Athene Holding Ltd. 10-Q Summary: Second Quarter 2022
Business context and reporting period
Athene is a retirement-services company that issues, reinsures and acquires annuities and other retirement savings products in the United States and internationally. The filing covers the three and six months ended June 30, 2022. On January 1, 2022, Athene completed its merger with Apollo Global Management, Inc. and became a wholly owned subsidiary of Apollo. The financial statements use pushdown accounting and present 2022 as “Successor” and prior periods as “Predecessor,” limiting comparability.
Financial condition and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenues | $1.8 billion, versus $6.4 billion | $1.5 billion, versus $10.8 billion |
| Net income (loss) | $(3.2) billion, versus $1.8 billion | $(5.6) billion, versus $1.9 billion |
| Net income (loss) available to common shareholder | $(2.2) billion, versus $1.4 billion | $(3.7) billion, versus $2.0 billion |
| Operating cash flow | Not separately provided for the quarter | $4.7 billion, versus $2.5 billion |
| Spread related earnings | $442 million, versus $662 million | $1.1 billion, versus $1.5 billion |
| Net investment spread | 1.32%, versus 2.06% | 1.59%, versus 2.34% |
| Total assets at period end | $234.3 billion, versus $235.1 billion at December 31, 2021 | |
| Total investments, including related parties and VIEs | $198.6 billion, versus $212.5 billion at December 31, 2021 | |
| Net invested assets | $189.3 billion, versus $175.3 billion at December 31, 2021 | |
| Total debt | $3.3 billion, versus $3.0 billion at December 31, 2021 | |
| Adjusted debt-to-capital ratio | 14.8%, versus 14.9% at December 31, 2021 | |
| Total shareholders’ equity | $3.4 billion, versus $22.2 billion of total equity at December 31, 2021 |
Second-quarter investment-related losses were $5.8 billion, compared with gains of $2.6 billion in the prior-year quarter. Six-month investment-related losses were $10.0 billion, compared with gains of $2.2 billion in the prior-year period. The principal drivers were higher U.S. Treasury rates, credit-spread widening, unfavorable equity-market performance, mortgage-loan fair-value losses, derivative losses and higher credit-loss provisions.
Operating inflows increased to $23.6 billion for the first six months, from $15.8 billion in the prior-year period. Net flows were $13.8 billion, compared with $7.0 billion. Retail inflows were $6.6 billion, flow-reinsurance inflows were $2.0 billion, funding-agreement inflows were $7.5 billion and pension-group-annuity inflows were $7.5 billion.
Material changes versus the prior comparable period
- GAAP earnings shifted from profit to substantial loss, primarily because of market-driven investment and derivative losses and the effects of purchase accounting.
- Premiums increased to $7.7 billion for the first six months, from $4.6 billion, primarily because of higher pension group annuity premiums.
- Net investment income declined to $3.4 billion for the first six months, from $3.7 billion, reflecting purchase-accounting marks, weaker alternative-investment performance and lower prior-year new-money rates, partly offset by portfolio growth and higher floating-rate income.
- Spread related earnings declined 26% to $1.1 billion for the first six months. The net investment earned rate decreased to 3.42% from 4.83%, while cost of funds improved to 1.86% from 2.51%.
- Accumulated other comprehensive loss was $(9.8) billion at June 30, 2022, compared with accumulated other comprehensive income of $2.4 billion at year-end 2021, primarily reflecting unrealized losses on available-for-sale securities.
- The allowance for credit losses on available-for-sale securities increased to $629 million from $123 million at year-end 2021.
- Athene contributed $7.845 billion of alternative investments to Apollo Aligned Alternatives, a consolidated variable interest entity, during the second quarter. Third-party investors began investing in the vehicle on July 1, 2022.
- Athene distributed its investment in Apollo Operating Group units to Apollo during the first quarter and paid $375 million of common-stock dividends during the first six months.
Liquidity, capital, outlook and risks
Management reported approximately $6.6 billion of capital available for deployment, consisting of approximately $3.2 billion of excess capital, $2.8 billion of assumed untapped debt capacity and $0.6 billion of available undrawn ACRA capital. Management expects continued growth in retail, flow-reinsurance, pension-group-annuity and funding-agreement channels, supported by higher interest rates and expanded distribution relationships.
Cash, restricted cash and cash held by consolidated VIEs totaled approximately $12.1 billion at June 30, 2022. Operating activities generated $4.7 billion, investing activities used $11.7 billion and financing activities provided $8.7 billion during the first six months. The company also had an undrawn $1.25 billion credit facility at June 30, 2022, access to $2.0 billion of committed repurchase facilities and an estimated ability to draw approximately $4.7 billion under FHLB arrangements, inclusive of outstanding funding agreements and subject to collateral and other limitations.
As of June 30, 2022, Athene had $16.3 billion of investment commitments, $23.0 billion of outstanding FABN funding agreements, $2.0 billion of FABR funding agreements, $3.0 billion of FHLB funding agreements and $1.4 billion of undrawn letters of credit. In the third quarter, the company entered into a revolving liquidity facility with $2.5 billion of borrowing capacity, potentially increasing to $3.0 billion; no amounts were outstanding as of August 5, 2022.
Key risks include interest-rate, equity-market, credit, liquidity, foreign-currency and counterparty risks; exposure to illiquid private assets and mortgage loans; potential forced sales of investments; reliance on Apollo for investment management and LIBOR transition activities; regulatory scrutiny of private-equity-owned insurers; changes in insurance and tax regulation; litigation and regulatory proceedings; and the ability of ACRA investors to fund commitments.
Athene had $64.2 billion of contracts tied to LIBOR, including $44.4 billion extending beyond June 30, 2023. Management stated that failure to complete the transition to replacement rates could materially affect financial results, cash flows, business operations and financial reporting.
The filing states that adoption of long-duration insurance accounting updates is required on January 1, 2023. Athene does not expect a material effect on shareholders’ equity at transition but was still evaluating the impact on subsequent financial statements.
Important facts investors should verify
- Separate recurring spread-related earnings from large market-driven GAAP losses and assess whether the 1.59% six-month net investment spread is sustained.
- Review the effect of pushdown accounting, provisional goodwill and VOBA assumptions on period-over-period comparability and reported equity.
- Monitor unrealized AFS losses, credit-loss allowances, mortgage-loan valuations and the concentration of investment-grade, structured-credit and private assets.
- Assess liquidity against policyholder withdrawals, funding-agreement maturities, repurchase obligations, restricted assets and the $16.3 billion of investment commitments.
- Verify statutory capital, RBC and BSCR measures for the current period; the filing provides the latest detailed ratios as of December 31, 2021.
- Evaluate related-party exposures, Apollo investment-management fees, consolidated VIEs, ACRA ownership and funding obligations.
- Track LIBOR remediation, regulatory examinations, the COLI settlement and potential additional enforcement or policyholder remediation costs.