Athene Holding Ltd. 2018 Q1 SEC Filing Summary
Business Context and Reporting Period
Athene Holding Ltd. is a Bermuda-based retirement services company that issues, reinsures and acquires retirement savings products, primarily fixed annuities, fixed indexed annuities, funding agreements and pension risk transfer obligations. The unaudited Form 10-Q covers the three months ended March 31, 2018, with comparisons to March 31, 2017 and December 31, 2017.
Results are affected by the January 1, 2018 deconsolidation of Athora Holding Ltd. Former German operations are now reflected primarily as a related-party investment, reducing comparability with prior periods.
Financial Performance and Key Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenues | $1,011 million | $1,619 million | Down $608 million |
| Benefits and expenses | $684 million | $1,213 million | Down $529 million |
| Income before taxes | $327 million | $406 million | Down $79 million |
| Income tax expense | $59 million | $22 million | Up $37 million |
| Net income | $268 million | $384 million | Down 30% |
| Basic EPS | $1.36 | $2.00 | Down $0.64 |
| Adjusted operating income | $237 million | $266 million | Down 11% |
| Operating cash flow | $573 million | $429 million | Up $144 million |
- Net investment income increased to $855 million from $786 million, supported by a larger investment portfolio, higher floating-rate income and stronger alternative investment performance.
- Investment-related gains and losses changed to a $236 million loss from a $682 million gain, primarily due to unfavorable FIA hedging derivative results, assumed reinsurance embedded derivatives and trading securities.
- The effective tax rate increased to 18% from 5%.
- Annualized consolidated ROE was 12.0%; adjusted ROE was 16.5% and adjusted operating ROE was 12.1%.
- Retirement Services generated adjusted operating income of $235 million, down from $275 million, and an adjusted operating ROE of 17.3%, down from 24.1%.
- Retirement Services’ investment margin on deferred annuities was 2.76%, versus 2.85% in the prior-year quarter; the net investment earned rate was 4.63% and cost of crediting was 1.87%.
Balance Sheet, Capital, Debt and Liquidity
| Balance-sheet item | March 31, 2018 | December 31, 2017 |
|---|---|---|
| Total assets | $93.6 billion | $99.7 billion |
| Total investments, including related parties | $80.3 billion | $84.4 billion |
| Invested assets | $78.7 billion | $82.3 billion |
| Shareholders’ equity | $8.7 billion | $9.2 billion |
| Cash and cash equivalents | $2.7 billion | $4.9 billion |
| Total liabilities | $84.9 billion | $90.5 billion |
| Long-term debt | $992 million | None reported |
- Cash, restricted cash and cash held by consolidated VIEs totaled $2.825 billion at March 31, 2018, down $2.172 billion during the quarter.
- Investing activities used $2.884 billion, principally reflecting investment purchases, while financing activities provided $139 million.
- Athene issued $1.0 billion of unsecured 4.125% senior notes due January 2028. The notes are subject to mandatory redemption at 101% of principal if the Voya-related transaction does not close.
- Management reported approximately $2.0 billion of excess capital and stated that capital ratios remained above internal targets. The filing provides detailed U.S. RBC and Bermuda BSCR ratios as of December 31, 2017, but does not provide a new March 31, 2018 ratio in the supplied text.
- Liquidity included $48.8 billion of assets considered liquid for monitoring purposes, an undrawn $1.0 billion revolving credit facility and access to Federal Home Loan Bank funding.
- Investment-type policy deposits were $1.774 billion and liability outflows were $1.474 billion during the quarter. Organic-channel deposits were approximately $2.1 billion.
Material Changes Versus the Prior Comparable Period
- Net income declined primarily because of unfavorable market-related investment and derivative results, lower adjusted operating income and higher income tax expense.
- Premiums increased to $278 million from $52 million, largely due to $266 million of pension risk transfer premiums in Q1 2018.
- Interest-sensitive contract benefits fell to $19 million from $692 million because the prior-year period included materially more favorable FIA embedded-derivative changes.
- Future policy and other policy benefits increased to $401 million from $214 million, primarily due to the PRT transaction, growth in the business and unfavorable equity-market effects on rider reserves.
- Total assets and invested assets declined largely because of Athora deconsolidation, while deposits, reinvested earnings and investment purchases partially offset the reduction.
- Unrealized losses on available-for-sale securities increased to $591 million from $246 million, driven by higher Treasury rates and wider credit spreads. Net other-than-temporary impairment losses were $3 million versus $1 million.
- Operating cash flow improved despite the lower net income, reflecting higher premiums, investment income and non-cash adjustments.
Guidance, Outlook, Commentary and Risks
- Management expects continued growth through retail, flow reinsurance, institutional and pension risk transfer channels, while maintaining pricing discipline and targeted returns.
- The Voya transaction involves reinsurance of approximately $19 billion of fixed annuity liabilities, a $75 million minority equity investment and $150 million of financing for Venerable. Closing was expected in the second or third quarter of 2018, subject to regulatory approval and other conditions. Results will not reflect the transaction until closing.
- Management expects the overall tax rate in 2018 to average approximately 14%–15% and beginning in 2019 to average approximately 12%–16%, subject to the interpretation and impact of the BEAT. Actual quarterly rates may be volatile.
- Interest-rate increases may improve yields on new investments and product attractiveness but may reduce the value of existing investments. Prolonged low rates could pressure investment margins and constrain crediting-rate reductions.
- Market volatility can affect FIA hedging costs, alternative-investment values, unrealized gains and losses, capital levels and earnings.
- Key risks include credit and counterparty exposure, investment and derivative valuation, policyholder lapse and withdrawal behavior, reinsurance counterparty performance, regulatory capital requirements, competition, tax-law changes, and reliance on Apollo-affiliated investment manager Athene Asset Management.
- The company was nearing resolution of a New York market-conduct examination concerning policy administration and conversion matters. Management expected no material impact, but stated that unresolved fines, penalties or policyholder payments could be material.
- Tax matters include IRS examinations, uncertainty regarding the BEAT, potential U.S. taxation of non-U.S. entities, CFC and RPII considerations, and possible FATCA withholding.
- The Griffiths class action had a proposed settlement subject to court approval; the expected monetary payment was described as immaterial, with a proposed capital-maintenance agreement.
- Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the Voya/Venerable transaction closed on the expected timetable and the final economic terms, capital requirements and liability impact.
- The actual effect of the BEAT and subsequent tax guidance on Athene’s effective tax rate, statutory capital and reinsurance structure.
- Current U.S. RBC, Bermuda BSCR and rating-agency capital ratios, including the effect of the Tax Act and new debt.
- The sustainability of the 2.76% deferred-annuity investment margin as rates, credit spreads, hedging costs and policyholder behavior change.
- Exposure to unrealized losses, below-investment-grade and structured securities, alternative investments, mortgage loans and related-party investments.
- Progress and final outcomes of the NYSDFS, Texas and other regulatory matters, the COLI litigation and outstanding IRS disputes.
- Liquidity after the quarterly cash decline, derivative collateral movements, policyholder outflows and any subsequent Federal Home Loan Bank borrowing.
- The effect of Athora deconsolidation on period-over-period comparisons and future reported revenue, assets, earnings and capital metrics.