2023-08-10 18:45:36 ET
Summary
- Jackson Financial offers Retail Annuities and trades at a large discount to its current book value.
- Annuities are a growing market considering the growing number of retirees.
- Jackson Financial has shown growth and a commitment to returning value to shareholders through share repurchases and high dividends.
Jackson Financial offers Retail Annuities, Institutional Products, and Closed Life and Annuity Blocks to retiring professionals in need of future income. Annuities have long been a pet peeve of mine and I do not advise buying them because I do not consider them investments. In spite of this bias, I view the purchase of shares in a public company that provides annuities as potentially very profitable. One of the main problems associated with annuities is their complexity and potential for high fees.
Annuities can come in various forms, each with its own set of features, benefits, and costs. This complexity can make it challenging for consumers to fully understand what they're purchasing, leading to confusion and potential dissatisfaction. Some annuities come with high fees and expenses, including sales charges, administrative costs, and underlying investment fees. These fees can eat into the potential returns and benefits of the annuity, reducing its overall value for the investor. If you are buying annuities, these problems can cost you a lot of money. As a seller of annuities, Jackson Financial and its shareholders benefit from these fees and any problems of complexity quickly become profits.
Earnings Call Takeaways
In their August 2023 earnings call , Jackson Financial showcased its remarkable journey since becoming an independent company two years ago. The company's consistent capital returns to shareholders have propelled its success, with over $1 billion returned representing almost 40% of its initial market capitalization. The announcement of a third quarter common dividend of $0.62 per share further demonstrates their commitment to shareholder value. As they steer towards their 2023 capital return target of $450 million to $550 million, Jackson maintains its focus on financial strength and growth. Their impressive performance is reflected in key financial indicators, including their RBC ratio, holding company assets, and their ability to optimize capital.
Amidst this success, Jackson remains focused on the future, actively engaging with regulators to enhance long-term reserves and capital solutions. The second quarter results revealed net income of $1.2 billion, bolstered by market trends and interest rates. Adjusted operating earnings per share rose due to a rising equity market and increased annuity account values. Jackson's strategic approach to risk management is evident in their investment portfolio and product offerings, with a focus on long-term retirement solutions.
The CEO, Laura Prieskorn, highlighted the company's prudent strategy, “Retail annuity sales totaled $3.1 billion for the quarter and have been stable the last few quarters. Variable annuity sales were flat from the first quarter while RILA sales gained momentum. Fixed annuity sales remain relatively modest as our pricing reflects our prudent investment approach.”
Their innovative RILA suite has driven growth, capturing market enthusiasm and expanding distribution. This success is aligned with the industry's growth, exemplified by surveys showing annuities gaining traction as retirement solutions. Jackson's leadership shines in Barron's Annual 100 Best Annuities Guide, further affirming their position. As they remain committed to their goals, Jackson's unwavering dedication to growth and value creation echoes through their performance and strategic initiatives. The journey continues, propelled by financial strength and a commitment to stakeholders' prosperity.
Valuation
Trading at just 33% of its total book value and at a PE of 2.28, Jackson Financial appears cheap. The continuous return of value through dividends and buybacks presents a fair opportunity for Jackson Financial to financially engineer a large move to the upside in its shares. If the company would focus more on buybacks at its current valuations, the stock should appreciate substantially. Jackson Financial can currently retire three shares for the book value of one.
Marcia Wadsten, Jackson Financial’s CFO, attributed this quarter’s book value growth to, “non-operating net hedging gains and healthy adjusted operating earnings.” The management has poised itself to take advantage of the current low value of the company’s stock and retire as many shares as possible.
As more people retire, annuities will gain popularity. As awareness regarding these products grows, so will the returns. Annuity sales grew 22% in 2022 and reached an all-time high of $310 billion dollars according to Money Geek’s recent post on US annuities growth. This continued growth looks promising for Jackson Financial.
Jackson Financial was the fourth largest annuity company in the US, but the largest fixed annuity provider in 2022. Leveraging its leadership in fixed annuities should allow Jackson to continue to grow and sell more products in a growing market.
Although hedging and portfolio values make Jackson Financial difficult to value. Judging this company based on its PE ratio seems unreasonable because earned income has fluctuated greatly each year due to open hedging being accounted for as profits and loss. It is more appropriate to look at cash flows, returns and book value.
A fair value approaching the current book value of $99 per share seems to provide a reasonable value especially as Jackson Financial continues to retire shares. Putting a significant discount on that fair value would be fair because of the large impact that interest rates and hedging can have on its value. As a very conservative investor, I believe a 50% discount is fair because of the complexity of Jackson Financial’s financials. This discount would still give us a minimum value of around $50 a share which is significantly higher than the current share price of $33.16.
Risks
Jackson Financial, specializing in annuity sales, confronts various risks tied to its business model. Regulatory alterations could impact the marketing, sales, and management of annuities, necessitating adjustments to operations. The volatility of interest rates might influence the profitability of annuity products and the company's ability to fulfill policyholder obligations. Investment performance can significantly affect the value and returns of annuities, potentially impacting both customer satisfaction and the company's reputation. The longevity risk arises from policyholders outliving their estimated life expectancies, potentially necessitating higher-than-expected payouts. Market-linked returns subject annuities to market fluctuations, which, if significant, could affect policyholder returns and customer perception. Operational disruptions, cyber threats, and technology failures could disrupt customer service and operational processes. Earlier this year Jackson did suffer from a data leak. Adequate liquidity is essential to meet policyholder obligations, while intense competition requires differentiation and effective marketing. Addressing negative perceptions, fostering trust, and adapting to changing demographics are essential for maintaining the business's stability and success.
Conclusion
Jackson Financial's journey since becoming an independent company has been marked by remarkable achievements in returning capital to shareholders, cementing their commitment to value creation. The consistent returns and strategic focus on financial strength and growth underscore their success. Their Q2 performance, engagement with regulators for enhanced solutions, and the momentum behind their innovative RILA suite reflect their forward-looking approach. Jackson Financial's ability to align with industry trends and capitalize on retiring demographics positions them for continued growth. Despite the complexities of valuation and inherent risks, the company's dedication to prudent financial management, innovative products, and stakeholder prosperity resonates strongly. I currently rate Jackson Financial a buy at prices under $34 and believe this represents a fair margin of safety. As always, please do your own due diligence prior to buying any stocks. Thank you for reading and commenting.
For further details see:
Jackson Financial: Selling Annuities Is Better Than Buying Annuities