10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 3, 2018
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 June 30, 2018 | ||||||||||
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 ¨
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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 x
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Accelerated filer ¨
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Non-accelerated filer ¨ (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 ¨ 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 June 30, 2018: |
||||||||||
Class A common shares |
164,734,282 |
Class M-2 common shares |
851,103 |
|||||||
Class B common shares |
25,483,107 |
Class M-3 common shares |
1,001,110 |
|||||||
Class M-1 common shares |
3,388,890 |
Class M-4 common shares |
4,354,425 |
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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, anticipated future tax rates, 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 (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,” “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 financial condition, liquidity, results of operations and cash flows 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 financial condition, liquidity, results of operations and cash flows 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, 2017 (2017 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; |
• |
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 LLC (AAM) of its investment management agreements with us and limitations on our ability to terminate such arrangements; |
• |
AAM’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; |
• |
increases in our tax liability resulting from the Base Erosion and Anti-Abuse Tax (BEAT) or unnecessary, inefficient, ineffective or counterproductive efforts undertaken to mitigate the cost of the BEAT; |
• |
improper interpretation or application of Public Law no. 115-97, the Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 (Tax Act) or subsequent changes to, clarifications of or guidance under the Tax Act that is counter to our interpretation and has retroactive effect; |
• |
Athene Holding Ltd. (AHL) or its non-U.S. subsidiaries becoming subject to U.S. federal income taxation; |
• |
adverse changes in U.S. tax law; |
3
• |
our being subject to U.S. withholding tax under the Foreign Account Tax Compliance Act (FATCA); |
• |
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 2017 Annual Report and elsewhere in this report and in our 2017 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. 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:
Entities
Term or Acronym |
Definition |
|
A-A Mortgage |
A-A Mortgage Opportunities, L.P. |
|
AAA |
AP Alternative Assets, L.P. |
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AAA Investor |
AAA Guarantor – Athene, L.P. |
|
AADE |
Athene Annuity & Life Assurance Company |
|
AAIA |
Athene Annuity and Life Company |
|
AAM |
Athene Asset Management LLC |
|
AGER |
AGER Bermuda Holding Ltd., now known as Athora Holding Ltd. and formerly a consolidated subsidiary |
|
AHL |
Athene Holding Ltd. |
|
ALIC |
Athene Life Insurance Company |
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ALR |
ALR Aircraft Investment Ireland Limited |
|
ALRe |
Athene Life Re Ltd. |
|
AmeriHome |
AmeriHome Mortgage Company, LLC |
|
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 |
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Athora |
Athora Holding Ltd., formerly known as AGER Bermuda Holding Ltd. and formerly a consolidated subsidiary |
|
CoInvest Other |
AAA Investments (Other), L.P. |
|
CoInvest VI |
AAA Investments (Co-Invest VI), L.P. |
|
CoInvest VII |
AAA Investments (Co-Invest VII), L.P. |
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DOL |
United States Department of Labor |
|
MidCap |
MidCap FinCo Limited |
|
NAIC |
National Association of Insurance Commissioners |
|
NCL LLC |
NCL Athene, LLC |
|
NYSDFS |
New York State Department of Financial Services |
|
Sprint |
Apollo Asia Sprint Co-Investment Fund, L.P. |
|
Voya |
Voya Financial, Inc. |
|
VIAC |
Voya Insurance and Annuity Company |
|
Venerable |
Venerable Holdings, Inc. |
4
Certain Terms & Acronyms
Term or Acronym |
Definition |
|
ABS |
Asset-backed securities |
|
ACL |
Authorized control level risk-based capital as defined by the model created by the National Association of Insurance Commissioners |
|
ALM |
Asset liability management |
|
ALRe RBC |
The risk-based capital ratio of ALRe, when applying the National Association of Insurance Commissioners risk-based capital factors |
|
AUM |
Assets under management |
|
Alternative investments |
Alternative investments, including investment funds, collateralized loan obligation 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 |
|
BEAT |
Base Erosion and Anti-Abuse Tax |
|
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 risk-based capital as defined by the model created by the National Association of Insurance Commissioners |
|
Capital ratio |
Ratios calculated (1) with respect to our U.S. insurance subsidiaries, by reference to risk-based capital, (2) with respect to ALRe, by reference to BSCR, and (3) with respect to our former German Group Companies, by reference to solvency capital requirements |
|
CLO |
Collateralized loan obligation |
|
CMBS |
Commercial mortgage-backed securities |
|
Cost of crediting |
The interest credited to the policyholders on our fixed annuities, including, with respect to our fixed indexed annuities, option costs, presented on an annualized basis for interim periods |
|
DAC |
Deferred acquisition costs |
|
Deferred annuities |
Fixed indexed annuities, annual reset annuities and multi-year guaranteed 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 |
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 |
|
GAAP |
Accounting principles generally accepted in the United States of America |
|
GLWB |
Guaranteed lifetime withdrawal benefit |
|
GMDB |
Guaranteed minimum death benefit |
|
IMA |
Investment management agreement |
|
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 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) |
|
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, payments on payout annuities and pension risk benefit payments |
5
Term or Acronym |
Definition |
|
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 |
|
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 |
|
Overall tax rate |
Tax rate including corporate income taxes, the BEAT and excise taxes, in each case, to the extent applicable, on a GAAP or non-GAAP basis, as specified |
|
Payout annuities |
Annuities with a current cash payment component, which consist primarily of SPIAs, 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 |
|
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 recoverable, 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 lifetime 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 |
|
Voya reinsurance transactions |
Collectively, the coinsurance and modified coinsurance agreements we entered into on June 1, 2018 with Voya Insurance and Annuity Company and ReliaStar Life Insurance Company |
6
Item 1. Financial Statements
Index to Condensed Consolidated Financial Statements (unaudited)
7
(In millions) |
June 30, 2018 |
December 31, 2017 |
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Assets |
|||||||
Investments |
|||||||
Fixed maturity securities, at fair value |
|||||||
Available-for-sale securities (amortized cost: 2018 – $59,445 and 2017 – $58,506) |
$ |
59,762 |
$ |
61,012 |
|||
Trading securities |
2,053 |
2,196 |
|||||
Equity securities, at fair value |
216 |
790 |
|||||
Mortgage loans, net of allowances (portion at fair value: 2018 – $38 and 2017 – $41) |
7,609 |
6,233 |
|||||
Investment funds (portion at fair value: 2018 – $126 and 2017 – $145) |
633 |
699 |
|||||
Policy loans |
504 |
530 |
|||||
Funds withheld at interest (portion at fair value: 2018 – $150 and 2017 – $312) |
7,700 |
7,085 |
|||||
Derivative assets |
1,929 |
2,551 |
|||||
Real estate (portion held for sale: 2017 – $32)
|
— |
624 |
|||||
Short-term investments, at fair value (cost: 2018 – $289 and 2017 – $201) |
289 |
201 |
|||||
Other investments (portion at fair value: 2018 – $50 and 2017 – $0)
|
123 |
133 |
|||||
Total investments |
80,818 |
82,054 |
|||||
Cash and cash equivalents |
3,608 |
4,888 |
|||||
Restricted cash |
178 |
105 |
|||||
Investments in related parties |
|||||||
Fixed maturity securities, at fair value |
|||||||
Available-for-sale securities (amortized cost: 2018 – $958 and 2017 – $399) |
956 |
406 |
|||||
Trading securities |
278 |
307 |
|||||
Investment funds (portion at fair value: 2018 – $198 and 2017 – $30) |
1,836 |
1,310 |
|||||
Funds withheld at interest (portion at fair value: 2018 – $162) |
14,221 |
— |
|||||
Short-term investments, at fair value (cost: 2018 – $172 and 2017 – $52) |
172 |
52 |
|||||
Other investments |
388 |
238 |
|||||
Accrued investment income (related party: 2018 – $24 and 2017 – $10) |
662 |
652 |
|||||
Reinsurance recoverable (related party: 2018 – $4; portion at fair value: 2018 – $1,717 and 2017 – $1,824) |
4,847 |
4,972 |
|||||
Deferred acquisition costs, deferred sales inducements and value of business acquired |
4,715 |
2,930 |
|||||
Other assets |
1,265 |
969 |
|||||
Assets of consolidated variable interest entities |
|||||||
Investments |
|||||||
Fixed maturity securities, trading, at fair value – related party |
48 |
48 |
|||||
Equity securities, at fair value – related party |
163 |
240 |
|||||
Investment funds (related party: 2018 – $542 and 2017 – $571; portion at fair value: 2018 – $542 and 2017 – $549) |
593 |
571 |
|||||
Cash and cash equivalents |
2 |
4 |
|||||
Other assets |
5 |
1 |
|||||
Total assets |
$ |
114,755 |
$ |
99,747 |
(Continued)
See accompanying notes to the unaudited condensed consolidated financial statements
8
(In millions, except share and per share data) |
June 30, 2018 |
December 31, 2017 |
|||||
Liabilities and Equity |
|||||||
Liabilities |
|||||||
Interest sensitive contract liabilities (related party: 2018 – $17,742; portion at fair value: 2018 – $9,008 and 2017 – $8,929) |
$ |
87,052 |
$ |
67,708 |
|||
Future policy benefits (related party: 2018 – $928; portion at fair value: 2018 – $2,249 and 2017 – $2,428) |
13,970 |
17,507 |
|||||
Other policy claims and benefits (related party: 2018 – $2)
|
136 |
211 |
|||||
Dividends payable to policyholders |
118 |
1,025 |
|||||
Short-term debt |
183 |
— |
|||||
Long-term debt |
991 |
— |
|||||
Derivative liabilities |
137 |
134 |
|||||
Payables for collateral on derivatives |
1,746 |
2,323 |
|||||
Funds withheld liability (portion at fair value: 2018 – $4 and 2017 – $22) |
389 |
407 |
|||||
Other liabilities (related party: 2018 – $69 and 2017 – $64)
|
1,524 |
1,222 |
|||||
Liabilities of consolidated variable interest entities |
4 |
2 |
|||||
Total liabilities |
106,250 |
90,539 |
|||||
Commitments and Contingencies (Note 13) |
|||||||
Equity |
|||||||
Common stock |
|||||||
Class A – par value $0.001 per share; authorized: 2018 and 2017 – 425,000,000 shares; issued and outstanding: 2018 – 164,734,282 and 2017 – 142,386,704 shares |
— |
— |
|||||
Class B – par value $0.001 per share; convertible to Class A; authorized: 2018 and 2017 – 325,000,000 shares; issued and outstanding: 2018 – 25,483,107 and 2017 – 47,422,399 shares |
— |
— |
|||||
Class M-1 – par value $0.001 per share; contingently convertible to Class A; authorized: 2018 and 2017 – 7,109,560 shares; issued and outstanding: 2018 – 3,388,890 and 2017 – 3,388,890 shares |
— |
— |
|||||
Class M-2 – par value $0.001 per share; contingently convertible to Class A; authorized: 2018 and 2017 – 5,000,000 shares; issued and outstanding: 2018 – 851,103 and 2017 – 851,103 shares |
— |
— |
|||||
Class M-3 – par value $0.001 per share; contingently convertible to Class A; authorized: 2018 and 2017 – 7,500,000 shares; issued and outstanding: 2018 – 1,001,110 and 2017 – 1,092,000 shares |
— |
— |
|||||
Class M-4 – par value $0.001 per share; contingently convertible to Class A; authorized: 2018 and 2017 – 7,500,000 shares; issued and outstanding: 2018 – 4,354,425 and 2017 – 4,711,743 shares |
— |
— |
|||||
Additional paid-in capital |
3,492 |
3,472 |
|||||
Retained earnings |
4,887 |
4,321 |
|||||
Accumulated other comprehensive income (related party: 2018 – $(2) and 2017 – $48)
|
126 |
1,415 |
|||||
Total shareholders' equity |
8,505 |
9,208 |
|||||
Total liabilities and equity |
$ |
114,755 |
$ |
99,747 |
(Concluded)
See accompanying notes to the unaudited condensed consolidated financial statements
9
Three months ended June 30, |
Six months ended June 30, |
||||||||||||||
(In millions, except per share data) |
2018 |
2017 |
2018 |
2017 |
|||||||||||
Revenues |
|||||||||||||||
Premiums (related party of $582 for the three and six months ended June 30, 2018)
|
$ |
726 |
$ |
379 |
$ |
1,004 |
$ |
431 |
|||||||
Product charges (related party of $5 for the three and six months ended June 30, 2018)
|
106 |
85 |
202 |
166 |
|||||||||||
Net investment income (related party investment income of $67 and $73 for the three months ended and $143 and $129 for the six months ended June 30, 2018 and 2017, respectively, and related party investment expense of $86 and $76 for the three months ended and $169 and $154 for the six months ended June 30, 2018 and 2017, respectively) |
958 |
821 |
1,813 |
1,607 |
|||||||||||
Investment related gains (losses) (related party of $2 and $3 for the three months ended and $19 and $(8) for the six months ended June 30, 2018 and 2017, respectively) |
(2 |
) |
460 |
(238 |
) |
1,142 |
|||||||||
Other-than-temporary impairment investment losses |
|||||||||||||||
Other-than-temporary impairment losses |
— |
(12 |
) |
(3 |
) |
(12 |
) |
||||||||
Other-than-temporary impairment losses reclassified to (from) other comprehensive income |
— |
1 |
— |
— |
|||||||||||
Net other-than-temporary impairment losses |
— |
(11 |
) |
(3 |
) |
(12 |
) |
||||||||
Other revenues |
6 |
8 |
12 |
16 |
|||||||||||
Revenues of consolidated variable interest entities |
|||||||||||||||
Net investment income (related party of $14 and $10 for the three months ended and $24 and $20 for the six months ended June 30, 2018 and 2017, respectively) |
14 |
10 |
24 |
20 |
|||||||||||
Investment related gains (losses) (related party of $(11) and $11 for the three months ended and $(6) and $12 for the six months ended June 30, 2018 and 2017, respectively) |
(11 |
) |
11 |
(6 |
) |
12 |
|||||||||
Total revenues |
1,797 |
1,763 |
2,808 |
3,382 |
|||||||||||
Benefits and expenses |
|||||||||||||||
Interest sensitive contract benefits (related party of $20 for the three and six months ended June 30, 2018)
|
332 |
553 |
351 |
1,245 |
|||||||||||
Amortization of deferred sales inducements |
23 |
11 |
43 |
29 |
|||||||||||
Future policy and other policy benefits (related party of $580 for the three and six months ended June 30, 2018) |
857 |
578 |
1,258 |
792 |
|||||||||||
Amortization of deferred acquisition costs and value of business acquired |
92 |
67 |
181 |
171 |
|||||||||||
Dividends to policyholders |
9 |
49 |
22 |
81 |
|||||||||||
Policy and other operating expenses (related party of $3 and $2 for the three months ended and $5 and $6 for the six months ended June 30, 2018 and 2017, respectively) |
153 |
168 |
295 |
321 |
|||||||||||
Operating expenses of consolidated variable interest entities |
1 |
— |
1 |
— |
|||||||||||
Total benefits and expenses |
1,467 |
1,426 |
2,151 |
2,639 |
|||||||||||
Income before income taxes |
330 |
337 |
657 |
743 |
|||||||||||
Income tax expense |
66 |
11 |
125 |
33 |
|||||||||||
Net income |
$ |
264 |
$ |
326 |
$ |
532 |
$ |
710 |
|||||||
Earnings per share |
|||||||||||||||
Basic – Classes A, B, M-1, M-2, M-3 and M-4 |
$ |
1.34 |
$ |
1.66 |
$ |
2.70 |
$ |
3.66 |
|||||||
Diluted – Class A |
1.33 |
1.65 |
2.69 |
3.59 |
|||||||||||
Diluted – Class B |
1.34 |
1.66 |
2.70 |
3.66 |
|||||||||||
Diluted – Class M-1 |
1.34 |
1.66 |
2.70 |
3.66 |
|||||||||||
Diluted – Class M-2 |
1.33 |
1.64 |
2.67 |
1.80 |
|||||||||||
Diluted – Class M-3 |
1.34 |
1.00 |
2.67 |
1.08 |
|||||||||||
Diluted – Class M-4 |
1.04 |
0.76 |
1.98 |
0.98 |
See accompanying notes to the unaudited condensed consolidated financial statements
10
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Three months ended June 30, |
Six months ended June 30, |
||||||||||||||
(In millions) |
2018 |
2017 |
2018 |
2017 |
|||||||||||
Net income |
$ |
264 |
$ |
326 |
$ |
532 |
$ |
710 |
|||||||
Other comprehensive income (loss), before tax |
|||||||||||||||
Unrealized investment gains (losses) on available-for-sale securities |
(667 |
) |
582 |
(1,577 |
) |
1,001 |
|||||||||
Noncredit component of other-than-temporary impairment losses on available-for-sale securities |
— |
(1 |
) |
— |
— |
||||||||||
Unrealized gains (losses) on hedging instruments |
101 |
(33 |
) |
45 |
(38 |
) |
|||||||||
Pension adjustments |
— |
(1 |
) |
3 |
(1 |
) |
|||||||||
Foreign currency translation adjustments |
(2 |
) |
8 |
(10 |
) |
10 |
|||||||||
Other comprehensive income (loss), before tax |
(568 |
) |
555 |
(1,539 |
) |
972 |
|||||||||
Income tax expense (benefit) related to other comprehensive income |
(109 |
) |
168 |
(292 |
) |
279 |
|||||||||
Other comprehensive income (loss) |
(459 |
) |
387 |
(1,247 |
) |
693 |
|||||||||
Comprehensive income (loss) |
$ |
(195 |
) |
$ |
713 |
$ |
(715 |
) |
$ |
1,403 |
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 |
Total Athene Holding Ltd. shareholders' equity |
Noncontrolling interest |
Total equity |
||||||||||||||||||||
Balance at December 31, 2016 |
$ |
— |
$ |
3,421 |
$ |
3,070 |
$ |
367 |
$ |
6,858 |
$ |
1 |
$ |
6,859 |
|||||||||||||
Net income |
— |
— |
710 |
— |
710 |
— |
710 |
||||||||||||||||||||
Other comprehensive income |
— |
— |
— |
693 |
693 |
— |
693 |
||||||||||||||||||||
Stock-based compensation |
— |
31 |
— |
— |
31 |
— |
31 |
||||||||||||||||||||
Retirement or repurchase of shares |
— |
— |
(8 |
) |
— |
(8 |
) |
— |
(8 |
) |
|||||||||||||||||
Other changes in equity of noncontrolling interests |
— |
— |
— |
— |
— |
(1 |
) |
(1 |
) |
||||||||||||||||||
Balance at June 30, 2017 |
$ |
— |
$ |
3,452 |
$ |
3,772 |
$ |
1,060 |
$ |
8,284 |
$ |
— |
$ |
8,284 |
|||||||||||||
Balance at December 31, 2017 |
$ |
— |
$ |
3,472 |
$ |
4,321 |
$ |
1,415 |
$ |
9,208 |
$ |
— |
$ |
9,208 |
|||||||||||||
Adoption of accounting standards1
|
— |
— |
39 |
(42 |
) |
(3 |
) |
— |
(3 |
) |
|||||||||||||||||
Net income |
— |
— |
532 |
— |
532 |
— |
532 |
||||||||||||||||||||
Other comprehensive loss |
— |
— |
— |
(1,247 |
) |
(1,247 |
) |
— |
(1,247 |
) |
|||||||||||||||||
Issuance of shares, net of expenses |
— |
1 |
— |
— |
1 |
— |
1 |
||||||||||||||||||||
Stock-based compensation |
— |
19 |
— |
— |
19 |
— |
19 |
||||||||||||||||||||
Retirement or repurchase of shares |
— |
— |
(5 |
) |
— |
(5 |
) |
— |
(5 |
) |
|||||||||||||||||
Balance at June 30, 2018 |
$ |
— |
$ |
3,492 |
$ |
4,887 |
$ |
126 |
$ |
8,505 |
$ |
— |
$ |
8,505 |
|||||||||||||
1 See discussion of adoptions in Note 1 – Business, Basis of Presentation and Significant Accounting Policies.
|
See accompanying notes to the unaudited condensed consolidated financial statements
12
Six months ended June 30, |
|||||||
(In millions) |
2018 |
2017 |
|||||
Cash flows from operating activities |
|||||||
Net income |
$ |
532 |
$ |
710 |
|||
Adjustments to reconcile net income to net cash provided by operating activities: |
|||||||
Amortization of deferred acquisition costs and value of business acquired |
181 |
171 |
|||||
Amortization of deferred sales inducements |
43 |
29 |
|||||
Accretion of net investment premiums, discounts, and other |
(99 |
) |
(101 |
) |
|||
Payment at inception of reinsurance agreements, net (related party: 2018 – $(407)) |
(394 |
) |
— |
||||
Stock-based compensation |
13 |
29 |
|||||
Net investment income (related party: 2018 – $(50) and 2017 – $(43)) |
(32 |
) |
(43 |
) |
|||
Net recognized (gains) losses on investments and derivatives (related party: 2018 – $(18) and 2017 – $3) |
161 |
(882 |
) |
||||
Policy acquisition costs deferred |
(311 |
) |
(248 |
) |
|||
Changes in operating assets and liabilities: |
|||||||
Accrued investment income (related party: 2018 – $(14)) |
(47 |
) |
(9 |
) |
|||
Interest sensitive contract liabilities (related party: 2018 – $15) |
7 |
1,140 |
|||||
Future policy benefits, other policy claims and benefits, dividends payable to policyholders and reinsurance recoverable (related party: 2018 – $15) |
352 |
387 |
|||||
Funds withheld assets and liabilities (related party: 2018 – $23) |
(32 |
) |
(222 |
) |
|||
Other assets and liabilities |
139 |
124 |
|||||
Consolidated variable interest entities related: |
|||||||
Net recognized (gains) losses on investments and derivatives (related party: 2018 – $5 and 2017 – $(12)) |
5 |
(12 |
) |
||||
Other operating activities, net |
1 |
— |
|||||
Net cash provided by operating activities |
519 |
1,073 |
|||||
Cash flows from investing activities |
|||||||
Sales, maturities and repayments of: |
|||||||
Fixed maturity securities |
|||||||
Available-for-sale securities (related party: 2018 – $97 and 2017 – $73) |
6,309 |
5,987 |
|||||
Trading securities (related party: 2018 – $22 and 2017 – $26) |
288 |
83 |
|||||
Equity securities (related party: 2018 – $0 and 2017 – $22) |
2 |
455 |
|||||
Mortgage loans |
686 |
632 |
|||||
Investment funds (related party: 2018 – $143 and 2017 – $172) |
252 |
221 |
|||||
Derivative instruments and other invested assets |
1,062 |
713 |
|||||
Short-term investments |
220 |
226 |
|||||
Purchases of: |
|||||||
Fixed maturity securities |
|||||||
Available-for-sale securities (related party: 2018 – $(211) and 2017 – $(64)) |
(8,953 |
) |
(9,111 |
) |
|||
Trading securities |
(81 |
) |
(66 |
) |
|||
Equity securities |
(62 |
) |
(492 |
) |
|||
Mortgage loans |
(1,924 |
) |
(1,184 |
) |
|||
Investment funds (related party: 2018 – $(556) and 2017 – $(179)) |
(654 |
) |
(227 |
) |
|||
Derivative instruments and other invested assets (related party: 2018 – $(150) and 2017 – $0) |
(659 |
) |
(376 |
) |
|||
Real estate |
— |
(13 |
) |
||||
Short-term investments (related party: 2018 – $(121) and 2017 – $(28)) |
(429 |
) |
(177 |
) |
|||
Consolidated variable interest entities related: |
|||||||
Sales, maturities and repayments of investments (related party: 2018 – $103 and 2017 – $7) |
103 |
7 |
|||||
Purchases of investments (related party: 2018 – $0 and 2017 – $(22)) |
(52 |
) |
(22 |
) |
|||
Deconsolidation of AGER Bermuda Holding Ltd. and its subsidiaries |
(296 |
) |
— |
||||
Cash settlement of derivatives |
(2 |
) |
4 |
||||
Other investing activities, net |
286 |
748 |
|||||
Net cash used in investing activities |
(3,904 |
) |
(2,592 |
) |
|||
(Continued) |
|||||||
See accompanying notes to the unaudited condensed consolidated financial statements |
13
Six months ended June 30, |
|||||||
(In millions) |
2018 |
2017 |
|||||
Cash flows from financing activities |
|||||||
Capital contributions |
$ |
1 |
$ |
— |
|||
Proceeds from short-term debt |
183 |
— |
|||||
Proceeds from long-term debt |
998 |
— |
|||||
Deposits on investment-type policies and contracts (related party: 2018 – $128) |
4,375 |
4,727 |
|||||
Withdrawals on investment-type policies and contracts (related party: 2018 – $(37)) |
(2,839 |
) |
(2,607 |
) |
|||
Payments for coinsurance agreements on investment-type contracts, net |
(12 |
) |
(15 |
) |
|||
Net change in cash collateral posted for derivative transactions |
(577 |
) |
477 |
||||
Repurchase of common stock |
(5 |
) |
(8 |
) |
|||
Other financing activities, net |
52 |
(5 |
) |
||||
Net cash provided by financing activities |
2,176 |
2,569 |
|||||
Effect of exchange rate changes on cash and cash equivalents |
— |
19 |
|||||
Net (decrease) increase in cash and cash equivalents |
(1,209 |
) |
1,069 |
||||
Cash and cash equivalents at beginning of year1
|
4,997 |
2,516 |
|||||
Cash and cash equivalents at end of period1
|
$ |
3,788 |
$ |
3,585 |
|||
Supplementary information |
|||||||
Non-cash transactions |
|||||||
Deposits on investment-type policies and contracts through reinsurance agreements (related party: 2018 – $17,525) |
$ |
18,247 |
$ |
385 |
|||
Withdrawals on investment-type policies and contracts through reinsurance agreements (related party: 2018 – $155) |
341 |
285 |
|||||
Investments received from settlements on reinsurance agreements |
8 |
36 |
|||||
Investment in Athora Holding Ltd. received upon deconsolidation |
108 |
— |
|||||
1 Includes cash and cash equivalents, restricted cash, and cash and cash equivalents of consolidated variable interest entities.
|
(Concluded)
See accompanying notes to the unaudited condensed consolidated financial statements
14
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 and the District of Columbia.
We conduct business primarily through the following consolidated subsidiaries:
• |
Our non-U.S. reinsurance subsidiaries, to which AHL’s other insurance subsidiaries and third party ceding companies directly and indirectly reinsure a portion of their liabilities, including Athene Life Re Ltd. (ALRe), a Bermuda exempted company; and |
• |
Athene USA Corporation, an Iowa corporation and its subsidiaries (Athene USA). |
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, 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, 2017 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 audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 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.
Deconsolidation – AGER Bermuda Holding Ltd. and its subsidiaries, now known as Athora Holding Ltd. (Athora), was our consolidated subsidiary for the year ended December 31, 2017. In April 2017, in connection with a private offering, Athora entered into subscription agreements with AHL, certain affiliates of Apollo Global Management, LLC (AGM and, together with its subsidiaries, Apollo) and a number of other third-party investors pursuant to which Athora secured commitments from such parties to purchase new common shares in Athora (Athora Offering). In November 2017, the Athora board of directors approved resolutions authorizing the closing of the Athora Offering (Closing) to occur on January 1, 2018 and approving a capital call from all of the Athora investors, excluding us. In connection with the Closing and the issuance of shares in respect of the capital call, each of which occurred on January 1, 2018, our equity interest in Athora was exchanged for common shares of Athora. As a result, on January 1, 2018, we held 10% of the aggregate voting power of and less than 50% of the economic interest in Athora and, as such, it is thereafter held as a related party investment rather than a consolidated subsidiary. We did not recognize a material amount in the condensed consolidated statements of income upon deconsolidation in 2018.
Adopted Accounting Pronouncements
Revenue Recognition (ASU 2017-13, ASU 2016-20, ASU 2016-12, ASU 2016-11, ASU 2016-10, ASU 2016-08, ASU 2015-14 and ASU 2014-09)
These updates are based on the core principle that 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. These 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 these updates. 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. We adopted these updates on a modified retrospective basis effective January 1, 2018. The adoptions did not have a material effect on our consolidated financial statements.
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 early adopted this update effective January 1, 2018, and the adoption did not have a material effect 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 adopted this update on a modified retrospective basis effective January 1, 2018. The adoption did not have a material effect on our consolidated financial statements.
15
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 adopted this update effective January 1, 2018, and have changed the presentation on the consolidated statements of cash flows as required by this update.
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. Prior to adoption, recognition of the income tax consequence was not recognized until the asset was sold to an outside party. We adopted this update effective January 1, 2018. Upon adoption, we recognized a cumulative-effect decrease to beginning retained earnings of $3 million.
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 adopted this update effective January 1, 2018, and the adoption did not have a material effect on our consolidated financial statements.
Financial Instruments – Recognition and Measurement (ASU 2016-01)
This update changes the 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 other comprehensive income (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. Prior to the effective date of this update, changes in fair value related to available-for-sale (AFS) equity securities were recognized in OCI. We adopted this update effective January 1, 2018. Upon adoption, we recognized a cumulative-effect increase to beginning retained earnings of $42 million and a corresponding decrease to accumulated other comprehensive income (AOCI). Additionally, we combined the presentation of AFS and trading equity securities on the consolidated balance sheets for all periods presented.
Recently Issued Accounting Pronouncements
Stock Compensation – Nonemployee Share-Based Payments (ASU 2018-07)
The amendments in this update simplify the accounting for share-based payments to nonemployees by aligning with the accounting for share-based payments to employees, with certain exceptions. We will be required to adopt this update on a modified retrospective basis effective January 1, 2019. Early adoption is permitted. We do not expect the adoption of this update will have a material effect on our consolidated financial statements.
Leases (ASU 2018-11, ASU 2018-10, ASU 2018-01, ASU 2017-13 and ASU 2016-02)
These updates are intended to increase transparency and comparability for lease transactions. ASU 2016-02, among other things, requires a lessee to recognize an asset and a liability for all lease arrangements longer than 12 months. Lessor accounting is largely unchanged. ASU 2016-02 required the adoption of this standard on a modified retrospective basis. However, with the issuance of ASU 2018-11, we are allowed the option to recognize the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings in the year of adoption, while continuing to present all prior periods under the previous lease guidance. The standard is effective January 1, 2019 and early adoption is permitted. We have reviewed our existing lease contracts and our implementation efforts are primarily focused on assessing the financial impact of these updates 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 update prospectively effective January 1, 2020. Early adoption is permitted. We do not expect the adoption of this update will 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. 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 update 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.
16
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
2. Investments
Available-for-sale Securities—The following table represents the amortized cost, gross unrealized gains and losses, fair value and other-than-temporary impairments (OTTI) in AOCI of our AFS investments by asset type. Our AFS investment portfolio 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 are separately disclosed below.
June 30, 2018 |
|||||||||||||||||||
(In millions) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
OTTI
in AOCI
|
||||||||||||||
Available-for-sale securities |
|||||||||||||||||||
U.S. government and agencies |
$ |
143 |
$ |
— |
$ |
(1 |
) |
$ |
142 |
$ |
— |
||||||||
U.S. state, municipal and political subdivisions |
1,152 |
124 |
(5 |
) |
1,271 |
— |
|||||||||||||
Foreign governments |
203 |
1 |
(5 |
) |
199 |
— |
|||||||||||||
Corporate |
37,258 |
481 |
(885 |
) |
36,854 |
1 |
|||||||||||||
CLO |
5,355 |
21 |
(24 |
) |
5,352 |
— |
|||||||||||||
ABS |
4,727 |
32 |
(43 |
) |
4,716 |
1 |
|||||||||||||
CMBS |
2,343 |
28 |
(47 |
) |
2,324 |
1 |
|||||||||||||
RMBS |
8,264 |
648 |
(8 |
) |
8,904 |
10 |
|||||||||||||
Total AFS securities |
59,445 |
1,335 |
(1,018 |
) |
59,762 |
13 |
|||||||||||||
Available-for-sale securities – related party |
|||||||||||||||||||
CLO |
473 |
2 |
(3 |
) |
472 |
— |
|||||||||||||
ABS |
485 |
2 |
(3 |
) |
484 |
— |
|||||||||||||
Total AFS securities – related party |
958 |
4 |
(6 |
) |
956 |
— |
|||||||||||||
Total AFS securities, including related party |
$ |
60,403 |
$ |
1,339 |
$ |
(1,024 |
) |
$ |
60,718 |
$ |
13 |
December 31, 2017 |
|||||||||||||||||||
(In millions) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
OTTI
in AOCI
|
||||||||||||||
Fixed maturity securities |
|||||||||||||||||||
U.S. government and agencies |
$ |
63 |
$ |
1 |
$ |
(2 |
) |
$ |
62 |
$ |
— |
||||||||
U.S. state, municipal and political subdivisions |
996 |
171 |
(2 |
) |
1,165 |
— |
|||||||||||||
Foreign governments |
2,575 |
116 |
(8 |
) |
2,683 |
— |
|||||||||||||
Corporate |
35,173 |
1,658 |
(171 |
) |
36,660 |
— |
|||||||||||||
CLO |
5,039 |
53 |
(8 |
) |
5,084 |
— |
|||||||||||||
ABS |
3,945 |
53 |
(27 |
) |
3,971 |
1 |
|||||||||||||
CMBS |
1,994 |
48 |
(21 |
) |
2,021 |
1 |
|||||||||||||
RMBS |
8,721 |
652 |
(7 |
) |
9,366 |
11 |
|||||||||||||
Total fixed maturity securities |
58,506 |
2,752 |
(246 |
) |
61,012 |
13 |
|||||||||||||
Equity securities1
|
271 |
7 |
(1 |
) |
277 |
— |
|||||||||||||
Total AFS securities |
58,777 |
2,759 |
(247 |
) |
61,289 |
13 |
|||||||||||||
Available-for-sale securities – related party |
|||||||||||||||||||
CLO |
353 |
7 |
— |
360 |
— |
||||||||||||||
ABS |
46 |
— |
— |
46 |
— |
||||||||||||||
Total AFS securities – related party |
399 |
7 |
— |
406 |
— |
||||||||||||||
Total AFS securities, including related party |
$ |
59,176 |
$ |
2,766 |
$ |
(247 |
) |
$ |
61,695 |
$ |
13 |
||||||||
1 Included in equity securities on the condensed consolidated balance sheets.
|
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:
June 30, 2018 |
|||||||
(In millions) |
Amortized Cost |
Fair Value |
|||||
Due in one year or less |
$ |
1,146 |
$ |
1,145 |
|||
Due after one year through five years |
8,521 |
8,517 |
|||||
Due after five years through ten years |
11,461 |
11,261 |
|||||
Due after ten years |
17,628 |
17,543 |
|||||
CLO, ABS, CMBS and RMBS |
20,689 |
21,296 |
|||||
Total AFS fixed maturity securities |
59,445 |
59,762 |
|||||
Fixed maturity securities – related party, CLO and ABS |
958 |
956 |
|||||
Total AFS fixed maturity securities, including related party |
$ |
60,403 |
$ |
60,718 |
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 amortized cost:
June 30, 2018 |
|||||||||||||||||||||||
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 |
|||||||||||||||||
Available-for-sale securities |
|||||||||||||||||||||||
U.S. government and agencies |
$ |
139 |
$ |
(1 |
) |
$ |
1 |
$ |
— |
$ |
140 |
$ |
(1 |
) |
|||||||||
U.S. state, municipal and political subdivisions |
125 |
(1 |
) |
77 |
(4 |
) |
202 |
(5 |
) |
||||||||||||||
Foreign governments |
103 |
(2 |
) |
45 |
(3 |
) |
148 |
(5 |
) |
||||||||||||||
Corporate |
17,178 |
(526 |
) |
5,105 |
(359 |
) |
22,283 |
(885 |
) |
||||||||||||||
CLO |
2,270 |
(21 |
) |
267 |
(3 |
) |
2,537 |
(24 |
) |
||||||||||||||
ABS |
1,689 |
(22 |
) |
678 |
(21 |
) |
2,367 |
(43 |
) |
||||||||||||||
CMBS |
880 |
(20 |
) |
382 |
(27 |
) |
1,262 |
(47 |
) |
||||||||||||||
RMBS |
380 |
(4 |
) |
248 |
(4 |
) |
628 |
(8 |
) |
||||||||||||||
Total AFS securities |
22,764 |
(597 |
) |
6,803 |
(421 |
) |
29,567 |
(1,018 |
) |
||||||||||||||
Available-for-sale securities – related party |
|||||||||||||||||||||||
CLO |
214 |
(3 |
) |
— |
— |
214 |
(3 |
) |
|||||||||||||||
ABS |
127 |
— |
86 |
(3 |
) |
213 |
(3 |
) |
|||||||||||||||
Total AFS securities – related party |
341 |
(3 |
) |
86 |
(3 |
) |
427 |
(6 |
) |
||||||||||||||
Total AFS securities, including related party |
$ |
23,105 |
$ |
(600 |
) |
$ |
6,889 |
$ |
(424 |
) |
$ |
29,994 |
$ |
(1,024 |
) |
18
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
December 31, 2017 |
|||||||||||||||||||||||
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 |
|||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||||||
U.S. government and agencies |
$ |
34 |
$ |
(1 |
) |
$ |
9 |
$ |
(1 |
) |
$ |
43 |
$ |
(2 |
) |
||||||||
U.S. state, municipal and political subdivisions |
50 |
(1 |
) |
39 |
(1 |
) |
89 |
(2 |
) |
||||||||||||||
Foreign governments |
435 |
(6 |
) |
76 |
(2 |
) |
511 |
(8 |
) |
||||||||||||||
Corporate |
3,992 |
(49 |
) |
2,457 |
(122 |
) |
6,449 |
(171 |
) |
||||||||||||||
CLO |
414 |
(2 |
) |
340 |
(6 |
) |
754 |
(8 |
) |
||||||||||||||
ABS |
515 |
(5 |
) |
549 |
(22 |
) |
1,064 |
(27 |
) |
||||||||||||||
CMBS |
460 |
(8 |
) |
179 |
(13 |
) |
639 |
(21 |
) |
||||||||||||||
RMBS |
506 |
(3 |
) |
210 |
(4 |
) |
716 |
(7 |
) |
||||||||||||||
Total fixed maturity securities |
6,406 |
(75 |
) |
3,859 |
(171 |
) |
10,265 |
(246 |
) |
||||||||||||||
Equity securities1
|
134 |
(1 |
) |
— |
— |
134 |
(1 |
) |
|||||||||||||||
Total AFS securities |
6,540 |
(76 |
) |
3,859 |
(171 |
) |
10,399 |
(247 |
) |
||||||||||||||
Available-for-sale securities – related party |
|||||||||||||||||||||||
CLO |
29 |
— |
— |
— |
29 |
— |
|||||||||||||||||
ABS |
42 |
— |
— |
— |
42 |
— |
|||||||||||||||||
Total AFS securities – related party |
71 |
— |
— |
— |
71 |
— |
|||||||||||||||||
Total AFS securities, including related party |
$ |
6,611 |
$ |
(76 |
) |
$ |
3,859 |
$ |
(171 |
) |
$ |
10,470 |
$ |
(247 |
) |
||||||||
1 Included in equity securities on the condensed consolidated balance sheets.
|
As of June 30, 2018, we held 3,517 AFS securities that were in an unrealized loss position. Of this total, 808 were in an unrealized loss position 12 months or more. As of June 30, 2018, we held 17 related party AFS securities that were in an unrealized loss position. Of this total, four were in an unrealized loss position 12 months or more. 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 Impairments—For the six months ended June 30, 2018, we incurred $3 million of net OTTI, of which $2 million related to intent-to-sell impairments. These securities were impaired to fair value as of the impairment date. The remaining net OTTI of $1 million related to credit impairments where a portion was bifurcated in AOCI. Any credit loss impairments not bifurcated in AOCI are excluded from the rollforward below.
The following table represents a rollforward of the cumulative amounts recognized on the condensed consolidated statements of income for OTTI related to pre-tax credit loss impairments on AFS fixed maturity securities, for which a portion of the securities’ total OTTI was recognized in AOCI:
Three months ended June 30, |
Six months ended June 30, |
||||||||||||||
(In millions) |
2018 |
2017 |
2018 |
2017 |
|||||||||||
Beginning balance |
$ |
7 |
$ |
16 |
$ |
7 |
$ |
16 |
|||||||
Initial impairments – credit loss OTTI recognized on securities not previously impaired |
— |
6 |
1 |
6 |
|||||||||||
Reduction in impairments from securities sold, matured or repaid |
— |
(6 |
) |
(1 |
) |
(6 |
) |
||||||||
Ending balance |
$ |
7 |
$ |
16 |
$ |
7 |
$ |
16 |
19
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Net Investment Income—Net investment income by asset class consists of the following:
Three months ended June 30, |
Six months ended June 30, |
||||||||||||||
(In millions) |
2018 |
2017 |
2018 |
2017 |
|||||||||||
Fixed maturity securities |
|||||||||||||||
AFS securities |
$ |
719 |
$ |
635 |
$ |
1,387 |
$ |
1,255 |
|||||||
Trading securities |
54 |
53 |
98 |
103 |
|||||||||||
Equity securities |
2 |
2 |
4 |
5 |
|||||||||||
Mortgage loans |
104 |
90 |
195 |
175 |
|||||||||||
Investment funds |
58 |
65 |
123 |
120 |
|||||||||||
Funds withheld at interest |
86 |
34 |
132 |
70 |
|||||||||||
Other |
23 |
21 |
46 |
38 |
|||||||||||
Investment revenue |
1,046 |
900 |
1,985 |
1,766 |
|||||||||||
Investment expenses |
(88 |
) |
(79 |
) |
(172 |
) |
(159 |
) |
|||||||
Net investment income |
$ |
958 |
$ |
821 |
$ |
1,813 |
$ |
1,607 |
Investment Related Gains (Losses)—Investment related gains (losses) by asset class consists of the following:
Three months ended June 30, |
Six months ended June 30, |
||||||||||||||
(In millions) |
2018 |
2017 |
2018 |
2017 |
|||||||||||
AFS securities |
|||||||||||||||
Gross realized gains on investment activity |
$ |
51 |
$ |
35 |
$ |
72 |
$ |
63 |
|||||||
Gross realized losses on investment activity |
(37 |
) |
(13 |
) |
(43 |
) |
(21 |
) |
|||||||
Net realized investment gains on AFS securities |
14 |
22 |
29 |
42 |
|||||||||||
Net realized investment gains (losses) on trading securities |
(76 |
) |
42 |
(165 |
) |
28 |
|||||||||
Net realized investment gains on equity securities |
3 |
2 |
4 |
20 |
|||||||||||
Derivative gains (losses) |
46 |
406 |
(138 |
) |
1,060 |
||||||||||
Other gains (losses) |
11 |
(12 |
) |
32 |
(8 |
) |
|||||||||
Investment related gains (losses) |
$ |
(2 |
) |
$ |
460 |
$ |
(238 |
) |
$ |
1,142 |
Proceeds from sales of AFS securities were $2,365 million and $1,235 million for the three months ended June 30, 2018 and 2017, respectively, and $4,002 million and $2,766 million for the six months ended June 30, 2018 and 2017, respectively.
The following table summarizes the change in unrealized gains (losses) on trading and equity securities, including related party, we still held as of the respective period end:
Three months ended June 30, |
Six months ended June 30, |
||||||||||||||
(In millions) |
2018 |
2017 |
2018 |
2017 |
|||||||||||
Trading securities |
$ |
30 |
$ |
48 |
$ |
(39 |
) |
$ |
59 |
||||||
Trading securities – related party |
(4 |
) |
12 |
(6 |
) |
— |
|||||||||
Equity securities |
4 |
(2 |
) |
4 |
13 |
Purchased Credit Impaired (PCI) Investments—The following table summarizes our PCI investments:
June 30, 2018 |
December 31, 2017 |
June 30, 2018 |
December 31, 2017 |
||||||||||||
(In millions) |
Fixed maturity securities |
Mortgage loans |
|||||||||||||
Contractually required payments receivable |
$ |
8,695 |
$ |
9,690 |
$ |
1,198 |
$ |
1,140 |
|||||||
Less: Cash flows expected to be collected1
|
(7,689 |
) |
(8,188 |
) |
(1,164 |
) |
(1,090 |
) |
|||||||
Non-accretable difference |
$ |
1,006 |
$ |
1,502 |
$ |
34 |
$ |
50 |
|||||||
Cash flows expected to be collected1
|
$ |
7,689 |
$ |
8,188 |
$ |
1,164 |
$ |
1,090 |
|||||||
Less: Amortized cost |
(5,905 |
) |
(6,168 |
) |
(860 |
) |
(817 |
) |
|||||||
Accretable difference |
$ |
1,784 |
$ |
2,020 |
$ |
304 |
$ |
273 |
|||||||
Fair value |
$ |
6,426 |
$ |
6,703 |
$ |
909 |
$ |
844 |
|||||||
Outstanding balance |
7,250 |
8,026 |
992 |
946 |
|||||||||||
1 Represents the undiscounted principal and interest cash flows expected.
|
20
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
During the period, we acquired PCI investments with the following amounts at the time of purchase:
June 30, 2018 |
|||||||
(In millions) |
Fixed maturity securities |
Mortgage loans |
|||||
Contractually required payments receivable |
$ |
405 |
$ |
89 |
|||
Cash flows expected to be collected |
381 |
87 |
|||||
Fair value |
310 |
68 |
The following table summarizes the activity for the accretable yield on PCI investments:
Three months ended June 30, 2018 |
Six months ended June 30, 2018 |
||||||||||||||
(In millions) |
Fixed maturity securities |
Mortgage loans |
Fixed maturity securities |
Mortgage loans |
|||||||||||
Beginning balance |
$ |
1,912 |
$ |
291 |
$ |
2,020 |
$ |
273 |
|||||||
Purchases of PCI investments, net of sales |
28 |
16 |
44 |
14 |
|||||||||||
Accretion |
(105 |
) |
(11 |
) |
(205 |
) |
(21 |
) |
|||||||
Net reclassification from (to) non-accretable difference |
(51 |
) |
8 |
(75 |
) |
38 |
|||||||||
Ending balance |
$ |
1,784 |
$ |
304 |
$ |
1,784 |
$ |
304 |
Mortgage Loans—Mortgage loans, net of allowances, consists of the following:
(In millions) |
June 30, 2018 |
December 31, 2017 |
|||||
Commercial mortgage loans |
$ |
6,197 |
$ |
5,223 |
|||
Commercial mortgage loans under development |
37 |
24 |
|||||
Total commercial mortgage loans |
6,234 |
5,247 |
|||||
Residential mortgage loans |
1,375 |
986 |
|||||
Mortgage loans, net of allowances |
$ |
7,609 |
$ |
6,233 |
We primarily invest in commercial mortgage loans on income producing properties including hotels, industrial properties and retail and office buildings. 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.
21
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:
June 30, 2018 |
December 31, 2017 |
||||||||||||
(In millions, except for percentages) |
Net Carrying Value |
Percentage of Total |
Net Carrying Value |
Percentage of Total |
|||||||||
Property type |
|||||||||||||
Office building |
$ |
1,769 |
28.4 |
% |
$ |
1,187 |
22.6 |
% |
|||||
Retail |
1,710 |
27.4 |
% |
1,223 |
23.3 |
% |
|||||||
Hotels |
895 |
14.4 |
% |
928 |
17.7 |
% |
|||||||
Industrial |
858 |
13.8 |
% |
944 |
18.0 |
% |
|||||||
Apartment |
545 |
8.7 |
% |
525 |
10.0 |
% |
|||||||
Other commercial |
457 |
7.3 |
% |
440 |
8.4 |
% |
|||||||
Total commercial mortgage loans |
$ |
6,234 |
100.0 |
% |
$ |
5,247 |
100.0 |
% |
|||||
U.S. Region |
|||||||||||||
East North Central |
$ |
921 |
14.8 |
% |
$ |
643 |
12.3 |
% |
|||||
East South Central |
160 |
2.6 |
% |
144 |
2.7 |
% |
|||||||
Middle Atlantic |
1,025 |
16.4 |
% |
909 |
17.3 |
% |
|||||||
Mountain |
512 |
8.2 |
% |
492 |
9.4 |
% |
|||||||
New England |
144 |
2.3 |
% |
162 |
3.1 |
% |
|||||||
Pacific |
1,362 |
21.9 |
% |
991 |
18.9 |
% |
|||||||
South Atlantic |
1,362 |
21.8 |
% |
873 |
16.6 |
% |
|||||||
West North Central |
189 |
3.0 |
% |
233 |
4.4 |
% |
|||||||
West South Central |
559 |
9.0 |
% |
655 |
12.5 |
% |
|||||||
Total U.S. Region |
6,234 |
100.0 |
% |
5,102 |
97.2 |
% |
|||||||
International Region |
— |
— |
% |
145 |
2.8 |
% |
|||||||
Total commercial mortgage loans |
$ |
6,234 |
100.0 |
% |
$ |
5,247 |
100.0 |
% |
Our residential mortgage loan portfolio includes first lien residential mortgage loans collateralized by properties located in the U.S. As of June 30, 2018, California and Florida represented 33.3% and 16.7%, respectively, of the portfolio, and the remaining 50.0% represented all other states, with each individual state comprising less than 5% of the portfolio. As of December 31, 2017, California, Florida and New York represented 34.3%, 15.6% and 6.0%, respectively, of the portfolio, and the remaining 44.1% represented all other states, with each individual state comprising less than 5% of the portfolio.
Mortgage Loan Valuation Allowance—The assessment of mortgage loan impairments and valuation allowances is substantially the same for residential and commercial mortgage loans. The valuation allowance was $1 million as of June 30, 2018 and $2 million as of December 31, 2017. We did not record any material activity in the valuation allowance during the six months ended June 30, 2018 or 2017.
Residential mortgage loans – The primary credit quality indicator of 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 of June 30, 2018 and December 31, 2017, $35 million and $28 million, respectively, of our residential mortgage loans were non-performing.
Commercial mortgage loans – As of June 30, 2018 and December 31, 2017, none of our commercial mortgage loans were 30 days or more past due.
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.
22
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 underlying collateral. The following represents the loan-to-value ratio of the commercial mortgage loan portfolio, excluding those under development, net of valuation allowances:
(In millions) |
June 30, 2018 |
December 31, 2017 |
|||||
Less than 50% |
$ |
1,952 |
$ |
1,841 |
|||
50% to 60% |
1,607 |
1,390 |
|||||
61% to 70% |
1,989 |
1,691 |
|||||
71% to 100% |
649 |
301 |
|||||
Commercial mortgage loans |
$ |
6,197 |
$ |
5,223 |
The debt service coverage ratio, based upon the most recent financial statements, is expressed as a percentage of a property’s net operating income to its debt service payments. A debt service ratio of less than 1.0 indicates a property’s operations do not generate enough income to cover debt payments. The following represents the debt service coverage ratio of the commercial mortgage loan portfolio, excluding those under development, net of valuation allowances:
(In millions) |
June 30, 2018 |
December 31, 2017 |
|||||
Greater than 1.20x |
$ |
5,776 |
$ |
4,742 |
|||
1.00x – 1.20x |
302 |
297 |
|||||
Less than 1.00x |
119 |
184 |
|||||
Commercial mortgage loans |
$ |
6,197 |
$ |
5,223 |
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, natural resources and hedge funds. Investment funds typically meet the definition of VIEs and are discussed further in Note 4 – Variable Interest Entities.
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 value of derivative instruments:
June 30, 2018 |
December 31, 2017 |
||||||||||||||||||||
Notional Amount |
Fair Value |
Notional Amount |
Fair Value |
||||||||||||||||||
(In millions) |
Assets |
Liabilities |
Assets |
Liabilities |
|||||||||||||||||
Derivatives designated as hedges |
|||||||||||||||||||||
Foreign currency swaps |
1,713 |
$ |
28 |
$ |
102 |
928 |
$ |
1 |
$ |
99 |
|||||||||||
Interest rate swaps |
— |
— |
— |
302 |
— |
— |
|||||||||||||||
Total derivatives designated as hedges |
28 |
102 |
1 |
99 |
|||||||||||||||||
Derivatives not designated as hedges |
|||||||||||||||||||||
Equity options |
34,189 |
1,875 |
13 |
31,460 |
2,500 |
19 |
|||||||||||||||
Futures |
4 |
3 |
— |
1,134 |
7 |
— |
|||||||||||||||
Total return swaps |
61 |
1 |
— |
114 |
5 |
— |
|||||||||||||||
Foreign currency swaps |
42 |
3 |
4 |
41 |
21 |
3 |
|||||||||||||||
Interest rate swaps |
480 |
— |
1 |
385 |
— |
2 |
|||||||||||||||
Credit default swaps |
10 |
— |
5 |
10 |
— |
5 |
|||||||||||||||
Foreign currency forwards |
595 |
19 |
12 |
1,139 |
17 |
6 |
|||||||||||||||
Embedded derivatives |
|||||||||||||||||||||
Funds withheld |
— |
312 |
4 |
— |
312 |
22 |
|||||||||||||||
Interest sensitive contract liabilities |
— |
— |
8,065 |
— |
— |
7,436 |
|||||||||||||||
Total derivatives not designated as hedges |
2,213 |
8,104 |
2,862 |
7,493 |
|||||||||||||||||
Total derivatives |
$ |
2,241 |
$ |
8,206 |
$ |
2,863 |
$ |
7,592 |
23
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 December 2045. During the three months ended June 30, 2018 and 2017, we had foreign currency swap gains of $101 million and losses of $33 million, respectively, recorded in AOCI. During the six months ended June 30, 2018 and 2017, we had foreign currency swap gains of $45 million and losses of $38 million, respectively, recorded in AOCI. There were no amounts reclassified to income during the six months ended June 30, 2018 and 2017, and as of June 30, 2018, no amounts are expected to be reclassified to income within the next 12 months.
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.
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. Certain of these swaps entered into during the fourth quarter of 2016 were designated as fair value hedges. These fair value hedges were dedesignated during the second quarter of 2018 and there was no material impact as a result.
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.
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 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 June 30, |
Six months ended June 30, |
||||||||||||||
(In millions) |
2018 |
2017 |
2018 |
2017 |
|||||||||||
Equity options |
$ |
89 |
$ |
259 |
$ |
(53 |
) |
$ |
787 |
||||||
Futures |
1 |
(4 |
) |
(4 |
) |
(14 |
) |
||||||||
Swaps |
(9 |
) |
9 |
(7 |
) |
14 |
|||||||||
Foreign currency forwards |
14 |
19 |
7 |
20 |
|||||||||||
Embedded derivatives on funds withheld |
(49 |
) |
123 |
(81 |
) |
253 |
|||||||||
Amounts recognized in investment related gains (losses) |
46 |
406 |
(138 |
) |
1,060 |
||||||||||
Embedded derivatives in indexed annuity products1
|
(54 |
) |
(302 |
) |
184 |
(733 |
) |
||||||||
Total gains (losses) on derivatives not designated as hedges |
$ |
(8 |
) |
$ |
104 |
$ |
46 |
$ |
327 |
||||||
1 Included in interest sensitive contract benefits.
|
24
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 |
||||||||||||||||||
June 30, 2018 |
||||||||||||||||||||||||
Derivative assets |
$ |
1,929 |
$ |
(59 |
) |
$ |
(1,746 |
) |
$ |
124 |
$ |
(111 |
) |
$ |
13 |
|||||||||
Derivative liabilities |
(137 |
) |
59 |
56 |
(22 |
) |
— |
(22 |
) |
|||||||||||||||
December 31, 2017 |
||||||||||||||||||||||||
Derivative assets |
$ |
2,551 |
$ |
(59 |
) |
$ |
(2,323 |
) |
$ |
169 |
$ |
(221 |
) |
$ |
(52 |
) |
||||||||
Derivative liabilities |
(134 |
) |
59 |
63 |
(12 |
) |
— |
(12 |
) |
|||||||||||||||
1 |
The gross amounts of recognized derivative assets and derivative liabilities are reported on the condensed consolidated balance sheets. As of June 30, 2018 and December 31, 2017, 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. |
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), NCL Athene, LLC (NCL LLC), Apollo Asia Sprint Co-Investment Fund, L.P. (Sprint) and ALR Aircraft Investment Ireland Limited (ALR), which are investment funds. We are the only limited partner, Class A member or holder of profit participating notes 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, Class A member or holder of profit participating notes, 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. (AAA Investor) and its subsidiary, Apollo Life Re Ltd., in order to provide a capital base to support future acquisitions.
25
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 June 30, 2018 and December 31, 2017, 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. In addition, we have advanced amounts under a subordinated debt facility to MidCap and, as of June 30, 2018 and December 31, 2017, the principal balance was $245 million, and this is included in other related party investments on the condensed consolidated balance sheets.
NCL LLC was formed to hold the investment in Norwegian Cruise Line Holdings Ltd. (NCLH) shares, which were previously held by 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 equity securities. We are the primary beneficiary and consolidate NCL LLC, as substantially all of its activities are conducted on our behalf.
We have 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 complete skyscraper in Southeast Asia. We are the primary beneficiary and consolidate Sprint, as substantially all of its activities are conducted on our behalf.
During the first quarter of 2018, we invested in profit participating notes of ALR. ALR was formed to invest in a joint venture that provides airplane lease financing to a major commercial airline. We are the only investor in the profit participating notes and, as substantially all of the activities of ALR are conducted on our behalf, we are the primary beneficiary and consolidate ALR.
Trading securities – related party – Trading securities represents investments in fixed maturity 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. Trading securities held by CoInvest VI and CoInvest VII are related party investments because Apollo affiliates exercise significant influence over the operations of these investees.
Equity securities – related party – Changes in fair value of equity securities are recognized in investment related gains (losses) within revenues of consolidated variable interest entities on the condensed consolidated statements of income. Prior period unrealized changes in fair value of equity securities designated as AFS were recognized in OCI. Equity securities held by CoInvest VI, CoInvest VII, CoInvest Other and NCL LLC are related party investments because Apollo affiliates exercise significant influence over the operations of these investees.
The following table summarizes the change in unrealized gains (losses) on trading and equity securities of our consolidated variable interest entities still held as of the respective period end:
Three months ended June 30, |
Six months ended June 30, |
||||||||||||||
(In millions) |
2018 |
2017 |
2018 |
2017 |
|||||||||||
Trading securities – related party |
$ |
1 |
$ |
1 |
$ |
1 |
$ |
1 |
|||||||
Equity securities – related party |
(14 |
) |
9 |
(39 |
) |
5 |
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.
26
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:
June 30, 2018 |
|||||||||||||||||||
(In millions) |
Total |
NAV1
|
Level 1 |
Level 2 |
Level 3 |
||||||||||||||
Assets of consolidated variable interest entities |
|||||||||||||||||||
Investments |
|||||||||||||||||||
Fixed maturity securities, trading |
$ |
48 |
$ |
— |
$ |
— |
$ |
— |
$ |
48 |
|||||||||
Equity securities |
163 |
— |
137 |
— |
26 |
||||||||||||||
Investment funds |
542 |
541 |
— |
— |
1 |
||||||||||||||
Cash and cash equivalents |
2 |
— |
2 |
— |
— |
||||||||||||||
Total assets of consolidated VIEs measured at fair value |
$ |
755 |
$ |
541 |
$ |
139 |
$ |
— |
$ |
75 |
|||||||||
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy.
|
December 31, 2017 |
|||||||||||||||||||
(In millions) |
Total |
NAV1
|
Level 1 |
Level 2 |
Level 3 |
||||||||||||||
Assets of consolidated variable interest entities |
|||||||||||||||||||
Investments |
|||||||||||||||||||
Fixed maturity securities, trading |
$ |
48 |
$ |
— |
$ |
— |
$ |
— |
$ |
48 |
|||||||||
Equity securities |
240 |
— |
212 |
— |
28 |
||||||||||||||
Investment funds |
549 |
528 |
— |
— |
21 |
||||||||||||||
Cash and cash equivalents |
4 |
— |
4 |
— |
— |
||||||||||||||
Total assets of consolidated VIEs measured at fair value |
$ |
841 |
$ |
528 |
$ |
216 |
$ |
— |
$ |
97 |
|||||||||
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy.
|
Fair Value Valuation Methods – See Note 5 – Fair Value for the valuation methods used to determine the fair value of trading securities, equity securities, investment funds and cash and cash equivalents.
27
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 June 30, 2018 |
|||||||||||||||||||||||||||
(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 |
|||||||||||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||||||||||
Trading securities |
$ |
47 |
$ |
1 |
$ |
— |
$ |
— |
$ |
— |
$ |
48 |
$ |
1 |
|||||||||||||
Equity securities |
28 |
(2 |
) |
— |
— |
— |
26 |
(2 |
) |
||||||||||||||||||
Investment funds |
20 |
(3 |
) |
— |
(16 |
) |
— |
1 |
(3 |
) |
|||||||||||||||||
Total Level 3 assets of consolidated VIEs |
$ |
95 |
$ |
(4 |
) |
$ |
— |
$ |
(16 |
) |
$ |
— |
$ |
75 |
$ |
(4 |
) |
||||||||||
1 Related to instruments held at end of period.
|
Three months ended June 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 |
|||||||||||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||||||||||
Trading securities |
$ |
50 |
$ |
1 |
$ |
— |
$ |
— |
$ |
— |
$ |
51 |
$ |
— |
|||||||||||||
Equity securities |
32 |
(2 |
) |
— |
— |
— |
30 |
(2 |
) |
||||||||||||||||||
Investment funds |
38 |
— |
1 |
(7 |
) |
— |
32 |
— |
|||||||||||||||||||
Total Level 3 assets of consolidated VIEs |
$ |
120 |
$ |
(1 |
) |
$ |
1 |
$ |
(7 |
) |
$ |
— |
$ |
113 |
$ |
(2 |
) |
||||||||||
1 Related to instruments held at end of period.
|
Six months ended June 30, 2018 |
|||||||||||||||||||||||||||
(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 |
|||||||||||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||||||||||
Trading securities |
$ |
48 |
$ |
1 |
$ |
— |
$ |
(1 |
) |
$ |
— |
$ |
48 |
$ |
1 |
||||||||||||
Equity securities |
28 |
(2 |
) |
— |
— |
— |
26 |
(2 |
) |
||||||||||||||||||
Investment funds |
21 |
(3 |
) |
— |
(17 |
) |
— |
1 |
(3 |
) |
|||||||||||||||||
Total Level 3 assets of consolidated VIEs |
$ |
97 |
$ |
(4 |
) |
$ |
— |
$ |
(18 |
) |
$ |
— |
$ |
75 |
$ |
(4 |
) |
||||||||||
1 Related to instruments held at end of period.
|
Six months ended June 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 |
|||||||||||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||||||||||
Trading securities |
$ |
50 |
$ |
1 |
$ |
— |
$ |
— |
$ |
— |
$ |
51 |
$ |
1 |
|||||||||||||
Equity securities |
43 |
(13 |
) |
— |
— |
— |
30 |
(13 |
) |
||||||||||||||||||
Investment funds |
38 |
— |
1 |
(7 |
) |
— |
32 |
— |
|||||||||||||||||||
Total Level 3 assets of consolidated VIEs |
$ |
131 |
$ |
(12 |
) |
$ |
1 |
$ |
(7 |
) |
$ |
— |
$ |
113 |
$ |
(12 |
) |
||||||||||
1 Related to instruments held at end of period.
|
There were no transfers between Level 1 or Level 2 during the three and six months ended June 30, 2018 and 2017.
28
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Significant Unobservable Inputs – For certain Level 3 trading securities and investment funds, the valuations have significant unobservable inputs, which may include, but are not limited to, 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. For example, the comparable multiples may be multiplied by the underlying investment’s earnings before interest, tax, depreciation and amortization or by some other applicable financial metric to establish the total enterprise value of the underlying investments. A comparable multiple consistent with the implied trading multiple of public industry peers or relevant recent private transactions are used when available.
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 may be 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 June 30, |
Six months ended June 30, |
||||||||||||||
(In millions) |
2018 |
2017 |
2018 |
2017 |
|||||||||||
Trading securities |
$ |
1 |
$ |
1 |
$ |
1 |
$ |
1 |
|||||||
Investment funds |
3 |
— |
9 |
5 |
|||||||||||
Total gains (losses) |
$ |
4 |
$ |
1 |
$ |
10 |
$ |
6 |
Fair Value of Financial Instruments Not Held at Fair Value – Assets of consolidated variable interest entities includes $51 million and $22 million of investment funds accounted for under the equity method and not carried at fair value as of June 30, 2018 and December 31, 2017, respectively; however, the carrying amount approximates fair value.
Non-Consolidated Securities and Investment Funds
Fixed Maturity 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. 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’ 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 of 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.
Investment funds – Investment funds include non-fixed income, alternative investments in the form of limited partnerships or similar legal structures.
Our risk of loss associated with our non-consolidated investments is limited and depends on the investment, including any unfunded commitments, as follows: (1) investment funds accounted for under the equity method are limited to our capital contributions, net of return of capital; (2) investment funds under the fair value option are limited to the fair value; (3) AFS securities and other investments are limited to amortized cost; and (4) trading securities are limited to carrying value.
The following summarizes the carrying value and maximum loss exposure of these non-consolidated investments:
June 30, 2018 |
December 31, 2017 |
||||||||||||||
(In millions) |
Carrying Value |
Maximum Loss Exposure |
Carrying Value |
Maximum Loss Exposure |
|||||||||||
Investment funds |
$ |
633 |
$ |
1,242 |
$ |
699 |
$ |
1,036 |
|||||||
Investment in related parties – investment funds |
1,836 |
3,644 |
1,310 |
2,598 |
|||||||||||
Assets of consolidated variable interest entities – investment funds |
593 |
594 |
571 |
594 |
|||||||||||
Investment in fixed maturity securities |
21,879 |
21,272 |
21,022 |
20,278 |
|||||||||||
Investment in related parties – fixed maturity securities |
1,234 |
1,321 |
713 |
792 |
|||||||||||
Total non-consolidated investments |
$ |
26,175 |
$ |
28,073 |
$ |
24,315 |
$ |
25,298 |
29
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:
June 30, 2018 |
December 31, 2017 |
||||||||||||||||||||
(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 |
$ |
237 |
37.4 |
% |
0 |
– |
6 |
$ |
271 |
38.8 |
% |
0 |
– |
7 |
|||||||
Real estate and other real assets |
179 |
28.3 |
% |
0 |
– |
7 |
161 |
23.0 |
% |
1 |
– |
7 |
|||||||||
Natural resources |
4 |
0.6 |
% |
0 |
– |
0 |
4 |
0.6 |
% |
1 |
– |
1 |
|||||||||
Hedge funds |
53 |
8.4 |
% |
0 |
– |
2 |
61 |
8.7 |
% |
0 |
– |
3 |
|||||||||
Credit funds |
160 |
25.3 |
% |
0 |
– |
4 |
202 |
28.9 |
% |
0 |
– |
5 |
|||||||||
Total investment funds |
633 |
100.0 |
% |
699 |
100.0 |
% |
|||||||||||||||
Investment funds – related parties |
|||||||||||||||||||||
Private equity – A-A Mortgage1
|
432 |
23.5 |
% |
4 |
– |
4 |
403 |
30.8 |
% |
5 |
– |
5 |
|||||||||
Private equity – other |
441 |
24.0 |
% |
0 |
– |
6 |
180 |
13.7 |
% |
0 |
– |
10 |
|||||||||
Real estate and other real assets |
499 |
27.2 |
% |
0 |
– |
10 |
297 |
22.7 |
% |
0 |
– |
7 |
|||||||||
Natural resources |
91 |
5.0 |
% |
3 |
– |
4 |
74 |
5.6 |
% |
4 |
– |
6 |
|||||||||
Hedge funds |
98 |
5.3 |
% |
0 |
– |
11 |
93 |
7.1 |
% |
9 |
– |
9 |
|||||||||
Credit funds |
275 |
15.0 |
% |
0 |
– |
3 |
263 |
20.1 |
% |
2 |
– |
4 |
|||||||||
Total investment funds – related parties |
1,836 |
100.0 |
% |
1,310 |
100.0 |
% |
|||||||||||||||
Investment funds owned by consolidated VIEs |
|||||||||||||||||||||
Private equity – MidCap2
|
541 |
91.2 |
% |
N/A |
528 |
92.5 |
% |
N/A |
|||||||||||||
Credit funds |
1 |
0.2 |
% |
0 |
– |
2 |
21 |
3.7 |
% |
0 |
– |
3 |
|||||||||
Real estate and other real assets |
51 |
8.6 |
% |
0 |
– |
4 |
22 |
3.8 |
% |
2 |
– |
3 |
|||||||||
Total investment funds owned by consolidated VIEs |
593 |
100.0 |
% |
571 |
100.0 |
% |
|||||||||||||||
Total investment funds including related parties and funds owned by consolidated VIEs |
$ |
3,062 |
$ |
2,580 |
|||||||||||||||||
1 A-A Mortgage Opportunities, L.P. (A-A Mortgage) is a platform to originate residential mortgage loans and mortgage servicing rights. Our total investment in A-A Mortgage, including amounts loaned to A-A Mortgage affiliates, was $604 million and $455 million as of June 30, 2018 and December 31, 2017, respectively.
| |||||||||||||||||||||
2 Our total investment in MidCap, including amounts advanced under credit facilities, was $779 million and $766 million as of June 30, 2018 and December 31, 2017, respectively.
|
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) |
June 30, 2018 |
December 31, 2017 |
|||||
Ownership Percentage |
|||||||
100% |
$ |
15 |
$ |
35 |
|||
50% – 99% |
837 |
520 |
|||||
3% – 49% |
1,399 |
1,301 |
|||||
Equity method investment funds |
$ |
2,251 |
$ |
1,856 |
The following table presents the carrying value by ownership percentage of investment funds where we elected the fair value option, including related party investment funds and investment funds owned by consolidated VIEs:
(In millions) |
June 30, 2018 |
December 31, 2017 |
|||||
Ownership Percentage |
|||||||
50% – 99% |
$ |
— |
$ |
— |
|||
3% – 49% |
678 |
590 |
|||||
Less than 3% |
133 |
134 |
|||||
Fair value option investment funds |
$ |
811 |
$ |
724 |
30
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.
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’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.
31
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:
June 30, 2018 |
|||||||||||||||||||
(In millions) |
Total |
NAV1
|
Level 1 |
Level 2 |
Level 3 |
||||||||||||||
Assets |
|||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||
AFS securities |
|||||||||||||||||||
U.S. government and agencies |
$ |
142 |
$ |
— |
$ |
140 |
$ |
2 |
$ |
— |
|||||||||
U.S. state, municipal and political subdivisions |
1,271 |
— |
— |
1,271 |
— |
||||||||||||||
Foreign governments |
199 |
— |
— |
199 |
— |
||||||||||||||
Corporate |
36,854 |
— |
— |
35,892 |
962 |
||||||||||||||
CLO |
5,352 |
— |
— |
5,071 |
281 |
||||||||||||||
ABS |
4,716 |
— |
— |
3,265 |
1,451 |
||||||||||||||
CMBS |
2,324 |
— |
— |
2,127 |
197 |
||||||||||||||
RMBS |
8,904 |
— |
— |
8,897 |
7 |
||||||||||||||
Total AFS securities |
59,762 |
— |
140 |
56,724 |
2,898 |
||||||||||||||
Trading securities |
|||||||||||||||||||
U.S. government and agencies |
5 |
— |
3 |
2 |
— |
||||||||||||||
U.S. state, municipal and political subdivisions |
127 |
— |
— |
110 |
17 |
||||||||||||||
Corporate |
1,338 |
— |
— |
1,334 |
4 |
||||||||||||||
CLO |
26 |
— |
— |
— |
26 |
||||||||||||||
ABS |
89 |
— |
— |
— |
89 |
||||||||||||||
CMBS |
49 |
— |
— |
49 |
— |
||||||||||||||
RMBS |
419 |
— |
— |
115 |
304 |
||||||||||||||
Total trading securities |
2,053 |
— |
3 |
1,610 |
440 |
||||||||||||||
Equity securities |
216 |
— |
20 |
194 |
2 |
||||||||||||||
Mortgage loans |
38 |
— |
— |
— |
38 |
||||||||||||||
Investment funds |
126 |
95 |
— |
— |
31 |
||||||||||||||
Funds withheld at interest – embedded derivative |
150 |
— |
— |
— |
150 |
||||||||||||||
Derivative assets |
1,929 |
— |
3 |
1,926 |
— |
||||||||||||||
Short-term investments |
289 |
— |
58 |
231 |
— |
||||||||||||||
Other investments |
50 |
— |
— |
50 |
— |
||||||||||||||
Cash and cash equivalents |
3,608 |
— |
3,608 |
— |
— |
||||||||||||||
Restricted cash |
178 |
— |
178 |
— |
— |
||||||||||||||
Investments in related parties |
|||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||
AFS securities |
|||||||||||||||||||
CLO |
472 |
— |
— |
433 |
39 |
||||||||||||||
ABS |
484 |
— |
— |
438 |
46 |
||||||||||||||
Total AFS securities – related party |
956 |
— |
— |
871 |
85 |
||||||||||||||
Trading securities |
|||||||||||||||||||
CLO |
114 |
— |
— |
— |
114 |
||||||||||||||
ABS |
164 |
— |
— |
— |
164 |
||||||||||||||
Total trading securities – related party |
278 |
— |
— |
— |
278 |
||||||||||||||
Investment funds |
198 |
93 |
— |
— |
105 |
||||||||||||||
Funds withheld at interest – embedded derivative |
162 |
— |
— |
— |
162 |
||||||||||||||
Short-term investments |
172 |
— |
— |
162 |
10 |
||||||||||||||
Reinsurance recoverable |
1,717 |
— |
— |
— |
1,717 |
||||||||||||||
Total assets measured at fair value |
$ |
71,882 |
$ |
188 |
$ |
4,010 |
$ |
61,768 |
$ |
5,916 |
|||||||||
(Continued) |
32
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018 |
|||||||||||||||||||
(In millions) |
Total |
NAV1
|
Level 1 |
Level 2 |
Level 3 |
||||||||||||||
Liabilities |
|||||||||||||||||||
Interest sensitive contract liabilities |
|||||||||||||||||||
Embedded derivative |
$ |
8,065 |
$ |
— |
$ |
— |
$ |
— |
$ |
8,065 |
|||||||||
Universal life benefits |
943 |
— |
— |
— |
943 |
||||||||||||||
Future policy benefits |
|||||||||||||||||||
AmerUs Closed Block |
1,490 |
— |
— |
— |
1,490 |
||||||||||||||
ILICO Closed Block and life benefits |
759 |
— |
— |
— |
759 |
||||||||||||||
Derivative liabilities |
137 |
— |
— |
132 |
5 |
||||||||||||||
Funds withheld liability – embedded derivative |
4 |
— |
— |
4 |
— |
||||||||||||||
Total liabilities measured at fair value |
$ |
11,398 |
$ |
— |
$ |
— |
$ |
136 |
$ |
11,262 |
|||||||||
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, 2017 |
|||||||||||||||||||
(In millions) |
Total |
NAV1
|
Level 1 |
Level 2 |
Level 3 |
||||||||||||||
Assets |
|||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||
AFS securities |
|||||||||||||||||||
U.S. government and agencies |
$ |
62 |
$ |
— |
$ |
26 |
$ |
36 |
$ |
— |
|||||||||
U.S. state, municipal and political subdivisions |
1,165 |
— |
— |
1,165 |
— |
||||||||||||||
Foreign governments |
2,683 |
— |
— |
2,683 |
— |
||||||||||||||
Corporate |
36,660 |
— |
— |
36,082 |
578 |
||||||||||||||
CLO |
5,084 |
— |
— |
5,020 |
64 |
||||||||||||||
ABS |
3,971 |
— |
— |
2,510 |
1,461 |
||||||||||||||
CMBS |
2,021 |
— |
— |
1,884 |
137 |
||||||||||||||
RMBS |
9,366 |
— |
— |
9,065 |
301 |
||||||||||||||
Total AFS securities |
61,012 |
— |
26 |
58,445 |
2,541 |
||||||||||||||
Trading securities |
|||||||||||||||||||
U.S. government and agencies |
3 |
— |
3 |
— |
— |
||||||||||||||
U.S. state, municipal and political subdivisions |
138 |
— |
— |
121 |
17 |
||||||||||||||
Corporate |
1,475 |
— |
— |
1,475 |
— |
||||||||||||||
CLO |
27 |
— |
— |
10 |
17 |
||||||||||||||
ABS |
94 |
— |
— |
17 |
77 |
||||||||||||||
CMBS |
51 |
— |
— |
51 |
— |
||||||||||||||
RMBS |
408 |
— |
— |
66 |
342 |
||||||||||||||
Total trading securities |
2,196 |
— |
3 |
1,740 |
453 |
||||||||||||||
(Continued) |
33
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
December 31, 2017 |
|||||||||||||||||||
(In millions) |
Total |
NAV1
|
Level 1 |
Level 2 |
Level 3 |
||||||||||||||
Equity securities |
790 |
— |
18 |
764 |
8 |
||||||||||||||
Mortgage loans |
41 |
— |
— |
— |
41 |
||||||||||||||
Investment funds |
145 |
104 |
— |
— |
41 |
||||||||||||||
Funds withheld at interest – embedded derivative |
312 |
— |
— |
— |
312 |
||||||||||||||
Derivative assets |
2,551 |
— |
7 |
2,544 |
— |
||||||||||||||
Short-term investments |
201 |
— |
40 |
161 |
— |
||||||||||||||
Cash and cash equivalents |
4,888 |
— |
4,888 |
— |
— |
||||||||||||||
Restricted cash |
105 |
— |
105 |
— |
— |
||||||||||||||
Investments in related parties |
|||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||
AFS securities |
|||||||||||||||||||
CLO |
360 |
— |
— |
360 |
— |
||||||||||||||
ABS |
46 |
— |
— |
46 |
— |
||||||||||||||
Total AFS securities – related party |
406 |
— |
— |
406 |
— |
||||||||||||||
Trading securities |
|||||||||||||||||||
CLO |
132 |
— |
— |
27 |
105 |
||||||||||||||
ABS |
175 |
— |
— |
175 |
— |
||||||||||||||
Total trading securities – related party |
307 |
— |
— |
202 |
105 |
||||||||||||||
Investment funds |
30 |
30 |
— |
— |
— |
||||||||||||||
Short-term investments |
52 |
— |
— |
52 |
— |
||||||||||||||
Reinsurance recoverable |
1,824 |
— |
— |
— |
1,824 |
||||||||||||||
Total assets measured at fair value |
$ |
74,860 |
$ |
134 |
$ |
5,087 |
$ |
64,314 |
$ |
5,325 |
|||||||||
Liabilities |
|||||||||||||||||||
Interest sensitive contract liabilities |
|||||||||||||||||||
Embedded derivative |
$ |
7,436 |
$ |
— |
$ |
— |
$ |
— |
$ |
7,436 |
|||||||||
Universal life benefits |
1,005 |
— |
— |
— |
1,005 |
||||||||||||||
Unit-linked contracts |
488 |
— |
— |
488 |
— |
||||||||||||||
Future policy benefits |
|||||||||||||||||||
AmerUs Closed Block |
1,625 |
— |
— |
— |
1,625 |
||||||||||||||
ILICO Closed Block and life benefits |
803 |
— |
— |
— |
803 |
||||||||||||||
Derivative liabilities |
134 |
— |
— |
129 |
5 |
||||||||||||||
Funds withheld liability – embedded derivative |
22 |
— |
— |
22 |
— |
||||||||||||||
Total liabilities measured at fair value |
$ |
11,513 |
$ |
— |
$ |
— |
$ |
639 |
$ |
10,874 |
|||||||||
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy.
| |||||||||||||||||||
(Concluded) |
See 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:
Fixed maturity – AFS and trading securities – 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. and non-U.S. corporate bonds, U.S. agency and government guaranteed securities, CLO, ABS, CMBS and RMBS.
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’s ability to compete in its relevant market. Privately placed fixed maturity securities are classified as Level 2 or 3.
34
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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.
Funds withheld (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 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 obligations to the closed block business. This component is the present value of the projected release of required capital and future earnings before income taxes on required capital supporting the AmerUs Closed Block, discounted at a rate which represents a market participant’s required rate of return, less the initial required capital. Unobservable inputs include estimates for these items. The AmerUs Closed Block policyholder liabilities and any corresponding reinsurance recoverable are classified as Level 3.
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’s obligations to the closed block business. This component uses the present value of future 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 non-performance risk. Unobservable inputs include estimates for these items. 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). 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. These universal life policyholder liabilities and corresponding reinsurance recoverable are classified as Level 3.
Fair Value Option—The following represents the gains (losses) recorded for instruments for which we have elected the fair value option:
Three months ended June 30, |
Six months ended June 30, |
||||||||||||||
(In millions) |
2018 |
2017 |
2018 |
2017 |
|||||||||||
Trading securities |
$ |
(76 |
) |
$ |
41 |
$ |
(165 |
) |
$ |
27 |
|||||
Investment funds, including related party investment funds |
10 |
7 |
6 |
14 |
|||||||||||
Future policy benefits |
51 |
(19 |
) |
135 |
(15 |
) |
|||||||||
Total gains (losses) |
$ |
(15 |
) |
$ |
29 |
$ |
(24 |
) |
$ |
26 |
35
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Gains and losses on trading and equity securities are recorded in investment related gains (losses) on the condensed consolidated statements of income. Prior period unrealized gains and losses on equity securities designated as AFS were recorded in OCI. 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. 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. 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.
The following summarizes information for fair value option mortgage loans:
(In millions) |
June 30, 2018 |
December 31, 2017 |
|||||
Unpaid principal balance |
$ |
37 |
$ |
40 |
|||
Mark to fair value |
1 |
1 |
|||||
Fair value |
$ |
38 |
$ |
41 |
There were no fair value option mortgage loans 90 days or more past due as of June 30, 2018 and December 31, 2017.
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 six months ended June 30, 2018 and 2017, there were no transfers between Level 1 and Level 2.
36
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Level 3 Financial Instruments—The following is a reconciliation for all Level 3 assets and liabilities measured at fair value on a recurring basis:
Three months ended June 30, 2018 |
|||||||||||||||||||||||||||||||
Total realized and unrealized gains (losses) |
Transfers |
||||||||||||||||||||||||||||||
(In millions) |
Beginning Balance |
Included in income |
Included in OCI |
Net purchases, issuances, sales and settlements |
In |
(Out) |
Ending Balance |
Total gains (losses) included in earnings1
|
|||||||||||||||||||||||
Assets |
|||||||||||||||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||||||||||||||
AFS securities |
|||||||||||||||||||||||||||||||
Corporate |
$ |
681 |
$ |
(8 |
) |
$ |
(5 |
) |
$ |
290 |
$ |
28 |
$ |
(24 |
) |
$ |
962 |
$ |
— |
||||||||||||
CLO |
167 |
— |
— |
211 |
32 |
(129 |
) |
281 |
— |
||||||||||||||||||||||
ABS |
1,294 |
3 |
(9 |
) |
273 |
— |
(110 |
) |
1,451 |
— |
|||||||||||||||||||||
CMBS |
63 |
— |
1 |
152 |
— |
(19 |
) |
197 |
— |
||||||||||||||||||||||
RMBS |
38 |
— |
— |
— |
— |
(31 |
) |
7 |
— |
||||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||
U.S. state, municipal and political subdivisions |
17 |
— |
— |
— |
— |
— |
17 |
— |
|||||||||||||||||||||||
Corporate |
— |
— |
— |
4 |
— |
— |
4 |
— |
|||||||||||||||||||||||
CLO |
1 |
— |
— |
— |
26 |
(1 |
) |
26 |
— |
||||||||||||||||||||||
ABS |
— |
— |
— |
— |
89 |
— |
89 |
— |
|||||||||||||||||||||||
RMBS |
321 |
(17 |
) |
— |
— |
— |
— |
304 |
3 |
||||||||||||||||||||||
Equity securities |
— |
1 |
— |
1 |
— |
— |
2 |
1 |
|||||||||||||||||||||||
Mortgage loans |
41 |
— |
— |
(3 |
) |
— |
— |
38 |
— |
||||||||||||||||||||||
Investment funds |
25 |
6 |
— |
— |
— |
— |
31 |
6 |
|||||||||||||||||||||||
Funds withheld at interest – embedded derivative |
207 |
(57 |
) |
— |
— |
— |
— |
150 |
— |
||||||||||||||||||||||
Investments in related parties |
|||||||||||||||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||||||||||||||
AFS securities |
|||||||||||||||||||||||||||||||
CLO |
62 |
— |
— |
38 |
— |
(61 |
) |
39 |
— |
||||||||||||||||||||||
ABS |
— |
— |
— |
46 |
— |
— |
46 |
— |
|||||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||
CLO |
91 |
(1 |
) |
— |
— |
24 |
— |
114 |
1 |
||||||||||||||||||||||
ABS |
171 |
(7 |
) |
— |
— |
— |
— |
164 |
(7 |
) |
|||||||||||||||||||||
Equity securities |
— |
— |
— |
— |
— |
— |
— |
— |
|||||||||||||||||||||||
Investment funds |
111 |
(6 |
) |
— |
— |
— |
— |
105 |
(6 |
) |
|||||||||||||||||||||
Funds withheld at interest – embedded derivative |
— |
162 |
— |
— |
— |
— |
162 |
— |
|||||||||||||||||||||||
Short-term investments |
— |
— |
— |
10 |
— |
— |
10 |
— |
|||||||||||||||||||||||
Reinsurance recoverable |
1,713 |
4 |
— |
— |
— |
— |
1,717 |
— |
|||||||||||||||||||||||
Total Level 3 assets |
$ |
5,003 |
$ |
80 |
$ |
(13 |
) |
$ |
1,022 |
$ |
199 |
$ |
(375 |
) |
$ |
5,916 |
$ |
(2 |
) |
||||||||||||
Liabilities |
|||||||||||||||||||||||||||||||
Interest sensitive contract liabilities |
|||||||||||||||||||||||||||||||
Embedded derivative |
$ |
(7,254 |
) |
$ |
(54 |
) |
$ |
— |
$ |
(757 |
) |
$ |
— |
$ |
— |
$ |
(8,065 |
) |
$ |
— |
|||||||||||
Universal life benefits |
(934 |
) |
(9 |
) |
— |
— |
— |
— |
(943 |
) |
— |
||||||||||||||||||||
Future policy benefits |
|||||||||||||||||||||||||||||||
AmerUs Closed Block |
(1,541 |
) |
51 |
— |
— |
— |
— |
(1,490 |
) |
— |
|||||||||||||||||||||
ILICO Closed Block and life benefits |
(764 |
) |
5 |
— |
— |
— |
— |
(759 |
) |
— |
|||||||||||||||||||||
Derivative liabilities |
(5 |
) |
— |
— |
— |
— |
— |
(5 |
) |
— |
|||||||||||||||||||||
Total Level 3 liabilities |
$ |
(10,498 |
) |
$ |
(7 |
) |
$ |
— |
$ |
(757 |
) |
$ |
— |
$ |
— |
$ |
(11,262 |
) |
$ |
— |
|||||||||||
1 Related to instruments held at end of period.
|
37
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three months ended June 30, 2017 |
|||||||||||||||||||||||||||||||
Total realized and unrealized gains (losses) |
Transfers |
||||||||||||||||||||||||||||||
(In millions) |
Beginning Balance |
Included in income |
Included in OCI |
Net purchases, issuances, sales and settlements |
In |
(Out) |
Ending Balance |
Total gains (losses) included in earnings1
|
|||||||||||||||||||||||
Assets |
|||||||||||||||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||||||||||||||
AFS Securities |
|||||||||||||||||||||||||||||||
Foreign governments |
$ |
13 |
$ |
1 |
$ |
— |
$ |
— |
$ |
— |
$ |
— |
$ |
14 |
$ |
— |
|||||||||||||||
Corporate |
490 |
3 |
4 |
28 |
— |
(73 |
) |
452 |
— |
||||||||||||||||||||||
CLO |
100 |
— |
4 |
17 |
11 |
(51 |
) |
81 |
— |
||||||||||||||||||||||
ABS |
1,222 |
5 |
3 |
11 |
— |
(148 |
) |
1,093 |
— |
||||||||||||||||||||||
CMBS |
147 |
1 |
— |
13 |
48 |
(87 |
) |
122 |
— |
||||||||||||||||||||||
RMBS |
60 |
1 |
2 |
6 |
243 |
— |
312 |
— |
|||||||||||||||||||||||
Trading Securities |
|||||||||||||||||||||||||||||||
U.S. state, municipal and political subdivisions |
17 |
— |
— |
— |
— |
— |
17 |
— |
|||||||||||||||||||||||
CLO |
27 |
— |
— |
— |
— |
(5 |
) |
22 |
1 |
||||||||||||||||||||||
RMBS |
82 |
(4 |
) |
— |
22 |
— |
— |
100 |
— |
||||||||||||||||||||||
Equity securities |
5 |
— |
— |
1 |
— |
— |
6 |
— |
|||||||||||||||||||||||
Mortgage loans |
44 |
— |
— |
(1 |
) |
— |
— |
43 |
— |
||||||||||||||||||||||
Funds withheld at interest – embedded derivative |
212 |
67 |
— |
— |
— |
— |
279 |
— |
|||||||||||||||||||||||
Investments in related parties |
|||||||||||||||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||||||||||||||
Trading securities, CLO |
131 |
5 |
— |
(12 |
) |
31 |
(32 |
) |
123 |
5 |
|||||||||||||||||||||
Short-term investments |
20 |
— |
— |
8 |
— |
— |
28 |
— |
|||||||||||||||||||||||
Reinsurance recoverable |
1,738 |
44 |
— |
— |
— |
— |
1,782 |
— |
|||||||||||||||||||||||
Total Level 3 assets |
$ |
4,308 |
$ |
123 |
$ |
13 |
$ |
93 |
$ |
333 |
$ |
(396 |
) |
$ |
4,474 |
$ |
6 |
||||||||||||||
Liabilities |
|||||||||||||||||||||||||||||||
Interest sensitive contract liabilities |
|||||||||||||||||||||||||||||||
Embedded derivative |
$ |
(5,793 |
) |
$ |
(302 |
) |
$ |
— |
$ |
(112 |
) |
$ |
— |
$ |
— |
$ |
(6,207 |
) |
$ |
— |
|||||||||||
Universal life benefits |
(910 |
) |
(44 |
) |
— |
— |
— |
— |
(954 |
) |
— |
||||||||||||||||||||
Future policy benefits |
|||||||||||||||||||||||||||||||
AmerUs Closed Block |
(1,602 |
) |
(19 |
) |
— |
— |
— |
— |
(1,621 |
) |
— |
||||||||||||||||||||
ILICO Closed Block and life benefits |
(813 |
) |
1 |
— |
— |
— |
— |
(812 |
) |
— |
|||||||||||||||||||||
Derivative liabilities |
(7 |
) |
1 |
— |
— |
— |
— |
(6 |
) |
— |
|||||||||||||||||||||
Total Level 3 liabilities |
$ |
(9,125 |
) |
$ |
(363 |
) |
$ |
— |
$ |
(112 |
) |
$ |
— |
$ |
— |
$ |
(9,600 |
) |
$ |
— |
|||||||||||
1 Related to instruments held at end of period.
|
38
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Six months ended June 30, 2018 |
|||||||||||||||||||||||||||||||
Total realized and unrealized gains (losses) |
Transfers |
||||||||||||||||||||||||||||||
(In millions) |
Beginning Balance |
Included in income |
Included in OCI |
Net purchases, issuances, sales and settlements |
In |
(Out) |
Ending Balance |
Total gains (losses) included in earnings1
|
|||||||||||||||||||||||
Assets |
|||||||||||||||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||||||||||||||
AFS securities |
|||||||||||||||||||||||||||||||
Corporate |
$ |
578 |
$ |
(3 |
) |
$ |
(9 |
) |
$ |
340 |
$ |
64 |
$ |
(8 |
) |
$ |
962 |
$ |
— |
||||||||||||
CLO |
64 |
— |
2 |
226 |
17 |
(28 |
) |
281 |
— |
||||||||||||||||||||||
ABS |
1,461 |
5 |
(17 |
) |
157 |
— |
(155 |
) |
1,451 |
— |
|||||||||||||||||||||
CMBS |
137 |
1 |
(3 |
) |
152 |
— |
(90 |
) |
197 |
— |
|||||||||||||||||||||
RMBS |
301 |
3 |
(8 |
) |
(19 |
) |
7 |
(277 |
) |
7 |
— |
||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||
U.S. state, municipal and political subdivisions |
17 |
— |
— |
— |
— |
— |
17 |
— |
|||||||||||||||||||||||
Corporate |
— |
— |
— |
4 |
— |
— |
4 |
— |
|||||||||||||||||||||||
CLO |
17 |
(1 |
) |
— |
— |
10 |
— |
26 |
— |
||||||||||||||||||||||
ABS |
77 |
(4 |
) |
— |
— |
16 |
— |
89 |
(3 |
) |
|||||||||||||||||||||
RMBS |
342 |
(38 |
) |
— |
— |
— |
— |
304 |
2 |
||||||||||||||||||||||
Equity securities |
8 |
1 |
— |
(7) |
— |
— |
2 |
— |
|||||||||||||||||||||||
Mortgage loans |
41 |
— |
— |
(3 |
) |
— |
— |
38 |
— |
||||||||||||||||||||||
Investment funds |
41 |
(3 |
) |
— |
(7 |
) |
— |
— |
31 |
(3 |
) |
||||||||||||||||||||
Funds withheld at interest – embedded derivative |
312 |
(162 |
) |
— |
— |
— |
— |
150 |
— |
||||||||||||||||||||||
Investments in related parties |
|||||||||||||||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||||||||||||||
AFS securities |
|||||||||||||||||||||||||||||||
CLO |
— |
— |
— |
39 |
— |
— |
39 |
— |
|||||||||||||||||||||||
ABS |
— |
— |
— |
46 |
— |
— |
46 |
— |
|||||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||
CLO |
105 |
(2 |
) |
— |
(18 |
) |
29 |
— |
114 |
1 |
|||||||||||||||||||||
ABS |
— |
— |
— |
— |
164 |
— |
164 |
— |
|||||||||||||||||||||||
Investment funds |
— |
(3 |
) |
— |
108 |
— |
— |
105 |
(3 |
) |
|||||||||||||||||||||
Funds withheld at interest – embedded derivative |
— |
162 |
— |
— |
— |
— |
162 |
— |
|||||||||||||||||||||||
Short-term investments |
— |
— |
— |
10 |
— |
— |
10 |
— |
|||||||||||||||||||||||
Reinsurance recoverable |
1,824 |
(107 |
) |
— |
— |
— |
— |
1,717 |
— |
||||||||||||||||||||||
Total Level 3 assets |
$ |
5,325 |
$ |
(151 |
) |
$ |
(35 |
) |
$ |
1,028 |
$ |
307 |
$ |
(558 |
) |
$ |
5,916 |
$ |
(6 |
) |
|||||||||||
Liabilities |
|||||||||||||||||||||||||||||||
Interest sensitive contract liabilities |
|||||||||||||||||||||||||||||||
Embedded derivative |
$ |
(7,436 |
) |
$ |
184 |
$ |
— |
$ |
(813 |
) |
$ |
— |
$ |
— |
$ |
(8,065 |
) |
$ |
— |
||||||||||||
Universal life benefits |
(1,005 |
) |
62 |
— |
— |
— |
— |
(943 |
) |
— |
|||||||||||||||||||||
Future policy benefits |
|||||||||||||||||||||||||||||||
AmerUs Closed Block |
(1,625 |
) |
135 |
— |
— |
— |
— |
(1,490 |
) |
— |
|||||||||||||||||||||
ILICO Closed Block and life benefits |
(803 |
) |
44 |
— |
— |
— |
— |
(759 |
) |
— |
|||||||||||||||||||||
Derivative liabilities |
(5 |
) |
— |
— |
— |
— |
— |
(5 |
) |
— |
|||||||||||||||||||||
Total Level 3 liabilities |
$ |
(10,874 |
) |
$ |
425 |
$ |
— |
$ |
(813 |
) |
$ |
— |
$ |
— |
$ |
(11,262 |
) |
$ |
— |
||||||||||||
1 Related to instruments held at end of period.
|
39
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Six months ended June 30, 2017 |
|||||||||||||||||||||||||||||||
Total realized and unrealized gains (losses) |
Transfers |
||||||||||||||||||||||||||||||
(In millions) |
Beginning balance |
Included in income |
Included in OCI |
Net purchases, issuances, sales and settlements |
In |
Out |
Ending balance |
Total gains (losses) included in earnings1
|
|||||||||||||||||||||||
Assets |
|||||||||||||||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||||||||||||||
AFS Securities |
|||||||||||||||||||||||||||||||
U.S. state, municipal and political subdivisions |
$ |
5 |
$ |
16 |
$ |
(1 |
) |
$ |
(20 |
) |
$ |
— |
$ |
— |
$ |
— |
$ |
— |
|||||||||||||
Foreign governments |
14 |
1 |
— |
(1 |
) |
— |
— |
14 |
— |
||||||||||||||||||||||
Corporate |
370 |
4 |
10 |
105 |
— |
(37 |
) |
452 |
— |
||||||||||||||||||||||
CLO |
158 |
— |
9 |
7 |
11 |
(104 |
) |
81 |
— |
||||||||||||||||||||||
ABS |
1,160 |
9 |
17 |
42 |
— |
(135 |
) |
1,093 |
— |
||||||||||||||||||||||
CMBS |
152 |
1 |
(3 |
) |
13 |
17 |
(58 |
) |
122 |
— |
|||||||||||||||||||||
RMBS |
17 |
1 |
— |
6 |
296 |
(8 |
) |
312 |
— |
||||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||
U.S. state, municipal and political subdivisions |
17 |
— |
— |
— |
— |
— |
17 |
— |
|||||||||||||||||||||||
CLO |
43 |
(1 |
) |
— |
(15 |
) |
— |
(5 |
) |
22 |
2 |
||||||||||||||||||||
RMBS |
96 |
(9 |
) |
— |
24 |
— |
(11 |
) |
100 |
(1 |
) |
||||||||||||||||||||
Equity Securities |
5 |
— |
— |
1 |
— |
— |
6 |
— |
|||||||||||||||||||||||
Mortgage loans |
44 |
— |
— |
(1 |
) |
— |
— |
43 |
— |
||||||||||||||||||||||
Funds withheld at interest – embedded derivative |
140 |
139 |
— |
— |
— |
— |
279 |
— |
|||||||||||||||||||||||
Investments in related parties |
|||||||||||||||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||||||||||||||
AFS Securities |
|||||||||||||||||||||||||||||||
ABS |
56 |
— |
1 |
(4 |
) |
— |
(53 |
) |
— |
— |
|||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||
CLO |
195 |
(3 |
) |
— |
(26 |
) |
— |
(43 |
) |
123 |
(1 |
) |
|||||||||||||||||||
Short-term investments |
— |
— |
— |
28 |
— |
— |
28 |
— |
|||||||||||||||||||||||
Reinsurance recoverable |
1,692 |
90 |
— |
— |
— |
— |
1,782 |
— |
|||||||||||||||||||||||
Total Level 3 assets |
$ |
4,164 |
$ |
248 |
$ |
33 |
$ |
159 |
$ |
324 |
$ |
(454 |
) |
$ |
4,474 |
$ |
— |
||||||||||||||
Liabilities |
|||||||||||||||||||||||||||||||
Interest sensitive contract liabilities |
|||||||||||||||||||||||||||||||
Embedded derivative |
$ |
(5,283 |
) |
$ |
(733 |
) |
$ |
— |
$ |
(191 |
) |
$ |
— |
$ |
— |
$ |
(6,207 |
) |
$ |
— |
|||||||||||
Universal life benefits |
(883 |
) |
(71 |
) |
— |
— |
— |
— |
(954 |
) |
— |
||||||||||||||||||||
Future policy benefits |
|||||||||||||||||||||||||||||||
AmerUs Closed Block |
(1,606 |
) |
(15 |
) |
— |
— |
— |
— |
(1,621 |
) |
— |
||||||||||||||||||||
ILICO Closed Block and life benefits |
(794 |
) |
(18 |
) |
— |
— |
— |
— |
(812 |
) |
— |
||||||||||||||||||||
Derivative liabilities |
(7 |
) |
1 |
— |
— |
— |
— |
(6 |
) |
1 |
|||||||||||||||||||||
Total Level 3 liabilities |
$ |
(8,573 |
) |
$ |
(836 |
) |
$ |
— |
$ |
(191 |
) |
$ |
— |
$ |
— |
$ |
(9,600 |
) |
$ |
1 |
|||||||||||
1 Related to instruments held at end of period.
|
40
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following represents the gross components of purchases, issuances, sales and settlements, net, shown above:
Three months ended June 30, 2018 |
|||||||||||||||||||
(In millions) |
Purchases |
Issuances |
Sales |
Settlements |
Net purchases, issuances, sales and settlements |
||||||||||||||
Assets |
|||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||
AFS securities |
|||||||||||||||||||
Corporate |
$ |
300 |
$ |
— |
$ |
(2 |
) |
$ |
(8 |
) |
$ |
290 |
|||||||
CLO |
211 |
— |
— |
— |
211 |
||||||||||||||
ABS |
347 |
— |
— |
(74 |
) |
273 |
|||||||||||||
CMBS |
152 |
— |
— |
— |
152 |
||||||||||||||
Trading securities |
|||||||||||||||||||
Corporate |
4 |
— |
— |
— |
4 |
||||||||||||||
Equity securities |
1 |
— |
— |
— |
1 |
||||||||||||||
Mortgage loans |
— |
— |
— |
(3 |
) |
(3 |
) |
||||||||||||
Investments in related parties |
|||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||
AFS securities |
|||||||||||||||||||
CLO |
38 |
— |
— |
— |
38 |
||||||||||||||
ABS |
46 |
— |
— |
— |
46 |
||||||||||||||
Trading securities, CLO |
30 |
— |
(30 |
) |
— |
— |
|||||||||||||
Short-term investments |
10 |
— |
— |
— |
10 |
||||||||||||||
Total Level 3 assets |
$ |
1,139 |
$ |
— |
$ |
(32 |
) |
$ |
(85 |
) |
$ |
1,022 |
|||||||
Liabilities |
|||||||||||||||||||
Interest sensitive contract liabilities |
|||||||||||||||||||
Embedded derivative |
$ |
— |
$ |
(858 |
) |
$ |
— |
$ |
101 |
$ |
(757 |
) |
|||||||
Total Level 3 liabilities |
$ |
— |
$ |
(858 |
) |
$ |
— |
$ |
101 |
$ |
(757 |
) |
41
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three months ended June 30, 2017 |
|||||||||||||||||||
(In millions) |
Purchases |
Issuances |
Sales |
Settlements |
Net purchases, issuances, sales and settlements |
||||||||||||||
Assets |
|||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||
AFS securities |
|||||||||||||||||||
Corporate |
$ |
30 |
$ |
— |
$ |
(1 |
) |
$ |
(1 |
) |
$ |
28 |
|||||||
CLO |
24 |
— |
(5 |
) |
(2 |
) |
17 |
||||||||||||
ABS |
99 |
— |
— |
(88 |
) |
11 |
|||||||||||||
CMBS |
13 |
— |
— |
— |
13 |
||||||||||||||
RMBS |
7 |
— |
— |
(1 |
) |
6 |
|||||||||||||
Trading securities |
|||||||||||||||||||
RMBS |
22 |
— |
— |
— |
22 |
||||||||||||||
Equity securities |
1 |
— |
— |
— |
1 |
||||||||||||||
Mortgage loans |
— |
— |
— |
(1 |
) |
(1 |
) |
||||||||||||
Investments in related parties |
|||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||
Trading securities, CLO |
— |
— |
(12 |
) |
— |
(12 |
) |
||||||||||||
Short-term investments |
8 |
— |
— |
— |
8 |
||||||||||||||
Total Level 3 assets |
$ |
204 |
$ |
— |
$ |
(18 |
) |
$ |
(93 |
) |
$ |
93 |
|||||||
Liabilities |
|||||||||||||||||||
Interest sensitive contract liabilities |
|||||||||||||||||||
Embedded derivative |
$ |
— |
$ |
(160 |
) |
$ |
— |
$ |
48 |
$ |
(112 |
) |
|||||||
Total Level 3 liabilities |
$ |
— |
$ |
(160 |
) |
$ |
— |
$ |
48 |
$ |
(112 |
) |
42
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Six months ended June 30, 2018 |
|||||||||||||||||||
(In millions) |
Purchases |
Issuances |
Sales |
Settlements |
Net purchases, issuances, sales and settlements |
||||||||||||||
Assets |
|||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||
AFS securities |
|||||||||||||||||||
Corporate |
$ |
358 |
$ |
— |
$ |
(5 |
) |
$ |
(13 |
) |
$ |
340 |
|||||||
CLO |
231 |
— |
(5 |
) |
— |
226 |
|||||||||||||
ABS |
356 |
— |
(21 |
) |
(178 |
) |
157 |
||||||||||||
CMBS |
153 |
— |
— |
(1 |
) |
152 |
|||||||||||||
RMBS |
— |
— |
— |
(19 |
) |
(19 |
) |
||||||||||||
Trading securities |
|||||||||||||||||||
Corporate |
4 |
— |
— |
— |
4 |
||||||||||||||
CLO |
7 |
— |
(7 |
) |
— |
— |
|||||||||||||
Equity securities |
1 |
— |
(8) |
— |
(7 |
) |
|||||||||||||
Mortgage loans |
— |
— |
— |
(3 |
) |
(3 |
) |
||||||||||||
Investment funds |
— |
— |
— |
(7 |
) |
(7 |
) |
||||||||||||
Investments in related parties |
|||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||
AFS securities |
|||||||||||||||||||
CLO |
39 |
— |
— |
— |
39 |
||||||||||||||
ABS |
46 |
— |
— |
— |
46 |
||||||||||||||
Trading securities, CLO |
30 |
— |
(48 |
) |
— |
(18 |
) |
||||||||||||
Investment funds |
108 |
— |
— |
— |
108 |
||||||||||||||
Short-term investments |
10 |
— |
— |
— |
10 |
||||||||||||||
Total Level 3 assets |
$ |
1,343 |
$ |
— |
$ |
(94 |
) |
$ |
(221 |
) |
$ |
1,028 |
|||||||
Liabilities |
|||||||||||||||||||
Interest sensitive contract liabilities |
|||||||||||||||||||
Embedded derivative |
$ |
— |
$ |
(984 |
) |
$ |
— |
$ |
171 |
$ |
(813 |
) |
|||||||
Total Level 3 liabilities |
$ |
— |
$ |
(984 |
) |
$ |
— |
$ |
171 |
$ |
(813 |
) |
43
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Six months ended June 30, 2017 |
|||||||||||||||||||
(In millions) |
Purchases |
Issuances |
Sales |
Settlements |
Net purchases, issuances, sales and settlements |
||||||||||||||
Assets |
|||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||
AFS securities |
|||||||||||||||||||
U.S. state, municipal and political subdivisions |
$ |
— |
$ |
— |
$ |
— |
$ |
(20 |
) |
$ |
(20 |
) |
|||||||
Foreign governments |
— |
— |
— |
(1 |
) |
(1 |
) |
||||||||||||
Corporate |
110 |
— |
(2 |
) |
(3 |
) |
105 |
||||||||||||
CLO |
24 |
— |
(2 |
) |
(15 |
) |
7 |
||||||||||||
ABS |
182 |
— |
— |
(140 |
) |
42 |
|||||||||||||
CMBS |
13 |
— |
— |
— |
13 |
||||||||||||||
RMBS |
7 |
— |
— |
(1 |
) |
6 |
|||||||||||||
Trading securities |
|||||||||||||||||||
CLO |
— |
— |
(15 |
) |
— |
(15 |
) |
||||||||||||
RMBS |
24 |
— |
— |
— |
24 |
||||||||||||||
Equity securities |
1 |
— |
— |
— |
1 |
||||||||||||||
Mortgage loans |
— |
— |
— |
(1 |
) |
(1 |
) |
||||||||||||
Investments in related parties |
|||||||||||||||||||
Fixed maturity securities |
|||||||||||||||||||
AFS securities, ABS |
5 |
— |
— |
(9 |
) |
(4 |
) |
||||||||||||
Trading securities, CLO |
— |
— |
(26 |
) |
— |
(26 |
) |
||||||||||||
Short-term investments |
28 |
— |
— |
— |
28 |
||||||||||||||
Total Level 3 assets |
$ |
394 |
$ |
— |
$ |
(45 |
) |
$ |
(190 |
) |
$ |
159 |
|||||||
Liabilities |
|||||||||||||||||||
Interest sensitive contract liabilities |
|||||||||||||||||||
Embedded derivative |
$ |
— |
$ |
(270 |
) |
$ |
— |
$ |
79 |
$ |
(191 |
) |
|||||||
Total Level 3 liabilities |
$ |
— |
$ |
(270 |
) |
$ |
— |
$ |
79 |
$ |
(191 |
) |
Significant Unobservable Inputs—Significant unobservable inputs occur when we could not obtain or corroborate the quantitative detail of the inputs. This applies to fixed maturity securities, equity securities, mortgage loans and certain derivatives, as well as embedded derivatives in liabilities. Additional significant unobservable inputs are described below.
Fixed maturity 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 June 30, 2018, discounts ranged from 6% to 9%, and as of December 31, 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, relative to 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. |
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. |
44
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following summarizes the unobservable inputs for the embedded derivatives of fixed indexed annuities:
June 30, 2018 |
||||||||||
(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 |
$ |
8,065 |
Option budget method |
Non-performance risk |
0.4 |
% |
– |
1.4% |
Decrease |
|
Option budget |
0.8 |
% |
– |
3.7% |
Increase |
|||||
Surrender rate |
4.7 |
% |
– |
11.0% |
Decrease |
December 31, 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 |
$ |
7,436 |
Option budget method |
Non-performance risk |
0.2 |
% |
– |
1.2% |
Decrease |
|
Option budget |
0.7 |
% |
– |
3.7% |
Increase |
|||||
Surrender rate |
1.5 |
% |
– |
19.4% |
Decrease |
45
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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:
June 30, 2018 |
|||||||||||||||||||||||
(In millions) |
Carrying Value |
Fair Value |
NAV1
|
Level 1 |
Level 2 |
Level 3 |
|||||||||||||||||
Financial Assets |
|||||||||||||||||||||||
Mortgage loans |
$ |
7,571 |
$ |
7,713 |
$ |
— |
$ |
— |
$ |
— |
$ |
7,713 |
|||||||||||
Investment funds |
507 |
507 |
507 |
— |
— |
— |
|||||||||||||||||
Policy loans |
504 |
504 |
— |
— |
504 |
— |
|||||||||||||||||
Funds withheld at interest |
7,550 |
7,550 |
— |
— |
— |
7,550 |
|||||||||||||||||
Other investments |
73 |
73 |
— |
— |
— |
73 |
|||||||||||||||||
Investments in related parties |
|||||||||||||||||||||||
Investment funds |
1,638 |
1,638 |
1,638 |
— |
— |
— |
|||||||||||||||||
Funds withheld at interest |
14,059 |
14,059 |
— |
— |
— |
14,059 |
|||||||||||||||||
Other investments |
388 |
371 |
— |
— |
— |
371 |
|||||||||||||||||
Total financial assets not carried at fair value |
$ |
32,290 |
$ |
32,415 |
$ |
2,145 |
$ |
— |
$ |
504 |
$ |
29,766 |
|||||||||||
Financial Liabilities |
|||||||||||||||||||||||
Interest sensitive contract liabilities |
$ |
46,586 |
$ |
43,972 |
$ |
— |
$ |
— |
$ |
— |
$ |
43,972 |
|||||||||||
Short-term debt |
183 |
183 |
— |
— |
183 |
— |
|||||||||||||||||
Long-term debt |
991 |
924 |
— |
— |
924 |
— |
|||||||||||||||||
Funds withheld liability |
385 |
385 |
— |
— |
385 |
— |
|||||||||||||||||
Total financial liabilities not carried at fair value |
$ |
48,145 |
$ |
45,464 |
$ |
— |
$ |
— |
$ |
1,492 |
$ |
43,972 |
|||||||||||
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy.
|
December 31, 2017 |
|||||||||||||||||||||||
(In millions) |
Carrying Value |
Fair Value |
NAV1
|
Level 1 |
Level 2 |
Level 3 |
|||||||||||||||||
Financial Assets |
|||||||||||||||||||||||
Mortgage loans |
$ |
6,192 |
$ |
6,342 |
$ |
— |
$ |
— |
$ |
— |
$ |
6,342 |
|||||||||||
Investment funds |
554 |
554 |
554 |
— |
— |
— |
|||||||||||||||||
Policy loans |
530 |
530 |
— |
— |
530 |
— |
|||||||||||||||||
Funds withheld at interest |
6,773 |
6,773 |
— |
— |
— |
6,773 |
|||||||||||||||||
Other investments |
133 |
133 |
— |
— |
58 |
75 |
|||||||||||||||||
Investments in related parties |
|||||||||||||||||||||||
Investment funds |
1,280 |
1,280 |
1,280 |
— |
— |
— |
|||||||||||||||||
Other investments |
238 |
259 |
— |
— |
— |
259 |
|||||||||||||||||
Total financial assets not carried at fair value |
$ |
15,700 |
$ |
15,871 |
$ |
1,834 |
$ |
— |
$ |
588 |
$ |
13,449 |
|||||||||||
Financial Liabilities |
|||||||||||||||||||||||
Interest sensitive contract liabilities |
$ |
31,586 |
$ |
31,656 |
$ |
— |
$ |
— |
$ |
— |
$ |
31,656 |
|||||||||||
Funds withheld liability |
385 |
385 |
— |
— |
385 |
— |
|||||||||||||||||
Total financial liabilities not carried at fair value |
$ |
31,971 |
$ |
32,041 |
$ |
— |
$ |
— |
$ |
385 |
$ |
31,656 |
|||||||||||
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy.
|
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, other investments and short-term debt, 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.
46
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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.
6. 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, 2017 |
$ |
1,354 |
$ |
520 |
$ |
1,056 |
$ |
2,930 |
|||||||
Additions |
1,607 |
120 |
— |
1,727 |
|||||||||||
Amortization |
(81 |
) |
(43 |
) |
(100 |
) |
(224 |
) |
|||||||
Impact of unrealized investment (gains) losses |
100 |
42 |
140 |
282 |
|||||||||||
Balance at June 30, 2018 |
$ |
2,980 |
$ |
639 |
$ |
1,096 |
$ |
4,715 |
(In millions) |
DAC |
DSI |
VOBA |
Total |
|||||||||||
Balance at December 31, 2016 |
$ |
1,142 |
$ |
462 |
$ |
1,336 |
$ |
2,940 |
|||||||
Additions |
248 |
80 |
— |
328 |
|||||||||||
Amortization |
(98 |
) |
(29 |
) |
(73 |
) |
(200 |
) |
|||||||
Impact of unrealized investment (gains) losses |
(65 |
) |
(28 |
) |
(89 |
) |
(182 |
) |
|||||||
Balance at June 30, 2017 |
$ |
1,227 |
$ |
485 |
$ |
1,174 |
$ |
2,886 |
7. Reinsurance
Reinsurance transactions—On June 1, 2018, we entered into coinsurance and modco agreements with Voya Insurance and Annuity Company (VIAC) to reinsure a block of fixed and fixed indexed annuities. VIAC is a related party pursuant to GAAP due to our minority equity investment in its holding company’s parent, VA Capital Company LLC (VA Capital), as discussed further in Note 12 – Related Parties. Additionally, we entered into modco agreements with ReliaStar Life Insurance Company (RLI), a subsidiary of Voya Financial, Inc. (Voya), to reinsure a block of fixed and fixed indexed annuities. The following summarizes these reinsurance transactions (collectively, Voya reinsurance transactions):
VIAC |
RLI |
||||||||||||||
(In millions) |
Coinsurance |
Modco |
Modco |
Total |
|||||||||||
Liabilities assumed |
$ |
3,667 |
$ |
14,911 |
$ |
457 |
$ |
19,035 |
|||||||
Less: Assets received |
3,478 |
14,332 |
445 |
18,255 |
|||||||||||
Ceding commission (paid) received |
(86 |
) |
(320 |
) |
12 |
(394 |
) |
||||||||
Net cost of reinsurance |
$ |
275 |
$ |
899 |
$ |
— |
$ |
1,174 |
|||||||
DAC |
$ |
293 |
$ |
999 |
$ |
4 |
$ |
1,296 |
|||||||
Unearned revenue reserve1
|
(8 |
) |
(57 |
) |
(4 |
) |
(69 |
) |
|||||||
Deferred profit liability2
|
(10 |
) |
(43 |
) |
— |
(53 |
) |
||||||||
Net cost of reinsurance |
$ |
275 |
$ |
899 |
$ |
— |
$ |
1,174 |
|||||||
1 Included within interest sensitive contract liabilities on the condensed consolidated balance sheets.
| |||||||||||||||
2 Included within future policy benefits on the condensed consolidated balance sheets.
|
DAC and unearned revenue reserve balances are amortized over the life of the reinsurance agreements on a basis consistent with our DAC amortization policy. The deferred profit liability balance is amortized over the life of the reinsurance agreement on a constant relationship to the benefit reserves.
47
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following summarizes the effect of reinsurance on premiums and future policy and other policy benefits on the consolidated statements of income:
Three months ended June 30, |
Six months ended June 30, |
||||||||||||||
(In millions) |
2018 |
2017 |
2018 |
2017 |
|||||||||||
Premiums |
|||||||||||||||
Direct |
$ |
114 |
$ |
423 |
$ |
432 |
$ |
528 |
|||||||
Reinsurance assumed |
651 |
7 |
656 |
12 |
|||||||||||
Reinsurance ceded |
(39 |
) |
(51 |
) |
(84 |
) |
(109 |
) |
|||||||
Total premiums |
$ |
726 |
$ |
379 |
$ |
1,004 |
$ |
431 |
|||||||
Future policy and other policy benefits |
|||||||||||||||
Direct |
$ |
284 |
$ |
658 |
$ |
736 |
$ |
999 |
|||||||
Reinsurance assumed |
655 |
15 |
664 |
23 |
|||||||||||
Reinsurance ceded |
(82 |
) |
(95 |
) |
(142 |
) |
(230 |
) |
|||||||
Total future policy and other policy benefits |
$ |
857 |
$ |
578 |
$ |
1,258 |
$ |
792 |
8. Debt
Senior Notes—In the first quarter of 2018, AHL issued $1 billion of unsecured senior notes due in January 2028. The senior notes have a 4.125% coupon rate, payable semi-annually. The senior notes are callable at any time prior to October 12, 2027 by AHL, at a price equal to the greater of (1) 100% of the principal and any accrued and unpaid interest and (2) an amount equal to the sum of the present values of remaining scheduled payments, discounted from the scheduled payment date to the redemption date at the Treasury Rate (as defined in the prospectus supplement relating to the senior notes, dated January 9, 2018) plus 25 basis points, and any accrued and unpaid interest. Interest expense on long-term debt was $11 million and $20 million for the three months ended June 30, 2018 and six months ended June 30, 2018, respectively.
Short-term Debt—In the second quarter of 2018, we borrowed $183 million from the Federal Home Loan Bank (FHLB) of Des Moines through their variable rate short-term federal funds program. The borrowing matures on August 24, 2018 and carries an interest rate of 2.16%, with interest due at maturity. In connection with such borrowing, the FHLB requires the borrower to purchase member stock and post sufficient collateral to secure the borrowing. To satisfy these requirements, we purchased an additional $7 million of FHLB stock; however, we were not required to post additional collateral. See Note 13 – Commitments and Contingencies for further discussion regarding existing collateral posting with the FHLB.
48
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
9. Earnings Per Share
The following represents our basic and diluted earnings per share (EPS) calculations:
Three months ended June 30, 2018 |
|||||||||||||||||||||||
(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 – basic and diluted |
$ |
220 |
$ |
34 |
$ |
5 |
$ |
1 |
$ |
1 |
$ |
3 |
|||||||||||
Basic weighted average shares outstanding |
164,458,153 |
25,483,236 |
3,388,890 |
844,449 |
1,003,528 |
2,121,647 |
|||||||||||||||||
Dilutive effect of stock compensation plans |
369,955 |
— |
— |
6,307 |
— |
594,331 |
|||||||||||||||||
Diluted weighted average shares outstanding |
164,828,108 |
25,483,236 |
3,388,890 |
850,756 |
1,003,528 |
2,715,978 |
|||||||||||||||||
Earnings per share1
|
|||||||||||||||||||||||
Basic |
$ |
1.34 |
$ |
1.34 |
$ |
1.34 |
$ |
1.34 |
$ |
1.34 |
$ |
1.34 |
|||||||||||
Diluted |
$ |
1.33 |
$ |
1.34 |
$ |
1.34 |
$ |
1.33 |
$ |
1.34 |
$ |
1.04 |
|||||||||||
1 Calculated using whole figures.
|
Three months ended June 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 – basic |
$ |
177 |
$ |
138 |
$ |
6 |
$ |
2 |
$ |
1 |
$ |
2 |
|||||||||||
Effect of stock compensation plans on allocated net income |
4 |
— |
— |
— |
— |
— |
|||||||||||||||||
Net income – diluted |
$ |
181 |
$ |
138 |
$ |
6 |
$ |
2 |
$ |
1 |
$ |
2 |
|||||||||||
Basic weighted average shares outstanding |
106,299,230 |
82,927,000 |
3,409,515 |
905,105 |
740,883 |
1,438,871 |
|||||||||||||||||
Dilutive effect of stock compensation plans |
2,706,762 |
— |
— |
15,000 |
491,292 |
1,718,314 |
|||||||||||||||||
Diluted weighted average shares outstanding |
109,005,992 |
82,927,000 |
3,409,515 |
920,105 |
1,232,175 |
3,157,185 |
|||||||||||||||||
Earnings per share1
|
|||||||||||||||||||||||
Basic |
$ |
1.66 |
$ |
1.66 |
$ |
1.66 |
$ |
1.66 |
$ |
1.66 |
$ |
1.66 |
|||||||||||
Diluted |
$ |
1.65 |
$ |
1.66 |
$ |
1.66 |
$ |
1.64 |
$ |
1.00 |
$ |
0.76 |
|||||||||||
1 Calculated using whole figures.
|
Six months ended June 30, 2018 |
|||||||||||||||||||||||
(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 – basic and diluted |
$ |
422 |
$ |
90 |
$ |
9 |
$ |
2 |
$ |
3 |
$ |
6 |
|||||||||||
Basic weighted average shares outstanding |
156,619,575 |
33,246,955 |
3,388,890 |
842,739 |
1,026,216 |
2,093,581 |
|||||||||||||||||
Dilutive effect of stock compensation plans |
381,446 |
— |
— |
7,642 |
10,286 |
761,780 |
|||||||||||||||||
Diluted weighted average shares outstanding |
157,001,021 |
33,246,955 |
3,388,890 |
850,381 |
1,036,502 |
2,855,361 |
|||||||||||||||||
Earnings per share1
|
|||||||||||||||||||||||
Basic |
$ |
2.70 |
$ |
2.70 |
$ |
2.70 |
$ |
2.70 |
$ |
2.70 |
$ |
2.70 |
|||||||||||
Diluted |
$ |
2.69 |
$ |
2.70 |
$ |
2.70 |
$ |
2.67 |
$ |
2.67 |
$ |
1.98 |
|||||||||||
1 Calculated using whole figures.
|
49
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Six months ended June 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 – basic |
$ |
337 |
$ |
354 |
$ |
13 |
$ |
2 |
$ |
1 |
$ |
3 |
|||||||||||
Effect of stock compensation plans on allocated net income |
6 |
— |
— |
— |
— |
— |
|||||||||||||||||
Net income – diluted |
$ |
343 |
$ |
354 |
$ |
13 |
$ |
2 |
$ |
1 |
$ |
3 |
|||||||||||
Basic weighted average shares outstanding |
92,350,216 |
96,772,641 |
3,430,840 |
476,070 |
372,488 |
723,410 |
|||||||||||||||||
Dilutive effect of stock compensation plans |
3,242,336 |
— |
— |
493,213 |
884,760 |
1,971,060 |
|||||||||||||||||
Diluted weighted average shares outstanding |
95,592,552 |
96,772,641 |
3,430,840 |
969,283 |
1,257,248 |
2,694,470 |
|||||||||||||||||
Earnings per share1
|
|||||||||||||||||||||||
Basic |
$ |
3.66 |
$ |
3.66 |
$ |
3.66 |
$ |
3.66 |
$ |
3.66 |
$ |
3.66 |
|||||||||||
Diluted |
$ |
3.59 |
$ |
3.66 |
$ |
3.66 |
$ |
1.80 |
$ |
1.08 |
$ |
0.98 |
|||||||||||
1 Calculated using whole figures.
|
We use the two-class method for allocating net income to each class of our common stock. Our Class M shares did not become eligible to participate in dividends until a return of investment (ROI) condition had been met for each class. Once eligible, each class of our common stock has equal dividend rights. The ROI condition was 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 and the allocation of basic income, shares are deemed to be participating in earnings for only the portion of the period after the condition is met. For purposes of calculating diluted weighted average shares outstanding, shares are deemed dilutive as of the beginning of the period.
Dilutive shares are calculated using the treasury stock method. For Class A shares, this method takes into account shares that can be settled into Class A shares, net of a conversion price. The diluted EPS calculations for Class A shares excluded the following shares, restricted stock units (RSUs) and options:
Three months ended June 30, |
Six months ended June 30, |
||||||||||
2018 |
2017 |
2018 |
2017 |
||||||||
Antidilutive shares, RSUs and options excluded from diluted EPS calculation |
35,078,635 |
74,650,807 |
35,078,635 |
73,792,976 |
|||||||
Shares, RSUs and options excluded from diluted EPS calculation as a performance condition had not been met |
280,030 |
1,448,998 |
280,030 |
1,448,998 |
|||||||
Total shares, RSUs and options excluded from diluted EPS calculation |
35,358,665 |
76,099,805 |
35,358,665 |
75,241,974 |
|||||||
Note: Shares, RSUs and options are as of period end. |
10. Accumulated Other Comprehensive Income
The following is a detail of AOCI and changes in AOCI. Prior period balances include equity securities that were classified as AFS securities prior to the adoption of ASU 2016-01.
(In millions) |
June 30, 2018 |
December 31, 2017 |
|||||
AFS securities |
$ |
328 |
$ |
2,577 |
|||
DAC, DSI, VOBA, future policy benefits and dividends payable to policyholders adjustments on AFS securities |
(116 |
) |
(744 |
) |
|||
Noncredit component of OTTI losses on AFS securities |
(13 |
) |
(13 |
) |
|||
Hedging instruments |
(50 |
) |
(95 |
) |
|||
Pension adjustments |
(2 |
) |
(5 |
) |
|||
Foreign currency translation adjustments |
(2 |
) |
8 |
||||
Accumulated other comprehensive income, before taxes |
145 |
1,728 |
|||||
Deferred income taxes |
(19 |
) |
(313 |
) |
|||
Accumulated other comprehensive income |
$ |
126 |
$ |
1,415 |
50
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Changes in AOCI are presented below:
Three months ended June 30, |
Six months ended June 30, |
||||||||||||||
(In millions) |
2018 |
2017 |
2018 |
2017 |
|||||||||||
Unrealized investment gains (losses) on AFS securities |
|||||||||||||||
Unrealized investment gains (losses) on AFS securities |
$ |
(889 |
) |
$ |
735 |
$ |
(2,171 |
) |
$ |
1,251 |
|||||
Change in DAC, DSI, VOBA, future policy benefits and dividends payable to policyholders adjustment |
233 |
(141 |
) |
624 |
(223 |
) |
|||||||||
Less: Reclassification adjustment for gains (losses) realized in net income1
|
11 |
12 |
30 |
27 |
|||||||||||
Less: Income tax expense (benefit) |
(138 |
) |
179 |
(301 |
) |
292 |
|||||||||
Net unrealized investment gains (losses) on AFS securities |
(529 |
) |
403 |
(1,276 |
) |
709 |
|||||||||
Noncredit component of OTTI losses on AFS securities |
|||||||||||||||
Noncredit component of OTTI losses on AFS securities |
1 |
1 |
— |
2 |
|||||||||||
Less: Reclassification adjustment for losses realized in net income1
|
1 |
2 |
— |
2 |
|||||||||||
Net noncredit component of OTTI losses on AFS securities |
— |
(1 |
) |
— |
— |
||||||||||
Unrealized gains (losses) on hedging instruments |
|||||||||||||||
Unrealized gains (losses) on hedging instruments |
101 |
(33 |
) |
45 |
(38 |
) |
|||||||||
Less: Income tax expense (benefit) |
29 |
(11 |
) |
9 |
(13 |
) |
|||||||||
Net unrealized gains (losses) on hedging instruments |
72 |
(22 |
) |
36 |
(25 |
) |
|||||||||
Pension adjustments |
— |
(1 |
) |
3 |
(1 |
) |
|||||||||
Foreign currency translation adjustments |
(2 |
) |
8 |
(10 |
) |
10 |
|||||||||
Change in AOCI from other comprehensive income (loss) |
(459 |
) |
387 |
(1,247 |
) |
693 |
|||||||||
Adoption of ASU 2016-01 |
— |
— |
(42 |
) |
— |
||||||||||
Change in AOCI |
$ |
(459 |
) |
$ |
387 |
$ |
(1,289 |
) |
$ |
693 |
|||||
1 Recognized in investment related gains (losses) on the condensed consolidated statements of income.
|
11. Income Taxes
Our effective tax rates were 20% and 3% for the three months ended June 30, 2018 and 2017, respectively, and 19% and 4% for the six months ended June 30, 2018 and 2017, 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. With the enactment of Public Law no. 115-97, an Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 (Tax Act), the U.S. statutory tax rate declined to 21% from 35%; however, the Base Erosion and Anti-Abuse Tax (BEAT) was established, which may subject payments to our non-U.S. reinsurance subsidiaries to a tax of 5%, which would increase to 10% in 2019. The income tax expense for the three and six months ended June 30, 2018 assumes that we have taken steps so that the BEAT is not applicable to such payments and thereby assumes that more income is subject to U.S. income tax.
The Internal Revenue Service is currently auditing the 2013 consolidated tax return filed by Athene USA, and is also conducting a limited scope audit of the 2015 consolidated tax return filed by Athene Annuity & Life Assurance Company (AADE). No material proposed adjustments have been issued with respect to either exam. See discussion of ongoing tax examinations relating to Aviva USA Corporation (Aviva USA) in Note 13 – Commitments and Contingencies.
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 Bermuda Minister of Finance that, in the event of any such taxes being imposed, we will be exempted from taxation until the year 2035.
12. Related Parties
Athene Asset Management
Investment related expenses – Substantially all of our investments are managed by Athene Asset Management LLC (AAM), a subsidiary of AGM. AAM provides direct investment management, asset allocation, mergers and acquisition asset diligence and certain operational support services for our investment portfolio, including investment compliance, tax, legal and risk management support. As of June 30, 2018, AAM directly managed $81,750 million of our investment portfolio assets, of which 86% are designated one or two (the two highest designations) by the National Association of Insurance Commissioners (NAIC).
51
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, subject to certain 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) |
June 30, 2018 |
December 31, 2017 |
|||||
Fixed maturity securities |
|||||||
AFS securities |
|||||||
Foreign governments |
$ |
151 |
$ |
152 |
|||
Corporate |
3,226 |
2,934 |
|||||
CLO |
5,630 |
5,166 |
|||||
ABS |
613 |
681 |
|||||
CMBS |
878 |
872 |
|||||
Trading securities |
115 |
121 |
|||||
Mortgage loans |
2,701 |
2,232 |
|||||
Investment funds |
27 |
26 |
|||||
Funds withheld at interest |
1,831 |
1,737 |
|||||
Other investments |
73 |
75 |
|||||
Total assets sub-advised by Apollo affiliates |
$ |
15,245 |
$ |
13,996 |
|||
Percent of assets sub-advised by Apollo affiliates to total AAM-managed assets |
16 |
% |
18 |
% |
During the second quarter of 2017, AAM 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 excess 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 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.
The following summarizes the asset management fees and sub-advisory fees we have incurred related to AAM and other Apollo affiliates:
Three months ended June 30, |
Six months ended June 30, |
||||||||||||||
(In millions) |
2018 |
2017 |
2018 |
2017 |
|||||||||||
Asset management fees |
$ |
72 |
$ |
64 |
$ |
142 |
$ |
126 |
|||||||
Sub-advisory fees |
14 |
12 |
27 |
28 |
The management and sub-advisory fees are included within net investment income on the condensed consolidated statements of income. As of June 30, 2018 and December 31, 2017, the management fees payable was $33 million and $28 million, respectively, and the sub-advisory fees payable was $15 million and $13 million, respectively. Both the management and sub-advisory fees payables are included in other liabilities on the condensed consolidated balance sheets.
52
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The investment management agreements with AAM have no stated term and any party can terminate upon notice. However, our bye-laws provide that we will not exercise our termination rights under the agreements until October 31, 2018 or any annual anniversary thereafter (each such date, an IMA (Investment Management Agreement) Termination Election Date) and any termination thereon requires the approval of two-thirds of our Independent Directors (as defined in the bye-laws) and prior written notice thereof to Apollo of at least 30 days. If the Independent Directors make such election and such notice is timely delivered, the termination will be effective on the second anniversary of the applicable IMA Termination Election Date (an IMA Termination Effective Date). Notwithstanding the foregoing, (1) the Independent Directors may only elect to terminate an investment management agreement or advisory agreement on an IMA Termination Election Date if two-thirds of the Independent Directors determine in their sole discretion acting in good faith that either (i) there has been unsatisfactory long-term performance materially detrimental to us by Apollo or (ii) the fees being charged by Apollo 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 Apollo and Apollo shall 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 Apollo are unfair and excessive, Apollo has the right to lower its fees to match the fees of such comparable asset manager) and (2) upon the determination by two-thirds of the Independent Directors, we may also terminate an investment management agreement or advisory agreement with Apollo as a result of either (i) a material violation of law relating to Apollo’s advisory business, or (ii) Apollo’s gross negligence, willful misconduct or reckless disregard of its obligations under the relevant agreement, and in either case (i) or (ii), the delivery at least 30 days’ prior written notice to Apollo of such termination and such termination will be effective at the end of such 30-day period.
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. Also, James Belardi, our Chief Executive Officer, is also an employee of AAM, receives substantial remuneration from acting as Chief Executive Officer of AAM, and owns a 5% profits interest in AAM. Additionally, five of the thirteen 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 require us to maintain a conflicts committee comprised solely of three of our directors who are not officers or employees of any member of the Apollo Group. The conflicts committee reviews and approves material transactions between us and the Apollo Group, subject to certain exceptions.
Other related party transactions
A-A Mortgage – We have an equity method investment in A-A Mortgage, which has an investment in AmeriHome Mortgage Company, LLC (AmeriHome). We have a loan purchase agreement with AmeriHome. The agreement allows us to purchase residential mortgage loans which they have purchased from correspondent sellers and pooled for sale in the secondary market. AmeriHome retains the servicing rights to the sold loans. We purchased $167 million and $0 million of residential mortgage loans under this agreement during the three months ended June 30, 2018 and 2017, respectively. We purchased $211 million and $1 million of residential mortgage loans under this agreement during the six months ended June 30, 2018 and 2017, respectively. Additionally, we have made loans to A-A Mortgage affiliates in the principal amount of $172 million and $52 million as of June 30, 2018 and December 31, 2017, respectively, and these are included in related party short-term investments on the condensed consolidated balance sheets.
Athora – On January 1, 2018, in order to align our interests with those of Athora, in connection with the Closing, we entered into a cooperation agreement with Athora, pursuant to which, among other things, (1) we will have the right to reinsure approximately 20% of the spread business written or reinsured by any insurance or reinsurance company owned or acquired by Athora, (2) Athora’s insurance subsidiaries will be required to purchase certain funding agreements and/or other spread instruments issued by our insurance subsidiaries, (3) we will provide Athora with a right of first refusal to pursue acquisition and reinsurance transactions in Europe (other than the United Kingdom) and (4) Athora will provide us and our subsidiaries with a right of first refusal to pursue acquisition and reinsurance transactions in North America and the United Kingdom. Additionally, as of June 30, 2018, we had $170 million of funding agreements outstanding to Athora, which were issued to Athora prior to Closing.
VA Capital and Venerable Holdings, Inc. (Venerable) – In connection with the Voya reinsurance transactions, we made a $75 million minority equity investment in VA Capital, which is included in investments in related parties – 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 holding company of Venerable. Additionally, we provided Venerable with a $150 million, 15-year term loan, which is held at amortized cost and included in investment in related parties – other investments on the condensed consolidated balance sheets. It has a stated interest rate 6.257%, which represents a below-market interest rate and management considered it as part of its evaluation and pricing of the Voya reinsurance transactions. Venerable is the holding company of VIAC.
53
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
13. Commitments and Contingencies
Contingent Commitments—We had commitments to make investments, primarily capital contributions to investment funds, of $3,036 million and $2,358 million as of June 30, 2018 and December 31, 2017, 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.
Funding Agreements—We are a member of the FHLB and, through membership, we have issued funding agreements to the FHLB in exchange for cash advances. As of June 30, 2018 and December 31, 2017, we had $701 million and $573 million, respectively, of funding agreements outstanding with the FHLB. We are required to provide collateral in excess of the funding 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, unaffiliated statutory trust to offer up to $10 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. Funding agreements outstanding under this program had a carrying value of $2,996 million as of June 30, 2018 and December 31, 2017.
Pledged Assets and Funds in Trust (Restricted Assets)—The total restricted assets included on the condensed consolidated balance sheets are as follows:
(In millions) |
June 30, 2018 |
December 31, 2017 |
|||||
Fixed maturity securities |
|||||||
AFS securities |
$ |
4,452 |
$ |
1,572 |
|||
Trading securities |
52 |
— |
|||||
Equity securities |
3 |
36 |
|||||
Mortgage loans |
943 |
914 |
|||||
Investment funds |
29 |
20 |
|||||
Short-term investments |
73 |
10 |
|||||
Other investments |
45 |
— |
|||||
Restricted cash |
178 |
105 |
|||||
Total restricted assets |
$ |
5,775 |
$ |
2,657 |
The restricted assets are primarily related to reinsurance trusts established in accordance with coinsurance agreements, and the FHLB funding agreements described above.
Litigation, Claims and Assessments
Griffiths Matter – On July 27, 2015, John Griffiths, on behalf of himself and others similarly situated, filed a putative class action complaint against us in the United States District Court for the District of Massachusetts. An amended complaint was filed on December 18, 2015. The complaint asserts claims against AHL, Athene Annuity and Life Company (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 Aviva 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 have been preliminarily approved by the court, 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 preliminary approval hearing is set for October 13, 2018.
54
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Internal Revenue Service (IRS) Matters – The IRS completed its examinations of the 2006 through 2010 Aviva USA tax years with Aviva USA agreeing to all proposed adjustments 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 was 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.
Corporate-owned Life Insurance (COLI) Matter – In 2000 and 2001, two insurance companies which were subsequently merged into AAIA purchased from American General Life Insurance Company (American General) broad based variable COLI policies that, as of June 30, 2018, had an asset value of $359 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, which the defendants have moved to dismiss. 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 value of the guarantees included within the asset value reflected above is $174 million as of June 30, 2018.
Holzer Matter – On September 12, 2016, Jack Holzer and Mary Bruesh-Holzer filed suit in Jackson County, Missouri against several defendants, including AADE, as successor-in-interest to Business Men’s Assurance Company of America. Mr. Holzer allegedly sustained injuries due to asbestos exposure from 1966–1973 while working in an office building in Kansas City, Missouri, then owned by Business Men’s Assurance Company of America. Plaintiffs asserted strict liability and negligence claims against AADE. On February 26, 2018, an agreement was reached that resulted in the settlement of this matter. The settlement had no impact on our financial condition, results of operations or cash flows.
Regulatory Matter – Our U.S. insurance subsidiaries have experienced increased service and administration 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 services on such policies. AllianceOne also administers certain 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 similar service and administration issues.
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 the New York State Department of Financial Services (NYSDFS), the California Department of Insurance (CDI) and the Texas Department of Insurance, indicating, in each case, that the respective regulator planned to undertake a market conduct examination or enforcement proceeding of the applicable U.S. insurance subsidiary 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 AllianceOne. On June 28, 2018 we entered into a consent order with the NYSDFS resolving that matter in a manner that, when considering the indemnification received from affiliates of Global Atlantic, did not have a material impact on our financial condition, results of operations or cash flows.
55
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
In addition to the foregoing, we have received inquiries, and expect to continue to receive inquiries, from other regulatory authorities regarding the conversion matter. 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.
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.
Caldera Matters – On May 3, 2018, AHL filed a writ commencing litigation in the Supreme Court of Bermuda against a former officer of AHL, a former director of AHL (who is also considered a former officer pursuant to Bermuda law), and Caldera Holdings, Ltd. (Caldera). AHL alleges in the writ, among other things, that the defendants breached various duties owed to AHL under Bermuda law by using AHL’s confidential information in their attempted acquisition of a company referred to in the litigation as Company A. AHL is seeking injunctive relief and damages.
On May 3, 2018, following AHL’s filing of the writ in Bermuda described above, Caldera, Caldera Life Reinsurance Company, and Caldera Shareholder, L.P., commenced an action in the Supreme Court of the State of New York, County of New York, by filing a Summons with Notice against AHL, Apollo, certain affiliates of Apollo and Leon Black, a founder of Apollo. On July 12, 2018, plaintiffs filed a complaint alleging claims for tortious interference with prospective business relations, defamation, and unfair competition related to plaintiffs’ attempt to purchase Company A and seeking alleged damages of “no less than $1.5 billion.” AHL intends to, among other things, move to dismiss the complaint against it. We believe we have meritorious defenses to the claims and intend to vigorously defend the litigation. In light of the inherent uncertainties involved in this matter, reasonably possible losses, if any, cannot be estimated at this time.
14. Segment Information
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—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 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, are included in our Retirement Services segment.
Corporate and Other—Corporate and Other includes certain other operations related to our corporate activities, including corporate allocated expenses, merger and acquisition costs, debt costs, certain integration and restructuring costs, certain stock-based compensation and intersegment eliminations. In Corporate and Other, we also hold capital in excess of the level of capital we hold in Retirement Services to support our operating strategy. Prior to the deconsolidation of Athora on January 1, 2018, Corporate and Other included our German operations, which were primarily comprised of participating long-duration savings products. See Note 1 – Business, Basis of Presentation and Significant Accounting Policies for discussion on the deconsolidation of our German operations in 2018.
Financial Measures—Segment adjusted operating income is an internal measure used by the chief operating decision maker to evaluate and assess the results of our segments.
Adjusted operating revenue is a component of adjusted operating income and excludes market volatility and adjustments for other non-operating activity. Our 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; |
• |
VIE expenses and noncontrolling interest; and |
• |
Other adjustments to revenues. |
56
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The table below reconciles segment adjusted operating revenues to total revenues presented on the condensed consolidated statements of income:
Three months ended June 30, |
Six months ended June 30, |
||||||||||||||
(In millions) |
2018 |
2017 |
2018 |
2017 |
|||||||||||
Retirement Services |
$ |
1,868 |
$ |
1,254 |
$ |
3,125 |
$ |
2,142 |
|||||||
Corporate and Other |
26 |
103 |
53 |
171 |
|||||||||||
Non-operating adjustments |
|||||||||||||||
Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets |
97 |
266 |
(61 |
) |
802 |
||||||||||
Investment gains (losses), net of offsets |
(149 |
) |
138 |
(255 |
) |
263 |
|||||||||
VIE expenses and noncontrolling interest |
2 |
— |
2 |
— |
|||||||||||
Other adjustments to revenues |
(47 |
) |
2 |
(56 |
) |
4 |
|||||||||
Total revenues |
$ |
1,797 |
$ |
1,763 |
$ |
2,808 |
$ |
3,382 |
Adjusted operating income 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 equals net income 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. |
The table below reconciles segment adjusted operating income to net income on the condensed consolidated statements of income:
Three months ended June 30, |
Six months ended June 30, |
||||||||||||||
(In millions) |
2018 |
2017 |
2018 |
2017 |
|||||||||||
Retirement Services |
$ |
289 |
$ |
267 |
$ |
524 |
$ |
542 |
|||||||
Corporate and Other |
1 |
13 |
3 |
4 |
|||||||||||
Non-operating adjustments |
|||||||||||||||
Investment gains (losses), net of offsets |
(74 |
) |
58 |
(107 |
) |
115 |
|||||||||
Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets |
75 |
15 |
170 |
109 |
|||||||||||
Integration, restructuring and other non-operating expenses |
(8 |
) |
(11 |
) |
(16 |
) |
(20 |
) |
|||||||
Stock-based compensation, excluding LTIP |
(2 |
) |
(13 |
) |
(5 |
) |
(23 |
) |
|||||||
Income tax (expense) benefit – non-operating |
(17 |
) |
(3 |
) |
(37 |
) |
(17 |
) |
|||||||
Net income |
$ |
264 |
$ |
326 |
$ |
532 |
$ |
710 |
The following represents total assets by segment:
(In millions) |
June 30, 2018 |
December 31, 2017 |
|||||
Total assets by segment |
|||||||
Retirement Services |
$ |
111,512 |
$ |
91,335 |
|||
Corporate and Other |
3,243 |
8,412 |
|||||
Total assets |
$ |
114,755 |
$ |
99,747 |
57
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations
58
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a leading 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-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 around the world, as well as Apollo’s global asset management infrastructure that supports 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 June 30, 2018, have an expected annual investment margin of 2-3% over the 8.2 year weighted-average life of our deferred annuities, which make up a substantial portion of our reserve liabilities. As of June 30, 2018, the weighted-average life of all products, which includes deferred annuities, payout annuities, PRT obligations, funding agreements and other products, was 9.0 years.
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. 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 acceptable to 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. 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 previously included our former German operations, which were primarily comprised of participating long-duration savings products.
Our consolidated annualized ROE for the six months ended June 30, 2018 and the year ended December 31, 2017 was 12.4% and 18.0%, respectively, and our consolidated annualized adjusted operating ROE was 12.9% and 15.8%, respectively. As a result of our focus on issuing, reinsuring and acquiring attractively-priced liabilities, our differentiated investment strategy and our significant scale, for the six months ended June 30, 2018 and the year ended December 31, 2017, in our Retirement Services segment, we generated an annualized investment margin on deferred annuities of 2.79% and 2.82%, respectively, and annualized adjusted operating ROE of 18.0% and 22.5%, respectively. We currently maintain what we believe to be high capital ratios for our rating and, as of June 30, 2018, hold approximately $2.0 billion of excess capital, and view this excess as strategic capital available to reinvest into organic and inorganic growth opportunities.
Our organic channels, including retail, flow reinsurance and institutional products, provided deposits of $4.7 billion and $5.1 billion for the six months ended June 30, 2018 and 2017, respectively. Withdrawals on our deferred annuities, maturities of our funding agreements, payments on payout annuities and pension risk benefit payments (collectively, liability outflows), in the aggregate, were $3.6 billion and $3.1 billion for the six months ended June 30, 2018 and 2017, respectively. We believe that our improving credit profile, our current product offerings and product design capabilities and our growing reputation as both a seasoned funding agreement issuer and a reliable PRT counterparty will continue to enable us to grow our existing organic channels and allow us to source additional volumes of profitably underwritten liabilities in various market environments.
59
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We plan to grow organically by expanding our retail, flow reinsurance and institutional distribution channels. We believe that we have the right people, infrastructure and scale to position us for continued growth. Within our retail channel, we had fixed annuity sales of $3.4 billion and $2.7 billion for the six months ended June 30, 2018 and 2017, respectively. The increase in our retail channel was driven by significant growth in our bank channel and the addition of new bank partners, the rising rate environment and new product introductions. We aim to grow our retail channel in the United States by deepening our relationships with our approximately 70 Independent Marketing Organizations (IMO) and more than 38,000 independent agents. Our strong financial position and capital efficient products allow us to be a dependable partner with IMOs and 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 crediting through increased volumes via current IMOs and access to new distribution channels, including small to mid-sized banks and regional broker-dealers. We are implementing the necessary technology platform, hiring and training a specialized sales force, and have created 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 deposits through our flow reinsurance channel of $677 million and $380 million for the six months ended June 30, 2018 and 2017, respectively. The increase in our flow reinsurance channel was driven by new product launches by our partners and the rising rate environment. As we continue to source additional reinsurance partners, we expect to further diversify our flow reinsurance channel and expect that our improving credit profile will help us attract additional reinsurance partners. Within our institutional channel, we generated deposits of $745 million and $2.0 billion for the six months ended June 30, 2018 and 2017, respectively. The decrease in our institutional channel is driven by the unfavorable market conditions for funding agreements. We issued funding agreements in the aggregate principal amount of $425 million and $1.7 billion for the six months ended June 30, 2018 and 2017, respectively. During the six months ended June 30, 2018, we closed two PRT transactions and issued group annuity contracts in the aggregate amount of $320 million, compared to $327 million in 2017. We expect to grow our institutional channel by continuing to engage in opportunistic issuances of funding agreements and by continuing to engage in PRT transactions.
Our inorganic channels, including acquisitions and block reinsurance, provided deposits of $19.1 billion for the six months ended June 30, 2018. On June 1, 2018, we closed on the Voya reinsurance transaction pursuant to which we entered into coinsurance and modco agreements with VIAC and RLI to reinsure a block of fixed and fixed indexed annuities providing $19.1 billion of deposits. Our inorganic channels have contributed significantly 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.
Deconsolidation Summary Included in Results of Operations
On January 1, 2018, in connection with the closing of the Athora Offering, our equity interest in the Athora was exchanged for common shares of Athora. See Note 1 – Business, Basis of Presentation and Significant Accounting Policies to the condensed consolidated financial statements for further details of the deconsolidation of our German operations. The deconsolidation of Athora decreased our total assets by $6.3 billion and our invested assets by $6.0 billion. The impact of this deconsolidation has an effect on the comparability of our historical results and therefore historical discussions of changes between periods are not necessarily indicative of future results. To enhance the comparability of our June 30, 2018 and 2017 results, we highlight the financial results applicable to the deconsolidation of Athora where meaningful. As of and after January 1, 2018, our investment in Athora is reflected as an alternative investment.
Industry Trends and Competition
Market Conditions
While the U.S. Federal Reserve has continued its process of policy rate normalization, longer dated interest Treasury yields have risen, but not in step with shorter term rates, and as a consequence, the yield curve has flattened notably over the past twelve months. Whether signaling low long-term inflation expectations, or a coming curve inversion, or simply due to supply dynamics in the global search for asset yield, the level of longer dated Treasury yields affects the yield we earn on invested assets. The appreciable rise in such longer dated yields to date in 2018 has benefited such yields on new purchases. While current economic fundamentals appear strong, uncertainty about future fiscal policy, changes in tax policy, the scope of potential deregulation, the imposition of tariffs or other barriers to international trade and levels of global trade, along with uncertainty about the Federal Reserve’s ability to manage its normalization process and the impact on inflation and wage growth, may trigger continued volatility across financial markets. Volatility, as seen recently in the equity markets, may adversely affect the hedging costs of our liability policy hedging program. Credit market volatility, which may widen credit spreads, benefits our investment purchases but may negatively affect the valuations of our in-force investment portfolio.
A volatile market environment may affect our ability to produce liability products that are profitable, have the desired risk profile to the company, and be desired by consumers. As a company with strong retirement, investment management and insurance capabilities, we expect that over the long term, market conditions resulting in higher Treasury yields and credit spreads will enhance the attractiveness of our portfolio of annuity products. We continue to monitor the behavior of our customers and other factors which react to market conditions, including mortality rates, morbidity rates, annuitization rates and lapse rates, in order to best serve our customers and generate strong profitability to our shareholders.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Interest Rate Environment
As a retirement services company focused on issuing and reinsuring fixed annuities, we are affected by the monetary policy of the Federal Reserve in the United States as well as other central banks around the world. In spite of the Federal Reserve increasing federal funds rates again in June of 2018, 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.
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. We address interest rate risk through managing the duration of the liabilities we source with assets we acquire and through asset liability management (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 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 will perform well in a rising interest rate environment. Our investment portfolio includes $17.3 billion of floating rate investments, or 18% of our total invested assets as of June 30, 2018. The percentage of floating rate investments decreased from December 31, 2017, due to the investment portfolio received in the Voya reinsurance transaction having a lower proportion of floating rate investments and a refinement in our definition to include only short duration securities that are directly tied or linked to an index. As part of our reinvestment strategy for the investment portfolios of companies we acquire or blocks we reinsure, 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.
If prevailing interest rates were to rise, we believe our products would be more attractive to consumers and our sales would likely increase. In periods of prolonged low interest rates, the investment margin earned on deferred annuities 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 June 30, 2018, most of our products were fixed annuities with 27% of our FIAs at the minimum guarantees and 52% of our fixed rate annuities at the minimum crediting rates. As of June 30, 2018, minimum guarantees on all of our deferred annuities, including those with crediting rates already at their minimum guarantees, were, on average, 90 to 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 or 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 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 2017 Annual Report, which includes a discussion regarding interest rate and other significant risks and our strategies for managing these risks.
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. 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.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
According to LIMRA, total fixed annuity market sales in the United States were $27.2 billion for the three months ended March 31, 2018. LIMRA made adjustments to its fixed annuity sales estimate and the updated total fixed annuity market sales in the United States were $27.1 billion for the three months ended March 31, 2017. The increase in fixed annuity market sales in 2018 compared to 2017 was driven by an increase in FIA products of $1.4 billion, or 10.7% over prior year, offset by a decrease in traditional fixed rate deferred annuities of $1.4 billion, or 13.9% over prior year. In the total fixed annuity market, for the three months ended March 31, 2018 (the most recent period for which specific market share data is available), we were the 5th largest company based on sales with a 4.7% market share and $1.3 billion in sales. For the three months ended March 31, 2017, our market share was 4.1% with sales of $1.1 billion.
FIAs have been one of the fastest growing annuity products, having grown from $27.3 billion in 2005 to $57.6 billion in sales for the year ended December 31, 2017. According to LIMRA, for the three months ended March 31, 2018 (the most recent period for which specific market share data is available), we were the 2nd largest provider of FIAs in terms of sales, and our market share for the same period was 8.3% with sales of $1.2 billion. For the three months ended March 31, 2017, our market share was 7.7% with sales of $1.0 billion.
Regulatory Developments
We continue to face material uncertainty regarding the ultimate impacts of tax reform to our business. On December 22, 2017, President Trump signed the Tax Act into law, which introduced significant changes to the Internal Revenue Code. While our expectations may be subject to change as we continue to evaluate the impact of the Tax Act on our business, we expect the following notable impacts:
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Overall tax rate—Although the Tax Act reduces corporate income tax rates to 21% beginning in 2018, it also imposes a new minimum tax, referred to as the BEAT, which taxes modified taxable income at a rate of 5% beginning in 2018, increasing to 10% in 2019 and 12.5% in 2026. In general, modified taxable income is calculated by adding back to a taxpayer’s regular taxable income the amount of certain “base erosion tax benefits” with respect to payments to foreign affiliates, as well as the “base erosion percentage” of any net operating loss deductions. The BEAT applies only to the extent it exceeds a taxpayer’s regular corporate income tax liability (determined without regard to certain tax credits). The BEAT is expected to apply to our U.S. subsidiaries with respect to payments to our non-U.S. reinsurance subsidiaries. The BEAT does not apply to premium paid to ALRe directly by unaffiliated ceding companies or investment income earned on our non-U.S. reinsurance subsidiaries’ surplus assets, which together currently represent approximately 25–30% of our pre-tax adjusted operating income. In addition to the BEAT, the 1% excise tax that we have historically paid will continue to apply to premiums paid to our Bermuda subsidiaries that are not subject to U.S. taxation, to the extent that any such premiums are paid.
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Within the context of affiliated modco arrangements, which is how much of our internal reinsurance is structured, it is our belief that the BEAT was generally intended to require the add back of the net amount paid or accrued by our U.S. subsidiaries to our non-U.S. reinsurance subsidiaries for premiums, investment income, reserve changes, other consideration and expenses (net basis). However, there is significant uncertainty regarding the computation of the BEAT in the context of affiliated modco arrangements, including whether the BEAT applies on a net basis or instead requires the add back of the gross amount paid or accrued, without reduction for claims or other expenses (gross basis). In light of this uncertainty, we have begun to take actions that would allow us to mitigate the potential effect of the BEAT on our results of operations should the BEAT apply on a gross basis. Our overall tax rate will depend on the ultimate interpretation of the Tax Act and the actions that we take. We currently expect that, absent any further mitigating efforts, our overall tax rate will be between 14–15%, on average, of each of pre-tax income and pre-tax adjusted operating income; however, we may experience significant fluctuations in the overall tax rate as a percentage of pre-tax income from period-to-period, with certain periods falling outside of our expected range. In addition, we are undertaking certain additional actions and exploring various alternatives intended to further mitigate the potential effect of the BEAT on our results of operations. If these actions are successful, we expect our overall tax rate will be more in line with our overall tax rate prior to the enactment of the Tax Act of approximately 11%, on average, of each of pre-tax income and pre-tax adjusted operating income, with significant fluctuations in the overall tax rate as a percentage of pre-tax income, as discussed above.
The estimated future overall tax rates presented above incorporate various assumptions and actual results may vary. See Item 1A. Risk Factors–Our business, financial condition, liquidity, results of operations and cash flows depend on the accuracy of our management’s assumptions and estimates, and we could face significant losses if these assumptions and estimates differ significantly from actual results–BEAT Mitigating Actions and Item 1A. Risk Factors–Risks Relating to Taxation–The BEAT may significantly increase our tax liability and our efforts to mitigate the cost of the BEAT may be unnecessary, inefficient, ineffective, or counterproductive, each included in Part II of this report.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
• |
Risk-based capital—In its meeting held on June 28, 2018, the NAIC Capital Adequacy Task Force approved updates to the RBC factors to reflect the change in the corporate income tax rate from 35% to 21% resulting from the Tax Act. With the change in RBC factors, our RBC ratios, along with those of other fixed annuity writers and life insurers in general, are expected to decrease. If the changes were applied to our RBC ratios as of June 30, 2018, we estimate a minimal decrease to our onshore U.S. RBC ratio and approximately 12% decrease to our offshore ALRe RBC ratio. Our capital ratios under the various rating agency models are not expected to be materially impacted by the change in tax rate, and those models are an important consideration in determining the appropriate levels of capital to run our business. Our initial assessment of the level of capital that we deem appropriate to run our business has not been impacted materially by the change in tax rate.
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• |
Target returns—The Tax Act may cause a reduction of the returns that we realize on our in-force business, depending on the success of our mitigating actions. See Part II–Item 1A. Risk Factors–Risks Relating to Taxation–The BEAT may significantly increase our tax liability and our efforts to mitigate the cost of the BEAT may be unnecessary, inefficient, ineffective, or counterproductive for a discussion regarding the mitigating actions being undertaken.
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• |
Controlled Foreign Corporation—As discussed more fully at Part II–Item 1A. Risk Factors–Risks Relating to Taxation–U.S. persons who own our Class A common shares may be subject to U.S. federal income taxation at ordinary income rates on our undistributed earnings and profits, adoption of the Tax Act resulted in certain changes affecting the determination as to whether an entity constitutes a Controlled Foreign Corporation (CFC). Being treated as a CFC could have adverse tax consequences to certain of our shareholders. To reduce the likelihood of such a result, we have restructured certain of our subsidiaries so that Athene USA, our U.S. holding company subsidiary, is now a wholly owned subsidiary of ALRe.
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Other provisions of the Tax Act could significantly increase the tax liability of our U.S. subsidiaries in future tax periods by accelerating items of income or deferring deductions. Although the acceleration of an item of income or deferral of a deduction in one tax period allows a taxpayer to recognize less taxable income in a future period, there can be no assurance that we will be able to utilize any resulting deferred tax assets in future tax periods.
The foregoing represents our current expectations of certain of the effects of the Tax Act and may be subject to change as additional guidance is made available and as we continue to evaluate the effect of this legislation on our business. See Part II–Item 1A. Risk Factors–Risks Relating to Taxation for further information on how the Tax Act could impact us.
Key Operating and Non-GAAP Measures
In addition to our results presented in accordance with GAAP, our results of operations include certain non-GAAP measures commonly used in our industry. Management believes the use of these non-GAAP measures, together with the relevant GAAP measures, provides information that may enhance an investor’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 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 GAAP measures. See Non-GAAP Measure Reconciliations for the appropriate reconciliations to the GAAP measures.
Adjusted Operating Income
Adjusted operating income 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 equals net income adjusted to eliminate the impact of the following (collectively, the “non-operating adjustments”):
• |
Investment Gains (Losses), Net of Offsets—Investment gains (losses), net of offsets, consist of the realized gains and losses on the sale of AFS securities, the change in assumed modco and funds withheld reinsurance embedded derivatives, unrealized gains and losses, impairments, and other investment gains and losses. Unrealized, impairments 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 impacts 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-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 lifetime withdrawal benefit (GLWB) and guaranteed minimum death benefits (GMDB) reserves (together, GLWB and GMDB reserves represent rider reserves) as well as the MVAs associated with surrenders or terminations of contracts.
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63
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
• |
Change in Fair Values of Derivatives and Embedded Derivatives – FIAs, Net of Offsets—Impacts related to the fair value accounting for derivatives hedging the FIA index credits and the related embedded derivative liability fluctuate from 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.
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We primarily hedge with options that align with the index terms of our FIA products (typically 1–2 years). From 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 “value of an embedded 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 consist of restructuring and integration expenses related to acquisitions and block reinsurance costs as well as certain other expenses which are not part of our core operations or likely to re-occur in the foreseeable future.
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• |
Stock Compensation Expense—Stock compensation expenses associated with our share incentive plans, excluding our long term incentive plan, are not part of our core operating expenses and fluctuate from time to time due to the structure of our plans.
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• |
Bargain Purchase Gain—Bargain purchase gains associated with acquisitions are adjustments to net income as they are not consistent with our core operations.
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• |
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.
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We consider these non-operating adjustments to be meaningful adjustments to net income for the reasons discussed in greater detail above. Accordingly, we believe using a measure which excludes the impact of these items is effective in analyzing the trends in our results of operations. Together with net income, we believe adjusted operating income, provides a meaningful financial metric that helps investors understand our underlying results and profitability. Adjusted operating income should not be used as a substitute for net income.
Adjusted ROE, Adjusted Operating ROE and Adjusted Net Income
Adjusted ROE, adjusted operating ROE and adjusted net income are non-GAAP measures used to evaluate our financial performance excluding the impacts of AOCI and funds withheld and modco reinsurance unrealized gains and losses, in each case net of DAC, DSI, rider reserve and tax offsets. Adjusted ROE is calculated as adjusted net income, divided by adjusted shareholders’ equity. Adjusted shareholders’ equity is calculated as the ending shareholders’ equity excluding AOCI and funds withheld and modco reinsurance unrealized gains and losses. Adjusted operating ROE is calculated as the adjusted operating income, divided by adjusted shareholders’ equity. Adjusted net income is calculated as net income excluding funds withheld and modco reinsurance unrealized gains and losses, net of DAC, DSI, rider reserve and tax offsets. 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 reinvested 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 adjusted operating fundamentals or future performance. Accordingly, we believe using measures which exclude AOCI and funds withheld and modco reinsurance unrealized gains and losses are useful in analyzing trends in our operating results. To enhance the ability to analyze these measures across periods, interim periods are annualized. Adjusted ROE, adjusted operating ROE and adjusted net income should not be used as a substitute for ROE and net income. However, we believe the adjustments to equity are significant to gaining an understanding of our overall results of operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Adjusted Operating Earnings Per Share, Weighted Average Shares Outstanding – Adjusted Operating and Adjusted Book Value Per Share
Adjusted operating earnings per share, weighted average shares outstanding – adjusted operating and adjusted book value per share 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 represents an economic view of our share counts and provides a simplified and consistent view of our outstanding shares. Adjusted operating earnings per share is calculated as the adjusted operating income, over the weighted average shares outstanding – adjusted operating. Adjusted book value per share is calculated as the adjusted shareholders’ equity divided by the adjusted operating common shares outstanding. Our Class B common shares are economically equivalent to Class A common shares and can be converted to Class A common shares on a one-for-one basis at any time. Our Class M common shares are in the legal form of shares but economically function as options as they are convertible into Class A shares after vesting and payment 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 are not dilutive they are excluded. Weighted average shares outstanding – adjusted operating and adjusted operating 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. Adjusted operating earnings per share, weighted average shares outstanding – adjusted operating and adjusted book value per share should not be used as a substitute for basic earnings per share – Class A common shares, basic weighted average shares outstanding – Class A or book value per 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 financial condition excluding the impacts of AOCI and funds withheld and modco reinsurance unrealized gains and losses, net of DAC, DSI, rider reserve and tax offsets. Adjusted debt to capital ratio is calculated as total debt excluding consolidated VIEs divided by adjusted 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 overall results of operations and financial condition.
Retirement Services Net Investment Earned Rate, Cost of Crediting and Investment Margin on Deferred Annuities
Investment margin is a key measurement of the financial health of our Retirement Services core deferred annuities. Investment margin on our deferred annuities is generated from the excess of our net investment earned rate over the cost of crediting to our policyholders. Net investment earned rate is a key measure of investment returns and cost of crediting is a key measure of the policyholder benefits on our deferred annuities.
Net investment earned rate is a non-GAAP measure we use to evaluate the performance of our invested assets that does not correspond to GAAP net investment income. Net investment earned rate is computed as the income from our invested assets divided by the average invested assets for the relevant period. To enhance the ability to analyze these measures across periods, interim periods are annualized. The adjustments to arrive at our net investment earned rate add alternative investment gains and losses, gains and losses related to trading securities for CLOs, net VIE impacts (revenues, expenses and noncontrolling interest) and the change in reinsurance embedded derivatives. We include the income and assets supporting our assumed reinsurance 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 reinsurance embedded derivatives. 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 crediting is the interest credited to the policyholders on our fixed strategies as well as the option costs on the indexed 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. The interest credited on fixed strategies and option costs on indexed annuity strategies are divided by the average account value of our deferred annuities. Our average account values are averaged over the number of quarters in the relevant period to obtain our cost of crediting for such period. To enhance the ability to analyze these measures across periods, interim periods are annualized.
Net investment earned rate, cost of crediting 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 85% of our Retirement Services reserve liabilities as of June 30, 2018. We believe measures like net investment earned rate, cost of crediting and investment margin on deferred annuities are effective in analyzing the trends of our core business operations, profitability and pricing discipline. While we believe net investment earned rate, cost of crediting and investment margin on deferred annuities 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 presented under GAAP.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Invested Assets
In managing our business we analyze invested assets, which do not correspond to total investments, including investments in related parties, as disclosed in our consolidated financial statements and notes thereto. Invested assets represent the investments that directly back our policyholder liabilities as well as surplus assets. Invested assets is used in the computation of net investment earned rate, which allows us to analyze the profitability of our investment portfolio. 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, (f) net investment payables and receivables and (g) 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). We include the underlying investments supporting our assumed funds withheld and modco agreements in our 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. Our invested assets are averaged over the number of quarters in the relevant period to compute our net investment earned rate for such period.
Reserve Liabilities
In managing our business we also analyze reserve liabilities, which does not correspond to total liabilities as disclosed in our consolidated financial statements and notes thereto. Reserve liabilities represents our policyholder liability obligations net of reinsurance and is used to analyze the costs of our liabilities. Reserve liabilities includes (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 recoverable, excluding policy loans ceded. 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.
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 deposits generated during a specific period of time. Our sales statistics include deposits 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).
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Results of Operations
The following summarizes the consolidated results of operations:
Three months ended June 30, |
Six months ended June 30, |
||||||||||||||
(In millions, except percentages) |
2018 |
2017 |
2018 |
2017 |
|||||||||||
Revenues |
$ |
1,797 |
$ |
1,763 |
$ |
2,808 |
$ |
3,382 |
|||||||
Benefits and expenses |
1,467 |
1,426 |
2,151 |
2,639 |
|||||||||||
Income before income taxes |
330 |
337 |
657 |
743 |
|||||||||||
Income tax expense (benefit) |
66 |
11 |
125 |
33 |
|||||||||||
Net income |
$ |
264 |
$ |
326 |
$ |
532 |
$ |
710 |
|||||||
Net income |
$ |
264 |
$ |
326 |
$ |
532 |
$ |
710 |
|||||||
Non-operating adjustments |
|||||||||||||||
Realized gains (losses) on sale of AFS securities |
11 |
24 |
28 |
35 |
|||||||||||
Unrealized, impairments and other investment gains (losses) |
10 |
(15 |
) |
16 |
(12 |
) |
|||||||||
Assumed modco and funds withheld reinsurance embedded derivatives |
(129 |
) |
65 |
(207 |
) |
133 |
|||||||||
Offsets to investment gains (losses) |
34 |
(16 |
) |
56 |
(41 |
) |
|||||||||
Investment gains (losses), net of offsets |
(74 |
) |
58 |
(107 |
) |
115 |
|||||||||
Change in fair values of derivatives and embedded derivatives – FIAs, net of offsets |
75 |
15 |
170 |
109 |
|||||||||||
Integration, restructuring and other non-operating expenses |
(8 |
) |
(11 |
) |
(16 |
) |
(20 |
) |
|||||||
Stock compensation expense |
(2 |
) |
(13 |
) |
(5 |
) |
(23 |
) |
|||||||
Income tax (expense) benefit – non-operating |
(17 |
) |
(3 |
) |
(37 |
) |
(17 |
) |
|||||||
Less: Total non-operating adjustments |
(26 |
) |
46 |
5 |
164 |
||||||||||
Adjusted operating income |
$ |
290 |
$ |
280 |
$ |
527 |
$ |
546 |
|||||||
Adjusted operating income by segment |
|||||||||||||||
Retirement Services |
$ |
289 |
$ |
267 |
$ |
524 |
$ |
542 |
|||||||
Corporate and Other |
1 |
13 |
3 |
4 |
|||||||||||
Adjusted operating income |
$ |
290 |
$ |
280 |
$ |
527 |
$ |
546 |
|||||||
ROE |
12.3 |
% |
16.4 |
% |
12.4 |
% |
18.7 |
% |
|||||||
Adjusted ROE |
17.5 |
% |
16.2 |
% |
16.6 |
% |
18.4 |
% |
|||||||
Adjusted operating ROE |
14.2 |
% |
16.2 |
% |
12.9 |
% |
16.2 |
% |
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 June 30, 2018 Compared to the Three Months Ended June 30, 2017
In this section, references to 2018 refer to the three months ended June 30, 2018 and references to 2017 refer to the three months ended June 30, 2017.
Net Income
Net income decreased by $62 million, or 19%, to $264 million in 2018 from $326 million in 2017. ROE decreased to 12.3% from 16.4% in 2017, and adjusted ROE increased to 17.5% from 16.2% in 2017. The decrease in net income was driven by unfavorable assumed reinsurance embedded derivative impacts and higher tax expense partially offset by a favorable net change in FIA derivatives. Assumed reinsurance embedded derivative impacts were unfavorable due to increases in U.S treasury rates, growth in the reinsurance block attributed to the Voya reinsurance transaction and credit spreads widening. The net change in FIA derivatives was driven by the favorable increase in discount rates compared to 2017, partially offset by the change in performance of the equity indices to which our FIA policies are linked compared to 2017.
The decrease in ROE was primarily driven by unfavorable assumed reinsurance embedded derivative impacts. Adjusted ROE, which excludes these impacts, increased primarily due to the favorable net change in FIA derivatives.
67
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Adjusted Operating Income
Adjusted operating income increased by $10 million or 4%, to $290 million in 2018 from $280 million in the prior period. Adjusted operating ROE was 14.2%, down from 16.2% in 2017. The increase in adjusted operating income was primarily driven by an increase in investment income partially offset by higher cost of crediting, other liability costs and income tax expense. The increase in investment income was driven by invested asset growth, earnings from the Voya reinsurance transaction and increased floating rate investment income which resulted from higher short-term interest rates. Cost of crediting was higher driven by block growth, including the addition of Voya liabilities. Other liability costs increased driven by higher rider reserve and DAC amortization related to less favorable equity market performance compared to 2017, actuarial out of period adjustments in 2017 and growth in the deferred annuity block of business.
Our consolidated net investment earned rate was 4.71% in 2018, a decrease from 4.72% in 2017, primarily attributed to 2017 benefiting from strong alternatives performance of 12.69% compared to 9.37% in 2018. Fixed and other net investment earned rate of 4.49% increased from 4.34% in 2017 driven by higher floating rate investment income in the quarter and the deconsolidation of Germany, partially offset by lower new money rates over the past year and lower returns on assets from the Voya reinsurance transaction.
Revenues
Total revenue increased by $34 million to $1.8 billion in 2018 from $1.8 billion in 2017. The increase was driven by an increase in premiums, higher net investment income and an increase in product charges, which were largely offset by a decrease in investment related gains and losses and a decrease in VIE investment related gains and losses.
Premiums increased by $347 million to $726 million in 2018 from $379 million in the prior period, driven by the Voya reinsurance inception premiums attributed to payout annuities with life contingencies partially offset by higher PRT premiums in the prior year.
Net investment income increased by $137 million to $958 million in 2018 from $821 million in 2017, primarily driven by earnings from growth in our investment portfolio attributed to a strong increase in deposits over the prior twelve months, $44 million of investment earnings from the Voya reinsurance transaction and higher floating rate investment income of $26 million due to higher short-term interest rates, partially offset by the deconsolidation of Germany in 2018.
Product charges increased by $21 million to $106 million in 2018 from $85 million in the prior period, primarily driven by growth in the block of business and charges related to the addition of the Voya reinsurance transaction.
Investment related gains and losses decreased by $462 million to $(2) million in 2018 from $460 million in the prior year, primarily due to the change in assumed reinsurance embedded derivatives, the change in fair value of FIA hedging derivatives and the unfavorable change in unrealized gains and losses on trading securities. The unfavorable change in assumed reinsurance embedded derivatives decreased by $190 million, driven by a change in the underlying assets related to the increase in U.S. treasury rates, an increase in the reinsurance block related to the Voya reinsurance transaction and credit spreads widening compared to the prior year benefiting from credit spreads tightening. The change in fair value of FIA hedging derivatives decreased by $167 million driven by the performance of the indices upon which our call options are based. Although the S&P performed slightly higher than the prior year (2.9% increase in 2018 compared to a 2.6% increase in 2017), we have fewer options which are directly linked to the S&P compared to prior year. The change in unrealized gains and losses on trading securities was comprised of an unfavorable decrease in AmerUs Closed Block assets of $70 million related to higher unrealized losses in the quarter due to the increase in U.S. treasury rates.
VIE investment related gains and losses decreased by $22 million to $(11) million in 2018 from $11 million in the prior year, primarily due to the decline in the market value of public equity positions in one of our funds.
Benefits and Expenses
Total benefits and expenses increased by $41 million to $1.5 billion in 2018 from $1.4 billion in 2017. The increase was driven by an increase in future policy benefits and amortization of DAC and VOBA, partially offset by a decrease in interest sensitive contract benefits and a decrease in dividends to policyholders.
Future policy and other policy benefits increased by $279 million to $857 million in 2018 from $578 million in 2017, primarily attributable to the Voya reinsurance policyholder obligations at inception related to payout annuities with life contingencies partially offset by higher PRT premiums in the prior year, a decrease in the change in AmerUs Closed Block fair value liability and $56 million related to the deconsolidation of our former German subsidiaries. The favorable change in the AmerUs Closed Block fair value liability of $71 million was primarily driven by the increase in unrealized losses on the underlying investments due to the increase in U.S. treasury rates.
DAC, DSI, and VOBA amortization increased by $37 million to $115 million in 2018 from $78 million in the prior year, primarily due to unfavorable investment related gains and losses and an increase in the DAC asset balance related to block growth and unfavorable impacts due to unfavorable changes in equity market performance compared to 2017, partially offset by an increase in the net change in FIA derivatives.
68
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Interest sensitive contract benefits decreased by $221 million to $332 million in 2018 from $553 million in 2017, driven by a decrease in FIA fair value embedded derivatives of $231 million. The decrease in FIA fair value embedded derivatives was due to a favorable change in discount rates used in our embedded derivative calculations as the current quarter experienced an increase in discount rates compared to 2017, which experienced a decrease in discount rates. The decrease was partially offset by an increase related to the performance of the equity indices to which our FIA policies are linked.
Dividends to policyholders decreased by $40 million to $9 million in 2018 from $49 million in the prior year, primarily attributed to the deconsolidation of our former German subsidiaries.
Taxes
Income tax expense increased by $55 million to $66 million in 2018 from $11 million in 2017. With the enactment of the Tax Act, the U.S. statutory tax rate declined to 21% from 35%; however, the BEAT was established, which may subject payments to our non-U.S. reinsurance subsidiaries to a tax of 5%, which would increase to 10% in 2019. The income tax expense for 2018 assumes that we have taken steps so that the BEAT is not applicable to such payments and thereby assumes that more income is subject to U.S. income tax.
Our effective tax rates were 20% in 2018 and 3% in 2017. The effective tax rate excludes the impacts of excise taxes of $0 million in 2018 and $12 million in 2017. 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.
Six Months Ended June 30, 2018 Compared to the Six Months Ended June 30, 2017
In this section, references to 2018 refer to the six months ended June 30, 2018 and references to 2017 refer to the six months ended June 30, 2017.
Net Income
Net income decreased by $178 million, or 25%, to $532 million in 2018 from $710 million in 2017. ROE decreased to 12.4% from 18.7% in 2017 and adjusted ROE decreased to 16.6% from 18.4% in 2017. The decrease in net income was driven by a $19 million decrease in adjusted operating income and unfavorable assumed reinsurance embedded derivative impacts partially offset by a favorable net change in FIA derivatives. Assumed reinsurance embedded derivative impacts were unfavorable due to increases in U.S treasury rates, growth in the reinsurance block attributed to the Voya reinsurance transaction and credit spreads widening. The net change in FIA derivatives was driven by the favorable increase in discount rates compared to 2017, partially offset by the change in performance of the equity indices to which our FIA policies are linked compared to 2017.
Adjusted Operating Income
Adjusted operating income decreased by $19 million, or 3%, to $527 million in 2018 from $546 million in the prior period. Adjusted operating ROE was 12.9%, down from 16.2% in 2017. The decrease in adjusted operating income was primarily driven by higher other liability costs, an increase in cost of crediting and higher income tax expense, partially offset by an increase in investment income. Other liability costs increased primarily due to higher rider reserves and DAC amortization related to less favorable equity market performance compared to 2017, actuarial out of period adjustments in 2017 and growth in the deferred annuity block of business. Cost of crediting was higher driven by block growth, including the addition of Voya liabilities. The increase in investment income was primarily due to invested asset growth, earnings from the Voya reinsurance transaction and increased floating rate investment income related to higher short-term interest rates.
Our consolidated net investment earned rate was 4.66% in 2018, an increase from 4.60% in 2017. Fixed and other net investment earned rate of 4.41% increased from 4.31% in 2017 driven by higher floating rate investment income in 2018 and the deconsolidation of Germany, partially offset by lower new money rates over the past year, lower returns on assets from the Voya reinsurance transaction and elevated levels of cash compared to 2017. Our alternative investment net investment earned rate was 9.78%, a decrease from 10.40% in 2017, primarily due to the strong performance of Amerihome experienced in 2017.
Revenues
Total revenue decreased by $574 million to $2.8 billion in 2018 from $3.4 billion in 2017. The decrease was driven by unfavorable changes in investment related gains and losses, partially offset by an increase in premiums, higher net investment income and an increase in product charges.
69
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Investment related gains and losses decreased by $1.4 billion to $(238) million in 2018 from $1.1 billion in the prior period, primarily due to the change in fair value of FIA hedging derivatives, the change in assumed reinsurance embedded derivatives and the unfavorable change in unrealized gains and losses on trading securities. The change in fair value of FIA hedging derivatives decreased by $832 million driven 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 1.7% increase in 2018, compared to an 8.2% increase in 2017. The assumed reinsurance embedded derivatives decreased by $367 million driven by a change in the underlying assets related to the increase in U.S. treasury rates, an increase in the reinsurance block related to the Voya reinsurance transaction and credit spreads widening compared to the prior year benefiting from credit spreads tightening. The change in unrealized gains and losses on trading securities was comprised of an unfavorable decrease in AmerUs Closed Block assets of $134 million related to higher unrealized losses in the first quarter of 2018 due to the increase in U.S. treasury rates.
Premiums increased by $573 million to $1.0 billion in 2018 from $431 million in the prior period, driven by the Voya reinsurance inception premiums attributed to payout annuities with life contingencies.
Net investment income increased by $206 million to $1.8 billion in 2018 from $1.6 billion in 2017, primarily driven by earnings from growth in our investment portfolio attributed to a strong increase in deposits over the prior twelve months, $44 million of investment earnings from the Voya reinsurance transaction and higher floating rate investment income due to higher short-term interest rates, partially offset by the deconsolidation of our former German subsidiaries. The increase in alternative investment income was primarily due to higher income in one of our hedge funds, partially offset by lower credit fund income.
Product charges increased by $36 million to $202 million in 2018 from $166 million in the prior period, primarily driven by growth in the block of business and charges related to the addition of the Voya reinsurance transaction.
Benefits and Expenses
Total benefits and expenses decreased by $488 million to $2.2 billion in 2018 from $2.6 billion in 2017. The decrease was driven by a decrease in interest sensitive contract benefits, a decrease in dividends payable to policyholders, and a decrease to policy and other operating expenses, partially offset by an increase in future policy and other policy benefits.
Interest sensitive contract benefits decreased by $894 million to $351 million in 2018 from $1.2 billion in 2017, primarily due to the change in FIA fair value embedded derivatives. The change in FIA fair value embedded derivatives decreased by $898 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 1.7% increase in 2018, compared to a 8.2% increase in 2017. Additionally, the FIA fair value embedded derivatives were impacted by a favorable change in discount rates used in our embedded derivative calculations as the current period experienced an increase in discount rates compared to 2017, which experienced a decrease in discount rates.
Dividends to policyholders decreased by $59 million to $22 million in 2018 from $81 million in the prior year, primarily attributed to the deconsolidation of our former German subsidiaries.
Policy and other operating expenses decreased by $26 million to $295 million in 2018 from $321 million in the prior year, primarily driven by lower stock compensation expense of $18 million and $31 million related to the deconsolidation of Germany, partially offset by debt costs related to our inaugural debt issuance in January.
Future policy and other policy benefits increased by $466 million to $1.3 billion in 2018 from $792 million in 2017, primarily attributable to the Voya reinsurance policyholder obligations at inception related to payout annuities with life contingencies and an increase in rider reserves, partially offset by a decrease in the change in AmerUs Closed Block fair value liability and $108 million related to the deconsolidation of our former German subsidiaries. The increase in rider reserves of $37 million was primarily driven by growth in the block of business and unfavorable impacts related to the change in equity market performance compared to 2017 resulting in decreased index credits to policyholder accounts which increased the amount needed to fund the rider reserve. The favorable change in the AmerUs Closed Block fair value liability of $148 million was primarily driven by the increase in unrealized losses on the underlying investments driven related to the increase in U.S. treasury rates.
Taxes
Income tax expense increased by $92 million to $125 million in 2018 from $33 million in 2017. With the enactment of the Tax Act, the U.S. statutory tax rate declined to 21% from 35%; however, the BEAT was established, which may subject payments to our non-U.S. reinsurance subsidiaries to a tax of 5%, which would increase to 10% in 2019. The income tax expense for 2018 assumes that we have taken steps so that the BEAT is not applicable to such payments and thereby assumes that more income is subject to U.S. income tax.
Our effective tax rates were 19% in 2018 and 4% in 2017. The effective tax rate excludes the impacts of excise taxes of $0 million in 2018 and $25 million in 2017. 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.
70
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations by Segment
The following summarizes our adjusted operating income by segment:
Three months ended June 30, |
Six months ended June 30, |
||||||||||||||
(In millions, except percentages) |
2018 |
2017 |
2018 |
2017 |
|||||||||||
Adjusted operating income by segment |
|||||||||||||||
Retirement Services |
$ |
289 |
$ |
267 |
$ |
524 |
$ |
542 |
|||||||
Corporate and Other |
1 |
13 |
3 |
4 |
|||||||||||
Adjusted operating income |
$ |
290 |
$ |
280 |
$ |
527 |
$ |
546 |
|||||||
Retirement Services adjusted operating ROE |
19.8 |
% |
22.0 |
% |
18.0 |
% |
23.1 |
% |
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 multi-year guaranteed annuities (MYGA), 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 June 30, 2018 Compared to the Three Months Ended June 30, 2017
In this section, references to 2018 refer to the three months ended June 30, 2018 and references to 2017 refer to the three months ended June 30, 2017.
Adjusted Operating Income
Adjusted operating income increased by $22 million, or 8%, to $289 million in 2018, from $267 million in 2017. Adjusted operating ROE was 19.8%, down from 22.0% in the prior period. The increase in adjusted operating income was primarily driven by an increase in net investment earnings partially offset by higher cost of crediting, other liability costs and income tax expense.
Net investment earnings increased $162 million primarily driven by earnings from growth in invested assets of $27.6 billion attributed to the Voya reinsurance transaction and a strong increase in deposits over the prior twelve months. Additionally, floating rate investment income was higher $26 million related to higher short-term interest rates.
Cost of crediting increased $54 million driven by block growth, including the addition of Voya liabilities.
Other liability costs increased $44 million driven by higher rider reserve and DAC amortization related to unfavorable impacts related to equity market performance resulting in favorable $13 million impact in 2018 compared to a $44 million benefit from equity market performance and actuarial out of period adjustments in 2017, as well as growth in the deferred annuity block of business and the addition of Voya liabilities. Although the S&P performed slightly higher than the prior year (2.9% increase in 2018 compared to a 2.6% increase in 2017), we have fewer options which are directly linked to the S&P compared to prior year.
Investment Margin on Deferred Annuities
Three months ended June 30, |
|||||
2018 |
2017 |
||||
Net investment earned rate |
4.74 |
% |
4.85 |
% |
|
Cost of crediting |
1.92 |
% |
1.89 |
% |
|
Investment margin on deferred annuities |
2.82 |
% |
2.96 |
% |
Investment margin on deferred annuities decreased by 14 basis points to 2.82% in 2018, from 2.96% in 2017. The decrease in the investment margin on deferred annuities was driven by the decrease in net investment earned rate of 11 basis points, and an unfavorable increase in cost of crediting of 3 basis points.
71
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net investment earned rate decreased due to the decrease in fixed and other net investment earned rates and alternative net investment earned rates. The fixed and other net investment earned rate decreased in 2018 to 4.49% from 4.55% in 2017 primarily attributed to lower new money rates over the past year, lower returns on the assets from the Voya reinsurance transaction and lower mortgage principal paydowns, partially offset by higher floating rate investment income in the quarter. The alternative investment net investments earned rate remained strong in 2018 at 11.28% driven by strong MidCap performance for the quarter returning 14.51%. The alternative investment net investment earned rate decreased from 12.28% in 2017 as a result of the prior year benefiting from the strong performance of AmeriHome which experienced an earned rate of 23.76% in prior year, compared to 12.14% in 2018.
Cost of crediting on deferred annuities increased by 3 basis points to 1.92% in 2018, from 1.89% in 2017. The increase in cost of crediting was driven by a higher rate on the Voya reinsurance liabilities. 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.
Six Months Ended June 30, 2018 Compared to the Six Months Ended June 30, 2017
In this section, references to 2018 refer to the six months ended June 30, 2018 and references to 2017 refer to the six months ended June 30, 2017.
Adjusted Operating Income
Adjusted operating income decreased by $18 million, or 3%, to $524 million in 2018, from $542 million in 2017. Adjusted operating ROE was 18.0%, down from 23.1% in the prior period. The decrease in adjusted operating income was primarily driven by an increase in other liability costs, cost of crediting and income tax expense, partially offset by higher net investment earnings.
Other liability costs increased $123 million driven by unfavorable impacts related to equity market performance resulting in an unfavorable $2 million impact in 2018 compared to a benefit of $77 million in 2017, as well as growth in our deferred annuity block of business, partially offset by lower excise taxes in 2018.
Cost of crediting increased $66 million driven by block growth, including the addition of Voya liabilities.
Net investment earnings increased $248 million driven primarily by earnings from growth in invested assets of $27.6 billion attributed to the Voya reinsurance transaction and a strong increase in deposits over the prior twelve months. Additionally, floating rate investment income increased by $60 million related to higher short-term interest rates, partially offset by a benefit in the prior year of $14 million from proceeds on the recovery of a bond previously written down and lower mortgage principal paydowns in 2018.
Investment Margin on Deferred Annuities
Six months ended June 30, |
|||||
2018 |
2017 |
||||
Net investment earned rate |
4.68 |
% |
4.80 |
% |
|
Cost of crediting |
1.89 |
% |
1.90 |
% |
|
Investment margin on deferred annuities |
2.79 |
% |
2.90 |
% |
Investment margin on deferred annuities decreased by 11 basis points to 2.79% in 2018, from 2.90% in 2017. The decrease in the investment margin on deferred annuities was driven by the decrease in net investment earned rate of 12 basis points, partially offset by a favorable decrease in cost of crediting of 1 basis point.
Net investment earned rate decreased due to the decrease in fixed and other net investment earned rate. The fixed and other net investment earned rate decreased in 2018, to 4.40% from 4.53% in 2017 primarily attributed to lower new money rates over the past year, lower returns on the assets from the Voya reinsurance transaction, lower mortgage principal paydowns, elevated levels of cash during 2018 and 2017 benefiting from proceeds from a bond previously written down. The decreases were partially offset by higher floating rate investment income in the quarter. The alternative investments net investments earned rate increased in 2018 to 11.64% from 11.48% in 2017, reflecting higher income in one of our hedge funds and strong performance from MidCap.
Cost of crediting on deferred annuities decreased by 1 basis point to 1.89% in 2018, from 1.90% in 2017. The decrease in cost of crediting was driven by rate actions on business that renewed in 2017, partially offset by a higher rate on the Voya reinsurance liabilities and an increase in option costs due to higher volatility and short-term interest rates.
72
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Corporate and Other
Corporate and Other includes certain other operations related to our corporate activities, including corporate allocated expenses, merger and acquisition costs, debt costs, certain integration and restructuring costs, certain stock-based compensation and intersegment eliminations. In Corporate and Other, we also hold capital in excess of the level of capital we hold in Retirement Services to support our operating strategy. Prior to the deconsolidation of Athora on January 1, 2018, Corporate and Other included our German operations, which were primarily comprised of participating long-duration savings products.
Adjusted Operating Income
Adjusted operating income decreased by $12 million to $1 million in the three months ended June 30, 2018, from $13 million in the three months ended June 30, 2017. The decrease in adjusted operating income was mainly driven by lower alternative investment income due to the decline in the market value of public equity positions in one of our funds and lower credit fund income. Our former German operations, which deconsolidated on January 1, 2018, had an operating loss of $8 million in the three months ended June 30, 2017.
Adjusted operating income decreased by $1 million to $3 million in the six months ended June 30, 2018, from $4 million in the six months ended June 30, 2017. The decrease in adjusted operating income, excluding Germany, was mainly driven by lower alternative investment income related to the decline in market value of public equity positions in one of our funds and debt costs from our inaugural debt issuance in January, partially offset by higher fixed and other investment income primarily related to the increase in excess capital. Our former German operations, which deconsolidated on January 1, 2018, had an operating loss of $11 million in the six months ended June 30, 2017.
Consolidated Investment Portfolio
We had consolidated investments, including related parties, of $98.7 billion and $84.4 billion as of June 30, 2018 and December 31, 2017, respectively. Our investment strategy seeks to achieve sustainable risk-adjusted returns through disciplined managing of investment characteristics with our long-duration liabilities and the diversification of risk. The investment strategies utilized by our investment managers focus 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 majority of our investment portfolio is managed by AAM, an indirect subsidiary of Apollo founded for the express purpose of managing our portfolio. 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 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 AAM investment team and Apollo’s credit portfolio managers assists us in sourcing and underwriting complex asset classes. AAM 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% of our portfolio to alternative investments where we primarily focus on fixed income-like, cash flow-based investments.
Our invested assets, which are those which directly back our policyholder liabilities as well as surplus assets (as previously discussed in Key Operating and Non-GAAP Measures), were $98.6 billion and $82.3 billion as of June 30, 2018 and December 31, 2017, respectively. AAM manages, directly and indirectly, $97.0 billion of investments, which in the aggregate constitute the vast majority of our investment portfolio as of June 30, 2018, comprising a diversified portfolio of fixed maturity and other securities. Through our relationship with Apollo, AAM has identified unique investment opportunities for us. AAM’s knowledge of our funding structure and regulatory requirements allows it to design customized strategies and investments for our portfolio.
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’s ratings. In addition, our investment portfolio is constrained by its scenario-based capital ratio limit and its stressed liquidity limit.
73
Item 2. Management’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:
June 30, 2018 |
December 31, 2017 |
||||||||||||
(In millions, except percentages) |
Carrying Value |
Percent of Total |
Carrying Value |
Percent of Total |
|||||||||
Fixed maturity securities, at fair value |
|||||||||||||
AFS securities |
$ |
59,762 |
60.6 |
% |
$ |
61,012 |
72.3 |
% |
|||||
Trading securities |
2,053 |
2.1 |
% |
2,196 |
2.6 |
% |
|||||||
Equity securities |
216 |
0.2 |
% |
790 |
0.9 |
% |
|||||||
Mortgage loans, net of allowances |
7,609 |
7.7 |
% |
6,233 |
7.4 |
% |
|||||||
Investment funds |
633 |
0.6 |
% |
699 |
0.8 |
% |
|||||||
Policy loans |
504 |
0.5 |
% |
530 |
0.6 |
% |
|||||||
Funds withheld at interest |
7,700 |
7.8 |
% |
7,085 |
8.4 |
% |
|||||||
Derivative assets |
1,929 |
2.0 |
% |
2,551 |
3.0 |
% |
|||||||
Real estate |
— |
— |
% |
624 |
0.7 |
% |
|||||||
Short-term investments |
289 |
0.3 |
% |
201 |
0.2 |
% |
|||||||
Other investments |
123 |
0.1 |
% |
133 |
0.2 |
% |
|||||||
Total investments |
80,818 |
81.9 |
% |
82,054 |
97.1 |
% |
|||||||
Investment in related parties |
|||||||||||||
Fixed maturity securities, at fair value |
|||||||||||||
AFS securities |
956 |
1.0 |
% |
406 |
0.5 |
% |
|||||||
Trading securities |
278 |
0.3 |
% |
307 |
0.4 |
% |
|||||||
Investment funds |
1,836 |
1.8 |
% |
1,310 |
1.6 |
% |
|||||||
Funds withheld at interest |
14,221 |
14.4 |
% |
— |
— |
% |
|||||||
Short-term investments |
172 |
0.2 |
% |
52 |
0.1 |
% |
|||||||
Other investments |
388 |
0.4 |
% |
238 |
0.3 |
% |
|||||||
Total related party investments |
17,851 |
18.1 |
% |
2,313 |
2.9 |
% |
|||||||
Total investments, including related party |
$ |
98,669 |
100.0 |
% |
$ |
84,367 |
100.0 |
% |
The increase in our total investments, including related party, as of June 30, 2018 of $14.3 billion compared to December 31, 2017 was mainly driven by $18.0 billion of assets from the Voya reinsurance transaction, growth from organic deposits of $4.7 billion less liability outflows of $3.6 billion and reinvestment of earnings. These were partially offset by the deconsolidation of $5.9 billion related to our former German operations, the change in unrealized gains and losses on AFS securities and a decrease in derivative assets. Unrealized gains and losses on AFS securities decreased $2.2 billion attributed to the increase in U.S. treasury rates and credit spreads widening. Derivative assets decreased by $622 million primarily attributed to higher maturities than purchases in the current period, partially offset by equity market performance as the S&P 500 index increased by 1.7% during the year.
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).
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 asset funds, credit funds, private equity funds and hedge funds. We have a strong preference for assets that have some or all of the following characteristics, among others: (1) investments that constitute a direct investment or an investment in a fund with a high degree of co-investment; (2) investments with credit- or debt-like characteristics (for example, a stipulated maturity and par value), or alternatively, investments with reduced volatility when compared to pure equity; or (3) investments that have less downside risk. We 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 received in these transactions, we actively reinvest these investments in our preferred credit-oriented strategies over time as we liquidate these holdings.
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.
74
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 meet their obligations under the contracts. We generally use industry standard agreements and annexes with bilateral collateral provisions to further reduce counterparty credit exposure.
AFS Securities
We invest 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 on our condensed consolidated balance sheets. Changes in fair value for our AFS portfolio, 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. Declines in fair value that are other than temporary are recorded as realized losses in the condensed consolidated statements of income, net of any applicable non-credit component of the loss, which is recorded as an adjustment to other comprehensive income.
The distribution of our AFS securities, including related parties, by type is as follows:
June 30, 2018 |
||||||||||||||||||
(In millions, except percentages) |
Amortized Cost |
Unrealized Gain |
Unrealized Loss |
Fair Value |
Percent of Total |
|||||||||||||
AFS securities |
||||||||||||||||||
U.S. government and agencies |
$ |
143 |
$ |
— |
$ |
(1 |
) |
$ |
142 |
0.2 |
% |
|||||||
U.S. state, municipal and political subdivisions |
1,152 |
124 |
(5 |
) |
1,271 |
2.1 |
% |
|||||||||||
Foreign governments |
203 |
1 |
(5 |
) |
199 |
0.3 |
% |
|||||||||||
Corporate |
37,258 |
481 |
(885 |
) |
36,854 |
60.7 |
% |
|||||||||||
CLO |
5,355 |
21 |
(24 |
) |
5,352 |
8.8 |
% |
|||||||||||
ABS |
4,727 |
32 |
(43 |
) |
4,716 |
7.8 |
% |
|||||||||||
CMBS |
2,343 |
28 |
(47 |
) |
2,324 |
3.8 |
% |
|||||||||||
RMBS |
8,264 |
648 |
(8 |
) |
8,904 |
14.7 |
% |
|||||||||||
Total AFS securities |
59,445 |
1,335 |
(1,018 |
) |
59,762 |
98.4 |
% |
|||||||||||
AFS securities – related party |
||||||||||||||||||
CLO |
473 |
2 |
(3 |
) |
472 |
0.8 |
% |
|||||||||||
ABS |
485 |
2 |
(3 |
) |
484 |
0.8 |
% |
|||||||||||
Total AFS securities – related party |
958 |
4 |
(6 |
) |
956 |
1.6 |
% |
|||||||||||
Total AFS securities, including related party |
$ |
60,403 |
$ |
1,339 |
$ |
(1,024 |
) |
$ |
60,718 |
100.0 |
% |
75
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
December 31, 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 |
$ |
63 |
$ |
1 |
$ |
(2 |
) |
$ |
62 |
0.1 |
% |
|||||||
U.S. state, municipal and political subdivisions |
996 |
171 |
(2 |
) |
1,165 |
1.9 |
% |
|||||||||||
Foreign governments |
2,575 |
116 |
(8 |
) |
2,683 |
4.3 |
% |
|||||||||||
Corporate |
35,173 |
1,658 |
(171 |
) |
36,660 |
59.5 |
% |
|||||||||||
CLO |
5,039 |
53 |
(8 |
) |
5,084 |
8.2 |
% |
|||||||||||
ABS |
3,945 |
53 |
(27 |
) |
3,971 |
6.4 |
% |
|||||||||||
CMBS |
1,994 |
48 |
(21 |
) |
2,021 |
3.3 |
% |
|||||||||||
RMBS |
8,721 |
652 |
(7 |
) |
9,366 |
15.2 |
% |
|||||||||||
Total fixed maturity securities |
58,506 |
2,752 |
(246 |
) |
61,012 |
98.9 |
% |
|||||||||||
Equity securities1
|
271 |
7 |
(1 |
) |
277 |
0.4 |
% |
|||||||||||
Total AFS securities |
58,777 |
2,759 |
(247 |
) |
61,289 |
99.3 |
% |
|||||||||||
AFS securities – related party |
||||||||||||||||||
CLO |
353 |
7 |
— |
360 |
0.6 |
% |
||||||||||||
ABS |
46 |
— |
— |
46 |
0.1 |
% |
||||||||||||
Total AFS securities – related party |
399 |
7 |
— |
406 |
0.7 |
% |
||||||||||||
Total AFS securities, including related party |
$ |
59,176 |
$ |
2,766 |
$ |
(247 |
) |
$ |
61,695 |
100.0 |
% |
|||||||
1 Included in equity securities on the condensed consolidated balance sheets.
|
76
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:
June 30, 2018 |
December 31, 2017 |
||||||||||||
(In millions, except percentages) |
Fair Value |
Percent of Total |
Fair Value |
Percent of Total |
|||||||||
Corporate |
|||||||||||||
Industrial other1
|
$ |
11,772 |
19.4 |
% |
$ |
12,026 |
19.6 |
% |
|||||
Financial |
11,783 |
19.4 |
% |
11,824 |
19.3 |
% |
|||||||
Utilities |
8,740 |
14.4 |
% |
8,296 |
13.5 |
% |
|||||||
Communication |
2,438 |
4.0 |
% |
2,607 |
4.2 |
% |
|||||||
Transportation |
2,121 |
3.5 |
% |
1,907 |
3.1 |
% |
|||||||
Total corporate |
36,854 |
60.7 |
% |
36,660 |
59.7 |
% |
|||||||
Other government-related securities |
|||||||||||||
U.S. state, municipal and political subdivisions |
1,271 |
2.1 |
% |
1,165 |
1.9 |
% |
|||||||
Foreign governments |
199 |
0.3 |
% |
2,683 |
4.4 |
% |
|||||||
U.S. government and agencies |
142 |
0.2 |
% |
62 |
0.1 |
% |
|||||||
Total non-structured securities |
38,466 |
63.3 |
% |
40,570 |
66.1 |
% |
|||||||
Structured securities |
|||||||||||||
CLO |
5,824 |
9.6 |
% |
5,444 |
8.9 |
% |
|||||||
ABS |
5,200 |
8.6 |
% |
4,017 |
6.5 |
% |
|||||||
CMBS |
2,324 |
3.8 |
% |
2,021 |
3.3 |
% |
|||||||
RMBS |
|||||||||||||
Agency |
115 |
0.2 |
% |
87 |
0.1 |
% |
|||||||
Non-agency |
8,789 |
14.5 |
% |
9,279 |
15.1 |
% |
|||||||
Total structured securities |
22,252 |
36.7 |
% |
20,848 |
33.9 |
% |
|||||||
Total AFS fixed maturity securities, including related party |
$ |
60,718 |
100.0 |
% |
$ |
61,418 |
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 AFS fixed maturity securities, including related parties, was $60.7 billion and $61.4 billion as of June 30, 2018 and December 31, 2017, respectively. The decrease was mainly driven by the deconsolidation of $5.9 billion related to our former German operations and the change in unrealized gains and losses on AFS securities. Unrealized gains and losses on AFS securities decreased attributed to the increase in U.S. treasury rates and credit spreads widening. These were partially offset by strong growth in deposits over liability outflows in assets from the Voya reinsurance transaction.
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. The SVO conducts credit analysis on these securities for the purpose of assigning an NAIC designation and/or unit price. With important exceptions discussed below, if a security has been rated by a Nationally Recognized Statistical Rating Organization (NRSRO), the SVO utilizes that rating and assigns an NAIC designation based upon the following system:
NAIC designation |
NRSRO equivalent rating |
|
1 |
AAA/AA/A |
|
2 |
BBB |
|
3 |
BB |
|
4 |
B |
|
5 |
CCC |
|
6 |
CC and lower |
77
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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) methodology is focused on determining the risk associated with the recovery of the amortized cost of each security. Because the NAIC’s methodology explicitly considers amortized cost and the likelihood of recovery of our investment, we view the NAIC’s methodology as the most appropriate way to view 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, the SVO has developed a ratings process and provides instruction on both modeled and non-modeled LBaSS. The modeled LBaSS 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 to model non-agency RMBS and CMBS owned by U.S. insurers for all years presented herein. Blackrock provides five prices (breakpoints), based on each U.S. 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 RBC that an insurer is required to hold for modeled LBaSS owned by the insurer. In general, under both the modeled and non-modeled LBaSS processes, the larger the discount to par value, the stronger the NAIC designation the LBaSS will have.
A summary of our AFS fixed maturity securities, including related parties, by NAIC designation (with our former German operations applying NRSRO ratings to map to NAIC designations) is as follows:
June 30, 2018 |
December 31, 2017 |
||||||||||||||||||||
(In millions, except percentages) |
Amortized Cost |
Fair Value |
Percent of Total |
Amortized Cost |
Fair Value |
Percent of Total |
|||||||||||||||
NAIC designation |
|||||||||||||||||||||
1 |
$ |
30,419 |
$ |
31,056 |
51.2 |
% |
$ |
30,906 |
$ |
32,447 |
52.8 |
% |
|||||||||
2 |
26,268 |
26,017 |
42.8 |
% |
24,147 |
25,082 |
40.9 |
% |
|||||||||||||
Total investment grade |
56,687 |
57,073 |
94.0 |
% |
55,053 |
57,529 |
93.7 |
% |
|||||||||||||
3 |
2,876 |
2,832 |
4.7 |
% |
2,978 |
3,040 |
5.0 |
% |
|||||||||||||
4 |
707 |
679 |
1.1 |
% |
789 |
765 |
1.2 |
% |
|||||||||||||
5 |
125 |
124 |
0.2 |
% |
70 |
66 |
0.1 |
% |
|||||||||||||
6 |
8 |
10 |
0.0 |
% |
15 |
18 |
0.0 |
% |
|||||||||||||
Total below investment grade |
3,716 |
3,645 |
6.0 |
% |
3,852 |
3,889 |
6.3 |
% |
|||||||||||||
Total fixed maturity securities, including related party |
$ |
60,403 |
$ |
60,718 |
100.0 |
% |
$ |
58,905 |
$ |
61,418 |
100.0 |
% |
Substantially all of our AFS fixed maturity portfolio, 94.0% and 93.7% as of June 30, 2018 and December 31, 2017, respectively, was invested in assets considered investment grade with a NAIC designation of 1 or 2.
78
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:
June 30, 2018 |
December 31, 2017 |
||||||||||||
(In millions, except percentages) |
Fair Value |
Percent of Total |
Fair Value |
Percent of Total |
|||||||||
NRSRO rating agency designation |
|||||||||||||
AAA/AA/A |
$ |
20,704 |
34.1 |
% |
$ |
21,448 |
34.9 |
% |
|||||
BBB |
23,837 |
39.3 |
% |
23,572 |
38.4 |
% |
|||||||
Non-rated1
|
6,932 |
11.4 |
% |
6,592 |
10.7 |
% |
|||||||
Total investment grade |
51,473 |
84.8 |
% |
51,612 |
84.0 |
% |
|||||||
BB |
2,878 |
4.7 |
% |
3,091 |
5.0 |
% |
|||||||
B |
1,096 |
1.8 |
% |
1,198 |
2.0 |
% |
|||||||
CCC |
3,004 |
5.0 |
% |
2,696 |
4.4 |
% |
|||||||
CC and lower |
1,572 |
2.6 |
% |
2,302 |
3.8 |
% |
|||||||
Non-rated1
|
695 |
1.1 |
% |
519 |
0.8 |
% |
|||||||
Total below investment grade |
9,245 |
15.2 |
% |
9,806 |
16.0 |
% |
|||||||
Total fixed maturity securities, including related party |
$ |
60,718 |
100.0 |
% |
$ |
61,418 |
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 where 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 if 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’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 15.2% and 16.0% as of June 30, 2018 and December 31, 2017, 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 to the difference in methodologies between the NRSRO and NAIC for RMBS due to investments acquired at a discount to par value, as discussed above.
As of June 30, 2018 and December 31, 2017, the non-rated securities shown above were comprised of 45% and 44%, respectively, of corporate private placement securities for which we have not sought individual ratings from the NRSROs and 38% and 42%, 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. As of June 30, 2018 and December 31, 2017, 91% and 93%, 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 cash flows from various types of business equipment. These holdings were $5.2 billion and $4.0 billion as of June 30, 2018 and December 31, 2017, respectively. As of June 30, 2018 and December 31, 2017, our ABS portfolio included $4.9 billion (95% of the total) and $3.8 billion (94% of the total), respectively, of securities that are considered investment grade based on NAIC designations, while $4.7 billion (90% of the total) and $3.6 billion (89% of the total), respectively, of securities were considered investment grade based on NRSRO ratings.
Collateralized Loan Obligations – We also invest in CLOs which pay principal and interest from cash flows received from underlying corporate loans. These holdings were $5.8 billion and $5.4 billion as of June 30, 2018 and December 31, 2017, respectively. As of June 30, 2018 and December 31, 2017, our CLO portfolio included $5.3 billion (91% of the total) and $4.6 billion (85% of the total), respectively, of securities that are considered investment grade based on NAIC designations, while $5.5 billion (95% of the total) and $4.8 billion (88% of the total), respectively, of securities were considered investment grade based on NRSRO ratings.
79
Item 2. Management’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 $2.3 billion and $2.0 billion as of June 30, 2018 and December 31, 2017, respectively. As of June 30, 2018 and December 31, 2017, our CMBS portfolio included $2.1 billion (89% of the total) and $1.9 billion (95% of the total), respectively, of securities that are considered investment grade based on NAIC designations, while $1.5 billion (65% of the total) and $1.4 billion (70% 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. These holdings were $8.9 billion and $9.4 billion as of June 30, 2018 and December 31, 2017, respectively. 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 are generally considered investment grade based on NAIC designations, given the likelihood that we ultimately receive principal and interest distributions in an amount at least equal to our amortized cost.
A summary of our AFS RMBS portfolio by NAIC designations and NRSRO quality ratings is as follows:
June 30, 2018 |
December 31, 2017 |
||||||||||||
(In millions, except percentages) |
Fair Value |
Percent of Total |
Fair Value |
Percent of Total |
|||||||||
NAIC designation |
|||||||||||||
1 |
$ |
8,219 |
92.4 |
% |
$ |
8,714 |
93.0 |
% |
|||||
2 |
385 |
4.3 |
% |
360 |
3.8 |
% |
|||||||
Total investment grade |
8,604 |
96.7 |
% |
9,074 |
96.8 |
% |
|||||||
3 |
189 |
2.1 |
% |
213 |
2.3 |
% |
|||||||
4 |
109 |
1.2 |
% |
73 |
0.8 |
% |
|||||||
5 |
1 |
0.0 |
% |
6 |
0.1 |
% |
|||||||
6 |
1 |
0.0 |
% |
— |
— |
% |
|||||||
Total below investment grade |
300 |
3.3 |
% |
292 |
3.2 |
% |
|||||||
Total RMBS |
$ |
8,904 |
100.0 |
% |
$ |
9,366 |
100.0 |
% |
|||||
NRSRO rating agency designation |
|||||||||||||
AAA/AA/A |
$ |
528 |
5.9 |
% |
$ |
335 |
3.6 |
% |
|||||
BBB |
268 |
3.0 |
% |
347 |
3.7 |
% |
|||||||
Non-rated1
|
2,750 |
30.9 |
% |
2,866 |
30.6 |
% |
|||||||
Total investment grade |
3,546 |
39.8 |
% |
3,548 |
37.9 |
% |
|||||||
BB |
352 |
4.0 |
% |
415 |
4.4 |
% |
|||||||
B |
401 |
4.5 |
% |
417 |
4.5 |
% |
|||||||
CCC |
2,904 |
32.6 |
% |
2,580 |
27.5 |
% |
|||||||
CC and lower |
1,568 |
17.6 |
% |
2,298 |
24.5 |
% |
|||||||
Non-rated1
|
133 |
1.5 |
% |
108 |
1.2 |
% |
|||||||
Total below investment grade |
5,358 |
60.2 |
% |
5,818 |
62.1 |
% |
|||||||
Total RMBS |
$ |
8,904 |
100.0 |
% |
$ |
9,366 |
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% and 96.8% as of June 30, 2018 and December 31, 2017, respectively, was invested in assets considered to be investment grade based upon an application of the NAIC’s methodology to our holdings of RMBS. The NAIC’s methodology with respect 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 U.S. 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 resulted in an investment grade NAIC designation. In contrast, our understanding is that in setting ratings, NRSROs focus on the likelihood of recovery of all contractual payments including principal at par value. As a result of a fundamental difference in approach, as of June 30, 2018 and December 31, 2017, NRSROs characterized 39.8% and 37.9%, respectively, of our RMBS as investment grade.
80
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unrealized Losses
Our investments in fixed maturity securities, including related parties, are reported at fair value with changes in fair value recorded in other comprehensive income. Certain of our fixed maturity securities, including related parties, have experienced declines in fair value that we consider temporary in nature. As of June 30, 2018, our fixed maturity securities, including related party, had a fair value of $60.7 billion, which was 0.5% above amortized cost of $60.4 billion. As of December 31, 2017, our fixed maturity securities, including related party, had a fair value of $61.4 billion, which was 4.3% above amortized cost of $58.9 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.
The following tables reflect the unrealized losses on the AFS fixed maturity portfolio, including related parties, by NAIC designations:
June 30, 2018 |
|||||||||||||||||||||
(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 |
$ |
13,387 |
$ |
(345 |
) |
$ |
13,042 |
97.4 |
% |
$ |
31,056 |
(1.1 |
)% |
||||||||
2 |
15,446 |
(563 |
) |
14,883 |
96.4 |
% |
26,017 |
(2.2 |
)% |
||||||||||||
Total investment grade |
28,833 |
(908 |
) |
27,925 |
96.9 |
% |
57,073 |
(1.6 |
)% |
||||||||||||
3 |
1,704 |
(72 |
) |
1,632 |
95.8 |
% |
2,832 |
(2.5 |
)% |
||||||||||||
4 |
440 |
(43 |
) |
397 |
90.2 |
% |
679 |
(6.3 |
)% |
||||||||||||
5 |
39 |
(1 |
) |
38 |
97.4 |
% |
124 |
(0.8 |
)% |
||||||||||||
6 |
2 |
— |
2 |
100.0 |
% |
10 |
— |
% |
|||||||||||||
Total below investment grade |
2,185 |
(116 |
) |
2,069 |
94.7 |
% |
3,645 |
(3.2 |
)% |
||||||||||||
Total |
$ |
31,018 |
$ |
(1,024 |
) |
$ |
29,994 |
96.7 |
% |
$ |
60,718 |
(1.7 |
)% |
December 31, 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 |
$ |
4,901 |
$ |
(100 |
) |
$ |
4,801 |
98.0 |
% |
$ |
32,447 |
(0.3 |
)% |
||||||||
2 |
4,284 |
(82 |
) |
4,202 |
98.1 |
% |
25,082 |
(0.3 |
)% |
||||||||||||
Total investment grade |
9,185 |
(182 |
) |
9,003 |
98.0 |
% |
57,529 |
(0.3 |
)% |
||||||||||||
3 |
881 |
(19 |
) |
862 |
97.8 |
% |
3,040 |
(0.6 |
)% |
||||||||||||
4 |
451 |
(40 |
) |
411 |
91.1 |
% |
765 |
(5.2 |
)% |
||||||||||||
5 |
60 |
(5 |
) |
55 |
91.7 |
% |
66 |
(7.6 |
)% |
||||||||||||
6 |
5 |
— |
5 |
100.0 |
% |
18 |
— |
% |
|||||||||||||
Total below investment grade |
1,397 |
(64 |
) |
1,333 |
95.4 |
% |
3,889 |
(1.6 |
)% |
||||||||||||
Total |
$ |
10,582 |
$ |
(246 |
) |
$ |
10,336 |
97.7 |
% |
$ |
61,418 |
(0.4 |
)% |
The gross unrealized losses on AFS fixed maturity securities, including related party, were $1.0 billion and $246 million as of June 30, 2018 and December 31, 2017, respectively. The increase in unrealized losses was driven by the increase in U.S. treasury rates and credit spreads widening for the six months ended June 30, 2018.
As of June 30, 2018 and December 31, 2017, we held $4.5 billion and $4.4 billion, respectively, in energy sector fixed maturity securities, or 7% of total AFS fixed maturity securities, including related party, as of each period. The gross unrealized capital losses on these securities were $127 million and $33 million, or 12% and 13%, respectively, of the total unrealized losses.
81
Item 2. Management’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 six months ended June 30, 2018, we recorded $3 million of OTTI losses comprised of $2 million related to corporate fixed maturities and $1 million related to RMBS. Of the OTTI losses recognized for the six months ended June 30, 2018, there were no OTTI losses related to the energy sector. During the six months ended June 30, 2017, we recorded $12 million of OTTI losses comprised of $8 million related to corporate fixed maturities, $3 million related to mortgage loans and $1 million related to ABS. Of the OTTI losses recognized during the six months ended June 30, 2017, there were no OTTI losses related to the energy sector. The annualized OTTI losses we have experienced for the six months ended June 30, 2018 and 2017 translate into 1 basis point and 3 basis points, respectively, of average invested assets.
International Exposure
A portion of our fixed maturity securities is invested in securities with international exposure. As of June 30, 2018 and December 31, 2017, 30% and 33% of the carrying value of our fixed maturity 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. 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 securities portfolio, including related parties, by country or region:
June 30, 2018 |
December 31, 2017 |
||||||||||||||||||||
(In millions, except percentages) |
Amortized Cost |
Fair Value |
Percent of Total |
Amortized Cost |
Fair Value |
Percent of Total |
|||||||||||||||
Country of risk |
|||||||||||||||||||||
Ireland |
$ |
526 |
$ |
512 |
2.8 |
% |
$ |
498 |
$ |
511 |
2.6 |
% |
|||||||||
Italy |
36 |
36 |
0.2 |
% |
59 |
64 |
0.3 |
% |
|||||||||||||
Spain |
56 |
57 |
0.3 |
% |
209 |
225 |
1.1 |
% |
|||||||||||||
Portugal |
— |
— |
— |
% |
1 |
1 |
0.0 |
% |
|||||||||||||
Total Ireland, Italy, Greece, Spain and Portugal1
|
618 |
605 |
3.3 |
% |
767 |
801 |
4.0 |
% |
|||||||||||||
Other Europe |
6,072 |
5,989 |
33.2 |
% |
8,087 |
8,395 |
42.0 |
% |
|||||||||||||
Total Europe |
6,690 |
6,594 |
36.5 |
% |
8,854 |
9,196 |
46.0 |
% |
|||||||||||||
Non-U.S. North America |
8,864 |
8,855 |
49.0 |
% |
8,048 |
8,220 |
41.2 |
% |
|||||||||||||
Australia & New Zealand |
1,647 |
1,620 |
9.0 |
% |
1,443 |
1,481 |
7.4 |
% |
|||||||||||||
Central & South America |
409 |
411 |
2.3 |
% |
481 |
508 |
2.6 |
% |
|||||||||||||
Africa & Middle East |
227 |
223 |
1.2 |
% |
193 |
196 |
1.0 |
% |
|||||||||||||
Asia/Pacific |
364 |
355 |
2.0 |
% |
321 |
327 |
1.6 |
% |
|||||||||||||
Supranational |
— |
— |
— |
% |
39 |
41 |
0.2 |
% |
|||||||||||||
Total |
$ |
18,201 |
$ |
18,058 |
100.0 |
% |
$ |
19,379 |
$ |
19,969 |
100.0 |
% |
|||||||||
1 As of each of the respective periods, we had no holdings in Greece.
|
Approximately 92.3% and 90.9% of these securities are investment grade by NAIC designation as of June 30, 2018 and December 31, 2017, respectively. As of June 30, 2018, 9% of our fixed maturity securities, including related parties, were invested in CLOs of Cayman Islands issuers (for which underlying investments are largely loans to U.S. issuers) and 21% were invested in securities of non-U.S. 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 $605 million and $801 million as of June 30, 2018 and December 31, 2017, respectively, of exposure in these countries.
As of June 30, 2018, we held United Kingdom and Channel Islands fixed maturity securities of $2.2 billion, or 3.6% of the total fixed maturities including related parties. As of June 30, 2018, these securities were in an unrealized loss position of $51 million. Our investment managers analyze each holding for credit risk by economic and other factors of each country and industry.
Trading Securities
Trading securities, including related parties, were $2.3 billion and $2.5 billion as of June 30, 2018 and December 31, 2017, respectively. Trading securities are primarily comprised of AmerUs Closed Block securities for which we have elected the fair value option valuation, CLO equity tranche securities, structured securities with embedded derivatives, and investments which support various reinsurance arrangements.
82
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:
June 30, 2018 |
December 31, 2017 |
||||||||||||
(In millions, except percentages) |
Net Carrying Value |
Percent of Total |
Net Carrying Value |
Percent of Total |
|||||||||
Property type |
|||||||||||||
Office building |
$ |
1,769 |
23.2 |
% |
$ |
1,187 |
19.0 |
% |
|||||
Retail |
1,710 |
22.4 |
% |
1,223 |
19.6 |
% |
|||||||
Hotels |
895 |
11.8 |
% |
928 |
14.9 |
% |
|||||||
Industrial |
858 |
11.3 |
% |
944 |
15.2 |
% |
|||||||
Apartment |
545 |
7.2 |
% |
525 |
8.4 |
% |
|||||||
Other commercial1
|
457 |
6.0 |
% |
440 |
7.1 |
% |
|||||||
Total net commercial mortgage loans |
6,234 |
81.9 |
% |
5,247 |
84.2 |
% |
|||||||
Residential loans |
1,375 |
18.1 |
% |
986 |
15.8 |
% |
|||||||
Total mortgage loans, net of allowances |
$ |
7,609 |
100.0 |
% |
$ |
6,233 |
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 $7.6 billion and $6.2 billion as of June 30, 2018 and December 31, 2017, respectively. This included $2.0 billion and $1.8 billion of mezzanine mortgage loans as of June 30, 2018 and December 31, 2017, 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 loans on income producing properties including hotels, apartments, retail and office buildings, and other commercial and industrial properties. 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 valuation allowances. Interest income is accrued on the principal amount of the loan based on the loan’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 June 30, 2018, we had $35 million of mortgage loans that were 90 days past due and $9 million in the process of foreclosure. As of December 31, 2017, we had $28 million of mortgage loans that were 90 days past due and $1 million in the process of foreclosure.
See Note 2 – Investments to the condensed consolidated financial statements for information regarding valuation allowance for collection loss, impairments, loan-to-value, and debt service coverage.
As of June 30, 2018 and December 31, 2017, we had not recorded any new specific loan valuation allowances and we recorded $0 million and $3 million, respectively, of OTTI through net income. We have established a general and specific loan valuation allowance in the aggregate amount of $1 million and $2 million as of June 30, 2018 and December 31, 2017, respectively, attributable to loans acquired in connection with the acquisition of Aviva USA.
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 some or all of the following characteristics, among others: (1) investments that constitute a direct investment or an investment in a fund with a high degree of co-investment; (2) investments with credit- or debt-like characteristics (for example, a stipulated maturity and par value), or alternatively, investments with reduced volatility when compared to pure equity; or (3) investments that have less downside risk. A portion 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. 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 June 30, 2018, the assets consisted of $137 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.
83
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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:
June 30, 2018 |
December 31, 2017 |
||||||||||||
(In millions, except percentages) |
Carrying Value |
Percent of Total |
Carrying Value |
Percent of Total |
|||||||||
Assets of consolidated VIEs |
|||||||||||||
Investments |
|||||||||||||
Fixed maturity securities |
|||||||||||||
Trading securities |
$ |
48 |
5.9 |
% |
$ |
48 |
5.5 |
% |
|||||
Equity securities |
163 |
20.1 |
% |
240 |
27.8 |
% |
|||||||
Investment funds |
593 |
73.2 |
% |
571 |
66.1 |
% |
|||||||
Cash and cash equivalents |
2 |
0.2 |
% |
4 |
0.5 |
% |
|||||||
Other assets |
5 |
0.6 |
% |
1 |
0.1 |
% |
|||||||
Total assets of consolidated VIEs |
$ |
811 |
100.0 |
% |
$ |
864 |
100.0 |
% |
|||||
Liabilities of consolidated VIEs |
|||||||||||||
Other liabilities |
$ |
4 |
100.0 |
% |
$ |
2 |
100.0 |
% |
|||||
Total liabilities of consolidated VIEs |
$ |
4 |
100.0 |
% |
$ |
2 |
100.0 |
% |
The assets of consolidated VIEs were $811 million and $864 million as of June 30, 2018 and December 31, 2017, respectively. The liabilities of consolidated VIEs were $4 million and $2 million as of June 30, 2018 and December 31, 2017, respectively.
The following table illustrates our investment funds, including related party positions of our non-consolidated VIEs and investment funds owned by consolidated VIEs: