Athene Holding Ltd. 10-Q Summary
Business Context and Reporting Period
Athene Holding Ltd., a Bermuda-based subsidiary of Apollo Global Management, specializes in issuing, reinsuring and acquiring retirement savings products, including fixed annuities, fixed indexed annuities, pension group annuities and funding agreements. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, with comparisons to the corresponding 2022 periods.
Management reported total assets of $269.8 billion and net invested assets of $208.1 billion at September 30, 2023. The company reported an expected annual net investment spread of approximately 1%–2% over the estimated 8.4-year weighted-average life of net reserve liabilities.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenues | $1.436 billion | $2.310 billion | $18.182 billion | $3.836 billion |
| Net investment income | $2.928 billion | $1.843 billion | $8.052 billion | $5.252 billion |
| Investment-related gains (losses) | $(2.624) billion | $(2.848) billion | $(1.193) billion | $(12.811) billion |
| Income before taxes | $493 million | $(1.173) billion | $2.507 billion | $(6.525) billion |
| Net income | $331 million | $(1.052) billion | $2.049 billion | $(5.742) billion |
| Net income available to AHL common shareholder | $442 million | $(622) million | $1.559 billion | $(3.412) billion |
| Spread related earnings | $872 million | $640 million | $2.358 billion | $1.769 billion |
| Operating cash flow | Not separately provided | Not separately provided | $3.704 billion | $6.077 billion |
Q3 net income available to common shareholders increased by $1.064 billion, while nine-month results improved by $4.971 billion. The nine-month comparison benefited substantially from much lower investment-related losses than in 2022.
Net investment spread increased to 2.13% in Q3 from 1.73% and to 1.98% for the nine months from 1.65%. The nine-month net investment earned rate increased to 4.57% from 3.47%, while cost of funds rose to 2.62% from 1.85%.
Balance Sheet, Capital and Liquidity
- Total investments were $189.1 billion, compared with $172.5 billion at December 31, 2022. Investments including related parties and consolidated VIEs totaled $234.3 billion.
- Cash and cash equivalents were $10.0 billion; cash, restricted cash and consolidated VIE cash totaled $11.4 billion for cash-flow purposes.
- Total liabilities were $255.7 billion; debt was $3.634 billion, compared with $3.658 billion at year-end 2022.
- AHL shareholders’ equity was $8.537 billion, and total equity including noncontrolling interests was $14.029 billion.
- The reported debt-to-capital ratio was 29.9%; the adjusted debt-to-capital ratio was 13.3%, compared with 14.7% at year-end 2022.
- A new unsecured Credit Facility provides $1.25 billion of capacity, expandable to $1.75 billion, and a new Liquidity Facility provides $2.6 billion of capacity, expandable to $3.1 billion. Both were undrawn at September 30, 2023.
- Management estimated approximately $8.4 billion of capital available for deployment, consisting of excess equity capital, potential debt capacity and available ACRA capital.
Financing activities generated $27.9 billion during the first nine months, primarily from deposits on investment-type contracts. Investing activities used $29.0 billion, reflecting purchases of available-for-sale securities, mortgage loans, derivatives and other investments.
Material Changes Versus the Prior Comparable Period
- Revenue and earnings improved materially: nine-month net income available to common shareholders changed from a $3.412 billion loss to $1.559 billion of income.
- Investment performance improved: investment-related losses narrowed to $1.193 billion from $12.811 billion, primarily because of more favorable changes in reinsurance assets, mortgage loans, FIA hedging derivatives and securities valuations.
- Net investment income increased: higher floating-rate income, higher new-money yields and portfolio growth offset lower alternative investment income and higher Apollo management fees.
- Business inflows grew: nine-month gross organic inflows rose 19% to $43.6 billion, driven by retail sales and flow reinsurance. Net flows were $16.8 billion, down from $19.8 billion because gross outflows increased to $26.8 billion.
- Retail sales strengthened: fixed annuity sales increased to $21.9 billion from $12.7 billion for the first nine months.
- Flow reinsurance increased: inflows rose to $7.7 billion from $4.3 billion.
- Institutional inflows declined: funding agreement and pension group annuity inflows decreased, although the company closed its largest single pension group annuity transaction to date in Q2 2023.
- VIAC recapture: Venerable recaptured $2.7 billion of reserves effective July 1, 2023. Athene recognized a $555 million gain in Q3 and transferred supporting assets to VIAC.
- Investment portfolio growth continued: mortgage loans increased to $38.0 billion from $27.5 billion, while AFS securities increased to $115.7 billion from $102.4 billion.
Guidance, Outlook, Commentary and Risks
Management expects continued growth through retail, flow reinsurance, pension group annuities and funding agreements, while maintaining disciplined pricing and targeted underwriting returns. It believes higher interest rates support annuity demand and improve returns on new investments, but also increase policyholder crediting costs and can reduce the fair value of existing assets.
- The AFS portfolio was 96.6% investment grade under NAIC designations, but had $20.6 billion of gross unrealized losses at September 30, 2023. Management stated that most securities are intended to be held until recovery or maturity.
- Commercial real estate, particularly office properties, remains a risk amid higher rates, refinancing constraints and uncertain property values. Commercial mortgage loans 90 days past due or in non-accrual status had fair value of $99 million.
- A 100-basis-point immediate increase in interest rates was estimated to reduce point-in-time pretax income by approximately $2.7 billion, net of offsets. A 10% decline in public equity prices was estimated to reduce pretax income by approximately $477 million.
- Higher rates are expected to increase spread-related earnings from floating-rate assets; a sustained 25-basis-point rate increase was estimated to increase annual spread-related earnings by approximately $45 million to $55 million.
- Key risks include investment and credit losses, interest-rate and equity-market volatility, liquidity needs, policyholder withdrawals, reinsurance counterparty performance, regulatory capital requirements, rating downgrades, litigation, cybersecurity and reliance on Apollo for investment management.
- Athene has $20.6 billion of investment commitments, $6.7 billion of FHLB funding agreements, $20.2 billion of FABN funding agreements, $4.0 billion of FABR funding agreements and $1.326 billion of undrawn letters of credit.
- Athene and affiliates provided guarantees supporting Atlas’s $3.3 billion deferred purchase-price obligation to Credit Suisse. The filing states the fair value of Athene’s guarantees was not material.
- Tax uncertainty increased because Bermuda proposed a corporate income tax regime potentially effective for tax years beginning January 1, 2025, and because of evolving US, OECD and Pillar Two rules.
The company adopted long-duration targeted improvements accounting effective January 1, 2023 using retrospective transition accounting. The filing cautions that interim results are not necessarily indicative of full-year results and that significant actuarial, valuation and market assumptions affect reported earnings and equity.
Most Important Facts for Investors to Verify
- Whether higher investment income and spread-related earnings remain durable as policyholder crediting costs, funding costs and Apollo management fees increase.
- The composition, duration, valuation and credit performance of the $234.3 billion investment portfolio, including the $20.6 billion of unrealized AFS losses and exposure to commercial real estate.
- The sustainability of strong retail and flow reinsurance inflows relative to rising withdrawals, benefit payments and reinsurance outflows.
- The effect of interest-rate, equity-market and policyholder-behavior changes on market risk benefits, FIA embedded derivatives, future policy benefits and OCI.
- Actual statutory capital, RBC and Bermuda solvency ratios at September 30, 2023, as the filing provides the most recent detailed ratios as of December 31, 2022.
- Liquidity under stressed surrender, collateral and asset-sale scenarios, including the availability and covenants of the new credit and liquidity facilities.
- Potential tax consequences of Bermuda’s proposed tax regime, the Inflation Reduction Act and OECD Pillar Two implementation.
- Related-party exposures and governance considerations arising from Apollo-managed investments, investment management fees and ACRA ownership arrangements.