Athene Holding Ltd. — Q3 2020 Form 10-Q Summary
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. Its principal reportable segment is Retirement Services, with remaining activities reported in Corporate and Other. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, with comparisons to the corresponding 2019 periods.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenues | $3.275 billion | $4.584 billion | $6.124 billion | $13.002 billion |
| Income before taxes | $1.024 billion | $279 million | $723 million | $1.769 billion |
| Net income | $884 million | $293 million | $599 million | $1.721 billion |
| Net income attributable to AHL shareholders | $652 million | $293 million | $448 million | $1.721 billion |
| Net income available to common shareholders | $622 million | $276 million | $381 million | $1.704 billion |
| Diluted EPS | $3.16 | $1.50 | $2.73 | $8.95 |
| Net cash from operating activities | — | — | $925 million | $1.985 billion |
| Adjusted operating income available to common shareholders | $302 million | $243 million | $684 million | $900 million |
Q3 2020 net income available to common shareholders increased 125% year over year, while nine-month earnings declined 78%, reflecting significantly different investment-market and pension risk-transfer conditions between periods. Q3 adjusted operating income rose 24%; nine-month adjusted operating income fell 24%.
Balance sheet, capital and liquidity
- Total assets were $191.1 billion at September 30, 2020, versus $146.9 billion at December 31, 2019. Total equity was $17.1 billion, including $15.9 billion attributable to AHL shareholders and $1.2 billion of noncontrolling interests.
- Total investments, including related-party investments, were $170.2 billion, versus $130.6 billion at year-end 2019. Net invested assets were $142.8 billion, including a $1.2 billion investment in Apollo.
- Cash and cash equivalents plus restricted cash totaled $8.8 billion. Management reported approximately $10.9 billion of available liquidity, comprising approximately $7.5 billion of cash and $3.4 billion of undrawn committed financing capacity.
- Long-term debt was $1.487 billion at September 30, 2020, compared with $992 million at year-end 2019; short-term debt declined from $475 million to zero. Athene issued $500 million of 6.150% senior unsecured notes due 2030 during the second quarter.
- Management estimated approximately $7.6 billion of capital available for deployment, consisting of approximately $3.2 billion of excess capital, $2.6 billion of potential debt capacity and $1.8 billion of available uncalled ACRA capital, subject to market and other conditions.
Material changes versus the prior comparable period
- Jackson reinsurance transaction: Athene entered into a funds-withheld coinsurance agreement effective June 1, 2020, reinsuring a block of fixed and fixed indexed annuities with $27.4 billion of liabilities assumed and $28.8 billion of gross deposits. Athene also made a $500 million equity investment in an indirect parent of Jackson.
- Growth in deposits: Nine-month gross deposits were $47.1 billion, including $28.8 billion from inorganic activity; net deposits were $28.8 billion. Organic deposits increased 27% to $18.3 billion, while liability outflows were $8.7 billion.
- Apollo strategic transaction: On February 28, 2020, Apollo acquired an incremental interest through $1.1 billion of AOG units and $350 million of cash consideration. Athene eliminated its multi-class share structure, converting Class B and Class M shares into Class A shares and warrants.
- ACRA noncontrolling interest: ACRA generated $232 million of noncontrolling-interest income in Q3 and $151 million for the nine months, compared with none in the 2019 periods. Athene’s economic ownership increased to 36.55% effective April 1, 2020.
- Credit losses and CECL: Adoption of the current expected credit loss standard reduced retained earnings by $117 million net of tax. The company recorded a $205 million nine-month provision for credit losses within investment-related gains and losses, and reported a $202 million increase in credit-loss reserves net of noncontrolling interests.
- Share activity: Athene issued $350 million of common stock during the first nine months and repurchased $425 million of common stock. The remaining share-repurchase authorization was approximately $224 million at September 30, 2020.
Margins, investment performance and management commentary
- Retirement Services’ nine-month net investment spread declined to 1.14% from 1.38%, as the net investment earned rate fell to 3.90% from 4.38%, partly offset by lower cost of funds.
- The nine-month investment margin on deferred annuities declined to 1.96% from 2.40%. Q3 net investment spread improved to 1.41% from 1.13% because lower cost of funds more than offset a modest decline in the net investment earned rate.
- Management attributed lower investment returns primarily to reduced floating-rate income, higher cash balances, weaker alternative investment performance in the first quarter and the effects of the COVID-19 economic downturn.
- Management expects continued low interest rates to pressure investment income and adjusted operating income. It estimates that a 25-basis-point rate decrease persisting for 12 months would reduce adjusted operating income by approximately $35 million to $45 million.
- Retail sales declined modestly to $5.5 billion from $5.6 billion in the first nine months, while flow-reinsurance deposits increased to $5.4 billion from $2.8 billion and funding-agreement deposits increased to $6.1 billion from $802 million.
Outlook, risks, contingencies and unusual items
- COVID-19: The company identified business-continuity, market and liquidity risks, including potential increases in credit losses, policyholder withdrawals, lapses, asset impairments and volatility in alternative investments. As of October 31, 2020, management reported no material adverse change in policyholder behavior and no material impairment to operations.
- Interest-rate and market risk: A hypothetical immediate 25-basis-point increase in rates from September 30 levels was estimated to reduce point-in-time pretax income by $731 million, partly offset by a $57 million increase from DAC, DSI, VOBA and rider-reserve effects.
- LIBOR transition: Contracts tied to LIBOR had aggregate notional exposure of $59.8 billion, including $30.7 billion extending beyond 2021. The company stated that unsuccessful or delayed transition efforts could materially affect results, liquidity and financial reporting.
- Investment concentrations: Management highlighted exposure to real estate, financial services, aviation, energy and retail, as well as significant individual exposures to MidCap, AmeriHome, Athora and PK AirFinance. Approximately 23% of net invested assets were in real-estate-related assets.
- Commitments: Investment commitments totaled $5.8 billion. Undrawn letters of credit totaled $1.4 billion. Restricted assets were $16.2 billion.
- Litigation and regulatory matters: The filing discusses the COLI litigation, policy-administration and market-conduct matters, the $45 million NYSDFS consent-order fine paid in Q2 2020, and Caldera-related litigation. Management does not expect current proceedings to have a material overall effect, while acknowledging litigation uncertainty.
- Related-party dependence: Apollo manages substantially all of Athene’s investments. Nine-month management fees under investment-management arrangements were $362 million, and the filing describes restrictions and delays on terminating those arrangements.
Most important facts for an investor to verify
- Whether the Jackson reinsurance transaction produces the expected spread, capital efficiency and liquidity benefits, including the impact of funds-withheld assets and ACRA’s third-party capital.
- The adequacy of credit-loss allowances under CECL, particularly for commercial mortgages, residential mortgages, structured securities and aviation-related investments.
- The sustainability of adjusted operating earnings and the 1.14% nine-month net investment spread in a prolonged low-rate environment.
- Actual policyholder surrender, lapse and withdrawal behavior as COVID-19-related economic conditions evolve.
- Exposure to Apollo-managed assets, related-party investments, management fees and restrictions on terminating investment-management agreements.
- Progress in remediating the $59.8 billion of LIBOR-linked contract exposure and the potential for basis mismatch or valuation effects.
- Regulatory capital, solvency ratios and dividend capacity at the insurance subsidiaries; the filing provides detailed year-end 2019 statutory ratios but does not provide updated September 30, 2020 statutory RBC or BSCR ratios in the supplied text.