Athene Holding Ltd. 2017 Form 10-K Summary
Business context and reporting period
Athene Holding Ltd. is a Bermuda-domiciled retirement services company that issues, reinsures and acquires fixed annuities, pension risk transfer products and funding agreements. Its core operations are reported in the Retirement Services segment, with Corporate and Other containing corporate activities and, through 2017, the German operations. This Form 10-K covers the fiscal year ended December 31, 2017, and was filed February 26, 2018. The filing is an annual report, not a quarterly filing, although fourth-quarter data is included in the unaudited quarterly results.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenues | $8.727 billion | $4.105 billion | +112% |
| Income before income taxes | $1.535 billion | $716 million | +114% |
| Net income available to AHL shareholders | $1.448 billion | $768 million | +89% |
| Adjusted operating income | $1.109 billion | $728 million | +52% |
| Basic EPS | $7.41 | $4.11 | +80% |
| ROE | 18.0% | 12.6% | +5.4 points |
| Adjusted operating ROE excluding AOCI | 15.5% | 12.1% | +3.4 points |
| Net investment income | $3.269 billion | $2.914 billion | +12% |
| Net cash provided by operating activities | $3.170 billion | $1.199 billion | +164% |
| Total assets | $99.747 billion | $86.699 billion | +15% |
| AHL shareholders’ equity | $9.208 billion | $6.858 billion | +34% |
Reported net margin was approximately 16.6%, compared with approximately 18.7% in 2016. The decline reflects the significant increase in premiums and policyholder-related benefits associated with the new pension risk transfer business and substantial market-driven revenue and expense items.
- Total premiums and deposits, net of ceded business, were $12.011 billion, up from $9.258 billion. Fixed indexed annuity deposits were $5.480 billion, funding agreement deposits were $3.054 billion and pension risk transfer premiums were $2.188 billion.
- Reserve liabilities increased to $81.183 billion from $70.974 billion. Fixed indexed annuities represented 59.7% of reserve liabilities, while total annuity products represented 85.4%.
- The deferred-annuity investment margin increased to 2.82% from 2.76%, as cost of crediting fell to 1.88% from 1.96%, partly offsetting a slight decline in the net investment earned rate to 4.70% from 4.72%.
- Total invested assets rose to $82.298 billion from $71.834 billion. Approximately 93.7% of fixed-maturity securities, including related parties, were investment grade under NAIC designations 1 or 2.
- Cash provided by financing activities was $5.048 billion, primarily reflecting $9.056 billion of deposits on investment-type policies and contracts, partly offset by $4.843 billion of withdrawals.
- Investing activities used $5.817 billion, principally because investment purchases exceeded sales, maturities and repayments.
- Gross debt was not outstanding under the $1.0 billion revolving credit facility at December 31, 2017, and the company was in compliance with its covenants. In January 2018, Athene issued $1.0 billion of 4.125% senior notes due 2028.
- Cash and cash equivalents were $4.888 billion, with approximately $51.7 billion of assets viewed as liquid for liquidity monitoring purposes. The company reported more than $1.5 billion of excess capital available for growth.
Material changes versus the prior comparable period
- 2017 results benefited materially from entering the pension risk transfer market. The company closed four transactions and recorded approximately $2.3 billion of PRT premiums, driving much of the increase in premiums, future policy benefits and operating cash flow.
- Funding agreements became a significant source of growth, with $3.0 billion of aggregate deposits through the FABN and FHLB channels, compared with none in 2016.
- Flow reinsurance deposits declined to $875 million from $3.5 billion, reflecting lower MYGA volumes, tighter investment spreads, strong equity markets and expectations of higher interest rates.
- Net investment earnings increased, supported by a larger asset base, higher short-term interest rates and stronger alternative investment income. The consolidated net investment earned rate rose to 4.47% from 4.35%.
- Investment-related gains increased to $2.572 billion from $652 million, and derivative gains were strongly affected by the 19.4% rise in the S&P 500. These market-sensitive items are not necessarily indicative of recurring earnings.
- AHL shareholders’ equity increased partly because other comprehensive income rose to $1.415 billion from $367 million, primarily reflecting unrealized investment gains.
- AGER, formerly the parent of the German operations, was deconsolidated effective January 1, 2018. Athene retained 10% of AGER’s voting power and less than 50% of its economic interest; future results will reflect an investment rather than consolidated German operations.
Guidance, outlook, commentary and unusual items
- Management expects to expand retail, flow reinsurance, institutional and acquisition/block-reinsurance channels, while maintaining pricing discipline and targeting generally mid-teen returns for organic and inorganic growth.
- In December 2017, Athene agreed to reinsure approximately $19 billion of Voya fixed annuities and committed a $75 million minority equity investment plus $150 million of financing to Venerable. Closing was expected in the second or third quarter of 2018, subject to regulatory approval and other conditions.
- Management expected an overall tax rate of approximately 14%–15% in 2018 and 12%–16% on average beginning in 2019, largely because of uncertainty surrounding the Base Erosion and Anti-Abuse Tax and affiliated modco reinsurance arrangements. These estimates were subject to change.
- The Tax Act reduced the U.S. corporate tax rate to 21% and produced a $7 million reduction in deferred tax liabilities in 2017, but management warned that BEAT could increase future taxes and that tax-related mitigation actions could be ineffective or counterproductive.
- The company recorded $33 million of net other-than-temporary impairment losses in 2017 and recognized $68 million of integration, restructuring and other non-operating expenses and $45 million of stock-based compensation expense.
- Fourth-quarter 2017 net income available to AHL shareholders was $464 million, compared with $364 million in fourth-quarter 2016. The filing also disclosed out-of-period adjustments that increased 2017 net income by $16 million in both the second and third quarters and $21 million in the fourth quarter; management concluded these were not material.
- Management identified increased policyholder-service and administration complaints related to the conversion and administration of certain Aviva USA blocks. NYSDFS and other regulators were reviewing the matter, and potential fines, penalties or policyholder payments could be material, although no amount could be reasonably estimated.
Principal risks and contingencies
- Profitability depends on assumptions regarding interest rates, investment returns, mortality, persistency, withdrawals and utilization of GLWB and GMDB riders. Adverse experience could increase reserves, accelerate DAC or VOBA amortization and reduce capital.
- The investment portfolio has exposure to illiquid and complex assets, including structured securities, mortgage loans, alternative investments, CLOs and real-estate-related assets. Fair-value estimates and market liquidity may be volatile.
- Interest-rate movements may compress investment spreads, increase withdrawals, create asset-liability mismatches or require sales of investments at unfavorable prices. Approximately 28% of invested assets were floating rate investments.
- Reinsurance creates counterparty exposure, particularly to Global Atlantic and Protective. Athene remains legally responsible for policyholder obligations if reinsurers fail to perform, subject to collateral and other protections.
- Tax uncertainty includes BEAT, potential U.S. federal taxation of AHL or ALRe, CFC/RPII rules, FATCA and possible changes to Bermuda tax treatment.
- Regulatory and litigation risks include the Global Atlantic/third-party administrator policy-conversion matter, unclaimed-property and market-conduct reviews, fiduciary-rule developments, cybersecurity requirements and potential changes to insurance capital rules.
- AHL depends on regulated subsidiaries for cash. Dividends are restricted by insurance regulations, the company does not currently pay common dividends, and AHL does not currently plan for U.S. subsidiaries to remit dividends.
- Apollo and AAM have significant influence over Athene. Apollo controlled approximately 45% of total voting power, and AAM and Apollo affiliates managed or sub-advised substantially all of the investment portfolio, creating related-party and investment-allocation conflicts.
Important facts for investors to verify
- Whether the Voya/Venerable transaction closed as expected, its final capital deployment and subsequent earnings impact.
- The final interpretation and financial effect of BEAT on Athene’s affiliated reinsurance arrangements, including the actual 2018 and later effective tax rates.
- Resolution of the NYSDFS and related regulatory matters concerning policy administration and conversion of Aviva USA blocks, including any fines, penalties or policyholder remediation.
- Actual performance, credit losses and liquidity of the structured, mortgage-related, CLO and alternative investment portfolios, including MidCap and A-A Mortgage exposures.
- Changes in U.S. RBC, Bermuda BSCR and rating-agency capital ratios after tax reform, growth transactions and any subsequent regulatory changes.
- Persistency, withdrawals, rider utilization and reserve adequacy for the large fixed indexed annuity portfolio.
- Progress on AGER deconsolidation and the economic value of Athene’s continuing investment and cooperation rights.
- Any change in ratings, Apollo/AAM investment-management arrangements, dividend capacity or access to holding-company liquidity.