Athene Holding Ltd. 2021 Q2 Form 10-Q Summary
Business context and reporting period
Athene is a Bermuda-based retirement services company that issues, reinsures and acquires retirement savings products, including fixed and fixed-indexed annuities, pension risk transfer contracts and institutional funding agreements. The unaudited report covers the three and six months ended June 30, 2021, with comparisons to the corresponding 2020 periods.
Athene operates primarily through its Retirement Services segment, with remaining activities reported in Corporate and Other. The company entered into an all-stock merger agreement with Apollo Global Management, Inc. in March 2021. Closing was expected in January 2022, subject to shareholder, regulatory and other customary approvals.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenues | $6.423 billion | $4.398 billion | $10.814 billion | $2.849 billion |
| Net income | $1.806 billion | $931 million | $1.883 billion | $(285) million |
| Net income available to common shareholders | $1.382 billion | $824 million | $1.960 billion | $(241) million |
| Diluted Class A EPS | $6.97 | $4.19 | $9.92 | $(0.64) |
| ROE | 29.6% | 26.8% | 21.0% | (3.4)% |
| Adjusted operating income available to common shareholders | $1.000 billion | $490 million | $1.748 billion | $382 million |
| Adjusted operating ROE | 30.8% | 19.4% | 28.2% | 7.8% |
| Net cash provided by operating activities | — | — | $2.498 billion | $1.402 billion |
Q2 revenue growth reflected higher premiums, net investment income and investment-related gains. Six-month revenue growth was especially affected by the unfavorable investment-related results recorded during the 2020 COVID-19 market downturn.
At June 30, 2021, total assets were $215.5 billion, compared with $202.8 billion at December 31, 2020. Total investments, including related parties, were $194.5 billion, up from $182.4 billion. Shareholders’ equity was $20.0 billion and total equity was $21.7 billion. Book value per common share was $92.33 and adjusted book value per common share was $67.46.
Long-term debt was $2.468 billion, up from $1.976 billion at year-end 2020, primarily reflecting the May 2021 issuance of $500 million of 3.950% senior notes due 2051. Cash and cash equivalents were $8.057 billion, or $8.726 billion including restricted cash. The company also had an undrawn $1.25 billion credit agreement and more than $1.0 billion of committed repurchase facilities.
Operating trends and material changes
- Six-month net income available to common shareholders improved by $2.201 billion from a $241 million loss to $1.960 billion of income.
- Six-month investment-related gains changed from a $1.024 billion loss in 2020 to a $2.122 billion gain in 2021, primarily due to favorable FIA hedging derivative performance, lower credit-loss provisions and stronger equity and alternative investment results.
- Net investment income increased to $3.742 billion from $2.081 billion, driven by portfolio growth, alternative investment performance, the Jackson reinsurance transaction, loan redemptions, bond call income and mortgage prepayments. These benefits were partly offset by lower new-money rates and floating-rate investment income.
- Six-month gross organic inflows increased 45% to $15.751 billion. Pension risk transfer inflows increased to $4.367 billion from $1.246 billion, while funding agreement inflows increased to $7.300 billion from $3.459 billion. Flow reinsurance inflows declined to $578 million from $3.126 billion due to pricing discipline in a competitive, low-rate market.
- Six-month liability outflows increased to $7.422 billion from $6.022 billion, primarily due to five-year multi-year guaranteed annuity contracts issued in 2016 reaching the end of surrender-charge periods.
- Net investment spread for Retirement Services increased to 2.18% for the six months from 1.00%. The investment margin on deferred annuities increased to 2.85% from 1.81%.
- Adjusted operating income for Retirement Services increased to $1.418 billion from $412 million for the six months. Corporate and Other adjusted operating income increased to $330 million from a $30 million loss.
- The company sold its investment in AmeriHome through A-A Mortgage in April 2021 and recognized $182 million of revenue for the six months, including a $174 million amount recognized in the first quarter.
Liquidity, capital and investment portfolio
Operating cash flow was $2.498 billion, while investing activities used $11.272 billion, mainly because investment purchases exceeded sales, maturities and repayments. Financing activities provided $9.058 billion, primarily from deposits on investment-type policies and contracts, debt proceeds, cash collateral and noncontrolling-interest contributions. Cash and restricted cash increased by $284 million during the six months.
Management estimated approximately $8.3 billion of capital available for deployment at June 30, 2021, consisting of approximately $4.0 billion of excess capital, $2.8 billion of potential debt capacity and $1.5 billion of uncalled ACRA capital, subject to market conditions and availability.
The investment portfolio was predominantly fixed income. Approximately 93.5% of available-for-sale securities, including related parties, had NAIC designations of 1 or 2. The company had $31.9 billion of floating-rate investments, representing approximately 20% of net invested assets, and $7.8 billion of net alternative investments.
Guidance, outlook, commentary and risks
- Management expects to continue expanding retail, flow reinsurance and institutional channels, while maintaining pricing discipline and targeting attractive underwritten returns.
- Management expects the institutional business to benefit from continued pension risk transfer activity and recurring funding agreement issuance. No formal earnings guidance was provided.
- Management described interest rates and credit spreads as historically low and warned that prolonged low rates could reduce investment income and net investment spread, particularly where policyholder minimum guarantees limit reductions in credited rates.
- The company expects COVID-19 and the Delta variant could adversely affect markets, economic growth, asset valuations and policyholder behavior.
- LIBOR transition remains a material uncertainty. Contracts tied to LIBOR had aggregate notional exposure of $69.638 billion, including $29.629 billion extending beyond June 30, 2023. Failure to complete the transition could create valuation, basis and operational risks.
- The proposed Apollo merger could be delayed, terminated or subject to unexpected regulatory conditions. Termination could result in transaction costs, market pressure and disruption to operations. Under specified circumstances, Apollo could owe Athene an $81.9 million termination fee.
- Key risks include credit and counterparty losses, interest-rate and equity-market volatility, insurer capital requirements, investment valuation uncertainty, dependence on Apollo for asset management, regulatory scrutiny, litigation, tax-law changes and restrictions on subsidiary dividends.
- The company had $11.449 billion of investment commitments, $1.397 billion of undrawn letters of credit and $16.069 billion of FABN funding agreements outstanding at June 30, 2021.
- Regulatory matters related to administration of legacy life and annuity business remain possible. Existing fines and remediation costs under certain consent orders are subject to indemnification by Global Atlantic or its affiliates, but future examinations or penalties could be material.
Important facts for investors to verify
- Confirm the final status, timing, regulatory approvals and economic terms of the Apollo merger.
- Separate recurring adjusted operating earnings from market-sensitive GAAP earnings, particularly FIA derivative results, alternative investment gains and reinsurance asset fair-value changes.
- Assess sustainability of the 2.18% Retirement Services net investment spread as rates remain low and credit spreads are tight.
- Review asset quality, concentration and valuation risk in corporate securities, CLOs, mortgage loans, related-party investments and Level 3 assets.
- Monitor policyholder withdrawals, funding agreement maturities and the increase in liability outflows.
- Evaluate liquidity after considering restricted assets, collateral requirements, investment commitments and the availability of subsidiary dividends.
- Track LIBOR remediation for the $29.629 billion of contracts extending beyond June 30, 2023.
- Review the effect of ACRA noncontrolling interests on earnings, capital deployment and economic ownership.
- Consider the sensitivity to an immediate 25-basis-point rate increase, which management estimated would reduce point-in-time pre-tax income by $603 million, partly offset by a $36 million increase from DAC, DSI and VOBA amortization and rider reserves.