This annuity company is expected to grow at an annual rate of 15.39% over the next five years.
Athene Holding Ltd. (ATH)
From Investor Advisory Service
With assets of $139 billion, Athene Holding Ltd. (ATH) may be one of the largest companies most investors have never heard of. Athene offers annuities directly to individuals, through intermediaries like banks and insurance agents, and by making deals with other insurance companies and pension funds. Most are “fixed indexed annuities” (FIAs) while the remaining offerings are primarily fixed annuities. It has almost no exposure to variable annuities, which are high-expense, tax-deferred investment vehicles.
FIAs are advertised as the chance to participate in the upside of the stock market without risking loss of principal. Each year, an FIA is “credited” with interest based on the performance of an underlying index such as the S&P 500. Depending on the FIA contract terms, interest credited will typically be some percentage of the appreciation of the index (without dividends), subject to a cap and never less than zero, even when the index is down. FIA providers like Athene buy call options on the S&P sufficient to pay investors during up years. The rest of the investor money is invested primarily in income-producing investments that form the bulk of the insurer’s revenue and profits.
Indexed annuities are popular with investors desiring a low-risk way to participate in the stock market, but long-term returns tend to be modest due to caps on upside returns. Fixed annuities are the more traditional form of annuity in which an individual turns over a pool of money to the insurance company in exchange for a series of payouts for as long as the investor (or investors in the case of a joint annuity) lives. This payout can start right away (an immediate annuity) or at a later date (a deferred annuity). Most annuities come with a surrender charge to prevent investors from changing their minds. The upside for the annuity company is that the money will remain invested with them for a very long time.
Athene is the second largest provider of fixed indexed annuities in the U.S. with a market share of 9.5% in 2018. It is the fifth largest provider of fixed annuities with a market share of 5.8%.
We are attracted to Athene because of its growth, its high return on capital, and its ultra-cheap valuation. That being said, we are not big fans of annuities even as we acknowledge they are very popular and constitute a large market.
Like all annuity companies, Athene’s results require considerable interpretation. Accounting rules require the re-valuation of certain assets and liabilities every quarter. Some of these are
genuine changes, like realized capital gains and losses, but others are temporary such as changes in values of derivatives backing its annuities. We report earnings excluding these changes. Most data sources leave them in, leading to a volatile looking SSG.
Athene has experienced strong growth since its founding. While much of its growth is “organic,” a considerable amount has come from the purchase of blocks of business from other insurance companies. It also enters into pension risk transfer agreements where Athene issues annuities to pensioners of large corporate retirement plans.
Athene’s adjusted return on equity was 16.2% in the second quarter while the unadjusted number was 25.6%. Its P/E is in the mid-single digits. The stock trades approximately 20% below
adjusted book value and more than 40% below unadjusted book value.
These absurdly low valuations don’t come without risk. The company’s profits will likely decline, even on an adjusted basis, when the stock market goes down. We’ve seen a few ups and
downs during its three years as a public company, but we don’t know what will happen when a bear market selloff happens. However, a similar company with a record longer than Athene’s, American Equity Investment Life (AEL), also sells fixed indexed annuities. While barely profitable on a GAAP basis in the last market downturn, it actually experienced modest growth in adjusted EPS. Athene recently gave up trying to buy AEL.
Expertise and low costs of capital are the keys to success in the fixed annuity industry. Athene’s credit rating was recently raised to A by all three leading credit rating agencies. Its goal is to get to A+. Higher ratings reduce its cost of capital.
Based on its return on capital, we believe Athene can grow its business at least 12% a year. Five years of such growth could lead to EPS of $11.68. A repeat of the high P/E ratio of 10.6 could lead to a stock price of 124. The potential total return could be 27% annually. We see the downside risk as 32% to 25.50, the product of the low P/E of 8.5 and theoretical low EPS of $3.00.
Doug Gerlach, www.InvestorAdvisoryService.com, 1-877-33-ICLUB, November 2019