Good morning, everyone. And welcome to today's conference call, title Jackson Financial, Inc. Q2 '23 Earnings Call. My name is Ellen and I will be coordinating the call for today. At the end of today's presentation, there will be an opportunity to ask a question [Operator Instructions]. I would now like to turn the call over to Liz Werner, Head of Investor Relations to begin. Liz, please go ahead whenever you are ready.

Good morning, everyone. And welcome to Jackson's second quarter earnings call. Today's remarks may contain forward-looking statements, which are subject to risks and uncertainties. These statements are not guarantees of future performance or events and are based upon management's current expectations. Jackson's filings with the SEC provide details on important factors that 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 Web site 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, everyone. And welcome to our second quarter 2023 earnings call. During today's call, we will provide an update on our quarterly results and outlook on achieving our financial targets, including our capital return goals. September of this year will mark Jackson's second anniversary as an independent company. Over these last two years, we have consistently returned capital to shareholders every quarter. In the second quarter, we continued to build upon our proven track record by returning $100 million through dividends and share repurchases. In addition to our earnings release, we announced the Board approval for a third quarter common dividend of $0.62 per share. By the time we reach our upcoming anniversary in mid-September, we expect to exceed $1 billion in capital returned to shareholders representing nearly 40% of our initial market capitalization. Looking ahead, we remain committed to delivering on our 2023 capital return target of $450 million to $550 million as we continue to focus on capital generation and long term financial strength. Based on our progress through the first six months of the year, we are reiterating our 2023 key financial targets. We ended the second quarter with an RBC ratio up from the prior quarter and within our target range of 425% to 500%. We took actions during the quarter to optimize required capital at the operating company, selling certain limited partnership assets from Jackson National Life Insurance Company to Jackson Financial Inc., and Marcia will provide more detail on this transaction later in the call. We maintained a strong holding company position with nearly $1.5 billion in assets. This includes cash and highly liquid assets of nearly $1 billion with additional liquidity expected over time from the sale of limited partnership assets along with future operating company dividends. We are…

Thank you, Laura. I will begin with our second quarter results summary on Slide 6. Our adjusted operating earnings of $283 million are up from this year's first quarter as the benefits of higher equity markets are coming through fee income, but earnings are down from the prior year's second quarter as described on the slide. Similarly, our second quarter adjusted book value attributable to common shareholders was up from the first quarter due to non-operating net hedging gains and healthy adjusted operating earnings. We have once again 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. The information in the appendix provides helpful insight into our highly rated and diversified commercial mortgage loan office portfolio. As you can see, Jackson remains conservatively positioned with only 1% exposure to below investment grade securities on a statutory basis, excluding funds withheld assets. Slide 7 outlines the notable items included in adjusted operating earnings for the second quarter. Results from limited partnership investments, which report on a one quarter lag, were $23 million lower in the current quarter than they would have been had returns matched our long term expectations. Similarly, in the second quarter of 2022, limited partnership income was also modestly below the long term expectation, creating a comparative pretax negative impact of $12 million. The current quarter also included a $25 million pretax allowance for reinsurance losses with no similar item in the prior year second quarter, bringing the total year over year comparative pretax impact to negative $37 million. In addition to the notable items, the second quarter of 2023 benefited from a lower effective tax rate as compared to the prior…

Thanks, Marcia. As noted, we have been highly engaged with our Michigan-based insurance regulator regarding statutory reserve and capital requirements related to the cash surrender value floor. We are seeking a long term solution that will provide greater visibility into the profitability and strong cash flows of our variable annuity business. We look forward to continued progress and expect to provide you future updates. I continue to be proud of the Jackson team, the performance of our business and our balanced approach to capital management. Our recent recognition in Barron's and the positive reception to our recent RILA suite enhancements reflect this team's industry leading distribution, exceptional service and ongoing product innovation. These core capabilities allow us to meet the needs of our distribution partners and their clients and deliver value to all stakeholders. To our associates, thank you for your efforts and thank you for your unwavering dedication to helping people achieve financial freedom so they can live the lives they want in retirement. I'll now open it up for questions.

[Operator Instructions] Our first question comes from Tom Gallagher from Evercore ISI. Tom, your line is now open, please proceed.

Good morning. First question just to follow-up on the go forward, if equity markets continue to strengthen, the mention that the call options being further in the money. Would you expect if we had a repeat of 2Q and 3Q stronger equity markets, et cetera, with the floored out reserves, that there wouldn't be much RBC decline, or would you still have some moderate level of RBC decline? Just considering what you are projecting.

I think we have gotten ourselves floored out so far into the tail that we kind of know there's less responsiveness in the reserves and required capital. So that has meant that the call options and that protection has been very helpful to us as we completed the second quarter and position ourselves for the third quarter. So I think that that's correct that if the equity market continue to climb we do have that call protection in place to help protect our RBC position as we go forward.

And then my follow up is just on the discussion with the Michigan regulator. I just want to get a sense for what are you -- I assume it's some kind of negotiation, but what is your wishlist? Because I look at the positive GAAP reserves, meaning it's a net asset now, I think, it's several billion. You have a non-admitted asset in a DTA that I think you said was 2 billion. Would the wishlist be to get all of that added back to TAC? Because if you did, I would assume your RBC might double or something like that. What's kind of a realistic outcome and what are you aiming to accomplish? Like, is it to fully align the economics where you can, where the movement in reserves looks more like GAAP, or do you think it's going to be some lesser version of that?

Tom, I think our -- rather than a wishlist in terms of what form it takes, I'll just sort of start with what is our aim here. So we are looking for a solution that allows for better alignment between the movement in our liabilities and our assets. And the key reason for that is sort of two outcomes and thinking of these as important benefits on a go forward basis. First is that that would allow us to make sure that our hedging is actually much more focused on the economic risk and that we're having to do less non-economic hedging against the framework element within the statutory framework being the cash surrender value floor. So I think that would create the opportunity for more efficient hedging, which is a great outcome in terms of the ability to use a lesser amount or spend a lesser amount of the fees we collect for that purpose. And then the second benefit going forward is that we're looking for something that we think will allow for the economics of our business to be more clearly recognized and reflected in our financial results, so that we just have more intuitive results for anyone who's looking from the outside and trying to understand how things are moving and why they're moving in the directions that they are. So that's really our goal is looking for an opportunity to not have this sort of artificial floor in the reserves in a way that creates all of this sort of noise and understanding the results as well as creates the need for some non-economic hedging spend. And the paths to get there probably are many and those are the things that we're kind of in discussion with at this point.

And one more if I could slip it in. When would you expect to have this resolved one way or the other? Do you think it would be by the end of this year, by the time you file your staff filings for 2023?

At this point, we're particularly focused on solutions that are durable over the long term. And there is -- even with being engaged with the regulator at this point, there is a process that we have to work through. So we don't have anything definitive to share at this time. We continue to push toward that long term solution and expect and look forward to giving future updates and additional disclosures.

Our next question comes from Ryan Krueger from Stifel. Ryan, your line is now open, please proceed.

My first question is, can you quantify if there was not the requirement for variable annuity reserve to be floored at cash surrender value, what the magnitude of the impact of that would be? In other words, how much higher -- how much lower would your reserves be or how much higher would your capital be if that dynamic did not currently exist?

It's a little complicated because there is both an impact to cash value floor kind of creates an impact both on the reserves and the required capital. So if there is no floor whatsoever, there would be definitely a much lower reserve requirement, but accompanying that would be some higher increase of required capital then. So today, there is -- the floor kind of impacts both the numerator and denominator. I think the easiest thing to sort of point to as just a context item is just looking at our reserve for the benefits under GAAP, the MRB liability, which is actually currently in an asset position of about $1.7 billion. So that just gives you a feel for the reserves related to the benefits on a more -- something that's a little bit more economically responsive basis of accounting. The other complication around the cash ready floor for SAT is that it is full policy calculation base contract and rider, so it's not a direct comparison apples-to-apples to the guaranteed benefit reserve on GAAP. But I think it's a good point of context in just general view of the kind of magnitude that would be significant.

And then on the alternative asset sale to the holding company. Do you have any expectation on the timing of now selling those assets to third parties, and I guess, has already been a process that's underway to do so?

The process has begun and our expectation is that we would have that sale before the end of the year.

[Operator Instructions] Our next question comes from Suneet Kamath from Jefferies. Suneet, your line is now open, please go ahead.

Could you help us with of the quarter-over-quarter decline in required capital? I'm just curious, like, how much of it was driven by the equity markets being higher versus how much of it was driven by the lower capital requirements on the LP sale? And maybe relatedly, if you hadn't done the LP sale, would you have still been in that sort of 425% to 500% RBC?

So maybe start with the second one first. Without the LP sale, we would estimate our RBC would have been approximately at the lower end of the range. But when we look at the movement in the CAL over the order, the majority of it, significant majority of it, was due to market conditions, the strong equity performance and move up in interest rates. And a much smaller piece would've been the component related to the LP sale.

And then, I guess on the Michigan thing. Can you give us a sense for how long you've been talking to them about this issue? Is this something that you've started this year or has it been sort of an ongoing conversation? Just any color there would be helpful.

We've been looking at the issue itself and considering options for quite a while. So that was something that began in the latter part of last year for our own internal analysis. The discussions with our regulator have been this year. We did some of our own work first to kind of bring forward just the results of that so we could begin the conversation with some context for them. But the conversations with the [Indiscernible] [divs] have been more this year and are ongoing.

And then maybe just a bigger picture question. When we talk about RBC, you have this really wide range, which is I think wider than most companies, even VA companies use. And we're always trying to estimate kind of where you land within that range. And in some ways it feels like there's some reluctance on your part to be more specific or provide more specificity on the components of RBC, even though we get a lot of that information from your peers. And so I just maybe wanted to understand why you take the approach that you've taken? Clearly, it has an impact on the stock, it's very important. I think some additional specificity would be helpful. I wanted to just get your logic behind that.

Well, I think it's actually kind of connected with how you started. The fact that we have the wider range in place is a function of the fact that we recognize that there is likely to be quarter by quarter volatility in the ratio. So we set a range that was wide enough to be able to absorb that volatility and leave us within a range that we're comfortable operating in at any point in that range. So I think with the acknowledgement that there's volatility quarterly in the RBC, we're looking at the business on a longer term basis. We're looking at the fundamentals of it, the economic, future of the business and the cash flows that come off of it. And some of the quarterly volatility is driven by some of the unique elements in the statutory framework. And we have just felt that some amount of focus on the detailed movements in a way detracts a little bit from some of the larger messaging around the fundamentals. And so we've just -- because we want to look at it in a larger range that way, we felt that that was an appropriate way to kind of communicate it externally.

I mean, for what it's worth, I would encourage you to maybe think about providing a little bit more specificity. I think the long term view makes sense a hundred percent, but my guess is most companies have the same view of the business. But just more color, sensitivities, that kind of thing I think would be very helpful.

Thanks. Appreciate the feedback.

Our next question comes from Alex Scott from Goldman Sachs. Alex, your line is now open, please go ahead.

First question I had is on the RBC and comments you made on CTE-98, I mean, it sounded like even in the tail scenarios that you are floored out of the surrender value. I mean, that's sort of surprising just given the tail is supposed to be worst 2% of scenarios. I would think that would be a nasty enough outcome that the guarantee would have some value beyond just the surrender value on the policies. Relatedly, my understanding is the NAIC is considering changing that model that's producing those scenarios, and that there has been some field testing going on. So I was just interested if -- have participated in that field testing, if you think that will still be the case under a new model that potentially introduces more rate vol? And is what you are communicating basically suggestive of you are really -- you are not having a whole lot of capital against the VAs at all right now, because of that dynamic with none of the scenarios putting you beyond the the surrender floor?

Well, I guess, let's just go back to where you started in a sense that that’s correct and the phenomenon that we saw in the second quarter in particular with the continued rise in interest rates, coupled with the higher interest rate -- continued rise in equities, coupled with the higher level of interest rates that we are in, is sort of favorable market condition kind of package that we haven't necessarily seen in quite the same forms since VM-21 came into play, given that last year when rates went up equities were down. So those were kind of working against each other in that sense. And so I think the natural outcome of current conditions would be that the flooring would push further out into the tail of the distribution. And so you are right, most of our full 10,000 scenario sets are floored out now. So the flooring is not just within reserves but sort of deeply into that required capital CTE-98 tail, as you were saying. And just again to kind of contrast with what we were saying earlier, on a GAAP basis, totally different methodology, of course, but there we are in an asset position. So I think it's not surprising to me or there is a consistency in sort of how you think about that, that if we work floored out on stat, you would in theory be seeing reductions in the liability requirements similar to what you are seeing in GAAP. But that just is something that doesn't work given the cash value floor. And you are right in that there is not a lot of required capital being held against it. But on the flip side of that, we are holding much higher reserves, because we are holding reserves at the cash surrender…

And maybe if I step away from some of these RBC dynamics and accounting and go back to your comments of your economic view of the cash projections has obviously benefited a lot from higher equities and higher rates. You know, I think that's something that we haven't really had any disclosure on since around the time that you all became a standalone public company. So I'd be interested -- I mean, can you provide any detail around that, can you help us think through what that looks like now? And if that's the way to look at the true economics it’d be beneficial for us to understand where it's at and maybe help us value the company properly outside of some of these headaches on RBC with surrender floors and so forth?

The disclosures that we put out initially and in our Form 10, the primary one I think that folks ask about is the five year projection of distributable cash flows. Of course that is in a statutory framework, so it would reflect any of the limitations or unique aspects of statutory accounting in that. So what we've been looking at is, while we definitely want to provide as much insight and help others get the greatest amount of insight into the business, we do think that the best time to update those will be just after we get our solution in place with respect to the cash value floor. So we have a clearer picture of how we think capital will emerge as we move forward under that solution. I think that'll be a lot more meaningful and it'll be a good opportunity to refresh that information.

Thank you. There are no further questions on the line, so I would now like to hand back to Laura Prieskorn for any closing comments.

Thank you. Your participation and interest are appreciated. We thank you for joining us this morning. Take care.

That concludes today's conference for everybody. Thank you very much for joining. You may now disconnect your lines. Have a lovely rest of the day.