Athene Holding Ltd. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Athene is a Bermuda-based retirement services company that issues, reinsures and acquires fixed annuities and other retirement savings products in the United States, Bermuda and Germany. The filing covers the three months ended March 31, 2017. Financial statements are unaudited and prepared under U.S. GAAP.
The company operates primarily through its Retirement Services segment, with Corporate and Other containing corporate activities and German operations. Apollo-affiliated entities, including Athene Asset Management, manage most of the investment portfolio.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenues | $1.619 billion | $722 million |
| Benefits and expenses | $1.224 billion | $634 million |
| Income before income taxes | $395 million | $88 million |
| Net income attributable to AHL shareholders | $373 million | $87 million |
| Basic EPS | $1.94 | $0.47 |
| Diluted Class A EPS | $1.87 | $0.47 |
| Operating income, net of tax | $258 million | $152 million |
| Operating ROE excluding AOCI | 15.3% | 10.8% |
| GAAP ROE | 20.6% | 6.3% |
| Net cash provided by operating activities | $429 million | $388 million |
Total assets were $89.220 billion at March 31, 2017, compared with $86.720 billion at December 31, 2016. Shareholders’ equity was $7.597 billion, including $673 million of accumulated other comprehensive income. Total investments, including related-party investments, were $75.129 billion, and invested assets were $73.573 billion.
Net investment income was $786 million, compared with $692 million in the prior-year quarter. The consolidated net investment earned rate was 4.48%, compared with 4.03%, while the Retirement Services deferred-annuity investment margin increased to 2.85% from 2.63%.
Cash and cash equivalents were $2.563 billion, with restricted cash of $73 million. Liquid assets used for liquidity monitoring were approximately $45.6 billion. A $1.0 billion revolving credit facility was undrawn. AHL reported no financial leverage at March 31, 2017.
Funding agreements carried a balance of $459 million with the Federal Home Loan Banks. Funding agreement-backed notes had a carrying value of $896 million, following $650 million of additional issuances during the quarter. The company also had $1.140 billion of investment commitments, primarily to investment funds.
Material changes versus the prior comparable period
- Net income increased $286 million, or 329%, to $373 million. Management attributed the increase to higher operating income, favorable FIA derivative results and favorable changes in assumed reinsurance embedded derivatives.
- Operating income increased $106 million, or 70%, to $258 million. Retirement Services operating income rose to $267 million from $197 million, while Corporate and Other’s loss narrowed to $9 million from $45 million.
- Investment-related gains increased to $682 million from a loss of $82 million. The change was primarily driven by FIA hedging derivatives, equity-market performance and assumed reinsurance embedded derivatives.
- Net investment income increased $94 million, supported by investment-portfolio growth, higher income from floating-rate securities, stronger alternative-investment results and recovery of a previously written-down bond.
- Interest-sensitive contract benefits rose to $696 million from $253 million, largely reflecting FIA embedded-derivative changes and higher interest credited on a larger deposit base.
- DAC, DSI and VOBA amortization increased to $126 million from $32 million, while policy and other operating expenses increased to $156 million from $104 million. Stock-based compensation was a $16 million expense in 2017 versus a $15 million benefit in 2016.
- Operating cash flow increased to $429 million from $388 million. Investing activities used $1.140 billion, compared with $115 million of investing cash inflow in the prior-year quarter, as investment purchases exceeded sales and maturities. Financing activities provided $813 million, compared with a $496 million use in Q1 2016.
- Organic-channel deposits increased to $1.9 billion from $1.6 billion. Fixed annuity retail sales rose to $1.1 billion from $663 million, while flow-reinsurance deposits declined to $166 million from $912 million.
- During the quarter, 24.0 million Class B shares were converted to Class A shares in connection with shareholder distributions and the March 2017 follow-on offering; Athene did not sell shares in that offering.
Guidance, outlook, commentary and unusual items
Management did not provide formal numerical earnings guidance in the filing. Management expects to grow through retail, flow reinsurance and institutional channels, including additional funding-agreement issuance and potential pension-risk-transfer opportunities. The company expects its financial-strength ratings, including A.M. Best’s upgrade to A in April 2017, to support distribution and market expansion.
Management reported more than $1.5 billion of excess capital and stated that capital ratios were high relative to its ratings. The filing disclosed a U.S. RBC ratio of 478% and an ALRe BSCR ratio of 228% as of December 31, 2016; current-quarter statutory ratios were not provided in the filing text.
Results were materially affected by market-sensitive items. The S&P 500 increased 5.5% in Q1 2017 versus 0.8% in Q1 2016, contributing to favorable FIA hedge results and derivative-related gains. The company recorded $1 million of net other-than-temporary impairment losses, compared with $10 million in Q1 2016.
Interest-rate and credit-spread conditions remain important. Approximately 29% of invested assets were floating-rate investments. Management expects rising rates could improve reinvestment yields and product attractiveness, but prolonged low rates could pressure investment margins and the ability to reduce policyholder crediting rates.
The Department of Labor fiduciary rule’s applicability date was delayed to June 9, 2017, with full implementation scheduled for January 1, 2018 under the then-current framework. Athene stated that changes to the rule could affect distribution, particularly for fixed indexed annuities sold to employee benefit plans and IRAs.
On April 14, 2017, AGER Bermuda Holding Ltd. entered into agreements for new capital. Athene committed to purchase approximately €285 million of additional shares, potentially reduced to €260 million if conditions are met, and expects its voting interest in the German group to fall to 10% after the transaction. The German operations are expected to become an investment rather than a consolidated subsidiary; deconsolidation could result in a gain or loss depending on changes in invested capital or fair value.
Material contingencies include two putative class actions, for which the company stated that reasonably possible losses cannot currently be estimated, and IRS disputes concerning deductions related to FIA hedges and marketing-organization commissions. Athene expects potential tax liabilities for certain pre-October 2, 2013 periods to be indemnified by Aviva plc if the stock-purchase-agreement requirements are satisfied. The company also reported a $333 million asset value for legacy corporate-owned life insurance policies, including $160 million of guarantees whose availability is subject to ongoing litigation.
The company adopted several accounting updates effective January 1, 2017, including ASU 2017-08 and ASU 2016-17; management reported no material effect on the financial statements. The 2016 comparative figures were revised for immaterial misstatements and a change in presentation of modified-coinsurance funds withheld balances.
Principal investor verification items
- Verify how much of Q1 earnings was generated by recurring operating income versus market-sensitive FIA derivatives, embedded derivatives and investment gains.
- Assess the sustainability of the 2.85% deferred-annuity investment margin, including sensitivity to interest rates, credit spreads, equity markets and policyholder behavior.
- Review investment-portfolio credit quality, particularly the $54.6 billion fixed-maturity portfolio, structured securities, non-agency RMBS and alternative investments.
- Confirm current statutory capital, RBC and BSCR ratios, excess capital and dividend capacity, since the latest detailed ratios in the filing are as of December 31, 2016.
- Monitor liquidity, collateral requirements, policyholder withdrawals, the $1.140 billion of investment commitments and additional funding-agreement issuance.
- Evaluate the effect of the DOL fiduciary-rule changes on FIA and traditional fixed-annuity distribution, sales and expenses.
- Track the AGER transaction, expected German deconsolidation, Athene’s capital commitment and any resulting gain or loss.
- Review litigation, IRS examinations, TPA administration issues and the COLI dispute for potential cash, capital, regulatory or reputational effects.
- Consider related-party exposure and governance, including Apollo/AAM investment-management arrangements, fees and associated termination restrictions.