Good morning. Thank you for attending the Jackson Financial Inc. First Quarter 2024 Earnings Call. My name is Cameron and I'll be your moderator for today. [Operator Instructions] And I would now like to pass the conference over to your host, Liz Werner, Head of Investor Relations. You may proceed.

Good morning, everyone, and welcome to Jackson's First Quarter 2024 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 on 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 U.S. 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; the President of Jackson National Life Distributors, Scott Romine; our Head of Asset Liability Management and Chief Actuary, Steve Binioris; the President and Chief Investment Officer of PPM, Craig Smith; and Chief Accounting Officer and Controller, Don Cummings. At this time, I'll turn the call over to our CEO, Laura Prieskorn.

Good morning, everyone. This marks the first quarter to include the positive impact of Brooke Re, our captive reinsurance solution. The hard work and execution that led to the formation of Brooke Re positions Jackson for long-term capital strength and a continued focus on delivering on our commitments to all stakeholders. Beginning on Slide 3, we are off to a strong start in 2024, and our first quarter results reflect the expected outcomes of Brooke Re. In our 2023 full year results, we shared the structure of Brooke Re and anticipated impacts on Jackson National Life. This quarter, Jackson National statutory capital generation and risk-based capital or RBC ratio increased consistent with our expectations. As anticipated, we also saw greater alignment between our economic hedging approach and U.S. GAAP reserving, which led to reduced volatility in net hedging results and by extension, GAAP net income. Importantly, our statutory capital generation is better aligned with our non-GAAP measure of adjusted operating earnings as both are primarily driven by the substantial assets under management or AUM supporting our variable annuity-based contract. As a result, Jackson now has more intuitive, predictable and stable financial results that better capture the healthy economics and earnings power of our large and profitable book of business. Turning to Slide 4. You will see the benefits of our economic hedging were evident in both U.S. GAAP and statutory results. In a quarter with significant moves in both equity markets and interest rates, we reported a smaller net hedging result compared to prior quarters, which we'll cover in more detail. We also reported nearly $800 million of GAAP net income at Jackson Financial. Our adjusted operating earnings of $334 million grew 23% from the first quarter of 2023, benefiting from higher equity markets and a favorable environment for spread…

Thank you, Laura. I'll begin on Slide 7 with our first quarter results summary. Adjusted operating earnings of $334 million increased from both 2023's first and fourth quarters, driven by stronger fee and spread earnings. Our adjusted book value attributable to common shareholders increased over the first quarter due to healthy adjusted operating earnings and positive net hedging results, which I will discuss in more detail shortly. As a reminder, in the appendix of our earnings presentation, we have included additional general account investment portfolio details that provide breakdowns on both U.S. GAAP and statutory basis excluding the assets reinsured to third parties through funds withheld agreement. The information provides helpful insight into our highly rated and diversified commercial mortgage loan portfolio which is less than 2% of the general account. Jackson remains conservatively positioned with only 1% exposure to below investment-grade securities on a statutory basis excluding funds withheld assets. Slide 8 outlines the notable item included in adjusted operating earnings for the first quarter. Results from limited partnership investments, which report on a 1-quarter lag, were slightly above our long-term expectation for a $3 million benefit. In the first quarter of 2023, limited partnership income was below our long-term expectation creating a comparative pretax benefit in the current quarter of $23 million. In addition to this notable item, both first quarter 2024 and first quarter 2023 benefited from a lower effective tax rate relative to the 15% long-term guidance with a larger benefit in the prior year's first quarter. This occurred due to higher pretax operating earnings in the current quarter, which made tax benefits that are similar on a dollar basis less impactful to the effective tax rate. Adjusted for both the notable item and the tax rate difference, earnings per share were $4.16 in the current…

Thank you, Marcia. Our first quarter results show we are off to a great start in 2024, and I'm pleased our Brooke Re resolution is performing as expected. I'm quite happy with the results we've produced in the first quarter and energized by the prospects for our business shared today. I look forward to continued success in the remainder of 2024. As always, I'd like to acknowledge our talented Jackson team and their dedication to our purpose in providing long-term solutions for Americans planning for their financial futures. Earlier this week, we published our annual corporate responsibility report, which details how we invest in each other and our communities while continuing to enhance access to our annuity products and take an active role in moving our industry forward. I encourage you to read the report posted on jackson.com to learn more about these efforts and how they drive business value to support our long-term success. Finally, as we've previously shared, Marcia is retiring effective June 3. At that time, we expect our Board to appoint Don Cummings as Chief Financial Officer. Marcia's leadership, steadfast commitment and positive contributions will be felt for years to come, and I'm grateful for her dedication and her counsel. It has been an honor to serve Jackson alongside Marcia through the most transformational time in the company's history.

Thank you, Laura. It has been a privilege to be part of Jackson for my entire career, especially as we were transitioning to and operating as an independent public company. As we turn to the future, I know Don is well positioned to support Jackson's ability to generate capital and maintain our balanced approach to capital management.

Thanks, Marcia. Good morning, everyone. I appreciate the opportunity to take on the role of CFO at Jackson. Over the last 3 years, I've worked closely with Marcia as we became an independent public company and have learned immensely from her commitment to managing capital for the benefit of all Jackson's stakeholders. As we continue to work through the transition, I'm optimistic about the future and look forward to meeting many of you in-person in the coming weeks.

Thank you, Marcia and Don. Congratulations to you both as you embrace new experiences. I'll now turn the call over to the operator for questions.

[Operator Instructions] The first question is from the line of Tom Gallagher with Evercore ISI.

First off, Marcia, best of luck to you. And I guess my questions are both on cash flow. First one is, so the -- I heard your reiteration of the $1 billion of annual capital generation and then after we consider interest expense, that would probably leave around $900 million available potentially for shareholders, and I know you're committing to a midpoint of $600 million for this year. What happens to the other $300 million like when you do the waterfall, is that plan to grow excess capital and have buffers for contingencies? Or does that get consumed some other way based on new sales stream or something else?

Thanks, Tom. I think it's early days with Brooke Re. So we set our target for this year with a view that, that is sustainable, but potentially can grow over time. And your math makes sense in terms of what that means for the net result after we consider holding company expenses. And the difference there is really something that we will evaluate, I guess, over time. We've talked in the past about our balance use of capital which supports balance sheet strength as well as new business investment and also return to shareholders. So I think as we move through 2024, we'll have an opportunity to watch the business perform under this arrangement and evaluate our options. But certainly, if we had a different mix of business that may change the magnitude of investment for new business. We have a pretty capital-efficient business mix today in terms of what we're writing, but that may be an opportunity that also allows us the opportunity to think about other strategic opportunities that might come along as well.

That makes sense. And then my follow-up is just looking at your 10-Q, it suggests that the permissible dividend out of Brooke Life is a little under $400 million for 2024, and if I look at your current capital plan and Holdco cash, it looks like you should be able to still execute it, but you'll probably be a little bit tight at the holding company if that's all you end up taking out this year. Is there a plan to take out extraordinary dividends for the year? Maybe talk a little bit about that because if this lower permissible dividend every year is going to be at a lower level relative to your cash flow, how do you think about extraordinary dividends as an option?

Sure. Yes. First of all, I guess, just to go back a second, we did talk about the fact that as we began 2024 and move beyond that, that we would change from our annual larger distribution out of the operating company out of JNL just to a more periodic cadence on that, which was also meant to contribute towards more RBC stability, which is just another thing that would bring that out as well as the Brooke Re transaction. As we think about 2024 so far, we've already taken a distribution out of JNL to set up and capitalize Brooke Re. So as we move through the remainder of this year, we'll look for opportunities as Jackson National Life is performing well and generating capital to be able to support distributions upward to the holding company. And we think we've talked about the fact that JNL is the main engine for capital generation to support those distributions, which, of course, are all subject to regulatory approval. And really Brooke Re is just the pass-through. The main engine that's generating capital is JNL, and that's where we would look to source those distributions. But I guess I would want to point out that we would expect in the near term any essential...

Sorry, I meant Brooke Life, which is the parent to Jackson.

Yes. But we would probably expect that our distributions would really come from JNL up to Brooke Life and then from Brooke Life further up to the holding company. That's just because the Jackson National that is really generating the capital that would fund those distributions. So that would be the starting point of the distributions, and they would just pass through Brooke Life into the holding company. And we would expect in the near term, those distributions to be extraordinary. But I'd point out that historically, most of Jackson's dividends would have been extraordinary in nature. So that's not a new situation for us.

Okay. That's really helpful. So as bottom line, you wouldn't expect the permissible dividends to be a gating item in this year?

No, I think we've worked through the extraordinary dividend passed alongside our regulator quite often in the past, and that would be our approach again.

The next question is from the line of Suneet Kamath with Jefferies.

Yes. Just a couple following on Tom's line of questioning. Can you just give us a sense of what you'd expect the annual dividend out of Jackson National Life through Brooke to the holding company to be?

Well, I think I would just look to our capital return target and consideration, of course, of the holding company expenses just to guide on what type of distribution would be needed to support both of those activities that would require funding at the holding company.

Okay. Got it. And then I guess as we think about that $400 million of capital generation in the quarter, since I think most of the hedges are now in Brooke Re, should we think about JNLIC's capital generation to have greater sensitivity to the markets, both up and down relative to what you had before. Is that the right way to think about it?

I would say JNL's capital generation should be less sensitive to the market than what we saw before, simply because the cash surrender value phenomenon created a lot of unique phenomenon in terms of how the capital generation would play out given that we had that significant mismatch between our hedge gain and loss relative to what the reserve increases or decreases would be next to that. So I think what we would expect going forward for Jackson is really that the fundamental component of our capital generation there is driven by our fees, our AUM-based fees, which are then, of course, going to be tied to the size of the AUM. So while we'll have some equity sensitivity in that AUM base could increase or decrease that related to market performance. There's going to be a steady engine, I guess, or AUM base that's going to produce a pretty steady level of ease to support that capital generation. Certainly, some fluctuation as AUM fluctuates, but I think sort of far less volatility in that given that we don't have that challenge around the mismatch between our liability movements and our hedge movements that we had in the past.

Right. I was just talking about just the core earnings from that business. It will be more like an asset management type of company where it's fees on AUM as opposed to...

Yes.

Got it. Okay. And then I guess the last question for me was just as I looked at your supplement, it looked like the sequential change in statutory operating earnings was down something like -- it was down like $89 million. And I would have thought that we would have seen a bigger delta just given the fourth quarter had all the business associated with -- that's now in Brooke Re in the stat numbers and this quarter doesn't? Is there something that's offsetting that? Or is that not the right way to think about it?

No, you're thinking about that correctly. You would anticipate from quarter 4 to quarter 1, a decline, just given the fact that the guaranteed benefit fees and guaranteed benefit payments, the net of those 2 would no longer be reflected in Q1. But there are a couple of offsetting items and Don can highlight, I think, 2 of the ones that are probably the most material there.

Yes. Thanks, Marcia. So Suneet, there were 2 kind of positive items that offset the net fee settlement that Marcia described. First of all, we had some interest rate derivative losses that we're amortizing through the IMR in the fourth quarter. In first quarter, now those derivatives are passed over to Brooke Re, so that didn't repeat. So we got a positive from that. And then the second positive is really just the impact of our RILA hedging efficiency. As you know, the risk on RILA from higher equities, which is a nice offset to the lower equity risk we have on the VAs. The way we set up the reinsurance agreement is that JNL does the hedging and then we have an internal process to pass those results over to Brooke Re. So Brooke Re is getting the full impact of the VA hedges. And then JNL has got a benefit on the RILA side from not having to do as much hedging externally. So the 2 of those items combined essentially offset the negative from the net settlement on that reinsurance agreement.

Got it. I don't know if there's any way you could size those impacts?

Yes. Just big ground rough numbers. So the Brooke Re reinsurance settlement about $600 million negative with positive items that I mentioned roughly about $500 million, so that's approximately your $100 million decrease that you saw.

The next question is from the line of Ryan Krueger with KBW.

First one was on Brooke Re. Can you give some more color on just -- we have the GAAP hedging results, but can you give us a little bit more color on what happened within Brooke Re given some differences between GAAP and the accounting in Brooke Re on the hedging results as well as where the, I guess, sequentially what the capital position within Brooke Re did?

Sure, Ryan. So yes, I think we talked before about the fact that we expect that there to be more alignment between our nonoperating net hedge gain result in GAAP versus what we would see in Brooke Re, but I highlighted that they won't be exactly the same. There's kind of a directional indicator there when you look at the GAAP results. But just to note a couple of things that are differences between them so that we're careful that we're not doing a direct read across. We did mention, of course, as we talked and disclosed how the Brooke Re arrangement would work that we're using a modified GAAP basis over there versus a GAAP, the GAAP reported results, which we had highlighted a couple of those modifications. So that just means the liability movements are not going to be exactly the same as what you see for the MRB results in our nonoperating, but again, directionally much more aligned than what we would have seen in the past, certainly, when we would compare statutory impacts to GAAP. And then also another point to kind of mention around scope is that nonoperating results under GAAP include impacts related to the RILA business. So you see the embedded derivatives component there, which is not something that would translate over into Brooke Re since the RILA business is not part of what was ceded to Brooke Re. And naturally, there's also some hedging associated with those RILA movements as part of the GAAP result that would not translate over. So just to kind of highlight a few of those things. But I guess just in summary, as we think about how we ended the quarter. In Brooke Re, our hedging performed as we expected. Overall, we saw an alignment with reference to what you referenced from the GAAP results. We saw a bit of an increase in the capital position in Brooke Re, and we remain certainly very well capitalized compared to our minimum operating capital level requirement.

Got it. And then maybe just going back one more time to the big difference between the $550 million to $650 million of capital return guidance and the expectation for closer to, let's say, $900 million of free cash flow. Is the primary reason for the difference just you're giving this some time to allow the strategy to play out and show that and demonstrate that it's effective. And then as we move past this year, assuming things work as intended, you could then step up capital returns to something that would be closer to your free cash flow generation?

Certainly, time is an important factor here. It is a new arrangement. We want to make sure that we have the opportunity to watch things develop. And as I mentioned earlier, I think, historically, as we set our target returns, our financial targets, including our capital return target, we've spoken to the fact that we've set them with a view that they are sustainable for the long term but have the opportunity to grow. So certainly, we will look for that type of an opportunity here to the performance of the business continue as we expect it will, and that may lead to some positive movements in the future.

Next question is from the line of Tom Gallagher with Evercore ISI.

Just my one follow-up is when I look at overall retail annuities, the outflows are now near $3 billion, closer to $2 billion of outflows last quarter. Part of that is the [indiscernible] market because your AUM went up for VA. But part of it also looks like the lapse rate went up by about 100 basis points versus Q4 levels and a lot higher from a year ago. Can you talk a little bit about what's going on with persistency and sales? Would you expect this level of flows or outflows to continue, get better, get worse? Any help on that would be appreciated.

Sure. Yes. When we look, Tom, at the VA outflows, I mean, keeping in mind, there's sort of 3 buckets within that, right? There's death claims that we're paying. There's full surrender benefits. And then there would be partial withdrawals, probably largely related to the usage of the guaranteed benefits that people bought for the very purpose of being able to draw down on that and support retirement income needs. So I think just to kind of take them one by one. I mean I think mortality benefits as the block ages. It's just people, healthy holders age through time. That's probably a component that you would expect given the size of our book and the fact that policyholders are aging over time that would generally drift upward over time in terms of sort of that component, that's not necessarily going to be market sensitive. But as you said, when the account values are higher, sometimes that just translates into absolute or in dollar terms, a little bit higher amounts that go out on these events. When we think about the full surrenders, I think that is the piece that is market sensitive, not only, as you said, but AUMs higher, the dollar amounts that go out the door are larger, but also that's an outflow that does tend to react upward or downward based on the moneyness of the guarantees we typically see and would be incorporated in our lapse assumptions, there's a market-sensitive kind of dynamic adjustment there, which means that when benefits are less than the money, there tends to be more outflow when benefits are more in the money following market downturn, the lapse rate declines. So I think that, given the strong market performance we've had recently, we would expect we would be at those higher levels of outflow from a full surrender perspective. And then the partial surrender partial withdrawal, systematic withdrawal type activity being the third bucket represents probably close to about 30% of our outflows for the quarter. And that is really, again, driven a lot by just the usage of those guarantees, which is exactly what they were designed for. And that would be another one that probably over time, you would expect would have more of an upward drift to it as more and more policy holders age into that stage of life where they're ready to use those benefits.

That's helpful. And were any of those 3 buckets notable in the quarter? Or would you say when you analyze what happened with surrenders were they kind of equally split?

The buckets are, I said about maybe 30% on the partials. I think we would probably see more like 15% of that being death benefit. So a little over half would be the full surrenders and that would be the piece that, as I mentioned, would be more subject to some fluctuation based on just the market conditions, the moneyness of the benefits, that would be one that would probably be more at a higher point at this point given the strong market performance we've had recently.

The next question is from the line of Suneet Kamath with Jefferies.

Just wanted to talk about the RILA's product just for a second. Can you just talk a little bit about where the growth is coming from and maybe give a sense of which distribution channels you're having the most success in?

Scott, do you want to take that?

Yes, sure. Thanks for the question, Suneet. We're seeing success with RILA sales across all of our distribution channels, which really highlights the strength of our distribution partnerships and the breadth of our distribution reach. RILA is doing exactly what it was designed to do. It's added diversification to our product suite. It's enabled us to bring a protection-oriented solution that has strong consumer value to the market and we're seeing the results of strong sales momentum. We had another record sales quarter, as Laura mentioned. And RILA continues to attract new advisers to Jackson's overall product suite, which continues to expand our overall distribution reach. Laura also mentioned the new enhancements we just made in April, the +Income optional income rider and launching in New York. So we believe that there's ample space for us to carve out a meaningful position in the RILA landscape based on our distribution strengths and our competitive product offerings.

Got it. And then just one last one for Marcia. So you talked about the capital efficiency between RILA and the traditional VA. We had another rider to talk about that capital efficiency going away as the RILA block has gotten to a particular size. I'm assuming you're way away from that given the relative sizes of the business but just wanted to confirm that and if there's any sort of rule of thumb in terms of when you might start to see some of that efficiency get eroded?

Sure. Yes. We did speak to that kind of efficiency from an economic perspective and the ability that, that has to reduce our net hedging needs from an equity perspective given that offset from a delta perspective, and I think we shared last quarter that, that offset from RILA was in the 14% range. And I can say that it has increased with the additional sales over the first quarter to just over 20%. So we're certainly not -- we don't have that 100% offset or anything we've got a ways to go before that. But I would point out that since we have the Brooke Re structure in place and our VA guarantees are now seated to Brooke Re following the modified reporting basis, we don't have that same offset in VM-21. We have the economic offset, which is evident in the efficiencies we get from a hedging perspective, but we don't have the VM-21 offset, so we're not necessarily expecting we would see a change in how our capital would be impacted if we were to reach full offset, a full parity, I guess, between the RILA and the VA book.

Got it. And then just one last one, if I could. What is the typical capital charge for RILA? I don't know if there's a rule of thumb you could share, but that would be helpful.

Maybe 5%, probably is just kind of an approximate off the top of our head here.

There are no further questions waiting at this time. I would like to turn the call over to Laura Prieskorn, the CEO, for final remarks.

Thank you. We appreciate you joining us today, and we look forward to speaking with you again soon. Take care.

That concludes the Jackson Financial Inc. First Quarter 2024 Earnings Call. Thank you for your participation, and enjoy the rest of your day.