Good morning and I would like to welcome you all to the Jackson Financial Inc. Fourth Quarter 2023 Earnings Call. My name is Brika and I will be the moderator for today’s conference. [Operator Instructions] I would now like to pass the conference over to your host, Liz Werner, Head of Investor Relations from Jackson Financial to begin. So Liz, please go ahead.

Good morning, everyone and welcome to Jackson’s fourth quarter and full year 2023 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 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; our Head of Asset Liability Management and Chief Actuary, Steve Binioris; 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 fourth quarter and full year 2023 earnings call. We have quite a bit to cover today, so will allow extra time to provide updates and answer your questions. We will start with a review of our strong track record of capital return and success in delivering on our financial targets, followed by an overview of our fourth quarter and full year 2023 results. We will also provide insights into the structure and strategic benefits of Brook Life Reinsurance Company, or Brook Re, our recently formed captive reinsurer. In prior quarters, we discussed our focus on finding a durable solution to the statutory impact of the cash surrender value floor with the goal of better aligning our reserve liability with the economics of our business. By addressing the statutory requirements associated with the cash surrender value floor, Brook Re provides the ability for more stable capital generation and reduced RBC volatility. It also allows the profitability of our healthy variable annuity book to be more transparent and intuitive in our results. Finally, we will conclude today’s remarks with our 2024 outlook and financial targets, along with our expectations for sustainable capital return to shareholders. Turning to Slide 3. Jackson’s capital return to common shareholders since becoming a standalone public company in 2021 has exceeded $1.2 billion in the form of share repurchases and shareholder dividends. The fourth quarter of 2023 marked our ninth consecutive quarter with share buyback activity. And as of year end 2023, the cumulative common shares repurchased represented over 21% of shares outstanding at separation. We view our cash dividend as a valuable source of sustainable capital return and have cumulatively paid more than $450 million to common shareholders in just over 2 years. Yesterday, we announced our…

Thank you, Laura. I’ll begin with our fourth quarter results summary on Slide 7. Adjusted operating earnings of $204 million decreased from last year’s fourth quarter as stronger fee and spread earnings were more than offset by higher expenses as well as the impact of our annual assumption review update. Our fourth quarter adjusted book value attributable to common shareholders increased from last year’s fourth quarter due to healthy full year adjusted operating earnings. Slide 8 outlines the notable items included in adjusted operating earnings for the fourth quarter. Results from limited partnership investments, which report on a 1-quarter delay were below our long-term expectation for a negative $28 million notable impact. In the fourth quarter of 2022, limited partnership income was below our long-term expectations, but to a greater degree, creating a comparative pre-tax benefit in the current quarter of $34 million. Consistent with prior years, we completed our annual actuarial assumptions review in the fourth quarter. This led to an unfavorable pre-tax adjusted operating earnings impact of $60 million in the current quarter compared to a benefit of $38 million in the fourth quarter of 2022. The impact in 2023 was focused in the closed block segment where we recorded a reserve increase for life insurance and annuitization benefits driven by a decrease in lapses partially offset by an increase in the long-term earned rate. In addition to these notable items, both fourth quarter 2022 and fourth quarter 2023 benefited from a lower effective tax rate relative to the 15% long-term guidance with a larger benefit in the current quarter. This occurred due to lower pre-tax operating earnings in the current quarter, which made tax benefits that are similar on a dollar basis more impactful. Adjusted for both the notable items and the tax rate difference, earnings per…

Thank you, Marcia. We are pleased to have yet again achieved our financial targets for the year ending 2023 and a strong financial position. Our year-end results underscore Jackson’s ability to maintain financial and risk management discipline while continuing to serve our customers through product innovation, exceptional distribution and industry-leading service. In 2024, we are targeting $550 million to $650 million in capital return to common shareholders. This represents a 20% increase from last year is our third increase since becoming an independent company, and we believe there is further potential to grow given the expected long-term benefits of Brooke Re. We have increased our per share common dividend level by 13%, representing continued confidence in our business. Looking over the long-term, since establishing our first dividend in the fourth quarter of 2021, we’ve increased our dividend per share by 40%. We continue to view our minimum RBC ratio at JNL as 425% and expect to operate above this level. Given a more stable and predictable capital and RBC ratio following the Brooke Re transaction, we believe that an RBC target range is no longer necessary. With respect to operating company dividends, our intent is to maintain our distributions from JNL to JFI through periodic payments over the course of the year as opposed to one large annual payment in the first quarter. Our outlook for consistent capital generation reflects our high-quality book of business and our ability to execute. Before closing, I’d like to acknowledge that the 2023 accomplishments covered today reflect the hard work of our incredibly talented associates who show up each day to provide long-term solutions for Americans planning for their financial futures. I am grateful for their contributions, and I am proud to work alongside the team so committed to our business, our communities, each…

[Operator Instructions] We have the first question from Ryan Krueger of KBW. Ryan, your line is open.

Thanks. Good morning. My first question was on capital generation and you had mentioned you would expect $1 billion or more annually. So, I had a couple of questions on that. One, was that for the in-force business only, or was that after new business strain?

Hi Ryan, it’s Marcia. That would be after a new business strain in line with the level and kind of sales mix that we would typically be – have been at recently, yes.

Got it. And then I guess just given the strength of that comment, I guess how should we think about the $550 million to $650 million of capital return guidance that you provided for 2024 relative to the $1 billion or more of expected capital generation?

Well, we are thinking about it in a couple of different ways, I guess to go through. First, the capital generation will support the return of capital, as you noted, but it also will support the level of holding company expenses and debt service that we need to do. So, there is a slide there that we need to think about. We have talked historically about our balanced use of capital between new business investment, which may – could include, I guess a different mix of business as we move forward over time that may require a different level of strain or upfront investment. Also capital returns, certainly one of the priorities as well as just balance sheet strength. As we looked at our capital return for 2024, we recognize that the Brooke Re transaction was new, and so we are going to take a measured approach here. But I think as Laura stated earlier, we would anticipate with this outlook that we might be able to see increases in our capital return as we move forward in time given that profile of expected capital generation.

Thanks. I had just one more follow-up. I wanted to make sure I understood. Is the $1 billion before the holding company expenses, or is that net of the holding company expenses, which I think are usually about – maybe about $125 million?

Yes, it would be before. So, that would be the just capital generation from the JNL entity, which would then need to, in part, support those holding company expenses that are, as you say, about $125 million a year.

Okay. Great. Thank you.

Thank you. We will move on to the next questionnaire, which is Suneet Kamath of Jefferies. Your line is now open.

Thanks. Good morning. So, just wanted to follow-up on Ryan’s question, so I think over the past couple of years, the subsidiary dividends to the holding company have been around $600 million. So, should we be expecting that to increase kind of given that $1 billion capital generation figure that you just mentioned?

Hi Suneet. Yes, I think – well, certainly to the extent that we are supporting a higher level of capital return, we would need to do that through a higher level of remittance from the operating company. And then as the capital return target moves forward in the future, likewise, we would have similar changes in our distribution to support that as needed.

Okay. Got it. And then I guess when we think about the capital sufficiency of Brooke Re, I had that comment in the deck of 95% plus of the scenarios, it’s adequately capitalized. I guess what are the 5% or so scenarios where it’s not, like what would have to happen for you to need to contribute more capital into that business? The reason I ask is because I think we normally think about VA capitalization is really in that tail scenario, which I am assuming would capture that 5% where capital is not sufficient, so just some color there.

Sure. So, first of all, I guess maybe I will make a comment or two comments about how we set things up and structure things for our initial capital level. We looked at the capital that we had put in from Jackson, which was approximately $700 million. And coupling that with a strong benefit from a negative liability puts us in a very strong balance sheet position to begin with. So, we start off well above that minimum operating capital that we want to maintain going forward. And then what we have structured given the goal for Brooke Re to be self-sustaining as we have structured a risk framework that looks at how the balance sheet might move as we look out over the future and kind of in a short-term view as well as a more longer term view and making sure that we would, as we have stated earlier, be above that minimum capital over time in greater than 95% or more than the 95th percentile of that distribution. So, we are looking across a wide number of economic scenarios and wanting to be at least at the 95th percentile. As we started this out and looked at the opportunity that we had and how we wanted to set the balance sheet up to begin with, we had a very strong position in terms of our capital at JNL at the end of the year, which provided us with a good deal of flexibility in terms of how we could position the starting balance sheet for Brooke Re. So – because of that, we chose to capitalize initially at a level closer to the 98th percentile of the distribution. So, I want to be clear that we are not aiming to be right at the 95th, it’s greater than the 95th and we are starting off in a stronger position than that. Looking at what some of those tail scenarios might look like, they would include the types of events that we would see – we would expect to see in a tail very high realized volatility, strong decline in the equity market or a strong drop in – or a large drop in interest rates. The types of things you might see in like the first quarter of…

Yes. Okay. Understood. And then I guess maybe just a last one, just so we can kind of keep score on this. So, normally, we look at RBC, and that’s kind of how we determine the capital adequacy of your insurance sub. Now, we have Brooke Re. So, what metrics are you going to give us sort of on a quarterly basis so we can kind of assess the capital adequacy of the subsidiary?

We will speak to the capitalization generally, I think on a regular basis with respect to the captive, the Brooke Re entity. We don’t, I think intend to put out a detailed kind of RBC like position in a different format for the Brooke Re, but we will speak to how it is performing, whether it maintains a good capital position, and we will probably generally speak to hedging in a different way than we have in the past, where we have historically talked about hedge spend as one of the metrics that we would look at to assess whether our hedging needs were within the budget of the fees we collect given that we will have more – probably more of a futures-based hedging strategy and not quite so heavily options-based strategy. That approach probably doesn’t really fit going forward, so I think we will talk in the future more about hedge effectiveness and how well our hedging has performed relative to our expectations. And that is really going to be what’s going to be the driving force for the stability of the balance sheet moving forward.

Okay. Thanks.

[Operator Instructions] We have the next question from Tom Gallagher of Evercore ISI.

Thanks. Just a follow-up to Suneet’s question on Brooke Re, the – I know you mentioned the target, I guess is going to be 95% plus. You are going to initially capitalize it closer to 98%. But isn’t the VA standard now CTE-98 across the industry? So, shouldn’t we be thinking about 98% being a better baseline, or is there something about this agreement you have with the captive and your regulator, that’s going to allow you to run closer to 95%?

Well, Tom, I think of it in kind of two layers. I mean we have a minimum operating capital, which is already kind of taking a place, if you will, of the market risk charge that we would have had in the statutory requirement, that being in the statutory world based on CTE-98. We have translated that to something that is more applicable to a modified GAAP basis. But within our minimum operating capital, we are already capturing that level of kind of tail-type situation and the level of required capital supports that. And then on top of that, within our risk framework, we are looking at adding further stresses on top of that as we move forward in time and ensuring that we maintain still that amount of minimum operating capital that in and of itself is already reflective of a stressed environment.

Got it. And when we think about the $1 billion a year of annual capital generation, when we think about I guess remittances that you would expect to get up to the holding company every year. Are there any limitations that we should think about on the permitted annual dividend amounts, I believe you are at the greater of 10% of stat surplus or 100% of prior year’s earnings. But will there be when you think about those rules, will in all probability do you think you will be able to remit potentially $1 billion a year free and clear, or do you see the need to maybe get extraordinary dividends approved every year?

Well, you are right there, there are a number of kind of elements in terms of defining what’s available as an ordinary dividend, what becomes an extraordinary dividend and the like. We have historically had many periods in which our distributions were of the extraordinary dividend type. So, we certainly have worked through that very well with our regulator when that is the case. So, I think we don’t – as we look out, I don’t think we are anticipating challenges around that in terms of just working through and understanding of where we sit, subject of course to the Regulator approval. When – where that’s needed, we will look through that. But I don’t think we anticipate seeing any significant challenge there.

Okay. Thanks. And just one final one, if I could, can you give us a sense for the sizing of interest rate hedges that you purchased in Q4 and whether or not you are done at this point, or would you expect to do more interest rate hedging from current levels?

Well, we had begun our transition late in December once we had our approval in hand, and we are working towards that. And as of the very beginning of June, probably the first or second business day, we were fully built up with our hedging on our new modified GAAP basis, both with respect to our equity position and our interest rate hedge position. So, we are where we need to be from the beginning of January and have been operating on that basis so far through the first quarter.

And would it be possible for you to give us an idea of the sizing of it at all, notional amount of rate swaps or some measure just to give us some better perspective on where you went from and where you went to?

Our positions that we would have had at the end of the year, which would have been, as I have said, getting us quite close to where we needed to be would be something that you – I think you will see in the 10-K disclosure.

Got it. Thanks.

Thank you. We have a follow-up question from Suneet Kamath with Jefferies. Your line is open.

Thanks. Thanks for the follow-up. So, just to come back to the $1 billion, so I think before you talked about capital generation of $700 million to $900 million, so let’s call it $800 million at the midpoint and now you are talking about $1 billion. Is that $200 million incremental capital generation, is that just lower hedge spend, or I guess I just wanted to unpack that a little bit, if you could. Thanks.

Sure. I think the main thing that’s really changed, I mean if you think about the liabilities, the products themselves, the cash flows that they are throwing off are the same as what they would be before or after the transaction. So, really, the main driver of the difference is going to be the fact that we have relief from the amount of non-economic hedging that we were doing in the past, which was costly. That’s – it’s not to say that in every period, that was – in every year that, that was exactly $200 million. That was something that varied and I think contributed to the variability of our capital generation each year. So, when we talked about that $700 million to $900 million, we talked about that in kind of normal market conditions, which obviously aren’t going to be the same 1 year to the next. I think one of the good things going forward is that what we will see is a much more consistent level of capital generation that won’t have those influences of the spend that we needed to have for the non-economic hedging to the degree that it was needed from 1 year to the next. And we will just not have a lot of the cash value floor complications that meet our capital generation sort of not always that transparent because it wasn’t always coming through TAC sometimes the benefits were effectively more in the reduction in the required capital. So, you could see things within the RBC ratio that weren’t necessarily always aligned with the TAC movement. And I think as we move forward under this arrangement, we will have much more consistency in that and the capital generation will be largely in the form of TAC increase.

Okay. Got it. And then I guess maybe just the last one just on the RBC. So, I just want to be clear, you are targeting $425 million, but you are expecting to operate above that. Is that – did I hear that right, or I just wanted to get a sense of like what should we be looking at or expecting in terms of RBC? Thanks.

Sure. We left the – the minimum is unchanged at $425 million. That was the Q4 and will be going forward. So, I think we will probably be operating in a very similar range. We had a – again, well above $425 million, but probably in that kind of range we talked about before. We just aren’t defining that whole thing as a target with a particular upper bound to it. But we would expect certainly to be operating generally at a level that’s in excess of that $425 million, probably in largely within the range we have historically kind of focused on.

Got it. Okay. Thanks.

[Operator Instructions] We currently have no further questions. So, I would like to hand it back to Laura Prieskorn, CEO, for any closing remarks.

Okay. Well, that wraps up our Q&A for today. Thanks everyone for your continued interest in Jackson. We appreciate you joining us today and we look forward to speaking with you again soon. Take care.

Thank you all for joining the Jackson Financial, Inc. fourth quarter ‘23 earnings call. I can confirm this has now concluded, and you may now disconnect your lines, and please enjoy the rest of your day.