Athene Holding Ltd. 2018 Q2 Form 10-Q Summary
Business context and reporting period
Athene is a Bermuda-based retirement services company that issues, reinsures and acquires fixed annuities, fixed indexed annuities, funding agreements, pension risk transfer obligations and other retirement products. The unaudited Form 10-Q covers the three and six months ended June 30, 2018, with comparisons to the same periods in 2017 and to December 31, 2017 for balance-sheet data.
Athene operates primarily through its U.S. insurance subsidiaries and Bermuda reinsurer Athene Life Re Ltd. Its reportable segment is Retirement Services, with remaining corporate activities reported in Corporate and Other.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenues | $1.797 billion, versus $1.763 billion | $2.808 billion, versus $3.382 billion |
| Income before taxes | $330 million, versus $337 million | $657 million, versus $743 million |
| Net income | $264 million, versus $326 million | $532 million, versus $710 million |
| Basic EPS | $1.34, versus $1.66 | $2.70, versus $3.66 |
| Adjusted operating income | $290 million, versus $280 million | $527 million, versus $546 million |
| Operating cash flow | Not separately provided for the quarter | $519 million, versus $1.073 billion |
| Investment margin on deferred annuities | 2.82%, versus 2.96% | 2.79%, versus 2.90% |
GAAP net income declined 19% in the quarter and 25% year to date. The six-month decline primarily reflected unfavorable investment-related and reinsurance embedded-derivative results, together with higher income taxes. Adjusted operating income increased 4% in the quarter but declined 3% year to date.
- Net investment income increased to $958 million in the quarter and $1.813 billion year to date, compared with $821 million and $1.607 billion, respectively.
- Investment-related gains and losses were a $2 million loss in the quarter and a $238 million loss year to date, compared with gains of $460 million and $1.142 billion in the prior-year periods.
- Effective tax rates were 20% for the quarter and 19% year to date, compared with 3% and 4% in the prior-year periods.
- Annualized consolidated ROE was 12.3% for the quarter and 12.4% year to date. Annualized adjusted operating ROE was 14.2% and 12.9%, respectively.
Balance sheet, debt and liquidity
- Total assets were $114.755 billion at June 30, 2018, up from $99.747 billion at December 31, 2017. Shareholders’ equity was $8.505 billion, down from $9.208 billion, primarily reflecting a $1.247 billion after-tax other comprehensive loss.
- Total investments, including related-party investments, were $98.669 billion, compared with $84.367 billion at year-end. Invested assets were $98.609 billion, compared with $82.298 billion.
- Cash and cash equivalents were $3.608 billion, with total cash including restricted cash and consolidated VIE cash of $3.788 billion at June 30, 2018.
- Debt consisted of $991 million of long-term debt and $183 million of short-term debt. Athene issued $1.0 billion of unsecured senior notes due January 2028 with a 4.125% coupon and borrowed $183 million from the Federal Home Loan Bank at a 2.16% variable rate, maturing August 24, 2018.
- Athene reported approximately $2.0 billion of excess capital and stated that its capital ratios remained strong. The filing provides year-end 2017 U.S. RBC and Bermuda solvency ratios, but does not provide a new June 30, 2018 U.S. RBC ratio in the excerpted financial discussion.
- Athene had an undrawn $1.0 billion revolving credit facility, access to Federal Home Loan Bank borrowing and $51.7 billion of assets considered liquid for liquidity-monitoring purposes.
- Operating cash flow fell to $519 million from $1.073 billion. Investing activities used $3.904 billion, while financing activities provided $2.176 billion, resulting in a $1.209 billion decrease in cash and cash equivalents.
Material changes versus the prior comparable period
- On June 1, 2018, Athene completed the Voya reinsurance transactions, assuming approximately $19.1 billion of liabilities and receiving approximately $18.255 billion of assets. The transactions increased invested assets by approximately $17.7 billion and materially increased premiums, policy liabilities, investment income and cost of crediting.
- The Voya transactions generated a $1.174 billion net cost of reinsurance, recorded through deferred acquisition costs, unearned revenue reserves and deferred profit liabilities rather than as an immediate full-period expense.
- On January 1, 2018, Athene deconsolidated Athora, formerly AGER Bermuda Holding Ltd. and its subsidiaries. The deconsolidation reduced total assets by approximately $6.3 billion and invested assets by approximately $6.0 billion and reduced comparability with 2017.
- Retail fixed annuity sales increased to $3.4 billion from $2.7 billion year to date. Organic deposits were $4.7 billion, while liability outflows were $3.6 billion. Inorganic deposits from the Voya transaction were $19.1 billion.
- Accumulated other comprehensive income fell to $126 million from $1.415 billion, primarily due to declines in unrealized available-for-sale investment gains as Treasury rates increased and credit spreads widened.
- Mortgage loans increased to $7.609 billion from $6.233 billion. The portfolio included $35 million of nonperforming residential mortgage loans; no commercial mortgage loans were 30 days or more past due.
Guidance, outlook, commentary and risks
Management expects to continue expanding retail, flow reinsurance and institutional distribution channels while pursuing opportunistic acquisitions and block reinsurance. Management cited the rising-rate environment, new bank partners, product introductions and an improving credit profile as factors supporting retail and flow-reinsurance growth. No formal GAAP earnings guidance was provided.
- Management expects an average overall tax rate of approximately 14% to 15% absent further mitigation of the Base Erosion and Anti-Abuse Tax, compared with an estimated approximately 11% if mitigation efforts are successful. Actual results may vary materially.
- Management expects higher interest rates and credit spreads to improve yields on new investments, but higher rates can reduce the fair value of existing investments and increase volatility in reported earnings.
- As of June 30, 2018, approximately 94% of available-for-sale fixed-maturity securities were investment grade under NAIC designations 1 or 2. Gross unrealized losses were $1.024 billion, compared with $246 million at year-end, primarily due to rate increases and wider credit spreads.
- Key risks include interest-rate, credit, equity-market, liquidity, counterparty, foreign-currency and policyholder-behavior risk; volatility in FIA hedging and reinsurance embedded derivatives; dependence on Apollo-affiliated investment management; regulatory and capital requirements; tax-law uncertainty; and competition in annuity markets.
- The IRS was auditing certain Athene and legacy Aviva USA tax returns. The filing also describes regulatory inquiries related to policy administration and conversion issues, a putative class-action settlement involving structured settlement annuities, and litigation brought by Caldera seeking alleged damages of no less than $1.5 billion. The filing states that losses in the Caldera matter cannot currently be estimated.
- Athene disclosed sensitivity to a parallel 25-basis-point increase in interest rates: an estimated $196 million decrease in pre-tax consolidated income at June 30, 2018. This is a modeled point-in-time estimate and may differ materially from actual results.
Most important facts for an investor to verify
- Verify the ultimate profitability, integration and capital impact of the $19.1 billion Voya reinsurance transaction.
- Assess whether recurring adjusted operating income and investment margin can offset higher cost of crediting, liability costs and tax expense.
- Monitor the application of BEAT and other Tax Act provisions, including the success and potential adverse consequences of mitigation actions.
- Review the quality, valuation and liquidity of the investment portfolio, particularly unrealized losses, structured securities, RMBS, mortgage loans and related-party investments.
- Confirm current statutory RBC, Bermuda solvency and rating-agency capital measures, since the filing’s discussion includes some year-end 2017 ratios rather than complete June 30, 2018 figures.
- Track developments in the Caldera litigation, IRS examinations, policy-administration regulatory matters and other contingencies.
- Reconcile GAAP net income with adjusted operating income because market-sensitive derivative and reinsurance valuations materially affected reported earnings.