Welcome to today's Jackson Financial Inc. Q4 2021 earnings call. My name is Bailey, and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press Star, followed by one on your telephone keypad. I would now like to pass the conference over to Liz Werner, Head of Investor Relations. Liz, please go ahead. Your line is now open.
Good morning, everyone. Before we start, we remind you that today's presentation may include forward-looking statements which are not guarantees of future performance or outcomes. A number of important factors, including the risks, uncertainties and assumptions discussed in risk factors, management's discussion and analysis of financial condition and results of operations and business financial goals in the company's registration statement on Form 10, and management's discussion and analysis of financial condition and results of operations in the company's most recent Q3 10-Q, could cause actual results and outcomes to differ materially from those reflected in the forward-looking statements. In this presentation, management will refer to certain non-GAAP measures which management believes provide useful information in measuring the financial performance of the business. A reconciliation of non-GAAP financial measures to the most comparable GAAP measures is contained in the appendix to the presentation.
With us today are Jackson CEO, Laura Prieskorn, our CFO, Marcia Wadsten, and our Vice Chair, Chad Myers. At this time, I'll turn it over to Laura.
Good morning and welcome to our full year and Q4 earnings call. This morning we'll discuss our accomplishments for the full year and the quarter as well as our outlook for the future. Looking back on 2021, we've successfully transitioned to operating as a public company, executed on our business strategies and delivered on our commitments to shareholders. 2021 was a momentous year for Jackson and throughout our transition we maintained a leading market position exceeding $19 billion in annuity sales through a network of over 580 distributors. We believe our diversified annuity offerings and dedicated distribution support and service sets us apart from competitors and positions us for the future. This year, we are pleased to once again be recognized by Service Quality Measurement Group, the independent organization that benchmarks over 500 leading customer contact centers across North America.
Jackson received 4 awards for its service efforts in 2021, including highest customer service for the financial services industry. These awards reflect the hard work and leadership of our operations team and Jackson's continued commitment to serving financial professionals and their clients. We remained focused on managing profitability, risk, and capital and are on track to reach our capital return target ahead of schedule. Yesterday's announcements included an increase to both our shareholder dividend per share and our existing share repurchase authorization. Today, we'll provide our outlook for capital return to shareholders, which has been reset to a calendar year basis for 2022. We look to our future with confidence and remain committed to our business and building a track record of delivering on our financial targets. Last quarter, I commented on the hard work and collaboration of our colleagues to position Jackson for success as an independent company.
The Jackson culture and a long tenured leadership team continue to serve us well. Turning to slide three. Our focus on execution is highlighted in Jackson's full year financial results. In 2021, both net income and adjusted operating earnings reached a three-year high. I'll speak to adjusted operating earnings, which excludes both hedging related volatility as well as the guarantee benefit fees intended to address hedging costs. For the full year 2021, adjusted operating earnings of $2.4 billion exceeded the prior year by over $500 million. These results include the benefit of limited partnership returns that were well above our long term assumption, as well as the incremental impact of other notable items. Adjusting for all notable items, our full year pre-tax adjusted operating earnings increased 22% from the prior year.
Of note, our retail annuity segment accounted for nearly two-thirds of total growth in pre-tax adjusted operating earnings. Later in the presentation, we provide insight into notable items for greater transparency into the strength of our underlying core business. The solid growth of our business, combined with effective risk management, resulted in healthy statutory capital generation, and we ended the year with total adjusted capital of $6.6 billion and an RBC ratio of 580% at our operating company, Jackson National Life Insurance. We finished 2021 in a strong regulatory capital position, consistent with the health of our annuity book and the favorable market environment. Since our separation, you've seen that we've promptly returned excess capital to shareholders following our first dividend and share repurchase program authorization announced four months ago.
Under our initial share repurchase program, we opportunistically pursued both open market purchases and a private share repurchase transaction with Prudential plc and Athene. In 2021, total share repurchase activity was $211 million or approximately 5.8 million shares. Importantly, we continue to view our stock as attractively valued and share repurchases are a good use of shareholder capital. As we enter 2022, we expect to deliver on our targeted capital return to shareholders ahead of schedule. Our initial target was a total capital return of $325 million-$425 million in the first twelve months as a public company, taking us through September 2022. Our revised target represents an increase in capital return to shareholders and a shift to a calendar year basis.
For the calendar year 2022, we're targeting capital return of $425 million-$525 million or a 27% increase at the midpoint of the previous target range. Yesterday's announced dividend and an additional $300 million in authorized share repurchase capacity is supported by an approved capital distribution from our operating company. These announcements allow Jackson to maintain its balanced approach to capital return. Based upon current shares outstanding, our Q1 dividend will be approximately $50 million, consistent with our Q4 dividend. Turning to slide 4, I'll review our progress on each of our financial targets. As I mentioned, we're on track to complete our 12-month targeted capital return to shareholders earlier than projected. The combination of a shareholder dividend and opportunistic share buybacks allowed for our swift execution relating to this target.
Our holding company cash and liquid assets are in excess of our previously stated minimum cash requirement of $250 million. We had over $600 million at the holding company as of year-end 2021, and that is after returning $261 million to shareholders in dividend and share repurchases. Our risk-based capital ratio at both the operating company and on an adjusted basis is also ahead of target. For 2022, we're maintaining a 500%-525% adjusted RBC target, which includes excess holding company liquidity. We believe this RBC target, along with a 20%-25% leverage ratio, is most appropriate for our business mix. Now let's turn to the Q4 financial and operating highlights on slide 5.
Our Q4 adjusted operating earnings of $7.48 per share reflect continued growth in fee income tied to strong account value growth as well as certain notable items in the quarter. Similar to last quarter, we benefited from outperformance in our limited partnership investments. We also benefited from a claims recovery as well as market-driven deferred acquisition cost amortization and our annual assumption unlocking, which Marsha will cover in more detail. As I mentioned last quarter, the market-driven DAC volatility will change next year with the adoption of the GAAP accounting standard referred to as LDTI. Excluding notable items for the 2020 and 2021 Q4' s, adjusted pre-tax operating earnings increased 30%. Importantly, our pre-tax retail annuity fee income increased 17% this quarter compared to the year-ago quarter.
This top-line momentum is largely the result of account value growth, which benefits both earnings growth and ROE. We expect retail annuities to drive further profitability and growth as we benefit from an increasingly diverse set of products and expanding distribution network. Retail annuity account values were $259 billion at 2021 year-end, up nearly 13% from the prior year-end. This in-force business provides a level of profitability and scale that supports our business growth plans and capital return targets. Our Q4 annuity sales were at their highest level for the year at $5 billion, up modestly from the prior year's quarter. Looking ahead, we expect sales momentum for Jackson and the industry to continue.
For the 2021 full year, Jackson's variable annuity and RILA sales grew 15% over the prior year due to momentum in investment-only variable annuity sales as well as the rollout of our RILA product suite called Jackson MarketLink Pro. Our strong fee-based advisory sales were also at a record level of $1.3 billion, up from $1 billion last year, highlighting our ability to broaden the annuity market. Looking at the 2021 full year preliminary industry annuity sales survey results from the Secure Retirement Institute, we see positive future trends. For the industry overall, 2021 annuity sales were at their highest level since 2008 and were at the 3rd highest year ever. All annuity categories saw growth, including fixed index, RILA and variable annuities.
Last year's industry-wide traditional variable annuity and RILA sales combined were $125 billion, a 27% increase driven by the strong RILA market and a reversal of declines in traditional variable annuity sales. This is a helpful backdrop for Jackson, and advisors attribute this strong demand to the need for balancing protection and growth amidst rising inflation along with proactive tax planning. Last quarter, we mentioned our entry into the defined contribution market with our AllianceBernstein partnership, and we look forward to continued opportunities in this market. We believe our expertise as a provider of lifetime income solutions will increase in value as retirement plan sponsors look to address income protection and longevity risk for their plan participants. These opportunities are more episodic and future sales will be provided in our financial supplement.
Our product expertise and innovation, along with best-in-class operational and distribution support, strongly position us for future growth. As I mentioned earlier, we actively deployed capital in the Q4 and ended the year in a strong capital position. Our adjusted RBC at year-end was 611%, ahead of our 500%-525% target. As a reminder, the adjusted RBC considers both the capital position of our operating company and excess holding company liquidity. Finally, in December, we refinanced a term loan with a $1.6 billion senior debt issuance and are at the midpoint of our financial leverage target range. At this time, I'll turn the call over to Marcia to provide more details on our Q4 financial results.
Thank you, Laura. Looking at our results on slide 6, we continue to generate healthy levels of adjusted operating earnings. As Laura just mentioned, our fee-focused business mix benefited from higher average separate account balances, driving higher fee income. As a reminder, we believe Jackson has taken a conservative approach to the treatment of guarantee fees within our definition of adjusted operating earnings, as all of the fees are moved below the line with no assumed profit on guaranteed benefits included in adjusted operating earnings. In 2021, strong adjusted operating earnings, combined with positive non-operating income, resulted in a growing book value even after returning $261 million to shareholders in the Q4 . Slide 7 outlines the notable items included in adjusted operating earnings for the Q4 , starting with the market-driven deceleration of DAC amortization.
To provide a little more background, the amortization of DAC is a key item for our results given our annuity-focused balance sheet. Operating DAC amortization has multiple components. For clarity, our financial supplement reports these components as core amortization, which is driven primarily by our pre-DAC gross profits for the period, and any market-related acceleration or deceleration, which results from the pattern of separate account returns over time, as well as the DAC impact from our annual assumption review, which occurred in the Q4 . In the Q4 of 2021, there was market-driven deceleration of DAC amortization, resulting in a $66 million reduction of DAC expense for the quarter on a pre-tax basis. This was primarily due to a 5.9% separate account return in that period, which exceeded the assumed return.
In the Q4 of 2020, there was a deceleration of DAC amortization resulting in a pre-tax $238 million reduction in DAC expense, primarily due to a 13.1% separate account return in that period, which significantly exceeded the assumed return. As a result, the market-driven DAC effect was a net negative impact of $172 million on a pre-tax basis when comparing the current Q4 to the prior year Q4 . In terms of future market-driven DAC acceleration or deceleration for modeling purposes, we have provided additional details on the mechanics of the DAC amortization calculation within the appendix of this presentation, which aligns with the format of our financial supplement. As Laura noted, this is expected to change in the Q1 of 2023 with the adoption of LDTI under GAAP accounting.
We continue to expect to provide more information regarding LDTI impacts later in the year. Additionally, we would note that the Q4' s of both 2020 and 2021 included strong limited partnership income, which is reported on a lag and can vary significantly from period to period. Limited partnership income in excess of long-term expectations was $106 million in the current quarter, compared to $70 million in the prior year's quarter, creating a comparative pre-tax benefit of $36 million. The current quarter also includes an $80 million pre-tax benefit from the recovery of claims on previously reinsured fixed and fixed-indexed annuities. When these policies are reinsured to a third party, they are no longer included in Jackson's income. However, in the event that a claim occurs and the beneficiaries elect to keep the funds at Jackson, the policy effectively returns to us.
The $80 million reflects an adjustment to include the portion of these claims related to periods prior to the Q4 of 2021. Consistent with prior years, we completed our annual assumption unlocking in the Q4 . This led to a $38 million pre-tax benefit to earnings, which was mainly reflected in the retail annuity segment from an increase in the variable annuity DAC balance due to lapse assumption updates. The prior year's annual assumption unlocking was a negative impact of $152 million. In addition to the notable items, the Q4 of 2020 had a lower effective tax rate than the Q4 of 2021, impacting the period-over-period comparison. The effective tax rate in the Q4 of 2020 included a one-time tax benefit attributable to prior year deferred tax balances for certain investment partnerships.
Additionally, Q4 of 2021 pre-tax operating earnings were higher than Q4 2020, which meant that the tax benefits that were similar on a dollar basis in the two quarters led to a smaller reduction to the effective tax rate in the current period. Adjusted for both the notable items and the tax effects, the earnings per share was up 30% from the prior year's quarter, primarily due to the strong growth of our fee-focused business. Slide 8 shows the same analysis, but on a full year basis. The overarching explanation is largely the same, but there was also an earnings per share impact from a higher weighted average diluted share count in full year 2021 compared to prior year.
This is primarily due to debt restructuring and the equity investment from Athene in June of 2020, which resulted in additional shares that were only partially reflected in full year 2020 due to weighting, but fully reflected in 2021. Earnings per share in 2021, after adjusting for these items, was up 22% compared to full year 2020. Slide 9 illustrates the reconciliation of Q4 2021 pre-tax adjusted operating earnings of $817 million to pre-tax income attributable to Jackson Financial of $672 million. As shown in the table, the total guaranteed benefits and hedging results or net hedge result was negative $381 million in the Q4 .
As we've noted, net income includes some changes in liability values under GAAP accounting that we consider to be non-economic and therefore will not align with our hedging assets. We focus our hedging on the economics of the business as well as the statutory capital position, and choose to accept the resulting GAAP below the line volatility. I would also note that the $309 million net hedge loss was modest when compared to pre-tax adjusted operating earnings of nearly $2.8 billion. Starting from the left side of the waterfall chart, you see a robust guarantee fee stream of $753 million in the Q4 , providing significant resources to support the hedging of our guarantees.
These fees are calculated based on the benefit base rather than the account value, which provides stability to the guarantee fee stream and protects our hedging budget when markets decline. As previously noted, all guarantee fees are presented in non-operating income to align with the hedging and liability movements. The main driver of the negative Q4 hedge result was the $1.7 billion loss on freestanding derivatives, which were driven by losses on equity hedges resulting from higher equity markets during the year. As a reminder, net reserve and embedded derivative liabilities for guaranteed benefits are defined by both FAS 157, which calculates the embedded derivative liabilities using current market inputs, and SOP 03-1, which calculates the insurance contract liabilities using longer term assumptions, making them less sensitive to current market inputs.
This quarter's $532 million benefit from reserve movements is primarily the result of FAS 157 accounting for the higher equity markets over the Q4 . This accounting for equity market movements is a good example, among others, of where our hedging approach and the GAAP treatment of liabilities are not aligned because our equity hedges will fully mark to market, as you see here, while the reserves are not fully sensitive to the economic impact of market movements. We've included a slide in the appendix which shows the key macroeconomic drivers of the GAAP net hedge result and how changes in these macro items may lead to noneconomic gains or losses due to the lack of alignment between our hedging approach and GAAP accounting.
Now let's switch gears and look at our business segments, starting with retail annuities on slide 10, where we continue to see healthy sales trends. We are pleased to have had strong levels of retail sales driven this quarter by growth in variable annuities without living benefits. Sales of Elite Access, our investment-only variable annuity, increased 45% from the prior year's quarter, and sales of other variable annuities without lifetime benefit guarantees were up 23% over the prior year period. While sales without lifetime benefits increased from 27% in the Q4 of last year to 37% in the fourth quarter of this year, we expect this percentage may vary over time based on market conditions and customer demand. We continue to focus on growing our fee-based advisory business and sales of these products were up 19% from the prior year's quarter.
Furthermore, our full year fee-based advisory sales of $1.3 billion were at record levels. Our total annuity market share highlights our consistent presence in the market, our strong distribution relationships, and disciplined approach to pricing and product design. We expect these attributes to support the growth of our recently launched RILA product midway through the fourth quarter, and we reported $108 million of sales in that partial quarter. We view this as an important product launch, capturing the economic diversification benefit between a RILA and a traditional living benefit variable annuity, as well as capital efficiencies through RILA account value growth alongside our large, healthy in-force traditional variable annuity block. Looking at pre-tax adjusted operating earnings on slide 11, we are up from the prior year fourth quarter.
In addition to the notable items I detailed earlier, this was the result of higher separate account assets as the fourth quarter of 2021 variable annuity ending account value was up 13% from the fourth quarter of 2020 ending account value, primarily due to strong returns. As a reminder, we have investment freedom on our variable annuity products, allowing both policyholders and Jackson to more fully capture the benefits of rising equity markets. While fixed annuity and fixed-indexed annuity account values are minimal after accounting for the business reinsured to Athene, they did also grow during the period.
Sales remain low, but the block has low surrender activity given the business was recently issued, meaning sales largely contribute directly to positive net flows. We will have a similar dynamic on RILA sales going forward, given our recent entry into this market with our October launch, such that the $108 million of sales in the quarter contribute to positive net flows. Our other operating segments are shown on slide 12. We temporarily suspended institutional business for new sales starting in early 2020 as we began the separation process, and this largely continued throughout 2021. This led to significant outflows as existing business has run off throughout the year, with account values declining from $11.1 billion a year ago to $8.8 billion as of the end of 2021.
Now that we have completed our separation, we have re-engaged in the market during the fourth quarter with $432 million of sales. We would note that the value of the institutional business goes deeper than just GAAP earnings. It provides diversification benefits, is cost-effective, and helps to stabilize our statutory capital generation. Our pre-tax adjusted operating earnings for the institutional segment of $27 million during the fourth quarter of 2021 was up from $12 million in the prior year's quarter due to spread compression in the prior year period. Going forward, the earnings should largely track the account values. Lastly, our closed life and annuity block segment reported higher pre-tax adjusted operating earnings, reflecting lower levels of benefits paid. Absent future M&A activity, the earnings for this segment should trend downward as the business runs off over time.
Slide 13 summarizes our robust capital position as of the end of 2021. As Laura noted, this strong position has given us the confidence to update our capital return target to $425 million-$525 million over calendar year 2022. Following the announcement of our share repurchase program and dividend in November, we completed $211 million of share repurchases and paid $50 million in dividends by the end of 2021. After returning this capital to shareholders, we continued to maintain cash and liquidity of over $600 million at the holding company above our minimum liquidity target. Our total GAAP leverage was at 22.9% at year-end, within our 20%-25% target range.
We also refinanced one of our two term loans with a $1.6 billion senior debt issuance in December. Jackson National Life Insurance Company reported a total adjusted capital position of $6.6 billion, down slightly from $6.8 billion as of the end of the third quarter. This was the result of the floored out reserves issue we have discussed before, which led to hedging losses on equity derivatives with rising markets that were not fully offset by reserve releases. However, the higher equity markets led to a reduction in required capital, or CAL, increasing our year-end RBC ratio to 580%. This was up from the estimated RBC of above 525% as of the third quarter, continuing the growing RBC trend we've seen throughout 2021.
This means that through the lens of the operating company only, and without considering excess capital at the holding company, we are above our 500%-525% adjusted RBC target. On an adjusted basis, the year-end RBC ratio was 611%. We would also note that Jackson National Life Insurance Company received approval from the Michigan Department of Insurance and Financial Services for a combined dividend and return of capital payment to Jackson's direct parent, Brooke Life, of $600 million, which 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 from Jackson in the first quarter of 2022.
This will support our new capital return targets while maintaining a healthy level of capital at the operating company. We will also have an adjusted RBC ratio above our target level. In summary, it was a successful quarter and year. We continued to increase our RBC ratio, refinanced one of our term loans, operate within our target leverage range, and we have ample holding company liquidity. With our robust capital levels, we are well positioned for the future. With that, I will turn it back to Laura Prieskorn for closing remarks.
Thank you, Marcia. Looking back on 2021, Jackson's ability to execute has led to many significant accomplishments. First, the successful transition to becoming a separate public company, resulting from the tremendous internal collaboration and hard work of our employees. Second, ending 2021 in a position of balance sheet strength while returning capital to shareholders and meeting our financial targets. Lastly, we continued to expand and diversify our product offerings and distribution channels. In 2022, we intend to maintain our balanced approach to capital management, investing in the growth of the company while delivering on our targeted capital return to shareholders. Jackson has long been a leader in the retirement income and savings solutions market. For over a decade, we've been one of the largest annuity writers with a disciplined and client-focused approach to the market, and we look forward to continuing that tradition.
Thank you for joining our call, and at this time, we'd like to open the line for questions.
Our first question today comes from Suneet Kamath from Jefferies. Suneet, please go ahead. Your line is now open.
Great. Thank you. I wanted to start with the $600 million dividend that you're taking out of the operating company in the first quarter. Is that a typical dividend that you guys would expect going forward, or was there anything unusual about that nominal amount of capital that's coming out?
Good morning, Suneet. Thanks for the question. Marcia, do you want to address the dividend?
Sure. Yeah, I think it was, you know, pretty normal course. I mean, it may be a little elevated compared to some maybe the average run rate we've seen over time, but it reflects a really good year for the business in 2021 and, you know, recognized too that we hadn't paid a dividend in the prior year. That all combined together to land us at that $600 million level.
Okay. I think you said $510 million is coming out of Brooke Life going to JFI. What about the remaining $90 million?
The other $90 million is will eventually make its way up to the holding company over the course of the year in connection with some, you know, financing arrangements between the entities. That is it's just something that timing-wise happens semi-annually with surplus note activity, and so that will eventually get up there to the holding company before the end of the year.
Got it. My last one is just on the macro environment. You know, we're sitting here with the market down, you know, 8%-10%. Can you just talk a little bit about the moving pieces in your RBC calculation and what we should expect as we think about first quarter?
Sure. We've certainly worked through many types of market conditions over time, and our hedging has performed as expected. I'll turn it over to Marcia to share more specific remarks.
Yeah. In terms of the capital, you know, statutory position, you know, we would certainly say market down, that's gonna be, you know, something that could translate into increased reserves or capital requirements. On the other end, on the other hand, we've had an increase in rates that would work in the opposite direction, tend to reduce requirements in the statutory framework. I think those things, you know, working in opposite directions right now, obviously we'll keep an eye on how things go. Just to reiterate what Laura said around the hedging, I mean, these types of movements are not outside the bounds of things that we've, you know, worked through before.
They're well within the range of sensitivities that we routinely watch and are preparing for in terms of how we've arranged our risk limits and our risk appetite. We're, you know, feeling like our position is actually holding up quite well, you know, during this period of time. We'd note that, you know, hedging can become more expensive when we have higher volatility like this. Again, we have a really strong base of fees that support that hedging budget with our benefit fees being based on the benefit base rather than the assets under management. That's a very stable fee income stream that supports our hedging. I think we feel like we're still, you know, well within range there.
Okay. Thank you.
Thank you, Suneet. The next question today comes from Ryan Krueger from KBW. Ryan, please go ahead. Your line is now open.
Thanks. Good morning. My first question is when you think about the $425 million-$525 million capital return target for 2022, can you talk about the extent to which you would expect that to be funded from ongoing capital generation from the business versus some use of existing excess capital?
Yes. Good morning, Ryan. Thanks for the question. You know, in general, we're targeting cash return that we know is supportable by the business and has a balanced mix between dividend and share repurchase. I'll remind that this updated target is now based on a calendar year basis, and we certainly view it to be sustainable for a normal course. Marcia, additional remarks?
I just add that, you know, what we're focusing on here is looking at how the business performed last year, what did that make available in order to be able to fund a return. It's not necessarily tied directly to how the business is. We're not getting ahead of ourselves in terms of how the business is gonna perform over the current year. We're, you know, feeling that $425 million-$525 million is a good target that we're comfortable with for this year.
Okay. Got it. Just a quick one. I guess, how should we think about the timing of when the last quarter you had talked about 7.2 million of diluted shares coming into the share count, but only some of that came in in the fourth quarter. How should we view the timing of that going forward?
That will come in over time, and I think it will depend upon market conditions and the way in terms of the pattern and the timing, is it perfectly predictable at this point in time, but that will come in gradually over the next couple of years.
Okay. Got it. Thank you.
Thank you, Ryan. The next question today comes from Tom Gallagher of Evercore ISI. Tom, please go ahead. Your line is now open.
Good morning. Just a first question on hedging costs. Can you remind us how much you're spending annually on hedging costs? I think you've mentioned in the past it's below your guaranteed fees. Can you just give some quantification of that? Is it $2 billion annually? Is it $2.5 billion annually you're spending on hedging? Then if we look at what's happened in the environment in Q1, you had two offsetting movements. You have interest rates rising a lot, but then you have vol spiking. I presume since I think you're using more shorter-term hedges, the vol is probably the overwhelming influence on hedge costs. Can you comment on if we remain in a Q1 environment for a while, what impact would you see it having on hedge costs? Would you still expect those to be below guaranteed fees?
Good morning, Tom. Chad, do you wanna take that?
Sure. Yeah. I think, Tom, what we've disclosed in the past is, you know, if you look at the guaranteed fees, it tends to run, you know, broad range, $2.5 billion or so a year in terms of the guaranteed fees we collect. You know, it's very much dependent on terms of the market on how much of that we're spending. You know, I think as we look at last year, you could expect that we spent less than that because it was a very low vol year, and that came through in capital formation. You know, we're partway through the quarter, so it's really too early to say exactly what's going on for this quarter other than hedging costs would be up.
Again, probably no big surprise there, but with the VIX running around 30, you can expect that we would have increased hedging costs, whether it's above the fees or not or, you know, at or above or wherever. I'm not exactly sure at the moment again, because we haven't gone the quarter fully done yet. I think it's very much within, as Marcia mentioned, within the range of what we've seen historically. We would expect to have that performance like we've seen historically. With respect to, you know, the interactions of how things are going, I think you'd see the benefits from, you know, from higher rates. Again, as mentioned, there is good offset there.
The quarter to date as we're talking about, you're rebalancing hedges. We do have, as you mentioned, shorter, you know, shorter dated hedges. So we are subject to roll, you know, the roll cost of those and are experiencing higher, you know, higher premiums that we'd have to pay for options bought. But I would also just keep in mind that a good chunk of our hedging book is off of futures. So in some respects, as interest rates start moving up on the short end, the futures carry will start to reduce somewhat. So that'll be a little bit of tailwind eventually once the Fed starts raising rates.
I think the other thing I'd mention is just that, keep in mind since our focus historically has been on more instantaneous shocks and risk limits that way as opposed to an immunization strategy of gap earnings, we don't tend to be as responsive to the market maybe as some others might be. As we see a lot of chop in the market, we're not rebalancing hedges maybe as you know as quickly or as just a knee-jerk reaction as you might have to if we operated a different way. That does mitigate a little bit of the cost because we're not getting whipsawed as much as you might otherwise get.
Gotcha. Thanks, Chad. That was helpful. Next question I had is just on would you still, and I think Suneet alluded to this question, but I'll ask a follow-up. With equity markets doing what they're doing and hedge costs doing what they're doing, just a broader question. Would you still expect to generate statutory capital or call it RBC, positive RBC capital, in a 1Q type of environment? Or is it, you know, you need to close the books before you make a determination on that? Because I ask because I've thought about the Florida reserves being a meaningful positive, in terms of, you know, not needing to build reserves in an equity market correction quarter, so that should give you some dry powder to generate RBC. Any thoughts on that?
Well, I think you may have hit it on the head earlier when you said we probably need to close the books to really know. You know, that's something obviously we'll be watching as we move through the year. But a lot of factors come into play there, and I think we just need to see how things play out in the calculations.
Okay. Just a follow-up on that. Can you give some quantification for when you would start to build reserves again based on equity market correction territory levels? I just wanna get a sense for how much embedded margin is in there to think about, you know, at what point you'd start to build reserves again.
I don't have the, you know, exact level in my head right now, but I know that where we had gotten to at the end of the year, we had significant flooring pretty deep into the tail. You know, even going into some of the scenarios that make up the CTE 98 for the capital requirement. We're without being able to quantify the exact percentage drop. I think we have a decent margin in there in terms of working our way through some of the, you know, any market downturn before reserves would go up.
You would see, to the extent that there's any flooring, you know, impacting the CTE 98 tail, you know, that will come off earlier, you know, as those tail scenarios respond more quickly than the full set that go into the 70 CTE for reserves. But we do have, I think, a good buffer, particularly, you know, with all of the market growth that we saw in 2021.
Okay, thanks.
Thank you, Tom. The next question today comes from Erik Bass from Autonomous Research. Erik, please go ahead. Your line is now open.
Hi. Thank you. I appreciate you mentioned earlier that you'll give more specifics on LDTI impacts later in the year, but I was hoping you could maybe talk a little about some of the qualitative impacts as we start to hear things from peers. I guess, specifically, should we expect a significant change from bringing the VA guarantees to fair value? Given your hedging strategy, do you expect GAAP earnings volatility to be higher or lower prospectively under LDTI?
Sure. Thanks, Erik. I guess I would say with respect to the first part, I think for us, by definition, the movement that will occur in terms of the calculations around market risk benefits will mean an increase in reserves simply because we're moving a portion of those guarantees as being reserved under real-world type framework with more of a long-term equity growth assumption to a calculation that's gonna be tied to current interest rates. You know, the actual impact on those reserves, you know, will be sensitive to, you know, factors that will play out over the course of this year, in terms of where the equity markets go, interest rates, and credit spreads as well.
I think definitionally, there would be an expectation for a reserve increase there that would come through retained earnings in terms of the implementation effects. As far as volatility going forward, I think what I would see is that if you think first to operating results, what we won't see is the market sensitivity and DAC amortization that we have today. I would think in operating results, we probably are looking at something less volatile. Whereas in non-operating results, I think because we have a couple things that are gonna go in maybe different directions, it's hard to say how it all plays out because it'll be somewhat market dependent.
I think the changes will introduce more interest rate sensitivity into the liabilities, given the move to FAS 157, and probably less sensitivity to the equity movements with respect to our hedging approach. I think there's a balance there. There's also less of a DAC buffering effect. All in, probably heightened volatility, but it's, you know, below the line. It's really gonna be probably pretty sensitive to whatever paths of market or, you know, economic factors play out period by period.
Got it. Thank you. That's very helpful color. Just one follow-up there. Do you have a sense of, I think you bifurcate some of the guarantees between fair value and SOP accounting, how much of the guarantees, I guess, are on SOP accounting and would need to move to fair value?
Well, I think you know for all companies I think you would see the death benefits, income benefits as well, but death benefits would be applicable to us since we have minimal amount of the GMIB business. Those will move. We do bifurcate our GMWB today. You know a good portion of that is already under FAS 157. It's only really the portion that would be projected to develop you know after the benefit base is exhausted where you would have you know an SOP 03 reserve component today that would need to change. The change would-
Got it. Thank you
Perfect. Thanks. If I could just sneak in one last one. Do you intend to provide an update to the different distributable cash flow scenarios that you'd included in the Form 10? And is that something you would do in the 10-K or at a later date?
It's not something we've planned at the moment. We recognize we'll have a lot of heightened disclosures coming in 2023 in connection with the LDTI changes. We'll certainly be looking at the overall package of disclosures and happy always to consider, you know, things that we think add greater, you know, understanding.
Thank you. I think it would be helpful, especially given the significant changes in the macro from over the past year, to see how those developed.
Sure. Thank you.
Thanks.
Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. The next question today comes from Goldman Sachs. Please go ahead. Your line is now open.
Hi, thanks for taking the question. First one I had for you all is just on the amount of capital you're distributing and sorta going back to the methodology, I think that you talked about previously, being the 50% of excess capital generated over 400 RBC. When I think through this $100 million higher, is that. Should I think about that as maybe you're shifting the way you think through that methodology or are you generating a $100 million more at this point than you expected? Can you help us think through that?
Are you hitting high enough RBC ratios where that methodology doesn't really make sense anymore, given, I think, you know, inherently like that methodology would cause the RBC to go up over time and at some point it doesn't need to go up anymore.
Sure. I'll take that. I guess, first I'd say, you know, we've maintained our view on the 40%-60% of excess capital generation as a guide. But that's the part I probably would emphasize as a guide. We wouldn't be doing, you know, exact calculation each period and having that directly, you know, indicate the amount of return. We do view it as a useful guide. We also recognize that, you know, capital return or excess capital generated in that way is not necessarily going to be stable every period. I mean, we have a key focus of our hedging program to help stabilize distributable earnings. But we do have market sensitivity. What we've done here is really just look at the business as it performed very well over last year.
You know, getting a fresh view now that we're on the other side of the demerger. With all of that in mind and in our own view of the business in the near term as well as long term, felt comfortable that we could increase to the $425-$525 target for 2022.
Got it. Yeah. Makes sense. I mean, I guess my follow-up here is we have this targeted RBC ratio that's lower than where you are by, you know, a decent amount. I think just based on that methodology of 40%-60%, and I think, please correct me if I'm wrong, but I think that methodology would actually cause upward momentum to continue on the RBC ratio. Maybe the more interesting number, I guess, from my point of view, would be instead of, you know, the minimum. You know, what's the maximum RBC? Like, how high would you let it get before you change that methodology to maybe returning, you know, something closer to 100% of excess capital generation?
Well, I think we would always have the flexibility to go outside of that. As I said, the 40-60 is a range. We wouldn't view the 40 or the 60 as, you know, hard min-maxes or anything there. You know, we certainly would have the capability if we've generated sufficient capital, and we have considered all of our balanced uses of capital across, you know, new business investment, you know, capital return being one of the component parts as well and maintaining our balance sheet strength and the like. You know, if, on balance, the right answer for shareholders was to return that, we would certainly be open to going higher and, you know, to whatever level made sense under the circumstances.
That really is just a g uide and circumstances will, you know, always come into play with consideration of the opportunities in front of us and what makes the best sense for the shareholders.
Got it. Thank you.
Thank you. There are no further questions registered, so I'd like to pass the conference back over to CEO Laura Prieskorn for closing remarks. Laura, please go ahead.
Thank you. Well, thank you all for joining us today. We look forward to your participation in our next quarterly call.
That concludes today's Jackson Financial Inc. fourth quarter 2021 earnings call. Thank you for your participation. You may now disconnect your-