Jackson National Life Insurance Co.'s decision to sunset a global financial crisis-era adjustment to its statutory capital and surplus will cap a year of transition for the top U.S. seller of variable annuities.
Amid waning production of variable annuities on an industrywide basis, the Prudential PLC subsidiary has ramped up sales of fixed annuities and fixed-indexed annuities as part of a broader initiative to accelerate the diversification of its business mix and support cash remittances to its parent. The forthcoming nonrenewal of a unique permitted accounting practice previously granted by its primary state regulator will further contribute to that goal.
Prudential CFO and COO Mark FitzPatrick during a Sept. 26 investor day presentation said third-quarter sales at Jackson continued along the lines of trends that emerged in the first half of the year. It saw a higher mix of fixed indexed annuities, growth in fixed annuities due to new product introductions and sluggishness in variable annuities. The latter product accounted for 68% and 66% of the company's sales and deposits in the first and second quarters. That's a stark departure the last two quarters of 2018 when it accounted for more than 80% of sales and deposits. Fixed and fixed-indexed annuities accounted for nearly 18% of Jackson's sales and deposits in the second quarter, up from just over 4% in the year-earlier period.
The company ranked as the No. 16 seller of fixed and fixed-indexed annuities in the first half, according to LIMRA Secure Retirement Institute survey data. It trailed only American International Group Inc. in total individual annuity sales.
Jackson tripled its share of fixed and fixed-indexed annuity sales to 1.8% in the first half of the year from 0.6% in the year-earlier period, the company said, on what it characterized as the strength of its distribution. It achieved share growth in the independent and full-service broker/dealer channels, as well as the bank channel.
Jackson's product line diversification is not solely driven by commercial interests, according to CEO Michael Falcon. It will also free up cash flow by reducing hedging needs, he said on an August conference call, describing statutory capital generation as "the constraining factor" on remittances to Prudential.
To that same end, eliminating the permitted practice will remove what has increasingly become a drag on Jackson's capitalization.
The National Association of Insurance Commissioners' Accounting Practices and Procedures Manual allows for state-specific variances to statutory accounting principles in the form of both permitted and prescribed practices. In Jackson's case, the company's statutory net income and surplus have been impacted by certain accounting practices prescribed by Michigan state law. The soon-to-expire permitted practice has materially impacted surplus since Jackson first made use of it in 2008.
The permitted practice allows the company to carry interest rate swaps at book value instead of fair value, as otherwise required under statutory accounting, so as to protect against rising interest rates. As Prudential explained in its investor day slide deck, the accounting treatment afforded by the permitted practice mitigates against a one-sided mark to market in cases where statutory reserves may not respond to interest rates in the same way as the hedges.
It initially provided a needed boost to Jackson's surplus during the throes of the financial crisis. The Michigan-domiciled Jackson reported surplus of nearly $3.75 billion at year-end 2008, which included a lift of $685.6 million associated with the permitted practice. In eight of the last nine years, however, permitted practice reduced the company's reported surplus.
The drag worsened in the company's June 30 quarterly statement as the permitted practice on a net-of-tax basis lowered Jackson's surplus by $571.7 million. The company's state-basis surplus of $4.44 billion compared unfavorably to a hypothetical result of $4.71 billion in the absence of permitted and prescribed practices.
While Jackson's company action level risk-based capital ratio exceeded 400% at midyear, it would have been about 45 points higher, the company said, had it not utilized the permitted practice. Executives declined to specify where Jackson's RBC ratio stood at the time of the investor day, but they continued to guide to a year-end range of between 400% and 450%.
Company officials had been reluctant to nonrenew the permitted practice, even as it emerged as a consistent drag on statutory capital, as they expressed concern about the hypothetical implications of having to ask the Michigan regulator to reinstate it at a future date. But the forthcoming effectiveness of a new NAIC statutory capital regime for life insurers that, Falcon said during the investor day, is "much less sensitive to ... short-term fluctuations in rates," contributed to the decision to move forward without what he described as a "headwind."
Jackson's experience in that regard is not necessarily unique. S&P Global Market Intelligence estimates that the U.S. life industry's surplus was marginally higher as of June 30 when calculated solely on the basis of Statutory Accounting Principles than when incorporating the impact of state permitted and prescribed practices. At the end of 2008, in contrast, surplus when incorporating those practices was $8.90 billion higher than when using Statutory Accounting Principles.
