Jackson Financial Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
March 1, 2023

Key Takeaways

  • Strong full year 2022 performance with $5.7 B net income and $1.8 B adjusted operating earnings, meeting or exceeding all four of Jackson’s key financial targets.
  • Robust capital generation and return: operating company RBC at 544%, total adjusted capital of $7 B, and $480 M returned to shareholders in 2022 via share buybacks ($283 M) and dividends ($199 M), with a 13% dividend increase for Q1 2023.
  • Diversified annuity sales of $15.7 B in 2022, including a first full year of $1.8 B in RILA sales and modest growth in fixed and fixed indexed annuities, countering industry‐wide declines in traditional VA sales.
  • In Q4, Jackson incurred a $1.2 B net hedging loss on equity derivatives, driving a GAAP net loss of $945 M and resulting in a 17% decline in adjusted operating earnings versus Q4 2021.
  • For 2023, Jackson targets an operating company RBC range of 425–500%, holding company liquidity at twice annual expenses, and plans $450–550 M of capital return, while refraining from setting a formal leverage ratio goal.
AI Generated. May Contain Errors.
Earnings Conference Call
Jackson Financial Q4 2022
00:00 / 00:00

There are 10 speakers on the call.

Operator

Ladies and gentlemen, hello and welcome to the Jackson Financial Inc. 4Q22 Earnings and 2023 Outlook Call. My name is Maxine, and I'll be coordinating the call today. I will now hand over to your host, Liz Werner, Head of Investor Relations to begin. Liz, please go ahead when you're ready.

Speaker 1

Good morning, everyone, and welcome to Jackson's 4th 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 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 the applicable securities laws, Jackson is under no obligation to update any forward looking statements if circumstances or management's estimates or opinions should change.

Speaker 1

Today's remarks may also refer to non GAAP financial measures. The reconciliation of those such 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 in the Relations page on our website at jackson.com. Joining us today are our CEO, Laura Prescorne our CFO, Marcia Wasdin Our Head of ALM and Chief Actuary, Steve Benioris our President of Jackson National Life Distributors, Scott Romine and President and Chief Investment Officer of PPM, Craig Smith.

Speaker 1

At this time, I'll turn the call over to our CEO, Laura Prieschorn.

Speaker 2

Thank you, Liz. Welcome everyone to our Q4 and full year 2022 earnings and 2023 outlook call. Today, we'll review our full year results and our success in delivering on our key financial targets. We'll speak to progress made on our strategic initiatives during our 1st full year as a public company and share our outlook for 2023, including specific financial targets for the year. But before I dive into our results, I want to acknowledge the tragedy that occurred in our hometown area of Lansing, Michigan just a few weeks Jackson has deep ties to Michigan State University and to the hundreds of Jackson associates who are MSU students or alumni.

Speaker 2

During this difficult time, we're focused on doing what we can to help our employees, our customers and the community we call home. I'm extremely proud of our team and how we've supported each other and our community during this time, just as we do every day. Turning to 2022. The hard work and dedication of that same talented team enabled us to achieve many milestones. We delivered strong financial results and provided industry leading service to our distribution partners and their clients.

Speaker 2

And we continue to demonstrate our ability to operate through volatile markets and successfully managed risk throughout 2022, including in the Q4. With respect to the macroeconomic impacts on our business, Early in the year, we stated that the positive impact of rising interest rates would be an emerging benefit and we saw that develop over the course of the year. We managed through significant equity market volatility, protected our statutory capital and met or exceeded each of our 4 key financial targets. As we look ahead to 2023, we believe our financial strength and our leadership in the annuity industry position us for another successful year. Moving on to our results.

Speaker 2

Net income for the full year 2022 was $5,700,000,000 primarily due to adjusted operating earnings was $1,800,000,000 and reflects the profitability of our retail annuity business. We delivered Strong operating margins despite lower equity markets in 2022. Margins that benefited from a double digit decline in operating expenses, primarily driven by lower variable compensation and a decline in asset based commissions. With over $200,000,000,000 in retail annuity Our scale and continued focus on operating efficiency position us well to deliver long term profitability. Jackson's solid operating company results contributed to our strong capital generation and financial flexibility.

Speaker 2

Our 2022 operating company RBC ratio was 5 44%. Total adjusted capital was $7,000,000,000 representing a $400,000,000 increase from year end 2021 after remitting $600,000,000 to the holding company in early 2022. We start 2023 with significant capacity for both continued investment in our business and capital return to shareholders. Therefore, we expect to distribute $600,000,000 from Jackson National Life Insurance Company in March. Consistent with our historical performance and subject to market conditions, we expect to continue to generate excess Capital at our operating company that will support our balanced approach to capital management.

Speaker 2

Our focus continues to be on maintaining a strong capital position, ongoing investment in our business and a consistent approach to returning capital to shareholders. In 2022, we delivered capital return to shareholders of more than $480,000,000 including $283,000,000 in share repurchases and $199,000,000 in dividends. Our balanced approach to capital management supports our outlook for future profitability and continued capital return. Yesterday, we announced our Board's approval of our shareholder dividend, which was up nearly 13% and represented our 2nd consecutive annual increase. This increase is reflected in our 1st quarter shareholder dividend of approximately $50,000,000 and highlights our commitment to long term shareholder return.

Speaker 2

We strengthened our Competitive position with the successful sales expansion of our registered index linked annuity or RILA combined with timely and disciplined pricing actions. Traditional variable annuity sales for Jackson and the industry are below historical levels, reflecting the decline for the Q2 earnings and 2023 outlook call. And then, we'll continue to rely on our experience operating profitably throughout product cycles. In the current competitive environment, Our fixed and fixed index annuity offerings provide modest incremental new sales as we maintain our pricing and investment discipline, while our Ryla offerings continue to be a source of sales growth and distribution expansion. We reached $1,800,000,000 in our 1st full year of Ryla sales and expect these products to remain a steady source of new sales in the future.

Speaker 2

With $15,700,000,000 in total annuity sales, we remain a market leader with the capacity to offer a range of products to meet the needs of financial professionals and their clients. Our competitive strength is not built on price competition, but on our consistent presence in the market, A compelling retirement value proposition, strong distribution relationships and our award winning customer service. We never explicitly target market share and see our long term market leading position as an outcome of successfully competing on capabilities. Over the past year, our distribution strategy included a call. For Jackson and the industry, and we ended 2022 with nearly 1100 RIA firm selling agreements, providing access to more than 10,000 investment advisor representatives.

Speaker 2

We established 3 new outsourced insurance desk or OID distribution partnerships in 2022, further increasing RIA access to our fee based annuities. These new relationships signify Jackson's ongoing commitment to diversifying and expanding our distribution opportunities. Jackson recently announced that we've been added to Icapital's InsurTech platform, Simon, which provides wealth management firms with increased access to our suite of annuities and product education tools. This platform gives financial professionals increased flexibility to deliver better outcomes as they support the evolving portfolio needs of their clients. We place high value on our distribution partners and seek to maintain a level of service and support that continues to set Jackson apart from others.

Speaker 2

On past calls, we've shared our history of industry recognition, And we're pleased to announce we've once again been recognized by the independent organization Service Quality Measurement or SQM with several awards, including highest customer service in the financial industry for 2022. Beyond our strategic initiatives to develop differentiated products and expand distribution, Jackson also seeks to serve financial professionals and their clients by supporting regulatory changes intended to improve Americans' retirement options. This past December, Jackson supported 2 pieces of legislation passed by Congress to enhance retirement savings opportunities and allow annuities to help Americans meet their retirement needs. Both the RILA Act and Secure 2.0 create opportunities for financial professionals to help their clients better prepare for retirement. The Rila Act directs the SEC to create a new registration form for Ryla products, easing the regulatory burden on insurers, allowing for more innovation and choice within the RYLA market and providing consumers with a clearer understanding of the risks and benefits of these products.

Speaker 2

Now that the Rila Act has passed, Jackson will continue to be a leading voice within the industry to ensure the SEC's new registration form is appropriately tailored to benefit consumers, reduce regulatory barriers and enable innovation within the RYLA market. Secure 2.0 builds upon the 2019 Secure Act, expanding opportunities for employees to plan for retirement and This legislation encourages retirement savings and creates new opportunities for Jackson and others to deliver annuity retirement solutions to Americans planning for a more secure retirement. Our team's relentless efforts allowed us to meet or exceed each of our 4 key 2022 financial targets. We consistently returned capital to shareholders through share repurchases and paid regular shareholder dividends in our 1st full year as a public company. We also ended the year with approximately and we had an adjusted RBC ratio above our targeted range.

Speaker 2

Leverage was below our 20% to 25 percent range, which we believe was prudent as we enter 2023. I'll now turn the call over to Marcia to review our financial results in more detail.

Speaker 3

Thank you, Laura. Turning to our results on Slide 5. Lower comparative equity levels in the 4th quarter led to a decline in our adjusted operating earnings from the prior year's 4th quarter. The decline was driven by lower fee income from reduced separate account assets under management as well as lower levels of private equity and other limited partnership income. These impacts were partially offset by lower deferred acquisition cost or DAC amortization, lower general and administrative expenses and lower commission expense.

Speaker 3

A portion of commissions are asset based and partially offset the market impact to fee income, which helps dampen earnings volatility through market cycles. As a reminder, we believe Jackson has taken a conservative approach to the treatment of guarantee fees within our definition of adjusted operating earnings as all guarantee fees are reflected below the line with no assumed profit on guarantee benefits included in adjusted operating earnings. Year end 2022 adjusted book value was up from year end 2021 due to full year non operating net hedging gains and healthy adjusted operating earnings. Adjusted book value was down from the Q3 of 2022 due primarily to net hedging losses in the recent quarter as well as the return of $86,000,000 to shareholders. We maintained a year end leverage ratio of 18.3%, which was below our long term targeted range of 20% to 25% and compares favorably to industry and to rating agency expectations.

Speaker 3

Similar to last quarter, We've included additional portfolio details in the appendix of our earnings presentation that provide breakdowns on both U. S. GAAP and statutory basis, excluding the assets reinsured to 3rd parties. Jackson's investment portfolio remains conservatively positioned with only 1% exposure to below investment grade securities on a statutory basis. Furthermore, our earnings were not impacted by credit with adoption of long duration targeted improvements or LDTI.

Speaker 3

Starting with total shareholders' equity, The impact is now expected to be positive as of the end of 2022, largely due to the higher level of interest rates. While retained earnings are expected to be reduced, this is more than offset by an increase to AOCI. This was primarily driven by the reclass of nonperformance risk allowance in the fair value calculation of market risk benefits from income to AOCI. Our leverage ratio is anticipated to remain at a healthy level after adoption of LDTI. And post LDTI, the level of underlying adjusted operating earnings is expected to remain largely intact with a modest increase to the core level of DAC amortization.

Speaker 3

Because of the conservative nature of our guarantee treatment that I mentioned earlier, we will not see any impact to adjusted operating earnings from the allocation of guarantee fees. As we've previously noted, adjusted operating earnings will no longer have a DAC acceleration or deceleration impact from market returns after LDTI, which will reduce the equity market sensitivity of that figure. With respect to net hedging results under LDTI, We would expect reduced equity market volatility in this figure as well because going forward, all guaranteed benefit liabilities as well as the related equity hedges will fully reflect equity market sensitivity. We do anticipate more interest rate sensitivity in net hedging results as the fair value approach under GAAP is sensitive to interest rates, both from a discounting and assumed equity market return perspective. As we have stated in the past, our interest rate hedging is focused on the impact of discounting future cash flows.

Speaker 3

We do not assume full correlation between interest rates and equity market returns with our interest rate hedging. Under LDTI, the level basis of DAC amortization means that we will no longer need to include a notable item for market driven DAC acceleration or deceleration, simplifying our earnings per share results. To assist with modeling, we will be publishing a historical financial supplement on our IR website updated for LVTI on or about March 22nd. Slide 7 outlines the notable items included in adjusted operating earnings for the 4th quarter, starting with limited partnership income. The Q4 of 2022 included lower levels of limited partnership income compared to the same period in the prior year.

Speaker 3

Results from limited partnership investments, which report on a 1 quarter lag, were $62,000,000 lower in the current quarter than they would have been had returns matched the long term expectation. Comparatively, in the Q4 of 2021, Limited Partnership was well above the long term expectation with a benefit of $106,000,000 to earnings, creating a comparative pre tax negative impact of $168,000,000 Additionally, there were positive market related impacts to DAC amortization expense in the Q4 of 2022 of $109,000,000 on a pre tax basis when comparing the Q4 of 2022 to the prior year period. Again, this notable item will no longer be necessary following the adoption of LDTI. Lastly, consistent with prior years, we completed our annual assumptions review in the 4th quarter. This led to an adjusted operating earnings pretax benefit of $53,000,000 compared to a benefit of $38,000,000 in the Q4 of 2021.

Speaker 3

The principal driver of the favorable impact in 2022 was in the retail annuity segment, where we recorded an increase in the variable annuity DAC balance, primarily due to changes in assumed persistency. There was no meaningful difference in the effective tax rates between the Q4 of 2022 and the prior year's Q4. Adjusting for both the notable items and the minimal tax rate difference, earnings per share were down 17% from the prior year's 4th quarter, primarily due to the reduced fee income resulting from lower average AUM. The current quarter's earnings per share benefited from a lower weighted average diluted share count relative to the Q4 of 2021 due to share buyback activity throughout 2022. Slide 8 shows the same analysis but on a full year basis.

Speaker 3

The explanation of the results is largely the same with the exception of a difference between the effective tax rate in the 2 full year periods. Earnings per share in 2022 after adjusting for these items were down 12% compared to full year 2021. Slide 9 illustrates the reconciliation of our 4th quarter pretax adjusted operating earnings of $567,000,000 to the pretax loss attributable to Jackson Financial of $945,000,000 Net income includes some changes in liability values under GAAP accounting that will not align with our hedging assets. We focus our hedging on the economics of the business as well as the statutory capital position and choose to accept the resulting GAAP below the line volatility. As shown in the table, the total guaranteed benefits and hedging results or net hedge result was a loss of $1,200,000,000 in the 4th quarter.

Speaker 3

Starting from the left side of the waterfall chart, you see a robust guarantee fee stream of $777,000,000 in the 4th quarter, providing significant resources to support the hedging of our guarantees. These fees are calculated based on the benefit base rather than the account value, which provides stability to the guarantee fee Protecting our hedge budget when markets decline. As previously noted, all guarantee fees are presented in non operating income to align with the hedging and liability movements. There was a $3,900,000,000 loss on freestanding derivatives, which was driven by losses on equity hedges in a quarter where the S and P was up over 7%. There was a gain of $1,100,000,000 on net reserve and embedded derivative movements, which were also driven by higher equity markets.

Speaker 3

The assumptions review produced a benefit of $367,000,000 to non operating earnings in addition to the benefit to adjusted operating earnings I noted earlier. This was mainly due to an overall decrease in the guaranteed minimum withdrawal benefit or GMWB reserves, driven principally by changes in GMWB utilization and mortality assumptions, partially offset by changes in assumed persistency. In addition to the net hedge result, Net income in the 4th quarter reflects $157,000,000 of losses from business reinsured to 3rd parties. This was primarily due to a loss on a funds withheld reinsurance treaty that includes an embedded derivative as well as the related net investment income. These non operating items, which can be volatile from period to period, are offset by changes in AOCI within the funds withheld account related to the reinsurance transaction, resulting in a minimal net impact on Jackson's adjusted book value.

Speaker 3

Furthermore, these items do not impact our statutory capital or free cash flow. It is important to note that while the net hedging result was a loss in the 4th quarter, It was a benefit of $2,400,000,000 when looking at the full year. Now let's look at our business segments, Starting with retail annuities on Slide 10. Variable annuity sales are down industry wide, which is consistent with prior periods of equity market declines. While Jackson's VA sales are down as well, we continue to produce significant volumes and total annuity sales are supported by Ryla fixed and fixed indexed annuity sales, which are up meaningfully from the Q4 of 2021.

Speaker 3

Overall, sales without lifetime benefits as a percentage of our total retail sales increased from 37% in the Q4 of last year to 43% in the Q4 of this year. We expect this percentage to vary somewhat over time based on market conditions and consumer demand. When viewed through a net flow lens, the gross sales we are generating in Ryla and other spread products translated to over $650,000,000 of non VA net flow in both the 3rd and 4th quarters of 2022. In addition to partially offsetting net outflows and variable annuities, these net flows provide valuable economic Our overall sales mix remains efficient from the standpoint of new business strain. Growing our advisory business remains a focus for us.

Speaker 3

And while sales of these products were down from the prior year's Q4 due in large Part to market conditions, we remain optimistic about the long term growth potential from this business. Laura's comments regarding distribution expansion illustrate our continued commitment to the space. Looking at pretax adjusted operating earnings for our retail annuity segment on Slide 11, We are down from the prior year's Q4. This was primarily the result of the decline in limited partnership income I discussed earlier, as well as the impact of reduced assets under management on fee income. During 2022, our efficient and variable Going into 2023, We would note that our retail annuity segment will see a negative impact to adjusted operating earnings from the increase in the minimum guaranteed interest rate payable on the portion of variable annuity assets that policyholders have invested in the fixed option.

Speaker 3

This minimum is reset annually based on the 5 year treasury rate, which was up in 2022. This rate increase was effective the 1st of this year and is expected to add $30,000,000 to $40,000,000 of interest credited expense to our quarterly results. It is important to note that we will get an offsetting benefit from higher rates over time on our invested assets as they are reinvested at higher yields.

Speaker 4

At the

Speaker 3

end of the Q4, we have built up nearly $1,900,000,000 of account value on Ryla. Because of the early age of our Ryla book, minimal surrender activity allows for sales to contribute to an immediate buildup in account value. Our other operating segments are shown on Slide 12. For our Institutional segment, Sales for the Q4 totaled $908,000,000 and account values were up to $9,000,000,000 Pretax adjusted operating earnings of $17,000,000 were down from $27,000,000 in the prior year period as higher interest credited and increased losses on operating derivatives were partially offset by higher net investment income. We remain committed to our institutional business.

Speaker 3

The value of the business is broader than what is exhibited through GAAP earnings since it provides diversification benefits, is cost effective and helps to stabilize our statutory capital generation. Lastly, our Closed Life and Annuity Block Segment reported a 4th quarter decline in adjusted operating earnings compared to the prior year, reflecting lower levels of limited partnership income, partially offset by lower debt and other policy benefits resulting from the continued decrease in the size of the closed blocks. Absent future M and A activity, the earnings for this segment should trend downward as the business runs off over time. Slide 13 summarizes our year end capital position. In a year that included a 20% in the S and P 500 and a dramatic increase in interest rates, our business remains strong.

Speaker 3

As we have mentioned, we returned $86,000,000 to our shareholders in the Q4, which put us above the midpoint in our full year target of $425,000,000 to $525,000,000 We remained active in share buybacks during the 4th quarter, which totaled 1,100,000 shares or $38,000,000 Yesterday, we announced the approval of our 1st quarter dividend of $0.62 per share, a nearly 13% increase over the prior year and a 24% increase from our initial dividend established following separation. We also announced a $450,000,000 increase to our existing share repurchase authorization. When combined with the $106,000,000 that remained at the end of 2022, this gives us $556,000,000 of capacity to use in 2023 beyond. As of February 22, we had repurchased $16,000,000 of shares in 2023, leaving $540,000,000 of that total amount remaining as of that date. Moving on to statutory capital.

Speaker 3

Our primary operating company, Jackson National Life Insurance Company, reported a tax position of $7,000,000,000 down from $9,500,000,000 as of the 3rd quarter. The higher equity markets during the quarter led to hedging losses and related deferred tax asset admissibility impacts, which were not fully offset by reserve releases. Because we consider the impacts to both TAC and statutory required capital or CAL when structuring or hedging, it is not unusual See reductions in TAC when equity markets rise. CAL was meaningfully reduced in the 4th quarter primarily due to the The operating company RBC increased from the 3rd quarter to 5 44%. In addition to our operating performance, the RBC ratio also benefited from the annual review and update of models and assumptions, which was a benefit to both GAAP and statutory results.

Speaker 3

This is now the 3rd straight quarter of operating company RBC ratio growth despite challenging macroeconomic circumstances, which is a testament to the overall resiliency of our in force business and the effectiveness of our risk management. Importantly, despite the heightened equity market volatility, our hedging spend was in line with the guarantee fees collected this quarter. As I discussed throughout the year, interest rates are a key driver of hedging expenses, both in the cost of the hedging instruments used to protect our book, which is driven by short term rates and the volume of hedging necessary to stay within our risk limits, which is driven by longer term rates. The higher level at both ends of the yield curve benefited hedging expenses in the current quarter and has also allowed us to increase the duration of our equity hedges. Our holding company cash position is approximately 6 $175,000,000 and continues to be well in excess of our minimum buffer.

Speaker 3

At the end of the year, the adjusted RBC ratio, which includes the excess over that buffer, was up to 5.77% and continues to be above the normal market target range. This improved position was due to the increase in the operating company RBC, exceeding the reduction in the level of holding company cash to support capital return to shareholders and holding company expenses. Lastly, our total financial leverage of 18.3 percent at the end of the 4th quarter was up modestly from 17.5% as of the end of the third quarter and still below our long term targeted range of 20% to 25%. We believe that this level provides us the financial flexibility to navigate ongoing market volatility. Given the strong position, we intend to refinance all or a portion of our upcoming November debt maturity.

Speaker 3

Slide 14 depicts our consistent approach to shareholder capital return, which has been steady since we began our dividend and share repurchase program in the Q4 of 2021. Despite the challenging market environment since our separation, our total cash return as a standalone company was nearly $750,000,000 as of year end 2022. This also illustrates our balanced and flexible approach to returning capital, which includes our dividend payments as well as public and private market Share repurchase transactions. In summary, we had a strong 4th quarter and full year demonstrating the continued resiliency of both our business and our balance sheet. We are especially proud to have met or exceeded each of our 4 2022 key financial targets and are excited to start 2023 from a position of strength.

Speaker 3

Now I will turn it back over to Laura to give more detail on our outlook for 2023 and provide our key financial targets for the year.

Speaker 1

Thank you,

Speaker 2

Marcia. Turning to Slide 17, We are initiating a 2023 RBC target for our operating company rather than a holding company adjusted RBC as disclosed at the time of separation. With our separation and initial capitalization now complete, it's more appropriate to focus on operating company RBC, a key metric for determining dividends to our holding company and one that is more comparable to our peers in the industry. At the operating company, we view 425% as a minimum RBC level in normal operating conditions and look to hold excess capital above that point to provide resiliency. Our target operating company RBC ratio of 4.25% to 500% is consistent with our risk management practice and is aligned with rating agency expectations.

Speaker 2

Generally speaking, we expect to hold excess capital above 4 25 percent at the operating company level. Capital exceeding the upper end of our target range of 500% would likely be held at our holding company for maximum flexibility. Moving to Slide 18. We also aim to maintain a holding company liquidity buffer that is 2 times our annual fixed expenses. Again, this has been our practice since separation and is another point of consistency and sustainability for Jackson.

Speaker 2

We expect to be well above this minimum level in 2023 as we remain prudent in the uncertain economic landscape, Retain capacity for investing in new business and prepare for our $600,000,000 debt maturity coming up in November. While we intend to refinance this debt maturity, the expected upstream of $600,000,000 from the operating company in March ensures we have the flexibility to opportunistically manage access to credit markets in 2023. This capital flexibility offers confidence in our ability to maintain a healthy capital position and meet our commitments of capital return to shareholders. Slide 19 covers our updated capital return target for 2023. The strength of our operating company combined with a high level of liquidity at our holding company and our confidence in future profitability provides the foundation for this target.

Speaker 2

Pro form a for the $600,000,000 expected remittance from the operating company, We expect to have more than $1,000,000,000 of excess liquidity above our minimum buffer at the holding company and a year end operating company RBC ratio adjusting for the remittance of nearly 500%. We've increased our 2023 capital return target range to $450,000,000 to $550,000,000 including share repurchases and shareholder dividends. We view our shareholder dividend as an important component of our capital return strategy, representing our continued confidence in our long term capital generation. Turning to our leverage on Slide 20. We start the year with a healthy ratio of 18.3%.

Speaker 2

Importantly, we expect this ratio to remain healthy for the implementation of LVTI. As noted, we also expect a high level of cash at the holding company and significant flexibility regarding the upcoming debt maturity in November. Going forward, we will no longer communicate a leverage target range. This was an important data point when we were working to go public, capitalize our operating entity and build an appropriate capital stack. Following the refinancing of all or a portion of the November debt maturity, we're comfortable with our dollar level of debt and do not see a near term need to expand on this level.

Speaker 2

With no additional maturities until 2027, Movements in our leverage ratio will be driven by changes to adjusted book value rather than an explicit attempt to manage the figure on our end, making the target ratio less meaningful. Our intention going forward is to conservatively manage leverage consistent with rating agency expectations. Finally, Slide 21 summarizes each Few of the key strengths we outlined for investors at separation. At that time, we shared our culture of execution and philosophy of maintaining strength across a wide range of capabilities, including product pricing and design, Distribution support and expense discipline. We stated that our in force business and future growth allowed for continued capital generation and we introduced experienced senior leadership team with years of working together within the company.

Speaker 2

Those core strengths were the driving force behind our strong performance last year. And those same strengths will help us continue to meet American's long term retirement savings and income needs. I'd like to thank Jackson Associates for their outstanding contributions to an outstanding year. I am proud to be a part of a team that focuses so well on serving each other, our customers and our communities, and I look forward to our continued success together. With that, let's open it up for questions.

Operator

Thank Our first question today comes from Tom Gallagher from Evercore ISI. Please go ahead, Tom. Your line is now open.

Speaker 4

Good morning. First question is just a follow-up on the comment you made about minimum Reset on the general account crediting rate, the $30,000,000 to $40,000,000 a quarter increase in interest expense. Just want to understand how you think about your NII uplift based on what you would expect there. Would you expect most of that to be offset by higher net investment income? Just any perspective on that would be appreciated.

Speaker 3

Sure, Tom. It's Marcia here. I'll take that and thank you for the question. I think what that is, is Another sort of element that in the statutory framework and the way our product is filed is a sort of timing item where that miss reset at one point in the year at the Again, each year. So I think what we would see what we would have seen somewhat in 2022 already is an uplift in our portfolio yield as rates We're higher and we were able to reinvest and then that we would expect to continue since our new money investment yield is Significantly higher than our portfolio yield.

Speaker 3

So I think all in, it will broadly offset or that will be offset with additional investment income. Some of that I think possibly already started in 2022 and then will naturally continue in 2023 as our assets You know, turnover and are reinvested at higher yields.

Speaker 4

That's helpful. Thanks. Yes, I guess What we'll probably see just given the one time immediate nature of the reset is if I just think about it sequentially, The Q4 to Q1 earnings then will go down, but then you'll get more of a gradual benefit over the course of the year. Is that a Good way to think about the timing related to that?

Speaker 3

Yes, that's right.

Speaker 4

Okay, thanks. And then Any just for a follow-up question, anything you could tell us about with the actuarial Review in Q4, any meaningful adjustments made there? And then just relatedly, Curious how your policyholder utilization trends have been looking since we had the big equity market correction in 2Q. Has there been a change on utilization? And how if you have seen a change, how would that compare to your reserving assumptions?

Speaker 4

Thanks.

Speaker 3

Sure. Yes, I'll take you through some of the high points on the assumption review. I mean, just as a reminder, think we've shared in the past that our approach is to look at really all the assumption types across all of our product types Each year so that we're able to more gradually make changes over time and do that kind With experience right as it emerges. So if we focus on variable annuities since that's the most material Business product line, I think the key assumptions there are always going to be around things like lapse and Utilization of the benefit and mortality, those are the key ones. With our VA business being so significant, we have Pretty enormous bank of experienced data that then is always increasing each year with new data as we collect it.

Speaker 3

So I think what we saw as we went through the process, the normal process this year to bring in that new experience data and take a look, We probably see a little bit of a trend toward pretty modest, but a slight trend towards A little more efficient utilization of the benefit. That's something we've been seeing kind of over the past couple of years, and I think it's moderated, But maybe just a slight increase there in terms of efficiency. Overall, I think our mortality were pretty immaterial changes. And I think our persistency, we had some slight updates there. We really didn't see anything in any of those categories that was A step change or anything like that away from what we've been seeing in our experience data so far.

Speaker 3

So really it was pretty routine updates bringing in another year of And then if we think about so far what we've experienced then in 2022 with the market turmoil, I believe as we've been we monitor our experience routinely all through the year, Separate from the deep dive annual process that we do. And I think what we've seen there is generally been lining up with what we would anticipate. Our assumptions have dynamic elements to them so that when the market is down, we automatically reflect within our assumptions Some related impacts to policyholder behavior and I think what we've typically seen in 2022 and I think it's also true what we watched An unusual period in 2020 after the COVID market period that what we saw was the behavior that was relatively in line with what our dynamic Assumptions would have assumed.

Speaker 4

That's very helpful. So essentially tracking in line With so no real deviations relative to what your longer term assumptions are. Is that fair?

Speaker 3

Yes. That is right, yes.

Speaker 4

Okay, thank you.

Operator

Thank you. Our next question comes from Alex Scott from Goldman Sachs. Please go ahead Alex. Your line is now open.

Speaker 5

Hi. Thanks for taking the question. So the first one I had is just on the RBC and I know you provided the 500% Pro form a. But I just wanted to see if you could opine on the impact you'd expect in 1Q from the mean reversion point change As well as what kind of impact you get throughout the year from just sort of normal core statutory net income generation in the normal market?

Speaker 3

Sure, Alex. Thank you for the question. So yes, we did indicate that if we looked at our year end position pro form a for the $600,000,000 distribution out of the operating Including the related impact to the DTA, we would be close to the 500 Percent level at the operating company. Looking ahead to the MRP change, as you noted, that is going to Go up 25 basis points effective at the beginning of the year. What we'll note about that is obviously that's a different direction than what we saw in both 2020 1 and 2022 where we had a 25 basis point decrease in each of those years.

Speaker 3

So that's certainly favorable movement for us. But one thing to point out is that the impact of that benefit is not going to be static and it's going to depend upon the position of the book at the time, Including the TAC and CAL levels themselves as well as how those are impacted by the cash surrender value floor. So we would Naturally expect when the cash value floor is more biting that the impact of the change that could be favorable Would be a little bit less so because of the fact that you're floored out and you don't have the ability to reflect it in full the same way you might if you didn't have cash value flow impact. So That's something to keep in mind as we go forward. We'll intend to talk through the movements and the impact, quantification when we go through our Q1 earnings.

Speaker 5

Got it. Okay. The follow-up I had is just on the comments you made on the Hedge budget, I mean it's something we've been focused on because I think one thing that's unique about your portfolio is get a little bit shorter Duration equity hedges or equity options on it than some other books we look at. So maybe a little more exposed to volatility. And I think there were comments about protecting the hedge I just wanted to understand like what are you doing there?

Speaker 5

I mean is that some kind of volatility protection? And when I think about all those things in aggregate, I mean, how much pressure is there on the hedge budget from just persisting sort of higher volatility than maybe a normal period?

Speaker 3

Well, I'll start off and maybe Steve can add some additional commentary. I mean, I think we view our fee, the fees that we collect on our guarantees as providing us a budget from which we can Do our hedge activity. Overall, we typically would like to be able to stay within that budget. There are times when we might have to go over and we would do what's needed at the time to protect the statutory position. In this period, I think we shared that consistent with the last couple of quarters, we've been generally in line with those fees.

Speaker 3

So that's been a good outcome Despite the fact that we've been in a higher volatility environment, which would typically, all else equal, increase our hedge I think we've had the benefits of higher interest rates in the latter part of the year, which we talked about being a benefit in time because that Increase or decreases the cost of our hedging when the short rates are up and it Decrease of the volume of hedging needed when the longer rates are up. So we've had those benefits from higher interest rates coming through in the 2nd part of the year, Probably offsetting some of the pressure on the hedging with the ongoing higher level of realized volatility that we've experienced. But Steve, do you want to add anything? Yes.

Speaker 6

No, it's

Speaker 5

offsetting movements. 1, obviously Marshall had the interest rate benefit that we've experienced, but 24% realized volatility in calendar year 2022. That's still at an elevated level. So they're kind of offsetting each other, but When soft put together, we price deep in the tail. So we've got the fees here to

Speaker 7

do what we need to do from a hedging perspective.

Speaker 5

Got it. Okay. Thank you.

Operator

Thank you. Our next question comes from Ryan Krueger from Stifel. Please go ahead. Your line is now open.

Speaker 8

Hi, thanks. Good morning. My first question was on the $450,000,000 to $550,000,000 of capital return that you're targeting. Is that a reasonable representation of what you'd expect to be ongoing capital generation in normal markets?

Speaker 2

Good morning, Ryan. We stated previously and continue to see our capital return level as sustainable. And part of the reason for that is that we take a measured approach to returning cash with the mindset of earn it first, Then pay it. Coming into 2023, we continue to see our healthy VA book generate Substantially positive cash flows from our base contract. And I think as you just heard, Marcia and Steve point out, our guaranteed fee stream Supports our hedging and that also remains robust.

Speaker 2

We've established our targets with confidence And that's based on our history of capital generation in our business combined with our proven ability to effectively manage through stress periods.

Speaker 8

Got it. Thanks. And then can you remind us What the impact of the mean reversion change was on your RBC ratio in 2022?

Speaker 3

In 2022, it was a 28 point impact on the RBC ratio. It was 20 22 points In the prior year.

Speaker 8

Okay, great. Thank you.

Operator

Our next question comes from Erik Bass from Autonomous. Please go ahead. Your line is now open.

Speaker 7

Hi, thank you. Have you seen any rebound in demand for traditional VAs as the equity markets have started to recover? Or do you think that some of the shift Consumer and distributor preference for Rylas and FIAs could prove more durable given the simpler nature of these products.

Speaker 1

Thanks for the question, Eric. Scott, do you want

Speaker 2

to address our outlook on sales?

Speaker 9

Yes, sure. I mean and I think when we talk about outlook, I'll just briefly touch on traditional VA Ryla and then spread because they're all interrelated. If we look at last year, dollars 15,700,000,000 was really a healthy level of sales given the market climate. And as you mentioned, Eric, sales down industry wide for VAs, but consistent with other periods of equity market declines, Our sales were down in line with industry or actually slightly outperforming. And in the rising interest rate, we do think that the shift towards Consumer preferences is towards protection oriented products, right?

Speaker 9

I believe it's a cyclical shift, not a secular shift away from growth oriented VAs. There's a long term demand for VAs for the millions of Americans retiring each year. They have a need for additional asset growth and income certainty. Indeed, it's continued to be an important part of our diversified product mix. We're still a leader in the space and we still have significant sales levels.

Speaker 9

Shifting to the RYLA front, we successfully established ourselves in the RYLA market with the Full year sales of $1,800,000,000 a run rate in the Q4 of over $2,000,000,000 and we continue to see RYLA as Meaningful growth opportunity, and it's really helped us attract new producers to the Jackson suite of products Yes, it really highlights the importance of diversified product. And if we shift the spread just for a moment, we did see higher but modest Sales levels for both fixed indexed annuities and fixed annuities. And as we've said, higher interest rates allow for more frequent Pricing and that helps make these products more competitive going forward. We've said in the past, we'll continue to review pricing and distribution opportunities that best meet demand and strike a balance Between good consumer value and profitability targets, and certainly having that diversified product mix Just an advantage.

Speaker 7

Thank you. Appreciate the color there. And then one follow-up On the individual annuities, can you provide any color on where you would expect core DAC amortization to trend in 2023?

Speaker 3

Well, Eric, I think the best way to look at that will be when we Publish our financial supplement that's restated for LDTI around the 22nd March. That will come out. We don't anticipate it being significantly different, but just a little bit higher. The straight line approach to amortization under LVTI is a bit It's going to be based more on say like the run off of policy count as a sort of simplified way to think about it. So that's still amortized over kind of like the same period we would have in the past, but because it's not capturing any of the natural growth in Gross profits that you might have previously seen under current 2022 and prior GAAP.

Speaker 3

It's just a little bit more a little bit faster pace, but I don't think we expect it to Anything super material and I think that will come through a little bit more clearly when you're able to take a look at that financial supplement.

Speaker 7

Got it. So we should view essentially what the run rate that gets reported in the restated supplement for 2022 As being a continued run rate in 2023?

Speaker 3

Yes, I think that would be a reasonable proxy.

Speaker 7

Okay. Thank you.

Operator

Thank you. Call. Our next question comes from Daniel Bergman from Jefferies. Please go ahead, Daniel. Your line is now open.

Speaker 6

Hi, thanks for taking the question filling in for Suneet this morning. First, I apologize if I missed it, but I just wanted See if reserves were floored at the cash surrender value at quarter end? And if not, how much of a gap was left? I think you'd put the comparable amount at about $1,000,000,000 at the end of the 3rd quarter?

Speaker 3

Yes. With the markets being up as they were in the 4th quarter, we were Able to release a lot of those reserves. So I think we're down to couple of $200,000,000 $300,000,000 level of In excess of the cash value at the end of 2022.

Speaker 6

Got it. That's great. Thanks. And then just separately, I think the operating tax rate has been below 15% the past 2 years, I think, by a pretty Reasonable decent amount in 2022. So I'm not sure if LDTI will affect the tax rate, but just wanted to see if we should still expect 15% going forward or are we likely to remain below that level going ahead?

Speaker 3

Yes, I think a bit below would be our general outlook on that. There shouldn't be an impact from LVTI as Result of that, what really drives our tax rate is some of the permit differences related to deferred Our dividend received reduction and that sort of thing. So generally, we'd expect those things to still go forward under the same basis Even under LVTI and would guide towards something below 15% as a general run rate, Although it can vary of course period to

Speaker 4

period. Got it. Thanks so much.

Operator

Thank you. This concludes our Q and A session. So I'll hand the call back over to Laura Priscorn for closing remarks.

Speaker 2

Great. Thank you to everybody on the call for your interest in Jackson and your participation. Take care.

Operator

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.

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