Jackson Financial Inc. quarterly report, Q3 FY2022

Jackson Financial Inc. — Q3 2022 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2022; balance-sheet comparisons are against December 31, 2021. Jackson Financial provides retirement savings and income products, primarily annuities, through its insurance subsidiaries. Amounts below are in millions of dollars except per-share data and percentages.

Financial results and key metrics

Metric	Q3 2022	Q3 2021	Nine months 2022	Nine months 2021
Total revenue	$4,022	$1,575	$14,932	$7,522
Net income attributable to Jackson Financial	$1,479	$206	$6,407	$2,598
Diluted EPS	$16.83	$2.18	$71.73	$27.50
Adjusted operating earnings, non-GAAP	$373	$487	$952	$1,692
Pretax adjusted operating earnings, non-GAAP	$404	$571	$1,065	$1,965

GAAP earnings included substantial, volatile derivative and investment gains: net gains were $1,419 in Q3 and $6,891 for nine months, versus losses of $1,379 and $1,194 in the comparable 2021 periods. Management attributed the improvement principally to market-driven hedge, guarantee-reserve and funds-withheld reinsurance movements. These items do not represent the company’s non-GAAP underlying operating measure.
Underlying adjusted operating earnings declined. Retail Annuities pretax adjusted operating earnings were $364 in Q3 (down from $527) and $988 for nine months (down from $1,779). Lower variable-annuity account values and limited-partnership income, and higher DAC amortization over the nine-month period, were key factors. Institutional Products earned $20 in Q3 and $62 year to date; Closed Life and Annuity Blocks earned $33 and $31, respectively.
Net investment income was $640 in Q3 and $2,022 for nine months, down from $837 and $2,568. Management cited lower limited-partnership investment income, which is generally reported on a one-quarter lag. Fee income decreased to $1,908 in Q3 and $5,854 year to date, primarily reflecting lower variable-annuity account values.
Q3 pretax income was $2,027 and income tax expense was $559; the effective tax rate was 27.4%. Nine-month pretax income was $8,064, tax expense $1,606, and effective tax rate 20.0%. The reported effective tax rates are affected by taxable-income relationships, tax credits and prior-year tax adjustments.

Cash flow, balance sheet and capital

Nine-month operating cash flow was $2,941, versus $3,535 in 2021; investing cash flow was $2,469, versus $624; financing cash outflow was $2,700, versus $3,696. Cash, cash equivalents and restricted cash ended at $5,341, up from $2,631 at year-end 2021.
Total assets were $302,970, down from $375,559; separate-account assets and matching liabilities fell to $185,042 from $248,949, largely reflecting market movements. Total equity was $9,703, compared with $11,074 at year-end; shareholders’ equity was $8,974.
Accumulated other comprehensive loss was $5,718, compared with income of $1,744 at year-end. The principal driver was unrealized investment losses amid rising interest rates and wider credit spreads. Management said the loss-position securities did not require earnings impairment and that it intended and expected to be able to hold them until recovery, but future sales or deteriorating credit could realize losses.
Long-term debt was $2,634, versus $2,649 at year-end. The company issued $750 of senior notes in June 2022 and used proceeds with cash to repay its $750 term loan due 2023. It had a $1,000 revolving credit facility, maturing in February 2024, and reported compliance with its financial covenants.
Management reported insurance subsidiaries well above minimum statutory capital requirements, but did not provide a specific RBC ratio in the supplied filing text. Jackson had $23.6 billion of unencumbered, unrestricted cash, short-term investments and securities available for sale. The holding company targets $250 million of cash and highly liquid securities to cover two years of fixed expenses.
The company paid $0.55 per share in Q3 dividends and repurchased 1.2 million shares for $39. The board approved another $0.55-per-share dividend for payment in December 2022. The company reported $119 of remaining repurchase authorization as of November 3, 2022.

Material changes versus comparable periods

Total sales fell to $3,874 in Q3 from $4,812; nine-month sales were $13,989 versus $14,395. Lower variable-annuity sales were partly offset by new RILA and higher institutional-product sales. RILA sales were $562 in Q3 and $1,251 year to date; the product launched in late 2021.
Retail annuity account value, net of reinsurance, declined to $197,901 from $259,423 at year-end 2021. Management cited negative variable-annuity market performance and net outflows. Nine-month retail annuity net flows, net of reinsurance, were negative $593, compared with negative $2,479 in 2021; gross of reinsurance, they were negative $1,681.
Net gains on derivatives and investments swung sharply year over year. In addition to market sensitivity, GAAP results were affected by higher DAC amortization: $564 in Q3 and $2,276 for nine months, versus $4 and $551 in 2021.
The company revised certain prior-period balance-sheet, income-statement and cash-flow classifications relating to deferred sales inducements, annuity liabilities, expenses and other items. Management said the changes were not material and did not affect previously reported net income, total equity or net cash flows.

Outlook, risks and unusual items

No specific earnings or sales guidance was provided. Management noted that higher interest rates can improve future investment yields and reduce expected hedging costs, but can also cause immediate hedge losses, increase surrenders and withdrawals, and raise collateral needs. Equity declines and volatility can reduce fee income and increase hedging costs; hedge results may not fully track policyholder exposures.
The company expects to be subject to the Inflation Reduction Act’s 15% corporate alternative minimum tax beginning in 2023; it had recorded no provision as of September 30, 2022. Management said the tax may affect cash taxes, with final regulatory guidance still pending. A 1% excise tax on certain stock repurchases also takes effect in 2023.
Jackson expects to adopt long-duration contract accounting (LDTI) on January 1, 2023, using a January 1, 2021 transition date. Its earlier estimate was a $2 billion–$4 billion reduction in total equity at transition; management said that, as of September 30, 2022, market changes—principally higher rates—had moved the estimate toward a positive equity impact. The final impact remains sensitive to market conditions and implementation.
Disclosure controls and procedures were deemed ineffective as of September 30, 2022 because of a material weakness in internal control over financial reporting related to the prior financial-statement restatement. Management expected remediation by year-end 2022, but stated the weakness would not be remediated until controls operated effectively for a sufficient period and testing confirmed this.
Other risks include regulatory and rating changes, policyholder behavior, reserve and valuation assumptions, reinsurance counterparty performance, cyber and operational disruptions, and tax-law changes that could reduce annuity product appeal. Moody’s had a negative outlook on Jackson National Life Insurance Company and its New York subsidiary as of November 3, 2022; the other listed subsidiary rating outlooks were stable.
Management said ordinary-course litigation was not expected to have a material adverse effect. Unfunded investment commitments were $1,577 for limited partnerships and LLCs and $1,401 for fixed-rate mortgage loans and other debt securities. The filing reported no off-balance-sheet arrangements as of quarter-end.

Important facts for investors to verify

Reconcile GAAP net income with adjusted operating earnings and assess how much of reported profit depends on market-sensitive derivatives, guarantee liabilities and funds-withheld reinsurance.
Track variable-annuity account values, fee income, net flows, sales mix and DAC amortization, particularly as equity markets and interest rates change.
Review statutory capital and dividend capacity, liquidity under elevated surrender or collateral demands, debt maturities and the terms of the revolving credit facility; the filing does not give a specific quarter-end RBC ratio.
Monitor the final LDTI transition adjustment, 2023 alternative minimum tax guidance, and the status and testing of internal-control remediation.
Evaluate unrealized investment losses, credit quality and potential forced or discretionary asset sales. Investment-grade debt securities were 92.2% of the debt portfolio at September 30, 2022, versus 93.5% at year-end 2021.