Hello and welcome to today's Jackson Financial Incorporated Fourth Quarter 2021 Earnings Call. My name is Bailey 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 Liz Werner, Head of Investor Relations. Liz, please go ahead. Your line is now open.

Good morning, everyone. Before we start, we remind you that today's presentation may include forward-looking statements which are not guarantees of future performance or outcomes. A number of important factors including the risks, uncertainties, and assumptions discussed in risk factors, management discussion, and analysis of financial condition, and results of operations, and business goals in the Company's registration statement on Form 10, and management's discussion and analysis of financial condition and results of operations in the Company's most recent third quarter 10-Q could cause actual results and outcomes to differ materially from those reflected in the forward-looking statements. In this presentation, management will refer to certain non-GAAP measures, which management believes provide useful information in measuring the financial performance of the business. A reconciliation of non-GAAP financial measures to the most comparable GAAP measures is contained in the appendix to the presentation. With us today are Jackson’s CEO, Laura Prieskorn; our CFO, Marcia Wadsten; and our Vice Chair, Chad Myers. At this time, I'll turn it over to Laura.

Good morning, and welcome to our full year and fourth quarter earnings call. This morning, we'll discuss our accomplishments for the full year in the quarter as well as our outlook for the future. Looking back on 2021, we've successfully transitioned to operating as a public company, executed on our business strategies and delivered on our commitments to shareholders. 2021 was a momentous year for Jackson, and throughout our transition we maintained a leading market position exceeding 19 billion in annuity sales through a network of over 580 distributors. We believe our diversified annuity offerings and dedicated distribution support and service sets us apart from competitors and positions us for the future. This year, we are pleased to once again be recognized by service quality measurement group, the independent organization that benchmarks over 500 leading customer context centers across North America. Jackson received four awards for its service efforts in 2021 including highest customer service for the financial services industry. These awards reflect the hard work and leadership of our operations team in Jackson's continued commitment to serving financial professionals and their clients. We remained focused on managing profitability, risk, and capital and are on track to reach our capital return target ahead of schedule. Yesterday's announcements included an increase to both our shareholder dividend per share and our existing share repurchase authorization. Today, we'll provide our outlook for capital of return to shareholders, which has been reset to a calendar year basis for 2022. We look to our future with confidence and remain committed our business and building a track record of delivering on our financial targets. Last quarter, I commented on the hard work and collaboration of our colleagues to position Jackson for success as an independent company. The Jackson culture and a long-tenured leadership team continue to…

Thank you, Laura. Looking at our results on Slide 6, we continue to generate healthy levels of adjusted operating earnings. As Laura just mentioned, our fee focused business mix benefited from higher average separate account balances, driving hierarchy income. 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 of the fees are moved below the line with no assumed profit on guaranteed benefits included in adjusted operating earnings. In 2021, strong adjusted operating earnings combined with positive non-operating income resulted in a growing book value even after returning 261 million to shareholders in the fourth quarter. Slide 7 outlines the notable items included in adjusted operating earnings for the fourth quarter, starting with the market driven deceleration of DAC amortization. To provide a little more background, the amortization of DAC is a key item for our results given our annuity focused balance sheet. Operating DAC amortization has multiple components. For clarity, our financial supplement reports these components as core amortization, which is driven primarily by our pre DAC gross profits for the period, and any market related acceleration or deceleration, which results from the pattern of separate account returns over time, as well as the DAC impact from our annual assumption review, which occurred in the fourth quarter. In the fourth quarter of 2021, there was market driven deceleration of DAC amortization resulting in a $66 million reduction of DAC expense for the quarter on a pretext basis. This was primarily due to a 5.9% separate account return in that period, which exceeded the assumed return. In the fourth quarter of 2020, there was a deceleration of DAC amortization resulting in a pretax $238 million reduction in DAC expense, primarily due to a…

Thank you, Marcia. Looking back on 2021, Jackson's ability to execute has led to many significant accomplishments. First, the successful transition into becoming a separate public company resulting from the tremendous internal collaboration and hard work of our employees. Second, ending 2021 in a position of balance sheet strength while returning capital to shareholders and meeting our financial targets. And lastly, we continue to expand and diversify our product offerings and distribution channels. In 2022, we intend to maintain our balanced approach to capital management, investing in the growth of the Company while delivering on our targeted capital return to shareholders. Jackson has long been a leader in the retirement income and savings solutions market. For over a decade, we've been one of the largest annuity writers with a disciplined and client focused approach to the market and we look forward to continuing that tradition. Thank you for joining our call. And at this time, we'd like to open the line for questions.

[Operator Instructions] Our first question today comes from Suneet Kamath with Jefferies. Suneet, please go ahead. Your line is open.

I wanted to start with the $600 million dividend that you're taking out of the operating company in the first quarter. Is that sort of a typical dividend that you guys would expect going forward? Or was there anything unusual about that nominal amount of capital that's coming out?

Marcia, do you want to address the dividend?

Sure. Yes, I think it was pretty normal quarter. I mean, it may be a little elevated compared to some -- maybe the average run rate we've seen over time, but it reflects a really good year for the business and to 2021. And kind of recognized too that we hadn't paid a dividend in the prior year, so that all combined together to land us at that $600 million level.

And then, I think you said, 510 is coming out of Brooke Life going to JFI. What about the remaining 90 million?

The other 90 million is, will eventually make its way up to the holding company over the course of the year in connection with some, financing transacts or financing arrangements between the entities. So that is, it's just something that timing wise happens semi-annually with surplus note activity and so that will eventually get up there to the holding company before the end of the year.

Got it. And then, my last one is, just on kind of the macro environment. We're sitting here with the market down 8% to 10%. Can you just talk a little bit about the moving pieces in your RBC calculation? And what we should expect as we think about first quarter?

Sure. We've certainly worked through many types of market conditions over time and our hedging has performed as expected, and I’ll turn it over to Marcia to share more specific remarks.

Yes. In terms of the capital statutory position we would certainly with the market down that's going to be something that could translate into increased reserves or capital requirements. But on the other end, on the other hand, we've had an increase in rate, that would work in the opposite direction, tend to you know, reduce, requirements in the statutory framework. So I think those things working kind of in opposite directions right now. Obviously, we'll keep an eye on how things go, but just to reiterate what Laura said around the hedging, I mean, these types of movements are not outside of the bounds of things that we've worked through before. They're well within the range of sensitivities that we routinely watched and now preparing for in terms of how we've arranged our risk limits and our risk appetite. So, we're feeling like our position is actually holding up quite well during this period of time. We note that hedging can become more expensive when we have higher volatility like this. But again, we have a really strong base of fees that support that hedging budget with our benefit fees being based on the benefit base rather than the asset under management. So, that's a very stable fee income stream that supports our hedging. So, I think we feel like we're still well within range there.

The next question today comes from Ryan Krueger from KBW. Ryan, please go ahead. Your line is now open.

Thanks. Good morning. My first question is, when you think about the 425 million to 525 million capital return target for 2022, can you talk about the extent to which you would expect that to be funded from ongoing capital generation from the business versus some use of the existing access capital?

Yes. Good morning, Ryan. Thanks for the question. In general, we're targeting cash return that we know is supportable by the business and has a balance mix in between dividend and share repurchase. I'll remind that this updated target is now based on a calendar year basis. And we certainly view it to be sustainable for a normal course. Marcia, additional remarks.

I might just add that what we're focusing on here is looking at how the business performed last year. What did that make available to in order to be able to fund a return? So, it's not necessarily tied directly to how the business is. We're not getting ahead of ourselves in terms of how the business is going to perform over the current year. So, we're feeling that 425 to 525 is a -- it's a good target that we're comfortable with for this year.

Okay. Got it. And then just a quick one. I guess, how should we think about the timing of when the last quarter you had talked about 7.2 million of diluted shares coming into the share count, but only some of that came in the fourth quarter. How should we be the timing of that going forward?

That will come in over time. And I think it will depend upon kind of market conditions and the way in terms of the pattern and the timing. Is it perfectly predictable at this point in time, but that will come in kind of gradually over the next couple of years.

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

Good morning. Just the first question on hedging costs. Can you remind us how much you're spending annually on hedging costs? I think you've mentioned in the past, it's below your guaranteed fees. But can you just give some quantification of that? Is it 2 billion annually? Is it 2.5 billion annually, you're spending on hedging? And then if we look at what's happened in the environment in Q1, you've had two offsetting movement. You have interest rates rising a lot, but then you have fall spiking. I presume since you're, I think you're using more shorter term hedges. The [vol] is the probably the overwhelming influence on hedge cost, but can you comment on if we remain in a Q1 environment for a while, what impact do would you see it having on hedge costs? And would you still expect those to be below guaranteed fees?

Good morning, Tom. Chad, do you want to take that?

Sure. I think Tom, what we've disclosed in the past is, if you look at the guarantee fees, it tends to run broad range 2.5 billion or so a year in terms of the guarantee fees we collect. It's very much dependent on terms of the market on how much of that we're spending. I think as we look at last year you could expect, we spent less than that because it was a very low [vol] year. And that came through in capital formation. We're part way through the quarter. So it's really too early to say exactly what's going on for this quarter, other than hedging costs would be up. Again probably no big surprise there, but with the [vix] running around 30, you can expect that we would have increased hedging costs, whether it's above the fees or not, or at or above or wherever. I'm not, not exactly sure at the moment. For the gain, because we haven't -- we don't have a quarter fully done yet, but I think it's very much within, as Marcia mentioned within the range of what we've seen historically. So we would expect to have that kind of performance, like we've seen historically. With respect to the interactions of how things are going. I think, you'd see the benefits from higher rates again, it's mentioned that there is good offset there. The quarter-to-date, as we're talking about you're kind of rebalancing hedges. We do have, as you mentioned, shorter dated hedges. So, we are subject to roll -- kind of the roll cost of those and are experiencing higher premiums that we'd have to pay for options bought. But I would also just keep in mind that a good chunk of our hedging book is off of futures. So, in some respects, as interest rates start moving up on the short end futures carry will start to reduce somewhat. So that'll be a little bit of tailwind eventually once the fed starts raising rates. And I think, the other thing I'd mentioned is just that, keep in mind, since we are -- our focus historically is been a on more instantaneous chops and risk limits that way, as opposed to an immunization strategy of GAAP earnings. We don't tend to be as responsive to the market maybe as some others might be. So as we see a lot of chop in the market, we're not rebalancing hedges maybe as quickly or as just kind of a immediate reaction as you might have to, if we operated a different way. So that does mitigate a little bit of the cost because we're not getting whip saw as much as you might otherwise get.

Next question I had is just on, would you still -- and I think Suneet sort of alluded to this question, but I'll ask a follow-up. With equity markets doing, what they're doing and hedge cost doing what they're doing. Just a broader question. Would you still expect to generate statutory capital or call it RBC -- positive RBC capital in a 1Q type of environment? Or is it you need to close the books before you make a determination on that? Because I ask because I've thought about the full Florida out reserves being a meaningful positive in terms of not needing to build reserves in an equity market correction quarter. So that should give you some dry powder to generate RBC, but any thoughts on that?

Well, I think you may have hit it on the head earlier when you said we probably need to close the books to really no, that's something, obviously we'll be watching as we move through the year, but a lot of factors come into play there. And I think we just need to kind of see how things play out in the calculations.

And then just a follow-up on that. Can you give some quantification for when you would start to build reserves again based on equity market correction territory levels? I just want to get a sense for how much kind of embedded margin is in there to think about at what point you'd start to build reserves again?

I don't have the kind of exact level in my head right now, but I know that where we had gotten to at the end of the year, we had significant flooring, pretty deep into the tail, so even going into some of the scenarios that make up the CTE-98 for the capital requirement. So, we're without being able to quantify the exact sort of percentage drop. I think we have a decent margin in there in terms of working away through some of the any kind of market downturn before reserves would go up. You would see to the extent that there's any kind of flooring impacting the CTE-98 tail that will come off earlier. As those tail scenarios respond more quickly than the full set that go into the 70 CTE for reserves, but we do have a, I think, a good buffer particularly with all of the market growth that we saw in 2021.

The next question today comes from Erik Bass from Autonomous Research. Eric, please go ahead. You line is now open.

Hi, thank you. And appreciate, you mentioned earlier that you'll give more specifics on LDTI impacts later in the year, but I was hoping you could maybe talk a little bit about some of the qualitative impacts as we started to hear things from peers. I guess specifically, should we expect a significant change from bringing the VA guarantees to fair value? And then also given your hedging strategy, do you expect GAAP earnings volatility to be higher or lower prospectively under LDTI?

Sure. Thanks, Eric. I guess I would say with respect to the first part, I think for us by definition, the movement that will occur in terms of the calculations around market risk benefits will mean an increase in reserve, simply because we're moving from or we're moving a portion of those guarantees as being reserved under real world type framework with more of a long-term equity growth assumption to a calculation that's going to be tied to current interest rates. The actual impact on those reserves will be sensitive to factors that will play out over the course of this year, in terms of where the equity markets go, interest rates and credit spreads as well. But I think definitionally, there would be an expectation for a reserve increase there that would come to retained earnings in terms of the implementation effects. And then as far as volatility going forward, I think what I would see is that if you sort of think first to operating results, what we won't see is the market sensitivity and DAC amortizations that we have today. So I was thinking in operating results, we probably are looking at something less volatile, whereas in non-operating results, I think because we have a couple things that are going to go in maybe different directions. So it's hard to say how it all plays out because it'll be somewhat market dependent, but I think the changes will introduce more interest rate sensitivity into the liability given the move to FAS 157 and probably less sensitivity to the equity movements with respect to our hedging approach. So I think there's a balance there there's also less of a DAC offering effect, all in probably heightened volatility, but it's below the line. But it's really going to be probably pretty sensitive to whatever path of market or kind of economic factors play out period by period.

Got it. Thank you. It's very helpful color. And just one follow-up there. Do you have a sense of, I think you bifurcate some of the guarantees between fair value and SOP accounting. How much of the guarantees I guess are sort of add SOP accounting and would need to move to fair value?

Well, I think for all companies, I think you would see the debt benefits, income as well, but debt benefits would be applicable to us since we have minimal amount of the GMIV business. Those will move. And then, we do bifurcate our GMWB today, a good portion of that is already under FAS 157. And it would, it's only really the portion that would be projected to develop after the benefit base is exhausted where you would have an SOP-03 reserve component today that would need to change. But the change would've benefits.

Perfect. Thanks. And I could just sneak in one last one. Do you intend to provide an update to the different distributable cash flow scenarios that you'd included in the Form-10? And is that something you'd do in the 10-K or at a later date?

It's not something we've planned at the moment, but we recognize we'll have a lot of heightened disclosures coming in 2023 in connection with the LDTI changes. So, we'll certainly be looking at the overall package of disclosures and happy always to consider things that we think add greater understanding.

Thank you. And I think it would be helpful especially given the significant changes in the macro from over the past year. Just be helpful. I see how those developed.

Sure. Thank you.

[Operator Instructions] The next question today comes from Goldman Sachs. Please go ahead. Your line is now open

Hi. Thanks for taking the question. So first one I had for you all is just on the amount of capital you're distributing and sort of going back to the methodology. I think that you talked about previously being the 50% of excess capital generated over 400 RBC. When I think through this a $100 million higher, is that -- should I think about that as maybe you're shifting the way you think through that methodology? Or are you generating a $100 million more at this point than you expected? Can you help us think through that? Or are you hitting high enough RBC ratios where that methodology doesn't really make sense anymore? Given I think inherently like that methodology would cause the RBC to go up over time, and at some point it doesn't need to go up anymore.

Sure. Let's take that, I guess. First, I'd say we've maintained our view on the 40% to 60% of excess capital generation as a guide. But that's the part I probably would emphasize as a guide. We wouldn't be doing exact calculation each period and having that directly indicates the amount of return. We do view it as a useful guide and we also recognize that capital return, our excess capital generated in that way is not necessarily going to be stable every period. I mean, we have a key focus of our hedging program to help stabilize distributable earnings, but we do have market sensitivity. So what we've done here is really just look at the business as it performed very well over last year, getting a fresh view now that we're kind of on the other side of the demerge. And with all of that in mind and in our own kind of view of business, and the near term, as well as long term felt comfortable that we could increase to the 425 to 525 target for 2022.

Got it. And makes sense. I mean, I guess my follow-up here is we have this targeted RBC ratio that's lower than where you are by a decent amount. But I think, just based on that methodology of 40 to 60 and I think, and please correct me if I'm wrong, but I think that kind of methodology would actually cause upward momentum to continue you on the RBC ratio. So maybe the more interesting number, I guess from my point of view, would be instead of the minimum -- what's sort of the maximum RBC, like how high would you let it get before you change that methodology to maybe returning something closer to a 100% access capital generation?

Well, I think we would always have the flexibility to go outside of that. As I said, the 40 to 60 range, we wouldn't view the 40 or the 60 as hard maxes or anything there. So, we certainly would have the capability if we've generated sufficient capital. And we have considered all of our balanced uses of capital across new business investment, capital return being one of the component parts as well and maintain our balance sheet strengths and the like if the on balance right answer for shareholders was to return that, we would certainly be open to going higher and to whatever level made sense under the circumstances. So that really is just kind of the guide and circumstances as well, always come into play with consideration of the opportunities in front of us and what makes the best sense for the shareholders.

There are no further questions registered. So, I'd like to pass the conference back over to CEO, Laura Prieskorn for closing remarks. Laura, please go ahead.

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

That concludes today's Jackson Financial Incorporated fourth quarter 2021 earnings call. Thank you for your participation. You may now disconnect.