|
| | | | | | | | | | |
| UNITED STATES SECURITIES AND EXCHANGE COMMISSION |
| | | | | | | | | |
| Washington, D.C. 20549 |
| | | | | | | | | |
| | | | | | | | | |
| FORM 10-Q |
| | | | | | | | | |
| | | | | | | | | |
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | | | | | | | |
| For the quarterly period ended September 30, 2017 |
| | | | | | | | | |
| OR |
| | | | | | | | | |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | | | | | | | |
| | | | | | | | | |
| | | | 001-37963 | | | |
| (Commission file number) |
| | | | | | | | | |
| ATHENE HOLDING LTD. |
| (Exact name of registrant as specified in its charter) |
| | | | | | | | | |
| | Bermuda | | | | 98-0630022 | |
| | (State or other jurisdiction of | | | | (I.R.S. Employer | |
| | incorporation or organization) | | | | Identification Number) | |
| | | | | | | | | |
| 96 Pitts Bay Road |
| Pembroke, HM08, Bermuda |
| (441) 279-8400 |
| (Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) |
| | | | | | | | | |
| | | | | | | | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ |
| | | | | | | | | |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o |
| | | | | | | | | |
| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. |
| | | | | | | | | |
| | Large accelerated filer ¨ | | Accelerated filer ¨ | |
| | Non-accelerated filer x (Do not check if a smaller reporting company) | | Smaller reporting company ¨ | |
| | | | | | Emerging growth company ¨ | |
| | | | | | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ |
| | | | | | | | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x |
| | | | | | | | | |
| | | The number of shares of each class of our common stock outstanding is set forth in the table below, as of September 30, 2017: | |
| | | | | | | | | |
| | | Class A common shares | 120,108,463 |
| | Class M-2 common shares | 867,923 |
| | |
| | | Class B common shares | 69,544,914 |
| | Class M-3 common shares | 1,253,000 |
| | |
| | | Class M-1 common shares | 3,388,890 |
| | Class M-4 common shares | 4,793,212 |
| | |
| | | | | | | | | |
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| UNITED STATES SECURITIES AND EXCHANGE COMMISSION | |
| | | | | | | | | | |
| | | Washington, D.C. 20549 | | | |
| | | | | | | | | | |
FORM 10-Q
☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-37963
ATHENE HOLDING LTD.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | (Exact name of registrant as specified in its charter) | | | | |
| | | | | | | | | | | | |
| Bermuda | | | | | | 98-0630022 | |
| (State or other jurisdiction of | | | | | | (I.R.S. Employer | |
| incorporation or organization) | | | | | | Identification Number) | |
Second Floor, Washington House
16 Church Street
Hamilton, HM 11, Bermuda
(441) 279-8400
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) |
| | | | | | | | | | | |
| | | | | | | |
| Securities registered pursuant to Section 12(b) of the Act: |
| Title of each class | | Trading Symbol | | Name of each exchange on which registered |
| Class A common shares, par value $0.001 per share | | ATH | | New York Stock Exchange |
| | | | |
Depositary Shares, each representing a 1/1,000th interest in a | | | | |
| 6.35% Fixed-to-Floating Rate Perpetual Non-Cumulative Preference Share, Series A | | ATHPrA | | New York Stock Exchange |
| | | | |
Depositary Shares, each representing a 1/1,000th interest in a | | | | |
| 5.625% Fixed-Rate Perpetual Non-Cumulative Preference Share, Series B | | ATHPrB | | New York Stock Exchange |
| | | | | | | | | | | |
Depositary Shares, each representing a 1/1,000th interest in a | | | | |
| 6.375% Fixed-Rate Reset Perpetual Non-Cumulative Preference Share, Series C | | ATHPrC | | New York Stock Exchange |
| | | | | | | | | | | |
Depositary Shares, each representing a 1/1,000th interest in a | | | | |
| 4.875% Fixed-Rate Perpetual Non-Cumulative Preference Share, Series D | | ATHPrD | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | ☑ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of April 30, 2021, 191,742,821 of our Class A common shares were outstanding.
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
PART II—OTHER INFORMATION
As used in this Quarterly Report on Form 10-Q (report), unless the context otherwise indicates, any reference to "Athene," "our“Athene,” “our Company," "the” “the Company," "us," "we"” “us,” “we” and "our"“our” refer to Athene Holding Ltd. together with its consolidated subsidiaries and any reference to "AHL"“AHL” refers to Athene Holding Ltd. only.
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q (report), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results and the assumptions upon which those statements are based,report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended.
amended (Exchange Act). You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “seek,” “assume,” “believe,” “may,” “will,” ��should,“should,” “could,” “would,” “likely” and other words and terms of similar meaning, including the negative of these or similar words and terms, in connection with any discussion of the timing or nature of future operating or financial performance or other events. However, not all forward-looking statements contain these identifying words. Forward-looking statements appear in a number of places throughout and give our current expectations and projections relating to our business, financial condition, results of operations, plans, strategies, objectives, future performance business and other matters.
We caution you that forward-looking statements are not guarantees of future performance and that our actual consolidated financial condition, results of operations, financial conditionliquidity, cash flows and liquidityperformance may differ materially from thosethat made in or suggested by the forward-looking statements contained in this report. There can be no assurance that actual developments will be those anticipated by us. In addition, even if our consolidated results of operations, financial condition and liquidity are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods. A number of important factors could cause actual results or conditions to differ materially from those contained or implied by the forward-looking statements, including the risks discussed in Part II—II–Item 1A. Risk Factorsincluded in this report and Part I—I–Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2016 (20162020 (2020 Annual Report). Factors that could cause actual results or conditions to differ from those reflected in the forward-looking statements contained in this report include:
•the accuracy of management’s assumptions and estimates;
•variability in the amount of statutory capital that our insurance and reinsurance subsidiaries have or are required to hold;
•interest rate and/or foreign currency fluctuations;
•our potential need for additional capital in the future and the potential unavailability of such capital to us on favorable terms or at all;
•major public health issues, and specifically the pandemic caused by the effects of the spread of the Coronavirus Disease of 2019 (COVID-19);
•changes in relationships with important parties in our product distribution network;
•the activities of our competitors and our ability to grow our retail business in a highly competitive environment;
•the impact of general economic conditions on our ability to sell our products and on the fair value of our investments;
•our ability to successfully acquire new companies or businesses and/or integrate such acquisitions into our existing framework;
•downgrades, potential downgrades or other negative actions by rating agencies;
•our dependence on key executives and inability to attract qualified personnel, or the potential loss of Bermudian personnel as a result of Bermuda employment restrictions;
•market and credit risks that could diminish the value of our investments;
foreign currency fluctuations;
the impact of •changes to the creditworthiness of our reinsurance and derivative counterparties;
•the discontinuation of London Inter-bank Offered Rate (LIBOR);
•changes in consumer perception regarding the desirability of annuities as retirement savings products;
introduction of the proposed European Union financial transaction tax;
•potential litigation (including class action litigation), enforcement investigations or regulatory scrutiny against us and our subsidiaries, which we may be required to defend against or respond to;
•the impact of new accounting rules or changes to existing accounting rules on our business;
•interruption or other operational failures in telecommunication and information technology and other operating systems, as well as our ability to maintain the security of those systems;
•the termination by Athene AssetApollo Global Management, L.P. (AAM)Inc. (AGM) or Apollo Asset Management Europe, LLP (AAME)any of its subsidiaries (collectively, AGM together with its subsidiaries, Apollo) of its investment management or advisory agreements with us and limitations on our ability to terminate such arrangements;
AAM’s or AAME’s•Apollo’s dependence on key executives and inability to attract qualified personnel;
•the delay or failure to complete or realize the expected benefits from the proposed merger with AGM;
•the accuracy of our estimates regarding the future performance of our investment portfolio;
•increased regulation or scrutiny of alternative investment advisers and certain trading methods;
•potential changes to laws or regulations affecting, among other things, group supervision and/or group capital requirements, entity-level regulatory capital standards, transactions with our affiliates, the ability of our subsidiaries to make dividend payments or distributions to us,AHL, acquisitions by or of us, minimum capitalization and statutory reserve requirements for insurance companies and fiduciary obligations on parties who distribute our products;
suspension•the failure to obtain or revocationmaintain licenses and/or other regulatory approvals as required for the operation of our subsidiaries’ insurance subsidiaries;
•increases in our tax liability resulting from the Base Erosion and reinsurance licenses;Anti-Abuse Tax (BEAT);
Athene Holding Ltd. (AHL)•AHL or Athene Life Re Ltd. (ALRe)any of its non-United States (US) subsidiaries becoming subject to U.S.US federal income taxation;
•adverse changes in U.S.US tax law;
•changes in our being subject to U.S. withholding tax under Foreign Account Tax Compliance Act;
our potential inabilityability to pay dividends or make distributions;
•the failure to achieve the economic benefits expected to be derived from the Athene Co-Invest Reinsurance Affiliate 1A Ltd. (together with its subsidiaries, ACRA) capital raise or future ACRA capital raises;
•the failure of third-party ACRA investors to fund their capital commitment obligations; and
•other risks and factors listed under in Part II—II–Item 1A. Risk Factors included in this report, Part I—Item 1A. Risk Factors included
in our 20162020 Annual Report and those discussed elsewhere in this report and in our 20162020 Annual Report.
We caution you that the important factors referenced above may not be exhaustive. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect or anticipate. In light of these risks, you should not place undue reliance upon any forward-looking statements contained in this report. TheUnless an earlier date is specified, the forward-looking statements included in this report are made only as of the date hereof.that this report was filed with the US Securities and Exchange Commission (SEC). We undertake no obligation, except as may be required by law, to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise. Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data.
GLOSSARY OF SELECTED TERMS
Unless otherwise indicated in this report, the following terms have the meanings set forth below:
Athene Holding Ltd. and Related Entities
|
| | | | | | | |
| Term or Acronym | | Definition |
| A-A Mortgage | | A-A Mortgage Opportunities, LPL.P. |
AAAAADE | | AP Alternative Assets, L.P. |
AAA Investor | | AAA Guarantor – Athene, L.P. |
AADE | | Athene Annuity & Life Assurance Company formerly known as Liberty Life Insurance Company, the parent insurance company of our U.S. insurance subsidiaries |
| AAIA | | Athene Annuity and Life Company formerly known as Aviva Life and Annuity Company |
AAMAARe | | Athene Asset Management, L.P.Annuity Re Ltd., a Bermuda reinsurance subsidiary |
AAMEACRA | | Apollo Asset Management Europe, LLP (togetherAthene Co-Invest Reinsurance Affiliate 1A Ltd., together with certain of its affiliates)subsidiaries |
ADKGADIP | | Apollo/Athene Deutschland Holding GmbH & Co. KGDedicated Investment Program |
AGERAGM | | AGER Bermuda Holding Ltd.Apollo Global Management, Inc. |
| AHL | | Athene Holding Ltd. |
ALICALRe | | Athene Life Insurance Company |
ALRe | | Athene Life Re Ltd., a Bermuda reinsurance subsidiary |
ALVALReI | | Athene Lebensversicherung AG, formerly known as Delta Lloyd Lebensversicherung AGLife Re International Ltd., a Bermuda reinsurance subsidiary |
| AmeriHome | | AmeriHome Mortgage Company, LLC |
APKAOG | | Athene Pensionskasse AG, formerly known as Delta Lloyd Pensionskasse AGApollo Operating Group |
| Apollo | | Apollo Global Management, LLCInc., together with its subsidiaries |
| Apollo Group | | (1) Apollo,AGM, (2) the AAA Investor,Guarantor – Athene, L.P. (3) any investment fund or other collective investment vehicle whose general partner or managing member is owned, directly or indirectly, by ApolloAGM or one or more of Apollo’sAGM’s subsidiaries, (4) BRH Holdings GP, Ltd. and its shareholders, (5) any executive officer or employee of AGM or AGM’s subsidiaries (6) any shareholder that has granted to AGM or any of its affiliates a valid proxy with respect to all of such shareholder’s Class A common shares pursuant to our bye-laws and (5)(7) any affiliate of any of the foregoing (except that AHL andor its subsidiaries and employees of AHL, its subsidiaries or AAM are not members of the Apollo Group) |
Athene USAAUSA | | Athene USA Corporation |
| Athora | | Athora Holding Ltd. |
| BMA | | Bermuda Monetary Authority |
| ISG | | Apollo Insurance Solutions Group LP, formerly known as Aviva USA CorporationAthene Asset Management LLC |
CoInvest VIJackson | | AAA Investments (Co-Invest VI), L.P.Jackson National Life Insurance Company |
CoInvest VIILIMRA | | AAA Investments (Co-Invest VII), L.P.Life Insurance and Market Research Association |
CoInvest OtherMidCap | | AAA Investments (Other), L.P.MidCap FinCo Designated Activity Company |
DLDNAIC | | Delta Lloyd Deutschland AG, now known as Athene Deutschland GmbHNational Association of Insurance Commissioners |
German Group CompaniesNYSDFS | | Athene Deutschland GmbH, Athene Deutschland Holding GmbH & Co. KG, Athene Deutschland Verwaltungs GmbH, Athene Lebensversicherung AG and Athene Pensionskasse AGNew York State Department of Financial Services |
London PrimeRLI | | London Prime Apartments Guernsey Holdings LimitedReliaStar Life Insurance Company |
MidCapTreasury | | MidCap FinCo LimitedUnited States Department of the Treasury |
NCL LLCVIAC | | NCL Athene, LLCVenerable Insurance and Annuity Company, formerly Voya Insurance and Annuity Company |
SprintVenerable | | Apollo Asia Sprint Co-Investment Fund, L.P.Venerable Holdings, Inc., together with its subsidiaries |
Certain Terms & Acronyms
|
| | | | | | | |
| Term or Acronym | | Definition |
| ABS | | Asset-backed securities |
| ACL | | Authorized control level RBC as defined by the model created by the National Association of Insurance Commissioners |
| ALM | | Asset liability management |
AUMALRe RBC | | Assets under managementThe risk-based capital ratio using ALRe’s Bermuda capital and applying NAIC risk-based capital factors to the statutory financial statements of ALRe and ALRe’s non-US reinsurance subsidiaries on an aggregate basis. Adjustments are made to (i) exclude US subsidiaries which are included within our US RBC Ratio, (ii) exclude our interests in the AOG units and other non-insurance subsidiary holding companies from our capital base and (iii) limit RBC concentration charges such that when they are applied to determine target capital, the charges do not exceed 100% of the asset’s carrying value. |
| Alternative investments | | Alternative investments, including investment funds, CLO equity positions and certain other debt instruments considered to be equity-like |
| Base of earnings | | Earnings generated from our results of operations and the underlying profitability drivers of our business |
| | |
| Bermuda capital | | The capital of ALReAthene’s non-US reinsurance subsidiaries calculated under U.S.US statutory accounting principles, including that for policyholder reserve liabilities which are subjected to U.S.US cash flow testing requirements, but (i) excluding certain items that do not exist under our applicable Bermuda requirements, such as interest maintenance reserves and (ii) including certain Bermuda statutory accounting differences, such as marking to market of inception date investment gains or losses relating to reinsurance transactions. Bermuda capital may from time to time materially differ from the calculation of statutory capital under US statutory accounting principles primarily due to the foregoing differences. |
| Block reinsurance | | A transaction in which the ceding company cedes all or a portion of a block of previously issued annuity contracts through a reinsurance agreement |
BMABSCR | | Bermuda Monetary Authority |
BSCR | | Bermuda Solvency Capital Requirement |
| CAL | | Company action level RBCrisk-based capital as defined by the model created by the National Association of Insurance Commissioners |
| CLO | | Collateralized loan obligation |
| CMBS | | Commercial mortgage-backed securities |
Capital ratioCML | | Ratios calculated (1) with respect to our U.S. insurance subsidiaries, by reference to RBC, (2) with respect to ALRe, by reference to BSCR, and (3) with respect to our German Group Companies, by reference to SCRCommercial mortgage loans |
| Cost of crediting | | The interest credited to the policyholders on our fixed annuities, including, with respect to our FIAs,fixed indexed annuities, option costs, as well as institutional costs related to institutional products, presented on an annualized basis for interim periods |
DACCost of funds | | Cost of funds includes liability costs related to cost of crediting on both deferred annuities and institutional products, as well as other liability costs. Cost of funds is computed as the total liability costs divided by the average net invested assets for the relevant period. Presented on an annualized basis for interim periods. |
| DAC | | Deferred acquisition costs |
| Deferred annuities | | FIAs,Fixed indexed annuities, annual reset annuities, multi-year guaranteed annuities and MYGAsregistered index-linked annuities |
| DSI | | Deferred sales inducement |
| Excess capital | | Capital in excess of the level management believes is needed to support our current operating strategy |
| FIA | | Fixed indexed annuity, which is an insurance contract that earns interest at a crediting rate based on a specified index on a tax-deferred basis |
| Fixed annuities | | FIAs together with fixed rate annuities |
| Fixed rate annuity | | Fixed rate annuity is anAn insurance contract that offers tax-deferred growth and the opportunity to produce a guaranteed stream of retirement income for the lifetime of its policyholder |
| Flow reinsurance | | A transaction in which the ceding company cedes a portion of newly issued policies to the reinsurer |
GLWBGAAP | | Guaranteed living withdrawal benefitsAccounting principles generally accepted in the United States of America |
GMDBGLWB | | Guaranteed lifetime withdrawal benefit |
| GMDB | | Guaranteed minimum death benefitsbenefit |
IMOGross invested assets | | Independent marketing organization |
Invested assets | | The sum of (a) total investments on the consolidated balance sheet with AFSavailable-for-sale securities at amortized cost, excluding derivatives, (b) cash and cash equivalents and restricted cash, (c) investments in related parties, (d) accrued investment income, (e) consolidated variable interest entities'entities’ assets, liabilities and noncontrolling interest and (f) policy loans ceded (which offset the direct policy loans in total investments). InvestedGross invested assets alsoincludes investments supporting assumed funds withheld and modco agreements and excludes assets associated with funds withheld liabilities related to business exited through reinsurance agreements and derivative collateral (offsetting the related cash positions). Gross invested assets includes the entire investment balance attributable to ACRA as ACRA is 100% consolidated |
| | | | | | | | |
| Term or Acronym | | Definition |
| IMA | | Investment management agreement |
| IMO | | Independent marketing organization |
| Investment margin on deferred annuities | | Investment margin applies to deferred annuities and is the excess of our net investment earned rate over the cost of crediting to our policyholders, presented on an annualized basis for interim periods |
| Liability outflows | | The aggregate of withdrawals on our deferred annuities, maturities of our funding agreements, and payments on payout annuities, |
LIMRA | | Life Insurance and Market Research Association |
MCR | | Minimum capital requirements |
MMS | | Minimum margin of solvency |
Modco | | Modified coinsurance |
MVA | | Market value adjustment |
MYGA | | Multi-year guaranteed annuity |
| pension risk benefit payments |
| | |
Term or AcronymMMS | | DefinitionMinimum margin of solvency |
NAICModco | | National Association of Insurance CommissionersModified coinsurance |
| MVA | | Market value adjustment |
| MYGA | | Multi-year guaranteed annuity |
| Net invested assets | | The sum of (a) total investments on the consolidated balance sheet with available-for-sale securities at amortized cost, excluding derivatives, (b) cash and cash equivalents and restricted cash, (c) investments in related parties, (d) accrued investment income, (e) consolidated variable interest entities’ assets, liabilities and noncontrolling interest and (f) policy loans ceded (which offset the direct policy loans in total investments). Net invested assets includes investments supporting assumed funds withheld and modco agreements and excludes assets associated with funds withheld liabilities related to business exited through reinsurance agreements and derivative collateral (offsetting the related cash positions). Net invested assets includes our economic ownership of ACRA investments but does not include the investments associated with the noncontrolling interest |
| Net investment earned rate | | Income from our net invested assets divided by the average net invested assets for the relevant period, presented on an annualized basis for interim periods |
Other liability costsNet investment spread | | Other liability costs include DAC, DSI and VOBA amortization and change in GLWB and GMDB reserves for all products,Net investment spread measures our investment performance less the total cost of our liabilities, presented on products other than deferred annuities including offsetsan annualized basis for premiums, product charges and other revenuesinterim periods |
OTTINet reserve liabilities | | Other-than-temporary impairment |
Payout annuities | | Annuities with a current cash payment component, which consist primarily of SPIAs, supplemental contracts and structured settlements |
PRT | | Pension risk transfer |
Policy loan | | A loan to a policyholder under the terms of, and which is secured by, a policyholder’s policy |
RBC | | Risk-based capital |
Reserve liabilities | | The sum of (a) interest sensitive contract liabilities, (b) future policy benefits, (c) dividends payable to policyholders, and (d) other policy claims and benefits, offset by reinsurance recoverables,recoverable, excluding policy loans ceded. ReserveNet reserve liabilities also includes the reserves related to assumed modco agreements in order to appropriately match the costs incurred in the consolidated statements of income with the liabilities. ReserveNet reserve liabilities is net of the ceded liabilities to third-party reinsurers as the costs of the liabilities are passed to such reinsurers and therefore we have no net economic exposure to such liabilities, assuming our reinsurance counterparties perform under our agreementsagreements. Net reserve liabilities is net of the reserve liabilities attributable to the ACRA noncontrolling interest |
| Other liability costs | | Other liability costs include DAC, DSI and VOBA amortization, change in rider reserves, the cost of liabilities on products other than deferred annuities and institutional products, excise taxes, as well as offsets for premiums, product charges and other revenues |
| Payout annuities | | Annuities with a current cash payment component, which consist primarily of single premium immediate annuities, supplemental contracts and structured settlements |
| Policy loan | | A loan to a policyholder under the terms of, and which is secured by, a policyholder’s policy |
| PRT | | Pension risk transfer |
| RBC | | Risk-based capital |
| Rider reserves | | Guaranteed livinglifetime withdrawal benefits and guaranteed minimum death benefits reserves |
| RMBS | | Residential mortgage-backed securities |
| RML | | Residential mortgage loan |
| Sales | | All money paid into an individual annuity, including money paid into new contracts with initial purchase occurring in the specified period and existing contracts with initial purchase occurring prior to the specified period (excluding internal transfers) |
| SPIA | | Single premium immediate annuity |
| Surplus assets | | Assets in excess of policyholder obligations, determined in accordance with the applicable domiciliary jurisdiction’s statutory accounting principles |
| TAC | | Total adjusted capital as defined by the model created by the NAIC |
U.S.US RBC Ratio | | The CAL RBC ratio for AADE, our parent U.S.US insurance company |
| VIE | | Variable interest entity |
| VOBA | | Value of business acquired |
Item 1. Financial Statements
Index to Condensed Consolidated Financial Statements (unaudited)
ATHENE HOLDING LTD.
Condensed Consolidated Balance Sheets(Unaudited)
|
| | | | | | | |
| (In millions) | September 30, 2017 | | December 31, 2016 |
| Assets | | | |
| Investments | | | |
| Available-for-sale securities, at fair value | | | |
| Fixed maturity securities (amortized cost: 2017 – $56,217 and 2016 – $51,110) | $ | 58,516 |
| | $ | 52,033 |
|
| Equity securities (cost: 2017 – $262 and 2016 – $319) | 318 |
| | 353 |
|
| Trading securities, at fair value | 2,709 |
| | 2,581 |
|
| Mortgage loans, net of allowances (portion at fair value: 2017 – $42 and 2016 – $44) | 6,445 |
| | 5,470 |
|
| Investment funds (portion at fair value: 2017 – $127 and 2016 – $99) | 747 |
| | 689 |
|
| Policy loans | 571 |
| | 602 |
|
| Funds withheld at interest (portion at fair value: 2017 – $303 and 2016 – $140) | 6,964 |
| | 6,538 |
|
| Derivative assets | 1,982 |
| | 1,370 |
|
| Real estate (portion held for sale: 2017 – $32 and 2016 – $23) | 621 |
| | 542 |
|
| Short-term investments, at fair value (cost: 2017 – $108 and 2016 – $189) | 108 |
| | 189 |
|
| Other investments | 77 |
| | 81 |
|
| Total investments | 79,058 |
| | 70,448 |
|
| Cash and cash equivalents | 3,607 |
| | 2,445 |
|
| Restricted cash | 100 |
| | 57 |
|
| Investments in related parties | | | |
| Available-for-sale securities, at fair value | | | |
| Fixed maturity securities (amortized cost: 2017 – $404 and 2016 – $341) | 409 |
| | 335 |
|
| Equity securities (cost: 2017 – $0 and 2016 – $20) | — |
| | 20 |
|
| Trading securities, at fair value | 140 |
| | 195 |
|
| Investment funds (portion at fair value: 2017 – $27 and 2016 – $0) | 1,330 |
| | 1,198 |
|
| Short-term investments, at fair value (cost: 2017 – $8 and 2016 – $0) | 8 |
| | — |
|
| Other investments | 238 |
| | 237 |
|
| Accrued investment income (related party: 2017 – $9 and 2016 – $9) | 626 |
| | 554 |
|
| Reinsurance recoverable (portion at fair value: 2017 – $1,783 and 2016 – $1,692) | 5,768 |
| | 6,001 |
|
| Deferred acquisition costs, deferred sales inducements and value of business acquired | 2,903 |
| | 2,940 |
|
| Current income tax recoverable | 29 |
| | 107 |
|
| Deferred tax assets | 12 |
| | 372 |
|
| Other assets | 868 |
| | 869 |
|
| Assets of consolidated variable interest entities | | | |
| Investments | | | |
| Available-for-sale securities, at fair value | | | |
| Equity securities – related party (cost: 2017 – $121 and 2016 – $143) | 173 |
| | 161 |
|
| Trading securities, at fair value – related party | 195 |
| | 167 |
|
| Investment funds (related party: 2017 – $583 and 2016 – $562; portion at fair value: 2017 – $562 and 2016 – $562) | 593 |
| | 573 |
|
| Cash and cash equivalents | 1 |
| | 14 |
|
| Other assets | 3 |
| | 6 |
|
| Total assets | $ | 96,061 |
| | $ | 86,699 |
|
| | | | | | | | | | | |
| (In millions) | March 31, 2021 | | December 31, 2020 |
| Assets | | | |
| Investments | | | |
| Available-for-sale securities, at fair value (amortized cost: 2021 – $82,190 and 2020 – $76,100; allowance for credit losses: 2021 – $111 and 2020 – $103) | $ | 85,524 | | | $ | 82,853 | |
| Trading securities, at fair value | 1,979 | | | 2,093 | |
| Equity securities (portion at fair value: 2021 – $322 and 2020 – $330) | 524 | | | 532 | |
| Mortgage loans (allowance for credit losses: 2021 – $235 and 2020 – $232; portion at fair value: 2021 – $18 and 2020 – $19; consolidated variable interest entities: 2021 – $1,812 and 2020 – $1,880) | 16,671 | | | 15,264 | |
| Investment funds (portion at fair value: 2021 – $319 and 2020 – $161; consolidated variable interest entities: 2021 – $154 and 2020 – $0) | 966 | | | 803 | |
| Policy loans | 356 | | | 369 | |
| Funds withheld at interest (portion at fair value: 2021 – $636 and 2020 – $1,944) | 46,024 | | | 48,612 | |
| Derivative assets | 3,677 | | | 3,523 | |
| Short-term investments (portion at fair value: 2021 – $117 and 2020 – $222) | 125 | | | 222 | |
| Other investments (allowance for credit losses: 2021 – $0 and 2020 – $3; portion at fair value: 2021 – $105 and 2020 – $105) | 1,722 | | | 572 | |
| Total investments | 157,568 | | | 154,843 | |
| Cash and cash equivalents | 6,427 | | | 7,704 | |
| Restricted cash | 546 | | | 738 | |
| Investments in related parties | | | |
| Available-for-sale securities, at fair value (amortized cost: 2021 – $6,854 and 2020 – $6,444; allowance for credit losses: 2021 – $0 and 2020 – $1) | 6,905 | | | 6,520 | |
| Trading securities, at fair value | 1,710 | | | 1,529 | |
| Equity securities, at fair value | 114 | | | 72 | |
| Mortgage loans (allowance for credit losses: 2021 – $15 and 2020 – $14) | 714 | | | 674 | |
| Investment funds (portion at fair value: 2021 – $2,060 and 2020 – $2,119) | 5,899 | | | 5,284 | |
| Funds withheld at interest (portion at fair value: 2021 – $580 and 2020 – $862) | 12,572 | | | 13,030 | |
| | | |
| Other investments (allowance for credit losses: 2021 – $2 and 2020 – $4) | 469 | | | 469 | |
| Accrued investment income (related party: 2021 – $61 and 2020 – $38) | 968 | | | 905 | |
| Reinsurance recoverable (portion at fair value: 2021 – $1,880 and 2020 – $2,100) | 4,690 | | | 4,848 | |
| Deferred acquisition costs, deferred sales inducements and value of business acquired | 5,303 | | | 4,906 | |
| Other assets (consolidated variable interest entities: 2021 – $173 and 2020 – $1) | 1,785 | | | 1,249 | |
| Total assets | $ | 205,670 | | | $ | 202,771 | |
(Continued)
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Balance Sheets(Unaudited)
|
| | | | | | | |
| (In millions, except share and per share data) | September 30, 2017 | | December 31, 2016 |
| Liabilities and Equity | | | |
| Liabilities | | | |
| Interest sensitive contract liabilities (portion at fair value: 2017 – $8,081 and 2016 – $6,574) | $ | 67,024 |
| | $ | 61,532 |
|
| Future policy benefits (portion at fair value: 2017 – $2,427 and 2016 – $2,400) | 15,687 |
| | 14,592 |
|
| Other policy claims and benefits | 211 |
| | 217 |
|
| Dividends payable to policyholders | 1,017 |
| | 974 |
|
| Derivative liabilities | 92 |
| | 40 |
|
| Payables for collateral on derivatives | 1,896 |
| | 1,383 |
|
| Funds withheld liability (portion at fair value: 2017 – $18 and 2016 – $6) | 394 |
| | 380 |
|
| Other liabilities (related party: 2017 – $67 and 2016 – $56) | 1,024 |
| | 688 |
|
| Liabilities of consolidated variable interest entities | 47 |
| | 34 |
|
| Total liabilities | 87,392 |
| | 79,840 |
|
| Equity | | | |
| Common stock | | | |
| Class A – par value $0.001 per share; authorized: 2017 and 2016 – 425,000,000 shares; issued and outstanding: 2017 – 120,108,463 and 2016 – 77,319,381 shares | — |
| | — |
|
| Class B – par value $0.001 per share; convertible to Class A; authorized: 2017 and 2016 – 325,000,000 shares; issued and outstanding: 2017 – 69,544,914 and 2016 – 111,805,829 shares | — |
| | — |
|
| Class M-1 – par value $0.001 per share; contingently convertible to Class A; authorized: 2017 and 2016 – 7,109,560 shares; issued and outstanding: 2017 – 3,388,890 and 2016 – 3,474,205 shares | — |
| | — |
|
| Class M-2 – par value $0.001 per share; contingently convertible to Class A; authorized: 2017 and 2016 – 5,000,000 shares; issued and outstanding: 2017 – 867,923 and 2016 – 1,067,747 shares | — |
| | — |
|
| Class M-3 – par value $0.001 per share; contingently convertible to Class A; authorized: 2017 and 2016 – 7,500,000 shares; issued and outstanding: 2017 – 1,253,000 and 2016 – 1,346,300 shares | — |
| | — |
|
| Class M-4 – par value $0.001 per share; contingently convertible to Class A; authorized: 2017 and 2016 – 7,500,000 shares; issued and outstanding: 2017 – 4,793,212 and 2016 – 5,397,802 shares | — |
| | — |
|
| Additional paid-in capital | 3,461 |
| | 3,421 |
|
| Retained earnings | 4,046 |
| | 3,070 |
|
| Accumulated other comprehensive income (related party: 2017 – $56 and 2016 – $12) | 1,162 |
| | 367 |
|
| Total Athene Holding Ltd. shareholders' equity | 8,669 |
| | 6,858 |
|
| Noncontrolling interest | — |
| | 1 |
|
| Total equity | 8,669 |
| | 6,859 |
|
| Total liabilities and equity | $ | 96,061 |
| | $ | 86,699 |
|
(Concluded)
See accompanying notes to unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Income (Unaudited)
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions, except per share data) | 2017 | | 2016 | | 2017 | | 2016 |
| Revenues | | | | | | | |
| Premiums | $ | 72 |
| | $ | 85 |
| | $ | 503 |
| | $ | 205 |
|
| Product charges | 86 |
| | 71 |
| | 252 |
| | 206 |
|
| Net investment income (related party investment income of $50 and $62 for the three months ended and $179 and $164 for the nine months ended September 30, 2017 and 2016, respectively, and related party investment expense of $81 and $73 for the three months ended and $235 and $226 for the nine months ended September 30, 2017 and 2016, respectively) | 820 |
| | 743 |
| | 2,427 |
| | 2,137 |
|
| Investment related gains (losses) (related party of $(2) and $(2) for the three months ended and $(10) and $(32) for the nine months ended September 30, 2017 and 2016, respectively) | 473 |
| | 380 |
| | 1,615 |
| | 523 |
|
| Other-than-temporary impairment investment losses | | | | | | | |
| Other-than-temporary impairment losses | (11 | ) | | (7 | ) | | (23 | ) | | (31 | ) |
| Other-than-temporary impairment losses recognized in other comprehensive income | (2 | ) | | 1 |
| | (2 | ) | | 4 |
|
| Net other-than-temporary impairment losses | (13 | ) | | (6 | ) | | (25 | ) | | (27 | ) |
| Other revenues | 8 |
| | 8 |
| | 24 |
| | 25 |
|
| Revenues of consolidated variable interest entities | | | | | | | |
| Net investment income (related party of $10 and $0 for the three months ended and $30 and $17 for the nine months ended September 30, 2017 and 2016, respectively) | 10 |
| | 7 |
| | 30 |
| | 40 |
|
| Investment related gains (losses) (related party of $17 and $(11) for the three months ended and $29 and $(48) for the nine months ended September 30, 2017 and 2016, respectively) | 17 |
| | (16 | ) | | 29 |
| | (70 | ) |
| Total revenues | 1,473 |
| | 1,272 |
| | 4,855 |
| | 3,039 |
|
| Benefits and Expenses | | | | | | | |
| Interest sensitive contract benefits | 621 |
| | 491 |
| | 1,866 |
| | 1,081 |
|
| Amortization of deferred sales inducements | 13 |
| | 13 |
| | 42 |
| | 19 |
|
| Future policy and other policy benefits | 259 |
| | 391 |
| | 1,051 |
| | 873 |
|
| Amortization of deferred acquisition costs and value of business acquired | 80 |
| | 120 |
| | 251 |
| | 210 |
|
| Dividends to policyholders | 48 |
| | 35 |
| | 129 |
| | 65 |
|
| Policy and other operating expenses (related party of $4 and $10 for the three months ended and $10 and $18 for the nine months ended September 30, 2017 and 2016, respectively) | 158 |
| | 180 |
| | 479 |
| | 447 |
|
| Operating expenses of consolidated variable interest entities | — |
| | 4 |
| | — |
| | 13 |
|
| Total benefits and expenses | 1,179 |
| | 1,234 |
| | 3,818 |
| | 2,708 |
|
| Income before income taxes | 294 |
| | 38 |
| | 1,037 |
| | 331 |
|
| Income tax expense (benefit) | 20 |
| | (88 | ) | | 53 |
| | (73 | ) |
| Net income | 274 |
| | 126 |
| | 984 |
| | 404 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
|
| Net income available to Athene Holding Ltd. shareholders | $ | 274 |
| | $ | 126 |
| | $ | 984 |
| | $ | 404 |
|
| | | | | | | | |
| Earnings per share | | | | | | | |
Basic – Classes A, B, M-1, M-2, M-3 and M-41 | $ | 1.40 |
| | $ | 0.68 |
| | $ | 5.05 |
| | $ | 2.18 |
|
| Diluted – Class A | 1.39 |
| | 0.68 |
| | 5.00 |
| | 2.17 |
|
| Diluted – Class B | 1.40 |
| | 0.68 |
| | 5.05 |
| | 2.18 |
|
Diluted – Class M-11 | 1.40 |
| | N/A |
| | 5.05 |
| | N/A |
|
Diluted – Class M-21 | 1.39 |
| | N/A |
| | 3.26 |
| | N/A |
|
Diluted – Class M-31 | 1.07 |
| | N/A |
| | 2.27 |
| | N/A |
|
Diluted – Class M-41 | 0.79 |
| | N/A |
| | 1.91 |
| | N/A |
|
| | | | | | | | |
| N/A – Not applicable |
1 Basic and diluted earnings per share for Class M-1, M-2, M-3 and M-4 were applicable only for the periods ended September 30, 2017. Refer to Note 9 – Earnings Per Share for further discussion. |
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 |
| 2016 |
| Net income | $ | 274 |
| | $ | 126 |
| | $ | 984 |
|
| $ | 404 |
|
| Other comprehensive income, before tax | | | | | | | |
| Unrealized investment gains (losses) on available-for-sale securities | 171 |
| | 499 |
| | 1,172 |
|
| 1,705 |
|
| Noncredit component of other-than-temporary impairment losses on available-for-sale securities | 2 |
| | (1 | ) | | 2 |
|
| (4 | ) |
| Unrealized gains (losses) on hedging instruments | (31 | ) | | (6 | ) | | (69 | ) |
| (13 | ) |
| Pension adjustments | 1 |
| | — |
| | — |
|
| (1 | ) |
| Foreign currency translation adjustments | 4 |
| | 1 |
| | 14 |
| | 1 |
|
| Other comprehensive income, before tax | 147 |
| | 493 |
| | 1,119 |
| | 1,688 |
|
| Income tax expense related to other comprehensive income | 45 |
| | 142 |
| | 324 |
|
| 531 |
|
| Other comprehensive income, after tax | 102 |
| | 351 |
| | 795 |
| | 1,157 |
|
| Comprehensive income | 376 |
| | 477 |
| | 1,779 |
| | 1,561 |
|
| Less: Comprehensive income attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
|
| Comprehensive income available to Athene Holding Ltd. shareholders | $ | 376 |
| | $ | 477 |
| | $ | 1,779 |
| | $ | 1,561 |
|
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Equity(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Total Athene Holding Ltd. shareholders' equity | | Noncontrolling interest | | Total equity |
| Balance at December 31, 2015 | $ | — |
| | $ | 3,281 |
| | $ | 2,308 |
| | $ | (237 | ) | | $ | 5,352 |
| | $ | 1 |
| | $ | 5,353 |
|
| Net income | — |
| | — |
| | 404 |
| | — |
| | 404 |
| | — |
| | 404 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | 1,157 |
| | 1,157 |
| | — |
| | 1,157 |
|
| Issuance of shares, net of expenses | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Stock-based compensation | — |
| | 135 |
| | — |
| | — |
| | 135 |
| | — |
| | 135 |
|
| Retirement or repurchase of shares | — |
| | (14 | ) | | (5 | ) | | — |
| | (19 | ) | | — |
| | (19 | ) |
| Balance at September 30, 2016 | $ | — |
| | $ | 3,403 |
| | $ | 2,707 |
| | $ | 920 |
| | $ | 7,030 |
| | $ | 1 |
| | $ | 7,031 |
|
| | | | | | | | | | | | | | |
| Balance at December 31, 2016 | $ | — |
| | $ | 3,421 |
| | $ | 3,070 |
| | $ | 367 |
| | $ | 6,858 |
| | $ | 1 |
| | $ | 6,859 |
|
| Net income | — |
| | — |
| | 984 |
| | — |
| | 984 |
| | — |
| | 984 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | 795 |
| | 795 |
| | — |
| | 795 |
|
| Stock-based compensation | — |
| | 40 |
| | — |
| | — |
| | 40 |
| | — |
| | 40 |
|
| Retirement or repurchase of shares | — |
| | — |
| | (8 | ) | | — |
| | (8 | ) | | — |
| | (8 | ) |
| Other changes in equity of noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Balance at September 30, 2017 | $ | — |
| | $ | 3,461 |
| | $ | 4,046 |
| | $ | 1,162 |
| | $ | 8,669 |
| | $ | — |
| | $ | 8,669 |
|
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
|
| | | | | | | |
| | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 |
| Cash flows from operating activities | | | |
| Net income | $ | 984 |
| | $ | 404 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Amortization of deferred acquisition costs and value of business acquired | 251 |
| | 210 |
|
| Amortization of deferred sales inducements | 42 |
| | 19 |
|
| Amortization (accretion) of net investment premiums, discounts, and other | (141 | ) | | (136 | ) |
| Stock-based compensation | 40 |
| | 61 |
|
| Net investment income (related party: 2017 – $(66) and 2016 – $(30)) | (65 | ) | | (4 | ) |
| Net recognized (gains) losses on investments and derivatives (related party: 2017 – $2 and 2016 – $23) | (1,271 | ) | | (226 | ) |
| Policy acquisition costs deferred | (371 | ) | | (449 | ) |
| Deferred income tax expense (benefit) | 50 |
| | (45 | ) |
| Changes in operating assets and liabilities: | | | |
| Accrued investment income | (67 | ) | | (20 | ) |
| Interest sensitive contract liabilities | 1,655 |
| | 995 |
|
| Future policy benefits, other policy claims and benefits, dividends payable to policyholders and reinsurance recoverable | 460 |
| | 222 |
|
| Current income tax recoverable | 78 |
| | 10 |
|
| Funds withheld assets and liabilities | (327 | ) | | (133 | ) |
| Other assets and liabilities | 51 |
| | (21 | ) |
| Consolidated variable interest entities related: | | | |
| Amortization (accretion) of net investment premiums, discounts, and other | — |
| | 3 |
|
| Net investment loss | 1 |
| | 4 |
|
| Net recognized (gains) losses on investments and derivatives (related party: 2017 – $(29) and 2016 – $48) | (28 | ) | | 70 |
|
| Net cash provided by operating activities | 1,342 |
| | 964 |
|
| | | | (Continued) |
|
| See accompanying notes to the unaudited condensed consolidated financial statements | | | |
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
|
| | | | | | | |
| | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 |
| Cash flows from investing activities | | | |
| Sales, maturities and repayments of: | | | |
| Available-for-sale securities | | | |
| Fixed maturity securities (related party: 2017 – $126 and 2016 – $12) | $ | 9,199 |
| | $ | 6,401 |
|
| Equity securities (related party: 2017 – $22 and 2016 – $0) | 530 |
| | 295 |
|
| Trading securities (related party: 2017 – $52 and 2016 – $16) | 333 |
| | 557 |
|
| Mortgage loans | 950 |
| | 615 |
|
| Investment funds (related party: 2017 – $219 and 2016 – $215) | 300 |
| | 277 |
|
| Derivative instruments and other invested assets (related party: 2017 – $0 and 2016 – $8) | 1,083 |
| | 226 |
|
| Real estate | — |
| | 7 |
|
| Short-term investments (related party: 2017 – $28 and 2016 – $55) | 289 |
| | 720 |
|
| Purchases of: | | | |
| Available-for-sale securities | | | |
| Fixed maturity securities (related party: 2017 – $(186) and 2016 – $0) | (13,668 | ) | | (8,306 | ) |
| Equity securities (related party: 2017 – $0 and 2016 – $(20)) | (426 | ) | | (244 | ) |
| Trading securities (related party: 2017 – $0 and 2016 – $(33)) | (308 | ) | | (698 | ) |
| Mortgage loans | (1,925 | ) | | (633 | ) |
| Investment funds (related party: 2017 – $(244) and 2016 – $(258)) | (366 | ) | | (322 | ) |
| Derivative instruments and other invested assets | (562 | ) | | (447 | ) |
| Real estate | (19 | ) | | (32 | ) |
| Short-term investments (related party: 2017 – $(37) and 2016 – $0) | (222 | ) | | (699 | ) |
| Consolidated variable interest entities related: | | | |
| Sales, maturities, and repayments of investments (related party: 2017 – $40 and 2016 – $15) | 40 |
| | 497 |
|
| Purchases of investments (related party: 2017 – $(22) and 2016 – $(10)) | (22 | ) | | (10 | ) |
| Cash settlement of derivatives | (4 | ) | | 29 |
|
| Change in restricted cash | (43 | ) | | 53 |
|
| Other investing activities, net | 339 |
| | 32 |
|
| Net cash used in investing activities | (4,502 | ) | | (1,682 | ) |
| | | | (Continued) |
|
| See accompanying notes to the unaudited condensed consolidated financial statements | | | |
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
|
| | | | | | | |
| | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 |
| Cash flows from financing activities | | | |
| Capital contributions | $ | — |
| | $ | 1 |
|
| Deposits on investment-type policies and contracts | 7,521 |
| | 4,189 |
|
| Withdrawals on investment-type policies and contracts | (3,701 | ) | | (3,516 | ) |
| Payments for coinsurance agreements on investment-type contracts, net | (17 | ) | | (66 | ) |
| Consolidated variable interest entities related repayment on borrowings | — |
| | (500 | ) |
| Net change in cash collateral posted for derivative transactions | 513 |
| | 254 |
|
| Repurchase of common stock | (8 | ) | | (2 | ) |
| Other financing activities, net | (29 | ) | | 207 |
|
| Net cash provided by financing activities | 4,279 |
| | 567 |
|
| Effect of exchange rate changes on cash and cash equivalents | 30 |
| | (2 | ) |
| Net increase (decrease) in cash and cash equivalents | 1,149 |
| | (153 | ) |
Cash and cash equivalents at beginning of year1 | 2,459 |
| | 2,720 |
|
Cash and cash equivalents at end of period1 | $ | 3,608 |
| | $ | 2,567 |
|
| | | | |
| Supplementary information | | | |
| Non-cash transactions | | | |
| Deposits on investment-type policies and contracts through reinsurance agreements | $ | 511 |
| | $ | 3,089 |
|
| Withdrawals on investment-type policies and contracts through reinsurance agreements | 390 |
| | 281 |
|
| Investments received from settlements on reinsurance agreements | 36 |
| | 47 |
|
| Purchase interests in investment funds in kind | 26 |
| | — |
|
| | | | |
1 Includes cash and cash equivalents of consolidated variable interest entities |
| | | | | | | | | | | |
| (In millions, except per share data) | March 31, 2021 | | December 31, 2020 |
| Liabilities and Equity | | | |
| Liabilities | | | |
| Interest sensitive contract liabilities (related party: 2021 – $13,830 and 2020 – $14,150; portion at fair value: 2021 – $13,581 and 2020 – $14,181) | $ | 146,247 | | | $ | 144,566 | |
| Future policy benefits (related party: 2021 – $1,665 and 2020 – $1,610; portion at fair value: 2021 – $2,254 and 2020 – $2,376) | 31,767 | | | 29,258 | |
| Other policy claims and benefits | 135 | | | 130 | |
| Dividends payable to policyholders | 110 | | | 110 | |
| | | |
| Long-term debt | 1,977 | | | 1,976 | |
| Derivative liabilities | 288 | | | 298 | |
| Payables for collateral on derivatives and securities to repurchase | 3,952 | | | 3,801 | |
| Funds withheld liability (portion at fair value: 2021 – $34 and 2020 – $59) | 422 | | | 452 | |
| Other liabilities (related party: 2021 – $108 and 2020 – $112; consolidated variable interest entities: 2021 – $200 and 2020 – $134) | 2,436 | | | 2,040 | |
| Total liabilities | 187,334 | | | 182,631 | |
| Commitments and Contingencies (Note 10) | 0 | | 0 |
| Equity | | | |
| Preferred stock | | | |
| Series A – par value $1 per share; $863 aggregate liquidation preference; authorized, issued and outstanding: 2021 and 2020 – 0.0 shares | 0 | | | 0 | |
| Series B – par value $1 per share; $345 aggregate liquidation preference; authorized, issued and outstanding: 2021 and 2020 – 0.0 shares | 0 | | | 0 | |
| Series C – par value $1 per share; $600 aggregate liquidation preference; authorized, issued and outstanding: 2021 and 2020 – 0.0 shares | 0 | | | 0 | |
| Series D – par value $1 per share; $575 aggregate liquidation preference; authorized, issued and outstanding: 2021 and 2020 – 0.0 shares | 0 | | | 0 | |
| Common stock | | | |
| Class A – par value $0.001 per share; authorized: 2021 and 2020 – 425.0 shares; issued and outstanding: 2021 – 191.7 and 2020 – 191.5 shares | 0 | | | 0 | |
| Additional paid-in capital | 6,623 | | | 6,613 | |
| Retained earnings | 8,647 | | | 8,073 | |
| Accumulated other comprehensive income (related party: 2021 – $55 and 2020 – $59) | 2,021 | | | 3,971 | |
| Total Athene Holding Ltd. shareholders’ equity | 17,291 | | | 18,657 | |
| Noncontrolling interests | 1,045 | | | 1,483 | |
| Total equity | 18,336 | | | 20,140 | |
| Total liabilities and equity | $ | 205,670 | | | $ | 202,771 | |
(Concluded)
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Income (Loss) (Unaudited)
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| (In millions, except per share data) | 2021 | | 2020 | | | | |
| Revenues | | | | | | | |
| Premiums (related party: 2021 – $79 and 2020 – $69) | $ | 3,011 | | | $ | 1,140 | | | | | |
| Product charges (related party: 2021 – $11 and 2020 – $16) | 150 | | | 140 | | | | | |
| Net investment income (related party investment income (loss): 2021 – $596 and 2020 – $(214); consolidated variable interest entities: 2021 – $35 and 2020 – $0; and related party investment expense: 2021 – $144 and 2020 – $128) | 1,704 | | | 745 | | | | | |
| Investment related gains (losses) (related party: 2021 – $(139) and 2020 – $(631); and consolidated variable interest entities: 2021 – $(66) and 2020 – $1) | (488) | | | (3,572) | | | | | |
| Other revenues | 14 | | | (2) | | | | | |
| Total revenues | 4,391 | | | (1,549) | | | | | |
| Benefits and expenses | | | | | | | |
| Interest sensitive contract benefits (related party: 2021 – $76 and 2020 – $(97)) | 394 | | | (1,319) | | | | | |
| Amortization of deferred sales inducements | 84 | | | 10 | | | | | |
| Future policy and other policy benefits (related party: 2021 – $89 and 2020 – $50) | 3,317 | | | 1,356 | | | | | |
| Amortization of deferred acquisition costs and value of business acquired | 164 | | | (413) | | | | | |
| Dividends to policyholders | 10 | | | 11 | | | | | |
| Policy and other operating expenses (related party: 2021 – $12 and 2020 – $16) | 283 | | | 188 | | | | | |
| Total benefits and expenses | 4,252 | | | (167) | | | | | |
| Income (loss) before income taxes | 139 | | | (1,382) | | | | | |
| Income tax expense (benefit) | 62 | | | (166) | | | | | |
| Net income (loss) | 77 | | | (1,216) | | | | | |
| Less: Net loss attributable to noncontrolling interests | (537) | | | (169) | | | | | |
| Net income (loss) attributable to Athene Holding Ltd. shareholders | 614 | | | (1,047) | | | | | |
| Less: Preferred stock dividends | 36 | | | 18 | | | | | |
| Net income (loss) available to Athene Holding Ltd. common shareholders | $ | 578 | | | $ | (1,065) | | | | | |
| | | | | | | |
| Earnings (loss) per share | | | | | | | |
| Basic – Class A | $ | 3.02 | | | $ | (5.81) | | | | | |
| Basic – Classes B, M-1, M-2, M-3 and M-4 | N/A | | (3.87) | | | | | |
| Diluted – Class A | 2.94 | | | (5.81) | | | | | |
| Diluted – Classes B, M-1, M-2, M-3 and M-4 | N/A | | (3.87) | | | | | |
| | | | | | | |
| N/A – Not applicable. See Note 8 – Earnings Per Share. |
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| (In millions) | 2021 | | 2020 | | | | |
| Net income (loss) | $ | 77 | | | $ | (1,216) | | | | | |
| Other comprehensive income (loss), before tax | | | | | | | |
| Unrealized investment gains (losses) on available-for-sale securities, net of offsets | (2,591) | | | (4,839) | | | | | |
| Unrealized gains (losses) on hedging instruments | (31) | | | 401 | | | | | |
| Foreign currency translation and other adjustments | 0 | | | 9 | | | | | |
| Other comprehensive loss, before tax | (2,622) | | | (4,429) | | | | | |
| Income tax benefit related to other comprehensive loss | (496) | | | (797) | | | | | |
| Other comprehensive loss | (2,126) | | | (3,632) | | | | | |
| Comprehensive loss | (2,049) | | | (4,848) | | | | | |
| Less: Comprehensive loss attributable to noncontrolling interests | (713) | | | (352) | | | | | |
| Comprehensive loss attributable to Athene Holding Ltd. shareholders | $ | (1,336) | | | $ | (4,496) | | | | | |
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Equity (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended |
| (In millions) | Preferred stock | | Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Total Athene Holding Ltd. shareholders’ equity | | Noncontrolling interests | | Total equity |
| Balance at December 31, 2020 | $ | 0 | | | $ | 0 | | | $ | 6,613 | | | $ | 8,073 | | | $ | 3,971 | | | $ | 18,657 | | | $ | 1,483 | | | $ | 20,140 | |
| Net income | — | | | — | | | — | | | 614 | | | — | | | 614 | | | (537) | | | 77 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (1,950) | | | (1,950) | | | (176) | | | (2,126) | |
| | | | | | | | | | | | | | | |
| Issuance of common shares, net of expenses | — | | | — | | | 1 | | | — | | | — | | | 1 | | | — | | | 1 | |
| Stock-based compensation | — | | | — | | | 9 | | | — | | | — | | | 9 | | | — | | | 9 | |
| Retirement or repurchase of shares | — | | | — | | | 0 | | | (4) | | | — | | | (4) | | | — | | | (4) | |
| Preferred stock dividends | — | | | — | | | — | | | (36) | | | — | | | (36) | | | — | | | (36) | |
| Contributions from noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | 235 | | | 235 | |
| | | | | | | | | | | | | | | |
| Change in equity of noncontrolling interests of consolidated variable interest entities | — | | | — | | | — | | | — | | | — | | | — | | | 40 | | | 40 | |
| Balance at March 31, 2021 | $ | 0 | | | $ | 0 | | | $ | 6,623 | | | $ | 8,647 | | | $ | 2,021 | | | $ | 17,291 | | | $ | 1,045 | | | $ | 18,336 | |
| | | | | | | | | | | | | | | |
| Balance at December 31, 2019 | $ | 0 | | | $ | 0 | | | $ | 4,171 | | | $ | 6,939 | | | $ | 2,281 | | | $ | 13,391 | | | $ | 750 | | | $ | 14,141 | |
| Adoption of accounting standard | — | | | — | | | — | | | (117) | | | (6) | | | (123) | | | (2) | | | (125) | |
| Net loss | — | | | — | | | — | | | (1,047) | | | — | | | (1,047) | | | (169) | | | (1,216) | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (3,449) | | | (3,449) | | | (183) | | | (3,632) | |
| | | | | | | | | | | | | | | |
| Issuance of common shares, net of expenses | — | | | — | | | 1,509 | | | — | | | — | | | 1,509 | | | — | | | 1,509 | |
| Stock-based compensation | — | | | — | | | 5 | | | — | | | — | | | 5 | | | — | | | 5 | |
| Retirement or repurchase of shares | — | | | — | | | (184) | | | (144) | | | — | | | (328) | | | — | | | (328) | |
| Preferred stock dividends | — | | | — | | | — | | | (18) | | | — | | | (18) | | | — | | | (18) | |
| Contributions from noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | 240 | | | 240 | |
| Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (46) | | | (46) | |
| | | | | | | | | | | | | | | |
| Balance at March 31, 2020 | $ | 0 | | | $ | 0 | | | $ | 5,501 | | | $ | 5,613 | | | $ | (1,174) | | | $ | 9,940 | | | $ | 590 | | | $ | 10,530 | |
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
| | | | | | | | | | | |
| Three months ended March 31, |
| (In millions) | 2021 | | 2020 |
| Cash flows from operating activities | | | |
| Net income (loss) | $ | 77 | | | $ | (1,216) | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
| Amortization of deferred acquisition costs and value of business acquired | 164 | | | (413) | |
| Amortization of deferred sales inducements | 84 | | | 10 | |
| Accretion of net investment premiums, discounts and other | (49) | | | (62) | |
| | | |
| Net investment (income) loss (related party: 2021 – $(416) and 2020 – $362; consolidated variable interest entities: 2021 – $56, 2020 – $0) | (381) | | | 343 | |
| Net recognized (gains) losses on investments and derivatives (related party: 2021 – $(77) and 2020 – $158; consolidated variable interest entities: 2021 – $67 and 2020 – $0) | (651) | | | 2,144 | |
| Policy acquisition costs deferred | (143) | | | (112) | |
| Changes in operating assets and liabilities: | | | |
| Accrued investment income (related party: 2021 – $(23) and 2020 – $(16)) | (63) | | | 5 | |
| Interest sensitive contract liabilities (related party: 2021 – $64 and 2020 – $(81)) | (34) | | | (1,282) | |
| Future policy benefits, other policy claims and benefits, dividends payable to policyholders and reinsurance recoverable (related party: 2021 – $59 and 2020 – $59) | 1,250 | | | 186 | |
| Funds withheld assets and liabilities (related party: 2021 – $153 and 2020 – $422) | 1,252 | | | 1,426 | |
| Other assets and liabilities | 120 | | | (258) | |
| Net cash provided by operating activities | 1,626 | | | 771 | |
| | | |
| | | |
| Cash flows from investing activities | | | |
| Sales, maturities and repayments of: | | | |
| Available-for-sale securities (related party: 2021 – $350 and 2020 – $205) | 3,431 | | | 4,541 | |
| Trading securities (related party: 2021 – $7 and 2020 – $17) | 18 | | | 48 | |
| Equity securities | 38 | | | 2 | |
| Mortgage loans | 325 | | | 898 | |
| Investment funds (related party: 2021 – $155 and 2020 – $65) | 173 | | | 111 | |
| Derivative instruments and other invested assets | 915 | | | 475 | |
| Short-term investments (related party: 2021 – $98 and 2020 – $0) | 330 | | | 139 | |
| Purchases of: | | | |
| Available-for-sale securities (related party: 2021 – $(767) and 2020 – $(425)) | (8,275) | | | (4,226) | |
| Trading securities (related party: 2021 – $(120) and 2020 – $(77)) | (149) | | | (77) | |
| Equity securities (related party: 2021 – $(35) and 2020 – $(3)) | (48) | | | (3) | |
| Mortgage loans (related party: 2021 – $(42) and 2020 – $0) | (1,786) | | | (1,365) | |
| Investment funds (related party: 2021 – $(429) and 2020 – $(358)) | (467) | | | (375) | |
| Derivative instruments and other invested assets | (1,613) | | | (305) | |
| Short-term investments (related party: 2021 – $(100) and 2020 – $0) | (232) | | | (125) | |
| | | |
| | | |
| Other investing activities, net | 457 | | | (116) | |
| Net cash used in investing activities | (6,883) | | | (378) | |
| | | (Continued) |
| See accompanying notes to the unaudited condensed consolidated financial statements | | | |
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
| | | | | | | | | | | |
| Three months ended March 31, |
| (In millions) | 2021 | | 2020 |
| Cash flows from financing activities | | | |
| Issuance of common stock | $ | 1 | | | $ | 350 | |
| | | |
| Repayment of short-term debt | 0 | | | (75) | |
| | | |
| | | |
| Deposits on investment-type policies and contracts (related party: 2021 – $26 and 2020 – $18) | 5,162 | | | 2,838 | |
| Withdrawals on investment-type policies and contracts (related party: 2021 – $(100) and 2020 – $(135)) | (1,684) | | | (1,633) | |
| Payments for coinsurance agreements on investment-type contracts, net | (8) | | | (6) | |
| Capital contributions from noncontrolling interests | 235 | | | 240 | |
| Capital distributions to noncontrolling interests | 0 | | | (46) | |
| Net change in cash collateral posted for derivative transactions and securities to repurchase | 151 | | | (372) | |
| | | |
| Preferred stock dividends | (36) | | | (18) | |
| Repurchase of common stock | (4) | | | (328) | |
| Other financing activities, net | (29) | | | 20 | |
| Net cash provided by financing activities | 3,788 | | | 970 | |
| Effect of exchange rate changes on cash and cash equivalents | 0 | | | (22) | |
| Net (decrease) increase in cash and cash equivalents | (1,469) | | | 1,341 | |
Cash and cash equivalents at beginning of year1 | 8,442 | | | 4,642 | |
Cash and cash equivalents at end of period1 | $ | 6,973 | | | $ | 5,983 | |
| | | |
| Supplementary information | | | |
| Non-cash transactions | | | |
| Deposits on investment-type policies and contracts through reinsurance agreements (related party: 2021 – $102 and 2020 – $72) | $ | 214 | | | $ | 131 | |
| Withdrawals on investment-type policies and contracts through reinsurance agreements (related party: 2021 – $408 and 2020 – $418) | 1,925 | | | 923 | |
| Investments received from settlements on reinsurance agreements | 54 | | | 0 | |
| | | |
| | | |
| Investments received from pension risk transfer premiums | 1,723 | | | 627 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Related party investments received in exchange for the issuance of Class A common shares | 0 | | | 1,147 | |
| Assets contributed to consolidated VIEs | 169 | | | 0 | |
| | | |
1 Includes cash and cash equivalents and restricted cash. |
(Concluded)
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
1. Business, Basis of Presentation and Significant Accounting Policies
Athene Holding Ltd. (AHL), a Bermuda exempted company, together with its subsidiaries (collectively, Athene, we, our, us, or the Company), is a leading financial services company specializing in retirement services company that issues, reinsures and acquires retirement savings products in all U.S. states, the District of ColumbiaUnited States (US) and Germany.internationally.
We conduct business primarily through the following consolidated subsidiaries:
Athene Life Re Ltd. (ALRe), a Bermuda exempted company•Our non-US reinsurance subsidiaries, to which AHL'sAHL’s other insurance subsidiaries and third partythird-party ceding companies directly and indirectly reinsure a portion of their liabilities;liabilities, including Athene Life Re Ltd. (ALRe), a Bermuda exempted company, and Athene Life Re International Ltd. (ALReI); and
•Athene USA Corporation, an Iowa corporation and(together with its subsidiaries, (Athene USA); andAUSA).
AGER Bermuda Holding Ltd. and its subsidiaries (AGER), which includes Athene Deutschland GmbH & Co. KG, a German partnership and its subsidiaries (ADKG).
In addition, we consolidate certain variable interest entities (VIEs), for which we have determined we are the primary beneficiary, as discussed in beneficiary. See Note 4 – Variable Interest Entities.Entities for further information on VIEs.
Consolidation and Basis of Presentation—We have prepared the accompanying condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the United States Securities and Exchange Commission'sCommission’s rules and regulations for Form 10-Q and Article 10 of Regulation S-X. The accompanying condensed consolidated financial statements are unaudited and reflect all adjustments, consisting only of normal recurring items, except as noted below, considered necessary for fair statement of the results for the interim periods presented. All significant intercompany accounts and transactions have been eliminated. Interim operating results are not necessarily indicative of the results expected for the entire year.year, particularly in light of the material risks and uncertainties surrounding the spread of the Coronavirus Disease of 2019 (COVID-19), which has resulted in significant volatility in the financial markets.
For entities that are consolidated, but not wholly owned, we allocate a portion of the income or loss and corresponding equity to the owners other than us. We include the aggregate of the income or loss and corresponding equity that is not owned by us in noncontrolling interests in the consolidated financial statements.
The condensed consolidated balance sheet as of December 31, 20162020 has been derived from the audited financial statements, but does not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with our revised audited consolidated financial statements included as Exhibit 99.1 toin our CurrentAnnual Report on Form 8-K, filed on June 13, 2017.10-K for the year ended December 31, 2020. The preparation of financial statements requires the use of management estimates. Our estimates may vary as more information about the extent to which COVID-19 and the resulting impact on economic conditions and the financial markets become known. Actual results may differ from estimates used in preparing the condensed consolidated financial statements.
DuringMerger—On March 8, 2021, we entered into an Agreement and Plan of Merger (Merger Agreement), by and among the quarter ended September 30, 2017, we recorded out-of-period adjustments that affected the condensed consolidated statementsCompany, Apollo Global Management, Inc., a Delaware corporation (AGM), Tango Holdings, Inc., a Delaware corporation and a direct wholly owned subsidiary of income. These adjustments, related to DACAGM (HoldCo), Blue Merger Sub, Ltd., a Bermuda exempted company and VOBA amortizationa direct wholly owned subsidiary of HoldCo (AHL Merger Sub), and actuarial reserves, increased consolidated income before taxes for the threeGreen Merger Sub, Inc., a Delaware corporation and nine months ended September 30, 2017 by $13 milliona direct, wholly owned subsidiary of HoldCo (AGM Merger Sub). The Company and $28 million, respectively. We evaluated these out-of-period adjustments and determined they were not materialAGM have agreed, subject to the condensed consolidated financial statements for eitherterms and conditions of the three or nine months ended September 30, 2017, or any other previously reported period.
Revisions—As part ofMerger Agreement, to effect an all-stock merger transaction to combine our continuing initiative to improve controls in our business processes and confirm the accuracy of our data relating to blocks ofrespective businesses acquired from Aviva USA as well as deposits since the acquisition, we identified an error in May 2017 relating to the impact of certain inputs used to calculate certain actuarial balances, which had the result of misstating our net investment earned rate used in the amortization calculation of deferred acquisition costs and the change in future policy benefits. We have revised our condensed consolidated financial statements and notes for the three and nine months ended September 30, 2016by: (1) AGM merging with AGM Merger Sub, with AGM surviving such merger as a resultdirect wholly owned subsidiary of correcting this errorHoldCo (AGM Merger), (2) the Company merging with AHL Merger Sub, with the Company surviving such merger as a direct, wholly owned subsidiary of HoldCo (AHL Merger and, together with the AGM Merger, Mergers), and (3) as of the effective time of the Mergers, changing the name of HoldCo to be Apollo Global Management, Inc. At the effective time of the Mergers, each AHL Class A common share, subject to certain exceptions, will be converted automatically into the right to receive 1.149 shares of HoldCo common stock. The Mergers are expected to close in January 2022 and are subject to shareholder and regulatory approvals, and other immaterial errors. We assessed the materiality of these errors and concluded these errors are not material to the condensed consolidated financial statements as a whole. However, we elected to revise the condensed consolidated financial statements to increase their accuracy, as well as provide consistency and comparability with balances and activities to be reported in future periods.customary closing conditions.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following is a summary of the revisions on the condensed consolidated statements of income:
|
| | | | | | | | | | | |
| | Three months ended September 30, 2016 |
| (In millions, except per share data) | As Previously Reported | | Revisions | | As Adjusted |
| Revenue | | | | | |
| Net investment income | $ | 747 |
| | $ | (4 | ) | | $ | 743 |
|
| Total revenues | 1,276 |
| | (4 | ) | | 1,272 |
|
| Benefits and Expenses | | | | | |
| Interest sensitive contract benefits | 482 |
| | 9 |
| | 491 |
|
| Amortization of deferred sales inducements | 14 |
| | (1 | ) | | 13 |
|
| Future policy and other policy benefits | 377 |
| | 14 |
| | 391 |
|
| Amortization of deferred acquisition costs and value of business acquired | 113 |
| | 7 |
| | 120 |
|
| Total benefits and expenses | 1,205 |
| | 29 |
| | 1,234 |
|
| Income before income taxes | 71 |
| | (33 | ) | | 38 |
|
| Income tax benefit | (87 | ) | | (1 | ) | | (88 | ) |
| Net income | 158 |
| | (32 | ) | | 126 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | — |
| | — |
|
| Net income available to Athene Holding Ltd. shareholders | $ | 158 |
| | $ | (32 | ) | | $ | 126 |
|
| | | | | | |
| Earnings per share on Class A and B shares | | | | | |
| Basic | $ | 0.85 |
| | $ | (0.17 | ) | | $ | 0.68 |
|
| Diluted | 0.85 |
| | (0.17 | ) | | 0.68 |
|
| | | | | | |
|
| | | | | | | | | | | |
| | Nine months ended September 30, 2016 |
| (In millions, except per share data) | As Previously Reported | | Revisions | | As Adjusted |
| Revenue | | | | | |
| Net investment income | $ | 2,143 |
| | $ | (6 | ) | | $ | 2,137 |
|
| Total revenues | 3,045 |
| | (6 | ) | | 3,039 |
|
| Benefits and Expenses | | | | | |
| Interest sensitive contract benefits | 1,068 |
| | 13 |
| | 1,081 |
|
| Amortization of deferred sales inducements | 20 |
| | (1 | ) | | 19 |
|
| Future policy and other policy benefits | 862 |
| | 11 |
| | 873 |
|
| Amortization of deferred acquisition costs and value of business acquired | 203 |
| | 7 |
| | 210 |
|
| Total benefits and expenses | 2,678 |
| | 30 |
| | 2,708 |
|
| Income before income taxes | 367 |
| | (36 | ) | | 331 |
|
| Income tax benefit | (70 | ) | | (3 | ) | | (73 | ) |
| Net income | 437 |
| | (33 | ) | | 404 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | — |
| | — |
|
| Net income available to Athene Holding Ltd. shareholders | $ | 437 |
| | $ | (33 | ) | | $ | 404 |
|
| | | | | | |
| Earnings per share on Class A and B shares | | | | | |
| Basic – Classes A and B | $ | 2.35 |
| | $ | (0.17 | ) | | $ | 2.18 |
|
| Diluted – Class A | 2.35 |
| | (0.18 | ) | | 2.17 |
|
| Diluted – Class B | 2.35 |
| | (0.17 | ) | | 2.18 |
|
| | | | | | |
We revised the condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2016 and the condensed consolidated statement of equity for the nine months ended September 30, 2016 only for the changes to net income presented above.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following is a summary of the revisions to the condensed consolidated statement of cash flows:
|
| | | | | | | | | | | |
| | Nine months ended September 30, 2016 |
| (In millions) | As Previously Reported | | Revisions | | As Adjusted |
| Cash flows from operating activities | | | | | |
| Net income | $ | 437 |
| | $ | (33 | ) | | $ | 404 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Amortization of deferred acquisition costs and value of business acquired | 203 |
| | 7 |
| | 210 |
|
| Amortization of deferred sales inducements | 20 |
| | (1 | ) | | 19 |
|
| Deferred income tax benefit | (42 | ) | | (3 | ) | | (45 | ) |
| Changes in operating assets and liabilities: | | | | | |
| Interest sensitive contract liabilities | 982 |
| | 13 |
| | 995 |
|
| Future policy benefits, other policy claims and benefits, dividends payable to policyholders and reinsurance recoverable | 211 |
| | 11 |
| | 222 |
|
| Other assets and liabilities | (23 | ) | | 2 |
| | (21 | ) |
| Net cash provided by operating activities | 968 |
| | (4 | ) | | 964 |
|
| Cash flows from investing activities | | | | | |
| Other investing activities, net | 28 |
| | 4 |
| | 32 |
|
| Net cash used in investing activities | (1,686 | ) | | 4 |
| | (1,682 | ) |
| Cash flows from financing activities | | | | | |
| Other financing activities, net | 200 |
| | 7 |
| | 207 |
|
| Net cash provided by financing activities | 560 |
| | 7 |
| | 567 |
|
| Effect of exchange rate changes on cash and cash equivalents | (2 | ) | | — |
| | (2 | ) |
| Net decrease in cash and cash equivalents | (160 | ) | | 7 |
| | (153 | ) |
Cash and cash equivalents at beginning of year1 | 2,720 |
| | — |
| | 2,720 |
|
Cash and cash equivalents at end of period1 | $ | 2,560 |
| | $ | 7 |
| | $ | 2,567 |
|
| | | | | | |
1 Includes cash and cash equivalents of consolidated variable interest entities |
Adopted Accounting Pronouncements
Stock Compensation – Scope of Modification Accounting (ASU 2017-09)
The amendments in this update clarify and simplify whenCodification Improvements to apply modification accounting for a change to the terms or conditions of a share-based payment award. These amendments are required to be adopted prospectively to awards modified after the date of adoption. The amendments are effective January 1, 2018. Early adoption is permitted and we have elected to early adopt effective April 1, 2017. The adoption did not have an impact on our consolidated financial statements.
Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs (ASU 2017-08)
The amendments in this update shorten the amortization period for certain callable debt securities held at a premium to the earliest call date. These amendments are required to be adopted on a modified retrospective basis effective January 1, 2019. Early adoption is permitted and we have elected to early adopt effective January 1, 2017. The adoption did not have a material impact on our consolidated financial statements.
Business Combinations – Clarifying the Definition of a Business (ASU 2017-01)2020-08)
The amendments in this update clarify the definition of a business with the objective of assisting entities with evaluating whether transactionsthat callable debt securities should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwillreevaluated each reporting period to determine if the amortized cost exceeds the amount repayable by the issuer at the next earliest call date and, consolidation. These amendments are requiredif so, the excess should be amortized to be adopted prospectively to any transactions after the date of adoption. The amendments are effective January 1, 2018. Early adoption is permitted and we have elected to early adopt effective April 1, 2017. The adoption did not have an impact on our consolidated financial statements.
Consolidation – Interest Held through Related Parties under Common Control (ASU 2016-17)
This update amends the consolidation guidance to change how indirect interests in VIEs are evaluated by a reporting entity when determining whether or not it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. Previously, if a single decision maker and its related parties were under common control, the single decision maker was required to consider indirect interests held through related parties to be the equivalent of direct interests in their entirety. The amendments change the evaluation of indirect interests to be considered on a proportionate basis.next call date. We adopted this standard effectiveupdate January 1, 2017, and the2021 on a prospective basis for existing or newly purchased callable debt securities. The adoption of this update did not have a material effect on our condensed consolidated financial statements.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (ASU 2020-01)
ImprovementsThe amendments in this update are related to Employee Share-Based Payment Accounting (ASU 2016-09)
This update simplifies several aspectscertain equity securities without a readily determinable fair value that apply measurement alternative to measure based on cost, minus impairment, if any, adjusted for any observable price changes in orderly transactions of identical or similar investments of the same issuer. The amendment clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for share-based payment award transactions, including income tax consequences, forfeitures and classification on the statementpurposes of cash flows.applying the measurement alternative immediately before applying or upon discontinuing the equity method. The standard requires entities to makeamendment further clarifies that for the purpose of applying accounting for certain forward contracts or purchased options, an entity-wide accounting policy election to either estimateentity should not consider whether the number of awards that are expected to vestunderlying securities would be accounted for under the equity method or account for forfeitures when they occur. We have elected to account for forfeitures when they occur.the fair value option upon settlement or exercise. We adopted this standardupdate on a prospective basis effective January 1, 2017, and the adoption2021. This update did not have a material effect on our condensed consolidated financial statements.
Equity MethodIncome Taxes – Simplifying the Accounting for Income Taxes (ASU 2019-12)
The amendments in this update simplify the accounting for income taxes by eliminating certain exceptions to the tax accounting guidance related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and Joint Ventures (ASU 2016-07)
This update eliminates the retroactive adjustmentsrecognition of deferred tax liabilities related to anforeign investment upon it qualifyingownership changes. It also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the equity method of accounting asfor transactions that result in a result of an increasestep-up in the leveltax basis of ownership interest or degreegoodwill and allocating consolidated income taxes to separate financial statements of influence by the investor.entities not subject to income tax. We adopted this standard effectiveupdate January 1, 2017,2021 and applied certain aspects of the update retrospectively while other aspects were applied on a modified retrospective basis. The adoption of this update did not have a material effect on our condensed consolidated financial statements.
Derivatives and Hedging – Contingent Put and Call Options (ASU 2016-06)
This update is intended to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to debt hosts. We adopted this standard effective January 1, 2017, and the adoption did not have a material effect on our consolidated financial statements.
Derivatives and Hedging – Effects of Derivative Contract Novation (ASU 2016-05)
This update is intended to clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require a de-designation of that hedging relationship provided all other hedge accounting criteria continue to be met. We adopted this standard effective January 1, 2017, and the adoption did not have a material effect on our consolidated financial statements.
Recently Issued Accounting Pronouncements
Derivatives and HedgingInsurance – Targeted Improvements to the Accounting for Long-Duration Contracts (ASU 2017-12)2020-11, ASU 2019-09, ASU 2018-12)
These updates amend four key areas pertaining to the accounting and disclosures for long-duration insurance and investment contracts.
•The amendmentsupdate requires cash flow assumptions used to measure the liability for future policy benefits to be updated at least annually and no longer allows a provision for adverse deviation. The remeasurement of the liability associated with the update of assumptions is required to be recognized in net income. Loss recognition testing is eliminated for traditional and limited-payment contracts. The update also requires the discount rate used in measuring the liability to be an upper-medium grade fixed-income instrument yield, which is to be updated at each reporting date. The change in liability due to changes in the discount rate is to be recognized in other comprehensive income.
•The update simplifies the amortization of deferred acquisition costs and other balances amortized in proportion to premiums, gross profits, or gross margins, requiring such balances to be amortized on a constant level basis over the expected term of the contracts. Deferred costs are required to be written off for unexpected contract terminations but are not subject to impairment testing.
•The update requires certain contract features meeting the definition of market risk benefits to be measured at fair value. Among the features included in this definition are guaranteed lifetime withdrawal benefit (GLWB) and guaranteed minimum death benefit (GMDB) riders attached to our annuity products. The change in fair value of the market risk benefits is to be recognized in net income, excluding the portion attributable to changes in instrument-specific credit risk which is recognized in other comprehensive income.
•The update contain improvements toalso introduces disclosure requirements around the financial reportingliability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities, and deferred acquisition costs. This includes disaggregated rollforwards of hedging relationships that more closely reflect the economic results of an entity's risk management activitiesthese balances and information about significant inputs, judgments, assumptions and methods used in its financial statements. Additionally, the amendments in this update make certain targeted improvements to simplify the application of hedge accounting. their measurement.
We will beare required to adopt this standard effectivethese updates on January 1, 2019.2023. Certain provisions of the update are required to be adopted on a fully retrospective basis, while others may be adopted on a modified retrospective basis. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
Gains and Losses from the Derecognition
The amendments in this update clarify the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. We will be required to adopt this standard on a retrospective or modified retrospective basis effective January 1, 2018. We are currently evaluating the impact of this guidance on our consolidated financial statements.
Intangibles – Simplifying the Test for Goodwill Impairment (ASU 2017-04)
The amendments in this update simplify the subsequent measurement of goodwill by eliminating the comparison of the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill to determine the goodwill impairment loss. With the adoption of this guidance, a goodwill impairment will be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of the goodwill allocated to that reporting unit. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. We will be required to adopt this standard prospectively effective January 1, 2020. Early adoption is permitted. We do not expect the adoption of this update to have a material effect on our consolidated financial statements.
Revenue Recognition (ASU 2016-20, ASU 2016-12, ASU 2016-11, ASU 2016-10, ASU 2016-08, ASU 2015-14 and ASU 2014-09)
ASU 2014-09 indicates an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2015-14 provided for a one-year deferral of the effective date, which will require us to adopt this standard effective January 1, 2018. ASU 2016-08 amends the principal-versus-agent implementation guidance and illustrations in ASU 2014-09. ASU 2016-10 clarifies the identification of performance obligations as well as licensing implementation guidance. ASU 2016-11 brings existing Securities and Exchange Commission (SEC) guidance into conformity with revenue recognition accounting guidance of ASU 2014-09 discussed above. ASU 2016-12 provides clarification on assessing collectability, presentation of sales tax, non-cash consideration and transition. ASU 2016-20 addresses necessary technical corrections and improvements to clarify codification amended by ASU 2014-09 within Topic 606. The revenue recognition updates replace all general and most industry-specific revenue recognition guidance, excluding insurance contracts, leases, financial instruments and guarantees, which have been scoped out of the update. Since the guidance does not apply to revenue on contracts accounted for under the financial instruments or insurance contracts standards, only a portion of our revenues are impacted by this guidance. Our remaining implementation efforts are focused on less than 0.3% of our revenues and our transition approach. We do not currently expect the adoption of this update to have a material impact on our consolidated financial statements.
Statement of Cash Flows – Restricted Cash (ASU 2016-18)
This update requires amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the consolidated statements of cash flows. We will be required to adopt this standard retrospectively for each period presented effective January 1, 2018. Early adoption is permitted. The adoption of this update will require us to change the presentation on the consolidated statements of cash flows for restricted cash or restricted cash equivalents; however, we do not expect the adoption of this update to have a material effect on our consolidated financial statements.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Income Taxes – Intra-Entity Transfers (ASU 2016-16)
This update requires the immediate recognition of current and deferred income tax effects of intra-entity transfers of assets, other than inventory. Currently, recognition of the income tax consequence is not recognized until the asset is sold to an outside party. We will be required to adopt this standard on a modified retrospective basis effective January 1, 2018. We are currently evaluating the impact of this guidance on our consolidated financial statements.
Statement of Cash Flows (ASU 2016-15)
This update provides specific guidance to clarify how entities should classify certain cash receipts and cash payments on the statement of cash flows. The update also clarifies the application of the predominance principle when cash receipts and cash payments have aspects of more than one class of cash flows. We will be required to adopt this standard effective January 1, 2018. We do not expect the adoption of this update to have a material effect on our consolidated financial statements.
Financial Instruments – Credit Losses (ASU 2016-13)
This update is designed to reduce complexity by limiting the number of credit impairment models used for different assets. The model will result in accelerated credit loss recognition on assets held at amortized cost, which includes our commercial and residential mortgage investments. The identification of credit-deteriorated securities will include all assets that have experienced a more-than-insignificant deterioration in credit since origination. Additionally, any changes in the expected cash flows of credit-deteriorated securities will be recognized immediately in the income statement. Available-for-sale (AFS) fixed maturity securities are not in scope of the new credit loss model, but will undergo targeted improvements to the current reporting model including the establishment of a valuation allowance for credit losses versus the current direct write down approach. We will be required to adopt this standard effective January 1, 2020. Early adoption is permitted effective January 1, 2019. We are currently evaluating the impact of this guidance on our consolidated financial statements.
Leases (ASU 2016-02)
This update is intended to increase transparency and comparability for lease transactions. A lessee is required to recognize an asset and a liability for all lease arrangements longer than 12 months. Lessor accounting is largely unchanged. We will be required to adopt this standard on a modified retrospective basis effective January 1, 2019. Early adoption is permitted. Our implementation efforts are primarily focused on the review of existing lease contracts and assessing the impact of this guidance on our consolidated financial statements.
Financial Instruments – Recognition and Measurement (ASU 2016-01)
This update changes the current accounting for certain equity investments, the presentation of changes in the fair value of liabilities measured under the fair value option due to instrument-specific credit risk, and certain disclosures. For liabilities measured under the fair value option, changes in fair value attributable to instrument-specific credit risk will no longer affect net income, but will be recognized separately in OCI. Additionally, this update requires equity investments to be measured at fair value with subsequent changes recognized in net income, except for those accounted for under the equity method or requiring consolidation. We currently recognize changes in fair value related to AFS equity securities in accumulated other comprehensive income (AOCI) on the consolidated balance sheets. We will be required to adopt this standard with a cumulative-effect adjustment to beginning retained earnings effective January 1, 2018. Refer to Note 2 – Investments for further information on the unrealized gains and losses of our AFS equity securities. We are currently evaluating the impact of this guidance on our consolidated financial statements.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
2. Investments
Available-for-saleAFS Securities—Our AFS investment portfolio includes bonds, collateralized loan obligations (CLO), asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS), and redeemable preferred stock, and equity securities. Additionally, itstock. Our AFS investment portfolio includes directrelated party investments in affiliatesthat are primarily comprised of Apollo Global Management, LLC (AGM and, together with its subsidiaries, Apollo) whereinvestments over which Apollo can exercise significant influence over the affiliates.influence. These investments are presented as investments in related parties on the condensed consolidated balance sheets, and are separately disclosed below.
The following table represents the cost or amortized cost, allowance for credit losses, gross unrealized gains and losses and fair value and other-than-temporary impairments (OTTI) in AOCI of our AFS investments by asset type: | | | | September 30, 2017 | | March 31, 2021 |
| (In millions) | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | OTTI in AOCI | (In millions) | Amortized Cost | | Allowance for Credit Losses | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Fixed maturity securities | | | | | | | | | | |
| U.S. government and agencies | $ | 59 |
| | $ | 1 |
| | $ | (2 | ) | | $ | 58 |
| | $ | — |
| |
| U.S. state, municipal and political subdivisions | 993 |
| | 153 |
| | (1 | ) | | 1,145 |
| | — |
| |
| AFS securities | | AFS securities | | | | | | | | | |
| US government and agencies | | US government and agencies | $ | 375 | | | $ | 0 | | | $ | 1 | | | $ | (25) | | | $ | 351 | |
| US state, municipal and political subdivisions | | US state, municipal and political subdivisions | 898 | | | 0 | | | 115 | | | (7) | | | 1,006 | |
| Foreign governments | 2,515 |
| | 90 |
| | (16 | ) | | 2,589 |
| | — |
| Foreign governments | 373 | | | 0 | | | 18 | | | (9) | | | 382 | |
| Corporate | 33,115 |
| | 1,520 |
| | (177 | ) | | 34,458 |
| | 1 |
| Corporate | 55,922 | | | (8) | | | 3,750 | | | (816) | | | 58,848 | |
| CLO | 4,963 |
| | 47 |
| | (14 | ) | | 4,996 |
| | — |
| CLO | 11,299 | | | 0 | | | 94 | | | (121) | | | 11,272 | |
| ABS | 3,885 |
| | 57 |
| | (42 | ) | | 3,900 |
| | 1 |
| ABS | 4,761 | | | (11) | | | 152 | | | (70) | | | 4,832 | |
| CMBS | 1,849 |
| | 54 |
| | (13 | ) | | 1,890 |
| | 1 |
| CMBS | 2,218 | | | (14) | | | 66 | | | (64) | | | 2,206 | |
| RMBS | 8,838 |
| | 650 |
| | (8 | ) | | 9,480 |
| | 12 |
| RMBS | 6,344 | | | (78) | | | 383 | | | (22) | | | 6,627 | |
| Total fixed maturity securities | 56,217 |
| | 2,572 |
| | (273 | ) | | 58,516 |
| | 15 |
| |
| Equity securities | 262 |
| | 57 |
| | (1) |
| | 318 |
| | — |
| |
| Total AFS securities | 56,479 |
| | 2,629 |
| | (274 | ) | | 58,834 |
| | 15 |
| Total AFS securities | 82,190 | | | (111) | | | 4,579 | | | (1,134) | | | 85,524 | |
| Fixed maturity securities – related party | | | | | | | | | | |
| AFS securities – related party | | AFS securities – related party | | | | | | | | | |
| Corporate | | Corporate | 213 | | | 0 | | | 8 | | | 0 | | | 221 | |
| CLO | 352 |
| | 4 |
| | — |
| | 356 |
| | — |
| CLO | 1,864 | | | 0 | | | 13 | | | (8) | | | 1,869 | |
| ABS | 52 |
| | 1 |
| | — |
| | 53 |
| | — |
| ABS | 4,777 | | | 0 | | | 78 | | | (40) | | | 4,815 | |
| Total fixed maturity securities – related party | 404 |
| | 5 |
| | — |
| | 409 |
| | — |
| |
| Total AFS securities – related party | | Total AFS securities – related party | 6,854 | | | 0 | | | 99 | | | (48) | | | 6,905 | |
| Total AFS securities including related party | $ | 56,883 |
| | $ | 2,634 |
| | $ | (274 | ) | | $ | 59,243 |
| | $ | 15 |
| Total AFS securities including related party | $ | 89,044 | | | $ | (111) | | | $ | 4,678 | | | $ | (1,182) | | | $ | 92,429 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| (In millions) | Amortized Cost | | Allowance for Credit Losses | | Gross Unrealized Gains | | Gross Unrealized Losses | |
Fair Value |
| AFS securities | | | | | | | | | |
| US government and agencies | $ | 349 | | | $ | 0 | | | $ | 3 | | | $ | (1) | | | $ | 351 | |
| US state, municipal and political subdivisions | 864 | | | 0 | | | 169 | | | 0 | | | 1,033 | |
| Foreign governments | 330 | | | 0 | | | 38 | | | 0 | | | 368 | |
| Corporate | 51,934 | | | (6) | | | 6,368 | | | (116) | | | 58,180 | |
| CLO | 9,631 | | | (1) | | | 145 | | | (206) | | | 9,569 | |
| ABS | 4,259 | | | (6) | | | 140 | | | (123) | | | 4,270 | |
| CMBS | 2,165 | | | (10) | | | 85 | | | (71) | | | 2,169 | |
| RMBS | 6,568 | | | (80) | | | 447 | | | (22) | | | 6,913 | |
| Total AFS securities | 76,100 | | | (103) | | | 7,395 | | | (539) | | | 82,853 | |
| AFS securities – related party | | | | | | | | | |
| Corporate | 213 | | | 0 | | | 2 | | | 0 | | | 215 | |
| CLO | 1,511 | | | (1) | | | 23 | | | (13) | | | 1,520 | |
| ABS | 4,720 | | | 0 | | | 95 | | | (30) | | | 4,785 | |
| Total AFS securities – related party | 6,444 | | | (1) | | | 120 | | | (43) | | | 6,520 | |
| Total AFS securities including related party | $ | 82,544 | | | $ | (104) | | | $ | 7,515 | | | $ | (582) | | | $ | 89,373 | |
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| (In millions) | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | OTTI in AOCI |
| Fixed maturity securities | | | | | | | | | |
| U.S. government and agencies | $ | 59 |
| | $ | 1 |
| | $ | — |
| | $ | 60 |
| | $ | — |
|
| U.S. state, municipal and political subdivisions | 1,024 |
| | 117 |
| | (1 | ) | | 1,140 |
| | — |
|
| Foreign governments | 2,098 |
| | 143 |
| | (6 | ) | | 2,235 |
| | — |
|
| Corporate | 29,433 |
| | 901 |
| | (314 | ) | | 30,020 |
| | 2 |
|
| CLO | 4,950 |
| | 14 |
| | (142 | ) | | 4,822 |
| | — |
|
| ABS | 2,980 |
| | 25 |
| | (69 | ) | | 2,936 |
| | — |
|
| CMBS | 1,835 |
| | 38 |
| | (26 | ) | | 1,847 |
| | — |
|
| RMBS | 8,731 |
| | 313 |
| | (71 | ) | | 8,973 |
| | 15 |
|
| Total fixed maturity securities | 51,110 |
| | 1,552 |
| | (629 | ) | | 52,033 |
| | 17 |
|
| Equity securities | 319 |
| | 35 |
| | (1 | ) | | 353 |
| | — |
|
| Total AFS securities | 51,429 |
| | 1,587 |
| | (630 | ) | | 52,386 |
| | 17 |
|
| Fixed maturity securities – related party | | | | | | | | | |
| CLO | 284 |
| | 1 |
| | (6 | ) | | 279 |
| | — |
|
| ABS | 57 |
| | — |
| | (1 | ) | | 56 |
| | — |
|
| Total fixed maturity securities – related party | 341 |
| | 1 |
| | (7 | ) | | 335 |
| | — |
|
| Equity securities – related party | 20 |
| | — |
| | — |
| | 20 |
| | — |
|
| Total AFS securities – related party | 361 |
| | 1 |
| | (7 | ) | | 355 |
| | — |
|
| Total AFS securities including related party | $ | 51,790 |
| | $ | 1,588 |
| | $ | (637 | ) | | $ | 52,741 |
| | $ | 17 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
The amortized cost and fair value of fixed maturity AFS securities, including related party, are shown by contractual maturity below: | | | | September 30, 2017 | | March 31, 2021 |
| (In millions) | Amortized Cost | | Fair Value | (In millions) | Amortized Cost | | Fair Value |
| AFS securities | | AFS securities | | | |
| Due in one year or less | $ | 984 |
| | $ | 988 |
| Due in one year or less | $ | 985 | | | $ | 1,000 | |
| Due after one year through five years | 8,048 |
| | 8,246 |
| Due after one year through five years | 8,603 | | | 9,060 | |
| Due after five years through ten years | 11,218 |
| | 11,605 |
| Due after five years through ten years | 15,913 | | | 16,559 | |
| Due after ten years | 16,432 |
| | 17,411 |
| Due after ten years | 32,067 | | | 33,968 | |
| CLO, ABS, CMBS and RMBS | 19,535 |
| | 20,266 |
| CLO, ABS, CMBS and RMBS | 24,622 | | | 24,937 | |
| Total AFS fixed maturity securities | 56,217 |
| | 58,516 |
| |
| Fixed maturity securities – related party, CLO and ABS | 404 |
| | 409 |
| |
| Total AFS fixed maturity securities including related party | $ | 56,621 |
| | $ | 58,925 |
| |
| Total AFS securities | | Total AFS securities | 82,190 | | | 85,524 | |
| AFS securities – related party | | AFS securities – related party | | | |
| | Due after one year through five years | | Due after one year through five years | 18 | | | 19 | |
| Due after five years through ten years | | Due after five years through ten years | 195 | | | 202 | |
| | CLO and ABS | | CLO and ABS | 6,641 | | | 6,684 | |
| Total AFS securities – related party | | Total AFS securities – related party | 6,854 | | | 6,905 | |
| Total AFS securities including related party | | Total AFS securities including related party | $ | 89,044 | | | $ | 92,429 | |
Actual maturities can differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Unrealized Losses on AFS Securities—The following summarizes the fair value and gross unrealized losses for AFS securities, including related party, for which an allowance for credit losses has not been recorded, aggregated by class of securityasset type and length of time the fair value has remained below cost or amortized cost:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 |
| Less than 12 months | | 12 months or more | | Total |
| (In millions) | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| AFS securities | | | | | | | | | | | |
| US government and agencies | $ | 312 | | | $ | (25) | | | $ | 0 | | | $ | 0 | | | $ | 312 | | | $ | (25) | |
| US state, municipal and political subdivisions | 226 | | | (7) | | | 6 | | | 0 | | | 232 | | | (7) | |
| Foreign governments | 211 | | | (9) | | | 1 | | | 0 | | | 212 | | | (9) | |
| Corporate | 15,665 | | | (749) | | | 398 | | | (43) | | | 16,063 | | | (792) | |
| CLO | 2,643 | | | (19) | | | 2,873 | | | (89) | | | 5,516 | | | (108) | |
| ABS | 752 | | | (21) | | | 524 | | | (40) | | | 1,276 | | | (61) | |
| CMBS | 588 | | | (23) | | | 245 | | | (22) | | | 833 | | | (45) | |
| RMBS | 562 | | | (7) | | | 124 | | | (4) | | | 686 | | | (11) | |
| Total AFS securities | 20,959 | | | (860) | | | 4,171 | | | (198) | | | 25,130 | | | (1,058) | |
| AFS securities – related party | | | | | | | | | | | |
| | | | | | | | | | | |
| CLO | 601 | | | (1) | | | 216 | | | (4) | | | 817 | | | (5) | |
| ABS | 2,262 | | | (40) | | | 14 | | | 0 | | | 2,276 | | | (40) | |
| Total AFS securities – related party | 2,863 | | | (41) | | | 230 | | | (4) | | | 3,093 | | | (45) | |
| Total AFS securities including related party | $ | 23,822 | | | $ | (901) | | | $ | 4,401 | | | $ | (202) | | | $ | 28,223 | | | $ | (1,103) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| | Less than 12 months | | 12 months or greater | | Total |
| (In millions) | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses |
| Fixed maturity securities | | | | | | | | | | | |
| U.S. government and agencies | $ | 17 |
| | $ | (1 | ) | | $ | 6 |
| | $ | (1) |
| | $ | 23 |
| | $ | (2 | ) |
| U.S. state, municipal and political subdivisions | 81 |
| | (1 | ) | | 3 |
| | — |
| | 84 |
| | (1 | ) |
| Foreign governments | 822 |
| | (16 | ) | | 25 |
| | — |
| | 847 |
| | (16 | ) |
| Corporate | 4,127 |
| | (90 | ) | | 1,465 |
| | (87 | ) | | 5,592 |
| | (177 | ) |
| CLO | 303 |
| | (1 | ) | | 671 |
| | (13 | ) | | 974 |
| | (14 | ) |
| ABS | 541 |
| | (4 | ) | | 573 |
| | (38 | ) | | 1,114 |
| | (42 | ) |
| CMBS | 345 |
| | (6 | ) | | 169 |
| | (7 | ) | | 514 |
| | (13 | ) |
| RMBS | 393 |
| | (5 | ) | | 166 |
| | (3 | ) | | 559 |
| | (8 | ) |
| Total fixed maturity securities | 6,629 |
| | (124 | ) | | 3,078 |
| | (149 | ) | | 9,707 |
| | (273 | ) |
| Equity securities | 72 |
| | (1) |
| | — |
| | — |
| | 72 |
| | (1 | ) |
| Total AFS securities | 6,701 |
| | (125 | ) | | 3,078 |
| | (149 | ) | | 9,779 |
| | (274 | ) |
| Fixed maturity securities, CLO – related party | 61 |
| | — |
| | — |
| | — |
| | 61 |
| | — |
|
| Total AFS securities including related party | $ | 6,762 |
| | $ | (125 | ) | | $ | 3,078 |
| | $ | (149 | ) | | $ | 9,840 |
| | $ | (274 | ) |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Less than 12 months | | 12 months or more | | Total |
| (In millions) | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| AFS securities | | | | | | | | | | | |
| US government and agencies | $ | 31 | | | $ | (1) | | | $ | 0 | | | $ | 0 | | | $ | 31 | | | $ | (1) | |
| US state, municipal and political subdivisions | 9 | | | 0 | | | 6 | | | 0 | | | 15 | | | 0 | |
| Foreign governments | 2 | | | 0 | | | 0 | | | 0 | | | 2 | | | 0 | |
| Corporate | 2,218 | | | (66) | | | 248 | | | (24) | | | 2,466 | | | (90) | |
| CLO | 1,649 | | | (33) | | | 3,179 | | | (167) | | | 4,828 | | | (200) | |
| ABS | 1,169 | | | (73) | | | 84 | | | (18) | | | 1,253 | | | (91) | |
| CMBS | 710 | | | (37) | | | 48 | | | (13) | | | 758 | | | (50) | |
| RMBS | 548 | | | (11) | | | 37 | | | (2) | | | 585 | | | (13) | |
| Total AFS securities | 6,336 | | | (221) | | | 3,602 | | | (224) | | | 9,938 | | | (445) | |
| AFS securities – related party | | | | | | | | | | | |
| CLO | 336 | | | (3) | | | 232 | | | (10) | | | 568 | | | (13) | |
| ABS | 1,012 | | | (30) | | | 0 | | | 0 | | | 1,012 | | | (30) | |
| Total AFS securities – related party | 1,348 | | | (33) | | | 232 | | | (10) | | | 1,580 | | | (43) | |
| Total AFS securities including related party | $ | 7,684 | | | $ | (254) | | | $ | 3,834 | | | $ | (234) | | | $ | 11,518 | | | $ | (488) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Less than 12 months | | 12 months or greater | | Total |
| (In millions) | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| Fixed maturity securities | | | | | | | | | | | |
| U.S. government and agencies | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
|
| U.S. state, municipal and political subdivisions | 85 |
| | (1 | ) | | 2 |
| | — |
| | 87 |
| | (1 | ) |
| Foreign governments | 137 |
| | (5 | ) | | 9 |
| | (1 | ) | | 146 |
| | (6 | ) |
| Corporate | 6,136 |
| | (228 | ) | | 1,113 |
| | (86 | ) | | 7,249 |
| | (314 | ) |
| CLO | 388 |
| | (2 | ) | | 3,102 |
| | (140 | ) | | 3,490 |
| | (142 | ) |
| ABS | 865 |
| | (17 | ) | | 767 |
| | (52 | ) | | 1,632 |
| | (69 | ) |
| CMBS | 576 |
| | (18 | ) | | 183 |
| | (8 | ) | | 759 |
| | (26 | ) |
| RMBS | 1,143 |
| | (19 | ) | | 1,727 |
| | (52 | ) | | 2,870 |
| | (71 | ) |
| Total fixed maturity securities | 9,331 |
| | (290 | ) | | 6,903 |
| | (339 | ) | | 16,234 |
| | (629 | ) |
| Equity securities | 179 |
| | (1 | ) | | — |
| | — |
| | 179 |
| | (1 | ) |
| Total AFS securities | 9,510 |
| | (291 | ) | | 6,903 |
| | (339 | ) | | 16,413 |
| | (630 | ) |
| Fixed maturity securities – related party | | | | | | | | | | | |
| CLO | 68 |
| | — |
| | 100 |
| | (6 | ) | | 168 |
| | (6 | ) |
| ABS | — |
| | — |
| | 56 |
| | (1 | ) | | 56 |
| | (1 | ) |
| Total fixed maturity securities – related party | 68 |
| | — |
| | 156 |
| | (7 | ) | | 224 |
| | (7 | ) |
| Equity securities – related party | 14 |
| | — |
| | — |
| | — |
| | 14 |
| | — |
|
| Total AFS securities – related party | 82 |
| | — |
| | 156 |
| | (7 | ) | | 238 |
| | (7 | ) |
| Total AFS securities including related party | $ | 9,592 |
| | $ | (291 | ) | | $ | 7,059 |
| | $ | (346 | ) | | $ | 16,651 |
| | $ | (637 | ) |
AsThe following summarizes the number of September 30, 2017, we held 1,413 AFS securities that were in an unrealized loss position. Of this total, 432 were in an unrealized loss position, longer than 12 months. As of September 30, 2017, we held oneincluding related party, AFS security that was infor which an unrealized loss position less than 12 months. allowance for credit losses has not been recorded:
| | | | | | | | | | | |
| March 31, 2021 |
| Unrealized loss position | | Unrealized loss position 12 months or more |
| AFS securities | 3,556 | | | 480 | |
| AFS securities – related party | 56 | | | 8 | |
The unrealized losses on AFS securities can primarily be attributed to changes in market interest rates since acquisition. We did not recognize the unrealized losses in income as we intend to hold these securities and it is not more likely than not we will be required to sell a security before the recovery of its amortized cost.
Other-Than-Temporary ImpairmentsAllowance for Credit Losses—For the nine months ended September 30, 2017, we incurred $25 million of net OTTI, of which $6 million related to intent-to-sell impairments. These securities were impaired to fair value as of the impairment date. The remaining net OTTI of $19 million related to credit impairments, of which $9 million related to credit loss impairments that we impaired to fair value and did not bifurcate a portion of the impairment in AOCI. Any credit loss impairments not bifurcated in AOCI are excluded from the rollforward below.
The following table represents a rollforwardsummarizes the activity in the allowance for credit losses for AFS securities, including Purchase Credit Deteriorated (PCD) securities, by asset type:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2021 |
| | | Additions | | Reductions | | | | |
| (In millions) | Beginning balance | | Initial credit losses | | Initial credit losses on PCD securities | | Securities sold during the period | | | | | | | | Additions (reductions) to previously impaired securities | | Ending Balance |
| AFS securities | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Corporate | $ | 6 | | | $ | 2 | | | $ | 0 | | | $ | (2) | | | | | | | | | $ | 2 | | | $ | 8 | |
| CLO | 1 | | | 0 | | | 0 | | | 0 | | | | | | | | | (1) | | | 0 | |
| ABS | 6 | | | 5 | | | 0 | | | 0 | | | | | | | | | 0 | | | 11 | |
| CMBS | 10 | | | 2 | | | 0 | | | 0 | | | | | | | | | 2 | | | 14 | |
| RMBS | 80 | | | 0 | | | 2 | | | (3) | | | | | | | | | (1) | | | 78 | |
| Total AFS securities | 103 | | | 9 | | | 2 | | | (5) | | | | | | | | | 2 | | | 111 | |
| | | | | | | | | | | | | | | | | |
| AFS securities – related party, CLO | 1 | | | 0 | | | 0 | | | (1) | | | | | | | | | 0 | | | 0 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total AFS securities including related party | $ | 104 | | | $ | 9 | | | $ | 2 | | | $ | (6) | | | | | | | | | $ | 2 | | | $ | 111 | |
| | | | | | | | | | | | | | | | | |
|
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 |
| Beginning balance | $ | 16 |
| | $ | 32 |
| | $ | 16 |
| | $ | 22 |
|
| Initial impairments – credit loss OTTI recognized on securities not previously impaired | 4 |
| | — |
| | 10 |
| | 8 |
|
| Additional impairments – credit loss OTTI recognized on securities previously impaired | — |
| | 1 |
| | — |
| | 3 |
|
| Reduction in impairments from securities sold, matured or repaid | (2 | ) | | (9 | ) | | (8 | ) | | (9 | ) |
| Reduction for credit loss that no longer has a portion of the OTTI loss recognized in AOCI | (6 | ) | | — |
| | (6 | ) | | — |
|
| Ending balance | $ | 12 |
| | $ | 24 |
| | $ | 12 |
| | $ | 24 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2020 |
| | | Additions | | Reductions | | | | |
| (In millions) | Beginning balance | | Initial credit losses | | Initial credit losses on PCD securities | | Securities sold during the period | | | | | | | | Additions (reductions) to previously impaired securities | | Ending Balance |
| AFS securities | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Corporate | $ | 0 | | | $ | 15 | | | $ | 0 | | | $ | 0 | | | | | | | | | $ | 0 | | | $ | 15 | |
| | | | | | | | | | | | | | | | | |
| ABS | 0 | | | 5 | | | 0 | | | 0 | | | | | | | | | 0 | | | 5 | |
| CMBS | 0 | | | 4 | | | 0 | | | 0 | | | | | | | | | 0 | | | 4 | |
| RMBS | 17 | | | 35 | | | 1 | | | (1) | | | | | | | | | 2 | | | 54 | |
| Total AFS securities | $ | 17 | | | $ | 59 | | | $ | 1 | | | $ | (1) | | | | | | | | | $ | 2 | | | $ | 78 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net Investment Income—Net investment income by asset class consists of the following:
| | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| (In millions) | | | | | 2021 | | 2020 |
| AFS securities | | | | | $ | 860 | | | $ | 837 | |
| Trading securities | | | | | 63 | | | 48 | |
| Equity securities | | | | | 4 | | | 4 | |
| Mortgage loans | | | | | 192 | | | 186 | |
| Investment funds | | | | | 463 | | | (278) | |
| Funds withheld at interest | | | | | 206 | | | 41 | |
| Other | | | | | 64 | | | 37 | |
| Investment revenue | | | | | 1,852 | | | 875 | |
| Investment expenses | | | | | (148) | | | (130) | |
| Net investment income | | | | | $ | 1,704 | | | $ | 745 | |
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 |
| 2016 |
| AFS securities | | | | | | | |
| Fixed maturity securities | $ | 646 |
| | $ | 563 |
| | $ | 1,901 |
| | $ | 1,703 |
|
| Equity securities | 3 |
| | 2 |
| | 7 |
| | 6 |
|
| Trading securities | 50 |
| | 59 |
| | 154 |
| | 184 |
|
| Mortgage loans, net of allowances | 98 |
| | 93 |
| | 273 |
| | 264 |
|
| Investment funds | 55 |
| | 65 |
| | 175 |
| | 122 |
|
| Funds withheld at interest | 35 |
| | 22 |
| | 105 |
| | 47 |
|
| Other | 18 |
| | 14 |
| | 56 |
| | 43 |
|
| Investment revenue | 905 |
| | 818 |
| | 2,671 |
| | 2,369 |
|
| Investment expenses | (85 | ) | | (75 | ) | | (244 | ) | | (232 | ) |
| Net investment income | $ | 820 |
| | $ | 743 |
| | $ | 2,427 |
| | $ | 2,137 |
|
Investment Related Gains (Losses)—Investment related gains (losses) by asset class consists of the following:
| | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| (In millions) | | | | | 2021 | | 2020 |
| AFS securities | | | | | | | |
| Gross realized gains on investment activity | | | | | $ | 73 | | | $ | 164 | |
| Gross realized losses on investment activity | | | | | (143) | | | (134) | |
| Net realized investment gains (losses) on AFS securities | | | | | (70) | | | 30 | |
| Net recognized investment losses on trading securities | | | | | (69) | | | (223) | |
| Net recognized investment gains (losses) on equity securities | | | | | 17 | | | (50) | |
| Derivative losses | | | | | (438) | | | (3,019) | |
| Provision for credit losses | | | | | (8) | | | (284) | |
| Other gains (losses) | | | | | 80 | | | (26) | |
| Investment related gains (losses) | | | | | $ | (488) | | | $ | (3,572) | |
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 |
| 2016 |
| AFS fixed maturity securities | | | | | | | |
| Gross realized gains on investment activity | $ | 31 |
| | $ | 31 |
| | $ | 94 |
| | $ | 102 |
|
| Gross realized losses on investment activity | (10 | ) | | (9 | ) | | (31 | ) | | (51 | ) |
| Net realized investment gains on fixed maturity securities | 21 |
| | 22 |
| | 63 |
|
| 51 |
|
| Net realized investment gains (losses) on trading securities | (1 | ) | | 28 |
| | 45 |
| | 93 |
|
| Derivative gains | 456 |
| | 336 |
| | 1,516 |
| | 387 |
|
| Other losses | (3 | ) | | (6 | ) | | (9 | ) | | (8 | ) |
| Investment related gains (losses) | $ | 473 |
| | $ | 380 |
| | $ | 1,615 |
| | $ | 523 |
|
Proceeds from sales of AFS securities were $1,863$892 million and $972$1,807 million for the three months ended September 30, 2017March 31, 2021 and 2016, respectively, and $4,629 million and $3,202 million for the nine months ended September 30, 2017 and 2016,2020, respectively.
The following table summarizes the change in unrealized gains and losses(losses) on trading and equity securities we still held as of the respective period end resulted in unrealized gainsend:
| | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| (In millions) | | | | | 2021 | | 2020 |
| Trading securities | | | | | $ | (121) | | | $ | (73) | |
| Trading securities – related party | | | | | 58 | | | (109) | |
| Equity securities | | | | | 9 | | | (37) | |
| Equity securities – related party | | | | | 6 | | | 0 | |
Table of $18 million and $37 million during the three months ended September 30, 2017 and 2016, respectively, and unrealized gains of $90 million and $143 million during the nine months ended September 30, 2017 and 2016, respectively, which are included in net realized investment gains (losses) on trading securities in the table above. The change in unrealized gains and losses on related party trading securities we still held as of the respective period end resulted in related party unrealized gains of $2 million and $0 million during the three months ended September 30, 2017 and 2016, respectively, and related party unrealized gains of $2 million and losses of $23 million during the nine months ended September 30, 2017 and 2016, respectively, which are included in net realized investment gains (losses) on trading securities in the table above.Contents
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Purchased Financial Assets with Credit Impaired (PCI) InvestmentsDeterioration—The following table summarizes our PCI investments:
|
| | | | | | | | | | | | | | | |
| | Fixed maturity securities | | Mortgage loans |
| (In millions) | September 30, 2017 | | December 31, 20163 | | September 30, 2017 | | December 31, 2016 |
Contractually required payments1 | $ | 11,477 |
| | $ | 11,202 |
| | $ | 1,544 |
| | $ | 424 |
|
Less: Cash flows expected to be collected2 | (8,247 | ) | | (7,948 | ) | | (1,066 | ) | | (286 | ) |
| Non-accretable difference | $ | 3,230 |
| | $ | 3,254 |
| | $ | 478 |
| | $ | 138 |
|
| | | | | | | | |
Cash flows expected to be collected2 | $ | 8,247 |
| | $ | 7,948 |
| | $ | 1,066 |
| | $ | 286 |
|
| Less: Amortized cost | (6,175 | ) | | (5,868 | ) | | (802 | ) | | (220 | ) |
| Accretable difference | $ | 2,072 |
| | $ | 2,080 |
| | $ | 264 |
| | $ | 66 |
|
| | | | | | | | |
| Fair value | $ | 6,699 |
| | $ | 6,049 |
| | $ | 831 |
| | $ | 221 |
|
| | | | | | | | |
1 Includes principal and accrued interest. |
2 Represents the undiscounted principal and interest cash flows expected. |
3 Prior period balances have been revised for immaterial misstatements to be comparable to current year balances. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
During the period, we acquired PCI investmentsPCD investment purchases with the following amounts at the time of purchase:
| | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, 2021 |
| (In millions) | | | | | Fixed maturity securities | | Mortgage loans |
| Purchase price | | | | | $ | 6 | | | $ | 335 | |
| Allowance for credit losses at acquisition | | | | | 2 | | | 6 | |
| Discount (premiums) attributable to other factors | | | | | (2) | | | (26) | |
| Par value | | | | | $ | 6 | | | $ | 315 | |
|
| | | | | | | |
| | Nine months ended September 30, 2017 |
| (In millions) | Fixed maturity securities | | Mortgage loans |
| Contractually required principal and interest | $ | 2,230 |
| | $ | 1,194 |
|
| Expected cash flows | 1,502 |
| | 835 |
|
| Estimated fair value | 1,131 |
| | 609 |
|
Repurchase Agreements—The following table summarizes the maturities of our repurchase agreements:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 |
| Remaining Contractual Maturity |
| (In millions) | Overnight and continuous | | Less than 30 days | | 30-90 days | | 91 days to 1 year | | Greater than 1 year | | Total |
Payables for repurchase agreements1 | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 599 | | | $ | 599 | |
| | | | | | | | | | | |
1 Included in payables for collateral on derivatives and securities to repurchase on the condensed consolidated balance sheets. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Remaining Contractual Maturity |
| (In millions) | Overnight and continuous | | Less than 30 days | | 30-90 days | | 91 days to 1 year | | Greater than 1 year | | Total |
Payables for repurchase agreements1 | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 598 | | | $ | 598 | |
| | | | | | | | | | | |
1 Included in payables for collateral on derivatives and securities to repurchase on the condensed consolidated balance sheets. |
The following table summarizes the activitysecurities pledged as collateral for the accretable yield on PCI investments:repurchase agreements:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (In millions) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| AFS securities – Corporate | $ | 553 | | | $ | 603 | | | $ | 559 | | | $ | 644 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, 2017 | | Nine months ended September 30, 2017 |
| (In millions) | Fixed maturity securities1 | | Mortgage loans | | Fixed maturity securities1 | | Mortgage loans |
| Beginning balance | $ | 2,098 |
| | $ | 259 |
| | $ | 2,080 |
| | $ | 66 |
|
| Purchases of PCI investments, net of sales | 53 |
| | 25 |
| | 289 |
| | 223 |
|
| Accretion | (41 | ) | | (1 | ) | | (138 | ) | | (1 | ) |
| Changes in expected cash flows | (38 | ) | | (19 | ) | | (159 | ) | | (24 | ) |
| Ending balance | $ | 2,072 |
| | $ | 264 |
| | $ | 2,072 |
| | $ | 264 |
|
| | | | | | | | |
1 Prior period beginning balances have been revised for immaterial misstatements to be comparable to current year balances. |
Mortgage Loans, including related party—Mortgage loans, net of allowances, consists of the following:
| | | | | | | | | | | |
| (In millions) | March 31, 2021 | | December 31, 2020 |
| Commercial mortgage loans | $ | 12,385 | | | $ | 11,383 | |
| Commercial mortgage loans under development | 283 | | | 232 | |
| Total commercial mortgage loans | 12,668 | | | 11,615 | |
| Allowance for credit losses on commercial mortgage loans | (172) | | | (167) | |
| Commercial mortgage loans, net of allowances | 12,496 | | | 11,448 | |
| Residential mortgage loans | 4,967 | | | 4,569 | |
| Allowance for credit losses on residential mortgage loans | (78) | | | (79) | |
| Residential mortgage loans, net of allowances | 4,889 | | | 4,490 | |
| Mortgage loans, net of allowances | $ | 17,385 | | | $ | 15,938 | |
|
| | | | | | | |
| (In millions) | September 30, 2017 | | December 31, 2016 |
| Commercial mortgage loans | $ | 5,503 |
| | $ | 5,058 |
|
| Commercial mortgage loans under development | — |
| | 74 |
|
| Total commercial mortgage loans | 5,503 |
| | 5,132 |
|
| Residential mortgage loans | 942 |
| | 338 |
|
| Mortgage loans, net of allowances | $ | 6,445 |
| | $ | 5,470 |
|
We primarily invest in commercial mortgage loans on income producing properties including hotels, industrial propertiesoffice and retail buildings, apartments, hotels and office buildings.industrial properties. We diversify the commercial mortgage loan portfolio by geographic region and property type to reduce concentration risk. We evaluate mortgage loans based on relevant current information to confirm if properties are performing at a consistent and acceptable level to secure the related debt.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
The distribution of commercial mortgage loans, including those under development, net of valuation allowances, by property type and geographic region, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (In millions, except for percentages) | Net Carrying Value | | Percentage of Total | | Net Carrying Value | | Percentage of Total |
| Property type | | | | | | | |
| Office building | $ | 3,817 | | | 30.5 | % | | $ | 3,589 | | | 31.4 | % |
| Retail | 2,100 | | | 16.8 | % | | 2,083 | | | 18.2 | % |
| Apartment | 2,770 | | | 22.2 | % | | 2,441 | | | 21.3 | % |
| Hotels | 1,334 | | | 10.7 | % | | 1,294 | | | 11.3 | % |
| Industrial | 1,801 | | | 14.4 | % | | 1,362 | | | 11.9 | % |
| Other commercial | 674 | | | 5.4 | % | | 679 | | | 5.9 | % |
| Total commercial mortgage loans | $ | 12,496 | | | 100.0 | % | | $ | 11,448 | | | 100.0 | % |
| | | | | | | |
| US Region | | | | | | | |
| East North Central | $ | 1,224 | | | 9.8 | % | | $ | 1,209 | | | 10.5 | % |
| East South Central | 414 | | | 3.3 | % | | 402 | | | 3.5 | % |
| Middle Atlantic | 3,227 | | | 25.8 | % | | 3,069 | | | 26.8 | % |
| Mountain | 480 | | | 3.9 | % | | 487 | | | 4.2 | % |
| New England | 376 | | | 3.0 | % | | 350 | | | 3.1 | % |
| Pacific | 2,919 | | | 23.4 | % | | 2,746 | | | 24.0 | % |
| South Atlantic | 1,875 | | | 15.0 | % | | 1,773 | | | 15.5 | % |
| West North Central | 141 | | | 1.1 | % | | 145 | | | 1.3 | % |
| West South Central | 674 | | | 5.4 | % | | 640 | | | 5.6 | % |
| Total US Region | 11,330 | | | 90.7 | % | | 10,821 | | | 94.5 | % |
| International Region | | | | | | | |
| United Kingdom | 724 | | | 5.8 | % | | 0 | | | 0 | % |
Other International1 | 442 | | | 3.5 | % | | 627 | | | 5.5 | % |
| Total International Region | 1,166 | | | 9.3 | % | | 627 | | | 5.5 | % |
| Total commercial mortgage loans | $ | 12,496 | | | 100.0 | % | | $ | 11,448 | | | 100.0 | % |
| | | | | | | |
1 Represents all other countries, with each individual country comprising less than 5% of the portfolio. |
|
| | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (In millions, except for percentages) | Net Carrying Value | | Percentage of Total | | Net Carrying Value | | Percentage of Total |
| Property type | | | | | | | |
| Office building | $ | 1,340 |
| | 24.4 | % | | $ | 1,217 |
| | 23.7 | % |
| Retail | 1,130 |
| | 20.5 | % | | 1,135 |
| | 22.1 | % |
| Hotels | 1,108 |
| | 20.1 | % | | 1,025 |
| | 20.0 | % |
| Industrial | 940 |
| | 17.1 | % | | 742 |
| | 14.5 | % |
| Apartment | 580 |
| | 10.5 | % | | 616 |
| | 12.0 | % |
| Other commercial | 405 |
| | 7.4 | % | | 397 |
| | 7.7 | % |
| Total commercial mortgage loans | $ | 5,503 |
| | 100.0 | % | | $ | 5,132 |
| | 100.0 | % |
| | | | | | | | |
| U.S. Region | | | | | | | |
| East North Central | $ | 553 |
| | 10.0 | % | | $ | 450 |
| | 8.8 | % |
| East South Central | 146 |
| | 2.7 | % | | 158 |
| | 3.1 | % |
| Middle Atlantic | 915 |
| | 16.6 | % | | 628 |
| | 12.2 | % |
| Mountain | 599 |
| | 10.9 | % | | 543 |
| | 10.6 | % |
| New England | 163 |
| | 3.0 | % | | 194 |
| | 3.8 | % |
| Pacific | 1,075 |
| | 19.5 | % | | 833 |
| | 16.2 | % |
| South Atlantic | 1,053 |
| | 19.1 | % | | 1,284 |
| | 25.0 | % |
| West North Central | 278 |
| | 5.1 | % | | 306 |
| | 6.0 | % |
| West South Central | 635 |
| | 11.5 | % | | 662 |
| | 12.9 | % |
| Total U.S. Region | 5,417 |
| | 98.4 | % | | 5,058 |
| | 98.6 | % |
| International Region | 86 |
| | 1.6 | % | | 74 |
| | 1.4 | % |
| Total commercial mortgage loans | $ | 5,503 |
| | 100.0 | % | | $ | 5,132 |
| | 100.0 | % |
Our residential mortgage loan portfolio includes first lien residential mortgage loans collateralized by properties located in the U.S. As of September 30, 2017, California, Floridavarious geographic locations and New York represented 33.3%, 15.6% and 6.2%, respectively,is summarized by proportion of the portfolio andin the remaining 44.9% represented all other states, with each individual state comprising less than 5%following table:
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| US States | | | |
| California | 23.3 | % | | 24.8 | % |
| Florida | 12.6 | % | | 13.3 | % |
| New York | 6.7 | % | | 6.2 | % |
Other1 | 43.1 | % | | 41.1 | % |
| Total US residential mortgage loan percentage | 85.7 | % | | 85.4 | % |
| International | | | |
| Ireland | 11.1 | % | | 12.9 | % |
Other2 | 3.2 | % | | 1.7 | % |
| Total International residential mortgage loan percentage | 14.3 | % | | 14.6 | % |
| Total residential mortgage loan percentage | 100.0 | % | | 100.0 | % |
| | | |
1 Represents all other states, with each individual state comprising less than 5% of the portfolio. |
2 Represents all other countries, with each individual country comprising less than 5% of the portfolio. |
Mortgage ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Loan Valuation Allowance—The assessment ofallowances for our mortgage loan impairmentsportfolio and valuation allowancesother loans is substantiallysummarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, 2021 |
| (In millions) | | | | | | | | | Commercial Mortgage | | Residential Mortgage | | Other Investments | | Total |
| Beginning balance | | | | | | | | | $ | 167 | | | $ | 79 | | | $ | 7 | | | $ | 253 | |
| | | | | | | | | | | | | | | |
| Provision (reversal) for expected credit losses | | | | | | | | | 5 | | | (7) | | | (5) | | | (7) | |
| Initial credit losses on PCD loans | | | | | | | | | 0 | | | 6 | | | 0 | | | 6 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Ending balance | | | | | | | | | $ | 172 | | | $ | 78 | | | $ | 2 | | | $ | 252 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2020 |
| (In millions) | Commercial Mortgage | | Residential Mortgage | | Other Investments | | Total |
| Beginning balance | $ | 10 | | | $ | 1 | | | $ | 0 | | | $ | 11 | |
| Adoption of accounting standard | 167 | | | 43 | | | 11 | | | 221 | |
| Provision for expected credit losses | 166 | | | 37 | | | 1 | | | 204 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Ending balance | $ | 343 | | | $ | 81 | | | $ | 12 | | | $ | 436 | |
Commercial mortgage loans – Our allowance model for commercial mortgage loans is based on the samecharacteristics of the loans in our portfolio, historical economic data and loss information, and current and forecasted economic conditions. Key loan characteristics affecting the estimate include, among others: time to maturity, delinquency status, loan-to-value ratios, debt service coverage ratios, etc. Key macroeconomic variables include unemployment rates, rent growth, capitalization rates, and the housing price index. Management reviews and approves forecasted macroeconomic variables, along with the reasonable and supportable forecast period and mean reversion technique. Management also evaluates assumptions from independent third parties and these assumptions have a high degree of subjectivity. The mean reversion technique varies by macroeconomic variable and may vary by geographic location. As of March 31, 2021, our reasonable and supportable forecast period was one year, after which, we revert to the 30-year or greater historical average or the 10-year US Department of the Treasury (Treasury) constant maturity rate over a period of up to eight years.
Residential mortgage loans – Our allowance model for residential mortgage loans is based on the characteristics of the loans in our portfolio, historical economic data and commercial mortgageloss information, and current and forecasted economic conditions. Key loan characteristics affecting the estimate include, among others: time to maturity, delinquency status, original credit scores and loan-to-value ratios. Key macroeconomic variables include unemployment rates and the housing price index. Management reviews and approves forecasted macroeconomic variables, along with the reasonable and supportable forecast period and mean reversion technique. Management also evaluates assumptions from independent third parties and these assumptions have a high degree of subjectivity. The mean reversion technique varies by macroeconomic variable and may vary by geographic location. As of March 31, 2021, our reasonable and supportable forecast period was one year, after which, we revert to the 30-year or greater historical average over a period of up to one year and then continue at those averages through the contractual life of the loan.
Other investments – The allowance model for the loans included in other investments and related party other investments derives an estimate based on historical loss data available for similarly rated unsecured corporate debt obligations, while also incorporating management’s expectations around prepayment. See Note 9 – Related Parties for further information on the related party loans. The valuation allowance was $2 million as of September 30, 2017and December 31, 2016. We did not record any material activity in the valuation allowance during the three or nine months ended September 30, 2017 or2016.
Credit Quality Indicators
Residential mortgage loans – The underwriting process for our residential mortgage loans includes an evaluation of relevant credit information including past loan performance, credit scores, loan-to-value and other relevant information. Subsequent to purchase or origination, we closely monitor economic conditions and loan performance to manage and evaluate our exposure to credit risk in our residential mortgage loan portfolio. The primary credit quality indicator ofmonitored for residential mortgage loans is loan performance. Nonperforming residential mortgage loans are 90 days or more past due and/or are in non-accrual status. As
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following represents our residential loan portfolio by origination year and performance status:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 |
| (In millions) | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
| Current (less than 30 days past due) | $ | 542 | | | $ | 911 | | | $ | 789 | | | $ | 1,594 | | | $ | 458 | | | $ | 121 | | | $ | 4,415 | |
| 30 to 59 days past due | 49 | | | 90 | | | 38 | | | 31 | | | 24 | | | 10 | | | 242 | |
| 60 to 89 days past due | 0 | | | 16 | | | 66 | | | 15 | | | 8 | | | 3 | | | 108 | |
| 90 days or more past due | 0 | | | 17 | | | 45 | | | 61 | | | 51 | | | 28 | | | 202 | |
| Total residential mortgages | $ | 591 | | | $ | 1,034 | | | $ | 938 | | | $ | 1,701 | | | $ | 541 | | | $ | 162 | | | $ | 4,967 | |
| | | | | | | | | | | | | |
| December 31, 2020 |
| (In millions) | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total |
| Current (less than 30 days past due) | $ | 955 | | | $ | 942 | | | $ | 1,730 | | | $ | 485 | | | $ | 141 | | | $ | 6 | | | $ | 4,259 | |
| 30 to 59 days past due | 68 | | | 16 | | | 34 | | | 26 | | | 8 | | | 1 | | | 153 | |
| 60 to 89 days past due | 15 | | | 7 | | | 16 | | | 9 | | | 3 | | | 0 | | | 50 | |
| 90 days or more past due | 3 | | | 26 | | | 22 | | | 43 | | | 12 | | | 1 | | | 107 | |
| Total residential mortgages | $ | 1,041 | | | $ | 991 | | | $ | 1,802 | | | $ | 563 | | | $ | 164 | | | $ | 8 | | | $ | 4,569 | |
| | | | | | | | | | | | | |
The following represents our residential loan portfolio in non-accrual status:
| | | | | | | | | | | |
| (In millions) | March 31, 2021 | | December 31, 2020 |
| Beginning amortized cost of residential mortgage loans in non-accrual status | $ | 107 | | | $ | 67 | |
| Ending amortized cost of residential mortgage loans in non-accrual status | 199 | | | 107 | |
| Amortized cost of residential mortgage loans in non-accrual status without a related allowance for credit losses | 38 | | | 13 | |
During the three months ended March 31, 2021 and 2020, we recognized $2 million and $1 million, respectively, of ourinterest income on residential mortgage loans were non-performing. As of December 31, 2016, all of our residential mortgage loans were performing.in non-accrual status.
Commercial mortgage loans – The following provides the aging ofrepresents our commercial mortgage loan portfolio including those under development, netby origination year and loan performance status:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 |
| (In millions) | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
| Current (less than 30 days past due) | $ | 1,043 | | | $ | 1,982 | | | $ | 4,424 | | | $ | 2,653 | | | $ | 985 | | | $ | 1,529 | | | $ | 12,616 | |
| 30 to 59 days past due | 0 | | | 0 | | | 5 | | | 22 | | | 0 | | | 0 | | | 27 | |
| | | | | | | | | | | | | |
| 90 days or more past due | 0 | | | 0 | | | 0 | | | 0 | | | 25 | | | 0 | | | 25 | |
| Total commercial mortgages | $ | 1,043 | | | $ | 1,982 | | | $ | 4,429 | | | $ | 2,675 | | | $ | 1,010 | | | $ | 1,529 | | | $ | 12,668 | |
| | | | | | | | | | | | | |
| December 31, 2020 |
| (In millions) | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total |
| Current (less than 30 days past due) | $ | 1,913 | | | $ | 4,400 | | | $ | 2,617 | | | $ | 987 | | | $ | 130 | | | $ | 1,452 | | | $ | 11,499 | |
| 30 to 59 days past due | 0 | | | 20 | | | 45 | | | 25 | | | 0 | | | 5 | | | 95 | |
| | | | | | | | | | | | | |
| 90 days or more past due | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 21 | | | 21 | |
| Total commercial mortgages | $ | 1,913 | | | $ | 4,420 | | | $ | 2,662 | | | $ | 1,012 | | | $ | 130 | | | $ | 1,478 | | | $ | 11,615 | |
| | | | | | | | | | | | | |
As of valuation allowances:March 31, 2021 and December 31, 2020, we had $25 million and $0 million, respectively, of commercial mortgage loans that were 90 days or more past due and still accruing interest.
The following represents our commercial mortgage loan portfolio in non-accrual status:
| | | | | | | | | | | |
| (In millions) | March 31, 2021 | | December 31, 2020 |
| Beginning amortized cost of commercial mortgage loans in non-accrual status | $ | 38 | | | $ | 0 | |
| Ending amortized cost of commercial mortgage loans in non-accrual status | 37 | | | 38 | |
| Amortized cost of commercial mortgage loans in non-accrual status without a related allowance for credit losses | 0 | | | 0 | |
During the three months ended March 31, 2021 and 2020, 0 interest income was recognized on commercial mortgage loans in non-accrual status.
|
| | | | | | | |
| (In millions) | September 30, 2017 | | December 31, 2016 |
| Current (less than 30 days past due) | $ | 5,497 |
| | $ | 5,111 |
|
| Over 90 days past due | 6 |
| | 21 |
|
| Total commercial mortgage loans | $ | 5,503 |
| | $ | 5,132 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Loan-to-value and debt service coverage ratios are measures we use to assess the risk and quality of commercial mortgage loans other than those under development. Loans under development are not evaluated using these ratios as the properties underlying these loans are generally not yet income-producing and the value of the underlying property significantly fluctuates based on the progress of construction. Therefore, the risk and quality of loans under development are evaluated based on the aging and geographical distribution of such loans as shown above.
The loan-to-value ratio is expressed as a percentage of the amount of the loan relative to the value of the underlying property. A loan-to-value ratio in excess of 100% indicates the unpaid loan amount exceeds the value of the underlying collateral. Loan-to-value information is updated annually as part of the re-underwriting process supporting the NAIC risk-based capital rating criteria. The following represents the loan-to-value ratio of the commercial mortgage loan portfolio, excluding those under development, net of valuation allowances: by origination year: |
| | | | | | | |
| (In millions) | September 30, 2017 | | December 31, 2016 |
| Less than 50% | $ | 1,836 |
| | $ | 1,787 |
|
| 50% to 60% | 1,353 |
| | 1,337 |
|
| 61% to 70% | 1,902 |
| | 1,401 |
|
| 71% to 100% | 402 |
| | 492 |
|
| Greater than 100% | 10 |
| | 41 |
|
| Commercial mortgage loans | $ | 5,503 |
| | $ | 5,058 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 |
| (In millions) | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
| Less than 50% | $ | 252 | | | $ | 453 | | | $ | 606 | | | $ | 201 | | | $ | 151 | | | $ | 1,140 | | | $ | 2,803 | |
| 50% to 59% | 67 | | | 291 | | | 1,332 | | | 715 | | | 325 | | | 196 | | | 2,926 | |
| 60% to 69% | 595 | | | 646 | | | 1,990 | | | 1,282 | | | 440 | | | 138 | | | 5,091 | |
| 70% to 79% | 113 | | | 459 | | | 470 | | | 374 | | | 94 | | | 18 | | | 1,528 | |
| | | | | | | | | | | | | |
| 100% or greater | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 37 | | | 37 | |
| Commercial mortgage loans | $ | 1,027 | | | $ | 1,849 | | | $ | 4,398 | | | $ | 2,572 | | | $ | 1,010 | | | $ | 1,529 | | | $ | 12,385 | |
| | | | | | | | | | | | | |
| December 31, 2020 |
| (In millions) | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total |
| Less than 50% | $ | 431 | | | $ | 600 | | | $ | 201 | | | $ | 152 | | | $ | 44 | | | $ | 1,153 | | | $ | 2,581 | |
| 50% to 59% | 315 | | | 1,320 | | | 765 | | | 300 | | | 40 | | | 147 | | 2,887 | |
| 60% to 69% | 583 | | | 1,988 | | | 1,222 | | | 440 | | | 46 | | | 106 | | 4,385 | |
| 70% to 79% | 478 | | | 485 | | | 375 | | | 95 | | | 0 | | | 13 | | 1,446 | |
| 80% to 99% | 0 | | | 0 | | | 0 | | | 25 | | | 0 | | | 21 | | 46 | |
| 100% or greater | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 38 | | 38 | |
| Commercial mortgage loans | $ | 1,807 | | | $ | 4,393 | | | $ | 2,563 | | | $ | 1,012 | | | $ | 130 | | | $ | 1,478 | | | $ | 11,383 | |
The debt service coverage ratio based upon the most recent financial statements, is expressed as a percentage of a property'sproperty’s net operating income to its debt service payments. A debt service ratio of less than 1.0 indicates a property'sproperty’s operations do not generate enough income to cover debt payments. Debt service coverage ratios are updated as more recent financial statements become available, at least annually or as frequently as quarterly in some cases. The following represents the debt service coverage ratio of the commercial mortgage loan portfolio, excluding those under development, netby origination year:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 |
| (In millions) | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
| Greater than 1.20x | $ | 714 | | | $ | 1,068 | | | $ | 2,814 | | | $ | 2,224 | | | $ | 861 | | | $ | 1,399 | | | $ | 9,080 | |
| 1.00x – 1.20x | 313 | | | 524 | | | 1,187 | | | 62 | | | 53 | | | 94 | | | 2,233 | |
| Less than 1.00x | 0 | | | 257 | | | 397 | | | 286 | | | 96 | | | 36 | | | 1,072 | |
| Commercial mortgage loans | $ | 1,027 | | | $ | 1,849 | | | $ | 4,398 | | | $ | 2,572 | | | $ | 1,010 | | | $ | 1,529 | | | $ | 12,385 | |
| | | | | | | | | | | | | |
| December 31, 2020 |
| (In millions) | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total |
| Greater than 1.20x | $ | 1,274 | | | $ | 2,964 | | | $ | 2,440 | | | $ | 846 | | | $ | 129 | | | $ | 1,369 | | | $ | 9,022 | |
| 1.00x – 1.20x | 533 | | | 1,122 | | | 36 | | | 70 | | | 1 | | | 101 | | | 1,863 | |
| Less than 1.00x | 0 | | | 307 | | | 87 | | | 96 | | | 0 | | | 8 | | | 498 | |
| Commercial mortgage loans | $ | 1,807 | | | $ | 4,393 | | | $ | 2,563 | | | $ | 1,012 | | | $ | 130 | | | $ | 1,478 | | | $ | 11,383 | |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | |
| (In millions) | September 30, 2017 | | December 31, 2016 |
| Greater than 1.20x | $ | 4,992 |
| | $ | 4,378 |
|
| 1.00x – 1.20x | 233 |
| | 353 |
|
| Less than 1.00x | 278 |
| | 327 |
|
| Commercial mortgage loans | $ | 5,503 |
| | $ | 5,058 |
|
Investment Funds—Our investment fund portfolio consists of funds that employ various strategies and include investments in real estate, and other real assets, credit, private equity and natural resources and hedge funds.resources. Investment funds typicallycan meet the definition of variable interest entities andVIEs, which are discussed further in Note 4 – Variable Interest Entities. Our investment funds do not specify timing of distributions on the funds’ underlying assets.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
3. Derivative Instruments
We use a variety of derivative instruments to manage risks, primarily equity, interest rate, credit, foreign currency and market volatility. See Note 5 – Fair Value for information about the fair value hierarchy for derivatives.
The following table presents the notional amount and fair valuesummarizes our investment funds, including related party:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (In millions, except for percentages) | Carrying value | | Percent of total | | Carrying value | | Percent of total |
| Investment funds | | | | | | | |
| Real estate | $ | 462 | | | 47.8 | % | | $ | 348 | | | 43.3 | % |
| Credit funds | 122 | | | 12.6 | % | | 107 | | | 13.3 | % |
| Private equity | 300 | | | 31.1 | % | | 267 | | | 33.3 | % |
| Real assets | 82 | | | 8.5 | % | | 81 | | | 10.1 | % |
| | | | | | | |
| | | | | | | |
| Total investment funds | 966 | | | 100.0 | % | | 803 | | | 100.0 | % |
| Investment funds – related parties | | | | | | | |
| Differentiated investments | | | | | | | |
| | | | | | | |
AmeriHome Mortgage Company, LLC (AmeriHome)1 | 583 | | | 9.9 | % | | 444 | | | 8.4 | % |
| Catalina Holdings Ltd. (Catalina) | 344 | | | 5.8 | % | | 334 | | | 6.3 | % |
Athora Holding Ltd. (Athora)1 | 689 | | | 11.7 | % | | 709 | | | 13.4 | % |
Venerable Holdings, Inc. (Venerable)1 | 316 | | | 5.4 | % | | 123 | | | 2.3 | % |
| Other | 308 | | | 5.2 | % | | 279 | | | 5.3 | % |
| Total differentiated investments | 2,240 | | | 38.0 | % | | 1,889 | | | 35.7 | % |
| Real estate | 942 | | | 16.0 | % | | 828 | | | 15.7 | % |
| Credit funds | 398 | | | 6.7 | % | | 375 | | | 7.1 | % |
| Private equity | 689 | | | 11.7 | % | | 473 | | | 8.9 | % |
| Real assets | 139 | | | 2.3 | % | | 172 | | | 3.3 | % |
| Natural resources | 110 | | | 1.9 | % | | 113 | | | 2.1 | % |
| Public equities | 100 | | | 1.7 | % | | 110 | | | 2.1 | % |
Investment in Apollo1 | 1,281 | | | 21.7 | % | | 1,324 | | | 25.1 | % |
| Total investment funds – related parties | 5,899 | | | 100.0 | % | | 5,284 | | | 100.0 | % |
| Total investment funds including related party | $ | 6,865 | | | | | $ | 6,087 | | | |
| | | | | | | |
1 Our AmeriHome investment was held indirectly through A-A Mortgage Opportunities, L.P. (A-A Mortgage). Our Venerable investment is in its parent company, VA Capital Company LLC (VA Capital). See further discussion on these investments and our investments in Apollo and Athora in Note 9 – Related Parties. |
Summarized Ownership of derivative instruments:
|
| | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| (In millions) | | Assets | | Liabilities | | | Assets | | Liabilities |
| Derivatives designated as hedges | | | | | | | | | | | |
| Foreign currency swaps | 648 |
| | $ | 1 |
| | $ | 63 |
| | 289 |
| | $ | 11 |
| | $ | 4 |
|
| Interest rate swaps | 302 |
| | — |
| | — |
| | 302 |
| | — |
| | 14 |
|
| Total derivatives designated as hedges | | | 1 |
| | 63 |
| | | | 11 |
| | 18 |
|
| Derivatives not designated as hedges | | | | | | | | | | | |
| Equity options | 30,323 |
| | 1,957 |
| | 10 |
| | 26,822 |
| | 1,336 |
| | — |
|
| Futures | 19 |
| | 8 |
| | 1 |
| | — |
| | 9 |
| | — |
|
| Total return swaps | 114 |
| | 2 |
| | — |
| | 41 |
| | 2 |
| | — |
|
| Foreign currency swaps | 41 |
| | 3 |
| | 3 |
| | 43 |
| | 5 |
| | — |
|
| Interest rate swaps | 406 |
| | — |
| | 2 |
| | 568 |
| | 1 |
| | 5 |
|
| Credit default swaps | 10 |
| | — |
| | 6 |
| | 10 |
| | — |
| | 7 |
|
| Foreign currency forwards | 1,096 |
| | 11 |
| | 7 |
| | 805 |
| | 6 |
| | 10 |
|
| Embedded derivatives | | | | | | | | | | | |
| Funds withheld | — |
| | 303 |
| | 18 |
| | — |
| | 140 |
| | 6 |
|
| Interest sensitive contract liabilities | — |
| | — |
| | 6,652 |
| | — |
| | — |
| | 5,283 |
|
| Total derivatives not designated as hedges |
| | 2,284 |
| | 6,699 |
| |
| | 1,499 |
| | 5,311 |
|
| Total derivatives |
| | $ | 2,285 |
| | $ | 6,762 |
| |
| | $ | 1,510 |
| | $ | 5,329 |
|
Derivatives Designated as Hedges
Foreign currency swaps–We use foreign currency swaps to convert foreign currency denominated cash flows of an investment to U.S. dollars to reduce cash flow fluctuations due to changes in currency exchange rates. Certain of these swaps are designated and accounted for as cash flow hedges, which will expire by June 2044. During the three months ended September 30, 2017 and 2016, we had foreign currency swap losses of $31 million and $6 million, respectively, recorded in AOCI. During the nine months ended September 30, 2017 and 2016, we had foreign currency swap losses of $69 million and $13 million, respectively, recorded in AOCI. There were no amounts reclassified to income and no amounts deemed ineffective for the three and nine months ended September 30, 2017 and2016. As of September 30, 2017, no amounts are expected to be reclassified to income within the next 12 months.
Interest rate swaps – We use interest rate swaps to reduce market risks from interest rate changes and to alter interest rate exposure arising from duration mismatches between assets and liabilities. Certain of these swaps entered into during the fourth quarter of 2016 are designated as fair value hedges. With an interest rate swap, we agree with another party to exchange the difference between fixed-rate and floating-rate interest amounts tied to an agreed-upon notional principal amount at specified intervals.
The following table represents the gains and losses on derivatives and the related hedged items in fair value hedge relationships, recorded in interest sensitive contract benefits on the condensed consolidated statements of income:
|
| | | | | | | |
| (In millions) | Three months ended September 30, 2017 | | Nine months ended September 30, 2017 |
| Gains recognized on derivative | $ | 2 |
| | $ | 4 |
|
| Losses recognized on hedged item | (3 | ) | | (4 | ) |
| Ineffectiveness recognized on fair value hedges | $ | (1 | ) | | $ | — |
|
Derivatives Not Designated as Hedges
Equity options – We use equity indexed options to economically hedge fixed indexed annuity products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specified market index, primarily the S&P 500. To hedge against adverse changes in equity indices, we enter into contracts to buy the equity indexed options within a limited time at a contracted price. The contracts are net settled in cash based on differentials in the indices at the time of exercise and the strike price.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Futures –Futures contracts are purchased to hedge the growth in interest credited to the customer as a direct result of increases in the related indices. We enter into exchange-traded futures with regulated futures commission clearing brokers who are members of a trading exchange. Under exchange-traded futures contracts, we agree to purchase a specified number of contracts with other parties and to post variation margin on a daily basis in an amount equal to the difference in the daily fair values of those contracts.
Total return swaps – We purchase total rate of return swaps to gain exposure and benefit from a reference asset or index without ownership. Total rate of return swaps are contracts in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of the underlying asset or index, which includes both the income it generates and any capital gains.
Credit default swaps – Credit default swaps provide a measure of protection against the default of an issuer or allow us to gain credit exposure to an issuer or traded index. We use credit default swaps coupled with a bond to synthetically create the characteristics of a reference bond. These transactions have a lower cost and are generally more liquid relative to the cash market. We receive a periodic premium for these transactions as compensation for accepting credit risk.
Hedging credit risk involves buying protection for existing credit risk. The exposure resulting from the agreements, which is usually the notional amount, is equal to the maximum proceeds that must be paid by a counterparty for a defaulted security. If a credit event occurs on a reference entity, then a counterparty who sold protection is required to pay the buyer the trade notional amount less any recovery value of the security.
Variance swaps – We use variance swaps to hedge the growth in interest credited to the customer as a direct result of changes in the volatility of the specified market index, primarily the S&P 500. In a variance swap transaction, we agree to exchange future realized volatility for current implied volatility. This type of contract pays the difference between the realized variance and a predefined strike multiplied by a notional value.
Foreign currency forwards – We use foreign currency forward contracts to hedge certain exposures to foreign currency risk. The price is agreed upon at the time of the contract and payment is made at a specified future date.
Embedded derivatives – We have embedded derivatives which are required to be separated from their host contracts and reported as derivatives. Host contracts include reinsurance agreements structured on a modco or funds withheld basis and indexed annuity products.
Method Investees—The following is a summary of the gains (losses) related to derivatives not designated as hedges:
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 |
| Equity options | $ | 367 |
| | $ | 197 |
| | $ | 1,154 |
| | $ | 105 |
|
| Futures | (5 | ) | | (7 | ) | | (19 | ) | | (14 | ) |
| Total return swaps | 5 |
| | 2 |
| | 12 |
| | 4 |
|
| Foreign currency swaps | 1 |
| | (1 | ) | | 7 |
| | 10 |
|
| Interest rate swaps | 2 |
| | (2 | ) | | 1 |
| | (5 | ) |
| Credit default swaps | — |
| | 1 |
| | 1 |
| | — |
|
| Variance swaps | — |
| | 4 |
| | 1 |
| | — |
|
| Foreign currency forwards | 4 |
| | 8 |
| | 24 |
| | 16 |
|
| Embedded derivatives on funds withheld | 82 |
| | 134 |
| | 335 |
| | 271 |
|
| Amounts recognized in investment related gains (losses) | 456 |
| | 336 |
| | 1,516 |
| | 387 |
|
Embedded derivatives in indexed annuity products1 | (344 | ) | | (243 | ) | | (1,077 | ) | | (390 | ) |
| Total gains (losses) for derivatives not designated as hedges | $ | 112 |
| | $ | 93 |
| | $ | 439 |
| | $ | (3 | ) |
| | | | | | | | |
1 Included in interest sensitive contract benefits. |
Credit Risk—We may be exposed to credit-related losses in the event of counterparty nonperformance on derivative financial instruments. Generally, the current credit exposuresummarized income statement information of our derivative contracts is the fair value at the reporting date less any collateral received from the counterparty.
We manage credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties. Where possible, we maintain collateral arrangements and use master netting agreements that provide for a single net payment from one counterparty to another at each due date and upon termination. We have also established counterparty exposure limits, where possible, in order to evaluate if there is sufficient collateral to support the net exposure.
Collateral arrangements typically require the posting of collateral in connection with its derivative instruments. Collateral agreements often contain posting thresholds, some of which may vary depending on the posting party's financial strength ratings. Additionally, a decrease in our financial strength rating to a specified level can result in settlement of the derivative position. As of September 30, 2017 and December 31, 2016, we had $50 million and $25 million, respectively, of collateral pledged to counterparties.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The estimated fair value of our net derivative and other financial assets and liabilities after the application of master netting agreements and collateral were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Gross amounts not offset on the condensed consolidated balance sheets | | | | | | |
| (In millions) | Gross amount recognized1 | | Financial instruments2 | | Collateral received/pledged | | Net amount | | Off-balance sheet securities collateral3 | | Net amount after securities collateral |
| September 30, 2017 | | | | | | | | | | | |
| Derivative assets | $ | 1,982 |
| | $ | (34 | ) | | $ | (1,896 | ) | | $ | 52 |
| | $ | (19 | ) | | $ | 33 |
|
| Derivative liabilities | (92 | ) | | 34 |
| | 50 |
| | (8 | ) | | — |
| | (8 | ) |
| | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | |
| Derivative assets | $ | 1,370 |
| | $ | (8 | ) | | $ | (1,383 | ) | | $ | (21 | ) | | $ | (26 | ) | | $ | (47 | ) |
| Derivative liabilities | (40 | ) | | 8 |
| | 25 |
| | (7 | ) | | — |
| | (7 | ) |
| | | | | | | | | | | | |
1 The gross amounts of recognized derivative assets and derivative liabilities are reported on the condensed consolidated balance sheets. As of September 30, 2017 and December 31, 2016, amounts not subject to master netting or similar agreements were immaterial. |
2 Represents amounts offsetting derivative assets and derivative liabilities that are subject to an enforceable master netting agreement or similar agreement that are not netted against the gross derivative assets or gross derivative liabilities for presentation on the condensed consolidated balance sheets. |
3 For securities collateral received, we do not have the right to sell or re-pledge the collateral. As such, we do not record the securities on the condensed consolidated balance sheets. |
4. Variable Interest Entities
Our investment funds typically meet the definition of a VIE, and in certain cases these investment funds are consolidated in our financial statements because we meet the criteria of the primary beneficiary.
Consolidated VIEs—We consolidate AAA Investments (Co-Invest VI), L.P. (CoInvest VI), AAA Investments (Co-Invest VII), L.P. (CoInvest VII), AAA Investments (Other), L.P. (CoInvest Other), London Prime Apartments Guernsey Holdings Limited (London Prime), NCL Athene, LLC (NCL LLC) and Apollo Asia Sprint Co-Investment Fund, L.P. (Sprint), which are investment funds. We are the only limited partner or Class A member in these investment funds and receive all of the economic benefits and losses, other than management fees and carried interest, as applicable, paid to the general partner in each entity, or a related entity, which are related parties. We do not have any voting rights as limited partner and, as the limited partner or Class A member, do not solely satisfy the power criteria to direct the activities that significantly impact the economics of the VIE. However, the criteria for the primary beneficiary are satisfied by our related party group and because substantially all of the activities are conducted on our behalf, we consolidate the investment funds.
No arrangement exists requiring us to provide additional funding in excess of our committed capital investment, liquidity, or the funding of losses or an increase to our loss exposure in excess of our investment in the VIEs. We elected the fair value option for certain fixed maturity and equity securities, and investment funds, which are reported in the consolidated variable interest entity sections on the condensed consolidated balance sheets.
CoInvest VI, CoInvest VII and CoInvest Other were formed to make investments, including co-investments alongside private equity funds sponsored by Apollo. We received our interests in CoInvest VI, CoInvest VII and CoInvest Other as part of a contribution agreement in 2012 with AAA Guarantor – Athene, L.P. and its subsidiary, Apollo Life Re Ltd., in order to provide a capital base to support future acquisitions. London Prime was formed for the purpose of investing in Prime London Ventures Limited, a Guernsey limited company, which purchases rental residential assets across prime central London.
CoInvest VII holds a significant investment in MidCap FinCo Limited (MidCap), which is included in investment funds of consolidated VIEs on the condensed consolidated balance sheets. We have purchased pools of loans sourced by MidCap and contemporaneously sold subordinated participation interests in the loans to a subsidiary of MidCap. As of September 30, 2017 and December 31, 2016, we had $14 million due to MidCap under the subordinated participation agreement which is reflected as a secured borrowing in other liabilities on the condensed consolidated balance sheets.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
During the third quarter of 2016, CoInvest VI contributed its largest investment, Norwegian Cruise Line Holdings Ltd. (NCLH) shares, to a newly formed entity, NCL LLC, in exchange for 100% of the membership interests in this entity. Subsequent to this contribution, CoInvest VI distributed its Class A membership interests in NCL LLC to us and the Class B membership interests in NCL LLC to the general partner of CoInvest VI. NCL LLC is subject to the same management fees, selling restrictions with respect to shares of NCLH, and carried interest calculation as CoInvest VI. NCL LLC classifies its NCLH shares as AFS equity securities. We are the primary beneficiary and consolidate NCL LLC, as substantially all of its activities are conducted on our behalf.
During the first quarter of 2017, we acquired a 100% limited partnership interest in Sprint, an entity formed to make a co-investment alongside private equity funds sponsored by Apollo. The underlying investment is a structured credit facility on a nearly completed skyscraper in Southeast Asia. We are the primary beneficiary and consolidate Sprint, as substantially all of its activities are conducted on our behalf.
We previously consolidated 2012 CMBS-I Fund L.P., a Delaware limited partnership, and 2012 CMBS-II Fund L.P., a Delaware limited partnership (collectively, CMBS Funds). The CMBS Funds were originally formed with the objective of generating high risk-adjusted investment returns by investing primarily in a portfolio of eligible CMBS and using leverage through repurchase agreements treated as collateralized financing. During the third quarter of 2016, the CMBS Funds each sold investments to fully settle the borrowings under their respective repurchase agreements of $500 million. The remaining investments of $167 million were distributed directly to us. During the fourth quarter of 2016, the CMBS Funds were fully dissolved.
Trading securities – related party – Trading securities represents investments in fixed maturity and equity securities with changes in fair value recognized in investment related gains (losses) within revenues of consolidated variable interest entities on the condensed consolidated statements of income. The change in unrealized gains and losses on trading securities we still held as of the respective period end resulted in unrealized gains of $8 million and $2 million for the three months ended September 30, 2017 and 2016, respectively, and unrealized gains of $14 million and losses of $51 million for the nine months ended September 30, 2017 and 2016, respectively. Trading securities held by CoInvest VI, CoInvest VII and CoInvest Other are related party investments because Apollo affiliates exercise significant influence over the operations of these investees.
Investment funds – including related party – Investment funds include non-fixed income, alternative investments in the form of limited partnerships or similar legal structures that meet the definition of VIEs; however, our consolidated VIEs are not considered the primary beneficiary of these investment funds. Changes in fair value for certain of these investment funds are included in investment related gains (losses) within revenues of consolidated variable interest entities on the condensed consolidated statements of income. Investment funds held by CoInvest VII, CoInvest Other and Sprint are related party investments as they are sponsored or managed by Apollo affiliates.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Fair Value—See Note 5 – Fair Value for a description of the levels of our fair value hierarchy and our process for determining the level we assign our assets and liabilities carried at fair value.
The following represents the hierarchy for assets and liabilities of our consolidated VIEs measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| (In millions) | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 |
| Assets of consolidated variable interest entities | | | | | | | | | |
| Investments | | | | | | | | | |
| AFS securities | | | | | | | | | |
| Equity securities | $ | 173 |
| | $ | — |
| | $ | 173 |
| | $ | — |
| | $ | — |
|
| Trading securities | | | | | | | | | |
| Fixed maturity securities | 50 |
| | — |
| | — |
| | — |
| | 50 |
|
| Equity securities | 145 |
| | — |
| | 116 |
| | — |
| | 29 |
|
| Investment funds | 562 |
| | 529 |
| | — |
| | — |
| | 33 |
|
| Cash and cash equivalents | 1 |
| | — |
| | 1 |
| | — |
| | — |
|
| Total assets of consolidated VIEs measured at fair value | $ | 931 |
| | $ | 529 |
| | $ | 290 |
| | $ | — |
| | $ | 112 |
|
| | | | | | | | | | |
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. |
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| (In millions) | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 |
| Assets of consolidated variable interest entities | | | | | | | | | |
| Investments | | | | | | | | | |
| AFS securities | | | | | | | | | |
| Equity securities | $ | 161 |
| | $ | — |
| | $ | 161 |
| | $ | — |
| | $ | — |
|
| Trading securities | | | | | | | | | |
| Fixed maturity securities | 50 |
| | — |
| | — |
| | — |
| | 50 |
|
| Equity securities | 117 |
| | — |
| | 74 |
| | — |
| | 43 |
|
Investment funds2 | 562 |
| | 524 |
| | — |
| | — |
| | 38 |
|
| Cash and cash equivalents | 14 |
| | — |
| | 14 |
| | — |
| | — |
|
| Total assets of consolidated VIEs measured at fair value | $ | 904 |
| | $ | 524 |
| | $ | 249 |
| | $ | — |
| | $ | 131 |
|
| | | | | | | | | | |
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. |
2 Prior period balances have been revised for immaterial misstatements to be comparable to current year balances. |
Fair Value Valuation Methods – Refer to Note 5 – Fair Value for the valuation methods used to determine the fair value of AFS securities, trading securities, investment funds and cash and cash equivalents.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Level 3 Financial Instruments – The following is a reconciliation for all VIE Level 3 assets and liabilities measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2017 |
| (In millions) | Beginning Balance | | Total realized and unrealized gains (losses) included in income | | Purchases | | Sales | | Transfers in (out) | | Ending Balance | | Total gains (losses) included in earnings1 |
| Assets of consolidated variable interest entities | | | | | | | | | | | | | |
| Trading securities | | | | | | | | | | | | | |
| Fixed maturity securities | $ | 51 |
| | $ | — |
| | $ | — |
| | $ | (1) |
| | $ | — |
| | $ | 50 |
| | $ | — |
|
| Equity securities | 30 |
| | (1 | ) | | — |
| | — |
| | — |
| | 29 |
| | (1 | ) |
Investment funds2 | 33 |
| | — |
| | — |
| | — |
| | — |
| | 33 |
| | — |
|
| Total Level 3 assets of consolidated VIEs | $ | 114 |
| | $ | (1 | ) | | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | 112 |
| | $ | (1 | ) |
| | | | | | | | | | | | | | |
1 Related to instruments held at end of period. |
2 Beginning balance has been revised for immaterial misstatements to be comparable to current year balances. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2016 |
| (In millions) | Beginning Balance | | Total realized and unrealized gains (losses) included in income | | Purchases | | Sales | | Transfers in (out) | | Ending Balance | | Total gains (losses) included in earnings1 |
| Assets of consolidated variable interest entities | | | | | | | | | | | | | |
| Trading securities | | | | | | | | | | | | | |
| Fixed maturity securities | $ | 53 |
| | $ | (1 | ) | | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | 51 |
| | $ | — |
|
| Equity securities | 52 |
| | (5 | ) | | — |
| | — |
| | — |
| | 47 |
| | — |
|
Investment funds2 | 38 |
| | 1 |
| | 1 |
| | (10 | ) | | — |
| | 30 |
| | — |
|
| Total Level 3 assets of consolidated VIEs | $ | 143 |
| | $ | (5 | ) | | $ | 1 |
| | $ | (11 | ) | | $ | — |
| | $ | 128 |
| | $ | — |
|
| | | | | | | | | | | | | | |
1 Related to instruments held at end of period. |
2 Prior period balances have been revised for immaterial misstatements to be comparable to current year balances. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2017 |
| (In millions) | Beginning Balance | | Total realized and unrealized gains (losses) included in income | | Purchases | | Sales | | Transfers in (out) | | Ending Balance | | Total gains (losses) included in earnings1 |
| Assets of consolidated variable interest entities | | | | | | | | | | | | | |
| Trading securities | | | | | | | | | | | | | |
| Fixed maturity securities | $ | 50 |
| | $ | 1 |
| | $ | — |
| | $ | (1) |
| | $ | — |
| | $ | 50 |
| | $ | 1 |
|
| Equity securities | 43 |
| | (15 | ) | | 1 |
| | — |
| | — |
| | 29 |
| | (15 | ) |
Investment funds2 | 38 |
| | — |
| | 1 |
| | (6 | ) | | — |
| | 33 |
| | — |
|
| Total Level 3 assets of consolidated VIEs | $ | 131 |
| | $ | (14 | ) | | $ | 2 |
| | $ | (7 | ) | | $ | — |
| | $ | 112 |
| | $ | (14 | ) |
| | | | | | | | | | | | | | |
1 Related to instruments held at end of period. |
2 Beginning balance has been revised for immaterial misstatements to be comparable to current year balances. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2016 |
| (In millions) | Beginning Balance | | Total realized and unrealized gains (losses) included in income | | Purchases | | Sales | | Transfers in (out) | | Ending Balance | | Total gains (losses) included in earnings1 |
| Assets of consolidated variable interest entities | | | | | | | | | | | | | |
| Trading securities | | | | | | | | | | | | | |
| Fixed maturity securities | $ | 53 |
| | $ | (1 | ) | | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | 51 |
| | $ | (1 | ) |
| Equity securities | 38 |
| | 8 |
| | 1 |
| | — |
| | — |
| | 47 |
| | 8 |
|
Investment funds2 | 34 |
| | 1 |
| | 9 |
| | (14 | ) | | — |
| | 30 |
| | — |
|
| Total Level 3 assets of consolidated VIEs | $ | 125 |
| | $ | 8 |
| | $ | 10 |
| | $ | (15 | ) | | $ | — |
| | $ | 128 |
| | $ | 7 |
|
| | | | | | | | | | | | | | |
1 Related to instruments held at end of period. |
2 Prior period balances have been revised for immaterial misstatements to be comparable to current year balances. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
There were no transfers between Level 1 or Level 2 during the three and nine months ended September 30, 2017 and 2016.
Significant Unobservable Inputs– For certain Level 3 trading securities and investment funds, the valuations have significant unobservable inputs for comparable multiples and weighted average cost of capital rates applied in the valuation models. These inputs in isolation can cause significant increases or decreases in fair value. Specifically, the comparable multiples are multiplied by the underlying investment's earnings before interest, tax, depreciation and amortization to establish the total enterprise value of the underlying investments. We use a comparable multiple consistent with the implied trading multiple of public industry peers.
For other Level 3 trading securities, valuations are performed using a discounted cash flow model. For a discounted cash flow model, the significant input is the discount rate applied to present value the projected cash flows. An increase in the discount rate can significantly lower the fair value; a decrease in the discount rate can significantly increase the fair value. The discount rate is determined by considering the weighted average cost of capital calculation of companies in similar industries with comparable debt to equity ratios.
Fair Value Option – The following represents the gains (losses) recorded for instruments within the consolidated VIEs for which we have elected the fair value option:
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 |
| Trading securities | | | | | | | |
| Fixed maturity securities | $ | — |
| | $ | (1 | ) | | $ | 1 |
| | $ | (1 | ) |
| Equity securities | 7 |
| | (33 | ) | | 12 |
| | (77 | ) |
| Investment funds | — |
| | 23 |
| | 5 |
| | 31 |
|
| Total gains (losses) | $ | 7 |
| | $ | (11 | ) | | $ | 18 |
| | $ | (47 | ) |
Fair Value of Financial Instruments Not Held at Fair Value – Assets of consolidated variable interest entities includes $31 million and $11 million of investment funds accounted for under the equity method investees, A-A Mortgage and not carried at fair value as of September 30, 2017 and December 31, 2016, respectively; however, the carrying amount approximates fair value.VA Capital:
| | | | | | | | | | | |
| Three months ended March 31, |
| (In millions) | 2021 | | 2020 |
| Net income – VA Capital | $ | 913 | | | $ | 48 | |
| Net income – A-A Mortgage | 261 | | | 39 | |
Commitments and Contingencies – Assets of CoInvest VI included equity investments in publicly traded shares of Caesars Entertainment Corporation (CEC) and Caesars Acquisition Company (CAC). We received the CEC and CAC shares as part of a contribution agreement in 2012 with AAA Guarantor – Athene, L.P. and its subsidiary, Apollo Life Re Ltd., in order to provide a capital base to support future acquisitions. Claims had been pending (which now have been dismissed with prejudice) against CEC, CAC and/or others, related to certain guaranties issued for debt of Caesars Entertainment Operating Company, Inc. (CEOC) and/or certain transactions involving CEOC and certain of its subsidiaries (collectively, Debtors), CEC, CAC and others. CEC and the Debtors announced on or about September 26, 2016 that CEC and CEOC had received confirmations from representatives of CEOC's major creditor groups of those groups' support for a term sheet that describes the key economic terms of a proposed consensual chapter 11 plan for the Debtors. The plan, containing such terms and further including such other terms respecting, among other things, the merger of CAC into CEC, that CoInvest VI and others will not retain their pre-merger CEC shares, that CoInvest VI and others will retain the value of their CAC shares when receiving shares in the merged CEC, and that CoInvest VI and others will receive releases to the fullest extent permitted by law, was confirmed by the Bankruptcy Court by order dated January 17, 2017. Conditions precedent to the effective date of the plan included regulatory approvals from the various gaming regulators, CEC and CAC shareholders' approval of the proposed merger between CEC and CAC with CEC being the surviving entity, and securing required financings. All of the conditions precedent to the effective date of the plan were fulfilled, and the plan became effective on October 6, 2017. As of September 30, 2017, CoInvest VI recorded a liability of $42 million for the entire carrying value of its pre-merger CEC shares. Also as of September 30, 2017, CoInvest VI's investment in CAC was carried at its fair value of $72 million. On or about October 6, 2017, CoInvest VI received 5,465,733 shares in the merged CEC derived from the value of CoInvest VI's investment in CAC.
Non-Consolidated Securities and Investment Funds—We invest in certain other entities meeting the definition of a VIE or voting interest entity (VOE). We do not consolidate VIEs for which we do not meet the criteria of primary beneficiary as described below. We also do not consolidate VOEs for which we do not have control.
Fixed Maturity Securitiesmaturity securities – We invest in securitization entities as a debt holder or an investor in the residual interest of the securitization vehicle, which are included in fixed maturity securities on the condensed consolidated balance sheets.vehicle. These entities are deemed VIEs due to insufficient equity within the structure and lack of control by the equity investors over the activities that significantly impact the economics of the entity. In general, we are a debt investor within these entities and, as such, hold a variable interest; however, due to the debt holders'holders’ lack of ability to control the decisions within the trust that significantly impact the entity, and the fact the debt holders are protected from losses due to the subordination byof the equity tranche, the debt holders are not deemed the primary beneficiary. Securitization vehicles in which we hold the residual tranche are not consolidated because we do not unilaterally have substantive rights to remove the general partner, or when assessing related party interests, we are not under common control, as defined by GAAP, with the related party, nor are substantially all of the activities conducted on our behalf; therefore, we are not deemed the primary beneficiary. Debt investments and investments in the residual tranche of securitization entities are considered debt instruments and are held at fair value on the balance sheet and classified as AFS or trading.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Investment funds – Investment funds include non-fixed income, alternative investments in the form of limited partnerships or similar legal structures that meet the definition of VIEs or VOEs.structures.
A portion of these investment funds are sponsored and managedEquity securities – We invest in preferred equity securities issued by unrelated parties in which we, as limited partner, do not have the power to direct the activities that most significantly impact the economic performance of the fund, nor do we unilaterally have substantive rights to remove the general partner or dissolve the entity without cause. As a result, we do not meet the power criterion to be considered the primary beneficiary and do not consolidate these VIEs in our financial statements. Investment funds managed by unrelated parties and classified as VOEs are not consolidated as we do not own a majority voting interest and have no other substantive rights that would provide control.
We also have equity interests in investment funds where the general partner or investment manager is a related party. We have determined we are not under common control, as defined by GAAP, with the related party, nor are weentities deemed to be VIEs due to insufficient equity within the primary beneficiary. As a result, investments in these VIEs are not consolidated.structure.
We account for non-consolidated investment funds where we are able
ATHENE HOLDING LTD.
Notes to exercise significant influence over the entity under the equity method or by electing the fair value option. For non-consolidated investment funds where we are not able to exercise significant influence, we elect the fair value option. Our investments in investment funds are generally passive in nature as we do not take an active role in the investment fund's management.Condensed Consolidated Financial Statements (Unaudited)
Our risk of loss associated with our non-consolidated VIEs and VOEs is limited andinvestments depends on the investment as follows: (1) investmentinvestment. Investment funds, accounted for under the equity method are limited to our initial investment plus unfunded commitments; (2) investment funds under the fair value option are limited to the fair value plus unfunded commitments; (3) AFS securities and other investments are limited to cost or amortized cost; and (4) trading securities are limited to the carrying value.value plus unfunded commitments. AFS securities are limited to amortized cost plus unfunded commitments.
The following summarizes the carrying value and maximum loss exposure of these non-consolidated VIEsinvestments:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (In millions) | Carrying Value | | Maximum Loss Exposure | | Carrying Value | | Maximum Loss Exposure |
| Investment funds | $ | 966 | | | $ | 1,605 | | | $ | 803 | | | $ | 1,265 | |
| Investment in related parties – investment funds | 5,899 | | | 8,664 | | | 5,284 | | | 7,989 | |
| Investment in fixed maturity securities | 25,324 | | | 25,009 | | | 23,325 | | | 23,027 | |
| Investment in related parties – fixed maturity securities | 8,394 | | | 9,738 | | | 7,834 | | | 8,126 | |
| Investment in related parties – equity securities | 114 | | | 114 | | | 72 | | | 72 | |
| Total non-consolidated investments | $ | 40,697 | | | $ | 45,130 | | | $ | 37,318 | | | $ | 40,479 | |
3. Derivative Instruments
We use a variety of derivative instruments to manage risks, primarily equity, interest rate, credit, foreign currency and VOEs:market volatility. See Note 5 – Fair Value for information about the fair value hierarchy for derivatives.
|
| | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (In millions) | Carrying Value | | Maximum Loss Exposure | | Carrying Value | | Maximum Loss Exposure |
| Investment funds | $ | 747 |
| | $ | 1,154 |
| | $ | 689 |
| | $ | 1,026 |
|
| Investment in related parties – investment funds | 1,330 |
| | 2,083 |
| | 1,198 |
| | 1,485 |
|
| Assets of consolidated variable interest entities – investment funds | 593 |
| | 622 |
| | 573 |
| | 593 |
|
| Investment in fixed maturity securities | 20,862 |
| | 20,131 |
| | 19,171 |
| | 19,090 |
|
| Investment in related parties – fixed maturity securities | 549 |
| | 544 |
| | 530 |
| | 536 |
|
| Total non-consolidated VIEs and VOEs | $ | 24,081 |
| | $ | 24,534 |
| | $ | 22,161 |
| | $ | 22,730 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following summarizes our investment funds, including related party investment funds and investment funds owned by consolidated VIEs:
|
| | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (In millions, except for percentages and years) | Carrying value | | Percent of total | | Remaining life in years | | Carrying value | | Percent of total | | Remaining life in years |
| Investment funds | | | | | | | | | | | | | | | |
| Private equity | $ | 279 |
| | 37.3 | % | | 0 | – | 7 | | $ | 268 |
| | 38.9 | % | | 0 | – | 7 |
| Real estate and other real assets | 166 |
| | 22.2 | % | | 0 | – | 6 | | 118 |
| | 17.2 | % | | 0 | – | 4 |
| Natural resources | 5 |
| | 0.7 | % | | 0 | – | 1 | | 5 |
| | 0.7 | % | | 1 | – | 2 |
| Hedge funds | 62 |
| | 8.3 | % | | 0 | – | 3 | | 72 |
| | 10.4 | % | | 0 | – | 3 |
| Credit funds | 235 |
| | 31.5 | % | | 0 | – | 5 | | 226 |
| | 32.8 | % | | 0 | – | 5 |
| Total investment funds | 747 |
| | 100.0 | % | | | | | | 689 |
| | 100.0 | % | | | | |
| Investment funds – related parties | | | | | | | | | | | | | | | |
Private equity – A-A Mortgage1 | 396 |
| | 29.8 | % | | 3 | – | 3 | | 343 |
| | 28.6 | % | | 3 | – | 3 |
| Private equity – other | 176 |
| | 13.2 | % | | 0 | – | 10 | | 131 |
| | 11.0 | % | | 0 | – | 10 |
| Real estate and other real assets | 245 |
| | 18.4 | % | | 0 | – | 7 | | 247 |
| | 20.6 | % | | 1 | – | 4 |
| Natural resources | 78 |
| | 5.9 | % | | 5 | – | 8 | | 49 |
| | 4.1 | % | | 5 | – | 5 |
| Hedge funds | 163 |
| | 12.2 | % | | 9 | – | 10 | | 192 |
| | 16.0 | % | | 9 | – | 9 |
| Credit funds | 272 |
| | 20.5 | % | | 1 | – | 4 | | 236 |
| | 19.7 | % | | 2 | – | 3 |
| Total investment funds – related parties | 1,330 |
| | 100.0 | % | | | | | | 1,198 |
| | 100.0 | % | | | | |
| Investment funds owned by consolidated VIEs | | | | | | | | | | | | | | | |
Private equity – MidCap2 | 529 |
| | 89.2 | % | | N/A | | 524 |
| | 91.4 | % | | N/A |
| Credit funds | 32 |
| | 5.4 | % | | 0 | – | 3 | | 38 |
| | 6.7 | % | | 0 | – | 3 |
| Real estate and other real assets | 32 |
| | 5.4 | % | | 2 | – | 3 | | 11 |
| | 1.9 | % | | 2 | – | 3 |
| Total investment funds owned by consolidated VIEs | 593 |
| | 100.0 | % | | | | | | 573 |
| | 100.0 | % | | | | |
| Total investment funds including related parties and funds owned by consolidated VIEs | $ | 2,670 |
| | | | | | | | $ | 2,460 |
| | | | | | |
| | | | | | | | | | | | | | | | |
1 A-A Mortgage Opportunities, LP (A-A Mortgage) is a platform to originate residential mortgage loans and mortgage servicing rights. |
2 Our total investment in MidCap, including amounts advanced under credit facilities, totaled $767 million and $761 million as of September 30, 2017 and December 31, 2016, respectively, which was less than 10% of total AHL shareholder's equity at September 30, 2017, but greater than 10% at December 31, 2016. |
Summarized Ownership of Investment Funds—The following table presents the carrying value by ownership percentage of equity method investment funds, including related party investment funds and investment funds owned by consolidated VIEs:
|
| | | | | | | |
| (In millions) | September 30, 2017 | | December 31, 2016 |
| Ownership Percentage | | | |
| 100% | $ | 25 |
| | $ | 27 |
|
| 50% – 99% | 605 |
| | 478 |
|
| Greater than 3% – 49% | 1,324 |
| | 1,294 |
|
| Equity method investment funds | $ | 1,954 |
| | $ | 1,799 |
|
The following table presents the carrying value by ownership percentage of investment funds where we elected thenotional amount and fair value option, includingof derivative instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| (In millions) | | Assets | | Liabilities | | | Assets | | Liabilities |
| Derivatives designated as hedges | | | | | | | | | | | |
| Foreign currency swaps | 4,856 | | | $ | 120 | | | $ | 183 | | | 4,417 | | | $ | 134 | | | $ | 181 | |
| Foreign currency forwards | 3,465 | | | 58 | | | 7 | | | 2,038 | | | 3 | | | 9 | |
| Foreign currency interest rate swaps | 1,183 | | | 1 | | | 57 | | | 0 | | | 0 | | | 0 | |
| Foreign currency forwards on net investments | 224 | | | 0 | | | 0 | | | 173 | | | 0 | | | 2 | |
| Total derivatives designated as hedges | | | 179 | | | 247 | | | | | 137 | | | 192 | |
| Derivatives not designated as hedges | | | | | | | | | | | |
| Equity options | 54,116 | | | 3,297 | | | 17 | | | 53,666 | | | 3,209 | | | 22 | |
| Futures | 26 | | | 40 | | | 0 | | | 24 | | | 58 | | | 2 | |
| Total return swaps | 119 | | | 4 | | | 0 | | | 97 | | | 6 | | | 0 | |
| Foreign currency swaps | 1,541 | | | 53 | | | 0 | | | 1,510 | | | 96 | | | 0 | |
| Interest rate swaps | 805 | | | 27 | | | 3 | | | 803 | | | 0 | | | 34 | |
| Credit default swaps | 10 | | | 0 | | | 5 | | | 10 | | | 0 | | | 4 | |
| Foreign currency forwards | 4,686 | | | 77 | | | 16 | | | 3,595 | | | 17 | | | 44 | |
| Embedded derivatives | | | | | | | | | | | |
| Funds withheld including related party | | | 1,216 | | | 34 | | | | | 2,806 | | | 59 | |
| Interest sensitive contract liabilities | | | 0 | | | 12,473 | | | | | 0 | | | 12,873 | |
| Total derivatives not designated as hedges | | | 4,714 | | | 12,548 | | | | | 6,192 | | | 13,038 | |
| Total derivatives | | | $ | 4,893 | | | $ | 12,795 | | | | | $ | 6,329 | | | $ | 13,230 | |
Derivatives Designated as Hedges
Cash Flow Hedges–We use foreign currency swaps to convert foreign currency denominated cash flows of investments or liabilities to US dollars to reduce cash flow fluctuations due to changes in currency exchange rates. These swaps will expire by March 2052. The following is a summary of the gains (losses) recorded in OCI related party investment funds and investment funds owned by consolidated VIEs:to cash flow hedges:
| | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| (In millions) | | | | | 2021 | | 2020 |
| Foreign currency swaps | | | | | $ | (31) | | | $ | 401 | |
|
| | | | | | | |
| (In millions) | September 30, 2017 | | December 31, 2016 |
| Ownership Percentage | | | |
| Greater than 3% – 49% | $ | 562 |
| | $ | 562 |
|
| 3% or less | 154 |
| | 99 |
|
| Fair value option investment funds | $ | 716 |
| | $ | 661 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
There were 0 amounts reclassified to income and 0 amounts deemed ineffective during the three months ended March 31, 2021 and 2020. As of March 31, 2021, 0 amounts are expected to be reclassified to income within the next 12 months.
Fair Value Hedges – We use foreign currency forward contracts and foreign currency interest rate swaps that are designated and accounted for as fair value hedges. We use foreign currency forward contracts to hedge certain exposures to foreign currency risk. The price is agreed upon at the time of the contract and payment is made at a specified future date. We use foreign currency interest rate swaps to hedge certain exposures to foreign currency risk and interest rate risk relating to foreign currency denominated funding agreements.
The following represents the carrying amount and the cumulative fair value hedging adjustments included in the hedged assets or liabilities:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (In millions) | Carrying amount of the hedged assets or liabilities1 | | Cumulative amount of fair value hedging gains (losses) | | Carrying amount of the hedged assets or liabilities1 | | Cumulative amount of fair value hedging gains (losses) |
| AFS securities – Foreign currency forwards | $ | 2,997 | | | $ | (102) | | | $ | 1,932 | | | $ | 117 | |
| Interest sensitive contract liabilities | | | | | | | |
| Foreign currency forwards | 75 | | | 4 | | | 65 | | | (1) | |
| Foreign currency interest rate swaps | 1,178 | | | 50 | | | 0 | | | 0 | |
| | | | | | | |
1 The carrying amount disclosed for AFS securities is amortized cost. |
The following is a summary of the gains (losses) related to the derivatives and related hedged items in fair value hedge relationships:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Derivatives | | Hedged Items | | Amount Excluded | | Net |
| Three months ended March 31, 2021 | | | | | | | |
| Investment related gains (losses) | | | | | | | |
| Foreign currency forwards | $ | 218 | | | $ | (217) | | | $ | 0 | | | $ | 1 | |
| Foreign currency interest rate swaps | (36) | | | 41 | | | 0 | | | 5 | |
| Interest sensitive contract benefits | | | | | | | |
| Foreign currency interest rate swaps | 1 | | | (1) | | | 0 | | | 0 | |
| | | | | | | |
| Three months ended March 31, 2020 | | | | | | | |
| Investment related gains (losses) – Foreign currency forwards | $ | 12 | | | $ | (8) | | | $ | 0 | | | $ | 4 | |
| | | | | | | |
Net Investment Hedges – We use foreign currency forwards to hedge the foreign currency exchange rate risk of our investments in subsidiaries that have a reporting currency other than the US dollar. We assess hedge effectiveness based on the changes in forward rates. During the three months ended March 31, 2021 and 2020, these derivatives had losses of $2 million and gains of $13 million, respectively, which are included in foreign currency translation and other adjustments on the condensed consolidated statements of comprehensive loss. As of March 31, 2021 and December 31, 2020, the cumulative foreign currency translation recorded in accumulated other comprehensive income (AOCI) related to these net investment hedges were losses of $2 million and $0 million, respectively. During the three months ended March 31, 2021 and 2020, there were 0 amounts deemed ineffective.
Derivatives Not Designated as Hedges
Equity options – We use equity indexed options to economically hedge fixed indexed annuity products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specified market index, primarily the S&P 500. To hedge against adverse changes in equity indices, we enter into contracts to buy equity indexed options. The contracts are net settled in cash based on differentials in the indices at the time of exercise and the strike price.
Futures –Futures contracts are purchased to hedge the growth in interest credited to the customer as a direct result of increases in the related indices. We enter into exchange-traded futures with regulated futures commission clearing brokers who are members of a trading exchange. Under exchange-traded futures contracts, we agree to purchase a specified number of contracts with other parties and to post variation margin on a daily basis in an amount equal to the difference in the daily fair values of those contracts.
Total return swaps – We purchase total rate of return swaps to gain exposure and benefit from a reference asset or index without ownership. Total rate of return swaps are contracts in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of the underlying asset or index, which includes both the income it generates and any capital gains.
Interest rate swaps – We use interest rate swaps to reduce market risks from interest rate changes and to alter interest rate exposure arising from duration mismatches between assets and liabilities. With an interest rate swap, we agree with another party to exchange the difference between fixed-rate and floating-rate interest amounts tied to an agreed-upon notional principal amount at specified intervals.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Credit default swaps – Credit default swaps provide a measure of protection against the default of an issuer or allow us to gain credit exposure to an issuer or traded index. We use credit default swaps coupled with a bond to synthetically create the characteristics of a reference bond. These transactions have a lower cost and are generally more liquid relative to the cash market. We receive a periodic premium for these transactions as compensation for accepting credit risk.
Hedging credit risk involves buying protection for existing credit risk. The exposure resulting from the agreements, which is usually the notional amount, is equal to the maximum proceeds that must be paid by a counterparty for a defaulted security. If a credit event occurs on a reference entity, then a counterparty who sold protection is required to pay the buyer the trade notional amount less any recovery value of the security.
Embedded derivatives – We have embedded derivatives which are required to be separated from their host contracts and reported as derivatives. Host contracts include reinsurance agreements structured on a modified coinsurance (modco) or funds withheld basis and indexed annuity products.
The following is a summary of the gains (losses) related to derivatives not designated as hedges:
| | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| (In millions) | | | | | 2021 | | 2020 |
| Equity options | | | | | $ | 502 | | | $ | (1,581) | |
| Futures | | | | | 11 | | | 16 | |
| Swaps | | | | | 31 | | | (75) | |
| Foreign currency forwards | | | | | (31) | | | 67 | |
| Embedded derivatives on funds withheld | | | | | (1,133) | | | (1,446) | |
| Amounts recognized in investment related gains (losses) | | | | | (620) | | | (3,019) | |
Embedded derivatives in indexed annuity products1 | | | | | 335 | | | 1,177 | |
| Total gains (losses) on derivatives not designated as hedges | | | | | $ | (285) | | | $ | (1,842) | |
| | | | | | | |
1 Included in interest sensitive contract benefits on the condensed consolidated statements of income (loss). |
Credit Risk—We may be exposed to credit-related losses in the event of counterparty nonperformance on derivative financial instruments. Generally, the current credit exposure of our derivative contracts is the fair value at the reporting date less any collateral received from the counterparty.
We manage credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties. Where possible, we maintain collateral arrangements and use master netting agreements that provide for a single net payment from one counterparty to another at each due date and upon termination. We have also established counterparty exposure limits, where possible, in order to evaluate if there is sufficient collateral to support the net exposure.
Collateral arrangements typically require the posting of collateral in connection with its derivative instruments. Collateral agreements often contain posting thresholds, some of which may vary depending on the posting party’s financial strength ratings. Additionally, a decrease in our financial strength rating to a specified level can result in settlement of the derivative position.
The estimated fair value of our net derivative and other financial assets and liabilities after the application of master netting agreements and collateral were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Gross amounts not offset on the condensed consolidated balance sheets | | | | | | |
| (In millions) | Gross amount recognized1 | | Financial instruments2 | | Collateral (received)/pledged | | Net amount | | Off-balance sheet securities collateral3 | | Net amount after securities collateral |
| March 31, 2021 | | | | | | | | | | | |
| Derivative assets | $ | 3,677 | | | $ | (211) | | | $ | (3,355) | | | $ | 111 | | | $ | (26) | | | $ | 85 | |
| Derivative liabilities | (288) | | | 211 | | | 67 | | | (10) | | | 0 | | | (10) | |
| | | | | | | | | | | |
| December 31, 2020 | | | | | | | | | | | |
| Derivative assets | $ | 3,523 | | | $ | (165) | | | $ | (3,196) | | | $ | 162 | | | $ | (46) | | | $ | 116 | |
| Derivative liabilities | (298) | | | 165 | | | 144 | | | 11 | | | 0 | | | 11 | |
| | | | | | | | | | | |
1 The gross amounts of recognized derivative assets and derivative liabilities are reported on the condensed consolidated balance sheets. As of March 31, 2021 and December 31, 2020, amounts not subject to master netting or similar agreements were immaterial. |
2 Represents amounts offsetting derivative assets and derivative liabilities that are subject to an enforceable master netting agreement or similar agreement that are not netted against the gross derivative assets or gross derivative liabilities for presentation on the condensed consolidated balance sheets. |
3 For non-cash collateral received, we do not recognize the collateral on our balance sheet unless the obligor (transferor) has defaulted under the terms of the secured contract and is no longer entitled to redeem the pledged asset. Amounts do not include any excess of collateral pledged or received. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
4. Variable Interest Entities
During the first quarter 2021, we consolidated the following VIEs:
•Hamlet Securitization Trust 2020-CRE1 (Hamlet)
•A-A SPN-9 (ASREII - ACRASP), L.P. and A-A SPN-9 (ASREII - ALRESP), L.P. (collectively, A-A SPN-9)
•A-A Offshore 2021-1 (Java), L.P. (Java)
Hamlet was formed to securitize a portion of our commercial mortgage loan portfolio as CMBS securities held by AHL subsidiaries and third-party cedant portfolios. Securitization of these commercial mortgage loans allows retention of the full economics of these assets while being able to pledge these assets as collateral to the Federal Home Loan Bank (FHLB) under the funding agreement program. As of March 31, 2021 and December 31, 2020, Hamlet primarily held $1,812 million and $1,880 million, respectively, of commercial mortgage loans. As substantially all of the activities and economics of Hamlet are conducted on our behalf, we are the primary beneficiary and consolidate Hamlet and the assets are included in mortgage loans on the condensed consolidated balance sheets. Additionally, as Hamlet is in the form of a trust, the commercial mortgage loan assets are included in the pledged assets and funds in trust table in Note 10 – Commitments and Contingencies.
A-A SPN-9 is comprised of limited partnership entities that invest in an underlying investment fund. As of March 31, 2021, A-A SPN-9 primarily held $130 million of investment funds. We are the only limited partner in these entities and receive all of the economic benefits and losses, other than management fees and carried interest, as applicable, paid to the general partner in each entity, or a related entity, which are related parties. We do not have any direct voting rights as a limited partner at the A-A SPN-9 level, but we do have an ability to dissolve the underlying investment that results in dissolution of the entities. Therefore, as we have a unilateral ability to ultimately dissolve the entities and also own all of the economics in each of the entities, we are deemed to be the primary beneficiary of the VIEs.
Java is an investment fund. As of March 31, 2021, Java primarily held $24 million of investment funds and $151 million of other assets. We are both the general partner and the only limited partner in this investment fund and receive all of the economic benefits and losses. The general partner hired a related party investment manager who receives management fees and service fees, as applicable. We hold both the power, as a general partner, and significant economics, as a limited partner, satisfying the primary beneficiary criteria.
No arrangement exists requiring us to provide additional funding in excess of our committed capital investment, liquidity, or the funding of losses or an increase to our loss exposure in excess of our investment in any of the consolidated VIEs.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
5. Fair Value
Fair value is the price we would receive to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market participants. We determine fair value based on the following fair value hierarchy:
Level 1 – Unadjusted quoted prices for identical assets or liabilities in an active market.
Level 2 – Quoted prices for inactive markets or valuation techniques that require observable direct or indirect inputs for substantially the full term of the asset or liability. Level 2 inputs include the following:
•Quoted prices for similar assets or liabilities in active markets,
•Observable inputs other than quoted market prices, and
•Observable inputs derived principally from market data through correlation or other means.
Level 3 – Prices or valuation techniques with unobservable inputs significant to the overall fair value estimate. These valuations use critical assumptions not readily available to market participants. Level 3 valuations are based on market standard valuation methodologies, including discounted cash flows, matrix pricing or other similar techniques.
Net Asset Value (NAV) – Investment funds are typically measured using NAV as a practical expedient in determining fair value and are not classified in the fair value hierarchy. Our carrying value reflects our pro rata ownership percentage as indicated by NAV in the investment fund financial statements, which we may adjust if we determine NAV is not calculated consistent with investment company fair value principles. The underlying investments of the investment funds may have significant unobservable inputs, which may include but are not limited to, comparable multiples and weighted average cost of capital rates applied in valuation models or a discounted cash flow model.
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the instrument'sinstrument’s fair value measurement.
We use a number of valuation sources to determine fair values. Valuation sources can include quoted market prices; third-party commercial pricing services; third-party brokers; industry-standard, vendor modeling software that uses market observable inputs; and other internal modeling techniques based on projected cash flows. We periodically review the assumptions and inputs of third-party commercial pricing services through internal valuation price variance reviews, comparisons to internal pricing models, back testing to recent trades, or monitoring trading volumes.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
The following represents the hierarchy for our assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 |
| (In millions) | Total | | NAV | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | | |
| AFS securities | | | | | | | | | |
| US government and agencies | $ | 351 | | | $ | — | | | $ | 342 | | | $ | 9 | | | $ | 0 | |
| US state, municipal and political subdivisions | 1,006 | | | — | | | 0 | | | 1,006 | | | 0 | |
| Foreign governments | 382 | | | — | | | 0 | | | 380 | | | 2 | |
| Corporate | 58,848 | | | — | | | 0 | | | 58,066 | | | 782 | |
| CLO | 11,272 | | | — | | | 0 | | | 11,098 | | | 174 | |
| ABS | 4,832 | | | — | | | 0 | | | 3,625 | | | 1,207 | |
| CMBS | 2,206 | | | — | | | 0 | | | 2,158 | | | 48 | |
| RMBS | 6,627 | | | — | | | 0 | | | 6,627 | | | 0 | |
| Total AFS securities | 85,524 | | | — | | | 342 | | | 82,969 | | | 2,213 | |
| Trading securities | | | | | | | | | |
| US government and agencies | 6 | | | — | | | 3 | | | 3 | | | 0 | |
| US state, municipal and political subdivisions | 100 | | | — | | | 0 | | | 100 | | | 0 | |
| | | | | | | | | |
| Corporate | 1,486 | | | — | | | 0 | | | 1,486 | | | 0 | |
| | | | | | | | | |
| ABS | 132 | | | — | | | 0 | | | 97 | | | 35 | |
| CMBS | 57 | | | — | | | 0 | | | 57 | | | 0 | |
| RMBS | 198 | | | — | | | 0 | | | 139 | | | 59 | |
| Total trading securities | 1,979 | | | — | | | 3 | | | 1,882 | | | 94 | |
| Equity securities | 322 | | | — | | | 36 | | | 272 | | | 14 | |
| Mortgage loans | 18 | | | — | | | 0 | | | 0 | | | 18 | |
| Investment funds | 319 | | | 148 | | | 0 | | | 0 | | | 171 | |
| Funds withheld at interest – embedded derivative | 636 | | | — | | | 0 | | | 0 | | | 636 | |
| Derivative assets | 3,677 | | | — | | | 40 | | | 3,637 | | | 0 | |
| Short-term investments | 117 | | | — | | | 51 | | | 66 | | | 0 | |
| Other investments | 105 | | | — | | | 0 | | | 105 | | | 0 | |
| Cash and cash equivalents | 6,427 | | | — | | | 6,427 | | | 0 | | | 0 | |
| Restricted cash | 546 | | | — | | | 546 | | | 0 | | | 0 | |
| Investments in related parties | | | | | | | | | |
| AFS securities | | | | | | | | | |
| Corporate | 221 | | | — | | | 0 | | | 20 | | | 201 | |
| CLO | 1,869 | | | — | | | 0 | | | 1,869 | | | 0 | |
| ABS | 4,815 | | | — | | | 0 | | | 684 | | | 4,131 | |
| Total AFS securities – related party | 6,905 | | | — | | | 0 | | | 2,573 | | | 4,332 | |
| Trading securities | | | | | | | | | |
| CLO | 69 | | | — | | | 0 | | | 25 | | | 44 | |
| ABS | 1,641 | | | — | | | 0 | | | 0 | | | 1,641 | |
| Total trading securities – related party | 1,710 | | | — | | | 0 | | | 25 | | | 1,685 | |
| Equity securities | 114 | | | — | | | 0 | | | — | | | 114 | |
| Investment funds | 2,060 | | | 90 | | | 0 | | | 0 | | | 1,970 | |
| Funds withheld at interest – embedded derivative | 580 | | | — | | | 0 | | | 0 | | | 580 | |
| | | | | | | | | |
| Reinsurance recoverable | 1,880 | | | — | | | 0 | | | 0 | | | 1,880 | |
| Total assets measured at fair value | $ | 112,919 | | | $ | 238 | | | $ | 7,445 | | | $ | 91,529 | | | $ | 13,707 | |
| | | | | | | | | |
| Liabilities | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | |
| Embedded derivative | $ | 12,473 | | | $ | — | | | $ | 0 | | | $ | 0 | | | $ | 12,473 | |
| Universal life benefits | 1,108 | | | — | | | 0 | | | 0 | | | 1,108 | |
| Future policy benefits | | | | | | | | | |
| AmerUs Life Insurance Company (AmerUs) Closed Block | 1,497 | | | — | | | 0 | | | 0 | | | 1,497 | |
| Indianapolis Life Insurance Company (ILICO) Closed Block and life benefits | 757 | | | — | | | 0 | | | 0 | | | 757 | |
| Derivative liabilities | 288 | | | — | | | 0 | | | 283 | | | 5 | |
| Funds withheld liability – embedded derivative | 34 | | | — | | | 0 | | | 34 | | | 0 | |
| Total liabilities measured at fair value | $ | 16,157 | | | $ | — | | | $ | 0 | | | $ | 317 | | | $ | 15,840 | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| (In millions) | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | | |
| AFS securities | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | |
| U.S. government and agencies | $ | 58 |
| | $ | — |
| | $ | 26 |
| | $ | 32 |
| | $ | — |
|
| U.S. state, municipal and political subdivisions | 1,145 |
| | — |
| | — |
| | 1,145 |
| | — |
|
| Foreign governments | 2,589 |
| | — |
| | — |
| | 2,589 |
| | — |
|
| Corporate | 34,458 |
| | — |
| | — |
| | 33,989 |
| | 469 |
|
| CLO | 4,996 |
| | — |
| | — |
| | 4,800 |
| | 196 |
|
| ABS | 3,900 |
| | — |
| | — |
| | 2,521 |
| | 1,379 |
|
| CMBS | 1,890 |
| | — |
| | — |
| | 1,803 |
| | 87 |
|
| RMBS | 9,480 |
| | — |
| | — |
| | 9,158 |
| | 322 |
|
| Total AFS fixed maturity securities | 58,516 |
| | — |
| | 26 |
| | 56,037 |
| | 2,453 |
|
| Equity securities | 318 |
| | — |
| | 114 |
| | 199 |
| | 5 |
|
| Total AFS securities | 58,834 |
| | — |
| | 140 |
|
| 56,236 |
| | 2,458 |
|
| Trading securities | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | |
| U.S. government and agencies | 3 |
| | — |
| | 3 |
| | — |
| | — |
|
| U.S. state, municipal and political subdivisions | 137 |
| | — |
| | — |
| | 120 |
| | 17 |
|
| Corporate | 1,475 |
| | — |
| | — |
| | 1,475 |
| | — |
|
| CLO | 29 |
| | — |
| | — |
| | 8 |
| | 21 |
|
| ABS | 90 |
| | — |
| | — |
| | 90 |
| | — |
|
| CMBS | 59 |
| | — |
| | — |
| | 59 |
| | — |
|
| RMBS | 418 |
| �� | — |
| | — |
| | 317 |
| | 101 |
|
| Total trading fixed maturity securities | 2,211 |
| | — |
| | 3 |
| | 2,069 |
| | 139 |
|
| Equity securities | 498 |
| | — |
| | — |
| | 498 |
| | — |
|
| Total trading securities | 2,709 |
| | — |
| | 3 |
| | 2,567 |
| | 139 |
|
| Mortgage loans | 42 |
| | — |
| | — |
| | — |
| | 42 |
|
| Investment funds | 127 |
| | 127 |
| | — |
| | — |
| | — |
|
| Funds withheld at interest – embedded derivative | 303 |
| | — |
| | — |
| | — |
| | 303 |
|
| Derivative assets | 1,982 |
| | — |
| | 8 |
| | 1,974 |
| | — |
|
| Short-term investments | 108 |
| | — |
| | 39 |
| | 69 |
| | — |
|
| Cash and cash equivalents | 3,607 |
| | — |
| | 3,607 |
| | — |
| | — |
|
| Restricted cash | 100 |
| | — |
| | 100 |
| | — |
| | — |
|
| Investments in related parties | | | | | | | | | |
| AFS, fixed maturity securities | | | | | | | | | |
| CLO | 356 |
| | — |
| | — |
| | 346 |
| | 10 |
|
| ABS | 53 |
| | — |
| | — |
| | 53 |
| | — |
|
| Total AFS securities – related party | 409 |
| | — |
| | — |
| | 399 |
| | 10 |
|
| Trading securities, CLO | 140 |
| | — |
| | — |
| | 49 |
| | 91 |
|
| Investment funds | 27 |
| | 27 |
| | — |
| | — |
| | — |
|
| Short-term investments | 8 |
| | — |
| | — |
| | — |
| | 8 |
|
| Reinsurance recoverable | 1,783 |
| | — |
| | — |
| | — |
| | 1,783 |
|
| Total assets measured at fair value | $ | 70,179 |
| | $ | 154 |
| | $ | 3,897 |
| | $ | 61,294 |
| | $ | 4,834 |
|
| | | | | | | | | | (Continued) |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| (In millions) | Total | | NAV | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | | |
| AFS securities | | | | | | | | | |
| US government and agencies | $ | 351 | | | $ | — | | | $ | 332 | | | $ | 19 | | | $ | 0 | |
| US state, municipal and political subdivisions | 1,033 | | | — | | | 0 | | | 999 | | | 34 | |
| Foreign governments | 368 | | | — | | | 0 | | | 366 | | | 2 | |
| Corporate | 58,180 | | | — | | | 0 | | | 57,402 | | | 778 | |
| CLO | 9,569 | | | — | | | 0 | | | 9,361 | | | 208 | |
| ABS | 4,270 | | | — | | | 0 | | | 3,470 | | | 800 | |
| CMBS | 2,169 | | | — | | | 0 | | | 2,126 | | | 43 | |
| RMBS | 6,913 | | | — | | | 0 | | | 6,913 | | | 0 | |
| Total AFS securities | 82,853 | | | — | | | 332 | | | 80,656 | | | 1,865 | |
| Trading securities | | | | | | | | | |
| US government and agencies | 6 | | | — | | | 3 | | | 3 | | | 0 | |
| US state, municipal and political subdivisions | 106 | | | — | | | 0 | | | 106 | | | 0 | |
| Corporate | 1,577 | | | — | | | 0 | | | 1,577 | | | 0 | |
| CLO | 4 | | | — | | | 0 | | | 0 | | | 4 | |
| ABS | 128 | | | — | | | 0 | | | 93 | | | 35 | |
| CMBS | 52 | | | — | | | 0 | | | 52 | | | 0 | |
| RMBS | 220 | | | — | | | 0 | | | 173 | | | 47 | |
| Total trading securities | 2,093 | | | — | | | 3 | | | 2,004 | | | 86 | |
| Equity securities | 330 | | | — | | | 57 | | | 262 | | | 11 | |
| Mortgage loans | 19 | | | — | | | 0 | | | 0 | | | 19 | |
| Investment funds | 161 | | | 144 | | | 0 | | | 0 | | | 17 | |
| Funds withheld at interest – embedded derivative | 1,944 | | | — | | | 0 | | | 0 | | | 1,944 | |
| Derivative assets | 3,523 | | | — | | | 58 | | | 3,465 | | | 0 | |
| Short-term investments | 222 | | | — | | | 146 | | | 74 | | | 2 | |
| Other investments | 105 | | | — | | | 0 | | | 105 | | | 0 | |
| Cash and cash equivalents | 7,704 | | | — | | | 7,704 | | | 0 | | | 0 | |
| Restricted cash | 738 | | | — | | | 738 | | | 0 | | | 0 | |
| | | | | | | | | |
| Investments in related parties | | | | | | | | | |
| AFS securities | | | | | | | | | |
| Corporate | 215 | | | — | | | 0 | | | 20 | | | 195 | |
| CLO | 1,520 | | | — | | | 0 | | | 1,520 | | | 0 | |
| ABS | 4,785 | | | — | | | 0 | | | 676 | | | 4,109 | |
| Total AFS securities – related party | 6,520 | | | — | | | 0 | | | 2,216 | | | 4,304 | |
| Trading securities | | | | | | | | | |
| CLO | 54 | | | — | | | 0 | | | 4 | | | 50 | |
| ABS | 1,475 | | | — | | | 0 | | | 0 | | | 1,475 | |
| Total trading securities – related party | 1,529 | | | — | | | 0 | | | 4 | | | 1,525 | |
| Equity securities | 72 | | | — | | | 0 | | | 0 | | | 72 | |
| Investment funds | 2,119 | | | 86 | | | 0 | | | 0 | | | 2,033 | |
| Funds withheld at interest – embedded derivative | 862 | | | — | | | 0 | | | 0 | | | 862 | |
| | | | | | | | | |
| Reinsurance recoverable | 2,100 | | | — | | | 0 | | | 0 | | | 2,100 | |
| Total assets measured at fair value | $ | 112,894 | | | $ | 230 | | | $ | 9,038 | | | $ | 88,786 | | | $ | 14,840 | |
| Liabilities | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | |
| Embedded derivative | $ | 12,873 | | | $ | — | | | $ | 0 | | | $ | 0 | | | $ | 12,873 | |
| Universal life benefits | 1,308 | | | — | | | 0 | | | 0 | | | 1,308 | |
| Future policy benefits | | | | | | | | | |
| AmerUs Closed Block | 1,600 | | | — | | | 0 | | | 0 | | | 1,600 | |
| ILICO Closed Block and life benefits | 776 | | | — | | | 0 | | | 0 | | | 776 | |
| Derivative liabilities | 298 | | | — | | | 2 | | | 292 | | | 4 | |
| Funds withheld liability – embedded derivative | 59 | | | — | | | 0 | | | 59 | | | 0 | |
| Total liabilities measured at fair value | $ | 16,914 | | | $ | — | | | $ | 2 | | | $ | 351 | | | $ | 16,561 | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| (In millions) | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 |
| Liabilities | | | | | | | | | |
| Interest sensitive contract liabilities |
|
| | | | | | | | |
| Embedded derivative | $ | 6,652 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6,652 |
|
| Universal life benefits | 957 |
| | — |
| | — |
| | — |
| | 957 |
|
| Unit-linked contracts | 472 |
| | — |
| | — |
| | 472 |
| | — |
|
| Future policy benefits | | | | | | | | | |
| AmerUs Closed Block | 1,616 |
| | — |
| | — |
| | — |
| | 1,616 |
|
| ILICO Closed Block and life benefits | 811 |
| | — |
| | — |
| | — |
| | 811 |
|
| Derivative liabilities | 92 |
| | — |
| | 1 |
| | 85 |
| | 6 |
|
| Funds withheld liability – embedded derivative | 18 |
| | — |
| | — |
| | 18 |
| | — |
|
| Total liabilities measured at fair value | $ | 10,618 |
| | $ | — |
| | $ | 1 |
| | $ | 575 |
| | $ | 10,042 |
|
| | | | | | | | | | |
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. |
| | | | | | | | | | (Concluded) |
|
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| (In millions) | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | | |
| AFS securities | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | |
| U.S. government and agencies | $ | 60 |
| | $ | — |
| | $ | 29 |
| | $ | 31 |
| | $ | — |
|
| U.S. state, municipal and political subdivisions | 1,140 |
| | — |
| | — |
| | 1,135 |
| | 5 |
|
| Foreign governments | 2,235 |
| | — |
| | — |
| | 2,221 |
| | 14 |
|
| Corporate | 30,020 |
| | — |
| | — |
| | 29,650 |
| | 370 |
|
| CLO | 4,822 |
| | — |
| | — |
| | 4,664 |
| | 158 |
|
| ABS | 2,936 |
| | — |
| | — |
| | 1,776 |
| | 1,160 |
|
| CMBS | 1,847 |
| | — |
| | — |
| | 1,695 |
| | 152 |
|
| RMBS | 8,973 |
| | — |
| | — |
| | 8,956 |
| | 17 |
|
| Total AFS fixed maturity securities | 52,033 |
| | — |
| | 29 |
| | 50,128 |
| | 1,876 |
|
| Equity securities | 353 |
| | — |
| | 79 |
| | 269 |
| | 5 |
|
| Total AFS securities | 52,386 |
| | — |
| | 108 |
| | 50,397 |
| | 1,881 |
|
| Trading securities | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | |
| U.S. government and agencies | 3 |
| | — |
| | 3 |
| | — |
| | — |
|
| U.S. state, municipal and political subdivisions | 137 |
| | — |
| | — |
| | 120 |
| | 17 |
|
| Corporate | 1,423 |
| | — |
| | — |
| | 1,423 |
| | — |
|
| CLO | 43 |
| | — |
| | — |
| | — |
| | 43 |
|
| ABS | 82 |
| | — |
| | — |
| | 82 |
| | — |
|
| CMBS | 81 |
| | — |
| | — |
| | 81 |
| | — |
|
| RMBS | 387 |
| | — |
| | — |
| | 291 |
| | 96 |
|
| Total trading fixed maturity securities | 2,156 |
| | — |
| | 3 |
| | 1,997 |
| | 156 |
|
| Equity securities | 425 |
| | — |
| | — |
| | 425 |
| | — |
|
| Total trading securities | 2,581 |
| | — |
| | 3 |
| | 2,422 |
| | 156 |
|
| | | | | | | | | | (Continued) |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| (In millions) | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 |
| Mortgage loans | 44 |
| | — |
| | — |
| | — |
| | 44 |
|
| Investment funds | 99 |
| | 99 |
| | — |
| | — |
| | — |
|
| Funds withheld at interest – embedded derivative | 140 |
| | — |
| | — |
| | — |
| | 140 |
|
| Derivative assets | 1,370 |
| | — |
| | 9 |
| | 1,361 |
| | — |
|
| Short-term investments | 189 |
| | — |
| | 19 |
| | 170 |
| | — |
|
| Cash and cash equivalents | 2,445 |
| | — |
| | 2,445 |
| | — |
| | — |
|
| Restricted cash | 57 |
| | — |
| | 57 |
| | — |
| | — |
|
| Investments in related parties |
|
| | | | | | | | |
| AFS, fixed maturity securities | | | | | | | | | |
| CLO | 279 |
| | — |
| | — |
| | 279 |
| | — |
|
| ABS | 56 |
| | — |
| | — |
| | — |
| | 56 |
|
| Total AFS fixed maturity securities | 335 |
| | — |
| | — |
| | 279 |
| | 56 |
|
| AFS, equity securities | 20 |
| | — |
| | 20 |
| | — |
| | — |
|
| Total AFS securities – related party | 355 |
| | — |
| | 20 |
| | 279 |
| | 56 |
|
| Trading securities, CLO | 195 |
| | — |
| | — |
| | — |
| | 195 |
|
| Reinsurance recoverable | 1,692 |
| | — |
| | — |
| | — |
| | 1,692 |
|
| Total assets measured at fair value | $ | 61,553 |
| | $ | 99 |
| | $ | 2,661 |
| | $ | 54,629 |
| | $ | 4,164 |
|
| Liabilities | | | | | | | | | |
| Interest sensitive contract liabilities |
|
| | | | | | | | |
| Embedded derivative | $ | 5,283 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 5,283 |
|
| Universal life benefits | 883 |
| | — |
| | — |
| | — |
| | 883 |
|
| Unit-linked contracts | 408 |
| | — |
| | — |
| | 408 |
| | — |
|
| Future policy benefits |
|
| | | | | | | | |
| AmerUs Closed Block | 1,606 |
| | — |
| | — |
| | — |
| | 1,606 |
|
| ILICO Closed Block and life benefits | 794 |
| | — |
| | — |
| | — |
| | 794 |
|
| Derivative liabilities | 40 |
| | — |
| | — |
| | 33 |
| | 7 |
|
| Funds withheld liability – embedded derivative | 6 |
| | — |
| | — |
| | 6 |
| | — |
|
| Total liabilities measured at fair value | $ | 9,020 |
| | $ | — |
| | $ | — |
| | $ | 447 |
| | $ | 8,573 |
|
| | | | | | | | | | |
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. |
| | | | | | | | | | (Concluded) |
|
Refer to Note 4 – Variable Interest Entities for fair value disclosures associated with consolidated VIEs.
Fair Value Valuation Methods—We used the following valuation methods and assumptions to estimate fair value:
AFS and trading securities
Fixed maturity –We obtain the fair value for most marketable securities without an active market from several commercial pricing services. These are classified as Level 2 assets. The pricing services incorporate a variety of market observable information in their valuation techniques, including benchmark yields, trading activity, credit quality, issuer spreads, bids, offers and other reference data. This category typically includes U.S.US and non-U.S.non-US corporate bonds, U.S.US agency and government guaranteed securities, CLO, ABS, CMBS and RMBS.
We also have fixed maturity securities priced based on indicative broker quotes or by employing market accepted valuation models. For certain fixed maturity securities, the valuation model uses significant unobservable inputs and are included in Level 3 in our fair value hierarchy. Significant unobservable inputs used include: discount rates, issue specific credit adjustments, material non-public financial information, estimation of future earnings and cash flows, default rate assumptions, liquidity assumptions and indicative quotes from market makers. These inputs are usually considered unobservable, as not all market participants have access to this data.
We value privately placed fixed maturity securities based on the credit quality and duration of comparable marketable securities, which may be securities of another issuer with similar characteristics. In some instances, we use a matrix-based pricing model. These models consider the current level of risk-free interest rates, corporate spreads, credit quality of the issuer and cash flow characteristics of the security. We also consider additional factors such as net worth of the borrower, value of collateral, capital structure of the borrower, presence of guarantees and our evaluation of the borrower'sborrower’s ability to compete in its relevant market. Privately placed fixed maturity securities are classified as Level 2 or 3.
Equity securities–Fair values of publicly traded equity securities are based on quoted market prices and classified as Level 1. Other equity securities, typically private equities or equity securities not traded on an exchange, we value based on other sources, such as commercial pricing services or brokers, and are classified as Level 2 or 3.
Mortgage loans – Mortgage loans for which we have elected the fair value option or those held for sale are carried at fair value. We estimate fair value on a monthly basis using discounted cash flow analysis and rates being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. The discounted cash flow model uses unobservable inputs, including estimates of discount rates and loan prepayments. Mortgage loans are classified as Level 3.
ATHENE HOLDING LTD.Investment funds – Certain investment funds for which we elected the fair value option are included in Level 3 and are priced based on market accepted valuation models. The valuation models use significant unobservable inputs, which include material non-public financial information, estimation of future distributable earnings and demographic assumptions. These inputs are usually considered unobservable, as not all market participants have access to this data.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Funds withheld (embedded derivative)at interest embedded derivative – We estimate the fair value of the embedded derivative based on the change in the fair value of the assets supporting the funds withheld payable under the combined coinsurance, modco and coinsurance funds withheld reinsurance agreements. As a result, the fair value of the embedded derivative is classified as Level 2 or 3 based on the valuation methods used for the assets held in trust supporting the reinsurance agreements.
Derivatives –Derivative contracts can be exchange traded or over-the-counter. Exchange-traded derivatives typically fall within Level 1 of the fair value hierarchy depending on trading activity. Over-the-counter derivatives are valued using valuation models or an income approach using third-party broker valuations. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlation of the inputs. We consider and incorporate counterparty credit risk in the valuation process through counterparty credit rating requirements and monitoring of overall exposure. We also evaluate and include our own nonperformance risk in valuing derivatives. The majority of our derivatives trade in liquid markets; therefore, we can verify model inputs and model selection does not involve significant management judgment. These are typically classified within Level 2 of the fair value hierarchy.
Cash and cash equivalents, including restricted cash – The carrying amount for cash equals fair value. We estimate the fair value for cash equivalents based on quoted market prices. These assets are classified as Level 1.
Interest sensitive contract liabilities (embedded derivative)embedded derivative– Embedded derivatives related to interest sensitive contract liabilities with fixed indexed annuity products are classified as Level 3. The valuations include significant unobservable inputs associated with economic assumptions and actuarial assumptions for policyholder behavior.
Unit-linked contracts– Unit-linked contracts are valued based on the fair value of the investments supporting the contract. The underlying investments are trading securities comprised primarily of mutual funds. The valuations of these are based on quoted market prices for similar assets and are classified as Level 2, resulting in a corresponding classification for the unit-linked contracts.
AmerUs Closed Block– We elected the fair value option for the future policy benefits liability in the AmerUs Closed Block. Our valuation technique is to set the fair value of policyholder liabilities equal to the fair value of assets. There is an additional component which captures the fair value of the open block's costblock’s obligations to hold capital in excess of existing liabilities on the closed block.block business. This component uses ais the present value of the projected release of required capital and future cash flows,earnings before income taxes on required capital supporting the AmerUs Closed Block, discounted at a rate which includes investment earnings and policyholder liability movements.represents a market participant’s required rate of return, less the initial required capital. Unobservable inputs include estimates for these items. The target surplus as a percentage of statutory reserves is 3.85% based on the statutory risk-based capital ratio applicable to this block of business. The AmerUs Closed Block policyholder liabilities and any corresponding reinsurance recoverable are classified as Level 3.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
ILICO Closed Block – We elected the fair value option for the ILICO Closed Block. Our valuation technique is to set the fair value of policyholder liabilities equal to the fair value of assets. There is an additional component which captures the fair value of the open block'sblock’s obligations to the closed block business. This component uses the present value of future cash flows. The cash flows which include commissions, administrative expenses, reinsurance premiums and benefits, and an explicit cost of capital. The discount rate includes a margin to reflect the business and nonperformance risk. Unobservable inputs include estimates for these items. The explicit cost of capital assumption is 9% of required capital, post tax. A margin of 8.94% is included in the discount rates to reflect the business risk. An additional 0.25% is included to reflect non-performance risk. The ILICO Closed Block policyholder liabilities and corresponding reinsurance recoverable are classified as Level 3.
Universal life liabilities and other life benefits– We elected the fair value option for certain blocks of universal and other life business ceded to Global Atlantic Financial Group Limited (together with its subsidiaries, Global Atlantic).Atlantic. We use a present value of liability cash flows. Unobservable inputs include estimates of mortality, persistency, expenses, premium payments and a risk margin used in the discount rates that reflects the riskiness of the business. The risk margin was 0.09%. These universal life policyholder liabilities and corresponding reinsurance recoverable are classified as Level 3.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Fair Value Option—The following represents the gains (losses) recorded for instruments for which we have elected the fair value option:option, including related parties:
| | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| (In millions) | | | | | 2021 | | 2020 |
| Trading securities | | | | | $ | (69) | | | $ | (223) | |
| | | | | | | |
| Investment funds | | | | | (60) | | | (300) | |
| Future policy benefits | | | | | 103 | | | 65 | |
| Total gains (losses) | | | | | $ | (26) | | | $ | (458) | |
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 |
| Trading securities | $ | (1 | ) | | $ | 28 |
| | $ | 45 |
| | $ | 93 |
|
| Mortgage loans | (1 | ) | | (1 | ) | | (1 | ) | | (1 | ) |
| Investment funds | 5 |
| | 4 |
| | 19 |
| | 4 |
|
| Future policy benefits | 5 |
| | (28 | ) | | (10 | ) | | (129 | ) |
| Total gains (losses) | $ | 8 |
| | $ | 3 |
| | $ | 53 |
| | $ | (33 | ) |
Gains and losses on trading securities are recorded in investment related gains (losses) on the condensed consolidated statements of income.income (loss). For fair value option mortgage loans, we record interest income in net investment income and subsequent changes in fair value in investment related gains (losses) on the condensed consolidated statements of income.income (loss). Gains and losses related to investment funds, including related party investment funds, are recorded in net investment income on the condensed consolidated statements of income.income (loss). We record the change in fair value of future policy benefits to future policy and other policy benefits on the condensed consolidated statements of income.income (loss).
The following summarizes information for fair value option mortgage loans:
| | | | | | | | | | | |
| (In millions) | March 31, 2021 | | December 31, 2020 |
| Unpaid principal balance | $ | 16 | | | $ | 17 | |
| Mark to fair value | 2 | | | 2 | |
| Fair value | $ | 18 | | | $ | 19 | |
|
| | | | | | | |
| (In millions) | September 30, 2017 | | December 31, 2016 |
| Unpaid principal balance | $ | 40 |
| | $ | 42 |
|
| Mark to fair value | 2 |
| | 2 |
|
| Fair value | $ | 42 |
| | $ | 44 |
|
There were no0 fair value option mortgage loans 90 days or more past due as of September 30, 2017March 31, 2021 and December 31, 2016.2020.
Transfers Between Levels—Transfers into Level 3 generally represent securities that were valued using pricing sources which, due to changing market conditions, were less observable than in prior periods as indicated by the increased volatility, which was reflected in vendor prices obtained for individual securities. Additionally, changes in pricing sources also led to securities transferring into Level 3.
Transfers out of Level 3 generally represent securities that were valued using pricing sources which, due to changing market conditions, were more observable than in prior periods as indicated by decreased volatility, which was reflected in vendor prices obtained for individual securities. Additionally, changes in pricing sources also led to securities transferring into Level 2.
Transfers into or out of any level are assumed to occur at the end of the period. For the three and nine months ended September 30, 2017 and 2016, there were no transfers between Level 1 and Level 2.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Level 3 Financial Instruments—The following is a reconciliationare reconciliations for all Level 3 assets and liabilities measured at fair value on a recurring basis:basis. All transfers in and out of Level 3 are based on changes in the availability of pricing sources, as described in the valuation methods above.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2021 |
| | | Total realized and unrealized gains (losses) | | | | | | | | | | |
| (In millions) | Beginning balance | | Included in income | | Included in OCI | | Net purchases, issuances, sales and settlements | | Net transfers in (out) | | Ending balance | | Total gains (losses) included in earnings1 | | Total gains (losses) included in OCI1 |
| Assets | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | |
| US state, municipal and political subdivisions | $ | 34 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (34) | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Foreign governments | 2 | | | 0 | | | 0 | | | 0 | | | 0 | | | 2 | | | 0 | | | 0 | |
| Corporate | 778 | | | 4 | | | 21 | | | 22 | | | (43) | | | 782 | | | 0 | | | 21 | |
| CLO | 208 | | | 0 | | | 0 | | | (34) | | | 0 | | | 174 | | | 0 | | | 0 | |
| ABS | 800 | | | 3 | | | 27 | | | 468 | | | (91) | | | 1,207 | | | 0 | | | 35 | |
| CMBS | 43 | | | 0 | | | 5 | | | 0 | | | 0 | | | 48 | | | 0 | | | 4 | |
| | | | | | | | | | | | | | | |
| Trading securities | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| CLO | 4 | | | 0 | | | 0 | | | (4) | | | 0 | | | 0 | | | 0 | | | 0 | |
| ABS | 35 | | | 0 | | | 0 | | | 0 | | | 0 | | | 35 | | | 0 | | | 0 | |
| RMBS | 47 | | | (5) | | | 0 | | | 0 | | | 17 | | | 59 | | | (2) | | | 0 | |
| Equity securities | 11 | | | 3 | | | 0 | | | 0 | | | 0 | | | 14 | | | 4 | | | 0 | |
| Mortgage loans | 19 | | | 0 | | | 0 | | | (1) | | | 0 | | | 18 | | | 0 | | | 0 | |
| Investment funds | 17 | | | 3 | | | 0 | | | 42 | | | 109 | | | 171 | | | 3 | | | 0 | |
| Funds withheld at interest – embedded derivative | 1,944 | | | (1,308) | | | 0 | | | 0 | | | 0 | | | 636 | | | 0 | | | 0 | |
| Short-term investments | 2 | | | 0 | | | 0 | | | 0 | | | (2) | | | 0 | | | 0 | | | 0 | |
| Investments in related parties | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | |
| Corporate | 195 | | | 0 | | | 6 | | | 0 | | | 0 | | | 201 | | | 0 | | | 6 | |
| | | | | | | | | | | | | | | |
| ABS | 4,109 | | | (5) | | | (27) | | | 115 | | | (61) | | | 4,131 | | | 0 | | | (27) | |
| Trading securities | | | | | | | | | | | | | | | |
| CLO | 50 | | | 16 | | | 0 | | | (3) | | | (19) | | | 44 | | | 25 | | | 0 | |
| ABS | 1,475 | | | 35 | | | 0 | | | 131 | | | 0 | | | 1,641 | | | 37 | | | 0 | |
| Equity securities | 72 | | | 8 | | | 0 | | | 34 | | | 0 | | | 114 | | | 8 | | | 0 | |
| Investment funds | 2,033 | | | (63) | | | 0 | | | 0 | | | 0 | | | 1,970 | | | (63) | | | 0 | |
| Funds withheld at interest – embedded derivative | 862 | | | (282) | | | 0 | | | 0 | | | 0 | | | 580 | | | 0 | | | 0 | |
| | | | | | | | | | | | | | | |
| Reinsurance recoverable | 2,100 | | | (220) | | | 0 | | | 0 | | | 0 | | | 1,880 | | | 0 | | | 0 | |
| Total Level 3 assets | $ | 14,840 | | | $ | (1,811) | | | $ | 32 | | | $ | 770 | | | $ | (124) | | | $ | 13,707 | | | $ | 12 | | | $ | 39 | |
| | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | |
| Embedded derivative | $ | (12,873) | | | $ | 335 | | | $ | 0 | | | $ | 65 | | | $ | 0 | | | $ | (12,473) | | | $ | 0 | | | $ | 0 | |
| Universal life benefits | (1,308) | | | 200 | | | 0 | | | 0 | | | 0 | | | (1,108) | | | 0 | | | 0 | |
| Future policy benefits | | | | | | | | | | | | | | | |
| AmerUs Closed Block | (1,600) | | | 103 | | | 0 | | | 0 | | | 0 | | | (1,497) | | | 0 | | | 0 | |
| ILICO Closed Block and life benefits | (776) | | | 19 | | | 0 | | | 0 | | | 0 | | | (757) | | | 0 | | | 0 | |
| Derivative liabilities | (4) | | | (1) | | | 0 | | | 0 | | | 0 | | | (5) | | | (1) | | | 0 | |
| Total Level 3 liabilities | $ | (16,561) | | | $ | 656 | | | $ | 0 | | | $ | 65 | | | $ | 0 | | | $ | (15,840) | | | $ | (1) | | | $ | 0 | |
| | | | | | | | | | | | | | | |
1 Related to instruments held at end of period. | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2017 |
| | | | Total realized and unrealized gains (losses) | | | | Transfers | | | | |
| (In millions) | Beginning Balance | | Included in income | | Included in OCI | | Purchases, issuances, sales and settlements, net | | In | | (Out) | | Ending Balance | | Total gains (losses) included in earnings1 |
| Assets | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | |
| Foreign governments | $ | 14 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (14 | ) | | $ | — |
| | $ | — |
|
| Corporate | 452 |
| | 5 |
| | — |
| | (13 | ) | | 37 |
| | (12 | ) | | 469 |
| | — |
|
| CLO | 81 |
| | — |
| | 1 |
| | 47 |
| | 86 |
| | (19 | ) | | 196 |
| | — |
|
| ABS | 1,093 |
| | 3 |
| | 1 |
| | 240 |
| | 83 |
| | (41 | ) | | 1,379 |
| | — |
|
| CMBS | 122 |
| | 1 |
| | (1 | ) | | (18 | ) | | 26 |
| | (43 | ) | | 87 |
| | — |
|
| RMBS | 312 |
| | 1 |
| | 13 |
| | (11 | ) | | 14 |
| | (7 | ) | | 322 |
| | — |
|
| Equity securities | 6 |
| | (1) |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | — |
|
| Trading securities | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
|
| CLO | 22 |
| | (4 | ) | | — |
| | — |
| | 11 |
| | (8 | ) | | 21 |
| | (3 | ) |
| RMBS | 100 |
| | (2 | ) | | — |
| | 4 |
| | 15 |
| | (16 | ) | | 101 |
| | 3 |
|
| Mortgage loans | 43 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | 42 |
| | (1 | ) |
| Funds withheld at interest – embedded derivative | 279 |
| | 24 |
| | — |
| | — |
| | — |
| | — |
| | 303 |
| | — |
|
| Investments in related parties | | | | | | | | | | | | | | | |
| AFS securities, fixed maturity, CLO | — |
| | — |
| | — |
| | 10 |
| | — |
| | — |
| | 10 |
| | — |
|
| Trading securities, CLO | 123 |
| | 3 |
| | — |
| | (24 | ) | | 19 |
| | (30 | ) | | 91 |
| | 2 |
|
| Short-term investments | 28 |
| | — |
| | — |
| | (20 | ) | | — |
| | — |
| | 8 |
| | — |
|
| Reinsurance recoverable | 1,782 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1,783 |
| | — |
|
| Total Level 3 assets | $ | 4,474 |
| | $ | 30 |
| | $ | 14 |
| | $ | 215 |
| | $ | 291 |
| | $ | (190 | ) | | $ | 4,834 |
| | $ | 1 |
|
| | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | |
| Embedded derivative | $ | (6,207 | ) | | $ | (344 | ) | | $ | — |
| | $ | (101 | ) | | $ | — |
| | $ | — |
| | $ | (6,652 | ) | | $ | — |
|
| Universal life benefits | (954 | ) | | (3 | ) | | — |
| | — |
| | — |
| | — |
| | (957 | ) | | — |
|
| Future policy benefits | | | | | | | | | | | | | | | |
| AmerUs Closed Block | (1,621 | ) | | 5 |
| | — |
| | — |
| | — |
| | — |
| | (1,616 | ) | | — |
|
| ILICO Closed Block and life benefits | (812 | ) | | 1 |
| | — |
| | — |
| | — |
| | — |
| | (811 | ) | | — |
|
| Derivative liabilities | (6 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | — |
|
| Total Level 3 liabilities | $ | (9,600 | ) | | $ | (341 | ) | | $ | — |
| | $ | (101 | ) | | $ | — |
| | $ | — |
| | $ | (10,042 | ) | | $ | — |
|
| | | | | | | | | | | | | | | | |
1 Related to instruments held at end of period. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2020 | | |
| | | Total realized and unrealized gains (losses) | | | | | | | | | | |
| (In millions) | Beginning balance | | Included in income | | Included in OCI | | Net purchases, issuances, sales and settlements | | Net transfers in (out) | | Ending balance | | Total gains (losses) included in earnings1 | | Total gains (losses) included in OCI1 |
| Assets | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | |
| US state, municipal and political subdivisions | $ | 40 | | | $ | 0 | | | $ | (3) | | | $ | 0 | | | $ | 0 | | | $ | 37 | | | $ | 0 | | | $ | (3) | |
| | | | | | | | | | | | | | | |
| Corporate | 725 | | | (5) | | | (33) | | | 33 | | | 513 | | | 1,233 | | | 0 | | | (31) | |
| CLO | 121 | | | 0 | | | (9) | | | 30 | | | (20) | | | 122 | | | 0 | | | (9) | |
| ABS | 1,374 | | | 22 | | | (119) | | | (183) | | | (177) | | | 917 | | | 0 | | | (103) | |
| CMBS | 46 | | | 0 | | | (5) | | | 4 | | | 0 | | | 45 | | | 0 | | | (5) | |
| RMBS | 0 | | | 0 | | | 0 | | | 0 | | | 42 | | | 42 | | | 0 | | | 0 | |
| Trading securities | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Corporate | 0 | | | 0 | | | 0 | | | 0 | | | 32 | | | 32 | | | 0 | | | 0 | |
| CLO | 6 | | | (3) | | | 0 | | | 0 | | | 0 | | | 3 | | | (3) | | | 0 | |
| ABS | 16 | | | 0 | | | 0 | | | (2) | | | 0 | | | 14 | | | 0 | | | 0 | |
| RMBS | 52 | | | (1) | | | 0 | | | 0 | | | 19 | | | 70 | | | 1 | | | 0 | |
| Equity securities | 3 | | | 4 | | | 0 | | | 0 | | | 0 | | | 7 | | | 4 | | | 0 | |
| Mortgage loans | 27 | | | 0 | | | 0 | | | (1) | | | 0 | | | 26 | | | 0 | | | 0 | |
| Investment funds | 22 | | | (1) | | | 0 | | | 0 | | | 0 | | | 21 | | | (1) | | | 0 | |
| Funds withheld at interest – embedded derivative | 801 | | | (1,175) | | | 0 | | | 0 | | | 0 | | | (374) | | | 0 | | | 0 | |
| Short-term investments | 41 | | | 0 | | | (1) | | | 27 | | | 0 | | | 67 | | | 0 | | | 0 | |
| Investments in related parties | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| AFS securities, ABS | 2,324 | | | (3) | | | (220) | | | (50) | | | (164) | | | 1,887 | | | 0 | | | (205) | |
| Trading securities | | | | | | | | | | | | | | | |
| CLO | 38 | | | (16) | | | 0 | | | 1 | | | 9 | | | 32 | | | (24) | | | 0 | |
| ABS | 711 | | | (101) | | | 0 | | | 66 | | | 0 | | | 676 | | | (101) | | | 0 | |
| Equity securities | 64 | | | (10) | | | 0 | | | 1 | | | (6) | | | 49 | | | (10) | | | 0 | |
| Investment funds | 132 | | | (300) | | | 0 | | | 1,147 | | | 0 | | | 979 | | | (300) | | | 0 | |
| Funds withheld at interest – embedded derivative | 594 | | | (609) | | | 0 | | | 0 | | | 0 | | | (15) | | | 0 | | | 0 | |
| | | | | | | | | | | | | | | |
| Reinsurance recoverable | 1,821 | | | 294 | | | 0 | | | 0 | | | 0 | | | 2,115 | | | 0 | | | 0 | |
| Total Level 3 assets | $ | 8,958 | | | $ | (1,904) | | | $ | (390) | | | $ | 1,073 | | | $ | 248 | | | $ | 7,985 | | | $ | (434) | | | $ | (356) | |
| | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | |
| Embedded derivative | $ | (10,942) | | | $ | 1,177 | | | $ | 0 | | | $ | 676 | | | $ | 0 | | | $ | (9,089) | | | $ | 0 | | | $ | 0 | |
| Universal life benefits | (1,050) | | | (272) | | | 0 | | | 0 | | | 0 | | | (1,322) | | | 0 | | | 0 | |
| Future policy benefits | | | | | | | | | | | | | | | |
| AmerUs Closed Block | (1,546) | | | 65 | | | 0 | | | 0 | | | 0 | | | (1,481) | | | 0 | | | 0 | |
| ILICO Closed Block and life benefits | (755) | | | (23) | | | 0 | | | 0 | | | 0 | | | (778) | | | 0 | | | 0 | |
| Derivative liabilities | (3) | | | (4) | | | 0 | | | 0 | | | 0 | | | (7) | | | 0 | | | 0 | |
| Total Level 3 liabilities | $ | (14,296) | | | $ | 943 | | | $ | 0 | | | $ | 676 | | | $ | 0 | | | $ | (12,677) | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | | |
1 Related to instruments held at end of period. | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2016 |
| | | | Total realized and unrealized gains (losses) | | | | Transfers | | | | |
| (In millions) | Beginning balance | | Included in income | | Included in OCI | | Purchases, issuances, sales and settlements, net | | In | | Out | | Ending balance | | Total gains (losses) included in earnings1 |
| Assets | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | 5 |
| | $ | — |
|
| Foreign governments | 16 |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | 15 |
| | — |
|
| Corporate | 402 |
| | 1 |
| | 1 |
| | 24 |
| | 3 |
| | (89 | ) | | 342 |
| | — |
|
| CLO | 285 |
| | 1 |
| | 15 |
| | 4 |
| | 11 |
| | (193 | ) | | 123 |
| | — |
|
| ABS | 1,238 |
| | 3 |
| | 11 |
| | 30 |
| | — |
| | (188 | ) | | 1,094 |
| | — |
|
| CMBS | 80 |
| | — |
| | 3 |
| | 4 |
| | — |
| | — |
| | 87 |
| | — |
|
| RMBS | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Equity securities | 10 |
| | — |
| | (1) |
| | (4 | ) | | — |
| | — |
| | 5 |
| | — |
|
| Trading securities | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
|
| Corporate | 1 |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
|
| CLO | 104 |
| | (1 | ) | | — |
| | (44 | ) | | — |
| | — |
| | 59 |
| | 4 |
|
| ABS | 89 |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
| | 87 |
| | — |
|
| RMBS | 122 |
| | (4 | ) | | — |
| | 16 |
| | — |
| | (6 | ) | | 128 |
| | (1 | ) |
| Mortgage loans | 45 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 45 |
| | — |
|
| Funds withheld at interest – embedded derivative | 122 |
| | 83 |
| | — |
| | — |
| | — |
| | — |
| | 205 |
| | — |
|
| Investments in related parties | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | |
| CLO | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| ABS | 58 |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | 57 |
| | — |
|
| Trading securities, CLO | 211 |
| | — |
| | — |
| | — |
| | — |
| | (22 | ) | | 189 |
| | 7 |
|
| Reinsurance recoverable | 1,898 |
| | (20 | ) | | — |
| | — |
| | — |
| | — |
| | 1,878 |
| | — |
|
| Total Level 3 assets | $ | 4,698 |
| | $ | 61 |
| | $ | 29 |
| | $ | 28 |
| | $ | 19 |
| | $ | (499 | ) | | $ | 4,336 |
| | $ | 10 |
|
| | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | |
| Embedded derivative | $ | (4,807 | ) | | $ | (243 | ) | | $ | — |
| | $ | (209 | ) | | $ | — |
| | $ | — |
| | $ | (5,259 | ) | | $ | — |
|
| Universal life benefits | (1,059 | ) | | 9 |
| | — |
| | — |
| | — |
| | — |
| | (1,050 | ) | | — |
|
| Future policy benefits | | | | | | | | | | | | | | | |
| AmerUs Closed Block | (1,682 | ) | | (28 | ) | | — |
| | — |
| | — |
| | — |
| | (1,710 | ) | | — |
|
| ILICO Closed Block and life benefits | (823 | ) | | 11 |
| | — |
| | — |
| | — |
| | — |
| | (812 | ) | | — |
|
| Derivative liabilities | (8 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (8 | ) | | — |
|
| Total Level 3 liabilities | $ | (8,379 | ) | | $ | (251 | ) | | $ | — |
| | $ | (209 | ) | | $ | — |
| | $ | — |
| | $ | (8,839 | ) | | $ | — |
|
| | | | | | | | | | | | | | | | |
1 Related to instruments held at end of period. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2017 |
| | | | Total realized and unrealized gains (losses) | | | | Transfers | | | | |
| (In millions) | Beginning Balance | | Included in income | | Included in OCI | | Purchases, issuances, sales and settlements, net | | In | | (Out) | | Ending Balance | | Total gains (losses) included in earnings1 |
| Assets | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | $ | 5 |
| | $ | 17 |
| | $ | (1 | ) | | $ | (21 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Foreign governments | 14 |
| | — |
| | — |
| | — |
| | — |
| | (14 | ) | | — |
| | — |
|
| Corporate | 370 |
| | 10 |
| | 10 |
| | 107 |
| | 23 |
| | (51 | ) | | 469 |
| | — |
|
| CLO | 158 |
| | 1 |
| | 9 |
| | 40 |
| | 53 |
| | (65 | ) | | 196 |
| | — |
|
| ABS | 1,160 |
| | 11 |
| | 18 |
| | 237 |
| | 6 |
| | (53 | ) | | 1,379 |
| | — |
|
| CMBS | 152 |
| | 1 |
| | (4 | ) | | 28 |
| | — |
| | (90 | ) | | 87 |
| | — |
|
| RMBS | 17 |
| | 1 |
| | 1 |
| | 12 |
| | 300 |
| | (9 | ) | | 322 |
| | — |
|
| Equity securities | 5 |
| | (1) |
| | 1 |
| | — |
| | — |
| | — |
| | 5 |
| | — |
|
| Trading securities | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
|
| CLO | 43 |
| | (2 | ) | | — |
| | (12 | ) | | — |
| | (8 | ) | | 21 |
| | 1 |
|
| RMBS | 96 |
| | (11 | ) | | — |
| | 26 |
| | 7 |
| | (17 | ) | | 101 |
| | 2 |
|
| Mortgage loans | 44 |
| | (1 | ) | | — |
| | (1 | ) | | — |
| | — |
| | 42 |
| | (1 | ) |
| Funds withheld at interest – embedded derivative | 140 |
| | 163 |
| | — |
| | — |
| | — |
| | — |
| | 303 |
| | — |
|
| Investments in related parties | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | |
| CLO | — |
| | — |
| | — |
| | 10 |
| | — |
| | — |
| | 10 |
| | — |
|
| ABS | 56 |
| | — |
| | 2 |
| | (5 | ) | | — |
| | (53 | ) | | — |
| | — |
|
| Trading securities, CLO | 195 |
| | (3 | ) | | — |
| | (52 | ) | | — |
| | (49 | ) | | 91 |
| | (1 | ) |
| Short-term investments | — |
| | — |
| | — |
| | 8 |
| | — |
| | — |
| | 8 |
| | — |
|
| Reinsurance recoverable | 1,692 |
| | 91 |
| | — |
| | — |
| | — |
| | — |
| | 1,783 |
| | — |
|
| Total Level 3 assets | $ | 4,164 |
| | $ | 277 |
| | $ | 36 |
| | $ | 377 |
| | $ | 389 |
| | $ | (409 | ) | | $ | 4,834 |
| | $ | 1 |
|
| | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | |
| Embedded derivative | $ | (5,283 | ) | | $ | (1,077 | ) | | $ | — |
| | $ | (292 | ) | | $ | — |
| | $ | — |
| | $ | (6,652 | ) | | $ | — |
|
| Universal life benefits | (883 | ) | | (74 | ) | | — |
| | — |
| | — |
| | — |
| | (957 | ) | | — |
|
| Future policy benefits | | | | | | | | | | | | | | | |
| AmerUs Closed Block | (1,606 | ) | | (10 | ) | | — |
| | — |
| | — |
| | — |
| | (1,616 | ) | | — |
|
| ILICO Closed Block and life benefits | (794 | ) | | (17 | ) | | — |
| | — |
| | — |
| | — |
| | (811 | ) | | — |
|
| Derivative liabilities | (7 | ) | | 1 |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | 1 |
|
| Total Level 3 liabilities | $ | (8,573 | ) | | $ | (1,177 | ) | | $ | — |
| | $ | (292 | ) | | $ | — |
| | $ | — |
| | $ | (10,042 | ) | | $ | 1 |
|
| | | | | | | | | | | | | | | | |
1 Related to instruments held at end of period. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2016 |
| | | | Total realized and unrealized gains (losses) | | | | Transfers | | | | |
| (In millions) | Beginning balance | | Included in income | | Included in OCI | | Purchases, issuances, sales and settlements, net | | In | | Out | | Ending balance | | Total gains (losses) included in earnings1 |
| Assets | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | 5 |
| | $ | — |
|
| Foreign governments | 17 |
| | 1 |
| | (1 | ) | | (2 | ) | | — |
| | — |
| | 15 |
| | — |
|
| Corporate | 636 |
| | 4 |
| | 27 |
| | (71 | ) | | 4 |
| | (258 | ) | | 342 |
| | — |
|
| CLO | 517 |
| | 3 |
| | 38 |
| | 7 |
| | 10 |
| | (452 | ) | | 123 |
| | — |
|
| ABS | 1,813 |
| | 78 |
| | (7 | ) | | (755 | ) | | 103 |
| | (138 | ) | | 1,094 |
| | — |
|
| CMBS | 67 |
| | 1 |
| | 3 |
| | 10 |
| | 53 |
| | (47 | ) | | 87 |
| | — |
|
| RMBS | 758 |
| | 3 |
| | 16 |
| | (249 | ) | | — |
| | (528 | ) | | — |
| | — |
|
| Equity securities | 9 |
| | — |
| | — |
| | (4 | ) | | — |
| | — |
| | 5 |
| | — |
|
| Trading securities | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
|
| Corporate | 16 |
| | — |
| | — |
| | (4 | ) | | — |
| | (12 | ) | | — |
| | 5 |
|
| CLO | 108 |
| | (4 | ) | | — |
| | (45 | ) | | — |
| | — |
| | 59 |
| | 8 |
|
| ABS | 98 |
| | (11 | ) | | — |
| | — |
| | — |
| | — |
| | 87 |
| | — |
|
| RMBS | 29 |
| | (7 | ) | | — |
| | 111 |
| | — |
| | (5 | ) | | 128 |
| | 1 |
|
| Mortgage loans | 48 |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
| | 45 |
| | — |
|
| Funds withheld at interest – embedded derivative | 36 |
| | 169 |
| | — |
| | — |
| | — |
| | — |
| | 205 |
| | — |
|
| Investments in related parties | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | |
| CLO | 7 |
| | — |
| | — |
| | — |
| | — |
| | (7 | ) | | — |
| | — |
|
| ABS | 60 |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
| | 57 |
| | — |
|
| Trading securities, CLO | 191 |
| | (23 | ) | | — |
| | 17 |
| | 26 |
| | (22 | ) | | 189 |
| | 21 |
|
| Reinsurance recoverable | 2,377 |
| | (499 | ) | | — |
| | — |
| | — |
| | — |
| | 1,878 |
| | — |
|
| Total Level 3 assets | $ | 6,804 |
| | $ | (285 | ) | | $ | 76 |
| | $ | (991 | ) | | $ | 201 |
| | $ | (1,469 | ) | | $ | 4,336 |
| | $ | 35 |
|
| | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | |
| Embedded derivative | $ | (4,464 | ) | | $ | (390 | ) | | $ | — |
| | $ | (405 | ) | | $ | — |
| | $ | — |
| | $ | (5,259 | ) | | $ | — |
|
| Universal life benefits | (1,464 | ) | | 414 |
| | — |
| | — |
| | — |
| | — |
| | (1,050 | ) | | — |
|
| Future policy benefits | | | | | | | | | | | | | | | |
| AmerUs Closed Block | (1,581 | ) | | (129 | ) | | — |
| | — |
| | — |
| | — |
| | (1,710 | ) | | — |
|
| ILICO Closed Block and life benefits | (897 | ) | | 85 |
| | — |
| | — |
| | — |
| | — |
| | (812 | ) | | — |
|
| Derivative liabilities | (7 | ) | | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (8 | ) | | — |
|
| Total Level 3 liabilities | $ | (8,413 | ) | | $ | (21 | ) | | $ | — |
| | $ | (405 | ) | | $ | — |
| | $ | — |
| | $ | (8,839 | ) | | $ | — |
|
| | | | | | | | | | | | | | | | |
1 Related to instruments held at end of period. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following represents the gross components of purchases, issuances, sales and settlements, net, and net transfers in (out) shown above:
| | | | Three months ended September 30, 2017 | | Three months ended March 31, 2021 |
| (In millions) | Purchases | | Issuances | | Sales | | Settlements | | Purchases, issuances, sales and settlements, net | (In millions) | Purchases | | Issuances | | Sales | | Settlements | | Net purchases, issuances, sales and settlements | | Transfers in | | Transfers out | | Net transfers in (out) |
| Assets | | | | | | | | | | Assets | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | AFS securities | |
| Fixed maturity | | | | | | | | | | |
| US state, municipal and political subdivisions | | US state, municipal and political subdivisions | $ | 0 | | | $ | — | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (34) | | | $ | (34) | |
| | Corporate | $ | 27 |
| | $ | — |
| | $ | (36 | ) | | $ | (4 | ) | | $ | (13 | ) | Corporate | 39 | | | — | | | (9) | | | (8) | | | 22 | | | 76 | | | (119) | | | (43) | |
| CLO | 72 |
| | — |
| | — |
| | (25 | ) | | 47 |
| CLO | 0 | | | — | | | 0 | | | (34) | | | (34) | | | 0 | | | 0 | | | 0 | |
| ABS | 275 |
| | — |
| | — |
| | (35 | ) | | 240 |
| ABS | 513 | | | — | | | 0 | | | (45) | | | 468 | | | 47 | | | (138) | | | (91) | |
| CMBS | — |
| | — |
| | (18 | ) | | — |
| | (18 | ) | |
| | Trading securities | | Trading securities | |
| | CLO | | CLO | 0 | | | — | | | (4) | | | 0 | | | (4) | | | 0 | | | 0 | | | 0 | |
| | RMBS | — |
| | — |
| | — |
| | (11 | ) | | (11 | ) | RMBS | 0 | | | — | | | 0 | | | 0 | | | 0 | | | 20 | | | (3) | | | 17 | |
| Trading securities, fixed maturity, RMBS | 4 |
| | — |
| | — |
| | — |
| | 4 |
| |
| | Mortgage loans | | Mortgage loans | — | | | — | | | — | | | (1) | | | (1) | | | 0 | | | 0 | | | 0 | |
| Investment funds | | Investment funds | 42 | | | — | | | 0 | | | 0 | | | 42 | | | 109 | | | 0 | | | 109 | |
| Short-term investments | | Short-term investments | 0 | | | — | | | 0 | | | 0 | | | 0 | | | 0 | | | (2) | | | (2) | |
| Investments in related parties | | | | | | | | | | Investments in related parties | |
| AFS securities, fixed maturity, CLO | 10 |
| | — |
| | — |
| | — |
| | 10 |
| |
| Trading securities, CLO | — |
| | — |
| | (24 | ) | | — |
| | (24 | ) | |
| Short-term investments | 8 |
| | — |
| | — |
| | (28 | ) | | (20 | ) | |
| | AFS securities, ABS | | AFS securities, ABS | 873 | | | — | | | (751) | | | (7) | | | 115 | | | 0 | | | (61) | | | (61) | |
| Trading securities | | Trading securities | |
| CLO | | CLO | 3 | | | — | | | 0 | | | (6) | | | (3) | | | 6 | | | (25) | | | (19) | |
| ABS | | ABS | 131 | | | — | | | 0 | | | 0 | | | 131 | | | 0 | | | 0 | | | 0 | |
| Equity securities | | Equity securities | 35 | | | — | | | 0 | | | (1) | | | 34 | | | 0 | | | 0 | | | 0 | |
| | Total Level 3 assets | $ | 396 |
| | $ | — |
| | $ | (78 | ) | | $ | (103 | ) | | $ | 215 |
| Total Level 3 assets | $ | 1,636 | | | $ | 0 | | | $ | (764) | | | $ | (102) | | | $ | 770 | | | $ | 258 | | | $ | (382) | | | $ | (124) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | Liabilities | |
| Interest sensitive contract liabilities | | | | | | | | | | |
| Embedded derivative | $ | — |
| | $ | (142 | ) | | $ | — |
| | $ | 41 |
| | $ | (101 | ) | |
| Interest sensitive contract liabilities – embedded derivative | | Interest sensitive contract liabilities – embedded derivative | $ | 0 | | | $ | (175) | | | $ | 0 | | | $ | 240 | | | $ | 65 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| | Total Level 3 liabilities | $ | — |
| | $ | (142 | ) | | $ | — |
| | $ | 41 |
| | $ | (101 | ) | Total Level 3 liabilities | $ | 0 | | | $ | (175) | | | $ | 0 | | | $ | 240 | | | $ | 65 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2016 |
| (In millions) | Purchases | | Issuances | | Sales | | Settlements | | Purchases, issuances, sales and settlements, net |
| Assets | | | | | | | | | |
| AFS securities | | | | | | | | | |
| Fixed maturity | | | | | | | | | |
| Foreign governments | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | (1 | ) |
| Corporate | 25 |
| | — |
| | — |
| | (1 | ) | | 24 |
|
| CLO | 12 |
| | — |
| | — |
| | (8 | ) | | 4 |
|
| ABS | 60 |
| | — |
| | — |
| | (30 | ) | | 30 |
|
| CMBS | 4 |
| | — |
| | — |
| | — |
| | 4 |
|
| Equity securities | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| Trading securities | | | | | | | | | |
| Fixed maturity | | | | | | | | | |
| CLO | — |
| | — |
| | (44 | ) | | — |
| | (44 | ) |
| RMBS | 16 |
| | — |
| | — |
| | — |
| | 16 |
|
| Investments in related parties | | | | | | | | | |
| AFS securities, fixed maturity, ABS | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Total Level 3 assets | $ | 117 |
| | $ | — |
| | $ | (48 | ) | | $ | (41 | ) | | $ | 28 |
|
| | | | | | | | | | |
| Liabilities | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | |
| Embedded derivative | $ | — |
| | $ | (244 | ) | | $ | — |
| | $ | 35 |
| | $ | (209 | ) |
| Total Level 3 liabilities | $ | — |
| | $ | (244 | ) | | $ | — |
| | $ | 35 |
| | $ | (209 | ) |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2020 |
| (In millions) | Purchases | | Issuances | | Sales | | Settlements | | Net purchases, issuances, sales and settlements | | Transfers in | | Transfers out | | Net transfers in (out) |
| Assets | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Corporate | $ | 74 | | | $ | — | | | $ | (10) | | | $ | (31) | | | $ | 33 | | | $ | 548 | | | $ | (35) | | | $ | 513 | |
| CLO | 33 | | | — | | | 0 | | | (3) | | | 30 | | | 3 | | | (23) | | | (20) | |
| ABS | 73 | | | — | | | (14) | | | (242) | | | (183) | | | 13 | | | (190) | | | (177) | |
| CMBS | 4 | | | — | | | 0 | | | 0 | | | 4 | | | 0 | | | 0 | | | 0 | |
| RMBS | 0 | | | — | | | 0 | | | 0 | | | 0 | | | 42 | | | 0 | | | 42 | |
| Trading securities | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Corporate | 0 | | | — | | | 0 | | | 0 | | | 0 | | | 32 | | | 0 | | | 32 | |
| | | | | | | | | | | | | | | |
| ABS | 0 | | | — | | | (2) | | | 0 | | | (2) | | | 0 | | | 0 | | | 0 | |
| RMBS | 0 | | | — | | | 0 | | | 0 | | | 0 | | | 20 | | | (1) | | | 19 | |
| | | | | | | | | | | | | | | |
| Mortgage loans | — | | | — | | | — | | | (1) | | | (1) | | | 0 | | | 0 | | | 0 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Short-term investments | 41 | | | — | | | 0 | | | (14) | | | 27 | | | 0 | | | 0 | | | 0 | |
| Investments in related parties | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| AFS securities, ABS | 5 | | | — | | | 0 | | | (55) | | | (50) | | | 0 | | | (164) | | | (164) | |
| Trading securities | | | | | | | | | | | | | | | |
| CLO | 13 | | | — | | | (12) | | | 0 | | | 1 | | | 9 | | | 0 | | | 9 | |
| ABS | 66 | | | — | | | 0 | | | 0 | | | 66 | | | 0 | | | 0 | | | 0 | |
| Equity securities | 3 | | | — | | | 0 | | | (2) | | | 1 | | | 0 | | | (6) | | | (6) | |
| Investment funds | 1,147 | | | 0 | | | 0 | | | 0 | | | 1,147 | | | 0 | | | 0 | | | 0 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total Level 3 assets | $ | 1,459 | | | $ | 0 | | | $ | (38) | | | $ | (348) | | | $ | 1,073 | | | $ | 667 | | | $ | (419) | | | $ | 248 | |
| | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities – embedded derivative | $ | 0 | | | $ | (116) | | | $ | 0 | | | $ | 792 | | | $ | 676 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | | |
| Total Level 3 liabilities | $ | 0 | | | $ | (116) | | | $ | 0 | | | $ | 792 | | | $ | 676 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2017 |
| (In millions) | Purchases | | Issuances | | Sales | | Settlements | | Purchases, issuances, sales and settlements, net |
| Assets | | | | | | | | | |
| AFS securities | | | | | | | | | |
| Fixed maturity | | | | | | | | | |
| U.S. state, municipal and political subdivisions | $ | — |
| | $ | — |
| | $ | — |
| | $ | (21 | ) | | $ | (21 | ) |
| Corporate | 152 |
| | — |
| | (37 | ) | | (8 | ) | | 107 |
|
| CLO | 83 |
| | — |
| | (2 | ) | | (41 | ) | | 40 |
|
| ABS | 495 |
| | — |
| | — |
| | (258 | ) | | 237 |
|
| CMBS | 29 |
| | — |
| | — |
| | (1 | ) | | 28 |
|
| RMBS | 14 |
| | — |
| | — |
| | (2 | ) | | 12 |
|
| Trading securities | | | | | | | | | |
| Fixed maturity | | | | | | | | | |
| CLO | 4 |
| | — |
| | (16 | ) | | — |
| | (12 | ) |
| RMBS | 26 |
| | — |
| | — |
| | — |
| | 26 |
|
| Mortgage loans | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Investments in related parties | | | | | | | | | |
| AFS securities | | | | | | | | | |
| Fixed maturity | | | | | | | | | |
| CLO | 10 |
| | — |
| | — |
| | — |
| | 10 |
|
| ABS | 5 |
| | — |
| | — |
| | (10 | ) | | (5 | ) |
| Trading securities, CLO | — |
| | — |
| | (52 | ) | | — |
| | (52 | ) |
| Short-term investments | 37 |
| | — |
| | — |
| | (29 | ) | | 8 |
|
| Total Level 3 assets | $ | 855 |
| | $ | — |
| | $ | (107 | ) | | $ | (371 | ) | | $ | 377 |
|
| | | | | | | | | | |
| Liabilities | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | |
| Embedded derivative | $ | — |
| | $ | (412 | ) | | $ | — |
| | $ | 120 |
| | $ | (292 | ) |
| Total Level 3 liabilities | $ | — |
| | $ | (412 | ) | | $ | — |
| | $ | 120 |
| | $ | (292 | ) |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2016 |
| (In millions) | Purchases | | Issuances | | Sales | | Settlements | | Purchases, issuances, sales and settlements, net |
| Assets | | | | | | | | | |
| AFS securities | | | | | | | | | |
| Fixed maturity | | | | | | | | | |
| Foreign governments | $ | — |
| | $ | — |
| | $ | — |
| | $ | (2 | ) | | $ | (2 | ) |
| Corporate | 47 |
| | — |
| | (55 | ) | | (63 | ) | | (71 | ) |
| CLO | 24 |
| | — |
| | (9 | ) | | (8 | ) | | 7 |
|
| ABS | 102 |
| | — |
| | — |
| | (857 | ) | | (755 | ) |
| CMBS | 10 |
| | — |
| | — |
| | — |
| | 10 |
|
| RMBS | — |
| | — |
| | — |
| | (249 | ) | | (249 | ) |
| Equity securities | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| Trading securities | | | | | | | | | |
| Fixed maturity | | | | | | | | | |
| Corporate | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| CLO | — |
| | — |
| | (45 | ) | | — |
| | (45 | ) |
| RMBS | 111 |
| | — |
| | — |
| | — |
| | 111 |
|
| Mortgage loans | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) |
| Investments in related parties | | | | | | | | | |
| AFS securities, fixed maturity, ABS | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) |
| Trading securities, CLO | 33 |
| | — |
| | (16 | ) | | — |
| | 17 |
|
| Total Level 3 assets | $ | 327 |
| | $ | — |
| | $ | (133 | ) | | $ | (1,185 | ) | | $ | (991 | ) |
| | | | | | | | | | |
| Liabilities | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | |
| Embedded derivative | $ | — |
| | $ | (517 | ) | | $ | — |
| | $ | 112 |
| | $ | (405 | ) |
| Total Level 3 liabilities | $ | — |
| | $ | (517 | ) | | $ | — |
| | $ | 112 |
| | $ | (405 | ) |
Significant Unobservable Inputs—Significant unobservable inputs occur when we could not obtain or corroborate the quantitative detail of the inputs. This applies to AFSfixed maturity securities, tradingequity securities, mortgage loans and certain derivatives, as well as embedded derivatives in liabilities. Additional significant unobservable inputs are described below.
Fixed maturityAFS and trading securities – For certain fixed maturity securities, internal models are used to calculate the fair value. We use a discounted cash flow approach. The discount rate is the significant unobservable input due to the determined credit spread being internally developed, illiquid, or as a result of other adjustments made to the base rate. The base rate represents a market comparable rate for securities with similar characteristics. As of September 30, 2017, discounts ranged from 2% to 6%. This excludes assets for which significant unobservable inputs are not developed internally, primarily consisting of broker quotes.
Interest sensitive contract liabilities – embedded derivative – Significant unobservable inputs we use in the fixed indexed annuities embedded derivative of the interest sensitive contract liabilities valuation include:
| |
1. | Non-performance risk – For contracts we issue, we use the credit spread from the U.S. treasury curve based on our public credit rating as of the valuation date. This represents our credit risk for use in the estimate of the fair value of embedded derivatives. For contracts reinsured through funds withheld reinsurance, the cedant company holds collateral against its exposure; therefore, immaterial non-performance risk is ascribed to these contracts. |
| |
2. | Option budget – We assume future hedge costs in the derivative's fair value estimate. The level of option budgets determines the future costs of the options and impacts future policyholder account value growth. |
| |
3. | Policyholder behavior – We regularly review the lapse and withdrawal assumptions (surrender rate). These are based on our initial pricing assumptions updated for actual experience. Actual experience may be limited for recently issued products. |
1.Nonperformance risk – For contracts we issue, we use the credit spread, relative to the Treasury curve based on our public credit rating as of the valuation date. This represents our credit risk for use in the estimate of the fair value of embedded derivatives.
2.Option budget – We assume future hedge costs in the derivative’s fair value estimate. The level of option budgets determines the future costs of the options and impacts future policyholder account value growth.
3.Policyholder behavior – We regularly review the lapse and withdrawal assumptions (surrender rate). These are based on our initial pricing assumptions updated for actual experience. Actual experience may be limited for recently issued products.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
The following summarizes the unobservable inputs for AFS and trading securities and the embedded derivatives of fixed indexed annuities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2021 |
| (In millions, except for percentages) | | Fair value | | Valuation technique | | Unobservable inputs | | Minimum | | Maximum | | Weighted average | | Impact of an increase in the input on fair value |
| AFS and trading securities | | $ | 5,982 | | | Discounted cash flow | | Discount rate | | 1.4 | % | | 18.0 | % | | 4.7 | % | 1 | | Decrease |
| | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives | | $ | 12,473 | | | Option budget method | | Nonperformance risk | | 0.1 | % | | 1.0 | % | | 0.5 | % | 2 | | Decrease |
| | | | | | Option budget | | 0.5 | % | | 3.5 | % | | 1.8 | % | 3 | | Increase |
| | | | | | Surrender rate | | 5.2 | % | | 9.6 | % | | 7.1 | % | 4 | | Decrease |
| | | | | | | | | | | | | | | |
| | December 31, 2020 |
| (In millions, except for percentages) | | Fair value | | Valuation technique | | Unobservable inputs | | Minimum | | Maximum | | Weighted average | | Impact of an increase in the input on fair value |
| AFS and trading securities | | $ | 5,858 | | | Discounted cash flow | | Discount rate | | 1.7 | % | | 35.0 | % | | 4.6 | % | 1 | | Decrease |
| | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives | | $ | 12,873 | | | Option budget method | | Nonperformance risk | | 0.0 | % | | 1.1 | % | | 0.5 | % | 2 | | Decrease |
| | | | | | Option budget | | 0.6 | % | | 3.5 | % | | 1.9 | % | 3 | | Increase |
| | | | | | Surrender rate | | 5.3 | % | | 9.5 | % | | 7.1 | % | 4 | | Decrease |
| | | | | | | | | | | | | | | |
1 The discount rate weighted average is calculated based on the relative fair values of the securities. |
2 The nonperformance risk weighted average is based on the projected excess benefits of reserves used in the calculation of the embedded derivative. |
3 The option budget weighted average is calculated based on the indexed account values. |
4 The surrender rate weighted average is calculated based on projected account values. |
|
| | | | | | | | | | |
| | September 30, 2017 |
| (In millions, except for percentages) | Fair value | Valuation technique | Unobservable inputs | Input/range of
inputs | Impact of an increase in the input on fair value |
| Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives | $ | 6,652 |
| Option budget method | Non-performance risk | 0.3 | % | – | 1.3% | Decrease |
| | | | Option budget | 0.7 | % | – | 3.7% | Increase |
| | | | Surrender rate | 0.0 | % | – | 19.6% | Decrease |
Financial Instruments Without Readily Determinable Fair Values—We have elected the measurement alternative for certain equity securities that do not have a readily determinable fair value. The carrying amount of the equity securities was $202 million, with a cumulative recorded impairment of $231 million as of March 31, 2021 and December 31, 2020.
|
| | | | | | | | | | |
| | December 31, 2016 |
| (In millions, except for percentages) | Fair value | Valuation technique | Unobservable inputs | Input/range of
inputs | Impact of an increase in the input on fair value |
| Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives | $ | 5,283 |
| Option budget method | Non-performance risk | 0.7 | % | – | 1.5% | Decrease |
| | | | Option budget | 0.8 | % | – | 3.8% | Increase |
| | | | Surrender rate | 0.0 | % | – | 16.3% | Decrease |
Fair Value of Financial Instruments Not Carried at Fair Value—The following represents our financial instruments not carried at fair value on the condensed consolidated balance sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 |
| (In millions) | Carrying Value | | Fair Value | | NAV | | Level 1 | | Level 2 | | Level 3 |
| Financial assets | | | | | | | | | | | |
| Mortgage loans | $ | 16,653 | | | $ | 17,176 | | | $ | — | | | $ | 0 | | | $ | 0 | | | $ | 17,176 | |
| Investment funds | 647 | | | 647 | | | 647 | | | 0 | | | 0 | | | 0 | |
| Policy loans | 356 | | | 356 | | | — | | | 0 | | | 356 | | | 0 | |
| Funds withheld at interest | 45,388 | | | 45,388 | | | — | | | 0 | | | 0 | | | 45,388 | |
| Short-term investments | 8 | | | 8 | | | — | | | 0 | | | 0 | | | 8 | |
| Other investments | 1,617 | | | 1,617 | | | — | | | 0 | | | 0 | | | 1,617 | |
| Investments in related parties | | | | | | | | | | | |
| Mortgage loans | 714 | | | 734 | | | — | | | 0 | | | 0 | | | 734 | |
| Investment funds | 3,839 | | | 3,839 | | | 3,839 | | | 0 | | | 0 | | | 0 | |
| Funds withheld at interest | 11,992 | | | 11,992 | | | — | | | 0 | | | 0 | | | 11,992 | |
| Other investments | 469 | | | 492 | | | — | | | 0 | | | 0 | | | 492 | |
| Total financial assets not carried at fair value | $ | 81,683 | | | $ | 82,249 | | | $ | 4,486 | | | $ | 0 | | | $ | 356 | | | $ | 77,407 | |
| | | | | | | | | | | |
| Financial liabilities | | | | | | | | | | | |
| Interest sensitive contract liabilities | $ | 97,239 | | | $ | 99,298 | | | $ | — | | | $ | 0 | | | $ | 0 | | | $ | 99,298 | |
| | | | | | | | | | | |
| Long-term debt | 1,977 | | | 2,215 | | | — | | | 0 | | | 2,215 | | | 0 | |
| Securities to repurchase | 599 | | | 599 | | | — | | | 0 | | | 599 | | | 0 | |
| Funds withheld liability | 388 | | | 388 | | | — | | | 0 | | | 388 | | | 0 | |
| Total financial liabilities not carried at fair value | $ | 100,203 | | | $ | 102,500 | | | $ | — | | | $ | 0 | | | $ | 3,202 | | | $ | 99,298 | |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | | | | September 30, 2017 | | December 31, 2016 | | December 31, 2020 |
| (In millions) | Fair Value Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | (In millions) | Carrying Value | | Fair Value | | NAV | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | | | |
| Financial assets | | Financial assets | | | | | | | | | | | |
| Mortgage loans | 3 | | $ | 6,403 |
| | $ | 6,568 |
| | $ | 5,426 |
| | $ | 5,560 |
| Mortgage loans | $ | 15,245 | | | $ | 15,811 | | | $ | — | | | $ | 0 | | | $ | 0 | | | $ | 15,811 | |
| Investment funds | NAV1 | | 620 |
| | 620 |
| | 590 |
| | 590 |
| Investment funds | 642 | | | 642 | | | 642 | | | 0 | | | 0 | | | 0 | |
| Policy loans | 2 | | 571 |
| | 571 |
| | 602 |
| | 602 |
| Policy loans | 369 | | | 369 | | | — | | | 0 | | | 369 | | | 0 | |
| Funds withheld at interest | 3 | | 6,661 |
| | 6,661 |
| | 6,398 |
| | 6,398 |
| Funds withheld at interest | 46,668 | | | 46,668 | | | — | | | 0 | | | 0 | | | 46,668 | |
| | Other investments | 3 | | 77 |
| | 77 |
| | 81 |
| | 81 |
| Other investments | 467 | | | 471 | | | — | | | 0 | | | 0 | | | 471 | |
| Investments in related parties | | | | | | | | | Investments in related parties | |
| Mortgage loans | | Mortgage loans | 674 | | | 694 | | | — | | | 0 | | | 0 | | | 694 | |
| Investment funds | NAV1 | | 1,303 |
| | 1,303 |
| | 1,198 |
| | 1,198 |
| Investment funds | 3,165 | | | 3,165 | | | 3,165 | | | 0 | | | 0 | | | 0 | |
| Funds withheld at interest | | Funds withheld at interest | 12,168 | | | 12,168 | | | — | | | 0 | | | 0 | | | 12,168 | |
| Other investments | 3 | | 238 |
| | 260 |
| | 237 |
| | 262 |
| Other investments | 469 | | | 499 | | | — | | | 0 | | | 0 | | | 499 | |
| Total assets not carried at fair value | | $ | 15,873 |
| | $ | 16,060 |
| | $ | 14,532 |
| | $ | 14,691 |
| |
| Liabilities | | | | | | | | | |
| Total financial assets not carried at fair value | | Total financial assets not carried at fair value | $ | 79,867 | | | $ | 80,487 | | | $ | 3,807 | | | $ | 0 | | | $ | 369 | | | $ | 76,311 | |
| | Financial liabilities | | Financial liabilities | |
| Interest sensitive contract liabilities | 3 | | $ | 31,328 |
| | $ | 30,932 |
| | $ | 27,628 |
| | $ | 26,930 |
| Interest sensitive contract liabilities | $ | 94,685 | | | $ | 98,945 | | | $ | — | | | $ | 0 | | | $ | 0 | | | $ | 98,945 | |
| | Long-term debt | | Long-term debt | 1,976 | | | 2,259 | | | — | | | 0 | | | 2,259 | | | 0 | |
| Securities to repurchase | | Securities to repurchase | 598 | | | 598 | | | — | | | 0 | | | 598 | | | 0 | |
| Funds withheld liability | 2 | | 376 |
| | 376 |
| | 374 |
| | 374 |
| Funds withheld liability | 393 | | | 393 | | | — | | | 0 | | | 393 | | | 0 | |
| Total liabilities not carried at fair value | | $ | 31,704 |
| | $ | 31,308 |
| | $ | 28,002 |
| | $ | 27,304 |
| |
| | | | | | | | | | |
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. | |
| Total financial liabilities not carried at fair value | | Total financial liabilities not carried at fair value | $ | 97,652 | | | $ | 102,195 | | | $ | — | | | $ | 0 | | | $ | 3,250 | | | $ | 98,945 | |
We estimate the fair value for financial instruments not carried at fair value using the same methods and assumptions as those we carry at fair value. The financial instruments presented above are reported at carrying value on the condensed consolidated balance sheets; however, in the case of policy loans, funds withheld at interest and liability, short-term investments, and other investments,securities to repurchase, the carrying amount approximates fair value.
Investment in related parties – Other investments – The fair value of related party other investments is determined using a discounted cash flow model using discount rates for similar investments.
Interest sensitive contract liabilities– The carrying and fair value of interest sensitive contract liabilities above includes fixed indexed and traditional fixed annuities without mortality or morbidity risks, funding agreements and payout annuities without life contingencies. The embedded derivatives within fixed indexed annuities without mortality or morbidity risks are excluded, as they are carried at fair value. The valuation of these investment contracts is based on discounted cash flow methodologies using significant unobservable inputs. The estimated fair value is determined using current market risk-free interest rates, adding a spread to reflect our nonperformance risk and subtracting a risk margin to reflect uncertainty inherent in the projected cash flows.
Long-term debt – We obtain the fair value of long-term debt from commercial pricing services. These are classified as Level 2. The pricing services incorporate a variety of market observable information in their valuation techniques including benchmark yields, trading activity, credit quality, issuer spreads, bids, offers and other reference data.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
6. Reinsurance
During the nine months ended September 30, 2017, we novated certain open blocks of business ceded to Global Atlantic, in accordance with the terms of the coinsurance and assumption agreement. As a result of the novation, interest sensitive contract liabilities decreased $278 million, future policy benefits decreased $26 million, policy loans decreased $7 million, and reinsurance recoverable decreased $297 million.
7. Deferred Acquisition Costs, Deferred Sales Inducements and Value of Business Acquired
The following represents a rollforward of deferred acquisition costs (DAC), deferred sales inducements (DSI) and value of business acquired (VOBA):
| | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | DAC | | DSI | | VOBA | | Total |
| Balance at December 31, 2020 | $ | 3,236 | | | $ | 857 | | | $ | 813 | | | $ | 4,906 | |
| Additions | 143 | | | 54 | | | 0 | | | 197 | |
| | | | | | | |
| Amortization | (98) | | | (84) | | | (66) | | | (248) | |
| Impact of unrealized investment (gains) losses | 271 | | | 87 | | | 90 | | | 448 | |
| Balance at March 31, 2021 | $ | 3,552 | | | $ | 914 | | | $ | 837 | | | $ | 5,303 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | DAC | | DSI | | VOBA | | Total |
| Balance at December 31, 2019 | $ | 3,274 | | | $ | 820 | | | $ | 914 | | | $ | 5,008 | |
| Adoption of accounting standard | 12 | | | 5 | | | 5 | | | 22 | |
| Additions | 112 | | | 38 | | | 0 | | | 150 | |
| | | | | | | |
| Amortization | 436 | | | (10) | | | (23) | | | 403 | |
| Impact of unrealized investment (gains) losses | 489 | | | 139 | | | 181 | | | 809 | |
| Balance at March 31, 2020 | $ | 4,323 | | | $ | 992 | | | $ | 1,077 | | | $ | 6,392 | |
7. Equity
|
| | | | | | | | | | | | | | | |
| (In millions) | DAC | | DSI | | VOBA | | Total |
| Balance at December 31, 2016 | $ | 1,142 |
| | $ | 462 |
| | $ | 1,336 |
| | $ | 2,940 |
|
| Additions | 371 |
| | 121 |
| | — |
| | 492 |
|
| Unlocking | 13 |
| | 4 |
| | (1 | ) | | 16 |
|
| Amortization | (142 | ) | | (46 | ) | | (121 | ) | | (309 | ) |
| Impact of unrealized investment (gains) losses | (90 | ) | | (36 | ) | | (110 | ) | | (236 | ) |
| Balance at September 30, 2017 | $ | 1,294 |
| | $ | 505 |
| | $ | 1,104 |
| | $ | 2,903 |
|
|
| | | | | | | | | | | | | | | |
| (In millions) | DAC | | DSI | | VOBA | | Total |
| Balance at December 31, 2015 | $ | 705 |
| | $ | 320 |
| | $ | 1,627 |
| | $ | 2,652 |
|
| Additions | 449 |
| | 145 |
| | — |
| | 594 |
|
| Unlocking | (12 | ) | | (3 | ) | | (23 | ) | | (38 | ) |
| Amortization | (76 | ) | | (16 | ) | | (99 | ) | | (191 | ) |
| Impact of unrealized investment (gains) losses | (81 | ) | | (39 | ) | | (207 | ) | | (327 | ) |
| Balance at September 30, 2016 | $ | 985 |
| | $ | 407 |
| | $ | 1,298 |
| | $ | 2,690 |
|
8. Common Stock
During the nine months ended September 30, 2017, a total of 42,260,915 Class B shares were converted to Class A shares, primarily in connection with two public follow-on offerings that included sales by holders of Class B shares, at which time the shares automatically converted to Class A common shares. In connection with each follow-on offering, AP Alternative Assets, L.P. distributed Class B shares to its unitholders and certain of such unitholders participated in the applicable follow-on offering. To the extent that such shares were distributed to unitholders other than a member of the Apollo Group (as defined by our bye-laws), such shares automatically converted to Class A shares. We did not sell any shares in the offerings.
Stock-based CompensationAccumulated Other Comprehensive Income (Loss)—Stock-based compensation expense was $11 million and $47 million for the three months ended September 30, 2017 and 2016, respectively, and $40 million and $61 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, the stock-based compensation plans had unrecognized compensation expense of $39 million. The cost is expected to be recognized over a weighted-average period of 1.2 years.
Employee Stock Purchase Plan – Eligible employees may participate in our 2017 Employee Stock Purchase Plan (ESPP), whichfollowing provides the opportunity to purchase our Class A shares at a discount from the market price through payroll deductions. Pursuant to the ESPP, employees are permitted to purchase shares at a price equal to 85%details and changes in AOCI:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Unrealized investment gains (losses) on AFS securities without a credit allowance | | Unrealized investment gains (losses) on AFS securities with a credit allowance | | DAC, DSI, VOBA and future policy benefits adjustments on AFS securities | | Unrealized gains (losses) on hedging instruments | | Foreign currency translation and other adjustments | | Accumulated other comprehensive income (loss) |
| Balance at December 31, 2020 | $ | 5,338 | | | $ | (39) | | | $ | (1,310) | | | $ | (26) | | | $ | 8 | | | $ | 3,971 | |
| | | | | | | | | | | |
| Other comprehensive income (loss) before reclassifications | (3,271) | | | (81) | | | 753 | | | (31) | | | 0 | | | (2,630) | |
Less: Reclassification adjustments for gains (losses) realized1 | (10) | | | 0 | | | 2 | | | 0 | | | 0 | | | (8) | |
| Less: Income tax expense (benefit) | (631) | | | (16) | | | 158 | | | (7) | | | 0 | | | (496) | |
| Less: Other comprehensive loss attributable to noncontrolling interests | (175) | | | 0 | | | 0 | | | (1) | | | 0 | | | (176) | |
| Balance at March 31, 2021 | $ | 2,883 | | | $ | (104) | | | $ | (717) | | | $ | (49) | | | $ | 8 | | | $ | 2,021 | |
| | | | | | | | | | | |
1 Recognized in investment related gains (losses) on the condensed consolidated statements of income (loss). |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Unrealized investment gains (losses) on AFS securities without a credit allowance | | Unrealized investment gains (losses) on AFS securities with a credit allowance | | DAC, DSI, VOBA and future policy benefits adjustments on AFS securities | | Unrealized gains (losses) on hedging instruments | | Foreign currency translation and other adjustments | | Accumulated other comprehensive income (loss) |
| Balance at December 31, 2019 | $ | 3,102 | | | $ | 0 | | | $ | (879) | | | $ | 61 | | | $ | (3) | | | $ | 2,281 | |
| Adoption of accounting standards | 4 | | | (4) | | | (6) | | | 0 | | | 0 | | | (6) | |
| Other comprehensive income (loss) before reclassifications | (5,762) | | | (273) | | | 1,352 | | | 401 | | | 9 | | | (4,273) | |
Less: Reclassification adjustments for gains (losses) realized1 | 171 | | | 0 | | | (15) | | | 0 | | | 0 | | | 156 | |
| Less: Income tax expense (benefit) | (1,128) | | | (53) | | | 287 | | | 97 | | | 0 | | | (797) | |
| Less: Other comprehensive income (loss) attributable to noncontrolling interests | (159) | | | 0 | | | 0 | | | (30) | | | 6 | | | (183) | |
| Balance at March 31, 2020 | $ | (1,540) | | | $ | (224) | | | $ | 195 | | | $ | 395 | | | $ | 0 | | | $ | (1,174) | |
| | | | | | | | | | | |
1 Recognized in investment related gains (losses) on the condensed consolidated statements of income (loss). |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
9.8. Earnings Per Share
The following represents our basic and diluted earnings per share (EPS) calculations:calculations, which are calculated using unrounded amounts:
| | | | | |
| Three months ended March 31, 2021 |
| (In millions, except per share data) | Class A |
| Net income available to Athene Holding Ltd. common shareholders – basic and diluted | $ | 578 | |
| |
| Basic weighted average shares outstanding | 191.3 | |
| Dilutive effect of stock compensation plans and warrants | 5.5 | |
| Diluted weighted average shares outstanding | 196.8 | |
| |
| Earnings per share | |
| Basic | $ | 3.02 | |
| Diluted | $ | 2.94 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2017 |
| (In millions, except share and per share data) | Class A | | Class B | | Class M-1 | | Class M-2 | | Class M-3 | | Class M-4 |
| Net income available to AHL shareholders – basic and diluted | $ | 167 |
| | $ | 98 |
| | $ | 5 |
| | $ | 1 |
| | $ | 1 |
| | $ | 2 |
|
| | | | | | | | | | | | |
| Basic weighted average shares outstanding | 119,519,911 |
| | 69,862,355 |
| | 3,388,890 |
| | 857,831 |
| | 928,870 |
| | 1,776,455 |
|
| Dilutive effect of stock compensation plans | 372,358 |
| | — |
| | — |
| | 7,191 |
| | 289,284 |
| | 1,362,388 |
|
| Diluted weighted average shares outstanding | 119,892,269 |
| | 69,862,355 |
| | 3,388,890 |
| | 865,022 |
| | 1,218,154 |
| | 3,138,843 |
|
| | | | | | | | | | | | |
Earnings per share1 | | | | | | | | | | | |
| Basic | $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.40 |
|
| Diluted | $ | 1.39 |
| | $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.39 |
| | $ | 1.07 |
| | $ | 0.79 |
|
| | | | | | | | | | | | |
1 Calculated using whole figures. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2020 |
| (In millions, except per share data) | Class A | | Class B | | Class M-1 | | Class M-2 | | Class M-3 | | Class M-4 |
| Net loss available to Athene Holding Ltd. common shareholders – basic and diluted | $ | (938) | | | $ | (98) | | | $ | (13) | | | $ | (3) | | | $ | (4) | | | $ | (9) | |
| | | | | | | | | | | |
| Basic weighted average shares outstanding | 161.4 | | | 25.4 | | | 3.3 | | | 0.8 | | | 1.0 | | | 2.4 | |
Dilutive effect of stock compensation plans and warrants1 | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Diluted weighted average shares outstanding | 161.4 | | | 25.4 | | | 3.3 | | | 0.8 | | | 1.0 | | | 2.4 | |
| | | | | | | | | | | |
| Loss per share | | | | | | | | | | | |
| Basic | $ | (5.81) | | | $ | (3.87) | | | $ | (3.87) | | | $ | (3.87) | | | $ | (3.87) | | | $ | (3.87) | |
| Diluted | $ | (5.81) | | | $ | (3.87) | | | $ | (3.87) | | | $ | (3.87) | | | $ | (3.87) | | | $ | (3.87) | |
|
1 The dilutive effective of stock compensation plans and warrants is antidilutive as a result of the net loss available to Athene Holding Ltd. common shareholders for the three months ended March 31, 2020. |
|
| | | | | | | |
| | Three months ended September 30, 2016 |
| (In millions, except share and per share data) | Class A | | Class B |
| Net income available to AHL shareholders – basic and diluted | $ | 34 |
| | $ | 92 |
|
| | | | |
| Basic weighted average shares outstanding | 49,798,963 |
| | 135,963,975 |
|
| Dilutive effect of stock compensation plans | 107,485 |
| | — |
|
| Diluted weighted average shares outstanding | 49,906,448 |
| | 135,963,975 |
|
| | | | |
Earnings per share1 | | | |
| Basic | $ | 0.68 |
| | $ | 0.68 |
|
| Diluted | $ | 0.68 |
| | $ | 0.68 |
|
| | | | |
1 Calculated using whole figures. | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2017 |
| (In millions, except share and per share data) | Class A | | Class B | | Class M-1 | | Class M-2 | | Class M-3 | | Class M-4 |
| Net income available to AHL shareholders – basic | $ | 513 |
| | $ | 443 |
| | $ | 17 |
| | $ | 3 |
| | $ | 3 |
| | $ | 5 |
|
| Effect of stock compensation plans on allocated net income | 11 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net income available to AHL shareholders – diluted | $ | 524 |
| | $ | 443 |
| | $ | 17 |
| | $ | 3 |
| | $ | 3 |
| | $ | 5 |
|
| | | | | | | | | | | | |
| Basic weighted average shares outstanding | 101,506,304 |
| | 87,703,973 |
| | 3,416,703 |
| | 604,722 |
| | 559,987 |
| | 1,078,282 |
|
| Dilutive effect of stock compensation plans | 3,297,329 |
| | — |
| | — |
| | 331,206 |
| | 686,268 |
| | 1,768,169 |
|
| Diluted weighted average shares outstanding | 104,803,633 |
| | 87,703,973 |
| | 3,416,703 |
| | 935,928 |
| | 1,246,255 |
| | 2,846,451 |
|
| | | | | | | | | | | | |
Earnings per share1 | | | | | | | | | | | |
| Basic | $ | 5.05 |
| | $ | 5.05 |
| | $ | 5.05 |
| | $ | 5.05 |
| | $ | 5.05 |
| | $ | 5.05 |
|
| Diluted | $ | 5.00 |
| | $ | 5.05 |
| | $ | 5.05 |
| | $ | 3.26 |
| | $ | 2.27 |
| | $ | 1.91 |
|
| | | | | | | | | | | | |
1 Calculated using whole figures. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | |
| | Nine months ended September 30, 2016 |
| (In millions, except share and per share data) | Class A | | Class B |
| Net income available to AHL shareholders – basic and diluted | $ | 108 |
| | $ | 296 |
|
| | | | |
| Basic weighted average shares outstanding | 49,960,549 |
| | 135,963,975 |
|
| Dilutive effect of stock compensation plans | 92,338 |
| | — |
|
| Diluted weighted average shares outstanding | 50,052,887 |
| | 135,963,975 |
|
| | | | |
Earnings per share1 | | | |
| Basic | $ | 2.18 |
| | $ | 2.18 |
|
| Diluted | $ | 2.17 |
| | $ | 2.18 |
|
| | | | |
1 Calculated using whole figures. | | |
We useFor the periods in which we had multiple classes of stock participating in earnings, we used the two-class method for allocating net income available to AHLAthene Holding Ltd. common shareholders to each class of our common stock. OurDuring the first quarter of 2020, as a result of the closing of the share transaction discussed further in Note 9 – Related Parties, we converted outstanding Class B shares to Class A shares and Class M shares do not become eligiblewere converted to participate in dividends untilClass A shares and warrants. As a return of investment (ROI) condition has been metresult, the EPS calculation for each class. Once eligible, each class of our common stock has equal dividend rights. Prior to the fourthfirst quarter of 2016,2020 used the ROI condition had not been metweighted average shares for any of ourthe quarter to allocate first quarter net loss to Class B and Class M shares and, as a result, no earnings were attributable toshares; however, for those classes. In conjunction with our IPO inclasses, the fourth quarter of 2016, the ROI condition for Class M-1 was met. The ROI conditions were subsequently met for Class M-2 on March 28, 2017, and for Class M-3 and Class M-4 on April 20, 2017. For purposes of calculating basic weighted average shares outstanding andrepresents only that period of time that the allocationshares were outstanding. The warrants issued as part of basic income,the conversion of the Class M shares are deemed to be participating in earnings for onlyincluded within the portiondilutive effect of the period after the condition is met. However, as shares are considered dilutive as of the beginning of the period, the resulting diluted EPS is comparatively lowerstock compensation plans and warrants above if the ROI condition is met after the beginning of the period than it would have been had the ROI condition been met at the beginning of the period.dilutive.
Dilutive shares are calculated using the treasury stock method. For Class A common shares, this method takes into account shares that can be settled into Class A common shares, net of a conversion price.The diluted EPS calculations for Class A shares excluded the following1.0 million and 11.1 million shares, restricted stock units, (RSUs)options and options:warrants as of March 31, 2021 and 2020, respectively.
|
| | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Antidilutive shares, RSUs and options excluded from diluted EPS calculation | 79,931,099 |
| | 135,963,975 |
| | 73,016,963 |
| | 135,963,975 |
|
| Shares, RSUs and options excluded from diluted EPS calculation as a performance condition had not been met | 187,046 |
| | — |
| | 1,425,926 |
| | — |
|
| Shares, RSUs and options excluded from diluted EPS calculation as issuance restrictions had not been satisfied as of the end of the period | — |
| | 12,720,694 |
| | — |
| | 12,720,694 |
|
| Total Shares, RSUs and options excluded from diluted EPS calculation | 80,118,145 |
| | 148,684,669 |
| | 74,442,889 |
| | 148,684,669 |
|
| | | | | | | | |
| Note: Shares, RSUs and options are as of period end. |
10. Accumulated Other Comprehensive Income
The following is a detail of AOCI:
|
| | | | | | | |
| (In millions) | September 30, 2017 | | December 31, 2016 |
| AFS securities | $ | 2,428 |
| | $ | 972 |
|
| DAC, DSI, VOBA, future policy benefits and dividends payable to policyholders adjustments on AFS securities | (692 | ) | | (408 | ) |
| Noncredit component of OTTI losses on AFS securities | (15 | ) | | (17 | ) |
| Hedging instruments | (59 | ) | | 10 |
|
| Pension adjustments | (4 | ) | | (4 | ) |
| Foreign currency translation adjustments | 2 |
| | (12 | ) |
| Accumulated other comprehensive income, before taxes | 1,660 |
| | 541 |
|
| Deferred income tax liability | (498 | ) | | (174 | ) |
| Accumulated other comprehensive income | $ | 1,162 |
| | $ | 367 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Changes in AOCI are presented below:
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 |
| Unrealized investment gains (losses) on AFS securities | | | | | | | |
| Unrealized investment gains (losses) on AFS securities | $ | 249 |
| | $ | 800 |
| | $ | 1,500 |
| | $ | 2,674 |
|
| Change in DAC, DSI, VOBA, future policy benefits and dividends payable to policyholders adjustment | (61 | ) | | (294 | ) | | (284 | ) | | (970 | ) |
Less: Reclassification adjustment for gains (losses) realized in net income1 | 17 |
| | 7 |
| | 44 |
| | (1 | ) |
| Less: Income tax expense | 55 |
| | 144 |
| | 347 |
| | 537 |
|
| Net unrealized investment gains (losses) on AFS securities | 116 |
| | 355 |
| | 825 |
| | 1,168 |
|
| Noncredit component of OTTI losses on AFS securities | | | | | | | |
| Noncredit component of OTTI losses on AFS securities | (7 | ) | | (1 | ) | | (5 | ) | | (11 | ) |
Less: Reclassification adjustment for losses realized in net income1 | (9 | ) | | — |
| | (7 | ) | | (7 | ) |
| Less: Income tax expense (benefit) | 1 |
| | (1 | ) | | 1 |
| | (2 | ) |
| Net noncredit component of OTTI losses on AFS securities | 1 |
| | — |
| | 1 |
| | (2 | ) |
| Unrealized gains (losses) on hedging instruments | | | | | | | |
| Unrealized gains (losses) on hedging instruments | (31 | ) | | (6 | ) | | (69 | ) | | (13 | ) |
| Less: Income tax benefit | (11 | ) | | (1 | ) | | (24 | ) | | (4 | ) |
| Net unrealized gains (losses) on hedging instruments | (20 | ) | | (5 | ) | | (45 | ) | | (9 | ) |
| Pension adjustments | 1 |
| | — |
| | — |
| | (1 | ) |
| Foreign currency translation adjustments | 4 |
| | 1 |
| | 14 |
| | 1 |
|
| Change in AOCI | $ | 102 |
| | $ | 351 |
| | $ | 795 |
| | $ | 1,157 |
|
| | | | | | | | |
1 Recognized in investment related gains (losses) on the condensed consolidated statements of income. |
11. Income Taxes
Our effective tax rates were 7% and (232)% for the three months ended September 30, 2017 and 2016, respectively, and 5% and (22)% for the nine months ended September 30, 2017, and 2016, respectively. Our effective tax rates may vary period-to-period depending upon the relationship of income and loss subject to tax compared to consolidated income and loss before income taxes. Our prior period effective tax rates reflect the significant effect of releasing $102 million of deferred tax valuation allowance. During the third quarter of 2016, we identified a tax plan that, when implemented, will allow us to use a significant portion of the U.S. non-life insurance companies’ net operating losses, which are scheduled to expire beginning in 2022, and other deductible temporary differences. As a result, we released the corresponding deferred tax valuation allowance in the third quarter of 2016, as it is more likely than not that these attributes will be realized.
The Internal Revenue Service is currently auditing the 2013 consolidated tax return filed by Athene USA Corporation, and recently initiated a limited scope audit of the 2015 consolidated tax return filed by Athene Annuity & Life Assurance Company. No material proposed adjustments have been issued with respect to either exam.
Under current Bermuda law, we are not required to pay any taxes in Bermuda on either income or capital gains. We have received an undertaking from the Minister of Finance in Bermuda that, in the event of any such taxes being imposed, we will be exempted from taxation until the year 2035.
12.9. Related Parties
Athene Asset ManagementApollo
Investment related expenses Current fee structure – Substantially all of our investments with the exception of the investments of ADKG, are managed by Athene Asset Management, L.P. (AAM),Apollo. Apollo provides us a subsidiaryfull suite of AGM. AAM providesservices that includes: direct investment management,management; asset allocation,sourcing and allocation; mergers and acquisition sourcing, execution and asset diligencediligence; and strategic support and advice. Apollo also provides certain operational support services for our investment portfolio including investment compliance, tax, legal and risk management support. As of September 30, 2017, AAM directly managed $59,315 million of
Apollo has extensive experience managing our investment portfolio and its knowledge of our liability profile enables it to tailor an asset management strategy to fit our specific needs. This strategy has proven responsive to changing market conditions and focuses on earning incremental yield by taking liquidity risk and complexity risk, rather than assuming solely credit risk. Our partnership has enabled us to take advantage of investment opportunities that would likely not otherwise have been available to us.
Under the Seventh Amended and Restated Fee Agreement between us and AGM’s subsidiary, Apollo Insurance Solutions Group LP (ISG) (Fee Agreement), we pay Apollo:
(1)a base management fee equal to the sum of (i) 0.225% per year of the lesser of (A) the aggregate market value of substantially all of the assets in substantially all of the investment accounts of or relating to us (collectively, the Accounts) on December 31, 2018 of $103.4 billion (Backbook Value) and (B) the aggregate market value of substantially all of the assets in the Accounts at the end of the respective month, plus (ii) 0.15% per year of the amount, if any (Incremental Value), by which 89%the aggregate market value of substantially all of the assets in the Accounts at the end of the respective month exceeds the Backbook Value; plus
(2)with respect to each asset in an Account, subject to certain exceptions, that is managed by Apollo and that belongs to a specified asset class tier (Core, Core Plus, Yield, and High Alpha), a sub-allocation fee as follows, which will, in the case of assets acquired after January 1, 2019, be subject to a cap of 10% of the applicable asset’s gross book yield:
(i)0.065% of the market value of Core assets, which include public investment grade corporate bonds, municipal securities, agency RMBS or CMBS, and obligations of governmental agencies or government sponsored entities that are designated one or two (the two highest designations)not expressly backed by the National AssociationUS government;
(ii)0.13% of Insurance Commissioners (NAIC).the market value of Core Plus assets, which include private investment grade corporate bonds, fixed rate first lien commercial mortgage loans (CML), and certain obligations issued or assumed by financial institutions and determined by Apollo to be “Tier 2 Capital” under Basel III, a set of recommendations for international banking regulations developed by the Bank for International Settlements;
(iii)0.375% of the market value of Yield assets, which include non-agency RMBS, investment grade CLO, CMBS and other ABS (other than RMBS and CLO), emerging market investments, below investment grade corporate bonds, subordinated debt obligations, hybrid securities or surplus notes issued or assumed by a financial institution, rated preferred equity, residential mortgage loans (RML), bank loans, investment grade infrastructure debt, and floating rate CMLs on slightly transitional or stabilized traditional real estate;
(iv)0.70% of the market value of High Alpha assets, which include subordinated CML, below investment grade CLO, unrated preferred equity, debt obligations originated by MidCap, CMLs for redevelopment or construction loans or secured by non-traditional real estate, below investment grade infrastructure debt, certain loans originated directly by Apollo (other than MidCap loans), and agency mortgage derivatives; and
(v)0.00% of the market value of cash and cash equivalents, US treasuries, non-preferred equities and alternatives.
The following represents assets based on the above sub-allocation structure:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In millions, except percentages) | March 31, 2021 | | Percent of Total | | December 31, 2020 | | Percent of Total |
| Core | $ | 46,343 | | | 25.4 | % | | $ | 49,392 | | | 27.3 | % |
| Core Plus | 41,810 | | | 22.9 | % | | 41,516 | | | 23.0 | % |
| Yield | 70,497 | | | 38.5 | % | | 64,693 | | | 35.8 | % |
| High Alpha | 7,038 | | | 3.9 | % | | 6,200 | | | 3.4 | % |
| Other | 17,003 | | | 9.3 | % | | 19,088 | | | 10.5 | % |
| Total sub-allocation assets | $ | 182,691 | | | 100.0 | % | | $ | 180,889 | | | 100.0 | % |
Additionally, the Fee Agreement provides for a possible payment by Apollo to us, or a possible payment by us to Apollo, equal to 0.025% of the Incremental Value as of the end of each year, beginning on December 31, 2019, depending upon the percentage of our investments that consist of Core and Core Plus assets. If more than 60% of our invested assets that are subject to the sub-allocation fees are invested in Core and Core Plus assets, we will receive a 0.025% fee reduction on the Incremental Value. If less than 50% of our invested assets that are subject to the sub-allocation fee are invested in Core and Core Plus assets, we will pay an additional fee of 0.025% on Incremental Value.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
For the services it renders, AAM earns a fee on all assets managed in accounts owned by or related to us, including sub-advised assets, but excluding assets of ADKG and certain other limited exceptions. Additionally, AAM recharges the sub-advisory fees it incurs with respect to our sub-advised assets to us. Historically, AAM generally earned an annual fee of 0.40% of assets under management. In the second quarter of 2017, following shareholder approval of an amendment to our bye-laws, we entered into the Fifth Amended and Restated Fee Agreement (Revised Fee Agreement), retroactive to January 1, 2017. The Revised Fee Agreement amended certain fee arrangements we previously had in place with AAM to provide for, among other things, an annual fee of 0.30% (reduced from 0.40%) on all assets that Apollo manages in accounts owned by us in the U.S. and Bermuda or in accounts supporting reinsurance ceded to our U.S. and Bermuda subsidiaries by third-party insurers (North American Accounts) in excess of $65,846 million (the level of assets in the North American Accounts as of December 31, 2016). The fee to be paid by us to AAM on the first $65,846 million of assets in the North American Accounts remains 0.40% per year, subject to certain discounts and exceptions.
For certain assets which require specialized sourcing and underwriting capabilities, AAM has chosen to mandate sub-advisors rather than building out in-house capabilities. AAM has entered into Master Sub-Advisory Agreements (MSAAs) with certain Apollo affiliates to sub-advise AAM with respect to a portion of our assets, with the fees recharged to us, in addition to the gross fee paid to AAM as described above. The MSAAs cover services rendered by Apollo-affiliated sub-advisors relating to the following investments:
|
| | | | | | | |
| (In millions, except for percentages) | September 30, 2017 | | December 31, 2016 |
| Fixed maturity securities | | | |
| U.S. state, municipal and political subdivisions | $ | — |
| | $ | 5 |
|
| Foreign governments | 153 |
| | 149 |
|
| Corporate | 2,648 |
| | 2,032 |
|
| CLO | 5,021 |
| | 4,727 |
|
| ABS | 803 |
| | 911 |
|
| CMBS | 869 |
| | 975 |
|
| Mortgage loans | 2,284 |
| | 1,767 |
|
| Investment funds | 25 |
| | 23 |
|
| Trading securities | 119 |
| | 126 |
|
| Funds withheld at interest | 1,762 |
| | 1,682 |
|
| Other investments | 77 |
| | 81 |
|
| Total assets sub-advised by Apollo affiliates | $ | 13,761 |
| | $ | 12,478 |
|
| Percent of assets sub-advised by Apollo affiliates to total AAM-managed assets | 19 | % | | 19 | % |
During the second quarterthree months ended March 31, 2021 and 2020, we incurred management fees, inclusive of 2017, AAMthe base and certain other Apollo affiliates entered into addendums to the MSAAs currently in effect, pursuant to which, with limited exceptions, Apollo will earn 0.40% per year on all assets in the North American Accounts explicitly sub-advised by Apollo up to $10,000 million, 0.35% per year on all assets in such accounts explicitly sub-advised by Apollo in excesssub-allocation fees, of $10,000 million up to $12,441 million (the level of fee-paying sub-advised assets in the North American Accounts at December 31, 2016), 0.40% per year on all assets in such accounts explicitly sub-advised by Apollo in excess of $12,441 million up to $16,000$144 million and 0.35% per year on all assets in such accounts explicitly sub-advised by Apollo in excess of $16,000 million. The addendums were retroactive to January 1, 2017.
Apollo Asset Management Europe
ADKG has an investment advisory agreement with Apollo Asset Management Europe (together with certain of its affiliates, AAME), also a subsidiary of AGM. AAME provides advisory services for all of ADKG's investment portfolio other than operating cash, mortgage loans secured by residential and commercial properties that are not identified and advised by AAME, and assets related to unit-linked policies. Also excluded are assets held in German special investment funds managed or advised by Apollo, AAM and any of the respective affiliates of Apollo, AAM or AAME, to the extent the entity receives a management or advisory fee in connection with the fund. In providing these services, AAME has access to Apollo's European expertise and capabilities. The ADKG investments sub-advised by AAME consist primarily of corporate and sovereign bonds, as compared to the more diverse range of assets managed by AAM or those held in the German special investment funds. As compensation for the investment advisory services rendered, AAME receives a fee of 0.10% per year on the assets it sub-advises. Affiliates of AAME receive an advisory fee of 0.35% per year on certain German special investment funds and our investment in a sub-fund of Apollo Capital Efficient Fund I (ACE fund), as well as a pro rata share of operating expenses up to 0.30% on the ACE fund. As of September 30, 2017 and December 31, 2016, the German special investment funds totaled $1,050 million and $258 million, respectively, and the ACE fund totaled $96 million and $84$128 million, respectively. The fees incurred for management of these funds are included in sub-advisory fees in the table below.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following represents the assets sub-advised by AAME:
|
| | | | | | | |
| (In millions) | September 30, 2017 | | December 31, 2016 |
| Fixed maturity securities | | | |
| Foreign governments | $ | 2,095 |
| | $ | 2,062 |
|
| Corporate | 1,216 |
| | 1,567 |
|
| Equity securities | 53 |
| | 187 |
|
| Investment funds | 38 |
| | 34 |
|
| Policy loans | 6 |
| | 6 |
|
| Real estate | 621 |
| | 541 |
|
| Other investments | 169 |
| | 153 |
|
| Cash and cash equivalents | 31 |
| | 25 |
|
| Total assets sub-advised by AAME | $ | 4,229 |
| | $ | 4,575 |
|
The following summarizes the asset management fees and sub-advisory fees we have incurred related to AAM, AAME and other Apollo affiliates:
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 |
| Asset management fees | $ | 67 |
| | $ | 61 |
| | $ | 193 |
| | $ | 176 |
|
| Sub-advisory fees | 14 |
| | 12 |
| | 42 |
| | 50 |
|
The management and sub-advisoryManagement fees are included within net investment income on the condensed consolidated statements of income.income (loss). As of September 30, 2017March 31, 2021 and December 31, 2016, the2020, management fees payable was $34were $48 million and $28$41 million, respectively, and the sub-advisory fees payable was $17 million and $11 million, respectively. Both the management and sub-advisory fees payables are included in other liabilities on the condensed consolidated balance sheets. Such amounts include fees incurred attributable to ACRA including all of the noncontrolling interest in ACRA.
TheIn addition to the assets on our condensed consolidated balance sheets managed by Apollo, Apollo manages the assets underlying our funds withheld receivable. For these assets, the third-party cedants pay Apollo fees based upon the same fee construct we have with Apollo. Such fees directly reduce the settlement payments that we receive from the third-party cedant and, as such, we indirectly pay those fees. Finally, Apollo charges management fees and carried interest on Apollo-managed funds and other entities in which we invest. Neither the fees paid by such third-party cedants nor the fees or carried interest paid by such Apollo-managed funds or other entities are included in the investment management or advisory agreements with AAM or AAME have no stated term and any party can terminate upon notice. However, ourfee amounts noted above.
Investment management agreement (IMA) termination – Our bye-laws currently provide that we may not, and will cause our subsidiaries not exercise our termination rights under the agreements until October 31, 2018to, terminate any IMA among us or any annualof our subsidiaries, on the one hand, and a member of the Apollo Group (as defined in our bye-laws), on the other hand, other than on June 4, 2023 or any two year anniversary thereafterof such date (each such date, an IMA Termination Election Date) and any termination thereonon an IMA Termination Election Date requires (i) the approval of two-thirds of our Independent Directors (as defined in the bye-laws) and (ii) prior written notice thereof to the applicable Apollo subsidiary of such termination at least 30 days.days, but not more than 90 days, prior to an IMA Termination Election Date. If theour Independent Directors make such election to terminate and notice of such noticetermination is timely delivered, the termination will be effective onno earlier than the second anniversary of the applicable IMA Termination Election Date (an IMA(IMA Termination Effective Date). Notwithstanding the foregoing, (1) the Independent Directors(A) except as set forth in clause (B) below, our board of directors may only elect to terminate an investment management agreement or advisory agreementIMA on an IMA Termination Election Date if two-thirds of theour Independent Directors determine, in their sole discretion and acting in good faith, that either (i) there has been unsatisfactory long-term performance materially detrimental to us by the applicable Apollo subsidiary or (ii) the fees being charged by the applicable Apollo subsidiary are unfair and excessive compared to a comparable asset manager (provided, that in either case such Independent Directors must deliver notice of any such determination to the applicable Apollo subsidiary and the applicable Apollo shallsubsidiary will have until the applicable IMA Termination Effective Date to address such concerns, and provided, further, that in the case of such a determination that the fees being charged by the applicable Apollo subsidiary are unfair and excessive, the applicable Apollo subsidiary has the right to lower its fees to match the fees of such comparable asset manager) and (2)(B) upon the determination by two-thirds of theour Independent Directors, we or our subsidiaries may also terminate an investment management agreement or advisory agreementIMA with the applicable Apollo subsidiary, on a date other than an IMA Termination Effective Date, as a result of either (i) a material violation of law relating to Apollo’sthe applicable Apollo subsidiary’s advisory business, or (ii) Apollo’sthe applicable Apollo subsidiary’s gross negligence, willful misconduct or reckless disregard of its obligations under the relevant agreement, in each case of this clause (B), that is materially detrimental to us, and in either case of this clause (B), subject to the delivery of written notice at least 30 days’days prior writtento such termination; provided, that in connection with an event described in clause (B)(i) or (B)(ii), the applicable Apollo subsidiary shall have the right to dispute such determination of the Independent Directors within 30 days after receiving notice to Apollofrom us of such terminationdetermination, in which case the matter will be submitted to binding arbitration and such termination will be effective atIMA shall continue to remain in effect during the endperiod of such 30-day period.the arbitration (the events described in the foregoing clauses (A) and (B) are referred to in more detail in our bye-laws as “AHL Cause”).
Governance – We have a management investment committee, which includes members of our senior management and reports to the risk committee of our board of directors. The committee focuses on strategic decisions involving our investment portfolio, such as approving investment limits, new asset classes and our allocation strategy, reviewing large asset transactions, as well as monitoring our credit risk, and the management of our assets and liabilities.
A significant voting interest in the Company is held by shareholders who are members of the Apollo Group, as defined in our bye-laws.Group. Also, James Belardi, our Chief Executive Officer, is also an employee of ISG and receives substantial remuneration from acting as Chief Executive Officer of AAM, andISG. Mr. Belardi also owns a 5% profitsprofit interest in AAM.ISG and in connection with such interest receives distributions in respect of ISG and sub-allocation fees earned by Apollo. Additionally, fivesix of the twelvesixteen members of our board of directors are employees of or consultants to Apollo (including Mr. Belardi). In order to protect against potential conflicts of interest resulting from transactions into which we have entered and will continue to enter into with the Apollo Group, our bye-laws createdrequire us to maintain a conflicts committee consistingcomprised solely of three of our directors who are not officers or employees of any member of the Apollo Group. The conflicts committee reviews and a majority of the committee members must approveapproves material transactions between us and the Apollo Group, subject to certain exceptions.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Other related party transactions—
A-A Mortgage – We had an equity method investment of $583 million and $444 million as of March 31, 2021 and December 31, 2020, respectively, in A-A Mortgage, which had an investment in AmeriHome. On February 16, 2021, Apollo, Athene and AmeriHome announced the sale of AmeriHome to a subsidiary of Western Alliance Bancorporation. This transaction closed on April 7, 2021 and we estimate $184 million of revenue from the premium of the platform sale, net of carry and transaction expenses. Of the total estimated premium, $174 million was recognized during the first quarter of 2021 as a result of the underlying investment being held at fair value. We have a loan purchase agreement with AmeriHome, Mortgage Company, LLC (AmeriHome), an investee of A-A Mortgage, an equity method investee.which survived the sale. The agreement allows us to purchase residential mortgage loans which they haveAmeriHome has purchased from correspondent sellers and pooled for sale in the secondary market. AmeriHome retains the servicing rights to the sold loans. We purchased $21$0 million and $19$169 million of residential mortgage loans under this agreement during the ninethree months ended SeptemberMarch 31, 2021 and 2020, respectively. Additionally, we hold investments issued by AmeriHome or AmeriHome affiliates of $372 million and $360 million as of March 31, 2021 and December 31, 2020, respectively, which are included in related party AFS securities on the condensed consolidated balances sheets. We also had commitments to make additional equity investments in A-A Mortgage of $381 million as of March 31, 2021.
MidCap – We have multiple investments in MidCap including profit participating notes, redeemable preferred stock and amounts advanced under a subordinated debt facility. The subordinated debt facility is included in related party other investments and the redeemable preferred stock and profit participating notes are included in related party trading securities on the condensed consolidated balance sheets. The following summarizes these investments in MidCap:
| | | | | | | | | | | |
| (In millions) | March 31, 2021 | | December 31, 2020 |
| Profit participating notes | $ | 573 | | | $ | 534 | |
| Subordinated debt facility | 321 | | | 328 | |
| Redeemable preferred stock | 77 | | | 77 | |
| Total investment in MidCap | $ | 971 | | | $ | 939 | |
Additionally, we hold ABS and CLO securities issued by MidCap affiliates of $801 million and $630 million as of March 31, 2021 and December 31, 2020, respectively, which are included in related party AFS securities on the condensed consolidated balance sheets.
Athora – We have a cooperation agreement with Athora, pursuant to which, among other things, (1) for a period of 30 2017days from the receipt of notice of a cession, we have the right of first refusal to reinsure (i) up to 50% of the liabilities ceded from Athora’s reinsurance subsidiaries to Athora Life Re Ltd. and 2016,(ii) up to 20% of the liabilities ceded from a third party to any of Athora’s insurance subsidiaries, subject to a limitation in the aggregate of 20% of Athora’s liabilities, (2) Athora agreed to cause its insurance subsidiaries to consider the purchase of certain funding agreements and/or other spread instruments issued by our insurance subsidiaries, subject to a limitation that the fair market value of such funding agreements purchased by any of Athora’s insurance subsidiaries may generally not exceed 3% of the fair market value of such subsidiary’s total assets, (3) we provide Athora with a right of first refusal to pursue acquisition and reinsurance transactions in Europe (other than the United Kingdom (UK)) and (4) Athora provides us and our subsidiaries with a right of first refusal to pursue acquisition and reinsurance transactions in North America and the UK. Notwithstanding the foregoing, pursuant to the cooperation agreement, Athora is only required to use its reasonable best efforts to cause its subsidiaries to adhere to the provisions set forth in the cooperation agreement and therefore Athora’s ability to cause its subsidiaries to act pursuant to the cooperation agreement may be limited by, among other things, legal prohibitions or the inability to obtain the approval of the board of directors or other applicable governing body of the applicable subsidiary, which approval is solely at the discretion of such governing body. As of March 31, 2021, we have not exercised our right of first refusal to reinsure liabilities ceded to Athora’s insurance or reinsurance subsidiaries.
Our investment in Athora, which is included in related party investment funds on the condensed consolidated balance sheets, was $689 million and $709 million as of March 31, 2021 and December 31, 2020, respectively. Additionally, as of March 31, 2021 and December 31, 2020, we had $117 million and $122 million, respectively, of funding agreements outstanding to Athora. We also have commitments to make additional equity investments in Athora of $293 million as of March 31, 2021.
Venerable – We have coinsurance and modco agreements with Venerable Insurance and Annuity Company (VIAC). VIAC is a related party due to ourminority equity investment in its holding company’s parent, VA Capital, which was $316 million and $123 million as of March 31, 2021 and December 31, 2020, respectively. The minority equity investment in VA Capital is included in related party investment funds on the condensed consolidated balance sheets and accounted for as an equity method investment. VA Capital is owned by a consortium of investors, led by affiliates of AGM, Crestview Partners and Reverence Capital Partners, and is the parent of Venerable, which is the parent of VIAC. Additionally, we have a 15-year term loan receivable from Venerable due in 2033, which is included in related party other investments on the condensed consolidated balance sheets. The loan is held at the principal balance less allowances and was $147 million and $145 million as of March 31, 2021 and December 31, 2020, respectively. While management views the overall transactions with Venerable as favorable to us, the stated interest rate of 6.257% on the term loan to Venerable represents a below-market interest rate, and management considered such rate as part of its evaluation and pricing of the reinsurance transactions.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Strategic Partnership – We have an agreement pursuant to which we may invest up to $2.5 billion over three years in funds managed by Apollo entities (Strategic Partnership). This arrangement is intended to permit us to invest across the Apollo alternatives platform into credit-oriented, strategic and other alternative investments in a manner and size that is consistent with our existing investment strategy. Fees for such investments payable by us to Apollo would be more favorable to us than market rates, and consistent with our existing alternative investments, investments made under the Strategic Partnership require approval of ISG and remain subject to our existing governance processes, including approval by our conflicts committee where applicable. As of March 31, 2021 and December 31, 2020, we had $229 million and $214 million, respectively, of investments under the Strategic Partnership and these investments are typically included in related party investment funds on the condensed consolidated balance sheets.
PK AirFinance – We have an investment in PK AirFinance (PK), an aviation lending business with a portfolio of loans (Aviation Loans). The Aviation Loans are generally fully secured by aircraft leases and aircraft. Apollo owns the PK loan origination platform, including personnel and systems and, pursuant to certain agreements entered into between us, Apollo, and certain entities managed by Apollo, the Aviation Loans are securitized by an SPV for which Apollo acts as ABS manager (ABS-SPV). The ABS-SPV issues tranches of senior notes and subordinated notes, which are secured by the Aviation Loans. As of March 31, 2021 and December 31, 2020, our investment in securitizations of loans originated by PK was $1,353 million and $1,373 million, respectively, and are included in related party AFS or trading securities on the condensed consolidated balance sheets. We also have commitments to make additional investment in securitizations of loans originated by PK of $1,270 million as of March 31, 2021.
Apollo/Athene Dedicated Investment Program (ADIP) – Our subsidiary, Athene Co-Invest Reinsurance Affiliate 1A Ltd. (together with its subsidiaries, ACRA) is partially owned by ADIP, which is managed by AGM. ALRe currently holds 36.55% of the economic interests in ACRA, with ADIP holding the remaining 63.45%. During the three months ended March 31, 2021 and 2020, we received capital contributions of $235 million and $240 million, respectively, from ADIP and paid dividends of $0 million and $46 million, respectively, to ADIP.
Apollo Share Exchange and Related Transactions – On February 28, 2020, we closed a strategic transaction with AGM and certain affiliates of AGM which collectively comprise the Apollo Operating Group (AOG), pursuant to which we sold 27,959,184 newly issued Class A common shares to the AOG for an investment in Apollo of 29,154,519 newly issued AOG units valued at $1.1 billion and we sold 7,575,758 newly issued Class A common shares to the AOG for $350 million. Additionally, Apollo Management Holdings, L.P. (AMH) has the right to purchase up to that number of Class A common shares that would increase by 5 percentage points the percentage of the issued and outstanding Class A common shares beneficially owned by the AOG and certain affiliates, employees and consultants of AGM (inclusive of Class A common shares over which any such persons have a valid proxy), calculated on a fully diluted basis. In connection with the closing of the transaction, we made certain amendments to our bye-laws which, among other things, eliminated our multi-class common share structure.
Concurrent with our entry into the transaction agreements, AMH, James Belardi, our Chief Executive Officer, and William Wheeler, our President (each an Other Shareholder), entered into a voting agreement, pursuant to which each Other Shareholder irrevocably appointed AMH as its proxy and attorney-in-fact (Proxy) to vote all of such Other Shareholder’s Class A common shares at any meeting of our shareholders occurring following the closing date and in connection with any written consent of our shareholders following the closing date. The Proxy will be of no force and effect if Apollo and certain affiliates thereof cease to hold some minimum level of ownership not to exceed 7.5% of our Class A common shares.
10. Commitments and Contingencies
Contingent Commitments—We had commitments to make investments, primarily capital contributions to investment funds, exclusiveinclusive of AGERrelated party commitments as discussed below,previously, of $1,761$11,198 million and $962$7,472 million as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively. We expect most of our current commitments will be invested over the next five years; however, these commitments could become due any time upon counterparty request.
On April 14, 2017 (Subscription Date), in connection with a private offering, AGER entered into subscription agreements with AHL, certain affiliates of AGM and a number of other third-party investors pursuant to which AGER secured commitments from such parties to purchase new common shares in AGER (AGER Offering). AHL's capital commitment includes the valuation of the AGER Group (comprised of our European operations which includes ADKG) at approximately €90 million, which approximated our invested capital in the AGER Group on the Subscription Date. Additionally, AHL has committed to purchase an additional €285 million of common shares (which may be reduced to €260 million if certain conditions are met), as well as an additional profits interest in securities which, upon meeting certain vesting triggers, will be convertible into additional common shares.
On August 9, 2017, our Bermuda subsidiaries, AGER and NewRe Life Re Ltd. (NewRe) entered into a stock purchase agreement with Aegon Ireland Holding B.V. and Aegon Europe Holding B.V., pursuant to which NewRe agreed to purchase all of the outstanding stock of Aegon Ireland plc. Prior to the closing of the transaction, which is expected in the first quarter of 2018, subject to regulatory approvals and other customary closing conditions, AGER expects to call capital from its investors, which is expected to result in the issuance by AGER of new common shares to affiliates of Apollo and other third-party investors, such that our interest in the AGER Group will be reduced, causing the AGER Group to thereafter be held by us as an investment rather than as a consolidated subsidiary.
The valuation of the AGER Group was fixed at approximately €90 million as of the Subscription Date, and is unaffected by any profit or loss or other increase or decrease in value of the AGER Group during the period between the Subscription Date and the date on which the AGER Group is deconsolidated. As a result, to the extent that our invested capital and/or the fair value of the AGER Group increases or decreases during such time period, we may incur a gain or loss upon deconsolidation.
Funding Agreements—We are a member of the Federal Home Loan Bank (FHLB) of Indianapolis and Des MoinesFHLB and, through membership, we have issued funding agreements to the FHLB in exchange for cash advances. As of September 30, 2017March 31, 2021 and December 31, 2016,2020, we had $623$2,001 million and $691$2,002 million, respectively, of FHLB funding agreements outstanding with the FHLB.outstanding. We are required to provide collateral in excess of the funding agreements,agreement amounts outstanding, considering any discounts to the securities posted and prepayment penalties.
We have a funding agreement backed notes (FABN) program, which allows Athene Global Funding, a special purpose, non-affiliated statutory-trustspecial-purpose, unaffiliated statutory trust, to offer up to $5 billion of its senior secured medium-term notes. Athene Global Funding uses the net proceeds from each sale to purchase one or more funding agreements from us. FundingAs of March 31, 2021 and December 31, 2020, we had $11,958 million and $8,822 million, respectively, of FABN funding agreements outstanding under this program. We had a carrying value$3,058 million of $2,996 million and $246 millionFABN capacity remaining as of September 30, 2017March 31, 2021.
During the third quarter of 2020, we established a secured funding agreement backed repurchase agreement (FABR) program, in which a special-purpose, unaffiliated entity entered into repurchase agreements with a bank and the proceeds of the repurchase agreements were used by the special purpose entity to purchase funding agreements from us. As of March 31, 2021 and December 31, 2016, respectively.2020, we had $1,000 million of FABR funding agreements outstanding.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Pledged Assets and Funds in Trust (Restricted Assets)—The total restricted assets included on the condensed consolidated balance sheets are as follows:
| | | | | | | | | | | |
| (In millions) | March 31, 2021 | | December 31, 2020 |
| AFS securities | $ | 9,056 | | | $ | 9,884 | |
| Trading securities | 69 | | | 60 | |
| Equity securities | 27 | | | 26 | |
| Mortgage loans | 4,916 | | | 5,028 | |
| Investment funds | 152 | | | 68 | |
| Derivative assets | 107 | | | 107 | |
| Short-term investments | 13 | | | 52 | |
| Other investments | 105 | | | 105 | |
| Restricted cash | 546 | | | 738 | |
| Total restricted assets | $ | 14,991 | | | $ | 16,068 | |
|
| | | | | | | |
| (In millions) | September 30, 2017 | | December 31, 2016 |
| AFS securities | | | |
| Fixed maturity | $ | 1,479 |
| | $ | 1,535 |
|
| Equity | 38 |
| | 40 |
|
| Investment funds | 22 |
| | 25 |
|
| Mortgage loans | 798 |
| | 1,003 |
|
| Short-term investments | 13 |
| | 15 |
|
| Restricted cash | 100 |
| | 57 |
|
| Total restricted assets | $ | 2,450 |
| | $ | 2,675 |
|
The restricted assets are primarily a result of the FHLB funding agreements described above. Additionally, we have establishedrelated to reinsurance trusts of assetsestablished in accordance with coinsurance agreements which are typically based on corresponding statutory reserves.and the FHLB and FABR funding agreements described above.
Letters of Credit—We have undrawn letters of credit totaling $1,401 million as of March 31, 2021. These letters of credit were issued for our reinsurance program and expire between December 10, 2021 and June 19, 2023.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Litigation, Claims and Assessments—On June 12, 2015, Don Hudson, on behalf of himself and others similarly situated, filed a putative class action complaint in the United States District Court for the Northern District of California against us. The complaint, which was similar to complaints recently filed against other large insurance companies, primarily alleged that captive reinsurance and other transactions had the effect of misrepresenting the financial condition of Athene Annuity and Life Company (AAIA). The complaint purported to be brought on behalf of a class of purchasers of annuity products issued by AAIA between 2007 and the present and asserts claims against AHL, ALRe, AUSA and AAIA in addition to Apollo and AAM. There were also various allegations related to the purchase of Aviva USA and concerning entry into a modco transaction with ALRe in October 2013. The suit asserted claims of violation of the Racketeer Influenced and Corrupt Organizations Act and sought compensatory damages, trebled, in an amount to be determined, costs and attorneys' fees. On March 25, 2016, the matter was transferred to the United States District Court for the Southern District of Iowa (S.D. IA Court). On May 25, 2016, the court granted plaintiff’s motion to file an amended complaint dropping plaintiff Silva and defendant Aviva plc. We moved to dismiss the amended complaint on June 30, 2016. On May 11, 2017, the putative class action complaint filed by Don Hudson, on behalf of himself and others similarly situated, against us was dismissed in a written decision by the S.D. IA Court. Plaintiff did not appeal the district court’s decision and this matter is concluded.
On July 27, 2015, John Griffiths, on behalf of himself and others similarly situated, filed a putative class action complaint in the United States District Court for the District of Massachusetts, against us. An amended complaint was filed on December 18, 2015. The complaint asserts claims against AHL, AAIA and Athene London Assignment Corporation (Athene London), in addition to an Aviva defendant. AHL is a named defendant due to its purchase of Aviva USA, and AAIA and Athene London are named as successors to AvivaCorporate-owned Life Insurance Company and Aviva London Assignment Corporation, respectively. The complaint alleges a putative class of all persons who are the beneficial owners of assets which were used to purchase structured settlement annuities that Aviva Life Insurance Company, Aviva London Assignment Corporation, and Aviva International Insurance Limited (collectively, the Aviva Entities) or their predecessors, as applicable, delivered to purchasers on or after April 1, 2003 that were backed by a capital maintenance agreement issued by Aviva International Insurance Limited or its predecessor (the CMA). The complaint alleges that the Aviva Entities sold structured settlement annuities to the public on the basis that such products were backed by the CMA, which was alleged to be a source of great financial strength. The complaint further alleges that the Aviva Entities used the CMA to enhance the sales volume and raise the price of the annuities. The complaint claims that, as a result of Aviva USA’s sale to AHL, the CMA terminated. According to the complaint, no notice of this termination was provided to the owners of the structured settlement annuities. The complaint alleges that the termination of the CMA gave rise to claims for breach of contract, breach of fiduciary duty, promissory estoppel, and unjust enrichment. AHL and plaintiff recently agreed to a term sheet settlement on a class wide basis. Terms of the settlement, which is subject to court approval, include: (1) AHL entering into a capital maintenance agreement with Athene London requiring AHL to provide capital to Athene London upon a missed structured settlement payment that is not timely cured and (2) AHL paying a monetary amount that is immaterial to us. The case against AHL has been stayed in totality and the case has been stayed against co-defendant Aviva until November 27, 2017 while the parties engage in a magistrate settlement conference.
The Internal Revenue Service (IRS) has completed its examinations of the 2006 through 2010 Aviva USA tax years. Aviva USA agreed to all adjustments that were proposed with respect to those tax years with two exceptions: (1) AAIA’s treatment of call options used to hedge fixed indexed annuity (FIA) liabilities for the tax years 2008–2010 and (2) the disallowance of offsetting tax deductions taken by AAIA and taxable income reported by the non-life subgroup with respect to unpaid independent marketing organization commissions. The first adjustment to which Aviva USA did not agree would disallow deductions of $191 million, $154 million and $76 million for 2008, 2009 and 2010, respectively. The second adjustment to which Aviva USA did not agree would increase non-life net operating losses and decrease AAIA net operating losses by $16 million in each of 2009 and 2010. Taxes, penalties and interest with respect to these two issues for the years under audit are subject to indemnification by Aviva plc under the Stock Purchase Agreement (SPA) between Aviva plc and AHL, dated December 21, 2012 assuming the SPA requirements are satisfied. Athene USA has been unable to negotiate a favorable settlement of this issue with the IRS, and is contesting the adjustment in federal court. If the IRS position is upheld in federal court, Athene USA expects that it would owe tax of $120 million, plus interest, for tax years ending on or before October 2, 2013, which are subject to indemnification by Aviva plc as described above.
The IRS also recently completed its examination of the 2011 through 2012 Aviva USA tax years, proposing adjustments that would increase taxable income by approximately $16 million in the aggregate for these two tax years. Athene USA agreed to all adjustments that were proposed with respect to those tax years except for adjustments relating to the same two issues that were not agreed to during the prior examination as discussed above. The first adjustment to which Athene USA did not agree would disallow deductions of $16 million in 2011 and increase deductions by $12 million in 2012. The second adjustment to which Athene USA did not agree would increase non-life net operating losses and decrease AAIA net operating losses by $15 million in 2011 and $12 million in 2012. Taxes, penalties and interest with respect to these two tax years are subject to indemnification by Aviva plc under the SPA, assuming the SPA requirements are satisfied. The treatment of FIA hedges is a recurring issue as to the timing of the related deductions and could affect the current income tax incurred in periods after October 2, 2013, which are not subject to indemnification by Aviva plc. Given that the disallowance of a deduction in one period results in an increased deduction in a future period, we do not expect that there will be any material impact to our financial condition resulting from this issue.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(COLI) Matter – In 2000 and 2001, two insurance companies, which were subsequently merged into AAIAAthene Annuity and Life Company (AAIA), purchased broad based variable COLI policies from American General Life Insurance Company (American General) broad based variable corporate-owned life insurance (COLI) policies that, as of September 30, 2017,March 31, 2021, had an asset value of $344$413 million, and is included in other assets on the condensed consolidated balance sheets. In January 2012, the COLI policy administrator delivered to AAIA a supplement to the existing COLI policies and advised that American General and ZC Resource Investment Trust (ZC Trust) had unilaterally implemented changes set forth in the supplement that, if effective, would: (1) potentially negatively impact the crediting rate for the policies and (2) change the exit and surrender protocols set forth in the policies. In March 2013, AAIA filed suit against American General, ZC Trust, and ZC Resource LLC in Chancery Court in Delaware, seeking, among other relief, a declaration that the changes set forth in the supplement were ineffectual and in breach of the parties’ agreement. The parties filed cross motions for judgment as a matter of law, and the court granted defendants’ motion and dismissed without prejudice on ripeness grounds. The issue that negatively impacts the crediting rate for one of the COLI policies has subsequently been triggered and, on April 3, 2018, we filed suit against the same defendants in Chancery Court in Delaware seeking substantially similar relief. Defendants moved to dismiss and the court heard oral arguments on February 13, 2019. The court issued an opinion on July 31, 2019 that did not address the merits, but found that the Chancery Court did not have jurisdiction over our claims and directed us to either amend our complaint or transfer the matter to Delaware Superior Court. The matter has been transferred to the Delaware Superior Court. Defendants renewed their motion to dismiss and the Superior Court heard oral arguments on December 18, 2019. The Superior Court issued an opinion on May 18, 2020 in which it granted in part and denied in part defendants’ motion. The Superior Court denied defendants’ motion with respect to the issue that negatively impacts the crediting rate for one of the COLI policies, which issue will pursue further adjudication.proceed to discovery. The Superior Court granted defendants’ motion and dismissed without prejudice on ripeness grounds claims related to the exit and surrender protocols set forth in the policies, and dismissed defendant ZC Resource LLC. If the supplement is ultimately deemed to be effective, the purported changes to the policies could impair AAIA’s ability to access the value of guarantees associated with the policies. The Superior Court issued a scheduling order providing for a July 2022 trial and the parties are currently engaged in discovery. The value of the guarantees included within the asset value reflected above is $164$196 million as of September 30, 2017.March 31, 2021.
Regulatory Matters – Beginning in 2015, our US insurance subsidiaries have experienced increased complaints related to the conversion and administration of the block of life insurance business acquired in connection with our acquisition of Aviva USA and reinsured to affiliates of Global Atlantic. The life insurance policies included in this block have been and are currently being administered by AllianceOne Inc. (AllianceOne), a subsidiary of DXC Technology Company, which was retained by such Global Atlantic affiliates to provide third party administration services on such policies. AllianceOne also administers a small block of annuity policies that were on Aviva USA’s legacy policy administration systems that were also converted in connection with the acquisition of Aviva USA and have experienced some similar service and administration issues, but to a lesser degree.
14.As a result of the difficulties experienced with respect to the administration of such policies, we have received notifications from several state regulators, including but not limited to New York State Department of Financial Services (NYSDFS), the California Department of Insurance (CDI) and the Texas Department of Insurance (TDI), indicating, in each case, that the respective regulator planned to undertake a market conduct examination or enforcement proceeding of the applicable US insurance subsidiary relating to the treatment of policyholders subject to our reinsurance agreements with affiliates of Global Atlantic and the conversion of the life and annuity policies, including the administration of such blocks by AllianceOne. We entered into consent orders with several state regulators, including the NYSDFS, the CDI and the TDI, to resolve underlying matters in the respective states. All fines and costs, including those associated with remediation plans, paid in connection with the consent orders are subject to indemnification by Global Atlantic or affiliates of Global Atlantic.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Pursuant to the terms of the reinsurance agreements between us and the relevant affiliates of Global Atlantic, the applicable affiliates of Global Atlantic have financial responsibility for the ceded life block and are subject to significant administrative service requirements, including compliance with applicable law. The agreements also provide for indemnification to us, including for administration issues.
In addition to the examinations and proceedings initiated to date, it is possible that other regulators may pursue similar formal examinations, inquiries or enforcement proceedings and that any examinations, inquiries and/or enforcement proceedings may result in fines, administrative penalties and payments to policyholders. While we do not expect the amount of any such fines, penalties or payments arising from these matters to be material to our financial condition, results of operations or cash flows, it is possible that such amounts could be material.
11. Segment Information
We operate our core business strategies out of one1 reportable segment, Retirement Services. In addition to Retirement Services, we report certain other operations in Corporate and Other.
Retirement Services—Retirement Services is comprised of our United StatesUS and Bermuda operations, which issue and reinsure retirement savings products and institutional products. Retirement Services has retail operations, which provide annuity retirement solutions to our policyholders. Retirement Services also has reinsurance operations, which reinsure multi-year guaranteed annuities, fixed indexed annuities, traditional one-year guarantee fixed deferred annuities, immediate annuities and institutional products from our reinsurance partners. In addition, our institutional operations, including funding agreements and pension risk transfer (PRT) obligations,group annuities, are included in our Retirement Services segment.
Corporate and Other—Corporate and Other includes certain other operations related to our corporate activities and our German operations, which is primarily comprised of participating long-duration savings products. In addition to our German operations, included in Corporate and Other aresuch as corporate allocated expenses, merger and acquisition costs, debt costs, preferred stock dividends, certain integration and restructuring costs, certain stock-based compensation and intersegment eliminations. In Corporate and Other,addition, we also hold capital in excess of the level of capital we hold in Retirement Services to support our operating strategy.
Financial Measures—Segment adjusted operating income net of tax,available to common shareholders is an internal measure used by the chief operating decision maker to evaluate and assess the results of our segments.
OperatingAdjusted operating revenue is a component of adjusted operating income net of tax,available to common shareholders and excludes market volatility and adjustments for other non-operating activity. Our adjusted operating revenue equals our total revenue, adjusted to eliminate the impact of the following non-operating adjustments:
•Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets;
•Investment gains (losses), net of offsets; and
•Noncontrolling interests, VIE expenses and noncontrolling interest; and
Otherother adjustments to revenues.
The table below reconciles segment adjusted operating revenues to total revenues presented on the condensed consolidated statements of income:income (loss):
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| (In millions) | 2021 | | 2020 | | | | |
| Retirement Services | $ | 3,637 | | | $ | 2,469 | | | | | |
| Corporate and Other | 38 | | | (330) | | | | | |
| Non-operating adjustments | | | | | | | |
| Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets | 493 | | | (1,671) | | | | | |
| Investment gains (losses), net of offsets | (857) | | | (1,685) | | | | | |
| Noncontrolling interests, VIE expenses and other adjustments to revenues | 1,080 | | | (332) | | | | | |
| Total revenues | $ | 4,391 | | | $ | (1,549) | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 |
| Operating revenue by segment | | | | | | | |
| Retirement Services | $ | 936 |
| | $ | 876 |
| | $ | 3,078 |
| | $ | 2,464 |
|
| Corporate and Other | 94 |
| | 69 |
| | 265 |
| | 166 |
|
| Total segment operating revenues | 1,030 |
| | 945 |
| | 3,343 |
| | 2,630 |
|
| Non-operating adjustments | | | | | | | |
| Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets | 379 |
| | 200 |
| | 1,181 |
| | 100 |
|
| Investment gains (losses), net of offsets | 63 |
| | 121 |
| | 326 |
| | 293 |
|
| VIE expenses and noncontrolling interest | — |
| | 4 |
| | — |
| | 13 |
|
| Other adjustments to revenues | 1 |
| | 2 |
| | 5 |
| | 3 |
|
| Total non-operating adjustments | 443 |
| | 327 |
| | 1,512 |
| | 409 |
|
| Total revenues | $ | 1,473 |
| | $ | 1,272 |
| | $ | 4,855 |
| | $ | 3,039 |
|
ATHENE HOLDING LTD.
NotesAdjusted operating income available to Condensed Consolidated Financial Statements (Unaudited)
Operating income, net of tax,common shareholders is an internal measure used to evaluate our financial performance excluding market volatility and expenses related to integration, restructuring, stock compensation and certain other expenses. Our adjusted operating income net of tax,available to common shareholders equals net income available to AHL'sAthene Holding Ltd. common shareholders adjusted to eliminate the impact of the following non-operating adjustments:
•Investment gains (losses), net of offsets;
•Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets;
•Integration, restructuring and other non-operating expenses;
•Stock-based compensation, excluding the long-term incentive plan (LTIP); and
•Income tax (expense) benefit – non-operating.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The table below reconciles segment adjusted operating income net of tax,available to common shareholders to net income available to Athene Holding Ltd. common shareholders presented on the condensed consolidated statements of income:income (loss):
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| (In millions) | 2021 | | 2020 | | | | |
| Retirement Services | $ | 784 | | | $ | 204 | | | | | |
| Corporate and Other | (36) | | | (312) | | | | | |
| Non-operating adjustments | | | | | | | |
| Investment gains (losses), net of offsets | (605) | | | (1,139) | | | | | |
| Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets | 488 | | | 65 | | | | | |
| Integration, restructuring and other non-operating expenses | (45) | | | (4) | | | | | |
| Stock-based compensation, excluding LTIP | 0 | | | (10) | | | | | |
| Income tax (expense) benefit – non-operating | (8) | | | 131 | | | | | |
| Net income (loss) available to Athene Holding Ltd. common shareholders | $ | 578 | | | $ | (1,065) | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 |
| Operating income, net of tax by segment | | | | | | | |
| Retirement Services | $ | 244 |
| | $ | 142 |
| | $ | 786 |
| | $ | 535 |
|
| Corporate and other | (13 | ) | | (25 | ) | | (9 | ) | | (87 | ) |
| Total segment operating income, net of tax | 231 |
| | 117 |
| | 777 |
| | 448 |
|
| Non-operating adjustments | | | | | | | |
| Investment gains (losses), net of offsets | 25 |
| | 58 |
| | 140 |
| | 98 |
|
| Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets | 46 |
| | (1 | ) | | 155 |
| | (88 | ) |
| Integration, restructuring and other non-operating expenses | (14 | ) | | (2 | ) | | (34 | ) | | (8 | ) |
| Stock-based compensation, excluding LTIP | (7 | ) | | (46 | ) | | (30 | ) | | (59 | ) |
| Income tax (expense) benefit – non-operating | (7 | ) | | — |
| | (24 | ) | | 13 |
|
| Total non-operating adjustments | 43 |
| | 9 |
| | 207 |
| | (44 | ) |
| Net income available to Athene Holding Ltd. shareholders | $ | 274 |
| | $ | 126 |
| | $ | 984 |
| | $ | 404 |
|
The following represents total assets by segment:
| | | | | | | | | | | |
| (In millions) | March 31, 2021 | | December 31, 2020 |
| Retirement Services | $ | 200,093 | | | $ | 197,295 | |
| Corporate and Other | 5,577 | | | 5,476 | |
| Total assets | $ | 205,670 | | | $ | 202,771 | |
|
| | | | | | | |
| (In millions) | September 30, 2017 | | December 31, 2016 |
| Total assets by segment | | | |
| Retirement Services | $ | 88,034 |
| | $ | 79,298 |
|
| Corporate and Other | 8,027 |
| | 7,401 |
|
| Total assets | $ | 96,061 |
| | $ | 86,699 |
|
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Index to Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a leading financial services company specializing in retirement services company that issues, reinsures and acquires retirement savings products designed for the increasing number of individuals and institutions seeking to fund retirement needs. We generate attractive financial results for our policyholders and shareholders by combining our two core competencies of (1) sourcing long-term, generally illiquid liabilities and (2) investing in a high qualityhigh-quality investment portfolio, which takes advantage of the illiquid nature of our liabilities. Our steady and significant base of earnings generates capital that we opportunistically invest across our business to source attractively-priced liabilities and capitalize on opportunities. Our differentiated investment strategy benefits from our strategic relationship with Apollo and its indirect subsidiary, AAM. AAM provides a full suite of services for our investment portfolio, including direct investment management, asset allocation, mergers and acquisition asset diligence and certain operational support services, including investment compliance, tax, legal and risk management support. Our relationship with Apollo and AAM also provides us with access to Apollo’s investment professionals across the world as well as Apollo’s global asset management infrastructure that, as of September 30, 2017, supported more than $241 billion of AUM across a broad array of asset classes. We are led by a highly skilled management team with extensive industry experience. We are based in Bermuda with our U.S. subsidiaries' headquarters located in Iowa.
We began operating in 2009 when the burdens of the financial crisis and resulting capital demands caused many companies to exit the retirement market, creating the need for a well-capitalized company with an experienced management team to fill the void. Taking advantage of this market dislocation, we have been able to acquire substantial blocks of long-duration liabilities and reinvest the related investments to produce profitable returns. We have established a significant base of earnings and, as of September 30, 2017,March 31, 2021, have an expected annual net investment marginspread for our Retirement Services segment, which measures our investment performance less the total cost of 2-3%our liabilities, of 1–2% over the 8.28.9 year weighted-average life of our reserve liabilities. The weighted-average life includes deferred annuities, which make up a substantial portion of our reserve liabilities. Even as we have grown to $81.2 billion in investments, including related parties, $78.8 billion in invested assetsPRT group annuities, funding agreements, payout annuities and total assets as of $96.1 billion as of September 30, 2017, we have continued to approach both sides of the balance sheet with an opportunistic mindset because we believe quickly identifying and capitalizing on market dislocations allows us to generate attractive, risk-adjusted returns for our shareholders. Further, our multiple distribution channels support growing origination across market environments and better enable us to achieve continued balance sheet growth while maintaining attractive profitability. We believe that in a typical market environment, we will be able to profitably grow through our organic channels, including retail, flow reinsurance and institutionalother products. In more challenging market environments, we believe that we will see additional opportunities to grow through our inorganic channels, including acquisitions and block reinsurance, due to market stress during those periods.
We are diligent in setting our return targets based on market conditions and risks inherent to our products offered and acquisitions or block reinsurance transactions. Generally, we target mid-teen returns for sources of organic growth and mid-teen or higher returns for sources of inorganic growth. However, specific return targets are established with due consideration to the facts and circumstances surrounding each growth opportunity and may be higher or lower than those that we target more generally. Factors that we consider in establishing return targets for a given growth opportunity include, but are not limited to, the certainty of the return profile, the strategic nature of the opportunity, the size and scale of the opportunity, the alignment and fit of the opportunity with our existing business, the opportunity for risk diversification and the existence of increased opportunities for higher returns or growth. If market conditions or risks inherent to a product or transaction create return profiles that are not acceptableto us, we generally will not sacrifice our profitability merely to facilitate growth.
We operate our core business strategies out of one reportable segment, Retirement Services. In addition to Retirement Services, we report certain other operations in Corporate and Other. Retirement Services is comprised of our U.S.US and Bermuda operations which issue and reinsure retirement savings products and institutional products. Corporate and Other includes certain other operations related to our corporate activities and our German operations, which is primarily comprisedactivities.
Our total assets have grown to $205.7 billion as of participating long-duration savings products.
March 31, 2021. Our book value per common share as of March 31, 2021 was $78.25. Our adjusted book value per common share was $62.88 as of March 31, 2021. Our consolidated annualized ROE for the ninethree months ended September 30, 2017March 31, 2021 and the year ended December 31, 20162020 was 16.9%12.9% and 12.6%10.0%, respectively, and our consolidated annualized adjusted operating ROE excluding AOCI was 14.8%25.3% and 12.1%, respectively. As a result of our focus on issuing, reinsuring and acquiring attractively-priced liabilities, our differentiated investment strategy and our significant scale, forFor the ninethree months ended September 30, 2017March 31, 2021 and the year ended the year ended December 31, 2016,2020, in our Retirement Services segment, we generated an annualized net investment spread of 2.48% and 1.31%, respectively, and an annualized adjusted operating ROE of 37.8% and 16.9%, respectively. Our Retirement Services segment generated an annualized investment margin on deferred annuities of 2.86%3.29% and 2.76%, respectively2.09% for the three months ended March 31, 2021 and annualized operating ROE excluding AOCIthe year ended December 31, 2020, respectively. As of 21.3%March 31, 2021, our deferred annuities had a weighted-average life of 8.6 years and 18.5%, respectively. We currently maintain what we believe to be high capital ratios formade up a significant portion of our rating and hold more than $1.5 billion of excess capital, and view this excess as strategic capital available to reinvest intoreserve liabilities.
The following table presents the inflows generated from our organic and inorganic growth opportunities.channels:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| (In millions, except percentages) | 2021 | | 2020 | | | | |
| Retail | $ | 1,757 | | | $ | 1,246 | | | | | |
| Flow reinsurance | 299 | | | 861 | | | | | |
Funding agreements1 | 3,226 | | | 823 | | | | | |
| Pension risk transfer | 2,893 | | | 1,017 | | | | | |
| Gross organic inflows | 8,175 | | | 3,947 | | | | | |
| Gross inorganic inflows | — | | | — | | | | | |
| Total gross inflows | 8,175 | | | 3,947 | | | | | |
| Inflows attributable to ACRA noncontrolling interest | (1,470) | | | — | | | | | |
Net outflows2 | (3,481) | | | (2,740) | | | | | |
| Net flows | $ | 3,224 | | | $ | 1,207 | | | | | |
| | | | | | | |
| Gross organic inflows | $ | 8,175 | | | $ | 3,947 | | | | | |
| Organic inflows attributable to ACRA noncontrolling interest | (1,470) | | | — | | | | | |
| Net organic inflows | 6,705 | | | 3,947 | | | | | |
Net outflows2 | (3,481) | | | (2,740) | | | | | |
| Net organic flows | $ | 3,224 | | | $ | 1,207 | | | | | |
| | | | | | | |
Net organic growth rate3 | 8.4 | % | | 4.0 | % | | | | |
| Average net invested assets | $ | 152,947 | | | $ | 119,344 | | | | | |
| | | | | | | |
1 Funding agreements are comprised of funding agreements issued under our FABN and FABR programs, funding agreements issued to the FHLB and long-term repurchase agreements. 2 Net outflows consist of full and partial policyholder withdrawals on deferred annuities, death benefits, pension risk transfer benefit payments, payments on payout annuities and funding agreement maturities net of the ACRA noncontrolling interest. In 2021 we revised the net outflows metric, for all periods presented, to include all outflows while previously this metric excluded inorganic business. 3 Net organic growth rate is calculated as net organic flows divided by average net invested assets, on an annualized basis. In 2021, we revised the net organic growth rate and average net invested assets metrics, for all periods presented, to include all outflows and net invested assets while previously these metrics excluded inorganic business. |
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
We have developed organic and inorganic channels to address the retirement services market and grow our assets and liabilities. By focusing on the retirement services market, we believe that we will benefit from several demographic and economic trends, including the increasing number of retirees in the United States, the lack of tax advantaged alternatives for people trying to save for retirement and expectations of a rising interest rate environment. To date, most of our products sold and acquired have been fixed annuities, which offer people saving for retirement a product that is tax advantaged, has a minimum guaranteed rate of return or minimum cash value and provides protection against investment loss. Our policies often include surrender charges (86% of our deferred annuity products, as of September 30, 2017) or MVAs (72% of our deferred annuity products, as of September 30, 2017), both of which increase persistency and protect our ability to meet our obligations to policyholders. Our organic channels, including retail, flow reinsurance and institutional products, provided depositsgross inflows of $8.0$8.2 billion and $6.9$3.9 billion for the ninethree months ended September 30, 2017March 31, 2021 and 2016, respectively.2020, respectively, which were underwritten to attractive, at-or-above target returns despite the historically low interest rate environment. Organic inflows increased $4.2 billion, or 107%, reflecting the strength of our multi-channel distribution platform and our ability to quickly pivot into the most optimal and profitable channels as opportunities arise. Withdrawals on our deferred annuities, maturities of our funding agreements, and payments on payout annuities and pension risk benefit payments (collectively, liability outflows), in the aggregate, were $4.4$3.5 billion and $4.0$2.7 billion for the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, respectively. Net organic growth rate of 8.4% and 4.0% for the three months ended March 31, 2021 and 2020, respectively, increased reflecting the aforementioned strong growth in organic inflows. We believe that our improving credit profile, our current product lineofferings and product design capabilities andas well as our growing reputation as both a seasoned funding agreement issuer and a reliable PRT counterparty will continue to enable us to further penetrategrow our existing organic channels and allow us to source additional volumes of profitably underwritten liabilities in various market environments. Our inorganic channels, including acquisitions and block reinsurance, have contributed significantlyWe plan to our growth. We believe our internal acquisitions team, with support from Apollo, has an industry-leading ability to source, underwrite, and expeditiously close transactions, which makes us a competitive counterparty for acquisition or block reinsurance transactions.
We plancontinue to grow organically by expanding each of our retail, flow reinsurance and institutional product distribution channels. We believe that we have the right people, infrastructure, scale and scalecapital discipline to position us for continued growth.
Within our retail channel, we had fixed annuity sales of $4.1$1.8 billion and $3.8$1.2 billion for the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, respectively. The increase in our retail channel was primarily driven by very strong performance in the bank and broker-dealer channels, and exhibits strong sales execution despite the challenging sales environment. We continued to execute in the retail channel despite industry-wide pressure on sales volumes as the economic impacts of the spread of COVID-19, as well as the mitigation measures undertaken to combat the spread, continue to affect the sales process. Despite the significant headwinds, we have maintained our disciplined approach to pricing, including with respect to targeted underwritten returns. We aim to grow our retail channel in the United States by deepening our relationships with our approximately 67 IMOs52 independent marketing organizations (IMO); approximately 61,000 independent agents; and approximately 34,000 independent agents.our growing network of 16 banks and 104 regional broker-dealers. Our strong financial position and capital efficient products allow us to be a dependable partnerpartners with IMOs, banks and broker-dealers as well as consistently write new business. We work with our IMOs to develop customized, and at times exclusive, products that help drive sales. We expect our retail channel to continue to benefit from our improving credit profile and recent product launches. We believe this should support growth in sales at our desired cost of creditingfunds through increased volumes via current IMOs, while also allowing us to continue to expand our bank and access to new distribution channels, including small to mid-sized banks and regional broker-dealers. Webroker-dealer channels. Additionally, we are implementing the necessary technology platform,focusing on hiring and training a specialized sales force and have createdcreating products to capture new potential distribution opportunities.
In our flow reinsurance channel, we target reinsurance business consistent with our preferred liability characteristics and, as such, flow reinsurance provides another opportunistic channel for us to source long-term liabilities with attractive crediting rates. We generated depositsinflows through our flow reinsurance channel of $570$299 million and $3.1 billion$861 million for the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, respectively. We believe theThe decrease in our flow reinsurance has been impactedchannel from prior year was driven by maintaining our rate discipline in the recent decline in overall MYGA volumes over the last several months, reflective of tighter investment spreads, the recent stock market rallylower interest rate environment amid a very competitive market. We expect that our credit profile and expectations of higher interest rates. As weour reputation as a solutions provider will help us continue to source additional reinsurance partners, we expect towhich will further diversify our flow reinsurance channel and expect that our improving credit profile will help us attract additional reinsurance partners. Inchannel.
Within our institutional channel, we generated depositsinflows of $3.3$6.1 billion and $0 million$1.8 billion for the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, respectively. Our ability to issueThe increase in our institutional channel was driven by higher funding agreements, namely thoseagreement inflows as well as higher PRT inflows. We issued through our FABN program, has benefited from our public company status and improving credit profile, allowing us to generate depositsfunding agreements in the aggregate principal amount of $3.0$3.2 billion and $0$823 million for the ninethree months ended September 30, 2017March 31, 2021 and 2016, respectively. In addition, growth2020, respectively, which included seven issuances in four different currencies in 2021. Funding agreements are comprised of funding agreements issued under our institutional channel was attributedFABN and FABR programs, funding agreements issued to our entry into the PRT market in 2017, during which we closed our inaugural transaction pursuant to which we issued a group annuity contractFHLB and repurchase agreements with maturities exceeding one year at issuance, with inflows in the aggregate principal amount of approximately $320 million. Additionally, subsequent$3.2 billion under our FABN program for the three months ended March 31, 2021. During the three months ended March 31, 2021, we closed one PRT transaction and issued annuity contracts in the aggregate principal amount of $2.9 billion, compared to quarter-end, we entered into two PRT agreements totaling approximately $1.0 billion during the three months ended March 31, 2020. Since entering the PRT channel in 2017 through March 31, 2021, we have closed 25 deals involving more than 290,000 plan participants resulting in the issuance or reinsurance of pension obligations.group annuities of $19.2 billion. We expect to grow our institutional channel by continuing to engage in PRT transactions and opportunistic issuances of funding agreementsagreements.
Our inorganic channel has contributed significantly to our growth through both acquisitions and block reinsurance transactions. On June 18, 2020, we entered into an agreement with Jackson, effective June 1, 2020, pursuant to which we agreed to reinsure a block of fixed and fixed indexed annuities on a funds withheld coinsurance basis providing $28.8 billion of gross inflows. Utilizing the strategic benefits of ACRA, approximately 63% of the total capital deployment for the transaction will be funded by continuingthird-party investors and approximately 37% will be funded by ALRe. As part of the Jackson reinsurance transaction, ACRA made an equity investment in Jackson Financial Inc. (JFI), an indirect parent of Jackson, which closed on July 17, 2020. On January 28, 2021, Prudential plc announced its intent to engagereduce its controlling interest in PRTJFI through a direct dividend demerger, which is expected to occur in the second quarter of 2021. We expect that our inorganic channel will continue to be an important source of profitable growth in the future. We believe our internal transactions team, with support from Apollo, has an industry-leading ability to source, underwrite and expeditiously close transactions. With support from Apollo, we are a solutions provider with a proven track record of closing transactions, which we believe makes us the ideal partner to insurance companies seeking to restructure their business.
Executing our growth strategy requires that we have sufficient capital available to deploy. We believe that we have significant capital available to us to support our growth aspirations. As of March 31, 2021, we estimate that we have approximately $8.1 billion in capital available to deploy, consisting of approximately $3.6 billion in excess capital, $2.9 billion in untapped debt capacity (assuming a peer average adjusted debt to capitalization ratio of 25%) and $1.6 billion in available uncalled capital at ACRA, subject, in the case of debt capacity, to favorable market conditions and general availability.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In order to support our growth strategies and capital deployment opportunities, we established ACRA as a long-duration, on-demand capital vehicle. Effective April 1, 2020, ALRe purchased additional shares in ACRA increasing our ownership from 33% to 36.55% of the economic interests, with the remaining 63.45% of the economic interests being owned by ADIP, a series of funds managed by an affiliate of Apollo. ACRA is expected to participate in certain transactions by drawing a portion of the required capital for such transactions from third-party investors equal to ADIP’s proportionate economic interest in ACRA. This shareholder-friendly, strategic capital solution is expected to allow us the flexibility to simultaneously deploy capital across multiple accretive avenues, while maintaining a strong financial position.
Strategic Transaction with Apollo
On February 28, 2020, we closed a transaction with Apollo in which Apollo acquired an incremental stake in us for AOG units valued at $1.1 billion, upon close, and $350 million of cash. Additionally, we converted our Class B common shares to Class A common shares and our Class M common shares to Class A common shares and warrants, eliminating our multi-class share structure. Changes in the value of the AOG units are reflected within the change in fair value of Apollo investment, net of tax line item and may present future volatility in our results of operations due to changes in the valuation of the AOG units. See Note 9 – Related Parties to the condensed consolidated financial statements for further discussion.
Merger with Apollo
On March 8, 2021, we entered into a Merger Agreement, by and among the Company, AGM, HoldCo, AHL Merger Sub, and AGM Merger Sub. The Company and AGM have agreed, subject to the terms and conditions of the Merger Agreement, to effect an all-stock merger transaction to combine our respective businesses by: (1) AGM merging with AGM Merger Sub, with AGM surviving such merger as a direct wholly owned subsidiary of HoldCo, (2) the Company merging with AHL Merger Sub, with the Company surviving such merger as a direct, wholly owned subsidiary of HoldCo, and (3) as of the effective time of the Mergers, changing the name of HoldCo to be Apollo Global Management, Inc. At the effective time of the Mergers, each AHL Class A common share, subject to certain exceptions, will be converted automatically into the right to receive 1.149 shares of HoldCo common stock. The Mergers are expected to close in January 2022 and are subject to shareholder and regulatory approvals, and other customary closing conditions.
Industry Trends and Competition
Market Conditions
Our businessDuring the first quarter of 2021, increased availability of vaccinations coupled with expectations of additional fiscal and results of operations are materially affected by conditionsmonetary stimulus measures drove increases in interest rates in the global capitalUS for the first time in three quarters. The US 10-year treasury rate rose almost 80 basis points during the quarter, and as inflation concerns began to gradually impact treasury prices, treasury rates experienced even more significant changes in longer-dated maturities. In addition, stock markets continued their strong performance, despite significant market volatility driven by a confluence of factors including increased retail investor trading volumes through internet brokerage platforms, persistent blockchain enthusiasm and proliferating Special Purpose Acquisition Companies (SPAC) issuances. As restrictions related to COVID-19 are lifted across the United States, the impact on consumer confidence and market momentum remains strongly positioned, increasing the prospects for higher interest rates and robust equity markets.
More broad-based participation in credit markets drove spreads to new lows in many sectors. Investment grade credit spreads, for example, tightened almost 10 basis points by mid-February driven by purchasing activity as all-in yields had risen by almost 40 basis points at that time. Speculative grade credit tightened by approximately 25 basis points during the quarter, and credit spreads on CMBS and CLOs remained close to their post financial crisis lows. Nonetheless, sponsorship for almost all sectors remained strong, a situation which becomes even more pronounced as limited supply calendars come into play in the second quarter.
COVID-19 remains the primary focus of most markets, and the economy generally. A general economic slowdown could adversely affect usthere are lingering concerns regarding vaccination deployment in large sections of Europe, as well as other developed economies. Global travel and leisure activities will likely remain challenged in the form of changesnear-term. Central banks and global governments however continue to meet these challenges head on, with US Federal Reserve (Fed) Chairman Jerome Powell committing to remain deliberately patient on policy, even if inflation begins to develop, which is a meaningful change from recent Fed policy positions.
Interest Rate Environment
Despite the increase in consumer behavior and decreases in the returns on and value of our investment portfolio. Concerns over the slow economic recovery, the level of U.S. national debt, currency fluctuations and volatility, the stability of the EU, Brexitrates, it is unlikely that this move represents a sustainable trend. Negative rate government issuance is still widely prevalent globally, and the potential exit of certain other EU members, the rate of growth of China and other Asian economies, unemployment, the availability and cost of credit, the U.S. housing market, inflation levels, low or negative interest rates, energy costs and geopolitical issues have contributed to increased volatility and diminished expectationsneed for the economy and the markets. Market conditions have generally improved since the U.S. electionsyield has been evidenced by continued buying in November of 2016 on hopes of improved economic growth, however the long term outlook remains uncertain. Declining economic growth rates globally and resultant diverging paths of monetary policy could increase volatility in the credit markets, potentially impacting the availability and cost of credit. Factors such as equity prices, equity market volatility, interest rates, counterparty risks, availability of credit, inflation rates, economic uncertainty, changes in laws or regulations (including laws relating to the financial markets generally or the taxation or regulation of the insurance industry), trade barriers, commodity prices, currency exchange rates and controls and national and international political circumstances (including governmental instability, wars, terrorist acts or security operations) can have a material impactspread sectors. A move higher than 2% on the valueUS 10-year would likely be met with another meaningful round of our investment portfolio and our ability to sell our products. We adjust the structure of our products depending on the economic environment, the behavior of customers and other factors, including mortality rates, morbidity rates, cap rates, rollup rates, annuitization rates and lapse rates, which can vary in response to changes in market conditions. We believe continued economic growth, stable financial markets and a potentially rising interest rate environment may ultimately enhance the attractiveness of our product portfolio. However, we remain exposed to potential slowdowns in economicpurchase activity, which could then trigger a move back towards lower rates as a more differentiated growth story develops in various markets. Even the significant size of stimulus packages, such as that adopted in the US, will likely not be characterized by rising unemployment, falling interestable to sustain higher rates widening credit spreads and an increase in corporate credit and real estate-related defaults.the medium-term, until the COVID-19 impact is more fully removed.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Interest Rate Environment
AsIn the meantime however, the availability of slightly higher rates is a retirement services company focused on issuingwelcome opportunity and reinsuring fixed annuities, we are affected byfar more attractive than what was available in the monetary policyfourth quarter for yield-focused buyers. Investment grade credit, still a relevant proxy for risk-asset appetite, has over 30 basis points of room to tighten before it reaches its post-global financial crisis lows. In the current market environment institutional investors continue to be willing to assume a greater degree of risk to achieve a specified level of return, and the market reaction functions observed in the early days of the Federal Reservesecond quarter suggest that risk appetite can drive investors to re-engage in widening markets at a faster pace than had been observed pre-COVID-19. As such, insurance company balance sheets are well positioned to invest to continue to take advantage of mispriced risk/reward in the United Statesshort-term. Eventually, global rates will normalize as well as other central banks aroundgrowth prospects continue to improve, but in the world. In spiteshort-term, the focus on COVID-19 is expected to create an effective ceiling through the remainder of the Federal Reserve increasing federal funds rates in December 2015, December 2016 and March and June of 2017, interest rates in the United States remain lower than historical levels. The lower interest rates in part are due to a number of actions taken in recent years by the Federal Reserve in an effort to stimulate economic activity. Any future increases in federal funds rates are uncertain and will depend on the economic outlook.calendar year.
Our investment portfolio consists predominantly of fixed maturity investments. See –Consolidated Investment Portfolio. If prevailing interest rates were to rise, we believe the yield on our new investment purchases may also rise and our investment income from floating rate investments would increase, while the value of our existing investments may decline. If prevailing interest rates were to decline, it is likely that the yield on our new investment purchases may decline and our investment income from floating rate investments would decrease, while the value of our existing investments may increase. Recent trends of decreasing interest rates, as expected, have led to a decrease in our investment income from floating rate investments, an overall decrease in asset yields and an increase in the value of our existing investments, though we observed a slight reversal of this trend during the first quarter of 2021.
We address interest rate risk through managing the duration of the liabilities we source with assets we acquire and through asset liability management (ALM)ALM modeling. We endeavor to limit reinvestment risk related to cash flows by managing our asset portfolio to ensure it provides adequate cash flows to meet our expected policyholder benefit cash flows to within tolerable risk management limits. Our strategy is to achieve sustainable yields that allow us to maintain an attractive investment margin. As part of our investment strategy, we purchase floating rate investments, which we expect willwould perform well in a rising interest rate environment.environment and which we expect would underperform in a declining rate environment, which was experienced in the prior year. Our investment portfolio includes $22.0$29.8 billion of floating rate investments, or approximately 28%19% of our totalnet invested assets as of September 30, 2017. As part of our reinvestment strategy for the investment portfolios of our acquired companies, we generally seek to reinvest assets at yields higher than the related assets being liquidated for reinvestment. We continuously seek to optimize our investment portfolio to achieve favorable returns over the long term.March 31, 2021.
If prevailing interest rates were to rise, we believe our products would be more attractive to consumers and our sales would likely increase. If prevailing interest rates were to decline, it is likely that our products would be less attractive to consumers and our sales would likely decrease. In periods of prolonged low interest rates, the net investment margin earned on deferred annuitiesspread may be negatively impacted by reduced investment income to the extent that we are unable to adequately reduce policyholder crediting rates due to policyholder guarantees in the form of minimum crediting rates or otherwise due to market conditions. As of September 30, 2017,March 31, 2021, most of our products were fixeddeferred annuities with approximately 36%22% of our FIAs at the minimum guarantees and approximately 49%37% of our fixed rate annuities at the minimum crediting rates. As of September 30, 2017,March 31, 2021, minimum guarantees on all of our deferred annuities, including those with crediting rates already at their minimum guarantees, were, on average, 80 to 90greater than 100 basis points below the crediting rates on such deferred annuities, allowing us room to reduce rates before reaching the minimum guarantees. Our remaining liabilities are associated with immediate annuities, pension risk transfer obligations, funding agreements orand life contracts for which we have little to no discretionary ability to change the rates of interest payable to the respective policyholder. A significant majority of our deferred annuity products have crediting rates that we may reset annually upon renewal, following the expiration of the current guaranteed period. While we have the contractual ability to lower these crediting rates to the guaranteed minimum levels, our willingness to do so may be limited by competitive pressures.
See Part I—Item 3. Quantitative and Qualitative Disclosures About Market Risks to this report and Part II—Item 7A. Quantitative and Qualitative Disclosures About Market Risks in our 20162020 Annual Report, which includes a discussion regarding interest rate and other significant risks and our strategies for managing these risks.
COVID-19
The spread of COVID-19 has resulted in significant volatility in the financial markets. The extent to which COVID-19 and the resulting impact on economic conditions and the financial markets may impact our business will depend on future developments and represents a material uncertainty to our business.
Risks and Mitigation Measures
The spread of COVID-19 presents three principal risks to our business: 1) business continuity risk; 2) market risk and 3) liquidity risk, including that resulting from policyholder behavior.
Business Continuity Risk.The spread of COVID-19 threatens the health and safety of our most valuable asset, our people. To mitigate the risk that the virus infects members of our workforce, to ensure the continuity of our operations throughout the duration of this pandemic and to ensure uninterrupted servicing of the policyholders who have entrusted us for their retirement needs, during March 2020 we implemented our business continuity plan. Pursuant to that plan, we implemented remote work protocols pursuant to which the significant majority of our employees worked remotely, with only certain operationally essential employees working at our facilities, to the extent lawfully permitted. For the operationally essential employees who continued working at our facilities, we implemented new safety protocols that incorporated recommendations, guidelines and regulations from the Center for Disease Control and other national, state and local health authorities, including mandated temperature screenings upon entering the building; the appropriate practice of social distancing, which includes but is not limited to a reduction in the number of people allowed in conference rooms and limiting elevator car capacity; the requirement to wear face coverings; and limitations on movement in the building, among other requirements designed to reduce the risk of transmission between employees (collectively, Safety Protocols). In addition, we implemented enhanced cleaning protocols, which include increased staff to clean common areas; availability of cleaning supplies, face coverings and hand sanitizer throughout our facilities that are operational; and actively encouraging our employees to adopt enhanced hygiene practices.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
On June 1, 2020, we commenced our repopulation plan and as of October 31, 2020, substantially all of our workforce had returned to the office. Prior to the commencement of our repopulation plan, all employees were required to complete a comprehensive training covering our repopulation plan and our Safety Protocols. Due to worsening conditions in our local communities, on November 10, 2020, we implemented a workplace rotation plan to reduce our office operating capacity in our West Des Moines office to 50% and on December 10, 2020, we reinstituted remote work arrangements at our Bermuda headquarters. On January 11, 2021, the first wave of employees returned to our Bermuda location and on January 19, 2021, our West Des Moines location returned to standard operating capacity. As of April 30, 2021, our Bermuda location had returned to working remotely, whereas our West Des Moines location continued to work at standard operating capacity. We have implemented case investigation and contact tracing procedures to appropriately identify and quarantine those individuals who have been or may have been exposed to the virus. As of April 30, 2021, we had 10 employees who had been certified as contact tracers through Johns Hopkins University. We have been successful in implementing our business continuity and repopulation plans and to date have experienced no material impairment to our business operations. We continue to closely monitor our situation and the recommendations and guidelines issued by national, state and local health authorities.
Market Risk. The effects of the spread of COVID-19 on economic conditions and the financial markets may trigger or increase the market risks to which we are subject, namely interest rate risk, credit risk and public equity risk. The spread of COVID-19 and the Federal Reserve’s responsive measures resulted in abrupt and significant decreases in interest rates and abrupt and significant increases in credit spreads. Changes in interest rates and credit spreads may result in a decrease in the value of our invested assets. To the extent that we needed to sell assets at these decreased values in order to satisfy our obligations, we would realize losses. However, approximately 75% of our deferred annuities have surrender charges, which we believe greatly reduce the likelihood and magnitude of unexpected withdrawals. Further, our PRT and funding agreement obligations are predominantly non-surrenderable. In addition, we mitigate interest rate risk by managing the effective duration of our assets and liabilities. In doing so, we closely monitor and manage our net duration mismatch as well as our cash inflows and outflows. Decreases in interest rates impact the interest income that we receive on our floating rate assets. For the three months ended March 31, 2021, we recognized $69 million less in floating rate income than we recognized for the three months ended March 31, 2020, primarily as a result of the period-over-period declines in interest rates.
Certain companies that issued the securities that we hold in our investment portfolio are more likely to experience financial hardship as a result of the economic effects of COVID-19. We mitigate such risk by actively managing our investment portfolio and attempting to exit or reduce exposures we deem to carry disproportionate risk when compared to their return profile.
We are exposed to public equity risk through the index crediting on our FIA products, our AOG unit holdings and our common stock holdings in OneMain Holdings, Inc. (OneMain). We effectively eliminate the public equity risk arising from the index crediting on our FIA products by hedging the relevant index performance over the crediting period. Though this results in an effective hedge for economic purposes, because the instruments used to hedge the index crediting period are for a shorter term than the FIA contract, the hedge is not deemed effective for accounting purposes and results in the recognition of gains and losses from period to period. The public equity volatility arising from our holdings of AOG units and OneMain stock is unhedged.
Liquidity Risk. In the current market environment, liquidity risk can arise in several areas of our business, including but not limited to asset-liability mismatch and policyholder behavior risk. As noted above, most of our deferred annuities have surrender charges, which reduce the likelihood and magnitude of expected withdrawals, and our PRT and funding agreement obligations are predominantly non-surrenderable.
To be prepared to capitalize on growth opportunities that may arise in the current market environment as well as to manage any near-term liquidity risk, we have strategically increased our available liquidity. As of March 31, 2021, we had approximately $10.4 billion of available liquidity comprised of $6.4 billion of cash and approximately $4.0 billion of undrawn capacity under various committed financing facilities. We have taken measures to increase our financial flexibility, including negotiating new committed lending facilities. We have also entered into several new securities repurchase arrangements with different financial institutions to provide access to additional short-term liquidity, to the extent available. As economic conditions have continued to stabilize, we have been investing our excess liquidity in yield producing assets.
With a record number of individuals finding themselves abruptly out of work and searching for sources of liquidity, we face policyholder behavior risk in the form of increased withdrawal levels and lapse rates. We have been closely monitoring policyholder behavior. As of April 30, 2021, we had noticed no material adverse change in policyholder behavior. We mitigate policyholder behavior risk by monitoring and projecting cash inflows and outflows and by maintaining greater levels of available liquidity.
Emerging Trends
As a result of the spread of COVID-19, the resulting impact on economic conditions and the financial markets and the mitigation efforts we have undertaken in response, we expect to see several trends impacting our future operating results.
First, we have held a greater proportion of our invested assets in cash and other liquid assets which has lowered our net investment earned rates and net investment spread compared to what we would have otherwise experienced pre-COVID-19. While we have continued to invest our excess cash in yield producing assets, we expect that our holdings of cash and other liquid assets may remain slightly elevated in the near-term. We expect that as we deploy these holdings and continue to redeploy the Jackson investment portfolio, we will experience increases in net investment earned rates and net investment spread.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Second, we expect that the current market environment will cause certain issuers of securities held in our investment portfolio to experience financial hardship, which could result in the recognition of increased credit losses. Post adoption of the new accounting standard regarding accounting for current expected credit losses, we have increased our reserve for credit losses, net of noncontrolling interests, by $75 million. We cannot predict the duration or severity of the current economic downturn. However, our ultimate loss experience resulting therefrom could be material and could cause our financial position, results of operations, cash flows and liquidity to differ materially from that presented herein.
Third, we have experienced increased volatility in the valuation of our alternative investments. In light of the current market environment, we may continue to experience such volatility in future periods. Given that approximately 50% of our alternative investments are accounted for on a one to three month lag, our financial results as they relate to the performance of our alternative investments may not be reflective of the economic conditions of a particular reporting period.
Fourth, the substantial decrease in interest rates recently experienced has had a negative impact on adjusted operating income. If the current rates persist for a prolonged period, our adjusted operating income would continue to be adversely affected when compared to pre-COVID-19 levels. Currently, we estimate that a 25 basis point decrease in interest rates that persists for a 12-month period will result in an approximate $35 – $45 million decrease in adjusted operating income.
The spread of COVID-19, the resulting impact on economic conditions and the financial markets and the mitigating efforts we have and will undertake may have consequences to our business that are unforeseen at this time. The emerging trends identified above do not purport to be complete and actual experience may differ materially from our current expectations.
Discontinuation of LIBOR
On December 4, 2020, the Intercontinental Exchange Benchmark Administrator (IBA), the party that administers the publication of LIBOR, published a consultation on its intention to cease publication of 1-week and 2-month USD LIBOR settings immediately following the LIBOR publication on December 31, 2021 and the overnight and 1-, 3-, 6- and 12-month USD LIBOR settings immediately following the LIBOR publication on June 30, 2023. The consultation closed on January 25, 2021 and on March 5, 2021, the IBA announced that in the absence of sufficient panel bank support and without the intervention of the UK Financial Conduct Authority (FCA) to compel continued panel bank contribution to LIBOR, it will not be possible for the IBA to publish the relevant LIBOR settings on a representative basis beyond the dates previously specified for such settings. The UK Government had previously announced that it intends to enact legislation to bestow upon the FCA the power to direct a methodology change to enable LIBOR to be published on a synthetic basis after such time that it loses representativeness (Proposed Powers). The FCA advised the IBA that the FCA had no intention of using its Proposed Powers to enable the calculation of a synthetic LIBOR with respect to overnight, 1-week, 2-month and 12-month LIBOR settings and indicated that it would consider the case for using its Proposed Powers in respect of the 1-month, 3-month and 6-month LIBOR settings. Absent use of the FCA’s Proposed Powers with respect to any of the remaining LIBOR settings, LIBOR for substantially all of our contracts with exposure to LIBOR would cease publication after June 30, 2023.
The discontinuation of LIBOR could have a significant impact on the financial markets and represents a material uncertainty to our business. To manage the uncertainty surrounding the discontinuation of LIBOR we have established a LIBOR transition team and a transition plan. We have created an Executive Steering Committee composed of senior executives to coordinate and oversee the execution of our plan. It is difficult to predict the full impact of the transition away from LIBOR on our contracts whose value is tied to LIBOR. The value or profitability of these contracts may be adversely affected.
As of March 31, 2021, we had contracts tied to LIBOR in the notional amounts set forth in the table below:
| | | | | | | | | | | |
| (In millions) | Total Exposure | | Extending Beyond June 30, 2023 |
| Investments | $ | 29,628 | | | $ | 23,835 | |
| Product Liabilities | 14,949 | | | 200 | |
| Derivatives Hedging Product Liabilities | 18,602 | | | 1,303 | |
| Other Derivatives | 1,546 | | | 1,463 | |
| Other Contracts | 3,213 | | | 2,363 | |
| Total notional of contracts tied to LIBOR | $ | 67,938 | | | $ | 29,164 | |
| | | |
| | | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Investments
As of March 31, 2021, our investments tied to LIBOR were in the following asset classes:
| | | | | | | | | | | |
| (In millions) | Total Exposure | | Extending Beyond June 30, 2023 |
| Multi-lateral Arrangements | | | |
| Corporates | $ | 846 | | | $ | 346 | |
| RMBS | 3,736 | | | 3,293 | |
| CMBS | 419 | | | 100 | |
| CLO | 14,707 | | | 14,382 | |
| ABS | 2,933 | | | 2,787 | |
| Bank Loans | 383 | | | 283 | |
| Total Multi-lateral Arrangements | 23,024 | | | 21,191 | |
| Bi-lateral Arrangements | | | |
| CML | 6,458 | | | 2,498 | |
| RML | 146 | | | 146 | |
| Total Bi-lateral Arrangements | 6,604 | | | 2,644 | |
| Total investments tied to LIBOR | $ | 29,628 | | | $ | 23,835 | |
Of the total notional value of investment-related contracts tied to LIBOR extending beyond June 30, 2023, $21.2 billion or 88.9% relate to multi-lateral arrangements. These arrangements are typically characterized by a large, diverse set of unrelated holders, the majority or all of whom must consent to amendments to the terms of the underlying investment instrument. Generally, when the amendments concern a material term such as the determination of interest, consent must be unanimous. Given the collective action issues inherent in such structures, such consent is typically impracticable and beyond our control. The existence and character of fallback provisions affected by the discontinuation of LIBOR vary widely from instrument to instrument. Many of our legacy contracts may not contemplate the permanent discontinuation of LIBOR and upon LIBOR’s discontinuation may result in the conversion of the instrument from a floating- to a fixed-rate instrument or may involve a significant degree of uncertainty as to the method of determining interest. To the extent that such legacy arrangements do not contemplate the permanent discontinuation of LIBOR, we would most likely look to some broad-based solution, such as the recently adopted New York law amendment, to rectify such deficiency. To the extent that such a solution is ineffective, for example as a result of being ruled unconstitutional, we would likely be required to undertake a re-evaluation of affected investments, which might result in the disposition of individual positions. To the extent that individual positions are retained, we may incur adverse financial consequences, including any mark-to-market impacts resulting from those investments that convert from a floating to a fixed rate. To the extent that the fallback rates ultimately used to determine interest payable on structured securities do not align with the fallback rates used to determine interest payable on the underlying assets, economic losses could be sustained on the overall structure.
The remaining notional value of investment-related contracts tied to LIBOR extending beyond June 30, 2023 of $2.6 billion or 11.1% relates to bi-lateral arrangements that are capable of being amended through negotiation with the relevant counterparty.
As our investment manager, Apollo maintains the documentation associated with the assets in our investment portfolio. We are therefore dependent upon Apollo for the successful completion of our LIBOR transition efforts relating to our investment portfolio. See Part I–Item 1A. Risk Factors–Uncertainty relating to the LIBOR Calculation process and the phasing out of LIBOR after a future date may adversely affect the value of our investment portfolio, our ability to achieve our hedging objectives and our ability to issue funding agreements bearing a floating rate of interest included in our 2020 Annual Report. Apollo’s failure to fulfill its responsibilities could have an adverse impact on our results of operations and ability to timely report accurate financial information.
Product Liabilities and Associated Hedging Instruments
As of March 31, 2021, we had product liabilities with a notional value of approximately $14.9 billion for which LIBOR is a component in the determination of interest credited, of which we expect $200 million to have a current crediting term that extends beyond June 30, 2023. For purposes of evaluating our exposure to LIBOR, we only consider our exposure to the current crediting term, which is typically one to two years. Upon renewal of the crediting term, we have the ability to migrate policyholders into new strategies not involving LIBOR. Generally, there are two categories of indices that use LIBOR in the determination of interest credited, “excess return” indices (return of index in excess of LIBOR) and indices that use LIBOR as a means to control volatility. The indices to which these products are tied are primarily proprietary indices for which key inputs are determined by the index sponsor. The index sponsor generally has the right to unilaterally change the reference rate upon the discontinuation of LIBOR. As a result, we do not anticipate any administrative concerns in connection with the transition from LIBOR to a replacement rate with respect to these products.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As of March 31, 2021, we held derivatives with a notional value of approximately $18.6 billion to hedge our exposure to these product liabilities, of which we expect $1.3 billion to extend beyond June 30, 2023. Included within this category are $3.9 billion of Eurodollar futures, of which we expect $1.1 billion to extend beyond June 30, 2023. Exchange traded products, such as Eurodollar futures, will follow the CME Group Inc.’s approach regarding the discontinuation of LIBOR. The remaining derivatives in this category are primarily purchased to hedge the current crediting period. We will be required to purchase new derivatives in future periods to hedge future crediting periods associated with the related existing product liabilities, which will expose us to potential basis mismatch to the extent that the reference rate for the product liability is not the same as the reference rate for the derivative instrument. These derivatives are entered into pursuant to an ISDA Master Agreement and will transition to SOFR in accordance with the process described below under the caption Other Derivatives.
Other Derivatives
Our other derivative contracts tied to LIBOR are generally entered into pursuant to an ISDA Master Agreement. ISDA published the ISDA 2020 IBOR Fallbacks Protocol (Protocol) and released Supplement 70 to the 2006 ISDA Definitions (Supplement) on October 23, 2020. The Protocol and Supplement include appropriate fallbacks that contemplate the permanent discontinuation of LIBOR. In January 2021, we joined industry peers by adhering to the Protocol and terms of the Supplement, each of which became effective on January 25, 2021. With respect to future transactions, we anticipate adoption of the 2021 ISDA Interest Rate Definitions. To the extent that the fallbacks incorporated into our other derivative contracts result in the use of a replacement rate that differs from that employed in the contract being hedged, we may experience basis mismatch. The Protocol contains templates for possible bilateral amendments to legacy contracts for situations in which the fallbacks contemplated by the Protocol give rise to potential basis risk. We intend to evaluate whether and the extent to which we are subject to such basis risk, as well as the possibility of using the available templates to mitigate such risk.
In addition to the exposure set forth in the table above, since March 31, 2021, we have added an additional $575 million of derivatives tied to LIBOR, all of which are expected to extend beyond June 30, 2023. Given our adherence to the Protocol and terms of the Supplement, all of these derivatives incorporate provisions that contemplate the permanent discontinuation of LIBOR.
Other Contracts and Other Sources of Exposure
The “Other Contracts” category is comprised of our credit agreement, floating rate funding agreements and fixed-to-float Series A preference shares, all of which contemplate the permanent discontinuation of LIBOR, are tied to LIBOR in a manner that is not expected to have a significant impact upon LIBOR’s discontinuation or have fallback provisions in place that provide for the determination of interest after the discontinuation of LIBOR. In addition to the other contracts for which we have quantified our exposure, we are party to contracts that are tied to LIBOR based upon the occurrence of some remote contingency, such as the accrual of penalty interest, or for which LIBOR is otherwise not a material term of the contract. These contracts do not lend themselves to quantification and are lower in priority in our LIBOR remediation efforts. Finally, LIBOR is used as a component in our internal derivative valuation models. We have begun to transition the benchmark yield curve in such models from LIBOR to the Secured Overnight Financing Rate and we expect to complete the transition prior to the discontinuation of LIBOR. Such transition may affect the valuation of our derivative instruments.
We can provide no assurance that we will be successful at fully implementing our plan prior to the discontinuation of LIBOR. Completion of certain components of our plan are contingent upon market developments and are therefore not fully within our control. To the extent management effort and attention is focused on other matters, such as responding to the risks posed by COVID-19, the timely completion of our plan could become more difficult. Failure to fully implement our plan prior to the discontinuation of LIBOR may have a material adverse effect on our business, financial position, results of operations and cash flows and on our ability to timely report accurate financial information.
Demographics
Over the next four decades, the retirement-age population is expected to experience unprecedented growth. Technological advances and improvements in healthcare are projected to continue to contribute to increasing average life expectancy, and aging individuals must be prepared to fund retirement periods that will last longer than ever before. Further, many working households in the United States do not have adequate retirement savings. As a tool for addressing the unmet need for retirement planning, we believe that many Americans have begun to look to tax-efficient savings products with low-risk or guaranteed return features and potential equity market upside, particularly as federal, state and local marginal tax rates have increased.upside. Our tax-efficient savings products are well positioned to meet this increasing customer demand.
We believe that our strong presence in the FIA market and strength of our relationships with IMOs position us to effectively serve consumers' demand in the rapidly growing retirement savings market. We expect that our retail channel will continue to benefit from our improving credit profile and recent product launches. We believe this should help us to grow sales at our desired cost of crediting through increased volumes via current IMOs and access to new distribution channels, including small to mid-sized banks and regional broker-dealers. We also believe that our improving credit profile has enabled and will continue to enable us to increase penetration in our existing organic channels, such as flow reinsurance and funding agreements, while also helping us to increase our presence in the PRT market.
Competition
We operate in highly competitive markets. We face a variety of large and small industry participants, including diversified financial institutions and insurance and reinsurance companies. These companies compete in one form or another for the growing pool of retirement assets driven by a number of external factors such as the continued aging of the population and the reduction in safety nets provided by governments and private employers. In the markets in which we operate, scale and the ability to provide value-added services and build long-term relationships are important factors to compete effectively. We believe that our leading presence in the retirement market, diverse range of capabilities and broad distribution network uniquely position us to effectively serve consumers’ increasing demand for retirement solutions, particularly in the FIA market.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
According to LIMRA, total fixed annuity market sales in the United States were $56.7$120.4 billion for the six monthsyear ended June 30, 2017,December 31, 2020, a 11.1%13.9% decrease from the same time period in 2016. This decrease was driven by a decrease2019 as interest rates pulled down crediting rates in traditionalall fixed rate deferred annuities of $3.1 billion, or 13.8% over prior year fixed rate deferred annuities,product lines and a decrease in FIA products of $2.7 billion, or 8.5% over prior year FIAs.the challenging macroeconomic backdrop amidst the COVID-19 crisis. In the total fixed annuity market, for the six monthsyear ended June 30, 2017December 31, 2020 (the most recent period for which specific market share data is available), we were the 5th4th largest company based on sales withof $7.7 billion, translating to a 4.8%6.4% market share and $2.7 billion in sales.share. For the six monthsyear ended June 30, 2016,December 31, 2019, our market share was 2.8%4.8% with sales of $1.8$6.8 billion.
FIAs are one ofAccording to LIMRA, total fixed-indexed annuity market sales in the fastest growing annuity products having grown from $27.3United States were $55.5 billion in 2005 to $60.9 billion in sales for the year ended December 31, 2016. According to LIMRA, for2020, a 24.5% decrease from the six monthssame time period in 2019. For the year ended June 30, 2017December 31, 2020 (the most recent period for which specific market share data is available), we were the 2nd largest provider of FIAs in termsbased on sales of sales,$5.8 billion, and our market share for the same period was 8.4% with10.5%. For the year ended December 31, 2019, we were the 2nd largest provider of FIAs based on sales of $2.5 billion. For the six months ended June 30, 2016, our market share was 5.0% with sales of $1.6 billion.
Regulatory Developments
Department of Labor
On April 6, 2016, the U.S. Department of Labor (DOL) issued a new regulation (fiduciary rule) more broadly defining the circumstances under which a person is considered to be a fiduciary by reason of giving investment advice or recommendations$6.1 billion, translating to an employee benefit plan or a plan’s participants or to IRA holders. In addition to releasing the investment advice regulation, the DOL: (1) issued a new prohibited transaction class exemption titled the “Best Interest Contract Exemption,” to be used in connection with the sale of FIAs or variable annuities, and (2) updated the previously prohibited transaction class exemption 84-24, to be used in connection with the sale of traditional fixed rate annuities. The April 10, 2017 applicability date for the fiduciary rule was delayed to June 9, 2017 in response to a memorandum issued to the DOL by President Trump. In addition to delaying the applicability date of the fiduciary rule, the DOL revised both exemptions, most notably allowing all annuity products, fixed, FIAs and variable annuities, to rely on an updated version of the prohibited transaction class exemption 84-24 from June 9, 2017 through January 1, 2018, at which time full implementation of the fiduciary rule is required. On August 9, 2017, the DOL submitted to the Office of Management and Budget a proposal to extend the January 1, 2018 full implementation date to July 1, 2019. In order for the extension to become effective, the proposal must be finalized and issued in the Federal Register before January 1, 2018. We cannot predict with any certainty the impact of the new fiduciary rule and exemptions, but the fiduciary rule and exemptions could alter the way our products and services are marketed and sold, particularly to purchasers of IRAs and individual retirement annuities. If implemented in its current form, the fiduciary rule could have an adverse effect on our ability to write new business. In addition, the NAIC has implemented a working group to update the current Suitability in Annuity Transactions Model Regulation to address the fiduciary standard and the SEC has indicated that it may propose rules creating a uniform standard of conduct applicable to broker-dealers and investment advisers. If either or both of these entities create rules or standards applicable to our business, it may affect the distribution of our products. Should the SEC or NAIC rules or standards, if adopted, not align with each other or the finalized fiduciary rule, the distribution of our products could be further complicated.8.3% market share.
Tax Reform
We continue to face material uncertainty regarding the substance and timing of tax reform. See Part II—Other Information—Item1A. Risk Factors—Risks Relating to Taxation—Changes in the U.S. tax law might adversely affect us or our shareholders for further discussion regarding tax reform.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Key Operating and Non-GAAP Measures
In addition to our results presented in accordance with GAAP, our results of operations includewe present certain financial information that includes non-GAAP measures commonly used in our industry.measures. Management believes the use of these non-GAAP measures, together with the relevant GAAP measures, provides information that may enhance an investor'sinvestor’s understanding of our results of operations and the underlying profitability drivers of our business. The majority of these non-GAAP measures are intended to remove from the results of operations the impact of market volatility (other than with respect to alternative investments) as well as integration, restructuring and certain other expenses which are not part of our underlying profitability drivers, or likely to re-occur in the foreseeable future, as such items fluctuate from period-to-periodperiod to period in a manner inconsistent with these drivers. These measures should be considered supplementary to our results in accordance with GAAP and should not be viewed as a substitute for the corresponding GAAP measures. See Non-GAAP Measure Reconciliations for the appropriate reconciliations to the GAAP measures.
Adjusted Operating Income Net of Tax(Loss) Available to Common Shareholders
OperatingAdjusted operating income net of tax, a commonly used term in the life insurance industry,(loss) available to common shareholders is a non-GAAP measure used to evaluate our financial performance excluding market volatility and expenses related to integration, restructuring, stock compensation and other expenses. Our adjusted operating income net of tax,(loss) available to common shareholders equals net income (loss) available to AHL’sAHL common shareholders adjusted to eliminate the impact of the following (collectively, the “non-operating adjustments”)non-operating adjustments):
•Investment Gains (Losses), Net of Offsets—Investment gains (losses), net of offsets, consistConsists of the realized gains and losses on the sale of AFS securities, the change in assumed modco and funds withheldfair value of reinsurance embedded derivatives,assets, unrealized gains and losses, impairments,changes in the credit loss allowance, and other investment gains and losses. Unrealized, impairmentsallowances and other investment gains and losses are comprised of the fair value adjustments of trading securities (other than CLOs) and investments held under the fair value option, derivative gains and losses not hedging FIA index credits, and the net OTTI impactschange in credit loss allowances recognized in operations net of the change in AmerUs Closed Block fair value reserve related to the corresponding change in fair value of investments and the change in unit linkedunit-linked reserves related to the corresponding trading securities. Investment gains and losses are net of offsets related to DAC, DSI, and VOBA amortization and changes to guaranteed livinglifetime withdrawal benefitsbenefit (GLWB) and guaranteed minimum death benefitsbenefit (GMDB) reserves (together, GLWB and GMDB reserves represent rider reserves) as well as the MVAsmarket value adjustments (MVA) associated with surrenders or terminations of contracts.
•Change in Fair Values of Derivatives and Embedded Derivatives – FIAs, Net of Offsets—ImpactsConsists of impacts related to the fair value accounting for derivatives hedging the FIA index credits and the related embedded derivative liability fluctuatefluctuations from period-to-period.period to period. The index reserve is measured at fair value for the current period and all periods beyond the current policyholder index term. However, the FIA hedging derivatives are purchased to hedge only the current index period. Upon policyholder renewal at the end of the period, new FIA hedging derivatives are purchased to align with the new term. The difference in duration between the FIA hedging derivatives and the index credit reserves creates a timing difference in earnings. This timing difference of the FIA hedging derivatives and index credit reserves is included as a non-operating adjustment, net of offsets related to DAC, DSI, and VOBA amortization and changes to rider reserves.
We primarily hedge with options that align with the index terms of our FIA products (typically 1-21–2 years). FromOn an economic basis, we believe this is suitable because policyholder accounts are credited with index performance at the end of each index term. However, because the “valueterm of an embedded derivative”derivative in an FIA contract is longer-dated, there is a duration mismatch which may lead to mismatches for accounting purposes.
•Integration, Restructuring, and Other Non-operating Expenses—Integration, restructuring, and other non-operating expenses consistConsists of restructuring and integration expenses related to mergersacquisitions and acquisitionsblock reinsurance costs as well as certain other expenses, which are not part ofpredictable or related to our core operations or likely to re-occur in the foreseeable future.
underlying profitability drivers.
•Stock Compensation Expense—StockConsists of stock compensation expenses associated with our share incentive plans, excluding our long termlong-term incentive plan, which are not part ofrelated to our core operating expensesunderlying profitability drivers and fluctuate from time to time due to the structure of our plans.
Bargain Purchase Gain—Bargain purchase gains associated with acquisitions are adjustments to net income as they are not consistent with our core operations. 60
Income Taxes (Expense) Benefit – Non-operating—The non-operating income tax expense is comprised of the appropriate jurisdiction's tax rate applied to the non-operating adjustments that are subject to income tax.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
•Bargain Purchase Gain—Consists of adjustments to net income (loss) available to AHL common shareholders as they are not related to our underlying profitability drivers.
•Income Tax (Expense) Benefit – Non-operating—Consists of the income tax effect of non-operating adjustments and is computed by applying the appropriate jurisdiction’s tax rate to the non-operating adjustments that are subject to income tax.
We consider these non-operating adjustments to be meaningful adjustments to net income (loss) available to AHL'sAHL common shareholders for the reasons discussed in greater detail above. Operating income, net of tax excluding notable items equals net income available to AHL's shareholders adjusted for non-operating adjustments and certain notable items in the period that facilitate the evaluation of our underlying profitability. Accordingly, we believe using these measuresa measure which excludes the impact of these items is effectiveuseful in analyzing our business performance and the trends in our results of operations. Together with net income (loss) available to AHL'sAHL common shareholders, we believe adjusted operating income net of tax, and operating income, net of tax excluding notable items provide(loss) available to common shareholders provides a meaningful financial metricsmetric that helphelps investors understand our underlying results and profitability. Operating income, net of tax, andAdjusted operating income net of tax excluding notable items(loss) available to common shareholders should not be used as a substitute for net income (loss) available to AHL'sAHL common shareholders.
ROE Excluding AOCI andAdjusted Operating ROE Excluding AOCI
ROE excluding AOCI andAdjusted operating ROE excluding AOCI areis a non-GAAP measuresmeasure used to evaluate our financial performance excluding the impacts of AOCI. AOCI fluctuates period-to-periodand the cumulative change in fair value of funds withheld and modco reinsurance assets, net of DAC, DSI, rider reserve and tax offsets. Adjusted AHL common shareholders’ equity is calculated as the ending AHL shareholders’ equity excluding AOCI, the cumulative change in fair value of funds withheld and modco reinsurance assets and preferred stock. Adjusted operating ROE is calculated as the adjusted operating income (loss) available to common shareholders, divided by average adjusted AHL common shareholders’ equity. These adjustments fluctuate period to period in a manner inconsistent with our underlying profitability drivers as the majority of such fluctuation is related to the market volatility of the unrealized gains and losses associated with our AFS securities. Once we have reinvestedExcept with respect to reinvestment activity relating to acquired blocks of businesses, we typically buy and hold AFS investments to maturity throughout the duration of market fluctuations, therefore, the period-over-period impacts in unrealized gains and losses are not necessarily indicative of current operating fundamentals or future performance. Accordingly, we believe using measures which exclude AOCI isand the cumulative change in fair value of funds withheld and modco reinsurance assets are useful in analyzing the trends ofin our operations.operating results. To enhance the ability to analyze these measures across periods, interim periods are annualized. ROE excluding AOCI andAdjusted operating ROE excluding AOCI should not be used as a substitute for ROE. However, we believe the adjustments to net income (loss) available to AHL common shareholders and AHL common shareholders’ equity are significant to gaining an understanding of our overall resultsfinancial performance.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Adjusted Operating Earnings (Loss) Per Common Share, - Operating Diluted Class A, Weighted Average Common Shares Outstanding -– Adjusted Operating Diluted Class A Common Shares and Adjusted Book Value Per Common Share Excluding AOCI
OperatingAdjusted operating earnings (loss) per common share, - operating diluted Class A, weighted average common shares outstanding -– adjusted operating diluted Class A common shares and adjusted book value per common share excluding AOCI are non-GAAP measures used to evaluate our financial performance and financial condition. The non-GAAP measures adjust the number of shares included in the corresponding GAAP measures to reflect the conversion or settlement of all shares and other stock-based awards outstanding. We believe using these measures represent an economic view of our share counts and provide a simplified and consistent view of our outstanding shares. OperatingAdjusted operating earnings (loss) per common share - operating diluted Class A is calculated as the adjusted operating income net of tax(loss) available to common shareholders, over the weighted average common shares outstanding - operating diluted Class A common shares. Book– adjusted operating. Adjusted book value per common share excluding AOCI is calculated as the endingadjusted AHL shareholders'common shareholders’ equity excluding AOCI divided by the adjusted operating dilutedcommon shares outstanding. Effective February 28, 2020, all Class B common shares were converted into Class A common shares outstanding.and all Class M common shares were converted into warrants and Class A common shares. Our Class B common shares arewere economically equivalent to Class A common shares and can be convertedwere convertible to Class A common shares on a one-for-one basis at any time. Our Class M common shares arewere in the legal form of shares but economically functionfunctioned as options as they arewere convertible into Class A common shares after vesting and settlementpayment of the conversion price. In calculating Class A diluted earnings per share on a GAAP basis, we are required to apply sequencing rules to determine the dilutive impacts, if any, of our Class B common shares, Class M common shares and any other stock-based awards. To the extent our Class B common shares, Class M common shares and/or any other stock-based awards arewere not dilutive, after considering the dilutive effects of the more dilutive securities in the sequence, they arewere excluded. Weighted average common shares outstanding -– adjusted operating diluted Class A common shares and adjusted operating diluted Class A common shares outstanding assume conversion or settlement of all outstanding items that are able to be converted to or settled in Class A common shares, including the impacts of Class B common shares on a one-for-one basis, the impacts of all Class M common shares net of the conversion price and any other stock-based awards, but excluding any awards for which the exercise or conversion price exceeds the market value of our Class A common shares on the applicable measurement date. For certain historical periods, Class M shares were not included due to issuance restrictions which were contingent upon our IPO. OperatingAdjusted operating earnings (loss) per common share, - operating diluted Class A, weighted average common shares outstanding -– adjusted operating diluted Class A common shares and adjusted book value per common share excluding AOCI should not be used as a substitute for basic earnings (loss) per share -– Class A common shares, basic weighted average common shares outstanding -– Class A or book value per common share. However, we believe the adjustments to the shares and equity are significant to gaining an understanding of our overall results of operations and financial condition.
Adjusted Debt to Capital Ratio
Adjusted debt to capital ratio is a non-GAAP measure used to evaluate our capital structure excluding the impacts of AOCI and the cumulative change in fair value of funds withheld and modco reinsurance assets, net of DAC, DSI, rider reserve and tax offsets. Adjusted debt to capital ratio is calculated as total debt divided by adjusted AHL shareholders’ equity. Adjusted debt to capital ratio should not be used as a substitute for the debt to capital ratio. However, we believe the adjustments to shareholders’ equity are significant to gaining an understanding of our capitalization, debt utilization and debt capacity.
Retirement Services Net Investment Earned Rate, Cost of Crediting andSpread, Investment Margin on Deferred Annuities and Operating Expenses
Investment marginNet investment spread is a key measurementmeasure of the financial healthprofitability of our Retirement Services core deferred annuities. Investment margin onsegment. Net investment spread measures our deferred annuities is generated frominvestment performance less the excesstotal cost of our net investment earned rate over the cost of crediting to our policyholders.liabilities. Net investment earned rate is a key measure of our investment returns andperformance, while cost of creditingfunds is a key measure of the cost of our policyholder benefits and liabilities. Investment margin on our deferred annuities. annuities measures our investment performance less the cost of crediting for our deferred annuities, which make up a significant portion of our net reserve liabilities.
Net investment earned rate is a non-GAAP measure we use to evaluate the performance of our net invested assets that does not correspond to GAAP net investment income. Net investment earned rate is computed as the income from our net invested assets divided by the average net invested assets, excluding the impacts of our investment in Apollo, for the relevant period. To enhance the ability to analyze these measures across periods, interim periods are annualized. The adjustments to net investment income to arrive at our net investment earned rate add (a) alternative investment gains and losses, (b) gains and losses related to trading securities for CLOs, (c) net VIE impacts (revenues, expenses and noncontrolling interest), (d) forward points gains and losses on foreign exchange derivative hedges and (e) the change in fair value of reinsurance embedded derivatives.assets, and removes the proportionate share of the ACRA net investment income associated with the ACRA noncontrolling interest as well as the gain or loss on our investment in Apollo. We include the income and assets supporting our assumedchange in fair value of reinsurance assets by evaluating the underlying investments of the funds withheld at interest receivables and we include the net investment income from those underlying investments which does not correspond to the GAAP presentation of change in fair value of reinsurance embedded derivatives.assets. We exclude the income and assets supporting business that we have exited through ceded reinsurance including funds withheld agreements. We believe the adjustments for reinsurance provide a net investment earned rate on the assets for which we have economic exposure.
Cost of funds includes liability costs related to cost of crediting on both deferred annuities and institutional products as well as other liability costs, but does not include the proportionate share of the ACRA cost of funds associated with the noncontrolling interest. Cost of funds is computed as the total liability costs divided by the average net invested assets, excluding our investment in Apollo, for the relevant period. To enhance the ability to analyze these measures across periods, interim periods are annualized.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Cost of crediting includes the costs for both deferred annuities and institutional products. Cost of crediting on deferred annuities is the interest credited to the policyholders on our fixed strategies as well as the option costs on the indexindexed annuity strategies. With respect to FIAs, the cost of providing index credits includes the expenses incurred to fund the annual index credits, and where applicable, minimum guaranteed interest credited. TheCost of crediting on institutional products is comprised of (i) PRT costs, including interest credited, benefit payments and other reserve changes, net of premiums received when issued, and (ii) funding agreement costs, including the interest payments and other reserve changes. Cost of crediting is computed as the cost of crediting for deferred annuities and institutional products divided by the average net invested assets, excluding the investment in Apollo, for the relevant periods. Cost of crediting on deferred annuities is computed as the net interest credited on fixed strategies and option costs on indexindexed annuity strategies are divided by the average net account value of our deferred annuities. Cost of crediting on institutional products is computed as the PRT and funding agreement costs divided by the average net institutional reserve liabilities. Our average net invested assets, excluding our investment in Apollo, net account values and net institutional reserve liabilities are averaged over the number of quarters in the relevant period to obtain our associated cost of crediting for such period. To enhance the ability to analyze these measures across periods, interim periods are annualized.
Other liability costs include DAC, DSI and VOBA amortization, change in rider reserves, the cost of liabilities on products other than deferred annuities and institutional products, excise taxes, premiums, product charges and other revenues. We believe a measure like other liability costs is useful in analyzing the trends of our core business operations and profitability. While we believe other liability costs is a meaningful financial metric and enhances our understanding of the underlying profitability drivers of our business, it should not be used as a substitute for total benefits and expenses presented under GAAP.
Net investment earned rate, cost of creditingfunds, net investment spread and investment margin on deferred annuities are non-GAAP measures we use to evaluate the profitability of our core deferred annuities business.Deferred annuities include our fixed rate annuities and FIAs, which account for approximately 78% of our Retirement Services reserve liabilities as of September 30, 2017. We believe measures like net investment earned rate, cost of crediting and investment margin on deferred annuitiesthese metrics are effectiveuseful in analyzing the trends of our core business operations, profitability and pricing discipline. While we believe net investment earned rate, costeach of crediting and investment margin on deferred annuitiesthese metrics are meaningful financial metrics and enhance our understanding of the underlying profitability drivers of our business, they should not be used as a substitute for net investment income, and interest sensitive contract benefits or total benefits and expenses presented under GAAP.
Operating expenses excludes integration, restructuring and other non-operating expenses, stock compensation expense, interest expense and policy acquisition expenses. We believe a measure like operating expenses is useful in analyzing the trends of our core business operations and profitability. While we believe operating expenses is a meaningful financial metric and enhances our understanding of the underlying profitability drivers of our business, it should not be used as a substitute for policy and other operating expenses presented under GAAP.
Net Invested Assets
In managing our business, we analyze net invested assets, which dodoes not correspond to total investments, including investments in related parties, as disclosed in our consolidated financial statements and notes thereto. InvestedNet invested assets representrepresents the investments that directly back our policyholdernet reserve liabilities as well as surplus assets. InvestedNet invested assets, excluding our investment in Apollo, is used in the computation of net investment earned rate, which allows us to analyze the profitability of our investment portfolio. InvestedNet invested assets includes (a) total investments on the consolidated balance sheets with AFS securities at cost or amortized cost, excluding derivatives, (b) cash and cash equivalents and restricted cash, (c) investments in related parties, (d) accrued investment income, (e) the consolidated VIE assets, liabilities and noncontrolling interest adjustments, (f) net investment payables and receivables, and (g) policy loans ceded (which offset the direct policy loans in total investments). Invested and (h) an allowance for credit losses. Net invested assets also excludes assets associated with funds withheld liabilities related to business exited through reinsurance agreements and derivative collateral (offsetting the related cash positions). We include the underlying investments supporting our assumed funds withheld and modco agreements in our net invested assets calculation in order to match the assets with the income received. We believe the adjustments for reinsurance provide a view of the assets for which we have economic exposure. OurNet invested assets includes our proportionate share of ACRA investments, based on our economic ownership, but does not include the proportionate share of investments associated with the noncontrolling interest. Net invested assets also includes our investment in Apollo. Our net invested assets, excluding our investment in Apollo, are averaged over the number of quarters in the relevant period to compute our net investment earned rate for such period. While we believe net invested assets is a meaningful financial metric and enhances our understanding of the underlying drivers of our investment portfolio, it should not be used as a substitute for total investments, including related parties, presented under GAAP.
Net Reserve Liabilities
In managing our business, we also analyze net reserve liabilities, which does not correspond to total liabilities as disclosed in our consolidated financial statements and notes thereto. ReserveNet reserve liabilities representsrepresent our policyholder liability obligations net of reinsurance and is used to analyze the costs of our liabilities. ReserveNet reserve liabilities includesinclude (a) the interest sensitive contract liabilities, (b) future policy benefits, (c) dividends payable to policyholders, and (d) other policy claims and benefits, offset by reinsurance recoverables,recoverable, excluding policy loans ceded. ReserveNet reserve liabilities include our proportionate share of ACRA reserve liabilities, based on our economic ownership, but does not include the proportionate share of reserve liabilities associated with the noncontrolling interest. Net reserve liabilities is net of the ceded liabilities to third-party reinsurers as the costs of the liabilities are passed to such reinsurers and, therefore, we have no net economic exposure to such liabilities, assuming our reinsurance counterparties perform under our agreements. The majority of our ceded reinsurance is a result of reinsuring large blocks of life business following acquisitions. For such transactions, GAAP requires the ceded liabilities and related reinsurance recoverables to continue to be recorded in our consolidated financial statements despite the transfer of economic risk to the counterparty in connection with the reinsurance transaction. While we believe net reserve liabilities is a meaningful financial metric and enhances our understanding of the underlying profitability drivers of our business, it should not be used as a substitute for total liabilities presented under GAAP.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Sales
Sales statistics do not correspond to revenues under GAAP but are used as relevant measures to understand our business performance as it relates to depositsinflows generated during a specific period of time. Our sales statistics include depositsinflows for fixed rate annuities and FIAs and align with the LIMRA definition of all money paid into an individual annuity, including money paid into new contracts with initial purchase occurring in the specified period and existing contracts with initial purchase occurring prior to the specified period (excluding internal transfers). While we believe sales is a meaningful metric and enhances our understanding of our business performance, it should not be used as a substitute for premiums presented under GAAP.
Net Organic Growth Rate
Item 2. Management's DiscussionNet organic growth rate is calculated as the net organic flows divided by average net invested assets. Net organic flows are comprised of net organic inflows less net outflows. Organic inflows are the deposits generated from our organic channels, which include retail, flow reinsurance and Analysisinstitutional. Net outflows are total liability outflows, including full and partial withdrawals on our deferred annuities, death benefits, pension risk transfer benefit payments, payments on payout annuities and maturities of Financial Conditionour funding agreements, net of outflows attributable to the ACRA noncontrolling interest. To enhance the ability to analyze these measures across periods, interim periods are annualized. We believe net organic growth rate provides a meaningful financial metric that enables investors to assess our growth from the channels that provide recurring inflows. Management uses net organic growth rate to monitor our business performance and Resultsthe underlying profitability drivers of Operationsour business.
Consolidated Results of Operations
The following summarizes the consolidated results of operations:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| (In millions, except per share data and percentages) | 2021 | | 2020 | | | | |
| Revenues | $ | 4,391 | | | $ | (1,549) | | | | | |
| Benefits and expenses | 4,252 | | | (167) | | | | | |
| Income (loss) before income taxes | 139 | | | (1,382) | | | | | |
| Income tax expense (benefit) | 62 | | | (166) | | | | | |
| Net income (loss) | 77 | | | (1,216) | | | | | |
| Less: Net loss attributable to noncontrolling interests | (537) | | | (169) | | | | | |
| Net income (loss) attributable to Athene Holding Ltd. | 614 | | | (1,047) | | | | | |
| Less: Preferred stock dividends | 36 | | | 18 | | | | | |
| Net income (loss) available to AHL common shareholders | $ | 578 | | | $ | (1,065) | | | | | |
| | | | | | | |
| Earnings (loss) per common share - basic Class A | $ | 3.02 | | | $ | (5.81) | | | | | |
Earnings (loss) per common share – diluted Class A1 | $ | 2.94 | | | $ | (5.81) | | | | | |
| ROE | 12.9 | % | | (36.5) | % | | | | |
| | | | | | | |
1 Diluted earnings (loss) per common share on a GAAP basis for Class A common shares, including diluted Class A weighted average common shares outstanding, includes for the three months ended March 31, 2020, the dilutive impacts, if any, of Class B common shares and Class M common shares and for both periods any other stock-based awards. |
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions, except percentages) | 2017 | | 2016 | | 2017 | | 2016 |
| Revenues | $ | 1,473 |
| | $ | 1,272 |
| | $ | 4,855 |
| | $ | 3,039 |
|
| Benefits and expenses | 1,179 |
| | 1,234 |
| | 3,818 |
| | 2,708 |
|
| Income before income taxes | 294 |
| | 38 |
| | 1,037 |
| | 331 |
|
| Income tax expense (benefit) | 20 |
| | (88 | ) | | 53 |
| | (73 | ) |
| Net income | 274 |
| | 126 |
| | 984 |
| | 404 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
|
| Net income available to AHL shareholders | $ | 274 |
| | $ | 126 |
| | $ | 984 |
| | $ | 404 |
|
| | | | | | | | |
| Operating income, net of tax by segment | | | | | | | |
| Retirement Services | $ | 244 |
| | $ | 142 |
| | $ | 786 |
| | $ | 535 |
|
| Corporate and Other | (13 | ) | | (25 | ) | | (9 | ) | | (87 | ) |
| Operating income, net of tax | 231 |
| | 117 |
| | 777 |
| | 448 |
|
| Non-operating adjustments | | | | | | | |
| Realized gains (losses) on sale of AFS securities | 29 |
| | 18 |
| | 64 |
| | 37 |
|
| Unrealized, impairments, and other investment gains (losses) | (3 | ) | | (12 | ) | | (15 | ) | | (36 | ) |
| Assumed modco and funds withheld reinsurance embedded derivatives | 20 |
| | 73 |
| | 153 |
| | 144 |
|
| Offsets to investment gains (losses) | (21 | ) | | (21 | ) | | (62 | ) | | (47 | ) |
| Investment gains (losses), net of offsets | 25 |
| | 58 |
| | 140 |
| | 98 |
|
| Change in fair values of derivatives and embedded derivatives – FIAs, net of offsets | 46 |
| | (1 | ) | | 155 |
| | (88 | ) |
| Integration, restructuring and other non-operating expenses | (14 | ) | | (2 | ) | | (34 | ) | | (8 | ) |
| Stock compensation expense | (7 | ) | | (46 | ) | | (30 | ) | | (59 | ) |
| Income tax (expense) benefit – non-operating | (7 | ) | | — |
| | (24 | ) | | 13 |
|
| Total non-operating adjustments | 43 |
| | 9 |
| | 207 |
| | (44 | ) |
| Net income available to AHL shareholders | $ | 274 |
| | $ | 126 |
| | $ | 984 |
| | $ | 404 |
|
| | | | | | | | |
| ROE | 13.0 | % | | 7.5 | % | | 16.9 | % | | 8.7 | % |
| ROE excluding AOCI | 14.9 | % | | 8.4 | % | | 18.7 | % | | 9.2 | % |
| Operating ROE excluding AOCI | 12.5 | % | | 7.9 | % | | 14.8 | % | | 10.2 | % |
We operate our core business strategies out of one reportable segment, Retirement Services. In addition to Retirement Services, we report certain other operations in Corporate and Other. See Results of Operations by Segment for further detail on the results of the segments.
Three Months Ended September 30, 2017 March 31, 2021Compared to the Three Months Ended September 30, 2016March 31, 2020
In this section, references to 20172021 refer to the three months ended September 30, 2017March 31, 2021 and references to 20162020 refer to the three months ended September 30, 2016.March 31, 2020.
Net Income (Loss) Available to AHL Common Shareholders
Net income (loss) available to AHL common shareholders increased by $148 million,$1.6 billion, or 117%154%, to $274 million for the three months ended September 30, 2017 from $126$578 million in the prior period.2021 from $(1.1) billion in 2020. ROE and ROE excluding AOCI increased to 13.0% and 14.9%, respectively,12.9% from 7.5% and 8.4%(36.5)% in 2016, respectively.2020. The increase in net income (loss) available to AHL common shareholders was driven by a $114 million$5.9 billion increase in operating income, net of tax, a favorable net change in FIA derivativesrevenues and a favorable$368 million decrease in stock compensation expense,noncontrolling interests, partially offset by an unfavorable changeincrease of $4.4 billion in benefits and expenses, a $228 million increase in income tax expense, and an $18 million increase in preferred stock dividends.
Revenues
Revenues increased by $5.9 billion to $4.4 billion in 2021 from $(1.5) billion in 2020. The increase was driven by an increase in investment related gains related to the assumed reinsurance embedded derivative. Theand losses, an increase in premiums and an increase in net change in FIA derivatives was primarily driven by the performanceinvestment income.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Our annual process of unlocking assumptions resulted in a decrease in pre-tax income of $33 million comparedInvestment related gains and (losses) increased by $3.1 billion to a decrease of $171$(488) million in 2016.
Operating Income, Net of Tax
Operating income, net of tax increased by $114 million, or 97%, to $231 million for the three months ended September 30, 20172021 from $117 million in the prior period. Operating income, net of tax, excluding notable items was $254 million, an increase of $85 million, or 50%, over the prior year. Operating ROE excluding AOCI was 12.5%, up from 7.9% in the prior period. The increase in operating income, net of tax, excluding notable items was driven by higher investment income. Investment income increased due to growth in our Retirement Services invested assets of $6.4 billion and higher short-term interest rates resulting in increased floating rate investment income.
Notable items for the quarter included unlocking, out of period actuarial adjustments of $13 million and a $17 million loss from our German operation compared to a loss of $7 million in the prior year. Our annual unlocking of assumptions resulted in an increase to other liability costs of $20 million compared to an increase of $158 million in prior year. The tax effect of these notable items for the quarter was $1 million compared to $11 million in the prior year. Additionally, in 2016 we recognized a $102 million deferred tax valuation allowance release.
Our consolidated net investment earned rate was 4.45% in three months ended September 30, 2017, an increase from 4.40% in the prior period, primarily attributed to the strong performance from our fixed income and other investment portfolios. Our alternative investment net investment earned rate was 9.07% in three months ended September 30, 2017, a decrease from 9.56% in the prior period as the prior year benefited from higher credit fund income due to more favorable credit spread tightening which was partially offset by decline in the market value of public equity positions in one of our funds in the prior year.
Revenues
Total revenue increased by $201 million to $1.5 billion in the three months ended September 30, 2017 from $1.3$(3.6) billion in the prior period. The increase was driven by favorable changes in investment related gains and losses, an increase in net investment income and a favorable change in VIE investment related gains and losses.
Investment related gains and losses increased by $93 million to $473 million in the three months ended September 30, 2017 from $380 million in the prior period,year, primarily due to the change in fair value of FIA hedging derivatives, the change in fair value of reinsurance assets, the change in provision for credit losses, the change in fair value of trading securities and an increase in equity securities reflecting the prior year decline in financial markets, partially offset by a decrease in realized gains and losses on AFS securities as a result of redeploying the change in assumedJackson reinsurance embedded derivatives. portfolio. The change in fair value of FIA hedging derivatives increased by $167 million$2.1 billion driven by the favorable performance of the indices upon which our call options are based. The majority of our call options are based on the S&P 500 index which experienced a 4.0% increaseincreased 5.8% in 2017,2021, compared to an 3.3% increasea decrease of 20.0% in 2016.2020. The assumed reinsurance embedded derivatives are based on the change in the fair value of the underlying investments held in modco and funds withheld portfolios (see Note 3 - Derivative Instruments to the condensed consolidated financial statements) which decreased by $61reinsurance assets increased $313 million primarily driven by the change in reinsurance embedded derivatives in the three months ended September 30, 2017, primarily duevalue of the underlying assets related to the prior year benefiting from bothsignificant credit spreads tightening and a decrease in U.S. treasury rates.
Net investment income increased by $77 million to $820 million in the three months ended September 30, 2017 from $743 million in the prior period, primarily driven by an increase in fixed income and other investment income. The increase in fixed income and other investment income was driven by earnings from growth in our investment portfolio attributed to a strong increase in deposits over the prior twelve months and higher short-term interest rates resulting in higher floating rate investment income.
VIE investment related gains and losses increased by $33 million to $17 million in the three months ended September 30, 2017 from $(16) million in the prior period, primarily driven by lossesspread widening in the prior year, resulting from a decline in market value of public equity positions in one of our funds, partially offset by the prior year benefiting from higher credit fund income due to more favorable credit spread tightening.
Benefits and Expenses
Total benefits and expenses decreased by $55 million to $1.2 billionincrease in US Treasury rates in the three months ended September 30, 2017 from $1.2 billioncurrent quarter compared to a decrease in the prior period.year. The decrease was driven by a decrease in future policy benefits, a decrease in DAC, DSI and VOBA amortization and lower policy and other operating expenses, offset by an increase in interest sensitive contract benefits.
Future policy and other policy benefits decreased by $132 million to $259 million in the three months ended September 30, 2017 from $391 million in the prior period, primarily attributable to a favorable change in the rider reserves and a favorable change in AmerUs Closed Block fair value liability. The favorable change in rider reservesprovision for credit losses of $126$276 million was primarily driven by a decreasedue to the unfavorable prior year impacts reflecting the economic downturn from the spread of $84COVID-19. The favorable change in fair value of trading securities of $154 million relatedwas comprised primarily of an increase in CLO equity securities, non-redeemable preferred stock and other trading securities mainly due to our annual unlocking of assumptions and an unfavorable impact from higher than expected persistencycredit spread widening in the prior year, partially offset by the change in US Treasury rates.
Premiums increased by $1.9 billion to $3.0 billion in 2021 from $1.1 billion in the prior year, driven by higher PRT premiums compared to prior year.
Net investment income increased by $959 million to $1.7 billion in 2021 from $745 million in the prior year, primarily driven by favorable alternative investment performance, a favorable change in the fair value of our investment in Apollo of $272 million mainly attributable to the change in valuation price compared to prior year and growth in our investment portfolio attributed to strong net flows in during the previous twelve months, partially offset by $69 million of lower floating rate investment income due to the lower interest rate environment.
Benefits and Expenses
Benefits and expenses increased by $4.4 billion to $4.3 billion in 2021 from $(167) million in 2020. The increase was driven by an increase in future policy and other policy benefits, an increase in interest sensitive contract benefits, an increase in DAC, DSI and VOBA amortization and an increase policy and other operating expenses.
Future policy and other policy benefits increased by $2.0 billion to $3.3 billion in 2021 from $1.4 billion in 2020, primarily attributable to higher PRT obligations as well as an increase in the change in rider reserves. The change in rider reserves of $116 million was primarily driven by a favorable net change in FIA derivatives as well as growth in the block of business. Unlocking in the third quarter of 2017 was unfavorable $49 million related to impacts of the net investment earned rate and mortality assumptions, while 2016 unlocking impact was unfavorable by $133 million. The favorable change in the AmerUs Closed Block fair value liability of $33 million was primarily driven by higher earnings on the block of business compared to prior year. We have elected the fair value option to value the AmerUs Closed Block whereby the fair value of liabilities is the sum of the fair value of the assets plus our cost of capital in the AmerUs Closed Block..
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
DAC, DSI and VOBA amortization decreased by $40 million to $93 million for the three months ended September 30, 2017 from $133 million in the prior period, primarily attributable to the $54 million favorable change in unlocking of assumptions of our DAC, DSI and VOBA assets, partially offset by growth in the FIA block increasing our DAC asset. Unlocking in the third quarter of 2017 was favorable $16 million primarily related to impacts of the net investment earned rate and mortality assumptions, while the 2016 unlocking impact was unfavorable by $38 million.
Policy and other operating expenses decreased by $22 million to $158 million in the three months ended September 30, 2017 from $180 million in the prior period, primarily due to a decrease in stock compensation expense of $39 million driven by the expense resulting from the accelerated vesting of shares in the prior year, partially offset by higher integration, restructuring and other non-operating expenses mainly due to Germany restructuring costs.
Interest sensitive contract benefits increased by $130 million$1.7 billion to $621$394 million in the three months ended September 30, 20172021 from $491 million$(1.3) billion in the prior period, primarily due to the change in FIA fair value embedded derivatives. The change2020, driven by an increase in FIA fair value embedded derivatives increased by $138 million,of $1.6 billion and growth in the block of business including the Jackson reinsurance transaction. The change in the FIA fair value embedded derivatives was primarily driven bydue to the performance of the equity indices to which our FIA policies are linked, primarily the S&P 500 index, which experienced a 4.0%an increase of 5.8% in 2017,2021, compared to a 3.3% increasedecrease of 20.0% in the prior period. Additionally,2020, partially offset by a favorable change in model and assumption impactsdiscount rates used in our embedded derivative calculations as the current year experienced a larger increase in discount rates compared to 2020.
DAC, DSI and VOBA amortization increased by $651 million to $248 million in 2021 from $(403) million in 2020, primarily due to the prior yearfavorable changes in investment related gains and losses as a result of a favorable change in fair value of reinsurance assets, net FIA derivatives, and equity markets as well as growth in the FIA block attributedof business.
Policy and other operating expenses increased by $95 million to $283 million in 2021 from $188 million in 2020, primarily driven by the increase.significant growth in the business and the accrual of costs associated with the previously announced merger with Apollo.
Taxes
Income tax expense (benefit) increased by $108$228 million to $20$62 million in 2021 from $(166) million in the three months ended September 30, 2017 from a benefit of $88 million in the prior period.2020. The increaseincome tax expense for 2021 was primarily driven by a release of a deferredhigher income before tax valuation allowance of $102 million in third quarter of 2016 and thedue to an increase in net investment income subject to U.S. income taxesand a favorable change in fair value of $20 million, or approximately $7 million of tax based on a 35% U.S. statutory rate. During 2016, we identified a tax plan that, when implemented, will allow us to use a significant portion of the U.S. non-life insurance companies’ net operating losses, which are scheduled to expire beginning in 2022.reinsurance assets.
Our effective tax rates were 7% in three months ended September 30, 2017 and (232)%rate in the prior period.first quarter of 2021 was 45% and 12% in 2020. Our effective tax rates may vary year-to-yearperiod to period depending upon the relationship of income and loss subject to tax compared to consolidated income and loss before income taxes.
Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016
In this section, references to 2017 refer to the nine months ended September 30, 2017 and references to 2016 refer to the nine months ended September 30, 2016.
Net Income Available to AHL Shareholders
Net income available to AHL shareholders The effective tax rate in 2021 increased by $580 million, or 144%, to $984 million for the nine months ended September 30, 2017 from $404 million in the prior period. ROE and ROE excluding AOCI increased to 16.9% and 18.7%, respectively, from 8.7% and 9.2% in 2016, respectively. The increase in net income available to AHL shareholders was driven bysignificantly as a $329 million increase in operating income, netresult of tax, a favorable net change in FIA derivatives and favorable investment gain and losses. The net change in FIA derivatives was primarily driven by the performance of the equity indices to which our FIA policies are linked, year-over-year change in discount rates and a favorable change in model and assumption impacts compared to the prior year. Investment gains andunrealized losses was favorable primarily driven by the higher realized gains on the sale of securities and favorable change in derivative and foreign currency gains and losses.
Operating Income, Net of Tax
Operating income, net of tax increased by $329 million, or 73%, to $777 million for the nine months ended September 30, 2017 from $448 million in the prior period. Operating ROE excluding AOCI was 14.8%, up from 10.2% in the prior period. The increase in operating income, net of tax, was primarily driven by a strong increase in investment income and lower other liability costs. Additionally, in 2016 we recognized a $102 million deferred tax valuation allowance release. The increase in investment income was primarily due to growth in our Retirement Services invested assets of $6.4 billion, higher short-term interest rates resulting in higher floating rate investment income, proceeds from a bond previously written down and higher alternative investment income, partially offset by lower bond call income. The increase in alternative investment income was primarily driven by higher income from our investment in AmeriHome, higher real estate income and a decline in the market value of public equity positions in one of our funds in the prior year, partially offset by lower credit fund income. Cost of crediting was higher by $40 million due to growth in our deferred annuity block of business which was partially offset by recent rate actions and lower option costs. The lower other liability costs were primarily due to lower DAC, DSI, VOBA and rider reserves attributed to unlocking and favorable impacts related to improved equity market performance, partially offset by growth in the block of business and higher gross profits. Our annual unlocking of assumptions resulted in an increase to other liability costs of $20 million compared to an increase of $158 million in prior year.
Our consolidated net investment earned rate was 4.55% in the nine months ended September 30, 2017, an increase from 4.21% in the prior period, primarily attributed to strong performance from our fixed income and otherwithin reinsurance investment portfolios and our alternative investment portfolio. Our alternative investment net investment earned rate was 9.92% in the nine months ended September 30, 2017, an increase from 5.51% in the prior period, primarily attributedthat are not subject to the strong performancetax.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Noncontrolling Interest
Revenues
Total revenue increasedNoncontrolling interest decreased by $1.9 billion$368 million to $4.9 billion$(537) million in the nine months ended September 30, 20172021 from $3.0 billion$(169) million in the prior period. The increase was2020, driven by favorable changesthe net loss related to noncontrolling interests in investment related gains and losses, an increase in premiums, an increase inACRA. The net investment income and an increase in VIE investment related gains and losses.
Investment related gains and losses increased by $1.1 billionloss attributable to $1.6 billion in the nine months ended September 30, 2017 from $523 million in the prior period,noncontrolling interests was primarily due to thean unfavorable change in fair value of FIA hedging derivatives, the change in assumed reinsurance embedded derivatives, higher realized gains on AFS securities and other derivative and foreign currency gains and losses. The change in fair valueassets as a result of FIA hedging derivatives increased by $1.0 billion drivenmore unrealized losses within reinsurance investment portfolios, magnified by the performance of the indices upon which our call options are based. The majority of our call options are based on the S&P 500 index which experienced a 12.5% increase in 2017, compared to an 6.1% increase in 2016. The assumedJackson reinsurance embedded derivatives increased by $31 million driven by growthtransaction in the reinsurance block, partially offset by the prior year benefiting from both credit spreads tightening and a decrease in U.S. treasury rates. The increase in investment gains and losses was partially offset by the change in unrealized gains and losses on trading securities which was comprisedsecond quarter of an unfavorable decrease in AmerUs Closed Block assets of $77 million related to higher unrealized gains in the prior year due to the decrease in U.S. treasury rates partially offset2020.
Preferred Stock Dividends
Preferred stock dividends increased by $18 million of gains related to unit-linked investments.
Premiums increased by $298 million to $503$36 million in the nine months ended September 30, 20172021 from $205$18 million in the prior period,2020, driven by approximately $320 million of premiums from our inaugural PRT transaction.
Net investment income increased by $290 million to $2.4 billion in the nine months ended September 30, 2017 from $2.1 billion in the prior period, primarily driven by a strong increase in fixed income and other investment income and an increase in alternative investment income. The increase in fixed income and other investment income was driven by earnings from growth in our investment portfolio attributed to a strong increase in deposits over the prior twelve months, higher short-term interest rates resulting in higher floating rate investment income and proceedsdividends paid on the recovery of a bond previously written down, partially offset by lower bond call income. The increasepreferred stock issued in alternative investment income was primarily due to the strong performance in AmeriHome, driven by increases in its overall balance sheet size, origination volumes and retained mortgage servicing rights, as well as an increase in real estate income.2020.
VIE investment related gains and losses increased by $99 million to $29 million in the nine months ended September 30, 2017 from $(70) million in the prior period, primarily driven by losses in the prior year resulting from a decline in market value of public equity positions in one of our funds, partially offset by the prior year benefiting from a favorable increase in the fair value of certain underlying investments in three of our consolidated VIEs, reflecting the removal of liquidity discounts related to marketability assumptions used in the determination of the fair value of certain of the investments.
Benefits and Expenses
Total benefits and expenses increased by $1.1 billion to $3.8 billion in the nine months ended September 30, 2017 from $2.7 billion in the prior period. The increase was driven by an unfavorable change in interest sensitive contract benefits, an increase in future policy and other policy benefits, an increase in DAC, DSI and VOBA amortization, an increase in dividends payable to policyholders and higher policy and other operating expenses.
Interest sensitive contract benefits increased by $785 million to $1.9 billion in the nine months ended September 30, 2017 from $1.1 billion in the prior period, primarily due to the change in FIA fair value embedded derivatives and higher interest credited to policyholders related to strong growth in deposits. The change in FIA fair value embedded derivatives increased by $728 million primarily driven by the performance of the equity indices to which our FIA policies are linked, primarily the S&P 500 index, which experienced a 12.5% increase in 2017, compared to a 6.1% increase in the prior period. Additionally, the FIA fair value embedded derivatives were impacted by a favorable change in discount rates used in our embedded derivative calculations as the decrease in the prior year were more favorable than the decrease in 2017, as well as a favorable change in model and assumption impacts compared to the prior year.
Future policy and other policy benefits increased by $178 million to $1.1 billion in the nine months ended September 30, 2017 from $873 million in the prior period, primarily attributable to approximately $320 million of policyholder obligations from our inaugural PRT transaction, partially offset by a favorable change in AmerUs Closed Block fair value liability and a favorable change in the rider reserves. The favorable change in the AmerUs Closed Block fair value liability of $120 million was primarily driven by higher unrealized gains in the prior year primarily due to the decrease in U.S. treasury rates and earnings on the block of business. We have elected the fair value option to value the AmerUs Closed Block whereby the fair value of liabilities is the sum of the fair value of the assets plus our cost of capital in the AmerUs Closed Block. The favorable change in rider reserves of $65 million was primarily driven by a decrease related to our annual unlocking of assumptions of $84 million and favorable impacts related to improved equity market performance compared to the prior period resulting in increased index credits to policyholder accounts, which lowered the amount needed to fund the rider reserve. The favorable change in rider reserves was partially offset by growth in the block of business, higher gross profits and an increase related to the net change in FIA derivatives. Unlocking in 2017 was unfavorable $49 million related to impacts of the net investment earned rate and mortality assumptions, while 2016 unlocking impacts were unfavorable by $133 million.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
DAC, DSI and VOBA amortization increased by $64 million to $293 million in the nine months ended September 30, 2017 from $229 million in the prior period, primarily due to the favorable net change in FIA derivatives and growth in the DAC asset balance related to block growth, partially offset by $54 million favorable change in unlocking of assumptions as well as favorable impacts related to improved equity market performance. Unlocking in 2017 was favorable $16 million primarily related to impacts of the net investment earned rate and mortality assumptions, while the 2016 unlocking impacts were unfavorable by $38 million.
Dividends to policyholders increased by $64 million to $129 million in the nine months ended September 30, 2017 from $65 million in the prior period, primarily attributed to higher Germany dividends to policyholders due to a timing difference in the recognition of participating income under US GAAP compared to German GAAP.
Policy and other operating expenses increased by $32 million to $479 million in 2017 from $447 million in 2016, primarily attributed to higher integration, restructuring and other non-operating expenses mainly due to Germany restructuring costs, partially offset by lower stock compensation due to the expense resulting from the accelerated vesting of shares in the prior year. The remaining increase was primarily attributed to growing our business and expanding our distribution channels.
Taxes
Income tax expense increased by $126 million to $53 million in nine months ended September 30, 2017 from a benefit of $73 million in the prior period. The increase was primarily driven by a release of a deferred tax valuation allowance of $102 million in third quarter of 2016 and the increase in income subject to U.S. income taxes of $87 million, or approximately $31 million of tax based on a 35% U.S. statutory rate, partially offset by a Germany income tax benefit in 2017.
Our effective tax rates were 5% in nine months ended September 30, 2017 and (22)% in the prior period. Our effective tax rates may vary year-to-year depending upon the relationship of income and loss subject to tax compared to consolidated income and loss before income taxes.
Results of Operations by Segment
The following summarizes our adjusted operating income (loss) available to common shareholders by segment:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| (In millions, except per share data and percentages) | 2021 | | 2020 | | | | |
| Net income (loss) available to AHL common shareholders | $ | 578 | | | $ | (1,065) | | | | | |
| | | | | | | |
| Non-operating adjustments | | | | | | | |
| Realized gains on sale of AFS securities | 19 | | | 12 | | | | | |
| Unrealized, allowances and other investment gains (losses) | 100 | | | (369) | | | | | |
| Change in fair value of reinsurance assets | (865) | | | (1,277) | | | | | |
| Offsets to investment gains (losses) | 141 | | | 495 | | | | | |
| Investment losses, net of offsets | (605) | | | (1,139) | | | | | |
| Change in fair values of derivatives and embedded derivatives – FIAs, net of offsets | 488 | | | 65 | | | | | |
| Integration, restructuring and other non-operating expenses | (45) | | | (4) | | | | | |
| Stock compensation expense | — | | | (10) | | | | | |
| Income tax (expense) benefit – non-operating | (8) | | | 131 | | | | | |
| Less: Total non-operating adjustments | (170) | | | (957) | | | | | |
| Adjusted operating income (loss) available to common shareholders | $ | 748 | | | $ | (108) | | | | | |
| | | | | | | |
| Adjusted operating income (loss) available to common shareholders by segment | | | | | | | |
| Retirement Services | $ | 784 | | | $ | 204 | | | | | |
| Corporate and Other | (36) | | | (312) | | | | | |
| Adjusted operating income (loss) available to common shareholders | $ | 748 | | | $ | (108) | | | | | |
| | | | | | | |
Adjusted operating earnings (loss) per common share1 | $ | 3.80 | | | $ | (0.60) | | | | | |
| Adjusted operating ROE | 25.3 | % | | (4.4) | % | | | | |
| Retirement Services adjusted operating ROE | 37.8 | % | | 10.6 | % | | | | |
1 Represents Class A common shares outstanding or weighted average common shares outstanding assuming conversion or settlement of all outstanding items that are able to be converted to or settled in Class A common shares, including for the three months ended March 31, 2020, the impacts of Class B common shares and Class M common shares and for both periods any other stock-based awards, but excluding any awards for which the exercise or conversion price exceeds the market value of our Class A common shares on the applicable measurement date. |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020
Adjusted Operating Income (Loss) Available to Common Shareholders
Adjusted operating income (loss) available to common shareholders increased by $856 million, or 793%, to $748 million in 2021 from $(108) million in 2020. Adjusted operating ROE was 25.3%, up from (4.4)% in 2020. Adjusted operating income available to common shareholders excluding the investment in Apollo, net of tax increased by segment:$636 million, or 485%, to $767 million in 2021 from $131 million in 2020. The increase in adjusted operating income (loss) available to common shareholders was driven by an increase in our Retirement Services segment of $580 million and an increase in our Corporate and Other segment of $276 million.
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions, except percentages) | 2017 | | 2016 | | 2017 | | 2016 |
| Operating income, net of tax by segment | | | | | | | |
| Retirement Services | $ | 244 |
| | $ | 142 |
| | $ | 786 |
| | $ | 535 |
|
| Corporate and Other | (13 | ) | | (25 | ) | | (9 | ) | | (87 | ) |
| Operating income, net of tax | $ | 231 |
| | $ | 117 |
| | $ | 777 |
| | $ | 448 |
|
| | | | | | | | |
| Retirement Services operating ROE excluding AOCI | 18.5 | % | | 13.0 | % | | 21.3 | % | | 16.8 | % |
Non-operating Adjustments
Non-operating adjustments increased by $787 million to $(170) million in 2021 from $(957) million in 2020. The increase in non-operating adjustments was primarily driven by the change in fair value of reinsurance assets, the change in net FIA derivatives, and a change in provision for credit losses, partially offset by higher non-operating expenses related to the accrual of costs associated with the previously announced merger with Apollo. The change in fair value of reinsurance assets was favorable by $412 million primarily due to significant credit spread widening in the prior year, partially offset by the increase in US Treasury rates in the current quarter compared to a decrease in the prior year. Net FIA derivatives were favorable by $423 million primarily due to the favorable performance of the equity indices to which our FIA policies are linked, primarily the S&P 500 index, and a more favorable change in discount rates used in our embedded derivative calculations. The favorable change in provision for credit losses of $277 million (net of noncontrolling interests) was primarily due to the unfavorable prior year impacts reflecting the economic downturn from the spread of COVID-19.
Retirement Services
Retirement Services is comprised of our United States and Bermuda operations which issue and reinsure retirement savings products and institutional products. Retirement Services has retail operations, which provide annuity retirement solutions to our policyholders. Retirement Services also has reinsurance operations, which reinsure FIAs, MYGAs, FIAs, traditional one year guarantee fixed deferred annuities, immediate annuities and institutional products from our reinsurance partners. In addition, our institutional operations, including funding agreements and PRT obligations, are included in our Retirement Services segment.
Three Months Ended September 30, 2017March 31, 2021 Compared to the Three Months Ended September 30, 2016March 31, 2020
Adjusted Operating Income Net of TaxAvailable to Common Shareholders
OperatingAdjusted operating income net of taxavailable to common shareholders increased by $102$580 million, or 72%284%, to $244$784 million in the three months ended September 30, 2017,2021, from $142$204 million in the prior period. Operating income, net of tax, excluding notable items2020. Adjusted operating ROE was $250 million, an increase of $63 million, or 34%, over the prior year. Operating ROE excluding AOCI was 18.5%37.8%, up from 13.0%10.6% in the prior period. The increase in adjusted operating income available to common shareholders was driven by higher net investment earnings, partially offset by higher cost of funds and higher operating tax excluding notable items wasexpense related to higher taxable earnings in 2021. Net investment earnings increased $751 million primarily driven by higher fixedfavorable alternative investment performance, $32.1 billion of growth in our average net invested assets from prior year attributed to a strong growth in deposits and other investment income,the Jackson reinsurance transaction, partially offset by lower alternative investment income.floating rate income and lower new money rates reflecting the prolonged lower interest rate environment. Cost of funds were $128 million higher primarily related to an increase in cost of crediting as a result of growth in the block of business, including the Jackson reinsurance transaction. Other liability costs were consistent with prior year as higher gross profits were entirely offset by the favorable change in actuarial experience and market impacts.
Net investment income increased $57 million driven by higher fixed income and other investment income, partially offset by lower alternative investment income. Fixed income and other investment income increased primarily attributed to earnings from growth in invested assetsInvestment Spread
| | | | | | | | | | | |
| Three months ended March 31, |
| 2021 | | 2020 |
| Net investment earned rate | 5.18 | % | | 4.04 | % |
| Cost of funds | 2.70 | % | | 3.01 | % |
| Net investment spread | 2.48 | % | | 1.03 | % |
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Notable items forNet investment spread, which measures the quarter included unlocking and outspread on our investment performance less the total cost of period actuarial adjustments of $13 million. Our annual unlocking of assumptions resulted in an increase to other liability costs of $20 million compared to an increase of $158 million in prior year. Unlocking in the third quarter of 2017 related to impacts of the net investment earned rate and mortality assumptions, while 2016 related to a decrease in the projected net investment earned rates and lower projected lapse rate assumptions. The tax effect of these notable items for the quarter was $1 million compared to $11 million in the prior year. Additionally, in 2016 we recognized a $102 million deferred tax valuation allowance release.
Investment Margin on Deferred Annuities
|
| | | | | |
| | Three months ended September 30, |
| | 2017 | | 2016 |
| Net investment earned rate | 4.64 | % | | 4.75 | % |
| Cost of crediting | 1.88 | % | | 1.96 | % |
| Investment margin on deferred annuities | 2.76 | % | | 2.79 | % |
Investment margin on deferred annuities decreased by 3our liabilities, increased 145 basis points to 2.76%2.48% in the three months ended September 30, 2017,2021 from 2.79%1.03% in the prior period. The decrease in the investment margin on deferred annuities was driven by the decrease in net investment earned rate of 11 basis points, partially offset by a favorable decrease in cost of crediting of 8 basis points.
2020. Net investment earned rate decreased increased 114 basis points due to the decrease ina a higher alternative investment net investment earned rate, partially offset by the decline in the fixed and other net investment earned rate.The alternative net investments earned rate increased in 2021 to 42.33% from 0.56% in 2020, driven by higher Venerable returns primarily due to a valuation increase related to the announced reinsurance agreement with Equitable Financial Life Insurance Company, unfavorable performance in the prior year reflecting the economic downturn from the spread of COVID-19, the sale of AmeriHome and higher MidCap returns as a result of a valuation increase in fixed income and other investment income earned rate.the quarter relating to a capital raise price at a premium compared to a decrease in valuation in the prior year. The fixed income and other net investment earned rate increaseddecreased in the three months ended September 30, 2017,2021 to 4.44%3.57% from 4.36%4.20% in the prior period2020, primarily attributed to higher short-term interest rates resulting in higherlower floating rate investment income, lower new money rates reflecting the prolonged lower interest rate environment, lower returns on the assets from the Jackson reinsurance transaction and higher levels of cash balances during the three months ended September 30, 2016. Thecurrent quarter.
Cost of funds decreased by 31 basis points to 2.70% in 2021, from 3.01% in 2020, primarily driven by lower other liability costs and cost of crediting. Other liability costs decreased 26 basis points primarily driven by alternative investments net investments earnedfavorable rider reserve and DAC amortization related to the change in actuarial experience and market impacts, partially offset by higher gross profits, as well as favorable other liability costs from the Jackson reinsurance transaction. Cost of crediting decreased 5 basis points primarily driven by a decrease in floating rate decreasedfunding agreements, lower rates on recent funding agreement issuances and PRT transactions and slightly favorable deferred annuity rates due to 9.79%favorable rate actions and lower option costs.
Investment Margin on Deferred Annuities
| | | | | | | | | | | |
| Three months ended March 31, |
| 2021 | | 2020 |
| Net investment earned rate | 5.18 | % | | 4.04 | % |
| Cost of crediting on deferred annuities | 1.89 | % | | 1.91 | % |
| Investment margin on deferred annuities | 3.29 | % | | 2.13 | % |
Investment margin on deferred annuities, which measures our investment performance less the cost of crediting for our deferred annuities, increased by 116 basis points to 3.29% in 2021, from 2.13% in 2020, driven by an increase in the three months ended September 30, 2017, from 14.26% in the prior period primarily attributed to the prior year benefiting from higher credit fund income due to more favorable credit spread tightening. The net investment earned rates continue to reflect impacts of holding approximately 28% of total invested assetsrate and a decrease in floating rate investments and 2% of invested assets in cash holdings to opportunistically capitalize on market dislocations.
Costthe cost of crediting on deferred annuities decreased by 8 basis points to 1.88% in the three months ended September 30, 2017, from 1.96% in the prior period. The decrease in cost of crediting was driven by recentyear related to favorable rate actions and lower option costs. Wecosts, as we continue to focus on pricing discipline, managing interest rates credited to policyholders and managing the cost of options to fund the annual index credits on our FIA products.
Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016
Operating Income, Net of Tax
Operating income, net of tax increased by $251 million, or 47%, to $786 million in the nine months ended September 30, 2017, from $535 million in the prior period. Operating ROE excluding AOCI was 21.3%, up from 16.8% in the prior period. The increase in operating income, net of tax, was primarily driven by an increase in net investment income and lower other liability costs, partially offset by higher cost of crediting.
Net investment income increased $257 million driven primarily by earnings from growth in invested assets of $6.4 billion attributed to a strong increase in deposits over the prior twelve months, higher short-term interest rates resulting in higher floating rate investment income and proceeds on the recovery of a bond previously written down, partially offset by lower bond call income.
Other liability costs decreased $139 million driven by unlocking and favorable impacts related to improved equity market performance, partially offset by growth in the block of business and higher gross profits. Our annual unlocking of assumptions resulted in an increase to other liability costs of $20 million compared to an increase of $158 million in prior year. Unlocking in 2017 related to impacts of the net investment earned rate and mortality assumptions, while 2016 related to a decrease in the projected net investment earned rates and lower projected lapse rate assumptions. Additionally, in 2016 we recognized a $102 million deferred tax valuation allowance release.
Cost of crediting increased $40 million driven by growth in our deferred annuity block of business which was partially offset by recent rate actions and lower option costs.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Investment Margin on Deferred Annuities
|
| | | | | |
| | Nine months ended September 30, |
| | 2017 | | 2016 |
| Net investment earned rate | 4.75 | % | | 4.64 | % |
| Cost of crediting | 1.89 | % | | 1.97 | % |
| Investment margin on deferred annuities | 2.86 | % | | 2.67 | % |
Investment margin on deferred annuities increased by 19 basis points to 2.86% in nine months ended September 30, 2017, from 2.67% in the prior period. The increase in the investment margin on deferred annuities was driven by the increase in net investment earned rate of 11 basis points, showing strength in our investment portfolio, and a favorable decrease in cost of crediting of 8 basis points.
Net investment earned rate increased due to the increase in fixed income and other investment income earned rate. The fixed income and other net investment earned rate increased in the nine months ended September 30, 2017, to 4.50% from 4.38% in the prior period primarily attributed to higher short-term interest rates resulting in higher floating rate investment income, higher cash balances during the prior year and the proceeds from a bond previously written down, partially offset by lower bond call income. The alternative investments net investments earned rate remained consistent with prior year, 10.86% compared to 10.85% in the prior period, as higher income from our investment in AmeriHome was offset by lower credit fund income. The net investment earned rates continue to reflect impacts of holding approximately 28% of total invested assets in floating rate investments and 2% of invested assets in cash holdings to opportunistically capitalize on market dislocations.
Cost of crediting on deferred annuities decreased by 8 basis points to 1.89% in nine months ended September 30, 2017, from 1.97% in the prior period. The decrease in cost of crediting was driven by recent rate actions and lower option costs. We continue to focus on pricing discipline, managing interest rates credited to policyholders and managing the cost of options to fund the annual index credits on our FIA products.
Corporate and Other
Corporate and Other includes certain other operations related to our corporate activities and our German operations, which is primarily comprised of participating long-duration savings products. In addition to our German operations, included in Corporate and Other aresuch as corporate allocated expenses, merger and acquisition costs, debt costs, preferred stock dividends, certain integration and restructuring costs, certain stock-based compensation and intersegment eliminations. In Corporate and Other,addition, we also hold capital in excess of the level of capital we hold in Retirement Services to support our operating strategy.
Adjusted Operating Income (Loss), Net of TaxLoss Available to Common Shareholders
OperatingAdjusted operating loss net of taxavailable to common shareholders decreased by $12$276 million to $13$36 million infrom $312 million for the three months ended September 30, 2017, from $25 millionMarch 31, 2021 and 2020, respectively. The decrease in the prior period. In the third quarter 2017, our German operation had anadjusted operating loss of $17 million,available to common shareholders was primarily driven by policyholder dividends related to a timing differencefavorable change of $220 million on our investment in recognition of participating income under U.S. GAAP compared to German GAAP. Operating income,Apollo, net of tax, excluding this notable item was $4 million, compared to a loss of $18 million in the prior year, excluding $7 million operating loss from our German operation. The increase in operating income, net of tax excluding this item was driven byas well as favorable alternative investment losses in the prior year resultingperformance from a declinean increase in the market value of publicour equity positionsposition in one of our funds, partially offset by the prior year benefiting fromOneMain and higher credit fund income due to more favorable credit spread tightening.
Operating loss, net of tax decreased by $78 million to $9 millionthe decline in the nine months ended September 30, 2017, from $87 million in the prior period. The decrease in operating loss, net of tax, was mainly driven by alternative investment lossesCLO equities in the prior year resulting from a decline inrelated to the market value of public equity positions in one of our funds, a decline in energy markets in the prior year, and higher CMBS fund income in the prior year. The higher alternative investment income wasunfavorable economic conditions. These items were partially offset by a $28 million operating loss from our German operations, a decline of $27 million from the prior year, primarily driven by unfavorable policyholderhigher preferred stock dividends and higher interest expense due to timing difference in the recognition2020 issuances.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Investment Portfolio
We had consolidated investments, including related parties, of $81.2$186.0 billion and $72.4$182.4 billion as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively. Our investment strategy seeks to achieve sustainable risk-adjusted returns through the disciplined managingmanagement of our investment characteristics withportfolio against our long-duration liabilities, andcoupled with the diversification of risk. The investment strategies utilized by our investment managers focusmanager focuses primarily on a buy and hold asset allocation strategy that may be adjusted periodically in response to changing market conditions and the nature of our liability profile. The majoritySubstantially all of our investment portfolio excluding investments of our German subsidiary, areis managed by AAM, an indirect subsidiary of Apollo, founded for the express purpose of managing Athene’s portfolio. AAMwhich provides a full suite of services, for our investment portfolio, including direct investment management, asset allocation, mergers and acquisition asset diligence, and certain operational support services, including investment compliance, tax, legal and risk management support. Our relationship with AAM and Apollo allows us to take advantage of our generally illiquid liability profile by identifying investment opportunities with an emphasis on earning incremental yield by taking liquidity and complexity risk rather than assuming solely credit risk. The deep experience of the AAMApollo’s investment team and Apollo’s credit portfolio managers utilize their deep experience to assist us in sourcing and underwriting complex asset classes. AAMApollo has selected a diverse array of corporate bonds and more structured, but highly rated asset classes. We also maintain holdings in floating rate and less rate-sensitive instruments, including CLOs, non-agency RMBS and various types of structured products. In addition to our fixed income portfolio, we opportunistically allocate 5-10%approximately 5% of our portfolio to alternative investments where we primarily focus on fixed income-like, cash flow-based investments.
Net investment income on the condensed consolidated statements of income (loss) included management fees under our investment management arrangements with Apollo, inclusive of base and sub-allocation fees, of $144 million and $128 million, respectively, during the three months ended March 31, 2021 and 2020. The total amounts we have incurred, directly and indirectly, from Apollo and its affiliates were as follows:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| (In millions) | 2021 | | 2020 | | | | |
Investment management agreements1,2 | $ | 195 | | | $ | 152 | | | | | |
Fund investments3 | 61 | | | (18) | | | | | |
Other4 | 11 | | | 9 | | | | | |
| Gross fees | 267 | | | 143 | | | | | |
ACRA noncontrolling interest5 | 25 | | | 5 | | | | | |
| Net fees | $ | 242 | | | $ | 138 | | | | | |
| | | | | | | |
1 Excludes $1 million and $0 million of sub-advisory fees paid to ISG for the benefit of third-party sub-advisors for the three months ended March 31, 2021 and 2020, respectively. |
2 Includes $55 million and $24 million of fees charged by Apollo to third-party cedants for the three months ended March 31, 2021 and 2020, respectively, with respect to assets supporting obligations reinsured to us. Third-party cedants bear legal responsibility for payment of the investment management fees charged; however, we are the beneficiaries of the services performed and the fees ultimately reduce the settlement payments received from such third-party cedants. |
3 Includes total management fees, carried interest (including unrealized but accrued carried interest fees) and other fees, including with respect to those investments we hold as equity method investments. |
4 Other primarily relates to fees resulting from shared services, advisory and other agreements with Apollo or its affiliates. |
5 Represents those fees incurred directly and indirectly attributable to ACRA, based upon the economic ownership of the noncontrolling interest in ACRA. |
Our net invested assets, which are those whichthat directly back our policyholdernet reserve liabilities as well as surplus assets, (as previously discussed in Key Operating and Non-GAAP Measures), were $78.8$155.7 billion and $71.8$150.2 billion as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively. AAM manages, directly and indirectly, approximately $73.1 billion and AAME and affiliates sub-advises approximately $5.4 billion, which in the aggregate constitute the vast majority of our investment portfolio as of September 30, 2017, comprising a diversified portfolio of fixed maturity and other securities. Through our relationship with Apollo, AAM has identified unique investment opportunities for us. AAM’sApollo’s knowledge of our funding structure and regulatory requirements allows it to design customized strategies and investments for our portfolio.
Our Apollo manages our asset portfolio is managed within the limits and constraints set forth in our Investment and Credit Risk Policy. Under this policy, we set limits on investments in our portfolio by asset class, such as corporate bonds, emerging markets securities, municipal bonds, non-agency RMBS, CMBS, CLOs, commercial mortgage whole loans and mezzanine loans and investment funds. We also set credit risk limits for exposure to a single issuer that vary based on the issuer'sissuer’s ratings. In addition, our investment portfolio is constrained by its scenario-based capital ratio limit and its stressed liquidity limit.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The following table presents the carrying values of our total investments and investments in related parties:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (In millions, except percentages) | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total |
| AFS securities, at fair value | $ | 85,524 | | | 45.9 | % | | $ | 82,853 | | | 45.4 | % |
| Trading securities, at fair value | 1,979 | | | 1.1 | % | | 2,093 | | | 1.2 | % |
| Equity securities | 524 | | | 0.3 | % | | 532 | | | 0.3 | % |
| Mortgage loans, net of allowances | 16,671 | | | 8.9 | % | | 15,264 | | | 8.4 | % |
| Investment funds | 966 | | | 0.5 | % | | 803 | | | 0.4 | % |
| Policy loans | 356 | | | 0.2 | % | | 369 | | | 0.2 | % |
| Funds withheld at interest | 46,024 | | | 24.7 | % | | 48,612 | | | 26.7 | % |
| Derivative assets | 3,677 | | | 2.0 | % | | 3,523 | | | 1.9 | % |
| Short-term investments | 125 | | | 0.1 | % | | 222 | | | 0.1 | % |
| Other investments, net of allowances | 1,722 | | | 0.9 | % | | 572 | | | 0.3 | % |
| Total investments | 157,568 | | | 84.6 | % | | 154,843 | | | 84.9 | % |
| Investments in related parties | | | | | | | |
| AFS securities, at fair value | 6,905 | | | 3.7 | % | | 6,520 | | | 3.6 | % |
| Trading securities, at fair value | 1,710 | | | 0.9 | % | | 1,529 | | | 0.8 | % |
| Equity securities, at fair value | 114 | | | 0.1 | % | | 72 | | | — | % |
| Mortgage loans, net of allowances | 714 | | | 0.4 | % | | 674 | | | 0.4 | % |
| Investment funds | 5,899 | | | 3.2 | % | | 5,284 | | | 2.9 | % |
| Funds withheld at interest | 12,572 | | | 6.8 | % | | 13,030 | | | 7.1 | % |
| | | | | | | |
| Other investments, net of allowances | 469 | | | 0.3 | % | | 469 | | | 0.3 | % |
| Total related party investments | 28,383 | | | 15.4 | % | | 27,578 | | | 15.1 | % |
| Total investments including related party | $ | 185,951 | | | 100.0 | % | | $ | 182,421 | | | 100.0 | % |
|
| | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (In millions, except percentages) | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total |
| AFS securities, at fair value | | | | | | | |
| Fixed maturity securities | $ | 58,516 |
| | 72.2 | % | | $ | 52,033 |
| | 71.8 | % |
| Equity securities | 318 |
| | 0.4 | % | | 353 |
| | 0.5 | % |
| Trading securities, at fair value | 2,709 |
| | 3.3 | % | | 2,581 |
| | 3.6 | % |
| Mortgage loans, net of allowances | 6,445 |
| | 7.9 | % | | 5,470 |
| | 7.5 | % |
| Investment funds | 747 |
| | 0.9 | % | | 689 |
| | 1.0 | % |
| Policy loans | 571 |
| | 0.7 | % | | 602 |
| | 0.8 | % |
| Funds withheld at interest | 6,964 |
| | 8.6 | % | | 6,538 |
| | 9.0 | % |
| Derivative assets | 1,982 |
| | 2.4 | % | | 1,370 |
| | 1.9 | % |
| Real estate | 621 |
| | 0.8 | % | | 542 |
| | 0.7 | % |
| Short-term investments | 108 |
| | 0.1 | % | | 189 |
| | 0.3 | % |
| Other investments | 77 |
| | 0.1 | % | | 81 |
| | 0.1 | % |
| Total investments | 79,058 |
| | 97.4 | % | | 70,448 |
| | 97.2 | % |
| Investment in related parties | | | | | | | |
| AFS securities at fair value | | | | | | | |
| Fixed maturity securities | 409 |
| | 0.5 | % | | 335 |
| | 0.5 | % |
| Equity securities | — |
| | — | % | | 20 |
| | — | % |
| Trading securities, at fair value | 140 |
| | 0.2 | % | | 195 |
| | 0.3 | % |
| Investment funds | 1,330 |
| | 1.6 | % | | 1,198 |
| | 1.7 | % |
| Short-term investments | 8 |
| | — | % | | — |
| | — | % |
| Other investments | 238 |
| | 0.3 | % | | 237 |
| | 0.3 | % |
| Total related party investments | 2,125 |
| | 2.6 | % | | 1,985 |
| | 2.8 | % |
| Total investments, including related party | $ | 81,183 |
| | 100.0 | % | | $ | 72,433 |
| | 100.0 | % |
The increase in our total investments, including related parties,party, as of September 30, 2017March 31, 2021 of $8.8$3.5 billion compared to December 31, 20162020 was primarily driven by strong growth from gross organic deposits of $8.2 billion in deposits,excess of liability outflows of $3.5 billion, the deployment of higher cash balances in the prior year and an increase in the market valuation of several investment funds. These increases were partially offset by unrealized gainslosses on AFS securities including related parties, an increase in derivative assets and reinvestment of earnings. The strong growth in deposits was attributed to $8.0 billion of organic growth for the ninethree months ended September 30, 2017, partially offset by liability outflows. Unrealized gains on AFS securities including related partiesMarch 31, 2021 of $3.4 billion and funds withheld at interest portfolios, both of which were $1.5 billion attributed to credit spreads tightening and U.S. treasury rates declining in the nine months ended September 30, 2017. Derivative assets increased by $612 million primarily attributed to an increase in equity markets during 2017 asUS Treasury rates, partially offset by the S&P 500 index increased by 12.5%.tightening of credit spreads.
Our investment portfolio consists largely of high quality fixed maturity securities, loans and short-term investments, as well as additional opportunistic holdings in investment funds and other instruments, including a small amount of equity holdings. Fixed maturity securities and loans include publicly issued corporate bonds, government and other sovereign bonds, privately placed corporate bonds and loans, mortgage loans, CMBS, RMBS, CLOs and other asset-backed securities (ABS).ABS.
While the substantial majority of our investment portfolio has been allocated to corporate bonds and structured credit products, a key component of our investment strategy is the opportunistic acquisition of investment funds with attractive risk and return profiles. Our investment fund portfolio consists of funds that employ various strategies including real estate and other real assetsasset funds, credit funds and private equity funds and hedge funds. We currently targethave a strong preference for assets that have some or all of the following characteristics, among others: (1) investments that are fixed-income-likeconstitute a direct investment or income producing and that have embedded downside protection. We also preferan investment funds that havein a fund with a high degree of co-investment, haveco-investment; (2) investments with credit- or debt-like characteristics (for example, a statedstipulated maturity valueand par value), or havealternatively, investments with reduced volatility versuswhen compared to pure equity. A majority of ourequity; or (3) investments in traditional private equity investments and hedge funds are a result of the acquisition of Aviva USA, which had existing private equity and hedge fund investment portfolios at the time of acquisition. We also acquired certain investment funds from AAA Investor (which are classified as private equity investments and consolidated VIEs) as a one-time capital contribution by our largest shareholder in advance of the Aviva USA acquisition. With respect to investment fund portfolios that we receive in these transactions, we actively reinvest these investments in our preferred credit-oriented strategies over time as we liquidate these holdings.believe have less downside risk.
We hold derivatives for economic hedging purposes to reduce our exposure to the cash flow variability of assets and liabilities, equity market risk, interest rate risk, credit risk and to a lesser extent, foreign exchange risk. Our primary use of derivative instruments relates to providing the income needed to fund the annual indexed credits on our FIA products. We primarily use fixed indexed options to economically hedge FIA products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specific market index.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
With respect to derivative positions, we transact with highly rated counterparties, and do not expect the counterparties to fail to meetfulfill their obligations under the contracts. We generally use industry standard agreements and annexes with bilateral collateral provisions to further reduce counterparty credit exposure.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Related Party Investments
We hold investments in related party assets primarily comprised of AFS securities, trading securities, investment funds and funds withheld at interest reinsurance receivables which are primarily a result of investments over which Apollo can exercise influence. As of March 31, 2021, these investments totaled $28.4 billion, or 13.8% of our total assets. Related party AFS and trading securities primarily consist of structured securities for which Apollo is the manager of the underlying securitization vehicle and securities issued by Apollo direct origination platforms including PK AirFinance, MidCap and, until its sale in April 2021, AmeriHome. In each case, the underlying collateral, borrower or other credit party is generally unaffiliated with us. Related party investment funds include strategic investments in direct origination platforms and insurance companies, investments in Apollo managed funds and our investment in Apollo. The funds withheld at interest related party amounts are primarily comprised of the Venerable reinsurance portfolios, which are considered related party even though a significant majority of the underlying assets within the investment portfolios do not have a related party affiliation.
A summary of our related party investments reflecting the nature of the affiliation is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (In millions, except percentages) | Carrying Value | | Percent of Total Assets | | Carrying Value | | Percent of Total Assets |
| Venerable funds withheld reinsurance portfolio | $ | 12,572 | | | 6.1 | % | | $ | 13,030 | | | 6.4 | % |
| Securitizations of unaffiliated assets where Apollo is manager | 8,747 | | | 4.3 | % | | 8,156 | | | 4.0 | % |
| Investments in Apollo funds | 2,378 | | | 1.2 | % | | 2,071 | | | 1.0 | % |
| Strategic investments in Apollo direct origination platforms | 1,868 | | | 0.9 | % | | 1,664 | | | 0.8 | % |
| Strategic investment in Apollo | 1,281 | | | 0.6 | % | | 1,324 | | | 0.7 | % |
| Strategic investments in insurance companies | 1,497 | | | 0.7 | % | | 1,314 | | | 0.6 | % |
| Other | 40 | | | — | % | | 19 | | | — | % |
| Total related party investments | $ | 28,383 | | | 13.8 | % | | $ | 27,578 | | | 13.5 | % |
As of March 31, 2021, the majority of the related party investments, or 10.4% of our total assets, were related to the Venerable reinsurance portfolio and securities for which Apollo is the manager of the securitization vehicle, but the underlying collateral, borrower or other credit party is unaffiliated with us. Approximately 3.4% of total assets were comprised of strategic investments in affiliated companies or Apollo funds. The related party net invested assets, which look through to the underlying assets of the funds withheld and modco reinsurance portfolios’ investments, were $21.4 billion, or 13.7% of our total net invested assets as of March 31, 2021. Approximately 8.4% of net invested assets were comprised of securitizations where Apollo was the manager of the securitization vehicle but the underlying collateral, borrower or other credit party is unaffiliated with us, while 5.3% was comprised of strategic investments in affiliated companies or Apollo funds.
AFS Securities
We invest in AFS securities with the intent to hold investments to maturity. In selecting investments we attempt to source investments that match our future cash flow needs. However, we may sell any of our investments in advance of maturity in order to timely satisfy our liabilities as they become due or in order to respond to a change in the credit profile or other characteristics of the particular investment.
AFS fixed maturity securities are carried at fair value, less allowances for expected credit losses, on our condensed consolidated balance sheets. Changes in fair value forof our AFS portfolio,securities, net of related DAC, DSI and VOBA amortization and the change in rider reserves, are charged or credited to other comprehensive income, net of tax. DeclinesAll changes in the allowance for expected credit losses, whether due to passage of time, change in expected cash flows, or change in fair value that are other than temporary are recorded as realized losses inthrough credit loss expense within investment related gains (losses) on the condensed consolidated statements of income net(loss).
Item 2. Management’s Discussion and Analysis of the loss, which is recorded as an adjustment to other comprehensive income.Financial Condition and Results of Operations
The distribution of our AFS securities, including related parties, by type is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 |
| (In millions, except percentages) | Amortized Cost | | Allowance for Credit Losses | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Percent of Total |
| AFS securities | | | | | | | | | | | |
| US government and agencies | $ | 375 | | | $ | — | | | $ | 1 | | | $ | (25) | | | $ | 351 | | | 0.4 | % |
| US state, municipal and political subdivisions | 898 | | | — | | | 115 | | | (7) | | | 1,006 | | | 1.1 | % |
| Foreign governments | 373 | | | — | | | 18 | | | (9) | | | 382 | | | 0.4 | % |
| Corporate | 55,922 | | | (8) | | | 3,750 | | | (816) | | | 58,848 | | | 63.7 | % |
| CLO | 11,299 | | | — | | | 94 | | | (121) | | | 11,272 | | | 12.2 | % |
| ABS | 4,761 | | | (11) | | | 152 | | | (70) | | | 4,832 | | | 5.2 | % |
| CMBS | 2,218 | | | (14) | | | 66 | | | (64) | | | 2,206 | | | 2.4 | % |
| RMBS | 6,344 | | | (78) | | | 383 | | | (22) | | | 6,627 | | | 7.2 | % |
| Total AFS securities | 82,190 | | | (111) | | | 4,579 | | | (1,134) | | | 85,524 | | | 92.6 | % |
| AFS securities – related party | | | | | | | | | | | |
| Corporate | 213 | | | — | | | 8 | | | — | | | 221 | | | 0.2 | % |
| CLO | 1,864 | | | — | | | 13 | | | (8) | | | 1,869 | | | 2.0 | % |
| ABS | 4,777 | | | — | | | 78 | | | (40) | | | 4,815 | | | 5.2 | % |
| Total AFS securities – related party | 6,854 | | | — | | | 99 | | | (48) | | | 6,905 | | | 7.4 | % |
| Total AFS securities including related party | $ | 89,044 | | | $ | (111) | | | $ | 4,678 | | | $ | (1,182) | | | $ | 92,429 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| (In millions, except percentages) | Amortized Cost | | Allowance for Credit Losses | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Percent of Total |
| AFS securities | | | | | | | | | | | |
| US government and agencies | $ | 349 | | | $ | — | | | $ | 3 | | | $ | (1) | | | $ | 351 | | | 0.4 | % |
| US state, municipal and political subdivisions | 864 | | | — | | | 169 | | | — | | | 1,033 | | | 1.2 | % |
| Foreign governments | 330 | | | — | | | 38 | | | — | | | 368 | | | 0.4 | % |
| Corporate | 51,934 | | | (6) | | | 6,368 | | | (116) | | | 58,180 | | | 65.1 | % |
| CLO | 9,631 | | | (1) | | | 145 | | | (206) | | | 9,569 | | | 10.7 | % |
| ABS | 4,259 | | | (6) | | | 140 | | | (123) | | | 4,270 | | | 4.8 | % |
| CMBS | 2,165 | | | (10) | | | 85 | | | (71) | | | 2,169 | | | 2.4 | % |
| RMBS | 6,568 | | | (80) | | | 447 | | | (22) | | | 6,913 | | | 7.7 | % |
| Total AFS securities | 76,100 | | | (103) | | | 7,395 | | | (539) | | | 82,853 | | | 92.7 | % |
| AFS securities – related party | | | | | | | | | | | |
| Corporate | 213 | | | — | | | 2 | | | — | | | 215 | | | 0.2 | % |
| CLO | 1,511 | | | (1) | | | 23 | | | (13) | | | 1,520 | | | 1.7 | % |
| ABS | 4,720 | | | — | | | 95 | | | (30) | | | 4,785 | | | 5.4 | % |
| Total AFS securities – related party | 6,444 | | | (1) | | | 120 | | | (43) | | | 6,520 | | | 7.3 | % |
| Total AFS securities including related party | $ | 82,544 | | | $ | (104) | | | $ | 7,515 | | | $ | (582) | | | $ | 89,373 | | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| (In millions, except percentages) | Cost or Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Fair Value | | Percent of Total |
| Fixed maturity securities | | | | | | | | | |
| U.S. government and agencies | $ | 59 |
| | $ | 1 |
| | $ | (2 | ) | | $ | 58 |
| | 0.1 | % |
| U.S. state, municipal and political subdivisions | 993 |
| | 153 |
| | (1 | ) | | 1,145 |
| | 1.9 | % |
| Foreign governments | 2,515 |
| | 90 |
| | (16 | ) | | 2,589 |
| | 4.4 | % |
| Corporate | 33,115 |
| | 1,520 |
| | (177 | ) | | 34,458 |
| | 58.2 | % |
| CLO | 4,963 |
| | 47 |
| | (14 | ) | | 4,996 |
| | 8.4 | % |
| ABS | 3,885 |
| | 57 |
| | (42 | ) | | 3,900 |
| | 6.6 | % |
| CMBS | 1,849 |
| | 54 |
| | (13 | ) | | 1,890 |
| | 3.2 | % |
| RMBS | 8,838 |
| | 650 |
| | (8 | ) | | 9,480 |
| | 16.0 | % |
| Total fixed maturity securities | 56,217 |
| | 2,572 |
| | (273 | ) | | 58,516 |
| | 98.8 | % |
| Equity securities | 262 |
| | 57 |
| | (1) |
| | 318 |
| | 0.5 | % |
| Total AFS securities | 56,479 |
| | 2,629 |
| | (274 | ) | | 58,834 |
| | 99.3 | % |
| Fixed maturity securities – related parties | | | | | | | | | |
| CLO | 352 |
| | 4 |
| | — |
| | 356 |
| | 0.6 | % |
| ABS | 52 |
| | 1 |
| | — |
| | 53 |
| | 0.1 | % |
| Total fixed maturity securities – related party | 404 |
| | 5 |
| | — |
| | 409 |
| | 0.7 | % |
| Equity securities – related party | — |
| | — |
| | — |
| | — |
| | — | % |
| Total AFS securities – related parties | 404 |
| | 5 |
| | — |
| | 409 |
| | 0.7 | % |
| Total AFS securities, including related parties | $ | 56,883 |
| | $ | 2,634 |
| | $ | (274 | ) | | $ | 59,243 |
| | 100.0 | % |
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| (In millions, except percentages) | Cost or Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Fair Value | | Percent of Total |
| Fixed maturity securities | | | | | | | | | |
| U.S. government and agencies | $ | 59 |
| | $ | 1 |
| | $ | — |
| | $ | 60 |
| | 0.1 | % |
| U.S. state, municipal and political subdivisions | 1,024 |
| | 117 |
| | (1 | ) | | 1,140 |
| | 2.2 | % |
| Foreign governments | 2,098 |
| | 143 |
| | (6 | ) | | 2,235 |
| | 4.2 | % |
| Corporate | 29,433 |
| | 901 |
| | (314 | ) | | 30,020 |
| | 57.0 | % |
| CLO | 4,950 |
| | 14 |
| | (142 | ) | | 4,822 |
| | 9.1 | % |
| ABS | 2,980 |
| | 25 |
| | (69 | ) | | 2,936 |
| | 5.6 | % |
| CMBS | 1,835 |
| | 38 |
| | (26 | ) | | 1,847 |
| | 3.5 | % |
| RMBS | 8,731 |
| | 313 |
| | (71 | ) | | 8,973 |
| | 17.0 | % |
| Total fixed maturity securities | 51,110 |
| | 1,552 |
| | (629 | ) | | 52,033 |
| | 98.7 | % |
| Equity securities | 319 |
| | 35 |
| | (1 | ) | | 353 |
| | 0.7 | % |
| Total AFS securities | 51,429 |
| | 1,587 |
| | (630 | ) | | 52,386 |
| | 99.4 | % |
| Fixed maturity securities – related parties | | | | | | | | | |
| CLO | 284 |
| | 1 |
| | (6 | ) | | 279 |
| | 0.5 | % |
| ABS | 57 |
| | — |
| | (1 | ) | | 56 |
| | 0.1 | % |
| Total fixed maturity securities – related party | 341 |
| | 1 |
| | (7 | ) | | 335 |
| | 0.6 | % |
| Equity securities – related party | 20 |
| | — |
| | — |
| | 20 |
| | — | % |
| Total AFS securities - related parties | 361 |
| | 1 |
| | (7 | ) | | 355 |
| | 0.6 | % |
| Total AFS securities, including related parties | $ | 51,790 |
| | $ | 1,588 |
| | $ | (637 | ) | | $ | 52,741 |
| | 100.0 | % |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Fixed Maturity Securities
We maintain a diversified AFS portfolio of corporate fixed maturity securities across industries and issuers, and a diversified portfolio of structured securities. The composition of our AFS fixed maturity securities, including related parties, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (In millions, except percentages) | Fair Value | | Percent of Total | | Fair Value | | Percent of Total |
| Corporate | | | | | | | |
Industrial other1 | $ | 20,522 | | | 22.2 | % | | $ | 20,637 | | | 23.1 | % |
| Financial | 18,578 | | | 20.1 | % | | 17,759 | | | 19.9 | % |
| Utilities | 13,351 | | | 14.4 | % | | 13,471 | | | 15.1 | % |
| Communication | 3,295 | | | 3.6 | % | | 3,155 | | | 3.5 | % |
| Transportation | 3,323 | | | 3.6 | % | | 3,373 | | | 3.8 | % |
| Total corporate | 59,069 | | | 63.9 | % | | 58,395 | | | 65.4 | % |
| Other government-related securities | | | | | | | |
| US state, municipal and political subdivisions | 1,006 | | | 1.1 | % | | 1,033 | | | 1.2 | % |
| Foreign governments | 382 | | | 0.4 | % | | 368 | | | 0.4 | % |
| US government and agencies | 351 | | | 0.4 | % | | 351 | | | 0.4 | % |
| Total non-structured securities | 60,808 | | | 65.8 | % | | 60,147 | | | 67.4 | % |
| Structured securities | | | | | | | |
| CLO | 13,141 | | | 14.2 | % | | 11,089 | | | 12.4 | % |
| ABS | 9,647 | | | 10.4 | % | | 9,055 | | | 10.1 | % |
| CMBS | 2,206 | | | 2.4 | % | | 2,169 | | | 2.4 | % |
| RMBS | | | | | | | |
| Agency | 27 | | | — | % | | 29 | | | — | % |
| Non-agency | 6,600 | | | 7.2 | % | | 6,884 | | | 7.7 | % |
| Total structured securities | 31,621 | | | 34.2 | % | | 29,226 | | | 32.6 | % |
| Total AFS securities including related party | $ | 92,429 | | | 100.0 | % | | $ | 89,373 | | | 100.0 | % |
| | | | | | | |
1 Includes securities within various industry segments including capital goods, basic industry, consumer cyclical, consumer non-cyclical, industrial and technology. |
|
| | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (In millions, except percentages) | Fair Value | | Percent of Total | | Fair Value | | Percent of Total |
| Corporate | | | | | | | |
Industrial other1 | $ | 11,469 |
| | 19.5 | % | | $ | 10,645 |
| | 20.3 | % |
| Financial | 10,955 |
| | 18.6 | % | | 9,156 |
| | 17.5 | % |
| Utilities | 7,705 |
| | 13.1 | % | | 6,588 |
| | 12.6 | % |
| Communication | 2,556 |
| | 4.3 | % | | 2,235 |
| | 4.3 | % |
| Transportation | 1,773 |
| | 3.0 | % | | 1,396 |
| | 2.7 | % |
| Total corporate | 34,458 |
| | 58.5 | % | | 30,020 |
| | 57.4 | % |
| Other government-related securities | | | | | | | |
| U.S. state, municipal and political subdivisions | 1,145 |
| | 1.9 | % | | 1,140 |
| | 2.2 | % |
| Foreign governments | 2,589 |
| | 4.4 | % | | 2,235 |
| | 4.3 | % |
| U.S. government and agencies | 58 |
| | 0.1 | % | | 60 |
| | 0.1 | % |
| Total non-structured securities | 38,250 |
| | 64.9 | % | | 33,455 |
| | 64.0 | % |
| Structured securities | | | | | | | |
| CLO | 5,352 |
| | 9.1 | % | | 5,101 |
| | 9.7 | % |
| ABS | 3,953 |
| | 6.7 | % | | 2,992 |
| | 5.7 | % |
| CMBS | 1,890 |
| | 3.2 | % | | 1,847 |
| | 3.5 | % |
| RMBS | | | | | | | |
| Agency | 93 |
| | 0.2 | % | | 112 |
| | 0.2 | % |
| Non-agency | 9,387 |
| | 15.9 | % | | 8,861 |
| | 16.9 | % |
| Total structured securities | 20,675 |
| | 35.1 | % | | 18,913 |
| | 36.0 | % |
| Total fixed maturity securities, including related parties | $ | 58,925 |
| | 100.0 | % | | $ | 52,368 |
| | 100.0 | % |
| | | | | | | | |
1 Includes securities within various industry segments including capital goods, basic industry, consumer cyclical, consumer non-cyclical, industrial, and technology. |
The fair value of our total fixed maturityAFS securities, including related parties, was $58.9$92.4 billion and $52.4$89.4 billion as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively. The increase was mainly driven by strong growth from organic deposits in deposits overexcess of liability outflows and the deployment of higher cash balances in the prior year, partially offset by unrealized gainslosses on AFS securities including related parties due to credit spreads tightening and U.S. treasury rates declining in the ninethree months ended September 30, 2017March 31, 2021 of $3.4 billion. The decrease in unrealized gains and reinvestmentlosses was attributed to an increase in US Treasury rates, partially offset by a tightening of earnings.credit spreads.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Securities Valuation Office (SVO) of the NAIC is responsible for the credit quality assessment and valuation of securities owned by state regulated insurance companies. Insurance companies report ownership of securities to the SVO when such securities are eligible for filing on the relevant schedule of the NAIC Financial Statement Blank.Statement. The SVO conducts credit analysis on these securities for the purpose of assigning an NAIC designation and/or unit price. With importantGenerally, the process for assigning an NAIC designation varies based upon whether a security is considered “filing exempt” (General Designation Process). Subject to certain exceptions, discussed below,a security is typically considered “filing exempt” if a securityit has been rated by a Nationally Recognized Statistical Rating Organization (NRSRO). For securities that are not “filing exempt,” insurance companies assign temporary designations based upon a subjective evaluation of credit quality. The insurance company generally must then submit the securities to the SVO within 120 days of acquisition to receive an NRSRO,NAIC designation. For securities considered “filing exempt,” the SVO utilizes thatthe NRSRO rating and assigns an NAIC designation based upon the following system:
|
| | | | | | | |
NAIC designation1 | | NRSRO equivalent rating |
| 1 | | AAA/AA/A |
| 2 | | BBB |
| 3 | | BB |
| 4 | | B |
| 5 | | CCC |
| 6 | | CC and lower |
1 As of December 31, 2020, the NAIC had introduced 20 NAIC designation modifiers that will be applied to each NAIC designation to determine a security’s NAIC designation category (i.e., NAIC 1.A through 1.G, NAIC 2.A through 2.C, NAIC 3.A through 3.C, NAIC 4.A through 4.C, NAIC 5.A through 5.C and NAIC 6). The NAIC intends to eventually assign unique risk-based capital charges to each NAIC designation category; however, as of March 31, 2021, risk-based capital charges remained unchanged regardless of NAIC designation category assigned (i.e., all securities assigned to an NAIC 1 designation category will receive the same risk-based capital charge as of March 31, 2021).
Item 2. Management's DiscussionAn important exception to the General Designation Process occurs in the case of certain loan-backed and Analysis of Financial Condition and Results of Operations
structured securities (LBaSS). The NRSRO ratings methodology is focused on the likelihood of recovery of all contractual payments, including principal at par, regardless of an investor’s carrying value. In effect, the NRSRO rating assumes that the holder is the original purchaser at par. In contrast, the SVO’s loan-backed and structured securities (LBaSS)LBaSS methodology is focused on determining the risk associated with the recovery of the amortized cost of each security. Because the NAIC'sNAIC’s methodology explicitly considers amortized cost and the likelihood of recovery of our investment,such amount, we view the NAIC'sNAIC’s methodology as the most appropriate way to viewmeans of evaluating the credit quality of our fixed maturity portfolio for purposes of evaluating credit quality since a large portion of our holdings were purchased and are carried at significant discounts to par.
Specific to LBaSS, theThe SVO has developed a ratingsdesignation process and provides instruction on both modeled and non-modeled LBaSS. TheFor modeled LBaSS, the process is specific to the non-agency RMBS and CMBS asset classes. In order to establish ratings at the individual security level, the SVO obtains loan-level analysis of each RMBS and CMBS using a selected vendor’s proprietary financial model. The SVO ensures that the vendor has extensive internal quality-control processes in place and the SVO conducts its own quality-control checks of the selected vendor’s valuation process. The SVO has retained the services of Blackrock, Inc. (Blackrock) to model non-agency RMBS and CMBS owned by U.S.US insurers for all years presented herein. Blackrock provides five prices (breakpoints), based on each U.S. insurer'sUS insurer’s statutory book value price, to utilize in determining the NAIC designation for each modeled LBaSS. For non-modeled LBaSS (including ABS and CLOs) with the initial designation of NAIC 1 or NAIC 6, the designation remains the same through the life of the security. For non-modeled LBaSS with the initial designation of NAIC 2 through NAIC 5, the selected vendors are not utilized and the NAIC designations are set using a standardized table of breakpoints provided by the SVO for application to the insurer’s statutory book value price.
The NAIC designation determines the associated level of RBCrisk-based capital that an insurer is required to hold for modeled LBaSSall securities owned by the insurer. In general, under both the modeled and non-modeled LBaSS processes,process, the larger the discount to par value at the strongertime of determination, the higher the NAIC designation the LBaSS will have.
A summary of our AFS fixed maturity securities, including related parties, by NAIC designation (with our German operations applying NRSRO ratings to map to NAIC designations as noted above) is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (In millions, except percentages) | Amortized Cost | | Fair Value | | Percent of Total | | Amortized Cost | | Fair Value | | Percent of Total |
| NAIC designation | | | | | | | | | | | |
| 1 | $ | 40,955 | | | $ | 42,552 | | | 46.0 | % | | $ | 38,171 | | | $ | 41,532 | | | 46.5 | % |
| 2 | 41,753 | | | 43,557 | | | 47.1 | % | | 38,231 | | | 41,704 | | | 46.7 | % |
| Total investment grade | 82,708 | | | 86,109 | | | 93.1 | % | | 76,402 | | | 83,236 | | | 93.2 | % |
| 3 | 4,971 | | | 5,025 | | | 5.4 | % | | 4,777 | | | 4,853 | | | 5.4 | % |
| 4 | 1,111 | | | 1,069 | | | 1.2 | % | | 1,191 | | | 1,145 | | | 1.3 | % |
| 5 | 183 | | | 154 | | | 0.2 | % | | 149 | | | 114 | | | 0.1 | % |
| 6 | 71 | | | 72 | | | 0.1 | % | | 25 | | | 25 | | | — | % |
| Total below investment grade | 6,336 | | | 6,320 | | | 6.9 | % | | 6,142 | | | 6,137 | | | 6.8 | % |
| Total AFS securities including related party | $ | 89,044 | | | $ | 92,429 | | | 100.0 | % | | $ | 82,544 | | | $ | 89,373 | | | 100.0 | % |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
| | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (In millions, except percentages) | Amortized Cost | | Fair Value | | Percent of Total | | Amortized Cost | | Fair Value | | Percent of Total |
| NAIC designation | | | | | | | | | | | |
| 1 | $ | 30,520 |
| | $ | 31,930 |
| | 54.2 | % | | $ | 29,477 |
| | $ | 30,211 |
| | 57.7 | % |
| 2 | 22,212 |
| | 23,063 |
| | 39.1 | % | | 18,348 |
| | 18,617 |
| | 35.5 | % |
| Total investment grade | 52,732 |
| | 54,993 |
| | 93.3 | % | | 47,825 |
| | 48,828 |
| | 93.2 | % |
| 3 | 3,014 |
| | 3,077 |
| | 5.2 | % | | 2,871 |
| | 2,812 |
| | 5.4 | % |
| 4 | 750 |
| | 731 |
| | 1.3 | % | | 647 |
| | 622 |
| | 1.2 | % |
| 5 | 78 |
| | 75 |
| | 0.1 | % | | 87 |
| | 82 |
| | 0.2 | % |
| 6 | 47 |
| | 49 |
| | 0.1 | % | | 21 |
| | 24 |
| | — | % |
| Total below investment grade | 3,889 |
| | 3,932 |
| | 6.7 | % | | 3,626 |
| | 3,540 |
| | 6.8 | % |
| Total fixed maturity securities, including related parties | $ | 56,621 |
| | $ | 58,925 |
| | 100.0 | % | | $ | 51,451 |
| | $ | 52,368 |
| | 100.0 | % |
Substantially allA significant majority of our AFS fixed maturity portfolio, 93.3%93.1% and 93.2% as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively, was invested in assets considered investment grade with a NAIC designation of 1 or 2.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
A summary of our AFS fixed maturity securities, including related parties, by NRSRO ratings is set forth below:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (In millions, except percentages) | Fair Value | | Percent of Total | | Fair Value | | Percent of Total |
| NRSRO rating agency designation | | | | | | | |
| AAA/AA/A | $ | 34,931 | | | 37.8 | % | | $ | 33,553 | | | 37.5 | % |
| BBB | 37,032 | | | 40.1 | % | | 34,404 | | | 38.5 | % |
Non-rated1 | 11,695 | | | 12.7 | % | | 12,732 | | | 14.3 | % |
| Total investment grade | 83,658 | | | 90.6 | % | | 80,689 | | | 90.3 | % |
| BB | 4,273 | | | 4.6 | % | | 4,020 | | | 4.5 | % |
| B | 1,061 | | | 1.1 | % | | 1,030 | | | 1.2 | % |
| CCC | 1,564 | | | 1.7 | % | | 1,557 | | | 1.7 | % |
| CC and lower | 847 | | | 0.9 | % | | 973 | | | 1.1 | % |
Non-rated1 | 1,026 | | | 1.1 | % | | 1,104 | | | 1.2 | % |
| Total below investment grade | 8,771 | | | 9.4 | % | | 8,684 | | | 9.7 | % |
| Total AFS securities including related party | $ | 92,429 | | | 100.0 | % | | $ | 89,373 | | | 100.0 | % |
| | | | | | | |
1 Securities denoted as non-rated by the NRSRO were classified as investment or non-investment grade according to the security’s respective NAIC designation. With respect to modeled LBaSS, the NAIC designation methodology differs in significant respects from the NRSRO rating methodology. |
|
| | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (In millions, except percentages) | Fair Value | | Percent of Total | | Fair Value | | Percent of Total |
| NRSRO rating agency designation | | | | | | | |
| AAA/AA/A | $ | 20,451 |
| | 34.7 | % | | $ | 18,791 |
| | 35.9 | % |
| BBB | 21,897 |
| | 37.2 | % | | 18,002 |
| | 34.4 | % |
Non-rated1 | 6,671 |
| | 11.3 | % | | 5,650 |
| | 10.8 | % |
| Total investment grade | 49,019 |
| | 83.2 | % | | 42,443 |
| | 81.1 | % |
| BB | 3,094 |
| | 5.2 | % | | 3,286 |
| | 6.3 | % |
| B | 1,278 |
| | 2.2 | % | | 1,372 |
| | 2.6 | % |
| CCC | 2,624 |
| | 4.4 | % | | 2,374 |
| | 4.5 | % |
| CC and lower | 2,274 |
| | 3.9 | % | | 2,404 |
| | 4.6 | % |
Non-rated1 | 636 |
| | 1.1 | % | | 489 |
| | 0.9 | % |
| Total below investment grade | 9,906 |
| | 16.8 | % | | 9,925 |
| | 18.9 | % |
| Total fixed maturity securities, including related parties | $ | 58,925 |
| | 100.0 | % | | $ | 52,368 |
| | 100.0 | % |
| | | | | | | | |
1 Securities denoted as non-rated by the NRSRO were classified as investment or non-investment grade according to the security's respective NAIC designation. |
Consistent with the NAIC Process and Procedures Manual, an NRSRO rating was assigned based on the following criteria: (a) the equivalent S&P rating wherewhen the security is rated by one NRSRO; (b) the equivalent S&P rating of the lowest NRSRO when the security is rated by two NRSROs; and (c) the equivalent S&P rating of the second lowest NRSRO ifwhen the security is rated by three or more NRSROs. If the lowest two NRSRO ratings are equal, then such rating will be the assigned rating. NRSRO ratings available for the periods presented were S&P, Fitch, Moody'sMoody’s Investor Service, (Moody's), DBRS, and Kroll Bond Rating Agency, Inc. (KBRA).
The portion of our AFS fixed maturity portfolio that was considered below investment grade based on NRSRO ratings was 16.8%9.4% and 18.9%9.7% as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively. The primary driver of the difference in the percentage of securities considered below investment grade by NRSROs as compared to the securities considered below investment grade by the NAIC relates tois the difference in methodologies between the NRSRO and NAIC for RMBS due to investments acquired and/or carried at a discount to par value, as discussed above.
As of September 30, 2017March 31, 2021 and December 31, 2016, the2020, non-rated securities shown above were comprised of 41%58% and 43%54%, respectively, of corporate private placement securities for which we have not sought individual ratings from the NRSROsNRSRO, and 43%19% and 44%18%, respectively, of RMBS, many of which were acquired at a significant discount to par. We rely on internal analysis of credit risk and designations assigned by the NAIC.NAIC to evaluate the credit risk of our portfolio. As of September 30, 2017each of March 31, 2021 and December 31, 2016, 91% and2020, 92%, respectively, of the non-rated securities were designated NAIC 1 or 2.
Asset-backed Securities– We invest in ABS which are securitized by pools of assets such as consumer loans, automobile loans, student loans, insurance-linked securities, operating cash flows of corporations and corporate debt. Thesecash flows from various types of business equipment. Our ABS holdings were $4.0$9.6 billion and $3.0$9.1 billion as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively. The increase in our ABS portfolio was primarily driven by the deployment of strong inflows. As of September 30, 2017March 31, 2021 and December 31, 2016,2020, our ABS portfolio included approximately $3.6$8.4 billion (92%(87% of the total) and $2.7$8.1 billion (91%(89% of the total), respectively, of securities that are considered investment grade based on NAIC designations, while approximately $3.5$8.3 billion (87%(86% of the total) and $2.5$8.0 billion (85%(88% of the total), respectively, of securities were considered investment grade based on NRSRO ratings.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Collateralized Loan Obligations– We also invest in CLOs which pay principal and interest from cash flows received from underlying corporate loans. These holdings were $5.4$13.1 billion and $5.1$11.1 billion as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively.
A summary of our AFS CLO portfolio, including related parties, by NAIC designations and NRSRO quality ratings is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (In millions, except percentages) | Fair Value | | Percent of Total | | Fair Value | | Percent of Total |
| NAIC designation | | | | | | | |
| 1 | $ | 8,391 | | | 63.9 | % | | $ | 6,786 | | | 61.2 | % |
| 2 | 4,380 | | | 33.3 | % | | 3,934 | | | 35.5 | % |
| Total investment grade | 12,771 | | | 97.2 | % | | 10,720 | | | 96.7 | % |
| 3 | 358 | | | 2.7 | % | | 356 | | | 3.2 | % |
| 4 | 8 | | | 0.1 | % | | 9 | | | 0.1 | % |
| 5 | 4 | | | — | % | | 4 | | | — | % |
| 6 | — | | | — | % | | — | | | — | % |
| Total below investment grade | 370 | | | 2.8 | % | | 369 | | | 3.3 | % |
| Total AFS CLO including related party | $ | 13,141 | | | 100.0 | % | | $ | 11,089 | | | 100.0 | % |
| | | | | | | |
| NRSRO rating agency designation | | | | | | | |
| AAA/AA/A | $ | 8,387 | | | 63.8 | % | | $ | 6,781 | | | 61.2 | % |
| BBB | 4,364 | | | 33.2 | % | | 3,930 | | | 35.4 | % |
| Non-rated | 17 | | | 0.1 | % | | 9 | | | 0.1 | % |
| Total investment grade | 12,768 | | | 97.1 | % | | 10,720 | | | 96.7 | % |
| BB | 362 | | | 2.8 | % | | 356 | | | 3.2 | % |
| B | 7 | | | 0.1 | % | | 9 | | | 0.1 | % |
| CCC | 4 | | | — | % | | 4 | | | — | % |
| CC and lower | — | | | — | % | | — | | | — | % |
| Non-rated | — | | | — | % | | — | | | — | % |
| Total below investment grade | 373 | | | 2.9 | % | | 369 | | | 3.3 | % |
| Total AFS CLO including related party | $ | 13,141 | | | 100.0 | % | | $ | 11,089 | | | 100.0 | % |
As of September 30, 2017March 31, 2021 and December 31, 2016,2020, a substantial majority of our AFS CLO portfolio, 97.2% and 96.7%, respectively, was invested in assets considered to be investment grade based upon application of the NAIC’s methodology and based on NRSRO ratings. The increase in our CLO portfolio was mainly driven by the deployment of strong inflows in the current quarter.
Commercial Mortgage-backed Securities– A portion of our AFS portfolio is invested in CMBS. CMBS are constructed from pools of commercial mortgages. These holdings were $2.2 billion as of each of March 31, 2021 and December 31, 2020. As of March 31, 2021 and December 31, 2020, our CMBS portfolio included approximately $4.5$1.6 billion (84%(71% of the total) and $4.2$1.6 billion (83%(72% of the total), respectively, of securities that are considered investment grade based on NAIC designations, while approximately $4.6$1.6 billion (86%(74% of the total) and $4.2$1.6 billion (82%(75% of the total), respectively, of securities were considered investment grade based on NRSRO ratings.
Residential Mortgage-backed Securities– A portion of our AFS portfolio is invested in RMBS, which are securities constructed from pools of residential mortgages. These holdings were $6.6 billion and $6.9 billion as of March 31, 2021 and December 31, 2020, respectively.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Commercial Mortgage-backed Securities– A portion of our fixed maturity AFS portfolio is invested in CMBS. CMBS are constructed from pools of commercial mortgages. These holdings were $1.9 billion and $1.8 billion as of September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017 and December 31, 2016, our CMBS portfolio included approximately $1.8 billion (97% of the total) and $1.8 billion (97% of the total), respectively, of securities that are considered investment grade based on NAIC designations while approximately $1.3 billion (68% of the total) and $1.1 billion (60% of the total), respectively, of securities were considered investment grade based on NRSRO ratings.
Residential Mortgage-backed Securities– As part of our core investment strategy, a portion of our fixed maturity AFS portfolio is invested in RMBS. RMBS are securities constructed from pools of residential mortgages and backed by payments from those pools. Excluding limitations on access to lending and other extraordinary economic conditions, prepayments of principal on the underlying loans can be expected to accelerate with decreases in market interest rates and diminish with increases in interest rates. Our investments in RMBS are primarily non-agency RMBS having a significant focus on assets with attractive entry prices, which in general results in investment grade ratings by the NAIC given the likelihood that we ultimately receive principal and interest distributions in an amount at least equal to our cost. These holdings were $9.5 billion and $9.0 billion as of September 30, 2017 and December 31, 2016, respectively.
A summary of our AFS RMBS portfolio by NAICdesignations and NRSRO quality ratings is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (In millions, except percentages) | Fair Value | | Percent of Total | | Fair Value | | Percent of Total |
| NAIC designation | | | | | | | |
| 1 | $ | 5,870 | | | 88.6 | % | | $ | 6,196 | | | 89.6 | % |
| 2 | 275 | | | 4.1 | % | | 232 | | | 3.4 | % |
| Total investment grade | 6,145 | | | 92.7 | % | | 6,428 | | | 93.0 | % |
| 3 | 283 | | | 4.3 | % | | 323 | | | 4.7 | % |
| 4 | 109 | | | 1.6 | % | | 120 | | | 1.7 | % |
| 5 | 40 | | | 0.6 | % | | 37 | | | 0.5 | % |
| 6 | 50 | | | 0.8 | % | | 5 | | | 0.1 | % |
| Total below investment grade | 482 | | | 7.3 | % | | 485 | | | 7.0 | % |
| Total AFS RMBS | $ | 6,627 | | | 100.0 | % | | $ | 6,913 | | | 100.0 | % |
| | | | | | | |
| NRSRO rating agency designation | | | | | | | |
| AAA/AA/A | $ | 827 | | | 12.5 | % | | $ | 872 | | | 12.6 | % |
| BBB | 609 | | | 9.2 | % | | 635 | | | 9.2 | % |
Non-rated1 | 2,125 | | | 32.0 | % | | 2,187 | | | 31.6 | % |
| Total investment grade | 3,561 | | | 53.7 | % | | 3,694 | | | 53.4 | % |
| BB | 215 | | | 3.2 | % | | 233 | | | 3.4 | % |
| B | 243 | | | 3.7 | % | | 261 | | | 3.8 | % |
| CCC | 1,484 | | | 22.4 | % | | 1,509 | | | 21.8 | % |
| CC and lower | 847 | | | 12.8 | % | | 971 | | | 14.1 | % |
Non-rated1 | 277 | | | 4.2 | % | | 245 | | | 3.5 | % |
| Total below investment grade | 3,066 | | | 46.3 | % | | 3,219 | | | 46.6 | % |
| Total AFS RMBS | $ | 6,627 | | | 100.0 | % | | $ | 6,913 | | | 100.0 | % |
| | | | | | | |
1 Securities denoted as non-rated by the NRSRO were classified as investment or non-investment grade according to the security’s respective NAIC designations. The NAIC designation methodology differs in significant respects from the NRSRO rating methodology. |
|
| | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (In millions, except percentages) | Fair Value | | Percent of Total | | Fair Value | | Percent of Total |
| NAIC designation | | | | | | | |
| 1 | $ | 8,928 |
| | 94.2 | % | | $ | 8,652 |
| | 96.4 | % |
| 2 | 238 |
| | 2.5 | % | | 140 |
| | 1.6 | % |
| Total investment grade | 9,166 |
| | 96.7 | % | | 8,792 |
| | 98.0 | % |
| 3 | 187 |
| | 2.0 | % | | 96 |
| | 1.1 | % |
| 4 | 76 |
| | 0.8 | % | | 29 |
| | 0.3 | % |
| 5 | 40 |
| | 0.4 | % | | 54 |
| | 0.6 | % |
| 6 | 11 |
| | 0.1 | % | | 2 |
| | — | % |
| Total below investment grade | 314 |
| | 3.3 | % | | 181 |
| | 2.0 | % |
| Total RMBS | $ | 9,480 |
| | 100.0 | % | | $ | 8,973 |
| | 100.0 | % |
| | | | | | | | |
| NRSRO rating agency designation | | | | | | | |
| AAA/AA/A | $ | 273 |
| | 2.9 | % | | $ | 345 |
| | 3.8 | % |
| BBB | 347 |
| | 3.7 | % | | 245 |
| | 2.7 | % |
Non-rated1 | 2,974 |
| | 31.3 | % | | 2,638 |
| | 29.5 | % |
| Total investment grade | 3,594 |
| | 37.9 | % | | 3,228 |
| | 36.0 | % |
| BB | 450 |
| | 4.7 | % | | 419 |
| | 4.7 | % |
| B | 500 |
| | 5.3 | % | | 567 |
| | 6.3 | % |
| CCC | 2,520 |
| | 26.6 | % | | 2,280 |
| | 25.4 | % |
| CC and lower | 2,268 |
| | 23.9 | % | | 2,395 |
| | 26.7 | % |
Non-rated1 | 148 |
| | 1.6 | % | | 84 |
| | 0.9 | % |
| Total below investment grade | 5,886 |
| | 62.1 | % | | 5,745 |
| | 64.0 | % |
| Total RMBS | $ | 9,480 |
| | 100.0 | % | | $ | 8,973 |
| | 100.0 | % |
| | | | | | | | |
1 Securities denoted as non-rated by the NRSRO were classified as investment or non-investment grade according to the security's respective NAIC designations. |
A significant majority of our RMBS portfolio, 96.7%92.7% and 98.0%93.0% as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively, was invested in assets considered to be investment grade bybased upon an application of the NAIC designations. The NAIC’s methodology with arespect to RMBS gives explicit effect to the amortized cost at which an insurance company carries each such investment. Because we invested in RMBS after the stresses related to US housing had caused significant downward pressure on prices of RMBS, we carry most of our investments in RMBS at significant discounts to par value, which results in an investment grade NAIC designation of 1 or 2. As NRSROdesignation. In contrast, our understanding is that in setting ratings, are focusedNRSROs focus on the likelihood of recovery ofrecovering all contractual payments including principal at par instead of the recovery of the amortized cost, the portion considered investment grade by NRSRO rating agencies of 37.9% and 36.0% as of September 30, 2017 and December 31, 2016, respectively, were lower than the NAIC designations. As we focus on acquiring RMBS assets with attractive entry prices, some of these assets have experienced deterioration in credit quality since their issuance and the vast majority of our purchases of such assets occurred after such deterioration at a discount to par value resulting in a statutory book price that yields an investment grade NAIC designation.value. As a result of deterioration in credit quality since issuance, these securities are generally considered below investment grade based on NRSRO methodologies. As a result, we have a significantfundamental difference in the numberapproach, as of securities considered belowMarch 31, 2021 and December 31, 2020, NRSRO characterized 53.7% and 53.4%, respectively, of our RMBS portfolio as investment grade when evaluated under the NRSRO methodologies when compared with the designations evaluated under the NAIC methodology.grade.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Unrealized Losses
Our investments in fixed maturityAFS securities, including related parties, are reported at fair value with changes in fair value recorded in other comprehensive income. Certain of our fixed maturityAFS securities, including related parties, have experienced declines in fair value that we consider temporary in nature. As of September 30, 2017, our fixed maturity securities, including related parties, had a fair value of $58.9 billion, which was approximately 4.1% above amortized cost of $56.6 billion. As of December 31, 2016, our fixed maturity securities, including related parties, had a fair value of $52.4 billion, which was approximately 1.8% above amortized cost of $51.5 billion. These investments are held to support our product liabilities, and we currently have the intent and ability to hold these securities until sale or maturity, and believe the securities will recover the amortized cost basis prior to sale or maturity. As of March 31, 2021, our AFS securities, including related party, had a fair value of $92.4 billion, which was 3.8% above amortized cost of $89.0 billion. As of December 31, 2020, our AFS securities, including related party, had a fair value of $89.4 billion, which was 8.3% above amortized cost of $82.5 billion.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following tables reflect the unrealized losses on the AFS fixed maturity portfolio, including related parties, for which an allowance for credit losses has not been recorded, by NAIC designations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 |
| (In millions, except percentages) | Amortized Cost of AFS Securities with Unrealized Loss | | Gross Unrealized Losses | | Fair Value of AFS Securities with Unrealized Loss | | Fair Value to Amortized Cost Ratio | | Fair Value of Total AFS Securities | | Gross Unrealized Losses to Total AFS Fair Value |
| NAIC designation | | | | | | | | | | | |
| 1 | $ | 12,653 | | | $ | (425) | | | $ | 12,228 | | | 96.6 | % | | $ | 42,552 | | | (1.0) | % |
| 2 | 13,854 | | | (520) | | | 13,334 | | | 96.2 | % | | 43,557 | | | (1.2) | % |
| Total investment grade | 26,507 | | | (945) | | | 25,562 | | | 96.4 | % | | 86,109 | | | (1.1) | % |
| 3 | 2,105 | | | (87) | | | 2,018 | | | 95.9 | % | | 5,025 | | | (1.7) | % |
| 4 | 572 | | | (57) | | | 515 | | | 90.0 | % | | 1,069 | | | (5.3) | % |
| 5 | 92 | | | (13) | | | 79 | | | 85.9 | % | | 154 | | | (8.4) | % |
| 6 | 50 | | | (1) | | | 49 | | | 98.0 | % | | 72 | | | (1.4) | % |
| Total below investment grade | 2,819 | | | (158) | | | 2,661 | | | 94.4 | % | | 6,320 | | | (2.5) | % |
| Total | $ | 29,326 | | | $ | (1,103) | | | $ | 28,223 | | | 96.2 | % | | $ | 92,429 | | | (1.2) | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| (In millions, except percentages) | Amortized Cost of Securities with Unrealized Loss | | Gross Unrealized Loss | | Fair Value of Securities with Unrealized Loss | | Fair Value to Amortized Cost Ratio | | Fair Value of Total AFS Fixed Maturity Securities | | Percent of Loss to Total AFS Fair Value NAIC Designation |
| NAIC designation | | | | | | | | | | | |
| 1 | $ | 5,026 |
| | $ | (127 | ) | | $ | 4,899 |
| | 97.5 | % | | $ | 31,930 |
| | (0.4 | )% |
| 2 | 3,660 |
| | (85 | ) | | 3,575 |
| | 97.7 | % | | 23,063 |
| | (0.4 | )% |
| Total investment grade | 8,686 |
| | (212 | ) | | 8,474 |
| | 97.6 | % | | 54,993 |
| | (0.4 | )% |
| 3 | 921 |
| | (21 | ) | | 900 |
| | 97.7 | % | | 3,077 |
| | (0.7 | )% |
| 4 | 389 |
| | (35 | ) | | 354 |
| | 91.0 | % | | 731 |
| | (4.8 | )% |
| 5 | 33 |
| | (4 | ) | | 29 |
| | 87.9 | % | | 75 |
| | (5.3 | )% |
| 6 | 12 |
| | (1 | ) | | 11 |
| | 91.7 | % | | 49 |
| | (2.0 | )% |
| Total below investment grade | 1,355 |
| | (61 | ) | | 1,294 |
| | 95.5 | % | | 3,932 |
| | (1.6 | )% |
| Total | $ | 10,041 |
| | $ | (273 | ) | | $ | 9,768 |
| | 97.3 | % | | $ | 58,925 |
| | (0.5 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| (In millions, except percentages) | Amortized Cost of AFS Securities with Unrealized Loss | | Gross Unrealized Losses | | Fair Value of AFS Securities with Unrealized Loss | | Fair Value to Amortized Cost Ratio | | Fair Value of Total AFS Securities | | Gross Unrealized Losses to Total AFS Fair Value |
| NAIC designation | | | | | | | | | | | |
| 1 | $ | 5,010 | | | $ | (129) | | | $ | 4,881 | | | 97.4 | % | | $ | 41,532 | | | (0.3) | % |
| 2 | 4,732 | | | (168) | | | 4,564 | | | 96.4 | % | | 41,704 | | | (0.4) | % |
| Total investment grade | 9,742 | | | (297) | | | 9,445 | | | 97.0 | % | | 83,236 | | | (0.4) | % |
| 3 | 1,646 | | | (119) | | | 1,527 | | | 92.8 | % | | 4,853 | | | (2.5) | % |
| 4 | 563 | | | (61) | | | 502 | | | 89.2 | % | | 1,145 | | | (5.3) | % |
| 5 | 54 | | | (11) | | | 43 | | | 79.6 | % | | 114 | | | (9.6) | % |
| 6 | 1 | | | — | | | 1 | | | 100.0 | % | | 25 | | | — | % |
| Total below investment grade | 2,264 | | | (191) | | | 2,073 | | | 91.6 | % | | 6,137 | | | (3.1) | % |
| Total | $ | 12,006 | | | $ | (488) | | | $ | 11,518 | | | 95.9 | % | | $ | 89,373 | | | (0.5) | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| (In millions, except percentages) | Amortized Cost of Securities with Unrealized Loss | | Gross Unrealized Loss | | Fair Value of Securities with Unrealized Loss | | Fair Value to Amortized Cost Ratio | | Fair Value of Total AFS Fixed Maturity Securities | | Percent of Loss to Total AFS Fair Value NAIC Designation |
| NAIC designation | | | | | | | | | | | |
| 1 | $ | 8,805 |
| | $ | (272 | ) | | $ | 8,533 |
| | 96.9 | % | | $ | 30,211 |
| | (0.9 | )% |
| 2 | 6,156 |
| | (220 | ) | | 5,936 |
| | 96.4 | % | | 18,617 |
| | (1.2 | )% |
| Total investment grade | 14,961 |
| | (492 | ) | | 14,469 |
| | 96.7 | % | | 48,828 |
| | (1.0 | )% |
| 3 | 1,769 |
| | (103 | ) | | 1,666 |
| | 94.2 | % | | 2,812 |
| | (3.7 | )% |
| 4 | 329 |
| | (35 | ) | | 294 |
| | 89.4 | % | | 622 |
| | (5.6 | )% |
| 5 | 34 |
| | (6 | ) | | 28 |
| | 82.4 | % | | 82 |
| | (7.3 | )% |
| 6 | 1 |
| | — |
| | 1 |
| | 100.0 | % | | 24 |
| | — | % |
| Total below investment grade | 2,133 |
| | (144 | ) | | 1,989 |
| | 93.2 | % | | 3,540 |
| | (4.1 | )% |
| Total | $ | 17,094 |
| | $ | (636 | ) | | $ | 16,458 |
| | 96.3 | % | | $ | 52,368 |
| | (1.2 | )% |
The gross unrealized losses on AFS fixed maturity securities, including related parties, were $273 million$1.1 billion and $636$488 million as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively. The decreaseincrease in unrealized losses was driven by the increase in US Treasury rates, partially offset by credit spreads tightening and U.S. treasury rates declining during ninethe three months ended September 30, 2017, resulting in an increase in unrealized gains.March 31, 2021.
As of September 30, 2017March 31, 2021 and December 31, 2016,2020, we held $4.1$6.3 billion and $3.6$6.9 billion, respectively, in energy sector fixed maturity securities, or 7% and 8%, respectively, of the total fixed maturity securities, in both periods, including related parties for each period.parties. The gross unrealized capital losses on these securities were $35$73 million and $73$28 million, or 13%7% and 11%6% of the total unrealized losses, respectively.
Provision for Credit Losses
For our credit loss accounting policies and the assumptions used in the allowances, see Note 1 – Business, Basis of Presentation and Significant Accounting Policies and Note 2 – Investments to the condensed consolidated financial statements, as well as Critical Accounting Estimates and Judgments.
As of March 31, 2021 and December 31, 2020, we held an allowance for credit losses on AFS securities of $111 million and $104 million, respectively. During the three months ended March 31, 2021, we recorded a change in provision for credit losses on AFS securities of $7 million, of which $9 million had an income statement impact and ($2) million related to PCD securities. During the three months ended March 31, 2020, we recorded a change in provision of $61 million, of which all $61 million had an income statement impact, primarily driven by an increase in RMBS and corporate allowances. The intent-to-sell impairments for the three months ended March 31, 2021 and the three months ended March 31, 2020 were $0 million and $13 million, respectively. The decrease was primarily related to improved economic conditions.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Other-Than-Temporary Impairments
For our OTTI policy and the identification of securities that could potentially have impairments, see Note 1 – Business, Basis of Presentation and Significant Accounting Policies and Note 2 – Investments to the condensed consolidated financial statements, as well as Critical Accounting Estimates and Judgments.
During the nine months ended September 30, 2017, we recorded $25 million of OTTI losses comprised of $13 million related to corporate fixed maturities, $5 million related to mortgage loans, $3 million related to real estate, $1 million related to ABS, $1 million related to CMBS, $1 million related to equity securities and $1 million related to RMBS. Of the OTTI losses recognized during nine months ended September 30, 2017, $1 million related to the energy sector. During the nine months ended September 30, 2016, we recorded $27 million of OTTI losses comprised of $13 million related to state, municipal and political subdivisions, $6 million related to corporate fixed maturities, $5 million related to ABS, $2 million related to RMBS and $1 million related to other assets. Of the OTTI losses recognized during 2016, $4 million related to the energy sector. The annualized OTTI losses we have experienced for the nine months ended September 30, 2017 and 2016, translate into 4 basis points and 5 basis points, respectively, of average invested assets.
International Exposure
A portion of our fixed maturityAFS securities are invested in securities with international exposure. As of each of September 30, 2017March 31, 2021 and December 31, 2016, 32%2020, 35% and 34% of the carrying value of our fixed maturityAFS securities, including related parties, was comprised of securities of issuers based outside of the United States and debt securities of foreign governments. These securities are either denominated in U.S.US dollars or do not expose us to significant foreign currency risk as a result of foreign currency swap arrangements.
The following table presents our international exposure in our fixed maturity securitiesAFS portfolio, including related parties, by country or region:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (In millions, except percentages) | Amortized Cost | | Fair Value | | Percent of Total | | Amortized Cost | | Fair Value | | Percent of Total |
| Country of risk | | | | | | | | | | | |
| Ireland | $ | 2,907 | | | $ | 2,972 | | | 9.2 | % | | $ | 2,407 | | | $ | 2,597 | | | 8.6 | % |
| Italy | 6 | | | 8 | | | — | % | | 6 | | | 8 | | | — | % |
| Spain | 51 | | | 57 | | | 0.2 | % | | 51 | | | 59 | | | 0.2 | % |
Total Ireland, Italy, Greece, Spain and Portugal1 | 2,964 | | | 3,037 | | | 9.4 | % | | 2,464 | | | 2,664 | | | 8.8 | % |
| Other Europe | 8,211 | | | 8,684 | | | 27.1 | % | | 7,991 | | | 8,925 | | | 29.6 | % |
| Total Europe | 11,175 | | | 11,721 | | | 36.5 | % | | 10,455 | | | 11,589 | | | 38.4 | % |
| Non-US North America | 14,863 | | | 15,006 | | | 46.8 | % | | 13,188 | | | 13,335 | | | 44.3 | % |
| Australia & New Zealand | 2,084 | | | 2,205 | | | 6.9 | % | | 1,925 | | | 2,143 | | | 7.1 | % |
| Central & South America | 692 | | | 707 | | | 2.2 | % | | 620 | | | 666 | | | 2.2 | % |
| Africa & Middle East | 1,630 | | | 1,641 | | | 5.1 | % | | 1,599 | | | 1,680 | | | 5.6 | % |
| Asia/Pacific | 804 | | | 810 | | | 2.5 | % | | 661 | | | 712 | | | 2.4 | % |
| Supranational | 1 | | | 1 | | | — | % | | 1 | | | 1 | | | — | % |
| Total | $ | 31,249 | | | $ | 32,091 | | | 100.0 | % | | $ | 28,449 | | | $ | 30,126 | | | 100.0 | % |
| | | | | | | | | | | |
1 As of each of the respective periods, we had no holdings in Greece or Portugal. |
|
| | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (In millions, except percentages) | Amortized Cost | | Fair Value | | Percent of Total | | Amortized Cost | | Fair Value | | Percent of Total |
| Country of risk | | | | | | | | | | | |
| Ireland | $ | 534 |
| | $ | 546 |
| | 2.9 | % | | $ | 510 |
| | $ | 516 |
| | 3.1 | % |
| Italy | 49 |
| | 53 |
| | 0.3 | % | | 90 |
| | 92 |
| | 0.6 | % |
| Spain | 224 |
| | 237 |
| | 1.2 | % | | 175 |
| | 190 |
| | 1.1 | % |
Total Portugal, Ireland, Italy, Greece and Spain1 | 807 |
| | 836 |
| | 4.4 | % | | 775 |
| | 798 |
| | 4.8 | % |
| Other Europe | 7,597 |
| | 7,847 |
| | 41.8 | % | | 6,336 |
| | 6,512 |
| | 39.2 | % |
| Total Europe | 8,404 |
| | 8,683 |
| | 46.2 | % | | 7,111 |
| | 7,310 |
| | 44.0 | % |
| Non-U.S. North America | 7,582 |
| | 7,726 |
| | 41.1 | % | | 7,185 |
| | 7,105 |
| | 42.8 | % |
| Australia & New Zealand | 1,300 |
| | 1,342 |
| | 7.1 | % | | 1,283 |
| | 1,304 |
| | 7.9 | % |
| Central & South America | 491 |
| | 521 |
| | 2.8 | % | | 456 |
| | 467 |
| | 2.8 | % |
| Africa & Middle East | 157 |
| | 163 |
| | 0.9 | % | | 164 |
| | 167 |
| | 1.0 | % |
| Asia/Pacific | 292 |
| | 300 |
| | 1.6 | % | | 216 |
| | 218 |
| | 1.3 | % |
| Supranational | 53 |
| | 53 |
| | 0.3 | % | | 26 |
| | 27 |
| | 0.2 | % |
| Total | $ | 18,279 |
| | $ | 18,788 |
| | 100.0 | % | | $ | 16,441 |
| | $ | 16,598 |
| | 100.0 | % |
| | | | | | | | | | | | |
1 As of each of March 31, 2017 and December 31, 2016, we had no holdings in Portugal or Greece. |
Approximately 90.4%95.4% and 89.7%94.8% of these securities are investment grade by NAIC designation as of September 30, 2017March 31, 2021 and December 31, 2016, respectively.2020. As of September 30, 2017, 8%March 31, 2021, 11% of our fixed maturityAFS securities, including related parties, were invested in CLOs of Cayman Islands issuers (for(included in Non-US North America) for which underlying investments are largely loans to U.S. issuers), 6%US issuers and 24% were invested in securities of non-U.S. issuers by our German Group Companies and 18% were invested in other non-U.S.non-US issuers.
Portugal, Ireland, Italy, Greece and Spain continue to represent credit risk as economic conditions in these countries continue to be volatile, especially within the financial and banking sectors. We had $836 million$3.0 billion and $798 million as of September 30, 2017 and December 31, 2016, respectively,$2.7 billion of exposure in these countries as of March 31, 2021 and December 31, 2020, respectively. A significant majority of these assets relate to Ireland and are primarily made up of Euro denominated CLOs, for which $185 million and $237 million, respectively, were a result of investments acquiredthe SPV is domiciled in Ireland, but the underlying leveraged loans involve borrowers from the DLD acquisition in 2015.broader European region.
The effects on our investments in non-U.S. securities as a result of Brexit is unknown at this time, but the effects of Brexit are likely to lead to greater volatility in global financial markets in the near term. As of September 30, 2017,March 31, 2021, we held United Kingdom and Channel Islands fixed maturityAFS securities of $1.6$3.6 billion, or 2.8%3.9% of the total fixed maturitiesour AFS securities, including related parties. As of September 30, 2017,March 31, 2021, these securities were in ana net unrealized gain position of $47$170 million. Our investment managers analyze each holding for credit risk by economic and other factors of each country and industry.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Trading Securities
Trading securities, including related parties, were $2.8$3.7 billion and $3.6 billion as of each of September 30, 2017March 31, 2021 and December 31, 2016. 2020. Trading securities are primarily comprised of AmerUs Closed Block securities for which we have elected the fair value option valuation, CLO and ABS equity tranche securities, MidCap profit participating notes, structured securities with embedded derivatives and investments which support various reinsurance arrangements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Mortgage Loans
The following is a summary of our mortgage loan portfolio by collateral type:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (In millions, except percentages) | Net Carrying Value | | Percent of Total | | Net Carrying Value | | Percent of Total |
| Property type | | | | | | | |
| Office building | $ | 3,817 | | | 21.9 | % | | $ | 3,589 | | | 22.5 | % |
| Retail | 2,100 | | | 12.1 | % | | 2,083 | | | 13.1 | % |
| Apartment | 2,770 | | | 15.9 | % | | 2,441 | | | 15.3 | % |
| Hotels | 1,334 | | | 7.7 | % | | 1,294 | | | 8.1 | % |
| Industrial | 1,801 | | | 10.4 | % | | 1,362 | | | 8.5 | % |
Other commercial1 | 674 | | | 3.9 | % | | 679 | | | 4.3 | % |
| Total net commercial mortgage loans | 12,496 | | | 71.9 | % | | 11,448 | | | 71.8 | % |
| Residential loans | 4,889 | | | 28.1 | % | | 4,490 | | | 28.2 | % |
| Total mortgage loans, net of allowances | $ | 17,385 | | | 100.0 | % | | $ | 15,938 | | | 100.0 | % |
| | | | | | | |
1 Other commercial loans include investments in nursing homes, other healthcare institutions, parking garages, storage facilities and other commercial properties. |
|
| | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (In millions, except percentages) | Net Carrying Value | | Percent of Total | | Net Carrying Value | | Percent of Total |
| Property type | | | | | | | |
| Office building | $ | 1,340 |
| | 20.8 | % | | $ | 1,217 |
| | 22.2 | % |
| Retail | 1,130 |
| | 17.5 | % | | 1,135 |
| | 20.7 | % |
| Hotels | 1,108 |
| | 17.2 | % | | 1,025 |
| | 18.7 | % |
| Industrial | 940 |
| | 14.6 | % | | 742 |
| | 13.6 | % |
| Apartment | 580 |
| | 9.0 | % | | 616 |
| | 11.3 | % |
Other commercial 1 | 405 |
| | 6.3 | % | | 397 |
| | 7.3 | % |
| Total net mortgage loans | 5,503 |
| | 85.4 | % | | 5,132 |
| | 93.8 | % |
| Residential loans | 942 |
| | 14.6 | % | | 338 |
| | 6.2 | % |
| Total mortgage loans, net of allowances | $ | 6,445 |
| | 100.0 | % | | $ | 5,470 |
| | 100.0 | % |
| | | | | | | | |
1 Other commercial loans include investments in nursing homes, other healthcare institutions, parking garages, storage facilities and other commercial properties. |
We invest a portion of our investment portfolio in mortgage loans, which are generally comprised of high quality commercial first lien and mezzanine real estate loans. Our mortgage loan holdings were $6.4$17.4 billion and $5.5$15.9 billion as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively. This included $1.8 billion and $1.5$1.9 billion of mezzanine mortgage loans for the respective periods.as of March 31, 2021 and December 31, 2020, respectively. We have acquired mortgage loans through acquisitions and reinsurance arrangements, as well as through an active program to invest in new mortgage loans. We invest in mortgage loansCMLs on income producing properties including hotels, apartments, retail and office buildings, and other commercial and industrial properties. Our RML portfolio primarily consists of first lien RMLs collateralized by properties located in the US. Loan-to-value ratios at the time of loan approval are generally 75% or less.
Our mortgage loans are primarily stated at unpaid principal balance, adjusted for any unamortized premium or discount, and net of valuationcredit loss allowances. Interest income is accrued on the principal amount of the loan based on the loan'sloan’s contractual interest rate. Amortization of premiums and discounts is recorded using the effective interest method. Interest income, amortization of premiums and discounts, and prepayment fees are reported in net investment income.
It is our policy to cease to accrue interest on loans that are over 90 days delinquent. For loans less than 90 days delinquent, interest is accrued unless it is determined that the accrued interest is not collectible. If a loan becomes over 90 days delinquent, it is our general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current is in place. As of September 30, 2017,March 31, 2021 and December 31, 2020, we had $6$227 million and $128 million, respectively, of mortgage loans that were 90 days past due, of which $43 million and $1$38 million, respectively, were in the process of foreclosure. AsWe will continue to evaluate these policies with regard to the economic downturn brought about by the spread of December 31, 2016, we had $21 millionCOVID-19. Our ability to initiate foreclosure proceedings may be limited by legislation passed and executive orders issued in response to the spread of mortgage loans that were 90 days past due and $20 million in the process of foreclosure.COVID-19.
See Note 2 – Investments to the condensed consolidated financial statements for information regarding valuationcredit loss allowance for collection loss, impairments, loan-to-value, and debt service coverage.
As of September 30, 2017March 31, 2021, we had a valuation allowance of $250 million comprised of $172 million of CML and $78 million of RML allowances. As of December 31, 2016,2020, we had nota valuation allowance of $246 million comprised of $167 million of CML and $79 million of RML allowances. During the three months ended March 31, 2021, we recorded any new specific loan valuation allowances and we recordeda change in provision for credit losses on CMLs of $5 million and $0RMLs of $(7) million. During the three months ended March 31, 2020, we recorded a change in provision for credit losses on CMLs of $166 million respectively,and RMLs of OTTI through net income. We have established$37 million. The decrease in provision for credit losses was primarily a general and specific loan valuation allowanceresult of the continued recovery from the economic downturn experienced in the aggregate amount of $2 million as of September 30, 2017 and December 31, 2016, attributable to loans acquired in connection with the acquisition of Aviva USA.prior year quarter.
Investment Funds and Variable Interest Entities
Our investment funds investment strategy primarily focuses on funds with core holdings of credit assets, real assets, real estate, preferred equity and income producing assets. Our investment strategy focuses on sourcing assets with the following characteristics: (1) investments that constitute a direct investment or an investment in a fund with a high degree of co-investment; (2) investments with debt-like characteristics, or alternatively, investments with reduced volatility when compared to pure equity; and (3) investments including some element of downside protection as compared to a pure directional investment. A significant amount of our current investment funds and VIE holdings are comprised of certain investment funds contributed by the AAA Investor (AAA Contribution) as further described in Note 4 – Variable Interest Entities to the condensed consolidated financial statements, and investment funds we acquired in the Aviva USA acquisition.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
At the time of the AAA Contribution, the contributed assets largely consisted of co-investments with Apollo private equity funds. However, the attributes of the contributed assets have changed significantly since the initial transaction primarily due to the initial public offering of two underlying fund investment holdings. As of September 30, 2017, the assets consisted of $288 million of publicly-traded equity securities, a substantial portion of which is in the process of being liquidated. These public equity securities have resulted in volatility in our statement of income in recent periods. At the end of the third quarter of 2016, Norwegian Cruise Line Holdings Ltd. (NCLH) was distributed from CoInvest VI to NCL Athene, LLC (NCL LLC), resulting in the investment being classified as an AFS security with any unrealized gains and losses recognized in AOCI, thereby reducing further volatility in our statement of income from this fund. See Note 4 – Variable Interest Entities to the condensed consolidated financial statements for further discussion of NCL LLC.
Our investment funds generally meet the definition of a VIE, and in certain cases these investment funds are consolidated in our financial statements because we meet the criteria of the primary beneficiary. See Note 4 – Variable Interest Entities to the condensed consolidated financial statements for further discussion on our investment funds that meet the criteria for consolidation and the accounting treatment for them.
The following table illustrates our consolidated VIE positions:
|
| | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (In millions, except percentages) | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total |
| Assets of consolidated VIEs | | | | | | | |
| Investments | | | | | | | |
| Available-for-sale securities | | | | | | | |
| Equity securities | $ | 173 |
| | 17.9 | % | | $ | 161 |
| | 17.5 | % |
| Trading securities | 195 |
| | 20.2 | % | | 167 |
| | 18.1 | % |
| Investment funds | 593 |
| | 61.5 | % | | 573 |
| | 62.2 | % |
| Cash and cash equivalents | 1 |
| | 0.1 | % | | 14 |
| | 1.5 | % |
| Other assets | 3 |
| | 0.3 | % | | 6 |
| | 0.7 | % |
| Total assets of consolidated VIEs | $ | 965 |
| | 100.0 | % | | $ | 921 |
| | 100.0 | % |
| | | | | | | | |
| Liabilities of consolidated VIEs | | | | | | | |
| Other liabilities | $ | 47 |
| | 100.0 | % | | $ | 34 |
| | 100.0 | % |
| Total liabilities of consolidated VIEs | $ | 47 |
| | 100.0 | % | | $ | 34 |
| | 100.0 | % |
The assets of consolidated VIEs were $965 million and $921 million as of September 30, 2017 and December 31, 2016, respectively. The liabilities of consolidated VIEs were $47 million and $34 million as of September 30, 2017 and December 31, 2016, respectively.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The following table illustrates our investment funds, including related party positions of our non-consolidated VIEs and investment funds owned by consolidated VIEs:party:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (In millions, except percentages) | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total |
| Investment funds | | | | | | | |
| Real estate | $ | 462 | | | 6.7 | % | | $ | 348 | | | 5.7 | % |
| Credit funds | 122 | | | 1.8 | % | | 107 | | | 1.8 | % |
| Private equity | 300 | | | 4.4 | % | | 267 | | | 4.4 | % |
| Real assets | 82 | | | 1.2 | % | | 81 | | | 1.3 | % |
| | | | | | | |
| | | | | | | |
| Total investment funds | 966 | | | 14.1 | % | | 803 | | | 13.2 | % |
| Investment funds – related parties | | | | | | | |
| Differentiated investments | | | | | | | |
| | | | | | | |
| AmeriHome | 583 | | | 8.5 | % | | 444 | | | 7.3 | % |
| Catalina | 344 | | | 5.0 | % | | 334 | | | 5.5 | % |
| Athora | 689 | | | 10.0 | % | | 709 | | | 11.6 | % |
| Venerable | 316 | | | 4.6 | % | | 123 | | | 2.0 | % |
| Other | 308 | | | 4.5 | % | | 279 | | | 4.6 | % |
| Total differentiated investments | 2,240 | | | 32.6 | % | | 1,889 | | | 31.0 | % |
| Real estate | 942 | | | 13.7 | % | | 828 | | | 13.5 | % |
| Credit funds | 398 | | | 5.8 | % | | 375 | | | 6.2 | % |
| Private equity | 689 | | | 10.0 | % | | 473 | | | 7.8 | % |
| Real assets | 139 | | | 2.0 | % | | 172 | | | 2.8 | % |
| Natural resources | 110 | | | 1.6 | % | | 113 | | | 1.9 | % |
| Public equities | 100 | | | 1.5 | % | | 110 | | | 1.8 | % |
| Investment in Apollo | 1,281 | | | 18.7 | % | | 1,324 | | | 21.8 | % |
| Total investment funds – related parties | 5,899 | | | 85.9 | % | | 5,284 | | | 86.8 | % |
| Total investment funds including related parties | $ | 6,865 | | | 100.0 | % | | $ | 6,087 | | | 100.0 | % |
|
| | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (In millions, except percentages) | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total |
| Investment funds | | | | | | | |
| Private equity | $ | 279 |
| | 10.5 | % | | $ | 268 |
| | 10.9 | % |
| Real estate and other real assets | 166 |
| | 6.2 | % | | 118 |
| | 4.8 | % |
| Natural resources | 5 |
| | 0.2 | % | | 5 |
| | 0.2 | % |
| Hedge funds | 62 |
| | 2.3 | % | | 72 |
| | 2.9 | % |
| Credit funds | 235 |
| | 8.8 | % | | 226 |
| | 9.2 | % |
| Total investment funds | 747 |
| | 28.0 | % | | 689 |
| | 28.0 | % |
| Investment funds – related parties | | | | | | | |
| Private equity – A-A Mortgage | 396 |
| | 14.8 | % | | 343 |
| | 13.9 | % |
| Private equity | 176 |
| | 6.6 | % | | 131 |
| | 5.3 | % |
| Real estate and other real assets | 245 |
| | 9.2 | % | | 247 |
| | 10.1 | % |
| Natural resources | 78 |
| | 2.9 | % | | 49 |
| | 2.0 | % |
| Hedge funds | 163 |
| | 6.1 | % | | 192 |
| | 7.8 | % |
| Credit funds | 272 |
| | 10.2 | % | | 236 |
| | 9.6 | % |
| Total investment funds – related parties | 1,330 |
| | 49.8 | % | | 1,198 |
| | 48.7 | % |
| Investment funds owned by consolidated VIEs | | | | | | | |
Private equity – MidCap1 | 529 |
| | 19.8 | % | | 524 |
| | 21.3 | % |
| Credit funds | 32 |
| | 1.2 | % | | 38 |
| | 1.6 | % |
| Real estate and other real assets | 32 |
| | 1.2 | % | | 11 |
| | 0.4 | % |
| Total investment funds owned by consolidated VIEs | 593 |
| | 22.2 | % | | 573 |
| | 23.3 | % |
| Total investment funds, including related parties and VIEs | $ | 2,670 |
| | 100.0 | % | | $ | 2,460 |
| | 100.0 | % |
| | | | | | | | |
1 MidCap is an underlying investment of one of our consolidated VIE investment funds. |
Overall, the total investment funds, including related parties and consolidated VIEs,party, were $2.7$6.9 billion and $2.5$6.1 billion, respectively, as of September 30, 2017March 31, 2021 and December 31, 2016, respectively.2020. See Note 42 – Variable Interest EntitiesInvestments to the condensed consolidated financial statements for further discussion regarding how we account for our investment funds. Our investment fund portfolio is subject to a number of market related risks including interest ratesrate risk and equity market risk. Interest rate risk represents the potential for changes in the investment fund'sfund’s net asset values resulting from changes in the general level of interest rates. Equity market risk represents potential for changes in the investment fund'sfund’s net asset values resulting from changes in equity markets or from other external factors which influence equity markets. We actively monitor our exposure to the risks inherent in these investments which could materially and adversely affect our results of operations and financial condition. The interest and equity marketThese risks expose us to potential volatility in our earnings year-over-year relatedperiod-over-period. We actively monitor our exposure to these risks. The increase in investment funds.funds, including related party, was primarily driven by an increase in the valuations of Venerable and AmeriHome.
Funds Withheld at Interest
Funds withheld at interest represents a receivable for amounts contractually withheld by ceding companies in accordance with modco and funds withheld reinsurance agreements in which we act as the reinsurer. Generally, assets equal to statutory reserves are withheld and legally owned by the ceding company. We hold funds withheld at interest receivables, including those held with VIAC, Lincoln and Jackson. As of September 30, 2017,March 31, 2021, the majority of the ceding companies holding the assets pursuant to such reinsurance agreements had a financial strength rating of A-A or better.better (based on an A.M. Best scale).
The funds withheld at interest is comprised of the host contract and an embedded derivative. We are subject to the investment performance on the withheld assets with the total return directly impacting the host contract and the embedded derivative. Interest accrues at a risk freerisk-free rate on the host receivable and is recorded as net investment income in the condensed consolidated statements of income.income (loss). The change in the embedded derivative in our reinsurance agreements areis similar to a total return swap on the income generated by the underlying assets held by the ceding companies andcompanies. The change in the embedded derivative is recorded in investment related gains (losses). Although we do not directly controllegally own the underlying investments in the funds withheld at interest, in each instance the ceding company has hired AAMApollo to manage the withheld assets in accordance with our investment guidelines.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The following summarizes the underlying investment composition of the funds withheld at interest:interest, including related parties:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (In millions, except percentages) | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total |
| Fixed maturity securities | | | | | | | |
| | | | | | | |
| US state, municipal and political subdivisions | $ | 462 | | | 0.8 | % | | $ | 513 | | | 0.8 | % |
| Foreign governments | 279 | | | 0.5 | % | | 301 | | | 0.5 | % |
| Corporate | 30,372 | | | 51.8 | % | | 34,057 | | | 55.2 | % |
| CLO | 5,912 | | | 10.1 | % | | 5,912 | | | 9.6 | % |
| ABS | 5,887 | | | 10.1 | % | | 5,212 | | | 8.5 | % |
| CMBS | 2,317 | | | 4.0 | % | | 2,374 | | | 3.8 | % |
| RMBS | 2,077 | | | 3.5 | % | | 2,270 | | | 3.7 | % |
| Equity securities | 142 | | | 0.2 | % | | 119 | | | 0.2 | % |
| Mortgage loans | 9,068 | | | 15.5 | % | | 8,201 | | | 13.3 | % |
| Investment funds | 1,522 | | | 2.6 | % | | 1,155 | | | 1.9 | % |
| Derivative assets | 222 | | | 0.4 | % | | 200 | | | 0.3 | % |
| Short-term investments | 226 | | | 0.4 | % | | 608 | | | 1.0 | % |
| Other investments | 15 | | | — | % | | 15 | | | — | % |
| Cash and cash equivalents | 594 | | | 1.0 | % | | 906 | | | 1.5 | % |
| Other assets and liabilities | (499) | | | (0.9) | % | | (201) | | | (0.3) | % |
| Total funds withheld at interest including related party | $ | 58,596 | | | 100.0 | % | | $ | 61,642 | | | 100.0 | % |
|
| | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (In millions, except percentages) | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total |
| Fixed maturity securities | | | | | | | |
| U.S. state, municipal and political subdivisions | $ | 118 |
| | 1.7 | % | | $ | 118 |
| | 1.8 | % |
| Corporate | 2,100 |
| | 30.2 | % | | 1,800 |
| | 27.6 | % |
| CLO | 665 |
| | 9.6 | % | | 591 |
| | 9.0 | % |
| ABS | 797 |
| | 11.4 | % | | 736 |
| | 11.3 | % |
| CMBS | 286 |
| | 4.1 | % | | 292 |
| | 4.5 | % |
| RMBS | 1,590 |
| | 22.8 | % | | 1,551 |
| | 23.7 | % |
| Equity securities | 28 |
| | 0.4 | % | | 29 |
| | 0.4 | % |
| Mortgage loans | 818 |
| | 11.8 | % | | 773 |
| | 11.8 | % |
| Investment funds | 372 |
| | 5.3 | % | | 329 |
| | 5.0 | % |
| Derivative assets | 63 |
| | 0.9 | % | | 53 |
| | 0.8 | % |
| Short-term investments | 7 |
| | 0.1 | % | | 80 |
| | 1.2 | % |
| Cash and cash equivalents | 100 |
| | 1.4 | % | | 105 |
| | 1.6 | % |
| Other assets and liabilities | 20 |
| | 0.3 | % | | 81 |
| | 1.3 | % |
| Total funds withheld at interest | $ | 6,964 |
| | 100.0 | % | | $ | 6,538 |
| | 100.0 | % |
As of September 30, 2017March 31, 2021 and December 31, 2016,2020, we held $7.0$58.6 billion and $6.5$61.6 billion, respectively, of funds withheld at interest receivables, respectively.including related party. Approximately 94.1%93.6% and 93.6%94.1% of the fixed maturity securities within the funds withheld at interest are investment grade by NAIC designation as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively. The decrease in funds withheld at interest, including related party, was primarily driven by unrealized losses in the three months ended March 31, 2021 attributed to an increase in US Treasury rates, partially offset by the tightening of credit spreads.
Derivative Instruments
We hold derivative instruments for economic hedging purposes to reduce our exposure to cash flow variability of assets and liabilities, equity market risk, interest rate risk, credit risk and foreign exchange risk. The types of derivatives we may use include interest rate swaps, foreign currency swaps and forward contracts, total return swaps, credit default swaps, variance swaps, futures and fixed indexedequity options.
A presentation ofdiscussion regarding our derivative instruments along with a discussion of the business strategy involved with our derivativesand how such instruments are used to manage risk is included in Note 3 – Derivative Instruments to the condensed consolidated financial statements. This includes:
| |
▪ | a comprehensive description of the derivatives instruments as well as the strategies to manage risk; |
| |
▪ | the notional amounts and estimated fair value by derivative instruments; and |
| |
▪ | impacts on the condensed consolidated statement of net income. |
As part of our risk management strategies, management continually evaluates our derivative instrument holdings and the effectiveness of such holdings in addressing risks identified in our operations.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Net Invested Assets
The following summarizes our net invested assets:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (In millions, except percentages) | Net Invested Asset Value1 | | Percent of Total | | Net Invested Asset Value1 | | Percent of Total |
| Corporate | $ | 74,549 | | | 47.9 | % | | $ | 71,040 | | | 47.3 | % |
| CLO | 15,835 | | | 10.2 | % | | 14,609 | | | 9.7 | % |
| Credit | 90,384 | | | 58.1 | % | | 85,649 | | | 57.0 | % |
| RMBS | 7,968 | | | 5.1 | % | | 8,337 | | | 5.6 | % |
| CML | 18,113 | | | 11.6 | % | | 16,778 | | | 11.2 | % |
| RML | 5,229 | | | 3.4 | % | | 4,774 | | | 3.2 | % |
| CMBS | 3,271 | | | 2.1 | % | | 3,227 | | | 2.1 | % |
| Real estate | 34,581 | | | 22.2 | % | | 33,116 | | | 22.1 | % |
| ABS | 14,061 | | | 9.0 | % | | 13,137 | | | 8.7 | % |
| Alternative investments | 8,004 | | | 5.1 | % | | 6,793 | | | 4.5 | % |
| State, municipal, political subdivisions and foreign government | 2,153 | | | 1.5 | % | | 2,136 | | | 1.4 | % |
| Equity securities | 494 | | | 0.3 | % | | 478 | | | 0.3 | % |
| Short-term investments | 227 | | | 0.1 | % | | 479 | | | 0.3 | % |
| US government and agencies | 242 | | | 0.2 | % | | 206 | | | 0.2 | % |
| Other investments | 25,181 | | | 16.2 | % | | 23,229 | | | 15.4 | % |
| Cash and equivalents | 2,844 | | | 1.8 | % | | 5,417 | | | 3.6 | % |
| Policy loans and other | 1,432 | | | 0.9 | % | | 1,455 | | | 1.0 | % |
| Net invested assets excluding investment in Apollo | 154,422 | | | 99.2 | % | | 148,866 | | | 99.1 | % |
| Investment in Apollo | 1,281 | | | 0.8 | % | | 1,324 | | | 0.9 | % |
| Net invested assets | $ | 155,703 | | | 100.0 | % | | $ | 150,190 | | | 100.0 | % |
| | | | | | | |
1 See Key Operating and Non-GAAP Measures for the definition of net invested assets. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (In millions, except percentages) | U.S. and Bermuda Invested Asset Value | | Germany Invested Asset Value | | Total Invested Asset Value1 | | Percent of Total | | U.S. and Bermuda Invested Asset Value | | Germany Invested Asset Value | | Total Invested Asset Value1 | | Percent of Total |
| Corporate | $ | 34,759 |
| | $ | 1,713 |
| | $ | 36,472 |
| | 46.3 | % | | $ | 31,000 |
| | $ | 1,682 |
| | $ | 32,682 |
| | 45.4 | % |
| CLO | 5,774 |
| | — |
| | 5,774 |
| | 7.3 | % | | 5,798 |
| | — |
| | 5,798 |
| | 8.1 | % |
| Credit | 40,533 |
| | 1,713 |
| | 42,246 |
| | 53.6 | % | | 36,798 |
| | 1,682 |
| | 38,480 |
| | 53.5 | % |
| RMBS | 10,696 |
| | — |
| | 10,696 |
| | 13.6 | % | | 10,619 |
| | — |
| | 10,619 |
| | 14.8 | % |
| Mortgage loans | 7,150 |
| | 108 |
| | 7,258 |
| | 9.2 | % | | 6,145 |
| | 95 |
| | 6,240 |
| | 8.7 | % |
| CMBS | 2,181 |
| | — |
| | 2,181 |
| | 2.8 | % | | 2,202 |
| | — |
| | 2,202 |
| | 3.1 | % |
| Real estate held for investment | — |
| | 622 |
| | 622 |
| | 0.8 | % | | — |
| | 542 |
| | 542 |
| | 0.8 | % |
| Real estate | 20,027 |
| | 730 |
| | 20,757 |
| | 26.4 | % | | 18,966 |
| | 637 |
| | 19,603 |
| | 27.4 | % |
| ABS | 4,782 |
| | — |
| | 4,782 |
| | 6.1 | % | | 3,873 |
| | — |
| | 3,873 |
| | 5.4 | % |
| Alternative investments | 3,441 |
| | 146 |
| | 3,587 |
| | 4.5 | % | | 3,297 |
| | 128 |
| | 3,425 |
| | 4.8 | % |
| State, municipal, political subdivisions and foreign government | 1,335 |
| | 2,357 |
| | 3,692 |
| | 4.7 | % | | 1,387 |
| | 1,936 |
| | 3,323 |
| | 4.6 | % |
| Equity securities | 241 |
| | 70 |
| | 311 |
| | 0.4 | % | | 199 |
| | 185 |
| | 384 |
| | 0.5 | % |
| Unit linked assets | — |
| | 405 |
| | 405 |
| | 0.5 | % | | — |
| | 363 |
| | 363 |
| | 0.5 | % |
| Short-term investments | 85 |
| | — |
| | 85 |
| | 0.1 | % | | 250 |
| | — |
| | 250 |
| | 0.3 | % |
| U.S. government and agencies | 29 |
| | 31 |
| | 60 |
| | 0.1 | % | | 32 |
| | 27 |
| | 59 |
| | 0.1 | % |
| Other investments | 9,913 |
| | 3,009 |
| | 12,922 |
| | 16.4 | % | | 9,038 |
| | 2,639 |
| | 11,677 |
| | 16.2 | % |
| Cash and equivalents | 1,680 |
| | 229 |
| | 1,909 |
| | 2.4 | % | | 1,111 |
| | 111 |
| | 1,222 |
| | 1.7 | % |
| Policy loans and other | 738 |
| | 232 |
| | 970 |
| | 1.2 | % | | 631 |
| | 221 |
| | 852 |
| | 1.2 | % |
| Total invested assets | $ | 72,891 |
| | $ | 5,913 |
| | $ | 78,804 |
| | 100.0 | % | | $ | 66,544 |
| | $ | 5,290 |
| | $ | 71,834 |
| | 100.0 | % |
| | | | | | | | | | | | | | | | |
1 Refer to Key Operating and Non-GAAP Measures for the definition of invested assets. |
Our totalnet invested assets were $78.8$155.7 billion and $71.8$150.2 billion as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively. As of September 30, 2017,March 31, 2021, our totalnet invested assets were mainly comprised of 46.3%47.9% of corporate securities, 29.8%26.4% of structured securities, 9.2%15.0% of mortgage loans and 4.5%5.1% of alternative investments. Corporate securities within our U.S. and Bermuda portfolio included $9.1$18.9 billion of private placements, which represented approximately 12%12.1% of our total U.S. and Bermudanet invested assets. The increase in totalnet invested assets as of September 30, 2017March 31, 2021 from December 31, 20162020 was primarily driven by strong growth in depositsfrom net organic inflows over liability outflows and reinvestment of earnings.
In managing our business we utilize net invested assets as presented in the above table. InvestedNet invested assets do not correspond to the total investments, including related parties, on our condensed consolidated balance sheets, as discussed previously in Key Operating and Non-GAAP Measures. InvestedNet invested assets represent the investments that directly back our policyholdernet reserve liabilities and surplus assets. We believe this view of our portfolio provides a view of the assets for which we have economic exposure. We adjust the presentation for funds withheld and modco transactions to include or exclude the underlying investments based upon the contractual transfer of economic exposure to such underlying investments. We also deconsolidate anyadjust for VIEs in order to show the net investment in the funds, which therefore are included in the alternative investments line above.
The Germany investment portfolio composition differs fromabove as well as adjust for the U.S. and Bermuda portfolio primarily due to the geographic location, regulatory environment and participating nature of the German products and therefore the portfolio is managed separately from our U.S. and Bermuda portfolios. The Germanallowance for credit losses. Net invested assets are predominantlyincludes our proportionate share of ACRA investments, based on our economic ownership, but excludes the proportionate share of investments associated with the noncontrolling interest.
Net invested in foreign government securities, corporate fixed income securities, real estate held for investment and assets backing our unit linked policies. The German invested assets are predominantly invested in Euro-denominated securities and investments.
Invested assets is utilized by management to evaluate our investment portfolio. Invested asset figures areNet invested assets, excluding our strategic investment in Apollo, is used in the computation of net investment earned rate, which allows us to analyze the profitability of our investment portfolio. InvestedNet invested assets is also used in our risk management processes for asset purchases, product design and underwriting, stress scenarios, liquidity, and ALM.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Net Alternative Investments
The following summarizes our alternative investments:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (In millions, except percentages) | Net Invested Asset Value | | Percent of Total | | Net Invested Asset Value | | Percent of Total |
| Retirement Services | | | | | | | |
| Differentiated investments | | | | | | | |
| AmeriHome | $ | 720 | | | 9.0 | % | | $ | 546 | | | 8.0 | % |
| MidCap | 650 | | | 8.1 | % | | 611 | | | 9.0 | % |
| Catalina | 344 | | | 4.3 | % | | 334 | | | 4.9 | % |
| Venerable | 316 | | | 3.9 | % | | 123 | | | 1.8 | % |
| | | | | | | |
| Other | 373 | | | 4.6 | % | | 339 | | | 5.0 | % |
| Total differentiated investments | 2,403 | | | 29.9 | % | | 1,953 | | | 28.7 | % |
| Real estate | 1,687 | | | 21.1 | % | | 1,537 | | | 22.6 | % |
| Credit | 1,055 | | | 13.2 | % | | 941 | | | 13.9 | % |
| Private equity | 1,311 | | | 16.4 | % | | 831 | | | 12.2 | % |
| Real assets | 307 | | | 3.8 | % | | 296 | | | 4.4 | % |
| Natural resources | 67 | | | 0.8 | % | | 60 | | | 0.9 | % |
| | | | | | | |
| Total Retirement Services alternative investments | 6,830 | | | 85.2 | % | | 5,618 | | | 82.7 | % |
| Corporate and Other | | | | | | | |
| | | | | | | |
| Athora | 669 | | | 8.4 | % | | 661 | | | 9.7 | % |
| Credit | 110 | | | 1.4 | % | | 93 | | | 1.4 | % |
| Natural resources | 222 | | | 2.8 | % | | 238 | | | 3.5 | % |
Equities1 | 173 | | | 2.2 | % | | 183 | | | 2.7 | % |
| | | | | | | |
| Total Corporate and Other alternative investments | 1,174 | | | 14.8 | % | | 1,175 | | | 17.3 | % |
| Net alternative investments | $ | 8,004 | | | 100.0 | % | | $ | 6,793 | | | 100.0 | % |
| | | | | | | |
1 As of March 31, 2021 and December 31, 2020, equities includes our private equity investment in Jackson and a public equity position in OneMain Holdings, Inc. (ticker: OMF). |
|
| | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (In millions, except percentages) | Invested Asset Value | | Percent of Total | | Invested Asset Value | | Percent of Total |
| Credit funds | $ | 797 |
| | 22.2 | % | | $ | 834 |
| | 24.3 | % |
| Private equity – MidCap | 529 |
| | 14.7 | % | | 524 |
| | 15.3 | % |
| Private equity – A-A Mortgage | 486 |
| | 13.6 | % | | 417 |
| | 12.2 | % |
| Private equity – other | 530 |
| | 14.8 | % | | 519 |
| | 15.2 | % |
| Mortgage and real assets | 546 |
| | 15.2 | % | | 470 |
| | 13.7 | % |
| Hedge funds | 274 |
| | 7.6 | % | | 311 |
| | 9.1 | % |
| Public equities | 236 |
| | 6.6 | % | | 215 |
| | 6.3 | % |
| Natural resources and other real assets | 189 |
| | 5.3 | % | | 135 |
| | 3.9 | % |
| Total alternative investments | $ | 3,587 |
| | 100.0 | % | | $ | 3,425 |
| | 100.0 | % |
AlternativeNet alternative investments were $3.6$8.0 billion and $3.4$6.8 billion as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively, representing 4.5%5.1% and 4.8%4.5% of our totalnet invested assets portfolio as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively. The increase in net alternative investments was primarily driven by an increase in the valuations of Venerable, AmeriHome and MidCap and an increase in CLO equities due to the tightening of credit spreads.
AlternativeNet alternative investments do not correspond to the total investment funds, including related parties, and VIEs, on our condensed consolidated balance sheets. As discussed above in the net invested assets section, we adjust the GAAP presentation for funds withheld, and modco and de-consolidate VIEs. We alsoThe investment in Apollo is excluded from our alternative investments, while we include CLO and ABS equity tranche securities in alternative investments due to their underlying characteristics and equity-like features.
Two ofThrough our relationship with Apollo, we have indirectly invested in companies that meet the key characteristics we look for in net alternative investments. Of our three largest alternative investments, two are in asset originators, MidCap and A-A Mortgage,AmeriHome, both of which, from time to time, provide us with access to assets for our investment portfolio. As of September 30, 2017, we held equity positions in MidCap of $529 million. MidCap isportfolio, with the third being a leading originator of senior debt capital in the middle-market with expertise in asset-backed loans, leveraged loans, real estate loans, discount loans and venture loans. MidCap represents a uniquestrategic investment in an origination platform made available to us through our relationship with Apollo. AsAthora.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
MidCap
MidCap is a commercial finance company that provides various financial products to middle-market businesses in multiple industries, primarily located in the US. MidCap primarily originates and invests in commercial and industrial loans, including senior secured corporate loans, working capital loans collateralized mainly by accounts receivable and inventory, senior secured loans collateralized by portfolios of commercial and consumer loans and related products and secured loans to highly capitalized pharmaceutical and medical device companies, and commercial real estate loans, including multifamily independent-living properties, assisted living, skilled nursing and medical office properties, warehouse, office building, hotel and other commercial use properties and multifamily properties. MidCap originates and acquires loans using borrowings under financing arrangements that it has in place with numerous financial institutions. MidCap’s earnings are primarily driven by the difference between the interest earned on its loan portfolio and the interest accrued under its outstanding borrowings. As a result, MidCap is primarily exposed to the credit risk of its loan counterparties and prepayment risk. Additionally, financial results are influenced by related levels of middle-market business investment and interest rates.
Our alternative investment in MidCap had a carrying value of $650 million and $611 million as of March 31, 2021 and December 31, 2020, respectively. As of March 31, 2021 and December 31, 2020, this alternative investment is comprised of our investment in MidCap, of $573 million and $534 million, respectively, and redeemable preferred stock of $77 million and $77 million, respectively. MidCap returned a net investment earned rate of 37.48% and (16.06)% for the three months ended March 31, 2021 and 2020, respectively. Alternative investment income (loss) from MidCap was $52 million and $(21) million for the three months ended March 31, 2021 and 2020, respectively. The increase in alternative investment income for the three months ended March 31, 2021 compared to 2020 was primarily due to a valuation increase in the current quarter driven by an increase in valuation associated with a capital raise priced at a slight premium and the decrease in valuation in the prior year reflecting an increase in loan loss assumptions and lower origination volumes due to the economic environment. The redeemable preferred stock returned a net investment earned rate of 26.83% and 0.00% for the three months ended March 31, 2021 and 2020, respectively. Alternative investment income from the redeemable preferred stock was $5 million and $0 million for the three months ended March 31, 2021 and 2020, respectively. The increase in alternative investment income for the three months ended March 31, 2021 compared to 2020 was primarily driven by an initial investment in the redeemable preferred stock in the second quarter of 2020 and favorable profit interests.
AmeriHome
Our equity investment in AmeriHome was held indirectly through A-A Mortgage, of which AmeriHome was the fund’s only investment. AmeriHome is a mortgage origination platform and an aggregator of mortgage servicing rights. AmeriHome acquires mortgage loans from retail originators and re-sells the loans to the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National Mortgage Association and other investors. AmeriHome retains the mortgage servicing rights on the loans that it sells and employs a subservicer to perform servicing operations, including payment collection. AmeriHome’s earnings are primarily driven by two sources: gains or losses on the sale of mortgage loans and the difference between the fee that it charges for mortgage servicing and the fee charged by the subservicer. As a result, AmeriHome’s financial results are influenced by interest rates and related housing demand. AmeriHome is primarily exposed to credit risk related to the accuracy of the representations and warranties in the loans that AmeriHome acquires and prepayment risk, which prematurely terminates fees related to mortgage servicing.
On February 16, 2021, Apollo, Athene and AmeriHome announced the sale of AmeriHome to a subsidiary of Western Alliance Bancorporation and the transaction closed on April 7, 2021. Our alternative investment in A-A Mortgage had a carrying value of $720 million and $546 million as of March 31, 2021 and December 31, 2020, respectively. Our investment in A-A Mortgage represents our proportionate share of its net asset value, which largely reflects any contributions to and distributions from A-A Mortgage and the fair value of AmeriHome. A-A Mortgage returned a net investment earned rate of 109.67% and 16.93% for the three months ended March 31, 2021 and 2020, respectively. Alternative investment income from A-A Mortgage was $174 million and $26 million for the three months ended March 31, 2021 and 2020, respectively. The increase in alternative investment income for the three months ended March 31, 2021 compared to 2020 was primarily due to an increase in valuation resulting from the April sale reflecting a premium of the platform sale, net of carry and transaction expenses.
Athora
Athora is a specialized insurance and reinsurance group fully focused on the European market. Athora’s principal operational subsidiaries are Athora Netherlands N.V. in the Netherlands, Athora Belgium SA in Belgium, Athora Lebensversicherung AG in Germany, Athora Ireland plc in Ireland, and Athora Life Re Ltd in Bermuda. Athora deploys capital and resources to further its mission to build a stand-alone independent and integrated insurance and reinsurance business. Athora’s growth is achieved primarily through acquisitions, portfolio transfers and reinsurance. Athora is building a European insurance brand and has successfully acquired, integrated, and transformed four insurance companies: Delta Lloyd Deutschland AG (2015), Aegon Ireland plc (2018), Generali Belgium SA (2019) and VIVAT NV (2020).
Our alternative investment in Athora had a carrying value of $669 million and $661 million as of March 31, 2021 and December 31, 2020, respectively. Our investment in Athora represents our proportionate share of its net asset value, which largely reflects any contributions to and distributions from Athora and changes in its fair value. Athora returned a net investment earned rate of 4.36% and 0.00% for the three months ended March 31, 2021 and 2020, respectively. Alternative investment income from Athora was $8 million and $0 million for the three months ended March 31, 2021 and 2020, respectively. The increase in alternative investment income for the three months ended March 31, 2021 compared to 2020 was primarily due to a slight share price increase in the current quarter.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Public Equity
We indirectly hold a public equity position in OneMain through our equity investment in an alternative investment. Although the net invested asset value of the security is minor, it has resulted in volatility in our statements of income in recent periods. As of March 31, 2021 and December 31, 2020, we indirectly held approximately 2.4 million and 2.8 million shares of OneMain with a market value of $100 million and $110 million, respectively. Alternative investment income (loss) from OneMain was $24 million and $(57) million for the three months ended March 31, 2021 and 2020, respectively. The increase in alternative investment income for the three months ended March 31, 2021 compared to 2020 was primarily due to an increase in share price in the current quarter compared to a decline in share price in the prior year.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Non-GAAP Measure Reconciliations
The reconciliations to the nearest GAAP measure for adjusted operating income net of tax(loss) available to common shareholders is included in the Consolidated Results of Operations section.
The reconciliation of basic earnings per Class A common share to adjusted operating earnings net of tax excluding notable items to net income available to AHL shareholdersper common share is as follows:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2021 | | 2020 | | | | |
| Basic earnings (loss) per share – Class A common shares | $ | 3.02 | | | $ | (5.81) | | | | | |
| Non-operating adjustments | | | | | | | |
| Realized net gains on sale of AFS securities | 0.10 | | | 0.07 | | | | | |
| Unrealized, allowances and other investment gains (losses) | 0.50 | | | (2.03) | | | | | |
| Change in fair value of reinsurance assets | (4.40) | | | (7.04) | | | | | |
| Offsets to investment gains (losses) | 0.72 | | | 2.73 | | | | | |
| Investment gains (losses), net of offsets | (3.08) | | | (6.27) | | | | | |
| Change in fair values of derivatives and embedded derivatives – FIAs, net of offsets | 2.48 | | | 0.36 | | | | | |
| Integration, restructuring and other non-operating expenses | (0.22) | | | (0.03) | | | | | |
| Stock compensation expense | — | | | (0.05) | | | | | |
| Income tax (expense) benefit – non-operating | (0.04) | | | 0.72 | | | | | |
| Less: Total non-operating adjustments | (0.86) | | | (5.27) | | | | | |
| Less: Effect of items convertible to or settled in Class A common shares | 0.08 | | | 0.06 | | | | | |
| Adjusted operating earnings (loss) per common share | $ | 3.80 | | | $ | (0.60) | | | | | |
|
| | | | | | | |
| | Three months ended September 30, |
| (In millions) | 2017 | | 2016 |
| Operating income, net of tax excluding notable items by segment | | | |
| Retirement Services operating income, net of tax excluding notable items | $ | 250 |
| | $ | 187 |
|
| Unlocking | (20 | ) | | (158 | ) |
| Actuarial out of period adjustments | 13 |
| | — |
|
| Deferred tax valuation allowance release | — |
| | 102 |
|
| Tax effects of notable items | 1 |
| | 11 |
|
| Retirement Services notable items | (6 | ) | | (45 | ) |
| Retirement Services operating income, net of tax | 244 |
| | 142 |
|
| | | | |
| Corporate and Other operating income, net of tax excluding notable items | 4 |
| | (18 | ) |
| Germany operating loss, net of tax | (17 | ) | | (7 | ) |
| Corporate and Other operating income, net of tax | (13 | ) | | (25 | ) |
| Operating income, net of tax | 231 |
| | 117 |
|
| Total non-operating adjustments | 43 |
| | 9 |
|
| Net income available to AHL shareholders | $ | 274 |
| | $ | 126 |
|
The reconciliation of basic weighted average common shares outstanding - Class A to weighted average common shares outstanding - adjusted operating, which is included in adjusted operating earnings per common share, is as follows:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| (In millions) | 2021 | | 2020 | | | | |
| Basic weighted average common shares outstanding – Class A | 191.3 | | | 161.4 | | | | | |
| Conversion of Class B common shares to Class A common shares | — | | | 16.9 | | | | | |
| Conversion of Class M common shares to Class A common shares | — | | | 3.2 | | | | | |
| Effect of other stock compensation plans | 5.5 | | | — | | | | | |
| Weighted average common shares outstanding – adjusted operating | 196.8 | | | 181.5 | | | | | |
The reconciliation of total AHL shareholders’ equity to total adjusted AHL common shareholders’ equity, excluding AOCIwhich is included in theadjusted book value per common share, adjusted debt to capital ratio and adjusted operating ROE, excluding AOCI and operating income ROE excluding AOCI is as follows:
| | | | | | | | | | | |
| (In millions) | March 31, 2021 | | December 31, 2020 |
| Total AHL shareholders’ equity | $ | 17,291 | | | $ | 18,657 | |
| Less: Preferred stock | 2,312 | | | 2,312 | |
| Total AHL common shareholders’ equity | 14,979 | | | 16,345 | |
| Less: AOCI | 2,021 | | | 3,971 | |
| Less: Accumulated change in fair value of reinsurance assets | 488 | | | 1,142 | |
| Total adjusted AHL common shareholders’ equity | $ | 12,470 | | | $ | 11,232 | |
| | | |
| Segment adjusted AHL common shareholders’ equity | | | |
| Retirement Services | $ | 8,870 | | | $ | 7,732 | |
| Corporate and Other | 3,600 | | | 3,500 | |
| Total adjusted AHL common shareholders’ equity | $ | 12,470 | | | $ | 11,232 | |
|
| | | | | | | |
| (In millions) | September 30, 2017 | | September 30, 2016 |
| Total AHL shareholders' equity | $ | 8,669 |
| | $ | 7,031 |
|
| Less: AOCI | 1,162 |
| | 920 |
|
| Total AHL shareholders' equity excluding AOCI | $ | 7,507 |
| | $ | 6,111 |
|
| | | | |
| Retirement Services | $ | 5,371 |
| | $ | 4,542 |
|
| Corporate and Other | 2,136 |
| | 1,569 |
|
| Total AHL shareholders' equity excluding AOCI | $ | 7,507 |
| | $ | 6,111 |
|
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The reconciliation of average AHL shareholders’ equity to average adjusted AHL common shareholders’ equity, which is included in adjusted operating ROE is as follows:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| (In millions) | 2021 | | 2020 | | | | |
| Average AHL shareholders’ equity | $ | 17,974 | | | $ | 11,666 | | | | | |
| Less: Average preferred stock | 2,312 | | | 1,172 | | | | | |
| Less: Average AOCI | 2,996 | | | 554 | | | | | |
| Less: Average accumulated change in fair value of reinsurance assets | 815 | | | 169 | | | | | |
| Average adjusted AHL common shareholders’ equity | $ | 11,851 | | | $ | 9,771 | | | | | |
| | | | | | | |
| Segment average adjusted AHL common shareholders’ equity | | | | | | | |
| Retirement Services | $ | 8,301 | | | $ | 7,722 | | | | | |
| Corporate and Other | 3,550 | | | 2,049 | | | | | |
| Average adjusted AHL common shareholders’ equity | $ | 11,851 | | | $ | 9,771 | | | | | |
The reconciliation of Class A common shares outstanding to adjusted operating common shares outstanding, which is included in adjusted book value per common share, is as follows:
| | | | | | | | | | | |
| (In millions) | March 31, 2021 | | December 31, 2020 |
| Class A common shares outstanding | 191.4 | | | 191.2 | |
| | | |
| | | |
| Effect of other stock compensation plans | 6.9 | | | 6.0 | |
| Adjusted operating common shares outstanding | 198.3 | | | 197.2 | |
The reconciliation of book value per common share to adjusted book value per common share is as follows:
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Book value per common share | $ | 78.25 | | | $ | 85.51 | |
| AOCI | (10.56) | | | (20.77) | |
| Accumulated change in fair value of reinsurance assets | (2.55) | | | (5.98) | |
| Effect of items convertible to or settled in Class A common shares | (2.26) | | | (1.81) | |
| Adjusted book value per common share | $ | 62.88 | | | $ | 56.95 | |
The reconciliation of net investment income to net investment earnings and earned rate is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2021 | | 2020 | | | | |
| (In millions, except percentages) | Dollar | | Rate | | Dollar | | Rate | | | | | | | | |
| GAAP net investment income | $ | 1,704 | | | 4.49 | % | | $ | 745 | | | 2.51 | % | | | | | | | | |
| Change in fair value of reinsurance assets | 366 | | | 0.97 | % | | 270 | | | 0.90 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Alternative gains (losses) | 69 | | | 0.18 | % | | (101) | | | (0.34) | % | | | | | | | | |
| ACRA noncontrolling interest | (198) | | | (0.52) | % | | (72) | | | (0.24) | % | | | | | | | | |
| Apollo investment loss | 25 | | | 0.07 | % | | 297 | | | 1.00 | % | | | | | | | | |
| Held for trading amortization and other | 32 | | | 0.08 | % | | 12 | | | 0.04 | % | | | | | | | | |
| Total adjustments to arrive at net investment earnings/earned rate | 294 | | | 0.78 | % | | 406 | | | 1.36 | % | | | | | | | | |
| Total net investment earnings/earned rate | $ | 1,998 | | | 5.27 | % | | $ | 1,151 | | | 3.87 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Retirement Services | $ | 1,935 | | | 5.18 | % | | $ | 1,184 | | | 4.04 | % | | | | | | | | |
| Corporate and Other | 63 | | | 11.22 | % | | (33) | | | (8.14) | % | | | | | | | | |
| Total net investment earnings/earned rate | $ | 1,998 | | | 5.27 | % | | $ | 1,151 | | | 3.87 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Retirement Services average net invested assets | $ | 149,397 | | | | | $ | 117,295 | | | | | | | | | | | |
| Corporate and Other average net invested assets ex. Apollo investment | 2,247 | | | | | 1,624 | | | | | | | | | | | |
| Consolidated average net invested assets ex. Apollo investment | $ | 151,644 | | | | | $ | 118,919 | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| (In millions, except percentages) | | | | | | | | | Dollar | | Rate | | Dollar | | Rate |
| GAAP net investment income | $ | 820 |
| | 4.23 | % | | $ | 743 |
| | 4.20 | % | | $ | 2,427 |
| | 4.31 | % | | $ | 2,137 |
| | 4.12 | % |
| Reinsurance embedded derivative impacts | 40 |
| | 0.20 | % | | 55 |
| | 0.31 | % | | 137 |
| | 0.25 | % | | 144 |
| | 0.28 | % |
| Net VIE earnings | 27 |
| | 0.14 | % | | (13 | ) | | (0.07 | )% | | 59 |
| | 0.10 | % | | (43 | ) | | (0.08 | )% |
| Alternative income gain (loss) | (4 | ) | | (0.02 | )% | | (2 | ) | | (0.01 | )% | | (11 | ) | | (0.02 | )% | | (34 | ) | | (0.07 | )% |
| Held for trading amortization | (20 | ) | | (0.10 | )% | | (6 | ) | | (0.03 | )% | | (50 | ) | | (0.09 | )% | | (21 | ) | | (0.04 | )% |
| Total adjustments to arrive at net investment earnings/earned rate | 43 |
| | 0.22 | % | | 34 |
| | 0.20 | % | | 135 |
| | 0.24 | % | | 46 |
| | 0.09 | % |
| Total net investment earnings/earned rate | $ | 863 |
| | 4.45 | % | | $ | 777 |
| | 4.40 | % | | $ | 2,562 |
| | 4.55 | % | | $ | 2,183 |
| | 4.21 | % |
| | | | | | | | | | | | | | | | |
| Retirement Services | $ | 811 |
| | 4.64 | % | | $ | 754 |
| | 4.75 | % | | $ | 2,412 |
| | 4.75 | % | | $ | 2,155 |
| | 4.64 | % |
| Corporate and Other | 52 |
| | 2.72 | % | | 23 |
| | 1.26 | % | | 150 |
| | 2.71 | % | | 28 |
| | 0.53 | % |
| Total net investment earnings/earned rate | $ | 863 |
| | 4.45 | % | | $ | 777 |
| | 4.40 | % | | $ | 2,562 |
| | 4.55 | % | | $ | 2,183 |
| | 4.21 | % |
| | | | | | | | | | | | | | | | |
| Retirement Services average invested assets | $ | 69,868 |
| | | | $ | 63,641 |
| | | | $ | 67,722 |
| | | | $ | 62,009 |
| | |
| Corporate and Other average invested assets | 7,673 |
| | | | 7,089 |
| | | | 7,398 |
| | | | 7,120 |
| | |
| Consolidated average invested assets | $ | 77,541 |
| | | | $ | 70,730 |
| | | | $ | 75,120 |
| | | | $ | 69,129 |
| | |
The reconciliation of interest sensitive contract benefits to Retirement Services' cost of crediting on deferred annuities, and the respective rates, is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| (In millions, except percentages) | Dollar | | Rate | | Dollar | | Rate | | Dollar | | Rate | | Dollar | | Rate |
| GAAP interest sensitive contract benefits | $ | 621 |
| | 4.35 | % | | $ | 491 |
| | 3.72 | % | | $ | 1,866 |
| | 4.43 | % | | $ | 1,081 |
| | 2.83 | % |
| Interest credited other than deferred annuities | (41 | ) | | (0.29 | )% | | (34 | ) | | (0.26 | )% | | (109 | ) | | (0.26 | )% | | (91 | ) | | (0.24 | )% |
| FIA option costs | 154 |
| | 1.08 | % | | 141 |
| | 1.07 | % | | 448 |
| | 1.08 | % | | 416 |
| | 1.08 | % |
| Product charges (strategy fees) | (19 | ) | | (0.13 | )% | | (14 | ) | | (0.11 | )% | | (53 | ) | | (0.13 | )% | | (38 | ) | | (0.10 | )% |
| Reinsurance embedded derivative impacts | 9 |
| | 0.06 | % | | 8 |
| | 0.06 | % | | 27 |
| | 0.06 | % | | 21 |
| | 0.05 | % |
| Change in fair value of embedded derivatives – FIAs | (464 | ) | | (3.25 | )% | | (326 | ) | | (2.47 | )% | | (1,397 | ) | | (3.32 | )% | | (669 | ) | | (1.74 | )% |
| Negative VOBA amortization | 8 |
| | 0.06 | % | | 12 |
| | 0.09 | % | | 30 |
| | 0.07 | % | | 36 |
| | 0.09 | % |
| Unit linked change in reserves | — |
| | — | % | | (20 | ) | | (0.15 | )% | | (17 | ) | | (0.04 | )% | | (1 | ) | | — | % |
| Other changes in interest sensitive contract liabilities | — |
| | — | % | | 1 |
| | 0.01 | % | | — |
| | — | % | | — |
| | — | % |
| Total adjustments to arrive at cost of crediting on deferred annuities | (353 | ) | | (2.47 | )% | | (232 | ) | | (1.76 | )% | | (1,071 | ) | | (2.54 | )% | | (326 | ) | | (0.86 | )% |
| Retirement Services cost of crediting on deferred annuities | $ | 268 |
| | 1.88 | % | | $ | 259 |
| | 1.96 | % | | $ | 795 |
| | 1.89 | % | | $ | 755 |
| | 1.97 | % |
| | | | | | | | | | | | | | | | |
| Average account value | $ | 57,050 |
| | | | $ | 52,739 |
| | | | $ | 56,102 |
| | | | $ | 51,183 |
| | |
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The reconciliation of interest sensitive contract benefits to Retirement Services’ cost of crediting, and the respective rates, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2021 | | 2020 | | | | |
| (In millions, except percentages) | Dollar | | Rate | | Dollar | | Rate | | | | | | | | |
| GAAP interest sensitive contract benefits | $ | 394 | | | 1.05 | % | | $ | (1,319) | | | (4.50) | % | | | | | | | | |
| Interest credited other than deferred annuities and institutional products | 97 | | | 0.26 | % | | 63 | | | 0.21 | % | | | | | | | | |
| FIA option costs | 279 | | | 0.75 | % | | 266 | | | 0.91 | % | | | | | | | | |
| Product charges (strategy fees) | (38) | | | (0.10) | % | | (32) | | | (0.11) | % | | | | | | | | |
| Reinsurance embedded derivative impacts | 14 | | | 0.04 | % | | 14 | | | 0.05 | % | | | | | | | | |
| Change in fair value of embedded derivatives – FIAs | 43 | | | 0.11 | % | | 1,504 | | | 5.13 | % | | | | | | | | |
| Negative VOBA amortization | 3 | | | 0.01 | % | | 7 | | | 0.02 | % | | | | | | | | |
| ACRA noncontrolling interest | (128) | | | (0.34) | % | | 38 | | | 0.13 | % | | | | | | | | |
| Other changes in interest sensitive contract liabilities | 4 | | | 0.01 | % | | (1) | | | 0.00 | % | | | | | | | | |
| Total adjustments to arrive at cost of crediting | 274 | | | 0.74 | % | | 1,859 | | | 6.34 | % | | | | | | | | |
| Retirement Services cost of crediting | $ | 668 | | | 1.79 | % | | $ | 540 | | | 1.84 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Retirement Services cost of crediting on deferred annuities | $ | 493 | | | 1.89 | % | | $ | 422 | | | 1.91 | % | | | | | | | | |
| Retirement Services cost of crediting on institutional products | 175 | | | 2.59 | % | | 118 | | | 3.31 | % | | | | | | | | |
| Retirement Services cost of crediting | $ | 668 | | | 1.79 | % | | $ | 540 | | | 1.84 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Retirement Services average net invested assets | $ | 149,397 | | | | | $ | 117,295 | | | | | | | | | | | |
| Average account value on deferred annuities | 104,310 | | | | | 88,119 | | | | | | | | | | | |
| Average net institutional reserve liabilities | 27,028 | | | | | 14,250 | | | | | | | | | | | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The reconciliation of GAAP benefits and expenses to other liability costs is as follows:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| (In millions) | 2021 | | 2020 | | | | |
| GAAP benefits and expenses | $ | 4,252 | | | $ | (167) | | | | | |
| Premiums | (3,011) | | | (1,140) | | | | | |
| Product charges | (150) | | | (140) | | | | | |
| Other revenues | (14) | | | 2 | | | | | |
| Cost of crediting | (375) | | | (259) | | | | | |
| Change in fair value of embedded derivatives – FIA, net of offsets | (298) | | | 1,456 | | | | | |
| DAC, DSI and VOBA amortization related to investment gains and losses | 139 | | | 425 | | | | | |
| Rider reserves related to investment gains and losses | 21 | | | 76 | | | | | |
| Policy and other operating expenses, excluding policy acquisition expenses | (201) | | | (117) | | | | | |
| | | | | | | |
| AmerUs closed block fair value liability | 93 | | | 45 | | | | | |
| ACRA noncontrolling interest | (107) | | | 165 | | | | | |
| Other changes in benefits and expenses | (7) | | | (4) | | | | | |
| Total adjustments to arrive at other liability costs | (3,910) | | | 509 | | | | | |
| Other liability costs | $ | 342 | | | $ | 342 | | | | | |
| | | | | | | |
| Retirement Services | $ | 342 | | | $ | 342 | | | | | |
| Corporate and Other | — | | | — | | | | | |
| Consolidated other liability costs | $ | 342 | | | $ | 342 | | | | | |
The reconciliation of policy and other operating expenses to operating expenses is as follows:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| (In millions) | 2021 | | 2020 | | | | |
| GAAP policy and other operating expenses | $ | 283 | | | $ | 188 | | | | | |
| Interest expense | (32) | | | (20) | | | | | |
| Policy acquisition expenses, net of deferrals | (82) | | | (71) | | | | | |
| Integration, restructuring and other non-operating expenses | (45) | | | (4) | | | | | |
| Stock compensation expenses | — | | | (10) | | | | | |
| ACRA noncontrolling interest | (21) | | | (4) | | | | | |
| Other changes in policy and other operating expenses | (5) | | | — | | | | | |
| Total adjustments to arrive at operating expenses | (185) | | | (109) | | | | | |
| Operating expenses | $ | 98 | | | $ | 79 | | | | | |
| | | | | | | |
| Retirement Services | $ | 78 | | | $ | 68 | | | | | |
| Corporate and Other | 20 | | | 11 | | | | | |
| Consolidated operating expenses | $ | 98 | | | $ | 79 | | | | | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The reconciliation of total investments, including related parties, to net invested assets is as follows:
| | | | | | | | | | | |
| (In millions) | March 31, 2021 | | December 31, 2020 |
| Total investments, including related parties | $ | 185,951 | | | $ | 182,421 | |
| Derivative assets | (3,677) | | | (3,523) | |
| Cash and cash equivalents (including restricted cash) | 6,973 | | | 8,442 | |
| Accrued investment income | 968 | | | 905 | |
| Payables for collateral on derivatives | (3,353) | | | (3,203) | |
| Reinsurance funds withheld and modified coinsurance | (572) | | | (2,459) | |
| VIE and VOE assets, liabilities and noncontrolling interest | (70) | | | (136) | |
| Unrealized (gains) losses | (3,685) | | | (7,275) | |
| Ceded policy loans | (199) | | | (204) | |
| Net investment receivables (payables) | (402) | | | 99 | |
| Allowance for credit losses | 362 | | | 357 | |
| Total adjustments to arrive at gross invested assets | (3,655) | | | (6,997) | |
| Gross invested assets | 182,296 | | | 175,424 | |
| ACRA noncontrolling interest | (26,593) | | | (25,234) | |
| Net invested assets | $ | 155,703 | | | $ | 150,190 | |
|
| | | | | | | |
| (In millions) | September 30, 2017 | | December 31, 2016 |
| Total investments, including related parties | $ | 81,183 |
| | $ | 72,433 |
|
| Derivative assets | (1,982 | ) | | (1,370 | ) |
| Cash and cash equivalents (including restricted cash) | 3,707 |
| | 2,502 |
|
| Accrued investment income | 626 |
| | 554 |
|
| Payables for collateral on derivatives | (1,896 | ) | | (1,383 | ) |
| Reinsurance funds withheld and modified coinsurance | (537 | ) | | (414 | ) |
| VIE assets, liabilities and noncontrolling interest | 918 |
| | 886 |
|
| AFS unrealized (gain) loss | (2,594 | ) | | (1,030 | ) |
| Ceded policy loans | (325 | ) | | (344 | ) |
| Net investment receivables (payables) | (296 | ) | | — |
|
| Total adjustments to arrive at invested assets | (2,379 | ) | | (599 | ) |
| Total invested assets | $ | 78,804 |
| | $ | 71,834 |
|
The reconciliation of total investment funds, including related parties, and VIEs, to net alternative investments within net invested assets is as follows:
| | | | | | | | | | | |
| (In millions) | March 31, 2021 | | December 31, 2020 |
| Investment funds, including related parties | $ | 6,865 | | | $ | 6,087 | |
| Equity securities | 217 | | | 165 | |
| CLO and ABS equities included in trading securities | 1,042 | | | 971 | |
| Investment in Apollo | (1,281) | | | (1,324) | |
| Investment funds within funds withheld at interest | 1,522 | | | 1,155 | |
| Royalties and other assets included in other investments | 140 | | | 66 | |
| | | |
| Unrealized (gains) losses and other adjustments | (24) | | | (44) | |
| ACRA noncontrolling interest | (477) | | | (283) | |
| Total adjustments to arrive at alternative investments | 1,139 | | | 706 | |
| Net alternative investments | $ | 8,004 | | | $ | 6,793 | |
|
| | | | | | | |
| (In millions) | September 30, 2017 | | December 31, 2016 |
| Investment funds, including related parties and VIEs | $ | 2,670 |
| | $ | 2,460 |
|
| CLO equities included in trading securities | 194 |
| | 260 |
|
| Investment funds within funds withheld at interest | 372 |
| | 329 |
|
| Royalties, other assets included in other investments and other assets | 77 |
| | 81 |
|
| Net assets of the VIE, excluding investment funds | 274 |
| | 295 |
|
| Total adjustments to arrive at alternative investments | 917 |
| | 965 |
|
| Alternative investments | $ | 3,587 |
| | $ | 3,425 |
|
The reconciliation of total liabilities to net reserve liabilities is as follows:
| | | | | | | | | | | |
| (In millions) | March 31, 2021 | | December 31, 2020 |
| Total liabilities | $ | 187,334 | | | $ | 182,631 | |
| | | |
| Long-term debt | (1,977) | | | (1,976) | |
| | | |
| Derivative liabilities | (288) | | | (298) | |
| Payables for collateral on derivatives | (3,353) | | | (3,203) | |
| Funds withheld liability | (422) | | | (452) | |
| Other liabilities | (2,436) | | | (2,040) | |
| | | |
| Reinsurance ceded receivables | (4,690) | | | (4,848) | |
| Policy loans ceded | (199) | | | (204) | |
| ACRA noncontrolling interest | (25,625) | | | (24,618) | |
| Other | (5) | | | (3) | |
| Total adjustments to arrive at net reserve liabilities | (38,995) | | | (37,642) | |
| Net reserve liabilities | $ | 148,339 | | | $ | 144,989 | |
|
| | | | | | | |
| (In millions) | September 30, 2017 | | December 31, 2016 |
| Total liabilities | $ | 87,392 |
| | $ | 79,840 |
|
| Derivative liabilities | (92 | ) | | (40 | ) |
| Payables for collateral on derivatives | (1,896 | ) | | (1,383 | ) |
| Funds withheld liability | (394 | ) | | (380 | ) |
| Other liabilities | (1,024 | ) | | (688 | ) |
| Liabilities of consolidated VIEs | (47 | ) | | (34 | ) |
| Reinsurance ceded receivables | (5,768 | ) | | (6,001 | ) |
| Policy loans ceded | (325 | ) | | (344 | ) |
| Other | 4 |
| | 4 |
|
| Total adjustments to arrive at reserve liabilities | (9,542 | ) | | (8,866 | ) |
| Total reserve liabilities | $ | 77,850 |
| | $ | 70,974 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
There are two forms of liquidity relevant to our business, funding liquidity and balance sheet liquidity. Funding liquidity relates to the ability to fund operations. Balance sheet liquidity relates to our ability to liquidate or rebalance our balance sheet without incurring significant costs from fees, bid-offer spreads, or market impact. We manage our liquidity position by matching projected cash demands with adequate sources of cash and other liquid assets. Our principal sources of liquidity, in the ordinary course of business, are operating cash flows and holdings of cash, cash equivalents and other readily marketable assets.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Our investment portfolio is structured to ensure a strong liquidity position over time in order to permit timely payment of policy and contract benefits without requiring asset sales at inopportune times or at depressed prices. In general, liquid assets include cash and cash equivalents, highly rated corporate bonds, unaffiliated preferred stock and unaffiliated public common stock, all of which generally have liquid markets with a large number of buyers. The carrying value of these assets, excluding assets within modified coinsurance and funds withheld portfolios, as of September 30, 2017March 31, 2021 was approximately $48.7$73.2 billion. Assets included in modified coinsurance and funds withheld portfolios are available to fund the benefits for the associated obligations but are restricted from other uses. The carrying value of the underlying assets in these modified coinsurance and funds withheld portfolios that we consider liquid as of March 31, 2021 was $34.3 billion. Although our investment portfolio does contain assets that are generally considered illiquid for liquidity monitoring purposes (primarily mortgage loans, policy loans, real estate, investment funds, and affiliated common stock), there is some ability to raise cash from these assets if needed. In periods of economic downturn, such as the one brought about by the spread of COVID-19, we may maintain higher cash balances than required to manage our liquidity risk and to take advantage of market dislocations as they arise. We have access to additional liquidity through our $1.0$1.25 billion revolving credit facility,agreement, which iswas undrawn as of the date hereofMarch 31, 2021 and hashad a remaining term of approximatelymore than three years.years, subject to up to two one-year extensions. We also have access to a $1.0 billion committed repurchase facility. Our registration statement on Form S-3 ASR (Shelf Registration Statement) provides us access to the capital markets, subject to market conditions and other factors. We are also party to repurchase agreements with several different financial institutions, pursuant to which we may obtain short-term liquidity, to the extent available. In addition, through our membership in the FHLB, of Des Moines (FHLBDM) and Indianapolis (FHLBI), we are eligible to borrow under variable rate short-term federal funds arrangements to provide additional liquidity.
We proactively manage our liquidity position to meet cash needs while minimizing adverse impacts on investment returns. We analyze our cash-flow liquidity over the upcoming 12 months by modeling potential demands on liquidity under a variety of scenarios, taking into account the provisions of our policies and contracts in force, our cash flow position, and the volume of cash and readily marketable securities in our portfolio. By policy, we maintain sufficient liquidity not only to meet our cash-flow requirements over the succeeding 12-month period in a moderately severe scenario (for example, a recessionary environment), but also to have excess liquidity available to invest into potential investment opportunities created from market dislocations. We also monitor our liquidity profile under more severe scenarios.
We perform a number of stress tests and analyses to assess our ability to meet our cash flow requirements, as well as the ability of our reinsurance and insurance subsidiaries to meet their collateral obligations. Among these analyses, we manage to the following ALM limits:
•our projected net cumulative cash flows, including both new business and target levels of new investments under a “plan scenario” and a “moderately severe scenario” event, are non-negative over a rolling 12-month horizon;
•we hold at least $250 millionenough cash, cash equivalents and other discounted liquid limit assets to cover 12 months of AHL’s and AUSA’s projected obligations, including debt servicing costs:
▪minimum of 50% of expenses and 100% of debt servicing to be held in cash and cash equivalents across the group; and at least $150 million in the aggregate in securities with the following characteristics:AHL operating accounts
| |
▪ | public corporate bonds rated A- or above; |
| |
▪ | liquid ABS (defined as prime auto, auto floorplan, Tier 1 subprime auto, auto lease, prime credit cards, equipment lease or utility stranded assets) and RMBS with weighted average lives less than three years rated A- or above; or |
| |
▪ | CMBS with weighted average lives less than three years rated AAA- or above; |
we maintain assets that can be liquidated in one quarter under normal market conditions equal to 25%▪minimum of the policyholder obligations that are deemed50% of any required AHL – AUSA inter-company loan commitments to be mostheld in cash and cash equivalents by AHL
▪dividends from ALRe sufficient to support the ongoing operations of AHL must be available under moderate and substantial stress scenarios
▪for purposes of administering this test, liquid which is definedlimit assets are discounted by 25% and include public corporate bonds rated A- or above, liquid ABS (defined as policiesprime auto, auto floorplan, Tier 1 subprime auto, auto lease, prime credit cards, equipment lease or utility stranded assets); RMBS with a cash surrender value, no income rider, no MVA,weighted average lives less than three years rated A- or above and CMBS with lowerweighted average lives less than 5% surrender charge protection and lower than 3% minimum floor guarantee, if any; andthree years rated AAA- or above
•we seek to maintain sufficient capital and surplus at ALRe to meet the following collateral calls from modco and third-party reinsurance contractscapital maintenance calls under a substantial stress event, such as the failure of a major financial institution (Lehman event).:
▪collateral calls from modco and third-party reinsurance contracts
▪AARe capital maintenance calls arising from AARe collateral calls from modco reinsurance contracts; and
▪US regulated entity capital maintenance calls from nonmodco activity.
Insurance Subsidiaries'Subsidiaries’ Liquidity
Operations
The primary cash flow sources for our insurance subsidiaries include retirement services product inflows (premiums), investment income, principal repayments on our investments, and net transfers from separate accounts and financial product deposits.inflows. Uses of cash include investment purchases, payments to policyholders for surrenders, withdrawals and withdrawals,payout benefits, interest and principal payments on funding agreements, payments to satisfy PRT obligations, policy acquisition costs and general operating costs.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our policyholder obligations are generally long-term in nature. However, one liquidity risk is an extraordinary level of early policyholder withdrawals. We include provisions within our annuity policies, such as surrender charges and MVAs, which are intended to protect us from early withdrawals. As of each of September 30, 2017March 31, 2021 and December 31, 2016,2020, approximately 86%75% of our deferred annuity liabilities were subject to penalty upon surrender. In addition, as of September 30, 2017each of March 31, 2021 and December 31, 2016,2020, approximately 72% and 73%, respectively,56% of policies contained MVAs that may also have the effect of limiting early withdrawals if interest rates increase.increase, but may encourage early withdrawals by effectively subsidizing a portion of surrender charges when interest rates decrease. Although interest rates rose during the three months ended March 31, 2021, given the sharp decline in interest rates that occurred during 2020, our MVAs may reduce the surrender charge otherwise required to be paid upon early withdrawal. Our funding agreements, group annuities and payout annuities are generally non-surrenderable.
Membership in Federal Home Loan Bank
Through our membership in the FHLB, we are eligible to borrow under variable rate short-term federal funds arrangements to provide additional liquidity. The borrowings must be secured by eligible collateral such as mortgage loans, eligible CMBS or RMBS, government or agency securities and guaranteed loans. As of each of March 31, 2021 and December 31, 2020, we had $0 million of outstanding borrowings under these arrangements.
We have issued funding agreements to the FHLB. These funding agreements were issued in an investment spread strategy, consistent with other investment spread operations. As of each of March 31, 2021 and December 31, 2020, we had funding agreements outstanding with the FHLB in the aggregate principal amount of $2.0 billion.
The maximum FHLB indebtedness by a member is determined by the amount of collateral pledged, and cannot exceed a specified percentage of the member’s total statutory assets dependent on the internal credit rating assigned to the member by the FHLB. As of March 31, 2021, the total maximum borrowings under the FHLB facilities were limited to $33.3 billion. However, our ability to borrow under the facilities is constrained by the availability of assets that qualify as eligible collateral under the facilities and certain other limitations. Considering these limitations, we estimate that as of March 31, 2021 we had the ability to draw up to a total of approximately $3.7 billion, inclusive of borrowings then outstanding. This estimate is based on our internal analysis and assumptions, and may not accurately measure collateral which is ultimately acceptable to the FHLB. Drawing such amounts would have an adverse impact on AADE’s and/or AAIA’s RBC ratio, which may further restrict our ability or willingness to draw up to our estimated capacity.
Securities Repurchase Agreements
We engage in repurchase transactions whereby we sell fixed income securities to third parties, primarily major brokerage firms or commercial banks, with a concurrent agreement to repurchase such securities at a determined future date. We require that, at all times during the term of the repurchase agreements, we maintain sufficient cash or other liquid assets sufficient to allow us to fund substantially all of the repurchase price. Proceeds received from the sale of securities pursuant to these arrangements are generally invested in short-term investments, with the offsetting obligation to repurchase the security included within payables for collateral on derivatives and securities to repurchase on the condensed consolidated balance sheets. As per the terms of the repurchase agreements, we monitor the market value of the securities sold and may be required to deliver additional collateral (which may be in the form of cash or additional securities) to the extent that the value of the securities sold decreases prior to the repurchase date.
As of March 31, 2021, the fair value of securities and collateral held by counterparties and payables for repurchase agreements was $603 million and $599 million, respectively.
On May 1, 2020, we signed a $1.0 billion committed repurchase facility with BNP Paribas. The facility has an initial commitment period of 12 months and automatically renews for successive 12-month periods until terminated by either party. During the commitment period, we may sell and BNP Paribas is required to purchase eligible investment grade corporate bonds pursuant to repurchase transactions at pre-agreed discounts in exchange for a 41 basis points per annum commitment fee. As of March 31, 2021, we had no outstanding payables under this facility.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Cash Flows
Our cash flows were as follows:
| | | | | | | | | | | |
| Three months ended March 31, |
| (In millions) | 2021 | | 2020 |
| Net income (loss) | $ | 77 | | | $ | (1,216) | |
| | | |
| Non-cash revenues and expenses | 1,549 | | | 1,987 | |
| Net cash provided by operating activities | 1,626 | | | 771 | |
| Sales, maturities and repayments of investments | 5,230 | | | 6,214 | |
| Purchases of investments | (12,570) | | | (6,476) | |
| | | |
| Other investing activities | 457 | | | (116) | |
| Net cash used in investing activities | (6,883) | | | (378) | |
| Issuance of common stock | 1 | | | 350 | |
| Net proceeds and repayments of debt | — | | | (75) | |
| Inflows on investment-type policies and contracts | 5,162 | | | 2,838 | |
| Withdrawals on investment-type policies and contracts | (1,684) | | | (1,633) | |
| Net capital contributions and distributions to/from noncontrolling interests | 235 | | | 194 | |
| Net change in cash collateral posted for derivative transactions and securities to repurchase | 151 | | | (372) | |
| | | |
| Preferred stock dividends | (36) | | | (18) | |
| Repurchase of common stock | (4) | | | (328) | |
| | | |
| Other financing activities | (37) | | | 14 | |
| Net cash provided by financing activities | 3,788 | | | 970 | |
| Effect of exchange rate changes on cash and cash equivalents | — | | | (22) | |
Net (decrease) increase in cash and cash equivalents1 | $ | (1,469) | | | $ | 1,341 | |
| | | |
1 Includes cash and cash equivalents and restricted cash. |
|
| | | | | | | |
| | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 |
| Net income | $ | 984 |
| | $ | 404 |
|
| Non-cash revenues and expenses | 358 |
| | 560 |
|
| Net cash provided by operating activities | 1,342 |
| | 964 |
|
| | | | |
| Sales, maturities, and repayment of investments | 12,724 |
| | 9,595 |
|
| Purchases and acquisitions of investments | (17,518 | ) | | (11,391 | ) |
| Other investing activities | 292 |
| | 114 |
|
| Net cash used in investing activities | (4,502 | ) | | (1,682 | ) |
| | | | |
| Capital contributions | — |
| | 1 |
|
| Deposits on investment-type policies and contracts | 7,521 |
| | 4,189 |
|
| Withdrawals on investment-type policies and contracts | (3,701 | ) | | (3,516 | ) |
| Net changes of cash collateral posted for derivative transactions | 513 |
| | 254 |
|
| Consolidated VIE repayment on borrowings | — |
| | (500 | ) |
| Other financing activities | (54 | ) | | 139 |
|
| Net cash provided by financing activities | 4,279 |
| | 567 |
|
| Effect of exchange rate changes on cash and cash equivalents | 30 |
| | (2 | ) |
Net increase (decrease) in cash and cash equivalents1 | $ | 1,149 |
| | $ | (153 | ) |
| | | | |
1 Includes cash and cash equivalents of consolidated VIEs |
Cash flows from operating activities
The primary cash inflows from operating activities include net investment income, annuity considerations and insurance premiums. The primary cash outflows from operating activities are comprised of benefit payments interest credited to policyholders, and operating expenses. Our operating activities generated cash flows totaling $1.3$1.6 billion and $964$771 million for the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, respectively. The increase in cash provided by operating activities for the nine months ended September 30, 2017 compared to 2016 was primarily driven by the increase in net investment income reflecting an increase in our investment portfolio attributed to the strong growth in deposits over the prior twelve months.higher cash received from PRT transactions.
Cash flows from investing activities
The primary cash inflows from investing activities are the sales, maturities and repayments of investments. The primary cash outflows from investing activities are the purchases and acquisitions of new investments. Our investing activities used cash flows totaling $4.5$6.9 billion and $1.7 billion$378 million for the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, respectively. The changeincrease in cash used in investing activities for the nine months ended September 30, 2017 compared to 2016 was primarily attributed to the purchase of investments relatedan increase in purchases due to the increase in deposits over liability outflowsdeployment of significant cash inflows from organic growth, as well as a higher amount of sales in the reinvestment of earnings.prior year to increase liquidity in response to the economic environment during that period.
Cash flows from financing activities
The primary cash inflows from financing activities are depositsinflows on our investment-type policies, changes of cash collateral posted for derivative transactions, capital contributions and proceeds from borrowing activities. The primary cash outflows from financing activities are withdrawals on our investment-type policies, changes of cash collateral posted for derivative transactions, repayments of outstanding borrowings, repurchases of common stock and repayments from borrowing activities.payment of preferred stock dividends. Our financing activities provided cash flows totaling $4.3$3.8 billion and $567 million$1.0 billion for the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, respectively. The changeincrease in cash provided fromby financing activities for the nine months ended September 30, 2017 was primarily attributed to the increase in deposits overhigher investment-type inflows from retail and funding agreements net of liability outflows, the favorable change in cash collateral posted for derivative transactions anddriven by favorable equity market performance in the settling of borrowings of our CMBS VIE fundscurrent quarter compared to unfavorable performance in the prior year.year quarter, a decrease in repurchases of common stock and the repayment of $75 million of short-term debt in the prior year quarter, partially offset by the issuance of stock in connection with the strategic transaction with Apollo in the prior year quarter.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Holding Company Liquidity
Dividends from Subsidiaries
AHL is a holding company whose primary liquidity needs include the cash-flow requirements relating to its corporate activities, including its day-to-day operations, debt servicing, preferred stock dividend payments and strategic transactions, such as acquisitions. The primary source of AHL’s cash flow is dividends from its subsidiaries, which are expected to be adequate to fund cash flow requirements based on current estimates of future obligations. As of September 30, 2017, AHL had no financial leverage.
The ability of AHL’s insurance subsidiaries to pay dividends is limited by applicable laws and regulations of the jurisdictions where the subsidiaries are domiciled, as well as agreements entered into with regulators. These laws and regulations require, among other things, the insurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay.
Subject to these limitations and prior notification to the appropriate regulatory agency, the U.S.US insurance subsidiaries are permitted to pay ordinary dividends based on calculations specified under insurance laws of the relevant state of domicile. Any distributions above the amount permitted by statute in any twelve month period are considered to be extraordinary dividends, and require the approval of the appropriate regulator is required prior to payment. In addition, dividends from U.S. insurance subsidiaries to AHL would result in a 30% withholding tax. AHL does not currently plan on having the U.S.US subsidiaries pay any dividends to AHL. Athene Lebensversicherung AG (ALV) and Athene Pensionskasse AG (APK) (the life insurance entities of our German Group Companies) are regulated by BaFin. ALV and APK are restricted as to the payment of dividends pursuant to calculations, which are based upon the analysis of current euro swap rates against existing policyholder guarantees. As of September 30, 2017, ALV and APK did not exceed this threshold and, therefore, no amounts are available for distribution to AHL. As a result, dividendsALRe.
Dividends from ALRe are projected to be the primary source of AHL’s liquidity.
Under the Bermuda Insurance Act, ALRe is prohibited from paying a dividend in an amount exceeding 25% of the prior year’s statutory capital and surplus, unless at least two members of ALRe’s board of directors and its principal representative in Bermuda sign and submit to the BMABermuda Monetary Authority (BMA) an affidavit attesting that a dividend in excess of this amount would not cause ALRe to fail to meet its relevant margins. In certain instances, ALRe would also be required to provide prior notice to the BMA in advance of the payment of dividends. In the event that such an affidavit is submitted to the BMA in accordance with the Bermuda Insurance Act, and further subject to ALRe meeting its relevant margins, ALRe is permitted to distribute up to the sum of 100% of statutory surplus and an amount less than 15% of its total statutory capital. Distributions in excess of this amount require the approval of the BMA.
The maximum distribution permitted by law or contract is not necessarily indicative of our actual ability to pay such distributions, which may be further restricted by business and other considerations, such as the potential imposition of withholding tax and the impact of such distributions on surplus, which could affect our ratings or competitive position and the amount of premiums that can be written. Specifically, the level of capital needed to maintain desired financial strength ratings from rating agencies, including S&P, A.M. Best and Fitch, is of particular concern when determining the amount of capital available for distributions. AHL believes its insurance subsidiaries have sufficient statutory capital and surplus, combined with additional capital available to be provided by AHL, to meet their financial strength ratings objectives. Finally,
state insurance laws and regulations require that the statutory surplus of our insurance subsidiaries following any dividend or distribution must be reasonable in relation to their outstanding liabilities and adequate for the insurance subsidiaries’ financial needs.
Other Sources of Funding
If needed, weWe may seek to secure additional funding at the holding company level by means other than dividends from subsidiaries, such as by drawing on our undrawn $1.0$1.25 billion credit facilityagreement or by pursuing future issuances of debt or equity securities to third-party investors. However, suchCertain other sources of liquidity potentially available at the holding company level are discussed below.
Shelf Registration – Under our Shelf Registration Statement, subject to market conditions, we have the ability to issue, in indeterminate amounts, debt securities, preference shares, depositary shares, Class A common shares, warrants and units.
Debt – On January 12, 2018, we issued $1.0 billion in aggregate principal amount of 4.125% senior notes due 2028 (2028 Notes). On April 3, 2020, we issued $500 million in aggregate principal amount of 6.150% senior unsecured notes due 2030 (2030 Notes). On October 8, 2020, we issued $500 million in aggregate principal amount of 3.500% senior unsecured notes due 2031 (2031 Notes).
Preferred Stock – On June 10, 2019, we issued 34,500 6.35% Fixed-to-Floating Rate Perpetual Non-Cumulative Preference Shares, Series A, par value of $1.00 per share with a liquidation preference of $25,000 per share, for aggregate proceeds of $839 million, net of the underwriters’ discount and estimated expenses.
On September 19, 2019, we issued 13,800 5.625% Fixed-Rate Perpetual Non-Cumulative Preference shares, Series B, par value of $1.00 per share with a liquidation preference of $25,000 per share, for aggregate proceeds of $333 million, net of the underwriters’ discount and estimated expenses.
On June 11, 2020, we issued 24,000 6.375% Fixed-Rate Reset Perpetual Non-Cumulative Preference shares, Series C, par value of $1.00 per share with a liquidation preference of $25,000 per share, for aggregate proceeds of $583 million, net of the underwriters’ discount and estimated expenses.
On December 18, 2020, we issued 23,000 4.875% Fixed-Rate Perpetual Non-Cumulative Preference shares, Series D, par value of $1.00 per share with a liquidation preference of $25,000 per share, for aggregate proceeds of $557 million, net of the underwriters’ discount and estimated expenses. See Note 7 – Equity to the condensed consolidated financial statements for further information.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Intercompany Note – AHL has an unsecured revolving note payable with ALRe, which permits AHL to borrow up to $1 billion with a fixed interest rate of 1.25% and a maturity date of March 31, 2024. As of March 31, 2021 and December 31, 2020, the revolving note payable had an outstanding balance of $25 million and $0 million, respectively.
In light of the spread of COVID-19 and the resulting impact on economic conditions and the financial markets, additional funding of the type described above may not be available on terms favorable to us or at all, depending onall. As a result of the economic consequences of the spread of COVID-19, we have observed an increase in our financial condition or resultscost of operations or prevailing market conditions.debt, though this trend has moderated as economic conditions have begun to stabilize. At the time of issuance, our 2028 Notes had a yield to maturity of 4.14% and a spread to benchmark treasury of T + 160 basis points. At the time of issuance, our 2030 Notes had a yield to maturity of 6.18% and a spread to benchmark treasury of T + 550 basis points. At the time of issuance, our 2031 Notes had a yield to maturity of 3.67% and a spread to benchmark treasury of T + 290 basis points. In addition, certain covenants in our credit facilityagreement prohibit us from incurring anymaintaining debt not expressly permitted thereby, which may limitin excess of specified thresholds. Specifically, our abilitycredit agreement prohibits us from permitting the Consolidated Debt to pursue future issuances of debt.
Membership in Federal Home Loan Bank
We are a member of the FHLBDM and the FHLBI. Membership in a FHLB requires the member to purchase FHLB common stock based on a percentage of the dollar amount of advances outstanding, subject to the investment being greater than or equal to a minimum level. We owned a total of $38 million and $40 million of FHLB common stock as of September 30, 2017 and December 31, 2016, respectively.
Through our membershipCapitalization Ratio (as such term is defined in the FHLBDM and FHLBI, we are eligiblecredit agreement) to borrow under variable rate short-term federal funds arrangements to provide additional liquidity. The borrowings must be secured by eligible collateral such as mortgage loans, eligible CMBS or RMBS, government or agency securities and guaranteed loans. There were no outstanding borrowings under these arrangements as of September 30, 2017 or December 31, 2016.
On August 11, 2016, we provided notice to the FHLBI that ALIC is withdrawing its membership thereto. The FHLBI confirmed receipt of our request on the following day. Pursuant to the FHLBI’s capital plan, ALIC’s membership will be withdrawnexceed 35% as of the fifth anniversaryend of any quarter.
Capital Resources
We believe that we have a strong capital position and that we are well positioned to meet policyholder and other obligations. We measure capital sufficiency using an internal capital model which reflects management’s view on the FHLBI's receipt ofvarious risks inherent to our notice. Until such time that ALIC’s membership is withdrawn, ALIC continues to have all of the rights and obligations of being a member of the FHLBI, except that with respect to some or all of the FHLBI stock that ALIC owns, we will be entitled to a lower dividend amount, to the extent that the FHLBI declares a dividend. ALIC may continue to borrow from the FHLBI, provided that without the consent of the FHLBI, the transaction must mature or otherwise terminate prior to ALIC’s withdrawal of membership.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
We have issued funding agreements to the FHLB in exchange for cash advances. These funding agreements were issued in an investment spread strategy, consistent with other investment spread operations. As of September 30, 2017 and December 31, 2016, we had an aggregate of $623 million and $691 million, respectively, of outstanding FHLB funding agreements. Refer to Note 13 – Commitments and Contingencies to the condensed consolidated financial statements for details of issued funding agreements and related collateral.
The maximum FHLB indebtedness by a member is determined bybusiness, the amount of collateral pledged,capital required to support our core operating strategies and cannot exceedthe amount of capital necessary to maintain our current ratings in a specified percentagerecessionary environment. The amount of the member's total statutory assets dependent on thecapital required to support our core operating strategies is determined based upon internal creditmodeling and analysis of economic risk, as well as inputs from rating assigned to the member by the FHLB. Asagency capital models and consideration of September 30, 2017, the total maximum borrowings under the FHLBDM facility was limited to $15.4 billion. However, our ability to borrow under the facilityNAIC RBC requirements. Capital in excess of this required amount is constrained by the availability of assets that qualify as eligible collateral under the facility and by the Iowa Code requirement that we maintain funds equivalent to our legal reserve in certain permitted investments, from which we exclude pledged assets. Considering these limitations, we estimate that as of September 30, 2017 we had the ability to draw up to a total of approximately $2 billion, inclusive of borrowings then outstanding. This estimate is based on our internal analysis and assumptions, and may not accurately measure collateralconsidered excess equity capital, which is ultimately acceptableavailable to the FHLB. Drawing such amounts would have an adverse impact on AAIA’s RBC ratio, which may further restrict our ability or willingness to draw up to our estimated capacity.deploy.
Capital Resources
As of December 31, 20162020 and 2015,2019, our U.S.US insurance companies'companies’ TAC, as defined by the NAIC, was $1.8$2.7 billion and $1.7$2.4 billion, respectively, and our ALRe statutory capital as defined by the BMA, was $6.1 billion and $5.7 billion, respectively. As of December 31, 2016 and 2015, our U.S.US RBC ratio was 478%425% and 552%429%, respectively, and our BSCR ratio was 228% and 323%, respectively, all above our internal targets. The change in our U.S. RBC as of December 31, 2016 compared to December 31, 2015 was primarily driven by our investment of capital to organically grow our retail channel, which increased significantly during 2016.respectively. Each U.S.US domestic insurance subsidiary’s state of domicile imposes minimum RBC requirements that were developed by the NAIC. The formulas for determining the amount of RBC specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of TAC to ACL.its authorized control level RBC (ACL). Our TAC was significantly in excess of all regulatory standards and above our internal targets as of September 30, 2017, December 31, 20162020 and 2015,2019, respectively.
Bermuda statutory capital and surplus for ALRe was $13.5 billion and $11.0 billion as of December 31, 2020 and 2019, respectively. ALRe adheres to BMA regulatory capital requirements to maintain statutory capital and surplus to meet the MMSminimum margin of solvency and maintain minimum economic balance sheet (EBS) capital and surplus to meet the Enhanced Capital Requirement (ECR). Effective January 1, 2016, in connection with the implementation of its broader regulatory regime, the BMA integrated the EBS framework into the determination of BSCR. The European Commission has granted the BMA's regulatory regime for reinsurance, group solvency calculation and group supervision full equivalence to Solvency II.enhanced capital requirement. Under the EBS framework, ALRe'sALRe’s assets are recorded at market value and its insurance reserves are determined by reference to nine prescribed scenarios, with the scenario resulting in the highest reserve balance being ultimately required to be selected. The ALReALRe’s EBS capital and surplus was $4.4$17.2 billion and $14.1 billion, resulting in a BSCR ratio of 228%,254% and 310% as of December 31, 2016. Although2020 and 2019, respectively. ALRe’s BSCR ratio includes the calculation of the ECR was unchanged from prior year, the BSCR ratios for December 31, 2016 and 2015 are not comparable as the 2015 calculation applied to ALRe's statutory capital and the 2016 calculation now applies to the EBS capitalsurplus of ALRe and surplus. Consistent with the previous regime the MRCall of ALRe’s subsidiaries, including AUSA and AOG subsidiaries. An insurer must have a BSCR ratio of 100% or greater to be considered solvent by the BMA is 100%.BMA. As of September 30, 2017, December 31, 20162020 and 2015,2019, ALRe held the appropriate capital to adhere to these regulatory standards. In evaluatingPrior to the implementation of our internal capital positionmodel, we also utilized an ALRe RBC ratio to analyze and determine the amount of capital needednecessary to support our Retirement Services segment, we reviewcore operating strategies. As of December 31, 2020 and 2019, our ALRe capitalRBC was 460% and 443%, respectively. The ALRe RBC ratio is calculated by applying the NAIC RBC factors.factors to the statutory financial statements of ALRe and ALRe's non-U.S.reinsurance subsidiaries on an aggregate basis with certain adjustments made by management as described in the glossary. We exclude our interests in the AOG units and other subsidiary holding companies from our capital base for purposes of calculating ALRe RBC, but do reflect such interests within our capital analysis, net of risk charges.
Repurchase of Securities
Share Repurchase Program
In December of 2018, our board of directors established a share repurchase program with an initial authorization for the repurchase of up to $250 million of our Class A common shares. In 2019, our board of directors approved four additional authorizations under our share repurchase program for the purchase of up to an additional $1.3 billion of our Class A common shares, in the aggregate, for a total authorization of $1.6 billion. As of December 31, 2016 and 2015, our ALRe RBC ratio was 529% and 468%, respectively, both above our internal targets. Our German Group Companies adhere toMay 10, 2021, we have repurchased, in the regulatory capital requirements set forth by BaFin. Our German Group Companies held the appropriate capital to adhere to these regulatory standards as of December 31, 2016. We believe that we enjoy a strong capital position in lightaggregate, 35.6 million Class A common shares for $1.3 billion since inception of our risksshare repurchase program and thathave $221 million of repurchase authorization remaining. The timing and amount of share repurchases, if any, will be determined by management in accordance with the authority delegated by our board of directors.
Repurchase of Other Securities
We may from time to time seek to retire or purchase our other outstanding debt or equity securities through cash purchases and/or exchanges for other securities, purchases in the open market, privately negotiated transactions or otherwise. Any such repurchases will be dependent upon several factors, including our liquidity requirements, contractual restrictions, general market conditions and applicable regulatory, legal and accounting factors. Whether or not we are well positioned to meet policyholder and other obligations. We also believe that our strong capital position, as well as our excess capital position, provides us the opportunity to take advantage of market dislocations as they arise.
Balance Sheet and Other Arrangements
Balance Sheet Arrangements
Contractual Obligations
As of September 30, 2017, there have been no significant changes to contractual obligations since December 31, 2016. See Part II—Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2016 Annual Report.
Other
In the normal course of business, we invest in various investment funds which are considered VIEs, and we consolidate a VIE when we are considered the primary beneficiary of the entity. For further discussionrepurchase any of our involvement with VIEs, see Note 4 – Variable Interest Entities toother securities and the condensed consolidated financial statements.size and timing of any such repurchases will be determined at our discretion.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Balance Sheet and Other Arrangements
Balance Sheet Arrangements
Contractual Obligations
There have been no material changes to our contractual obligations from those previously disclosed in our 2020 Annual Report.
Off Balance Sheet Arrangements
None.
Critical Accounting Estimates and Judgments
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Amounts based on such estimates involve numerous assumptions subject to varying and potentially significant degrees of judgment and uncertainty, particularly related to the future performance of the underlying business, and will likely change in the future as additional information becomes available. Critical estimates and assumptions are evaluated on an ongoing basis based on historical developments, market conditions, industry trends and other information that is reasonable under the circumstances. There can be no assurance that actual results will conform to estimates and assumptions and that reported results of operations will not be materially affected by the need to make future accounting adjustments to reflect periodic changes in these estimates and assumptions. Critical accounting estimates are impacted significantly by our methods, judgments and assumptions used in the preparation of the consolidated financial statements and should be read in conjunction with our significant accounting policies described in Note 1 – Business, Basis of Presentation and Significant Accounting Policies to the consolidated financial statements of our 20162020 Annual Report. The most critical accounting estimates and judgments include those used in determining:
•fair value of investments;
impairment of investments and valuation•credit loss allowances;
•future policy benefit reserves;
•derivatives valuation, including embedded derivatives;
•deferred acquisition costs, deferred sales inducements and value of business acquired;
stock-based compensation;
•consolidation of VIEs; and
•valuation allowances on deferred tax assets.
The above critical accounting estimates and judgments are discussed in detail in Part II—Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of OperationsOperations—Critical Accounting Estimates and Judgments of our 20162020 Annual Report.
See Note 1 – Business, Basis of Presentation and Significant Accounting Policies to the condensed consolidated financial statements included in Part I—Item 1. Financial Statements for adoption of new and future accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
We regularly analyze our exposure to market risks, which reflect potential losses in value due to credit and counterparty risk, interest rate risk, currency risk, commodity price risk and equity price risk. As a result of that analysis, we have determined that we are primarily exposed to credit risk, interest rate risk and to a lesser extent, equity price risk. A description of our market risk exposures, including strategies used to manage our exposure to market risk, may be found under Part II—Item 7A. Quantitative and Qualitative Disclosures About Market Risk of the 2016our 2020 Annual Report.
Assuming a 25 basis points increase in interest rates persists for a 12-month period, the estimated impact to operating income, net of tax, would be an increase of approximately $25 – $30 million. This is driven by an increase in investment income from floating rate assets, offset by DAC, DSI and VOBA amortization and rider reserve change, all calculated without regard to future changes to assumptions.
There have been no other material changes to our market risk exposures from the market risk exposuresthose previously disclosed in the 2016our 2020 Annual Report.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as such term is defined under Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation, as of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at attaining the level of reasonable assurance noted above.
Changes in Internal Control Over Financial Reporting
There were no changes to the Company’sour internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the quarter ended September 30, 2017,March 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to litigation arising in the ordinary course of our business, including litigation principally relating to our FIA business. We cannot assure you that our insurance coverage will be adequate to cover all liabilities arising out of such claims. WeThe outcomes of legal proceedings and claims brought against us are not engagedsubject to significant uncertainty. There is significant judgment required in assessing both the probability of an adverse outcome and the determination as to whether an exposure can be reasonably estimated. In management’s opinion, the ultimate disposition of any current legal proceeding that we believeor claim brought against us will benot have a material toeffect on our business, financial condition, results of operations or cash flows. Litigation is, however, inherently uncertain and an adverse outcome from such litigation could have a material effect on the operating results of a particular reporting period.
From time to time, in the ordinary course of business and like others in the insurance and financial services industries, we receive requests for information from government agencies in connection with such agencies’ regulatory or investigatory authority. Such requests can include financial or market conduct examinations, subpoenas or demand letters for documents to assist the government in audits or investigations. We and each of our U.S.US insurance subsidiaries review such requests and notices and take appropriate action. We have been subject to certain requests for information and investigations in the past and could be subject to them in the future.
For a description of certain legal proceedings affecting us, refer to see Note 1310 – Commitments and Contingencies – Litigation, Claims and Assessments to the condensed consolidated financial statements.
Item 1A. Risk Factors
The following should be read in conjunction with, and supplementssupplement and amends,amend, the factors that may affect our business or operations described in Part I—I–Item 1A. Risk Factors of our 20162020 Annual Report. Other than as described in this Item 1A, there have been no material changes to our risk factors from the risk factors previously disclosed in our 20162020 Annual Report.
The following updates and supplements the risk factors described in our 2020 Annual Report:
Risks Relating to Our Businessthe Proposed Merger between Us and AGM
CertainThere are a number of our investmentsrequired approvals and other closing conditions in RMBS securitiesaddition to shareholder approvals which may experience a decline in value if trustees are permitted to withhold funds to meet expenses and/prevent or claims incurred in connection with litigation against such trustees
In June 2017, Wells Fargo, National Association (Wells Fargo), as trustee of certain pre-crisis residential mortgage-backed securities (Legacy RMBS) transactions, notified certificateholders that it withheld a portiondelay completion of the fundsmergers.
The mergers are subject to a number of conditions to closing as specified in the merger agreement. These closing conditions include, among others, (i) receipt of the required approval of the (a) AGM merger agreement proposal and (b) AHL merger agreement proposal; (ii) the authorizations, consents, orders or approvals of, or declarations or filings with, and the expiration of waiting periods required from, certain governmental authorities having been obtained and being in full force and effect; (iii) there being in effect no injunction, judgment, ruling or law enacted, promulgated, issued, entered, amended or enforced by any governmental authority enjoining, restraining or otherwise making illegal or prohibiting the consummation of the mergers; (iv) the SEC having declared the registration statement on Form S-4 effective under the Securities Act, there being no stop order in effect by the SEC suspending the effectiveness of the registration statement and there being no pending proceedings for that purpose; (v) the accuracy of the representations and warranties of the other party to the extent required under the merger agreement; (vi) in the case of each of AGM, AHL and HoldCo’s compliance with, in all material respects, each of the covenants, obligations and agreements it is required to comply with or perform at or prior to the effective times of the mergers and issuance to the other party or parties, as applicable, of a certificate signed by an executive officer of the party to such effect; and (vii) since the date of the merger agreement there must not have occurred and be continuing any (a) state of facts, circumstance, condition, event, change, development, occurrence, result, effect, action or omission that has had or would reasonably be expected to have, individually in the aggregate, a material adverse effect with respect to the other party or (b) material adverse effect with respect to the other party. In addition, the obligations of HoldCo to effect the mergers are subject to:
•AGM and AHL having received during related clean-up callsa written tax opinion from AGM’s counsel and AHL’s counsel, respectively, or a nationally recognized accounting firm or law firm reasonably acceptable to meet litigation expenses (both incurredAGM or AHL, as applicable, in form and anticipated) and/substance reasonably satisfactory to AGM and AHL, respectively, dated as of the closing date, to the effect that, based on the AGM tax representation letter and the AHL tax representation letter, the mergers and the exchange of the AOG units, taken together, will be treated as a transaction described in Section 351 of the Internal Revenue Code of 1986 (Code), dated as of the closing date; and
•the completion, or claimsthe completion concurrently with the closing, in connection with Blackrock, et al. v. Wells Fargo (Blackrock Litigation). The Blackrock Litigation is oneall respects of the restructuring involving AGM and its subsidiaries, among others, pursuant to which (i) all AOG units held of record or beneficially by persons other than AGM, AHL and their respective subsidiaries will be exchanged, in a series of cases various parties have brought against trusteessteps, for shares of Legacy RMBS transactions forcommon stock of HoldCo (HoldCo Shares) or other consideration and (ii) the alleged failureonly outstanding class of such trustees to perform their respective duties and obligations under the related transaction documents.
In July 2017, various funds managed by Pacific Investment Management Company, LLC (collectively, PIMCO) brought a declaratory judgment action in the Supreme Court of New York against Wells Fargo seeking to prevent Wells Fargo from paying any portioncommon stock outstanding upon consummation of the defense costsrestructuring shall be AGM’s Class A common stock or the HoldCo Shares.
No assurance can be given that the required stockholder and shareholder consents and approvals, as applicable, will be obtained or that the required conditions to closing will be satisfied, and, if all required consents and approvals are obtained and the conditions are satisfied, no assurance can be given as to the terms, conditions and timing of the Blackrock Litigationconsents and approvals. Any delay in completing the mergers could cause HoldCo not to realize, or to be delayed in realizing, some or all of the benefits that we expect to achieve if the mergers are successfully completed within their expected time frame.
Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot be met.
Before the transactions contemplated by the merger agreement and the corporate governance updates can be completed, various approvals must be obtained from the trusts at issue in the litigation, and claiming that Wells Fargo, as trustee, breached certain duties to investors. In September 2017, Wells Fargo filed a motion to dismiss the claims brought by PIMCO.
It is not known at this time whether Wells Fargo will seek to withhold funds from other Legacy RMBS transactions or whether other RMBS trustees will attempt to take similar action. We hold a substantial Legacy RMBS portfolio, the ratings, yield and value of which could be adversely affected if Wells Fargo or other RMBS trustees have established, or attempt to establish, similar reserves in other Legacy RMBS transactions.
Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021 may adversely affect the value of our investment portfolio and may further affect our ability to issue funding agreements bearing a floating rate of interest
Regulators and law enforcementregulatory agencies in the UKUnited States and elsewhereother countries. In deciding whether to grant these approvals, the relevant governmental entities will consider a variety of factors, including the regulatory standing of each of the parties. An adverse development in either party’s regulatory standing or other factors could result in an inability to obtain one or more of the required regulatory approvals or delay receipt of required approvals.
The terms of the approvals that are conducting civil and criminal investigations into whethergranted may impose conditions, limitations, obligations or costs, or place restrictions on the banks that contribute to the British Bankers’ Association (BBA) in connection with the calculationconduct of daily LIBOR may have been under-reportingAGM’s or otherwise manipulatingAHL’s business or attempting to manipulate LIBOR. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to this alleged manipulation of LIBOR.
Actions by the BBA, regulators or law enforcement agencies may result inrequire changes to the manner in which LIBOR is determinedterms of the transactions contemplated by the merger agreement and the corporate governance updates. There can be no assurance that regulators will not impose any such conditions, limitations, obligations or the establishment of alternative reference rates. For example, on July 27, 2017, the U.K. Financial Conduct Authority announcedrestrictions and that it intends to stop persuadingsuch conditions, limitations, obligations or compelling banks to submit LIBOR rates after 2021. At this time, it isrestrictions will not possible to predicthave the effect of delaying the completion of any of the transactions contemplated by the merger agreement and the corporate governance updates, imposing additional material costs on or otherwise reducing the anticipated benefits of the mergers if the mergers were consummated successfully within the expected timeframe. Nor can there be any assurance that any such changes, any establishment of alternative reference ratesconditions, terms, obligations or any other reforms to LIBOR that may be enactedrestrictions will not result in the UKdelay or elsewhere. Uncertainty as toabandonment of the naturetransaction. Additionally, the completion of such potential changes, alternative reference ratesthe mergers is conditioned on the absence of certain orders or injunctions issued by any court of competent jurisdiction or other reformslegal restraints that would prohibit or make illegal the consummation of any of the transactions contemplated by the merger agreement.
The mergers, including uncertainty regarding the mergers, may adversely affect the trading market for LIBOR-based securities, including those held in our investment portfoliocause strategic partners to delay or defer decisions concerning us and may furthercould adversely affect our ability to issue funding agreements bearing a floating rate of interest. As of September 30, 2017, 28% of our invested assets were floating rate investments, some of which were referenced to LIBOR.
The following updates and replaces the second, fourth and fifth paragraphs of the similarly named risk factor included in our 2016 Annual Report:
We rely significantly on third parties for investment services and certain other services related to our policies, and we may be held responsible for obligations that arise from the acts or omission of third parties under their respective agreements with us if they are deemed to have acted on our behalf.
Many of our subsidiaries’ products and services are sold through third-party intermediaries. In particular, our insurance businesses are reliant on such intermediaries to describe and explain these products and services to potential customers, and although we take precautions to avoid this result, such intermediaries may be deemed to have acted on our behalf. If that occurs, the intentional or unintentional misrepresentation of our subsidiaries’ products and services in advertising materials or other external communications, or inappropriate activities by our personnel or an intermediary could result in liability for us and have an adverse effect on our reputation and business prospects, as well as lead to potential regulatory actions or litigation involving or against us. In addition, as a result of our acquisitions, we rely on third-party administrators (TPAs) to administer a portion of our annuity contracts, as well as a small amount of legacy life insurance business. We currently rely on these TPAs to administer a number of our policies. Some of our reinsurers also use TPAs to administer business reinsured to them by us. To the extent any of these TPAs do not administer such business appropriately, we may experience customer complaints, regulatory intervention and other adverse impacts, which could affect our future growth and profitability. If any of these TPAs or their employees are found to have made material misrepresentations to our policyholders, violated applicable insurance, privacy or other laws and regulations or otherwise engaged in misconduct, we could be held liable for their actions, which could adversely affect our reputation and business prospects, as well as lead to potential regulatory actions or litigation against us. Our U.S. insurance subsidiaries have experienced increased service and administration complaints related to the conversion and administration of the Aviva USA life insurance policies reinsured to affiliates of Global Atlantic by the TPA retained by such Global Atlantic affiliates to provide services on such policies, as well as on certain annuity policies that were on Aviva USA’s life systems that were also converted to and are being administered by the same TPA. As a result of these increased complaints and service-related issues, our U.S. insurance subsidiaries may be subject to increased regulatory scrutiny, including fines and penalties, and policyholder litigation. To date, the New York State Department of Financial Services is in the process of conducting a market conduct examination and the Texas Department of Insurance has notified us that it intends to undertake an enforcement proceeding, in each case, relating to the treatment of policyholders subject to our reinsurance agreements with affiliates of Global Atlantic and the conversion of such annuity policies, including the administration of such blocks by such TPA. Additionally, if any of our TPAs fails to perform in accordance with our standards, we may incur additional costs in connection with finding and retaining new TPAs, which may divert the time and attention of our senior management fromeffectively manage our business.
Further, on April 6, 2016,The mergers will happen only if the DOL issuedstated conditions are met, including the fiduciary rule which imposes upon third parties who sell annuities within Employee Retirement Income Security Act of 1974 (as amended, ERISA) plans or to individual retirement account (IRA) holders a fiduciary duty to retirement investors. For the year ended December 31, 2016, of our total deposits of $8.8 billion from our organic channels, 42% was associated with sales of FIAs to employee benefit plans and IRAs and 14% was associated with traditional fixed annuities sold to employee benefit plans and IRAs. The requirementsadoption of the fiduciary rule were originally scheduled to begin to be implemented on April 10, 2017, with full implementation on January 1, 2018. The DOL delayedmerger agreement by AGM’s stockholders and the applicability dateapproval of the fiduciary rule for 60-daysAHL merger agreement proposal by AHL’s shareholders, among other conditions. Many of the conditions are outside our control, and both parties also have certain rights to June 9, 2017 and, in addition to delayingterminate the applicability date, the DOL adjusted the exemption requirements that apply to sales in the interim period starting June 9, 2017 until the full compliance date of January 1, 2018. On July 6, 2017, the DOL issued a request for information (RFI)merger agreement. Accordingly, there may be uncertainty regarding the fiduciary rule. The DOL indicated that the information gathered from the responses to the RFI “could form the basis of new exemptions or changes/revisions”. Along with the request for comments about the fiduciary rule and its impact, the DOL asked for commentary regarding the potential impact of extending the January 1, 2018 full compliance date. On August 9, 2017, the DOL submitted to the Office of Management and Budget a proposal to extend the January 1, 2018 full implementation date to July 1, 2019. In order for the extension to become effective, the proposal must be finalized and issued in the Federal Register before January 1, 2018. We are assisting our distribution partners with the interim requirements.
The fiduciary rule's obligations for distributors of products to retirement accounts may result in additional compliance costs to us, regulatory scrutiny and litigation, as well as reduced product sales. Since the fiduciary rule is in the process of being implemented, we are not able to assess the actual impact that such regulations may have on us and our associates. If the fiduciary rule is fully implemented in its current form, our results of operations and financial condition may be negatively impacted as we implement the fiduciary rule’s numerous requirements.
Risks Relating to Insurance and Other Regulatory Matters
The following updates and replaces the specified paragraphscompletion of the similarly named sectionsmergers. This uncertainty may cause strategic partners or others that deal with us to delay or defer entering into contracts with us or making other decisions concerning us or seek to change or cancel existing business relationships with us, which could negatively affect our business. Any delay or deferral of the risk factor entitled “Changesthose decisions or changes in the laws and regulations governing the insurance industry or otherwise applicable to our business, including the DOL fiduciary regulation, mayexisting agreements could have a material adverse effect on our business, regardless of whether the mergers are ultimately completed.
In addition, the merger agreement restricts us from making certain acquisitions and taking other specified actions until the mergers occur without the consent of the other parties (such consent not to be unreasonably withheld, conditioned or delayed). These restrictions may prevent us from pursuing attractive business opportunities or strategic transactions that may arise prior to the completion of the mergers.
The merger agreement may be terminated in accordance with its terms, the mergers may not be consummated and we could be negatively impacted.
Either AGM or AHL may terminate the merger agreement under certain circumstances, including, among other reasons, if the mergers are not completed by June 30, 2022. In addition, if the merger agreement is terminated under certain circumstances specified in the merger agreement, AGM may be required to pay AHL a termination fee of $81,900,000, including certain circumstances in which the AGM board of directors makes or publicly proposes to make a change in its recommendation in support of the transaction, amongst other things.
If the mergers are not completed for any reason, including as a result of AGM stockholders or holders of AHL common shares and AHL preferred shares failing to adopt the merger agreement, our ongoing business may be adversely affected and, without realizing any of the benefits of having completed the mergers, we would be subject to a number of risks, including the following:
•we may experience negative reactions from the financial markets, including negative impacts on our share price;
•we may experience negative reactions from our business partners, regulators and employees;
•we will be required to pay certain legal, financing and accounting costs and associated fees and expenses relating to the mergers, whether or not the mergers are completed; and
•matters relating to the mergers require substantial commitments of time and resources by our management, which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to us as an independent company.
Litigation filed in connection with the mergers could prevent or delay the consummation of the mergers or result in the payment of damages following completion of the mergers.
Lawsuits in connection with the mergers may be filed against AGM, AHL, HoldCo, AGM Merger Sub, AHL Merger Sub and/or their respective directors and officers, which could prevent or delay the consummation of the mergers and result in additional costs to us. The ultimate resolution of any lawsuits cannot be predicted with certainty, and an adverse ruling in any such lawsuit may cause the mergers to be delayed or not to be completed, which could cause us not to realize some or all of the anticipated benefits of the mergers. The defense or settlement of any lawsuit or claim that remains unresolved at the time the mergers is consummated may adversely affect HoldCo’s business, financial condition, liquidity, results of operations and prospects” included in our 2016 Annual Report. There have been no material changescash flows. We cannot currently predict the outcome of or reasonably estimate the possible loss or range of loss from any such lawsuits or claims.
Coordinating the businesses of AGM and AHL may be more difficult, costly or time-consuming than expected and HoldCo may fail to other sectionsrealize the anticipated benefits of such risk factor,the mergers, which include: “Non-Bank SIFIs,” “FIAs,” “U.S. Consumer Protection Lawsmay adversely affect HoldCo’s business results and Privacy and Data Security Regulation,” and “NAIC.”negatively affect the value of HoldCo’s Shares following the mergers.
U.S. Federal Oversight
The following updates and replaces the third paragraphsuccess of the “U.S. Federal Oversight” subsection included withinmergers will depend on, among other things, the 2016 Annual Report:
On April 6, 2016, the DOL issuedability of AGM and AHL to coordinate their businesses under HoldCo in a new regulation more broadly defining the circumstances under whichmanner that facilitates growth opportunities. However, AGM and AHL may not be able to successfully coordinate their respective businesses in a person is consideredmanner that permits anticipated growth to be realized, without adversely affecting current revenues and investments. If the combined company is not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully, or at all, or may take longer to realize than expected. Specifically, the following issues, among others, must be addressed in order to realize the anticipated benefits of the mergers so the combined company performs as expected:
•coordinating the businesses of AGM and AHL and meeting the capital requirements of the combined company, in a fiduciary by reason of giving investment advice or recommendationsmanner that permits the combined company to an employee benefit plan or a plan’s participants orachieve the growth anticipated to IRA holders. In addition to releasingresult from the investment advice regulation,mergers;
•coordinating the DOL: (1) issued a new prohibited transaction class exemption, referred to as BICE, tocompanies’ technologies;
•coordinating the companies’ operating practices, internal controls and other policies, procedures and processes;
•addressing possible differences in business backgrounds and corporate cultures;
•coordinating geographically dispersed organizations; and
•effecting actions that may be usedrequired in connection with the sale of FIAs or variable annuities, and (2) updated the previously prohibited transaction class exemption 84-24, to be used in connection with the sale of traditional fixed rate annuities. The April 10, 2017 applicability date for the DOL regulation was delayed to June 9, 2017, in response to a memorandum issued to the DOL by President Trump. obtaining regulatory approvals.
In addition, to delayingat times the applicability dateattention of certain members of either company’s or both companies’ management and resources may be focused on completion of the DOL regulation,mergers and the DOL revised both exemptions, most notably allowing all annuity products, fixed, FIAs and variable annuities, to rely on an updated versioncoordination of the prohibited transaction class exemption 84-24AGM and AHL businesses under HoldCo and diverted from June 9, 2017 through January 1, 2018, atday-to-day business operations, which time full implementationmay disrupt each company’s ongoing business and the business of the DOL regulation is required. On August 9, 2017,combined company.
Furthermore, the DOL submittedboard of directors of HoldCo will consist of the current directors of AGM and certain directors of AHL. Combining the boards of directors of each company into a single HoldCo board could require the reconciliation of differing priorities and philosophies.
An inability to realize the Officefull extent of Managementthe anticipated benefits of the mergers and Budget a proposal to extend the January 1, 2018 full implementation date to July 1, 2019. In order forother transactions contemplated by the extension to become effective, the proposal must be finalized and issuedmerger agreement, as well as any delays encountered in the Federal Register before January 1, 2018. For the year ended December 31, 2016, of our total deposits of approximately $8.8 billion from organic channels, 42% was associated with sales of FIAs to employee benefit plans and IRAs and 14% was associated with traditional fixed annuities sold to employee benefit plans and IRAs. We cannot predict with any certainty the impact of the new regulation and exemptions, but the regulation and exemptions could alter the way our products and services are marketed and sold, particularly to purchasers of IRAs and individual retirement annuities. If implemented in its current form, the DOL regulationcombination process, could have an adverse effect on our ability to write new business.upon the revenues, level of expenses and operating results of the combined company, which may adversely affect the value of the common stock of the combined company after the completion of the mergers. In addition, the NAIC has implemented a working group to updateactual coordination of the current SuitabilityAGM and AHL businesses under HoldCo may result in Annuity Transactions Model Regulation to address the fiduciary standardadditional and unforeseen expenses, and the SEC has indicated that it may propose rules creating a uniform standard of conduct applicable to broker-dealers and investment advisers. The NAIC or SEC rules, if adopted, may affect the distribution of our products. In addition, should the SEC and NAIC rules, if adopted, not align with each other or the finalized DOL regulations, the distribution of our products could be further complicated.
Regulation of Over-The-Counter (OTC) Derivatives
The following updates and replaces the third paragraphanticipated benefits of the "Regulation of Over-The-Counter (OTC) Derivatives" subsection included withincoordination plan may not be realized. If AGM and AHL are not able to adequately address coordination challenges, they may be unable to successfully coordinate their operations or realize the 2016 Annual Report:
The Dodd-Frank Act and the CFTC rules thereunder require us, in connection with certain swap transactions, to comply with mandatory clearing and on-facility trade execution requirements, and it is anticipated that the types of swaps subject to these requirements will be expanded over time. In addition, new regulations require us to comply with mandatory minimum margin requirements for uncleared swaps and, in some instances, uncleared security-based swaps. Uncleared swap variation margin regulations issued by U.S. bank prudential regulators, the CFTC and regulators in certain other jurisdictions, such as the European Union and Canada, generally took effect on March 1, 2017. These regulations require market participants to enter into agreements consistent with the requirements thereunder and a failure to do so could result in trading disruptions. Derivative clearing requirements and mandatory margin requirements could increase the cost of our risk mitigation and could have other implications. For example, increased margin requirements, combined with netting restrictions and restrictions on securities that qualify as eligible collateral, could reduce our liquidity and require increased holdings of cash and highly liquid securities with lower yields causing a reduction in income. In addition, the requirement that certain trades be centrally cleared through clearinghouses subjects us to documentation that is significantly more counterparty-favorable and may entitle counterparties to unilaterally change such terms as trading limits and the amount of margin required. The ability of any such counterparty to take such actions could create trading disruptions and liquidity concerns. Finally, the requirement that certain trades be centrally cleared through clearinghouses concentrates counterparty risk in both clearinghouses and clearing members. The failure of a clearinghouse could have a significant impact on the financial system. Even if a clearinghouse does not fail, large losses could force significant capital calls on clearinghouse members during a financial crisis, which could lead clearinghouse members to default. Because clearinghouses are still developing and the related bankruptcy process is untested, it is difficult to anticipate or identify all actual risks related to the default of a clearinghouse.
Risks Relating to Taxation
The following updates and replaces the similarly named risk factor included in our 2016 Annual Report:
Changes in U.S. tax law might adversely affect us or our shareholders.
The tax treatment of non-U.S. companies and their U.S. and non-U.S. insurance subsidiaries has been the subject of Congressional discussion and legislative proposals. Legislative proposals relating to the tax treatment of non-U.S. companies have been introduced in the past that could, if enacted, materially affect us. Both the U.S. Congress and President Trump’s administration have indicated a desire to reform the U.S. Internal Revenue Code of 1986, as amended. In November, Chairman Brady (R-TX)benefits of the House Committee on Ways and Means released proposed legislation entitled the Tax Cuts and Jobs Act of 2017 (the Proposed Bill). The Proposed Bill would, if enacted, reduce corporate tax rates to 20%, impose a 20% excise tax on payments made by domestic insurers to related foreign insurers under certain circumstances, and significantly accelerate taxable income and therefore cash tax expense by the imposition of other changes which would impact life insurance companies, among others. Although a reduction in the corporate tax rate would generally have a positive impact on the earnings and cash flow of our U.S. companies, the impositioncoordination of the proposed 20% excise tax and other components of the Proposed Bill could, if enacted, add significant expense and have a material adverse effect on our results of operations. two companies.
The Proposed Bill also includes proposals that could, if enacted, affect whether AHL or any of its non-U.S. subsidiaries are treated as a “passive foreign investment company” (PFIC) or a “controlled foreign corporation” (CFC). Whether or not the Proposed Bill is enacted, interpretations of U.S. federal income tax law, including those regarding whether a company is engaged in a trade or business (or has a permanent establishment) within the United States or is a PFIC, or whether U.S. persons are required to include in their gross income “subpart F income” or related person insurance income (RPII) of a CFC, are subject to change, possibly on a retroactive basis. Regulations regarding the application of the PFIC rules to insurance companies and regarding RPII are only in proposed form. Whether or not the Proposed Bill is enacted, new regulations or pronouncements interpreting or clarifying the existing proposed regulations may be forthcoming.
It is possible that the Proposed Bill will be amended significantly before passage, that other legislative proposals could emerge in the future or that no tax legislation is enacted in the near future. Such amendments or future proposals could also have an adverse impact on us. No prediction can be made as to whether any particular proposed legislation will be enacted or, if enacted, what the specific provisions or the effective date of any such legislation would be, or whether it would have any effect on us. As such, we cannot assure you that future legislative, administrative or judicial developments will not result in an increase in the amount of U.S. tax payable by us or by an investor in our Class A common shares or reduce the attractiveness of our products. If any such developments occur, our business, financial condition and results of operation could be materially and adversely affected and could have a material and adverse effect on your investment in our common shares.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Securities
Purchases of common stock made by or on behalf of us or our affiliates during the three months ended September 30, 2017March 31, 2021 are set forth below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | (a) Total number of shares purchased | | (b) Average price paid per share | | (c) Total number of shares purchased as part of publicly announced programs1 | | (d) Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs1 |
| January 1 – January 31, 2021 | | 56,360 | | | $ | 43.14 | | | — | | | $ | 221,408,041 | |
| February 1 – February 28, 2021 | | 71,361 | | | $ | 45.59 | | | — | | | $ | 221,408,041 | |
| March 1 – March 31, 2021 | | — | | | $ | — | | | — | | | $ | 221,408,041 | |
| | | | | | | | |
|
1 Prior to October 28, 2019, we had announced approvals by our board of directors for $967 million of aggregate repurchases under our share repurchase program. Amounts authorized for repurchase under those approvals had been fully used prior to December 31, 2020. On October 28, 2019, we announced that our board of directors had approved an additional $600 million authorization for the repurchase of our Class A common shares. The remaining authorization does not have a definitive expiration date, but may be terminated at any time at the sole discretion of our board of directors. |
|
| | | | | | | | | | |
| Period | (a) Total number of shares purchased1 | (b) Average price paid per share1 | (c) Total number of shares purchased as part of publicly announced programs2 | (d) Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs2 |
| July 1 – July 31, 2017 | 232 |
| $ | 49.61 |
| — |
| $ | — |
|
| August 1 – August 31, 2017 | — |
| $ | — |
| — |
| $ | — |
|
| September 1 – September 30, 2017 | 290 |
| $ | 52.31 |
| — |
| $ | — |
|
| | | | | |
1 Purchases relate to shares withheld (under the terms of employee stock compensation plans) to offset tax withholding obligations that occur upon the delivery of outstanding shares underlying restricted stock units or upon the exercise of stock options. |
2 As of September 30, 2017, our Board of Directors had not authorized any purchases of common stock in connection with a publicly announced plan or program. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
EXHIBIT INDEX
| | | | | |
| Exhibit No. | Description |
| 2.1 | Agreement and Plan of Merger, dated March 8, 2021, by and among Athene Holding Ltd., Apollo Global Management, Inc., Tango Holdings, Inc., Blue Merger Sub, Ltd., and Green Merger Sub, Inc. (incorporated by reference to Exhibit 2.1 to the Form 8-K filed on March 8, 2021). |
| 10.1 | |
| 10.2.1 | |
| 10.2.2 | |
| 10.2.3 | |
| 10.2.4 | |
| 10.2.5 | |
| 10.2.6 | |
| 31.1 | |
| 31.2 | |
| 32.1 | |
| 32.2 | |
| 101.INS | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH | XBRL Taxonomy Extension Schema. |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase. |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase. |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase. |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase. |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | |
| ATHENE HOLDING LTD. |
| |
| Date: May 10, 2021 | ATHENE HOLDING LTD. |
| |
Date: November 7, 2017 | /s/ Martin P. Klein |
| Martin P. Klein |
| Executive Vice President and Chief Financial Officer |
| (principal financial officer and duly authorized signatory) |
EXHIBIT INDEX
|
| |
Exhibit No. | Description |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101.INS | XBRL Instance Document. |
101.SCH | XBRL Taxonomy Extension Schema. |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase. |
101.LAB | XBRL Taxonomy Extension Label Linkbase. |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase. |
101.DEF | XBRL Taxonomy Extension Definition Linkbase. |
