Jackson Financial Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unless noted, amounts are in millions of dollars. Jackson is a U.S. retirement-focused insurer and financial services company, primarily selling annuities and managing closed life and annuity blocks. Comparative 2022 figures reflect adoption of LDTI and certain revisions and reclassifications.
Financial results and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Fee income | $1,913 | $1,934 | $3,801 | $3,946 |
| Net investment income | $672 | $692 | $1,394 | $1,382 |
| GAAP total revenue | $410 | $6,694 | $(339) | $8,915 |
| GAAP net income (loss) attributable to Jackson | $1,217 | $3,263 | $(280) | $5,457 |
| Net income (loss) attributable to common shareholders | $1,204 | $3,263 | $(293) | $5,457 |
| Adjusted operating earnings, after tax (non-GAAP) | $283 | $407 | $554 | $784 |
| Pretax adjusted operating earnings (non-GAAP) | $305 | $464 | $607 | $909 |
- GAAP volatility: Derivatives and investment results were losses of $2,246 in Q2 and $5,645 for the first half, versus gains of $4,015 and $3,477 in the comparable 2022 periods. Favorable market risk benefit movements partly offset these results: gains of $2,570 in Q2 and $2,744 for the first half. GAAP results therefore differ substantially from the non-GAAP operating measure.
- Operating trends: Six-month adjusted operating earnings declined to $554 from $784. Lower fee income, driven mainly by lower average separate-account values, higher credited interest and interest expense, and weaker operating derivative results weighed on earnings. Retail Annuities generated $684 of first-half pretax adjusted operating earnings, down from $850; Institutional Products earned $26, down from $42; Closed Life and Annuity Blocks recorded a $13 loss versus $3 income; Corporate and Other recorded a $90 loss versus $14 income.
- Cash flow: First-half operating cash flow was $2,547, investing cash outflow was $2,804, and financing cash outflow was $1,941. Cash, cash equivalents and restricted cash fell by $2,198 to $2,103. Management attributed the investing outflow mainly to derivative settlements and collateral associated with market increases.
- Balance sheet and liquidity: At June 30, total assets were $326,980 and total liabilities $317,557; total equity was $9,423, including $533 of Series A preferred equity. Cash and cash equivalents were $2,100, down from $4,298 at year-end 2022. Jackson reported $21.1 billion of unrestricted, unencumbered cash, short-term investments and publicly and privately traded securities available for liquidity needs. Separate-account assets and matching liabilities were each $212,719.
- Debt and capital: Long-term debt was $2,633, including $599 of senior notes due in 2023, $250 of surplus notes due in 2027 and other senior notes. The company had a $1.0 billion revolving credit facility maturing in 2028 and reported compliance with its covenants. Net collateral payable on derivatives was $498, down from $689 at year-end. Insurance subsidiaries were described as well above minimum required capital levels; a current RBC ratio was not provided in the supplied text.
Material changes and operating measures
- Total sales were $3,408 in Q2 and $7,197 for the first half, down from $4,343 and $10,115 in 2022. Lower variable-annuity sales were partly offset by higher RILA sales; higher interest rates supported growth in fixed and fixed-index annuity sales.
- Variable-annuity net flows remained negative: $(2,045) in Q2 and $(3,819) for the first half. Total Retail Annuities net flows, net of reinsurance, were $(1,477) and $(2,702), respectively. RILA net flows were positive.
- Retail Annuities account value, net of reinsurance, rose to $227,266 from $209,967 at year-end, primarily reflecting positive investment performance, despite negative net flows. Total AUM increased to $306,402 from $290,549.
- Available-for-sale debt securities had $5,911 of gross unrealized losses and $119 of gross unrealized gains at June 30. Management said it did not intend, and was not more likely than not required, to sell securities in unrealized-loss positions before recovery; it expected to recover amortized cost. Investment-grade debt securities represented 92.9% of total debt securities.
- Mortgage-loan credit-loss allowances rose to $162 from $95 at year-end, including an $82 increase associated primarily with two stressed mezzanine loans. The largest reported property-type balance was apartment loans; office loans were $1,497.
Outlook, risks and unusual items
- Outlook: The filing provides no quantified earnings or sales guidance. Management cites retirement demographics and product demand as opportunities, while noting that interest rates, equity performance, volatility, credit conditions and policyholder behavior can materially affect sales, fees, hedging, reserves, liquidity and capital.
- Hedging and accounting sensitivity: Equity-market gains and interest-rate changes can drive substantial derivative and market-risk-benefit remeasurement swings. Management cautions that hedges may be less effective during large market moves or high volatility and that basis risk can cause hedge results to diverge from underlying customer funds.
- Reinsurance and credit: The reinsurance recoverable allowance increased to $39 from $15; the company cited a specific reinsurer ordered into liquidation. Jackson retains liability if reinsurers fail to meet obligations, notwithstanding collateral and other protections.
- Unusual investment item: Jackson Financial purchased private-equity fund interests from its insurance subsidiary for $452, versus a $502 carrying value, and recorded an expected $50 loss on future divestiture in net investment income, excluded from adjusted operating earnings.
- Cybersecurity: A MOVEit-related incident at vendor Pension Benefit Information exposed information relating to approximately 850,000 Jackson customers. Jackson also reported unauthorized access to two of its own servers. The company said it notified affected individuals and regulators, provided identity-protection services, and did not believe the incident had a material adverse effect.
- Controls and contingencies: Disclosure controls and internal control over financial reporting were deemed ineffective due to a material weakness in risk assessment over a process-level control for the non-performance-risk adjustment used in valuing certain variable-annuity guarantees. Remediation began in Q1; management expected completion by year-end 2023. Management said ordinary-course litigation was not expected to materially harm financial condition.
- Other items: The company expected to be subject to the Inflation Reduction Act corporate alternative minimum tax beginning in 2023, but had recorded no provision as of June 30, pending regulatory guidance. LDTI adoption reduced equity by $3.0 billion at its January 1, 2021 transition date. A $0.62-per-share common dividend and $0.50-per-depositary-share preferred dividend were declared after quarter-end.
Investor verification priorities
- Reconcile GAAP net income and derivative/MRB volatility with adjusted operating earnings, and assess how much of the earnings trend reflects core operations versus market remeasurement.
- Review variable-annuity sales, persistent negative net flows, fee-base trends and the assumptions and hedging effectiveness underlying market-risk-benefit valuations.
- Assess the two stressed mezzanine loans, office-property exposure, rising mortgage allowance and the liquidation-related reinsurer credit exposure.
- Verify progress and testing of remediation for the disclosed material weakness, including governance over the non-performance-risk valuation input.
- Monitor liquidity and collateral requirements, the 2023 senior-note maturity, insurance-subsidiary dividend capacity, and the impact of capital distributions and preferred dividends.
- Follow any further disclosures on the customer data incident, potential costs or claims, and implementation of the corporate alternative minimum tax.