Jackson Financial Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. FORWARD-LOOKING STATEMENTS – CAUTIONARY LANGUAGE Certain statements made in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). A forward-looking statement is a statement that is not a historical fact and includes any statement that may predict, forecast, indicate or imply future results, performance or achievements. Forward-looking statements may contain words like: “anticipate,” “believe,” “estimate,” “expect,” “project,” “shall,” “will” and other words or phrases with similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, trends in our businesses, prospective services or products, future performance or financial results and the outcome of contingencies, such as legal proceedings. Forward- looking statements are subject to risks and uncertainties. Actual results could differ materially from those expressed in or implied by such forward-looking statements due to a variety of factors, including: • general conditions in the global capital markets and the economy; • adverse capital and credit market conditions, including volatility in interest rates and credit spreads, prolonged periods of low interest rates, volatile equity markets and decreased liquidity and credit capacity; • adverse impacts on our results of operations and capitalization as a result of optional guarantee benefits within certain of our annuities; • unavailability of hedging instruments and inadequacy of our hedging and reinsurance programs to protect us against the full extent of the exposure or losses we seek to mitigate; • variance in the performance of our hedge assets and customer funds, also referred to as basis risk; • disruptions in our business functions as a result of adverse outcomes from our operational risks and those of our material outsourcing partners; • operational failures, failure of our information technology systems, and the failure to protect the confidentiality of customer information or proprietary business information; • inability to recruit, motivate and retain experienced and productive employees; • misconduct by our employees or business partners; • difficulty in marketing and distributing products; • Jackson Financial’s dependence on the ability of its subsidiaries to transfer funds to meet Jackson Financial’s obligations and liquidity needs; • risks arising from acquisitions or other strategic transactions; • risks related to natural and man-made disasters and catastrophes, diseases, epidemics, pandemics (including COVID-19), malicious acts, cyberattacks, terrorist acts, civil unrest and climate change; • the degree to which we are leveraged and our inability to refinance our indebtedness; • deterioration of the credit quality of the securities and loans in our investment portfolio; • failure to adequately describe and administer, or meet any of the complex product and regulatory requirements relating to, the many complex features and options contained in our annuities; 66 • our counterparties’ requirements to pledge collateral or make payments related to declines in estimated fair value of specified assets and changes in the actual or perceived soundness or condition of other financial institutions and market participants; • inadequate reserves due to differences between our actual experience and management’s estimates and assumptions; • significant deviations from our assumptions regarding the probabilities that our annuity contracts will remain in force from one period to the next; • changes in the levels of amortization of deferred acquisition costs (“DAC”) ; • changes in accounting standards; • models that rely on a number of estimates, assumptions, sensitivities and projections that are inherently uncertain and which may contain misjudgments and errors; • a downgrade in our financial strength or credit ratings; • competition from other insurance companies, banks, asset managers and other financial institutions; • failure of our risk management policies and procedures to adequately identify, monitor and manage risks, which could leave us exposed to unidentified or unanticipated risks; • changes in U.S. federal income or other tax laws or the interpretation of tax laws; • changes in U.S. federal, state and other securities and state insurance laws and regulations; and • adverse outcomes of legal or regulatory actions. The risks and uncertainties included here are not exhaustive. Our Form 10 includes additional factors that could affect our businesses and financial performance. Moreover, we operate in a rapidly changing and competitive environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors. Further, it is not possible to assess the effect of all risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report, except as otherwise required by law. Available Information We maintain a public website at www.jackson.com. We use our website as a routine channel for distribution of important information, including news releases, analyst presentations, financial information and corporate governance information. We post filings on our website as soon as practicable after they are electronically filed with, or furnished to, the SEC, including our annual and quarterly reports on Forms 10-K and 10-Q, respectively, and current reports on Form 8-K; our proxy statements, and any amendments to those reports or statements. All such postings and filings are available free of charge on the “Investor Relations” section of our website, investors.jackson.com. The SEC’s website, www.sec.gov, contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. 67 Overview of Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in its entirety and in conjunction with the condensed consolidated financial statements and related notes contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our Form 10 that was declared effective by the SEC on August 6, 2021 (the “Form 10”) and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the company’s quarterly report for the quarter ended June 30, 2021, that were filed with the U.S. Securities and Exchange Commission (the “SEC”). Jackson Financial Inc. (“Jackson Financial”) along with its subsidiaries (collectively, the “Company,” which also may be referred to as “we,” “our” or “us”), is a financial services company focused on helping Americans grow and protect their retirement savings and income to enable them to pursue financial freedom for life in the United States (“U.S.”). Jackson Financial, domiciled in the U.S., was previously a majority-owned subsidiary of Prudential plc (“Prudential”), London, England and was the holding company for Prudential’s U.S. operations. As described below, the Company's demerger from Prudential was completed on September 13, 2021 ("Demerger"), and the Company is no longer a majority-owned subsidiary of Prudential. Jackson Financial’s primary life insurance subsidiary, Jackson, is licensed to sell group and individual annuity products (including fixed, fixed index and variable annuities), and various protection products, primarily whole life, universal life and variable universal life and term life insurance products in all 50 states and the District of Columbia. On January 28, 2021, Prudential announced its intent to pursue the separation of its U.S. business operations in 2021. On August 6, 2021, the registration on Form 10 of the Company's Class A common stock became effective under the Securities Exchange Act of 1934, as amended. The Demerger transaction described in the Form 10 was effective on September 13, 2021. Post-demerger, Prudential retained a 19.9 percent non-controlling interest in the Company. On September 9, 2021, the Company effected a 104,960.3836276-for-1 stock split of its Class A common stock and Class B common stock by way of a reclassification of its Class A common stock and Class B common stock. The incremental par value of the newly issued shares was recorded with the offset to additional paid-in capital. All share and earnings per share information presented herein have been retroactively adjusted to reflect the stock split. On June 18, 2020, the Company’s subsidiary, Jackson, announced that it had entered into a funds withheld coinsurance agreement with Athene Life Re Ltd. (“Athene”) effective June 1, 2020 to reinsure on 100% quota share basis, a block of Jackson’s in-force fixed and fixed-index annuity product liabilities in exchange for a $1.2 billion ceding commission. In addition, we entered into an investment agreement with Athene Life Re Ltd., pursuant to which Athene invested $500.0 million of capital into the Company in return for a 9.9% voting interest corresponding to a 11.1% economic interest in the Company. The transaction was completed on July 17, 2020. In August 2020, the Company contributed the $500.0 million, as a capital contribution, to its subsidiary, Jackson. 68 Executive Summary This executive summary of Management’s Discussion and Analysis of Financial Condition and Results of Operation highlights selected information and may not contain all of the information that is important to current or potential investors in our securities. You should read this Quarterly Report on Form 10-Q, together with the Form 10, in their entirety for a more detailed description of events, trends, uncertainties, risks and critical accounting estimates affecting us. We help Americans grow and protect their retirement savings and income to enable them to pursue financial freedom for life. We believe that we are uniquely positioned in our markets because of our differentiated products, well-known brand and disciplined risk management. Our market leadership is supported by our efficient and scalable operating platform and industry-leading distribution network. We believe these core strengths will enable us to grow profitably as an aging U.S. population transitions into retirement. We offer a diverse suite of annuities to retail investors in the U.S. Our variable annuities have been among the best-selling products of their kind in the U.S. primarily due to the differentiated features we offer as compared to our competitors, in particular the wider range of investment options and greater freedom to invest across multiple investment options. We also offer fixed index annuities and fixed annuities. In the fourth quarter of 2021, Jackson successfully launched Market Link Pro SM and Market Link Pro Advisory SM , its commission and advisory based suite of Registered Index-Linked Annuities (RILAs). Also in the fourth quarter of 2021, we entered the Defined Contribution market as a carrier in the AllianceBernstein Lifetime Income Strategy. We sell our products through a distribution network that includes independent broker-dealers, wirehouses, regional broker-dealers, banks, and independent registered investment advisors, third-party platforms and insurance agents. We have been the top selling retail annuity company in the United States for eight of the past nine years, according to the Life Insurance Marketing and Research Association (LIMRA). Our operating platform is scalable and efficient. We administer approximately 75% of our in-force policies on our in-house policy administration platform. The remainder of our business is administered through established third-party arrangements. We believe that our operating platform provides us with a competitive advantage by allowing us to grow efficiently and provide superior customer service. We manage our business through three segments: Retail Annuities, Institutional Products, and Closed Life and Annuity Blocks. We report certain activities and items that are not included in these segments, including the results of PPM, in Corporate and Other. See Note 13 to Condensed Consolidated Financial Statements for further information on our segments. Revenues Our revenues come from five primary sources: • Fee income derived from our annuities and investment management products; • Net investment income from our investment portfolio; • Premiums from certain of our life insurance and annuity products, as well as premiums from reinsurance transactions; • Net realized gains (losses) on investments, including trading activity within our investment portfolio and risk management related derivative activities; and • Other income, which primarily represents expense allowances associated with our reinsurance agreements. Benefits and Expenses Our benefits and expenses consist of five primary sources: • Death, other policy benefits and change in policy reserves, net of deferrals; • Interest credited on contract holder funds, net of deferrals; 69 • Operating costs and other expenses, net of deferrals; • Interest expense; and • Amortization of deferred acquisition and sales inducement costs. Net Income Volatility Our results experience net income volatility due to the mismatch between movements in our policyholder liabilities and the market driven movements in the derivatives used in our hedging program. Our hedging program seeks to balance three objectives: protecting against the economic impact of adverse market conditions, protecting our statutory capital and stabilizing our statutory distributable earnings throughout market cycles. Our hedging program is based on economic cash flow models of our liabilities, rather than the U.S. GAAP accounting view of the embedded derivative liabilities. We do not directly seek to offset the movement in our U.S. GAAP liabilities from adverse market conditions. As a result, the changes in the value of the derivatives used as part of the hedging program are not expected to match the movements in the hedged liabilities on a U.S. GAAP basis from period to period, resulting in volatility as a result of changes in fair value recorded to net income. Accordingly, we evaluate and manage the performance of our business using Adjusted Operating Earnings, a non-GAAP financial measure that reduces the impact of market volatility by excluding changes in fair value of freestanding and embedded derivative instruments. Significant Factors Impacting Results The following selected factors have impacted, and may in the future impact, our financial condition and results of operations. Impact of Hedging We utilize derivatives primarily as part of our variable and fixed index annuity financial risk management program, primarily to reduce the inherent equity market and interest rate risk associated with the optional guarantee benefits embedded in those products. Derivative contracts, primarily composed of futures and options on equity indices and interest rates, are an essential part of our program and are selected to provide a measure of economic protection. These transactions are intended to manage the risk of a change in the value, yield, price, cash flows or degree of exposure with respect to assets, liabilities or future cash flows which we have acquired or incurred. Our hedging program seeks to balance three objectives: protecting against the economic impact of adverse market conditions, protecting our statutory capital and stabilizing our statutory distributable earnings throughout market cycles. The balance among these three objectives may shift over time based on our capital position, market conditions and other needs of the business. For example, in 2020, our total level of hedging requirements under our risk framework were higher as a result of our level of statutory capital and our focus on protecting statutory capital in preparation for the Demerger. We do not employ a hedging program that seeks to offset the movement in our U.S. GAAP liabilities. As a result, the changes in the value of these derivatives are not expected to match the movements in hedged liabilities on a U.S. GAAP basis from period to period. With this focus, the program does not meet the accounting requirements for hedge accounting and, accordingly, we have not sought hedge accounting treatment on either a U.S. GAAP or Statutory accounting principles basis. Accordingly, changes in value of the derivatives are recognized in the period in which they occur with offsetting changes in reserves recognized in the current period, resulting in net income volatility. Impact of Mean Reversion Methodology on DAC Amortization Our operating income includes amortization of DAC balances. For our variable annuities, DAC is amortized in proportion to expected gross profits. A significant portion of the expected gross profits on our variable annuities are composed of the core contract charges, investment management fees, and associated administrative fees, which depend on the performance of the account value upon which fees are assessed, as well as guarantee fees, which are assessed on the benefit base. This, in turn, depends on account value returns from period to period, including in future periods, and the features of optional guarantee benefits selected by our customers. We employ a mean reversion methodology with the objective of stabilizing the amortization of DAC that would otherwise be highly volatile due to fluctuations in future gross profits arising from changes in equity market and interest rate levels over the short term. The mean reversion methodology seeks to achieve this objective by applying a dynamic adjustment to the assumption for short-term future investment returns. This dynamic adjustment incorporates actual returns for the current and preceding two years combined along with our estimate of 70 projected returns for the next five years that are set such that the average rate of return over the eight-year period is equivalent to the current long-term assumed return. This methodology prevents our DAC models from being distorted by a significant increase or decrease in the account value or benefit base in one peri od from inflated or deflated projected contract-related charges (including core contract charges and guarantee fees, as applicable) due to volatility in equity market returns or interest rates. However, this methodology does result in income volatility when historical period returns that deviate significantly from the mean are dropped from the mean reversion formula . For example, during a period in which a large negative return falls out of the calculation due to the passage of time, the projected returns for the next five years would be reset at a lower level, such that the average rate of return over the eight-year period remains equivalent to the current long-term assumed return. This would result in a potentially materially higher amortization of DAC for the current period, even if the actual returns for the current period are equivalent to the current long-term assumed return. Recent Acquisitions and Reinsurance Transactions We expect to continue to manage and diversify our overall mortality and longevity risks through closed block acquisitions, which we believe provide opportunities to deploy capital at attractive risk-adjusted returns and diversify our in-force business. We also use third-party reinsurance to manage capital in support of our strategy by monetizing selected risks in our in-force business. A reinsurance transaction could have a significant impact on our results of operations in the period in which the transaction occurs as a result of the reserves acquired or divested at the time the transaction is closed, and assets added or removed from the balance sheet (including any premium paid or received), net of ceding commission. A reinsurance transaction could also impact the credit risk in our investment portfolio. Generally, acquired blocks of business will increase our exposure to credit risk in our investment portfolio, while business that is disposed of or reinsured will reduce the amount of credit risk in our investment portfolio and increase the counterparty credit risk to which we are exposed. Retail Annuities Effective June 1, 2020, we entered into a reinsurance agreement with Athene, ceding a $27.6 billion portfolio of fixed and fixed index annuity liabilities in exchange for approximately $1.2 billion in ceding commissions. Our reinsurance arrangement with Athene is a funds withheld coinsurance arrangement where Athene, as reinsurer, will bear responsibility for all financial terms of the reinsured policies (i.e., premiums, expenses, claims, etc.) and, we, as the ceding company, hold certain assets backing the reserves as collateral in a segregated custody account. Separation Costs Prior to the Demerger, we received certain operational support services from Prudential and provided services to Prudential, pursuant to an intra-group master services agreement. That intra-group master services agreement was terminated in connection with the Demerger as part of the complete operational separation of Prudential’s and our businesses. The process of replicating and replacing functions, systems and infrastructure provided by Prudential or certain of its affiliates in order to operate as a separate public company has been completed. In connection with preparing for the Demerger and our operation as a separate, publicly traded company, we incurred, and expect to incur, one-time and recurring expenses. We estimated that the aggregate amount of these one-time expenses would be approximately $75 million, of which approximately $18 million was incurred in 2020 and approximately $63 million was incurred during the nine months ended September 30, 2021. We estimate that our incremental annual recurring expenses relating to operating on a stand-alone basis will be between approximately $25 million and $30 million. These expenses primarily relate to information security, finance, risk management, human resources, corporate communications, public relations and other support services. Macroeconomic, Industry and Regulatory Trends We discuss a number of trends and uncertainties below that we believe could materially affect our future business performance, including our results of operations, our investments, our cash flows, and our capital and liquidity position. Macroeconomic and Financial Market Conditions Our business and results of operations are affected by macroeconomic factors. The level of interest rates and shape of the yield curve, credit and equity market performance (including market paths, equity volatility and other factors), regulation, tax policy, the level of U.S. employment, inflation and the overall economic growth rate can affect both our short and long-term profitability. Monetary and fiscal policy in the United States, or similar actions in foreign nations, could result in increased volatility in financial markets, including interest rates, currencies and equity markets, and could impact our 71 business in both the short-term and medium-term. Political events, including the imposition of stay-at-home orders and business shutdowns or other effects arising as a result of the COVID-19 pandemic, civil unrest, tariffs or other barriers to international trade, and the effects that these or other political events could have on levels of economic activity, could also impact our business through impacts on consumers’ behavior or impact on financial markets. In the short- to medium-term, the potential for increased volatility, coupled with prevailing interest rates remaining below historical averages and uncertain equity market performance, could pressure sales and reduce demand for our products as consumers consider purchasing alternative products to meet their objectives. In addition, this environment could make it difficult to consistently develop products that are attractive to customers. Our financial performance can be adversely affected by market volatility and equity market declines if fees assessed on the account value or benefit base of our annuities fluctuate, hedging costs increase and revenues decline due to reduced sales and increased outflows. Equity Market Environment Our financial performance is impacted by the performance of equity markets. For example, our variable annuities earn fees based on the account value, which changes with equity market levels. After a very volatile 2020, U.S. equity markets have performed well in 2021 with the S&P 500 generally at or near all time highs throughout the year. Equity volatility has moderated in 2021 from historically high levels in 2020 resulting in reduced hedging costs year over year. While equity implied volatility has decreased in 2021 it still remains above its historical median despite the high S&P 500 levels. The financial performance of our hedging program could be impacted by large directional market movements or periods of high volatility. In particular, our hedges could be less effective in periods of large directional movements or we could experience more frequent or more costly rebalancing in periods of high volatility, which would lead to adverse performance versus our hedge targets and increased hedging costs. Further, we are also exposed to basis risk, which results from our inability to purchase or sell hedge assets whose performance is perfectly correlated to the performance of the funds into which customers allocate their assets. We make funds available to customers where we believe we can transact in sufficiently correlated hedge assets, and we anticipate some variance in the performance of our hedge assets and customer funds. This variance may result in our hedge assets outperforming or underperforming the customer assets they are intended to match. This variance may be exacerbated during periods of high volatility, leading to a mismatch in our hedge results relative to our hedge targets. Interest Rate Environment We believe the interest rate environment will continue to impact our business and financial performance in the future for several reasons, including the following: • Our investment portfolio is predominantly composed of fixed income securities. In the near term, we expect the yields we earn on new investments will be materially lower than yields we earned on maturing investments due to the low interest rate environment. • A prolonged low interest rate environment could subject us to increased hedging costs or an increase in the amount of statutory reserves that our insurance subsidiaries are required to hold for optional guarantee benefits, decreasing statutory surplus, which would adversely affect their ability to pay dividends. Certain inputs to the statutory models rely on prescribed interest rates, which are, in turn, determined using a historical interest rate perspective with a mean reversion path over the longer term. If rates remain at the current low levels, we expect these prescribed rates to continue to decline as the NAIC updates the calculations each year, which would adversely impact our statutory capital. In addition, low interest rates could also increase the perceived value of optional guarantee benefits features to our customers, which in turn could lead to a higher utilization of withdrawal or annuitization features of annuity policies and higher persistency of those products over time. Finally, low interest rates could continue to cause an acceleration of DAC amortization or reserve increase due to loss recognition for annuities and interest-sensitive life insurance. A gradual rise in interest rates would have benefits that are offsetting to risks previously described. Those potential benefits include increased new money investment yields, a reduction in hedging requirements and more attractive product features. • Some of our annuities have a guaranteed minimum interest crediting rate. These guaranteed minimum interest crediting rates may not be lowered, even if earnings on our investment portfolio decline, resulting in net investment spread compression that negatively impacts earnings. In addition, we expect more customers to hold policies with comparatively high guaranteed minimum interest crediting rates longer in a low interest rate environment, resulting in lower than previously expected lapse rates. Conversely, a rise in the average yield on our investment portfolio should positively impact earnings. Similarly, we expect customers would be less likely to hold policies if existing 72 guaranteed minimum interest crediting rates are perceived to have less value as interest rates rise, resulting in higher than previously expected lapse rates. Credit Market Environment Our financial performance is impacted by conditions in fixed income markets. With an improving economy, credit spreads have tightened in 2021 after increasing substantially at the onset of the COVID-19 pandemic in 2020, and credit defaults have also reduced from levels seen in 2020. As credit spreads widen, the fair value of our existing investment portfolio generally decreases, although we generally expect the widening spreads to increase the yield on new fixed income investments. Conversely, as credit spreads tighten, the fair value of our existing investment portfolio generally increases, and the yield available on new investment purchases decreases. While changing credit spreads impact the fair value of our investment portfolio, this revaluation will not affect our net income, unless such changes are realized through the sale of securities or are included in our trading portfolios and is instead reflected in our AOCI. Shifts in the credit quality of the assets underlying our investment portfolio may also impact the level of regulatory required statutory capital for our insurance company subsidiaries. As such, significant credit rating downgrades or payment defaults could negatively impact our RBC ratio. COVID-19 We continue to closely monitor developments related to the COVID-19 pandemic. The COVID-19 pandemic has caused significant economic and financial turmoil both in the United States and around the world. These conditions could continue and could worsen in the future. At this time, it is not possible to estimate the long-term effectiveness of any therapeutic treatments and vaccines for COVID-19, or their efficacy with respect to current or future variants or mutations of COVID-19, or the longer-term effects that the COVID-19 pandemic could have on our business. The extent to which the COVID-19 pandemic impacts our business, results of operations, financial condition and cash flows will depend on future developments which are highly uncertain and cannot be predicted, including the availability and efficacy of vaccines against COVID-19 and against variant strains of the virus. Federal and state authorities’ actions could include restrictions of movements. We are not able to predict the duration and effectiveness of governmental and regulatory actions taken to contain or address the COVID-19 pandemic or the impact of future laws, regulations or restrictions on our business. Consumer Behavior We believe that many retirees have begun to look to tax-efficient savings products as a tool for addressing their unmet need for retirement planning. We believe our products are well positioned to meet this increasing consumer demand. However, consumer behavior may be impacted by increased economic uncertainty, increased unemployment rates, declining equity markets, lower interest rates and increased volatility of financial markets. In recent years, we have introduced new products to better address changes in consumer demand and targeted distributions channels which meet changes in consumer preferences. Demographics We expect demographic trends in the U.S. population, in particular the increase in the number of retirement age individuals, to generate significant demand for our products. In addition, the potential risk to government social safety net programs and shifting of responsibility for retirement planning and financial security from employers and other institutions to employees, highlights the need for individuals to plan for their long-term financial security and will create additional opportunities to generate sustained demand for our products. Based on a 2017 U.S. Census Bureau Population Projection, the portion of the U.S. population age 55 or older is expected to grow through 2030 at double the annual rate of growth forecast for the overall U.S. population. If this growth is realized, 32% of the overall U.S. population, or 112 million individuals, will be age 55 or older by 2030, compared to 29%, or 95 million individuals, in 2018. We believe we are well positioned to capture the increased demand generated by these demographic trends. Competition The insurance industry is highly competitive, with several factors affecting our ability to compete effectively, including the range of products offered, product terms and features, financial strength and credit ratings, brand strength and name recognition, investment management performance and fund management trends, the ability to respond to developing demographic trends, customer appetite for certain products and technological advances. Our competitors include major stock and mutual insurance companies, mutual fund organizations, banks and other financial services companies. In recent 73 years, there has been substantial consolidation and convergence among companies in the insurance and financial services industries resulting in increased competition from large, well-capitalized insurance and financial services firms that market products and services similar to us. Increased consolidation among banks and other financial services companies could create firms with even stronger competitive positions, negatively impact the insurance industry’s sales, increase competition for access to distribution partners, result in greater distribution expenses and impair our ability to market our annuities to our current customer base or expand our customer base. Despite the increasing competition, we believe that our competitive strengths position us well in the current competitive environment. Regulatory Policy We operate in a highly regulated industry. Our insurance company subsidiaries are regulated primarily at the state level, with some policies and products also subject to federal regulation. As such, regulations recently approved or currently under review at both the U.S. federal and state level could impact our business model, including statutory reserve and capital requirements. We anticipate that our ability to respond to changes in regulation and other legislative activity will be critical to our long-term financial performance. In particular, the following could materially impact our business: Department of Labor Fiduciary Advice Rule The Department of Labor (“DOL”) has issued a new regulatory action (the “Fiduciary Advice Rule”) effective February 16, 2021, that reinstates the text of the DOL’s 1975 investment advice regulation defining what constitutes fiduciary “investment advice” to ERISA Plans and IRAs and provides guidance interpreting such regulation. The guidance provided by the DOL broadens the circumstances under which financial institutions, including insurance companies, could be considered fiduciaries under ERISA or the Tax Code. In particular, the DOL states that a recommendation to “roll over” assets from a qualified retirement plan to an IRA, or from an IRA to another IRA, can be considered fiduciary investment advice if provided by someone with an existing relationship with the ERISA Plan or an IRA owner (or in anticipation of establishing such a relationship). This guidance reverses an earlier DOL interpretation suggesting that roll over advice did not constitute investment advice giving rise to a fiduciary relationship. Because we do not engage in direct distribution of annuities, including IRA products and annuities sold to ERISA plan participants and to IRA owners, we believe that we will have limited exposure to the new Fiduciary Advice Rule. Unlike the DOL’s previous fiduciary rule issued in 2016, compliance with the Fiduciary Advice Rule will not require us or our distributors to provide the disclosures required for exemptive relief under the previous rule. However, we continue to analyze the impact of the Fiduciary Advice Rule, and, while we cannot predict the rule’s impact, it could have an adverse effect on sales of annuities through our distribution partners, as approximately 62% of our annuity sales were purchased within IRAs or other qualified accounts (excluding employer-sponsored qualified plans) during 2020. The Fiduciary Advice Rule may also lead to changes to our compensation practices and product offerings and increased litigation risk, which could adversely affect our results of operations and financial condition. We may also need to take certain additional actions in order to comply with or assist our distributors in their compliance with the Fiduciary Advice Rule. Legislative Reforms Congress approved the Setting Every Community Up for Retirement Enhancement Act of 2019 (the "SECURE Act") on December 20, 2019. The SECURE Act provides individuals with greater access to retirement products. Namely, it makes it easier for 401(k) programs to offer annuities as an investment option by, among other things, creating a statutory safe harbor in ERISA for a retirement plan’s selection of an annuity provider. The SECURE Act represents the largest overhaul to retirement plans in over a decade. We view these reforms as beneficial to our business model and expect growth opportunities will arise from the new law. Tax Laws All of our annuities offer investors the opportunity to benefit from tax deferral. If U.S. tax laws were to change, such that our annuities no longer offer tax-deferred advantages, demand for our products could materially decrease. Key Non-GAAP Financial Measures and Operating Measures In addition to presenting our results of operations and financial condition in accordance with U.S. GAAP, we use and report, selected non-GAAP financial measures. Management believes that the use of these non-GAAP financial measures, together with relevant U.S. GAAP financial measures, provides a better understanding of our results of operations, financial 74 condition and the underlying profitability drivers of our business. These non-GAAP financial measures should be considered supplementary to our results of operations and financial condition that are presented in accordance with U.S. GAAP and should not be viewed as a substitute for the U.S. GAAP financial measures. Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate such measures. Consequently, our non-GAAP financial measures may not be comparable to similar measures used by other companies. These non-GAAP financial measures should not be viewed as substitutes for the most directly comparable financial measures calculated in accordance with U.S. GAAP. We also use a number of operating measures that management believes provide useful information about our businesses and the operational factors underlying our financial performance. Non-GAAP Financial Measures Adjusted Operating Earnings Adjusted Operating Earnings is an after-tax non-GAAP financial measure, which we believe should be used to evaluate our financial performance on a consolidated basis by excluding certain items that may be highly variable from period to period due to accounting treatment under U.S. GAAP or that are non-recurring in nature, as well as certain other revenues and expenses which we do not view as driving our underlying profitability. Adjusted Operating Earnings should not be used as a substitute for net income as calculated in accordance with U.S. GAAP. However, we believe the adjustments to net income are useful for gaining an understanding of our overall results of operations. Adjusted Operating Earnings equals our net income adjusted to eliminate the impact of the following items: • Fees Attributable to Guarantee Benefits: fees paid in conjunction with guaranteed benefit features offered for certain of our variable annuities and fixed index annuities are set at a level intended to mitigate the cost of hedging and funding the liabilities associated with such guaranteed benefit features. The full amount of the fees attributable to guaranteed benefit features have been excluded from Adjusted Operating Earnings as the related net movements in freestanding derivatives and net reserve and embedded derivative movements, as described below, have been excluded from Adjusted Operating Earnings. This presentation of our earnings is intended to directly align revenue and related expenses associated with the guaranteed benefit features; • Net Movement in Freestanding Derivatives, except earned income (periodic settlements and changes in settlement accruals) on derivatives that are hedges of investments, but do not qualify for hedge accounting treatment: changes in the fair value of our freestanding derivatives used to manage the risk associated with our life and annuity reserves, including those arising from the guaranteed benefit features offered for certain of our variable annuities and fixed index annuities. Net movements in freestanding derivatives have been excluded from Adjusted Operating Earnings because the market value of these derivatives may vary significantly from period to period as a result of near-term market conditions and therefore are not directly comparable or reflective of the underlying profitability of our business; • Net Reserve and Embedded Derivative Movements: changes in the valuation of certain life and annuity reserves, a portion of which are accounted for as embedded derivative instruments, and which are primarily composed of variable and fixed index annuity reserves, including those arising from the guaranteed benefit features offered for certain of our variable annuities. Net reserve and embedded derivative movements have been excluded from Adjusted Operating Earnings because the carrying values of these derivatives may vary significantly from period to period as the result of near-term market conditions and policyholder behavior-related inputs and therefore are not directly comparable or reflective of the underlying profitability of our business. Movements in reserves attributable to the current period claims and benefit payments in excess of a customer’s account value on these policies are also excluded from Adjusted Operating Earnings as these benefit payments are affected by near-term market conditions and policyholder behavior-related inputs and therefore may vary significantly from period to period; • Net Realized Investment Gains and Losses including change in fair value of funds withheld embedded derivative: Realized investment gains and losses associated with the periodic sales or disposals of securities, excluding those held within our trading portfolio, as well as impairments of securities, after adjustment for the non-credit component of the impairment charges and change in fair value of funds withheld embedded derivative related to the Athene Reinsurance Transaction; 75 • DAC and DSI Impact: amortization of deferred acquisition costs and deferred sales inducements associated with the items excluded from Adjusted Operating Earnings; • Assumption changes: the impact on the valuation of Net Derivative and Reserve Movements, including amortization on DAC, arising from changes in underlying actuarial assumptions; • Loss on Athene Reinsurance Transaction: includes contractual ceding commission, cost of reinsurance write-off and DAC and DSI write-off related to the Athene Reinsurance Transaction; • Net investment income on funds withheld assets: includes net investment income on funds withheld assets related to funds withheld reinsurance transactions; • Other items: one-time or other non-recurring items, such as costs relating to the Demerger and our separation from Prudential, the impact of discontinued operations and investments that are consolidated on our financial statements due to U.S. GAAP accounting requirements, such as our investments in collateralized loan obligations, but for which the consolidation effects are not aligned with our economic interest or exposure to those entities; and • Operating income taxes are calculated using the prevailing corporate federal income tax rate of 21% while taking into account any items recognized differently in our financial statements and federal income tax returns, including the dividends received deduction and other tax credits. For interim reporting periods, the company uses an estimated annual effective tax rate in computing its tax provision including consideration of discrete items. As detailed above, the fees attributed to guaranteed benefits, the associated movements in optional guaranteed benefit liabilities and related claims and benefit payments are excluded from Adjusted Operating Earnings, as we believe this approach appropriately removes the impact to both revenue and related expenses associated with the guaranteed benefit features that are offered for certain of our variable annuities and fixed index annuities and gives investors a better picture of what is driving our underlying profitability. The following is a reconciliation of Adjusted Operating Earnings to net income (loss) attributable to Jackson Financial Inc., the most comparable U.S. GAAP measure. Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in millions) Net income (loss) attributable to Jackson Financial, Inc. $ 206.2 $ (396.6) $ 2,597.7 $ (1,709.2) Income tax expense (benefit) (16.4) (157.0) 514.7 (580.8) Pretax income (loss) attributable to Jackson Financial Inc 189.8 (553.6) 3,112.4 (2,290.0) Non-operating adjustments (income) loss: Fees attributable to guarantee benefit reserves (728.1) (633.7) (2,100.7) (1,858.3) Net movement in freestanding derivatives 493.3 3,530.3 3,966.3 812.4 Net reserve and embedded derivative movements 996.7 (1,378.1) (2,221.8) 5,158.6 DAC and DSI impact (169.3) (349.1) 283.8 (980.9) Net realized investment gains (losses) including change in fair value of funds withheld embedded derivative 79.1 355.4 (218.7) (974.5) Loss on Athene Reinsurance Transaction — 34.9 — 2,081.6 Net investment income on funds withheld assets (299.6) (277.1) (884.5) (506.0) Other items 9.3 (83.3) 28.5 (12.4) Total non-operating adjustments 381.4 1,199.3 (1,147.1) 3,720.5 Pretax Adjusted Operating Earnings 571.2 645.7 1,965.3 1,430.5 Operating income taxes 83.8 98.9 273.3 195.8 Adjusted Operating Earnings $ 487.4 $ 546.8 $ 1,692.0 $ 1,234.7 76 Adjusted Book Value and Adjusted Operating ROE We use Adjusted Operating ROE to manage our business and evaluate our financial performance. Adjusted Operating ROE excludes items that vary from period to period due to accounting treatment under U.S. GAAP or that are non-recurring in nature, as such items may distort the underlying profitability of our business. We calculate Adjusted Operating ROE by dividing our Adjusted Operating Earnings by average Adjusted Book Value. Adjusted Book Value excludes AOCI attributable to Jackson Financial Inc. AOCI attributable to Jackson Financial Inc. does not include AOCI arising from investments held within the funds withheld account related to the Athene Reinsurance Transaction. We exclude AOCI attributable to Jackson Financial Inc. from Adjusted Book Value because our invested assets are generally invested to closely match the duration of our liabilities, which are longer duration in nature, and therefore we believe period-to-period fair market value fluctuations in AOCI to be inconsistent with this objective. We believe excluding AOCI attributable to Jackson Financial Inc. is more useful to investors in analyzing trends in our business. Changes in AOCI within the funds withheld account related to the Athene Reinsurance Transaction offset the related non-operating earnings from the Athene Reinsurance Transaction resulting in a minimal net impact on Adjusted Book Value of Jackson Financial Inc. Adjusted Book Value and Adjusted Operating ROE should not be used as substitutes for total stockholders’ equity and ROE as calculated using net income and total equity in accordance with U.S. GAAP. However, we believe the adjustments to equity and earnings are useful to gaining an understanding of our overall results of operations. The following is a reconciliation of Adjusted Book Value to total stockholders’ equity and a comparison of Adjusted Operating ROE to ROE, the most comparable U.S. GAAP measure: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in millions) Total stockholders' equity $ 10,258.2 $ 9,375.8 $ 10,258.2 $ 9,375.8 Adjustments to total stockholders’ equity: Exclude accumulated other comprehensive income attributable to Jackson Financial Inc. (1) (1,563.9) (2,636.7) (1,563.9) (2,636.7) Adjusted Book Value $ 8,694.3 $ 6,739.1 $ 8,694.3 $ 6,739.1 ROE 8.0 % (17.4) % 34.6 % (28.1) % Adjusted Operating ROE on average equity 22.5 % 33.0 % 27.4 % 24.3 % (1) Excludes $481.3 million and $1,213.9 million related to the investments held within the funds withheld account related to the Athene Reinsurance Transaction as of September 30, 2021 and September 30, 2020, respectively. Operating Measures Sales Sales of annuities and institutional products include all money deposited by customers into new and existing contracts. We believe sales statistics are useful to gaining an understanding of, among other things, the attractiveness of our products, how we can best meet our customers’ needs, evolving industry product trends and the performance of our business from period to period. 77 Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in millions) Sales Variable annuities $ 4,737.7 $ 4,457.9 $ 14,232.7 $ 11,757.0 Fixed Index Annuities 23.3 61.4 92.3 949.8 Fixed Annuities 7.7 8.9 27.0 315.3 Total Retail Annuity Sales 4,768.7 4,528.2 14,352.0 13,022.1 Total Institutional Product Sales 43.4 — 43.4 1,284.2 Total Sales $ 4,812.1 $ 4,528.2 $ 14,395.4 $ 14,306.3 Our new business annuities sales levels for the three and nine months ended September 30, 2021 have been in line with the trends seen in the second half of 2020. For the three and nine months ended September 30, 2021, sales of variable annuities were higher than in the three and nine months ended September 30, 2020, driven primarily by an increased level of sales of variable annuities without lifetime living benefits. For the three and nine months ended September 30, 2021, sales of fixed index annuities and fixed annuities remained at historically low levels following pricing actions taken in early 2020. In addition, there were $43.4 million in sales of institutional products during the three and nine months ended September 30, 2021, compared to nil and $1.3 billion during the comparable periods in the prior year. Account Value Account Value generally equals the policy account value of our variable annuities, fixed index annuities, fixed annuities and institutional products. It reflects the total amount of customer invested assets that have accumulated within a respective product and equals cumulative customer contributions, which includes gross deposits or premiums plus accrued credited interest plus or minus the impact of market movements, as applicable, less withdrawals and various fees. Annual average account value is calculated by averaging balances as of the end of each month in the trailing 12-month period, as well as the ending balance of the prior 12-month period. Quarterly average account value is calculated by averaging balances as of the end of each month in the quarter, as well as the ending balance of the prior quarter. We believe account value is a useful metric in providing an understanding of, among other things, the sources of potential fee income generation, potential benefit obligations and risk management priorities. 78 As of September 30, 2021 2020 (in millions) Account Value GMWB For Life $ 179,806.7 $ 148,657.6 GMWB 7,078.9 6,196.2 Other Guarantees - Living Benefits 1,788.9 1,730.8 No Living Benefits 57,731.8 47,948.9 Total Variable Annuity Account Value 246,406.3 204,533.5 Fixed Index Annuity (1) 265.4 125.5 Fixed Annuity (1) 1,098.6 1,066.6 Total Fixed & Fixed Index Annuity Account Value 1,364.0 1,192.1 Total Retail Annuities Account Value $ 247,770.3 $ 205,725.6 Total Institutional Products Account Value $ 8,838.5 $ 12,310.8 Total Closed Life and Annuity Blocks Account Value (2) $ 8,847.2 $ 9,183.3 (1) Net of reinsurance to Athene, where substantially all of our in-force fixed and fixed index annuity product liabilities were reinsured, effective June 1, 2020. (2) Excludes payout annuities and traditional life insurance without account value. Net Flows Net flows represents the net change in customer account balances during a period, including gross premiums, surrenders, withdrawals and benefits. Net flows excludes investment performance, interest credited to customer accounts, transfers between fixed and variable benefits for variable annuities and policy charges. We believe net flows is a useful metric in providing an understanding of, among other things, sales, ongoing premiums and deposits, the changes in account value from period to period, sources of potential fee income and policyholder behavior. Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in millions) Net Flows: Variable Annuity $ (129.4) $ 885.3 $ (694.8) $ 1,190.0 Fixed Index Annuity (1) (347.1) (235.5) (998.2) 12.1 Fixed Annuity (1) (249.8) (257.0) (786.0) (637.2) Total Retail Annuities Net Flows $ (726.3) $ 392.8 $ (2,479.0) $ 564.9 Total Institutional Products Net Flows $ (103.7) $ (115.0) $ (2,384.3) $ (223.4) Total Closed Life and Annuity Blocks Net Flows (2) $ (65.4) $ (62.3) $ (209.9) $ (218.8) (1) Gross of reinsurance to Athene. (2) Excludes payout annuities and traditional life insurance without account value. The decrease in net flows for the three and nine months ended September 30, 2021, was primarily due to strong variable annuity sales being exceeded by surrender and death benefit outflows from our large in-force block. Benefit Base Benefit base refers to a notional amount that represents the value of a customer’s guaranteed benefit, and therefore may be a different value from the invested assets in a customer’s account value. The benefit base may be used to calculate the fees 79 for a customer’s guaranteed benefits within an annuity contract. The guaranteed death benefit and guaranteed living benefit within the same contract may not have the same benefit base. We believe benefit base is a useful metric for our variable annuity policies in providing an understanding of, among other things, fee income generation, potential optional guarantee benefit obligations and risk management priorities. September 30, 2021 December 31, 2020 Account Value Benefit Base Account Value Benefit Base (in millions) No Living Benefits $ 57,731.8 N/A $ 53,021.6 N/A By Guaranteed Living Benefits: GMWB for Life 179,806.7 178,354.8 167,007.2 160,225.7 GMWB 7,078.9 5,834.6 6,807.4 5,557.7 GMIB (1) 1,788.9 2,096.8 1,826.5 2,216.3 GMAB — — 49.2 7.2 Total $ 246,406.3 $ 186,286.2 $ 228,711.9 $ 168,006.9 By Guaranteed Death Benefit: Return of AV (No GMDB) $ 28,821.6 N/A $ 26,368.6 N/A Return of Premium 188,608.5 133,447.5 174,678.2 128,481.5 Highest Anniversary Value 15,015.1 14,606.2 14,322.9 13,175.2 Rollup 4,119.1 4,906.3 4,061.8 5,005.5 Combination HAV/Rollup 9,842.0 10,294.0 9,280.4 9,447.0 Total $ 246,406.3 $ 163,254.0 $ 228,711.9 $ 156,109.2 (1) Substantially all of our GMIB benefits are reinsured. AUM AUM, or assets under management, refers to investment assets that are managed by one of our subsidiaries and includes: (i) the assets in our investment portfolio managed by PPM, which excludes assets held in funds withheld accounts for reinsurance transactions, (ii) other assets managed by PPM, including those for Prudential and its affiliates or third parties and (iii) the separate account assets of our Retail Annuities segment which JNAM administers. Total AUM reflects exclusions between segments to avoid double counting. We believe AUM is a useful metric for understanding of, among other things, the sources of our earnings, net investment income and performance of our invested assets, customer directed investments and risk management priorities. September 30, December 31, 2021 2020 (in millions) Jackson Invested Assets $ 47,400.6 $ 49,832.2 Former Asia Affiliates Invested Assets 26,721.4 31,009.4 Former United Kingdom Affiliates Invested Assets 2,071.6 22,882.1 Other Third Party Invested Assets 2,922.0 2,253.9 Total PPM AUM 79,115.6 105,977.6 Total JNAM AUM 268,452.0 255,668.7 Total AUM $ 347,567.6 $ 361,646.3 PPM manages the majority of our investment portfolio and provides investment management services to former affiliates in Asia and the United Kingdom and other third parties across markets, including public fixed income, private equity, private debt and commercial real estate. Since December 31, 2020, PPM’s assets under management have decreased, primarily due to withdrawals by the former United Kingdom affiliate. 80 Consolidated Results of Operations The following table sets forth, for the periods presented, certain data from our condensed consolidated income statements. The information contained in the table below should be read in conjunction with our condensed consolidated financial statements and the related notes. Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in millions) Revenues Fee income $ 1,961.9 $ 1,666.5 $ 5,673.5 $ 4,847.9 Premium 35.1 46.5 100.3 134.0 Net investment income 852.0 881.4 2,575.6 2,105.6 Net gains (losses) on derivatives and investments (1,379.3) (2,504.8) (1,194.4) (4,517.7) Other income 16.6 21.5 70.2 35.6 Total revenues 1,486.3 111.1 7,225.2 2,605.4 Benefits and Expenses Death, other policy benefits and change in policy reserves, net of deferrals 394.1 224.2 887.1 1,071.4 Interest credited on other contract holder funds, net of deferrals 216.6 230.3 656.6 979.3 Interest expense 6.3 7.8 19.0 81.0 Operating costs and other expenses, net of deferrals 613.6 573.3 1,811.5 367.2 Cost of reinsurance — 6.2 — 2,520.1 Amortization of deferred acquisition and sales inducement costs 4.0 (398.8) 552.3 (85.8) Total benefits and expenses 1,234.6 643.0 3,926.5 4,933.2 Pretax income (loss) before noncontrolling interests 251.7 (531.9) 3,298.7 (2,327.8) Income tax expense (benefit) (16.4) (157.0) 514.7 (580.8) Net income (loss) 268.1 (374.9) 2,784.0 (1,747.0) Less: Net income (loss) attributable to noncontrolling interests 61.9 21.7 186.3 (37.8) Net income (loss) attributable to Jackson Financial Inc. $ 206.2 $ (396.6) $ 2,597.7 $ (1,709.2) Adjusted Operating Earnings Net income (loss) attributable to Jackson Financial, Inc. $ 206.2 $ (396.6) $ 2,597.7 $ (1,709.2) Income tax expense (benefit) (16.4) (157.0) 514.7 (580.8) Pretax income (loss) attributable to Jackson Financial Inc 189.8 (553.6) 3,112.4 (2,290.0) Non-operating adjustments (income) loss: Fees attributable to guarantee benefit reserves (728.1) (633.7) (2,100.7) (1,858.3) Net movement in freestanding derivatives 493.3 3,530.3 3,966.3 812.4 Net reserve and embedded derivative movements 996.7 (1,378.1) (2,221.8) 5,158.6 DAC and DSI impact (169.3) (349.1) 283.8 (980.9) Net realized investment gains (losses) including change in fair value of funds withheld embedded derivative 79.1 355.4 (218.7) (974.5) Loss on Athene Reinsurance Transaction — 34.9 — 2,081.6 Net investment income on funds withheld assets (299.6) (277.1) (884.5) (506.0) Other items 9.3 (83.3) 28.5 (12.4) Total non-operating adjustments 381.4 1,199.3 (1,147.1) 3,720.5 Pretax Adjusted Operating Earnings 571.2 645.7 1,965.3 1,430.5 Operating income taxes 83.8 98.9 273.3 195.8 Adjusted Operating Earnings $ 487.4 $ 546.8 $ 1,692.0 $ 1,234.7 81 Three Months Ended September 30, 2021 compared to Three Months Ended September 30, 2020 Net Income (Loss) Attributable to Jackson Financial Inc. Our net income (loss) attributable to Jackson Financial Inc. improved by $603 million, or 152%, to net income of $206 million during the three months ended September 30, 2021, from net loss of $397 million during the three months ended September 30, 2020. This was driven by lower net losses on derivatives instruments, as freestanding derivative losses were lower during the three months ended September 30, 2021 compared to the same period in 2020. These improvements were partially offset by losses on embedded derivative instruments on our variable annuities during the three months ended September 30, 2021 compared to gains during the same period in 2020, as further described below. In addition, contributing to the improvement was higher fee income and lower losses on funds withheld reinsurance of $115 million for the three months ended September 30, 2021, compared to losses of $378 million for the same period in 2020, as further described below. Revenues Total revenues increased by $1,375 million to $1,486 million during the three months ended September 30, 2021 from $111 million during the three months ended September 30, 2020. A discussion of the notable items related to the change in revenues from the three months ended September 30, 2021 to three months ended September 30, 2020 is included in the below commentary. Fee Income Fee income increased $295 million, or 18%, to $1,962 million during the three months ended September 30, 2021 from $1,667 million during the three months ended September 30, 2020. Fee income includes $1,821 million of variable annuity related fees and charges during the three months ended September 30, 2021 versus $1,519 million during the three months ended September 30, 2020. This increase was primarily due to a $47 billion, or 25%, increase in average variable annuity account value balances to $232 billion in 2021 from $185 billion in 2020. The increase in average variable annuity account value balances was primarily a result of favorable separate account returns over the last year. Premium Premium decreased $12 million, or 26%, to $35 million during the three months ended September 30, 2021 from $47 million during the three months ended September 30, 2020. This decrease was primarily a result of ongoing terminations as the closed block of life business continues to run off. Net Investment Income Net investment income decreased $29 million, or 3%, to $852 million during the three months ended September 30, 2021 from $881 million during the three months ended September 30, 2020. The decrease in net investment income was primarily due to lower income on debt securities due to lower portfolio balances partially offset by higher income on limited partnership investments, which are recorded on a one quarter lag. Net Gains (Losses) on Derivatives and Investments Total net gains (losses) on derivatives and investments increased $1,126 million, to a loss of $1,379 million during the three months ended September 30, 2021, from a loss of $2,505 million during the three months ended September 30, 2020. This increase was primarily a result of lower net derivative losses driven by lower losses on freestanding derivatives during the three months ended September 30, 2021, compared to losses during the same period in the prior year due to relatively flat market performance during the third quarter 2021 compared to significant market increases and higher hedging costs in the comparable period in 2020. In addition, there were lower losses on funds withheld reinsurance for the three months ended September 30, 2021 compared to the same period in 2020. These increases were partially offset by losses on movements in reserves on guarantees that are accounted for as embedded derivatives for the three months ended September 30, 2021 compared to gains on reserve movements due to market returns in the same period in the prior year. 82 Three Months Ended September 30, 2021 2020 (in millions) Net gains (losses) excluding derivatives and funds withheld assets $ 36.4 $ 23.0 Net gains (losses) on freestanding derivatives (455.1) (3,492.2) Net gains (losses) on embedded derivatives (excluding funds withheld reinsurance) (845.4) 1,342.8 Net gains (losses) on derivative instruments (1,300.5) (2,149.4) Net gains (losses) on funds withheld reinsurance (115.2) (378.4) Total net gains (losses) on derivatives and investments $ (1,379.3) $ (2,504.8) Other Income Other income decreased $5 million, or 23%, to $17 million during the three months ended September 30, 2021 from $22 million during the three months ended September 30, 2020. Total Benefits and Expenses Total benefits and expenses increased $592 million, or 92%, to $1,235 million during the three months ended September 30, 2021 from $643 million during the three months ended September 30, 2020. A discussion of the notable items related to the change in total benefits and expenses is included in the below commentary. Death, Other Policy Benefits and Change in Policy Reserves, Net of Deferrals Death, other policy benefits and change in policy reserves increased $170 million, or 76%, to $394 million during the three months ended September 30, 2021 from $224 million during the three months ended September 30, 2020. This increase was primarily a result of unfavorable movements in reserves on variable annuity guarantees accounted for as insurance liabilities, compared to favorable movements in reserves in the same period in the prior year. Interest Credited on Contract Holder Funds, Net of Deferrals Interest credited on contract holder funds, net of deferrals, decreased $13 million, or 6%, to $217 million during the three months ended September 30, 2021 from $230 million during the three months ended September 30, 2020. This decrease was primarily driven by a reduction in our institutional products account value. Operating Costs and Other Expenses, Net of Deferrals Operating costs and other expenses, net of deferrals, increased $41 million, or 7%, to $614 million during the three months ended September 30, 2021 from $573 million during the three months ended September 30, 2020. This increase was primarily due to higher asset-based commissions, which are non-deferrable and are the result of higher account values during the three months ended September 30, 2021, compared to the equivalent period in 2020. Cost of Reinsurance There was no cost of reinsurance during the three months ended September 30, 2021, compared to $6 million during the three months ended September 30, 2020, which was due to the Athene post-closing settlement. Amortization of Deferred Acquisition Costs and Deferred Sales Inducement Costs Amortization of deferred acquisition costs and deferred sales inducement costs increased $403 million, or 101%, to an expense of $4 million during the three months ended September 30, 2021 from a benefit of $399 million during the three months ended September 30, 2020. This was primarily due to lower net freestanding and embedded derivative losses in 2021 leading to lesser negative impacts to current period gross profits and, therefore, greater current period amortization during the three months ended September 30, 2021 compared to the same period in 2020. 83 Income Taxes Income taxes increased $141 million to a benefit of $16 million during the three months ended September 30, 2021, from a benefit of $157 million during the three months ended September 30, 2020. The provision for income tax in the current period led to an effective tax rate of (8.6)% for the three months ended September 30, 2021, compared to 28.4% during the three months ended September 30, 2020. The expense during the three months ended September 30, 2021 increased primarily due to the relationship of the taxable income to the consolidated pre-tax income and the impact of the 2020 provision-to-return adjustments recorded in the current quarter. The effective tax rate differs from the statutory rate of 21% primarily due to the dividends received deduction and utilization of tax credits. Pretax Adjusted Operating Earnings Pretax adjusted operating earnings decreased $75 million, or 12%, to $571 million during the three months ended September 30, 2021, from $646 million during the three months ended September 30, 2020, primarily due to higher amortization of DAC and higher asset-based commissions, partially offset by higher fee income driven by separate account returns. Nine Months Ended September 30, 2021 compared to Nine Months Ended September 30, 2020 Net Income (Loss) Attributable to Jackson Financial Inc. Our net income (loss) attributable to Jackson Financial Inc. improved by $4,307 million to net income of $2,598 million during the nine months ended September 30, 2021, from net loss of $1,709 million during the nine months ended September 30, 2020. This was driven by an improvement on net losses on derivatives instruments, due to gains on embedded derivative instruments on our variable annuities during the nine months ended September 30, 2021 compared to losses during the same period in 2020, partially offset by larger losses on freestanding derivatives during the nine months ended September 30, 2021 compared to the same period in 2020, as further described below. In addition, contributing to the improvement were higher fee income and lower interest credited, as further described below. These favorable variances were partially offset by lower gains on funds withheld reinsurance of $15 million for the nine months ended September 30, 2021, compared to gains of $790 million for the same period in 2020, and higher amortization of deferred acquisition costs. Revenues Total revenues increased by $4,620 million to $7,225 million during the nine months ended September 30, 2021 from $2,605 million during the nine months ended September 30, 2020. A discussion of the notable items related to the change in revenues from the nine months ended September 30, 2021 to nine months ended September 30, 2020 are included in the below commentary. Fee Income Fee income increased $826 million, or 17%, to $5,674 million during the nine months ended September 30, 2021 from $4,848 million during the nine months ended September 30, 2020. Fee income includes $5,245 million of variable annuity related fees and charges during the nine months ended September 30, 2021 versus $4,380 million during the nine months ended September 30, 2020. This increase was primarily due to a $47 billion, or 25%, increase in average variable annuity account value balances to $232 billion in 2021 from $185 billion in 2020. The increase in average variable annuity account value balances was primarily a result of favorable separate account returns during the period. Premium Premium decreased $34 million, or 25%, to $100 million during the nine months ended September 30, 2021 from $134 million during the nine months ended September 30, 2020. This decrease was primarily due to reinsurance premium recoveries on certain term life insurance products for a specified reinsured block of business that lapsed at the end of the level term period in 2020. Upon the policy lapse, we received a return of the ceded premium from the reinsurer. 84 Net Investment Income Net investment income increased $470 million, or 22%, to $2,576 million during the nine months ended September 30, 2021 from $2,106 million during the nine months ended September 30, 2020. The increase in net investment income was primarily due to higher income on limited partnership investments, which are recorded on a one quarter lag. Partially offsetting this increase was lower income on debt securities due to lower portfolio balances and higher investment expenses related to market appreciation on deferred compensation during the nine months ended September 30, 2021. Net Gains (Losses) on Derivatives and Investments Total net gains on derivatives and investments increased $3,324 million, to a loss of $1,194 million during the nine months ended September 30, 2021, from a loss of $4,518 million during the nine months ended September 30, 2020. This increase was primarily a result of favorable movements in reserves on guarantees that are accounted for as embedded derivatives, which were primarily driven by higher interest rates (influencing projected separate account returns and discount rates), compared to losses during the same period in the prior year. This increase was partially offset by higher losses on freestanding derivatives during the nine months ended September 30, 2021, compared to losses during the comparable period in the prior year due to higher market returns as well as a higher interest rate environment, which resulted in losses within our interest rate related hedge movements. In addition, there were lower gains on funds withheld reinsurance for the nine months ended September 30, 2021, compared to the same period in 2020. Nine Months Ended September 30, 2021 2020 (in millions) Net gains (losses) excluding derivatives and funds withheld assets $ 203.9 $ 184.2 Net gains (losses) on freestanding derivatives (3,849.3) (722.2) Net gains (losses) on embedded derivatives (excluding funds withheld reinsurance) 2,435.9 (4,770.0) Net gains (losses) on derivative instruments (1,413.4) (5,492.2) Net gains (losses) on funds withheld reinsurance 15.1 790.3 Total net gains (losses) on derivatives and investments $ (1,194.4) $ (4,517.7) Other Income Other income increased $34 million, or 94%, to $70 million during the nine months ended September 30, 2021 from $36 million during the nine months ended September 30, 2020. This increase was driven by higher expense allowances received related to the Athene Reinsurance Transaction, which is a benefit to us and is recorded within other income. In addition, in the first quarter of 2020, we reimbursed a portion of reinsurance expense allowances resulting from lapses on certain term life insurance products described above which resulted in a net other expense during that period. Total Benefits and Expenses Total benefits and expenses decreased $1,006 million, or 20%, to $3,927 million during the nine months ended September 30, 2021 from $4,933 million during the nine months ended September 30, 2020. A discussion of the notable items related to the change in total benefits and expenses is included in the below commentary. Death, Other Policy Benefits and Change in Policy Reserves, Net of Deferrals Death, other policy benefits and change in policy reserves decreased $184 million, or 17%, to $887 million during the nine months ended September 30, 2021 from $1,071 million during the nine months ended September 30, 2020. This decrease was primarily a result of more favorable movements in reserves on variable annuity guarantees accounted for as insurance liabilities, compared to the same period in prior year. Interest Credited on Contract Holder Funds, Net of Deferrals Interest credited on contract holder funds, net of deferrals, decreased $322 million, or 33%, to $657 million during the nine months ended September 30, 2021 from $979 million during the nine months ended September 30, 2020. This decrease was 85 primarily driven from the impact of ceding the majority of the fixed and fixed-index annuity business to Athene, as previously described. For the nine months ended September 30, 2021, $475 million of interest credited was ceded to Athene, compared to $221 million for the nine months ended September 30, 2020. Operating Costs and Other Expenses, Net of Deferrals Operating costs and other expenses, net of deferrals, increased $1,445 million to $1,812 million during the nine months ended September 30, 2021 from $367 million during the nine months ended September 30, 2020. The ceding commission of $1.2 billion received in 2020 due to the Athene Reinsurance Transaction was included as a contra expense within operating costs and other expenses. Excluding this ceding commission, operating costs and other expenses increased by 16% primarily due to higher asset-based commissions, which are non-deferrable, and the result of higher account values during the nine months ended September 30, 2021, compared to the equivalent period in 2020. In addition, other general expenses were higher due to higher costs of $52 million related to separation costs during the nine months ended September 30, 2021, compared to the same period in the prior year. Cost of Reinsurance There was no cost of reinsurance during the nine months ended September 30, 2021, compared to $2,520 million during the nine months ended September 30, 2020. Cost of reinsurance was due to the Athene Reinsurance transaction in June 2020 and includes the net impact of the ceded premium of $30.1 billion and ceded reserves of $27.6 billion, resulting in a net charge of $2.5 billion as of the effective date of the agreement. Amortization of Deferred Acquisition Costs and Deferred Sales Inducement Costs Amortization of deferred acquisition costs and deferred sales inducement costs increased $638 million to $552 million during the nine months ended September 30, 2021 from $(86) million during the nine months ended September 30, 2020. This was primarily due to lower net freestanding and embedded derivative losses in 2021 leading to lesser negative impacts to current period gross profits and, therefore, greater current period amortization during the nine months ended September 30, 2021 compared to the same period in 2020. Income Taxes Income taxes increased $1,096 million to an expense of $515 million during the nine months ended September 30, 2021, from a benefit of $581 million during the nine months ended September 30, 2020. The provision for income tax in the current period led to an effective tax rate of 16.5% for the nine months ended September 30, 2021, compared to 25.4% during the nine months ended September 30, 2020. The expense during the nine months ended September 30, 2021 increased primarily due to the relationship of the taxable income to the consolidated pre-tax income, the impact of the CARES Act recognized in the first nine months of the prior year, offset by the impact of the 2020 provision-to-return adjustments recorded in the current quarter. The effective tax rate differs from the statutory rate of 21% primarily due to the dividends received deduction and utilization of tax credits. Pretax Adjusted Operating Earnings Pretax adjusted operating earnings increased $534 million, or 37%, to $1,965 million during the nine months ended September 30, 2021, from $1,431 million during the nine months ended September 30, 2020, primarily as a result of higher fee income, driven by separate account returns, and lower interest credited, resulting from the Athene Reinsurance Transaction, partially offset by lower spread income and higher amortization of DAC. Segment Results of Operations We manage our business through three segments: Retail Annuities, Institutional Products, and Closed Life and Annuity Blocks. We report certain activities and items that are not included in these segments, including the results of PPM, within Corporate and Other. The following table and discussion represent an overall view of our results of operations for each segment. 86 Retail Annuities The following table sets forth, for the periods presented, certain data underlying the results for our Retail Annuities segment. The information contained in the table below should be read in conjunction with our condensed consolidated financial statements and the related notes. Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in millions) Retail Annuities: Operating Revenues Fee income $ 1,089.9 $ 881.0 $ 3,135.6 $ 2,530.7 Net investment income 180.7 135.3 529.4 762.1 Income on operating derivatives 13.3 10.2 41.9 35.9 Other income 11.8 12.9 35.4 17.3 Total Operating Revenues 1,295.7 1,039.4 3,742.3 3,346.0 Operating Benefits and Expenses Death, other policy benefits and change in policy reserves 24.6 22.4 42.1 40.2 Interest credited on other contract holder funds 66.3 65.1 199.9 463.1 Interest expense 5.7 5.8 16.5 21.5 Operating costs and other expenses, net of deferrals 512.5 464.2 1,472.5 1,313.5 Amortization of deferred acquisition costs and deferred sales inducement costs 159.4 (61.0) 232.6 102.8 Total Operating Benefits and Expenses 768.5 496.5 1,963.6 1,941.1 Pretax Adjusted Operating Earnings $ 527.2 $ 542.9 $ 1,778.7 $ 1,404.9 The following table summarizes a roll forward of account value for our Retail Annuities segment as of the dates indicated: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in millions) Retail Annuities: Balance as of beginning of period $ 276,185.0 $ 221,333.7 $ 256,740.4 $ 230,931.8 Premiums and deposits 4,818.3 4,956.9 14,492.7 13,504.5 Surrenders, withdrawals, and benefits (5,544.6) (4,564.1) (16,971.7) (12,939.6) Net flows (726.3) 392.8 (2,479.0) 564.9 Credited Interest/Investment performance (1,559.2) 11,879.6 20,952.1 3,298.0 Policy Charges and other (689.9) (715.4) (2,003.9) (1,904.0) Balance as of end of period 273,209.6 232,890.7 273,209.6 232,890.7 Ceded reinsurance (25,439.3) (27,165.1) (25,439.3) (27,165.1) Balance as of end of period, net of ceded reinsurance $ 247,770.3 $ 205,725.6 $ 247,770.3 $ 205,725.6 Three Months Ended September 30, 2021 compared to Three Months Ended September 30, 2020 Operating Revenues Operating revenues increased $257 million, or 25%, to $1,296 million during the three months ended September 30, 2021 from $1,039 million during the three months ended September 30, 2020, primarily due to higher fee income resulting from growth in variable annuity account values. 87 Fee Income Fee income increased by $209 million to $1,090 million during the three months ended September 30, 2021 from $881 million during the three months ended September 30, 2020. Fees associated with variable annuities represented the substantial majority of fee income, totaling $1,089 million for the three months ended September 30, 2021, up $208 million from $881 million for the three months ended September 30, 2020. This increase was primarily due to a $47 billion, or 25%, increase in average separate account balances to $232 billion at September 30, 2021, compared to an average separate account balance of $185 billion at September 30, 2020. The increase in average separate account balances was primarily a result of favorable separate account returns over the last year. Net Investment Income Net investment income increased $46 million, or 34%, to $181 million during the three months ended September 30, 2021 from $135 million during the three months ended September 30, 2020. This increase was primarily due to higher income on limited partnership investments. Income on operating derivatives Income on operating derivatives increased to $13 million during the three months ended September 30, 2021 from $10 million during the three months ended September 30, 2020. This income relates to quarterly interest payments and accruals with respect to our interest rate swaps and, for which, we generally receive amounts based on fixed rates and pay amounts based on floating rates. Other Income Other operating income decreased to $12 million during the three months ended September 30, 2021 from $13 million during the three months ended September 30, 2020. Operating Benefits and Expenses Operating benefits and expenses increased $272 million, or 55%, to $769 million during the three months ended September 30, 2021 from $497 million during the three months ended September 30, 2020, primarily from higher DAC amortization due to separate account returns, and higher operating costs, driven by higher non-deferrable commission expenses. Death, other policy benefits and change in policy reserves, net of deferrals Death, other policy benefits and change in policy reserves increased to a net charge of $25 million during the three months ended September 30, 2021 from $22 million during the three months ended September 30, 2020. Interest credited on contract holder funds, net of deferrals Interest credited on contract holder funds, net of deferrals, increased $1 million, or 2%, to $66 million during the three months ended September 30, 2021 from $65 million during the three months ended September 30, 2020. Operating costs and other expenses, net of deferrals Operating costs and other expenses, net of deferrals, increased $49 million, or 11%, to $513 million during the three months ended September 30, 2021 from $464 million during the three months ended September 30, 2020. This increase was primarily due to higher non-deferrable commission expenses, a result of higher account values during the three months ended September 30, 2021, compared to the same period in 2020. Amortization of deferred acquisition costs and deferred sales inducement costs Amortization of deferred acquisition costs and deferred sales inducement costs increased $220 million, or 361%, to an expense of $159 million for the three months ended September 30, 2021 from a benefit of $61 million during the three months ended September 30, 2020. This was primarily due to a separate account return of (1)% in 2021 that was lower than both the expected 2021 quarterly return and the quarterly return of 7% in 2020, which resulted in a decrease in expected 88 gross profits and, therefore, higher current period amortization during the three months ended September 30, 2021 compared to the same period in 2020. Pretax Adjusted Operating Earnings Pretax adjusted operating earnings decreased $16 million to $527 million during the three months ended September 30, 2021 from $543 million during the three months ended September 30, 2020, as a result of the items described above. Nine Months Ended September 30, 2021 compared to Nine Months Ended September 30, 2020 Operating Revenues Operating revenues increased $396 million, or 12%, to $3,742 million during the nine months ended September 30, 2021 from $3,346 million during the nine months ended September 30, 2020, primarily due to higher fee income resulting from growth in variable annuity account values, partially offset by lower net investment income. Fee Income Fee income increased by $605 million to $3,136 million during the nine months ended September 30, 2021 from $2,531 million during the nine months ended September 30, 2020. Fees associated with variable annuities represented the substantial majority of fee income, totaling $3,135 million for the nine months ended September 30, 2021, up $623 million from $2,512 million for the nine months ended September 30, 2020. This increase was primarily due to a $47 billion, or 25%, increase in average separate account balances to $232 billion at September 30, 2021, compared to an average separate account balance of $185 billion at September 30, 2020. The increase in average separate account balances was primarily a result of favorable separate account returns over the last year. Net Investment Income Net investment income decreased $233 million, or 31%, to $529 million during the nine months ended September 30, 2021 from $762 million during the nine months ended September 30, 2020. This decrease was primarily due to the decrease in invested assets a result of the Athene Reinsurance Transaction, partially offset by higher income on limited partnership investments. Income on operating derivatives Income on operating derivatives increased $6 million, or 17%, to $42 million during the nine months ended September 30, 2021 from $36 million during the nine months ended September 30, 2020. This income relates to quarterly interest payments and accruals with respect to our interest rate swaps and, for which, we generally receive amounts based on fixed rates and pay amounts based on floating rates. The increase in income compared to prior year was primarily due to the floating rates being lower during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. Other Income Other operating income increased $18 million, or 106%, to $35 million during the nine months ended September 30, 2021 from $17 million during the nine months ended September 30, 2020. This increase was driven by the expense allowance received related to the Athene Reinsurance Transaction, which is a benefit to us and is recorded within other income. Operating Benefits and Expenses Operating benefits and expenses increased $23 million, or 1%, to $1,964 million during the nine months ended September 30, 2021 from $1,941 million during the nine months ended September 30, 2020, primarily from higher DAC amortization due to separate account returns and higher operating costs driven by higher non-deferrable commission expenses, partially offset by lower interest credited from the Athene Reinsurance Transaction. 89 Death, other policy benefits and change in policy reserves, net of deferrals Death, other policy benefits and change in policy reserves remained relatively flat during the nine months ended September 30, 2021 and 2020. Interest credited on contract holder funds, net of deferrals Interest credited on contract holder funds, net of deferrals, decreased $263 million, or 57%, to $200 million during the nine months ended September 30, 2021 from $463 million during the nine months ended September 30, 2020. This decrease was primarily driven from the impact of ceding the majority of the fixed and fixed index annuity business to Athene. For the nine months ended September 30, 2021, $475 million of interest credited was ceded to Athene, compared to $221 million for the nine months ended September 30, 2020. Operating costs and other expenses, net of deferrals Operating costs and other expenses, net of deferrals, increased $159 million, or 12%, to $1,473 million during the nine months ended September 30, 2021 from $1,314 million during the nine months ended September 30, 2020. This increase was primarily due to higher non-deferrable commission expenses, a result of higher account values during the nine months ended September 30, 2021, compared to the same period in 2020. Amortization of deferred acquisition costs and deferred sales inducement costs Amortization of deferred acquisition costs and deferred sales inducement costs increased $130 million, or 126%, to $233 million for the nine months ended September 30, 2021 from $103 million during the nine months ended September 30, 2020. This was primarily due to a decrease in the short-term future variable annuities separate account growth assumption resulting from the mean reversion methodology, which led to decreased expected future gross profits, and therefore, higher current period amortization during the nine months ended September 30, 2021 compared to the same period in 2020. Pretax Adjusted Operating Earnings Pretax adjusted operating earnings increased $374 million, or 27%, to $1,779 million during the nine months ended September 30, 2021 from $1,405 million during the nine months ended September 30, 2020, as a result of the items described above. Institutional Products The following table sets forth, for the periods presented, certain data underlying the results for our Institutional Products segment. The information contained in the table below should be read in conjunction with our condensed consolidated financial statements and the related notes. Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in millions) Institutional Products: Operating Revenues Net investment income $ 68.7 $ 87.6 $ 189.1 $ 284.4 Income on operating derivatives (1.1) — (1.1) — Other income — — — 1.6 Total Operating Revenues 67.6 87.6 188.0 286.0 Operating Benefits and Expenses Interest credited on other contract holder funds (1) 47.3 58.0 147.1 194.4 Interest expense (1) (1.9) 2.0 — 14.9 Operating costs and other expenses, net of deferrals 1.1 1.3 3.6 3.9 Total Operating Benefits and Expenses 46.5 61.3 150.7 213.2 Pretax Adjusted Operating Earnings $ 21.1 $ 26.3 $ 37.3 $ 72.8 90 (1) At September 30, 2021, interest expense recorded for certain funding agreements has been reclassified to interest credited on other contract holder funds, prospectively. The following table summarizes a roll forward of account value for our Institutional Products segment as of the dates indicated: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in millions) Institutional Products: Balance as of beginning of period $ 8,909.9 $ 12,325.0 $ 11,137.8 $ 12,287.1 Premiums and deposits 43.4 — 43.4 1,284.2 Surrenders, withdrawals, and benefits (147.1) (115.0) (2,427.7) (1,507.6) Net flows (103.7) (115.0) (2,384.3) (223.4) Credited Interest 45.4 60.0 147.1 209.3 Policy Charges and other (13.1) 40.8 (62.1) 37.8 Balance as of end of period $ 8,838.5 $ 12,310.8 $ 8,838.5 $ 12,310.8 Three Months Ended September 30, 2021 compared to Three Months Ended September 30, 2020 Operating Revenues Operating revenues decreased $20 million, or 23%, to $68 million during the three months ended September 30, 2021 from $88 million during the three months ended September 30, 2020. This change was driven by a decrease in net investment income, primarily due to lower income on debt securities due to lower portfolio balances. Operating Benefits and Expenses Operating benefits and expenses decreased $14 million, or 23%, to $47 million during the three months ended September 30, 2021 from $61 million during the three months ended September 30, 2020. This decrease was due to the reduction in the institutional products account value. Institutional products account value decreased from $12,311 million as of September 30, 2020, to $8,839 million as of September 30, 2021. Pretax Adjusted Operating Earnings Pretax adjusted operating earnings decreased to $21 million during the three months ended September 30, 2021 from $26 million during the three months ended September 30, 2020, as a result of the items described above. Nine Months Ended September 30, 2021 compared to Nine Months Ended September 30, 2020 Operating Revenues Operating revenues decreased $98 million, or 34%, to $188 million during the nine months ended September 30, 2021 from $286 million during the nine months ended September 30, 2020. This change was driven by a decrease in net investment income, primarily due to lower income on debt securities due to lower portfolio balances. Operating Benefits and Expenses Operating benefits and expenses decreased $62 million, or 29%, to $151 million during the nine months ended September 30, 2021 from $213 million during the nine months ended September 30, 2020. This decrease was due to a reduction in the institutional product account value. Institutional product account value decreased from $12,311 million as of September 30, 2020, to $8,839 million as of September 30, 2021. 91 Pretax Adjusted Operating Earnings Pretax adjusted operating earnings decreased to $37 million during the nine months ended September 30, 2021 from $73 million during the nine months ended September 30, 2020, as a result of the items described above. Closed Life and Annuity Blocks The following table sets forth, for the periods presented, certain data underlying the results for our Closed Life and Annuity Blocks segment. The information contained in the table below should be read in conjunction with our condensed consolidated financial statements and the related notes. Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in millions) Closed Life and Annuity Blocks: Operating Revenues Fee income $ 122.5 $ 127.3 $ 370.5 $ 385.8 Premium 38.2 49.7 109.5 143.6 Net investment income 244.4 245.6 705.8 543.9 Income on operating derivatives 18.4 21.4 56.1 39.2 Other income 7.6 7.6 29.3 13.4 Total Operating Revenues 431.1 451.6 1,271.2 1,125.9 Operating Benefits and Expenses Death, other policy benefits and change in policy reserves 218.2 237.0 630.9 642.5 Interest credited on other contract holder funds 103.0 107.2 309.6 321.8 Operating costs and other expenses, net of deferrals 37.6 39.3 116.1 115.7 Amortization of deferred acquisition costs and deferred sales inducement costs 4.0 3.2 11.0 10.9 Total Operating Benefits and Expenses 362.8 386.7 1,067.6 1,090.9 Pretax Adjusted Operating Earnings $ 68.3 $ 64.9 $ 203.6 $ 35.0 Three Months Ended September 30, 2021 compared to Three Months Ended September 30, 2020 Operating Revenues Operating revenues decreased $21 million, or 5%, to $431 million during the three months ended September 30, 2021 from $452 million during the three months ended September 30, 2020. The primary drivers are discussed below. Fee Income Fee income decreased $4 million, or 3%, to $123 million during the three months ended September 30, 2021 from $127 million during the three months ended September 30, 2020. This decrease was primarily due to an overall decrease in mortality and expense charges as the closed block of life business continues to run off. Premium Premium decreased by $12 million, or 24%, to $38 million during the three months ended September 30, 2021 from $50 million during the three months ended September 30, 2020. This decrease was primarily a result of ongoing terminations as the closed block of life business continues to run off. Net Investment Income Net investment income decreased $2 million, or 1%, to $244 million during the three months ended September 30, 2021 from $246 million during the three months ended September 30, 2020. 92 Income on operating derivatives Income on operating derivatives decreased $3 million, or 14%, to $18 million during the three months ended September 30, 2021 from $21 million during the three months ended September 30, 2020. This income relates to quarterly interest payments and accruals with respect to our interest rate swaps and, for which, we generally receive amounts based on fixed rates and pay amounts based on floating rates. The decrease in income compared to prior year was primarily due to the floating rates being higher during the three months ended September 30, 2021, compared to the three months ended September 30, 2020. Other Operating Income Other operating income remained flat at $8 million during the three months ended September 30, 2021 and 2020. Operating Benefits and Expenses Operating benefits and expenses decreased $24 million, or 6%, to $363 million during the three months ended September 30, 2021 from $387 million during the three months ended September 30, 2020. The primary drivers are discussed below. Death, other policy benefits and change in policy reserves, net of deferrals Death, other policy benefits and change in policy reserves decreased $19 million, to $218 million during the three months ended September 30, 2021 from $237 million during the three months ended September 30, 2020. This decrease was primarily due to lower benefits resulting from the continued decrease in the size of the closed blocks. Interest credited on contract holder funds, net of deferrals Interest credited on contract holder funds, net of deferrals, decreased $4 million, or 4%, to $103 million during the three months ended September 30, 2021 from $107 million during the three months ended September 30, 2020. This decrease was largely a result of the continued decrease in the size of the closed blocks. Pretax Adjusted Operating Earnings Pretax adjusted operating earnings increased $3 million to $68 million during the three months ended September 30, 2021 from $65 million during the three months ended September 30, 2020, as a result of the items described above. Nine Months Ended September 30, 2021 compared to Nine Months Ended September 30, 2020 Operating Revenues Operating revenues increased $145 million, or 13%, to $1,271 million during the nine months ended September 30, 2021 from $1,126 million during the nine months ended September 30, 2020. The primary drivers are discussed below. Fee Income Fee income decreased $15 million, or 4%, to $371 million during the nine months ended September 30, 2021 from $386 million during the nine months ended September 30, 2020. This decrease was primarily due to an overall decrease in mortality and expense charges as the closed block of life business continues to run off. Premium Premium decreased by $34 million, or 24%, to $110 million during the nine months ended September 30, 2021 from $144 million during the nine months ended September 30, 2020. This decrease was primarily due to reinsurance premium recoveries on certain term life insurance products for a specified reinsured block of business that lapsed at the end of the level term period in 2020. Upon the policy lapse, we received a return of the ceded premium from the reinsurer. 93 Net Investment Income Net investment income increased $162 million, or 30%, to $706 million during the nine months ended September 30, 2021 from $544 million during the nine months ended September 30, 2020. This increase was primarily due to higher levels of investment income on private equity and other limited partnership investments, when compared to the same period in 2020. Income on operating derivatives Income on operating derivatives increased $17 million, or 44%, to $56 million during the nine months ended September 30, 2021 from $39 million during the nine months ended September 30, 2020. This income relates to quarterly interest payments and accruals with respect to our interest rate swaps and, for which, we generally receive amounts based on fixed rates and pay amounts based on floating rates. The increase in income compared to prior year was primarily due to the floating rates being lower during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. Other Operating Income Other operating income increased $16 million to $29 million during the nine months ended September 30, 2021 from $13 million during the nine months ended September 30, 2020. In the first quarter of 2020, we reimbursed a portion of reinsurance expense allowances resulting from lapses on certain term life insurance products described above which resulted in a net other expense during that period. Operating Benefits and Expenses Operating benefits and expenses decreased $23 million to $1,068 million during the nine months ended September 30, 2021, as compared to $1,091 million during the nine months ended September 30, 2020. The primary drivers are discussed below. Death, other policy benefits and change in policy reserves, net of deferrals Death, other policy benefits and change in policy reserves decreased $12 million, to $631 million during the nine months ended September 30, 2021 from $643 million during the nine months ended September 30, 2020. This decrease was primarily due to the benefit of a reserve increase during the nine months ended September 30, 2020, related to certain term life insurance products. Interest credited on contract holder funds, net of deferrals Interest credited on contract holder funds, net of deferrals, decreased $12 million, or 4%, to $310 million during the nine months ended September 30, 2021 from $322 million during the nine months ended September 30, 2020. This decrease was largely a result of the continued decrease in the size of the closed blocks. Pretax Adjusted Operating Earnings Pretax adjusted operating earnings increased $169 million to $204 million during the nine months ended September 30, 2021 from $35 million during the nine months ended September 30, 2020, as a result of the items described above. 94 Corporate and Other Corporate and Other includes the operations of PPM and unallocated corporate revenue and expenses, as well as certain eliminations and consolidation adjustments. The following table sets forth, for the periods presented, certain data underlying the results for Corporate and Other. The information contained in the table below should be read in conjunction with our condensed consolidated financial statements and the related notes. Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in millions) Corporate and Other: Operating Revenues Fee income $ 18.3 $ 21.4 $ 57.5 $ 63.5 Net investment income (6.4) 23.4 46.1 23.2 Income on operating derivatives 7.9 6.6 20.3 15.1 Other income (2.8) 1.0 5.5 3.3 Total Operating Revenues 17.0 52.4 129.4 105.1 Operating Benefits and Expenses Interest expense 2.5 — 2.5 44.6 Operating costs and other expenses, net of deferrals 49.9 32.7 156.3 125.5 Amortization of deferred acquisition costs and deferred sales inducement costs 10.0 8.1 24.9 17.2 Total Operating Benefits and Expenses 62.4 40.8 183.7 187.3 Pretax Adjusted Operating Earnings $ (45.4) $ 11.6 $ (54.3) $ (82.2) Three Months Ended September 30, 2021 compared to Three Months Ended September 30, 2020 Operating Revenues Operating revenues decreased $35 million, or 67%, to $17 million during the three months ended September 30, 2021 from $52 million during the three months ended September 30, 2020. The primary drivers are discussed below. Fee Income Fee income decreased $3 million, or 14%, to $18 million during the three months ended September 30, 2021 from $21 million during the three months ended September 30, 2020. This decrease was due to slightly lower asset management fees generated at PPM. Net Investment Income Net investment income decreased $29 million to $(6) million during the three months ended September 30, 2021 from $23 million during the three months ended September 30, 2020. This decrease was due to the allocation of net investment income from Corporate and Other to Institutional Products reflecting internal portfolio rebalancing and the attribution of net investment income on capital to support the business segments. Income on operating derivatives Income on operating derivatives increased $1 million, or 14%, to $8 million during the three months ended September 30, 2021 from $7 million during the three months ended September 30, 2020. This income relates to quarterly interest payments and accruals with respect to our interest rate swaps and, for which, we generally receive amounts based on fixed rates and pay amounts based on floating rates. Operating Benefits and Expenses 95 Operating benefits and expenses increased to $62 million during the three months ended September 30, 2021 from $41 million during the three months ended September 30, 2020. The primary drivers are discussed below. Interest Expense Interest expense was $3 million during the during the three months ended September 30, 2021, compared to nil during the three months ended September 30, 2020. The interest expense incurred in the current year relates to interest on our term loans. See Note 10 - Short-Term and Long-Term Debt of our condensed consolidated financial statements. Operating costs and other expenses, net of deferrals Operating costs and other expenses, net of deferrals increased $17 million, or 52%, to $50 million during the three months ended September 30, 2021 from $33 million during the three months ended September 30, 2020. This increase was primarily due to the receipt of an insurance settlement during the three months ended September 30, 2020 which reduced operating expenses. Pretax Adjusted Operating Earnings Pretax adjusted operating earnings decreased $57 million to $(45) million during the three months ended September 30, 2021 from $12 million during the three months ended September 30, 2020, as a result of the items described above. Nine Months Ended September 30, 2021 compared to Nine Months Ended September 30, 2020 Operating Revenues Operating revenues increased $24 million, or 23%, to $129 million during the nine months ended September 30, 2021 from $105 million during the nine months ended September 30, 2020. The primary drivers are discussed below. Fee Income Fee income decreased $6 million, or 9%, to $58 million during the nine months ended September 30, 2021 from $64 million during the nine months ended September 30, 2020. This decrease was due to slightly lower asset management fees generated at PPM. Net Investment Income Net investment income increased $23 million to $46 million during the nine months ended September 30, 2021 from $23 million during the nine months ended September 30, 2020. This increase was primarily due to higher income on limited partnership investments. Income on Operating Derivatives Income on operating derivatives increased $5 million, or 33%, to $20 million during the nine months ended September 30, 2021 from $15 million during the nine months ended September 30, 2020. This income relates to quarterly interest payments and accruals with respect to our interest rate swaps and, for which we generally receive amounts based on fixed rates and pay amounts based on floating rates. Operating Benefits and Expenses Operating benefits and expenses decreased to $184 million during the nine months ended September 30, 2021 from $187 million during the nine months ended September 30, 2020. This decrease was primarily due to interest expense, as described below. Interest Expense Interest expense was $3 million during the during the nine months ended September 30, 2021, compared to $45 million during the nine months ended September 30, 2020. The interest expense incurred in the current year relates to interest on our term loans. The interest expense incurred in the prior year relates to interest on our surplus note, which was restructured 96 as an intercompany obligation in June 2020. See Note 10 - Short-Term and Long-Term Debt to our condensed consolidated financial statements. Operating costs and other expenses, net of deferrals Operating costs and other expenses, net of deferrals increased $30 million, or 24%, to $156 million during the nine months ended September 30, 2021 from $126 million during the nine months ended September 30, 2020. This increase was primarily due to the receipt of an insurance settlement during the nine months ended September 30, 2020 which reduced operating expenses. Pretax Adjusted Operating Earnings Pretax adjusted operating earnings increased $28 million to $(54) million during the nine months ended September 30, 2021 from $(82) million during the nine months ended September 30, 2020, as a result of the items described above. Investments Our investment portfolio primarily consists of fixed-income securities and loans, primarily publicly-traded corporate and government bonds, private securities and loans, asset-backed securities and commercial mortgage loans. Asset-backed securities include mortgage-backed and other structured securities. The fair value of these and our other invested assets fluctuates depending on market and other general economic conditions and the interest rate environment and could be adversely impacted by other economic factors. Investment Strategy Our overall investment strategy is to maintain a diversified and largely investment grade fixed income portfolio that is capital efficient, achieve risk-adjusted returns that support competitive pricing for our products, generate profitable growth of our business and maintain adequate liquidity to support our obligations. The investments within our investment portfolio are primarily managed by PPM, our wholly-owned registered investment adviser. Our investment strategy benefits from PPM’s ability to originate investments directly, as well as participate in transactions originated by banks, investment banks, commercial finance companies and other intermediaries. We may also use third-party investment managers for certain niche asset classes. As of September 30, 2021, third-party investment managers represented approximately 1% of our AUM. Our investment program seeks to generate a competitive rate of return on our invested assets to support the profitable growth of our business, while maintaining investment portfolio allocations within the company’s risk tolerance. This means seeking to maximize risk-adjusted return within the context of a largely fixed income portfolio while also managing exposure to downside risk in a stressed environment, regulatory and rating agency capital models, overall portfolio yield, diversification and correlation with other investments and company exposures. Our Investment Committee has specified a target strategic asset allocation (“SAA”) that is designed to deliver the highest expected return within a defined risk tolerance while meeting other important objectives such as those mentioned in the prior paragraph. The fixed income portion of the SAA is assessed relative to a customized index of public corporate bonds that represents a close approximation of the maturity profile of our liabilities and a credit quality mix that that is consistent with our risk tolerance. PPM’s objective is to outperform this index on a number of measures including portfolio yield, total return and capital loss due to downgrades and defaults. While PPM has access to a broad universe of potential investments, we believe grounding the investment program with a customized public corporate index that can be easily tracked and monitored helps guide PPM in meeting the risk and return expectations and assists with performance evaluation. Recognizing the trade offs between the level of risk, required capital, liquidity and investment return, the largest allocation within our investment portfolio is to investment grade fixed income securities. As previously mentioned, our investment manager accesses a broad universe of potential investments to construct the investment portfolio and takes into account the benefits of diversification across various sectors, collateral types and asset classes. To this end, our SAA and investment portfolio includes allocations to public and private corporate bonds (both investment grade and high yield), commercial mortgage loans, structured securities, private equity and U.S. Treasury securities. These U.S. Treasury 97 securities, while lower yielding than other alternatives, provide a higher level of liquidity and play a meaningful role in managing our interest rate exposure. As of September 30, 2021 and December 31, 2020, we had total investments of $74 billion and $80 billion, respectively. Portfolio Composition The following table summarizes the carrying values of our investments: September 30, December 31, 2021 2020 (in millions) Available-for-sale debt securities, at fair value $ 52,123.0 $ 59,075.0 Debt Securities, at fair value under fair value option 1,516.6 1,276.7 Debt securities, at fair value option 117.9 105.7 Equity securities, at fair value 290.1 193.1 Mortgage loans, net of allowance 11,731.4 10,727.5 Policy loans 4,511.9 4,523.5 Derivative instruments 1,141.9 2,219.8 Other invested assets 2,770.5 2,366.7 Total investments $ 74,203.3 $ 80,488.0 Available-for-sale debt securities decreased to $52,123 million at September 30, 2021 from $59,075 million at the end of 2020, primarily due to a decrease in net unrealized gains. The amortized cost of debt securities, available for sale, decreased from $55,523 million as of December 31, 2020 to $51,199 million as of September 30, 2021. Further, net unrealized gains on these assets decreased from a net unrealized gain of $4,948 million as of December 31, 2020 to a net unrealized gain of $2,568 million as of September 30, 2021. Other Invested Assets In June 2021, we entered into an arrangement to sell $420.4 million of limited partnership investments, of which $235.8 million and $168.0 million was sold in second and third quarter of 2021, respectively, and the remainder is to be sold by January 2022. We expect to reinvest in new limited partnerships as attractive opportunities become available. 98 Debt Securities In accordance with guidance adopted January 1, 2020 regarding expected credit loss, securities that incurred a credit loss after December 31, 2019 and were still held at 2020, are presented net of allowance for credit losses. In accordance with previous guidance, the non-credit other-than-temporary impairment (“OTTI”) loss is presented for debt securities, where applicable. At September 30, 2021 and December 31, 2020, the amortized cost, gross unrealized gains and losses, fair value and OTTI of debt securities or allowance for credit losses, including $1,517 million and $1,277 million in securities carried at fair value under the fair value option, were as follows (in millions): September 30, 2021 Amortized Cost Allowance for Credit Loss Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. government securities $ 4,792.9 $ — $ 83.0 $ 412.9 $ 4,463.0 Other government securities 1,440.6 — 142.3 20.9 1,562.0 Corporate securities Utilities 5,830.7 — 711.4 20.8 6,521.3 Energy 3,137.4 — 277.9 16.8 3,398.5 Banking 1,744.2 — 99.4 8.5 1,835.1 Healthcare 3,188.4 — 201.5 23.6 3,366.3 Finance/Insurance 4,089.5 — 285.9 41.4 4,334.0 Technology/Telecom 2,376.6 — 145.9 31.7 2,490.8 Consumer goods 2,522.6 — 143.1 39.5 2,626.2 Industrial 2,176.3 — 152.8 11.4 2,317.7 Capital goods 2,114.0 — 158.5 7.4 2,265.1 Real estate 1,842.4 — 106.8 9.0 1,940.2 Media 1,185.4 — 94.4 15.9 1,263.9 Transportation 1,787.4 — 124.9 11.6 1,900.7 Retail 1,380.9 — 87.0 15.8 1,452.1 Other (1) 2,419.6 — 165.8 6.4 2,579.0 Total Corporate Securities 35,795.4 — 2,755.3 259.8 38,290.9 Residential mortgage-backed 753.2 2.0 59.6 1.9 808.9 Commercial mortgage-backed 2,686.1 — 152.4 3.6 2,834.9 Other asset-backed securities 5,731.2 7.4 92.6 18.6 5,797.8 Total Debt Securities $ 51,199.4 $ 9.4 $ 3,285.2 $ 717.7 $ 53,757.5 (1) No single remaining industry exceeds 3% of the portfolio. 99 December 31, 2020 Amortized Cost Allowance for Credit Loss Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. government securities $ 5,078.9 $ — $ 162.0 $ 114.9 $ 5,126.0 Other government securities 1,497.1 — 200.6 0.8 1,696.9 Corporate securities Utilities 6,270.4 — 1,029.2 1.9 7,297.7 Energy 3,430.2 — 351.1 8.2 3,773.1 Banking 2,341.6 — 206.4 0.4 2,547.6 Healthcare 3,729.4 — 357.6 1.6 4,085.4 Finance/Insurance 3,586.0 — 390.6 15.9 3,960.7 Technology/Telecom 2,765.7 — 279.2 5.8 3,039.1 Consumer goods 2,508.1 — 277.0 0.3 2,784.8 Industrial 2,582.5 — 279.9 0.6 2,861.8 Capital goods 2,384.6 — 230.8 1.5 2,613.9 Real estate 2,113.2 — 169.5 1.3 2,281.4 Media 1,352.9 — 148.9 0.9 1,500.9 Transportation 2,011.2 — 184.4 3.8 2,191.8 Retail 1,749.4 — 181.1 0.3 1,930.2 Other (1) 2,625.5 — 245.1 1.3 2,869.3 Total Corporate Securities 39,450.7 — 4,330.8 43.8 43,737.7 Residential mortgage-backed 911.7 — 74.4 1.2 984.9 Commercial mortgage-backed 3,077.6 — 248.5 3.5 3,322.6 Other asset-backed securities 5,507.4 13.6 100.2 4.7 5,589.3 Total Debt Securities $ 55,523.4 $ 13.6 $ 5,116.5 $ 168.9 $ 60,457.4 (1) No single remaining industry exceeds 3% of the portfolio. Debt Securities Credit Quality The following tables set forth the composition of the fair value of debt securities, including both those held as available for sale and for trading, as classified by rating categories as assigned by nationally recognized statistical rating organizations (“NRSRO”), the NAIC or, if not rated by such organizations, our consolidated investment advisor. The Company uses the second lowest rating by an NRSRO when NRSRO ratings are not equivalent and, for purposes of the table, if not otherwise rated by a NRSRO, the NAIC rating of a security is converted to an equivalent NRSRO-style rating. Percent of Total Debt Securities Carrying Value as of September 30, December 31, Investment Rating 2021 2020 AAA 16.5 % 18.8 % AA 9.2 % 8.1 % A 29.2 % 30.5 % BBB 39.1 % 37.7 % Investment grade 94.0 % 95.1 % BB 3.4 % 2.9 % B and below 2.6 % 2.0 % Below investment grade 6.0 % 4.9 % Total debt securities 100.0 % 100.0 % 100 Unrealized Losses The following tables summarize the number of securities, fair value and the related amount of gross unrealized losses aggregated by investment category and length of time that individual debt securities have been in a continuous loss position (dollars in millions): September 30, 2021 December 31, 2020 Less than 12 months Less than 12 months Gross Fair Value Gross Fair Value Unrealized # of Unrealized # of Losses securities Losses securities U.S. government securities $ 1.3 $ 134.5 20 $ 114.9 $ 3,944.7 7 Other government securities 12.9 272.8 31 0.8 89.4 7 Public utilities 15.2 535.2 70 1.8 146.5 8 Corporate securities 183.0 5,526.3 626 41.5 1,391.1 161 Residential mortgage-backed 1.8 186.8 96 1.2 35.4 28 Commercial mortgage-backed 2.8 167.8 22 3.2 151.9 13 Other asset-backed securities 18.5 1,880.3 260 1.4 796.4 91 Total temporarily impaired securities $ 235.5 $ 8,703.7 1,125 $ 164.8 $ 6,555.4 315 12 months or longer 12 months or longer Gross Fair Value Gross Fair Value Unrealized # of Unrealized # of Losses securities Losses securities U.S. government securities $ 411.5 $ 3,335.3 6 $ — $ — — Other government securities 8.0 52.4 6 — — — Public utilities 5.7 62.2 5 — — — Corporate securities 56.0 604.7 64 0.5 2.9 3 Residential mortgage-backed 0.1 3.3 12 — 1.8 4 Commercial mortgage-backed 0.8 40.2 4 0.3 9.7 1 Other asset-backed securities 0.1 13.0 3 3.3 29.8 4 Total temporarily impaired securities $ 482.2 $ 4,111.1 100 $ 4.1 $ 44.2 12 Total Total Gross Fair Value Gross Fair Value Unrealized # of Unrealized # of Losses securities Losses securities U.S. government securities $ 412.8 $ 3,469.8 26 $ 114.9 $ 3,944.7 7 Other government securities 20.9 325.2 37 0.8 89.4 7 Public utilities 20.9 597.4 75 1.8 146.5 8 Corporate securities (1) 239.0 6,131.0 690 42.0 1,394.0 164 Residential mortgage-backed 1.9 190.1 108 1.2 37.2 32 Commercial mortgage-backed 3.6 208.0 26 3.5 161.6 14 Other asset-backed securities 18.6 1,893.3 263 4.7 826.2 95 Total temporarily impaired securities $ 717.7 $ 12,814.8 1,225 $ 168.9 $ 6,599.6 327 (1) Certain corporate securities contain multiple lots and fit the criteria of both aging groups. 101 Evaluation of Available For Sale Debt Securities See Note 3 to Condensed Consolidated Financial Statements for information about how we evaluate our available for sale debt securities for credit loss. The following table summarizes net gains (losses) on derivatives and investments (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Available-for-sale securities Realized gains on sale $ 28.3 $ 99.2 $ 149.1 $ 519.2 Realized losses on sale (1.3) (2.7) (59.0) (186.4) Credit loss income (expense) (17.4) (0.3) (10.2) (17.4) Gross impairments (0.1) (0.2) (0.1) (26.6) Credit loss income (expense) on mortgage loans 13.5 (31.9) 61.9 (65.8) Other (1) 13.4 (41.1) 62.2 (38.8) Net gains (losses) excluding derivatives and funds withheld assets 36.4 23.0 203.9 184.2 Net gains (losses) on derivative instruments (see Note 4) (1,300.5) (2,149.4) (1,413.4) (5,492.2) Net gains (losses) on funds withheld reinsurance treaties (see Note 7) (115.2) (378.4) 15.1 790.3 Total net gains (losses) on derivatives and investments $ (1,379.3) $ (2,504.8) $ (1,194.4) $ (4,517.7) (1) Includes the foreign currency gain or loss related to foreign denominated mortgage loans and trust instruments supporting funding agreements. Equity Securities Equity securities consist of investments in common and preferred stock holdings and mutual fund investments. Common and preferred stock investments generally arise out of previous private equity investments or other settlements rather than as direct investments. Mutual fund investments typically represent investments made in our own mutual funds to seed those structures for external issuance at a later date. The following table summarizes our holdings: September 30, December 31, 2021 2020 (in millions) Common Stock $ 81.0 $ 71.9 Preferred Stock 178.0 97.6 Mutual Funds 31.1 23.6 Total $ 290.1 $ 193.1 The increase in limited partnerships was due to strong fourth-quarter financial statements of the limited partnerships that increased the value of our investments, which we received and recorded during the three months ended March 31, 2021. Mortgage Loans Our investments in mortgage loans provide an opportunity for higher investment yields within an asset class where PPM has a positive track record and a demonstrated ability to manage risk in the portfolio. As of September 30, 2021 and December 31, 2020, commercial mortgage loans of $11,731 million and $10,728 million, respectively, are reported net of allowance for credit losses of $135 million and $179 million at each date, respectively. As of September 30, 2021, commercial mortgage loans were collateralized by properties located in 38 states and the District of Columbia and residential mortgage loans were collateralized by properties located in 50 states and the District of Columbia. 102 The table below presents the carrying value, net of allowance of credit loss, of our mortgage loans by property type: September 30, December 31, 2021 2020 Commercial: (in millions) Apartment $ 3,807.8 $ 3,905.3 Hotel 1,052.3 882.7 Office 1,942.4 1,569.7 Retail 2,130.8 1,942.4 Warehouse 1,856.0 1,978.8 Total Commercial $ 10,789.3 $ 10,278.9 Residential 942.1 448.6 Total $ 11,731.4 $ 10,727.5 The table below presents the carrying value, net of allowance for credit loss, of our mortgage loans by region: September 30, December 31, 2021 2020 (in millions) East North Central $ 1,229.3 $ 1,211.4 East South Central 522.1 452.7 Middle Atlantic 1,538.2 1,275.8 Mountain 695.7 840.0 New England 479.9 476.2 Pacific 2,886.6 2,588.6 South Atlantic 2,469.0 2,529.9 West North Central 562.7 379.3 West South Central 835.5 811.8 Foreign 512.4 161.8 Total $ 11,731.4 $ 10,727.5 The following table provides information relating to the loan-to-value ratio of our commercial mortgage loans: September 30, December 31, 2021 2020 (in millions) Loan-to-Value Ratio < 70% $ 9,655.6 $ 9,263.8 70% - 80% 1,034.3 845.0 80% - 100% 84.7 170.1 > 100% 14.7 — Total $ 10,789.3 $ 10,278.9 103 The following table provides a summary of the allowance for credit losses related to our mortgage loans: September 30, 2021 2020 (in millions) Balance at beginning of period $ 179.2 $ 8.9 Cumulative effect of change in accounting principle — 62.0 Charge offs, net of recoveries — — Additions from purchase of purchased credit -deteriorated mortgage loans — — Provision (release) (82.8) 88.1 Balance at end of period $ 96.4 $ 159.0 As of September 30, 2021 and 2020, our commercial mortgage loan portfolio is current and accruing interest, and we had no commercial mortgage loans that were delinquent greater than 90 days, restructured or in the process of foreclosure. Delinquency status is determined from the date of the first missed contractual payment. Derivative Instruments The following table presents the aggregate contractual or notional amounts and the fair values of our freestanding and embedded derivatives instruments (in millions): September 30, 2021 Assets Liabilities Contractual/ Contractual/ Net Notional Fair Notional Fair Fair Amount (1) Value Amount (1) Value Value Freestanding derivatives Cross-currency swaps $ 758.8 $ 37.4 $ 1,008.6 $ 34.6 $ 2.8 Equity index call options 20,000.0 135.8 — — 135.8 Equity index futures (2) — — 17,329.8 — — Equity index put options 25,000.0 339.0 — — 339.0 Interest rate swaps 7,728.1 485.5 — — 485.5 Interest rate swaps - cleared (2) 1,500.0 — — — — Put-swaptions 15,500.0 104.8 2,500.0 4.9 99.9 Treasury futures (2) 3,986.6 — 13.9 — — Credit default swaps — — — — — Total freestanding derivatives 74,473.5 1,102.5 20,852.3 39.5 1,063.0 Embedded derivatives VA embedded derivatives (3) N/A — N/A 3,091.6 (3,091.6) FIA embedded derivatives (4) N/A — N/A 1,439.7 (1,439.7) Total embedded derivatives N/A — N/A 4,531.3 (4,531.3) Derivatives related to funds withheld under reinsurance treaties Cross-currency swaps 94.4 6.2 63.4 0.8 5.4 Cross-currency forwards 915.0 33.2 5.5 0.1 33.1 Funds withheld embedded derivative (5) N/A — N/A 271.7 (271.7) Total derivatives related to funds withheld under reinsurance treaties 1,009.4 39.4 68.9 272.6 (233.2) Total $ 75,482.9 $ 1,141.9 $ 20,921.2 $ 4,843.4 $ (3,701.5) (1) The notional amount for swaps and swaptions represents the stated principal balance used as a basis for calculating payments. The contractual amount for futures and options represents the market exposure of open positions. (2) Variation margin is considered settlement resulting in the netting of cash received/paid for variation margin against the fair value of the trades. (3) Included within reserves for future policy benefits and claims payable on the condensed consolidated balance sheets. The nonperformance risk adjustment is included in the balance above. (4) Included within other contract holder funds on the condensed consolidated balance sheets. The nonperformance risk adjustment is included in the balance above. 104 December 31, 2020 Assets Liabilities Contractual/ Contractual/ Net Notional Fair Notional Fair Fair Amount (1) Value Amount (1) Value Value Freestanding derivatives Cross-currency swaps $ 1,228.1 $ 93.0 $ 516.0 $ 34.0 $ 59.0 Equity index call options 26,300.0 1,127.3 — — 1,127.3 Equity index futures (2) — — 27,651.0 — — Equity index put options 27,000.0 178.0 — — 178.0 Interest rate swaps 4,250.0 721.8 500.0 0.9 720.9 Interest rate swaps - cleared (2) — — 1,500.0 8.2 (8.2) Put-swaptions 1,000.0 99.5 — — 99.5 Treasury futures (2) 8,520.5 — 3.8 — — Credit default swaps 0.5 — — — — Total freestanding derivatives 68,299.1 2,219.6 30,170.8 43.1 2,176.5 Embedded derivatives VA embedded derivatives (3) N/A — N/A 5,592.1 (5,592.1) FIA embedded derivatives (4) N/A — N/A 1,483.9 (1,483.9) Total embedded derivatives N/A — N/A 7,076.0 (7,076.0) Derivatives related to funds withheld under reinsurance treaties Cross-currency swaps 7.4 — 100.7 5.2 (5.2) Cross-currency forwards 75.3 0.2 668.3 8.1 (7.9) Funds withheld embedded derivative (5) N/A — N/A 826.6 (826.6) Total derivatives related to funds withheld under reinsurance treaties 82.7 0.2 769.0 839.9 (839.7) Total $ 68,381.8 $ 2,219.8 $ 30,939.8 $ 7,959.0 $ (5,739.2) (1) The notional amount for swaps and swaptions represents the stated principal balance used as a basis for calculating payments. The contractual amount for futures and options represents the market exposure of open positions. (2) Variation margin is considered settlement resulting in the netting of cash received/paid for variation margin against the fair value of the trades. (3) Included within reserves for future policy benefits and claims payable on the condensed consolidated balance sheets. The nonperformance risk adjustment is included in the balance above. (4) Included within other contract holder funds on the condensed consolidated balance sheets. The nonperformance risk adjustment is included in the balance above. 105 Investment Income Our sources of net investment income are as follows (in millions) : Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Debt securities $ 271.7 $ 416.8 $ 872.2 $ 1,338.7 Equity securities (0.2) 0.4 6.4 (13.3) Mortgage loans 79.4 83.6 241.5 285.3 Policy loans 19.8 21.8 55.5 59.7 Limited partnerships 192.7 113.3 585.6 (26.0) Other investment income 1.8 3.9 9.9 21.6 Total investment income excluding funds withheld assets 565.2 639.8 1,771.1 1,666.0 Net investment income on funds withheld assets (see Note 7) 299.6 277.1 884.5 506.0 Investment expenses: Derivative trading commission (0.9) (1.1) (2.2) (4.2) Depreciation on real estate (3.6) (2.7) (8.4) (8.2) Expenses related to consolidated entities (1) (7.5) (9.1) (24.1) (29.4) Other investment expenses (2) (0.8) (22.6) (45.3) (24.6) Total investment expenses (12.8) (35.5) (80.0) (66.4) Net investment income $ 852.0 $ 881.4 $ 2,575.6 $ 2,105.6 (1) Includes management fees, administrative fees, legal fees, and other expenses related to the consolidation of certain investments. (2) Includes interest expense and market appreciation on deferred compensation; investment software expense, custodial fees, and other bank fees; institutional product issuance related expenses; and other expenses. Other investment expenses includes deferred compensation expenses, which may become positive when markets decline, as was the case during the three and nine months ended September 30, 2020, when markets declined due to the economic shutdown resulting from the pandemic. Evaluation of Invested Assets We perform regular evaluations of our invested assets. On a monthly basis, management identifies those investments that may require additional monitoring and carefully reviews the carrying value of such investments to determine whether specific investments should be placed on a non-accrual status and to determine if any declines in value may be other than temporary. In making these reviews, management principally considers the adequacy of any collateral, compliance with contractual covenants, the borrower’s recent financial performance, news reports and other externally generated information concerning the issuer’s affairs. In the case of publicly traded bonds, management also considers market value quotations, where available. For mortgage loans, management generally considers information concerning the mortgaged property and, among other things, factors impacting the current and expected payment status of the loan and, if available, the current fair value of the underlying collateral. For investments in partnerships, management reviews the financial statements and other information provided by the general partners. The carrying values of investments that are determined to have declines in value that are other than temporary are reduced to net realizable value and, in determining whether an other than temporary impairment has occurred, we consider a security’s forecasted cash flows as well as the severity of depressed fair values. Investment income is not accrued on securities in default and otherwise where the collection is uncertain. Subsequent receipts of interest on such securities are generally used to reduce the cost basis of the securities. The provisions for impairment on mortgage loans are based on losses expected by management to be realized on transfers of mortgage loans to real estate, on the disposition and settlement of mortgage loans and on mortgage loans that management believes may not be collectible in full. Accrual of interest on mortgage loans is generally suspended when principal or interest payments on mortgage loans are past due more than 90 days. Interest is then accounted for on a cash basis. 106 Liquidity and Capital Resources Liquidity is our ability to generate sufficient cash flows to meet the cash requirements of operating, investing and financing activities. Capital refers to our long-term financial resources available to support the business operations and contribute to future growth. Our ability to generate and maintain sufficient liquidity and capital depends on the profitability of the businesses, timing of cash flows on investments and products, general economic conditions and access to the capital markets and the alternate sources of liquidity and capital described herein. The discussion below describes our liquidity and capital resources for the nine months ended September 30, 2021 and 2020. Cash Flows The following table presents a summary of our cash flow activity for the periods set forth below: Nine Months Ended September 30, 2021 2020 (in millions) Net cash provided by (used in) operating activities $ 3,576.6 $ 2,447.4 Net cash provided by (used in) investing activities 624.1 (3,702.8) Net cash provided by (used in) financing activities (3,737.6) 768.8 Net increase (decrease) in cash and cash equivalents 463.1 (486.6) Cash and cash equivalents, beginning of period 2,018.7 1,934.5 Total cash and cash equivalents, end of period $ 2,481.8 $ 1,447.9 Cash flows provided by Operating Activities The principal operating cash inflows from our insurance activities come from insurance premiums, fees charged on our products, sales of annuities and institutional products and net investment income. The principal operating cash outflows are the result of annuity, life insurance and institutional product benefits, operating expenses and income tax, as well as interest expense. The primary liquidity concern with respect to these cash flows is the risk of early contract holder and policyholder withdrawal. Cash flows provided by operating activities increased $1,129 million to $3,577 million during the nine months ended September 30, 2021 from $2,447 million during the nine months ended September 30, 2020. This increase in cash provided by operating activities was primarily due to a higher net loss in nine months of 2020 due to the impact of the Athene Reinsurance Transaction. Cash flows provided by (used in) Investing Activities The principal cash inflows from our investment activities come from repayments of principal, proceeds from maturities and sales of investments, as well as settlements of freestanding derivatives. The principal cash outflows relate to purchases of investments and settlements of freestanding derivatives. It is not unusual to have a net cash outflow from investing activities because cash inflows from insurance operations are typically reinvested to fund insurance liabilities. We closely monitor and manage these risks through our comprehensive investment risk management process. The primary liquidity concerns with respect to these cash flows are the risk of default by debtors or market disruptions that might impact the timing of investment related cash flows. Cash flows provided by (used in) investing activities increased $4,327 million to $624 million during the nine months ended September 30, 2021 from $(3,703) million during the nine months ended September 30, 2020. This increase was due to the sale of assets during the nine months of 2020 related to the Athene Reinsurance Transaction. Cash flows provided by (used in) Financing Activities The principal cash inflows from our financing activities come from deposits of funds associated with policyholder account balances and lending of securities. The principal cash outflows come from withdrawals associated with policyholder 107 account balances and the return of securities on loan. The primary liquidity concerns with respect to these cash flows are market disruption and the risk of early policyholder withdrawal. Cash flows provided by (used in) financing activities decreased $4,506 million to $(3,738) million during the nine months ended September 30, 2021 from $769 million for the nine months ended September 30, 2020. This decrease was primarily due to higher variable annuity surrender and death benefit outflows from our large in-force block in addition to reductions in the institutional products account value. This was partially offset by debt agreements entered into during the nine months ended September 30, 2021. Statutory Capital Our insurance company subsidiaries have statutory surplus above the level needed to meet current regulatory requirements. RBC requirements are used as minimum capital requirements by the NAIC and the state insurance departments to identify companies that merit regulatory action. RBC is based on a formula calculated by applying factors to various asset, premium, claim, expense and statutory reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk, market risk and business risk and is calculated on an annual basis. The formula is used as an early warning regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. As of September 30, 2021, our insurance companies were well in excess of the minimum required capital levels. Jackson is also subject to risk-based capital guidelines that provide a method to measure the adjusted capital that a life insurance company should have for regulatory purposes, taking into account the risk characteristics of Jackson’s investments and products. Holding Company Liquidity As a holding company with no business operations of its own, Jackson Financial primarily derives cash flows from dividends and interest payments from its insurance subsidiaries. These principal sources of liquidity are expected to be supplemented by cash and short-term investments held by Jackson Financial and access to bank lines of credit and the capital markets. We intend to maintain a minimum amount of approximately $250 million in cash and cash equivalents at Jackson Financial. The main uses of liquidity for Jackson Financial are interest payments and debt repayment, holding company operating expenses, payment of dividends and other distributions to stockholders, which may include stock repurchases, and capital contributions, if needed, to our insurance company subsidiaries. Our principal sources of liquidity and our anticipated capital position are described in the following paragraphs. Distributions from our Insurance Company Subsidiaries The ability of our insurance company subsidiaries to pay dividends is limited by applicable laws and regulations of the jurisdictions where such subsidiaries are domiciled as well as agreements entered into with regulators. These laws and regulations require, among other things, our insurance company subsidiaries to maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay. Subject to these limitations, our insurance company subsidiaries are permitted to pay ordinary dividends based on calculations specified under insurance laws of the relevant state of domicile, subject to prior notification to the appropriate regulatory agency. Any distributions above the amount permitted by statute in any twelve-month period are considered to be extraordinary dividends, and the approval of the appropriate regulator is required prior to payment. In Michigan, the Director of the Michigan Department of Insurance and Financial Services (the Michigan Director of Insurance) may limit, or not permit, the payment of dividends from either Jackson or Brooke Life, if it determines that the surplus of either these subsidiaries is not reasonable in relation to their outstanding liabilities and is not adequate to meet their financial needs, as required by Michigan insurance law. Unless otherwise approved by the Michigan Director of Insurance, dividends may only be paid from earned surplus. Also, surplus note arrangements and interest payments must be approved by the Michigan Director of Insurance and such interest payments to related parties reduce the otherwise calculated ordinary dividend capacity for that period. In New York, all dividends require approval from NYSDFS. For 2021, Jackson and Brooke Life, Jackson’s direct parent company, had total ordinary dividend capacity, based on 2020 statutory capital and surplus and statutory net gain from operations, subject to the availability of earned surplus, of $477 million and $377 million, respectively. Brooke Life, as the sole owner of our other insurance company subsidiaries, including Jackson and Jackson National Life NY, is the direct recipient of any dividend payments from those subsidiaries and must make dividend payments to its ultimate parent company, Jackson Financial, in order for any funds from our 108 insurance company subsidiaries to reach Jackson Financial. As such, Jackson Financial’s ability to receive dividend payments from our insurance company subsidiaries is effectively limited by Brooke Life’s ability to make dividend payments to Jackson Financial. The maximum distribution permitted by law or contract is not necessarily indicative of an insurer’s actual ability to pay such distributions, which may be constrained by business and other considerations, such as imposition of withholding tax, the impact of such distributions on surplus, which could affect the insurer’s ratings or competitive position, the ability to generate new annuity sales and the ability to pay future dividends or make other distributions. Further, state insurance laws and regulations require that the statutory surplus of our insurance subsidiaries following any dividend or distribution must be reasonable in relation to their outstanding liabilities and adequate for the insurance subsidiaries’ financial needs. Along with solvency regulations, another primary consideration in determining the amount of capital used for dividends is the level of capital needed to maintain desired financial strength ratings from rating agencies, including A.M. Best, S&P, Moody’s and Fitch. Given recent economic events that have affected the insurance industry, both regulators and rating agencies could become more conservative in their methodology and criteria, including increasing capital requirements for insurance company subsidiaries. We believe our insurance company subsidiaries have sufficient statutory capital and surplus to maintain their desired financial strength rating. Insurance Company Subsidiaries’ Liquidity The liquidity requirements for our insurance company subsidiaries primarily relate to the liabilities associated with their insurance and reinsurance activities, operating expenses and income taxes. Liabilities arising from insurance and reinsurance activities include the payment of policyholder benefits when due, cash payments in connection with policy surrenders and withdrawals and policy loans. Liquidity requirements are principally for purchases of new investments, management of derivative related margin requirements, repayment of principal and interest on debt, payments of interest on surplus notes, funding of insurance product liabilities including payments for policy benefits, surrenders, maturities and new policy loans, funding of expenses including payment of commissions, operating expenses and taxes. As of September 30, 2021, Jackson’s outstanding surplus notes and bank debt included $ 68.1 million of bank loans from the Federal Home Loan Bank of Indianapolis ("FHLBI"), collateralized by mortgage-related securities and mortgage loans and $250.0 million of surplus notes maturing in 2027. Significant increases in interest rates could create sudden increases in surrender and withdrawal requests by customers and contract holders, and result in increased liquidity requirements at our insurance company subsidiaries. Significant increases in interest rates or equity markets may also result in higher margin and collateral requirements on our derivative portfolio. Other factors that are not directly related to interest rates can also give rise to an increase in liquidity requirements, including, changes in ratings from rating agencies, general policyholder concerns relating to the life insurance industry (e.g., the unexpected default of a large, unrelated life insurer) and competition from other products, including non-insurance products such as mutual funds, certificates of deposit and newly developed investment products. Most of the life insurance and annuity products Jackson offers permit the policyholder or contract holder to withdraw or borrow funds or surrender cash values. As of September 30, 2021, approximately half of Jackson’s general account reserves are either not surrenderable, or included policy restrictions such as surrender charges greater than 5%, or market value adjustments to discourage early withdrawal of policy and contract funds. The liquidity sources for our insurance company subsidiaries are their cash, short-term investments, sales of publicly traded bonds, premium income, sales of annuities and institutional products, investment income, commercial repurchase agreements and utilization of a short-term borrowing facility with the FHLBI. Jackson uses a variety of asset liability management techniques to provide for the orderly provision of cash flow from investments and other sources as policies and contracts mature in accordance with their normal terms. Jackson’s principal sources of liquidity to meet unexpected cash outflows associated with sudden and severe increases in surrenders and withdrawals are its portfolio of liquid assets and its net operating cash flows. As of September 30, 2021, the portfolio of cash, short-term investments and privately and publicly traded securities and equities, which are unencumbered and unrestricted to sale, amounted to $26.5 billion. 109 Our Indebtedness On February 22, 2021, we and a syndicate of banks entered into a credit agreement consisting of a $1.0 billion Revolving Facility, and a credit agreement consisting of a $1.7 billion senior unsecured delayed draw term loan facility that matures in February 2022 and a $1.0 billion senior unsecured delayed draw term loan facility that matures in February 2023. On July 19, 2021, we and such banks entered into amendments to such credit agreements in order to (i) extend the period during which we were permitted to draw under the Credit Facilities from the date that was the six-month anniversary of our entry into the credit agreements to the date that was the nine-month anniversary of our entry into the credit agreements, (ii) extend the maturity date of the 2022 DDTL Facility from February 2022 to May 2022 and (iii) amend the definition used to calculate our adjusted consolidated net worth to reflect certain changes in our restated audited financial statements included in the Form 10. When referring to the Credit Facilities, the associated credit agreements and the terms and conditions thereof, in each case in this report, we are referring to the Credit Facilities, the credit agreements and their terms and conditions as amended by the amendments entered into on July 19, 2021. The credit agreements for the Credit Facilities contain a number of customary representations and warranties, affirmative and negative covenants and events of default (including a change of control provision). Such covenants, among other things, restrict, subject to certain exceptions, our ability to pay dividends and distributions or repurchase common shares if a default or event of default has occurred and is continuing (with such negative covenant dropping away if our long term unsecured senior, non-credit enhanced, debt ratings are either (x) BBB+ or better from S&P or (y) Baa1 or better from Moody’s), incur additional indebtedness, create liens on our or our subsidiaries’ assets and make fundamental changes. The credit agreements for the Credit Facilities contain financial maintenance covenants, including a minimum adjusted consolidated net worth test of no less than 70% of our adjusted consolidated net worth as of the date of the Demerger (taking into account 50% of the proceeds of any additional equity issuances) and a maximum consolidated indebtedness to total capitalization ratio test not to exceed 35%. The credit agreement for the DDTL Facilities also contains a covenant that requires we maintain minimum long term unsecured senior, non-credit enhanced, debt ratings of at least (x) BBB- from S&P and (y) Baa3 from Moody’s. The Revolving Facility provides for borrowings to be available for working capital and other general corporate purposes under aggregate commitments of $1.0 billion, with a sublimit of $500 million available for letters of credit. The Revolving Facility further provides for the ability to request, subject to customary terms and conditions, an increase in commitments thereunder by an additional $500 million. Commitments under the Revolving Facility terminate on February 22, 2024. On September 10, 2021, we borrowed an aggregate principal amount of $2.35 billion as follows: $1.6 billion under the 2022 DDTL Facility and $750 million under the 2023 DDTL Facility. We have contributed a majority of the proceeds from the borrowings under the DDTL Facilities to Jackson.With respect to the remaining amount of proceeds from the borrowings under the DDTL Facilities, we have (i) established a minimum liquidity buffer of at least $250.0 million at the Company, and (ii) retained the balance of the proceeds of approximately $575.0 million at the Company. With respect to items (i) and (ii), such amounts are expected to be used for general corporate purposes, including interest payments and debt repayment, holding company operating expenses, payment of dividends and other distributions to stockholders, which may include stock repurchases, and capital contributions, if needed, to our insurance company subsidiaries. Surplus Notes On March 15, 1997, our subsidiary, Jackson, issued 8.15% surplus notes in the principal amount of $250 million due March 15, 2027. These surplus notes were issued pursuant to Rule 144A under the Securities Act of 1933, as amended, and are unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims and may not be redeemed at the option of the Company or any holder prior to maturity. Interest is payable semi-annually on March 15th and September 15th of each year. Interest expense on the notes was $5.1 million and $15.3 million for the three and nine months ended September 30, 2021, respectively. Interest expense on the notes was $5.2 million and $15.4 million for the three and nine months ended September 30, 2020, respectively. On November 6, 2019, Jackson Financial, through its subsidiary, Brooke Life, issued a 4.5% surplus note payable to Prudential, in the principal amount of $2.0 billion, due November 6, 2059. Immediately following issuance of the $2.0 billion surplus note, Jackson Financial remitted a return of capital of $2.0 billion to Prudential. These two actions 110 increased total indebtedness by $2.0 billion and reduced total stockholder’s equity by $2.0 billion. The surplus note was unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims. The Brooke Life surplus note was assigned to Jackson Finance in connection with our debt restructuring in June 2020, ultimately resulting in a cashless transaction, whereby the surplus note was contributed to Jackson Financial and stockholder’s equity increased by $2.0 billion. Under Michigan Insurance Law, for statutory reporting purposes, the surplus notes are not part of the legal liabilities of the Company and are considered surplus funds. Payments of interest or principal may only be made with the prior approval of the commissioner of insurance of the state of Michigan and only out of surplus earnings which the commissioner determines to be available for such payments under Michigan Insurance Law. Federal Home Loan Bank Jackson is a member of the regional FHLBI primarily for the purpose of participating in its collateralized loan advance program with short-term and long-term funding facilities. Membership requires us to purchase and hold a minimum amount of FHLBI capital stock, plus additional stock based on outstanding advances. Advances are in the form of either short-term or long-term notes or funding agreements issued to FHLBI. As of September 30, 2021, Jackson held a short-term borrowing of nil and a bank loan with an outstanding balance of $68.1 million. As of December 31, 2020, Jackson held a short-term borrowing of $380 million and a bank loan with an outstanding balance of $72.3 million. Bank Loan On November 7, 2019, we issued a $350 million short-term note payable to Standard Chartered Bank, which was guaranteed by Prudential. Immediately following the issuance of the $350 million short-term note payable, we paid a special dividend of $350 million to Prudential. These two actions increased total indebtedness by $350 million and reduced total stockholder’s equity by $350 million. This note accrued interest at LIBOR plus .2% per annum and was due November 7, 2020. In June 2020, we transferred the loan to a Prudential affiliate in connection with our debt restructuring, ultimately resulting in a cashless transaction, whereby the note was transferred to a Prudential affiliate and stockholder’s equity increased by $350 million. Financial Strength Ratings Our access to funding and our related cost of borrowing, the attractiveness of certain of our subsidiaries’ products to customers, our attractiveness as a reinsurer to potential ceding companies and requirements for derivatives collateral posting are affected by our credit ratings and financial strength ratings which are periodically reviewed by the rating agencies. Financial strength ratings and credit ratings are important factors affecting consumer confidence in an insurer and its competitive position in marketing products as well as critical factors considered by ceding companies in selecting a reinsurer. Our principal insurance company subsidiaries are rated by A.M. Best, S&P, Moody’s and Fitch. Financial strength ratings represent the opinions of rating agencies regarding the financial ability of an insurer or reinsurer to meet its obligations under an insurance policy or reinsurance arrangement and generally involve quantitative and qualitative evaluations by rating agencies of a company’s financial condition and operating performance. Generally, rating agencies base their financial strength ratings upon information furnished to them by the company and upon their own investigations, studies and assumptions. Financial strength ratings are based upon factors of concern to customers, distribution partners and ceding companies and are not directed toward the protection of investors. Financial strength ratings are not recommendations to buy, sell or hold securities and they may be revised or revoked at any time at the sole discretion of the rating organization. Company A.M. Best Fitch Moody’s S&P Jackson Rating A A A2 A Outlook stable stable negative stable 111 In evaluating a company’s financial strength, the rating agencies evaluate a variety of factors including but not limited to our strategy, market positioning and track record, our mix of business, profitability, leverage and liquidity, the adequacy and soundness of our reinsurance, the quality and estimated market value of our assets, the adequacy of our surplus, our capital structure, and the experience and competence of our management. In addition to the financial strength ratings, rating agencies use an outlook statement to indicate a short or medium term trend which, if continued, may lead to a rating change. A positive outlook indicates a rating may be raised and a negative outlook indicates a rating may be lowered. A stable outlook is assigned when ratings are not likely to be changed. Outlooks should not be confused with expected stability of the issuer’s financial or economic performance. A stable outlook does not preclude a rating agency from changing a rating at any time without notice. A.M. Best, S&P, Moody’s and Fitch review their ratings of insurance companies from time to time. There can be no assurance that any particular rating will continue for any given period of time or that it will not be changed or withdrawn entirely if, in their judgment, circumstances so warrant. While the degree to which ratings adjustments will affect sales of our annuities and institutional products, and persistency is unknown, if our ratings are negatively adjusted for any reason, we believe we could experience a material decline in the sales in our individual channel, origination in our institutional channel, and the persistency of our existing business. Summary of Critical Accounting Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in our condensed consolidated financial statements included elsewhere herein. For a discussion of our significant accounting policies, see Note 3 to Consolidated Financial Statements in our Form 10. The most critical estimates include those used in determining: • deferred acquisition costs and deferred sales inducements • reserves for future policy benefits and claims payable and other contract holder funds • accounting for reinsurance • valuation and impairment of investments • valuation of freestanding derivative instruments • valuation of embedded derivatives • income taxes • value of business acquired • consolidation of variable interest entities In applying our accounting policies, we make subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries while others are specific to our business and operations. Actual results could differ from these estimates. Off–Balance Sheet Arrangements We do not have any off–balance sheet arrangements as of September 30, 2021. Principal Definitions, Abbreviations and Acronyms Used in the Text and Notes of this Report we, us, our and the Company Jackson Financial Inc. and its consolidated subsidiaries, unless the context refers only to Jackson Financial Inc. as a corporate entity (which we refer to as "JFI") Jackson Jackson National Life Insurance Company, a Company subsidiary. Jackson Finance Jackson Finance, LLC, a Company subsidiary. PPM PPM Holdings, Inc., a Company subsidiary. ACL Allowance for credit loss Account value or account balance The amount of money in a customer’s account. For example, the value increases with additional premiums and investment gains, and it decreases with withdrawals, investment losses and fees. 112 Athene Athene Life Re Ltd. and its affiliates and permitted transferees, including Athene Co-Invest Reinsurance Affiliate 1A Ltd. Athene Equity Investment The July 2020 investment of $500 million by Athene in JFI for Class A common stock and Class B common stock, representing approximately 9.9% of the total combined voting power and approximately 11.1% of the total common stock of the Company Athene Reinsurance Transaction The funds withheld coinsurance agreement entered into with Athene on June 18, 2020, effective June 1, 2020, to reinsure a 100% quota share of a block of our in-force fixed and fixed index annuity liabilities in exchange for approximately $1.2 billion in ceding commissions Athene Transactions The Athene Reinsurance Transaction and the Athene Equity Investment, together AUM (Assets under management) General account investments and separate account assets. Benefit base A notional amount (not actual cash value) used to calculate the owner’s guaranteed benefits within an annuity contract. The death benefit and living benefit within the same contract may have different benefit bases. CMBS Commercial mortgage-backed securities DAC (Deferred acquisition costs) Represent the incremental costs related directly to the successful acquisition of new and certain renewal insurance policies and annuity contracts and which have been deferred on the balance sheet as an asset. DDTL Facility Delayed Draw Term Loan Facility Deferred tax asset or Deferred tax liability Assets or liabilities that are recorded for the difference between book basis and tax basis of an asset or a liability. DSI (Deferred sales inducements) Represent amounts that are credited to a policyholder’s account balance that are higher than the expected crediting rates on similar contracts without such an inducement and that are an incentive to purchase a contract and also meet the accounting criteria to be deferred as an asset that is amortized over the life of the contract. Fixed Annuity An annuity that guarantees a set annual rate of return with interest at rates we determine, subject to specified minimums. Credited interest rates are guaranteed not to change for certain limited periods of time. Fixed Index Annuity An annuity with an ability to share in the upside from certain financial markets such as equity indices. Form 10 Form 10 registration statement registering the Company’s Class A common stock under the Securities Exchange Act of 1934, as amended, which became effective on August 6, 2021. General account assets The assets held in the general accounts of our insurance companies. GIC Guaranteed investment contract Guarantee Fees Fees charged on annuities for optional benefit guarantees GMAB (Guaranteed minimum accumulation benefit) An add-on benefit (available for an additional cost) which entitles an owner to a minimum payment, typically in lump-sum, after a set period of time, typically referred to as the accumulation period. The minimum payment is based on the benefit base, which could be greater than the underlying account value. GMDB (Guaranteed minimum death benefit) An add-on benefit that guarantees an owner’s beneficiaries are entitled to a minimum payment based on the benefit base, which could be greater than the underlying account value, upon the death of the owner. GMIB (Guaranteed minimum income benefit) An add-on benefit (available for an additional cost) where an owner is entitled to annuitize the policy and receive a minimum payment stream based on the benefit base, which could be greater than the payment stream resulting from current annuitization of the underlying account value. GMWB (Guaranteed minimum withdrawal benefit) An add-on benefit (available for an additional cost) where an owner is entitled to withdraw a maximum amount of their benefit base each year, for which cumulative payments to the owner could be greater than the underlying account value. 113 GMWB for Life (Guaranteed minimum withdrawal benefit for life) An add-on benefit (available for an additional cost) where an owner is entitled to withdraw the guaranteed annual withdrawal amount each year, for the duration of the policyholder’s life, regardless of account performance. NAIC National Association of Insurance Commissioners NAV Net asset value Net flows Net flows represent the net change in customer account balances during a period, including gross premiums, surrenders, withdrawals and benefits. Net flows exclude investment performance, interest credited to customer accounts and policy charges. RBC (Risk-based capital) Rules to determine insurance company statutory capital requirements. It is based on rules published by the NAIC. RMBS Residential mortgage-backed securities Variable annuity A type of annuity that offers tax-deferred investment into a range of asset classes and a variable return, which offers insurance features related to potential future income payments. VIE Variable interest entity 114 Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes to the quantitative and qualitative disclosures about market risk described in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk” previously disclosed in our Form 10.