Jackson Financial Q2 2024 Earnings Call Transcript

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August 8, 2024

There are 7 speakers on the call.

Operator

Hello, everyone, and welcome to the Jackson Financial Inc. 2Q24 Earnings Call. My name is Charlie, and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. I'll now hand over to our host, Liz Werner, Head of Investor Relations to begin.

Operator

Liz, please go ahead.

Speaker 1

Good morning, everyone, and welcome to Jackson's 2nd 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.

Speaker 1

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.

Speaker 1

Joining us today are our CEO, Laura Prescorne our CFO, Don Cummings the President of Jackson National Life Distributors, Scott Romine our Head of Asset Liability Management and Chief Actuary, Steve Vignoras and the President and Chief Investment Officer of PPM, Craig Smith. At this time, I'll turn the call over to our CEO, Laura Priesgorn.

Speaker 2

Good morning, everyone. As we moved through the Q2, our operating trends and strong capital levels supported positive financial results and sustainable capital return. Today, we look forward to discussing our 2nd quarter results and progress through the first half of twenty twenty four. Beginning on Slide 3, we achieved positive net income and solid operating earnings growth in the Q2 of 2024, driven by increased fee income from higher average annuity assets under management and higher net investment income. The benefits of a favorable equity market and strong annuity sales contributed to growth from the Q2 of 2023 and from the Q1 of this year.

Speaker 2

We continue to see successful retail annuity sales across all product lines, demonstrating our continued focus on execution. Jackson provides a range of annuity solutions to advisors and their clients. And in the Q2 of 2024, we saw strong demand for registered index linked annuities or RILAs and traditional variable annuities. Total retail annuity sales grew 36% from the Q2 of 2023 15% from the Q1 of this year. Variable annuity sales benefited from rising equity markets and the opportunity for equity growth available through our commitment to investment freedom.

Speaker 2

Our 2nd quarter variable annuity sales of $2,700,000,000 represented a return to a level we last saw in the Q3 of 2022. We continue to build momentum in Ryla sales, reaching a record $1,400,000,000 in the 2nd quarter with an increasing share of new and reactivated advisors selling Ryla as their leading annuity solution, demonstrating that Ryla continues to be a source of diversification and a product of choice for our financial professionals. We expect Jackson's sales momentum to continue as we focus on providing the best solutions to U. S. Retirement savers through our product innovation, strength in distribution and best in class service.

Speaker 2

Our traditional investment only variable annuity and Ryla products were once again recognized in Barron's annual 100 Best Annuities Guide published in late July. I'm proud that these products were highlighted across 3 categories for offering exceptional value for policyholders. Preliminary data from Industry Trade Organization, LIMRA, shows the overall U. S. Annuity market is expected to set a new sales record in the first half of twenty twenty four.

Speaker 2

According to their recent forecast, sales of traditional VA are expected to exceed $40,000,000,000 in 2024, up more than 15% from 2023 and sales of RYLA are expected to exceed $50,000,000,000 in 2024, up approximately 8% from 2023. We're excited about the growth the industry is seeing across product lines as more Americans seek solutions offering guaranteed lifetime income. Critical to this continued growth is a focus on enhancing the digital experience for financial professionals and consumers to strengthen understanding of an annuity's value to a confident and secure retirement. Jackson has a long history of investing in technology, which we believe has contributed to our competitive cost structure and exceptional service delivery for financial professionals and their clients. We are a leader in digital connectivity through data exchanges and integrations within the annuity industry ecosystem.

Speaker 2

This allows us to connect to an advisor's platform of choice, making annuities more accessible for financial professionals and their clients and making it easier to do business with Jackson. With a variety of educational tools and information available, jackson.com serves as a platform for financial professionals to build their practice, support their clients, and optimize annuities in their current books of business. The platform also serves clients helping them to plan their journey more easily toward financial freedom. As an example, we have enhanced the capabilities within our digital ecosystem, a one stop platform for financial professionals. This digital experience initially available for our Ryla products allows advisors to illustrate how a Ryla could fit within a client's portfolio to meet their specific needs based on customized market scenarios.

Speaker 2

We have seen substantial growth in activity for this platform with Q2 2024 visits up nearly 75% compared to the Q2 of 2023. The success of our Ryla digital ecosystem experience has led to stronger sales lead generation, contributed to new advisor relationships and furthered our sales momentum. Approximately 1 third of our Ryla sales this quarter came from producers utilizing our Ryla digital ecosystem, clearly demonstrating that financial professionals are relying on our industry leading technology to provide clients with better information and service. Jackson also plays a leadership role in the Insured Retirement Institute's Digital First for Annuities initiative, helping to establish industry wide data standards and embracing innovation to ensure financial professionals and clients experience a streamlined and modern approach to retirement planning. We look forward to continuing this important work to enhance the overall digital experience and simplify integration of our products within the industry.

Speaker 2

Turning back to Slide 3. During the Q2 of 2024 and excluding the impact of its distribution to JFI, Jackson National Life's total adjusted capital grew by $321,000,000 and for the first half of the year increased by $681,000,000 Our more stable capital generation continues to reflect the success of Brook Re. Importantly, this stability supports our balanced approach to capital management, which includes our commitment to shareholder return, maintaining and strengthening our balance sheet and funding growth through new business and other strategic opportunities. Capital return in the Q2 was $144,000,000 through a combination of common share repurchases and common share dividends. Yesterday, we also announced our Board's approval of a $750,000,000 increase to our common share repurchase authorization and a 3rd quarter common stock dividend of $0.70 per share.

Speaker 2

The expanded share repurchase authorization has no time limit and provides flexibility for capital return into the future. We believe this announcement highlights our commitment to future profitability, capital generation and long term shareholder value. You can see our record of consistent capital return on Slide 4, which totals $1,500,000,000 since separation, including repurchases of 25% of our common shares at separation.

Speaker 1

Slide 5 shows we

Speaker 2

are on pace to achieve our full year targets for the 4th year in a row. For the Q2 of 2024, our estimated RBC ratio is between 5 50% 5 70%, well above our minimum of 4 25%. The greater stability of capital generation will continue to support our approach to more frequent capital distributions than our prior practice of an annual dividend to our holding company. Following this approach, our statutory capital at the end of the second quarter was approximately $4,700,000,000 after the $250,000,000 distribution from our main operating company Jackson National Life in June. At this time, I'd like to turn the call over to our CFO, Don Cummings.

Speaker 3

Thank you, Laura. I'll begin on Slide 6 with our 2nd quarter results summary. Adjusted operating earnings of $410,000,000 were up 45% over the Q2 of last year and 23% over the Q1 of this year. This significant growth in earnings was primarily due to higher fee income from growth in variable annuity assets under management and higher earnings on spread products. Spread earnings benefited from gains in net investment income, primarily driven by the growth of our Rylablock as well as higher portfolio yields.

Speaker 3

The investment portfolio supporting our spread products has continued to perform well. The appendix of our earnings presentation provides breakdowns on both GAAP and statutory bases, excluding the assets reinsured to 3rd parties through funds withheld agreements. This information includes insights into our highly rated and diversified commercial office loan portfolio, which is less than 2% of the investment portfolio. Jackson remains conservatively positioned with only 1% exposure to below investment grade securities on a statutory basis, excluding funds withheld assets. Before turning to notable items in the quarter, I want to highlight the growth in book value since year end.

Speaker 3

Our adjusted book value attributable to common shareholders ended the 2nd quarter at $11,500,000,000 or $150.35 per diluted share, an increase of over 10% from year end 2023, driven by our strong operating performance and common share repurchase activity. Slide 7 outlines the notable items included adjusted operating earnings for the Q2 of 2024. Reported earnings per share were $5.32 for the current quarter. Adjusting for $0.37 of notable items and the difference in tax rates from our 15% guidance, earnings per share were $4.87 for the current quarter compared to $3.54 in the prior year's 2nd quarter. This strong earnings improvement was primarily due to the growth in assets under management and spread income benefits noted earlier, as well as the reduction in diluted share count from common share repurchase activity.

Speaker 3

Notable items for the quarter also included a $0.31 benefit from a payout annuity reserve release due to death. This was a one off item in the current quarter that we do not expect to repeat. Turning to Slide 8, we've included a waterfall comparison of our Q2 2024 non GAAP pre tax adjusted operating earnings of $473,000,000 to GAAP pre tax income attributable to Jackson Financial of $311,000,000 We continue to see greater alignment between adjusted operating earnings and GAAP income following the establishment of Brook Re at the beginning of this year. Although our net hedge result was a loss of $201,000,000 in the Q2 of 2024, for the first half of the year, we reported a net hedge gain of $226,000,000 The hedging results include a robust guaranteed benefit fee stream that is derived from the benefit base rather than the account value, which provides stability to the guarantee fees even in periods when markets decline. During the Q2 of 2024, the net hedge result included a loss on freestanding derivatives of about $1,000,000,000 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 in a rising equity market environment.

Speaker 3

Changes in net market risk benefits or net MRB benefited from the same equity market and interest rate movements, providing a $516,000,000 offset to the freestanding derivatives loss. It is important to note that in addition to market and interest rate impacts, there will be an MRB increase in each period as time passes due to the collection of fees. The reserve and embedded derivative loss of $278,000,000 during the Q2 primarily reflects losses on Ryla reserves resulting from higher equity markets. The Ryla business provides a natural equity risk offset to our guaranteed variable annuity business, which results in hedging efficiencies that increase as the Ryla block grows. The change in the net MRB, fees collected during the period, as well as the reserve and embedded derivative movements should be viewed collectively when comparing to freestanding derivative losses that come through in our hedge results.

Speaker 3

The deferred acquisition costs or DAC amortization reported 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 will decline from the current level over time. To summarize the results of our hedging program, we've included a subtotal in the table on slide 8 that excludes DAC amortization as this expense is not an element of our hedging program or driven by current period activity. The net impact of guarantee fees, freestanding derivatives loss, market risk benefits gain and reserve and embedded derivative movements was a $65,000,000 loss in the Q2 of 2024. We believe this result demonstrates that our hedging program continues to be effective in reducing the volatility of our results and is working as expected with the establishment of Brook Re.

Speaker 3

Non operating results also included $71,000,000 in gains from business reinsured to 3rd 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 adjusted book value. Furthermore, these items do not impact our statutory capital or free cash flow. Our segment results begin on slide 9 and focus on the healthy new business profile of our retail annuities segment in the current quarter, illustrated by growth of 36% from the Q2 of last year and 15% from the Q1 of this year.

Speaker 3

Our Ryla product continues to gain momentum with 2nd quarter sales reaching a record level of $1,400,000,000 supporting further diversification in our top line growth. Going forward, we expect continued growth in our Rylo business to be supported by our recent launch of a living benefit as well as the recent availability of 1 of Jackson's base Ryla products in New York. Sales of variable annuities grew from the second quarter of last year and the Q1 of this year driven by products without lifetime income benefits, including Elite Access, our investment only variable annuity. The gross sales we are generating in Ryla and other spread products translated to $1,400,000,000 of non variable annuity net flows in the Q2 of 2024, which has grown materially over time. These net flows provide valuable economic diversification and hedging efficiency benefits.

Speaker 3

Importantly, our overall sales mix remains efficient from the standpoint of new business strain. Looking at Q2 2024 pretaxadjustedoperatingearnings for our segments on Slide 10, higher equity markets and a continued positive environment for spread products has driven solid growth in our retail annuity segment compared to both the Q2 of last year and the Q1 of this year. Jackson's earnings power is supported by the growing level of assets under management as healthy separate account returns combined with growing non variable annuity net flows have built our AUM up to $247,000,000,000 an increase of 9% from the Q2 of last year. Importantly, the positive separate account performance has offset our overall net outflows, including the impact of slightly elevated surrenders of variable annuities coming out of their surrender charge period by nearly $13,000,000,000 in the first half of twenty twenty four. For our Institutional segment, pre tax adjusted operating earnings were up from the Q2 of last year due to higher spread income.

Speaker 3

We have seen increased new business activity in 2024 with over $600,000,000 in 2nd quarter sales and what we believe to be a strong start to the Q3 to date. Our Closed Life and Annuity Blocks segment reported higher pretax adjusted operating earnings compared to both the Q2 of last year and the Q1 of this year due primarily to improved mortality trends. Slide 11 summarizes our strong 2024 capital and liquidity position. The profitability of our in force business including the variable annuity based contract provided substantial capital generation of $321,000,000 during the 2nd quarter. Consistent with our prior guidance for smaller periodic distributions from Jackson National Life, $250,000,000 was distributed to JFI during the Q2 of 2024.

Speaker 3

After accounting for this impact and the related reduction in deferred tax asset amissibility, Jackson's total adjusted capital or TAC increased slightly and ended the quarter at $4,700,000,000 Our company action level required capital or CAL is also much more stable following the formation of Brook Re. This stability was apparent in our Q2 2024 results with estimated CAL slightly higher, reflecting growth in Ryla assets and normal investment portfolio activity. Our estimated RBC ratio range of 5 50% to 5 70% remains well above our 4 25% minimum. We are pleased with Brook Reis' 2nd quarter performance, which is operating as expected and remains well capitalized. Our holding company cash and highly liquid asset position at the end of the quarter was over $500,000,000 which continues to be above our minimum buffer.

Speaker 3

The extraordinary dividend from Jackson National Life this quarter is consistent 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 strong financial base for future operating company dividends. As Laura mentioned earlier, we received Board approval for a $750,000,000 addition to our existing common share repurchase authorization. As a reminder, there is no time limit on this authorization, which positions us well to reach our 2024 financial targets and future share repurchase activity. Overall, I am incredibly pleased with our 2nd quarter results, which demonstrate positive momentum in sales, earnings, capital generation and holding company liquidity.

Speaker 3

I'll now turn the call back to Laura.

Speaker 2

Thank you, Don. Our Q2 results demonstrate we continue to benefit from our stable capital position and market leadership. We look forward to the second half of twenty twenty four and providing further updates on our growth, product initiatives and continued capital generation. As always, I'd like to acknowledge our talented Jackson team. Their dedication to our purpose in providing long term solutions to Americans planning for their financial futures is our greatest strength.

Speaker 2

The opportunity to work alongside our associates is ever rewarding as we continue to deliver against our strategic and operational goals, while supporting our communities and each other. At this time, I'd like to turn it over to the operator for questions.

Operator

Thank Our first question comes from Suneet Kamath of Jefferies. Suneet, your line is open. Please go ahead.

Speaker 4

I just wanted to start with the capital generation. If we look kind of year to date, I think you're a little over $600,000,000 which is pretty well in excess of I guess your $1,000,000,000 plus that you've talked about before. I just was hoping you could unpack that. How much of that was maybe the better markets versus better investment spreads? Because even if I think about the market impact, the growth seems just a lot higher than that.

Speaker 4

So I just wanted to understand what's going in there,

Speaker 3

please. Thanks. Hey, Suneet, it's Don. I'll take that question. So first of all, just a reminder on our $1,000,000,000 capital generation guidance, that was based on performance under normal market conditions.

Speaker 3

So as we look at the performance in the first half, we've obviously had a strong tailwind from the equity market performance to reach that $680,000,000 So we are a bit ahead, but we continue to feel very comfortable with that $1,000,000,000 guidance and growth in statutory capital. I would say that the business that we're writing today is fairly capital efficient. And as we see attractive opportunities going forward to diversify our mix of business, that could change the magnitude of required capital related to organic growth. But overall, just to answer your question, I think the main delta from the $1,000,000,000 is really that, that was a more normal market environment as opposed to the strong growth that we've seen in the first half of the year.

Speaker 4

And maybe just a follow-up on that, Hikes. Because I think the markets through the Q2 were up like 14%, if you just use the S and P. And obviously, the growth off of the sort of the run rate in capital generation is well above that percentage wise. So is it just the positive operating leverage that you're getting and that's what's giving you higher capital generation because it does seem to be coming in higher than the overall market? Thanks.

Speaker 3

Yes. So it is a combination. So obviously, our portfolio is pretty heavily weighted toward variable annuity business. So within Jackson National, you're going to see the higher variable annuity AUM driving our fee income. So that's a significant component.

Speaker 3

The other thing that I would remind you of is that we did have strong growth in RYLA sales. So as we continue to bring on assets for that business, we're seeing higher spread based earnings as well.

Speaker 4

Got it. And then my follow-up is just on, just how where we sit today. Obviously, first half of the year was pretty good, but now volatility has spiked, Interest rates have been pretty volatile as well. I guess, how should we think about the capital generation in JLNIC? And the reason I ask is my thought was or my understanding was that most of the hedges are now in Brook Re which means the capital generation of JN LIC might be a little bit more tied to the markets, but I just wanted to get your thoughts based on that as well as just where we sit today in terms of the volatility.

Speaker 4

Thanks.

Speaker 3

Yes. So maybe I'll address the volatility point first, Suneet. So the recent market pullback that we saw in the last few days, our hedging program continued to perform as expected with Brookery in place. And I think there are a couple of things that contribute to that. So first of all, just reminding everyone that our hedging program is now aligned more with the economics post the Brook Ray transaction.

Speaker 3

So that makes it easier to manage with less rebalancing needed given that we've got a much more predictable hedge target. And our hedge target is really just our MRB position on a modified GAAP basis. So that is certainly contributing to the positive results at J and L. And we do have some hedges at J and L for business that was not ceded over to Brook Ray. But you're right in that we would continue to see most of the performance at J&L being driven by our base contract, and there is a little bit of sensitivity to market results there, and the impact on variable annuity AUM.

Speaker 3

And then again, as I said earlier, the growth in spread products.

Speaker 4

Okay. Thanks.

Operator

Thank you. Our next question is from Tom Gallagher of Evercore ISI. Tom, your line is open. Please go ahead.

Speaker 5

Good morning. Couple of questions on hedging in Brookly. So Don, I was following your comments and it sounds like the $200,000,000 plus derivative loss was largely offset by the fees you're collecting, the guaranteed fees you're collecting. I think you said it was a net of $64,000,000 for Brookery in the quarter. So my question is, can you just comment on what are the actual hard assets that are currently capitalizing Brook?

Speaker 5

How does that compare to the $64,000,000 And just can you mention your capital levels there? Do you have a buffer over what you target?

Speaker 3

Yes. Thanks, Tom. So, first of all, just a reminder. So the components of the hedge gain or loss in the quarter, which we displayed on Slide 8 of the earnings material, those are for JFI on a consolidated basis. And there's not a direct read across to Brook Reade, but generally, I think you can use that as kind of an informational proxy.

Speaker 3

Brook Reade follows a modified GAAP structure. So it's not going to be the exact same numbers, but kind of directionally a good indicator. In terms of just some stats on Brook Re, just to remind you of what we've previously disclosed. So we funded Brook Reedy on day 1 with $700,000,000 of cash and investments. And then on day 1, we had an MRB that was in an asset position.

Speaker 3

And through the first half of the year, we've a bit of growth in Brook Reis equity. So everything with Brook Reis with 2 quarters behind us is operating as we expected and we continue to be comfortable with that structure.

Speaker 5

Got you. And so the $64,000,000 I could compare to the $700,000,000 or is the net reserve position that's an asset large enough where it's not going to be a 10% type swing in your capital there that it would be much smaller. Maybe if you could comment on that?

Speaker 3

Yes. So the $65,000,000 wouldn't be relative to the $700,000,000 of hard assets because again, there's a couple of components to Brook Reeves equity. The hard assets that we put in, in addition to the MRB asset. And that's going to be significantly higher than the $700,000,000 We provide some disclosures in our financial supplement on the consolidated JFI MRB position. But again, not that's not a direct read across for Brookhaven.

Speaker 3

It gives you an idea of the magnitude of the assets that we've got in Brookhaven.

Speaker 5

Okay. And then my last question is just when I if I look back a few years ago when you were still using a different hedging approach, I think the duration of most of your derivatives were around 3 months. And then there was a period where as rates began to move higher, you started lengthening that out. Can you comment about average duration of your hedging instruments and also roll risk? If we get into an environment where the market becomes a lot more volatile, how should we think about roll risk on your hedges?

Speaker 5

Thanks.

Speaker 3

Yes. So I'll make a couple of points and maybe ask Steve to just chime in on some of the specifics around the duration of our hedges. But because Brook Ray's hedging program is more aligned with the economics, It's much easier for us to manage and actually requires less rebalancing than our historical approach under the old statutory framework. So we feel comfortable that that's working as we kind of designed it and as we expected. I'll let Steve just chime in on in terms of the duration of the hedges that we're using and that sort of thing.

Speaker 6

Yes, Tom. In terms of focusing on interest rates as part of the modified GAAP move, we really increased our interest rate protection as part of that framework. And so we do have some pretty significant north of $30,000,000,000 of interest rate derivatives. Those are more tied to the longer end of the yield curve. So 10, 20, 30 year part of the yield curve.

Speaker 6

So we've got some pretty good production there that's tied to liability. In terms of on the equity side, we both have a combination of futures. But importantly, we do still have a significant put option portfolio that's there for retail type events, worked really well in recent periods, market volatility picked up, having those puts in place serves us well. And those will vary from 3 to 6 to 9 months. We try to stagger the maturities a little bit on the put options as well.

Speaker 6

So we feel pretty good comfortable that our hedging is pretty resilient for the foreseeable future. In terms of the roll risk, we're pretty diversified across multiple indices. We've ramped up to 7 different equity indices that we're using right now. So we want to make sure we're lined up well with the liabilities we offer in our platform. And one of the benefits that we are getting, with respect to managing the collateral, the counterparty risk is Bralette does provide a nice offset to our VAs.

Speaker 6

We're seeing about a 30% reduction in our kind of our external hedging needs. And so that does help with managing the liquidity and the role of the overall risk management program.

Speaker 5

Got you. Thanks for the color.

Operator

Thank you. At this time, we have no further questions. I'll hand back over to Laura Priescorn for any closing or final remarks.

Speaker 2

Thank you. Your participation in today's call is appreciated. We thank you all for joining us this morning. Take care.

Operator

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.

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Jackson Financial Q2 2024
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