Jackson Financial: An Interesting Value and Income Proposition (NYSE:JXN)

Jackson Finance (New York Stock Exchange: GXN) offers an interesting mix of income and value for shareholders, as the company has excess capital supporting its dividends and share buybacks, plus its valuation is very cheap compared to its peers.

Business overview

Jackson Financial is a financial services company operating predominantly in the life insurance industry, offering retirement and annuity planning products. Jackson was separated from a British company Prudential plc (PUK) in 2021, and has been operating independently since then. Its current market value is about $5.5 billion, and its shares are traded on the New York Stock Exchange.

Jackson National Life Insurance Company, its subsidiary, was founded in 1961 and thus has a long history in the life insurance industry in the United States. At present, its core activity is providing retirement solutions to its clients across the country, being a leading company. in this part. It also enjoys a significant market share in the variable annuity (VA) business, supported by good product diversification, a diversified distribution approach through multiple channels, and efficient operations.

Its insurance subsidiaries are licensed to offer their products in all 50 U.S. states and the District of Columbia, with the company providing individual and group annuities to retail and institutional clients in the United States. Its business is largely dominated by the VA segment, especially in CAs with guarantees, while the other annuities and life segments have much lower weights on total premiums.

Its operations are organized across three main segments, namely Retail Annuities, Institutional Products and Closed Block, with Retail being by far the most important segment measured by operating profits, as shown in the following chart.

Given its significant exposure to the VA sector, Jackson has significant balance sheet exposure to equity-sensitive ALM risks. Although it has historically enjoyed good organic capital generation and implemented a successful hedging strategy, an important step to improve risk management and reduce the sensitivity of its balance sheet to capital markets risks was its decision to establish a reinsurance company called Brooke Re. This captive reinsurer is wholly owned by Jackson Financial and entered into a co-insurance agreement in January, whereby applicable and future VA-guaranteed benefits are transferred to Brooke Re, while the underlying contract remains at Jackson.

By transferring its liabilities to the reinsurer, this will allow Jackson to have a different hedging policy, which is more in line with market movements compared to the previous statutory reserve approach. The company expects this new methodology to result in lower capital volatility and more predictable earnings for Jackson over the long term, which should be positive for shareholders and its stock market valuation.

Jackson capitalized Brooke Re for a net amount of $699 million, which had a negative impact on its capital ratio (from 624% at the end of 2023, to 543% initially to create Brooke Re), but remained well above his internal capital. Goal. In fact, RBC’s capital ratio was above 555% at the end of the first quarter of 2024 in its main operating business, well above its target of at least 425%.

Given that Jackson is expected to have a more efficient hedging policy in the future and reduce hedging costs, it is expected to maintain its excess capital position in the coming years, providing it with good financial flexibility in the future. Furthermore, Jackson’s VA business is mostly oriented towards fee-based revenues, which provides good visibility regarding future cash flows, and therefore following the liability transaction for Brooke Re, capital generation will be more closely aligned with operating profits, increasing the potential Long-term forecasting.

Regarding its investment portfolio, Jackson Financial had about $40 billion in investments at the end of the first quarter of 2024, which were mostly conservatively allocated to fixed-income asset classes. In fact, corporate bonds constitute the most important sector, accounting for more than half of their investments, almost entirely invested in investment grade securities. Its allocation to stocks and commercial real estate represents approximately 4% of its total investment portfolio. Its asset allocation can therefore be considered quite conservative and Jackson is not expected to report significant losses from his investment portfolio.

Financial evaluation

In terms of its financial performance, Jackson Financial does not have a long history since it has only been a public company since 2021, but it has nonetheless recorded positive financial performance over the past two years.

In 2023, its total sales were $13.9 billion, down about $4 billion compared to the previous year, as value-added sales in the retail and institutional sectors declined as higher interest rates increased competition from other products, including term deposits. On the other hand, sales of fixed annuities increased due to higher rates, but were not enough to offset declining sales in Virginia with lifetime living benefits.

Regarding assets under management, the company announced that they had risen to $315 billion at the end of 2023, due to positive market returns, while net flows were negative during the year. This increase was mainly justified by separate accounts managed by Jackson Financial Asset Management, while its invested assets remained relatively stable at around $44 billion during the year. Net investment income benefited from the higher rates, rising to $2.93 billion in 2023, up 6.1% year-on-year.

Under pressure from an inflationary environment, Jackson reported operating expenses rose 4.8% year-on-year to more than $2.5 billion last year, but the issue that most impacted its bottom line were losses on derivatives and investments. Indeed, Jackson reported a net loss of about $7.66 billion in 2023, compared to a loss of $837 million in 2022, resulting in a net income of only $899 million in 2023.

As shown in the previous table, its hedging results can be highly volatile and have a significant impact on the company’s profit and loss account, which is the main reason behind its decision to establish Brooke Re. This occurs because there are differences between US GAAP and the economic value of liabilities and assets, resulting in fluctuations in their accounting numbers that do not reflect their underlying business.

For this reason, Jackson prefers to use adjusted earnings as a better measure to analyze its operating performance. Its adjusted operating profit was $1.07 billion in 2023 (versus $1.4 billion the previous year), and its adjusted operating return on equity (ROE) was 10.6%, an acceptable profitability level in the life insurance industry.

During the first quarter of 2024 Jackson reported positive operating momentum, with retail annuity sales up 18% year over year, supporting quarterly fee income increasing to nearly $2 billion, up 5.8% year over year. Net investment income reached US$734 million, an increase of 4% year-on-year. Its net income in the quarter was $784 million, a significant improvement from a loss of about $1.5 billion in the first quarter of 2023. On an adjusted basis, its operating income was $334 million in the first quarter of 2024, an increase of 23% year over year. , supported by higher stock markets and better income spread.

Regarding its capital position, RBC’s capital ratio was above 555% at the end of last March, well above its internal target. This excess capital position represents strong support for its attractive shareholder remuneration policy, something it has been able to achieve since its IPO in 2021.

In fact, Jackson has returned about $1.4 billion of excess capital to shareholders over the past few years, whether through dividends or stock buybacks, repurchasing about 23% of its outstanding shares at the time of the spinoff from Prudential plc.

Last quarter, it returned $172 million to shareholders, representing a payout ratio of about 50% based on adjusted operating earnings, which is a conservative payout ratio and leaves plenty of room to grow earnings and make stock buybacks in the future.

Its current quarterly earnings are $0.70 per share, unchanged from the previous quarter, but up 12.9% year over year. Annually, Jackson is expected to pay out $2.80 per share, which means that at the current stock price it offers a forward yield of about 3.80%. While this isn’t a high dividend yield, it is an interesting dividend compared to other companies in the financial sector.

Moreover, its dividend appears to be sustainable given that Jackson has a strong capital position and its liquidity profile at the holding level is also very good, holding enough cash to cover its expenses in the next two years; Thus Jackson can easily maintain a growing dividend policy in the future.

Evaluation and risks

In terms of its valuation, Jackson is currently trading at a book value of 0.59x, which is a relatively low valuation multiple, but has been trading at a premium to its historical average of 0.4x over the past two years.

Moreover, compared to its closest peers, e.g Voya Finance (Fuya) or Lincoln National (LNC), is also trading at an undemanding valuation since its peers are trading at near or higher book value. While Jackson has significant exposure to the annuities market, this discount appears unwarranted and is a sign of undervaluation in my opinion.

With respect to its principal risks, given its business profile, Jackson is exposed to numerous risks, including general conditions in the economy and financial markets, and increased levels of volatility that could adversely affect its hedging strategy and profitability. Interest rate movements could also have a significant impact on its business, both from its investments and the value of future benefits in its variable annuity business, if interest rates decline rapidly in the future.

Conclusion

Jackson Financial is an insurance company with significant exposure to variable annuities, a market that can be considered mature and highly competitive, but which has some positive growth prospects as the U.S. population ages. Given its exposure to capital markets, its financial results can be volatile which goes some way to justifying its cheap valuation, but compared to its peers, the discount appears harsh, making Jackson an interesting source of income and value in the financial sector.