Jackson Financial Inc (JXN) 2022 Q2 法說會逐字稿

Hello, and welcome to the Jackson Financial Inc. 2Q 2022 Earnings Call. My name is Lauren, and I will be coordinating your call today. (Operator Instructions)

I will now hand you 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 outcomes. A number of factors, including risks, uncertainties and assumptions discussed in Risk Factors and Management's Discussion and Analysis of Financial Condition 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; our Vice Chair, Chad Myers; our Head of ALM and Chief Actuary, Steve Binioris; and the President and CEO of PPM, Craig Smith.

At this time, I'll 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 at both our 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 sizable 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 policyholder's benefit base, which is not subject to market volatility, and are intended to cover our hedge costs 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 in 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-based commissions declined, which partially offset the market impact on our fee income. Separately, we also realized a 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 recapitalization 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 were $490 million, up from $199 million in the first quarter. Last week, we reached over $1 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 our 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-index 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 advisers and their clients.

During the quarter, we saw further expansion of our adviser 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 advisers offering retirement planning as well as the overall growth opportunity in the RIA 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 1 of 5 finalists for the Insurance Technology Award for Wealth Management's annual awards program.

We also maintained 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 returned to shareholders. We have returned $308 million through share repurchases and 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 2 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 returned 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 in the 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 comparative 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 Laura 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 Blue Book disclosures show our investment portfolio, including the assets backing the liabilities that were transferred to Athene 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 reinsured to Athene.

Jackson's investment portfolio remains conservatively positioned, with only 2% exposure to below investment-grade securities on a statutory basis, along with an up-in-quality bias in 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 LDTI 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 LDTI impact. Based on a more current environment, we expect that the estimated equity reduction will be materially improved. Furthermore, our current balance sheet positions us well for any LDTI 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 LDTI shareholders' equity impact from movements in various market factors.

Slide 6 outlines the notable items included in adjusted operating earnings for the second quarter, starting with the 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 pretax 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 pretax $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 pretax 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 1-quarter lag, 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 had returns 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 pretax 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 pretax operating earnings were higher than the current year quarter, which meant that the tax benefits that were similar on a dollar basis in these 2 periods led 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 the notable items and the tax 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 a 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 a 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 prove persistent.

Slide 8 illustrates the reconciliation of our second quarter pretax adjusted operating earnings of $243 million to pretax 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 noneconomic 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 macroeconomic 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 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 and protects our hedge budget when markets decline.

As previously noted, all guarantee fees are presented in nonoperating 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 and 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 declines. 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 a 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 in-force traditional variable annuity block.

Looking at pretax adjusted operating earnings on Slide 10, we are down from the prior year's 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 our 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-index annuity books. Although much of this business is reinsured to Athene, the account values remaining at Jackson grew during the period due to positive net flows. Higher interest rates are allowing for more frequent repricing 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 as broader than just GAAP earnings, as it provides diversification benefits, is cost effective and helps to stabilize our statutory capital generation.

In the Institutional segment, our pretax 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 Block 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 Laura noted, we managed our exposure through a challenging market, successfully maintained our financial strength and continued 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 repurchasers of our stock over the remainder of the year, with $183 million remaining on our repurchase authorization.

As Laura mentioned, yesterday we announced the approval of our third quarter dividend of $0.55 per share. Our substantial quarterly dividend 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 year-end 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, it 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 TAC position. The increased level of capital had an additional deferred tax asset admissibility benefit.

Importantly, despite the heightened volatility, our hedging spend 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 TAC 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 in-force business and 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 it best represented 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, an 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 in-force 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 2 items driving the adjusted RBC decline despite the increase in the operating company RBC. One was the $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-to-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 clearer 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 2 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's 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 returned capital to shareholders in each subsequent quarter. As a reminder, when we separated, we established a $325 million to $425 million capital return target in the first 12 months, and we reached this target within the first 6 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.

(Operator Instructions) Our first question comes from Ryan Krueger from KBW.

My first question was, can you help us think about more of what you would view as a stressed RBC minimum that you'd want to maintain when we're in more of a stress environment like we're in today?

Ryan, thank you for the question. Marcia, do you want to respond?

Sure. Thank you. We haven't set out 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 2, as an example, how resilient our business is and how strong our risk management program is under stress. And as we've shown in some prior materials for our Investor Analyst Day, there were some examples shown of other prior past stress periods where we were able to maintain a really stable RBC, all things considered.

Got it. And then a little bit of a different question. On fixed annuities, you haven't been selling much for the last couple of years. You have very strong distribution and there's significant appetite from reinsurers to reinsure new fixed annuity business. Have you looked into considering starting to sell more fixed annuities and just reinsuring it to generate additional income from your distribution ability?

Thanks, Ryan. On the fixed annuity front, with certainly the rising rates, it has allowed us to do more frequent repricing of our fixed annuities and fixed indexed annuities. Certainly, that will help make us more competitive in the second quarter. We continue to see our Market Link Pro offering, our RILA sales, as our best opportunity, given the economic offset and capital efficiency between this product and our variable annuity products. On the reinsurance point, I'll let Marcia respond.

We have looked at possibilities for flow reinsurance in the past, but just haven't necessarily come to anything that 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 we'll 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.

Our next question comes from Suneet Kamath from Jefferies.

I think you made the comment in your prepared remarks that capital formation in the quarter was above the capital that you 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 at the 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, too, additional benefits that we saw begin to emerge in the second quarter with regard to hedge spend under the higher short rates.

Got it. 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 end and long end? You've talked about this last quarter. But just in terms of what's still in front of us, any way you can help us think about what that future benefit could be?

Well, I think as we discussed in the past times, the benefit comes through both in the form of a lower cost of options that we might purchase and also in a more favorable result with our futures roll cost. And so we think as we look at those 2 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 a positive to us when we roll the futures, as opposed to a cost, as we progress through 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. An 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.

Okay. Got it. 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 kind of the $500 million 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're 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.

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

First one I had was just going back to the spend on hedging. From looking through some of the stat disclosure, it looked like because of an increased notional in the first part of the year that auction premiums were up pretty substantially on what was added. And I'm just wanting to understand. I mean, has that fully amortized in those higher hedge costs? I mean, is there some pressure as we get into the back half of the year from that fully amortizing in? Or is that not the right way to think about it?

Steve, would you like to take that?

Sure. The interaction we 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 just to deal with the overall cost, is shorten up hedge expiries, 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, with things changing, rates going higher and vol coming down a little bit, we've been able to extend maturities a little bit 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 to the extent that we're able to extend maturities a little bit, then that will actually move in a positive direction for us on a go-forward basis.

Got it. And the 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, I 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 noneconomic? 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 movements come through FAS 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 market. Because once you have poor equity market performance, you're not even going to have future benefit payments that you need to make. And the interest rate risk for a healthy block of business like ours comes in more as sort of a secondary risk on top of the equity risk in discounting of those future benefit payments that would arise out of equity movement.

So our view of interest rate risk and just risk in general is looking at the cash flow themselves, and that's not necessarily consistent with the FAS 157 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 nonoperating income that will result from just kind of a mismatch between the way the assets and liabilities will be moving.

(Operator Instructions) Our next question comes from Erik Bass from Autonomous Research.

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 I guess, how much of the benefit is getting passed through in pricing? And how is this changing the value proposition for consumers?

Thanks, Erik. As I mentioned earlier, the rising rates are allowing us to do more frequent pricing on our spread 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 investments in a higher interest rate environment, then naturally, we would be able to pass that on through a higher credited rate and a higher value proposition for the consumer and still maintain our same level of return.

Got it. And I guess I was just wondering from an industry perspective, are you seeing others take that same approach so that...? Kind of, I guess, 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 credited rate offering in response to higher rates. So that would imply they're taking a similar view, at least to a certain extent, in passing the benefits of a higher interest rate environment and higher yields that can be earned on to the policyholders through a higher credited rate.

Got it. And then this is more of a philosophical question, but has 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 would it make 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 a new company and some of the volatility may be 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 our hedging program would be aligned with that the way it has been.

We currently have no further questions registered. So I'll now hand you back over to Laura Prieskorn, CEO, for closing remarks.

Okay. Well, thank you all for joining us this morning. We appreciate your participation, and we look forward to connecting with you next quarter.

This concludes today's call. Thank you for joining. You may now disconnect your lines.