Athene Holding Ltd. 10-Q Summary
Business context and reporting period
Athene is a Bermuda-domiciled retirement-services company that issues, reinsures and acquires annuities and other retirement savings products in the United States and internationally. The unaudited filing covers the quarter and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods. Its principal reportable segment is Retirement Services.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenues | $8.724 billion | $3.275 billion | $19.538 billion | $6.124 billion |
| Income before taxes | $720 million | $1.024 billion | $2.849 billion | $723 million |
| Net income | $770 million | $884 million | $2.653 billion | $599 million |
| Net income available to common shareholders | $698 million | $622 million | $2.658 billion | $381 million |
| Diluted Class A EPS | $3.51 | $3.16 | $13.42 | $2.73 |
| Adjusted operating income available to common shareholders | $541 million | $302 million | $2.289 billion | $684 million |
| Adjusted operating ROE | 15.6% | 11.7% | 23.7% | 9.1% |
For the nine months, reported ROE was 18.6%, compared with 3.5% in 2020. Retirement Services adjusted operating income was $1.955 billion, versus $773 million, and segment adjusted operating ROE was 28.3%, versus 14.0%.
- Net investment income was $1.474 billion in Q3 and $5.216 billion for nine months, up from $1.209 billion and $3.290 billion, respectively. Nine-month growth reflected portfolio expansion, strong alternative-investment performance, the Jackson reinsurance transaction and higher returns in selected investments.
- Investment-related gains were $386 million in Q3 and $2.508 billion for nine months, compared with $1.797 billion and $773 million. Results were materially affected by FIA hedging derivatives, foreign exchange gains, credit-loss provisions and changes in the fair value of reinsurance assets.
- Retirement Services net investment spread was 1.53% in Q3 and 1.96% for nine months, compared with 1.41% and 1.14%. The nine-month investment margin on deferred annuities was 2.62%, versus 1.96%.
- Gross organic inflows were $11.937 billion in Q3 and $27.688 billion for nine months. Nine-month inflows included $10.960 billion from pension group annuities and $9.637 billion from funding agreements. Net organic flows were $8.612 billion for nine months, versus $9.552 billion.
- Total assets were $224.396 billion at September 30, 2021, up from $202.771 billion at December 31, 2020. Total investments, including related parties, were $203.824 billion, compared with $182.421 billion.
- Total equity was $22.372 billion, including $20.389 billion attributable to Athene shareholders and $1.983 billion of noncontrolling interests. Book value per common share was $94.24; adjusted book value per common share was $71.50.
- Long-term debt was $2.469 billion, up from $1.976 billion. The company issued $500 million of 3.950% senior notes due 2051 in May 2021. Preferred stock liquidation preference totaled $2.312 billion.
- Operating cash flow was $7.261 billion for nine months, compared with $925 million. Investing activities used $19.449 billion, while financing activities provided $12.259 billion. Cash and restricted cash totaled $8.510 billion at September 30.
Material changes versus the prior comparable period
- Revenue and common-shareholder earnings increased substantially for nine months, primarily because of higher pension group annuity premiums, portfolio growth and stronger alternative-investment and derivative results.
- Q3 net income was lower despite higher common earnings in part because 2020 benefited from unusually large investment-related gains, while 2021 included less favorable FIA hedge and reinsurance-asset valuation effects.
- Future policy and other policy benefits increased to $12.281 billion for nine months from $2.469 billion, largely reflecting higher pension group annuity obligations and benefit payments. Interest-sensitive contract benefits increased to $2.945 billion from $1.982 billion.
- Gross organic inflows rose 52% year over year for nine months, but net organic growth declined to 7.3% from 9.9% because of higher outflows, ACRA noncontrolling interests and a larger invested-asset base. Management attributed higher outflows principally to five-year MYGA contracts issued in 2016 exiting surrender-charge periods.
- Mortgage loans, net of allowances, increased to $20.810 billion from $15.938 billion. Mortgage loans 90 days past due increased to $889 million from $128 million, including $737 million of government-guaranteed or partially guaranteed GNMA early-buyout loans.
- Unrealized losses on available-for-sale securities increased to $754 million from $488 million, mainly due to higher U.S. Treasury rates. Management stated that the losses were primarily temporary and that it intended to hold the securities through recovery.
Guidance, outlook, commentary, risks and unusual items
No formal earnings guidance was provided. Management expects continued growth across retail, flow-reinsurance and institutional channels, including pension group annuities and funding-agreement issuance, while maintaining pricing discipline. Management estimated approximately $8.0 billion of capital available for deployment, consisting of approximately $3.6 billion of excess capital, $3.1 billion of untapped debt capacity and $1.3 billion of available uncalled ACRA capital.
- A proposed all-stock merger with Apollo Global Management was expected to close in January 2022, subject to shareholder, regulatory and other customary approvals. Each AHL Class A share was to convert into the right to receive 1.149 HoldCo shares, subject to stated exceptions.
- The merger creates execution, approval, integration, regulatory and transaction-termination risks. If not completed, Athene could incur transaction costs and experience adverse reactions from markets, employees, regulators and business partners.
- Interest-rate risk is significant. A hypothetical immediate 25-basis-point rate increase was estimated to reduce point-in-time pretax income by $591 million, partly offset by a $36 million increase from DAC, DSI and VOBA amortization and rider-reserve effects. A sustained 25-basis-point increase was estimated to increase adjusted operating income by approximately $25 million to $35 million over 12 months.
- LIBOR transition remains a material uncertainty. Contracts tied to LIBOR totaled $72.226 billion, including $35.120 billion extending beyond June 30, 2023. The company cited potential valuation, basis-mismatch, contract-amendment and operational risks.
- Liquidity resources included $8.510 billion of cash and restricted cash, an undrawn $1.25 billion credit agreement, more than $2.0 billion of committed repurchase facilities and estimated FHLB borrowing capacity of approximately $3.6 billion, subject to collateral and regulatory constraints.
- Investment and counterparty risks include exposure to credit spreads, structured securities, mortgage loans, alternative investments, derivatives, related parties and Apollo-managed assets. Related-party investments were approximately $29.1 billion, or 12.9% of total assets.
- The filing recorded an out-of-period tax adjustment that overstated consolidated net income by $116 million for Q3 and $63 million for nine months. Management concluded the adjustment was not material to the current or prior periods.
- Other contingencies include the COLI litigation, regulatory matters relating to legacy policy administration and potential additional examinations or enforcement actions. Management did not expect current matters to have a material effect on financial condition, although litigation and regulatory outcomes remain uncertain.
Important facts for investors to verify
- Reconcile GAAP earnings with adjusted operating income and assess the impact of derivative, reinsurance-asset and alternative-investment volatility.
- Review the merger’s approval status, expected closing date, termination provisions and any regulatory conditions.
- Monitor interest-rate sensitivity, minimum annuity crediting guarantees, surrender behavior and the sustainability of the 1.96% nine-month net investment spread.
- Assess credit quality and concentration in corporate bonds, CLOs, RMBS, mortgage loans, related-party investments and Level 3 valuations.
- Evaluate liquidity against policyholder withdrawals, funding-agreement maturities, collateral calls and the company’s substantial investment commitments of $13.564 billion.
- Follow progress in remediating LIBOR-linked contracts and the potential effect of fallback provisions and basis mismatch.
- Confirm the financial effect and disclosure treatment of the out-of-period tax adjustment, COLI litigation and regulatory matters.