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

21 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 2 - Summary of Significant Accounting Policies (continued) Separate Account Assets and Liabilities The assets and liabilities associated with individual variable annuity and life contracts, which aggregated $19,634.4 million and $28,079.7 million at December 31, 2008 and 2007, respectively, are segregated in nonguaranteed separate accounts. The Company receives fees for assuming mortality and certain expense risks. Such fees are recorded as earned. The Company has issued a group variable annuity contract designed for use in connection with and issued to the Company s Defined Contribution Retirement Plan. These deposits are allocated to the non-guaranteed Jackson National Separate Account II and aggregated $106.4 million and $153.8 million at December 31, 2008 and 2007, respectively. Goodwill The value of business acquired and goodwill relates to the acquisition of Life of Georgia in 2005 and is being amortized to surplus over 10 years. Annual Statement Classification Differences In the Annual Statement, interest expense is netted against net investment income but is included as an expense in the accompanying Statutory Statements of Operations. Note 3 - Fair Value of Financial Instruments Fair value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company s view of market assumptions in the absence of observable market information. Jackson utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. On January 1, 2008, the Company adopted the required disclosures of FAS No. 157, Fair Value Measurements ( FAS 157 ), which requires all assets and liabilities measured at fair value on a recurring basis to be classified into one of the following categories: Level 1 Level 2 Level 3 Observable inputs that reflect quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date. Level 1 securities include U.S. Treasury securities and exchange traded equity and derivative securities. Observable inputs, other than quoted prices included in Level 1, for the asset or liability or prices for similar assets and liabilities. Most debt securities that are valued by the NAIC or model priced using observable inputs are classified within Level 2. Level 2 also includes freestanding and embedded derivative instruments that are priced using models with observable market inputs. Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk). Level 3 securities include less liquid securities such as highly structured or lower quality asset-backed securities. Because Level 3 fair values, by their nature, contain unobservable market inputs, considerable judgment may be used to determine the Level 3 fair values. Level 3 fair values represent the Company s best estimate of an amount that could be realized in a current market exchange absent actual market exchanges. In many situations, inputs used to measure the fair value of an asset or liability may fall into different levels of the fair value hierarchy. In these situations, the Company will determine the level in which the fair value falls based upon the lowest level input that is significant to the determination of the fair value. As a result, both observable and unobservable inputs may be used in the determination of fair values that the Company has classified within Level 3. 16

22 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 3 - Fair Value of Financial Instruments (continued) Where quoted market prices are not available, fair value estimates are made at a point in time, based on relevant market data, as well as the best information about the individual financial instrument. Illiquid market conditions have resulted in inactive markets for certain of the Company s financial instruments. As a result, there is generally no or limited observable market data for these assets and liabilities. Fair value estimates for financial instruments deemed to be in an illiquid market are based on judgments regarding current economic conditions, liquidity discounts, currency, credit and interest rate risks, loss experience and other factors. These fair values are estimates and involve considerable uncertainty and variability as a result of the inputs selected and may differ significantly from the values that would have been used had a ready market existed, and the differences could be material. As a result, such calculated fair value estimates may not be realizable in an immediate sale or settlement of the instrument. In addition, changes in the underlying assumptions used in the fair value measurement technique could significantly affect these fair value estimates. The following is a discussion of the methodologies used to determine fair values of the financial instruments. Bonds and Equity Securities The fair values for bonds and equity securities are determined by NAIC provided prices. If the NAIC does not provide a price, management estimates fair value using information available from independent pricing services, broker-dealer quotes, or internally derived estimates. Priority is given to publicly available prices from independent sources, when available. Securities for which the independent pricing service does not provide a quotation are either submitted to independent broker-dealers for prices or priced internally. Typical inputs used by these three pricing methods include, but are not limited to, reported trades, benchmark yields, credit spreads, liquidity premiums, and/or estimated cash flows based on default and prepayment assumptions. As a result of typical trading volumes and the lack of quoted market prices for most fixed maturities, independent pricing services will normally derive the security prices through recently reported trades for identical or similar securities, making adjustments through the reporting date based upon available market observable information as outlined above. If there are no recently reported trades, the independent pricing services and brokers may use matrix or pricing model processes to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at relevant market rates. Included in the pricing of asset-backed securities are estimates of the rate of future prepayments of principal over the remaining life of the securities. Such estimates are derived based on the characteristics of the underlying structure and prepayment assumptions believed to be relevant for the underlying collateral. Actual prepayment experience may vary from these estimates. Prices from independent pricing services are sometimes unavailable for securities that are rarely traded or are traded only in privately negotiated transactions. As a result, certain securities are priced using broker-dealer quotes, which utilize inputs that may be difficult to corroborate with observable market based data. Additionally, the majority of these quotes are non-binding. Internally derived estimates may be used to develop a fair value for securities for which the Company is unable to obtain either a reliable price from an independent pricing service or a suitable broker-dealer quote. These estimates may incorporate Level 2 and Level 3 inputs and are generally derived using expected future cash flows, discounted at market interest rates available from market sources based on the credit quality and duration of the instrument to determine fair value. For securities that may not be reliably priced using these internally developed pricing models, a fair value may be estimated using indicative market prices. These prices are indicative of an exit price, but the assumptions used to establish the fair value may not be observable or corroborated by market observable information, and, therefore, represent Level 3 inputs. 17

23 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 3 - Fair Value of Financial Instruments (continued) The Company determines the fair values of certain financial assets based on NAIC provided prices, where available. The Company also determines fair value based on quoted market prices or estimated future cash flows discounted at the appropriate current market rate. As appropriate, fair values reflect adjustments for counterparty credit quality, the Company s credit standing, liquidity and risk margins on unobservable inputs. The Company performs a monthly analysis on the prices and credit spreads received from third parties to ensure that the prices represent a reasonable estimate of the fair value. This process involves quantitative and qualitative analysis and is overseen by investment and accounting professionals. Examples of procedures performed include, but are not limited to, initial and on-going review of third party pricing service methodologies, review of pricing statistics and trends, back testing recent trades and monitoring of trading volumes. In addition, the Company considers whether prices received from independent brokers represent a reasonable estimate of fair value through the use of internal and external cash flow models developed based on spreads and, when available, market indices. As a result of this analysis, if the Company determines there is a more appropriate fair value based upon the available market data, the price received from the third party is adjusted accordingly. An internally developed model is used to price certain asset-backed securities for which the Company is unable to obtain a reasonable price from either a third party pricing service or an independent broker quotation. The pricing model used by the Company begins with current spread levels of similarly-rated securities to determine the market discount rate for the security. Additional risk premiums for illiquidity and non-performance are incorporated, if warranted, and included in the discount rate. Cash flows, as estimated by the Company using issuer-specific default statistics and prepayment assumptions, are discounted to determine an estimated fair value. The Company reviewed the independent pricing services valuation methodologies and related inputs, and evaluated the various types of securities in its investment portfolio to determine an appropriate FAS 157 fair value hierarchy level based upon trading activity and the observability of market inputs. Based on the results of this evaluation, each price was classified into Level 1, 2, or 3. Most prices provided by independent pricing services are classified into Level 2 because the most significant inputs used in pricing the securities are market observable. Due to a general lack of transparency in the process that the brokers use to develop prices, most valuations that are based on brokers prices are classified as Level 3. Some valuations may be classified as Level 2 if the price can be corroborated. Matrix-priced securities, primarily consisting of certain private placement debt, are classified as Level 2 as values are determined using observable market inputs. At December 31, 2008 and 2007, bonds valued internally had an amortized cost of $10.1 billion and $5.2 billion, respectively, and an estimated fair value of $8.7 billion and $5.2 billion, respectively. Estimates of fair value for these bonds are based on the unobservable valuation inputs described above. Mortgage Loans Fair values are determined using future cash flows discounted at current market rates. The aggregate fair values approximated $6.1 billion and $5.8 billion at December 31, 2008 and 2007, respectively. Policy Loans Fair values are determined using projected future cash flows discounted at current market interest rates. Projected future cash flows include assumptions regarding mortality and lapse expectations. The aggregate fair values approximated $665.7 million and $654.9 million at December 31, 2008 and 2007, respectively. 18

24 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 3 - Fair Value of Financial Instruments (continued) Freestanding Derivative Instruments As described in Note 2, freestanding derivative instruments are reported on the balance sheet at amortized cost or fair value. Derivatives priced using valuation models incorporate inputs that are predominantly observable in the market. Inputs used to value derivatives include, but are not limited to, interest rate swap curves, credit spreads, interest rates, counterparty credit risk, equity volatility and equity index levels. Derivative instruments classified as Level 1 include futures, which are traded on active exchanges. Derivative instruments classified as Level 2 include interest rate swaps, cross currency swaps, credit default swaps, put swaptions and equity index call and put options. The derivative valuations are determined using pricing models with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Spread cap options are classified as Level 3 as the fair values are determined through non-binding broker quotes. As noted above, due to a general lack of transparency in the process that the brokers use to develop prices, most valuations that are based on brokers prices are classified as Level 3. Although no other freestanding derivatives are currently classified as Level 3, a derivative instrument containing Level 1 or Level 2 inputs could be classified as a Level 3 financial instrument in its entirety if it includes at least one significant Level 3 input. Fair Values of Separate Account Assets Separate account assets are invested in mutual funds, which are categorized as Level 1 assets. Annuity Reserves Fair values for immediate annuities, without mortality features, are derived by discounting the future estimated cash flows using current market interest rates for similar maturities. Fair values for deferred annuities, including equity indexed annuities, are determined using projected future cash flows discounted at the rate that would be required to transfer the liability to a willing third party. The carrying value and fair value of such annuities approximated $27.5 billion and $21.4 billion, respectively, at December 31, 2008; and $25.0 billion and $19.9 billion, respectively, at December 31, Reserves for Guaranteed Investment Contracts Fair value is based on the present value of future cash flows at current market interest rates. The fair value approximated $8.6 billion at December 31, 2008 and Separate Account Liabilities Separate account liabilities are carried at the fair value of the separate account assets. The fair value approximated $19.7 billion and $28.2 billion at December 31, 2008 and 2007, respectively. Indebtedness Fair value of surplus notes is based on future cash flows discounted at current interest rates. The fair value approximated $221.7 million and $290.2 million at December 31, 2008 and 2007, respectively. Carrying value of the short-term borrowings from Parent of $32.0 million at December 31, 2007 is considered a reasonable estimate for fair value due to the short-term maturity. Carrying value of the FHLB short-term notes of $150.0 million and $250.0 million at December 31, 2008 and 2007, respectively, is considered a reasonable estimate for fair value due to the short-term maturity and monthly interest rate reset. 19

25 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 3 - Fair Value of Financial Instruments (continued) Financial assets and liabilities measured at fair value on a recurring basis The following table provides information as of December 31, 2008 about the Company s financial assets and liabilities measured at fair value on a recurring basis. (In thousands) Level 1 Level 2 Level 3 Total Assets at fair value: Common stock $ 356,993 $ - $ - $ 356,993 Sub-total 356, ,993 Derivative assets (14,013) 563,472 71, ,518 Separate account assets 19,740, ,740,791 Total assets at fair value $20,083,771 $ 563,472 $ 71,059 $20,718,302 Liabilities at fair value: Derivatives liabilities $ - $ (6,176) $ - $ (6,176) Total liabilities at fair value $ - $ (6,176) $ - $ (6,176) Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table summarizes the changes in assets and liabilities classified in Level 3 for Gains and losses reported in this table may include changes in fair value that are attributable to both observable and unobservable inputs. (In thousands) Equity Derivative Securities Assets Total Balance at January 1, 2008: $ - $229,887 $229,887 Total gains or losses (realized/unrealized) Included in net income - 146, ,014 Included in surplus - (120,185) (120,185) Purchases, issuances and settlements - (184,657) (184,657) Transfers in (out) of Level Balance at December 31, 2008 $ - $71,059 $ 71,059 Changes in the value of equity securities for realized gains/losses are included in net income, and changes in unrealized gains/losses have been included in surplus. 20

26 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 3 - Fair Value of Financial Instruments (continued) Assets measured at fair value on a non-recurring basis The following table summarizes the changes in assets measured at fair value on a non-recurring basis as of December 31, (in thousands) Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Bonds $ - $ 428 $ - Preferred stock 1, $ 1,413 $ 428 $ 496 At December 31, 2008, all bonds measured at fair value on a non-recurring basis were priced by the NAIC. Note 4 - Investments Investments are comprised primarily of debt securities and commercial mortgage loans. Debt securities primarily include publicly-traded industrial, asset-backed, utility and government bonds. Asset-backed bonds include mortgage-backed and other structured securities. The Company generates the majority of its deposits from interest-sensitive individual annuity contracts, life insurance products and guaranteed investment contracts on which it has committed to pay a declared rate of interest. The Company s strategy of investing in fixed-income securities aims to ensure matching of the asset yield with the interest-sensitive liabilities and to earn a stable return on its investments. With the Company s primarily fixed-rate securities portfolio, it is exposed to interest rate risk, that is the risk that interest rates will change and cause a decrease in the value of its investments. Additionally, changes in interest rates may cause certain interest-sensitive products to become uncompetitive or may cause disintermediation. The Company mitigates this risk by charging fees for nonconformance with certain policy provisions, by offering products that transfer risk to the purchaser and/or by attempting to match the maturity schedule of its assets with the expected payouts of its liabilities. To the extent that liabilities come due more quickly than assets mature, the Company could potentially have to borrow funds or sell assets prior to maturity and potentially recognize a gain or loss. Debt Securities Debt securities consist of all bonds and short-term investments. Book/adjusted carrying value, which principally represents amortized cost, gross unrealized gains and losses, and estimated fair value of the Company's debt securities are as follows (in thousands): Book/Adjusted Gross Gross Estimated Carrying Unrealized Unrealized Fair December 31, 2008 Value Gains Losses Value Governments $ 5,449 $ 963 $ - $ 6,412 Special revenue and special assessment 25, ,819 Public utilities 3,217,601 35, ,662 3,031,067 Industrial and miscellaneous 22,211, ,729 2,768,417 19,596,302 Asset-backed 11,512, ,296 1,547,004 10,114,904 Total $ 36,972,983 $ 338,188 $ 4,537,667 $ 32,773,504 21

27 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 4 Investments (continued) Book/Adjusted Gross Gross Estimated Carrying Unrealized Unrealized Fair December 31, 2007 Value Gains Losses Value Governments $ 12,664 $ 532 $ 4 $ 13,192 Special revenue and special assessment 7, ,350 Public utilities 1,974,322 46,339 15,984 2,004,677 Industrial and miscellaneous 22,729, , ,129 22,596,295 Asset-backed 10,957, , ,282 10,760,547 Total $ 35,681,379 $ 565,081 $ 863,399 $ 35,383,061 At December 31, 2008 and 2007, common and preferred stock, excluding wholly-owned subsidiaries, had gross unrealized gains of $2.9 million and $52.9 million, respectively, and gross unrealized losses of $104.5 million and $10.3 million, respectively. The amount of gross unrealized losses and the associated estimated fair value of bonds and stocks (excluding wholly-owned subsidiaries) are as follows (in thousands): Less than 12 months 12 months or longer Total Gross Estimated Gross Estimated Gross Estimated Unrealized Fair Unrealized Fair Unrealized Fair December 31, 2008 Losses Value Losses Value Losses Value Special revenue and special assessment $ 584 $ 5,916 $ - $ - $ 584 $ 5,916 Public utilities 148,330 1,877,620 73, , ,662 2,296,320 Industrial and miscellaneous 1,530,762 11,364,701 1,237,655 4,200,894 2,768,417 15,565,595 Asset-backed 829,850 3,142, ,154 2,891,581 1,547,004 6,034,325 Subtotal debt securities 2,509,526 16,390,981 2,028,141 7,511,175 4,537,667 23,902,156 Common and preferred stock 84, ,784 20,463 79, , ,075 Total temporarily impaired securities $ 2,593,608 $ 16,657,765 $ 2,048,604 $ 7,590,466 $ 4,642,212 $ 24,248,231 Less than 12 months 12 months or longer Total Gross Estimated Gross Estimated Gross Estimated Unrealized Fair Unrealized Fair Unrealized Fair December 31, 2007 Losses Value Losses Value Losses Value Governments $ 4 $ 6,435 $ - $ - $ 4 $ 6,435 Public utilities 1, ,054 14, ,805 15, ,859 Industrial and miscellaneous 234,013 5,998, ,116 6,463, ,129 12,462,433 Asset-backed 175,340 3,292, ,942 3,010, ,282 6,303,695 Subtotal debt securities 411,319 9,568, ,080 10,014, ,399 19,583,422 Common and preferred stock 8, ,355 1,587 47,926 10, ,281 Total temporarily impaired securities $ 419,987 $ 9,744,257 $ 453,667 $ 10,062,446 $ 873,654 $ 19,806,703 22

28 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 4 Investments (continued) Asset-backed securities include investments in mortgage-backed securities which are collateralized by residential mortgage loans and are neither explicitly nor implicitly guaranteed by U.S. government agencies ( non-agency mortgage-backed securities ). The Company s non-agency mortgage-backed securities include investments in securities backed by prime, Alt-A, and subprime loans as follows (in thousands): Book/Adjusted Gross Gross Estimated Carrying Unrealized Unrealized Fair December 31, 2008 Value Gains Losses Value Prime $ 1,884,849 $ 14,087 $ 315,769 $ 1,583,167 Alt-A 1,148,752 1, , ,033 Subprime 478, , ,710 Total non-agency mortgage-backed securities $ 3,512,117 $ 16,695 $ 704,902 $ 2,823,910 The Company defines its exposure to non-agency residential mortgage loans as follows. Prime loan-backed securities are collateralized by mortgage loans made to the highest rated borrowers. Alt-A loan-backed securities are collateralized by mortgage loans made to borrowers who lack credit documentation or necessary requirements to obtain prime borrower rates. Subprime loan-backed securities are collateralized by mortgage loans made to borrowers that have a FICO score of 680 or lower. 96.8% of the Company s investments in Alt- A related mortgage-backed securities are rated investment grade by at least one nationally recognized statistical rating organization ( NRSRO ). 92.6% of the Company s investments in subprime related mortgage-backed securities are rated triple-a by at least one NRSRO. In 2008, the Company recorded other-than-temporary impairment charges of $4.3 million, $82.0 million, and zero on securities backed by prime, Alt-A, and subprime loans, respectively. No other-than-temporary impairment charges were recorded on securities backed by prime, Alt-A or subprime loans in Asset-backed securities also include investments in securities which are collateralized by commercial mortgage loans ( CMBS ). The amortized cost and estimated fair value of the Company s investment in CMBS is $3,092.2 million and $2,506.7 million, respectively, at December 31, % of these investments are rated investment grade by at least one NRSRO. No other-than-temporary impairment charges were recorded on CMBS during Jackson recorded $4.2 million in other-than-temporary impairment charges on CMBS in Corporate securities include direct investments in below investment grade syndicated bank loans. Unlike most corporate debentures, syndicated bank loans are collateralized by specific tangible assets of the borrowers. As such, investors in these securities that become impaired have historically experienced less severe losses than corporate bonds. The amortized cost and estimated fair value of the Company s direct investments in bank loans is $549.2 million and $442.7 million, respectively, at December 31, The Company periodically reviews its debt securities and stocks on a case-by-case basis to determine if any decline in fair value below amortized cost, or cost, respectively, is other-than-temporary. Factors considered when determining whether a decline is other-than-temporary include the length of time a security has been in an unrealized loss position, reasons for the decline in value, expectations for the amount and timing of a recovery in fair value, and the Company s intent and ability to hold a security to recovery in fair value. If it is determined that a decline in fair value of an investment is temporary, an impairment loss is not recorded. If the decline is considered to be other-than-temporary, a realized loss is recorded in the statement of operations. The AVR is also charged for the realized loss, with an offsetting credit to surplus. 23

29 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 4 Investments (continued) Generally, securities with fair values that are less than 80% of cost and other securities the Company determines are underperforming or potential problem securities are subject to regular review. To facilitate the review, securities with significant declines in value, or where other objective criteria evidencing credit deterioration have been met, are included on a watch list. Among the criteria for securities to be included on a watch list are: credit deterioration which has led to a significant decline in value of the security; a significant covenant related to the security has been breached; and an issuer has filed or indicated a possibility of filing for bankruptcy, has missed or announced it intends to miss a scheduled interest or principal payment; or has experienced a specific material adverse change that may impair its creditworthiness. When performing these reviews, the Company considers the relevant facts and circumstances relating to each investment and exercises considerable judgment in determining whether a security is other-than-temporarily impaired. Assessment factors include judgments about an obligor s current and projected financial position, an issuer s current and projected ability to service and repay its debt obligations, the existence of, and realizable value of, any collateral backing the obligations, the macro-economic outlook and micro-economic outlooks for specific industries and issuers. Assessing the duration of asset-backed securities can also involve assumptions regarding underlying collateral such as prepayment rates, default and recovery rates, and third-party servicing capabilities. Among the factors considered is whether the decline in fair value results from a change in the quality of the security itself, or from a downward movement in the market as a whole, the likelihood of recovering the carrying value based on the current and short term prospects of the issuer and the Company s ability and intent to hold the security until such a recovery may occur. Unrealized losses that are considered to be primarily the result of market conditions, such as increasing interest rates, unusual market volatility or industry-related events, and where the Company also believes there exists a reasonable expectation for recovery and, furthermore, has the intent and ability to hold the investment until maturity or the market recovery, are usually determined to be temporary. To the extent factors contributing to recognized impairment losses affected other investments, such investments were reviewed for other-than-temporary impairment and losses were recorded when appropriate. In addition to the review procedures described above, investments in structured securities where market prices are depressed are subject to a rigorous review of their future estimated cash flows, including expected and stress case scenarios, to identify potential shortfalls in contractual payments. Even in the case of severely depressed market values on structured securities, the Company places significant importance on the results of its cash flow testing and its ability and intent to hold these securities until their fair values recover when reaching other-thantemporary impairment conclusions with regard to these securities. If there has been an adverse change in estimated cash flows which results in a negative yield, an impairment is recognized in the statement of operations and in AVR. There are inherent uncertainties in assessing the fair values assigned to the Company s investments and in determining whether a decline in market value is other-than-temporary. The Company s review of fair value involves several criteria including economic conditions, credit loss experience, other issuer-specific developments and future cash flows. These assessments are based on the best available information at the time. Factors such as market liquidity, the widening of bid/ask spreads and a change in the cash flow assumptions can contribute to future price volatility. If actual experience differs negatively from the assumptions and other considerations, realized losses may be recognized in the statement of operations and the AVR or IMR in future periods. The Company currently intends to hold securities with unrealized losses not considered other-than-temporary until they mature or recover in value. However, if the specific facts and circumstances surrounding a security, or the outlook for its industry sector change, the Company may sell the security and realize a loss. 24

30 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 4 Investments (continued) Of the total carrying value for bonds in an unrealized loss position at December 31, 2008, 90.3% were investment grade and 9.7% were below investment grade. Unrealized losses from bonds that were below investment grade comprised approximately 17.9% of the aggregate gross unrealized losses on debt securities. Corporate bonds in an unrealized loss position were diversified across industries. As of December 31, 2008, the industries comprising the larger proportion of unrealized losses included energy and utilities (12.4% of bonds gross unrealized losses) and financial services (9.9%). The largest unrealized loss related to a single corporate obligor was $91.5 million at December 31, The book/adjusted carrying value, gross unrealized gains and losses and estimated fair value of debt securities at December 31, 2008, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities where securities can be called or pre-paid with or without early redemption penalties. Book/Adjusted Gross Gross Estimated Carrying Unrealized Unrealized Fair Maturity distribution Value Gains Losses Value (in thousands) Due in 1 year or less $ 1,089,464 $ 1,424 $ 27,715 $ 1,063,173 Due after 1 year through 5 years 9,368,742 50, ,123 8,679,771 Due after 5 years through 10 years 11,519,048 78,969 1,697,899 9,900,118 Due after 10 years through 20 years 2,456,632 28, ,387 2,148,284 Due after 20 years 1,026,485 30, , ,254 Asset-backed 11,512, ,296 1,547,004 10,114,904 Total debt securities $ 36,972,983 $ 338,188 $ 4,537,667 $ 32,773,504 Effective yields, which are used to calculate amortization, are adjusted periodically to reflect actual payments to date and anticipated future payments. Resultant adjustments to carrying values are included in investment income using the retrospective method. Prepayment assumptions for loan-backed securities, including structured securities, were obtained from independent providers of broker-dealer estimates. With regard to structured securities deemed to be high-risk, meaning the Company might not recover substantially all of its recorded investment due to unanticipated prepayment events, changes in investment yields due to changes in estimated future cash flows are accounted for on a prospective basis. The book/adjusted carrying value of securities changing from the retrospective to the prospective methodology in 2008 and 2007 was $103.6 million and zero, respectively. Debt securities are classified into six quality categories specified by the NAIC designations. These categories range from Class 1 (the highest) to Class 6 (the lowest). Performing securities are designated Classes 1-5. Securities in or near default are designated Class 6. Securities designated as Class 3, 4, 5, and 6 are noninvestment grade securities. If a designation is not currently available from the NAIC, the Company s investment advisor provides the designation. At December 31, 2008, the Company s investment advisor provided the designation for debt securities with book/adjusted carrying value and estimated fair value of $367.2 million and $346.4 million, respectively. 25

31 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 4 Investments (continued) The Company's debt securities by NAIC designation are as follows at December 31, 2008: Book/Adjusted Gross Gross Estimated Carrying Unrealized Unrealized Fair Quality category per NAIC designation Value Gains Losses Value (in thousands) Class 1 $ 19,989,666 $ 271,627 $ 1,849,448 $ 18,411,845 Class 2 13,950,966 53,326 1,875,045 12,129,247 Class 3 1,916,754 1, ,237 1,481,292 Class 4 766,137 2, , ,374 Class 5 305,630 8, , ,616 Class 6 43, ,130 Total debt securities $ 36,972,983 $ 338,188 $ 4,537,667 $ 32,773,504 The book/adjusted carrying value and fair value of debt securities in default that were anticipated to be income producing when purchased were $4.3 million and $4.2 million, respectively, at December 31, The book/adjusted carrying value and fair value of debt securities that were non-income producing for the 12 months preceding December 31, 2008 were zero and $3 thousand, respectively, and for the 12 months preceding December 31, 2007 were zero and $0.1 million, respectively. Debt securities with a book/adjusted carrying value of $3.3 million at both December 31, 2008 and 2007 were on deposit with regulatory authorities as required by law in various states in which business is conducted. Net realized gains (losses) on investments and capital assets are as follows (in thousands): Years ended December 31, Sales of bonds Gross gains $ 46,914 $ 122,086 Gross losses (306,869) (154,357) Sales of stocks Gross gains 7,137 12,959 Gross losses (36,675) (615) Derivative instruments 846,506 47,041 Sale of capital assets - 4,350 Impairment losses (827,739) (58,127) Net realized losses $ (270,726) $ (26,663) Net losses allocated to IMR $ (129,190) $ (14,650) Net losses allocated to AVR (141,536) (16,363) Gain on sale of capital assets - 4,350 Net realized losses $ (270,726) $ (26,663) Proceeds on sales of bonds totaled $2.7 billion and $4.5 billion in 2008 and 2007, respectively. 26

32 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 4 Investments (continued) Mortgage Loans on Real Estate At December 31, 2008, mortgage loans were collateralized by properties located in 42 states. The minimum and maximum lending rates for loans issued in 2008 were 2.84% and 8.00%, respectively. The maximum percentage of any one loan to the value of the security at the time of the loan, exclusive of insured or guaranteed or purchase money mortgages, was 77.9%. Limited Partnership Interests The limited partnerships in which the Company has an interest primarily invest in securities. Limited partnership income recognized by the Company was $45.1 million and $142.6 million in 2008 and 2007, respectively. In 2008 and 2007, $193.2 million and $74.8 million, respectively, of unrealized gains were credited directly to surplus. Impairment losses totaled $113.2 million and $2.5 million in 2008 and 2007, respectively. Certain limited partnerships in which the Company has a significant ownership interest hold publicly-traded equity securities that are fair valued at a discount to their exchange-traded price as a result of lock-up trading restrictions imposed in connection with initial public offering transactions. These lock-up restrictions are for a limited period of time, generally six months, and preclude the partnerships from selling these securities during the restricted period. The discounts at December 31, 2008 were 15% and totaled $16.9 thousand. At December 31, 2007, the discounts were 15% and totaled $1.5 million. Derivative Instruments The fair value of derivatives reflects the estimated amounts, net of payment accruals, that the Company would receive or pay upon sale or termination of the contracts at the reporting date. With respect to swaps and putswaptions, the notional amount represents the stated principal balance used as a basis for calculating payments. With respect to futures and options, the contractual amount represents the market exposure of outstanding positions. 27

33 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 4 Investments (continued) A summary of the aggregate contractual or notional amounts, carrying values and fair values for derivative instruments outstanding is as follows (in thousands): December 31, 2008 Assets Liabilities Contractual/ Contractual/ Net Notional Carrying Fair Notional Carrying Fair Fair Amount Value Value Amount Value Value Value Cross-currency swaps $ 958,840 $ 21,670 $ 82,103 $ - $ - $ - $ 82,103 Equity index call options 1,442,100 34,594 10, ,314 Equity index put options 9,450, , , ,435 Put-swaptions 24,500,000 25,350 24,939 17,000,000 6,477 6,477 31,416 Futures 661,062 (14,012) (14,012) (14,012) Credit default swaps 300,000 (25,513) (25,513) (25,513) Total return swaps ,897 (301) (301) (301) Interest rate swaps 8,940,000 8,754 (867,150) (867,150) Spread cap options 4,000,000 71,059 71, ,059 Total $ 50,252,002 $ 649,337 $ (190,825) $ 17,006,897 $ 6,176 $ 6,176 $ (184,649) December 31, 2007 Assets Liabilities Contractual/ Contractual/ Net Notional Carrying Fair Notional Carrying Fair Fair Amount Value Value Amount Value Value Value Cross-currency swaps $ 1,198,115 $ 44,368 $ 230,759 $ - $ - $ - $ 230,759 Equity index call options 1,054,521 94,244 78, ,594 Equity index put options 7,250,000 97,973 97, ,973 Put-swaptions 30,000,000 49,478 48,635 23,000,000 4,524 4,524 53,159 Futures 738,600 (10,125) (10,125) (10,125) Credit default swaps 46,000 (509) (509) (509) Total return swaps ,897 (1,740) (1,740) (1,740) Interest rate swaps 10,540,000 (51,855) (226,674) (226,674) Spread cap options 10,000, , , ,887 Total $ 60,827,236 $ 453,461 $ 448,540 $ 23,006,897 $ 2,784 $ 2,784 $ 451,324 During 2008 and 2007, the Company recorded net expenses of $128.9 million and $28.4 million, respectively, on derivative instruments. 28

34 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 4 Investments (continued) Securities Lending The Company has entered into a securities lending agreement with an agent bank whereby blocks of securities are loaned to third parties, primarily major brokerage firms. At December 31, 2008 and 2007, the estimated fair value of loaned securities was $106.0 million and $205.7 million, respectively. The agreement requires a minimum of 102% of the fair value of the loaned securities to be held as collateral, calculated on a daily basis. To further minimize the credit risks related to this program, the financial condition of the counterparties is monitored on a regular basis. Cash collateral received in the amount of $121.7 million and $217.8 million at December 31, 2008 and 2007, respectively, was not available for the general use of the Company, but was invested by the agent bank. Accordingly, the collateral received is netted against the corresponding liability to return the cash collateral, with neither reflected on the accompanying statutory statements of admitted assets, liabilities, capital and surplus. Note 5 - Investment Income The sources of net investment income by major category are as follows (in thousands): Years ended December 31, Debt securities $ 2,188,294 $ 2,184,750 Mortgage loans 353, ,331 Other investment income 227, ,216 Total investment income 2,768,538 2,903,297 Less investment expenses 48,748 45,397 Net investment income $ 2,719,790 $ 2,857,900 Note 6 - Reinsurance The Company assumes and cedes reinsurance from and to other insurance companies in order to limit losses from large exposures; however, if the reinsurer is unable to meet its obligations, the originating issuer of the coverage retains the liability. The maximum amount of life insurance risk retained by the Company on any one life is generally $2.0 million. Amounts not retained are ceded to other companies on a yearly renewable term or a coinsurance basis. Effective December 31, 2002, upon approval of the Michigan commissioner of insurance, Jackson ceded the guaranteed minimum death benefit reserve associated with variable annuities to an affiliate, Prudential Atlantic Reinsurance Company, Dublin, Ireland ( PARC ), a wholly owned subsidiary of Prudential. The contracts reinsured were in force prior to the effective date of the reinsurance agreement. Therefore, in accordance with NAIC SAP, the net increase in surplus as a result of the transaction was credited directly to surplus with an offsetting deduction from net income. As earnings emerge on the business reinsured, net income will be credited with such earnings while the original direct surplus entry will be correspondingly reduced. In 2008 and 2007, the earnings adjustment totaled $(157.4) million and $(5.4) million, respectively. The effect of the accounting treatment is that all earnings impact (up to the amount of the original surplus adjustment) of the reinsurance is reflected directly in surplus and excluded from net income. 29

35 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 6 Reinsurance (continued) Effective December 31, 2008, the company entered into a reinsurance agreement with Jackson New York, whereby the company assumed, on a 90% quota share basis, the guaranteed minimum withdrawal benefits on variable annuity contracts issued by Jackson New York and in force at December 31, The reinsurance agreement resulted in assumed reinsurance premiums of $241.6 million and reserves of $12.1 million. Additionally, in order to maintain Jackson New York s capital and surplus at an acceptable level following the inception of the treaty, capital contributions were made to Jackson New York totaling $166.4 million. The net impact of the transactions were reflected in other admitted assets at December 31, 2008 and were settled in the first quarter of In accordance with NAIC SAP, the gain arising from the treaty of $229.5 million was excluded from net income and reported directly in surplus. The effect of reinsurance on premiums and benefits is as follows (in thousands): Years ended December 31, Direct premiums and annuity considerations $ 10,509,187 $ 11,171,981 Reinsurance assumed 259,063 20,084 Reinsurance ceded (172,142) (177,460) Total premiums and annuity considerations $ 10,596,108 $ 11,014,605 Direct benefits to policyholders and beneficiaries $ 6,694,490 $ 7,242,572 Reinsurance assumed 16,308 17,182 Reinsurance ceded (140,582) (141,662) Total benefits to policyholders and beneficiaries $ 6,570,216 $ 7,118,092 Policy reserves and liabilities are stated net of reinsurance ceded to other companies. Reserves were reduced by $1,145.7 million and $889.9 million at December 31, 2008 and 2007, respectively. Reserves ceded to Brooke Life totaled $52.6 million and $54.9 million at December 31, 2008 and 2007, respectively. Reserves ceded to PARC totaled $449.7 million and $235.7 million at December 31, 2008 and 2007, respectively. Note 7 - Federal Income Taxes The Company is subject to federal income taxation as a life insurance company and files a consolidated federal income tax return with Brooke Life and Jackson National Life Insurance Company of New York. The Company has entered into a written tax sharing agreement that is generally based on separate return calculations. Intercompany balances are settled on a quarterly basis. In 2008 and 2007, tax benefits of $31.3 million and $29.7 million, respectively, primarily resulting from Brooke Life s interest deductions on its notes payable of $87.1 million in both 2008 and 2007 were recognized by the Company in accordance with the tax sharing agreement. In 2008, $100.1 million of tax benefits attributable to Jackson National Life Insurance Company of New York, primarily related to the reinsurance agreement discussed in Note 6, were utilized in accordance with the tax sharing agreement. With few exceptions, the Company is generally no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years prior to

36 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 7 - Federal Income Taxes (continued) A reconciliation of the more significant book to tax differences and the related tax effects (at a 35% statutory rate) is as follows (in thousands): Years ended December 31, Amount Tax Effect Amount Tax Effect Gain (loss) from operations and related federal income tax $ (535,982) $ (187,594) $ 670,319 $ 234,612 Adjustment under tax sharing agreement (375,397) (131,389) (84,972) (29,740) Tax credits (15,571) (5,450) (14,714) (5,150) Over accrual of taxes (42,889) (15,011) (48,676) (17,037) Deferred compensation (22,358) (7,825) 31,089 10,881 Dividends received deduction (215,500) (75,425) (158,000) (55,300) Deferred acquisition costs 48,248 16,887 1, Investments - limited partnerships (50,146) (17,551) (150,555) (52,694) Investments - expensed fixed index annuity options (66,409) (23,243) 24,318 8,511 Investments - other 13,144 4,600 44,643 15,625 Reserves 125,426 43,899 (24,273) (8,495) Deferred and uncollected premium ,303 9,906 Amortization of value of business acquired and goodwill 19,414 6,795 19,414 6,795 Deferred gain on reinsurance 386, ,413 16,521 5,782 Other 14,860 5,201 23,023 8,058 Taxable income (loss) and current tax on operations $ (715,706) $ (250,497) $ 378,383 $ 132,434 Current income taxes incurred consist of the following major components: Years ended December 31, Federal taxes on operations $ (98,647) $ 184,361 Tax credits (5,450) (5,150) Prior year over accrual of tax reserves (15,011) (17,037) Adjustment pursuant to tax sharing agreement (131,389) (29,740) Current tax on operations (250,497) 132,434 Federal taxes on capital gains 167,195 40,074 Prior year over accrual of tax on capital gains (6,605) (6,860) Current income taxes incurred $ (89,907) $ 165,648 31

37 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 7 - Federal Income Taxes (continued) The main components of the deferred tax assets (DTAs) and liabilities (DTLs) are as follows (in thousands): December 31, DTAs resulting from book/tax differences in: Reserves $ 191,862 $ 151,666 Deferred acquisition costs 217, ,559 Investments 610, ,519 Deferred compensation 61,690 68,202 Other 66,868 64,745 Total DTAs 1,148,099 1,044,691 DTAs non-admitted per NAIC SAP (610,238) (468,472) DTAs admitted per NAIC SAP 537, ,219 DTLs resulting from book/tax differences in: Investments 314, ,801 Reserves 6,875 10,193 Deferred and uncollected premium 46,468 48,796 Other 14,057 8,009 Total DTLs 382, ,799 Net admitted DTA per NAIC SAP 155,835 79,420 Additional admitted DTA per permitted practice 159,423 - Total net admitted DTA $ 315,258 $ 79,420 The change in net deferred income taxes is comprised of the following: December 31, Change Total DTAs $ 1,148,099 $ 1,044,691 Total DTLs 382, ,799 Change per statements of capital and surplus $ 766,073 $ 547,892 $ 218,181 There are no temporary differences for which deferred tax liabilities have not been recognized. Accordingly, there are no events that would cause unrecognized temporary differences to become taxable. There are no unrecognized deferred tax liabilities in foreign subsidiaries and foreign corporate joint ventures that are permanent in duration. At December 31, 2008 and 2007, the Company had no tax operating loss carryforwards. 32

38 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 7 - Federal Income Taxes (continued) In August, 2007, the IRS issued Revenue Ruling that would have changed accepted industry and IRS interpretations of the statutes governing the computation of the Dividends Received Deduction ("DRD") on separate account assets held in connection with variable annuity and life contracts, but that ruling was suspended by Revenue Ruling Revenue Ruling also announced the Treasury Department's and the IRS' intention to issue regulations with respect to certain computational aspects of the DRD on separate account assets held in connection with variable contracts. Any regulations that the IRS ultimately proposes for issuance in this area will be subject to public notice and comment, at which time insurance companies and other interested parties will have the opportunity to raise legal and practical questions about the content, scope and application of such regulations. Although regulations that represent a substantial change in an interpretation of the law are generally given a prospective effective date, there is no assurance that the change will not be retrospectively applied. As a result, depending on the ultimate timing and substance of any such regulations, which are unknown at this time, such future regulations could result in the elimination of some or all of the separate account DRD tax benefit that the Company receives. During 2008 and 2007, the Company recognized an income tax benefit of $54.7 million and $48.9 million, respectively, related to the separate account DRD. The following are income taxes incurred in the current year and prior years that will be available for recoupment in the event of future net losses: 2008, zero; 2007, $156.8 million; 2006, $168.6 million. Losses from operations may be carried back three taxable years to recoup prior income taxes incurred. Note 8 - Capital, Surplus and Dividend Restrictions Under Michigan Insurance Law, dividends on capital stock can only be distributed out of earned surplus adjusted to exclude any unrealized capital gains and the effect of permitted practices, unless the Commissioner approves the dividend prior to payment. At December 31, 2008, adjusted earned surplus was approximately $104.8 million. Furthermore, without the prior approval of the Commissioner, dividends are also subject to restrictions relating to statutory surplus and/or statutory earnings. The maximum dividend that can be paid in 2009, subject to the availability of earned surplus, without prior approval of the Michigan Commissioner is approximately $288.7 million. In 2008, in connection with the reinsurance treaty with Jackson New York as described in Note 6, the Company recorded capital contributions to Jackson New York totaling $166.4 million. Additionally, the Company paid $100.1 million to Jackson New York for utilization of tax benefits which was recorded as a capital contribution in accordance with the tax sharing agreement. The Company made a capital contribution during 2008 of $25.0 million to its wholly owned subsidiary, PGDS (US One) LLC ( PGDS ). In December 2008, the Company recorded an impairment charge of $22.0 million related to its investment in PGDS. The Company s investment of $3.0 million in PGDS at December 31, 2008 is non-admitted. The Company made a capital contribution during 2008 of $10.0 million to its wholly owned subsidiary, Squire Reassurance Company LLC ( Squire ). The Company s investment of $10.0 million in Squire at December 31, 2008 is non-admitted. In 2007, the Company made a capital contribution of $10.0 million to its wholly owned subsidiary, Curian Capital, LLC. The Company made dividend payments of $313.1 million and $246.0 million, respectively, in 2008 and

39 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 9 - Indebtedness Surplus Notes On March 15, 1997, the Company issued 8.15% Notes (the Notes ) in the principal amount of $250 million due March 15, The Notes were issued pursuant to Rule 144A under the Securities Act of 1933 and are unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims. Under Michigan Insurance Law, the Notes are not part of the legal liabilities of the Company and are considered capital and surplus for statutory reporting purposes. Payments of interest or principal may only be made with the prior approval of the commissioner of insurance of the State of Michigan and only out of surplus earnings which the commissioner determines to be available for such payments under Michigan Insurance law. The Notes may not be redeemed at the option of the Company or any holder prior to maturity. Interest is payable semi-annually on March 15 and September 15 of each year. Interest paid on the Notes was $20.4 million in both 2008 and Short-term borrowings Jackson has entered into a short-term note program with the FHLB, securing advances made throughout the year. Interest rates were fixed or variable and based on the FHLB cost of funds or market rates. Short term notes averaged $260.3 million in 2008 at an average interest rate of 2.2%. Jackson paid $7.0 million of interest on these notes during Previously, during 2007, Jackson entered into a short-term note program with the FHLB that expired on March 11, Jackson paid $92 thousand of interest on the 2007 notes. Short-term borrowings from Parent On December 21, 2007, Jackson entered into an unsecured cash advance facility with Prudential. The $32 million advance was repaid in full on September 24, The Company paid interest of $1.1 million and $20 thousand on this loan during 2008 and 2007, respectively. Reverse Repurchase Agreements During 2008 and 2007, the Company entered into reverse repurchase agreements whereby the Company agreed to sell and repurchase securities. These activities have been accounted for as financing transactions, with the assets and associated liabilities included in the balance sheet. Short-term borrowings under such agreements averaged $6.7 million and $12.7 million during 2008 and 2007, respectively, at weighted average interest rates of 2.89% for 2008 and 5.00% for There was no outstanding balance under such borrowings at December 31, 2008 and Interest paid totaled $0.2 million and $0.6 million in 2008 and 2007, respectively. The highest level of short-term borrowings at any month end was $50.0 million in 2008 and $90.0 million in Note 10 - Life and Annuity Reserves The Company waives deductions of deferred fractional premiums upon death of the insured and returns premiums paid and due beyond the date of death. Surrender values are not promised in excess of the legally computed reserves. At December 31, 2008 and 2007, 64% and 68%, respectively, of annuity reserves and deposit liabilities were subject to surrender charges of at least 5% or at market value in the event of discretionary withdrawal by policyholders. Extra premiums are charged for substandard lives for policies issued on such lives in addition to the gross premium. Mean reserves are determined by computing the regular mean reserve for the plan and, holding in addition, one half of the extra premium charge for the year. The Company had insurance in force for which the gross premiums are less than the net premiums of approximately $10.5 billion and $11.5 billion, at December 31, 2008 and 2007, respectively, according to the valuation standard set by the State of Michigan. 34

40 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 10 - Life and Annuity Reserves (continued) The Company s incurred but not reported claim provision is based on the Company s historical experience. The provision was $26.9 million at December 31, 2008 and The Company issues variable annuity and life contracts through its separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contract holder (traditional variable annuities and life). The Company also issues variable annuity contracts through separate accounts where the Company contractually guarantees to the contract holder (variable contracts with guarantees) either a) return of no less than total deposits made to the contract adjusted for any partial withdrawals, b) total deposits made to the contract adjusted for any partial withdrawals plus a minimum return, or c) the highest contract value on a specified anniversary date adjusted for any withdrawals following the contract anniversary. These guarantees include benefits that are payable in the event of death (guaranteed minimum death benefit ( GMDB )), annuitization (guaranteed minimum income benefit ( GMIB )), at specified dates during the accumulation period (guaranteed minimum withdrawal benefit ( GMWB )) or at the end of a specified period (guaranteed minimum accumulated benefit ( GMAB )). The Company had variable annuity contracts with guarantees, where the net amount at risk is the amount of guaranteed benefit in excess of current account value, as follows (dollars in millions): General Account Weighted Separate Reserve Average Minimum Account Net Amount before Attained December 31, 2008 Return Value at Risk Reinsurance Age Return of net deposits plus a minimum return GMDB 0% - 6% $ 15,257 $ 7,027 $ GMWB - premium only $ 3,172 $ 947 $ 89.6 GMWB - for life 0% - 5% $ 557 $ 188 $ 22.1 GMAB - premium only $ 16 $ 7 $ 0.1 Highest specified anniversary account value minus withdrawals postanniversary GMDB $ 2,821 $ 1,508 $ GMWB - highest anniversary only $ 1,976 $ 1,172 $ 60.2 GMWB - for life $ 1,099 $ 628 $ 31.8 Combination net deposits plus minimum return, highest specified anniversary account value minus withdrawals post-anniversary GMDB 0% - 6% $ 1,526 $ 869 $ GMIB 0% - 7% $ 3,839 $ 1,945 $ 90.5 GMWB - for life 0% - 6% $ 1,866 $ 1,045 $

41 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 10 - Life and Annuity Reserves (continued) General Account Weighted Separate Reserve Average Minimum Account Net Amount before Attained December 31, 2007 Return Value at Risk Reinsurance Age Return of net deposits plus a minimum return GMDB 0% - 5% $ 21,739 $ 1,230 $ GMWB - premium only $ 5,271 $ 12 $ 47.6 GMWB - for life 0% - 5% $ 967 $ 1 $ 12.8 GMAB - premium only $ 19 $ - $ - Highest specified anniversary account value minus withdrawals postanniversary GMDB $ 3,994 $ 67 $ GMWB - highest anniversary only $ 2,947 $ 61 $ 21.9 GMWB - for life $ 1,603 $ 36 $ 8.4 Combination net deposits plus minimum return, highest specified anniversary account value minus withdrawals post-anniversary GMDB 0% - 5% $ 2,310 $ 48 $ GMIB 0% - 6% $ 2,511 $ 82 $ 38.5 GMWB - for life 0% - 5% $ 3,154 $ 77 $ 17.8 The average period until expected annuitization for the GMIB is 6.6 years and 6.7 years as of December 31, 2008 and 2007, respectively. GMDB benefits on issues prior to 2003 are fully reinsured. GMIB benefits are reinsured, subject to aggregate annual claim limits. Deductibles also apply on reinsurance of GMIB business issued since March 1, At December 31, 2008, account balances of the variable annuity contracts were invested in variable separate accounts as follows (in millions): Fund type: Equity $ 14,341 Bond 2,191 Balanced 1,863 Money market 1,209 Total $ 19,604 Reserves for variable annuities and associated guarantees follow prescribed regulations and actuarial guidelines. Basic reserves are calculated using the Standard Valuation Law, Variable Annuity Model Regulation, and Actuarial Guidelines 33 and 34; GMDB benefits using Actuarial Guideline 34; and GMIB, GMAB and GMWB benefits using Actuarial Guideline 39. The scenario analysis prescribed by Actuarial Guideline 39 included an analysis of 1,000 stochastic scenarios to test if reserves over and above the fee accumulations are required. These scenarios were based on bond yield data taken from the AA-rated component of the Merrill Lynch Corporate Master Index as of December 31, For comparison purposes, the 70 th percentile from the distribution of stochastic results was used as the key benchmark. 36

42 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 10 - Life and Annuity Reserves (continued) Analysis of annuity reserves and deposit liabilities by withdrawal characteristics is as follows (in thousands): December 31, Subject to discretionary withdrawal: With market value adjustment $ 6,175,218 $ 5,276,746 At book value less current surrender charge of 5% or more 10,020,611 8,298,981 At fair value 19,322,903 27,703,570 Total with adjustment or at market value 35,518,732 41,279,297 At book value with surrender charge of less than 5% 10,994,750 11,045,046 Not subject to discretionary withdrawal 8,954,928 8,610,028 Total gross 55,468,410 60,934,371 Reinsurance ceded 37,254 39,733 Total, net of reinsurance $ 55,431,156 $ 60,894,638 Universal Life Insurance Secondary Guarantees The Company issues universal life contracts with secondary guarantees, also called no-lapse guarantees. No-lapse guarantees are offered in the form of minimum premium guarantees or no-lapse account values. Reserves are calculated according to the Standard Valuation Law, Universal Life Insurance Model Regulation, Valuation of Life Insurance Policies Model Regulation, and Actuarial Guideline 38. Reserves for variable universal life contracts are calculated according to the Standard Valuation Law, Universal Life Insurance Model Regulation, Variable Life Insurance Model Regulation and Actuarial Guideline 37. Note 11 Separate Accounts All reserves of the non-guaranteed separate accounts are subject to discretionary withdrawal at fair value. Reserves for variable annuity contract guarantees are held in the general account. All assets of the separate accounts are carried at fair value. Premiums, considerations or deposits totaled $4,584.4 million and $7,405.9 million for 2008 and 2007, respectively. Reserves totaled $18.8 billion and $26.9 billion at December 31, 2008 and 2007, respectively. A reconciliation of net transfers to separate account for the years ended December 31, 2008 and 2007 is as follows (in thousands): Transfers as reported in the summary of operations of the separate account statement: Transfers to separate accounts $ 4,477,747 $ 8,515,876 Transfers from separate accounts 1,611,479 2,353,663 Net transfers to separate accounts 2,866,268 6,162,213 Reconciling adjustments: Benefit fees (guaranteed minimum income/withdrawal) (103,967) (64,390) Term certain (11,621) (8,169) Transfers as reported in the accompanying statements of operations $ 2,750,680 $ 6,089,654 37

43 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 12 - Employee Retirement Plans The Company has a defined contribution retirement plan covering substantially all employees. To be eligible to participate in the Company s contribution, an employee must have attained the age of 21, completed at least 1,000 hours of service in a 12-month period and passed their 12-month employment anniversary. In addition, the employee must be employed on the applicable January 1 or July 1 entry date. The Company's annual contributions, as declared by the board of directors, are based on a percentage of eligible compensation paid to participating employees during the year. In addition, the Company matches up to 6 percent of a participant s elective contribution to the plan during the year. The Company s expense related to this plan was $10.3 million and $10.8 million in 2008 and 2007, respectively. The Company maintains non-qualified voluntary deferred compensation plans for certain agents and employees. At December 31, 2008 and 2007, the liability for such plans totaled $171.2 million and $194.0 million, respectively. Jackson invests general account assets in selected mutual funds in amounts similar to participant elections as a hedge against significant movement in the payout liability. The Company s loss (income) related to these plans, including a match of elective deferrals for the agents deferred compensation plan, and the change in value of participant elected deferrals was $(54.6) million and $18.4 million in 2008 and 2007, respectively. This income or loss is offset by unrealized gains (losses) on the general account mutual funds, credited directly to surplus, of $(68.1) million and $12.5 million in 2008 and 2007, respectively. Note 13 Related Party Transactions The Company s investment portfolio is managed by PPM America, Inc. ( PPMA ), a registered investment advisor, and PPM Finance, Inc. (collectively PPM ). PPM is ultimately a wholly-owned subsidiary of Prudential. The Company paid $35.4 million and $33.0 million to PPM for investment advisory services in 2008 and 2007, respectively. Jackson has shared services administrative agreements with affiliates PPMA, National Planning Holdings, Inc. ( NPH ), PGDS (US ONE), LLC ( PGDS ), Jackson National Asset Management, LLC, Curian Clearing, LLC and Curian Capital, LLC. Under the agreements, Jackson allocated $18.2 million and $16.5 million of certain management and corporate services expenses to affiliates in 2008 and 2007, respectively. The Company contracted with PGDS to provide certain information technology services. The cost of the services, totaling $43.7 million and $22.2 million in 2008 and 2007, respectively, is based on PGDS cost. During 2008, Jackson transferred certain fixed assets to PGDS at Jackson s book value of approximately $25.0 million. Jackson provides a $40.0 million revolving credit facility to PPMA. The loan is unsecured, matures on September 9, 2013, accrues interest at LIBOR plus 2% per annum, and has a commitment fee of 0.25% per annum. There was no balance outstanding at December 31, 2008 or The highest outstanding loan balance during 2008 and 2007 was $20.0 million and $26.0 million, respectively. Interest and commitment fees totaled $177 thousand and $524 thousand during 2008 and 2007, respectively. Jackson provides a $30.0 million revolving credit facility to PGDS (One) LLC. The loan, first utilized in 2008, is unsecured, matures on January 24, 2012, accrues interest at LIBOR plus 2% per annum, and has a commitment fee of 0.10% per annum. The balance outstanding at December 31, 2008 was $30.0 million. The highest outstanding loan balance during 2008 was $30.0 million. Interest and commitment fees totaled $1.9 million during

44 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 13 Related Party Transactions (continued) Effective January 24, 2007, Jackson provided a $20.0 million revolving credit facility to Curian Clearing, LLC. The loan is unsecured, matures on June 14, 2011, accrues interest at LIBOR plus 2% per annum, and has a commitment fee of 0.10% per annum. There was no balance outstanding at December 31, 2008 or The highest outstanding loan balance during 2008 and 2007 was $7.0 million and $11.3 million, respectively. Interest and commitment fees totaled $52 thousand and $154 thousand during 2008 and 2007, respectively. Note 14 Commitments and Contingent Liabilities The Company is involved in litigation arising in the ordinary course of business. It is the opinion of management that the ultimate disposition of such litigation will not have a material adverse affect on the Company s financial condition or results of operations. The Company has been named in civil litigation proceedings which appear to be substantially similar to other class action litigation brought against many life insurers alleging misconduct in the sale of insurance products. The Company generally accrues for legal contingencies once the contingency is deemed to be probable and estimable. Accordingly, at December 31, 2008 and 2007, the Company had recorded accruals totaling $31.0 million and $35.0 million, respectively. In addition to the litigation noted above, in connection with the purchase of Life of Georgia in 2005, the Company assumed a liability related to a class action lawsuit. This liability of $2.2 million and $2.0 million at December 31, 2008 and 2007, respectively, is fully indemnified by ING Groep, N.V. and an offsetting indemnification receivable is included in other assets. The Company has guaranteed the policyholder obligations of its wholly owned subsidiary, Jackson National Life Insurance Company of New York. The Company does not consider that this guaranty results in a material exposure to a loss. The Company has agreed to support and provide Curian Capital, LLC and Curian Clearing, LLC, wholly owned subsidiaries, the necessary liquidity to fund the operations of the companies and to meet their obligations as they become due. The Company does not consider this as resulting in a material exposure to a loss. At December 31, 2008, the Company had unfunded commitments related to its investments in limited partnerships and limited liability companies totaling $575.0 million. At December 31, 2008, unfunded commitments on fixed-rate commercial mortgage loans and available lines of credit totaled $11.8 million and $14.4 million, respectively. At December 31, 2008, the Company had pledged mortgage related securities with a fair value of $2.1 billion in connection with funding agreements issued to and short-term borrowings from the FHLB. Securities pledged are reported as invested assets. 39

45 Jackson National Life Insurance Company Notes to Statutory Financial Statements December 31, 2008 Note 14 Commitments and Contingent Liabilities (continued) In 2008, the Company entered into two separate but similar Option Put and Forbearance Agreements with a bank counterparty related to pre-existing investments of $118.8 million in securities issued by two entities structured to pass through investment returns based on the performance of underlying reference pools of syndicated bank loans totaling up to $700.0 million. These agreements create a potential payment obligation of up to $318.0 million to the extent losses incurred on the reference pools under an event of liquidation exceed the value of the structured entities. At December 31, 2008, the Company believes the possibility of an event of liquidation and payment on either of the agreements is remote. As such, no financial obligation has been recorded for these agreements as of December 31, In connection with this potential obligation, the Company has pledged high quality securities to the counterparty in the amount of $154.7 million at December 31, Securities pledged as collateral are reported as invested assets. In connection with the reinsurance treaty with Jackson New York described in Note 6, Jackson placed high quality securities with a carrying value and fair value at December 31, 2008 of $273.8 million and $268.5 million, respectively, in a trust for the benefit of Jackson New York. The trust is required in order for Jackson New York to record a credit for the reserves ceded to Jackson. The securities are reported as invested assets. The Company leases office space and equipment under several operating leases that expire at various dates through Certain leases include escalating lease rates and, as a result, at December 31, 2008, Jackson recorded a liability of $9.2 million for future lease payments. Lease expense was $22.7 million and $17.1 million in 2008 and 2007, respectively. Future minimum payments under noncancellable operating leases are as follows (in thousands): 2009 $ 8, , , , ,128 Thereafter 25,143 Total $ 68,081 40

46 Additional Information Jackson National Life Insurance Company Supplemental Schedule of Selected Financial Data December 31, 2008 Schedule 1 Investment income earned U.S. government bonds $ 2,357,836 Other bonds (unaffiliated) 2,160,625,480 Bonds exempt from U.S. tax - Bonds of affiliates - Preferred stocks (unaffiliated) 25,310,368 Preferred stocks of affiliates - Common stocks (unaffiliated) 8,113,503 Common stocks of affiliates 106,487,783 Mortgage loans 353,199,496 Real estate 9,412,266 Contract loans 64,344,583 Cash, cash equivalents and short-term investments 12,237,438 Derivative instruments (129,486,160) Other invested assets 68,555,310 Aggregate write-ins for investment income (6,216,583) Total investment income $ 2,674,941,320 Real estate owned - book value less encumbrances $ 99,675,168 Mortgage loans by type - book value Farm mortgages $ - Residential mortgages - Commercial mortgages 6,392,522,961 Total mortgage loans $ 6,392,522,961 Mortgage loans by standing - book value Good standing $ 6,392,522,961 Good standing with restructured loans $ - Interest overdue more than 90 days, not in foreclosure $ - Foreclosure in process $ - Other long term assets - statement value $ 1,495,834,899 Contract loans $ 840,250,289 Bonds & stocks of parents, subsidiaries and affiliates - book value Bonds $ - Preferred stocks $ - Common stocks $ 98,196,736 Continued 41

47 Additional Information Jackson National Life Insurance Company Supplemental Schedule of Selected Financial Data December 31, 2008 Schedule 1 Bonds and short-term investments by class and maturity: Bonds by maturity - statement value Due within one year or less $ 2,269,513,169 Over 1 year through 5 years 13,928,087,407 Over 5 years through 10 years 16,082,752,914 Over 10 years through 20 years 3,569,138,110 Over 20 years 1,123,490,928 Total by maturity $ 36,972,982,528 Bonds by class - statement value Class 1 $ 19,989,665,938 Class 2 13,950,966,119 Class 3 1,916,753,627 Class 4 766,136,761 Class 5 305,630,563 Class 6 43,829,520 Total by class $ 36,972,982,528 Total bonds publicly traded $ 28,059,595,661 Total bonds privately placed $ 8,913,386,867 Preferred stocks - statement value $ 324,204,302 Common stocks - market value $ 455,189,434 Short-term investments - book value $ 180,130,996 Options, caps and floors owned - statement value $ 658,437,647 Options, caps and floors written & in force - statement value $ (6,476,717) Collar, swap and forward agreements open - statement value $ 4,609,821 Futures contracts open - current value $ 675,075,000 Cash on deposit $ (2,452,677) Cash equivalents $ 21,777,561 Life insurance in force Industrial $ 450,905,000 Ordinary $ 53,720,870,000 Credit life $ - Group life $ 189,500,000 Amount of accidental death benefits in force under ordinary policies $ 2,057,805,000 Continued 42

48 Additional Information Jackson National Life Insurance Company Supplemental Schedule of Selected Financial Data December 31, 2008 Schedule 1 Life insurance policies with disability provisions in force Industrial $ 302,000 Ordinary $ 15,501,674,000 Credit life $ - Group life $ 97,336,000 Supplementary contracts in force: Ordinary - not involving life contingencies- Amount on deposit $ 2,691,997 Income payable $ 40,204 Ordinary - involving life contingencies- Income payable $ 406,063 Group - not involving life contingencies- Amount on deposit $ 55,649 Income payable $ 11,468 Group - involving life contingencies- Income payable $ 507 Annuities: Ordinary- Immediate - amount of income payable $ 216,089,833 Deferred - fully paid account balance $ 10,936,134,111 Deferred - not fully paid - account balance $ 14,844,431,513 Group- Amount of income payable $ 8,031,709 Fully paid account balance $ 553,994,303 Not fully paid - account balance $ 1,752,991,781 Accident and health insurance - premiums in force: Ordinary $ - Group $ - Credit $ - Deposit funds and dividend accumulations: Deposit funds - account balance $ 110,633 Dividend accumulations - account balance $ 5,568,391 See accompanying independent auditor's report. 43

49 1) JACKSON NATIONAL LIFE INSURANCE COMPANY Supplemental Investment Risks Interrogatories December 31, 2008 Total admitted assets (excluding Separate Accounts): $ 48,586,479,389 2) 10 largest exposures to a single issuer/borrower/investment (excluding US Government): Issuer Category Amount Percentage Schedule 2 Piedmont CDO Trust Unaffiliated domestic securities $ 536,359, % Citigroup Unaffiliated domestic securities $ 226,404, % RREEF CW - Atlanta Commercial mortgage loans $ 225,000, % AIG Unaffiliated domestic securities $ 220,026, % Simpson Housing/GE Portfolio Commercial mortgage loans $ 208,962, % HSBC Finance Unaffiliated domestic securities $ 179,477, % Guggenheim Commercial mortgage loans $ 178,360, % Dominion Unaffiliated domestic securities $ 164,722, % JP Morgan Chase Unaffiliated domestic securities $ 159,135, % Wellpoint Unaffiliated domestic securities $ 132,879, % 3) Total admitted assets held in bonds and preferred stock by NAIC rating: Bonds Amount Percentage Preferred stock Amount Percentage NAIC-1 $ 19,989,665, % P/RP-1 $ 252,016, % NAIC-2 $ 13,950,966, % P/RP-2 $ 64,512, % NAIC-3 $ 1,916,753, % P/RP-3 $ 4,464,397 % NAIC-4 $ 766,136, % P/RP-4 $ % NAIC-5 $ 305,630, % P/RP-5 $ 1,343,547 % NAIC-6 $ 43,829, P/RP-6 $ 1,867, % 4) Assets held in foreign investments: Amount Percentage Total admitted assets held in foreign investments $ 3,907,672, % 5) Aggregate foreign investment exposure categorized by NAIC sovereign rating: Amount Percentage Countries rated NAIC-1 $ 3,859,888, % Countries rated NAIC-2 $ 9,805,538 % Countries rated NAIC-3 or below $ 37,978, % 6) Two largest foreign investment exposures in a single country, excluding Canada, categorized by the country's NAIC sovereign rating: Amount Percentage Countries rated NAIC-1: Great Britain $ 1,379,829, % Netherlands $ 535,782, % Countries rated NAIC-2: Brazil $ 9,625,538 % Iceland $ 180,000 % Countries rated NAIC-3 or below: Liberia $ 37,606, % Supra-national $ 305,856 % 7) There is no unhedged foreign currency exposure. 8) Not applicable. 9) Not applicable. 10) Ten largest non-sovereign (i.e., non-govermental) foreign issues: Issuer NAIC Rating Amount Percentage British Telecommunications PLC 2FE $ 130,966, % Vodafone Group 1FE $ 128,629, % Barclay's Bank 1FE $ 93,374, % Koninklijke KPN NV 2FE $ 98,631, % Deutsche Telekom International Finance 2FE $ 91,318, % British Sky Broadcasting 2FE 0 86,736, % France Telecom 1FE $ 85,192, % Scottish Power 1FE $ 68,389, % BSKYB Finance UK 2FE $ 62,540, % Lloyds TSB Bank PLC 1FE $ 61,962, % 44 (Continued)

50 JACKSON NATIONAL LIFE INSURANCE COMPANY Supplemental Investment Risks Interrogatories December 31, 2008 Schedule 2, Continued 11) Assets held in Canadian investments: Amount Percentage Total admitted assets held in Canadian investments $ 1,374,016, % Canadian-currency-denominated investments $ 11,261,045 12) Admitted assets held in investments with contractual sales restrictions. Federal Home Loan Bank of Indianapolis Class B-1 $ 117,500, % 13) Admitted assets held in the largest 10 equity interests: Issuer Amount Percentage PPM America Private Equity Fund, L.P. $ 190,590, % PPM America Private Equity Fund II, L.P. $ 141,515, % Federal Home Loan Bank of Indianapolis $ 117,500, % LAF Holdings, LLC $ 101,740, % Jackson National Life Insurance Co of New York $ 94,662, % Lloyds TSB Bank PLC $ 61,962, % Barclays Bank PLC $ 52,625, % First Union Capital I $ 46,010, % CMEP Co-Investment ICF Consulting, L.P $ 43,554, % JNL/S&P Managed Aggressive Growth Fund $ 31,597, % 14) There were no assets held in nonaffiliated, privately placed equities, exceeding 2.5% of the Company s total admitted assets. 15) There were no assets held in general partnership interests that exceeded 2.5% of the Company s total admitted assets. 16) Admitted assets held in the largest 10 mortgage loans: Type Amount Percentage Commercial $ 225,000, % Commercial $ 208,894, % Commercial $ 178,360, % Commercial $ 107,392, % Commercial $ 107,085, % Commercial $ 100,000, % Commercial $ 67,500, % Commercial $ 62,740, % Commercial $ 51,764, % Commercial $ 50,250, % Amount and percentage of the reporting entity's total admitted assets held in the following categories of mortgage loans Construction loans $ 271,330, % Mortgage loans over 90 days past due $ % Mortgage loans in the process of foreclosure $ % Mortgage loans foreclosed $ % Restructured mortgage loans $ % 17) Mortgage loan to value ratios as determined from the most current appraisal as of the annual statement date: Loan to Value Amount Percentage 71 to 80% $ 831,832, % below 70% $ 5,560,690, % 18) There were no assets held in real estate that exceeded 2.5% of the Company's total admitted assets. Commercial 45 (Continued)

51 JACKSON NATIONAL LIFE INSURANCE COMPANY Supplemental Investment Risks Interrogatories December 31, 2008 Schedule 2, Continued 19) There were no assets held in mezzanine real estate loans that exceeded 2.5% of the Company's total admitted assets. 20) Total admitted assets subject to the following types of agreements: At year end At end of each quarter Agreement type Amount Percentage 1st Qtr 2nd Qtr 3rd Qtr Securities lending $ 105,974, % $ 252,440,054 $ 241,764,981 $ 174,494,677 Repurchase 50,000,000 Reverse repurchase Dollar repurchase Dollar reverse repurchase 21) Total admitted assets for warrants not attached to other financial instruments, options, caps and floors: Owned Written Type Amount Percentage Amount Percentage Hedging $ 658,437, % $ % 22) Total admitted assets subject to potential exposure for collars, swaps and forwards: At year end At end of each quarter Type Amount Percentage 1st Qtr 2nd Qtr 3rd Qtr Hedging $ 108,619, % $ 99,281,878 $ 131,687,663 $ 115,983,216 Other $ % $ $ $ 23) Total admitted assets subject to potential exposure for futures contracts: At year end At end of each quarter Type Amount Percentage 1st Qtr 2nd Qtr 3rd Qtr Hedging $ 74,250, % $ 45,000,000 $ 67,400,000 $ 60,750,000 See accompanying independent auditors' report. 46

52 JACKSON NATIONAL LIFE INSURANCE COMPANY Summary Investment Schedule December 31, 2008 Schedule 3 Admitted assets as reported in the annual Investment categories Gross investment holdings statement Bonds: U.S. Treasury securities $ 4,111, % $ 4,111, % Foreign government 1,336, % 1,336, % States, territories and possessions general obligations % % Revenue and assessment obligations 6,500, % 6,500, % Mortgage-backed securities: Pass-through securities: GNMA 99,084, % 99,084, % FNMA and FHLMC 2,092,467, % 2,092,467, % CMO's and REMIC's: GNMA, FNMA, FHLMC or VA 1,116,434, % 1,116,434, % Non-U.S. Government % % All other 6,067,816, % 6,067,816, % Other debt and other fixed income securities: Unaffiliated domestic securities 22,376,750, % 22,376,750, % Unaffiliated foreign securities 5,028,347, % 5,028,347, % Affiliated securities % % Equity interests: Investments in mutual funds 228,500, % 228,500, % Preferred stocks: Affiliated % % Unaffiliated 324,204, % 324,204, % Publicly traded equity securities: Unaffiliated 10,992, % 10,992, % Other equity securities: Affiliated 94,662, % 94,662, % Unaffiliated 117,500, % 117,500, % Mortgage loans: Multifamily residential properties 1,351,793, % 1,351,793, % Commercial loans 5,040,729, % 5,040,729, % Real estate investments: Property occupied by the Company 79,761, % 79,761, % Property held for the production of income (including $0 of property acquired in satisfaction of debt) 19,215, % 19,215, % Property held for sale (including $0 property acquired in satisfaction of debt) 698, % 698, % Contract loans 840,250, % 840,250, % Receivables for securities 33,325, % 33,325, % Cash, cash equivalents and short-term investments 199,461, % 199,461, % Other invested assets 1,447,192, % 2,132,755, % Total invested assets $ 46,581,138, % $ 47,266,700, % See accompanying independent auditors' report. 47

53 ANNEX 2

54 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY ASSETS 1 Assets Current Year 2 Nonadmitted Assets 3 Net Admitted Assets (Cols. 1-2) Prior Year 4 Net Admitted Assets 1. Bonds (Schedule D) 2. Stocks (Schedule D): 2.1 Preferred stocks 2.2Commonstocks 3. Mortgage loans on real estate (Schedule B): 3.1 First liens 3.2 Other than first liens 4. Real estate (Schedule A): 4.1 Properties occupied by the company (less $ encumbrances) 4.2 Properties held for the production of income (less $ encumbrances) 4.3 Properties held for sale (less $ encumbrances) 5. Cash ($, Schedule E - Part 1), cash equivalents ($, Schedule E - Part 2) and short-term investments ($, Schedule DA) 6. Contract loans (including $ premium notes) 7. Other invested assets (Schedule BA) 8. Receivables for securities 9. Aggregate write-ins for invested assets 10. Subtotals, cash and invested assets (Lines 1 to 9) 11. Title plants less $ charged off (for Title insurers only) 12. Investment income due and accrued 13. Premiums and considerations: 13.1 Uncollected premiums and agents' balances in the course of collection 13.2 Deferred premiums and agents' balances and installments booked but deferred and not yet due (including $ earned but unbilled premiums) 13.3 Accrued retrospective premiums 14. Reinsurance: 14.1 Amounts recoverable from reinsurers 14.2 Funds held by or deposited with reinsured companies 14.3 Other amounts receivable under reinsurance contracts 15. Amounts receivable relating to uninsured plans 16.1 Current federal and foreign income tax recoverable and interest thereon 16.2 Net deferred tax asset 17. Guaranty funds receivable or on deposit 18. Electronic data processing equipment and software 19. Furniture and equipment, including health care delivery assets ($ ) 20. Net adjustment in assets and liabilities due to foreign exchange rates 21. Receivables from parent, subsidiaries and affiliates 22. Health care ($ ) and other amounts receivable 23. Aggregate write-ins for other than invested assets 24. Total assets excluding Separate Accounts, Segregated Accounts and Protected Cell Accounts (Lines 10 to 23) 25. From Separate Accounts, Segregated Accounts and Protected Cell Accounts 26. Total (Lines 24 and 25) DETAILS OF WRITE-INS Summary of remaining write-ins for Line 9 from overflow page Totals (Lines 0901 thru 0903 plus 0998)(Line 9 above) Summary of remaining write-ins for Line 23 from overflow page Totals (Lines 2301 thru 2303 plus 2398)(Line 23 above) 1

55 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY LIABILITIES, SURPLUS AND OTHER FUNDS 1 2 Prior Year Current Year 1. Aggregate reserve for life contracts $ (Exh. 5, Line ) less $ included in Line 6.3 (including $ Modco Reserve) 2. Aggregate reserve for accident and health contracts (Exhibit 6, Line 17, Col. 1) (including $ Modco Reserve) 3. Liability for deposit-type contracts (Exhibit 7, Line 14, Col. 1) (including $ Modco Reserve) 4. Contract claims: 4.1 Life (Exhibit 8, Part 1, Line 4.4, Col. 1 less sum of Cols. 9, 10 and 11) 4.2 Accident and health (Exhibit 8, Part 1, Line 4.4, sum of Cols. 9, 10 and 11) 5. Policyholders dividends $ and coupons $ due and unpaid (Exhibit 4, Line 10) 6. Provision for policyholders dividends and coupons payable in following calendar year - estimated amounts: 6.1 Dividends apportioned for payment (including $ Modco) 6.2 Dividends not yet apportioned (including $ Modco) 6.3 Coupons and similar benefits (including $ Modco) 7. Amount provisionally held for deferred dividend policies not included in Line 6 8. Premiums and annuity considerations for life and accident and health contracts received in advance less $ discount; including $ accident and health premiums (Exhibit 1, Part 1, Col. 1, sum of lines 4 and 14) 9. Contract liabilities not included elsewhere: 9.1 Surrender values on canceled contracts 9.2 Provision for experience rating refunds, including $ accident and health experience rating refunds 9.3 Other amounts payable on reinsurance including $ assumed and $ ceded 9.4 Interest maintenance reserve (IMR, Line 6) 10. Commissions to agents due or accrued-life and annuity contracts $ accident and health $ and deposit-type contract funds $ 11. Commissions and expense allowances payable on reinsurance assumed 12. General expenses due or accrued (Exhibit 2, Line 12, Col. 6) 13. Transfers to Separate Accounts due or accrued (net) (including $ accrued for expense allowances recognized in reserves, net of reinsured allowances) 14. Taxes, licenses and fees due or accrued, excluding federal income taxes (Exhibit 3, Line 9, Col. 5) 15.1 Current federal and foreign income taxes including $ on realized capital gains (losses) 15.2 Net deferred tax liability 16. Unearned investment income 17. Amounts withheld or retained by company as agent or trustee 18. Amounts held for agents' account, including $ agents' credit balances 19. Remittances and items not allocated 20. Net adjustment in assets and liabilities due to foreign exchange rates 21. Liability for benefits for employees and agents if not included above 22. Borrowed money $ and interest thereon $ 23. Dividends to stockholders declared and unpaid 24. Miscellaneous liabilities: 24.1 Asset valuation reserve (AVR, Line 16, Col. 7) 24.2 Reinsurance in unauthorized companies 24.3 Funds held under reinsurance treaties with unauthorized reinsurers 24.4 Payable to parent, subsidiaries and affiliates 24.5 Drafts outstanding 24.6 Liability for amounts held under uninsured plans 24.7 Funds held under coinsurance 24.8 Payable for securities 24.9 Capital notes $ and interest thereon $ 25. Aggregate write-ins for liabilities 26. Total Liabilities excluding Separate Accounts business (Lines 1 to 25) 27. From Separate Accounts Statement 28. Total Liabilities (Lines 26 and 27) 29. Common capital stock 30. Preferred capital stock 31. Aggregate write-ins for other than special surplus funds 32. Surplus notes 33. Gross paid in and contributed surplus (Page 3, Line 33, Col. 2 plus Page 4, Line 51.1, Col. 1) 34. Aggregate write-ins for special surplus funds 35. Unassigned funds (surplus) 36. Less treasury stock, at cost: 36.1 shares common (value included in Line 29 $ ) 36.2 shares preferred (value included in Line 30 $ ) 37. Surplus (Total Lines ) (including $ in Separate Accounts Statement) 38. Totals of Lines 29, 30 and 37 (Page 4, Line 55) 39. Totals of Lines 28 and 38 (Page 2, Line 26, Col. 3) DETAILS OF WRITE-INS Summary of remaining write-ins for Line 25 from overflow page Totals (Lines 2501 thru 2503 plus 2598)(Line 25 above) Summary of remaining write-ins for Line 31 from overflow page Totals (Lines 3101 thru 3103 plus 3198)(Line 31 above) Summary of remaining write-ins for Line 34 from overflow page Totals (Lines 3401 thru 3403 plus 3498)(Line 34 above) 2

56 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY SUMMARY OF OPERATIONS 1 Current Year 2 Prior Year 1. Premiums and annuity considerations for life and accident and health contracts (Exhibit 1, Part 1, Line 20.4, Col. 1, less Col. 11) 2. Considerations for supplementary contracts with life contingencies 3. Net investment income (Exhibit of Net Investment Income, Line 17) 4. Amortization of interest maintenance reserve (IMR, Line 5) 5. Separate Accounts net gain from operations excluding unrealized gains or losses 6. Commissions and expense allowances on reinsurance ceded (Exhibit 1, Part 2, Line 26.1, Col. 1) 7. Reserve adjustments on reinsurance ceded 8. Miscellaneous Income: 8.1 Income from fees associated with investment management, administration and contract guarantees from Separate Accounts 8.2 Charges and fees for deposit-type contracts 8.3 Aggregate write-ins for miscellaneous income 9. Total (Lines 1 to 8.3) 10. Death benefits 11. Matured endowments (excluding guaranteed annual pure endowments) 12. Annuity benefits (Exhibit 8, Part 2, Line 6.4, Cols ) 13. Disability benefits and benefits under accident and health contracts 14. Coupons, guaranteed annual pure endowments and similar benefits 15. Surrender benefits and withdrawals for life contracts 16. Group conversions 17. Interest and adjustments on contract or deposit-type contract funds 18. Payments on supplementary contracts with life contingencies 19. Increase in aggregate reserves for life and accident and health contracts 20. Totals (Lines 10 to 19) 21. Commissions on premiums, annuity considerations, and deposit-type contract funds (direct business only) (Exhibit 1, Part 2, Line 31, Col. 1) 22. Commissions and expense allowances on reinsurance assumed (Exhibit 1, Part 2, Line 26.2, Col. 1) 23. General insurance expenses (Exhibit 2, Line 10, Cols. 1, 2, 3 and 4) 24. Insurance taxes, licenses and fees, excluding federal income taxes (Exhibit 3, Line 7, Cols ) 25. Increase in loading on deferred and uncollected premiums 26. Net transfers to or (from) Separate Accounts net of reinsurance 27. Aggregate write-ins for deductions 28. Totals (Lines 20 to 27) 29. Net gain from operations before dividends to policyholders and federal income taxes (Line 9 minus Line 28) 30. Dividends to policyholders 31. Net gain from operations after dividends to policyholders and before federal income taxes (Line 29 minus Line 30) 32. Federal and foreign income taxes incurred (excluding tax on capital gains) 33. Net gain from operations after dividends to policyholders and federal income taxes and before realized capital gains or (losses) (Line 31 minus Line 32) 34. Net realized capital gains (losses) (excluding gains (losses) transferred to the IMR) less capital gains tax of $ (excluding taxes of $ transferred to the IMR) 35. Net income (Line 33 plus Line 34) CAPITAL AND SURPLUS ACCOUNT 36. Capital and surplus, December 31, prior year (Page 3, Line 38, Col. 2) 37. Net income (Line 35) 38. Change in net unrealized capital gains (losses) less capital gains tax of $ 39. Change in net unrealized foreign exchange capital gain (loss) 40. Change in net deferred income tax 41. Change in nonadmitted assets 42. Change in liability for reinsurance in unauthorized companies 43. Change in reserve on account of change in valuation basis, (increase) or decrease (Exh. 5A, Line , Col. 4) 44. Change in asset valuation reserve 45. Change in treasury stock (Page 3, Lines 36.1 and 36.2, Col. 2 minus Col. 1) 46. Surplus (contributed to) withdrawn from Separate Accounts during period 47. Other changes in surplus in Separate Accounts Statement 48. Change in surplus notes 49. Cumulative effect of changes in accounting principles 50. Capital changes: 50.1 Paid in 50.2 Transferred from surplus (Stock Dividend) 50.3 Transferred to surplus 51. Surplus adjustment: 51.1 Paid in 51.2 Transferred to capital (Stock Dividend) 51.3 Transferred from capital 51.4 Change in surplus as a result of reinsurance 52. Dividends to stockholders 53. Aggregate write-ins for gains and losses in surplus 54. Net change in capital and surplus for the year (Lines 37 through 53) 55. Capital and surplus, December 31, current year (Lines ) (Page 3, Line 38) DETAILS OF WRITE-INS Summary of remaining write-ins for Line 8.3 from overflow page Totals (Lines thru plus )(Line 8.3 above) Summary of remaining write-ins for Line 27 from overflow page Totals (Lines 2701 thru 2703 plus 2798)(Line 27 above) Summary of remaining write-ins for Line 53 from overflow page Totals (Lines 5301 thru 5303 plus 5398)(Line 53 above) 3

57 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY CASH FLOW 1 Current Year 2 Prior Year Cash from Operations 1. Premiums collected net of reinsurance 2. Net investment income 3. Miscellaneous income 4. Total (Lines 1 through 3) 5. Benefit and loss related payments 6. Net transfers to Separate Accounts, Segregated Accounts and Protected Cell Accounts 7. Commissions, expenses paid and aggregate write-ins for deductions 8. Dividends paid to policyholders 9. Federal and foreign income taxes paid (recovered) net of $ tax on capital gains (losses) 10. Total (Lines 5 through 9) 11. Net cash from operations (Line 4 minus Line 10) Cash from Investments 12. Proceeds from investments sold, matured or repaid: 12.1 Bonds 12.2 Stocks 12.3 Mortgage loans 12.4 Real estate 12.5 Other invested assets 12.6 Net gains or (losses) on cash, cash equivalents and short-term investments 12.7 Miscellaneous proceeds 12.8 Total investment proceeds (Lines 12.1 to 12.7) 13. Cost of investments acquired (long-term only): 13.1 Bonds 13.2 Stocks 13.3 Mortgage loans 13.4 Real estate 13.5 Other invested assets 13.6 Miscellaneous applications 13.7 Total investments acquired (Lines 13.1 to 13.6) 14. Net increase (decrease) in contract loans and premium notes 15. Net cash from investments (Line 12.8 minus Line 13.7 minus Line 14) Cash from Financing and Miscellaneous Sources 16. Cash provided (applied): 16.1 Surplus notes, capital notes 16.2 Capital and paid in surplus, less treasury stock 16.3 Borrowed funds 16.4 Net deposits on deposit-type contracts and other insurance liabilities 16.5 Dividends to stockholders 16.6 Other cash provided (applied) 17. Net cash from financing and miscellaneous sources (Lines 16.1 to 16.4 minus Line 16.5 plus Line 16.6) RECONCILIATION OF CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS 18. Net change in cash, cash equivalents and short-term investments (Line 11, plus Lines 15 and 17) 19. Cash, cash equivalents and short-term investments: 19.1 Beginning of year 19.2 End of year (Line 18 plus Line 19.1) Note: Supplemental disclosures of cash flow information for non-cash transactions: 4

58 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY 1. Summary of Significant Accounting Policies A. Accounting Policies The financial statements of the Company are presented on the basis of accounting practices prescribed or permitted by the Michigan Office of Financial and Insurance Regulation. The 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, for determining its solvency under Michigan Insurance Law. The Office of Financial and Insurance Regulation has adopted the National Association of Insurance Commissioners' (NAIC) Accounting Practices and Procedures Manual (NAIC SAP), including appendices A - F and excluding Actuarial Guideline XXXV 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. The Company has received approval from the Office of Financial and Insurance Regulation 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 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 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 an aggregate write-in for 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 an aggregate write-in for special surplus funds, at December 31, 2008, with no effect on net income in The additional admitted assets and capital & 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 Risk- Based Capital as reported on page 22 by $81.5 million and increase total adjusted capital by $845.0 million. A reconciliation of the Company's net income and capital and surplus between NAIC SAP and practices prescribed or permitted by the State of Michigan is shown below: 12/31/ /31/2007 Net income/(loss), Michigan basis $ (623,395,499) $ 490,010,567 Adjustments: Valuation of Life Insurance Policies Model Regulation (XXX): Increase in aggregate reserves for life and accident and health policies and contracts (1,298,426) (1,445,726) Actuarial Guideline XXXV: (Increase)/decrease in aggregate reserves for life and accident and health policies and contracts 126,124,886 (5,140,606) Increase/(decrease) in market values of financial derivatives used to hedge equity-index linked liabilities (34,018,877) 11,798,796 Actuarial Guideline XXXV adjustment 92,106,009 6,658,190 Increase in federal income taxes (29,805,056) (1,942,201) Net income/(loss), NAIC SAP $ (562,392,972) $ 493,280,830 5

59 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY 12/31/ /31/2007 Statutory Capital and Surplus, Michigan basis $ 3,745,685,512 $ 4,024,056,717 Adjustments: Aggregate reserve for life policies and contracts: Valuation of Life Insurance Policies Model Regulation (XXX): Reserve, Michigan basis 9,612,111 8,862,598 Reserve, NAIC SAP 24,193,645 22,145,706 Model Regulation (XXX) adjustment (14,581,534) (13,283,108) Actuarial Guideline XXXV: Reserve, Michigan basis 4,716,621,309 4,282,122,028 Reserve, NAIC SAP 4,746,634,175 4,438,259,780 Mark to market of financial derivatives used to hedge equity-index linked liabilities (16,087,208) 17,931,669 Actuarial Guideline XXXV adjustment (46,100,074) (138,206,083) SSAP No effectiveness of interest rate swaps per permitted practice (685,562,530) - Additional deferred tax asset per permitted practice (159,423,000) - Tax effect of differences 19,343,011 49,148,067 Statutory Capital and Surplus, NAIC SAP $ 2,859,361,385 $ 3,921,715,593 B. Use of Estimates in the Preparation of the Financial Statements The preparation of financial statements in conformity with Statutory Accounting Principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. It also requires disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. C. Accounting Policy Life premiums are recognized as income over the premium-paying period of the related policies. Annuity considerations are recognized as revenue when received. Health premiums are earned ratably over the terms of the related insurance and reinsurance contracts. Expenses incurred in connection with acquiring new insurance business, including acquisition costs such as sales commissions, are charged to operations as incurred. In addition, the Company uses the following accounting policies: (1) Short-term investments are stated at amortized cost. (2) Bonds not backed by other loans are stated at amortized cost except those with an NAIC rating of 6, which are at lower of amortized cost or fair value. Acquisition discounts and premiums are amortized into investment income through call or maturity dates using the interest method. (3) Common stocks are stated at fair value, except as described in item (7) below. (4) Preferred stocks are stated at cost, except those with an NAIC SVO rating of 4 through 6, which are reported at the lower of cost or fair value. (5) Mortgage loans on real estate are stated at unpaid principal balances adjusted for unamortized purchase discounts or premiums. (6) Loan-backed securities and structured securities are stated at amortized cost except those with an NAIC rating of "6", which are at lower of amortized cost or fair value. The retrospective yield adjustment method is used to value all securities except those where the yield has become negative, which are valued using the prospective adjustment method (see Note 5.D.(3)). (7) The Company carries its audited wholly owned insurance and non-insurance subsidiaries at statutory capital and surplus and U.S. generally accepted accounting principles (GAAP) equity, respectively. The Company nonadmits an unaudited $3.5 million equity of Jackson National Life (Bermuda) Limited, a wholly owned subsidiary, and reflects $3.5 million carrying value in Schedule D, Part 2, Section 2. The Company also nonadmits an unaudited $12.4 million equity in three limited liability subsidiaries and reflects $12.4 million carrying value in Schedule BA Part 1. (8) The Company carries ownership interests in partnerships and limited liability companies based on the GAAP equity of the investee. (9) Derivative instruments used for hedging purposes are stated at amortized cost or fair value. Derivative instruments held for investment purposes are stated at fair value. See Note 8 for more information on derivative instruments. 6

60 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY (10) The Company anticipates investment income as a factor in the premium deficiency calculation, in accordance with SSAP No. 54, Individual and Group Accident and Health Contracts. (11) Unpaid losses and loss adjustment expenses include an amount determined from individual case estimates and loss reports and an amount, based on past experience, for losses incurred but not reported. Such liabilities are necessarily based on assumptions and estimates and while management believes the amount is adequate, the ultimate liability may be in excess of or less than the amount provided. The methods for making such estimates and for establishing the resulting liability are continually reviewed and any adjustments are reflected in the period determined. (12) The Company did not modify its capitalization policy from the prior period. (13) The Company does not have pharmaceutical rebate receivables. 2. Accounting Changes and Corrections of Errors A. Material Changes in Accounting Principles and/or Correction of Errors The Company had no material changes in accounting principles, correction of errors or changes in estimates for the years ended December 31, 2008 and Business Combinations and Goodwill A. Statutory Purchase Method (1) (4) On May 18, 2005, Brooke Life Insurance Company (BLIC), parent of the Company, purchased 100% interest of the Life Insurance Company of Georgia (LOG) from a downstream subsidiary of ING Groep, N.V. (ING). On May 31, 2005, BLIC transferred 100% of its interest in LOG to the Company. On December 31, 2005, LOG was merged into the Company. The purchase of LOG by BLIC was accounted for as a statutory purchase and the subsequent transfer to the Company as a capital contribution. The final adjusted purchase price paid by BLIC for LOG was $253,458,829, with the $194,919,400 excess of the adjusted purchase price over the net statutory assets acquired recorded as goodwill. There was no value ascribed to the Life Insurance Company of Georgia name or other such intangibles. The Company amortizes LOG goodwill, recording amortization expense of $19,413,606 during 2008 and B. Statutory Merger The Company did not have business combinations during the year accounted for as a statutory merger. C. Assumption Reinsurance The Company did not have goodwill resulting from assumption reinsurance during the year. D. Impairment Loss The Company did not recognize an impairment loss during the year with respect to business combinations and goodwill. 4. Discontinued Operations The Company did not have transactions during the year with respect to discontinued operations. 5. Investments A. Mortgage Loans, including Mezzanine Real Estate Loans (1) The minimum and maximum lending rates for mortgage loans issued during 2008 were: City loans 1.73% 8.00% (2) During 2008, the Company did not reduce interest rates on any outstanding mortgage loans. (3) The maximum percentage of any one loan to the value of security at the time of the loan, exclusive of insured or guaranteed or purchase money mortgages, was 74%. The Company does not have reportable information for items (4) through (12) with respect to mortgage loans. 7

61 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY B. Debt Restructuring In connection with certain problem credit workouts (often related to bankruptcy proceedings or a debtor s Offer to Exchange ), the Company receives cash and/or newly issued securities in partial or full satisfaction of outstanding debtor obligations. To the extent such transactions meet the definition of a troubled debt restructuring, they are accounted for at fair value with any associated losses realized. (1) The Company has no investment in restructured loans. (2) The Company has no realized capital losses related to restructured loans noted above. (3) The Company has no additional funding commitments to debtors whose debt has been restructured. (4) The Company does not accrue interest on bonds deemed to be impaired. Interest income is recorded when collected (i.e., cash basis). C. Reverse Mortgages The Company does not have investments in reverse mortgages. D. Loan-Backed Securities (1) Actual historical and projected future cash flows are used in determining book values for all of the Company s loan-backed securities. (2) Principal prepayment assumptions for loan-backed securities, including structured securities, are obtained from broker dealers, independent providers of broker dealer estimates, or internal models. (3) In 2008, The Company changed from the retrospective to prospective adjustment methodology due to negative yields on specific securities totaling $103.6 million. E. Repurchase Agreements Company investment policies for repurchase agreements require collateral securities to have a fair value of at least 102% of the purchase price paid. At December 31, 2008, the Company has no investment in repurchase agreements. F. Real Estate The Company has no real estate investment activities requiring disclosure. G. Low Income Housing Tax Credit Investments The Company does not have investments in low-income housing tax credits. 6. Joint Ventures, Partnerships and Limited Liability Companies A. The Company has no investments in joint ventures, partnerships or limited liability companies that exceed 10% of its admitted assets. B. The Company recognized impairment writedowns of $113,215,644 and $2,500,000 on joint ventures, partnerships, and limited liability companies during 2008 and 2007, respectively. 7. Investment Income A. Due and accrued income was excluded from surplus on the following basis: Bonds - securities in default and otherwise where collection of interest is uncertain. Mortgage loans - loans in foreclosure or delinquent greater than one year, and otherwise where collection of interest is uncertain. Real Estate properties where rent is in arrears for more than three months. B. Income due and accrued on investments where collection is not likely has been excluded from net investment income. At December 31, 2008, the amount excluded was $2.7 million. No additional nonadmitted amounts have been charged to surplus. 8

62 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY 8. Derivative Instruments A. The Company enters into financial derivative transactions, including swaps, put-swaptions, forwards, futures and options to reduce and manage business risks. These transactions manage the risk of a change in the value, yield, price, credit risk, cash flows, or quantity of, or a degree of exposure with respect to assets, liabilities, or future cash flows, which the Company has acquired or incurred. Derivative instruments are held primarily for hedging purposes. Hedge accounting practices are supported by correlation analysis, cash flow matching, duration matching, and/or scenario testing. Fair values of derivative instruments are based on quoted market prices, estimates received from financial institutions, or valuation pricing 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 market risk (market movements) on derivatives used for hedging purposes, fair value changes would be anticipated to be offset by fair value changes of the hedged items. Derivatives used in hedging activities and acquired prior to 2003 are accounted for in a manner consistent with the hedged items. Excluding interest rate swaps as described in Note 1A, derivatives used in hedging activities and acquired after 2002 are accounted for at fair value. Cash requirements for derivatives activities are limited to payments on swaps, margin requirements on open futures contracts, and potential collateral posting requirements in accordance with derivatives counterparty agreements. B. Interest rate swap agreements hedge assets or liabilities and generally involve the exchange of fixed and floating payments over the life of the agreements without an exchange of the underlying principal (notional) amount. Generally, 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. Put-swaption contracts provide the purchaser with the right, but not the obligation, to require the writers to pay the present value of a long duration interest rate swap at future exercise dates. The Company purchases and writes putswaption contracts with maturities up to 10 years. On a net basis, the Company s put-swaption contracts hedge against significant upward movements in interest rates. Equity index futures contracts and equity index call and put options are used to hedge the Company s obligations associated with its fixed indexed immediate and deferred annuities and guarantees in variable annuity products. 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. Cross-currency swaps, which embody spot and forward currency swaps and additionally, in some cases, interest rate swaps and equity swaps, are entered into for the purpose of hedging the Company's foreign currency denominated guaranteed investment contracts. Credit default swaps are used to hedge potential changes in the credit quality of certain bonds held by the Company. Spread cap options are used as a macro-economic hedge against significant declines in interest rates. Jackson receives quarterly settlements based on the spread between the 2-year and the 10-year constant maturity swap rates in excess of a specified spread. C. With the permitted practice described in Note 1A, interest rate swap agreements are included in invested assets at amortized cost. Net amounts paid or received on interest rate swaps and interest accruals are included in investment income. Put-swaption contracts owned and executed prior to 2003 are included in invested assets at amortized cost. Putswaption contracts owned and executed after 2002 are included in invested assets and put-swaption contracts written are included in 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. For those reported at fair value, changes in fair value are recorded as unrealized gains or unrealized losses. Equity index call options transacted prior to 2003 are included in invested assets at amortized cost. Equity index call options transacted after 2002 are included in invested assets at fair value. Realized gains on options held at amortized cost are included in investment income. For call options reported at fair value, changes in fair value are recorded as unrealized gains or unrealized losses. Equity index futures contracts and equity index put options are included in invested assets at fair value. Changes in fair value are recorded as unrealized gains or unrealized losses. Equity swaps held for investment purposes are included in invested assets at fair value. Net periodic payments, as well as fair value changes, are included in investment income. Cross-currency swaps transacted prior to 2003 are included in invested assets at amortized cost. Cross-currency swaps transacted after 2002 are included in invested assets at fair value. Amounts paid or received are netted with amounts paid or received on the hedge-associated foreign currency denominated guaranteed investment contracts. Changes in fair value are recorded as unrealized gains or unrealized losses. 9

63 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY Credit default swaps are included in invested assets at fair value. Changes in fair value are recorded as unrealized gains or unrealized losses. Periodic premiums paid are included in investment income. Spread cap options are included in invested assets at fair value. Amounts received on spread cap options and interest accruals are included in investment income. D. The Company has no unrealized gain or loss representing the component of derivative instruments gain or loss that are excluded from the assessment of hedge effectiveness. E. The net gain recognized in unrealized gains or losses during the reporting period resulting from derivatives that no longer qualify for hedge accounting is $0. F. The Company has no derivatives accounted for as cash flow hedges of a forecasted transaction. 9. Income Taxes A. The components of the net deferred tax asset at December 31 are as follows: Total gross deferred tax assets $ 1,148,098,893 $ 1,044,691,190 Total deferred tax liabilities (382,025,733) (496,798,920) Net deferred tax asset 766,073, ,892,270 Less deferred tax asset nonadmitted 610,238, ,472,728 Net admitted deferred tax asset per NAIC SAP $ 155,835,000 $ 79,419,542 Change in nonadmitted deferred tax asset per NAIC SAP $ 141,765,432 $ (21,679,168) As described in Note 1A, the Company received a permitted practice to admit additional deferred tax assets. Total net deferred tax assets at December 31 were as follows: Net admitted deferred tax asset per NAIC SAP $ 155,835,000 $ 79,419,542 Additional admitted deferred tax asset per permitted practice 159,423,000 - Total net admitted deferred tax asset $ 315,258,000 $ 79,419,542 B. Regarding deferred tax liabilities that are not recognized: (1) There are no temporary differences for which deferred tax liabilities have not been recognized. Accordingly, there are no events that would cause unrecognized temporary differences to become taxable. (2) There are no unrecognized temporary differences. (3) There are no unrecognized deferred tax liabilities related to investments in foreign subsidiaries and foreign corporate joint ventures that are essentially permanent in duration. (4) There are no other deferred tax liabilities not recognized. C. Significant components of income taxes incurred as of December 31 are: (1) Current income taxes incurred consist of the following major components: Operations Federal taxes on operations $ (98,647,499) $ 184,361,337 Adjustment under Tax Sharing Agreement (131,388,940) (29,740,337) Tax credits (5,450,000) (5,150,000) Prior year over accrual of taxes on operations (15,010,561) (17,036,745) Current tax on operations (250,497,000) 132,434,255 Capital Gains Federal taxes on capital gains 167,195,032 40,074,211 Prior year over accrual of taxes on capital gains (6,605,683) (6,860,603) Current tax on capital gains 160,589,349 33,213,608 Total current taxes incurred $ (89,907,651) $ 165,647,863 10

64 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY (2) The main components of deferred tax amounts at December 31 are as follows: Deferred tax assets resulting from book/tax differences in: Deferred acquisition costs $ 217,177,636 $ 192,558,588 Insurance reserves 191,862, ,666,382 Investments 610,500, ,518,936 Deferred compensation 61,690,111 68,202,302 Other 66,868,056 64,744,982 Total deferred tax assets 1,148,098,893 1,044,691,190 Deferred tax assets nonadmitted (610,238,160) (468,472,728) Admitted deferred tax assets per NAIC SAP 537,860, ,218,462 Deferred tax liabilities resulting from book/tax differences in: Investments 314,625, ,801,246 Insurance reserves 6,874,398 10,192,897 Due and deferred premium 46,468,088 48,795,476 Other 14,057,314 8,009,301 Total deferred tax liabilities 382,025, ,798,920 Net admitted deferred tax asset per NAIC SAP 155,835,000 79,419,542 Additional admitted deferred tax asset per permitted practice 159,423,000 - Total net admitted deferred tax asset $ 315,258,000 $ 79,419,542 (3) The change in net deferred income taxes is comprised of the following: Change Total deferred tax assets $ 1,148,098,893 $ 1,044,691,190 Total deferred tax liabilities 382,025, ,798,920 Change per Summary of Operations, Line 40 $ 766,073,160 $ 547,892,270 $ 218,180,890 D. The provision for federal income taxes incurred is different from that which would be obtained by applying the statutory federal income tax rate to income (including capital items) before income taxes. The significant items causing this difference are: 2008 Ordinary loss $ (535,983,270) Capital losses (267,604,189) Effective Total pre-tax book loss $ (803,587,459) Tax Rate Provision computed at statutory rate $ (281,255,611) % Dividend received deduction (75,425,000) 9.39 Adjustment under Tax Sharing Agreement (131,388,940) Interest maintenance reserve (13,243,415) 1.65 Tax credits (5,450,000) 0.68 Investments 237,916,541 (29.61) Deferred acquisition costs 16,886,682 (2.10) Prior year over accrual of taxes (21,616,244) 2.69 Insurance reserves 43,899,223 (5.46) Deferred gain on reinsurance 135,412,450 (16.85) Amortization of goodwill and VOBA 6,794,762 (0.85) Deferred premiums 196,366 (0.02) Other (2,634,465) 0.33 Total $ (89,907,651) % E. Tax operating loss carry forwards, tax credits or taxes incurred available for recoupment: (1) At December 31, 2008 the Company had no tax operating loss carry forwards. 11

65 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY (2) The following are income taxes incurred in the current and prior years that will be available for recoupment in the event of future net losses: F. Federal Income Tax Allocations 2008 $ ,840, ,637,412 (1) The Company files a consolidated federal income tax return with its parent, Brooke Life Insurance Company, and subsidiary, Jackson National Life Insurance Company of New York. (2) The Company has entered into written agreements with Jackson National Life Insurance Company of New York and Brooke Life Insurance Company. These agreements are generally based on separate return calculations. Intercompany balances are settled on a quarterly basis. 10. Information Concerning Parent, Subsidiaries and Affiliates A., B. & C. During 2008 and 2007, the Company paid dividends totaling $313,100,957 and $246,000,000, respectively, to its parent, Brooke Life Insurance Company. The Company made a capital contribution during 2008 of $25,000,000 to its wholly owned subsidiary, PGDS (US One) LLC ( PGDS ). In December 2008, the Company recorded an impairment charge of $22.0 million related to its investment in PGDS. The Company made a capital contribution during 2008 of $10,000,000 to its wholly owned subsidiary, Squire Reassurance Company LLC. Effective December 31, 2008, the company entered into a reinsurance agreement with its wholly owned subsidiary, Jackson National Life Insurance Company of New York ( JNY ), whereby the company assumed, on a 90% quota share basis, the guaranteed minimum withdrawal benefit on variable annuity contracts issued by JNY and in force as of December 31, The reinsurance agreement resulted in assumed premiums of $241.6 million and reserves of $12.1 million. In order to maintain JNY s capital and surplus at an acceptable level, capital contributions were made totaling $166.4 million. The net impact of the transactions were reflected in the receivable from parent, subsidiaries and affiliates at December 31, 2008 and will be settled in the first quarter of In accordance with NAIC SAP, the surplus impact of the treaty was excluded from net income and reported directly in surplus. In accordance with the tax sharing agreement, the Company utilized $100.1 million of tax benefits attributable to JNY (including the tax benefits resulting from the reinsurance treaty noted above), which is reflected as a capital contribution to JNY in The Company made a capital contribution during 2007 of $10,000,000 to Curian Capital, LLC. D. Other than as discussed in Notes 10A, 11 and 14, the Company does not have any material amounts due from or to related parties as of the date of each balance sheet included in these financial statements that require disclosure. E. The Company has guaranteed the policyholder obligations of its wholly owned subsidiary, Jackson National Life Insurance Company of New York. The Company does not consider that this guaranty results in a material contingent exposure of its assets to any additional liability. The Company has agreed to support and provide Curian Clearing, LLC, a wholly owned subsidiary, the necessary liquidity to fund the operations of the company and to meet its obligations as they become due. The Company does not consider this as resulting in a material exposure to a loss. F. The Company has contracted with PGDS, a wholly owned subsidiary, to provide certain information technology services. The cost of the services, totaling $43.7 million and $22.2 million in 2008 and 2007, respectively, is based on PGDS cost. At December 31, 2007, the information technology equipment was owned by the Company, with PGDS providing services. In 2008, PGDS purchased the information technology equipment from the Company for $25.0 million. The Company has contracted to receive investment management services from affiliates PPM America, Inc. and PPM Finance, Inc. The cost of the services was $35.4 million and $33.0 million in 2008 and 2007, respectively. G. All outstanding shares of the Company are owned by Brooke Life Insurance Company, an insurance company domiciled in the State of Michigan. The Company is a member of the Prudential plc group incorporated in England. The group structure is shown in Schedule Y. H. The Company does not own any shares of an upstream intermediate entity or ultimate parent, either directly or indirectly, via a downstream subsidiary, controlled or affiliated company. I. The Company does not have investments in subsidiary, controlled or affiliated companies that exceed 10% of the admitted assets of the Company. 12

66 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY J. In 2008, the Company recorded an impairment charge of $22.0 million related to its investment in PGDS. The impairment charge relates to certain development costs incurred by PGDS that cannot be recouped through its service agreements with Jackson and other affiliates. Jackson carries its investment in PGDS at its unaudited GAAP equity value, which has been nonadmitted. The Company did not recognize any other material impairment writedown for investments in subsidiary, controlled or affiliated companies during the statement period. K. The Company does not have investments in foreign insurance subsidiaries holding annuity reserves. L. The Company does not hold an investment in a downstream noninsurance holding company. 11. Debt On December 14, 2006, Brooke Holdings, LLC issued $16.0 million of 5.00% notes due to the Company on December 31, On December 28, 2007, the notes plus accrued interest were repaid in full. On August 30, 2007, Brooke Holdings, LLC issued $3.0 million of 4.35% notes due to the Company on December 31, On December 28, 2007, the notes plus accrued interest were repaid in full. On December 28, 2007, Prudential plc issued $32,000,000 of 4.4% notes due to the Company on December 28, On September 24, 2008, the notes plus accrued interest were repaid in full. Reverse repurchase agreements are accounted for as collateralized borrowings. Collateral securities sold under such agreements continue to be included in invested assets. Proceeds received from the sale of securities subject to reverse repurchase agreements are included in liabilities. At December 31, 2008 and 2007, the Company has no reverse repurchase agreements outstanding. On December 15, 2007, Jackson entered into a short-term note program with the Federal Home Loan Bank of Indianapolis. Included in Federal Home Loan Bank advances at December 31, 2008 and 2007 were $150.5 million and $250.5 million of short-term notes, respectively. The notes outstanding at December 31, 2007 were repaid in full in 2008, including accrued interest. Interest of $7,048,626 and $91,500 was paid in 2008 and 2007, respectively. 12. Retirement Plans, Deferred Compensation, Postemployment Benefits and Compensated Absences and Other Postretirement Benefit Plans A. Defined Benefit Plan The Company does not offer a defined benefit plan. B. Defined Contribution Plans The Company has a defined contribution retirement plan covering substantially all employees. To be eligible to participate in the Company s contribution, an employee must have attained the age of 21, have completed at least 1,000 hours of service in a 12-month period and passed their 12-month employment anniversary. In addition, the employee must be employed on the applicable January 1 or July 1 entry date. The Company's annual contributions, as declared by the board of directors, are based on a percentage of eligible compensation paid to participating employees during the year. In addition, the Company matches up to 6 percent of a participant s elective contribution to the plan during the year. The Company s expense related to this plan was $10.3 million and $10.8 million in 2008 and 2007, respectively. The Company maintains non-qualified voluntary deferred compensation plans for certain agents and employees. At December 31, 2008 and 2007, the liability for such plans totaled $171.2 million and $194.0 million, respectively. Jackson invests general account assets in selected mutual funds in amounts similar to participant elections as a hedge against significant movement in the payout liability. The Company s expense related to these plans, including a match of elective deferrals for the agents deferred compensation plan, and the change in value of participant elected deferrals was $(54.6) million and $18.4 million in 2008 and 2007, respectively. This expense is offset by unrealized (losses) gains on the general account mutual funds of $(68.1) million and $12.5 million in 2008 and 2007, respectively. C. Multiemployer Plans The Company does not participate in multiemployer plans. D. Consolidated/Holding Company Plans The Company does not participate in a plan sponsored by either the parent company or holding company. E. Postretirement Benefits and Compensated Absences Postemployment benefits and compensated absences that might exist at December 31, 2008, are accrued in accordance with SSAP No. 11, Postemployment Benefits and Compensated Absences. 13

67 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY F. Impact of Medicare Modernization Act on Postretirement Benefits There was no impact of the Medicare Modernization Act on Postretirement Benefits. 13. Capital and Surplus, Shareholders' Dividend Restrictions and Quasi-Reorganizations (1) The Company has 50,000,000 shares of common capital stock authorized and 12,000,000 shares issued and outstanding with each share having a par value of $1.15. (2) The Company does not have preferred stock authorized, issued or outstanding. (3) Under Michigan insurance law, dividends on capital stock can only be distributed out of earned surplus adjusted to exclude any unrealized capital gains and the effect of permitted practices, unless the Commissioner approves the dividend prior to payment. At December 31, 2008, adjusted earned surplus was approximately $104.8 million. Furthermore, without the prior approval of the Commissioner, dividends are also subject to restrictions relating to statutory surplus and/or statutory earnings. The maximum dividend which can be paid in 2009, subject to the availability of earned surplus, without prior approval of the Michigan commissioner of insurance is approximately $288.7 million. (4) On September 24, 2008 and December 13, 2007, the Company paid dividends of $313,100,957 and $246,000,000, respectively, to its parent. (5) Except as noted in (3) above and in Note 1A, there are no prohibitions placed on the portion of Company profits that may be paid as ordinary dividends to stockholders. (6) Except as noted in Note 1A, there were no restrictions placed on the Company's surplus, including for whom the surplusisbeingheld. (7) The Company had no advances to surplus. (8) The Company held no stock, including stock of affiliated companies, for special purposes. (9) Changes in the balance of special surplus funds from the prior year are due to $159,423,000 of deferred tax assets that the Company is admitting in accordance with and subject to the restrictions of the State of Michigan permitted practice. (10) The portion of unassigned funds represented or (reduced) by each item below is as follows: (a) unrealized gains and losses: $ (517,120,641) (b) nonadmitted asset values: $ (680,469,445) (c) separate account business: $ 897,025,848 (d) asset valuation reserves: $ (219,751,093) (e) reinsurance in unauthorized companies: $ 0 (11) The Company issued the following surplus debentures or similar obligations: Date Issued Interest Rate Principal And/Or Par Value (Face Carrying Value of Interest Paid Amount of Notes) Note Current Year Total Principal And/Or Interest Paid Unapproved Principal And/Or Interest Date of Maturity March 15, % $ 250,000,000 $ 249,296,148 $ 20,375,000 $ 234,142,708 0 March 15, Total $ 250,000,000 $ 249,296,148 $ 20,375,000 $ 234,142,708 0 XXX The surplus notes in the amount of $250,000,000, listed in the above table, were issued pursuant to Rule 144A under the Securities Act of 1933, underwritten by a syndicate that included Goldman Sachs & Co., J.P. Morgan & Co., and Morgan Stanley & Co., and are administered by Citibank, N.A. as fiscal agent. The surplus notes have the following repayment conditions and restrictions: Payments of interest or principal may be made only with the prior approval of the commissioner of insurance of the State of Michigan and only out of surplus earnings which the commissioner determines to be available for such payments under Michigan Insurance Law. The surplus notes may not be redeemed at the option of the Company or any holder of the notes prior to maturity. The surplus notes have the following subordination terms: The Notes will rank pari passu with any other future surplus, capital or contribution notes of the Company and with all other similarly subordinated claims. The liquidation preference to the insurer's common shareholder is as follows: In the event that the Parent is subject to such a proceeding, holders of indebtedness, policy claims and prior claims would be afforded a greater priority under the liquidation act and the terms of the Notes and, accordingly, would have the right to be paid in full before any payments of interest or principal are made to Note holders. 14

68 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY (12) The Company was not subject to a quasi-reorganization during the year. (13) The Company was not subject to a quasi-reorganization in the prior 10 years. 14. Contingencies A. Contingent Commitments In September of 2008, the Company issued a 5 year revolving note to PPM America, Inc. (PPMA), an affiliate. The note is in the amount of $40 million and bears interest at the rate of LIBOR plus 2% per annum. As of December 31, 2008, no amounts were outstanding. Effective June 14, 2006, the Company provided a $20 million revolving credit facility to Curian Clearing, LLC. The loan is unsecured, matures on June 14, 2011, accrues interest at LIBOR plus 2% per annum, and has a commitment fee of 0.10% per annum. There was no balance outstanding at December 31, 2008 or The highest outstanding loan balance during 2008 was $7.0 million. Interest and commitment fees totaled $52,000 and $154,000 during 2008 and 2007, respectively. Effective January 24, 2007, the Company provided a $30 million revolving credit facility to PGDS. The loan is unsecured, matures on January 24, 2012, accrues interest at LIBOR plus 2% per annum, and has a commitment fee of 0.10% per annum. The balance outstanding at December 31, 2008 was $30.0 million. Interest and commitment fees totaled $1,867,350 and $0 during 2008 and 2007, respectively. Effective January 1, 2008, the Company provided a $5.0 million revolving credit facility to National Planning Holdings, an affiliate. The loan is unsecured, matures on December 31, 2012, accrues interest at LIBOR plus 2% per annum, and has a commitment fee of.10% per annum. The balance at December 31, 2008 was $4.0 million. Interest and commitment fees totaled $71,509 during At December 31, 2008, the Company has unfunded commitments related to its investments in limited partnerships and limited liability companies totaling $574,978,268, including $76,385,494 to limited partnerships and limited liability companies in which the Company has taken an impairment charge. The Company has guaranteed the policyholder obligations of its wholly owned subsidiary, Jackson National Life Insurance Company of New York. The Company does not consider that this guaranty results in a material exposure to a loss contingency. The Company has agreed to support and provide Curian Capital, LLC and Curian Clearing, LLC, wholly-owned subsidiaries, the necessary liquidity to fund the operations of the companies and to meet their obligations as they become due. The Company does not consider this as resulting in a material exposure to a loss contingency. B. Assessments The Company is unaware of any assessments that would have a material impact on its financial position or results of operations. C. Gain Contingencies The Company does not recognize gain contingencies except as provided under SSAP No. 5, Liabilities, Contingencies and Impairments of Assets. The Company did not realize a gain subsequent to the balance sheet date but prior to the issuance of the financial statements that requires disclosure. D. Claims related extra contractual obligation and bad faith losses stemming from lawsuits The Company did not make any payments in the reporting period to settle claims related extra contractual obligations or bad faith claims stemming from lawsuits. E. All Other Contingencies The Company is involved in litigation arising in the ordinary course of business. It is the opinion of management that the ultimate disposition of such litigation will not have a material adverse affect on the Company's financial condition or results of operations. The Company has been named in civil litigation proceedings which appear to be substantially similar to other class action litigation brought against many life insurers alleging misconduct in the sale or administration of insurance products. The Company generally accrues for legal contingencies once the contingency is deemed to be probable and estimable. Accordingly, at December 31, 2008 and 2007, the Company recorded accruals totaling $31.0 million and $35.0 million, respectively. In addition to the litigation noted above, in connection with the purchase of the Life Insurance Company of Georgia in 2005, the Company assumed a liability related to a class action lawsuit. This liability of $2.2 million and $2.0 million at December 31, 2008 and 2007, respectively, is fully indemnified by ING and an offsetting indemnification receivable is included in other assets. 15

69 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY In 2008, the Company entered into two separate but similar contracts with a bank counterparty related to preexisting investments of $118.8 million in securities issued by two entities structured to pass through investment returns based on the performance of underlying reference pools of syndicated bank loans totaling up to $700.0 million. These contracts create a potential payment obligation of up to $318.0 million to the extent losses incurred on the reference pools under an event of liquidation exceed the value of the structured entities. At December 31, 2008, the Company believes the possibility of an event of liquidation and payment on either of the contracts is remote. As such, no financial obligation has been recorded for these contracts as of December 31, In connection with this potential obligation, the Company has pledged high quality securities, identified in Schedule D with the designation C (see General Interrogatory 23.25), to the counterparty in the amount of $154.7 million at December 31, These contracts generated income to the Company during 2008 of $175.5 thousand. 15. Leases The Company leases office space, land and equipment under operating leases that expire at various dates through Certain leases include escalating lease rates and, as a result, at December 31, 2008, the Company recorded a liability of $9.2 million for future lease payments. Lease expense was $22.7 million and $17.1 million for 2008 and 2007, respectively. noncancellable operating leases are as follows (in thousands): Future minimum payments under 2009 $ 8, , , , ,128 Thereafter 25,143 Total $ 68,081 The Company subleases office space under several operating leases that expire at various dates through Total future lease income to be received on the subleased property is $0.3 million. Lease income for the subleased property totaled $0.7 million per year in 2008 and Information About Financial Instruments With Off-Balance Sheet Risk And Financial Instruments With Concentrations of Credit Risk A. (1) The table below summarizes the aggregate contractual or notional amounts for the Company s financial instruments, including those with off-balance sheet risk (in thousands): Assets Liabilities a. Interest rate swaps $ 8,940,000 $ 10,540,000 $ 0 $ 0 b. Cross-currency swaps 958,840 1,198, c. Put-swaptions 24,500,000 30,000,000 17,000,000 23,000,000 d Futures 661, , e. Credit default swaps 300,000 46, f. Call options 1,442,100 1,054, g. Put options owned 9,450,000 7,250, h. Equity index swaps 0 0 6,897 6,897 i. Spread cap options 4,000,000 10,000, See Schedule DB for additional details. (2) See Note 8.A. for a description of the credit risk, market risk and cash requirements of these financial instruments. (3) 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 nonperformance by counterparties to financial instruments; however, the Company does not anticipate nonperformance given counterparties high credit ratings. The credit exposure of derivatives is represented by the fair value of contracts with a positive fair value at the reporting date. Ultimately, this exposure is reduced by any offsetting positions with, and collateral posted by, counterparties. See Schedule DB Part E Section 1 for the net counterparty credit exposure as of December 31, During 2008, nonperformance by one derivative counterparty resulted in a loss of $17.2 million, which is included as a component of investment income. 16

70 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY Futures transactions are effected through regulated exchanges and positions are marked to market and settled in cash on a daily basis. As such, the Company has little exposure to credit-related losses for exchange-traded derivatives. (4) 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 posted must be high quality, liquid securities or cash as dictated by the agreements. 17. Sale, Transfer and Servicing of Financial Assets and Extinguishments of Liabilities A. Transfers of Receivables reported as Sales No transfers as described by SSAP No. 42, Sale of Premium Receivables, have occurred during the year. B. Transfer and Servicing of Financial Assets The Company has entered into a securities lending agreement with an agent bank, for the purpose of earning fees, whereby blocks of securities are loaned to third parties, primarily major brokerage firms. As of December 31, 2008, the estimated fair value of loaned securities was $105,974,513. The agreement requires collateral with a minimum fair value of 102 percent of the fair value of the loaned securities, calculated on a daily basis. To further minimize the credit risks related to this program, the financial condition of the counterparties is monitored by the agent bank on a regular basis. Cash collateral received is not available for the general use of the Company but is invested by the agent bank for the benefit of the Company. Securities loaned are identified in Schedule D with the designation LS. C. Wash Sales No material reportable wash sales have occurred during the year. 18. Gain or Loss to the Reporting Entity from Uninsured A&H Plans and the Uninsured Portion of Partially Insured Plans There was no gain or loss from uninsured A&H plans and the uninsured portion of partially insured plans. 19. Direct Premium Written/Produced by Managing General Agents/Third Party Administrators There was no direct premium written or produced by managing general agents or third party administrators. 20. Other Items A. Extraordinary Items The Company did not have an extraordinary event or transaction during the year. B. Troubled Debt Restructuring The Company did not restructure its debt during the year. C. Other Disclosures At December 31, 2008, the Company has pledged mortgage-related securities with a fair value of $2,090.0 million in connection with guaranteed investment contracts issued to and short-term borrowings drawn from the Federal Home Loan Bank of Indianapolis. Securities pledged continue to be reported as invested assets and are identified in Schedule D with the designation C (see General Interrogatory 23.25). D. Uncollectible Balances The Company does not have balances that are reasonably possible to be uncollectible that require disclosure. E. Business Interruption Insurance Recoveries The Company does not have business interruption insurance recoveries that require disclosure. F. State Transferable Tax Credits The Company does not have any State Transferable Tax Credits that require disclosure. 17

71 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY G. Hybrid Securities Hybrid securities owned by the Company as of December 31, 2008, included on Schedule D - Part 2 - Section 1, are as follows: CUSIP# Name of Issuer General Description Book/Adjusted Carrying Value AA7 Bank of America BankAmerican Capital II $ 4,197, FAA1 Dresdner Dresdner Funding Trust I 4,418, AE5 First Union First Union Capital I 46,010, AE3 First Union First Union Instit Cap II 10,132, AA5 Fleet Capital Fleet Capital Trust II 10,386, VAA7 Goldman Sachs Goldman Sachs Group 2,000, *AA3 Lloyds Lloyds TSB Bank PLC 29,432,556 G07980AH1 Barclays Barclays Bank PLC 13,625,864 G55356AG7 Lloyds Lloyds TSB Bank PLC 32,530,000 Total $ 152,735,268 H. Subprime Mortgage Related Risk Exposure The Company defines exposure to subprime mortgage related risk as investments in securities collateralized by mortgage loans in which the borrower has a FICO score of 680 or lower. The Company mitigates risk exposure by placing limits on the aggregate amount of these investments as well as the amount of non-aaa subprime investments. The current holdings of subprime collateralized mortgage-backed securities are AAA-rated and in senior tranches, with collateral consisting of primarily fixed-rate and first-lien mortgages. The following table represents the Company s direct exposure through other investments: (thousands) Actual Book Adjusted Fair Other-than-temporary Cost Carrying Value Value Impairment Losses Residential mortgage-backed securities $ 477,994 $ 478,608 $ 396,710 $ - Collateralized debt obligations 7,893 7,893 7,382 - Total $ 485,887 $ 486,501 $ 404,092 $ - I. FHLB Agreements The Company 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. 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, the Company 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. The total borrowing/funding capacity available at December 31, 2008 was $4,278.6 million. At December 31, 2008, the Company has pledged mortgage-related securities with a fair value of $2,090.0 million in connection with guaranteed investment contracts and short-term borrowings issued to the Federal Home Loan Bank of Indianapolis. Securities pledged continue to be reported as invested assets and are identified in Schedule D with the designation C (see General Interrogatory 23.25). 21. Events Subsequent The Company is not aware of any events occurring subsequent to the balance sheet date which require disclosure to keep the financial statements from being misleading or that may have a material effect on the financial condition of the Company. 22. Reinsurance A. Ceded Reinsurance Report Section 1 - General Interrogatories (1) None of the reinsurers, listed in Schedule S as non-affiliated, are owned in excess of 10% or controlled, either directly or indirectly, by the Company or by any representative, officer, trustee, or director of the Company. 18

72 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY (2) None of the policies issued by the Company have been reinsured with a company chartered in a country other than the United States (excluding U.S. Branches of such Companies) which is owned in excess of 10% or controlled directly or indirectly by an insured, a beneficiary, a creditor or an insured or any other person not primarily engaged in the insurance business. Section 2 - Ceded Reinsurance Report - Part A (1) The Company does not have reinsurance agreements in effect under which the reinsurer may unilaterally cancel any reinsurance for reasons other than for nonpayment of premium or other similar credits. (2) The Company does not have reinsurance agreements in effect such that the amount of losses paid or accrued through the statement date may result in a payment to the reinsurer of amounts that, in aggregate and allowing for offset of mutual credits from other reinsurance agreements with the same reinsurer, exceed the total direct premium collected under the reinsured policies. Section 3 - Ceded Reinsurance Report - Part B (1) The estimated amount of the aggregate reduction in surplus (for agreements other than those under which the reinsurer may unilaterally cancel for reasons other than for nonpayment of premium or other similar credits that are reflected in Section 2 above) from termination of all reinsurance agreements, by either party, as of the date of this statement, is approximately $292 million. (2) The Company has not executed new agreements or amended existing agreements, since January 1, 2008, to include policies or contracts that were in force or which had existing reserves established by the Company as of the effective date of the agreement. B. Uncollectible Reinsurance The Company did not write off reinsurance balances due from reinsurers. C. Commutation of Ceded Reinsurance The Company did not commute reinsurance during the period covered by this annual statement. 23. Retrospectively Rated Contracts & Contracts Subject to Redetermination The Company is not a party to retrospectively rated contracts or contracts subject to redetermination. 24. Change in Incurred Losses and Loss Adjustment Expenses The Company does not have incurred losses or loss adjustment expenses that require disclosure. 25. Intercompany Pooling Arrangements The Company is not part of a group of affiliated insurers that utilizes a pooling arrangement. 26. Structured Settlements The Company does not have structured settlements that require disclosure. 27. Health Care Receivables The Company does not have health care receivables that require disclosure. 28. Participating Policies For the reporting year ended 2008, estimated premiums on participating policies were $750,000, or 0.13% of total direct ordinary life premiums. The Company accounts for its policyholder dividends based upon recent experience factors. In 2008, the Company paid dividends in the amount of $273,755 to policyholders and did not allocate any additional income to such policyholders. 29. Premium Deficiency Reserves The Company does not have accident and health or property/casualty premium deficiency reserves. 19

73 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY 30. Reserves for Life Contracts and Deposit-Type Contracts (1) The Company waives deduction of deferred fractional premiums upon death of the insured and returns premiums paid and due beyond the date of death. Surrender values are not promised in excess of the legally computed reserves. (2) For policies issued on substandard lives, either the gross premiums are calculated on a rated age, or an extra premium is charged in addition to the standard premium at the true issue age. Mean reserves are calculated as the regular mean reserve for the plan at the rated age, or the regular mean reserve for the plan at the true issue age plus one-half (1/2) the extra premium charged. (3) As of December 31, 2008, the Company had $10,477,536,294 of insurance in force for which the gross premiums are less than the net premiums according to the standard valuation set by the State of Michigan. Reserves to cover the deficiency reserves for the above insurance totaled the gross amount of $123,038,985 at year-end and are reported in Exhibit 5, Miscellaneous Reserves section. (4) The Tabular Interest (Page 7, Line 4) has been determined by formula as described in the instructions for Page 7. The Tabular Less Actual Reserve Released (Page 7, Line 5) has been determined by formula as described in the instructions for Page 7. The Tabular Cost (Page 7, Line 9) has been determined by formula as described in the instructions for Page 7. (5) The Company does not make a determination of tabular interest on funds not involving life contingencies. (6) The Company does not have other changes that require disclosure. 31. Analysis of Annuity Actuarial Reserves and Deposit Liabilities by Withdrawal Characteristics (1) (2) Amount %oftotal A. Subject to descretionary withdrawal: 1. With fair value adjustment $ 6,175,217, % 2. At book value less surrender charge of 5% of more 10,020,611, % 3. At fair value 19,322,903, % 4. Total with adjustment or at fair value (Total of 1 through 3) 35,518,731, % 5. At book value (minimal or no charge or adjustment) 10,994,750, % B. Not subject to descretionary withdrawal provisions 8,954,928, % C. Total annuity actuarial reserves and deposit fund liabilities (gross) 55,468,410, % D. Reinsurance Ceded 37,254,310 E. Total (net) (C) - (D) $ 55,431,155,939 F. Reconciliation of total annuity actuarial reserves and deposit fund liabilities. Life & Accident & Health Annual Statement: 1. Exhibit 5, Annuities Section, Total (net) $ 27,942,033, Exhibit 5, Supplementary Contracts with Life Contingencies Section, Total (net) 2,391, Exhibit 7, Deposit-Type Contracts, Line 14, Column 1 8,664,584, Subtotal 36,609,009,042 Separate Accounts Annual Statement: 5. Exhibit 3, Line , Column 2 18,817,397, Exhibit 3, Line , Column Policyholder dividend and coupon accumulations 0 8. Policyholder premiums 0 9. Guaranteed interest contracts Other contract deposit funds 4,749, Subtotal 18,822,146, Combined Total $ 55,431,155,939 20

74 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY 32. Premium and Annuity Considerations Deferred and Uncollected A. Deferred and uncollected life insurance premiums and annuity considerations as of December 31, 2008, were as follows: (1) (2) Type Gross Net of Loading (1) Industrial $ 97,832 $ 51,011 (2) Ordinary new business 2,017, ,575 (3) Ordinary renewal 94,245, ,712,649 (4) Credit Life 0 0 (5) Group Life 386, ,390 (6) Group Annuity 0 0 (7) Totals $ 96,747,727 $ 116,629, Separate Accounts A. General Nature and Characteristics of Separate Accounts Business: The Company maintains Separate Accounts as funding vehicles for certain individual flexible premium variable annuity and variable life contracts issued by the Company. Additionally, the Company maintains a separate account as the funding vehicle for the group variable annuity contract for the Company's Defined Contribution Plan. The assets of the Separate Accounts are carried at market value. The reserves for minimum guaranteed death benefit, minimum guaranteed income benefit, and minimum guaranteed withdrawal benefit are held in Exhibit 5, Section G of the Company's general account annual statement. This business has been included in column 4 of the table below. Information regarding the separate accounts of the Company is as follows (000's omitted): (1) (2) (3) (4) (5) Nonindexed Nonindexed Nonguaranteed Guarantee Less Guarantee Separate Indexed than/equal to 4% More than 4% Accounts Total (1) Premiums, considerations or deposits for year ended 12/31/08 $ 4,584,404 $ 4,584,404 Reserves at 12/31/08 (2) For accounts with assets at: (a) Fair value $ 18,843,766 $ 18,843,766 (b) Amortized Cost 0 0 (c) Total Reserves* $ 18,843,766 $ 18,843,766 (3) By withdrawal characteristics: (a) Subject to discretionary withdrawal: (b) With MV adjustment $ 0 $ 0 (c) At book value without MV adjustment and with current surrender charge of 5% or more 0 0 (d) At fair value 18,842,135 18,842,135 (e) At book value without MV adjustment and with current surrender charge less than 5% 0 0 (f) Subtotal 18,842,135 18,842,135 (g) Not subject to discretionary withdrawal 1,630 1,630 (h) Total $ 18,843,766 $ 18,843,766 * Line 2(c) should equal Line 3(h). (4) Reserves for Asset Default Risk in Lieu of AVR $ 0 $ 0 B. Reconciliation of Net Transfers To or (From) Separate Accounts (1) Transfers as reported in the Summary of Operations of the Separate Accounts Statement: (a) Transfers to Separate Accounts (Page 4, Line 1.4) $ 4,477,747 (b) Transfers from Separate Accounts (Page 4, Line 10) 1,611,479 (c) Net transfers to or (from) Separate Accounts (a) (b) 2,866,268 (2) Reconciling Adjustments: (a) Benefit Fees (Guaranteed Minimum Income/Withdrawal) (103,967) (b) Term Certain (11,621) (3) Transfers as Reported in the Summary of Operations of the Life, Accident & Health Annual Statement (1c) + (2) = (Page 4, Line 26) $ 2,750,680 21

75 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY 34. Loss/Claim Adjustment Expenses The Company does not have loss/claim adjustment expenses that require disclosure. 22

76 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY DIRECT BUSINESS IN THE STATE OF Grand Total DURING THE YEAR 2008 NAIC Group Code 0918 LIFE INSURANCE NAIC Company Code DIRECT PREMIUMS AND ANNUITY CONSIDERATIONS Ordinary Credit Life (Group and Individual) Group Industrial Total 1. Life insurance 2. Annuity considerations 3. Deposit-type contract funds XXX XXX 4. Other considerations 5. Totals (Sum of Lines 1 to 4) DIRECT DIVIDENDS TO POLICYHOLDERS Life insurance: 6.1 Paid in cash or left on deposit 6.2 Applied to pay renewal premiums 6.3 Applied to provide paid-up additions or shorten the endowment or premium-paying period 6.4 Other 6.5 Totals (Sum of Lines 6.1 to 6.4) Annuities: 7.1 Paid in cash or left on deposit 7.2 Applied to provide paid-up annuities 7.3 Other 7.4 Totals (Sum of Lines 7.1 to 7.3) 8. Grand Totals (Lines 6.5 plus 7.4) DIRECT CLAIMS AND BENEFITS PAID 9. Death benefits 10. Matured endowments 11. Annuity benefits 12. Surrender values and withdrawals for life contracts 13. Aggregate write-ins for miscellaneous direct claims and benefits paid 14. All other benefits, except accident and health 15. Totals DETAILS OF WRITE-INS Summary of Line 13 from overflow page Totals (Lines 1301 thru 1303 plus 1398) (Line 13 above) DIRECT DEATH BENEFITS AND MATURED ENDOWMENTS INCURRED 1 Ordinary 2 Credit Life (Group and Individual) Group Industrial Total No. of Ind.Pols. &Gr. Certifs. No. Amount Amount Amount No. Amount No. Amount 16. Unpaid December 31, prior year 17. Incurred during current year Settled during current year: 18.1 By payment in full 18.2 By payment on compromised claims 18.3 Totals paid 18.4 Reduction by compromise 18.5 Amount rejected 18.6 Total settlements 19. Unpaid Dec. 31, current year ( ) No. of POLICY EXHIBIT Policies 20. In force December 31, prior year (a) 21. Issued during year 22. Other changes to in force (Net) 23. In force December 31 of current year (a) (a) Includes Individual Credit Life Insurance: prior year $ current year $ Includes Group Credit Life Insurance: Loans less than or equal to 60 months at issue, prior year $, current year $ Loans greater than 60 months at issue BUT NOT GREATER THAN 120 MONTHS, prior year $, current year $ ACCIDENT AND HEALTH INSURANCE 1 Direct Premiums 2 Direct Premiums Earned 3 Dividends Paid Or Credited On Direct Business 4 Direct Losses Paid 5 Direct Losses Incurred 24. Group Policies (b) 24.1 Federal Employees Health Benefits Program premium (b) 24.2 Credit (Group and Individual) 24.3 Collectively Renewable Policies (b) 24.4 Medicare Title XVIII exempt from state taxes or fees Other Individual Policies: 25.1 Non-cancelable (b) 25.2 Guaranteed renewable (b) 25.3 Non-renewable for stated reasons only (b) 25.4 Other accident only 25.5 All other (b) 25.6 Totals (Sum of Lines 25.1 to 25.5) 26. Totals (Lines ) (b) For health business on indicated lines report: Number of persons insured under PPO managed care products and number of persons insured under indemnity only products. No. of Certifs. 23

77 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY OVERFLOW PAGE FOR WRITE-INS Additional Write-ins for Assets Line Summary of remaining write-ins for Line 23 from overflow page Additional Write-ins for Liabilities Line Summary of remaining write-ins for Line 25 from overflow page Additional Write-ins for Summary of Operations Line Summary of remaining write-ins for Line 8.3 from overflow page Additional Write-ins for Summary of Operations Line Summary of remaining write-ins for Line 27 from overflow page Additional Write-ins for Exhibit of Net Investment Income Line Summary of remaining write-ins for Line 15 from overflow page Additional Write-ins for Exhibit 2 Line Summary of remaining write-ins for Line 9.3 from overflow page Additional Write-ins for Exhibit of Nonadmitted Assets Line Summary of remaining write-ins for Line 23 from overflow page 24

78 ANNUAL STATEMENT FOR THE YEAR 2008 OF THE JACKSON NATIONAL LIFE INSURANCE COMPANY OVERFLOW PAGE FOR WRITE-INS Additional Write-ins for Analysis of Operations Line Summary of remaining write-ins for Line 8.3 from overflow page Additional Write-ins for Analysis of Operations Line Summary of remaining write-ins for Line 27 from overflow page 25

79 ANNEX 3

80 Jackson National Life Insurance Company NAIC Number NAIC Group Number 0918 The following discussion provides an assessment by management of the results of operations and financial condition and liquidity of Jackson National Life Insurance Company ( Jackson or Company ). Information presented in this discussion supplements the financial statements, exhibits, and schedules in the 2008 Annual Statement. Results of Operations Net Income (Loss) Net loss totaled $623.4 million for the year ended December 31, 2008, as compared to net income of $490.0 million for the year ended December 31, The loss is primarily due to the unprecedented economic environment and conditions in 2008, including the effect of the significant decline in equity markets on the Company s variable annuity guaranteed benefit reserves, separate account CARVM allowance, impairment losses and realized investment losses, offset somewhat by realized gains on equity derivative instruments. Sales and Revenues Premiums and annuity considerations totaled $10.60 billion for the year ended December 31, 2008 as compared to $11.01 billion in Reflecting the significant volatility and deterioration in the equity markets in 2008, variable annuity premiums received in 2008 of $6.1 billion were down 29% compared to $8.6 billion received in This decline was partially offset by fixed annuity sales of $2.9 billion in 2008, up 162% over 2007 sales of $1.1 billion. Sales of fixed-indexed annuities during the year totaled $.93 billion, an increase of 4% compared to $.89 billion a year ago. Sales of institutional products, which are treated as deposits for statutory accounting purposes and a market in which Jackson participates on an opportunistic basis, of $2.21 billion in 2008 were up 18% compared to Net investment income, which is gross income earned on invested assets reduced by investment expenses, decreased to $2.65 billion in 2008 from $2.80 billion in Gross investment income earned on invested assets totaled $2.67 billion in 2008 compared to $2.88 billion in The yield earned on average invested assets, adjusted for various leverage transactions, totaled 5.91% on average adjusted invested assets of $46.27 billion in 2008, as compared to 6.41% on average adjusted invested assets of $45.00 billion in Investment yields in 2007 included higher returns on private equity investments held through limited partnerships. Fee income from separate accounts increased to $523.8 million in 2008 from $483.3 million in 2007, due to higher average separate account balances through the first eight months of Other income increased to $121.5 million in 2008 from $54.6 million in The 2008 income includes $48.8 million of fees for early redemption of certain institutional medium term notes and $18.6 million of class action settlements from certain underwriters of WorldCom securities. Reserves, Benefits and Expenses Death benefits increased to $464.1 million in 2008 from $430.2 million in Annuity benefits and surrenders, which includes annuitizations and death benefits on annuities, as well as annuity surrender benefits and partial withdrawals, decreased to $5.81 billion in 2008 from $6.39 billion in Fixed annuity withdrawals represented 10.74% and 13.54% of average fixed annuity reserves in 2008 and 2007, respectively. Jackson monitors liquidity regularly and believes that the investment portfolio and other sources of funds provide sufficient liquidity for anticipated withdrawals. Aggregate institutional investment product withdrawals, excluding $925.0 million and $843.0 million in rollovers of maturing contracts in 2008 and 2007, respectively, increased to $2.64 billion in 2008 from $1.59 billion in Life surrenders increased to $246.8 million in 2008 from $236.8 million in Aggregate reserves for life and annuities increased $3.32 billion in 2008, compared to a decrease of $1.07 billion in The increase in 2008 was primarily attributable to the increase in fixed annuity sales ($2.9 billion), transfers of variable annuity balances from the variable account fund to fixed account funds ($186.4 million), and the 1

81 MD&A, Page 2 NAIC Number increase in reserves for variable annuity guaranteed benefits ($913.4 million). The average interest rate credited on interest sensitive liabilities (excluding institutional product liabilities) was 4.06% in 2008, as compared to 4.02% in Interest credited on institutional investment products totaled $332.9 million in 2008, as compared to $428.2 million in 2007, due primarily to lower interest credited rates on floating rate contracts. The average interest rate credited on institutional deposits was 3.80% in 2008, compared to 5.32% in Commissions totaled $709.9 million in 2008, compared to $758.8 million in Commissions represented 6.70% and 6.89% of total premiums in 2008 and 2007, respectively. The decrease in total commissions resulted primarily from the decreased sales. General insurance expenses decreased to $343.2 million in 2008 from $350.9 million in The decrease in expenses was due primarily to the provision for legal settlements in Net transfers to separate accounts decreased to $2.8 billion in 2008 from $6.1 billion in The decrease is primarily due to the reduction in sales of variable annuities in 2008, but also includes a decrease of $472.7 million in the separate account CARVM allowance. Effective December 31, 2008, the company entered into a reinsurance agreement with its wholly-owned subsidiary, Jackson National Life Insurance Company of New York ( JNY ), whereby the company assumed, on a 90% quota share basis, the guaranteed minimum withdrawal benefits on variable annuity contracts issued by JNY and in force at December 31, The reinsurance agreement resulted in assumed reinsurance premiums of $241.6 million and reserves of $12.1 million. In order to maintain JNY s capital and surplus at an acceptable level, capital contributions were made to JNY totaling $166.4 million. The net impact of the transactions were reflected in the receivable from parent, subsidiaries and affiliates at December 31, 2008 and will be settled in the first quarter of In accordance with NAIC SAP, the gain arising from the treaty of $229.5 million was excluded from net income and reported directly in surplus. Additionally, the earnings adjustment on previously reinsured in-force business resulted in expense of $157.4 million and $5.4 million in 2008 and 2007, respectively. Federal income tax expense is charged to operations based on current taxable income rather than statutory income. Current year federal income tax expense is based on statutory income adjusted for certain timing differences which are the result of dissimilar financial reporting and tax basis accounting methods. A deferred tax expense is not provided for the tax effect of these timing differences. Accordingly, federal income tax expense (benefit) on operations totaled $(250.5) million in 2008, compared to $132.4 million in 2007, resulting in effective tax rates of 46.7% and 19.8% in 2008 and 2007, respectively. The increase in the effective tax rate this year is primarily attributable to an increase in the separate account dividends received deduction. Additional items affecting the effective tax rate include timing of income recognition on limited partnership investments and the benefit recognized under the tax sharing agreements with Brooke Life Insurance Company and JNY. Realized Gains and Losses Realized gains and losses were as follows: Tax expense Tax expense Gain (loss) (benefit) Net Gain (loss) (benefit) Net Net realized gain (loss) Sales of bonds (260.0) $ (127.5) $ (132.5) $ (32.4) $ (22.9) $ (9.5) Sales of stocks (29.5) (7.8) (21.7) (28.8) Derivative instruments Sale of capital assets Impairment writedowns (827.7) - (827.7) (58.1) - (58.1) Total (270.7) (430.2) (26.7) 35.2 (61.9) Transferred to IMR (129.2) (36.9) (92.3) (14.6) (0.6) (14.0) Per Income Statement $ (141.5) $ $ (337.9) $ (12.1) $ 35.8 $ (47.9) 2

82 MD&A, Page 3 NAIC Number Impairment writedowns as a percentage of Jackson's average invested assets totaled 1.8% and 0.13% in 2008 and 2007, respectively. Net realized capital gains and losses transferred to the interest maintenance reserve ( IMR ) are amortized into income over the approximate remaining lives of the investments sold. At December 31, 2008 and 2007, the interest maintenance reserve totaled $44.8 million and $172.9 million, respectively. Financial Condition and Liquidity Capital and surplus decreased to $3.75 billion at December 31, 2008, as compared to $4.02 billion at December 31, The decrease of $278.4 million is comprised of net loss ($623.4 million), unrealized losses on interest related derivatives ($626.7 million), subsidiaries ($323.6 million) and equities and other investments ($84.5 million), an increase in non-admitted assets ($136.1 million) and dividends to parent ($313.1 million), offset partially by the positive effects of permitted practices ($845.0 million), an increase for reinsurance ($386.9 million), a decrease in the asset valuation reserve ($226.8 million), an increase in net deferred tax asset ($218.2 million) and unrealized gains on equity derivatives ($152.1 million). The unrealized loss on subsidiaries in 2008 is due primarily to Jackson National Life Insurance Company of New York s net loss of $309.4 million which is the result of a significant increase in reserves for guaranteed benefits on variable annuities as required under New York Regulation 128. The impact of this loss on Jackson s surplus was mitigated somewhat by reinsuring 90% of the benefits to Jackson, which is not required to hold the additional New York Regulation 128 reserves, resulting in an increase in Jackson s surplus of $229.5 million which is included in the $386.9 million increase for reinsurance noted above. Admitted assets totaled $68.33 billion at December 31, 2008, as compared to $73.96 billion at December 31, This decrease is attributable to an $8.5 billion decrease in separate account assets supporting variable annuity liabilities, partially offset by a $2.8 billion increase in general account assets supporting the fixed annuity and life insurance liabilities. Effective for 2008 reporting, the Michigan Insurance Commissioner granted Jackson three permitted practices, which expire October 1, 2009, unless extended by the Commissioner. One permitted practice allows Jackson to carry interest rate swaps at book value, as if statutory hedge accounting were in place, instead of at fair value as would have been otherwise required. As a condition of granting the permitted practice, Jackson had to demonstrate the effectiveness of its interest rate swap program pursuant to the Michigan Insurance Code. The Commissioner also granted a permitted practice to allow Jackson to recognize book to tax differences that will reverse within the next 3 years (instead of 1 year as required by the NAIC) when determining the admissible deferred tax asset (subject to a limitation of 15% of capital and surplus versus the 10% limitation imposed by the NAIC guidance). Finally, the Commissioner granted a permitted practice to allow Jackson to use an average interest rate in calculating certain regulatory capital requirements. The permitted practices require that Jackson maintain certain minimum capital levels excluding the effect of the permitted practices. The total effect of these permitted practices was to increase statutory surplus by $845.0 million and reduce authorized control level required capital by $81.5 million at December 31, Excluding the effect of these permitted practices, Jackson s adjusted capital and surplus was well in excess of regulatory requirements. These permitted practices had no impact on the statutory net loss. General account cash and invested assets totaled $47.27 billion at December 31, 2008, as compared to $44.82 billion at December 31, 2007 due primarily to sales of fixed annuities which exceeded surrenders and other benefits. Jackson s investment portfolio is broadly diversified with more than 1,640 issuers. Below investment grade bonds totaled 6.4% of cash and invested assets at December 31, 2008, up from 4.8% at December 31, Jackson s direct exposure to the subprime mortgage market is $478.5 million at December 31, Most of this exposure is in fixed rate, residential mortgage backed securities that are AAA rated and hold first liens on the underlying collateral. Jackson had total unrealized gains of $338.2 million and total unrealized losses of $4,537.7 million on its debt securities at December 31, Of the total carrying value of bonds in an unrealized loss position at December 31, 2008, 90.3% were investment grade. Unrealized losses from bonds that were below investment grade comprised 17.9% of the aggregate gross unrealized loss on debt securities. For Statutory reporting, Jackson s debt securities are reported at amortized cost, so the unrealized gains and losses are not reflected in income or capital and surplus. 3

83 MD&A, Page 4 NAIC Number Mortgage loans aggregated $6.39 billion at December 31, 2008, consisting of 587 commercial first mortgage loans with an average loan balance of approximately $11.1 million, collateralized by properties located in 41 states and the District of Columbia. Approximately 30% of this portfolio was distribution/warehouse, 21% was multi-family residential, 21% was office, 17% was retail and 11% was hotel and other. At December 31, 2008, approximately 14% of this portfolio was secured by properties located in California, approximately 10% by properties located in Texas, approximately 8% by properties located in Illinois and no more than 7% of this portfolio was secured by properties in any other single state. At the time of their origination or purchase by Jackson, the majority of mortgage loans had loan-to-value ratios of 75% or less. During 2008 and 2007, loans delinquent by more than 90 days, foreclosed loans and restructured loans were not significant in relation to the total mortgage loan portfolio. Other invested assets, which totaled $1.48 billion at December 31, 2008, are comprised of investment vehicles that have holdings in equity securities, debt securities and other investments in the amounts of $1,005.5 million, $413.6 million and $64.3 million, respectively. Other invested assets, which include limited partnership and limited liability company interests, are generally accounted for by using the equity method of accounting. Investments in common and preferred stocks are minimal, representing less than 2% of cash and invested assets at December 31, Jackson's investments in common stocks consist of investments in mutual funds hedging its deferred compensation plan liabilities or invested temporarily as seed money supporting newly established variable and mutual funds, investments in affiliated companies and certain investments acquired in credit restructurings. Derivatives used in conjunction with Jackson s risk management program at December 31, 2008 were primarily comprised of $41.50 billion aggregate notional amount of put swaptions, $8.94 billion in aggregate notional amount of interest rate swap agreements, $4.00 billion in aggregate notional amount of spread cap options, $9.45 billion notional amount of equity index put options, $.96 billion notional amount of cross currency swaps and $1.44 billion notional amount of equity index call options. Interest rate swaps with a book/adjusted carrying value of $0 and fair value of $(685.6) million were reported at book/adjusted carrying value per the aforementioned permitted practice. Overall, the net fair value of Jackson's general account derivatives at December 31, 2008 was $(255.7) million, as compared to $221.4 million at December 31, Included in surplus at December 31, 2008 and 2007 are unrealized gains on derivatives of $382.2 million and $172.0 million, respectively. Sources of liquidity include premium deposits, investment income and cash provided from maturing or sold investments. With 80% of Jackson's cash and invested assets in bonds and cash and short-term investments, Jackson's investment portfolio is highly liquid. Considering the composition of Jackson's investment and liability portfolio coupled with significant new annual sales and credit availability through funding agreements issued to, and short-term borrowings from, the Federal Home Loan Bank of Indianapolis, Jackson is well positioned to meet its current and future cash needs. Jackson carefully monitors cash and short-term investments to maintain adequate balances for timely payment of claims, policy benefits, expenses and taxes. In addition, regulatory authorities establish minimum liquidity and capital standards. 4

84 ANNEX 4

85 Year ended December 31, 2008 RECENT DEVELOPMENTS PREMIUMS AND ANNUITY CONSIDERATIONS totaled $10,596.1 million for the year ended December 31, 2008 as compared with $11,014.6 million in Reflecting the significant volatility and deterioration in the equity markets in 2008, variable annuity premiums received in 2008 of $6,070.4 million were down 29% compared to $8,572.8 million received in This decline was mostly offset by fixed annuity sales of $2,912.5 million in 2008, up 162% over 2007 sales of $1,110.3 million. Sales of fixed-indexed annuities during the year totaled $928.1 million, an increase of 4% compared to $893.5 million a year ago. Sales of institutional products of $2,212.2 million in 2008, which are treated as deposits for statutory accounting purposes and a market in which Jackson participates on an opportunistic basis, were up 18% compared to NET LOSS totaled $623.4 million for the year ended December 31, 2008, compared to net income of $490.0 million for the year ended December 31, The loss is primarily due to the unprecedented economic environment and conditions in 2008, including the effect of the significant decline in equity markets on the Company s variable annuity guaranteed benefit reserves ($902.3 million), separate account CARVM allowance ($472.7 million), impairment losses ($827.7 million) and realized investment losses ($160.3 million), offset somewhat by realized gains on derivative instruments ($846.5 million). CAPITAL AND SURPLUS decreased to $3.7 billion at December 31, 2008 from $4.0 billion at December 31, The decrease of $278.4 million is comprised of net loss ($623.4 million), unrealized losses on interest related derivatives ($626.7 million), subsidiaries ($323.6 million) and equities and other investments ($84.5 million), an increase in non-admitted assets ($136.1 million) and dividends to parent ($313.1 million), offset partially by the positive effects of permitted practices ($845.0 million), an increase for reinsurance ($386.9 million), a decrease in the asset valuation reserve ($226.8 million), an increase in net deferred tax asset ($218.2 million) and unrealized gains on equity derivatives ($152.1 million). The subsidiaries loss in 2008 is due primarily to Jackson National Life Insurance Company of New York s net loss of $309.4 million which is the result of a significant increase in reserves for guaranteed benefits on variable annuities as required under New York Regulation 128. The impact of this loss on Jackson s surplus was mitigated somewhat by reinsuring 90% of the benefits to Jackson, which is not required to hold the additional New York Regulation 128 reserves, resulting in an increase in Jackson s surplus of $229.5 million which is included in the $386.9 million increase for reinsurance noted above. TOTAL ADMITTED ASSETS decreased to $68.3 billion at December 31, 2008 from $74.0 billion at December 31, This decrease is attributable to an $8.5 billion decrease in separate account assets supporting variable annuity liabilities, partially offset by a $2.8 billion increase in general account assets supporting the fixed annuity and life insurance liabilities. Effective for 2008 reporting, the Michigan Insurance Commissioner granted Jackson three permitted practices, which expire October 1, 2009, unless extended by the Commissioner. One permitted practice allows Jackson to carry interest rate swaps at book value, as if statutory hedge accounting were in place, instead of at fair value as would have been otherwise required. As a condition of granting the permitted practice, Jackson had to demonstrate the effectiveness 1

86 of its interest rate swap program pursuant to the Michigan Insurance Code. The Commissioner also granted a permitted practice to allow Jackson to recognize book to tax differences that will reverse within the next 3 years (instead of 1 year as required by the NAIC) when determining the admissible deferred tax asset (subject to a limitation of 15% of capital and surplus versus the 10% limitation imposed by the NAIC guidance). Finally, the Commissioner granted a permitted practice to allow Jackson to use an average interest rate in calculating certain regulatory capital requirements. The permitted practices require that Jackson maintain certain minimum capital levels excluding the effect of the permitted practices. The total effect of these permitted practices was to increase statutory surplus by $845.0 million and reduce authorized control level required capital by $81.5 million at December 31, Excluding the effect of these permitted practices, Jackson s adjusted capital and surplus was well in excess of regulatory requirements. These permitted practices had no impact on statutory net loss. Jackson s investment portfolio is broadly diversified with more than 1,640 issuers. Below investment grade bonds totaled 6.4% of cash and invested assets at December 31, 2008, up from 4.8% at December 31, Jackson s direct exposure to the subprime mortgage market is $478.5 million at December 31, Most of this exposure is in fixed rate, residential mortgage backed securities that are AAA rated and hold first liens on the underlying collateral. Jackson had total unrealized gains of $338.2 million and total unrealized losses of $4,537.7 million on its debt securities at December 31, Of the total carrying value of bonds in an unrealized loss position at December 31, 2008, 90.3% were investment grade. Unrealized losses from bonds that were below investment grade comprised 17.9% of the aggregate gross unrealized loss on debt securities. For Statutory reporting, Jackson s debt securities are reported at amortized cost, so the unrealized gains and losses are not reflected in income or capital and surplus. 2

87 ANNEX 5

88 D3: US insurance operations a Summary results and balance sheet i Results and movements on shareholders equity 2008 $m 2007 $m Operating profit based on longer-term investment returns Short-term fluctuations in investment returns (1,959) (36) (Loss) profit before shareholder tax (1,207) 853 Tax 133 (252) (Loss) profit for the year (1,074) $m 2007 $m (Loss) profit for the year (1,074) 601 Items recognised directly in equity: Exchange movements 1,454 (64) Unrealised valuation movements on securities classified as available-for-sale: Unrealised holding losses arising during the year (4,597) (460) Less losses included in the income statement 902 (26) (5,018) (488) Related change in amortisation of deferred income and acquisition costs 1, Related tax 1, Total items of income and expense recognised directly in equity (530) (288) Total income and expense for the year (1,604) 312 Transfers to Central companies (233) (244) Net (decrease) increase in equity (1,837) 68 Shareholders equity at beginning of year 4,981 5,316 Shareholders equity at end of year 3,144 5,384 Included within the movements in shareholders equity is a net reduction in value of Jackson s debt securities classified as available-for-sale under IAS 39 of $3,896 million (2007: $486 million). This reduction reflects the effects of widening of global credit spreads partially offset by the effect of reduced risk-free interest rates and a steepening yield curve.these temporary market movements do not reflect defaults or impairments. With the exception of debt securities for US insurance operations classified as available-for-sale under IAS 39, unrealised value movements on the Group s investments are booked within the income statement. For debt securities classified as available for-sale, unless impaired, fair value movements are recorded as a movement in shareholder reserves direct to equity. Realised gains and losses, including impairments, are recorded in the income statement. In 2008, Jackson recorded $715 million (2007: $70 million) of impairment losses arising from: 2008 $m 2007 $m Residential mortgage-backed securities 240 Public fixed income Other

89 Further details on the impairment losses recognised in the year are shown in note B1. Jackson s portfolio of debt securities is managed proactively with credit analysts closely monitoring and reporting on the credit quality of its holdings. Jackson continues to review its investments on a case-by-case basis to determine whether any decline in fair value represents an impairment. In addition, investment in structured securities where market prices are depressed are subject to a rigorous review of their future estimated cash flows, including expected and stress case scenarios, to identify potential shortfalls in contractual payments. Impairment charges are generally recorded on structured securities when the Company forecasts a contractual payment shortfall. The impairment loss reflects the difference between the fair value and book value. A portion of the impairment losses arising in 2008 arose on residential mortgage-backed securities (RMBS). The impairment testing for RMBS was determined using a cash flow modelling approach designed to estimate future principal losses on underlying collateral mortgage loans supporting the investments in the structures. Principal loss estimates were based on the current delinquency/foreclosure statistics for the underlying pools. In aggregate, the more severe the current delinquency/foreclosure statistics for an underlying pool, the higher the principal losses projected. Projected underlying losses for each collateral pool are then run through a model of the bond structure to calculate the expected future cash flows of the bond. This cash flow simulation will indicate the extent of estimated future principal losses on securitisation tranches held by Jackson. In 2008, the collateral performance of these RMBS has deteriorated coupled with the deterioration of the market price of these securities. Note D3(d) below shows fair value of certain structured debt securities of Jackson when the markets are not active due to market illiquidity. In general, the debt securities of the Group s US insurance operations are purchased with the intention and the ability to hold them for the longer term. In 2008, there was a movement in the balance sheet value for debt securities classified as available-for-sale from a net unrealised loss of $196 million to a net unrealised loss of $4,165 million (2007: net unrealised gain of $219 million to a net unrealised loss of $196 million). During 2008, as a result of these factors, the gross unrealised gain in the balance sheet decreased from $603 million at 31 December 2007 to $404 million at 31 December 2008 while the gross unrealised loss increased from $874 million at 31 December 2007 to $4,569 million at 31 December Details of the securities in an unrealised loss position are shown in D3(d) below. These features are included in the table shown below of the movements in the values of available-for-sale securities: Changes in unrealised appreciation Foreign exchange translation $m $m $m $m Assets fair valued at below book value Book value 29,619 21,359 Unrealised loss (4,569) (3,698) (240) (874) Fair value (as included in balance sheet) 25,050 20,485 Assets fair valued at or above book value Book value 9,052 16,006 Unrealised gain 404 (198) Fair value (as included in balance sheet) 9,456 16,609 Total Book value 38,671 37,366 Net unrealised (loss) gain (4,165) (3,896) (73) (271) Fair value (as included in balance sheet)* 34,506 37,095 Reflected as part of movement in shareholders equity Movement in unrealised appreciation (3,896) (486) Exchange movements (73) (4) (3,969) (490) * Debt securities for US operations as included in the balance sheet of $34,865 million (2007: $37,825 million) comprise $34,506 million (2007: $37,095 million) in respect of securities classified as available-for-sale and $360 million (2007: $731 million) for securities of consolidated investment funds classified as fair value through profit and loss. Translated at the closing rate of US$1.44: 1 Included within the movement in unrealised losses for the debt securities of Jackson of $3,698 million (2007: $364 million) as shown above was a value reduction of $193 million (2007: $110 million) relating to the sub-prime and Alt-A securities as referred to in section B6. 2

90 ii Balance sheet Variable annuity separate account assets and liabilities note i $m Fixed annuity, GIC and other business note i $m US insurance operations Assets Intangible assets attributable to shareholders: Deferred acquisition costs and other intangible assets 5,697 5,697 3,838 Total 5,697 5,697 3,838 Deferred tax assets 2,831 2,831 1,308 Other non-investment and non-cash assets 2,615 2,615 1,979 Investments of long-term business and other operations: Investment properties Financial investments: Loans note ii 7,363 7,363 6,485 Equity securities and portfolio holdings in unit trusts 20, ,771 30,868 Debt securities D3d 34,865 34,865 37,825 Other investments note iii 1,806 1,806 1,517 Deposits Total investments 20,903 45,482 66,385 77,225 Cash and cash equivalents Total assets 20,903 56,979 77,881 84,686 Equity and liabilities Equity Shareholders equity 2,441 2,441 5,355 Minority interests 2 Total equity 2,441 2,441 5,357 Liabilities note iv Policyholder liabilities: Insurance contract liabilities 20,903 40,169 61,072 65,543 Investment contract liabilities without discretionary participation features (GIC and annuity certain) 4,148 4,148 3,826 Total 20,903 44,317 65,220 69,368 Core structural borrowings of shareholder-financed operations Operational borrowings attributable to shareholder-financed operations ,176 Other non-insurance liabilities: Obligations under funding, securities lending and sale and repurchase agreements 4,775 4,775 5,416 Net asset value attributable to unit holders of consolidated unit trusts and similar funds Deferred tax liabilities 1,922 1,922 1,272 Other creditors Provisions Derivative liabilities Other liabilities Total 9,236 9,236 8,536 Total liabilities 20,903 54,537 75,440 79,329 Total equity and liabilities 20,903 56,979 77,881 84, Total $m 2007 Total $m Notes i Assets and liabilities attaching to variable annuity business that are not held in the separate account are shown within other business. ii Loans The loans of Jackson of $7,363 million (2007: $6,485 million) comprise mortgage loans of $6,519 million (2007: $5,655 million) and policy loans of $844 million (2007: $830 million). All of the mortgage loans are commercial mortgage loans which are collateralised by properties. The property types are mainly industrial, multi-family residential, suburban office, retail and hotel. Jackson s mortgage loan portfolio does not include any single-family residential mortgage loans and is therefore not exposed to the risk of defaults associated with residential sub-prime mortgage loans. The policy loans are fully secured by individual life insurance policies or annuity policies. These loans are accounted for at amortised cost, less any impairment. 3

91 iii Other investments comprise: $m $m Derivative assets note G Partnerships in investment pools and other ,806 1,517 Partnerships in investment pools and other comprise primarily investments in limited partnerships. These include interest in the PPM America Private Equity Fund and diversified investments in 157 (2007: 164) other partnerships by independent money managers that generally invest in various equities and fixed income loans and securities. iv Summary policyholder liabilities (net of reinsurance) and reserves at 31 December 2008 The policyholder liabilities, net of reinsurers share of $1,150 million (2007: $868 million), reflect balances in respect of the following: $m $m Policy reserves and liabilities on non-linked business: Reserves for future policyholder benefits and claims payable 3,620 1,823 Deposits on investment contracts (as defined under US GAAP) 35,890 33,410 Guaranteed investment contracts 3,656 3,354 Unit-linked (variable annuity) business 20,903 29,913 64,069 68,500 In addition to the policyholder liabilities above, Jackson has entered into a programme of funding arrangements under contracts which, in substance, are almost identical to GICs. The liabilities under these funding arrangements totalled $4,648 million (2007: $5,190 million) and are included in other non-insurance liabilities in the balance sheet above. b Reconciliation of movement in investments A reconciliation of the total investments of US insurance operations from the beginning of the year to the end of the year is as follows: Variable annuity separate account assets and liabilities $m Fixed annuity, GIC and other business $m US insurance operations Total $m At 1 January 2007 Total investments 22,247 48,464 70,712 Less: Derivative liabilities (180) (180) Directly held investments, net of derivative liabilities 22,247 48,284 70,532 Net cash inflow (outflow) from operating activities 5,947 (1,204) 5,112 Realised gains (losses) in the year (92) (92) Unrealised gains (losses) in the year 1, ,295 Foreign exchange translation differences (366) (810) (1,176) Movement in the year of directly held investments, net of derivative liabilities 7,163 (2,075) 5,089 At 31 December 2007/1 January 2008 Total investments 29,913 47,313 77,225 Less: Derivative liabilities note G3 (315) (315) Directly held investments, net of derivative liabilities 29,913 46,998 76,910 Net cash inflow from operating activities 2,728 3,000 5,728 Realised gains (losses) in the year (771) (771) Unrealised gains (losses) in the year (11,792) (5,775) (17,567) Foreign exchange translation differences 8,106 17,810 25,916 Movement in the year of directly held investments, net of derivative liabilities (958) 14,264 13,306 At 31 December 2008 Total investments 20,903 45,482 66,385 Less: Derivative liabilities note G3 (1,241) (1,241) Directly held investments, net of derivative liabilities 20,903 44,241 65,144 4

92 c Reconciliation of movement in policyholder liabilities A reconciliation of the total policyholder liabilities of US insurance operations from the beginning of the year to the end of the year is as follows: Variable annuity separate account liabilities 4m Fixed annuity, GIC and other business $m US insurance operations Total $m At 1 January ,247 39,886 62,133 Premiums 7,946 4,768 12,714 Surrenders (1,921) (5,036) (6,957) Maturities/Deaths (184) (797) (981) Investment-related items and other movements 1, ,459 At 31 December 2007/1 January ,913 39, Premiums 4,883 7,576 12,459 Surrenders (1,950) (5,183) (7,133) Maturities/Deaths (298) (746) (1,044) Investment-related items and other movements (11,645) 3,214 (8,430) At 31 December ,903 44,317 65,220 The positive investment-related and other movement during 2008 within fixed annuity, GIC and other business principally represents interest credited to the policyholder account and increases in reserves for variable annuity guarantees. Variable annuity separate account liabilities are mainly impacted by market movements. d Information on credit risks of debt securities 2008 $m 2007 $m Summary Carrying Carrying value value Corporate security and commercial loans: Publicly traded and SEC Rule 144A traded 18,976 20,593 Non-SEC Rule 144A traded 4,706 5,201 23,682 25,794 Residential mortgage-backed securities 6,483 6,324 Commercial mortgage-backed securities 2,687 3,050 Other debt securities 2,013 2,658 Total debt securities 34,865 37,826 i Credit quality For statutory reporting in the US, debt securities are classified into six quality categories specified by the Securities Valuation Office of the National Association of Insurance Commissioners (NAIC). The categories range from Class 1 (the highest) to Class 6 (the lowest). Performing securities are designated as Classes 1 to 5. Securities in or near default are designated Class 6. Securities designated as Class 3, 4, 5 and 6 are non-investment grade securities. Generally, securities rated AAA to A by nationally recognised statistical ratings organisations are reflected in Class 1, BBB in Class 2, BB in Class 3 and B and below in Classes 4 to 6. If a designation is not currently available from the NAIC, Jackson s investment adviser, PPM America, provides the designation for the purposes of disclosure below. 5

93 The following table shows the quality of publicly traded and SEC Rule 144A traded debt securities held by the US operations as at 31 December 2008 and 2007 by NAIC classifications: Carrying value Carrying value $m % of total $m % of total NAIC designation: 1 7, , , , , , , The following table shows the quality of the non-sec Rule 144A traded private placement portfolio by NAIC classifications: Carrying value Carrying value $m % of total $m % of total NAIC designation: 1 1, , , , , , The following table shows the quality of residential and commercial mortgage-backed securities: Carrying value $m (unless otherwise stated) Carrying value $m (unless otherwise stated) Residential mortgage-backed securities (included within debt securities) Total residential mortgage-backed securities 6,483 6,324 Residential mortgage-backed securities rated AAA or equivalent by a nationally recognised statistical ratings organisation (including Standard & Poor s, Moody s and Fitch): Amount 5,398 5,422 Percentage of total 83.3% 85.7% Residential mortgage-backed securities rated NAIC 1: Amount 6,098 6,310 Percentage of total 94.1% 99.8% Commercial mortgage-backed securities (included within debt securities) Total commercial mortgage-backed securities 2,687 3,050 Commercial mortgage-backed securities rated AAA or equivalent by a nationally recognised statistical ratings organisation (including Standard & Poor s, Moody s and Fitch): Amount 2,280 2,516 Percentage of total 84.9% 82.5% Commercial mortgage-backed securities rated NAIC 1: Amount 2,610 2,910 Percentage of total 97.1% 95.4% 6

94 Included within other debt securities of $2,013 million (2007: $2,658 million) in the summary shown above are $1,284 million(2007: $1,405 million) of asset-backed securities held directly by Jackson, of which $953 million (2007: $1,153 million) were NAIC designation 1 and $229 million (2007: $253 million) NAIC designation 2. In addition, other debt securities includes $370 million (2007: $629 million) in respect of securities held by the Piedmont trust entity and $360 million (2007: $623 million) from the consolidation of investment funds managed by PPM America. In addition to the ratings disclosed above, the following table summarises by rating the debt securities held by US insurance operations as at 31 December 2008 using Standard and Poor s (S&P), Moody s and Fitch ratings: 2008 $m 2007 $m Carrying Carrying value value S&P AAA 7,651 7,755 S&P AA+ to AA- 1,226 2,363 S&P A+ to A- 7,540 7,280 S&P BBB+ to BBB- 10,175 10,779 S&P Other 1,899 2,215 28,491 30,392 Moody s Aaa Moody s Aa1 to Aa Moody s A1 to A Moody s Baa1 to Baa Moody s Other ,242 1,734 Fitch Other 4,464 4,943 Total debt securities 34,864 37,825 In the table above, S&P ratings have been used where available. For securities where S&P ratings are not immediately available, those produced by Moody s and then Fitch have been used as an alternative. The amounts within Other which are not rated by S&P, Moody s or Fitch have the following NAIC classifications: 2008 $m 2007 $m NAIC 1 1,918 2,148 NAIC 2 2,372 2,610 NAIC ,464 4,943 ii Determining the fair value of debt securities when the markets are not active Under IAS 39, unless categorised as held to maturity debt securities are required to be fair valued. Where available, quoted market prices are used. However, where securities are in inactive markets, IAS 39 requires that valuation techniques be applied. Included in debt securities are debt securities with a fair value of $34,861 million (2007: $37,813 million) which are not quoted on active markets and for which fair value is determined using internal valuation techniques, or is provided by brokers or pricing services, where the specific securities have been valued using valuation techniques by these third-party providers. Jackson selects the source of pricing and/or the valuation technique with the objective of arriving at a fair value measurement which reflects the price at which an orderly transaction would take place between market participants on the measurement date. Jackson performs quantitative and qualitative analysis of prices received from third-parties e.g. independent brokers or pricing services to consider whether these prices represent fair value, particularly when the markets are not active for the securities concerned. Debt securities of US insurance operations valued using internally derived valuation techniques in 2008 include certain asset-backed securities which had previously been valued using prices provided by a pricing service or brokers in the context of active markets. The use of such pricing sources has historically generated reliable fair values for these assets. The current market dislocations have caused a reassessment of the valuation process for these asset-backed securities. In particular, beginning at the end of the third quarter of 2008, the external prices obtained for certain asset-backed securities were deemed to be inappropriate in the current market conditions. 7

95 For the valuations at 31 December 2008, Jackson has therefore utilised internal valuation models, provided by PPM America, to derive fair values of all non agency residential mortgage-backed securities and asset-backed securities and certain commercial mortgage-backed securities. The use of internal valuation models has resulted in a fair value of these securities that was higher than those provided from pricing services and brokers of $1,093 million on a total amortised cost of $5.0 billion. See note G1 for further details on the fair value measurement using valuation techniques when the markets are not active. iii Sub-prime, Alt-A and CDO funds exposures Included within the debt securities of Jackson at 31 December 2008 are exposures to sub-prime and Alt-A mortgages and CDO funds as follows: 2008 $m 2007 $m Carrying Carrying value value Sub-prime mortgages (91% S&P rated AAA, 3% AA (2007: 100% S&P rated AAA)) Alt-A mortgages (60% AAA, 15% AA (2007: 77% AAA, 17% AA)) 929 1,314 1,347 1,786 CDO funds* ,807 2,303 *Including Group s economic interest in Piedmont and other consolidated CDO portfolios. Jackson defines its exposure to sub-prime mortgages as investments in residential mortgage-backed securities in which the underlying borrowers have a US Fair Isaac Credit Organisation (FICO) credit score of 659 or lower. With an average FICO score of , Jackson s sub-prime collateral could be categorised as near prime with a score close to a prime score of 660. iv Debt securities classified as available-for-sale in an unrealised loss position Debt securities above are shown net of cumulative impairment losses on retained securities of $1,216 million (2007: $490 million). The unrealised losses in the US insurance operations balance sheet on unimpaired securities are $(4,569) million (2007: $(874) million). This reflects assets with fair market value and book value of $25,049 million (2007: $20,485 million) and $29,619 million (2007: $21,359 million) respectively. The following table shows the fair value of the debt securities in a gross unrealised loss position for various percentages of book value and by maturity of security at 31 December 2008: 2008 $m 2007 $m Fair Unrealised Fair Unrealised Fair value of securities as a percentage of book value value Loss value loss Between 90% and 100% 12,591 (620) 18,652 (545) Between 80% and 90% 6,586 (1,163) 1560 (243) Below 80% 5,872 (2,786) 273 (86) 25,049 (4,569) 20,485 (874) 2008 $m 2007 $m Unrealised Unrealised By maturity of security loss loss Less than 1 year (30) (2) 1 to 5 years (772) (108) 5 to 10 years (1,777) (326) More than 10 years (568) (119) Mortgage-backed securities (1,422) (319) Total (4,569) (874) As shown in the table above, $2,787 million of the $4,569 million of gross unrealised losses at 31 December 2008 related to securities whose fair value were below 80 per cent of the book value. The analysis of the $2,787 million, by category of debt securities and by age analysis indicating the length of time for which their fair value was below 80 per cent of the book value, are as follows: 8

96 2008 $m 2007 $m Fair Unrealised Fair Unrealised Category analysis value loss value loss Residential mortgage-backed securities Prime 413 (165) 4 (2) Alt-A 207 (183) 54 (20) Sub-prime 69 (56) 689 (404) 58 (22) Commercial mortgage-backed securities 284 (124) 8 (2) Other asset-backed securities 1,166 (539) 8 (2) Total structured securities 2,139 (1,067) 74 (26) Corporates 3,733 (1,720) 199 (60) Total 5,872 (2,787) 273 (86) 2008 $m 2007 $m Fair Unrealised Fair Unrealised Age analysis value loss value loss Less than 3 months 4,483 (1,961) 273 (86) 3 months to 6 months (579) More than 6 months 388 (246) 5,872 (2,786) 273 (86) The following table shows the aged analysis for all the unrealised losses in the portfolio by reference to the length of time the securities have been in an unrealised loss position: 2008 $m 2007 $m Non- Non- Aged analysis of unrealised investment Investment investment Investment losses for the periods indicated grade grade Total grade grade Total Less than 6 months (155) (521) (676) (18) (115) (133) 6 months to 1 year (180) (1,674) (1,853) (42) (229) (271) 1 year to 2 years (221) (894) (1,116) (4) (42) (46) 2 years to 3 years (22) (131) (152) (68) (279) (346) 3 years to 4 years (81) (60) (681) (2) (16) (18) 4 years to 5 years (7) (45) (52) (54) (54) 5 years to 6 years (39) (39) 6 years to 7 years (2) (4) (6) (666) (3,904) (4,569) (135) (739) (874) Included within the table above are amounts relating to sub-prime and Alt-A securities of: 2008 $m 2007 $m Fair Unrealised Fair Unrealised Fair value of securities as a percentage of book value value loss value loss Between 90% and 100% 689 (39) 1,138 (48) Between 80% and 90% 172 (27) 263 (44) Below 80% 276 (239) 56 (20) 1137 (305) 1,457 (112) Sub-prime and Alt-A securities with unrealised losses of $131 million (2007: $74 million) in the balance sheet at 31 December 2008 have been in an unrealised loss position for less than one year with the remaining securities with unrealised losses of $174 million (2007: $38 million) being in an unrealised loss position for more than one year. 9

97 e Products and guarantees Jackson provides long-term savings and retirement products to retail and institutional customers throughout the US. Jackson offers fixed annuities (interest-sensitive, fixed indexed and immediate annuities), variable annuities (VA), life insurance and institutional products. i Fixed annuities Interest-sensitive annuities At 31 December 2008, interest-sensitive fixed annuities accounted for 29 per cent (2007: 25 per cent) of policy and contract liabilities of Jackson. Interest-sensitive fixed annuities are primarily deferred annuity products that are used for retirement planning and for providing income in retirement. They permit tax-deferred accumulation of funds and flexible payout options. The policyholder of an interest-sensitive fixed annuity pays Jackson a premium, which is credited to the policyholder s account. Periodically, interest is credited to the policyholder s account and in some cases administrative charges are deducted from the policyholder s account. Jackson makes benefit payments at a future date as specified in the policy based on the value of the policyholder s account at that date. The policy provides that at Jackson s discretion it may reset the interest rate, subject to a guaranteed minimum. The minimum guarantee varies from 1.5 per cent to 5.5 per cent (2007: 1.5 per cent to 5.5 per cent) depending on the jurisdiction of issue and the date of issue, with 83 per cent (2007: 80 per cent) of the fund at three per cent or less. The average guarantee rate is 3.1 per cent (2007: 3.1 per cent). Approximately 34 per cent (2007: 30 per cent) of the interest-sensitive fixed annuities Jackson wrote in 2008 provide for a market value adjustment, that could be positive or negative, on surrenders in the surrender period of the policy. This formula-based adjustment approximates the change in value that assets supporting the product would realise as interest rates move up or down. The minimum guaranteed rate is not affected by this adjustment. Fixed indexed annuities Fixed indexed annuities accounted for eight per cent (2007: seven per cent) of Jackson s policy and contract liabilities at 31 December Fixed indexed annuities vary in structure, but generally are deferred annuities that enable policyholders to obtain a portion of an equity-linked return (based on participation rates and caps) but provide a guaranteed minimum return. These guaranteed minimum rates are generally set at three per cent. Jackson hedges the equity return risk on fixed indexed products using futures and options linked to the relevant index. The cost of these hedges is taken into account in setting the index participation rates or caps. Jackson bears the investment and surrender risk on these products. Immediate annuities At 31 December 2008, immediate annuities accounted for two per cent (2007: two per cent) of Jackson s policy and contract liabilities. Immediate annuities guarantee a series of payments beginning within a year of purchase and continuing over either a fixed period of years and/or the life of the policyholder. If the term is for the life of the policyholder, then Jackson s primary risk is mortality risk. The implicit interest rate on these products is based on the market conditions that exist at the time the policy is issued and is guaranteed for the term of the annuity. ii Variable annuities At 31 December 2008, VAs accounted for 39 per cent (2007: 45 per cent) of Jackson s policy and contract liabilities. VAs are deferred annuities that have the same tax advantages and payout options as interest-sensitive and fixed indexed annuities. The primary differences between VAs and interest-sensitive or fixed indexed annuities are investment risk and return. If a policyholder chooses a VA, the rate of return depends upon the performance of the selected fund portfolio. Policyholders may allocate their investment to either the fixed or variable account. Investment risk on the variable account is borne by the policyholder, while investment risk on the fixed account is borne by Jackson through guaranteed minimum fixed rates of return. At 31 December 2008, approximately 18 per cent (2007: approximately nine per cent) of VA funds were in fixed accounts. Jackson issues VA contracts where it contractually guarantees to the contractholder either a) return of no less than total deposits made to the contract adjusted for any partial withdrawals, b) total deposits made to the contract adjusted for any partial withdrawals plus a minimum return, or c) the highest contract value on a specified anniversary date adjusted for any withdrawals following the contract anniversary. These guarantees include benefits that are payable in the event of death (guaranteed minimum death benefit (GMDB)), annuitisation (guaranteed minimum income benefit (GMIB)), or at specified dates during the accumulation period (guaranteed minimum withdrawal benefit (GMWB)) and guaranteed minimum accumulation benefit (GMAB). Jackson hedges these risks using equity options and futures contracts as described in note D3(f). The GMIB is reinsured. 10

98 iii Life insurance Jackson s life insurance products accounted for 10 per cent (2007: nine per cent) of Jackson s policy and contract liabilities at 31 December The products offered include variable universal life insurance, term life insurance and interest-sensitive life insurance. iv Institutional products Jackson s institutional products consist of GICs, funding agreements (including agreements issued in conjunction with Jackson s participation in the US Federal Home Loan Bank programme) and medium-term note funding agreements. At 31 December 2008, institutional products accounted for 12 per cent of policy and contract liabilities (2007: 12 per cent). Under a traditional GIC, the policyholder makes a lump sum deposit. The interest rate paid is fixed and established when the contract is issued. If deposited funds are withdrawn earlier than the specified term of the contract, an adjustment is made that approximates a market value adjustment. Under a funding agreement, the policyholder either makes a lump sum deposit or makes specified periodic deposits. Jackson agrees to pay a rate of interest, which may be fixed but which is usually a floating short-term interest rate linked to an external index. The average term of the funding arrangements is one to two years. Funding agreements terminable by the policyholder with less than 90 days notice account for one per cent (2007: less than one per cent) of total policyholder reserves. Medium-term note funding agreements are generally issued to support trust instruments issued on non-us exchanges or to qualified investors (as defined by SEC Rule 144A). Through the funding agreements, Jackson agrees to pay a rate of interest, which may be fixed or floating, to the holders of the trust instruments. f Exposure to market risk and risk management Jackson s main exposures are to market risk through its exposure to interest rate risk and equity risk. Approximately 90 per cent (2007: 90 per cent) of its general account investments support interest-sensitive and fixed indexed annuities, life business and surplus and 10 per cent (2007: 10 per cent) support institutional business. All of these types of business contain considerable interest rate guarantee features and, consequently, require that the assets that support them are primarily fixed income or fixed maturity. Prudential is exposed primarily to the following risks in the US arising from fluctuations in interest rates: The risk of loss related to meeting guaranteed rates of accumulation following a sharp and sustained fall in interest rates; the risk of loss related to policyholder withdrawals following a sharp and sustained increase in interest rates; and the risk of mismatch between the expected duration of certain annuity liabilities and prepayment risk and extension risk inherent in mortgage-backed securities. Prudential is also exposed to the following risks in the US arising from equity market movements: The risk of loss related to the incidence of benefits related to guarantees issued in conjunction with its VA contracts; the risk of loss related to meeting contractual accumulation requirements in FIA contracts; and the risk that the hedge programme is not effective in mitigation of periodic accounting risk. Jackson enters into financial derivative transactions, including those noted below to reduce and manage business risks. These transactions manage the risk of a change in the value, yield, price, cash flows, or quantity of, or a degree of exposure with respect to assets, liabilities or future cash flows, which Jackson has acquired or incurred. Jackson uses free-standing derivative instruments for hedging purposes. Additionally, certain liabilities, primarily trust instruments supported by funding agreements, fixed indexed annuities, certain GMWB variable annuity features and reinsured GMIB variable annuity features contain embedded derivatives as defined by IAS 39, Financial Instruments: Recognition and Measurement. Jackson does not account for such derivatives as either fair value or cash flow hedges as might be permitted if the specific hedge documentation requirements of IAS 39 were followed. Financial derivatives, including derivatives embedded in certain host liabilities that have been separated for accounting and financial reporting purposes are carried at fair value. Value movements on the derivatives are reported within the income statement. Under the Group s accounting policies supplementary analysis of the profit before taxes attributable to shareholders is provided as shown in note B1. In preparing this analysis, value movements on Jackson s derivative contracts, other than for certain equity-based product management activities, are included within short-term fluctuations in investment returns and excluded from operating results based on longer-term investment returns. Value movements on derivative instruments used for certain equity-based product management activities, based on a static long-term volatility assumption and, for embedded liabilities, average Corporate AA interest rates, are included within operating results based on longer-term investment returns, as the value movements broadly offset the economic impact of changed levels of benefit payments and reserves as equity markets fluctuate. Any differences in value movements on these derivatives between the static long-term volatility assumption and implied volatility or average Corporate AA interest rates and ending Corporate AA interest rates is reflected as a component of short-term fluctuations. The types of derivatives used by Jackson and their purpose are as follows: 11

99 Interest rate swaps generally involve the exchange of fixed and floating payments over the life of the agreement without an exchange of the underlying principal amount. These agreements are used for hedging purposes; 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-duration interest rate swap at future exercise dates. Jackson purchases and writes put-swaptions with maturities up to 10 years. On a net basis, put-swaptions hedge against significant upward movements in interest rates; equity index futures contracts and equity index call and put options are used to hedge Jackson s obligations associated with its issuance of fixed indexed immediate and deferred annuities and certain VA guarantees. These annuities and guarantees contain embedded options which are fair valued for financial reporting purposes; total return swaps in which Jackson receives equity returns or returns based on reference pools of assets in exchange for short-term floating rate payments based on notional amounts, are held for both hedging and investment purposes; cross-currency swaps, which embody spot and forward currency swaps and additionally, in some cases, interest rate swaps and equity index swaps, are entered into for the purpose of hedging Jackson s foreign currency denominated funding agreements supporting trust instrument obligations; spread cap options are used as a macro-economic hedge against declining interest rates. Jackson receives quarterly settlements based on the spread between the two-year and the 10-year constant maturity swap rates in excess of a specified spread; and credit default swaps, represent agreements under which Jackson has purchased default protection on certain underlying corporate bonds held in its portfolio. These contracts allow Jackson to sell the protected bonds at par value to the counterparty in the event of their default in exchange for periodic payments made by Jackson for the life of the agreement. Note D3(j) parts (iii) and (iv) show the sensitivities of Jackson s results through its exposure to equity risk and interest rate risk. g Process for setting assumptions and determining contract liabilities Under the MSB of reporting applied under IFRS 4 for insurance contracts, providing the requirements of the Companies Act, UK GAAP standards and the ABI SORP are met, it is permissible to reflect the previously applied UK GAAP basis. Accordingly, and consistent with the basis explained in note A4, in the case of Jackson the carrying values of insurance assets and liabilities are consolidated into the Group accounts based on US GAAP. Under US GAAP, investment contracts (as defined for US GAAP purposes) are accounted for by applying in the first instance a retrospective deposit method to determine the liability for policyholder benefits. This is then augmented by potentially three additional amounts. These amounts are for: Any amounts that have been assessed to compensate the insurer for services to be performed over future periods (i.e. deferred income); any amounts previously assessed against policyholders that are refundable on termination of the contract; and any probable future loss on the contract (i.e. premium deficiency). Capitalised acquisition costs and deferred income for these contracts are amortised over the life of the book of contracts. The present value of the estimated gross profits is generally computed using the rate of interest that accrues to policyholder balances (sometimes referred to as the contract rate). Estimated gross profits include estimates of the following elements, each of which will be determined based on the best estimate of amounts of the following individual elements over the life of the book of contracts without provision for adverse deviation for: Amounts expected to be assessed for mortality less benefit claims in excess of related policyholder balances; amounts expected to be assessed for contract administration less costs incurred for contract administration; amounts expected to be earned from the investment of policyholder balances less interest credited to policyholder balances; amounts expected to be assessed against policyholder balances upon termination of contracts (sometimes referred to as surrender charges); and other expected assessments and credits. VA contracts written by Jackson may, as described above, provide for GMDB, GMIB, GMWB and GMAB features. In general terms, liabilities for these benefits are accounted for under US GAAP by using estimates of future benefits and fees under best estimate persistency assumptions. The GMDB liability is determined each period end by estimating the expected value of death benefits in excess of the projected account balance and recognising the excess ratably over the life of the contract based on total expected assessments. At 31 December 2008, the GMDB liability was valued using a series of deterministic investment performance scenarios, a mean investment return of 8.4 per cent (2007: 8.4 per cent) and assumptions for lapse, mortality and expense that are the same as those used in amortising the capitalised acquisition costs. The direct GMIB liability is determined by estimating the expected value of the annuitisation benefits in excess of the projected account balance at the date of annuitisation and recognising the excess ratably over the accumulation period based on total expected assessments. 12

100 The assumptions used for calculating the direct GMIB liability at 31 December 2008 and 2007 are consistent with those used for calculating the GMDB liability. Jackson regularly evaluates estimates used and adjusts the additional GMDB and GMIB liability balances, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. GMIB benefits are essentially fully reinsured, subject to annual claim limits. As this reinsurance benefit is net settled, it is considered to be a derivative under IAS 39 and is, therefore, recognised at fair value with the change in fair value included as a component of short-term derivative fluctuations. Most GMWB features are considered to be embedded derivatives under IAS 39. Therefore, provisions for these benefits are recognised at fair value, with the change in fair value included in operating profit based on longer-term investment returns. Certain GMWB features guarantee payments over a lifetime and, therefore, include mortality risk. Provisions for these GMWB amounts are valued consistent with the GMDB valuation method discussed above. For periods prior to 2008, the fair values of Jackson s GMWB reserves and GMIB reinsurance were calculated based on actuarial and capital market assumptions related to projected cash flows, including benefits and related contract charges, over the lives of the contracts, incorporating expectations concerning policyholder behaviour such as lapses, fund selection, resets and withdrawal utilisation. Because of the dynamic and complex nature of these cash flows, best estimate assumptions and a stochastic process involving the generation of thousands of scenarios that assume risk neutral returns consistent with swap rates and incorporating implied volatility data and evaluations of historical volatilities for various indices were used. Estimating these cash flows involved numerous estimates and subjective judgements including those regarding expected market rates of return, market volatility, correlations of market index returns to funds, fund performance, discount rates, utilisation of the benefit by policyholders under varying conditions and policyholder lapsation. At each valuation date, Jackson assumed expected returns based on risk-adjusted spot rates as represented by the LIBOR forward curve as of that date and market volatility as determined with reference to implied volatility and evaluations of historical volatilities for various indices. The risk-adjusted spot rates as represented by the LIBOR spot curve as of the valuation date were used to determine the present value of expected future cash flows produced in the stochastic process. As GMWB obligations are relatively new in the marketplace, actual policyholder behaviour experience is limited. As a result, estimates of future policyholder behaviour are subjective and based on internal and external data. As markets change, mature and evolve and actual policyholder behaviour emerges, management continually evaluates the appropriateness of its assumptions for this component of the fair value model. Effective 1 January 2008, Jackson re-evaluated certain assumptions used in the calculation of the reserves related to GMWB and GMIB reinsurance. As a result, Jackson now bases its volatility assumptions solely on implied market volatility with no reference to historical volatility levels and explicitly incorporates Jackson s own credit risk in place of the risk-adjusted rates referenced above. Volatility assumptions are now based on a weighting of available market data on implied volatility for durations up to 12 years, at which point the projected volatility is held constant. Non-performance risk is incorporated into the calculation through the use of interest rates sourced from a AA corporate credit curve. Other risk margins, particularly for market illiquidity and policyholder behaviour are also incorporated into the model through the use of explicitly conservative assumptions. On a periodic basis, Jackson rationalises the resulting fair values based on comparisons to other models and market movements. With the exception of the GMDB, GMIB, GMWB and GMAB features of VA contracts, the financial guarantee features of Jackson s contracts are in most circumstances not explicitly valued, but the impact of any interest guarantees would be reflected as they are earned in the current account value (i.e. the US GAAP liability). For traditional life insurance contracts, provisions for future policy benefits are determined under US GAAP standards SFAS 60, Accounting and Reporting by Insurance Enterprises using the net level premium method and assumptions as of the issue date as to mortality, interest, policy lapses and expenses plus provisions for adverse deviation. Institutional products are accounted for as investment contracts under IFRS with the liability classified as being in respect of financial instruments rather than insurance contracts, as defined by IFRS 4. In practice, there is no material difference between the IFRS and US GAAP basis of recognition and measurement for these contracts. Certain institutional products representing obligations issued in currencies other than US dollars have been hedged for changes in exchange rates using cross-currency swaps. The fair value of derivatives embedded in funding agreements, as well as foreign currency transaction gains and losses, are included in the carrying value of the trust instruments supported by funding agreements recorded in other non-insurance liabilities. h Reinsurance The principal reinsurance ceded by Jackson outside the Group is on term life insurance, direct and assumed accident and health business and GMIB variable annuity guarantees. In 2008, the premiums for such ceded business amounted to $98 million (2007: $119 million). Net commissions received on ceded business and claims incurred ceded to external reinsurers totalled $14 million and $71 million, respectively, during 2008 (2007: $20 million and $94 million respectively). There were no deferred gains or losses on reinsurance contracts in either 2008 or The reinsurance asset for business ceded outside the Group was $1,150 million (2007: $868 million). 13

101 i Assumptions used to measure insurance assets and liabilities 2008 a Measurement basis for embedded derivatives of variable annuity business There were no changes of assumptions that had a material effect on the Jackson results. However, there has been a significant change of estimation technique for two aspects of the basis of measuring embedded derivatives for Guaranteed Minimum Withdrawal Benefit (GMWB) features of Jackson s variable annuity products and the reinsurance of the Guaranteed Minimum Income Benefit (GMIB). The two aspects are for the application of: i ii Implied current equity volatility levels rather than historic long-term average levels, which had been applied previously, and The reference basis for determining the discount rate to apply to future cash flows in the projection of the effect of the guarantees. The change is to apply AA corporate bond rates based off appropriate Merrill Lynch indices, rather than LIBOR based swap rates that, in 2008, had become both anomalously low and distorted by comparison to US Treasury bond curve rates. In broad terms, corporate AA rates were approximately 400 basis points higher than the LIBOR based swap rates at the end of Similarly, at the beginning of 2008 corporate AA rates were approximately 100 basis points higher than the LIBOR based swap rate. The effect of the change in respect of equity volatility is to increase the total loss for 2008 for Jackson by $181 million. The effect of the change for the reference basis for discounting is to reduce the total loss by $249 million. b Deferred acquisition costs Income statement amortisation for variable annuity business Under IFRS 4, the Group applies US GAAP to the insurance assets and liabilities of Jackson. Under the US GAAP standard FAS 97, acquisition costs for Jackson s fixed and variable annuity business are deferred and then amortised in line with the expected emergence of margins. The amortisation profile is dependant on assumptions which, for variable annuity business, the key assumption is the expected level of equity market returns. For 2008 and recent previous years a rate of 8.4 per cent has been applied using, as is industry practice, a mean reversion methodology. The mean reversion methodology is applied with the objective of adjusting the amortisation of deferred acquisition costs that would otherwise be highly volatile for the fact that the expected level of future gross profits fluctuates for altered variable annuity asset values arising from changes in equity market levels at the end of each reporting period. The mean reversion methodology achieves this objective by dynamic adjustment to the level of expectations of short-term future investment returns. Under the methodology the projected returns for the next five years are, for the purposes of determining the amortisation profile, set so that normally combined with the actual returns for the current and preceding two years the average rate of return is 8.4 per cent. The mean reversion methodology does, however, include a cap of 15 per cent per annum on the project return for each of the next five years. For 2008 this capping effect applied to restrict the projected returns below the rate of approximately 20 per cent per annum level that would have otherwise applied. Projected returns after the next five years are set at 8.4 per cent. In 2008, US equity market indices fell by some 38.5 per cent. If there had been no mean reversion methodology in place there would have been an increased amortisation charge of approximately $360 million. However, as noted above, the mean reversion methodology allows for a substantial, but not complete, recovery of the lost fund value. As a result, DAC amortisation, reflected in the 2008 results after incorporating the mean reversion has instead increased by some $201 million, of which $58 million arises due to the capping feature. Statement of changes in equity shadow DAC adjustments Consequent upon the negative unrealised valuation movement in 2008 of $(3,896) million (2007: $(486) million) there is a credit of $1,538 million (2007: $175 million) for altered shadow amortisation booked within the statement of changes in equity. These adjustments reflect the changes to the pattern of reported gross profits that would have happened if the assets had been sold, crystallising the loss, and the proceeds reinvested at correspondingly higher current yields. In the event of further unrealised losses, this dynamic would be constrained under two circumstances. Firstly, the DAC asset would not be written up any further beyond the original deferral plus a provision for interest accrual on the asset. Secondly, and more generally, the write up of DAC would be constrained if not supported by expectations of future profitability The operating profit based on longer-term investment returns of $884 million for US insurance operations for 2007 has been determined after taking account of several changes of assumptions during the year. Generally, assumptions were modified in 2007 to conform to more recent experience. These changes included revisions to the assumptions regarding mortality rates, resulting in an increase in operating profits of $28 million, and utilisation of free partial withdrawal options, resulting in a decrease to operating profits of $8 million. In addition, several smaller changes relating to lapse rates and other assumptions resulted in a decrease of $4 million in operating profits. Combined with other minor modifications, the resulting net impact of all changes during the year was an increase in pre-tax profits of $16 million. 14

102 j Sensitivity of IFRS basis profit and equity to market and other risks i Currency fluctuations Consistent with the Group s accounting policies, the profits of the Group s US operations are translated at average exchange rates and shareholders equity at the closing rate for the reporting period. For 2008, the rates were US$1.85 (2007: US$2.00) and US$1.44 (2007: US$1.99) to 1 sterling, respectively. A 10 per cent increase or decrease in these rates would reduce or increase profit before tax attributable to shareholders, profit for the year and shareholders equity attributable to US insurance operations respectively as follows: A 10% increase in exchange rates A 10% decrease in exchange rates 2008 $m 2007 $m 2008 $m 2007 $m (Loss) profit before tax attributable to shareholders* (Loss) profit for the year 94 (58) (115) 70 Shareholders equity attributable to US insurance operations (293) (484) * Sensitivity on (loss) profit before tax i.e. aggregate of the operating profit based on longer-term investment returns and short-term fluctuations, as discussed in note B1. The opposite effect of a 10 per cent increase and decrease of exchange rates on (loss) profit for 2008 compared to 2007 is due to a loss before and after tax for 2008 compared to a profit before and after tax for ii Other sensitivities The principal determinants of variations in operating profit based on longer-term returns are: Growth in the size of assets under management covering the liabilities for the contracts in force; incidence of guarantees and the effectiveness of the related hedge programme; and spread returns for the difference between investment returns and rates credited to policyholders. For the purpose of determining longer-term returns, adjustment is necessary for the normalisation of investment returns to remove the effects of short-term volatility in investment returns. Amortisation of deferred acquisition costs. For term business, acquisition costs are deferred and amortised in line with expected premiums. For annuity business, acquisition costs are deferred and amortised in line with expected gross profits on the relevant contracts. For interestsensitive business, the key assumption is the expected long-term spread between the earned rate and the rate credited to policyholders, which is based on an annual spread analysis. In addition, expected gross profits depend on mortality assumptions, assumed unit costs and terminations other than deaths (including the related charges) all of which are based on a combination of actual experience of Jackson, industry experience and future expectations. A detailed analysis of actual experience is measured by internally developed mortality and persistency studies. For variable annuity business, the key assumption is the expected long-term level of equity market returns, which for 2008 and 2007 was 8.4 per cent per annum implemented using a mean reversion methodology. These returns affect the level of future expected profits through their effects on the fee income and the required level of provision for guaranteed minimum death benefit claims. The mean reversion methodology dampens the impact of equity market movements during a particular year, but does not fully eliminate the effects of movements in the equity markets. In addition, the mean reversion methodology includes both a cap and a floor that determine the maximum impact that the methodology may have. Due to the significant market movements during 2008, Jackson exceeded the cap on future equity market returns, resulting in a higher level of DAC amortisation than would have been recognised had the cap not been met. Variations in fees and other income, offset by variations in market value adjustment payments and, where necessary, strengthening of liabilities. Except to the extent of mortality experience, which primarily affects profits through variations in claim payments and GMDB reserves, the profits of Jackson are relatively insensitive to changes in insurance risk. 15

103 iii Exposure to equity risk As noted in note D3(f), Jackson is exposed to equity risk through the options embedded in the fixed indexed liabilities and GMDB and GMWB guarantees included in certain VA benefits. This risk is managed using a comprehensive equity hedging programme to minimise the risk of a significant economic impact as a result of increases or decreases in equity market levels while taking advantage of naturally offsetting exposures in Jackson s operations. Jackson purchases external futures and options that hedge the risks inherent in these products, while also considering the impact of rising and falling separate account fees. As a result of this hedging programme, if the equity markets were to increase, Jackson s free-standing derivatives would decrease in value. However, over time, this movement would be broadly offset by increased separate account fees and reserve decreases, net of the related changes to amortisation of deferred acquisition costs. Due to the nature of the freestanding and embedded derivatives, this hedge, while highly effective on an economic basis, may not completely mute the immediate impact of the market movements as the free-standing derivatives reset immediately while the hedged liabilities reset more slowly (see note D3(g) for further details on the valuation of the guarantees) and fees are recognised prospectively. At 31 December 2008 based on the hedges in place at that time, it is estimated that an immediate decrease in the equity markets of 10 per cent would result in an accounting charge, net of related DAC amortisation, before tax of up to $29 million, excluding the impact on future separate account fees. After related deferred tax there would have been an estimated reduction in shareholders equity at 31 December 2008 of up to $22 million. An immediate decrease in the equity markets of 20 and 40 per cent would result in an accounting charge, net of related DAC amortisation, before tax of up to $58 million and $129 million respectively, excluding the impact on future separate account fees. After related deferred tax there would have been an estimated reduction in shareholders equity at 31 December 2008 of up to $43 million and $86 million respectively. Since the year-end we have implemented additional equity hedging to reduce the exposure to further falls in the level of the S&P index. An immediate increase in the equity markets of the percentages above would result in an approximately equal and opposite estimated effect on profit and shareholders equity. At 31 December 2007, it was estimated that an immediate decrease in the equity markets at 10 per cent would result in an accounting benefit, net of related DAC amortisation, before tax of up to $60 million, excluding the impact on future separate account fees. After related deferred tax, it was estimated that there would have been an increase in shareholders equity of up to $40 million. The difference in the effects of a decrease in the equity markets at 31 December 2008 and 2007 was due to an increased number of GMDB and GMWB guarantees being in the money. As a result of this changed position, the adverse effects from a decreasing equity market at 31 December 2008 more than offsets the benefits from the hedging instruments. The actual impact on financial results would vary contingent upon the volume of new product sales and lapses, changes to the derivative portfolio, correlation of market returns and various other factors including volatility, interest rates and elapsed time. In addition, Jackson is also exposed to equity risk from its holding of equity securities, partnerships in investment pools and other financial derivatives. Jackson has extended the range of reasonably possible movements in the value of equity securities, partnerships in investment pools and other financial derivatives at 31 December Consequently, in addition to the movement of 10 per cent as applied at 31 December 2007, for 2008, Jackson has also estimated the sensitivity to movements of 20 and 40 per cent. A 10 per cent fall in their value at 31 December 2008 and 2007 and a 20 and 40 per cent fall in their value at 31 December 2008 would have given rise to the following effects on pre-tax profit, net of related changes in amortisation of DAC, profit after tax and shareholders equity $m 2007 $m A decrease A decrease A decrease A decrease of 40% of 20% of 10% of 10% Pre-tax profit, net of related changes in amortisation of DAC (472) (261) (182) (152) Related deferred tax effects Net sensitivity of profit after tax and shareholders equity (307) (170) (119) (100) iv Exposure to interest rate risk Notwithstanding the market risk exposure described in note D3(f), except in the circumstances of interest rate scenarios where the guarantee rates included in contract terms are higher than crediting rates that can be supported from assets held to cover liabilities, the accounting measurement of fixed annuity liabilities of Jackson products is not generally sensitive to interest rate risk. This position derives from the nature of the products and the US GAAP basis of measurement described in notes D3(e) and D3(g). The GMWB features attaching to variable annuity business represents embedded derivatives which are fair valued and so will be sensitive to changes in interest rate. 16

104 Debt securities and related derivatives are marked to fair value. Value movements on derivatives, again net of related changes to amortisation of DAC and deferred tax, are recorded within profit and loss. Fair value movements on debt securities, net of related changes to amortisation of DAC and deferred tax, are recorded within the statement of changes in equity. Similar to the sensitivity analysis to equity prices movement above, Jackson has extended the range of the movements in interest rates that are reasonably possible to occur at 31 December 2008 in its sensitivity analysis. In addition to the movement in interest rates of one per cent as applied at 31 December 2007, for 2008, Jackson has also estimated the sensitivity to movement in interest rates of two per cent. The estimated sensitivity of these items and policyholder liabilities to a one per cent decrease and increase in interest rates at 31 December 2008 and 2007 and to a two per cent decrease and increase in interest rates at 31 December 2008 is as follows: 2008 $m 2007 $m A 2% A 1% A 1% A 2% A 1% A 1% decrease decrease increase increase decrease increase Profit and loss Direct effect Derivatives value change (827) (385) (231) 325 Policyholder liabilities (743) (313) (76) 58 Related effect on amortisation of DAC (278) (568) 104 (116) Pre-tax profit effect Operating profit based on longer-term investment returns (184) (85) (30) 22 Short-term fluctuations in investment returns (670) (305) (173) 245 (854) (390) (203) 267 Related effect on charge for deferred tax (167) (298) 72 (94) Net profit effect (558) (255) (131) 173 Statement of changes in equity Direct effect on carrying value of debt securities 3,560 1,780 (1,780) (3,560) 1688 (1688) Related effect on amortisation of DAC (890) (446) (422) 422 Related effect on movement in deferred tax (935) (467) (444) 444 Net effect 1, (867) (1,735) 822 (822) Total net effect on IFRS equity 1, (613) (1,179) 691 (649) k Duration of liabilities The Group uses cash flow projections of expected benefit payments as part of the determination of the value of in-force business when preparing EEV basis results. The maturity profile of the cash flows used for that purpose for 2008 and 2007 is as follows: 2008 $m 2007 $m Fixed annuity and other business (including GICs and similar contracts) Variable annuity Fixed annuity and other business (including GICs and similar contracts) Variable annuity Policyholder liabilities 44,317 20,903 39,456 29,913 % % % % Expected maturity: 0 to 5 years to 10 years to 15 years to 20 years to 25 years Over 25 years The maturity tables shown above have been prepared on a discounted basis. Details of undiscounted cash flows for investment contracts are shown in note G2. 17

105 ANNEX 6

106 1

107 2

108 3

109 4

110 5

111 6

112 7

113 8

114 9

115 10

116 11

117 12

118 13

119 14

120 15

121 ANNEX 7

122 Jackson National Life Insurance Company Three months ended March 31, 2009 RECENT DEVELOPMENTS PREMIUMS AND ANNUITY CONSIDERATIONS totaled $2,507.0 million for the three months ended March 31, 2009 as compared with $2,306.2 million for the same period in The uncertainty in the economy and the decline in the stock market in the first quarter of 2009 have increased customer demand for fixed annuities. Fixed annuity premiums received in the first three months of 2009 of $692.5 million were up 81% compared to $381.8 million received for the same period in Sales of fixed-indexed annuities during the first three months of the year totaled $353.7 million, an increase of 83% compared to $193.6 million in the same period a year ago. This increase was partially offset by variable annuity sales of $1,507.6 million in 2009, down 15% from 2008 sales of $1,779.7 million. Jackson did not sell any institutional products during the first quarter of 2009, as the company redirected available capital to support higher-margin annuity sales. Jackson participates in the institutional market on an opportunistic basis when capital is available and margins are attractive. NET LOSS totaled $248.1 million for the three months ended March 31, 2009, compared to net income of $85.1 million for the three months ended March 31, The loss is primarily due to the unprecedented economic environment starting in the last half of 2008 and conditions in 2009, including the effect of the significant decline in equity markets on the Company s variable annuity guaranteed benefit reserves and losses associated with CARVM allowance on separate account business. CAPITAL AND SURPLUS decreased to $3.51 billion at March 31, 2009 compared to $3.75 billion at December 31, The decrease of $235.3 million is comprised of net loss ($248.1 million) and a decrease in net deferred tax asset ($156.5 million), partially offset by a decrease in non-admitted assets ($54.5 million), net unrealized capital gains ($41.8 million), a change in surplus as a result of reinsurance ($32.3 million) and a decrease in the asset valuation reserve ($40.7 million). TOTAL ADMITTED ASSETS decreased to $66.9 billion at March 31, 2009 from $68.3 billion at December 31, This decrease is attributable primarily to a $1.3 billion decrease in separate account assets supporting variable annuity liabilities. Effective for 2008 reporting, the Michigan Insurance Commissioner granted Jackson three permitted practices, which expire October 1, 2009, unless extended by the Commissioner. One permitted practice allows Jackson to carry interest rate swaps at book value, as if statutory hedge accounting were in place, instead of at fair value as would have been otherwise required. As a condition of granting the permitted practice, Jackson had to demonstrate the effectiveness of its interest rate swap program pursuant to the Michigan Insurance Code. The Commissioner also granted a permitted practice to allow Jackson to recognize book to tax differences that will reverse within the next 3 years (instead of 1 year as required by the NAIC) when determining the admissible deferred tax asset (subject to a limitation of 15% of capital and surplus versus the 10% limitation imposed by the NAIC guidance). Finally, the Commissioner granted a permitted practice to allow Jackson to use an average interest rate in calculating certain regulatory capital requirements. The permitted practices require that Jackson maintain certain minimum capital

123 levels excluding the effect of the permitted practices. The total effect of these permitted practices was to increase statutory surplus by $646.9 million at March 31, Excluding the effect of these permitted practices, Jackson s adjusted capital and surplus was well in excess of regulatory requirements. These permitted practices had no impact on statutory net loss. Jackson s investment portfolio is broadly diversified with slightly more than 1,600 issuers. Below investment grade bonds totaled 8.1% of cash and invested assets at March 31, 2009, up from 6.4% at December 31, Jackson s direct exposure to the subprime mortgage market is $475.5 million at March 31, Most of this exposure is in fixed rate, residential mortgage backed securities that are AAA rated and hold first liens on the underlying collateral. Jackson had total unrealized gains of $347.7 million and total unrealized losses of $4,561.1 million on its debt securities at March 31, Of the total carrying value of bonds in an unrealized loss position at March 31, 2009, 86.4% were investment grade. Unrealized losses from bonds that were below investment grade comprised 24.6% of the aggregate gross unrealized loss on debt securities. For Statutory reporting, Jackson s debt securities are generally reported at amortized cost, so the unrealized gains and losses are not reflected in income or capital and surplus. 2

124 ANNEX 8

125 1

126 2