10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 10, 2022
UNITED STATES SECURITIES AND EXCHANGE COMMISSION | ||||||||||||||||||||||||||||||||
Washington, D.C. 20549 | ||||||||||||||||||||||||||||||||
FORM 10-Q
For the quarterly period ended March 31, 2022
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, a smaller reporting company or an emerging growth company. See the 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, 2022, 203,805,432 of our Class A common shares were outstanding, all of which are held by Apollo Global Management, Inc.
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, 2021 (2021 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 certain limitations on our ability to terminate such arrangements;
•Apollo’s dependence on key executives and inability to attract qualified personnel;
•the failure to realize the expected benefits from our 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) or otherwise;
•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 Holding Ltd. (together with its subsidiaries, ACRA) capital raise or future ACRA capital raises;
3
•the failure of third-party ACRA investors to fund their capital commitment obligations; and
•other risks and factors listed in Part II–Item 1A. Risk Factors included in this report, Part I—Item 1A. Risk Factors included in our 2021 Annual Report and those discussed elsewhere in this report and in our 2021 Annual Report.
We caution you that the important factors referenced above may not be exhaustive. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect or anticipate. In light of these risks, you should not place undue reliance upon any forward-looking statements contained in this report. 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 | |||||||
AAM | Apollo Asset Management, Inc., formerly known as Apollo Global Management, Inc. | |||||||
AARe | Athene Annuity Re Ltd., a Bermuda reinsurance subsidiary | |||||||
ACRA | Athene Co-Invest Reinsurance Affiliate Holding Ltd., together with its subsidiaries | |||||||
ACRA HoldCo | Athene Co-Invest Reinsurance Affiliate Holding Ltd. | |||||||
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 (other than us or our subsidiaries) | |||||||
Apollo Group | (1) AGM and AGM’s subsidiaries, including AAM, (2) any investment fund or other collective investment vehicle whose general partner or managing member is owned, directly or indirectly, by clause (1), (3) BRH Holdings GP, Ltd. and each of its shareholders, (4) any executive officer or employee of AGM or AGM’s subsidiaries, and (5) any affiliate of a person described in clauses (1), (2), (3) or (4) above; provided none of AHL or its subsidiaries (other than ACRA HoldCo and ACRA HoldCo’s subsidiaries) will be deemed to be a member of the Apollo Group |
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AUSA | Athene USA Corporation | |||||||
Athora | Athora Holding Ltd. | |||||||
BMA | Bermuda Monetary Authority | |||||||
ISG | Apollo Insurance Solutions Group LP | |||||||
Jackson | Jackson Financial, Inc., together with its subsidiaries | |||||||
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 | |||||||
Venerable | Venerable Holdings, Inc., together with its subsidiaries | |||||||
Wheels/Donlen | Wheels, Inc. (Wheels), merged with Donlen LLC (Donlen) |
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 | |||||||
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. | |||||||
Bermuda RBC | The risk-based capital ratio of our non-US reinsurance subsidiaries by applying NAIC risk-based capital factors to the statutory financial statements 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. | |||||||
Block reinsurance | A transaction in which the ceding company cedes all or a portion of a block of previously issued annuity contracts through a reinsurance agreement | |||||||
BSCR | Bermuda Solvency Capital Requirement | |||||||
CAL | Company action level risk-based capital as defined by the model created by the National Association of Insurance Commissioners | |||||||
CLO | Collateralized loan obligation | |||||||
CMBS | Commercial mortgage-backed securities | |||||||
CML | Commercial mortgage loans | |||||||
Cost of crediting | The interest credited to the policyholders on our fixed annuities, including, with respect to our fixed indexed annuities, option costs, as well as institutional costs related to institutional products, presented on an annualized basis for interim periods | |||||||
Cost of funds | Cost of funds includes liability costs related to cost of crediting on both deferred annuities and institutional products, as well as other liability costs. Cost of funds is computed as the total liability costs divided by the average net invested assets for the relevant period. Presented on an annualized basis for interim periods. | |||||||
DAC | Deferred acquisition costs | |||||||
Deferred annuities | Fixed indexed annuities, annual reset annuities, multi-year guaranteed annuities and registered index-linked annuities | |||||||
DSI | Deferred sales inducement | |||||||
Excess capital | Capital in excess of the level management believes is needed to support our current operating strategy | |||||||
FIA | Fixed indexed annuity, which is an insurance contract that earns interest at a crediting rate based on a specified index on a tax-deferred basis | |||||||
Fixed annuities | FIAs together with fixed rate annuities | |||||||
Fixed rate annuity | An insurance contract that offers tax-deferred growth and the opportunity to produce a guaranteed stream of retirement income for the lifetime of its policyholder | |||||||
Flow reinsurance | A transaction in which the ceding company cedes a portion of newly issued policies to the reinsurer | |||||||
GAAP | Accounting principles generally accepted in the United States of America | |||||||
GLWB | Guaranteed lifetime withdrawal benefit | |||||||
GMDB | Guaranteed minimum death benefit | |||||||
Gross invested assets | The sum of (a) total investments on the consolidated balance sheet with available-for-sale securities at amortized cost, excluding derivatives, (b) cash and cash equivalents and restricted cash, (c) investments in related parties, (d) accrued investment income, (e) consolidated variable interest entities’ assets, liabilities and noncontrolling interest and (f) policy loans ceded (which offset the direct policy loans in total investments). Gross invested assets includes investments supporting assumed funds withheld and modco agreements and excludes assets associated with funds withheld liabilities related to business exited through reinsurance agreements and derivative collateral (offsetting the related cash positions). Gross invested assets includes the entire investment balance attributable to ACRA as ACRA is 100% consolidated | |||||||
IMA | Investment management agreement |
5
Term or Acronym | Definition | |||||||
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 group annuity benefit payments | |||||||
MCR | Minimum capital requirements | |||||||
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 (loss) 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 | |||||||
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
Successor | Predecessor | |||||||||||||
(In millions) | March 31, 2022 | December 31, 2021 | ||||||||||||
Assets | ||||||||||||||
Investments | ||||||||||||||
Available-for-sale securities, at fair value (amortized cost: 2022 – $ |
$ | $ | ||||||||||||
Trading securities, at fair value | ||||||||||||||
Equity securities (portion at fair value: 2022 – $ |
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Mortgage loans (allowance for credit losses: 2021 – $ |
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Investment funds (portion at fair value: 2022 – $ |
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Policy loans | ||||||||||||||
Funds withheld at interest (portion at fair value: 2022 – $( |
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Derivative assets | ||||||||||||||
Short-term investments (portion at fair value: 2022 – $ |
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Other investments (portion at fair value: 2022 – $ |
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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: 2022 – $ |
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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: 2022 – $ |
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Funds withheld at interest (portion at fair value: 2022 – $( |
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Short-term investments, at fair value | ||||||||||||||
Other investments | ||||||||||||||
Accrued investment income (related party: 2022 – $ |
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Reinsurance recoverable (portion at fair value: 2022 – $ |
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Deferred acquisition costs, deferred sales inducements and value of business acquired | ||||||||||||||
Goodwill | ||||||||||||||
Other assets (related party: 2022 – $ |
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Assets of consolidated variable interest entities | ||||||||||||||
Investments | ||||||||||||||
Mortgage loans (related party: 2022 – $ |
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Investment funds (related party: 2022 – $ |
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Other investments, at fair value | ||||||||||||||
Cash and cash equivalents | ||||||||||||||
Other assets | ||||||||||||||
Total assets | $ | $ | ||||||||||||
(Continued)
See accompanying notes to the unaudited condensed consolidated financial statements
8
Successor | Predecessor | |||||||||||||
(In millions, except per share data) | March 31, 2022 | December 31, 2021 | ||||||||||||
Liabilities and Equity | ||||||||||||||
Liabilities | ||||||||||||||
Interest sensitive contract liabilities (related party: 2022 – $ |
$ | $ | ||||||||||||
Future policy benefits (related party: 2022 – $ |
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Long-term debt | ||||||||||||||
Derivative liabilities | ||||||||||||||
Payables for collateral on derivatives and securities to repurchase | ||||||||||||||
Other liabilities (related party: 2022 – $ |
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Liabilities of consolidated variable interest entities | ||||||||||||||
Debt (portion at fair value: 2022 – $ |
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Other liabilities | ||||||||||||||
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 deficit) | ( |
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Accumulated other comprehensive income (loss) (related party: 2022 – $( |
( |
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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)
Successor | Predecessor | |||||||||||||
(In millions) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | ||||||||||||
Revenues | ||||||||||||||
Premiums (related party of $ |
$ | $ | ||||||||||||
Product charges (related party of $ |
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Net investment income (related party investment income of $ |
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Investment related gains (losses) (related party of $( |
( |
( |
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Other revenues | ( |
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Revenues of consolidated variable interest entities | ||||||||||||||
Net investment income | ||||||||||||||
Investment related gains (losses) | ( |
( |
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Total revenues | ( |
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Benefits and expenses | ||||||||||||||
Interest sensitive contract benefits (related party of $( |
( |
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Amortization of deferred sales inducements | ||||||||||||||
Future policy and other policy benefits (related party of $ |
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Amortization of deferred acquisition costs and value of business acquired | ||||||||||||||
Policy and other operating expenses (related party of $ |
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Total benefits and expenses | ||||||||||||||
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 shareholder | $ | ( |
$ | |||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements
10
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
Successor | Predecessor | |||||||||||||
(In millions) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | ||||||||||||
Net income (loss) | $ | ( |
$ | |||||||||||
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 | $ | ( |
$ | ( |
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See accompanying notes to the unaudited condensed consolidated financial statements
11
Successor | |||||||||||||||||||||||||||||||||||||||||||||||
Three months ended | |||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | Preferred stock | Common stock | Additional paid-in capital | Retained earnings (accumulated deficit) | Accumulated other comprehensive income (loss) | Total Athene Holding Ltd. shareholders’ equity | Noncontrolling interests | Total equity | |||||||||||||||||||||||||||||||||||||||
Balance as of January 1, 2022 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | ( |
— | ( |
( |
( |
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Other comprehensive loss | — | — | — | — | ( |
( |
( |
( |
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Stock-based compensation allocation from parent | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends | — | — | — | ( |
— | ( |
— | ( |
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Common stock dividends | — | — | — | ( |
— | ( |
— | ( |
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Distributions to parent | — | — | ( |
( |
— | ( |
— | ( |
|||||||||||||||||||||||||||||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Consolidation of variable interest entities | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Other changes in equity of noncontrolling interests | — | — | — | — | — | — | ( |
( |
|||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2022 | $ | $ | $ | $ | ( |
$ | ( |
$ | $ | $ | |||||||||||||||||||||||||||||||||||||
Predecessor | |||||||||||||||||||||||||||||||||||||||||||||||
Three months ended | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | ( |
||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | ( |
( |
( |
( |
|||||||||||||||||||||||||||||||||||||||
Issuance of common shares, net of expenses | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Retirement or repurchase of shares | — | — | ( |
— | ( |
— | ( |
||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends | — | — | — | ( |
— | ( |
— | ( |
|||||||||||||||||||||||||||||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Consolidation of variable interest entities | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements
12
Successor | Predecessor | |||||||||||||
(In millions) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | ||||||||||||
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 | ||||||||||||||
Net amortization (accretion) of net investment premiums, discounts and other | ( |
|||||||||||||
Net investment (income) loss (related party: 2022 – $( |
( |
( |
||||||||||||
Net recognized (gains) losses on investments and derivatives (related party: 2022 – $ |
( |
|||||||||||||
Policy acquisition costs deferred | ( |
( |
||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||
Accrued investment income (related party: 2022 – $ |
( |
|||||||||||||
Interest sensitive contract liabilities (related party: 2022 – $( |
( |
( |
||||||||||||
Future policy benefits and reinsurance recoverable (related party: 2022 – $ |
( |
|||||||||||||
Funds withheld assets (related party: 2022 – $ |
||||||||||||||
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: 2022 – $ |
||||||||||||||
Trading securities (related party: 2022 – $ |
||||||||||||||
Equity securities | ||||||||||||||
Mortgage loans (related party: 2022 – $ |
||||||||||||||
Investment funds (related party: 2022 – $ |
||||||||||||||
Derivative instruments and other invested assets (related party: 2022 – $ |
||||||||||||||
Short-term investments (related party: 2022 – $ |
||||||||||||||
Purchases of: | ||||||||||||||
Available-for-sale securities (related party: 2022 – $( |
( |
( |
||||||||||||
Trading securities (related party: 2022 – $( |
( |
( |
||||||||||||
Equity securities (related party: 2022 – $( |
( |
( |
||||||||||||
Mortgage loans (related party: 2022 – $( |
( |
( |
||||||||||||
Investment funds (related party: 2022 – $( |
( |
( |
||||||||||||
Derivative instruments and other invested assets (related party: 2022 – $( |
( |
( |
||||||||||||
Short-term investments (related party: 2022 – $( |
( |
( |
||||||||||||
Consolidation of new variable interest entities | ||||||||||||||
Other investing activities, net | ( |
|||||||||||||
Net cash used in investing activities | ( |
( |
||||||||||||
(Continued) | ||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements |
13
Successor | Predecessor | |||||||||||||
(In millions) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | ||||||||||||
Cash flows from financing activities | ||||||||||||||
Issuance of common stock | $ | $ | ||||||||||||
Deposits on investment-type policies and contracts (related party: 2022 – $ |
||||||||||||||
Withdrawals on investment-type policies and contracts (related party: 2022 – $( |
( |
( |
||||||||||||
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 | ( |
( |
||||||||||||
Common 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 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: 2022 – $ |
$ | $ | ||||||||||||
Withdrawals on investment-type policies and contracts through reinsurance agreements (related party: 2022 – $ |
||||||||||||||
Investments received from settlements on reinsurance agreements | ||||||||||||||
Investments received from pension group annuity premiums | ||||||||||||||
Assets contributed to consolidated VIEs | ||||||||||||||
Distributions to parent | ||||||||||||||
(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 5 – 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.
Merger – On January 1, 2022, we completed our merger with Apollo Global Management, Inc. (AGM, and together with its subsidiaries other than us or our subsidiaries, Apollo) and are now a direct wholly owned subsidiary of AGM. We have elected pushdown accounting in which we use AGM’s basis of accounting, which reflects the fair market value of our assets and liabilities at the time of the merger, unless otherwise prescribed by GAAP. Our condensed consolidated financial statements are presented as Predecessor for the periods prior to the merger and Successor for subsequent periods. We, along with certain of our non-US subsidiaries, are Bermuda exempted companies that have historically not been subject to US corporate income taxes on earnings. Due to the merger, our non-US earnings will generally be subject to US corporate income taxes. See Note 2 – Business Combination for further information on the merger.
Segments—We operate our core business strategies out of one reportable segment. As a wholly owned subsidiary of AGM, we no longer report certain other operations in a corporate and other segment.
Significant Accounting Policies
Mortgage loans—Effective January 1, 2022, we elected the fair value option on our mortgage loan portfolio. Interest income is accrued on the principal amount of the loan based on its contractual interest rate. We accrue interest on loans until it is probable we will not receive interest, or the loan is 90 days past due unless guaranteed by US government-sponsored agencies. Interest income and prepayment fees are reported in net investment income on the condensed consolidated statements of income (loss). Changes in the fair value of the mortgage loan portfolio are reported in investment related gains (losses) on the condensed consolidated statements of income (loss).
Derivative Instruments
Embedded Derivatives – We issue and reinsure products, primarily indexed annuity products, or purchase investments that contain embedded derivatives. If we determine the embedded derivative has economic characteristics not clearly and closely related to the economic characteristics of the host contract, and a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host contract and accounted for separately, unless the fair value option is elected on the host contract. Under the fair value option, bifurcation of the embedded derivative is not necessary as the entire contract is carried at fair value with all related gains and losses recognized in investment related gains (losses) on the condensed consolidated statements of income (loss). Embedded derivatives are carried on the condensed consolidated balance sheets at fair value in the same line item as the host contract.
15
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Fixed indexed annuity, index-linked variable annuity and indexed universal life insurance contracts allow the policyholder to elect a fixed interest rate return or an equity market component for which interest credited is based on the performance of certain stock market indices. The equity market option is an embedded derivative. The benefit reserve is equal to the sum of the fair value of the embedded derivative and the host (or guaranteed) component of the contracts. The fair value of the embedded derivatives represents the present value of cash flows attributable to the indexed strategies. The embedded derivative cash flows are based on assumptions for future policy growth, which include assumptions for expected index credits on the next policy anniversary date, future equity option costs, volatility, interest rates and policyholder behavior assumptions including lapses and the use of benefit riders. The embedded derivative cash flows are discounted using a rate that reflects our own credit rating. The host contract is established at contract inception as the initial account value less the initial fair value of the embedded derivative and accreted over the policy’s life. Contracts acquired through a business combination which contain an embedded derivative are re-bifurcated as of the acquisition date. Changes in the fair value of embedded derivatives associated with fixed indexed annuities, index-linked variable annuities and indexed universal life insurance contracts are included in interest sensitive contract benefits on the condensed consolidated statements of income (loss).
Additionally, reinsurance agreements written on a funds withheld or modco basis contain embedded derivatives. We have determined that the right to receive or obligation to pay the total return on the assets supporting the funds withheld at interest or funds withheld liability, respectively, represents a total return swap with a floating rate leg. The fair value of embedded derivatives on funds withheld and modco agreements is computed as the unrealized gain (loss) on the underlying assets and is included within funds withheld at interest and funds withheld liability on the condensed consolidated balance sheets for assumed and ceded agreements, respectively. The change in the fair value of the embedded derivatives is recorded in investment related gains (losses) on the condensed consolidated statements of income (loss). Assumed and ceded earnings from funds withheld at interest, funds withheld liability and changes in the fair value of embedded derivatives are reported in operating activities on the condensed consolidated statements of cash flows. Contributions to and withdrawals from funds withheld at interest and funds withheld liability are reported in operating activities on the condensed consolidated statements of cash flows.
Variable Interest Entities—An entity that does not have sufficient equity to finance its activities without additional financial support, or in which the equity investors, as a group, do not have the characteristics typically afforded to common shareholders is a VIE. The determination as to whether an entity qualifies as a VIE depends on the facts and circumstances surrounding each entity and may require significant judgment. Our investment funds typically qualify as VIEs and are evaluated for consolidation under the VIE model.
Deferred Acquisition Costs, Deferred Sales Inducements and Value of Business Acquired
Deferred Acquisition Costs and Deferred Sales Inducements – Costs related directly to the successful acquisition of new, or renewal of, insurance or investment contracts are deferred to the extent they are recoverable from future premiums or gross profits. These costs consist of commissions and policy issuance costs, as well as sales inducements credited to policyholder account balances, and are included in deferred acquisition costs (DAC), deferred sales inducements (DSI) and value of business acquired (VOBA) on the condensed consolidated balance sheets. We perform periodic tests, including at issuance, to determine if the deferred costs are recoverable. If we determine that the deferred costs are not recoverable, we record a cumulative charge to the current period.
16
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Value of Business Acquired – We establish VOBA for blocks of insurance contracts acquired through the acquisition of insurance entities and through application of pushdown accounting. We record the fair value of the liabilities assumed in two components: reserves and VOBA. Reserves are established using our best estimate assumptions consistent with our policies for future policy benefits and interest sensitive contract liabilities. VOBA is the difference between the fair value of the liabilities and the reserves. VOBA can be either positive or negative. Any negative VOBA is recorded to the same financial statement line on the condensed consolidated balance sheets as the associated reserves. Positive VOBA is recorded in deferred acquisition costs, deferred sales inducements and value of business acquired on the condensed consolidated balance sheets. We perform periodic tests to determine if the VOBA remains recoverable. If we determine that VOBA is not recoverable, we record a cumulative charge to the current period.
Recognition of Revenues and Related Expenses—Revenues for universal life-type policies and investment contracts, including surrender and market value adjustments, costs of insurance, policy administration, GMDB, GLWB and no-lapse guarantee charges, are earned when assessed against policyholder account balances during the period. Interest credited to policyholder account balances and the change in fair value of embedded derivatives within fixed indexed annuity contracts is included in interest sensitive contract benefits on the condensed consolidated statements of income (loss).
Premiums for long-duration contracts, including products with fixed and guaranteed premiums and benefits, are recognized as revenue when due from policyholders. When premiums are due over a significantly shorter period than the period over which benefits are provided, such as immediate annuities with life contingencies (which includes pension group annuities), a deferred profit liability is established equal to the excess of the gross premium over the net premium. The deferred profit liability is recognized in future policy benefits on the condensed consolidated balance sheets and amortized into income in relation to applicable policyholder liabilities through future policy and other policy benefits on the condensed consolidated statements of income (loss).
All insurance related revenue is reported net of reinsurance ceded.
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 GLWB and 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 condensed consolidated financial statements.
17
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
2. Business Combination
At the closing of the merger with AGM, each issued and outstanding AHL Class A common share (other than shares held by Apollo, the Apollo Operating Group (AOG) or the respective direct or indirect wholly owned subsidiaries of Athene or the AOG) was converted automatically into 1.149 shares of AGM common shares and any cash paid in lieu of fractional AGM common shares. In connection with the merger, AGM issued to AHL Class A common shareholders 158.2 million AGM common shares in exchange for 137.6 million AHL Class A common shares that were issued and outstanding as of the acquisition date, exclusive of the 54.6 million shares previously held by Apollo immediately before the acquisition date.
The consideration was calculated based on historical AGM’s December 31, 2021 closing share price multiplied by the AGM common shares issued in the share exchange, as well as the fair value of stock-based compensation awards replaced, fair value of warrants converted to AGM common shares and other equity consideration, and effective settlement of pre-existing relationships and other consideration.
The following represents the calculation of consideration:
(In millions, except exchange ratio and share price data) | Consideration | ||||
AHL common shares purchased | |||||
Exchange ratio | |||||
Shares of common stock issued in exchange | |||||
AGM Class A shares closing price | $ | ||||
Total merger consideration at closing | $ | ||||
Fair value of estimated RSUs, options and warrants assumed and other equity consideration | |||||
Effective settlement of pre-existing relationships | |||||
Total merger consideration | |||||
Fair value of AHL common shares previously held by Apollo and other adjustments | |||||
Total AHL equity value held by AGM | |||||
Fair value of preferred stock | |||||
Noncontrolling interest | |||||
Total AHL equity value | $ |
18
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following represents the calculation of goodwill and fair value amounts recognized:
(In millions) | Fair value and goodwill calculation | ||||
Merger consideration | $ | ||||
Fair value of AHL common shares previously held by Apollo and other adjustments | |||||
Total AHL equity value held by AGM | |||||
Assets | |||||
Investments | $ | ||||
Cash and cash equivalents | |||||
Restricted cash | |||||
Investment in related parties | |||||
Reinsurance recoverable | |||||
VOBA | |||||
Other assets | |||||
Assets of consolidated variable interest entities | |||||
Estimated fair value of total assets acquired by AGM | |||||
Liabilities | |||||
Interest sensitive contract liabilities | |||||
Future policy benefits | |||||
Long-term debt | |||||
Payables for collateral on derivatives and securities to repurchase | |||||
Other liabilities | |||||
Liabilities of consolidated variable interest entities | |||||
Estimated fair value of total liabilities assumed by AGM | |||||
Identifiable net assets | |||||
Less: Fair value of preferred stock | |||||
Less: Fair value of noncontrolling interests | |||||
Estimated fair value of net assets acquired by AGM, excluding goodwill | |||||
Goodwill attributable to AHL | $ |
Included within the above are provisional amounts for (1) VOBA, (2) interest sensitive contract liabilities, (3) future policy benefits, and (4) other assets and other liabilities for the portion of our net assets AGM acquired relating to other identifiable intangible assets and deferred taxes, based on the availability of data as of the date the financial statements were available to be issued. Any adjustment to provisional amounts will be made prospectively as data becomes available. The income effects from changes to provisional amounts will be recorded in the period the adjustment is made, as if the adjustment had been recorded on the merger date. We expect to finalize pushdown accounting as soon as practicable but no later than one year from the merger date.
As part of pushdown accounting, we recorded the calculated goodwill based on the amount that our AHL equity value to be held by AGM exceeded the fair value of identifiable net assets less the amounts attributable to fair values of preferred stock and noncontrolling interests. Goodwill is primarily attributable to the scale, skill sets, operations, and synergies that can be achieved subsequent to the merger. The goodwill recorded is not expected to be deductible for tax purposes. We incurred transaction costs of $70 million associated with the merger which were included in policy and other operating expenses on the consolidated statements of income for the year ended December 31, 2021.
We also recorded VOBA and other identifiable intangible assets. Other identifiable intangible assets are included in other assets on the condensed consolidated balance sheets, as follows:
Distribution channels | These assets are valued using the excess earnings method, which derives value based on the present value of the cash flow attributable to the distribution channels, less returns for contributory assets. | |||||||
Trade name | This represents the Athene trade name and was valued using the relief-from-royalty method considering publicly available third-party trade name royalty rates as well as expected premiums generated by the use of the trade name over its anticipated life. | |||||||
Insurance licenses | Licenses are protected through registration and were valued using the market approach based on third-party market transactions from which the prices paid for state insurance licenses could be derived. |
19
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The fair value and weighted average estimated useful life of identifiable intangible assets consists of the following:
Fair value
(in millions)
|
Weighted average useful life
(in years)
|
||||||||||
VOBA | $ | ||||||||||
Distribution channels | |||||||||||
Trade name | |||||||||||
Insurance licenses | Indefinite | ||||||||||
Total | $ |
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:
Successor | |||||||||||||||||||||||||||||
March 31, 2022 | |||||||||||||||||||||||||||||
(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 |
$ | $ | ( |
$ | $ | ( |
$ |
20
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Predecessor | |||||||||||||||||||||||||||||
December 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 | $ | $ | ( |
$ | $ | ( |
$ |
The amortized cost and fair value of AFS securities, including related party, are shown by contractual maturity below:
Successor | |||||||||||
March 31, 2022 | |||||||||||
(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 | |||||||||||
Due after 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.
21
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Unrealized Losses on AFS Securities—The following summarizes the fair value and gross unrealized losses for AFS securities, including related party, for which an allowance for credit losses has not been recorded, aggregated by asset type and length of time the fair value has remained below amortized cost:
Successor | |||||||||||||||||||||||||||||||||||
March 31, 2022 | |||||||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||||||||||
Corporate | ( |
( |
|||||||||||||||||||||||||||||||||
CLO | ( |
( |
|||||||||||||||||||||||||||||||||
ABS |
( |
( |
|||||||||||||||||||||||||||||||||
Total AFS securities – related party |
( |
( |
|||||||||||||||||||||||||||||||||
Total AFS securities including related party |
$ | $ | ( |
$ | $ | $ | $ | ( |
Predecessor | |||||||||||||||||||||||||||||||||||
December 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 |
|||||||||||||||||||||||||||||||||||
Corporate | ( |
( |
|||||||||||||||||||||||||||||||||
CLO | ( |
( |
( |
||||||||||||||||||||||||||||||||
ABS | ( |
( |
( |
||||||||||||||||||||||||||||||||
Total AFS securities – related party |
( |
( |
( |
||||||||||||||||||||||||||||||||
Total AFS securities including related party |
$ | $ | ( |
$ | $ | ( |
$ | $ | ( |
22
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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:
Successor | |||||||||||
March 31, 2022 | |||||||||||
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 application of pushdown accounting or 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 by asset type:
Successor | |||||||||||||||||||||||||||||||||||
Three months ended March 31, 2022 | |||||||||||||||||||||||||||||||||||
Additions | Reductions | ||||||||||||||||||||||||||||||||||
(In millions) | January 1, 2022 | Initial credit losses | Initial credit losses on PCD securities | Securities sold during the period | Additions (reductions) to previously impaired securities | Ending Balance | |||||||||||||||||||||||||||||
AFS securities | |||||||||||||||||||||||||||||||||||
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 | $ | $ | $ | $ | ( |
$ | $ | ||||||||||||||||||||||||||||
Predecessor | |||||||||||||||||||||||||||||||||||
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 |
$ | $ | $ | $ | ( |
$ | $ | ||||||||||||||||||||||||||||
23
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Net Investment Income—Net investment income by asset class, including related party, consists of the following:
Successor | Predecessor | |||||||||||||
(In millions) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | ||||||||||||
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, including related party, consists of the following:
Successor | Predecessor | |||||||||||||
(In millions) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | ||||||||||||
AFS securities | ||||||||||||||
Gross realized gains on investment activity | $ | $ | ||||||||||||
Gross realized losses on investment activity | ( |
( |
||||||||||||
Net realized investment losses on AFS securities | ( |
( |
||||||||||||
Net recognized investment losses on trading securities | ( |
( |
||||||||||||
Net recognized investment gains on equity securities | ||||||||||||||
Net recognized investment losses on mortgage loans | ( |
|||||||||||||
Derivative losses | ( |
( |
||||||||||||
Provision for credit losses | ( |
|||||||||||||
Other gains | ||||||||||||||
Investment related gains (losses) | $ | ( |
$ | ( |
||||||||||
Proceeds from sales of AFS securities were $298 million and $892 million for the three months ended March 31, 2022 and 2021, respectively.
The following table summarizes the change in unrealized gains (losses) on trading and equity securities, including related party, we held as of the respective period end:
Successor | Predecessor | |||||||||||||
(In millions) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | ||||||||||||
Trading securities | $ | ( |
$ | ( |
||||||||||
Trading securities – related party | ( |
|||||||||||||
Equity securities | ||||||||||||||
Equity securities – related party | ( |
24
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Repurchase Agreements—The following table summarizes the maturities of our repurchase agreements:
Successor | |||||||||||||||||||||||||||||||||||
March 31, 2022 | |||||||||||||||||||||||||||||||||||
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.
|
Predecessor | |||||||||||||||||||||||||||||||||||
December 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.
|
The following table summarizes the securities pledged as collateral for repurchase agreements:
Successor | Predecessor | |||||||||||||||||||||||||
March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||
(In millions) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||||||
AFS securities | ||||||||||||||||||||||||||
U.S. government and agencies | $ | $ | $ | $ | ||||||||||||||||||||||
Corporate | ||||||||||||||||||||||||||
CLO | ||||||||||||||||||||||||||
Total securities pledged under repurchase agreements | $ | $ | $ | $ | ||||||||||||||||||||||
Reverse Repurchase Agreements—As of March 31, 2022, amounts loaned under reverse repurchase agreements were $26 million, and collateral received was $616 million.
Mortgage Loans, including related party and VIEs—Mortgage loans includes both commercial and residential loans. In connection with the merger, we elected the fair value option on our mortgage loan portfolio. See Note 6 – Fair Value for further fair value option information. The following represents the mortgage loan portfolio:
Successor | |||||
(In millions) | March 31, 2022 | ||||
Commercial mortgage loans | $ | ||||
Commercial mortgage loans under development | |||||
Total commercial mortgage loans – unpaid principal balance | |||||
Mark to fair value | ( |
||||
Commercial mortgage loans | |||||
Residential mortgage loans – unpaid principal balance | |||||
Mark to fair value | ( |
||||
Residential mortgage loans | |||||
Mortgage loans | $ |
25
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following represents the mortgage loan portfolio based on amortized cost:
Predecessor | |||||
(In millions) | December 31, 2021 | ||||
Commercial mortgage loans | $ | ||||
Commercial mortgage loans under development | |||||
Total commercial mortgage loans | |||||
Allowance for credit losses on commercial mortgage loans | ( |
||||
Commercial mortgage loans | |||||
Residential mortgage loans | |||||
Allowance for credit losses on residential mortgage loans | ( |
||||
Residential mortgage loans | |||||
Mortgage loans | $ |
We primarily invest in commercial mortgage loans on income producing properties including office and retail buildings, apartments, hotels and industrial properties. We diversify the commercial mortgage loan portfolio by geographic region and property type to reduce concentration risk. We evaluate mortgage loans based on relevant current information to confirm if properties are performing at a consistent and acceptable level to secure the related debt.
The distribution of commercial mortgage loans, including those under development, by property type and geographic region, is as follows:
Successor | Predecessor | |||||||||||||||||||||||||
March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||
(In millions, except for percentages) | Fair 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.
|
26
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Our residential mortgage loan portfolio includes first lien residential mortgage loans collateralized by properties in various geographic locations and is summarized by proportion of the portfolio in the following table:
Successor | Predecessor | |||||||||||||
March 31, 2022 | December 31, 2021 | |||||||||||||
US states | ||||||||||||||
California | % | % | ||||||||||||
Florida | % | % | ||||||||||||
New Jersey | % | % | ||||||||||||
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.
|
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 5 – Variable Interest Entities. Our investment funds do not specify timing of distributions on the funds’ underlying assets.
27
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following summarizes our investment funds, including related party and consolidated VIEs:
Successor | Predecessor | |||||||||||||||||||||||||
March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||
(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 | ||||||||||||||||||||||||||
Athora Holding Ltd. (Athora)1
|
% | % | ||||||||||||||||||||||||
Athene Freedom Holdings LP (Athene Freedom)1,2
|
% | % | ||||||||||||||||||||||||
Catalina Holdings Ltd. (Catalina)2
|
% | % | ||||||||||||||||||||||||
Venerable Holdings, Inc. (Venerable)1
|
% | % | ||||||||||||||||||||||||
Other | % | % | ||||||||||||||||||||||||
Total differentiated investments | % | % | ||||||||||||||||||||||||
Real estate | % | % | ||||||||||||||||||||||||
Credit funds | % | % | ||||||||||||||||||||||||
Private equity | % | % | ||||||||||||||||||||||||
Natural resources | % | % | ||||||||||||||||||||||||
Real assets | % | % | ||||||||||||||||||||||||
Public equities | % | % | ||||||||||||||||||||||||
Investment in Apollo1
|
% | % | ||||||||||||||||||||||||
Total investment funds – related parties | % | % | ||||||||||||||||||||||||
Investment funds owned by consolidated VIEs | ||||||||||||||||||||||||||
Differentiated investments | % | % | ||||||||||||||||||||||||
Private equity |
% | % | ||||||||||||||||||||||||
Natural resources | % | % | ||||||||||||||||||||||||
Real estate | % | % | ||||||||||||||||||||||||
Credit funds | % | % | ||||||||||||||||||||||||
Real assets | % | % | ||||||||||||||||||||||||
Total investment funds owned by consolidated VIEs | % | % | ||||||||||||||||||||||||
Total investment funds including related party and funds owned by consolidated VIEs | $ | $ | ||||||||||||||||||||||||
1 Our Venerable investment is in its parent company, VA Capital Company LLC (VA Capital). See further discussion on this investment and our investments in Apollo, Athora and Athene Freedom in Note 9 – Related Parties.
| ||||||||||||||||||||||||||
2 Investment is held as a consolidated VIE as of March 31, 2022.
|
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 at risk 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 securitization entity 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 sheets 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.
28
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Equity securities – We invest in preferred equity securities issued by entities deemed to be VIEs due to insufficient equity at risk within the structure.
Our risk of loss associated with our non-consolidated investments depends on the investment. Investment funds, equity securities and trading securities are limited to the carrying value plus unfunded commitments. AFS securities are limited to amortized cost plus unfunded commitments.
The following summarizes the carrying value and maximum loss exposure of these non-consolidated investments:
Successor | Predecessor | |||||||||||||||||||||||||
March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||
(In millions) | Carrying Value | Maximum Loss Exposure | Carrying Value | Maximum Loss Exposure | ||||||||||||||||||||||
Investment funds | $ | $ | $ | $ | ||||||||||||||||||||||
Investment in related parties – investment funds | ||||||||||||||||||||||||||
Assets of consolidated VIEs – investment funds | ||||||||||||||||||||||||||
Investment in fixed maturity securities | ||||||||||||||||||||||||||
Investment in related parties – fixed maturity securities | ||||||||||||||||||||||||||
Investment in related parties – equity securities | ||||||||||||||||||||||||||
Total non-consolidated investments | $ | $ | $ | $ | ||||||||||||||||||||||
Concentrations—The following represents our investment concentrations in excess of 10% of shareholders’ equity:
Successor | Predecessor | |||||||||||||
(In millions) | March 31, 2022 | December 31, 2021 | ||||||||||||
Athene Freedom1
|
$ | $ | ||||||||||||
AP Tundra Holdings LLC2
|
N/A | |||||||||||||
MidCap1
|
N/A | |||||||||||||
PK Air1
|
N/A | |||||||||||||
SoftBank Vision Fund II | N/A | |||||||||||||
AP Aristotle Holdings LLC2
|
N/A | |||||||||||||
1 Includes investments of the consolidated VIE, in which an underlying investment includes single issuers exceeding concentration threshold, and affiliated securities if applicable and attributable to the single issuer. See further discussion of these investments in Note – 9 Related Parties.
| ||||||||||||||
2 Represents a consolidated VIE investment in which an underlying investment includes a single issuer exceeding concentration threshold.
| ||||||||||||||
N/A – Not applicable as investment did not meet single issuer concentration threshold for the period. |
29
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
4. Derivative Instruments
We use a variety of derivative instruments to manage risks, primarily equity, interest rate, credit, foreign currency and market volatility. See Note 6 – Fair Value for information about the fair value hierarchy for derivatives.
The following table presents the notional amount and fair value of derivative instruments:
Successor | Predecessor | |||||||||||||||||||||||||||||||||||||
March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||
(In millions) | Assets | Liabilities | Assets | Liabilities | ||||||||||||||||||||||||||||||||||
Derivatives designated as hedges | ||||||||||||||||||||||||||||||||||||||
Foreign currency hedges | ||||||||||||||||||||||||||||||||||||||
Swaps | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
Forwards | ||||||||||||||||||||||||||||||||||||||
Interest rate swaps | ||||||||||||||||||||||||||||||||||||||
Forwards on net investments | ||||||||||||||||||||||||||||||||||||||
Interest rate swaps | ||||||||||||||||||||||||||||||||||||||
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 used 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. Effective January 1, 2022, our cash flow hedges were redesignated to fair value hedges as they no longer qualified for cash flow hedge accounting. The following is a summary of the gains (losses) related to cash flow hedges:
Predecessor | |||||
(In millions) | Three months ended March 31, 2021 | ||||
Foreign currency swaps – Other comprehensive income | $ | ( |
|||
Foreign currency swaps – Investment related gains (losses) |
There were no amounts deemed ineffective during the three months ended March 31, 2021.
Fair Value Hedges – We use foreign currency forward contracts, foreign currency swaps, foreign currency interest rate swaps and interest rate swaps that are designated and accounted for as fair value hedges to hedge certain exposures to foreign currency risk and interest rate risk. The foreign currency forward price is agreed upon at the time of the contract and payment is made at a specified future date.
30
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following represents the carrying amount and the cumulative fair value hedging adjustments included in the hedged assets or liabilities:
Successor | Predecessor | |||||||||||||||||||||||||
March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||
(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 | $ | $ | ( |
$ | $ | ( |
||||||||||||||||||||
Foreign currency swaps | ( |
|||||||||||||||||||||||||
Mortgage loans – Foreign currency forwards | ( |
|||||||||||||||||||||||||
Interest sensitive contract liabilities | ||||||||||||||||||||||||||
Foreign currency swaps | ||||||||||||||||||||||||||
Foreign currency interest rate swaps | ||||||||||||||||||||||||||
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:
Amount Excluded | |||||||||||||||||||||||||||||
(In millions) | Derivatives | Hedged Items | Net | Recognized in income through amortization approach | Recognized in income through changes in fair value | ||||||||||||||||||||||||
Three months ended March 31, 2022 (Successor) |
|||||||||||||||||||||||||||||
Investment related gains (losses) | |||||||||||||||||||||||||||||
Foreign currency forwards | $ | $ | ( |
$ | $ | $ | |||||||||||||||||||||||
Foreign currency swaps | ( |
( |
|||||||||||||||||||||||||||
Foreign currency interest rate swaps | ( |
||||||||||||||||||||||||||||
Interest rate swaps | ( |
||||||||||||||||||||||||||||
Interest sensitive contract benefits | |||||||||||||||||||||||||||||
Foreign currency interest rate swaps | ( |
||||||||||||||||||||||||||||
Three months ended March 31, 2021 (Predecessor) |
|||||||||||||||||||||||||||||
Investment related gains (losses) | |||||||||||||||||||||||||||||
Foreign currency forwards | $ | $ | ( |
$ | $ | $ | |||||||||||||||||||||||
Foreign currency interest rate swaps | ( |
||||||||||||||||||||||||||||
Interest sensitive contract benefits | |||||||||||||||||||||||||||||
Foreign currency interest rate swaps | ( |
The following is a summary of the gains (losses) excluded from the assessment of hedge effectiveness that were recognized in OCI:
Successor | Predecessor | |||||||||||||
(In millions) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | ||||||||||||
Foreign currency forwards | $ | ( |
$ | |||||||||||
Foreign currency swaps | ( |
|||||||||||||
31
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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, 2022 and 2021, these derivatives had gains of $2 million and losses of $2 million, respectively. These derivatives are included in foreign currency translation and other adjustments on the condensed consolidated statements of comprehensive loss. As of March 31, 2022 and December 31, 2021, the cumulative foreign currency translations recorded in accumulated other comprehensive income (loss) (AOCI) related to these net investment hedges were gains of $2 million and $1 million, respectively. During the three months ended March 31, 2022 and 2021, there were no amounts deemed ineffective.
Derivatives Not Designated as Hedges
Equity options – We use equity indexed options to economically hedge fixed indexed annuity products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specified market index, primarily the S&P 500. To hedge against adverse changes in equity indices, we enter into contracts to buy equity indexed options. The contracts are net settled in cash based on differentials in the indices at the time of exercise and the strike price.
Futures – Futures contracts are purchased to hedge the growth in interest credited to the customer as a direct result of increases in the related indices. We enter into exchange-traded futures with regulated futures commission clearing brokers who are members of a trading exchange. Under exchange-traded futures contracts, we agree to purchase a specified number of contracts with other parties and to post variation margin on a daily basis in an amount equal to the difference in the daily fair values of those contracts.
Total return swaps – We purchase total rate of return swaps to gain exposure and benefit from a reference asset or index without ownership. Total rate of return swaps are contracts in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of the underlying asset or index, which includes both the income it generates and any capital gains.
Interest rate swaps – We use interest rate swaps to reduce market risks from interest rate changes and to alter interest rate exposure arising from duration mismatches between assets and liabilities. With an interest rate swap, we agree with another party to exchange the difference between fixed-rate and floating-rate interest amounts tied to an agreed-upon notional principal amount at specified intervals.
Credit default swaps – Credit default swaps provide a measure of protection against the default of an issuer or allow us to gain credit exposure to an issuer or traded index. We use credit default swaps coupled with a bond to synthetically create the characteristics of a reference bond. These transactions have a lower cost and are generally more liquid relative to the cash market. We receive a periodic premium for these transactions as compensation for accepting credit risk.
Hedging credit risk involves buying protection for existing credit risk. The exposure resulting from the agreements, which is usually the notional amount, is equal to the maximum proceeds that must be paid by a counterparty for a defaulted security. If a credit event occurs on a reference entity, then a counterparty who sold protection is required to pay the buyer the trade notional amount less any recovery value of the security.
Embedded derivatives – We have embedded derivatives which are required to be separated from their host contracts and reported as derivatives. Host contracts include reinsurance agreements structured on a modified coinsurance (modco) or funds withheld basis and indexed annuity products.
The following is a summary of the gains (losses) related to derivatives not designated as hedges:
Successor | Predecessor | |||||||||||||
(In millions) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | ||||||||||||
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 net 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.
32
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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, 2022 (Successor) |
|||||||||||||||||||||||||||||||||||
Derivative assets | $ | $ | ( |
$ | ( |
$ | ( |
$ | $ | ( |
|||||||||||||||||||||||||
Derivative liabilities | ( |
||||||||||||||||||||||||||||||||||
December 31, 2021 (Predecessor) |
|||||||||||||||||||||||||||||||||||
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, 2022 and December 31, 2021, 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.
|
5. Variable Interest Entities
As a result of our merger with AGM, we reassessed consolidation conclusions for VIEs. We determined that we are required to consolidate additional Apollo-managed investment funds and certain entities that issue CLOs where Apollo is the collateral manager. Since the criteria for the primary beneficiary are satisfied by our related party group, we are deemed the primary beneficiary. 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.
The following summarizes the income statement activity of the consolidated VIEs:
Successor | Predecessor | |||||||||||||
(In millions) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | ||||||||||||
Mortgage loans | $ | $ | ||||||||||||
Investment funds | ( |
|||||||||||||
Net investment income | $ | $ | ||||||||||||
Provision for credit losses | $ | $ | ( |
|||||||||||
Other gains (losses) | ( |
|||||||||||||
Investment related gains (losses) | $ | ( |
$ | ( |
||||||||||
33
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following summarizes the debt of consolidated VIEs as of March 31, 2022:
Principal balance
(in millions)
|
Weighted average interest rate |
Weighted average
remaining maturity
(in years)
|
|||||||||||||||
Senior secured notes | $ | % | |||||||||||||||
Subordinated notes1
|
N/A | N/A | |||||||||||||||
Secured and other borrowings1
|
N/A | N/A | |||||||||||||||
Total VIE debt | $ | ||||||||||||||||
1 The principal outstanding balances of the subordinated notes do not have contractual interest rates or maturities but instead receive distributions from the excess cash flows of the VIEs. Secured and other borrowings do not generally have principal balances, stated rates and maturities and are included at carrying value.
|
6. 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.
34
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:
Successor | |||||||||||||||||||||||||||||
March 31, 2022 | |||||||||||||||||||||||||||||
(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 |
— | ||||||||||||||||||||||||||||
Foreign governments |
— | ||||||||||||||||||||||||||||
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 | — | ||||||||||||||||||||||||||||
Mortgage loans | — | ||||||||||||||||||||||||||||
Investment funds | |||||||||||||||||||||||||||||
Funds withheld at interest – embedded derivative | ( |
— | ( |
||||||||||||||||||||||||||
Short-term investments | — | ||||||||||||||||||||||||||||
(Continued) |
35
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Successor | |||||||||||||||||||||||||||||
March 31, 2022 | |||||||||||||||||||||||||||||
(In millions) | Total | NAV | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Reinsurance recoverable | — | ||||||||||||||||||||||||||||
Assets of consolidated VIEs | |||||||||||||||||||||||||||||
Mortgage loans | — | ||||||||||||||||||||||||||||
Investment funds | |||||||||||||||||||||||||||||
Other investments | — | ||||||||||||||||||||||||||||
Cash and cash equivalents | — | ||||||||||||||||||||||||||||
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 | — | ( |
|||||||||||||||||||||||||||
Liabilities of consolidated VIEs – debt | — | ||||||||||||||||||||||||||||
Total liabilities measured at fair value | $ | $ | — | $ | ( |
$ | $ | ||||||||||||||||||||||
(Concluded) |
Predecessor | |||||||||||||||||||||||||||||
December 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 |
— | ||||||||||||||||||||||||||||
Foreign governments | — | ||||||||||||||||||||||||||||
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 | — | ||||||||||||||||||||||||||||
(Continued) |
36
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Predecessor | |||||||||||||||||||||||||||||
December 31, 2021 | |||||||||||||||||||||||||||||
(In millions) | Total | NAV | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
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 | — | ||||||||||||||||||||||||||||
Assets of consolidated VIEs | |||||||||||||||||||||||||||||
Investment funds | |||||||||||||||||||||||||||||
Cash and cash equivalents | — | ||||||||||||||||||||||||||||
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 | — | ||||||||||||||||||||||||||||
Liabilities of consolidated VIEs – debt | — | ||||||||||||||||||||||||||||
Total liabilities measured at fair value | $ | $ | — | $ | $ | $ | |||||||||||||||||||||||
(Concluded) |
37
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 – 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 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.
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.
38
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 and consolidated VIEs:
Successor | Predecessor | |||||||||||||
(In millions) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | ||||||||||||
Trading securities | $ | ( |
$ | ( |
||||||||||
Mortgage loans | ( |
|||||||||||||
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, including related parties and consolidated VIEs:
Successor | Predecessor | |||||||||||||
(In millions) | March 31, 2022 | December 31, 2021 | ||||||||||||
Unpaid principal balance | $ | $ | ||||||||||||
Mark to fair value | ( |
|||||||||||||
Fair value | $ | $ | ||||||||||||
39
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following represents our commercial mortgage loan portfolio 90 days or more past due and/or in non-accrual status:
Successor | |||||
(In millions) | March 31, 2022 | ||||
Unpaid principal balance of commercial mortgage loans 90 days or more past due and/or in non-accrual status | $ | ||||
Mark to fair value of commercial mortgage loans 90 days or more past due and/or in non-accrual status | ( |
||||
Fair value of commercial mortgage loans 90 days or more past due and/or in non-accrual status | $ | ||||
Fair value of commercial mortgage loans 90 days or more past due | $ | ||||
Fair value of commercial mortgage loans in non-accrual status |
The following represents our residential loan portfolio 90 days or more past due and/or in non-accrual status:
Successor | |||||
(In millions) | March 31, 2022 | ||||
Unpaid principal balance of residential mortgage loans 90 days or more past due and/or in non-accrual status | $ | ||||
Mark to fair value of residential mortgage loans 90 days or more past due and/or in non-accrual status | ( |
||||
Fair value of residential mortgage loans 90 days or more past due and/or in non-accrual status | $ | ||||
Fair value of residential mortgage loans 90 days or more past due1
|
$ | ||||
Fair value of residential mortgage loans in non-accrual status | |||||
1 Includes $ |
There were no fair value option mortgage loans 90 days or more past due as of December 31, 2021.
The following is the estimated amount of gains (losses) included in earnings during the period attributable to changes in instrument-specific credit risk on our mortgage loan portfolio:
Successor | Predecessor | |||||||||||||
(In millions) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | ||||||||||||
Mortgage loans | $ | ( |
$ | |||||||||||
We estimated the portion of gains and losses attributable to changes in instrument-specific credit risk by identifying commercial loans with loan-to-value ratios meeting credit quality criteria, and residential mortgage loans with delinquency status meeting credit quality criteria.
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.
40
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Successor | |||||||||||||||||||||||||||||||||||||||||||||||
Three months ended March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
Total realized and unrealized gains (losses) | |||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | Balance at January 1, 2022 | 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 | |||||||||||||||||||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||||||||||||||||||||||
Investments in related parties | |||||||||||||||||||||||||||||||||||||||||||||||
AFS securities | |||||||||||||||||||||||||||||||||||||||||||||||
Corporate | ( |
||||||||||||||||||||||||||||||||||||||||||||||
CLO | |||||||||||||||||||||||||||||||||||||||||||||||
ABS | ( |
( |
( |
( |
( |
||||||||||||||||||||||||||||||||||||||||||
Trading securities | |||||||||||||||||||||||||||||||||||||||||||||||
CLO | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
ABS | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
Equity securities | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
Mortgage loans | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
Investment funds | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
Funds withheld at interest – embedded derivative | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
Short-term investments | |||||||||||||||||||||||||||||||||||||||||||||||
Reinsurance recoverable | ( |
||||||||||||||||||||||||||||||||||||||||||||||
Assets of consolidated VIEs | |||||||||||||||||||||||||||||||||||||||||||||||
Mortgage loans | ( |
( |
( |
||||||||||||||||||||||||||||||||||||||||||||
Investment funds | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
Other investments | |||||||||||||||||||||||||||||||||||||||||||||||
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 | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
Liabilities of consolidated VIEs – debt | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 liabilities | $ | ( |
$ | $ | $ | ( |
$ | ( |
$ | ( |
$ | $ | |||||||||||||||||||||||||||||||||||
1 Related to instruments held at end of period.
|
41
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Predecessor | |||||||||||||||||||||||||||||||||||||||||||||||
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
|
|||||||||||||||||||||||||||||||||||||||
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 | ( |
||||||||||||||||||||||||||||||||||||||||||||||
Investments in related parties |
|||||||||||||||||||||||||||||||||||||||||||||||
AFS securities | |||||||||||||||||||||||||||||||||||||||||||||||
Corporate | |||||||||||||||||||||||||||||||||||||||||||||||
ABS | ( |
( |
( |
( |
|||||||||||||||||||||||||||||||||||||||||||
Trading securities | |||||||||||||||||||||||||||||||||||||||||||||||
CLO | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
ABS | |||||||||||||||||||||||||||||||||||||||||||||||
Equity securities | |||||||||||||||||||||||||||||||||||||||||||||||
Investment funds | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
Funds withheld at interest – embedded derivative |
( |
||||||||||||||||||||||||||||||||||||||||||||||
Reinsurance recoverable | ( |
||||||||||||||||||||||||||||||||||||||||||||||
Assets of consolidated VIEs - Investment funds | |||||||||||||||||||||||||||||||||||||||||||||||
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.
|
42
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:
Successor | |||||||||||||||||||||||||||||||||||||||||||||||
Three months ended March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
(In millions) | Purchases | Issuances | Sales | Settlements | Net purchases, issuances, sales and settlements |
Transfers in1
|
Transfers out2
|
Net transfers in (out) | |||||||||||||||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||||||||||||||||||
AFS securities |
|||||||||||||||||||||||||||||||||||||||||||||||
Corporate | $ | $ | — | $ | ( |
$ | ( |
$ | $ | $ | ( |
$ | |||||||||||||||||||||||||||||||||||
CLO |
— | ( |
( |
||||||||||||||||||||||||||||||||||||||||||||
ABS |
— | ( |
( |
( |
( |
||||||||||||||||||||||||||||||||||||||||||
CMBS |
— | ( |
( |
||||||||||||||||||||||||||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||||||||||||||||||
CLO |
— | ( |
( |
||||||||||||||||||||||||||||||||||||||||||||
ABS | — | ||||||||||||||||||||||||||||||||||||||||||||||
RMBS |
— | ( |
|||||||||||||||||||||||||||||||||||||||||||||
Mortgage loans | — | ( |
( |
||||||||||||||||||||||||||||||||||||||||||||
Short-term investments |
— | ||||||||||||||||||||||||||||||||||||||||||||||
Investments in related parties |
|||||||||||||||||||||||||||||||||||||||||||||||
AFS securities |
|||||||||||||||||||||||||||||||||||||||||||||||
Corporate | — | ( |
( |
||||||||||||||||||||||||||||||||||||||||||||
CLO |
— | ||||||||||||||||||||||||||||||||||||||||||||||
ABS | — | ( |
( |
( |
( |
( |
|||||||||||||||||||||||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||||||||||||||||||
CLO | — | ( |
( |
( |
( |
||||||||||||||||||||||||||||||||||||||||||
ABS |
— | ( |
( |
( |
( |
( |
|||||||||||||||||||||||||||||||||||||||||
Equity securities |
— | ( |
( |
||||||||||||||||||||||||||||||||||||||||||||
Mortgage loans | — | ( |
|||||||||||||||||||||||||||||||||||||||||||||
Investment funds |
— | ( |
( |
( |
( |
||||||||||||||||||||||||||||||||||||||||||
Short-term investments |
— | ||||||||||||||||||||||||||||||||||||||||||||||
Assets of consolidated VIEs | |||||||||||||||||||||||||||||||||||||||||||||||
Mortgage loans | — | ( |
( |
||||||||||||||||||||||||||||||||||||||||||||
Investment funds | — | ( |
( |
||||||||||||||||||||||||||||||||||||||||||||
Other investments | — | ||||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 assets |
$ | $ | $ | ( |
$ | ( |
$ | $ | $ | ( |
$ | ||||||||||||||||||||||||||||||||||||
Liabilities |
|||||||||||||||||||||||||||||||||||||||||||||||
Interest sensitive contract liabilities – embedded derivative |
$ | $ | ( |
$ | $ | $ | ( |
$ | $ | $ | |||||||||||||||||||||||||||||||||||||
Liabilities of consolidated VIEs – debt | ( |
( |
|||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 liabilities |
$ | $ | ( |
$ | $ | $ | ( |
$ | ( |
$ | $ | ( |
|||||||||||||||||||||||||||||||||||
1 Transfers in includes assets and liabilities of consolidated VIEs that we consolidated effective March 31, 2022 ($ | |||||||||||||||||||||||||||||||||||||||||||||||
2 Transfers out includes the elimination of investments in related party securities issued by VIEs that we consolidated effective March 31, 2022 ($ |
43
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Predecessor | |||||||||||||||||||||||||||||||||||||||||||||||
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 | — | — | — | ( |
( |
||||||||||||||||||||||||||||||||||||||||||
Short-term investments |
— | ( |
( |
||||||||||||||||||||||||||||||||||||||||||||
Investments in related parties |
|||||||||||||||||||||||||||||||||||||||||||||||
AFS securities, ABS | — | ( |
( |
( |
( |
||||||||||||||||||||||||||||||||||||||||||
Trading securities |
|||||||||||||||||||||||||||||||||||||||||||||||
CLO |
— | ( |
( |
( |
( |
||||||||||||||||||||||||||||||||||||||||||
ABS |
— | ||||||||||||||||||||||||||||||||||||||||||||||
Equity securities |
— | ( |
|||||||||||||||||||||||||||||||||||||||||||||
Assets of consolidated VIEs – 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 – We use discounted cash flow models to calculate the fair value for certain fixed maturity securities. The discount rate is a significant unobservable input because the credit spread includes adjustments made to the base rate. The base rate represents a market comparable rate for securities with similar characteristics. This excludes assets for which fair value is provided by independent broker quotes, but includes assets for which fair value is provided by affiliated quotes.
Mortgage loans – We use discounted cash flow models from independent commercial pricing services to calculate the fair value of our mortgage loan portfolio. The discount rate is a significant unobservable input. This approach uses market transaction information and client portfolio-oriented information, such as prepayments or defaults, to support the valuations.
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 US Department of the Treasury (Treasury) curve based on our public credit rating as of the valuation date. This represents our credit risk for use in the estimate of the fair value of embedded derivatives.
2.Option budget – We assume future hedge costs in the derivative’s fair value estimate. The level of option budgets determines the future costs of the options and impacts future policyholder account value growth.
3.Policyholder behavior – We regularly review the lapse and withdrawal assumptions (surrender rate). These are based on our initial pricing assumptions updated for actual experience. Actual experience may be limited for recently issued products.
44
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following summarizes the unobservable inputs for AFS and trading securities, mortgage loans and the embedded derivatives of fixed indexed annuities:
Successor | |||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
(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 | |||||||||||||||||||||||||||||||||||||||
Mortgage loans | $ | Discounted cash flow | Discount rate | % | % | % | 1 |
Decrease | |||||||||||||||||||||||||||||||||||||||
Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives |
$ | Discounted cash flow | Nonperformance risk | % | % | % | 2 |
Decrease | |||||||||||||||||||||||||||||||||||||||
Option budget | % | % | % | 3 |
Increase | ||||||||||||||||||||||||||||||||||||||||||
Surrender rate | % | % | % | 4 |
Decrease | ||||||||||||||||||||||||||||||||||||||||||
Predecessor | |||||||||||||||||||||||||||||||||||||||||||||||
December 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 | ||||||||||||||||||||||||||||||||||||||||||
1 The discount rate weighted average is calculated based on the relative fair values of the securities or loans.
| |||||||||||||||||||||||||||||||||||||||||||||||
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.
|
45
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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. As of March 31, 2022 and December 31, 2021, the carrying amount of the equity securities was $400 million and $0 million , respectively, with no cumulative recorded impairment.
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:
Successor | |||||||||||||||||||||||||||||||||||
March 31, 2022 | |||||||||||||||||||||||||||||||||||
(In millions) | Carrying Value | Fair Value | NAV | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||
Financial assets | |||||||||||||||||||||||||||||||||||
Investment funds | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Policy loans | — | ||||||||||||||||||||||||||||||||||
Funds withheld at interest | — | ||||||||||||||||||||||||||||||||||
Short-term investments | — | ||||||||||||||||||||||||||||||||||
Other investments | — | ||||||||||||||||||||||||||||||||||
Investments in related parties | |||||||||||||||||||||||||||||||||||
Investment funds | |||||||||||||||||||||||||||||||||||
Funds withheld at interest | — | ||||||||||||||||||||||||||||||||||
Other investments | — | ||||||||||||||||||||||||||||||||||
Assets of consolidated VIEs – investment funds | |||||||||||||||||||||||||||||||||||
Total financial assets not carried at fair value | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Financial liabilities | |||||||||||||||||||||||||||||||||||
Interest sensitive contract liabilities | $ | $ | $ | — | $ | $ | $ | ||||||||||||||||||||||||||||
Long-term debt | — | ||||||||||||||||||||||||||||||||||
Securities to repurchase | — | ||||||||||||||||||||||||||||||||||
Liabilities of consolidated VIEs – debt | — | ||||||||||||||||||||||||||||||||||
Total financial liabilities not carried at fair value | $ | $ | $ | — | $ | $ | $ |
Predecessor | |||||||||||||||||||||||||||||||||||
December 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 | — | ||||||||||||||||||||||||||||||||||
Other investments | — | ||||||||||||||||||||||||||||||||||
Investments in related parties | |||||||||||||||||||||||||||||||||||
Mortgage loans | — | ||||||||||||||||||||||||||||||||||
Investment funds | |||||||||||||||||||||||||||||||||||
Funds withheld at interest | — | ||||||||||||||||||||||||||||||||||
Other investments | — | ||||||||||||||||||||||||||||||||||
Assets of consolidated VIEs – mortgage loans | — | ||||||||||||||||||||||||||||||||||
Total financial assets not carried at fair value | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Financial liabilities | |||||||||||||||||||||||||||||||||||
Interest sensitive contract liabilities | $ | $ | $ | — | $ | $ | $ | ||||||||||||||||||||||||||||
Long-term debt | — | ||||||||||||||||||||||||||||||||||
Securities to repurchase | — | ||||||||||||||||||||||||||||||||||
Funds withheld liability | — | ||||||||||||||||||||||||||||||||||
Liabilities of consolidated VIEs – debt | — | ||||||||||||||||||||||||||||||||||
Total financial liabilities not carried at fair value |
$ | $ | $ | — | $ | $ | $ |
46
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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, short-term investments, funds withheld at interest and liability, securities to repurchase, and debt of consolidated VIEs, 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.
7. Deferred Acquisition Costs, Deferred Sales Inducements and Value of Business Acquired
The following represents a rollforward of DAC, DSI and VOBA:
Successor | |||||||||||||||||||||||
(In millions) | DAC | DSI | VOBA | Total | |||||||||||||||||||
Balance at January 1, 2022 | $ | $ | $ | $ | |||||||||||||||||||
Additions | |||||||||||||||||||||||
Amortization | ( |
( |
|||||||||||||||||||||
Balance at March 31, 2022 | $ | $ | $ | $ |
Predecessor | |||||||||||||||||||||||
(In millions) | DAC | DSI | VOBA | Total | |||||||||||||||||||
Balance at December 31, 2020 | $ | $ | $ | $ | |||||||||||||||||||
Additions | |||||||||||||||||||||||
Amortization | ( |
( |
( |
( |
|||||||||||||||||||
Impact of unrealized investment (gains) losses | |||||||||||||||||||||||
Balance at March 31, 2021 | $ | $ | $ | $ |
The expected amortization of VOBA for the next five years is as follows:
(In millions) | Expected Amortization | ||||
20221
|
$ | ||||
2023 | |||||
2024 | |||||
2025 | |||||
2026 | |||||
2027 | |||||
1 Expected amortization for the remainder of 2022.
|
47
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
8. Equity
Distributions to Parent—In the first quarter of 2022, we distributed our investment in AOG units to AGM. See Note 9 – Related Parties for further information on the investment in AOG units. The AOG distribution resulted in a reduction of additional paid-in capital of $1,916 million and an increase in accumulated deficit of $26 million. In connection with the AOG distribution to AGM, we also issued a stock dividend of 11.6 million shares to the Apollo Group shareholders other than AGM. Additionally, we recorded a reestablishment of the liabilities that were considered effectively settled upon merger of $810 million, as these liabilities were settled during the first quarter of 2022 in the normal course of business as intercompany payables to AGM.
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 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 January 1, 2022 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Other comprehensive income (loss) before reclassifications |
( |
( |
( |
( |
|||||||||||||||||||||||||||||||
Less: Reclassification adjustments for gains (losses) realized in net income1
|
( |
( |
( |
||||||||||||||||||||||||||||||||
Less: Income tax expense (benefit) |
( |
( |
( |
( |
|||||||||||||||||||||||||||||||
Less: Other comprehensive income (loss) attributable to noncontrolling interests | ( |
( |
( |
( |
( |
||||||||||||||||||||||||||||||
Balance at March 31, 2022 | $ | ( |
$ | ( |
$ | $ | ( |
$ | $ | ( |
|||||||||||||||||||||||||
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 allowance2
|
Unrealized investment gains (losses) on AFS securities with a credit allowance2
|
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) realized in net income1
|
( |
( |
|||||||||||||||||||||||||||||||||
Less: Income tax expense (benefit) |
( |
( |
( |
||||||||||||||||||||||||||||||||
Less: Other comprehensive income (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).
| |||||||||||||||||||||||||||||||||||
2 Previously reported amounts have been revised to correct a misstatement, which was not material, in the classification of balances and changes attributable to AFS securities with and without credit allowances.
|
9. Related Parties
Apollo
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.
48
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
During the three months ended March 31, 2022 and 2021, we incurred management fees, inclusive of the base and sub-allocation fees, of $186 million and $144 million, respectively. Management fees are included within net investment income on the condensed consolidated statements of income (loss). As of March 31, 2022 and December 31, 2021, management fees payable were $84 million and $59 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.
Termination of ACRA investment management agreements (IMA) – Our bye-laws currently provide that, with respect to IMAs covering assets backing reserves and surplus in ACRA, whether from internal reinsurance, third-party reinsurance, or inorganic transactions, among us or any of our subsidiaries, on the one hand, and Apollo Insurance Solutions Group LP (ISG), on the other hand, we may not, and will not cause our subsidiaries to, terminate any such IMA with Apollo other than at specified termination dates and with relevant board approvals of independent directors and written notice.
Governance – We have a management investment and asset liability 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.
Prior to our merger with AGM on January 1, 2022, a significant voting interest in the Company was held by shareholders who are members of the Apollo Group. James Belardi, our Chief Executive Officer, also serves as a member of the board of directors and an executive officer of AGM, and, as Chief Executive Officer of ISG, receives compensation from ISG for services he provides. Mr. Belardi also owns a 5% profit interest in ISG and in connection with such interest receives a specified percentage of other fee streams earned by Apollo from us, including sub-allocation fees. Additionally, six of the sixteen members of our board of directors (including Mr. Belardi) are employees of or consultants to Apollo. 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 general partners, directors (other than independent directors of AGM), managers, 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.
49
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Other related party transactions
Athene Freedom – We have a limited partnership investment in Athene Freedom, for which an Apollo affiliate is the general partner. As of March 31, 2022 and in connection with the reassessment of VIEs resulting from the merger, we consolidated Athene Freedom as a VIE. Athene Freedom indirectly invests in both Wheels, Inc. (Wheels) and Donlen, LLC (Donlen). We own ABS and corporate debt securities issued by Wheels and Donlen of $2,211 million and $2,419 million as of March 31, 2022 and December 31, 2021, respectively, which are held as related party AFS securities on the condensed consolidated balance sheets.
MidCap – As of March 31, 2022 and in connection with the reassessment of VIEs resulting from the merger, we consolidated MidCap as a VIE. We hold multiple investments in MidCap including profit participating notes, senior unsecured notes and redeemable preferred stock, which prior to consolidation, were included in related party AFS or trading securities on the condensed consolidated balance sheets for periods prior to March 31, 2022.
The following summarizes the Predecessor investments in MidCap:
Predecessor | |||||
(In millions) | December 31, 2021 | ||||
Profit participating notes | $ | ||||
Senior unsecured notes | |||||
Redeemable preferred stock | |||||
Total investment in MidCap | $ | ||||
Additionally, we hold ABS and CLO securities issued by MidCap affiliates of $892 million and $897 million as of March 31, 2022 and December 31, 2021, 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, 2022, we have not exercised our right of first refusal to reinsure liabilities ceded to Athora’s insurance or reinsurance subsidiaries.
The following table summarizes our investments in Athora:
Successor | Predecessor | |||||||||||||
(In millions) | March 31, 2022 | December 31, 2021 | ||||||||||||
Investment fund | $ | $ | ||||||||||||
Non-redeemable preferred equity securities | ||||||||||||||
Total investment in Athora | $ | $ | ||||||||||||
Additionally, as of March 31, 2022 and December 31, 2021, we had $61 million and $63 million, respectively, of funding agreements outstanding to Athora. We also have commitments to make additional investments in Athora of $552 million as of March 31, 2022.
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 $230 million and $219 million as of March 31, 2022 and December 31, 2021, 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 Apollo, Crestview Partners III Management , LLC and Reverence Capital Partners L.P., and is the parent of Venerable, which is the parent of VIAC.
50
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
We also have term loans receivable from Venerable due in 2033, which are included in related party other investments on the condensed consolidated balance sheets. The loans are held at the principal balance less allowances and were $255 million and $222 million as of March 31, 2022 and December 31, 2021, respectively. While management views the overall transactions with Venerable as favorable to us, the stated interest rate of 6.257 % on the initial term loan to Venerable represented a below-market interest rate, and management considered such rate as part of its evaluation and pricing of the reinsurance transactions.
Strategic Partnership – We have an agreement pursuant to which we may invest up to $2.875 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, 2022 and December 31, 2021, we had $823 million and $415 million, respectively, of investments under the Strategic Partnership and these investments are typically included as consolidated VIEs or related party investment funds on the condensed consolidated balance sheets.
PK AirFinance – We have investments in PK AirFinance (PK Air), 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 Air 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 a special purpose vehicle (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. We have purchased both senior and subordinated notes of PK Air, which are included in related party AFS or trading securities on the condensed consolidated balance sheets. During the first quarter of 2022, we contributed our investment in the subordinated notes to PK Air Holdings, LP (PK Air Holdings), which is a consolidated VIE investment fund on the condensed consolidated balance sheets. The following summarizes our investments in PK Air notes:
Successor | Predecessor | |||||||||||||
(In millions) | March 31, 2022 | December 31, 2021 | ||||||||||||
AFS or trading securities | $ | $ | ||||||||||||
We also have commitments to make additional investments in PK Air of $1,252 million as of March 31, 2022.
Apollo/Athene Dedicated Investment Program (ADIP) – Our subsidiary, Athene Co-Invest Reinsurance Affiliate Holding Ltd. (together with its subsidiaries, ACRA) is partially owned by ADIP, a series of funds managed by Apollo. ALRe currently holds 36.55 % of the economic interests in ACRA and all of ACRA’s voting interests, with ADIP holding the remaining 63.45 % of the economic interests. During the three months ended March 31, 2022 and 2021, we received capital contributions of $311 million and $235 million, respectively, from ADIP. Additionally, as of March 31, 2022 and December 31, 2021, we had $108 million and $81 million, respectively, of related party payables for contingent investment fees payable by ACRA to Apollo. ACRA is obligated to pay the contingent investment fees on behalf of ADIP and, as such, the balance is attributable to noncontrolling interest.
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. As of December 31, 2021, the investment in Apollo was $2,112 million, which was included in related party investment funds on the condensed consolidated balance sheets. Subsequent to our merger with AGM, our investment in Apollo was distributed to AGM in the first quarter of 2022.
Apollo Aligned Alternatives, L.P. (AAA) Investment – On April 1, 2022, we contributed certain of our alternative investments to AAA in exchange for limited partnership interests in AAA. Apollo established AAA for the purpose of providing a single vehicle through which we and third-party investors can participate in a portfolio of alternative investments. Additionally, AAA is expected to provide us further diversification in alternatives exposure and provide Apollo the potential to raise additional AUM in alternatives. Third-party investors are expected to invest in AAA at a later date.
51
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 $16,636 million as of March 31, 2022. 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 Federal Home Loan Bank of Des Moines (FHLB) and, through membership, we have issued funding agreements to the FHLB in exchange for cash advances. As of March 31, 2022 and December 31, 2021, we had $3,246 million and $2,751 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, 2022 and December 31, 2021, we had $22,481 million and $19,728 million, respectively, of board-authorized FABN funding agreements outstanding. We had $12,330 million of board-authorized FABN capacity remaining as of March 31, 2022.
We also established a secured funding agreement backed repurchase agreement (FABR) program, in which a special-purpose, unaffiliated entity enters 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, 2022 and December 31, 2021, we had $2,000 million and $1,000 million, respectively, of FABR funding agreements outstanding.
Pledged Assets and Funds in Trust (Restricted Assets)—The total restricted assets included on the condensed consolidated balance sheets are as follows:
Successor | Predecessor | |||||||||||||
(In millions) | March 31, 2022 | December 31, 2021 | ||||||||||||
AFS securities | $ | $ | ||||||||||||
Trading securities | ||||||||||||||
Equity securities | ||||||||||||||
Mortgage loans | 5,333 | 5,033 | ||||||||||||
Investment funds | ||||||||||||||
Derivative assets | ||||||||||||||
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 $1,369 million as of March 31, 2022. These letters of credit were issued for our reinsurance program and expire between May 22, 2023 and December 10, 2023.
52
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Litigation, Claims and Assessments
Corporate-owned Life Insurance (COLI) Matter – In 2000 and 2001, two insurance companies which were subsequently merged into AAIA, purchased broad based variable COLI policies from American General Life Insurance Company (American General). 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 was 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 proceeded 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 were to have been deemed effective, the purported changes to the policies could have impaired AAIA’s ability to access the value of guarantees associated with the policies. The parties engaged in discovery as well as discussions concerning whether the matter could be resolved without further litigation and, at the request of the parties, on August 11, 2021, the court entered an Amended Scheduling Order setting the trial date for June 2023. On December 27, 2021, the parties agreed in principle to a settlement, pursuant to which we will be able to surrender the policies at any time and receive proceeds within six months. During the year ended December 31, 2021, we recorded an impairment of the COLI asset of $53 million, and an adjustment to deferred tax liabilities of $47 million, to reflect the terms of the settlement.
Regulatory Matters – From 2015 to 2018, our US insurance subsidiaries 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.
Pursuant to the terms of the reinsurance agreements between us and the relevant affiliates of Global Atlantic, the applicable affiliates of Global Atlantic have financial responsibility for the ceded life block and are subject to significant administrative service requirements, including compliance with applicable law. The agreements also provide for indemnification to us, including for administration issues.
In addition to the examinations and proceedings initiated to date, it is possible that other regulators may pursue similar formal examinations, inquiries or enforcement proceedings and that any examinations, inquiries and/or enforcement proceedings may result in fines, administrative penalties and payments to policyholders.
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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
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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 shareholder 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. Effective January 1, 2022, as a result of the closing of the merger involving us and Apollo, Apollo Global Management, Inc. (NYSE: APO) became the beneficial owner of 100% of our Class A common shares and controls all of the voting power to elect members to our board of directors.
We have established a significant base of earnings and, as of March 31, 2022, have an expected annual net investment spread, which measures our investment performance less the total cost of our liabilities, of 1–2% over the 8.4 year weighted-average life of our net reserve liabilities. The weighted-average life includes deferred annuities, pension group annuities, funding agreements, payout annuities and other products.
Our total assets have grown to $246.1 billion as of March 31, 2022. For the three months ended March 31, 2022 and the year ended December 31, 2021, we generated an annualized net investment spread of 1.86% and 1.94%, respectively.
The following table presents the inflows generated from our organic and inorganic channels:
Successor | Predecessor | |||||||||||||
(In millions) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | ||||||||||||
Retail | $ | 2,865 | $ | 1,757 | ||||||||||
Flow reinsurance | 1,001 | 299 | ||||||||||||
Funding agreements1
|
5,696 | 3,226 | ||||||||||||
Pension group annuities | 1,994 | 2,893 | ||||||||||||
Gross organic inflows | 11,556 | 8,175 | ||||||||||||
Gross inorganic inflows | — | — | ||||||||||||
Total gross inflows | 11,556 | 8,175 | ||||||||||||
Gross outflows2
|
(4,883) | (4,122) | ||||||||||||
Net flows | $ | 6,673 | $ | 4,053 | ||||||||||
Inflows attributable to Athene | $ | 9,333 | $ | 6,705 | ||||||||||
Inflows attributable to ACRA noncontrolling interest | 2,223 | 1,470 | ||||||||||||
Total gross inflows | 11,556 | 8,175 | ||||||||||||
Outflows attributable to Athene | (4,072) | (3,481) | ||||||||||||
Outflows attributable to ACRA noncontrolling interest | (811) | (641) | ||||||||||||
Total gross outflows2
|
$ | (4,883) | $ | (4,122) | ||||||||||
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 Gross outflows consist of full and partial policyholder withdrawals on deferred annuities, death benefits, pension group annuity benefit payments, payments on payout annuities and funding agreement maturities.
|
Our organic channels, including retail, flow reinsurance and institutional products, provided gross inflows of $11.6 billion and $8.2 billion for the three months ended March 31, 2022 and 2021, respectively, which were underwritten to attractive, above target returns despite the low interest rate environment. Gross organic inflows increased $3.4 billion, or 41% from the prior year, reflecting the strength of our multi-channel distribution platform and our ability to quickly pivot into optimal and profitable channels as opportunities arise. Withdrawals on our deferred annuities, maturities of our funding agreements, payments on payout annuities and pension group annuity payments (collectively, gross outflows), in the aggregate were $4.9 billion and $4.1 billion for the three months ended March 31, 2022 and 2021, respectively. The increase in gross outflows was primarily driven by the maturity of a funding agreement issuance. 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 pension group annuity 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.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Within our retail channel, we had fixed annuity sales of $2.9 billion and $1.8 billion for the three months ended March 31, 2022 and 2021, respectively. The increase in our retail channel was primarily driven by the strong performance of our index annuity products in the independent marketing organizations (IMO) and broker-dealer channels, exhibiting strong sales execution despite the challenging sales environment, and higher MYGA sales. 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 53 IMOs; approximately 68,000 independent agents; and our growing network of 18 banks and 119 regional broker-dealers. Our strong financial position and diverse, 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 continue to focus 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 $1.0 billion and $299 million for the three months ended March 31, 2022 and 2021, respectively. The increase in our flow reinsurance channel from prior year was driven by strong volumes with existing partnerships, including volumes from our new Japanese partner that was added during second half of 2021. 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 $7.7 billion and $6.1 billion for the three months ended March 31, 2022 and 2021, respectively. The increase in our institutional channel was driven by higher funding agreements, partially offset by lower pension group annuity inflows. We issued funding agreements in the aggregate principal amount of $5.7 billion and $3.2 billion for the three months ended March 31, 2022 and 2021, respectively, which included seven FABN issuances in three different currencies during the quarter. 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 $3.5 billion, $1.0 billion, $495 million and $750 million, respectively, for the three months ended March 31, 2022. During the three months ended March 31, 2022, we closed two pension group annuity transactions and issued annuity contracts in the aggregate principal amount of $2.0 billion, compared to $2.9 billion during the three months ended March 31, 2021. Since entering the pension group annuity channel in 2017, we have closed 35 deals involving more than 390,000 plan participants resulting in the issuance or reinsurance of group annuities of $32.2 billion to date. We expect to grow our institutional channel by continuing to engage in pension group annuity transactions and programmatic issuances of funding agreements.
Our inorganic channel has contributed significantly to our growth through both acquisitions and block reinsurance transactions. 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. We expect that our inorganic channel will continue to be an important source of profitable growth in the future.
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, 2022, we estimate that we have approximately $7.3 billion in capital available to deploy, consisting of approximately $3.3 billion in excess capital, $2.9 billion in untapped debt capacity (assuming a peer average adjusted debt to capitalization ratio of 25%) and $1.1 billion in available undrawn capital at ACRA, subject, in the case of debt capacity, to favorable market conditions and general availability.
In order to support our growth strategies and capital deployment opportunities, we established ACRA as a long-duration, on-demand capital vehicle. We own 36.55% of the economic interests in ACRA, with the remaining 63.45% of the economic interests being owned by ADIP, a series of funds managed by an affiliate of Apollo. ACRA participates 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 allows us the flexibility to simultaneously deploy capital across multiple accretive avenues, while maintaining a strong financial position.
Merger with Apollo
On January 1, 2022, we completed our merger with AGM and are now a direct wholly owned subsidiary of AGM. The total consideration for the transaction was $13.1 billion. The consideration was calculated based on historical AGM’s December 31, 2021 closing share price multiplied by the AGM common shares issued in the share exchange, as well as the fair value of stock-based compensation awards replaced, fair value of warrants converted to AGM common shares and other equity consideration, and effective settlement of pre-existing relationships and other consideration.
At the closing of the merger with AGM, each issued and outstanding AHL Class A common share (other than shares held by Apollo, the AOG or the respective direct or indirect wholly owned subsidiaries of Athene or the AOG) was converted automatically into 1.149 shares of AGM common shares with cash paid in lieu of any fractional AGM common shares. In connection with the merger, AGM issued to AHL Class A common shareholders 158.2 million AGM common shares in exchange for 137.6 million AHL Class A common shares that were issued and outstanding as of the acquisition date, exclusive of the 54.6 million shares previously held by Apollo immediately before the acquisition date.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
AAA Investment
On April 1, 2022, we contributed certain of our alternative investments to AAA in exchange for limited partnership interests in AAA. Apollo established AAA for the purpose of providing a single vehicle through which we and third-party investors can participate in a portfolio of alternative investments. Additionally, AAA enhances Apollo’s ability to increase alternatives assets under management (AUM) by raising capital from 3rd parties, which will allow Athene to achieve greater scale and diversification for alternatives. Third-party investors are expected to invest in AAA at a later date.
Also in connection with the AAA investment, on April 1, 2022, we entered into the AAA Facility, pursuant to which we may provide loans to AAA to fund, among other things, withdrawals from and investments by AAA. The AAA Facility replaces our previous contingent commitments related to the investments we contributed, among others. Interest on any loans made pursuant to the AAA Facility accrues at a fixed rate of 8% per year, and has a maturity date of April 1, 2032, subject to extension. AAA is managed exclusively by Apollo, and investment advisory services are provided to AAA under the terms of an investment management agreement with Apollo.
Industry Trends and Competition
Market Conditions
As a leading financial services company specializing in retirement services, we are affected by numerous factors, including the condition of global financial markets and the economy. Price fluctuations within equity, credit, commodity and foreign exchange markets, as well as interest rates, which may be volatile and mixed across geographies, can significantly impact the performance of our business including but not limited to the valuation of investments and related income we may recognize.
We carefully monitor economic and market conditions that could potentially give rise to global market volatility and affect our business operations, investment portfolio and derivatives, which includes global inflation. We have seen US inflation continue to rise during 2022, which has been driven by various factors, including supply chain disruptions, consumer demand, employment levels, low (but rising) mortgage interest rates and a severely distorted supply/demand housing imbalance, and residential vacancy rates. During the first quarter of 2022, the US Federal Reserve (Federal Reserve) indicated its plan to be more aggressive at the beginning of the tightening cycle to lessen inflation transpiring widely through the US economy, resulting in considerable market volatility. As a result, the Federal Reserve voted to increase the federal funds rate during the first quarter of 2022. The US Bureau of Labor Statistics reported the annual US inflation rate increased to 8.5% as of March 31, 2022, compared to 7.0% as of December 2021 and continues to be the highest rate since the 1980s.
Adverse economic conditions may result from domestic and global economic and political developments, including plateauing or decreasing economic growth and business activity, civil unrest, geopolitical tensions or military action, such as the armed conflict between Ukraine and Russia and corresponding sanctions imposed by the US and other countries, and new or evolving legal and regulatory requirements on business investment, hiring, migration, labor supply and global supply chains.
Coupled with the drop in equity markets in the first quarter of 2022, the Bureau of Economic Analysis reported real GDP decreased at an annual rate of 1.4% in the first quarter of 2022. As of April 2022, the International Monetary Fund estimated the US will expand by 4.0% in 2022 and 2.6% in 2023. The US Bureau of Labor Statistics reported the US unemployment rate decreased to 3.9% as of the end of the first quarter of 2022. Although some pressure on oil prices eased in late 2021, oil price per barrel rose during the first quarter of 2022 and is expected to continue to rise throughout 2022.
Interest Rate Environment
The endpoint for the move higher in rates is difficult to predict and will take a delicate balancing act by the Federal Reserve to engineer. There are elements of inflation that seem to be COVID-related or otherwise transitory, but geopolitical conditions including the Russia invasion of Ukraine, and other factors may persist longer and contribute to inflation absent Federal Reserve actions. Generally higher rates are reasonable to expect for the remainder of the year. While higher rates are beneficial for reinvestment opportunities across an insurance balance sheet and would boost investment income, unrealized losses will increase. It is plausible that inflation pressures could cause the Federal Reserve to raise rates more dramatically, which might ultimately result in an economic recession, although inflation pressures and Federal Reserve actions, along with other geopolitical issues, are difficult to predict.
Our investment portfolio consists predominantly of fixed maturity investments. See –Consolidated Investment Portfolio. If prevailing interest rates were to rise, we believe the yield on our new investment purchases may also rise and our investment income from floating rate investments would increase, while the value of our existing investments may decline. If prevailing interest rates were to decline, it is likely that the yield on our new investment purchases may decline and our investment income from floating rate investments would decrease, while the value of our existing investments may increase.
We address interest rate risk through managing the duration of the liabilities we source with assets we acquire 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 as experienced in the prior year. Our investment portfolio includes $36.9 billion of floating rate investments, or 20% of our net invested assets as of March 31, 2022.
57
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 2022, most of our products were deferred annuities with 21% of our FIAs at the minimum guarantees and 37% of our fixed rate annuities at the minimum crediting rates. As of March 31, 2022, 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 group annuity 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 2021 Annual Report, which includes a discussion regarding interest rate and other significant risks and our strategies for managing these risks.
Discontinuation of LIBOR
On December 31, 2021, (1) most LIBOR settings (i.e., 24 out of 35, including 1-week and 2-month US Dollar (USD) LIBOR as well as all other non-USD LIBOR settings) ceased to be published and (2) a few of the most widely used GBP and JPY LIBOR settings (i.e., 1-, 3- and 6- month GBP and JPY LIBOR settings) were deemed permanently unrepresentative, but will continue to be published on a synthetic basis, for a limited time period for the purpose of all legacy contracts (except for cleared derivatives). The remaining USD LIBOR settings (i.e., 1-, 3-, 6- and 12-month USD LIBOR settings) will continue to be published, subject to limitations on use, and cease or become unrepresentative on June 30, 2023. Without the intervention of the UK Financial Conduct Authority using enhanced powers provided by the UK Government to compel continued panel bank contribution by the IBA, the LIBOR administrator, LIBOR will 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, 2022, 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 | $ | 35,211 | $ | 30,036 | |||||||
Product Liabilities | 17,297 | 5,267 | |||||||||
Derivatives Hedging Product Liabilities | 20,103 | 6,870 | |||||||||
Other Derivatives | 3,530 | 3,530 | |||||||||
Other Contracts | 1,663 | 1,113 | |||||||||
Total notional of contracts tied to LIBOR | $ | 77,804 | $ | 46,816 | |||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Investments
As of March 31, 2022, our investments tied to LIBOR were in the following asset classes:
(In millions) | Total Exposure | Extending Beyond June 30, 2023 | |||||||||
Multi-lateral Arrangements | |||||||||||
Corporates | $ | 823 | $ | 623 | |||||||
RMBS | 3,076 | 2,981 | |||||||||
CMBS | 632 | 476 | |||||||||
CLO | 15,191 | 14,832 | |||||||||
ABS | 7,213 | 6,269 | |||||||||
Bank Loans | 1,400 | 1,206 | |||||||||
Total Multi-lateral Arrangements | 28,335 | 26,387 | |||||||||
Bi-lateral Arrangements | |||||||||||
CML | 6,750 | 3,523 | |||||||||
RML | 126 | 126 | |||||||||
Total Bi-lateral Arrangements | 6,876 | 3,649 | |||||||||
Total investments tied to LIBOR | $ | 35,211 | $ | 30,036 |
Of the total notional value of investment-related contracts tied to LIBOR extending beyond June 30, 2023, $26.4 billion or 87.9% 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 New York or US federal LIBOR transition law, 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 $3.6 billion or 12.1% 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–Risks Relating to Our Business Operations–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 2021 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, 2022, we had product liabilities with a notional value of approximately $17.3 billion for which LIBOR is a component in the determination of interest credited, of which we expect $5.3 billion 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.
59
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As of March 31, 2022, we held derivatives with a notional value of approximately $20.1 billion to hedge our exposure to these product liabilities, of which we expect $6.9 billion to extend beyond June 30, 2023. Included within this category are $6.0 billion of Eurodollar futures, of which we expect $2.5 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 the Secured Overnight Financing Rate (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.
Other Contracts and Other Sources of Exposure
The “Other Contracts” category is comprised of our LIBOR-based floating rate funding agreements, fixed-to-float Series A preference shares, and our credit agreement, if any amounts were to be outstanding, all of which contemplate the permanent discontinuation of LIBOR. These agreements 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 are in the process of transitioning the benchmark yield curve in such models from LIBOR to SOFR 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, insurance and reinsurance companies and private equity firms. These companies compete in one form or another for the growing pool of retirement assets driven by a number of external factors such as the continued aging of the population and the reduction in safety nets provided by governments and private employers. In the markets in which we operate, scale and the ability to provide value-added services and build long-term relationships are important factors to compete effectively. We believe that our leading presence in the retirement market, diverse range of capabilities and broad distribution network uniquely position us to effectively serve consumers’ increasing demand for retirement solutions, particularly in the FIA market.
According to LIMRA, total fixed annuity market sales in the United States were $129.3 billion for the year ended December 31, 2021, a 7.4% increase from the same time period in 2020, as a rise in interest rates driven by the economic recovery spurred continued growth in the US annuity market. In the total fixed annuity market, for the year ended December 31, 2021 (the most recent period for which specific market share data is available), we were the fourth largest company based on sales of $8.3 billion, translating to a 6.4% market share. For the year ended December 31, 2020, our market share was 6.4% with sales of $7.7 billion.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
According to LIMRA, total fixed-indexed annuity market sales in the United States were $63.7 billion for the year ended December 31, 2021, a 14.8% increase from the same time period in 2020. For the year ended December 31, 2021 (the most recent period for which specific market share data is available), we were the largest provider of FIAs based on sales of $7.7 billion, and our market share for the same period was 12.1%. For the year ended December 31, 2020, we were the largest provider of FIAs based on sales of $5.8 billion, translating to a 10.5% market share.
According to LIMRA, total registered indexed linked annuity (RILA) market sales in the United States were $38.7 billion for the year ended December 31, 2021, a 62.1% increase from the same time period in 2020. For the year ended December 31, 2021 (the most recent period for which specific market share data is available), we were the ninth largest provider of RILAs based on sales of $566 million, and our market share for the same period was 1.5%. For the year ended December 31, 2020, we were the ninth largest provider of RILAs based on sales of $187 million, translating to a 0.8% market share. We believe RILAs represent a significant opportunity for Athene.
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.
Spread Related Earnings (SRE)
Spread related earnings is a pre-tax non-GAAP measure used to evaluate our financial performance excluding market volatility and expenses related to integration, restructuring, stock compensation and other expenses. Our spread related earnings equals net income (loss) available to AHL common shareholder adjusted to eliminate the impact of the following:
•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 mortgage loans, investments held under the fair value option and our investment in Apollo, 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. Investment gains and losses are net of offsets related to DAC and DSI 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 and DSI 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, including long-term incentive expenses, 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
•Income Tax (Expense) Benefit —Consists of the income tax effect of all income statement adjustments, including our Apollo investment, and is computed by applying the appropriate jurisdiction’s tax rate to all adjustments subject to income tax.
We consider these adjustments to be meaningful adjustments to net income (loss) available to AHL common shareholder 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 shareholder, we believe spread related earnings provides a meaningful financial metric that helps investors understand our underlying results and profitability. Spread related earnings should not be used as a substitute for net income (loss) available to AHL common shareholder.
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 changes in fair value of funds withheld and modco reinsurance assets as well as mortgage loan assets, net of DAC, DSI, rider reserve and tax offsets. Adjusted debt to capital ratio is calculated as total long-term and short-term debt at notional value divided by adjusted capitalization. Adjusted capitalization includes our adjusted AHL common shareholder’s equity, preferred stock and the notional value of our debt. Adjusted AHL common shareholder’s equity is calculated as the ending AHL shareholders’ equity excluding AOCI, the cumulative changes in fair value of funds withheld and modco reinsurance assets and mortgage loan assets as well as preferred stock. 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 changes in fair value of funds withheld and modco reinsurance assets as well as mortgage loan assets are useful in analyzing trends in our operating results. 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.
Net Investment Spread and Other Operating Expenses
Net investment spread is a key measure of profitability. Net investment spread measures our investment performance plus our strategic capital management fees from ACRA, less our total cost of funds. 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.
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, 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. 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