Athene Holding Ltd. 10-Q Summary
Business context and reporting period
Athene Holding Ltd. is a Bermuda-based retirement services company that issues, reinsures and acquires retirement savings products, including fixed indexed annuities, fixed-rate annuities, pension risk-transfer contracts and funding agreements. This unaudited Form 10-Q covers the three months ended March 31, 2020, filed May 8, 2020. Results were materially affected by COVID-19-related market volatility, widening credit spreads and sharply lower interest rates.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenues | $(1.549) billion | $4.995 billion |
| Net income (loss) | $(1.216) billion | $708 million |
| Net income (loss) available to common shareholders | $(1.065) billion | $708 million |
| Basic Class A EPS | $(5.81) | $3.65 |
| Net cash from operating activities | $771 million | $1.009 billion |
| Net cash used in investing activities | $(378) million | $(2.776) billion |
| Net cash from financing activities | $970 million | $1.882 billion |
| Annualized consolidated ROE | (36.5)% | 30.8% |
| Adjusted operating income (loss) available to common shareholders | $(108) million | $287 million |
| Annualized adjusted operating ROE | (4.4)% | 12.8% |
At March 31, 2020, total assets were $142.2 billion, total equity was $10.5 billion and Athene shareholders’ equity was $9.9 billion. Cash and cash equivalents plus restricted cash totaled $6.0 billion. Total debt comprised $400 million of short-term debt and $986 million of long-term debt.
Total investments, including related-party investments, were $122.0 billion, down from $130.6 billion at December 31, 2019. Net invested assets were $121.2 billion. The available-for-sale portfolio had a fair value of $69.2 billion and gross unrealized losses of $4.6 billion, compared with $469 million of unrealized losses at year-end 2019.
Retirement Services generated adjusted operating income of $204 million, compared with $286 million in Q1 2019. Its annualized net investment spread declined to 1.03% from 1.36%, while the investment margin on deferred annuities declined to 2.13% from 2.23%. Net deposits were $3.947 billion, compared with $4.759 billion, and liability outflows were approximately $2.7 billion.
Material changes versus the prior comparable period
- Net income available to common shareholders declined by $1.8 billion, primarily because investment-related gains of $1.8 billion in Q1 2019 became investment-related losses of $3.6 billion.
- Investment-related losses included $3.019 billion of derivative losses, a $284 million provision for credit losses and declines in trading and equity securities.
- Net investment income fell to $745 million from $1.082 billion, reflecting losses on the Apollo investment, alternative investment losses, lower floating-rate income and higher management fees.
- Premiums declined to $1.140 billion from $2.000 billion, primarily because of lower pension risk-transfer premiums.
- Adjusted operating income became a $108 million loss, driven by a $312 million Corporate and Other loss and lower Retirement Services earnings. Excluding the Apollo investment, adjusted operating income was $131 million.
- COVID-19-related market effects drove a substantial deterioration in accumulated other comprehensive income, from $2.281 billion of income at December 31, 2019 to $(1.174) billion at March 31, 2020.
- The company adopted CECL accounting effective January 1, 2020, reducing retained earnings by $117 million net of tax. Credit-loss allowances increased substantially, including commercial mortgage loan allowances of $343 million versus $10 million at year-end.
- On February 28, 2020, Athene completed its strategic transaction with Apollo. Athene issued shares for approximately $1.1 billion of Apollo units and issued additional Class A shares for $350 million in cash. The multi-class share structure was eliminated.
Liquidity, debt and capital
Management estimated approximately $7.4 billion of capital available to deploy at March 31, 2020, consisting of approximately $2.7 billion of excess capital, $2.3 billion of untapped debt capacity and $2.4 billion of uncalled ACRA capital, subject to market availability and other conditions.
The company had an undrawn $1.25 billion credit agreement and approximately $6.3 billion of available liquidity as of April 30, 2020, comprising $5.1 billion of cash and $1.25 billion of undrawn credit capacity. Management intended to increase available liquidity to approximately $10 billion. On April 3, 2020, Athene issued $500 million of 6.150% senior unsecured notes due 2030. On May 1, 2020, it entered into a $1.0 billion committed repurchase facility with BNP Paribas.
Share repurchases totaled $319 million during the quarter. Management temporarily halted repurchases in March 2020 to preserve liquidity; $321 million remained under the authorization at March 31, 2020.
Guidance, outlook, risks and unusual items
- Management expects prolonged low interest rates to pressure investment income and adjusted operating earnings. It estimated that a persistent 25-basis-point rate decline could reduce adjusted operating income by approximately $30 million to $35 million over 12 months.
- COVID-19 creates business-continuity, market and liquidity risks, including wider credit spreads, lower asset values, higher hedging costs, increased credit losses and potentially elevated policyholder withdrawals. As of April 30, 2020, management reported no material adverse change in policyholder behavior.
- Stress testing estimated approximately $1 billion of potential credit losses and impairments under a baseline recession scenario and approximately $2 billion under a deep recession scenario, net of DAC and tax offsets. These were hypothetical estimates, not forecasts.
- Approximately 78% of deferred annuity liabilities had surrender charges and approximately 63% had market-value adjustment features, which management believes reduce withdrawal risk. Pension risk-transfer and funding-agreement obligations are generally non-surrenderable.
- The company had $41.4 billion of contracts tied to LIBOR, including $22.1 billion extending beyond 2021. Failure to transition successfully from LIBOR could create basis mismatch and adverse financial effects.
- Investment concentration and credit risks include exposure to real estate, financial services, aviation, energy, MidCap, AmeriHome, Athora and PK AirFinance. Management identified $1.4 billion of PK AirFinance-related securitization exposure and $25.0 billion of net invested assets in real-estate-related assets.
- Regulatory and litigation matters include a $45 million NYDFS fine related to pension risk-transfer licensing matters, policy-administration regulatory proceedings, a corporate-owned life insurance dispute and Caldera litigation. The filing states that potential losses in the Caldera matter cannot currently be estimated.
- Athene pays Apollo investment-management fees; those fees were $128 million in Q1 2020 versus $92 million in Q1 2019. Related-party governance, investment concentration and Apollo’s influence remain material investor considerations.
Important facts for investors to verify
- Whether the unusually large Q1 GAAP loss and unrealized losses represent temporary market volatility or developing credit impairment and reserve pressure.
- Subsequent-quarter performance of the investment portfolio, especially CLOs, mortgage loans, real estate, aviation-related assets and other alternative investments.
- Actual policyholder surrender, lapse and withdrawal behavior as COVID-19 economic effects continue.
- Current statutory capital, RBC and Bermuda solvency ratios, which are reported in the filing primarily using December 31, 2019 data.
- Availability and cost of liquidity facilities, repurchase financing, FHLB capacity and future capital-market funding.
- The effect of the Apollo transaction on ownership, governance, related-party investments, management fees and future earnings volatility.
- Progress in replacing LIBOR and resolving related contract, hedge and basis-mismatch exposures.
- Developments in regulatory proceedings, litigation, tax matters and potential credit-loss allowances under CECL.