Hello, and welcome to today's Jackson Financial, Inc First Quarter 2023 Earnings Call. My name is Daily and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to our host Liz Werner, Head of Investor Relations. Liz, please go ahead.

Good morning, everyone and welcome to Jackson's first 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 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 US GAAP figures is included in our earnings release, financial supplement and earnings presentation all of which are available on the Investor Relations page of our website at investors.jackson.com. Joining us today are our CEO, Laura Prieskorn; our CFO, Marcia Wadsten; our Head of Asset Liability Management and Chief Actuary, Steve Binioris; our President of Jackson National Life Distributors Scott Romine; and our President and Chief Investment Officer of PPM, Craig Smith. At this time, I'll turn the call over to our CEO, Laura Prieskorn.

Thank you, Liz. Good morning, and welcome to our first quarter 2023 earnings call. Today, we'll discuss our first quarter results, our progress towards our 2023 financial targets and our insights on the current state of the annuity industry. Over the course of the first quarter, we maintained our risk management discipline preserving our capital strength and positioning the company for continued profitability. Our hedging strategy effectively navigated a period of significant equity market and interest rate volatility and our capital position remains strong after remitting $600 million from our operating company in March. The strength of our capital position is reflected in both an operating company RBC within our target range and over $1.5 billion in holding company liquidity including $533 million in proceeds from our successful preferred stock issuance. We remain focused on returning capital to shareholders and are off to a strong start having returned $124 million during the first quarter through dividends and share repurchases. We consistently take a long-term view on our business and have significant experience managing through various market conditions. Turning to first quarter results, our adjusted operating earnings were $3.15 per share and largely reflect market impact on separate account values compared to a year ago as well as the impact of the higher minimum interest credit rate we highlighted last quarter. Our operating results also reflect our efficient expense structure. Retail Annuities delivered attractive operating margins benefiting from variable expenses and lower asset-based commissions. Combined these variable costs contributed to a 7% decline in operating costs from a year ago and a 3% decline from the fourth quarter of 2022. This quarter, we're providing greater transparency into our investment portfolio given the regional bank crisis and emerging commercial real estate concerns. These additional disclosures provide key metrics that highlight credit quality…

Thank you, Laura. I'll begin with our results on slide six, where lower comparative equity market levels drove the change in our adjusted operating earnings from the prior year's first quarter. In addition to lower fee income from reduced separate account assets under management, other contributing factors of the year-over-year change include higher minimum interest credited rates on our VA fixed rate options that I flagged last quarter and lower income on operating derivatives. These operating derivatives have long been a part of our duration management strategy and have protected our spread income from lower interest rates in the past. Given increases in short-term rates in the last year, these have shifted from income to loss. Over time, this will be offset by rising investment income. Improved mortality on the closed block, lower asset-based commission expenses and higher net investment income, provided partial offsetting positive impacts to our adjusted operating earnings. As a reminder, we believe Jackson has taken a conservative approach to the treatment of guarantee fees within our definition of adjusted operating earnings, as all guarantee fees are reflected below the line, with no assumed profit on guaranteed benefits included in adjusted operating earnings. This approach is partly why we did not report a negative impact to adjusted operating earnings from fee attribution, following the adoption of LDTI. First quarter adjusted book value attributable to common shareholders was down from year-end 2022 due to nonoperating net hedging losses, partially offset by healthy adjusted operating earnings. As Laura mentioned, we've included additional general account investment portfolio details in the appendix of our earnings presentation that provide breakdowns on both US GAAP and statutory basis, excluding the assets reinsured to third parties or funds withheld assets. Given the increased focus on the potential for a near-term credit cycle, we expanded…

Thanks Marcia. We're pleased with the performance of Jackson's business in the first quarter of 2023, especially in light of volatile conditions. We continue to maintain a strong financial position with substantial liquidity, are on track to reach our 2023 key financial targets, and are well-positioned to deliver against our strategic and operational goals. We had a strong start for capital return in the quarter and remain confident in our long-term prospects for continued success. Before we open it up to questions, I'd like to take a moment to acknowledge our associates. Along with their exceptional contributions to our business, I am not just proud, I am impressed by the many ways they live out our purpose and meaningfully contribute to the communities in which we live and work. Our associates are the driving force behind our corporate philanthropic efforts and I'm happy to share that our volunteerism has returned to pre-pandemic levels with more than one-third of our associates volunteering in their communities in this past year. You'll find more about our associates' impact and other details related to talent development, our sustainability efforts, and strength in governance in our second annual ESG report, published on jackson.com earlier this month. As I shared in that report, the efforts of this Jackson team to shape the future of our industry, build upon our core capabilities to deliver value to stakeholders and invest in our communities reflect our desire to create a more confident future for everyone. With that, I'll open it up for questions.

Thank you. [Operator Instructions] Our first question today comes from the line of Alex Scott from Goldman Sachs. Please go ahead. Your line is now open.

Hi, good morning. First one I had is just on the projected cash flows you mentioned. I understand there's this reserve boring issue and you feel that the cash flows are strong. I mean, it's been quite some time since we've been able to look at scenarios and projections of your cash flow. So I wanted to see first, if you could shed some light on that and help us think through how you see those cash flows at least maybe in the base case. And then the second piece of my question is just -- is there -- there's so much volatility in your RBC ratio that, it sounds like there's a reasonable explanation for why it happens. But just given the noise that it creates with the way your stock trades and the cost of equity that your company receives, have you thought about actions that could be taken whether internal or external to try to mitigate some of that?

Good morning, Alex. Yes, thank you for the question. I'll ask Marcia to comment on the projected cash flows.

Yes. Hi, Alex. Thanks for the question. One thing I would say, I guess just as a point of support for that statement is that the very fact that the statutory requirements, reserve and capital requirements are based on a present value of projected cash flows, under conservative statutory assumptions and the like. And so, when that result comes out with a present value kind of implied principles-based or cash value-based set of reserves or capital requirements that are lower than the cash value floor that in and of itself kind of, I think, speaks to the fact that there are strong cash flows in the business that are not necessarily able to be fully reflected on the balance sheet because of that cash value floor kind of aspects within the statutory framework. I'd say that even separate from the -- I think the projected cash flow illustration that you're maybe referring that to we put in our Form-10. We haven't updated that at this point. I think I've mentioned previously that we've had a lot of focus through this point just getting additional disclosures and everything related to our LDTI implementation. So that is something that we absolutely can look at in the future. But I think just the very fact that the cash value floor, comes into play by definition indicates that the cash values underneath the block are strong and stronger than what would be implied by the reserve that is required with the cash value floor. So hopefully, that's helpful. And then to your second point on the volatility and the RBC ratio, I mean we do recognize that the cash value floor is a part of that aspect that creates some of that volatility in the RBC ratio. But again, the -- that is a…

Got it. Okay. We'll, look for updates there. Second question on the – more on the flows and growth – you made some pretty optimistic commentary at the beginning of the call on just the environment and how much growth we could see in the retirement business more broadly for the industry. I listened to that commentary obviously, the flows overall including the variable annuities are still negative this quarter. How would you expect that environment to flow into the actual AUM dollars? And would you expect that to inflect and become more significantly positive and create sort of a net flow positive organic growth rate at some point in the near future?

Thank you, Alex. Scott, do you want to just provide an outlook on the industry and then maybe Marcia can touch on AUM?

Yes. Sure. I mean we look at the long-term demand for the retirement solutions that really provide protection growth, lifetime income and as a leading retirement solutions provider, we believe we're well positioned to meet this demand. Think about it, we compete on really broad capabilities and a diversified product set that provides strong consumer value. So if we look at it by segment, we believe that there is great pent-up demand for all the benefits that a variable annuity has to be able to grow assets to provide lifetime income. If you look at it from a RILA point of view, our Market Link Pro, RILA is doing exactly what it was designed to do. It's added diversification onto our product suite. It's brought a protection-oriented solution to market that has really strong consumer value and it's helped us attract new advisers. We recently launched an updated version of our RILA Market Link Pro2 with new product features that we believe will be very attractive and we continue to see that segment of the market as a growth opportunity. Even talking about spread I mean this is – we've got relatively modest but growing spread sales and we've got a long history of being in these markets. So if you look at it in totality of our diversified product set, we like where we are. Another way to look at it is really the hallmark of our success has been the depth and breadth of support we offer our distribution partners. It's meaningful adviser engagement. It's not just a transactional relationship but rather we focus on building that mutually beneficial long-term relationship. And it's through the entire cycle. We add value presale point of sale and post-sale. It starts with those strong relationships with our highly regarded wholesaling team and it goes all the way through post-sale to our award-winning service. So like we're – we like the retirement market and the growth opportunity there and believe we're well positioned.

And then Alex I'll just add on just to kind of fill in the picture from a net flow perspective. When you think about the outflows I think first of all the nature of this a lot of our products in force are such that they provide guaranteed income. So we would naturally expect as the policies age, that the policyholders are using those benefits for the very purpose and we see an increase in the outflows. We'll also see aging in terms of mortality, outflows and some surrender outflows as well too, as policies age through the surrender charge period. But I think when you look at the size of our back book, relative to those outflows in connection with the inflows and opportunity there that Scott just talked about, you also have to bring in the fact that historically, we see on average positive growth in the market and that is going to be strongly supportive of our AUM, as we move forward in time as well.

Got it. Thanks for the answers.

Thank you. The next question today comes from the line of Erik Bass from Autonomous. Please go ahead. Your line is now open

Hi. Thank you. You mentioned the diversification benefit from the institutional business and presumably growth in RILAs and fixed and indexed annuities is also helping. And it seems like there's a lot of market opportunity to grow in these areas. So how are you thinking about allocating capital, to growing in these businesses? And does it make sense to push more growth there, to kind of balance the earnings mix and the capital generation.

Thanks, Erik It's Marcia here. Yes, I think we are happy to be involved in all of those areas and take advantage of the products that we have to offer there. One thing to note is, those do tend to be products that have a little bit higher capital requirements. So we want to be thoughtful about the pace in, which we would increase our sales in those areas to moderate, how we would be building up additional required capital investment in new business at the time we're building up. We've been actively repricing our spread products and our RILA product been active in the institutional market, where we can and where the market conditions are favorable. So I think, we would continue to kind of try to do that, but all with the lens towards making sure that we are staying true to our disciplined pricing, and we're not going to chase market share in those areas either. So we want to do what we can to be having products on the shelves, that are of interest in all types of consumers, but at the same time make sure that we're disciplined in our pricing and anything we can do to further diversify, is something we would be happy to realize in time, but in a kind of moderated disciplined way.

Got it. Thank you. And then just, wondering if you could provide a little more color on where the RBC ratio ended up within your target range, and then with VA reserves being back to floor, how should we think about the impact on TAC and the RBC ratio going forward if markets continue to trend higher.

Sure. Let me step back for a moment, first. I think just to maybe provide a reminder about the target range that we set out, that is still relatively new for 2023, as they moved away from the adjusted RBC target range. So when we set the 425% to 500%, RBC target range under normal market conditions, that was established to maintain a high degree of resilience in our capital position, to support our ratings and to manage the business within our risk framework. So it's our target and so kind of definitionally, we are happy to be operating anywhere within that range and we had shared last quarter that 425, is a minimum naturally of that range and that anything any level above that is really excess capital, at the operating company as we view it. And I would say that, what we said at the end of the first quarter, we indeed had excess capital at the operating company as measured through that lens. But I would say, too our guidance in this area the approach to our guidance is not new. We've been guiding to either being above, below or within the range historically, with our adjusted RBC target. And the difference here is that, we just moved to a focus on the operating company rather than including holding company, and the range is somewhat wider in line with how we've historically managed the business, and is consistent with our risk framework. So our intent going forward is to, provide similar guidance in that regard being either above, below or in range. And so we're happy, with our strong capital position at the end of quarter one, having us be in -- within the range. When it comes to.

No, no, no. You're going to -- there to the second part, sorry.

Yes, second part. So kind of looking ahead and thinking about TAC and cash value floor, I think the question is around probably what's the outlook for the evolution of our tax, given the flooring. And again, just as a reminder, right the presence of the cash value floor is really a byproduct of the -- of our healthy books as measured by those projected cash flows and it does create volatility as we said. But we take that cash value floor into account when we set our hedging and also in the hedging instruments that we use and our hedging is set to operate to keep us within our risk framework and protect statutory capital protecting statutory capital is a key objective there. That's not new to us and it doesn't preclude us from generating capital and I think 2021 is a good example of that. But one of the things that I think is an important point of context is if you look back with a longer view of our history when you look at our average tax position a year-end tax position over the past 15 years it was $4.9 billion and that was also supportive of our ability to pay distributions out of the operating company on average of about $500 million a year. So this is a level of tax that is very much in line with where we typically operate in. We understand that if we continue to have flooring that one could worry that the tax will continue to decrease, but we will adjust our hedging as needed to make sure that we're protecting the statutory capital and that's just really all part of the byproduct of our risk framework. Steve, do you have anything to add?

The only thing I'd add is with higher rates, we're able to manage the CSV floor and stay within our budget. For the first quarter, we are benefiting from higher rates. And so our option spend was lower than our guarantee fee base, which is a positive. But again as Marcia highlighted we adapt our hedging profile. And, obviously, we made even more upside protection if we are stored out on the CSV and you'll see maybe a shift to more CAL– options, but again all within our hedge spend. So we feel pretty good about that.

Got it. Thank you. That’s helpful.

Thank you. The next question today comes from the line of Suneet Kamath from Jefferies. Please go ahead. Your line is now open.

Thanks. Good morning. I was just hoping you could start with -- there were a lot of obviously moving pieces with respect to RBC. You had the dividend, you had the DTA, you had the flooring. So would it be possible to just walk through those and just give us some guidance in terms of like how big of an impact these discrete items had on the RBC?

Good morning, Suneet. Let me give some high-level color on that I guess. So the -- I would say the -- starting with the TAC. I mean, obviously, there are two parts here with the numerator and denominator, but let me try to talk about them a little bit and match that up in terms of what that means for RBC. But we did, obviously, have the distribution, $600 million distribution out of the operating company in March. That also carries with it effectively since it's a reduction in TAC and associated decrease in the admissibility of deferred tax. So when you combine those together that was a fairly significant decrease in the RBC as you might expect and that's naturally part of ending the prior year in a really strong position. And then as we went through the rest of the quarters influences, I would say we had further impact from the TAC around the cash value floors we were talking about earlier in the sense that our hedging losses with a strong up-market, up equity market came through in TAC without reserve releases available against that. So that had a decreasing effect on TAC, which was also -- carries an additional impact with the deferred tax asset admissibility. But then those same helpful influences from the strong market along with the MRP helped in the denominator generally because of the flooring those things are not going to have as much of a benefit on reserves as we already floored out, but they can influence the capital requirement. And so those were benefits within the CAL to help mitigate there. So I think overall I'd say key drivers certainly where the distribution, $600 million distribution. Another key driver I would say would be the overall effect of the reduced deferred tax asset and visibility, the non-admitted deferred tax asset increased from $1.1 billion at the end of the year to $1.6 billion at the end of the first quarter. So that's pretty significant, but that is real economic value that will be realized in time just a timing item within the statutory framework. Otherwise, I mean, we did have just influences from the market that obviously impacted results to improve as well. But that's kind of the general -- kind of key drivers I would say.

Got it. And then if I -- I think we went through this last year in the first quarter. And if my memory serves -- I think the RBC did kind of build back but I thought a fair amount of that build back was actually because the markets went down in 2Q and that kind of got you away from the floor and you had a little bit more symmetry between the hedges and the reserve releases. I mean is that kind of what we're looking at? You kind of alluded to this in an earlier question, but I'm just trying to understand like other than the markets going down what is it that you can do to kind of support the RBC.

I'd say the market's going down is something that would support TAC. This necessarily mean you need that to support the RBC. So I think last year you're right the market did go down and that probably kind of had the opposite effect of what you have in the markets up right where you have hedging gains that come through tax, but you don't really have to set up additional reserves because you already have a buffer within that cash value floor. But when you look at overall RBC, I think, as we moved through last year I would say it was the market's down that really overall helped RBC as much as it was just the benefits of the higher interest rate environment as we continue to see that persist through the latter part of the year combined with just the underlying cash generation from the business itself. I mean if the base product continues to generate good cash flows every period. We continued as we move through the balance of last year to stay kind of within our the fees on our hedging costs and enjoy the benefits of a higher interest rate environment in terms of what that meant to hedging costs overall and overall, kind of, upward trend on investment income for example. And I think those things will continue to be helpful to us as we move forward as interest rates kind of remain at a higher level.

Got it. Maybe just one last quick numbers one. Can you just talk about what your expectation is for capital generation like in a typical year after whatever strain you have associated with new business?

Well we've shared in the past I think that under kind of reasonably good conditions we would maybe see something in the $700 million to $900 million range. That's kind of what we call again maybe normal to good market conditions. And it's hard to of course define exactly what that means. But I would say for our business with helpful conditions are where we have modestly growing equity markets, we have some stability in interest rates and we have more modest levels of volatility maybe than what we certainly saw in the first quarter this year. But I think in that type of environment you'd continue to see healthy cash flows off of our base contract. You see hedging spend within our guarantee fees as we have and then lower volatility is always helpful for us with a book that has the cash flow in the store kind of impacts and it certainly is something that we've benefited from in time to pass. So we've had a little bit more moderated volatility. But under those kinds of circumstances I think that level of capital generation is not an unreasonable expectation.

Okay. Thank you.

Thank you. The next question today comes from the line of Tom Gallagher from Evercore ISI. Please go ahead. Your line is now open.

Good morning. First question is just a follow-up on the comment about your funds within the VAs underperforming the hedges. Can you just comment on how big of a basis risk breakage you had this quarter from that?

Hi, Tom, this is Steve. Yes it was a small factor this quarter and it really was driven by significant returns from a very few small number of stocks. In general, as you know we are more diversified than the S&P 500 that served us well long term. And we have seen similar instances like Q1 in the past. But the thing is that these tended -- overtime sets up basis risk has generally not been a nonissue for us historically. To the extent, we see basis risk we tend to prefer to see it in that markets like in the Q1 for example as the guarantees are less fighting in those situations we do have investment freedom and we are happy with the underlying separate account performance. We did have returns of 6% in Q1, which is a very strong separate account return. And then we think we feel that stacks up very well against other disclosures who in many cases have volatility control within their separate account funds. So we look very favorably I think in Q1. And even if you look back at previous data points like Q1 of last year and Q4 of last year you'll see that we're very happy with our performance relative to other disclosures. Lastly, I think the one thing that we do watch very careful is policyholder transfer activity. And you know, the market is a little bit around. We didn't see any noticeable change in policyholder behavior, which also tend to have very stable allocations. They keep those allocations, and so that is -- that level of is very helpful for us when we manage basis risk as a whole.

Got you. And so you all don't really - the basis risk wasn't really a major contributor to the capital volatility was the other factors this quarter. Sorry I was asking -- so the basis risk what I just want to confirm was not a major contributor to the RBC volatility this quarter?

Sorry, Tom. It was not a major contributor.

Right. Right. Okay. Thanks. Another question I had is just -- I just want to make sure I'm understanding the automatic reset on crediting rate. That was a headwind this quarter. But if I understood your comments it's based off the five-year treasury and I look at year-to-date that's down 50 basis points. Is it just the -- how does that work mechanically? Is it just the spot rate, or is there an averaging? And I guess, my question there is if we -- if it is just a spot rate and things remain where they are now would these crediting rates reset downward 50 basis points so you would actually see spread expansion next year, or can you elaborate on that? Thanks.

Certainly. Yeah, this is Marcia here. So you're right. This is a formulaic approach for compliance with the fair enough [ph] requirements and it applies primarily to our VA fixed fund options account values and the methodology is that it resets at the first of each year based on the five-year treasury rate and where it stood throughout the month of October of the prior year. So, we won't be able to know exactly where it will go at the beginning of next year, until we get our way through October this year. But as a reference point to the average five-year -- five-year rate within October. And then it would reset down, let's say rates stay sort of exactly where they are and that's our experience through October, it would reset down. There's an overall, minimum and maximum that it can set to. There's a floor and a cap on that. And it had been at the minimum level at 1% for several years, given the rate environment that we were in, with last year's rate movement, it moved basically to the top end of that range. So, there's really no likelihood of any material increase and that it can only kind of either stay where it is or decrease as may be the case if rates kind of stay where they are now as we move forward through the rest of the year.

Got you. That's helpful. And how much did it actually increase in absolute terms? Like where did it get reset to?

It moved from 1% to 2.9% -- 2.95% excuse me and 3% is the [indiscernible] can go to. There's a rounding to the nearest five basis point kind of approach to it. So it landed just shy at the upper end of the range at 2.95.

Got you. And so even though the five-year treasury is above that level, would it still technically move down because it's not -- it sounds like it's not as clear as just spot rate.

Yes, I didn't really give you a whole formula. It's a reference to the five-year rate but then there's an adjustment factor to it. There was a reduction to that five-year rate. So, it's -- and that reduction factor is constant. So it's really relative to if the five-year rate is lower than it was last year you'll see a corresponding similar -- equal size reduction in the actual rate.

Okay. All right. Thank you.

Thank you. There are no additional questions waiting at this time. So I'd like to pass the conference back over to Laura Prieskorn for any closing remarks.

Thank you. We continue to have confidence in our business and our ability to meet our targeted level of capital returns for 2023. We thank you for your interest in Jackson and your participation in today's call. Take care.

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.