10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 8, 2020
UNITED STATES SECURITIES AND EXCHANGE COMMISSION |
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Washington, D.C. 20549 |
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FORM 10-Q
For the quarterly period ended March 31, 2020
or
Commission File Number: 001-37963

(Exact name of registrant as specified in its charter) |
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(State or other jurisdiction of |
(I.R.S. Employer |
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incorporation or organization) |
Identification Number) |
(441 ) 279-8400
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) | |||||||||||
Securities registered pursuant to Section 12(b) of the Act: | |||||||||||
Title of each class |
Trading Symbol |
Name of each exchange on which registered |
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Depositary Shares, each representing a 1/1,000th interest in a
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Depositary Shares, each representing a 1/1,000th interest in a
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☑ |
Accelerated filer ☐ |
Non-accelerated filer ☐ |
Smaller reporting company |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of April 3, 2020, 194,224,043 of our Class A common shares were outstanding.
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
PART II—OTHER INFORMATION
As used in this Quarterly Report on Form 10-Q (report), unless the context otherwise indicates, any reference to “Athene,” “our 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 report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (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 business, financial condition, results of operations, plans, strategies, objectives, future performance and other matters.
We caution you that forward-looking statements are not guarantees of future performance and that our actual consolidated financial condition, results of operations, liquidity, cash flows and performance may differ materially from that made in or suggested by the forward-looking statements contained in this report. 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, 2019 (2019 Annual Report). Factors that could cause actual results or conditions to differ from those reflected in the forward-looking statements contained in this report include:
• |
the accuracy of management’s assumptions and estimates; |
• |
variability in the amount of statutory capital that our insurance and reinsurance subsidiaries have or are required to hold; |
• |
interest rate and/or foreign currency fluctuations; |
• |
our potential need for additional capital in the future and the potential unavailability of such capital to us on favorable terms or at all; |
• |
major public health issues, and specifically the pandemic caused by the effects of the spread of the Coronavirus Disease of 2019 (COVID-19); |
• |
changes in relationships with important parties in our product distribution network; |
• |
the activities of our competitors and our ability to grow our retail business in a highly competitive environment; |
• |
the impact of general economic conditions on our ability to sell our products and on the fair value of our investments; |
• |
our ability to successfully acquire new companies or businesses and/or integrate such acquisitions into our existing framework; |
• |
downgrades, potential downgrades or other negative actions by rating agencies; |
• |
our dependence on key executives and inability to attract qualified personnel, or the potential loss of Bermudian personnel as a result of Bermuda employment restrictions; |
• |
market and credit risks that could diminish the value of our investments; |
• |
changes to the creditworthiness of our reinsurance and derivative counterparties; |
• |
the discontinuation of London Inter-bank Offered Rate (LIBOR); |
• |
changes in consumer perception regarding the desirability of annuities as retirement savings products; |
• |
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 Apollo Global Management, Inc. (AGM) or any of its subsidiaries (collectively, AGM together with its subsidiaries, Apollo) of its investment management agreements with us and limitations on our ability to terminate such arrangements; |
• |
Apollo’s dependence on key executives and inability to attract qualified personnel; |
• |
the accuracy of our estimates regarding the future performance of our investment portfolio; |
• |
increased regulation or scrutiny of alternative investment advisers and certain trading methods; |
• |
potential changes to regulations affecting, among other things, transactions with our affiliates, the ability of our subsidiaries to make dividend payments or distributions to AHL, acquisitions by or of us, minimum capitalization and statutory reserve requirements for insurance companies and fiduciary obligations on parties who distribute our products; |
• |
the failure to obtain or maintain licenses and/or other regulatory approvals as required for the operation of our insurance subsidiaries; |
• |
increases in our tax liability resulting from the Base Erosion and Anti-Abuse Tax (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; |
• |
AHL or any of its non-United States (U.S.) subsidiaries becoming subject to U.S. federal income taxation; |
• |
adverse changes in U.S. tax law; |
• |
our being subject to U.S. withholding tax under the Foreign Account Tax Compliance Act (FATCA); |
• |
changes in our ability to pay dividends or make distributions; |
• |
our failure to recognize the benefits expected to be derived from the share exchange transaction with Apollo; |
3
• |
the failure to achieve the economic benefits expected to be derived from the Athene Co-Invest Reinsurance Affiliate 1A Ltd. (together with its subsidiaries, ACRA) capital raise or future ACRA capital raises; |
• |
the failure of third-party ACRA investors to fund their capital commitment obligations; and |
• |
other risks and factors listed in Part II–Item 1A. Risk Factors included in this report, Part I—Item 1A. Risk Factors included in our 2019 Annual Report and those discussed elsewhere in this report and in our 2019 Annual Report.
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We caution you that the important factors referenced above may not be exhaustive. In light of these risks, you should not place undue reliance upon any forward-looking statements contained in this report. Unless an earlier date is specified, the forward-looking statements included in this report are made only as of the date that this report was filed with the U.S. Securities and Exchange Commission (SEC). We undertake no obligation, except as may be required by law, to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise. Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data.
GLOSSARY OF SELECTED TERMS
Unless otherwise indicated in this report, the following terms have the meanings set forth below:
Entities
Term or Acronym |
Definition |
|
A-A Mortgage |
A-A Mortgage Opportunities, L.P. |
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AAA Investor |
AAA Guarantor – Athene, L.P. |
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AAIA |
Athene Annuity and Life Company |
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AARe |
Athene Annuity Re Ltd., a Bermuda reinsurance subsidiary |
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ACRA |
Athene Co-Invest Reinsurance Affiliate 1A Ltd., together with its subsidiaries |
|
ADIP |
Apollo/Athene Dedicated Investment Program |
|
AGM |
Apollo Global Management, Inc. |
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AHL |
Athene Holding Ltd. |
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ALRe |
Athene Life Re Ltd., a Bermuda reinsurance subsidiary |
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ALReI |
Athene Life Re International Ltd., a Bermuda reinsurance subsidiary |
|
AmeriHome |
AmeriHome Mortgage Company, LLC |
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AOG |
Apollo Operating Group |
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Apollo |
Apollo Global Management, Inc., together with its subsidiaries |
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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, (5) any executive officer or employee of AGM or its subsidiaries (6) any shareholder that has granted to AGM or any of its affiliates a valid proxy with respect to all of such shareholder’s Class A common shares pursuant to our bye-laws and (7) any affiliate of any of the foregoing (except that AHL or its subsidiaries are not members of the Apollo Group) |
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Athene USA |
Athene USA Corporation |
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Athora |
Athora Holding Ltd. |
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BMA |
Bermuda Monetary Authority |
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CoInvest VI |
AAA Investments (Co-Invest VI), L.P. |
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CoInvest VII |
AAA Investments (Co-Invest VII), L.P. |
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ISG |
Apollo Insurance Solutions Group LP, formerly known as Athene Asset Management LLC |
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LIMRA |
Life Insurance and Market Research Association |
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MidCap |
MidCap FinCo Designated Activity Company |
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NAIC |
National Association of Insurance Commissioners |
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NYSDFS |
New York State Department of Financial Services |
|
RLI |
ReliaStar Life Insurance Company |
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Treasury |
United States Department of the Treasury |
|
Voya |
Voya Financial, Inc. |
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VIAC |
Venerable Insurance and Annuity Company, formerly Voya Insurance and Annuity Company |
|
Venerable |
Venerable Holdings, Inc., together with its subsidiaries |
4
Certain Terms & Acronyms
Term or Acronym |
Definition |
|
ABS |
Asset-backed securities |
|
ACL |
Authorized control level RBC as defined by the model created by the National Association of Insurance Commissioners |
|
ALM |
Asset liability management |
|
ALRe RBC |
The risk-based capital ratio of ALRe, when applying the NAIC risk-based capital factors. |
|
Alternative investments |
Alternative investments, including investment funds, CLO equity positions and certain other debt instruments considered to be equity-like |
|
Base of earnings |
Earnings generated from our results of operations and the underlying profitability drivers of our business |
|
Bermuda capital |
The capital of ALRe calculated under U.S. statutory accounting principles, including that for policyholder reserve liabilities which are subjected to U.S. cash flow testing requirements, but excluding certain items that do not exist under our applicable Bermuda requirements, such as interest maintenance reserves |
|
Block reinsurance |
A transaction in which the ceding company cedes all or a portion of a block of previously issued annuity contracts through a reinsurance agreement |
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BSCR |
Bermuda Solvency Capital Requirement |
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CAL |
Company action level risk-based capital as defined by the model created by the National Association of Insurance Commissioners |
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CLO |
Collateralized loan obligation |
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CMBS |
Commercial mortgage-backed securities |
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CML |
Commercial mortgage loans |
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Cost of crediting |
The interest credited to the policyholders on our fixed annuities, including, with respect to our fixed indexed annuities, option costs, as well as institutional costs related to institutional products, presented on an annualized basis for interim periods |
|
Cost of funds |
Cost of funds includes liability costs related to cost of crediting on both deferred annuities and institutional products, as well as other liability costs. Cost of funds is computed as the total liability costs divided by the average net invested assets for the relevant period. Presented on an annualized basis for interim periods. |
|
DAC |
Deferred acquisition costs |
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Deferred annuities |
Fixed indexed annuities, annual reset annuities, multi-year guaranteed annuities and registered index-linked annuities |
|
DSI |
Deferred sales inducement |
|
Excess capital |
Capital in excess of the level management believes is needed to support our current operating strategy |
|
FIA |
Fixed indexed annuity, which is an insurance contract that earns interest at a crediting rate based on a specified index on a tax-deferred basis |
|
Fixed annuities |
FIAs together with fixed rate annuities |
|
Fixed rate annuity |
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 |
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GAAP |
Accounting principles generally accepted in the United States of America |
|
GLWB |
Guaranteed lifetime withdrawal benefit |
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GMDB |
Guaranteed minimum death benefit |
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Gross invested assets |
The sum of (a) total investments on the consolidated balance sheet with available-for-sale securities at amortized cost, excluding derivatives, (b) cash and cash equivalents and restricted cash, (c) investments in related parties, (d) accrued investment income, (e) consolidated variable interest entities’ assets, liabilities and noncontrolling interest and (f) policy loans ceded (which offset the direct policy loans in total investments). Gross 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). Gross invested assets includes the entire investment balance attributable to ACRA as ACRA is 100% consolidated |
|
IMA |
Investment management agreement |
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IMO |
Independent marketing organization |
|
Investment margin on deferred annuities |
Investment margin applies to deferred annuities and is the excess of our net investment earned rate over the cost of crediting to our policyholders, presented on an annualized basis for interim periods |
|
Liability outflows |
The aggregate of withdrawals on our deferred annuities, maturities of our funding agreements, payments on payout annuities, and pension risk benefit payments |
|
MMS |
Minimum margin of solvency |
5
Term or Acronym |
Definition |
|
Modco |
Modified coinsurance |
|
MVA |
Market value adjustment |
|
MYGA |
Multi-year guaranteed annuity |
|
Net invested assets |
The sum of (a) total investments on the consolidated balance sheet with available-for-sale securities at amortized cost, excluding derivatives, (b) cash and cash equivalents and restricted cash, (c) investments in related parties, (d) accrued investment income, (e) consolidated variable interest entities’ assets, liabilities and noncontrolling interest and (f) policy loans ceded (which offset the direct policy loans in total investments). Net invested assets includes investments supporting assumed funds withheld and modco agreements and excludes assets associated with funds withheld liabilities related to business exited through reinsurance agreements and derivative collateral (offsetting the related cash positions). Net invested assets includes our economic ownership of ACRA investments but does not include the investments associated with the noncontrolling interest |
|
Net investment earned rate |
Income from our net invested assets divided by the average net invested assets for the relevant period, presented on an annualized basis for interim periods |
|
Net investment spread |
Net investment spread measures our investment performance less the total cost of our liabilities, presented on an annualized basis for interim periods |
|
Net 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. Net 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. Net reserve liabilities is net of the ceded liabilities to third-party reinsurers as the costs of the liabilities are passed to such reinsurers and therefore we have no net economic exposure to such liabilities, assuming our reinsurance counterparties perform under our agreements. Net reserve liabilities is net of the reserve liabilities attributable to the ACRA noncontrolling interest |
|
Other liability costs |
Other liability costs include DAC, DSI and VOBA amortization, change in rider reserves, the cost of liabilities on products other than deferred annuities and institutional products, excise taxes, as well as offsets for premiums, product charges and other revenues |
|
OTTI |
Other-than-temporary impairment |
|
Payout annuities |
Annuities with a current cash payment component, which consist primarily of single premium immediate annuities, supplemental contracts and structured settlements |
|
Policy loan |
A loan to a policyholder under the terms of, and which is secured by, a policyholder’s policy |
|
PRT |
Pension risk transfer |
|
RBC |
Risk-based capital |
|
Rider reserves |
Guaranteed 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 |
6
Item 1. Financial Statements
Index to Condensed Consolidated Financial Statements (unaudited)
7
(In millions) |
March 31, 2020 |
December 31, 2019 |
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Assets |
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Investments |
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Available-for-sale securities, at fair value (amortized cost: 2020 – $67,576 and 2019 – $67,479; allowance for credit losses: 2020 – $78) |
$ |
$ |
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Trading securities, at fair value (consolidated variable interest entities: 2020 – $14 and 2019 – $16)
|
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Equity securities, at fair value |
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Mortgage loans (allowance for credit losses: 2020 – $394 and 2019 – $11; portion at fair value: 2020 – $26 and 2019 – $27) |
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Investment funds (portion at fair value: 2020 – $157 and 2019 – $154; consolidated variable interest entities: 2020 – $20 and 2019 – $19) |
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Policy loans |
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Funds withheld at interest (portion at fair value: 2020 – $(374) and 2019 – $801) |
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Derivative assets |
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Short-term investments (portion at fair value: 2020 – $393 and 2019 – $406) |
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Other investments (portion at fair value: 2020 – $98 and 2019 – $93)
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Total investments |
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Cash and cash equivalents (consolidated variable interest entities: 2020 – $0 and 2019 – $3)
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Restricted cash |
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Investments in related parties |
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Available-for-sale securities, at fair value (amortized cost: 2020 – $4,004 and 2019 – $3,783) |
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Trading securities, at fair value |
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Equity securities, at fair value (consolidated variable interest entities: 2020 – $0 and 2019 – $6) |
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Mortgage loans (allowance for credit losses: 2020 – $30 and 2019 – $0) |
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Investment funds (portion at fair value: 2020 – $1,097 and 2019 – $819; consolidated variable interest entities: 2020 – $0 and 2019 – $664) |
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Funds withheld at interest (portion at fair value: 2020 – $(15) and 2019 – $594) |
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Other investments (allowance for credit losses: 2020 – $12) |
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Accrued investment income (related party: 2020 – $43 and 2019 – $27) |
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Reinsurance recoverable (portion at fair value: 2020 – $2,115 and 2019 – $1,821) |
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Deferred acquisition costs, deferred sales inducements and value of business acquired |
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Other assets (related party: 2020 – $361 and 2019 – $0; consolidated variable interest entities: 2020 – $19 and 2019 – $20)
|
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Total assets |
$ |
$ |
(Continued)
See accompanying notes to the unaudited condensed consolidated financial statements
8
(In millions, except per share data) |
March 31, 2020 |
December 31, 2019 |
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Liabilities and Equity |
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Liabilities |
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Interest sensitive contract liabilities (related party: 2020 – $14,706 and 2019 – $15,285; portion at fair value: 2020 – $10,411 and 2019 – $11,992) |
$ |
$ |
|||||
Future policy benefits (related party: 2020 – $1,313 and 2019 – $1,302; portion at fair value: 2020 – $2,259 and 2019 – $2,301) |
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Other policy claims and benefits (related party: 2020 – $18 and 2019 – $13)
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Dividends payable to policyholders |
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Short-term debt |
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Long-term debt |
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Derivative liabilities |
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Payables for collateral on derivatives and securities to repurchase |
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Funds withheld liability (portion at fair value: 2020 – $24 and 2019 – $31) |
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Other liabilities (related party: 2020 – $61 and 2019 – $79)
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Total liabilities |
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Commitments and Contingencies (Note 10) |
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Equity |
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Preferred stock |
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Series A – par value $1 per share; $863 aggregate liquidation preference; authorized, issued and outstanding: 2020 and 2019 – 0.0 shares |
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Series B – par value $1 per share; $345 aggregate liquidation preference; authorized, issued and outstanding: 2020 and 2019 – 0.0 shares |
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Common stock |
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Class A – par value $0.001 per share; authorized: 2020 and 2019 – 425.0 shares; issued and outstanding: 2020 – 194.3 and 2019 – 143.2 shares |
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Class B – par value $0.001 per share; convertible to Class A; authorized: 2020 – 0.0 and 2019 – 325.0 shares; issued and outstanding: 2020 – 0.0 and 2019 – 25.4 shares |
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Class M-1 – par value $0.001 per share; convertible to Class A; authorized: 2020 – 0.0 and 2019 – 7.1 shares; issued and outstanding: 2020 – 0.0 and 2019 – 3.3 shares |
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Class M-2 – par value $0.001 per share; convertible to Class A; authorized: 2020 – 0.0 and 2019 – 5.0 shares; issued and outstanding: 2020 – 0.0 and 2019 – 0.8 shares |
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Class M-3 – par value $0.001 per share; convertible to Class A; authorized: 2020 – 0.0 and 2019 – 7.5 shares; issued and outstanding: 2020 – 0.0 and 2019 – 1.0 shares |
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Class M-4 – par value $0.001 per share; convertible to Class A; authorized: 2020 – 0.0 and 2019 – 7.5 shares; issued and outstanding: 2020 – 0.0 and 2019 – 4.0 shares |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive income (loss) (related party: 2020 – $(457) and 2019 – $17)
|
( |
) |
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Total Athene Holding Ltd. shareholders’ equity |
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Noncontrolling interests |
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Total equity |
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Total liabilities and equity |
$ |
$ |
(Concluded)
See accompanying notes to the unaudited condensed consolidated financial statements
9
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Income (Loss) (Unaudited)
Three months ended March 31, |
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(In millions, except per share data) |
2020 |
2019 |
|||||
Revenues |
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Premiums (related party: 2020 – $69 and 2019 – $66)
|
$ |
$ |
|||||
Product charges (related party: 2020 – $16 and 2019 – $14)
|
|||||||
Net investment income (related party investment income: 2020 – $(214) and 2019 – $199; consolidated variable interest entities: 2020 – $0 and 2019 – $16; and related party investment expense: 2020 – $128 and 2019 – $92) |
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Investment related gains (losses) (related party: 2020 – $(631) and 2019 – $321; and consolidated variable interest entities: 2020 – $1 and 2019 – $5) |
( |
) |
|||||
Other revenues |
( |
) |
|||||
Total revenues |
( |
) |
|||||
Benefits and expenses |
|||||||
Interest sensitive contract benefits (related party: 2020 – $(97) and 2019 – $183)
|
( |
) |
|||||
Amortization of deferred sales inducements |
|||||||
Future policy and other policy benefits (related party: 2020 – $50 and 2019 – $106) |
|||||||
Amortization of deferred acquisition costs and value of business acquired |
( |
) |
|||||
Dividends to policyholders |
|||||||
Policy and other operating expenses (related party: 2020 – $16 and 2019 – $8) |
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Total benefits and expenses |
( |
) |
|||||
Income (loss) before income taxes
|
( |
) |
|||||
Income tax expense (benefit) |
( |
) |
|||||
Net income (loss)
|
( |
) |
|||||
Less: Net loss attributable to noncontrolling interests |
( |
) |
|||||
Net income (loss) attributable to Athene Holding Ltd. shareholders
|
( |
) |
|||||
Less: Preferred stock dividends |
|||||||
Net income (loss) available to Athene Holding Ltd. common shareholders |
$ |
( |
) |
$ |
|||
Earnings per share |
|||||||
Basic – Class A |
$ |
( |
) |
$ |
|||
Basic – Classes B, M-1, M-2, M-3 and M-4 |
( |
) |
|||||
Diluted – Class A |
( |
) |
|||||
Diluted – Class B |
( |
) |
|||||
Diluted – Class M-1 |
( |
) |
|||||
Diluted – Class M-2 |
( |
) |
|||||
Diluted – Class M-3 |
( |
) |
|||||
Diluted – Class M-4 |
( |
) |
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 March 31, |
|||||||
(In millions) |
2020 |
2019 |
|||||
Net income (loss)
|
$ |
( |
) |
$ |
|||
Other comprehensive income (loss), before tax |
|||||||
Unrealized investment gains (losses) on available-for-sale securities, net of offsets |
( |
) |
|||||
Unrealized gains (losses) on hedging instruments |
( |
) |
|||||
Foreign currency translation and other adjustments |
|||||||
Other comprehensive income (loss), before tax |
( |
) |
|||||
Income tax expense (benefit) related to other comprehensive income (loss)
|
( |
) |
|||||
Other comprehensive income (loss) |
( |
) |
|||||
Comprehensive income (loss) |
( |
) |
|||||
Less: Comprehensive loss attributable to noncontrolling interests |
( |
) |
|||||
Comprehensive income (loss) attributable to Athene Holding Ltd. shareholders |
$ |
( |
) |
$ |
See accompanying notes to the unaudited condensed consolidated financial statements
11
Three months ended |
|||||||||||||||||||||||||||||||
(In millions) |
Preferred stock |
Common stock |
Additional paid-in capital |
Retained earnings |
Accumulated other comprehensive income (loss) |
Total Athene Holding Ltd. shareholders’ equity |
Noncontrolling interests |
Total shareholders’ equity |
|||||||||||||||||||||||
Balance at December 31, 2018 |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
$ |
$ |
|||||||||||||||||||||
Net income |
— |
— |
— |
— |
|||||||||||||||||||||||||||
Other comprehensive income |
— |
— |
— |
— |
— |
||||||||||||||||||||||||||
Issuance of common shares, net of expenses |
— |
— |
— |
— |
— |
||||||||||||||||||||||||||
Stock-based compensation |
— |
— |
— |
— |
— |
||||||||||||||||||||||||||
Retirement or repurchase of shares |
— |
— |
( |
) |
( |
) |
— |
( |
) |
— |
( |
) |
|||||||||||||||||||
Balance at March 31, 2019 |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||
Balance at December 31, 2019 |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||
Adoption of accounting standard |
— |
— |
— |
( |
) |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||||||||||||
Net loss |
— |
— |
— |
( |
) |
— |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||
Other comprehensive loss |
— |
— |
— |
— |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||
Issuance of common shares, net of expenses |
— |
— |
— |
— |
— |
||||||||||||||||||||||||||
Stock-based compensation |
— |
— |
— |
— |
— |
||||||||||||||||||||||||||
Retirement or repurchase of shares |
— |
— |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||||
Preferred stock dividends |
— |
— |
— |
( |
) |
— |
( |
) |
— |
( |
) |
||||||||||||||||||||
Contributions from noncontrolling interests |
— |
— |
— |
— |
— |
— |
|||||||||||||||||||||||||
Distributions to noncontrolling interests |
— |
— |
— |
— |
— |
— |
( |
) |
( |
) |
|||||||||||||||||||||
Balance at March 31, 2020 |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
$ |
$ |
See accompanying notes to the unaudited condensed consolidated financial statements
12
Three months ended March 31, |
|||||||
(In millions) |
2020 |
2019 |
|||||
Cash flows from operating activities |
|||||||
Net income (loss) |
$ |
( |
) |
$ |
|||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|||||||
Amortization of deferred acquisition costs and value of business acquired |
( |
) |
|||||
Amortization of deferred sales inducements |
|||||||
Accretion of net investment premiums, discounts and other |
( |
) |
( |
) |
|||
Net investment (income) loss (related party: 2020 – $362 and 2019 – $18) |
|||||||
Net recognized (gains) losses on investments and derivatives (related party: 2020 – $158 and 2019 – $(5); consolidated variable interest entities: 2020 – $0 and 2019 – $(6)) |
( |
) |
|||||
Policy acquisition costs deferred |
( |
) |
( |
) |
|||
Changes in operating assets and liabilities: |
|||||||
Accrued investment income (related party: 2020 – $(16) and 2019 – $3) |
( |
) |
|||||
Interest sensitive contract liabilities (related party: 2020 – $(81) and 2019 – $167) |
( |
) |
|||||
Future policy benefits, other policy claims and benefits, dividends payable to policyholders and reinsurance recoverable (related party: 2020 – $59 and 2019 – $95) |
|||||||
Funds withheld assets and liabilities (related party: 2020 – $422 and 2019 – $(500)) |
( |
) |
|||||
Other assets and liabilities |
( |
) |
|||||
Net cash provided by operating activities |
|||||||
Cash flows from investing activities |
|||||||
Sales, maturities and repayments of: |
|||||||
Available-for-sale securities (related party: 2020 – $205 and 2019 – $50; consolidated variable interest entities: 2020 – $3 and 2019 – $0) |
|||||||
Trading securities (related party: 2020 – $17 and 2019 – $1; consolidated variable interest entities: 2020 – $0 and 2019 – $1) |
|||||||
Equity securities (related party: 2020 – $2 and 2019 – $50; consolidated variable interest entities: 2020 – $0 and 2019 – $50) |
|||||||
Mortgage loans |
|||||||
Investment funds (related party: 2020 – $65 and 2019 – $87; consolidated variable interest entities: 2020 – $0 and 2019 – $2) |
|||||||
Derivative instruments and other invested assets |
|||||||
Short-term investments |
|||||||
Purchases of: |
|||||||
Available-for-sale securities (related party: 2020 – $(425) and 2019 – $(280)) |
( |
) |
( |
) |
|||
Trading securities (related party: 2020 – $(77) and 2019 – $(3)) |
( |
) |
( |
) |
|||
Equity securities (related party: 2020 – $(3) and 2019 – $(177)) |
( |
) |
( |
) |
|||
Mortgage loans |
( |
) |
( |
) |
|||
Investment funds (related party: 2020 – $(358) and 2019 – $(152)) |
( |
) |
( |
) |
|||
Derivative instruments and other invested assets |
( |
) |
( |
) |
|||
Short-term investments |
( |
) |
( |
) |
|||
Deconsolidation of previously consolidated variable interest entities |
( |
) |
|||||
Other investing activities, net |
( |
) |
|||||
Net cash used in investing activities |
( |
) |
( |
) |
|||
(Continued) |
|||||||
See accompanying notes to the unaudited condensed consolidated financial statements |
13
Three months ended March 31, |
|||||||
(In millions) |
2020 |
2019 |
|||||
Cash flows from financing activities |
|||||||
Issuance of common stock |
$ |
$ |
|||||
Repayment of short-term debt |
( |
) |
|||||
Deposits on investment-type policies and contracts (related party: 2020 – $18 and 2019 – $101) |
|||||||
Withdrawals on investment-type policies and contracts (related party: 2020 – $(135) and 2019 – $(106)) |
( |
) |
( |
) |
|||
Payments for coinsurance agreements on investment-type contracts, net |
( |
) |
( |
) |
|||
Capital contributions from noncontrolling interests |
|||||||
Capital distributions to noncontrolling interests |
( |
) |
|||||
Net change in cash collateral posted for derivative transactions and securities to repurchase |
( |
) |
|||||
Preferred stock dividends |
( |
) |
|||||
Repurchase of common stock |
( |
) |
( |
) |
|||
Other financing activities, net |
( |
) |
|||||
Net cash provided by financing activities |
|||||||
Effect of exchange rate changes on cash and cash equivalents |
( |
) |
|||||
Net increase in cash and cash equivalents |
|||||||
Cash and cash equivalents at beginning of year1
|
|||||||
Cash and cash equivalents at end of period1
|
$ |
$ |
|||||
Supplementary information |
|||||||
Non-cash transactions |
|||||||
Deposits on investment-type policies and contracts through reinsurance agreements (related party: 2020 – $72 and 2019 – $45) |
$ |
$ |
|||||
Withdrawals on investment-type policies and contracts through reinsurance agreements (related party: 2020 – $418 and 2019 – $429) |
|||||||
Investments received from settlements on reinsurance agreements |
|||||||
Investments received from pension risk transfer premiums |
|||||||
Related party investments received in exchange for the issuance of Class A common shares |
— |
||||||
1 Includes cash and cash equivalents and restricted cash.
|
(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 United States (U.S.) states and the District of Columbia, and the United Kingdom (UK).
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 Life Re International Ltd. (ALReI); and |
• |
Athene USA Corporation, an Iowa corporation (together with its subsidiaries, Athene USA). |
In addition, we consolidate certain variable interest entities (VIEs), for which we determined we are the primary beneficiary.
Consolidation and Basis of Presentation —We have prepared the accompanying condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the United States Securities and Exchange Commission’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 results for the interim periods presented. All significant intercompany accounts and transactions have been eliminated. Interim operating results are not necessarily indicative of the results expected for the entire year, particularly in light of the material risks and uncertainties surrounding the spread of the Coronavirus Disease of 2019 (COVID-19), which has resulted in significant volatility in the financial markets.
VIE Deconsolidation – During the first quarter 2020, as a result of the Apollo Global Management, Inc. (AGM and, together with its subsidiaries, Apollo) share transaction discussed further in Note 9 – Related Parties, we reassessed the consolidation conclusions for the following VIEs which are managed by Apollo affiliates:
• |
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); |
• |
Entities included under our agreement to purchase funds managed by Apollo entities (Strategic Partnership). |
Following the share transaction we determined that we are no longer the primary beneficiary of these entities, as a result of Apollo receiving significant economics of these entities through their increased economic ownership in the Company. We did not recognize a gain or loss upon deconsolidation, as the deconsolidated VIEs accounted for their assets and liabilities at fair value. As of March 31, 2020, the deconsolidated VIEs are included at net asset value (NAV) in related party investment funds on the condensed consolidated balance sheets.
15
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Summary of Significant Accounting Policies
The following accounting policies have been updated for the adoption of Accounting Standards Update (ASU) 2016-13 and related ASUs, and apply for reporting periods beginning January 1, 2020.
Investments
Purchased Credit Deteriorated (PCD) Investments – We purchase certain structured securities, primarily residential mortgage backed securities (RMBS), and re-performing mortgage loans having experienced a more-than-insignificant deterioration in credit quality since their origination which upon our assessment have been determined to meet the definition of PCD investments. Additionally, structured securities classified as beneficial interests follow the initial measurement guidance for PCD investments if there is a significant difference between contractual cash flows adjusted for expected prepayments and expected cash flows at the date of recognition. The initial allowance for credit losses for PCD investments is recorded through a gross-up adjustment to the initial amortized cost. For mortgage loans, the initial allowance is determined using the methodology described in the Credit Losses – Assets Held at Amortized Cost and Off-Balance Sheet Credit Exposures section. For structured securities classified as beneficial interests, the initial allowance is calculated as the present value of the difference between contractual cash flows adjusted for expected prepayments and expected cash flows at the date of recognition. The non-credit purchase discount or premium is amortized into investment income using the effective interest method. The credit discount, represented by the allowance for expected credit losses, is remeasured each period following the policies for measuring credit losses described in the Credit Losses – Assets Held at Amortized Cost and Off-Balance Sheet Credit Exposures and Credit Losses – Available-for-Sale Securities sections below.
Credit Losses – Assets Held at Amortized Cost and Off-Balance Sheet Credit Exposures – We establish an allowance for expected credit losses at the time of purchase for assets held at amortized cost, which primarily includes our residential and commercial mortgage loan portfolios, but also includes certain other loans and reinsurance assets. The allowance for expected credit losses represents the portion of the asset's amortized cost basis that we do not expect to collect due to credit losses over the asset's contractual life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions or macroeconomic forecasts. We use a quantitative probability of default and loss given default methodology to develop our estimate of expected credit loss. We develop the estimate on a collective basis factoring in the risk characteristics of the assets in the portfolio. If an asset does not share similar risk characteristics with other assets, the asset is individually assessed.
Allowance estimates are highly dependent on expectations of future economic conditions and macroeconomic forecasts, which involve significant judgment and subjectivity. We use quantitative modeling to develop the allowance for expected credit losses. Key inputs into the model include data pertaining to the characteristics of the assets, historical losses and current market conditions. Additionally, the model incorporates management’s expectations around future economic conditions and macroeconomic forecasts over a reasonable and supportable forecast period, after which the model reverts to historical averages. These inputs, the reasonable and supportable forecast period, and reversion to historical average technique are subject to a formal governance and review process by management. Additionally, management considers qualitative adjustments to the model output to the extent that any relevant information regarding the collectability of the asset is available and not already considered in the quantitative model. If we determine that a financial asset has become collateral dependent, which we determine to be when foreclosure is probable, the allowance is measured as the difference between amortized cost and the fair value of the collateral, less any expected costs to sell.
The initial allowance for invested assets held at amortized cost other than for PCD investments, and subsequent changes in the allowance including PCD investments, are recorded through a charge to credit loss expense within investment related gains (losses) on the condensed consolidated statements of income (loss). Credit loss expense for reinsurance assets held at amortized cost is recorded through policy and other operating expenses on the condensed consolidated statements of income (loss).
We limit accrued interest income on loans to 90 days of interest. Once a loan becomes 90 days past due, the loan is put on non-accrual status and any accrued interest is written off. Once a loan is on non-accrual status, we first apply any payments received to the principal of the loan, and once the principal is repaid, we include amounts received in net investment income. We have elected to present accrued interest receivable separately in accrued investment income on the condensed consolidated balance sheets. We have also elected the practical expedient to exclude the accrued interest receivable from the amortized cost balance used to calculate the allowance given our policy to write off such balances in a timely manner. Any write-off of accrued interest is recorded through a reversal of net investment income on the condensed consolidated statements of income (loss).
Upon determining that all or a portion of the amortized cost of an asset is uncollectible, which is generally when all efforts for collection are exhausted, the amortized cost is written off against the existing allowance. Any write off in excess of the existing allowance is recorded through credit loss expense within investment related gains (losses) on the condensed consolidated statements of income (loss).
We also have certain off-balance sheet credit exposures for which we establish a liability for expected future credit losses. These exposures primarily relate to commitments to fund commercial or residential mortgage loans that are not unconditionally cancelable. The methodology for estimating the liability for these credit exposures is consistent with that described above, with the additional consideration pertaining to the probability of funding. At the time the commitment expires or is funded, the liability is reversed and an allowance for expected credit losses is established, as applicable. The liability for off-balance sheet credit exposures is included in other liabilities on the condensed consolidated balance sheets. The establishment of the initial liability and all subsequent changes are recorded through credit loss expense within investment related gains (losses) on the condensed consolidated statements of income (loss).
16
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Credit Losses – Available-for-Sale Securities – We evaluate available-for-sale (AFS) securities with a fair value that has declined below amortized cost to determine how the decline in fair value should be recognized. If we determine, based on the facts and circumstances related to the specific security, that we intend to sell a security or it is more likely than not that we would be required to sell a security before the recovery of its amortized cost, any existing allowance for credit losses is reversed and the amortized cost of the security is written down to fair value. If neither of these conditions exist, we evaluate whether the decline in fair value has resulted from a credit loss or other factors.
For non-structured AFS securities, we qualitatively consider relevant facts and circumstances in evaluating whether a decline below fair value is credit-related. Relevant facts and circumstances include but are not limited to: (1) the extent to which the fair value is less than amortized cost; (2) changes in agency credit ratings, (3) adverse conditions related to the security’s industry or geographical area, (4) failure to make scheduled payments, and (5) other known changes in the financial condition of the issuer or quality of any underlying collateral or credit enhancements. For structured AFS securities meeting the definition of beneficial interests, the qualitative assessment is bypassed, and any securities having experienced a decline in fair value below amortized cost move directly to a quantitative analysis.
If upon completion of this analysis it is determined that a potential credit loss exists, an allowance for expected credit losses is established equal to the amount by which the present value of expected cash flows is less than amortized cost, limited by the amount by which fair value is less than amortized cost. A non-structured security’s cash flow estimates are derived from scenario-based outcomes of expected corporate restructurings or the disposition of assets using security-specific facts and circumstances including timing, security interests and loss severity. A structured security’s cash flow estimates are based on security-specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity, prepayments and structural support, including subordination and guarantees. The expected cash flows are discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete a structured security. For securities with a contractual interest rate that varies based on changes in an independent factor, such as an index or rate, the effective interest rate is calculated based on the factor as it changes over the life of the security. Inherently under the discounted cash flow model, both the timing and amount of cash flows affect the measurement of the allowance for expected credit losses.
The allowance for expected credit losses is remeasured each period for the passage of time, any change in expected cash flows, and changes in the fair value of the security. All impairments, whether intent or requirement to sell or credit-related, are recorded through a charge to credit loss expense within investment related gains (losses) on the condensed consolidated statements of income (loss). All changes in the allowance for expected credit losses are recorded through credit loss expense within investment related gains (losses) on the condensed consolidated statements of income (loss).
We have elected to present accrued interest receivable separately in accrued investment income on the condensed consolidated balance sheets. We have also elected the practical expedient to exclude the accrued interest receivable from the amortized cost balance used to calculate the allowance for expected credit losses, as we have a policy to write off such balances in a timely manner, when they become 90 days past due. Any write-off of accrued interest is recorded through a reversal of net investment income on the condensed consolidated statements of income (loss).
Upon determining that all or a portion of the amortized cost of an asset is uncollectible, which is generally when all efforts for collection are exhausted, the amortized cost is written off against the existing allowance. Any write off in excess of the existing allowance is recorded through credit loss expense within investment related gains (losses) on the condensed consolidated statements of income (loss).
Adopted Accounting Pronouncements
Financial Instruments – Credit Losses (ASU 2019-05, ASU 2019-04, ASU 2018-19 and ASU 2016-13)
This update limits the number of credit impairment models used for different assets and results in accelerated credit loss recognition on assets held at amortized cost, which primarily includes our commercial and residential mortgage loans, but also includes certain other loans and reinsurance assets. The identification of PCD financial assets includes all assets that have experienced a more-than-insignificant deterioration in credit since origination. Additionally, changes in the expected cash flows of purchased credit-deteriorated financial assets are recognized immediately in the income statement. AFS securities are not in scope of the new credit loss model, but were subject to targeted improvements including the establishment of a valuation allowance for credit losses versus the previous direct write down approach. We adopted this update effective January 1, 2020 with a cumulative-effect adjustment that decreased retained earnings by $117 million net of tax and offsetting impacts to DAC, DSI, VOBA and the SOP 03-1 reserve. The adjustment to retained earnings primarily relates to the establishment of an allowance on our commercial mortgage loan portfolio, which represented approximately 1.59 % of the amortized cost of the portfolio, but also includes immaterial impacts relating to other assets in scope, including residential mortgage loans, funds withheld at interest, and reinsurance recoverable.
17
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Additionally, the update requires investments previously considered purchased credit impaired (PCI), which includes certain of our residential mortgage loans and RMBS to become subject to a modified PCD framework at the transition date. Any required allowance at transition for these assets is to be recorded through a gross-up of the amortized cost, rather than a charge to retained earnings. Additionally, under the AFS impairment model, the recording of an allowance is prohibited in instances where fair value exceeds amortized cost as such securities are not considered impaired under the AFS impairment model. Therefore, no allowance was recorded at transition for PCI RMBS that were in an unrealized gain position. The transition increase of amortized cost and corresponding valuation allowance for residential mortgage loans and RMBS was $36 million and $17 million, respectively.
Collaborative Arrangements (ASU 2018-18)
The amendments in this update provide guidance on whether certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606, providing comparability in the presentation of revenue for certain transactions. We adopted this update effective January 1, 2020. This update did not have a material effect on our consolidated financial statements.
Consolidation (ASU 2018-17)
The amendments in this update expand certain discussions in the VIE guidance, including considerations necessary for determining when a decision-making fee is a variable interest. We adopted this update effective January 1, 2020. The adoption of this update did not have a material effect on our consolidated financial statements.
Cloud Computing Arrangements (ASU 2018-15)
The amendments in this update align the requirements for capitalizing implementation costs incurred in a cloud computing service arrangement with the requirements for capitalizing implementation costs incurred for internal-use software. We adopted this update on a prospective basis effective January 1, 2020. This update did not have a material effect on our consolidated financial statements.
Fair Value Measurement – Disclosure Requirements (ASU 2018-13)
The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. On October 1, 2018, we early adopted the removal and modification of certain disclosures as permitted. The additional disclosures in the update were adopted effective January 1, 2020. The adoption of this update did not have a material effect 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 is 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 continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. We do not have material goodwill and adopted this update on a prospective basis effective January 1, 2020. The adoption of this update did not have a material effect on our consolidated financial statements.
Recently Issued Accounting Pronouncements
Insurance – Targeted Improvements to the Accounting for Long-Duration Contracts (ASU 2019-09, ASU 2018-12)
These updates amend four key areas pertaining to the accounting and disclosures for long-duration insurance and investment contracts.
• |
The update requires cash flow assumptions used to measure the liability for future policy benefits to be updated at least annually and no longer allows a provision for adverse deviation. The remeasurement of the liability associated with the update of assumptions is required to be recognized in net income. Loss recognition testing is eliminated for traditional and limited-payment contracts. The update also requires the discount rate used in measuring the liability to be an upper-medium grade fixed-income instrument yield, which is to be updated at each reporting date. The change in liability due to changes in the discount rate is to be recognized in other comprehensive income. |
• |
The update simplifies the amortization of deferred acquisition costs and other balances amortized in proportion to premiums, gross profits, or gross margins, requiring such balances to be amortized on a constant level basis over the expected term of the contracts. Deferred costs are required to be written off for unexpected contract terminations but are not subject to impairment testing. |
• |
The update requires certain contract features meeting the definition of market risk benefits to be measured at fair value. Among the features included in this definition are the guaranteed lifetime withdrawal benefits (GLWB) and guaranteed minimum death benefit (GMDB) riders attached to our annuity products. The change in fair value of the market risk benefits is to be recognized in net income, excluding the portion attributable to changes in instrument-specific credit risk which is recognized in other comprehensive income. |
• |
The update also introduces disclosure requirements around the liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities, and deferred acquisition costs. This includes disaggregated rollforwards of these balances and information about significant inputs, judgments, assumptions and methods used in their measurement. |
The amendments in ASU 2018-12 were originally intended to become effective January 1, 2021; however, with the issuance of ASU 2019-09, we will not be required to adopt the amendments until January 1, 2022. Certain provisions of the update are required to be adopted on a fully retrospective basis, while others may be adopted on a modified retrospective basis. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
18
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Income Taxes – Simplifying the Accounting for Income Taxes (ASU 2019-12)
The amendments in this update simplify the accounting for income taxes by eliminating certain exceptions to the tax accounting guidance related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities related to foreign investment ownership changes. It also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating consolidated income taxes to separate financial statements of entities not subject to income tax. We will be required to adopt this update January 1, 2021 and apply certain aspects of the update retrospectively while other aspects will be applied on a modified retrospective basis. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
2. Investments
AFS Securities—Our AFS investment portfolio includes bonds, collateralized loan obligations (CLO), asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), RMBS and redeemable preferred stock. Our AFS investment portfolio includes related party investments that are primarily a result of investments over which Apollo can exercise significant influence. These investments are presented as investments in related parties on the condensed consolidated balance sheets, and are separately disclosed below.
The following table represents the amortized cost, allowance for credit losses, gross unrealized gains and losses and fair value of our AFS investments by asset type:
March 31, 2020 |
|||||||||||||||||||
(In millions) |
Amortized Cost |
Allowance for Credit Losses |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||||
AFS securities |
|||||||||||||||||||
U.S. government and agencies |
$ |
$ |
$ |
$ |
$ |
||||||||||||||
U.S. state, municipal and political subdivisions |
( |
) |
|||||||||||||||||
Foreign governments |
( |
) |
|||||||||||||||||
Corporate |
( |
) |
( |
) |
|||||||||||||||
CLO |
( |
) |
|||||||||||||||||
ABS |
( |
) |
( |
) |
|||||||||||||||
CMBS |
( |
) |
( |
) |
|||||||||||||||
RMBS |
( |
) |
( |
) |
|||||||||||||||
Total AFS securities |
( |
) |
( |
) |
|||||||||||||||
AFS securities – related party |
|||||||||||||||||||
Corporate |
|||||||||||||||||||
CLO |
( |
) |
|||||||||||||||||
ABS |
( |
) |
|||||||||||||||||
Total AFS securities – related party |
( |
) |
|||||||||||||||||
Total AFS securities including related party |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
19
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table represents the amortized cost, gross unrealized gains and losses, fair value and other than temporary impairments (OTTI) in accumulated other comprehensive income (AOCI) of our AFS investments by asset type:
December 31, 2019 |
|||||||||||||||||||
(In millions) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
OTTI
in AOCI
|
||||||||||||||
AFS securities |
|||||||||||||||||||
U.S. government and agencies |
$ |
$ |
$ |
$ |
$ |
||||||||||||||
U.S. state, municipal and political subdivisions |
( |
) |
|||||||||||||||||
Foreign governments |
|||||||||||||||||||
Corporate |
( |
) |
|||||||||||||||||
CLO |
( |
) |
|||||||||||||||||
ABS |
( |
) |
|||||||||||||||||
CMBS |
( |
) |
|||||||||||||||||
RMBS |
( |
) |
|||||||||||||||||
Total AFS securities |
( |
) |
|||||||||||||||||
AFS securities – related party |
|||||||||||||||||||
Corporate |
|||||||||||||||||||
CLO |
( |
) |
|||||||||||||||||
ABS |
( |
) |
|||||||||||||||||
Total AFS securities – related party |
( |
) |
|||||||||||||||||
Total AFS securities including related party |
$ |
$ |
$ |
( |
) |
$ |
$ |
The amortized cost and fair value of AFS securities, including related party, are shown by contractual maturity below:
March 31, 2020 |
|||||||
(In millions) |
Amortized Cost |
Fair Value |
|||||
AFS securities |
|||||||
Due in one year or less |
$ |
$ |
|||||
Due after one year through five years |
|||||||
Due after five years through ten years |
|||||||
Due after ten years |
|||||||
CLO, ABS, CMBS and RMBS |
|||||||
Total AFS securities |
|||||||
AFS securities – related party |
|||||||
Due after one year through five years |
|||||||
CLO and ABS |
|||||||
Total AFS securities – related party |
|||||||
Total AFS securities including related party |
$ |
$ |
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.
20
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Unrealized Losses on AFS Securities—The following summarizes the fair value and gross unrealized losses for AFS securities, including related party, for which an allowance for credit losses has not been recorded, aggregated by asset type and length of time the fair value has remained below amortized cost:
March 31, 2020 |
|||||||||||||||||||||||
Less than 12 months |
12 months or more |
Total |
|||||||||||||||||||||
(In millions) |
Fair Value |
Gross
Unrealized
Losses
|
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
|||||||||||||||||
AFS securities |
|||||||||||||||||||||||
U.S. state, municipal and political subdivisions |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
|||||||||||
Foreign governments |
( |
) |
( |
) |
|||||||||||||||||||
Corporate |
( |
) |
( |
) |
( |
) |
|||||||||||||||||
CLO |
( |
) |
( |
) |
( |
) |
|||||||||||||||||
ABS |
( |
) |
( |
) |
( |
) |
|||||||||||||||||
CMBS |
( |
) |
( |
) |
( |
) |
|||||||||||||||||
RMBS |
( |
) |
( |
) |
( |
) |
|||||||||||||||||
Total AFS securities |
( |
) |
( |
) |
( |
) |
|||||||||||||||||
AFS securities – related party |
|||||||||||||||||||||||
Corporate |
|||||||||||||||||||||||
CLO |
( |
) |
( |
) |
( |
) |
|||||||||||||||||
ABS |
( |
) |
( |
) |
|||||||||||||||||||
Total AFS securities – related party |
( |
) |
( |
) |
( |
) |
|||||||||||||||||
Total AFS securities including related party |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
The following summarizes the fair value and gross unrealized losses for AFS securities, including related party, aggregated by asset type and length of time the fair value has remained below amortized cost:
December 31, 2019 |
|||||||||||||||||||||||
Less than 12 months |
12 months or more |
Total |
|||||||||||||||||||||
(In millions) |
Fair Value |
Gross
Unrealized
Losses
|
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
|||||||||||||||||
AFS securities |
|||||||||||||||||||||||
U.S. government and agencies |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||
U.S. state, municipal and political subdivisions |
( |
) |
( |
) |
|||||||||||||||||||
Corporate |
( |
) |
( |
) |
( |
) |
|||||||||||||||||
CLO |
( |
) |
( |
) |
( |
) |
|||||||||||||||||
ABS |
( |
) |
( |
) |
( |
) |
|||||||||||||||||
CMBS |
( |
) |
( |
) |
( |
) |
|||||||||||||||||
RMBS |
( |
) |
( |
) |
( |
) |
|||||||||||||||||
Total AFS securities |
( |
) |
( |
) |
( |
) |
|||||||||||||||||
AFS securities – related party |
|||||||||||||||||||||||
CLO |
( |
) |
( |
) |
( |
) |
|||||||||||||||||
ABS |
( |
) |
( |
) |
|||||||||||||||||||
Total AFS securities – related party |
( |
) |
( |
) |
( |
) |
|||||||||||||||||
Total AFS securities including related party |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
As of March 31, 2020, we held 4,327 AFS securities that were in an unrealized loss position. Of this total, 346 were in an unrealized loss position 12 months or more. As of March 31, 2020, we held 104 related party AFS securities that were in an unrealized loss position. Of this total, eight 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.
21
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Allowance for Credit Losses—The following table summarizes the activity in the allowance for credit losses for AFS securities by asset type:
Three months ended March 31, 2020 |
|||||||||||||||||||||||
Additions |
Reductions |
||||||||||||||||||||||
(In millions) |
Beginning balance |
Initial credit losses |
Initial credit losses on PCD securities |
Additions for previously impaired securities |
Securities sold during the period |
Ending Balance |
|||||||||||||||||
AFS securities |
|||||||||||||||||||||||
Corporate |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||
ABS |
|||||||||||||||||||||||
CMBS |
|||||||||||||||||||||||
RMBS |
( |
) |
|||||||||||||||||||||
Total AFS securities |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
Net Investment Income—Net investment income by asset class consists of the following:
Three months ended March 31, |
|||||||
(In millions) |
2020 |
2019 |
|||||
AFS securities |
$ |
$ |
|||||
Trading securities |
|||||||
Equity securities |
|||||||
Mortgage loans |
|||||||
Investment funds |
( |
) |
|||||
Funds withheld at interest |
|||||||
Other |
|||||||
Investment revenue |
|||||||
Investment expenses |
( |
) |
( |
) |
|||
Net investment income |
$ |
$ |
Investment Related Gains (Losses)—Investment related gains (losses) by asset class consists of the following:
Three months ended March 31, |
|||||||
(In millions) |
2020 |
2019 |
|||||
AFS securities |
|||||||
Gross realized gains on investment activity |
$ |
$ |
|||||
Gross realized losses on investment activity |
( |
) |
( |
) |
|||
Net realized investment gains on AFS securities |
|||||||
Net recognized investment gains (losses) on trading securities |
( |
) |
|||||
Net recognized investment gains (losses) on equity securities |
( |
) |
|||||
Derivative gains (losses) |
( |
) |
|||||
Provision for credit losses |
( |
) |
|||||
Other gains (losses) |
( |
) |
|||||
Investment related gains (losses) |
$ |
( |
) |
$ |
Proceeds from sales of AFS securities were $1,807 million and $1,253 million for the three months ended March 31, 2020 and 2019, respectively.
The following table summarizes the change in unrealized gains (losses) on trading and equity securities we held as of the respective period end:
Three months ended March 31, |
|||||||
(In millions) |
2020 |
2019 |
|||||
Trading securities |
$ |
( |
) |
$ |
|||
Trading securities – related party |
( |
) |
( |
) |
|||
Equity securities |
( |
) |
|||||
Equity securities – related party |
22
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Purchased Financial Assets with Credit Deterioration—During the three months ended March 31, 2020, we purchased PCD investments with the following amounts at the time of purchase:
(In millions) |
Fixed maturity securities |
Mortgage loans |
|||||
Purchase price |
$ |
$ |
|||||
Allowance for credit losses at acquisition |
|||||||
Discount (premiums) attributable to other factors |
|||||||
Par value |
$ |
$ |
Repurchase Agreements—The following table summarizes the maturities of our repurchase agreements:
March 31, 2020 |
|||||||||||||||||||
Remaining Contractual Maturity |
|||||||||||||||||||
(In millions) |
Overnight and continuous |
Up to 30 days |
30-90 days |
Greater than 90 days |
Total |
||||||||||||||
Payables for repurchase agreements1
|
$ |
$ |
$ |
$ |
$ |
||||||||||||||
1 Included in payables for collateral on derivatives and securities to repurchase on the condensed consolidated balance sheets.
|
December 31, 2019 |
|||||||||||||||||||
Remaining Contractual Maturity |
|||||||||||||||||||
(In millions) |
Overnight and continuous |
Up to 30 days |
30-90 days |
Greater than 90 days |
Total |
||||||||||||||
Payables for repurchase agreements1
|
$ |
$ |
$ |
$ |
$ |
||||||||||||||
1 Included in payables for collateral on derivatives and securities to repurchase on the condensed consolidated balance sheets.
|
The following table summarizes the securities pledged as collateral for repurchase agreements:
March 31, 2020 |
December 31, 2019 |
||||||||||||||
(In millions) |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
|||||||||||
AFS securities – Corporate |
$ |
$ |
$ |
$ |
|||||||||||
Total securities pledged under repurchase agreements |
$ |
$ |
$ |
$ |
Reverse Repurchase Agreements—Reverse repurchase agreements represent the purchase of investments from a seller with the agreement that the investments will be repurchased by the seller at a specified price and date or within a specified period of time. The investments purchased, which represent collateral on a secured lending arrangement, are not reflected in our condensed consolidated balance sheets; however, the secured lending arrangement is recorded as a short-term investment for the principal amount loaned under the agreement. As of March 31, 2020 and December 31, 2019, amounts loaned under reverse repurchase agreements were $190 million and collateral backing the agreement was $616 million and $630 million, respectively.
23
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Mortgage Loans, including related party—Mortgage loans, net of allowances, consists of the following:
(In millions) |
March 31, 2020 |
December 31, 2019 |
|||||
Commercial mortgage loans |
$ |
$ |
|||||
Commercial mortgage loans under development |
|||||||
Total commercial mortgage loans |
|||||||
Allowance for credit losses on commercial mortgage loans |
( |
) |
( |
) |
|||
Commercial mortgage loans, net of allowances |
|||||||
Residential mortgage loans |
|||||||
Allowance for credit losses on residential mortgage loans |
( |
) |
( |
) |
|||
Residential mortgage loans, net of allowances |
|||||||
Mortgage loans, net of allowances |
$ |
$ |
We primarily invest in commercial mortgage loans on income producing properties including office and retail buildings, apartments, hotels and industrial properties. We diversify the commercial mortgage loan portfolio by geographic region and property type to reduce concentration risk. We evaluate mortgage loans based on relevant current information to confirm if properties are performing at a consistent and acceptable level to secure the related debt.
The distribution of commercial mortgage loans, including those under development, net of allowances, by property type and geographic region, is as follows:
March 31, 2020 |
December 31, 2019 |
||||||||||||
(In millions, except for percentages) |
Net Carrying Value |
Percentage of Total |
Net Carrying Value |
Percentage of Total |
|||||||||
Property type |
|||||||||||||
Office building |
$ |
% |
$ |
% |
|||||||||
Retail |
% |
% |
|||||||||||
Apartment |
% |
% |
|||||||||||
Hotels |
% |
% |
|||||||||||
Industrial |
% |
% |
|||||||||||
Other commercial |
% |
% |
|||||||||||
Total commercial mortgage loans |
$ |
% |
$ |
% |
|||||||||
U.S. Region |
|||||||||||||
East North Central |
$ |
% |
$ |
% |
|||||||||
East South Central |
% |
% |
|||||||||||
Middle Atlantic |
% |
% |
|||||||||||
Mountain |
% |
% |
|||||||||||
New England |
% |
% |
|||||||||||
Pacific |
% |
% |
|||||||||||
South Atlantic |
% |
% |
|||||||||||
West North Central |
% |
% |
|||||||||||
West South Central |
% |
% |
|||||||||||
Total U.S. Region |
% |
% |
|||||||||||
International Region |
% |
% |
|||||||||||
Total commercial mortgage loans |
$ |
% |
$ |
% |
24
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Our residential mortgage loan portfolio includes first lien residential mortgage loans collateralized by properties in various geographic locations and is summarized by proportion of the portfolio in the following table:
March 31, 2020 |
December 31, 2019 |
||||
U.S. States |
|||||
California |
% |
% |
|||
Florida |
% |
% |
|||
Texas |
% |
% |
|||
Other1
|
% |
% |
|||
Total U.S. residential mortgage loan percentage |
% |
% |
|||
International – Ireland |
% |
% |
|||
Total residential mortgage loan percentage |
% |
% |
|||
1Represents all other states, with each individual state comprising less than 5% of the portfolio.
|
Loan Valuation Allowance—The allowances for our mortgage loan portfolio and other loans is summarized as follows:
Three months ended March 31, 2020 |
|||||||||||||||
(In millions) |
Commercial Mortgage |
Residential Mortgage |
Related Party Other Investments |
Total |
|||||||||||
Beginning balance |
$ |
$ |
$ |
$ |
|||||||||||
Adoption of accounting standard |
|||||||||||||||
Provision for expected credit losses |
|||||||||||||||
Ending balance |
$ |
$ |
$ |
$ |
Residential mortgage loans – Our allowance model for residential mortgage loans is based on the characteristics of the loans in our portfolio, historical economic data and loss information, and current and forecasted economic conditions. Key loan characteristics affecting the estimate include, among others: time to maturity, delinquency status, original credit scores and loan-to-value ratios. Key macroeconomic variables include unemployment rates and the housing price index. Management reviews and approves forecasted macroeconomic variables, along with the reasonable and supportable forecast period and mean reversion technique. Management also evaluates assumptions from independent third parties and these assumptions have a high degree of subjectivity. The mean reversion technique varies by macroeconomic variable and may vary by geographic location. As of March 31, 2020, our reasonable and supportable forecast period ranged from 3 months – 1 year, after which, we revert to the 30-year or greater historical average over a period of up to 9 months and then continue at those averages through the contractual life of the loan.
Commercial mortgage loans – Our allowance model for commercial mortgage loans is based on the characteristics of the loans in our portfolio, historical economic data and loss information, and current and forecasted economic conditions. Key loan characteristics affecting the estimate include, among others: time to maturity, delinquency status, loan-to-value ratios, debt service coverage ratios, etc. Key macroeconomic variables include unemployment rates, rent growth, capitalization rates, and the housing price index. Management reviews and approves forecasted macroeconomic variables, along with the reasonable and supportable forecast period and mean reversion technique. Management also evaluates assumptions from independent third parties and these assumptions have a high degree of subjectivity. The mean reversion technique varies by macroeconomic variable and may vary by geographic location. As of March 31, 2020, our reasonable and supportable forecast period ranged from 3 months – 2 years, after which, we revert to the 30-year or greater historical average over a period of up to 10 years.
Related party other investments – The allowance model for the loans included in related party other investments derives an estimate based on historical loss data available for similarly rated unsecured corporate debt obligations, while also incorporating management’s expectations around prepayment.
Credit Quality Indicators
Residential mortgage loans – The underwriting process for our residential mortgage loans includes an evaluation of relevant credit information including past loan performance, credit scores, loan-to-value and other relevant information. Subsequent to purchase or origination, we closely monitor economic conditions and loan performance to manage and evaluate our exposure to credit risk in our residential mortgage loan portfolio. The primary credit quality indicator monitored for residential mortgage loans is loan performance. Nonperforming residential mortgage loans are 90 days or more past due and/or are in non-accrual status.
25
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following represents our residential loan portfolio by origination year and performance status:
March 31, 2020 |
|||||||||||||||||||||||||||
(In millions) |
2020 |
2019 |
2018 |
2017 |
2016 |
Prior |
Total |
||||||||||||||||||||
Current (less than 30 days past due) |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||||
30 to 59 days past due |
|||||||||||||||||||||||||||
60 to 89 days past due |
|||||||||||||||||||||||||||
Over 90 days past due |
|||||||||||||||||||||||||||
Total residential mortgages |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
As of December 31, 2019, $67 million of our residential mortgage loans were nonperforming.
The following represents our residential loan portfolio in non-accrual status:
(In millions) |
March 31, 2020 |
||
Beginning amortized cost of residential mortgage loans in non-accrual status |
$ |
||
Ending amortized cost of residential mortgage loans in non-accrual status |
|||
Amortized cost of residential mortgage loans in non-accrual status without a related allowance for credit losses |
During the three months ended March 31, 2020, we recognized $1 million of interest income on residential mortgage loans in non-accrual status.
Commercial mortgage loans – The following represents our commercial mortgage loan portfolio by origination year and loan performance status:
March 31, 2020 |
|||||||||||||||||||||||||||
(In millions) |
2020 |
2019 |
2018 |
2017 |
2016 |
Prior |
Total |
||||||||||||||||||||
Current (less than 30 days past due) |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
As of December 31, 2019, none of our commercial loans were 30 days or more past due.
The following represents our commercial mortgage loan portfolio in non-accrual status:
(In millions) |
March 31, 2020 |
||
Beginning amortized cost of commercial mortgage loans in non-accrual status |
$ |
||
Ending amortized cost of commercial mortgage loans in non-accrual status |
|||
Amortized cost of commercial mortgage loans in non-accrual status without a related allowance for credit losses |
During the three months ended March 31, 2020, no interest income was recognized on commercial mortgage loans in non-accrual status.
Loan-to-value and debt service coverage ratios are measures we use to assess the risk and quality of commercial mortgage loans other than those under development. Loans under development are not evaluated using these ratios as the properties underlying these loans are generally not yet income-producing and the value of the underlying property significantly fluctuates based on the progress of construction. Therefore, the risk and quality of loans under development are evaluated based on the aging and geographical distribution of such loans as shown above.
The loan-to-value ratio is expressed as a percentage of the amount of the loan relative to the value of the underlying property. A loan-to-value ratio in excess of 100% indicates the unpaid loan amount exceeds the value of the underlying collateral. Loan-to-value information is updated annually as part of the re-underwriting process supporting the NAIC risk based capital rating criteria. The following represents the loan-to-value ratio of the commercial mortgage loan portfolio, excluding those under development, by origination year:
March 31, 2020 |
|||||||||||||||||||||||||||
(In millions) |
2020 |
2019 |
2018 |
2017 |
2016 |
Prior |
Total |
||||||||||||||||||||
Less than 50% |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||||
50% to 60% |
|||||||||||||||||||||||||||
61% to 70% |
|||||||||||||||||||||||||||
71% to 80% |
|||||||||||||||||||||||||||
81% to 100% |
|||||||||||||||||||||||||||
Commercial mortgage loans |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
26
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following represents the loan-to-value ratio of the commercial mortgage loan portfolio, excluding those under development, net of valuation allowances:
(In millions) |
December 31, 2019 |
||
Less than 50% |
$ |
||
50% to 60% |
|||
61% to 70% |
|||
71% to 80% |
|||
81% to 100% |
|||
Commercial mortgage loans |
$ |
The debt service coverage ratio 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. Debt service coverage ratios are updated as more recent financial statements become available, at least annually or as frequently as quarterly in some cases. The following represents the debt service coverage ratio of the commercial mortgage loan portfolio, excluding those under development, by origination year:
March 31, 2020 |
|||||||||||||||||||||||||||
(In millions) |
2020 |
2019 |
2018 |
2017 |
2016 |
Prior |
Total |
||||||||||||||||||||
Greater than 1.20x |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||||
1.00x – 1.20x |
|||||||||||||||||||||||||||
Less than 1.00x |
|||||||||||||||||||||||||||
Commercial mortgage loans |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
The following represents the debt service coverage ratio of the commercial mortgage loan portfolio, excluding those under development, net of valuation allowances:
(In millions) |
December 31, 2019 |
||
Greater than 1.20x |
$ |
||
1.00x – 1.20x |
|||
Less than 1.00x |
|||
Commercial mortgage loans |
$ |
27
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Investment Funds—Our investment fund portfolio consists of funds that employ various strategies and include investments in real estate, real assets, credit, equity and natural resources. Investment funds can meet the definition of VIEs. Our investment funds do not specify timing of distributions on the funds’ underlying assets.
The following summarizes our investment funds, including related party:
March 31, 2020 |
December 31, 2019 |
||||||||||||
(In millions, except for percentages) |
Carrying value |
Percent of total |
Carrying value |
Percent of total |
|||||||||
Investment funds |
|||||||||||||
Real estate |
$ |
% |
$ |
% |
|||||||||
Credit funds |
% |
% |
|||||||||||
Private equity |
% |
% |
|||||||||||
Real assets |
% |
% |
|||||||||||
Natural resources |
% |
% |
|||||||||||
Total investment funds |
% |
% |
|||||||||||
Investment funds – related parties |
|||||||||||||
Differentiated investments |
|||||||||||||
MidCap FinCo Designated Activity Company (MidCap)1
|
% |
% |
|||||||||||
AmeriHome Mortgage Company, LLC (AmeriHome)1
|
% |
% |
|||||||||||
Catalina Holdings Ltd. (Catalina) |
% |
% |
|||||||||||
Athora Holding Ltd. (Athora)1
|
% |
% |
|||||||||||
Venerable Holdings, Inc. (Venerable)1
|
% |
% |
|||||||||||
Other |
% |
% |
|||||||||||
Total differentiated investments |
% |
% |
|||||||||||
Real estate |
% |
% |
|||||||||||
Credit funds |
% |
% |
|||||||||||
Private equity |
% |
% |
|||||||||||
Real assets |
% |
% |
|||||||||||
Natural resources |
% |
% |
|||||||||||
Public equities |
% |
% |
|||||||||||
Investment in Apollo1
|
% |
% |
|||||||||||
Total investment funds – related parties |
% |
% |
|||||||||||
Total investment funds including related party |
$ |
$ |
|||||||||||
1 See further discussion on MidCap, AmeriHome, Athora, Venerable and our investment in Apollo in Note 9 – Related Parties.
|
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. 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.
Equity securities – We invest in preferred equity securities issued by entities deemed to be VIEs due to insufficient equity within the structure.
Our risk of loss associated with our non-consolidated investments depends on the investment. Investment funds, equity securities and trading securities are limited to the carrying value plus unfunded commitments. AFS securities are limited to amortized cost plus unfunded commitments.
28
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following summarizes the carrying value and maximum loss exposure of these non-consolidated investments:
March 31, 2020 |
December 31, 2019 |
||||||||||||||
(In millions) |
Carrying Value |
Maximum Loss Exposure |
Carrying Value |
Maximum Loss Exposure |
|||||||||||
Investment funds |
$ |
$ |
$ |
$ |
|||||||||||
Investment in related parties – investment funds |
|||||||||||||||
Investment in fixed maturity securities |
|||||||||||||||
Investment in related parties – fixed maturity securities |
|||||||||||||||
Investment in related parties – equity securities |
|||||||||||||||
Total non-consolidated investments |
$ |
$ |
$ |
$ |
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 4 – Fair Value for information about the fair value hierarchy for derivatives.
The following table presents the notional amount and fair value of derivative instruments:
March 31, 2020 |
December 31, 2019 |
||||||||||||||||||||
Notional Amount |
Fair Value |
Notional Amount |
Fair Value |
||||||||||||||||||
(In millions) |
Assets |
Liabilities |
Assets |
Liabilities |
|||||||||||||||||
Derivatives designated as hedges |
|||||||||||||||||||||
Foreign currency swaps |
$ |
$ |
$ |
$ |
|||||||||||||||||
Foreign currency forwards |
|||||||||||||||||||||
Foreign currency forwards on net investments |
|||||||||||||||||||||
Total derivatives designated as hedges |
|||||||||||||||||||||
Derivatives not designated as hedges |
|||||||||||||||||||||
Equity options |
|||||||||||||||||||||
Futures |
|||||||||||||||||||||
Total return swaps |
|||||||||||||||||||||
Foreign currency swaps |
|||||||||||||||||||||
Interest rate swaps |
|||||||||||||||||||||
Credit default swaps |
|||||||||||||||||||||
Foreign currency forwards |
|||||||||||||||||||||
Embedded derivatives |
|||||||||||||||||||||
Funds withheld including related party |
( |
) |
|||||||||||||||||||
Interest sensitive contract liabilities |
|||||||||||||||||||||
Total derivatives not designated as hedges |
|||||||||||||||||||||
Total derivatives |
$ |
$ |
$ |
$ |
29
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 2050. During the three months ended March 31, 2020 and 2019, we had foreign currency swap gains of $401 million and losses of $8 million, respectively, recorded in AOCI. There were no amounts reclassified to income and no amounts deemed ineffective for the three months ended March 31, 2020 and 2019. As of March 31, 2020, no amounts are expected to be reclassified to income within the next 12 months.
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. Certain of these forwards are designated and accounted for as fair value hedges. As of March 31, 2020 and December 31, 2019, the carrying amount of the hedged AFS securities was $659 million and $456 million, respectively, and the cumulative amount of fair value hedging adjustments included in the hedged AFS securities included losses of $8 million and gains of $1 million, respectively. The gains and losses on derivatives and the related hedged items in fair value hedge relationships are recorded in investment related gains (losses) on the condensed consolidated statements of income (loss). During the three months ended March 31, 2020 and 2019, the derivatives had gains of $12 million and $3 million, respectively, and the related hedged items had losses of $8 million and $3 million, respectively.
Foreign currency forwards on net investments – We have foreign currency forwards designated as net investment hedges. These forwards hedge the foreign currency exchange rate risk of our investments in subsidiaries that have a reporting currency other than the U.S. dollar. We assess hedge effectiveness based on the changes in forward rates. During the three months ended March 31, 2020, these derivatives had gains of $13 million, which are included in foreign currency translation and other adjustments on the condensed consolidated statements of comprehensive income (loss). As of March 31, 2020 and December 31, 2019, the cumulative foreign currency translation recorded in AOCI related to these net investment hedges were gains of $11 million and losses of $2 million, respectively. During the three months ended March 31, 2020, there were no amounts deemed ineffective.
Derivatives Not Designated as Hedges
Equity options – We use equity indexed options to economically hedge fixed indexed annuity products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specified market index, primarily the S&P 500. To hedge against adverse changes in equity indices, we enter into contracts to buy equity indexed options. The contracts are net settled in cash based on differentials in the indices at the time of exercise and the strike price.
Futures – Futures contracts are purchased to hedge the growth in interest credited to the customer as a direct result of increases in the related indices. We enter into exchange-traded futures with regulated futures commission clearing brokers who are members of a trading exchange. Under exchange-traded futures contracts, we agree to purchase a specified number of contracts with other parties and to post variation margin on a daily basis in an amount equal to the difference in the daily fair values of those contracts.
Total return swaps – We purchase total rate of return swaps to gain exposure and benefit from a reference asset or index without ownership. Total rate of return swaps are contracts in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of the underlying asset or index, which includes both the income it generates and any capital gains.
Interest rate swaps – We use interest rate swaps to reduce market risks from interest rate changes and to alter interest rate exposure arising from duration mismatches between assets and liabilities. With an interest rate swap, we agree with another party to exchange the difference between fixed-rate and floating-rate interest amounts tied to an agreed-upon notional principal amount at specified intervals.
Credit default swaps – Credit default swaps provide a measure of protection against the default of an issuer or allow us to gain credit exposure to an issuer or traded index. We use credit default swaps coupled with a bond to synthetically create the characteristics of a reference bond. These transactions have a lower cost and are generally more liquid relative to the cash market. We receive a periodic premium for these transactions as compensation for accepting credit risk.
Hedging credit risk involves buying protection for existing credit risk. The exposure resulting from the agreements, which is usually the notional amount, is equal to the maximum proceeds that must be paid by a counterparty for a defaulted security. If a credit event occurs on a reference entity, then a counterparty who sold protection is required to pay the buyer the trade notional amount less any recovery value of the security.
Embedded derivatives – We have embedded derivatives which are required to be separated from their host contracts and reported as derivatives. Host contracts include reinsurance agreements structured on a modified coinsurance (modco) or funds withheld basis and indexed annuity products.
30
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following is a summary of the gains (losses) related to derivatives not designated as hedges:
Three months ended March 31, |
|||||||
(In millions) |
2020 |
2019 |
|||||
Equity options |
$ |
( |
) |
$ |
|||
Futures |
( |
) |
|||||
Swaps |
( |
) |
|||||
Foreign currency forwards |
|||||||
Embedded derivatives on funds withheld |
( |
) |
|||||
Amounts recognized in investment related gains (losses) |
( |
) |
|||||
Embedded derivatives in indexed annuity products1
|
( |
) |
|||||
Total gains (losses) on derivatives not designated as hedges |
$ |
( |
) |
$ |
|||
1 Included in interest sensitive contract benefits on the condensed consolidated statements of income (loss).
|
Credit Risk—We may be exposed to credit-related losses in the event of counterparty nonperformance on derivative financial instruments. Generally, the current credit exposure of our derivative contracts is the fair value at the reporting date less any collateral received from the counterparty.
We manage credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties. Where possible, we maintain collateral arrangements and use master netting agreements that provide for a single net payment from one counterparty to another at each due date and upon termination. We have also established counterparty exposure limits, where possible, in order to evaluate if there is sufficient collateral to support the net exposure.
Collateral arrangements typically require the posting of collateral in connection with its derivative instruments. Collateral agreements often contain posting thresholds, some of which may vary depending on the posting party’s financial strength ratings. Additionally, a decrease in our financial strength rating to a specified level can result in settlement of the derivative position.
The estimated fair value of our net derivative and other financial assets and liabilities after the application of master netting agreements and collateral were as follows:
Gross amounts not offset on the condensed consolidated balance sheets |
||||||||||||||||||||||||
(In millions) |
Gross amount recognized1
|
Financial instruments2
|
Collateral (received)/pledged |
Net amount |
Off-balance sheet securities collateral3
|
Net amount after securities collateral |
||||||||||||||||||
March 31, 2020 |
||||||||||||||||||||||||
Derivative assets |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
||||||||
Derivative liabilities |
( |
) |
( |
) |
( |
) |
||||||||||||||||||
December 31, 2019 |
||||||||||||||||||||||||
Derivative assets |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
( |
) |
||||||||||
Derivative liabilities |
( |
) |
||||||||||||||||||||||
1 |
The gross amounts of recognized derivative assets and derivative liabilities are reported on the condensed consolidated balance sheets. As of March 31, 2020 and December 31, 2019, 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. |
31
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
4. 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.
NAV – Investment funds are typically measured using NAV as a practical expedient in determining fair value and are not classified in the fair value hierarchy. The underlying investments of the investment funds may have significant unobservable inputs, which may include but are not limited to, comparable multiples and weighted average cost of capital rates applied in valuation models or a discounted cash flow model.
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the instrument’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.
32
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following represents the hierarchy for our assets and liabilities measured at fair value on a recurring basis:
March 31, 2020 |
|||||||||||||||||||
(In millions) |
Total |
NAV |
Level 1 |
Level 2 |
Level 3 |
||||||||||||||
Assets |
|||||||||||||||||||
AFS securities |
|||||||||||||||||||
U.S. government and agencies |
$ |
$ |
— |
$ |
$ |
$ |
|||||||||||||
U.S. state, municipal and political subdivisions |
— |
||||||||||||||||||
Foreign governments |
— |
||||||||||||||||||
Corporate |
— |
||||||||||||||||||
CLO |
— |
||||||||||||||||||
ABS |
— |
||||||||||||||||||
CMBS |
— |
||||||||||||||||||
RMBS |
— |
||||||||||||||||||
Total AFS securities |
— |
||||||||||||||||||
Trading securities |
|||||||||||||||||||
U.S. government and agencies |
— |
||||||||||||||||||
U.S. state, municipal and political subdivisions |
— |
||||||||||||||||||
Corporate |
— |
||||||||||||||||||
CLO |
— |
||||||||||||||||||
ABS |
— |
||||||||||||||||||
CMBS |
— |
||||||||||||||||||
RMBS |
— |
||||||||||||||||||
Total trading securities |
— |
||||||||||||||||||
Equity securities |
— |
||||||||||||||||||
Mortgage loans |
— |
||||||||||||||||||
Investment funds |
|||||||||||||||||||
Funds withheld at interest – embedded derivative |
( |
) |
— |
( |
) |
||||||||||||||
Derivative assets |
— |
||||||||||||||||||
Short-term investments |
— |
||||||||||||||||||
Other investments |
— |
||||||||||||||||||
Cash and cash equivalents |
— |
||||||||||||||||||
Restricted cash |
— |
||||||||||||||||||
Investments in related parties |
|||||||||||||||||||
AFS securities |
|||||||||||||||||||
Corporate |
— |
||||||||||||||||||
CLO |
— |
||||||||||||||||||
ABS |
— |
||||||||||||||||||
Total AFS securities – related party |
— |
||||||||||||||||||
Trading securities |
|||||||||||||||||||
CLO |
— |
||||||||||||||||||
ABS |
— |
||||||||||||||||||
Total trading securities – related party |
— |
||||||||||||||||||
Equity securities |
— |
||||||||||||||||||
Investment funds |
|||||||||||||||||||
Funds withheld at interest – embedded derivative |
( |
) |
— |
( |
) |
||||||||||||||
Reinsurance recoverable |
— |
||||||||||||||||||
Total assets measured at fair value |
$ |
$ |
$ |
$ |
$ |
||||||||||||||
(Continued) |
33
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2020 |
|||||||||||||||||||
(In millions) |
Total |
NAV |
Level 1 |
Level 2 |
Level 3 |
||||||||||||||
Liabilities |
|||||||||||||||||||
Interest sensitive contract liabilities |
|||||||||||||||||||
Embedded derivative |
$ |
$ |
— |
$ |
$ |
$ |
|||||||||||||
Universal life benefits |
— |
||||||||||||||||||
Future policy benefits |
|||||||||||||||||||
AmerUs Life Insurance Company (AmerUs) Closed Block |
— |
||||||||||||||||||
Indianapolis Life Insurance Company (ILICO) Closed Block and life benefits |
— |
||||||||||||||||||
Derivative liabilities |
— |
||||||||||||||||||
Funds withheld liability – embedded derivative |
— |
||||||||||||||||||
Total liabilities measured at fair value |
$ |
$ |
— |
$ |
$ |
$ |
|||||||||||||
(Concluded) |
December 31, 2019 |
|||||||||||||||||||
(In millions) |
Total |
NAV |
Level 1 |
Level 2 |
Level 3 |
||||||||||||||
Assets |
|||||||||||||||||||
AFS securities |
|||||||||||||||||||
U.S. government and agencies |
$ |
$ |
— |
$ |
$ |
$ |
|||||||||||||
U.S. state, municipal and political subdivisions |
— |
||||||||||||||||||
Foreign governments |
— |
||||||||||||||||||
Corporate |
— |
||||||||||||||||||
CLO |
— |
||||||||||||||||||
ABS |
— |
||||||||||||||||||
CMBS |
— |
||||||||||||||||||
RMBS |
— |
||||||||||||||||||
Total AFS securities |
— |
||||||||||||||||||
Trading securities |
|||||||||||||||||||
U.S. government and agencies |
— |
||||||||||||||||||
U.S. state, municipal and political subdivisions |
— |
||||||||||||||||||
Corporate |
— |
||||||||||||||||||
CLO |
— |
||||||||||||||||||
ABS |
— |
||||||||||||||||||
CMBS |
— |
||||||||||||||||||
RMBS |
— |
||||||||||||||||||
Total trading securities |
— |
||||||||||||||||||
Equity securities |
— |
||||||||||||||||||
Mortgage loans |
— |
||||||||||||||||||
Investment funds |
|||||||||||||||||||
Funds withheld at interest – embedded derivative |
— |
||||||||||||||||||
Derivative assets |
— |
||||||||||||||||||
Short-term investments |
— |
||||||||||||||||||
Other investments |
— |
||||||||||||||||||
Cash and cash equivalents |
— |
||||||||||||||||||
Restricted cash |
— |
||||||||||||||||||
(Continued) |
34
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
December 31, 2019 |
|||||||||||||||||||
(In millions) |
Total |
NAV |
Level 1 |
Level 2 |
Level 3 |
||||||||||||||
Investments in related parties |
|||||||||||||||||||
AFS securities |
|||||||||||||||||||
Corporate |
— |
||||||||||||||||||
CLO |
— |
||||||||||||||||||
ABS |
— |
||||||||||||||||||
Total AFS securities – related party |
— |
||||||||||||||||||
Trading securities |
|||||||||||||||||||
CLO |
— |
||||||||||||||||||
ABS |
— |
||||||||||||||||||
Total trading securities – related party |
— |
||||||||||||||||||
Equity securities |
— |
||||||||||||||||||
Investment funds |
|||||||||||||||||||
Funds withheld at interest – embedded derivative |
— |
||||||||||||||||||
Short-term investments |
— |
||||||||||||||||||
Reinsurance recoverable |
— |
||||||||||||||||||
Total assets measured at fair value |
$ |
$ |
$ |
$ |
$ |
||||||||||||||
Liabilities |
|||||||||||||||||||
Interest sensitive contract liabilities |
|||||||||||||||||||
Embedded derivative |
$ |
$ |
— |
$ |
$ |
$ |
|||||||||||||
Universal life benefits |
— |
||||||||||||||||||
Future policy benefits |
|||||||||||||||||||
AmerUs Closed Block |
— |
||||||||||||||||||
ILICO Closed Block and life benefits |
— |
||||||||||||||||||
Derivative liabilities |
— |
||||||||||||||||||
Funds withheld liability – embedded derivative |
— |
||||||||||||||||||
Total liabilities measured at fair value |
$ |
$ |
— |
$ |
$ |
$ |
|||||||||||||
(Concluded) |
35
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Fair Value Valuation Methods—We used the following valuation methods and assumptions to estimate fair value:
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 also have fixed maturity securities priced based on indicative broker quotes or by employing market accepted valuation models. For certain fixed maturity securities, the valuation model uses significant unobservable inputs and are included in Level 3 in our fair value hierarchy. Significant unobservable inputs used include: issue specific credit adjustments, material non-public financial information, estimation of future earnings and cash flows, default rate assumptions, liquidity assumptions and indicative quotes from market makers. These inputs are usually considered unobservable, as not all market participants have access to this data.
We value privately placed fixed maturity securities based on the credit quality and duration of comparable marketable securities, which may be securities of another issuer with similar characteristics. In some instances, we use a matrix-based pricing model. These models consider the current level of risk-free interest rates, corporate spreads, credit quality of the issuer and cash flow characteristics of the security. We also consider additional factors such as net worth of the borrower, value of collateral, capital structure of the borrower, presence of guarantees and our evaluation of the borrower’s ability to compete in its relevant market. Privately placed fixed maturity securities are classified as Level 2 or 3.
Equity securities – Fair values of publicly traded equity securities are based on quoted market prices and classified as Level 1. Other equity securities, typically private equities or equity securities not traded on an exchange, we value based on other sources, such as commercial pricing services or brokers, and are classified as Level 2 or 3.
Mortgage loans – Mortgage loans for which we have elected the fair value option or those held for sale are carried at fair value. We estimate fair value on a monthly basis using discounted cash flow analysis and rates being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. The discounted cash flow model uses unobservable inputs, including estimates of discount rates and loan prepayments. Mortgage loans are classified as Level 3.
Investment funds – Certain investment funds for which we elected the fair value option are included in Level 3 and are priced based on market accepted valuation models. The valuation models use significant unobservable inputs, which include material non-public financial information, estimation of future distributable earnings and demographic assumptions. These inputs are usually considered unobservable, as not all market participants have access to this data.
Funds withheld at interest embedded derivative – We estimate the fair value of the embedded derivative based on the change in the fair value of the assets supporting the funds withheld payable under modco and 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 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.
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.
36
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
ILICO Closed Block – We elected the fair value option for the ILICO Closed Block. Our valuation technique is to set the fair value of policyholder liabilities equal to the fair value of assets. There is an additional component which captures the fair value of the open block’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 nonperformance 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. 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, including related parties:
Three months ended March 31, |
|||||||
(In millions) |
2020 |
2019 |
|||||
Trading securities |
$ |
( |
) |
$ |
|||
Investment funds |
( |
) |
( |
) |
|||
Future policy benefits |
( |
) |
|||||
Total gains (losses) |
$ |
( |
) |
$ |
Gains and losses on trading securities are recorded in investment related gains (losses) on the condensed consolidated statements of income (loss). For fair value option mortgage loans, we record interest income in net investment income and subsequent changes in fair value in investment related gains (losses) on the condensed consolidated statements of income (loss). Gains and losses related to investment funds, including related party investment funds, are recorded in net investment income on the condensed consolidated statements of income (loss). We record the change in fair value of future policy benefits to future policy and other policy benefits on the condensed consolidated statements of income (loss).
The following summarizes information for fair value option mortgage loans:
(In millions) |
March 31, 2020 |
December 31, 2019 |
|||||
Unpaid principal balance |
$ |
$ |
|||||
Mark to fair value |
|||||||
Fair value |
$ |
$ |
There were no fair value option mortgage loans 90 days or more past due as of March 31, 2020 and December 31, 2019.
37
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Level 3 Financial Instruments—The following tables are reconciliations for all Level 3 assets and liabilities measured at fair value on a recurring basis. All transfers in and out of Level 3 are based on changes in the availability of pricing sources, as described in the valuation methods above.
Three months ended March 31, 2020 |
|||||||||||||||||||||||||||||||
Total realized and unrealized gains (losses) |
|||||||||||||||||||||||||||||||
(In millions) |
Beginning balance |
Included in income |
Included in OCI |
Net purchases, issuances, sales and settlements |
Net transfers in (out) |
Ending balance |
Total gains (losses) included in income1
|
Total gains (losses) included in OCI1
|
|||||||||||||||||||||||
Assets |
|||||||||||||||||||||||||||||||
AFS securities |
|||||||||||||||||||||||||||||||
U.S. state, municipal and political subdivisions |
$ |
$ |
$ |
( |
) |
$ |
$ |
$ |
$ |
$ |
( |
) |
|||||||||||||||||||
Corporate |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||||||||
CLO |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||||||||
ABS |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||||||
CMBS |
( |
) |
( |
) |
|||||||||||||||||||||||||||
RMBS |
|||||||||||||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||
Corporate |
|||||||||||||||||||||||||||||||
CLO |
( |
) |
( |
) |
|||||||||||||||||||||||||||
ABS |
( |
) |
|||||||||||||||||||||||||||||
RMBS |
( |
) |
|||||||||||||||||||||||||||||
Equity securities |
|||||||||||||||||||||||||||||||
Mortgage loans |
( |
) |
|||||||||||||||||||||||||||||
Investment funds |
( |
( |
|||||||||||||||||||||||||||||
Funds withheld at interest – embedded derivative |
( |
) |
( |
) |
|||||||||||||||||||||||||||
Short-term investments |
( |
) |
|||||||||||||||||||||||||||||
Investments in related parties |
|||||||||||||||||||||||||||||||
AFS securities, ABS |
( |
) |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||
CLO |
( |
) |
( |
) |
|||||||||||||||||||||||||||
ABS |
( |
) |
( |
) |
|||||||||||||||||||||||||||
Equity securities |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||||||||
Investment funds |
( |
) |
( |
) |
|||||||||||||||||||||||||||
Funds withheld at interest – embedded derivative |
( |
) |
( |
) |
|||||||||||||||||||||||||||
Reinsurance recoverable |
|||||||||||||||||||||||||||||||
Total Level 3 assets |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
|||||||||||||||
Liabilities |
|||||||||||||||||||||||||||||||
Interest sensitive contract liabilities |
|||||||||||||||||||||||||||||||
Embedded derivative |
$ |
( |
) |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||
Universal life benefits |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||||||||
Future policy benefits |
|||||||||||||||||||||||||||||||
AmerUs Closed Block |
( |
) |
( |
) |
|||||||||||||||||||||||||||
ILICO Closed Block and life benefits |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||||||||
Derivative liabilities |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||||||||
Total Level 3 liabilities |
$ |
( |
) |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||||||||
1 Related to instruments held at end of period.
|
38
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three months ended March 31, 2019 |
|||||||||||||||||||||||||||||||
Total realized and unrealized gains (losses) |
|||||||||||||||||||||||||||||||
(In millions) |
Beginning balance |
Included in income |
Included in OCI |
Net purchases, issuances, sales and settlements |
Net transfers in (out) |
Ending balance |
Total gains (losses) included in earnings1
|
Total gains (losses) included in OCI1
|
|||||||||||||||||||||||
Assets |
|||||||||||||||||||||||||||||||
AFS securities |
|||||||||||||||||||||||||||||||
Corporate |
$ |
$ |
( |
) |
$ |
$ |
$ |
( |
) |
$ |
$ |
$ |
|||||||||||||||||||
CLO |
( |
) |
|||||||||||||||||||||||||||||
ABS |
( |
) |
|||||||||||||||||||||||||||||
CMBS |
( |
) |
( |
) |
|||||||||||||||||||||||||||
RMBS |
|||||||||||||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||
Corporate |
|||||||||||||||||||||||||||||||
CLO |
|||||||||||||||||||||||||||||||
ABS |
|||||||||||||||||||||||||||||||
RMBS |
( |
) |
( |
) |
|||||||||||||||||||||||||||
Equity securities |
|||||||||||||||||||||||||||||||
Mortgage loans |
|||||||||||||||||||||||||||||||
Investment funds |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||||||||
Funds withheld at interest – embedded derivative |
|||||||||||||||||||||||||||||||
Investments in related parties |
|||||||||||||||||||||||||||||||
AFS securities, ABS |
|||||||||||||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||
CLO |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||||||||
ABS |
( |
) |
( |
) |
|||||||||||||||||||||||||||
Equity securities |
|||||||||||||||||||||||||||||||
Investment funds |
( |
) |
|||||||||||||||||||||||||||||
Funds withheld at interest – embedded derivative |
( |
) |
|||||||||||||||||||||||||||||
Reinsurance recoverable |
|||||||||||||||||||||||||||||||
Total Level 3 assets |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
|||||||||||||||||||
Liabilities |
|||||||||||||||||||||||||||||||
Interest sensitive contract liabilities |
|||||||||||||||||||||||||||||||
Embedded derivative |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||||
Universal life benefits |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||||||||
Future policy benefits |
|||||||||||||||||||||||||||||||
AmerUs Closed Block |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||||||||
ILICO Closed Block and life benefits |
( |
) |
( |
) |
( |
) |
|||||||||||||||||||||||||
Derivative liabilities |
( |
) |
( |
) |
|||||||||||||||||||||||||||
Total Level 3 liabilities |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||||
1 Related to instruments held at end of period.
|
39
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following represents the gross components of purchases, issuances, sales and settlements, net, and net transfers in (out) shown above:
Three months ended March 31, 2020 |
|||||||||||||||||||||||||||||||
(In millions) |
Purchases |
Issuances |
Sales |
Settlements |
Net purchases, issuances, sales and settlements |
Transfers in |
Transfers out |
Net transfers in (out) |
|||||||||||||||||||||||
Assets |
|||||||||||||||||||||||||||||||
AFS securities |
|||||||||||||||||||||||||||||||
Corporate |
$ |
$ |
— |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||||
CLO |
— |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||||
ABS |
— |
( |
) |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||
CMBS |
— |
||||||||||||||||||||||||||||||
RMBS |
— |
— |
|||||||||||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||
Corporate |
— |
||||||||||||||||||||||||||||||
ABS |
— |
( |
) |
( |
) |
||||||||||||||||||||||||||
RMBS |
— |
( |
) |
||||||||||||||||||||||||||||
Mortgage loans |
— |
— |
— |
( |
) |
( |
) |
||||||||||||||||||||||||
Short-term investments |
— |
( |
) |
||||||||||||||||||||||||||||
Investments in related parties |
|||||||||||||||||||||||||||||||
AFS securities, ABS |
— |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||
CLO |
— |
( |
) |
||||||||||||||||||||||||||||
ABS |
— |
||||||||||||||||||||||||||||||
Equity securities |
— |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||||
Investment funds |
|||||||||||||||||||||||||||||||
Total Level 3 assets |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
$ |
( |
) |
$ |
|||||||||||||||||
Liabilities |
|||||||||||||||||||||||||||||||
Interest sensitive contract liabilities – embedded derivative |
$ |
$ |
( |
) |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
Total Level 3 liabilities |
$ |
$ |
( |
) |
$ |
$ |
$ |
$ |
$ |
$ |
40
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three months ended March 31, 2019 |
|||||||||||||||||||||||||||||||
(In millions) |
Purchases |
Issuances |
Sales |
Settlements |
Net purchases, issuances, sales and settlements |
Transfers in |
Transfers out |
Net transfers in (out) |
|||||||||||||||||||||||
Assets |
|||||||||||||||||||||||||||||||
AFS securities |
|||||||||||||||||||||||||||||||
Corporate |
$ |
$ |
— |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
||||||||||||||
CLO |
— |
( |
) |
( |
) |
||||||||||||||||||||||||||
ABS |
— |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||
CMBS |
— |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||
Corporate |
— |
||||||||||||||||||||||||||||||
CLO |
— |
||||||||||||||||||||||||||||||
ABS |
— |
||||||||||||||||||||||||||||||
RMBS |
— |
( |
) |
( |
) |
||||||||||||||||||||||||||
Investment funds |
— |
— |
— |
( |
) |
( |
) |
||||||||||||||||||||||||
Investments in related parties |
|||||||||||||||||||||||||||||||
AFS securities, ABS |
— |
( |
) |
||||||||||||||||||||||||||||
Trading securities, CLO |
— |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||
Equity securities |
— |
( |
) |
||||||||||||||||||||||||||||
Investment funds |
— |
— |
|||||||||||||||||||||||||||||
Total Level 3 assets |
$ |
$ |
— |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
||||||||||||||
Liabilities |
|||||||||||||||||||||||||||||||
Interest sensitive contract liabilities – embedded derivative |
$ |
$ |
( |
) |
$ |
$ |
$ |
( |
) |
$ |
$ |
$ |
|||||||||||||||||||
Total Level 3 liabilities |
$ |
$ |
( |
) |
$ |
$ |
$ |
( |
) |
$ |
$ |
$ |
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.
AFS and trading securities – For certain fixed maturity securities, internal models are used to calculate the fair value. We use a discounted cash flow approach. The discount rate is the significant unobservable input due to the determined credit spread being internally developed, illiquid, or as a result of other adjustments made to the base rate. The base rate represents a market comparable rate for securities with similar characteristics. 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. |
Nonperformance risk – For contracts we issue, we use the credit spread, relative to the U.S. Department of the Treasury (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. |
41
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following summarizes the unobservable inputs for AFS and trading securities and the embedded derivatives of fixed indexed annuities:
March 31, 2020 |
||||||||||||||||||||
(In millions, except for percentages) |
Fair value |
Valuation technique |
Unobservable inputs |
Minimum |
Maximum |
Weighted average |
Impact of an increase in the input on fair value |
|||||||||||||
AFS and trading securities |
$ |
Discounted cash flow |
Discount |
% |
% |
% |
1 |
Decrease |
||||||||||||
Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives |
$ |
Option budget method |
Nonperformance risk |
% |
% |
% |
2 |
Decrease |
||||||||||||
Option budget |
% |
% |
% |
3 |
Increase |
|||||||||||||||
Surrender rate |
% |
% |
% |
4 |
Decrease |
|||||||||||||||
December 31, 2019 |
||||||||||||||||||||
Fair value |
Valuation technique |
Unobservable inputs |
Minimum |
Maximum |
Weighted average |
Impact of an increase in the input on fair value |
||||||||||||||
AFS and trading securities |
$ |
Discounted cash flow |
Discount |
% |
% |
% |
1 |
Decrease |
||||||||||||
Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives |
$ |
Option budget method |
Nonperformance risk |
% |
% |
% |
2 |
Decrease |
||||||||||||
Option budget |
% |
% |
% |
3 |
Increase |
|||||||||||||||
Surrender rate |
% |
% |
% |
4 |
Decrease |
|||||||||||||||
1 The discount weighted average is calculated based on the relative fair values of the securities.
| ||||||||||||||||||||
2 The nonperformance risk weighted average is based on the projected excess benefits of reserves used in the calculation of the embedded derivative.
| ||||||||||||||||||||
3 The option budget weighted average is calculated based on the indexed account values.
| ||||||||||||||||||||
4 The surrender rate weighted average is calculated based on projected account values.
|
Fair Value of Financial Instruments Not Carried at Fair Value—The following represents our financial instruments not carried at fair value on the condensed consolidated balance sheets:
March 31, 2020 |
|||||||||||||||||||||||
(In millions) |
Carrying Value |
Fair Value |
NAV |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||||||
Financial assets |
|||||||||||||||||||||||
Mortgage loans |
$ |
$ |
$ |
— |
$ |
$ |
$ |
||||||||||||||||
Investment funds |
|||||||||||||||||||||||
Policy loans |
— |
||||||||||||||||||||||
Funds withheld at interest |
— |
||||||||||||||||||||||
Short-term investments |
— |
||||||||||||||||||||||
Other investments |
— |
||||||||||||||||||||||
Investments in related parties |
|||||||||||||||||||||||
Mortgage loans |
— |
||||||||||||||||||||||
Investment funds |
|||||||||||||||||||||||
Funds withheld at interest |
— |
||||||||||||||||||||||
Other investments |
— |
||||||||||||||||||||||
Total financial assets not carried at fair value |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||
Financial liabilities |
|||||||||||||||||||||||
Interest sensitive contract liabilities |
$ |
$ |
$ |
— |
$ |
$ |
$ |
||||||||||||||||
Short-term debt |
— |
||||||||||||||||||||||
Long-term debt |
— |
||||||||||||||||||||||
Securities to repurchase |
— |
||||||||||||||||||||||
Funds withheld liability |
— |
||||||||||||||||||||||
Total financial liabilities not carried at fair value |
$ |
$ |
$ |
— |
$ |
$ |
$ |
42
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
December 31, 2019 |
|||||||||||||||||||||||
(In millions) |
Carrying Value |
Fair Value |
NAV |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||||||
Financial assets |
|||||||||||||||||||||||
Mortgage loans |
$ |
$ |
$ |
— |
$ |
$ |
$ |
||||||||||||||||
Investment funds |
|||||||||||||||||||||||
Policy loans |
— |
||||||||||||||||||||||
Funds withheld at interest |
— |
||||||||||||||||||||||
Short-term investments |
— |
||||||||||||||||||||||
Other investments |
— |
||||||||||||||||||||||
Investments in related parties |
|||||||||||||||||||||||
Mortgage loans |
— |
||||||||||||||||||||||
Investment funds |
|||||||||||||||||||||||
Funds withheld at interest |
— |
||||||||||||||||||||||
Other investments |
— |
||||||||||||||||||||||
Total financial assets not carried at fair value |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||
Financial liabilities |
|||||||||||||||||||||||
Interest sensitive contract liabilities |
$ |
$ |
$ |
— |
$ |
$ |
$ |
||||||||||||||||
Short-term debt |
— |
||||||||||||||||||||||
Long-term debt |
— |
||||||||||||||||||||||
Securities to repurchase |
— |
||||||||||||||||||||||
Funds withheld liability |
— |
||||||||||||||||||||||
Total financial liabilities not carried at fair value |
$ |
$ |
$ |
— |
$ |
$ |
$ |
We estimate the fair value for financial instruments not carried at fair value using the same methods and assumptions as those we carry at fair value. The financial instruments presented above are reported at carrying value on the condensed consolidated balance sheets; however, in the case of policy loans, funds withheld at interest and liability, short-term investments, short-term debt, and securities to repurchase, the carrying amount approximates fair value.
Investment in related parties – Other investments – The fair value of related party other investments is determined using a discounted cash flow model using discount rates for similar investments.
Interest sensitive contract liabilities – The carrying and fair value of interest sensitive contract liabilities above includes fixed indexed and traditional fixed annuities without mortality or morbidity risks, funding agreements and payout annuities without life contingencies. The embedded derivatives within fixed indexed annuities without mortality or morbidity risks are excluded, as they are carried at fair value. The valuation of these investment contracts is based on discounted cash flow methodologies using significant unobservable inputs. The estimated fair value is determined using current market risk-free interest rates, adding a spread to reflect our nonperformance risk and subtracting a risk margin to reflect uncertainty inherent in the projected cash flows.
Long-term debt – We obtain the fair value of long-term debt from commercial pricing services. These are classified as Level 2. The pricing services incorporate a variety of market observable information in their valuation techniques including benchmark yields, trading activity, credit quality, issuer spreads, bids, offers and other reference data.
43
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
5. 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, 2019 |
$ |
$ |
$ |
$ |
|||||||||||
Adoption of accounting standard |
|||||||||||||||
Additions |
|||||||||||||||
Amortization |
( |
) |
( |
) |
|||||||||||
Impact of unrealized investment (gains) losses |
|||||||||||||||
Balance at March 31, 2020 |
$ |
$ |
$ |
$ |
(In millions) |
DAC |
DSI |
VOBA |
Total |
|||||||||||
Balance at December 31, 2018 |
$ |
$ |
$ |
$ |
|||||||||||
Additions |
|||||||||||||||
Amortization |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||
Impact of unrealized investment (gains) losses |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||
Balance at March 31, 2019 |
$ |
$ |
$ |
$ |
6. Debt
Short-term Borrowing—As of March 31, 2020, we had $400 million of short-term debt outstanding with the Federal Home Loan Bank (FHLB) through their variable rate short-term federal funds program. As of March 31, 2020, the borrowings had maturity dates ranging from May 4, 2020 to May 11, 2020 and a weighted average interest rate of 1.80 %, with interest due at maturity. In connection with short-term borrowings, the FHLB requires the borrower to purchase member stock and post sufficient collateral to secure the borrowing. See Note 10 – Commitments and Contingencies for further discussion regarding existing collateral posting with the FHLB.
Senior Notes—In the second quarter of 2020, AHL issued $500 million of senior unsecured notes due April 3, 2030. The senior notes have a 6.150 % coupon rate, payable semi-annually. The senior notes are callable, in whole or in part, at any time prior to January 3, 2030 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 second supplemental indenture, dated April 3, 2020) plus 50 basis points, and any accrued and unpaid interest. Thereafter, the notes are callable, in whole or in part, by AHL at a price equal to 100% of the principal and any accrued and unpaid interest.
7. Earnings Per Share
The following represents our basic and diluted earnings per share (EPS) calculations, which are calculated using unrounded amounts:
Three months ended March 31, 2020 |
|||||||||||||||||||||||
(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 loss available to Athene Holding Ltd. common shareholders – basic and diluted |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||||
Basic weighted average shares outstanding |
|||||||||||||||||||||||
Dilutive effect of stock compensation plans1
|
|||||||||||||||||||||||
Diluted weighted average shares outstanding |
|||||||||||||||||||||||
Earnings per share |
|||||||||||||||||||||||
Basic |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||||
Diluted |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||||
1 The dilutive effect of stock compensation plans is antidilutive as a result of the net loss available to Athene Holding Ltd. common shareholders for the three months ended March 31, 2020.
|
44
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three months ended March 31, 2019 |
|||||||||||||||||||||||
(In millions, except per share data) |
Class A |
Class B |
Class M-1 |
Class M-2 |
Class M-3 |
Class M-4 |
|||||||||||||||||
Net income available to Athene Holding Ltd. common shareholders – basic and diluted |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||
Basic weighted average shares outstanding |
|||||||||||||||||||||||
Dilutive effect of stock compensation plans |
|||||||||||||||||||||||
Diluted weighted average shares outstanding |
|||||||||||||||||||||||
Earnings per share |
|||||||||||||||||||||||
Basic |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||
Diluted |
$ |
$ |
$ |
$ |
$ |
$ |
During the first quarter of 2020, as a result of the closing of the share transaction discussed further in Note 9 – Related Parties, we converted outstanding Class B shares to Class A shares and Class M shares were converted to Class A shares and warrants. As a result, the EPS calculation for the first quarter of 2020 uses the weighted average shares for the quarter for all classes to allocate net income; however, for Class B and Class M shares, the weighted average shares outstanding represents only that period of time that the shares were outstanding. The warrants issued as part of the conversion of the Class M shares are evaluated for dilution within the dilutive effect of stock compensation plans.
We use the two-class method for allocating net income available to Athene Holding Ltd. common shareholders to each class of our common stock. 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 11.1 million and 34.8 million shares, restricted stock units, options and warrants as of March 31, 2020 and 2019, respectively.
8. Equity
Preferred Stock—We have two series of preferred stock: 6.35 % Fixed-to-Floating Rate Perpetual Non-Cumulative Preference Shares, Series A (Series A) and 5.625 % Fixed Rate Perpetual Non-Cumulative Preference Shares, Series B (Series B) as summarized below:
Series A |
Series B |
||||||
Authorized, issued and outstanding |
|||||||
Liquidation preference per share |
$ |
$ |
|||||
Dividends declared and paid per share during the period |
$ |
$ |
|||||
Aggregate dividends declared and paid during the period (in millions)
|
$ |
$ |
Preferred stock dividends are payable on a non-cumulative basis only when, as and if declared, quarterly in arrears on the 30th day of March, June, September and December of each year. Preferred stock ranks senior to our common stock with respect to dividends, to the extent declared, and in liquidation, to the extent of the liquidation preference.
Common Stock—During the first quarter of 2020, shareholders approved amendments to our bye-laws which eliminated our multi-class share structure at closing of the share transaction with Apollo. See Note 9 – Related Parties for further information on this transaction. On February 28, 2020, all Class B shares were converted to Class A shares on a one-to-one basis. Class M shares were converted to Class A shares representing 5% of the Class M value and warrants representing 95% of the Class M value. The warrants were issued with substantially the same terms, including the same economic terms, as the Class M shares.
Our bye-laws place certain restrictions on Class A shares such that a holder of Class A shares, except for shareholders permitted by our board of directors, which include members of the Apollo Group, as defined in our bye-laws, cannot control greater than 9.9 % of the total outstanding vote and if a holder of Class A shares were to control greater than 9.9 %, then a holder’s voting power is automatically reduced to 9.9 % and the other holders of Class A shares would vote the remainder on a prorated basis.
Share Repurchase Authorization
Our board of directors has approved authorizations of $1,567 million for the repurchase of our Class A shares under our repurchase program. We may repurchase shares in open market transactions, in privately negotiated transactions or otherwise. The size and timing of repurchases will depend on legal requirements, market and economic conditions and other factors, and are solely at our discretion. The program has no expiration date, but may be modified, suspended or terminated by the board at any time.
45
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following summarizes the activity on our share repurchase authorization:
Three months ended March 31, |
|||||||
(In millions) |
2020 |
2019 |
|||||
Beginning balance at January 1 |
$ |
$ |
|||||
Repurchases |
( |
) |
( |
) |
|||
Ending balance at March 31 |
$ |
$ |
The table below shows the changes in each class of shares issued and outstanding:
(In millions) |
Three months ended March 31, 2020 |
|
Class A |
||
Beginning balance |
||
Issued shares |
||
Forfeited shares |
( |
) |
Repurchased shares |
( |
) |
Converted from Class B shares |
||
Converted from Class M shares |
||
Ending balance |
194.3 |
|
Class B |
||
Beginning balance |
||
Converted to Class A shares |
( |
) |
Ending balance |
— |
|
Class M-1 |
||
Beginning balance |
||
Converted to Class A shares |
( |
) |
Converted to warrants |
( |
) |
Ending balance |
— |
|
Class M-2 |
||
Beginning balance |
||
Converted to Class A shares |
||
Converted to warrants |
( |
) |
Ending balance |
— |
|
Class M-3 |
||
Beginning balance |
||
Converted to Class A shares |
||
Converted to warrants |
( |
) |
Ending balance |
— |
|
Class M-4 |
||
Beginning balance |
||
Converted to Class A shares |
( |
) |
Converted to warrants |
( |
) |
Repurchased shares |
( |
) |
Ending balance |
— |
46
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Accumulated Other Comprehensive Income (Loss)—The following provides the details of AOCI and changes in AOCI:
(In millions) |
Unrealized investment gains (losses) on AFS securities without a credit allowance |
Unrealized investment gains (losses) on AFS securities with a credit allowance |
DAC, DSI, VOBA and future policy benefits adjustments on AFS securities |
Unrealized gains (losses) on hedging instruments |
Foreign currency translation and other adjustments |
Accumulated other comprehensive income (loss) |
|||||||||||||||||
Balance at December 31, 2019 |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
|||||||||||||
Adoption of accounting standards |
( |
) |
( |
) |
( |
) |
|||||||||||||||||
Other comprehensive income (loss) before reclassifications |
( |
) |
( |
) |
( |
) |
|||||||||||||||||
Less: Reclassification adjustments for gains (losses) realized in net income (loss)1
|
( |
) |
|||||||||||||||||||||
Less: Income tax expense (benefit) |
( |
) |
( |
) |
( |
) |
|||||||||||||||||
Less: Other comprehensive income (loss) attributable to NCI |
( |
) |
( |
) |
( |
) |
|||||||||||||||||
Balance at March 31, 2020 |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
$ |
$ |
( |
) |
|||||||||||
1 Recognized in investment related gains (losses) on the condensed consolidated statements of income (loss).
|
(In millions) |
Unrealized investment gains (losses) on AFS securities |
DAC, DSI, VOBA and future policy benefits adjustments on AFS securities |
Unrealized gains (losses) on hedging instruments |
Foreign currency translation and other adjustments |
Accumulated other comprehensive income (loss) |
||||||||||||||
Balance at December 31, 2018 |
$ |
( |
) |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
||||||||
Other comprehensive income (loss) before reclassifications |
( |
) |
( |
) |
|||||||||||||||
Less: Reclassification adjustments for gains (losses) realized in net income (loss)1
|
( |
) |
( |
) |
|||||||||||||||
Less: Income tax expense (benefit) |
( |
) |
( |
) |
|||||||||||||||
Balance at March 31, 2019 |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
||||||||||
1 Recognized in investment related gains (losses) on the condensed consolidated statements of income (loss).
|
9. Related Parties
Apollo
Current fee structure – Substantially all of our investments are managed by Apollo, which 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.
During the second quarter of 2019, we entered into the Seventh Amended and Restated Fee Agreement, dated as of June 10, 2019, between us and AGM’s subsidiary, Apollo Insurance Solutions Group LP (ISG) (Fee Agreement). Under the Fee Agreement, effective retroactive to January 1, 2019, we pay Apollo:
(1) |
a base management fee equal to the sum of (i) |
(2) |
with respect to each asset in an Account, subject to certain exceptions, that is managed by Apollo and that belongs to a specified asset class tier (Core, Core Plus, Yield, and High Alpha), a sub-allocation fee as follows, which will, in the case of assets acquired after January 1, 2019, be subject to a cap of 10% of the applicable asset’s gross book yield:
|
(i) |
47
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(ii) |
(iii) |
(iv) |
(v) |
The following represents assets based on the above sub-allocation structure:
(In millions, except percentages) |
March 31, 2020 |
Percent of Total |
December 31, 2019 |
Percent of Total |
|||||||||
Core |
$ |
% |
$ |
% |
|||||||||
Core Plus |
% |
% |
|||||||||||
Yield |
% |
% |
|||||||||||
High Alpha |
% |
% |
|||||||||||
Other |
% |
% |
|||||||||||
Total sub-allocation assets |
$ |
% |
$ |
% |
Additionally, the Fee Agreement provides for a possible payment by Apollo to us, or a possible payment by us to Apollo, equal to 0.025 % of the Incremental Value as of the end of each year, beginning on December 31, 2019, depending upon the percentage of our investments that consist of Core and Core Plus assets. If more than 60 % of our invested assets that are subject to the sub-allocation fees are invested in Core and Core Plus assets, we will receive a 0.025 % fee reduction on the Incremental Value. If less than 50 % of our invested assets that are subject to the sub-allocation fee are invested in Core and Core Plus assets, we will pay an additional fee of 0.025 % on Incremental Value.
During the three months ended March 31, 2020 and 2019, we incurred management fees, inclusive of the base and sub-allocation fees, of $128 million and $92 million, respectively. Management fees are included within net investment income on the condensed consolidated statements of income (loss). As of March 31, 2020 and December 31, 2019, management fees payable were $43 million and $42 million, respectively, and are included in other liabilities on the condensed consolidated balance sheets.
Investment management agreement (IMA) termination – Our bye-laws currently provide that we may not, and will cause our subsidiaries not to, terminate any IMA among us or any of our subsidiaries, on the one hand, and a member of the Apollo Group (as defined in our bye-laws), on the other hand, other than on June 4, 2023 or any two year anniversary of such date (each such date, an IMA Termination Election Date) and any termination on an IMA Termination Election Date requires (i) the approval of two-thirds of our Independent Directors (as defined in the bye-laws) and (ii) prior written notice to the applicable Apollo subsidiary of such termination at least 30 days, but not more than 90 days, prior to an IMA Termination Election Date. If our Independent Directors make such election to terminate and notice of such termination is delivered, the termination will be effective no earlier than the second anniversary of the applicable IMA Termination Election Date (IMA Termination Effective Date). Notwithstanding the foregoing, (A) except as set forth in clause (B) below, our board of directors may only elect to terminate an IMA on an IMA Termination Election Date if two-thirds of our Independent Directors determine, in their sole discretion and acting in good faith, that either (i) there has been unsatisfactory long-term performance materially detrimental to us by the applicable Apollo subsidiary or (ii) the fees being charged by the applicable Apollo subsidiary are unfair and excessive compared to a comparable asset manager (provided, that in either case such Independent Directors must deliver notice of any such determination to the applicable Apollo subsidiary and the applicable Apollo subsidiary will have until the applicable IMA Termination Effective Date to address such concerns, and provided, further, that in the case of such a determination that the fees being charged by the applicable Apollo subsidiary are unfair and excessive, the applicable Apollo subsidiary has the right to lower its fees to match the fees of such comparable asset manager) and (B) upon the determination by two-thirds of our Independent Directors, we or our subsidiaries may also terminate an IMA with the applicable Apollo subsidiary, on a date other than an IMA Termination Effective Date, as a result of either (i) a material violation of law relating to the applicable Apollo subsidiary’s advisory business, or (ii) the applicable Apollo subsidiary’s gross negligence, willful misconduct or reckless disregard of its obligations under the relevant agreement, in each case of this clause (B), that is materially detrimental to us, and in either case of this clause (B), subject to the delivery of written notice at least 30 days prior to such termination; provided, that in connection with an event described in clause (B)(i) or (B)(ii), the applicable Apollo subsidiary shall have the right to dispute such determination of the Independent Directors within 30 days after receiving notice from us of such determination, in which case the matter will be submitted to binding arbitration and such IMA shall continue to remain in effect during the period of the arbitration (the events described in the foregoing clauses (A) and (B) are referred to in more detail in our bye-laws as “AHL Cause”).
48
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Governance – We have a management investment committee, which includes members of our senior management and reports to the risk committee of our board of directors. The committee focuses on strategic decisions involving our investment portfolio, such as approving investment limits, new asset classes and our allocation strategy, reviewing large asset transactions, as well as monitoring our credit risk, and the management of our assets and liabilities.
A significant voting interest in the Company is held by shareholders who are members of the Apollo Group. Also, James Belardi, our Chief Executive Officer, is an employee of ISG and receives remuneration from acting as Chief Executive Officer of ISG. Mr. Belardi also owns a 5% profit interest in ISG (Interest). It is expected that the Interest will be revised such that Mr. Belardi will receive a lesser interest in the equity of ISG and also receive a specified percentage of other fee streams earned by Apollo, potentially comprised of or including the sub-allocation fees. Additionally, six of the fifteen 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 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 Opportunities, L.P. (A-A Mortgage) – We have an equity method investment of $508 million and $487 million as of March 31, 2020 and December 31, 2019, respectively, in A-A Mortgage, which has an investment in AmeriHome. We have a loan purchase agreement with AmeriHome. The agreement allows us to purchase residential mortgage loans which AmeriHome has purchased from correspondent sellers and pooled for sale in the secondary market. AmeriHome retains the servicing rights to the sold loans. We purchased $169 million and $0 million of residential mortgage loans under this agreement during the three months ended March 31, 2020 and 2019, respectively. Additionally, we hold ABS securities issued by AmeriHome affiliates of $164 million and $170 million as of March 31, 2020 and December 31, 2019, respectively, which are included in related party AFS securities on the condensed consolidated balances sheets. We also have commitments to make additional equity investments in A-A Mortgage of $169 million as of March 31, 2020.
MidCap – AAA Investment (Co Invest VII), L.P. (CoInvest VII) holds a significant investment in MidCap, which was $508 million and $547 million as of March 31, 2020 and December 31, 2019, respectively. CoInvest VII is included in related party investment funds on the condensed consolidated balance sheets and was reflected as a consolidated VIE in prior periods. We have also advanced amounts under a subordinated debt facility to Midcap and, as of March 31, 2020 and December 31, 2019, the principal balance was $345 million and, net of discounts and allowances, was $330 million and $339 million, respectively, which is included in other related party investments on the condensed consolidated balance sheets. Our total investment in MidCap, including amounts advanced under credit facilities, was $838 million and $886 million as of March 31, 2020 and December 31, 2019, respectively. Additionally, we hold ABS and CLO securities issued by MidCap affiliates of $524 million and $624 million as of March 31, 2020 and December 31, 2019, respectively, which are included in related party AFS securities on the condensed consolidated balance sheets.
Athora – We have a cooperation agreement with Athora, pursuant to which, among other things, (1) for a period of 30 days from the receipt of notice of a cession, we have the right of first refusal to reinsure (i) up to 50% of the liabilities ceded from Athora’s reinsurance subsidiaries to Athora Life Re Ltd. and (ii) up to 20% of the liabilities ceded from a third party to any of Athora’s insurance subsidiaries, subject to a limitation in the aggregate of 20% of Athora’s liabilities, (2) Athora agreed to cause its insurance subsidiaries to consider the purchase of certain funding agreements and/or other spread instruments issued by our insurance subsidiaries, subject to a limitation that the fair market value of such funding agreements purchased by any of Athora’s insurance subsidiaries may generally not exceed 3% of the fair market value of such subsidiary’s total assets, (3) we provide Athora with a right of first refusal to pursue acquisition and reinsurance transactions in Europe (other than the UK) and (4) Athora provides us and our subsidiaries with a right of first refusal to pursue acquisition and reinsurance transactions in North America and the UK. Notwithstanding the foregoing, pursuant to the cooperation agreement, Athora is only required to use its reasonable best efforts to cause its subsidiaries to adhere to the provisions set forth in the cooperation agreement and therefore Athora’s ability to cause its subsidiaries to act pursuant to the cooperation agreement may be limited by, among other things, legal prohibitions or the inability to obtain the approval of the board of directors or other applicable governing body of the applicable subsidiary, which approval is solely at the discretion of such governing body. As of March 31, 2020, we have not exercised our right of first refusal to reinsure liabilities ceded to Athora’s insurance or reinsurance subsidiaries.
Our investment in Athora, which is included in related party investment funds on the condensed consolidated balance sheets, was $130 million and $132 million as of March 31, 2020 and December 31, 2019, respectively. Additionally, as of March 31, 2020 and December 31, 2019, we had $110 million and $146 million, respectively, of funding agreements outstanding to Athora. During the first quarter of 2020, Athora called capital and we remitted $361 million to Athora. We did not receive shares from Athora until April 1, 2020; therefore, we recorded a receivable in other assets on the consolidated balance sheets as of March 31, 2020 for the capital funding. We also have commitments to make additional equity investments in Athora of $364 million as of March 31, 2020.
49
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Venerable – We have coinsurance and modco agreements with Venerable Insurance and Annuity Company (VIAC, formerly Voya Insurance and Annuity Company). VIAC is a related party due to our minority equity investment in its holding company’s parent, VA Capital Company LLC (VA Capital), which was $110 million and $99 million as of March 31, 2020 and December 31, 2019, respectively. The minority equity investment in VA Capital is included in related party investment funds on the condensed consolidated balance sheets and accounted for as an equity method investment. VA Capital is owned by a consortium of investors, led by affiliates of AGM, Crestview Partners and Reverence Capital Partners, and is the parent of Venerable, which is the parent of VIAC. Additionally, we have a 15-year term loan receivable from Venerable due in 2033, which is included in related party other investments on the condensed consolidated balance sheets. The loan is held at the principal balance less allowances and was $145 million and $148 million as of March 31, 2020 and December 31, 2019, respectively. While management views the overall transactions with Venerable as favorable to us, the stated interest rate of 6.257 % on the term loan to Venerable represents a below-market interest rate, and management considered such rate as part of its evaluation and pricing of the reinsurance transactions.
Strategic Partnership – On October 24, 2018, we entered into an agreement pursuant to which we may invest up to $2.5 billion over three years in funds managed by Apollo entities (Strategic Partnership). This arrangement is intended to permit us to invest across the Apollo alternatives platform into credit-oriented, strategic and other alternative investments in a manner and size that is consistent with our existing investment strategy. Fees for such investments payable by us to Apollo would be more favorable to us than market rates, and consistent with our existing alternative investments, investments made under the Strategic Partnership require approval of ISG and remain subject to our existing governance processes, including approval by our conflicts committee where applicable. As of March 31, 2020 and December 31, 2019, we had $162 million and $97 million, respectively, of investments under the Strategic Partnership and these investments are included in related party investment funds on the condensed consolidated balance sheets and were reflected as consolidated VIEs in prior periods.
PK AirFinance – During the fourth quarter of 2019, we and Apollo purchased PK AirFinance (PK), an aviation lending business, including PK’s in force loan portfolio (Aviation Loans), from the Aviation Services Unit of GE Capital (GE). The Aviation Loans are generally fully secured by aircraft leases and aircraft. In connection with such transaction, Apollo acquired the PK loan origination platform, including personnel and systems and, pursuant to certain agreements entered into between us, Apollo, and certain entities managed by Apollo (collectively, PK Transaction Agreements), the existing Aviation Loans were acquired and securitized by a newly formed SPV for which Apollo acts as ABS manager (ABS-SPV). The ABS-SPV issued tranches of senior notes and subordinated notes, which are secured by the Aviation Loans.
In connection with the acquisition of the existing Aviation Loans by the ABS-SPV (i) a tranche of senior notes was acquired by third-party investors and (ii) we purchased mezzanine tranches of the senior notes and the subordinated notes. As of March 31, 2020 and December 31, 2019, our investment in securitizations of loans originated by PK was $1,141 million and $1,282 million, respectively, and are included in related party AFS or trading securities on the condensed consolidated balance sheets.
In addition to the investment in the senior notes and subordinated notes, we also have a right to acquire, whether directly, through the ABS-SPV or through a similar vehicle, all Aviation Loans originated by PK (Forward Flow Loans). All servicing and administrative costs and expenses of Apollo (determined at cost, without mark-up) that are incurred in connection with the sourcing, origination, servicing and maintaining the Forward Flow Loans, net of any service fees and servicing and administrative cost and expense reimbursement amounts received directly from the ABS-SPV or other entities investing in the Forward Flow Loans are allocated to, and reimbursed by the ABS-SPV or us, as applicable, subject to an agreed-upon annual cap.
In addition to the payment of the expenses described in the preceding paragraph and the base management fee paid to Apollo on all assets managed by Apollo, we have paid or expect to pay the following fees to Apollo or certain service providers that are affiliates of, or are companies managed by, Apollo in connection with the PK Transaction Agreements:
(A) |
To Apollo, sub-allocation fees on the senior notes based on the rates applicable to Yield assets and sub-allocation fees on the subordinated notes based on the rates applicable to High Alpha assets. |
(B) |
To Redding Ridge Asset Management LLC, a company in which certain funds managed by Apollo have an interest, as consideration for assistance with the structuring, monitoring, support and maintenance of the securitization transactions, a one-time structuring fee, as well as ongoing support fees equal to 1.5 bps on the total capitalization amount and certain other fees, which may become due upon the occurrence of certain events; and |
(C) |
To Merx Aviation Servicing Limited, a company externally managed by Apollo Investment Management, L.P., with respect to certain diligence, technical support and enforcement, remarketing and restructuring services with respect to the existing Aviation Loans and the Forward Flow Loans, a one-time servicing fee, as well as certain special situations fees, which may become due upon the occurrence of certain events. |
Apollo/Athene Dedicated Investment Program (ADIP) – Our subsidiary, Athene Co-Invest Reinsurance Affiliate 1A Ltd. (together with its subsidiaries, ACRA) is partially owned by ADIP, which is managed by AGM. As of March 31, 2020, ADIP owned 67% of the equity interests, while we retained 100% of the voting power and 33% of the equity interests in ACRA. During the first quarter of 2020, we received capital of $240 million from and paid a dividend of $46 million to ADIP. On April 1, 2020, ALRe purchased 14,000 newly issued ACRA shares for $66 million, which resulted in ALRe holding 36.55% of the economic interests in ACRA. The remaining 63.45% of the economic interests in ACRA are held by ADIP.
50
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Apollo Share Exchange and Related Transactions – On February 28, 2020, we closed a strategic transaction with AGM and certain affiliates of AGM which collectively comprise the Apollo Operating Group (AOG), pursuant to which we sold 27,959,184 newly issued Class A common shares to the AOG for an investment in Apollo of 29,154,519 newly issued AOG units valued at $1.1 billion and we sold 7,575,758 newly issued Class A common shares to the AOG for $350 million. Pursuant to the underlying transaction agreements, among other things (1) AGM has the right to purchase additional Class A common shares until August 26, 2020 to the extent AOG and certain affiliates, employees and consultants of AGM do not beneficially own at least 35% of the issued and outstanding Class A common shares (inclusive of Class A common shares over which any such persons have a valid proxy), on a fully diluted basis, in a number to achieve such 35% ownership level at a price based upon a weighted average price during the 30 days prior to the exercise of the purchase right and (2) Apollo Management Holdings, L.P. (AMH) has the right to purchase up to that number of Class A common shares that would increase by 5 percentage points the percentage of the issued and outstanding Class A common shares beneficially owned by the AOG and certain affiliates, employees and consultants of AGM (inclusive of Class A common shares over which any such persons have a valid proxy), calculated on a fully diluted basis. In connection with the closing of the transaction, we made certain amendments to our bye-laws which, among other things, eliminated our current multi-class share structure.
Concurrently with our entry into the transaction agreements, AMH, James Belardi, our Chief Executive Officer, and William Wheeler, our President (each an “Other Shareholder”), entered into a voting agreement, pursuant to which each Other Shareholder irrevocably appointed AMH as its proxy and attorney-in-fact (Proxy) to vote all of such Other Shareholder’s Class A common shares at any meeting of our shareholders occurring following the closing date and in connection with any written consent of our shareholders following the closing date. The Proxy will be of no force and effect if Apollo and certain affiliates thereof cease to hold some minimum level of ownership not to exceed 7.5% of our Class A common shares.
AA Infrastructure Fund 1 LLC (AA Infrastructure) – We have an investment in preferred shares of AA Infrastructure, which is a fund managed by ISG. As of March 31, 2020 and December 31, 2019, we held $49 million and $58 million, respectively, of preferred shares, which are included in related party equity securities on the consolidated balance sheets and also held AA Infrastructure ABS securities of $284 million and $267 million, respectively, which are included in related party trading securities on the consolidated balance sheets.
10. Commitments and Contingencies
Contingent Commitments—We had commitments to make investments, primarily capital contributions to investment funds, inclusive of related party commitments discussed previously, of $4,939 million and $4,793 million as of March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019, we had $1,426 million and $1,226 million, respectively, of FHLB funding agreements outstanding. 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 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. As of March 31, 2020 and December 31, 2019, we had $4,325 million and $3,700 million, respectively, of FABN funding agreements outstanding. We had $5,375 million of remaining FABN capacity as of March 31, 2020.
Pledged Assets and Funds in Trust (Restricted Assets)—The total restricted assets included on the condensed consolidated balance sheets are as follows:
(In millions) |
March 31, 2020 |
December 31, 2019 |
|||||
AFS securities |
$ |
$ |
|||||
Trading securities |
|||||||
Equity securities |
|||||||
Mortgage loans |
|||||||
Investment funds |
|||||||
Derivative assets |
|||||||
Short-term investments |
|||||||
Other investments |
|||||||
Restricted cash |
|||||||
Total restricted assets |
$ |
$ |
51
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The restricted assets are primarily related to reinsurance trusts established in accordance with coinsurance agreements, and the FHLB funding agreements described above.
Letter of Credit—We have an undrawn letter of credit for $188 million as of March 31, 2020. This letter of credit was issued for our reinsurance program and expires by December 31, 2020.
Litigation, Claims and Assessments
Corporate-owned Life Insurance (COLI) Matter – In 2000 and 2001, two insurance companies, which were subsequently merged into Athene Annuity and Life Company (AAIA), purchased broad based variable COLI policies from American General Life Insurance Company (American General) that, as of March 31, 2020, had an asset value of $382 million, and is included in other assets on the condensed consolidated balance sheets. In January 2012, the COLI policy administrator delivered to AAIA a supplement to the existing COLI policies and advised that American General and ZC Resource Investment Trust (ZC Trust) had unilaterally implemented changes set forth in the supplement that, if effective, would: (1) potentially negatively impact the crediting rate for the policies and (2) change the exit and surrender protocols set forth in the policies. In March 2013, AAIA filed suit against American General, ZC Trust, and ZC Resource LLC in Chancery Court in Delaware, seeking, among other relief, a declaration that the changes set forth in the supplement were ineffectual and in breach of the parties’ agreement. The parties filed cross motions for judgment as a matter of law, and the court granted defendants’ motion and dismissed without prejudice on ripeness grounds. The issue that negatively impacts the crediting rate for one of the COLI policies has subsequently been triggered and, on April 3, 2018, we filed suit against the same defendants in Chancery Court in Delaware seeking substantially similar relief. Defendants moved to dismiss and the court heard oral arguments on February 13, 2019. The court issued an opinion on July 31, 2019 that did not address the merits, but found that the Chancery Court did not have jurisdiction over our claims and directed us to either amend our complaint or transfer the matter to Delaware Superior Court. The matter has been transferred to the Delaware Superior Court. Defendants renewed their motion to dismiss and the Superior Court heard oral arguments on December 18, 2019. The Superior Court took the matter under advisement and we expect an opinion in the next few months. 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 $202 million as of March 31, 2020.
Regulatory Matters – Beginning in 2015, our U.S. insurance subsidiaries have experienced increased complaints related to the conversion and administration of the block of life insurance business acquired in connection with our acquisition of Aviva USA and reinsured to affiliates of Global Atlantic. The life insurance policies included in this block have been and are currently being administered by AllianceOne Inc. (AllianceOne), a subsidiary of DXC Technology Company, which was retained by such Global Atlantic affiliates to provide third party administration services on such policies. AllianceOne also administers a small block of annuity policies that were on Aviva USA’s legacy policy administration systems that were also converted in connection with the acquisition of Aviva USA and have experienced some similar service and administration issues, but on a reduced scale.
As a result of the difficulties experienced with respect to the administration of such policies, we have received notifications from several state regulators, including but not limited to New York State Department of Financial Services (NYSDFS), the California Department of Insurance (CDI) and the Texas Department of Insurance, indicating, in each case, that the respective regulator planned to undertake a market conduct examinations 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 the life and annuity policies, including the administration of such blocks by AllianceOne. We have entered into consent orders with several states, including the NYSDFS, to resolve underlying matters in those states. All fines and costs, including those associated with remediation plans, paid in connection with the consent orders are subject to indemnification by Global Atlantic or affiliates of Global Atlantic. Global Atlantic is currently in negotiation with the CDI to resolve the pending joint action related to the converted life insurance policies.
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.
On January 23, 2019, we received a letter from the NYSDFS, with respect to a pension risk transfer (PRT) transaction, which expressed concerns with our interpretation and reliance upon certain exemptions from licensing in New York in connection with certain activities performed by employees in our PRT channel, including specific activities performed within New York. On April 13, 2020, we entered into a consent order with the NYSDFS to resolve this matter. Pursuant to the consent order, the NYSDFS imposed a fine of $45 million, which was accrued in other liabilities on the consolidated balance sheets as of December 31, 2019.
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
52
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
damages. Athene amended its writ on October 16, 2018. The trial court denied two separate motions to dismiss made by defendant Caldera on June 28, 2018 and by the former officer and former director defendants on January 14, 2019. On September 20, 2019, the Bermuda Court of Appeal affirmed both trial court rulings and dismissed the defendants’ appeal. Defendants have not further pursued an appeal of this decision to the Judicial Committee of the Privy Council, the court of final appeal for matters litigated in Bermuda. On March 17, 2020, we filed an application for leave to amend the complaint to more broadly assert defendants’ breaches of duties.
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 has moved to dismiss the complaint. On January 21, 2019, plaintiffs filed an amended complaint, which revised certain allegations about jurisdiction, venue and the merits of the plaintiffs’ claims. We have renewed our motion to dismiss and, on December 20, 2019, the court granted our motion to dismiss. Plaintiffs have filed an appeal. 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.
11. 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 U.S. 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 group annuities, are included in our Retirement Services segment.
Corporate and Other—Corporate and Other includes certain other operations related to our corporate activities such as corporate allocated expenses, merger and acquisition costs, debt costs, preferred stock dividends, certain integration and restructuring costs, certain stock-based compensation and intersegment eliminations. In addition, we also hold capital in excess of the level of capital we hold in Retirement Services to support our operating strategy.
Financial Measures—Segment adjusted operating income available to common shareholders 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 available to common shareholders and excludes market volatility and adjustments for other non-operating activity. Our adjusted operating revenue equals our total revenue, adjusted to eliminate the impact of the following non-operating adjustments:
• |
Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets; |
• |
Investment gains (losses), net of offsets; and |
• |
VIE expenses, noncontrolling interests and other adjustments to revenues. |
The table below reconciles segment adjusted operating revenues to total revenues presented on the condensed consolidated statements of income (loss):
Three months ended March 31, |
|||||||
(In millions) |
2020 |
2019 |
|||||
Retirement Services |
$ |
$ |
|||||
Corporate and Other |
( |
) |
|||||
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, noncontrolling interest and other adjustments to revenues |
( |
) |
|||||
Total revenues |
$ |
( |
) |
$ |
53
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Adjusted operating income available to common shareholders is an internal measure used to evaluate our financial performance excluding market volatility and expenses related to integration, restructuring, stock compensation and certain other expenses. Our adjusted operating income available to common shareholders equals net income available to Athene Holding Ltd. common shareholders adjusted to eliminate the impact of the following non-operating adjustments:
• |
Investment gains (losses), net of offsets; |
• |
Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets; |
• |
Integration, restructuring and other non-operating expenses; |
• |
Stock-based compensation, excluding the long-term incentive plan (LTIP); and |
• |
Income tax (expense) benefit – non-operating. |
The table below reconciles segment adjusted operating income available to common shareholders to net income available to Athene Holding Ltd. common shareholders presented on the condensed consolidated statements of income (loss):
Three months ended March 31, |
|||||||
(In millions) |
2020 |
2019 |
|||||
Retirement Services |
$ |
$ |
|||||
Corporate and Other |
( |
) |
|||||
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 LTIP |
( |
) |
( |
) |
|||
Income tax (expense) benefit – non-operating |
( |
) |
|||||
Net income (loss) available to Athene Holding Ltd. common shareholders |
$ |
( |
) |
$ |
The following represents total assets by segment:
(In millions) |
March 31, 2020 |
December 31, 2019 |
|||||
Retirement Services |
$ |
$ |
|||||
Corporate and Other |
|||||||
Total assets |
$ |
$ |
54
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
55
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.
We have established a significant base of earnings and, as of March 31, 2020, have an expected annual net investment spread for our Retirement Services segment, which measures our investment performance less the total cost of our liabilities, of 1–2% over the 9.3 year weighted-average life of our reserve liabilities. The weighted-average life includes deferred annuities, PRT group annuities, funding agreements, payout annuities and other products.
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.
Our consolidated annualized ROE for the three months ended March 31, 2020 and the year ended December 31, 2019 was (36.5)% and 19.7%, respectively, and our consolidated annualized adjusted operating ROE was (4.4)% and 14.1%, respectively. For the three months ended March 31, 2020 and the year ended December 31, 2019, in our Retirement Services segment, we generated an annualized net investment spread of 1.03% and 1.50%, respectively, and an annualized adjusted operating ROE of 10.6% and 17.3%, respectively. Our Retirement Services segment generated an annualized investment margin on deferred annuities of 2.13% and 2.46% for the three months ended March 31, 2020 and the year ended December 31, 2019, respectively. As of March 31, 2020, our deferred annuities had a weighted-average life of 8.7 years and made up a significant portion of our reserve liabilities.
The following table presents the deposits generated from our organic and inorganic channels:
Three months ended March 31, |
|||||||
(In millions) |
2020 |
2019 |
|||||
Retail sales |
$ |
1,246 |
$ |
1,816 |
|||
Flow reinsurance |
861 |
1,020 |
|||||
Funding agreements |
823 |
— |
|||||
Pension risk transfer |
1,017 |
1,923 |
|||||
Net deposits |
$ |
3,947 |
$ |
4,759 |
Our organic channels, including retail, flow reinsurance and institutional products, provided deposits of $3.9 billion and $4.8 billion in the three months ended March 31, 2020 and 2019, 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 $2.7 billion and $2.8 billion for the three months ended March 31, 2020 and 2019, respectively. We believe that our credit profile, our current product offerings and product design capabilities as well as our growing reputation as both a seasoned funding agreement issuer a