Jackson Financial (JXN)

Buying a dollar for 50 cents

Key Data

• Name: Jackson Financial

• Sector: Insurance - Annuities

• Share Price: $90

• Dividend: $2.80

• Market Cap: $6.7 Billion

• Areas of Operation: USA

Business:

Jackson Financial Inc. (“Jackson Financial” or “JFI”), 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 in the United States (“U.S.”). (…)

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, fixed, and payout annuities.

This is Prudentials old US annuity business which was spun-off into its own company a few years ago.

The company is one of the largest retirement services provider in the USA, and sells a range of retirement products from Registered Index Linked Annuities (RILA) to standard annuities, to other more complex financial products.

The company has a number of subsidiaries that handle the day to day operations, while the holding company owns it and coordinates everything.

The subsidiaries are:

• Jackson - The primary operating subsidiary

• Brooke Life - Another subsidiary, and the direct parent of Jackson

• Brooke Re - A Michigan based captive re-insurer that has been recently established

• Jackson Finance - Another subsidiary

• PPMH - Another subsidiary

• PPM - Another subsidiary

The main reason for this split is due to the fact that insurance and financial advisory are both highly regulated businesses both at a federal and a state level.

By splitting this up, the company can ensure that each subsidiary is regulated by only one regulator, allowing for clearer and more consistent regulatory guidance and norms.

The company generally operates through 3 reporting segments:

• Retail Annuities

• Institutional Products

• Closed Life and Annuity Blocks

• Other activities are reported under “Other”

Retail Annuities is the largest segment by far in terms of assets and sales:

On these assets the company effectively charges a fee, that is based not directly on the asset value but on the benefit base to the client, allowing a more stable fee business than one that would be dependent on the potentially volatile asset value.

Important Notes

Background

First things first. There is a reason the company is cheap.

From their latest annual report:

Due to this material weakness in our disclosure controls and procedures and internal control over financial reporting, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2022.

Material weaknesses in disclosures and internal controls are not a good thing, and it’s natural to demand a significant risk premium when such things happen.

In this case it looks like the issue has been resolved, and so I will be giving them the benefit of the doubt.

As a result of the material weakness, our management identified the need for additional evidence supporting the review and challenge of inputs and results as well as enhancements to the governance process in developing the discount rate used to estimate the fair value of some of our guarantee features. Our management has implemented new controls and enhanced certain existing controls to remediate the material weakness. Management has evaluated the effectiveness of these new and enhanced controls and has concluded that these controls are operating effectively such that the material weakness is fully remediated as of December 31, 2023.

Key Indicators:

• Revenue Growth CAGR: -2%

• Net Margin: 30%

• Return on Assets: 0%

• Return on Operating Capital: 2%

• Return on Equity: 9%

• Debt to Assets: 97%

• Book Value per Share: $125

• Cyclicality: Cyclical

• Expected State: Growth

Current Valuation:

• Price to Earnings: 7.7

• Price to Book: 0.7

• Price to Tangible Book: 0.7

• Price to Revenue: 2.3

Shade Research Valuation:

Assumptions:

• Discount Rate: 14.81%

• Nominal Revenue Growth: -10%

• Normalized Sales per share: $93.65

• Normalized Earnings per share: $38.66

• Normalized Book per share: $123.65

I’m valuing this business in a sum of the parts manner with 2 key parts:

• The Net Asset Value

• The Fee Business

In essence I have taken the fee revenues that come from selling and managing annuities and customer assets, and valued it as its own independent business.

Additionally I have taken the net non-operating assets of the business, provided some appropriate discount to account for asset quality and lack of direct control, and valued that.

The net asset value part is the easiest to value because the majority of the company’s assets on the balance sheet are either customer assets (which have a correspondingly equal customer liability), insurance operations related assets (deferred acquisition costs, reinsurance recoverable, etc…), and investments.

Those investments are really the primary asset we are valuing, and so I took the book value of them, considered the level of risk for the asset, and added a discount to it according to my own judgement.

At the end my own judgement on the actual value of these assets ended up being slightly more conservative than the fair market value of these assets as reported, so I’m reasonably confident in its accuracy.

Ultimately I valued this part of the business at $82.58 per share.

Next I valued the fee business.

In essence I took the cash-flows that came from selling and managing the customer funds, and attempted to normalize those values, and estimated it forward until 2030, assuming that those revenues would decrease 10% per year while costs would remain the same.

I feel this is a very conservative stance, and there’s a lot of subjective decisions here. A big issue is the changes in market value of the free standing derivatives, etc… which have a significant impact in the net income, but which i judged was not likely to impact the ultimate value of the business, due to the way they structure their annuity business.

Ultimately this part of the business was discounted at a 14.8% discount rate, and with a $0 terminal value, the earnings generated here were valued at $59.49 per share.

Results

Putting both of these parts together I estimate that the true Net Present Value of JXN 0.00%↑ is around $142 per share.

This is slightly above the tangible book value of the business, and well in line with industry norms. Additionally it means the company is trading at a significant discount to what i estimate to be its true value, and so I have opened a position, and will continue to add to it as cash comes in from my day job.

My current stance on it is Buy.

Ultimately this is a high beta company that consists of a stack of treasuries and corporate bonds with a fairly stable fee business on top.

I like it, I’m buying it.