Hello, and welcome to the Jackson Financial, Inc. Third Quarter 2022 Earnings Call. My name is Alex, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Liz Werner, Head of Investor Relations. Liz, please go ahead.

Good morning, everyone. Before we begin, we remind you that today's presentation may include forward-looking statements which are not guarantees of future performance or outcomes. A number of important factors, including risks, uncertainties and assumptions discussed in Risk Factors and Management's Discussion and Analysis of Financial Condition in the company's 2021 Form 10-K and 2022 second quarter 10-Q could cause actual results to differ materially from those reflected in the forward-looking statements. In this presentation, management will refer to certain non-GAAP measures, which management believes provide useful information 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 presentation. With us today are Jackson's CEO, Laura Prieskorn; our CFO, Marcia Wadsten; our Vice Chair, Chad Myers; the President of Jackson National Life Distributors, Scott Romine; our Head of ALM and Chief Actuary, Steve Binioris; and the President and CEO of PPM, Craig Smith. At this time, I'll turn the call over to Laura.

Thank you, Liz. Good morning, and welcome to our third quarter earnings call. Today, we will discuss our results, our continued capital return to shareholders and our recent sales and distribution initiatives. Overall, our third quarter results continue to demonstrate Jackson's resiliency through periods of market stress. Through the first nine months of the year, we navigated ongoing volatility across markets and a decline in the broader equity markets of approximately 25%, building on our track record of effective risk management and operating profitability. Looking toward the end of the year, we remain confident in delivering on our 2022 capital return targets and in the long-term profitability of the business. Net income for the third quarter of 2022 was $1.5 billion, driven largely by the positive impact of rising interest rates. This contributed to growth in book value. It also further reduced our financial leverage, which remained well below our target range of 20% to 25% over the past two quarters. For the 9-month period, net income was $6.4 billion and adjusted book value reached $12.4 billion. We reported solid underlying operating results this quarter. Pretax adjusted operating earnings excluding notable items, were $480 million. This is in line with the second quarter despite market pressure on annuity account values. Jackson's operating efficiency remains a key contributor to profitability and reflects our culture of expense discipline. During the third quarter, our disciplined risk management approach and our healthy in-force book drove solid capital generation at our operating company. As anticipated, rising interest rates were a benefit and our operating RBC increased significantly from the second quarter of 2022. The value of our hedging strategy is even more visible in volatile market environments preserving the economics of our book as well as statutory capital. We remain balanced in our approach to…

Thank you, Laura. Turning to our results on Slide 5. Lower equity markets in the quarter led to a decline in our adjusted operating earnings from the prior year's third quarter. Lower fee income from reduced separate account assets under management as well as lower levels of limited partnership income were partially offset by lower deferred acquisition cost amortization expense and lower commission expense. A portion of commissions are asset-based and partially offset the market impact to fee income which helps dampen earnings volatility through market cycles. As a reminder, we believe Jackson has taken a conservative approach to the treatment of guaranteed fees within our definition of adjusted operating earnings, as all guarantee fees are moved below the line with no assumed profit on guaranteed benefits included in adjusted operating earnings. In the third quarter, strong net income resulted in a higher adjusted book value even after returning $88 million to shareholders in the quarter. This reduced our leverage ratio to 17.5%, which compares favorably to the industry and rating agency expectations. Similar to last quarter, we've included additional portfolio details in the appendix of our earnings presentation that provide portfolio breakdowns on both GAAP and statutory basis, excluding the assets reinsured to Athene. Jackson's investment portfolio remains conservatively positioned with only 1% exposure to below investment-grade securities on a statutory basis, along with an up-in-quality bias and structured securities and commercial mortgage loans. Furthermore, our earnings were not impacted by credit losses and impairments as these were minimal in the quarter. In the second quarter, we provided preliminary estimates of the impact of long duration targeted improvement or LDTI adoption on shareholders' equity as of the transition date of January 1, 2021. As of the transition date, we estimated a reduction of equity in a range of $2…

Thank you, Marcia. Slide 12 clearly depicts our consistent approach to shareholder capital returns. Our total cash return since completing our separation now exceeds $650 million at the end of the third quarter and we anticipate ending 2022 at or above the midpoint of our target range. In summary, the third quarter demonstrated the continued resiliency of both our business and our balance sheet. It also marked the completion of our first full year as an independent public company. In mid-September, our associates were recognized for their collective accomplishments in celebration of this milestone. Our team's commitment to excellence and our strong momentum position us well for the remainder of the year as we build on the successes of the quarter. We are optimistic about the future of our business, as our focused strategy and resilience continue to power us forward to deliver value for all stakeholders. And with that, I'll now open up the call for questions.

[Operator Instructions] Our first question for today comes from Suneet Kamath from Jefferies. Suneet, your line is now open.

Great, thank you and good morning. Just wanted to start on the RBC. Obviously, it's good to see a strong improving RBC despite challenging equity market. But there has been a fair amount of volatility in the RBC this year on an absolute basis, and I would say, relative to your peers. So have you given any thought to strategy that you could pursue to try to smooth out the RBC, so it feels like every time you guys report earnings, the stock is up or down a ton based on what the RBC is. And any kind of transparency, I think, would be helpful to the volatility. But just any thoughts on that?

Yes, of course. Good morning. Thanks for the question, Suneet. We had mentioned in first quarter and second quarter that the rising rates would initially be an impact - negative impact. And then in the second half of the year, we would expect to see the benefits come through. So we're in that point in the year, certainly, and I'll turn it over to Marcia to talk through the more specifics around the drivers.

Sure. Thanks, Suneet. So I think I understand the question about the volatility. I think the way we look at it, though, is that RBC volatility is not inconsistent with the ability to have stable cash returns and that is a priority for us. We see RBC volatility as being a reasonable trade-off for a very high return business. And we manage that short-term volatility within our risk talent, so as we said before, and I think, again, in the prepared remarks here, we don't see the 500 to 525 adjusted RBC of measure directly of distributable and not a minimum that would impede our ability to return capital. Just generally speaking, I think we - this is a business that we're managing over the long term, not quarter-to-quarter, and it's supported by a healthy book of business. So while we've managed the volatility in RBC over time, which is kind of a natural consequence to the market sensitivity in our business, we've got a good history of strong cash return to shareholders, both before as a private company and more recently as a public company. So we're comfortable that while we have volatility in market-driven volatility we're comfortable with that level of volatility because of our framework, our risk framework, because of our hedging strategy and just the strength of our balance sheet. And just would watch to avoid spending money and destroying value if it's not economical and really in the best interest of the shareholders.

Okay. And then I guess on your comment about the year-end assumption review, I just wanted to confirm, first of all, that you guys don't have a big exposure to SGUL and so the industry study that has affected some of your peers this year. And then sort of relatedly, the other product that has been getting some attention is VA, particularly with respect to lapse rates. So just curious, how is your lapse rate experience been versus your expectations? And maybe how does it compare to some of the industry studies that are out there?

Sure. Thanks. So yes, you're right on UL with secondary guarantees, our exposure is minimal. We have approximately $1 billion of reserves for the kind of base contract and guarantees combined on either a day after set basis. So definitely not a material block at all for us. With respect to VA Labs, we - as I mentioned previously in this last year at this time and then earlier in the remarks, we have a really comprehensive process around our assumption review. So certainly lapse assumption is one that gets a lot of focus. And we have a ton of experience data to help support those - setting those assumptions. Our process is to make us adjusting every year in response to any emerging experience. So that number one keeps us from having opportunity for larger changes that you're catching up to experience because we're just kind of keeping up to it regularly. We've not seen anything significantly different this year and throughout 2022, actual lapse rates have kind of been reduced in the way you would expect them to with market paydown and the money this guarantees up. I think the behavior has generally been in line with what our dynamic lapse assumptions would assume. So naturally, we'll make tweaks as we go through and complete the process to reflect the latest experience we have. But when you think about how we compare to industry, I would say a couple of things. One, we take advantage of opportunities to look at all of the industry study data that we can get and participate in some studies in order to have access to that. But the other key thing is really that we are, of course, along with others, subject to the standard projection testing within the statutory framework to ensure that as a whole our assumptions are not more aggressive than what the reserving and capital requirements would be under the prescribed assumptions. And we've historically never had to set up any additional reserves as a result of that test. So I think that indicates our assumptions are kind of reasonably aligned or in some cases, maybe more conservative than what those prescribed assumptions would require.

Got it. And then just maybe if I could sneak one more in on LDTI. I think you alluded to this a little bit in your prepared remarks, but maybe we could flush that out a little bit more. One of your company - sorry, one of your competitors talked about a pretty sizable hit to operating earnings from the adoption of LDTI, and I think the impact was sort of felt in the attributed fees. And so I know you guys treat your VA guarantee fees differently than some of your peers, but I just wanted to get a sense if you think just based on that different treatment, does that mean that you would have potentially less of an impact from LDTI in terms of your earnings? Or any additional color on that would be helpful if you can provide it. Thanks.

Sure. So we - the main impact to our operating earnings for LDTI really will be, I think, driven by DAC and that will be the absence of the market sensitivity that we have today. But when you think about the fees, we have, as noted before, taken what we think is a conservative approach by putting the full amount of guarantee fees below the line. Under our LDTI development work, you have to reassess those attributed fees under the LDTI framework, and that has resulted in continuation of the situation we had pre LDTI, which is our attributed fees in and that are less than the guarantee fees that we collect. So we will be having no dependence on the fees that will be included in operating income to support the GAAP MRV liabilities and a consequence we'll be able to make no change to our adjusted operating earnings definition with respect to guarantee fees and kind of continue that conservative approach.

Got it. Thank you so much.

Thank you. Our next question comes from Nigel Dally of Morgan Stanley. Nigel, your line is now open.

Great. Thanks, and good morning. I wanted to touch on the capital return targets, obviously good to hear that you expect to be at or above the midpoint of your expected range for 2022. How should we be thinking about free cash flow generation for '23, assuming no year-end actuarial review surprises, would have similar it will be a reasonable goal? Or is there likely to be a little under pressure just from the market decline that we've seen this year?

Nigel, it's Marcia here. What we - as we said, we'll have that finalized and come back after we've looked at our year-end results. But I think where we would sit today, we would kind of reiterate what we've said in the past that our return target of $4.25 to $5.25 that we established for 2022 is in line what we think is a reasonable long-term, kind of level of capital return. So at this point, we've got nothing more specific to kind of define for 2023 yet, but I think that's just helpful context.

Okay. And then just a numbers question. Just on the tax rate. Historically, you had the 15% guidance range is clearly below that, is still a good number to be? Or should we expect that to continue to be somewhat below that range next - for the foreseeable future?

Well, I think for just the coming quarter, I think we probably would have a continuation of a trend that's more similar to what we've been experiencing in the last couple of quarters. As we move into next year, with LDTI and you're thinking about operating profits under that. Without the market sensitivity and DAC, I think we'll end up with just a bit more of a stable picture in terms of how operating income emerges, which will probably alleviate some of the tax rate variability that we've seen. But I think for - as a placeholder, I wouldn't probably have any newer guidance than the 15% at this point.

That’s great. Thank you.

Thank you. Our next question comes from Tom Gallagher of Evercore ISI. Tom, your line is now open.

Good morning. Following this quarter's results are your variable annuity statutory reserves floored out at zero again? Or do you still have a considerable amount of reserves? Maybe give some quantification if you do still have reserves that you'd be able to release to the extent that equity markets ended up strong in 4Q when you had mark-to-market derivative losses. I'm just trying to understand what that dynamic is going to look like in Q4.

We did end the quarter with reserve - reserves up compared to where we would have been earlier in the year. Just largely driven by the equity performance and what that meant for our separate accounts in the second quarter. So we are sitting as we enter Q4 with a higher level of reserves in place than we would have had - kind of in earlier periods this year or last year.

Can you give some dimensioning of that from a sizing perspective. I just want to get a sense for whether it's - it would potentially be large enough to offset the mark-to-market derivative losses in Q4 to the extent that equity markets moved up a lot higher or can even help their gains from where we are now?

Yes, at the end of the third quarter, we had about $1 billion of reserves in excess of the cash surrender value on the VA block.

That's helpful. Thanks. And then did I hear you correctly that you said you made some changes to your hedging, including increasing duration of equity hedges. Any color on how you think - how you either have been changing that portfolio? And as you think about now with interest rates where they are, are you thinking about adding more interest rate protection up here? And any color for what you've done on the equity side as well. Thanks.

So I think first on the duration question. So with respect to the purchases we've made for equity options, the higher level of interest rates does make a longer-dated options, more economical. So we've been able to kind of shift as options have expired and we had rebalanced ,taken the opportunity in this higher interest rate environment gets to kind of extend the maturity of it on some of those so that we have a little bit more of a stable coverage in that regard and have a little bit less roll activity than we need to do. And then on interest rate hedging, we're always kind of looking at interest rate hedging with respect to kind of the cash flow profile and the risk profile of the business. So that is something that will just automatically be adjusted over time just based on the position we're in. And that's really kind of a second order thing because initially, it's the equity movements in the market that kind of define what the expected level of benefit payments will be in the future that need to be discounted and that's what kind of gives rise to the interest rate risk. So as we move through time and either equity movement change the kind of profile there of those feature payments or the interest rate levels are themselves different, that's going to just dictate natural adjustments that we're going to make. But they'll always be just with the lens towards keeping us within our risk framework and making sure that we're protected with - against any of the sensitivities that we're looking at to be in compliance with any of our risk limits.

That's helpful. And just one quick follow-up. The last time I checked, it looked like most of your equity options were about - were three months. Have you - so when you're talking about extending duration, have you been going six months or a year? Any color on that?

Tom, this is Steve. Yes. Many of our put options that we started do kind of starting in Q2 and into Q3, they were roughly one to two years in duration. So quite a bit longer in the trades we've historically done in the last five, six years of flow rates.

Okay. Thanks a lot for the color.

Thank you. Our next question comes from Erik Bass of Autonomous. Erik, your line is now open.

Hi, thank you. I was just hoping you could talk a bit about your appetite for growing fixed annuity and FIA sales in this environment.

Good morning, Eric. We certainly have been paying attention to the rising interest rates and have taken opportunity for pricing actions across our entire annuity spectrum, which does include our fixed index annuity offerings as well. So we have seen an increase in sales in those products. But our prudent pricing certainly looks to strike the balance between our profitability targets and good consumer value. So we're happy to see the increase in sales, and we'll continue to monitor rates and be disciplined in our product pricing going forward.

Got it. I guess, strategically, do you - does it benefit you at all? Or would you like to see a more balanced mix between spread-based products, including RILA's, FIAs, fixed annuities and institutional with your traditional VAs over time? Or are you really agnostic and we'll just saw what the market is kind of bearing in where there's policyholder demand?

Yes. We'll stay consistent with our full annuity product offering. The growth in RILA sales certainly is where we see our best opportunity. And we've mentioned before we get the economic offset with the RILA sales to our VA sales. So we're happy to continue to see momentum in the RILA sales, but we'll continue to be consistent and have our annuity offerings - has products across the entire spectrum.

If I could just ask one last one. Marcia, you touched on this, I think, in your prepared remarks, but can you just talk a little bit about why required capital was flat this quarter. I guess just looking back to first quarter, equity markets were also down 5% and rates also up 80 basis points in that quarter. So what was different now? Is it just a different starting point?

Yes, it is primarily a different starting point, largely related to where we stand with the degree of cash value floor impact because that does often kind of impact us far into the tail even within the CTE98 calculation that defines the required capital for VA. So it is just a different starting point. And as things played out this year having come in far this quarter - excuse me, having come into the quarter in a different position than we came into the first quarter, we just saw more kind of liability response that was inhibited by the cash value floor impact. And so we ended up with a pretty offsetting impact between the equity decline and the interest rate rise for the quarter kind of just facing each other out pretty well to keep us at an overall level of required capital that was consistent with how we entered the quarter.

And this is Steve. Just to add one more thing. One thing we dealt with the deal with in the first quarter was the mean reversion parameter. The decrease, which would have come through in account that was reported. Obviously, that's a onetime a year look. And one of the things we keep on saying is rates continue to move up, that's going to benefit us and things are tracking right now with, I guess, two months left in the year. When we flip the clock to the New Year, does look like it will unwind that drop that we experienced at the beginning of the last - beginning of this year and still positive next year.

Got it. Thank you. Appreciate that.

Thank you. Our next question comes from Alex Scott of Goldman Sachs. Alex, your line is now open.

Hi, good morning. First one I had was I just wanted to come back to the comments about operating earnings you made. I think as part of that conversation, you mentioned that attributed fees under LDTI, you expect to be actually lower than the actual fees that you're earning on the riders. And I just wanted to make sure I understood that correctly because I think all of your peers so far have said that attributed fees are higher. I mean, one of the companies actually is included in operating and operating earnings going down. But even the company that operating earnings is not changing. They said on their call that attributed fees were well higher than actual fees. So this would be something that I think is very unique and differentiated about you all, if that's true. So I wanted to sort of unpack that a little bit and understand that comment.

Sure, this is Marcia. That is correct. That is the way the results are coming through for us under LDTI. I mean I think it's a combination of a few different factors. Our book of business is different than some others in terms of either the nature of guarantees and even the time period over which they were written. So the calculation of attributed fees is going to be defined by the conditions at policy issue. And so take into account what level of guarantees that we price to, I think you've historically said that we've been generally not a price leader. We've been kind of taken a conservative approach and made sure that we were really pricing in a disciplined manner to cover kind of tail type scenarios. So we feel like our pricing has been solid, and that's generated the level of fees that we charge, and then when you go to calculate the attributed fees, one of the things that is different for some companies that may have had a heavier concentration of benefits that would have been previously or currently under SOP-03-1 and shifting over to FAS 157 under the LDTI changes, that would be GMIBs and benefits, which we have as well. But I think our block wouldn't have any significant exposure to GMIB having being more predominantly GMWB. A lot of that was already under FA 157.So I think maybe just there are differences in the books of business between product mix and just the level of profitability, I guess, or strength of the fees to cover off the requirements under GAAP.

Got it. Okay. I'm on to give that some thought. The other question I wanted to ask you, as I've looked at the last few quarters and tried to follow what you're saying. I've realized I really don't know what your hedge target is on your variable annuities. It doesn't sound like it's market neutral just based on what you're saying about volatility under LDTI and so forth and wanting to retain more economics. I think based on the last few quarters, it's clearly not statutory accounting. Could you maybe just try to help me think holistically, like how do you hedge your variable annuities? What is the target? Like what is this risk framework that you talked about? Like what is that target?

I'll start off and then I'll probably have Steve jump in as well. But the way we look at the hedging is our economic view is focused on the underlying cash flow. So it's not a market consistent type which would be more in line with GAAP. We are looking at the cash flows of the business. And so that is, in a sense, more aligned with statutory as statutory is more just a cash flow-based type of a view, but statutory has various statutory specific limits and nuances to that framework, which requires us to sometimes be doing additional hedging to protect that. And we do have this statutory element to our considerations for hedging. As we talked about before, kind of more of an economic view cash flow-based economic view is the kind of primary view. And then we have a statutory overlay, if needed in terms of a macro hedge, if there's additional hedging needed to protect that capital. But we're also not in either case, either on an economic basis or a statutory basis doing kind of like an immunization strategy where we're trying to exactly match movement either, both in the economic. We recognize there can be some degree of volatility around there, and we're trying to strike a good balance between the amount that we spend on hedging, not overspending and destroying value by taking an immunization approach and having some leeway in there. And that leeway is really what's guided by our framework and our ability to make sure that we're staying within our risk limit under stresses.

Yes. And then I'll just add. Obviously, these are volatile quarters and we continue to perform pretty well in terms of how the hedging is coming through. And our strategy is consistent. It's not something that's adjusted over time. It doesn't change with markets. It's very strategic. It's - I would say it's not a tactical hedging approach where depending on where level of rates are, we'll take a view on where rates will go. It's really dictated by our framework and our profile. That dictates effects of hedges we'll do. And obviously, rates have gone up quite a bit this year. We're benefiting from that. And as I highlighted earlier, one of the things that comes through is, we've been able to extend the duration of some of our equity trades, which is definitely helpful, but a little bit natural risk in kind of rebalancing the book that we had to deal with for many years now. So we are seeing the benefits of higher rates coming through in terms of the volume of hedging you have to do and then obviously the cost associated with those trades as well.

Yes, I think maybe it's just an issue of like being on the outside looking in, that makes it very difficult. I mean at any point, something you're able to disclose us around that hedge target and help us think through that a bit more. I think would maybe help us understand that the story is potentially not as volatile as it seems looking in from the outside. Anything you can do to help with that over time would be very appreciated. Thank you.

Thank you. Our final question for today comes from Ryan Krueger of Stifel. Ryan, your line is now open.

Hi, good morning. I had a couple of questions on hedging also. First, could you give us any sense of where your hedge cost, annual hedge costs are running at now that you're putting on hedges in a better rate environment relative to your guarantee fees.

Ryan, for the third quarter kind of our run rate that we're at currently has our hedge costs fairly in line with our guarantee fees. That is - it's important to note that we are still in a high volatility environment. So that is something that is a factor in and of itself that will increase the cost of hedging. And as we've been benefiting, as Steve said earlier, with regard to higher interest rates. I think as we go forward, at least in the near term with rates being at these more elevated levels, if we see volatility kind of subside, then I think we would certainly expect to find ourselves in a situation where we would be as we've oftentimes in the past been where our hedging costs could be below guarantee fees.

Got it. Thanks. And then, last question is on interest rate hedging. So I understand that your comment on how you view interest rate hedging relative to long-term potential claims. But the 1- to 2-year duration on equity hedges is still - exposes you to a lot of rollover risk over the long term versus the long duration of the liabilities. Why not do increased interest rate hedging to protect the actual cost of the equity hedges because I think that's still one of the biggest variables in your long-term cash flows and given how much more attractive the rate environment is, it would seem like that would reduce some of the long-term role risk on hedging costs?

Yes, Ryan, I think it's a good question. I mean if you go back to - it's going way back to pre-global financial crisis, you would have saw by trades in the 3- to 5-year kind of duration, right? And so we have moved them up from where shorter durations to, as I mentioned, in one to two years. We still have a - the one thing that we saw in that time period was higher interest rates, we have that today, but we have very low volatility at that point in time the growth. I think were flyballs were sub-18% for long-duration trades. We're not there today. The volatility is still elevated. So we're seeing some benefits of the rates, right? So that's allowing us to extend our trade a little further out. So would we like to maybe get a little longer, yes, that might be ideal. But again, we dealt with the roll risk for 10-plus years now, so it's something we're good at. And so we are benefiting from slightly longer durations. And the other thing too is, I think there's only so far you want to go out in terms of trades. We - as Marcia mentioned, we do get assumption updates. Our experience comes in. We have a very large bucket experience every time we kind of update that, we're seeing emerging experience coming slowly over time. So I don't know if you can nearly want to lock in a 10-year duration trade because if you're saying, I think I know what possible behavior experience is going to be for the next 10 years. And I don't think anybody can be that precise on it. I think we take a view on it, obviously, but we're adjusting our experience. So it's kind of a balancing out between not quite too far out and many experience emerge at the same time.

Okay. Got it. Thank you.

Thank you. We have no further questions for today. So I'll hand back to Laura Prieskorn for any closing remarks.

Thank you. We appreciate your participation in our call and your interest in Jackson, and thank you for joining us this morning.

Thank you all for joining today's call. You may now disconnect.