Jackson Financial Inc. (NYSE:JXN) Q1 2023 Earnings Call Transcript May 10, 2023

Jackson Financial Inc. misses on earnings expectations. Reported EPS is $3.15 EPS, expectations were $3.87.

Operator: Hello, and welcome to today’s Jackson Financial, Inc First Quarter 2023 Earnings Call. My name is Daily and I’ll be the moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to our host Liz Werner, Head of Investor Relations. Liz, please go ahead.

Liz Werner: Good morning, everyone and welcome to Jackson’s first quarter earnings call. Today’s remarks may contain forward-looking statements, which are subject to risks and uncertainties. These statements are not guarantees of future performance or events and are based upon management’s current expectations. Jackson’s filings with the SEC provide details on important factors that may cause actual results or events to differ materially. Except as required by law Jackson is under no obligation to update any forward-looking statements if circumstances or management’s estimates or opinions should change. Today’s remarks also refer to certain non-GAAP financial measures. The reconciliation of those measures to the most comparable US GAAP figures is included in our earnings release, financial supplement and earnings presentation all of which are available on the Investor Relations page of our website at investors.jackson.com.

Joining us today are our CEO, Laura Prieskorn; our CFO, Marcia Wadsten; our Head of Asset Liability Management and Chief Actuary, Steve Binioris; our President of Jackson National Life Distributors Scott Romine; and our President and Chief Investment Officer of PPM, Craig Smith. At this time, I’ll turn the call over to our CEO, Laura Prieskorn.

Laura Prieskorn: Thank you, Liz. Good morning, and welcome to our first quarter 2023 earnings call. Today, we’ll discuss our first quarter results, our progress towards our 2023 financial targets and our insights on the current state of the annuity industry. Over the course of the first quarter, we maintained our risk management discipline preserving our capital strength and positioning the company for continued profitability. Our hedging strategy effectively navigated a period of significant equity market and interest rate volatility and our capital position remains strong after remitting $600 million from our operating company in March. The strength of our capital position is reflected in both an operating company RBC within our target range and over $1.5 billion in holding company liquidity including $533 million in proceeds from our successful preferred stock issuance.

We remain focused on returning capital to shareholders and are off to a strong start having returned $124 million during the first quarter through dividends and share repurchases. We consistently take a long-term view on our business and have significant experience managing through various market conditions. Turning to first quarter results, our adjusted operating earnings were $3.15 per share and largely reflect market impact on separate account values compared to a year ago as well as the impact of the higher minimum interest credit rate we highlighted last quarter. Our operating results also reflect our efficient expense structure. Retail Annuities delivered attractive operating margins benefiting from variable expenses and lower asset-based commissions.

Combined these variable costs contributed to a 7% decline in operating costs from a year ago and a 3% decline from the fourth quarter of 2022. This quarter, we’re providing greater transparency into our investment portfolio given the regional bank crisis and emerging commercial real estate concerns. These additional disclosures provide key metrics that highlight credit quality across our fixed portfolio and commercial real estate assets. Our conservative underwriting and the high quality of our investment portfolio continue to be a strength of the company. These additional disclosures are in our earnings deck and will be covered in more detail later in the call. Retail annuity sales totaled $3.1 billion for the quarter and were relatively flat from the fourth quarter of 2022.

The stabilization of variable annuity sales industry-wide is consistent with our view that recent sales trends reflected cyclical and not secular pressure. We continue to position our product portfolio for future growth, implementing several changes to our traditional VA product offerings over the first quarter. These changes capture the benefit of the higher interest rate environment, offer attractive value to financial professionals and clients and are aligned with our pricing and return requirements. Fixed and fixed index annuity sales continued to increase and provide positive net flows as we maintain pricing and investment discipline. Our RILA offering Market Link Pro generated sales of $533 million over the quarter and remains an opportunity for growth.

We recently filed an update to our Market Link Pro product suite that will offer enhanced solutions to financial professionals and their clients. Our growing success in the RILA market has positively contributed to our distribution expansion and diversification strategy, adding over 2,500 relationships with new or re-engaged advisers since introducing Market Link Pro 15 months ago with nearly 500 added in the first quarter alone. The core of our business is bringing confidence and better outcomes to American’s retirement portfolio. We are witnessing the greatest surge of new retirees our country has ever seen with more than 10,000 Americans turning 65 every day, a number that will increase to more than 12,000 each day at its peak in 2024. When you add recent market volatility to the mix, the need for protected retirement solutions is reaching historic highs.

Retirees and pre-retirees continue to report high concerns about inflation and their ability to successfully finance retirement. The 2023 retirement confidence survey conducted by the Employee Benefit Research Institute or EBRI and Greenwald Research shows a significant decline in the confidence Americans feel in having enough money to live comfortably throughout their retirement years. EBRI is a nonpartisan nonprofit organization that focuses solely on data and research and does not advocate or lobby. This survey was sponsored by 18 of the largest global asset managers and insurance companies including Jackson. The survey reports that an understanding of retirement plan investment options is lacking for some and that two-thirds of retirees prioritized income generation over maintaining wealth during retirement with nearly three-quarter of pre-retirees feeling the same.

This need in the market fuels Jackson’s relentless focus on providing product solutions, planning tools and resources to help our distribution partners and their clients, protect and grow assets while creating opportunities for guaranteed lifetime income. With that backdrop, Jackson continues to be well-positioned in the industry as the annuity market expands. According to data from a recent survey of financial professionals and investors by Cogent syndicated, Jackson holds its lead as the firm with the broadest reach and has the strongest perception among annuity users for offering the best retirement income products. Consistent with our long history, Jackson also ranks highest by a notable margin for best-in-class service in acting in policyholders’ best interest.

Turning to page 4. I’ll review our progress towards our 2023 key financial targets. Our operating company’s RBC target range of 425% to 500%, provides a significant level of capital to manage through periods of volatility is consistent with our current A rating and rating agency expectations and supports the long-term growth of our business. With over $1.5 billion in cash and highly liquid securities at our holding company, we believe we are well positioned and on pace to meet our 2023 capital return target of $450 million to $550 million. In addition, to our earnings release, we announced our Board has approved a second quarter common dividend of $0.62 per share. We view our shareholder dividend as an important component of our capital return strategy, representing our continued confidence in long-term capital generation.

Turning to page 5. You will see we have consistently returned capital to shareholders through both dividends and share repurchases. Through the first quarter this has allowed us to repurchase 16% of our outstanding common shares since separation in September of 2021. This balanced approach to capital management supports growth and capital return to shareholders, while maintaining a resilient balance sheet. With that, I’ll turn the call over to Marcia to go over our financial results in greater detail.

Marcia Wadsten: Thank you, Laura. I’ll begin with our results on slide six, where lower comparative equity market levels drove the change in our adjusted operating earnings from the prior year’s first quarter. In addition to lower fee income from reduced separate account assets under management, other contributing factors of the year-over-year change include higher minimum interest credited rates on our VA fixed rate options that I flagged last quarter and lower income on operating derivatives. These operating derivatives have long been a part of our duration management strategy and have protected our spread income from lower interest rates in the past. Given increases in short-term rates in the last year, these have shifted from income to loss.

Over time, this will be offset by rising investment income. Improved mortality on the closed block, lower asset-based commission expenses and higher net investment income, provided partial offsetting positive impacts to our adjusted operating earnings. As a reminder, we believe Jackson has taken a conservative approach to the treatment of guarantee fees within our definition of adjusted operating earnings, as all guarantee fees are reflected below the line, with no assumed profit on guaranteed benefits included in adjusted operating earnings. This approach is partly why we did not report a negative impact to adjusted operating earnings from fee attribution, following the adoption of LDTI. First quarter adjusted book value attributable to common shareholders was down from year-end 2022 due to nonoperating net hedging losses, partially offset by healthy adjusted operating earnings.

As Laura mentioned, we’ve included additional general account investment portfolio details in the appendix of our earnings presentation that provide breakdowns on both US GAAP and statutory basis, excluding the assets reinsured to third parties or funds withheld assets. Given the increased focus on the potential for a near-term credit cycle, we expanded this section to provide greater transparency, specifically around our exposure to regional banks and commercial mortgages. Regional bank exposure is limited with only $135 million in smaller regional banks. We had zero exposure to Silicon Valley Bank, Signature Bank and First Republic Bank and we had no exposure to Credit Suisse AT1s at any point during the first quarter. Jackson’s investment portfolio remains conservatively positioned with only 1% exposure to below investment grade securities on a statutory basis, excluding funds withheld assets.

Slide seven outlines the notable items included in adjusted operating earnings for the first quarter. As we noted last quarter, following the adoption of LDTI, DAC amortization expense is no longer sensitive to market movements, meaning that we will not need a notable item for that impact. This leaves only limited partnership income as a notable item for this quarter. The first quarter of 2023 included lower levels of limited partnership income compared to the same period in the prior year. Results from limited partnership investments which report on a one-quarter lag were $20 million lower in the current quarter than they would have been had returns matched long-term expectations. Comparatively in the first quarter of 2022, limited partnership income was well above the long-term expectation with a benefit of $36 million to earnings, creating a comparative pretax negative impact of $56 million.

In addition to the notable items, the first quarter of 2023 had a lower effective tax rate than the prior year’s quarter. First quarter 2022 pretax operating earnings were higher than the current year quarter, which meant that in the case of tax benefits that were similar on a dollar basis in these two periods, the current period had a larger reduction to the effective tax rate. Adjusted for both the notable items and the tax rate difference, earnings per share were down 18% from the prior year’s first quarter. A substantial portion of this decline was from the previously flagged increase in VA fixed option crediting rates due to the regulatory minimum requirement. Additionally, the current quarter earnings per share benefited from a lower weighted average diluted share count relative to the first quarter of 2022, due to share buyback activity through the first quarter of 2023.

We have continued our share buyback activity in the second quarter, with over 800,000 shares repurchased since the end of quarter one through May 3. Slide 8 illustrates the reconciliation of our first quarter pre-tax adjusted operating earnings of $302 million to the pre-tax loss attributable to Jackson Financial of $2.1 billion. Net income includes some changes in liability values under GAAP accounting that will not align with our hedging assets. We focus our hedging on the economics of the business as well as the statutory position and choose to accept the resulting GAAP non-operating volatility. This presentation has changed under LDTI in particular for the treatment of variable annuity guaranteed benefit liabilities. Prior to LDTI, we had some VA guarantees that were calculated as insurance contracts using long-term assumptions and some as embedded derivatives that were effectively fair valued using current market assumptions.

Following LDTI implementation, we now report all via guaranteed benefit liabilities as market risk benefits or MRBs, and these are effectively fair valued. As shown in the table, the total guaranteed benefits and hedging results or net hedge result was a loss of $1.9 billion in the first quarter. Starting from the left side of the waterfall chart, you can see a robust guarantee fee stream of $780 million in the first quarter providing significant resources to support the hedging of our guarantees. These fees are calculated based on the benefit base rather than the account value, which provides stability to the guarantee fee stream protecting our hedge budget, when markets decline. Consistent with our practice all guarantee fees are presented in non-operating income to align with the hedging and liability movements.

There was a $2.5 billion loss on freestanding derivatives primarily the result of losses on equity hedges in a quarter when the S&P was up 7% with a partial offset from interest rate derivative gains as rates were down modestly. Movements in the net MRB liability provided a small gain, due in large part to the same equity and rate movements, which were largely offsetting. It is important to note that MRB calculations reflect the impact of interest rates from both the changes in the discounting of future cash flows, which we take into account in our hedging, as well as the impact of rates on assumed future equity market returns, which we do not explicitly hedge. Because of this dynamic, movements in interest rates will have a larger MRB impact than the associated hedging assets.

That means that when interest rates rise, you would expect the net hedge result to be positive and when interest rates decline, you would expect it to be negative all else being equal. To assist you with analysis, our financial supplement includes the detailed roll forward of the net MRB liability in the appendix section of our earnings presentation, includes a slide that provides a simplified definition of each of the components of change in that roll forward. Non-operating results also include $366 million of losses from business reinsured to third parties. This was primarily due to a loss on funds withheld reinsurance treaty that includes an embedded derivative, as well as the related net investment income. These non-operating items which can be volatile from period to period are offset by changes in AOCI within the funds withheld account related to the reinsurance transaction, resulting in a minimal net impact on Jackson’s adjusted book value.

Furthermore, these items do not impact our statutory capital or free cash flow. Importantly, while the net hedging result was a loss in this quarter, it was a benefit of approximately $3 billion in full year 2022, primarily due to increases in interest rates over the calendar year. Now, let’s look at our business segments starting with Retail annuities on slide 9. Variable annuity sales are down industry-wide versus a year ago, consistent with prior periods of equity market volatility. While Jackson’s VA sales are down as well, we continue to produce significant volumes and total annuity sales are supported by RILA fixed and fixed indexed annuity sales, which are up meaningfully from the first quarter of 2022. Overall, sales without lifetime benefits as a percentage of our total retail sales increased from 33% in the first quarter of last year to 43% in the first quarter of this year.

We expect this percentage to vary somewhat over time based on market conditions and consumer demand. When viewed through a net flow lens the gross sales we are generating in RILA and other spread products translated to nearly $550 million of non-VA net flow in the first quarter of 2023. In addition to partially offsetting net outflows in variable annuities, these net flows provide valuable economic diversification and capital efficiency benefits. Importantly, our overall sales mix remains efficient from the standpoint of new business strain. Looking at pre-tax adjusted operating earnings for our Retail Annuity segment on slide 10, we are down from the prior year’s first quarter. This was primarily the result of the impact of reduced assets under management on fee income and the higher interest credited on VA fixed account options, noted earlier.

As Laura highlighted, our efficient and variable expense structure has helped support earnings, in a declining AUM environment. As we disclosed last quarter, starting in the first quarter of 2023 our retail annuity segment will see a negative impact to adjusted operating earnings from the increase in the minimum guaranteed interest rate payable, on the portion of variable annuity assets that policyholders have invested in the fixed option. This minimum is reset annually based on the five-year treasury rate which was up in 2022. This rate increase was effective the first of the year and was a key driver in the $41 million increase in credited interest, compared to the first quarter of 2022. It is important to note, that we will get an offsetting benefit from higher rates over time on our invested assets as they are reinvested at higher yields.

As of the end of the first quarter, we have built up $2.5 billion of account value on RILA with five quarters of sales since launch. Because of the early age of our RILA book, minimal surrender activity allows for sales to contribute to an immediate buildup in account value. Similarly, we are growing AUM in fixed and fixed indexed annuity to $1.7 billion at the end of the first quarter. Our other operating segments are shown on slide 11. For our institutional segment, sales for the first quarter totaled $649 million and account values were $8.7 billion. Pre-tax adjusted operating earnings of $9 million were down from $23 million in the prior year period, as higher interest credited and increased losses on operating derivatives were partially offset by higher net investment income.

We remain committed to our institutional business. The value of the business is broader than what is exhibited through GAAP earnings since it provides diversification benefits is cost-effective and helps to stabilize our statutory capital generation. Lastly, our Closed Life and Annuity Blocks segment reported a larger first quarter adjusted operating loss compared to the prior year quarter reflecting losses on operating derivatives, partially offset by improved mortality. Under LDTI, we will now have some additional volatility in this segment due to the quarterly experience update for future policy benefits. While this figure can be a positive or negative in any given quarter, we would expect it to net to a small number overtime. You can see this in our financial supplement where the last five quarters ranged from a loss of $18 million to a gain of $36 million and on a cumulative basis, totaled to a gain of only $8 million.

Slide 12, summarizes our first quarter capital position. As Laura mentioned, we returned $124 million to our shareholders in the first quarter, which gives us a strong start to the year and puts us on pace to achieve our full year capital return target of $450 million to $550 million. We remained active in share buybacks during the first quarter, which totaled 1.7 million shares or $70 million. As of May 3rd, we had $457 million remaining on our share repurchase authorization. Net of the $6 million distribution and related deferred tax asset impact, we began the quarter within our operating company RBC target range, of 425% to 500% and remain within this range at the end of the quarter. And importantly, we ended the quarter with over $1.5 billion in holding company liquidity including proceeds from our preferred equity offering.

I think it would be helpful to review the macroeconomic environment during the first quarter. While a simple point-to-point view of equity markets and interest rates would indicate a fairly tranquil period, both equity markets and interest rates exhibited significant volatility with multiple spikes and rapid pullbacks along the way. In fact interest rate volatility as measured by the MOVE Index was at its highest level since the financial crisis in the 2008 to 2009 period. This was due in part to the market’s reaction to the concerns in the banking sector, which led to market outperformance concentrated among a handful of companies. As a result, more diversified actively managed funds underperformed their respective index and this was the case in our highly diversified separate account as well.

While these types of disconnects can have a positive or negative impact on our RBC ratio in an isolated quarter, they tend to revert to the mean over time. Another important point to consider is that our variable annuity book is in a very healthy position as measured by the projected cash flows of the block. As we’ve discussed in the past, this position may lead to a flooring out of statutory reserves at the cash surrender value, which can create an asymmetry between these reserves and hedging assets. We experienced flooring during the first quarter as equity markets rose, which in combination with the extreme volatility I noted earlier, drove elevated losses on hedges that were not offset by reserve releases. The healthy cash flows embedded in the books still remain.

However, statutory rules limit the ability to reflect the full economic value in our results due to the conservatism in the CSB floor. Additionally, the decline in total adjusted capital from these items had a knock-on effect on deferred tax asset admissibility, which further impacts the RBC ratio. However, we believe that there is economic value in these deferred tax assets that will eventually be realized, but the conservatism and statutory accounting does not allow us to fully recognize them in our current capital position. Higher equity markets and the update to the mean reversion parameter lowered our required capital or CAL, which declined materially from year-end. Importantly, our hedge spend was within the guarantee fees collected this quarter despite the heightened equity market and interest rate volatility.

As we have previously discussed, interest rates are a key driver of hedging expenses both in the cost of the hedging instruments used to protect our book, which is driven by short-term rates and the volume of hedging necessary to stay within our risk limits, which is driven by longer term rates. And we continue to see the benefits of the higher interest rate environment in this way. Our holding company cash position at the end of the first quarter was over $1.5 billion and continues to be well in excess of our minimum buffer. This was boosted by our preferred issuance during the first quarter that helped to effectively prefund our $600 million senior debt maturity coming in November, which we intend to retire at that time. Following that retirement, we have no debt maturities until 2027 and are comfortable with our absolute level of debt and overall capital structure.

We also renewed our revolving credit facility a year early, proactively extending the term to February of 2028. Our strong position supports our capital return targets and gives us flexibility in managing our business. I will now turn it back over to Laura for closing remarks.

Laura Prieskorn: Thanks Marcia. We’re pleased with the performance of Jackson’s business in the first quarter of 2023, especially in light of volatile conditions. We continue to maintain a strong financial position with substantial liquidity, are on track to reach our 2023 key financial targets, and are well-positioned to deliver against our strategic and operational goals. We had a strong start for capital return in the quarter and remain confident in our long-term prospects for continued success. Before we open it up to questions, I’d like to take a moment to acknowledge our associates. Along with their exceptional contributions to our business, I am not just proud, I am impressed by the many ways they live out our purpose and meaningfully contribute to the communities in which we live and work.

Our associates are the driving force behind our corporate philanthropic efforts and I’m happy to share that our volunteerism has returned to pre-pandemic levels with more than one-third of our associates volunteering in their communities in this past year. You’ll find more about our associates’ impact and other details related to talent development, our sustainability efforts, and strength in governance in our second annual ESG report, published on jackson.com earlier this month. As I shared in that report, the efforts of this Jackson team to shape the future of our industry, build upon our core capabilities to deliver value to stakeholders and invest in our communities reflect our desire to create a more confident future for everyone. With that, I’ll open it up for questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question today comes from the line of Alex Scott from Goldman Sachs. Please go ahead. Your line is now open.

Operator: Thank you. The next question today comes from the line of Erik Bass from Autonomous. Please go ahead. Your line is now open

Operator: Thank you. The next question today comes from the line of Suneet Kamath from Jefferies. Please go ahead. Your line is now open.

Operator: Thank you. The next question today comes from the line of Tom Gallagher from Evercore ISI. Please go ahead. Your line is now open.

Operator: Thank you. There are no additional questions waiting at this time. So I’d like to pass the conference back over to Laura Prieskorn for any closing remarks.

Laura Prieskorn: Thank you. We continue to have confidence in our business and our ability to meet our targeted level of capital returns for 2023. We thank you for your interest in Jackson and your participation in today’s call. Take care.

Operator: This concludes today’s conference call. Thank you all for your participation. You may now disconnect your lines.