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MARKET COMMENTARY

All it took was a couple hours of hawkish comments from Jay Powell, and the previously unstoppable bull run of the past 6 weeks was suddenly reduced to a hasty rout.

The ultimate irony is that the apparent discrepancy appears to be just that the market has priced in only a single rate increase through the end of the year, while the Fed’s estimate of peak funds rate implies two more rate hike prior to year-end. Is an extra 25 bps really the difference between whether we are in a bull or bear market? Seems kind of silly, if that’s all.

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At the moment, for every indicator that shows continued economic resiliency (low unemployment, consumer spending, etc.) there is a corresponding negative one (higher credit card delinquencies, lower commercial bank lending, manufacturing activity contraction, etc.) that demonstrates the toll that higher rates have begun to take on economic vitality.

 

Because the data is quite mixed and even contradictory, we are going through a period where it it’s easy to make a case either for or against rates being at a level sufficient to restrain inflation. As a result, I fully expect to see continued heightened volatility in the near term, with market sentiment swinging wildly based on which narrative is supported by the latest economic data release.

STAT OF THE WEEK

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PORTFOLIO COMMENTARY

InterActiveCorp (IAC)

CEO Shuffle

IAC made some management moves this past week, moving the CEO of Care.com, Tim Allen, over to their Ask Media Group subsidiary in the same role. In a bit of portfolio coincidence, the new CEO of Care.com comes from WBD, where he was General Manager of HBO Max.

IAC has appointed Brad Wilson to CEO, who brings more than 20 years of leadership experience at major consumer technology brands including HBO Max, Disney Streaming, and IAC progeny LendingTree and Travelocity. Mr. Wilson succeeds Care.com CEO and 18-year IAC veteran Tim Allen, who has been appointed CEO at IAC’s Ask Media Group (AMG), a search-based technology and marketing company. Both changes are effective immediately.

“As he has done several times previously for IAC, Tim led a transformation, steadily growing Care.com’s revenue and profitability, and the company is now preparing for its next phase of growth,” said Joey Levin, CEO, IAC. “I’m grateful he’ll now take the reins at a long-time key profit engine for IAC, Ask Media Group. No one can drive AMG like Tim can, especially as we enter a new era of AI innovation in search.”

Mr. Levin continued, “I’m excited to welcome Brad to succeed Tim to lead Care.com. His experience driving subscriber and revenue growth at some of the world’s most recognizable consumer brands in categories like entertainment, finance, and travel will help Care grow and enhance our platform to better serve families and caregivers.”

Mr. Wilson previously served as US General Manager at HBO Max where he also oversaw global growth capabilities that supported the service’s launch to more than 60 countries.

Jackson Financial (JXN)

LIMRA Multi-Year Annuity Sales Forecast Implications

One underappreciated aspect of the bull case for Jackson Financial is just how much demographics are going to be driving demand for annuities for the new few years, serving as a tailwind for the company’s sales growth. Just last year, US annuities set a record for the largest amount ever sold at almost $313 Billion.

And, given the waves of Boomers hitting retirement age, the TAM for annuities will be steadily increasing over the next decade.

Reinforcing this point, LIMRA just released a multi-year annuity sales forecast that, if even directionally accurate, has significant positive implications for our investment in JXN. Of particular interest is its forecast for variable annuities sales to grow almost 50% by 2027 from 2022 levels, which equates to an 8% CAGR over the next five years.

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The record-smashing tier of annuity sales will not be going away anytime soon, LIMRA analysts predict.

For two decades, annuity sales hovered around the $200 billion to $250 billion range before busting out in 2022 with sales of $312.8 billion, LIMRA found. That record could be short-lived depending on how 2023 plays out.

LIMRA’s forecast suggests that protection products will continue to boost growth in the annuity market for the next several years. Although the product mix may shift over time, LIMRA doesn’t anticipate sales going back to those lower numbers.

“Overall individual annuity sales could see a slight pullback in 2024 as interest rates decrease, yet the favorable demographics combined with improving equity markets will continue to propel sales in a positive trajectory through 2027,” said Todd Giesing, assistant vice president, LIMRA Annuity Research.

On average, more than 10,000 baby boomers reach retirement age every day, a trend that will continue through at least 2030.

Those simple demographics will affect the future of annuities with more people reaching an age where they would consider purchasing one, LIMRA noted. The average age of an annuity buyer is in their early 60s with the majority purchased between ages 55–70.

According to Oxford Economics, the U.S. population aged 65 or over is expected to grow by more than 8.3 million from 2022 to 2027.

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LIMRA broke down each of the individual product categories:

Traditional variable annuities: Volatility in the equity markets will cause investors to continue shying away from traditional VAs. Unless there are drastic tax changes, it is unlikely traditional VA products will be utilized for tax deferral beyond what the industry experienced in 2022. Growth potential and guaranteed income solutions will be the drivers of growth in 2027, which means traditional VAs will see upward momentum.

Registered index-linked annuities: The RILA market has experienced remarkable growth over the past few years and LIMRA is projecting continued growth through the next several years. As equity markets turn back into growth mode, investors will be seeking out solutions with the balance of protection and growth potential.

While Jackson is the market leader in traditional VA (TVA) sales (~21%), it had only a 4% share of RILA sales as of the end of last year. If we apply JXN’s market share of each product as of the end of last year to the mid-point of the sales forecast for each product category, we get a JXN specific sales forecast that looks like this.

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Source: LIMRA and Author Estimates

Now, do I expect JXN sales to come anywhere close to matching this?

Of course not.

I used a pretty simplistic market-share assumption, and I’m certain there will be significant variances with both JXN’s actual market share and the over-all demand for both products.

But I was not looking at creating this table to get an accurate prediction, but simply to understand the general implications of LIMRA’s forecast for JXN’s future prospects.

Conclusion: if JXN’s annual sales for the next few years even comes close to approaching the trajectory seen here, it will produce prodigious amounts of cashflow, fueling large stock buybacks, a safe and growing annual dividend amount, and turbocharge the company’s NAV.

2seventy bio (TSVT)

No new company news this week.

Warner Bros. Discovery (WBD) Diagonal Spread

No new company news this week.

CURRENT TRADE POSITIONS

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As always, hope that everyone has a great week!