10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 7, 2017
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 |
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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 |
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001-37963 |
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(Commission file number) | ||||||||||
ATHENE HOLDING LTD. | ||||||||||
(Exact name of registrant as specified in its charter) | ||||||||||
Bermuda |
98-0630022 |
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(State or other jurisdiction of |
(I.R.S. Employer |
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incorporation or organization) |
Identification Number) |
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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 ¨
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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
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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 ¨
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Accelerated filer ¨
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Non-accelerated filer x (Do not check if a smaller reporting company)
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Smaller reporting company ¨
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Emerging growth company ¨
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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. ¨
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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
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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 |
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TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
PART II—OTHER INFORMATION
As used in this Form 10-Q, unless the context otherwise indicates, any reference to "Athene," "our Company," "the Company," "us," "we" and "our" refer to Athene Holding Ltd. together with its consolidated subsidiaries and any reference to "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, 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, and Section 21E of the Securities Exchange Act of 1934, as amended.
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,” “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 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 results of operations, financial condition and liquidity may differ materially from those 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—Item 1A. Risk Factors included in this report and Part I—Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2016 (2016 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 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; |
• |
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 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; |
• |
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 Asset Management, L.P. (AAM) or Apollo Asset Management Europe, LLP (AAME) of its investment management or advisory agreements with us and limitations on our ability to terminate such arrangements; |
• |
AAM’s or AAME’s dependence on key executives and inability to attract qualified personnel; |
• |
increased regulation or scrutiny of alternative investment advisers and certain trading methods; |
• |
potential changes to regulations affecting, among other things, transactions with our affiliates, the ability of our subsidiaries to make dividend payments or distributions to us, acquisitions by or of us, minimum capitalization and statutory reserve requirements for insurance companies and fiduciary obligations on parties who distribute our products; |
• |
suspension or revocation of our subsidiaries’ insurance and reinsurance licenses; |
• |
Athene Holding Ltd. (AHL) or Athene Life Re Ltd. (ALRe) becoming subject to U.S. federal income taxation; |
• |
adverse changes in U.S. tax law; |
• |
our being subject to U.S. withholding tax under Foreign Account Tax Compliance Act; |
• |
our potential inability to pay dividends or distributions; and |
• |
other risks and factors listed under Part II—Item 1A. Risk Factors included in this report, Part I—Item 1A. Risk Factors included
|
in our 2016 Annual Report and elsewhere in this report and in our 2016 Annual Report.
3
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. The forward-looking statements included in this report are made only as of the date hereof. 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, LP |
|
AAA |
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 |
|
AAM |
Athene Asset Management, L.P. |
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AAME |
Apollo Asset Management Europe, LLP (together with certain of its affiliates) |
|
ADKG |
Athene Deutschland Holding GmbH & Co. KG |
|
AGER |
AGER Bermuda Holding Ltd. |
|
AHL |
Athene Holding Ltd. |
|
ALIC |
Athene Life Insurance Company |
|
ALRe |
Athene Life Re Ltd. |
|
ALV |
Athene Lebensversicherung AG, formerly known as Delta Lloyd Lebensversicherung AG |
|
AmeriHome |
AmeriHome Mortgage Company, LLC |
|
APK |
Athene Pensionskasse AG, formerly known as Delta Lloyd Pensionskasse AG |
|
Apollo |
Apollo Global Management, LLC |
|
Apollo Group |
(1) Apollo, (2) the AAA Investor, (3) any investment fund or other collective investment vehicle whose general partner or managing member is owned, directly or indirectly, by Apollo or one or more of Apollo’s subsidiaries, (4) BRH Holdings GP, Ltd. and its shareholders and (5) any affiliate of any of the foregoing (except that AHL and its subsidiaries and employees of AHL, its subsidiaries or AAM are not members of the Apollo Group) |
|
Athene USA |
Athene USA Corporation, formerly known as Aviva USA Corporation |
|
CoInvest VI |
AAA Investments (Co-Invest VI), L.P. |
|
CoInvest VII |
AAA Investments (Co-Invest VII), L.P. |
|
CoInvest Other |
AAA Investments (Other), L.P. |
|
DLD |
Delta Lloyd Deutschland AG, now known as Athene Deutschland GmbH |
|
German Group Companies |
Athene Deutschland GmbH, Athene Deutschland Holding GmbH & Co. KG, Athene Deutschland Verwaltungs GmbH, Athene Lebensversicherung AG and Athene Pensionskasse AG |
|
London Prime |
London Prime Apartments Guernsey Holdings Limited |
|
MidCap |
MidCap FinCo Limited |
|
NCL LLC |
NCL Athene, LLC |
|
Sprint |
Apollo Asia Sprint Co-Investment Fund, L.P. |
4
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 |
|
AUM |
Assets under management |
|
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 ALRe calculated under U.S. statutory accounting principles, including that for policyholder reserve liabilities which are subjected to U.S. cash flow testing requirements, but excluding certain items that do not exist under our applicable Bermuda requirements, such as interest maintenance reserves |
|
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 |
|
BMA |
Bermuda Monetary Authority |
|
BSCR |
Bermuda Solvency Capital Requirement |
|
CAL |
Company action level RBC as defined by the model created by the National Association of Insurance Commissioners |
|
CLO |
Collateralized loan obligation |
|
CMBS |
Commercial mortgage-backed securities |
|
Capital ratio |
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 SCR |
|
Cost of crediting |
The interest credited to the policyholders on our fixed annuities, including, with respect to our FIAs, option costs, presented on an annualized basis for interim periods |
|
DAC |
Deferred acquisition costs |
|
Deferred annuities |
FIAs, annual reset annuities and MYGAs |
|
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 an 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 |
|
GLWB |
Guaranteed living withdrawal benefits |
|
GMDB |
Guaranteed minimum death benefits |
|
IMO |
Independent marketing organization |
|
Invested assets |
The sum of (a) total investments on the consolidated balance sheet with AFS 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). 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) |
|
Investment margin |
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 |
5
Term or Acronym |
Definition |
|
NAIC |
National Association of Insurance Commissioners |
|
Net investment earned rate |
Income from our invested assets divided by the average invested assets for the relevant period, presented on an annualized basis for interim periods |
|
Other liability costs |
Other liability costs include DAC, DSI and VOBA amortization and change in GLWB and GMDB reserves for all products, the cost of liabilities on products other than deferred annuities including offsets for premiums, product charges and other revenues |
|
OTTI |
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, excluding policy loans ceded. 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. 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 |
|
Rider reserves |
Guaranteed living 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. RBC Ratio |
The CAL RBC ratio for AADE, our parent U.S. insurance company |
|
VIE |
Variable interest entity |
|
VOBA |
Value of business acquired |
6
Item 1. Financial Statements
Index to Condensed Consolidated Financial Statements (unaudited)
7
(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 |
(Continued)
See accompanying notes to the unaudited condensed consolidated financial statements
8
(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
9
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
10
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
11
(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
12
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 |
13
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 |
14
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
|
(Concluded)
See accompanying notes to the unaudited condensed consolidated financial statements
15
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 retirement services company that issues, reinsures and acquires retirement savings products in all U.S. states, the District of Columbia and Germany.
We conduct business primarily through the following consolidated subsidiaries:
• |
Athene Life Re Ltd. (ALRe), a Bermuda exempted company to which AHL's other insurance subsidiaries and third party ceding companies directly and indirectly reinsure a portion of their liabilities; |
• |
Athene USA Corporation, an Iowa corporation and its subsidiaries (Athene USA); and |
• |
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 determined we are the primary beneficiary, as discussed in Note 4 – Variable Interest Entities.
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'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 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.
The condensed consolidated balance sheet as of December 31, 2016 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 to our Current Report on Form 8-K, filed on June 13, 2017. The preparation of financial statements requires the use of management estimates. Actual results may differ from estimates used in preparing the condensed consolidated financial statements.
During the quarter ended September 30, 2017, we recorded out-of-period adjustments that affected the condensed consolidated statements of income. These adjustments, related to DAC and VOBA amortization and actuarial reserves, increased consolidated income before taxes for the three and nine months ended September 30, 2017 by $13 million and $28 million, respectively. We evaluated these out-of-period adjustments and determined they were not material to the condensed consolidated financial statements for either the three or nine months ended September 30, 2017, or any other previously reported period.
Revisions—As part of our continuing initiative to improve controls in our business processes and confirm the accuracy of our data relating to blocks of 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, 2016 as a result of correcting this error 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.
16
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.
17
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 when 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.
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)
The amendments in this update clarify the definition of a business with the objective of assisting entities with evaluating whether transactions 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, goodwill and consolidation. These amendments are required 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. We adopted this standard effective January 1, 2017, and the adoption did not have a material effect on our consolidated financial statements.
18
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Improvements to Employee Share-Based Payment Accounting (ASU 2016-09)
This update simplifies several aspects of the accounting for share-based payment award transactions, including income tax consequences, forfeitures and classification on the statement of cash flows. The standard requires entities to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. We have elected to account for forfeitures when they occur. We adopted this standard effective January 1, 2017, and the adoption did not have a material effect on our consolidated financial statements.
Equity Method and Joint Ventures (ASU 2016-07)
This update eliminates the retroactive adjustments to an investment upon it qualifying for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence by the investor. 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 – 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 Hedging – Targeted Improvements (ASU 2017-12)
The amendments in this update contain improvements to the financial reporting of hedging relationships that more closely reflect the economic results of an entity's risk management activities in its financial statements. Additionally, the amendments in this update make certain targeted improvements to simplify the application of hedge accounting. We will be required to adopt this standard effective January 1, 2019. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
Gains and Losses from the Derecognition of Nonfinancial Assets (ASU 2017-05)
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.
19
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.
20
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
2. Investments
Available-for-sale 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), redeemable preferred stock, and equity securities. Additionally, it includes direct investments in affiliates of Apollo Global Management, LLC (AGM and, together with its subsidiaries, Apollo) where Apollo can exercise significant influence over the affiliates. These investments are presented as investments in related parties on the condensed consolidated balance sheets and separately disclosed below.
The following table represents the cost or amortized cost, gross unrealized gains and losses, fair value and other-than-temporary impairments (OTTI) in AOCI of our AFS investments by asset type:
September 30, 2017 |
|||||||||||||||||||
(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 |
$ |
(2 |
) |
$ |
58 |
$ |
— |
||||||||
U.S. state, municipal and political subdivisions |
993 |
153 |
(1 |
) |
1,145 |
— |
|||||||||||||
Foreign governments |
2,515 |
90 |
(16 |
) |
2,589 |
— |
|||||||||||||
Corporate |
33,115 |
1,520 |
(177 |
) |
34,458 |
1 |
|||||||||||||
CLO |
4,963 |
47 |
(14 |
) |
4,996 |
— |
|||||||||||||
ABS |
3,885 |
57 |
(42 |
) |
3,900 |
1 |
|||||||||||||
CMBS |
1,849 |
54 |
(13 |
) |
1,890 |
1 |
|||||||||||||
RMBS |
8,838 |
650 |
(8 |
) |
9,480 |
12 |
|||||||||||||
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 |
|||||||||||||
Fixed maturity securities – related party |
|||||||||||||||||||
CLO |
352 |
4 |
— |
356 |
— |
||||||||||||||
ABS |
52 |
1 |
— |
53 |
— |
||||||||||||||
Total fixed maturity securities – related party |
404 |
5 |
— |
409 |
— |
||||||||||||||
Total AFS securities including related party |
$ |
56,883 |
$ |
2,634 |
$ |
(274 |
) |
$ |
59,243 |
$ |
15 |
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 |
21
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 |
|||||||
(In millions) |
Amortized Cost |
Fair Value |
|||||
Due in one year or less |
$ |
984 |
$ |
988 |
|||
Due after one year through five years |
8,048 |
8,246 |
|||||
Due after five years through ten years |
11,218 |
11,605 |
|||||
Due after ten years |
16,432 |
17,411 |
|||||
CLO, ABS, CMBS and RMBS |
19,535 |
20,266 |
|||||
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 |
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, aggregated by class of security and length of time the fair value has remained below cost or amortized cost:
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) |
— |
— |