects of the reserves certainly contribute completely to the numerator position in terms of what it does with our reserves, but a little less so, although on a limited basis, it applies well, but on a lesser extent when it comes to the required capital requirements given that's calculated further in the tail.

Got you. So is it fair to say you add all that up, and again with the caveat being if the markets were to close, where things are today, would you expect to have positive RBC build in the quarter? Or is it too involved to really determine that at this point?

Well, there are a lot of moving pieces, and it's going to depend on factors and how they play in together. I think all considered, we would probably anticipate some additional pressure on the RBC in the second quarter, but I know as we've remarked on earlier that we see some tailwinds that will catch up more in the second half of the year around the effects of Fed actions and what that does to the rates on the short end of the curve and the benefits that will play out there in terms of our overall hedge spend. But when it comes to the second quarter, just in general, I mean, certainly, it's true that currently not quite halfway through. So more -- certainly more to play out there. But it will -- we'll have to think too about not just where interest rates land and equities land, but the level of volatility and the sort of pass through that quarter as well in terms of what that does to the hedge fund. We have seen, I think slightly lower level of volatility in the second quarter so far. So that's kind of moving in a better direction. But still at a heightened level.

That's really helpful. And then just relatedly, if there is a little bit of incremental RBC pressure in 2Q and you were to dip below the 500% to 525% target range. Can you just remind us your views on sustainability of all 5x in common dividends, if you were to drop below that, and at what level you might have to reconsider capital return plans.

Sure, Tom. I think a couple of things to put out as a reminder, that we see the 500% to 525% as a target range. I think we've communicated earlier in some situations that we don't see the end of that being a bright line that indicates switch flips and we would turn things off. So we're comfortable, too, that, that also target that we set, considering normal market conditions. These conditions have been somewhat unique, and we would take that into account as well. But I don't think we see anything at this point that would change our capital return plans for the year given the market volatility and the conditions we've seen. And we wouldn't necessarily see an immediate change in our view, should we get below 500%.

Our next question is with Suneet Kamath of Jefferies.

Great. Just going back to Slide 12. Can you help us with that last bullet, just in terms of sizing those 2 impacts and a higher cost of hedges from market volatility and then the negative impact on interest rates. Can you just help us sort of dimension or quantify those 2 impacts?

Sure, Suneet. This is Marcia. I'd say they're roughly similar in size, not tilted heavily in one way or another in terms of how those 2 played into the results for the period. They were both impactful. It's the level of volatility that we had and needed that translated to in terms of our hedge spend being higher is something that was significant, but both of these are kind of, let's say, kind of similar size, I think, in terms of what they impacted in the quarter.

Got it. And then I guess when we think back to that slide where you talked about the benefit from higher rates, I think was Slide 7, is there any way that you can help us size kind of the impacts of some of these things? There's the immediate impact, which we obviously saw in the quarter, but then you have this go-forward impact that looks positive across the board. But just order of magnitude, is there any help that you can give us with that?

I don't know that I'd quantify it right now because it probably depends upon the path and so forth. But I think one of the -- I guess, to give a little bit of flavor to the component parts, I mean, one of the -- looks just back up and say, I guess, our equity hedging consists of both futures and options. So we definitely would see as rates go up, the potential for what is currently a cost in terms of our future carry to potentially even change signs and become a positive in the period given where the short end of the rates may end up. So as we move through the year, I think that's a significant item that could, number one, diminish from a negative to something more neutral, but could even change around and become a positive item. And then when it comes to options, I think key input to the cost of options is going to be interest rates and volatility, 2 important items there. So as rates go up that's certainly helpful to the extent that volatility settles down as well. Then that would compound the benefits that we would get there in terms of our hedging -- the cost of our hedging when it comes to the options component.

Okay. And then just my last one is just on -- from your supplement, you show your statutory operating earnings of $1 billion, statutory net income of $1.7 billion in the quarter. Just wanted to understand the difference between the two? And then what is sort of a sustainable level of stat earnings that you guys think that you can produce on a quarterly basis?

Well, let me start with the first part there. I mean, I think the difference between the operating earnings and the net income on a stat basis is going to be bringing in things like realized gains and losses is probably the primary different items. So I think that -- keeping in mind that, that's realized, not necessarily the unrealized component, which is going to be a big portion of the interest rate hedge losses over the period would have been unrealized in nature, given that we use swap disruptions there more so than that treasury futures. So that's probably the biggest contributor to the difference there on the stat side with the incorporation of realized gains and losses.

And on the sustainable stat earnings?

Yes. I mean I think in the past, we've said -- I mean, this is obviously going to depend period to period. But on an annual basis, we've talked about earnings that kind of approximate $700 to $800 -- $900 million in a year, excuse me. And I would say the key place to look there would just be the projections that we had out in Form-10 that gives you a sense of how earnings might evolve over a 5-year period under different stresses because it's certainly going to be market sensitive.

Our next question is with Alex Scott of Goldman Sachs.

The RBC ratio, I mean when I find what the overall including holding company cash RBC ratio just for the operating company. I come out to around 450 RBC still a lot of years. And I just wanted to find out like what is the process like with the regulator in getting extraordinary dividends. The reason I think people are a little more sensitive here just has to deal with a more limited ordinary dividend capacity. And so when we get to the end of the year, I mean, what sort of the requirements on the regulatory end to get an extraordinary dividend, right? Does that need to be up above the certain level. How do I think through the way that conversation goes to the end of the year if the RBC ratio hasn't gotten higher or maybe it's even gone a little lower.

Chad, do you want to talk through that process?

Sure. So in terms of extraordinary versus ordinary dividends, I would say, going back historically, most of our dividends over the last decade or so have been extraordinary in one form or another, be it at the Jackson National Operating company or the immediate parent flowing up to the ultimate parent. So it's a well-worn conversation with the regulator. I would keep in mind, too, that the way the regulator looks at, we talk about -- and the example you're using 450 on a regulatory basis, that's 900 because they're looking at a different lens than we are. And we've never really had any issues getting extraordinary dividends out in normal course with a well-capitalized company, which we certainly are. So I don't think that's particularly a gating issue for us.

Okay. And then second question was just these scenarios that everybody provides them it's kind of crazy that we have to ask before now. But we're all trying to understand what a significantly higher rate environment, combined with a materially lower equity market, what the net of that means as we think through the cash flow scenarios, we're all trying to sort of look at the different ones and maybe got one from another and add it to another scenario and it's off, right? So I was just if you could help us think through that. Have you updated that kind of scenario and looked at it yourself, like could you even help us think it through directionally positive or negative when we think through the net of those 2 things.

Sure, Alex. Yes, I understand the complexity of trying to mix and match because there's a lot of interactions. So appreciate that challenge there. I guess I would say, when you think to what the assumptions were that we had in our Form-10 disclosures and projections that we had there, we had -- those were based off of rates in the forward curve as of the end of 2020, and we assumed a 7% equity total return on an annualized basis. If you look at kind of where things are sort of from that point to the end of the first quarter, rates are clearly up materially relative to what we would assume. Those projections would have assumed we would have gotten to a point of rate that we were well beyond, and we would have thought we would have gotten to that highest point at the end of 2025. So we're certainly well ahead of where we were assuming we would be on that basis and on an equity return basis, if you think about the returns over that 5-quarter period through 2021 in the first quarter of 2022. We have annualized return of approximately 18% relative to the 7% assumption that we would have baked into those projections. So I think while we did have an official update on those items, I think if you look at where we sit today, logically, we would think both factors of rates and equities despite the fact that equities have come down some this year would be favorable relative to what we disclosed in our Form-10. So hopefully, that provides a little bit of frame of reference when you're looking at our last set of disclosures there and thinking about how events changed moving forward to kind of the current position.

Our next question is with Erik Bass of Autonomous Research.

I was hoping you could provide some more color on how the cost of hedging moved over the course of the quarter and where it sits today.

Sure. Marcia, again. Thanks for that, Erik. So we definitely saw higher hedging costs over the quarter. I think that's consistent with what we've said in the past that under period those high volatility, we spend more in some cases that leads to spending more than that guarantee fees that we collect in the period. But if that's necessary, that's what we do in order to protect the balance sheet. So I think what we saw transpire in the first quarter of the year was exactly that elevated cost of hedging. So we did spend a greater amount than what we had taken in, in terms of guarantee fees over the quarter for this period similar to what we've seen in the past, we've had other periods like that where volatility, is particularly high. And then naturally, when volatility settles down, the way it typically does for some period of time, that relationship can reverse and we would then expect to be in a position where our hedging budget will be fully covered by the fees that we collect.

Got it. And I guess, just curious, I mean, as you mentioned earlier, kind of for hedging costs, think of the 3-month treasury, which has started to move up. So I would assume that's a positive from where you ended the quarter and equity volatility is still high, but I don't know if that's kind of where it sits relative to your normal expectation. So I guess I'm wondering, as we sit today, are you in a better position than you were in the first quarter?

Yes. I think we are. The movement up in the short rate, as you noted, happened pretty late in the first quarter. So not enough time to kind of be much of a benefit for that quarter. But as you say in place now as we moved into the second quarter, and we've seen a little bit of moderation in the volatility so far in the second quarter. So I think both of those are moving us in a better direction in getting us a better relationship between our hedge costs at least quarter-to-date relative to our fees.

Got it. And then could you provide a little bit more color on how your hedging performed in 1Q? And I know you said in general, it performed as expected, but I wonder if you could give any more color on sort of the pieces in particular, did you see any impact from basis risk in the quarter given kind of the big moves in the market and some underperformance of active managers.

Yes. I guess touching on the basis risk point. We do have periods of time where we have basis risk movements that are either positive or negative, tend to see a little bit more basis risk in periods with higher volatility. And we did have a little bit of a negative basis risk result in our first quarter. I think not as significant as we've seen in periods past. But we did have a little bit there. We often have seen though that basis risk over time tends to kind of mean revert. So when we have periods of negatives, we tend to have periods of positive that occur as well in the following periods that allows a kind of mean revert. So that was quite manageable. I think when we just look at how the hedging performed and how we evaluate it, we tend to say that the best way to evaluate our hedge effectiveness is just through the lens of our risk limits and how the hedging is protecting our business relative to our limit, some of which are on a statutory basis. And so that is why we sometimes have an additional hedge spend to protect the debt. I think we referred to that in the past as our kind of macro hedge to protect our stat sensitivities against the risk limits that are set out in a statutory framework.

And if I could sneak in one last one. Just given the increase in interest rates, are you considering making any changes to your hedging program to lock in some of the benefit?

I mean I think what we would say is our main focus when we're setting our interest rate hedging position and just the risk profile of the business. So we don't typically make tactical moves or make stuff on them direction of travel with rates or equity. So we'll just be updating and resetting our hedge positioning as needed, the way we would typically do in a dynamic fashion when we look at the risk profile of the business. But with respect to interest rate risk that a lot of that is really connected to how much we might think we have benefits payments to make in the future, which is really on a first order basis driven by what the equity markets do. And then that kind of like have a follow-on to determine how much hedging we need on an interest rate basis. So we're going to be focusing on those as usual and making adjustments as we need to.

Our next question is with Ryan Krueger of KBW.

I guess, first, can you help us think about how far away your reserves are from, I guess, not being floored anymore or maybe like what the dollar amount would have been as a benefit from an offset standpoint if they work forward.

Sure, Ryan. So we haven't quantified, I guess, what our results have been if they weren't forward. But we have -- we ended the quarter pretty floored out. So as we moved through the quarter, we may have generated a little bit of extra reserves as we were going through the quarter when the market was down more significantly in the middle of the quarter. But by the end of the quarter, we were back to being floored out again. And the impact, I guess, the difference, I guess, between the floored out reserve and maybe unfloored reserve, if you think of it that way, it's pretty significant from a reserve standpoint when that's measured at CTE70. But I think what's important to note is under VM-21, you have both the CTE70 measure and you have the CTE98 measure that comes into play as well. We've had periods of time, and I think it's end of the third quarter with similar to where we've had some of that flooring even impacting far enough into the tail to have an impact on some of the scenarios that make up the CTE98 tail. So it's pretty significant flooring that, that can change primarily with market declines. That allows some of that sort of excess or whatever to flow into our results when we -- when reserves would not go up otherwise as much as they would should we have not been floored out under our rate -- or excuse me, under market drop scenario.

Got it. And then, I guess, in your -- when you calculate CTE98, do you project all of your future hedging costs within that? Or I guess can you give any more color on how you go about that? Because I think some companies have taken different approaches there and some companies have implicit CDHS to try to match just moves more. So just if you could give any color on kind of how you go about that?

Sure. Our CDHS is focused on our kind of core equity hedging and macro hedging, which might be done for equity purposes or, in our case, also the interest rate hedging is not considered within the CDHS. So with the calculations under VM-21, you have to actually do a blend of projection basis that includes only your in-force hedging and then another one that includes benefits from rebalancing with your CDHS to blend those 2 results together. So our calculation would do that with respect to all of our core equity hedging that would be reflected in there. So we're not capturing future rebalancing of an interest rate hedge position within our CTE98 or CTE70 calculations.

Our next question is with Alex Scott of Goldman Sachs.

I just had a follow-up on the cash flow current question. I was thinking about the equity piece. And I hear you that equities moved higher since that projection was done. Could you help us think though about like the direction of equities because guess they're higher, but they reach a much higher level. And I think you're looking at benefits to [indiscernible] in them, right? So the benefit would have gotten more higher before -- or at least on some of the policies before the decline. So I think maybe using that equity scenario and thinking it's better, is that -- are we like -- should we definitely think that, that's the case? Or is there may be a negative offset from like the fact that equities went off as the basis were marked and then they come down. Do you see what I'm saying?

Yes. Yes, understood. Yes, I mean it's true that some of the benefits would have maybe an annual step-up feature if the market performance at that point, warranted an increase. So to the extent that you have market up and then down and you happen to have policies that reach an anniversary during the high market level period, then they can have certain increases to their benefit base. That would be a partial offset to overall rising equity level results. But I think it's just a partial offset. It wouldn't certainly be a full offset or more than offsetting impact at all because you have the benefit of the base contract, which are helped underlying assets under management and our fee revenues there are going to be helped by the market going up. So that's kind of underpinning results as well. But I think the -- so I take your point that I think that given the strength of the market growth since we did those Form-10 disclosures and the fact that the market was up pretty steadily through 2021, I think we didn't have the kind of extreme situation that you would need but like maybe an enormous market up and then a giant drop in order to be able to have a significant impact from policies that may have had ratchets in the middle of that period at the top of the market.

And I would just add to that, too, that when the ratchets happen, you also ratcheted up the fees at the same time. And so what we see through time is that we don't actually spend all the fees over a long period of time. And so you'd actually expect a net benefit going forward from that net ratchet.

Got it. Okay. Really helpful. I mean to the extent you guys could update those cash flows at some point, I mean I hear you on all the noneconomic noise in RBC, I'd love to see sort of the economic view again within the cash...

That concludes our Q&A session. So I would like to pass the conference back to management team for any closing remarks.

Thank you. We thank everybody for joining us today and look forward to your participation in our next quarterly call. Thank you.

That concludes the Jackson Financial Inc., first Quarter 202 Earnings Call. Thank you for your participation. You may now disconnect your line.