Jackson Financial Inc. — Q1 2022 Form 10-Q
Business context and reporting period. Jackson Financial is a U.S. retirement-focused financial services and insurance company, principally offering annuities. This unaudited filing covers the three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. The company completed its separation from Prudential in September 2021.
Financial performance and position
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior year-end |
|---|---|---|
| Total revenue | $4.301 billion | $5.507 billion in Q1 2021 |
| Net income attributable to Jackson Financial | $2.025 billion; diluted EPS $22.51 | $2.932 billion; diluted EPS $31.03 |
| Pretax adjusted operating earnings | $418 million; adjusted operating earnings after tax $354 million | $633 million; after-tax adjusted operating earnings $568 million |
| Adjusted operating ROE | 15.1% | 29.1% in Q1 2021 |
| Net investment income | $720 million | $928 million |
| Operating cash flow | $860 million | $1.344 billion |
| Cash, cash equivalents and restricted cash | $2.680 billion | $2.631 billion at December 31, 2021 |
| Total assets / total equity | $352.641 billion / $10.289 billion | $375.484 billion / $11.074 billion at December 31, 2021 |
| Long-term debt | $2.640 billion | $2.649 billion at December 31, 2021 |
GAAP earnings include large, volatile derivative and investment marks. Total gains on derivatives and investments were $1.605 billion, down from $2.706 billion. Net income should therefore be considered alongside adjusted operating earnings, which exclude specified market-sensitive and other items. The filing does not present a conventional consolidated operating margin as a key performance measure.
Investment-related market declines materially affected equity: accumulated other comprehensive income (loss) moved from $1.744 billion at year-end to a $939 million loss at March 31, chiefly reflecting unrealized investment depreciation. Available-for-sale debt securities had $2.262 billion of gross unrealized losses; management said it did not intend, and was not more likely than not required, to sell the affected securities before recovery and expected to recover amortized cost.
Changes and operating trends
- Total revenue fell 22%, while attributable net income fell 31% and pretax adjusted operating earnings fell 34% year over year. The company cited less favorable guarantee-reserve movements, lower limited-partnership and debt-security income, and losses on securities sales; lower derivative losses and reduced DAC amortization partly offset these items.
- Retail Annuities pretax adjusted operating earnings declined to $406 million from $568 million, mainly on lower investment income, higher DAC/DSI amortization and higher operating costs. Retail account value was $242.3 billion net of ceded reinsurance; gross account value declined during the quarter as market performance reduced balances.
- Institutional Products earnings rose to $23 million from $10 million. Sales were $975 million, contributing to positive segment net flows of $316 million.
- Closed Life and Annuity Blocks reported an adjusted operating loss of $8 million versus earnings of $79 million, primarily due to lower investment income and less favorable reserve movements.
- Total sales increased to $5.772 billion from $4.724 billion, driven by institutional sales and the newly launched registered index-linked annuity (RILA). Retail annuity sales were $4.797 billion; variable annuity sales were $4.575 billion.
- Shareholders’ equity declined to $9.574 billion, while retained earnings rose to $4.782 billion. The company repurchased 3.43 million shares for $140 million and paid a $0.55-per-share dividend in Q1.
Liquidity, capital and debt
Operating, investing and financing cash flows were $860 million, negative $202 million and negative $609 million, respectively. Cash increased by $49 million during the quarter. At March 31, the company reported $25.4 billion of unrestricted, unencumbered cash, short-term investments and privately and publicly traded securities and equities available for sale. It also reported $500 million of FHLB advances, $584 million of repurchase agreements, and a $1.0 billion revolving credit facility. Management stated that insurance subsidiaries were well above minimum statutory capital requirements; a current RBC ratio is not provided in the supplied filing text.
Jackson’s 2022 ordinary dividend capacity was reported as nil, while Brooke Life’s was $514 million, subject to earned-surplus and regulatory limits. In March, Jackson returned $600 million of capital to Brooke Life, which paid a $510 million ordinary dividend to Jackson Financial. The company reported compliance with its debt covenants at quarter-end.
Outlook, risks and unusual items
- No specific financial guidance: The filing provides no numerical full-year earnings or revenue guidance and cautions that quarterly results are not necessarily indicative of full-year results. The board approved a Q2 dividend of $0.55 per share, payable June 16, 2022.
- Market exposure: Q1 equity-market declines, increased volatility, rising interest rates and wider credit spreads affected account values, hedging costs, investment marks and guarantee liabilities. Management noted that hedge performance may be less effective in sharp market moves or volatile periods.
- Accounting and valuation: Derivatives are generally marked to market through earnings because they do not qualify for hedge accounting. Critical estimates include annuity guarantees, policyholder behavior, DAC, reserves, reinsurance and investment valuations. Adoption of the long-duration insurance accounting standard is expected January 1, 2023 and is expected to have a significant impact; transition effects are market-sensitive.
- Capital and liquidity risks: Sharp rate increases could prompt higher surrenders and increase collateral needs. The holding company depends on subsidiary distributions, which are subject to regulatory and contractual restrictions.
- Controls: Management concluded disclosure controls and procedures were ineffective at March 31, 2022 because of a material weakness in internal control related to accounting for significant, complex or unusual transactions. Remediation work was underway; management expected completion in Q2 2022, subject to controls operating effectively and successful testing.
- Contingencies: The company faces ordinary-course litigation, including allegations concerning insurance-product sales; management did not expect ultimate disposition to materially adversely affect financial condition. Unfunded commitments included $1.807 billion for limited partnerships/LLCs and $1.956 billion for fixed-rate mortgage loans and other debt securities.
- Other risks: The filing highlights economic and market volatility, credit deterioration, regulatory changes, policyholder behavior, operational and cyber risks, COVID-19 uncertainty, and possible adverse rating actions. Moody’s outlook for Jackson National Life Insurance Company was negative as of May 10, 2022; the other listed principal ratings had stable outlooks.
Important facts for investors to verify
- How much of GAAP income reflects market-sensitive derivative and investment accounting, and how adjusted earnings reconcile to GAAP results.
- Whether the Q1 increase in market-related guarantee exposures and the decline in separate-account values affect future hedging costs, reserves and statutory capital.
- The quality and recoverability of the investment portfolio, including unrealized losses, below-investment-grade exposure and mortgage-loan performance.
- Actual statutory capital/RBC levels, dividend capacity and holding-company liquidity, including the ability to obtain distributions from regulated subsidiaries.
- Progress and testing results for the material-weakness remediation, and the financial statement effects of the 2023 long-duration accounting adoption.
- Whether sales, net flows and segment earnings trends persist, especially in Retail Annuities and the newer RILA and institutional businesses.