Athene Holding Ltd. — 2020 Form 10-K Summary
Business context and reporting period
Athene Holding Ltd. is a Bermuda-domiciled retirement services company that issues, reinsures and acquires annuities, pension risk-transfer obligations and funding agreements. Its primary reportable segment is Retirement Services, supported by Corporate and Other activities. This filing covers the fiscal year ended December 31, 2020, with comparisons primarily to 2019.
The company’s strategy combines sourcing long-duration liabilities with investing in a diversified portfolio of primarily fixed-income, structured-credit, mortgage and alternative assets. Apollo manages substantially all of the investment portfolio and provides related investment, sourcing and operational services.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenues | $14.8 billion | $16.3 billion | Down 9% |
| Income before taxes | $2.2 billion | $2.3 billion | Down 4% |
| Net income | $1.9 billion | $2.2 billion | Down 12% |
| Net income available to common shareholders | $1.4 billion | $2.1 billion | Down 32% |
| Adjusted operating income available to common shareholders | $1.24 billion | $1.29 billion | Down 4% |
| Basic EPS | $8.51 | $11.44 | Down 26% |
| Adjusted operating EPS | $6.42 | $6.97 | Down 8% |
| ROE | 10.0% | 19.7% | Down 9.7 points |
| Adjusted operating ROE | 12.1% | 14.1% | Down 2.0 points |
| Net investment income | $4.89 billion | $4.60 billion | Up 6% |
| Net cash from operating activities | $4.15 billion | $2.66 billion | Up 56% |
At December 31, 2020, total assets were $202.8 billion versus $146.9 billion in 2019. Total investments, including related parties, were $182.4 billion, and net invested assets were $150.2 billion. Interest-sensitive contract liabilities were $144.6 billion and future policy benefits were $29.3 billion.
Common shareholders’ equity was $16.3 billion, while total AHL shareholders’ equity was $18.7 billion, including $2.3 billion of preferred stock. Book value per common share was $85.51 and adjusted book value per common share was $56.95.
The Retirement Services segment generated adjusted operating income of $1.27 billion and adjusted operating ROE of 16.9%. Its net investment spread declined to 1.31% from 1.50%, reflecting a decrease in the net investment earned rate to 4.04% from 4.43%, partially offset by a decrease in cost of funds to 2.73% from 2.93%.
Growth, capital and liquidity
- Gross organic inflows increased 52% to $27.5 billion, led by funding agreements, flow reinsurance and retail annuity sales. Net organic flows were $21.1 billion, producing a 27.1% net organic growth rate.
- The Jackson block reinsurance transaction, effective June 1, 2020, generated $28.8 billion of gross inflows and materially increased assets, liabilities and funds-withheld balances.
- Gross premiums and deposits were $55.5 billion, compared with $18.5 billion in 2019. Net premiums and deposits after ceded reinsurance and ACRA noncontrolling interests were $36.8 billion.
- Management estimated more than $7.7 billion of deployable capital at year-end, consisting of approximately $3.5 billion of excess equity capital, $2.5 billion of estimated untapped debt capacity and $1.7 billion of uncalled ACRA commitments.
- Available liquidity was approximately $11.1 billion, including $7.7 billion of cash and $3.4 billion of undrawn committed financing capacity. The $1.25 billion revolving credit facility was undrawn.
- Debt was $2.0 billion, with a debt-to-capital ratio of 9.6% and an adjusted debt-to-capital ratio of 12.7%. The company issued $500 million of 6.15% senior notes due 2030 and $500 million of 3.50% senior notes due 2031 during 2020.
- The US RBC ratio was 425%, compared with 429% in 2019. ALRe’s BSCR ratio was 254%, compared with 310% in 2019. Management stated that regulatory capital remained significantly above required action levels.
- The company repurchased 13.3 million common shares for $419 million during 2020. Approximately $221 million remained under the repurchase authorization at year-end.
Material changes versus 2019
- Common-shareholder earnings declined primarily because investment-related gains were lower, noncontrolling interests and preferred dividends increased, and income tax expense rose.
- Investment-related gains decreased to $3.3 billion from $4.7 billion, mainly because of less favorable FIA hedging derivative results, lower equity-security results and weaker changes in trading-security fair values.
- Net investment income increased by $289 million, but lower short-term interest rates reduced floating-rate investment income by approximately $273 million.
- Income tax expense increased to $285 million from $117 million, and the effective tax rate increased to 13% from 5%.
- Net income attributable to noncontrolling interests increased to $380 million from $13 million, principally because ACRA was substantially larger and had a full year of noncontrolling-interest effects.
- The company completed a February 2020 strategic transaction with Apollo, issued new Class A shares in exchange for Apollo Operating Group units and cash, and eliminated its prior multi-class common-share structure.
- Funds withheld at interest increased substantially, primarily because of the Jackson transaction and the July 2020 restructuring of a MassMutual reinsurance agreement.
- The company adopted the current expected credit loss standard in 2020, reducing retained earnings by $117 million, net of related offsets, at adoption.
Outlook, commentary, risks and unusual items
Management expects to continue expanding retail, flow reinsurance, institutional and inorganic channels while maintaining pricing discipline. It targets mid-teen returns for many organic and inorganic opportunities, although actual returns may vary by transaction and market conditions.
- COVID-19 created material uncertainty involving business continuity, investment valuations, credit losses, policyholder withdrawals, sales activity and liquidity. Management reported no material operational impairment through February 15, 2021 and no material adverse change in policyholder behavior as of January 31, 2021.
- Prolonged low interest rates are expected to pressure investment income and adjusted operating income. Management estimated that a 25-basis-point rate decrease persisting for 12 months could reduce adjusted operating income by approximately $35 million to $45 million.
- The company has significant exposure to illiquid and complex assets, including real estate-related assets equal to 22.1% of net invested assets, CLOs equal to 9.7%, and investments in the financial services industry equal to 12.1%, excluding CLOs.
- Material single-issuer exposures included approximately $1.8 billion to PK AirFinance, $935 million to MidCap, $770 million to AmeriHome and $661 million to Athora.
- LIBOR transition is a material uncertainty. Total contracts tied to LIBOR had a notional amount of $63.2 billion, including $25.2 billion extending beyond June 30, 2023.
- Apollo-related risks include concentration of voting power, conflicts of interest, management-fee arrangements and reliance on Apollo as investment manager. Apollo-related fees totaled $716 million net of ACRA noncontrolling interests in 2020.
- The company remains exposed to policyholder behavior, longevity and mortality assumptions, FIA embedded-derivative valuation, guaranteed lifetime withdrawal benefits, credit losses, reinsurance-counterparty performance, regulatory changes, tax uncertainty and cybersecurity or outsourcing failures.
- Legal and regulatory matters include ongoing market-conduct and administration-related matters connected with the Aviva USA block, a $45 million NYSDFS fine paid in 2020, and litigation concerning a corporate-owned life insurance matter. Management did not expect current proceedings to have a material effect, although adverse outcomes could affect a particular period.
- The company announced the expected sale of AmeriHome to Western Alliance Bancorporation after year-end and estimated approximately $175 million of alternative investment income from the transaction, net of carry and transaction expenses, subject to closing conditions.
Most important facts for an investor to verify
- Reconcile GAAP net income and common-shareholder earnings with adjusted operating income and understand the effect of investment gains, FIA derivatives, AOCI and noncontrolling interests.
- Assess whether the 2020 growth in assets and liabilities, particularly from Jackson, is producing acceptable long-term investment spreads and returns.
- Review the quality, liquidity, valuation and concentration of the investment portfolio, including CLOs, mortgage loans, real estate-related assets, PK AirFinance, MidCap, AmeriHome and Athora.
- Monitor the effect of sustained low interest rates on investment income, crediting rates, policyholder behavior, reserve assumptions and capital ratios.
- Verify the status and economic impact of LIBOR remediation across investments, product liabilities and hedging instruments.
- Evaluate the terms, fees and termination restrictions associated with Apollo’s investment-management relationship and the implications of Apollo’s approximately 35% voting control.
- Confirm the availability of holding-company liquidity, subsidiary dividend capacity, debt covenants, collateral requirements and $7.5 billion of investment commitments.
- Review regulatory examinations, consent orders, litigation, indemnification arrangements and the potential for additional policyholder remediation costs.
- Consider the effect of the planned AmeriHome sale and other post-year-end developments on 2021 earnings and capital.