Athene Holding Ltd. 10-Q Summary — First Quarter 2021
Business context and reporting period
Athene is a Bermuda-based retirement-services company that issues, reinsures and acquires annuities, pension risk-transfer contracts and institutional funding products in the U.S. and internationally. This unaudited Form 10-Q covers the three months ended March 31, 2021, with comparisons to the three months ended March 31, 2020 and December 31, 2020 balance-sheet amounts.
The company operates primarily through its Retirement Services segment, with remaining corporate activities reported in Corporate and Other. On March 8, 2021, Athene entered into an all-stock merger agreement with Apollo Global Management. Closing was expected in January 2022, subject to shareholder, regulatory and other approvals.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenues | $4.391 billion | $(1.549) billion |
| Income before income taxes | $139 million | $(1.382) billion |
| Net income attributable to Athene shareholders | $614 million | $(1.047) billion |
| Net income available to common shareholders | $578 million | $(1.065) billion |
| Basic/diluted Class A EPS | $3.02/$2.94 | $(5.81)/$(5.81) |
| Adjusted operating income available to common shareholders | $748 million | $(108) million |
| Adjusted operating EPS | $3.80 | $(0.60) |
| GAAP ROE | 12.9% | (36.5)% |
| Adjusted operating ROE | 25.3% | (4.4)% |
Revenue included $3.011 billion of premiums, $1.704 billion of net investment income and $(488) million of investment-related gains and losses. Net investment income benefited from alternative-investment performance, portfolio growth and a favorable change in the value of Athene’s Apollo investment, partly offset by lower floating-rate income.
Retirement Services adjusted operating income increased to $784 million from $204 million. The segment’s net investment spread was 2.48%, compared with 1.03% in the prior-year quarter, while the investment margin on deferred annuities was 3.29%, compared with 2.13%.
Operating cash flow was $1.626 billion, compared with $771 million. Investing activities used $6.883 billion, primarily reflecting purchases of investments, while financing activities provided $3.788 billion. Cash, cash equivalents and restricted cash declined by $1.469 billion during the quarter to $6.973 billion.
At March 31, 2021, total assets were $205.670 billion, total liabilities were $187.334 billion and total equity was $18.336 billion. Total investments, including related parties, were $185.951 billion, and net invested assets were $155.703 billion.
Long-term debt was $1.977 billion. Outstanding funding agreements included $11.958 billion under the FABN program, $1.000 billion under the FABR program and $2.001 billion issued to the Federal Home Loan Bank. The $1.25 billion credit agreement and $1.0 billion committed repurchase facility were undrawn at quarter-end.
Management reported approximately $10.4 billion of available liquidity, consisting of $6.4 billion of cash and approximately $4.0 billion of undrawn committed financing capacity. Management also estimated approximately $8.1 billion of capital available for deployment, including excess capital, potential debt capacity and uncalled ACRA capital.
Material changes versus prior comparable periods
- Net income available to common shareholders improved by $1.643 billion, from a $1.065 billion loss to $578 million of income. The improvement primarily reflected lower investment-related losses, higher premiums and higher net investment income.
- Adjusted operating income increased by $856 million to $748 million, driven primarily by stronger Retirement Services earnings and improved alternative-investment performance.
- Gross organic inflows increased 107% to $8.175 billion. Pension risk-transfer inflows increased to $2.893 billion from $1.017 billion, and funding-agreement inflows increased to $3.226 billion from $823 million. Flow reinsurance inflows decreased to $299 million from $861 million.
- Net organic flows increased to $3.224 billion from $1.207 billion, and the net organic growth rate increased to 8.4% from 4.0%.
- Total investments, including related parties, increased by $3.530 billion from year-end 2020. Net invested assets increased by $5.513 billion, primarily from net inflows and reinvested earnings.
- Shareholders’ equity declined to $17.291 billion from $18.657 billion, and total equity declined to $18.336 billion from $20.140 billion, primarily because of $2.126 billion of other comprehensive loss, including unrealized losses on available-for-sale securities as interest rates rose.
- The company recorded a $537 million net loss attributable to noncontrolling interests, primarily associated with ACRA and unfavorable changes in reinsurance assets.
- AmeriHome was sold to Western Alliance Bancorporation on April 7, 2021. Athene recognized an estimated $174 million of related revenue in the first quarter and expected total revenue of approximately $184 million from the platform sale, net of carry and transaction expenses.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings guidance. Management expects continued growth in retail, flow-reinsurance, pension-risk-transfer and funding-agreement channels, while maintaining pricing and underwriting discipline in a low-rate, competitive market.
Management expects interest rates to remain a significant earnings driver. A sustained 25-basis-point decrease in interest rates was estimated to reduce adjusted operating income by approximately $35 million to $45 million over 12 months. Lower rates may reduce investment income and pressure spreads, although they may support annuity demand. Approximately 75% of deferred annuity liabilities were subject to surrender penalties, and most funding agreements, group annuities and payout annuities were non-surrenderable.
COVID-19 remained a material uncertainty affecting business continuity, policyholder behavior, credit losses, market valuations and liquidity. Management reported no material operational impairment and no material adverse change in policyholder behavior as of April 30, 2021, but noted that ultimate credit losses and market effects could be material.
LIBOR transition was a significant contingency. Athene reported $67.938 billion of contracts tied to LIBOR, including $29.164 billion extending beyond June 30, 2023. Failure to complete the transition or mismatches between replacement rates could adversely affect investments, hedging, earnings, cash flows and financial reporting.
Other material risks include interest-rate, credit, equity-market, foreign-currency and counterparty risk; exposure to alternative-investment valuation volatility; concentration in related-party investments and Apollo-managed assets; regulatory capital and dividend restrictions; litigation and regulatory matters; and dependence on Apollo under investment-management agreements.
The proposed Apollo merger could be delayed or not completed because of shareholder or regulatory approval requirements, closing conditions, litigation or other termination events. If completed, integration and coordination may be more difficult or costly than expected. If terminated, Athene could incur transaction costs, business disruption and adverse market or partner reactions.
Contingent investment commitments totaled $11.198 billion at March 31, 2021. The filing also disclosed $1.401 billion of undrawn letters of credit, a corporate-owned life insurance dispute involving guarantees valued at $196 million, and regulatory matters relating to policy administration and conversion issues. Management did not expect current legal or regulatory matters to materially affect financial condition, results or cash flows, but acknowledged that outcomes remain uncertain.
Important facts for investors to verify
- Confirm the status, approvals, timing and final terms of the proposed Apollo merger and assess related integration and termination risks.
- Reconcile GAAP earnings with adjusted operating income, particularly the effects of FIA derivatives, reinsurance-asset fair values, alternative investments and noncontrolling interests.
- Monitor interest rates, net investment spread, cost of funds, crediting-rate flexibility and the effect of prolonged low rates on earnings.
- Assess the quality and valuation sensitivity of the investment portfolio, including $92.429 billion of available-for-sale securities, mortgage loans, structured credit and alternative investments.
- Evaluate liquidity against policyholder withdrawals, funding-agreement maturities, collateral requirements and the company’s reliance on financing facilities and subsidiary dividends.
- Track credit-loss allowances, mortgage-loan delinquencies, unrealized losses and the potential effects of COVID-19 on asset values and policyholder behavior.
- Review LIBOR-transition plans for $29.164 billion of exposures extending beyond June 30, 2023 and the potential for basis mismatch in investments and hedges.
- Consider related-party exposure: investments in related parties totaled $28.383 billion, while Apollo and its affiliates managed substantially all of the investment portfolio.