Athene Holding Ltd. 2019 Q1 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 indexed annuities, fixed-rate annuities, pension risk transfer contracts and institutional funding agreements. The unaudited report covers the three months ended March 31, 2019, with comparisons to the three months ended March 31, 2018 and balances at December 31, 2018.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenues | $4.961 billion | $1.011 billion | Up $3.950 billion |
| Income before taxes | $740 million | $322 million | Up $418 million |
| Net income | $708 million | $277 million | Up 156% |
| Basic EPS | $3.65 | $1.40 | Up $2.25 |
| Adjusted operating income | $287 million | $241 million | Up 19% |
| Operating cash flow | $1.009 billion | $573 million | Up $436 million |
| Net cash used in investing | $2.776 billion | $2.884 billion | Improved by $108 million |
| Net cash provided by financing | $1.882 billion | $139 million | Up $1.743 billion |
- GAAP ROE was 30.8%, compared with 12.4% in the prior-year quarter. Adjusted ROE was 14.5%, compared with 17.1%.
- Retirement Services adjusted operating income was $286 million, up from $239 million. Retirement Services adjusted operating ROE was 14.4%, down from 17.8%.
- Net investment income was $1.066 billion, compared with $855 million. Investment-related gains were $1.772 billion, versus a $236 million loss in Q1 2018.
- The effective tax rate was approximately 4%, compared with 14% in Q1 2018.
- Total assets were $132.857 billion at March 31, 2019, up from $125.505 billion at December 31, 2018. Shareholders’ equity was $10.117 billion, up from $8.276 billion.
- Long-term debt was $991 million. The company also had an undrawn $1.0 billion revolving credit facility and a $174 million outstanding balance on its intercompany revolving note with ALRe.
- Cash and cash equivalents were $3.021 billion, with restricted cash of $497 million. Liquid assets used for liquidity monitoring were approximately $54.3 billion.
- Invested assets were $113.771 billion, compared with $111.034 billion at year-end 2018. Approximately 94.5% of available-for-sale securities had NAIC designations of 1 or 2.
Material changes versus the prior comparable period
- Deposits increased to $4.759 billion from $2.056 billion, driven by retail sales of $1.816 billion, flow reinsurance of $1.020 billion and pension risk transfer deposits of $1.923 billion. No funding agreements were issued in Q1 2019, versus $300 million in Q1 2018.
- Premiums increased to $1.966 billion from $278 million, primarily because of higher pension risk transfer and flow reinsurance activity.
- Investment-related gains improved by approximately $2.0 billion, primarily because of favorable FIA hedging derivative valuations, higher reinsurance asset values and favorable trading-security results. The S&P 500 increased 13.1% during Q1 2019, compared with a 1.2% decline in Q1 2018.
- Benefits and expenses increased to $4.221 billion from $689 million, reflecting growth in the insurance blocks, higher pension risk transfer obligations, FIA embedded-derivative changes and higher amortization.
- Net investment spread declined to 1.36% from 1.79%. The net investment earned rate declined to 4.21% from 4.63%, while cost of funds increased slightly to 2.85% from 2.84%.
- Investment margin on deferred annuities declined to 2.23% from 2.76%, as the net investment earned rate decreased and the cost of crediting increased to 1.98% from 1.87%.
- Accumulated other comprehensive income increased to $706 million from a $472 million loss, primarily due to $1.478 billion of pretax unrealized investment gains in Q1 2019 versus an $891 million loss in Q1 2018.
- The company repurchased approximately 1.2 million Class A shares for $47 million during Q1 2019. Remaining authorization was $103 million at March 31 and $350 million as of May 7, 2019 after additional authorization.
Guidance, outlook, management commentary and risks
- Management reported an expected annual Retirement Services net investment spread of 1% to 2% over the 9.6-year weighted-average life of reserve liabilities and approximately $1 billion of excess capital available for growth opportunities.
- Management expects continued organic growth in retail, flow reinsurance and institutional channels, supported by new products, additional distribution partners and pension risk transfer opportunities. Inorganic block reinsurance transactions are expected to remain an important growth source.
- Management discussed a proposed framework involving ALRe, Athene Co-Invest Reinsurance Affiliate 1A and Apollo/Athene Dedicated Investment Program capital. The arrangement remained subject to fundraising and final approvals. ALRe currently retrocedes approximately $8 billion of annuity reserves to ACRA.
- Market conditions remain sensitive to interest rates, Treasury yields, credit spreads, equity volatility and Federal Reserve policy. Prolonged low rates could reduce investment income and spreads, while higher rates could reduce the fair value of existing investments and increase surrender activity.
- Key risks include credit and counterparty losses, reinsurance counterparty performance, insurance and regulatory capital requirements, rating-agency actions, competition, policyholder lapses and withdrawals, litigation, regulatory scrutiny, operational and information-technology failures, tax-law changes and reliance on Apollo-affiliated investment management.
- The company had $2.938 billion of investment commitments, primarily to investment funds, and $9.513 billion of restricted assets. It also had a $219 million unused letter of credit expiring by December 31, 2020.
- Regulatory inquiries continued regarding policy administration and pension risk transfer licensing. Potential losses related to the New York pension risk transfer matter could not be estimated. The Caldera litigation includes a claim seeking at least $1.5 billion, although the company believes it has meritorious defenses.
- The company adopted the new lease guidance on January 1, 2019 without a material effect. It is evaluating the effects of future accounting guidance, including credit losses and long-duration insurance contracts.
- Management stated that a material weakness in internal control identified in the 2018 Annual Report was remediated during Q1 2019 through implementation of a new control. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Assess the sustainability of Q1 GAAP earnings because a substantial portion of the increase came from market-sensitive investment and derivative gains.
- Reconcile GAAP net income of $708 million with adjusted net income of $324 million and adjusted operating income of $287 million.
- Monitor the decline in net investment spread and deferred-annuity investment margin, particularly under changing interest-rate and credit-spread conditions.
- Review liquidity, collateral requirements, restricted assets, FHLB funding agreements and the availability of the undrawn revolving credit facility under stressed scenarios.
- Evaluate credit quality and valuation risk in the investment portfolio, including structured securities, mortgage loans, alternative investments and related-party holdings.
- Track regulatory matters, the Caldera litigation, policy-administration complaints and the proposed ACRA/ADIP framework, including required approvals and economic terms.
- Confirm statutory capital and RBC metrics, noting that the filing provides the latest detailed U.S. RBC and ALRe capital ratios as of December 31, 2018 rather than March 31, 2019.