Jackson Financial - Q1 2024

Transcript

Operator (participant)

Good morning. Thank you for attending the Jackson Financial, Inc. first quarter 2024 earnings call. My name is Cameron, and I'll be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Liz Werner, Head of Investor Relations. You may proceed.

Liz Werner (Head of Investor Relations)

Good morning, everyone, and welcome to Jackson's first quarter 2024 earnings call. Today's remarks may contain forward-looking statements which are subject to risks and uncertainties. These statements are not guarantees of future performance or events and are based on management's current expectations. Jackson's filings with the SEC provide details on important factors that may cause actual results or events to differ materially. Except as required by law, Jackson is under no obligation to update any forward-looking statements if circumstances or management's estimates or opinions should change. Today's remarks also refer to certain non-GAAP financial measures. The reconciliation of those measures to the most comparable U.S. GAAP figures is included in our earnings release, financial supplement, and earnings presentation, all of which are available on the investor relations page of our website at investors.jackson.com.

Joining us today are our CEO, Laura Prieskorn, our CFO, Marcia Wadsten, the President of Jackson National Life Distributors, Scott Romine, our Head of Asset Liability Management and Chief Actuary, Steve Binioris, the President and Chief Investment Officer of PPM, Craig Smith, and Chief Accounting Officer and Controller, Don Cummings. At this time, I'll turn the call over to our CEO, Laura Prieskorn.

Laura Prieskorn (CEO)

Good morning, everyone. This marks the first quarter to include the positive impact Brooke Re, our captive reinsurance solution. The hard work and execution that led to the formation Brooke Re positions Jackson for long-term capital strength and a continued focus on delivering on our commitments to all stakeholders. Beginning on slide three, we are off to a strong start in 2024, and our first quarter results reflect the expected outcomes Brooke Re. In our 2023 full-year results, we shared the structure Brooke Re and anticipated impacts on Jackson National Life. This quarter, Jackson National's statutory capital generation and risk-based capital, or RBC ratio, increased, consistent with our expectations. As anticipated, we also saw greater alignment between our economic hedging approach and US GAAP reserving, which led to reduced volatility in net hedging results and, by extension, GAAP net income.

Importantly, our statutory capital generation is better aligned with our non-GAAP measure of adjusted operating earnings, as both are primarily driven by the substantial assets under management, or AUM, supporting our variable annuity-based contract. As a result, Jackson now has more intuitive, predictable, and stable financial results that better capture the healthy economics and earnings power of our large and profitable book of business. Turning to slide four, you will see the benefits of our economic hedging were evident in both US GAAP and statutory results. In a quarter with significant moves in both equity markets and interest rates, we reported a smaller net hedging result compared to prior quarters, which we'll cover in more detail. We also reported nearly $800 million of GAAP net income at Jackson Financial.

Our adjusted operating earnings of $334 million grew 23% from the first quarter of 2023, benefiting from higher equity markets and a favorable environment for spread income. At Jackson National, statutory capital increased by nearly $400 million, broadly consistent with the level of adjusted operating earnings. This pace of capital generation is well aligned with our financial targets and an expectation for $1 billion or more in annual capital generation under normal market conditions. This capital generation drove Jackson National's first quarter estimated RBC to 555%-575%, up from 543% at the beginning of the year after giving effect to the funding Brooke Re. We continue to make progress on diversifying our sales mix with another record quarter of RILA production, driving an overall increase in retail annuity sales of nearly 20% over the prior year's first quarter.

Our product innovation continues with the recent launch of Plus Income, a guaranteed lifetime income option now available in our Jackson Market Link Pro product suite. This option enables policyholders to create an immediate income stream or defer withdrawals, providing the opportunity to grow income over time. Along with our variable annuity living benefit options, the addition of Plus Income to our RILA suite underscores our philosophy of providing product offerings focused on choice, flexibility, and strong consumer value. We believe our sustained history of product innovation, strong distribution partnerships, and industry-leading service position Jackson for continued sales momentum into the future. Overall, these results helped fuel a very positive start to the year in returning capital to common shareholders, delivering $172 million through dividends and share buybacks in the first quarter of 2024. Slide five highlights our consistent track record of returning capital through different market environments and conditions.

Jackson's capital return to common shareholders has exceeded $1.4 billion in share repurchases and dividends since becoming a standalone public company in September of 2021. As of the end of the first quarter of 2024, cumulative common shares repurchased represented more than 23% of shares outstanding at separation. This aligns with our balanced approach to capital return, which we believe will continue to serve us well. We continue to view a cash dividend as a valuable stream of sustainable capital return and have cumulatively paid more than $500 million to common shareholders in less than three years. Yesterday, we announced our board's approval of a second quarter shareholder dividend of $0.70 per common share. This reflects our continued confidence in our ability to generate capital and our focus on long-term profitability and in our commitment to increasing shareholder value.

Moving to slide six, maintaining a strong capital position at our operating companies' and parent company, Jackson Financial, remains a priority as evidenced again this quarter. Our first quarter capital return to common shareholders compares favorably with our annual target of $550-$650 million, and our holding company liquidity as of the end of the first quarter continues to be above our targeted minimum level at nearly $500 million. We ended the first quarter significantly above our RBC minimum of 425%. Our estimated RBC ratio is between 555%-575%, and our statutory total adjusted capital, or TAC, is approximately $4.7 billion. The greater stability and predictability of these metrics following the implementation of Brooke Re transaction, along with our expectations for smaller periodic distributions from Jackson National, simplifies expectations for our operating company capital position going forward.

I'll now turn it over to Marcia to review details of our first quarter financials.

Marcia Wadsten (CFO)

Thank you, Laura. I'll begin on slide seven with our first quarter results summary. Adjusted operating earnings of $334 million increased from both 2023's first and fourth quarters, driven by stronger fee and spread earnings. Our adjusted book value attributable to common shareholders increased over the first quarter due to healthy adjusted operating earnings and positive net hedging results, which I will discuss in more detail shortly. As a reminder, in the appendix of our earnings presentation, we have included additional general account investment portfolio details that provide breakdowns on both US GAAP and statutory bases, excluding the assets reinsured to third parties through funds withheld agreements. The information provides helpful insight into our highly rated and diversified commercial mortgage loan portfolio, which is less than 2% of the general account. Jackson remains conservatively positioned, with only 1% exposure to below-investment-grade securities on a statutory basis, excluding funds withheld assets.

Slide eight outlines the notable item included in adjusted operating earnings for the first quarter. Results from limited partnership investments, which report on a one-quarter lag, were slightly above our long-term expectation for a $3 million benefit. In the first quarter of 2023, limited partnership income was below our long-term expectation, creating a comparative pre-tax benefit in the current quarter of $23 million. In addition to this notable item, both first quarter 2024 and first quarter 2023 benefited from a lower effective tax rate relative to the 15% long-term guidance, with a larger benefit in the prior year's first quarter. This occurred due to higher pre-tax operating earnings in the current quarter, which made tax benefits that are similar on a dollar basis less impactful to the effective tax rate.

Adjusted for both the notable item and the tax rate difference, earnings per share were $4.16 in the current quarter compared to $3.18 in the prior year's first quarter, due primarily to the equity market and spread income benefits noted earlier. Slide nine offers a visual reconciliation of our first quarter 2024 pre-tax adjusted operating earnings of $389 million to the pre-tax income attributable to Jackson Financial of $896 million. Here we see another positive outcome of Brooke Re solution, as our economic hedging is now better aligned with US GAAP reserving. As shown in the table, total guaranteed benefits and hedging results, or net hedge result, was a gain of $427 million in the first quarter of 2024. Starting from the top of the table, this gain includes a robust guaranteed benefit fee stream.

These guaranteed benefit fees are calculated from the benefit base rather than the account value, which provides stability to the guarantee fee stream when markets decline. Consistent with our practice, all guarantee fees are presented in non-operating income to align with related hedging and liability movements. During the period, the net hedge result included a loss on freestanding derivatives, primarily due to losses on interest rate hedges in a quarter where interest rates were up across the yield curve, as well as losses on equity hedges in a rising equity market environment. Movements in net market risk benefits, or net MRB, benefited from the same equity market and interest rate movements, which broadly offset the freestanding derivative results. This illustrates the improved alignment between the hedging and the related hedged items following Brooke Re implementation.

The reserve and embedded derivative movements' loss primarily reflects losses on RILA reserves resulting from higher equity markets. This RILA business provides a natural equity offset to the guaranteed variable annuity business on the books, which results in hedging efficiencies that increase as the RILA block grows. The deferred acquisition cost, or DAC amortization, included in the net hedge result is associated with the non-operating portion of DAC as of the transition date to LDTI. This non-operating DAC will continue to run off over time, and the amount of quarterly amortization should decline slowly from the current level. Non-operating results also included $69 million in gains from business reinsured to third parties. This resulted from a loss on a funds withheld reinsurance treaty due to the change in the associated embedded derivative value netted against the related net investment income.

These non-operating items, which can be volatile from period to period, are offset by changes in accumulated other comprehensive income, or AOCI, in the funds withheld account related to reinsurance, resulting in a minimal net impact on Jackson's adjusted book value. Furthermore, these items do not impact our statutory capital or free cash flow. Our segment results start on slide 10 and focus on retail annuity sales progress. As Laura highlighted, our RILA product continues to gain momentum, with first quarter sales reaching a record level of $1.2 billion, supporting further diversification in our top line. Sales of variable annuities were relatively flat compared to the first quarter of 2023 and are consistent with the quarterly pace we've seen since the fourth quarter of 2022.

When viewed through a net flow lens, the gross sales we are generating in RILA and spread products translated to $1.1 billion of non-VA net flow in the first quarter of 2024, which has grown materially over time. These net flows provide valuable economic diversification and hedging efficiency benefits. Importantly, our overall sales mix remains efficient from the standpoint of new business stream. Looking at first quarter 2024 pre-tax adjusted operating earnings for our segments on slide 11, higher equity markets and a continued positive environment for spread income have driven solid growth in our retail annuity segment compared to both the first and fourth quarters of 2023. Jackson's earnings power is supported by the growing level of account value, as healthy separate account returns combined with growing non-VA net flows have built up AUM to $248 billion, an increase of 13% from the first quarter of 2023.

For our institutional segment, pre-tax adjusted operating earnings were also up from both prior periods due to higher spread income. Our closed life and annuity block segment reported higher pre-tax adjusted operating earnings compared to both prior periods. This is due primarily to reserve decreases as the business runs off and to the annual assumption updates in the fourth quarter 2023 when comparing sequentially. Slide 12 summarizes our first quarter capital position. The profitability of our variable annuity-based contract was the primary driver of an increase in JNL's total adjusted capital, or TAC, to nearly $4.7 billion. This is an increase of approximately $400 million from the pro forma January 1st level after reflecting the impact Brooke Re. Going forward, our company action level required capital, or CAL, is much more stable now that the cash surrender value floor impacts have been removed.

Our estimated RBC ratio between 555%-575% was well above our 425% minimum and up from the January 1st pro forma level of 543%. We also had a successful first quarter Brooke Re, which operated as expected and remains well capitalized. Our holding company cash and highly liquid asset position at the end of the quarter was nearly $500 million, which continues to be above our minimum buffer. As previously indicated and subject to regulatory approval, we intend to have periodic distributions from our operating company throughout the year with the goal of reducing the RBC volatility that occurred from our past practice of sizable annual dividends. We believe our robust capital position across operating companies provides a favorable financial foundation for future operating company dividends. Overall, I am very pleased with these results, which demonstrate strengths in sales, earnings, capital, and holding company liquidity.

I'll now turn the call back to Laura.

Laura Prieskorn (CEO)

Thank you, Marcia. Our first quarter results show we are off to a great start in 2024, and I'm pleased Brooke Re solution is performing as expected. I'm quite happy with the results we've produced in the first quarter and energized by the prospects for our business shared today. I look forward to continued success in the remainder of 2024. As always, I'd like to acknowledge our talented Jackson team and their dedication to our purpose in providing long-term solutions for Americans planning for their financial futures. Earlier this week, we published our annual corporate responsibility report, which details how we invest in each other and our communities while continuing to enhance access to our annuity products and take an active role in moving our industry forward.

I encourage you to read the report posted on Jackson.com to learn more about these efforts and how they drive business value to support our long-term success. Finally, as we've previously shared, Marcia's retiring effective June 3rd. At that time, we expect our board to appoint Don Cummings as Chief Financial Officer. Marcia's leadership, steadfast commitment, and positive contributions will be felt for years to come, and I'm grateful for her dedication and her counsel. It has been an honor to serve Jackson alongside Marcia through the most transformational time in the company's history.

Marcia Wadsten (CFO)

Thank you, Laura. It has been a privilege to be part of Jackson for my entire career, especially as we were transitioning to and operating as an independent public company. As we turn to the future, I know Don is well positioned to support Jackson's ability to generate capital and maintain our balanced approach to capital management.

Don Cummings (Chief Accounting Officer and Controller)

Thanks, Marcia. Good morning, everyone. I appreciate the opportunity to take on the role of CFO at Jackson. Over the last three years, I've worked closely with Marcia as we became an independent public company and have learned immensely from her commitment to managing capital for the benefit of all Jackson stakeholders. As we continue to work through the transition, I'm optimistic about the future and look forward to meeting many of you in person in the coming weeks.

Laura Prieskorn (CEO)

Thank you, Marcia and Don. Congratulations to you both as you embrace new experiences. I'll now turn the call over to the operator for questions.

Operator (participant)

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. And as a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question, and we will pause here briefly as questions are registered. And the first question is from the line of Tom Gallagher with Evercore ISI. You may proceed.

Tom Gallagher (Senior Managing Director and Senior Equity Analyst)

Good morning. First off, Marcia, best of luck to you. And I guess my questions are both on cash flow. The first one is, so I heard your reiteration of the $1 billion of annual capital generation, and then after we consider interest expense, that would probably leave around $900 million available potentially for shareholders. And I know you're committing to a midpoint of $600 million for this year. What happens to the other $300 million? When you do the waterfall, is that planned to grow excess capital and have buffers for contingencies, or does that get consumed some other way based on new sales stream or something else?

Marcia Wadsten (CFO)

Thanks, Tom. I think it's early days Brooke Re, so we set our target for this year with a view that that is sustainable but potentially can grow over time. Your math makes sense in terms of what that means for kind of the net result after we consider our holding company expenses. The difference there is really something that we will evaluate, I guess, over time. We've talked in the past about our balanced use of capital, which supports balance sheet strength as well as new business investment and also return to shareholders. I think as we move through 2024, we'll have an opportunity to watch the business perform under this arrangement and evaluate our options. Certainly, if we had a different mix of business, that may change the magnitude of investment for new business.

We have a pretty capital-efficient business mix today in terms of what we're writing, but that may be an opportunity that also allows us the opportunity to think about other strategic opportunities that might come along as well.

Tom Gallagher (Senior Managing Director and Senior Equity Analyst)

That makes sense. Then my follow-up is just looking at your 10-Q, it suggests that the permissible dividend out of Brooke Life is a little under $400 million for 2024. If I look at your current capital plan and holding co-cash, it looks like you should be able to still execute it, but you'd probably be a little bit tight at the holding company if that's all you end up taking out this year. Is there a plan to take out extraordinary dividends for the year? Maybe talk a little bit about that. Because if this lower permissible dividend every year is going to be at a lower level relative to your cash flow, how do you think about extraordinary dividends as an option?

Marcia Wadsten (CFO)

Sure. Yeah. First of all, I guess just to go back a second, we did talk about the fact that as we began 2024 and moved beyond that, that we would change from our kind of annual larger distribution out of the operating company, out of JNL, just to a more periodic cadence on that, which was also meant to kind of contribute toward more RBC stability, which is just another thing that would bring that out as well as Brooke Re transaction. As we think about 2024 so far, we've already taken a distribution out of JNL to set up and Brooke Re. So as we move through the remainder of this year, we'll look for opportunities as Jackson National Life is performing well and generating capital to be able to support distributions upward to the holding company.

And we think we've talked about the fact that JNL is the main engine for capital generation to support those distributions, which, of course, are all subject to regulatory approval. And Brooke Re is kind of just the pass-through. The main engine that's generating capital is JNL, and that's where we would look to kind of source those distributions. But I guess I would want to point out that we would expect in the near term.

Tom Gallagher (Senior Managing Director and Senior Equity Analyst)

Sorry. I meant Brooke Life. I'm sorry. I meant Brooke Life.

Marcia Wadsten (CFO)

Right. We would.

Tom Gallagher (Senior Managing Director and Senior Equity Analyst)

Which is the parent to Jackson?

Marcia Wadsten (CFO)

Yeah. But we would probably expect that our distributions would really come from JNL up to Brooke Life and then from Brooke Life further up to the holding company. That's just because the real—it's Jackson National that is really generating the capital that would fund those distributions. So that would be the starting point of the distributions, and they would just pass through Brooke Life into the holding company. And we would expect in the near term, those distributions to be extraordinary. But I'd point out that almost historically, most of Jackson's dividends would have been extraordinary in nature. So that's not a new situation for us.

Tom Gallagher (Senior Managing Director and Senior Equity Analyst)

Okay. That's really helpful. So is bottom line, you wouldn't expect the permissible dividends to be a gating item this year?

Marcia Wadsten (CFO)

No. I think we've worked through the extraordinary dividend pass alongside our regulator quite often in the past, and that would be our approach again.

Tom Gallagher (Senior Managing Director and Senior Equity Analyst)

Great. Thank you.

Operator (participant)

The next question is from the line of Suneet Kamath with Jefferies. You may proceed.

Suneet Kamath (Senior Research Analyst)

Yeah. Thanks. Good morning. Just a couple following on Tom's line of questioning. Can you just give us a sense of what you'd expect the annual dividend out of Jackson National Life through Brooke to the holding company to be?

Marcia Wadsten (CFO)

Well, I think I would just look to our capital return target and consideration, of course, of the holding company expenses to kind of guide on what type of distribution would be needed to support both of those activities that would require funding at the holding company.

Suneet Kamath (Senior Research Analyst)

Okay. Got it. And then I guess as we think about that $400 million of capital generation in the quarter, since I think most of the hedges are now Brooke Re, should we think about JNLIC's capital generation to be more to have greater sensitivity to the markets both up and down relative to what you had before? Is that the right way to think about it?

Marcia Wadsten (CFO)

I would say JNL's capital generation should be less sensitive to the market than what we saw before simply because the cash surrender value kind of phenomenon created a lot of unique phenomenon in terms of how the capital generation would play out given that we had that significant mismatch between our hedge gain and loss relative to what the reserve increases or decreases would be next to that. So I think what we would expect going forward for Jackson is really that the fundamental component of our capital generation there is driven by our fees, our AUM-based fees, which are then, of course, going to be tied to the size of the AUM. So while we'll have some equity sensitivity in that, the AUM base could increase or decrease a bit related to market performance.

There's going to be a steady engine, I guess, or AUM base that's going to produce a pretty steady level of fees to support that capital generation. Certainly, some fluctuation as AUM fluctuates, but I think sort of far less volatility in that given that we don't have that challenge around the mismatch between our liability movements and our hedge movements that we had in the past.

Suneet Kamath (Senior Research Analyst)

Right. I was just talking about just the core earnings from that business. It'll be more like an asset management type of company where it's fees on AUM as opposed to.

Marcia Wadsten (CFO)

Yeah.

Suneet Kamath (Senior Research Analyst)

All right. Got it. Okay. And then I guess the last question for me was just as I looked at your supplement, it looked like the sequential change in statutory operating earnings was down something like it was down like $89 million. And I would have thought that we would have seen a bigger delta just given the fourth quarter had all of the business associated with that's now Brooke Re in the stat numbers, and this quarter doesn't. Is there something that's offsetting that, or is that not the right way to think about it?

Marcia Wadsten (CFO)

No. You're thinking about that correctly. You would anticipate from quarter four to quarter one a decline just given the fact that the guaranteed benefit fees and guaranteed benefit payments, the net of those two, would no longer be reflected in Q1. But there are a couple of offsetting items, and Don can highlight, I think, two of the ones that are probably the most material there.

Don Cummings (Chief Accounting Officer and Controller)

Yeah. Thanks, Marcia. So Suneet, there were two kind of positive items that offset the net fee settlement that Marcia described. First of all, we had some interest rate derivative losses that we're amortizing through the IMR in fourth quarter. In first quarter now, those derivatives are passed over Brooke Re, so that didn't repeat. So we got a positive from that. And then the second positive is really just kind of the impact of our RILA hedging efficiency. As you know, the risk on RILA from higher equities, which is a nice offset to the lower equity risk we have on the VAs. The way we set up the reinsurance agreement is that JNL does the hedging, and then we have an internal process to pass those results over to Brooke Re.

Brooke Re is getting the full impact of the VA hedges, and then JNL's got a benefit on the RILA side from not having to do as much hedging externally. So the two of those items combined essentially offset the negative from the net settlement on the reinsurance agreement.

Suneet Kamath (Senior Research Analyst)

Got it. I don't know if there's any way you could size those impacts.

Don Cummings (Chief Accounting Officer and Controller)

Yeah. Just big, round, rough numbers. So Brooke Re reinsurance settlement, about -$600 million negative. The two positive items that I mentioned, roughly about $500 million. So that's approximately your $100 million decrease that you saw.

Suneet Kamath (Senior Research Analyst)

Got it. Okay. That's helpful. Thank you.

Operator (participant)

The next question is from the line of Ryan Kruger with KBW. You may proceed.

Ryan Krueger (Managing Director and Senior Equity Research Analyst)

Hey. Good morning. First one was Brooke Re. Can you give some more color on just we have the GAAP hedging results, but can you give us a little bit more color on kind of what happened Brooke Re given some differences between GAAP and the accounting Brooke Re on the hedging results as well as where the, I guess, sequentially kind of what the capital position Brooke Re did?

Marcia Wadsten (CFO)

Sure, Ryan. So yeah, I think we talked before about the fact that we expected there to be more alignment between our non-operating net hedge gain result in GAAP versus what we would see Brooke Re, but highlighted that they won't be exactly the same. There's kind of a directional indicator there when you look at the GAAP results. But just to note a couple of things that are differences between them so that we're careful that we're not doing a direct read across. We did mention, of course, as we talked and disclosed how Brooke Re arrangement would work, that we're using a modified GAAP basis over there versus the GAAP reported results, which we had highlighted a couple of those modifications.

So that just means the liability movements are not going to be exactly the same as what you see for the MRB result in our non-operating, but again, directionally much more aligned than what we would have seen in the past, certainly, when we would compare statutory impacts to GAAP. And then also just another point to kind of mention around scope is that the non-operating results under GAAP include impacts related to the RILA business. So you see the embedded derivative component there, which is not something that would translate over Brooke Re since the RILA business is not part of what was ceded Brooke Re. And naturally, there's also some hedging associated with those RILA movements. It's part of the GAAP result that would not translate over. So just to kind of highlight a few of those things.

But I guess just in summary, as we think about how we ended the quarter Brooke Re, our hedging performed as we expected. Overall, we saw kind of in alignment with reference to what you referenced from the GAAP results, we saw a bit of an increase in the capital position Brooke Re, and we remain certainly very well capitalized compared to our minimum operating capital level requirement.

Ryan Krueger (Managing Director and Senior Equity Research Analyst)

Got it. Thank you. And then maybe just going back one more time to the difference between the $550 million-$650 million of capital return guidance and the kind of expectation for closer to, let's say, $900 million of free cash flow. Is the primary reason for the difference just you're giving it some time to allow the strategy to play out and show that and demonstrate that it's effective? And then as we move past this year, assuming things work as intended, you could then step up capital or turn to something that would be closer to your free cash flow generation?

Marcia Wadsten (CFO)

Yeah. Certainly, time is an important factor here. It is a new arrangement. We want to make sure that we have the opportunity for just to watch things develop. And as I mentioned earlier, I think we've historically, as we've set our target returns, our financial target, including our capital return target, we've spoken to the fact that we've set them with a view that they are sustainable for the long term but have the opportunity to grow. So certainly, we would look for that type of an opportunity here should the performance of the business continue as we expect it will. And that may lead to some positive movements in the future.

Ryan Krueger (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

The next question is from the line of Tom Gallagher with Evercore ISI. You may proceed.

Tom Gallagher (Senior Managing Director and Senior Equity Analyst)

Hi. Thanks. Just my one follow-up is when I look at overall retail annuities, the outflows are now near $3 billion, closer to $2 billion of outflows last quarter. Part of that appears to just be market because your AUM went up for VA. But part of it also looks like the lapse rate went up by about 100 basis points versus Q4 levels and a lot higher from a year ago. Can you talk a little bit about what's going on with persistency and sales? Would you expect this level of flows or outflows to continue, get better, get worse? Any help on that would be appreciated.

Marcia Wadsten (CFO)

Sure. Yeah. When we look, Tom, at the VA outflows, I mean, keeping in mind there's sort of three buckets within that, right? There's death claims that we're paying. There's full surrender benefits. And then there would be partial withdrawals, probably largely related to the usage of the guaranteed benefits that people bought for the very purpose of being able to draw down on that and support retirement income needs. So I think just to kind of take them one by one, I mean, I think mortality benefits as the block ages is just people, policyholders age through time. That's probably a component that you would expect given the size of our book and the fact that policyholders are aging over time that would generally drift upward over time in terms of sort of that component. That's not necessarily going to be market-sensitive.

But as you said, when the account values are higher, sometimes that just translates into absolute or in dollar terms, a little bit higher amounts that go out on these events. When we think about the full surrenders, I think that is the piece that is market-sensitive. Not only, as you said, when AUM is higher, the dollar amounts that go out the door are larger, but also that's an outflow that does tend to react upward or downward based on the moneyness of the guarantees. What we would typically see and would be incorporated in our lapse assumptions is a market-sensitive kind of dynamic adjustment there, which means that when benefits are less in the money, there tends to be more outflow. When benefits are more in the money following market downturn, the lapse rate declines.

So I think that, given the strong market performance we've had recently, we would expect we would be at those higher levels of outflow from a full surrender perspective. Then the partial surrender or partial withdrawal, systematic withdrawal type activity being the third bucket, represents probably close to about 30% of our outflows for the quarter. That is really, again, driven a lot by just the usage of those guarantees, which is exactly what they were designed for. That would be another one that probably over time you would expect would have more of an upward drift to it as more and more policyholders age into that stage of life where they're ready to use those benefits.

Tom Gallagher (Senior Managing Director and Senior Equity Analyst)

That's helpful. And were any of those three buckets notable in the quarter, or would you say when you analyze what happened with surrenders, were they kind of equally split?

Marcia Wadsten (CFO)

The buckets are, I said, about maybe 30% on the partials. I think we'd probably see more like 15% of that being death benefits. So a little over half would be the full surrenders, and that would be the piece that, as I mentioned, would be more subject to some fluctuation based on just the market conditions, the moneyness of the benefits. That would be one that would probably be more at a higher point at this point given the strong market performance we've had recently.

Tom Gallagher (Senior Managing Director and Senior Equity Analyst)

Okay. Thank you.

Operator (participant)

The next question is from the line of Suneet Kamath with Jefferies. You may proceed.

Suneet Kamath (Senior Research Analyst)

Yeah. Thanks for letting me back in. I wanted to talk about the RILA product just for a second. Can you just talk a little bit about where the growth is coming from and maybe give a sense of which distribution channels you're having the most success in?

Laura Prieskorn (CEO)

Yeah. Scott, do you want to take the?

Scott Romine (President of Jackson National Life Distributors)

Yeah. Sure. Thanks for the question, Suneet. We're seeing success with RILA sales across all of our distribution channels, which really highlights the strength of our distribution partnerships and the breadth of our distribution reach. RILA is doing exactly what it was designed to do. It's added diversification to our product suite. It's enabled us to bring a protection-oriented solution that has strong value to the market. And we're seeing the results of strong sales momentum. We had another record sales quarter, as Laura mentioned. And RILA continues to attract new advisors to Jackson's overall product suite, which continues to expand our overall distribution reach. Laura also mentioned the new enhancements we just made in April, the Plus Income optional income rider, and launching in New York.

We believe that there's ample space for us to carve out a meaningful position in the RILA landscape based on our distribution strengths and our competitive product offerings.

Suneet Kamath (Senior Research Analyst)

Got it. And then just one last one from Marcia. So you talked about the capital efficiency between RILA and the traditional VA. We had another writer talk about sort of that capital efficiency going away as the RILA block has gotten to a particular size. I'm assuming you're way away from that given the relative sizes of the business, but just wanted to confirm that and if there's any sort of rule of thumb in terms of when you might start to see some of that efficiency get eroded. Thanks.

Marcia Wadsten (CFO)

Sure. Yeah. We did speak to that kind of efficiency from an economic perspective and the ability that that has to kind of reduce our net hedging need from an equity perspective given that offset from a delta perspective. And I think we shared last quarter that that offset from RILA was in the 14% range. And I can say that it has increased with the additional sales over the first quarter to just over 20%.

We're certainly not we don't have that 100% offset or anything. We've got ways to go before that. But I would point out that since we have Brooke Re structure in place and our VA guarantees are now ceded Brooke Re and following the modified, yeah, reporting basis, we don't have that same offset in VM-21. We have the economic offset, which is evident in the efficiencies we get from a hedging perspective.

But we don't have the VM-21 offset. So we're not necessarily expecting we would see a change in how our capital would be impacted if we were to reach full offset, a full parity, I guess, between the RILA and the VA book.

Suneet Kamath (Senior Research Analyst)

Got it. And then just one last one, if I could. What is the typical capital charge for a RILA? I don't know if there's a rule of thumb you could share, but that would be helpful. Thanks.

Marcia Wadsten (CFO)

Maybe 5%, probably, is just kind of an approximate off the top of our head here.

Suneet Kamath (Senior Research Analyst)

Okay. Thanks. Good luck, Marcia.

Marcia Wadsten (CFO)

Thank you.

Operator (participant)

There are no further questions waiting at this time. I would like to turn the call over to Laura Prieskorn, the CEO, for final remarks.

Liz Werner (Head of Investor Relations)

Thank you. We appreciate you joining us today and look forward to speaking with you again soon. Take care.

Operator (participant)

That concludes the Jackson Financial Inc First Quarter 2024 Earnings Call. Thank you for your participation and enjoy the rest of your day.