JACKSON FINANCIAL INC. – 10-Q – MD&A and Analysis of Financial Condition and Results of Operations – InsuranceNewsNet
FORWARD-LOOKING STATEMENTS – DISCLAIMER
Certain statements made in this Quarterly Report on Form 10-Q (this "Report") are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. A forward-looking statement is a statement that is not a historical fact and includes any statement that may predict, forecast, indicate or imply future results, performance or achievements. Forward-looking statements may contain words like: "anticipate," "believe," "estimate," "expect," "project," "shall," "will" and other words or phrases with similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, trends in our businesses, prospective services or products, future performance or financial results and the outcome of contingencies, such as legal proceedings.
Forward-looking statements are subject to risks and uncertainties. Real
results could differ materially from those expressed or implied by such
forward-looking statements due to various factors, including:
•conditions in the capital and credit markets and the economy, which impact liquidity, investment performance and valuation, hedge program performance, interest rates and credit spreads; •Jackson Financial's dependence on the ability of its subsidiaries to transfer funds to meet
Jackson Financial'sobligations and liquidity needs; •downgrade in our financial strength or credit ratings, which impact our business and costs of financing; •changes in laws and regulations, which impact how we conduct our business, the relative appeal of our products versus those from other financial institutions, and changes in accounting standards, which impact how we account for and present our results of operations; •operational failures, including failure of our information technology systems, failure to protect the confidentiality of customer information or proprietary business information, and disruptions from third-party outsourcing partners; •a failure to adequately describe and administer, or meet any of the complex product and regulatory requirements relating to, the many complex features and options contained in our annuities; •adverse impacts on our results of operations and capitalization as a result of optional guaranteed benefits within certain of our annuities; •models that rely on a number of estimates, assumptions, sensitivities and projections, which models inform our business decisions and strategy, and which may contain misjudgments and errors and may not be as predictive as desired; •risks related to natural and man-made disasters and catastrophes, diseases, epidemics, pandemics (including COVID-19), malicious acts, cyberattacks, terrorist acts, civil unrest and climate change; •inadequate reserves due to differences between our actual experience and management's estimates and assumptions; •changes in the levels of amortization of deferred acquisition costs ("DAC"); and •adverse outcomes of legal or regulatory actions. The risks and uncertainties included here are not exhaustive. Our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SECon March 7, 2022, (the "2021 Annual Report") and other reports filed with the United States Securities and Exchange Commission("SEC") includes additional factors that could affect our businesses and financial performance. Moreover, we operate in a rapidly changing and competitive environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors. Further, it is not possible to assess the effect of all risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this Report, except as otherwise required by law. 72
Item 2 | Management's Discussion and Analysis | Available Information & Principal Definitions Available Information We make available free of charge, through our website, investors.jackson.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, our proxy statements, and any amendments to those reports or statements as soon as reasonably practicable after these materials are electronically filed with, or furnished to, the
SEC. We use our website as a routine channel for distribution of important information, including news releases, analyst presentations, financial information, and corporate governance information. The content of Jackson's website is not incorporated by reference into this Report or in any other report or document filed with the SEC, and any references to Jackson's website are intended to be inactive textual references only. The SEC'swebsite, www.sec.gov, contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Main definitions, abbreviations and acronyms used in the text and the notes of
we, us, our and the Company
context refers only to Jackson
(which we refer to as "JFI" or "Jackson Financial") Jackson
Jackson National Life Insurance Company, a Company subsidiary. Brooke Life Brooke Life Insurance Company, a
Subsidiary of the company and direct
parent company of
Jackson National Life Insurance Company. Jackson Finance Jackson Finance, LLC, a Company subsidiary. PPMH PPM Holdings, Inc., a Company subsidiary PPM PPM America Inc., a subsidiary of PPMH ACL Allowance for credit loss
Account Value or Account Balance The amount of money in a customer’s account. For example, the value
increases with additional premiums and investment gains, and it decreases with withdrawals, investment losses and fees. Athene
Athene Life Re Ltd.and its affiliates and permitted transferees, including Athene Co-Invest Reinsurance Affiliate 1A Ltd. Athene Equity InvestmentThe July 2020investment of $500
million by Athene in JFI for Class
A Common Stock and Class
Stock, representing approximately
9.9% of the total combined voting
power and approximately 11.1% of
the total common stock of the Company
Athene Reinsurance Transaction The funds withheld co-insurance agreement entered into with Athene on
June 18, 2020, effective June 1, 2020, to reinsure a 100% quota share of a block of our in-force fixed and fixed index annuity liabilities in exchange for
commissions Athene Transactions The Athene Reinsurance Transaction and
AUM (Assets Under Management) Investment assets managed by one of our subsidiaries and
includes: (i) the assets in our
investment portfolio managed by PPM,
which excludes assets held in funds
accounts retained for
reinsurance transactions, (ii)
third-party assets managed by PPM,
including those for Prudential and its
affiliates or third parties,
and (iii) the separate account assets
of our retail annuities
segment that Jackson National Asset
and administers. Benefit base A notional amount (not actual cash value) used to calculate the owner's guaranteed benefits within an annuity contract. The death benefit and living benefit within the same contract may have different benefit bases. CMBS Commercial mortgage-backed securities
DAC (Deferred Acquisition Costs) Represent additional costs directly related to success
acquisition of new and certain renewal insurance policies and annuity contracts and which have been deferred on the balance sheet as an asset. DDTL Facility Delayed Draw Term Loan Facility 73
Item 2 | Management discussion and analysis | Information available &
Deferred tax asset or Deferred Assets or liabilities that are recorded for the difference between tax liability book basis and tax basis of an asset or a liability. DSI (Deferred sales Represent amounts that are credited to a policyholder's account inducements) balance that are higher than the expected crediting rates on similar contracts without such an inducement and that are an incentive to purchase a contract and also meet the accounting criteria to be deferred as an asset that is amortized over the life of the contract. Fixed Annuity An annuity that guarantees a set annual rate of return with interest at rates we determine, subject to specified minimums. Credited interest rates are guaranteed not to change for certain limited periods of time. Fixed Index Annuity An annuity with an ability to share in the upside from certain financial markets, such as equity indices, and provides downside protection. Form 10 Form 10 registration statement registering the Company's Class A Common Stock under the Securities Exchange Act of 1934, as amended, which became effective on
August 6, 2021. General account assets The assets held in the general accounts of our insurance companies. GIC Guaranteed investment contract Guarantee Fees Fees charged on annuities for optional benefit guarantees GMAB (Guaranteed minimum An add-on benefit (enhanced benefits available for an additional accumulation benefit) cost) which entitles an owner to a minimum payment, typically in lump-sum, after a set period of time, typically referred to as the accumulation period. The minimum payment is based on the benefit base, which could be greater than the underlying account value. GMDB (Guaranteed minimum death An add-on benefit (enhanced benefits available for an additional benefit) cost) that guarantees an owner's
beneficiaries are entitled to a
minimum payment based on the benefit base,
which could be bigger
than the underlying account value, upon the death of the owner. GMIB (Guaranteed minimum income An add-on benefit (available for an additional cost) where an owner benefit) is entitled to annuitize the policy and receive a minimum payment stream based on the benefit base, which could be greater than the payment stream resulting from current annuitization of the underlying account value. GMWB (Guaranteed minimum An add-on benefit (available for an additional cost) where an owner withdrawal benefit) is entitled to withdraw a maximum amount of their benefit base each year, for which cumulative payments to the owner could be greater than the underlying account value. GMWB for Life (Guaranteed An add-on benefit (available for an additional cost) where an owner minimum withdrawal benefit for is entitled to withdraw the guaranteed annual withdrawal amount each life) year, for the duration of the
the life of the policyholder, regardless of
account performance. NAIC
National Association of Insurance Commissioners NAV Netasset value Net flows Net flows represent the net change in customer account balances during a period, including gross premiums, surrenders, withdrawals and benefits. Net flows exclude investment performance, interest credited to customer accounts and policy charges.
RBC (Risk-Based Capital) rules for determining legal capital requirements for insurance companies.
It is based on rules published by the NAIC. RILA A registered index-linked annuity that offers market index-linked investment options, subject to a cap, and offers a variety of guarantees designed to modify or limit losses. RMBS Residential mortgage-backed securities Variable annuity A type of annuity that offers tax-deferred investment into a range of asset classes and a variable return, which offers insurance features related to potential future income payments. VIE Variable interest entity 74
Item 2 | Management discussion and analysis | Overview and Executive Summary
Overview of the management report and analysis of the financial situation and
Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in its entirety and in conjunction with the Condensed Consolidated Financial Statements and related notes contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in our 2021 Annual Report.
Jackson Financial Inc.("Jackson Financial") along with its subsidiaries (collectively, the "Company," which also may be referred to as "we," "our" or "us"), is a financial services company focused on helping Americans grow and protect their retirement savings and income to enable them to pursue financial freedom for life. Jackson Financial, domiciled in the United States("U.S."), was previously a majority-owned subsidiary of Prudential plc ("Prudential"), London, Englandand was the holding company for Prudential's U.S.operations. The Company's demerger from Prudential was completed on September 13, 2021(the "Demerger"), and the Company no longer is a majority-owned subsidiary of Prudential. See Note 1 to Condensed Consolidated Financial Statements for further discussion of the Demerger. Jackson Financial'sprimary life insurance subsidiary, Jackson, is licensed to sell group and individual annuity products (including immediate, registered index-linked, deferred fixed, fixed index and variable annuities), and various protection products, primarily whole life, universal life and variable universal life and term life insurance products in all 50 states and the District of Columbia.
This executive summary of Management's Discussion and Analysis of Financial Condition and Results of Operation highlights selected information and may not contain all of the information that is important to current or potential investors in our securities. You should read this Quarterly Report on Form 10-Q, together with our 2021 Annual Report, in their entirety for a more detailed description of events, trends, uncertainties, risks and critical accounting estimates affecting us. We help Americans grow and protect their retirement savings and income to enable them to pursue financial freedom for life. We believe that we are uniquely positioned in our markets because of our differentiated products, well-known brand and disciplined risk management. Our market leadership is supported by our efficient and scalable operating platform and industry-leading distribution network. We believe these core strengths will enable us to grow profitably as an aging
U.S.population transitions into retirement. We offer a diverse suite of annuities to retail investors in the U.S.Our variable annuities have been among the best-selling products of their kind in the U.S.primarily due to the differentiated features we offer as compared to our competitors, in particular the wider range of investment options and greater freedom to invest across multiple investment options. We also offer fixed index annuities and fixed annuities. In the fourth quarter of 2021, our primary life insurance subsidiary, Jackson National Life Insurance Companyand its insurance subsidiaries ("Jackson") successfully launched Market Link ProSM and Market Link Pro AdvisorySM, its commission and advisory based suite of registered index-linked annuities ("RILA"). Also in the fourth quarter of 2021, we entered the Defined Contribution market as a carrier in the AllianceBernstein Lifetime Income Strategy ("AllianceBernstein"). We sell our products through a distribution network that includes independent broker-dealers, wirehouses, regional broker-dealers, banks, and independent registered investment advisors, third-party platforms and insurance agents. We have been the top selling retail annuity company in the United Statesfor nine of the past ten years, according to the Life Insurance Marketing and Research Association("LIMRA"). Our operating platform is scalable and efficient. We administer approximately 77% of our in-force policies on our in-house policy administration platform. The remainder of our business is administered through established third-party arrangements. We believe that our operating platform provides us with a competitive advantage by allowing us to grow efficiently and provide superior customer service. We manage our business through three segments: Retail Annuities, Institutional Products, and Closed Life and Annuity Blocks. We report certain activities and items that are not included in these segments, including the results of PPM Holdings, Inc., the holding company of PPM, which manages the majority of our general account investment portfolio, in Corporate and Other. See Note 3 to Condensed Consolidated Financial Statements for further information on our segments. 75 -------------------------------------------------------------------------------- Item 2 | Management's Discussion and Analysis | Executive
Several important recent events concern us, including:
•Demerger from Prudential plc: We were previously a majority-owned subsidiary of Prudential plc ("Prudential"),
London, Englandand served as the holding company for its U.S.operations. The demerger, or separation, from Prudential was completed on September 13, 2021("Demerger"), and we are no longer a majority-owned subsidiary of Prudential. Prudential retained an equity interest in us, which, as a result of sales subsequent to the Demerger, represents 14.3% of our outstanding Class A Common Stock as of June 30, 2022. Prudential sold additional shares of the Company's Class A Common Stock during the third quarter of 2022 and as of August 5, 2022Prudential retained a 9.0% remaining interest in the Company. •Common Stock Reclassification: On September 9, 2021, Jackson Financialeffected a 104,960.3836276-for-1 stock split of its Class A Common Stock and Class B Common Stock by way of a reclassification of its Class A Common Stock and Class B Common Stock. All share and earnings per share information presented in this Report have been retroactively adjusted to reflect the stock split. •Athene Transactions: On June 18, 2020, Jackson announced that it had entered into a funds withheld coinsurance agreement (the "Athene Reinsurance Agreement") with Athene Life Re Ltd.("Athene") effective June 1, 2020to reinsure on 100% quota share basis, a block of Jackson's in-force fixed and fixed-index annuity product liabilities in exchange for a $1.2 billionceding commission (the "Athene Reinsurance Transaction"). As a result, we hold various investments whose economic performance accrues to Athene but is reported in our financial statements. In July 2020, Athene invested $500 millionof capital into the Company for an equity interest. In August 2020, the Company contributed $500 million, as a capital contribution to Jackson. Athene has an equity interest in us, which represents an 8.9% economic interest and an 8.9% voting interest of our outstanding Class A Common Stock as of June 30, 2022.
• Elimination of Class B common shares: the
The updated certificate of incorporation has been further amended and updated,
after shareholder approval, eliminate the Class B common shares.
•Common Stock Repurchases: Since the Demerger and through
June 30, 2022, we have repurchased 11,083,113 shares of our Class A Common Stock for an aggregate consideration of $417 million. After giving effect to those repurchases and issuances for our share based compensation, we had 9,608,399 of treasury stock and 84,864,727 shares of Class A Common Stock outstanding at June 30, 2022. •As discussed in Note 2 of Notes to Condensed Consolidated Financial Statements in this Report, we will be adopting ASU 2018-12, "Targeted Improvements to the Accounting for Long-Duration Contracts," ("LDTI") for our fiscal year beginning January 1, 2023, with a transition date of January 1, 2021. Based upon the elected transition methods, the Company currently estimates the adoption of the standard will result in a decrease of between approximately $2 billionand $4 billionin the Company's total equity at the transition date of January 1, 2021. Market changes since the transition date, primarily higher interest rates, have significantly reduced the estimated negative impact to the Company's total equity as of June 30, 2022. See further discussion in Note 2 for the significant changes for this future change in accounting principle. Our GAAP results are affected by the potential variability associated with our amortization of deferred acquisition costs and the fact that our use of derivatives does not qualify for GAAP deferral, meaning that the derivatives are marked to market each reporting period. See "Summary of Critical Accounting Estimates" below for more information. Also, an understanding of several key operating measures, including sales, account value, net flows, benefit base and AUM, is helpful to evaluating our results. See "Key Operating Measures" below. Finally, we are affected by various economic, industry and regulatory trends, which are described below under "Macroeconomic, Industry and Regulatory Trends." 76
Item 2 | Management discussion and analysis | Non-GAAP Financial Measures
Non-GAAP Financial Measures
In addition to presenting our results of operations and financial condition in accordance with
U.S.GAAP, we use and report, selected non-GAAP financial measures. Management believes that the use of these non-GAAP financial measures, together with relevant U.S.GAAP financial measures, provides a better understanding of our results of operations, financial condition and the underlying performance drivers of our business. These non-GAAP financial measures should be considered supplementary to our results of operations and financial condition that are presented in accordance with U.S.GAAP and should not be viewed as a substitute for the U.S.GAAP financial measures. Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate such measures. Consequently, our non-GAAP financial measures may not be comparable to similar measures used by other companies. These non-GAAP financial measures should not be viewed as substitutes for the most directly comparable financial measures calculated in accordance with U.S.GAAP. Adjusted Operating Earnings Adjusted Operating Earnings is an after-tax non-GAAP financial measure, which we believe should be used to evaluate our financial performance on a consolidated basis by excluding certain items that may be highly variable from period to period due to accounting treatment under U.S.GAAP or that are non-recurring in nature, as well as certain other revenues and expenses that we do not view as driving our underlying performance. Adjusted Operating Earnings should not be used as a substitute for net income as calculated in accordance with U.S.GAAP. However, we believe the adjustments to net income are useful for gaining an understanding of our overall results of operations.
Adjusted operating income is our net income adjusted to eliminate
impact of the following elements:
1.Guaranteed Benefits and Hedging Results: the fees attributed to guaranteed benefits, the associated movements in optional guaranteed benefit liabilities and related claims and benefit payments are excluded from Adjusted Operating Earnings, as we believe this approach appropriately removes the impact to both revenue and related expenses associated with the guaranteed benefit features that are offered for certain of our variable annuities and fixed index annuities and gives investors a better picture of what is driving our underlying performance. This adjustment includes the following components: •Fees Attributable to Guarantee Benefits: fees earned in conjunction with guaranteed benefit features offered for certain of our variable annuities and fixed index annuities are set at a level intended to mitigate the cost of hedging and funding the liabilities associated with such guaranteed benefit features. The full amount of the fees attributable to guaranteed benefit features have been excluded from Adjusted Operating Earnings as the related net movements in freestanding derivatives and net reserve and embedded derivative movements, as described below, have been excluded from Adjusted Operating Earnings. This adjusted presentation of our earnings is intended to directly align revenue and related expenses associated with the guaranteed benefit features; •Net Movement in Freestanding Derivatives, except earned income (periodic settlements and changes in settlement accruals) on derivatives that are hedges of investments, but do not qualify for hedge accounting treatment: changes in the fair value of our freestanding derivatives used to manage the risk associated with our life and annuity reserves, including those arising from the guaranteed benefit features offered for certain of our variable annuities and fixed index annuities. Net movements in freestanding derivatives have been excluded from Adjusted Operating Earnings as the market value of these derivatives may vary significantly from period to period as a result of near-term market conditions and therefore are not directly comparable or reflective of the underlying performance of our business; 77 -------------------------------------------------------------------------------- Item 2 | Management's Discussion and Analysis | Non-GAAP Financial Measures •Net Reserve and Embedded Derivative Movements: changes in the valuation of certain life and annuity reserves, a portion of which are accounted for as embedded derivative instruments, and which are primarily composed of variable and fixed index annuity reserves, including those arising from the guaranteed benefit features offered for certain of our variable annuities. Net reserve and embedded derivative movements have been excluded from Adjusted Operating Earnings as the carrying values of these derivatives may vary significantly from period to period as the result of near-term market conditions and policyholder behavior-related inputs and therefore are not directly comparable or reflective of the underlying performance of our business. Movements in reserves attributable to the current period claims and benefit payments in excess of a customer's account value on these policies are also excluded from Adjusted Operating Earnings as these benefit payments are affected by near-term market conditions and policyholder behavior-related inputs and therefore may vary significantly from period to period;
• Impact of DACs and Deferred Sales Incentives (“DSI”): amortization of
acquisition costs and deferred sales incentives associated with items
excluded from adjusted operating income;
•Assumption changes: the impact on the valuation of Net Derivative and Reserve Movements, including amortization on DAC, arising from changes in underlying actuarial assumptions on an annual basis; 2.Net Realized Investment Gains and Losses including change in fair value of funds withheld embedded derivative: Realized investment gains and losses associated with the periodic sales or disposals of securities, excluding those held within our trading portfolio, as well as impairments of securities, after adjustment for the non-credit component of the impairment charges and change in fair value of funds withheld embedded derivative related to the Athene Reinsurance Transaction;
3. Loss on Athene reinsurance transaction: includes contractual cession
commission, amortization of reinsurance cost and DAC and DSI amortization related to
the Athene reinsurance operation;
4.Net investment income on retained assets: includes net investment income
on funds withheld assets related to funds withheld reinsurance operations;
5.Other items: one-time or other non-recurring items, such as costs relating to the Demerger and our separation from Prudential, the impact of discontinued operations and investments that are consolidated on our financial statements due to
U.S.GAAP accounting requirements, such as our investments in CLOs, but for which the consolidation effects are not aligned with our economic interest or exposure to those entities. Operating income taxes are calculated using the prevailing corporate federal income tax rate of 21% while taking into account any items recognized differently in our financial statements and federal income tax returns, including the dividends received deduction and other tax credits. For interim reporting periods, the company uses an estimated annual effective tax rate ("ETR") in computing its tax provision including consideration of discrete items. 78 -------------------------------------------------------------------------------- Item 2 | Management's Discussion and Analysis | Non-GAAP Financial Measures The following is a reconciliation of Adjusted Operating Earnings to net income (loss) attributable to Jackson Financial Inc., the most comparable U.S.GAAP measure. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (in millions) Net income (loss) attributable to Jackson Financial, Inc. $ 2,903 $ (540) $ 4,928 $ 2,392Income tax expense (benefit) 717 (54) 1,047 531 Pretax income (loss) attributable to Jackson Financial Inc 3,620 (594) 5,975 2,923 Non-operating adjustments (income) loss: Guaranteed benefits and hedging results: Fees attributable to guarantee benefit reserves (765) (701) (1,529) (1,373) Net movement in freestanding derivatives (2,847) 442 (1,371) 3,473 Net reserve and embedded derivative movements 772 1,374 (1,067) (3,219) DAC and DSI impact 845 (243) 1,190 453 Assumption changes - - - - Total guaranteed benefits and hedging results (1,995) 872 (2,777) (666) Net realized investment (gains) losses including change in fair value of funds withheld embedded derivative (1,082) 752 (1,980) (298) Net investment income on funds withheld assets (364) (294) (624) (585) Other items 64 25 67 20 Total non-operating adjustments (3,377) 1,355 (5,314) (1,529) Pretax Adjusted Operating Earnings 243 761 661 1,394 Operating income taxes 18 125 82 189 Adjusted Operating Earnings $ 225 $ 636$ 579 $ 1,20579
Item 2 | Management discussion and analysis | Non-GAAP Financial Measures
Adjusted book value and adjusted operating ROE
We use Adjusted Operating Return on Equity ("ROE") to manage our business and evaluate our financial performance. Adjusted Operating ROE excludes items that vary from period to period due to accounting treatment under
U.S.GAAP or that are non-recurring in nature, as such items may distort the underlying performance of our business. We calculate Adjusted Operating ROE by dividing our Adjusted Operating Earnings by average Adjusted Book Value. Adjusted Book Value excludes Accumulated Other Comprehensive Income (Loss) ("AOCI") attributable to Jackson Financial Inc.AOCI attributable to Jackson Financial Inc.does not include AOCI arising from investments held within the funds withheld account related to the Athene Reinsurance Transaction. We exclude AOCI attributable to Jackson Financial Inc.from Adjusted Book Value because our invested assets are generally invested to closely match the duration of our liabilities, which are longer duration in nature, and therefore we believe period-to-period fair market value fluctuations in AOCI to be inconsistent with this objective. We believe excluding AOCI attributable to Jackson Financial Inc.is more useful to investors in analyzing trends in our business. Changes in AOCI within the funds withheld account related to the Athene Reinsurance Transaction offset the related non-operating earnings from the Athene Reinsurance Transaction resulting in a minimal net impact on Adjusted Book Value of Jackson Financial Inc.Adjusted Book Value and Adjusted Operating ROE should not be used as substitutes for total shareholders' equity and ROE as calculated using annualized net income and average equity in accordance with U.S.GAAP. However, we believe the adjustments to equity and earnings are useful to gaining an understanding of our overall results of operations. The following is a reconciliation of Adjusted Book Value to total shareholders' equity and a comparison of Adjusted Operating ROE to ROE, the most comparable U.S.GAAP measure: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (in millions) Net income (loss) attributable to Jackson Financial, Inc. $ 2,903 $ (540) $ 4,928 $ 2,392Adjusted Operating Earnings $ 225 636 579 1,205 Total shareholders' equity $ 9,563 $ 10,391 $ 9,563 $ 10,391Adjustments to total shareholders' equity: Exclude accumulated other comprehensive income (loss) attributable to Jackson Financial Inc. (1) 2,045 (1,758) 2,045 (1,758) Adjusted Book Value $ 11,608 $ 8,633 $ 11,608 $ 8,633ROE 121.4 % (21.2) % 100.1 % 48.3 % Adjusted Operating ROE on average equity 8.4 % 29.2 % 11.4 % 31.2 %
Athene reinsurance operation in
Item 2 | Management discussion and analysis | Main operational measures
Main operational measures
We use a number of operational measures that management believe are helpful
information about our business and the operational factors underlying our
Sales of annuities and institutional products include all money deposited by customers into new and existing contracts. We believe sales statistics are useful to gaining an understanding of, among other things, the attractiveness of our products, how we can best meet our customers' needs, evolving industry product trends and the performance of our business from period to period. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (in millions) Sales Variable annuities
$ 3,633 $ 4,821 $ 8,208 $ 9,495RILA 490 - 689 - Fixed Index Annuities 13 32 32 72 Fixed Annuities 6 6 10 16 Total Retail Annuity Sales 4,142 4,859 8,939 9,583 Total Institutional Product Sales 201 - 1,176 - Total Sales $ 4,343 $ 4,859 $ 10,115 $ 9,583For the three and six months ended June 30, 2022, total sales decreased by $516 millionand increased by $532 millioncompared to the three and six months ended June 30, 2021, respectively. Lower retail sales were primarily due to decreased sales of our variable annuities with lifetime living benefits, partially offset by sales of our lifetime income solutions offering in the defined contribution market and our new RILA product, that were both launched in the fourth quarter of 2021. In addition, sales of our institutional products were higher by $201 millionand $1,176 million, compared to the three and six months ended June 30, 2021, respectively. Sales of fixed index and fixed annuities remained at historically low levels although higher rates in 2022 have enabled more frequent pricing actions. 81
Item 2 | Management discussion and analysis | Main operational measures
Account value generally equals the account value of our variable annuities, RILA, fixed index annuities, fixed annuities, and institutional products. It reflects the total amount of customer invested assets that have accumulated within a respective product and equals cumulative customer contributions, which includes gross deposits or premiums, plus accrued credited interest plus or minus the impact of market movements, as applicable, less withdrawals and various fees. We believe account value is a useful metric in providing an understanding of, among other things, the sources of potential fee income generation, potential benefit obligations and risk management priorities. June 30, 2022 December 31, 2021 (in millions) Account Value GMWB For Life
$ 149,730$ 188,078 GMWB 5,778 7,318 Other Guarantees - Living Benefits 1,401 1,808 No Living Benefits 49,390 60,719 Total Variable Annuity Account Value 206,299 257,923 RILA 735 110 Fixed Index Annuity (1) 321 291 Fixed Annuity (1) 1,102 1,099 Total Fixed & Fixed Index Annuity Account Value 1,423 1,390 Total Retail Annuities Account Value $
Total Institutional Products Account Value
$ 8,483$ 8,830
Total Account Value of Closed Life and Annuity Pools (2)
(1) Net of reinsurance in Athens.
(2) Excludes payout annuities and traditional life insurance with no account value.
Item 2 | Management discussion and analysis | Main operational measures
Net flows represent the net change in customer account balances during a period, including gross premiums, surrenders, withdrawals and benefits. Net flows exclude investment performance, interest credited to customer accounts, transfers between fixed and variable benefits for variable annuities and policy charges. We believe net flows is a useful metric in providing an understanding of, among other things, sales, ongoing premiums and deposits, the changes in account value from period to period, sources of potential fee income and policyholder behavior. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (in millions) Net Flows: Variable Annuity
$ (300) $ (325) $ (298) $ (565)RILA 489 - 687 - Fixed Index Annuity (1) 18 27 33 62 Fixed Annuity (1) (8) 13 (13) 3 Total Retail Annuities Net Flows, Net of Reinsurance 199 (285) 409 (500) Net flows ceded to Athene $ (585) $ (599) $ (1,188) $ (1,252)Total Retail Annuities net flows, Gross of Reinsurance $ (386)$
Total Institutional Products Net Flows
Total Closed Life and Annuity Blocks Net Flows (2)
(1) Net of reinsurance in Athens.
(2) Excludes payout annuities and traditional life insurance with no account value.
Net flows improved for the three and six months ended
June 30, 2022, compared to the three and six months ended June 30, 2021, due primarily to increased sales of both RILA and institutional products which has a positive effect on net flows. 83
Item 2 | Management discussion and analysis | Main operational measures
Benefit base refers to a notional amount that represents the value of a customer's guaranteed benefit, and therefore may be a different value from the invested assets in a customer's account value. The benefit base may be used to calculate the fees for a customer's guaranteed benefits within an annuity contract. The guaranteed death benefit and guaranteed living benefit within the same contract may not have the same benefit base. We believe benefit base is a useful metric for our variable annuity policies in providing an understanding of, among other things, fee income generation, potential optional guarantee benefit obligations and risk management priorities. The following table shows variable annuity account value and benefit base as of
June 30, 2022and December 31, 2021: June 30, 2022 December 31, 2021 Account Value Benefit Base Account Value Benefit Base (in millions) No Living Benefits $ 49,390N/A $ 60,719N/A
By Guaranteed Living Benefits:
GMWB for Life 149,730 187,862 188,078 183,626 GMWB 5,778 5,792 7,318 5,860 GMIB (1) 1,401 1,977 1,808 2,059 Total
$ 206,299 $ 195,631 $ 257,923 $ 191,545
By guaranteed death benefit:
Return of AV (No GMDB)
$ 25,114N/A $ 30,337N/A Return of Premium 157,491 137,498 197,544 135,034 Highest Anniversary Value 12,242 14,552 15,599 14,767 Rollup 3,334 4,785 4,188 4,850 Combination HAV/Rollup 8,118 10,373 10,255 10,402 Total $ 206,299 $ 167,208 $ 257,923 $ 165,053
(1) Almost all of our GMIB benefits are reinsured.
Assets under management
AUM, or assets under management, refers to investment assets that are managed by one of our subsidiaries and includes: (i) the assets in our investment portfolio managed by PPM, which excludes assets held in funds withheld accounts for reinsurance transactions, (ii) third-party assets managed by PPM, including those for Prudential and its affiliates or third parties, and (iii) the separate account assets of our Retail Annuities segment that
Jackson National Asset Management("JNAM") manages and administers. Total AUM reflects exclusions between segments to avoid double counting. We believe AUM is a useful metric for understanding of, among other things, the sources of our earnings, net investment income and performance of our invested assets, customer directed investments and risk management priorities. June 30, December 31, 2022 2021 (in millions) Jackson Invested Assets $ 46,267 $ 47,224Third Party Invested Assets (including CLOs) 26,751 31,980 Total PPM AUM 73,018 79,204 Total JNAM AUM 221,634 280,250 Total AUM $ 294,652 $ 359,454PPM manages the majority of our investment portfolio and provides investment management services to Prudential affiliates in Asia, former affiliates in the United Kingdom, and other third parties across markets, including public fixed income, private equity, private debt and commercial real estate. 84
Item 2 | Management discussion and analysis | Macroeconomics, Industry and
Macroeconomic, sectoral and regulatory trends
We discuss below a number of trends and uncertainties that we believe may
materially affect our future business performance, including our results of
operations, investments, cash flows, capital and liquidity
Macroeconomic and financial market conditions
Our business and results of operations are affected by macroeconomic factors. The level of interest rates and shape of the yield curve, credit and equity market performance (including market paths, equity volatility and other factors), regulation, tax policy, the level of
U.S.employment, inflation and the overall economic growth rate can affect both our short and long-term profitability. Monetary and fiscal policy in the United States, or similar actions in foreign nations, could result in increased volatility in financial markets, including interest rates, currencies and equity markets, and could impact our business in both the short-term and medium-term. Political events, including the imposition of stay-at-home orders and business shutdowns or other effects arising as a result of the COVID-19 pandemic, civil unrest, tariffs or other barriers to international trade, and the effects that these or other political events could have on levels of economic activity, could also impact our business through impacts on consumers' behavior or impact on financial markets. In the short- to medium-term, the potential for increased volatility could pressure sales and reduce demand for our products as consumers consider purchasing alternative products to meet their objectives, especially while prevailing interest rates remain below historical averages. In addition, low interest rate environments can make it difficult to consistently develop products that are attractive to customers while rising interest rates may make certain product features more attractive. Our financial performance can be adversely affected by market volatility and equity market declines if fees assessed on the account value of our annuities fluctuate, hedging costs increase and revenues decline due to reduced sales and increased outflows.
Stock market environment
Our financial performance is impacted by the performance of equity markets. For example, our variable annuities earn fees based on the account value, which changes with equity market levels. After a very volatile 2020,
U.S.equity markets performed well in 2021 with the S&P 500 generally at or near all-time highs throughout the year. Through the first half of 2022 equity markets declined and equity volatility increased, resulting in higher hedging costs. The financial performance of our hedging program could be impacted by large directional market movements or periods of high volatility. In particular, our hedges could be less effective in periods of large directional movements or we could experience more frequent or more costly rebalancing in periods of high volatility, which would lead to adverse performance versus our hedge targets and increased hedging costs. Further, we are also exposed to basis risk, which results from our inability to purchase or sell hedge assets whose performance is perfectly correlated to the performance of the funds into which customers allocate their assets. We make funds available to customers where we believe we can transact in sufficiently correlated hedge assets, and we anticipate some variance in the performance of our hedge assets and customer funds. This variance may result in our hedge assets outperforming or underperforming the customer assets they are intended to match. This variance may be exacerbated during periods of high volatility, leading to a mismatch in our hedge results relative to our hedge targets and GAAP results. 85
Item 2 | Management's Discussion and Analysis | Macroeconomic, Industry and Regulatory Trends Interest Rate Environment
The interest rate environment has affected and will continue to affect our
future business and financial performance for the following reasons:
•To the extent interest rates continue to increase, consistent with the
Federal Reserve'ssignals about upcoming interest rate decisions, the effects of low interest rates discussed below will diminish over time. However, both nominal and real interest rates remain low by historical standards and may continue to be so even after additional rounds of interest rate increases by the Federal Reserve. During periods of sharp rises in interest rates, the results of our variable annuity business, statutory capital and RBC ratio may be impacted both positively and negatively. While rising rates result in hedging losses immediately due to reductions in the market value of interest rate hedges, we would expect lower hedging costs and reduced levels of hedging going forward in a higher interest rate environment. Further, we expect near-term hedging losses from rising rates may be more than offset by changes in the fair value of the related guaranteed benefit liabilities as was the case in the first half of 2022. Our statutory capital and RBC ratio may be negatively impacted by rising rates due to minimum required reserving levels (i.e., cash surrender value floor) when reserve releases are limited and unable to offset interest rate hedging losses. •For the past several years, we have operated in a low interest rate environment. A prolonged low interest rate environment subjects us to increased hedging costs or an increase in the amount of statutory reserves that our insurance subsidiaries are required to hold for optional guaranteed benefits, decreasing statutory surplus, which would adversely affect their ability to pay dividends. Certain inputs to the statutory models rely on prescribed interest rates, which are, in turn, determined using a historical interest rate perspective with a mean reversion path over the longer term. At low interest rate levels these prescribed rates could decline further as the NAIC updates the calculations each year, which would adversely impact our statutory capital. In addition, low interest rates could also increase the perceived value of optional guaranteed benefit features to our customers, which in turn could lead to a higher utilization of withdrawal or annuitization features of annuity policies and higher persistency of those products over time. Finally, low interest rates would continue to cause an acceleration of DAC amortization or reserve increase due to loss recognition for annuities and interest-sensitive life insurance. A gradual rise in interest rates would have benefits that are offsetting to a low interest rate environment previously described. Those potential benefits of rising interest rates include increased new money investment yields, a reduction in hedging requirements and more attractive product features. •Some of our annuities have a guaranteed minimum interest crediting rate. These guaranteed minimum interest crediting rates may not be lowered, even if earnings on our investment portfolio decline, resulting in net investment spread compression that negatively impacts earnings. In addition, we expect more customers to hold policies with comparatively high guaranteed minimum interest crediting rates longer in a low interest rate environment, resulting in lower than previously expected lapse rates. Conversely, a rise in the average yield on our investment portfolio should positively impact earnings. Similarly, we expect customers would be less likely to hold policies if existing guaranteed minimum interest crediting rates are perceived to have less value as interest rates rise, resulting in higher than previously expected lapse rates. 86
Item 2 | Management's Discussion and Analysis | Macroeconomic, Industry and Regulatory Trends Credit Market Environment Our financial performance is impacted by conditions in fixed income markets. After tightening in 2021, credit spreads widened in the first half of 2022. As credit spreads widen, the fair value of our existing investment portfolio generally decreases, although we generally expect the widening spreads to increase the yield on new fixed income investments. Conversely, as credit spreads tighten, the fair value of our existing investment portfolio generally increases, and the yield available on new investment purchases decreases. While changing credit spreads impact the fair value of our investment portfolio, this revaluation is generally reflected in our Accumulated Other Comprehensive Income. The revaluation will impact net income for realized gains or losses from the sale of securities, the change in fair value of trading securities or securities carried at fair value under the fair value election, or potential changes in the allowance for credit loss ("ACL"). Shifts in the credit quality of the assets underlying our investment portfolio may also impact the level of regulatory required statutory capital for our insurance company subsidiaries. As such, significant credit rating downgrades or payment defaults could negatively impact our RBC ratio. COVID-19 We continue to closely monitor developments related to the COVID-19 pandemic. The COVID-19 pandemic has caused significant economic and financial turmoil both in
the United Statesand around the world. While there has been a gradual resumption of activity, COVID-19 and its variants continue to affect activity, and those effects could worsen in the future. At this time, it is not possible to estimate the long-term effectiveness of any therapeutic treatments and vaccines for COVID-19, or their efficacy with respect to current or future variants or mutations of COVID-19, or the longer-term effects that the COVID-19 pandemic could have on our business. The extent to which the COVID-19 pandemic impacts our business, results of operations, financial condition and cash flows will depend on future developments which are highly uncertain and cannot be predicted, including the availability and efficacy of vaccines against COVID-19 and against variant strains of the virus. Federal and state authorities' actions could include restrictions of movements. We are not able to predict the duration and effectiveness of governmental and regulatory actions taken to contain or address the COVID-19 pandemic or the impact of future laws, regulations or restrictions on our business.
We believe that many retirees have begun to look to tax-efficient savings products as a tool for addressing their unmet need for retirement planning. We believe our products are well positioned to meet this increasing consumer demand. However, consumer behavior may be impacted by increased economic uncertainty, increased unemployment rates, declining equity markets, lower interest rates and increased volatility of financial markets. In recent years, we have introduced new products to better address changes in consumer demand and targeted distribution channels which meet changes in consumer preferences.
We expect demographic trends in the
U.S.population, in particular the increase in the number of retirement age individuals, to generate significant demand for our products. In addition, the potential risk to government social safety net programs and shifting of responsibility for retirement planning and financial security from employers and other institutions to employees, highlights the need for individuals to plan for their long-term financial security and will create additional opportunities to generate sustained demand for our products. We believe we are well positioned to capture the increased demand generated by these demographic trends.
We operate in a highly regulated industry. Our insurance company subsidiaries are regulated primarily at the state level, with some policies and products also subject to federal regulation. As such, regulations recently approved or currently under review at both the
U.S.federal and state level could impact our business model, including statutory reserve and capital requirements. We anticipate that our ability to respond to changes in regulation and other legislative activity will be critical to our long-term financial performance. In particular, the following could materially impact our business: 87
Item 2 | Management discussion and analysis | Macroeconomics, Industry and
The Department of Labor("DOL") has issued a new regulatory action (the "Fiduciary Advice Rule") effective February 16, 2021, that reinstates the text of the DOL's 1975 investment advice regulation defining what constitutes fiduciary "investment advice" to Employee Retirement Income Security Act ("ERISA") Plans and Individual Retirement Accounts ("IRAs") and provides guidance interpreting such regulation. The guidance provided by the DOL broadens the circumstances under which financial institutions, including insurance companies, could be considered fiduciaries under ERISA or the Tax Code. In particular, the DOL states that a recommendation to "roll over" assets from a qualified retirement plan to an IRA, or from an IRA to another IRA, can be considered fiduciary investment advice if provided by someone with an existing relationship with the ERISA Plan or an IRA owner (or in anticipation of establishing such a relationship). This guidance reverses an earlier DOL interpretation suggesting that roll over advice did not constitute investment advice giving rise to a fiduciary relationship. Because we do not engage in direct distribution of annuities, including IRA products and annuities sold to ERISA plan participants and to IRA owners, we believe that we will have limited exposure to the new Fiduciary Advice Rule. Unlike the DOL's previous fiduciary rule issued in 2016, compliance with the Fiduciary Advice Rule will not require us or our distributors to provide the disclosures required for exemptive relief under the previous rule. However, we continue to analyze the impact of the Fiduciary Advice Rule, and, while we cannot predict the rule's impact, it could have an adverse effect on sales of annuities through our distribution partners. The Fiduciary Advice Rule may also lead to changes to our compensation practices and product offerings and increased litigation risk, which could adversely affect our results of operations and financial condition. We may also need to take certain additional actions in order to comply with or assist our distributors in their compliance with the Fiduciary Advice Rule.
Congressapproved the Setting Every Community Up for Retirement Enhancement Act of 2019 (the "SECURE Act") on December 20, 2019. The SECURE Act provides individuals with greater access to retirement products. Namely, it makes it easier for 401(k) programs to offer annuities as an investment option by, among other things, creating a statutory safe harbor in ERISA for a retirement plan's selection of an annuity provider. The SECURE Act represents the largest overhaul to retirement plans in over a decade. We view these reforms as beneficial to our business model and expect growth opportunities will arise from the new law.
All our annuities offer investors the possibility of benefiting from a tax advantage
offer tax-deferred benefits, demand for our products could significantly