Jackson National Life Global Funding U.S. $10,750,000,000

Transcription

1 BASE PROSPECTUS SUPPLEMENT Jackson National Life Global Funding U.S. $10,750,000,000 GLOBAL DEBT ISSUANCE PROGRAM This supplement (this Base Prospectus Supplement ) is supplemental to and must be read in conjunction with the Offering Memorandum dated August 28, 2008 (the Base Prospectus ) and the Base Prospectus Supplement dated November 12, 2008, prepared by Jackson National Life Global Funding (the Trust ), under the Trust s global medium-term note program for the issuance of senior secured medium-term notes. This Base Prospectus Supplement constitutes a supplement to the Base Prospectus for the purposes of Article 16 of the Directive 2003/71/EC (the Prospectus Directive ). This Base Prospectus Supplement has been approved by the Irish Financial Services Regulatory Authority (the Financial Regulator ), as competent authority under the Prospectus Directive. The Financial Regulator only approves this Base Prospectus Supplement as meeting the requirements imposed under Irish and EU law pursuant to the Prospectus Directive. References herein to this document are to this Base Prospectus Supplement incorporating Annex 1, Annex 2, Annex 3, Annex 4, Annex 5, Annex 6, Annex 7 and Annex 8 hereto. Annex 1 of this Base Prospectus Supplement contains the text of Jackson National Life Insurance Company s ( Jackson ) yearly audited statutory financial statements as of and for the years ended December 31, 2008 and 2007 (including any notes and schedules thereto, the 2008 and 2007 Audited Statutory Financial Statements ). Annex 2 of this Base Prospectus Supplement contains the text of Jackson s annual statutory financial statements as of and for the year ended December 31, 2008 (including any notes thereto, and excluding schedules, the 2008 Statutory Financial Statements ). Annex 3 of this Base Prospectus Supplement includes Jackson s Management Discussion and Analysis of Results of Operation, Financial Condition and Liquidity for the year ended December 31, 2008 (the 2008 MD&A ). Annex 4 of this Base Prospectus Supplement includes a description of certain recent developments ( 2008 Recent Developments ) related to the filing with the Michigan Office of Financial and Insurance Regulation by Jackson of its 2008 Statutory Financial Statements. Annex 5 of this Base Prospectus Supplement contains information concerning Jackson which has been made available as part of the Prudential plc Annual Report Such information is based on International Financial Reporting Standards and has been converted into U.S. Dollars. Jackson is an indirectly owned subsidiary of Prudential plc, London, England (Prudential plc is not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America.). Annex 6 of this Base Prospectus Supplement contains the text of the quarterly unaudited unconsolidated statutory financial statements for the quarter ended March 31, 2009 (including any notes thereto, and excluding schedules, the 2009 First Quarter Statutory Financial Statements ). Annex 7 of this Base Prospectus Supplement includes a description of certain recent developments ( 2009 First Quarter Recent Developments ) related to the filing with the Michigan Office of Financial and Insurance Regulation by Jackson of its 2009 First Quarter Statutory Financial Statements. Annex 8 of this Base Prospectus Supplement contains information concerning Jackson which has been made available as part of

2 the Prudential plc First Quarter 2009 Interim Management Statement. Such information is based on International Financial Reporting Standards and has been converted into U.S. Dollars. Copies of the 2008 and 2007 Audited Statutory Financial Statements, the 2008 Statutory Financial Statements, 2008 Recent Developments, 2009 First Quarter Statutory Financial Statements and 2009 First Quarter Recent Developments will be made available for inspection at the offices of the parties at whose offices documents are to be available for inspection as identified in General Information in the Base Prospectus. Except as disclosed in this Base Prospectus Supplement, there has been no other significant new factor, material mistake or inaccuracy relating to the information included in the Base Prospectus since the publication of the Base Prospectus. Where there is any inconsistency between the Base Prospectus or the previous Base Prospectus Supplement, the language used in this Base Prospectus Supplement shall prevail. Each of the Trust and Jackson accepts responsibility for the information contained in this Base Prospectus Supplement. To the best of the knowledge of each of the Trust and Jackson (having taken all reasonable care to ensure that such is the case) the information contained in this Base Prospectus Supplement is in accordance with the facts and does not omit anything likely to affect the import of such information. Base Prospectus Supplement dated June 16, 2009

3 ANNEX 1

4 Jackson National Life Insurance Company Statutory Financial Statements December 31, 2008 and 2007

5 Jackson National Life Insurance Company Index to Statutory Financial Statements December 31, 2008 and 2007 Independent Auditors Report 1 Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus 2 Statutory Statements of Operations 3 Statutory Statements of Capital and Surplus 4 Statutory Statements of Cash Flow 5 Notes to Statutory Financial Statements 6 Supplemental Schedule of Selected Financial Data 41 Supplemental Investment Risks Interrogatories 44 Summary Investment Schedule 47

6 KPMG LLP 303 East Wacker Drive Chicago, IL To the Board of Directors and Stockholder of Jackson National Life Insurance Company: Independent Auditors Report We have audited the accompanying statutory statements of admitted assets, liabilities, capital and surplus of Jackson National Life Insurance Company (the Company ) as of December 31, 2008 and 2007, and the related statutory statements of operations, capital and surplus, and cash flow for the years then ended. These statutory financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these statutory financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described more fully in note 2 to the financial statements, Jackson National Life Insurance Company prepared these financial statements using accounting practices prescribed or permitted by the Michigan Office of Financial and Insurance Regulation, which practices differ from U.S. generally accepted accounting principles. The effects on the financial statements of the variances between the statutory basis of accounting and U.S. generally accepted accounting principles also are described in note 2. In our opinion, because of the effects of the matters discussed in the preceding paragraph, the statutory financial statements referred to above do not present fairly, in conformity with U.S. generally accepted accounting principles, the financial position of Jackson National Life Insurance Company as of December 31, 2008 and 2007, or the results of its operations or its cash flows for the years then ended. Also, in our opinion, the statutory financial statements referred to above present fairly, in all material respects, the admitted assets, liabilities, capital and surplus of Jackson National Life Insurance Company as of December 31, 2008 and 2007, and the results of its operations and its cash flow for the years then ended, on the basis of accounting described in note 2. As described more fully in note 2 to the statutory financial statements, the Company prepared these statutory financial statements using accounting practices prescribed or permitted by the Michigan Office of Financial and Insurance Regulation. These practices differ from the National Association of Insurance Commissioners statutory accounting practices, as described in note 2. Our audits were made for the purpose of forming an opinion on the basic statutory financial statements taken as a whole. The supplementary information included in the accompanying Supplemental Schedule of Selected Financial Data, Supplemental Investment Risks Interrogatories and Summary Investment Schedule is presented for purposes of additional analysis and is not a required part of the basic statutory financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic statutory financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic statutory financial statements taken as a whole. Chicago, Illinois April 29, 2009 KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative.

7 Jackson National Life Insurance Company Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus December 31, 2008 and 2007 (In thousands, except per share information) Admitted Assets Bonds, at amortized cost $ 36,792,852 $ 35,561,636 Stocks: Preferred, at lower of cost or fair value (cost: 2008, $327,312; 2007, $261,948) 324, ,948 Common, at fair value (cost: 2008, $384,260; 2007, $433,566) 356, ,796 Subsidiaries, on equity basis (cost: 2008, $416,467; 2007, $149,974) 94, ,086 Cash and short-term investments 199,462 97,990 Mortgage loans 6,392,523 5,488,966 Policy loans 840, ,571 Limited partnership interests 1,483,419 1,399,188 Real estate 99,675 97,410 Other invested assets 682, ,385 Total cash and invested assets 47,266,701 44,821,976 Investment income due and accrued 478, ,157 Premiums deferred and uncollected 116, ,191 Electronic data processing equipment, at cost (less accumulated depreciation 2008, $29,583; 2007, $34,543) ,369 Federal income taxes receivable 67,356 8,626 Net deferred tax asset 315,258 79,420 Value of business acquired and goodwill 123, ,175 Other admitted assets 217, ,420 From separate accounts statement 19,740,791 28,233,533 Total admitted assets $ 68,327,271 $ 73,963,867 Liabilities, Capital and Surplus Liabilities: Aggregate reserves: Life $ 6,653,732 $ 6,717,131 Annuity 28,715,464 25,328,258 Guaranteed investment contracts 8,212,780 8,306,019 Liability for other deposit-type contracts 443, ,754 Policy and contract claims 272, ,921 Other policyholder funds 13,849 14,731 Beneficiary funds 501, ,502 Remittances in process 35,195 26,134 Interest maintenance reserve 44, ,896 Asset valuation reserve 219, ,509 General expenses and taxes due and accrued 167, ,550 Accrued transfers to separate accounts (919,534) (1,356,746) Short-term borrowings from Parent - 32,020 Short-term borrowings 150, ,519 Other liabilities 329, ,079 From separate accounts statement 19,740,791 28,233,533 Total liabilities 64,581,585 69,939,810 Capital and surplus: Capital stock (par value $1.15 per share; 50,000 shares authorized; 12,000 shares issued and outstanding) 13,800 13,800 Surplus notes 249, ,280 Gross paid-in and contributed surplus 2,532,812 2,532,812 Special surplus funds 844,986 - Unassigned surplus 104,792 1,228,165 Total capital and surplus 3,745,686 4,024,057 Total liabilities, capital and surplus $ 68,327,271 $ 73,963,867 See accompanying notes to statutory financial statements. 2

8 Jackson National Life Insurance Company Statutory Statements of Operations For the Years Ended December 31, 2008 and 2007 (In thousands) Income: Premiums and annuity considerations: Life $ 464,946 $ 484,314 Annuities 10,131,162 10,530,291 Total premiums and annuity considerations 10,596,108 11,014,605 Net investment income 2,719,790 2,857,900 Fee income from separate accounts 523, ,303 Commissions and expense allowances on reinsurance ceded 18,082 18,211 Other income 121,425 54,582 Total income 13,979,211 14,428,601 Benefits and other deductions: Death and other benefits: Annuity benefits and surrenders 5,805,221 6,393,604 Life claims 464, ,189 Life surrenders 246, ,751 Other 54,042 57,548 Increase (decrease) in aggregate reserves: Life (63,399) (8,616) Annuities 3,387,206 (1,063,659) Reinsurance of in-force business 386,893 5,406 Interest credited on guaranteed investment contracts 332, ,169 Interest expense on surplus notes, reverse repurchase agreements and other debt 27,144 21,635 Commissions 709, ,800 General insurance expenses 343, ,858 Taxes, licenses and fees 37,716 30,693 Amortization of value of business acquired and goodwill 19,414 19,414 Other deductions 13,292 7,836 Net transfers to separate accounts 2,750,680 6,089,654 Total benefits and other deductions 14,515,193 13,758,282 Gain (loss) from operations before federal income tax and net realized capital losses (535,982) 670,319 Federal income tax (benefit) (250,497) 132,434 Gain (loss) from operations before net realized capital losses (285,485) 537,885 Net realized capital losses, less capital gains tax expense of $196,373 in 2008 and $35,861 in 2007, excluding tax expense of $(35,783) in 2008 and $(664) in 2007 transferred to the IMR (337,909) (47,874) Net income (loss) $ (623,395) $ 490,011 See accompanying notes to statutory financial statements. 3

9 Jackson National Life Insurance Company Statutory Statements of Capital and Surplus For the Years Ended December 31, 2008 and 2007 (In thousands) Surplus Capital Surplus Gross paid-in and Special stock notes contributed funds Unassigned Total Balances at December 31, 2006 $ 13,800 $ 249,265 $ 2,532,812 $ - $ 881,020 $ 3,676,897 Net income , ,011 Change in net unrealized capital gains , ,764 Change in net deferred income tax (9,401) (9,401) Change in asset valuation reserve (60,259) (60,259) Change in non-admitted assets (14,140) (14,140) Change in surplus as a result of reinsurance ,406 5,406 Surplus notes amortization Dividend to stockholder (246,000) (246,000) Change in surplus in separate accounts statement (236) (236) Balances at December 31, , ,280 2,532,812-1,228,165 4,024,057 Net loss (623,395) (623,395) Change in net unrealized capital gains (losses) (882,709) (882,709) Change in net deferred income tax , ,181 Change in asset valuation reserve , ,758 Change in non-admitted assets, excluding effect of permitted practices (136,000) (136,000) Change in surplus as a result of reinsurance , ,893 Surplus notes amortization Dividend to stockholder (313,101) (313,101) Change in surplus as a result of permitted practices , ,986 Balances at December 31, 2008 $ 13,800 $ 249,296 $ 2,532,812 $ 844,986 $ 104,792 $ 3,745,686 See accompanying notes to statutory financial statements. 4

10 Jackson National Life Insurance Company Statutory Statements of Cash Flow For the Years Ended December 31, 2008 and 2007 (In thousands) Cash from operations: Operating receipts: Premiums and annuity considerations $ 10,576,943 $ 11,035,278 Net investment income 2,734,380 2,884,950 Other 645, ,538 Total cash received from operations 13,956,435 14,457,766 Operating disbursements: Benefit payments 6,339,506 7,057,328 Commissions, general expenses and taxes 1,097,825 1,084,232 Interest paid on surplus notes and reverse repurchase agreements 27,128 21,620 Net transfers to separate accounts 2,313,468 6,442,530 Federal income taxes 68, ,388 Total cash disbursed in operations 9,846,820 14,730,098 Net cash from operations 4,109,615 (272,332) Cash from investments: Proceeds from investments sold, matured, or repaid: Bonds 4,826,522 7,613,562 Stocks 143, ,789 Mortgage loans 407, ,933 Real estate Limited partnerships and other invested assets 1,021, ,112 Total investment proceeds 6,399,499 9,034,396 Cost of investments acquired: Bonds 7,029,954 7,294,581 Stocks 588, ,452 Mortgage loans 1,310,914 1,031,580 Real estate 4,879 12,518 Limited partnerships and other invested assets 383, ,827 Total investments acquired 9,317,123 9,143,958 Net increase in policy loans (11,679) (13,559) Net cash from investments (2,929,303) (123,121) Cash from financing and miscellaneous sources: Other cash provided (applied): Short-term borrowings (100,000) 250,000 Short-term borrowings from Parent (32,000) 32,000 Net deposits on deposit-type contracts (549,299) 216,494 Dividend paid to stockholder (313,101) (246,000) Other (84,440) (16,294) Net cash from financing and miscellaneous sources (1,078,840) 236,200 Net change in cash and short-term investments 101,472 (159,253) Cash and short-term investments at beginning of year 97, ,243 Cash and short-term investments at end of year $ 199,462 $ 97,990 See accompanying notes to statutory financial statements. 5

11 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 1 - Organization Jackson National Life Insurance Company (the Company or Jackson ) is wholly-owned by Brooke Life Insurance Company ( Brooke Life or the Parent ) which is ultimately a wholly-owned subsidiary of Prudential plc ( Prudential ), London, England. Jackson is licensed to sell group and individual annuity products (including immediate, index-linked and deferred fixed annuities and variable annuities), guaranteed investment contracts ( GICs ) and individual life insurance products, including variable universal life, in 49 states and the District of Columbia. Note 2 - Summary of Significant Accounting Policies Basis of Presentation The accompanying financial statements have been prepared in accordance with accounting practices prescribed or permitted by the Michigan Office of Financial and Insurance Regulation ( statutory ), which vary in some respects from U.S. generally accepted accounting principles ( GAAP ) and include the following: (1) the costs related to acquiring business, principally commissions, bonus interest on certain products and certain policy issue and underwriting costs, are charged to income in the year incurred and thus are not amortized over the periods benefited; (2) recognition of the value of acquired insurance in force and goodwill are limited and is amortized over the life of the business acquired, up to ten years; (3) future policy benefit reserves are based on statutory mortality and interest requirements without the consideration of withdrawals; (4) the Commissioners Annuity Reserve Valuation Method ( CARVM ) expense allowance associated with statutory reserving practices for deferred annuities held in the separate accounts is reported in the general account as a negative liability; (5) assets must be included in the statement of admitted assets, liabilities, capital and surplus at "admitted asset value", with "non-admitted assets" excluded through a charge to surplus; (6) an asset valuation reserve ( AVR ) is established by a direct charge to surplus to offset future potential credit related investment losses (under GAAP, a reserve for losses on investments is deducted from the asset to which it relates); (7) the carrying values of loan-backed and structured securities are reduced to the undiscounted estimated future cash flows for otherthan-temporary declines in fair value (under GAAP, carrying values for such securities that are other than high credit quality are reduced to fair value); (8) bonds are generally carried at amortized cost (at fair value under GAAP) and, for investments carried at fair value, changes in investment valuations are recorded against surplus (under GAAP, investments are generally carried at fair value (amortized cost for mortgage loans and policy loans), with changes in valuation recorded in other comprehensive income); (9) realized gains and losses resulting from changes in interest rates on fixed income investments are deferred in the interest maintenance reserve ( IMR ) and amortized into investment income over the approximate remaining life of the investment sold; (10) material gains or losses resulting from market value adjustments ( MVA ) on policies and contracts backed by assets that are valued at book/adjusted carrying value are deferred in the IMR and amortized in a manner consistent with the determination of the MVA; (11) premiums for universal life and investment-type products, other than guaranteed investment contracts and annuities certain, are recognized as income, but are accounted for as deposits to policyholders' accounts under GAAP; (12) a net deferred tax asset, for the tax effect of timing differences between book and tax assets and liabilities, is only reported as an admitted asset to the extent that it is realizable within three years (one year in 2007), and less than 15% (10% in 2007) of capital and surplus, with the change in net deferred tax asset or liability being recorded directly to surplus; (13) surplus notes issued by the Company are recorded as surplus rather than as a liability; (14) investments in subsidiaries or companies where Jackson has a controlling interest or is the primary beneficiary of a variable interest entity are reported as investments, but are consolidated under GAAP; (15) the surplus impact of reinsuring contracts in force prior to the effective date of the reinsurance agreement is recorded directly to surplus; (16) assets and liabilities for certain derivative contracts are reported net for statutory, but are reported gross under GAAP; (17) for derivative instruments carried at fair value, changes in fair value are recorded directly to surplus (under GAAP, derivative instruments are carried at fair value with changes in fair value generally recorded in income); (18) reserve credits for reinsurance ceded are net against the reserve liability, but are reported as assets under GAAP; (19) statements of cash flow are prepared under a prescribed format, which differs from the indirect format prescribed by GAAP; and (20) there is no presentation of comprehensive income. 6

12 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 2 - Summary of Significant Accounting Policies (continued) A reconciliation of the Company s statutory to GAAP net income (loss) and statutory capital and surplus to GAAP stockholder s equity is as follows (in millions): For the years ended December 31, Statutory net income (loss) $ (623.4) $ Adjustments: Future policy benefits and policyholders account balances Deferred acquisition costs and sales inducements Net investment income (85.6) 42.2 Net realized losses on investments (1,061.7) (76.6) Fair value of hedging instruments (450.0) 6.4 Amortization of value of business acquired and goodwill Separate account CARVM allowance (359.7) Federal income taxes (85.9) Other, net GAAP net income (loss) $ (981.9) $ As of December 31, Statutory capital and surplus $ 3,745.7 $ 4,024.1 Adjustments: Future policy benefits and policyholders account balances (1,476.9) (993.3) Deferred acquisition costs and sales inducements 4, ,862.3 Valuation of derivatives (841.8) 6.4 Separate account CARVM allowance (945.2) (1,440.7) Interest maintenance reserve Asset valuation reserve Federal income taxes (175.7) (52.4) Valuation of investments (1,446.4) (89.6) Surplus notes (249.3) (249.3) Value of business acquired and goodwill (123.8) (143.2) Other, net (259.6) (255.9) GAAP stockholder s equity $ 2,500.7 $ 5,297.9 The Michigan Office of Financial and Insurance Regulation recognizes statutory accounting practices prescribed or permitted by the State of Michigan for determining and reporting the financial condition and results of operations of an insurance company and for determining its solvency under Michigan Insurance law. The Office of Financial and Insurance Regulation has adopted the NAIC Accounting Practices and Procedures Manual ( NAIC SAP ), including appendices A - F and excluding Actuarial Guideline 35 in appendix C as a component of prescribed or permitted practices by the State of Michigan to the extent that the accounting practices, procedures, and reporting standards are not modified by the Michigan Insurance Code. The commissioner of insurance has the right to permit other specific practices that deviate from prescribed practices. 7

13 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 2 - Summary of Significant Accounting Policies (continued) Permitted Practices The Company has received approval from the Office of Financial and Insurance Regulation ( OFIR ) regarding the use of three permitted practices. The permitted practices are effective December 31, 2008 and expire October 1, 2009, unless extended by the commissioner of insurance. The effects of these permitted practices may not be considered by the Company when determining the surplus available for dividends, nor in the nature of dividends as ordinary or extraordinary. The first permitted practice allows the Company to report the effectiveness of its hedging program related to interest rate swaps consistent with the system the Company has adopted in accordance with Section 943 (2) of the Michigan Insurance Code, as opposed to Statement of Statutory Accounting Principles No. 86 Accounting for Derivative Instruments and Hedging Activities ( NAIC SSAP No. 86 ). Hedging transactions thus identified as effective were reported pursuant to the accounting guidance set forth in NAIC SSAP No. 86. The effect of this permitted practice was to increase capital and surplus by $685.6 million, to be reflected as special surplus funds, at December 31, 2008, with no effect on net income in The second permitted practice allows the Company to calculate its C-3 Phase II component of Risk-Based Capital using an average of the past 36 months swap rates as opposed to the year end swap rate. This permitted practice had no impact on net income or capital and surplus in The third permitted practice allows the Company to increase the realization period for recognizing admitted deferred tax assets from one year to three years and increase the admitted asset recognition limit from 10% to 15% of adjusted capital and surplus. The effect of this permitted practice was to increase capital and surplus by $159.4 million, to be reflected as special surplus funds, at December 31, 2008, with no effect on net income in The additional admitted assets and capital and surplus provided by this permitted practice cannot be considered for purposes of determining regulatory triggers or filing requirements that are based on admitted assets or capital and surplus. The effect of the permitted practices on Risk-Based Capital was to decrease the Authorized Control Level ( ACL ) Risk-Based Capital by $81.5 million and increase total adjusted capital by $845.0 million. In compliance with OFIR instructions, the impact of these permitted practices on assets were reported in the Annual Statement Assets page as separate write-ins. On the Annual Statement Summary of Operations Capital and Surplus Account, the impact of the additional admitted deferred tax asset was included in the change in non-admitted assets and the impact of the interest rate swaps adjustment was included as a write-in for gains and losses in surplus. In the accompanying Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus, the impacts are included in net deferred tax asset and other invested assets. In the accompanying Statutory Statements of Capital and Surplus, the impact is included in a separate line for change in surplus as a result of permitted practices. 8

14 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 2 - Summary of Significant Accounting Policies (continued) Reconciliation to NAIC SAP A reconciliation of the Company's net income (loss) and capital and surplus between NAIC SAP and practices prescribed or permitted by the State of Michigan is shown below (in millions): Years Ended December 31, Net income (loss), as stated herein $ (623.4) $ Adjustments: Valuation of Life Insurance Policies Model Regulation (XXX): Increase in aggregate reserves for life and accident and health policies and contracts (1.3) (1.5) Actuarial Guideline 35: Decrease (increase) in aggregate reserves for life and accident and health policies and contracts (5.1) (Decrease) increase in market values of financial derivatives used to hedge index-linked liabilities (34.0) 11.8 Actuarial Guideline 35 adjustment Increase in federal income taxes (29.8) (2.0) Net income (loss), NAIC SAP $ (562.3) $ December 31, Statutory Capital and Surplus, as stated herein $ 3,745.7 $ 4,024.1 Adjustments: Aggregate reserve for life policies and contracts Valuation of Life Insurance Policies Model Regulation (XXX): Reserve per Michigan basis Reserve per NAIC SAP Model Regulation (XXX) adjustment (14.6) (13.3) Actuarial Guideline 35: Reserve per Michigan basis 4, ,282.1 Reserve per NAIC SAP 4, ,438.2 Mark to market of financial derivatives used to hedge index-linked liabilities (16.1) 17.9 Actuarial Guideline 35 adjustment (46.1) (138.2) SSAP No effectiveness of interest rate swaps per permitted practice (685.6) - Additional deferred tax asset per permitted practice (159.4) - Tax effect of differences Statutory Capital and Surplus, NAIC SAP $ 2,859.4 $ 3,

15 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 2 - Summary of Significant Accounting Policies (continued) New Accounting Pronouncement In April 2009, the NAIC adopted Statement of Statutory Accounting Principles No. 98, Treatment of Cash Flows When Quantifying Changes in Valuation and Impairments, An Amendment to SSAP No. 43, Loan-Backed and Structured Securities ( SSAP 98 ), effective September 30, 2009, with changes resulting from adoption accounted for prospectively. SSAP 98 will require other than temporarily impaired loan-backed and structured securities to be written down to fair value rather than undiscounted cash flows. The Company has not yet quantified the impact of adoption on the Statutory Financial Statements. Estimates The preparation of the accompanying financial statements and notes requires the use of estimates and assumptions about future events that affect the amounts reported in the financial statements and the accompanying notes. Significant estimates and assumptions, as further discussed in the notes, include: 1) valuation of investments and derivative instruments, including fair values of securities without readily ascertainable market values and the determination of when an unrealized loss is other-than-temporary; 2) assumptions used in calculating policy reserves and liabilities, including mortality rates, expenses and investment returns; 3) assumptions as to future earnings levels being sufficient to realize deferred tax benefits and whether or not certain deferred tax assets will reverse within three years for 2008 or one year for 2007; 4) estimates related to liabilities for lawsuits and establishment of liability for state guaranty fund assessments; and 5) assumptions and estimates associated with the Company s tax positions which impact the amount of recognized tax benefits recorded by the Company. These estimates and assumptions are based on management s best estimates and judgments. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors deemed appropriate. As facts and circumstances dictate, these estimates and assumptions may be adjusted. Since future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates, including those resulting from continuing changes in the economic environment, will be reflected in the financial statements for those periods in which the changes arise. Investments Bonds, which include loan-backed and structured securities, are stated at amortized cost except those with an NAIC designation of 6, which are stated at lower of amortized cost or fair value. Acquisition premiums and discounts are amortized into investment income through call or maturity dates using the interest method. Loanbacked and structured securities are amortized over the estimated redemption period. The retrospective adjustment method is used to value all loan-backed and structured securities except those where the yield has become negative, which are valued using the prospective adjustment method. Preferred stocks are stated at cost, except those with a NAIC designation of 4 to 6 which are reported at the lower of cost or fair value. Common stocks are stated at fair value. The Company s investments in subsidiaries are recorded on the equity method. Insurance subsidiaries are reported at their audited statutory basis net worth and non-insurance subsidiaries are carried at their audited net worth as determined under GAAP. Included in stocks is the Company s 100% interest in the common stocks of Jackson National Life Insurance Company of New York ( Jackson New York ), a life insurance company and Jackson National Life (Bermuda) LTD, an inactive Bermuda based insurance company. Included in limited partnership interests is $24.5 million and $35.4 million at December 31, 2008 and 2007, respectively, of the Company s 100% ownership in member interests of Jackson National Asset Management, LLC, an investment advisor and transfer agent; Jackson National Life Distributors, LLC, a broker dealer; and Curian Clearing, LLC, a broker dealer. The Company also acquires controlling ownership interests in companies through troubled debt restructuring arrangements. These investments are held for sale purposes and are not operated as subsidiaries. These equity investments are carried at fair value. 10

16 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 2 - Summary of Significant Accounting Policies (continued) Cash and short-term investments, which primarily include high quality, non-asset backed commercial paper and money market instruments, are carried at amortized cost. These investments have original maturities of twelve months or less, and are considered cash equivalents for reporting cash flow. Mortgage loans are carried at aggregate unpaid principal balances, net of unamortized discounts and premiums. Policy loans are carried at the unpaid principal balances. Limited partnership interests, including limited liability company interests, are accounted for using the equity method. Distributions of earnings from these entities are recorded as investment income and unrealized gains and losses are credited or charged directly to surplus. Real estate is stated at depreciated cost. Buildings are depreciated over the estimated useful life, up to 40 years. Realized capital gains and losses are recorded at the date of sale and are calculated on a specific cost identification basis. Investments are reduced to estimated fair value (undiscounted cash flows for asset-backed securities) for declines in value that are determined to be other-than-temporary. In determining whether an other-than-temporary impairment has occurred, the Company considers a security s forecasted cash flows as well as the severity and duration of depressed fair values. Derivative Instruments The Company enters into financial derivative transactions, including swaps, put-swaptions, spread caps, 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 the Company has acquired or incurred. Derivative instruments are held primarily for hedging purposes and are included in either other invested assets or other liabilities. Derivative instruments afforded hedge accounting treatment are stated at either amortized cost or fair value and are accounted for in a manner consistent with the hedged items. Derivative instruments not afforded hedge accounting treatment are stated at fair value. Hedge accounting practices are supported by cash flow matching, duration matching or scenario testing. Fair values for derivative instruments are based on quoted market prices, estimates received from financial institutions, or valuation models and generally reflect the estimated amounts that the Company would receive or pay upon sale or termination of the contracts as of the reporting date. With respect to fair value changes resulting from market movements on derivatives used for hedging purposes, fair value changes are anticipated to be offset by fair value changes of the hedged items. Cash requirements for derivative instrument activities are limited to payment commitments on swaps, margin requirements on open futures contracts, and collateral posting requirements in accordance with derivatives counterparty agreements. The Company manages the potential credit exposure for over-the-counter derivative contracts through careful evaluation of the counterparty credit standing, collateral agreements, and master netting agreements. The Company is exposed to credit-related losses in the event of non-performance by counterparties; however, it does not anticipate non-performance. During 2008, non-performance by one derivative counterparty resulted in a loss on the related transactions. The related charge of $17.2 million is included in net investment income. 11

17 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 2 - Summary of Significant Accounting Policies (continued) All of the Company s significant over-the-counter financial derivative counterparty master agreements contain netting provisions allowing for the offset of contractual payments due from and due to counterparties. To the extent that the net market value of aggregate contracts with individual counterparties exceeds established threshold amounts, collateral posting in favor of the exposed party is required. Collateral must be high quality liquid securities or cash as directed by the agreements. All of these master agreements also contain downgrade triggers that allow the party potentially harmed by the downgrade to, at its option, cause the related transactions to be unwound at market value or to be assigned to a different counterparty. All of these triggers are set in the BBB range and refer to Jackson s claims paying rating and the counterparty s senior debt rating. The intent of the triggers is to provide for a more orderly unwind of positions than might otherwise take place in the event of a bankruptcy. Interest rate swap agreements hedge assets or liabilities and generally involve the exchange of fixed and floating payments over the life of an agreement without an exchange of the underlying principal (notional) amount. No cash is exchanged at the outset of the contract. The Company agrees with counterparties to exchange, at specified intervals, the difference between referenced rates on the notional amount. A cash payment, representing the net differential, is usually made by one counterparty to the other at each payment date. With the permitted practice described in Note 2, interest rate swap agreements at December 31, 2008 are included in other invested assets at amortized cost. At December 31, 2007, interest rate swap agreements transacted through 2002 were carried at amortized cost while those transactions after 2002 were carried at fair value. Net amounts paid or received on interest rate swaps and interest accruals are included in investment income. Put-swaption contracts provide the purchaser with the right, but not the obligation, to require the writer to pay the present value of a long term interest rate swap at future exercise dates. The Company purchases and writes put-swaption contracts with maturities up to 10 years. On a net basis, put-swaption contracts hedge against significant upward movements in interest rates. Put-swaption contracts owned and transacted through year end 2002 are included in other invested assets at amortized cost. Put-swaption contracts owned and transacted after 2002 are included in other invested assets and put-swaption contracts written are included in other liabilities at fair value. Premiums paid or received for put-swaption contracts held at amortized cost are amortized to investment income over the terms of the contracts. Changes in fair value are recorded as unrealized capital gains or losses. Equity index futures contracts and equity index call and put options are used to hedge the Company s overall net exposure to equities. Equity index put options are included in other invested assets at fair value. Changes in fair value are recorded as unrealized capital gains or losses. Futures contracts are executed on regulated exchanges through brokers and, as such, the Company has little exposure to counterparty non-performance related to futures. Carrying value is equal to the variation margin of $(14.0) million and $(10.1) million at December 31, 2008 and 2007, respectively, which is included in other invested assets. Changes in variation margin are recorded as unrealized capital gains or losses. Equity index call options owned are used to hedge the Company s obligations associated with its issuance of fixed index immediate and deferred annuities. Equity index call options transacted through year end 2002 are accounted for as hedges. Realized gains and losses on options are included in income consistent with the increase in the reserve for the associated fixed index annuities. Premiums paid or received for equity index call options are included in net investment income ratably over the terms of the options. Equity index call options transacted after 2002 are included in other invested assets at fair value and changes in fair value are recorded as unrealized capital gains or losses. 12

18 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 2 - Summary of Significant Accounting Policies (continued) Equity index swaps, in which the Company receives equity returns in exchange for short-term floating rate payments based on a notional amount, are held for both hedging and investment purposes. Equity index swaps held for hedging purposes are accounted for consistently with the guaranteed investment contracts they hedge. Cross-currency swaps, which embody spot and forward currency swaps and additionally, in some cases, interest rate and equity index swaps, are entered into for the purpose of hedging the Company s foreign currency denominated guaranteed investment contracts. Cross-currency swaps transacted through year end 2002 are included in invested assets at amortized cost. Cross- currency swaps transacted after 2002 are included in other invested assets at fair value. Amounts paid or received are netted with amounts paid or received on the hedged foreign currency denominated guaranteed investment contracts. Changes in fair value are recorded as unrealized capital gains or losses. Credit default swaps, with maturities up to five years, represent agreements under which the Company has purchased default protection on certain underlying corporate bonds held in its portfolio. These contracts allow the Company to sell the protected bonds at par value to the counterparty in the event of their default in exchange for periodic payments made by the Company for the life of the agreement. Credit default swaps are carried at fair value and included in other invested assets. Changes in fair value are recorded as unrealized captial gains or losses. Spread cap options, with maturities of up to five years, are used as a macro-economic hedge against declining interest rates. The Company receives quarterly settlements based on the spread between the 2-year and the 10- year constant maturity swap rates in excess of an initial specified spread. Spread cap options are included in other invested assets at fair value. Amounts earned on spread cap options are included in investment income. Changes in fair value are recorded as unrealized capital gains or losses. Life and Annuity Reserves Aggregate reserves for life insurance policies are based on statutory mortality and interest requirements without consideration for withdrawals. The mortality and interest assumptions currently being used on the majority of new policies issued are based upon either the 1980 Commissioners Standard Ordinary Table with a 4.00% interest rate or the 2001 Commissioners Standard Ordinary Table with a 4.00% interest rate. With respect to older ordinary policies, the mortality assumptions range from the American Experience Table to the 2001 Commissioners Standard Ordinary Table with interest assumptions ranging from 1.50% to 6.25%. With respect to older industrial policies, the mortality assumptions range from the American Experience Table to the 1961 Commissioners Standard Industrial Table with interest assumptions ranging from 1.50% to 6.00%. As of December 31, 2008 and 2007, approximately 33% of the life reserves were calculated on a net level reserve basis and 67% were calculated on a modified reserve basis. The majority of annuity and GIC reserves are established with an interest rate assumption ranging from 3.00% to 8.75% and are carried at the greater of surrender value or the greatest present value of the guaranteed benefits discounted at statutory valuation interest rates. Jackson and Jackson National Life Funding, LLC have established a European Medium Term Note program, with up to $7 billion in aggregate principal amount outstanding at any one time. Jackson National Life Funding, LLC was formed as a special purpose vehicle solely for the purpose of issuing instruments to institutional investors, the proceeds of which are deposited with Jackson and secured by the issuance of funding agreements. Outstanding balances totaled $1.05 billion and $1.33 billion at December 31, 2008 and 2007, respectively, and are included in aggregate reserves for guaranteed investment contracts. Issued instruments representing obligations denominated in a foreign currency have been hedged for changes in exchange rates using cross-currency swaps. 13

19 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 2 - Summary of Significant Accounting Policies (continued) Jackson and Jackson National Life Global Funding have established a $10.8 billion aggregate Global Medium Term Note program. Jackson National Life Global Funding was formed as a statutory business trust, solely for the purpose of issuing instruments to institutional investors, the proceeds of which are deposited with Jackson and secured by the issuance of funding agreements. The outstanding balances at December 31, 2008 and 2007 totaled $3.51 billion and $3.62 billion, respectively, and are included in aggregate reserves for guaranteed investment contracts. Issued instruments representing obligations denominated in a foreign currency have been hedged for changes in exchange rates using cross-currency swaps. Jackson is a member of the regional Federal Home Loan Bank of Indianapolis ( FHLB ) primarily for the purpose of participating in its mortgage-collateralized loan advance program and its short-term funding facility. Membership requires the Company to purchase and hold a minimum amount of FHLB capital stock plus additional stock based on outstanding advances. Advances are in the form of short-term notes or funding agreements issued to FHLB. At December 31, 2008 and 2007, Jackson held $117.5 million and $82.5 million, respectively, of FHLB capital stock, supporting $1,902.5 million and $1,650.0 million, respectively, in funding agreements included in aggregate reserves for guaranteed investment contracts, and short-term borrowings. Actuarial Guideline 35 was adopted by the NAIC in December The purpose of Actuarial Guideline 35 is to interpret the standards for the valuation of statutory reserves for index-linked annuities. NAIC SAP requires application of Actuarial Guideline 35 for all index-linked annuities issued after December 31, Michigan law prescribes the valuation of index-linked annuities without consideration of the Guideline. As a result, and as demonstrated in the Company s reconciliation of net income and capital and surplus between NAIC SAP and practices prescribed or permitted by the State of Michigan, the Guideline is not reflected in the Company s accounts as of December 31, 2008 and Interest Maintenance Reserve The Company is required to maintain an Interest Maintenance Reserve ( IMR ). The IMR establishes a reserve for the net, after tax, accumulated unamortized realized gains and losses on sales of fixed income investments primarily attributable to changes in interest rates. Net realized gains and losses charged or credited to the IMR are amortized into investment income over the approximate remaining life of the investment sold using the grouped method. Material gains or losses resulting from Market Value Adjustments ( MVA ) on policies and contracts backed by assets that are valued at book/adjusted carrying value are deferred in the IMR and amortized in a manner consistent with the determination of the MVA. In 2008, MVA gains of $3.1 million, less a tax expense of $1.1 million, were transferred to the IMR. In 2007, MVA benefits of $98 thousand, less a tax benefit of $34 thousand, were transferred to the IMR. Asset Valuation Reserve The Company is required to maintain an Asset Valuation Reserve ( AVR ). The AVR is computed in accordance with a formula prescribed by the NAIC and represents a provision for possible fluctuations in the value of bonds, equity securities, mortgage loans, real estate and other invested assets. Changes in the AVR are recorded directly to surplus. Revenue and Expense Recognition Premiums for traditional life insurance are recognized as revenue when due. Annuity considerations are recognized as revenue when collected. GICs and other investment products with no mortality risk are accounted for using deposit accounting. Accordingly, GIC premiums and withdrawals are not reflected in the statement of operations, but are credited or charged directly to policyholders accounts, while interest credited to the policyholders accounts is reflected in the statement of operations. Commission and expense allowances, which represent commission and expense reimbursements related to reinsurance ceded to other companies, are recognized as revenue when due. The CARVM allowance represents the excess of separate account contract 14

20 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 2 - Summary of Significant Accounting Policies (continued) values over statutory reserves for variable annuities. Benefits, claims and expenses are recognized when incurred. General expenses, including costs of acquiring new business, are charged to operations as incurred. During 2008, the Company received $18.6 million from class action settlements against certain underwriters of WorldCom securities. These settlements were recorded in other income. Jackson terminated, at the customers requests, a number of Medium Term Note contracts at a discounted rate during The income on these early terminations, totaling $48.8 million, is included in other income. Investment Income Due and accrued income was excluded from surplus on the following basis: Bonds - securities in default and otherwise where collection is uncertain. Mortgage loans - loans in foreclosure, delinquent greater than one year or where collection of interest is uncertain. Real estate properties where rent is in arrears for more than three months. Income due and accrued on investments where collection is not likely has been excluded from net investment income. For the years ended December 31, 2008, and 2007, the amount excluded from investment income was $2.7 million and $42 thousand, respectively. Furniture and Equipment Furniture and equipment are carried at cost less accumulated depreciation, which is charged to operations on a straight-line basis over the estimated useful lives of the related assets. Furniture and electronic data processing equipment and software are depreciated over 3-7 years. Furniture and equipment, except for certain electronic data processing equipment and software, is non-admitted. Depreciation expense on admitted assets totaled $3.8 million and $6.6 million for 2008 and 2007, respectively, while depreciation expense on non-admitted assets totaled $11.0 million and $10.3 million for 2008 and 2007, respectively. Federal Income Taxes Federal income taxes are charged to operations based on current taxable income. Current year federal income tax expense is based on financial reporting income or loss adjusted for certain timing differences, which are the result of dissimilar financial reporting and tax basis accounting methods. A net deferred tax asset, for the tax effect of timing differences between financial reporting and the tax basis of assets and liabilities, is allowed to be reported as an admitted asset only to the extent that it is realizable within one year and represents less than 10% of surplus, with the change in net deferred tax asset or liability being recorded directly to surplus. As discussed in Note 2, effective December 31, 2008, the Company received approval regarding the use of a permitted practice which allows the Company to increase the realization period for recognizing admitted deferred tax assets from one year to three years and increase the admitted asset recognition limit from 10% to 15% of adjusted capital and surplus. Non-admitted Assets Certain assets designated as "non-admitted assets" (principally net deferred tax assets not realizable within three years (one year at December 31, 2007), agents' debit balances, furniture, equipment, computer software, prepaid expenses, certain other receivables and certain common stocks) have been excluded from the statutory statement of admitted assets, liabilities, capital and surplus by a direct charge to surplus. 15