I recently took a look at the variable annuity provider, Jackson Financial. Optically it is cheap as it generates ~$750m in excess cash annually against a market cap of ~$2.3B. But variable annuities have been ticking time bombs in the past, and the market is pricing them as such today as well.
I found two good resources that outline the issues in the past located here:
- McKinsey: Responding to the Annuities Crisis (2009)
- Boston Federal Reserve: Variable Annuities – Recent Trends (2014)
I exchanged emails with investor relations to try to get more clarity on the business, and perhaps unpack whether “this time is different” with respect to the business, but unfortunately couldn’t break through. In any case, it’s more an interest versus something I would seriously consider as an investment, given its singular product focus (lack of business diversity), lack of investment manager type at the helm, etc. But somebody wrote up a positive view on the business and I decided to respond to them. Here’s my response:
I think GAAP cash on balance sheet may not be the best way to evaluate the business’ cash position. That is likely the aggregate of cash at insurance subsidiaries and holding company cash, of which an overwhelming amount is likely held as a part of reserves against liabilities (along with fixed income and equity assets). Perhaps better is the company’s indication of holding company cash in excess of their self defined liquidity buffer. In the most recent earnings report, Holdco cash was stated as ~$1B, with a minimum liquidity amount of $250m.
Perhaps more important though, is the machine of how VAs work, and whether “this time is different.” Specifically, are the guarantees associated with ~60%+ of their liability book well underwritten and hedged? Is the hedge program effective in practice versus theory in the next major downturn? The company will give a resounding “yes” but in practice there’s no way to know until it happens, unfortunately. As an example, current correlations between underlying VA 3rd party equity managers and their hedges are ~98% correlated (JXN indicated) today, but in the 2008 crisis, the correlations that historically performed close to 1 detached and the “slippage” between the underlying funds and their hedges gapped out.
Another point to consider is what the very firms that are rating the debt investment grade have to say about the business. Moody’s indicates that its book is far more concentrated than other competitors, which have other distinct lines of business to cushion the historically very volatile VA business. It also indicates that given the concentrated book, its leverage level could be lower than its current level. All together, Moody’s has JXN on negative watch as a result. While the business may be on much better footing today than bad actors in the past, and its own setup in the past, I think the potential set of outcomes in a big downturn ranges from “just fine” to complete equity wipeout, a hard situation to underwrite with conviction.
Disclosure: We do not own shares of JXN, this is not investment advice. Do your own work.