Athene Holding Ltd. — Q1 2023 Form 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 and indexed annuities, pension group annuities and funding agreements. The filing covers the unaudited three months ended March 31, 2023, compared with the same period in 2022. Athene is wholly owned and controlled by Apollo Global Management, Inc.
The company adopted the long-duration targeted improvements accounting guidance effective January 1, 2023 and retrospectively adjusted 2022 comparative results.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenues | $4.060 billion | $(281) million | Improved by $4.341 billion |
| Income before taxes | $1.386 billion | $(2.180) billion | Improved by $3.566 billion |
| Net income | $1.223 billion | $(1.896) billion | Improved by $3.119 billion |
| Net income attributable to Athene shareholders | $768 million | $(1.015) billion | Improved by $1.783 billion |
| Net income available to common shareholder | $721 million | $(1.050) billion | Improved by $1.771 billion |
| Net cash from operating activities | $75 million | $155 million | Down $80 million |
| Spread related earnings | $687 million | $674 million | Up 2% |
| Net investment spread | 1.83% | 1.87% | Down 4 basis points |
| Net investment earned rate | 4.25% | 3.65% | Up 60 basis points |
| Cost of funds | 2.45% | 1.81% | Up 64 basis points |
Reported net income and margins were strongly affected by market-driven fair-value changes. Net income available to common shareholders represented approximately 18% of reported revenues, while reported net income represented approximately 30%; these ratios are not necessarily indicative of recurring profitability.
Balance Sheet, Debt and Liquidity
- Total assets increased to $257.7 billion at March 31, 2023 from $243.9 billion at December 31, 2022.
- Total investments were $176.5 billion, including $26.8 billion of related-party investments. Total investments including related parties and consolidated VIEs were $219.4 billion.
- Net invested assets increased to $206.7 billion from $196.5 billion.
- Cash and cash equivalents were $13.8 billion, with total cash including restricted cash and consolidated VIE cash of $15.6 billion.
- Total debt was $3.650 billion. The adjusted debt-to-capital ratio was 14.7%, compared with a reported debt-to-capital ratio of 29.6%.
- The $2.5 billion Liquidity Facility, potentially expandable to $3.0 billion, was undrawn at quarter-end. A $1.0 billion draw made in February 2023 was repaid during the quarter.
- A separate $1.25 billion Credit Facility was also undrawn. The company reported access to $2.0 billion of committed repurchase facilities.
- Payables for repurchase agreements increased to $7.8 billion from $4.7 billion at year-end 2022.
- Management estimated approximately $7.5 billion of capital available for deployment, including excess equity capital, debt capacity and anticipated ACRA 2 capital.
Material Changes Versus the Prior Comparable Period
- Investment-related gains were $1.065 billion versus a $4.212 billion loss in Q1 2022, driven by favorable changes in reinsurance assets, mortgage loans, trading securities and FIA hedging derivatives.
- Net investment income increased to $2.407 billion from $1.683 billion, reflecting portfolio growth, higher floating-rate income and higher new-money yields. Alternative investment performance was less favorable.
- Premiums declined to $96 million from $2.110 billion, primarily because Q1 2022 included approximately $1.9 billion of pension group annuity premiums.
- Gross organic inflows increased 3% to $11.927 billion. Retail inflows rose to $8.578 billion from $2.865 billion, and flow reinsurance inflows rose to $1.793 billion from $1.001 billion.
- Funding agreement inflows declined to $1.5 billion from $5.7 billion, while pension group annuity inflows declined to $56 million from $1.994 billion.
- Gross outflows increased to $6.879 billion from $4.883 billion, primarily due to certain reinsurance blocks experiencing shock lapse activity. Net flows were $5.048 billion versus $6.673 billion.
- Benefits and expenses increased to $2.674 billion from $1.899 billion, mainly due to higher FIA embedded derivative costs, market risk benefit remeasurement losses and operating expenses.
- Accumulated other comprehensive loss improved to $6.148 billion from $7.321 billion, aided by $2.099 billion of unrealized investment gains on available-for-sale securities.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings guidance. Management expects continued growth in retail, flow reinsurance and institutional channels, supported by higher interest rates, product launches and expanded distribution. Management also expects inorganic transactions and pension group annuities to remain important growth channels.
- Management reported an expected annual net investment spread of 1% to 2% over an estimated 8.4-year weighted-average life of net reserve liabilities.
- Management expects the initial closing of ACRA 2 on July 1, 2023, subject to applicable conditions, with approximately $2.0 billion of pro forma capital available for deployment.
- Interest-rate volatility remains material. A hypothetical immediate 25-basis-point rate increase was estimated to reduce point-in-time pretax income by approximately $570 million, net of offsets; a persistent 25-basis-point increase was estimated to increase spread related earnings by approximately $45 million to $55 million.
- A 10% decline in public equity prices was estimated to reduce point-in-time pretax income by approximately $408 million.
- The investment portfolio contained $16.5 billion of gross unrealized losses on available-for-sale securities, although management stated it intended and was able to hold the securities for recovery and did not expect to be forced to sell them.
- The allowance for credit losses on available-for-sale securities increased to $503 million. The company recorded $41 million of intent-to-sell impairments, primarily associated with the failure of Silicon Valley Bank.
- Commercial mortgage loans 90 days past due or in non-accrual status increased to $142 million fair value from $19 million at year-end 2022. Management identified commercial real estate, particularly office properties, as an area of market concern.
- The company had $19.3 billion of investment commitments, $1.344 billion of undrawn letters of credit and $3.3 billion of guarantees related to the Atlas acquisition of certain Credit Suisse securitized-products assets. The fair value of Athene’s guarantees was described as immaterial to the financial statements.
- Contracts tied to LIBOR totaled $50.0 billion, including $44.7 billion extending beyond June 30, 2023. The filing warns that transition, fallback and basis-mismatch risks could adversely affect results.
- Key risks include interest-rate, equity, credit and counterparty risk; liquidity and surrender activity; reinsurance counterparty performance; regulatory capital and dividend restrictions; reliance on Apollo for investment management; related-party conflicts; litigation; tax-law changes; and operational or cybersecurity failures.
Most Important Facts for Investors to Verify
- Separate recurring spread related earnings of $687 million from volatile US GAAP earnings driven by fair-value movements.
- Monitor whether the 1.83% net investment spread remains stable as cost of funds rises and policyholder crediting rates reset.
- Review the quality, valuation and concentration of the investment portfolio, including unrealized losses, commercial real estate exposure, structured securities and related-party investments.
- Assess surrender, withdrawal and shock-lapse trends, particularly because gross outflows increased materially year over year.
- Verify statutory capital, RBC and Bermuda solvency metrics for the March 31, 2023 quarter; the filing provides detailed capital ratios primarily as of December 31, 2022.
- Evaluate liquidity against $243.3 billion of estimated future cash obligations, repurchase-agreement funding, collateral requirements and restricted assets.
- Review the economic and governance implications of Apollo investment-management arrangements, related-party transactions, ACRA vehicles and the Atlas guarantees.
- Track the implementation of LDTI, including sensitivity to discount rates, longevity, policyholder behavior and market risk benefit assumptions.