Q3 2024 Earnings Summary
- Strong Demand Driven by Favorable Demographics and Adviser Adoption: Jackson Financial is experiencing increased demand due to favorable demographics, with more Americans turning 65 and responsible for funding their own retirement. Additionally, more advisers are incorporating annuity solutions into their clients' financial plans, enhancing Jackson's sales and diversification.
- Diversification of Product Offerings Attracting New Advisers and Clients: The company's re-engagement in the spread business has attracted new advisers and brought back clients who hadn't done business with Jackson in a while. This diversification is important for overall sales and supports growth.
- Comfort with Profitability Across Product Lines and Strong Capital Position with Brooke Re: Jackson Financial is comfortable with the profitability of all its products, including fixed annuities. The establishment of Brooke Re has provided capital stability, enabling the company to expand its distribution efforts and support growth without compromising returns. ,
- Significant hedging losses and exposure to market volatility: During the quarter, Jackson Financial ($JXN) experienced hedging losses of about $130 million. The company acknowledges that they do not hedge volatility as they "don't view volatility as kind of a core risk embedded within our guarantees". This acceptance of GAAP result variability due to not hedging volatility could lead to significant losses in times of high market volatility, potentially impacting capital if a significant market event occurs.
- Consistent negative impact from policyholder behavior: There has been a consistent negative impact from actual policyholder behavior versus expectations, amounting to $514 million year-to-date, primarily due to higher lapse rates and withdrawals. This deviation suggests that lapse assumptions may not accurately reflect current policyholder behavior, potentially leading to negative impacts on future profitability.
- Limited transparency on Brook Re's financials: Management is not disclosing the exact financials of Brook Re, their captive reinsurance subsidiary. This lack of transparency may raise concerns about the capital adequacy and financial stability of Brook Re, especially given that Brook Re plays a crucial role in the company's risk management strategy.
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Aging demographics | Not mentioned in Q2 2024. | Discussed in Q3 2024 as a significant driver for annuity demand due to the increasing number of Americans turning 65 and adviser adoption fueling demand. | New Topic |
Diversification through Spread Business | Emphasized in Q2 2024 with a focus on RILA and spread products boosting product mix diversification and hedging efficiency. | Highlighted in Q3 2024 with renewed focus on re-engagement in the spread business; supported by a broad retail distribution network and $1 billion in spread sales driving adviser attraction and diversification. | Recurring with increased focus and positive sentiment |
Capital Generation & Stability via Brooke Re | Addressed in Q2 2024 with stable performance (e.g., $321 million in Q2, $681 million in H1) and alignment with capital management strategies. | Expanded in Q3 2024 with strong capital generation ($462 million in Q3) and detailed discussion of Brooke Re’s contribution to stability and shareholder returns, supported by robust RBC ratios and cash distribution. | Recurring with improved emphasis on stability and performance |
Hedging Strategy Performance | Q2 2024 noted a net hedge loss of $201 million in the quarter but overall a net hedge gain for the first half through diversified interest rate and equity hedges. | **Q3 2024 reported a net hedge loss of $295 million in the quarter, offset by a nine‐month net gain; increasing focus on market volatility, fixed volatility assumptions and the impact of equity hedges. ** | Recurring with increased volatility concerns and mixed results |
Reliance on Complex Hedging Strategies | Discussed in Q2 2024 with reliance on over $30 billion in interest rate derivatives and diversified equity hedging (including put options across multiple maturities). | Reiterated in Q3 2024 with similar reliance on complex hedging strategies; emphasis on the natural offset provided by RILA products and maintaining cost-efficient volatility management through fixed volatility assumptions. | Recurring with consistent strategy and similar sentiment |
Market Sensitivity to Equity Performance | Q2 2024 focused on positive impacts, citing strong equity markets that boosted capital generation and fee income driven by higher variable annuity AUM. | Q3 2024 revealed downside effects as strong equity markets led to higher lapse rates and negatively impacted profitability via unexpected policyholder behavior. | Recurring but with contrasting sentiment: shift from capital growth to concerns over lapses |
Negative Impact of Policyholder Behavior | Not mentioned in Q2 2024. | Described in Q3 2024 as a significant negative factor, with deviations in expected lapse and withdrawal behavior contributing to a $514 million adverse impact. | New Topic |
Limited Transparency in Brook Re's Financials | Not mentioned in Q2 2024. | Mentioned in Q3 2024; the call noted that exact financials of Brooke Re are not disclosed, aligning with typical captive arrangements but raising potential concerns about transparency. | New Topic |
Growth in RILA Sales | Q2 2024 showcased record RILA sales of $1.4 billion, emphasizing the role of digital ecosystems and diversification in the product mix. | Q3 2024 reported even stronger performance with record RILA sales of $1.6 billion, further establishing market leadership and expanding distribution channels. | Recurring with increased performance and strong positive sentiment |
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Capital Returns
Q: Will you send $1 billion to the holding company annually?
A: Don Cummings explained that 2024 was unique due to funding Brooke Re, so they didn't have a distribution to the holding company in the first quarter . Future capital generation depends on business performance, but they expect to continue periodic capital distributions . They will provide capital return targets with the fourth-quarter results and anticipate increasing capital returns in 2025 if performance continues as expected . -
Hedging Losses
Q: What caused $130 million hedging losses, any capital impact?
A: Don Cummings noted that the hedging losses are mainly due to volatility, which they don't view as a core risk . They accept some variability in GAAP results due to setting a fixed volatility assumption at Brooke Re . The company has a strong capital buffer at Brooke Re, and it would take a significant market event, like the global financial crisis or COVID-19 shock, to cause capital issues . -
Brooke Re Dividends
Q: When can you take dividends from Brooke Re?
A: Don Cummings stated that after three quarters, Brooke Re is expected to be capital generative over time . Equity has grown in the first nine months, but they have no near-term plans to take capital out of Brooke Re . They believe capital generation at JNL is sufficient to fund near-term capital return targets . -
Fixed Annuity Sales
Q: Why increase low-return fixed annuity sales?
A: CEO Laura Prieskorn explained that annuity sales are strong across all types, with rational behavior from peers . President Scott Romine added that demand is driven by favorable demographics and a need for retirement solutions . Fixed annuities help attract new advisers and diversify their product suite . CFO Don Cummings said they are comfortable with the returns, with fixed annuities at the lower end but profitable . -
Policyholder Lapses
Q: What's driving negative impacts from policyholder behavior?
A: Don Cummings explained that higher-than-expected lapse rates are causing negative impacts on the Market Risk Benefits . When equity markets are strong, policyholders tend to withdraw more, leading to higher lapses . They set lapse assumptions on a long-term basis and will update actuarial assumptions in the fourth quarter . -
Basis Risk Impact
Q: Are you experiencing basis risk like competitors?
A: Don Cummings stated that basis risk was fairly muted in the quarter . Year-to-date basis risk has been modest . Their rigorous approach in managing funds and using different indices in hedging has limited the impact . -
RILA Pricing
Q: Do you price RILA on a stand-alone basis?
A: Don Cummings confirmed that they price RILA on a stand-alone basis without considering diversification benefits from VA business . Diversification benefits come through in hedging results but are not factored into pricing .