Market Volatility And Regulatory Changes Threaten Annuity Sales And Earnings Growth

Key Takeaways

• Jackson Financial's reliance on variable annuity sales and exposure to market volatility may threaten revenue due to changing consumer preferences.
  
• Increased digital spending and significant growth in RILA sales could strain finances and increase market risk exposure, affecting earnings and operational efficiency.
  
• Jackson Financial's focus on annuities, digital investments, and market expansion can diversify revenue streams and enhance financial health.

Catalysts

Through its subsidiaries, provides suite of annuities to retail investors in the United States.

• Jackson's strong reliance on variable annuity sales could potentially impact future revenue negatively, especially considering market volatility and shifts in consumer preference away from such products.
  
• Possible regulatory changes or shifts in the annuity market dynamics could reduce the appeal of Jackson Financial's annuity products, directly affecting net investment income.
  
• Increased spending on digital initiatives and technology could strain net margins if these investments do not yield expected sales growth or operational efficiencies.
  
• The company's significant growth in RILA sales, while positive, introduces higher exposure to market risks, which could impact earnings through increased hedging costs or capital requirements.
  
• The focus on expanding share repurchase authorization might limit financial flexibility in the future, potentially impacting earnings if the company cannot invest in new growth areas effectively.

Assumptions

• Analysts are assuming Jackson Financial's revenue will grow by 17.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 50.1% today to 9.4% in 3 years time.
• Analysts expect earnings to reach $686.1 million (and earnings per share of $9.59) by about October 2027, down from $2.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2027 earnings, up from 3.3x today. This future PE is lower than the current PE for the US Diversified Financial industry at 15.4x.
• Analysts expect the number of shares outstanding to decline by 1.68% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.4%, as per the Simply Wall St company report.

Risks

• Increased fee income from higher average annuity assets under management and higher net investment income due to favorable equity market can boost Jackson Financial's revenue and net margins.
  
• Strong demand for Jackson’s registered index-linked annuities (RILAs) and traditional variable annuities, with sales growth in these products, can lead to increased revenue.
  
• Jackson's leadership in digital connectivity and technology investments for enhancing the digital experience for financial professionals and consumers can improve operational efficiency and customer satisfaction, potentially increasing revenue.
  
• Solid growth in book value and a commitment to shareholder return through common share repurchases and dividends reflect strong financial health and may enhance earnings per share.
  
• Expansion into new markets, as evidenced by the launch of a base RILA product in New York, along with product innovation, can diversify revenue streams and contribute to growth in earnings.

Valuation

• The analysts have a consensus price target of $91.2 for Jackson Financial based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $111.0, and the most bearish reporting a price target of just $74.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.3 billion, earnings will come to $686.1 million, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 8.4%.
• Given the current share price of $98.92, the analyst's price target of $91.2 is 8.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.