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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Washington, D.C. 20549
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FORM 10-Q
 
 
 
 
 
 
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-37963
athenelogoa31.jpg
ATHENE HOLDING LTD.
 
 
 
 
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bermuda
 
 
 
 
 
98-0630022
 
 
(State or other jurisdiction of
 
 
 
 
 
(I.R.S. Employer
 
 
incorporation or organization)
 
 
 
 
 
Identification Number)
 
96 Pitts Bay Road
Pembroke, HM 08, Bermuda
(441) 279-8400
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Class A common shares, par value $0.001 per share
 
ATH
 
New York Stock Exchange
 
 
 
 
 
Depositary Shares, each representing a 1/1,000th interest in a
 
 
 
 
6.35% Fixed-to-Floating Rate Perpetual Non-Cumulative Preference Share, Series A
 
ATHPrA
 
New York Stock Exchange
 
 
 
 
 
Depositary Shares, each representing a 1/1,000th interest in a
 
 
 
 
5.625% Fixed Rate Perpetual Non-Cumulative Preference Share, Series B
 
ATHPrB
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of April 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.

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.
AAA Investor
 
AAA Guarantor – Athene, L.P.
AAIA
 
Athene Annuity and Life Company
AARe
 
Athene Annuity Re Ltd., a Bermuda reinsurance subsidiary
ACRA
 
Athene Co-Invest Reinsurance Affiliate 1A Ltd., together with its subsidiaries
ADIP
 
Apollo/Athene Dedicated Investment Program
AGM
 
Apollo Global Management, Inc.
AHL
 
Athene Holding Ltd.
ALRe
 
Athene Life Re Ltd., a Bermuda reinsurance subsidiary
ALReI
 
Athene Life Re International Ltd., a Bermuda reinsurance subsidiary
AmeriHome
 
AmeriHome Mortgage Company, LLC
AOG
 
Apollo Operating Group
Apollo
 
Apollo Global Management, Inc., together with its subsidiaries
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)
Athene USA
 
Athene USA Corporation
Athora
 
Athora Holding Ltd.
BMA
 
Bermuda Monetary Authority
CoInvest VI
 
AAA Investments (Co-Invest VI), L.P.
CoInvest VII
 
AAA Investments (Co-Invest VII), L.P.
ISG
 
Apollo Insurance Solutions Group LP, formerly known as Athene Asset Management LLC
LIMRA
 
Life Insurance and Market Research Association
MidCap
 
MidCap FinCo Designated Activity Company
NAIC
 
National Association of Insurance Commissioners
NYSDFS
 
New York State Department of Financial Services
RLI
 
ReliaStar Life Insurance Company
Treasury
 
United States Department of the Treasury
Voya
 
Voya Financial, Inc.
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
BSCR
 
Bermuda Solvency Capital Requirement
CAL
 
Company action level risk-based capital as defined by the model created by the National Association of Insurance Commissioners
CLO
 
Collateralized loan obligation
CMBS
 
Commercial mortgage-backed securities
CML
 
Commercial mortgage loans
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
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
GAAP
 
Accounting principles generally accepted in the United States of America
GLWB
 
Guaranteed lifetime withdrawal benefit
GMDB
 
Guaranteed minimum death benefit
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
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


ATHENE HOLDING LTD.
Condensed Consolidated Balance Sheets (Unaudited)


(In millions)
March 31, 2020
 
December 31, 2019
Assets
 
 
 
Investments
 
 
 
Available-for-sale securities, at fair value (amortized cost: 2020 – $67,576 and 2019 – $67,479; allowance for credit losses: 2020 – $78)
$
65,671

 
$
71,374

Trading securities, at fair value (consolidated variable interest entities: 2020 – $14 and 2019 – $16)
1,979

 
2,070

Equity securities, at fair value
206

 
247

Mortgage loans (allowance for credit losses: 2020 – $394 and 2019 – $11; portion at fair value: 2020 – $26 and 2019 – $27)
14,395

 
14,306

Investment funds (portion at fair value: 2020 – $157 and 2019 – $154; consolidated variable interest entities: 2020 – $20 and 2019 – $19)
740

 
750

Policy loans
403

 
417

Funds withheld at interest (portion at fair value: 2020 – $(374) and 2019 – $801)
13,716

 
15,181

Derivative assets
1,610

 
2,888

Short-term investments (portion at fair value: 2020 – $393 and 2019 – $406)
583

 
596

Other investments (portion at fair value: 2020 – $98 and 2019 – $93)
172

 
158

Total investments
99,475

 
107,987

Cash and cash equivalents (consolidated variable interest entities: 2020 – $0 and 2019 – $3)
5,419

 
4,240

Restricted cash
564

 
402

Investments in related parties
 
 
 
Available-for-sale securities, at fair value (amortized cost: 2020 – $4,004 and 2019 – $3,783)
3,546

 
3,804

Trading securities, at fair value
718

 
785

Equity securities, at fair value (consolidated variable interest entities: 2020 – $0 and 2019 – $6)
49

 
64

Mortgage loans (allowance for credit losses: 2020 – $30 and 2019 – $0)
623

 
653

Investment funds (portion at fair value: 2020 – $1,097 and 2019 – $819; consolidated variable interest entities: 2020 – $0 and 2019 – $664)
4,631

 
3,550

Funds withheld at interest (portion at fair value: 2020 – $(15) and 2019 – $594)
12,452

 
13,220

Other investments (allowance for credit losses: 2020 – $12)
475

 
487

Accrued investment income (related party: 2020 – $43 and 2019 – $27)
802

 
807

Reinsurance recoverable (portion at fair value: 2020 – $2,115 and 2019 – $1,821)
5,087

 
4,863

Deferred acquisition costs, deferred sales inducements and value of business acquired
6,392

 
5,008

Other assets (related party: 2020 – $361 and 2019 – $0; consolidated variable interest entities: 2020 – $19 and 2019 – $20)
1,946

 
1,005

Total assets
$
142,179

 
$
146,875

(Continued)
See accompanying notes to the unaudited condensed consolidated financial statements

8


ATHENE HOLDING LTD.
Condensed Consolidated Balance Sheets (Unaudited)


(In millions, except per share data)
March 31, 2020
 
December 31, 2019
Liabilities and Equity
 
 
 
Liabilities
 
 
 
Interest sensitive contract liabilities (related party: 2020 – $14,706 and 2019 – $15,285; portion at fair value: 2020 – $10,411 and 2019 – $11,992)
$
101,911

 
$
102,745

Future policy benefits (related party: 2020 – $1,313 and 2019 – $1,302; portion at fair value: 2020 – $2,259 and 2019 – $2,301)
23,741

 
23,330

Other policy claims and benefits (related party: 2020 – $18 and 2019 – $13)
145

 
138

Dividends payable to policyholders
112

 
113

Short-term debt
400

 
475

Long-term debt
986

 
992

Derivative liabilities
222

 
97

Payables for collateral on derivatives and securities to repurchase
2,883

 
3,255

Funds withheld liability (portion at fair value: 2020 – $24 and 2019 – $31)
396

 
408

Other liabilities (related party: 2020 – $61 and 2019 – $79)
853

 
1,181

Total liabilities
131,649

 
132,734

Commitments and Contingencies (Note 10)
 
 
 
Equity
 
 
 
Preferred stock
 
 
 
Series A – par value $1 per share; $863 aggregate liquidation preference; authorized, issued and outstanding: 2020 and 2019 – 0.0 shares

 

Series B – par value $1 per share; $345 aggregate liquidation preference; authorized, issued and outstanding: 2020 and 2019 – 0.0 shares

 

Common stock
 
 
 
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

 

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

 

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

 

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

 

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

 

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

 

Additional paid-in capital
5,501

 
4,171

Retained earnings
5,613

 
6,939

Accumulated other comprehensive income (loss) (related party: 2020 – $(457) and 2019 – $17)
(1,174
)
 
2,281

Total Athene Holding Ltd. shareholders’ equity
9,940

 
13,391

Noncontrolling interests
590

 
750

Total equity
10,530

 
14,141

Total liabilities and equity
$
142,179

 
$
146,875

(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,
(In millions, except per share data)
2020
 
2019
Revenues
 
 
 
Premiums (related party: 2020 – $69 and 2019 – $66)
$
1,140

 
$
2,000

Product charges (related party: 2020 – $16 and 2019 – $14)
140

 
125

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)
745

 
1,082

Investment related gains (losses) (related party: 2020 – $(631) and 2019 – $321; and consolidated variable interest entities: 2020 – $1 and 2019 – $5)
(3,572
)
 
1,776

Other revenues
(2
)
 
12

Total revenues
(1,549
)
 
4,995

Benefits and expenses
 
 
 
Interest sensitive contract benefits (related party: 2020 – $(97) and 2019 – $183)
(1,319
)
 
1,516

Amortization of deferred sales inducements
10

 
5

Future policy and other policy benefits (related party: 2020 – $50 and 2019 – $106)
1,356

 
2,329

Amortization of deferred acquisition costs and value of business acquired
(413
)
 
231

Dividends to policyholders
11

 
9

Policy and other operating expenses (related party: 2020 – $16 and 2019 – $8)
188

 
165

Total benefits and expenses
(167
)
 
4,255

Income (loss) before income taxes
(1,382
)
 
740

Income tax expense (benefit)
(166
)
 
32

Net income (loss)
(1,216
)
 
708

Less: Net loss attributable to noncontrolling interests
(169
)
 

Net income (loss) attributable to Athene Holding Ltd. shareholders
(1,047
)
 
708

Less: Preferred stock dividends
18

 

Net income (loss) available to Athene Holding Ltd. common shareholders
$
(1,065
)
 
$
708

 
 
 
 
Earnings per share
 
 
 
Basic – Class A
$
(5.81
)
 
$
3.65

Basic – Classes B, M-1, M-2, M-3 and M-4
(3.87
)
 
3.65

Diluted – Class A
(5.81
)
 
3.64

Diluted – Class B
(3.87
)
 
3.65

Diluted – Class M-1
(3.87
)
 
3.65

Diluted – Class M-2
(3.87
)
 
3.65

Diluted – Class M-3
(3.87
)
 
3.65

Diluted – Class M-4
(3.87
)
 
3.15


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)
$
(1,216
)
 
$
708

Other comprehensive income (loss), before tax
 
 
 
Unrealized investment gains (losses) on available-for-sale securities, net of offsets
(4,839
)
 
1,477

Unrealized gains (losses) on hedging instruments
401

 
(8
)
Foreign currency translation and other adjustments
9

 

Other comprehensive income (loss), before tax
(4,429
)
 
1,469

Income tax expense (benefit) related to other comprehensive income (loss)
(797
)
 
291

Other comprehensive income (loss)
(3,632
)
 
1,178

Comprehensive income (loss)
(4,848
)
 
1,886

Less: Comprehensive loss attributable to noncontrolling interests
(352
)
 

Comprehensive income (loss) attributable to Athene Holding Ltd. shareholders
$
(4,496
)
 
$
1,886


See accompanying notes to the unaudited condensed consolidated financial statements


11


ATHENE HOLDING LTD.
Condensed Consolidated Statements of Equity (Unaudited)


 
Three months ended
(In millions)
Preferred stock
 
Common stock
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive income (loss)
 
Total Athene Holding Ltd. shareholders’ equity
 
Noncontrolling interests
 
Total shareholders’ equity
Balance at December 31, 2018
$

 
$

 
$
3,462

 
$
5,286

 
$
(472
)
 
$
8,276

 
$

 
$
8,276

Net income

 

 

 
708

 

 
708

 

 
708

Other comprehensive income

 

 

 

 
1,178

 
1,178

 

 
1,178

Issuance of common shares, net of expenses

 

 
1

 

 

 
1

 

 
1

Stock-based compensation

 

 
5

 

 

 
5

 

 
5

Retirement or repurchase of shares

 

 
(20
)
 
(31
)
 

 
(51
)
 

 
(51
)
Balance at March 31, 2019
$

 
$

 
$
3,448

 
$
5,963

 
$
706

 
$
10,117

 
$

 
$
10,117

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2019
$

 
$

 
$
4,171

 
$
6,939

 
$
2,281

 
$
13,391

 
$
750

 
$
14,141

Adoption of accounting standard

 

 

 
(117
)
 
(6
)
 
(123
)
 
(2
)
 
(125
)
Net loss

 

 

 
(1,047
)
 

 
(1,047
)
 
(169
)
 
(1,216
)
Other comprehensive loss

 

 

 

 
(3,449
)
 
(3,449
)
 
(183
)
 
(3,632
)
Issuance of common shares, net of expenses

 

 
1,509

 

 

 
1,509

 

 
1,509

Stock-based compensation

 

 
5

 

 

 
5

 

 
5

Retirement or repurchase of shares

 

 
(184
)
 
(144
)
 


 
(328
)
 


 
(328
)
Preferred stock dividends

 

 

 
(18
)
 

 
(18
)
 

 
(18
)
Contributions from noncontrolling interests

 

 

 

 

 

 
240

 
240

Distributions to noncontrolling interests

 

 

 

 

 

 
(46
)
 
(46
)
Balance at March 31, 2020
$

 
$

 
$
5,501

 
$
5,613

 
$
(1,174
)
 
$
9,940

 
$
590

 
$
10,530


See accompanying notes to the unaudited condensed consolidated financial statements


12


ATHENE HOLDING LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)


 
Three months ended March 31,
(In millions)
2020
 
2019
Cash flows from operating activities
 
 
 
Net income (loss)
$
(1,216
)
 
$
708

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Amortization of deferred acquisition costs and value of business acquired
(413
)
 
231

Amortization of deferred sales inducements
10

 
5

Accretion of net investment premiums, discounts and other
(62
)
 
(33
)
Net investment (income) loss (related party: 2020 – $362 and 2019 – $18)
343

 
25

Net recognized (gains) losses on investments and derivatives (related party: 2020 – $158 and 2019 – $(5); consolidated variable interest entities: 2020 – $0 and 2019 – $(6))
2,144

 
(950
)
Policy acquisition costs deferred
(112
)
 
(173
)
Changes in operating assets and liabilities:
 
 
 
Accrued investment income (related party: 2020 – $(16) and 2019 – $3)
5

 
(69
)
Interest sensitive contract liabilities (related party: 2020 – $(81) and 2019 – $167)
(1,282
)
 
1,403

Future policy benefits, other policy claims and benefits, dividends payable to policyholders and reinsurance recoverable (related party: 2020 – $59 and 2019 – $95)
186

 
653

Funds withheld assets and liabilities (related party: 2020 – $422 and 2019 – $(500))
1,426

 
(1,011
)
Other assets and liabilities
(258
)
 
220

Net cash provided by operating activities
771

 
1,009

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)
4,541

 
2,231

Trading securities (related party: 2020 – $17 and 2019 – $1; consolidated variable interest entities: 2020 – $0 and 2019 – $1)
48

 
32

Equity securities (related party: 2020 – $2 and 2019 – $50; consolidated variable interest entities: 2020 – $0 and 2019 – $50)
2

 
60

Mortgage loans
898

 
354

Investment funds (related party: 2020 – $65 and 2019 – $87; consolidated variable interest entities: 2020 – $0 and 2019 – $2)
111

 
133

Derivative instruments and other invested assets
475

 
256

Short-term investments
139

 
104

Purchases of:
 
 
 
Available-for-sale securities (related party: 2020 – $(425) and 2019 – $(280))
(4,226
)
 
(4,470
)
Trading securities (related party: 2020 – $(77) and 2019 – $(3))
(77
)
 
(284
)
Equity securities (related party: 2020 – $(3) and 2019 – $(177))
(3
)
 
(205
)
Mortgage loans
(1,365
)
 
(1,049
)
Investment funds (related party: 2020 – $(358) and 2019 – $(152))
(375
)
 
(185
)
Derivative instruments and other invested assets
(305
)
 
(287
)
Short-term investments
(125
)
 
(67
)
Deconsolidation of previously consolidated variable interest entities
(3
)
 

Other investing activities, net
(113
)
 
601

Net cash used in investing activities
(378
)
 
(2,776
)
 
 
 
(Continued)

See accompanying notes to the unaudited condensed consolidated financial statements
 
 
 

13


ATHENE HOLDING LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)


 
Three months ended March 31,
(In millions)
2020
 
2019
Cash flows from financing activities
 
 
 
Issuance of common stock
$
350

 
$

Repayment of short-term debt
(75
)
 

Deposits on investment-type policies and contracts (related party: 2020 – $18 and 2019 – $101)
2,838

 
2,793

Withdrawals on investment-type policies and contracts (related party: 2020 – $(135) and 2019 – $(106))
(1,633
)
 
(1,638
)
Payments for coinsurance agreements on investment-type contracts, net
(6
)
 
(25
)
Capital contributions from noncontrolling interests
240

 

Capital distributions to noncontrolling interests
(46
)
 

Net change in cash collateral posted for derivative transactions and securities to repurchase
(372
)
 
812

Preferred stock dividends
(18
)
 

Repurchase of common stock
(328
)
 
(51
)
Other financing activities, net
20

 
(9
)
Net cash provided by financing activities
970

 
1,882

Effect of exchange rate changes on cash and cash equivalents
(22
)
 

Net increase in cash and cash equivalents
1,341

 
115

Cash and cash equivalents at beginning of year1
4,642

 
3,405

Cash and cash equivalents at end of period1
$
5,983

 
$
3,520

 
 
 
 
Supplementary information
 
 
 
Non-cash transactions
 
 
 
Deposits on investment-type policies and contracts through reinsurance agreements (related party: 2020 – $72 and 2019 – $45)
$
131

 
$
208

Withdrawals on investment-type policies and contracts through reinsurance agreements (related party: 2020 – $418 and 2019 – $429)
923

 
888

Investments received from settlements on reinsurance agreements

 
12

Investments received from pension risk transfer premiums
627

 
1,363

Related party investments received in exchange for the issuance of Class A common shares
1,147

 

 
 
 
 
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.

The condensed consolidated balance sheet as of December 31, 2019 has been derived from the audited financial statements, but does not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. The preparation of financial statements requires the use of management estimates. Our estimates may vary as more information about the extent to which COVID-19 and the resulting impact on economic conditions and the financial markets become known. Actual results may differ from estimates used in preparing the condensed consolidated financial statements.

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 SecuritiesOur 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
$
37

 
$

 
$
3

 
$

 
$
40

U.S. state, municipal and political subdivisions
815

 

 
102

 
(8
)
 
909

Foreign governments
278

 

 
14

 
(1
)
 
291

Corporate
44,315

 
(15
)
 
2,138

 
(1,970
)
 
44,468

CLO
8,057

 

 
4

 
(1,420
)
 
6,641

ABS
4,970

 
(5
)
 
32

 
(434
)
 
4,563

CMBS
2,431

 
(4
)
 
65

 
(201
)
 
2,291

RMBS
6,673

 
(54
)
 
116

 
(267
)
 
6,468

Total AFS securities
67,576

 
(78
)
 
2,474

 
(4,301
)
 
65,671

AFS securities – related party
 
 
 
 
 
 
 
 
 
Corporate
18

 

 
1

 

 
19

CLO
1,226

 

 

 
(186
)
 
1,040

ABS
2,760

 

 
1

 
(274
)
 
2,487

Total AFS securities – related party
4,004

 

 
2

 
(460
)
 
3,546

Total AFS securities including related party
$
71,580

 
$
(78
)
 
$
2,476

 
$
(4,761
)
 
$
69,217




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
$
35

 
$
1

 
$

 
$
36

 
$

U.S. state, municipal and political subdivisions
1,322

 
220

 
(1
)
 
1,541

 

Foreign governments
298

 
29

 

 
327

 

Corporate
44,106

 
3,332

 
(210
)
 
47,228

 
1

CLO
7,524

 
21

 
(196
)
 
7,349

 

ABS
5,018

 
124

 
(24
)
 
5,118

 
4

CMBS
2,304

 
104

 
(8
)
 
2,400

 
1

RMBS
6,872

 
513

 
(10
)
 
7,375

 
19

Total AFS securities
67,479


4,344


(449
)

71,374


25

AFS securities – related party
 
 
 
 
 
 
 
 
 
Corporate
18

 
1

 

 
19

 

CLO
951

 
3

 
(18
)
 
936

 

ABS
2,814

 
37

 
(2
)
 
2,849

 

Total AFS securities – related party
3,783

 
41

 
(20
)
 
3,804

 

Total AFS securities including related party
$
71,262

 
$
4,385

 
$
(469
)
 
$
75,178

 
$
25



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
$
1,070

 
$
1,064

Due after one year through five years
9,168

 
9,050

Due after five years through ten years
11,040

 
10,823

Due after ten years
24,167

 
24,771

CLO, ABS, CMBS and RMBS
22,131

 
19,963

Total AFS securities
67,576

 
65,671

AFS securities – related party
 
 
 
Due after one year through five years
18

 
19

CLO and ABS
3,986

 
3,527

Total AFS securities – related party
4,004

 
3,546

Total AFS securities including related party
$
71,580

 
$
69,217



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 SecuritiesThe 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
$
157

 
$
(7
)
 
$
10

 
$
(1
)
 
$
167

 
$
(8
)
Foreign governments
43

 
(1
)
 

 

 
43

 
(1
)
Corporate
15,956

 
(1,842
)
 
335

 
(127
)
 
16,291

 
(1,969
)
CLO
3,996

 
(751
)
 
2,436

 
(637
)
 
6,432

 
(1,388
)
ABS
3,255

 
(395
)
 
108

 
(24
)
 
3,363

 
(419
)
CMBS
1,082

 
(183
)
 
36

 
(5
)
 
1,118

 
(188
)
RMBS
2,856

 
(176
)
 
30

 
(4
)
 
2,886

 
(180
)
Total AFS securities
27,345

 
(3,355
)
 
2,955

 
(798
)
 
30,300

 
(4,153
)
AFS securities – related party
 
 
 
 
 
 
 
 
 
 
 
Corporate
3

 

 

 

 
3

 

CLO
887

 
(144
)
 
153

 
(42
)
 
1,040

 
(186
)
ABS
2,389

 
(274
)
 

 

 
2,389

 
(274
)
Total AFS securities – related party
3,279

 
(418
)
 
153

 
(42
)
 
3,432

 
(460
)
Total AFS securities including related party
$
30,624

 
$
(3,773
)
 
$
3,108

 
$
(840
)
 
$
33,732

 
$
(4,613
)

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
$
3

 
$

 
$

 
$

 
$
3

 
$

U.S. state, municipal and political subdivisions
78

 
(1
)
 
10

 

 
88

 
(1
)
Corporate
2,898

 
(140
)
 
902

 
(70
)
 
3,800

 
(210
)
CLO
1,959

 
(38
)
 
3,241

 
(158
)
 
5,200

 
(196
)
ABS
642

 
(6
)
 
255

 
(18
)
 
897

 
(24
)
CMBS
220

 
(4
)
 
41

 
(4
)
 
261

 
(8
)
RMBS
445

 
(6
)
 
163

 
(4
)
 
608

 
(10
)
Total AFS securities
6,245


(195
)

4,612


(254
)

10,857


(449
)
AFS securities – related party
 
 
 
 
 
 
 
 
 
 
 
CLO
362

 
(7
)
 
242

 
(11
)
 
604

 
(18
)
ABS
357

 
(2
)
 

 

 
357

 
(2
)
Total AFS securities – related party
719

 
(9
)
 
242

 
(11
)
 
961

 
(20
)
Total AFS securities including related party
$
6,964

 
$
(204
)
 
$
4,854

 
$
(265
)
 
$
11,818

 
$
(469
)


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 LossesThe 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
$

 
$
15

 
$

 
$

 
$

 
$
15

ABS

 
5

 

 

 

 
5

CMBS

 
4

 

 

 

 
4

RMBS
17

 
35

 
1

 
2

 
(1
)
 
54

Total AFS securities
$
17


$
59


$
1


$
2


$
(1
)

$
78


    
Net Investment Income—Net investment income by asset class consists of the following:
 
Three months ended March 31,
(In millions)
2020
 
2019
AFS securities
$
837

 
$
753

Trading securities
48

 
42

Equity securities
4

 
3

Mortgage loans
186

 
151

Investment funds
(278
)
 
26

Funds withheld at interest
41

 
163

Other
37

 
39

Investment revenue
875

 
1,177

Investment expenses
(130
)
 
(95
)
Net investment income
$
745

 
$
1,082



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
$
164

 
$
17

Gross realized losses on investment activity
(134
)
 
(13
)
Net realized investment gains on AFS securities
30

 
4

Net recognized investment gains (losses) on trading securities
(223
)
 
56

Net recognized investment gains (losses) on equity securities
(50
)
 
18

Derivative gains (losses)
(3,019
)
 
1,692

Provision for credit losses
(284
)
 

Other gains (losses)
(26
)
 
6

Investment related gains (losses)
$
(3,572
)
 
$
1,776



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
$
(73
)
 
$
71

Trading securities – related party
(109
)
 
(2
)
Equity securities
(37
)
 
18

Equity securities – related party

 
3



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
$
14

 
$

Allowance for credit losses at acquisition
1

 

Discount (premiums) attributable to other factors
1

 

Par value
$
16

 
$


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
$

 
$

 
$
293

 
$
1,001

 
$
1,294

 
 
 
 
 
 
 
 
 
 
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
$

 
$
102

 
$
200

 
$
210

 
$
512

 
 
 
 
 
 
 
 
 
 
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
$
1,328

 
$
1,435

 
$
498

 
$
534

Total securities pledged under repurchase agreements
$
1,328

 
$
1,435

 
$
498

 
$
534


Reverse Repurchase AgreementsReverse 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
$
11,281

 
$
10,422

Commercial mortgage loans under development
140

 
93

Total commercial mortgage loans
11,421

 
10,515

Allowance for credit losses on commercial mortgage loans
(343
)
 
(10
)
Commercial mortgage loans, net of allowances
11,078

 
10,505

Residential mortgage loans
4,021

 
4,455

Allowance for credit losses on residential mortgage loans
(81
)
 
(1
)
Residential mortgage loans, net of allowances
3,940

 
4,454

Mortgage loans, net of allowances
$
15,018

 
$
14,959



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
$
3,465

 
31.2
%
 
$
2,899

 
27.6
%
Retail
2,117

 
19.1
%
 
2,182

 
20.8
%
Apartment
2,333

 
21.1
%
 
2,142

 
20.4
%
Hotels
1,062

 
9.6
%
 
1,104

 
10.5
%
Industrial
1,402

 
12.7
%
 
1,448

 
13.8
%
Other commercial
699

 
6.3
%
 
730

 
6.9
%
Total commercial mortgage loans
$
11,078

 
100.0
%
 
$
10,505

 
100.0
%
 
 
 
 
 
 
 
 
U.S. Region
 
 
 
 
 
 
 
East North Central
$
1,200

 
10.8
%
 
$
1,036

 
9.9
%
East South Central
422

 
3.8
%
 
428

 
4.1
%
Middle Atlantic
2,953

 
26.6
%
 
2,580

 
24.6
%
Mountain
508

 
4.6
%
 
528

 
5.0
%
New England
336

 
3.0
%
 
340

 
3.2
%
Pacific
2,559

 
23.1
%
 
2,502

 
23.8
%
South Atlantic
1,980

 
17.9
%
 
1,920

 
18.3
%
West North Central
140

 
1.3
%
 
146

 
1.4
%
West South Central
770

 
7.0
%
 
791

 
7.5
%
Total U.S. Region
10,868

 
98.1
%
 
10,271

 
97.8
%
International Region
210

 
1.9
%
 
234

 
2.2
%
Total commercial mortgage loans
$
11,078

 
100.0
%
 
$
10,505

 
100.0
%



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
26.5
%
 
27.0
%
Florida
13.5
%
 
12.7
%
Texas
5.3
%
 
6.2
%
Other1
41.3
%
 
41.7
%
Total U.S. residential mortgage loan percentage
86.6
%
 
87.6
%
International – Ireland
13.4
%
 
12.4
%
Total residential mortgage loan percentage
100.0
%
 
100.0
%
 
 
 
 
1Represents all other states, with each individual state comprising less than 5% of the portfolio.

Loan Valuation AllowanceThe 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
$
10

 
$
1

 
$

 
$
11

Adoption of accounting standard
167

 
43

 
11

 
221

Provision for expected credit losses
166

 
37

 
1

 
204

Ending balance
$
343

 
$
81

 
$
12

 
$
436



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 months1 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 months2 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)
$
38

 
$
998

 
$
2,042

 
$
547

 
$
151

 
$
9

 
$
3,785

30 to 59 days past due

 
47

 
36

 
32

 
15

 
1

 
131

60 to 89 days past due

 
7

 
11

 
8

 
4

 

 
30

Over 90 days past due

 
9

 
17

 
32

 
15

 
2

 
75

Total residential mortgages
$
38

 
$
1,061

 
$
2,106

 
$
619

 
$
185

 
$
12

 
$
4,021



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
$
67

Ending amortized cost of residential mortgage loans in non-accrual status
75

Amortized cost of residential mortgage loans in non-accrual status without a related allowance for credit losses
6



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)
$
1,103

 
$
4,537

 
$
2,846

 
$
1,050

 
$
160

 
$
1,725

 
$
11,421



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
40

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%
$
149

 
$
760

 
$
207

 
$
147

 
$
74

 
$
1,351

 
$
2,688

50% to 60%
143

 
1,128

 
786

 
332

 
40

 
172

 
2,601

61% to 70%
441

 
2,023

 
1,481

 
476

 
46

 
108

 
4,575

71% to 80%
342

 
599

 
287

 
95

 

 
54

 
1,377

81% to 100%

 

 

 

 

 
40

 
40

Commercial mortgage loans
$
1,075

 
$
4,510

 
$
2,761

 
$
1,050

 
$
160

 
$
1,725

 
$
11,281




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%
$
2,640

50% to 60%
2,486

61% to 70%
4,093

71% to 80%
1,162

81% to 100%
31

Commercial mortgage loans
$
10,412



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
$
860

 
$
3,661

 
$
2,703

 
$
974

 
$
160

 
$
1,599

 
$
9,957

1.00x – 1.20x
149

 
849

 
58

 
53

 

 
114

 
1,223

Less than 1.00x
66

 

 

 
23

 

 
12

 
101

Commercial mortgage loans
$
1,075

 
$
4,510

 
$
2,761

 
$
1,050

 
$
160

 
$
1,725

 
$
11,281



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
$
9,212

1.00x – 1.20x
1,166

Less than 1.00x
34

Commercial mortgage loans
$
10,412




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
$
284

 
38.4
%
 
$
277

 
36.9
%
Credit funds
122

 
16.5
%
 
153

 
20.4
%
Private equity
244

 
33.0
%
 
236

 
31.5
%
Real assets
89

 
12.0
%
 
83

 
11.1
%
Natural resources
1

 
0.1
%
 
1

 
0.1
%
Total investment funds
740

 
100.0
%
 
750

 
100.0
%
Investment funds – related parties
 
 
 
 
 
 
 
Differentiated investments
 
 
 
 
 
 
 
MidCap FinCo Designated Activity Company (MidCap)1
508

 
11.0
%
 
547

 
15.4
%
AmeriHome Mortgage Company, LLC (AmeriHome)1
508

 
11.0
%
 
487

 
13.7
%
Catalina Holdings Ltd. (Catalina)
296

 
6.4
%
 
271

 
7.6
%
Athora Holding Ltd. (Athora)1
130

 
2.8
%
 
132

 
3.7
%
Venerable Holdings, Inc. (Venerable)1
110

 
2.4
%
 
99

 
2.8
%
Other
281

 
6.1
%
 
222

 
6.3
%
Total differentiated investments
1,833

 
39.7
%
 
1,758

 
49.5
%
Real estate
775

 
16.7
%
 
853

 
24.0
%
Credit funds
446

 
9.6
%
 
370

 
10.4
%
Private equity
227

 
4.9
%
 
105

 
3.0
%
Real assets
256

 
5.5
%
 
182

 
5.1
%
Natural resources
200

 
4.3
%
 
163

 
4.6
%
Public equities
44

 
1.0
%
 
119

 
3.4
%
Investment in Apollo1
850

 
18.3
%
 

 
%
Total investment funds – related parties
4,631

 
100.0
%
 
3,550

 
100.0
%
Total investment funds including related party
$
5,371

 
 
 
$
4,300

 
 
 
 
 
 
 
 
 
 
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
$
740

 
$
1,232

 
$
750

 
$
1,265

Investment in related parties – investment funds
4,631

 
6,724

 
3,550

 
5,955

Investment in fixed maturity securities
20,380

 
22,548

 
22,694

 
22,170

Investment in related parties – fixed maturity securities
4,245

 
5,177

 
4,570

 
4,878

Investment in related parties – equity securities
49

 
49

 
58

 
58

Total non-consolidated investments
$
30,045

 
$
35,730

 
$
31,622

 
$
34,326




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
3,226

 
$
519

 
$
58

 
3,158

 
$
113

 
$
56

Foreign currency forwards
801

 
6

 
2

 
717

 
1

 
9

Foreign currency forwards on net investments
136

 
4

 

 
139

 

 
2

Total derivatives designated as hedges
 
 
529

 
60

 
 
 
114

 
67

Derivatives not designated as hedges
 
 
 
 
 
 
 
 
 
 
 
Equity options
48,654

 
999

 
11

 
49,549

 
2,746

 
5

Futures
7

 
19

 
7

 
8

 
10

 
1

Total return swaps
124

 

 
25

 
106

 
6

 

Foreign currency swaps
11

 
2

 

 
35

 
2

 
1

Interest rate swaps
776

 
9

 
88

 
776

 
3

 
4

Credit default swaps
10

 

 
7

 
10

 

 
3

Foreign currency forwards
3,230

 
52

 
24

 
1,924

 
7

 
16

Embedded derivatives
 
 
 
 
 
 
 
 
 
 
 
Funds withheld including related party
 
 
(389
)
 
24

 
 
 
1,395

 
31

Interest sensitive contract liabilities
 
 

 
9,089

 
 
 

 
10,942

Total derivatives not designated as hedges
 
 
692

 
9,275

 
 
 
4,169

 
11,003

Total derivatives
 
 
$
1,221

 
$
9,335

 
 
 
$
4,283

 
$
11,070




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
$
(1,581
)
 
$
849

Futures
16

 
(11
)
Swaps
(75
)
 
18

Foreign currency forwards
67

 
6

Embedded derivatives on funds withheld
(1,446
)
 
830

Amounts recognized in investment related gains (losses)
(3,019
)
 
1,692

Embedded derivatives in indexed annuity products1
1,177

 
(1,017
)
Total gains (losses) on derivatives not designated as hedges
$
(1,842
)
 
$
675

 
 
 
 
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
$
1,610

 
$
(64
)
 
$
(1,589
)
 
$
(43
)
 
$
(170
)
 
$
(213
)
Derivative liabilities
(222
)
 
64

 
15

 
(143
)
 

 
(143
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
$
2,888

 
$
(67
)
 
$
(2,743
)
 
$
78

 
$
(145
)
 
$
(67
)
Derivative liabilities
(97
)
 
67

 
31

 
1

 

 
1

 
 
 
 
 
 
 
 
 
 
 
 
 
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
$
40

 
$

 
$
40

 
$

 
$

U.S. state, municipal and political subdivisions
909

 

 

 
872

 
37

Foreign governments
291

 

 

 
291

 

Corporate
44,468

 

 

 
43,235

 
1,233

CLO
6,641

 

 

 
6,519

 
122

ABS
4,563

 

 

 
3,646

 
917

CMBS
2,291

 

 

 
2,246

 
45

RMBS
6,468

 

 

 
6,426

 
42

Total AFS securities
65,671

 

 
40

 
63,235

 
2,396

Trading securities
 
 
 
 
 
 
 
 
 
U.S. government and agencies
11

 

 
8

 
3

 

U.S. state, municipal and political subdivisions
112

 

 

 
112

 

Corporate
1,425

 

 

 
1,393

 
32

CLO
3

 

 

 

 
3

ABS
94

 

 

 
80

 
14

CMBS
51

 

 

 
51

 

RMBS
283

 

 

 
213

 
70

Total trading securities
1,979

 

 
8

 
1,852

 
119

Equity securities
206

 

 
23

 
176

 
7

Mortgage loans
26

 

 

 

 
26

Investment funds
157

 
136

 

 

 
21

Funds withheld at interest – embedded derivative
(374
)
 

 

 

 
(374
)
Derivative assets
1,610

 

 
19

 
1,591

 

Short-term investments
393

 

 
42

 
284

 
67

Other investments
98

 

 

 
98

 

Cash and cash equivalents
5,419

 

 
5,419

 

 

Restricted cash
564

 

 
564

 

 

Investments in related parties
 
 
 
 
 
 
 
 
 
AFS securities
 
 
 
 
 
 
 
 
 
Corporate
19

 

 

 
19

 

CLO
1,040

 

 

 
1,040

 

ABS
2,487

 

 

 
600

 
1,887

Total AFS securities – related party
3,546

 

 

 
1,659

 
1,887

Trading securities
 
 
 
 
 
 
 
 
 
CLO
42

 

 

 
10

 
32

ABS
676

 

 

 

 
676

Total trading securities – related party
718

 

 

 
10

 
708

Equity securities
49

 

 

 

 
49

Investment funds
1,097

 
118

 

 

 
979

Funds withheld at interest – embedded derivative
(15
)
 

 

 

 
(15
)
Reinsurance recoverable
2,115

 

 

 

 
2,115

Total assets measured at fair value
$
83,259

 
$
254

 
$
6,115

 
$
68,905

 
$
7,985

 
 
 
 
 
 
 
 
 
(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
$
9,089

 
$

 
$

 
$

 
$
9,089

Universal life benefits
1,322

 

 

 

 
1,322

Future policy benefits
 
 
 
 
 
 
 
 
 
AmerUs Life Insurance Company (AmerUs) Closed Block
1,481

 

 

 

 
1,481

Indianapolis Life Insurance Company (ILICO) Closed Block and life benefits
778

 

 

 

 
778

Derivative liabilities
222

 

 
7

 
208

 
7

Funds withheld liability – embedded derivative
24

 

 

 
24

 

Total liabilities measured at fair value
$
12,916

 
$

 
$
7

 
$
232

 
$
12,677

 
 
 
 
 
 
 
 
 
(Concluded)


 
December 31, 2019
(In millions)
Total
 
NAV
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
AFS securities
 
 
 
 
 
 
 
 
 
U.S. government and agencies
$
36

 
$

 
$
36

 
$

 
$

U.S. state, municipal and political subdivisions
1,541

 

 

 
1,501

 
40

Foreign governments
327

 

 

 
327

 

Corporate
47,228

 

 

 
46,503

 
725

CLO
7,349

 

 

 
7,228

 
121

ABS
5,118

 

 

 
3,744

 
1,374

CMBS
2,400

 

 

 
2,354

 
46

RMBS
7,375

 

 

 
7,375

 

Total AFS securities
71,374

 

 
36

 
69,032

 
2,306

Trading securities
 
 
 
 
 
 
 
 
 
U.S. government and agencies
11

 

 
8

 
3

 

U.S. state, municipal and political subdivisions
135

 

 

 
135

 

Corporate
1,456

 

 

 
1,456

 

CLO
6

 

 

 

 
6

ABS
108

 

 

 
92

 
16

CMBS
51

 

 

 
51

 

RMBS
303

 

 

 
251

 
52

Total trading securities
2,070

 

 
8

 
1,988

 
74

Equity securities
247

 

 
43

 
201

 
3

Mortgage loans
27

 

 

 

 
27

Investment funds
154

 
132

 

 

 
22

Funds withheld at interest – embedded derivative
801

 

 

 

 
801

Derivative assets
2,888

 

 
10

 
2,878

 

Short-term investments
406

 

 
46

 
319

 
41

Other investments
93

 

 

 
93

 

Cash and cash equivalents
4,240

 

 
4,240

 

 

Restricted cash
402

 

 
402

 

 

 
 
 
 
 
 
 
 
 
(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
19

 

 

 
19

 

CLO
936

 

 

 
936

 

ABS
2,849

 

 

 
525

 
2,324

Total AFS securities – related party
3,804

 

 

 
1,480

 
2,324

Trading securities
 
 
 
 
 
 
 
 
 
CLO
74

 

 

 
36

 
38

ABS
711

 

 

 

 
711

Total trading securities – related party
785

 

 

 
36

 
749

Equity securities
64

 

 

 

 
64

Investment funds
819

 
687

 

 

 
132

Funds withheld at interest – embedded derivative
594

 

 

 

 
594

Short-term investments

 

 

 

 

Reinsurance recoverable
1,821

 

 

 

 
1,821

Total assets measured at fair value
$
90,589

 
$
819

 
$
4,785

 
$
76,027

 
$
8,958

Liabilities
 
 
 
 
 
 
 
 
 
Interest sensitive contract liabilities
 
 
 
 
 
 
 
 
 
Embedded derivative
$
10,942

 
$

 
$

 
$

 
$
10,942

Universal life benefits
1,050

 

 

 

 
1,050

Future policy benefits
 
 
 
 
 
 
 
 
 
AmerUs Closed Block
1,546

 

 

 

 
1,546

ILICO Closed Block and life benefits
755

 

 

 

 
755

Derivative liabilities
97

 

 
1

 
93

 
3

Funds withheld liability – embedded derivative
31

 

 

 
31

 

Total liabilities measured at fair value
$
14,421

 
$

 
$
1

 
$
124

 
$
14,296

 
 
 
 
 
 
 
 
 
(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 OptionThe 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
$
(223
)
 
$
56

Investment funds
(300
)
 
(4
)
Future policy benefits
65

 
(40
)
Total gains (losses)
$
(458
)
 
$
12



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
$
23

 
$
25

Mark to fair value
3

 
2

Fair value
$
26

 
$
27



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 InstrumentsThe 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
$
40

 
$

 
$
(3
)
 
$

 
$

 
$
37

 
$

 
$
(3
)
Corporate
725

 
(5
)
 
(33
)
 
33

 
513

 
1,233

 

 
(31
)
CLO
121

 

 
(9
)
 
30

 
(20
)
 
122

 

 
(9
)
ABS
1,374

 
22

 
(119
)
 
(183
)
 
(177
)
 
917

 

 
(103
)
CMBS
46

 

 
(5
)
 
4

 

 
45

 

 
(5
)
RMBS

 

 

 

 
42

 
42

 

 

Trading securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate

 

 

 

 
32

 
32

 

 

CLO
6

 
(3
)
 

 

 

 
3

 
(3
)
 

ABS
16

 

 

 
(2
)
 

 
14

 

 

RMBS
52

 
(1
)
 

 

 
19

 
70

 
1

 

Equity securities
3

 
4

 

 

 

 
7

 
4

 

Mortgage loans
27

 

 

 
(1
)
 

 
26

 

 

Investment funds
22

 
(1)

 

 

 

 
21

 
(1)

 

Funds withheld at interest – embedded derivative
801

 
(1,175
)
 

 

 

 
(374
)
 

 

Short-term investments
41

 

 
(1
)
 
27

 

 
67

 

 

Investments in related parties
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AFS securities, ABS
2,324

 
(3
)
 
(220
)
 
(50
)
 
(164
)
 
1,887

 

 
(205
)
Trading securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CLO
38

 
(16
)
 

 
1

 
9

 
32

 
(24
)
 

ABS
711

 
(101
)
 

 
66

 

 
676

 
(101
)
 

Equity securities
64

 
(10
)
 

 
1

 
(6
)
 
49

 
(10
)
 

Investment funds
132

 
(300
)
 

 
1,147

 

 
979

 
(300
)
 

Funds withheld at interest – embedded derivative
594

 
(609
)
 

 

 

 
(15
)
 

 

Reinsurance recoverable
1,821

 
294

 

 

 

 
2,115

 

 

Total Level 3 assets
$
8,958

 
$
(1,904
)
 
$
(390
)
 
$
1,073

 
$
248

 
$
7,985

 
$
(434
)
 
$
(356
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive contract liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Embedded derivative
$
(10,942
)
 
$
1,177

 
$

 
$
676

 
$

 
$
(9,089
)
 
$

 
$

Universal life benefits
(1,050
)
 
(272
)
 

 

 

 
(1,322
)
 

 

Future policy benefits
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AmerUs Closed Block
(1,546
)
 
65

 

 

 

 
(1,481
)
 

 

ILICO Closed Block and life benefits
(755
)
 
(23
)
 

 

 

 
(778
)
 

 

Derivative liabilities
(3
)
 
(4
)
 

 

 

 
(7
)
 

 

Total Level 3 liabilities
$
(14,296
)
 
$
943

 
$

 
$
676

 
$

 
$
(12,677
)
 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
$
898

 
$
(2
)
 
$
5

 
$
165

 
$
(31
)
 
$
1,035

 
$

 
$

CLO
107

 

 
2

 
30

 
(29
)
 
110

 

 

ABS
1,615

 
3

 
16

 
57

 
(77
)
 
1,614

 

 

CMBS
187

 

 
2

 
(6
)
 
(9
)
 
174

 

 

RMBS
56

 

 
1

 

 

 
57

 

 

Trading securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate

 

 

 

 
10

 
10

 

 

CLO
1

 

 

 

 
7

 
8

 
1

 

ABS

 

 

 
6

 

 
6

 

 

RMBS
134

 
(3
)
 

 

 
(45
)
 
86

 
2

 

Equity securities
3

 

 

 

 

 
3

 

 

Mortgage loans
32

 

 

 

 

 
32

 

 

Investment funds
29

 
(3
)
 

 
(1
)
 

 
25

 
(3
)
 

Funds withheld at interest – embedded derivative
57

 
389

 

 

 

 
446

 

 

Investments in related parties
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AFS securities, ABS
328

 

 

 
169

 

 
497

 

 

Trading securities
 
 
 
 
 
 
 
 
 
 

 
 
 
 
CLO
113

 
(1
)
 

 
(1
)
 
(22
)
 
89

 
4

 

ABS
149

 
(11
)
 

 

 

 
138

 
(11
)
 

Equity securities
133

 
1

 

 
173

 

 
307

 
4

 

Investment funds
120

 
(1
)
 

 
19

 

 
138

 

 

Funds withheld at interest – embedded derivative
(110
)
 
324

 

 

 

 
214

 

 

Reinsurance recoverable
1,676

 
61

 

 

 

 
1,737

 

 

Total Level 3 assets
$
5,528

 
$
757

 
$
26

 
$
611

 
$
(196
)
 
$
6,726

 
$
(3
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive contract liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Embedded derivative
$
(7,969
)
 
$
(1,017
)
 
$

 
$
(120
)
 
$

 
$
(9,106
)
 
$

 
$

Universal life benefits
(932
)
 
(47
)
 

 

 

 
(979
)
 

 

Future policy benefits
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AmerUs Closed Block
(1,443
)
 
(40
)
 

 

 

 
(1,483
)
 

 

ILICO Closed Block and life benefits
(730
)
 
(13
)
 

 

 

 
(743
)
 

 

Derivative liabilities
(4
)
 

 

 

 

 
(4
)
 

 

Total Level 3 liabilities
$
(11,078
)
 
$
(1,117
)
 
$

 
$
(120
)
 
$

 
$
(12,315
)
 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
$
74

 
$

 
$
(10
)
 
$
(31
)
 
$
33

 
$
548

 
$
(35
)
 
$
513

CLO
33

 

 

 
(3
)
 
30

 
3

 
(23
)
 
(20
)
ABS
73

 

 
(14
)
 
(242
)
 
(183
)
 
13

 
(190
)
 
(177
)
CMBS
4

 

 

 

 
4

 

 

 

RMBS

 

 

 

 

 
42

 

 
42

Trading securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate

 

 

 

 

 
32

 

 
32

ABS

 

 
(2
)
 

 
(2
)
 

 

 

RMBS

 

 

 

 

 
20

 
(1
)
 
19

Mortgage loans

 

 

 
(1
)
 
(1
)
 

 

 

Short-term investments
41

 

 

 
(14
)
 
27

 

 

 

Investments in related parties
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AFS securities, ABS
5

 

 

 
(55
)
 
(50
)
 

 
(164
)
 
(164
)
Trading securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CLO
13

 

 
(12
)
 

 
1

 
9

 

 
9

ABS
66

 

 

 

 
66

 

 

 

Equity securities
3

 

 

 
(2
)
 
1

 

 
(6
)
 
(6
)
Investment funds
1,147

 

 

 

 
1,147

 

 

 

Total Level 3 assets
$
1,459

 
$

 
$
(38
)
 
$
(348
)
 
$
1,073

 
$
667

 
$
(419
)
 
$
248

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive contract liabilities – embedded derivative
$

 
$
(116
)
 
$

 
$
792

 
$
676

 
$

 
$

 
$

Total Level 3 liabilities
$

 
$
(116
)
 
$

 
$
792

 
$
676

 
$

 
$

 
$




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
$
238

 
$

 
$
(1
)
 
$
(72
)
 
$
165

 
$

 
$
(31
)
 
$
(31
)
CLO
30

 

 

 

 
30

 

 
(29
)
 
(29
)
ABS
189

 

 
(33
)
 
(99
)
 
57

 
19

 
(96
)
 
(77
)
CMBS

 

 

 
(6
)
 
(6
)
 
8

 
(17
)
 
(9
)
Trading securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate

 

 

 

 

 
10

 

 
10

CLO

 

 

 

 

 
7

 

 
7

ABS
6

 

 

 

 
6

 

 

 

RMBS

 

 

 

 

 
38

 
(83
)
 
(45
)
Investment funds

 

 

 
(1
)
 
(1
)
 

 

 

Investments in related parties
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AFS securities, ABS
170

 

 

 
(1
)
 
169

 

 

 

Trading securities, CLO

 

 
(1
)
 

 
(1
)
 

 
(22
)
 
(22
)
Equity securities
177

 

 
(4
)
 

 
173

 

 

 

Investment funds
19

 

 

 

 
19

 

 

 

Total Level 3 assets
$
829

 
$

 
$
(39
)
 
$
(179
)
 
$
611

 
$
82

 
$
(278
)
 
$
(196
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive contract liabilities – embedded derivative
$

 
$
(233
)
 
$

 
$
113

 
$
(120
)
 
$

 
$

 
$

Total Level 3 liabilities
$

 
$
(233
)
 
$

 
$
113

 
$
(120
)
 
$

 
$

 
$



Significant Unobservable InputsSignificant 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
 
$
3,522

 
Discounted cash flow
 
Discount
 
3.8
%
 
19.0
%
 
7.8
%
1 
 
Decrease
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives
 
$
9,089

 
Option budget method
 
Nonperformance risk
 
1.9
%
 
2.5
%
 
2.3
%
2 
 
Decrease
 
 
 
 
 
 
Option budget
 
0.7
%
 
3.7
%
 
1.9
%
3 
 
Increase
 
 
 
 
 
 
Surrender rate
 
5.0
%
 
10.4
%
 
7.2
%
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
 
$
1,289

 
Discounted cash flow
 
Discount
 
3.0
%
 
9.0
%
 
6.6
%
1 
 
Decrease
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives
 
$
10,942

 
Option budget method
 
Nonperformance risk
 
0.2
%
 
1.1
%
 
0.6
%
2 
 
Decrease
 
 
 
 
 
 
Option budget
 
0.7
%
 
3.7
%
 
1.9
%
3 
 
Increase
 
 
 
 
 
 
Surrender rate
 
3.5
%
 
8.1
%
 
7.1
%
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 ValueThe 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
$
14,369

 
$
14,948

 
$

 
$

 
$

 
$
14,948

Investment funds
583

 
583

 
583

 

 

 

Policy loans
403

 
403

 

 

 
403

 

Funds withheld at interest
14,090

 
14,090

 

 

 

 
14,090

Short-term investments
190

 
190

 

 

 

 
190

Other investments
74

 
74

 

 

 

 
74

Investments in related parties
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans
623

 
648

 

 

 

 
648

Investment funds
3,534

 
3,534

 
3,534

 

 

 

Funds withheld at interest
12,467

 
12,467

 

 

 

 
12,467

Other investments
475

 
444

 

 

 

 
444

Total financial assets not carried at fair value
$
46,808

 
$
47,381

 
$
4,117

 
$

 
$
403

 
$
42,861

 
 
 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive contract liabilities
$
58,277

 
$
58,762

 
$

 
$

 
$

 
$
58,762

Short-term debt
400

 
400

 

 

 
400

 

Long-term debt
986

 
903

 

 

 
903

 

Securities to repurchase
1,294

 
1,294

 

 

 
1,294

 

Funds withheld liability
372

 
372

 

 

 
372

 

Total financial liabilities not carried at fair value
$
61,329

 
$
61,731

 
$

 
$

 
$
2,969

 
$
58,762




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
$
14,279

 
$
14,719

 
$

 
$

 
$

 
$
14,719

Investment funds
596

 
596

 
596

 

 

 

Policy loans
417

 
417

 

 

 
417

 

Funds withheld at interest
14,380

 
14,380

 

 

 

 
14,380

Short-term investments
190

 
190

 

 

 

 
190

Other investments
65

 
65

 

 

 

 
65

Investments in related parties
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans
653

 
641

 

 

 

 
641

Investment funds
2,731

 
2,731

 
2,731

 

 

 

Funds withheld at interest
12,626

 
12,626

 

 

 

 
12,626

Other investments
487

 
537

 

 

 

 
537

Total financial assets not carried at fair value
$
46,424

 
$
46,902

 
$
3,327

 
$

 
$
417

 
$
43,158

 
 
 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest sensitive contract liabilities
$
57,272

 
$
58,027

 
$

 
$

 
$

 
$
58,027

Short-term debt
475

 
475

 

 

 
475

 

Long-term debt
992

 
1,036

 

 

 
1,036

 

Securities to repurchase
512

 
512

 

 

 
512

 

Funds withheld liability
377

 
377

 

 

 
377

 

Total financial liabilities not carried at fair value
$
59,628

 
$
60,427

 
$

 
$

 
$
2,400

 
$
58,027



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
$
3,274

 
$
820

 
$
914

 
$
5,008

Adoption of accounting standard
12

 
5

 
5

 
22

Additions
112

 
38

 

 
150

Amortization
436

 
(10
)
 
(23
)
 
403

Impact of unrealized investment (gains) losses
489

 
139

 
181

 
809

Balance at March 31, 2020
$
4,323

 
$
992

 
$
1,077

 
$
6,392


(In millions)
DAC
 
DSI
 
VOBA
 
Total
Balance at December 31, 2018
$
3,921

 
$
799

 
$
1,187

 
$
5,907

Additions
173

 
60

 

 
233

Amortization
(226
)
 
(5
)
 
(5
)
 
(236
)
Impact of unrealized investment (gains) losses
(149
)
 
(49
)
 
(87
)
 
(285
)
Balance at March 31, 2019
$
3,719

 
$
805

 
$
1,095

 
$
5,619




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
$
(938
)
 
$
(98
)
 
$
(13
)
 
$
(3
)
 
$
(4
)
 
$
(9
)
 
 
 
 
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
161.4

 
25.4

 
3.3

 
0.8

 
1.0

 
2.4

Dilutive effect of stock compensation plans1

 

 

 

 

 

Diluted weighted average shares outstanding
161.4

 
25.4

 
3.3

 
0.8

 
1.0

 
2.4

 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
 
 
 
 
Basic
$
(5.81
)
 
$
(3.87
)
 
$
(3.87
)
 
$
(3.87
)
 
$
(3.87
)
 
$
(3.87
)
Diluted
$
(5.81
)
 
$
(3.87
)
 
$
(3.87
)
 
$
(3.87
)
 
$
(3.87
)
 
$
(3.87
)
 
 
 
 
 
 
 
 
 
 
 
 
1 The dilutive 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
$
589

 
$
93

 
$
12

 
$
3

 
$
3

 
$
8

 
 
 
 
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
161.3

 
25.4

 
3.4

 
0.8

 
1.0

 
2.1

Dilutive effect of stock compensation plans
0.4

 

 

 

 

 
0.3

Diluted weighted average shares outstanding
161.7

 
25.4

 
3.4

 
0.8

 
1.0

 
2.4

 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
 
 
 
 
Basic
$
3.65

 
$
3.65

 
$
3.65

 
$
3.65

 
$
3.65

 
$
3.65

Diluted
$
3.64

 
$
3.65

 
$
3.65

 
$
3.65

 
$
3.65

 
$
3.15



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
34,500

 
13,800

Liquidation preference per share
$
25,000

 
$
25,000

Dividends declared and paid per share during the period
$
396.88

 
$
351.56

Aggregate dividends declared and paid during the period (in millions)
$
13

 
$
5



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
$
640

 
$
150

Repurchases
(319
)
 
(47
)
Ending balance at March 31
$
321

 
$
103



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
143.2

Issued shares
35.9

Forfeited shares
(0.1
)
Repurchased shares
(10.4
)
Converted from Class B shares
25.4

Converted from Class M shares
0.3

Ending balance
194.3

Class B
 
Beginning balance
25.4

Converted to Class A shares
(25.4
)
Ending balance

Class M-1
 
Beginning balance
3.3

Converted to Class A shares
(0.2
)
Converted to warrants
(3.1
)
Ending balance

Class M-2
 
Beginning balance
0.8

Converted to Class A shares
0.0

Converted to warrants
(0.8
)
Ending balance

Class M-3
 
Beginning balance
1.0

Converted to Class A shares
0.0

Converted to warrants
(1.0
)
Ending balance

Class M-4
 
Beginning balance
4.0

Converted to Class A shares
(0.1
)
Converted to warrants
(3.6
)
Repurchased shares
(0.3
)
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
$
3,102

 
$

 
$
(879
)
 
$
61

 
$
(3
)
 
$
2,281

Adoption of accounting standards
4

 
(4
)
 
(6
)
 

 

 
(6
)
Other comprehensive income (loss) before reclassifications
(5,762
)
 
(273
)
 
1,352

 
401

 
9

 
(4,273
)
Less: Reclassification adjustments for gains (losses) realized in net income (loss)1
171

 

 
(15
)
 

 

 
156

Less: Income tax expense (benefit)
(1,128
)
 
(53
)
 
287

 
97

 

 
(797
)
Less: Other comprehensive income (loss) attributable to NCI
(159
)
 

 

 
(30
)
 
6

 
(183
)
Balance at March 31, 2020
$
(1,540
)
 
$
(224
)
 
$
195

 
$
395

 
$

 
$
(1,174
)
 
 
 
 
 
 
 
 
 
 
 
 
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
$
(628
)
 
$
121

 
$
39

 
$
(4
)
 
$
(472
)
Other comprehensive income (loss) before reclassifications
1,981

 
(509
)
 
(8
)
 

 
1,464

Less: Reclassification adjustments for gains (losses) realized in net income (loss)1
(7
)
 
2

 

 

 
(5
)
Less: Income tax expense (benefit)
401

 
(108
)
 
(2
)
 

 
291

Balance at March 31, 2019
$
959

 
$
(282
)
 
$
33

 
$
(4
)
 
$
706

 
 
 
 
 
 
 
 
 
 
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) 0.225% per year of the lesser of (A) the aggregate market value of substantially all of the assets in substantially all of the investment accounts of or relating to us (collectively, the Accounts) on December 31, 2018 of $103.4 billion (Backbook Value) and (B) the aggregate market value of substantially all of the assets in the Accounts at the end of the respective month, plus (ii) 0.15% per year of the amount, if any (Incremental Value), by which the aggregate market value of substantially all of the assets in the Accounts at the end of the respective month exceeds the Backbook Value; plus

(2)
with respect to each asset in an Account, subject to certain exceptions, that is managed by Apollo and that belongs to a specified asset class tier (Core, Core Plus, Yield, and High Alpha), a sub-allocation fee as follows, which will, in the case of assets acquired after January 1, 2019, be subject to a cap of 10% of the applicable asset’s gross book yield:

(i)
0.065% of the market value of Core assets, which include public investment grade corporate bonds, municipal securities, agency RMBS or CMBS, and obligations of governmental agencies or government sponsored entities that are not expressly backed by the U.S. government;

47


ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)


(ii)
0.13% of the market value of Core Plus assets, which include private investment grade corporate bonds, fixed rate first lien commercial mortgage loans (CML), and certain obligations issued or assumed by financial institutions and determined by Apollo to be “Tier 2 Capital” under Basel III, a set of recommendations for international banking regulations developed by the Bank for International Settlements;
(iii)
0.375% of the market value of Yield assets, which include non-agency RMBS, investment grade CLO, CMBS and other ABS (other than RMBS and CLO), emerging market investments, below investment grade corporate bonds, subordinated debt obligations, hybrid securities or surplus notes issued or assumed by a financial institution, rated preferred equity, residential mortgage loans (RML), bank loans, investment grade infrastructure debt, and floating rate CMLs on slightly transitional or stabilized traditional real estate;
(iv)
0.70% of the market value of High Alpha assets, which include subordinated CML, below investment grade CLO, unrated preferred equity, debt obligations originated by MidCap, CMLs for redevelopment or construction loans or secured by non-traditional real estate, below investment grade infrastructure debt, certain loans originated directly by Apollo (other than MidCap loans), and agency mortgage derivatives; and
(v)
0.00% of the market value of cash and cash equivalents, U.S. treasuries, non-preferred equities and alternatives.

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
$
28,858

 
23.8
%
 
$
32,474

 
25.5
%
Core Plus
29,717

 
24.5
%
 
30,155

 
23.6
%
Yield
44,269

 
36.4
%
 
48,557

 
38.0
%
High Alpha
5,390

 
4.4
%
 
5,062

 
4.0
%
Other
13,290

 
10.9
%
 
11,302

 
8.9
%
Total sub-allocation assets
$
121,524

 
100.0
%
 
$
127,550

 
100.0
%


Additionally, the Fee Agreement provides for a possible payment by Apollo to us, or a possible payment by us to Apollo, equal to 0.025% of the Incremental Value as of the end of each year, beginning on December 31, 2019, depending upon the percentage of our investments that consist of Core and Core Plus assets. If more than 60% of our invested assets that are subject to the sub-allocation fees are invested in Core and Core Plus assets, we will receive a 0.025% fee reduction on the Incremental Value. If less than 50% of our invested assets that are subject to the sub-allocation fee are invested in Core and Core Plus assets, we will pay an additional fee of 0.025% on Incremental Value.

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
$
8,877

 
$
9,369

Trading securities
46

 
45

Equity securities
16

 
22

Mortgage loans
2,964

 
2,535

Investment funds
7

 
84

Derivative assets
60

 
105

Short-term investments
101

 
92

Other investments
93

 
88

Restricted cash
564

 
402

Total restricted assets
$
12,728

 
$
12,742




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 ServicesRetirement 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 OtherCorporate 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
$
2,469

 
$
3,306

Corporate and Other
(330
)
 
32

Non-operating adjustments
 
 
 
Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets
(1,671
)
 
940

Investment gains (losses), net of offsets
(1,685
)
 
713

VIE expenses, noncontrolling interest and other adjustments to revenues
(332
)
 
4

Total revenues
$
(1,549
)
 
$
4,995




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
$
204

 
$
286

Corporate and Other
(312
)
 
1

Non-operating adjustments
 
 
 
Investment gains (losses), net of offsets
(1,139
)
 
458

Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets
65

 
(27
)
Integration, restructuring and other non-operating expenses
(4
)
 
(1
)
Stock-based compensation, excluding LTIP
(10
)
 
(3
)
Income tax (expense) benefit – non-operating
131

 
(6
)
Net income (loss) available to Athene Holding Ltd. common shareholders
$
(1,065
)
 
$
708



The following represents total assets by segment:
(In millions)
March 31, 2020
 
December 31, 2019
Retirement Services
$
139,097

 
$
143,881

Corporate and Other
3,082

 
2,994

Total assets
$
142,179

 
$
146,875




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 and a reliable PRT counterparty will continue to enable us to grow our existing organic channels and allow us to source additional volumes of profitably underwritten liabilities in various market environments. We plan to continue to grow organically by expanding each of our retail, flow reinsurance and institutional distribution channels. We believe that we have the right people, infrastructure and scale to position us for continued growth.

Within our retail channel, we had fixed annuity sales of $1.2 billion and $1.8 billion for the three months ended March 31, 2020 and 2019, respectively. The decrease in our retail channel was primarily driven by competitive positioning and our disciplined approach to pricing and maintaining targets in a low interest rate environment. We aim to grow our retail channel by deepening our relationships with our approximately 50 independent marketing organizations (IMO); approximately 51,000 independent agents; and our growing network of 92 small and mid-sized banks and 13 regional broker-dealers. Our strong financial position and capital efficient products allow us to be dependable partners with IMOs, banks and broker-dealers as well as consistently write new business. We expect our retail channel to continue to benefit from our credit profile and recent product launches. We believe this should support growth in sales at our desired cost of funds through increased volumes via current IMOs, while also allowing us to continue to expand our bank and broker-dealer channels. Additionally, we are focusing on hiring and training a specialized sales force and creating products to capture new potential distribution opportunities.

In our flow reinsurance channel, we target reinsurance business consistent with our preferred liability characteristics and, as such, flow reinsurance provides another opportunistic channel for us to source liabilities with attractive crediting rates. We generated deposits through our flow reinsurance channel of $861 million and $1.1 billion for the three months ended March 31, 2020 and 2019, respectively. The decrease in our flow reinsurance channel from prior year was driven by the competitive positioning while maintaining rate discipline in a low interest rate environment, while prior year benefited from a rising interest rate environment. We expect that our credit profile and our reputation as a solutions provider will help us continue to source additional reinsurance partners, which will further diversify our flow reinsurance channel.


56


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Within our institutional channel, we generated deposits of $1.8 billion and $1.9 billion for the three months ended March 31, 2020 and 2019, respectively. The slight decrease in our institutional channel is driven by lower PRT deposits being largely offset by higher funding agreement deposits. During the three months ended March 31, 2020, we closed one PRT transaction and issued group annuity contracts in the aggregate principal amount of $1.0 billion, compared to $1.9 billion during the three months ended March 31, 2019. Since entering the PRT channel in 2017 through March 31, 2020, we have closed 17 deals involving more than 178,000 plan participants resulting in the issuance of group annuities of $11.9 billion. We issued funding agreements in the aggregate principal amount of $823 million and $0 million for the three months ended March 31, 2020 and three months ended March 31, 2019, respectively. We expect to grow our institutional channel by continuing to engage in PRT transactions and opportunistic issuances of funding agreements.

Our inorganic channel has contributed significantly to our growth through both acquisitions and block reinsurance transactions. We expect that our inorganic channels will continue to be important sources of profitable growth in the future. We believe our internal transactions team, with support from Apollo, has an industry-leading ability to source, underwrite and expeditiously close transactions. With support from Apollo, we are a solutions provider with a proven track record of closing transactions, which we believe makes us the ideal partner to insurance companies seeking to restructure their business.

Executing our growth strategy requires that we have sufficient capital available to deploy. We believe that we have significant capital available to us to support our growth aspirations. As of March 31, 2020, we estimate that we have $7.4 billion in capital available to deploy, consisting of approximately $2.7 billion in excess capital, $2.3 billion in untapped debt capacity (assuming a peer average adjusted debt to capitalization ratio of 25%) and $2.4 billion in uncalled capital at ACRA, subject, in the case of debt capacity, to favorable market conditions and general availability. Excess capital includes the capital from the $500 million debt issuance completed in early April, while the untapped debt capacity includes the impact of the debt issuance and excludes the short-term debt with repayment due in the second quarter.

In order to support our growth strategies and capital deployment opportunities, we established ACRA as a long-duration, on-demand capital vehicle. As of March 31, 2020, we owned 33% of the economic interests and 100% of the voting interests of ACRA, with the remaining 67% of the economic interests being owned by ADIP, a series of funds managed by an affiliate of Apollo. ACRA is expected to participate in qualifying transactions and certain other transactions by drawing a portion of the required capital for such transactions from third-party investors equal to ADIP’s proportionate economic interest in ACRA. This shareholder-friendly, strategic capital solution is expected to allow us the flexibility to simultaneously deploy capital across multiple accretive avenues, while maintaining a strong financial position.

Strategic Transaction with Apollo

On February 28, 2020, we closed a transaction with Apollo in which Apollo acquired an incremental stake in us for AOG units valued at approximately $1.1 billion, upon close, and approximately $350 million of cash. Additionally, we converted our Class B common shares to Class A common shares and our Class M common shares to Class A common shares and warrants, eliminating our multi-class share structure. The AOG units are reflected within the change in fair value of Apollo investment, net of tax line item and may present future volatility in our results of operations due to changes in the valuation of the AOG units. See Note 9 – Related Parties to the consolidated financial statements for further discussion.


Industry Trends and Competition

Market Conditions

On March 3, 2020, the U.S. Federal Reserve (Federal Reserve) decreased interest rates by 50 basis points in its first emergency rate cut since 2008. That action was quickly followed by a 100 basis point emergency rate cut on March 15, 2020, bringing the target federal funds rate range to 0% – 0.25%. The emergency rate cuts were in response to economic uncertainty resulting from the spread of COVID-19 and follows three separate 25 basis point rate cuts that occurred during 2019. The economic uncertainty has created considerable volatility in both the credit and equity markets, which has been amplified by a recently concluded price war among major oil producing countries, which when combined with a collapse in demand for oil and storage capacity constraints, has resulted in significant declines in oil prices. Unprecedented fiscal and monetary measures have been undertaken in the form of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) and Federal Reserve programs implemented with funding provided by the CARES Act, respectively. The programs implemented by the Federal Reserve have provided significant liquidity to the capital markets and together with the broader CARES Act have reduced the volatility experienced in the credit and equity markets. It is unclear whether current fiscal and monetary policy or measures adopted in the future will be effective at continuing to abate the market volatility brought about by the spread of COVID-19.

57


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


To the extent that it has not already been so affected, current market volatility may be exacerbated by a number of factors, including market illiquidity, an inability to curtail the advancement of COVID-19, changes in the political environment or a lack thereof, uncertainty about future fiscal policy, further changes in oil prices or the factors impacting oil prices, changes in tax policy, the scope of potential deregulation or increased regulation, the imposition of additional tariffs or other barriers to international trade and levels of global trade, the future path of the Federal Reserve’s quantitative tightening or easing and uncertainty about the Federal Reserve’s ability to manage its normalization process and the impact on inflation and wage growth. In particular, equity market volatility has and may further place upward pressure on the hedging costs of our liability policy hedging program. Decreases in the risk-free rate have offset some of this upward pressure in the near-term, but this offsetting impact is not likely to persist into future periods. In addition, equity market volatility has and may further result in increases in rider reserves as we are required to fund more of the interest credited. Credit market volatility, which has and may further widen credit spreads, generally benefits our investment purchases but may negatively affect the valuations of our in-force investment portfolio.

A volatile market environment, such as the one brought about by the spread of COVID-19, may affect our ability to produce liability products that are profitable, have our desired risk profile, and are desirable to consumers. We continue to monitor the behavior of our customers and other factors that react to market conditions, including annuitization rates and lapse rates, in order to best serve our customers and generate strong profitability to our shareholders.

Interest Rate Environment

As a retirement services company focused on issuing and reinsuring fixed annuities, we are affected by the monetary policy of the Federal Reserve in the United States as well as other central banks around the world. The Federal Reserve aggressively cut rates during March 2020 after cutting rates on a more normalized basis on three separate occasions in 2019. Consequently, most treasury tenors, except the 30 year, are trading below 1%. Increased demand for treasury securities as a source of security amidst economic uncertainty has driven a decrease in the ten-year yield to below 1%, which is unprecedented. With the Federal Reserve undertaking extraordinary market intervention measures, it is anticipated that treasury yields will remain low in the near term.

Our investment portfolio consists predominantly of fixed maturity investments. See –Consolidated Investment Portfolio. If prevailing interest rates were to rise, we believe the yield on our new investment purchases may also rise and our investment income from floating rate investments would increase, while the value of our existing investments may decline. If prevailing interest rates were to decline, it is likely that the yield on our new investment purchases may decline and our investment income from floating rate investments would decrease, while the value of our existing investments may increase. Recent trends have entailed decreasing interest rates leading to a decrease in our investment income from floating rate investments, whereas widening credit spreads have resulted in an overall increase in asset yields, which we expect would result in an increase in the yield on our new investment purchases and a decline in the value of our existing investments.

We address interest rate risk through managing the duration of the liabilities we source with assets we acquire through ALM modeling. As part of our investment strategy, we purchase floating rate investments, which we expect would perform well in a rising interest rate environment and which we expect would underperform in a declining rate environment, such as has been experienced during the first quarter of 2020. Our investment portfolio includes $22.0 billion of floating rate investments, or 18% of our net invested assets as of March 31, 2020.

If prevailing interest rates were to rise, we believe our products would be more attractive to consumers and our sales would likely increase. If prevailing interest rates were to decline, it is likely that our products would be less attractive to consumers and our sales would likely decrease. In periods of prolonged low interest rates, the net investment spread may be negatively impacted by reduced investment income to the extent that we are unable to adequately reduce policyholder crediting rates due to policyholder guarantees in the form of minimum crediting rates or otherwise due to market conditions. As of March 31, 2020, most of our products were fixed annuities with 22% of our FIAs at the minimum guarantees and 39% of our fixed rate annuities at the minimum crediting rates. As of March 31, 2020, minimum guarantees on all of our deferred annuities, including those with crediting rates already at their minimum guarantees, were, on average, greater than 100 basis points below the crediting rates on such deferred annuities, allowing us room to reduce rates before reaching the minimum guarantees. Our remaining liabilities are associated with immediate annuities, pension risk transfer obligations, funding agreements and life contracts for which we have little to no discretionary ability to change the rates of interest payable to the respective policyholder. A significant majority of our deferred annuity products have crediting rates that we may reset annually upon renewal, following the expiration of the current guaranteed period. While we have the contractual ability to lower these crediting rates to the guaranteed minimum levels, our willingness to do so may be limited by competitive pressures.

See Part IItem 3. Quantitative and Qualitative Disclosures About Market Risks to this report and Part IIItem 7A. Quantitative and Qualitative Disclosures About Market Risks in our 2019 Annual Report, which includes a discussion regarding interest rate and other significant risks and our strategies for managing these risks.

COVID-19
The spread of COVID-19 has resulted in significant volatility in the financial markets. The extent to which COVID-19 and the resulting impact on economic conditions and the financial markets may impact our business will depend on future developments and represents a material uncertainty to our business.


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Risks and Mitigation Measures

The spread of COVID-19 presents three principal risks to our business: 1) business continuity risk; 2) market risk and 3) liquidity risk, including that resulting from policyholder behavior.

Business Continuity Risk. The spread of COVID-19 threatens the health and safety of our most valuable asset, our people. To mitigate the risk that the virus infects members of our workforce, to ensure the continuity of our operations throughout the duration of this pandemic and to ensure uninterrupted servicing of the policyholders who have entrusted us for their retirement needs, we have implemented our business continuity plan. Pursuant to that plan, as of May 8, 2020, the significant majority of our employees were working remotely, with only certain operationally essential employees working at our facilities, to the extent lawfully permitted. The essential employees who continue to work at our facilities are required to adhere to social distancing and other Center for Disease Control guidelines and government mandates, and we have designed certain operational redundancies and sterilization protocols to minimize the risk of disruption in the event that certain critical facilities, such as our mailroom, become contaminated. We have been successful in implementing our business continuity plan and to date have experienced no material impairment to our business operations. We have commenced planning for the return of non-operationally essential employees to our facilities. Currently, we expect that these employees will return in several separate phases. The timeframe over which these phases will occur is uncertain at this time and is subject to national and local orders, recommendations and guidelines.

Market Risk. The effects of the spread of COVID-19 on economic conditions and the financial markets may trigger or increase the market risks to which we are subject, namely interest rate risk, credit risk and public equity risk. The spread of COVID-19 and the Federal Reserve’s responsive measures have resulted in abrupt and significant decreases in interest rates and abrupt and significant increases in credit spreads. Changes in interest rates and credit spreads may result in a decrease in the value of our invested assets. To the extent that we needed to sell assets at these decreased values in order to satisfy our obligations, we would realize losses. However, approximately 78% of our deferred annuities have surrender charges, and 63% have market value adjustment features, which we believe greatly reduce the livelihood and magnitude of unexpected withdrawals. Further, our PRT and funding agreement obligations are predominantly non-surrenderable. In addition, we mitigate interest rate risk by managing the effective duration of our assets and liabilities. In doing so, we closely monitor and manage our net duration mismatch as well as our cash inflows and outflows. Decreases in interest rates impact the interest income that we receive on our floating rate assets. For the three months ended March 31, 2020, we recognized $15 million less in floating rate income than we recognized for the three months ended December 31, 2019, primarily as a result of the declines in interest rates occurring during the three months ended March 31, 2020.

A greater proportion of the companies that issued the securities that we hold in our investment portfolio are more likely to experience financial hardship as a result of the economic effects of COVID-19. We mitigate such risk by actively managing our investment portfolio and attempting to exit or reduce exposures we deem to carry disproportionate risk when compared to their return profile. For the three months ended March 31, 2020, we recognized increased intent to sell impairments of $13 million when compared to the three months ended March 31, 2019, as a result of our active portfolio management.

We are exposed to public equity risk through the index crediting on our FIA products, our AOG unit holdings and our common stock holdings in OneMain Holdings, Inc. (OneMain). We effectively eliminate the public equity risk arising from the index crediting on our FIA products by hedging the relevant index performance over the crediting period. Though this results in an effective hedge for economic purposes, because the instruments used to hedge the index crediting period are for a shorter term than the FIA contract, the hedge is not deemed effective for accounting purposes and results in the recognition of gains and losses from period to period. The public equity volatility arising from our holdings of AOG Units and OneMain stock is unhedged. During the three months ended March 31, 2020, we recognized an income statement impact of $(289) million resulting from our FIA products (net of offsets) and declines in the market value of our AOG and OneMain holdings.

Liquidity Risk. In the current market environment, liquidity risk can arise in several areas of our business, including but not limited to asset-liability mismatch and policyholder behavior risk. As noted above, most of our deferred annuities have surrender charges and market value adjustments, which reduce the likelihood and magnitude of expected withdrawals, and our PRT and funding agreement obligations are predominantly non-surrenderable.

To be prepared to capitalize on growth opportunities that may arise in the current market environment as well as to manage any near-term liquidity risk, we have strategically increased our available liquidity. As of April 30, 2020, we had approximately $6.3 billion of available liquidity comprised of $5.1 billion of cash and $1.25 billion of undrawn capacity under our credit agreement. We intend to further increase our available liquidity to approximately $10 billion. We have taken measures to achieve this objective, including negotiating new committed lending facilities and retaining a portion of the proceeds received from our organic channels in cash and other highly liquid assets. We have also entered into several new securities repurchase arrangements with different financial institutions to provide access to additional short-term liquidity, to the extent available.

With a record number of individuals finding themselves abruptly out of work and searching for sources of liquidity, we face policyholder behavior risk in the form of increased withdrawal levels and lapse rates may be elevated. We have been closely monitoring policyholder behavior on a daily basis. As of April 30, 2020, we had noticed no material adverse change in policyholder behavior. We mitigate policyholder behavior risk by monitoring and projecting cash inflows and outflows and by maintaining greater levels of available liquidity.


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Emerging Trends

As a result of the spread of COVID-19, the resulting impact on economic conditions and the financial markets and the mitigation efforts we have undertaken in response, we expect to see several trends impacting our future operating results.

First, we could hold a greater proportion of our invested assets in cash and other liquid assets which could impact our net investment earned rates and net spread.

Second, we expect that the current market environment will cause certain issuers of securities held in our investment portfolio to experience financial hardship, resulting in recognition of credit losses or impairments. During the three months ended March 31, 2020, we recorded a provision for credit losses of $284 million, post-adoption of the new accounting standard regarding accounting for current expected credit losses, more commonly referred to as “CECL.” While we cannot predict the duration or severity of the current economic downturn, we regularly perform stress testing of our investment portfolio under two hypothetical scenarios: a baseline recession scenario and a deep recession scenario. The assumptions for each hypothetical scenario and past experience are included in the chart below.
 
Athene Assumptions
 
Sample Historical Recession Data Peak to Trough for Calendar Year
 
Baseline
Recession
Scenario
 
Deep
Recession
Scenario
 
1990
 
2001
 
2008
 
Euro 2016
10 Yr US Treasury Yield
Down 60%
 
Down 83%
 
Up 4%
 
Down 21%
 
Down 43%
 
Down 84%1
Absolute Spreads
(BBB / B)
279bps /
802bps
 
636bps / 1,789bps
 
240bps /
NA
 
318bps /
1,083bps
 
642bps /
1,913bps
 
317bps /
876bps
Equity Markets2
(25)%
 
(49)%
 
(20)%
 
(30)%
 
(49)%
 
(12)%
FI Defaults
(BBB / B)
0.70% /
12.9%
 
1.4% /
13.7%
 
0.30% /
13.7%
 
1.01% /
9.2%
 
0.9% /
7.1%
 
0.0% /
 2.4%
Housing Price
(Peak to Trough)
(3)%
 
(27)%
 
(3)%
 
No Decline
 
(33)%
 
No Decline
 
 
 
 
 
 
 
 
 
 
 
 
1 German 10-year bund yield.
2 Primarily for representative purposes. Stress scenarios apply customized stresses as relevant for Alternatives sub-categories.

In March 2020, we evaluated our investment portfolio under these hypothetical stress scenarios and estimated that absent any management intervention, we would recognize credit losses and impairments, net of DAC and tax offsets, as well as losses in our alternatives portfolio, of approximately $1 billion and $2 billion under the baseline recession scenario and deep recession scenario, respectively. These scenarios are hypothetical and are not representative of the current economic environment and even if representative, actual results may differ materially from estimates.

Third, we have experienced downward pressure on the valuation of our alternatives portfolio. During the three months ended March 31, 2020, we experienced a decrease in net income of $37 million attributed to mark-to-market performance of our alternative investments. With approximately 60% of our alternatives portfolio accounted for on a one to three month lag, we expect to see any adverse impact of the economic environment during the three months ended March 31, 2020 largely reflected in our second quarter performance for those alternatives reported on a lag.

Fourth, the substantial and sudden decrease in interest rates during March 2020 will have a negative impact on adjusted operating income if the current rates persist for a prolonged period. Currently, we estimate that a 25 basis point decrease in interest rates that persists for a 12-month period will result in an approximate $30 – $35 million decrease in adjusted operating income.
The spread of COVID-19, the resulting impact on economic conditions and the financial markets and the mitigating efforts we have and will undertake may have consequences to our business that are unforeseen at this time. The emerging trends identified above do not purport to be complete and actual experience may differ materially from our current expectations.

Discontinuation of LIBOR
The UK Financial Conduct Authority (FCA) has announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. It is expected that a number of private-sector banks currently reporting information used to set LIBOR will stop doing so after 2021 when their current reporting commitment ends, which could either cause LIBOR to stop publication immediately or cause the FCA to determine that the quality of LIBOR has degraded to the degree that LIBOR is no longer representative of its underlying market. With an estimated $200 trillion in notional transactions referencing USD LIBOR in the cash and derivatives markets, including more than $35 trillion extending past 2021, the discontinuation of LIBOR could have a significant impact on the financial markets and represents a material uncertainty to our business.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


To manage the uncertainty surrounding the discontinuation of LIBOR we have established a plan, which involves the following six phases: (1) identify and quantify our exposure to LIBOR; (2) establish a counterparty communication strategy; (3) evaluate the specific risks to our business arising as a result of the transition; (4) identify actions that we can take to mitigate the risks identified in phase 3; (5) monitor market developments regarding the adoption of a replacement rate; and (6) transition to the market consensus rate or rates once such rate or rates emerge and are operational.
The phases of our plan are not discrete and need not occur in chronological order. Our plan is subject to change as we gain additional information. We have created an Executive Steering Committee composed of senior executives to coordinate and oversee the execution of our plan.

As of March 31, 2020, we had contracts tied to LIBOR in the notional amounts set forth in the table below:
(In millions)
Total Exposure
 
Extending Beyond 2021
Investments
$
21,402

 
$
18,103

“Excess Return” Product Liabilities
7,671

 
880

Derivatives Hedging “Excess Return” Product Liabilities
7,456

 

Other Derivatives
1,886

 
453

Other Contracts
2,963

 
2,663

Total notional of contracts tied to LIBOR
$
41,378

 
$
22,099


Investments

As of March 31, 2020, our investments tied to LIBOR were in the following asset classes:
(In millions)
Total Exposure
 
Extending Beyond 2021
Multi-lateral Arrangements
 
 
 
Corporates
$
1,014

 
$
495

RMBS
4,168

 
3,864

CMBS
274

 
30

CLO
10,521

 
10,448

ABS
1,402

 
1,324

Bank Loans
402

 
277

Total Multi-lateral Arrangements
17,781

 
16,438

Bi-lateral Arrangements


 
 
CML
3,479

 
1,523

RML
142

 
142

Total Bi-lateral Arrangements
3,621

 
1,665

Total investments tied to LIBOR
$
21,402

 
$
18,103


Of the total notional value of investment-related contracts tied to LIBOR, extending beyond 2021, $16.4 billion or 90.8% relate to multi-lateral arrangements. These arrangements are typically characterized by a large, diverse set of unrelated holders, the majority or all of whom must consent to amendments to the terms of the underlying investment instrument. Generally, when the amendments concern a material term such as the determination of interest, consent must be unanimous. Given the collective action issues inherent in such structures, such consent is impracticable and beyond our control. To the extent that such legacy arrangements do not contemplate the permanent discontinuation of LIBOR, we would look to some broad-based solution, such as the Alternative Reference Rates Committee’s proposed New York law amendment, to rectify such deficiency. To the extent that the fallback rates ultimately used to determine interest payable on such investments do not align with the fallback rates used to determine interest payable on the underlying assets, economic losses could be sustained on the overall structure.
The remaining notional value of investment-related contracts tied to LIBOR extending beyond 2021 of $1.7 billion or 9.2% relates to bi-lateral arrangements for which we, or some party acting on our behalf, such as a mortgage servicer, are able to negotiate directly with the applicable counterparty for amendments to the terms of the arrangement. For these arrangements, we will evaluate the need for amendments to legacy contracts.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


“Excess Return” Product Liabilities and Associated Hedging Instruments

As of March 31, 2020, we had product liabilities with a notional value of approximately $7.7 billion for which interest credited is computed on “excess return” indices (return of index in excess of LIBOR) and for which we expect product liabilities with a notional value of approximately $880 million to extend beyond 2021. The “excess return” indices to which these products are tied are primarily proprietary indices for which key inputs are determined by the index sponsor. The index sponsor has the right to unilaterally change the reference rate upon the discontinuation of LIBOR. As a result, we do not anticipate any administrative concerns in connection with the transition from LIBOR to a replacement rate with respect to these products.

As of March 31, 2020, we held derivatives with a notional value of approximately $7.5 billion to hedge our exposure to these product liabilities. As these derivatives are primarily purchased to hedge the current crediting period, we expect that substantially all of such derivatives will expire before the end of 2021. We will be required to purchase new derivatives in future periods to hedge future crediting periods associated with existing product liabilities, which will expose us to potential basis mismatch to the extent that the reference rate for the product liability is not the same as the reference rate for the derivative instrument.

Other Derivatives

Our other derivative contracts tied to LIBOR are generally entered into pursuant to an ISDA Master Agreement. We believe that fallbacks contemplating a permanent discontinuation of LIBOR will be integrated into the ISDA Master Agreement and applied to our outstanding obligations via standard protocol counterparty consent. To the extent that the fallbacks ultimately incorporated into our other derivative contracts result in the use of a replacement rate that differs from that employed in the contract being hedged, we will experience basis mismatch. We will continue to evaluate this risk as fallbacks become better defined.

Other Contracts

Other contracts is comprised of our credit agreement, floating rate funding agreements and fixed-to-float Series A preference shares, all of which contemplate the permanent discontinuation of LIBOR.

We can provide no assurance that we will be successful at completing all the phases of our plan prior to the discontinuation of LIBOR. Completion of certain phases of our plan are contingent upon market developments and are therefore not fully within our control. To the extent management effort and attention is focused on other matters, such as responding to the risks posed by COVID-19, the timely completion of our plan could become more difficult. Failure to complete all phases of our plan prior to the discontinuation of LIBOR may have a material adverse effect on our business, financial position, results of operations and cash flows.

Demographics

Over the next four decades, the retirement-age population is expected to experience unprecedented growth. Technological advances and improvements in healthcare are projected to continue to contribute to increasing average life expectancy, and aging individuals must be prepared to fund retirement periods that will last longer than ever before. Further, many working households in the United States do not have adequate retirement savings. As a tool for addressing the unmet need for retirement planning, we believe that many Americans have begun to look to tax-efficient savings products with low-risk or guaranteed return features and potential equity market upside. Our tax-efficient savings products are well positioned to meet this increasing customer demand.

Competition

We operate in highly competitive markets. We face a variety of large and small industry participants, including diversified financial institutions and insurance and reinsurance companies. These companies compete in one form or another for the growing pool of retirement assets driven by a number of external factors such as the continued aging of the population and the reduction in safety nets provided by governments and private employers. In the markets in which we operate, scale and the ability to provide value-added services and build long-term relationships are important factors to compete effectively. We believe that our leading presence in the retirement market, diverse range of capabilities and broad distribution network uniquely position us to effectively serve consumers’ increasing demand for retirement solutions, particularly in the FIA market.

According to LIMRA, total fixed annuity market sales in the United States were $139.8 billion for the year ended December 31, 2019, a 4.7% increase from the same time period in 2018. In the total fixed annuity market, for the year ended December 31, 2019 (the most recent period for which specific market share data is available), we were the 5th largest company based on sales of $6.8 billion, translating to a 4.8% market share. For the year ended December 31, 2018, our market share was 5.6% with sales of $7.5 billion.

FIAs have been one of the fastest growing annuity products, having grown from $27.3 billion in sales for the year ended December 31, 2005 to $73.5 billion in sales for the year ended December 31, 2019. FIA sales grew $3.9 billion in the one year period from December 31, 2018 to December 31, 2019. According to LIMRA data, for the year ended December 31, 2019 (the most recent period for which specific market share data is available), we were the 2nd largest provider of FIAs based on sales of $6.1 billion, and our market share for the same period was 8.3%. For the year ended December 31, 2018, we were the 2nd largest provider of FIAs based on sales of $6.6 billion, translating to a 9.4% market share.

62


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Key Operating and Non-GAAP Measures

In addition to our results presented in accordance with GAAP, we present certain financial information that includes non-GAAP measures. Management believes the use of these non-GAAP measures, together with the relevant GAAP measures, provides information that may enhance an investor’s understanding of our results of operations and the underlying profitability drivers of our business. The majority of these non-GAAP measures are intended to remove from the results of operations the impact of market volatility (other than with respect to alternative investments) as well as integration, restructuring and certain other expenses which are not part of our underlying profitability drivers, as such items fluctuate from period to period in a manner inconsistent with these drivers. These measures should be considered supplementary to our results in accordance with GAAP and should not be viewed as a substitute for the corresponding GAAP measures.

Adjusted Operating Income (Loss) Available to Common Shareholders

Adjusted operating income (loss) available to common shareholders is a non-GAAP measure used to evaluate our financial performance excluding market volatility and expenses related to integration, restructuring, stock compensation and other expenses. Our adjusted operating income (loss) available to common shareholders equals net income (loss) available to AHL common shareholders adjusted to eliminate the impact of the following (collectively, the non-operating adjustments):

Investment Gains (Losses), Net of Offsets—Consists of the realized gains and losses on the sale of AFS securities, the change in fair value of reinsurance assets, unrealized gains and losses, allowances, and other investment gains and losses. Unrealized, allowances and other investment gains and losses are comprised of the fair value adjustments of trading securities (other than CLOs) and investments held under the fair value option, derivative gains and losses not hedging FIA index credits, and the change in credit loss allowances recognized in operations net of the change in AmerUs Closed Block fair value reserve related to the corresponding change in fair value of investments and the change in unit-linked reserves related to the corresponding trading securities. Investment gains and losses are net of offsets related to DAC, DSI, and VOBA amortization and changes to guaranteed lifetime withdrawal benefit (GLWB) and guaranteed minimum death benefit (GMDB) reserves (together, GLWB and GMDB reserves represent rider reserves) as well as the market value adjustments (MVA) associated with surrenders or terminations of contracts.

Change in Fair Values of Derivatives and Embedded Derivatives – FIAs, Net of Offsets—Consists of impacts related to the fair value accounting for derivatives hedging the FIA index credits and the related embedded derivative liability fluctuations from period to period. The index reserve is measured at fair value for the current period and all periods beyond the current policyholder index term. However, the FIA hedging derivatives are purchased to hedge only the current index period. Upon policyholder renewal at the end of the period, new FIA hedging derivatives are purchased to align with the new term. The difference in duration between the FIA hedging derivatives and the index credit reserves creates a timing difference in earnings. This timing difference of the FIA hedging derivatives and index credit reserves is included as a non-operating adjustment, net of offsets related to DAC, DSI, and VOBA amortization and changes to rider reserves.

We primarily hedge with options that align with the index terms of our FIA products (typically 1–2 years). From an economic basis, we believe this is suitable because policyholder accounts are credited with index performance at the end of each index term. However, because the term of an embedded derivative in an FIA contract is longer-dated, there is a duration mismatch which may lead to mismatches for accounting purposes.

Integration, Restructuring, and Other Non-operating Expenses—Consists of restructuring and integration expenses related to acquisitions and block reinsurance costs as well as certain other expenses, which are not predictable or related to our underlying profitability drivers.

Stock Compensation Expense—Consists of stock compensation expenses associated with our share incentive plans, excluding our long-term incentive plan, which are not related to our underlying profitability drivers and fluctuate from time to time due to the structure of our plans.

Bargain Purchase Gain—Consists of adjustments to net income (loss) available to AHL common shareholders as they are not related to our underlying profitability drivers.

Income Tax (Expense) Benefit – Non-operating—Consists of the income tax effect of non-operating adjustments and is computed by applying the appropriate jurisdiction’s tax rate to the non-operating adjustments that are subject to income tax.

We consider these non-operating adjustments to be meaningful adjustments to net income (loss) available to AHL common shareholders for the reasons discussed in greater detail above. Accordingly, we believe using a measure which excludes the impact of these items is useful in analyzing our business performance and the trends in our results of operations. Together with net income (loss) available to AHL common shareholders, we believe adjusted operating income (loss) available to common shareholders provides a meaningful financial metric that helps investors understand our underlying results and profitability. Adjusted operating income (loss) available to common shareholders should not be used as a substitute for net income (loss) available to AHL common shareholders.


63


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Adjusted Operating ROE

Adjusted operating ROE is a non-GAAP measure used to evaluate our financial performance excluding the impacts of AOCI and the cumulative change in fair value of funds withheld and modco reinsurance assets, net of DAC, DSI, rider reserve and tax offsets. Adjusted AHL common shareholders’ equity is calculated as the ending AHL shareholders’ equity excluding AOCI, the cumulative change in fair value of funds withheld and modco reinsurance assets and preferred stock. Adjusted operating ROE is calculated as the adjusted operating income (loss) available to common shareholders, divided by average adjusted AHL common shareholders’ equity. These adjustments fluctuate period to period in a manner inconsistent with our underlying profitability drivers as the majority of such fluctuation is related to the market volatility of the unrealized gains and losses associated with our AFS securities. Except with respect to reinvestment activity relating to acquired blocks of businesses, we typically buy and hold AFS investments to maturity throughout the duration of market fluctuations, therefore, the period-over-period impacts in unrealized gains and losses are not necessarily indicative of current operating fundamentals or future performance. Accordingly, we believe using measures which exclude AOCI and the cumulative change in fair value of funds withheld and modco reinsurance assets are useful in analyzing trends in our operating results. To enhance the ability to analyze these measures across periods, interim periods are annualized. Adjusted operating ROE should not be used as a substitute for ROE. However, we believe the adjustments to net income (loss) available to AHL common shareholders and equity are significant to gaining an understanding of our overall financial performance.

Adjusted Operating Earnings (Loss) Per Common Share, Weighted Average Common Shares Outstanding Adjusted Operating and Adjusted Book Value Per Common Share

Adjusted operating earnings (loss) per common share, weighted average common shares outstanding – adjusted operating and adjusted book value per common share are non-GAAP measures used to evaluate our financial performance and financial condition. The non-GAAP measures adjust the number of shares included in the corresponding GAAP measures to reflect the conversion or settlement of all shares and other stock-based awards outstanding. We believe using these measures represent an economic view of our share counts and provide a simplified and consistent view of our outstanding shares. Adjusted operating earnings (loss) per common share is calculated as the adjusted operating income (loss) available to common shareholders, over the weighted average common shares outstanding – adjusted operating. Adjusted book value per common share is calculated as the adjusted AHL common shareholders’ equity divided by the adjusted operating common shares outstanding. Effective February 28, 2020, all Class B common shares were converted into Class A common shares and all Class M common shares were converted into warrants and Class A common shares. Our Class B common shares were economically equivalent to Class A common shares and could have been converted to Class A common shares on a one-for-one basis at any time. Our Class M common shares were in the legal form of shares but economically functioned as options as they were convertible into Class A common shares after vesting and settlement of the conversion price. In calculating Class A diluted earnings per share on a GAAP basis, we are required to apply sequencing rules to determine the dilutive impacts, if any, of our Class B common shares, Class M common shares and any other stock-based awards. To the extent our Class B common shares, Class M common shares and/or any other stock-based awards were not dilutive, after considering the dilutive effects of the more dilutive securities in the sequence, they were excluded. Weighted average common shares outstanding – adjusted operating and adjusted operating common shares outstanding assume conversion or settlement of all outstanding items that are able to be converted to or settled in Class A common shares, including the impacts of Class B common shares on a one-for-one basis, the impacts of all Class M common shares net of the conversion price and any other stock-based awards, but excluding any awards for which the exercise or conversion price exceeds the market value of our Class A common shares on the applicable measurement date. For certain historical periods, Class M shares were not included due to issuance restrictions which were contingent upon our IPO. Adjusted operating earnings (loss) per common share, weighted average common shares outstanding – adjusted operating and adjusted book value per common share should not be used as a substitute for basic earnings (loss) per share – Class A common shares, basic weighted average common shares outstanding – Class A or book value per common share. However, we believe the adjustments to the shares and equity are significant to gaining an understanding of our overall results of operations and financial condition.

Adjusted Debt to Capital Ratio

Adjusted debt to capital ratio is a non-GAAP measure used to evaluate our capital structure excluding the impacts of AOCI and the cumulative change in fair value of funds withheld and modco reinsurance assets, net of DAC, DSI, rider reserve and tax offsets. Adjusted debt to capital ratio is calculated as total debt divided by adjusted AHL shareholders’ equity. Adjusted debt to capital ratio should not be used as a substitute for the debt to capital ratio. However, we believe the adjustments to total debt and shareholders’ equity are significant to gaining an understanding of our capitalization, debt utilization and debt capacity.

Retirement Services Net Investment Spread, Investment Margin on Deferred Annuities and Operating Expenses
    
Net investment spread is a key measurement of the profitability of our Retirement Services segment. Net investment spread measures our investment performance less the total cost of our liabilities. Net investment earned rate is a key measure of our investment performance, while cost of funds is a key measure of the cost of our policyholder benefits and liabilities. Investment margin on our deferred annuities measures our investment performance less the cost of crediting for our deferred annuities, which make up a significant portion of our net reserve liabilities.


64


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Net investment earned rate is a non-GAAP measure we use to evaluate the performance of our net invested assets that does not correspond to GAAP net investment income. Net investment earned rate is computed as the income from our net invested assets divided by the average net invested assets, excluding the impacts of our investment in Apollo, for the relevant period. To enhance the ability to analyze these measures across periods, interim periods are annualized. The adjustments to arrive at our net investment earned rate add (a) alternative investment gains and losses, (b) gains and losses related to trading securities for CLOs, (c) net VIE impacts (revenues, expenses and noncontrolling interest), (d) forward points gains and losses on foreign exchange derivative hedges and (e) the change in fair value of reinsurance assets, and removes the proportionate share of the ACRA net investment income associated with the ACRA noncontrolling interest as well as the gain or loss on our investment in Apollo. We include the income and assets supporting our change in fair value of reinsurance assets by evaluating the underlying investments of the funds withheld at interest receivables and we include the net investment income from those underlying investments which does not correspond to the GAAP presentation of change in fair value of reinsurance assets. We exclude the income and assets supporting business that we have exited through ceded reinsurance including funds withheld agreements. We believe the adjustments for reinsurance provide a net investment earned rate on the assets for which we have economic exposure.

Cost of funds includes liability costs related to cost of crediting on both deferred annuities and institutional products as well as other liability costs, but does not include the proportionate share of the ACRA cost of funds associated with the noncontrolling interest. Cost of funds is computed as the total liability costs divided by the average net invested assets, excluding our investment in Apollo, for the relevant period. To enhance the ability to analyze these measures across periods, interim periods are annualized.

Cost of crediting includes the costs for both deferred annuities and institutional products. Cost of crediting on deferred annuities is the interest credited to the policyholders on our fixed strategies as well as the option costs on the indexed annuity strategies. With respect to FIAs, the cost of providing index credits includes the expenses incurred to fund the annual index credits, and where applicable, minimum guaranteed interest credited. Cost of crediting on institutional products is comprised of PRT costs including interest credited, benefit payments and other reserve changes, net of premiums received when issued, as well as funding agreement costs including the interest payments and other reserve changes. Cost of crediting is computed as the cost of crediting for deferred annuities and institutional products divided by the average net invested assets, excluding the investment in Apollo, for the relevant periods. Cost of crediting on deferred annuities is computed as the net interest credited on fixed strategies and option costs on indexed annuity strategies divided by the average net account value of our deferred annuities. Cost of crediting on institutional products is computed as the PRT and funding agreement costs divided by the average net institutional reserve liabilities. Our average net invested assets, excluding our investment in Apollo, net account values and net institutional reserve liabilities are averaged over the number of quarters in the relevant period to obtain our associated cost of crediting for such period. To enhance the ability to analyze these measures across periods, interim periods are annualized.

Other liability costs include DAC, DSI and VOBA amortization, change in rider reserves, the cost of liabilities on products other than deferred annuities and institutional products, excise taxes, premiums, product charges and other revenues. We believe a measure like other liability costs is useful in analyzing the trends of our core business operations and profitability. While we believe other liability costs is a meaningful financial metric and enhances our understanding of the underlying profitability drivers of our business, it should not be used as a substitute for total benefits and expenses presented under GAAP.

Net investment earned rate, cost of funds, net investment spread and investment margin on deferred annuities are non-GAAP measures we use to evaluate the profitability of our business. We believe these metrics are useful in analyzing the trends of our business operations, profitability and pricing discipline. While we believe each of these metrics are meaningful financial metrics and enhance our understanding of the underlying profitability drivers of our business, they should not be used as a substitute for net investment income, interest sensitive contract benefits or total benefits and expenses presented under GAAP.

Operating expenses excludes integration, restructuring and other non-operating expenses, stock compensation expense, interest expense and policy acquisition expenses. We believe a measure like operating expenses is useful in analyzing the trends of our core business operations and profitability. While we believe operating expenses is a meaningful financial metric and enhances our understanding of the underlying profitability drivers of our business, it should not be used as a substitute for policy and other operating expenses presented under GAAP.


65


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Net Invested Assets

In managing our business, we analyze net invested assets, which does not correspond to total investments, including investments in related parties, as disclosed in our consolidated financial statements and notes thereto. Net invested assets represents the investments that directly back our net reserve liabilities as well as surplus assets. Net invested assets, excluding our investment in Apollo, is used in the computation of net investment earned rate, which allows us to analyze the profitability of our investment portfolio. Net invested assets includes (a) total investments on the consolidated balance sheets with AFS securities at cost or amortized cost, excluding derivatives, (b) cash and cash equivalents and restricted cash, (c) investments in related parties, (d) accrued investment income, (e) VIE assets, liabilities and noncontrolling interest adjustments, (f) net investment payables and receivables, (g) policy loans ceded (which offset the direct policy loans in total investments) and (h) an allowance for credit losses. Net invested assets also excludes assets associated with funds withheld liabilities related to business exited through reinsurance agreements and derivative collateral (offsetting the related cash positions). We include the underlying investments supporting our assumed funds withheld and modco agreements in our net invested assets calculation in order to match the assets with the income received. We believe the adjustments for reinsurance provide a view of the assets for which we have economic exposure. Net invested assets includes our proportionate share of ACRA investments, based on our economic ownership, but does not include the proportionate share of investments associated with the noncontrolling interest. Net invested assets also includes our investment in Apollo. Our net invested assets, excluding our investment in Apollo, are averaged over the number of quarters in the relevant period to compute our net investment earned rate for such period. While we believe net invested assets is a meaningful financial metric and enhances our understanding of the underlying drivers of our investment portfolio, it should not be used as a substitute for total investments, including related parties, presented under GAAP.

Net Reserve Liabilities

In managing our business, we also analyze net reserve liabilities, which does not correspond to total liabilities as disclosed in our consolidated financial statements and notes thereto. Net reserve liabilities represent our policyholder liability obligations net of reinsurance and is used to analyze the costs of our liabilities. Net reserve liabilities include (a) the interest sensitive contract liabilities, (b) future policy benefits, (c) dividends payable to policyholders, and (d) other policy claims and benefits, offset by reinsurance recoverable, excluding policy loans ceded. Net reserve liabilities include our proportionate share of ACRA reserve liabilities, based on our economic ownership, but does not include the proportionate share of reserve liabilities associated with the noncontrolling interest. Net reserve liabilities is net of the ceded liabilities to third-party reinsurers as the costs of the liabilities are passed to such reinsurers and, therefore, we have no net economic exposure to such liabilities, assuming our reinsurance counterparties perform under our agreements. The majority of our ceded reinsurance is a result of reinsuring large blocks of life business following acquisitions. For such transactions, GAAP requires the ceded liabilities and related reinsurance recoverables to continue to be recorded in our consolidated financial statements despite the transfer of economic risk to the counterparty in connection with the reinsurance transaction. While we believe net reserve liabilities is a meaningful financial metric and enhances our understanding of the underlying profitability drivers of our business, it should not be used as a substitute for total liabilities presented under GAAP.

Sales

Sales statistics do not correspond to revenues under GAAP but are used as relevant measures to understand our business performance as it relates to deposits generated during a specific period of time. Our sales statistics include deposits for fixed rate annuities and FIAs and align with the LIMRA definition of all money paid into an individual annuity, including money paid into new contracts with initial purchase occurring in the specified period and existing contracts with initial purchase occurring prior to the specified period (excluding internal transfers). While we believe sales is a meaningful metric and enhances our understanding of our business performance, it should not be used as a substitute for premiums presented under GAAP.


Consolidated Results of Operations

The following summarizes the consolidated results of operations:
 
Three months ended March 31,
(In millions, except percentages)
2020
 
2019
Revenues
$
(1,549
)
 
$
4,995

Benefits and expenses
(167
)
 
4,255

Income (loss) before income taxes
(1,382
)
 
740

Income tax expense (benefit)
(166
)
 
32

Net income (loss)
(1,216
)
 
708

Less: Net loss attributable to noncontrolling interests
(169
)
 

Net income (loss) attributable to Athene Holding Ltd.
(1,047
)
 
708

Less: Preferred stock dividends
18

 

Net income (loss) available to AHL common shareholders
$
(1,065
)
 
$
708

 
 
 
 
ROE
(36.5
)%
 
30.8
%

66


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019

In this section, references to 2020 refer to the three months ended March 31, 2020 and references to 2019 refer to the three months ended March 31, 2019.

Net Income (Loss) Available to AHL Common Shareholders

Net income (loss) available to AHL common shareholders decreased by $1.8 billion, or 250%, to $(1.1) billion in 2020 from $708 million in 2019. ROE decreased to (36.5)% from 30.8% in 2019. The decrease in net income (loss) available to AHL common shareholders was driven by a $6.5 billion decrease in revenues, partially offset by a decrease of $4.4 billion in benefits and expenses and a $198 million decrease in income tax expenses.

Revenues

Revenues decreased by $6.5 billion to $(1.5) billion in 2020 from $5.0 billion in 2019. The decrease was driven by a decrease in investment related gains and losses, a decrease in premiums, and a decrease in net investment income.

Investment related gains and losses decreased by $5.3 billion to $(3.6) billion in 2020 from $1.8 billion in the prior year, primarily due to the change in fair value of FIA hedging derivatives, the change in fair value of reinsurance assets, the provision for credit losses, the change in fair value of trading securities and a decrease in equity securities reflecting the decline in financial markets. The change in fair value of FIA hedging derivatives decreased $2.4 billion driven by the unfavorable performance of the indices upon which our call options are based. The majority of our call options are based on the S&P 500 index which decreased 20.0% in 2020, compared to an increase of 13.1% in 2019. The change in fair value of reinsurance assets decreased $2.3 billion primarily driven by the change in the value of the underlying assets related to credit spreads widening, partially offset by the decrease in U.S. Treasury rates. The unfavorable provision for credit losses of $284 million was primarily a result of the forecasted economic downturn from the spread of COVID-19. The unfavorable change in fair value of trading securities of $279 million was comprised primarily of a decrease in AmerUs Closed Block assets of $97 million, CLO equity securities, non-redeemable preferred stock and other trading securities primarily due to credit spreads widening, partially offset by the decrease in U.S. Treasury rates.

Premiums decreased by $860 million to $1.1 billion in 2020 from $2.0 billion in the prior year, driven by lower PRT premiums compared to prior year.

Net investment income decreased by $337 million to $745 million in 2020 from $1.1 billion in the prior year, primarily driven by an unrealized loss on our investment in Apollo of $297 million due to the decrease in share price and an increase in the liquidity discount, alternative investment losses, higher investment management fees due primarily to increased invested assets compared to the prior year and lower floating rate income due to the lower interest rate environment.

Benefits and Expenses

Benefits and expenses decreased by $4.4 billion to $(167) million in 2020 from $4.3 billion in 2019. The decrease was driven by a decrease in interest sensitive contract benefits, a decrease in future policy and other policy benefits and a decrease in DAC, DSI and VOBA amortization.

Interest sensitive contract benefits decreased by $2.8 billion to $(1.3) billion in 2020 from $1.5 billion in 2019, driven by a decrease in FIA fair value embedded derivatives of $2.8 billion. The change in the FIA fair value embedded derivatives was primarily due the performance of the equity indices to which our FIA policies are linked, primarily the S&P 500 index, which experienced a decrease of 20.0% in 2020, compared to an increase of 13.1% in 2019, as well as a favorable change in discount rates used in our embedded derivative calculations as the current year experienced an increase in discount rates compared to 2019, which experienced a decrease in discount rates.

Future policy and other policy benefits decreased by $973 million to $1.4 billion in 2020 from $2.3 billion in 2019, primarily attributable to lower PRT obligations, a decrease in the change in AmerUs Closed Block fair value liability and a decrease in the change in rider reserves. The favorable change in the AmerUs Closed Block fair value liability of $105 million was primarily driven by the increase in unrealized losses on the underlying investments related to credit spreads widening, partially offset by the decrease in U.S. Treasury rates compared to prior year. The change in rider reserve of $46 million was primarily due to the unfavorable change in reinsurance embedded derivatives, partially offset by the favorable net change in FIA derivatives, unfavorable impacts from equity market performance and growth in the block of business.

DAC, DSI and VOBA amortization decreased by $639 million to $(403) million in 2020 from $236 million in 2019, primarily due to the unfavorable change in investment related gains and losses as a result of an unfavorable change in reinsurance embedded derivatives, partially offset by the favorable net change in FIA derivatives, unfavorable impacts from equity market performance and growth in the block of business.

Taxes

Income tax expense (benefit) decreased by $198 million to $(166) million in 2020 from $32 million in 2019. The income tax benefit for 2020 was primarily driven by lower income before tax resulting from the unfavorable change in reinsurance embedded derivatives and unrealized losses on our investment in Apollo.

67


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



Our effective tax rate in the first quarter of 2020 was (12%) and 4% in 2019. Our effective tax rates may vary period to period depending upon the relationship of income and loss subject to tax compared to consolidated income and loss before income taxes.

Noncontrolling Interest

Noncontrolling interest decreased by $169 million to $(169) million in 2020 from $0 million in 2019, driven by a net loss related to noncontrolling interests in ACRA following the sale of a 67% interest in ACRA to ADIP on October 1, 2019. There was no significant noncontrolling interest prior to the ACRA sale to ADIP.

Preferred Stock Dividends

Preferred stock dividends increased by $18 million to $18 million in 2020 from $0 million in 2019, driven by our issuance of preferred stock in in June and September of 2019.


Results of Operations by Segment

The following summarizes our adjusted operating income (loss) available to common shareholders by segment:
 
Three months ended March 31,
(In millions, except percentages)
2020
 
2019
Net income (loss) available to AHL common shareholders
$
(1,065
)
 
$
708

 
 
 
 
Non-operating adjustments
 
 
 
Realized gains (losses) on sale of AFS securities
12

 
12

Unrealized, allowances and other investment gains (losses)
(369
)
 
29

Change in fair value of reinsurance assets
(1,277
)
 
616

Offsets to investment gains (losses)
495

 
(199
)
Investment gains (losses), net of offsets
(1,139
)
 
458

Change in fair values of derivatives and embedded derivatives – FIAs, net of offsets
65

 
(27
)
Integration, restructuring and other non-operating expenses
(4
)
 
(1
)
Stock compensation expense
(10
)
 
(3
)
Income tax (expense) benefit – non-operating
131

 
(6
)
Less: Total non-operating adjustments
(957
)
 
421

Adjusted operating income (loss) available to common shareholders
$
(108
)
 
$
287

 
 
 
 
Adjusted operating income (loss) available to common shareholders by segment
 
 
 
Retirement Services
$
204

 
$
286

Corporate and Other
(312
)
 
1

Adjusted operating income (loss) available to common shareholders
$
(108
)
 
$
287

 
 
 
 
Adjusted operating ROE
(4.4
)%
 
12.8
%
Retirement Services adjusted operating ROE
10.6
 %
 
14.4
%


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019

Adjusted Operating Income (Loss) Available to Common Shareholders

Adjusted operating income (loss) available to common shareholders decreased by $395 million, or 138%, to $(108) million in 2020 from $287 million in 2019. Adjusted operating ROE was (4.4)%, down from 12.8% in 2019. Adjusted operating income (loss) available to common shareholders excluding the investment in Apollo, net of tax was $131 million for the three months ended March 31, 2020. The decrease in adjusted operating income (loss) available to common shareholders was primarily driven by a decrease in our Corporate and Other segment of $313 million, as well as a decrease in our Retirement Services segment of $82 million.

Our consolidated net investment earned rate was 3.87% in 2020, a decrease from 4.28% in 2019, primarily due to the unfavorable performance in our alternative portfolio as well as less favorable performance of our fixed and other investment portfolio. Alternative net investment earned rate was (2.58)% in 2020, a decrease from 4.36% in 2019, driven by a decrease in the market value of the equity position in OneMain as well as decreases in credit fund and MidCap returns. Fixed and other net investment earned rate was 4.20% in 2020, a decrease from 4.28% in 2019, driven by lower floating rate investment income and higher investment management fees due primarily to increased invested assets compared to the prior year, partially offset by higher bond call income and mortgage prepayments.

Non-operating Adjustments

Non-operating adjustments decreased by $1.4 billion to $(957) million in 2020 from $421 million in 2019. The decrease in non-operating adjustments was primarily driven by the unfavorable changes in fair value of reinsurance assets and credit loss allowances, partially offset by the favorable change in net FIA derivatives. The change in fair value of reinsurance assets were unfavorable by $1.9 billion due to credit spreads widening, partially offset by a decrease in U.S. Treasury rates. The change in provision for credit loss in 2020 of $284 million was primarily a result of the forecasted economic downturn from the spread of COVID-19. Net FIA derivatives were favorable by $92 million primarily due to the favorable change in discount rates used in our embedded derivative calculations, partially offset by the unfavorable performance of the equity indices to which our FIA policies are linked, primarily the S&P 500 index.

Retirement Services

Retirement Services is comprised of our United States and Bermuda operations which issue and reinsure retirement savings products and institutional products. Retirement Services has retail operations, which provide annuity retirement solutions to our policyholders. Retirement Services also has reinsurance operations, which reinsure FIAs, MYGAs, traditional one year guarantee fixed deferred annuities, immediate annuities and institutional products from our reinsurance partners. In addition, our institutional operations, including funding agreements and PRT obligations, are included in our Retirement Services segment.

Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019

Adjusted Operating Income Available to Common Shareholders

Adjusted operating income available to common shareholders decreased by $82 million, or 29%, to $204 million in 2020, from $286 million in 2019. Adjusted operating ROE was 10.6%, down from 14.4% in the prior period. The decrease in adjusted operating income available to common shareholders was driven by higher cost of funds, partially offset by higher net investment earnings. Cost of funds were $87 million higher primarily related to unfavorable rider reserves and DAC amortization related to unfavorable impacts from equity market performance and higher k-factors, partially offset by lower gross profits. Net investment earnings increased $13 million primarily driven by $5.9 billion of growth in our average net invested assets from prior year attributed to a strong growth in deposits as well as higher bond call income and mortgage prepayments, partially offset by lower floating rate investment income, alternative investment losses and higher investment management fees due primarily to increased invested assets compared to the prior year.

Net Investment Spread
 
Three months ended March 31,
 
2020
 
2019
Net investment earned rate
4.04
%
 
4.21
%
Cost of funds
3.01
%
 
2.85
%
Net investment spread
1.03
%
 
1.36
%


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Net investment spread, which measures the spread on our investment performance less the total cost of our liabilities, decreased 33 basis points to 1.03% in 2020 from 1.36% in 2019. Net investment earned rate decreased due to a decline in alternative net investment earned rate and fixed and other net investment earned rate. The alternative net investments earned rate decreased in 2020 to 0.56% from 2.13% in 2019, driven by lower credit fund returns, mainly PK AirFinance equities, as well as a lower MidCap return mainly due to a decrease in valuation reflecting an increase in loan loss assumptions and lower origination volumes due to the current interest rate environment. The fixed and other net investment earned rate decreased in 2020 to 4.20% from 4.28% in 2019, primarily attributed to lower floating rate income and higher investment management fees due primarily to increased invested assets compared to the prior year, partially offset by higher bond call income and mortgage prepayments.

Cost of funds increased by 16 basis points to 3.01% in 2020, from 2.85% in 2019, primarily driven by unfavorable rider reserves and DAC amortization due to unfavorable impacts from equity market performance and higher k-factors, partially offset by lower gross profits and lower cost of crediting. Cost of crediting decreased 8 basis points primarily driven by favorable rate actions on deferred annuities, a decrease in floating rate funding agreement rates and a decrease in PRT rates.

Investment Margin on Deferred Annuities
 
Three months ended March 31,
 
2020
 
2019
Net investment earned rate
4.04
%
 
4.21
%
Cost of crediting on deferred annuities
1.91
%
 
1.98
%
Investment margin on deferred annuities
2.13
%
 
2.23
%

Investment margin on deferred annuities, which measures our investment performance less the cost of crediting for our deferred annuities, decreased by 10 basis points to 2.13% in 2020, from 2.23% in 2019, driven by a decrease in the net investment earned rate, partially offset by a decrease in the cost of crediting on deferred annuities from the prior year as we continue to focus on pricing discipline, managing interest rates credited to policyholders and managing the cost of options to fund the annual index credits on our FIA products.

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.

Adjusted Operating Income (Loss) Available to Common Shareholders

Adjusted operating income (loss) available to common shareholders decreased by $313 million to $(312) million in 2020, from $1 million in 2019. The decrease in adjusted operating income (loss) available to common shareholders was primarily driven by a $239 million loss on the strategic investment in Apollo, net of tax, alternative investment losses attributed to a decrease in market value of the equity position in OneMain and lower credit fund income related to CLO equity declines, as well as preferred stock dividends.


Consolidated Investment Portfolio
 
We had consolidated investments, including related parties, of $122.0 billion and $130.6 billion as of March 31, 2020 and December 31, 2019, respectively. Our investment strategy seeks to achieve sustainable risk-adjusted returns through the disciplined management of our investment portfolio against our long-duration liabilities, coupled with the diversification of risk. The investment strategies utilized by our investment managers focus primarily on a buy and hold asset allocation strategy that may be adjusted periodically in response to changing market conditions and the nature of our liability profile. Substantially all of our investment portfolio is managed by Apollo, which provides a full suite of services, including direct investment management, asset allocation, mergers and acquisition asset diligence, and certain operational support services, including investment compliance, tax, legal and risk management support. Our relationship with Apollo allows us to take advantage of our generally illiquid liability profile by identifying investment opportunities with an emphasis on earning incremental yield by taking liquidity and complexity risk rather than assuming solely credit risk. Apollo’s investment team and credit portfolio managers utilize their deep experience to assist us in sourcing and underwriting complex asset classes. Apollo has selected a diverse array of corporate bonds and more structured, but highly rated asset classes. We also maintain holdings in floating rate and less rate-sensitive instruments, including CLOs, non-agency RMBS and various types of structured products. In addition to our fixed income portfolio, we opportunistically allocate 5–10% of our portfolio to alternative investments where we primarily focus on fixed income-like, cash flow-based investments.


70


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Our net invested assets, which are those that directly back our net reserve liabilities as well as surplus assets, were $121.2 billion and $117.5 billion as of March 31, 2020 and December 31, 2019, respectively. Apollo’s knowledge of our funding structure and regulatory requirements allows it to design customized strategies and investments for our portfolio. Apollo manages our asset portfolio within the limits and constraints set forth in our Investment and Credit Risk Policy. Under this policy, we set limits on investments in our portfolio by asset class, such as corporate bonds, emerging markets securities, municipal bonds, non-agency RMBS, CMBS, CLOs, commercial mortgage whole loans and mezzanine loans and investment funds. We also set credit risk limits for exposure to a single issuer that vary based on the issuer’s ratings. In addition, our investment portfolio is constrained by its scenario-based capital ratio limit and its stressed liquidity limit.

The following table presents the carrying values of our total investments and investments in related parties:
 
March 31, 2020
 
December 31, 2019
(In millions, except percentages)
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
AFS securities, at fair value
$
65,671

 
53.9
%
 
$
71,374

 
54.7
%
Trading securities, at fair value
1,979

 
1.6
%
 
2,070

 
1.6
%
Equity securities, at fair value
206

 
0.2
%
 
247

 
0.2
%
Mortgage loans, net of allowances
14,395

 
11.8
%
 
14,306

 
11.0
%
Investment funds
740

 
0.6
%
 
750

 
0.6
%
Policy loans
403

 
0.3
%
 
417

 
0.3
%
Funds withheld at interest
13,716

 
11.3
%
 
15,181

 
11.6
%
Derivative assets
1,610

 
1.3
%
 
2,888

 
2.2
%
Short-term investments
583

 
0.5
%
 
596

 
0.5
%
Other investments
172

 
0.1
%
 
158

 
0.1
%
Total investments
99,475

 
81.6
%
 
107,987

 
82.8
%
Investments in related parties
 
 
 
 
 
 
 
AFS securities, at fair value
3,546

 
2.9
%
 
3,804

 
2.9
%
Trading securities, at fair value
718

 
0.6
%
 
785

 
0.6
%
Equity securities, at fair value
49

 
%
 
64

 
0.0
%
Mortgage loans, net of allowances
623

 
0.5
%
 
653

 
0.5
%
Investment funds
4,631

 
3.8
%
 
3,550

 
2.7
%
Funds withheld at interest
12,452

 
10.2
%
 
13,220

 
10.1
%
Other investments, net of allowances
475

 
0.4
%
 
487

 
0.4
%
Total related party investments
22,494

 
18.4
%
 
22,563

 
17.2
%
Total investments including related party
$
121,969

 
100.0
%
 
$
130,550

 
100.0
%

The decrease in our total investments, including related party, as of March 31, 2020 of $8.6 billion compared to December 31, 2019 was mainly driven by unrealized losses on AFS securities of $6.0 billion attributed to significant widening of credit spreads, partially offset by a decrease in U.S. Treasury rates, a decrease in derivative assets due to unfavorable equity market performance and a decrease in asset purchases from the prior quarter driven by the low interest rate environment as well as an effort to increase liquidity. The decrease was partially offset by growth from organic deposits of $3.9 billion in excess of liability outflows of $2.7 billion as well as an increase in investment funds driven by our investment in Apollo of $850 million.

Our investment portfolio consists largely of high quality fixed maturity securities, loans and short-term investments, as well as additional opportunistic holdings in investment funds and other instruments, including equity holdings. Fixed maturity securities and loans include publicly issued corporate bonds, government and other sovereign bonds, privately placed corporate bonds and loans, mortgage loans, CMBS, RMBS, CLOs, and ABS.

While the substantial majority of our investment portfolio has been allocated to corporate bonds and structured credit products, a key component of our investment strategy is the opportunistic acquisition of investment funds with attractive risk and return profiles. Our investment fund portfolio consists of funds that employ various strategies including real estate and other real asset funds, credit funds and private equity funds. We have a strong preference for assets that have some or all of the following characteristics, among others: (1) investments that constitute a direct investment or an investment in a fund with a high degree of co-investment; (2) investments with credit- or debt-like characteristics (for example, a stipulated maturity and par value), or alternatively, investments with reduced volatility when compared to pure equity; or (3) investments that we believe have less downside risk.


71


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


We hold derivatives for economic hedging purposes to reduce our exposure to the cash flow variability of assets and liabilities, equity market risk, interest rate risk, credit risk and foreign exchange risk. Our primary use of derivative instruments relates to providing the income needed to fund the annual indexed credits on our FIA products. We primarily use fixed indexed options to economically hedge FIA products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specific market index.

With respect to derivative positions, we transact with highly rated counterparties, and expect the counterparties to fulfill their obligations under the contracts. We generally use industry standard agreements and annexes with bilateral collateral provisions to further reduce counterparty credit exposure.

AFS Securities

We invest in AFS securities with the intent to hold investments to maturity. In selecting investments we attempt to source investments that match our future cash flow needs. However, we may sell any of our investments in advance of maturity in order to timely satisfy our liabilities as they become due or in order to respond to a change in the credit profile or other characteristics of the particular investment.

AFS securities are carried at fair value on our condensed consolidated balance sheets. Changes in fair value of our AFS securities, net of related DAC, DSI and VOBA amortization and the change in rider reserves, are charged or credited to other comprehensive income, net of tax. All changes in the allowance for expected credit losses, whether due to passage of time, change in expected cash flows, or change in fair value are recorded through credit loss expense within investment related gains (losses) on the condensed consolidated statements of income (loss).

The distribution of our AFS securities, including related parties, by type is as follows:
 
March 31, 2020
(In millions, except percentages)
Amortized Cost
 
Allowance for Credit Losses
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Percent of Total
AFS securities
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agencies
$
37

 
$

 
$
3

 
$

 
$
40

 
0.1
%
U.S. state, municipal and political subdivisions
815

 

 
102

 
(8
)
 
909

 
1.3
%
Foreign governments
278

 

 
14

 
(1
)
 
291

 
0.4
%
Corporate
44,315

 
(15
)
 
2,138

 
(1,970
)
 
44,468

 
64.3
%
CLO
8,057

 

 
4

 
(1,420
)
 
6,641

 
9.6
%
ABS
4,970

 
(5
)
 
32

 
(434
)
 
4,563

 
6.6
%
CMBS
2,431

 
(4
)
 
65

 
(201
)
 
2,291

 
3.3
%
RMBS
6,673

 
(54
)
 
116

 
(267
)
 
6,468

 
9.3
%
Total AFS securities
67,576

 
(78
)
 
2,474

 
(4,301
)
 
65,671

 
94.9
%
AFS securities – related party
 
 
 
 
 
 
 
 
 
 
 
Corporate
18

 

 
1

 

 
19

 
%
CLO
1,226

 

 

 
(186
)
 
1,040

 
1.5
%
ABS
2,760

 

 
1

 
(274
)
 
2,487

 
3.6
%
Total AFS securities – related party
4,004

 

 
2

 
(460
)
 
3,546

 
5.1
%
Total AFS securities including related party
$
71,580

 
$
(78
)
 
$
2,476

 
$
(4,761
)
 
$
69,217

 
100.0
%


72


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


 
December 31, 2019
(In millions, except percentages)
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Percent of Total
AFS securities
 
 
 
 
 
 
 
 
 
U.S. government and agencies
$
35

 
$
1

 
$

 
$
36

 
0.0
%
U.S. state, municipal and political subdivisions
1,322

 
220

 
(1
)
 
1,541

 
2.1
%
Foreign governments
298

 
29

 

 
327

 
0.4
%
Corporate
44,106

 
3,332

 
(210
)
 
47,228

 
62.8
%
CLO
7,524

 
21

 
(196
)
 
7,349

 
9.8
%
ABS
5,018

 
124

 
(24
)
 
5,118

 
6.8
%
CMBS
2,304

 
104

 
(8
)
 
2,400

 
3.2
%
RMBS
6,872

 
513

 
(10
)
 
7,375

 
9.8
%
Total AFS securities
67,479

 
4,344

 
(449
)
 
71,374

 
94.9
%
AFS securities – related party
 
 
 
 
 
 
 
 
 
Corporate
18

 
1

 

 
19

 
0.0
%
CLO
951

 
3

 
(18
)
 
936

 
1.3
%
ABS
2,814

 
37

 
(2
)
 
2,849

 
3.8
%
Total AFS securities – related party
3,783

 
41

 
(20
)
 
3,804

 
5.1
%
Total AFS securities including related party
$
71,262

 
$
4,385

 
$
(469
)
 
$
75,178

 
100.0
%

We maintain a diversified AFS portfolio of corporate fixed maturity securities across industries and issuers, and a diversified portfolio of structured securities. The composition of our AFS securities, including related parties, is as follows:
 
March 31, 2020
 
December 31, 2019
(In millions, except percentages)
Fair Value
 
Percent of Total
 
Fair Value
 
Percent of Total
Corporate
 
 
 
 
 
 
 
Industrial other1
$
14,483

 
20.9
%
 
$
14,956

 
19.9
%
Financial
14,243

 
20.6
%
 
15,286

 
20.3
%
Utilities
10,255

 
14.8
%
 
11,217

 
14.9
%
Communication
2,592

 
3.8
%
 
2,739

 
3.7
%
Transportation
2,914

 
4.2
%
 
3,049

 
4.1
%
Total corporate
44,487

 
64.3
%
 
47,247

 
62.9
%
Other government-related securities
 
 
 
 
 
 
 
U.S. state, municipal and political subdivisions
909

 
1.3
%
 
1,541

 
2.1
%
Foreign governments
291

 
0.4
%
 
327

 
0.4
%
U.S. government and agencies
40

 
0.1
%
 
36

 
%
Total non-structured securities
45,727

 
66.1
%
 
49,151

 
65.4
%
Structured securities
 
 
 
 
 
 
 
CLO
7,681

 
11.1
%
 
8,285

 
11.0
%
ABS
7,050

 
10.2
%
 
7,967

 
10.6
%
CMBS
2,291

 
3.3
%
 
2,400

 
3.2
%
RMBS
 
 
 
 
 
 
 
Agency
10

 
%
 
3

 
%
Non-agency
6,458

 
9.3
%
 
7,372

 
9.8
%
Total structured securities
23,490

 
33.9
%
 
26,027

 
34.6
%
Total AFS securities including related party
$
69,217

 
100.0
%
 
$
75,178

 
100.0
%
 
 
 
 
 
 
 
 
1 Includes securities within various industry segments including capital goods, basic industry, consumer cyclical, consumer non-cyclical, industrial and technology.


73


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


The fair value of our AFS securities, including related parties, was $69.2 billion and $75.2 billion as of March 31, 2020 and December 31, 2019, respectively. The decrease was mainly driven by the change in unrealized losses on AFS securities. The decrease in unrealized losses on AFS securities was attributed to the significant widening of credit spreads, partially offset by a decrease in U.S. Treasury rates. The overall decrease in AFS securities was partially offset by growth in deposits over liability outflows.

The Securities Valuation Office (SVO) of the NAIC is responsible for the credit quality assessment and valuation of securities owned by state regulated insurance companies. Insurance companies report ownership of securities to the SVO when such securities are eligible for filing on the relevant schedule of the NAIC Financial Statement. The SVO conducts credit analysis on these securities for the purpose of assigning an NAIC designation and/or unit price. Generally, the process for assigning an NAIC designation varies based upon whether a security is considered “filing exempt” (General Designation Process). Subject to certain exceptions, a security is typically considered “filing exempt” if it has been rated by a Nationally Recognized Statistical Rating Organization (NRSRO). For securities that are not “filing exempt,” insurance companies assign temporary designations based upon a subjective evaluation of credit quality. The insurance company must then submit the securities to the SVO within 120 days of acquisition to receive an NAIC designation. For securities considered “filing exempt,” the SVO utilizes the NRSRO rating and assigns an NAIC designation based upon the following system:
NAIC designation
 
NRSRO equivalent rating
1
 
AAA/AA/A
2
 
BBB
3
 
BB
4
 
B
5
 
CCC
6
 
CC and lower

An important exception to the General Designation Process occurs in the case of certain loan-backed and structured securities (LBaSS). The NRSRO ratings methodology is focused on the likelihood of recovery of all contractual payments, including principal at par, regardless of an investor’s carrying value. In effect, the NRSRO rating assumes that the holder is the original purchaser at par. In contrast, the SVO’s LBaSS methodology is focused on determining the risk associated with the recovery of the amortized cost of each security. Because the NAIC’s methodology explicitly considers amortized cost and the likelihood of recovery of such amount, we view the NAIC’s methodology as the most appropriate means of evaluating the credit quality of our fixed maturity portfolio since a large portion of our holdings were purchased and are carried at significant discounts to par.

The SVO has developed a designation process and provides instruction on both modeled and non-modeled LBaSS. For modeled LBaSS, the process is specific to the non-agency RMBS and CMBS asset classes. In order to establish ratings at the individual security level, the SVO obtains loan-level analysis of each RMBS and CMBS using a selected vendor’s proprietary financial model. The SVO ensures that the vendor has extensive internal quality-control processes in place and the SVO conducts its own quality-control checks of the selected vendor’s valuation process. The SVO has retained the services of Blackrock, Inc. (Blackrock) to model non-agency RMBS and CMBS owned by U.S. insurers for all years presented herein. Blackrock provides five prices (breakpoints), based on each U.S. insurer’s statutory book value price, to utilize in determining the NAIC designation for each modeled LBaSS.

Prior to January 1, 2019, certain non-modeled LBaSS (including CLOs and ABS, other than RMBS and CMBS) underwent ratings evaluation by an NAIC credit rating provider (CRP). Such securities were subject to an exemption from the General Designation Process (MFE Exemption) and received NAIC designations through a prescribed process (MFE Process). Pursuant to the MFE Process, CRP ratings were translated to an NAIC designation equivalent. If the translation process resulted in an NAIC designation equivalent of NAIC 1 or NAIC 6, then such designation was considered the final NAIC designation. If the translation process resulted in an NAIC designation equivalent of NAIC 2 through NAIC 5, then the NAIC designation equivalent was used to select the appropriate breakpoint from a pricing matrix and such breakpoint was applied to the amortized cost or fair value (in each instance, as a percentage of par), as applicable, to determine the final NAIC designation. Effective January 1, 2019, the MFE Exemption was eliminated, and as a result, NAIC designations for all non-modeled LBaSS are thereafter determined through the General Designation Process.

The NAIC designation determines the associated level of risk-based capital (RBC) that an insurer is required to hold for all securities owned by the insurer. In general, under the modeled LBaSS process and, prior to January 1, 2019, the non-modeled LBaSS process, the larger the discount to par value at the time of determination, the higher the NAIC designation the LBaSS will have.

74


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



A summary of our AFS securities, including related parties, by NAIC designation is as follows:
 
March 31, 2020
 
December 31, 2019
(In millions, except percentages)
Amortized Cost
 
Fair Value
 
Percent of Total
 
Amortized Cost
 
Fair Value
 
Percent of Total
NAIC designation
 
 
 
 
 
 
 
 
 
 
 
1
$
36,068

 
$
35,844

 
51.8
%
 
$
36,392

 
$
38,667

 
51.4
%
2
30,894

 
29,432

 
42.5
%
 
30,752

 
32,336

 
43.0
%
Total investment grade
66,962

 
65,276

 
94.3
%
 
67,144

 
71,003

 
94.4
%
3
3,677

 
3,117

 
4.5
%
 
3,237

 
3,300

 
4.4
%
4
805

 
710

 
1.0
%
 
740

 
740

 
1.0
%
5
93

 
72

 
0.1
%
 
102

 
94

 
0.1
%
6
43

 
42

 
0.1
%
 
39

 
41

 
0.1
%
Total below investment grade
4,618

 
3,941

 
5.7
%
 
4,118

 
4,175

 
5.6
%
Total AFS securities including related party
$
71,580

 
$
69,217

 
100.0
%
 
$
71,262

 
$
75,178

 
100.0
%

A significant majority of our AFS portfolio, 94.3% and 94.4% as of March 31, 2020 and December 31, 2019, respectively, was invested in assets considered investment grade with a NAIC designation of 1 or 2.

A summary of our AFS securities, including related parties, by NRSRO ratings is set forth below:
 
March 31, 2020
 
December 31, 2019
(In millions, except percentages)
Fair Value
 
Percent of Total
 
Fair Value
 
Percent of Total
NRSRO rating agency designation
 
 
 
 
 
 
 
AAA/AA/A
$
26,515

 
38.3
%
 
$
28,299

 
37.7
%
BBB
25,198

 
36.4
%
 
29,032

 
38.6
%
Non-rated1
10,268

 
14.8
%
 
10,014

 
13.3
%
Total investment grade
61,981

 
89.5
%
 
67,345

 
89.6
%
BB
3,193

 
4.6
%
 
3,403

 
4.5
%
B
810

 
1.2
%
 
813

 
1.1
%
CCC
1,722

 
2.5
%
 
1,981

 
2.6
%
CC and lower
918

 
1.3
%
 
1,076

 
1.4
%
Non-rated1
593

 
0.9
%
 
560

 
0.8
%
Total below investment grade
7,236

 
10.5
%
 
7,833

 
10.4
%
Total AFS securities including related party
$
69,217

 
100.0
%
 
$
75,178

 
100.0
%
 
 
 
 
 
 
 
 
1 Securities denoted as non-rated by the NRSRO were classified as investment or non-investment grade according to the security’s respective NAIC designation. With respect to modeled LBaSS, and prior to January 1, 2019, non-modeled LBaSS, the NAIC designation methodology differs in significant respects from the NRSRO rating methodology.

Consistent with the NAIC Process and Procedures Manual, an NRSRO rating was assigned based on the following criteria: (a) the equivalent S&P rating when the security is rated by one NRSRO; (b) the equivalent S&P rating of the lowest NRSRO when the security is rated by two NRSROs; and (c) the equivalent S&P rating of the second lowest NRSRO when the security is rated by three or more NRSROs. If the lowest two NRSRO ratings are equal, then such rating will be the assigned rating. NRSRO ratings available for the periods presented were S&P, Fitch, Moody’s Investor Service, DBRS, and Kroll Bond Rating Agency, Inc.

The portion of our AFS portfolio that was considered below investment grade based on NRSRO ratings was 10.5% and 10.4% as of March 31, 2020 and December 31, 2019, respectively. The primary driver of the difference in the percentage of securities considered below investment grade by NRSROs as compared to the securities considered below investment grade by the NAIC is the difference in methodologies between the NRSRO and NAIC for RMBS due to investments acquired and/or carried at a discount to par value, as discussed above.

As of March 31, 2020 and December 31, 2019, non-rated securities were comprised 64% and 61%, respectively, of corporate private placement securities for which we have not sought individual ratings from the NRSRO, and 21% and 24%, respectively, were comprised of RMBS, many of which were acquired at a significant discount to par. We rely on internal analysis and designations assigned by the NAIC to evaluate the credit risk of our portfolio. As of March 31, 2020 and December 31, 2019, 95% and 95%, respectively, of the non-rated securities were designated NAIC 1 or 2.


75


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Asset-backed Securities – We invest in ABS which are securitized by pools of assets such as consumer loans, automobile loans, student loans, insurance-linked securities, operating cash flows of corporations and cash flows from various types of business equipment. Our ABS holdings were $7.1 billion and $8.0 billion as of March 31, 2020 and December 31, 2019, respectively. The decrease in our ABS portfolio is mainly driven by sales and maturities in excess of new purchases in an effort to increase liquidity as well as unrealized losses due to credit spreads widening, partially offset by the lower interest rate environment. As of March 31, 2020 and December 31, 2019, our ABS portfolio included $6.6 billion (94% of the total) and $7.4 billion (92% of the total), respectively, of securities that are considered investment grade based on NAIC designations, while $6.6 billion (93% of the total) and $7.4 billion (92% of the total), respectively, of securities were considered investment grade based on NRSRO ratings.

Collateralized Loan Obligations – We also invest in CLOs which pay principal and interest from cash flows received from underlying corporate loans. These holdings were $7.7 billion and $8.3 billion as of March 31, 2020 and December 31, 2019, respectively.

A summary of our AFS CLO portfolio, including related parties, by NAIC designations and NRSRO quality ratings is as follows:
 
March 31, 2020
 
December 31, 2019
(In millions, except percentages)
Fair Value
 
Percent of Total
 
Fair Value
 
Percent of Total
NAIC designation
 
 
 
 
 
 
 
1
$
4,888

 
63.6
%
 
$
4,626

 
55.9
%
2
2,738

 
35.7
%
 
3,499

 
42.2
%
Total investment grade
7,626

 
99.3
%
 
8,125

 
98.1
%
3
48

 
0.6
%
 
133

 
1.6
%
4
7

 
0.1
%
 
20

 
0.2
%
5

 
%
 
7

 
0.1
%
6

 
%
 

 
%
Total below investment grade
55

 
0.7
%
 
160

 
1.9
%
Total AFS CLO including related party
$
7,681

 
100.0
%
 
$
8,285

 
100.0
%
 
 
 
 
 
 
 
 
NRSRO rating agency designation
 
 
 
 
 
 
 
AAA/AA/A
$
4,888

 
63.6
%
 
$
4,626

 
55.9
%
BBB
2,738

 
35.7
%
 
3,499

 
42.2
%
Non-rated

 
%
 

 
%
Total investment grade
7,626

 
99.3
%
 
8,125

 
98.1
%
BB
48

 
0.6
%
 
133

 
1.6
%
B
7

 
0.1
%
 
20

 
0.2
%
CCC

 
%
 
7

 
0.1
%
CC and lower

 
%
 

 
%
Non-rated

 
%
 

 
%
Total below investment grade
55

 
0.7
%
 
160

 
1.9
%
Total AFS CLO including related party
$
7,681

 
100.0
%
 
$
8,285

 
100.0
%

As of March 31, 2020 and December 31, 2019, a substantial majority of our AFS CLO portfolio, 99.3% and 98.1%, respectively, was invested in assets considered to be investment grade based upon application of the NAIC’s methodology and based on NRSRO ratings. The decrease in our CLO portfolio is mainly driven by unrealized losses due to credit spreads widening, partially offset by the lower interest rate environment.

Commercial Mortgage-backed Securities – A portion of our AFS portfolio is invested in CMBS. CMBS are constructed from pools of commercial mortgages. These holdings were $2.3 billion and $2.4 billion as of March 31, 2020 and December 31, 2019. As of March 31, 2020 and December 31, 2019, our CMBS portfolio included $2.1 billion (90% of the total) and $2.1 billion (89% of the total), respectively, of securities that are considered investment grade based on NAIC designations, while $1.7 billion (74% of the total) and $1.7 billion (72% of the total), respectively, of securities were considered investment grade based on NRSRO ratings.

Residential Mortgage-backed Securities – A portion of our AFS portfolio is invested in RMBS, which are securities constructed from pools of residential mortgages. These holdings were $6.5 billion and $7.4 billion as of March 31, 2020 and December 31, 2019, respectively.


76


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


A summary of our AFS RMBS portfolio by NAIC designations and NRSRO quality ratings is as follows:
 
March 31, 2020
 
December 31, 2019
(In millions, except percentages)
Fair Value
 
Percent of Total
 
Fair Value
 
Percent of Total
NAIC designation
 
 
 
 
 
 
 
1
$
5,915

 
91.4
%
 
$
6,701

 
90.9
%
2
239

 
3.7
%
 
330

 
4.5
%
Total investment grade
6,154

 
95.1
%
 
7,031

 
95.4
%
3
258

 
4.0
%
 
289

 
3.9
%
4
49

 
0.8
%
 
52

 
0.7
%
5
5

 
0.1
%
 
3

 
%
6
2

 
%
 

 
%
Total below investment grade
314

 
4.9
%
 
344

 
4.6
%
Total AFS RMBS
$
6,468

 
100.0
%
 
$
7,375

 
100.0
%
 
 
 
 
 
 
 
 
NRSRO rating agency designation
 
 
 
 
 
 
 
AAA/AA/A
$
668

 
10.3
%
 
$
715

 
9.7
%
BBB
507

 
7.8
%
 
606

 
8.2
%
Non-rated1
2,116

 
32.7
%
 
2,428

 
32.9
%
Total investment grade
3,291

 
50.8
%
 
3,749

 
50.8
%
BB
266

 
4.1
%
 
281

 
3.8
%
B
217

 
3.4
%
 
232

 
3.2
%
CCC
1,643

 
25.4
%
 
1,890

 
25.6
%
CC and lower
918

 
14.2
%
 
1,074

 
14.6
%
Non-rated1
133

 
2.1
%
 
149

 
2.0
%
Total below investment grade
3,177

 
49.2
%
 
3,626

 
49.2
%
Total AFS RMBS
$
6,468

 
100.0
%
 
$
7,375

 
100.0
%
 
 
 
 
 
 
 
 
1 Securities denoted as non-rated by the NRSRO were classified as investment or non-investment grade according to the security’s respective NAIC designations. The NAIC designation methodology differs in significant respects from the NRSRO rating methodology.

A significant majority of our RMBS portfolio, 95.1% and 95.4% as of March 31, 2020 and December 31, 2019, respectively, was invested in assets considered to be investment grade based upon an application of the NAIC designations. The NAIC’s methodology with respect to RMBS gives explicit effect to the amortized cost at which an insurance company carries each such investment. Because we invested in RMBS after the stresses related to U.S. housing had caused significant downward pressure on prices of RMBS, we carry most of our investments in RMBS at significant discounts to par value, which results in an investment grade NAIC designation. In contrast, our understanding is that in setting ratings, NRSROs focus on the likelihood of recovering all contractual payments including principal at par value. As a result of a fundamental difference in approach, as of March 31, 2020 and December 31, 2019, NRSRO characterized 50.8% and 50.8%, respectively, of our RMBS portfolio as investment grade. The decrease in our RMBS portfolio is mainly driven by unrealized losses due to credit spreads widening, partially offset by the lower interest rate environment.

Unrealized Losses

Our investments in AFS securities, including related parties, are reported at fair value with changes in fair value recorded in other comprehensive income. Certain of our AFS securities, including related parties, have experienced declines in fair value that we consider temporary in nature. As of March 31, 2020, our AFS securities, including related party, had a fair value of $69.2 billion, which was 3.3% below amortized cost of $71.6 billion. As of December 31, 2019, our AFS securities, including related party, had a fair value of $75.2 billion, which was 5.5% above amortized cost of $71.3 billion. These investments are held to support our product liabilities, and we currently have the intent and ability to hold these securities until sale or maturity, and believe the securities will recover the amortized cost basis prior to sale or maturity.

77


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



The following tables reflect the unrealized losses on the AFS portfolio, including related parties, for which an allowance for credit losses has not been recorded, by NAIC designations:
 
March 31, 2020
(In millions, except percentages)
Amortized Cost of AFS Securities with Unrealized Loss
 
Gross Unrealized Losses
 
Fair Value of AFS Securities with Unrealized Loss
 
Fair Value to Amortized Cost Ratio
 
Fair Value of Total AFS Securities
 
Gross Unrealized Losses to Total AFS Fair Value
NAIC designation
 
 
 
 
 
 
 
 
 
 
 
1
$
17,205

 
$
(1,595
)
 
$
15,610

 
90.7
%
 
$
35,844

 
(4.4
)%
2
17,337

 
(2,358
)
 
14,979

 
86.4
%
 
29,432

 
(8.0
)%
Total investment grade
34,542

 
(3,953
)
 
30,589

 
88.6
%
 
65,276

 
(6.1
)%
3
3,027

 
(554
)
 
2,473

 
81.7
%
 
3,117

 
(17.8
)%
4
671

 
(88
)
 
583

 
86.9
%
 
710

 
(12.4
)%
5
66

 
(16
)
 
50

 
75.8
%
 
72

 
(22.2
)%
6
39

 
(2
)
 
37

 
94.9
%
 
42

 
(4.8
)%
Total below investment grade
3,803

 
(660
)
 
3,143

 
82.6
%
 
3,941

 
(16.7
)%
Total
$
38,345

 
$
(4,613
)
 
$
33,732

 
88.0
%
 
$
69,217

 
(6.7
)%

The following tables reflect the unrealized losses on the AFS portfolio, including related parties, by NAIC designations:
 
December 31, 2019
(In millions, except percentages)
Amortized Cost of AFS Securities with Unrealized Loss
 
Gross Unrealized Losses
 
Fair Value of AFS Securities with Unrealized Loss
 
Fair Value to Amortized Cost Ratio
 
Fair Value of Total AFS Securities
 
Gross Unrealized Losses to Total AFS Fair Value
NAIC designation
 
 
 
 
 
 
 
 
 
 
 
1
$
5,672

 
$
(160
)
 
$
5,512

 
97.2
%
 
$
38,667

 
(0.4
)%
2
5,252

 
(223
)
 
5,029

 
95.8
%
 
32,336

 
(0.7
)%
Total investment grade
10,924

 
(383
)
 
10,541

 
96.5
%
 
71,003

 
(0.5
)%
3
945

 
(41
)
 
904

 
95.7
%
 
3,300

 
(1.2
)%
4
338

 
(34
)
 
304

 
89.9
%
 
740

 
(4.6
)%
5
79

 
(11
)
 
68

 
86.1
%
 
94

 
(11.7
)%
6
1

 

 
1

 
100.0
%
 
41

 
 %
Total below investment grade
1,363

 
(86
)
 
1,277

 
93.7
%
 
4,175

 
(2.1
)%
Total
$
12,287

 
$
(469
)
 
$
11,818

 
96.2
%
 
$
75,178

 
(0.6
)%

The gross unrealized losses on AFS securities, including related parties, were $4.6 billion and $469 million as of March 31, 2020 and December 31, 2019, respectively. The increase in unrealized losses was driven by credit spreads widening, partially offset by the decrease in U.S. Treasury rates during the three months ended March 31, 2020.

As of March 31, 2020 and December 31, 2019, we held $4.4 billion and $5.6 billion, respectively in energy sector fixed maturity securities, or 6% and 7% of the total fixed maturity securities, respectively, including related parties for each period. The gross unrealized capital losses on these securities were $839 million and $65 million, or 18% and 14% of the total unrealized losses, respectively.

Provision for Credit Losses

For our credit loss accounting policies and the assumptions used in the allowances, see Note 1 – Business, Basis of Presentation and Significant Accounting Policies and Note 2 – Investments to the condensed consolidated financial statements, as well as Critical Accounting Estimates and Judgments.


78


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


During the three months ended March 31, 2020, we recorded a change in provision for credit losses on AFS securities of $61 million, which were primarily driven by an increase in RMBS and corporate allowances. The intent-to-sell impairments for the three months ended March 31, 2020 were $13 million primarily related to corporates. During the three months ended March 31, 2019, we recorded $1 million of OTTI impairments. The annualized intent-to-sell impairments we experienced for the three months ended March 31, 2020 translate into 4 basis points of average net invested assets, which exclude the ACRA noncontrolling interest. The annualized OTTI losses we experienced for the three months ended March 31, 2019 translate into less than 1 basis point of average net invested assets.

International Exposure

A portion of our AFS securities are invested in securities with international exposure. As of March 31, 2020 and December 31, 2019, 32% of the carrying value of our AFS securities, including related parties, was comprised of securities of issuers based outside of the United States and debt securities of foreign governments. These securities are either denominated in U.S. dollars or do not expose us to significant foreign currency risk as a result of foreign currency swap arrangements.

The following table presents our international exposure in our AFS portfolio, including related parties, by country or region:
 
March 31, 2020
 
December 31, 2019
(In millions, except percentages)
Amortized Cost
 
Fair Value
 
Percent of Total
 
Amortized Cost
 
Fair Value
 
Percent of Total
Country of risk
 
 
 
 
 
 
 
 
 
 
 
Ireland
$
1,242

 
$
1,076

 
4.8
%
 
$
1,109

 
$
1,137

 
4.7
%
Italy
6

 
7

 
%
 
6

 
7

 
%
Spain
66

 
67

 
0.3
%
 
66

 
71

 
0.2
%
Total Ireland, Italy, Greece, Spain and Portugal1
1,314

 
1,150

 
5.1
%
 
1,181

 
1,215

 
4.9
%
Other Europe
7,245

 
7,044

 
31.7
%
 
7,333

 
7,711

 
32.1
%
Total Europe
8,559

 
8,194

 
36.8
%
 
8,514

 
8,926

 
37.0
%
Non-U.S. North America
12,326

 
10,736

 
48.3
%
 
11,650

 
11,670

 
48.5
%
Australia & New Zealand
1,821

 
1,842

 
8.3
%
 
1,853

 
1,966

 
8.2
%
Central & South America
487

 
460

 
2.1
%
 
473

 
501

 
2.1
%
Africa & Middle East
411

 
402

 
1.8
%
 
350

 
379

 
1.6
%
Asia/Pacific
610

 
598

 
2.7
%
 
580

 
616

 
2.6
%
Total
$
24,214

 
$
22,232

 
100.0
%
 
$
23,420

 
$
24,058

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
1 As of each of the respective periods, we had no holdings in Greece or Portugal.

Approximately 96.2% and 95.8% of these securities are investment grade by NAIC designation as of March 31, 2020 and December 31, 2019, respectively. As of March 31, 2020, 10% of our AFS securities, including related parties, were invested in CLOs of Cayman Islands issuers (included in Non-U.S. North America for which underlying investments are largely loans to U.S. issuers) and 22% were invested in securities of other non-U.S. issuers.

Portugal, Ireland, Italy, Greece and Spain continue to represent credit risk as economic conditions in these countries continue to be volatile, especially within the financial and banking sectors. We had $1.2 billion of exposure in these countries as of March 31, 2020 and December 31, 2019.

As of March 31, 2020, we held United Kingdom and Channel Islands AFS securities of $2.9 billion, or 4.2% of our AFS securities, including related parties. As of March 31, 2020, these securities were in a net unrealized loss position of $141 million. Our investment managers analyze each holding for credit risk by economic and other factors of each country and industry.

Trading Securities

Trading securities, including related parties, were $2.7 billion and $2.9 billion as of March 31, 2020 and December 31, 2019, respectively. Trading securities are primarily comprised of AmerUs Closed Block securities for which we have elected the fair value option valuation, CLO equity tranche securities, structured securities with embedded derivatives, and investments which support various reinsurance arrangements.


79


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Mortgage Loans

The following is a summary of our mortgage loan portfolio by collateral type:
 
March 31, 2020
 
December 31, 2019
(In millions, except percentages)
Net Carrying Value
 
Percent of Total
 
Net Carrying Value
 
Percent of Total
Property type
 
 
 
 
 
 
 
Office building
$
3,465

 
23.1
%
 
$
2,899

 
19.3
%
Retail
2,117

 
14.1
%
 
2,182

 
14.6
%
Apartment
2,333

 
15.5
%
 
2,142

 
14.3
%
Hotels
1,062

 
7.1
%
 
1,104

 
7.4
%
Industrial
1,402

 
9.3
%
 
1,448

 
9.7
%
Other commercial1
699

 
4.7
%
 
730

 
4.9
%
Total net commercial mortgage loans
11,078

 
73.8
%
 
10,505

 
70.2
%
Residential loans
3,940

 
26.2
%
 
4,454

 
29.8
%
Total mortgage loans, net of allowances
$
15,018

 
100.0
%
 
$
14,959

 
100.0
%
 
 
 
 
 
 
 
 
1 Other commercial loans include investments in nursing homes, other healthcare institutions, parking garages, storage facilities and other commercial properties.

We invest a portion of our investment portfolio in mortgage loans, which are generally comprised of high quality commercial first lien and mezzanine real estate loans. Our mortgage loan holdings were $15.0 billion as of both March 31, 2020 and December 31, 2019. This included $2.0 billion and $1.9 billion of mezzanine mortgage loans as of March 31, 2020 and December 31, 2019, respectively. We have acquired mortgage loans through acquisitions and reinsurance arrangements, as well as through an active program to invest in new mortgage loans. We invest in CMLs on income producing properties including hotels, apartments, retail and office buildings, and other commercial and industrial properties. Our RML portfolio primarily consists of first lien RMLs collateralized by properties located in the U.S. Loan-to-value ratios at the time of loan approval are generally 75% or less.

Our mortgage loans are primarily stated at unpaid principal balance, adjusted for any unamortized premium or discount, and net of credit loss allowances. Interest income is accrued on the principal amount of the loan based on the loan’s contractual interest rate. Amortization of premiums and discounts is recorded using the effective interest method. Interest income, amortization of premiums and discounts, and prepayment fees are reported in net investment income.

It is our policy to cease to accrue interest on loans that are over 90 days delinquent. For loans less than 90 days delinquent, interest is accrued unless it is determined that the accrued interest is not collectible. If a loan becomes over 90 days delinquent, it is our general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current is in place. As of March 31, 2020 and December 31, 2019, we had $75 million and $67 million, respectively, of mortgage loans that were 90 days past due, of which $36 million and $33 million, respectively, were in the process of foreclosure. We will continue to evaluate these policies with regard to the economic downturn brought about by the spread of COVID-19.

See Note 2 – Investments to the condensed consolidated financial statements for information regarding credit loss allowance for collection loss, loan-to-value, and debt service coverage.

As of March 31, 2020, we had valuation allowances of $424 million comprising of $343 million of CML and $81 million of RML allowances. During the three months ended March 31, 2020, we recorded a change in provision for credit losses on CMLs of $166 million and RMLs of $37 million. The increase in provision for credit losses was primarily a result of the economic downturn experienced from the spread of COVID-19. As of December 31, 2019, we had a valuation allowance of $11 million.

Investment Funds

Our investment funds investment strategy primarily focuses on funds with core holdings of credit assets, real assets, real estate, preferred equity and income producing assets. Our investment funds generally meet the definition of a VIE, and in certain cases these investment funds are consolidated in our financial statements because we meet the criteria of the primary beneficiary.



80


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


The following table illustrates our investment funds, including related party:
 
March 31, 2020
 
December 31, 2019
(In millions, except percentages)
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
Investment funds
 
 
 
 
 
 
 
Real estate
$
284

 
5.3
%
 
$
277

 
6.4
%
Credit funds
122

 
2.3
%
 
153

 
3.6
%
Private equity
244

 
4.5
%
 
236

 
5.5
%
Real assets
89

 
1.7
%
 
83

 
2.0
%
Natural resources
1

 
%
 
1

 
%
Total investment funds
740

 
13.8
%
 
750

 
17.5
%
Investment funds – related parties
 
 
 
 
 
 
 
Differentiated investments
 
 
 
 
 
 
 
MidCap
508

 
9.5
%
 
547

 
12.7
%
AmeriHome
508

 
9.5
%
 
487

 
11.3
%
Catalina
296

 
5.5
%
 
271

 
6.3
%
Athora
130

 
2.4
%
 
132

 
3.1
%
Venerable
110

 
2.1
%
 
99

 
2.3
%
Other
281

 
5.2
%
 
222

 
5.2
%
Total differentiated investments
1,833

 
34.2
%
 
1,758

 
40.9
%
Real estate
775

 
14.4
%
 
853

 
19.8
%
Credit funds
446

 
8.3
%
 
370

 
8.6
%
Private equity
227

 
4.2
%
 
105

 
2.4
%
Real assets
256

 
4.8
%
 
182

 
4.2
%
Natural resources
200

 
3.7
%
 
163

 
3.8
%
Public equities
44

 
0.8
%
 
119

 
2.8
%
Investment in Apollo
850

 
15.8
%
 

 
%
Total investment funds – related parties
4,631

 
86.2
%
 
3,550

 
82.5
%
Total investment funds including related parties
$
5,371

 
100.0
%
 
$
4,300

 
100.0
%

Overall, the total investment funds, including related party, were $5.4 billion and $4.3 billion, respectively, as of March 31, 2020 and December 31, 2019. See Note 2 – Investments to the condensed consolidated financial statements for further discussion regarding how we account for our investment funds. Our investment fund portfolio is subject to a number of market related risks including interest rate risk and equity market risk. Interest rate risk represents the potential for changes in the investment fund’s net asset values resulting from changes in the general level of interest rates. Equity market risk represents potential for changes in the investment fund’s net asset values resulting from changes in equity markets or from other external factors which influence equity markets. These risks expose us to potential volatility in our earnings period-over-period. We actively monitor our exposure to these risks. The increase in investment funds, including related party, was primarily driven by our investment in Apollo of $850 million at March 31, 2020.

Funds Withheld at Interest

Funds withheld at interest represents a receivable for amounts contractually withheld by ceding companies in accordance with modco and funds withheld reinsurance agreements in which we act as the reinsurer. Generally, assets equal to statutory reserves are withheld and legally owned by the ceding company. We hold funds withheld at interest receivables, including those held with VIAC and Lincoln. As of March 31, 2020, the significant majority of the ceding companies holding the assets pursuant to such reinsurance agreements had a financial strength rating of B+ or better (based on an A.M. Best scale).

The funds withheld at interest is comprised of the host contract and an embedded derivative. We are subject to the investment performance on the withheld assets with the total return directly impacting the host contract and the embedded derivative. Interest accrues at a risk-free rate on the host receivable and is recorded as net investment income in the condensed consolidated statements of income (loss). The embedded derivative in our reinsurance agreements is similar to a total return swap on the income generated by the underlying assets held by the ceding companies. The change in the embedded derivative is recorded in investment related gains (losses). Although we do not directly control the underlying investments in the funds withheld at interest, in each instance the ceding company has hired Apollo to manage the withheld assets in accordance with our investment guidelines.


81


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


The following summarizes the underlying investment composition of the funds withheld at interest, including related parties:
 
March 31, 2020
 
December 31, 2019
(In millions, except percentages)
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
Fixed maturity securities
 
 
 
 
 
 
 
U.S. government and agencies
$
15

 
0.1
 %
 
$
15

 
0.1
 %
U.S. state, municipal and political subdivisions
324

 
1.2
 %
 
482

 
1.7
 %
Foreign governments
134

 
0.5
 %
 
143

 
0.5
 %
Corporate
13,156

 
50.3
 %
 
14,590

 
51.4
 %
CLO
2,283

 
8.7
 %
 
2,586

 
9.1
 %
ABS
2,149

 
8.2
 %
 
2,510

 
8.8
 %
CMBS
475

 
1.8
 %
 
756

 
2.7
 %
RMBS
1,302

 
5.0
 %
 
1,482

 
5.2
 %
Equity securities
61

 
0.2
 %
 
74

 
0.3
 %
Mortgage loans
4,411

 
16.9
 %
 
4,357

 
15.3
 %
Investment funds
927

 
3.6
 %
 
807

 
2.8
 %
Derivative assets
65

 
0.2
 %
 
224

 
0.8
 %
Short-term investments
127

 
0.5
 %
 
157

 
0.6
 %
Cash and cash equivalents
807

 
3.1
 %
 
239

 
0.8
 %
Other assets and liabilities
(68
)
 
(0.3
)%
 
(21
)
 
(0.1
)%
Total funds withheld at interest including related party
$
26,168

 
100.0
 %
 
$
28,401

 
100.0
 %

As of March 31, 2020 and December 31, 2019, we held $26.2 billion and $28.4 billion, respectively, of funds withheld at interest receivables, including related party. Approximately 94.1% and 94.4% of the fixed maturity securities within the funds withheld at interest are investment grade by NAIC designation as of March 31, 2020 and December 31, 2019, respectively. The decrease in funds withheld at interest receivables, including related party, was primarily driven by unrealized losses on fixed maturity securities due to credit spreads widening, partially offset by the decrease in U.S. Treasury rates, as well as run-off in the underlying blocks of business.

Derivative Instruments

We hold derivative instruments for economic hedging purposes to reduce our exposure to cash flow variability of assets and liabilities, equity market risk, interest rate risk, credit risk and foreign exchange risk. The types of derivatives we may use include interest rate swaps, foreign currency swaps and forward contracts, total return swaps, credit default swaps, variance swaps, futures and fixed indexed options.

A discussion regarding our derivative instruments and how such instruments are used to manage risk is included in Note 3 – Derivative Instruments to the condensed consolidated financial statements.

As part of our risk management strategies, management continually evaluates our derivative instrument holdings and the effectiveness of such holdings in addressing risks identified in our operations.


82


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Net Invested Assets

The following summarizes our net invested assets:
 
March 31, 2020
 
December 31, 2019
(In millions, except percentages)
Net Invested Asset Value1
 
Percent of Total
 
Net Invested Asset Value1
 
Percent of Total
Corporate
$
54,666

 
45.1
%
 
$
55,077

 
46.9
%
CLO
11,118

 
9.2
%
 
10,223

 
8.7
%
Credit
65,784

 
54.3
%
 
65,300

 
55.6
%
RMBS
8,123

 
6.7
%
 
8,394

 
7.1
%
CML
14,954

 
12.3
%
 
14,038

 
12.0
%
RML
4,112

 
3.4
%
 
4,490

 
3.8
%
CMBS
2,846

 
2.3
%
 
2,930

 
2.5
%
Real estate
30,035

 
24.7
%
 
29,852

 
25.4
%
ABS
10,292

 
8.5
%
 
10,317

 
8.8
%
Alternative investments
5,787

 
4.8
%
 
5,586

 
4.8
%
State, municipal, political subdivisions and foreign government
1,557

 
1.3
%
 
2,260

 
1.9
%
Equity securities
369

 
0.3
%
 
365

 
0.3
%
Short-term investments
604

 
0.5
%
 
624

 
0.5
%
U.S. government and agencies
51

 
%
 
49

 
%
Other investments
18,660

 
15.4
%
 
19,201

 
16.3
%
Cash and equivalents
4,718

 
3.9
%
 
1,958

 
1.7
%
Policy loans and other
1,153

 
1.0
%
 
1,175

 
1.0
%
Net invested assets excluding investment in Apollo
120,350

 
99.3
%
 
117,486

 
100.0
%
Investment in Apollo
850

 
0.7
%
 

 
%
Net invested assets
$
121,200

 
100.0
%
 
$
117,486

 
100.0
%
 
 
 
 
 
 
 
 
1 See Key Operating and Non-GAAP Measures for the definition of net invested assets.

Our net invested assets were $121.2 billion and $117.5 billion as of March 31, 2020 and December 31, 2019, respectively. As of March 31, 2020, our net invested assets were mainly comprised of 45.1% of corporate securities, 26.7% of structured securities, 15.7% of mortgage loans and 4.8% of alternative investments. Corporate securities included $16.0 billion of private placements, which represented 13.2% of our net invested assets. The increase in net invested assets as of March 31, 2020 from December 31, 2019 was primarily driven by growth in deposits over liability outflows, and our investment in Apollo of $850 million and reinvestment of earnings.

In managing our business we utilize net invested assets as presented in the above table. Net invested assets do not correspond to total investments, including related parties, on our condensed consolidated balance sheets, as discussed previously in Key Operating and Non-GAAP Measures. Net invested assets represent the investments that directly back our net reserve liabilities and surplus assets. We believe this view of our portfolio provides a view of the assets for which we have economic exposure. We adjust the presentation for funds withheld and modco transactions to include or exclude the underlying investments based upon the contractual transfer of economic exposure to such underlying investments. We also adjust for VIEs in order to show the net investment in the funds, which are included in the alternative investments line above as well as adjust for the allowance for credit losses. Net invested assets includes our proportionate share of ACRA investments, based on our economic ownership, but excludes the proportionate share of investments associated with the noncontrolling interest.

Net invested assets is utilized by management to evaluate our investment portfolio. Net invested assets, excluding our strategic investment in Apollo, is used in the computation of net investment earned rate, which allows us to analyze the profitability of our investment portfolio. Net invested assets is also used in our risk management processes for asset purchases, product design and underwriting, stress scenarios, liquidity, and ALM.


83


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Net Alternative Investments

The following summarizes our alternative investments:
 
March 31, 2020
 
December 31, 2019
(In millions, except percentages)
Net Invested Asset Value
 
Percent of Total
 
Net Invested Asset Value
 
Percent of Total
Retirement Services
 
 
 
 
 
 
 
Differentiated investments
 
 
 
 
 
 
 
AmeriHome
$
621

 
10.7
%
 
$
595

 
10.7
%
MidCap
508

 
8.8
%
 
547

 
9.8
%
Catalina
296

 
5.1
%
 
271

 
4.9
%
Venerable
110

 
1.9
%
 
99

 
1.8
%
Other
332

 
5.7
%
 
208

 
3.7
%
Total differentiated investments
1,867

 
32.2
%
 
1,720

 
30.9
%
Real estate
1,410

 
24.4
%
 
1,430

 
25.6
%
Credit
950

 
16.4
%
 
968

 
17.3
%
Private equity
495

 
8.6
%
 
378

 
6.8
%
Real assets
385

 
6.6
%
 
349

 
6.2
%
Natural resources
61

 
1.1
%
 
51

 
0.9
%
Other
58

 
1.0
%
 
58

 
1.0
%
Total Retirement Services alternative investments
5,226

 
90.3
%
 
4,954

 
88.7
%
Corporate and Other
 
 
 
 
 
 
 
Athora
140

 
2.4
%
 
140

 
2.5
%
Credit
88

 
1.5
%
 
128

 
2.3
%
Natural resources
289

 
5.0
%
 
245

 
4.4
%
Public equities1
44

 
0.8
%
 
119

 
2.1
%
Total Corporate and Other alternative investments
561

 
9.7
%
 
632

 
11.3
%
Net alternative investments
$
5,787

 
100.0
%
 
$
5,586

 
100.0
%
 
 
 
 
 
 
 
 
1 As of March 31, 2020, public equities is exclusively comprised of an investment in OneMain Holdings, Inc. (ticker: OMF).

Net alternative investments were $5.8 billion and $5.6 billion as of March 31, 2020 and December 31, 2019, respectively, representing 4.8% of our net invested assets portfolio as of both March 31, 2020 and December 31, 2019, respectively.

Net alternative investments do not correspond to the total investment funds, including related parties and VIEs, on our condensed consolidated balance sheets. As discussed above in the net invested assets section, we adjust the GAAP presentation for funds withheld, modco and VIEs. The investment in Apollo is excluded from our alternative investments, while we include CLO equity tranche securities in alternative investments due to their underlying characteristics and equity-like features.

Through our relationship with Apollo, we have indirectly invested in companies that meet the key characteristics we look for in net alternative investments. Two of our largest alternative investments are in asset originators, MidCap and AmeriHome, both of which, from time to time, provide us with access to assets for our investment portfolio.

MidCap

Our equity investment in MidCap is held indirectly through CoInvest VII, of which MidCap constitutes substantially all of the fund’s investments. MidCap is a commercial finance company that provides various financial products to middle-market businesses in multiple industries, primarily located in the U.S. MidCap primarily originates and invests in commercial and industrial loans, including senior secured corporate loans, working capital loans collateralized mainly by accounts receivable and inventory, senior secured loans collateralized by portfolios of commercial and consumer loans and related products and secured loans to highly capitalized pharmaceutical and medical device companies, and commercial real estate loans, including multifamily independent-living properties, assisted living, skilled nursing and medical office properties, warehouse, office building, hotel and other commercial use properties and multifamily properties. MidCap originates and acquires loans using borrowings under financing arrangements that it has in place with numerous financial institutions. MidCap’s earnings are primarily driven by the difference between the interest earned on its loan portfolio and the interest accrued under its outstanding borrowings. As a result, MidCap is primarily exposed to the credit risk of its loan counterparties and prepayment risk. Additionally, financial results are influenced by related levels of middle-market business investment and interest rates.

84


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



Our alternative investment in CoInvest VII is substantially comprised of its investment in MidCap, which had a carrying value of $508 million and $547 million as of March 31, 2020 and December 31, 2019, respectively. Our investment in CoInvest VII largely reflects any contributions to and distributions from CoInvest VII and the fair value of MidCap. CoInvest VII returned a net investment earned rate of (16.06)% and 9.50% for the three months ended March 31, 2020 and 2019, respectively. Alternative investment income (loss) from CoInvest VII was $(21) million and $14 million for the three months ended March 31, 2020 and 2019, respectively. The decrease in alternative investment income for the three months ended March 31, 2020 compared to 2019 was mainly due to a decrease in valuation reflecting an increase in loan loss assumptions and lower origination volumes due to the current interest rate environment.

AmeriHome

Our equity investment in AmeriHome is held indirectly through A-A Mortgage, of which AmeriHome is currently the fund’s only investment. AmeriHome is a mortgage origination platform and an aggregator of mortgage servicing rights. AmeriHome acquires mortgage loans from retail originators and re-sells the loans to the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National Mortgage Association and other investors. AmeriHome retains the mortgage servicing rights on the loans that it sells and employs a subservicer to perform servicing operations, including payment collection. AmeriHome’s earnings are primarily driven by two sources: gains or losses on the sale of mortgage loans and the difference between the fee that it charges for mortgage servicing and the fee charged by the subservicer. As a result, AmeriHome’s financial results are influenced by interest rates and related housing demand. AmeriHome is primarily exposed to credit risk related to the accuracy of the representations and warranties in the loans that AmeriHome acquires and prepayment risk, which prematurely terminates fees related to mortgage servicing.

Our alternative investment in A-A Mortgage had a carrying value of $621 million and $595 million as of March 31, 2020 and December 31, 2019, respectively. Our investment in A-A Mortgage represents our proportionate share of its net asset value, which largely reflects any contributions to and distributions from A-A Mortgage and the fair value of AmeriHome. A-A Mortgage returned a net investment earned rate of 16.93% and 14.27% for the three months ended March 31, 2020 and 2019, respectively. Alternative investment income from A-A Mortgage was $26 million and $20 million for the three months ended March 31, 2020 and 2019, respectively.

Public Equities

We indirectly hold public equity positions through our equity investments in a few alternative investments. Although the net invested asset value of these securities is minor, such securities have resulted in volatility in our statements of income (loss) in recent periods. As of March 31, 2020 and December 31, 2019, we indirectly held public equity positions of $44 million and $119 million, respectively. As of March 31, 2020 and December 31, 2019, we held approximately 2.8 million shares of OneMain with a market value of $44 million and $119 million, respectively. The decrease in market value is driven by the decline in share price, partially offset by dividend received in 2020.


Non-GAAP Measure Reconciliations

The reconciliations to the nearest GAAP measure for adjusted operating income (loss) available to common shareholders is included in the Consolidated Results of Operations section.

The reconciliation of total AHL shareholders’ equity to total adjusted AHL common shareholders’ equity, which is included in adjusted book value per common share, adjusted debt to capital ratio and adjusted operating ROE, is as follows:
(In millions)
March 31, 2020
 
December 31, 2019
Total AHL shareholders’ equity
$
9,940

 
$
13,391

Less: Preferred stock
1,172

 
1,172

Total AHL common shareholders’ equity
8,768

 
12,219

Less: AOCI
(1,174
)
 
2,281

Less: Accumulated change in fair value of reinsurance assets
(155
)
 
493

Total adjusted AHL common shareholders’ equity
$
10,097

 
$
9,445

 
 
 
 
Segment adjusted AHL common shareholders’ equity
 
 
 
Retirement Services
$
8,002

 
$
7,443

Corporate and Other
2,095

 
2,002

Total adjusted AHL common shareholders’ equity
$
10,097

 
$
9,445



85


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


The reconciliation of average AHL shareholders’ equity to average adjusted AHL common shareholders’ equity, which is included in adjusted operating ROE is as follows:
 
Three months ended March 31,
(In millions)
2020
 
2019
Average AHL shareholders’ equity
$
11,666

 
$
9,197

Less: Average preferred stock
1,172

 

Less: Average AOCI
554

 
117

Less: Average accumulated change in fair value of reinsurance assets
169

 
117

Average adjusted AHL common shareholders’ equity
$
9,771

 
$
8,963

 
 
 
 
Segment average adjusted AHL common shareholders’ equity
 
 
 
Retirement Services
$
7,722

 
$
8,004

Corporate and Other
2,049

 
959

Average adjusted AHL common shareholders’ equity
$
9,771

 
$
8,963




The reconciliation of net investment income to net investment earnings and earned rate is as follows:
 
Three months ended March 31,
 
2020
 
2019
(In millions, except percentages)
Dollar
 
Rate
 
Dollar
 
Rate
GAAP net investment income
$
745

 
2.51
 %
 
$
1,082

 
3.85
 %
Change in fair value of reinsurance assets
270

 
0.90
 %
 
132

 
0.47
 %
Alternative income gain (loss)
(101
)
 
(0.34
)%
 
(5
)
 
(0.02
)%
ACRA noncontrolling interest
(72
)
 
(0.24
)%
 

 
 %
Apollo investment (income) loss
297

 
1.00
 %
 

 
 %
Held for trading amortization and other
12

 
0.04
 %
 
(6
)
 
(0.02
)%
Total adjustments to arrive at net investment earnings/earned rate
406

 
1.36
 %
 
121

 
0.43
 %
Total net investment earnings/earned rate
$
1,151

 
3.87
 %
 
$
1,203

 
4.28
 %
 
 
 
 
 
 
 
 
Retirement Services
$
1,184

 
4.04
 %
 
$
1,171

 
4.21
 %
Corporate and Other
(33
)
 
(8.14
)%
 
32

 
13.19
 %
Total net investment earnings/earned rate
$
1,151

 
3.87
 %
 
$
1,203

 
4.28
 %
 
 
 
 
 
 
 
 
Retirement Services average net invested assets
$
117,295

 
 
 
$
111,443

 
 
Corporate and Other average net invested assets ex. Apollo investment
1,624

 
 
 
959

 
 
Consolidated average net invested assets ex. Apollo investment
$
118,919

 
 
 
$
112,402

 
 


86


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


The reconciliation of interest sensitive contract benefits to Retirement Services’ cost of crediting, and the respective rates, is as follows:
 
Three months ended March 31,
 
2020
 
2019
(In millions, except percentages)
Dollar
 
Rate
 
Dollar
 
Rate
GAAP interest sensitive contract benefits
$
(1,319
)
 
(4.50
)%
 
$
1,516

 
5.44
 %
Interest credited other than deferred annuities and institutional products
63

 
0.21
 %
 
55

 
0.20
 %
FIA option costs
266

 
0.91
 %
 
278

 
1.00
 %
Product charges (strategy fees)
(32
)
 
(0.11
)%
 
(28
)
 
(0.10
)%
Reinsurance embedded derivative impacts
14

 
0.05
 %
 
15

 
0.05
 %
Change in fair value of embedded derivatives – FIAs
1,504

 
5.13
 %
 
(1,311
)
 
(4.70
)%
Negative VOBA amortization
7

 
0.02
 %
 
12

 
0.04
 %
ACRA noncontrolling interest
38

 
0.13
 %
 

 
 %
Other changes in interest sensitive contract liabilities
(1
)
 
0.00
 %
 
(2
)
 
(0.01
)%
Total adjustments to arrive at cost of crediting
1,859

 
6.34
 %
 
(981
)
 
(3.52
)%
Retirement Services cost of crediting
$
540

 
1.84
 %
 
$
535

 
1.92
 %
 
 
 
 
 
 
 
 
Retirement Services cost of crediting on deferred annuities
$
422

 
1.91
 %
 
$
444

 
1.98
 %
Retirement Services cost of crediting on institutional products
118

 
3.31
 %
 
91

 
3.69
 %
Retirement Services cost of crediting
$
540

 
1.84
 %
 
$
535

 
1.92
 %
 
 
 
 
 
 
 
 
Retirement Services average net invested assets
$
117,295

 
 
 
$
111,443

 
 
Average account value on deferred annuities
88,119

 
 
 
89,809

 
 
Average net institutional reserve liabilities
14,250

 
 
 
9,809

 
 


87


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


The reconciliation of GAAP benefits and expenses to other liability costs is as follows:
 
Three months ended March 31,
(In millions)
2020
 
2019
GAAP benefits and expenses
$
(167
)
 
$
4,255

Premiums
(1,140
)
 
(2,000
)
Product charges
(140
)
 
(125
)
Other revenues
2

 
(12
)
Cost of crediting
(259
)
 
(242
)
Change in fair value of embedded derivatives – FIA, net of offsets
1,456

 
(1,260
)
DAC, DSI and VOBA amortization related to investment gains and losses
425

 
(173
)
Rider reserves related to investment gains and losses
76

 
(28
)
Policy and other operating expenses, excluding policy acquisition expenses
(117
)
 
(103
)
AmerUs closed block fair value liability
45

 
(53
)
ACRA noncontrolling interest
165

 

Other
(4
)
 
1

Total adjustments to arrive at other liability costs
509

 
(3,995
)
Other liability costs
$
342

 
$
260

 
 
 
 
Retirement Services
$
342

 
$
260

Corporate and Other

 

Consolidated other liability costs
$
342

 
$
260


The reconciliation of policy and other operating expenses to operating expenses is as follows:
 
Three months ended March 31,
(In millions)
2020
 
2019
GAAP policy and other operating expenses
$
188

 
$
165

Interest expense
(20
)
 
(17
)
Policy acquisition expenses, net of deferrals
(71
)
 
(62
)
Integration, restructuring and other non-operating expenses
(4
)
 
(1
)
Stock compensation expenses
(10
)
 
(3
)
ACRA noncontrolling interest
(4
)
 

Total adjustments to arrive at operating expenses
(109
)
 
(83
)
Operating expenses
$
79

 
$
82

 
 
 
 
Retirement Services
$
68

 
$
62

Corporate and Other
11

 
20

Consolidated operating expenses
$
79

 
$
82



88


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


The reconciliation of total investments, including related parties, to net invested assets is as follows:
(In millions)
March 31, 2020
 
December 31, 2019
Total investments, including related parties
$
121,969

 
$
130,550

Derivative assets
(1,610
)
 
(2,888
)
Cash and cash equivalents (including restricted cash)
5,983

 
4,639

Accrued investment income
802

 
807

Payables for collateral on derivatives
(1,589
)
 
(2,743
)
Reinsurance funds withheld and modified coinsurance
355

 
(1,440
)
VIE and VOE assets, liabilities and noncontrolling interest
23

 
25

Unrealized (gains) losses
2,292

 
(4,095
)
Ceded policy loans
(229
)
 
(235
)
Net investment receivables (payables)
(238
)
 
(57
)
Allowance for credit losses
505

 

Total adjustments to arrive at gross invested assets
6,294

 
(5,987
)
Gross invested assets
128,263

 
124,563

ACRA noncontrolling interest
(7,063
)
 
(7,077
)
Net invested assets
$
121,200

 
$
117,486


The reconciliation of total investment funds, including related parties, to net alternative investments within net invested assets is as follows:
(In millions)
March 31, 2020
 
December 31, 2019
Investment funds, including related parties
$
5,371

 
$
4,300

Nonredeemable preferred stock included in equity securities
65

 
78

CLO and ABS equities included in trading securities
308

 
405

Investment in Apollo
(850
)
 

Investment funds within funds withheld at interest
927

 
807

Royalties and other assets included in other investments
64

 
67

Unrealized (gains) losses and other adjustments
14

 
8

ACRA noncontrolling interest
(112
)
 
(79
)
Total adjustments to arrive at alternative investments
416


1,286

Net alternative investments
$
5,787

 
$
5,586


The reconciliation of total liabilities to net reserve liabilities is as follows:
(In millions)
March 31, 2020
 
December 31, 2019
Total liabilities
$
131,649

 
$
132,734

Short-term debt
(400
)
 
(475
)
Long-term debt
(986
)
 
(992
)
Derivative liabilities
(222
)
 
(97
)
Payables for collateral on derivatives and securities to repurchase
(2,883
)
 
(3,255
)
Funds withheld liability
(396
)
 
(408
)
Other liabilities
(853
)
 
(1,181
)
Reinsurance ceded receivables
(5,087
)
 
(4,863
)
Policy loans ceded
(229
)
 
(235
)
ACRA noncontrolling interest
(6,322
)
 
(6,574
)
Other
2

 
(2
)
Total adjustments to arrive at net reserve liabilities
(17,376
)
 
(18,082
)
Net reserve liabilities
$
114,273

 
$
114,652




89


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Liquidity and Capital Resources

There are two forms of liquidity relevant to our business, funding liquidity and balance sheet liquidity. Funding liquidity relates to the ability to fund operations. Balance sheet liquidity relates to our ability to liquidate or rebalance our balance sheet without incurring significant costs from fees, bid-offer spreads, or market impact. We manage our liquidity position by matching projected cash demands with adequate sources of cash and other liquid assets. Our principal sources of liquidity, in the ordinary course of business, are operating cash flows and holdings of cash, cash equivalents and other readily marketable assets.

Our investment portfolio is structured to ensure a strong liquidity position over time in order to permit timely payment of policy and contract benefits without requiring asset sales at inopportune times or at depressed prices. In general, liquid assets include cash and cash equivalents, highly rated corporate bonds, unaffiliated preferred stock and unaffiliated public common stock, all of which generally have liquid markets with a large number of buyers. The carrying value of these assets as of March 31, 2020 was $69.6 billion. Although our investment portfolio does contain assets that are generally considered illiquid for liquidity monitoring purposes (primarily mortgage loans, policy loans, real estate, investment funds, and affiliated common stock), there is some ability to raise cash from these assets if needed. In periods of economic downturn, such as the one brought about by the spread of COVID-19, we may maintain higher cash balances than required to manage our liquidity risk and to take advantage of market dislocations as they arise. We have access to additional liquidity through our $1.25 billion credit agreement, which was undrawn as of March 31, 2020 and had a remaining term of approximately five years, subject to up to two one-year extensions. Our registration statement on Form S-3 ASR (Shelf Registration Statement) provides us access to the capital markets, subject to market conditions and other factors. We are also party to agreements with several different financial institutions, pursuant to which we may engage in secured repurchase transactions to obtain short-term liquidity, to the extent available. In addition, through our membership in the FHLB, we are eligible to borrow under variable rate short-term federal funds arrangements to provide additional liquidity.

We proactively manage our liquidity position to meet cash needs while minimizing adverse impacts on investment returns. We analyze our cash-flow liquidity over the upcoming 12 months by modeling potential demands on liquidity under a variety of scenarios, taking into account the provisions of our policies and contracts in force, our cash flow position, and the volume of cash and readily marketable securities in our portfolio. We also monitor our liquidity profile under more severe scenarios.

We perform a number of stress tests and analyses to assess our ability to meet our cash flow requirements, as well as the ability of our reinsurance and insurance subsidiaries to meet their collateral obligations. Among these analyses, we manage to the following ALM limits:

our projected net cumulative cash flows, including both new business and target levels of new investments under a “plan scenario” and a “moderately severe scenario” event, are non-negative over a rolling 12-month horizon;
we hold enough cash, cash equivalents and other discounted liquid limit assets to cover 12 months of AHL’s and Athene USA’s projected obligations, including debt servicing costs:
minimum of 50% of expenses and 100% of debt servicing to be held in cash and cash equivalents at AHL operating accounts
minimum of 50% of any required AHL – Athene USA inter-company loan commitments to be held in cash and cash equivalents by AHL
dividends from ALRe sufficient to support the ongoing operations of AHL must be available under moderate and substantial stress scenarios
for purposes of administering this test, liquid limit assets are discounted by 25% and include public corporate bonds rated A- or above, liquid ABS (defined as prime auto, auto floorplan, Tier 1 subprime auto, auto lease, prime credit cards, equipment lease or utility stranded assets); RMBS with weighted average lives less than three years rated A- or above and CMBS with weighted average lives less than three years rated AAA- or above
we seek to maintain sufficient capital and surplus at ALRe to meet the following collateral and capital maintenance calls under a substantial stress event, such as the failure of a major financial institution (Lehman event):
collateral calls from modco and third-party reinsurance contracts
AARe capital maintenance calls arising from AARe collateral calls from modco reinsurance contracts; and
U.S. regulated entity capital maintenance calls from nonmodco activity.

Insurance Subsidiaries’ Liquidity

Operations

The primary cash flow sources for our insurance subsidiaries include retirement services product inflows (premiums), investment income, principal repayments on our investments, and net transfers from separate accounts and financial product deposits. Uses of cash include investment purchases, payments to policyholders for surrenders and withdrawals, maturity payments on funding agreements, policy acquisition costs and general operating costs.


90


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Our policyholder obligations are generally long-term in nature. However, one liquidity risk is an extraordinary level of early policyholder withdrawals. We include provisions within our annuity policies, such as surrender charges and MVAs, which are intended to protect us from early withdrawals. As of both March 31, 2020 and December 31, 2019, approximately 78% of our deferred annuity liabilities were subject to penalty upon surrender. In addition, as of March 31, 2020 and December 31, 2019, approximately 63% and 64%, respectively, of policies contained MVAs that may also have the effect of limiting early withdrawals if interest rates increase, but may encourage early withdrawals by effectively subsidizing a portion of surrender charges when interest rates decrease. Our funding agreements, group annuities and payout annuities are generally non-surrenderable.

Membership in Federal Home Loan Bank

Through our membership in the FHLB, we are eligible to borrow under variable rate short-term federal funds arrangements to provide additional liquidity. The borrowings must be secured by eligible collateral such as mortgage loans, eligible CMBS or RMBS, government or agency securities and guaranteed loans. As of March 31, 2020 or December 31, 2019, we had $400 million and $475 million, respectively, of outstanding borrowings under these arrangements.

We have issued funding agreements to the FHLB in exchange for cash advances. These funding agreements were issued in an investment spread strategy, consistent with other investment spread operations. As of March 31, 2020 and December 31, 2019, we had funding agreements outstanding with the FHLB in the aggregate principal amount of $1.4 billion and $1.2 billion, respectively.

The maximum FHLB indebtedness by a member is determined by the amount of collateral pledged, and cannot exceed a specified percentage of the member’s total statutory assets dependent on the internal credit rating assigned to the member by the FHLB. As of March 31, 2020, the total maximum borrowings under the FHLB facility were limited to $19.7 billion. However, our ability to borrow under the facility is constrained by the availability of assets that qualify as eligible collateral under the facility and by the Iowa Code requirement that we maintain funds equivalent to our legal reserve in certain permitted investments, from which we exclude pledged assets. Considering these limitations, we estimate that as of March 31, 2020 we had the ability to draw up to a total of approximately $2.0 billion, inclusive of borrowings then outstanding. This estimate is based on our internal analysis and assumptions, and may not accurately measure collateral which is ultimately acceptable to the FHLB. Drawing such amounts would have an adverse impact on AAIA’s RBC ratio, which may further restrict our ability or willingness to draw up to our estimated capacity.

Securities Repurchase Agreements

We engage in repurchase transactions whereby we sell fixed income securities to third parties, primarily major brokerage firms or commercial banks, with a concurrent agreement to repurchase such securities at a determined future date. We require that, at all times during the term of the repurchase agreements, we maintain sufficient cash or other liquid assets sufficient to allow us to fund substantially all of the repurchase price. Proceeds received from the sale of securities pursuant to these arrangements are generally invested in short-term investments, with the offsetting obligation to repurchase the security included within payables for collateral on derivatives and securities to repurchase on the condensed consolidated balance sheets. As per the terms of the repurchase agreements, we monitor the market value of the securities sold and may be required to deliver additional collateral (which may be in the form of cash or additional securities) to the extent that the value of the securities sold decreases prior to the repurchase date.

As of March 31, 2020, the fair value of securities and collateral held by counterparties and payables for repurchase agreements was $1.4 billion and $1.3 billion, respectively.

On May 1, 2020, we signed a $1.0 billion committed repurchase facility with BNP Paribas. The facility has an initial commitment period of 12 months and automatically renews for successive 12-month periods until terminated by either party. During the commitment period, we may sell and BNP Paribas is required to purchase eligible investment grade corporate bonds pursuant to repurchase transactions at pre-agreed discounts in exchange for a 41 basis points per annum commitment fee.



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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Cash Flows

Our cash flows were as follows:
 
Three months ended March 31,
(In millions)
2020
 
2019
Net income (loss)
$
(1,216
)
 
$
708

Non-cash revenues and expenses
1,987

 
301

Net cash provided by operating activities
771

 
1,009

Sales, maturities and repayments of investments
6,214

 
3,170

Purchases of investments
(6,476
)
 
(6,547
)
Other investing activities
(116
)
 
601

Net cash used in investing activities
(378
)
 
(2,776
)
Issuance of common stock
350

 

Net proceeds and repayments of debt
(75
)
 

Deposits on investment-type policies and contracts
2,838

 
2,793

Withdrawals on investment-type policies and contracts
(1,633
)
 
(1,638
)
Net capital contributions and distributions to/from noncontrolling interests
194

 

Net change in cash collateral posted for derivative transactions and securities to repurchase
(372
)
 
812

Preferred stock dividends
(18
)
 

Repurchase of common stock
(328
)
 
(51
)
Other financing activities
14

 
(34
)
Net cash provided by financing activities
970

 
1,882

Effect of exchange rate changes on cash and cash equivalents
(22
)
 

Net increase (decrease) in cash and cash equivalents1
$
1,341

 
$
115

 
 
 
 
1 Includes cash and cash equivalents and restricted cash.

Cash flows from operating activities

The primary cash inflows from operating activities include net investment income, annuity considerations and insurance premiums. The primary cash outflows from operating activities are comprised of benefit payments and operating expenses. Our operating activities generated cash flows totaling $771 million and $1.0 billion for the three months ended March 31, 2020 and 2019, respectively. The decrease in cash provided by operating activities was primarily driven by lower cash received from PRT transactions as well as a decrease in net investment income.

Cash flows from investing activities

The primary cash inflows from investing activities are the sales, maturities and repayments of investments. The primary cash outflows from investing activities are the purchases and acquisitions of new investments. Our investing activities used cash flows totaling $378 million and $2.8 billion for the three months ended March 31, 2020 and 2019, respectively. The decrease in cash used in investing activities was primarily attributed to an increase in the sales. maturities and repayments of investments to increase liquidity in response to the current economic environment and capitalize on growth opportunities as they may arise.

Cash flows from financing activities

The primary cash inflows from financing activities are deposits on our investment-type policies, changes of cash collateral posted for derivative transactions, capital contributions and proceeds from borrowing activities. The primary cash outflows from financing activities are withdrawals on our investment-type policies, changes of cash collateral posted for derivative transactions, repayments of outstanding borrowings, repurchases of common stock and payment of preferred stock dividends. Our financing activities provided cash flows totaling $1.0 billion and $1.9 billion for the three months ended March 31, 2020 and 2019, respectively. The decrease in cash provided by financing activities was primarily attributed to the change in cash collateral posted for derivative transactions driven by unfavorable equity market performance in 2020, an increase in repurchases of common stock, the repayment of $75 million of short-term debt and the payment of preferred stock dividends, partially offset by higher investment-type deposits from retail, flow reinsurance and funding agreement deposits, the issuance of $350 million of common stock as part of the strategic Apollo transaction and net capital contributions from noncontrolling interests.


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Holding Company Liquidity

Dividends from Subsidiaries

AHL is a holding company whose primary liquidity needs include the cash-flow requirements relating to its corporate activities, including its day-to-day operations, debt servicing, preferred stock dividend payments and strategic transactions, such as acquisitions. The primary source of AHL’s cash flow is dividends from its subsidiaries, which are expected to be adequate to fund cash flow requirements based on current estimates of future obligations.

The ability of AHL’s insurance subsidiaries to pay dividends is limited by applicable laws and regulations of the jurisdictions where the subsidiaries are domiciled, as well as agreements entered into with regulators. These laws and regulations require, among other things, the insurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay.

Subject to these limitations and prior notification to the appropriate regulatory agency, the U.S. insurance subsidiaries are permitted to pay ordinary dividends based on calculations specified under insurance laws of the relevant state of domicile. Any distributions above the amount permitted by statute in any twelve month period are considered to be extraordinary dividends, and require the approval of the appropriate regulator prior to payment. AHL does not currently plan on having the U.S. subsidiaries pay any dividends to ALRe.

Dividends from ALRe are projected to be the primary source of AHL’s liquidity. Under the Bermuda Insurance Act, ALRe is prohibited from paying a dividend in an amount exceeding 25% of the prior year’s statutory capital and surplus, unless at least two members of ALRe’s board of directors and its principal representative in Bermuda sign and submit to the Bermuda Monetary Authority (BMA) an affidavit attesting that a dividend in excess of this amount would not cause ALRe to fail to meet its relevant margins. In certain instances, ALRe would also be required to provide prior notice to the BMA in advance of the payment of dividends. In the event that such an affidavit is submitted to the BMA in accordance with the Bermuda Insurance Act, and further subject to ALRe meeting its relevant margins, ALRe is permitted to distribute up to the sum of 100% of statutory surplus and an amount less than 15% of its total statutory capital. Distributions in excess of this amount require the approval of the BMA.

The maximum distribution permitted by law or contract is not necessarily indicative of our actual ability to pay such distributions, which may be further restricted by business and other considerations, such as the impact of such distributions on surplus, which could affect our ratings or competitive position and the amount of premiums that can be written. Specifically, the level of capital needed to maintain desired financial strength ratings from rating agencies, including S&P, A.M. Best and Fitch, is of particular concern when determining the amount of capital available for distributions. AHL believes its insurance subsidiaries have sufficient statutory capital and surplus, combined with additional capital available to be provided by AHL, to meet their financial strength ratings objectives. Finally, state insurance laws and regulations require that the statutory surplus of our insurance subsidiaries following any dividend or distribution must be reasonable in relation to their outstanding liabilities and adequate for the insurance subsidiaries’ financial needs.

Other Sources of Funding

If needed, we may seek to secure additional funding at the holding company level by means other than dividends from subsidiaries, such as by drawing on our undrawn $1.25 billion credit agreement or by pursuing future issuances of debt or equity securities to third-party investors. Certain other sources of liquidity potentially available at the holding company level are discussed below.

Shelf Registration – Under our Shelf Registration Statement, subject to market conditions, we have the ability to issue, in indeterminate amounts, debt securities, preference shares, depositary shares, Class A common shares, warrants and units.

Debt – On January 12, 2018, we issued $1.0 billion in aggregate principal amount of 4.125% Senior Notes due January 2028 (2028 Notes). On April 3, 2020, we issued $500 million in aggregate principal amount of 6.150% senior unsecured notes due 2030 (2030 Notes).

Preferred Stock – On June 10, 2019, we issued 34,500 6.35% Fixed-to-Floating Rate Perpetual Non-Cumulative Preference Shares, Series A, par value of $1.00 per share with a liquidation preference of $25,000 per share, for aggregate proceeds of $839 million, net of the underwriters’ discount and expenses.

On September 19, 2019, we issued 13,800 5.625% Fixed Rate Perpetual Non-Cumulative Preference shares, Series B, par value of $1.00 per share with a liquidation preference of $25,000 per share, for aggregate proceeds of $333 million, net of the underwriters’ discount and expenses. See Note 8 – Equity to the condensed consolidated financial statements for further information.

Intercompany Note – AHL has an unsecured revolving note payable with ALRe, which permits AHL to borrow up to $1 billion with a fixed interest rate of 1.25% and a maturity date of March 31, 2024. As of March 31, 2020 and December 31, 2019, the revolving note payable had an outstanding balance of $553 million and $38 million, respectively.


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


In light of the spread of COVID-19 and the resulting impact on economic conditions and the financial markets, additional funding of the type described above may not be available on terms favorable to us or at all. As a result of the economic consequences of the spread of COVID-19, we have observed an increase in our cost of debt. At the time of issuance, our 2028 Notes had a yield to maturity of 4.14% and a spread to benchmark treasury of T + 160 basis points. At the time of issuance, our 2030 Notes had a yield to maturity of 6.18% and a spread to benchmark treasury of T + 550 basis points. In addition, certain covenants in our credit agreement prohibit us from maintaining debt in excess of specified thresholds. Specifically, our credit agreement prohibits us from permitting the Consolidated Debt to Capitalization Ratio (as such term is defined in the credit agreement) to exceed 35% as of the end of any quarter.

Capital Resources

As of December 31, 2019 and 2018, our U.S. insurance companies’ TAC, as defined by the NAIC, was $2.4 billion and $2.2 billion, respectively, and our U.S. RBC ratio was 429% and 421%, respectively. Each U.S. domestic insurance subsidiary’s state of domicile imposes minimum RBC requirements that were developed by the NAIC. The formulas for determining the amount of RBC specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of TAC to its authorized control level RBC (ACL). Our TAC was significantly in excess of all regulatory standards as of December 31, 2019 and 2018, respectively.

ALRe statutory capital was $11.0 billion and $9.7 billion as of December 31, 2019 and 2018, respectively. ALRe adheres to BMA regulatory capital requirements to maintain statutory capital and surplus to meet the minimum margin of solvency and maintain minimum economic balance sheet (EBS) capital and surplus to meet the enhanced capital requirement. Under the EBS framework, ALRe’s assets are recorded at market value and its insurance reserves are determined by reference to nine prescribed scenarios, with the scenario resulting in the highest reserve balance being ultimately required to be selected. ALRe’s EBS capital and surplus was $14.1 billion and $12.0 billion, resulting in a BSCR ratio of 310% and 340% as of December 31, 2019 and 2018, respectively. An insurer must have a BSCR ratio of 100% or greater to be considered solvent by the BMA. As of December 31, 2019 and 2018, ALRe held the appropriate capital to adhere to these regulatory standards. In evaluating our capital position and the amount of capital needed to support our Retirement Services segment, we review our capital by applying the NAIC RBC factors to the statutory financial statements of AHL’s non-U.S. reinsurance subsidiaries, on an aggregate basis. As of December 31, 2019 and 2018, our ALRe RBC was 443% and 405%, respectively. We believe that we enjoy a strong capital position in light of our risks and that we are well positioned to meet policyholder and other obligations. We also believe that our strong capital position, as well as our excess capital position and access to uncalled capital commitments at ACRA, may provide us the opportunity to take advantage of market dislocations as they arise.

Repurchase of Securities

Share Repurchase Program

In December 2018, our board of directors established a share repurchase program with an initial authorization for the repurchase of up to $250 million of our Class A shares. In 2019, our board of directors approved four additional authorizations under our share repurchase program for the purchase of up to an additional $1.3 billion of our Class A common shares, in the aggregate, for a total authorization of $1.6 billion. Pursuant to our share repurchase program, we repurchased 10.4 million Class A common shares for $319 million during the three months ended March 31, 2020. As of May 8, 2020, we have repurchased, in the aggregate, 32.8 million Class A common shares for approximately $1.2 billion since inception of our share repurchase program and have $321 million of repurchase authorization remaining. In connection with our strategic initiative to increase available liquidity in response to the spread of COVID-19, during March 2020, management temporarily halted share repurchases under our program.

Repurchase of Other Securities

We may from time to time seek to retire or purchase our other outstanding debt or equity securities through cash purchases and/or exchanges for other securities, purchases in the open market, privately negotiated transactions or otherwise. Any such repurchases will be dependent upon several factors, including our liquidity requirements, contractual restrictions, general market conditions and applicable regulatory, legal and accounting factors. Whether or not we repurchase any of our other securities and the size and timing of any such repurchases will be determined at our discretion.


Balance Sheet and Other Arrangements

Contractual Obligations

There have been no material changes to our contractual obligations from those previously disclosed in the 2019 Annual Report.

Off Balance Sheet Arrangements

None.


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Critical Accounting Estimates and Judgments

The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Amounts based on such estimates involve numerous assumptions subject to varying and potentially significant degrees of judgment and uncertainty, particularly related to the future performance of the underlying business, and will likely change in the future as additional information becomes available. Critical estimates and assumptions are evaluated on an ongoing basis based on historical developments, market conditions, industry trends and other information that is reasonable under the circumstances. There can be no assurance that actual results will conform to estimates and assumptions and that reported results of operations will not be materially affected by the need to make future accounting adjustments to reflect periodic changes in these estimates and assumptions. Critical accounting estimates are impacted significantly by our methods, judgments and assumptions used in the preparation of the consolidated financial statements and should be read in conjunction with our significant accounting policies described in Note 1 – Business, Basis of Presentation and Significant Accounting Policies to the consolidated financial statements of our 2019 Annual Report. The most critical accounting estimates and judgments include those used in determining:

fair value of investments;
credit loss allowances;
future policy benefit reserves;
derivatives valuation, including embedded derivatives;
deferred acquisition costs, deferred sales inducements and value of business acquired;
consolidation of VIEs; and
valuation allowances on deferred tax assets.

Except as described below under Investments, the above critical accounting estimates and judgments are discussed in detail in Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates and Judgments of our 2019 Annual Report.

See Note 1 – Business, Basis of Presentation and Significant Accounting Policies to the condensed consolidated financial statements for adoption of new and future accounting pronouncements.

Investments

Credit Loss Allowances

Establishing allowances for expected credit losses is a quantitative and qualitative process, which is subject to risks and uncertainties and involves significant estimates and judgments by management. Changes in the estimates and judgments used in such analysis can have a significant impact on our consolidated results of operations.

The allowance for expected credit losses on assets held at amortized cost and off-balance sheet credit exposures is established utilizing quantitative modeling. 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. For residential mortgage loans, key loan characteristics impacting 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. For commercial mortgage loans, key loan characteristics impacting the estimate include among others: time to maturity, delinquency status, loan-to-value ratios and debt service coverage ratios. Key macroeconomic variables include unemployment rates, rent growth, capitalization rates, and the housing price index. 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 occur 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.

We evaluate 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 is subject solely to a quantitative analysis.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations



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.


Item 3. Quantitative and Qualitative Disclosures About Market Risks

We regularly analyze our exposure to market risks, which reflect potential losses in value due to credit and counterparty risk, interest rate risk, currency risk, commodity price risk and equity price risk. As a result of that analysis, we have determined that we are primarily exposed to credit risk, interest rate risk and equity price risk. A description of our market risk exposures, including strategies used to manage our exposure to market risk, may be found under Part II—Item 7A. Quantitative and Qualitative Disclosures About Market Risk of the 2019 Annual Report. There have been no material changes to our market risk exposures from those previously disclosed in the 2019 Annual Report.


Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures as such term is defined under Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation, as of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at attaining the level of reasonable assurance noted above.

Changes in Internal Control Over Financial Reporting

There were no changes to our internal control over financial reporting during the quarter ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as described below.

Effective January 1, 2020, we implemented ASU 2016-13, Financial Instruments – Credit Losses, and other related ASUs, as disclosed in Note 1 – Business, Basis of Presentation and Significant Accounting Policies of the condensed consolidated financial statements. With the implementation, we enhanced our business processes and related control activities to consider new financial reporting requirements, including use of credit loss models, assumptions used in developing our credit loss estimates and new disclosure requirements. Certain of these business processes and control activities, such as the development and maintenance of certain credit loss models, have been outsourced to Apollo, a related party.





96




PART IIOTHER INFORMATION

Item 1. Legal Proceedings

We are subject to litigation arising in the ordinary course of our business, including litigation principally relating to our FIA business. We cannot assure you that our insurance coverage will be adequate to cover all liabilities arising out of such claims. The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. There is significant judgment required in assessing both the probability of an adverse outcome and the determination as to whether an exposure can be reasonably estimated. In management’s opinion, the ultimate disposition of any current legal proceeding or claim brought against us will not have a material effect on our financial condition, results of operations or cash flows. Litigation is, however, inherently uncertain and an adverse outcome from such litigation could have a material effect on the operating results of a particular reporting period.

From time to time, in the ordinary course of business and like others in the insurance and financial services industries, we receive requests for information from government agencies in connection with such agencies’ regulatory or investigatory authority. Such requests can include financial or market conduct examinations, subpoenas or demand letters for documents to assist the government in audits or investigations. We and each of our U.S. insurance subsidiaries review such requests and notices and take appropriate action. We have been subject to certain requests for information and investigations in the past and could be subject to them in the future.

For a description of certain legal proceedings affecting us, see Note 10 – Commitments and ContingenciesLitigation, Claims and Assessments to the condensed consolidated financial statements.


Item 1A. Risk Factors

The following should be read in conjunction with, and supplement and amend, the factors that may affect our business or operations described in Part I–Item 1A. Risk Factors of our 2019 Annual Report. Other than as described in this Item 1A, there have been no material changes to our risk factors from the risk factors previously disclosed in our 2019 Annual Report.

Certain metrics discussed in this section are based on management view and therefore may not correspond to amounts disclosed in our condensed consolidated financial statements or the notes thereto. For example, investment figures cited represent our invested assets, which include assets held by cedants that correspond to liabilities ceded to us. We believe that these metrics provide the most comprehensive view of our risk exposures. See Part 1–Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations–Key Operating and Non-GAAP Measures–Net Invested Assets for further discussion.

The following updates and supplements the risk factors described in our 2019 Annual Report:
Major public health issues, and specifically the pandemic caused by the spread of COVID-19, could have an adverse impact on our financial condition, results of operations, liquidity, cash flows and other aspects of our business.
We are closely monitoring developments related to the COVID-19 pandemic to assess its impact on our business. While still evolving, the COVID-19 pandemic has caused significant economic and financial turmoil both in the U.S. and around the world, and has fueled concerns that it will lead to a global recession. These conditions are expected to continue in the near term. At this time, it is not possible to estimate how long it will take to halt the spread of the virus or the longer term-effects that the COVID-19 pandemic could have on our business. The extent to which the COVID-19 pandemic impacts our business, results of operations, financial condition, liquidity or prospects will depend on future developments which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic and the actions taken to contain or address its impact, and may cause us to revisit or revise estimates of future earnings or other guidance we have previously provided to the markets. In particular, certain projected financial information previously provided to our shareholders in connection with our recent share issuance transaction with Apollo may as a result of the impact from the COVID-19 pandemic materially differ from our actual results, and should not be relied upon.
While we have implemented risk management and contingency plans and taken preventive measures and other precautions, no predictions of specific scenarios can be made with respect to the COVID-19 pandemic and such measures may not adequately predict the impact on our business from such events. Currently, most of our employees are working remotely with only operationally critical employees working at our facilities for business continuity purposes, to the extent lawfully permitted. An extended period of remote work arrangements could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business. We also outsource certain critical business activities to third parties. As a result, we rely upon the successful implementation and execution of the business continuity planning of such entities in the current environment. While we closely monitor the business continuity activities of these third parties, successful implementation and execution of their business continuity strategies are largely outside our control. If one or more of the third parties to whom we outsource certain critical business activities experience operational failures as a result of the impacts from the spread of COVID-19, or claim that they cannot perform due to a force majeure, it may have a material adverse effect on our business, financial condition, results of operations, liquidity and cash flows.
With one exception, each of the Non-U.S. Companies (as defined below) currently intends to operate in a manner that will not cause it to be subject to current U.S. federal income taxation on its net income, and certain of them intend to be UK tax resident by reason of having their central management and control exercised in the UK. However, our directors and personnel reside in various jurisdictions and often must travel

97




to carry out their duties in accordance with such intended tax positions. Travel restrictions imposed as a result of the COVID-19 pandemic have limited, and may continue to limit, such travel. While we have implemented contingency plans to mitigate the impact of such travel restrictions, no assurances can be provided that we will not become subject to greater tax liabilities than anticipated due to restrictions on the ability of our directors and personnel to carry out their activities from the intended jurisdictions.
Increased economic uncertainty and increased unemployment resulting from the economic impacts of the spread of COVID-19 may also result in policyholders seeking sources of liquidity and withdrawing at rates greater than we previously expected. If policyholder lapse and surrender rates significantly exceed our expectations, it could have a material adverse effect on our business, financial condition, results of operations, liquidity and cash flows. Such events or conditions could also have an adverse effect on our sales of new policies. In addition, such events or conditions could result in a decrease or halt in economic activity in large geographic areas, adversely affecting our business within such geographic areas and/or adversely affecting the general economic climate.
The effects of the spread of COVID-19 on economic conditions and the financial markets may trigger or exacerbate the market risk discussed elsewhere in this report and in our 2019 Annual Report. Specifically, our investment portfolio (and, namely, the valuations of invested assets we hold) has been, and may continue to be, adversely affected. Moreover, changes in interest rates, reduced liquidity or a continued slowdown in the U.S. or in global economic conditions may also adversely affect the values and cash flows of these assets. Within our investment portfolio, there is exposure to certain segments of the economy that have been disproportionately affected by the spread of COVID-19, including but not limited to, aviation, real estate (including CMLs, triple net lease investments, RMLs, CMBS, RMBS and related servicer investments), retail, energy and financial services. These investments are subject to increased credit or valuation risk, which could ultimately result in increased investment losses. Our investments in mortgages and mortgage-backed securities could be negatively affected by delays or failures of borrowers to make payments of principal and interest when due or delays or moratoriums on foreclosures or enforcement actions with respect to delinquent or defaulted mortgages imposed by governmental authorities. Further, extreme market volatility may leave us unable to react to market events in a prudent manner consistent with our historical investment practices in dealing with more orderly markets. Market dislocations, decreases in observable market activity or unavailability of information, in each case, arising from the spread of COVID-19, may restrict our access to key inputs used to derive certain estimates and assumptions made in connection with financial reporting or otherwise, including estimates and changes in long term macro-economic assumptions relating to accounting for CECL. Restricted access to such inputs may make our financial statement balances and estimates and assumptions used to run our business subject to greater variability and subjectivity.
While governmental and non-governmental organizations are engaging in efforts to combat the spread and severity of the COVID-19 pandemic and related public health issues, these measures may not be effective. We also cannot predict how legal and regulatory responses to concerns about the COVID-19 pandemic and related public health issues will impact our business. Such events or conditions could result in additional regulation or restrictions affecting the conduct of our business in the future.
As a financial services company, we are exposed to liquidity risk, which is the risk that we are unable to meet near-term obligations as they come due.
Liquidity risk is a manifestation of events that are driven by other risk types (e.g. market, policyholder behavior, operational). A liquidity shortfall may arise in the event of insufficient funding sources or an immediate and significant need for cash or collateral. In addition, it is possible that expected liquidity sources, such as our credit agreement, may be unavailable or inadequate to satisfy the liquidity demands described below. In particular, the spread of COVID-19 has introduced tremendous volatility into the financial markets and may restrict the liquidity sources available to us and further may result in an increase of our liquidity demands.
We have four primary sources of liquidity exposure and associated drivers that trigger material liquidity demand. Those sources are:
Collateral market exposure: Abrupt changes to interest rate, equity, and/or currency markets, such as that experienced during the three months ended March 31, 2020, have and may further increase collateral requirements to counterparties and may create liquidity risk.
Asset liability mismatch: There are liquidity risks associated with liabilities coming due prior to the matching asset cash flows. Structural maturities mismatch can occur in activities such as securities lending, where the liabilities are effectively overnight open transactions or otherwise short-term in nature and may be used to fund longer-term assets.
Funding Availability: We have availed ourselves of the financial markets for funding (such as through the issuance of senior notes, securities lending and repurchase arrangements and other forms of borrowing in the capital markets). These sources might not be available during times of stress, or may only be available on unfavorable terms, which can result in a decrease in our profitability and a significant reduction in our financial flexibility.
Policyholder cash flows: We face potential liquidity risks from unexpected cash demands due to severe mortality, policyholder withdrawals or lapse events. If such events were to occur, we may face unexpectedly high levels of claim payments to policyholders.

If a material liquidity demand is triggered and we are unable to satisfy the demand with the sources of liquidity readily available to us, it may have a material adverse impact on our business, financial condition, results of operations, liquidity and cash flows.
See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity and Capital Resources for a discussion of our liquidity and sources and uses of liquidity, including information about legal and regulatory limits on the ability of our subsidiaries to pay dividends.
The following updates and replaces the final paragraph of the similarly named risk factor in our 2019 Annual Report:

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Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021 may adversely affect the value of our investment portfolio, our ability to achieve our hedging objectives and our ability to issue funding agreements bearing a floating rate of interest.
To manage the uncertainty surrounding the discontinuation of LIBOR, we have established a six-phase plan. Our plan is subject to change as we gain additional information. We have created an Executive Steering Committee composed of senior executives to coordinate and oversee execution of our plan. To the extent that management effort and attention is focused on other matters, such as responding to the risk posed by COVID-19, successfully completing all of the phases of our plan prior to the discontinuation of LIBOR could become more difficult. Although we expect that we will be successful at completing all the phases of our plan prior to the discontinuation of LIBOR, we can provide no assurance at this time. Failure to complete all phases of our plan prior to the discontinuation of LIBOR may have a material adverse effect on our business, financial position, results of operations and cash flows. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations–Industry Trends and Competition-Discontinuation of LIBOR for further discussion.
The following updates and replaces, in their entirety, the similarly named risk factors in our 2019 Annual Report:
Our investment portfolio may be subject to concentration risk, particularly with respect to single issuers, including MidCap, AmeriHome, Athora and PK AirFinance; industries, including financial services; and asset classes, including real estate.
Concentration risk arises from exposure to significant asset defaults of a single issuer, industry or class of securities, based on economic conditions, geography or as a result of adverse regulatory or court decisions. When an investor’s assets are concentrated and that particular asset or class of assets experiences significant defaults, the default of such assets could threaten the investor’s financial condition, results of operations and cash flows. Our most significant potential exposures to concentration risk of single issuers are our investments in MidCap, a provider of revolving and term debt facilities to middle market companies in North America and Europe; A-A Mortgage and its indirect investment in AmeriHome, a mortgage lender and mortgage servicer; Athora, an insurance holding company focused on the European life insurance market; and PK AirFinance, a provider and arranger of loans principally to airlines and aircraft leasing companies secured by commercial aircraft.

As of March 31, 2020, our exposure, including loaned amounts, to MidCap was $838 million, which represented 0.7% of our net invested assets and 8.4% of total Athene Holding Ltd. shareholders’ equity. In addition, on April 30, 2020, we committed to invest $110 million in preferred shares to be issued by MidCap. As of March 31, 2020, our exposure to A-A Mortgage was $621 million, which represented 0.5% of our net invested assets and 6.2% of total Athene Holding Ltd. shareholders’ equity. On April 1, 2020, pursuant to a capital call, we made an incremental investment in Athora of $361 million. Pro forma for this investment, as of March 31, 2020, our exposure to Athora was $491 million, which represented 0.4% of our net invested assets and 4.9% of total Athene Holding Ltd. shareholders’ equity. As of March 31, 2020, our exposure to securitizations of loans originated by PK AirFinance was $1.4 billion, which represented 1.2% of our net invested assets and 14.4% of total Athene Holding Ltd. shareholders’ equity.

Given our significant exposure to these issuers, we are subject to the idiosyncratic risk inherent in their business. For example:
AmeriHome relies upon a subservicer to perform servicing operations on the loans for which it has mortgage servicing rights. If the subservicer were to experience financial distress or fail to provide adequate or timely services, AmeriHome may have difficulty finding another subservicer to perform servicing operations and may experience a significant decline in its financial performance. Such risks may be heightened in the current economic environment. In addition, mortgage servicers are obligated to advance certain amounts not paid by borrowers, including amounts arising from the forbearance of certain payments as mandated by the CARES Act. AmeriHome may require significant liquidity in order to make these advances and adequate sources of liquidity could be unavailable to AmeriHome to satisfy these obligations.

As a life insurer, Athora is subject to credit risk with respect to its investment portfolio and mortality risk with respect to its product liabilities, each of which may be exacerbated by unforeseen events, including but not limited to the spread of the COVID-19 pandemic. Further, Athora has significant European operations, which expose it to volatile economic conditions and risks relating to European member countries and withdrawals thereof, such as the UK. In addition, Athora is subject to multiple legal and regulatory regimes that may hinder or prevent it from achieving its business objectives.

Our investment in the PK AirFinance securitization of loans is subject to risks to the aircraft and airline industries generally, and specifically in connection with the decrease in air travel as a result of the spread of COVID-19, which has likely resulted in a reduction in aircraft valuations and/or delinquent loan payments. While our investment is supported by significant equity subordination provided by borrowers, if borrowers default on their loans, PK AirFinance may pursue foreclosure and re-market the related aircraft or may restructure the defaulted loans. To the extent that the proceeds from any such restructuring or re-marketing were not sufficient to satisfy the corresponding principal balance in the securitization, significant losses on our investment could be recognized, beginning with the equity tranche of the securitization that we hold.

To the extent that we suffer a significant loss on our investment in MidCap, A-A Mortgage, Athora or the securities issued by PK AirFinance, our financial condition, results of operations and cash flows could be adversely affected.

MidCap, AmeriHome and PK AirFinance are nonbank lenders focused on providing financing to individuals or entities. As a result, through these investments, we have significant exposure to credit risk, which has increased as a result of the economic conditions brought about by the

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spread of COVID-19. As a result of the current economic environment, our investees in this sector have experienced a decrease in origination volumes and may experience increased credit and liquidity risk as borrowers defer loan payments or default on their obligations. To the extent that the current downturn causes a deterioration in the creditworthiness of the counterparties of such investees or adversely affects the securitization market for the loans originated by these entities, we may suffer significant losses on our investments in these entities and our financial condition, results of operations and cash flows could be adversely affected. In addition to the concentration risk arising from our investments in single issuers within the nonbank lending sector of the financial services industry, we have significant exposure to the financial services industry more broadly as a result of the composition of investments in our investment portfolio. As of March 31, 2020, 13% of our net invested assets were invested in issuers within the financial services industry, excluding CLOs. The current economic downturn or any further macroeconomic, regulatory or other changes having an adverse impact on the financial services industry more broadly, could have a material and adverse effect on our business, financial condition, results of operations and cash flows.
As of March 31, 2020, 25% of our net invested assets were invested in real estate-related assets. Any significant decline in the value of real estate generally or the occurrence of any of the risks described above with respect to our real estate-related investments could materially and adversely affect our financial condition and results of operations.
The BEAT may significantly increase our tax liability.
The Tax Act introduced a new tax called the BEAT. The BEAT operates as a minimum tax and is generally calculated as a percentage (10% in 2019 2025, and 12.5% in 2026 and thereafter) of the “modified taxable income” of an “applicable taxpayer.” Modified taxable income is calculated by adding back to a taxpayer’s regular taxable income the amount of certain “base erosion tax benefits” with respect to certain payments made to foreign affiliates of the taxpayer, as well as the “base erosion percentage” of any net operating loss deductions. The BEAT applies for a taxable year only to the extent it exceeds a taxpayer’s regular corporate income tax liability for such year (determined without regard to certain tax credits).
Certain of our reinsurance agreements require our U.S. subsidiaries (including any non-U.S. subsidiaries subject to U.S. federal income taxation) to pay or accrue substantial amounts to our non-U.S. reinsurance subsidiaries that would be characterized as “base erosion payments” with respect to which there are “base erosion tax benefits.” However, in certain types of reinsurance transactions, it is not clear whether any amounts paid or accrued by non-U.S. reinsurance entities would be netted against amounts paid or accrued to such entities for purposes of calculating the “base erosion payments” and “base erosion tax benefits.”
In light of the possibility of material additional tax cost to our U.S. subsidiaries and the lack of clear guidance regarding the appropriate method by which to compute the BEAT, we have undertaken certain actions intended to mitigate the potential effect of the BEAT on our results of operations. Such actions may have adverse consequences to our business, such as subjecting income in respect of our affiliate reinsurance to a layer of withholding tax of up to 30%, which would not have been payable under our prior structure. There can be no assurances that our efforts to mitigate the BEAT will be successful, and our consideration of any further actions may be expensive and time consuming. In addition, we have been, and may continue to be, required to take action before the uncertainty regarding the BEAT is resolved, and accordingly any action we take may, in hindsight, prove to have been unnecessary, ineffective or counterproductive.
The application of the BEAT to our reinsurance arrangements could be affected by further legislative action (including possibly a “technical corrections” bill), administrative guidance or court decisions, any of which could have retroactive effect. In addition, tax authorities may disagree with our BEAT calculations, or the interpretations on which those calculations are based, and assess additional taxes, interest and penalties, and the uncertainty regarding the correct interpretation of the BEAT may make such disagreements more likely. We will establish our tax provision in accordance with GAAP.
However, there can be no assurance that this provision will accurately reflect the amount of federal income tax that we ultimately pay, as that amount could differ materially from the estimate. There may be material adverse consequences to our business if tax authorities successfully challenge our BEAT calculations, in light of the uncertainties described above.
In addition, we have made estimates regarding the effective tax rate we expect to experience, which take into account the impacts of federal income tax and the BEAT. The determination of each such figure, or range of figures, involves numerous estimates and assumptions, including estimates and assumptions regarding our BEAT calculations. Such estimates and assumptions may prove incorrect. To the extent that actual experience differs from the estimates and assumptions inherent in our projections, our future effective tax rate may deviate materially from the estimates provided and our financial condition and results of operations may be materially less favorable than are implied by the projections provided.
AHL or its non-U.S. subsidiaries may be subject to U.S. federal income taxation in an amount greater than expected.
AHL and certain of its subsidiaries are treated as foreign corporations under the Internal Revenue Code (such subsidiaries, the Non-U.S. Subsidiaries, and together with AHL, the Non-U.S. Companies). Any Non-U.S. Company that is considered to be engaged in a trade or business in the U.S. generally will be subject to U.S. federal income taxation on a net basis on its income that is effectively connected with such U.S. trade or business (including branch profits tax on the portion of its earnings and profits that is attributable to such income), unless otherwise provided under an applicable income tax treaty. In addition, a Non-U.S. Company generally will be subject to U.S. federal income taxation on a gross basis on certain U.S.-source income, and certain premiums earned on insurance with respect to U.S. risks, that are not effectively connected with a U.S. trade or business, unless otherwise provided under an applicable income tax treaty.
With one exception, each of the Non-U.S. Companies currently intends to operate in a manner that will not cause it to be treated as being engaged in a trade or business within the U.S. However, the enactment of the BEAT, the reduction of the federal income tax rate applicable to

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corporations included in the Tax Act and other factors may cause some or all of the Non-U.S. Companies to conduct business differently. Moreover, there is considerable uncertainty as to when a foreign corporation is engaged in a trade or business within the United States, as the law is unclear and the determination is highly factual and must be made annually, and therefore there can be no assurance that the IRS will not successfully contend that a Non-U.S. Company that does not intend to be treated as engaged in a trade or business in the U.S. is nonetheless so engaged. If any such Non-U.S. Company is treated as engaged in a trade or business in the U.S., it may incur greater tax costs than expected on any income not exempt from taxation under an applicable income tax treaty, which could have a material adverse effect on our financial condition, results of operations and cash flows.
AHL is a UK tax resident and expects to qualify for the benefits of the income tax treaty between the U.S. and the UK (UK Treaty) because its Class A common shares are listed and regularly traded on the NYSE. In addition, certain of the Non-U.S. Subsidiaries are UK tax residents (together with AHL, the UK Resident Companies) and expect to qualify for the benefits of the UK Treaty by reason of being subsidiaries of AHL or by reason of satisfying an ownership and base erosion test. Accordingly, our UK Resident Companies are expected to qualify for certain exemptions from, or reduced rates of, the U.S. taxes described above that are provided for by the UK Treaty. However, there can be no assurances that our UK Resident Companies will continue to qualify for treaty benefits or satisfy all of the requirements for the tax exemptions and reductions they intend to claim. If any of our UK Resident Companies fails to qualify for such benefits or satisfy such requirements, it may incur greater tax costs than expected, which could have a material adverse effect on our financial condition, results of operations and cash flows.
U.S. persons who own our equity securities may be subject to U.S. federal income taxation at ordinary income rates on our undistributed earnings and profits.
For any taxable year in which a Non-U.S. Company is treated as a controlled foreign corporation (CFC), a “10% U.S. Shareholder” of the Non-U.S. Company that held our equity securities directly or indirectly through non-U.S. entities as of the last day in such taxable year that the Non-U.S. Company was a CFC would generally be required to include in gross income as ordinary income its pro rata share of the Non-U.S. Company’s income, regardless of whether that income was actually distributed to such U.S. person (with certain adjustments). A “10% U.S. Shareholder” of an entity treated as a foreign corporation for U.S. federal income tax purposes is a U.S. person who owns (directly, indirectly through non-U.S. entities or constructively) 10% or more of the total value of all classes of shares of the corporation or 10% or more of the total combined voting power of all classes of voting shares of the corporation. Any U.S. person that owns (or is treated as owning) 10% or more of the value of AHL should consult with their tax advisor regarding their investment in AHL.
In general, a non-U.S. corporation is a CFC if 10% U.S. Shareholders, in the aggregate, own (or are treated as owning) stock of the non-U.S. corporation possessing more than 50% of the voting power or value of such corporation’s stock. However, this threshold is lowered to 25% for purposes of taking into account the insurance income of a non-U.S. corporation. Further, special rules apply for purposes of taking into account any related person insurance income (RPII) of a non-U.S. corporation, as described below.
In addition, if a U.S. person disposes of shares in a non-U.S. corporation and the U.S. person owned (directly, indirectly through non-U.S. entities or constructively) 10% or more of the total combined voting power of the voting stock of the corporation at any time when the corporation was a CFC during the five-year period ending on the date of disposition, any gain from the disposition will generally be treated as a dividend to the extent of the U.S. person’s share of the corporation’s undistributed earnings and profits that were accumulated during the period or periods that the U.S. person owned the shares while the corporation was a CFC (with certain adjustments). Also, a U.S. person may be required to comply with specified reporting requirements, regardless of the number of shares owned.
We do not believe that AHL is a CFC. However, we believe that all of the Non-U.S. Subsidiaries are CFCs, except that we believe ALRe is a CFC only for purposes of taking into account certain insurance income. Specifically, the Tax Act eliminated the prohibition on “downward attribution” from non-U.S. persons to U.S. persons under former Section 958(b)(4) of the Code for purposes of determining constructive stock ownership under the CFC rules. As a result, our U.S. subsidiaries are deemed to own all of the stock of the Non-U.S. Subsidiaries (other than ALRe) for CFC purposes. Further, we believe that 10% U.S. Shareholders of ALRe collectively own more than 25%, but less than 50%, of the vote and value of ALRe by reason of downward attribution from certain of our direct or indirect shareholders. The legislative history under the Tax Act indicates that this change in law was not intended to cause a foreign corporation to be treated as a CFC with respect to a 10% U.S. Shareholder that is not related to the U.S. persons receiving such downward attribution. However, it is not clear whether a court would interpret the change made by the Tax Act in a manner consistent with such indicated intent. Moreover, no assurances can be provided that any of the Non-U.S. Companies would not be a CFC, even without regard to the downward attribution of stock from non-U.S. persons to U.S. persons, as such classification depends upon the identity and relationships of the beneficial owners of our equity securities, over which we have limited knowledge and control. Accordingly, any U.S. person that owns (or is treated as owning) 10% or more of the voting power or value of AHL should consult with their tax advisor regarding their investment in AHL.
U.S. persons who own our equity securities may be subject to U.S. federal income taxation at ordinary income rates on a disproportionate share of our undistributed earnings and profits attributable to RPII.
If any of the Non-U.S. Companies is treated as recognizing RPII in a taxable year and is also treated as a CFC for such taxable year, each U.S. person that owns our equity securities directly or indirectly through non-U.S. entities as of the last day in such taxable year must generally include in gross income its pro rata share of the RPII, determined as if the RPII were distributed proportionately only to all such U.S. persons, regardless of whether that income is distributed (with certain adjustments). For this purpose, a Non-U.S. Company generally will be treated as a CFC if U.S. persons in the aggregate are treated as owning (directly or indirectly through non-U.S. entities) 25% or more of the total voting power or value of the Non-U.S. Company’s stock at any time during the taxable year. We believe that the Non-U.S. Companies are treated as CFCs for this purpose, based on the current ownership of our equity securities.

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RPII generally is any income of a non-U.S. corporation attributable to insuring or reinsuring risks of a U.S. person that owns (or is treated as owning) stock of such non-U.S. corporation, or risks of a person that is “related” to such a U.S. person. For this purpose, (1) a person is “related” to another person if such person “controls,” or is “controlled” by, such other person, or if both are “controlled” by the same persons, and (2) “control” of a corporation means ownership (or deemed ownership) of stock possessing more than 50% of the total voting power or value of such corporation’s stock and “control” of a partnership, trust or estate for U.S. federal income tax purposes means ownership (or deemed ownership) of more than 50% by value of the beneficial interests in such partnership, trust or estate.
The Non-U.S. Companies that are insurance enterprises (the “Non-U.S. Insurance Companies”) may derive income that is considered RPII. We believe that an exception under the RPII rules for CFCs with de minimis RPII currently applies to such Non-U.S. Insurance Companies, such that U.S. persons are not required to include any RPII in their gross income with respect to any of the Non-U.S. Companies. However, AGM and its affiliates and related parties own a substantial number of our Class A common shares, have rights to acquire additional Class A common shares and hold proxies to vote Class A common shares owned by certain of our employees. Further, Athene and AGM may have considerable overlap in ownership. If it is determined that AGM controls Athene, or that the same persons control both Athene and AGM through owning (or being treated as owning) more than 50% of the vote or value of both Athene and AGM, substantially all of the income of the Non-U.S. Insurance Companies derived from the reinsurance of affiliates likely will constitute RPII. This would trigger the adverse RPII consequences described above to all U.S. persons that hold our equity securities directly or indirectly through non-U.S. entities and could have a material adverse effect on the value of their investment in our equity securities.

Our bye-laws currently limit to 9.9% the voting power of AHL owned by persons who, together with their affiliates, beneficially own more than 9.9% of the voting power of AHL, subject to exemptions authorized by our board of directors (the “9.9% Voting Cutback”). If the 9.9% Voting Cutback is applicable to any person, excess voting power generally will be reallocated to all other Class A common shares, including those held by AGM and its affiliates. Further, the voting power of Class A common shares that are owned (or treated as owned) by certain persons who own (or are treated as owning) any AGM stock would also be reallocated to all other Class A common shares, including those held by AGM and its affiliates. Our bye-laws limit these reallocations of voting power so that AGM, and any person or persons who control AGM, would not own (or be treated as owning) more than 49.9% of the total voting power of our stock if they do not own (and are not treated as owning) more than 50% of the total value of our stock. These rules are intended to prevent any such reallocation of voting power from causing AGM to be considered to control us or to be controlled by the same persons who control us for purposes of the RPII provisions. However, because the relevant attribution rules are complex and there is no definitive legal authority on whether these voting provisions are effective for these purposes, there can be no assurance that this will be the case.
Our bye-laws also generally provide that no person (nor certain direct or indirect beneficial owners or related persons to such person) who owns our equity securities may acquire any shares of AGM or otherwise make any investment that would cause such person, or any other person that is a U.S. person, to own (or be treated as owning) more than 50% of the vote or value of our equity securities. Any holder of our equity securities that violates this restriction may be required, at the discretion of our board of directors, to sell its equity securities or take any other reasonable action that our board of directors deems necessary. However, this restriction does not apply to members of the Apollo Group.
We have only a limited ability to determine whether any of the Non-U.S. Insurance Companies is treated as recognizing RPII in a taxable year, the amount of any such RPII or any U.S. person’s share of such RPII, and to obtain the information necessary to accurately make such determinations or fully enforce the voting provisions and ownership restrictions described above. We will take reasonable steps to obtain such information, but there can be no assurances that such steps will be adequate or that we will be successful in this regard. Accordingly, no assurances can be provided that the adverse RPII consequences described above will not apply to all U.S. persons that hold our equity securities directly or indirectly through non-U.S. entities.
The following updates and replaces, in its entirety, the risk factor entitled Our bye-laws contain provisions that cause a holder of Class A common shares to lose the right to vote the shares if the holder owns an equity interest in Apollo, AP Alternative Assets, L.P. (AAA) or certain other entities in our 2019 Annual Report:
Our bye-laws contain provisions that may cause a holder of Class A common shares to lose the right to vote the shares if the holder or certain connected persons own an equity interest in AGM.
Our bye-laws contain a voting restriction that can result in any “Restricted Common Shares” having no right to vote. A holder’s Class A common shares are considered “Restricted Common Shares” if and when the holder or any person who is considered to indirectly or constructively own any of the holder’s shares (other than certain members of the Apollo Group) owns (directly, indirectly or constructively) any stock of AGM. This voting restriction applies only if there is a person who (together with its affiliates) beneficially owns Class A common shares that would, absent the voting adjustments in our bye-laws, possess more than 9.9% of the total voting power of our Class A common shares and who has not received the consent of at least 70% (75% after March 31, 2021) of our board of directors to exceed such voting threshold. This voting restriction does not affect the transferability of Class A common shares and will not apply after any date identified as the “Restriction Termination Date” by at least 70% (75% after March 31, 2021) of our board of directors.
The following updates and replaces, in their entirety, the similarly named risk factors in our 2019 Annual Report:
Our bye-laws contain provisions that could discourage takeovers and business combinations that our shareholders might consider in their best interests, including provisions that prevent a holder of Class A common shares from having a significant stake in Athene.
Our bye-laws include certain provisions that could have the effect of delaying, deferring, preventing or rendering more difficult a change of control that holders of our Class A common shares might consider in their best interests. For example, our bye-laws contain voting adjustments

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that may reduce the votes of a holder’s Class A common shares to the extent necessary to prevent any person (together with its affiliates) from beneficially owning Class A common shares having more than 9.9% of the total voting power of our Class A common shares, unless such person has received the consent of at least 70% (75% after March 31, 2021) of our board of directors to exceed such threshold. In addition, if the votes of any Class A common shares are required to be reduced pursuant to these adjustments, the votes of all Class A common shares that are “Restricted Common Shares” generally are reduced to zero. The votes of all Class A common shares that did not suffer a reduction in votes are then increased, pro rata based on their then current voting power, in an aggregate amount equal to the aggregate reduction in votes under the voting adjustments described above, except that the increase in votes of any Class A common share is limited to the extent necessary to avoid triggering further voting reductions and to avoid creating a “RPII Control Group,” as defined in our bye-laws. Such adjustments, if implicated, would result in some Class A common shares having more than one vote per share. Therefore, a shareholder’s voting rights may increase above 5% of the aggregate voting power of our Class A common shares, even if the shareholder holds fewer than 5% of our Class A common shares, thereby possibly resulting in the shareholder becoming a reporting person subject to Schedule 13D or 13G filing requirements under the Exchange Act. These requirements could discourage any potential investment in our Class A common shares. In addition, our board of directors is classified into three classes of directors, with directors of each class serving staggered three-year terms. Any change in the number of directors is required by our bye-laws to be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class or from the removal of a director will hold such directorship for a term that coincides with the remaining term of that class. Moreover, our bye-laws require specific advance notice procedures and other protocols for holders of common shares to make shareholder proposals and nominate directors. Among other requirements, a shareholder must meet the minimum requirements for eligible shareholders to submit shareholder proposals under Rule 14a-8 of the Exchange Act, and submit specific information and make specific undertakings in relation to the shareholder proposal or director nomination.
Any or all of these provisions could prevent holders of our Class A common shares from receiving the benefit from any premium to the market price of our Class A common shares offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of any of these provisions could adversely affect the prevailing market price of our Class A common shares if they were viewed as discouraging takeover attempts in the future.
Future sales of common shares by existing shareholders could cause our share price to decline.
Sales of substantial amounts of our Class A common shares in the public market, or the perception that these sales could occur, could cause the market price of our Class A common shares to decline. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
We have filed registration statements on Form S-8 under the Securities Act to register the Class A common shares to be issued under our 2017 employee stock purchase plan (ESPP) and our equity compensation plans and, as a result, all Class A common shares acquired upon the purchase of shares under our ESPP and the vesting of share awards or the exercise of stock options granted under our equity compensation plans will also be freely tradeable under the Securities Act, subject to the terms of any lock-up agreements, unless purchased by our affiliates. As of March 31, 2020, 6.1 million common shares are reserved for future issuances under our ESPP and equity incentive plans, in the aggregate. The issuance of these shares or their subsequent sale may cause our share price to decline.
Pursuant to the shareholders agreement among us and certain members of the Apollo group that was entered into in connection with the share issuance transaction with Apollo, AGM and certain of its affiliates agreed not to directly or indirectly transfer any Class A common share prior to February 28, 2023, subject to certain exceptions (Apollo Lock-up). As of March 31, 2020, there more than 50 million shares subject to the Apollo Lock-up. When the Apollo Lock-up ends, the market price of our common shares could decline if the holders of those shares sell them or are perceived by the market as intending to sell them. Furthermore, Apollo has the right to require, subject to the expiration or waiver of the Apollo Lock-up, us to register Class A common shares for resale in certain circumstances pursuant to the registration rights agreements we have entered into with Apollo.
In the future, we may issue additional common shares or other equity or debt securities convertible into or exercisable or exchangeable for Class A common shares in connection with a financing, strategic investment, litigation settlement or employee arrangement or otherwise. Any of these issuances could result in substantial dilution to our existing shareholders and could cause the trading price of our Class A common shares to decline.



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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

Previously reported in the Current Report on Form 8-K filed with the SEC on March 2, 2020.

Issuer Purchases of Securities

Purchases of common stock made by or on behalf of us or our affiliates during the three months ended March 31, 2020 are set forth below:
Period
(a) Total number of shares purchased1,3,4
(b) Average price paid per share3
(c) Total number of shares purchased as part of publicly announced programs1,2
(d) Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs2
January 1 – January 31, 2020
51,723

$
46.88

2,193

$
640,063,226

February 1 – February 29, 2020
36,416,090

$
42.71

821,749

$
600,462,375

March 1 – March 31, 2020
9,628,573

$
32.03

9,624,573

$
321,408,033

 
 
 
 
 
1 Except as described in footnotes 3 and 4 below, differences in amounts between column (a) and (c) relate to shares withheld (under the terms of employee stock-based compensation plans) to offset tax withholding obligations that occur upon the delivery of outstanding shares underlying equity awards or upon the exercise of stock options.
2 Prior to August 5, 2019, we had announced approvals by our board of directors for $617 million of aggregate repurchases under our share repurchase program. Amounts authorized for repurchase under those approvals had been fully used prior to December 31, 2019. On August 5, 2019, we announced that our board of directors had approved an additional $350 million authorization for the repurchase of our Class A common shares. On October 28, 2019, we announced that our board of directors had approved an additional $600 million authorization for the repurchase of our Class A common shares. Neither of the remaining authorizations have a definitive expiration date, but may be terminated at any time at the sole discretion of our board of directors. See Note 8 – Equity to the condensed consolidated financial statements for more information.
3 AOG, our affiliate, purchased 35,534,942 Class A common shares on February 28, 2020. The average price paid per share is calculated based on the fair value of the AOG units and cash consideration we received upon closing of the transaction. See Note 9 – Related Parties to the condensed consolidated financial statements for further detail.
4 Marty Klein, our Chief Financial Officer, purchased 4,000 Class A common shares on March 13, 2020.

Purchases of depositary shares made by or on behalf of us or our affiliates during the three months ended March 31, 2020:
Period
 
(a) Total number of shares purchased1
 
(b) Average price paid per share
 
(c) Total number of shares purchased as part of publicly announced programs2
 
(d) Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs2
January 1 – January 31, 2020
 

 
$

 

 
$

February 1 – February 29, 2020
 

 
$

 

 
$

March 1 – March 31, 2020
 
800

 
$
22.41

 

 
$

 
 
 
 
 
 
 
 
 
1 Purchases relate to certain executive officers or members of our board of directors as our affiliates.
2 As of March 31, 2020, our board of directors had not authorized any purchases of depositary shares in connection with a publicly announced plan or program.


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EXHIBIT INDEX

Exhibit No.
Description
3.1
4.1
4.2
4.3
10.1
10.2
10.3
10.4
31.1
31.2
32.1
32.2
101.INS
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
XBRL Taxonomy Extension Schema.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase.
101.LAB
XBRL Taxonomy Extension Label Linkbase.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase.
101.DEF
XBRL Taxonomy Extension Definition Linkbase.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


105




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
ATHENE HOLDING LTD.
 
 
Date: May 8, 2020
/s/ Martin P. Klein
 
Martin P. Klein
 
Executive Vice President and Chief Financial Officer
 
(principal financial officer and duly authorized signatory)



106