Athene Holding Ltd. — FY 2021 Form 10-K Summary
Business context and reporting period
Athene Holding Ltd. filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Athene is a Bermuda-based retirement-services company that issues, reinsures and acquires annuities, funding agreements and pension group annuity obligations. Its primary reportable segment is Retirement Services, with additional activities reported in Corporate and Other.
The filing also reports a significant subsequent event: on January 1, 2022, Athene merged with Apollo Global Management, Inc. As a result, Apollo became the beneficial owner of 100% of Athene’s Class A common shares and controls the company.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenues | $26.3 billion | $14.8 billion | +78% |
| Net income | $3.8 billion | $1.9 billion | +98% |
| Net income available to common shareholders | $3.7 billion | $1.4 billion | +157% |
| Diluted earnings per Class A share | $18.71 | $8.34 | +124% |
| GAAP ROE | 19.3% | 10.0% | +9.3 points |
| Adjusted operating income available to common shareholders | $3.1 billion | $1.2 billion | +147% |
| Adjusted operating ROE | 23.1% | 12.1% | +11.0 points |
| Total assets | $235.1 billion | $202.8 billion | +16% |
| Net invested assets | $175.3 billion | $150.2 billion | +17% |
| Net reserve liabilities | $162.0 billion | $145.0 billion | +12% |
Revenue growth reflected higher premiums, net investment income and investment-related gains. Premiums increased to $14.3 billion from $6.0 billion, primarily because of higher pension group annuity activity. Net investment income increased to $7.2 billion from $4.9 billion, supported by portfolio growth, the Jackson reinsurance transaction and favorable alternative-investment performance.
Investment-related gains increased to $4.2 billion from $3.3 billion, including favorable changes in FIA hedging derivatives, foreign-exchange derivatives, equity securities and realized gains on available-for-sale securities. These gains were partly offset by unfavorable changes in the fair value of reinsurance assets as U.S. Treasury rates increased.
Growth, margins and operating trends
- Gross organic inflows increased 34% to $37.0 billion from $27.5 billion. Net organic flows were $12.0 billion, compared with $14.4 billion in 2020, and the net organic growth rate declined to 7.4% from 10.8%.
- Retail inflows increased to $8.8 billion from $7.8 billion, while flow-reinsurance inflows declined to $2.6 billion from $6.0 billion because of pricing discipline in a low-rate environment.
- Institutional inflows increased materially, including $13.8 billion of pension group annuity inflows and $11.9 billion of funding agreement inflows.
- Retirement Services adjusted operating income increased 91% to $2.4 billion, and segment adjusted operating ROE increased to 25.1% from 16.9%.
- Retirement Services net investment spread increased to 1.77% from 1.31%, reflecting a 4.30% net investment earned rate and a 2.53% cost of funds.
- Investment margin on deferred annuities increased to 2.45% from 2.09%.
- Net alternative investments increased to $9.9 billion from $6.8 billion and represented 5.6% of net invested assets. Alternative investment performance was a significant contributor to earnings.
Cash flow, debt and liquidity
| Metric | 2021 | 2020 |
|---|---|---|
| Operating cash flow | $10.3 billion | $4.2 billion |
| Cash used in investing activities | $(27.9) billion | $(14.8) billion |
| Cash provided by financing activities | $19.6 billion | $14.5 billion |
| Cash and restricted cash at year-end | $10.4 billion | $8.4 billion |
| Total debt | $3.0 billion | $2.0 billion |
| Debt-to-capital ratio | 12.8% | 9.6% |
| Adjusted debt-to-capital ratio | 14.8% | 12.7% |
Athene had a $1.25 billion revolving credit facility that was undrawn at year-end and access to more than $2.0 billion of committed repurchase facilities. Management estimated approximately $7.35 billion of deployable capital, comprising $3.35 billion of excess equity capital, $2.7 billion of untapped debt capacity and $1.3 billion of available undrawn ACRA commitments.
As of December 31, 2021, the U.S. RBC ratio was 377%, the Bermuda group BSCR ratio was 232% and Bermuda RBC was 410%. Management stated that regulatory capital was significantly above levels that would prompt regulatory action.
Material changes versus the prior comparable period
- Net income available to common shareholders increased by $2.3 billion, driven by higher revenue and lower noncontrolling-interest expense, partially offset by higher benefits and expenses and taxes.
- Future policy and other policy benefits increased to $15.7 billion from $7.2 billion, primarily because of higher pension group annuity obligations and benefit payments, growth in the business and rider-reserve changes.
- Policy and other operating expenses increased to $1.1 billion from $855 million, including merger-related costs, interest expense and a $53 million impairment of a corporate-owned life insurance asset.
- Preferred stock dividends increased to $141 million from $95 million as a result of recent preferred-share issuances.
- Total investments, including related parties, increased to $212.5 billion from $182.4 billion. The portfolio remained concentrated in corporate securities, structured credit, mortgage loans and alternative investments.
- Gross unrealized losses on available-for-sale securities increased to $941 million from $488 million, primarily because of higher U.S. Treasury rates. Management classified the losses as generally temporary and stated it had the intent and ability to hold the securities for recovery.
- Mortgage loans 90 days or more past due increased to $990 million from $128 million, although $856 million was related to government-guaranteed or partially guaranteed GNMA early buyouts accruing interest.
Guidance, outlook, commentary and unusual items
Management expects to continue expanding retail, flow-reinsurance and institutional channels, pursue acquisitions and block-reinsurance opportunities, develop new annuity products and use Apollo’s origination platform to source assets. It generally targets mid-teen returns for organic growth and mid-teen or higher returns for inorganic growth, although these are targets rather than guarantees.
Management expected higher interest rates in 2022 and stated that rising rates could improve new investment yields, floating-rate investment income, product attractiveness and sales. However, higher rates may reduce the fair value of existing investments and could increase policyholder withdrawals and liquidity demands.
The filing identifies substantial LIBOR exposure. Contracts tied to LIBOR totaled $77.1 billion, including $38.3 billion extending beyond June 30, 2023. Investment-related contracts represented $26.4 billion of the exposure extending beyond that date. Athene established a LIBOR transition plan and adhered to the ISDA fallback protocol, but stated that implementation and basis-mismatch risks remain.
Other unusual or material items include the $12.2 billion preliminary purchase price for the Apollo merger, the $750 million common-stock dividend declared on December 31, 2021 and paid on January 4, 2022, the $53 million COLI impairment, and a $63 million out-of-period tax adjustment recorded in the third quarter of 2021 to correct previously disclosed jurisdictional tax errors. Management concluded that the tax adjustment was not material to 2021 or prior periods.
Principal risks and contingencies
- Investment portfolio exposure to interest-rate, credit, liquidity, valuation, real-estate, structured-credit and concentration risks.
- Concentrated exposures to Wheels/Donlen, SoftBank, PK AirFinance, MidCap and Athora.
- Reliance on Apollo for investment management, asset sourcing, systems and operational support, including potential conflicts of interest and fee-related risks.
- Liquidity risk from policyholder withdrawals, collateral calls, repurchase agreements, funding maturities and $14.8 billion of investment commitments.
- Counterparty risk involving reinsurers, cedants, plan sponsors and derivative counterparties; reinsurance does not generally discharge Athene’s primary obligations to policyholders.
- Uncertainty related to COVID-19, inflation, market volatility, cybersecurity, outsourcing and changing insurance, capital, tax and privacy regulation.
- Administrative and policyholder-service issues involving the Aviva USA block and AllianceOne; related regulatory examinations and consent orders remain possible, although management does not expect current matters to be material.
- Ordinary-course litigation, principally involving the fixed indexed annuity business. Management stated that current proceedings are not expected to have a material effect, while acknowledging that litigation outcomes are inherently uncertain.
- Potential future tax exposure under BEAT, U.S. tax rules for foreign corporations, UK tax rules and changes to Bermuda tax law after the current exemption expires in 2035.
Facts an investor should verify
- Reconcile GAAP net income of $3.8 billion and common-shareholder income of $3.7 billion with adjusted operating income of $3.1 billion, including the treatment of investment gains, derivatives and reinsurance fair-value changes.
- Assess the sustainability of the 2021 earnings increase given the contribution from alternative investments, favorable equity-market performance and derivative gains.
- Review the quality, valuation methodology and concentration of the $212.5 billion investment portfolio, including Level 3 assets and Apollo-related investments.
- Evaluate liquidity against $207.0 billion of disclosed future cash obligations, collateral requirements and $14.8 billion of unfunded investment commitments.
- Monitor U.S. RBC, Bermuda BSCR, debt levels and dividend capacity after the Apollo merger and the $750 million common dividend.
- Review the final purchase accounting and strategic effects of the January 1, 2022 Apollo merger, including governance, related-party fees and investment-management termination rights.
- Track LIBOR remediation, replacement-rate implementation and potential basis mismatch across investments, funding agreements and hedging derivatives.
- Review the notes on reinsurance recoverables, counterparty collateral, policyholder-service remediation, COLI settlement terms and pending regulatory matters.