Jackson Financial Inc. (NYSE:JXN) has grown by double digits, has an investment grade balance sheet and is undervalued on a peer review basis.
Jackson Financial is the largest annuity provider in the United States with an AUM of 359 billion. They are retirement specialists who deal only with annuities. A brief definition of an annuity is a financial instrument that makes a series of interest and principal payments at fixed intervals and has a specified end. The three main types of annuities are fixed rate, variable rate and indexed. The following analysis need not go into the different characteristics of each, just keep in mind that annuities are safe havens.
The set up
jackson was derived from Prudential (PUK) on August 27, 2021, on the basis of 1 Jackson share for 40 Prudential shares. The shares began trading on the NYSE on September 20, 2021, at $25. Prudential retained a 19.9% stake in the spin-off. Prudential decided to part ways with Jackson because low interest rates were weighing on annuities and new accounting rules could create unwanted earnings volatility.
Annuities Companies have been taken over since the financial crisis of 2008. Recent deals include the sale of the AIG (AIG) Annuities line to Mass Mutual and KKR (KKR) buying the insurance arm of Goldman Sachs (GS) Global Atlantic. Warren Buffet has also just acquired Alleghany (Y), which is not a pure-play annuity company but which belongs to the same sector. Multiples of these companies and divisions are sold at very cheap valuations, with Alleghany being bought at 1.26 lbs, 3x EV/sell and 0.97 sell price. It was a classic Buffett deal, buying a company at extremely low valuations in the hope that he expects the company to see significant appreciation in the years to come.
Why Jackson is attractive
First, I want to point out that Jackson’s peers are not perfect comparisons, as they are all diversified into other products other than annuities. Jackson’s only products are annuities.
When evaluating peer-to-peer (see chart above), I’ve labeled all matching Jackson data in the quartile as green, with inaccurate data as yellow because they’re usually close to that number. Upon examination, you will see that Jackson is the leader in profitability in almost every category except return on assets and leveraged FCF margin. Both of these categories still have respectable numbers near the median. Jackson leads the industry in profitability with margins nearly 20% above industry medians.
Jackson has grown by double digits using all measures except revenue for the past three years. This is impressive, as a low interest rate environment is unfavorable to annuity companies. Jacksons ability to continue to grow its profitability, assets and book value over the past three years during this period is a testament to the quality of its investment decisions. A more favorable market is expected as the Federal Reserve has indicated that it will raise interest rates. This should drive the growth of the insurance industry and Jackson Financial.
Looking at the rating charts, you can see that Jackson is at the bottom of every metric. Jackson has managed to grow book value at a CAGR of 11.63% over the past 3 years. However, Jackson only trades at 0.4 of his book value.
As Jackson is a mature company, I would expect Jackson to trade at least in line with its book value. Given that the company has higher margins and growth equal to or better than the industry, I would expect the company to trade at least in line with its peer group. This leads me to believe that Jackson will increase his rating over time to match his peer group.
Annuity companies generally perform better in a rising rate environment because their products will generate a higher return for customers, making them more attractive. At the same time, annuities are often preferred to bonds because their price does not drop like bonds do in a rising rate environment. As central banks in the western world raise the overnight rate and see the yield on annuities rise, this should lead to new inflows into annuities
Additional demand is being created by market instability and geopolitical uncertainty as investors seek safe havens. Annuities are comparable to a life insurance policy in terms of security. For many investors who want income from their portfolio, an annuity makes more sense than a life insurance policy. An annuity also tends to hold its value better than bonds. These factors are attractive to investors and savers with a low tolerance for risk.
Inflation effectively works like a tax on your capital, lowering your total return. Realizing this can make an investment in an annuity much less attractive because, at least in real terms, many investors will experience a real loss. This makes them even less attractive to the majority of people buying annuities who are retirees who will be using the payments to live on and may need their investment to last for a long time. Jackson specializes in this type of investing and has several risk management techniques to mitigate these risks, but basic inflation risk will remain on many investors’ minds.
Jackson Financial’s valuations are extremely low compared to its peers. With its high growth rate and low valuations, investors should be able to see gains for years to come. Rising interest rates and global instability are favorable to safe havens such as annuities, which should stimulate growth.
Large investors and private equity have been buying annuity and insurance companies over the past few years, which is a bullish signal. Inflation is a headwind, but due to many factors, many investors will prefer a safe haven, such as an annuity, to other safe-haven assets. Jackson Financial appears to have years of continued growth and is significantly mispriced, making this company a solid buy.