Athene Holding Ltd. quarterly report, Q3 FY2019

Athene Holding Ltd. 2019 Q3 Form 10-Q Summary

Business context and reporting period

Athene Holding Ltd. is a Bermuda-based retirement services company that issues, reinsures and acquires U.S. retirement savings products, including fixed indexed annuities, fixed-rate annuities, pension risk-transfer contracts and funding agreements. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019, with comparisons to the corresponding 2018 periods.

The company operates primarily through its Retirement Services segment and reports Corporate and Other activities separately. Substantially all invested assets are managed by Apollo under investment management agreements.

Financial performance and key metrics

Metric	Q3 2019	Q3 2018	9M 2019	9M 2018
Total revenues	$4.501 billion	$2.576 billion	$12.831 billion	$5.389 billion
Benefits and expenses	$4.222 billion	$1.897 billion	$11.062 billion	$4.067 billion
Net income	$293 million	$623 million	$1.721 billion	$1.157 billion
Net income available to common shareholders	$276 million	$623 million	$1.704 billion	$1.157 billion
Basic EPS	$1.50	$3.16	$8.97	$5.86
Adjusted operating income available to common shareholders	$243 million	$371 million	$900 million	$900 million

Q3 net income available to common shareholders declined 56% year over year, primarily because benefits and expenses rose faster than revenues and because 2019 included preferred stock dividends.
Nine-month net income available to common shareholders increased 47%, driven by higher premiums, investment-related gains, net investment income and deposits.
Reported nine-month ROE was 20.8%, compared with 17.0% in the prior-year period. Adjusted operating ROE was 13.3%, compared with 14.5%.
Net investment income increased to $3.297 billion for the nine months from $2.883 billion. Investment-related gains increased to $3.776 billion from $578 million, substantially reflecting favorable changes in reinsurance asset and derivative fair values.
Net cash provided by operating activities was $1.985 billion, versus $1.143 billion in the prior-year period. Investing activities used $7.259 billion, while financing activities provided $5.904 billion.
Total assets were $144.202 billion at September 30, 2019, compared with $125.505 billion at December 31, 2018. Total shareholders’ equity rose to $13.545 billion from $8.276 billion, aided by $2.914 billion of other comprehensive income and $1.172 billion of preferred-stock issuance proceeds.
Total investments, including related parties, were $127.101 billion, and invested assets were $121.140 billion. Cash and cash equivalents were $3.833 billion, with total cash including restricted cash of approximately $4.032 billion.
Long-term debt was $992 million. The company reported an undrawn $1.0 billion revolving credit facility and approximately $1.8 billion of excess capital as of September 30, 2019.

Material changes versus the prior comparable period

Organic deposits increased to $14.435 billion for the nine months from $8.032 billion. Pension risk-transfer deposits rose to $5.233 billion from $796 million, and flow-reinsurance deposits increased to $2.754 billion from $1.287 billion.
Retail sales were $5.646 billion for the nine months, compared with $5.524 billion. Funding-agreement deposits increased to $802 million from $425 million.
Liability outflows increased to $8.5 billion from $5.7 billion, reflecting higher withdrawals, funding-agreement maturities, payout annuity payments and pension-risk-transfer benefit payments.
The Retirement Services net investment spread declined to 1.38% for the nine months from 1.82%. The net investment earned rate declined to 4.38% from 4.63%, while cost of funds increased to 3.00% from 2.81%.
The investment margin on deferred annuities declined to 2.40% from 2.70%, as the net investment earned rate fell and cost of crediting increased.
AFS securities, including related parties, increased to $73.271 billion from $60.702 billion. Unrealized gains improved substantially as Treasury rates declined and credit spreads tightened; gross unrealized losses fell to $557 million from $1.797 billion.
The company repurchased 12.8 million Class A shares for $544 million during the nine months. Preferred stock issuance generated $1.172 billion of net proceeds, while preferred dividends totaled $17 million.
The company adopted the new lease standard effective January 1, 2019 without a material effect on the consolidated financial statements.

Guidance, outlook, management commentary, risks and unusual items

Management expects continued growth through retail, flow-reinsurance and institutional channels, particularly pension risk transfer and opportunistic funding-agreement issuance. No formal earnings guidance was provided.
Management expects the Retirement Services annual net investment spread to remain approximately 1%–2% over the 9.4-year weighted-average life of reserve liabilities.
Management cited lower interest rates, a flatter yield curve and market volatility as important factors affecting investment income, hedging costs, product sales, credit spreads and the valuation of existing investments.
For a sustained 25-basis-point increase in interest rates, management estimated an increase of approximately $30 million–$35 million in adjusted operating income over 12 months, subject to significant modeling assumptions.
Annual assumption unlocking increased benefits and expenses by $165 million in 2019, versus a $179 million reduction in 2018. The changes principally involved lapse, long-term investment-return and indexed-annuity embedded-derivative assumptions.
Net other-than-temporary impairment losses were $32 million for the nine months, including $19 million related to intent-to-sell impairments.
Effective January 1, 2020, the company expects the new credit-loss standard to reduce opening retained earnings by approximately $140 million–$240 million on a pre-tax basis, based on preliminary commercial mortgage-loan model results. The final impact remains uncertain.
On October 1, 2019, after quarter-end, Athene sold 67% of the economic interests in ACRA to Apollo/Athene Dedicated Investment Program for $575 million. As of September 30, 2019, ACRA had been retroceded approximately $9.1 billion of annuity and group-annuity reserves.
On October 27, 2019, after quarter-end, Athene entered into an agreement with Apollo affiliates involving approximately $1.2 billion of Apollo operating-group units and $350 million of cash in exchange for newly issued Class A shares, together with proposed governance and share-structure changes. The transaction was expected to close in the first quarter of 2020, subject to shareholder and regulatory approvals.
Material risks include interest-rate, credit, equity-market and counterparty risk; liquidity and early-withdrawal risk; reliance on Apollo for investment management; regulatory capital and licensing requirements; litigation and regulatory inquiries; tax uncertainty involving BEAT, CFC, RPII, PFIC and FATCA rules; and risks associated with the proposed Apollo transaction.
Reported contingencies include $3.536 billion of investment commitments, an undrawn $195 million letter of credit, regulatory matters relating to policy administration and New York pension-risk-transfer licensing, and litigation involving the COLI matter and Caldera. Management generally did not expect these matters to have a material effect, but acknowledged that outcomes are uncertain.

Important facts for investors to verify

Reconcile reported GAAP earnings with adjusted operating income and assess how much nine-month earnings depended on favorable investment and reinsurance fair-value changes.
Evaluate the sustainability of the lower 1.38% net investment spread and the effect of continued low interest rates on asset yields, crediting rates and minimum guarantees.
Review the final impact of ASU 2016-13 credit-loss adoption, particularly the estimated $140 million–$240 million pre-tax retained-earnings reduction.
Confirm completion, terms, dilution and governance effects of the Apollo share-exchange transaction and the ACRA capital transaction.
Monitor Apollo management fees, related-party investments and the restrictions on Athene’s ability to terminate Apollo investment management agreements.
Verify statutory capital, RBC and BSCR ratios for the latest period; the filing’s detailed ratios are primarily presented for December 31, 2018, not September 30, 2019.
Assess liquidity against policyholder withdrawals, collateral requirements, restricted assets of $11.169 billion, FHLB funding agreements and the company’s reliance on subsidiary dividends.