Yahoo Finance Jackson Financial Inc. (NYSE:JXN) Q1 2024 Earnings Call Transcript
Jackson Financial Inc. (NYSE:JXN) Q1 2024 Earnings Call Transcript May 9, 2024
Jackson Financial Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. Thank you for attending the Jackson Financial Inc. First Quarter 2024 Earnings Call. My name is Camron and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. And I would now like to pass the conference over to your host, Liz Werner, Head of Investor Relations. You may proceed.
Liz Werner: Good morning everyone and welcome to Jackson’s first quarter 2024 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 U.S. 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; the President of Jackson National Life Distributors, Scott Romine; our Head of Asset Liability Management and Chief Actuary, Steve Binioris; the President and Chief Investment Officer of PPM, Craig Smith; and Chief Accounting Officer and Controller, Don Cummings. At this time, I’ll turn the call over to our CEO, Laura Prieskorn.
Laura Prieskorn: Good morning everyone. This marks the first quarter to include the positive impact of Brook Re, our captive reinsurance solution. The hard work and execution that led to the formation of Brook Re positions Jackson for long-term capital strength and a continued focus on delivering on our commitments to all stakeholders. Beginning on Slide 3, we are off to a strong start in 2024, and our first quarter results reflect the expected outcomes of Brook Re. In our 2023 full year results, we shared the structure of Brook Re and anticipated impacts on Jackson National Life. This quarter, Jackson National statutory capital generation and risk-based capital or RBC ratio increased, consistent with our expectations. As anticipated, we also saw greater alignment between our economic hedging approach and U.S. GAAP reserving, which led to reduced volatility in net hedging results and by extension, GAAP net income.
Importantly, our statutory capital generation is better aligned with our non-GAAP measure of adjusted operating earnings as both are primarily driven by the substantial assets under management or AUM supporting our variable annuity-based contract. As a result, Jackson now has more intuitive, predictable, and stable financial results that better capture the healthy economics and earnings power of our large and profitable book of business. Turning to Slide 4, you will see the benefits of our economic hedging were evident in both U.S. GAAP and statutory results. In a quarter with significant moves in both equity markets and interest rates, we reported a smaller net hedging result compared to prior quarters, which we'll cover in more detail. We also reported nearly $800 million of GAAP net income at Jackson Financial.
Our adjusted operating earnings of $334 million grew 23% from the first quarter of 2023, benefiting from higher equity markets and a favorable environment for spread income. At Jackson National, statutory capital increased by nearly $400 million, broadly consistent with the level of adjusted operating earnings. This pace of capital generation is well-aligned with our financial targets and an expectation for $1 billion or more in annual capital generation under normal market conditions. This capital generation drove Jackson National's first quarter estimated RBC to 555% to 575%, up from 543% at the beginning of the year after giving effect to the funding of Brook Re. We continue to make progress on diversifying our sales mix with another record quarter of RILA production, driving an overall increase in retail annuity sales of nearly 20% over the prior year's first quarter.
Our product innovation continues with the recent launch of Plus Income, a guaranteed lifetime income option now available in our Jackson Market Link Pro product suite. This option enables policyholders to create an immediate income stream or defer withdrawals, providing the opportunity to grow income over time. Along with our variable annuity living benefit options, the addition of plus income to our RILA suite underscores our philosophy of providing product offerings focused on choice, flexibility, and strong consumer value. We believe our sustained history of product innovation, strong distribution partnerships, and industry-leading service position Jackson for continued sales momentum into the future. Overall, these results helped fuel a very positive start to the year in returning capital to common shareholders, delivering $172 million through dividends and share buybacks in the first quarter of 2024.
Slide 5 highlights our consistent track record of returning capital through different market environments and conditions. Jackson's capital return to common shareholders has exceeded $1.4 billion in share repurchases and dividends since becoming a stand-alone public company in September of 2021. As of the end of the first quarter of 2024, cumulative common shares repurchased represented more than 23% of shares outstanding at separation. This aligns with our balanced approach to capital return, which we believe will continue to serve us well. We continue to view a cash dividend as a valuable stream of sustainable capital return and have cumulatively paid more than $500 million to common shareholders in less than three years. Yesterday, we announced our Board's approval of a second quarter shareholder dividend of $0.70 per common share.
This reflects our continued confidence in our ability to generate capital and our focus on long-term profitability and in our commitment to increasing shareholder value. Moving to Slide 6. Maintaining a strong capital position at our operating companies and parent company, Jackson Financial, remains a priority as evidenced again this quarter. Our first quarter capital return to common shareholders compares favorably with our annual target of $550 million to $650 million, and our holding company liquidity as of the end of the first quarter continues to be above our targeted minimum level at nearly $500 million. We ended the first quarter significantly above our RBC minimum of 425%. Our estimated RBC ratio is between 555 to 575% and our statutory total adjusted capital, or TAC, is approximately $4.7 billion.
The greater stability and predictability of these metrics following the implementation of our Brook Re transaction, along with our expectations for smaller periodic distributions from Jackson National simplifies expectations for our operating company capital position going forward. I'll now turn it over to Marcia to review details of our first quarter financials.
Marcia Wadsten: Thank you, Laura. I'll begin on Slide 7 with our first quarter results summary. Adjusted operating earnings of $334 million increased from both 2023's first and fourth quarters, driven by stronger fee and spread earnings. Our adjusted book value attributable to common shareholders increased over the first quarter due to healthy adjusted operating earnings and positive net hedging results, which I will discuss in more detail shortly. As a reminder, 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 basis, excluding the assets reinsured to third-parties through funds withheld agreement. The information provides helpful insight into our highly rated and diversified commercial mortgage loan portfolio, which is less than 2% of the general account.
Jackson remains conservatively positioned with only 1% exposure to below investment-grade securities on a statutory basis, excluding funds withheld assets. Slide 8 outlines the notable item included in adjusted operating earnings for the first quarter. Results from limited partnership investments, which report on a one-quarter lag, we're slightly above our long-term expectation for a $3 million benefit. In the first quarter of 2023, limited partnership income was below our long-term expectation, creating a comparative pretax benefit in the current quarter of $23 million. In addition to this notable item, both first quarter 2024 and first quarter 2023 benefited from a lower effective tax rate relative to the 15% long-term guidance with a larger benefit in the prior year's first quarter.
This occurred due to higher pretax operating earnings in the current quarter, which made tax benefits that are similar on a dollar basis, less impactful to the effective tax rate. Adjusted for both the notable item and the tax rate difference, earnings per share were $4.16 in the current quarter compared to $3.18 in the prior year's first quarter due primarily to the equity market and spread income benefits noted earlier. Slide 9 offers a visual reconciliation of our first quarter 2024 pretax adjusted operating earnings of $389 million to the pretax income attributable to Jackson Financial of $896 million. Here we see another positive outcome of the Brook Re solution as our economic hedging is now better aligned with U.S. GAAP reserving. As shown in the table, total guaranteed benefits and hedging results or net hedge result was a gain of $427 million in the first quarter of 2024.
Starting from the top of the table, this gain includes a robust guaranteed benefit fee stream. These guaranteed benefit fees are calculated from the benefit base rather than the account value, which provides stability to the guarantee fee stream when markets decline. Consistent with our practice, all guarantee fees are presented in non-operating income to align with related hedging and liability movements. During the period, the net hedge result included a loss on freestanding derivatives, primarily due to losses on interest rate hedges in a quarter where interest rates were up across the yield curve as well as losses on equity hedges and a rising equity market environment. Movements in net market risk benefits or net MRB benefited from the same equity market and interest rate movements, which broadly offset the freestanding derivative results.
This illustrates the improved alignment between the hedging and the related hedged items following the Brook Re implementation. The reserve and embedded derivative movements loss primarily reflects losses on RILA reserves resulting from higher equity markets. This RILA business provides a natural equity offset to the guaranteed variable annuity business on the books, which results in hedging efficiencies that increase as the RILA block grows. The deferred acquisition cost or DAC amortization included in the net hedge result is associated with the non-operating portion of DAC as of the transition date to LDTI. This non-operating DAC will continue to run off over time, and the amount of quarterly amortization should decline slowly from the current level.
Non-operating results also included $69 million in gains from business reinsured to third-parties. This resulted from a loss on a funds withheld reinsurance treaty due to the change in the associated embedded derivative value netted against 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 10 and focus on retail annuity sales progress. As Laura highlighted, our RILA product continues to gain momentum with first quarter sales reaching a record level of $1.2 billion, supporting further diversification in our top line.
Sales of variable annuities were relatively flat compared to the first quarter of 2023 and are consistent with the quarterly pace we've seen since the fourth quarter of 2022. When viewed through a net flow lens, the gross sales we are generating in RILA and spread products translated to $1.1 billion of non-VA net flow in the first quarter of 2024, which has grown materially over time. These net flows provide valuable economic diversification and hedging efficiency benefits. Importantly, our overall sales mix remains efficient from the standpoint of new business strain. Looking at first quarter 2024 pretax adjusted operating earnings for our segments on Slide 11, higher equity markets and a continued positive environment for spread income has driven solid growth in our retail annuity segment compared to both the first and fourth quarters of 2023.
Jackson's earnings power is supported by the growing level of account value as healthy separate account returns, combined with growing non-VA net flows have built up AUM to $248 million, an increase of 13% from the first quarter of 2023. For our institutional segment, pretax adjusted operating earnings were also up from both prior periods due to higher spread income. Our closed Life and Annuity Blocks segment reported higher pretax adjusted operating earnings compared to both prior periods. This is due primarily to reserve decreases as the business runs off and to the annual assumption updates in the fourth quarter 2023 when comparing sequentially. Slide 12 summarizes our first quarter capital position. The profitability of our variable annuity based contract was the primary driver of an increase in JNL total adjusted capital or TAC to nearly $4.7 billion.
This is an increase of approximately $400 million from the pro forma January 1 level after reflecting the impact of Brook Re. Going forward, our company action level required capital, or CAL, is much more stable now that the cash surrender value floor impacts have been removed. Our estimated RBC ratio between 555% to 575% was well above our 425% minimum and up from the January 1st pro forma level of 543%. We also had a successful first quarter at Brook Re, which operated as expected and remains well-capitalized. Our holding company cash and highly liquid asset position at the end of the quarter was nearly $500 million, which continues to be above our minimum buffer. As previously indicated and subject to regulatory approval, we intend to have periodic distributions from our operating company throughout the year with the goal of reducing the RBC volatility that occurred from our past practice of sizable annual dividends.
We believe our robust capital position across operating companies provides a favorable financial foundation for future operating company dividends. Overall, I'm very pleased with these results, which demonstrate strength in sales, earnings, capital, and holding company liquidity. I'll now turn the call back to Laura.
Laura Prieskorn: Thank you, Marcia. Our first quarter results show we are off to a great start in 2024, and I'm pleased our Brook Re solution is performing as expected. I'm quite happy with the results we produced in the first quarter and energized by the prospects for our business shared today. I look forward to continued success in the remainder of 2024. As always, I'd like to acknowledge our talented Jackson team and their dedication to our purpose in providing long-term solutions for Americans planning for their financial futures. Earlier this week, we published our annual Corporate Responsibility Report, which details how we invest in each other and our communities, while continuing to enhance access to our annuity products and take an active role in moving our industry forward.
I encourage you to read the report posted on jackson.com to learn more about these efforts and how they drive business value to support our long-term success. Finally, as we've previously shared, Marcia is retiring effective June 3rd. At that time, we expect our Board to appoint Don Cummins as Chief Financial Officer. Marcia's leadership, steadfast commitment, and positive contributions will be felt for years to come, and I'm grateful for her dedication and her counsel. It has been an honor to serve Jackson alongside Marsha through the most transformational time in the company's history.
Marcia Wadsten: Thank you, Laura. It has been a privilege to be part of Jackson for my entire career, especially as we were transitioning to and operating as an independent public company. As we turn to the future, I know Don is well-positioned to support Jackson's ability to generate capital and maintain our balanced approach to capital management.
A - Don Cummings: Thanks Marcia. Good morning, everyone. I appreciate the opportunity to take on the role of CFO at Jackson. Over the last three years, I've worked closely with Marcia as we became an independent public company and have learned immensely from her commitment to managing capital for the benefit of all Jackson's stakeholders. As we continue to work through the transition, I'm optimistic about the future and look forward to meeting many of you in person in the coming weeks.
Laura Prieskorn: Thank you, Marcia and Don. Congratulations to you both as you embrace new experiences. I'll now turn the call over to the operator for questions.
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