10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 10, 2021
UNITED STATES SECURITIES AND EXCHANGE COMMISSION | ||||||||||||||||||||||||||||||||
Washington, D.C. 20549 | ||||||||||||||||||||||||||||||||
FORM 10-Q
For the quarterly period ended March 31, 2021
or
Commission File Number: 001-37963

(Exact name of registrant as specified in its charter) | ||||||||||||||||||||||||||||||||||||||
(State or other jurisdiction of | (I.R.S. Employer | |||||||||||||||||||||||||||||||||||||
incorporation or organization) | Identification Number) |
(441 ) 279-8400
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) | |||||||||||||||||||||||||||||||||||
Securities registered pursuant to Section 12(b) of the Act: | |||||||||||||||||||||||||||||||||||
Title of each class | Trading Symbol | Name of each exchange on which registered | |||||||||||||||||||||||||||||||||
Depositary Shares, each representing a 1/1,000th interest in a
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Depositary Shares, each representing a 1/1,000th interest in a
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Depositary Shares, each representing a 1/1,000th interest in a
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Depositary Shares, each representing a 1/1,000th interest in a
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☑ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of April 30, 2021, 191,742,821 of our Class A common shares were outstanding.
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
PART II—OTHER INFORMATION
As used in this Quarterly Report on Form 10-Q (report), unless the context otherwise indicates, any reference to “Athene,” “our 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, 2020 (2020 Annual Report). Factors that could cause actual results or conditions to differ from those reflected in the forward-looking statements contained in this report include:
•the accuracy of management’s assumptions and estimates;
•variability in the amount of statutory capital that our insurance and reinsurance subsidiaries have or are required to hold;
•interest rate and/or foreign currency fluctuations;
•our potential need for additional capital in the future and the potential unavailability of such capital to us on favorable terms or at all;
•major public health issues, and specifically the pandemic caused by the effects of the spread of the Coronavirus Disease of 2019 (COVID-19);
•changes in relationships with important parties in our product distribution network;
•the activities of our competitors and our ability to grow our retail business in a highly competitive environment;
•the impact of general economic conditions on our ability to sell our products and on the fair value of our investments;
•our ability to successfully acquire new companies or businesses and/or integrate such acquisitions into our existing framework;
•downgrades, potential downgrades or other negative actions by rating agencies;
•our dependence on key executives and inability to attract qualified personnel, or the potential loss of Bermudian personnel as a result of Bermuda employment restrictions;
•market and credit risks that could diminish the value of our investments;
•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 delay or failure to complete or realize the expected benefits from the proposed merger with AGM;
•the accuracy of our estimates regarding the future performance of our investment portfolio;
•increased regulation or scrutiny of alternative investment advisers and certain trading methods;
•potential changes to laws or regulations affecting, among other things, group supervision and/or group capital requirements, entity-level regulatory capital standards, transactions with our affiliates, the ability of our subsidiaries to make dividend payments or distributions to 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);
•AHL or any of its non-United States (US) subsidiaries becoming subject to US federal income taxation;
•adverse changes in US tax law;
•changes in our ability to pay dividends or make distributions;
•the failure to achieve the economic benefits expected to be derived from the Athene Co-Invest Reinsurance Affiliate 1A Ltd. (together with its subsidiaries, ACRA) capital raise or future ACRA capital raises;
•the failure of third-party ACRA investors to fund their capital commitment obligations; and
3
•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 2020 Annual Report and those discussed elsewhere in this report and in our 2020 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 US Securities and Exchange Commission (SEC). We undertake no obligation, except as may be required by law, to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise. Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data.
GLOSSARY OF SELECTED TERMS
Unless otherwise indicated in this report, the following terms have the meanings set forth below:
Entities
Term or Acronym | Definition | |||||||
A-A Mortgage | A-A Mortgage Opportunities, L.P. | |||||||
AADE | Athene Annuity & Life Assurance Company | |||||||
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) AGM, (2) AAA Guarantor – Athene, L.P. (3) any investment fund or other collective investment vehicle whose general partner or managing member is owned, directly or indirectly, by AGM or one or more of AGM’s subsidiaries, (4) BRH Holdings GP, Ltd. and its shareholders, (5) any executive officer or employee of AGM or AGM’s subsidiaries (6) any shareholder that has granted to AGM or any of its affiliates a valid proxy with respect to all of such shareholder’s Class A common shares pursuant to our bye-laws and (7) any affiliate of any of the foregoing (except that AHL or its subsidiaries are not members of the Apollo Group) | |||||||
AUSA | Athene USA Corporation | |||||||
Athora | Athora Holding Ltd. | |||||||
BMA | Bermuda Monetary Authority | |||||||
ISG | Apollo Insurance Solutions Group LP, formerly known as Athene Asset Management LLC | |||||||
Jackson | Jackson National Life Insurance Company | |||||||
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 | |||||||
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 using ALRe’s Bermuda capital and applying NAIC risk-based capital factors to the statutory financial statements of ALRe and ALRe’s non-US reinsurance subsidiaries on an aggregate basis. Adjustments are made to (i) exclude US subsidiaries which are included within our US RBC Ratio, (ii) exclude our interests in the AOG units and other non-insurance subsidiary holding companies from our capital base and (iii) limit RBC concentration charges such that when they are applied to determine target capital, the charges do not exceed 100% of the asset’s carrying value. | |||||||
Alternative investments | Alternative investments, including investment funds, CLO equity positions and certain other debt instruments considered to be equity-like | |||||||
Base of earnings | Earnings generated from our results of operations and the underlying profitability drivers of our business | |||||||
Bermuda capital | The capital of Athene’s non-US reinsurance subsidiaries calculated under US statutory accounting principles, including that for policyholder reserve liabilities which are subjected to US cash flow testing requirements, but (i) excluding certain items that do not exist under our applicable Bermuda requirements, such as interest maintenance reserves and (ii) including certain Bermuda statutory accounting differences, such as marking to market of inception date investment gains or losses relating to reinsurance transactions. Bermuda capital may from time to time materially differ from the calculation of statutory capital under US statutory accounting principles primarily due to the foregoing differences. | |||||||
Block reinsurance | A transaction in which the ceding company cedes all or a portion of a block of previously issued annuity contracts through a reinsurance agreement | |||||||
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 |
5
Term or Acronym | Definition | |||||||
IMA | Investment management agreement | |||||||
IMO | Independent marketing organization | |||||||
Investment margin on deferred annuities | Investment margin applies to deferred annuities and is the excess of our net investment earned rate over the cost of crediting to our policyholders, presented on an annualized basis for interim periods | |||||||
Liability outflows | The aggregate of withdrawals on our deferred annuities, maturities of our funding agreements, payments on payout annuities, and pension risk benefit payments | |||||||
MMS | Minimum margin of solvency | |||||||
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 | |||||||
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 | |||||||
US RBC Ratio | The CAL RBC ratio for AADE, our parent US insurance company | |||||||
VIE | Variable interest entity | |||||||
VOBA | Value of business acquired |
6
Item 1. Financial Statements
Index to Condensed Consolidated Financial Statements (unaudited)
7
(In millions) | March 31, 2021 | December 31, 2020 | |||||||||
Assets | |||||||||||
Investments | |||||||||||
Available-for-sale securities, at fair value (amortized cost: 2021 – $ |
$ | $ | |||||||||
Trading securities, at fair value | |||||||||||
Equity securities (portion at fair value: 2021 – $ |
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Mortgage loans (allowance for credit losses: 2021 – $ |
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Investment funds (portion at fair value: 2021 – $ |
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Policy loans | |||||||||||
Funds withheld at interest (portion at fair value: 2021 – $ |
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Derivative assets | |||||||||||
Short-term investments (portion at fair value: 2021 – $ |
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Other investments (allowance for credit losses: 2021 – $ |
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Total investments | |||||||||||
Cash and cash equivalents | |||||||||||
Restricted cash | |||||||||||
Investments in related parties | |||||||||||
Available-for-sale securities, at fair value (amortized cost: 2021 – $ |
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Trading securities, at fair value | |||||||||||
Equity securities, at fair value | |||||||||||
Mortgage loans (allowance for credit losses: 2021 – $ |
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Investment funds (portion at fair value: 2021 – $ |
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Funds withheld at interest (portion at fair value: 2021 – $ |
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Other investments (allowance for credit losses: 2021 – $ |
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Accrued investment income (related party: 2021 – $ |
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Reinsurance recoverable (portion at fair value: 2021 – $ |
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Deferred acquisition costs, deferred sales inducements and value of business acquired | |||||||||||
Other assets (consolidated variable interest entities: 2021 – $ |
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Total assets | $ | $ |
(Continued)
See accompanying notes to the unaudited condensed consolidated financial statements
8
(In millions, except per share data) | March 31, 2021 | December 31, 2020 | |||||||||
Liabilities and Equity | |||||||||||
Liabilities | |||||||||||
Interest sensitive contract liabilities (related party: 2021 – $ |
$ | $ | |||||||||
Future policy benefits (related party: 2021 – $ |
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Other policy claims and benefits | |||||||||||
Dividends payable to policyholders | |||||||||||
Long-term debt | |||||||||||
Derivative liabilities | |||||||||||
Payables for collateral on derivatives and securities to repurchase | |||||||||||
Funds withheld liability (portion at fair value: 2021 – $ |
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Other liabilities (related party: 2021 – $ |
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Total liabilities | |||||||||||
Commitments and Contingencies (Note 10) | |||||||||||
Equity | |||||||||||
Preferred stock | |||||||||||
Series A – par value $ |
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Series B – par value $ |
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Series C – par value $ |
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Series D – par value $ |
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Common stock | |||||||||||
Class A – par value $ |
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Additional paid-in capital | |||||||||||
Retained earnings | |||||||||||
Accumulated other comprehensive income (related party: 2021 – $ |
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Total Athene Holding Ltd. shareholders’ equity | |||||||||||
Noncontrolling interests | |||||||||||
Total equity | |||||||||||
Total liabilities and equity | $ | $ |
(Concluded)
See accompanying notes to the unaudited condensed consolidated financial statements
9
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Income (Loss) (Unaudited)
Three months ended March 31, | |||||||||||
(In millions, except per share data) | 2021 | 2020 | |||||||||
Revenues | |||||||||||
Premiums (related party: 2021 – $ |
$ | $ | |||||||||
Product charges (related party: 2021 – $ |
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Net investment income (related party investment income (loss): 2021 – $ |
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Investment related gains (losses) (related party: 2021 – $( |
( |
( |
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Other revenues | ( |
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Total revenues | ( |
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Benefits and expenses | |||||||||||
Interest sensitive contract benefits (related party: 2021 – $ |
( |
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Amortization of deferred sales inducements | |||||||||||
Future policy and other policy benefits (related party: 2021 – $ |
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Amortization of deferred acquisition costs and value of business acquired | ( |
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Dividends to policyholders | |||||||||||
Policy and other operating expenses (related party: 2021 – $ |
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Total benefits and expenses | ( |
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Income (loss) before income taxes | ( |
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Income tax expense (benefit) | ( |
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Net income (loss) | ( |
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Less: Net loss attributable to noncontrolling interests | ( |
( |
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Net income (loss) attributable to Athene Holding Ltd. shareholders | ( |
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Less: Preferred stock dividends | |||||||||||
Net income (loss) available to Athene Holding Ltd. common shareholders | $ | $ | ( |
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Earnings (loss) per share | |||||||||||
Basic – Class A |
$ | $ | ( |
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Basic – Classes B, M-1, M-2, M-3 and M-4 |
N/A | ( |
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Diluted – Class A |
( |
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Diluted – Classes B, M-1, M-2, M-3 and M-4 | N/A | ( |
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N/A – Not applicable. See Note 8 – Earnings Per Share. |
See accompanying notes to the unaudited condensed consolidated financial statements
10
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
Three months ended March 31, | |||||||||||
(In millions) | 2021 | 2020 | |||||||||
Net income (loss) | $ | $ | ( |
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Other comprehensive income (loss), before tax | |||||||||||
Unrealized investment gains (losses) on available-for-sale securities, net of offsets | ( |
( |
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Unrealized gains (losses) on hedging instruments | ( |
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Foreign currency translation and other adjustments | |||||||||||
Other comprehensive loss, before tax | ( |
( |
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Income tax benefit related to other comprehensive loss | ( |
( |
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Other comprehensive loss | ( |
( |
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Comprehensive loss | ( |
( |
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Less: Comprehensive loss attributable to noncontrolling interests | ( |
( |
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Comprehensive loss attributable to Athene Holding Ltd. shareholders | $ | ( |
$ | ( |
See accompanying notes to the unaudited condensed consolidated financial statements
11
Three months ended | |||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | Preferred stock | Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | Total Athene Holding Ltd. shareholders’ equity | Noncontrolling interests | Total equity | |||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | ( |
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Other comprehensive loss | — | — | — | — | ( |
( |
( |
( |
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Issuance of common shares, net of expenses | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Retirement or repurchase of shares | — | — | ( |
— | ( |
— | ( |
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Preferred stock dividends | — | — | — | ( |
— | ( |
— | ( |
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Contributions from noncontrolling interests | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Change in equity of noncontrolling interests of consolidated variable interest entities | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Adoption of accounting standard | — | — | — | ( |
( |
( |
( |
( |
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Net loss | — | — | — | ( |
— | ( |
( |
( |
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Other comprehensive loss | — | — | — | — | ( |
( |
( |
( |
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Issuance of common shares, net of expenses | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Retirement or repurchase of shares | — | — | ( |
( |
— | ( |
— | ( |
|||||||||||||||||||||||||||||||||||||||
Preferred stock dividends | — | — | — | ( |
— | ( |
— | ( |
|||||||||||||||||||||||||||||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | ( |
( |
|||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | $ | $ | $ | $ | $ | ( |
$ | $ | $ |
See accompanying notes to the unaudited condensed consolidated financial statements
12
Three months ended March 31, | |||||||||||
(In millions) | 2021 | 2020 | |||||||||
Cash flows from operating activities |
|||||||||||
Net income (loss) | $ | $ | ( |
||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
Amortization of deferred acquisition costs and value of business acquired | ( |
||||||||||
Amortization of deferred sales inducements | |||||||||||
Accretion of net investment premiums, discounts and other | ( |
( |
|||||||||
Net investment (income) loss (related party: 2021 – $( |
( |
||||||||||
Net recognized (gains) losses on investments and derivatives (related party: 2021 – $( |
( |
||||||||||
Policy acquisition costs deferred | ( |
( |
|||||||||
Changes in operating assets and liabilities: | |||||||||||
Accrued investment income (related party: 2021 – $( |
( |
||||||||||
Interest sensitive contract liabilities (related party: 2021 – $ |
( |
( |
|||||||||
Future policy benefits, other policy claims and benefits, dividends payable to policyholders and reinsurance recoverable (related party: 2021 – $ |
|||||||||||
Funds withheld assets and liabilities (related party: 2021 – $ |
|||||||||||
Other assets and liabilities | ( |
||||||||||
Net cash provided by operating activities | |||||||||||
Cash flows from investing activities | |||||||||||
Sales, maturities and repayments of: | |||||||||||
Available-for-sale securities (related party: 2021 – $ |
|||||||||||
Trading securities (related party: 2021 – $ |
|||||||||||
Equity securities | |||||||||||
Mortgage loans | |||||||||||
Investment funds (related party: 2021 – $ |
|||||||||||
Derivative instruments and other invested assets | |||||||||||
Short-term investments (related party: 2021 – $ |
|||||||||||
Purchases of: | |||||||||||
Available-for-sale securities (related party: 2021 – $( |
( |
( |
|||||||||
Trading securities (related party: 2021 – $( |
( |
( |
|||||||||
Equity securities (related party: 2021 – $( |
( |
( |
|||||||||
Mortgage loans (related party: 2021 – $( |
( |
( |
|||||||||
Investment funds (related party: 2021 – $( |
( |
( |
|||||||||
Derivative instruments and other invested assets | ( |
( |
|||||||||
Short-term investments (related party: 2021 – $( |
( |
( |
|||||||||
Other investing activities, net | ( |
||||||||||
Net cash used in investing activities | ( |
( |
|||||||||
(Continued) | |||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements |
13
Three months ended March 31, | |||||||||||
(In millions) | 2021 | 2020 | |||||||||
Cash flows from financing activities | |||||||||||
Issuance of common stock | $ | $ | |||||||||
Repayment of short-term debt | ( |
||||||||||
Deposits on investment-type policies and contracts (related party: 2021 – $ |
|||||||||||
Withdrawals on investment-type policies and contracts (related party: 2021 – $( |
( |
( |
|||||||||
Payments for coinsurance agreements on investment-type contracts, net |
( |
( |
|||||||||
Capital contributions from noncontrolling interests | |||||||||||
Capital distributions to noncontrolling interests | ( |
||||||||||
Net change in cash collateral posted for derivative transactions and securities to repurchase | ( |
||||||||||
Preferred stock dividends | ( |
( |
|||||||||
Repurchase of common stock | ( |
( |
|||||||||
Other financing activities, net | ( |
||||||||||
Net cash provided by financing activities | |||||||||||
Effect of exchange rate changes on cash and cash equivalents | ( |
||||||||||
Net (decrease) increase in cash and cash equivalents | ( |
||||||||||
Cash and cash equivalents at beginning of year1
|
|||||||||||
Cash and cash equivalents at end of period1
|
$ | $ | |||||||||
Supplementary information | |||||||||||
Non-cash transactions | |||||||||||
Deposits on investment-type policies and contracts through reinsurance agreements (related party: 2021 – $ |
$ | $ | |||||||||
Withdrawals on investment-type policies and contracts through reinsurance agreements (related party: 2021 – $ |
|||||||||||
Investments received from settlements on reinsurance agreements | |||||||||||
Investments received from pension risk transfer premiums | |||||||||||
Related party investments received in exchange for the issuance of Class A common shares | |||||||||||
Assets contributed to consolidated VIEs | |||||||||||
(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 financial services company specializing in retirement services that issues, reinsures and acquires retirement savings products in the United States (US) and internationally.
We conduct business primarily through the following consolidated subsidiaries:
•Our non-US 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, AUSA).
In addition, we consolidate certain variable interest entities (VIEs) for which we have determined we are the primary beneficiary. See Note 4 – Variable Interest Entities for further information on VIEs.
Consolidation and Basis of Presentation —We have prepared the accompanying condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the United States Securities and Exchange Commission’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 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.
Merger—On March 8, 2021, we entered into an Agreement and Plan of Merger (Merger Agreement), by and among the Company, Apollo Global Management, Inc., a Delaware corporation (AGM), Tango Holdings, Inc., a Delaware corporation and a direct wholly owned subsidiary of AGM (HoldCo), Blue Merger Sub, Ltd., a Bermuda exempted company and a direct wholly owned subsidiary of HoldCo (AHL Merger Sub), and Green Merger Sub, Inc., a Delaware corporation and a direct, wholly owned subsidiary of HoldCo (AGM Merger Sub). The Company and AGM have agreed, subject to the terms and conditions of the Merger Agreement, to effect an all-stock merger transaction to combine our respective businesses by: (1) AGM merging with AGM Merger Sub, with AGM surviving such merger as a direct wholly owned subsidiary of HoldCo (AGM Merger), (2) the Company merging with AHL Merger Sub, with the Company surviving such merger as a direct, wholly owned subsidiary of HoldCo (AHL Merger and, together with the AGM Merger, Mergers), and (3) as of the effective time of the Mergers, changing the name of HoldCo to be Apollo Global Management, Inc. At the effective time of the Mergers, each AHL Class A common share, subject to certain exceptions, will be converted automatically into the right to receive 1.149 shares of HoldCo common stock. The Mergers are expected to close in January 2022 and are subject to shareholder and regulatory approvals, and other customary closing conditions.
Adopted Accounting Pronouncements
Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs (ASU 2020-08)
The amendments in this update clarify that callable debt securities should be reevaluated each reporting period to determine if the amortized cost exceeds the amount repayable by the issuer at the next earliest call date and, if so, the excess should be amortized to the next call date. We adopted this update January 1, 2021 on a prospective basis for existing or newly purchased callable debt securities. The adoption of this update did not have a material effect on our condensed consolidated financial statements.
15
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (ASU 2020-01)
The amendments in this update are related to certain equity securities without a readily determinable fair value that apply measurement alternative to measure based on cost, minus impairment, if any, adjusted for any observable price changes in orderly transactions of identical or similar investments of the same issuer. The amendment clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative immediately before applying or upon discontinuing the equity method. The amendment further clarifies that for the purpose of applying accounting for certain forward contracts or purchased options, an entity should not consider whether the underlying securities would be accounted for under the equity method or the fair value option upon settlement or exercise. We adopted this update on a prospective basis effective January 1, 2021. This update did not have a material effect on our condensed consolidated financial statements.
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 adopted this update January 1, 2021 and applied certain aspects of the update retrospectively while other aspects were applied on a modified retrospective basis. The adoption of this update did not have a material effect on our condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
Insurance – Targeted Improvements to the Accounting for Long-Duration Contracts (ASU 2020-11, ASU 2019-09, ASU 2018-12)
These updates amend four key areas pertaining to the accounting and disclosures for long-duration insurance and investment contracts.
•The 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 guaranteed lifetime withdrawal benefit (GLWB) and guaranteed minimum death benefit (GMDB) riders attached to our annuity products. The change in fair value of the market risk benefits is to be recognized in net income, excluding the portion attributable to changes in instrument-specific credit risk which is recognized in other comprehensive income.
•The update 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.
We are required to adopt these updates on January 1, 2023. Certain provisions of the update are required to be adopted on a fully retrospective basis, while others may be adopted on a modified retrospective basis. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
16
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
2. Investments
AFS Securities—Our AFS investment portfolio includes bonds, collateralized loan obligations (CLO), asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS) and redeemable preferred stock. Our AFS investment portfolio includes related party investments that are primarily comprised 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, 2021 | |||||||||||||||||||||||||||||
(In millions) | Amortized Cost | Allowance for Credit Losses | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||||
AFS securities | |||||||||||||||||||||||||||||
US government and agencies | $ | $ | $ | $ | ( |
$ | |||||||||||||||||||||||
US state, municipal and political subdivisions |
( |
||||||||||||||||||||||||||||
Foreign governments | ( |
||||||||||||||||||||||||||||
Corporate | ( |
( |
|||||||||||||||||||||||||||
CLO | ( |
||||||||||||||||||||||||||||
ABS | ( |
( |
|||||||||||||||||||||||||||
CMBS | ( |
( |
|||||||||||||||||||||||||||
RMBS | ( |
( |
|||||||||||||||||||||||||||
Total AFS securities | ( |
( |
|||||||||||||||||||||||||||
AFS securities – related party | |||||||||||||||||||||||||||||
Corporate | |||||||||||||||||||||||||||||
CLO | ( |
||||||||||||||||||||||||||||
ABS |
( |
||||||||||||||||||||||||||||
Total AFS securities – related party |
( |
||||||||||||||||||||||||||||
Total AFS securities including related party |
$ | $ | ( |
$ | $ | ( |
$ |
December 31, 2020 | |||||||||||||||||||||||||||||
(In millions) | Amortized Cost | Allowance for Credit Losses | Gross Unrealized Gains | Gross Unrealized Losses |
Fair Value |
||||||||||||||||||||||||
AFS securities | |||||||||||||||||||||||||||||
US government and agencies | $ | $ | $ | $ | ( |
$ | |||||||||||||||||||||||
US state, municipal and political subdivisions | |||||||||||||||||||||||||||||
Foreign governments | |||||||||||||||||||||||||||||
Corporate | ( |
( |
|||||||||||||||||||||||||||
CLO | ( |
( |
|||||||||||||||||||||||||||
ABS | ( |
( |
|||||||||||||||||||||||||||
CMBS | ( |
( |
|||||||||||||||||||||||||||
RMBS | ( |
( |
|||||||||||||||||||||||||||
Total AFS securities | ( |
( |
|||||||||||||||||||||||||||
AFS securities – related party | |||||||||||||||||||||||||||||
Corporate | |||||||||||||||||||||||||||||
CLO | ( |
( |
|||||||||||||||||||||||||||
ABS | ( |
||||||||||||||||||||||||||||
Total AFS securities – related party | ( |
( |
|||||||||||||||||||||||||||
Total AFS securities including related party | $ | $ | ( |
$ | $ | ( |
$ |
17
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The amortized cost and fair value of AFS securities, including related party, are shown by contractual maturity below:
March 31, 2021 | |||||||||||
(In millions) | Amortized Cost | Fair Value | |||||||||
AFS securities | |||||||||||
Due in one year or less | $ | $ | |||||||||
Due after one year through five years | |||||||||||
Due after five years through ten years | |||||||||||
Due after ten years | |||||||||||
CLO, ABS, CMBS and RMBS | |||||||||||
Total AFS securities | |||||||||||
AFS securities – related party | |||||||||||
Due after one year through five years | |||||||||||
Due after five years through ten years | |||||||||||
CLO and ABS | |||||||||||
Total AFS securities – related party |
|||||||||||
Total AFS securities including related party | $ | $ |
Actual maturities can differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Unrealized Losses on AFS Securities—The following summarizes the fair value and gross unrealized losses for AFS securities, including related party, for which an allowance for credit losses has not been recorded, aggregated by asset type and length of time the fair value has remained below amortized cost:
March 31, 2021 | |||||||||||||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||
(In millions) | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||||||||||||
AFS securities | |||||||||||||||||||||||||||||||||||
US government and agencies |
$ | $ | ( |
$ | $ | $ | $ | ( |
|||||||||||||||||||||||||||
US state, municipal and political subdivisions |
( |
( |
|||||||||||||||||||||||||||||||||
Foreign governments | ( |
( |
|||||||||||||||||||||||||||||||||
Corporate | ( |
( |
( |
||||||||||||||||||||||||||||||||
CLO | ( |
( |
( |
||||||||||||||||||||||||||||||||
ABS | ( |
( |
( |
||||||||||||||||||||||||||||||||
CMBS |
( |
( |
( |
||||||||||||||||||||||||||||||||
RMBS |
( |
( |
( |
||||||||||||||||||||||||||||||||
Total AFS securities |
( |
( |
( |
||||||||||||||||||||||||||||||||
AFS securities – related party | |||||||||||||||||||||||||||||||||||
CLO | ( |
( |
( |
||||||||||||||||||||||||||||||||
ABS |
( |
( |
|||||||||||||||||||||||||||||||||
Total AFS securities – related party |
( |
( |
( |
||||||||||||||||||||||||||||||||
Total AFS securities including related party |
$ | $ | ( |
$ | $ | ( |
$ | $ | ( |
18
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
December 31, 2020 | |||||||||||||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||
(In millions) | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||||||||||||
AFS securities | |||||||||||||||||||||||||||||||||||
US government and agencies |
$ | $ | ( |
$ | $ | $ | $ | ( |
|||||||||||||||||||||||||||
US state, municipal and political subdivisions |
|||||||||||||||||||||||||||||||||||
Foreign governments | |||||||||||||||||||||||||||||||||||
Corporate | ( |
( |
( |
||||||||||||||||||||||||||||||||
CLO | ( |
( |
( |
||||||||||||||||||||||||||||||||
ABS | ( |
( |
( |
||||||||||||||||||||||||||||||||
CMBS |
( |
( |
( |
||||||||||||||||||||||||||||||||
RMBS |
( |
( |
( |
||||||||||||||||||||||||||||||||
Total AFS securities | ( |
( |
( |
||||||||||||||||||||||||||||||||
AFS securities – related party |
|||||||||||||||||||||||||||||||||||
CLO |
( |
( |
( |
||||||||||||||||||||||||||||||||
ABS |
( |
( |
|||||||||||||||||||||||||||||||||
Total AFS securities – related party |
( |
( |
( |
||||||||||||||||||||||||||||||||
Total AFS securities including related party |
$ | $ | ( |
$ | $ | ( |
$ | $ | ( |
The following summarizes the number of AFS securities that were in an unrealized loss position, including related party, for which an allowance for credit losses has not been recorded:
March 31, 2021 | |||||||||||
Unrealized loss position | Unrealized loss position 12 months or more | ||||||||||
AFS securities | |||||||||||
AFS securities – related party |
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.
Allowance for Credit Losses—The following table summarizes the activity in the allowance for credit losses for AFS securities, including Purchase Credit Deteriorated (PCD) securities, by asset type:
Three months ended March 31, 2021 | |||||||||||||||||||||||||||||||||||
Additions | Reductions | ||||||||||||||||||||||||||||||||||
(In millions) | Beginning balance | Initial credit losses | Initial credit losses on PCD securities | Securities sold during the period | Additions (reductions) to previously impaired securities | Ending Balance | |||||||||||||||||||||||||||||
AFS securities | |||||||||||||||||||||||||||||||||||
Corporate | $ | $ | $ | $ | ( |
$ | $ | ||||||||||||||||||||||||||||
CLO | ( |
||||||||||||||||||||||||||||||||||
ABS | |||||||||||||||||||||||||||||||||||
CMBS |
|||||||||||||||||||||||||||||||||||
RMBS |
( |
( |
|||||||||||||||||||||||||||||||||
Total AFS securities | ( |
||||||||||||||||||||||||||||||||||
AFS securities – related party, CLO | ( |
||||||||||||||||||||||||||||||||||
Total AFS securities including related party |
$ | $ | $ | $ | ( |
$ | $ | ||||||||||||||||||||||||||||
19
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three months ended March 31, 2020 | |||||||||||||||||||||||||||||||||||
Additions | Reductions | ||||||||||||||||||||||||||||||||||
(In millions) | Beginning balance | Initial credit losses | Initial credit losses on PCD securities | Securities sold during the period | Additions (reductions) to previously impaired securities | Ending Balance | |||||||||||||||||||||||||||||
AFS securities | |||||||||||||||||||||||||||||||||||
Corporate | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
ABS | |||||||||||||||||||||||||||||||||||
CMBS | |||||||||||||||||||||||||||||||||||
RMBS | ( |
||||||||||||||||||||||||||||||||||
Total AFS securities | $ | $ | $ | $ | ( |
$ | $ | ||||||||||||||||||||||||||||
Net Investment Income—Net investment income by asset class consists of the following:
Three months ended March 31, | |||||||||||
(In millions) | 2021 | 2020 | |||||||||
AFS securities | $ | $ | |||||||||
Trading securities | |||||||||||
Equity securities | |||||||||||
Mortgage loans | |||||||||||
Investment funds | ( |
||||||||||
Funds withheld at interest | |||||||||||
Other | |||||||||||
Investment revenue | |||||||||||
Investment expenses | ( |
( |
|||||||||
Net investment income | $ | $ |
Investment Related Gains (Losses)—Investment related gains (losses) by asset class consists of the following:
Three months ended March 31, | |||||||||||
(In millions) | 2021 | 2020 | |||||||||
AFS securities | |||||||||||
Gross realized gains on investment activity | $ | $ | |||||||||
Gross realized losses on investment activity | ( |
( |
|||||||||
Net realized investment gains (losses) on AFS securities | ( |
||||||||||
Net recognized investment losses on trading securities | ( |
( |
|||||||||
Net recognized investment gains (losses) on equity securities | ( |
||||||||||
Derivative losses | ( |
( |
|||||||||
Provision for credit losses | ( |
( |
|||||||||
Other gains (losses) | ( |
||||||||||
Investment related gains (losses) | $ | ( |
$ | ( |
Proceeds from sales of AFS securities were $892 million and $1,807 million for the three months ended March 31, 2021 and 2020, 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) | 2021 | 2020 | |||||||||
Trading securities | $ | ( |
$ | ( |
|||||||
Trading securities – related party | ( |
||||||||||
Equity securities | ( |
||||||||||
Equity securities – related party |
20
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Purchased Financial Assets with Credit Deterioration—The following table summarizes our PCD investment purchases with the following amounts at the time of purchase:
Three months ended March 31, 2021 | ||||||||||||||
(In millions) | Fixed maturity securities | Mortgage loans | ||||||||||||
Purchase price | $ | $ | ||||||||||||
Allowance for credit losses at acquisition | ||||||||||||||
Discount (premiums) attributable to other factors | ( |
( |
||||||||||||
Par value | $ | $ |
Repurchase Agreements—The following table summarizes the maturities of our repurchase agreements:
March 31, 2021 | |||||||||||||||||||||||||||||||||||
Remaining Contractual Maturity | |||||||||||||||||||||||||||||||||||
(In millions) | Overnight and continuous | Less than 30 days | 30-90 days | 91 days to 1 year | Greater than 1 year | Total | |||||||||||||||||||||||||||||
Payables for repurchase agreements1
|
$ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
1 Included in payables for collateral on derivatives and securities to repurchase on the condensed consolidated balance sheets.
|
December 31, 2020 | |||||||||||||||||||||||||||||||||||
Remaining Contractual Maturity | |||||||||||||||||||||||||||||||||||
(In millions) | Overnight and continuous | Less than 30 days | 30-90 days | 91 days to 1 year | Greater than 1 year | Total | |||||||||||||||||||||||||||||
Payables for repurchase agreements1
|
$ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
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, 2021 | December 31, 2020 | ||||||||||||||||||||||
(In millions) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||
AFS securities – Corporate | $ | $ | $ | $ | |||||||||||||||||||
Mortgage Loans, including related party—Mortgage loans, net of allowances, consists of the following:
(In millions) | March 31, 2021 | December 31, 2020 | |||||||||
Commercial mortgage loans | $ | $ | |||||||||
Commercial mortgage loans under development | |||||||||||
Total commercial mortgage loans | |||||||||||
Allowance for credit losses on commercial mortgage loans | ( |
( |
|||||||||
Commercial mortgage loans, net of allowances | |||||||||||
Residential mortgage loans | |||||||||||
Allowance for credit losses on residential mortgage loans | ( |
( |
|||||||||
Residential mortgage loans, net of allowances | |||||||||||
Mortgage loans, net of allowances | $ | $ |
We primarily invest in commercial mortgage loans on income producing properties including office and retail buildings, apartments, hotels and industrial properties. We diversify the commercial mortgage loan portfolio by geographic region and property type to reduce concentration risk. We evaluate mortgage loans based on relevant current information to confirm if properties are performing at a consistent and acceptable level to secure the related debt.
21
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The distribution of commercial mortgage loans, including those under development, net of allowances, by property type and geographic region, is as follows:
March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
(In millions, except for percentages) | Net Carrying Value | Percentage of Total | Net Carrying Value | Percentage of Total | |||||||||||||||||||
Property type | |||||||||||||||||||||||
Office building | $ | % | $ | % | |||||||||||||||||||
Retail | % | % | |||||||||||||||||||||
Apartment | % | % | |||||||||||||||||||||
Hotels | % | % | |||||||||||||||||||||
Industrial | % | % | |||||||||||||||||||||
Other commercial | % | % | |||||||||||||||||||||
Total commercial mortgage loans | $ | % | $ | % | |||||||||||||||||||
US Region | |||||||||||||||||||||||
East North Central | $ | % | $ | % | |||||||||||||||||||
East South Central | % | % | |||||||||||||||||||||
Middle Atlantic | % | % | |||||||||||||||||||||
Mountain | % | % | |||||||||||||||||||||
New England | % | % | |||||||||||||||||||||
Pacific | % | % | |||||||||||||||||||||
South Atlantic | % | % | |||||||||||||||||||||
West North Central | % | % | |||||||||||||||||||||
West South Central | % | % | |||||||||||||||||||||
Total US Region | % | % | |||||||||||||||||||||
International Region | |||||||||||||||||||||||
United Kingdom | % | % | |||||||||||||||||||||
Other International1
|
% | % | |||||||||||||||||||||
Total International Region | % | % | |||||||||||||||||||||
Total commercial mortgage loans | $ | % | $ | % | |||||||||||||||||||
1 Represents all other countries, with each individual country comprising less than 5% of the portfolio.
|
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, 2021 | December 31, 2020 | ||||||||||
US States | |||||||||||
California | % | % | |||||||||
Florida | % | % | |||||||||
New York | % | % | |||||||||
Other1
|
% | % | |||||||||
Total US residential mortgage loan percentage | % | % | |||||||||
International | |||||||||||
Ireland | % | % | |||||||||
Other2
|
% | % | |||||||||
Total International residential mortgage loan percentage | % | % | |||||||||
Total residential mortgage loan percentage | % | % | |||||||||
1 Represents all other states, with each individual state comprising less than 5% of the portfolio.
| |||||||||||
2 Represents all other countries, with each individual country comprising less than 5% of the portfolio.
|
22
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Loan Valuation Allowance—The allowances for our mortgage loan portfolio and other loans is summarized as follows:
Three months ended March 31, 2021 | |||||||||||||||||||||||
(In millions) | Commercial Mortgage | Residential Mortgage | Other Investments | Total | |||||||||||||||||||
Beginning balance | $ | $ | $ | $ | |||||||||||||||||||
Provision (reversal) for expected credit losses |
( |
( |
( |
||||||||||||||||||||
Initial credit losses on PCD loans | |||||||||||||||||||||||
Ending balance | $ | $ | $ | $ |
Three months ended March 31, 2020 | |||||||||||||||||||||||
(In millions) | Commercial Mortgage | Residential Mortgage | Other Investments | Total | |||||||||||||||||||
Beginning balance | $ | $ | $ | $ | |||||||||||||||||||
Adoption of accounting standard | |||||||||||||||||||||||
Provision for expected credit losses | |||||||||||||||||||||||
Ending balance | $ | $ | $ | $ |
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, 2021, our reasonable and supportable forecast period was one year , after which, we revert to the 30-year or greater historical average or the 10-year US Department of the Treasury (Treasury) constant maturity rate over a period of up to eight years .
Residential mortgage loans – Our allowance model for residential mortgage loans is based on the characteristics of the loans in our portfolio, historical economic data and 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, 2021, our reasonable and supportable forecast period was one year , after which, we revert to the 30-year or greater historical average over a period of up to one year and then continue at those averages through the contractual life of the loan.
Other investments – The allowance model for the loans included in other investments and related party other investments derives an estimate based on historical loss data available for similarly rated unsecured corporate debt obligations, while also incorporating management’s expectations around prepayment. See Note 9 – Related Parties for further information on the related party loans.
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.
23
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following represents our residential loan portfolio by origination year and performance status:
March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||
(In millions) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Total | ||||||||||||||||||||||||||||||||||
Current (less than 30 days past due) | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
30 to 59 days past due | |||||||||||||||||||||||||||||||||||||||||
60 to 89 days past due | |||||||||||||||||||||||||||||||||||||||||
90 days or more past due | |||||||||||||||||||||||||||||||||||||||||
Total residential mortgages | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||
(In millions) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Total | ||||||||||||||||||||||||||||||||||
Current (less than 30 days past due) | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
30 to 59 days past due | |||||||||||||||||||||||||||||||||||||||||
60 to 89 days past due | |||||||||||||||||||||||||||||||||||||||||
90 days or more past due | |||||||||||||||||||||||||||||||||||||||||
Total residential mortgages | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
The following represents our residential loan portfolio in non-accrual status:
(In millions) | March 31, 2021 | December 31, 2020 | |||||||||
Beginning amortized cost of residential mortgage loans in non-accrual status | $ | $ | |||||||||
Ending amortized cost of residential mortgage loans in non-accrual status | |||||||||||
Amortized cost of residential mortgage loans in non-accrual status without a related allowance for credit losses |
During the three months ended March 31, 2021 and 2020, we recognized $2 million and $1 million, respectively, 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, 2021 | |||||||||||||||||||||||||||||||||||||||||
(In millions) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Total | ||||||||||||||||||||||||||||||||||
Current (less than 30 days past due) | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
30 to 59 days past due | |||||||||||||||||||||||||||||||||||||||||
90 days or more past due | |||||||||||||||||||||||||||||||||||||||||
Total commercial mortgages | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||
(In millions) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Total | ||||||||||||||||||||||||||||||||||
Current (less than 30 days past due) | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
30 to 59 days past due | |||||||||||||||||||||||||||||||||||||||||
90 days or more past due | |||||||||||||||||||||||||||||||||||||||||
Total commercial mortgages | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
As of March 31, 2021 and December 31, 2020, we had $25 million and $0 million, respectively, of commercial mortgage loans that were 90 days or more past due and still accruing interest.
The following represents our commercial mortgage loan portfolio in non-accrual status:
(In millions) | March 31, 2021 | December 31, 2020 | |||||||||
Beginning amortized cost of commercial mortgage loans in non-accrual status | $ | $ | |||||||||
Ending amortized cost of commercial mortgage loans in non-accrual status | |||||||||||
Amortized cost of commercial mortgage loans in non-accrual status without a related allowance for credit losses |
During the three months ended March 31, 2021 and 2020, no interest income was recognized on commercial mortgage loans in non-accrual status.
24
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Loan-to-value and debt service coverage ratios are measures we use to assess the risk and quality of commercial mortgage loans other than those under development. Loans under development are not evaluated using these ratios as the properties underlying these loans are generally not yet income-producing and the value of the underlying property significantly fluctuates based on the progress of construction. Therefore, the risk and quality of loans under development are evaluated based on the aging and geographical distribution of such loans as shown above.
The loan-to-value ratio is expressed as a percentage of the amount of the loan relative to the value of the underlying property. A loan-to-value ratio in excess of 100% indicates the unpaid loan amount exceeds the value of the underlying collateral. Loan-to-value information is updated annually as part of the re-underwriting process supporting the NAIC risk-based capital rating criteria. The following represents the loan-to-value ratio of the commercial mortgage loan portfolio, excluding those under development, by origination year:
March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||
(In millions) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Total | ||||||||||||||||||||||||||||||||||
Less than 50% | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
50% to 59% | |||||||||||||||||||||||||||||||||||||||||
60% to 69% | |||||||||||||||||||||||||||||||||||||||||
70% to 79% | |||||||||||||||||||||||||||||||||||||||||
100% or greater | |||||||||||||||||||||||||||||||||||||||||
Commercial mortgage loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||
(In millions) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Total | ||||||||||||||||||||||||||||||||||
Less than 50% | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
50% to 59% | |||||||||||||||||||||||||||||||||||||||||
60% to 69% | |||||||||||||||||||||||||||||||||||||||||
70% to 79% | |||||||||||||||||||||||||||||||||||||||||
80% to 99% | |||||||||||||||||||||||||||||||||||||||||
100% or greater | |||||||||||||||||||||||||||||||||||||||||
Commercial mortgage loans | $ | $ | $ | $ | $ | $ | $ |
The debt service coverage ratio is expressed as a percentage of a property’s net operating income to its debt service payments. A debt service ratio of less than 1.0 indicates a property’s operations do not generate enough income to cover debt payments. Debt service coverage ratios are updated as more recent financial statements become available, at least annually or as frequently as quarterly in some cases. The following represents the debt service coverage ratio of the commercial mortgage loan portfolio, excluding those under development, by origination year:
March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||
(In millions) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Total | ||||||||||||||||||||||||||||||||||
Greater than 1.20x | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
1.00x – 1.20x | |||||||||||||||||||||||||||||||||||||||||
Less than 1.00x | |||||||||||||||||||||||||||||||||||||||||
Commercial mortgage loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||
(In millions) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Total | ||||||||||||||||||||||||||||||||||
Greater than 1.20x | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
1.00x – 1.20x | |||||||||||||||||||||||||||||||||||||||||
Less than 1.00x | |||||||||||||||||||||||||||||||||||||||||
Commercial mortgage loans | $ | $ | $ | $ | $ | $ | $ |
25
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, which are discussed further in Note 4 – Variable Interest Entities. 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, 2021 | December 31, 2020 | ||||||||||||||||||||||
(In millions, except for percentages) | Carrying value | Percent of total | Carrying value | Percent of total | |||||||||||||||||||
Investment funds | |||||||||||||||||||||||
Real estate | $ | % | $ | % | |||||||||||||||||||
Credit funds | % | % | |||||||||||||||||||||
Private equity | % | % | |||||||||||||||||||||
Real assets | % | % | |||||||||||||||||||||
Total investment funds | % | % | |||||||||||||||||||||
Investment funds – related parties |
|||||||||||||||||||||||
Differentiated investments | |||||||||||||||||||||||
AmeriHome Mortgage Company, LLC (AmeriHome)1
|
% | % | |||||||||||||||||||||
Catalina Holdings Ltd. (Catalina) | % | % | |||||||||||||||||||||
Athora Holding Ltd. (Athora)1
|
% | % | |||||||||||||||||||||
Venerable Holdings, Inc. (Venerable)1
|
% | % | |||||||||||||||||||||
Other | % | % | |||||||||||||||||||||
Total differentiated investments | % | % | |||||||||||||||||||||
Real estate | % | % | |||||||||||||||||||||
Credit funds | % | % | |||||||||||||||||||||
Private equity | % | % | |||||||||||||||||||||
Real assets | % | % | |||||||||||||||||||||
Natural resources | % | % | |||||||||||||||||||||
Public equities | % | % | |||||||||||||||||||||
Investment in Apollo1
|
% | % | |||||||||||||||||||||
Total investment funds – related parties | % | % | |||||||||||||||||||||
Total investment funds including related party |
$ | $ | |||||||||||||||||||||
1 Our AmeriHome investment was held indirectly through A-A Mortgage Opportunities, L.P. (A-A Mortgage). Our Venerable investment is in its parent company, VA Capital Company LLC (VA Capital). See further discussion on these investments and our investments in Apollo and Athora in Note 9 – Related Parties.
|
Summarized Ownership of Equity Method Investees—The following is the summarized income statement information of our equity method investees, A-A Mortgage and VA Capital:
Three months ended March 31, | |||||||||||
(In millions) | 2021 | 2020 | |||||||||
Net income – VA Capital | $ | $ | |||||||||
Net income – A-A Mortgage |
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.
26
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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.
The following summarizes the carrying value and maximum loss exposure of these non-consolidated investments:
March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
(In millions) | Carrying Value | Maximum Loss Exposure | Carrying Value | Maximum Loss Exposure | |||||||||||||||||||
Investment funds | $ | $ | $ | $ | |||||||||||||||||||
Investment in related parties – investment funds | |||||||||||||||||||||||
Investment in fixed maturity securities | |||||||||||||||||||||||
Investment in related parties – fixed maturity securities | |||||||||||||||||||||||
Investment in related parties – equity securities | |||||||||||||||||||||||
Total non-consolidated investments | $ | $ | $ | $ |
3. Derivative Instruments
We use a variety of derivative instruments to manage risks, primarily equity, interest rate, credit, foreign currency and market volatility. See Note 5 – Fair Value for information about the fair value hierarchy for derivatives.
The following table presents the notional amount and fair value of derivative instruments:
March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
Notional Amount | Fair Value | Notional Amount | Fair Value | ||||||||||||||||||||||||||||||||
(In millions) | Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||
Derivatives designated as hedges | |||||||||||||||||||||||||||||||||||
Foreign currency swaps | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Foreign currency forwards | |||||||||||||||||||||||||||||||||||
Foreign currency interest rate swaps | |||||||||||||||||||||||||||||||||||
Foreign currency forwards on net investments | |||||||||||||||||||||||||||||||||||
Total derivatives designated as hedges | |||||||||||||||||||||||||||||||||||
Derivatives not designated as hedges | |||||||||||||||||||||||||||||||||||
Equity options | |||||||||||||||||||||||||||||||||||
Futures | |||||||||||||||||||||||||||||||||||
Total return swaps | |||||||||||||||||||||||||||||||||||
Foreign currency swaps | |||||||||||||||||||||||||||||||||||
Interest rate swaps | |||||||||||||||||||||||||||||||||||
Credit default swaps | |||||||||||||||||||||||||||||||||||
Foreign currency forwards | |||||||||||||||||||||||||||||||||||
Embedded derivatives | |||||||||||||||||||||||||||||||||||
Funds withheld including related party | |||||||||||||||||||||||||||||||||||
Interest sensitive contract liabilities | |||||||||||||||||||||||||||||||||||
Total derivatives not designated as hedges | |||||||||||||||||||||||||||||||||||
Total derivatives | $ | $ | $ | $ |
Derivatives Designated as Hedges
Cash Flow Hedges – We use foreign currency swaps to convert foreign currency denominated cash flows of investments or liabilities to US dollars to reduce cash flow fluctuations due to changes in currency exchange rates. These swaps will expire by March 2052. The following is a summary of the gains (losses) recorded in OCI related to cash flow hedges:
Three months ended March 31, | |||||||||||
(In millions) | 2021 | 2020 | |||||||||
Foreign currency swaps | $ | ( |
$ |
27
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Fair Value Hedges – We use foreign currency forward contracts and foreign currency interest rate swaps that are designated and accounted for as fair value hedges. We use foreign currency forward contracts to hedge certain exposures to foreign currency risk. The price is agreed upon at the time of the contract and payment is made at a specified future date. We use foreign currency interest rate swaps to hedge certain exposures to foreign currency risk and interest rate risk relating to foreign currency denominated funding agreements.
The following represents the carrying amount and the cumulative fair value hedging adjustments included in the hedged assets or liabilities:
March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
(In millions) |
Carrying amount of the hedged assets or liabilities1
|
Cumulative amount of fair value hedging gains (losses) |
Carrying amount of the hedged assets or liabilities1
|
Cumulative amount of fair value hedging gains (losses) | |||||||||||||||||||
AFS securities – Foreign currency forwards | $ | $ | ( |
$ | $ | ||||||||||||||||||
Interest sensitive contract liabilities | |||||||||||||||||||||||
Foreign currency forwards | ( |
||||||||||||||||||||||
Foreign currency interest rate swaps | |||||||||||||||||||||||
1 The carrying amount disclosed for AFS securities is amortized cost.
|
The following is a summary of the gains (losses) related to the derivatives and related hedged items in fair value hedge relationships:
(In millions) | Derivatives | Hedged Items | Amount Excluded | Net | |||||||||||||||||||
Three months ended March 31, 2021 | |||||||||||||||||||||||
Investment related gains (losses) | |||||||||||||||||||||||
Foreign currency forwards | $ | $ | ( |
$ | $ | ||||||||||||||||||
Foreign currency interest rate swaps | ( |
||||||||||||||||||||||
Interest sensitive contract benefits | |||||||||||||||||||||||
Foreign currency interest rate swaps | ( |
||||||||||||||||||||||
Three months ended March 31, 2020 | |||||||||||||||||||||||
Investment related gains (losses) – Foreign currency forwards | $ | $ | ( |
$ | $ | ||||||||||||||||||
Net Investment Hedges – We use foreign currency forwards to hedge the foreign currency exchange rate risk of our investments in subsidiaries that have a reporting currency other than the US dollar. We assess hedge effectiveness based on the changes in forward rates. During the three months ended March 31, 2021 and 2020, these derivatives had losses of $2 million and gains of $13 million, respectively, which are included in foreign currency translation and other adjustments on the condensed consolidated statements of comprehensive loss. As of March 31, 2021 and December 31, 2020, the cumulative foreign currency translation recorded in accumulated other comprehensive income (AOCI) related to these net investment hedges were losses of $2 million and $0 million, respectively. During the three months ended March 31, 2021 and 2020, there were 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.
28
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Credit default swaps – Credit default swaps provide a measure of protection against the default of an issuer or allow us to gain credit exposure to an issuer or traded index. We use credit default swaps coupled with a bond to synthetically create the characteristics of a reference bond. These transactions have a lower cost and are generally more liquid relative to the cash market. We receive a periodic premium for these transactions as compensation for accepting credit risk.
Hedging credit risk involves buying protection for existing credit risk. The exposure resulting from the agreements, which is usually the notional amount, is equal to the maximum proceeds that must be paid by a counterparty for a defaulted security. If a credit event occurs on a reference entity, then a counterparty who sold protection is required to pay the buyer the trade notional amount less any recovery value of the security.
Embedded derivatives – We have embedded derivatives which are required to be separated from their host contracts and reported as derivatives. Host contracts include reinsurance agreements structured on a modified coinsurance (modco) or funds withheld basis and indexed annuity products.
The following is a summary of the gains (losses) related to derivatives not designated as hedges:
Three months ended March 31, | |||||||||||
(In millions) | 2021 | 2020 | |||||||||
Equity options | $ | $ | ( |
||||||||
Futures | |||||||||||
Swaps | ( |
||||||||||
Foreign currency forwards | ( |
||||||||||
Embedded derivatives on funds withheld | ( |
( |
|||||||||
Amounts recognized in investment related gains (losses) | ( |
( |
|||||||||
Embedded derivatives in indexed annuity products1
|
|||||||||||
Total gains (losses) on derivatives not designated as hedges | $ | ( |
$ | ( |
|||||||
1 Included in interest sensitive contract benefits on the condensed consolidated statements of income (loss).
|
Credit Risk—We may be exposed to credit-related losses in the event of counterparty nonperformance on derivative financial instruments. Generally, the current credit exposure of our derivative contracts is the fair value at the reporting date less any collateral received from the counterparty.
We manage credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties. Where possible, we maintain collateral arrangements and use master netting agreements that provide for a single net payment from one counterparty to another at each due date and upon termination. We have also established counterparty exposure limits, where possible, in order to evaluate if there is sufficient collateral to support the net exposure.
Collateral arrangements typically require the posting of collateral in connection with its derivative instruments. Collateral agreements often contain posting thresholds, some of which may vary depending on the posting party’s financial strength ratings. Additionally, a decrease in our financial strength rating to a specified level can result in settlement of the derivative position.
The estimated fair value of our net derivative and other financial assets and liabilities after the application of master netting agreements and collateral were as follows:
Gross amounts not offset on the condensed consolidated balance sheets | |||||||||||||||||||||||||||||||||||
(In millions) |
Gross amount recognized1
|
Financial instruments2
|
Collateral (received)/pledged | Net amount |
Off-balance sheet securities collateral3
|
Net amount after securities collateral | |||||||||||||||||||||||||||||
March 31, 2021 | |||||||||||||||||||||||||||||||||||
Derivative assets | $ | $ | ( |
$ | ( |
$ | $ | ( |
$ | ||||||||||||||||||||||||||
Derivative liabilities | ( |
( |
( |
||||||||||||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||
Derivative assets | $ | $ | ( |
$ | ( |
$ | $ | ( |
$ | ||||||||||||||||||||||||||
Derivative liabilities | ( |
||||||||||||||||||||||||||||||||||
1 The gross amounts of recognized derivative assets and derivative liabilities are reported on the condensed consolidated balance sheets. As of March 31, 2021 and December 31, 2020, amounts not subject to master netting or similar agreements were immaterial.
| |||||||||||||||||||||||||||||||||||
2 Represents amounts offsetting derivative assets and derivative liabilities that are subject to an enforceable master netting agreement or similar agreement that are not netted against the gross derivative assets or gross derivative liabilities for presentation on the condensed consolidated balance sheets.
| |||||||||||||||||||||||||||||||||||
3 For non-cash collateral received, we do not recognize the collateral on our balance sheet unless the obligor (transferor) has defaulted under the terms of the secured contract and is no longer entitled to redeem the pledged asset. Amounts do not include any excess of collateral pledged or received.
|
29
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
4. Variable Interest Entities
During the first quarter 2021, we consolidated the following VIEs:
•Hamlet Securitization Trust 2020-CRE1 (Hamlet)
•A-A SPN-9 (ASREII - ACRASP), L.P. and A-A SPN-9 (ASREII - ALRESP), L.P. (collectively, A-A SPN-9)
•A-A Offshore 2021-1 (Java), L.P. (Java)
Hamlet was formed to securitize a portion of our commercial mortgage loan portfolio as CMBS securities held by AHL subsidiaries and third-party cedant portfolios. Securitization of these commercial mortgage loans allows retention of the full economics of these assets while being able to pledge these assets as collateral to the Federal Home Loan Bank (FHLB) under the funding agreement program. As of March 31, 2021 and December 31, 2020, Hamlet primarily held $1,812 million and $1,880 million, respectively, of commercial mortgage loans. As substantially all of the activities and economics of Hamlet are conducted on our behalf, we are the primary beneficiary and consolidate Hamlet and the assets are included in mortgage loans on the condensed consolidated balance sheets. Additionally, as Hamlet is in the form of a trust, the commercial mortgage loan assets are included in the pledged assets and funds in trust table in Note 10 – Commitments and Contingencies.
A-A SPN-9 is comprised of limited partnership entities that invest in an underlying investment fund. As of March 31, 2021, A-A SPN-9 primarily held $130 million of investment funds. We are the only limited partner in these entities and receive all of the economic benefits and losses, other than management fees and carried interest, as applicable, paid to the general partner in each entity, or a related entity, which are related parties. We do not have any direct voting rights as a limited partner at the A-A SPN-9 level, but we do have an ability to dissolve the underlying investment that results in dissolution of the entities. Therefore, as we have a unilateral ability to ultimately dissolve the entities and also own all of the economics in each of the entities, we are deemed to be the primary beneficiary of the VIEs.
Java is an investment fund. As of March 31, 2021, Java primarily held $24 million of investment funds and $151 million of other assets. We are both the general partner and the only limited partner in this investment fund and receive all of the economic benefits and losses. The general partner hired a related party investment manager who receives management fees and service fees, as applicable. We hold both the power, as a general partner, and significant economics, as a limited partner, satisfying the primary beneficiary criteria.
No arrangement exists requiring us to provide additional funding in excess of our committed capital investment, liquidity, or the funding of losses or an increase to our loss exposure in excess of our investment in any of the consolidated VIEs.
30
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
5. Fair Value
Fair value is the price we would receive to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market participants. We determine fair value based on the following fair value hierarchy:
Level 1 – Unadjusted quoted prices for identical assets or liabilities in an active market.
Level 2 – Quoted prices for inactive markets or valuation techniques that require observable direct or indirect inputs for substantially the full term of the asset or liability. Level 2 inputs include the following:
•Quoted prices for similar assets or liabilities in active markets,
•Observable inputs other than quoted market prices, and
•Observable inputs derived principally from market data through correlation or other means.
Level 3 – Prices or valuation techniques with unobservable inputs significant to the overall fair value estimate. These valuations use critical assumptions not readily available to market participants. Level 3 valuations are based on market standard valuation methodologies, including discounted cash flows, matrix pricing or other similar techniques.
Net Asset Value (NAV) – Investment funds are typically measured using NAV as a practical expedient in determining fair value and are not classified in the fair value hierarchy. Our carrying value reflects our pro rata ownership percentage as indicated by NAV in the investment fund financial statements, which we may adjust if we determine NAV is not calculated consistent with investment company fair value principles. The underlying investments of the investment funds may have significant unobservable inputs, which may include but are not limited to, comparable multiples and weighted average cost of capital rates applied in valuation models or a discounted cash flow model.
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the instrument’s fair value measurement.
We use a number of valuation sources to determine fair values. Valuation sources can include quoted market prices; third-party commercial pricing services; third-party brokers; industry-standard, vendor modeling software that uses market observable inputs; and other internal modeling techniques based on projected cash flows. We periodically review the assumptions and inputs of third-party commercial pricing services through internal valuation price variance reviews, comparisons to internal pricing models, back testing to recent trades, or monitoring trading volumes.
31
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following represents the hierarchy for our assets and liabilities measured at fair value on a recurring basis:
March 31, 2021 | |||||||||||||||||||||||||||||
(In millions) | Total | NAV | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||
AFS securities | |||||||||||||||||||||||||||||
US government and agencies | $ | $ | — | $ | $ | $ | |||||||||||||||||||||||
US state, municipal and political subdivisions |
— | ||||||||||||||||||||||||||||
Foreign governments | — | ||||||||||||||||||||||||||||
Corporate | — | ||||||||||||||||||||||||||||
CLO | — | ||||||||||||||||||||||||||||
ABS | — | ||||||||||||||||||||||||||||
CMBS | — | ||||||||||||||||||||||||||||
RMBS | — | ||||||||||||||||||||||||||||
Total AFS securities | — | ||||||||||||||||||||||||||||
Trading securities | |||||||||||||||||||||||||||||
US government and agencies | — | ||||||||||||||||||||||||||||
US state, municipal and political subdivisions |
— | ||||||||||||||||||||||||||||
Corporate | — | ||||||||||||||||||||||||||||
ABS | — | ||||||||||||||||||||||||||||
CMBS | — | ||||||||||||||||||||||||||||
RMBS | — | ||||||||||||||||||||||||||||
Total trading securities | — | ||||||||||||||||||||||||||||
Equity securities | — | ||||||||||||||||||||||||||||
Mortgage loans | — | ||||||||||||||||||||||||||||
Investment funds | |||||||||||||||||||||||||||||
Funds withheld at interest – embedded derivative | — | ||||||||||||||||||||||||||||
Derivative assets | — | ||||||||||||||||||||||||||||
Short-term investments | — | ||||||||||||||||||||||||||||
Other investments | — | ||||||||||||||||||||||||||||
Cash and cash equivalents | — | ||||||||||||||||||||||||||||
Restricted cash | — | ||||||||||||||||||||||||||||
Investments in related parties | |||||||||||||||||||||||||||||
AFS securities | |||||||||||||||||||||||||||||
Corporate | — | ||||||||||||||||||||||||||||
CLO | — | ||||||||||||||||||||||||||||
ABS | — | ||||||||||||||||||||||||||||
Total AFS securities – related party | — | ||||||||||||||||||||||||||||
Trading securities | |||||||||||||||||||||||||||||
CLO | — | ||||||||||||||||||||||||||||
ABS | — | ||||||||||||||||||||||||||||
Total trading securities – related party | — | ||||||||||||||||||||||||||||
Equity securities | — | ||||||||||||||||||||||||||||
Investment funds | |||||||||||||||||||||||||||||
Funds withheld at interest – embedded derivative | — | ||||||||||||||||||||||||||||
Reinsurance recoverable | — | ||||||||||||||||||||||||||||
Total assets measured at fair value | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Liabilities | |||||||||||||||||||||||||||||
Interest sensitive contract liabilities | |||||||||||||||||||||||||||||
Embedded derivative | $ | $ | — | $ | $ | $ | |||||||||||||||||||||||
Universal life benefits | — | ||||||||||||||||||||||||||||
Future policy benefits |
|||||||||||||||||||||||||||||
AmerUs Life Insurance Company (AmerUs) Closed Block | — | ||||||||||||||||||||||||||||
Indianapolis Life Insurance Company (ILICO) Closed Block and life benefits |
— | ||||||||||||||||||||||||||||
Derivative liabilities | — | ||||||||||||||||||||||||||||
Funds withheld liability – embedded derivative | — | ||||||||||||||||||||||||||||
Total liabilities measured at fair value | $ | $ | — | $ | $ | $ | |||||||||||||||||||||||
32
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
December 31, 2020 | |||||||||||||||||||||||||||||
(In millions) | Total | NAV | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||
AFS securities | |||||||||||||||||||||||||||||
US government and agencies | $ | $ | — | $ | $ | $ | |||||||||||||||||||||||
US state, municipal and political subdivisions |
— | ||||||||||||||||||||||||||||
Foreign governments | — | ||||||||||||||||||||||||||||
Corporate | — | ||||||||||||||||||||||||||||
CLO | — | ||||||||||||||||||||||||||||
ABS | — | ||||||||||||||||||||||||||||
CMBS | — | ||||||||||||||||||||||||||||
RMBS | — | ||||||||||||||||||||||||||||
Total AFS securities | — | ||||||||||||||||||||||||||||
Trading securities | |||||||||||||||||||||||||||||
US government and agencies | — | ||||||||||||||||||||||||||||
US state, municipal and political subdivisions |
— | ||||||||||||||||||||||||||||
Corporate | — | ||||||||||||||||||||||||||||
CLO | — | ||||||||||||||||||||||||||||
ABS | — | ||||||||||||||||||||||||||||
CMBS | — | ||||||||||||||||||||||||||||
RMBS | — | ||||||||||||||||||||||||||||
Total trading securities | — | ||||||||||||||||||||||||||||
Equity securities | — | ||||||||||||||||||||||||||||
Mortgage loans | — | ||||||||||||||||||||||||||||
Investment funds | |||||||||||||||||||||||||||||
Funds withheld at interest – embedded derivative | — | ||||||||||||||||||||||||||||
Derivative assets | — | ||||||||||||||||||||||||||||
Short-term investments | — | ||||||||||||||||||||||||||||
Other investments | — | ||||||||||||||||||||||||||||
Cash and cash equivalents | — | ||||||||||||||||||||||||||||
Restricted cash | — | ||||||||||||||||||||||||||||
Investments in related parties | |||||||||||||||||||||||||||||
AFS securities | |||||||||||||||||||||||||||||
Corporate | — | ||||||||||||||||||||||||||||
CLO | — | ||||||||||||||||||||||||||||
ABS | — | ||||||||||||||||||||||||||||
Total AFS securities – related party | — | ||||||||||||||||||||||||||||
Trading securities | |||||||||||||||||||||||||||||
CLO | — | ||||||||||||||||||||||||||||
ABS | — | ||||||||||||||||||||||||||||
Total trading securities – related party | — | ||||||||||||||||||||||||||||
Equity securities | — | ||||||||||||||||||||||||||||
Investment funds | |||||||||||||||||||||||||||||
Funds withheld at interest – embedded derivative | — | ||||||||||||||||||||||||||||
Reinsurance recoverable | — | ||||||||||||||||||||||||||||
Total assets measured at fair value | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Liabilities | |||||||||||||||||||||||||||||
Interest sensitive contract liabilities | |||||||||||||||||||||||||||||
Embedded derivative | $ | $ | — | $ | $ | $ | |||||||||||||||||||||||
Universal life benefits | — | ||||||||||||||||||||||||||||
Future policy benefits |
|||||||||||||||||||||||||||||
AmerUs Closed Block |
— | ||||||||||||||||||||||||||||
ILICO Closed Block and life benefits |
— | ||||||||||||||||||||||||||||
Derivative liabilities | — | ||||||||||||||||||||||||||||
Funds withheld liability – embedded derivative | — | ||||||||||||||||||||||||||||
Total liabilities measured at fair value | $ | $ | — | $ | $ | $ | |||||||||||||||||||||||
33
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 US and non-US corporate bonds, US agency and government guaranteed securities, CLO, ABS, CMBS and RMBS.
We also have fixed maturity securities priced based on indicative broker quotes or by employing market accepted valuation models. For certain fixed maturity securities, the valuation model uses significant unobservable inputs and are included in Level 3 in our fair value hierarchy. Significant unobservable inputs used include: discount rates, issue specific credit adjustments, material non-public financial information, estimation of future earnings and cash flows, default rate assumptions, liquidity assumptions and indicative quotes from market makers. These inputs are usually considered unobservable, as not all market participants have access to this data.
We value privately placed fixed maturity securities based on the credit quality and duration of comparable marketable securities, which may be securities of another issuer with similar characteristics. In some instances, we use a matrix-based pricing model. These models consider the current level of risk-free interest rates, corporate spreads, credit quality of the issuer and cash flow characteristics of the security. We also consider additional factors such as net worth of the borrower, value of collateral, capital structure of the borrower, presence of guarantees and our evaluation of the borrower’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.
34
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
ILICO Closed Block – We elected the fair value option for the ILICO Closed Block. Our valuation technique is to set the fair value of policyholder liabilities equal to the fair value of assets. There is an additional component which captures the fair value of the open block’s obligations to the closed block business. This component uses the present value of future cash flows which include commissions, administrative expenses, reinsurance premiums and benefits, and an explicit cost of capital. The discount rate includes a margin to reflect the business and nonperformance risk. Unobservable inputs include estimates for these items. The ILICO Closed Block policyholder liabilities and corresponding reinsurance recoverable are classified as Level 3.
Universal life liabilities and other life benefits – We elected the fair value option for certain blocks of universal and other life business ceded to Global Atlantic. We use a present value of liability cash flows. Unobservable inputs include estimates of mortality, persistency, expenses, premium payments and a risk margin used in the discount rates that reflects the riskiness of the business. These universal life policyholder liabilities and corresponding reinsurance recoverable are classified as Level 3.
Fair Value Option—The following represents the gains (losses) recorded for instruments for which we have elected the fair value option, including related parties:
Three months ended March 31, | |||||||||||
(In millions) | 2021 | 2020 | |||||||||
Trading securities | $ | ( |
$ | ( |
|||||||
Investment funds | ( |
( |
|||||||||
Future policy benefits | |||||||||||
Total gains (losses) | $ | ( |
$ | ( |
Gains and losses on trading securities are recorded in investment related gains (losses) on the condensed consolidated statements of income (loss). For fair value option mortgage loans, we record interest income in net investment income and subsequent changes in fair value in investment related gains (losses) on the condensed consolidated statements of income (loss). Gains and losses related to investment funds, including related party investment funds, are recorded in net investment income on the condensed consolidated statements of income (loss). We record the change in fair value of future policy benefits to future policy and other policy benefits on the condensed consolidated statements of income (loss).
The following summarizes information for fair value option mortgage loans:
(In millions) | March 31, 2021 | December 31, 2020 | |||||||||
Unpaid principal balance | $ | $ | |||||||||
Mark to fair value | |||||||||||
Fair value | $ | $ |
There were no fair value option mortgage loans 90 days or more past due as of March 31, 2021 and December 31, 2020.
35
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Level 3 Financial Instruments—The following are reconciliations for 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, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
Total realized and unrealized gains (losses) | |||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | Beginning balance | Included in income | Included in OCI | Net purchases, issuances, sales and settlements | Net transfers in (out) | Ending balance |
Total gains (losses) included in earnings1
|
Total gains (losses) included in OCI1
|
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Assets | |||||||||||||||||||||||||||||||||||||||||||||||
AFS securities | |||||||||||||||||||||||||||||||||||||||||||||||
US state, municipal and political subdivisions | $ | $ | $ | $ | $ | ( |
$ | $ | $ | ||||||||||||||||||||||||||||||||||||||
Foreign governments | |||||||||||||||||||||||||||||||||||||||||||||||
Corporate | ( |
||||||||||||||||||||||||||||||||||||||||||||||
CLO | ( |
||||||||||||||||||||||||||||||||||||||||||||||
ABS | ( |
||||||||||||||||||||||||||||||||||||||||||||||
CMBS | |||||||||||||||||||||||||||||||||||||||||||||||
Trading securities | |||||||||||||||||||||||||||||||||||||||||||||||
CLO | ( |
||||||||||||||||||||||||||||||||||||||||||||||
ABS | |||||||||||||||||||||||||||||||||||||||||||||||
RMBS | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
Equity securities | |||||||||||||||||||||||||||||||||||||||||||||||
Mortgage loans | ( |
||||||||||||||||||||||||||||||||||||||||||||||
Investment funds | |||||||||||||||||||||||||||||||||||||||||||||||
Funds withheld at interest – embedded derivative | ( |
||||||||||||||||||||||||||||||||||||||||||||||
Short-term investments | ( |
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Investments in related parties | |||||||||||||||||||||||||||||||||||||||||||||||
AFS securities | |||||||||||||||||||||||||||||||||||||||||||||||
Corporate | |||||||||||||||||||||||||||||||||||||||||||||||
ABS | ( |
( |
( |
( |
|||||||||||||||||||||||||||||||||||||||||||
Trading securities | |||||||||||||||||||||||||||||||||||||||||||||||
CLO | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
ABS | |||||||||||||||||||||||||||||||||||||||||||||||
Equity securities | |||||||||||||||||||||||||||||||||||||||||||||||
Investment funds | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
Funds withheld at interest – embedded derivative | ( |
||||||||||||||||||||||||||||||||||||||||||||||
Reinsurance recoverable | ( |
||||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 assets | $ | $ | ( |
$ | $ | $ | ( |
$ | $ | $ | |||||||||||||||||||||||||||||||||||||
Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
Interest sensitive contract liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
Embedded derivative | $ | ( |
$ | $ | $ | $ | $ | ( |
$ | $ | |||||||||||||||||||||||||||||||||||||
Universal life benefits | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
Future policy benefits | |||||||||||||||||||||||||||||||||||||||||||||||
AmerUs Closed Block | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
ILICO Closed Block and life benefits | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
Derivative liabilities | ( |
( |
( |
( |
|||||||||||||||||||||||||||||||||||||||||||
Total Level 3 liabilities | $ | ( |
$ | $ | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||||||||||
1 Related to instruments held at end of period.
|
36
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three months ended March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
Total realized and unrealized gains (losses) | |||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | Beginning balance | Included in income | Included in OCI | Net purchases, issuances, sales and settlements | Net transfers in (out) | Ending balance |
Total gains (losses) included in earnings1
|
Total gains (losses) included in OCI1
|
|||||||||||||||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||||||||||||||||||
AFS securities |
|||||||||||||||||||||||||||||||||||||||||||||||
US state, municipal and political subdivisions |
$ | $ | $ | ( |
$ | $ | $ | $ | $ | ( |
|||||||||||||||||||||||||||||||||||||
Corporate | ( |
( |
( |
||||||||||||||||||||||||||||||||||||||||||||
CLO |
( |
( |
( |
||||||||||||||||||||||||||||||||||||||||||||
ABS |
( |
( |
( |
( |
|||||||||||||||||||||||||||||||||||||||||||
CMBS |
( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
RMBS |
|||||||||||||||||||||||||||||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||||||||||||||||||
Corporate | |||||||||||||||||||||||||||||||||||||||||||||||
CLO |
( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
ABS |
( |
||||||||||||||||||||||||||||||||||||||||||||||
RMBS |
( |
||||||||||||||||||||||||||||||||||||||||||||||
Equity securities |
|||||||||||||||||||||||||||||||||||||||||||||||
Mortgage loans | ( |
||||||||||||||||||||||||||||||||||||||||||||||
Investment funds | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
Funds withheld at interest – embedded derivative |
( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
Short-term investments | ( |
||||||||||||||||||||||||||||||||||||||||||||||
Investments in related parties |
|||||||||||||||||||||||||||||||||||||||||||||||
AFS securities, ABS | ( |
( |
( |
( |
( |
||||||||||||||||||||||||||||||||||||||||||
Trading securities | |||||||||||||||||||||||||||||||||||||||||||||||
CLO | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
ABS | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
Equity securities | ( |
( |
( |
||||||||||||||||||||||||||||||||||||||||||||
Investment funds | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
Funds withheld at interest – embedded derivative |
( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
Reinsurance recoverable |
|||||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 assets |
$ | $ | ( |
$ | ( |
$ | $ | $ | $ | ( |
$ | ( |
|||||||||||||||||||||||||||||||||||
Liabilities |
|||||||||||||||||||||||||||||||||||||||||||||||
Interest sensitive contract liabilities |
|||||||||||||||||||||||||||||||||||||||||||||||
Embedded derivative |
$ | ( |
$ | $ | $ | $ | $ | ( |
$ | $ | |||||||||||||||||||||||||||||||||||||
Universal life benefits |
( |
( |
( |
||||||||||||||||||||||||||||||||||||||||||||
Future policy benefits |
|||||||||||||||||||||||||||||||||||||||||||||||
AmerUs Closed Block |
( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
ILICO Closed Block and life benefits |
( |
( |
( |
||||||||||||||||||||||||||||||||||||||||||||
Derivative liabilities | ( |
( |
( |
||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 liabilities |
$ | ( |
$ | $ | $ | $ | $ | ( |
$ | $ | |||||||||||||||||||||||||||||||||||||
1 Related to instruments held at end of period.
|
37
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, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | Purchases | Issuances | Sales | Settlements | Net purchases, issuances, sales and settlements | Transfers in | Transfers out | Net transfers in (out) | |||||||||||||||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||||||||||||||||||
AFS securities |
|||||||||||||||||||||||||||||||||||||||||||||||
US state, municipal and political subdivisions |
$ | $ | — | $ | $ | $ | $ | $ | ( |
$ | ( |
||||||||||||||||||||||||||||||||||||
Corporate | — | ( |
( |
( |
( |
||||||||||||||||||||||||||||||||||||||||||
CLO |
— | ( |
( |
||||||||||||||||||||||||||||||||||||||||||||
ABS |
— | ( |
( |
( |
|||||||||||||||||||||||||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||||||||||||||||||
CLO |
— | ( |
( |
||||||||||||||||||||||||||||||||||||||||||||
RMBS |
— | ( |
|||||||||||||||||||||||||||||||||||||||||||||
Mortgage loans | — | — | — | ( |
( |
||||||||||||||||||||||||||||||||||||||||||
Investment funds | — | ||||||||||||||||||||||||||||||||||||||||||||||
Short-term investments |
— | ( |
( |
||||||||||||||||||||||||||||||||||||||||||||
Investments in related parties |
|||||||||||||||||||||||||||||||||||||||||||||||
AFS securities, ABS | — | ( |
( |
( |
( |
||||||||||||||||||||||||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||||||||||||||||||
CLO | — | ( |
( |
( |
( |
||||||||||||||||||||||||||||||||||||||||||
ABS |
— | ||||||||||||||||||||||||||||||||||||||||||||||
Equity securities |
— | ( |
|||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 assets |
$ | $ | $ | ( |
$ | ( |
$ | $ | $ | ( |
$ | ( |
|||||||||||||||||||||||||||||||||||
Liabilities |
|||||||||||||||||||||||||||||||||||||||||||||||
Interest sensitive contract liabilities – embedded derivative |
$ | $ | ( |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
Total Level 3 liabilities |
$ | $ | ( |
$ | $ | $ | $ | $ | $ |
38
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three months ended March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | Purchases | Issuances | Sales | Settlements | Net purchases, issuances, sales and settlements | Transfers in | Transfers out | Net transfers in (out) | |||||||||||||||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||||||||||||||||||
AFS securities |
|||||||||||||||||||||||||||||||||||||||||||||||
Corporate | $ | $ | — | $ | ( |
$ | ( |
$ | $ | $ | ( |
$ | |||||||||||||||||||||||||||||||||||
CLO |
— | ( |
( |
( |
|||||||||||||||||||||||||||||||||||||||||||
ABS |
— | ( |
( |
( |
( |
( |
|||||||||||||||||||||||||||||||||||||||||
CMBS |
— | ||||||||||||||||||||||||||||||||||||||||||||||
RMBS |
— | ||||||||||||||||||||||||||||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||||||||||||||||||
Corporate | — | ||||||||||||||||||||||||||||||||||||||||||||||
ABS | — | ( |
( |
||||||||||||||||||||||||||||||||||||||||||||
RMBS |
— | ( |
|||||||||||||||||||||||||||||||||||||||||||||
Mortgage loans | — | — | — | ( |
( |
||||||||||||||||||||||||||||||||||||||||||
Short-term investments |
— | ( |
|||||||||||||||||||||||||||||||||||||||||||||
Investments in related parties |
|||||||||||||||||||||||||||||||||||||||||||||||
AFS securities, ABS | — | ( |
( |
( |
( |
||||||||||||||||||||||||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||||||||||||||||||
CLO |
— | ( |
|||||||||||||||||||||||||||||||||||||||||||||
ABS |
— | ||||||||||||||||||||||||||||||||||||||||||||||
Equity securities |
— | ( |
( |
( |
|||||||||||||||||||||||||||||||||||||||||||
Investment funds |
|||||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 assets |
$ | $ | $ | ( |
$ | ( |
$ | $ | $ | ( |
$ | ||||||||||||||||||||||||||||||||||||
Liabilities |
|||||||||||||||||||||||||||||||||||||||||||||||
Interest sensitive contract liabilities – embedded derivative |
$ | $ | ( |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
Total Level 3 liabilities |
$ | $ | ( |
$ | $ | $ | $ | $ | $ |
Significant Unobservable Inputs—Significant unobservable inputs occur when we could not obtain or corroborate the quantitative detail of the inputs. This applies to fixed maturity securities, equity securities, mortgage loans and certain derivatives, as well as embedded derivatives in liabilities. Additional significant unobservable inputs are described below.
AFS and trading securities – For certain fixed maturity securities, internal models are used to calculate the fair value. We use a discounted cash flow approach. The discount rate is the significant unobservable input due to the determined credit spread being internally developed, illiquid, or as a result of other adjustments made to the base rate. The base rate represents a market comparable rate for securities with similar characteristics. This excludes assets for which significant unobservable inputs are not developed internally, primarily consisting of broker quotes.
Interest sensitive contract liabilities – embedded derivative – Significant unobservable inputs we use in the fixed indexed annuities embedded derivative of the interest sensitive contract liabilities valuation include:
1.Nonperformance risk – For contracts we issue, we use the credit spread, relative to the 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.
39
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following summarizes the unobservable inputs for AFS and trading securities and the embedded derivatives of fixed indexed annuities:
March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
(In millions, except for percentages) | Fair value | Valuation technique | Unobservable inputs | Minimum | Maximum | Weighted average | Impact of an increase in the input on fair value | ||||||||||||||||||||||||||||||||||||||||
AFS and trading securities |
$ | Discounted cash flow | Discount rate | % | % | % | 1 |
Decrease | |||||||||||||||||||||||||||||||||||||||
Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives |
$ | Option budget method | Nonperformance risk | % | % | % | 2 |
Decrease | |||||||||||||||||||||||||||||||||||||||
Option budget | % | % | % | 3 |
Increase | ||||||||||||||||||||||||||||||||||||||||||
Surrender rate | % | % | % | 4 |
Decrease | ||||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
(In millions, except for percentages) | Fair value |
Valuation technique | Unobservable inputs | Minimum | Maximum | Weighted average | Impact of an increase in the input on fair value | ||||||||||||||||||||||||||||||||||||||||
AFS and trading securities |
$ | Discounted cash flow | Discount rate | % | % | % | 1 |
Decrease | |||||||||||||||||||||||||||||||||||||||
Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives |
$ | Option budget method | Nonperformance risk | % | % | % | 2 |
Decrease | |||||||||||||||||||||||||||||||||||||||
Option budget | % | % | % | 3 |
Increase | ||||||||||||||||||||||||||||||||||||||||||
Surrender rate | % | % | % | 4 |
Decrease | ||||||||||||||||||||||||||||||||||||||||||
1 The discount rate weighted average is calculated based on the relative fair values of the securities.
| |||||||||||||||||||||||||||||||||||||||||||||||
2 The nonperformance risk weighted average is based on the projected excess benefits of reserves used in the calculation of the embedded derivative.
| |||||||||||||||||||||||||||||||||||||||||||||||
3 The option budget weighted average is calculated based on the indexed account values.
| |||||||||||||||||||||||||||||||||||||||||||||||
4 The surrender rate weighted average is calculated based on projected account values.
|
Financial Instruments Without Readily Determinable Fair Values—We have elected the measurement alternative for certain equity securities that do not have a readily determinable fair value. The carrying amount of the equity securities was $202 million, with a cumulative recorded impairment of $231 million as of March 31, 2021 and December 31, 2020.
Fair Value of Financial Instruments Not Carried at Fair Value—The following represents our financial instruments not carried at fair value on the condensed consolidated balance sheets:
March 31, 2021 | |||||||||||||||||||||||||||||||||||
(In millions) | Carrying Value | Fair Value | NAV | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||
Financial assets | |||||||||||||||||||||||||||||||||||
Mortgage loans | $ | $ | $ | — | $ | $ | $ | ||||||||||||||||||||||||||||
Investment funds | |||||||||||||||||||||||||||||||||||
Policy loans | — | ||||||||||||||||||||||||||||||||||
Funds withheld at interest | — | ||||||||||||||||||||||||||||||||||
Short-term investments | — | ||||||||||||||||||||||||||||||||||
Other investments | — | ||||||||||||||||||||||||||||||||||
Investments in related parties | |||||||||||||||||||||||||||||||||||
Mortgage loans | — | ||||||||||||||||||||||||||||||||||
Investment funds | |||||||||||||||||||||||||||||||||||
Funds withheld at interest | — | ||||||||||||||||||||||||||||||||||
Other investments | — | ||||||||||||||||||||||||||||||||||
Total financial assets not carried at fair value | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Financial liabilities | |||||||||||||||||||||||||||||||||||
Interest sensitive contract liabilities | $ | $ | $ | — | $ | $ | $ | ||||||||||||||||||||||||||||
Long-term debt | — | ||||||||||||||||||||||||||||||||||
Securities to repurchase | — | ||||||||||||||||||||||||||||||||||
Funds withheld liability | — | ||||||||||||||||||||||||||||||||||
Total financial liabilities not carried at fair value | $ | $ | $ | — | $ | $ | $ |
40
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
December 31, 2020 | |||||||||||||||||||||||||||||||||||
(In millions) | Carrying Value | Fair Value | NAV | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||
Financial assets | |||||||||||||||||||||||||||||||||||
Mortgage loans | $ | $ | $ | — | $ | $ | $ | ||||||||||||||||||||||||||||
Investment funds | |||||||||||||||||||||||||||||||||||
Policy loans | — | ||||||||||||||||||||||||||||||||||
Funds withheld at interest | — | ||||||||||||||||||||||||||||||||||
Other investments | — | ||||||||||||||||||||||||||||||||||
Investments in related parties | |||||||||||||||||||||||||||||||||||
Mortgage loans | — | ||||||||||||||||||||||||||||||||||
Investment funds | |||||||||||||||||||||||||||||||||||
Funds withheld at interest | — | ||||||||||||||||||||||||||||||||||
Other investments | — | ||||||||||||||||||||||||||||||||||
Total financial assets not carried at fair value | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Financial liabilities | |||||||||||||||||||||||||||||||||||
Interest sensitive contract liabilities | $ | $ | $ | — | $ | $ | $ | ||||||||||||||||||||||||||||
Long-term debt | — | ||||||||||||||||||||||||||||||||||
Securities to repurchase | — | ||||||||||||||||||||||||||||||||||
Funds withheld liability | — | ||||||||||||||||||||||||||||||||||
Total financial liabilities not carried at fair value |
$ | $ | $ | — | $ | $ | $ |
We estimate the fair value for financial instruments not carried at fair value using the same methods and assumptions as those we carry at fair value. The financial instruments presented above are reported at carrying value on the condensed consolidated balance sheets; however, in the case of policy loans, funds withheld at interest and liability, short-term investments, and securities to repurchase, the carrying amount approximates fair value.
Other investments – The fair value of 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.
41
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
6. Deferred Acquisition Costs, Deferred Sales Inducements and Value of Business Acquired
The following represents a rollforward of deferred acquisition costs (DAC), deferred sales inducements (DSI) and value of business acquired (VOBA):
(In millions) | DAC | DSI | VOBA | Total | |||||||||||||||||||
Balance at December 31, 2020 | $ | $ | $ | $ | |||||||||||||||||||
Additions | |||||||||||||||||||||||
Amortization | ( |
( |
( |
( |
|||||||||||||||||||
Impact of unrealized investment (gains) losses | |||||||||||||||||||||||
Balance at March 31, 2021 | $ | $ | $ | $ |
(In millions) | DAC | DSI | VOBA | Total | |||||||||||||||||||
Balance at December 31, 2019 | $ | $ | $ | $ | |||||||||||||||||||
Adoption of accounting standard | |||||||||||||||||||||||
Additions | |||||||||||||||||||||||
Amortization | ( |
( |
|||||||||||||||||||||
Impact of unrealized investment (gains) losses | |||||||||||||||||||||||
Balance at March 31, 2020 | $ | $ | $ | $ |
7. Equity
Accumulated Other Comprehensive Income (Loss)—The following provides the details and changes in AOCI:
(In millions) | Unrealized investment gains (losses) on AFS securities without a credit allowance | Unrealized investment gains (losses) on AFS securities with a credit allowance | DAC, DSI, VOBA and future policy benefits adjustments on AFS securities | Unrealized gains (losses) on hedging instruments | Foreign currency translation and other adjustments | Accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||
Balance at December 31, 2020 | $ | $ | ( |
$ | ( |
$ | ( |
$ | $ | ||||||||||||||||||||||||||
Other comprehensive income (loss) before reclassifications |
( |
( |
( |
( |
|||||||||||||||||||||||||||||||
Less: Reclassification adjustments for gains (losses) realized1
|
( |
( |
|||||||||||||||||||||||||||||||||
Less: Income tax expense (benefit) |
( |
( |
( |
( |
|||||||||||||||||||||||||||||||
Less: Other comprehensive loss attributable to noncontrolling interests | ( |
( |
( |
||||||||||||||||||||||||||||||||
Balance at March 31, 2021 | $ | $ | ( |
$ | ( |
$ | ( |
$ | $ | ||||||||||||||||||||||||||
1 Recognized in investment related gains (losses) on the condensed consolidated statements of income (loss).
|
(In millions) | Unrealized investment gains (losses) on AFS securities without a credit allowance | Unrealized investment gains (losses) on AFS securities with a credit allowance | DAC, DSI, VOBA and future policy benefits adjustments on AFS securities | Unrealized gains (losses) on hedging instruments | Foreign currency translation and other adjustments | Accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||
Balance at December 31, 2019 | $ | $ | $ | ( |
$ | $ | ( |
$ | |||||||||||||||||||||||||||
Adoption of accounting standards |
( |
( |
( |
||||||||||||||||||||||||||||||||
Other comprehensive income (loss) before reclassifications |
( |
( |
( |
||||||||||||||||||||||||||||||||
Less: Reclassification adjustments for gains (losses) realized1
|
( |
||||||||||||||||||||||||||||||||||
Less: Income tax expense (benefit) |
( |
( |
( |
||||||||||||||||||||||||||||||||
Less: Other comprehensive income (loss) attributable to noncontrolling interests | ( |
( |
( |
||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | $ | ( |
$ | ( |
$ | $ | $ | $ | ( |
||||||||||||||||||||||||||
1 Recognized in investment related gains (losses) on the condensed consolidated statements of income (loss).
|
42
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
8. 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, 2021 | |||||
(In millions, except per share data) | Class A | ||||
Net income available to Athene Holding Ltd. common shareholders – basic and diluted |
$ | ||||
Basic weighted average shares outstanding | |||||
Dilutive effect of stock compensation plans and warrants | |||||
Diluted weighted average shares outstanding | |||||
Earnings per share | |||||
Basic | $ | ||||
Diluted | $ |
Three months ended March 31, 2020 | |||||||||||||||||||||||||||||||||||
(In millions, except per share data) | Class A | Class B | Class M-1 | Class M-2 | Class M-3 | Class M-4 | |||||||||||||||||||||||||||||
Net loss available to Athene Holding Ltd. common shareholders – basic and diluted | $ | ( |
$ | ( |
$ | ( |
$ | ( |
$ | ( |
$ | ( |
|||||||||||||||||||||||
Basic weighted average shares outstanding | |||||||||||||||||||||||||||||||||||
Dilutive effect of stock compensation plans and warrants1
|
|||||||||||||||||||||||||||||||||||
Diluted weighted average shares outstanding | |||||||||||||||||||||||||||||||||||
Loss per share | |||||||||||||||||||||||||||||||||||
Basic | $ | ( |
$ | ( |
$ | ( |
$ | ( |
$ | ( |
$ | ( |
|||||||||||||||||||||||
Diluted | $ | ( |
$ | ( |
$ | ( |
$ | ( |
$ | ( |
$ | ( |
|||||||||||||||||||||||
1 The dilutive effective of stock compensation plans and warrants is antidilutive as a result of the net loss available to Athene Holding Ltd. common shareholders for the three months ended March 31, 2020.
|
For the periods in which we had multiple classes of stock participating in earnings, we used the two-class method for allocating net income available to Athene Holding Ltd. common shareholders to each class of our common stock. 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 used the weighted average shares for the quarter to allocate first quarter net loss to Class B and Class M shares; however, for those classes, 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 included within the dilutive effect of stock compensation plans and warrants above if dilutive.
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 1.0 million and 11.1 million shares, restricted stock units, options and warrants as of March 31, 2021 and 2020, respectively.
43
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
9. Related Parties
Apollo
Current fee structure – Substantially all of our investments are managed by Apollo. Apollo provides us a full suite of services that includes: direct investment management; asset sourcing and allocation; mergers and acquisition sourcing, execution and asset diligence; and strategic support and advice. Apollo also provides certain operational support services for our investment portfolio including investment compliance, tax, legal and risk management support.
Apollo has extensive experience managing our investment portfolio and its knowledge of our liability profile enables it to tailor an asset management strategy to fit our specific needs. This strategy has proven responsive to changing market conditions and focuses on earning incremental yield by taking liquidity risk and complexity risk, rather than assuming solely credit risk. Our partnership has enabled us to take advantage of investment opportunities that would likely not otherwise have been available to us.
Under the Seventh Amended and Restated Fee Agreement between us and AGM’s subsidiary, Apollo Insurance Solutions Group LP (ISG) (Fee Agreement), we pay Apollo:
(1)a base management fee equal to the sum of (i) 0.225 % per year of the lesser of (A) the aggregate market value of substantially all of the assets in substantially all of the investment accounts of or relating to us (collectively, the Accounts) on December 31, 2018 of $103.4 billion (Backbook Value) and (B) the aggregate market value of substantially all of the assets in the Accounts at the end of the respective month, plus (ii) 0.15 % per year of the amount, if any (Incremental Value), by which 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 US government;
(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, US treasuries, non-preferred equities and alternatives.
The following represents assets based on the above sub-allocation structure:
(In millions, except percentages) | March 31, 2021 | Percent of Total | December 31, 2020 | Percent of Total | |||||||||||||||||||
Core | $ | % | $ | % | |||||||||||||||||||
Core Plus | % | % | |||||||||||||||||||||
Yield | % | % | |||||||||||||||||||||
High Alpha | % | % | |||||||||||||||||||||
Other | % | % | |||||||||||||||||||||
Total sub-allocation assets | $ | % | $ | % |
Additionally, the Fee Agreement provides for a possible payment by Apollo to us, or a possible payment by us to Apollo, equal to 0.025 % of the Incremental Value as of the end of each year, beginning on December 31, 2019, depending upon the percentage of our investments that consist of Core and Core Plus assets. If more than 60 % of our invested assets that are subject to the sub-allocation fees are invested in Core and Core Plus assets, we will receive a 0.025 % fee reduction on the Incremental Value. If less than 50 % of our invested assets that are subject to the sub-allocation fee are invested in Core and Core Plus assets, we will pay an additional fee of 0.025 % on Incremental Value.
44
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
During the three months ended March 31, 2021 and 2020, we incurred management fees, inclusive of the base and sub-allocation fees, of $144 million and $128 million, respectively. Management fees are included within net investment income on the condensed consolidated statements of income (loss). As of March 31, 2021 and December 31, 2020, management fees payable were $48 million and $41 million, respectively, and are included in other liabilities on the condensed consolidated balance sheets. Such amounts include fees incurred attributable to ACRA including all of the noncontrolling interest in ACRA.
In addition to the assets on our condensed consolidated balance sheets managed by Apollo, Apollo manages the assets underlying our funds withheld receivable. For these assets, the third-party cedants pay Apollo fees based upon the same fee construct we have with Apollo. Such fees directly reduce the settlement payments that we receive from the third-party cedant and, as such, we indirectly pay those fees. Finally, Apollo charges management fees and carried interest on Apollo-managed funds and other entities in which we invest. Neither the fees paid by such third-party cedants nor the fees or carried interest paid by such Apollo-managed funds or other entities are included in the investment management fee amounts noted above.
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”).
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 and in connection with such interest receives distributions in respect of ISG and sub-allocation fees earned by Apollo. Additionally, six of the sixteen 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.
45
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Other related party transactions
A-A Mortgage – We had an equity method investment of $583 million and $444 million as of March 31, 2021 and December 31, 2020, respectively, in A-A Mortgage, which had an investment in AmeriHome. On February 16, 2021, Apollo, Athene and AmeriHome announced the sale of AmeriHome to a subsidiary of Western Alliance Bancorporation. This transaction closed on April 7, 2021 and we estimate $184 million of revenue from the premium of the platform sale, net of carry and transaction expenses. Of the total estimated premium, $174 million was recognized during the first quarter of 2021 as a result of the underlying investment being held at fair value. We have a loan purchase agreement with AmeriHome, which survived the sale. 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 $0 million and $169 million of residential mortgage loans under this agreement during the three months ended March 31, 2021 and 2020, respectively. Additionally, we hold investments issued by AmeriHome or AmeriHome affiliates of $372 million and $360 million as of March 31, 2021 and December 31, 2020, respectively, which are included in related party AFS securities on the condensed consolidated balances sheets. We also had commitments to make additional equity investments in A-A Mortgage of $381 million as of March 31, 2021.
MidCap – We have multiple investments in MidCap including profit participating notes, redeemable preferred stock and amounts advanced under a subordinated debt facility. The subordinated debt facility is included in related party other investments and the redeemable preferred stock and profit participating notes are included in related party trading securities on the condensed consolidated balance sheets. The following summarizes these investments in MidCap:
(In millions) | March 31, 2021 | December 31, 2020 | |||||||||
Profit participating notes | $ | $ | |||||||||
Subordinated debt facility | |||||||||||
Redeemable preferred stock | |||||||||||
Total investment in MidCap | $ | $ |
Additionally, we hold ABS and CLO securities issued by MidCap affiliates of $801 million and $630 million as of March 31, 2021 and December 31, 2020, respectively, which are included in related party AFS securities on the condensed consolidated balance sheets.
Athora – We have a cooperation agreement with Athora, pursuant to which, among other things, (1) for a period of 30 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 United Kingdom (UK)) and (4) Athora provides us and our subsidiaries with a right of first refusal to pursue acquisition and reinsurance transactions in North America and the UK. Notwithstanding the foregoing, pursuant to the cooperation agreement, Athora is only required to use its reasonable best efforts to cause its subsidiaries to adhere to the provisions set forth in the cooperation agreement and therefore Athora’s ability to cause its subsidiaries to act pursuant to the cooperation agreement may be limited by, among other things, legal prohibitions or the inability to obtain the approval of the board of directors or other applicable governing body of the applicable subsidiary, which approval is solely at the discretion of such governing body. As of March 31, 2021, we have not exercised our right of first refusal to reinsure liabilities ceded to Athora’s insurance or reinsurance subsidiaries.
Our investment in Athora, which is included in related party investment funds on the condensed consolidated balance sheets, was $689 million and $709 million as of March 31, 2021 and December 31, 2020, respectively. Additionally, as of March 31, 2021 and December 31, 2020, we had $117 million and $122 million, respectively, of funding agreements outstanding to Athora. We also have commitments to make additional equity investments in Athora of $293 million as of March 31, 2021.
Venerable – We have coinsurance and modco agreements with Venerable Insurance and Annuity Company (VIAC). VIAC is a related party due to our minority equity investment in its holding company’s parent, VA Capital, which was $316 million and $123 million as of March 31, 2021 and December 31, 2020, respectively. The minority equity investment in VA Capital is included in related party investment funds on the condensed consolidated balance sheets and accounted for as an equity method investment. VA Capital is owned by a consortium of investors, led by affiliates of AGM, Crestview Partners and Reverence Capital Partners, and is the parent of Venerable, which is the parent of VIAC. Additionally, we have a 15-year term loan receivable from Venerable due in 2033, which is included in related party other investments on the condensed consolidated balance sheets. The loan is held at the principal balance less allowances and was $147 million and $145 million as of March 31, 2021 and December 31, 2020, respectively. While management views the overall transactions with Venerable as favorable to us, the stated interest rate of 6.257 % on the term loan to Venerable represents a below-market interest rate, and management considered such rate as part of its evaluation and pricing of the reinsurance transactions.
46
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Strategic Partnership – We have an agreement pursuant to which we may invest up to $2.5 billion over three years in funds managed by Apollo entities (Strategic Partnership). This arrangement is intended to permit us to invest across the Apollo alternatives platform into credit-oriented, strategic and other alternative investments in a manner and size that is consistent with our existing investment strategy. Fees for such investments payable by us to Apollo would be more favorable to us than market rates, and consistent with our existing alternative investments, investments made under the Strategic Partnership require approval of ISG and remain subject to our existing governance processes, including approval by our conflicts committee where applicable. As of March 31, 2021 and December 31, 2020, we had $229 million and $214 million, respectively, of investments under the Strategic Partnership and these investments are typically included in related party investment funds on the condensed consolidated balance sheets.
PK AirFinance – We have an investment in PK AirFinance (PK), an aviation lending business with a portfolio of loans (Aviation Loans). The Aviation Loans are generally fully secured by aircraft leases and aircraft. Apollo owns the PK loan origination platform, including personnel and systems and, pursuant to certain agreements entered into between us, Apollo, and certain entities managed by Apollo, the Aviation Loans are securitized by an SPV for which Apollo acts as ABS manager (ABS-SPV). The ABS-SPV issues tranches of senior notes and subordinated notes, which are secured by the Aviation Loans. As of March 31, 2021 and December 31, 2020, our investment in securitizations of loans originated by PK was $1,353 million and $1,373 million, respectively, and are included in related party AFS or trading securities on the condensed consolidated balance sheets. We also have commitments to make additional investment in securitizations of loans originated by PK of $1,270 million as of March 31, 2021.
Apollo/Athene Dedicated Investment Program (ADIP) – Our subsidiary, Athene Co-Invest Reinsurance Affiliate 1A Ltd. (together with its subsidiaries, ACRA) is partially owned by ADIP, which is managed by AGM. ALRe currently holds 36.55 % of the economic interests in ACRA, with ADIP holding the remaining 63.45 %. During the three months ended March 31, 2021 and 2020, we received capital contributions of $235 million and $240 million, respectively, from ADIP and paid dividends of $0 million and $46 million, respectively, to ADIP.
Apollo Share Exchange and Related Transactions – On February 28, 2020, we closed a strategic transaction with AGM and certain affiliates of AGM which collectively comprise the Apollo Operating Group (AOG), pursuant to which we sold 27,959,184 newly issued Class A common shares to the AOG for an investment in Apollo of 29,154,519 newly issued AOG units valued at $1.1 billion and we sold 7,575,758 newly issued Class A common shares to the AOG for $350 million. Additionally, Apollo Management Holdings, L.P. (AMH) has the right to purchase up to that number of Class A common shares that would increase by 5 percentage points the percentage of the issued and outstanding Class A common shares beneficially owned by the AOG and certain affiliates, employees and consultants of AGM (inclusive of Class A common shares over which any such persons have a valid proxy), calculated on a fully diluted basis. In connection with the closing of the transaction, we made certain amendments to our bye-laws which, among other things, eliminated our multi-class common share structure.
Concurrent with our entry into the transaction agreements, AMH, James Belardi, our Chief Executive Officer, and William Wheeler, our President (each an Other Shareholder), entered into a voting agreement, pursuant to which each Other Shareholder irrevocably appointed AMH as its proxy and attorney-in-fact (Proxy) to vote all of such Other Shareholder’s Class A common shares at any meeting of our shareholders occurring following the closing date and in connection with any written consent of our shareholders following the closing date. The Proxy will be of no force and effect if Apollo and certain affiliates thereof cease to hold some minimum level of ownership not to exceed 7.5 % of our Class A common shares.
10. Commitments and Contingencies
Contingent Commitments—We had commitments to make investments, primarily capital contributions to investment funds, inclusive of related party commitments discussed previously, of $11,198 million and $7,472 million as of March 31, 2021 and December 31, 2020, respectively. We expect most of our current commitments will be invested over the next five years; however, these commitments could become due any time upon counterparty request.
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, 2021 and December 31, 2020, we had $2,001 million and $2,002 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, 2021 and December 31, 2020, we had $11,958 million and $8,822 million, respectively, of FABN funding agreements outstanding. We had $3,058 million of FABN capacity remaining as of March 31, 2021.
During the third quarter of 2020, we established a secured funding agreement backed repurchase agreement (FABR) program, in which a special-purpose, unaffiliated entity entered into repurchase agreements with a bank and the proceeds of the repurchase agreements were used by the special purpose entity to purchase funding agreements from us. As of March 31, 2021 and December 31, 2020, we had $1,000 million of FABR funding agreements outstanding.
47
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Pledged Assets and Funds in Trust (Restricted Assets)—The total restricted assets included on the condensed consolidated balance sheets are as follows:
(In millions) | March 31, 2021 | December 31, 2020 | |||||||||
AFS securities | $ | $ | |||||||||
Trading securities | |||||||||||
Equity securities | |||||||||||
Mortgage loans | |||||||||||
Investment funds | |||||||||||
Derivative assets | |||||||||||
Short-term investments | |||||||||||
Other investments | |||||||||||
Restricted cash | |||||||||||
Total restricted assets | $ | $ |
The restricted assets are primarily related to reinsurance trusts established in accordance with coinsurance agreements and the FHLB and FABR funding agreements described above.
Letters of Credit—We have undrawn letters of credit totaling $1,401 million as of March 31, 2021. These letters of credit were issued for our reinsurance program and expire between December 10, 2021 and June 19, 2023.
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, 2021, had an asset value of $413 million, and is included in other assets on the condensed consolidated balance sheets. In January 2012, the COLI policy administrator delivered to AAIA a supplement to the existing COLI policies and advised that American General and ZC Resource Investment Trust (ZC Trust) had unilaterally implemented changes set forth in the supplement that, if effective, would: (1) potentially negatively impact the crediting rate for the policies and (2) change the exit and surrender protocols set forth in the policies. In March 2013, AAIA filed suit against American General, ZC Trust, and ZC Resource LLC in Chancery Court in Delaware, seeking, among other relief, a declaration that the changes set forth in the supplement were ineffectual and in breach of the parties’ agreement. The parties filed cross motions for judgment as a matter of law, and the court granted defendants’ motion and dismissed without prejudice on ripeness grounds. The issue that negatively impacts the crediting rate for one of the COLI policies has subsequently been triggered and, on April 3, 2018, we filed suit against the same defendants in Chancery Court in Delaware seeking substantially similar relief. Defendants moved to dismiss and the court heard oral arguments on February 13, 2019. The court issued an opinion on July 31, 2019 that did not address the merits, but found that the Chancery Court did not have jurisdiction over our claims and directed us to either amend our complaint or transfer the matter to Delaware Superior Court. The matter has been transferred to the Delaware Superior Court. Defendants renewed their motion to dismiss and the Superior Court heard oral arguments on December 18, 2019. The Superior Court issued an opinion on May 18, 2020 in which it granted in part and denied in part defendants’ motion. The Superior Court denied defendants’ motion with respect to the issue that negatively impacts the crediting rate for one of the COLI policies, which issue will proceed to discovery. The Superior Court granted defendants’ motion and dismissed without prejudice on ripeness grounds claims related to the exit and surrender protocols set forth in the policies, and dismissed defendant ZC Resource LLC. If the supplement is ultimately deemed to be effective, the purported changes to the policies could impair AAIA’s ability to access the value of guarantees associated with the policies. The Superior Court issued a scheduling order providing for a July 2022 trial and the parties are currently engaged in discovery. The value of the guarantees included within the asset value reflected above is $196 million as of March 31, 2021.
Regulatory Matters – Beginning in 2015, our US insurance subsidiaries have experienced increased complaints related to the conversion and administration of the block of life insurance business acquired in connection with our acquisition of Aviva USA and reinsured to affiliates of Global Atlantic. The life insurance policies included in this block have been and are currently being administered by AllianceOne Inc. (AllianceOne), a subsidiary of DXC Technology Company, which was retained by such Global Atlantic affiliates to provide third party administration services on such policies. AllianceOne also administers a small block of annuity policies that were on Aviva USA’s legacy policy administration systems that were also converted in connection with the acquisition of Aviva USA and have experienced some similar service and administration issues, but to a lesser degree.
As a result of the difficulties experienced with respect to the administration of such policies, we have received notifications from several state regulators, including but not limited to New York State Department of Financial Services (NYSDFS), the California Department of Insurance (CDI) and the Texas Department of Insurance (TDI), indicating, in each case, that the respective regulator planned to undertake a market conduct examination or enforcement proceeding of the applicable US insurance subsidiary relating to the treatment of policyholders subject to our reinsurance agreements with affiliates of Global Atlantic and the conversion of the life and annuity policies, including the administration of such blocks by AllianceOne. We entered into consent orders with several state regulators, including the NYSDFS, the CDI and the TDI, to resolve underlying matters in the respective states. All fines and costs, including those associated with remediation plans, paid in connection with the consent orders are subject to indemnification by Global Atlantic or affiliates of Global Atlantic.
48
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
11. Segment Information
We operate our core business strategies out of one reportable segment, Retirement Services. In addition to Retirement Services, we report certain other operations in Corporate and Other.
Retirement Services—Retirement Services is comprised of our US and Bermuda operations, which issue and reinsure retirement savings products and institutional products. Retirement Services has retail operations, which provide annuity retirement solutions to our policyholders. Retirement Services also has reinsurance operations, which reinsure multi-year guaranteed annuities, fixed indexed annuities, traditional one-year guarantee fixed deferred annuities, immediate annuities and institutional products from our reinsurance partners. In addition, our institutional operations, including funding agreements and group annuities, are included in our Retirement Services segment.
Corporate and Other—Corporate and Other includes certain other operations related to our corporate activities such as corporate allocated expenses, merger and acquisition costs, debt costs, preferred stock dividends, certain integration and restructuring costs, certain stock-based compensation and intersegment eliminations. In addition, we also hold capital in excess of the level of capital we hold in Retirement Services to support our operating strategy.
Financial Measures—Segment adjusted operating income available to common shareholders is an internal measure used by the chief operating decision maker to evaluate and assess the results of our segments.
Adjusted operating revenue is a component of adjusted operating income available to common shareholders and excludes market volatility and adjustments for other non-operating activity. Our adjusted operating revenue equals our total revenue, adjusted to eliminate the impact of the following non-operating adjustments:
•Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets;
•Investment gains (losses), net of offsets; and
•Noncontrolling interests, VIE expenses 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) | 2021 | 2020 | |||||||||
Retirement Services | $ | $ | |||||||||
Corporate and Other | ( |
||||||||||
Non-operating adjustments | |||||||||||
Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets |
( |
||||||||||
Investment gains (losses), net of offsets | ( |
( |
|||||||||
Noncontrolling interests, VIE expenses and other adjustments to revenues | ( |
||||||||||
Total revenues | $ | $ | ( |
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.
49
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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) | 2021 | 2020 | |||||||||
Retirement Services | $ | $ | |||||||||
Corporate and Other | ( |
( |
|||||||||
Non-operating adjustments | |||||||||||
Investment gains (losses), net of offsets |
( |
( |
|||||||||
Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets |
|||||||||||
Integration, restructuring and other non-operating expenses | ( |
( |
|||||||||
Stock-based compensation, excluding LTIP | ( |
||||||||||
Income tax (expense) benefit – non-operating | ( |
||||||||||
Net income (loss) available to Athene Holding Ltd. common shareholders | $ | $ | ( |
The following represents total assets by segment:
(In millions) | March 31, 2021 | December 31, 2020 | |||||||||
Retirement Services | $ | $ | |||||||||
Corporate and Other | |||||||||||
Total assets | $ | $ |
50
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
51
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a leading financial services company specializing in retirement services 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, 2021, 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 8.9 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 US and Bermuda operations which issue and reinsure retirement savings products and institutional products. Corporate and Other includes certain other operations related to our corporate activities.
Our total assets have grown to $205.7 billion as of March 31, 2021. Our book value per common share as of March 31, 2021 was $78.25. Our adjusted book value per common share was $62.88 as of March 31, 2021. Our consolidated annualized ROE for the three months ended March 31, 2021 and the year ended December 31, 2020 was 12.9% and 10.0%, respectively, and our consolidated annualized adjusted operating ROE was 25.3% and 12.1%, respectively. For the three months ended March 31, 2021 and the year ended December 31, 2020, in our Retirement Services segment, we generated an annualized net investment spread of 2.48% and 1.31%, respectively, and an annualized adjusted operating ROE of 37.8% and 16.9%, respectively. Our Retirement Services segment generated an annualized investment margin on deferred annuities of 3.29% and 2.09% for the three months ended March 31, 2021 and the year ended December 31, 2020, respectively. As of March 31, 2021, our deferred annuities had a weighted-average life of 8.6 years and made up a significant portion of our reserve liabilities.
The following table presents the inflows generated from our organic and inorganic channels:
Three months ended March 31, | |||||||||||
(In millions, except percentages) | 2021 | 2020 | |||||||||
Retail | $ | 1,757 | $ | 1,246 | |||||||
Flow reinsurance | 299 | 861 | |||||||||
Funding agreements1
|
3,226 | 823 | |||||||||
Pension risk transfer | 2,893 | 1,017 | |||||||||
Gross organic inflows | 8,175 | 3,947 | |||||||||
Gross inorganic inflows | — | — | |||||||||
Total gross inflows | 8,175 | 3,947 | |||||||||
Inflows attributable to ACRA noncontrolling interest | (1,470) | — | |||||||||
Net outflows2
|
(3,481) | (2,740) | |||||||||
Net flows | $ | 3,224 | $ | 1,207 | |||||||
Gross organic inflows | $ | 8,175 | $ | 3,947 | |||||||
Organic inflows attributable to ACRA noncontrolling interest | (1,470) | — | |||||||||
Net organic inflows | 6,705 | 3,947 | |||||||||
Net outflows2
|
(3,481) | (2,740) | |||||||||
Net organic flows | $ | 3,224 | $ | 1,207 | |||||||
Net organic growth rate3
|
8.4 | % | 4.0 | % | |||||||
Average net invested assets | $ | 152,947 | $ | 119,344 | |||||||
1 Funding agreements are comprised of funding agreements issued under our FABN and FABR programs, funding agreements issued to the FHLB and long-term repurchase agreements. 2 Net outflows consist of full and partial policyholder withdrawals on deferred annuities, death benefits, pension risk transfer benefit payments, payments on payout annuities and funding agreement maturities net of the ACRA noncontrolling interest. In 2021 we revised the net outflows metric, for all periods presented, to include all outflows while previously this metric excluded inorganic business. 3 Net organic growth rate is calculated as net organic flows divided by average net invested assets, on an annualized basis. In 2021, we revised the net organic growth rate and average net invested assets metrics, for all periods presented, to include all outflows and net invested assets while previously these metrics excluded inorganic business.
|
52
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our organic channels, including retail, flow reinsurance and institutional products, provided gross inflows of $8.2 billion and $3.9 billion for the three months ended March 31, 2021 and 2020, respectively, which were underwritten to attractive, at-or-above target returns despite the historically low interest rate environment. Organic inflows increased $4.2 billion, or 107%, reflecting the strength of our multi-channel distribution platform and our ability to quickly pivot into the most optimal and profitable channels as opportunities arise. Withdrawals on our deferred annuities, maturities of our funding agreements, payments on payout annuities and pension risk benefit payments (collectively, liability outflows), in the aggregate, were $3.5 billion and $2.7 billion for the three months ended March 31, 2021 and 2020, respectively. Net organic growth rate of 8.4% and 4.0% for the three months ended March 31, 2021 and 2020, respectively, increased reflecting the aforementioned strong growth in organic inflows. We believe that our 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, scale and capital discipline to position us for continued growth.
Within our retail channel, we had fixed annuity sales of $1.8 billion and $1.2 billion for the three months ended March 31, 2021 and 2020, respectively. The increase in our retail channel was primarily driven by very strong performance in the bank and broker-dealer channels, and exhibits strong sales execution despite the challenging sales environment. We continued to execute in the retail channel despite industry-wide pressure on sales volumes as the economic impacts of the spread of COVID-19, as well as the mitigation measures undertaken to combat the spread, continue to affect the sales process. Despite the significant headwinds, we have maintained our disciplined approach to pricing, including with respect to targeted underwritten returns. We aim to grow our retail channel by deepening our relationships with our approximately 52 independent marketing organizations (IMO); approximately 61,000 independent agents; and our growing network of 16 banks and 104 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 inflows through our flow reinsurance channel of $299 million and $861 million for the three months ended March 31, 2021 and 2020, respectively. The decrease in our flow reinsurance channel from prior year was driven by maintaining our rate discipline in the lower interest rate environment amid a very competitive market. 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.
Within our institutional channel, we generated inflows of $6.1 billion and $1.8 billion for the three months ended March 31, 2021 and 2020, respectively. The increase in our institutional channel was driven by higher funding agreement inflows as well as higher PRT inflows. We issued funding agreements in the aggregate principal amount of $3.2 billion and $823 million for the three months ended March 31, 2021 and 2020, respectively, which included seven issuances in four different currencies in 2021. Funding agreements are comprised of funding agreements issued under our FABN and FABR programs, funding agreements issued to the FHLB and repurchase agreements with maturities exceeding one year at issuance, with inflows in the aggregate principal amount of $3.2 billion under our FABN program for the three months ended March 31, 2021. During the three months ended March 31, 2021, we closed one PRT transaction and issued annuity contracts in the aggregate principal amount of $2.9 billion, compared to $1.0 billion during the three months ended March 31, 2020. Since entering the PRT channel in 2017 through March 31, 2021, we have closed 25 deals involving more than 290,000 plan participants resulting in the issuance or reinsurance of group annuities of $19.2 billion. We expect to grow our institutional channel by continuing to engage in PRT transactions and opportunistic issuances of funding agreements.
Our inorganic channel has contributed significantly to our growth through both acquisitions and block reinsurance transactions. On June 18, 2020, we entered into an agreement with Jackson, effective June 1, 2020, pursuant to which we agreed to reinsure a block of fixed and fixed indexed annuities on a funds withheld coinsurance basis providing $28.8 billion of gross inflows. Utilizing the strategic benefits of ACRA, approximately 63% of the total capital deployment for the transaction will be funded by third-party investors and approximately 37% will be funded by ALRe. As part of the Jackson reinsurance transaction, ACRA made an equity investment in Jackson Financial Inc. (JFI), an indirect parent of Jackson, which closed on July 17, 2020. On January 28, 2021, Prudential plc announced its intent to reduce its controlling interest in JFI through a direct dividend demerger, which is expected to occur in the second quarter of 2021. We expect that our inorganic channel will continue to be an important source of profitable growth in the future. We believe our internal transactions team, with support from Apollo, has an industry-leading ability to source, underwrite and expeditiously close transactions. With support from Apollo, we are a solutions provider with a proven track record of closing transactions, which we believe makes us the ideal partner to insurance companies seeking to restructure their business.
Executing our growth strategy requires that we have sufficient capital available to deploy. We believe that we have significant capital available to us to support our growth aspirations. As of March 31, 2021, we estimate that we have approximately $8.1 billion in capital available to deploy, consisting of approximately $3.6 billion in excess capital, $2.9 billion in untapped debt capacity (assuming a peer average adjusted debt to capitalization ratio of 25%) and $1.6 billion in available uncalled capital at ACRA, subject, in the case of debt capacity, to favorable market conditions and general availability.
53
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In order to support our growth strategies and capital deployment opportunities, we established ACRA as a long-duration, on-demand capital vehicle. Effective April 1, 2020, ALRe purchased additional shares in ACRA increasing our ownership from 33% to 36.55% of the economic interests, with the remaining 63.45% of the economic interests being owned by ADIP, a series of funds managed by an affiliate of Apollo. ACRA is expected to participate in certain transactions by drawing a portion of the required capital for such transactions from third-party investors equal to ADIP’s proportionate economic interest in ACRA. This shareholder-friendly, strategic capital solution is expected to allow us the flexibility to simultaneously deploy capital across multiple accretive avenues, while maintaining a strong financial position.
Strategic Transaction with Apollo
On February 28, 2020, we closed a transaction with Apollo in which Apollo acquired an incremental stake in us for AOG units valued at $1.1 billion, upon close, and $350 million of cash. Additionally, we converted our Class B common shares to Class A common shares and our Class M common shares to Class A common shares and warrants, eliminating our multi-class share structure. Changes in the value of the AOG units are reflected within the change in fair value of Apollo investment, net of tax line item and may present future volatility in our results of operations due to changes in the valuation of the AOG units. See Note 9 – Related Parties to the condensed consolidated financial statements for further discussion.
Merger with Apollo
On March 8, 2021, we entered into a Merger Agreement, by and among the Company, AGM, HoldCo, AHL Merger Sub, and AGM Merger Sub. The Company and AGM have agreed, subject to the terms and conditions of the Merger Agreement, to effect an all-stock merger transaction to combine our respective businesses by: (1) AGM merging with AGM Merger Sub, with AGM surviving such merger as a direct wholly owned subsidiary of HoldCo, (2) the Company merging with AHL Merger Sub, with the Company surviving such merger as a direct, wholly owned subsidiary of HoldCo, and (3) as of the effective time of the Mergers, changing the name of HoldCo to be Apollo Global Management, Inc. At the effective time of the Mergers, each AHL Class A common share, subject to certain exceptions, will be converted automatically into the right to receive 1.149 shares of HoldCo common stock. The Mergers are expected to close in January 2022 and are subject to shareholder and regulatory approvals, and other customary closing conditions.
Industry Trends and Competition
Market Conditions
During the first quarter of 2021, increased availability of vaccinations coupled with expectations of additional fiscal and monetary stimulus measures drove increases in interest rates in the US for the first time in three quarters. The US 10-year treasury rate rose almost 80 basis points during the quarter, and as inflation concerns began to gradually impact treasury prices, treasury rates experienced even more significant changes in longer-dated maturities. In addition, stock markets continued their strong performance, despite significant market volatility driven by a confluence of factors including increased retail investor trading volumes through internet brokerage platforms, persistent blockchain enthusiasm and proliferating Special Purpose Acquisition Companies (SPAC) issuances. As restrictions related to COVID-19 are lifted across the United States, the impact on consumer confidence and market momentum remains strongly positioned, increasing the prospects for higher interest rates and robust equity markets.
More broad-based participation in credit markets drove spreads to new lows in many sectors. Investment grade credit spreads, for example, tightened almost 10 basis points by mid-February driven by purchasing activity as all-in yields had risen by almost 40 basis points at that time. Speculative grade credit tightened by approximately 25 basis points during the quarter, and credit spreads on CMBS and CLOs remained close to their post financial crisis lows. Nonetheless, sponsorship for almost all sectors remained strong, a situation which becomes even more pronounced as limited supply calendars come into play in the second quarter.
COVID-19 remains the primary focus of most markets, and there are lingering concerns regarding vaccination deployment in large sections of Europe, as well as other developed economies. Global travel and leisure activities will likely remain challenged in the near-term. Central banks and global governments however continue to meet these challenges head on, with US Federal Reserve (Fed) Chairman Jerome Powell committing to remain deliberately patient on policy, even if inflation begins to develop, which is a meaningful change from recent Fed policy positions.
Interest Rate Environment
Despite the increase in rates, it is unlikely that this move represents a sustainable trend. Negative rate government issuance is still widely prevalent globally, and the need for yield has been evidenced by continued buying in spread sectors. A move higher than 2% on the US 10-year would likely be met with another meaningful round of purchase activity, which could then trigger a move back towards lower rates as a more differentiated growth story develops in various markets. Even the significant size of stimulus packages, such as that adopted in the US, will likely not be able to sustain higher rates in the medium-term, until the COVID-19 impact is more fully removed.
54
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In the meantime however, the availability of slightly higher rates is a welcome opportunity and far more attractive than what was available in the fourth quarter for yield-focused buyers. Investment grade credit, still a relevant proxy for risk-asset appetite, has over 30 basis points of room to tighten before it reaches its post-global financial crisis lows. In the current market environment institutional investors continue to be willing to assume a greater degree of risk to achieve a specified level of return, and the market reaction functions observed in the early days of the second quarter suggest that risk appetite can drive investors to re-engage in widening markets at a faster pace than had been observed pre-COVID-19. As such, insurance company balance sheets are well positioned to invest to continue to take advantage of mispriced risk/reward in the short-term. Eventually, global rates will normalize as growth prospects continue to improve, but in the short-term, the focus on COVID-19 is expected to create an effective ceiling through the remainder of the calendar year.
Our investment portfolio consists predominantly of fixed maturity investments. See –Consolidated Investment Portfolio. If prevailing interest rates were to rise, we believe the yield on our new investment purchases may also rise and our investment income from floating rate investments would increase, while the value of our existing investments may decline. If prevailing interest rates were to decline, it is likely that the yield on our new investment purchases may decline and our investment income from floating rate investments would decrease, while the value of our existing investments may increase. Recent trends of decreasing interest rates, as expected, have led to a decrease in our investment income from floating rate investments, an overall decrease in asset yields and an increase in the value of our existing investments, though we observed a slight reversal of this trend during the first quarter of 2021.
We address interest rate risk through managing the duration of the liabilities we source with assets we acquire 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, which was experienced in the prior year. Our investment portfolio includes $29.8 billion of floating rate investments, or 19% of our net invested assets as of March 31, 2021.
If prevailing interest rates were to rise, we believe our products would be more attractive to consumers and our sales would likely increase. If prevailing interest rates were to decline, it is likely that our products would be less attractive to consumers and our sales would likely decrease. In periods of prolonged low interest rates, the net investment 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, 2021, most of our products were deferred annuities with 22% of our FIAs at the minimum guarantees and 37% of our fixed rate annuities at the minimum crediting rates. As of March 31, 2021, 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 I—Item 3. Quantitative and Qualitative Disclosures About Market Risks to this report and Part II—Item 7A. Quantitative and Qualitative Disclosures About Market Risks in our 2020 Annual Report, which includes a discussion regarding interest rate and other significant risks and our strategies for managing these risks.
COVID-19
The spread of COVID-19 has resulted in significant volatility in the financial markets. The extent to which COVID-19 and the resulting impact on economic conditions and the financial markets may impact our business will depend on future developments and represents a material uncertainty to our business.
Risks and Mitigation Measures
The spread of COVID-19 presents three principal risks to our business: 1) business continuity risk; 2) market risk and 3) liquidity risk, including that resulting from policyholder behavior.
Business Continuity Risk. The spread of COVID-19 threatens the health and safety of our most valuable asset, our people. To mitigate the risk that the virus infects members of our workforce, to ensure the continuity of our operations throughout the duration of this pandemic and to ensure uninterrupted servicing of the policyholders who have entrusted us for their retirement needs, during March 2020 we implemented our business continuity plan. Pursuant to that plan, we implemented remote work protocols pursuant to which the significant majority of our employees worked remotely, with only certain operationally essential employees working at our facilities, to the extent lawfully permitted. For the operationally essential employees who continued working at our facilities, we implemented new safety protocols that incorporated recommendations, guidelines and regulations from the Center for Disease Control and other national, state and local health authorities, including mandated temperature screenings upon entering the building; the appropriate practice of social distancing, which includes but is not limited to a reduction in the number of people allowed in conference rooms and limiting elevator car capacity; the requirement to wear face coverings; and limitations on movement in the building, among other requirements designed to reduce the risk of transmission between employees (collectively, Safety Protocols). In addition, we implemented enhanced cleaning protocols, which include increased staff to clean common areas; availability of cleaning supplies, face coverings and hand sanitizer throughout our facilities that are operational; and actively encouraging our employees to adopt enhanced hygiene practices.
55
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
On June 1, 2020, we commenced our repopulation plan and as of October 31, 2020, substantially all of our workforce had returned to the office. Prior to the commencement of our repopulation plan, all employees were required to complete a comprehensive training covering our repopulation plan and our Safety Protocols. Due to worsening conditions in our local communities, on November 10, 2020, we implemented a workplace rotation plan to reduce our office operating capacity in our West Des Moines office to 50% and on December 10, 2020, we reinstituted remote work arrangements at our Bermuda headquarters. On January 11, 2021, the first wave of employees returned to our Bermuda location and on January 19, 2021, our West Des Moines location returned to standard operating capacity. As of April 30, 2021, our Bermuda location had returned to working remotely, whereas our West Des Moines location continued to work at standard operating capacity. We have implemented case investigation and contact tracing procedures to appropriately identify and quarantine those individuals who have been or may have been exposed to the virus. As of April 30, 2021, we had 10 employees who had been certified as contact tracers through Johns Hopkins University. We have been successful in implementing our business continuity and repopulation plans and to date have experienced no material impairment to our business operations. We continue to closely monitor our situation and the recommendations and guidelines issued by national, state and local health authorities.
Market Risk. The effects of the spread of COVID-19 on economic conditions and the financial markets may trigger or increase the market risks to which we are subject, namely interest rate risk, credit risk and public equity risk. The spread of COVID-19 and the Federal Reserve’s responsive measures resulted in abrupt and significant decreases in interest rates and abrupt and significant increases in credit spreads. Changes in interest rates and credit spreads may result in a decrease in the value of our invested assets. To the extent that we needed to sell assets at these decreased values in order to satisfy our obligations, we would realize losses. However, approximately 75% of our deferred annuities have surrender charges, which we believe greatly reduce the likelihood and magnitude of unexpected withdrawals. Further, our PRT and funding agreement obligations are predominantly non-surrenderable. In addition, we mitigate interest rate risk by managing the effective duration of our assets and liabilities. In doing so, we closely monitor and manage our net duration mismatch as well as our cash inflows and outflows. Decreases in interest rates impact the interest income that we receive on our floating rate assets. For the three months ended March 31, 2021, we recognized $69 million less in floating rate income than we recognized for the three months ended March 31, 2020, primarily as a result of the period-over-period declines in interest rates.
Certain companies that issued the securities that we hold in our investment portfolio are more likely to experience financial hardship as a result of the economic effects of COVID-19. We mitigate such risk by actively managing our investment portfolio and attempting to exit or reduce exposures we deem to carry disproportionate risk when compared to their return profile.
We are exposed to public equity risk through the index crediting on our FIA products, our AOG unit holdings and our common stock holdings in OneMain Holdings, Inc. (OneMain). We effectively eliminate the public equity risk arising from the index crediting on our FIA products by hedging the relevant index performance over the crediting period. Though this results in an effective hedge for economic purposes, because the instruments used to hedge the index crediting period are for a shorter term than the FIA contract, the hedge is not deemed effective for accounting purposes and results in the recognition of gains and losses from period to period. The public equity volatility arising from our holdings of AOG units and OneMain stock is unhedged.
Liquidity Risk. In the current market environment, liquidity risk can arise in several areas of our business, including but not limited to asset-liability mismatch and policyholder behavior risk. As noted above, most of our deferred annuities have surrender charges, which reduce the likelihood and magnitude of expected withdrawals, and our PRT and funding agreement obligations are predominantly non-surrenderable.
To be prepared to capitalize on growth opportunities that may arise in the current market environment as well as to manage any near-term liquidity risk, we have strategically increased our available liquidity. As of March 31, 2021, we had approximately $10.4 billion of available liquidity comprised of $6.4 billion of cash and approximately $4.0 billion of undrawn capacity under various committed financing facilities. We have taken measures to increase our financial flexibility, including negotiating new committed lending facilities. We have also entered into several new securities repurchase arrangements with different financial institutions to provide access to additional short-term liquidity, to the extent available. As economic conditions have continued to stabilize, we have been investing our excess liquidity in yield producing assets.
With a record number of individuals finding themselves abruptly out of work and searching for sources of liquidity, we face policyholder behavior risk in the form of increased withdrawal levels and lapse rates. We have been closely monitoring policyholder behavior. As of April 30, 2021, we had noticed no material adverse change in policyholder behavior. We mitigate policyholder behavior risk by monitoring and projecting cash inflows and outflows and by maintaining greater levels of available liquidity.
Emerging Trends
As a result of the spread of COVID-19, the resulting impact on economic conditions and the financial markets and the mitigation efforts we have undertaken in response, we expect to see several trends impacting our future operating results.
First, we have held a greater proportion of our invested assets in cash and other liquid assets which has lowered our net investment earned rates and net investment spread compared to what we would have otherwise experienced pre-COVID-19. While we have continued to invest our excess cash in yield producing assets, we expect that our holdings of cash and other liquid assets may remain slightly elevated in the near-term. We expect that as we deploy these holdings and continue to redeploy the Jackson investment portfolio, we will experience increases in net investment earned rates and net investment spread.
56
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Second, we expect that the current market environment will cause certain issuers of securities held in our investment portfolio to experience financial hardship, which could result in the recognition of increased credit losses. Post adoption of the new accounting standard regarding accounting for current expected credit losses, we have increased our reserve for credit losses, net of noncontrolling interests, by $75 million. We cannot predict the duration or severity of the current economic downturn. However, our ultimate loss experience resulting therefrom could be material and could cause our financial position, results of operations, cash flows and liquidity to differ materially from that presented herein.
Third, we have experienced increased volatility in the valuation of our alternative investments. In light of the current market environment, we may continue to experience such volatility in future periods. Given that approximately 50% of our alternative investments are accounted for on a one to three month lag, our financial results as they relate to the performance of our alternative investments may not be reflective of the economic conditions of a particular reporting period.
Fourth, the substantial decrease in interest rates recently experienced has had a negative impact on adjusted operating income. If the current rates persist for a prolonged period, our adjusted operating income would continue to be adversely affected when compared to pre-COVID-19 levels. Currently, we estimate that a 25 basis point decrease in interest rates that persists for a 12-month period will result in an approximate $35 – $45 million decrease in adjusted operating income.
Fourth, the substantial decrease in interest rates recently experienced has had a negative impact on adjusted operating income. If the current rates persist for a prolonged period, our adjusted operating income would continue to be adversely affected when compared to pre-COVID-19 levels. Currently, we estimate that a 25 basis point decrease in interest rates that persists for a 12-month period will result in an approximate $35 – $45 million decrease in adjusted operating income.
The spread of COVID-19, the resulting impact on economic conditions and the financial markets and the mitigating efforts we have and will undertake may have consequences to our business that are unforeseen at this time. The emerging trends identified above do not purport to be complete and actual experience may differ materially from our current expectations.
Discontinuation of LIBOR
On December 4, 2020, the Intercontinental Exchange Benchmark Administrator (IBA), the party that administers the publication of LIBOR, published a consultation on its intention to cease publication of 1-week and 2-month USD LIBOR settings immediately following the LIBOR publication on December 31, 2021 and the overnight and 1-, 3-, 6- and 12-month USD LIBOR settings immediately following the LIBOR publication on June 30, 2023. The consultation closed on January 25, 2021 and on March 5, 2021, the IBA announced that in the absence of sufficient panel bank support and without the intervention of the UK Financial Conduct Authority (FCA) to compel continued panel bank contribution to LIBOR, it will not be possible for the IBA to publish the relevant LIBOR settings on a representative basis beyond the dates previously specified for such settings. The UK Government had previously announced that it intends to enact legislation to bestow upon the FCA the power to direct a methodology change to enable LIBOR to be published on a synthetic basis after such time that it loses representativeness (Proposed Powers). The FCA advised the IBA that the FCA had no intention of using its Proposed Powers to enable the calculation of a synthetic LIBOR with respect to overnight, 1-week, 2-month and 12-month LIBOR settings and indicated that it would consider the case for using its Proposed Powers in respect of the 1-month, 3-month and 6-month LIBOR settings. Absent use of the FCA’s Proposed Powers with respect to any of the remaining LIBOR settings, LIBOR for substantially all of our contracts with exposure to LIBOR would cease publication after June 30, 2023.
The discontinuation of LIBOR could have a significant impact on the financial markets and represents a material uncertainty to our business. To manage the uncertainty surrounding the discontinuation of LIBOR we have established a LIBOR transition team and a transition plan. We have created an Executive Steering Committee composed of senior executives to coordinate and oversee the execution of our plan. It is difficult to predict the full impact of the transition away from LIBOR on our contracts whose value is tied to LIBOR. The value or profitability of these contracts may be adversely affected.
As of March 31, 2021, we had contracts tied to LIBOR in the notional amounts set forth in the table below:
(In millions) | Total Exposure | Extending Beyond June 30, 2023 | |||||||||
Investments | $ | 29,628 | $ | 23,835 | |||||||
Product Liabilities | 14,949 | 200 | |||||||||
Derivatives Hedging Product Liabilities | 18,602 | 1,303 | |||||||||
Other Derivatives | 1,546 | 1,463 | |||||||||
Other Contracts | 3,213 | 2,363 | |||||||||
Total notional of contracts tied to LIBOR | $ | 67,938 | $ | 29,164 | |||||||
57
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Investments
As of March 31, 2021, our investments tied to LIBOR were in the following asset classes:
(In millions) | Total Exposure | Extending Beyond June 30, 2023 | |||||||||
Multi-lateral Arrangements | |||||||||||
Corporates | $ | 846 | $ | 346 | |||||||
RMBS | 3,736 | 3,293 | |||||||||
CMBS | 419 | 100 | |||||||||
CLO | 14,707 | 14,382 | |||||||||
ABS | 2,933 | 2,787 | |||||||||
Bank Loans | 383 | 283 | |||||||||
Total Multi-lateral Arrangements | 23,024 | 21,191 | |||||||||
Bi-lateral Arrangements | |||||||||||
CML | 6,458 | 2,498 | |||||||||
RML | 146 | 146 | |||||||||
Total Bi-lateral Arrangements | 6,604 | 2,644 | |||||||||
Total investments tied to LIBOR | $ | 29,628 | $ | 23,835 |
Of the total notional value of investment-related contracts tied to LIBOR extending beyond June 30, 2023, $21.2 billion or 88.9% relate to multi-lateral arrangements. These arrangements are typically characterized by a large, diverse set of unrelated holders, the majority or all of whom must consent to amendments to the terms of the underlying investment instrument. Generally, when the amendments concern a material term such as the determination of interest, consent must be unanimous. Given the collective action issues inherent in such structures, such consent is typically impracticable and beyond our control. The existence and character of fallback provisions affected by the discontinuation of LIBOR vary widely from instrument to instrument. Many of our legacy contracts may not contemplate the permanent discontinuation of LIBOR and upon LIBOR’s discontinuation may result in the conversion of the instrument from a floating- to a fixed-rate instrument or may involve a significant degree of uncertainty as to the method of determining interest. To the extent that such legacy arrangements do not contemplate the permanent discontinuation of LIBOR, we would most likely look to some broad-based solution, such as the recently adopted New York law amendment, to rectify such deficiency. To the extent that such a solution is ineffective, for example as a result of being ruled unconstitutional, we would likely be required to undertake a re-evaluation of affected investments, which might result in the disposition of individual positions. To the extent that individual positions are retained, we may incur adverse financial consequences, including any mark-to-market impacts resulting from those investments that convert from a floating to a fixed rate. To the extent that the fallback rates ultimately used to determine interest payable on structured securities do not align with the fallback rates used to determine interest payable on the underlying assets, economic losses could be sustained on the overall structure.
The remaining notional value of investment-related contracts tied to LIBOR extending beyond June 30, 2023 of $2.6 billion or 11.1% relates to bi-lateral arrangements that are capable of being amended through negotiation with the relevant counterparty.
As our investment manager, Apollo maintains the documentation associated with the assets in our investment portfolio. We are therefore dependent upon Apollo for the successful completion of our LIBOR transition efforts relating to our investment portfolio. See Part I–Item 1A. Risk Factors–Uncertainty relating to the LIBOR Calculation process and the phasing out of LIBOR after a future date may adversely affect the value of our investment portfolio, our ability to achieve our hedging objectives and our ability to issue funding agreements bearing a floating rate of interest included in our 2020 Annual Report. Apollo’s failure to fulfill its responsibilities could have an adverse impact on our results of operations and ability to timely report accurate financial information.
Product Liabilities and Associated Hedging Instruments
As of March 31, 2021, we had product liabilities with a notional value of approximately $14.9 billion for which LIBOR is a component in the determination of interest credited, of which we expect $200 million to have a current crediting term that extends beyond June 30, 2023. For purposes of evaluating our exposure to LIBOR, we only consider our exposure to the current crediting term, which is typically one to two years. Upon renewal of the crediting term, we have the ability to migrate policyholders into new strategies not involving LIBOR. Generally, there are two categories of indices that use LIBOR in the determination of interest credited, “excess return” indices (return of index in excess of LIBOR) and indices that use LIBOR as a means to control volatility. The indices to which these products are tied are primarily proprietary indices for which key inputs are determined by the index sponsor. The index sponsor generally has the right to unilaterally change the reference rate upon the discontinuation of LIBOR. As a result, we do not anticipate any administrative concerns in connection with the transition from LIBOR to a replacement rate with respect to these products.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As of March 31, 2021, we held derivatives with a notional value of approximately $18.6 billion to hedge our exposure to these product liabilities, of which we expect $1.3 billion to extend beyond June 30, 2023. Included within this category are $3.9 billion of Eurodollar futures, of which we expect $1.1 billion to extend beyond June 30, 2023. Exchange traded products, such as Eurodollar futures, will follow the CME Group Inc.’s approach regarding the discontinuation of LIBOR. The remaining derivatives in this category are primarily purchased to hedge the current crediting period. We will be required to purchase new derivatives in future periods to hedge future crediting periods associated with the related existing product liabilities, which will expose us to potential basis mismatch to the extent that the reference rate for the product liability is not the same as the reference rate for the derivative instrument. These derivatives are entered into pursuant to an ISDA Master Agreement and will transition to SOFR in accordance with the process described below under the caption Other Derivatives.
Other Derivatives
Our other derivative contracts tied to LIBOR are generally entered into pursuant to an ISDA Master Agreement. ISDA published the ISDA 2020 IBOR Fallbacks Protocol (Protocol) and released Supplement 70 to the 2006 ISDA Definitions (Supplement) on October 23, 2020. The Protocol and Supplement include appropriate fallbacks that contemplate the permanent discontinuation of LIBOR. In January 2021, we joined industry peers by adhering to the Protocol and terms of the Supplement, each of which became effective on January 25, 2021. With respect to future transactions, we anticipate adoption of the 2021 ISDA Interest Rate Definitions. To the extent that the fallbacks incorporated into our other derivative contracts result in the use of a replacement rate that differs from that employed in the contract being hedged, we may experience basis mismatch. The Protocol contains templates for possible bilateral amendments to legacy contracts for situations in which the fallbacks contemplated by the Protocol give rise to potential basis risk. We intend to evaluate whether and the extent to which we are subject to such basis risk, as well as the possibility of using the available templates to mitigate such risk.
In addition to the exposure set forth in the table above, since March 31, 2021, we have added an additional $575 million of derivatives tied to LIBOR, all of which are expected to extend beyond June 30, 2023. Given our adherence to the Protocol and terms of the Supplement, all of these derivatives incorporate provisions that contemplate the permanent discontinuation of LIBOR.
Other Contracts and Other Sources of Exposure
The “Other Contracts” category is comprised of our credit agreement, floating rate funding agreements and fixed-to-float Series A preference shares, all of which contemplate the permanent discontinuation of LIBOR, are tied to LIBOR in a manner that is not expected to have a significant impact upon LIBOR’s discontinuation or have fallback provisions in place that provide for the determination of interest after the discontinuation of LIBOR. In addition to the other contracts for which we have quantified our exposure, we are party to contracts that are tied to LIBOR based upon the occurrence of some remote contingency, such as the accrual of penalty interest, or for which LIBOR is otherwise not a material term of the contract. These contracts do not lend themselves to quantification and are lower in priority in our LIBOR remediation efforts. Finally, LIBOR is used as a component in our internal derivative valuation models. We have begun to transition the benchmark yield curve in such models from LIBOR to the Secured Overnight Financing Rate and we expect to complete the transition prior to the discontinuation of LIBOR. Such transition may affect the valuation of our derivative instruments.
We can provide no assurance that we will be successful at fully implementing our plan prior to the discontinuation of LIBOR. Completion of certain components of our plan are contingent upon market developments and are therefore not fully within our control. To the extent management effort and attention is focused on other matters, such as responding to the risks posed by COVID-19, the timely completion of our plan could become more difficult. Failure to fully implement our plan prior to the discontinuation of LIBOR may have a material adverse effect on our business, financial position, results of operations and cash flows and on our ability to timely report accurate financial information.
Demographics
Over the next four decades, the retirement-age population is expected to experience unprecedented growth. Technological advances and improvements in healthcare are projected to continue to contribute to increasing average life expectancy, and aging individuals must be prepared to fund retirement periods that will last longer than ever before. Further, many working households in the United States do not have adequate retirement savings. As a tool for addressing the unmet need for retirement planning, we believe that many Americans have begun to look to tax-efficient savings products with low-risk or guaranteed return features and potential equity market upside. 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.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
According to LIMRA, total fixed annuity market sales in the United States were $120.4 billion for the year ended December 31, 2020, a 13.9% decrease from the same time period in 2019 as interest rates pulled down crediting rates in all fixed product lines and the challenging macroeconomic backdrop amidst the COVID-19 crisis. In the total fixed annuity market, for the year ended December 31, 2020 (the most recent period for which specific market share data is available), we were the 4th largest company based on sales of $7.7 billion, translating to a 6.4% market share. For the year ended December 31, 2019, our market share was 4.8% with sales of $6.8 billion.
According to LIMRA, total fixed-indexed annuity market sales in the United States were $55.5 billion for the year ended December 31, 2020, a 24.5% decrease from the same time period in 2019. For the year ended December 31, 2020 (the most recent period for which specific market share data is available), we were the largest provider of FIAs based on sales of $5.8 billion, and our market share for the same period was 10.5%. For the year ended December 31, 2019, we were the 2nd largest provider of FIAs based on sales of $6.1 billion, translating to an 8.3% market share.
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, changes in the credit loss allowance, 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). On 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.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
•Bargain Purchase Gain—Consists of adjustments to net income (loss) available to AHL common shareholders as they are not related to our underlying profitability drivers.
•Income Tax (Expense) Benefit – Non-operating—Consists of the income tax effect of non-operating adjustments and is computed by applying the appropriate jurisdiction’s tax rate to the non-operating adjustments that are subject to income tax.
We consider these non-operating adjustments to be meaningful adjustments to net income (loss) available to AHL 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.
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 AHL common shareholders’ equity are significant to gaining an understanding of our overall financial performance.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 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 were convertible 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 payment of the conversion price. In calculating Class A diluted earnings per share on a GAAP basis, we are required to apply sequencing rules to determine the dilutive impacts, if any, of our Class B common shares, Class M common shares and any other stock-based awards. To the extent our Class B common shares, Class M common shares and/or any other stock-based awards 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 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 measure 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.
Net investment earned rate is a non-GAAP measure we use to evaluate the performance of our net invested assets that does not correspond to GAAP net investment income. Net investment earned rate is computed as the income from our net invested assets divided by the average net invested assets, excluding the impacts of our investment in Apollo, for the relevant period. To enhance the ability to analyze these measures across periods, interim periods are annualized. The adjustments to net investment income to arrive at our net investment earned rate add (a) alternative investment gains and losses, (b) gains and losses related to trading securities for CLOs, (c) net VIE impacts (revenues, expenses and noncontrolling interest), (d) forward points gains and losses on foreign exchange derivative hedges and (e) the change in fair value of reinsurance 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.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cost of crediting includes the costs for both deferred annuities and institutional products. Cost of crediting on deferred annuities is the interest credited to the policyholders on our fixed strategies as well as the option costs on the 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 (i) PRT costs, including interest credited, benefit payments and other reserve changes, net of premiums received when issued, and (ii) funding agreement costs, including the interest payments and other reserve changes. Cost of crediting is computed as the cost of crediting for deferred annuities and institutional products divided by the average net invested assets, excluding the investment in Apollo, for the relevant periods. Cost of crediting on deferred annuities is computed as the net interest credited on fixed strategies and option costs on 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.
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, off