Jackson Financial (NYSE:JXN) offers an interesting combination of income and value to shareholders, as the company has an excess capital position that supports its dividend and share buybacks, plus its valuation is quite cheap compared to peers.

Business Overview

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

Its main operating subsidiary, named Jackson National Life Insurance Company, was formed in 1961 and has therefore a long history in the life insurance industry in the U.S. Nowadays, its core business is offering retirement solutions for its customers across the country, being a leading company in this segment. It also has a sizable market share in the Variable Annuities (VA) business, supported by a good product diversification, a diversified distribution approach through several channels, and efficient operations.

Its insurance companies are licensed to offers its products across all 50 U.S. States and the District of Columbia, with the company providing individual and group annuities to retail and institutional customers in the U.S. Its business is largely dominated by the VA segment, especially in VAs with guarantees, while other annuities and the life segment have much smaller weights on total premiums.

Its operations are organized across three major segments, namely Retail Annuities, Institutional Products, and Closed Block, with retail being by far the most important segment measured by operating earnings, as shown in the next graph.

Due to its high exposure to the VA segment, Jackson has considerable balance sheet exposure to asset-liability management risks and equity-sensitive liabilities. While historically, it has a good organic capital generation and has implemented a successful hedging strategy, an important step to improve its risk management and reduce sensitivity in its balance sheet to capital markets risk, was its decision to establish a reinsurance company called Brooke Re. This captive reinsurance company is wholly owned by Jackson Financial and entered into a coinsurance agreement back in January, where the in-force and future VA guaranteed benefits are transferred to Brooke Re, while the base contract remains at Jackson.

By moving its liabilities to the reinsurance company, this will allow Jackson to have a different hedging policy, which is more aligned with market moves compared to its former statutory reserve approach. The company expects this new methodology to lead to less capital volatility and more predictable earnings at Jackson over the long term, which should be positive for shareholders and its valuation in the stock market.

Jackson capitalized Brooke Re by a net amount of $699 million, which had a negative impact on its capital ratio (from 624% at the end of 2023, to 543% pro forma for the establishment of Brooke Re), but remained well above its internal target. Indeed, its RBC capital ratio was above 555% at the end of Q1 2024 in its main operating company, well above its target of at least 425%.

Given that Jackson expects to have a more efficient hedging policy going forward and lower hedging costs, its excess capital position is expected to be maintained in the coming years, providing it with good financial flexibility ahead. Moreover, Jackson’s VA business is mostly geared to fee-based revenues, providing good visibility regarding future cash flows, thus following this transaction of liabilities to Brooke Re, its capital generation will be more aligned with operating earnings, increasing its predictability over the long term.

Regarding its investment portfolio, Jackson Financial has about $40 billion of investments at the end of Q1 2024, which are conservatively allocated mostly to fixed-income asset classes. Indeed, corporate bonds are the most important segment, representing more than half of its investments, being invested almost entirely in investment-grade securities. Its allocation to equities and commercial real estate represents about 4% of its total investment portfolio; thus its asset allocation can be considered quite conservative and Jackson is not expected to report significant losses from its investment portfolio.

Financial Overview

Regarding its financial performance, Jackson Financial does not have a long history given that it’s only a public company since 2021, but nevertheless it has reported a positive financial performance over the past couple of years.

In 2023, its total sales amounted to $13.9 billion, down by some $4 billion compared to the previous year, as VA sales declined in the retail and institutional segments as higher interest rates led to increased competition from other products, including time deposits. On the other hand, fixed annuities sales increased due to higher rates, but were not enough to offset lower sales in VA with lifetime livings benefits.

Regarding assets under management, the company reported an increase 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 own invested assets remained relatively stable at about $44 billion during the year. Its net investment income benefited from higher rates, increasing to $2.93 billion in 2023, up by 6.1% YoY.

Pressured by the inflationary environment, Jackson reported operating expenses up by 4.8% YoY to more than $2.5 billion in the past year, but the issue which impacted most its bottom-line was 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, leading to a net income of only $899 million in 2023.

As shown in the previous table, its hedging results can be quite volatile and have a great impact on the company’s P&L account, being a major reason why it decided to establish Brooke Re. This happens because there are differences between US GAAP and the economic value of liabilities and assets, leading to volatility in its accounting numbers that do not reflect its underlying business.

Because of that, Jackson prefers to use adjusted earnings as a better metric to analyze its operating performance. Its adjusted operating earnings were $1.07 billion in 2023 (vs. $1.4 billion in the previous year), and its adjusted operating return on equity (ROE) ratio was 10.6%, which is an acceptable profitability level in the life insurance industry.

During the first quarter of 2024, Jackson reported a positive operating momentum, with retail annuity sales up 18% YoY, supporting an increase in quarterly fee income to nearly $2 billion, up 5.8% YoY. Net investment income amounted to $734 million, an increase of 4% YoY. Its net income in the quarter was $784 million, a great improvement from a loss of almost $1.5 billion in the first quarter of 2023. On an adjusted basis, its operating income was $334 million in Q1 2024, an increase of 23% YoY, supported by higher equity markets and better spread income.

Regarding its capital position, its RBC capital ratio was above 555% at the end of last March, significantly above its internal target. This excess capital position is a strong support for an attractive shareholder remuneration policy, something it has been able to deliver since its IPO back in 2021.

Indeed, Jackson has returned about $1.4 billion of excess capital to shareholders over the past few years, both through dividends and share buybacks, repurchasing some 23% of its outstanding shares at the time of separation from Prudential plc.

In the past quarter, it returned $172 million to shareholders, which represent a payout ratio of about 50% based on adjusted operating earnings, which is a conservative payout ratio and leaves plenty of room for dividend growth and performing share buybacks in the future.

Its current quarterly dividend $0.70 per share, unchanged from the previous quarter, but up by 12.9% YoY. Annually, Jackson is expected to distribute $2.80 per share, which means at its current share price it offers a forward dividend yield of about 3.80%. While this is not a high-dividend yield, it’s an interesting yield compared to other companies in the financial sector.

Moreover, its dividend seems to be sustainable given that Jackson has a strong capital position and its liquidity profile at the holding level is also quite good, holding enough cash to cover its expenses in the next couple of years; thus Jackson can easily maintain its growing dividend policy ahead.

Valuation & Risks

Regarding its valuation, Jackson is currently trading at 0.59x book value, which is a relatively low valuation multiple, but it’s trading at a premium to its historical average of 0.4x over the past couple of years.

Moreover, compared to its closest peers, such as Voya Financial (VOYA) or Lincoln National (LNC), is also trading at an undemanding valuation given that its peers trade at close or above book value. While Jackson is heavily exposed to the annuities market, this discount seems to be unwarranted and is a sign of undervaluation in my opinion.

Regarding its major risks, due to its business profile, Jackson is exposed to several risks, including general conditions in the economy and financial markets, and increasing levels of volatility that can impact negatively its hedging strategy and profitability. Interest rate movements can also have a great impact on its business, both from its investments and the value of future benefits in the variable annuities business, in the case of rapidly declining interest rates in the future.

Conclusion

Jackson Financial is an insurance company highly exposed to variable annuities, a market that can be considered mature and highly competitive, but has some positive growth prospects as population becomes older in the U.S. Due to its exposure to capital markets, its financial results can be volatile justifying to some extent its cheap valuation, but compared to its peers, the discount seems to be harsh, making Jackson an interesting income and value play in the financial sector.