Jackson Financial Inc. quarterly report, Q3 FY2021

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Jackson Financial Inc. — Q3 2021 Form 10-Q

Reporting period: Three and nine months ended September 30, 2021. Jackson provides retirement savings and income products, principally annuities and life insurance. Its demerger from Prudential plc was completed September 13, 2021; Prudential retained a 19.9% interest.

Financial performance and position

  • Q3 revenue and earnings: Revenue was $1.486 billion, versus $111 million in Q3 2020. Net income attributable to Jackson was $206 million ($2.18 per share), compared with a $397 million loss ($4.28 per share). Results were materially affected by derivative and guarantee-liability fair-value movements.
  • Nine-month results: Revenue was $7.225 billion versus $2.605 billion; net income attributable to Jackson was $2.598 billion versus a $1.709 billion loss. The comparison reflects highly volatile market-related items and the 2020 Athene reinsurance transaction.
  • Underlying measure: Adjusted operating earnings, a non-GAAP measure, were $487 million in Q3, down from $547 million; nine-month earnings were $1.692 billion, up from $1.235 billion. Q3 pretax adjusted operating earnings fell 12%, primarily due to higher DAC amortization and asset-based commissions. Nine-month growth reflected higher fee income and lower interest credited, partly offset by lower spread income and higher DAC amortization.
  • Revenue drivers: Fee income rose 18% in Q3 and 17% for the first nine months, primarily as average variable-annuity account values increased 25% year over year to $232 billion. Net investment income was down 3% in Q3 but up 22% year to date, with higher limited-partnership income offsetting lower debt-security income.
  • Segments: Q3 pretax adjusted operating earnings were $527 million for Retail Annuities (down from $543 million), $21 million for Institutional Products (down from $26 million), $68 million for Closed Life and Annuity Blocks (up from $65 million), and a $45 million loss for Corporate and Other (versus $12 million earnings). Nine-month Retail Annuities earnings rose to $1.779 billion; Institutional Products declined to $37 million; Closed Life and Annuity Blocks increased to $204 million; Corporate and Other recorded a $54 million loss.
  • Cash flow: Nine-month operating cash flow was $3.577 billion, investing cash flow was $624 million, and financing cash outflow was $3.738 billion. Cash and cash equivalents ended the period at $2.482 billion, up from $2.019 billion at year-end 2020. Financing outflows primarily reflected policyholder withdrawals and reductions in institutional account balances.
  • Balance sheet and liquidity: Total assets were $364.4 billion and total equity was $10.9 billion. General-account investments were $74.2 billion, down from $80.5 billion at year-end; separate-account assets and liabilities were each $237.1 billion. Jackson reported $26.5 billion of unencumbered, unrestricted cash, short-term investments, and publicly and privately traded securities. Management said insurance subsidiaries were well above minimum statutory capital requirements; the filing does not provide a current RBC ratio.
  • Debt: Debt was $2.670 billion, versus $322 million at year-end 2020, after $2.35 billion of term-loan borrowings in September. This included $1.602 billion due May 2022 and $751 million due February 2023. A $1.0 billion revolving facility is available through February 2024. The company also had $250 million of 8.15% surplus notes due 2027 and $68 million of FHLB bank loans.
  • Equity and market valuation effects: Accumulated other comprehensive income declined to $2.045 billion from $3.821 billion, mainly reflecting lower unrealized investment gains. Available-for-sale debt securities had $2.568 billion of net unrealized gains, down from $4.948 billion at year-end 2020.

Material changes and outlook

  • Retail annuity sales were $4.769 billion in Q3, including $4.738 billion of variable annuities. Fixed and fixed-index annuity sales remained historically low following 2020 pricing actions. Retail annuity net flows were negative $726 million in Q3 and negative $2.479 billion year to date; management attributed outflows primarily to surrender and death-benefit activity exceeding sales.
  • The Athene transaction reinsured 100% of a block of fixed and fixed-index annuity liabilities. Related changes affect investment income, credited interest, reported earnings, and comparisons with 2020. At September 30, assets held as collateral in the segregated account were $29.8 billion.
  • Management reported that variable-annuity market exposure and hedging create substantial GAAP earnings volatility because hedge movements do not precisely match liability accounting movements. The company manages underlying performance using non-GAAP adjusted operating earnings. Management cited strong equity markets and lower volatility in 2021, while warning that large market moves, hedge basis risk, interest-rate changes, and low yields can affect fees, hedging costs, spreads, capital, and policyholder behavior.
  • No specific full-year earnings or revenue guidance was provided. Management said interim results are not necessarily indicative of full-year results. In Q4 2021, Jackson launched Market Link Pro and Market Link Pro Advisory registered index-linked annuities and entered the defined-contribution market through an AllianceBernstein lifetime-income strategy.
  • On November 8, 2021, the board declared a $0.50-per-share Q4 dividend, payable December 9, and authorized a $300 million Class A share-repurchase program. No dividends had been paid through September 30.

Risks, contingencies, and unusual items

  • Disclosure controls and procedures were deemed ineffective as of September 30 due to a material weakness in internal control over financial reporting associated with the prior-year restatement. Remediation steps were underway; management expected remediation to be completed in Q2 2022, subject to successful testing.
  • Key risks include market and interest-rate volatility, guarantee-benefit exposure, hedge effectiveness and basis risk, investment credit quality, liquidity needs from policyholder withdrawals and derivative collateral, debt refinancing, regulatory changes, and dependence on subsidiary distributions. The $1.6 billion May 2022 term loan is a significant near-term refinancing item.
  • COVID-19 effects remained uncertain. Mortgage concessions included $12.7 million of deferred commercial mortgage principal and interest at September 30; the company said these concessions did not materially affect results or financial position. There were no commercial mortgage loans more than 90 days delinquent, restructured, or in foreclosure; residential mortgage loans included $291.2 million more than 90 days delinquent and $2.7 million in foreclosure.
  • Unfunded investment commitments were $1.489 billion for limited partnerships and LLCs and $1.555 billion for fixed-rate commercial mortgage loans and other debt securities. Management stated ordinary-course litigation was not expected to have a material adverse effect. The filing reported no off-balance-sheet arrangements.
  • Adoption of the long-duration insurance-contract accounting standard is expected to significantly affect financial statements and disclosures, including the pattern of future profit emergence; adoption is required for fiscal years beginning after December 15, 2022, and Jackson did not plan early adoption.

Important facts for investors to verify

  • Whether the material weakness is remediated on schedule and whether subsequent filings report effective controls.
  • How Jackson will repay or refinance the $1.602 billion term loan due May 2022, and whether debt covenants, ratings, or insurance-subsidiary dividend limits constrain holding-company liquidity.
  • Whether negative annuity net flows persist and how surrenders, sales, account values, and product mix affect fee income and capital needs.
  • How much GAAP earnings volatility reflects hedge/liability accounting mismatches versus underlying operating performance; review reconciliations of adjusted operating earnings to GAAP results.
  • The financial and operational effects of the Prudential separation, including recurring standalone costs, Prudential’s retained ownership and PPM assets under management, and execution of the announced dividend and repurchase authorization.