Jackson Financial Inc. quarterly report, Q1 FY2023

Jackson Financial Inc. — Q1 2023 Form 10-Q

Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are against December 31, 2022. Jackson provides annuity, life insurance and institutional retirement products, principally through its Retail Annuities business.

Key financial results

MetricQ1 2023Q1 2022
GAAP total revenue$(749) million$2,221 million
GAAP net income (loss) attributable to Jackson Financial$(1,497) million$2,194 million
Basic and diluted EPS$(18.11)$25.41 basic; $24.39 diluted
Adjusted operating earnings, non-GAAP$271 million$377 million
Pretax adjusted operating earnings, non-GAAP$302 million$445 million
Net cash from operating activities$1,461 million$833 million
Net cash used in investing activities$(2,882) million$(202) million
Net cash used in financing activities$(1,099) million$(582) million

The GAAP loss primarily reflected $3.399 billion of net losses on derivatives and investments, including losses related to funds-withheld reinsurance, and unfavorable market risk benefit movements. Management’s adjusted operating measure excludes significant market-sensitive and other items; it also declined year over year. GAAP revenue and earnings therefore should be read alongside, not replaced by, the non-GAAP measures.

Business performance and period-over-period changes

  • Total sales were $3.789 billion, down from $5.772 billion. Retail annuity sales fell to $3.140 billion from $4.797 billion, primarily on lower variable annuity sales; RILA sales rose to $533 million from $199 million. Institutional product sales declined to $649 million from $975 million.
  • Retail Annuities pretax adjusted operating earnings were $356 million, versus $425 million; Institutional Products were $9 million versus $23 million; Closed Life and Annuity Blocks lost $20 million versus $9 million; Corporate and Other lost $43 million versus income of $6 million.
  • Retail annuity net flows, net of reinsurance, were negative $1.225 billion; gross of reinsurance, negative $2.428 billion. Institutional net flows were negative $391 million. The filing attributes weaker flows to lower variable annuity sales and higher institutional withdrawals.
  • Fee income declined to $1.888 billion from $2.012 billion, with lower average separate-account values cited as a principal factor. Net investment income increased to $722 million from $690 million.
  • Operating costs and other expenses decreased to $616 million from $666 million. Interest credited on contract-holder funds rose to $285 million from $197 million, while interest expense increased to $43 million from $20 million.

Financial position, liquidity and capital

  • Total assets were $321.464 billion and total liabilities $311.997 billion at March 31. Total equity was $9.467 billion, including $533 million of newly issued preferred stock; shareholders’ equity was $8.638 billion.
  • Cash and cash equivalents were $1.779 billion, down from $4.298 billion at year-end. The company reported $1.461 billion of operating cash flow, but investing outflows—primarily derivative settlements and collateral—contributed to a $2.520 billion decrease in cash, cash equivalents and restricted cash.
  • Long-term debt was $2.632 billion, including $598 million of senior notes due in 2023; fair value was reported at $2.403 billion. Jackson also had a $1.0 billion revolving credit facility maturing in 2028 and was in compliance with its covenants. A separate $500 million uncommitted short-term facility was established in April; it had not been drawn as of May 9.
  • Management said insurance subsidiaries were well above minimum regulatory capital levels. Jackson reported $22.6 billion of unencumbered and unrestricted cash, short-term investments and publicly and privately traded securities. Net collateral payable on derivatives was $545 million, compared with $689 million at year-end.
  • Available-for-sale debt securities had $5.223 billion of net unrealized losses at March 31, down from $6.286 billion at year-end. Management said it did not intend, and did not expect to be required, to sell the impaired securities before recovery; credit-spread and interest-rate changes could nevertheless affect valuations and liquidity.

Outlook, risks and unusual items

  • The filing gives no quantified earnings or sales guidance. Management noted that equity markets rose and volatility eased in Q1, but warned that market volatility, interest-rate movements, hedging effectiveness and basis risk can affect earnings, capital and collateral needs. Rising rates may also increase surrender activity and reduce asset values.
  • Jackson adopted long-duration targeted improvements (LDTI) effective January 1, 2023, with a January 1, 2021 transition date. Adoption reduced equity by approximately $3.0 billion at transition and materially changed measurement and presentation of market risk benefits, policy liabilities and acquisition costs. Comparative periods were recast; reported Q1 2022 net income attributable to Jackson increased by $169 million under the new standard.
  • The allowance for mortgage loan credit losses increased by $51 million to $146 million, primarily due to stress around repayment or refinancing of one mezzanine loan. The company continued to assess options with the borrower and lending group.
  • Disclosure controls and internal control over financial reporting were reported ineffective as of March 31 because of a material weakness in risk assessment of a control over the non-performance-risk adjustment used to value certain variable-annuity guarantees. Remediation began in Q1; management expected remediation by year-end.
  • Jackson became subject to the new corporate alternative minimum tax framework in 2023, but had recorded no AMT provision as of March 31; Treasury guidance was pending. Litigation was described as arising in the ordinary course, and management did not expect its ultimate disposition to materially adversely affect financial condition.
  • The company issued $533 million net proceeds from Series A preferred stock, with an initial 8.0% annual dividend rate through March 2028. It repurchased $70 million of common stock in Q1 and had $457 million of repurchase authorization remaining as of May 3. Common and preferred dividends remain subject to board discretion and other restrictions.

Most important facts for investors to verify

  • How much of the GAAP loss and its year-over-year swing reflects market-sensitive derivative, reinsurance and market risk benefit accounting, versus underlying operating performance.
  • Whether adjusted operating earnings, retail sales and net flows stabilize, particularly for variable annuities and institutional products.
  • How the mortgage-loan allowance and the stressed mezzanine loan develop, and whether other real-estate exposures require additional provisions.
  • Whether management remediates the disclosed material weakness by year-end and whether the control issue affects future valuations or reported results.
  • Cash needs from policyholder withdrawals, derivative collateral, debt maturity and capital distributions, alongside subsidiary statutory capital and dividend capacity.
  • The effects of LDTI presentation, pending AMT guidance, and any changes in ratings, regulation or market conditions on earnings, capital and liquidity.