Jackson Financial Inc

NYSE:JXN

Earnings Call Analysis

Jackson Financial's Positive Q3 Momentum

As of Q3 2023, Jackson has exceeded shareholder commitments with over $1 billion returned since 2021, including $120 million this quarter. RBC ratios remain strong, above target range, with estimated values increasing to $4.5 billion. Net income soared to $2.8 billion, driven predominantly by a gain on market risk benefits from elevated interest rates, while adjusted operating earnings rose to $3.80 per share, reflecting growth in fee income and managed corporate expenses. Annuity sales grew 6%, with RILA driving a sales run rate beyond $3 billion. With a target capital return of $450 million to $550 million for 2023 in sight, and remaining share repurchase authorization at about $360 million, Jackson reinforces its robust liquidity and financial flexibility, including an imminent $600 million debt retirement and no further maturities until 2027.

Company Overview and Leadership's Commitment

CEO Laura Prieskorn highlighted the consistent delivery on commitments to shareholders since the company's inception as an independent entity. They marked their independence with significant shareholder value creation, surpassing $1 billion in dividends and share repurchases. Prieskorn emphasized the importance of sustaining this momentum and confirmed a strong capital position with a reaffirmed target for capital return.

Capital Position and Dividend Announcement

Prieskorn confirmed a robust capital position for Jackson, with an RBC ratio above the target range of 425-500%, and an increase in total adjusted statutory capital to $4.5 billion. Further reinforcing shareholder value, a fourth quarter common dividend of $0.62 per share was announced, reflective of the company’s healthy liquidity and disciplined capital management strategy.

Balance Sheet and Liquidity

The company's robust balance sheet was underscored by nearly $1.4 billion in liquidity at the holding company level. This strong financial foundation supports the company’s operations and strategic initiatives, including significant debt retirement and maintaining flexibility for future investments and share repurchases.

Earnings Performance and Sales Growth

Jackson reported strong earnings performance with net income totaling $2.8 billion, bolstered primarily by gains on market risk benefits from higher interest rates. Adjusted operating earnings were $3.80 per share. Retail annuity sales grew 6% from the second quarter, driven by RILA sales momentum. Variable annuity sales were aligned with market trends, and positive fund performance has offset the impact of net outflow, demonstrating the company's ability to navigate market shifts effectively.

Strategic Product and Sales Diversification

Prieskorn detailed sales diversification with their enhanced RILA product generating significant interest and record sales, exemplifying Jackson's adaptability and forward-thinking in product offerings. They remain committed to providing financial solutions that resonate with market demands and continue to drive growth in the annuity space.

Regulatory Advocacy and Adaptability

The company’s response to regulatory changes, including recent proposals by the Department of Labor, reflects Jackson's resilience and adaptability amid evolving regulations. The company’s proactive strategy ensures they remain well-positioned to navigate potential regulatory challenges while advocating for fair regulations that support retirement investors.

Conclusion and Outlook

Prieskorn closed with reflections on the third quarter's success and the cumulative efforts throughout the year, reinforcing the trajectory towards the company's strategic and operational goals. The company remains focused on driving future growth and delivering sustained shareholder returns based on their disciplined approach.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, everyone, and welcome to the Jackson Financial, Inc. Third Quarter 2023 Earnings Call. [Operator Instructions] I would now like to turn the conference call over to our host, Liz Werner, Head of Investor Relations. Please go ahead.

[Elizabeth Werner, executive]

Good morning, everyone, and welcome to Jackson's third 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 may also contain certain non-GAAP financial measures. The reconciliation of those measures to the most comparable U.S. GAAP figures is included in our earnings release, financial supplement and earnings presentation, all of which are available on the Investor Relations page of our website at investors.jackson.com.

Joining us today are our CEO, Laura Prieskorn; our CFO, Marcia Wadsten; our Head of Asset Liability Management and Chief Actuary, Steve Binioris; 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 third quarter 2023 earnings call. In today's call, we'll provide an update on our strong capital position, our product and distribution initiatives and our solid third quarter operating results. In our 2 years as an independent public company, we have consistently delivered on our commitments to shareholders. We continue to build on this momentum in the third quarter with total capital return to shareholders exceeding $120 million through share repurchases and common dividends and ending the quarter with an RBC above our target range.

As we enter the fourth quarter, we look forward to furthering our track record of execution by achieving our 2023 financial times. Since our separation in September of 2021, Jackson's cumulative capital return has surpassed $1 billion in combined shareholder dividends and share buybacks. We have repurchased common shares for 8 consecutive quarters. As of the end of the third quarter, our cumulative share repurchases represent 19% of our common shares outstanding at the time of separation.

We view dividends as an important component of sustained return to shareholders and paid our first dividend within 4 months of becoming an independent public company. Alongside this morning's earnings release, we are pleased to also announce our Board's approval for a fourth quarter common dividend of $0.62 per share.

Maintaining a strong capital position at Jackson and its operating companies is a priority for Jackson's leadership. We ended the third quarter with an estimated RBC ratio above our target range of 425% to 500%, and our total adjusted statutory capital increased to $4.5 billion. We have consistently reported estimated RBC within or above our target range and consistently above rating agency requirements each quarter since separation.

Our capital flexibility is further supported by liquidity at the holding company level, which was nearly $1.4 billion in liquid assets, taking into account the cash proceeds from the sale of limited partnership assets in October.

We announced our plans to sell these assets last quarter, and the sale was successfully completed last month. As previously stated, we are retiring $600 million in senior debt later this month, and we'll enter 2024 with a strong level of liquidity within the holding company. At the end of the third quarter, year-to-date capital return totaled nearly $350 million. When combined with our fourth quarter dividend and expected share repurchases, this total offers us confidence in our ability to achieve our 2023 return target of $450 million to $550 million.

Our remaining share repurchase authorization of approximately $360 million provides flexibility for continued execution. As discussed earlier this year, statutory reserving and capital requirements are subject to flooring at the cash surrender value, or CSV, which has led to volatility in our statutory results. We remain highly engaged with regulators to deliver a CSV for solution to better represent the economic value of our business. We have had positive engagement with our regulators over the past few months and are targeting early 2024 for a CSV floor solution.

While the specific timing is difficult to predict, our work is in pursuit of a comprehensive and enduring solution that recognizes the financial strength of Jackson and positions us for greater RBC stability. We look forward to providing a more detailed update in the coming months.

Turning to our third quarter results. Net income totaled $2.8 billion, primarily due to the gain on market risk benefits resulting from higher interest rates. Adjusted operating earnings were $3.80 per share, an increase from the second quarter of 2023 due to fee income growth and lower corporate expense. Retail annuity sales increased 6% from the second quarter of 2023 to $3.3 billion, driven by continued momentum in RILA sales. Variable annuity sales and net flows were consistent with market trends and the expected aging of our in-force book.

Positive fund performance has resulted in a 3% increase in variable annuity account values for the year, which more than offsets the impact of net outflows. Like prior quarters, our fixed and fixed index annuity sales remained relatively modest as pricing reflects our prudent investment approach.

Our ability to meet the needs of advisers and their clients positions Jackson well for further growth and diversification through our product offerings and expertise. Our enhanced RILA product has been embraced by the market with sales exceeding $800 million in the third quarter and reaching record sales levels in the month of September. In less than 2 years, we've reached an annualized sales run rate of over $3 billion and 26% of our RILA producers were either new or reactivated producers.

Our enhanced RILA product and focus on digital marketing have made for a powerful combination in the market. Our innovative RILA digital experience ensures that financial professionals can more easily educate their clients on the benefits of RILA and how it fits into their specific goals for growth and protection with flexibility. The tool was built to be intuitive, simple and action-oriented and to allow for customized experiences in which financial professionals and clients are able to model various scenarios to better understand outcomes.

Designing this unique interface resulted in significantly increased year-over-year engagement on our website, jackson.com. More than 1/3 of our sales came from producers utilizing our RILA digital experience, clearly demonstrating that financial professionals are relying on our industry-leading technology to provide clients with better information and service.

In late August, we refined our perspective to flagship variable annuity benefit suite with a goal to simplify and customize the consumer experience. Perspective II offers a streamlined menu of benefit options that enables financial professionals and their clients to easily navigate living benefit alternatives while maintaining focus on asset growth and protection.

Over time, as traditional pension plans have phased out, annuities are filling the gap, helping retirees to create their own stream of guaranteed lifetime income. When proposed regulations may limit a retirement investors access to annuities or worse than the retirement savings GAAP Americans are experiencing, we engage with regulators, agencies and legislators to advocate for fair regulations that do not impede a retirement investors access to valuable retirement solutions.

The Department of Labor's latest fiduciary proposal was just released, and we are still reviewing the profile. Our initial reaction is that the DOL may not have fully considered the regulations developed by the National Association of Insurance Commissioners and the safeguards these rules provide to retirement investors. We will continue to work with our trade associations to better understand how the proposed rule will impact Americans saving for retirement.

Jackson is fully accustomed to operating in a highly regulated industry and has a track record of successfully adapting to new and updated regulations. If the rule becomes effective, Jackson will work through our change management process to implement the final requirements. Overall, I remain pleased with our momentum towards our strategic and operational goals during the third quarter. We look forward to achieving our 2023 key financial targets and continuing to deliver long-term value to our shareholders, distribution partners and policyholders.

I'll now turn it over to Marcia to review our financials for the quarter in greater detail.

[Marcia Wadsten, executive]

Thank you, Laura. I'll begin with our third quarter results summary on Slide 6. Adjusted operating earnings of $315 million were up from this year's second quarter, primarily due to higher fee and spread income. Similarly, our third quarter adjusted book value attributable to common shareholders was up from the second quarter due to nonoperating net hedging gains and healthy adjusted operating earnings.

In the appendix of our earnings presentation, we have included additional general account investment portfolio details that provide breakdowns on both U.S. GAAP and statutory basis, excluding the assets reinsured to third parties or funds withheld assets. The information 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. As a reminder, we will complete our annual assumption review process in the coming quarter and will disclose the results of the review in our fourth quarter and full year earnings release.

This process entails a thorough and comprehensive assessment of our assumptions and models performed every year.

Slide 7 outlines the notable items included in adjusted operating earnings for the third quarter. Results from limited partnership investments, which report on a 1-quarter lag, were $13 million lower in the current quarter than they would have been had returns matched our long-term expectations. In the third quarter of 2022, limited partnership income was also below our long-term expectations, but to a greater degree, creating a comparative pretax benefit in the current quarter of $41 million.

In addition to this notable item, both third quarter 2022 and third quarter 2023 benefited from a lower effective tax rate relative to the 15% long-term guidance. The benefit in the prior year's quarter was larger due to a higher level of pretax operating earnings, excluding notables. Adjusted for both the notable items and the tax rate difference, earnings per share were $3.77 for the current quarter compared to $4.52 in the prior year's third quarter.

Key drivers of the year-over-year difference includes the previously mentioned increase in VA fixed option crediting rate due to regulatory minimum requirements and the change in income from operating derivatives resulting from higher short-term interest rates. Additionally, the prior year's quarter included a gain from the experience update for future policy benefits that did not repeat in the current quarter. It is important to note that we saw positive sequential trends as the earnings per share, excluding notables in the second quarter of this year, was $3.54.

Slide 8 illustrates the reconciliation of our third quarter pretax adjusted operating earnings of $355 million to pretax income attributable to Jackson Financial of $3.5 billion. Net income includes some changes in liability values under U.S. GAAP accounting that will not align with our hedging assets. We focus our hedging on the economics of the business as well as our statutory capital position and choose to accept the resulting U.S. GAAP nonoperating volatility.

As shown in the table, the total guaranteed benefits and hedging results or net hedge result was a gain of $2.8 billion in the third quarter. Starting from the left side of the chart, you see a robust guaranteed benefit fee stream of $784 million, 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 related hedging and liability movements. There was a $271 million loss on freestanding derivatives, primarily due to losses on interest rate hedges in a quarter where interest rates were up across the yield curve. Movements in net market risk benefits or MRB, provided a $2.4 billion gain that more than offset the freestanding derivative movements due in large part to the same 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 of 2023 and continued into the third quarter as the strong economic profile of our in-force book led to an MRB net asset of approximately $3 billion. Nonoperating results also included $462 million of gains from business reinsured to third parties. This was primarily due to a gain 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. Jackson continues to remain an industry leader in the annuities market and our traditional VA sales have stabilized over the past 4 quarters, which is consistent with VA industry trends.

As Laura highlighted, our RILA sales growth puts us on pace of over $3 billion annually and has driven improved overall sales diversification. Sales of annuities without lifetime benefits increased to 48% of our total retail sales, up from 41% in the third quarter of last year. While we expect this percentage to vary somewhat over time based on market conditions and consumer demand, our RILA offering has contributed to diversification within our sales mix.

When viewed through a net flow lens, the gross sales we are generating in RILA and other spread products translated to more than $800 million of non-VA net flow in the third 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 stream.

Looking at pretax adjusted operating earnings for our Retail Annuities segment on Slide 10, we show positive underlying trends as demonstrated by AUM growth across our annuity product categories despite being down from the prior year's third quarter. 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 for our enhanced RILA suite positions us well for ongoing success as we enter the fourth quarter.

Our other operating segments are shown on Slide 11. For our Institutional segment, sales for the third quarter totaled $112 million and account values were $8.7 billion. Pretax adjusted operating earnings were essentially flat from the prior year. Our Closed Life and Annuity Blocks segment reported lower pretax adjusted operating earnings 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.

The prior year's quarter included a gain on this line item that did not repeat in the current period. While this figure can be a 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 for the last 5 quarters ranged from a loss of $16 million to a gain of $36 million, totaling to a gain of only $25 million on a cumulative basis.

Slide 12 summarizes our third quarter capital position. As Laura mentioned, we returned $123 million to our shareholders in the third quarter through a combination of dividends and share repurchases 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 third quarter, which totaled 1.9 million shares or $71 million. We generated significant regulatory capital in the period as our variable annuity book remains in a healthy position, and our hedging performed well.

Our total adjusted capital increased by approximately $700 million to $4.5 billion, reflecting strong base contract cash flows, positive variable annuity net guarantee results and related tax benefits.

This was only slightly offset by higher required capital, which was driven by a decline in equity markets, partially offset by higher interest rates. The combined effects of these items led to our estimated RBC ratio rising above our 425% to 500% target range.

During the third quarter, our hedge spend was within the guarantee fees collected as we benefited from a more favorable hedging environment. Our holding company asset position at the end of the first quarter was nearly $1.4 billion, including over $900 million in cash and highly liquid assets, which continues to be well above our minimum buffer. Consistent with our second quarter commentary, Jackson Financial completed the planned sale of limited partnership assets in October. Giving effect to that sale, JFI had nearly $1.4 billion in cash and highly liquid securities, a very strong level of liquidity, which provides significant financial flexibility. We are retiring the $600 million senior debt maturity later this month.

Following that retirement, we have no debt maturities until 2027. Upon our separation, we made it clear that we were committed to maintaining a strong balance sheet and rating profile. We have delivered on this commitment over time, as illustrated by our quarterly reporting of estimated RBC ratios consistently within or above our target range, a conservative leverage ratio that has improved since separation and a deliberate balanced approach to capital return to shareholders.

We have been pleased that our financial results have consistently compared favorably to rating agency triggers, and we remain committed to a continued improvement of our profile in the future. In addition to our strong financial performance, we have made significant progress on diversifying our sales mix. We are proud of our execution and believe we are doing the right things to strengthen our credit profile for the future.

Stability of our capital position is very important and is driving our efforts toward obtaining a more economic framework that is not adversely impacted by the cash surrender value floor. As previously stated, our goals are reduced statutory capital volatility, more efficient hedging and more intuitive results for our external stakeholders.

I will now turn it back over to Laura for closing remarks.

[Laura Prieskorn, executive]

Thanks, Marcia. Our third quarter results and our accomplishments throughout the year underscore our ability to serve our customers through product innovation, exceptional distribution, effective risk management and industry-leading service. As I mentioned earlier, we look forward to providing additional insights into our cash surrender value floor solution and continued capital generation in the near future.

We continue to work closely with our regulators and are focused on arriving at a solution that meets the goals Marcia outlined. As 2023 comes to an end, I am proud of our accomplishments. We have completed our second year of operating as an independent public company and delivered on our commitments to stakeholders, returning capital to our shareholders, maintaining a strong balance sheet and serving our distribution partners and their clients.

I am grateful to each of our talented associates who contribute every day to Jackson's successes and help create a more confident financial future for American Savings for and Living and retirement.

I'll now turn the call over to the operator for questions.

[Operator]

[Operator Instructions]. So our first question comes from the line of Tom Gallagher of Evercore ISI.

[Thomas Gallagher, analyst]

Good morning. Yes, that's -- I think that's comforting to hear that -- I think you said March 2024 is when you expect timing-wise to get some further progress on the Florida reserve situation. I just want to get a -- I'm not asking for specifics, but just get a general idea about how you think the change might end up looking. I mean I'll tell you, in my head how I've thought about it and if you could just maybe tell me whether I'm thinking about it correctly or not.

But I guess the first thing is, I would guess that you would get some kind of permitted practice for an allowance to be able to move your reserve to a net asset, maybe up to some limit because I assume it won't be unlimited. And that -- and if they're able to do that, willing to do that, that would allow you to have greater hedging symmetry. So you'd be able to hedge the economics and not worry about this issue as much going forward. Is that -- am I thinking about that correctly?

[Laura Prieskorn, executive]

Thanks for the question. I'll maybe address timing and then have Marcia cover your comments on the specifics that you've mentioned. From a timing perspective, I think importantly, we've made great progress year-to-date, which has allowed us to confidently indicate a targeted completion early in 2024. It is hard to predict any specific timing given, obviously, we're dependent on regulator approval. But again, great progress being made, and we do intend to provide updates as soon as possible around the particular timing and the specifics of the solution. But I can have Marcia comment on your thoughts around the solution specifically?

[Marcia Wadsten, executive]

Sure, Tom. While you're correct, we're not going to go into the details of the form of the solution. I think we can certainly start with just what we said about the goal of the solution, and that does have certain implications, I think, about how things would change going forward. So what we've said is we're looking for a more economic liability basis that's going to move in line with hedging and that would, as you indicate, allowed for more economic hedging.

And that's -- one of the restated goals was to avoid any costs and implications related to noneconomic hedging that we have today given the influence of the cash or undervalued floor. So we would be looking for a situation looking forward to the opportunity to have kind of more economic hedging and avoid that noneconomic hedging. We also think that, that type of solution then would also promote greater stability in our capital in RBC and just more kind of predictable kind of capital generation as we move forward.

And we're also keenly, I think, interested in having results that I think everyone sees us more intuitive as markets move and the statutory results kind of moved sensibly, I guess, what the market changes are period-to-period. Keep in mind, I guess, that all of these items or these elements are what I'm thinking of as more long-term benefits as we move forward. So our goals here are really focused on kind of those long-term benefits rather than kind of motivated by near-term impacts.

[Thomas Gallagher, analyst]

That was really helpful. The -- and I guess my follow-up is the $3 billion MRB that you have on a GAAP basis. Is it possible you're going to be -- if and when a solution comes through, is it possible that we get a material increase to your RBC to reflect being able to have some similar directional change on the balance sheet? Should we expect some kind of change in RBC? Or do you think this is going to be more of a prospective change to ongoing capital generation and not really a balance sheet impact or is it potentially both?

[Marcia Wadsten, executive]

I think that emphasis would be, Tom, on the prospective impacts. And as said, really, this is -- we're looking for a solution that works well as we move forward in time, not so much focused on kind of day 1 type impacts.

[Operator]

Our next question comes from the line of Ryan Krueger of KBW.

[Ryan Krueger, analyst]

I have a similar related follow-up, but would -- do you think this would -- the potential solution would allow you to change your hedging program at all? Or is it more just making the statutory results to move more sensibly relative to how your hedging approach already is?

[Marcia Wadsten, executive]

Well, right, I'll -- this is Marcia here. I think there is an implication that there would be some changes in kind of how our hedges would be positioned. I think we've talked regularly in the past that the way we think about hedging is to hedge the economic risk profile, but then to also consider our statutory position and make sure that we're also protecting our statutory balance sheet and stabilizing distributable earnings over time.

So what I think we would anticipate with the solution is that if you have less of an impact from the cash to undervalued floor, you're just not going to have quite as much of a need, not that it's going to go entirely away potentially, but you're not going to have quite as much of a need for what we would call the kind of macro hedge adjustments, those that are sort of statutory focused and you'd be kind of more economically heading. So I think that just the balance between the economic focus within our hedging and that those are statutory lens that we have to look through today would change in the amount of focus on economic would kind of rise and the focus on the statutory piece would just naturally become a little bit less dominant without the heavy influence of the cash undervalued floor and the way we experience it now.

[Ryan Krueger, analyst]

Got it. No, that makes sense. And then maybe just one other one kind of related to what Tom was asking. Is it more likely that it would be just a permitted practice or some sort of change to your existing legal entity for the use of a new legal entity like a captive that where you could move some of the reserves to the captive entity?

[Marcia Wadsten, executive]

Well, I think we feel it's a little premature to talk about the form today. So unfortunately, I have to kind of pass on that and just let you know that we'll come back with an update as soon as we can and share the kind of detail for all of that at that point.

[Operator]

Our next question comes from the line of Suneet Kamath of Jefferies. Please go ahead.

[Suneet Kamath, analyst]

Just a couple on capital. So first on the Michigan solution, assuming you get it in early '24, would that change how you think about your RBC target of $425 million to $500 million?

[Marcia Wadsten, executive]

I think that's a likely outcome, Suneet, that we would want to revisit that, not indicating that how it would change. But I do think that when we set that 425% to 500% target range, we set a wider range purposefully, given the volatility in our business. And I think to the extent that some of that volatility was contributed to by the cash surrender value floor, a solution that mitigates that cash to undervalued floor solution could very well likely mean that we don't need such a wide range to think about. And therefore, that's something that we would be considering as we look forward and provide our outlook and targets for 2024.

[Suneet Kamath, analyst]

Got it. That makes sense. The second one was just on the RILA product. I think you had mentioned that there's some capital benefits you get as that block grows. Can you just maybe talk about how much of a benefit are you getting? And at sort of what point in terms of the size of that block, does it really start to move the needle from a capital perspective?

[Marcia Wadsten, executive]

Sure. Yes, that's a great question, and thank you for that. We are really pleased with the momentum that we've had with the RILA business. And while in terms of account value, it is still relatively small at just under $4 billion compared to the size of our variable annuity block. It does have really a good profile in terms of an offsetting risk from an equity perspective, in terms of the direction of the risk.

So we see benefits already with the -- even with the size of our RILA block today in terms of the types of scenarios that would naturally play out into your statutory requirements, particularly when you think about the tail scenarios that drive your CTE98 requirement, which on a VA-only viewpoint are going to be largely significant downward equity stress type paths, which are going to definitely have an economic offset because that's certainly going to not be the profile of your RILA.

So we're seeing already benefits within our statutory requirements from the offset, which is both an economic risk offset but also kind of captured as well in [indiscernible] that way. But when we just look at the sizing of it and the question around how big -- when does it become material, already today with the size of block we have, we're seeing about a 10% economic offset from our equity risk relative to the VA block, the VA guarantee business, despite the fact that it is still a relatively small size block. With momentum in the RILA block, we look forward to an increased offset there as well.

[Suneet Kamath, analyst]

Got it. And then if I could just sneak one more in. Just on your unassigned surplus, I think it was negative in the second quarter. Obviously, your stat results in the third quarter were much stronger. So do you have an update on that? And as we think about kind of capital return into next year, should we think about that $450 million to $550 million is a reasonable starting point?

[Marcia Wadsten, executive]

Well, we've talked about the capital return target of $450 million to $550 million as being a reasonable kind of long-term view. So it's certainly, I think, a better starting point. And I think as far as unassigned surplus goes, I mean, we are doing our own modeling and looking forward on that. And I think we believe we'll be in a position that is not going to be problematic with our ability to support what we need to do to deliver on our capital return targets once we've established and communicated them early next year.

[Operator]

[Operator Instructions] We now have a follow-up question from Tom Gallagher of Evercore ISI.

[Thomas Gallagher, analyst]

Just a question on the assumption review in Q4. Can you give some sense for how policyholder behavior on your variable annuity block is trending right now. Has that been running above or below long-term expectations? And would you expect any meaningful positive or negative change there?

[Marcia Wadsten, executive]

Yes. Thanks, Tom. Yes, we've -- as we've historically done, we complete our -- we do our annual review process to be completed in the fourth quarter. So that work is underway right now, and we'll be able to provide kind of more specific outcomes of that with our quarter 4 and full year results.

In terms of the policyholder behavior that we've seen, as we move through this year, I think largely, we've seen policyholder behavior that's not too different than what our assumptions would indicate. For example, we've seen a little bit of an uptick, and I think you can see that in the financial supplement in variable annuity surrenders, but that would be kind of natural with the rebound in the equity markets. That's naturally kind of part of that dynamic behavior that I think we would -- we typically expect and include in our modeling.

But I think the key point is we really have a large bank of experience data that we use to help inform our assumptions. And every year, we look at the new experience that they merged, make adjustments. So we typically never have years where there's no adjustments for making them small adjustments as experiences emerge each period and keeping up essentially with the experience that way so that we can avoid larger, less frequent updates. As far as directionality, I think it's nothing we can speak to today, but we'll look forward to providing those updates next quarter.

[Operator]

Thank you. As there are no additional questions waiting at this time, I'd like to hand the conference call back over to Laura Prieskorn, CEO, for closing remarks.

[Laura Prieskorn, executive]

Thank you. As I mentioned earlier, I'm proud of our team for continuing to deliver on our commitment to stakeholders. And as we mark the end of our second year as an independent company, the momentum that we've built towards our strategic and operational goals affirms our disciplined approach. We appreciate you joining us today, and we look forward to speaking to you again soon. Take care.

[Operator]

Ladies and gentlemen, thank you for joining us in the Jackson Finance Inc. Third Quarter 2023 Earnings Call. Have a great rest of your day. You may now disconnect.