Jackson's Annuity Stormproofing Worked

What You Need to Know

Hedging gains helped Jackson report $3 billion in net income.
Nervous savers helped Equitable post a 52% increase in net asset inflows for the retirement products it wants to sell.
Many issuers are continuing use reinsurance deals and product strategy shifts to reduce exposure to annuity guarantee risk.

Derivatives can make an annuity issuer’s earnings look messy, but they helped Jackson sail smoothly through the spring stock market storms.

Thanks to hedging arrangements, the annuity giant is reporting $3 billion in net income for the quarter ending June 30, on just $6.5 billion in revenue.

During a conference call this week, Jackson CEO Laura Prieskorn told securities analysts that the hedging strategy worked as intended, with costs that were in line with expectations.

“We believe the effectiveness of our hedging strategy is most evident in challenging environments, which was the case this quarter,” Prieskorn said.

What It Means

Some of your clients may be using annuities in an effort to protect their retirement nest eggs against investment market risk.

The second quarter may have been a great test of how well that strategy will work.

More Issuer Insights

Here are seven other things annuity issuer executives have been telling analysts over the past two weeks.

1. Clients are hungry for safe ways to save for retirement.

Mark Pearson, Equitable Holdings’ CEO, pointed to the fact that the net flow of assets into individual annuities and other individual retirement products the company wants to sell increased 52% between the second quarter of 2021 and the latest quarter, to $1.3 billion.

“This was a record sales quarter for our individual retirement business, further demonstrating the continued need clients have for our products,” Pearson said.

2. Many issuers are still focusing on reducing their exposure to interest rate risk, stock market risk and other forms of risk.

Principal Financial, for example, began its earnings call by pointing out that a transaction to reinsure the company’s in-force U.S. retail fixed annuities closed in the second quarter and had an effective date of Jan. 1, 2022.

Andy Sullivan, head of the U.S. businesses at Prudential Financial, emphasized that the company has reduced its exposure to traditional variable annuities with guaranteed living benefits to less than 10% of enterprise earnings.

“That reduction is very intentional, and it was the two-step process of pivoting and runoff that remains on track,” Sullivan said.

Prudential intentionally let billions of dollars flow out of older, higher-risk annuities while emphasizing sales of its less volatile FlexGuard annuities, he added.

Ellen Cooper, CEO of Lincoln Financial, noted that fewer than 30% of the company’s second-quarter individual annuity sales came from variable annuities with guaranteed living benefits.

Brighthouse Financial CEO Eric Steigerwalt talked about a new registered index-linked annuity — the Shield Level Pay Plus contract — that will offer some, but not total, protection against market volatility.

3. Cost control is a focus.

Prieskorn, for example, noted that Jackson pays commissions tied to customers’ asset levels.

In the second quarter, falling stock prices cut the asset base, and that cut spending on asset-based commissions, she said.

4. Distribution is important.

Rob Lewin, the CFO at Global Atlantic parent company KKR, said that KKR believes Global Atlantic is well-positioned to benefit from the effects of rising interest rates on sales of individual annuities.

“Their relationships across the bank and broker-dealer channel have served them really well,” Lewin said.

5. Money talks.

Marc Rowan is the CEO of Apollo, the parent company of Athene. This has been a pretty good year of Athene and other annuity issuers, Rowan told the analysts.

“Although, if you don’t have lots of excess capital, you’re not really able to take full advantage of it,” Rowan said.

6. The outlook is good for big group annuity deals.

Employers use big group annuities, or bulk annuity deals, to shift responsibility for defined benefit pension plans to insurers.

Nigel Wilson, the CEO of Legal & General, said rising interest rates, and widening spreads between the interest rates higher-risk bond issuers pay and the rates lower-risk bond issuers pay, have been good for the pension risk transfer annuity market.

Widening spreads are reducing projected pension plan asset deficits and improving group annuity pricing, “with positive consequential effects for both volumes and margins,” Wilson said.

7. Helping the environment should be a great investment opportunity for annuity issuers.

Annuity issuers use big portfolios of bonds, mortgages and other long-duration fixed-income assets to support guarantee obligations.

Wilson said he sees promising investment opportunity trends.

“Climate change, or possibly climate catastrophe, creates a $20 trillion liability, and, with it, for us, a series of huge investment opportunities,” he said. “There’s a great deal more to do as we tackle the planet’s most pressing crisis.

The Numbers

Here’s a look at what some key players in the U.S. individual annuity market have said about their second-quarter results in the past two weeks:

Jackson is reporting $3 billion in net income for the latest quarter on $6.5 billion in revenue, compared with a net loss of $540 million in net income on $232 million in revenue for the year-earlier quarter.

The revenue figures include changes in the value of derivatives and investments.

The sum of premium revenue, fee revenue and ordinary net investment income held steady, at about $2.7 billion.