Jackson Financial Inc

NYSE:JXN

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, everyone, and welcome to today's conference call, titled Jackson Financial, Inc., Q2 '23 Earnings Call. My name is Ellen, and I'll be coordinating the call for today. [Operator Instructions]I would now like to turn the call over to Liz Werner, Head of Investor Relations, to begin. Liz, please go ahead whenever you are ready.

[Elizabeth Werner, executive]

Good morning, everyone, and welcome to Jackson's second 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 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 website, at investors.jackson.com.Joining us today are CEO, Laura Prieskorn; our CFO, Marcia Wadsten; our Head of Asset Liability Management and Chief Actuary, Steve Binioris; our President of Jackson National Life Distributors, Scott Romine; and President and Chief Investment Officer of PPM, Craig Smith.At this time, I'll turn the call over to our CEO, Laura Prieskorn.

[Laura Prieskorn, executive]

Thank you, Liz. Good morning, everyone, and welcome to our second quarter 2023 earnings call. During today's call, we'll provide an update on our quarterly results and outlook on achieving our financial targets, including our capital return goals.September of this year will mark Jackson's second anniversary as an independent company. Over these last 2 years, we have consistently returned capital to shareholders every quarter. In the second quarter, we continued to build upon our proven track record by returning $100 million through dividends and share repurchases.In addition to our earnings release, we announced board approval for a third quarter common dividend of $0.62 per share. By the time we reach our upcoming anniversary in mid-September, we expect to exceed $1 billion in capital returned to shareholders, representing nearly 40% of our initial market capitalization.Looking ahead, we remain committed to delivering on our 2023 capital return target of $450 million to $550 million as we continue to focus on capital generation and long-term financial strength.Based on our progress through the first 6 months of the year, we are reiterating our 2023 key financial targets. We ended the second quarter with an RBC ratio up from the prior quarter and within our target range of 425% to 500%. We took actions during the quarter to optimize required capital at the operating company, selling certain limited partnership assets from Jackson National Life Insurance Company to Jackson Financial, Inc., and Marcia will provide more detail on this transaction later in the call.We maintained a strong holding company position, with nearly $1.5 billion in assets. This includes cash and highly liquid assets of nearly $1 billion, with additional liquidity expected over time from the sale of limited partnership assets along with future operating company dividends. We are pleased with our current holding company position, which allows us to meet our November debt maturity and our current year capital return target and provides a strong asset base as we head into 2024.As discussed in the first quarter, statutory reserving and capital requirements are subject to flooring at the cash surrender value, or CSV, and the economics of our business are not recognized through our capital position. We are actively engaged with our Michigan regulator and are optimistic we will develop a long-term reserves and capital solution that will better reflect the economics of our business and facilitate more efficient risk management.Turning to our second quarter results, net income was $1.2 billion, reflecting the benefit of a rising equity market and higher interest rates.Adjusted operating earnings were $3.34 per share, an increase from the prior quarter due to the rising equity market and a 4% increase in average annuity account values.We remain confident in credit quality across our investment portfolio and have updated the enhanced disclosures provided last quarter, with particular emphasis on commercial real estate. We updated the internal valuation of our entire loan portfolio for current property fundamentals and cap rates. The loan to value of the portfolio has increased but remains below 55%. You will see commercial office exposure below 2% of our overall investment portfolio, consisting entirely of first-mortgage loans rated at the 2 highest rating levels: CM1 and CM2. Our conservative underwriting and high-quality investment portfolio remain a core strength of our business.Retail annuity sales totaled $3.1 billion for the quarter and have been stable over the last few quarters. Variable annuity sales were flat from the first quarter, while RILA sales gained momentum. Fixed annuity sales remain relatively modest, as our pricing reflects our prudent investment approach. We remain focused on offering products and solutions that meet the long-term retirement needs of financial professionals and their clients.Our most recent enhancement to the Jackson Market Link Pro RILA suite reflects product innovations that have been embraced by the market. RILA sales reached $540 million in the quarter, up from the first quarter and still climbing. We set a record for RILA sales in the month of July and continue to benefit from our distribution strength as we grow in this space.Our increasing success in the RILA market has made a positive contribution to our distribution expansion and diversification strategy. We've added over 3,200 relationships with new or reengaged advisers since introducing this suite of products in October of 2021. This includes nearly 1,200 relationships in the second quarter alone, following the launch of our enhanced RILA suite in early June. We also benefit from a broader consumer demographic, as the average age of a RILA policyholder is 5 years younger than our traditional variable annuity buyer.Overall, the awareness of annuities as a retirement solution continues to grow, and we saw increased evidence of this trend in the recently released Committee of Annuity Insurers Survey conducted by the Gallup organization and Matthew Greenwald & Associates. 87% of individual annuity owners agree annuities are an effective way to save for retirement. These surveys not only heighten awareness of the value of annuities, they serve as a tool for key stakeholders in Washington when developing retirement-related legislation and regulatory policies.In July, our leadership was once again highlighted in Barron's annual 100 Best Annuities Guide. Jackson had 4 products featured across 3 categories this year, including our Elite Access Advisory II and Perspective II variable annuity products and our Jackson Market Link Pro RILA suite, which was highlighted 3x as a leading product providing valuable market protections for policyholders.Overall, I remain pleased with our momentum towards our strategic and operational goals during the second quarter. We continue to maintain a strong balance sheet and remain committed to achieving our 2023 key financial targets.Our focus on product innovation led to the successful rollout of an enhanced RILA suite and an expanding distribution network. As a leader in the annuity industry, we will continue to serve financial professionals' and their clients' needs for reliable retirement savings and protected income solutions and remain steadfast in our commitment to sustainable growth and long-term value creation for all of our stakeholders.I'll now turn it over to Marcia to review our numbers for the quarter in greater detail.

[Marcia Wadsten, executive]

Thank you, Laura. I'll begin with our second quarter results summary on Slide 6.Our adjusted operating earnings of $283 million are up from this year's first quarter, as the benefits of higher equity markets are coming through fee income, but earnings are down from the prior year second quarter, as described on the slide.Similarly, our second quarter adjusted book value attributable to common shareholders was up from the first quarter due to nonoperating net hedging gains and healthy adjusted operating earnings.We've once again included additional general account investment portfolio details in the appendix of our earnings presentation that provide breakdowns on both U.S. GAAP and statutory bases, excluding the assets reinsured to third parties or funds withheld assets. The information in the appendix provides helpful insight into our highly rated and diversified commercial mortgage loan office portfolio. As you can see, Jackson remains conservatively positioned, with only 1% exposure to below-investment-grade securities on a statutory basis, excluding funds withheld assets.Slide 7 outlines the notable items included in adjusted operating earnings for the second quarter. Results from limited partnership investments, which report on a 1-quarter lag, were $23 million lower in the current quarter than they would have been had returns matched our long-term expectations. Similarly, in the second quarter of 2022, limited partnership income was also modestly below the long-term expectation, creating a comparative pretax negative impact of $12 million.The current quarter also included a $25 million pretax allowance for reinsurance losses, with no similar item in the prior year second quarter, bringing the total year-over-year comparative pretax impact to negative $37 million.In addition to the notable items, the second quarter of 2023 benefited from a lower effective tax rate as compared to the prior year's quarter. Second quarter 2022 pretax operating earnings were higher than the current year quarter, meaning that in the case of tax benefits that were similar on a dollar basis in these 2 periods, the current period had a larger reduction to the effective tax rate.Adjusted for both the notable items and the tax rate difference, earnings per share were $3.54 for the current quarter, compared to $4.52 in the prior year second quarter. This reflects the previously flagged increase in VA fixed-option crediting rates due to the regulatory minimum requirement as well as the change in income from operating derivatives resulting from higher short-term interest rates. Once again, we saw positive sequential trends, as the earnings per share excluding notables in the first quarter of this year was $3.18.Slide 8 illustrates the reconciliation of our first quarter pretax adjusted operating earnings of $305 million to pretax income attributable to Jackson Financial of $1.5 billion.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 a resulting GAAP nonoperating volatility.For example, the market risk benefit, or MRB, calculations reflect the impact of interest rates from both the changes in the discounting of future cash flows, which we consider in our hedging, as well as the impact of rates on assumed future equity market returns, which we do not explicitly hedge. Because of this dynamic, movements in interest rates will have a larger MRB impact than the associated hedging assets. This means that when interest rates rise, you would expect the net hedge result to be a positive; and when interest rates decline, you would expect it to be negative, all else being equal.As shown in the table, the total guaranteed benefits and hedging results, our net hedge result, was a gain of $1.1 billion in the second quarter.Starting from the left side of the waterfall chart, you see a robust guaranteed benefit fee stream of $781 million in the 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 stream, protecting our hedge budget when markets decline. Consistent with our practice, all guarantee fees are presented in nonoperating income to align with the hedging and liability movements.There was a $1.9 billion loss on freestanding derivatives, primarily the result of losses on equity and interest rate hedges in the quarter, where the S&P had a total return of nearly 9% and interest rates were up across the yield curve.Movements in net MRB liability provided a $2.6 billion gain that more than offset the freestanding derivative movements, due in large part to these same equity market and interest rate increases. Unlike the statutory framework, the GAAP reserves for variable annuity benefits do not have a minimum requirement and can become negative, switching from a liability to an asset position. This happened during the second quarter, as the strong economic profile of our in-force book led to a market risk benefit net asset of approximately $1.5 billion.Nonoperating results also include $118 million of gains from business reinsured to third 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 nonoperating items, which can be volatile from period to period, are offset by changes in accumulated other comprehensive income, or AOCI, in the funds withheld account related to reinsurance, resulting in a minimal net impact on Jackson's adjusted book value. Furthermore, these items do not impact our statutory capital or free cash flow.Our segment results start on Slide 9, with retail annuities. Variable annuity sales are down industry-wide compared to a year ago, but for Jackson, VA sales have stabilized over the past 3 quarters and we remain an industry leader in that market.Our total annuity sales are supported by RILA fixed and fixed index annuity sales, which are up meaningfully from the second quarter of 2022.Overall, sales without lifetime benefits as a percentage of our total retail sales increased to 43% in the second quarter of this year, up from 38% in the second quarter of last 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 RILA and other spread products translated to nearly $600 million of non-VA net flow in the second quarter of 2023. In addition to partially offsetting net outflows in variable annuities, these net flows provide valuable economic diversification and capital efficiency benefits. Importantly, our overall sales mix remains efficient from the standpoint of new business strain.Looking at pretax adjusted operating earnings for our retail annuity segment, on Slide 10, although we are down from the prior year's second quarter, we show positive underlying trends, as demonstrated by the AUM growth in all of our annuity product categories. Higher equity markets are benefiting our variable annuity account value, and strong net flows are driving growth in RILA, fixed and fixed index annuity account values. Furthermore, the positive momentum Laura mentioned for our enhanced RILA suite positions us well for the future as we enter the third quarter.Our other operating segments are shown on Slide 11. For our institutional segment, sales for the first quarter totaled $304 million, and account values were $8.9 billion. Sales outpaced surrenders in the current quarter, and pretax adjusted operating earnings were essentially flat from the prior year.Lastly, our closed life and annuity block segment was also relatively stable compared to the prior year. Under LDTI, we will now have some additional volatility in this segment due to the quarterly experience update for future policy benefits. While this figure can be positive or negative in any given quarter, we would expect it to net to a small number over time. You can see this in our financial supplement, where the last 5 quarters ranged from a loss of $16 million to a gain of $36 million and, on a cumulative basis, totaled to a gain of only $15 million.Slide 12 summarizes our second quarter capital position. As Laura mentioned, we returned $100 million to our shareholders in the second quarter and remain committed to reaching our full year capital return target of $450 million to $550 million.We were active in share buybacks during the second quarter, which totaled 1.4 million shares, or $47 million. As of the end of the second quarter, we had $439 million remaining on our share repurchase authorization.Our variable annuity book continues to be in a very favorable position, as measured by the projected cash flows of the block, which was further improved by the equity market and rate movements in the second quarter. As we've discussed in the past, this has led to a flooring-out of statutory reserves at the cash surrender value minimum reserve, which can create an asymmetry between these reserves and hedging assets. We experienced flooring during the second quarter as equity markets and interest rates rose, which drove losses on hedges, with minimal offset by reserves released.The strong future cash flows embedded in the book still remain. However, statutory rules limit the ability to reflect the full economic value in our current results due to the conservatism in the CSV floor. This flooring impact contrasts with the large reduction in our MRB liability in the quarter, which, as discussed earlier, flipped into an asset position, as there is no minimum floor concept in GAAP accounting.In the quarter, we saw a further negative impact to TAC of approximately $400 million due to an increase in nonadmitted deferred tax assets, which now total $2 billion.The RBC ratio benefited from a reduction in required capital, or CAL, that resulted from higher equity markets, higher interest rates and the sale of limited partnership assets from Jackson National Life Insurance Company to JFI. Earlier in the year, we decided to take actions to manage our limited partnership exposure down to a level more in line with our investment mix prior to our funds withheld reinsurance agreement. We have taken this approach multiple times in the past to manage our limited partnership exposure, given the strong underlying returns, and have been successful with the execution.We expect to sell these investments in coming quarters, but given the excess liquidity at the holding company level, we utilized our financial flexibility by moving these investments out of JNLIC, allowing for more efficient investing at the operating company.Unlike previous quarters, where the CSV floor effect was most impactful to reserves, as 2023 progressed we began to materially experience flooring within our required capital level as well. As of the end of June, almost all of the 10,000 scenarios used in VM-21 were floored at the cash surrender value, which is further into the tail than we have ever experienced. This impacted statutory results because we increasingly had very little reserves or required capital to release. However, this also means that we were building latent capital, not just within TAC, but in the RBC ratio as well.As of the end of the second quarter, we had cushion for potential declines in equity markets and interest rates that limits the corresponding increases in reserves and required capital. This cushion, along with the significant downside protection from our hedge portfolio, positions us well for stress scenarios.As we discussed last quarter, when dealing with the CSC floor we can protect the upside exposure in the book through call options. As markets continued to rise during the second quarter, these positions became increasingly more in the money, providing substantial payoffs to help protect our TAC and RBC ratio. This moneyness in the call option portfolio at the end of the second quarter gives us an improved RBC profile for further upside moves in equity markets during the second half of the year should they occur.During the second quarter, our hedge spend was within the guarantee fees collected. This continues to be a tailwind going into the third quarter due to higher levels of interest rates as well as lower levels of volatility compared to much of the first half of 2023. This has allowed us to purchase options at more favorable prices and with longer durations.Our holding company asset position at the end of the first quarter was nearly $1.5 billion, including nearly $1 billion of cash and highly liquid assets, which continues to be well in excess of our minimum buffer.This was supported by our preferred issuance during the first quarter that helped to effectively prefund our $600 million senior debt maturity coming in November, which we intend to retire at that time. Following that retirement, we have no debt maturities until 2027.I will now turn it back over to Laura for closing remarks.

[Laura Prieskorn, executive]

Thanks, Marcia. As noted, we've been highly engaged with our Michigan-based insurance regulator regarding statutory reserve and capital requirements related to the cash surrender value floor. We're seeking a long-term solution that will provide greater visibility into the profitability and strong cash flows of our variable annuity business. We look forward to continued progress and expect to provide you with future updates.I continue to be proud of the Jackson team, the performance of our business and our balanced approach to capital management. Our recent recognition in Barron's and the positive reception to our recent RILA suite enhancements reflect this team's industry-leading distribution, exceptional service and ongoing product innovation. These core capabilities allow us to meet the needs of our distribution partners and their clients and deliver value to all stakeholders.To our associates, thank you for your efforts and thank you for your unwavering dedication to helping people achieve financial freedom so they can live the lives they want in retirement.I'll now open it up for questions.

[Operator]

[Operator Instructions] Our first question comes from Tom Gallagher, from Evercore ISI.

[Thomas Gallagher, analyst]

First question, just a follow-up on the go-forward if equity markets continue to strengthen, the mention that the call options being further in the money, would you expect if we had a repeat of 2Q's and 3Q's stronger equity markets, et cetera, with the floored-out reserves, that there wouldn't be much RBC decline? Or would you still have some moderate level of RBC decline, just considering what you're projecting?

[Marcia Wadsten, executive]

Tom, thanks for the question. This is Marcia here. I think we have gotten ourselves floored out so far into the tail that we kind of know there's less responsiveness in the reserves and required capital. So that has meant that the call options and that protection has been very helpful to us as we completed the second quarter and position ourselves for the third quarter. So I think that that's correct, that if the equity markets continue to climb, we do have that call protection in place to help protect our RBC position as we go forward.

[Thomas Gallagher, analyst]

Okay. And then my follow-up is just on the discussion with the Michigan regulator. I just want to get a sense for what do you -- I assume it's some kind of negotiation, but what is your wish list? Because I look at the positive GAAP reserves, meaning it's a net asset now, I think it's several billion. You have a nonadmitted asset in a DTA that I think you said was $2 billion. Would the wish list be to get all of that added back to TAC? Because if you did, I would assume your RBC might double or something like that. What's kind of a realistic outcome? And what are you aiming to accomplish? Like, is it to fully align the economics where you can -- where the movement in reserves looks more like GAAP? Or do you think it's going to be some lesser version of that?

[Marcia Wadsten, executive]

Tom, I think our -- rather than a wish list in terms of what form it takes, I'll just sort of start with what is our aim here. So we are looking for a solution that allows for better alignment between the movement in our liabilities and our assets. And the key reason for that is sort of 2 outcomes and thinking of these as important benefits on a go-forward basis.First is that that would allow us to make sure that our hedging is actually much more focused on the economic risk and that we're having to do less noneconomic hedging against the framework element within the statutory framework, being the cash surrender value floor. So I think that would create the opportunity for more efficient hedging, which is a great outcome in terms of the ability to use a lesser amount or spend a lesser amount of the fees we collect for that purpose.And then the second benefit going forward is that we're looking for something that we think will allow for the economics of our business to be more clearly recognized and reflected in our financial results so that we just have more intuitive results for anyone who's looking from the outside and trying to understand how things are moving and why they're moving in the directions that they are.So that's really our goal, is looking for an opportunity to not have this sort of artificial floor in the reserves in a way that creates all of the sort of noise and understanding the results as well as creates the need for some noneconomic hedging spend. And the paths to get there probably are many, and those are the things that we're kind of in discussion with at this point.

[Thomas Gallagher, analyst]

And sorry, one more if I could slip it in. When would you expect to have this resolved one way or the other? Do you think it would be by the end of this year, by the time you file your [ stat ] filings for 2023?

[Laura Prieskorn, executive]

Tom, this is Laura. At this point, we're particularly focused on solutions that are durable over the long term. And even with being engaged with the regulator at this point, there is a process that we have to work through. So we don't have anything definitive to share at this time. We continue to push toward that long-term solution and expect and look forward to giving future updates and additional disclosures.

[Operator]

Our next question comes from Ryan Krueger, from Stifel.

[Ryan Krueger, analyst]

My first question is, can you quantify if there was not the requirement for variable annuity reserves to be floored at cash surrender value, what the magnitude of the impact of that would be? In other words, how much higher -- how much lower would your reserves be or how much higher would your capital be if that dynamic did not currently exist?

[Marcia Wadsten, executive]

Ryan, this is Marcia. It's a little complicated because there's both an impact that the cash value floor kind of creates an impact both on the reserves and the required capital. So if there was no floor whatsoever, there would be definitely a much lower reserve requirement, but accompanying that would be some higher increase in required capital then. So today, the floor kind of impacts both the numerator and denominator.I think the easiest thing to sort of point to as just a context item is just looking at our reserve for the benefits under GAAP for the MRB liability, which is actually currently in an asset position of about $1.7 billion. So that just gives you a feel for the reserves related to the benefit on a more -- something that's a little bit more economically responsive basis of accounting.The other complication around the cash value floor for stat is that it is a full policy calculation, base contract and rider. So it's not a direct comparison, apples-to-apples, to the guaranteed benefit reserve on GAAP, but I think it's a good point of context and just general view of the kind of magnitude that would be significant.

[Ryan Krueger, analyst]

And then on the alternative asset sales to the holding company, do you have any expectation on the timing of now selling those assets to third parties? And I guess, has there already been a process that's underway to do so?

[Marcia Wadsten, executive]

The process has begun, and our expectation is that we would have that sale before the end of the year.

[Operator]

[Operator Instructions] Our next question comes from Suneet Kamath, from Jefferies.

[Suneet Kamath, analyst]

Could you help us with the quarter-over-quarter decline in required capital? I'm just curious, like, how much of it was driven by the equity markets being higher versus how much of it was driven by the lower capital requirements on the LP sale? And maybe relatedly, if you hadn't done the LP sale, would you have still been in that sort of 425% to 500% RBC?

[Marcia Wadsten, executive]

Suneet, this is Marcia. So maybe start with the second one first. Without the LP sale, we would estimate our RBC would have been approximately at the lower end of the range. But when we look at the movement in the CAL over the quarter, the majority of it, a significant majority of it, was due to market conditions, the strong equity performance and move-up in interest rates, and a much smaller piece would have been the component related to the LP sale.

[Suneet Kamath, analyst]

Okay. Got it. And then I guess on the Michigan thing, can you give us a sense for how long you've been talking to them about this issue? Is this something that you've started this year? Or has it been sort of an ongoing conversation? Just any color there would be helpful.

[Marcia Wadsten, executive]

We've been looking at the issue itself and considering options for quite a while. So that was something that began in the latter part of last year for our own internal analysis. The discussions with our regulator have been this year. We did some of our own work first to kind of bring forward just the results of that so we could begin a conversation with some context for them. But the conversations with DIFS have been more this year and are ongoing.

[Suneet Kamath, analyst]

Got it. Okay. And then maybe just a bigger-picture question. When we talk about RBC, you have this really wide range, which is, I think, wider than most companies, even VA companies, use, and we're always trying to estimate kind of where you land within that range. And in some ways, it feels like there's some reluctance on your part to be more specific or provide more specificity on the components of RBC, even though we get a lot of that information from your peers. And so I just maybe wanted to understand why you take the approach that you've taken. Clearly, it has an impact on the stock. It's very important. I think some additional specificity would be helpful, but I wanted to just get your logic behind that.

[Marcia Wadsten, executive]

Well, I think it's actually kind of connected with how you started. The fact that we have the wider range in place is a function of the fact that we recognize that there is likely to be quarter-by-quarter volatility in the ratio. So we set a range that was wide enough to be able to absorb that volatility and leave us within a range that we're comfortable operating in at any point in that range.So I think with the acknowledgment that there is volatility quarterly in the RBC, we're looking at the business on a longer-term basis. We're looking at the fundamentals of it, the economic future of the business and the cash flows that come off of it. And some of the quarterly volatility is driven by some of the unique elements in the statutory framework.And we have just felt that some amount of focus on the detailed movements in a way detracts a little bit from some of the larger messaging around the fundamentals. And so we've just -- because we want to look at it in a larger range that way, we've felt that that was an appropriate way to kind of communicate it externally.

[Suneet Kamath, analyst]

I mean, for what it's worth, I would encourage you to maybe think about providing a little bit more specificity. I think the long-term view makes sense, 100%, but my guess is most companies have the same view of the business. But just more color, sensitivities, that kind of thing, I think would be very helpful.

[Marcia Wadsten, executive]

Thanks. Appreciate the feedback.

[Operator]

Our next question comes from Alex Scott, from Goldman Sachs.

[Taylor Scott, analyst]

First question I had is on the RBC and comments you made on CTE98. I mean, it sounded like even in the tail scenarios that you're floored out at the surrender value. I mean, that's sort of surprising, just given the tail is supposed to be worst 2% of scenarios. I would think that would be a nasty enough outcome that the guarantee would add some value beyond just the surrender value on the policies.Relatedly, my understanding is the NAIC is considering changing that model that's producing those scenarios and that there's been some field testing going on. So I was just interested if you guys have participated in that field testing, if you think that will still be the case under a new model that potentially introduces more rate vol?And is what you're communicating basically suggestive of you're really not having to hold a whole lot of capital against the VAs at all right now because of that dynamic with none of the scenarios putting you beyond the surrender floor?

[Marcia Wadsten, executive]

Well, I guess, let's just go back to where we started in the sense that that's correct. The phenomenon that we saw in the second quarter, in particular, with the continued rise in interest rates, coupled with the higher interest rates -- excuse me, continued rise in equities, coupled with the higher level of interest rates that we're in, is a sort of favorable market conditions kind of package that we haven't necessarily seen in quite the same forms and VM-21 came into play, given that last year when rates went up, equities were down. So those were kind of working against each other in that sense.And so I think the natural outcome of current conditions would be that the flooring would push further out into the tail of the distribution. And so you're right, most of our full 10,000 scenarios are floored out now. So the flooring is not just within the reserves, but sort of deeply into that required capital, CTE98 tail, as you were saying.And just again to kind of contrast with what we were saying earlier, on a GAAP basis, totally different methodology of course. But there, we're in an asset position. So I think it's not surprising to me or there's a consistency in sort of how you think about that, that if we weren't floored out on stat, you would, in theory, be seeing reductions in the liability requirements similar to what you're seeing in GAAP, but that just is something that doesn't work given the cash value floor.And you're right in that there is not a lot of required capital being held against it. But on the flip side of that, we're holding much higher reserves because we're holding reserves at the cash surrender value than what would really be implied by a cash value-based, kind of [ principles-based ] framework that's really just looking at the projection of the cash flows and, as you say, looking at those in the context of tail scenarios.When it comes to the work that the NAIC is doing on the scenario generator, we are involved in that. We've been very engaged in that work and have participated all along with all of the NAIC's efforts around VA reform to participate in field studies or be engaged in industry groups and the like. So we're watching that carefully.It's a little unclear yet exactly what the form of the final changes might take. I think there's been some evolution in that as the project has moved forward or moved through time. So it's a little too early to say exactly where that's going to go. But I think you're right in saying that intentional in there is some more lower-rate scenarios, probably in response to kind of the low-rate environment that we were in historically and now kind of aren't in as much. But there would be an intentional focus on more low-rate scenarios and potentially recalibration of the equity scenarios as well. But that's still taking shape. So it's too early to kind of think about impacts or understand what the final landscape will look like there.

[Taylor Scott, analyst]

Got it. That's all very helpful. And maybe if I step away from some of these RBC dynamics and accounting and go back to your comments of your economic view of the cash projections has obviously benefited a lot from higher equities and higher rates, I think that's something that we haven't really had any disclosure on since around the time that you all became a stand-alone public company. So I'd be interested, I mean, can you provide any detail around that? Can you help us think through what that looks like now? And if that's the way to look at the true economics, it would be beneficial for us to understand where it's at and maybe help us value the company properly outside of some of these headaches on RBC with surrender floors and so forth.

[Marcia Wadsten, executive]

The disclosures that we put out initially in our Form 10, the primary one I think that folks ask about is the 5-year projection of distributable cash flows. Of course, that is in a statutory framework. So it would reflect any of the limitations or unique aspects of statutory accounting in that.So what we've been looking at is while we definitely want to provide as much insight and help others get the greatest amount of insight into the business, we do think that the best time to update those will be just after we get our solution in place with respect to the cash value floor so we have a clearer picture of how we think capital will emerge as we move forward under that solution. I think that will be a lot more meaningful, and it will be a good opportunity to refresh that information.

[Operator]

Thank you. There are no further questions on the line. So I'd now like to hand back to Laura Prieskorn for any closing comments.

[Laura Prieskorn, executive]

Thank you. Your participation and interest are appreciated. We thank you for joining us this morning. Take care.

[Operator]

That concludes today's conference for everybody. Thank you very much for joining. You may now disconnect your lines. Have a lovely rest of your day.