Jackson Financial Inc

NYSE:JXN

Earnings Call Analysis

Strong Capital Returns and Dividend Growth

In 2023, the company's share buyback activity continued for the ninth consecutive quarter, repurchasing over 21% of outstanding shares since separation. It paid more than $450 million in dividends in two years, with the latest dividend increasing to $0.70 per share, reflecting confidence in sustainable capital generation and a commitment to shareholder value. The company ended the year with a strong capital position, an RBC ratio of 624%, and total adjusted statutory capital exceeding $5 billion. Net income reached nearly $900 million, and adjusted operating earnings hit $1.1 billion. Annuity sales remained stable, with remarkable growth in the Registered Index-Linked Annuity (RILA) product, selling nearly $3 billion, a 60% increase from the previous year. Looking ahead to 2024, the company targets a 20% increase in capital return to shareholders, aiming for $550 million to $650 million.

Challenging Earnings Amidst Market Unpredictability

In the turbulence of the market, earnings per share for 2023 slipped by 18% compared with the previous year. Lower derivative income and heightened market-related expenses played the lead roles in this downturn. However, the company sees these stumbling blocks as temporary, with the promise of improved earnings on the horizon, given the tailwinds from favorable interest and equity market circumstances.

Robust Guaranteed Fee Framework in the Face of Market Declines

In a landscape where markets can twist and turn, the company's model shines. Guaranteed benefit fees, the heart of their hedge budget, are rooted not in volatile account values but steady benefit bases—offering stability when the market takes a plunge. But that very market's slide triggered a staggering $1.2 billion turbulence in net market risk benefits, a loss significant enough to eclipse other positive derivative performances.

Record Sales and Profitability Prospects in Retail Annuities

Diving into the company's key products, the Retail Annuities segment is writing a success story with its RILA product, which has bulldozed past record sales, topping $1 billion in the fourth quarter. Tastes have shifted, with a surge in sales without lifetime benefits, now over half of total sales and up 10% from the prior year. Higher interest rates have magnified the products' profitability appeal, even as variable annuity account values flourished with market boosts. Rising gross sales have been transformed into $1 billion in non-VA net flow, sowing seeds for product diversification and capital efficiency.

RBC Comfort Zone and Holding Company Liquidity

The company is also preparing to weather any financial storms with confidence. With an eye on long-term vitality, projections suggest staying within or above the target RBC (Risk-Based Capital) range in various interest rate scenarios. Meanwhile, the holding company touts a robust cash position with no significant debt maturities in sight until 2027, anchoring its financial security.

Aligning Hedging and Reserves with Economic Realities

In an effort to sync its reserves with actual business practices, the company has unveiled Brooke Re. This strategic move aligns reserves with hedging instruments, scaling back noneconomic hedging and easing the articulation of their hedging strategy. Remarkably, the modified GAAP approach in play at Brooke Re shuns the traditional cash surrender value floor, making reserves consistently sensitive to market shifts and likely resulting in more stable, foreseeable financial results.

Redefining Capital Generation

Guiding its capital creation, JNL banks on VA-based contract fee income, now distinct from guarantees. This directed approach aligns with the company's desire to expand its balance sheet through spread and mortality business. Looking forward, adjusted operating earnings are poised to be indicators of this capital generation, with expectations for it to exceed $1 billion annually. It's a future where capital growth is tuned with market behavior—equities, chiefly, and net flows to a smaller extent.

Steady and Strategic Financial Recalibration

The closing strains of 2023 brought with it a robust 624% estimated RBC ratio and the establishment of a hedging method in harmony with the company's amended framework. Even as JNL's TAC dipped to $4.3 billion due to planned capital maneuvers, the company maintains an enviously high pro forma estimated RBC ratio, asserting its financial resilience and readiness for the coming year.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and I would like to welcome you all to the Jackson Financial Inc. Fourth Quarter 2023 Earnings Call. My name is Rika, and I will be the moderator for today's conference. [Operator Instructions]

I would now like to pass the conference over to your host, Liz Werner, Head of Investor Relations from Jackson Financial to begin. So Liz, please go ahead.

[Elizabeth Werner, executive]

Good morning, everyone, and welcome to Jackson's Fourth Quarter and Full Year 2023 Earnings Call. Today's remarks may contain forward-looking statements, which are subject to risks and uncertainties. These statements are not guarantees of future performance or events and are based upon management's current expectations. Jackson's filings with the SEC provide details on important factors that may cause actual results or events to differ materially. Except as required by law, Jackson is under no obligation to update any forward-looking statements if circumstances or management's estimates or opinions should change.

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

Joining us today are our CEO, Laura Prieskorn; our CFO, Marcia Wadsten; our Head of Asset Liability Management and Chief Actuary, Steve Binioris; and our President and Chief Investment Officer of PPM, Craig Smith. At this time, I'll turn the call over to our CEO, Laura Prieskorn.

[Laura Prieskorn, executive]

Thank you, Liz. Good morning, everyone, and welcome to our fourth quarter and full year 2023 earnings call. We have quite a bit to cover today, so will allow extra time to provide updates and answer your questions. We'll start with a review of our strong track record of capital return and success in delivering on our financial targets, followed by an overview of our fourth quarter and full year 2023 results.

We'll also provide insights into the structure and strategic benefits of Brooke Life Reinsurance Company, or Brooke Re, our recently formed captive reinsurer. In prior quarters, we discussed our focus on finding a durable solution to the statutory impact of the cash surrender value floor with the goal of better aligning our reserve liability with the economics of our business.

By addressing the statutory requirements associated with the cash surrender value floor, Brooke Re provides the ability for more stable capital generation and reduced RBC volatility. It also allows the profitability of our healthy variable annuity book to be more transparent and intuitive in our results.

Finally, we'll conclude today's remarks with our 2024 outlook and financial targets, along with our expectations for sustainable capital return to shareholders. Turning to Slide 3. Jackson's capital return to common shareholders since becoming a stand-alone public company in 2021 has exceeded $1.2 billion in the form of share repurchases and shareholder dividends.

The fourth quarter of 2023 marked our ninth consecutive quarter with share buyback activity and as of year-end 2023, the cumulative common shares repurchased represented over 21% of shares outstanding at separation. We view our cash dividend as a valuable source of sustainable capital return and have cumulatively paid more than $450 million to common shareholders in just over two years.

Yesterday, we announced our Board's approval of the third increase in our common shareholder quarterly dividend to $0.70 per share, highlighting our confidence in our ability to generate capital, our focus on long-term profitability and our commitment to increasing shareholder value.

Moving to Slide 4. Maintaining a strong capital position at our operating companies and parent company, Jackson Financial, remains a priority as evidenced again this quarter. We ended 2023 above our RBC target range with an estimated ratio of 624% and with total adjusted statutory capital of more than $5 billion.

In January, we established Brooke Re to be self-sustaining from a capital standpoint, both initially and into the future. Pro forma for the transactions with Brooke Re, Jackson National Life has an estimated RBC ratio of 543%, consistent with our guidance and our quarterly track record of being within or above our target RBC range.

Going forward, we expect Jackson National Life statutory earnings and distribution capacity will more closely align with our adjusted operating earnings. Our holding company liquidity at year-end continued to be well above our targeted minimum level and was approximately $600 million.

As scheduled in November, we repaid $600 million in senior debt, further enhancing our financial flexibility and resilient balance sheet. Holding company liquidity supports our capital return goals and provides a buffer for covering holding company expenses.

In 2023, we returned $464 million to common shareholders through share repurchases and common dividends, comfortably within our target range for capital return of $450 million to $550 million. Our remaining common share repurchase authorization of approximately 300 million combined with our holding company liquidity, position us well for reaching our 2024 target and building on our track record of consistent shareholder returns.

Jackson has consistently achieved or exceeded its financial target commitments and has maintained a strong capital position throughout. Our first 12-month capital return target was achieved within six months, and we have consistently raised our annual financial targets. We are pleased to share we are once again increasing our financial return targets in 2024, and we'll share more details later in the call.

Moving to Slide 5. 2023 was a fantastic year of execution for Jackson with our financial performance highlighting the strong fundamentals of our business. Net income for the year was nearly $900 million and adjusted operating earnings were $1.1 billion.

In 2023, we navigated volatile markets and maintained a resilient capital position, delivering on our commitments and investing in our business. Our statutory capital discipline allowed us to meet and exceed our financial targets while also capitalizing Brooke Re in January 2024.

Beginning in 2024, and subject to regulatory approval, we intend to have periodic distributions from our operating company throughout the year with the goal of reducing the RBC volatility that occurred from our past practice of sizable annual dividend. Variable annuity sales remained relatively stable over the course of the year, and we have seen VA profitability improved with the rise in interest rates.

Consumer preference for protection-oriented products impacted the broader annuity market and Jackson met market demand through our Registered Index-Linked Annuity or RILA product suite. In our second full year selling RILA, sales were nearly $3 billion, up 60% from 2022. Notably, RILA sales in the fourth quarter alone reached $1 billion, accounting for nearly 1/3 of our total annuity sales and reaching a $4 billion annual run rate.

For Jackson, RILA's value proposition goes beyond sales diversification and positive net flows. RILA also contributes to hedging efficiency, which in turn, positively impacts capital. We have a long history of product innovation, strong distribution partnerships and industry-leading service. These strengths, combined with the enhancements made to our RILA's suite earlier this year positioned Jackson well for continued RILA sales momentum.

Our consistent ability to execute enables us to achieve our strategic and operational goals and serves as the foundation of our results. Summing it up on Slide 6, 2023 was a terrific year of progress for Jackson. We met or exceeded all financial targets for the third consecutive time, ended 2023 with robust levels of capital and liquidity, grew our RILA business and continued to create long-term value for shareholders.

I'll now turn the call over to Marcia to review our fourth quarter and full year financials and provide an overview of our Brooke Re transaction.

[Marcia Wadsten, executive]

Thank you, Laura. I'll begin with our fourth quarter results summary on Slide 7. Adjusted operating earnings of $204 million decreased from last year's fourth quarter as stronger fee and spread earnings were more than offset by higher expenses as well as the impact of our annual assumption review update.

Our fourth quarter adjusted book value attributable to common shareholders increased from last year's fourth quarter due to healthy full year adjusted operating earnings. Slide 8 outlines the notable items included in adjusted operating earnings for the fourth quarter. Results from limited partnership investments, which report on a one quarter delay were below our long-term expectation for a negative $28 million notable impact.

In the fourth quarter of 2022, limited partnership income was below our long-term expectations, but to a greater degree, creating a comparative pretax benefit in the current quarter of $34 million. Consistent with prior years, we completed our annual actuarial assumptions review in the fourth quarter. This led to an unfavorable pretax adjusted operating earnings impact of $60 million in the current quarter compared to a benefit of $38 million in the fourth quarter of 2022.

The impact in 2023 was focused in the Closed Block segment where we recorded a reserve increase for life insurance and annuitization benefits driven by a decrease in lapses partially offset by an increase in the long-term earned rate. In addition to these notable items, both fourth quarter 2022 and fourth quarter 2023 benefited from a lower effective tax rate relative to the 15% long-term guidance with a larger benefit in the current quarter.

This occurred due to lower pretax operating earnings in the current quarter, which made tax benefits that are similar on a dollar basis more impactful. Adjusted for both the notable items and the tax rate difference, earnings per share were $3.07 for the current quarter compared to $3.37 in the prior year's fourth quarter.

Key drivers of the year-over-year difference include higher levels of market-related costs within operating expenses resulting from stronger equity markets as well as lower income on operating derivatives from higher levels of floating interest rates. While higher equity markets and interest rates created this near-term reduction in adjusted operating earnings, they provide a positive tailwind for future adjusted operating earnings due to a significantly larger fee base and an improved profitability profile.

Slide 9 shows the same analysis, but on a full year basis. Earnings per share in 2023 after adjusting for the notable items were down 18% compared to full year 2022. Consistent with the fourth quarter of 2023, this was primarily the result of lower income on operating derivatives and higher levels of market-related costs. As noted for the quarter, the same tailwinds from higher rates in equity markets will benefit earnings going forward.

Slide 10 illustrates the reconciliation of our fourth quarter pretax adjusted operating earnings of $203 million to the pretax loss attributable to Jackson Financial of $2 billion. As shown in the table, the total guaranteed benefits and hedge results or net hedge result was a loss of $990 million in the fourth quarter of 2023.

Starting from the left side of the chart, you see a robust guaranteed benefit fee stream of $780 million, providing significant resources to support the hedging of our guarantees. These guaranteed benefit fees are calculated based on the benefit base rather than the account value, which provides stability to the guaranteed 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 $43 million gain on freestanding derivatives primarily due to gains on interest rate hedges in a quarter where interest rates were down across the yield curve, mostly offset by losses on equity hedges in a rising equity market environment.

Movements in net market risk benefits, or net MRB drove a $1.2 billion loss that more than offset the freestanding derivative movements due in large part to the same interest rate decreases. This illustrates that net income has historically included changes in liability values under U.S. GAAP accounting that have not aligned well with our hedging assets.

As I will discuss later, we would expect going forward that U.S. GAAP accounting will better align with our economic hedging with the establishment and funding of the reinsurance relationship with Brooke Re leading to lower levels of net hedging gains or losses. Nonoperating results also included $841 million of losses from business reinsured to third party. This was primarily due to a loss on the funds withheld reinsurance treaty due to the change in the associated embedded derivative value and 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, and 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 11 with Retail Annuities. As Laura highlighted, our RILA product continues to gain momentum with our fourth quarter sales reaching a record level of more than $1 billion, supporting further diversification in our top line.

Sales of without lifetime benefits increased to 53% of our total retail sales, up from 43% in the fourth quarter of last year. While recent consumer preference for protection results in VA sales below historical levels, higher interest rates provide an even stronger profitability profile on current sales. When viewed through a net flow lens, the gross sales we are generating in RILA and other spread products translated to $1 billion of non-VA net flow in the fourth quarter of 2023, which has grown materially over time.

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 Annuities segment on Slide 12, we show positive underlying trends in the growth across our annuity product categories as demonstrated by assets under management, or AUM. Our variable annuity account values grew by double digits, benefiting from stronger equity markets.

Spread income continues to benefit from higher interest rates and strong net flows are driving growth in RILA, fixed and fixed indexed annuity account values. Furthermore, the positive momentum for our enhanced RILA suite positions us well for ongoing success as we enter 2024.

RILA growth has an added benefit to our hedging efficiency as it has an upside equity risk profile that offsets the downside equity risk profile in our guaranteed VA business. Netting these risks reduced the fee amount of external equity hedging required to protect our business, and this reduction grew to 14% as of the fourth quarter of 2023.

As you can see, the benefit is not dollar for dollar as our $5 billion of RILA account value is offsetting a larger amount of VA-guaranteed equity exposure, illustrating that we can rapidly grow this hedging offset benefit as RILA AUM increases.

Our other operating segments are shown on Slide 13. For our Institutional segment, pretax adjusted operating earnings were up from the prior year due to higher spread income and reduced interest expense. Sales in 2023 totaled $1.1 billion and account values ended the year at $8.4 billion. Our Closed Life and Annuity Blocks segment reported lower pretax adjusted operating earnings compared to the prior year. This is primarily due to the assumptions review impact I discussed earlier, partially offset by lower expenses.

Slide 14 summarizes our year-end capital position. We returned $117 million to common shareholders in the fourth quarter through a combination of dividends and share repurchases, and we reached our capital return target for the third straight time since becoming a public company.

As Laura mentioned earlier, we also announced a 13% increase in our first quarter common dividend to $0.70 per share. We generated significant regulatory capital or TAC in the quarter, driven by the profitability of our variable annuity book and effective risk management. Our TAC increased by approximately $700 million to $5.2 billion, reflecting positive variable annuity net guarantee results, strong base contract cash flows and tax benefits.

As we moved closer to the end of the year, we began to transition our hedging to align more with our captive new modified GAAP approach, adding meaningful interest rate protection. This increased level of protection led to hedging gains when interest rates declined in December, which had little offset in regulatory capital due to our deeply floored out reserve position and contributed to the gain in capital in the fourth quarter.

These gains on interest rate hedges reflected an offset to the impact of lower rates on modified GAAP liabilities in Brooke Re and helped to fund the initial capitalization I will discuss in a few moments. As we noted in our 8-K in December, we expected JNL to remain at or above our target RBC range after the formation of Brooke Re, which we were positioned to do whether interest rates rose or declined in December.

There was an additional benefit from a lower level of required capital or CAL, which was driven by strong equity markets, partially offset by lower interest rates. The combined effects of the TAC increase and CAL reduction led to our estimated RBC ratio rising to 624%, well above our target range.

Our holding company cash and highly liquid asset position at the end of the year was approximately $600 million, which continues to be well above our minimum buffer. We repaid the $600 million senior debt obligation that matured in November and have no debt maturities until 2027. In the midst of Jackson's progress in 2023, the execution of our innovative long-term solution to the cash surrender value floor was certainly a highlight, which we dive into beginning on Slide 16.

Here, we show the noneconomic aspects of the cash surrender value floor within statutory reserves and required capital. Statutory accounting for variable annuities uses a principle-based reserving approach looking at the present value of cash flows across a distribution of thousands of scenarios. It then focuses on the tail of these outcomes to determine the level of statutory reserves and required capital.

These cash flow-based outcomes would be represented by the red line on the chart, where you can see that as you move left to right toward more favorable scenarios, the requirement gets smaller and smaller. The statutory framework also considers the aggregate cash surrender value, or CSV, of the variable annuity book, which is the amount due to policyholders in the unlikely event that 100% of all policyholders immediately surrendered their annuity.

The statutory framework forces the cash flow-based scenario requirements to be overwritten by this cash surrender value, if that surrender value exceeds the cash flow-based outcome. This is illustrated by the base line in the chart where only the extreme portion of the tail is above the cash surrender value and the remainder of the distribution is floored out.

This has been a common issue for years at Jackson as our prudently designed and priced variable annuity book led to healthy cash flow-based outcomes and a large portion of these scenarios floored at the CSV. We successfully managed this dynamic for many years, protected our balance sheet and generated significant distributable capital. However, the rise in interest rates pushed this impact further and further into the tail of the distribution.

We continue to successfully navigate the situation, but the greater impact of the CSV floor led to several consequences. The fundamental impact was a consistently noneconomic profile of our statutory liability requirements that often could not decrease and could only increase. As a consequence of this noneconomic liability profile, we experienced volatility in statutory capital, required capital and the RBC ratio, especially when equity markets or interest rates were rising.

Managing this one-sided movement required elevated levels of noneconomic hedging with associated cost to protect our capital position from these upside scenarios. Turning to Slide 17. You can see that this noneconomic hedging made our hedging strategy more complex and consumed resources that could have been put to better use.

This resulted in yet another adverse outcome of less predictable earnings results and capital generation. We have consistently stated that our goals for this transaction were not focused on day-one capital benefits, but rather on creating a liability framework consistent with the way we manage our business.

Specifically, this means reserves and hedging instruments would be aligned. This not only reduces the need for noneconomic hedging, but also makes it easier to explain our hedging strategy and allows us to focus hedging on the economic impact to our business.

And lastly, the removal of the CSC floor-driven volatility means that we would see capital impacts emerge more intuitively with changes in equity markets and interest rates, making our results more predictable. Slide 18 describes the structure and initial capital flows of our CSV floor solution. We formed Brooke Re, a Michigan-based captive reinsurer wholly owned by Brooke Life Insurance Company. Brooke Life, Brooke Re and Jackson National Life Insurance Company, or JNL, are all domiciled in Michigan, giving us consistent regulatory oversight.

Through the coinsurance agreement executed in January, the inforce and future VA guaranteed benefits are transferred to Brooke Re, while the VA base contract remains at JNL. The base contract is expected to continue generating substantial earnings and capital for JNL and will continue to be subject to the CSV floor requirement.

Application of the CSV floor minimum liability requirement is more relevant to the base contract which can be monetized unlike the guaranteed benefits. The determination of reserves and required capital for the guaranteed benefits reinsured to Brooke Re will follow a modified GAAP framework, which we believe is a more appropriate economic approach.

JNL will execute the hedging of these guarantees on Brooke Re's behalf and will transfer the hedging gains and losses to Brooke Re through a coinsurance agreement along with future fees collected, benefits paid and an allowance for expenses.

JNL made a $749 million capital distribution to Brooke Life, which retained $50 million to increase its capital position. Brooke Life made a $699 million initial capital investment into Brooke Re that serves as the carrying value on Brooke Life's statutory balance sheet, a ceding commission of nearly $1.2 billion reflects the healthy expected cash flow profile of our VA guarantees.

The ceding commission was funded through transactions that effectively round-tripped the commission from JNL to Brooke Life, then to Brooke Re and back to JNL. Importantly, all of these initial capital flows were entirely within the operating entities, so holding company liquidity at JFI was not impacted by this transaction.

Slide 19 summarizes the benefits of our modified GAAP reserve approach, which, as we previously mentioned, aligns the economics of our liability with the way we manage our business. The key aspect is the lack of a cash surrender value floor, which means that modified GAAP reserves are always responsive to market movements as are the related hedge assets.

Another benefit is that this arrangement creates a clear dividing line between the base contract at JNL and the guarantees at Brooke Re. This will allow us to focus hedging under guarantee and will help each quarter to provide greater transparency into the underlying economics and capital generation at JNL.

The reserving methodology is modified GAAP as we received regulatory approval for some modifications to U.S. GAAP to add incremental stability to the captive balance sheet and facilitate a self-sustaining entity, with four main adjustments noted here on the slide.

Two of the adjustments are to use fixed long-term volatility and nonperformance risk spread assumptions rather than market-implied volatility in Jackson's own credit spread. These two adjustments help align the liability treatment to the hedging by removing aspects that we do not consider as primary risks to the business and therefore, do not hedge.

The second two adjustments are intended to apply a margin of prudence to the liability to help support the self-sustaining design. These adjustments include a haircut to the guarantee fee stream reflected in the reserve and an expense provision for administration costs.

All of these adjustments collectively tend to result in a more conservative reserve compared to U.S. GAAP. On Slide 20, we explain our minimum operating capital and the determination of the initial capitalization amount. Our minimum operating capital framework is broadly similar to the statutory required capital risk charge methodology.

A key change we made to the statutory framework is in the market risk component. As a reminder, statutory market risk charge uses the same methodology as the reserve calculation, but measured further into the tail. The charge has been based on the relationship between the detail requirement and the reserves already posted.

However, if we kept this exact approach, our reserves and required capital would be misaligned with reserves using an economic modified GAAP framework and the required capital using the statutory framework, which is impacted by the CSV floor. We corrected this by replacing the statutory detail calculation with a modified GAAP reserve that has been recalculated under stressed conditions. The market risk charge is then based on this stressed reserve relative to the original modified GAAP reserve.

As a result of the $699 million initial capitalization, Brooke Re's equity position is well above its minimum operating capital level. We seek to hold capital sufficient to remain above this minimum level following adverse scenarios. Our initial capitalization level means that we would have sufficient resources to remain above our minimum operating capital in more than 95% of scenarios and across multiple time frames.

Importantly, we expect Brooke Re to not only be self-sustaining, capital generative over the long term. Looking at Slide 21. This economic reserve and required capital framework is expected to lead to fewer one-sided hedging outcomes going forward. An economically responsive liability makes our hedge target more predictable and requires less frequent rebalancing and the removal of noneconomic upside protection reduces equity hedging costs.

We will expect to have a higher level of interest rate protection going forward, which aligns up well with our economic framework and is no longer complicated by the CSV floor. Lastly, we anticipate a high level of hedge effectiveness from this framework while continuing to protect the business from the impact of larger shocks.

All of these items should lead to a simpler hedging strategy and more intuitive financial results. Slide 22 summarizes how Brooke Re will check all the boxes for our stated goals. We are very pleased to have a durable long-term solution that aligns our reserves and hedging instruments, avoids having resources consumed by noneconomic hedging and simplifies the communication of our hedging strategy and financial results.

Moving on from Brooke Re. Slide 24 lays out the favorable profile of JNL going forward. We expect to see a more stable and predictable capital generation and that this capital generation will better align with adjusted operating earnings as reported by JFI. Additionally, U.S. GAAP net income will benefit from lower volatility in net hedging results given our more U.S. GAAP-focused liability structure.

Capital generation at JNL will primarily be driven by VA-based contract fee income, which is now completely separated from the guarantee. While fee business is the main driver of capital generation, we also continue to have significant balance sheet diversification from our inforce spread and mortality business, which we seek to grow over time.

Lastly, in addition to the anticipated strong future cash flow profile, JNL will have a robust initial capital position well above our targeted RBC level after consideration of the initial transaction impact. Turning to Slide 25. As I noted earlier, one of the advantages of the Brooke Re solution is increased alignment of capital generation at JNL with adjusted operating earnings at JFI.

While there are differences in the two approaches, which is tax outcomes and acquisition cost treatment, we would expect adjusted operating earnings to be a directional proxy for capital generation over time. This would imply a greater degree of capital generation going forward than what we have seen since separation. We currently estimate that our annual capital generation would generally be at or above $1 billion. The pie chart on the left side of the slide looks at U.S. GAAP reserves at JFI.

Variable annuity fee-based AUM makes up most of the reserves and will likewise be the biggest driver of capital generation. Economically, this is very similar to an asset management business with the earnings trajectory tightly aligned with AUM.

As such, the level of future capital generation will be sensitive to equity markets, and, to a lesser degree, net flows. We have a meaningful level of spread reserves and given the recent vintages of our retained non-VA annuity block, we are delivering strong net flows.

We expect this to continue given our positive momentum in RILA and our desire to grow other spread sales as well. Lastly, our closed block life reserves reflect our successful M&A track record. Growth in this segment will depend on future acquisition activity.

Slide 26 shows the JNL capital position after the funding of Brooke Re. We ended 2023 with a very strong 624% estimated RBC ratio and our hedging will now fully align with our new framework. As I noted earlier, a $749 million return of capital payment from JNL strengthened the capital position at Brooke Life and gave a robust starting position at Brooke Re. When you consider the secondary deferred tax asset admissibility impact, JNL TAC was reduced to $4.3 billion.

There was a modest offsetting benefit from the release of the VA guarantee capital requirement reducing CAL by $36 million. This led to a very healthy pro forma estimated RBC ratio at JNL of over 540%. Slide 27 provides a look into the capital framework at the three main entities following this transaction. The target at our holding company, JFI, remains at 2x its annual fixed expenses and as well in excess of that position coming into 2024.

Jackson National Life is our primary operating company and as noted, maintains a strong RBC level after the funding of Brooke Re. Our captive reinsurer, Brooke Re is well capitalized, with the expectation to be self-sustaining under adverse scenarios and capital generative over the long term, and we expect our hedging to have a high degree of effectiveness.

In summary, our innovative CSV floor solution delivers on the established goals of reducing the noneconomic influences in our liability requirements and hedging as well as increased transparency and more intuitive results. I will now turn it back over to Laura to provide our updated 2024 financial targets on Page 29.

[Laura Prieskorn, executive]

Thank you, Marcia. We are pleased to have yet again achieved our financial targets for the year ending 2023 and a strong financial position. Our year-end results underscore Jackson's ability to maintain financial and risk management discipline while continuing to serve our customers through product innovation, exceptional distribution and industry-leading service.

In 2024, we are targeting $550 million to $650 million in capital return to common shareholders. This represents a 20% increase from last year, is our third increase since becoming an independent company, and we believe there is further potential to grow given the expected long-term benefits of Brooke Re.

We have increased our per share common dividend level by 13%, representing continued confidence in our business. Looking over the long term, since establishing our first dividend in the fourth quarter of 2021, we've increased our dividend per share by 40%. We continue to view our minimum RBC ratio at JNL as 425% and expect to operate above this level.

Given a more stable and predictable capital and RBC ratio following the Brooke Re transaction, we believe that an RBC target range is no longer necessary. With respect to operating company dividends, our intent is to maintain our distributions from JNL to JFI through periodic payments over the course of the year as opposed to one large annual payment in the first quarter.

Our outlook for consistent capital generation reflects our high-quality book of business and our ability to execute. Before closing, I'd like to acknowledge that the 2023 accomplishments covered today reflect the hard work of our incredibly talented associates who show up each day to provide long-term solutions for Americans planning for their financial futures.

I am grateful for their contributions, and I am proud to work alongside a team so committed to our business, our communities, each other and the customers we serve. I look forward to working together to execute against our strategic priorities, building on our strong track record of performance excellence and delivering another set of outstanding results for 2024.

Before we turn the call over to Q&A, I want to comment on the news of our CFO, Marcia Wadsten's future retirement plans. After 32 years of outstanding and dedicated service, Marcia has decided to retire. During her long tenure, she has led finance and actuarial teams across the organization and has had an incredible impact on the company overall.

Her deep subject matter expertise has allowed for positive rating agency, analysts and shareholder engagements. Marcia was instrumental in our execution and transition to an independent public company and to our recently announced formation of Brooke Re. Marcia will remain CFO until early June and will then continue to serve in an advisory capacity.

We anticipate a smooth transition to Don Cummings who is expected to assume the role of CFO at the time of Marcia's retirement. Many of you know Don, who is our current Controller and Chief Accounting Officer. He has been a valuable member of our senior management team since joining Jackson, and we look forward to his future contributions as our next CFO.

We are extremely grateful to Marcia for her contributions and leadership which have had a positive impact on associates and external stakeholders, and we are excited for her to eventually enjoy retirement. I'll now turn the call over to the operator for questions.

[Operator]

[Operator Instructions] We have the first question from Ryan Krueger of KBW.

[Ryan Krueger, analyst]

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

[Marcia Wadsten, executive]

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

[Ryan Krueger, analyst]

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

[Marcia Wadsten, executive]

Well, we are thinking about it in a couple of different ways, I guess, to go through. First, the capital generation will support the return of capital, as you noted, but it also will support the level of holding company expenses and debt service that we need to do.

So there's a slide there that we need to think about. We've talked historically about our balanced use of capital between new business investment, which may -- could include, I guess, a different mix of business as we move forward over time that may require a different level of strain or upfront investment.

Also capital return, certainly one of the priorities as well as just balance sheet strength. As we looked at our capital return for 2024, we recognize that the Brooke Re transaction is new. And so we're going to take a measured approach here. But I think as Laura stated earlier, we would anticipate with this outlook that we might be able to see increases in our capital return as we move forward in time given that profile of expected capital generation.

[Ryan Krueger, analyst]

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

[Marcia Wadsten, executive]

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

[Operator]

We'll move on to the next questionnaire, which is Suneet Kamath of Jefferies.

[Suneet Kamath, analyst]

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

[Marcia Wadsten, executive]

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

[Suneet Kamath, analyst]

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

[Marcia Wadsten, executive]

Sure. So first of all, I guess, maybe I'll make a comment or two about how we set things up and structure things for our initial capital level. We looked at the capital that we had put in from Jackson, which was approximately $700 million.

And coupling that with strong benefit from a negative liability puts us in a very strong balance sheet position to begin with. So we started off well above that minimum operating capital that we want to maintain going forward.

And then what we've structured given the goal for Brooke Re to be self-sustaining as we've structured a risk framework that looks at how the balance sheet might move as we look out over the future in kind of in a short-term view as well as a more longer-term view and making sure that we would, as we stated earlier, be above that minimum capital over time in greater than 95% or more than the 95th percentile of that distribution.

So we're looking across a wide number of economic scenarios and wanting to be at least at the 95th percentile. As we started this out and looked at the opportunity that we had and how we wanted to set the balance sheet up to begin with, we had a very strong position in terms of our capital at JNL at the end of the year, which provided us with a good deal of flexibility in terms of how we could position the starting balance sheet for Brooke Re.

So -- because of that, we chose to capitalize initially at a level closer to the 98th percentile of the distribution. So I want to be clear that we're not aiming to be right at the 95th, it's greater than the 95th and we're starting off in a stronger position than that.

Looking at what some of those tail scenarios might look like, they would include the types of events that we would see -- we'd expect to see in a tail, very high realized volatility, strong decline in the equity market or a strong drop in -- or a large drop in interest rates, the types of things you might see in like the first quarter of --

[Suneet Kamath, analyst]

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

[Marcia Wadsten, executive]

We will speak to the capitalization generally, I think, on a regular basis with respect to the captive, the Brooke Re entity. We don't, I think, intend to put out a detailed kind of RBC like position in a different format for the Brooke Re, but we will speak to how it is performing, whether it maintains a good capital position, and we'll probably generally speak to hedging in a different way than we have in the past, where we have historically talked about hedge spend as one of the metrics that we would look at to assess whether our hedging needs were within the budget of the fees we collect given that we'll have more -- probably more of a futures-based hedging strategy and not quite so heavily options-based strategy.

That approach probably doesn't really fit going forward. So I think we'll talk in the future more about hedge effectiveness and how well our hedging has performed relative to our expectations. And that is really going to be what's going to be the driving force for the stability of the balance sheet moving forward.

[Operator]

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

[Thomas Gallagher, analyst]

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

[Marcia Wadsten, executive]

Well, Tom, I think of it in kind of two layers. I mean, we have a minimum operating capital, which is already kind of taking a place, if you will, of the market risk charge that we would have in the statutory requirement, that being in the statutory world based on CTE (98). We've translated that to something that is more applicable to a modified GAAP basis.

But within our minimum operating capital, we're already capturing that level of -- kind of tail-type situation and the level of required capital supports that. And then on top of that, within our risk framework, we're looking at adding further stresses on top of that as we move forward in time and ensuring that we maintain still that amount of minimum operating capital that in and of itself is already reflective of a stressed environment.

[Thomas Gallagher, analyst]

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

[Marcia Wadsten, executive]

Well, you're right, there are a number of kind of elements in terms of defining what's available as an ordinary dividend, what becomes an extraordinary dividend and the like. We've historically had many periods in which our distributions were of the extraordinary dividend type.

So we certainly have worked through that very well with our regulator when that is the case. So I think we don't -- as we look out, I don't think we -- we're anticipating challenges around that in terms of just working through and understanding of where we sit, subject, of course, to the regulator approval when -- where that's needed, we'll look through that. But I don't think we anticipate seeing any significant challenge there.

[Thomas Gallagher, analyst]

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

[Marcia Wadsten, executive]

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

[Thomas Gallagher, analyst]

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

[Marcia Wadsten, executive]

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

[Operator]

We have a follow-up question from Suneet Kamath of Jefferies.

[Suneet Kamath, analyst]

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

[Marcia Wadsten, executive]

Sure. I think the main thing that's really changed, I mean, if you think about the liabilities, the products themselves, the cash flows that they're throwing off are the same as what they would be before or after the transaction. So really, the main driver of the difference is going to be the fact that we have relief from the amount of noneconomic hedging that we were doing in the past, which was costly.

That's -- it's not to say that in every period, that was -- in every year that, that was exactly $200 million. That was something that varied and I think contributed to the variability of our capital generation each year. So when we talked about that $700 million to $900 million, we talked about that and kind of normal market conditions, which obviously aren't going to be the same one year to the next.

I think one of the good things going forward is that what we will see is a much more consistent level of capital generation that won't have those influences of the spend that we needed to have for the noneconomic hedging to the degree that it was needed from one year to the next.

And we'll just not have a lot of the cash value floor complications that need our capital generation sort of not always that transparent because it wasn't always coming through TAC, sometimes the benefits were effectively more reduction in the required capital. So you could see things within the RBC ratio that weren't necessarily always aligned with the TAC movement. And I think as we move forward under this arrangement, we'll have much more consistency in that and the capital generation will be largely in the form of TAC increases.

[Suneet Kamath, analyst]

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

[Marcia Wadsten, executive]

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

[Operator]

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

[Laura Prieskorn, executive]

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

[Operator]

Thank you all for joining the Jackson Financial Inc. Fourth Quarter '23 Earnings Call. I can confirm this has now concluded, and you may now disconnect your lines, and please enjoy the rest of your day.