Description

Price: $65.77

Shares out (mm): 77.4

Market cap (mm): $5,091

Overview

Jackson Financial (“JXN”) is the 9^th largest retail annuity company in the US (2^nd largest in variable annuities) with $12.8bn of annuity sales in 2023.  The company was spun from Prudential in 2021.

JXN currently trades at 4x P/E, ~50% of book value, 12% distributable FCF (“dFCF”; defined herein) yield, and 4% dividend yield.  The company expects to return $550-$650mm of capital to shareholders this year, or 11-13% of its market cap, via dividends and share repurchases.  I believe this capital return will likely grow to $875mm, or 17% of market cap, in the coming years.

JXN was written up in 2021 by ladera838.  In addition to providing a business overview, that write up and the related messages highlight several earnings quality and business opacity issues that continue to weigh on JXN’s valuation.  deepgame also addressed some business quality differences between JXN and other players in the space in a CRBG write-up in September 2023.  What has changed?  In addition to consistently returning a significant amount of capital generated by the business back to shareholders since becoming a public company, JXN recently executed a meaningful structural change that I believe will increase earnings power and reduce the volatility of the company’s Risk Based Capital (“RBC”) ratio going forward.  This structural change should allow for significant increases to an already generous capital return program. 

My pitch

• JXN is cheap at 4x earnings  / ~50% of book value / mid-to-high teens % dFCF yield
• JXN’s accounting is opaque, and GAAP earnings are volatile, but capital generation has been very consistent over a long period of time
• An increasing percentage of JXN’s capital generation will be returned to shareholders
  • JXN will likely return ~45% of its current market cap back to shareholders over the next 3 years via dividends and share repurchases
• This capital return algorithm has the potential to generate significant shareholder value

Background

I was drawn to JXN at the time of its spin for two reasons.  First, the structure of the spin, whereby PRU shareholders received 1 share of JXN for every 40 shares of PRU, created a setup where JXN was likely to be sold indiscriminately as holders retained the large cap PRU and exited the much smaller JXN.  Second, while JXN’s GAAP accounting was (and is) complex and highly specialized, its capital generation has been very consistent:

Since becoming a public company, JXN’s capital generation has translated into stable shareholder returns via dividends and share repurchases:

Brooke Re

In January 2024, JXN established and funded Brooke Life Reinsurance Company (“Brooke Re”).  The company’s Q4’23 earnings slides (pages 16 – 27) and earnings call transcript detail the rationale for the establishment of, and benefits of, Brooke Re.  In short, Brooke Re allows JXN to minimize non-economic hedging and reduce RBC volatility by better aligning its reserve liability with the economics of its business.  The company believes this will result in a greater degree of capital generation going forward.  The company feels it will also provide more visibility for investors as adjusted operating earnings will be a better directional proxy for capital generation.  I agree.

On the Q4’23 call, JXN management said “We currently estimate that our annual capital generation would generally be at or above $1bn.”  This is an increase from the company’s prior guidance of $700-$900mm.  Relative to $1bn+ of capital generation, $550-$650mm of capital return in 2024 appears conservative, and I believe it is.  I expect JXN’s capital return to increase to ~$875mm annually as the Brooke Re transaction seasons.

My very simple math below highlights the power of the capital return algorithm over time:

Valuation & potential upside

Given the volatility of EPS, I have historically valued the space on capital return, or what I refer to as “distributable FCF” (dFCF; dividends + share repurchases).  JXN has historically traded at a discount to peers on this metric (and others).

I find a capital return algorithm of JXN’s magnitude to be rare and shareholders of companies that have executed similar programs (e.g., AN) have been rewarded.  I believe there is significant potential upside in JXN shares as a result of its capital return program:

Catalyst

Aggressive capital returns
Better earnings stability with Brooke Re
Compounding