Jackson Financial Inc.

Moat: 1/5

Understandability: 3/5

Balance Sheet Health: 4/5

Jackson Financial Inc. (JXN) is a US-based financial services company focused on providing retirement products and services, primarily annuities, to Americans.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Jackson Financial Inc. (JXN) operates in the complex landscape of the insurance industry, specifically focusing on retirement savings products. The company’s core offerings are annuities, which are contracts between the company and individuals, where the individual pays a premium in exchange for guaranteed future income streams, often during retirement. These products are intended to provide long-term financial security.

  • Product Focus: JXN’s primary products include a variety of annuities designed for different retirement needs. The bulk of the premiums are from fixed indexed annuities. These provide a return based on the performance of specific market indices. Variable annuities are also available, giving investors an element of control and opportunity for increased growth, but also a greater level of risk. The company also offers fixed annuities.
  • Distribution: JXN utilizes a multi-channel distribution network. The company works with independent broker-dealers, wirehouses, and banks, but also engages with financial advisors. The company does have some direct sales. This multi-channel distribution aims to increase their reach and customer base.
  • Competitive Landscape: The financial services sector, and specifically the retirement products space, is highly competitive, with multiple large insurers and asset management firms all vying for the same customer. Major players include Prudential, MetLife, and many large private insurance companies, along with the investment arms of large banks. JXN has to stand out within these companies, making it hard to capture significant market share.
  • Market Trends: Increasing demand for retirement income solutions, and an aging population in the US, creates the demand for JXN’s products. As the financial markets become more volatile, individuals are seeking more financial stability and are putting their money into more guarantees. In addition, regulation is increasing in the sector. In addition, the market has become much more competitive, given the fact that there are many competitors chasing after the same customers.
  • What Makes JXN Different?: Jackson Financial differentiates by focusing on serving a specific market segment, but its primary products can be obtained through many other large insurers. It also differentiates through proprietary research, customer support, and a wide range of product choices. Furthermore, their large assets under management creates a brand name.

Moat Analysis

JXN’s competitive advantages are limited, granting a low moat rating.

  • Intangible Assets (Brands & Patents): While the Jackson brand name is well-established, it does not have the same widespread recognition as brand leaders like Prudential or MetLife. There are no patents in the business and the brand is not a strong differentiator.
  • Switching Costs: The annuity products offered by JXN do not necessarily create strong switching costs. While it is time-consuming to change insurance providers, the differences between providers in term of functionality is minimal. So this means that if a competitor offers a more favorable deal, then JXN customers are more likely to switch.
  • Network Effects: This is not applicable to JXN’s business, which is the selling of financial products.
  • Cost Advantages: The company does not have a clearly defined or visible cost advantage to compete on price in general. Many large players can replicate JXN’s costs, which means that it doesn’t have a durable cost advantage.

Moat Rating: 1/5 Based on the above assessment, JXN does not have a wide moat. Its competitive advantages are weak and can easily be replicated by its competitors. A low rating of 1 is appropriate.

Risks to Moat and Business Resilience

Despite its established position, Jackson Financial faces several risks that could erode its business and diminish its moat:

  • Regulatory Risk: Insurance companies, including those selling annuities are subject to high levels of regulations. A change in these regulations could materially impact the company’s ability to sell its products and its profitability. Such changes are very hard to predict and require the company to be nimble and adaptable.
  • Interest Rate Sensitivity: The prices of JXN’s liabilities, which are their financial products, are affected by current interest rates, which may negatively impact their profitability.
  • Competitive Pressures: The industry is fiercely competitive. There are multiple, much larger players competing for the same customer base. These competitors have vast distribution networks, strong brand recognition and greater bargaining power, which all negatively affect JXN.
  • Reputational Risks: Given the nature of the business, there is a risk of loss of reputation from scandal or from bad publicity. This could lead to a drop in sales.
  • Economic Downturns: A general economic downturn, or a recession could negatively impact their investments and also depress their revenue.

Business Resilience: While the insurance sector is fairly resilient as a whole, JXN has low barriers to entry and there is always a risk of an increased competition. While companies with strong brand names can weather crises, JXN’s brand is still relatively newer and thus it is untested during major downturns. However, they do have a wide variety of offerings that give the company some diversification, giving the business moderate resilience.

Financial Analysis

JXN’s financials reveal a company in a volatile sector, with its own profitability swings:

  • Revenue: JXN’s revenue is primarily generated by premiums paid for its annuity products. Revenues were up in 2022 compared to 2021 primarily from a change in accounting method. However, total revenue dropped to 11.3 billion in 2023 from 14.1 billion in 2022, and 15.9 billion in 2021. Revenue growth is likely to be variable.
  • Margins: Operating margins have ranged from low to high single-digits. Overall, margins have recently become negative due to increase in interest rates and market volatility. The company is expected to improve these. This is an industry-wide trend, which means that it will be difficult for JXN to produce high margins in the coming year.
  • Returns on Capital (ROIC): JXN has had relatively high return on invested capital, and this is the only positive metric within their financial reports. ROIC has ranged from 8 percent to 13 percent in recent years. As an insurance company, these numbers are reasonably good. However, these are quite volatile and can quickly change.
  • Profitability: JXN’s profitability is highly variable and tied to the financial markets. The net income of JXN has fluctuated in the last three years from $1.9 billion in 2021 to -$1.1 billion in 2022 to $1.8 billion in 2023, demonstrating its lack of consistent profitability.
  • Cash Flows: JXN’s cash flows are variable, and heavily influenced by how its investments and debt are performing. Their operating cash flows are mostly negative because it pays a lot of money in claims to its customers. In 2022, the company had a negative FCF of -$6.3 billion and a negative FCF of $118 million in 2021.
  • Debt and Leverage: The company has taken on a large amount of debt recently due to its increased reliance on fixed rate products. The company has a credit rating of BBB, which is slightly below investment-grade, indicating a higher default risk and a more expensive cost of capital. Leverage in the company is roughly 2:1 debt to equity. This is a highly leveraged company.
  • Share Repurchases: JXN did have an active share buyback program, which it stopped at the end of 2022. There are no current plans to restart the program, although they are open to buybacks if the value of the stock improves.

Understandability Rating: 3 / 5

JXN’s business model isn’t terribly complex, selling life insurance products. However, they operate in a volatile industry and face a lot of moving parts. The financial statements are also quite complex, which makes understanding it more difficult. A rating of 3 is appropriate.

Balance Sheet Health Rating: 4 / 5

The company’s balance sheet is relatively healthy despite the large leverage. The company has a decent cash position, a well-diversified asset portfolio and a clear path to reducing its long-term debt. While there are some risks due to the nature of the business, the financial reports are robust. Thus, a 4 rating seems to fit well.

Recent Concerns

  • Accounting Changes: Management notes that recent changes in accounting rules have a large impact on reported figures. These have led to wide swings in the company’s revenue and profitability from year-to-year. The large amount of changes has made it difficult to interpret the financial data and makes it hard to use for valuation purposes.
  • Interest Rates: Management has warned of the effects of interest rates on the company’s profitability, saying that the low interest rate environment had been a tailwind for many years. This has reversed in the past 2 years. The company expects interest rates to stabilize, but it is unknown when this will happen and to what extent it will affect profitability in the long term.
  • Negative Cash Flows: Operating cash flow continues to be negative, since the company has to provide a large cash outlay for the insurance products it sells. Because of this, there is pressure to reduce debt and increase profitability.
  • Credit Downgrades: As discussed before, JXN’s credit rating is just barely in the investment grade, and a downgrade could result in a significantly higher cost of debt and further pressure on its profitability.

In Summary

JXN is a financial services company in the business of providing annuity products. There are several challenges and risks that are apparent from its latest reports. It does not have a strong economic moat, making it unlikely to outperform the market long term. It is a company to avoid for most investors. Its profitability is volatile and the company is heavily affected by interest rates and market conditions. Furthermore, it operates in a highly regulated sector.