# Jackson Financial Inc. (JXN) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Jackson Financial Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1822993/000182299322000009/jxn-20211231.htm
Accession: 0001822993-22-000009
Filing date: 2022-03-07
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/JXN/
All MD&A years: /company/JXN/mda/
Next year: /company/JXN/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

This executive summary highlights selected information and may not contain all of the information that is important to you. You should read this Annual Report on Form 10-K in its entirety for a more detailed description of events, trends, uncertainties, risks and critical accounting estimates affecting us.

Jackson Financial Inc. (“Jackson Financial”) along with its subsidiaries (collectively, the “Company,” which also may be referred to as “we,” “our” or “us”), is a financial services company focused on helping Americans grow and protect their retirement savings and income to enable them to pursue financial freedom for life in the United States (“U.S.”). 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 ProSM and Market Link Pro AdvisorySM, 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 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 Consolidated Financial Statements for further information on our segments.

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 18.4% of our outstanding Class A common stock and Class B common stock as of December 31, 2021.

•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. On December 13, 2021, Athene converted a total of 725,623 shares of its Class B common stock to Class A common stock on a one-for-one basis. Athene has an equity interest in us, which represents a 10.6% economic interest and a 9.9% voting interest of our outstanding Class A common stock and Class B common stock as of December 31, 2021. On February 1, 2022,

58

Athene converted the remaining 638,861 shares of its Class B common stock to Class A common stock on a one-for-one basis.

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 “Critical Accounting Estimates” 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.”

Impact of Recent Accounting Pronouncements

For a complete discussion of new accounting pronouncements affecting us, see Note 2 to Consolidated Financial Statements.

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.

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:

•    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;

59

•    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 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;

•    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;

•    Loss on Athene Reinsurance Transaction: includes contractual ceding commission, cost of reinsurance write-off and DAC and DSI write-off related to the Athene Reinsurance Transaction;

•    Net investment income on funds withheld assets: includes net investment income on funds withheld assets related to funds withheld reinsurance transactions;

•    Other items: one-time or other non-recurring items, such as costs relating to the Demerger and our separation from Prudential, the impact of discontinued operations and investments that are consolidated on our financial statements due to U.S. GAAP accounting requirements, such as our investments in 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.

As detailed above, the fees attributed to guaranteed benefits, the associated movements in optional guaranteed benefit liabilities and related claims and benefit payments are excluded from Adjusted Operating Earnings, as we believe this approach appropriately removes the impact to both revenue and related expenses associated with the guaranteed benefit features that are offered for certain of our variable annuities and fixed index annuities and gives investors a better picture of what is driving our underlying performance.

Included above in Other items, in connection with preparing for the Demerger and our operation as a separate, publicly traded company, we incurred one-time and recurring expenses of approximately $51 million and $18 million during the year ended December 31, 2021 and 2020, respectively.

60

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.

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2021","","2020","","2019"],["","","(in millions)"],["Net income (loss) attributable to Jackson Financial, Inc.","","$","3,183","","","$","(1,634)","","","$","(497)"],["Income tax expense (benefit)","","602","","","(854)","","","(369)"],["Pretax income (loss) attributable to Jackson Financial Inc","","3,785","","","(2,488)","","","(866)"],["Non-operating adjustments (income) loss:"],["Fees attributable to guarantee benefit reserves","","(2,854)","","","(2,509)","","","(2,377)"],["Net movement in freestanding derivatives","","5,674","","","4,662","","","6,595"],["Net reserve and embedded derivative movements","","(2,753)","","","3,184","","","(60)"],["DAC and DSI impact","","266","","","(1,261)","","","(898)"],["Assumption changes","","(24)","","","(128)","","","81"],["Net realized investment gains (losses) including change in fair value of funds withheld embedded derivative","","(161)","","","(817)","","","141"],["Loss on Athene Reinsurance Transaction","","\u2014","","","2,082","","","\u2014"],["Net investment income on funds withheld assets","","(1,188)","","","(792)","","","(330)"],["Other items","","36","","","41","","","40"],["Total non-operating adjustments","","(1,004)","","","4,462","","","3,192"],["Pretax Adjusted Operating Earnings","","2,781","","","1,974","","","2,326"],["Operating income taxes","","383","","","94","","","290"],["Adjusted Operating Earnings","","$","2,398","","","$","1,880","","","$","2,036"]]
[[/GREPCENT_TABLE]]

61

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 ("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 net income and total equity in accordance with U.S. GAAP. However, we believe the adjustments to equity and earnings are useful to gaining an understanding of our overall results of operations.

The following is a reconciliation of Adjusted Book Value to total shareholders’ equity and a comparison of Adjusted Operating ROE to ROE, the most comparable U.S. GAAP measure:

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2021","","2020","","2019"],["","","(in millions)"],["Total shareholders' equity","","$","10,394","","","$","9,429","","","$","6,837"],["Adjustments to total shareholders\u2019 equity:"],["Affiliated surplus note impact on additional paid-in capital","","\u2014","","","\u2014","","","2,000"],["Affiliated bank loan impact on retained earnings","","\u2014","","","\u2014","","","350"],["Exclude accumulated other comprehensive income attributable to Jackson Financial Inc. (1)","","(1,457)","","","(2,608)","","","(2,397)"],["Adjusted Book Value","","$","8,937","","","$","6,821","","","$","6,790"],["ROE","","31.5","%","","(20.1)","%","","(6.9)","%"],["Adjusted Operating ROE on average equity","","28.6","%","","27.6","%","","28.0","%"],["(1) Excludes $287 million and $1,213 million related to the investments held within the funds withheld account related to the Athene Reinsurance Transaction as of December 31, 2021 and 2020, respectively."]]
[[/GREPCENT_TABLE]]

62

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.

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2021","","2020","","2019"],["","","(in millions)"],["Sales"],["Variable annuities","","$","19,073","","","$","16,621","","","$","14,694"],["RILA","","108","","","\u2014","","","\u2014"],["Fixed Index Annuities","","115","","","997","","","3,821"],["Fixed Annuities","","33","","","327","","","1,194"],["Total Retail Annuity Sales","","19,329","","","17,945","","","19,709"],["Total Institutional Product Sales","","475","","","1,284","","","2,522"],["Total Sales","","$","19,804","","","$","19,229","","","$","22,231"]]
[[/GREPCENT_TABLE]]

For the year ended December 31, 2021, sales of variable annuities were higher than in the year ended December 31, 2020, driven primarily by an increased level of sales of variable annuities without lifetime living benefits. For the year ended December 31, 2021, sales of fixed index annuities and fixed annuities remained at historically low levels following pricing actions taken in early 2020. In addition, there were $475 million in sales of institutional products during the year ended December 31, 2021, compared to $1.3 billion during the prior year.

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.

63

[[GREPCENT_TABLE]]
[["","December 31,"],["","2021","","2020"],["","(in millions)"],["Account Value"],["GMWB For Life","$","188,078","","","$","167,007"],["GMWB","7,318","","","6,807"],["Other Guarantees - Living Benefits","1,808","","","1,876"],["No Living Benefits","60,719","","","53,022"],["Total Variable Annuity Account Value","257,923","","","228,712"],["RILA","110","","","\u2014"],["Fixed Index Annuity (1)","291","","","176"],["Fixed Annuity (1)","1,099","","","1,077"],["Total Fixed & Fixed Index Annuity Account Value","1,390","","","1,253"],["Total Retail Annuities Account Value","$","259,423","","","$","229,965"],["Total Institutional Products Account Value","$","8,830","","","$","11,138"],["Total Closed Life and Annuity Blocks Account Value (2)","$","8,778","","","$","9,100"],["(1) Net of reinsurance to Athene, where substantially all of our in-force fixed and fixed index annuity product liabilities were reinsured, effective June 1, 2020."],["(2) Excludes payout annuities and traditional life insurance without account value."]]
[[/GREPCENT_TABLE]]

Net Flows

Net flows represents the net change in customer account balances during a period, including gross premiums, surrenders, withdrawals and benefits. Net flows excludes investment performance, interest credited to customer accounts, transfers between fixed and variable benefits for variable annuities and policy charges. We believe net flows is a useful metric in providing an understanding of, among other things, sales, ongoing premiums and deposits, the changes in account value from period to period, sources of potential fee income and policyholder behavior.

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2021","","2020","","2019"],["","","(in millions)"],["Net Flows:"],["Variable Annuity","","$","(1,011)","","","$","1,788","","","$","(1,178)"],["RILA","","108","","","\u2014","","","\u2014"],["Fixed Index Annuity (1)","","(1,348)","","","(295)","","","(395)"],["Fixed Annuity (1)","","(1,110)","","","(912)","","","2,433"],["Total Retail Annuities Net Flows","","$","(3,361)","","","$","581","","","$","860"],["Total Institutional Products Net Flows","","$","(2,440)","","","$","(1,517)","","","$","1,039"],["Total Closed Life and Annuity Blocks Net Flows (2)","","$","(267)","","","$","(293)","","","$","(286)"],["(1) Gross of reinsurance to Athene."],["(2) Excludes payout annuities and traditional life insurance without account value."]]
[[/GREPCENT_TABLE]]

The decrease in net flows for the year ended December 31, 2021, was primarily due to strong variable annuity sales being exceeded by surrender and death benefit outflows from our large in-force block.

64

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 December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","","","Years Ended December 31,"],["","","","2021","","2020"],["","","","Account Value","","Benefit Base","","Account Value","","Benefit Base"],["","","","(in millions)"],["No Living Benefits","","","$","60,719","","","N/A","","$","53,022","","","N/A"],["By Guaranteed Living Benefits:"],["GMWB for Life","","","188,078","","","183,626","","","167,007","","","160,226"],["GMWB","","","7,318","","","5,860","","","6,807","","","5,558"],["GMIB (1)","","","1,808","","","2,059","","","1,827","","","2,216"],["GMAB","","","\u2014","","","\u2014","","","49","","","7"],["Total","","","$","257,923","","","$","191,545","","","$","228,712","","","$","168,007"],["By Guaranteed Death Benefit:"],["Return of AV (No GMDB)","","","$","30,337","","","N/A","","$","26,369","","","N/A"],["Return of Premium","","","197,544","","","135,034","","","174,678","","","128,482"],["Highest Anniversary Value","","","15,599","","","14,767","","","14,323","","","13,175"],["Rollup","","","4,188","","","4,850","","","4,062","","","5,005"],["Combination HAV/Rollup","","","10,255","","","10,402","","","9,280","","","9,447"],["Total","","","$","257,923","","","$","165,053","","","$","228,712","","","$","156,109"],["(1) Substantially all of our GMIB benefits are reinsured."]]
[[/GREPCENT_TABLE]]

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.

[[GREPCENT_TABLE]]
[["","December 31,"],["","2021","","2020"],["","(in millions)"],["Jackson Invested Assets","$","47,224","","","$","49,832"],["Third Party Invested Assets (including CLOs)","31,980","","","56,145"],["Total PPM AUM","79,204","","","105,977"],["Total JNAM AUM","280,250","","","255,669"],["Total AUM","$","359,454","","","$","361,646"]]
[[/GREPCENT_TABLE]]

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. Since December 31, 2020, PPM’s assets under management have decreased, primarily due to withdrawals by the former United Kingdom affiliate.

65

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, this environment could make it difficult to consistently develop products that are attractive to customers. Our financial performance can be adversely affected by market volatility and equity market declines if fees assessed on the account value of our annuities fluctuate, hedging costs increase and revenues decline due to reduced sales and increased outflows.

Equity Market Environment

Our financial performance is impacted by the performance of equity markets. For example, our variable annuities earn fees based on the account value, which changes with equity market levels. After a very volatile 2020, U.S. equity markets have performed well in 2021 with the S&P 500 generally at or near all time highs throughout the year. Equity volatility has moderated in 2021 from historically high levels in 2020 resulting in reduced hedging costs year over year. While equity implied volatility has decreased in 2021, it still remains above its historical median despite the high S&P 500 levels. The financial performance of our hedging program could be impacted by large directional market movements or periods of high volatility. In particular, our hedges could be less effective in periods of large directional movements or we could experience more frequent or more costly rebalancing in periods of high volatility, which would lead to adverse performance versus our hedge targets and increased hedging costs. Further, we are also exposed to basis risk, which results from our inability to purchase or sell hedge assets whose performance is perfectly correlated to the performance of the funds into which customers allocate their assets. We make funds available to customers where we believe we can transact in sufficiently correlated hedge assets, and we anticipate some variance in the performance of our hedge assets and customer funds. This variance may result in our hedge assets outperforming or underperforming the customer assets they are intended to match. This variance may be exacerbated during periods of high volatility, leading to a mismatch in our hedge results relative to our hedge targets and GAAP results.

Interest Rate Environment

We believe the interest rate environment will continue to impact our business and financial performance in the future for several reasons, including the following:

•    Our investment portfolio is predominantly composed of fixed income securities. In the near term, we expect the yields we earn on new investments will be materially lower than yields we earned on maturing investments due to the low interest rate environment.

•    A prolonged low interest rate environment could subject us to increased hedging costs or an increase in the amount of statutory reserves that our insurance subsidiaries are required to hold for optional 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. If rates remain at the current low levels, we expect these prescribed rates may continue to decline as the NAIC updates the calculations each year, which would adversely impact our statutory capital. In addition, low interest rates could also increase the perceived value of optional guaranteed

66

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 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 increase, consistent with the Federal Reserve’s signals about upcoming interest rate decisions, the effects of low interest rates discussed above will diminish. 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 increases by the Federal Reserve.

Credit Market Environment

Our financial performance is impacted by conditions in fixed income markets. With an improving economy, credit spreads have tightened in 2021 after increasing substantially at the onset of the COVID-19 pandemic in 2020, and credit defaults have also reduced from levels seen in 2020. As credit spreads widen, the fair value of our existing investment portfolio generally decreases, although we generally expect the widening spreads to increase the yield on new fixed income investments. Conversely, as credit spreads tighten, the fair value of our existing investment portfolio generally increases, and the yield available on new investment purchases decreases. While changing credit spreads impact the fair value of our investment portfolio, this revaluation 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.

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.

67

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:

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 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.

NAIC Valuation Manual Updates

In 2019, the NAIC adopted changes to section 21 of the NAIC Valuation Manual (VM-21) with the aim of reducing the non-economic volatility in the variable annuity statutory balance sheet and enhancing risk management. The framework applies to variable annuities’ reserve and capital requirements and, among other things, is expected to produce more stable RBC ratios compared to the prior statutory framework. The NAIC guidance had an effective date of January 2020 for the new framework, with early adoption permitted. We early adopted the new framework for Jackson in the period ending December 31, 2019.

New York has enacted Insurance Regulation 213 ("Regulation 213") requiring principle-based reserving. New York’s Regulation 213 establishes that the reserving standard in New York will be consistent with the reserve standards, valuation methods and related requirements of the NAIC Valuation Manual, while also establishing deviations from the NAIC Valuation Manual, by regulation, in areas where New York State Department of Financial Services ("NYDFS") determines that an alternative requirement would be in the best interest of New York customers. Most notably, these changes were effective as of December 31, 2020 for variable annuities.

68

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.

69

Consolidated Results of Operations

The following table sets forth, for the periods presented, certain data from our consolidated income statements. The information contained in the table below should be read in conjunction with our consolidated financial statements and the related notes:

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2021","","2020","","2019"],["","","(in millions)"],["Revenues"],["Fee income","","$","7,670","","","$","6,604","","","$","6,413"],["Premiums","","133","","","160","","","567"],["Net investment income","","3,429","","","2,829","","","3,143"],["Net gains (losses) on derivatives and investments","","(2,478)","","","(6,451)","","","(6,714)"],["Other income","","94","","","64","","","69"],["Total revenues","","8,848","","","3,206","","","3,478"],["Benefits and Expenses"],["Death, other policy benefits and change in policy reserves, net of deferrals","","913","","","1,284","","","1,464"],["Interest credited on other contract holder funds, net of deferrals","","868","","","1,210","","","1,641"],["Interest expense","","37","","","88","","","99"],["Operating costs and other expenses, net of deferrals","","2,462","","","984","","","2,066"],["Cost of reinsurance","","\u2014","","","2,520","","","\u2014"],["Amortization of deferred acquisition and sales inducement costs","","521","","","(389)","","","(981)"],["Total benefits and expenses","","4,801","","","5,697","","","4,289"],["Pretax income (loss)","","4,047","","","(2,491)","","","(811)"],["Income tax expense (benefit)","","602","","","(854)","","","(369)"],["Net income (loss)","","3,445","","","(1,637)","","","(442)"],["Less: Net income (loss) attributable to noncontrolling interests","","262","","","(3)","","","55"],["Net income (loss) attributable to Jackson Financial Inc.","","$","3,183","","","$","(1,634)","","","$","(497)"],["Adjusted Operating Earnings"],["Net income (loss) attributable to Jackson Financial, Inc.","","$","3,183","","","$","(1,634)","","","$","(497)"],["Income tax expense (benefit)","","602","","","(854)","","","(369)"],["Pretax income (loss) attributable to Jackson Financial Inc","","3,785","","","(2,488)","","","(866)"],["Non-operating adjustments (income) loss:"],["Fees attributable to guarantee benefit reserves","","(2,854)","","","(2,509)","","","(2,377)"],["Net movement in freestanding derivatives","","5,674","","","4,662","","","6,595"],["Net reserve and embedded derivative movements","","(2,753)","","","3,184","","","(60)"],["DAC and DSI impact","","266","","","(1,261)","","","(898)"],["Assumption changes","","(24)","","","(128)","","","81"],["Net realized investment gains (losses) including change in fair value of funds withheld embedded derivative","","(161)","","","(817)","","","141"],["Loss on Athene Reinsurance Transaction","","\u2014","","","2,082","","","\u2014"],["Net investment income on funds withheld assets","","(1,188)","","","(792)","","","(330)"],["Other items","","36","","","41","","","40"],["Total non-operating adjustments","","(1,004)","","","4,462","","","3,192"],["Pretax Adjusted Operating Earnings","","2,781","","","1,974","","","2,326"],["Operating income taxes","","383","","","94","","","290"],["Adjusted Operating Earnings","","$","2,398","","","$","1,880","","","$","2,036"]]
[[/GREPCENT_TABLE]]

70

Year Ended December 31, 2021 compared to Year Ended December 31, 2020

Pretax Income (Loss)

Our pretax income (loss) increased by $6,538 million to a pretax income of $4,047 million for the year ended December 31, 2021, from a pretax loss of $2,491 million for the year ended December 31, 2020 primarily due to:

•$3,973 million improvement on total net gains (losses) on derivatives and investments as shown in table below and driven by:

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2021","","2020","","Variance"],["","","(in millions)"],["Net gains (losses) excluding derivatives and funds withheld assets","","$","182","","","$","377","","","$","(195)"],["Net gains (losses) on freestanding derivatives","","(5,520)","","","(4,534)","","","(986)"],["Net gains (losses) on embedded derivatives (excluding funds withheld reinsurance)","","2,881","","","(2,734)","","","5,615"],["Net gains (losses) on derivative instruments","","(2,639)","","","(7,268)","","","4,629"],["Net gains (losses) on funds withheld reinsurance","","(21)","","","440","","","(461)"],["Total net gains (losses) on derivatives and investments","","$","(2,478)","","","$","(6,451)","","","$","3,973"]]
[[/GREPCENT_TABLE]]

◦Favorable movements in reserves on guarantees that are accounted for as embedded derivatives, driven by positive separate account returns as well as higher interest rates, influencing projected separate account returns and discount rates, compared to losses in the prior year;

Primarily offset by:

◦Higher freestanding derivative losses as a result of the higher interest rate environment in 2021, which resulted in losses within our interest rate related hedge instruments, partially offset by lower losses on our equity derivatives primarily driven by lower volatility compared to prior year;

◦Lower benefit due to losses recognized on funds withheld assets compared to gains in the prior year; and

◦Lower gains for current year on gains excluding derivatives and funds withheld assets.

•$2,520 million decrease in cost of reinsurance, reflecting the Athene Reinsurance Transaction in June 2020;

•$1,066 million increase in fee income primarily due to a $45 billion increase in average variable annuity account values as a result of separate account returns on investments during the year;

•$600 million increase in net investment income as a result of higher income on limited partnership investments, which are recorded on a one quarter lag. Partially offsetting this increase was lower income on debt securities due to lower portfolio balances in 2021 as a result of the Athene transaction;

•$371 million benefit for lower death, other policy benefits and change in policy reserves primarily due to more favorable movements in reserves on variable annuity guarantees accounted for as insurance liabilities, and lower other policy benefits driven by recovery of claims on previously reinsured policies for fixed annuities and fixed-indexed annuities of $24 million; and

•$342 million benefit from lower interest credited on contract holder funds, net of deferrals, primarily driven from the impact of ceding the majority of the fixed and fixed-index annuity business to Athene.

This increase was partially offset by:

•$1,478 million higher operating costs and other expenses, net of deferrals, as the ceding commission of $1.2 billion received due to the Athene Reinsurance Transaction was included as a contra expense in 2020. Excluding the ceding commissions, operating costs and other expenses increased by 13%, primarily due to higher asset-based commissions, which are non-deferrable and the result of higher account values in 2021; and

•$910 million lower benefit from amortization of deferred acquisition costs and deferred sales inducement costs driven by lower net freestanding derivative losses and embedded derivative gains in 2021, leading to lesser negative impacts to current period gross profits and, therefore, greater current period amortization.

71

Income Taxes

Income tax expense increased $1,456 million to an expense of $602 million for the year ended December 31, 2021, from a benefit of $854 million for the year ended December 31, 2020. The 2021 income tax expense represents an effective income tax rate of 16%, versus a 2020 income tax benefit that represents an effective income tax rate of 34%. Our effective rate typically varies from the marginal statutory rate of 21% due to the impact of permanent tax differences, such as dividends received deduction and foreign tax credits. In addition, income taxes for the year ended December 31, 2021 included $24 million benefit of net interest related to income taxes and $3 million benefit for the reversal of an uncertain tax position. During 2020, in addition to the dividends received deduction and foreign tax credits, a benefit attributable to prior year deferred tax balances for certain investment partnerships was recorded along with an adjustment with respect to our methodology for state income taxes, and an income tax benefit related to the Athene Reinsurance transaction.

Year Ended December 31, 2020 compared to Year Ended December 31, 2019

Pretax Income (Loss)

Our pretax income (loss) decreased by $1,680 million to a pretax loss of $2,491 million for the year ended December 31, 2020, from a pretax loss of $811 million for the year ended December 31, 2019 primarily due to:

•$2,520 million net charge for the cost of reinsurance due to the Athene Reinsurance Transaction in June 2020;

•$592 million lower benefit from amortization of deferred acquisition costs and deferred sales inducement costs driven by a DAC write-off of $764 million related to our fixed and fixed-index blocks of business, as a result of the Athene Reinsurance Transaction. Excluding the impact of this write off, amortization would have been a benefit of $173 million primarily due to a more favorable benefit of amortization of deferred acquisition costs, resulting from the higher losses on derivative movements, compared to 2019, partially offset by the unfavorable impact from assumption changes;

•$407 million decrease in premiums primarily due to the John Hancock NY assumed reinsurance transaction in 2019. Excluding the impact of the John Hancock NY reinsurance transaction, premiums were relatively consistent with prior year; and

•$314 million decrease in net investment income as the investment yield on our portfolio declined from 4.03% at December 31, 2019 to 3.33% in 2020, due to the portfolio rebalancing activity undertaken following the Athene Reinsurance Transaction, and investing at new money interest rates that were lower than the investment yield prior to this rebalancing.

This decrease was partially offset by:

•$1,082 million benefit from lower operating costs and other expenses, net of deferrals, as the ceding commission of $1.2 billion received due to the Athene Reinsurance Transaction was included as a contra expense within operating costs and other expenses. In addition, the ceding commission associated with the John Hancock NY reinsurance transaction of $65 million was included as a contra expense in 2019. Excluding these ceding commissions, operating costs and other expenses increased by 4%, compared to the prior year;

•$431 million benefit from lower interest credited on contract holder funds, net of deferrals, primarily driven from the impact of ceding the majority of the fixed and fixed-index annuity business to Athene;

•$263 million improvement on total net losses on derivatives and investments as shown in table below and driven by:

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2020","","2019","","Variance"],["","","(in millions)"],["Net gains (losses) excluding derivatives and funds withheld assets","","$","377","","","$","189","","","$","188"],["Net gains (losses) on freestanding derivatives","","(4,534)","","","(6,524)","","","1,990"],["Net gains (losses) on embedded derivatives (excluding funds withheld reinsurance)","","(2,734)","","","(49)","","","(2,685)"],["Net gains (losses) on derivative instruments","","(7,268)","","","(6,573)","","","(695)"],["Net gains (losses) on funds withheld reinsurance","","440","","","(330)","","","770"],["Total net gains (losses) on derivatives and investments","","$","(6,451)","","","$","(6,714)","","","$","263"]]
[[/GREPCENT_TABLE]]

72

◦Lower freestanding derivative losses as a result of lower market returns compared to prior year, as well as a lower interest rate environment, which resulted in higher gains within our interest rate related hedge movements;

◦Higher benefit due to the realized gains recognized on funds withheld assets compared to losses in the prior year; and

◦Higher gains for current year on realized gains excluding derivatives and funds withheld assets.

Primarily offset by:

◦Higher losses in reserves on guarantees that are accounted for as embedded derivatives, driven by lower interest rates, influencing drift and discount rates, and higher implied volatility, which had the effect of more than offsetting the benefit of an increase in equity prices. Additionally, the embedded derivative movement reflected an update to both our credit rating during 2020, as well as, a change in discount rate methodology during the year;

•$191 million increase in fee income primarily due to an $8 billion increase in average variable annuity account value balances as a result of separate account returns on investments during the year; and

•$180 million benefit for lower death, other policy benefits and change in policy reserves primarily due to the John Hancock NY assumed reinsurance transaction, which resulted in an increase in reserves of $471 million during 2019. Excluding the impact of reserves from the John Hancock reinsurance transaction, death, other policy benefits and change in policy reserves, net of deferrals, increased $290 million as a result of more unfavorable movements in embedded liability reserves, as described above.

Income Taxes

Income tax benefit increased $485 million to a benefit of $854 million for the year ended December 31, 2020, from a benefit of $369 million for the year ended December 31, 2019. The 2020 income tax benefit represents an effective income tax benefit rate of 34% for the year ended December 31, 2020 versus a benefit rate of 43% for the year-ended December 31, 2019. The benefit during the year ended December 31, 2020 arose primarily from the dividends received deduction and foreign tax credits. In addition, during 2020 we recorded a benefit attributable to prior year deferred tax balances for certain investment partnerships, as well as an adjustment with respect to our methodology for state income taxes. Our effective rate typically varies from the marginal statutory rate of 21% due to the impact of permanent tax differences as described above. In addition, income taxes for the year ended December 31, 2020 included an income tax benefit of $487 million related to the Athene Reinsurance Transaction.

73

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. See also Item 8. Financial Statements and Supplementary Data, Note 3, Segment Information:

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2021","","2020","","2019"],["","","","","(in millions)"],["Pretax Adjusted Operating Earnings by Segment:"],["Retail Annuities","","$","2,528","","","$","2,006","","","$","2,287"],["Institutional Products","","64","","","85","","","106"],["Closed Life and Annuity Blocks","","224","","","\u2014","","","\u2014"],["Corporate and Other","","(35)","","","(117)","","","(67)"],["Pretax Adjusted Operating Earnings","","2,781","","","1,974","","","2,326"],["Pre-tax reconciling items from adjusted operating income to net income (loss) attributable to Jackson Financial, Inc.:"],["Fees attributable to guarantee benefit reserves","","2,854","","","2,509","","","2,377"],["Net movement in freestanding derivatives","","(5,674)","","","(4,662)","","","(6,595)"],["Net reserve and embedded derivative movements","","2,753","","","(3,184)","","","60"],["DAC and DSI impact","","(266)","","","1,261","","","898"],["Assumption changes","","24","","","128","","","(81)"],["Net realized investment gains (losses) including change in fair value of funds withheld embedded derivative","","161","","","817","","","(141)"],["Loss on Athene Reinsurance Transaction","","\u2014","","","(2,082)","","","\u2014"],["Net investment income on funds withheld assets","","1,188","","","792","","","330"],["Other items","","(36)","","","(41)","","","(40)"],["Total pre-tax reconciling items","","1,004","","","(4,462)","","","(3,192)"],["Pretax income (loss) attributable to Jackson Financial, Inc.","","3,785","","","(2,488)","","","(866)"],["Income tax expense (benefit)","","602","","","(854)","","","(369)"],["Net income (loss) attributable to Jackson Financial, Inc.","","$","3,183","","","$","(1,634)","","","$","(497)"]]
[[/GREPCENT_TABLE]]

74

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 consolidated financial statements and the related notes.

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2021","","2020","","2019"],["","","(in millions)"],["Retail Annuities:"],["Operating Revenues"],["Fee income","","$","4,236","","","$","3,470","","","$","3,406"],["Net investment income","","675","","","931","","","1,504"],["Income on operating derivatives","","52","","","48","","","39"],["Other income","","47","","","30","","","1"],["Total Operating Revenues","","5,010","","","4,479","","","4,950"],["Operating Benefits and Expenses"],["Death, other policy benefits and change in policy reserves","","(45)","","","54","","","27"],["Interest credited on other contract holder funds","","268","","","532","","","906"],["Interest expense","","22","","","27","","","35"],["Operating costs and other expenses, net of deferrals","","2,039","","","1,797","","","1,757"],["Amortization of deferred acquisition costs and deferred sales inducement costs","","198","","","63","","","(62)"],["Total Operating Benefits and Expenses","","2,482","","","2,473","","","2,663"],["Pretax Adjusted Operating Earnings","","$","2,528","","","$","2,006","","","$","2,287"]]
[[/GREPCENT_TABLE]]

The following table summarizes a roll forward of account value for our Retail Annuities segment as of the dates indicated:

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2021","","2020","","2019"],["","","(in millions)"],["Retail Annuities Account Value:"],["Balance as of beginning of period","","$","256,740","","","$","230,932","","","$","196,764"],["Premiums and deposits","","19,511","","","18,117","","","19,730"],["Surrenders, withdrawals, and benefits","","(22,872)","","","(17,536)","","","(18,870)"],["Net flows","","(3,361)","","","581","","","860"],["Credited Interest/Investment performance","","33,693","","","27,648","","","35,608"],["Policy Charges and other","","(2,693)","","","(2,421)","","","(2,300)"],["Balance as of end of period","","284,379","","","256,740","","","230,932"],["Ceded reinsurance","","(24,956)","","","(26,775)","","","\u2014"],["Balance as of end of period, net of ceded reinsurance","","$","259,423","","","$","229,965","","","$","230,932"]]
[[/GREPCENT_TABLE]]

Year Ended December 31, 2021 compared to Year Ended December 31, 2020

Pretax Adjusted Operating Earnings

Pretax Adjusted Operating Earnings increased $522 million to $2,528 million for the year ended December 31, 2021 from $2,006 million for the year ended December 31, 2020 primarily due to:

•$766 million increase in fee income primarily due to a $45 billion increase in average variable annuity account values as a result of separate account returns on investments during the year.

•$264 million benefit from a decrease in interest credited on contract holder funds, net of deferrals, primarily driven from the impact of ceding the majority of the fixed and fixed-index annuity business to Athene.

75

•$99 million decrease in death, other policy benefits and change in policy reserves primarily due to lower other policyholder benefits due to recovery of claims on previously reinsured policies for fixed annuities and fixed-indexed annuities in 2021.

•$17 million increase in other operating income driven by the expense allowance received related to the Athene Reinsurance Transaction, which is a benefit to us and is recorded within other operating income.

These increases were partially offset by:

•$256 million decrease in net investment income primarily due to the decrease in invested assets as a result of the Athene Reinsurance Transaction, partially offset by higher income on limited partnership investments.

•$242 million increase in operating costs and other expenses, net of deferrals, due to higher non-deferrable commission expenses, a result of higher account values during 2021.

•$135 million increase in amortization of deferred acquisition costs and deferred sales inducement costs primarily due to a decrease in the expected short-term future variable annuity separate account growth resulting from the mean reversion methodology, which led to decreased expected future gross profits, and therefore higher current period amortization during 2021.

Account Value

Retail annuities account value, gross of reinsurance, increased $27.6 billion between periods primarily due to positive variable annuity separate account growth in 2021 driven by favorable market performance relative to prior year. This was partially offset by negative net flows in 2021, as strong variable annuity sales were exceeded by surrender and death benefit outflows from our large in-force block.

Year Ended December 31, 2020 compared to Year Ended December 31, 2019

Pretax Adjusted Operating Earnings

Pretax Adjusted Operating Earnings decreased $281 million to $2,006 million for the year ended December 31, 2020 from $2,287 million for the year ended December 31, 2019 primarily due to:

•$573 million decrease in net investment income as investment yields decreased from 3.93% at December 31, 2019 to 3.45% in 2020, as well as a decrease in invested assets within the retail annuity investment portfolios from $40.2 billion as of December 31, 2019 to $13.7 billion in 2020, of which $24 billion was a result of the Athene Reinsurance Transaction. The decrease in investment yield was due to the retail annuity portfolio rebalancing activity that was undertaken following the Athene Reinsurance Transaction to realign this portfolio with our investment management objectives. This resulted in investing at new money interest rates which were lower than the investment yield prior to rebalancing.

•$125 million increase in amortization of deferred acquisition costs and deferred sales inducement costs primarily due to a net unfavorable impact of $138 million from assumption changes in 2020, compared to a $50 million benefit in 2019. This was partially offset by higher deferred acquisition costs deceleration of $330 million in 2020, compared to deceleration of $280 million in 2019.

•$40 million increase in operating costs and other expenses, net of deferrals, due to an increase in allocated corporate expenses driven by growth in this segment as compared to other segments.

•$27 million increase in death, other policy benefits and change in policy reserves primarily as a result of higher other policyholder benefits, compared to 2019.

These decreases were partially offset by:

•$374 million benefit from a decrease in interest credited on contract holder funds, net of deferrals primarily driven from the impact of ceding the majority of the fixed and fixed-index annuity business to Athene.

•$64 million increase in fee income increased primarily due to an $8 billion, or 4%, increase in average separate account balances as a result of separate account returns on investments during the year.

•$29 million increase in other operating income driven by the expense allowance received related to the Athene Reinsurance Transaction, which is a benefit to us and is recorded within other operating income.

76

•$9 million increase in income on operating derivatives primarily due to the decrease in rates during 2020. This income relates to quarterly interest payments with respect to our interest rate swaps and, for which, we generally receive amounts based on fixed rates and pay amounts based on floating rates.

Account Value

Retail annuities account value, gross of reinsurance, increased $25.8 billion between periods primarily due to positive variable annuity separate account growth in 2020 driven by favorable market performance in the year. This was partially offset by net flows that were positive in 2020 but smaller in magnitude than guaranteed benefit fees assessed against policyholders.

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 consolidated financial statements and the related notes.

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2021","","2020","","2019"],["","","(in millions)"],["Institutional Products:"],["Operating Revenues"],["Net investment income","","$","260","","","$","355","","","$","450"],["Income on operating derivatives","","(3)","","","\u2014","","","\u2014"],["Other income","","\u2014","","","1","","","\u2014"],["Total Operating Revenues","","257","","","356","","","450"],["Operating Benefits and Expenses"],["Interest credited on other contract holder funds (1)","","188","","","250","","","291"],["Interest expense (1)","","\u2014","","","16","","","49"],["Operating costs and other expenses, net of deferrals","","5","","","5","","","4"],["Total Operating Benefits and Expenses","","193","","","271","","","344"],["Pretax Adjusted Operating Earnings","","$","64","","","$","85","","","$","106"]]
[[/GREPCENT_TABLE]]

(1)     At December 31, 2021, interest expense recorded for institutional products has been reclassified to interest credited on other contract holder funds.

The following table summarizes a roll forward of account value for our Institutional Products segment as of the dates indicated:

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2021","","2020","","2019"],["","","(in millions)"],["Institutional Products:"],["Balance as of beginning of period","","$","11,138","","","$","12,287","","","$","10,900"],["Premiums and deposits","","475","","","1,284","","","2,522"],["Surrenders, withdrawals, and benefits","","(2,915)","","","(2,801)","","","(1,483)"],["Net flows","","(2,440)","","","(1,517)","","","1,039"],["Credited Interest","","188","","","266","","","339"],["Policy Charges and other","","(56)","","","102","","","9"],["Balance as of end of period","","$","8,830","","","$","11,138","","","$","12,287"]]
[[/GREPCENT_TABLE]]

77

Year Ended December 31, 2021 compared to Year Ended December 31, 2020

Pretax Adjusted Operating Earnings

Pretax Adjusted Operating Earnings decreased $21 million to $64 million for the year ended December 31, 2021 from $85 million for the year ended December 31, 2020 primarily due to:

•$95 million decrease in net investment income primarily due to spread compression in the prior year arising from higher levels of liquid assets and reinvestment at lower rates net of interest rate hedges following the portfolio repositioning in 2020.

This decrease was partially offset by:

•$78 million benefit from a decrease in operating benefits and expenses primarily from 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 $11,138 million at December 31, 2020 to $8,830 million at December 31, 2021. The decline in account value was driven by continued maturities of the existing contracts and funding agreements in addition to lower issuances in 2021.

Year Ended December 31, 2020 compared to Year Ended December 31, 2019

Pretax Adjusted Operating Earnings

Pretax Adjusted Operating Earnings decreased $21 million to $85 million for the year ended December 31, 2020 from $106 million for the year ended December 31, 2019 primarily due to:

•$95 million decrease in net investment income primarily due to the impact of investing at interest rates lower than the overall portfolio yield. Average invested assets increased from $12,847 million at December 31, 2019 to $13,546 million at December 31, 2020, an increase of 5.4%, while the investment yield decreased from 3.50% at December 31, 2019 to 2.62% at December 31, 2020.

This decrease was partially offset by:

•$73 million benefit from a decrease in operating benefits and expenses primarily from a decrease in interest credited resulting from a reduction in the institutional product account value during the year. In addition, lower interest rates in 2020 resulted in lower interest expense, compared to 2019, with respect to our FHLB funding agreements, which are mostly floating rate contracts.

Account Value

Institutional product account value decreased from $12,287 million at December 31, 2019 to $11,138 million at December 31, 2020. The decline in account value was driven by higher maturities of existing contracts and funding agreements in addition to lower new funding agreement issuances in 2020.

78

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 consolidated financial statements and the related notes.

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2021","","2020","","2019"],["","","(in millions)"],["Closed Life and Annuity Blocks:"],["Operating Revenues"],["Fee income","","$","492","","","$","513","","","$","528"],["Premiums","","145","","","172","","","581"],["Net investment income","","925","","","759","","","802"],["Income on operating derivatives","","72","","","58","","","26"],["Other income","","39","","","25","","","58"],["Total Operating Revenues","","1,673","","","1,527","","","1,995"],["Operating Benefits and Expenses"],["Death, other policy benefits and change in policy reserves","","861","","","916","","","1,425"],["Interest credited on other contract holder funds","","412","","","428","","","444"],["Operating costs and other expenses, net of deferrals","","162","","","166","","","107"],["Amortization of deferred acquisition costs and deferred sales inducement costs","","14","","","17","","","19"],["Total Operating Benefits and Expenses","","1,449","","","1,527","","","1,995"],["Pretax Adjusted Operating Earnings (1)","","$","224","","","$","\u2014","","","$","\u2014"]]
[[/GREPCENT_TABLE]]

(1)    Pretax adjusted operating earnings were both below one million for years ended December 31, 2020 and 2019.

Year Ended December 31, 2021 compared to Year Ended December 31, 2020

Pretax Adjusted Operating Earnings

Pretax Adjusted Operating Earnings increased $224 million to $224 million for the year ended December 31, 2021 from $0 million for the year ended December 31, 2020 primarily due to:

•$166 million increase in net investment income primarily due to higher levels of investment income on private equity and other limited partnership investments, when compared to the same period in 2020.

•$55 million decrease in death, other policy benefit and change in policy reserves primarily as a result of a policy benefits increase in 2020.

•$16 million benefit from a decrease in interest credited on contract holder funds, net of deferrals, largely as a result of continued decrease in the size of the closed blocks.

•$14 million increase in income on operating derivatives primarily due to the decrease in floating rates during 2021, which resulted in more income received than what we paid. This income relates to quarterly interest payments with respect to our interest rate swaps and, for which, we generally receive amounts based on fixed rates and pay amounts based on floating rates.

•$14 million increase in other income. In the first quarter of 2020, we reimbursed a portion of reinsurance expense allowances resulting from lapses on certain term life insurance products described below, which resulted in a net other expense during that period.

These increases were partially offset by:

•$27 million decrease in premiums primarily due to reinsurance premium recoveries on certain term life insurance products for a specified reinsured block of business that lapsed at the end of the level term period in 2020. Upon the policy lapse, we received a return of the ceded premium from the reinsurer.

•$21 million decrease in fee income primarily due to an overall decrease in mortality and expense charges as the closed block of life business continues to run off.

79

Year Ended December 31, 2020 compared to Year Ended December 31, 2019

Pretax Adjusted Operating Earnings

Pretax Adjusted Operating Earnings were relatively flat for the year ended December 31, 2020, compared to the year ended December 31, 2019 primarily due to:

•$509 million benefit from a decrease in death, other policy benefit and change in policy reserves primarily as a result of the John Hancock NY assumed reinsurance transaction. Excluding the initial impact of this reinsurance transaction, death, other policy benefit and change in policy reserves were slightly lower by $38 million, compared to prior year.

•$32 million increase in income on operating derivatives primarily due to the decrease in rates during 2020. This income relates to quarterly interest payments with respect to our interest rate swaps and, for which, we generally receive amounts based on fixed rates and pay amounts based on floating rates.

•$16 million benefit from a decrease in interest credited on contract holder funds, net of deferrals, largely as a result of continued decrease in the size of the closed blocks.

These increases were mostly offset by:

•$409 million decrease in premiums primarily as a result of the John Hancock NY reinsurance transaction. Upon closing of the John Hancock NY reinsurance transaction in 2019, we reported $406 million in assumed premium. Excluding the impact of this reinsurance transaction, premiums remained relatively flat, compared to the prior year.

•$59 million increase in operating costs and other expenses, net of deferrals, primarily due to the $65 million negative ceding commission in 2019 related to the John Hancock NY reinsurance transaction. Excluding the impact of this reinsurance transaction, operating costs and other expenses, net of deferrals, decreased $6 million.

•$43 million decrease in net investment income primarily due to investing at lower rates than the overall portfolio yield as compared to prior year.

•$16 million decrease in fee income primarily due to an overall decrease in mortality and expense charges as the closed block of life business continues to run off.

80

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 consolidated financial statements and the related notes.

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2021","","2020","","2019"],["","","(in millions)"],["Corporate and Other:"],["Operating Revenues"],["Fee income","","$","76","","","$","100","","","$","88"],["Net investment income","","102","","","20","","","41"],["Income on operating derivatives","","32","","","21","","","8"],["Other income","","8","","","8","","","10"],["Total Operating Revenues","","218","","","149","","","147"],["Operating Benefits and Expenses"],["Interest expense","","15","","","45","","","15"],["Operating costs and other expenses, net of deferrals","","204","","","201","","","198"],["Amortization of deferred acquisition costs and deferred sales inducement costs","","34","","","20","","","1"],["Total Operating Benefits and Expenses","","253","","","266","","","214"],["Pretax Adjusted Operating Earnings","","$","(35)","","","$","(117)","","","$","(67)"]]
[[/GREPCENT_TABLE]]

Year Ended December 31, 2021 compared to Year Ended December 31, 2020

Pretax Adjusted Operating Earnings

Pretax adjusted operating earnings increased $82 million to $(35) million for the year ended December 31, 2021 from $(117) million for the year ended December 31, 2020 primarily due to the following:

•$82 million increase in net investment income primarily due to higher income on limited partnership investments.

•$30 million decrease in interest expense; The interest expense incurred in the current year relates to our term loans and senior notes. The interest expense incurred in the prior year primarily relates our surplus note, which was restructured as an intercompany obligation in June 2020. See Note 11 - Long-Term Debt to our consolidated financial statements.

•$11 million increase in income on operating derivatives primarily due to the decrease in floating rates during 2021, which resulted in more income received than what we paid. This income relates to quarterly interest payments with respect to our interest rate swaps and, for which, we generally receive amounts based on fixed rates and pay amounts on floating rates with respect to our interest rate swaps.

These increases were partially offset by:

•$24 million decrease in fee income due to lower asset management fees generated at PPM resulting from managed asset withdrawals by the former United Kingdom affiliate. Fee income shown above excludes fees on the Company's assets managed by PPM as part of elimination and consolidation adjustments presented in Corporate and Other.

81

Year Ended December 31, 2020 compared to Year Ended December 31, 2019

Pretax Adjusted Operating Earnings

Pretax adjusted operating earnings decreased $50 million to $(117) million for the year ended December 31, 2020 from $(67) million for the year ended December 31, 2019 primarily due to the following:

•$30 million increase in interest expense primarily related to Brooke Life’s $2.0 billion surplus note and $350 million loan with Standard Chartered Bank, both of which were entered into during the fourth quarter of 2019 and subsequently restructured in June 2020. See Note 11 - Long-Term Debt to our consolidated financial statements.

•$21 million decrease in net investment income primarily due to lower levels of investment income allocated to the corporate segment.

This decrease was partially offset by:

•$13 million increase in income on operating derivatives primarily due to the decrease in rates during 2020. This income relates to quarterly interest payments with respect to our interest rate swaps and, for which, we generally receive amounts based on fixed rates and pay amounts on floating rates with respect to our interest rate swaps.

•$12 million increase in fee income due to slightly higher asset management fees generated at PPM. Fee income shown above excludes fees on the Company's assets managed by PPM as part of elimination and consolidation adjustments presented in Corporate and Other.

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 adviser. Our investment strategy benefits from PPM’s ability to originate investments directly, as well as participate in transactions originated by banks, investment banks, commercial finance companies and other intermediaries. 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 Consolidated Financial Statements for further details. We may also use other third-party investment managers for certain niche asset classes. As of December 31, 2021, Apollo Insurance Solutions Group LP managed $25.3 billion of cash and investments and other third-party investment managers represented approximately $192 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

82

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 December 31, 2021 and 2020, we had total investments of $74.2 billion and $80.5 billion, respectively.

Portfolio Composition

The following table summarizes the carrying values of our investments:

[[GREPCENT_TABLE]]
[["","December 31,"],["","2021","","2020"],["","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","$","32,453","","","$","19,094","","","$","51,547","","","$","34,601","","","$","24,474","","","$","59,075"],["Debt Securities, at fair value under fair value option","1,547","","","164","","","1,711","","","1,109","","","168","","","1,277"],["Debt securities, trading, at fair value","117","","","\u2014","","","117","","","105","","","\u2014","","","105"],["Equity securities, at fair value","163","","","116","","","279","","","151","","","42","","","193"],["Mortgage loans, net of allowance for credit losses","6,743","","","4,739","","","11,482","","","7,742","","","2,986","","","10,728"],["Policy loans","992","","","3,483","","","4,475","","","1,053","","","3,471","","","4,524"],["Freestanding derivative instruments","1,375","","","42","","","1,417","","","2,220","","","\u2014","","","2,220"],["Other invested assets","2,484","","","715","","","3,199","","","2,241","","","125","","","2,366"],["Total investments","$","45,874","","","$","28,353","","","$","74,227","","","$","49,222","","","$","31,266","","","$","80,488"]]
[[/GREPCENT_TABLE]]

Available-for-sale debt securities decreased to $51,547 million at December 31, 2021 from $59,075 million at the end of 2020, 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 $55,523 million as of December 31, 2020 to $51,206 million as of December 31, 2021. Further, net unrealized gains on these assets decreased from a net unrealized gain of $4,948 million as of December 31, 2020 to a net unrealized gain of $2,178 million as of December 31, 2021.

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, 2020 to December 31, 2021 primarily resulted from the increased valuations of limited partnership investments.

83

Debt Securities

At December 31, 2021 and December 31, 2020, 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):

[[GREPCENT_TABLE]]
[["December 31, 2021","","Amortized Cost","","Allowance for Credit Loss","","Gross Unrealized Gains","","Gross Unrealized Losses","","Fair Value"],["U.S. government securities","","$","4,525","","","$","\u2014","","","$","97","","","$","301","","","$","4,321"],["Other government securities","","1,489","","","\u2014","","","147","","","17","","","1,619"],["Corporate securities"],["Utilities","","6,069","","","\u2014","","","671","","","25","","","6,715"],["Energy","","2,872","","","\u2014","","","222","","","16","","","3,078"],["Banking","","1,944","","","\u2014","","","79","","","10","","","2,013"],["Healthcare","","3,196","","","\u2014","","","175","","","21","","","3,350"],["Finance/Insurance","","4,299","","","\u2014","","","228","","","47","","","4,480"],["Technology/Telecom","","2,376","","","\u2014","","","123","","","26","","","2,473"],["Consumer goods","","2,525","","","\u2014","","","123","","","38","","","2,610"],["Industrial","","1,996","","","\u2014","","","118","","","10","","","2,104"],["Capital goods","","2,206","","","\u2014","","","134","","","8","","","2,332"],["Real estate","","1,805","","","\u2014","","","82","","","11","","","1,876"],["Media","","1,187","","","\u2014","","","84","","","19","","","1,252"],["Transportation","","1,789","","","\u2014","","","105","","","13","","","1,881"],["Retail","","1,289","","","\u2014","","","75","","","13","","","1,351"],["Other (1)","","2,217","","","\u2014","","","134","","","5","","","2,346"],["Total Corporate Securities","","35,770","","","\u2014","","","2,353","","","262","","","37,861"],["Residential mortgage-backed","","528","","","2","","","46","","","3","","","569"],["Commercial mortgage-backed","","1,968","","","\u2014","","","76","","","6","","","2,038"],["Other asset-backed securities","","6,926","","","7","","","71","","","23","","","6,967"],["Total Debt Securities","","$","51,206","","","$","9","","","$","2,790","","","$","612","","","$","53,375"],["(1) No single remaining industry exceeds 3% of the portfolio."]]
[[/GREPCENT_TABLE]]

84

[[GREPCENT_TABLE]]
[["December 31, 2020","","Amortized Cost","","Allowance for Credit Loss","","Gross Unrealized Gains","","Gross Unrealized Losses","","Fair Value"],["U.S. government securities","","$","5,079","","","$","\u2014","","","$","162","","","$","115","","","$","5,126"],["Other government securities","","1,497","","","\u2014","","","201","","","1","","","1,697"],["Corporate securities"],["Utilities","","6,270","","","\u2014","","","1,029","","","2","","","7,297"],["Energy","","3,430","","","\u2014","","","351","","","8","","","3,773"],["Banking","","2,342","","","\u2014","","","206","","","\u2014","","","2,548"],["Healthcare","","3,729","","","\u2014","","","358","","","2","","","4,085"],["Finance/Insurance","","3,586","","","\u2014","","","391","","","16","","","3,961"],["Technology/Telecom","","2,766","","","\u2014","","","279","","","6","","","3,039"],["Consumer goods","","2,508","","","\u2014","","","277","","","\u2014","","","2,785"],["Industrial","","2,583","","","\u2014","","","280","","","1","","","2,862"],["Capital goods","","2,385","","","\u2014","","","231","","","2","","","2,614"],["Real estate","","2,113","","","\u2014","","","170","","","1","","","2,282"],["Media","","1,353","","","\u2014","","","149","","","1","","","1,501"],["Transportation","","2,011","","","\u2014","","","184","","","4","","","2,191"],["Retail","","1,749","","","\u2014","","","181","","","\u2014","","","1,930"],["Other (1)","","2,625","","","\u2014","","","245","","","1","","","2,869"],["Total Corporate Securities","","39,450","","","\u2014","","","4,331","","","44","","","43,737"],["Residential mortgage-backed","","912","","","\u2014","","","74","","","1","","","985"],["Commercial mortgage-backed","","3,078","","","\u2014","","","249","","","3","","","3,324"],["Other asset-backed securities","","5,507","","","14","","","100","","","5","","","5,588"],["Total Debt Securities","","$","55,523","","","$","14","","","$","5,117","","","$","169","","","$","60,457"],["(1) No single remaining industry exceeds 3% of the portfolio."]]
[[/GREPCENT_TABLE]]

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.

[[GREPCENT_TABLE]]
[["","","Percent of Total Debt Securities Carrying Value"],["","","December 31,"],["Investment Rating","","2021","","2020"],["AAA","","14.5","%","","18.8","%"],["AA","","9.6","%","","8.1","%"],["A","","28.5","%","","30.5","%"],["BBB","","40.9","%","","37.7","%"],["Investment grade","","93.5","%","","95.1","%"],["BB","","3.6","%","","2.9","%"],["B and below","","2.9","%","","2.0","%"],["Below investment grade","","6.5","%","","4.9","%"],["Total debt securities","","100.0","%","","100.0","%"]]
[[/GREPCENT_TABLE]]

85

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):

[[GREPCENT_TABLE]]
[["","","December 31, 2021","","December 31, 2020"],["","","Less than 12 months","","Less than 12 months"],["","","Gross","","Fair Value","","","","Gross","","Fair Value"],["","","Unrealized","","","# of","","Unrealized","","","# of"],["","","Losses","","","securities","","Losses","","","securities"],["U.S. government securities","","$","2","","","$","107","","","16","","","$","115","","","$","3,945","","","7"],["Other government securities","","17","","","252","","","23","","","1","","","89","","","7"],["Public utilities","","17","","","721","","","93","","","2","","","147","","","8"],["Corporate securities","","180","","","6,343","","","728","","","41","","","1,391","","","161"],["Residential mortgage-backed","","3","","","174","","","109","","","1","","","35","","","28"],["Commercial mortgage-backed","","5","","","314","","","37","","","3","","","152","","","13"],["Other asset-backed securities","","22","","","3,224","","","338","","","2","","","797","","","91"],["Total temporarily impaired securities","","$","246","","","$","11,135","","","1,344","","","$","165","","","$","6,556","","","315"],["","","12 months or longer","","12 months or longer"],["","","Gross","","Fair Value","","","","Gross","","Fair Value"],["","","Unrealized","","","# of","","Unrealized","","","# of"],["","","Losses","","","securities","","Losses","","","securities"],["U.S. government securities","","$","299","","","$","3,190","","","7","","","$","\u2014","","","$","\u2014","","","\u2014"],["Other government securities","","\u2014","","","4","","","2","","","\u2014","","","\u2014","","","\u2014"],["Public utilities","","7","","","99","","","8","","","\u2014","","","\u2014","","","\u2014"],["Corporate securities","","58","","","661","","","69","","","1","","","3","","","3"],["Residential mortgage-backed","","\u2014","","","11","","","12","","","\u2014","","","2","","","4"],["Commercial mortgage-backed","","1","","","30","","","3","","","\u2014","","","10","","","1"],["Other asset-backed securities","","1","","","11","","","3","","","3","","","29","","","4"],["Total temporarily impaired securities","","$","366","","","$","4,006","","","104","","","$","4","","","$","44","","","12"],["","","Total","","Total"],["","","Gross","","Fair Value","","","","Gross","","Fair Value"],["","","Unrealized","","","# of","","Unrealized","","","# of"],["","","Losses","","","securities","","Losses","","","securities"],["U.S. government securities","","$","301","","","$","3,297","","","21","","","$","115","","","$","3,945","","","7"],["Other government securities","","17","","","256","","","25","","","1","","","89","","","7"],["Public utilities","","24","","","820","","","98","","","2","","","147","","","8"],["Corporate securities (1)","","238","","","7,004","","","776","","","42","","","1,394","","","164"],["Residential mortgage-backed","","3","","","185","","","121","","","1","","","37","","","32"],["Commercial mortgage-backed","","6","","","344","","","39","","","3","","","162","","","14"],["Other asset-backed securities","","23","","","3,235","","","341","","","5","","","826","","","95"],["Total temporarily impaired securities","","$","612","","","$","15,141","","","1,421","","","$","169","","","$","6,600","","","327"]]
[[/GREPCENT_TABLE]]

(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 2021. Of the $443 million total increase in unrealized losses and the $8,541 million additional fair value on securities with an associated unrealized loss, $196 million and $6,089 million, respectively, are associated with assets subject to funds withheld agreements.

86

Evaluation of Available-For-Sale Debt Securities

See Note 4 to 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):

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2021","","2020","","2019"],["Available-for-sale securities"],["Realized gains on sale","","$","169","","","$","778","","","$","307"],["Realized losses on sale","","(88)","","","(196)","","","(107)"],["Credit loss income (expense)","","(10)","","","(14)","","","\u2014"],["Gross impairments","","\u2014","","","(27)","","","(3)"],["Credit loss income (expense) on mortgage loans","","62","","","(61)","","","\u2014"],["Other (1)","","49","","","(103)","","","(8)"],["Net gains (losses) excluding derivatives and funds withheld assets","","182","","","377","","","189"],["Net gains (losses) on derivative instruments","","(2,639)","","","(7,268)","","","(6,573)"],["Net gains (losses) on funds withheld reinsurance treaties","","(21)","","","440","","","(330)"],["Total net gains (losses) on derivatives and investments","","$","(2,478)","","","$","(6,451)","","","$","(6,714)"],["(1) Includes the foreign currency gain or loss related to foreign denominated mortgage loans and trust instruments supporting funding agreements."]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","December 31,"],["","2021","","2020"],["","(in millions)"],["Common Stock","$","78","","","$","72"],["Preferred Stock","168","","","98"],["Mutual Funds","33","","","23"],["Total","$","279","","","$","193"]]
[[/GREPCENT_TABLE]]

Mortgage Loans

Our investments in mortgage loans provide an opportunity for higher investment yields within an asset class where PPM has a positive track record and a demonstrated ability to manage risk in the portfolio. Commercial mortgage loans of $10.5 billion and $10.2 billion at December 31, 2021 and 2020, respectively, are reported net of an allowance for credit losses of $85 million and $165 million at each date, respectively. At December 31, 2021, commercial mortgage loans were collateralized by properties located in 38 states, the District of Columbia, and Europe. Residential mortgage loans of $939 million and $449 million at December 31, 2021 and 2020, respectively, are reported net of an allowance for credit losses of $9 million and $14 million at each date, respectively. Loans were collateralized by properties located in 50 states, the District of Columbia, Mexico, and Europe.

87

The table below presents the carrying value, net of allowance of credit loss, of our mortgage loans by property type:

[[GREPCENT_TABLE]]
[["","December 31,"],["","2021","","2020"],["","(in millions)"],["Commercial:"],["Apartment","$","3,755","","","$","3,905"],["Hotel","1,054","","","883"],["Office","1,889","","","1,570"],["Retail","2,104","","","1,942"],["Warehouse","1,741","","","1,979"],["Total Commercial","$","10,543","","","$","10,279"],["Residential","939","","","449"],["Total","$","11,482","","","$","10,728"]]
[[/GREPCENT_TABLE]]

The table below presents the carrying value, net of allowance for credit loss, of our mortgage loans by region:

[[GREPCENT_TABLE]]
[["","December 31,"],["","2021","","2020"],["","(in millions)"],["East North Central","$","1,184","","","$","1,211"],["East South Central","491","","","453"],["Middle Atlantic","1,558","","","1,276"],["Mountain","688","","","840"],["New England","452","","","476"],["Pacific","2,897","","","2,589"],["South Atlantic","2,295","","","2,530"],["West North Central","552","","","379"],["West South Central","829","","","812"],["Foreign","536","","","162"],["Total","$","11,482","","","$","10,728"]]
[[/GREPCENT_TABLE]]

The following table provides information about the credit quality of our mortgage loans:

[[GREPCENT_TABLE]]
[["","December 31,"],["","2021","","2020"],["","(in millions)"],["Commercial mortgage loans"],["Loan to value ratios:"],["Less than 70%","$","9,819","","","$","9,264"],["70% - 80%","670","","","845"],["80% - 100%","44","","","170"],["Greater than 100%","10","","","\u2014"],["Total","10,543","","","10,279"],["Residential mortgage loans"],["Performing","727","","","449"],["Nonperforming (1)","212","","","\u2014"],["Total","939","","","449"],["Total mortgage loans","$","11,482","","","$","10,728"]]
[[/GREPCENT_TABLE]]

(1) Includes $202 million of loans purchased when the loans were greater than 90 days delinquent and are supported with insurance or other guarantees provided by various governmental programs, and $5 million of loans in process of foreclosure.

88

The following table provides a summary of the allowance for credit losses related to our mortgage loans:

[[GREPCENT_TABLE]]
[["","December 31,"],["","2021","","2020"],["","(in millions)"],["Balance at beginning of period","$","179","","","$","9"],["Cumulative effect of change in accounting principle","\u2014","","","62"],["Charge offs, net of recoveries","\u2014","","","\u2014"],["Additions from purchase of purchased credit -deteriorated mortgage loans","\u2014","","","\u2014"],["Provision (release)","(85)","","","108"],["Balance at end of period","$","94","","","$","179"]]
[[/GREPCENT_TABLE]]

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 December 31, 2021, there was $6 million of recorded investment, $7 million of unpaid principal balance, nil related loan allowance, $2 million of average recorded investment, and no investment income recognized on impaired residential mortgage loans. At December 31, 2020, there were no impaired mortgages.

89

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):

[[GREPCENT_TABLE]]
[["","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","","","","\u2014","","","606"],["Equity index futures (2)","18,258","","","\u2014","","","","\u2014","","","\u2014"],["Equity index put options","27,500","","","150","","","","\u2014","","","150"],["Interest rate swaps","7,728","","","430","","","","\u2014","","","430"],["Interest rate swaps - cleared (2)","1,500","","","\u2014","","","","\u2014","","","\u2014"],["Put-swaptions","19,000","","","133","","","","\u2014","","","133"],["Treasury futures (2)","912","","","\u2014","","","","\u2014","","","\u2014"],["Total freestanding derivatives","97,665","","","1,374","","","","35","","","1,339"],["Embedded derivatives"],["VA embedded derivatives (3)","N/A","","\u2014","","","","2,626","","","(2,626)"],["FIA embedded derivatives (4)","N/A","","\u2014","","","","1,439","","","(1,439)"],["RILA embedded derivatives","N/A","","\u2014","","","","6","","","(6)"],["Total embedded derivatives","N/A","","\u2014","","","","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","","\u2014","","","","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)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(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 consolidated balance sheets. The nonperformance risk adjustment is included in the balance above."],["(4) Included within other contract holder funds on the consolidated balance sheets. The nonperformance risk adjustment is included in the balance above."],["(5) Included within funds withheld payable under reinsurance treaties on the consolidated balance sheets."]]
[[/GREPCENT_TABLE]]

90

[[GREPCENT_TABLE]]
[["","December 31, 2020"],["","Contractual/","","Assets","","","Liabilities","","Net"],["","Notional","","Fair","","","Fair","","Fair Value"],["","Amount (1)","","Value","","","Value","","Asset (Liability)"],["Freestanding derivatives"],["Cross-currency swaps","$","1,744","","","$","93","","","","$","34","","","$","59"],["Equity index call options","26,300","","","1,127","","","","\u2014","","","1,127"],["Equity index futures (2)","27,651","","","\u2014","","","","\u2014","","","\u2014"],["Equity index put options","27,000","","","178","","","","\u2014","","","178"],["Interest rate swaps","4,750","","","722","","","","1","","","721"],["Interest rate swaps - cleared (2)","1,500","","","\u2014","","","","8","","","(8)"],["Put-swaptions","1,000","","","100","","","","\u2014","","","100"],["Treasury futures (2)","8,525","","","\u2014","","","","\u2014","","","\u2014"],["Total freestanding derivatives","98,470","","","2,220","","","","43","","","2,177"],["Embedded derivatives"],["VA embedded derivatives (3)","N/A","","\u2014","","","","5,592","","","(5,592)"],["FIA embedded derivatives (4)","N/A","","\u2014","","","","1,484","","","(1,484)"],["Total embedded derivatives","N/A","","\u2014","","","","7,076","","","(7,076)"],["Derivatives related to funds withheld under reinsurance treaties"],["Cross-currency swaps","109","","","\u2014","","","","5","","","(5)"],["Cross-currency forwards","743","","","\u2014","","","","8","","","(8)"],["Funds withheld embedded derivative (5)","N/A","","\u2014","","","","827","","","(827)"],["Total derivatives related to funds withheld under reinsurance treaties","852","","","\u2014","","","","840","","","(840)"],["Total","$","99,322","","","$","2,220","","","","$","7,959","","","$","(5,739)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(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 consolidated balance sheets. The nonperformance risk adjustment is included in the balance above."],["(4) Included within other contract holder funds on the consolidated balance sheets. The nonperformance risk adjustment is included in the balance above."],["(5) Included within funds withheld payable under reinsurance treaties on the consolidated balance sheets."]]
[[/GREPCENT_TABLE]]

91

Investment Income

Our sources of net investment income are as follows (in millions):

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2021","","2020","","2019"],["Debt securities (1)","","$","1,154","","","$","1,617","","","$","2,164"],["Equity securities","","8","","","(14)","","","15"],["Mortgage loans","","319","","","365","","","392"],["Policy loans","","73","","","79","","","89"],["Limited partnerships","","795","","","105","","","248"],["Other investment income","","13","","","12","","","57"],["Total investment income excluding funds withheld assets","","2,362","","","2,164","","","2,965"],["Net investment income on funds withheld assets","","1,188","","","792","","","330"],["Investment expenses:"],["Derivative trading commission","","(3)","","","(5)","","","(4)"],["Depreciation on real estate","","(11)","","","(11)","","","(11)"],["Expenses related to consolidated entities (2)","","(41)","","","(43)","","","(52)"],["Other investment expenses (3)","","(66)","","","(68)","","","(85)"],["Total investment expenses","","(121)","","","(127)","","","(152)"],["Net investment income","","$","3,429","","","$","2,829","","","$","3,143"],["(1) Includes management fees, administrative fees, legal fees, and other expenses related to the consolidation of certain investments."],["(2) Includes interest expense and market appreciation on deferred compensation; investment software expense, custodial fees, and other bank fees; institutional product issuance related expenses; and other expenses."]]
[[/GREPCENT_TABLE]]

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.

92

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 consolidated financial statements in conformity with GAAP. For more details on Policyholder Liabilities, see “— Summary of Critical Accounting Estimates.”

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 December 31, 2021, 90% of our policy and contract liabilities were in our Retail Annuities segment, 3% were in our Institutional Products segment and 7% were in our Closed Life and Annuity Blocks segment.

The table below represents a breakdown of our policy and contract liabilities:

[[GREPCENT_TABLE]]
[["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","\u2014","","","\u2014","","","110","","","110"],["Fixed Annuities","\u2014","","","2","","","13,172","","","13,174"],["Fixed Index Annuities","\u2014","","","50","","","13,161","","","13,211"],["Payout Annuities","\u2014","","","\u2014","","","1,399","","","1,399"],["Total Retail Annuities","248,859","","","4,382","","","37,872","","","291,113"],["Total Institutional Products","\u2014","","","\u2014","","","8,830","","","8,830"],["Traditional Life","\u2014","","","4,762","","","4,161","","","8,923"],["Interest-sensitive Life","90","","","1,722","","","7,410","","","9,222"],["Group Payout Annuities","\u2014","","","4,895","","","\u2014","","","4,895"],["Other Annuities","\u2014","","","\u2014","","","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","\u2014","","","1,868","","","\u2014","","","1,868"],["Total","$","248,949","","","$","17,629","","","$","59,689","","","$","326,267"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["December 31, 2020","Separate Accounts","","Reserves for future policy benefits","","Other contract holder funds","","Total"],["","(in millions)"],["Variable Annuities","$","218,983","","","7,334","","","10,609","","","236,926"],["Fixed Annuities","\u2014","","","2","","","13,987","","","13,989"],["Fixed Index Annuities","\u2014","","","65","","","14,029","","","14,094"],["Payout Annuities","\u2014","","","\u2014","","","1,459","","","1,459"],["Total Retail Annuities","218,983","","","7,401","","","40,084","","","266,468"],["Total Institutional Products","\u2014","","","\u2014","","","11,138","","","11,138"],["Traditional Life","\u2014","","","5,125","","","4,152","","","9,277"],["Interest-sensitive Life","80","","","1,772","","","7,683","","","9,535"],["Group Payout Annuities","\u2014","","","5,220","","","\u2014","","","5,220"],["Other Annuities","\u2014","","","\u2014","","","1,481","","","1,481"],["Total Closed Life and Annuity Blocks","80","","","12,117","","","13,316","","","25,513"],["Total Policy and Contract Liabilities","219,063","","","19,518","","","64,538","","","303,119"],["Claims payable and other","\u2014","","","1,972","","","\u2014","","","1,972"],["Total","$","219,063","","","$","21,490","","","$","64,538","","","$","305,091"]]
[[/GREPCENT_TABLE]]

93

As of December 31, 2021, $248.9 billion or 77% 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 December 31, 2021, $50.3 billion or 16% of our policy and contract liabilities were backed by our investment portfolio and $25.2 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 December 31, 2021, our general account policy and contract liabilities, net of those ceded to Athene, were composed of 5% for fixed index annuities and fixed deferred and payout annuities, 18% for Institutional Products segment, 19% for fixed account option variable annuities, 9% for guaranteed benefit and other variable annuity reserves, and a 49% Closed Life and Annuity Block segment reserves. As of December 31, 2021, 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 December 31, 2021, 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 December 31, 2021, 94% 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.

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

94

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.

Actuarial Assumption Changes (Unlocking)

Our annual actuarial assumption review of our estimates of future gross profits underlying the amortization of deferred acquisition costs and deferred sales inducements, as well as the valuation of the embedded derivatives and reserves for annuities and life insurance with optional guaranteed benefits, may result in an “unlocking” impact. Generally, favorable unlocking means the change in assumptions required a reduction in reserves or increase in DAC, and unfavorable unlocking means the change in assumptions required an increase in reserves or reduction in DAC.

The following tables reflect the impacts from our annual assumption review to pretax (loss) income, non-operating adjustments and Adjusted Operating Earnings for the periods presented.

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2021","2020","2019"],["","(in millions)"],["Assumption Review Impact:"],["Total assumption review impact on pretax (loss) income","$","62","","$","(24)","","$","(31)"],["Total assumption review impact on pretax non-operating adjustments","(24)","","(128)","","80"],["Total assumption review impact on Pretax Adjusted Operating Earnings","$","38","","$","(152)","","$","49"],["Assumption Review Impact on Pretax Adjusted Operating Earnings by Segment:"],["Retail Annuities","$","38","","$","(138)","","$","51"],["Closed Life and Annuity Blocks","\u2014","","(14)","","(2)"],["Total assumption review impact on Pretax Adjusted Operating Earnings","$","38","","$","(152)","","$","49"]]
[[/GREPCENT_TABLE]]

2021 Assumption Updates

The impact of assumption changes on Pretax Adjusted Operating Earnings was $38 million, with the majority of this impact attributed to the Retail Annuities segment at $38 million. The principal driver of the favorable impact for Retail Annuities was an increase in the variable annuity DAC balance due to lapse assumption updates.

The impact on pretax non-operating adjustments of $24 million was mainly due to an overall decrease in the GMWB and GMWB for Life optional guarantee benefit reserves. The reserve decrease was driven principally by assumption changes to GMWB utilization, the effect of which was partially offset due to changes in assumed persistency and mortality and a strengthening of the mortality risk margin.

In aggregate, the total impact of assumption changes on pretax income was $62 million.

95

2020 Assumption Updates

The impact of assumption changes on Pretax Adjusted Operating Earnings was $(152) million, with the majority of this impact attributed to the Retail Annuities segment at $(138) million. The principal assumption change driving the unfavorable impact for Retail Annuities was a decrease in the variable annuity DAC balance due to long-term separate account return and hedge cost assumption updates. Updates to other assumptions, mainly related to REALIC business, produced minor additional impacts to unamortized DAC balances and reserves across annuity and life insurance products within the Retail Annuities and Closed Life and Annuity Blocks segments.

The impact on pretax non-operating adjustments of $128 million was mainly due to an overall decrease in the GMWB and GMWB for Life optional guarantee benefit reserves. The reserve decrease was driven principally by assumption changes to persistency, mortality, fund fee and non-performance risk assumptions. These effects were partially offset by updated fund transfer, GMWB utilization, and long-term separate account return assumptions which resulted in reserve increases.

In aggregate, the total impact of assumption changes on pretax (loss) income was $(24) million.

2019 Assumption Updates

The impact of assumption changes on Pretax Adjusted Operating Earnings was $49 million, with the majority of this impact attributed to the Retail Annuities segment at $51 million, partially offset by impacts to the Closed Life and Annuity Blocks segment. The principal assumption change driving the favorable impact for Retail Annuities was a reduction in variable annuity lapse rates which increased projected estimated gross profits and consequently reduced the DAC amortization expense. Updates to other assumptions, such as mortality, partial withdrawal and expense assumptions, produced minor impacts to unamortized DAC balances and reserves across annuity and life insurance products within the Retail Annuities and Closed Life and Annuity Blocks segments.

The impact on pretax non-operating adjustments of $(80) million was due to an overall increase in the GMWB and GMWB for Life optional guarantee benefit reserves. The reserve increase was driven principally by assumption changes to fund transfer rates, which increased the projected allocation to the separate accounts, increased investment management fees, which reduced projected account balances, and more efficient GMWB utilization. These effects were partially offset by updated mortality assumptions which resulted in reserve decreases.

In aggregate, the total impact of assumption changes on pretax (loss) income was $(31) million.

96

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 years ended December 31, 2021, 2020 and 2019.

Cash Flows

The following table presents a summary of our cash flow activity for the periods set forth below:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2021","","2020","","2019"],["","(in millions)"],["Net cash provided by (used in) operating activities","$","5,743","","","$","3,777","","","$","4,368"],["Net cash provided by (used in) investing activities","(1,296)","","","(4,333)","","","(8,329)"],["Net cash provided by (used in) financing activities","(3,835)","","","640","","","1,927"],["Net increase (decrease) in cash, cash equivalents, and restricted cash","612","","","84","","","(2,034)"],["Cash, cash equivalents, and restricted cash at beginning of period","2,019","","","1,935","","","3,969"],["Total cash, cash equivalents, and restricted cash at end of period","$","2,631","","","$","2,019","","","$","1,935"]]
[[/GREPCENT_TABLE]]

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.

Cash flows provided by (used in) operating activities increased $1,966 million to $5,743 million during the year ended December 31, 2021 from $3,777 million during the year ended December 31, 2020. This increase in cash provided by operating activities was primarily due to a net loss in 2020 due to the impact of the Athene Reinsurance Transaction compared to net income in 2021.

Cash flows provided by (used in) operating activities decreased $591 million, or 14%, to $3,777 million for the year ended December 31, 2020 from $4,368 million for the year ended December 31, 2019. This decrease in cash provided by operating activities was primarily due to a higher net loss in 2020 due to the impact of the Athene Reinsurance Transaction.

Cash flows provided by (used in) Investing Activities

The principal cash inflows from our investment activities come from repayments of principal, proceeds from maturities and sales of investments, as well as settlements of freestanding derivatives. The principal cash outflows relate to purchases of investments and settlements of freestanding derivatives. It is not unusual to have a net cash outflow from investing activities because cash inflows from insurance operations are typically reinvested to fund insurance liabilities. We closely monitor and manage these risks through our comprehensive investment risk management process. The primary liquidity concerns with respect to these cash flows are the risk of default by debtors or market disruptions that might impact the timing of investment related cash flows as well as derivative collateral needs.

Cash flows provided by (used in) investing activities increased $3,037 million to $(1,296) million during the year ended December 31, 2021 from $(4,333) million during the year ended December 31, 2020. This increase was due to the sale of assets during 2020 related to the Athene Reinsurance Transaction.

97

Cash flows provided by (used in) investing activities increased $3,996 million, to $(4,333) million for the year ended December 31, 2020 from $(8,329) million for the year ended December 31, 2019. This increase was due to a decrease in outflows related to the previously mentioned Athene Reinsurance Transaction and decreased freestanding derivative losses during 2020, compared to 2019.

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 $4,475 million to $(3,835) million during the year ended December 31, 2021 from $640 million for the year ended December 31, 2020. This decrease was primarily due to higher variable annuity surrender and death benefit outflows from our large in-force block in addition to reductions in the institutional products account value. This was partially offset by our issuance of senior notes and debt agreements entered into during the year ended December 31, 2021.

Cash flows provided by (used in) financing activities decreased $1,287 million to $640 million for the year ended December 31, 2020 from $1,927 million for the year ended December 31, 2019. This decrease in cash flows provided by financing activities was primarily due to cash inflows from debt agreements entered into in 2019 and lower sales within our institutional products, compared to 2019.

Statutory Capital

Our insurance company subsidiaries have statutory surplus above the level needed to meet current regulatory requirements. RBC requirements are used as minimum capital requirements by the NAIC and the state insurance departments to identify companies that merit regulatory action. RBC is based on a formula calculated by applying factors to various asset, premium, claim, expense and statutory reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk, market risk and business risk and is calculated on an annual basis. The formula is used as an early warning regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. As of December 31, 2021, our insurance companies were well in excess of the minimum required capital levels. Jackson is also subject to risk-based capital guidelines that provide a method to measure the adjusted capital that a life insurance company should have for regulatory purposes, taking into account the risk characteristics of Jackson’s investments and products.

Jackson had an RBC ratio of 580%, 347% and 366% as of December 31, 2021, 2020 and 2019, respectively. The increase in Jackson’s RBC ratio as of December 31, 2021 as compared to December 31, 2020 was primarily driven by the capital contribution to Jackson of a portion of the proceeds from the post-demerger debt raise.

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.

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

98

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 National Life ("Jackson") or Brooke Life Insurance Company ("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 NYSDFS.

For 2022, Jackson and Brooke Life has 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 February 14, 2022, Jackson received approval from the Michigan Department of Insurance and Financial Services for a $453 million extraordinary dividend and $147 million return of capital to Jackson’s parent company, Brooke Life. The combined dividend and return of capital payment to Brooke of $600 million is expected to occur in the first quarter of 2022. Brooke Life expects to pay a $510 million ordinary dividend to its ultimate parent, Jackson Financial, subsequent to the receipt of the $600 million combined extraordinary dividend and return of capital from Jackson in the first quarter of 2022.

The maximum distribution permitted by law or contract is not necessarily indicative of an insurer’s actual ability to pay such distributions, which may be constrained by business and other considerations, such as imposition of withholding tax, the impact of such distributions on surplus, which could affect the insurer’s ratings or competitive position, the ability to generate new annuity sales and the ability to pay future dividends or make other distributions. Further, state insurance laws and regulations require that the statutory surplus of our insurance subsidiaries following any dividend or distribution must be reasonable in relation to their outstanding liabilities and adequate for the insurance subsidiaries’ financial needs. Along with solvency regulations, another primary consideration in determining the amount of capital used for dividends is the level of capital needed to maintain desired financial strength ratings from rating agencies, including A.M. Best, S&P, Moody’s and Fitch. Given recent economic events that have affected the insurance industry, both regulators and rating agencies could become more conservative in their methodology and criteria, including increasing capital requirements for insurance company subsidiaries. We believe our insurance company subsidiaries have sufficient statutory capital and surplus to maintain their desired financial strength rating.

Insurance Company Subsidiaries’ Liquidity

The liquidity requirements for our insurance company subsidiaries primarily relate to the liabilities associated with their insurance and reinsurance activities, operating expenses and income taxes. Liabilities arising from insurance and reinsurance activities include the payment of policyholder benefits when due, cash payments in connection with policy surrenders and withdrawals and policy loans.

Liquidity requirements are principally for purchases of new investments, management of derivative related margin requirements, repayment of principal and interest on debt, payments of interest on surplus notes, funding of insurance product liabilities including payments for policy benefits, surrenders, maturities and new policy loans, funding of expenses including payment of commissions, operating expenses and taxes. As of December 31, 2021, Jackson’s outstanding surplus notes and bank debt included $67 million of bank loans from the Federal Home Loan Bank of Indianapolis

99

("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 December 31, 2021, approximately half of Jackson’s general account reserves are either not surrenderable, or included policy restrictions such as surrender charges greater than 5%, or market value adjustments to discourage early withdrawal of policy and contract funds.

The liquidity sources for our insurance company subsidiaries are their cash, short-term investments, sales of publicly traded bonds, 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 December 31, 2021, the portfolio of cash, short-term investments and privately and publicly traded securities and equities, which are unencumbered and unrestricted to sale, amounted to $24.9 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 matures in February 2022 and a $1.0 billion senior unsecured delayed draw term loan facility that matures in February 2023. On July 19, 2021, we and such banks entered into amendments to such credit agreements in order to (i) extend the period during which we were permitted to draw under the Credit Facilities from the date that was the six-month anniversary of our entry into the credit agreements to the date that was the nine-month anniversary of our entry into the credit agreements, (ii) extend the maturity date of the 2022 DDTL Facility from February 2022 to May 2022 and (iii) amend the definition used to calculate our adjusted consolidated net worth to reflect certain changes in our restated audited financial statements included in our Form 10. When referring to the Credit Facilities, the associated credit agreements and the terms and conditions thereof, in each case in this report, we are referring to the Credit Facilities, the credit agreements and their terms and conditions as amended by the amendments entered into on July 19, 2021.

The credit agreements for the Credit Facilities contain a number of customary representations and warranties, affirmative and negative covenants and events of default (including a change of control provision). Such covenants, among other things, restrict, subject to certain exceptions, our ability to pay dividends and distributions or repurchase common shares if a default or event of default has occurred and is continuing (with such negative covenant dropping away if our long term

100

unsecured senior, non-credit enhanced, debt ratings are either (x) BBB+ or better from S&P or (y) Baa1 or better from Moody’s), incur additional indebtedness, create liens on our or our subsidiaries’ assets and make fundamental changes. The credit agreements for the Credit Facilities contain financial maintenance covenants, including a minimum adjusted consolidated net worth test of no less than 70% of our adjusted consolidated net worth as of the date of the Demerger (taking into account 50% of the proceeds of any additional equity issuances) and a maximum consolidated indebtedness to total capitalization ratio test not to exceed 35%. The credit agreement for the DDTL Facilities also contains a covenant that requires we maintain minimum long term unsecured senior, non-credit enhanced, debt ratings of at least (x) BBB- from S&P and (y) Baa3 from Moody’s.

The Revolving Facility provides for borrowings to be available for working capital and other general corporate purposes under aggregate commitments of $1.0 billion, with a sublimit of $500 million available for letters of credit. The Revolving Facility further provides for the ability to request, subject to customary terms and conditions, an increase in commitments thereunder by an additional $500 million. Commitments under the Revolving Facility terminate on February 22, 2024.

On September 10, 2021, we borrowed an aggregate principal amount of $2.35 billion as follows: $1.6 billion under the 2022 DDTL Facility and $750 million under the 2023 DDTL Facility. We 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 (see detail discussion in footnote 11). 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 $20 million, $21 million, and $20 million for the years ended December 31, 2021, 2020 and 2019, respectively.

On November 6, 2019, Jackson Financial, through its subsidiary, Brooke Life, issued a 4.5% surplus note payable to Prudential, in the principal amount of $2.0 billion, due November 6, 2059. Immediately following issuance of the $2.0 billion surplus note, Jackson Financial remitted a return of capital of $2.0 billion to Prudential. These two actions increased total indebtedness by $2.0 billion and reduced total shareholder’s equity by $2.0 billion. The surplus note was unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims.

The Brooke Life surplus note was assigned to Jackson Finance, LLC ("Jackson Finance") in connection with our debt restructuring in June 2020, ultimately resulting in a cashless transaction, whereby the surplus note was contributed to Jackson Financial and shareholder’s equity increased by $2.0 billion.

Under Michigan Insurance Law, for statutory reporting purposes, the surplus notes are not part of the legal liabilities of the Company and are considered surplus funds. Payments of interest or principal may only be made with the prior approval of the commissioner of insurance of the state of Michigan and only out of surplus earnings which the commissioner determines to be available for such payments under Michigan Insurance Law.

Federal Home Loan Bank

Jackson is a member of the regional FHLBI primarily for the purpose of participating in its collateralized loan advance program with 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

101

issued to FHLBI. As of December 31, 2021, Jackson held a bank loan with an outstanding balance of $67 million. As of December 31, 2020, Jackson held advances of $380 million and a bank loan with an outstanding balance of $72 million.

Bank Loan

On November 7, 2019, we issued a $350 million note payable to Standard Chartered Bank, which was guaranteed by Prudential. Immediately following the issuance of the $350 million note payable, we paid a special dividend of $350 million to Prudential. These two actions increased total indebtedness by $350 million and reduced total shareholder’s equity by $350 million. This note accrued interest at LIBOR plus 0.2% per annum and was due November 7, 2020.

In June 2020, we transferred the loan to a Prudential affiliate in connection with our debt restructuring, ultimately resulting in a cashless transaction, whereby the note was transferred to a Prudential affiliate and shareholder’s equity increased by $350 million.

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 stockholders, 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 National Life’s statutory capital and surplus, plus asset valuation reserve and 50% of policyholder dividends of Jackson National Life and its subsidiaries. Company action level required capital is the minimum amount of capital necessary for Jackson National Life 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

On November 8, 2021, our Board of Directors approved the commencement of a regular quarterly cash dividend and declared a fourth quarter cash dividend on Jackson Financial's Class A and Class B common stock of $0.50 per share, that was paid on December 9, 2021 to shareholders of record on November 19, 2021.

On February 28, 2022, our Board of Directors declared a first quarter cash dividend on JFI's Class A common stock of $0.55 per share, payable on March 23, 2022 to shareholders of record on March 14, 2022.

102

There were no dividends declared or paid to our shareholders for the year ended December 31, 2020. Dividends declared and paid to the Company’s former ultimate parent, Prudential, were $875 million for the year ended December 31, 2019. Dividends paid in 2019 consisted of $525 million of ordinary dividends and $350 million in exchange for the short-term note payable to Standard Charter Bank, see Note 11 to Consolidated Financial Statements.

Share Repurchase and Common Stock Conversion

On November 8, 2021, our Board of Directors authorized a share repurchase program for our Class A common stock of $300 million.

On December 13, 2021, we repurchased 2,242,516 shares of our Class A Common Stock from Prudential and 1,134,767 shares of our Class A Common Stock from Athene. The price per share in the repurchase was $37.01. On December 13, 2021, Athene converted a total of 725,623 shares of its Class B common stock to Class A common stock on a one-for-one basis. On February 1, 2022, Athene converted the remaining 638,861 shares of its Class B common stock to Class A common stock on a one-for-one basis.

As of December 31, 2021, we repurchased a total of 5,778,649 shares of Class A common stock for an aggregate purchase price of $211 million, which were funded with cash on hand. On February 28, 2022, our Board of Directors authorized an increase of $300 million in our existing share repurchase authorization of JFI's Class A common stock.

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 March 4, 2022, the financial strength ratings of our principal insurance subsidiaries were as follows:

[[GREPCENT_TABLE]]
[["Company","","A.M. Best","","Fitch","","Moody\u2019s","","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"]]
[[/GREPCENT_TABLE]]

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

103

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.

Contractual Obligations

We have contractual obligations identified within Item 8. "Financials Statements and Supplementary Data; Note. 5 Derivative Instruments, Note 9. Reserves for Future Policy Benefits and Claims Payable and Other Contract Holder Funds, Note 10. Certain Nontraditional Long-Duration Contracts and Variable Annuity Guarantees, Note 11. Long-Term Debt, Note 14. Commitments and Contingencies, and Note 15. Leases." As of December 31, 2021, we had no unique material cash requirements from known contractual and other obligations.

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 consolidated financial statements. The following are our most critical estimates, which require management’s most difficult, subjective and complex judgments, including the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

The following discussion is not intended to represent a comprehensive list of our accounting policies. For a detailed discussion of the application of these and other accounting policies, see Note 2 to Consolidated Financial Statements.

Deferred Acquisition Costs

Deferred acquisition costs relate directly to the successful acquisition of new or renewal insurance business and can be capitalized. These costs primarily pertain to commissions and certain costs associated with policy issuance. All other acquisition costs are expensed as incurred.

Deferred acquisition costs are increased by interest thereon and amortized into income in proportion to estimated gross profits, including realized gains and losses and derivative movements, for annuities and interest-sensitive life products and in proportion to anticipated premium revenues for traditional life products. Due to volatility of certain factors that affect gross profits, including realized capital gains and losses and derivative movements, amortization may be a benefit or a charge in any given period. In the event of negative amortization, the related deferred acquisition cost balance is capped at the initial amount capitalized, plus interest.

As available-for-sale debt securities are carried at fair value, an adjustment is made to deferred acquisition costs equal to the change in amortization that would have occurred if such securities had been sold at their stated fair value and the proceeds reinvested at current yields. This adjustment, along with the change in net unrealized gains (losses) on available-for-sale debt securities, net of applicable tax, is credited or charged directly to equity as a component of other comprehensive income.

For variable annuities, the projection of expected gross profits includes, among other things, an expectation as to the account value upon which core contract fees would be charged. Separate account returns may vary significantly between years, which could have a meaningful impact on the amount of DAC amortization that is recorded in a given year.

104

Accordingly, we employ a mean reversion methodology with the objective of adjusting the amortization of deferred acquisition costs that would otherwise be highly volatile due to fluctuations in the level of future gross profits arising from changes in equity market levels. The mean reversion methodology achieves this objective by applying a dynamic adjustment to the assumption for short-term future investment returns. Under this methodology, the projected returns for the next five years are set such that, when combined with the actual returns for the current and preceding two years, the average rate of return over the eight-year period reverts to the current long-term assumed growth rate (7.15% for 2021 and 2020 and 7.4% for 2019, after external investment management fees). This methodology prevents a significant increase or decrease in the separate account fee base in one period due to equity market returns from inflating or deflating, as applicable, the projected gross fees in our DAC models. The mean reversion methodology does, however, include a cap and a floor of 15% and 0% per annum, respectively, on the projected return for each of the next five years. If a projected growth rate of more than 15% or less than 0% per annum would have been necessary to achieve the long-term assumed growth rate at that time, the dampening effects of the mean reversion methodology described above will be limited. As of December 31, 2021 and 2020, projected returns under mean reversion were within the range bound by the 15% cap and 0% floor.

Deferred acquisition costs are reviewed periodically to ensure that the unamortized portion does not exceed the expected recoverable amounts. In assessing recoverability for both deferred acquisition costs, the Company evaluates its fixed index annuity and fixed annuity blocks of business separately from its variable annuity business consistent with the manner of acquiring, servicing and measuring profitability of these products. The Company’s accounting policy includes reinsurance balances when evaluating recoverability of deferred acquisition costs. Any amount deemed unrecoverable is written off with a charge through deferred acquisition costs amortization.

Reserves for Future Policy Benefits and Claims Payable and Other Contract Holder Funds

We establish reserves for future policy benefits to, or on behalf of, customers in the same period in which the policy is issued or acquired, using methodologies prescribed by U.S. GAAP. The assumptions used in establishing reserves are generally based on our experience, industry benchmarking and other factors, as applicable. Annually, or as circumstances warrant, we conduct a comprehensive review of our actuarial assumptions—such as mortality, morbidity, and policyholder behavior assumptions—and update assumptions when appropriate. Generally, we do not expect trends 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. See Notes 9 and 10 to Consolidated Financial Statements for additional information on these accounting policies.

We issue variable contracts through our separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contract holder. Certain of these contracts include contract provisions by which we contractually guarantee to the contract holder either a) return of no less than total deposits made to the account adjusted for any partial withdrawals, b) total deposits made to the account adjusted for any partial withdrawals plus a minimum return, or c) the highest account value on a specified anniversary date adjusted for any withdrawals following the contract anniversary. These guarantees include benefits that are payable upon the depletion of funds (GMWB), in the event of death (GMDB), at annuitization (GMIB), or at the end of a specified period (GMAB). Substantially all of our GMIB benefits are reinsured. GMIB benefits and GMAB benefits were discontinued in 2009 and 2011, respectively. For additional information regarding our account value by optional guarantee benefit, see “Business–Our Segments–Retail Annuities–Variable Annuities.”

For traditional life insurance contracts, which include term and whole life, reserves for future policy benefits are determined using the net level premium method and assumptions as of the issue date or acquisition date as to mortality, interest, persistency and expenses, plus provisions for adverse deviations. These assumptions are not unlocked unless the reserve is determined to be deficient.

Group payout annuities consist of a closed block of defined benefit annuity plans. The liability for future benefits for these limited payment contracts is calculated using assumptions as of the acquisition date as to mortality and expense plus provisions for adverse deviation.

In conjunction with a prior acquisition, we recorded a fair value adjustment related to certain annuity and interest-sensitive liability blocks of business to reflect the cost of the interest guarantees within the in-force liabilities, based on the difference between the guaranteed interest rate and an assumed new money guaranteed interest rate. This adjustment was recorded in reserves for future policy benefits and claims payable. This component of the acquired reserves is reassessed

105

at the end of each period, taking into account changes in the in-force block. Any resulting change in the reserve is recorded as a change in policy reserve through the consolidated income statements.

Our liabilities for interest-sensitive life contracts approximate the policyholder’s account value, plus the remaining balance of the fair value adjustment related to previously acquired business.

For fixed deferred annuities, the fixed option on variable annuities, fixed index annuities, Registered Index-Linked Annuities ("RILAs"), guaranteed investment contracts and other investment contracts, the liability is the policyholder’s account value, plus, as applicable, the unamortized balance of the previously mentioned fair value adjustment. The liability for RILAs and fixed index annuities is based on three components, 1) the imputed value of the underlying guaranteed host contract, 2) the fair value of the embedded option component of the contract and 3) the liability for guaranteed benefits related to the minimum death benefit or payments for life rider.

The Guaranteed Minimum Death Benefits ("GMDB") liability is determined by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected assessments. The direct portion of our Guaranteed Minimum Income Benefits ("GMIB") liabilities, which are substantially reinsured, are determined in this same way.

Certain Guaranteed Minimum Withdrawal Benefits ("GMWB") products include a “not-for-life” component up to the point at which the guaranteed withdrawal benefit is exhausted, after which benefits paid are considered to be “for-life” benefits. The liability related to this “not-for-life” portion is valued as an embedded derivative, while the “for-life” benefits are valued as an insurance liability consistent with the GMDB liability described above.

Non-life contingent components of GMWBs and Guaranteed Minimum Accumulation Benefits ("GMAB") are recorded at fair value, using internally developed models as observable markets do not exist for those benefits. The fair value of the reserve is based on the expectations of future benefit payments and certain future fees associated with the benefits. At the inception of the contract, we attribute to the embedded derivative a portion of rider fees collected from the contract holder, which is then held static in future valuations. That portion of the fees, generally referred to as the attributed fees, are set such that the present value of the attributed fees is equal to the present value of future claims expected to be paid under the guaranteed benefit at the inception of the contract. In subsequent valuations, both the present value of future benefits and the present value of attributed fees are revalued based on current market conditions and policyholder behavior assumptions. The difference between each of the two components represents the fair value of the embedded derivative.

The fair value calculation described above is based on the present value of future cash flows comprised of future expected benefit payments, less future attributed rider fees, over the lives of the contracts. Estimating these cash flows requires numerous estimates and subjective judgments related to capital market inputs, as well as actuarially determined assumptions related to expectations concerning policyholder behavior. Capital market inputs include expected market rates of return, market volatility, correlations of market index returns to funds, fund performance and discount rates. The more significant actuarial assumptions include benefit utilization by customers, persistency, mortality and withdrawal rates. Best estimate assumptions plus risk margins are used as applicable. See “Policy and Contract Liabilities—Actuarial Assumption Changes (Unlocking).”

At each valuation date, we assume expected returns based on the greater of London Inter-bank Offered Rate ("LIBOR") swap rates and constant maturity treasury rates as of that date to determine the value of expected future cash flows produced in a stochastic process. Volatility assumptions are based on a weighting of available market data for implied market volatility for durations up to 10 years, grading to a historical volatility level by year 15, where such long-term historical volatility levels contain an explicit risk margin. Additionally, non-performance risk is incorporated into the calculation through the use of discount rates based on a blend of yields on similarly-rated peer debt and yields on JFI debt (adjusted to operating company levels). Risk margins are also incorporated into the model assumptions, particularly for policyholder behavior. Estimates of future policyholder behavior are subjective and are based primarily on our own experience.

We have also established additional reserves for life insurance business for universal life plans with secondary guarantees, interest-sensitive life plans that exhibit “profits followed by loss” patterns and account balance adjustments to tabular guaranteed cash values on one interest-sensitive life plan. These reserves are determined using a series of deterministic

106

premium persistency scenarios and other experience assumptions, discounted using rates equal to the crediting rates of the policies.

Income Taxes

Income taxes represent the net amount of income taxes that we expect to pay to or receive from various taxing jurisdictions in connection with our operations. We provide for federal and state income taxes currently payable, as well as those deferred due to temporary differences between the financial reporting and tax bases of assets and liabilities.

Deferred federal income taxes arise from the recognition of temporary differences between the basis of assets and liabilities determined for financial reporting purposes and the basis determined for income tax purposes. Such temporary differences are principally related to the effects of recording certain invested assets at market value, the deferral of acquisition costs and sales inducements and the provisions for future policy benefits and expenses. Deferred tax assets and liabilities are measured using the tax rates expected to be in effect when such benefits are realized. We are required to test the value of deferred tax assets for realizability. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. In determining the need for a valuation allowance, we consider the carryback eligibility of losses, reversal of existing temporary differences, estimated future taxable income and tax planning strategies.

The determination of the valuation allowance for our deferred tax assets requires management to make certain judgments and assumptions regarding future operations that are based on historical experience and expectations of future performance. In order to recognize a tax benefit in the consolidated financial statements, there must be a greater than 50% chance of success of our position being sustained by the relevant taxing authority with regard to that tax position. Management’s judgments are potentially subject to change given the inherent uncertainty in predicting future performance, which is impacted by such factors as policyholder behavior, competitor pricing and other specific industry and market conditions.

Reinsurance

Accounting for reinsurance requires extensive use of assumptions and estimates, particularly related to the future performance of the underlying business and the potential impact of counterparty credit risk with respect to reinsurance receivables. We periodically review actual and anticipated experience compared to the aforementioned assumptions used to establish assets and liabilities relating to ceded and assumed reinsurance and evaluate the financial strength of counterparties to our reinsurance agreements. Counterparty credit risk may be managed through the use of letters of credit, collateral trusts or on balance sheet funds withheld agreements. Assets held under funds withheld agreements are included on our balance sheets, but remain the property of the respective counterparties subject to triggers embedded within the relevant reinsurance agreements.

Additionally, for each of our reinsurance agreements, we determine whether the agreement provides indemnification against loss or liability relating to insurance risk, in accordance with applicable accounting standards. We review all contractual features, including those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims. If we determine that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, we record the agreement using the deposit method of accounting. For reinsurance contracts other than those covering GMIB exposure, reinsurance recoverable balances are calculated using methodologies and assumptions that are consistent with those used to calculate the direct liabilities.

Our GMIBs are reinsured with an unrelated party and, due to the net settlement provisions of the reinsurance agreement, meet the definition of a derivative. Accordingly, the GMIB reinsurance agreement is recorded at fair value using internally developed models consistent with those used to value our other products with optional guaranteed benefits.

Investments – Valuation and Impairment

We determine the fair values of certain financial assets and liabilities based on quoted market prices, where available. When necessary, we may also determine fair value based on estimated future cash flows discounted at the appropriate current market rate. Fair values also, if appropriate, reflect adjustments for counterparty credit quality, credit rating, liquidity and incorporate risk margins for unobservable inputs.

107

Where quoted market prices are not available, fair value estimates are made at a point in time, based on relevant market data, as well as the best information about the individual financial instrument. At times, illiquid market conditions could result in inactive markets for certain of our financial instruments. In such instances, there could be no or limited observable market data for these assets and liabilities. Fair value estimates for financial instruments deemed to be in an illiquid market are based on judgments regarding current economic conditions, liquidity discounts, currency, credit and interest rate risks, loss experience and other factors. These fair values are estimates and involve considerable uncertainty and variability as a result of the inputs selected and may differ materially from the values that would have been used had an active market existed. As a result of market inactivity, such calculated fair value estimates may not be realizable in an immediate sale or settlement of the instrument. In addition, changes in the underlying assumptions used in the fair value measurement technique could significantly affect these fair value estimates.

We periodically review our available-for-sale debt securities on a case-by-case basis to determine if an impairment is necessary for securities with a decline in fair value to below cost or amortized cost. Factors considered in determining whether an impairment is necessary include whether we have the intent to sell, or whether it is more likely than not we will be required to sell the security before the amortized cost basis is fully recovered, the severity of the unrealized loss, the reasons for the decline in value and expectations for the amount and timing of a recovery in fair value. For debt securities in an unrealized loss position, for which we deem an impairment necessary, the amortized cost may be written down to fair value through net gains (losses) on derivatives and investments, or an allowance for credit loss (“ACL”) may be recorded along with a charge to net gains (losses) on derivatives and investments.

Securities determined to be underperforming or potential problem securities are subject to regular review. To facilitate the review, securities with significant declines in value, or where other objective criteria evidencing credit deterioration have been met, are included on a watch list. Among the criteria for securities to be included on a watch list are: credit deterioration that has led to a significant decline in fair value of the security; a significant covenant related to the security has been breached; or an issuer has filed or indicated a possibility of filing for bankruptcy, has missed or announced it intends to miss a scheduled interest or principal payment, or has experienced a specific material adverse change that could impair its creditworthiness.

In performing these reviews, we consider the relevant facts and circumstances relating to each investment and exercise considerable judgment in determining whether an impairment is needed for a particular security. Assessment factors include judgments about an obligor’s current and projected financial position, an issuer’s current and projected ability to service and repay its debt obligations, the existence of, and realizable value of, any collateral backing the obligations and the outlooks for specific industries and issuers. This assessment may also involve assumptions regarding underlying collateral such as prepayment rates, default and recovery rates, and third-party servicing capabilities.

In addition to the review procedures described above, investments in asset-backed securities where market prices are depressed are subject to a review of their future estimated cash flows, including expected and stress case scenarios, to identify potential shortfalls in contractual payments. These estimated cash flows are developed using available performance indicators from the underlying assets including current and projected default or delinquency rates, levels of credit enhancement, current subordination levels, vintage, expected loss severity and other relevant characteristics. These estimates reflect a combination of data derived by third parties and internally developed assumptions. Where possible, this data is benchmarked against third-party sources.

For mortgage-backed securities, credit losses are assessed using a cash flow model that estimates the cash flows on the underlying mortgages, using the security-specific collateral characteristics and transaction structure. The model estimates cash flows from the underlying mortgage loans and distributes those cash flows to various tranches of securities, considering the transaction structure and any subordination and credit enhancements existing in that structure. The cash flow model incorporates actual cash flows on the mortgage-backed securities through the current period and then projects the remaining cash flows using a number of assumptions, including prepayment speeds, default rates and loss severity. Specifically, for prime and Alt-A RMBS, the assumed default percentage is dependent on the severity of delinquency status, with foreclosures and real estate owned receiving higher rates, but also includes the currently performing loans. These estimates reflect a combination of data derived by third parties and internally developed assumptions. Where possible, this data is benchmarked against other third-party sources. In addition, these estimates are extrapolated along a default timing curve to estimate the total lifetime pool default rate.

108

After these reviews, we recognize impairments on debt securities in an unrealized loss position when any of the following circumstances exists:

•We intend to sell a security;

•It is more likely than not that we will be required to sell a security prior to recovery; or

•We do not expect full recovery of the amortized cost based on the discounted cash flows estimated to be collected.

Commercial mortgage loans are carried at the aggregate unpaid principal balance, adjusted for any applicable unamortized discount or premium, or allowance for credit loss ("ACL"). Acquisition discounts and premiums on mortgage loans are amortized into investment income through maturity dates using the effective interest method. Interest income is accrued on the principal balance of the loan based on the loan’s contractual interest rate. Interest income and amortization of premiums and discounts are reported in net investment income along with prepayment fees and mortgage loan fees, which are recorded as incurred.

We review mortgage loans on a quarterly basis to estimate the ACL with changes in the ACL recorded in net gains (losses) on derivatives and investments. Apart from an ACL recorded on individual mortgage loans where the borrower is experiencing financial difficulties, we record an ACL on the pool of mortgage loans based on lifetime expected credit losses. Credit loss estimates are pooled by property type and unfunded commitments are included in the model with an allowance for credit losses determined accordingly.

Mortgage loans on real estate deemed uncollectible are charged against the ACL, and subsequent recoveries, if any, are credited to the ACL.

Accrued interest receivables are presented separate from the amortized cost of debt securities and mortgage loans. An allowance for credit losses is not estimated on an accrued interest receivable. Rather, receivable balances that are deemed uncollectible are written off with a corresponding reduction to net investment income.

Derivatives

Freestanding Derivative Instruments

We enter into financial derivative transactions, including swaps, put-swaptions, futures and options to reduce and manage business risks. These transactions manage the risk of a change in the value, yield, price, cash flows, credit quality or degree of exposure with respect to assets, liabilities or future cash flows that we have acquired or incurred.

Freestanding derivative instruments are reported at fair value, that reflects the estimated amounts, net of payment accruals, which we would receive or pay upon sale or termination of the contracts at the reporting date. Freestanding derivatives priced using third party pricing services incorporate inputs that are predominantly observable in the market. The determination of the estimated fair value of freestanding derivatives, when quoted market values are not available, is based on market standard valuation methodologies and inputs that management believes are consistent with what other market participants would use when pricing such instruments. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, default risk, nonperformance risk, volatility, liquidity and changes in estimates and assumptions used in the pricing models. See Notes 5 and 6 to Consolidated Financial Statements for additional information on significant inputs into our derivative pricing methodology.

Embedded Derivatives - Product Liabilities

Certain liabilities, including fixed index annuities, RILAs, and guarantees offered in connection with variable, fixed index, or registered index-linked annuities issued by us, may contain embedded derivatives. Derivatives embedded in certain host insurance contracts that have been separated for accounting and financial reporting purposes, are carried at fair value.

See Notes 5 and 10 to Consolidated Financial Statements for additional information on our accounting policies for embedded derivatives bifurcated for insurance host contracts.

109

Embedded Derivatives - Funds Withheld Reinsurance Agreements

The Company has recorded an embedded derivative liability related to the Athene Reinsurance Agreement (the “Athene Embedded Derivative”) in accordance with ASC 815-15 as Jackson’s obligation under the Reinsurance Agreement is based on the total return of investments in a segregated funds withheld account rather than Jackson’s own creditworthiness. As the Reinsurance Agreement transfers the economics of the investments in the segregated funds withheld account to Athene, they will receive an investment return equivalent to owning the underlying assets. At inception of the Reinsurance Agreement, the Athene Embedded Derivative was valued at zero. Additionally, the inception fair value of the investments in the segregated funds withheld account differed from their book value and, accordingly, the amortization of this difference is reported in Net gains (losses) on derivatives and investments in the Consolidated Income Statement, while the investments are held. Subsequent to the effective date of the Reinsurance Agreement, the Athene Embedded Derivative is measured at fair value with changes reported in Net gains (losses) on derivatives and investments in the Consolidated Income Statement. The Athene Embedded Derivative Liability is included in Funds withheld payable under reinsurance treaties in the Consolidated Balance Sheet.

See Note 8 to Consolidated Financial Statements for additional information on Athene Reinsurance Transaction.

Net Investment Income

Net investment income reported for each of our three segments and Corporate and Other includes an allocation for investment income generated on assigned capital. The amount of capital assigned to each of our segments for purposes of measuring segment net investment income is established at a level that management considers necessary to support the segment’s risks. This assessment is determined based upon internal models and contemplates National Association of Insurance Commissioners (“NAIC”) RBC requirements at internally defined levels. Capital in excess of the amount required to support our core operating strategies is considered excess equity capital and is reflected in Corporate and Other.

Contingent Liabilities

We are a party to legal actions and, at times, regulatory investigations. Given the inherent unpredictability of these matters, it is difficult to estimate their impact on our financial position. A reserve is established for contingent liabilities if it is probable that a loss has been incurred and the amount is reasonably estimable. It is possible that an adverse outcome in certain of our contingent liabilities, or the use of different assumptions in the determination of amounts recorded, could have a material effect upon our financial position. However, it is the opinion of management that the ultimate disposition of contingent liabilities is unlikely to have a material adverse effect on our financial position.

Consolidation of Variable Interest Entities (“VIEs”)

The Company invests in a number of asset types that it has determined are VIEs, such as equity positions in collateralized loan obligations (“CLOs”), limited partnerships (“LPs”), limited liability companies (“LLCs”), and mutual funds that are assessed to determine whether they meet the criteria as a VIE. For those entities deemed to be VIEs, we further assess whether the VIE must be consolidated as a result of the terms specific to each entity. Entities for which consolidation is required are included on our consolidated financial statements. To the extent that external parties are also invested in these VIEs, a noncontrolling interest is reflected on our consolidated financial statements as well. See Note 4 to Consolidated Financial Statements for additional information.

110