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
| Metric | Q1 2023 | Q1 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.