Athene Holding Ltd. 2018 Form 10-K Summary
Business context and reporting period
Athene Holding Ltd. is a Bermuda-based retirement services company that issues, reinsures and acquires fixed annuities, pension risk-transfer products and funding agreements. Its primary reportable segment is Retirement Services, supported by an investment strategy managed substantially by Athene Asset Management, an Apollo affiliate. This Form 10-K covers the fiscal year ended December 31, 2018; it is an annual filing rather than a quarterly report.
Effective January 1, 2018, Athora was deconsolidated after Athene’s ownership declined to approximately 10% of voting power and 23% of economic interest. Athene also completed significant Voya and Lincoln reinsurance transactions during 2018.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenues | $6.543 billion | $8.727 billion | Down 25% |
| Income before taxes | $1.175 billion | $1.464 billion | Down 20% |
| Net income available to AHL shareholders | $1.053 billion | $1.358 billion | Down 22% |
| Adjusted operating income | $1.140 billion | $1.055 billion | Up 8% |
| GAAP ROE | 12.1% | 16.9% | Down 4.8 points |
| Adjusted operating ROE | 13.9% | 15.1% | Down 1.2 points |
| Net investment income | $4.004 billion | $3.269 billion | Up 22% |
| Net investment earned rate | 4.54% | 4.47% | Up 7 basis points |
| Deferred-annuity investment margin | 2.65% | 2.82% | Down 17 basis points |
| Operating cash flow | $2.874 billion | $3.170 billion | Down 9% |
| Total assets | $125.505 billion | $100.161 billion | Up 25% |
| Total AHL shareholders’ equity | $8.276 billion | $9.176 billion | Down 10% |
Total premiums and deposits increased to $40.031 billion from $12.011 billion. Reserve liabilities increased to $107.732 billion from $81.252 billion, primarily reflecting growth in fixed indexed annuities and acquired or reinsured blocks.
- Retirement Services adjusted operating income rose 16% to $1.201 billion, while segment adjusted operating ROE declined to 18.4% from 21.5%.
- Fixed indexed annuity premiums and deposits increased to $29.973 billion from $5.480 billion, driven substantially by inorganic transactions.
- Invested assets reached $111.034 billion, including $55.772 billion of corporate securities, $28.837 billion of structured securities, $14.423 billion of mortgage loans and $4.492 billion of alternative investments.
- Approximately 94.2% of AFS securities, including related parties, were investment grade under NAIC designations 1 or 2.
- Interest-sensitive contract liabilities were $96.610 billion, and future policy benefits were $16.704 billion.
- Long-term debt was $991 million at year-end, principally the $1.0 billion of 4.125% senior notes due 2028. The $1.0 billion revolving credit facility was undrawn, and the company reported compliance with its covenants.
- Cash, cash equivalents and restricted cash totaled approximately $3.4 billion. Management identified $52.8 billion of assets as liquid for liquidity-monitoring purposes.
- U.S. insurance subsidiaries reported a 421% company-action-level RBC ratio for AADE. ALRe reported a 340% BSCR ratio and a 405% RBC ratio.
Material changes versus the prior comparable period
- Net income declined primarily because investment-related gains changed from a $2.572 billion gain in 2017 to a $1.324 billion loss in 2018. The deterioration reflected weaker equity-index performance, widening credit spreads and higher U.S. Treasury rates.
- The S&P 500 declined 6.2% in 2018 versus a 19.4% increase in 2017, reducing the value of FIA hedging derivatives and affecting related embedded-derivative accounting.
- Net investment income increased $735 million to $4.004 billion because of portfolio growth, higher floating-rate income and alternative investment income.
- Benefits and expenses declined $1.895 billion to $5.368 billion, principally because of lower FIA fair-value-related interest-sensitive contract benefits and lower DAC, DSI and VOBA amortization.
- Adjusted operating income increased despite lower GAAP earnings, reflecting growth in invested assets and higher underlying Retirement Services earnings. The deferred-annuity investment margin narrowed as the cost of crediting rose to 1.95% from 1.88%.
- The Voya transactions added approximately $19.1 billion of deposits and the Lincoln transaction added approximately $7.9 billion. These transactions materially increased funds-withheld and modco exposures.
- Athora’s deconsolidation reduced reported assets by approximately $6.3 billion and invested assets by approximately $6.0 billion, while shifting Athora to a related-party investment.
- A fourth-quarter share repurchase authorization permitted up to $250 million of Class A share repurchases. Athene repurchased approximately 2.5 million shares for $100 million during 2018.
Guidance, outlook, commentary, risks and unusual items
Management expects continued growth through retail, flow reinsurance, institutional products, pension risk transfer, acquisitions and block reinsurance. It targets generally mid-teen returns for organic growth and mid-teen or higher returns for inorganic opportunities, but these are strategic targets rather than formal earnings guidance.
Management expects the effective and overall tax rates to average approximately 9% to 10% over the near and medium term, subject to significant period-to-period variation and uncertainty related to the Base Erosion and Anti-Abuse Tax.
- Control weakness and financial statement revision: Management and the auditor identified a material weakness in controls over valuation of the host contracts within FIA liabilities. A $140 million understatement of FIA liabilities, offset by $62 million of DAC, rider-reserve and tax effects, resulted in a net $78 million correction. The error was not material to prior annual statements but was material to fourth-quarter 2018 results. Management implemented a new control in January 2019 and assessed the weakness as remediated after year-end.
- Fourth-quarter result: Revised quarterly information shows a fourth-quarter 2018 net loss of approximately $104 million, despite full-year net income of $1.053 billion.
- Market and investment risk: The portfolio is exposed to credit spreads, interest rates, structured securities, CLOs, mortgage loans, alternative investments and relatively illiquid assets. Gross unrealized losses on AFS securities increased to $1.797 billion from $246 million.
- Interest-rate sensitivity: An immediate 25-basis-point rate increase was estimated to reduce point-in-time pretax income by $199 million, plus an additional $23 million effect from DAC, DSI, VOBA and rider-reserve adjustments. A persistent 25-basis-point increase was estimated to increase adjusted operating income by approximately $25 million to $30 million.
- Reinsurance and counterparty risk: Athene remains legally responsible for policyholder obligations if certain reinsurers fail to perform. Major exposures include Global Atlantic, Protective, VIAC and other counterparties.
- Regulatory and legal matters: The company faces continuing regulatory inquiries related to policy administration and conversion of legacy Aviva business. A January 2019 NYSDFS letter raised concerns regarding licensing exemptions for certain PRT activities; reasonably possible losses could not be estimated.
- Litigation: A Caldera-related lawsuit seeks alleged damages of at least $1.5 billion; the company disputes the claims and states that reasonably possible losses cannot currently be estimated.
- Liquidity and commitments: Investment-fund commitments totaled $3.036 billion, and restricted assets totaled $8.032 billion. Funding agreement obligations included $2.7 billion under the FABN program and $926 million with the FHLB.
- Governance and related-party exposure: Apollo controlled approximately 45% of total voting power. AAM and Apollo affiliates managed substantially all invested assets and received $349 million of asset-management and sub-advisory fees in 2018.
Most important facts for an investor to verify
- Reconcile the revised quarterly results, particularly the approximately $104 million fourth-quarter loss, to the $1.053 billion full-year net income.
- Review remediation testing and auditor updates concerning the material weakness in FIA host-contract valuation controls.
- Assess whether growth from Voya, Lincoln and other reinsurance transactions is producing acceptable spreads after crediting costs, rider reserves, capital charges and counterparty risk.
- Monitor the deferred-annuity investment margin, policyholder behavior, surrender rates, rider utilization and reserve adequacy.
- Evaluate unrealized losses, below-investment-grade and Level 3 exposures, CLO and mortgage-loan concentrations, and sensitivity to rates and credit spreads.
- Verify capital and liquidity headroom at AHL, ALRe and the U.S. insurance subsidiaries, including dividend restrictions and collateral requirements.
- Track regulatory inquiries, the NYSDFS licensing issue, policy-administration matters, Caldera litigation and any related indemnification or settlement costs.
- Review the economic terms, fees and termination restrictions associated with AAM and Apollo-related investment-management arrangements.
- Consider tax risks involving BEAT, CFC and RPII rules, U.S. taxation of non-U.S. entities, FATCA and the expiration of Bermuda’s current tax assurance after 2035.