Jackson Financial Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Jackson is a U.S. retirement and insurance company whose principal business is annuities. Unless noted, amounts are in millions of dollars. The filing presents unaudited interim results.
Financial results and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| GAAP total revenue | $231.9 | $(2,332.9) | $5,738.9 | $2,494.3 |
| Net income (loss) attributable to Jackson | $(540.0) | $(3,109.3) | $2,391.5 | $(1,312.6) |
| Adjusted operating earnings, after tax (non-GAAP) | $636.4 | $374.9 | $1,204.5 | $687.9 |
| Pretax adjusted operating earnings (non-GAAP) | $760.8 | $509.4 | $1,394.0 | $784.8 |
| Net investment income | $795.9 | $436.4 | $1,723.6 | $1,224.2 |
| Net gains (losses) on derivatives and investments | $(2,520.7) | $(4,371.3) | $184.9 | $(2,012.9) |
- GAAP results were highly affected by market movements and derivatives. Management says its hedging program is designed around economic and statutory objectives, not to offset U.S. GAAP liability movements period by period. Adjusted operating earnings excludes several volatile or non-recurring items and is not a substitute for GAAP net income.
- Q2 fee income was $1,895.6, up 21% year over year; first-half fee income was $3,711.6, up 17%. Higher variable-annuity account values, supported by market returns, were a key driver.
- Q2 pretax adjusted operating earnings rose 50% year over year, while first-half pretax adjusted operating earnings rose 78%. Retail Annuities generated $683.2 in Q2 and $1,251.5 for the first half; Institutional Products generated $6.3 and $16.2, respectively.
- Retail annuity sales were $4,859.1 in Q2 and $9,583.4 for the first half. Variable-annuity sales increased year over year; fixed and fixed-index annuity sales remained low after pricing actions. There were no institutional product sales in the first half of 2021.
- Retail annuity net flows were negative $884.0 in Q2 and negative $1,752.6 for the first half; institutional product net flows were negative $1,735.2 and negative $2,280.6, respectively.
Balance sheet, cash flow, and liquidity
- At June 30, 2021, total assets were $366.7 billion, total liabilities $355.7 billion, and total equity $11.0 billion. Cash and cash equivalents were $1.5 billion, down from $2.0 billion at December 31, 2020.
- Total investments were $74.7 billion, down from $80.5 billion at year-end. Separate-account assets and matching liabilities were $239.8 billion. Available-for-sale debt securities were 94.1% investment grade; 5.9% were below investment grade.
- Reported debt was $317.7 million, consisting principally of $249.7 million in surplus notes and $68.0 million in FHLB bank loans. Separate from that balance, FHLB advances were $250 million, and repurchase agreements were $2.26 billion.
- For the first half, operating cash flow was $2,147.4, investing cash flow $580.0, and financing cash flow negative $3,211.5, producing a $484.1 decrease in cash. The filing’s MD&A cash-flow comparison gives 2020 operating cash flow as $1,426.7, while the cash-flow statement reports $1,401.6; verify the comparable-period figure.
- Management said insurance subsidiaries were well above minimum regulatory capital levels. It reported $37.2 billion in cash, short-term investments, and publicly and privately traded securities available as liquidity resources at June 30.
Material changes, outlook, and risks
- In June 2020, Jackson ceded a block of fixed and fixed-index annuity liabilities to Athene under a 100% quota-share funds-withheld coinsurance agreement, receiving approximately $1.2 billion in ceding commission. This transaction materially affects year-over-year comparisons, including lower interest credited and the absence in 2021 of the prior-year reinsurance charge.
- Jackson Financial’s demerger from Prudential was completed September 13, 2021, after the reporting date; Prudential retained a 19.9% interest. On September 10, Jackson borrowed $2.35 billion under delayed-draw term facilities, largely to capitalize the insurance subsidiary. These are subsequent events, not June 30 balances.
- Management planned to introduce a registered index-linked annuity in Q4 2021. It estimated approximately $75 million of total one-time separation costs, including about $51 million incurred in the first half, and $25–$30 million in annual incremental recurring stand-alone costs. No formal earnings or financial guidance is provided in the supplied filing text.
- Key exposures include low interest rates and spread compression, equity and credit-market volatility, hedging and basis risk, annuity withdrawals and guarantees, policyholder behavior, reinsurer and counterparty credit, and COVID-19 uncertainty. Management noted U.S. equity markets reached highs in the first half and volatility eased from 2020 levels, while still exceeding historical averages.
- COVID-related mortgage concessions included $18.6 million of deferred commercial mortgage payments at June 30; the company said these concessions did not result in troubled-debt-restructuring accounting or a reported financial-statement impact. Management considered ordinary-course litigation not likely to materially harm financial condition; legal accruals were $6.4 million.
- Disclosure controls were deemed ineffective at June 30 because of a material weakness identified in connection with a restatement of previously issued 2020 financial statements. Management reported remediation steps and expected remediation to be completed in Q2 2022, subject to testing that controls operate effectively.
Important facts for investors to verify
- Reconcile GAAP results with adjusted operating earnings and understand the effects of derivatives, embedded guarantees, and the Athene transaction.
- Confirm the first-half 2020 operating cash-flow comparison: $1,401.6 in the cash-flow statement versus $1,426.7 in MD&A.
- Review the post-quarter demerger, $2.35 billion borrowing, use of proceeds, credit-facility covenants, and resulting holding-company liquidity and leverage.
- Track remediation and testing of the material weakness, as well as the expected effects of the long-duration insurance accounting standard, which the company said could significantly affect financial statements and profit emergence.
- Assess persistency and net flows, guaranteed-benefit exposures, investment credit quality, liquidity needs, and the effect of low rates or market stress on statutory capital and ratings.