About half of the assets in our variable annuity portfolios are in passive funds, which are easier to hedge
Having just concluded a record year, Jackson National Life Insurance Co. is now among the leaders in annuity sales.
The insurer ranked third in variable annuity sales and seventh in fixed annuities last year, up from 12th and 11th places, respectively, in 2007, according to LIMRA. That growth occurred under the leadership of Clark Manning, who passed the chief executive baton to Mike Wells in October.
In his first in-depth interview since taking over as chief executive, Mr. Wells discussed the firm's business strategy.
Q. Jackson ended last year with $14.7 billion in VA sales, a 47% increase. But even your biggest competitors have had to pull back on some aspects of their products because of interest rates. For example, Prudential Financial Inc. reduced the compounded growth rate on its VA's highest daily account value and MetLife Inc. lowered the income that annuity holders get when they activate their income benefit rider. What would lead Jackson to make those kinds of changes?
A. When you look at our competitors' products, they're not basing their changes solely on interest rates; there are a number of variables in variable annuity pricing, including assumptions for volatility.
Prudential, Met and Jackson provide three -different offerings to clients. Met Life has a [guaranteed-minimum-income benefit] and a fixed-annuitization structure. Prudential has portfolio insurance and a guaranteed-range-outcome proposition. Ours is a guaranteed withdrawal to consumers. All three function differently, but all succeed. Some macro issues drive all three benefits, but it gets very company-specific when it comes to pricing and hedging.
If you go full cycle and look at the pricing war, we never followed the industry. We charged more than the industry for benefits and had more margin. Our hedges have worked across the cycle because we make sure the fees we charge offset our guarantees.
Q. What can you share on the Jackson Select Protector, which has been filed with the Securities and Exchange Commission? It seems to be a single-life GLWB with a quarterly step-up, no roll-up and no true joint-life option, and it appears to be slated for a May release. Is this an attempt to curtail risk or is it an attempt to appeal to a new adviser audience?
A. We don't talk about filings we have in process.
Q. What was behind the temporary closure of the JNL/BlackRock Global Allocation Fund? Who made the call to stop taking new money or transfers, and why? Has this ever happened with other subaccounts, and when will it be resolved?
A. The BlackRock [Inc.] fund was too much of a good thing. We had sold up to the regulatory limit; there's a legal percentage. There are two models: a subadvised model and a hub-and-spoke model in which managers have the funds they use and various managers feed off of them. We got to a level approaching the regulatory maximum and we haven't disclosed yet what we're going to do. What the SEC is trying to avoid is a fund manager — or us — having the incidence of ownership. It's an in-process filing.
Q. LPL Financial recently commissioned Sun Life Financial Inc. and other insurers to build a fee-based variable annuity. What are your thoughts on the demand for fee-based variable annuities, and will Jackson develop its own version?
A. We're going to watch and see what develops in this space. We look at the number of advisers who have never sold a VA, and it's huge. I think LPL has good instincts about what consumers and planners need for their practices. You get into the question of whether the person buying the managed account is a pure equity player or wants the guarantees. We'll let someone else take a shot at it before we do.
It's very possible they'll succeed. If we had this conversation three years ago, the argument would've been, “Shouldn't you own the S&P fund and not buy the insurance?” Now people wish they owned it.
We like the advisory space. Our assumption is that we'll be a fast follower and that we can get product in there faster — it's three to six months for us. The discussion has been around for a long time; the concept has crystallized and now you have a few distribution players endorsing it. It'll be interesting to see how that plays out.
Q. What aspects of Jackson's hedging methods allow it to continue offering rich products even when its largest competitors have had to increase fees or reduce roll-ups on living benefits?
A. We're one of the largest writers of fixed indexed annuities, a natural offset of variable annuities. If we write $2 billion of fixed indexed annuities, that has the effect of offsetting $2 billion of guarantees on our guaranteed-lifetime-withdrawal benefit, but that's not hedging by any means.
We have a normal hedge model with a stochastic element to it.
About half of the assets in our variable annuity portfolios are in passive funds, which are easier to hedge. We tend to look at active funds that are defensive in nature, and have timely and accurate reporting. We've passed up on some funds that just can't be hedged properly. In those cases, a carrier must overhedge and then the concept doesn't work.
Q. What is the ceiling for Jackson's VA and equity exposure?
A. As we grow the company, we grow its capabilities. Our parent [Prudential PLC] is a $31 billion firm in terms of market capitalization, about the same size as Prudential [Financial]; MetLife is at about $43 billion or so. None of the three is reaching a point where VAs are a definitive part of the business.
Variable annuities aren't capital-intensive from a statutory-rating point of view. Rating agencies want more than one revenue source; they like other business lines and they're happy if you're not a single-product company. Those are dynamic measurements. The informal risk-based-capital-ratio number that gets you a double-A rating has crept up. As you take more risk, rating agencies want more capital behind the firm. With Jackson's annuity business versus its parent, we look at risk across the board and how much longevity risk is in one company versus the other — the same way Prudential and Met do.
Our RBC ratio is 483%. The industry is very heavily capitalized.
E-mail Darla Mercado at dmercado@investmentnews.com.
