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: • conditions in the capital and credit markets and the economy which impact liquidity, investment performance and valuation, hedge program performance, interest rates and credit spreads; • Jackson Financial’s dependence on the ability of its subsidiaries to transfer funds to meet Jackson Financial’s obligations and liquidity needs; • downgrade in our financial strength or credit ratings, which impact our business and costs of financing; • changes in laws and regulations, which impact how we conduct our business, the relative appeal of our products versus those from other financial institutions, and changes in accounting standards, which impact how we account for and present our results of operations; • operational failures, including failure of our information technology systems, failure to protect the confidentiality of customer information or proprietary business information, and disruptions from third-party outsourcing partners; • a 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; • adverse impacts on our results of operations and capitalization as a result of optional guaranteed benefits within certain of our annuities; • models that rely on a number of estimates, assumptions, sensitivities and projections, which models inform our business decisions and strategy, and which may contain misjudgments and errors and may not be as predictive as desired; • 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; • inadequate reserves due to differences between our actual experience and management’s estimates and assumptions; • changes in the levels of amortization of deferred acquisition costs (“DAC”) ; and • adverse outcomes of legal or regulatory actions. The risks and uncertainties included here are not exhaustive. Our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 7, 2022, (the "2021 Annual Report") and other reports filed with the United States Securities and Exchange Commission (“SEC”) 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. 66 Available Information We make available free of charge, through our website, investors.jackson.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, our proxy statements, and any amendments to those reports or statements as soon as reasonably practicable after these materials are electronically filed with, or furnished to, the SEC. We use our website as a routine channel for distribution of important information, including news releases, analyst presentations, financial information, and corporate governance information. The content of Jackson’s website is not incorporated by reference into this Form 10-K or in any other report or document filed with the SEC, and any references to Jackson’s website are intended to be inactive textual references only. The SEC’s website, www.sec.gov, contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. 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. Brooke Life Brooke Life Insurance Company, a Company subsidiary and the direct parent company of Jackson National Life Insurance Company. Jackson Finance Jackson Finance, LLC, a Company subsidiary. PPMH PPM Holdings, Inc., a Company subsidiary PPM PPM America Inc., a subsidiary of PPMH 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. 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) 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) third-party 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 that JNAM manages and administers. 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. 67 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, and provides downside protection. 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 (enhanced benefits 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 (enhanced benefits available for an additional cost) 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. 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. RILA A registered index-linked annuity that offers market index-linked investment options, subject to a cap, and offers a variety of guarantees designed to modify or limit losses. 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 68 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 2021 Annual Report. 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. Jackson Financial, domiciled in the United States (“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. The Company's demerger from Prudential was completed on September 13, 2021 (the "Demerger"), and the Company no longer is a majority-owned subsidiary of Prudential. See Note 1 to Condensed Consolidated Financial Statements for further discussion of the Demerger. Jackson Financial’s primary life insurance subsidiary, Jackson, is licensed to sell group and individual annuity products (including immediate, registered index-linked, deferred 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. 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 our 2021 Annual Report, 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, our primary life insurance subsidiary, Jackson National Life Insurance Company and its insurance subsidiaries (“Jackson”) successfully launched Market Link Pro SM and Market Link Pro Advisory SM , its commission and advisory based suite of registered index-linked annuities ("RILA"). Also in the fourth quarter of 2021, we entered the Defined Contribution market as a carrier in the AllianceBernstein Lifetime Income Strategy ("AllianceBernstein"). 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 nine of the past ten years, according to the Life Insurance Marketing and Research Association ("LIMRA"). Our operating platform is scalable and efficient. We administer approximately 77% 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 Holdings, Inc., the holding company of PPM, which manages the majority of our general account investment portfolio, in Corporate and Other. See Note 3 to Condensed Consolidated Financial Statements for further information on our segments. 69 There are several significant recent events involving us, including: • Demerger from Prudential plc : We were previously a majority-owned subsidiary of Prudential plc (“Prudential”), London, England and served as the holding company for its U.S. operations. The demerger, or separation, from Prudential was completed on September 13, 2021 ("Demerger"), and we are no longer a majority-owned subsidiary of Prudential. Prudential retained an equity interest in us, which represents 19.2% of our outstanding Class A Common Stock as of March 31, 2022. • Common Stock Reclassification : On September 9, 2021, Jackson Financial 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. All share and earnings per share information presented in this Report have been retroactively adjusted to reflect the stock split. • Athene Transactions : On June 18, 2020, Jackson announced that it had entered into a funds withheld coinsurance agreement (the “Athene Reinsurance 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 (the “Athene Reinsurance Transaction”). As a result, we hold various investments whose economic performance accrues to Athene but is reported in our financial statements. In July 2020, Athene invested $500 million of capital into the Company for an equity interest. In August 2020, the Company contributed the $500 million, as a capital contribution to Jackson. Athene has an equity interest in us, which represents an 8.9% economic interest and an 8.9% voting interest of our outstanding Class A Common Stock and Class B Common Stock as of March 31, 2022. Athene no longer owns any shares of Class B Common Stock as a result of the automatic conversion of those Class B shares into shares of Class A Common Stock. Our GAAP results are affected by the potential variability associated with our amortization of deferred acquisition costs and the fact that our use of derivatives does not qualify for GAAP deferral, meaning that the derivatives are marked to market each reporting period. See “Summary of Critical Accounting Estimates” below for more information. Also, an understanding of several key operating measures, including sales, account value, net flows, benefit base and AUM, is helpful to evaluating our results. See “Key Operating Measures” below. Finally, we are affected by various economic, industry and regulatory trends, which are described below under “Macroeconomic, Industry and Regulatory Trends.” Non-GAAP Financial 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 condition and the underlying performance 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. 70 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 that we do not view as driving our underlying performance. 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: 1. Guaranteed Benefits and Hedging Results: 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 performance. This adjustment includes the following components: • Fees Attributable to Guarantee Benefits: fees earned 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 adjusted 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 as 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 performance 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 as 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 performance 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; • DAC and Deferred Sales Inducements ("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 on an annual basis; 71 2. 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; 3. 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; 4. Net investment income on funds withheld assets : includes net investment income on funds withheld assets related to funds withheld reinsurance transactions; 5. 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 CLOs, but for which the consolidation effects are not aligned with our economic interest or exposure to those entities. 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. 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 March 31, 2022 2021 (in millions) Net income (loss) attributable to Jackson Financial, Inc. $ 2,025 $ 2,932 Income tax expense (benefit) 330 586 Pretax income (loss) attributable to Jackson Financial Inc 2,355 3,518 Non-operating adjustments (income) loss: Guaranteed benefits and hedging results: Fees attributable to guarantee benefit reserves (764) (672) Net movement in freestanding derivatives 1,476 3,031 Net reserve and embedded derivative movements (1,839) (4,592) DAC and DSI impact 345 696 Assumption changes — — Total guaranteed benefits and hedging results (782) (1,537) Net realized investment (gains) losses including change in fair value of funds withheld embedded derivative (898) (1,050) Net investment income on funds withheld assets (260) (291) Other items 3 (7) Total non-operating adjustments (1,937) (2,885) Pretax Adjusted Operating Earnings 418 633 Operating income taxes 64 65 Adjusted Operating Earnings $ 354 $ 568 72 Adjusted Book Value and Adjusted Operating ROE We use Adjusted Operating Return on Equity ("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 performance of our business. We calculate Adjusted Operating ROE by dividing our Adjusted Operating Earnings by average Adjusted Book Value. Adjusted Book Value excludes Accumulated Other Comprehensive Income (Loss) ("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 shareholders’ equity and ROE as calculated using annualized net income and average 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 shareholders’ equity and a comparison of Adjusted Operating ROE to ROE, the most comparable U.S. GAAP measure: Three Months Ended March 31, 2022 2021 (in millions) Total shareholders' equity $ 9,574 $ 9,984 Adjustments to total shareholders’ equity: Exclude accumulated other comprehensive income (loss) attributable to Jackson Financial Inc. (1) 253 (1,170) Adjusted Book Value $ 9,827 $ 8,814 ROE 81.1 % 120.8 % Adjusted Operating ROE on average equity 15.1 % 29.1 % (1) Excludes $(686) million and $273 million related to the investments held within the funds withheld account related to the Athene Reinsurance Transaction as of March 31, 2022 and 2021, respectively. 73 Key Operating Measures We use a number of operating measures that management believes provide useful information about our businesses and the operational factors underlying our financial performance. 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. Three Months Ended March 31, 2022 2021 (in millions) Sales Variable annuities $ 4,575 $ 4,674 RILA 199 — Fixed Index Annuities 19 40 Fixed Annuities 4 10 Total Retail Annuity Sales 4,797 4,724 Total Institutional Product Sales 975 — Total Sales $ 5,772 $ 4,724 For the three months ended March 31, 2022, total sales increased by $1,048 million compared to the three months ended March 31, 2021, driven primarily by $975 million in sales of institutional products and $199 million of sales from our new RILA product launched in the fourth quarter of 2021. These increases were partially offset by lower sales of variable annuities driven by decreased sales of variable annuities with lifetime living benefits, partially offset by sales of our lifetime income solutions offering in the defined contribution market that was launched in the fourth quarter of 2021. Sales of fixed index and fixed annuities remained at historically low levels following pricing actions taken in early 2021. 74 Account Value Account value generally equals the account value of our variable annuities, RILA, 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. 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. As of March 31, 2022 2021 (in millions) Account Value GMWB For Life $ 175,102 $ 172,867 GMWB 6,768 6,968 Other Guarantees - Living Benefits 1,656 1,883 No Living Benefits 57,029 54,812 Total Variable Annuity Account Value 240,555 236,530 RILA 305 — Fixed Index Annuity (1) 307 214 Fixed Annuity (1) 1,100 1,070 Total Fixed & Fixed Index Annuity Account Value 1,407 1,284 Total Retail Annuities Account Value $ 242,267 $ 237,814 Total Institutional Products Account Value $ 9,173 $ 10,579 Total Closed Life and Annuity Blocks Account Value (2) $ 8,666 $ 9,003 (1) Net of reinsurance to Athene. (2) Excludes payout annuities and traditional life insurance without account value. 75 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, 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 March 31, 2022 2021 (in millions) Net Flows: Variable Annuity $ 2 $ (241) RILA 198 — Fixed Index Annuity (1) (300) (326) Fixed Annuity (1) (293) (302) Total Retail Annuities Net Flows $ (393) $ (869) Total Institutional Products Net Flows $ 316 $ (545) Total Closed Life and Annuity Blocks Net Flows (2) $ (87) $ (83) (1) Gross of reinsurance to Athene. (2) Excludes payout annuities and traditional life insurance without account value. Net flows improved for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, due primarily to positive net flows from variable annuities ("VA") and RILA, as well as increased sales of institutional products, offsetting surrender and death benefit outflows from our large in-force block. 76 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 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. The following table shows variable annuity account value and benefit base as of March 31, 2022 and December 31, 2021: March 31, 2022 December 31, 2021 Account Value Benefit Base Account Value Benefit Base (in millions) No Living Benefits $ 57,029 N/A $ 60,719 N/A By Guaranteed Living Benefits: GMWB for Life 175,102 186,177 188,078 183,626 GMWB 6,768 5,837 7,318 5,860 GMIB (1) 1,656 2,019 1,808 2,059 Total $ 240,555 $ 194,033 $ 257,923 $ 191,545 By Guaranteed Death Benefit: Return of AV (No GMDB) $ 28,986 N/A $ 30,337 N/A Return of Premium 183,793 136,365 197,544 135,034 Highest Anniversary Value 14,413 14,690 15,599 14,767 Rollup 3,858 4,811 4,188 4,850 Combination HAV/Rollup 9,505 10,395 10,255 10,402 Total $ 240,555 $ 166,261 $ 257,923 $ 165,053 (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) third-party 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 that Jackson National Asset Management ("JNAM") manages and 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. March 31, December 31, 2022 2021 (in millions) Jackson Invested Assets $ 44,959 $ 47,224 Third Party Invested Assets (including CLOs) 30,639 31,980 Total PPM AUM 75,598 79,204 Total JNAM AUM 260,822 280,250 Total AUM $ 336,420 $ 359,454 PPM manages the majority of our investment portfolio and provides investment management services to Prudential affiliates in Asia, former affiliates in the United Kingdom, and other third parties across markets, including public fixed income, private equity, private debt and commercial real estate. 77 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 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 could pressure sales and reduce demand for our products as consumers consider purchasing alternative products to meet their objectives, especially while prevailing interest rates remain below historical averages. In addition, low interest rate environments can make it difficult to consistently develop products that are attractive to customers while rising interest rates may make certain product features more attractive. Our financial performance can be adversely affected by market volatility and equity market declines if fees assessed on the account value 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 performed well in 2021 with the S&P 500 generally at or near all time highs throughout the year. In the first quarter of 2022, equity markets declined and equity volatility increased, resulting in higher hedging costs. 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 and GAAP results. 78 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: • 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 guaranteed 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. At low interest rate levels these prescribed rates could decline further 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 guaranteed benefit 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 of rising interest rates 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 guaranteed minimum interest crediting rates are perceived to have less value as interest rates rise, resulting in higher than previously expected lapse rates. • To the extent interest rates continue to increase, consistent with the Federal Reserve’s signals about upcoming interest rate decisions, the effects of low interest rates discussed above will diminish over time. However, both nominal and real interest rates remain low by historical standards and may continue to be so even after several rounds of interest rate increase s by the Federal Reserve. During periods of sharp rises in interest rates, the results of our variable annuity business, statutory capital and RBC Ratio may be impacted both positively and negatively. While rising rates result in hedging losses in the near-term due to reductions in the market value of interest rate hedges, we would expect lower hedging costs and reduced levels of hedging going forward in a higher interest rate environment. Further, we expect near-term hedging losses from rising rates may be offset by changes in the fair value of the related guaranteed benefit liabilities as was the case in the first quarter of 2022. Our statutory capital and RBC Ratio may be negatively impacted by rising rates due to minimum required reserving levels (i.e., cash surrender value floor) where reserve releases are limited and unable to offset interest rate hedging losses. Credit Market Environment Our financial performance is impacted by conditions in fixed income markets. After tightening in 2021, credit spreads widened again in the first quarter of 2022, 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 is generally reflected in our Accumulated Other Comprehensive Income. The revaluation will impact net income for realized gains or losses from the sale of securities, the change in fair value of trading securities or securities carried at fair value under the fair value election, or potential changes in the allowance for credit loss ("ACL"). 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. 79 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 distribution 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. We believe we are well positioned to capture the increased demand generated by these demographic trends. 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: 80 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 Employee Retirement Income Security Act ("ERISA") Plans and Individual Retirement Accounts ("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. 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. 81 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 March 31, 2022 2021 (in millions) Revenues Fee income $ 1,922 $ 1,816 Premiums 34 34 Net investment income 720 928 Net gains (losses) on derivatives and investments 1,605 2,706 Other income 20 23 Total revenues 4,301 5,507 Benefits and Expenses Death, other policy benefits and change in policy reserves, net of deferrals 567 283 Interest credited on other contract holder funds, net of deferrals 206 222 Interest expense 20 6 Operating costs and other expenses, net of deferrals 607 598 Amortization of deferred acquisition and sales inducement costs 515 812 Total benefits and expenses 1,915 1,921 Pretax income (loss) 2,386 3,586 Income tax expense (benefit) 330 586 Net income (loss) 2,056 3,000 Less: Net income (loss) attributable to noncontrolling interests 31 68 Net income (loss) attributable to Jackson Financial Inc. $ 2,025 $ 2,932 Adjusted Operating Earnings Net income (loss) attributable to Jackson Financial, Inc. $ 2,025 $ 2,932 Income tax expense (benefit) 330 586 Pretax income (loss) attributable to Jackson Financial Inc 2,355 3,518 Non-operating adjustments (income) loss: Guaranteed benefits and hedging results: Fees attributable to guarantee benefit reserves (764) (672) Net movement in freestanding derivatives 1,476 3,031 Net reserve and embedded derivative movements (1,839) (4,592) DAC and DSI impact 345 696 Assumption changes — — Total guaranteed benefits and hedging results (782) (1,537) Net realized investment (gains) losses including change in fair value of funds withheld embedded derivative (898) (1,050) Net investment income on funds withheld assets (260) (291) Other items 3 (7) Total non-operating adjustments (1,937) (2,885) Pretax Adjusted Operating Earnings 418 633 Operating income taxes 64 65 Adjusted Operating Earnings $ 354 $ 568 82 Three Months Ended March 31, 2022 compared to Three Months Ended March 31, 2021 Pretax Income (Loss) Our pretax income (loss) decreased by $1,200 million to a pretax income of $2,386 million for the three months ended March 31, 2022, from a pretax income of $3,586 million for the three months ended March 31, 2021 primarily due to: • $1,101 million decrease in total net gains (losses) on derivatives and investments as shown in table below and driven by: Three Months Ended March 31, 2022 2021 Variance (in millions) Net gains (losses) excluding derivatives and funds withheld assets $ (130) $ 153 $ (283) Net gains (losses) on freestanding derivatives (1,441) (2,993) 1,552 Net gains (losses) on embedded derivatives (excluding funds withheld reinsurance) 2,148 4,648 (2,500) Net gains (losses) on derivative instruments 707 1,655 (948) Net gains (losses) on funds withheld reinsurance 1,028 898 130 Total net gains (losses) on derivatives and investments $ 1,605 $ 2,706 $ (1,101) ◦ Less favorable movements in reserves for guaranteed benefits, driven by lower separate account returns compared to prior year; and ◦ Lower benefit due to losses on sales of securities recognized on gains (losses) excluding derivatives and funds withheld assets, compared to prior year gains. Primarily offset by: ◦ Lower freestanding derivative losses as a result of lower losses on our equity derivatives primarily driven by market decreases in 2022 compared to market increases in the prior year and lower losses within our interest rate related hedge instruments as compared to the prior year; and ◦ Higher benefit due to gains recognized on funds withheld assets compared to prior year; • $284 million increase in death, other policy benefits and change in policy reserves primarily due to less favorable movements in reserves on variable annuity guarantees accounted for as insurance liabilities; • $208 million decrease in net investment income as a result of lower income on limited partnership investments, which are recorded on a one quarter lag, and lower income on debt securities; and • $14 million higher interest expense incurred in the current year related to our term loans and senior notes. This decrease was partially offset by: • $106 million increase in fee income primarily due to a $14 billion increase in average variable annuity account values stemming from strong separate account performance over the past year; • $297 million benefit from amortization of deferred acquisition costs and deferred sales inducement costs driven by lower net freestanding and embedded derivative gains in 2022, leading to lower current period gross profits and, therefore, lesser current period amortization. Income Taxes Income tax expense decreased $256 million to an expense of $330 million for the three months ended March 31, 2022, from an expense of $586 million for the three months ended March 31, 2021. The provision for income tax in the current period led to an effective income tax rate of 14% for the three months ended March 31, 2022 compared to the 2021 effective income tax rate of 17%. Our effective tax rate differs from the statutory rate of 21% primarily due to the dividends received deduction and utilization of tax credits. 83 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 Holdings, Inc., the holding company of PPM, within Corporate and Other. The following tables and discussion represent an overall view of our results of operations for each segment. Pretax Adjusted Operating Earnings by Segment The following table summarizes pretax adjusted operating earnings from the Company's business segment operations and also provides a reconciliation of the segment measure to net income on a consolidated GAAP basis. Also, see Note 3 to Condensed Consolidated Financial Statements for further information: Three Months Ended March 31, 2022 2021 (in millions) Pretax Adjusted Operating Earnings by Segment: Retail Annuities $ 406 $ 568 Institutional Products 23 10 Closed Life and Annuity Blocks (8) 79 Corporate and Other (3) (24) Pretax Adjusted Operating Earnings 418 633 Pre-tax reconciling items from adjusted operating income to net income (loss) attributable to Jackson Financial, Inc.: Guaranteed benefits and hedging results: Fees attributable to guarantee benefit reserves 764 672 Net movement in freestanding derivatives (1,476) (3,031) Net reserve and embedded derivative movements 1,839 4,592 DAC and DSI impact (345) (696) Assumption changes — — Total guaranteed benefits and hedging results 782 1,537 Net realized investment (gains) losses including change in fair value of funds withheld embedded derivative 898 1,050 Net investment income on funds withheld assets 260 291 Other items (3) 7 Total pre-tax reconciling items 1,937 2,885 Pretax income (loss) attributable to Jackson Financial, Inc. 2,355 3,518 Income tax expense (benefit) 330 586 Net income (loss) attributable to Jackson Financial, Inc. $ 2,025 $ 2,932 84 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 March 31, 2022 2021 (in millions) Retail Annuities: Operating Revenues Fee income $ 1,016 $ 995 Net investment income 118 205 Income on operating derivatives 11 14 Other income 11 12 Total Operating Revenues 1,156 1,226 Operating Benefits and Expenses Death, other policy benefits and change in policy reserves 16 6 Interest credited on other contract holder funds 68 67 Interest expense 5 5 Operating costs and other expenses, net of deferrals 504 476 Amortization of deferred acquisition costs and deferred sales inducement costs 157 104 Total Operating Benefits and Expenses 750 658 Pretax Adjusted Operating Earnings $ 406 $ 568 The following table summarizes a roll forward of account value for our Retail Annuities segment as of the dates indicated: Three Months Ended March 31, 2022 2021 (in millions) Retail Annuities Account Value: Balance as of beginning of period $ 284,379 $ 256,741 Premiums and deposits 4,842 4,772 Surrenders, withdrawals, and benefits (5,235) (5,641) Net flows (393) (869) Credited Interest/Investment performance (16,613) 8,880 Policy Charges and other (726) (641) Balance as of end of period 266,647 264,111 Ceded reinsurance (24,380) (26,297) Balance as of end of period, net of ceded reinsurance $ 242,267 $ 237,814 85 Three Months Ended March 31, 2022 compared to Three Months Ended March 31, 2021 Pretax Adjusted Operating Earnings Pretax Adjusted Operating Earnings decreased $162 million to $406 million for the three months ended March 31, 2022 from $568 million for the three months ended March 31, 2021 primarily due to: • $87 million decrease in net investment income primarily due to lower levels of investment income on private equity and other limited partnership investments, when compared to the same period in 2021; • $53 million increase in amortization of deferred acquisition costs and deferred sales inducement costs primarily due to lower separate account returns, which led to decreased expected future gross profits, and therefore higher current period amortization during 2022; and • $28 million increase in operating costs and other expenses, net of deferrals, primarily due to higher incentive compensation expenses in 2022. These decreases were partially offset by: • $21 million increase in fee income primarily due to a $14 billion increase in average variable annuity account values stemming from strong separate account performance over the past year. Account Value Retail annuities account value, gross of reinsurance, increased $2.5 billion between periods primarily due to positive variable annuity separate account growth in the last three quarters of 2021 and first quarter of 2022 driven by favorable market performance relative to prior year. This was partially offset by negative net flows in 2022, primarily from our reinsured fixed and fixed index annuity block. 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 March 31, 2022 2021 (in millions) Institutional Products: Operating Revenues Net investment income $ 64 $ 64 Income on operating derivatives (1) — Other income — — Total Operating Revenues 63 64 Operating Benefits and Expenses Interest credited on other contract holder funds 39 52 Interest expense — 1 Operating costs and other expenses, net of deferrals 1 1 Total Operating Benefits and Expenses 40 54 Pretax Adjusted Operating Earnings $ 23 $ 10 86 The following table summarizes a roll forward of account value for our Institutional Products segment as of the dates indicated: Three Months Ended March 31, 2022 2021 (in millions) Institutional Products: Balance as of beginning of period $ 8,830 $ 11,138 Premiums and deposits 975 — Surrenders, withdrawals, and benefits (659) (545) Net flows 316 (545) Credited Interest 39 53 Policy Charges and other (12) (67) Balance as of end of period $ 9,173 $ 10,579 Three Months Ended March 31, 2022 compared to Three Months Ended March 31, 2021 Pretax Adjusted Operating Earnings Pretax Adjusted Operating Earnings increased $13 million to $23 million for the three months ended March 31, 2022 from $10 million for the three months ended March 31, 2021 primarily due to a decrease in interest credited resulting from a reduction in institutional product account values during the year. Account Value Institutional product account value decreased from $10,579 million at March 31, 2021 to $9,173 million at March 31, 2022. The decline in account value was driven by continued maturities of the existing contracts and funding agreements, partially offset by new issuances in 2022. 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 March 31, 2022 2021 (in millions) Closed Life and Annuity Blocks: Operating Revenues Fee income $ 121 $ 125 Premiums 37 38 Net investment income 196 257 Income on operating derivatives 15 20 Other income 8 9 Total Operating Revenues 377 449 Operating Benefits and Expenses Death, other policy benefits and change in policy reserves 242 221 Interest credited on other contract holder funds 99 103 Operating costs and other expenses, net of deferrals 40 41 Amortization of deferred acquisition costs and deferred sales inducement costs 4 5 Total Operating Benefits and Expenses 385 370 Pretax Adjusted Operating Earnings $ (8) $ 79 87 Three Months Ended March 31, 2022 compared to Three Months Ended March 31, 2021 Pretax Adjusted Operating Earnings Pretax Adjusted Operating Earnings decreased $87 million to $(8) million for the three months ended March 31, 2022 from $79 million for the three months ended March 31, 2021 primarily due to: • $61 million decrease in net investment income primarily due to lower levels of investment income on private equity and other limited partnership investments, when compared to the same period in 2021; and • $21 million increase in death, other policy benefit and change in policy reserves primarily as a result of less favorable reserve movements in 2022 compared to 2021. Corporate and Other Corporate and Other includes the operations of PPM Holdings, Inc., the holding company 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 March 31, 2022 2021 (in millions) Corporate and Other: Operating Revenues Fee income $ 18 $ 21 Net investment income 53 12 Income on operating derivatives 10 4 Other income 1 2 Total Operating Revenues 82 39 Operating Benefits and Expenses Interest expense 15 — Operating costs and other expenses, net of deferrals 61 56 Amortization of deferred acquisition costs and deferred sales inducement costs 9 7 Total Operating Benefits and Expenses 85 63 Pretax Adjusted Operating Earnings $ (3) $ (24) Three Months Ended March 31, 2022 compared to Three Months Ended March 31, 2021 Pretax Adjusted Operating Earnings Pretax adjusted operating earnings increased $21 million to $(3) million for the three months ended March 31, 2022 from $(24) million for the three months ended March 31, 2021 primarily due to the following: • $41 million increase in net investment income primarily due to higher current quarter net investment income resulting from an increased excess capital position, as the investment income on that excess capital remains in the Corporate and Other segment. This increase was partially offset by: • $15 million increase in interest expense related to our senior notes and term loans. 88 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 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, achieves risk-adjusted returns that support competitive pricing for our products, generates profitable growth of our business and maintains adequate liquidity to support our obligations. The investments within our investment portfolio are primarily managed by PPM, our wholly-owned registered investment advisor. 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. Certain investments held in funds withheld accounts for reinsurance transactions are managed by Apollo Insurance Solutions Group LP, an Athene affiliate, see Note 8 of Condensed Consolidated Financial Statements for further details. We may also use other third-party investment managers for certain niche asset classes. As of March 31, 2022, Apollo Insurance Solutions Group LP managed $23.5 billion of cash and investments and other third-party investment managers represented approximately $187 million of investments. 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), mortgage loans, structured securities, private equity and U.S. Treasury securities. These U.S. Treasury securities, while lower yielding than other alternatives, provide a higher level of liquidity and play a role in managing our interest rate exposure. As of March 31, 2022 and December 31, 2021, we had total investments of $69.3 billion and $74.2 billion, respectively. 89 Portfolio Composition The following table summarizes the carrying values of our investments: March 31, 2022 December 31, 2021 Investments excluding Funds Withheld Funds Withheld Total Investments excluding Funds Withheld Funds Withheld Total (in millions) Debt Securities, available-for-sale, net of allowance for credit losses $ 29,642 $ 17,128 $ 46,770 $ 32,453 $ 19,094 $ 51,547 Debt Securities, at fair value under fair value option 1,628 158 1,786 1,547 164 1,711 Debt securities, trading, at fair value 115 — 115 117 — 117 Equity securities, at fair value 162 99 261 163 116 279 Mortgage loans, net of allowance for credit losses 6,764 4,666 11,430 6,743 4,739 11,482 Mortgage loans, at fair value under fair value option — 190 190 — — — Policy loans 973 3,490 4,463 992 3,483 4,475 Freestanding derivative instruments 875 51 926 1,375 42 1,417 Other invested assets 2,611 793 3,404 2,484 715 3,199 Total investments $ 42,770 $ 26,575 $ 69,345 $ 45,874 $ 28,353 $ 74,227 Available-for-sale debt securities decreased to $46,770 million at March 31, 2022 from $51,547 million at December 31, 2021, primarily due to sales, consistent with the decrease in underlying policy liabilities, and a decrease in net unrealized gains. The amortized cost of debt securities, available-for-sale, decreased from $51,206 million as of December 31, 2021 to $50,119 million as of March 31, 2022. Further, net unrealized gains on these assets decreased from a net unrealized gain of $2,178 million as of December 31, 2021 to a net unrealized loss of $1,416 million as of March 31, 2022. Other Invested Assets In June 2021, we entered into an arrangement to sell $420 million of limited partnership investments, of which $236 million and $168 million were sold in the second and third quarter of 2021, respectively, and the remainder was sold in January 2022. We expect to reinvest in new LPs as attractive opportunities become available. The increase in Other Invested Assets from December 31, 2021 to March 31, 2022 primarily resulted from the increased valuations of limited partnership investments. 90 Debt Securities At March 31, 2022 and December 31, 2021, the amortized cost, gross unrealized gains and losses, fair value, and allowance for credit loss of debt securities, including trading securities and securities carried at fair value under the fair value option, were as follows (in millions): March 31, 2022 Amortized Cost Allowance for Credit Loss Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. government securities $ 3,730 $ — $ 20 $ 479 $ 3,271 Other government securities 1,563 6 51 65 1,543 Corporate securities Utilities 5,912 — 226 150 5,988 Energy 3,096 20 76 136 3,016 Banking 1,885 — 17 89 1,813 Healthcare 3,162 — 56 178 3,040 Finance/Insurance 4,591 2 58 235 4,412 Technology/Telecom 2,346 — 33 120 2,259 Consumer goods 2,619 — 30 166 2,483 Industrial 1,909 — 41 65 1,885 Capital goods 2,138 — 32 71 2,099 Real estate 1,734 — 12 69 1,677 Media 1,275 — 32 62 1,245 Transportation 1,598 — 28 63 1,563 Retail 1,316 — 29 68 1,277 Other (1) 2,132 — 30 53 2,109 Total Corporate Securities 35,713 22 700 1,525 34,866 Residential mortgage-backed 484 2 35 19 498 Commercial mortgage-backed 1,724 — 6 44 1,686 Other asset-backed securities 6,905 2 34 130 6,807 Total Debt Securities $ 50,119 $ 32 $ 846 $ 2,262 $ 48,671 (1) No single remaining industry exceeds 3% of the portfolio. 91 December 31, 2021 Amortized Cost Allowance for Credit Loss Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. government securities $ 4,525 $ — $ 97 $ 301 $ 4,321 Other government securities 1,489 — 147 17 1,619 Corporate securities Utilities 6,069 — 671 25 6,715 Energy 2,872 — 222 16 3,078 Banking 1,944 — 79 10 2,013 Healthcare 3,196 — 175 21 3,350 Finance/Insurance 4,299 — 228 47 4,480 Technology/Telecom 2,376 — 123 26 2,473 Consumer goods 2,525 — 123 38 2,610 Industrial 1,996 — 118 10 2,104 Capital goods 2,206 — 134 8 2,332 Real estate 1,805 — 82 11 1,876 Media 1,187 — 84 19 1,252 Transportation 1,789 — 105 13 1,881 Retail 1,289 — 75 13 1,351 Other (1) 2,217 — 134 5 2,346 Total Corporate Securities 35,770 — 2,353 262 37,861 Residential mortgage-backed 528 2 46 3 569 Commercial mortgage-backed 1,968 — 76 6 2,038 Other asset-backed securities 6,926 7 71 23 6,967 Total Debt Securities $ 51,206 $ 9 $ 2,790 $ 612 $ 53,375 (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, PPM. 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 March 31, December 31, Investment Rating 2022 2021 AAA 12.2 % 14.5 % AA 9.9 % 9.6 % A 29.4 % 28.5 % BBB 41.4 % 40.9 % Investment grade 92.9 % 93.5 % BB 3.9 % 3.6 % B and below 3.2 % 2.9 % Below investment grade 7.1 % 6.5 % Total debt securities 100.0 % 100.0 % 92 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): March 31, 2022 December 31, 2021 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 $ 80 $ 431 18 $ 2 $ 107 16 Other government securities 65 538 57 17 252 23 Public utilities 109 2,037 240 17 721 93 Corporate securities 1,013 13,488 1,673 180 6,343 728 Residential mortgage-backed 15 266 194 3 174 109 Commercial mortgage-backed 35 1,105 156 5 314 37 Other asset-backed securities 127 4,198 490 22 3,224 338 Total temporarily impaired securities $ 1,444 $ 22,063 2,828 $ 246 $ 11,135 1,344 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 $ 399 $ 1,982 9 $ 299 $ 3,190 7 Other government securities — 9 4 — 4 2 Public utilities 41 198 28 7 99 8 Corporate securities 362 1,967 223 58 661 69 Residential mortgage-backed 4 45 38 — 11 12 Commercial mortgage-backed 9 77 6 1 30 3 Other asset-backed securities 3 47 8 1 11 3 Total temporarily impaired securities $ 818 $ 4,325 316 $ 366 $ 4,006 104 Total Total Gross Fair Value Gross Fair Value Unrealized # of Unrealized # of Losses securities Losses securities U.S. government securities $ 479 $ 2,413 23 $ 301 $ 3,297 23 Other government securities 65 547 60 17 256 25 Public utilities 150 2,235 261 24 820 101 Corporate securities (1) 1,375 15,455 1,823 238 7,004 797 Residential mortgage-backed 19 311 231 3 185 121 Commercial mortgage-backed 44 1,182 161 6 344 40 Other asset-backed securities 130 4,245 498 23 3,235 341 Total temporarily impaired securities $ 2,262 $ 26,388 3,057 $ 612 $ 15,141 1,448 (1) Certain corporate securities contain multiple lots and fit the criteria of both aging groups. The increase in rates on U.S. Treasury securities and the widening credit spreads of investment grade corporate securities resulted in the reduction in fair values and increase in unrealized losses during the three months ended March 31, 2022. Of the $1,650 million total increase in unrealized losses and the $11,247 million additional fair value on securities with an associated unrealized loss, $852 million and $4,185 million, respectively, are associated with assets subject to funds withheld agreements. 93 Evaluation of Available-For-Sale Debt Securities See Note 4 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 March 31, 2022 2021 Available-for-sale securities Realized gains on sale $ 24 $ 25 Realized losses on sale (178) (6) Credit loss income (expense) — 9 Credit loss income (expense) on mortgage loans 12 59 Other (1) 12 66 Net gains (losses) excluding derivatives and funds withheld assets (130) 153 Net gains (losses) on derivative instruments 707 1,655 Net gains (losses) on funds withheld reinsurance treaties 1,028 898 Total net gains (losses) on derivatives and investments $ 1,605 $ 2,706 (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: March 31, December 31, 2022 2021 (in millions) Common Stock $ 80 $ 78 Preferred Stock 151 168 Mutual Funds 30 33 Total $ 261 $ 279 Mortgage Loans C ommercial mortgage loans of $10.6 billion and $10.5 billion at March 31, 2022 and December 31, 2021, respectively, are reported net of an allowance for credit losses of $78 million and $85 million at each date, respectively. At March 31, 2022, commercial mortgage loans were collateralized by properties located in 38 states, the District of Columbia, and Europe. Residential mortgage loans of $1,039 million and $939 million at March 31, 2022 and December 31, 2021, respectively, are reported net of an allowance for credit losses of $6 million and $9 million at each date, respectively. Loans were collateralized by properties located in 50 states, the District of Columbia, Mexico, and Europe. 94 The table below presents the carrying value, net of allowance of credit loss, of our mortgage loans by property type: March 31, December 31, 2022 2021 (in millions) Commercial: Apartment $ 3,875 $ 3,755 Hotel 1,049 1,054 Office 1,891 1,889 Retail 2,049 2,104 Warehouse 1,717 1,741 Total Commercial $ 10,581 $ 10,543 Residential 1,039 939 Total $ 11,620 $ 11,482 The table below presents the carrying value, net of allowance for credit loss, of our mortgage loans by region: March 31, December 31, 2022 2021 (in millions) East North Central $ 1,182 $ 1,184 East South Central 490 491 Middle Atlantic 1,566 1,558 Mountain 671 688 New England 454 452 Pacific 3,023 2,897 South Atlantic 2,189 2,295 West North Central 548 552 West South Central 938 829 Foreign 559 536 Total $ 11,620 $ 11,482 The following table provides information about the credit quality of our mortgage loans: March 31, December 31, 2022 2021 (in millions) Commercial mortgage loans Loan to value ratios: Less than 70% $ 9,927 $ 9,819 70% - 80% 600 670 80% - 100% 44 44 Greater than 100% 10 10 Total 10,581 10,543 Residential mortgage loans Performing 897 727 Nonperforming (1) 142 212 Total 1,039 939 Total mortgage loans $ 11,620 $ 11,482 (1) As of March 31, 2022 and December 31, 2021, includes $119 million and $202 million of loans purchased when the loans were greater than 90 days delinquent and $17 million and $5 million of loans in process of foreclosure, respectively, and are supported with insurance or other guarantees provided by various governmental programs. 95 The following table provides a summary of the allowance for credit losses related to our mortgage loans: March 31, 2022 2021 (in millions) Balance at beginning of period $ 94 $ 179 Charge offs, net of recoveries — — Provision (release) (10) (65) Balance at end of period $ 84 $ 114 The Company’s mortgage loans that are current and in good standing are accruing interest. Interest is not accrued on loans greater than 90 days delinquent and in process of foreclosure, when deemed uncollectible. Delinquency status is determined from the date of the first missed contractual payment. At March 31, 2022, there was $19 million of recorded investment, $20 million of unpaid principal balance, no related loan allowance, $7 million of average recorded investment, and $1 million investment income recognized on impaired residential mortgage loans. At December 31, 2021, there was $6 million of recorded investment, $7 million of unpaid principal balance, no related loan allowance, $2 million of average recorded investment, and no investment income recognized on impaired residential mortgage loans. 96 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): March 31, 2022 Contractual/ Assets Liabilities Net Notional Fair Fair Fair Value Amount (1) Value Value Asset (Liability) Freestanding derivatives Cross-currency swaps $ 1,784 $ 44 $ 55 $ (11) Equity index call options 30,500 391 — 391 Equity index futures (2) 20,220 — — — Equity index put options 35,500 290 — 290 Interest rate swaps 7,728 143 — 143 Interest rate swaps - cleared (2) 1,500 — — — Put-swaptions 22,000 — 343 (343) Treasury futures (2) 16 — — — Total freestanding derivatives 119,248 868 398 470 Embedded derivatives VA embedded derivatives (3) N/A — 452 (452) FIA embedded derivatives (4) N/A — 1,299 (1,299) RILA embedded derivatives (4) N/A — 16 (16) Total embedded derivatives N/A — 1,767 (1,767) Derivatives related to funds withheld under reinsurance treaties Cross-currency swaps 158 13 1 12 Cross-currency forwards 1,296 45 6 39 Funds withheld embedded derivative (5) N/A 1,161 — 1,161 Total derivatives related to funds withheld under reinsurance treaties 1,454 1,219 7 1,212 Total $ 120,702 $ 2,087 $ 2,172 $ (85) (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. (5) Included within funds withheld payable under reinsurance treaties on the Condensed Consolidated Balance Sheets. 97 December 31, 2021 Contractual/ Assets Liabilities Net Notional Fair Fair Fair Value Amount (1) Value Value Asset (Liability) Freestanding derivatives Cross-currency swaps $ 1,767 $ 55 $ 35 $ 20 Equity index call options 21,000 606 — 606 Equity index futures (2) 18,258 — — — Equity index put options 27,500 150 — 150 Interest rate swaps 7,728 430 — 430 Interest rate swaps - cleared (2) 1,500 — — — Put-swaptions 19,000 133 — 133 Treasury futures (2) 912 — — — Total freestanding derivatives 97,665 1,374 35 1,339 Embedded derivatives VA embedded derivatives (3) N/A — 2,626 (2,626) FIA embedded derivatives (4) N/A — 1,439 (1,439) RILA embedded derivatives (4) N/A — 6 (6) Total embedded derivatives N/A — 4,071 (4,071) Derivatives related to funds withheld under reinsurance treaties Cross-currency swaps 158 10 1 9 Cross-currency forwards 1,119 33 5 28 Funds withheld embedded derivative (5) N/A — 120 (120) Total derivatives related to funds withheld under reinsurance treaties 1,277 43 126 (83) Total $ 98,942 $ 1,417 $ 4,232 $ (2,815) (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. (5) Included within funds withheld payable under reinsurance treaties on the Condensed Consolidated Balance Sheets. 98 Investment Income Our sources of net investment income are as follows (in millions) : Three Months Ended March 31, 2022 2021 Debt securities (1) $ 273 $ 323 Equity securities 1 — Mortgage loans 73 82 Policy loans 17 19 Limited partnerships 108 243 Other investment income 1 4 Total investment income excluding funds withheld assets 473 671 Net investment income on funds withheld assets 260 291 Investment expenses: Derivative trading commission (1) (1) Depreciation on real estate (3) (3) Expenses related to consolidated entities (2) (21) (8) Other investment expenses (3) 12 (22) Total investment expenses (13) (34) Net investment income $ 720 $ 928 (1) Includes unrealized gains and losses on trading securities and includes $(10) million and $38 million as of March 31, 2022 and 2021, respectively, related to the change in fair value for securities carried under the fair value option. (2) Includes management fees, administrative fees, legal fees, and other expenses related to the consolidation of certain investments. (3) 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. 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 an allowance for credit loss is required. 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. In determination of an allowance for credit loss, 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. 99 Policy and Contract Liabilities We establish, and carry as liabilities, actuarially determined amounts that are calculated to meet policy obligations or to provide for future annuity payments. Amounts for actuarial liabilities are computed and reported on the Condensed Consolidated Financial Statements in conformity with GAAP. For more details on Policyholder Liabilities, see "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” included in our 2021 Annual Report.” As an insurance company, a substantial portion of our profits are derived from fee income and the invested assets backing our policy and contract liabilities, which includes separate account liabilities, reserves for future policy benefits and claims payable and other contract holder funds. As of March 31, 2022, 89% of our policy and contract liabilities were in our Retail Annuities segment, 3% were in our Institutional Products segment and 8% were in our Closed Life and Annuity Blocks segment. The table below represents a breakdown of our policy and contract liabilities: March 31, 2022 Separate Accounts Reserves for future policy benefits Other contract holder funds Total (in millions) Variable Annuities $ 231,113 $ 2,403 $ 10,367 $ 243,883 Registered Index Linked Annuities — — 305 305 Fixed Annuities — 2 12,940 12,942 Fixed Index Annuities — 8 12,835 12,843 Payout Annuities — — 1,389 1,389 Total Retail Annuities 231,113 2,413 37,836 271,362 Total Institutional Products — — 9,173 9,173 Traditional Life — 4,699 4,115 8,814 Interest-sensitive Life 85 1,693 7,323 9,101 Group Payout Annuities — 4,819 — 4,819 Other Annuities — — 1,396 1,396 Total Closed Life and Annuity Blocks 85 11,211 12,834 24,130 Total Policy and Contract Liabilities 231,198 13,624 59,843 304,665 Claims payable and other — 1,943 — 1,943 Total $ 231,198 $ 15,567 $ 59,843 $ 306,608 December 31, 2021 Separate Accounts Reserves for future policy benefits Other contract holder funds Total (in millions) Variable Annuities $ 248,859 4,330 10,030 263,219 Registered Index Linked Annuities — — 110 110 Fixed Annuities — 2 13,172 13,174 Fixed Index Annuities — 50 13,161 13,211 Payout Annuities — — 1,399 1,399 Total Retail Annuities 248,859 4,382 37,872 291,113 Total Institutional Products — — 8,830 8,830 Traditional Life — 4,762 4,161 8,923 Interest-sensitive Life 90 1,722 7,410 9,222 Group Payout Annuities — 4,895 — 4,895 Other Annuities — — 1,416 1,416 Total Closed Life and Annuity Blocks 90 11,379 12,987 24,456 Total Policy and Contract Liabilities 248,949 15,761 59,689 324,399 Claims payable and other — 1,868 — 1,868 Total $ 248,949 $ 17,629 $ 59,689 $ 326,267 100 As of March 31, 2022, $231.2 billion or 76% of our policy and contract liabilities were backed by separate accounts assets. These separate account assets backed reserves primarily related to our variable annuities. Separate account liabilities are fully funded by cash flows from the customer’s corresponding separate account assets and are set equal to the fair value of such invested assets. We generate revenue on our separate account liabilities primarily from asset-based fee income. Separate account assets and associated liabilities are subject to variability driven by the performance of the underlying investments, which are exposed to fluctuations in equity markets and bond fund valuations. As a result, revenue derived from asset-based fee income is similarly subject to variability in line with the variability of the underlying separate account assets. As of March 31, 2022, $48.8 billion or 16% of our policy and contract liabilities were backed by our investment portfolio and $24.6 billion reinsured by Athene, were backed by funds withheld assets. Our variable annuity fixed account option, variable annuity guaranteed benefit and other reserves, our RILA and fixed annuities and fixed index annuities reserves, not reinsured, our Institutional Products segment reserves, as well as our Closed Life and Annuity Blocks segment reserves, were primarily backed by our investment portfolio. As of March 31, 2022, our general account policy and contract liabilities, net of those ceded to Athene, were composed of 1% for registered index linked annuities, 5% for fixed index annuities and fixed deferred and payout annuities, 19% for Institutional Products segment, 20% for fixed account option variable annuities, 6% for guaranteed benefit and other variable annuity reserves, and a 49% Closed Life and Annuity Block segment reserves. As of March 31, 2022, 39% of our fixed annuity and fixed index annuity policy and contract liabilities were subject to surrender charges of at least 5% or at market value in the event of discretionary withdrawal by customers. As of March 31, 2022, 100% of our RILA policy and contract liabilities were subject to surrender charges of at least 5% or at market value in the event of discretionary withdrawal by customers. We have the discretion, subject to contractual limitations and minimums, to reset the crediting terms on the majority of our fixed index annuities and fixed annuities. As of March 31, 2022, 93% of fixed annuity, fixed-indexed annuity, and the fixed accounts of RILA and variable annuity correspond to crediting rates that are at the guaranteed minimum crediting rate. Liabilities for other contract holder funds are policy account balances on interest-sensitive life insurance, fixed annuities, fixed index annuities, RILA and variable annuity or variable life insurance contract allocations to fixed fund options. These account balance liabilities are equal to the sum of deposits, plus interest credited, less charges and withdrawals. We establish reserves for future policy benefits and claims payable under insurance policies using methodologies consistent with U.S. GAAP. Reserves for insurance policies are generally equal to the present value of future expected benefits to be paid, reduced by the present value of future expected revenue. The assumptions used in establishing reserves are generally based on our experience, industry benchmarking or other factors, as applicable. Annually, or as circumstances warrant, we conduct a comprehensive review of our actuarial assumptions, and update those assumptions when appropriate. The principal assumptions used in the establishment of reserves for future policy benefits are policy lapse, mortality, benefit utilization and withdrawals, investment returns, and expenses. Generally, we do not expect trends that impact our assumptions to change significantly in the short-term and, to the extent these trends may change, we expect such changes to be gradual over the long-term. For non–life-contingent components of Guaranteed Minimum Withdrawal Benefits ("GMWB") features available in our variable annuities, the guaranteed benefits are accounted for as embedded derivatives, with fair values calculated as the present value of expected future guaranteed benefit payments to contract holders less the present value of assessed rider fees attributable to the embedded derivative feature. In accordance with U.S. GAAP, the fair values of these guaranteed benefit features are based on assumptions a market participant would use in valuing these embedded derivatives. Changes in the fair value of the embedded derivatives are recorded through a benefit or charge to current period earnings. Movements in the fair value of the embedded derivatives are typically in the opposite direction relative to primary market risks. Specifically, downward movements in equity market levels reduce contract holder account value and typically correlate with an increased likelihood that outstanding guaranteed benefits will result in a claim, increasing the fair value liability. Similarly, downward movements in interest rates lower the assumed future market growth and typically correlate with an increased likelihood that outstanding guaranteed benefits will result in a claim, increasing the fair value liability. Downward movements in interest rates also lower the discount rates used in the calculation of the fair value liability associated with higher projected future guaranteed benefit payments, which increases the fair value liability. 101 For reserves related to the life-contingent components of guaranteed benefit features available in our variable annuities, fixed index annuities and RILA, we calculate the change in reserves by applying a “benefit ratio” to total assessments received in the period. The benefit ratio is determined by dividing the present value of total expected benefit payments by the present value of total expected assessments, primarily fees based on account value or benefit base, over the life of the contract. The level and direction of the change in reserves will vary over time based on the benefit ratio and the level of assessments associated with the variable annuity, fixed index annuity, or RILA. These reserves typically move in the opposite direction relative to primary market risks. Specifically, downward movements in equity market levels will reduce contract holder account value and typically correlate with an increased likelihood that outstanding guaranteed benefits will result in a claim, which increases the reserve. For traditional life insurance and payout annuities, reserves for future policy benefits are measured using assumptions determined as of the issuance date or acquisition date with provisions for the risk of adverse deviation, as appropriate. These assumptions are not unlocked unless a premium deficiency exists. At least annually, we perform premium deficiency tests using best estimate assumptions as of the testing date without provision for adverse deviation. If the liabilities determined based on these best estimate assumptions are greater than the net reserves (i.e., U.S. GAAP reserves net of any DAC or reinsurance), the existing net reserves are adjusted by first reducing the DAC or DSI by the amount of the deficiency (or to zero) through a charge to current period earnings. If the deficiency is more than these asset balances, we increase the reserves by the excess through a charge to current period earnings. If a premium deficiency is recognized, the assumptions as of the premium deficiency test date are locked in and used in subsequent reserve measurements, and the net reserves continue to be subject to premium deficiency testing. In a sustained low interest rate environment, there is generally an increased likelihood that the liabilities determined based on best estimate assumptions will be greater than the net reserves. 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 three months ended March 31, 2022 and 2021. Cash Flows The following table presents a summary of our cash flow activity for the periods set forth below: Three Months Ended March 31, 2022 2021 (in millions) Net cash provided by (used in) operating activities $ 860 $ 1,344 Net cash provided by (used in) investing activities (202) (1,500) Net cash provided by (used in) financing activities (609) (290) Net increase (decrease) in cash, cash equivalents, and restricted cash 49 (446) Cash, cash equivalents, and restricted cash at beginning of period 2,631 2,019 Total cash, cash equivalents, and restricted cash at end of period $ 2,680 $ 1,573 Cash flows provided by Operating Activities The principal operating cash inflows from our insurance activities come from insurance premiums, fees charged on our products and net investment income. The principal operating cash outflows are the result of annuity and life insurance benefits, interest credited on other contract holder funds, 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 benefit payments. 102 Cash flows provided by (used in) operating activities decreased $484 million to $860 million during the three months ended March 31, 2022 from $1,344 million during the three months ended March 31, 2021. This decrease in cash provided by operating activities was primarily due to lower net income in 2022 driven by decreases in total net gains on derivatives and investments, compared to 2021. 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 as well as derivative collateral needs. Cash flows provided by (used in) investing activities increased $1,298 million to $(202) million during the three months ended March 31, 2022 from $(1,500) million during the three months ended March 31, 2021. This increase was primarily due to decreased outflows related to derivative settlements in 2022 compared to 2021. 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, issuance of debt, and lending of securities. The principal cash outflows come from withdrawals associated with policyholder 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 $319 million to $(609) million during the three months ended March 31, 2022 from $(290) million for the three months ended March 31, 2021. This decrease was primarily due to increased outflows related to the settlement of our repurchase agreements, partially offset by increased sales of our institutional products during 2022 compared to 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 that incorporates both factor-based components (applied to various asset, premium, claim, expense and statutory reserve items) and model-based components. 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 March 31, 2022, 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 cash and cash equivalents at Jackson Financial adequate to fund two years of holding company fixed expenses. 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 shareholders, 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. 103 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, Jackson's direct parent company, 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 the New York State Department of Financial Services. For 2022, Jackson and Brooke Life have total ordinary dividend capacity, based on 2021 statutory capital and surplus and statutory net gain from operations, subject to the availability of earned surplus, of nil and $514 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 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. On March 1, 2022, Jackson remitted a $600 million return of capital to its parent company, Brooke Life. Brooke Life subsequently paid a $510 million ordinary dividend to its ultimate parent, Jackson Financial. In addition, Brooke Life also paid $45 million of interest associated with the $2 billion surplus note between Brooke Life and Jackson Finance, LLC ("Jackson Finance"), a subsidiary of 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. 104 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 March 31, 2022, Jackson’s outstanding surplus notes and bank debt included $ 63 million of bank loans from the Federal Home Loan Bank of Indianapolis ("FHLBI"), collateralized by mortgage-related securities and mortgage loans and $250 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 March 31, 2022, approximately half of Jackson’s general account reserves are either not surrenderable, included 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, insurance premiums, fees charged on our products, 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 or benefit payments are its portfolio of liquid assets and its net operating cash flows. As of March 31, 2022, the portfolio of cash, short-term investments and privately and publicly traded securities and equities, which are unencumbered and unrestricted to sale, amounted to $25.4 billion. Our Indebtedness Senior Notes On November 23, 2021, the Company issued $1.6 billion aggregate principal amount of its senior unsecured notes consisting of $600 million aggregate principal amount of 1.1% Senior Notes due November 22, 2023 (the “2023 Senior Notes”), $500 million aggregate principal amount of 3.1% Senior Notes due November 23, 2031 (the “2031 Senior Notes”) and $500 million aggregate principal amount of 4.0% Senior Notes due November 23, 2051 (the “2051 Senior Notes” and, together with the 2023 Senior Notes and the 2031 Senior Notes, the “Senior Notes”). The proceeds of the Senior Notes were used, together with cash on hand, to repay the Company’s $1.6 billion aggregate principal amount of senior unsecured delayed draw term loan facility that was due to mature in May 2022 (the “2022 DDTL Facility”), as described below. Term Loans 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, as subsequently amended, was to mature in May 2022, and a $1.0 billion senior unsecured delayed draw term loan facility that matures in February 2023 (the "2023 DDTL Facility"). 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. 105 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. We were in compliance with these covenants at March 31, 2022. 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 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 million at Jackson Financial, and (ii) retained the balance of the proceeds of approximately $575 million at Jackson Financial. The amounts at Jackson Financial 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 shareholders, which may include stock repurchases, and capital contributions, if needed, to our insurance company subsidiaries. On November 23, 2021, the Company issued $1.6 billion aggregate principal amount of its senior unsecured notes. The proceeds of the Senior Notes were used, together with cash on hand, to repay the above mentioned $1.6 billion borrowing under the 2022 DDTL Facility. Surplus Notes On March 15, 1997, our subsidiary, Jackson, issued 8.2% 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 million during both the three months ended March 31, 2022, and 2021, respectively. 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 Michigan Director of Insurance and only out of surplus earnings which the director 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 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 notes or funding agreements issued to FHLBI. As of March 31, 2022 and December 31, 2021, Jackson held a bank loan with an outstanding balance of $63 million and $67 million, respectively. 106 Dividend and Stock Repurchase Consistent with our goals to manage risk and capital and optimize our financial leverage, we generally intend to target return of capital to our shareholders, which may take the form of cash dividends and/or stock repurchases, on an annual basis of approximately 40-60% of the annual change in our excess capital, adjusted for any contributions and distributions, subject to market conditions and approval by our Board of Directors. For purposes of this analysis, we define excess capital as total adjusted capital less 400% of company action level required capital. Consistent with statutory accounting requirements, total adjusted capital is defined as Jackson’s statutory capital and surplus, plus asset valuation reserve and 50% of policyholder dividends of Jackson and its subsidiaries. Company action level required capital is the minimum amount of capital necessary for Jackson to avoid submitting a corrective action plan to its regulator. Any declaration of cash dividends or stock repurchases will be at the discretion of JFI’s Board of Directors and will depend on our financial condition, earnings, liquidity and capital requirements, regulatory constraints, level of indebtedness, contractual restrictions with respect to paying cash dividends or repurchasing stock, restrictions imposed by Delaware law, general business conditions and any other factors that JFI’s Board of Directors deems relevant in making any such determination. Therefore, there can be no assurance that we will pay any cash dividends to holders of our common stock or approve any stock repurchase program, or as to the amount of any such cash dividends or stock repurchases. Delaware law requires that dividends be paid and stock repurchases made only out of “surplus,” which is defined as the fair market value of our net assets, minus our stated capital; or out of the current or the immediately preceding year’s earnings. JFI is a holding company and has no direct operations. All of our business operations are conducted through our subsidiaries. Any dividends we pay or stock repurchases we make will depend upon the funds legally available for distribution, including dividends or distributions from our subsidiaries to us. The states in which our insurance subsidiaries are domiciled impose certain restrictions on our insurance subsidiaries’ ability to pay dividends to their parent companies. These restrictions are based in part on the prior year’s statutory income and surplus, as well as earned surplus. Such restrictions, or any future restrictions adopted by the states in which our insurance subsidiaries are domiciled, could have the effect, under certain circumstances, of significantly reducing dividends or other amounts payable by our subsidiaries without affirmative approval of state regulatory authorities. See “Risk Factors—As a holding company, JFI depends on the ability of its subsidiaries to meet its obligations and liquidity needs, including dividends and stock repurchases.” Dividends to Shareholders and Share Repurchases During the first quarter of 2022, we paid a cash dividend of $0.55 per share on JFI's Class A Common Stock totaling $52 million. On May 9, 2022, our Board of Directors approved a second quarter cash dividend on JFI's Class A Common Stock of $0.55 per share, payable on June 16, 2022 to shareholders of record on June 2, 2022. During the first quarter of 2022, we repurchased a total of 3,433,610 shares of Class A Common Stock for an aggregate purchase price of $140 million, which were funded with cash on hand. See Note 17 to Condensed Consolidated Financial Statements for further information on dividends to shareholders and share repurchases. 107 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. As of May 10, 2022, the financial strength ratings of our principal insurance subsidiaries were as follows : Company A.M. Best Fitch Moody’s S&P Jackson National Life Insurance Company Rating A A A2 A Outlook stable stable negative stable Jackson National Life Insurance Company of New York Rating A A A2 A Outlook stable stable negative stable Brooke Life Insurance Company Rating A Outlook stable In evaluating a company’s financial strength, the rating agencies evaluate a variety of factors including 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. 108 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. The most critical estimates include those used in determining: • deferred acquisition costs • reserves for future policy benefits and claims payable and other contract holder funds • income taxes • accounting for reinsurance • valuation and impairment of investments • valuation of freestanding derivative instruments • valuation of embedded derivatives • net investment income • contingent liabilities • 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. The above critical accounting estimates are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” and Note 2 of the Notes to the Consolidated Financial Statements included in our 2021 Annual Report. Off–Balance Sheet Arrangements We do not have any off–balance sheet arrangements as of March 31, 2022. 109