Jackson Financial, Inc. (NYSE:JXN) Q2 2022 Earnings Conference Call August 10, 2022 10:00 AM ET
Liz Werner - Head, IR
Laura Prieskorn - CEO, President & Director
Marcia Wadsten - EVP & CFO
Conference Call Participants
Suneet Kamath - Jefferies
Alexander Scott - Goldman Sachs
Erik Bass - Autonomous Research
Good morning, and welcome to the Jackson Financial Inc. 2Q 2022 Earnings Call. My name is Lauren, and I’ll be coordinating your call today. [Operator Instructions].
I would now like to hand over to your host Liz Werner, Head of Investor Relations to begin. Liz, please go ahead.
Good morning, everyone. Before we begin, we remind you that today’s presentation may include forward-looking statements, which are not guarantees of future performance or outcome. A number of important factors, including the risks, uncertainties and assumptions discussed in risk factors and management’s discussion and analysis of financial conditions in the company’s 2021 Form 10-K and the most recent first quarter 10-Q could cause actual results to differ materially from those reflected in the forward-looking statements.
In this presentation, management will refer to certain non-GAAP measures, which management believes provide useful information in measuring the financial performance of the business. A reconciliation of non-GAAP financial measures to the most comparable GAAP measures is contained in the appendix to the presentation. With us today are Jackson’s CEO, Laura Prieskorn; our CFO, Marcia Wadsten; and our Vice Chair, Chad Myers, our Head of [Indiscernible] and the President and CEO of [Indiscernible].
At this time I will turn the call over to Laura.
Thank you, Liz. Good morning, and welcome to our second quarter earnings call. In addition to our second quarter results, we’ll discuss Jackson’s financial strength, our continued capital return to shareholders and our favorable business outlook. Despite a challenging market, our disciplined approach to risk management and the profitability of our healthy book resulted in strong capital levels that both are operating and holding companies. Looking forward, we see a clear path to achieving our 2022 capital return target and remain confident in our long term capital generation.
For the second quarter, we reported net income of nearly $3 billion, driven by sizeable net hedging gains that protected our business during equity market stress conditions. Our hedging strategy performed as intended preserving statutory capital during periods of significant stress, which was evident in our healthy and growing operating company RBC ratio. Although market volatility was high during the quarter, some benefit of higher rates was realized in hedging costs that were largely in line with our guaranteed benefit fees. These fees are based on a policyholders benefit base, which is not subject to market volatility, and are intended to cover our hedge cost over the life of a policy and throughout market cycles.
We believe the effectiveness of our hedging strategy is most evident in challenging environments which was the case this quarter. From an operating standpoint, we focus on adjusted operating earnings excluding notable items, which were 481 million for the quarter driven by the impact of the equity market on separate account fees. Our separate account assets outpaced the broader S&P by 2% during the quarter as a result of our diversification and investment performance.
Importantly, with over 208 billion and annuity assets, we have the scale to support future growth and capital generation. Our confidence in Jackson’s long term profitability growth and capital generation is also tied to the company’s history of operating efficiency. Jackson’s culture of expense discipline seeks to maximize productivity, and prioritize stakeholder value.
Our operating expenses include some variable components that dampen potential earnings volatility through market cycles. In the past, we’ve referred to our flexible on demand workforce as one example of creatively managing expenses. This quarter, our asset base commissions declined, which partially offset the market impact on our fee income. Separately, we also realized to benefit from lower stock based compensation expense in the quarter, reflecting our June 30 share price.
Throughout the quarter, we were once again deliberate in returning capital to shareholders, which totaled $116 million, and included share repurchases and shareholder dividends. In the second quarter, we also completed the last step in our re-capitalization and issued senior notes to repay term loan debt. And yesterday, we announced approval of our third quarter dividend of $0.55 per share an indication of the sustainability of our cash flow and our long term commitment to return capital to shareholders.
Our business momentum continued this quarter as we saw expanding RILA sales through the period. For the quarter RILA sales for 490 million, up from 199 million in the first quarter. Last week, we reached over a billion in RILA sales since our launch last October. At our current level, we are approaching a 2 billion annual sales run rate and we are seeing the true capabilities of the Jackson distribution network. Approximately 17% of our RILA sales are with new producers for Jackson, which speaks to both our distribution strength and our product design.
Throughout this period of market uncertainty, we remain well-positioned as a market leader with stable and highly valued service that our distribution partners and policyholders have come to expect and rely upon.
Given the weak equity market and demand for principal protection, traditional variable annuity sales declined across the industry, including for Jackson. However, our asset retention remains high, consistent with our experience and expectations of policyholder behavior during periods of market volatility and highlights the long term value proposition or annuities provide over the course of market cycles. Importantly, our total net flows were positive for our retail annuities business.
Annuity industry sales for the quarter are estimated to have reached a record of over 77 billion, due largely to a shift towards fixed and fixed indexed annuity products. We continue to monitor interest rate changes, review pricing and distribution opportunities that best meet demand for spread business and update our product pricing in a disciplined manner. For the industry RILA sales growth continues and second quarter sales were over 10 billion, while traditional VA sales were 15 billion. During a period of market uncertainty, we believe annuities are a valuable option for protecting retirement assets and income and managing market exposure. Our RILA sales provide meaningful capital synergies with our VA business and we look forward to further product innovations that meet the needs of our advisors and their clients.
During the quarter, we saw a further expansion of our advisor relationships with the addition of the Pinnacle Group, serving 15,000 RIAs and offering advisory annuity products.
Our continued focus and commitment to the advisory channel reflects our view that annuities are a valuable solution for advisors offering retirement planning, as well as the overall growth opportunity in the RILA space. Delivering technology driven solutions and quality service also distinguishes Jackson and positions the company as a leader within this emerging annuity channel. As recognition of our innovative approach, our retirement expense and income calculator program was one of five finalists for the insurance technology award for wealth management annual awards program.
We also maintain our presence in the institutional market and would expect to be opportunistic over the remainder of the year. We see continued value in the diversification benefits, cost effectiveness, and stable statutory capital generation this business provides.
Turning to page 4. We are reaffirming our 2022 financial targets. The significant progress we have made through the first half of the year puts us in a very solid position for reaching our target of 425 million to 525 million in capital return to shareholders. We have returned 308 million through share repurchases in shareholder dividends during the first half of this year, which highlights our commitment to providing shareholder value.
Last quarter, we stated that our adjusted RBC range of 500% to 525% represents a long term target during a normal market condition. We do not consider the current environment to be normal and the adjusted RBC is not our measure of excess capital. While our adjusted RBC was slightly below our long term target this quarter absent the nuances of the calculation of this metric under stress conditions, the ratio would have been within the target range. Marcia will cover this in more detail later in the presentation.
Cash at our holding company exceeded $800 million well above our minimum buffer, and the excess represents nearly two years of current holding company expenses and shareholder dividends. We ended the quarter with our operating company RBC up from the first quarter and over 450%. During the second quarter, our capital formation exceeded our capital return to shareholders. Our substantial operating company capital positions Jackson for continued growth and future capital generation.
Combined with our holding company excess capital and low leverage Jackson has the capital flexibility and financial strength to pursue its business strategies and maintain its balanced approach to capital management. We’ll discuss both our operating and adjusted RBC ratios in more detail to provide additional insight into our capital strength and flexibility later in this presentation. While our adjusted RBC provides insight into capital across the company, we know that sustainable capital return is supported by both the current balance sheet strength of our operating company and its ability to continue to generate statutory capital. We are confident in our outlook for continued capital generation and our ability to successfully navigate challenging markets.
I’ll now turn the call over to Marcia to review the quarter’s financial results in more detail.
Thank you, Laura. Turning to our results on slide 5. Lower equity markets in the quarter led to a decline in our adjusted operating earnings from the prior year second quarter. The largest driver was higher deferred acquisition cost amortization, resulting from lower comparatives separate account returns, but it was also impacted by lower fee income from reduced separate account assets under management, as well as lower limited partnership income.
However, lower expenses reflecting the variable nature of a portion of our expense base that Lauren noted earlier, provided a partial offset. 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 moved below the line, with no assumed profit on guaranteed benefits included in adjusted operating earnings.
In the second quarter strong net income resulted in a growing adjusted book value, even after returning 116 million to shareholders in the quarter. This has moved our leverage ratio down to 18.5%, which compares favorably to industry and rating agency expectations. In regard to our balance sheet strength, it is important to note that both our GAAP filings and statutory bluebook disclosures show our investment portfolio including the assets backing the liabilities that were transferred to a theme as part of our reinsurance transaction in 2020. This complicates the analysis of our investment portfolio for external parties.
To help with this, we’ve included additional portfolio details in the appendix of our earnings presentation that provide portfolio breakdowns on both GAAP and statutory basis, excluding the assets, reinsurance [Indiscernible]. Jackson’s investment portfolio remains conservatively positions, with only 2% exposure to below investment grade securities on statutory basis, along with an append quality bias and structured securities and commercial mortgage loans.
Furthermore, our earnings were not impacted by credit losses and impairments as these were minimal in the quarter. We are providing preliminary estimates of the impact of LDTIs adoption on shareholders equity, as of the transition date of January 1, 2021. At that point, we estimate a reduction of equity in a range of $2 billion to $4 billion. Importantly, since that time, we have seen a material rise in interest rates, which are the largest driver of the LDTIs impact. Based on a more current environment, we expect that the estimated equity reduction will be materially improved.
Furthermore, our current balance sheet positions as well for any LDTIs impact, as our financial leverage ratio is below our target range. For more transparency, we’ve included a slide in the appendix that provides some helpful directional guidance for the change in the LDTIs shareholders equity impact for movements in various market factors.
Slide 6 outlines the notable items included in adjusted operating earnings for the second quarter, starting with a market driven acceleration of DAC amortization expense. Operating DAC amortization has multiple components which are outlined on page 17 of our financial supplement. Market driven acceleration or deceleration of DAC is a notable item and results from the pattern of separate account returns over time.
In the second quarter of 2022, there was market driven acceleration of amortization resulting in a $227 million increase in DAC expense in the quarter on a pre-tax basis. This was primarily due to a negative 14% separate account return in that period, which was below the assumed return. In contrast, in the second quarter of 2021, there was a deceleration of amortization, resulting in a pretext $72 million reduction in DAC expense, primarily due to a 6.5% separate account return in that period, which exceeded the assumed return.
As a result, the market driven DAC effect was a net negative impact of 299 million on a pre-tax basis when comparing the current second quarter to the prior year second quarter. In terms of future market driven DAC acceleration or deceleration for modeling purposes, we have provided additional details on the mechanics of the calculation within the appendix of the presentation. This market related effect is expected to change in the first quarter of 2023 with the adoption of LDTI which contemplates level amortization over time.
Additionally, we would note that the second quarter of 2022 included lower levels of limited partnership income, compared to the same period in the prior year. Limited partnership income, which is reported on a one quarter lack was slightly below the annualized long term expectation of 10%, which led to earnings being $11 million lower in the current quarter than they would have been heavy turns matched the long term expectation. Comparatively in the second quarter of 2021 LP income was well above the long term expectation, with a benefit of 61 million to earnings, creating a comparative pre-tax negative impact of $72 million.
In addition to the notable items, the second quarter of 2022 had a lower effective tax rate than the prior year’s quarter. Second quarter 2021 pre-tax operating earnings were higher than the current year quarter, which meant that the tax benefits that were similar on $1 basis and these two periods lead to a larger reduction to the effective tax rate in the current period.
The current quarter’s effective tax rate was also reduced for discrete items related to incentive compensation and state income taxes. Adjusted for both notable items and the text effects, earnings per share was down from the prior year’s quarter, primarily due to the reduced fee income resulting from lower average AUM.
Slide 7 provides insight into the impact of rising interest rates to the results of our VA business, both immediately and going forward. The slide considers our healthy VA book and the corresponding impact from the cash surrender value floor on reserves, which is an example of conservatism within statutory accounting. Our reserves were still impacted by this floor at the beginning of the second quarter.
When reserves are floored out and longer rates rise, we can experience the near term RBC headwind from hedging losses that aren’t offset by reserve releases. Unlike the first quarter, where reserves were floored at both the beginning and the end of the period, this was less of an issue in the second quarter, as declining equity markets led to increasing reserves, and this reserve increase was partially mitigated by the higher level of interest rates.
As I discussed last quarter interest rates are also 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 in the volume of hedging necessary to stay within our risk limits, which is driven by longer term rates. The increase in both ends of the yield curve were benefit to hedging expenses in the current quarter. In the first quarter, we disclosed that our hedge spend was above our fees which impacted our capital generation. In the second quarter, our hedge spend declined and was roughly in line with fees despite continued market volatility.
Additional increases in the short end of the curve since quarter end provide continued benefit to our hedging spend going forward. This would be especially helpful should market volatility proved persistent.
Slide 8 illustrates the reconciliation of our second quarter pre-tax adjusted operating earnings of 243 million to pre-tax income attributable to Jackson Financial of 3.6 billion. Net income includes some changes in liability values under GAAP accounting that we consider to be non-economic, and therefore will not align with our hedging assets. We focus our hedging on the economics of the business as well as statutory capital position and choose to accept the resulting gap below the line volatility.
As we show in the appendix slide, which covers the gap below the line impact from macro economic factors under current GAAP rules, higher rates, and lower equity markets are a combination that leads to significantly positive net hedging results. As shown in the table, the total guaranteed benefits and hedging results or net hedge result was a gain of $2 billion in the second quarter. Starting from the left side of the waterfall chart, you see a robust guarantee fee stream of $765 million in the second quarter, providing significant resources to support the hedging over guarantees.
These fees are calculated based on the benefit base rather than the account value, which provides stability to the guarantee fee stream and protects our hedge budget when markets decline. As previously noted, all guarantee fees are presented in non-operating income to align with the hedging and liability movements. There was a $2.8 billion gain on freestanding derivatives, which was driven by gains on equity hedges in the quarter as a result of declining equity markets. This was partially offset by losses on interest rate hedges in the rising interest rate environment. There was a loss of 772 million on net reserve an embedded derivative movements, which were also driven by declining equity markets, but partially offset by higher interest rates. The high level of net income in the quarter helps to support our adjusted book value and improve our financial leverage ratio.
Now let’s look at our business segments starting with retail annuities on slide 9, where we see resilient sales in the face of significant market volatility. As Laura mentioned, variable annuity sales are down industry wide, which is not inconsistent with prior periods of equity market decline. While our VA sales are down as well, we continue to produce significant volumes.
Importantly, our sales without lifetime benefits as a percentage of total retail sales increased from 35% in the second quarter of last year to 38% in the second quarter of this year. We expect this percentage may vary somewhat over time based on market conditions and consumer demand. Growing our fee based advisory business remains the focus for us and while sales of these products were down from the prior year’s quarter due in large part to market conditions. We are optimistic about the long term growth potential from this business.
Our total annuity market share highlights our consistent presence in the market, our strong distribution relationships and our disciplined approach to pricing and product design. These attributes led to our successful RILA launch less than a year ago, and our continued sales growth in that product line. RILA provides a valuable economic diversification benefit and capital efficiencies as RILA account value growth complements our large healthy enforced traditional variable annuity block.
Looking at pre-tax adjusted operating earnings on slide 10, we are down from the prior year second quarter. This was primarily the result of the notable items I detailed earlier, as well as the impact of reduced AUM on fee income. Our efficient expense structure has helped to support earnings in this declining AUM environment. As of the end of the second quarter, we have built up 735 million of account value on RILA and as Lauren noted, we recently passed the $1 billion mark of total cumulative sales since our launch in October. Because of the early age of a RILA book, surrender activity should be minimal, and sales lead to an immediate buildup in account value. We have a similar dynamic on our fixed annuity and fixed indexed annuity books.
Although much of this business is reinsured to a theme, the account values remaining at Jackson grew during the period due to positive net flows. Higher interest rates are allowing for more frequent re-pricing of our fixed and fixed index products, helping to make them more competitive in the marketplace going into the second half of the year. Our other operating segments are shown on slide 11. We reengaged in institutional sales late last year, and this continued through the second quarter of 2022 with 201 million of sales.
We see the value of the institutional business is broader than just GAAP earnings, as it provides a diversification benefits is cost effective and helps to stabilize our statutory capital generation. In the institutional segment, our pre-tax adjusted operating earnings of 19 million during the second quarter of this year was up from 6 million in the prior year’s quarter, primarily due to increased net investment income. Lastly, our closed life and annuity black segment reported a decline in adjusted operating earnings compared to the prior year reflecting lower levels of limited partnership income. Absent future M&A activity, the earnings for this segment should trend downward as the business runs off over time.
Slide 12 summarizes our progress on capital return as well as our balance sheet and capital position as of the second quarter. As Lauren noted, we managed our exposure through a challenging market, successfully maintained our financial strength and continue to make progress toward our capital return goals. Year-to-date, we have returned 308 million, a level that keeps us ahead of pace to reach our 2022 target of 425 million to 525 million.
The strength of our overall capital position enables continued return to shareholders through dividends and share buybacks. We expect to remain active repurchase shares of our stock over the remainder of the year, with 183 million remaining on a repurchase authorization. As Laura mentioned yesterday, we announced the approval of our third quarter dividend of $0.55 per share. Our substantial quarterly dividends is a key differentiator for us and speaks to our confidence in Jackson’s long term sustainable capital generation.
We intend to provide updated cash return guidance beyond calendar year 2022 after we review our yearend earnings results. Our total financial leverage of 18.5% was down from 21.2% as of the end of the first quarter. We believe that this level provides us the financial flexibility to navigate potential market volatility, as well as any future accounting impact of LDTI. Moving on to statutory capital, our primary operating company Jackson National Life Insurance Company reported a total adjusted capital position of $8.7 billion, up from 5.4 billion as of the first quarter.
Our hedging program is built to protect the business from stresses and as expected and delivered substantial gains during the declining equity market. Our floored out reserve position entering the quarter limited the corresponding reserve increases, leading to an overall gain in our reported tax position. The increased level of capital had an additional deferred tax asset admissibility benefit. Importantly, despite the heightened volatility, our hedging span was roughly in line with our fees this quarter, in part due to the benefits of higher interest rates discussed earlier.
The statutory required capital or CAL was up during the quarter primarily due to the equity market decline. This was partially offset by the benefit to CAL from higher interest rates. Taking into account both the tech and the CAL movements the estimated operating company RBC increased from the first quarter and was above 450%, a very healthy level of capitalization at the regulated entity.
The increase in operating company RBC under these circumstances is a testament to the overall resiliency of our enforce business in the effectiveness of our risk management. This quarter, we are speaking to both our operating company RBC and adjusted RBC, to provide additional transparency and clarity into our capital position, capital generation and adjusted RBC target definition. Since separation, we’ve primarily focused on our adjusted RBC as the best representative the company’s capital position and was agnostic to capital movements between the holding company and the operating company. Now that our recapitalization and capital structure have been completed, it is less relevant in that respect.
Additionally, we defined the 500% to 525% adjusted RBC ratio target as an RBC target range under normal market conditions. The first half of 2022 which has seen significant equity market declines and spiking interest rates does not qualify as normal market conditions.
Most importantly, as previously stated, and adjusted RBC target for normal market conditions, is not intended to be an official barometer of Jackson’s excess capital, or ability to return capital to shareholders. While current levels of capitalization are an important input into our capital return considerations long term capital planning is also influenced by the expectation of future earnings on our healthy enforce block.
At the end of the second quarter, the adjusted RBC ratio was down modestly and slightly below the normal market target range. There were two items driving the adjusted RBC decline, despite the increase in the operating company RBC. One was 116 million of cash returned to shareholders, which reduced the level of excess cash. The other was the fact that during periods of stress, which would not be considered normal conditions, the CAL can move materially from quarter we experienced this in the second quarter where the increased CAL reduced the RBC ratio benefit of the excess cash held at the holding company. Without this CAL effect on excess capital at the holding company, the adjusted RBC ratio would have been roughly flat and still within our target range.
During the market stress, this quarter, the adjusted RBC level and movement was less meaningful in terms of providing a lens into quarterly capital development. Under these circumstances, the increase in the operating company RBC ratio gives a clear indication of the performance of our underlying business and hedging program. Despite the reduced benefit to the adjusted RBC ratio, our holding company cash position exceeds 800 million and continues to be well in excess of our minimum buffer. As Laura noted at quarter end this level of excess cash represents nearly two years of holding company expenses and current levels of shareholder dividends. This cash position also provides significant flexibility should the current stress environment persist.
In summary, we are pleased to have continued to stay ahead of pace on our capital return target, increased operating company RBC in a very difficult market environment, maintain significant excess holding company cash and to be operating below our target leverage range.
And with that, I will turn it back to Laura.
Thank you, Marcia. I want to amplify Marcia statements about our commitment to returning capital to shareholders. As you can see on slide 13, we have been consistent in our approach to shareholder capital return. Shortly after our separation last year, and immediately following our share repurchase authorization. We return capital to shareholders and each subsequent quarter.
As a reminder, when we separated we established a 325 million to 425 million capital return targets in the first 12 months, and we reach this target within the first six months of our spin off. We execute share repurchases through multiple strategies and we continue to view our shares as attractively valued. We also believe our dividend is just one indication of the sustainability of our long term capital generation.
In summary, the second quarter demonstrated the continued resiliency of both our business and our balance sheet. We are confident in our ability to reach our targeted capital return this year and we remain focused on delivering value to all our stakeholders including our shareholders.
With that, I will open it up for questions.
Thank you. [Operator Instructions] First question comes from Ryan Krueger from KBW. Ryan please go ahead.
My first question was, can you help us think about more of what you would view as a stress RBC minimum that you’d want to maintain when we’re in more, of a stress environment like we’re in today?
Morning, Ryan, thank you for the question. Marcia do you want to respond?
Sure, thank you. We haven’t set out you know, a particular RBC level. But I think what we’re seeing is that through market cycles, we’ve historically operated in a 400% to 500% RBC range. And throughout all that time, we were able to get dividends out of the operating company as well. So we’re, I think you can see from quarter two as an example, how resilient our businesses and how strong our risk management program is under stress, and as we’ve shown in some prior materials for our investor day, our analysts, excuse me, there were some examples shown of other prior past stress periods where we were able to maintain a really stable RBC, all things considered.
And then a little bit of a different question on fixed annuities. And you haven’t been selling much for the last couple of years. You have very strong distribution, and there’s significant appetite from reinsures to reinsure new fixed annuity business. Have you looked into considering starting a more fixed annuities and just reinsuring it to generate additional income from your distribution ability?
Thanks, Ryan. On the fixed annuity Ryan with certainly the rising rate has allowed us to do more frequent re-pricing of our fixed annuities and fixed indexed annuities. Certainly, that’ll help make us more competitive in the second quarter. We continue to see our market link pro offering our VA sales as our best opportunity given the economic offset and capital efficiency between this product and our variable annuity products. And the reinsurance point, I’ll let Marcia respond.
Yes, we have looked at possibilities for flow reinsurance in the past, but just haven’t necessarily come to anything that has met our target returns and kind of filled the whole picture in the way we would like it to but we’ve also done that under a lower interest rate environment. So certainly keep our eye open for as market conditions change our own pricing opportunities and anything that may exist as well. From a reinsurance standpoint, that would be advantageous.
Thank you. Our next question comes from Suneet Kamath from Jefferies. Suneet please go ahead.
Thanks, and good morning, I think you made the comment in your prepared remarks that capital formation in the quarter was above the capital that you’ve distributed. I was just hoping you could put some numbers around that, or at least what’s the best way to think about how much capital was formed in the quarter?
Sure. Thank you Suneet. This is Marcia here. I can take that one. So first of all, I guess we want to just step back and kind of look at the performance of the quarter and recognize that we saw during a volatile market period we saw positive RBC generation as an operating company. And we can see that relative to the impact of the capital return on our RBC, and that definitely is a favorable relationship there in terms of the ability to cover off the capital return with the capital that we generated during the period. We just have good core earnings power that remains intact. And we continue to expect, as we go forward, two additional benefits that we saw begin to emerge in the second quarter with regard to hedge spend under the higher short rates.
And then I guess, on that last point, can you help us think through how much of a benefit you’re getting from the rising rates both short and long end. You’ve talked about this last quarter, but just in terms of what’s still in front of us anyway, you can help us think about what the future benefit could be?
Well, I think we spend just, the benefit comes through both in the form of lower cost of actions that we might purchase, and also in a more favorable result with our futures cost. And so we think, as we look at those two items, certainly have seen benefits already kind of emerge a little bit here in the second quarter, and then with recent actions would expect those to continue.
I would say, with regard to the futures, we would anticipate getting to a point where that could even be positive to us when we roll futures as opposed to a cost as we progress through to the latter part of the year. And then when it comes to options one of the things that’s a result of a higher interest rate environment, is that it may make certain trades become more cost effective. And that would give us the potential to take advantage of those types of opportunities. And example, there could be longer dated options, as well as the just absolute cost of the similar term options that we would have been purchasing recently.
And then just my last one, just to tie it all together. I think on the last quarter call, you talked about expectations for annual dividends in the kind of the $500 to $700 million range. Is that still, based on everything that’s happened so far this year, is that still sort of in the range of what you’re thinking about for next year?
Well, at this point, and I think consistent with what we did for 2022, we’ll have to wait until we see how our year end results play out before we’ll know what we’ll be doing with regard to any kind of dividend out of the operating company. But just as we’ve said before, we are operating in a position that’s very consistent with what we’ve done for many years, and we’ve routinely been able to get dividends out of the operating company. So we’re not seeing any concerns there. But we’ll have to wait until we see year end results before we know the specifics.
Thank you. Our next question comes from Alexander Scott from Goldman Sachs. Alex, please go ahead.
Hi, first one I had was just going back to the spend on hedging. From looking through some of the stat disclosure look like because of the increase in notional in the first part of the year that option premiums were up pretty substantially on what was added. And I’m just wanting to understand I mean, is that fully amortized in those higher hedge costs? I mean, is there some pressure as we get into the back of the year from that fully amortizing in, or is that not the right way to think about it?
Sure. Yes, the interaction you saw with hedges typically what happens is when we get to more volatile markets, often one of the things that we need to do both to be more nimble and to just to deal with the overall cost is shorten up hedge experts, which is something that you would have seen coming into the year with both low rates coming into the year. And as the market became more volatile, as Marcia alluded to, we would see things changing rates going higher and ball coming down a little bit, we’ve been able to extend maturities, we’ll back out.
But what you would have seen is options that ostensibly would be fairly quickly amortizing of the stuff that we were buying in the first half of the year. So there’s not a lot to be dragging through into the second half. And as to the extent that we’re able to extend maturities a little bit, then that’ll actually move in a positive direction for us on a go forward basis.
And second one I had was going back to some of the comments you made about accepting GAAP volatility. And I think those comments were mainly related to the current GAAP accounting, which makes a lot of sense, given how asymmetrical it is to think the economic reality under the new LDTI rules. I mean, we can sort of see just based on what you’re saying, on year end ‘20 versus where you sort of are communicating today having a much less material impact, that there’s probably still a fair amount of net income movement under that accounting framework. Will you still take the same approach? Do you still view that as non-economic and what’s the thought process there as to why it’s not economic?
Sure. Yes. I think we will take the same approach, largely driven by kind of the way reserve movement come through back 157, where you have sort of that higher level of interest rate sensitivity, that comes from more of a market consistent or fair value type approach whereas I think when you see a healthy block of business, like we have, the primary risk, really in the business comes from the equity markets because unless you have poor equity market performance, you’re not going to have future benefit payments that you need to make.
And the interest rate risk for a healthy black a business like ours comes in more in as a sort of a secondary risk on top of the equity risk in discounting of those future benefit payments that would arise out of equity movements. So our view of interest rate risk and interest risk in general and looking at the cash flows themselves and that’s not necessarily consistent with the fair value approach. So, I think we would continue to have that same view as we move forward, that there will be certain elements that will flow through non-operating income, that will result from just kind of a mismatch between the way the assets and liabilities will be moving.
Thank you. [Operator Instructions] Our next question comes from Erik Bass with Autonomous Research. Eric please go ahead.
Hi, thank you. And with the rise in interest rates, can you talk about how pricing is adjusting in the annuity market and what current competitive dynamics look like? And guess how much of the benefit is getting passed through in pricing, and how’s this changing the value proposition for consumers?
Yes, thanks, Eric. As I mentioned earlier, the rising rates are allowing us to do more frequent pricing on our spreads business. Marcia I’m not sure if there’s anything else you would add from what we’ve previously stated?
Just to say from a pricing perspective that we’re going to continue to maintain the same return target. So if we can achieve higher yields on the investment and a higher interest rate environment, then naturally we would be able to pass that on through a higher accredited rate and a higher value proposition for the consumer and still maintain our same level of return.
And just wondering, from an industry perspective, are you seeing others take that same approach so that kind of things, what are you seeing in the competitive landscape and how much of the benefits are getting passed through?
It’s always challenging to say fully what’s happening with profitability inside other firms, but we’re certainly seeing companies, increasing their accredited rate offering in response to higher rates. So that would imply they’re taking a similar view, at least to a certain extent, and in passing the benefits of a higher interest rate environment and higher yields, that can be earned onto the policyholders through a high accredited rate.
And then this is more of a philosophical question. But as the volatility in your stock year-to-date, and particularly over the past quarter, changed your view at all on the value of having more of a first dollar hedging program. I’d say investors clearly aren’t giving you credit for the ROE that you’re producing. So it makes sense to spend more and generate a lower return but with less volatility.
No. I don’t think we’ve had any change in our view, I think we have had a really strong record of good performance out of our hedge program, the way it’s worked, I think we recognize that we’re also still in a new company and some of the volatility maybe related to the fact that that track record isn’t necessarily as familiar to everyone as it is to us. But we’re not, we still have the same kind of risk framework that defines how we look at risk and in our hedging program would be aligned with that the way it has been.
Thank you. We currently have no further questions registered. So I’ll now hand you back over to Laura Prieskorn, CEO for the closing remarks.
Okay, well, thank you all for joining us this morning. We appreciate your participation and look forward to connecting with you next quarter.
This concludes today’s call. Thank you for joining us and I’ll disconnect your lines.