Earnings Call Transcript - JXN Q3 2023

Operator, Operator

Good morning, everyone. Welcome to Jackson Financial Incorporated's Third Quarter 2023 Earnings Call. All lines are muted during the presentation, and there will be a question-and-answer session at the end. I would now like to turn the call over to Liz Werner, Head of Investor Relations. Please go ahead.

Liz Werner, Head of Investor Relations

Good morning, everyone. And welcome to Jackson's third 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 may contain certain non-GAAP financial measures. The reconciliation of those measures to the most comparable U.S. GAAP figures is included in our earnings release, financial supplement and earnings presentation, all of which are available on the Investor Relations 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, CEO

Thank you, Liz. Good morning, everyone, and welcome to our third quarter 2023 earnings call. In today's call, we'll provide an update on our strong capital position, our product and distribution initiatives, and our solid third quarter operating results. In our two years as an independent public company, we have consistently delivered on our commitments to shareholders. We continue to build on this momentum in the third quarter with total capital return to shareholders exceeding $120 million through share repurchases and common dividends and ending the quarter with an RBC above our target range. As we enter the fourth quarter, we look forward to furthering our track record of execution by achieving our 2023 financial targets. Since our separation in September of 2021, Jackson's cumulative capital return has surpassed $1 billion in combined shareholder dividends and share buybacks. We have repurchased common shares for eight consecutive quarters. As of the end of the third quarter, our cumulative share repurchases represent 19% of our common shares outstanding at the time of separation. We view dividends as an important component of sustained return to shareholders and paid our first dividend within four months of becoming an independent public company. Alongside this morning's earnings release, we are pleased to also announce our board's approval for a fourth quarter common dividend of $0.62 per share. Maintaining a strong capital position at Jackson and its operating companies is a priority for Jackson's leadership. We ended the third quarter with an estimated RBC ratio above our target range of 425% to 500% and our total adjusted statutory capital increased to $4.5 billion. We have consistently reported estimated RBC within or above our target range and consistently above rating agency requirements each quarter since separation. Our capital flexibility is further supported by liquidity at the holding company level, which was nearly $1.4 billion in liquid assets, taking into account the cash proceeds from the sale of limited partnership assets in October. We announced our plans to sell these assets last quarter and the sale was successfully completed last month. As previously stated, we are retiring $600 million in senior debt later this month and will enter 2024 with a strong level of liquidity within the holding company. At the end of the third quarter, year-to-date capital return totaled nearly $350 million, and when combined with our fourth quarter dividend and expected share repurchases, this total offers us confidence in our ability to achieve our 2023 return target of $450 million to $550 million. Our remaining share repurchase authorization of approximately $360 million provides flexibility for continued execution. As discussed earlier this year, statutory reserving and capital requirements are subject to flooring at the Cash Surrender Value or CSV, which has led to volatility in our statutory results. We remain highly engaged with regulators to deliver a CSV floor solution to better represent the economic value of our business. We have had positive engagement with our regulators over the past few months and are targeting early 2024 for a CSV floor solution. While the specific timing is difficult to predict, our work is in pursuit of a comprehensive and enduring solution that recognizes the financial strength of Jackson and positions us for greater RBC stability. We look forward to providing a more detailed update in the coming months. Turning to our third quarter results, net income totaled $2.8 billion, primarily due to the gain on market risk benefits resulting from higher interest rates. Adjusted operating earnings were $3.80 per share, an increase from the second quarter of 2023, due to fee income growth and lower corporate expense. Retail annuity sales increased 6% from the second quarter of 2023 to $3.3 billion, driven by continued momentum in RILA sales. Variable annuity sales and net flows were consistent with market trends and the expected aging of our in-force book. Positive fund performance has resulted in a 3% increase in variable annuity account values for the year, which more than offsets the impact of net outflows. Like prior quarters, our fixed and fixed index annuity sales remained relatively modest as pricing reflects our prudent investment approach. Our ability to meet the needs of advisors and their clients positions Jackson well for further growth and diversification through our product offerings and expertise. Our enhanced RILA product has been embraced by the market with sales exceeding $800 million in the third quarter, reaching record sales levels in the month of September. In less than two years, we've reached an annualized sales run rate of over $3 billion, and 26% of our RILA producers were either new or reactivated producers. Our enhanced RILA product and focus on digital marketing have made for a powerful combination in the market. Our innovative RILA digital experience ensures that financial professionals can more easily educate their clients on the benefits of a RILA and how it fits into their specific goals for growth and protection with flexibility. The tool was built to be intuitive, simple, and action-oriented, and to allow for customized experiences in which financial professionals and clients can model various scenarios to better understand outcomes. Designing this unique interface resulted in significantly increased year-over-year engagement on our website jackson.com. More than one-third of our sales came from producers utilizing our RILA digital experience, clearly demonstrating that financial professionals are relying on our industry-leading technology to provide clients with better information and service. In late August, we refined our Perspective II flagship variable annuity benefit suite with the goal to simplify and customize the consumer experience. Perspective II offers a streamlined menu of benefit options that enables financial professionals and their clients to easily navigate living benefit alternatives while maintaining focus on asset growth and protection. Over time, as traditional pension plans have phased out, annuities are filling the gap, helping retirees create their own stream of guaranteed lifetime income. When proposed regulations may limit a retirement investor's access to annuities or worsen the retirement savings gap Americans are experiencing, we engage with regulators, agencies, and legislators to advocate for fair regulations that do not impede a retirement investor's access to valuable retirement solutions. The Department of Labor's latest fiduciary proposal was just released and we are still reviewing the proposal. Our initial reaction is that the DOL may not have fully considered the regulations developed by the National Association of Insurance Commissioners and the safeguards these rules provide to retirement investors. We will continue to work with our trade associations to better understand how the proposed rule will impact Americans saving for retirement. Jackson is fully accustomed to operating in a highly regulated industry and has a track record of successfully adapting to new and updated regulations. If the rule becomes effective, Jackson will work through our change management process to implement the final requirements. Overall, I remain pleased with our momentum towards our strategic and operational goals during the third quarter. We look forward to achieving our 2023 key financial targets and continuing to deliver long-term value to our shareholders, distribution partners, and policyholders. I'll now turn it over to Marcia to review our financials for the quarter in greater detail.

Marcia Wadsten, CFO

Thank you, Laura. I'll begin with our third quarter result summary on slide six. Adjusted operating earnings of $315 million were up from this year's second quarter, primarily due to higher fee and spread income. Similarly, our third quarter adjusted book value attributable to common shareholders was up from the second quarter due to non-operating net hedging gains and healthy adjusted operating earnings. In the appendix of our earnings presentation, we have included additional general account investment portfolio details that provide breakdowns on both U.S. GAAP and statutory bases, excluding the assets reinsured to third-parties or funds withheld assets. The information provides helpful insight into our highly rated and diversified commercial mortgage loan office portfolio. As you can see, Jackson remains conservatively positioned with only 1% exposure to below-investment-grade securities on a statutory basis, excluding funds withheld assets. As a reminder, we will complete our annual assumptions review process in the coming quarter and will disclose the results of the review in our fourth quarter and full-year earnings release. This process entails a thorough and comprehensive assessment of our assumptions and models performed every year. Slide seven outlines the notable items included in adjusted operating earnings for the third quarter. Results from limited partnership investments, which report on a one-quarter lag, were $13 million lower in the current quarter than they would have been had returns matched our long-term expectations. In the third quarter of 2022, limited partnership income was also below our long-term expectations, but to a greater degree, creating a comparative pre-tax benefit in the current quarter of $41 million. In addition to this notable item, both third quarter 2022 and third quarter 2023 benefited from a lower effective tax rate relative to the 15% long-term guidance. The benefit in the prior year's quarter was larger due to a higher level of pre-tax operating earnings excluding notables. Adjusted for both the notable item and the tax rate difference, earnings per share were $3.77 for the current quarter, compared to $4.52 in the prior year's current quarter. Key drivers of the year-over-year difference include the previously mentioned increase in VA fixed option crediting rates due to regulatory minimum requirements and the change in income from operating derivatives resulting from higher short-term interest rates. Additionally, the prior year's quarter included a gain from the experience update for future policy benefits that did not repeat in the current quarter. It is important to note that we saw positive sequential trends as the earnings per share excluding notables in the second quarter of this year were $3.54. Slide eight illustrates the reconciliation of our third quarter pre-tax adjusted operating earnings of $355 million to pre-tax income attributable to Jackson Financial of $3.5 billion. Net income includes some changes in liability values under U.S. GAAP accounting that will not align with our hedging assets. We focus our hedging on the economics of the business as well as our statutory capital position, and choose to accept the resulting U.S. GAAP non-operating volatility. As shown in the table, the total guaranteed benefits and hedging results, or net hedge result, was a gain of $2.8 billion in the third quarter. Starting from the left side of the chart, you see a robust guaranteed benefit fee stream of $784 million, 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 related hedging and liability movements. There was a $271 million loss on freestanding derivatives, primarily due to losses on interest rate hedges in a quarter where interest rates were up across the yield curve. Movements in net market risk benefits or MRB provided a $2.4 billion gain that more than offset the freestanding derivative movements due in large part to these same interest rate increases. Unlike the statutory framework, the GAAP reserves for variable annuity benefits do not have a minimum requirement and can become negative, switching from a liability to an asset position. This happened during the second quarter of 2023 and continued into the third quarter as the strong economic profile of our enforced book led to an MRB net asset of approximately $3 billion. Non-operating results also included $462 million of gains from business reinsured to third party. This was primarily due to a gain on a 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 accumulated other comprehensive income or AOCI in the funds withheld account related to reinsurance, 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. Our segment results start on slide nine with retail annuities. Jackson continues to remain an industry leader in the annuities market and our traditional VA sales have stabilized over the past four quarters, which is consistent with VA industry trends. As Laura highlighted, our RILA sales growth puts us on pace of over $3 billion annually and has driven improved overall sales diversification. Sales of annuities without lifetime benefit increased to 48% of our total retail sales, up from 41% in the third quarter of last year. While we expect this percentage to vary somewhat over time based on market conditions and consumer demand, our RILA offering has contributed to diversification within our sales mix. When viewed through a net flow lens, the growth sales we are generating in RILA and other spread products translated to more than $800 million of non-VA net flow in the third 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 streams. Looking at pre-tax adjusted operating earnings for our retail annuity segment on slide 10, we show positive underlying trends as demonstrated by AUM growth across our annuity product categories, despite being down from the prior year's third quarter. Higher equity markets are benefiting our variable annuity count value and strong net flows are driving growth in RILA fixed and fixed index annuity account values. Furthermore, the positive momentum for our enhanced RILA suite positions us well for ongoing success as we enter the fourth quarter. Our other operating segments are shown on slide 11. For our institutional segment, sales for the third quarter totaled $112 million and account values were $8.7 billion. Pre-tax adjusted operating earnings were essentially flat from the prior year. Our Closed Life and Annuity Block segment reported lower pre-tax adjusted operating earnings compared to the prior year. Under LDTI, we will now have some additional volatility in this segment, due to the quarterly experience update for future policy benefits. The prior year's quarter included a gain on this line item that did not repeat in the current period. While this figure can be a positive or negative in any given quarter, we would expect it to net to a small number over time. You can see this in our financial supplement where the last five quarters ranged from a loss of $16 million to a gain of $36 million, totaling to a gain of only $25 million on a cumulative basis. Slide 12 summarizes our third quarter capital position. As Laura mentioned, we returned $123 million to our shareholders in the third quarter through a combination of dividends and share repurchases and remain committed to reaching our full-year capital return target of $450 million to $550 million. We were active in share buybacks during the third quarter, which totaled 1.9 million shares or $71 million. We generated significant regulatory capital in the period as our variable annuity book remains in a healthy position and our hedging performed well. Our total adjusted capital increased by approximately $700 million to $4.5 billion, reflecting strong base contract cash flows, positive variable annuity net guarantee results, and related tax benefits. This was only slightly offset by higher required capital, which was driven by a decline in equity markets, partially offset by higher interest rates. The combined effects of these items led to our estimated RBC ratio rising above our 425% to 500% target range. During the third quarter, our hedge spend was within the guarantee fees collected as we benefited from a more favorable hedging environment. Our holding company asset position at the end of the first quarter was nearly $1.4 billion, including over $900 million in cash and highly liquid assets, which continues to be well above our minimum buffer. Consistent with our second quarter commentary, Jackson Financial completed the planned sale of limited partnership assets in October. Giving effect to that sale, JFI had nearly $1.4 billion in cash and highly liquid securities, a very strong level of liquidity which provides significant financial flexibility. We are retiring the $600 million senior debt maturity later this month. Following that retirement, we have no debt maturities until 2027. Upon our separation, we made it clear that we were committed to maintaining a strong balance sheet and rating profile. We have delivered on this commitment over time as illustrated by our quarterly reporting of estimated RBC ratios consistently within or above our target range, a conservative leverage ratio that has improved since separation, and a deliberate balanced approach to capital return to shareholders. We have been pleased that our financial results have consistently compared favorably to rating agency triggers and we remain committed to a continued improvement of our profile in the future. In addition to our strong financial performance, we have made significant progress on diversifying our sales mix. We are proud of our execution and believe we are doing the right things to strengthen our credit profile for the future. Stability of our capital position is very important and is driving our efforts toward obtaining a more economic framework that is not adversely impacted by the cash surrender value floor. As previously stated, our goals are reduced statutory capital volatility, more efficient hedging, and more intuitive results for our external stakeholders.

Laura Prieskorn, CEO

I will now turn it back over to Laura for closing remarks. Thanks, Marcia. Our third quarter results and our accomplishments throughout the year underscore our ability to serve our customers through product innovation, exceptional distribution, effective risk management, and industry-leading service. As I mentioned earlier, we look forward to providing additional insights into our cash surrender value floor solution and continued capital generation in the near future. We continue to work closely with our regulators and are focused on arriving at a solution that meets the goals Marcia outlined. As 2023 comes to an end, I am proud of our accomplishments. We have completed our second year of operating as an independent public company and delivered on our commitments to stakeholders, returning capital to our shareholders, maintaining a strong balance sheet, and serving our distribution partners and their clients. I am grateful to each of our talented associates, who contribute every day to Jackson's successes and help create a more confident financial future for Americans saving for and living in retirement. I'll now turn the call over to the operator for questions. Thank you.

Operator, Operator

Thank you. Our first question comes from Tom Gallagher of Evercore ISI. Your line is now open. Please go ahead.

Tom Gallagher, Analyst

Good morning. Yes, I find it reassuring to hear that. I believe you mentioned that by March 2024 you expect to see further developments regarding the Florida reserve situation. I would like to get a general understanding of how you envision this change might take shape. I can share my thoughts on it, and if you could let me know if I'm on the right track, that would be helpful. First, I assume there would be some form of permitted practice that allows you to move your reserve to a net asset, perhaps with certain limitations, as I imagine it wouldn't be unlimited. If that were the case, it could enable greater hedging symmetry, allowing you to better manage the economic aspects without as much concern about this issue moving forward. Is my thinking along the right lines?

Laura Prieskorn, CEO

Good morning, Tom, and thanks for the question. I'll maybe address timing and then have Marcia cover your comments on the specifics that you mentioned. From a timing perspective, I think importantly, we've made great progress year-to-date, which has allowed us to confidently indicate a targeted completion early in 2024. It is hard to predict any specific timing given, obviously we're dependent on regulator approval, but again great progress being made and we do intend to provide updates as soon as possible around the particular timing and the specifics of the solution. But I can have Marcia comment on your thoughts around the solution specifically?

Marcia Wadsten, CFO

Sure, Tom. You're right that we won't go into the specifics of the solution we have in mind. However, we can share our goals for the solution, which will influence how things will change in the future. We're aiming for a more economic liability basis that aligns with hedging, allowing for more effective economic hedging. One of our goals is to eliminate costs and implications associated with non-economic hedging that we currently experience, especially due to the impact of the cash surrender value floor. We're looking forward to achieving more economic hedging while avoiding non-economic hedging. Additionally, we believe this solution will foster greater stability in our capital and RBC, leading to more predictable capital generation as we progress. We also want the results to feel intuitive to everyone, with our statutory results sensibly reflecting market changes from period to period. It's important to note that these elements focus on long-term benefits rather than short-term impacts.

Tom Gallagher, Analyst

That was really helpful. Thanks. My follow-up is regarding the $3 billion MRB you have on a GAAP basis. If and when a solution is found, could we see a significant increase in your RBC to reflect a similar change on the balance sheet? Should we anticipate changes in RBC, or do you believe this will primarily influence ongoing capital generation without much impact on the balance sheet, or could it be both?

Laura Prieskorn, CEO

I think the emphasis would be, Tom, on the prospective impact. And as I said, really, this is, you know, we're looking for a solution that works well as we move forward in time, not so much focused on day one type impacts.

Operator, Operator

Thank you. Our next question comes from the line of Ryan Krueger of KBW. Your line is now open. Please go ahead.

Ryan Krueger, Analyst

Hi, thanks. Good morning. I have a related follow-up. Do you think the potential solution would allow you to change your hedging program, or is it primarily about making the statutory results align better with your existing hedging approach?

Marcia Wadsten, CFO

Well, Ryan, this is Marcia here. I think there is an implication that there would be some changes in how our hedges would be positioned. We've discussed before that our approach to hedging involves managing the economic risk profile while also protecting our statutory balance sheet and stabilizing distributable earnings over time. With this solution, we anticipate that if there's less impact from the cash surrender value floor, there will be a reduced need for what we refer to as the macro hedge adjustments, which are more focused on statutory aspects. Instead, the emphasis would shift towards economic hedging. Therefore, the balance between the economic elements of our hedging and the statutory perspectives we consider would change, resulting in an increased focus on the economic side and a diminished emphasis on the statutory aspects as the influence of the cash surrender value floor lessens.

Ryan Krueger, Analyst

Got it. No, that makes sense. And then maybe just one other one related to what Tom was asking. Is it more likely that it would be just a permitted practice or some sort of change to your existing legal entity or the use of a new legal entity, like a captive, that where you could move some of the reserves to the captive entity?

Marcia Wadsten, CFO

Well, I think we feel it's a little premature to talk about the forum today, so unfortunately I have to pass on that and just let you know that we'll come back with an update as soon as we can and share the details of all of that at that point.

Operator, Operator

Thank you. Our next question comes from the line of Sameer Kumar of Jeffries. Your line is now open. Please go ahead.

Sameer Kumar, Analyst

Great. Thank you. Just a couple on capital, so first on the Michigan solution, assuming you get it in early '24. Would that change how you think about your RBC target of 425% to 500%?

Laura Prieskorn, CEO

I think that's a likely outcome, Sameer, that we would want to revisit that, not indicating yet how it would change, but I do think that when we set that 425% to 500% target range, we set a wider range purposefully given the volatility in our business. And I think if to the extent that some of that volatility was contributed to by the cash surrender value floor, a solution that mitigates that cash surrender value floor solution could very well likely mean that we don't need such a wide range to think about. And therefore that's something that we would be considering as we look forward and provide our outlook and targets for 2024.

Sameer Kumar, Analyst

Got it, that makes sense. The second one was just on the RILA product. I think you had mentioned that there's some capital benefits you get as that block grows. Can you just maybe talk about how much of a benefit you are getting and at sort of what point in terms of the size of that block does it really start to move the needle from a capital perspective?

Laura Prieskorn, CEO

Sure. Yes, that's a great question and thank you for that. We are really pleased with the momentum that we've had with the RILA business and while in terms of account value it is still relatively small at just under $4 billion compared to the size of our variable annuity block. It does have a really good profile in terms of an offsetting risk from an equity perspective in terms of the direction of the risk. So we see benefits already with even with the size of our RILA block today in terms of the types of scenarios that would naturally play out into your statutory requirements, particularly when you think about the tail scenarios that drive your CTE 98 requirements, which on a VA-only viewpoint are going to be largely significant downward equity stress type paths, which are going to definitely have an economic offset because that's certainly going to not be the profile of your RILA. So we're seeing already benefits within our statutory requirements from the offset, which is both an economic risk offset, but also kind of captured as well in VM 21 that way. But when we just look at the sizing of it and the question around how big, when does it become material, already today with the size of block we have, we're seeing about a 10% economic offset from our equity risk relative to the VA block, the VA guaranteed business, despite the fact that it is still a relatively small size block. With continued momentum in the RILA block, we look forward to an increased offset there as well.

Sameer Kumar, Analyst

Got it. And then if I could just sneak one more and just on your unassigned surplus, I think it was negative in the second quarter. Obviously, your stat results in the third quarter were much stronger. So do you have an update on that? And as we think about, kind of, capital return into next year. Should we think about that 450% to 550% is a reasonable starting point?

Laura Prieskorn, CEO

We have mentioned the capital return target of 450% to 550% as a reasonable long-term expectation, so it serves as a starting point. Regarding unassigned surplus, we are conducting our own modeling and looking ahead. We believe we will be in a position that won't hinder our ability to meet our capital return targets once we establish and communicate them early next year.

Operator, Operator

Thank you. We now have a follow-up question from Tom Gallagher of Evercore ISI. Your line is now open.

Tom Gallagher, Analyst

Thanks. Just a question on the assumption reviewing Q4. Can you give some sense for how policyholder behavior on your variable annuity block is trending right now? Has that been running above or below long-term expectations? And would you expect any meaningful positive or negative change there? Thanks.

Laura Prieskorn, CEO

Yes, thank you, Tom. As we have traditionally done, we are currently in the process of completing our annual review, which takes place in the fourth quarter. We’ll provide more specific outcomes with our fourth quarter and full-year results. Regarding policyholder behavior this year, it has mostly aligned with our assumptions. For instance, we've observed a slight increase in variable annuity surrenders, which is expected given the rebound in the equity markets; this behavior aligns with our typical expectations and is incorporated into our modeling. Importantly, we rely on a substantial amount of experience data to inform our assumptions, and we adjust these assumptions annually based on new data. We generally make small adjustments as experience develops each period, which helps us avoid larger, less frequent updates. As for the direction of changes, there's nothing we can discuss today, but we look forward to providing those updates next quarter.

Operator, Operator

Thank you. As there are no additional questions waiting at this time, I'd like to hand the conference call back over to Laura Prieskorn, CEO, for closing remarks.

Laura Prieskorn, CEO

Thank you. As I mentioned earlier, I'm proud of our team for continuing to deliver on our commitment to stakeholders. And as we mark the end of our second year as an independent company, the momentum that we build towards our strategic and operational goals affirms our disciplined approach. We appreciate you joining us today and we look forward to speaking to you again soon. Take care.

Operator, Operator

Ladies and gentlemen, thank you for joining us for the Jackson Financial Incorporated third quarter 2023 earnings call. Have a great rest of your day. You may now disconnect.