We noticed a bullish thesis on Athene Holding Ltd. (ATH) on ValueInvestorsClub by Jumpman23. VIC is our preferred site because the ideas there are generally posted by aspiring analysts who produce quality research. We find the ideas presented on the site well thought out and worthy of a serious consideration. Click here for the full article. Below we summarized the ATH bullish thesis:
ATH is an insurance holding company. Through its subsidiaries, the company conducts worldwide business in insurance, reinsurance and acquisition of retirement saving products. Founded in 2009 by Apollo Global Management to build a portfolio of fixed annuities, ATH has acquired Liberty Life Insurance Company, Investors Insurance Corporation, Presidential Life Corporation, and Aviva USA. The last one is ATH’s prized and most transformative acquisition for $1.55 billion, a 57% discount to book value thereby boosting its asset base from $15 billion to $60 billion.
This is the second write up by the analyst after the first one in September, 2018, which did not yield expected results, primarily, due to concerns about the credit asset impairment (asset’s market value less than the value listed on balance sheet).
ATH’s business model is geared towards more aggressive yield enhancement than traditional insurers tend to aim. Thus, the company’s asset allocation to AIFs and structured credit is generally higher than its peers. In that scenario, an impairment situation may not be entirely unexpected.
Two major developments since the analyst’s first write up
- Alignment between ATH and Apollo:
In 2019, Apollo and ATH announced a strategic transaction whereby the ownership structure between the two companies would go through a transformation to eliminate super voting structure, which has been a major culprit behind ATH’s sub-par valuation. The increased alignment between the two companies would help attract wider investor participation and allow ATH to be eligible to become an S&P 500 Index constituent.
- Creation of ACRA:
In 2019, ATH created a separately capitalized vehicle ACRA (Athene Co-Invest Reinsurance Affiliate) that facilitated third-party investors to co-invest with ATH in PRT (Pension Risk Transfer) business. With ATH putting up one-third of capital and third party investor coming up with two-thirds helps ATH to conduct large transactions with less than otherwise required capital.
COVID impact:
Fortunately, the pandemic did not adversely affect ATH as it was among the first financial services firms in March, 2020 to pre-empt detailed update of its portfolio. The transparent output of various portfolio stress tests and strong balance sheet with ample liquidity helped ATH instill confidence among investors.
ATH has strong credit asset portfolio that can manage asset impairments. The company has proven track record of turning stress periods into opportunities such as re-purchase shares at attractive levels or close suitable M&As. It has the ability to grow earnings at mid-high teens based on organic as well as inorganic basis.
At $36+, ATH is trading around 0.7x PB and 5.2x FY19 PE. A move to trailing 1.0x PB from this level would translate into a 40% price gain. A mid-teens asset growth to $250-300 billion would double the stock price.
Footnote: Since the publication of the article, ATH has seen a 28% price gain.
