Jackson Financial Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

There are 10 speakers on the call.

Operator

Hello, and welcome to the Jackson Financial Incorporated 3Q24 Earnings Call. My name is Harry, and I'll be your operator today. All lines are currently in a listen only mode, and there will be an opportunity for Q and A after management's prepared remarks. I would now like to hand the conference over to Liz Werner, Jackson's Head of Investor Relations. Thank you.

Operator

Please go ahead.

Speaker 1

Good morning, everyone, and welcome to Jackson's Q3 2024 Earnings Call. Today's remarks may contain forward looking statements, which are subject to risks and uncertainties. These statements are not guarantees of future performance or events and are based 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 circumstances or management's estimates or opinions should change.

Speaker 1

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.

Speaker 1

Joining us today are our CEO, Laura Prieskorn our CFO, Don Cummings the President of Jackson National Life Distributors, Scott Romine and our Chief Actuary, Steve Binyores and the President and Chief Investment Officer of PPM, Craig Smith. At this time, I'll turn the call over to

Speaker 2

our CEO, Laura Prieskorn. Good morning, everyone. Today, we will discuss Jackson's 3rd quarter results and progress through the 1st 9 months of the year. Our results reflect diversified and growing annuity sales, recent product and distribution initiatives and sustainable capital generation. With 3 operating quarters completed with our captive Brook Re, we're realizing the benefits of greater capital stability, which are evident in our Q3 results.

Speaker 2

Beginning with Slide 3, net income was a loss for the 3rd quarter and positive over the full 9 months. Importantly, we've experienced less volatility than prior periods with the formation of Brook Re and achieved greater alignment between adjusted operating earnings, GAAP net income and statutory capital generation. Adjusted operating earnings were up in the 3rd quarter compared to the same period last year and are also up comparatively on a year to date basis. Increased fee income combined with greater investment spread income once again supported strong earnings growth in our retail annuity segment. Favorable equity markets and increasing sales resulted in a 9% growth in assets under management through the 1st 9 months to more than $250,000,000,000 The combination of product innovation, risk management, best in class service, scale and strong distribution partnerships continue to provide a solid foundation for sustainable growth.

Speaker 2

Total retail annuity sales exceeded $5,000,000,000 for the Q3, up 59% from the Q3 of 2023 and up 25% from the Q2 of 2024, marking our highest and most diversified quarter of sales since becoming an independent company in September of 2021. Our Rylas segment hit record sales with more than 1.6 $1,000,000,000 in the Q3 of 2024 bringing us to more than $4,000,000,000 over the 1st 9 months of the year. Jackson Market Link Pro continues to grow as a Ryla product of choice and after 3 years of offering this product, we are a top 5 Ryla provider according to LIMRA's Q2 2024 sales ranking. Over the past 6 months, we have seen additional sales from our new Ryla offering in New York and our Ryla with Living benefit launched in April of this year. We continue to expand our distribution network announcing earlier this week that Jackson Market Link Pro 2 is now available to approximately 5,000 financial professionals with JPMorgan Wealth Management.

Speaker 2

We look forward to providing this important partner and its clients access to Jackson's unique product and industry leading service as consumer demand for Ryla continues to grow. Our traditional variable annuity sales were $2,600,000,000 for the Q3 and continue to benefit from a favorable equity market with sales up 6% over the 1st 9 months of the year. Jackson continues to meet the demands of a dynamic market delivering flexible protection and income oriented solutions to Americans planning for retirement. Most recently, we introduced Principal Guard, a guaranteed minimum accumulation benefit or GMAB to our Elite Access variable annuity suite. This benefit provides policyholders to add valuable principal protection while maintaining investment flexibility.

Speaker 2

Our user friendly digital capabilities also allow advisors and their clients to analyze how our Principal Guard benefit meets the client's needs under a range of individual planning scenarios. We have a long history with fixed and fixed indexed annuities and have consistently offered a full range of competitive products that provide choice, flexibility and strong consumer value across the annuity spectrum. Our continued monitoring of interest rates supported by our broad retail distribution network and increased capital generation stability with Brookery in place enabled us to reengage in this market with targeted distribution partners, delivering $1,000,000,000 in spread sales in the Q3 of 2024. These spread sales further diversify our sales mix, contribute to growth in our business, improve our ratings profile, bring new advisors to Jackson and bring new money to the annuity space. We expect to remain active in the spread business while maintaining After tax capital generation grew to 4 After tax capital generation grew to $462,000,000 for the Q3 of 2024 and more than $1,000,000,000 for the 1st 9 months of the year.

Speaker 2

Holding company cash approached $650,000,000 including a $300,000,000 distribution during the quarter from Jackson National Life. Our practice of periodic operating company dividends continues to contribute to our more stable RBC, while positioning us to meet our financial objectives. 3rd quarter capital return rose to $167,000,000 and we are on track to deliver at the upper half of our $550,000,000 to $650,000,000 target for the year. Yesterday, we announced our Board's approval of a common stock dividend of $0.70 per share

Speaker 3

for the Q4 of 2024 and repurchased an additional $48,000,000 of common shares between the end of Q3 and Friday, November 1, leaving us with an outstanding share repurchase authorization of approximately $684,000,000

Speaker 2

This provides flexibility and visibility into our 2025 opportunities for capital return. As you can see on Slide 4, we have consistently returned capital to our shareholders through both common shareholder dividends and share repurchases. The pace accelerated in 2024 with year to date per share capital return up 52% from the same period in 2023. On a cumulative basis since separation in 2021, we've returned nearly $1,700,000,000 to shareholders. We've consistently delivered on our capital return commitments while maintaining our financial strength and investing in our business.

Speaker 2

Our Q3 2024 sales growth and capital generation were a result of our balanced approach to capital management. Turning to Slide 5, we are on track to meet our annual financial targets for the 4th year in a row. Our estimated RBC ratio was up slightly from the 2nd quarter and in range of 550% to 5 70%, well above our minimum of 4 25% and at a level to support continued growth. We ended the quarter with over $4,800,000,000 in statutory capital and believe our financial strength and continued capital generation position us well for future growth and capital return. At this time, I'd like to turn the call over to our CFO, Don Cummings.

Speaker 3

Thank you, Laura. I'll begin on Slide 6 with our Q3 Adjusted operating earnings of $350,000,000 were up 11% over the Q3 of last year. This significant growth in earnings was primarily due to higher fee income from growth in our variable annuity assets under management and higher earnings on spread products. We had a challenging comparable on a sequential basis with the non recurring payout annuity reserve release benefiting 2nd quarter earnings by $24,000,000 after tax or $0.31 per share and the impact of higher market related operating expenses in the Q3. These market related costs were particularly impactful in the Q3 of this year with Jackson's common share price up nearly 24% and the S and P 500 up over 5%, driving an increase in general and administrative expenses.

Speaker 3

Spread earnings benefited from gains in net investment income, primarily driven by the growth of our Ryla block as well as higher portfolio yields on our bond portfolio. The investment portfolio supporting our spread products has continued to perform well. The appendix of our earnings presentation provides information on our high quality diversified investment portfolio. This information includes insights into our commercial office loan portfolio, which is less than 2% of the investment portfolio. It also includes our exposure to below investment grade securities, which represents only 1% of the portfolio on a statutory basis.

Speaker 3

Before turning to notable items in the quarter, I want to highlight the growth in book value since year end. Our adjusted book value attributable to common shareholders ended the Q3 with $11,200,000,000 or $149.29 per diluted share, an increase of approximately 10% from year end, driven by our strong operating performance and common share repurchase activity. Adjusted operating return on equity was 13% for the 9 months of this year, up from 11.6% in the comparable period of last year. Slide 7 outlines the notable items included in adjusted operating earnings. Reported adjusted operating earnings per share were $4.60 for the current quarter, Adjusting for $0.28 of notable items and the difference in tax rates from our 15% guidance, earnings per share were $4.86 for the current quarter compared to $3.77 in the prior year's Q3.

Speaker 3

This strong earnings improvement was primarily due to the growth in assets under management and spread income benefits noted earlier as well as a reduction in diluted share count from the common share repurchase activity. The only notable item for the current quarter was a $0.28 negative impact from limited partnership results coming in below our 10% long term assumption. As a reminder, the same item was a small benefit in both the 1st and second quarter of this year. Turning to Slide 8, we've included a waterfall comparison of our Q3 pretax adjusted operating earnings of $411,000,000 to the GAAP pre tax loss attributable to Jackson Financial of $582,000,000 Before covering the results of our hedging program, I want to note that non operating results include $515,000,000 in losses from business reinsurer to 3rd parties. This resulted from losses on a legacy funds withheld reinsurance treaty due to the change in the associated embedded derivative net of the related investment income.

Speaker 3

Non operating items related to this reinsurance treaty can be volatile from period to period and have a minimal net impact on our adjusted book value. Furthermore, these items do not impact Jackson's statutory capital generation or free cash flow. Excluding the impact of this reinsurance treaty, we continue to see less volatility in GAAP income following the establishment of Brook Re at the beginning of this year. Now turning to our hedging program. The net hedge result before DAC amortization was a loss of $295,000,000 in the Q3 and a net hedge gain of $206,000,000 for the 1st 9 months of the year.

Speaker 3

As I discussed last quarter, the DAC amortization item is not an element of our hedging program or driven by current period activity. So we evaluate the results of our hedging before this item. Our hedging results include a robust stream of guaranteed benefit fees that are derived from the benefit base rather than the account value, which provides stability to the guarantee fees even in periods when markets decline as we experienced in 2022. During the Q3, the net hedge result included a net gain on hedging instruments of about $600,000,000 primarily due to gains on interest rate hedges in a quarter where interest rates were down across the yield curve. The gain on interest rate hedges was partially offset by losses on equity hedges in a rising equity market environment.

Speaker 3

Changes in net market risk benefits or net MRB were driven in part by the same interest rate and equity market impacts, leading to a nearly $1,200,000,000 negative offset to the hedging instruments gain. It is important to note that in addition to market and interest rate impacts, there will be an MRB increase in each period as time passes due to the collection of fees. Additionally, the MRB change was negatively impacted by higher levels of market implied volatility during the Q3, which does not apply to Brook Re as the modified GAAP approach uses a fixed long term volatility assumption. The reserve and embedded derivative loss of $493,000,000 during the Q3 primarily reflects increases in Rylo reserves resulting from higher equity markets. The Rylo business continues to provide a natural equity risk offset to our guaranteed variable annuity business, which results in hedging efficiencies that increase as the Rylo block grows.

Speaker 3

In summary, the change in the net MRB, fees collected during the period as well as the reserve and embedded derivative movements

Speaker 4

should

Speaker 3

be viewed collectively when comparing to hedging instrument gains or losses that come through in our results. We believe this quarter's result demonstrates that our hedging program continues to be effective in improving the stability of our results and is working as expected with the establishment of Brook Re. Our segment results begin on Slide 9 and focus on the healthy new business profile of our retail annuities segment, illustrated by growth of 59% from the Q3 of last year and 25% from the Q2 of this year. Our Ryla product continues to gain momentum with 3rd quarter sales reaching a record level of $1,600,000,000 supporting further diversification in our top line growth. As Laura mentioned, we expect continued growth in our Rylo business to be supported by our recent launch of Living Benefit, the recent availability of 1 of Jackson's base Rylo products in New York and our expanded distribution opportunities through financial professionals at JPMorgan Wealth Management.

Speaker 3

Sales of variable annuities remained strong, growing from the Q3 of last year and broadly flat compared to the Q2 of this year. We continue to believe there is a long term underlying demand for lifetime income products. VAs with guarantees are well positioned for the millions of Americans who retire each year and need additional asset growth and income certainty. During the Q3, we successfully leveraged our broad retail annuity distribution platform to drive growth in fixed annuity sales and delivered $1,000,000,000 of fixed and fixed index annuity sales in the quarter. This was a strong quarter in the fixed annuity market both for Jackson and the industry as consumers look to lock in crediting rates during a quarter with declining interest rates.

Speaker 3

While we expect our distribution efforts to continue to deliver higher levels of fixed annuity sales relative to the last few years, we expect near term volumes will be below 3rd quarter levels. The sales we generated in Ryla and other Sprint products translated to $2,500,000,000 of non variable annuity net flows in the Q3, which has grown materially over time. These net flows provide valuable economic diversification and hedging efficiency benefits. Importantly, our overall sales mix remains capital efficient and the stability in capital following the formation of Brook Reedy provides us the opportunity to allocate some capital to spread products in support of further diversification of our business going forward. We remain focused on our consistent balanced approach to capital return while maintaining our financial strength and investing in our business.

Speaker 3

Looking at pretax adjusted operating earnings for our segments on Slide 10, higher equity markets and a continued positive environment for spread products have driven solid growth in our retail annuity segment compared to the Q3 of last year. Excluding the impact of a non recurring gain from previously disclosed payout annuity reserve releases in the Q2, earnings for retail annuities were up about 5% on a sequential basis. Jackson's earnings power is supported by the growing level of assets under management as healthy separate account returns combined with growing non variable annuity net flows have built our total retail annuity AUM up to $256,000,000,000 an increase of 18% from the Q3 of last year. Importantly, the positive separate account performance has offset our retail annuity net outflows by over $21,000,000,000 in the 1st 9 months of this year, including the impact of elevated surrenders of variable annuities coming out of their surrender charge period. For our Institutional segment, pretax adjusted operating earnings were down from the Q3 of last year, primarily due to reductions in average AUM from $2,200,000,000 of maturities year to date.

Speaker 3

We have experienced increased new business activity this year with over $1,500,000,000 in year to date sales and what we believe to be a strong start to the Q4. Our Closed Life and Annuity Block segment reported pretax adjusted operating earnings that were broadly unchanged from the Q3 of last year and down from the Q2 of this year due to comparatively stronger results from updating future policy cash flow assumptions in the Q2. Slide 11 summarizes our strong capital and liquidity position. The profitability of our in force business, including the variable annuity base contract and a one time benefit from the corporate alternative minimum tax provided substantial capital generation of $462,000,000 during the Q3. Consistent with our prior guidance for smaller periodic distributions from Jackson National Life, $300,000,000 was distributed during the Q3.

Speaker 3

After accounting for the impact of this distribution and the related reduction in deferred tax asset admissibility, Jackson's total adjusted capital or TAC increased and ended the quarter at $4,800,000,000 Our statutory capital generation of $1,100,000,000 through the 1st 9 months of this year has exceeded our original guidance when measured on an after tax basis before dividends and distributions. We believe this after tax measure of capital generation provides the most insight into the underlying strength of our business and provides the foundation for making capital allocation decisions about future organic growth, pursuit of strategic opportunities and return of capital to shareholders. That said, we understand the value of reflecting the change in company action level required capital or CAL when measuring free capital generation. Reflecting the change in CAL, our free capital generation was over $850,000,000 through the 1st 9 months of this year, which we believe puts us on a pace to exceed $1,000,000,000 for the full year on this measure as well. Regardless of the way you measure capital generation, we have thus far outperformed our guidance provided earlier this year and we believe we remain well positioned for continuing our balanced approach to capital management heading into 2025.

Speaker 3

Cal has continued to remain stable following the formation of Brook Re as was apparent in our Q3 results with estimated Cal slightly higher reflecting growth in fixed annuity sales, partially offset by overall investment portfolio activity. Our estimated RBC ratio was up slightly from the 2nd quarter and in the range of 550% to 5 70% and remains well above our minimum of 4 25%. We are also pleased with Brook Rees' 3rd quarter performance, which is operating as expected and remains capitalized well above our minimum operating capital level. Our holding company cash and highly liquid asset position at the end of the quarter grew to nearly $650,000,000 which continues to be above our minimum buffer. The extraordinary dividend from Jackson National Life this quarter is consistent with the goal of stabilizing RBC compared to our past practice of a sizable annual dividend.

Speaker 3

We believe our robust capital position provides a strong financial base for future operating company dividends. We returned $167,000,000 to common shareholders during the quarter through share repurchases and dividends. And year to date we have returned $483,000,000

Speaker 4

or

Speaker 3

$6.24 per share, a strong pace relative to our 2024 target of $550,000,000 to 650,000,000 dollars Our strong capital generation and growing holding company liquidity position should allow us to finish 2024 in the upper half of our targeted capital return range. Overall, I'm very pleased with our 3rd quarter results, which demonstrate positive momentum in sales, earnings, capital generation, holding company liquidity and capital return. I'll now turn the call back to Laura.

Speaker 2

Thank you, Dan. Our Q3 results and cumulative progress through the 1st 9 months demonstrate Jackson's business strength, market leadership and sustainable capital generation. As we look forward to completing another year as an independent company, our focus on execution and capital discipline is strong. We remain committed to profitable growth, serving all stakeholders and enhancing shareholder value over the long term, including our commitment to capital return. As always, I'd like to acknowledge our talented Jackson team.

Speaker 2

Their dedication to our purpose of helping Americans achieve financial freedom for life is our greatest strength. The opportunity to work along side our associates is ever rewarding as we continue to deliver against our strategic and operational goals while supporting our clients, our distribution partners, our communities and each other. At this time, I'll turn it over to the operator for questions.

Speaker 4

Thank

Operator

you. Our first question today will be from the line of Alex Scott with Barclays. Please go ahead. Your line is now open.

Speaker 5

Hi, good morning. The first question I wanted to ask is just on the strong statutory earnings this quarter and I think there was part of it, there was non recurring and you all have been pretty clear about the expectation there. But I wanted to understand like how much of an offset do you expect from growing the business, just acknowledging the strength in Rylus sales and so forth? Like how much sort of net uplift to RBC that is more readily available to send to the holding company do you expect to have annually?

Speaker 4

Hey, Alex, it's Don. Good morning. Yes, I'll take your question. So in terms of capital usage for new business, we feel really comfortable with our current capital mix. We do believe that's relatively capital efficient.

Speaker 4

And that could change obviously as we see opportunities going forward to diversify our mix. But we're pretty comfortable. And I think one example of the flexibility that we have there is with the increased level of fixed annuity sales that we saw in the quarter. We were able to do that and there obviously was a little bit of a capital impact related to that on the required side, but that was kind of largely offset with some normal portfolio activity. In terms of Ryla strain, I think there's kind of a minimal impact coming through TAC in the current quarter.

Speaker 4

But as we bring on more assets, there is obviously, there's capital that you have to put up to support those growing level of assets. But in general, we're pretty comfortable with our product mix and feel that it's quite manageable going forward.

Speaker 5

Okay, great. Thanks. 2nd one I have is on Brook Reid. I know there's a little bit of noise just around the hedging this quarter. But as we think through that structure, I think over time, you guys have said there is positive margin between the fees and the cost of hedging there on these riders.

Speaker 5

At what point would you have the confidence to actually take a common dividend and have that help the overall cash flow of the company? And I appreciate you set it up recently, but I'm just sort of interested in the more medium to long term there.

Speaker 4

Yes. So in terms of Brook Reedy, as you pointed out, it's we've got 3 quarters now of experience operating with Brook Reedy in place. And we do expect that over time, it will be capital generative. And if you look at just the results through the 1st 9 months, we have seen some growth in the equity there. We don't have any expectations here in the near term to take any capital generation occurring at J and L and continue to see that growing a bit and think that, that will be sufficient to fund our near term capital return targets.

Speaker 5

Great. Thank you.

Operator

Our next question will be from the line of Suneet Kamath with Jefferies. Please go ahead. Your line is now open.

Speaker 6

Great. Thanks. I just wanted to talk about the capital generation. Your comment that you're running over a 1,000,000,000 dollars year to date. But if we look at the HoldCo dividends, they're about half that level.

Speaker 6

And I know 2024 is a little bit of an odd year because of the whole setup of Brookery. But is your expectation that in a normal year over a 12 month period, you would send $1,000,000,000 to the holding company?

Speaker 4

Yes. Thanks for that, Suneet. So obviously, 2024, as you highlighted, is a little unique. We didn't really have a distribution up to the holding company in the Q1 because we use some of that capital to fund the establishment of Brook Reedy. And in terms of future capital generation, it will continue to depend on the performance of our business.

Speaker 4

So we would fully expect to continue with our approach of periodic distribution of capital. And as I said, it's going to depend on the level of performance that we have in terms of generating capital. So I don't want to give you a guide at this point. As you know, we typically publish our capital return targets in connection with our Q4 results. So as part of that, we'll be sharing what our plan is.

Speaker 4

If you look back at our track record since we've been a public company, I think you'll see a sort of consistent balanced approach in terms of growing the level of capital return that we have. I'm anticipating if the business continues to perform as expected that we will see some increase in the level of our capital return for 2025.

Speaker 6

Okay. Got it. And then I guess my other question was and I think you hit on this in your prepared remarks, but when you price and hold capital for Ryla, are you holding capital sort of on a standalone basis or are you embedding that diversification benefit that you get with the traditional VA business? Thanks.

Speaker 4

Yes. No, when we're pricing, it's done on a stand alone basis. So we don't take into account the offset that we get with the VA business. That does come through, as we've talked about on prior calls in our hedging results, to the extent it allows us to do less lower levels of external hedging. We do get a benefit from that.

Speaker 4

But in terms of pricing, we don't take that into account. It's really done on a stand alone basis.

Speaker 6

Got it. And if I could just sneak one more in. One of your competitors earlier this year has talked about pretty sizable basis risk year to date, I guess, just given how skewed the S and T's performance has been from a handful of stocks. Are you seeing any of that in your results?

Speaker 4

Yes. So basis risk for the quarter was fairly muted for us. And the 1st two quarters of the year, we did see a little bit of basis risk. It was kind of positive in 1 quarter, offset by negative result in the second, I believe. But on a year to date basis, it's been fairly modest.

Speaker 4

We do have a very rigorous approach in terms of managing the funds that are available on our platform. And I think that's one of the things that we use to help manage that. We also use a number of different indices in our hedging approach. So based on all of that, we haven't seen a significant impact from basis risk year to date.

Speaker 6

Got it. Thanks, Dan.

Operator

And our next question is from the line of Ryan Krueger with Keith, Brett and Woods. Please go ahead. Your line is open.

Speaker 7

Hey, thanks. Good morning. First one was on for CRE. Can you provide us a little more color on or at least quantification on how the capital has moved at Brook REIT on a year to date basis at this point?

Speaker 4

Yes. So we obviously are not currently disclosing the exact financials of Brookery, I think consistent with other companies that have captive arrangements. As I mentioned, we have seen some growth there. It's not a huge amount, but don't really want to quantify it at this point. I would say that just as a reminder, we did put $700,000,000 in, in terms of the initial capitalization of Brook Reade.

Speaker 4

And the other kind of component of equity that exists there is the asset related to the MRB or the variable annuity guarantees and the combined result of both of those have grown in the 1st 9 months.

Speaker 7

Okay, got it. Thanks. And then when I look at the market risk benefits roll forward, it looks like there's been a fairly consistent amount of negative impact from actual holder behavior versus your expectation is $514,000,000 year to date. Can you give some additional info on what is driving that and how to think about that as we go forward?

Speaker 4

Sure, Ryan. So what ends up in the sort of the unexpected component of the MRB roll forward is essentially related to lapse activity and withdrawals. And our lapse rate assumptions are set on a kind of a long term view of what we expect to happen. And from quarter to quarter on a short term basis, you can see some variability in that. But really, assumptions are set more on a long term basis.

Speaker 4

And as you know, Jackson goes through a process of updating its actuarial assumptions in the Q4. And I don't want to get ahead of that, but we will be doing that. We're actually going through the final phases of that now, and we'll be reporting that out along with our 4th quarter results.

Speaker 7

Thanks. Just one quick follow-up to that. Is this is what's happening currently mostly lower than expected lapse rate? Is that been the short term deviation?

Speaker 4

No, it's actually the other way around. As we've talked about, when equity markets are really strong like we've seen this year, we do tend to see a higher level of lapse rates or of policyholders withdrawing their money. So it's higher lapses.

Speaker 7

Okay, great. Thank

Operator

you. Our next question will be from the line of Tom Gallagher with Evercore ISI. Please go ahead. Your line is now open.

Speaker 8

Good morning. A few questions. First, just on the hedging. The I guess, excluding the equity vol, which you gets excluded for purposes of Mercury Capital. It looks like you had about $130,000,000 of hedging losses in the quarter.

Speaker 8

Just curious what caused the hedging losses, which factors? And how big of a loss when we think about hedging in Brook Re, how big of a loss or how much of breakage would you need to see before there would be some capital implications? It sounds like you have a pretty big buffer there, but just want to get a broad sense for what that would look like.

Speaker 4

Yes. So just in terms of the level of hedging losses and the math you did there with subtracting out the volatility, it sounds like you're on the right track. We don't view volatility as kind of a core risk embedded within our guarantees. And so rather than developing a fairly costly hedging approach to cover off volatility, that's what led us to setting the fixed volatility assumption within our modified GAAP approach at Brook Ray. And we do accept that that's going to create a little bit of variability in the GAAP results that show up in our non operating results.

Speaker 4

So that's the point on volatility. And in terms of the level of losses that we would be able to sustain at Brook Reedy prior to putting in any capital, if you go back to our original disclosures around the establishment of Brook Reedy, we set it up intentionally to be sort of self sustaining. And so Re. We set it up intentionally to be sort of self sustaining. And so we do feel like we have a pretty strong buffer there and well above the minimum operating capital that's required for a regulatory basis.

Speaker 4

We also have internal risk levels that we monitor quite regularly, and we feel good about that and really feel like we're in a strong position in terms of Brookery. It would take a very significant market event to cause a capital issue. I think as we've disclosed on prior calls, that would typically be very high levels of volatility combined with really significant equity stresses or equity and interest rate stresses combined. So think of events like the global financial crisis in the 'seven, 'eight period or potentially similar to the COVID shock in 2020 would be the scenario where we could potentially need some additional capital upgrade.

Speaker 8

Got you. That's helpful, Don. So as a BrightLine test with the $700,000,000 of hard assets that you funded it with initially, if that if you went through that, would that be one way to think about it? Because I know you have other equity, but the rest of the equity that's been created there, which is essentially an embedded gain from the embedded derivatives, doesn't really feel like real equity. I mean, I don't know if the regulator views it that way.

Speaker 8

But just curious like how you is that a reasonable initial level to think about if you depleted that $700,000,000 which obviously you're way away from that because you have year to date gains, but just trying to understand like a bright line level?

Speaker 4

Yes. We don't have a bright line. Just related to the $700,000,000 recall that, that was our initial capital or hard assets, if you will, that we put into the company. Each quarter, we settle up on the results of the business with Brook Re. And so the hard assets have actually grown as well over the 1st 9 months of the year.

Speaker 8

Got you. Thanks. And then just

Speaker 4

sorry, Tom, just to close that out, we don't really have a bright line. We do have new growth metrics that we monitor, which are kind of scenario based and we look at it very, very closely. But there's no BrightLine dollar amount that would guide you to.

Speaker 8

Got you. And then I just my follow-up is just on sales. The big ramp up in fixed and FIA sales in Q3, I heard your comments about I think you said probably not going to stay at that level. But I guess my question is, that's probably the most competitive part of the life insurance market. That's where all the alternative managers are operating.

Speaker 8

How do you think about standalone ROEs? Like I heard everything you said about diversification. That all makes sense. But I can't imagine these are particularly high returning sales like Ryla, in my view, is probably a much better quality sale for you. So why like enter into that market in such a big way if that's in fact where most of the competition is intense in pricing?

Speaker 8

I don't know, that's a bit of a rambling question, but what kind of returns do you think you're actually getting on those product sales?

Speaker 2

Good morning, Tom, and thank you for that question.

Speaker 6

Yes, I'll

Speaker 2

have Scott address the drivers for the sales and then Don can address the return question. But year to date, we've seen very constructive characteristics for annuity sales overall across all different annuity types. And we've seen very rational behavior out of our peers as well. So across the entire industry, we're seeing growth in markets for each annuity type. And Scott can share our view on what's driving those increased sales.

Speaker 9

Yes. Thanks, Laura, and thanks for the question, Tom. I mean, there are several drivers and it starts with demand. I mean, you've heard virtually every firm in our industry talk about favorable demographics. And the reason why is because that opportunity is real.

Speaker 9

It's not just the number of Americans turning 65 that have the need, but the number of Americans that now are responsible for funding their own retirement and the need for protection, for growth, for lifetime income is stronger than ever. It's also another driver is the number of solutions that are available. As Laura pointed out, it really highlights the importance of having product solutions that are available that have strong consumer value across the entire risk spectrum, whether it's the growth potential of VA, the protected growth of Ryla or the principal guarantee of spread, that's important to overall to Jackson sales and diversification. Another driver is really the number of advisors that are now using annuity solutions as part of their client diversification and part of their overall financial planning. I mean, we've spent a lot of effort over the years to ensure that our products are integrated in the wealth management platforms and then the financial planning tools that advisors use to run their business and to serve their clients.

Speaker 9

And it's really helped advisors illustrate the positive impact our solutions can have on a client's portfolio and really helps demonstrate how we can drive potentially better outcomes. From a spread specific standpoint, we talked about some of the drivers, active repricing, the capital stability of Brook Re, our ability to tap into the strength of distribution and reengage with key distribution partners. But for Jackson, a key reason to be in the spread business is it helps us attract new advisors to our overall suite of products. Much like Lila did, what we've seen with the spread sales, it's brought advisors back to Jackson that hadn't done business with us in a while. So we're very pleased with the results we've seen with our diversified sales.

Speaker 4

Yes, Tom, I'll just add a couple of things to that and then address your question on return. So as you know, Jackson's had a pretty long history of being in the spread business. And so, as Scott was mentioning now that we have more stability with Brook Ray in place in terms of our capital position, we made the decision to support the distribution effort. In terms of returns, we're very comfortable with the profitability of all the products that we're currently selling, including the fixed annuities. And the range of returns really varies by product.

Speaker 4

So as you pointed out, our VAs is our some of our highest return products. Fixed annuities are going to be at the lower end of the range and Ryla falls somewhere in the middle there. We don't disclose specific IRR targets, but we're comfortable with the returns we're seeing on that business.

Speaker 8

Got you. Thanks, guys.

Operator

With no further questions on the line, I will now hand the call back over to Jackson's CEO, Laura Prescod, for any closing remarks.

Speaker 2

Thank you all for joining us this morning, and we look forward to providing you our next update on our full year results in the New Year. Take care.

Operator

This will conclude the Jackson Financial Incorporated 3Q24 earnings call. Thank you to everyone who was able to join us. You may now disconnect your lines.

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Earnings Conference Call
Jackson Financial Q3 2024
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