Athene Holding Ltd. quarterly report, Q1 FY2022

Athene Holding Ltd. — Form 10-Q Summary

Business context and reporting period

Athene is a retirement-services company that issues, reinsures and acquires annuities and other retirement savings products in the United States and internationally. This unaudited report covers the quarter ended March 31, 2022. On January 1, 2022, Athene completed its merger with Apollo Global Management, Inc. and became a wholly owned subsidiary. The company applied pushdown accounting, so 2022 results are presented as “Successor” and 2021 results as “Predecessor”; management cautions that the periods are not fully comparable.

Financial performance and key metrics

Revenue: $(269) million, compared with $4.391 billion in the prior-year quarter. The decline primarily reflected $4.200 billion of investment-related losses.
Net income: Net loss was $2.366 billion, compared with net income of $77 million. Net loss available to Athene common shareholders was $1.518 billion, compared with income of $578 million.
Investment results: Net investment income was $1.683 billion, versus $1.669 billion. Investment-related losses included $3.041 billion of derivative losses, $796 million of mortgage-loan losses, $410 million of net realized AFS losses and $192 million of credit-loss provisions.
Non-GAAP profitability: Spread-related earnings were $670 million, down from $845 million. Net investment spread was 1.86%, versus 2.63%; net investment earned rate was 3.65%, versus 5.27%; and cost of funds was 1.82%, versus 2.66%.
Inflows and sales: Gross organic inflows increased 41% to $11.556 billion, led by retail inflows of $2.865 billion, flow reinsurance of $1.001 billion and funding agreements of $5.696 billion. Gross outflows were $4.883 billion, producing net flows of $6.673 billion.
Cash flow: Operating activities provided $155 million, compared with $1.626 billion. Investing activities used $6.165 billion, and financing activities provided $5.463 billion. Cash and cash equivalents, including restricted cash and VIE cash, ended at $9.878 billion, down $551 million during the quarter.
Assets and investments: Total assets were $246.134 billion. Total investments were $171.370 billion on the consolidated balance sheet; investments including related parties and consolidated VIEs were $214.420 billion. Net invested assets were $184.271 billion.
Capital and equity: Total equity was $13.692 billion, including $11.149 billion attributable to Athene shareholders. Shareholders’ equity declined from $20.130 billion at year-end, primarily due to the net loss, $7.004 billion of after-tax OCI losses and distributions to the parent.
Debt and liquidity: Long-term debt was $3.287 billion, versus $2.964 billion at year-end. Athene had an undrawn $1.25 billion credit agreement, $2.0 billion of committed repurchase facilities and approximately $7.3 billion of estimated capital available to deploy, subject to market and other conditions.
Investment portfolio quality: AFS securities, including related parties, had a fair value of $105.223 billion and gross unrealized losses of $7.031 billion. Approximately 95.0% carried NAIC designations 1 or 2.

Material changes versus the prior comparable period

Results shifted from positive GAAP earnings to a substantial loss because of rising Treasury rates, widening credit spreads, weaker equity markets and unfavorable derivative and reinsurance-asset valuations.
Other comprehensive loss was $5.385 billion, compared with $2.126 billion, primarily reflecting unrealized AFS investment losses. Accumulated other comprehensive loss was $4.674 billion at March 31, 2022.
The company elected the fair value option for its mortgage-loan portfolio beginning January 1, 2022. Mortgage loans increased to $23.696 billion on the consolidated balance sheet, and the fair value option generated a $916 million loss, including related parties and VIEs.
Athene reassessed its VIE conclusions after the Apollo merger and consolidated additional Apollo-managed funds and CLO-related entities. VIE assets and liabilities increased materially, including $13.568 billion of VIE investment funds and $5.905 billion of VIE debt.
The merger established $4.181 billion of goodwill and $4.547 billion of VOBA and eliminated predecessor DAC and DSI balances through pushdown accounting.
Gross organic inflows, retail sales and flow reinsurance increased substantially, while pension group annuity inflows declined to $1.994 billion from $2.893 billion.
Management fees paid to Apollo, including base and sub-allocation fees, increased to $186 million from $144 million. Total direct and indirect fees to Apollo and affiliates were $299 million, compared with $242 million.

Guidance, outlook, commentary and risks

Management expects to continue expanding retail, flow-reinsurance and institutional channels and believes higher interest rates may improve reinvestment opportunities, investment income, product attractiveness and sales. Higher rates also create greater unrealized losses on existing investments.
Management targets a long-term annual net investment spread of approximately 1%–2% over the 8.4-year weighted-average life of net reserve liabilities. The first-quarter spread of 1.86% remained within that stated range.
Management estimates approximately $3.3 billion of excess capital, $2.9 billion of potential untapped debt capacity and $1.1 billion of available undrawn ACRA capital, although debt capacity depends on market conditions and availability.
Market risks include interest rates, credit spreads, equity markets, foreign currency, counterparty performance and valuation uncertainty. A hypothetical immediate 25-basis-point rate increase was estimated to reduce pre-tax income by $992 million before offsets; a 10% public-equity decline was estimated to reduce pre-tax income by $399 million before offsets.
The company had $77.804 billion of contracts tied to LIBOR, including $46.816 billion extending beyond June 30, 2023. Transition execution, fallback provisions and potential basis mismatches remain material uncertainties.
Investment risks include $16.636 billion of commitments, concentrated and related-party investments, alternative investments, mortgage loans and significant Level 3 valuations. The company held $28.115 billion of related-party investments, or 11.3% of total assets.
Regulatory and legal risks include heightened scrutiny of private-equity-owned insurers, sales-conduct requirements, insurance regulation, litigation and possible additional examinations concerning administration of legacy life and annuity blocks. Global Atlantic is responsible for indemnification of certain regulatory fines and remediation costs under applicable reinsurance agreements.
On April 1, 2022, after quarter-end, Athene contributed alternative investments to Apollo Aligned Alternatives and entered into a revolving facility that may fund the vehicle at a fixed 8% interest rate through 2032.

Facts investors should verify

Reconcile GAAP net loss of $1.518 billion attributable to common shareholders with spread-related earnings of $670 million and assess the recurring versus market-sensitive components.
Review the effect of pushdown accounting, goodwill, VOBA, fair-value mortgage accounting and additional VIE consolidation on period-to-period comparability.
Monitor unrealized AFS losses, credit-loss allowances, mortgage-loan performance and the effect of further rate or credit-spread movements on capital and liquidity.
Evaluate exposure to Apollo-managed and other related-party investments, management fees, conflicts-of-interest controls and the $2.875 billion Strategic Partnership commitment.
Verify statutory capital, RBC and Bermuda BSCR metrics for March 31, 2022; the filing provides the latest detailed ratios as of December 31, 2021 rather than March 31, 2022.
Track LIBOR transition progress, the $16.636 billion of investment commitments, funding-agreement maturities and the company’s ability to access subsidiary dividends, debt capacity and ACRA capital.