Athene Holding Ltd. annual report, FY2019

Athene Holding Ltd. 2019 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2019; filed February 20, 2020. The filing is an annual report, not a standalone quarterly filing. Athene is a Bermuda-based retirement services company operating primarily through its Retirement Services segment, issuing, reinsuring and acquiring annuities, funding agreements and pension risk-transfer obligations. Apollo manages substantially all of Athene’s investment portfolio.

Financial performance and key metrics

Metric	2019	2018	Change
Total revenues	$16.258 billion	$6.637 billion	+145%
Income before taxes	$2.302 billion	$1.175 billion	+96%
Net income	$2.185 billion	$1.053 billion	+107%
Net income available to common shareholders	$2.136 billion	$1.053 billion	+103%
Adjusted operating income	$1.289 billion	$1.140 billion	+13%
GAAP ROE	19.7%	12.1%	+7.6 points
Adjusted operating ROE	14.1%	13.9%	+0.2 points
Net investment income	$4.522 billion	$4.004 billion	+13%
Operating cash flow	$2.656 billion	$2.874 billion	-8%
Total assets	$146.875 billion	$125.505 billion	+17%

2019 revenue and GAAP earnings benefited substantially from market-driven investment gains, including favorable changes in FIA hedging derivatives, reinsurance embedded derivatives and trading securities. Investment-related gains were $4.752 billion in 2019 versus a $1.324 billion loss in 2018. The S&P 500 increased 28.9% in 2019 compared with a 6.2% decline in 2018.

Adjusted operating income increased more moderately because it excludes specified market-related gains and losses. Retirement Services generated $1.322 billion of adjusted operating income, up from $1.201 billion, while adjusted operating ROE declined to 17.3% from 18.4%.

Balance sheet, liquidity and capital

• Net invested assets increased to $117.486 billion from $111.034 billion. Total investments, including related parties, increased to $129.845 billion from $107.632 billion.
• Reserve liabilities were $114.652 billion, including $73.346 billion of fixed indexed annuity reserves, $19.481 billion of fixed-rate annuity reserves and $8.230 billion of PRT reserves.
• Liquid assets used for liquidity monitoring were $77.1 billion. Cash and cash equivalents plus restricted cash were approximately $4.6 billion at year-end.
• Debt consisted of $992 million of long-term debt and $475 million of short-term FHLB borrowings. The $1.25 billion revolving credit facility was undrawn at year-end.
• Debt-to-capital was 9.9%; adjusted debt-to-capital was 12.1%. Management estimated more than $6.7 billion of deployable capital, comprising approximately $2.0 billion of excess equity capital, $2.1 billion of untapped debt capacity and $2.6 billion of uncalled ACRA commitments.
• AADE’s company-action-level RBC ratio was 429%, compared with 421% in 2018. ALRe’s BSCR ratio was 310%, compared with 340% in 2018.
• Athene issued $1.172 billion of preferred stock in 2019 and paid $36 million of preferred dividends. It repurchased 19.9 million Class A shares for $827 million, with $640 million of authorization remaining at year-end.

Business activity and material changes

• Net premiums and deposits were $17.963 billion, down from $40.125 billion in 2018, primarily because 2018 included $26.982 billion of inorganic deposits from major block reinsurance transactions.
• Organic deposits increased to $18.075 billion from $13.196 billion. Flow reinsurance deposits rose to $3.950 billion from $2.423 billion, and PRT deposits rose to $6.042 billion from $2.581 billion.
• Retail fixed annuity sales declined to $6.782 billion from $7.542 billion, reflecting lower interest rates and weakness in the broader annuity market.
• Athene closed five PRT transactions, including its first UK PRT arrangement, reinsuring approximately $818 million of obligations. The Bristol-Myers Squibb transaction covered approximately $2.6 billion of pension obligations.
• Reserve liabilities increased 6% to $114.652 billion. PRT reserves increased 75% to $8.230 billion, while fixed indexed annuity reserves were broadly stable.
• ACRA became a partially third-party funded capital vehicle. ADIP acquired 67% of ACRA’s economic interests for $575 million, and $2.6 billion of ADIP commitments remained uncalled at year-end. ACRA had retroceded approximately $9.8 billion of reserve liabilities by December 31, 2019.
• Athene entered into an agreement with Apollo that was expected to close in the first quarter of 2020, subject to approvals. The transaction contemplated issuing new Athene shares to Apollo for approximately $1.2 billion of AOG units and $350 million of cash, eliminating the multi-class common share structure and potentially increasing Apollo’s economic ownership to approximately 35%.
• Athene launched the Amplify registered index-linked annuity product and acquired or invested in additional asset-originating platforms, including PK AirFinance.

Margins, investments and unusual items

• Retirement Services net investment spread declined to 1.50% from 1.70%, as the net investment earned rate fell to 4.43% from 4.60% and cost of funds increased to 2.93% from 2.90%.
• Investment margin on deferred annuities declined to 2.46% from 2.65%; cost of crediting increased to 1.97% from 1.95%.
• Approximately 94.4% of AFS securities, including related parties, had NAIC designations of 1 or 2. However, NRSRO ratings classified 10.4% as below investment grade, reflecting methodology differences, particularly for RMBS.
• Net other-than-temporary impairment losses were $38 million, compared with $18 million in 2018. Gross unrealized losses on AFS securities decreased to $469 million from $1.797 billion.
• Investment portfolio exposure remained significant in CLOs, real estate-related assets and alternative investments. Net invested assets included $10.223 billion of CLOs, $29.852 billion of real estate-related assets and $5.586 billion of alternative investments.
• Management identified substantial accounting sensitivity to interest rates, equity markets, policyholder lapses, rider utilization, mortality, investment yields and fair-value assumptions. FIA embedded derivative liabilities totaled $10.942 billion at year-end.
• The 2019 GAAP results include significant market-related volatility and should not be interpreted as equivalent to recurring operating earnings. Management’s non-GAAP measures exclude selected investment, derivative, integration, restructuring and stock-compensation effects.

Guidance, outlook and management commentary

Management did not provide formal numerical earnings guidance in the filing. It expects to continue expanding retail, flow reinsurance, institutional and inorganic channels while maintaining pricing discipline and targeting generally mid-teen returns on capital. Management expects demographic demand for retirement products and the Apollo relationship to support growth, but noted that low interest rates may reduce product competitiveness, investment yields and net investment spreads.

Athene expects to manage capital to support current ratings and withstand recessionary conditions. It expects ACRA to provide additional capacity for acquisitions, PRT transactions and flow reinsurance. The company also expects the Apollo Share Exchange to close in the first quarter of 2020, subject to regulatory and other conditions.

Principal risks and contingencies

• Interest-rate, equity-market, credit-spread and foreign-currency volatility can affect investment values, hedging costs, policyholder behavior, reserves, liquidity and capital.
• Low rates may compress investment spreads, while rapidly rising rates may increase surrenders and force asset sales at unfavorable prices.
• Policyholder behavior, including lapses, withdrawals and GLWB utilization, may differ materially from assumptions used in pricing and reserve models.
• The investment portfolio includes relatively illiquid assets, structured securities, CLOs, mortgage loans, real estate-related assets and alternative investments, creating valuation and liquidity risks.
• Athene is exposed to reinsurer, ceding-company and derivative-counterparty credit risk. Reinsurance does not generally discharge primary obligations to policyholders if counterparties fail.
• LIBOR transition remains a material uncertainty. The company identified approximately $25 billion of non-product-liability notional exposure tied to LIBOR, including approximately $20 billion expected to extend beyond 2021, plus $6.9 billion of product liabilities linked to excess-return indices.
• Regulatory matters include NYSDFS concerns regarding PRT licensing practices, market-conduct and administration matters related to the Aviva/Global Atlantic block, and other regulatory inquiries. Management generally does not expect material effects, but acknowledges outcomes could differ.
• Pending litigation includes the COLI matter, Caldera-related litigation and other ordinary-course claims. The filing states that reasonably possible losses in the Caldera matter cannot currently be estimated.
• The company relies heavily on Apollo for investment management and faces related-party conflicts, fee and allocation risks, and limited ability to terminate investment management agreements.
• Future accounting changes, including the 2020 current expected credit loss adoption and the 2022 long-duration insurance accounting standard, may materially affect equity, earnings volatility and disclosures. The 2020 credit-loss adoption was expected to reduce retained earnings by approximately $216 million before offsets.

Important facts for investors to verify

• Separate recurring adjusted operating income from market-sensitive GAAP earnings, particularly the $4.752 billion of 2019 investment-related gains.
• Assess whether the 1.50% net investment spread and 14.1% adjusted operating ROE can be sustained as asset yields decline and liabilities grow.
• Review the composition, valuation and stress sensitivity of CLOs, RMBS, mortgage loans, real estate-related assets, alternative investments and Level 3 assets.
• Monitor capital ratios, dividend capacity, collateral requirements, liquidity under stress and the repayment of the $475 million FHLB borrowing.
• Confirm the closing and final economics of the Apollo Share Exchange, including ownership, governance, voting rights and the effect on the multi-class share structure.
• Track LIBOR transition milestones, fallback provisions and potential basis risk in funding agreements, investments and hedges.
• Review the assumptions and sensitivities for FIA embedded derivatives, GLWB and GMDB reserves, DAC/DSI/VOBA and policyholder lapse behavior.
• Evaluate related-party exposure and fees to Apollo, including 2019 management fees of $426 million and investments involving MidCap, AmeriHome, Venerable and other Apollo-affiliated entities.