Athene Holding Ltd. — 2022 Q3 Form 10-Q Summary
Business context and reporting period
Athene is a retirement-services company that issues, reinsures and acquires annuities and other retirement savings products in the United States and internationally. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022.
On January 1, 2022, Athene merged with Apollo Global Management, Inc. and became its wholly owned subsidiary. The filing applies pushdown accounting; periods before the merger are presented as “Predecessor” and later periods as “Successor.” Management cautions that this accounting change limits comparability with 2021.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenues | $2.3 billion | $8.7 billion | $3.8 billion | $19.5 billion |
| Net investment income | $1.8 billion | $1.5 billion | $5.3 billion | $5.2 billion |
| Investment-related gains/(losses) | $(2.8) billion | $385 million | $(12.8) billion | $2.6 billion |
| Net income/(loss) | $(1.4) billion | $770 million | $(6.9) billion | $2.7 billion |
| Net income/(loss) available to common shareholder | $(936) million | $698 million | $(4.6) billion | $2.7 billion |
| Spread related earnings | $576 million | $548 million | $1.7 billion | $2.1 billion |
| Net investment spread | 1.60% | 1.73% | 1.59% | 2.13% |
| Operating cash flow | Not separately provided | Not separately provided | $6.1 billion | $7.3 billion |
Net investment income increased because of portfolio growth and higher floating-rate income, but this was more than offset by market-related losses. The investment-related losses reflected higher Treasury rates, wider credit spreads, unfavorable equity-index performance, mortgage-loan fair-value losses, derivative losses and realized losses on available-for-sale securities.
Total benefits and expenses were $3.9 billion in the third quarter and $11.9 billion for the nine months, compared with $8.0 billion and $16.7 billion, respectively, in the prior-year periods. The decreases primarily reflected lower pension group annuity-related benefits, favorable changes in indexed-annuity embedded derivatives and purchase-accounting effects. Policy and other operating expenses increased to $388 million in Q3 and $1.1 billion for the nine months.
Balance sheet, capital and liquidity
- Total assets were $236.7 billion at September 30, 2022, compared with $235.1 billion at December 31, 2021.
- Total investments, including related parties and consolidated VIEs, were $200.4 billion, down from $212.5 billion, primarily because of unrealized losses and the distribution of Athene’s Apollo investment to AGM.
- Net invested assets increased to $195.2 billion from $175.3 billion, driven by net organic inflows, purchase-accounting adjustments and alternative-investment valuation changes.
- Total liabilities were $238.6 billion; debt was $3.3 billion, compared with $3.0 billion at year-end 2021.
- GAAP total equity declined to a deficit of $1.9 billion, largely because of a $16.1 billion after-tax other comprehensive loss. AFS securities had $21.6 billion of gross unrealized losses at quarter-end, principally attributable to interest-rate and spread movements.
- Adjusted AHL common shareholder equity was $15.0 billion, and the adjusted debt-to-capital ratio was 14.5%, compared with 14.9% at December 31, 2021.
- Cash flow from operations was $6.1 billion. Investing activities used $22.3 billion, while financing activities provided $17.1 billion. Cash and cash equivalents, restricted cash and VIE cash totaled approximately $11.3 billion at period-end.
- A $2.5 billion revolving liquidity facility, with potential capacity up to $3.0 billion, was entered into during the quarter and was undrawn at September 30, 2022. The existing $1.25 billion credit facility was also undrawn.
Material changes versus the prior comparable period
- Q3 net loss available to common shareholders was $936 million versus $698 million of income; the nine-month loss was $4.6 billion versus $2.7 billion of income.
- Organic inflows increased 32% year over year to $36.6 billion for the nine months. Retail inflows rose to $12.7 billion from $5.9 billion, and flow-reinsurance inflows rose to $4.3 billion from $1.2 billion.
- Total net flows increased to $19.8 billion from $14.5 billion, despite gross outflows rising to $16.8 billion from $13.2 billion.
- Fixed-annuity sales benefited from higher interest rates, bank and broker-dealer expansion, and strong indexed-annuity and MYGA demand.
- Spread related earnings increased 5% in Q3 to $576 million but declined 18% for the nine months to $1.7 billion. The nine-month decline reflected weaker alternative-investment performance and higher operating expenses, partly offset by lower cost of funds.
- On April 1, 2022, Athene contributed approximately $8.0 billion of alternative investments to Apollo Aligned Alternatives, a consolidated VIE. Third-party investors began investing in the vehicle on July 1, 2022.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings guidance. Management expects continued growth in retail, flow reinsurance, pension group annuities and funding agreements, supported by higher interest rates, expanded distribution and Athene’s credit profile. Management estimated approximately $5.8 billion of capital available to deploy, consisting of $2.7 billion of excess capital, $2.9 billion of assumed untapped debt capacity and $0.2 billion of available undrawn ACRA capital.
Management reported an expected annual net investment spread of 1%–2% over the 8.5-year weighted-average life of net reserve liabilities. It also indicated that a sustained 25-basis-point rise in interest rates could increase spread related earnings by approximately $30 million to $40 million over 12 months, although actual results may differ materially.
- Market risks remain significant. A hypothetical immediate 25-basis-point rate increase was estimated to reduce point-in-time pretax income by $749 million, partially offset by $24 million of DAC, DSI and rider-reserve effects. A 10% decline in public equity markets was estimated to reduce pretax income by $244 million, partially offset by $15 million of related offsets.
- LIBOR-related contracts had total notional exposure of $60.5 billion, including $47.8 billion extending beyond June 30, 2023. Transition execution, fallback provisions and potential basis mismatches remain material uncertainties.
- Investment risks include substantial exposure to fixed-income securities, private placements, structured credit, mortgage loans, alternative investments, related parties and Level 3 valuations. The company had $18.1 billion of investment commitments that could become payable upon counterparty request.
- Liquidity could be affected by policyholder withdrawals, funding-agreement maturities, collateral requirements, adverse asset sales and the relatively illiquid nature of portions of the investment portfolio.
- Regulatory risks include increased scrutiny of private-equity-owned insurers, potential changes to capital and reserve requirements, sales-conduct rules, tax law and insurance regulation.
- The Inflation Reduction Act’s corporate minimum tax and stock-repurchase excise tax could affect future tax liabilities; implementation remained unclear.
- Regulatory matters related to policy administration and prior Aviva USA business remain possible, although management believes current proceedings are not expected to have a material effect on financial condition. Global Atlantic or its affiliates are responsible for indemnifying certain related fines and remediation costs.
Most important facts for investors to verify
- Assess the economic significance of the $21.6 billion AFS unrealized loss and whether credit losses, forced sales or further spread widening could convert OCI losses into earnings or capital pressure.
- Reconcile GAAP equity deficit with adjusted equity and statutory capital measures; the filing’s latest detailed US RBC and Bermuda capital ratios are for December 31, 2021 rather than September 30, 2022.
- Evaluate whether higher interest rates continue to improve sales and floating-rate income faster than they increase policyholder crediting costs, funding costs and fair-value volatility.
- Review Apollo-related fees, investment concentrations, related-party assets, governance arrangements and conflicts-of-interest protections.
- Monitor the $18.1 billion of investment commitments, $231.3 billion of disclosed future cash obligations, funding-agreement maturities and available liquidity facilities.
- Confirm the timing and quantified equity impact of the required January 1, 2023 adoption of long-duration insurance accounting changes.
- Track LIBOR transition execution, regulatory examinations, litigation and the eventual impact of the Inflation Reduction Act.