Athene Holding Ltd. — Form 10-Q Summary
Business context and reporting period
Athene is a Bermuda-domiciled retirement services company that issues, reinsures and acquires fixed annuities, pension risk-transfer products, funding agreements and other retirement savings products. The filing covers the unaudited quarter and six months ended June 30, 2019, with comparisons to the corresponding 2018 periods. Its principal reportable segment is Retirement Services.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenues | $3.369 billion vs. $1.802 billion | $8.330 billion vs. $2.813 billion |
| Net income | $720 million vs. $257 million | $1.428 billion vs. $534 million |
| Income before taxes | $750 million vs. $321 million | $1.490 billion vs. $643 million |
| GAAP net margin | 21.4% vs. 14.3% | 17.1% vs. 19.0% |
| Adjusted operating income | $370 million vs. $288 million | $657 million vs. $529 million |
| Adjusted operating ROE | 16.2% vs. 14.2% | 14.6% vs. 13.3% |
| Net cash provided by operating activities | Not separately presented for the quarter | $1.583 billion vs. $427 million |
- Retirement Services adjusted operating income was $376 million in the quarter and $662 million for the six months, up from $287 million and $526 million, respectively.
- Six-month net investment spread was 1.52%, down from 1.85%; investment margin on deferred annuities was 2.44%, down from 2.79%.
- As of June 30, 2019, total assets were $138.980 billion, invested assets were $116.671 billion and total shareholders’ equity was $12.365 billion.
- Cash and cash equivalents were $4.847 billion, plus $391 million of restricted cash. The company also had a $1.0 billion undrawn revolving credit facility and estimated FHLB borrowing capacity of approximately $1.7 billion, including outstanding funding agreements.
- Long-term debt was $991 million, unchanged from December 31, 2018. The company also had $3.0 billion of funding agreements outstanding under its FABN program and $926 million of FHLB funding agreements.
- Six-month organic deposits were $8.798 billion, compared with $4.746 billion in 2018. Liability outflows were $5.7 billion, compared with $3.6 billion.
Material changes versus the prior comparable period
- Quarterly net income increased 180%, while six-month net income increased 167%. The primary driver was substantially higher investment-related gains, including favorable changes in reinsurance assets, FIA hedging derivatives and trading securities.
- Quarterly investment-related gains were $1.316 billion versus a $2 million loss in 2018; six-month gains were $3.088 billion versus a $238 million loss.
- Net investment income increased to $1.161 billion for the quarter and $2.227 billion for the six months, supported by portfolio growth from the Voya and Lincoln transactions, higher deposits and floating-rate investment income.
- Benefits and expenses increased to $2.619 billion for the quarter and $6.840 billion for the six months. Interest-sensitive contract benefits rose materially because of changes in the fair value of FIA embedded derivatives and growth in the business.
- Total investments, including related-party investments, increased to $120.106 billion from $107.632 billion at year-end 2018. AFS securities increased to $68.618 billion from $60.702 billion, and gross unrealized losses declined to $492 million from $1.797 billion.
- Accumulated other comprehensive income improved to $1.760 billion from a $472 million loss, primarily due to unrealized AFS investment gains.
- The company issued $839 million of Series A preferred stock, carrying a 6.35% fixed-to-floating, non-cumulative dividend rate, and repurchased $427 million of common stock during the first six months.
- The company entered into a revised fee agreement with Apollo Asset Management effective retroactively to January 1, 2019. Investment management fees were $94 million in the quarter and $186 million for the six months, compared with $86 million and $169 million, respectively.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal numerical earnings guidance. Management expects continued growth in retail, flow reinsurance, pension risk transfer and institutional channels, supported by new distribution relationships, product launches and an improving credit profile. Management reported approximately $1.5 billion of excess capital available for growth and stated that the company expects to continue pursuing organic and inorganic opportunities.
- Management expects low interest rates and an inverted yield curve to pressure reinvestment yields and investment spreads. Most deferred annuity products retain room to reduce crediting rates before reaching minimum guarantees, but competitive pressures may limit such reductions.
- Management is developing a framework involving Athene Co-Invest Reinsurance Affiliate and Apollo/Athene Dedicated Investment Program. The proposed structure would allow third-party capital to participate in qualifying acquisitions, block reinsurance and pension risk-transfer transactions; completion remained subject to fundraising and approvals.
- Key market exposures include interest rates, credit spreads, equity markets, foreign currency, derivative counterparties and valuation of less-liquid assets. The company held $7.112 billion of Level 3 assets and $13.264 billion of Level 3 liabilities measured at fair value.
- The investment portfolio was concentrated in corporate and structured credit assets. Approximately 94.9% of AFS securities were investment grade under NAIC designations, although 11.6% were below investment grade under NRSRO ratings.
- The company recorded $7 million of net other-than-temporary impairment losses during the six months.
- Contingencies include regulatory inquiries regarding policy administration and pension risk-transfer licensing, the COLI litigation, Caldera-related litigation involving a claimed $1.5 billion or more, and shareholder derivative actions alleging excessive investment management fees. Management generally does not expect current regulatory matters to be material, but stated that some potential losses cannot be reasonably estimated and that litigation outcomes remain uncertain.
- Future accounting changes could be significant, particularly the credit-loss standard required in 2020 and the long-duration insurance-contract standard required in 2021. Management had not yet produced a reasonable estimate of the credit-loss standard’s effect.
- Additional risks include potential BEAT and other U.S. tax liabilities, possible CFC, RPII or PFIC treatment for U.S. shareholders, restrictions on insurance-subsidiary dividends, dependence on AAM and Apollo, and limitations on Athene’s ability to terminate investment management agreements.
Facts investors should verify
- Separate recurring adjusted operating earnings from volatile GAAP investment gains, reinsurance fair-value changes and FIA derivative accounting effects.
- Track the decline in net investment spread and deferred-annuity investment margin, particularly under prolonged low interest rates.
- Review asset quality and downside exposure in corporate bonds, RMBS, CLOs, mortgage loans, alternative investments and Level 3 valuations.
- Confirm statutory capital, RBC and BSCR ratios at the next reporting date; the filing provides detailed ratios primarily as of December 31, 2018.
- Monitor the proposed ACRA/ADIP framework, related-party investment allocations and the revised AAM fee structure.
- Follow regulatory, COLI, Caldera and shareholder litigation developments, including the unresolved New York pension risk-transfer matter.
- Assess the effect of future credit-loss and long-duration insurance accounting standards on equity, earnings and reported reserves.