Jackson Financial Inc. (JXN) Q4 2022 Earnings Call Transcript

Jackson Financial Inc. (NYSE:JXN) Q4 2022 Earnings Conference Call March 1, 2023 10:00 AM ET

Company Participants

Liz Werner – Head, IR

Laura Prieskorn – CEO, President & Director

Marcia Wadsten – EVP & CFO

Steve Binioris – Head of ALM and Chief Actuary

Scott Romine – President of Jackson National Life Distributors

Craig Smith – President and Chief Investment Officer, PPM

Conference Call Participants

Tom Gallagher – Evercore ISI

Alex Scott – Goldman Sachs

Ryan Krueger – Stifel

Erik Bass – Autonomous

Daniel Bergman – Jefferies

Operator

Ladies and gentlemen, hello, and welcome to the Jackson Financial, Inc. 4Q ’22 Earnings and 2023 Outlook Call. My name is Maxine, and I’ll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Liz Werner, Head of Investor Relations, to begin. Liz, please go ahead when you are ready.

Liz Werner

Good morning, everyone, and welcome to Jackson’s fourth quarter earnings call. Today’s remarks may contain forward-looking statements, which are subject to risks and uncertainties. These statements are not guarantees of future performance or events and are based on management’s current expectations. Jackson’s filings with the SEC provide details on important factors that may cause actual results or events to differ materially. Except as required by the applicable securities laws, Jackson is under no obligation to update any forward-looking statements if circumstances or management’s estimates or opinions should change.

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

Joining us today are our CEO, Laura Prieskorn, our CFO; Marcia Wadsten; our Head of ALM 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

Thank you, Liz. Welcome, everyone, to our fourth quarter and full year 2022 earnings and 2023 outlook call. Today, we’ll review our full year results and our success in delivering on our key financial targets. We’ll speak to progress made on our strategic initiatives during our first full year as a public company and share our outlook for 2023, including specific financial targets for the year.

But before I dive into our results, I want to acknowledge the tragedy that occurred in our hometown area of L’Anse, Michigan just a few weeks ago. Jackson has deep ties to Michigan State University into the hundreds of Jackson associates who are MSU students or alumni.

During this difficult time, we’re focused on doing what we can to help our employees, our customers and the community we call home. I’m extremely proud of our team and how we’ve supported each other and our community during this time, just as we do every day.

Turning to 2022. The hard work and dedication of that same talented team enabled us to achieve many milestones. We delivered strong financial results and provided industry-leading service to our distribution partners and their clients. And we continue to demonstrate our ability to operate through volatile markets and successfully managed risk throughout 2022, including in the fourth quarter.

With respect to the macroeconomic impacts on our business, early in the year, we stated that the positive impact of rising interest rates would be an emerging benefit, and we saw that develop over the course of the year. We managed through significant equity market volatility, protected our statutory capital and met or exceeded each of our four key financial targets. As we look ahead to 2023, we believe our financial strength and our leadership in the annuity industry position us for another successful year.

Moving on to our results. Net income for the full year 2022 was $5.7 billion, primarily due to adjusted operating earnings and the benefits of higher interest rates throughout the year. Our pretax adjusted operating earnings, excluding notable items was $1.8 billion and reflects the profitability of our retail annuity business.

We delivered strong operating margins despite lower equity markets in 2022. Margins that benefited from a double-digit decline in operating expenses, primarily driven by lower variable compensation and a decline in asset-based commissions. With over $200 billion in retail annuity account value, our scale and continued focus on operating efficiency position us well to deliver long-term profitability.

Jackson’s solid operating company results contributed to our strong capital generation and financial flexibility. Our 2022 operating company RBC ratio was 544%. Total adjusted capital was $7 billion, representing a $400 million increase from year-end 2021 after remitting $600 million to the holding company in early 2022.

We start 2023 with significant capacity for both continued investment in our business and capital return to shareholders. Therefore, we expect to distribute $600 million from Jackson National Life Insurance Company in March.

Consistent with our historical performance and subject to market conditions, we expect to continue to generate excess capital at our operating company that will support our balanced approach to capital management. Our focus continues to be on maintaining a strong capital position, ongoing investment in our business and a consistent approach to returning capital to shareholders.

In 2022, we delivered capital return to shareholders of more than $480 million, including $283 million in share repurchases and $199 million in dividends. Our balanced approach to capital management supports our outlook for future profitability and continued capital return.

Yesterday, we announced our Board’s approval of our shareholder dividend, which was up nearly 13% and represented our second consecutive annual increase. This increase is reflected in our first quarter shareholder dividend of approximately $50 million and highlights our commitment to long-term shareholder return.

We strengthened our competitive position with the successful sales expansion of our registered index-linked annuity, or RILA, combined with timely and disciplined pricing actions. Traditional variable annuity sales for Jackson and the industry are below historical levels, reflecting the decline in equity markets and shifting product preferences and a rising interest rate environment. Should that trend persist, we will continue to rely on our experience operating profitably throughout product cycles.

In the current competitive environment, our fixed index annuity offerings provide modest incremental new sales as we maintain our pricing and investment discipline, while our RILA offerings continue to be a source of sales growth and distribution expansion. We reached $1.8 billion in our first full year of RILA sales and expect these products to remain a steady source of new sales in the future.

With $15.7 billion in total annuity sales, we remain a market leader with the capacity to offer a range of products to meet the needs of financial professionals and their clients. Our competitive strength is not built on price competition, but on our consistent presence in the market, a compelling retirement value proposition, strong distribution relationships and our award-winning customer service. We never explicitly target market share and see our long-term market-leading position as an outcome of successfully competing on capabilities.

Over the past year, our distribution strategy included a focus on strengthening our presence among independent registered investment advisers. RIAs are an emerging market for Jackson and the industry, and we ended 2022 with nearly 1,100 RIA firm selling agreements, providing access to more than 10,000 investment adviser representatives.

We established three new outsourced insurance desk or OID distribution partnerships in 2022, further increasing RIA access to our fee-based annuities. These new relationships signify Jackson’s ongoing commitment to diversifying and expanding our distribution opportunities.

Jackson recently announced that we’ve been added to iCapital’s Insurtech platform, SIMON, which provides wealth management firms with increased access to our suite of annuities and product education tools. This platform gives financial professionals increased flexibility to deliver better outcomes as they support the evolving portfolio needs of their clients.

We place high value on our distribution partners and seek to maintain a level of service and support that continues to set Jackson apart from others. On past calls, we’ve shared our history of industry recognition, and we’re pleased to announce we’ve once again been recognized by the independent organization Service Quality Measurement or SQM, with several awards, including highest customer service in the financial industry for 2022.

Beyond our strategic initiatives to develop differentiated products and expand distribution, Jackson also seeks to serve financial professionals and their clients by supporting regulatory changes intended to improve American’s retirement options. This past December, Jackson supported two pieces of legislation passed by Congress to enhance retirement savings opportunities and allow annuities to help Americans meet their retirement needs.

Both the RILA Act and Secure 2.0 create opportunities for financial professionals to help their clients better prepare for retirement. The RILA Act directs the SEC to create a new registration form for RILA products, easing a regulatory burden on insurers, allowing for more innovation and choice within the RILA market and providing consumers with a clearer understanding of the risk and benefits of these products.

Now that the RILA Act has passed, Jackson will continue to be a leading voice within the industry to ensure the SEC’s new registration form is appropriately tailored to benefit consumers, reduce regulatory barriers and enable innovation within the RILA market.

Secure 2.0 builds upon the 2019 Secure Act, expanding opportunities for employees to plan for retirement and presenting income annuities as a valuable solution. Key highlights of the act include required minimum distribution exceptions for lifetime income annuities and allowing the use of annuity payments as offsets to required minimum distributions for non-annuity balances. This legislation encourages retirement savings and creates new opportunities for Jackson and others to deliver annuity retirement solutions to Americans planning for a more secure retirement.

Our team’s relentless efforts allowed us to meet or exceed each of our four key 2022 financial targets. We consistently returned capital to shareholders through share repurchases and paid regular shareholder dividends in our first full year as a public company.

We also ended the year with approximately $675 million in holding company cash and liquid securities, well above our $250 million minimum, and we had an adjusted RBC ratio above our targeted range. Leverage was below our 20% to 25% range, which we believe was prudent as we enter 2023.

I’ll now turn the call over to Marcia to review our financial results in more detail.

Marcia Wadsten

Thank you, Laura. Turning to our results on slide five. Lower comparative equity market levels in the fourth quarter led to a decline in our adjusted operating earnings from the prior year’s fourth quarter. The decline was driven by lower fee income from reduced separate account assets under management as well as lower levels of private equity and other limited partnership income.

These impacts were partially offset by lower deferred acquisition cost or DAC amortization, lower general and administrative expenses and lower commission expense. A portion of commissions are asset-based and partially offset the market impact of fee income, which helps dampen earnings volatility through market cycles.

As a reminder, we believe Jackson has taken a conservative approach to the treatment of guarantee fees within our definition of adjusted operating earnings as all guarantee fees are reflected below the line with no assumed profit on guaranteed benefits included in adjusted operating earnings.

Year-end 2022 adjusted book value was up from year-end 2021 due to full year non-operating net hedging gains and healthy adjusted operating earnings. Adjusted book value was down from the third quarter of 2022 due primarily to net hedging losses in the recent quarter as well as the return of $86 million to shareholders.

We maintained a year-end leverage ratio of 18.3%, which was below our long-term targeted range of 20% to 25% and compares favorably to industry and to rating agency expectations. Similar to last quarter, we’ve included additional portfolio details in the appendix of our earnings presentation that provide breakdowns on both U.S. GAAP and statutory basis, excluding the assets reinsured to third parties. Jackson’s investment portfolio remains conservatively positioned with only 1% exposure to below investment-grade securities on a statutory basis. Furthermore, our earnings were not impacted by credit losses and impairments as these were minimal in the quarter.

Slide six provides an update on the impacts of the new GAAP accounting with adoption of long-duration targeted improvements or LDTI. Starting with total shareholders’ equity, the impact is now expected to be positive as of the end of 2022, largely due to the higher level of interest rates.

While retained earnings are expected to be reduced, this was more than offset by an increase to AOCI. This was primarily driven by the reclass of non-performance risk allowance in the fair value calculation of market risk benefits from income to AOCI. Our leverage ratio is anticipated to remain at a healthy level after adoption of LDTI.

And post LDTI, the level of underlying adjusted operating earnings is expected to remain largely intact with a modest increase to the core level of DAC amortization. Because of the conservative nature of our guarantee fees treatment that I mentioned earlier, we will not see any impact to adjusted operating earnings from the allocation of guarantee fees.

As we’ve previously noted, adjusted operating earnings will no longer have a DAC acceleration or deceleration impact from market returns after LDTI, which will reduce the equity market sensitivity of that figure.

With respect to net hedging results under LDTI, we would expect reduced equity market volatility in this figure as well because going forward, all guaranteed benefit liabilities as well as the related equity hedges will fully reflect equity market sensitivity. We do anticipate more interest rate sensitivity in net hedging results as the fair value approach under GAAP is sensitive to interest rates, both from a discounting and assumed equity market return perspective.

As we have stated in the past, our interest rate hedging is focused on the impact of discounting future cash flows. We do not assume full correlation between interest rates and equity market returns with our interest rate hedging.

Under LDTI, the level basis of DAC amortization means that we will no longer need to include a notable item for market-driven deck acceleration or deceleration, simplifying our earnings per share results. To assist with modeling, we will be publishing a historical financial supplement on our IR website, updated for LDTI on or about March 22.

Slide seven outlines the notable items included in adjusted operating earnings for the fourth quarter, starting with limited partnership income. The fourth quarter of 2022 included lower levels of limited partnership income compared to the same period in the prior year. Results from limited partnership investments, which report on a one quarter lag, were $62 million lower in the current quarter than they would have been had returns matched the long-term expectation.

Comparatively, in the fourth quarter of 2021, limited partnership was well above the long-term expectation with a benefit of $106 million to earnings, creating a comparative pretax negative impact of $168 million.

Additionally, there were positive market-related impacts to DAC amortization expense in the fourth quarter of 2022 of $109 million on a pretax basis when comparing the fourth quarter of 2022 to the prior year period. Again, this notable item will no longer be necessary following the adoption of LDTI.

Lastly, consistent with prior years, we completed our annual assumptions review in the fourth quarter. This led to an adjusted operating earnings pretax benefit of $53 million compared to a benefit of $38 million in the fourth quarter of 2021.

The principal driver of the favorable impact in 2022 was in the retail annuity segment where we recorded an increase in the variable annuity DAC balance, primarily due to changes in assumed persistency.

There was no meaningful difference in the effective tax rate between the fourth quarter of 2022 and the prior year’s fourth quarter. Adjusting for both the notable items and the minimal tax rate difference, earnings per share were down 17% from the prior year’s fourth quarter, primarily due to the reduced fee income resulting from lower average AUM. The current quarter’s earnings per share benefited from a lower weighted average diluted share count relative to the fourth quarter of 2021 due to share buyback activity throughout 2022.

Slide eight shows the same analysis, but on a full year basis. The explanation of the results is largely the same with the exception of a difference between the effective tax rate in the two full year period. Earnings per share in 2022 after adjusting for these items were down 12% compared to full year 2021.

Slide nine illustrates the reconciliation of our fourth quarter pretax adjusted operating earnings of $567 million to the pretax loss attributable to Jackson Financial of $945 million. Net income includes some changes in liability values under GAAP accounting that will not align with our hedging assets.

We focus our hedging on the economics of the business as well as the statutory capital position and choose to accept the resulting GAAP below-the-line volatility. As shown in the table, the total guaranteed benefits and hedging results or net hedge result was a loss of $1.2 billion in the fourth quarter.

Starting from the left side of the waterfall chart, you see a robust guarantee fee stream of $777 million in the fourth quarter, providing significant resources to support the hedging of our guarantees. These fees are calculated based on the benefit base rather than the account value, which provides stability to the guarantee fee stream protecting our hedge budget when markets declined. As previously noted, all guarantee fees are presented in non-operating income to align with the hedging and liability movements.

There was a $3.9 billion loss on freestanding derivatives, which was driven by losses on equity hedges in a quarter where the S&P was up over 7%. There was a gain of $1.1 billion on net reserve and embedded derivative movements, which were also driven by higher equity markets. The assumptions review produced a benefit of $367 million to non-operating earnings in addition to the benefit to adjusted operating earnings, I noted earlier.

This was mainly due to an overall decrease in the guaranteed minimum withdrawal benefit or GMWB reserves, driven principally by changes in GMWB utilization and mortality assumptions, partially offset by changes in assumed persistency.

In addition to the net hedge result, net income in the fourth quarter reflects $157 million of losses from business reinsured to third parties. This was primarily due to a loss on the funds withheld reinsurance treaty that includes an embedded derivative as well as the related net investment income. These non-operating items, which can be volatile from period to period are offset by changes in AOCI within the funds withheld account related to the reinsurance transaction, resulting in a minimal net impact on Jackson’s adjusted book value. Furthermore, these items do not impact our statutory capital or free cash flow. It is important to note that while the net hedging result was a loss in the fourth quarter, it was a benefit of $2.4 billion when looking at the full year.

Now let’s look at our business segments, starting with Retail Annuities on slide 10. Variable annuity sales are down industry-wide, which is consistent with prior periods of equity market declines. While Jackson’s VA sales are down as well, we continue to produce significant volumes and total annuity sales are supported by RILA fixed and fixed indexed annuity sales, which are up meaningfully from the fourth quarter of 2021.

Overall, sales without lifetime benefits as a percentage of our total retail sales increased from 37% in the fourth quarter of last year to 43% in the fourth quarter of this year. We expect this percentage to vary somewhat over time based on market conditions and consumer demand.

When viewed through a net flow lens, the gross sales we are generating in RILA and other spread products translated to over $650 million of non-VA net flow in both the third and fourth quarters of 2022. In addition to partially offsetting net outflows in variable annuities, these net flows provide valuable economic diversification and capital efficiency benefits. Our overall sales mix remains efficient from the standpoint of new business strain.

Growing our advisory business remains a focus for us, and while sales of these products were down from the prior year’s fourth quarter, due in large part to market conditions, we remain optimistic about the long-term growth potential from this business. Laura’s comments regarding distribution expansion illustrate our continued commitment to this space.

Looking at pretax adjusted operating earnings for our Retail annuity segment on slide 11, we are down from the prior year’s fourth quarter. This was primarily the result of the decline in limited partnership income I discussed earlier, as well as the impact of reduced assets under management on fee income. During 2022, our efficient and variable expense structure has helped to support earnings in a declining AUM environment.

Going into 2023, we would note that our retail annuity segment will see a negative impact to adjusted operating earnings from the increase in the minimum guaranteed interest rate payable on the portion of variable annuity assets that policyholders have invested in the fixed option. This minimum is reset annually based on the 5-year treasury rate, which was up in 2022.

This rate increase was effective the first of this year and is expected to add $30 million to $40 million of interest credited expense to our quarterly results. It is important to note that we will get an offsetting benefit from higher rates over time on our invested assets as they are reinvested at higher yields.

At the end of the fourth quarter, we have built up nearly $1.9 billion of account value on RILA because of the early age of our RILA book, minimal surrender activity allows for sales to contribute to an immediate build-up in account value.

Our other operating segments are shown on Slide 12. For our institutional segment, sales for the fourth quarter totaled $908 million and account values were up to $9 billion. Pretax adjusted operating earnings of $17 million were down from $27 million in the prior year period as higher interest credited and increased losses on operating derivatives were partially offset by higher net investment income.

We remain committed to our institutional business. The value of the business is broader than what is exhibited through GAAP earnings since it provides diversification benefits, is cost-effective and helps to stabilize our statutory capital generation.

Lastly, our Closed Life and Annuity Blocks segment reported a fourth quarter decline in adjusted operating earnings compared to the prior year, reflecting lower levels of limited partnership income, partially offset by lower death and other policy benefits resulting from the continued decrease in the size of the closed blocks. Absent future M&A activity, the earnings for this segment should trend downward as the business runs off over time.

Slide 13 summarizes our year-end capital position in a year that included a 20% decline in the S&P 500 and a dramatic increase in interest rates, our business remained strong. As we have mentioned, we returned $86 million to our shareholders in the fourth quarter, which put us above the midpoint in our full year target of $425 million to $525 million. We remained active in share buybacks during the fourth quarter, which totaled 1.1 million shares or $38 million.

Yesterday, we announced the approval of our first quarter dividend of $0.62 per share, a nearly 13% increase over the prior year and a 24% increase from our initial dividend established following separation. We also announced a $450 million increase to our existing share repurchase authorization.

When combined with the $106 million that remained at the end of 2022, this gives us $556 million of capacity to use in 2023 and beyond. As of February 22, we had repurchased $16 million of shares in 2023, leaving $540 million of that total amount remaining as of that date.

Moving on to statutory capital. Our primary operating company, Jackson National Life Insurance Company, reported a tax position of $7 billion, down from $9.5 billion as of the third quarter. The higher equity markets during the quarter led to hedging losses and related deferred tax asset admissibility impacts, which were not fully offset by reserve releases. Because we consider the impacts to both TAC and statutory required capital or CAL, when structuring our hedging, it is not unusual to see reductions in TAC when equity markets rise.

CAL was meaningfully reduced in the fourth quarter, primarily due to the strong equity markets I just discussed. Considering both the TAC and the CAL movements, the operating company RBC increased from the third quarter to 544%. In addition to our operating performance, the RBC ratio also benefited from the annual review and update of models and assumptions, which was a benefit to both GAAP and statutory results.

This is now the third straight quarter of operating company RBC ratio growth despite challenging macroeconomic circumstances, which is a testament to the overall resiliency of our in-force business and the effectiveness of our risk management. Importantly, despite the heightened equity market volatility, our hedging spend was in line with the guarantee fees collected this quarter.

As I discussed throughout the year, interest rates are a key driver of hedging expenses, both in the cost of the hedging instruments used to protect our book, which is driven by short-term rates and the volume of hedging necessary to stay within our risk limits, which is driven by longer-term rates.

The higher level at both ends of the yield curve benefited hedging expenses in the current quarter and has also allowed us to increase the duration of our equity hedges. Our holding company cash position is approximately $675 million and continues to be well in excess of our minimum buffer.

At the end of the year, the adjusted RBC ratio, which includes the excess over that buffer was up to 577% and continues to be above the normal market target range. This improved position was due to the increase in the operating company, RBC, exceeding the reduction in the level of holding company cash to support capital return to shareholders and holding company expenses.

Lastly, our total financial leverage of 18.3% at the end of the fourth quarter was up modestly from 17.5% as of the end of the third quarter and still below our long-term targeted range of 20% to 25%. We believe that this level provides us the financial flexibility to navigate ongoing market volatility. Given this strong position, we intend to refinance all of our portion of our upcoming November debt maturity.

Slide 14 depicts our consistent approach to shareholder capital return, which has been steady since we began our dividend and share repurchase program in the fourth quarter of 2021. Despite the challenging market environment since our separation, our total cash return as a stand-alone company was nearly $750 million as of year-end 2022.

This also illustrates our balanced and flexible approach to returning capital, which includes our dividend payments, as well as public and private market share repurchase transactions.

In summary, we had a strong fourth quarter and full year, demonstrating the continued resiliency of both our business and our balance sheet. We are especially proud to have met or exceeded each of our four 2022 key financial targets and are excited to start 2023 from a position of strength.

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

Laura Prieskorn

Thank you, Marcia. Turning to slide 17. We are initiating a 2023 RBC target for our operating company rather than a holding company adjusted RBC as disclosed at the time of separation. With our separation and initial capitalization now complete, it’s more appropriate to focus on operating company RBC, a key metric for determining dividends to our holding company and one that is more comparable to our peers in the industry.

At the operating company, we view 425% as a minimum RBC level in normal operating conditions and look to hold excess capital above that point to provide resiliency. A target operating company RBC ratio of 425% to 500% is consistent with our risk management practice and is aligned with rating agency expectations.

Generally speaking, we expect to hold excess capital above 425% at the operating company level. Capital exceeding the upper end of our target range of 500% would likely be held at our holding company for maximum flexibility.

Moving to slide 18. We also aim to maintain a holding company liquidity buffer that is two times our annual fixed expenses. Again, this has been our practice since separation and is another point of consistency and sustainability for Jackson. We expect to be well above this minimum level in 2023 as we remain prudent in the uncertain economic landscape, retain capacity for investing in new business and prepare for our $600 million debt maturity coming up in November.

While we intend to refinance this debt maturity, the expected upstream of $600 million from the operating company in March, ensures we have the flexibility to opportunistically manage access to credit markets in 2023. This capital flexibility offers confidence in our ability to maintain a healthy capital position and meet our commitments of capital return to shareholders.

Slide 19 covers our updated capital return target for 2023. The strength of our operating company combined with a high level of liquidity at our holding company and our confidence in future profitability provides the foundation for this target.

Pro forma for the $600 million expected remittance from the operating company, we expect to have more than $1 billion of excess liquidity above our minimum buffer at the holding company and a year-end operating company RBC ratio, adjusting for the remittance of nearly 500%.

We’ve increased our 2023 capital return target range to $450 million to $550 million, including share repurchases and shareholder dividends. We view our shareholder dividend as an important component of our capital return strategy, representing our continued confidence in our long-term capital generation.

Turning to our leverage on slide 20. We start the year with a healthy ratio of 18.3%. Importantly, we expect this ratio to remain healthy after the implementation of LDTI. As noted, we also expect a high level of cash at the holding company and significant flexibility regarding the upcoming debt maturity in November. Going forward, we will no longer communicate a leverage target range.

This was an important data point when we were working to go public, capitalize our operating entity and build an appropriate capital stack. Following the refinancing of all or a portion of the November debt maturity, we’re comfortable with our dollar level of debt and do not see a near-term need to expand on this level. With no additional maturities until 2027, movements in our leverage ratio will be driven by changes to adjusted book value rather than an explicit attempt to manage the figure on our end, making a target ratio less meaningful. Our intention going forward is to conservatively manage leverage consistent with rating agency expectations.

Finally, slide 21 summarizes each of the 2023 financial targets detailed. But before we open up for questions, I want to revisit a few of the key strengths we outlined for investors at separation. At that time, we shared our culture of execution and philosophy of maintaining strength across a wide range of capabilities, including product pricing and design, distribution support and expense discipline.

We stated that our in-force business and future growth allowed for continued capital generation, and we introduced an experienced senior leadership team with years of working together within the company. Those core strengths were the driving force behind our strong performance last year, and those same strengths will help us continue to meet American’s long-term retirement savings and income needs.

I’d like to thank Jackson associates for their outstanding contributions to an outstanding year. I am proud to be a part of a team that focuses so well on serving each other, our customers and our communities, and I look forward to our continued success together.

With that, let’s open it up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question today comes from Tom Gallagher from Evercore ISI. Please go ahead. Tom, your line is now open.

Tom Gallagher

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

Marcia Wadsten

Sure, Tom. It’s Marcia here. I’ll take that, and thank you for the question. I think what that is, is another sort of element that in the statutory framework and the way our product is filed as a sort of timing item where that miss-reset [ph] at one point in the year at the beginning of each year. So I think what we would – what we would have seen somewhat in 2022 already is an uplift in our portfolio yield as rates were higher and we were able to reinvest.

And then that, we would expect to continue since our new money investment yield is significantly higher than our portfolio yield. So I think all in, it will broadly offset that will be offset with additional investment income. Some of that, I think, possibly already started in 2022, and then we’ll naturally continue in 2023 as our asset turnover and are reinvested at higher yields.

Tom Gallagher

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

Marcia Wadsten

Yes, that’s right.

Tom Gallagher

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

Marcia Wadsten

Sure. Yes, I’ll take you through some of the high points on the assumption review. I mean just as a reminder, I think we’ve shared in the past that our approach is to look at really all the assumption types across all of our product types each year so that we’re able to more gradually make changes over time and do that kind of incrementally with experience right as it emerges.

So if we focus on variable annuity since that’s the most material business product line, I think the key assumptions there are always going to be around things like lapse and utilization of the benefit and mortality. Those are the key ones. With our VA business being so significant, we have a pretty enormous bank of experience data that then is always increasing each year with the new data as we collect it.

So I think what we saw as we went through the process, the normal process this year to bring in that new experience data and take a look – we probably see a little bit of a trend toward pretty modest, but a slight trend towards a little more efficient utilization of the benefit. That’s something we’ve been seeing kind of over the past couple of years, and I think it’s moderated. But maybe just a slight increase there in terms of efficiency.

Overall, I think our mortality were pretty immaterial changes. And I think our persistency, we had some slight updates there. We really didn’t see anything in any of those categories that was a step change or anything like that away from what we’ve been seeing in our experience data so far. So really, it was pretty routine updates bringing in another year of experience data.

And then if we think about so far, what we’ve experienced then in 2022 with the market turmoil, I believe as we’ve been – we monitor our experience routinely all through the year separate from the deep dived annual process that we do. And I think what we’ve seen there has generally been lining up with what we would anticipate.

Our assumptions have dynamic elements to them, so that when the market is down, we automatically reflect within our assumptions, some related impacts to policyholder behavior. And I think what we’ve typically seen in 2022, and I think it’s also true, what we’ve watched kind of an unusual period in 2020 after the COVID market period that what we saw was the behavior that was relatively in line with what our dynamic assumptions would have assumed.

Tom Gallagher

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

Marcia Wadsten

Yes. That is right. Yes.

Tom Gallagher

Okay. Thank you.

Operator

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

Alex Scott

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

Marcia Wadsten

Sure, Alex. Thank you for the question. So yes, we did indicate that if we looked at our year-end position pro forma for the $600 million distribution out of the operating company, including the related impact to the DTA, we would be close to the 500% level at the operating company. Looking ahead to the MRP change, as you noted, that is going to go up 25 basis points effective at the beginning of the year.

What we’ll note about that is, obviously, that’s a different direction than what we saw in both 2021 and 2022, where we had a 25 basis point decrease in each of those years. So that’s certainly favorable movement for us.

But one thing to point out is that the impact of that benefit is not going to be static, and it’s going to depend upon the position of the book at the time, including the tech and CAL levels themselves as well as how those are impacted by the cash surrender value floor.

So we would naturally expect when the cash value floor is more biding that the impact of a change that could be favorable would be a little bit less so because of the fact that you’re floored out and you don’t have the ability to reflect it in full the same way you might if you didn’t have cash value flow intact. So that’s something to keep in mind as we go forward. We’ll intend to talk through the movements and the impact quantification when we go through our Q1 earnings.

Alex Scott

Got it. Okay. The follow-up I had is just on the comments you made on the hedge budget. I mean it’s something we’ve been focused on because I think one thing that’s unique about your portfolio has got a little bit shorter duration, equity hedge or equity options on it than some other books we look at. So maybe a little more exposed to volatility. And I think there were comments about protecting the hedge budgets.

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

Marcia Wadsten

Well, I’ll start off and I think maybe Steve can add some additional commentary. I mean, I think we view our fee, the fees that we collect on our guarantees as providing us a budget from which we can do our hedge activity. Overall, we typically would like to be able to stay within that budget. There are times when we might have to go over, and we would do what’s needed at the time to protect the statutory position.

In this period, I think we shared that consistent with the last couple of quarters, we’ve been generally in line with those. So that’s been a good outcome despite the fact that we’ve been in a higher volatility environment, which would typically all else equal, increase our hedge spend. I think we’ve had the benefits of higher interest rates in the latter part of the year, which we talked about being a benefit in time because that increases or decreases the cost of our hedging when the short rates are up, and it decreases the kind of volume of hedging needed when the longer leases are up.

So we’ve had those benefits from higher interest rates coming through in the second part of the year, probably offsetting some of the pressure on the hedging with the ongoing higher level of realized volatility that we’ve experienced. But Steve, do you want to add anything

Steve Binioris

Offsetting movements on obviously [indiscernible] the interest rate benefit that we’ve experienced, but 24% realized volatility in calendar year ’22, that’s still at an elevated level. So they’re kind of offsetting each other. But when it’s all put together, we price deepen the tail. So we’ve got the fees there to do what we need to do from a hedging perspective.

Alex Scott

Got it. Okay, thank you.

Operator

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

Ryan Krueger

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

Laura Prieskorn

Good morning, Ryan. We’ve stated previously and we continue to see our capital return level as sustainable. And part of the reason for that is that we take a measured approach to returning cash with the mindset of earn it first, then pay it. Coming into 2023, we continue to see our Healthy VA book generate substantially positive cash flows from our base contracts.

And I think as you just heard Marcia and Steve pointed out, our guarantee fee stream supports our hedging, and that also remains robust. We’ve established our targets with confidence, and that’s based on our history of capital generation in our business, combined with our proven ability to effectively manage through stress periods.

Ryan Krueger

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

Laura Prieskorn

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

Ryan Krueger

Okay, great. Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from Erik Bass from Autonomous. Please go ahead. Your line is now open.

Erik Bass

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

Laura Prieskorn

Thanks for the question, Erik. Scott, do you want to address our outlook on sales?

Scott Romine

Yes, sure. I mean – and I think when we talk about outlook, I’ll just briefly touch on traditional VA RILA and then spread because they’re all interrelated. If we look at last year, $15.7 billion was really a healthy level of sales given the market climate. And as you mentioned, Erik, sales down industry-wide for VAs, but consistent with other periods of equity market declines.

Our sales were down in line with industry or actually slightly outperforming. And in the rising interest rate, we do think that the shift towards consumer preferences is towards protection-oriented products, right? Believe it’s a cyclical shift, not a secular shift away from growth oriented VA. There’s a long-term demand for VA for the millions of Americans retiring each year. They have a need for additional asset growth and income certainty. And these continue to be an important part of our diversified product mix. We’re still the leader in the space, and we saw significant sales levels.

Shifting to the RILA front, we successfully established ourselves in the RILA market, full year sales of $1.8 billion run rate in the fourth quarter of over $2 billion. And we continue to see RILA as a meaningful growth opportunity, and it’s really helped us attract new producers to the Jackson suite of products and really highlights the importance of diversified product, and if we shift to spread just for a moment, we did see higher but modest sales levels for both fixed index annuities and fixed annuities.

And as we’ve said, higher interest rates allow for more frequent repricing and that helps make these products more competitive going forward. We’ve said in the past, we’ll continue to review pricing and distribution opportunities that best meet demand and strike balance between good consumer value and profitability targets. And certainly, having that diversified product mix is an advantage.

Erik Bass

Thank you. I appreciate the color there. And then one follow-up just on the individual annuities. Can you provide any color on where you would expect core DAC amortization to trend in 2023?

Laura Prieskorn

Well, Eric, I think the best way to look at that will be when we publish our financial supplement that’s restated for LDTI around the 22nd of March that will come out. We don’t anticipate it being significantly different, but just a little bit higher. The straight-line approach to amortization under LDTI is a bit – it’s going to be based more on, say, like the runoff of policy count as a sort of simplified way to think about it.

So that’s still amortized over kind of like the same period we would have in the past. But because it’s not capturing any of the natural growth in gross profits that you might have previously seen under current 2022 and prior GAAP.

It’s just a little bit more a little bit faster pace. But I don’t think you – we expect it to be anything super material. And I think that will come through a little bit more clearly when you’re able to take a look at that financial supplement.

Erik Bass

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

Laura Prieskorn

Yes, I think that would be a reasonable proxy.

Erik Bass

Okay. Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from Daniel Bergman from Jefferies. Please go ahead. Daniel, your line is now open.

Daniel Bergman

Hi, thanks for taking the questions. [indiscernible] this morning. First, I apologize if I missed it, but I just wanted to see if reserves were floored at the cash or undervalue at quarter end? And if not, how much of a gap was left. I think you’d put the comparable amount at about $1 billion at the end of the third quarter?

Laura Prieskorn

Yes, with the markets being up as they were in the fourth quarter, we were able to release a lot of those reserves. So I think we’re down to a couple of $200 million, $300 million level of reserves in excess of the cash value at the end of 2022.

Daniel Bergman

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

Laura Prieskorn

Yes. I think a bit below would be our general outlook on that. There shouldn’t be an impact from LDTI as a result of that. What really drives our tax rate is some of the permit differences related to dividend received deduction and that sort of thing.

So generally, I would expect those things to still go forward under the same basis even under LDTI and would guide towards something below 15% as a general run rate, although it can vary, of course, period-to-period.

Daniel Bergman

Got it. Thanks so much.

Operator

Thank you. This concludes our Q&A session. So I’ll hand the call back over to Laura Prieskorn for closing remarks.

Laura Prieskorn

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

Operator

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