Athene Holding Ltd. 2020 Q2 Form 10-Q Summary
Business context and reporting period
Athene is a retirement services company that issues, reinsures and acquires annuities, pension risk-transfer products and institutional funding products in the United States, Bermuda and the United Kingdom. The unaudited report covers the three and six months ended June 30, 2020, with comparisons to 2019.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenues | $4.398 billion | $3.423 billion | $2.849 billion | $8.418 billion |
| Net income attributable to AHL shareholders | $843 million | $720 million | $(204) million | $1.428 billion |
| Net income available to common shareholders | $824 million | $720 million | $(241) million | $1.428 billion |
| Diluted EPS | $4.19 | $3.75 | $(0.64) | $7.41 |
| Net cash from operating activities | Not separately provided for the quarter | $1.402 billion | $1.583 billion | |
| Total assets | $183.241 billion at June 30, 2020 | $146.875 billion at December 31, 2019 | ||
| Total equity | $15.639 billion at June 30, 2020 | $14.141 billion at December 31, 2019 |
- Q2 GAAP ROE was 26.8%, compared with 25.6% in the prior-year quarter. Six-month ROE was negative 3.4%, compared with 27.7% in the prior-year period.
- Six-month adjusted operating income available to common shareholders was $382 million, down from $657 million; adjusted operating ROE was 7.8%, down from 14.6%.
- Retirement Services adjusted operating income was $208 million in Q2 and $412 million for the six months, versus $376 million and $662 million, respectively, in the comparable periods.
- Retirement Services net investment spread was 0.96% in Q2 and 1.00% for the six months, compared with 1.68% and 1.52% in 2019.
- Net invested assets were $137.3 billion at June 30, 2020, up from $117.5 billion at year-end 2019. Consolidated investments, including related parties, were $163.0 billion.
- Cash and cash equivalents plus restricted cash totaled $7.521 billion at June 30, 2020, versus $4.642 billion at year-end 2019.
- Long-term debt was $1.486 billion, compared with $992 million at year-end 2019; short-term debt declined to zero from $475 million.
Material changes versus the prior comparable period
- Q2 net income available to common shareholders increased 14% to $824 million, primarily because investment-related gains increased to $2.548 billion from $1.313 billion and net investment income increased to $1.336 billion from $1.182 billion. These gains were partly offset by lower premiums and higher interest-sensitive contract benefits.
- For the six months, common-shareholder results reversed to a $241 million loss from $1.428 billion of income. Investment-related gains shifted to a $1.024 billion loss from a $3.089 billion gain, reflecting market volatility, unfavorable FIA hedging results, lower reinsurance-asset fair values and $289 million of credit-loss provisions.
- Six-month net investment income declined to $2.081 billion from $2.264 billion, primarily because of lower floating-rate income and unfavorable alternative-investment performance.
- The company adopted the current expected credit loss standard on January 1, 2020, reducing retained earnings by $117 million net of tax. Total mortgage-loan allowances increased to $399 million at June 30 from $11 million at year-end 2019.
- On June 18, 2020, Athene entered into a funds-withheld coinsurance transaction with Jackson covering $27.439 billion of assumed liabilities and generating $28.805 billion of net consideration. The related $500 million equity investment in Jackson’s indirect parent closed on July 17, 2020.
- Organic deposits increased 24% to $10.868 billion for the six months. Gross deposits, including the Jackson transaction, were $39.660 billion, or $21.392 billion net of ACRA’s noncontrolling interest.
- On February 28, 2020, Athene completed a strategic share transaction with Apollo, issued additional Class A shares, converted its multi-class share structure and received an investment in Apollo valued at approximately $1.1 billion plus $350 million in cash.
- Athene issued $500 million of 6.150% senior notes due 2030 and $583 million of Series C preferred stock during 2020.
Guidance, outlook, commentary and risks
- Management estimated approximately $7.3 billion of capital available for deployment, consisting of $3.0 billion of excess capital, $2.5 billion of potential debt capacity and $1.8 billion of uncalled ACRA capital, subject to market and other conditions.
- Management expects COVID-19 to remain a material source of uncertainty. It identified business-continuity, market, credit, liquidity and policyholder-behavior risks, although no material operational impairment or adverse change in policyholder behavior had been observed as of July 31, 2020.
- Excluding the Jackson transaction, available liquidity was approximately $8.5 billion at June 30, comprising $5.2 billion of cash and $3.3 billion of undrawn financing capacity. The $1.25 billion credit agreement was undrawn.
- Management estimated that a 25-basis-point interest-rate decline persisting for 12 months could reduce adjusted operating income by approximately $30 million to $35 million.
- Stress testing estimated potential credit losses, impairments and alternative-investment losses of approximately $1 billion under a baseline recession scenario and $2 billion under a deep recession scenario, before management intervention. These scenarios are hypothetical.
- The company had $5.1 billion of investment commitments, $1.418 billion of undrawn letters of credit and $27.084 billion of contracts tied to LIBOR that extend beyond 2021. LIBOR transition remains a material uncertainty.
- Key exposures include credit spreads, low interest rates, real estate and mortgage assets, CLOs, alternative investments, aviation finance, financial services, counterparty performance, regulatory capital, tax matters and reliance on Apollo for investment management and LIBOR-transition activities.
- Regulatory matters include a $45 million NYSDFS consent-order fine paid in Q2 and continuing policy-administration matters related to the Aviva USA block. Management does not currently expect these matters to be material, but acknowledges that regulatory outcomes remain uncertain.
Important facts for investors to verify
- Reconcile the large difference between Q2 profitability and the six-month loss, particularly the effects of FIA derivatives, reinsurance embedded derivatives, credit losses and investment-market movements.
- Assess the credit quality and valuation sensitivity of the enlarged funds-withheld portfolio arising from the Jackson transaction, including related exposure to corporate bonds, mortgages, structured securities and cash.
- Monitor mortgage-loan delinquencies, credit-loss allowances and exposure to hotels, retail, office properties, aviation and other COVID-19-sensitive sectors.
- Verify statutory capital, RBC and BSCR ratios as of June 30, 2020; the filing provides the latest detailed ratios as of December 31, 2019 rather than June 30, 2020.
- Evaluate liquidity after the Jackson transaction, including collateral requirements, FHLB funding agreements, repurchase facilities, policyholder withdrawals and the $5.1 billion of investment commitments.
- Review Apollo-related fees, related-party investments, governance rights, investment-management termination restrictions and the valuation volatility of Athene’s Apollo investment.
- Track the implementation of the long-duration insurance accounting standard, expected for January 1, 2022 or potentially 2023, and its possible effects on reserves, DAC, market-risk benefits and earnings.