| | UNITED STATES SECURITIES AND EXCHANGE COMMISSION | | | | | | | | | | | | |
Washington, D.C. 20549 | | | | | | | | | | | | |
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FORM 10-Q | | | | | | | | | | | | |
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| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended March 31, 2017 | |
| For the quarterly period ended March 31, 2018 | | For the quarterly period ended March 31, 2018 |
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OR | | | | | | | | | | | | |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| | | 001-37963 | | | | 001-37963 | | |
(Commission file number) | | | | | �� | | | | | | | | |
ATHENE HOLDING LTD. | (Exact name of registrant as specified in its charter) | | | | | | | | | | | | |
| | Bermuda | | | 98-0630022 | | Bermuda | | | 98-0630022 | |
| | (State or other jurisdiction of | | | (I.R.S. Employer | | (State or other jurisdiction of | | | (I.R.S. Employer | |
| | incorporation or organization) | | | Identification Number) | | incorporation or organization) | | | Identification Number) | |
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96 Pitts Bay Road | Pembroke, HM08, Bermuda | (441) 279-8400 | (Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) | | | | | | | | | | | | |
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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 x No ¨ | Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ | Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ |
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o | |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ | | Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | | |
| | Large accelerated filer ¨ | | Accelerated filer ¨ | | Large accelerated filer x | | Accelerated filer ¨ | |
| | Non-accelerated filer x (Do not check if a smaller reporting company) | | Smaller reporting company ¨ | | Non-accelerated filer ¨ (Do not check if a smaller reporting company) | | Smaller reporting company ¨ | |
| | | | | Emerging growth company ¨ | | | | | Emerging growth company ¨ | |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ | 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. ¨ | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x | | Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x |
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| | | The number of shares of each class of our common stock outstanding is set forth in the table below, as of April 17, 2017: | | | The number of shares of each class of our common stock outstanding is set forth in the table below, as of April 16, 2018: | |
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| | | Class A common shares | 101,618,993 |
| | Class M-2 common shares | 974,563 |
| | | Class A common shares | 164,709,405 |
| | Class M-2 common shares | 851,103 |
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| | | Class B common shares | 87,740,079 |
| | Class M-3 common shares | 1,346,650 |
| | | Class B common shares | 25,483,250 |
| | Class M-3 common shares | 1,006,110 |
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| | | Class M-1 common shares | 3,431,547 |
| | Class M-4 common shares | 5,326,164 |
| | | Class M-1 common shares | 3,388,890 |
| | Class M-4 common shares | 4,376,946 |
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TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
PART II—OTHER INFORMATION
As used in this Form 10-Q, unless the context otherwise indicates, any reference to "Athene," "our“Athene,” “our Company," "the” “the Company," "us," "we"” “us,” “we” and "our"“our” refer to Athene Holding Ltd. together with its consolidated subsidiaries and any reference to "AHL"“AHL” refers to Athene Holding Ltd. only.
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q (report), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results and the assumptions upon which those statements are based, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.amended (Exchange Act).
You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “seek,” “assume,” “believe,” “may,” “will,” “should,” “could,” “would,” “likely” and other words and terms of similar meaning, including the negative of these or similar words and terms, in connection with any discussion of the timing or nature of future operating or financial performance or other events. However, not all forward-looking statements contain these identifying words. Forward-looking statements appear in a number of places throughout and give our current expectations and projections relating to our financial condition, results of operations, plans, strategies, objectives, future performance, business and other matters.
We caution you that forward-looking statements are not guarantees of future performance and that our actual consolidated results of operations, financial condition and liquidity may differ materially from those made in or suggested by the forward-looking statements contained in this report. There can be no assurance that actual developments will be those anticipated by us. In addition, even if our consolidated results of operations, financial condition and liquidity are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods. A number of important factors could cause actual results or conditions to differ materially from those contained or implied by the forward-looking statements, including the risks discussed in Part II—II–Item 1A. Risk Factors included in this report and Part I—I–Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2016 (20162017 (2017 Annual Report). Factors that could cause actual results or conditions to differ from those reflected in the forward-looking statements contained in this report include:
the accuracy of management’s assumptions and estimates;
variability in the amount of statutory capital that our insurance and reinsurance subsidiaries have or are required to hold;
interest rate fluctuations;
our potential need for additional capital in the future and the potential unavailability of such capital to us on favorable terms or at all;
changes in relationships with important parties in our product distribution network;
the activities of our competitors and our ability to grow our retail business in a highly competitive environment;
the impact of general economic conditions on our ability to sell our products and the fair value of our investments;
our ability to successfully acquire new companies or businesses and/or integrate such acquisitions into our existing framework;
downgrades, potential downgrades or other negative actions by rating agencies;
our dependence on key executives and inability to attract qualified personnel, or the potential loss of Bermudian personnel as a result of Bermuda employment restrictions;
market and credit risks that could diminish the value of our investments;
foreign currency fluctuations;
the impact of changes to the credit worthinesscreditworthiness of our reinsurance and derivative counterparties;
changes in consumer perception regarding the desirability of annuities as retirement savings products;
introduction of the proposed European Union financial transaction tax;
potential litigation (including class action litigation), enforcement investigations or regulatory scrutiny against us and our subsidiaries, which we may be required to defend against or respond to;
the impact of new accounting rules or changes to existing accounting rules on our business;
interruption or other operational failures in telecommunication and information technology and other operating systems, as well as our ability to maintain the security of those systems;
the termination by Athene Asset Management L.P.LLC (AAM) or Apollo Asset Management Europe, LLP (AAME) of its investment management or advisory agreements with us and limitations on our ability to terminate such arrangements;
AAM’s or AAME’s dependence on key executives and inability to attract qualified personnel;
increased regulation or scrutiny of alternative investment advisers and certain trading methods;
potential changes to regulations affecting, among other things, transactions with our affiliates, the ability of our subsidiaries to make dividend payments or distributions to us, acquisitions by or of us, minimum capitalization and statutory reserve requirements for insurance companies and fiduciary obligations on parties who distribute our products;
suspension or revocation of our subsidiaries’ insurance and reinsurance licenses;
increases in our tax liability resulting from the Base Erosion and Anti-Abuse Tax (BEAT) or unnecessary, inefficient, ineffective or counterproductive efforts undertaken to mitigate the cost of the BEAT;
improper interpretation or application of Public Law no. 115-97, the Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 (Tax Act) or subsequent changes to, clarifications of or guidance under the Tax Act that is counter to our interpretation and has retroactive effect;
Athene Holding Ltd. (AHL) or Athene Life Re Ltd. (ALRe)its non-U.S. subsidiaries becoming subject to U.S. federal income taxation;
adverse changes in U.S. tax law;
our being subject to U.S. withholding tax under the Foreign Account Tax Compliance Act; andAct (FATCA);
our potential inability to pay dividends or distributions.distributions; and
other risks and factors listed under Part II—Item 1A. Risk Factors included in this report, Part I—Item 1A. Risk Factors included
in our 20162017 Annual Report and elsewhere in this report and in our 20162017 Annual Report.
We caution you that the important factors referenced above may not be exhaustive. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect or anticipate. In light of these risks, you should not place undue reliance upon any forward-looking statements contained in this report. The forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation, except as may be required by law, to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise. Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data.
GLOSSARY OF SELECTED TERMS
Unless otherwise indicated in this report, the following terms have the meanings set forth below:
Athene Holding Ltd. and Related Entities
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| Term or Acronym | | Definition |
| A-A Mortgage | | A-A Mortgage Opportunities, LP |
| AAA | | AP Alternative Assets, L.P. |
| AAA Investor | | AAA Guarantor – Athene, L.P. |
| AADE | | Athene Annuity & Life Assurance Company formerly known as Liberty Life Insurance Company, the parent insurance company of our U.S. insurance subsidiaries |
| AAIA | | Athene Annuity and Life Company formerly known as Aviva Life and Annuity Company |
| AAM | | Athene Asset Management L.P.LLC |
AAMEAGER | | Apollo Asset Management Europe, LLP (together with certain of its affiliates) |
ADKG | | Athene DeutschlandAGER Bermuda Holding GmbH & Co. KGLtd., now known as Athora Holding Ltd. and formerly a consolidated subsidiary |
| AHL | | Athene Holding Ltd. |
| ALIC | | Athene Life Insurance Company |
| ALR | | ALR Aircraft Investment Ireland Limited |
| ALRe | | Athene Life Re Ltd. |
ALV | | Athene Lebensversicherung AG, formerly known as Delta Lloyd Lebensversicherung AG |
| AmeriHome | | AmeriHome Mortgage Company, LLC |
AMTG | | Apollo Residential Mortgage, Inc. |
APK | | Athene Pensionskasse AG, formerly known as Delta Lloyd Pensionskasse AG |
| Apollo | | Apollo Global Management, LLC |
| Apollo Group | | (1) Apollo, (2) the AAA Investor, (3) any investment fund or other collective investment vehicle whose general partner or managing member is owned, directly or indirectly, by Apollo or one or more of Apollo’s subsidiaries, (4) BRH Holdings GP, Ltd. and its shareholders and (5) any affiliate of any of the foregoing (except that AHL and its subsidiaries and employees of AHL, its subsidiaries or AAM are not members of the Apollo Group) |
ARI | | Apollo Commercial Real Estate Finance, Inc. |
| Athene USA | | Athene USA Corporation |
| Athora | | Athora Holding Ltd., formerly known as Aviva USA CorporationAGER Bermuda Holding Ltd. and formerly a consolidated subsidiary |
DLDCoInvest Other | | Delta Lloyd Deutschland AG, now known as Athene Deutschland GmbHAAA Investments (Other), L.P. |
German Group CompaniesCoInvest VI | | Athene Deutschland GmbH, Athene Deutschland Holding GmbH & Co. KG, Athene Deutschland Verwaltungs GmbH, Athene Lebensversicherung AG and Athene Pensionskasse AGAAA Investments (Co-Invest VI), L.P. |
| CoInvest VII | | AAA Investments (Co-Invest VII), L.P. |
| DOL | | United States Department of Labor |
| MidCap | | MidCap FinCo Limited |
| NAIC | | National Association of Insurance Commissioners |
| NCL LLC | | NCL Athene, LLC |
| NYSDFS | | New York State Department of Financial Services |
| Sprint | | Apollo Asia Sprint Co-Investment Fund, L.P. |
| Voya | | Voya Financial, Inc. |
| VIAC | | Voya Insurance and Annuity Company |
| Venerable | | Venerable Holdings, Inc. |
Certain Terms & Acronyms
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| | |
| Term or Acronym | | Definition |
| ABS | | Asset-backed securities |
| ACL | | Authorized control level RBC as defined by the model created by the National Association of Insurance Commissioners |
| ALM | | Asset liability management |
| ALRe RBC | | The risk-based capital ratio of ALRe, when applying the NAIC risk-based capital factors |
| AUM | | Assets under 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 |
| BEAT | | Base Erosion and Anti-Abuse Tax |
| Bermuda capital | | The capital of ALRe calculated under U.S. statutory accounting principles, including that for policyholder reserve liabilities which are subjected to U.S. cash flow testing requirements, but excluding certain items that do not exist under our applicable Bermuda requirements, such as interest maintenance reserves.reserves |
| Block reinsurance | | A transaction in which the ceding company cedes all or a portion of a block of previously issued annuity contracts through a reinsurance agreement |
| BMA | | Bermuda Monetary Authority |
| BSCR | | Bermuda Solvency Capital Requirement |
| CAL | | Company action level RBC as defined by the model created by the National Association of Insurance Commissioners |
CLO | | Collateralized loan obligation |
CMBS | | Commercial mortgage-backed securities |
| Capital ratio | | Ratios calculated (1) with respect to our U.S. insurance subsidiaries, by reference to RBC, (2) with respect to ALRe, by reference to BSCR, and (3) with respect to our former German Group Companies, by reference to SCR |
| CLO | | Collateralized loan obligation |
| CMBS | | Commercial mortgage-backed securities |
| Cost of crediting | | The interest credited to the policyholders on our fixed annuities, including, with respect to our FIAs,fixed indexed annuities, option costs, presented on an annualized basis for interim periods |
| DAC | | Deferred acquisition costs |
| Deferred annuities | | FIAs,Fixed indexed annuities, annual reset annuities and MYGAsmulti-year guaranteed annuities |
| DSI | | Deferred sales inducement |
| Excess capital | | Capital in excess of the level management believes is needed to support our current operating strategy |
| FIA | | Fixed indexed annuity, which is an insurance contract that earns interest at a crediting rate based on a specified index on a tax-deferred basis |
| Fixed annuities | | FIAs together with fixed rate annuities |
| Fixed rate annuity | | Fixed rate annuity is anAn 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 livinglifetime withdrawal benefitsbenefit |
| GMDB | | Guaranteed minimum death benefitsbenefit |
| IMA | | Investment management agreement |
| IMO | | Independent marketing organization |
| Invested assets | | The sum of (a) total investments on the consolidated balance sheet with AFS securities at amortized cost, excluding derivatives, (b) cash and cash equivalents and restricted cash, (c) investments in related parties, (d) accrued investment income, (e) consolidated variable interest entities'entities’ assets, liabilities and noncontrolling interest and (f) policy loans ceded (which offset the direct policy loans in total investments). Invested assets alsoincludes investments supporting assumed funds withheld and modco agreements and excludes assets associated with funds withheld liabilities related to business exited through reinsurance agreements and derivative collateral (offsetting the related cash positions). |
| Investment margin | | Investment margin applies to deferred annuities and is the excess of our net investment earned rate over the cost of crediting to our policyholders, presented on an annualized basis for interim periods |
| Liability outflows | | The aggregate of withdrawals on our deferred annuities, maturities of our funding agreements, payments on payout annuities and pension risk benefit payments |
| LIMRA | | Life Insurance and Market Research Association |
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| | |
| Term or Acronym | | Definition |
| MCR | | Minimum capital requirements |
| MMS | | Minimum margin of solvency |
| Modco | | Modified coinsurance |
| MVA | | Market value adjustment |
| MYGA | | Multi-year guaranteed annuity |
NAIC | | National Association of Insurance Commissioners |
| Net investment earned rate | | Income from our invested assets divided by the average invested assets for the relevant period. |
| period, presented on an annualized basis for interim periods |
| | |
Term or AcronymOther liability costs | | DefinitionOther liability costs include DAC, DSI and VOBA amortization and change in GLWB and GMDB reserves for all products, the cost of liabilities on products other than deferred annuities including offsets for premiums, product charges and other revenues |
| OTTI | | Other-than-temporary impairment |
| Overall tax rate | | Tax rate including corporate income taxes, the BEAT and excise taxes |
| Payout annuities | | Annuities with a current cash payment component, which consist primarily of SPIAs, supplemental contracts and structured settlements |
| Policy loan | | A loan to a policyholder under the terms of, and which is secured by, a policyholder’s policy |
| PRT | | Pension risk transfer |
| RBC | | Risk-based capital |
| Reserve liabilities | | The sum of (a) interest sensitive contract liabilities, (b) future policy benefits, (c) dividends payable to policyholders, and (d) other policy claims and benefits, offset by reinsurance recoverables,recoverable, excluding policy loans ceded. Reserve liabilities also includes the reserves related to assumed modco agreements in order to appropriately match the costs incurred in the consolidated statements of income with the liabilities. Reserve liabilities is net of the ceded liabilities to third-party reinsurers as the costs of the liabilities are passed to such reinsurers and therefore we have no net economic exposure to such liabilities, assuming our reinsurance counterparties perform under our agreements.agreements |
| Rider reserves | | Guaranteed livinglifetime withdrawal benefits and guaranteed minimum death benefits reserves |
| RMBS | | Residential mortgage-backed securities |
| RML | | Residential mortgage loan |
| Sales | | All money paid into an individual annuity, including money paid into new contracts with initial purchase occurring in the specified period and existing contracts with initial purchase occurring prior to the specified period (excluding internal transfers) |
| SPIA | | Single premium immediate annuity |
| Surplus assets | | Assets in excess of policyholder obligations, determined in accordance with the applicable domiciliary jurisdiction’s statutory accounting principles |
| TAC | | Total adjusted capital as defined by the model created by the NAIC |
| U.S. RBC Ratio | | The CAL RBC ratio for AADE, our parent U.S. insurance company |
| VIE | | Variable interest entity |
| VOBA | | Value of business acquired |
Item 1. Financial Statements
Index to Condensed Consolidated Financial Statements (unaudited)
ATHENE HOLDING LTD.
Condensed Consolidated Balance Sheets(Unaudited)
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| | | | | | | |
| (In millions) | March 31, 2017 | | December 31, 2016 |
| Assets | | | |
| Investments | | | |
| Available-for-sale securities, at fair value | | | |
| Fixed maturity securities (amortized cost: 2017 – $52,850 and 2016 – $51,110) | $ | 54,225 |
| | $ | 52,033 |
|
| Equity securities (cost: 2017 – $381 and 2016 – $319) | 422 |
| | 353 |
|
| Trading securities, at fair value | 2,595 |
| | 2,581 |
|
| Mortgage loans, net of allowances (portion at fair value: 2017 – $44 and 2016 – $44) | 5,453 |
| | 5,470 |
|
| Investment funds (portion at fair value: 2017 – $97 and 2016 – $99) | 689 |
| | 689 |
|
| Policy loans | 579 |
| | 602 |
|
| Funds withheld at interest (portion at fair value: 2017 – $212 and 2016 – $140) | 6,593 |
| | 6,538 |
|
| Derivative assets | 1,708 |
| | 1,370 |
|
| Real estate (portion held for sale: 2017 – $23 and 2016 – $23) | 553 |
| | 542 |
|
| Short-term investments, at fair value (cost: 2017 – $166 and 2016 – $189) | 166 |
| | 189 |
|
| Other investments | 82 |
| | 81 |
|
| Total investments | 73,065 |
| | 70,448 |
|
| Cash and cash equivalents | 2,563 |
| | 2,445 |
|
| Restricted cash | 73 |
| | 57 |
|
| Investments in related parties | | | |
| Available-for-sale securities, at fair value | | | |
| Fixed maturity securities (amortized cost: 2017 – $359 and 2016 – $341) | 361 |
| | 335 |
|
| Equity securities (cost: 2017 – $0 and 2016 – $20) | — |
| | 20 |
|
| Trading securities, at fair value | 169 |
| | 195 |
|
| Investment funds (portion at fair value: 2017 – $23 and 2016 – $0) | 1,276 |
| | 1,198 |
|
| Short-term investments, at fair value (cost: 2017 – $20 and 2016 – $0) | 20 |
| | — |
|
| Other investments | 238 |
| | 237 |
|
| Accrued investment income (related party: 2017 – $9 and 2016 – $9) | 575 |
| | 554 |
|
| Reinsurance recoverable (portion at fair value: 2017 – $1,738 and 2016 – $1,692) | 5,960 |
| | 6,001 |
|
| Deferred acquisition costs, deferred sales inducements and value of business acquired | 2,895 |
| | 2,964 |
|
| Current income tax recoverable | 12 |
| | 107 |
|
| Deferred tax assets | 233 |
| | 369 |
|
| Other assets | 817 |
| | 869 |
|
| Assets of consolidated variable interest entities | | | |
| Investments | | | |
| Available-for-sale securities, at fair value | | | |
| Equity securities – related party (cost: 2017 – $143 and 2016 – $143) | 191 |
| | 161 |
|
| Trading securities, at fair value – related party | 166 |
| | 167 |
|
| Investment funds (related party: 2017 – $588 and 2016 – $562; portion at fair value: 2017 – $567 and 2016 – $562) | 599 |
| | 573 |
|
| Cash and cash equivalents | 2 |
| | 14 |
|
| Other assets | 5 |
| | 6 |
|
| Total assets | $ | 89,220 |
| | $ | 86,720 |
|
|
| | | | | | | |
| (In millions) | March 31, 2018 | | December 31, 2017 |
| Assets | | | |
| Investments | | | |
| Fixed maturity securities, at fair value | | | |
| Available-for-sale securities (amortized cost: 2018 – $57,371 and 2017 – $58,506) | $ | 58,575 |
| | $ | 61,012 |
|
| Trading securities | 2,088 |
| | 2,196 |
|
| Equity securities, at fair value | 160 |
| | 790 |
|
| Mortgage loans, net of allowances (portion at fair value: 2018 – $41 and 2017 – $41) | 6,139 |
| | 6,233 |
|
| Investment funds (portion at fair value: 2018 – $131 and 2017 – $145) | 647 |
| | 699 |
|
| Policy loans | 510 |
| | 530 |
|
| Funds withheld at interest (portion at fair value: 2018 – $207 and 2017 – $312) | 7,093 |
| | 7,085 |
|
| Derivative assets | 2,031 |
| | 2,551 |
|
| Real estate (portion held for sale: 2018 – $0 and 2017 – $32) | — |
| | 624 |
|
| Short-term investments, at fair value (cost: 2018 – $235 and 2017 – $201) | 235 |
| | 201 |
|
| Other investments (portion at fair value: 2018 – $39 and 2017 – $0) | 113 |
| | 133 |
|
| Total investments | 77,591 |
| | 82,054 |
|
| Cash and cash equivalents | 2,735 |
| | 4,888 |
|
| Restricted cash | 87 |
| | 105 |
|
| Investments in related parties | | | |
| Fixed maturity securities, at fair value | | | |
| Available-for-sale securities (amortized cost: 2018 – $501 and 2017 – $399) | 505 |
| | 406 |
|
| Trading securities | 305 |
| | 307 |
|
| Investment funds (portion at fair value: 2018 – $153 and 2017 – $30) | 1,499 |
| | 1,310 |
|
| Short-term investments, at fair value (cost: 2018 – $123 and 2017 – $52) | 123 |
| | 52 |
|
| Other investments | 238 |
| | 238 |
|
| Accrued investment income (related party: 2018 – $12 and 2017 – $10) | 620 |
| | 652 |
|
| Reinsurance recoverable (portion at fair value: 2018 – $1,713 and 2017 – $1,824) | 4,834 |
| | 4,972 |
|
| Deferred acquisition costs, deferred sales inducements and value of business acquired | 3,142 |
| | 2,930 |
|
| Other assets | 1,067 |
| | 969 |
|
| Assets of consolidated variable interest entities | | | |
| Investments | | | |
| Fixed maturity securities, trading, at fair value – related party | 47 |
| | 48 |
|
| Equity securities, at fair value – related party | 177 |
| | 240 |
|
| Investment funds – related party (portion at fair value: 2018 – $554 and 2017 – $549) | 582 |
| | 571 |
|
| Cash and cash equivalents | 3 |
| | 4 |
|
| Other assets | 2 |
| | 1 |
|
| Total assets | $ | 93,557 |
| | $ | 99,747 |
|
(Continued)
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Balance Sheets(Unaudited)
| | | (In millions, except share and per share data) | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| Liabilities and Equity | | | | | | |
| Liabilities | | | | | | |
| Interest sensitive contract liabilities (portion at fair value: 2017 – $7,132 and 2016 – $6,574) | $ | 62,634 |
| | $ | 61,532 |
| |
| Future policy benefits (portion at fair value: 2017 – $2,415 and 2016 – $2,400) | 14,727 |
| | 14,569 |
| |
| Interest sensitive contract liabilities (portion at fair value: 2018 – $8,188 and 2017 – $8,929) | | $ | 67,551 |
| | $ | 67,708 |
|
| Future policy benefits (portion at fair value: 2018 – $2,305 and 2017 – $2,428) | | 13,059 |
| | 17,507 |
|
| Other policy claims and benefits | 214 |
| | 217 |
| 137 |
| | 211 |
|
| Dividends payable to policyholders | 917 |
| | 974 |
| 119 |
| | 1,025 |
|
| Long-term debt | | 992 |
| | — |
|
| Derivative liabilities | 32 |
| | 40 |
| 186 |
| | 134 |
|
| Payables for collateral on derivatives | 1,681 |
| | 1,383 |
| 1,145 |
| | 2,323 |
|
| Funds withheld liability (portion at fair value: 2017 – $11 and 2016 – $6) | 382 |
| | 380 |
| |
| Other liabilities (related party: 2017 – $63 and 2016 – $56) | 999 |
| | 685 |
| |
| Funds withheld liability (portion at fair value: 2018 – $11 and 2017 – $22) | | 395 |
| | 407 |
|
| Other liabilities (related party: 2018 – $89 and 2017 – $64) | | 1,277 |
| | 1,222 |
|
| Liabilities of consolidated variable interest entities | 37 |
| | 34 |
| 1 |
| | 2 |
|
| Total liabilities | 81,623 |
| | 79,814 |
| 84,862 |
| | 90,539 |
|
| Commitments and Contingencies (Note 12) | | | | |
| Equity | | | | | | |
| Common stock | | | | | | |
| Class A – par value $0.001 per share; authorized: 2017 and 2016 – 425,000,000 shares; issued and outstanding: 2017 – 101,563,650 and 2016 – 77,319,381 shares | — |
| | — |
| |
| Class B – par value $0.001 per share; convertible to Class A; authorized: 2017 and 2016 – 325,000,000 shares; issued and outstanding: 2017 – 87,775,578 and 2016 – 111,805,829 shares | — |
| | — |
| |
| Class M-1 – par value $0.001 per share; contingently convertible to Class A; authorized: 2017 and 2016 – 7,109,560 shares; issued and outstanding: 2017 – 3,431,547 and 2016 – 3,474,205 shares | — |
| | — |
| |
| Class M-2 – par value $0.001 per share; contingently convertible to Class A; authorized: 2017 and 2016 – 5,000,000 shares; issued and outstanding: 2017 – 974,563 and 2016 – 1,067,747 shares | — |
| | — |
| |
| Class M-3 – par value $0.001 per share; contingently convertible to Class A; authorized: 2017 and 2016 – 7,500,000 shares; issued and outstanding: 2017 – 1,346,650 and 2016 – 1,346,300 shares | — |
| | — |
| |
| Class M-4 – par value $0.001 per share; contingently convertible to Class A; authorized: 2017 and 2016 – 7,500,000 shares; issued and outstanding: 2017 – 5,345,432 and 2016 – 5,397,802 shares | — |
| | — |
| |
| Class A – par value $0.001 per share; authorized: 2018 and 2017 – 425,000,000 shares; issued and outstanding: 2018 – 164,722,131 and 2017 – 142,386,704 shares | | — |
| | — |
|
| Class B – par value $0.001 per share; convertible to Class A; authorized: 2018 and 2017 – 325,000,000 shares; issued and outstanding: 2018 – 25,483,250 and 2017 – 47,422,399 shares | | — |
| | — |
|
| Class M-1 – par value $0.001 per share; contingently convertible to Class A; authorized: 2018 and 2017 – 7,109,560 shares; issued and outstanding: 2018 – 3,388,890 and 2017 – 3,388,890 shares | | — |
| | — |
|
| Class M-2 – par value $0.001 per share; contingently convertible to Class A; authorized: 2018 and 2017 – 5,000,000 shares; issued and outstanding: 2018 – 851,103 and 2017 – 851,103 shares | | — |
| | — |
|
| Class M-3 – par value $0.001 per share; contingently convertible to Class A; authorized: 2018 and 2017 – 7,500,000 shares; issued and outstanding: 2018 – 1,006,110 and 2017 – 1,092,000 shares | | — |
| | — |
|
| Class M-4 – par value $0.001 per share; contingently convertible to Class A; authorized: 2018 and 2017 – 7,500,000 shares; issued and outstanding: 2018 – 4,398,646 and 2017 – 4,711,743 shares | | — |
| | — |
|
| Additional paid-in capital | 3,436 |
| | 3,421 |
| 3,485 |
| | 3,472 |
|
| Retained earnings | 3,488 |
| | 3,117 |
| 4,625 |
| | 4,321 |
|
| Accumulated other comprehensive income (related party: 2017 – $51 and 2016 – $12) | 673 |
| | 367 |
| |
| Total Athene Holding Ltd. shareholders' equity | 7,597 |
| | 6,905 |
| |
| Noncontrolling interest | — |
| | 1 |
| |
| Total equity | 7,597 |
| | 6,906 |
| |
| Accumulated other comprehensive income (related party: 2018 – $4 and 2017 – $48) | | 585 |
| | 1,415 |
|
| Total shareholders' equity | | 8,695 |
| | 9,208 |
|
| Total liabilities and equity | $ | 89,220 |
| | $ | 86,720 |
| $ | 93,557 |
| | $ | 99,747 |
|
(Concluded)
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Income(Unaudited)
| | | | Three months ended March 31, | Three months ended March 31, |
| (In millions, except per share data) | 2017 | | 2016 | 2018 | | 2017 |
| Revenues | | | | | | |
| Premiums | $ | 52 |
| | $ | 60 |
| $ | 278 |
| | $ | 52 |
|
| Product charges | 81 |
| | 66 |
| 96 |
| | 81 |
|
| Net investment income (related party investment income: 2017 – $56 and 2016 – $45; and related party investment expense: 2017 – $78 and 2016 – $81) | 786 |
| | 692 |
| |
| Investment related gains (losses) (related party: 2017 – $(11) and 2016 – $(21)) | 682 |
| | (82 | ) | |
| Net investment income (related party investment income: 2018 – $76 and 2017 – $56; and related party investment expense: 2018 – $83 and 2017 – $78) | | 855 |
| | 786 |
|
| Investment related gains (losses) (related party: 2018 – $17 and 2017 – $(11)) | | (236 | ) | | 682 |
|
| Other-than-temporary impairment investment losses | | | | | | |
| Other-than-temporary impairment losses | — |
| | (22 | ) | (3 | ) | | — |
|
| Other-than-temporary impairment losses recognized in other comprehensive income | (1 | ) | | 12 |
| |
| Other-than-temporary impairment losses reclassified to (from) other comprehensive income | | — |
| | (1 | ) |
| Net other-than-temporary impairment losses | (1 | ) | | (10 | ) | (3 | ) |
| (1 | ) |
| Other revenues | 8 |
| | 8 |
| 6 |
| | 8 |
|
| Revenues of consolidated variable interest entities | | | | | | |
| Net investment income (related party: 2017 – $10 and 2016 – $3) | 10 |
| | 11 |
| |
| Investment related gains (losses) (related party: 2017 – $1 and 2016 – $(14)) | 1 |
| | (23 | ) | |
| Net investment income (related party: 2018 – $10 and 2017 – $10) | | 10 |
| | 10 |
|
| Investment related gains (losses) (related party: 2018 – $5 and 2017 – $1) | | 5 |
| | 1 |
|
| Total revenues | 1,619 |
| | 722 |
| 1,011 |
| | 1,619 |
|
| Benefits and Expenses | | | | |
| Benefits and expenses | | | | |
| Interest sensitive contract benefits | 696 |
| | 253 |
| 19 |
| | 692 |
|
| Amortization of deferred sales inducements | 18 |
| | 4 |
| 20 |
| | 18 |
|
| Future policy and other policy benefits | 214 |
| | 224 |
| 401 |
| | 214 |
|
| Amortization of deferred acquisition costs and value of business acquired | 108 |
| | 28 |
| 89 |
| | 104 |
|
| Dividends to policyholders | 32 |
| | 17 |
| 13 |
| | 32 |
|
| Policy and other operating expenses (related party: 2017 – $4 and 2016 – $0) | 156 |
| | 104 |
| |
| Operating expenses of consolidated variable interest entities | — |
| | 4 |
| |
| Policy and other operating expenses (related party: 2018 – $2 and 2017 – $4) | | 142 |
| | 153 |
|
| Total benefits and expenses | 1,224 |
| | 634 |
| 684 |
| | 1,213 |
|
| Income before income taxes | 395 |
| | 88 |
| 327 |
| | 406 |
|
| Income tax expense | 22 |
| | 1 |
| 59 |
| | 22 |
|
| Net income | 373 |
| | 87 |
| $ | 268 |
| | $ | 384 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | — |
| |
| Net income available to Athene Holding Ltd. shareholders | $ | 373 |
| | $ | 87 |
| |
| | | | | | | |
| Earnings per share | | | | | | |
Basic – Classes A, B, M-1 and M-21 | $ | 1.94 |
| | $ | 0.47 |
| |
Basic – Classes A, B, M-1, M-2, M-3 and M-41 | | $ | 1.36 |
| | $ | 2.00 |
|
| Diluted – Class A | 1.87 |
| | 0.47 |
| 1.36 |
| | 1.92 |
|
| Diluted – Class B | 1.94 |
| | 0.47 |
| 1.36 |
| | 2.00 |
|
Diluted – Class M-11 | 1.94 |
| | N/A |
| |
Diluted – Class M-21 | 0.08 |
| | N/A |
| |
| Diluted – Class M-1 | | 1.36 |
| | 2.00 |
|
| Diluted – Class M-2 | | 1.34 |
| | 0.08 |
|
Diluted – Class M-31 | | 1.33 |
| | N/A |
|
Diluted – Class M-41 | | 0.94 |
| | N/A |
|
| | | | | | | |
N/A – Not applicable | 1 Basic and diluted earnings per share for Class M-1 and M-2 were applicable only for the three months ended March 31, 2017. Refer to Note 9 – Earnings Per Share for further discussion. | |
1 Basic and diluted earnings per share for class M-3 and M-4 were not applicable for the period ended March 31, 2017. See Note 8 – Earnings Per Share for further discussion. | | 1 Basic and diluted earnings per share for class M-3 and M-4 were not applicable for the period ended March 31, 2017. See Note 8 – Earnings Per Share for further discussion. |
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
|
| | | | | | | |
| Three months ended March 31, |
| (In millions) | 2017 |
| 2016 |
| Net income | $ | 373 |
|
| $ | 87 |
|
| Other comprehensive income, before tax | | | |
| Change in unrealized investment gains on available for sale securities | 419 |
|
| 303 |
|
| Change in noncredit component of other-than-temporary impairment losses, available-for-sale | 1 |
|
| (12 | ) |
| Comprehensive loss on hedging instruments | (5 | ) |
| (10 | ) |
| Comprehensive income (loss) on pension adjustments | — |
|
| (1 | ) |
| Comprehensive gain on foreign currency translation adjustments | 2 |
| | 3 |
|
| Other comprehensive income, before tax | 417 |
| | 283 |
|
| Income tax expense related to other comprehensive income | 111 |
|
| 98 |
|
| Other comprehensive income, after tax | 306 |
| | 185 |
|
| Comprehensive income | 679 |
| | 272 |
|
| Less: comprehensive income attributable to noncontrolling interests | — |
| | — |
|
| Comprehensive income available to Athene Holding Ltd. shareholders | $ | 679 |
| | $ | 272 |
|
|
| | | | | | | |
| | Three months ended March 31, |
| (In millions) | 2018 | | 2017 |
| Net income | $ | 268 |
| | $ | 384 |
|
| Other comprehensive income (loss), before tax | | | |
| Unrealized investment gains (losses) on available-for-sale securities | (910 | ) | | 419 |
|
| Noncredit component of other-than-temporary impairment losses on available-for-sale securities | — |
| | 1 |
|
| Unrealized gains (losses) on hedging instruments | (56 | ) | | (5 | ) |
| Pension adjustments | 3 |
| | — |
|
| Foreign currency translation adjustments | (8 | ) | | 2 |
|
| Other comprehensive income (loss), before tax | (971 | ) | | 417 |
|
| Income tax expense (benefit) related to other comprehensive income | (183 | ) | | 111 |
|
| Other comprehensive income (loss) | (788 | ) | | 306 |
|
| Comprehensive income (loss) | $ | (520 | ) | | $ | 690 |
|
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Equity(Unaudited)
| | | (In millions) | Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Total Athene Holding Ltd. shareholders' equity | | Noncontrolling interest | | Total equity | Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income | | Total Athene Holding Ltd. shareholders' equity | | Noncontrolling interest | | Total equity |
| Balance at December 31, 2015 | $ | — |
| | $ | 3,281 |
| | $ | 2,318 |
| | $ | (237 | ) | | $ | 5,362 |
| | $ | 1 |
| | $ | 5,363 |
| |
| Net income | — |
| | — |
| | 87 |
| | — |
| | 87 |
| | — |
| | 87 |
| |
| Other comprehensive income | — |
| | — |
| | — |
| | 185 |
| | 185 |
| | — |
| | 185 |
| |
| Issuance of shares, net of expenses | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| |
| Stock-based compensation | — |
| | 3 |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
| |
| Balance at March 31, 2016 | $ | — |
| | $ | 3,285 |
| | $ | 2,405 |
| | $ | (52 | ) | | $ | 5,638 |
| | $ | 1 |
| | $ | 5,639 |
| |
| | | | | | | | | | | | | | | |
| Balance at December 31, 2016 | $ | — |
| | $ | 3,421 |
| | $ | 3,117 |
| | $ | 367 |
| | $ | 6,905 |
| | $ | 1 |
| | $ | 6,906 |
| $ | — |
| | $ | 3,421 |
| | $ | 3,070 |
| | $ | 367 |
| | $ | 6,858 |
| | $ | 1 |
| | $ | 6,859 |
|
| Net income | — |
| | — |
| | 373 |
| | — |
| | 373 |
| | — |
| | 373 |
| — |
| | — |
| | 384 |
| | — |
| | 384 |
| | — |
| | 384 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | 306 |
| | 306 |
| | — |
| | 306 |
| — |
| | — |
| | — |
| | 306 |
| | 306 |
| | — |
| | 306 |
|
| Stock-based compensation | — |
| | 15 |
| | — |
| | — |
| | 15 |
| | — |
| | 15 |
| — |
| | 15 |
| | — |
| | — |
| | 15 |
| | — |
| | 15 |
|
| Retirement or repurchase of shares | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) | | — |
| | (2 | ) | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) | | — |
| | (2 | ) |
| Other changes in equity of noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Balance at March 31, 2017 | $ | — |
| | $ | 3,436 |
| | $ | 3,488 |
| | $ | 673 |
| | $ | 7,597 |
| | $ | — |
| | $ | 7,597 |
| $ | — |
| | $ | 3,436 |
| | $ | 3,452 |
| | $ | 673 |
| | $ | 7,561 |
| | $ | — |
| | $ | 7,561 |
|
| | | | | | | | | | | | | | | |
| Balance at December 31, 2017 | | $ | — |
| | $ | 3,472 |
| | $ | 4,321 |
| | $ | 1,415 |
| | $ | 9,208 |
| | $ | — |
| | $ | 9,208 |
|
Adoption of accounting standards1 | | — |
| | — |
| | 39 |
| | (42 | ) | | (3 | ) | | — |
| | (3 | ) |
| Net income | | — |
| | — |
| | 268 |
| | — |
| | 268 |
| | — |
| | 268 |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | (788 | ) | | (788 | ) | | — |
| | (788 | ) |
| Issuance of shares, net of expenses | | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Stock-based compensation | | — |
| | 12 |
| | — |
| | — |
| | 12 |
| | — |
| | 12 |
|
| Retirement or repurchase of shares | | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) | | — |
| | (3 | ) |
| Balance at March 31, 2018 | | $ | — |
| | $ | 3,485 |
| | $ | 4,625 |
| | $ | 585 |
| | $ | 8,695 |
| | $ | — |
| | $ | 8,695 |
|
| | | | | | | | | | | | | | | |
1 See discussion of adoptions in Note 1 – Business, Basis of Presentation and Significant Accounting Policies. | | 1 See discussion of adoptions in Note 1 – Business, Basis of Presentation and Significant Accounting Policies. |
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
| | | | Three months ended March 31, | Three months ended March 31, |
| (In millions) | 2017 | | 2016 | 2018 | | 2017 |
| Cash flows from operating activities | | | | | | |
| Net income | $ | 373 |
| | $ | 87 |
| $ | 268 |
| | $ | 384 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Amortization of deferred acquisition costs and value of business acquired | 108 |
| | 28 |
| 89 |
| | 104 |
|
| Amortization of deferred sales inducements | 18 |
| | 4 |
| 20 |
| | 18 |
|
| Amortization (accretion) of net investment premiums, discounts, and other | (54 | ) | | (74 | ) | |
| Accretion of net investment premiums, discounts, and other | | (45 | ) | | (54 | ) |
| Stock-based compensation | 16 |
| | (15 | ) | 7 |
| | 13 |
|
| Net investment income (related party: 2017 – $(27) and 2016 – $5) | (30 | ) | | 25 |
| |
| Net recognized (gains) losses on investments and derivatives (related party: 2017 – $10 and 2016 – $14) | (547 | ) | | 111 |
| |
| Net investment income (related party: 2018 – $(43) and 2017 – $(27)) | | (29 | ) | | (30 | ) |
| Net recognized (gains) losses on investments and derivatives (related party: 2018 – $(24) and 2017 – $10) | | 209 |
| | (547 | ) |
| Policy acquisition costs deferred | (105 | ) | | (97 | ) | (122 | ) | | (105 | ) |
| Deferred income tax expense (benefit) | 22 |
| | 7 |
| |
| Changes in operating assets and liabilities: | | | | | | |
| Accrued investment income | (21 | ) | | 1 |
| (27 | ) | | (21 | ) |
| Interest sensitive contract liabilities | 659 |
| | 310 |
| (201 | ) | | 655 |
|
| Future policy benefits, other policy claims and benefits, dividends payable to policyholders and reinsurance recoverable | (18 | ) | | (77 | ) | 333 |
| | (18 | ) |
| Current income tax recoverable | 95 |
| | 39 |
| |
| Funds withheld assets and liabilities | (91 | ) | | 8 |
| (7 | ) | | (91 | ) |
| Other assets and liabilities | 4 |
| | 9 |
| 84 |
| | 121 |
|
| Consolidated variable interest entities related: | | | | | | |
| Net recognized (gains) losses on investments and derivatives (related party: 2017 – $(1) and 2016 – $14) | (1 | ) | | 23 |
| |
| Change in other assets and liabilities | 1 |
| | (1 | ) | |
| Net recognized (gains) losses on investments and derivatives (related party: 2018 – $(6) and 2017 – $(1)) | | (6 | ) | | (1 | ) |
| Other operating activities, net | | — |
| | 1 |
|
| Net cash provided by operating activities | 429 |
| | 388 |
| 573 |
| | 429 |
|
| Cash flows from investing activities | | | | |
| Sales, maturities and repayments of: | | | | |
| Fixed maturity securities | | | | |
| Available-for-sale securities (related party: 2018 – $57 and 2017 – $7) | | 3,017 |
| | 2,688 |
|
| Trading securities (related party: 2018 – $1 and 2017 – $14) | | 31 |
| | 42 |
|
| Equity securities (related party: 2018 – $0 and 2017 – $22) | | 2 |
| | 170 |
|
| Mortgage loans | | 396 |
| | 281 |
|
| Investment funds (related party: 2018 – $52 and 2017 – $23) | | 83 |
| | 52 |
|
| Derivative instruments and other invested assets | | 551 |
| | 360 |
|
| Short-term investments | | 103 |
| | 95 |
|
| Purchases of: | | | | |
| Fixed maturity securities | | | | |
| Available-for-sale securities (related party: 2018 – $(158) and 2017 – $(25)) | | (5,914 | ) | | (4,274 | ) |
| Trading securities | | (25 | ) | | (17 | ) |
| Equity securities | | (9 | ) | | (211 | ) |
| Mortgage loans | | (463 | ) | | (265 | ) |
| Investment funds (related party: 2018 – $(182) and 2017 – $(71)) | | (213 | ) | | (94 | ) |
| Derivative instruments and other invested assets | | (224 | ) | | (189 | ) |
| Real estate | | — |
| | (7 | ) |
| Short-term investments (related party: 2018 – $(72) and 2017 – $(20)) | | (209 | ) | | (93 | ) |
| Consolidated variable interest entities related: | | | | |
| Sales, maturities, and repayments of investments (related party: 2018 – $59 and 2017 – $0) | | 59 |
| | — |
|
| Purchases of investments (related party: 2018 – $0 and 2017 – $(21)) | | — |
| | (21 | ) |
| Deconsolidation of AGER Bermuda Holding Ltd. and its subsidiaries | | (296 | ) | | — |
|
| Cash settlement of derivatives | | (2 | ) | | (8 | ) |
| Other investing activities, net | | 229 |
| | 363 |
|
| Net cash used in investing activities | | (2,884 | ) | | (1,128 | ) |
| | | | (Continued) |
| | | (Continued) |
|
| See accompanying notes to the unaudited condensed consolidated financial statements | | | | | | |
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
|
| | | | | | | |
| | Three months ended March 31, |
| (In millions) | 2017 | | 2016 |
| Cash flows from investing activities | | | |
| Sales, maturities, and repayments of: | | | |
| Available-for-sale securities | | | |
| Fixed maturity securities (related party: 2017 – $7 and 2016 – $9) | $ | 2,688 |
| | $ | 2,518 |
|
| Equity securities (related party: 2017 – $22 and 2016 – $0) | 120 |
| | 5 |
|
| Trading securities (related party: 2017 – $14 and 2016 – $24) | 92 |
| | 235 |
|
| Mortgage loans | 281 |
| | 146 |
|
| Investment funds (related party: 2017 – $23 and 2016 – $37) | 52 |
| | 56 |
|
| Derivative instruments and other invested assets | 360 |
| | 59 |
|
| Short-term investments (related party: 2017 – $0 and 2016 – $55) | 95 |
| | 133 |
|
| Purchases of: | | | |
| Available-for-sale securities | | | |
| Fixed maturity securities (related party: 2017 – $(25) and 2016 – $0) | (4,288 | ) | | (1,810 | ) |
| Equity securities | (157 | ) | | (82 | ) |
| Trading securities (related party: 2017 – $0 and 2016 – $(24)) | (71 | ) | | (242 | ) |
| Mortgage loans | (265 | ) | | (344 | ) |
| Investment funds (related party: 2017 – $(71) and 2016 – $(85)) | (94 | ) | | (98 | ) |
| Derivative instruments and other invested assets | (189 | ) | | (157 | ) |
| Real estate | (7 | ) | | (6 | ) |
| Short-term investments (related party: 2017 – $(20) and 2016 – $0) | (93 | ) | | (427 | ) |
| Consolidated variable interest entities related: | | | |
| Sales, maturities, and repayments of investments (related party: 2017 – $0 and 2016 – $3) | — |
| | 6 |
|
| Purchases of investments (related party: 2017 – $(21) and 2016 – $(10)) | (21 | ) | | (10 | ) |
| Change in restricted cash | — |
| | (4 | ) |
| Cash settlement of derivatives | (8 | ) | | 9 |
|
| Change in restricted cash | (16 | ) | | 43 |
|
| Other investing activities, net | 381 |
| | 85 |
|
| Net cash (used in) provided by investing activities | (1,140 | ) | | 115 |
|
| Cash flows from financing activities | | | |
| Capital contributions | — |
| | 1 |
|
| Deposits on investment-type policies and contracts | 1,925 |
| | 784 |
|
| Withdrawals on investment-type policies and contracts | (1,403 | ) | | (1,185 | ) |
| Payments for coinsurance agreements on investment-type contracts, net | (10 | ) | | (21 | ) |
| Net change in cash collateral posted for derivative transactions | 298 |
| | (106 | ) |
| Repurchase of common stock | (2 | ) | | (1 | ) |
| Other financing activities, net | 5 |
| | 32 |
|
| Net cash provided by (used in) financing activities | 813 |
| | (496 | ) |
| Effect of exchange rate changes on cash and cash equivalents | 4 |
| | 10 |
|
| Net increase in cash and cash equivalents | 106 |
| | 17 |
|
Cash and cash equivalents at beginning of year1 | 2,459 |
| | 2,720 |
|
Cash and cash equivalents at end of period1 | $ | 2,565 |
| | $ | 2,737 |
|
| | | | |
| Supplementary information | | | |
| Non-cash transactions | | | |
| Deposits on investment-type policies and contracts through reinsurance agreements | $ | 169 |
| | $ | 899 |
|
| Withdrawals on investment-type policies and contracts through reinsurance agreements | 182 |
| | 79 |
|
| Investments received from settlements on reinsurance agreements | 24 |
| | — |
|
| | | | |
1 Includes cash and cash equivalents of consolidated variable interest entities |
|
| | | | | | | |
| | Three months ended March 31, |
| (In millions) | 2018 | | 2017 |
| Cash flows from financing activities | | | |
| Capital contributions | $ | 1 |
| | $ | — |
|
| Proceeds from long-term debt | 998 |
| | — |
|
| Deposits on investment-type policies and contracts | 1,774 |
| | 1,925 |
|
| Withdrawals on investment-type policies and contracts | (1,474 | ) | | (1,399 | ) |
| Payments for coinsurance agreements on investment-type contracts, net | (10 | ) | | (10 | ) |
| Net change in cash collateral posted for derivative transactions | (1,178 | ) | | 298 |
|
| Repurchase of common stock | (3 | ) | | (2 | ) |
| Other financing activities, net | 31 |
| | 5 |
|
| Net cash provided by financing activities | 139 |
| | 817 |
|
| Effect of exchange rate changes on cash and cash equivalents | — |
| | 4 |
|
| Net (decrease) increase in cash and cash equivalents | (2,172 | ) | | 122 |
|
Cash and cash equivalents at beginning of year1 | 4,997 |
| | 2,516 |
|
Cash and cash equivalents at end of period1 | $ | 2,825 |
| | $ | 2,638 |
|
| | | | |
| Supplementary information | | | |
| Non-cash transactions | | | |
| Deposits on investment-type policies and contracts through reinsurance agreements | $ | 108 |
| | $ | 169 |
|
| Withdrawals on investment-type policies and contracts through reinsurance agreements | 91 |
| | 182 |
|
| Investments received from settlements on reinsurance agreements | — |
| | 24 |
|
| Investment in Athora Holding Ltd. received upon deconsolidation | 108 |
| | — |
|
| | | | |
1 Includes cash and cash equivalents, restricted cash, and cash and cash equivalents of consolidated variable interest entities. |
(Concluded)
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
1. Business, Basis of Presentation and Significant Accounting Policies
Athene Holding Ltd. (AHL), a Bermuda exempted company, together with its subsidiaries (collectively, Athene, we, our, us, or the Company), is a leading retirement services company that issues, reinsures and acquires retirement savings products in all U.S. states and the District of Columbia and Germany.Columbia.
We conduct business primarily through the following consolidated subsidiaries:
Athene Life Re Ltd., a Bermuda exempted companyOur non-U.S. reinsurance subsidiaries, to which AHL'sAHL’s other insurance subsidiaries and third party ceding companies directly and indirectly reinsure a portion of their liabilities, including Athene Life Re Ltd. (ALRe);, a Bermuda exempted company; and
Athene USA Corporation, an Iowa corporation and its subsidiaries (Athene USA); and
Athene Deutschland GmbH & Co. KG, a German partnership and its subsidiaries (ADKG).
In addition, we consolidate certain variable interest entities (VIEs), for which we determined we are the primary beneficiary, as discussed in Note 4 – Variable Interest Entities.
Basis of Presentation—We have prepared the accompanying condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the United States Securities and Exchange Commission'sCommission’s rules and regulations for Form 10-Q and Article 10 of Regulation S-X. The accompanying condensed consolidated financial statements are unaudited and reflect all adjustments, consisting only of normal recurring items, considered necessary for fair statement of the periods presented. All significant intercompany accounts and transactions have been eliminated. Interim operating results are not necessarily indicative of the results expected for the entire year.
The accompanying condensed consolidated balance sheet as of December 31, 20162017 has been derived from the audited financial statements, but does not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K.10-K for the year ended December 31, 2017. The preparation of financial statements requires the use of management estimates. Actual results may differ from estimates used in preparing the condensed consolidated financial statements.
ChangeDeconsolidation – AGER Bermuda Holding Ltd. and its subsidiaries, now known as Athora Holding Ltd. (Athora), was our consolidated subsidiary for the year ended December 31, 2017. In April 2017, in Accounting Policyconnection with a private offering, Athora entered into subscription agreements with AHL, certain affiliates of Apollo Global Management, LLC (AGM and, Revisions—Subsequenttogether with its subsidiaries, Apollo) and a number of other third-party investors pursuant to which Athora secured commitments from such parties to purchase new common shares in Athora (Athora Offering). In November 2017, the originalAthora board of directors approved resolutions authorizing the closing of the Athora Offering (Closing) to occur on January 1, 2018 and approving a capital call from all of the Athora investors, excluding us. In connection with the Closing and the issuance of the condensed consolidated financial statements for the three months ended March 31, 2016, we adopted a changeshares in accounting principle regarding the balance sheet presentation of assets and liabilities associated with reinsurance agreements written on a modified coinsurance (modco) basis. The funds withheld assets and liabilities arising from modco contracts are presented grossrespect of the corresponding policy benefit liabilitiescapital call, each of which occurred on January 1, 2018, our equity interest in Athora was exchanged for common shares of Athora. As a result, on January 1, 2018, we held 10% of the condensedaggregate voting power of and less than 50% of the economic interest in Athora and, as such, it is thereafter held as a related party investment rather than a consolidated balance sheets, whereas these assets and liabilities were previously presented net onsubsidiary. We did not recognize a contract-by-contract basis. We also applied this change retrospectively to the condensed consolidated statement of cash flows for the three months ended March 31, 2016, for the corresponding balance sheet classification changes within operating activities. There was no impact tomaterial amount in the condensed consolidated statements of income comprehensive income, or equity resulting from this change.
We have also revised our condensed consolidated financial statements and notes as a result of correcting immaterial misstatements. We assessed the materiality of these revisions and concluded these revisions are not material to the condensed consolidated financial statements as a whole. However, we elected to revise the condensed consolidated financial statements to increase their accuracy, as well as provide consistency and comparability with balances and activities to be reportedupon deconsolidation in future periods.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements2018. (Unaudited)
The following is a summary of the impacts of the revisions on the condensed consolidated statements of income:
|
| | | | | | | | | | | |
| | Three months ended March 31, 2016 |
| (In millions, except per share data) | As Previously Reported | | Revisions | | As Adjusted |
| Revenue | | | | | |
| Net investment income | $ | 693 |
| | $ | (1 | ) | | $ | 692 |
|
| Total revenues | 723 |
| | (1 | ) | | 722 |
|
| Benefits and Expenses | | | | | |
| Interest sensitive contract benefits | 246 |
| | 7 |
| | 253 |
|
| Amortization of deferred sales inducements | 2 |
| | 2 |
| | 4 |
|
| Future policy and other policy benefits | 222 |
| | 2 |
| | 224 |
|
| Amortization of deferred acquisition costs and value of business acquired | 20 |
| | 8 |
| | 28 |
|
| Total benefits and expenses | 615 |
| | 19 |
| | 634 |
|
| Income before income taxes | 108 |
| | (20 | ) | | 88 |
|
| Income tax expense | 1 |
| | — |
| | 1 |
|
| Net income | 107 |
| | (20 | ) | | 87 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | — |
| | — |
|
| Net income available to Athene Holding Ltd. shareholders | $ | 107 |
| | $ | (20 | ) | | $ | 87 |
|
| | | | | | |
| Earnings per share on Class A and B shares | | | | | |
| Basic | $ | 0.57 |
| | $ | (0.10 | ) | | $ | 0.47 |
|
| Diluted | $ | 0.57 |
| | $ | (0.10 | ) | | $ | 0.47 |
|
| | | | | | |
The following is a summary of the impacts of the revisions on the condensed consolidated statements of comprehensive income:
|
| | | | | | | | | | | |
| | Three months ended March 31, 2016 |
| (In millions) | As Previously Reported | | Revisions | | As Adjusted |
| Net income | $ | 107 |
| | $ | (20 | ) | | $ | 87 |
|
| Other comprehensive income, before tax | | | | | |
| Comprehensive income (loss) on foreign currency translation adjustments | 4 |
| | (1 | ) | | 3 |
|
| Other comprehensive income, before tax | 284 |
| | (1 | ) | | 283 |
|
| Income tax expense related to other comprehensive income | 98 |
| | — |
| | 98 |
|
| Other comprehensive income, after tax | 186 |
| | (1 | ) | | 185 |
|
| Comprehensive income | 293 |
| | (21 | ) | | 272 |
|
| Less: comprehensive income attributable to noncontrolling interests | — |
| | — |
| | — |
|
| Comprehensive income available to Athene Holding Ltd. shareholders | $ | 293 |
| | $ | (21 | ) | | $ | 272 |
|
We revised the condensed consolidated statements of equity for the three months ended March 31, 2016 for the changes to net income and other comprehensive income presented above, and an adjustment of $1 million to retirement of shares.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following is a summary of the impact of changes in accounting policy and revisions to the impacted lines of the condensed consolidated statements of cash flows:
|
| | | | | | | | | | | | | | | |
| | Three months ended March 31, 2016 |
| (In millions) | As Previously Reported | | Change in Accounting Policy | | Revisions | | As Adjusted |
| Cash flows from operating activities | | | | | | | |
| Net income | $ | 107 |
| | $ | — |
| | $ | (20 | ) | | $ | 87 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
| Amortization of deferred acquisition costs and value of business acquired | 20 |
| | — |
| | 8 |
| | 28 |
|
| Amortization of deferred sales inducements | 2 |
| | — |
| | 2 |
| | 4 |
|
| Deferred income tax expense | (1 | ) | | — |
| | 8 |
| | 7 |
|
| Changes in operating assets and liabilities: | | | | | | | |
| Accrued investment income | (9 | ) | | — |
| | 10 |
| | 1 |
|
| Interest sensitive contract liabilities | 293 |
| | 13 |
| | 4 |
| | 310 |
|
Future policy benefits, other policy claims and benefits, dividends payable to policyholders and reinsurance recoverable1 | (82 | ) | | (35 | ) | | 40 |
| | (77 | ) |
| Current income tax recoverable | 47 |
| | — |
| | (8 | ) | | 39 |
|
| Funds withheld assets and liabilities | (14 | ) | | 22 |
| | — |
| | 8 |
|
| Other asset and liabilities | 21 |
| | — |
| | (12 | ) | | 9 |
|
| Net cash provided by operating activities | 356 |
| | — |
| | 32 |
| | 388 |
|
| Cash flows from investing activities | | | | | | | |
| Other investing activities, net | 95 |
| | — |
| | (10 | ) | | 85 |
|
| Net cash provided by (used in) investing activities | 125 |
| | — |
| | (10 | ) | | 115 |
|
| Cash flows from financing activities | | | | | | | |
| Withdrawals on investment-type policies and contracts | (1,150 | ) | | — |
| | (35 | ) | | (1,185 | ) |
| Other financing activities, net | 19 |
| | — |
| | 13 |
| | 32 |
|
| Net cash used in financing activities | (474 | ) | | — |
| | (22 | ) | | (496 | ) |
| Effect of exchange rate changes on cash and cash equivalents | 10 |
| | — |
| | — |
| | 10 |
|
| Net increase in cash and cash equivalents | 17 |
| | — |
| | — |
| | 17 |
|
Cash and cash equivalents at beginning of year2 | 2,720 |
| | — |
| | — |
| | 2,720 |
|
Cash and cash equivalents at end of period2 | $ | 2,737 |
| | $ | — |
| | $ | — |
| | $ | 2,737 |
|
| | | | | | | | |
1 Financial statement line item renamed for the current period presentation |
2 Includes cash and cash equivalents of consolidated variable interest entities |
Adopted Accounting Pronouncements
Receivables – Nonrefundable FeesRevenue Recognition (ASU 2017-13, ASU 2016-20, ASU 2016-12, ASU 2016-11, ASU 2016-10, ASU 2016-08, ASU 2015-14 and Other Costs (ASU 2017-08)ASU 2014-09)
The amendmentsThese updates are based on the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in this update shortenan amount that reflects the amortization period for certain callable debt securities held at a premiumconsideration to which the earliest call date. These amendments are requiredentity expects to be entitled in exchange for those goods or services. These updates replace all general and most industry-specific revenue recognition guidance, excluding insurance contracts, leases, financial instruments and guarantees, which have been scoped out of these updates. Since the guidance does not apply to revenue on contracts accounted for under the financial instruments or insurance contracts standards, only a portion of our revenues are impacted by this guidance. We adopted these updates on a modified retrospective basis effective January 1, 2019. Early adoption is permitted and we have elected to early adopt effective January 1, 2017.2018. The adoption did not have a material impact on our consolidated financial statements.
Consolidation – Interest Held through Related Parties under Common Control (ASU 2016-17)
This update amends the consolidation guidance to change how indirect interests in VIEs are evaluated by a reporting entity when determining whether or not it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. Previously, if a single decision maker and its related parties were under common control, the single decision maker was required to consider indirect interests held through related parties to be the equivalent of direct interests in their entirety. The amendments change the evaluation of indirect interests to be considered on a proportionate basis. We adopted this standard effective January 1, 2017, and the adoption did not have a material effect on our consolidated financial statements.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Improvements to Employee Share-Based Payment Accounting (ASU 2016-09)
This update simplifies several aspects of the accounting for share-based payment award transactions, including income tax consequences, forfeitures and classification on the statement of cash flows. The standard requires entities to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. We have elected to account for forfeitures when they occur. We adopted this standard effective January 1, 2017, and the adoption did not have a material effect on our consolidated financial statements.
Equity Method and Joint Ventures (ASU 2016-07)
This update eliminates the retroactive adjustments to an investment upon it qualifying for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence by the investor. We adopted this standard effective January 1, 2017, and the adoptionadoptions did not have a material effect on our consolidated financial statements.
Derivatives and Hedging – Contingent Put and Call OptionsTargeted Improvements (ASU 2016-06)2017-12)
ThisThe amendments in this update is intendedcontain improvements to clarify the requirements for assessing whether contingent call (put) optionsfinancial reporting of hedging relationships that can acceleratemore closely reflect the paymenteconomic results of principal on debt instruments are clearly and closely relatedan entity’s risk management activities in its financial statements. Additionally, the amendments in this update make certain targeted improvements to debt hosts.simplify the application of hedge accounting. We early adopted this standardupdate effective January 1, 2017,2018, and the adoption did not have a material effect on our consolidated financial statements.
DerivativesGains and HedgingLosses from the Derecognition of Nonfinancial Assets (ASU 2017-05)
The amendments in this update clarify the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. We adopted this update on a modified retrospective basis effective January 1, 2018. The adoption did not have a material effect on our consolidated financial statements.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Statement of Cash Flows – Effects of Derivative Contract NovationRestricted Cash (ASU 2016-05)2016-18)
This update is intended to clarify that a change inrequires amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the counterparty to a derivative instrument that has been designated asbeginning-of-period and end-of-period amounts shown on the hedging instrument does not, in andconsolidated statements of itself, require a de-designation of that hedging relationship provided all other hedge accounting criteria continue to be met.cash flows. We adopted this standardupdate effective January 1, 2017,2018, and have changed the presentation on the consolidated statements of cash flows as required by this update.
Income Taxes – Intra-Entity Transfers (ASU 2016-16)
This update requires the immediate recognition of current and deferred income tax effects of intra-entity transfers of assets, other than inventory. Prior to adoption, recognition of the income tax consequence was not recognized until the asset was sold to an outside party. We adopted this update effective January 1, 2018. Upon adoption, we recognized a cumulative-effect decrease to beginning retained earnings of $3 million.
Statement of Cash Flows (ASU 2016-15)
This update provides specific guidance to clarify how entities should classify certain cash receipts and cash payments on the statement of cash flows. The update also clarifies the application of the predominance principle when cash receipts and cash payments have aspects of more than one class of cash flows. We adopted this update effective January 1, 2018, and the adoption did not have a material effect on our consolidated financial statements.
Financial Instruments – Recognition and Measurement (ASU 2016-01)
This update changes the accounting for certain equity investments, the presentation of changes in the fair value of liabilities measured under the fair value option due to instrument-specific credit risk, and certain disclosures. For liabilities measured under the fair value option, changes in fair value attributable to instrument-specific credit risk will no longer affect net income, but will be recognized separately in other comprehensive income (OCI). Additionally, this update requires equity investments to be measured at fair value with subsequent changes recognized in net income, except for those accounted for under the equity method or requiring consolidation. Prior to the effective date of this update, changes in fair value related to available-for-sale (AFS) equity securities were recognized in OCI. We adopted this update effective January 1, 2018. Upon adoption, we recognized a cumulative-effect increase to beginning retained earnings of $42 million and a corresponding decrease to accumulated other comprehensive income (AOCI). Additionally, we combined the presentation of AFS and trading equity securities on the consolidated balance sheets for all periods presented.
Recently Issued Accounting Pronouncements
GainsLeases (ASU 2018-1, ASU 2017-13 and Losses from the Derecognition of Nonfinancial Assets (ASU 2017-05)ASU 2016-02)
The amendments in this update clarify the scope ofThese updates are intended to increase transparency and comparability for lease transactions. A lessee is required to recognize an asset derecognition guidance and a liability for all lease arrangements longer than 12 months. Lessor accounting for partial sales of nonfinancial assets.is largely unchanged. We will be required to adopt this standardthese updates on a retrospective or modified retrospective basis effective January 1, 2018.2019. Early adoption is permitted. We have reviewed our existing lease contracts and our implementation efforts are currently evaluatingprimarily focused on assessing the financial impact of this guidancethese updates on our consolidated financial statements.
Intangibles – Simplifying the Test for Goodwill Impairment (ASU 2017-04)
The amendments in this update simplify the subsequent measurement of goodwill by eliminating the comparison of the implied fair value of a reporting unit'sunit’s goodwill with the carrying amount of that goodwill to determine the goodwill impairment loss. With the adoption of this guidance, a goodwill impairment will be the amount by which a reporting unit'sunit’s carrying value exceeds its fair value, not to exceed the carrying amount of the goodwill allocated to that reporting unit. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. We will be required to adopt this standardupdate prospectively effective January 1, 2020. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
Business Combinations – Clarifying the Definition of a Business (ASU 2017-01)
The amendments in this update clarify the definition of a business with the objective of assisting entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. We will be required to adopt this standard effective January 1, 2018. We are currently evaluating the impact of this guidance on our consolidated financial statements.
Revenue Recognition (ASU 2016-20, ASU 2016-12, ASU 2016-11, ASU 2016-10, ASU 2016-08, ASU 2015-14 and ASU 2014-09)
ASU 2014-09 indicates an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2015-14 provided for a one-year deferral of the effective date, which will require us to adopt this standard effective January 1, 2018. ASU 2016-08 amends the principal-versus-agent implementation guidance and illustrations in ASU 2014-09. ASU 2016-10 clarifies the identification of performance obligations as well as licensing implementation guidance. ASU 2016-11 brings existing Securities and Exchange Commission (SEC) guidance into conformity with revenue recognition accounting guidance of ASU 2014-09 discussed above. ASU 2016-12 provides clarification on assessing collectability, presentation of sales tax, non-cash consideration and transition. ASU 2016-20 addresses necessary technical corrections and improvements to clarify codification amended by ASU 2014-09 within Topic 606. The revenue recognition updates replace all general and most industry-specific revenue recognition guidance, excluding insurance contracts, leases, financial instruments and guarantees, which have been scoped out of the update. Since the guidance does not apply to revenue on contracts accounted for under the financial instruments or insurance contracts standards, only a portion of our revenues are impacted by this guidance. Our evaluation process includes, but is not limited to, identifying contracts within the scope of the guidance, reviewing and documenting our accounting for these contracts, identifying and determining the accounting for any related contract costs and assessing the impact of this guidance on our consolidated financial statements.
Statement of Cash Flows – Restricted Cash (ASU 2016-18)
This update requires amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the consolidated statements of cash flows. We will be required to adopt this standard retrospectively for each period presented effective January 1, 2018. Early adoption is permitted. The adoption of this update will require us to change the presentation on the consolidated statements of cash flows for restricted cash or restricted cash equivalents; however, we do not expect the adoption of this update to have a material effect on our consolidated financial statements.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Income Taxes – Intra-Entity Transfers (ASU 2016-16)
This update requires the immediate recognition of current and deferred income tax effects of intra-entity transfers of assets, other than inventory. Currently, recognition of the income tax consequence was not recognized until the asset was sold to an outside party. We will be required to adopt this standard on a modified retrospective basis effective January 1, 2018. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
Statement of Cash Flows (ASU 2016-15)
This update provides specific guidance to clarify how entities should classify certain cash receipts and cash payments on the statement of cash flows. The update also clarifies the application of the predominance principle when cash receipts and cash payments have aspects of more than one class of cash flows. We will be required to adopt this standard effective January 1, 2018. We do not expect the adoption of this update to have a material effect on our consolidated financial statements.
Financial Instruments – Credit Losses (ASU 2016-13)
This update is designed to reduce complexity by limiting the number of credit impairment models used for different assets. The model will result in accelerated credit loss recognition on assets held at amortized cost, which includes our commercial and residential mortgage investments. The identification of credit-deteriorated securities will include all assets that have experienced a more-than-insignificant deterioration in credit since origination. Additionally, any changes in the expected cash flows of credit-deteriorated securities will be recognized immediately in the income statement. Available-for-saleAFS fixed maturity securities are not in scope of the new credit loss model, but will undergo targeted improvements to the current reporting model including the establishment of a valuation allowance for credit losses versus the current direct write down approach. We will be required to adopt this standardupdate effective January 1, 2020. Early adoption is permitted effective January 1, 2019. We are currently evaluating the impact of this guidance on our consolidated financial statements.
Leases (ASU 2016-02)
This update is intended to increase transparency and comparability for lease transactions. A lessee is required to recognize an asset and a liability for all lease arrangements longer than 12 months. Lessor accounting is largely unchanged. We will be required to adopt this standard on a modified retrospective basis effective January 1, 2019. Early adoption is permitted. Our implementation efforts are primarily focused on the review of existing lease contracts and assessing the impact of this guidance on our consolidated financial statements.
Financial Instruments – Recognition and Measurement (ASU 2016-01)16
This update retains the current accounting for classifying and measuring investments in debt securities and loans, but requires equity investments to be measured at fair value with subsequent changes recognized in net income, except for those accounted for under the equity method or requiring consolidation. We currently recognize changes in fair value related to available-for-sale (AFS) equity securities in accumulated other comprehensive income (AOCI) on the consolidated balance sheets. We will be required to adopt this standard with a cumulative-effect adjustment to beginning retained earnings effective January 1, 2018. Refer to Note 2 – Investments for further information on the unrealized gains and losses
Contents
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
2. Investments
Available-for-sale Securities—The following table represents the amortized cost, gross unrealized gains and losses, fair value and other-than-temporary impairments (OTTI) in AOCI of our AFS investments by asset type. Our AFS investment portfolio includes bonds, collateralized loan obligations (CLO), asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS), redeemable preferred stock, and equity securities. Additionally, it includes direct investments in affiliates of Apollo Global Management, LLC (AGM and, together with its subsidiaries, Apollo) where Apollo can exercise significant influence over the affiliates. These investments are presented as investments in related parties on the condensed consolidated balance sheets, and are separately disclosed below.
The following table represents the cost or amortized cost, gross unrealized gains and losses, fair value and other-than-temporary impairments (OTTI) in AOCI of our AFS investments by asset type: | | | | March 31, 2017 | March 31, 2018 |
| (In millions) | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | OTTI in AOCI | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | OTTI in AOCI |
| Fixed maturity securities | | | | | | | | | | |
| Available-for-sale securities | | | | | | | | | | |
| U.S. government and agencies | $ | 59 |
| | $ | 1 |
| | $ | — |
| | $ | 60 |
| | $ | — |
| $ | 25 |
| | $ | — |
| | $ | — |
| | $ | 25 |
| | $ | — |
|
| U.S. state, municipal and political subdivisions | 1,016 |
| | 125 |
| | (1 | ) | | 1,140 |
| | — |
| 995 |
| | 140 |
| | (3 | ) | | 1,132 |
| | — |
|
| Foreign governments | 1,959 |
| | 87 |
| | (15 | ) | | 2,031 |
| | — |
| 137 |
| | 2 |
| | (3 | ) | | 136 |
| | — |
|
| Corporate | 30,806 |
| | 1,021 |
| | (260 | ) | | 31,567 |
| | 2 |
| 35,489 |
| | 875 |
| | (497 | ) | | 35,867 |
| | 1 |
|
| CLO | 5,039 |
| | 34 |
| | (52 | ) | | 5,021 |
| | — |
| 5,617 |
| | 36 |
| | (11 | ) | | 5,642 |
| | — |
|
| ABS | 3,279 |
| | 34 |
| | (53 | ) | | 3,260 |
| | — |
| 4,595 |
| | 44 |
| | (32 | ) | | 4,607 |
| | 1 |
|
| CMBS | 1,835 |
| | 46 |
| | (21 | ) | | 1,860 |
| | — |
| 1,981 |
| | 32 |
| | (34 | ) | | 1,979 |
| | 1 |
|
| RMBS | 8,857 |
| | 458 |
| | (29 | ) | | 9,286 |
| | 14 |
| 8,532 |
| | 666 |
| | (11 | ) | | 9,187 |
| | 10 |
|
| Total fixed maturity securities | 52,850 |
| | 1,806 |
| | (431 | ) | | 54,225 |
| | 16 |
| |
| Equity securities | 381 |
| | 42 |
| | (1 | ) | | 422 |
| | — |
| |
| Total AFS securities | 53,231 |
| | 1,848 |
| | (432 | ) | | 54,647 |
| | 16 |
| 57,371 |
| | 1,795 |
| | (591 | ) | | 58,575 |
| | 13 |
|
| Fixed maturity securities – related party | | | | | | | | | | |
| Available-for-sale securities – related party | | | | | | | | | | |
| CLO | 304 |
| | 3 |
| | (1 | ) | | 306 |
| | — |
| 456 |
| | 4 |
| | — |
| | 460 |
| | — |
|
| ABS | 55 |
| | — |
| | — |
| | 55 |
| | — |
| 45 |
| | — |
| | — |
| | 45 |
| | — |
|
| Total fixed maturity securities – related party | 359 |
| | 3 |
| | (1 | ) | | 361 |
| | — |
| |
| Total AFS securities including related party | $ | 53,590 |
| | $ | 1,851 |
| | $ | (433 | ) | | $ | 55,008 |
| | $ | 16 |
| |
| Total AFS securities – related party | | 501 |
| | 4 |
| | — |
| | 505 |
| | — |
|
| Total AFS securities, including related party | | $ | 57,872 |
| | $ | 1,799 |
| | $ | (591 | ) | | $ | 59,080 |
| | $ | 13 |
|
| | | | December 31, 2016 | December 31, 2017 |
| (In millions) | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | OTTI in AOCI | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | OTTI in AOCI |
| Fixed maturity securities | | | | | | | | | | | | | | | | | | |
| U.S. government and agencies | $ | 59 |
| | $ | 1 |
| | $ | — |
| | $ | 60 |
| | $ | — |
| $ | 63 |
| | $ | 1 |
| | $ | (2 | ) | | $ | 62 |
| | $ | — |
|
| U.S. state, municipal and political subdivisions | 1,024 |
| | 117 |
| | (1 | ) | | 1,140 |
| | — |
| 996 |
| | 171 |
| | (2 | ) | | 1,165 |
| | — |
|
| Foreign governments | 2,098 |
| | 143 |
| | (6 | ) | | 2,235 |
| | — |
| 2,575 |
| | 116 |
| | (8 | ) | | 2,683 |
| | — |
|
| Corporate | 29,433 |
| | 901 |
| | (314 | ) | | 30,020 |
| | 2 |
| 35,173 |
| | 1,658 |
| | (171 | ) | | 36,660 |
| | — |
|
| CLO | 4,950 |
| | 14 |
| | (142 | ) | | 4,822 |
| | — |
| 5,039 |
| | 53 |
| | (8 | ) | | 5,084 |
| | — |
|
| ABS | 2,980 |
| | 25 |
| | (69 | ) | | 2,936 |
| | — |
| 3,945 |
| | 53 |
| | (27 | ) | | 3,971 |
| | 1 |
|
| CMBS | 1,835 |
| | 38 |
| | (26 | ) | | 1,847 |
| | — |
| 1,994 |
| | 48 |
| | (21 | ) | | 2,021 |
| | 1 |
|
| RMBS | 8,731 |
| | 313 |
| | (71 | ) | | 8,973 |
| | 15 |
| 8,721 |
| | 652 |
| | (7 | ) | | 9,366 |
| | 11 |
|
| Total fixed maturity securities | 51,110 |
| | 1,552 |
| | (629 | ) | | 52,033 |
| | 17 |
| 58,506 |
| | 2,752 |
| | (246 | ) | | 61,012 |
| | 13 |
|
| Equity securities | 319 |
| | 35 |
| | (1 | ) | | 353 |
| | — |
| |
Equity securities1 | | 271 |
| | 7 |
| | (1 | ) | | 277 |
| | — |
|
| Total AFS securities | 51,429 |
| | 1,587 |
| | (630 | ) | | 52,386 |
| | 17 |
| 58,777 |
| | 2,759 |
| | (247 | ) | | 61,289 |
| | 13 |
|
| Fixed maturity securities – related party | | | | | | | | | | |
| Available-for-sale securities – related party | | | | | | | | | | |
| CLO | 284 |
| | 1 |
| | (6 | ) | | 279 |
| | — |
| 353 |
| | 7 |
| | — |
| | 360 |
| | — |
|
| ABS | 57 |
| | — |
| | (1 | ) | | 56 |
| | — |
| 46 |
| | — |
| | — |
| | 46 |
| | — |
|
| Total fixed maturity securities – related party | 341 |
| | 1 |
| | (7 | ) | | 335 |
| | — |
| |
| Equity securities – related party | 20 |
| | — |
| | — |
| | 20 |
| | — |
| |
| Total AFS securities – related party | 361 |
| | 1 |
| | (7 | ) | | 355 |
| | — |
| 399 |
| | 7 |
| | — |
| | 406 |
| | — |
|
| Total AFS securities including related party | $ | 51,790 |
| | $ | 1,588 |
| | $ | (637 | ) | | $ | 52,741 |
| | $ | 17 |
| |
| Total AFS securities, including related party | | $ | 59,176 |
| | $ | 2,766 |
| | $ | (247 | ) | | $ | 61,695 |
| | $ | 13 |
|
| | | | | | | | | | | |
1 Included in equity securities on the condensed consolidated balance sheets. | | 1 Included in equity securities on the condensed consolidated balance sheets. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
The amortized cost and fair value of fixed maturity AFS securities, including related party, are shown by contractual maturity below: | | | | March 31, 2017 | March 31, 2018 |
| (In millions) | Amortized Cost | | Fair Value | Amortized Cost | | Fair Value |
| Due in one year or less | $ | 696 |
| | $ | 698 |
| $ | 1,041 |
| | $ | 1,042 |
|
| Due after one year through five years | 7,408 |
| | 7,564 |
| 8,291 |
| | 8,337 |
|
| Due after five years through ten years | 11,345 |
| | 11,629 |
| 10,732 |
| | 10,721 |
|
| Due after ten years | 14,391 |
| | 14,907 |
| 16,582 |
| | 17,060 |
|
| CLO, ABS, CMBS and RMBS | 19,010 |
| | 19,427 |
| 20,725 |
| | 21,415 |
|
| Total AFS fixed maturity securities | 52,850 |
| | 54,225 |
| 57,371 |
| | 58,575 |
|
| Fixed maturity securities – related party, CLO and ABS | 359 |
| | 361 |
| 501 |
| | 505 |
|
| Total AFS fixed maturity securities including related party | $ | 53,209 |
| | $ | 54,586 |
| |
| Total AFS fixed maturity securities, including related party | | $ | 57,872 |
| | $ | 59,080 |
|
Actual maturities can differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Unrealized Losses on AFS Securities—The following summarizes the fair value and gross unrealized losses for AFS securities, including related party, aggregated by class of security and length of time the fair value has remained below cost or amortized cost:
| | | | March 31, 2017 | March 31, 2018 |
| | Less than 12 months | | 12 months or greater | | Total | 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 | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses |
| Fixed maturity securities | | | | | | | | | | | | |
| Available-for-sale securities | | | | | | | | | | | | |
| U.S. government and agencies | $ | 16 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 16 |
| | $ | — |
| $ | 23 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 23 |
| | $ | — |
|
| U.S. state, municipal and political subdivisions | 65 |
| | (1 | ) | | 2 |
| | — |
| | 67 |
| | (1 | ) | 70 |
| | (1 | ) | | 46 |
| | (2 | ) | | 116 |
| | (3 | ) |
| Foreign governments | 314 |
| | (15 | ) | | 10 |
| | — |
| | 324 |
| | (15 | ) | 55 |
| | (2 | ) | | 20 |
| | (1 | ) | | 75 |
| | (3 | ) |
| Corporate | 5,565 |
| | (197 | ) | | 949 |
| | (63 | ) | | 6,514 |
| | (260 | ) | 13,298 |
| | (296 | ) | | 2,630 |
| | (201 | ) | | 15,928 |
| | (497 | ) |
| CLO | 318 |
| | (3 | ) | | 1,906 |
| | (49 | ) | | 2,224 |
| | (52 | ) | 1,508 |
| | (6 | ) | | 291 |
| | (5 | ) | | 1,799 |
| | (11 | ) |
| ABS | 776 |
| | (7 | ) | | 756 |
| | (46 | ) | | 1,532 |
| | (53 | ) | 1,166 |
| | (13 | ) | | 541 |
| | (19 | ) | | 1,707 |
| | (32 | ) |
| CMBS | 410 |
| | (12 | ) | | 205 |
| | (9 | ) | | 615 |
| | (21 | ) | 825 |
| | (19 | ) | | 168 |
| | (15 | ) | | 993 |
| | (34 | ) |
| RMBS | 854 |
| | (16 | ) | | 534 |
| | (13 | ) | | 1,388 |
| | (29 | ) | 561 |
| | (8 | ) | | 138 |
| | (3 | ) | | 699 |
| | (11 | ) |
| Total fixed maturity securities | 8,318 |
| | (251 | ) | | 4,362 |
| | (180 | ) | | 12,680 |
| | (431 | ) | |
| Equity securities | 240 |
| | (1 | ) | | — |
| | — |
| | 240 |
| | (1 | ) | |
| Total AFS securities | 8,558 |
| | (252 | ) | | 4,362 |
| | (180 | ) | | 12,920 |
| | (432 | ) | 17,506 |
| | (345 | ) | | 3,834 |
| | (246 | ) | | 21,340 |
| | (591 | ) |
| Fixed maturity securities – related party | | | | | | | | | | | | |
| Available-for-sale securities – related party | | | | | | | | | | | | |
| CLO | 25 |
| | — |
| | 31 |
| | (1 | ) | | 56 |
| | (1 | ) | 10 |
| | — |
| | — |
| | — |
| | 10 |
| | — |
|
| ABS | — |
| | — |
| | 50 |
| | — |
| | 50 |
| | — |
| 41 |
| | — |
| | — |
| | — |
| | 41 |
| | — |
|
| Total fixed maturity securities – related party | 25 |
| | — |
| | 81 |
| | (1 | ) | | 106 |
| | (1 | ) | |
| Total AFS securities including related party | $ | 8,583 |
| | $ | (252 | ) | | $ | 4,443 |
| | $ | (181 | ) | | $ | 13,026 |
| | $ | (433 | ) | |
| Total AFS securities – related party | | 51 |
| | — |
| | — |
| | — |
| | 51 |
| | — |
|
| Total AFS securities, including related party | | $ | 17,557 |
| | $ | (345 | ) | | $ | 3,834 |
| | $ | (246 | ) | | $ | 21,391 |
| | $ | (591 | ) |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
| | | | December 31, 2016 | December 31, 2017 |
| | Less than 12 months | | 12 months or greater | | Total | 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 | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| Fixed maturity securities | | | | | | | | | | | | | | | | | | | | | | |
| U.S. government and agencies | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
| $ | 34 |
| | $ | (1 | ) | | $ | 9 |
| | $ | (1 | ) | | $ | 43 |
| | $ | (2 | ) |
| U.S. state, municipal and political subdivisions | 85 |
| | (1 | ) | | 2 |
| | — |
| | 87 |
| | (1 | ) | 50 |
| | (1 | ) | | 39 |
| | (1 | ) | | 89 |
| | (2 | ) |
| Foreign governments | 137 |
| | (5 | ) | | 9 |
| | (1 | ) | | 146 |
| | (6 | ) | 435 |
| | (6 | ) | | 76 |
| | (2 | ) | | 511 |
| | (8 | ) |
| Corporate | 6,136 |
| | (228 | ) | | 1,113 |
| | (86 | ) | | 7,249 |
| | (314 | ) | 3,992 |
| | (49 | ) | | 2,457 |
| | (122 | ) | | 6,449 |
| | (171 | ) |
| CLO | 388 |
| | (2 | ) | | 3,102 |
| | (140 | ) | | 3,490 |
| | (142 | ) | 414 |
| | (2 | ) | | 340 |
| | (6 | ) | | 754 |
| | (8 | ) |
| ABS | 865 |
| | (17 | ) | | 767 |
| | (52 | ) | | 1,632 |
| | (69 | ) | 515 |
| | (5 | ) | | 549 |
| | (22 | ) | | 1,064 |
| | (27 | ) |
| CMBS | 576 |
| | (18 | ) | | 183 |
| | (8 | ) | | 759 |
| | (26 | ) | 460 |
| | (8 | ) | | 179 |
| | (13 | ) | | 639 |
| | (21 | ) |
| RMBS | 1,143 |
| | (19 | ) | | 1,727 |
| | (52 | ) | | 2,870 |
| | (71 | ) | 506 |
| | (3 | ) | | 210 |
| | (4 | ) | | 716 |
| | (7 | ) |
| Total fixed maturity securities | 9,331 |
| | (290 | ) | | 6,903 |
| | (339 | ) | | 16,234 |
| | (629 | ) | 6,406 |
| | (75 | ) | | 3,859 |
| | (171 | ) | | 10,265 |
| | (246 | ) |
| Equity securities | 179 |
| | (1 | ) | | — |
| | — |
| | 179 |
| | (1 | ) | |
Equity securities1 | | 134 |
| | (1 | ) | | — |
| | — |
| | 134 |
| | (1 | ) |
| Total AFS securities | 9,510 |
| | (291 | ) | | 6,903 |
| | (339 | ) | | 16,413 |
| | (630 | ) | 6,540 |
| | (76 | ) | | 3,859 |
| | (171 | ) | | 10,399 |
| | (247 | ) |
| Fixed maturity securities – related party | | | | | | | | | | | | |
| Available-for-sale securities – related party | | | | | | | | | | | | |
| CLO | 68 |
| | — |
| | 100 |
| | (6 | ) | | 168 |
| | (6 | ) | 29 |
| | — |
| | — |
| | — |
| | 29 |
| | — |
|
| ABS | — |
| | — |
| | 56 |
| | (1 | ) | | 56 |
| | (1 | ) | 42 |
| | — |
| | — |
| | — |
| | 42 |
| | — |
|
| Total fixed maturity securities – related party | 68 |
| | — |
| | 156 |
| | (7 | ) | | 224 |
| | (7 | ) | |
| Equity securities – related party | 14 |
| | — |
| | — |
| | — |
| | 14 |
| | — |
| |
| Total AFS securities – related party | 82 |
| | — |
| | 156 |
| | (7 | ) | | 238 |
| | (7 | ) | 71 |
| | — |
| | — |
| | — |
| | 71 |
| | — |
|
| Total AFS securities including related party | $ | 9,592 |
| | $ | (291 | ) | | $ | 7,059 |
| | $ | (346 | ) | | $ | 16,651 |
| | $ | (637 | ) | |
| Total AFS securities, including related party | | $ | 6,611 |
| | $ | (76 | ) | | $ | 3,859 |
| | $ | (171 | ) | | $ | 10,470 |
| | $ | (247 | ) |
| | | | | | | | | | | | | |
1 Included in equity securities on the condensed consolidated balance sheets. | | 1 Included in equity securities on the condensed consolidated balance sheets. |
As of March 31, 2017,2018, we held 1,7272,662 AFS securities that were in an unrealized loss position. Of this total, 522467 were in an unrealized loss position longer than 12 months.months or more. As of March 31, 2017,2018, we held eightthree related party AFS securities that were in an unrealized loss position. Of this total, fivenone were in an unrealized loss position longer than 12 months.months or more. The unrealized losses on AFS securities can primarily be attributed to changes in market interest rates since acquisition. We did not recognize the unrealized losses in income as we intend to hold these securities and it is not more likely than not we will be required to sell a security before the recovery of its amortized cost.
Other-Than-Temporary Impairments—For the three months ended March 31, 2017,2018, we incurred $1$3 million of net OTTI, of which $2 million related to credit loss impairments that weintent-to-sell impairments. These securities were impaired to fair value and did not bifurcateas of the impairment date. The remaining net OTTI of $1 million related to credit impairments where a portion of the impairmentwas bifurcated in AOCI. Any credit loss impairments not bifurcated in AOCI are excluded from the rollforward below.
The following table represents a rollforward of the cumulative amounts recognized on the condensed consolidated statements of income for OTTI related to pre-tax credit loss impairments on AFS fixed maturity securities, for which a portion of the securities'securities’ total OTTI was recognized in AOCI:
| | | | Three months ended March 31, | Three months ended March 31, |
| (In millions) | 2017 | | 2016 | 2018 | | 2017 |
| Beginning balance | $ | 16 |
| | $ | 22 |
| 7 |
| | $ | 16 |
|
| Initial impairments – credit loss OTTI recognized on securities not previously impaired | — |
| | 7 |
| 1 |
| | — |
|
| Additional impairments – credit loss OTTI recognized on securities previously impaired | — |
| | 2 |
| — |
| | — |
|
| Reduction in impairments from securities sold, matured or repaid | | (1 | ) | | — |
|
| Reduction for credit loss that no longer has a portion of the OTTI loss recognized in AOCI | | — |
| | — |
|
| Ending balance | $ | 16 |
| | $ | 31 |
| $ | 7 |
| | $ | 16 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Net Investment Income—Net investment income by asset typeclass consists of the following:
| | | | Three months ended March 31, | Three months ended March 31, |
| (In millions) | 2017 |
| 2016 | 2018 | | 2017 |
| Fixed maturity securities | | | | |
| AFS securities | | | | $ | 668 |
| | $ | 620 |
|
| Fixed maturity securities | $ | 620 |
| | $ | 589 |
| |
| Trading securities | | 44 |
| | 50 |
|
| Equity securities | 2 |
| | 2 |
| 2 |
| | 3 |
|
| Trading securities | 51 |
| | 63 |
| |
| Mortgage loans, net of allowances | 85 |
| | 83 |
| |
| Mortgage loans | | 91 |
| | 85 |
|
| Investment funds | 55 |
| | 12 |
| 65 |
| | 55 |
|
| Funds withheld at interest | 36 |
| | 13 |
| 46 |
| | 36 |
|
| Other | 17 |
| | 12 |
| 23 |
| | 17 |
|
| Investment revenue | 866 |
| | 774 |
| 939 |
| | 866 |
|
| Investment expenses | (80 | ) | | (82 | ) | (84 | ) | | (80 | ) |
| Net investment income | $ | 786 |
| | $ | 692 |
| $ | 855 |
| | $ | 786 |
|
Investment Related Gains (Losses)—Investment related gains (losses) by asset type consistclass consists of the following:
|
| | | | | | | |
| | Three months ended March 31, |
| (In millions) | 2017 |
| 2016 |
| AFS fixed maturity securities | | | |
| Gross realized gain on investment activity | $ | 28 |
| | $ | 36 |
|
| Gross realized loss on investment activity | (8 | ) | | (32 | ) |
| Net realized investment gains on fixed maturity securities | 20 |
|
| 4 |
|
| Net realized investment gains (losses) on trading securities | 2 |
| | 12 |
|
| Derivative gains (losses) | 654 |
| | (92 | ) |
| Other gains (losses) | 6 |
| | (6 | ) |
| Investment related gains (losses) | $ | 682 |
| | $ | (82 | ) |
|
| | | | | | | |
| | Three months ended March 31, |
| (In millions) | 2018 | | 2017 |
| AFS securities | | | |
| Gross realized gains on investment activity | $ | 21 |
| | $ | 28 |
|
| Gross realized losses on investment activity | (6 | ) | | (8 | ) |
| Net realized investment gains on AFS securities | 15 |
| | 20 |
|
| Net realized investment losses on trading securities | (89 | ) | | (14 | ) |
| Net realized investment gains on equity securities | 1 |
| | 18 |
|
| Derivative gains (losses) | (184 | ) | | 654 |
|
| Other gains | 21 |
| | 4 |
|
| Investment related gains (losses) | $ | (236 | ) | | $ | 682 |
|
Proceeds from sales of AFS securities were $1,531$1,637 million and $1,015$1,531 million for the three months ended March 31, 20172018 and 2016,2017, respectively.
Included in net realized investment gains (losses) on trading securities are gains of $26 million and $36 million resulting fromThe following table summarizes the change in unrealized gains orand losses for the underlyingon trading and equity securities, including related party, we still held as of March 31, 2017and2016, respectively. Also included in net realized investment gains (losses) on trading securities are related party losses of $12 million and $13 million resulting from the change in unrealized gains or losses for the underlying securities we still held as of March 31, 2017 and 2016, respectively.respective period end:
|
| | | | | | | |
| | Three months ended March 31, |
| (In millions) | 2018 | | 2017 |
| Trading securities | $ | (69 | ) | | $ | 11 |
|
| Trading securities – related party | (2 | ) | | (12 | ) |
| Equity securities | — |
| | 15 |
|
Purchased Credit Impaired (PCI) Investments—The following table summarizes our PCI investments:investments:
| | | | Fixed maturity securities | | Mortgage loans | March 31, 2018 | | December 31, 2017 | | March 31, 2018 | | December 31, 2017 |
| (In millions) | March 31, 2017 | | December 31, 2016 | | March 31, 2017 | | December 31, 2016 | Fixed maturity securities | | Mortgage loans |
Contractually required payments1 | $ | 7,932 |
| | $ | 7,761 |
| | $ | 693 |
| | $ | 424 |
| |
Less: Cash flows expected to be collected2 | (5,367 | ) | | (5,285 | ) | | (475 | ) | | (286 | ) | |
| Contractually required payments receivable | | $ | 9,009 |
| | $ | 9,690 |
| | $ | 1,131 |
| | $ | 1,140 |
|
Less: Cash flows expected to be collected1 | | (7,996 | ) | | (8,188 | ) | | (1,098 | ) | | (1,090 | ) |
| Non-accretable difference | $ | 2,565 |
| | $ | 2,476 |
| | $ | 218 |
| | $ | 138 |
| $ | 1,013 |
| | $ | 1,502 |
| | $ | 33 |
| | $ | 50 |
|
| | | | | | | | | | | | | | | |
| Cash flows expected to be collected | $ | 5,367 |
| | $ | 5,285 |
| | $ | 475 |
| | $ | 286 |
| |
Cash flows expected to be collected1 | | $ | 7,996 |
| | $ | 8,188 |
| | $ | 1,098 |
| | $ | 1,090 |
|
| Less: Amortized cost | (3,964 | ) | | (3,898 | ) | | (362 | ) | | (220 | ) | (6,084 | ) | | (6,168 | ) | | (807 | ) | | (817 | ) |
| Accretable difference | $ | 1,403 |
| | $ | 1,387 |
| | $ | 113 |
| | $ | 66 |
| $ | 1,912 |
| | $ | 2,020 |
| | $ | 291 |
| | $ | 273 |
|
| | | | | | | | | | | | | | | |
| Fair value | $ | 4,187 |
| | $ | 4,029 |
| | $ | 364 |
| | $ | 221 |
| $ | 6,622 |
| | $ | 6,703 |
| | $ | 877 |
| | $ | 844 |
|
| Outstanding balance | | 7,468 |
| | 8,026 |
| | 935 |
| | 946 |
|
| | | | | | | | | | | | | | | |
1 Includes principal and accrued interest. | |
2 Represents the undiscounted principal and interest cash flows expected. | |
1 Represents the undiscounted principal and interest cash flows expected. | | 1 Represents the undiscounted principal and interest cash flows expected. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
During the period, we acquired PCI investments with the following amounts at the time of purchase:
|
| | | | | | | |
| | Three months ended March 31, 2017 |
| (In millions) | Fixed maturity securities | | Mortgage loans |
| Contractually required principal and interest | $ | 574 |
| | $ | 298 |
|
| Expected cash flows | 364 |
| | 205 |
|
| Estimated fair value | 264 |
| | 147 |
|
|
| | | | | | | |
| | March 31, 2018 |
| (In millions) | Fixed maturity securities | | Mortgage loans |
| Contractually required payments receivable | $ | 215 |
| | $ | — |
|
| Cash flows expected to be collected | 197 |
| | — |
|
| Fair value | 166 |
| | — |
|
The following tables summarizetable summarizes the activity for the accretable yield on PCI investments:
| | | | Three months ended March 31, 2017 | Three months ended March 31, 2018 |
| (In millions) | Fixed maturity securities | | Mortgage loans | Fixed maturity securities | | Mortgage loans |
| Beginning balance at January 1 | $ | 1,387 |
| | $ | 66 |
| $ | 2,020 |
| | $ | 273 |
|
| Purchases of PCI investments, net of sales | 58 |
| | 57 |
| 16 |
| | (2 | ) |
| Accretion | (30 | ) | | — |
| (100 | ) | | (10 | ) |
| Changes in expected cash flows | (12 | ) | | (10 | ) | |
| Net reclassification from (to) non-accretable difference | | (24 | ) | | 30 |
|
| Ending balance at March 31 | $ | 1,403 |
| | $ | 113 |
| $ | 1,912 |
| | $ | 291 |
|
Mortgage Loans—Mortgage loans, net of allowances, consistconsists of the following:
| | | (In millions) | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| Commercial mortgage loans | $ | 4,905 |
| | $ | 5,058 |
| $ | 5,109 |
| | $ | 5,223 |
|
| Commercial mortgage loans under development | 74 |
| | 74 |
| 24 |
| | 24 |
|
| Total commercial mortgage loans | 4,979 |
| | 5,132 |
| 5,133 |
| | 5,247 |
|
| Residential mortgage loans | 474 |
| | 338 |
| 1,006 |
| | 986 |
|
| Mortgage loans, net of allowances | $ | 5,453 |
| | $ | 5,470 |
| $ | 6,139 |
| | $ | 6,233 |
|
We primarily invest in commercial mortgage loans on income producing properties including hotels, industrial properties and retail and office buildings. We diversify the commercial mortgage loan portfolio by geographic region and property type to reduce concentration risk. We evaluate mortgage loans based on relevant current information to confirm if properties are performing at a consistent and acceptable level to secure the related debt.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
The distribution of commercial mortgage loans, including those under development, net of valuation allowances, by property type and geographic region, is as follows:
| | | | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| (In millions, except for percentages) | Net Carrying Value | | Percentage of Total | | Net Carrying Value | | Percentage of Total | Net Carrying Value | | Percentage of Total | | Net Carrying Value | | Percentage of Total |
| Property type | | | | | | | | | | | | | | |
| Office building | | $ | 1,389 |
| | 27.1 | % | | $ | 1,187 |
| | 22.6 | % |
| Retail | | 1,167 |
| | 22.7 | % | | 1,223 |
| | 23.3 | % |
| Hotels | $ | 998 |
| | 20.0 | % | | $ | 1,025 |
| | 20.0 | % | 935 |
| | 18.2 | % | | 928 |
| | 17.7 | % |
| Retail | 1,138 |
| | 22.8 | % | | 1,135 |
| | 22.1 | % | |
| Office building | 1,139 |
| | 22.9 | % | | 1,217 |
| | 23.7 | % | |
| Industrial | 682 |
| | 13.7 | % | | 742 |
| | 14.5 | % | 789 |
| | 15.4 | % | | 944 |
| | 18.0 | % |
| Apartment | 572 |
| | 11.5 | % | | 616 |
| | 12.0 | % | 441 |
| | 8.6 | % | | 525 |
| | 10.0 | % |
| Other commercial | 450 |
| | 9.1 | % | | 397 |
| | 7.7 | % | 412 |
| | 8.0 | % | | 440 |
| | 8.4 | % |
| Total commercial mortgage loans | $ | 4,979 |
| | 100.0 | % | | $ | 5,132 |
| | 100.0 | % | $ | 5,133 |
| | 100.0 | % | | $ | 5,247 |
| | 100.0 | % |
| | | | | | | | | | | | | | | |
| U.S. Region | | | | | | | | | | | | | | |
| East North Central | $ | 405 |
| | 8.1 | % | | $ | 450 |
| | 8.8 | % | $ | 654 |
| | 12.8 | % | | $ | 643 |
| | 12.3 | % |
| East South Central | 148 |
| | 3.0 | % | | 158 |
| | 3.1 | % | 128 |
| | 2.5 | % | | 144 |
| | 2.7 | % |
| Middle Atlantic | 662 |
| | 13.3 | % | | 628 |
| | 12.2 | % | 825 |
| | 16.1 | % | | 909 |
| | 17.3 | % |
| Mountain | 538 |
| | 10.8 | % | | 543 |
| | 10.6 | % | 488 |
| | 9.5 | % | | 492 |
| | 9.4 | % |
| New England | 192 |
| | 3.9 | % | | 194 |
| | 3.8 | % | 186 |
| | 3.6 | % | | 162 |
| | 3.1 | % |
| Pacific | 810 |
| | 16.3 | % | | 833 |
| | 16.2 | % | 1,119 |
| | 21.8 | % | | 991 |
| | 18.9 | % |
| South Atlantic | 1,192 |
| | 23.9 | % | | 1,284 |
| | 25.0 | % | 900 |
| | 17.5 | % | | 873 |
| | 16.6 | % |
| West North Central | 296 |
| | 5.9 | % | | 306 |
| | 6.0 | % | 223 |
| | 4.3 | % | | 233 |
| | 4.4 | % |
| West South Central | 663 |
| | 13.3 | % | | 662 |
| | 12.9 | % | 610 |
| | 11.9 | % | | 655 |
| | 12.5 | % |
| Total U.S. Region | 4,906 |
| | 98.5 | % | | 5,058 |
| | 98.6 | % | 5,133 |
| | 100.0 | % | | 5,102 |
| | 97.2 | % |
| International Region | 73 |
| | 1.5 | % | | 74 |
| | 1.4 | % | — |
| | — | % | | 145 |
| | 2.8 | % |
| Total commercial mortgage loans | $ | 4,979 |
| | 100.0 | % | | $ | 5,132 |
| | 100.0 | % | $ | 5,133 |
| | 100.0 | % | | $ | 5,247 |
| | 100.0 | % |
Our residential mortgage loan portfolio includes first lien residential mortgage loans collateralized by properties located in the U.S. As of March 31, 20172018, California, Florida and New York represented 32.7%35.9%, 12.1%14.9% and 6.6%5.8%, respectively, of the portfolio. Theportfolio, and the remaining 48.6%43.4% represented all other states, with each individual state comprising less than 5% of the portfolio. As of December 31, 2016,2017, California, Florida and New York represented 38.9%34.3%, 9.1%15.6% and 5.1%6.0%, respectively, of the portfolio, and the remaining 46.9%44.1% represented all other states, with each individual state comprising less than 5% of the portfolio.
Mortgage Loan Valuation Allowance—The assessment of mortgage loan impairments and valuation allowances is substantially the same for residential and commercial mortgage loans. The valuation allowance was $2$1 million as of March 31, 20172018 and$2 million as of December 31, 2016.2017. We did not record any material impairments or significant activity in the valuation allowance during the three months ended March 31, 20172018 or 20162017.
Residential mortgage loans – The primary credit quality indicator of residential mortgage loans is loan performance. Nonperforming residential mortgage loans are 90 days or more past due and/or are in non-accrual status. As of March 31, 20172018, $3 and December 31, 2017, $37 million and $28 million, respectively, of our residential mortgage loans were non-performing. As of December 31, 2016, all of our residential mortgage loans were performing.
Commercial mortgage loans – The following provides the agingAs of March 31, 2018 and December 31, 2017, all of our commercial mortgage loan portfolio, including those under development, net of valuation allowances:loans were less than 30 days past due.
|
| | | | | | | |
| (In millions) | March 31, 2017 | | December 31, 2016 |
| Current (less than 30 days past due) | $ | 4,962 |
| | $ | 5,111 |
|
| Over 90 days past due | 17 |
| | 21 |
|
| Total commercial mortgage loans | $ | 4,979 |
| | $ | 5,132 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Loan-to-value and debt service coverage ratios are measures we use to assess the risk and quality of commercial mortgage loans other than those under development. Loans under development are not evaluated using these ratios as the properties underlying these loans are generally not yet income-producing and the value of the underlying property significantly fluctuates based on the progress of construction. Therefore, the risk and quality of loans under development are evaluated based on the aging and geographical distribution of such loans as shown above.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The loan-to-value ratio is expressed as a percentage of the amount of the loan relative to the value of the underlying property. A loan-to-value ratio in excess of 100% indicates the unpaid loan amount exceeds the underlying collateral. The following represents the loan-to-value ratio of the commercial mortgage loan portfolio, excluding those under development, net of valuation allowances:
| | | (In millions) | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| Less than 50% | $ | 1,698 |
| | $ | 1,787 |
| $ | 1,769 |
| | $ | 1,841 |
|
| 50% to 60% | 1,333 |
| | 1,337 |
| 1,312 |
| | 1,390 |
|
| 61% to 70% | 1,379 |
| | 1,401 |
| 1,721 |
| | 1,691 |
|
| 71% to 100% | 461 |
| | 492 |
| 307 |
| | 301 |
|
| Greater than 100% | 34 |
| | 41 |
| |
| Commercial mortgage loans | $ | 4,905 |
| | $ | 5,058 |
| $ | 5,109 |
| | $ | 5,223 |
|
The debt service coverage ratio, based upon the most recent financial statements, is expressed as a percentage of a property'sproperty’s net operating income to its debt service payments. A debt service ratio of less than 1.0 indicates a property'sproperty’s operations do not generate enough income to cover debt payments. The following represents the debt service coverage ratio of the commercial mortgage loan portfolio, excluding those under development, net of valuation allowances:
|
| | | | | | | |
| (In millions) | March 31, 2017 | | December 31, 2016 |
| Greater than 1.20x | $ | 4,345 |
| | $ | 4,378 |
|
| 1.00x – 1.20x | 246 |
| | 353 |
|
| Less than 1.00x | 314 |
| | 327 |
|
| Commercial mortgage loans | $ | 4,905 |
| | $ | 5,058 |
|
Real Estate—Depreciation expense on invested real estate was $3 million during the three months ended March 31, 2017 and 2016. Accumulated depreciation was $14 million and $11 million as of March 31, 2017 and December 31, 2016, respectively. |
| | | | | | | |
| (In millions) | March 31, 2018 | | December 31, 2017 |
| Greater than 1.20x | $ | 4,667 |
| | $ | 4,742 |
|
| 1.00x – 1.20x | 298 |
| | 297 |
|
| Less than 1.00x | 144 |
| | 184 |
|
| Commercial mortgage loans | $ | 5,109 |
| | $ | 5,223 |
|
Investment Funds—Our investment fund portfolio consists of funds that employ various strategies and include investments in mortgagereal estate and other real estate,assets, credit, private equity, natural resources and hedge funds. Investment funds typically meet the definition of variable interest entitiesVIEs and are discussed further in Note 4 – Variable Interest Entities.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
3. Derivative Instruments
We use a variety of derivative instruments to manage risks, primarily equity, interest rate, credit, foreign currency and market volatility. There
have been no significant changes in our accounting policies related to derivatives during the three months ended March 31, 2017. See Note 5 – Fair Value for information about the fair value hierarchy for derivatives.
The following table presents the notional amount and fair value of derivative instruments:
| | | | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| | Notional Amount | | Fair Value | | Notional Amount | | Fair Value | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| (In millions) | | Assets | | Liabilities | | Assets | | Liabilities | | Assets | | Liabilities | | Assets | | Liabilities |
| Derivatives designated as hedges | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency swaps | 384 |
| | $ | 10 |
| | $ | 8 |
| | 289 |
| | $ | 11 |
| | $ | 4 |
| 1,324 |
| | $ | 2 |
| | $ | 155 |
| | 928 |
| | $ | 1 |
| | $ | 99 |
|
| Interest rate swaps | 302 |
| | — |
| | — |
| | 302 |
| | — |
| | 14 |
| 302 |
| | — |
| | — |
| | 302 |
| | — |
| | — |
|
| Total derivatives designated as hedges | | | 10 |
| | 8 |
| | | | 11 |
| | 18 |
| | | 2 |
| | 155 |
| | | | 1 |
| | 99 |
|
| Derivatives not designated as hedges | | | | | | | | | | | | | | | | | | | | | | |
| Equity options | 27,751 |
| | 1,680 |
| | 2 |
| | 26,822 |
| | 1,336 |
| | — |
| 31,868 |
| | 2,019 |
| | 13 |
| | 31,460 |
| | 2,500 |
| | 19 |
|
| Futures | 8 |
| | 10 |
| | 1 |
| | — |
| | 9 |
| | — |
| 5 |
| | 5 |
| | — |
| | 1,134 |
| | 7 |
| | — |
|
| Total return swaps | 110 |
| | — |
| | — |
| | 41 |
| | 2 |
| | — |
| 56 |
| | — |
| | 4 |
| | 114 |
| | 5 |
| | — |
|
| Foreign currency swaps | 42 |
| | 5 |
| | — |
| | 43 |
| | 5 |
| | — |
| 39 |
| | 2 |
| | 4 |
| | 41 |
| | 21 |
| | 3 |
|
| Interest rate swaps | 469 |
| | 1 |
| | 3 |
| | 568 |
| | 1 |
| | 5 |
| 550 |
| | — |
| | 1 |
| | 385 |
| | — |
| | 2 |
|
| Credit default swaps | 10 |
| | — |
| | 7 |
| | 10 |
| | — |
| | 7 |
| 10 |
| | — |
| | 5 |
| | 10 |
| | — |
| | 5 |
|
| Foreign currency forwards | 1,150 |
| | 2 |
| | 11 |
| | 805 |
| | 6 |
| | 10 |
| 637 |
| | 3 |
| | 4 |
| | 1,139 |
| | 17 |
| | 6 |
|
| Embedded derivatives | | | | | | | | | | | | | | | | | | | | | | |
| Funds withheld | — |
| | 212 |
| | 11 |
| | — |
| | 140 |
| | 6 |
| — |
| | 207 |
| | 11 |
| | — |
| | 312 |
| | 22 |
|
| Interest sensitive contract liabilities | — |
| | — |
| | 5,793 |
| | — |
| | — |
| | 5,283 |
| — |
| | — |
| | 7,254 |
| | — |
| | — |
| | 7,436 |
|
| Total derivatives not designated as hedges |
| | 1,910 |
| | 5,828 |
| |
| | 1,499 |
| | 5,311 |
| | | 2,236 |
| | 7,296 |
| | | | 2,862 |
| | 7,493 |
|
| Total derivatives |
| | $ | 1,920 |
| | $ | 5,836 |
| |
| | $ | 1,510 |
| | $ | 5,329 |
| | | $ | 2,238 |
| | $ | 7,451 |
| | | | $ | 2,863 |
| | $ | 7,592 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Derivatives Designated as Hedges
Foreign currency swaps – We use foreign currency swaps to convert foreign currency denominated cash flows of an investment to U.S. dollars to reduce cash flow fluctuations due to changes in currency exchange rates. Certain of these swaps are designated and accounted for as cash flow hedges, which will expire by June 2043.December 2045. During the three months ended March 31, 20172018 and 20162017, we had foreign currency swap losses of $5$56 million and $10$5 million, respectively, recorded in AOCI. There were no amounts reclassified to income and no amounts deemed ineffective forduring the three months ended March 31, 20172018 and 20162017. As, and as of March 31, 2017,2018, no amounts are expected to be reclassified to income within the next 12 months.
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. Certain of these swaps entered into during the fourth quarter of 2016 are designated as fair value hedges. 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. As of
March 31, 2018 and December 31, 2017, the carrying amount of the hedged interest sensitive contract liabilities was $279 million and $293 million, respectively, and the cumulative amount of fair value hedging adjustment included in the hedged interest sensitive contract liabilities included gains of $17 million and $12 million, respectively. The following table represents the gains and losses on derivatives and the related hedged items in fair value hedge relationships are recorded in interest sensitive contract benefits on the condensed consolidated statements of income:
|
| | | |
| (In millions) | Three months ended March 31, 2017 |
| Loss recognized on derivative | $ | (1 | ) |
| Gain recognized on hedged item | 1 |
|
| Ineffectiveness recognized on fair value hedges | $ | — |
|
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 the equity indexed options within a limited time at a contracted price.options. The contracts are net settled in cash based on differentials in the indices at the time of exercise and the strike price.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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.
Credit default swaps – Credit default swaps provide a measure of protection against the default of an issuer or allow us to gain credit exposure to an issuer or traded index. We use credit default swaps coupled with a bond to synthetically create the characteristics of a reference bond. These transactions have a lower cost and are generally more liquid relative to the cash market. We receive a periodic premium for these transactions as compensation for accepting credit risk.
Hedging credit risk involves buying protection for existing credit risk. The exposure resulting from the agreements, which is usually the notional amount, is equal to the maximum proceeds that must be paid by a counterparty for a defaulted security. If a credit event occurs on a reference entity, then a counterparty who sold protection is required to pay the buyer the trade notional amount less any recovery value of the security.
Foreign currency forwards – We use foreign currency forward contracts to hedge certain exposures to foreign currency risk. The price is agreed upon at the time of the contract and payment is made at a specified future date.
Embedded derivatives – We have embedded derivatives which are required to be separated from their host contracts and reported as derivatives. Host contracts include reinsurance agreements structured on a modco or funds withheld basis and indexed annuity products.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following is a summary of the gains (losses) related to derivatives not designated as hedges:
| | | | Three months ended March 31, | Three months ended March 31, |
| (In millions) | 2017 | | 2016 | 2018 | | 2017 |
| Equity options | $ | 528 |
| | $ | (121 | ) | $ | (142 | ) | | $ | 528 |
|
| Futures | (10 | ) | | (3 | ) | (5 | ) | | (10 | ) |
| Total return swaps | 5 |
| | 1 |
| |
| Foreign currency swaps | — |
| | 6 |
| |
| Interest rate swaps | — |
| | (3 | ) | |
| Swaps | | 2 |
| | 5 |
|
| Foreign currency forwards | 1 |
| | — |
| (7 | ) | | 1 |
|
| Embedded derivatives on funds withheld | 130 |
| | 28 |
| (32 | ) | | 130 |
|
| Amounts recognized in investment related gains (losses) | 654 |
| | (92 | ) | (184 | ) | | 654 |
|
Embedded derivatives in indexed annuity products1 | (431 | ) | | (19 | ) | 238 |
| | (431 | ) |
| Total gains (losses) for derivatives not designated as hedges | $ | 223 |
| | $ | (111 | ) | |
| Total gains on derivatives not designated as hedges | | $ | 54 |
| | $ | 223 |
|
| | | | | | | |
1 Included in interest sensitive contract benefits. | 1 Included in interest sensitive contract benefits. | 1 Included in interest sensitive contract benefits. |
Credit Risk—We may be exposed to credit-related losses in the event of counterparty nonperformance on derivative financial instruments. Generally, the current credit exposure of our derivative contracts is the fair value at the reporting date less any collateral received from the counterparty.
We manage credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties. Where possible, we maintain collateral arrangements and use master netting agreements that provide for a single net payment from one counterparty to another at each due date and upon termination. We have also established counterparty exposure limits, where possible, in order to evaluate if there is sufficient collateral to support the net exposure.
Collateral arrangements typically require the posting of collateral in connection with its derivative instruments. Collateral agreements often contain posting thresholds, some of which may vary depending on the posting party'sparty’s financial strength ratings. Additionally, a decrease in our financial strength rating to a specified level can result in settlement of the derivative position. As of March 31, 2017 and December 31, 2016, we had $11 million and $25 million, respectively, of collateral pledged to counterparties.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 | | | | | | | | | 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 | Gross amount recognized1 | | Financial instruments2 | | Collateral received/pledged | | Net amount | | Off-balance sheet securities collateral3 | | Net amount after securities collateral |
| March 31, 2017 | | | | | | | | | | | | |
| March 31, 2018 | | | | | | | | | | | | |
| Derivative assets | $ | 1,708 |
| | $ | (11 | ) | | $ | (1,681 | ) | | $ | 16 |
| | $ | (22 | ) | | $ | (6 | ) | $ | 2,031 |
| | $ | (87 | ) | | $ | (1,145 | ) | | $ | 799 |
| | $ | (769 | ) | | $ | 30 |
|
| Derivative liabilities | (32 | ) | | 11 |
| | 11 |
| | (10 | ) | | — |
| | (10 | ) | (186 | ) | | 87 |
| | 98 |
| | (1 | ) | | — |
| | (1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | | |
| Derivative assets | $ | 1,370 |
| | $ | (8 | ) | | $ | (1,383 | ) | | $ | (21 | ) | | $ | (26 | ) | | $ | (47 | ) | $ | 2,551 |
| | $ | (59 | ) | | $ | (2,323 | ) | | $ | 169 |
| | $ | (221 | ) | | $ | (52 | ) |
| Derivative liabilities | (40 | ) | | 8 |
| | 25 |
| | (7 | ) | | — |
| | (7 | ) | (134 | ) | | 59 |
| | 63 |
| | (12 | ) | | — |
| | (12 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
1 The gross amounts of recognized derivative assets and derivative liabilities are reported on the condensed consolidated balance sheets. As of March 31, 2017 and December 31, 2016, amounts that are not subject to master netting agreements or similar agreements were immaterial. | |
1 The gross amounts of recognized derivative assets and derivative liabilities are reported on the condensed consolidated balance sheets. As of March 31, 2018 and December 31, 2017, amounts not subject to master netting or similar agreements were immaterial. | | 1 The gross amounts of recognized derivative assets and derivative liabilities are reported on the condensed consolidated balance sheets. As of March 31, 2018 and December 31, 2017, amounts not subject to master netting or similar agreements were immaterial. |
2 Represents amounts offsetting derivative assets and derivative liabilities that are subject to an enforceable master netting agreement or similar agreement that are not netted against the gross derivative assets or gross derivative liabilities for presentation on the condensed consolidated balance sheets. | 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. | 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 securities collateral received, we do not have the right to sell or re-pledge the collateral. As such, we do not record the securities 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. | | 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. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
4. Variable Interest Entities
Our investment funds typically meet the definition of a VIE, and in certain cases these investment funds are consolidated in our financial statements because we meet the criteria of the primary beneficiary.
Consolidated VIEs—We consolidate AAA Investments (Co-Invest VI), L.P. (CoInvest VI), AAA Investments (Co-Invest VII), L.P. (CoInvest VII), AAA Investments (Other), L.P. (CoInvest Other), London Prime Apartments Guernsey Holdings Limited (London Prime), NCL Athene, LLC (NCL LLC) and, Apollo Asia Sprint Co-Investment Fund, L.P. (Sprint) and ALR Aircraft Investment Ireland Limited (ALR), which are investment funds. We are the only limited partner or Class A member in these investment funds and receive all of the economic benefits and losses, other than management fees and carried interest, as applicable, paid to the general partner in each entity, or a related entity, which are related parties. We do not have any voting rights as limited partner and, as the limited partner or Class A member, do not solely satisfy the power criteria to direct the activities that significantly impact the economics of the VIE. However, the criteria for the primary beneficiary are satisfied by our related party group and, because substantially all of the activities are conducted on our behalf, we consolidate the investment funds.
No arrangement exists requiring us to provide additional funding in excess of our committed capital investment, liquidity, or the funding of losses or an increase to our loss exposure in excess of our investment in the VIEs. We elected the fair value option for certain fixed maturity and equity securities, and investment funds, which are reported in the consolidated variable interest entity sections on the condensed consolidated balance sheets.
CoInvest VI, CoInvest VII and CoInvest Other were formed to make investments, including co-investments alongside private equity funds sponsored by Apollo. We received our interests in CoInvest VI, CoInvest VII and CoInvest Other as part of a contribution agreement in 2012 with AAA Guarantor – Athene, L.P. (AAA Investor) and its subsidiary, Apollo Life Re Ltd., in order to provide a capital base to support future acquisitions. London Prime was formed for the purpose of investing in Prime London Ventures Limited, a Guernsey limited company, which purchases rental residential assets across prime central London.
CoInvest VII holds a significant investment in MidCap FinCo Limited (MidCap), which is included in investment funds of consolidated VIEs on the condensed consolidated balance sheets. We have purchased pools of loans sourced by MidCap and contemporaneously sold subordinated participation interests in the loans to a subsidiary of MidCap. As of March 31, 20172018 and December 31, 2016,2017, we had $14 million due to MidCap under the subordinated participation agreement which is reflected as a secured borrowing in other liabilities on the condensed consolidated balance sheets. In addition, we have advanced amounts under a subordinated debt facility to MidCap and, as of March 31, 2018 and December 31, 2017, the principal balance due was $245 million, and this is included in other related party investments on the condensed consolidated balance sheets.
DuringNCL LLC was formed to hold the third quarter of 2016, CoInvest VI contributed its largest investment in Norwegian Cruise Line Holdings Ltd. (NCLH) shares, to a newly formed entity, NCL LLC, in exchange for 100% of the membership interests in this entity. Subsequent to this contribution, CoInvest VI distributed its Class A membership interests in NCL LLC to us and the Class B membership interests in NCL LLC to the general partner ofwhich were previously held by CoInvest VI. NCL LLC is subject to the same management fees, selling restrictions with respect to shares of NCLH, and carried interest calculation as CoInvest VI. NCL LLC classifies its NCLH shares as AFS equity securities. We are the primary beneficiary and consolidate NCL LLC, as substantially all of its activities are conducted on our behalf.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
During the first quarter of 2017, we acquiredWe have a 100% limited partnership interest in Sprint, an entity formed to make a co-investment alongside private equity funds sponsored by Apollo. The underlying investment is a structured credit facility on a nearly completedcomplete skyscraper in Southeast Asia. We are the primary beneficiary and consolidate Sprint, as substantially all of its activities are conducted on our behalf.
We previously consolidated 2012 CMBS-I Fund L.P., a Delaware limited partnership, and 2012 CMBS-II Fund L.P., a Delaware limited partnership (collectively, CMBS Funds). The CMBS Funds were originallyDuring the first quarter of 2018, we invested in profit participating notes of ALR. ALR was formed with the objective of generating high risk-adjusted investment returns by investing primarilyto invest in a portfoliojoint venture that provides airplane lease financing to a major commercial airline. We are the only investor in the profit participating notes and, as substantially all of eligible CMBSthe activities of ALR are conducted on our behalf, we are the primary beneficiary and using leverage through repurchase agreements treated as collateralized financing. During the fourth quarter of 2016, the CMBS Funds were fully dissolved.consolidate ALR.
Trading securities – related party – Trading securities represents investments in fixed maturity and equity securities with changes in fair value recognized in investment related gains (losses) within revenues of consolidated variable interest entities on the condensed consolidated statements of income. For the three months ended March 31, 2017 and 2016, investment related gains (losses) included losses of $4 million and $21 million, respectively, resulting from theThe change in unrealized gains and losses underlyingon trading securities we still held as of the respective period end date.resulted in no unrealized gains or losses during the three months ended March 31, 2018 and 2017. Trading securities held by CoInvest VI and CoInvest VII are related party investments because Apollo affiliates exercise significant influence over the operations of these investees.
Equity securities – related party – Changes in fair value of equity securities are recognized in investment related gains (losses) within revenues of consolidated variable interest entities on the condensed consolidated statements of income. Prior period unrealized changes in fair value of equity securities designated as AFS were recognized in OCI. The change in unrealized gains and losses on equity securities we still held as of the respective period end resulted in unrealized losses of $25 million and $4 million for the three months ended March 31, 2018 and 2017, respectively. Equity securities held by CoInvest VI, CoInvest VII, and CoInvest Other and NCL LLC are considered related party investments because Apollo affiliates exercise significant influence over the operations of these investees.
Investment funds – including related party – Investment funds include non-fixed income, alternative investments in the form of limited partnerships or similar legal structures that meet the definition of VIEs; however, our consolidated VIEs are not considered the primary beneficiary of these investment funds. Changes in fair value for certain of these investment funds are included in investment related gains (losses) within revenues of consolidated variable interest entities on the condensed consolidated statements of income. Investment funds held by CoInvest VII, CoInvest Other and Sprint are considered related party investments as they are sponsored or managed by Apollo affiliates.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Fair Value – —See Note 5 – Fair Value for a description of the levels of our fair value hierarchy and our process for determining the level we assign our assets and liabilities carried at fair value.
The following represents the hierarchy for assets and liabilities of our consolidated VIEs measured at fair value on a recurring basis:
| | | | March 31, 2017 | March 31, 2018 |
| (In millions) | Total | | Level 1 | | Level 2 | | Level 3 | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 |
| Assets of consolidated variable interest entities | | | | | | | | | | | | | | | | |
| Investments | | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | |
| Equity securities | $ | 191 |
| | $ | 191 |
| | $ | — |
| | $ | — |
| |
| Trading securities | | | | | | | | |
| Fixed maturity securities | 50 |
| | — |
| | — |
| | 50 |
| |
| Fixed maturity securities, trading | | $ | 47 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 47 |
|
| Equity securities | 116 |
| | 84 |
| | — |
| | 32 |
| 177 |
| | — |
| | 149 |
| | — |
| | 28 |
|
| Investment funds | 567 |
| | — |
| | — |
| | 567 |
| 554 |
| | 534 |
| | — |
| | — |
| | 20 |
|
| Cash and cash equivalents | 2 |
| | 2 |
| | — |
| | — |
| 3 |
| | — |
| | 3 |
| | — |
| | — |
|
| Total assets of consolidated VIEs measured at fair value | $ | 926 |
| | $ | 277 |
| | $ | — |
| | $ | 649 |
| $ | 781 |
| | $ | 534 |
| | $ | 152 |
| | $ | — |
| | $ | 95 |
|
| | | | | | | | | | | |
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. | | 1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. |
| | | | December 31, 2016 | December 31, 2017 |
| (In millions) | Total | | Level 1 | | Level 2 | | Level 3 | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 |
| Assets of consolidated variable interest entities | | | | | | | | | | | | | | | | |
| Investments | | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | |
| Equity securities | $ | 161 |
| | $ | 161 |
| | $ | — |
| | $ | — |
| |
| Trading securities | | | | | | | | |
| Fixed maturity securities | 50 |
| | — |
| | — |
| | 50 |
| |
| Fixed maturity securities, trading | | $ | 48 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 48 |
|
| Equity securities | 117 |
| | 74 |
| | — |
| | 43 |
| 240 |
| | — |
| | 212 |
| | — |
| | 28 |
|
| Investment funds | 562 |
| | — |
| | — |
| | 562 |
| 549 |
| | 528 |
| | — |
| | — |
| | 21 |
|
| Cash and cash equivalents | 14 |
| | 14 |
| | — |
| | — |
| 4 |
| | — |
| | 4 |
| | — |
| | — |
|
| Total assets of consolidated VIEs measured at fair value | $ | 904 |
| | $ | 249 |
| | $ | — |
| | $ | 655 |
| $ | 841 |
| | $ | 528 |
| | $ | 216 |
| | $ | — |
| | $ | 97 |
|
| | | | | | | | | | | |
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. | | 1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. |
Fair Value Valuation Methods—Refer to – See Note 5 – Fair Value for the valuation methods used to determine the fair value of AFStrading securities, tradingequity securities, investment funds and cash and cash equivalents.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Level 3 Financial Instruments – The following is a reconciliation for all VIE Level 3 assets and liabilities measured at fair value on a recurring basis:
| | | | Three months ended March 31, 2017 | Three months ended March 31, 2018 |
| (In millions) | Beginning Balance | | Total realized and unrealized gains (losses) included in income | | Purchases | | Sales | | Transfers in (out) | | Other | | Ending Balance | | Total gains (losses) included in earnings1 | Beginning Balance | | Total realized and unrealized gains (losses) included in income | | Purchases | | Sales | | Transfers in (out) | | Ending Balance | | Total gains (losses) included in earnings1 |
| Assets of consolidated variable interest entities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | |
| Trading securities | | | | | | | | | | | | | | | | $ | 48 |
| | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | 47 |
| | $ | — |
|
| Fixed maturity securities | $ | 50 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 50 |
| | $ | — |
| |
| Equity securities | 43 |
| | (11 | ) | | — |
| | — |
| | — |
| | — |
| | 32 |
| | (11 | ) | 28 |
| | — |
| | — |
| | — |
| | — |
| | 28 |
| | — |
|
| Investment funds | 562 |
| | 5 |
| | — |
| | — |
| | — |
| | — |
| | 567 |
| | 5 |
| 21 |
| | 1 |
| | — |
| | (2 | ) | | — |
| | 20 |
| | 1 |
|
| Total Level 3 assets of consolidated VIEs | $ | 655 |
| | $ | (6 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 649 |
| | $ | (6 | ) | $ | 97 |
| | $ | 1 |
| | $ | — |
| | $ | (3 | ) | | $ | — |
| | $ | 95 |
| | $ | 1 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1 Related to instruments held at end of period. | 1 Related to instruments held at end of period. | 1 Related to instruments held at end of period. |
| | | | Three months ended March 31, 2016 | Three months ended March 31, 2017 |
| (In millions) | Beginning Balance | | Total realized and unrealized gains (losses) included in income | | Purchases | | Sales | | Transfers in (out) | | Other | | Ending Balance | | Total gains (losses) included in earnings1 | Beginning Balance | | Total realized and unrealized gains (losses) included in income | | Purchases | | Sales | | Transfers in (out) | | Ending Balance | | Total gains (losses) included in earnings1 |
| Assets of consolidated variable interest entities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | |
| Trading securities | | | | | | | | | | | | | | | | $ | 50 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 50 |
| | $ | — |
|
| Fixed maturity securities | $ | 53 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 53 |
| | $ | — |
| |
| Equity securities | 38 |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | 40 |
| | — |
| 43 |
| | (11 | ) | | — |
| | — |
| | — |
| | 32 |
| | (11 | ) |
| Investment funds | 516 |
| | 4 |
| | 8 |
| | (3 | ) | | — |
| | — |
| | 525 |
| | 4 |
| 38 |
| | — |
| | — |
| | — |
| | — |
| | 38 |
| | — |
|
| Total Level 3 assets of consolidated VIEs | $ | 607 |
| | $ | 4 |
| | $ | 10 |
| | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | 618 |
| | $ | 4 |
| $ | 131 |
| | $ | (11 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 120 |
| | $ | (11 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1 Related to instruments held at end of period. | 1 Related to instruments held at end of period. | 1 Related to instruments held at end of period. |
There were no transfers between Level 1 or Level 2 during the three months ended March 31, 20172018 and 2016.2017.
Significant Unobservable Inputs – For certain Level 3 trading securities and investment funds, the valuations have significant unobservable inputs, forwhich may include, but are not limited to, comparable multiples and weighedweighted average cost of capital rates applied in the valuation models. These inputs in isolation can cause significant increases or decreases in fair value. Specifically,For example, the comparable multiples aremay be multiplied by the underlying investment'sinvestment’s earnings before interest, tax, depreciation and amortization or by some other applicable financial metric to establish the total enterprise value of the underlying investments. We use aA comparable multiple consistent with the implied trading multiple of public industry peers.peers or relevant recent private transactions are used when available.
For other Level 3 trading securities, valuations are performed using a discounted cash flow model. For a discounted cash flow model, the significant input is the discount rate applied to present value the projected cash flows. An increase in the discount rate can significantly lower the fair value; a decrease in the discount rate can significantly increase the fair value. The discount rate ismay be determined by considering the weighted average cost of capital calculation of companies in similar industries with comparable debt to equity ratios.
Fair Value Option – The following represents the gains (losses) recorded for instruments within the consolidated VIEs for which we have elected the fair value option:
| | | | Three months ended March 31, | Three months ended March 31, |
| (In millions) | 2017 | | 2016 | 2018 | | 2017 |
| Trading securities, equity securities | $ | (4 | ) | | $ | (18 | ) | |
| Equity securities | | $ | (9 | ) | | $ | (4 | ) |
| Investment funds | 5 |
| | 4 |
| 6 |
| | 5 |
|
| Total gains (losses) | $ | 1 |
| | $ | (14 | ) | $ | (3 | ) | | $ | 1 |
|
Fair Value of Financial Instruments Not Held at Fair Value – Assets of consolidated variable interest entities includes $32$28 million and $11$22 million of investment funds accounted for under the equity method and therefore, not carried at fair value as of March 31, 20172018 and December 31, 2016,2017, respectively; however, the carrying amount approximates fair value.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Commitments and Contingencies – Included in assets of CoInvest VI are equity investments in publicly traded shares of Caesars Entertainment Corporation (CEC) and Caesars Acquisition Company (CAC). We received the CEC and CAC shares as part of a contribution agreement in 2012 with AAA Guarantor - Athene, L.P. and its subsidiary, Apollo Life Re Ltd., in order to provide a capital base to support future acquisitions. There are pending claims against CEC, CAC and/or others, related to certain guaranties issued for debt of Caesars Entertainment Operating Company, Inc. (CEOC) and/or certain transactions involving CEOC and certain of its subsidiaries (collectively, Debtors), CEC, CAC and others. CEC and the Debtors announced on or about September 26, 2016 that CEC and CEOC had received confirmations from representatives of CEOC's major creditor groups of those groups’ support for a term sheet that describes the key economic terms of a proposed consensual chapter 11 plan for the Debtors. The plan, containing such terms and further including such other terms respecting, among other things, the merger of CAC into CEC, that CoInvest VI and others will not retain their pre-merger CEC shares, that CoInvest VI and others will retain the value of their CAC shares when receiving shares in the merged CEC, and that CoInvest VI and others will receive releases to the fullest extent permitted by law, was confirmed by the Bankruptcy Court by order dated January 17, 2017. Conditions precedent to the effective date of the plan include regulatory approvals from the various gaming regulators, CEC and CAC shareholders' approval of the proposed merger, and securing required financings. As a result, CoInvest VI has recorded a liability of $30 million for the entire carrying value of the CEC shares. As of March 31, 2017, CoInvest VI's investment in CAC is carried at its fair value of $52 million.
Non-Consolidated Securities and Investment Funds—We invest in certain other entities meeting the definition of a VIE or voting interest entity (VOE). We do not consolidate such VIEs for which we do not meet the criteria of primary beneficiary as described below. We also do not consolidate such VOEs for which we do not have control.
Fixed Maturity Securities – We invest in securitization entities as a debt holder or an investor in the residual interest of the securitization vehicle, which are included in fixed maturity securities on the condensed consolidated balance sheets. These entities are deemed VIEs due to insufficient equity within the structure and lack of control by the equity investors over the activities that significantly impact the economics of the entity. In general, we are a debt investor within these entities and, as such, hold a variable interest; however, due to the debt holders'holders’ lack of ability to control the decisions within the trust that significantly impact the entity, and the fact the debt holders are protected from losses due to the subordination by the equity tranche, the debt holders are not deemed the primary beneficiary. Securitization vehicles in which we hold the residual tranche are not consolidated because we do not unilaterally have substantive rights to remove the general partner, or when assessing related party interests, we are not under common control, as defined by GAAP, with the related party, nor are substantially all of the activities conducted on our behalf; therefore, we are not deemed the primary beneficiary. Debt investments and investments in the residual tranche of securitization entities are considered debt instruments and are held at fair value on the balance sheet and classified as AFS or trading.
Investment funds – Investment funds include non-fixed income, alternative investments in the form of limited partnerships or similar legal structures that meet the definition of VIEs or VOEs.structures.
A portion of these investment funds are sponsored and managed by unrelated parties in which we, as limited partner, do not have the power to direct the activities that most significantly impact the economic performance of the fund, nor do we unilaterally have substantive rights to remove the general partner or dissolve the entity without cause. As a result, we do not meet the power criterion to be considered the primary beneficiary and do not consolidate these VIEs in our financial statements. Investment funds managed by unrelated parties and classified as VOEs are not consolidated as we do not own a majority voting interest and have no other substantive rights that would provide control.
We also have equity interests in investment funds where the general partner or investment manager is a related party. We have determined we are not under common control, as defined by GAAP, with the related party, nor are we deemed to be the primary beneficiary. As a result, investments in these VIEs are not consolidated.
We account for non-consolidated investment funds where we are able to exercise significant influence over the entity under the equity method or by electing the fair value option. For non-consolidated investment funds where we are not able to exercise significant influence, we elect the fair value option. Our investments in investment funds are generally passive in nature as we do not take an active role in the investment fund's management.
Our risk of loss associated with our non-consolidated VIEs and VOEsinvestments is limited and depends on the investment, including any unfunded commitments, as follows: (1) investment funds accounted for under the equity method are limited to our initial investment plus unfunded commitments;capital contributions, net of return of capital; (2) investment funds under the fair value option are limited to the fair value plus unfunded commitments;value; (3) AFS securities and other investments are limited to cost or amortized cost; and (4) trading securities are limited to carrying value.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following summarizes the carrying value and maximum loss exposure of these non-consolidated VIEs and VOEs:investments:
| | | | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| (In millions) | Carrying Value | | Maximum Loss Exposure | | Carrying Value | | Maximum Loss Exposure | Carrying Value | | Maximum Loss Exposure | | Carrying Value | | Maximum Loss Exposure |
| Investment funds | $ | 689 |
| | $ | 1,048 |
| | $ | 689 |
| | $ | 1,026 |
| $ | 647 |
| | $ | 1,104 |
| | $ | 699 |
| | $ | 1,036 |
|
| Investment in related parties – investment funds | 1,276 |
| | 1,546 |
| | 1,198 |
| | 1,485 |
| 1,499 |
| | 2,665 |
| | 1,310 |
| | 2,598 |
|
| Assets of consolidated variable interest entities – investment funds | 599 |
| | 621 |
| | 573 |
| | 593 |
| 582 |
| | 606 |
| | 571 |
| | 594 |
|
| Investment in fixed maturity securities | 19,995 |
| | 19,578 |
| | 19,171 |
| | 19,090 |
| 21,971 |
| | 21,281 |
| | 21,022 |
| | 20,278 |
|
| Investment in related parties – fixed maturity securities | 530 |
| | 528 |
| | 530 |
| | 536 |
| 810 |
| | 806 |
| | 713 |
| | 792 |
|
| Total non-consolidated VIEs | $ | 23,089 |
| | $ | 23,321 |
| | $ | 22,161 |
| | $ | 22,730 |
| |
| Total non-consolidated investments | | $ | 25,509 |
| | $ | 26,462 |
| | $ | 24,315 |
| | $ | 25,298 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following summarizes our investment funds, including related party investment funds and investment funds owned by consolidated VIEs:
|
| | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2017 | | December 31, 2016 |
| (In millions, except for percentages and years) | Carrying value | | Percent of total | | Life of underlying funds in years | | Carrying value | | Percent of total | | Life of underlying funds in years |
| Investment funds | | | | | | | | | | | | | | | |
| Private equity | $ | 245 |
| | 35.6 | % | | 0 | – | 7 | | $ | 268 |
| | 38.9 | % | | 0 | – | 7 |
| Mortgage and real estate | 143 |
| | 20.8 | % | | 0 | – | 6 | | 118 |
| | 17.2 | % | | 0 | – | 4 |
| Natural resources | 5 |
| | 0.7 | % | | 0 | – | 1 | | 5 |
| | 0.7 | % | | 1 | – | 2 |
| Hedge funds | 69 |
| | 10.0 | % | | 0 | – | 3 | | 72 |
| | 10.4 | % | | 0 | – | 3 |
| Credit funds | 227 |
| | 32.9 | % | | 0 | – | 5 | | 226 |
| | 32.8 | % | | 0 | – | 5 |
| Total investment funds | 689 |
| | 100.0 | % | | | | | | 689 |
| | 100.0 | % | | | | |
| Investment funds – related parties | | | | | | | | | | | | | | | |
Private equity – A-A Mortgage1 | 366 |
| | 28.7 | % | | 5 | – | 5 | | 343 |
| | 28.6 | % | | 3 | – | 3 |
| Private equity – other | 152 |
| | 11.9 | % | | 0 | – | 10 | | 131 |
| | 11.0 | % | | 0 | – | 10 |
| Mortgage and real estate | 262 |
| | 20.5 | % | | 0 | – | 4 | | 247 |
| | 20.6 | % | | 1 | – | 4 |
| Natural resources | 76 |
| | 6.0 | % | | 5 | – | 5 | | 49 |
| | 4.1 | % | | 5 | – | 5 |
| Hedge funds | 180 |
| | 14.1 | % | | 9 | – | 9 | | 192 |
| | 16.0 | % | | 9 | – | 9 |
| Credit funds | 240 |
| | 18.8 | % | | 1 | – | 3 | | 236 |
| | 19.7 | % | | 2 | – | 3 |
| Total investment funds – related parties | 1,276 |
| | 100.0 | % | | | | | | 1,198 |
| | 100.0 | % | | | | |
| Investment funds owned by consolidated VIEs | | | | | | | | | | | | | | | |
Private equity – MidCap2 | 528 |
| | 88.1 | % | | N/A | | 524 |
| | 91.4 | % | | N/A |
| Credit funds | 39 |
| | 6.5 | % | | 0 | – | 3 | | 38 |
| | 6.7 | % | | 0 | – | 3 |
| Mortgage and real assets | 32 |
| | 5.4 | % | | 2 | – | 3 | | 11 |
| | 1.9 | % | | 2 | – | 3 |
| Total investment funds owned by consolidated VIEs | 599 |
| | 100.0 | % | | | | | | 573 |
| | 100.0 | % | | | | |
| Total investment funds including related parties and funds owned by consolidated VIEs | $ | 2,564 |
| | | | | | | | $ | 2,460 |
| | | | | | |
| | | | | | | | | | | | | | | | |
1 A-A Mortgage Opportunities, LP (A-A Mortgage) is a platform to originate residential mortgage loans and mortgage servicing rights. |
2 Our total investment in MidCap, including amounts advanced under credit facilities, totaled $766 million and $761 million as of March 31, 2017 and December 31, 2016, respectively, which is greater than 10% of total AHL shareholders' equity at the respective period end dates. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
| (In millions, except for percentages and years) | Carrying value | | Percent of total | | Remaining life in years | | Carrying value | | Percent of total | | Remaining life in years |
| Investment funds | | | | | | | | | | | | | | | |
| Private equity | $ | 240 |
| | 37.1 | % | | 0 | – | 6 | | $ | 271 |
| | 38.8 | % | | 0 | – | 7 |
| Real estate and other real assets | 174 |
| | 26.9 | % | | 1 | – | 7 | | 161 |
| | 23.0 | % | | 1 | – | 7 |
| Natural resources | 4 |
| | 0.6 | % | | 1 | – | 1 | | 4 |
| | 0.6 | % | | 1 | – | 1 |
| Hedge funds | 56 |
| | 8.7 | % | | 0 | – | 2 | | 61 |
| | 8.7 | % | | 0 | – | 3 |
| Credit funds | 173 |
| | 26.7 | % | | 0 | – | 4 | | 202 |
| | 28.9 | % | | 0 | – | 5 |
| Total investment funds | 647 |
| | 100.0 | % | | | | | | 699 |
| | 100.0 | % | | | | |
| Investment funds – related parties | | | | | | | | | | | | | | | |
Private equity – A-A Mortgage1 | 418 |
| | 27.9 | % | | 5 | – | 5 | | 403 |
| | 30.8 | % | | 5 | – | 5 |
| Private equity – other | 283 |
| | 18.9 | % | | 0 | – | 6 | | 180 |
| | 13.7 | % | | 0 | – | 10 |
| Real estate and other real assets | 322 |
| | 21.5 | % | | 0 | – | 6 | | 297 |
| | 22.7 | % | | 0 | – | 7 |
| Natural resources | 98 |
| | 6.5 | % | | 4 | – | 5 | | 74 |
| | 5.6 | % | | 4 | – | 6 |
| Hedge funds | 99 |
| | 6.6 | % | | 11 | – | 11 | | 93 |
| | 7.1 | % | | 9 | – | 9 |
| Credit funds | 279 |
| | 18.6 | % | | 1 | – | 4 | | 263 |
| | 20.1 | % | | 2 | – | 4 |
| Total investment funds – related parties | 1,499 |
| | 100.0 | % | | | | | | 1,310 |
| | 100.0 | % | | | | |
| Investment funds owned by consolidated VIEs | | | | | | | | | | | | | | | |
Private equity – MidCap2 | 534 |
| | 91.8 | % | | N/A | | 528 |
| | 92.5 | % | | N/A |
| Credit funds | 20 |
| | 3.4 | % | | 0 | – | 3 | | 21 |
| | 3.7 | % | | 0 | – | 3 |
| Real estate and other real assets | 28 |
| | 4.8 | % | | 1 | – | 2 | | 22 |
| | 3.8 | % | | 2 | – | 3 |
| Total investment funds owned by consolidated VIEs | 582 |
| | 100.0 | % | | | | | | 571 |
| | 100.0 | % | | | | |
| Total investment funds including related parties and funds owned by consolidated VIEs | $ | 2,728 |
| | | | | | | | $ | 2,580 |
| | | | | | |
| | | | | | | | | | | | | | | | |
1 A-A Mortgage Opportunities, LP (A-A Mortgage) is a platform to originate residential mortgage loans and mortgage servicing rights. Our total investment in A-A Mortgage, including amounts loaned to Aris Mortgage Holding Company LLC (Aris Holdco), a 100% equity investment of A-A Mortgage, was $541 million and $455 million as of March 31, 2018 and December 31, 2017, respectively. |
2 Our total investment in MidCap, including amounts advanced under credit facilities, totaled $772 million and $766 million as of March 31, 2018 and December 31, 2017, respectively. |
Summarized Ownership of Investment Funds—The following table presents the carrying value by ownership percentage of equity method investment funds, including related party investment funds and investment funds owned by consolidated VIEs:
| | | (In millions) | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| Ownership Percentage | | | | | | |
| 100% | $ | 25 |
| | $ | 27 |
| $ | 15 |
| | $ | 35 |
|
| 50% – 99% | 557 |
| | 478 |
| 579 |
| | 520 |
|
| Greater than 3% – 49% | 1,295 |
| | 1,294 |
| |
| 3% – 49% | | 1,296 |
| | 1,301 |
|
| Equity method investment funds | $ | 1,877 |
| | $ | 1,799 |
| $ | 1,890 |
| | $ | 1,856 |
|
The following table presents the carrying value by ownership percentage of investment funds where we elected the fair value option, including related party investment funds and investment funds owned by consolidated VIEs:
| | | (In millions) | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| Ownership Percentage | | | | | | |
| Greater than 3% – 49% | $ | 567 |
| | $ | 562 |
| |
| 3% or less | 120 |
| | 99 |
| |
| 3% – 49% | | $ | 690 |
| | $ | 590 |
|
| Less than 3% | | 148 |
| | 134 |
|
| Fair value option investment funds | $ | 687 |
| | $ | 661 |
| $ | 838 |
| | $ | 724 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
5. Fair Value
Fair value is the price we would receive to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market participants. We determine fair value based on the following fair value hierarchy:
Level 1 – Unadjusted quoted prices for identical assets or liabilities in an active market.
Level 2 – Quoted prices for inactive markets or valuation techniques that require observable direct or indirect inputs for substantially the full term of the asset or liability. Level 2 inputs include the following:
Quoted prices for similar assets or liabilities in active markets,
Observable inputs other than quoted market prices, and
Observable inputs derived principally from market data through correlation or other means.
Level 3 – Prices or valuation techniques with unobservable inputs significant to the overall fair value estimate. These valuations use critical assumptions not readily available to market participants. Level 3 valuations are based on market standard valuation methodologies, including discounted cash flows, matrix pricing or other similar techniques.
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the instrument'sinstrument’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.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
The following represents the hierarchy for our assets and liabilities measured at fair value on a recurring basis: | | | | March 31, 2017 | March 31, 2018 |
| (In millions) | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| U.S. government and agencies | $ | 60 |
| | $ | — |
| | $ | 28 |
| | $ | 32 |
| | $ | — |
| $ | 25 |
| | $ | — |
| | $ | 23 |
| | $ | 2 |
| | $ | — |
|
| U.S. state, municipal and political subdivisions | 1,140 |
| | — |
| | — |
| | 1,140 |
| | — |
| 1,132 |
| | — |
| | — |
| | 1,132 |
| | — |
|
| Foreign governments | 2,031 |
| | — |
| | — |
| | 2,018 |
| | 13 |
| 136 |
| | — |
| | — |
| | 136 |
| | — |
|
| Corporate | 31,567 |
| | — |
| | — |
| | 31,077 |
| | 490 |
| 35,867 |
| | — |
| | — |
| | 35,186 |
| | 681 |
|
| CLO | 5,021 |
| | — |
| | — |
| | 4,921 |
| | 100 |
| 5,642 |
| | — |
| | — |
| | 5,475 |
| | 167 |
|
| ABS | 3,260 |
| | — |
| | — |
| | 2,038 |
| | 1,222 |
| 4,607 |
| | — |
| | — |
| | 3,313 |
| | 1,294 |
|
| CMBS | 1,860 |
| | — |
| | — |
| | 1,713 |
| | 147 |
| 1,979 |
| | — |
| | — |
| | 1,916 |
| | 63 |
|
| RMBS | 9,286 |
| | — |
| | — |
| | 9,226 |
| | 60 |
| 9,187 |
| | — |
| | — |
| | 9,149 |
| | 38 |
|
| Total AFS fixed maturity securities | 54,225 |
| | — |
| | 28 |
| | 52,165 |
| | 2,032 |
| |
| Equity securities | 422 |
| | — |
| | 83 |
| | 334 |
| | 5 |
| |
| Total AFS securities | 54,647 |
| | — |
| | 111 |
|
| 52,499 |
| | 2,037 |
| 58,575 |
| | — |
| | 23 |
| | 56,309 |
| | 2,243 |
|
| Trading securities | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| U.S. government and agencies | 3 |
| | — |
| | 3 |
| | — |
| | — |
| 3 |
| | — |
| | 3 |
| | — |
| | — |
|
| U.S. state, municipal and political subdivisions | 141 |
| | — |
| | — |
| | 124 |
| | 17 |
| 130 |
| | — |
| | — |
| | 113 |
| | 17 |
|
| Corporate | 1,434 |
| | — |
| | — |
| | 1,434 |
| | — |
| 1,399 |
| | — |
| | — |
| | 1,399 |
| | — |
|
| CLO | 27 |
| | — |
| | — |
| | — |
| | 27 |
| 27 |
| | — |
| | — |
| | 26 |
| | 1 |
|
| ABS | 84 |
| | — |
| | — |
| | 84 |
| | — |
| 94 |
| | — |
| | — |
| | 94 |
| | — |
|
| CMBS | 73 |
| | — |
| | — |
| | 73 |
| | — |
| 50 |
| | — |
| | — |
| | 50 |
| | — |
|
| RMBS | 384 |
| | — |
| | — |
| | 302 |
| | 82 |
| 385 |
| | — |
| | — |
| | 64 |
| | 321 |
|
| Total trading fixed maturity securities | 2,146 |
| | — |
| | 3 |
| | 2,017 |
| | 126 |
| |
| Total trading securities | | 2,088 |
| | — |
| | 3 |
| | 1,746 |
| | 339 |
|
| Equity securities | 449 |
| | — |
| | — |
| | 449 |
| | — |
| 160 |
| | — |
| | 11 |
| | 149 |
| | — |
|
| Total trading securities | 2,595 |
| | — |
| | 3 |
| | 2,466 |
| | 126 |
| |
| Mortgage loans | 44 |
| | — |
| | — |
| | — |
| | 44 |
| 41 |
| | — |
| | — |
| | — |
| | 41 |
|
| Investment funds | 97 |
| | 97 |
| | — |
| | — |
| | — |
| 131 |
| | 106 |
| | — |
| | — |
| | 25 |
|
| Funds withheld at interest – embedded derivative | 212 |
| | — |
| | — |
| | — |
| | 212 |
| 207 |
| | — |
| | — |
| | — |
| | 207 |
|
| Derivative assets | 1,708 |
| | — |
| | 10 |
| | 1,698 |
| | — |
| 2,031 |
| | — |
| | 5 |
| | 2,026 |
| | — |
|
| Short-term investments | 166 |
| | — |
| | 28 |
| | 138 |
| | — |
| 235 |
| | — |
| | 48 |
| | 187 |
| | — |
|
| Other investments | | 39 |
| | — |
| | — |
| | 39 |
| | — |
|
| Cash and cash equivalents | 2,563 |
| | — |
| | 2,563 |
| | — |
| | — |
| 2,735 |
| | — |
| | 2,735 |
| | — |
| | — |
|
| Restricted cash | 73 |
| | — |
| | 73 |
| | — |
| | — |
| 87 |
| | — |
| | 87 |
| | — |
| | — |
|
| Investments in related parties | | | | | | | | | | | | | | | | | | |
| AFS, fixed maturity securities | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities | | | | | | | | | | |
| CLO | 306 |
| | — |
| | — |
| | 306 |
| | — |
| 460 |
| | — |
| | — |
| | 398 |
| | 62 |
|
| ABS | 55 |
| | — |
| | — |
| | 55 |
| | — |
| 45 |
| | — |
| | — |
| | 45 |
| | — |
|
| Total AFS securities – related party | 361 |
| | — |
| | — |
| | 361 |
| | — |
| 505 |
| | — |
| | — |
| | 443 |
| | 62 |
|
| Trading securities, CLO | 169 |
| | — |
| | — |
| | 38 |
| | 131 |
| |
| Trading securities | | | | | | | | | | |
| CLO | | 134 |
| | — |
| | — |
| | 43 |
| | 91 |
|
| ABS | | 171 |
| | — |
| | — |
| | — |
| | 171 |
|
| Total trading securities – related party | | 305 |
| | — |
| | — |
| | 43 |
| | 262 |
|
| Investment funds | 23 |
| | 23 |
| | — |
| | — |
| | — |
| 153 |
| | 42 |
| | — |
| | — |
| | 111 |
|
| Short-term investments | 20 |
| | — |
| | — |
| | — |
| | 20 |
| 123 |
| | — |
| | — |
| | 123 |
| | — |
|
| Reinsurance recoverable | 1,738 |
| | — |
| | — |
| | — |
| | 1,738 |
| 1,713 |
| | — |
| | — |
| | — |
| | 1,713 |
|
| Total assets measured at fair value | $ | 64,416 |
| | $ | 120 |
| | $ | 2,788 |
| | $ | 57,200 |
| | $ | 4,308 |
| $ | 69,128 |
| | $ | 148 |
| | $ | 2,912 |
| | $ | 61,065 |
| | $ | 5,003 |
|
| | | | | | | | | | (Continued) |
| | | | | | | | | (Continued) |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
| | | | March 31, 2017 | March 31, 2018 |
| (In millions) | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 |
| Liabilities | | | | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities |
|
| | | | | | | | | | | | | | | | | |
| Embedded derivative | $ | 5,793 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 5,793 |
| $ | 7,254 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 7,254 |
|
| Universal life benefits | 910 |
| | — |
| | — |
| | — |
| | 910 |
| 934 |
| | — |
| | — |
| | — |
| | 934 |
|
| Unit-linked contracts | 429 |
| | — |
| | — |
| | 429 |
| | — |
| |
| Future policy benefits | | | | | | | | | | | | | | | | | | |
| AmerUs Closed Block | 1,602 |
| | — |
| | — |
| | — |
| | 1,602 |
| 1,541 |
| | — |
| | — |
| | — |
| | 1,541 |
|
| ILICO Closed Block and life benefits | 813 |
| | — |
| | — |
| | — |
| | 813 |
| 764 |
| | — |
| | — |
| | — |
| | 764 |
|
| Derivative liabilities | 32 |
| | — |
| | 1 |
| | 24 |
| | 7 |
| 186 |
| | — |
| | — |
| | 181 |
| | 5 |
|
| Funds withheld liability – embedded derivative | 11 |
| | — |
| | — |
| | 11 |
| | — |
| 11 |
| | — |
| | — |
| | 11 |
| | — |
|
| Total liabilities measured at fair value | $ | 9,590 |
| | $ | — |
| | $ | 1 |
| | $ | 464 |
| | $ | 9,125 |
| $ | 10,690 |
| | $ | — |
| | $ | — |
| | $ | 192 |
| | $ | 10,498 |
|
| | | | | | | | | | | | | | | | | | | |
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. | 1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. | 1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. |
| | | | | | | | | | (Concluded) |
| | | | | | | | | (Concluded) |
|
| | | | December 31, 2016 | December 31, 2017 |
| (In millions) | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| U.S. government and agencies | $ | 60 |
| | $ | — |
| | $ | 29 |
| | $ | 31 |
| | $ | — |
| $ | 62 |
| | $ | — |
| | $ | 26 |
| | $ | 36 |
| | $ | — |
|
| U.S. state, municipal and political subdivisions | 1,140 |
| | — |
| | — |
| | 1,135 |
| | 5 |
| 1,165 |
| | — |
| | — |
| | 1,165 |
| | — |
|
| Foreign governments | 2,235 |
| | — |
| | — |
| | 2,221 |
| | 14 |
| 2,683 |
| | — |
| | — |
| | 2,683 |
| | — |
|
| Corporate | 30,020 |
| | — |
| | — |
| | 29,650 |
| | 370 |
| 36,660 |
| | — |
| | — |
| | 36,082 |
| | 578 |
|
| CLO | 4,822 |
| | — |
| | — |
| | 4,664 |
| | 158 |
| 5,084 |
| | — |
| | — |
| | 5,020 |
| | 64 |
|
| ABS | 2,936 |
| | — |
| | — |
| | 1,776 |
| | 1,160 |
| 3,971 |
| | — |
| | — |
| | 2,510 |
| | 1,461 |
|
| CMBS | 1,847 |
| | — |
| | — |
| | 1,695 |
| | 152 |
| 2,021 |
| | — |
| | — |
| | 1,884 |
| | 137 |
|
| RMBS | 8,973 |
| | — |
| | — |
| | 8,956 |
| | 17 |
| 9,366 |
| | — |
| | — |
| | 9,065 |
| | 301 |
|
| Total AFS fixed maturity securities | 52,033 |
| | — |
| | 29 |
| | 50,128 |
| | 1,876 |
| |
| Equity securities | 353 |
| | — |
| | 79 |
| | 269 |
| | 5 |
| |
| Total AFS securities | 52,386 |
| | — |
| | 108 |
| | 50,397 |
| | 1,881 |
| 61,012 |
| | — |
| | 26 |
| | 58,445 |
| | 2,541 |
|
| Trading securities | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| U.S. government and agencies | 3 |
| | — |
| | 3 |
| | — |
| | — |
| 3 |
| | — |
| | 3 |
| | — |
| | — |
|
| U.S. state, municipal and political subdivisions | 137 |
| | — |
| | — |
| | 120 |
| | 17 |
| 138 |
| | — |
| | — |
| | 121 |
| | 17 |
|
| Corporate | 1,423 |
| | — |
| | — |
| | 1,423 |
| | — |
| 1,475 |
| | — |
| | — |
| | 1,475 |
| | — |
|
| CLO | 43 |
| | — |
| | — |
| | — |
| | 43 |
| 27 |
| | — |
| | — |
| | 10 |
| | 17 |
|
| ABS | 82 |
| | — |
| | — |
| | 82 |
| | — |
| 94 |
| | — |
| | — |
| | 17 |
| | 77 |
|
| CMBS | 81 |
| | — |
| | — |
| | 81 |
| | — |
| 51 |
| | — |
| | — |
| | 51 |
| | — |
|
| RMBS | 387 |
| | — |
| | — |
| | 291 |
| | 96 |
| 408 |
| | — |
| | — |
| | 66 |
| | 342 |
|
| Total trading fixed maturity securities | 2,156 |
| | — |
| | 3 |
| | 1,997 |
| | 156 |
| |
| Equity securities | 425 |
| | — |
| | — |
| | 425 |
| | — |
| |
| Total trading securities | 2,581 |
| | — |
| | 3 |
| | 2,422 |
| | 156 |
| 2,196 |
| | — |
| | 3 |
| | 1,740 |
| | 453 |
|
| | | | | | | | | | (Continued) |
| | | | | | | | | (Continued) |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
| | | | December 31, 2016 | December 31, 2017 |
| (In millions) | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 |
| Equity securities | | 790 |
| | — |
| | 18 |
| | 764 |
| | 8 |
|
| Mortgage loans | 44 |
| | — |
| | — |
| | — |
| | 44 |
| 41 |
| | — |
| | — |
| | — |
| | 41 |
|
| Investment funds | 99 |
| | 99 |
| | — |
| | — |
| | — |
| 145 |
| | 104 |
| | — |
| | — |
| | 41 |
|
| Funds withheld at interest – embedded derivative | 140 |
| | — |
| | — |
| | — |
| | 140 |
| 312 |
| | — |
| | — |
| | — |
| | 312 |
|
| Derivative assets | 1,370 |
| | — |
| | 9 |
| | 1,361 |
| | — |
| 2,551 |
| | — |
| | 7 |
| | 2,544 |
| | — |
|
| Short-term investments | 189 |
| | — |
| | 19 |
| | 170 |
| | — |
| 201 |
| | — |
| | 40 |
| | 161 |
| | — |
|
| Cash and cash equivalents | 2,445 |
| | — |
| | 2,445 |
| | — |
| | — |
| 4,888 |
| | — |
| | 4,888 |
| | — |
| | — |
|
| Restricted cash | 57 |
| | — |
| | 57 |
| | — |
| | — |
| 105 |
| | — |
| | 105 |
| | — |
| | — |
|
| Investments in related parties |
|
| | | | | | | | | | | | | | | | | |
| AFS, fixed maturity securities | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities | | | | | | | | | | |
| CLO | 279 |
| | — |
| | — |
| | 279 |
| | — |
| 360 |
| | — |
| | — |
| | 360 |
| | — |
|
| ABS | 56 |
| | — |
| | — |
| | — |
| | 56 |
| 46 |
| | — |
| | — |
| | 46 |
| | — |
|
| Total AFS fixed maturity securities | 335 |
| | — |
| | — |
| | 279 |
| | 56 |
| |
| AFS, equity securities | 20 |
| | — |
| | 20 |
| | — |
| | — |
| |
| Total AFS securities – related party | 355 |
| | — |
| | 20 |
| | 279 |
| | 56 |
| 406 |
| | — |
| | — |
| | 406 |
| | — |
|
| Trading securities, CLO | 195 |
| | — |
| | — |
| | — |
| | 195 |
| |
| Trading securities | | | | | | | | | | |
| CLO | | 132 |
| | — |
| | — |
| | 27 |
| | 105 |
|
| ABS | | 175 |
| | — |
| | — |
| | 175 |
| | — |
|
| Total trading securities – related party | | 307 |
| | — |
| | — |
| | 202 |
| | 105 |
|
| Investment funds | | 30 |
| | 30 |
| | — |
| | — |
| | — |
|
| Short-term investments | | 52 |
| | — |
| | — |
| | 52 |
| | — |
|
| Reinsurance recoverable | 1,692 |
| | — |
| | — |
| | — |
| | 1,692 |
| 1,824 |
| | — |
| | — |
| | — |
| | 1,824 |
|
| Total assets measured at fair value | $ | 61,553 |
| | $ | 99 |
| | $ | 2,661 |
| | $ | 54,629 |
| | $ | 4,164 |
| $ | 74,860 |
| | $ | 134 |
| | $ | 5,087 |
| | $ | 64,314 |
| | $ | 5,325 |
|
| Liabilities | | | | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities |
|
| | | | | | | | | | | | | | | | | |
| Embedded derivative | $ | 5,283 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 5,283 |
| $ | 7,436 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 7,436 |
|
| Universal life benefits | 883 |
| | — |
| | — |
| | — |
| | 883 |
| 1,005 |
| | — |
| | — |
| | — |
| | 1,005 |
|
| Unit-linked contracts | 408 |
| | — |
| | — |
| | 408 |
| | — |
| 488 |
| | — |
| | — |
| | 488 |
| | — |
|
| Future policy benefits |
|
| | | | | | | | | | | | | | | | | |
| AmerUs Closed Block | 1,606 |
| | — |
| | — |
| | — |
| | 1,606 |
| 1,625 |
| | — |
| | — |
| | — |
| | 1,625 |
|
| ILICO Closed Block and life benefits | 794 |
| | — |
| | — |
| | — |
| | 794 |
| 803 |
| | — |
| | — |
| | — |
| | 803 |
|
| Derivative liabilities | 40 |
| | — |
| | — |
| | 33 |
| | 7 |
| 134 |
| | — |
| | — |
| | 129 |
| | 5 |
|
| Funds withheld liability – embedded derivative | 6 |
| | — |
| | — |
| | 6 |
| | — |
| 22 |
| | — |
| | — |
| | 22 |
| | — |
|
| Total liabilities measured at fair value | $ | 9,020 |
| | $ | — |
| | $ | — |
| | $ | 447 |
| | $ | 8,573 |
| $ | 11,513 |
| | $ | — |
| | $ | — |
| | $ | 639 |
| | $ | 10,874 |
|
| | | | | | | | | | | | | | | | | | | |
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. | 1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. | 1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. |
| | | | | | | | | | (Concluded) |
| | | | | | | | | (Concluded) |
|
Refer toSee Note 4 – Variable Interest Entities for fair value disclosures associated with consolidated VIEs.
Fair Value Valuation Methods—We used the following valuation methods and assumptions to estimate fair value:
Fixed maturity –AFS and trading securities
Fixed maturity – We obtain the fair value for most marketable bondssecurities without an active market from several commercial pricing services. These are classified as Level 2 assets. The pricing services incorporate a variety of market observable information in their valuation techniques, including benchmark yields, trading activity, credit quality, issuer spreads, bids, offers and other reference data. This category typically includes U.S. and non-U.S. corporate bonds, U.S. agency and government guaranteed securities, CLO, ABS, CMBS and RMBS.
We value privately placed fixed maturity securities based on the credit quality and duration of comparable marketable securities, which may be securities of another issuer with similar characteristics. In some instances, we use a matrix-based pricing model. These models consider the current level of risk-free interest rates, corporate spreads, credit quality of the issuer and cash flow characteristics of the security. We also consider additional factors such as net worth of the borrower, value of collateral, capital structure of the borrower, presence of guarantees and our evaluation of the borrower'sborrower’s ability to compete in its relevant market. Privately placed fixed maturity securities are classified as Level 2 or 3.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Equity securities – Fair values of publicly traded equity securities are based on quoted market prices and classified as Level 1. Other equity securities, typically private equities or equity securities not traded on an exchange, we value based on other sources, such as commercial pricing services or brokers and are classified as Level 2 or 3.
Mortgage loans – Mortgage loans for which we have elected the fair value option or those held for sale are carried at fair value. We estimate fair value on a monthly basis using discounted cash flow analysis and rates being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. The discounted cash flow model uses unobservable inputs, including estimates of discount rates and loan prepayments. Mortgage loans are classified as Level 3.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Funds withheld (embedded derivative) – We estimate the fair value of the embedded derivative based on the change in the fair value of the assets supporting the funds withheld payable under the combined coinsurance, modco and coinsurance funds withheld reinsurance agreements. As a result, the fair value of the embedded derivative is classified as Level 2 or 3 based on the valuation methods used for the assets held in trust supporting the reinsurance agreements.
Derivatives – Derivative contracts can be exchange traded or over-the-counter. Exchange-traded derivatives typically fall within Level 1 of the fair value hierarchy depending on trading activity. Over-the-counter derivatives are valued using valuation models or an income approach using third-party broker valuations. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlation of the inputs. We consider and incorporate counterparty credit risk in the valuation process through counterparty credit rating requirements and monitoring of overall exposure. We also evaluate and include our own nonperformance risk in valuing derivatives. The majority of our derivatives trade in liquid markets; therefore, we can verify model inputs and model selection does not involve significant management judgment. These are typically classified within Level 2 of the fair value hierarchy.
Cash and cash equivalents – including restricted cash – The carrying amount for cash equals fair value. We estimate the fair value for cash equivalents based on quoted market prices. These assets are classified as Level 1.
Interest sensitive contract liabilities (embedded derivative) – Embedded derivatives related to interest sensitive contract liabilities with fixed indexed annuity products are classified as Level 3. The valuations include significant unobservable inputs associated with economic assumptions and actuarial assumptions for policyholder behavior.
Unit-linked contracts – Unit-linked contracts are valued based on the fair value of the investments supporting the contract. The underlying investments are trading securities comprised primarily of mutual funds. The valuations of these are based on quoted market prices for similar assets and are classified inas Level 2, resulting in a corresponding classification for the unit-linked contracts.
AmerUs Closed Block – We elected the fair value option for the future policy benefits liability in the AmerUs Closed Block. Our valuation technique is to set the fair value of policyholder liabilities equal to the fair value of assets. There is an additional component which captures the fair value of the open block's costblock’s obligations to hold capital in excess of existing liabilities on the closed block.block business. This component uses ais the present value of the projected release of required capital and future cash flows,earnings before income taxes on required capital supporting the AmerUs Closed Block, discounted at a rate which includes investment earnings and policyholder liability movements.represents a market participant’s required rate of return, less the initial required capital. Unobservable inputs include estimates for these items. The target surplus as a percentage of statutory reserves is 3.85% based on the statutory risk-based capital ratio applicable to this block of business. 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'sblock’s obligations to the closed block business. This component uses the present value of future cash flows. The cash flows which include commissions, administrative expenses, reinsurance premiums and benefits, and an explicit cost of capital. The discount rate includes a margin to reflect the business and non-performance risk. Unobservable inputs include estimates for these items. The explicit cost of capital assumption is 9% of required capital, post tax. A margin of 8.94% is included in the discount rates to reflect the business risk. An additional 0.26% is included to reflect non-performance risk. The ILICO Closed Block policyholder liabilities and corresponding reinsurance recoverable are classified as Level 3.
Universal life liabilities and other life benefits – We elected the fair value option for certain blocks of universal and other life business ceded to Global Atlantic Financial Group Limited (together with its subsidiaries, Global Atlantic). We use a present value of liability cash flows. Unobservable inputs include estimates of mortality, persistency, expenses, premium payments and a risk margin used in the discount rates that reflects the riskiness of the business. The risk margin was 0.09%. These universal life policyholder liabilities and corresponding reinsurance recoverable are classified as Level 3.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Fair Value Option—The following represents the gains (losses) recorded for instruments for which we have elected the fair value option:
| | | | Three months ended March 31, | Three months ended March 31, |
| (In millions) | 2017 | | 2016 | 2018 | | 2017 |
| Trading securities | $ | 2 |
| | $ | 12 |
| $ | (89 | ) | | $ | (14 | ) |
| Investment funds | 7 |
| | 3 |
| |
| Equity securities | | — |
| | 16 |
|
| Investment funds, including related party investment funds | | (4 | ) | | 7 |
|
| Future policy benefits | 4 |
| | (53 | ) | 84 |
| | 4 |
|
| Total gains (losses) | $ | 13 |
| | $ | (38 | ) | $ | (9 | ) | | $ | 13 |
|
Gains and losses on trading and equity securities are recorded in investment related gains (losses) on the condensed consolidated statements of income. Prior period unrealized gains and losses on equity securities designated as AFS were recorded in OCI. For fair value option mortgage loans, we record interest income in net investment income and subsequent changes in fair value in investment related gains (losses) on the condensed consolidated statements of income. Gains and losses related to investment funds, including related party investment funds, are recorded in net investment income on the condensed consolidated statements of income. We record the change in fair value of future policy benefits to future policy and other policy benefits on the condensed consolidated statements of income.
The following summarizes information for fair value option mortgage loans:
| | | (In millions) | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| Unpaid principal balance | $ | 42 |
| | $ | 42 |
| $ | 40 |
| | $ | 40 |
|
| Mark to fair value | 2 |
| | 2 |
| 1 |
| | 1 |
|
| Fair value | $ | 44 |
| | $ | 44 |
| $ | 41 |
| | $ | 41 |
|
There were no fair value option mortgage loans 90 days or more past due as of March 31, 20172018 and December 31, 2016.2017.
Transfers Between Levels—Transfers into Level 3 generally represent securities that were valued using pricing sources which, due to changing market conditions, were less observable than in prior periods as indicated by the increased volatility, which was reflected in vendor prices obtained for individual securities. Additionally, changes in pricing sources also led to securities transferring into Level 3.
Transfers out of Level 3 generally represent securities that were valued using pricing sources which, due to changing market conditions, were more observable than in prior periods as indicated by decreased volatility, which was reflected in vendor prices obtained for individual securities. Additionally, changes in pricing sources also led to securities transferring into Level 2.
Transfers into or out of any level are assumed to occur at the end of the period. For the three months ended March 31, 20172018 and 2016,2017, there were no transfers between Level 1 and Level 2.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Level 3 Financial Instruments—The following is a reconciliation for all Level 3 assets and liabilities measured at fair value on a recurring basis:
| | | | Three months ended March 31, 2017 | Three months ended March 31, 2018 |
| | | | Total realized and unrealized gains (losses) | | | | Transfers | | | | | | | Total realized and unrealized gains (losses) | | | | Transfers | | | | |
| (In millions) | Beginning Balance | | Included in income | | Included in OCI | | Purchases, issuances, sales and settlements, net | | In | | (Out) | | Ending Balance | | Total gains (losses) included in earnings1 | Beginning Balance | | Included in income | | Included in OCI | | Purchases, issuances, sales and settlements, net | | In | | (Out) | | Ending Balance | | Total gains (losses) included in earnings1 |
| Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | $ | 5 |
| | $ | 16 |
| | $ | (1 | ) | | $ | (20 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| Foreign governments | 14 |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | 13 |
| | — |
| |
| Corporate | 370 |
| | 1 |
| | 6 |
| | 92 |
| | 21 |
| | — |
| | 490 |
| | — |
| $ | 578 |
| | $ | 4 |
| | $ | (4 | ) | | $ | 58 |
| | $ | 53 |
| | $ | (8 | ) | | $ | 681 |
| | $ | — |
|
| CLO | 158 |
| | — |
| | 4 |
| | 3 |
| | 29 |
| | (94 | ) | | 100 |
| | — |
| 64 |
| | — |
| | 2 |
| | 131 |
| | — |
| | (30 | ) | | 167 |
| | — |
|
| ABS | 1,160 |
| | 4 |
| | 14 |
| | 75 |
| | — |
| | (31 | ) | | 1,222 |
| | — |
| 1,461 |
| | 2 |
| | (7 | ) | | (104 | ) | | — |
| | (58 | ) | | 1,294 |
| | — |
|
| CMBS | 152 |
| | 39 |
| | — |
| | — |
| | — |
| | (44 | ) | | 147 |
| | — |
| 137 |
| | — |
| | (1 | ) | | — |
| | — |
| | (73 | ) | | 63 |
| | — |
|
| RMBS | 17 |
| | — |
| | 1 |
| | — |
| | 50 |
| | (8 | ) | | 60 |
| | — |
| 301 |
| | 1 |
| | (5 | ) | | 23 |
| | 7 |
| | (289 | ) | | 38 |
| | — |
|
| Equity securities | 5 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| |
| Trading securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
| 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
|
| CLO | 43 |
| | (1) |
| | — |
| | (15 | ) | | — |
| | — |
| | 27 |
| | 1 |
| 17 |
| | — |
| | — |
| | 1 |
| | — |
| | (17 | ) | | 1 |
| | — |
|
| ABS | | 77 |
| | — |
| | — |
| | — |
| | — |
| | (77 | ) | | — |
| | (3 | ) |
| RMBS | 96 |
| | (5 | ) | | — |
| | 2 |
| | — |
| | (11 | ) | | 82 |
| | (1 | ) | 342 |
| | (21 | ) | | — |
| | — |
| | — |
| | — |
| | 321 |
| | — |
|
| Equity securities | | 8 |
| | — |
| | — |
| | (8) |
| | — |
| | — |
| | — |
| | — |
|
| Mortgage loans | 44 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 44 |
| | — |
| 41 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 41 |
| | — |
|
| Investment funds | | 41 |
| | (9 | ) | — |
| — |
| | (7 | ) | | — |
| | — |
| | 25 |
| | — |
|
| Funds withheld at interest – embedded derivative | 140 |
| | 72 |
| | — |
| | — |
| | — |
| | — |
| | 212 |
| | — |
| 312 |
| | (105 | ) | | — |
| | — |
| | — |
| | — |
| | 207 |
| | — |
|
| Investments in related parties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | | |
| CLO | | — |
| | — |
| | — |
| | 62 |
| | — |
| | — |
| | 62 |
| | — |
|
| Trading securities | | | | | | | | | | | | | | | | |
| CLO | | 105 |
| | 1 |
| | — |
| | (1 | ) | | 18 |
| | (32 | ) | | 91 |
| | (1 | ) |
| ABS | 56 |
| | — |
| | 1 |
| | (2 | ) | | — |
| | (55 | ) | | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | 171 |
| | — |
| | 171 |
| | — |
|
| Trading securities, CLO | 195 |
| | (12 | ) | | — |
| | (14 | ) | | — |
| | (38 | ) | | 131 |
| | (12 | ) | |
| Short-term investments | — |
| | — |
| | — |
| | 20 |
| | — |
| | — |
| | 20 |
| | — |
| |
| Investment funds | | — |
| | 3 |
| | — |
| | 108 |
| | — |
| | — |
| | 111 |
| | 3 |
|
| Reinsurance recoverable | 1,692 |
| | 46 |
| | — |
| | — |
| | — |
| | — |
| | 1,738 |
| | — |
| 1,824 |
| | (111 | ) | | — |
| | — |
| | — |
| | — |
| | 1,713 |
| | — |
|
| Total Level 3 assets | $ | 4,164 |
| | $ | 160 |
| | $ | 25 |
| | $ | 140 |
| | $ | 100 |
| | $ | (281 | ) | | $ | 4,308 |
| | $ | (12 | ) | $ | 5,325 |
| | $ | (235 | ) | | $ | (15 | ) | | $ | 263 |
| | $ | 249 |
| | $ | (584 | ) | | $ | 5,003 |
| | $ | (1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Embedded derivative | $ | (5,283 | ) | | $ | (431 | ) | | $ | — |
| | $ | (79 | ) | | $ | — |
| | $ | — |
| | $ | (5,793 | ) | | $ | — |
| $ | (7,436 | ) | | $ | 238 |
| | $ | — |
| | $ | (56 | ) | | $ | — |
| | $ | — |
| | $ | (7,254 | ) | | $ | — |
|
| Universal life liabilities | (883 | ) | | (27 | ) | | — |
| | — |
| | — |
| | — |
| | (910 | ) | | — |
| |
| Universal life benefits | | (1,005 | ) | | 71 |
| | — |
| | — |
| | — |
| | — |
| | (934 | ) | | — |
|
| Future policy benefits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AmerUs Closed Block | (1,606 | ) | | 4 |
| | — |
| | — |
| | — |
| | — |
| | (1,602 | ) | | — |
| (1,625 | ) | | 84 |
| | — |
| | — |
| | — |
| | — |
| | (1,541 | ) | | — |
|
| ILICO Closed Block and life benefits | (794 | ) | | (19 | ) | | — |
| | — |
| | — |
| | — |
| | (813 | ) | | — |
| (803 | ) | | 39 |
| | — |
| | — |
| | — |
| | — |
| | (764 | ) | | — |
|
| Derivative liabilities | (7 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (7 | ) | | — |
| (5 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (5 | ) | | — |
|
| Total Level 3 liabilities | $ | (8,573 | ) | | $ | (473 | ) | | $ | — |
| | $ | (79 | ) | | $ | — |
| | $ | — |
| | $ | (9,125 | ) | | $ | — |
| $ | (10,874 | ) | | $ | 432 |
| | $ | — |
| | $ | (56 | ) | | $ | — |
| | $ | — |
| | $ | (10,498 | ) | | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1 Related to instruments held at end of period. | 1 Related to instruments held at end of period. | 1 Related to instruments held at end of period. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
| | | | Three months ended March 31, 2016 | Three months ended March 31, 2017 |
| | | | Total realized and unrealized gains (losses) | | | | Transfers | | | | | | | Total realized and unrealized gains (losses) | | | | Transfers | | | | |
| (In millions) | Beginning balance | | Included in income | | Included in OCI | | Purchases, issuances, sales and settlements, net | | In | | Out | | Ending balance | | Total gains (losses) included in earnings1 | Beginning balance | | Included in income | | Included in OCI | | Purchases, issuances, sales and settlements, net | | In | | Out | | Ending balance | | Total gains (losses) included in earnings1 |
| Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | | $ | 5 |
| | $ | 16 |
| | $ | (1 | ) | | $ | (20 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Foreign governments | $ | 17 |
| | $ | 1 |
| | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | 17 |
| | $ | — |
| 14 |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | 13 |
| | — |
|
| Corporate | 636 |
| | — |
| | 2 |
| | (12 | ) | | 11 |
| | (188 | ) | | 449 |
| | — |
| 370 |
| | 1 |
| | 6 |
| | 92 |
| | 21 |
| | — |
| | 490 |
| | — |
|
| CLO | 517 |
| | 2 |
| | (22 | ) | | — |
| | 729 |
| | (189 | ) | | 1,037 |
| | — |
| 158 |
| | — |
| | 4 |
| | 3 |
| | 29 |
| | (94 | ) | | 100 |
| | — |
|
| ABS | 1,813 |
| | 52 |
| | (17 | ) | | (510 | ) | | 103 |
| | (80 | ) | | 1,361 |
| | — |
| 1,160 |
| | 4 |
| | 14 |
| | 75 |
| | — |
| | (31 | ) | | 1,222 |
| | — |
|
| CMBS | 67 |
| | — |
| | — |
| | 29 |
| | 12 |
| | (25 | ) | | 83 |
| | — |
| 152 |
| | 39 |
| | — |
| | — |
| | — |
| | (44 | ) | | 147 |
| | — |
|
| RMBS | 758 |
| | 1 |
| | (7 | ) | | (63 | ) | | — |
| | — |
| | 689 |
| | — |
| 17 |
| | — |
| | 1 |
| | — |
| | 50 |
| | (8 | ) | | 60 |
| | — |
|
| Trading securities | | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | | 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
|
| CLO | | 43 |
| | (1 | ) | | — |
| | (15 | ) | | — |
| | — |
| | 27 |
| | 1 |
|
| RMBS | | 96 |
| | (5 | ) | | — |
| | 2 |
| | — |
| | (11 | ) | | 82 |
| | (1 | ) |
| Equity securities | 9 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | 10 |
| | — |
| 5 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | — |
|
| Trading securities | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
| |
| Corporate | 16 |
| | (1 | ) | | — |
| | (4 | ) | | — |
| | (11 | ) | | — |
| | 3 |
| |
| CLO | 108 |
| | (11 | ) | | — |
| | — |
| | — |
| | — |
| | 97 |
| | (8 | ) | |
| ABS | 98 |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
| | 96 |
| | — |
| |
| RMBS | 29 |
| | (1 | ) | | — |
| | 48 |
| | — |
| | (5 | ) | | 71 |
| | (1 | ) | |
| Mortgage loans | 48 |
| | (1 | ) | | — |
| | (2 | ) | | — |
| | — |
| | 45 |
| | (1 | ) | 44 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 44 |
| | — |
|
| Funds withheld at interest – embedded derivative | 36 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 37 |
| | — |
| 140 |
| | 72 |
| | — |
| | — |
| | — |
| | — |
| | 212 |
| | — |
|
| Investments in related parties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | | |
| ABS | | 56 |
| | — |
| | 1 |
| | (2 | ) | | — |
| | (55 | ) | | — |
| | — |
|
| Trading securities | | | | | | | | | | | | | | | | |
| CLO | 7 |
| | — |
| | (1 | ) | | — |
| | 40 |
| | — |
| | 46 |
| | — |
| 195 |
| | (12 | ) | | — |
| | (14 | ) | | — |
| | (38 | ) | | 131 |
| | (12 | ) |
| ABS | 60 |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | 59 |
| | — |
| |
| Trading securities, CLO | 191 |
| | (13 | ) | | — |
| | 9 |
| | 26 |
| | — |
| | 213 |
| | 9 |
| |
| Short-term investments | | — |
| | — |
| | — |
| | 20 |
| | — |
| | — |
| | 20 |
| | — |
|
| Reinsurance recoverable | 2,377 |
| | (365 | ) | | — |
| | — |
| | — |
| | — |
| | 2,012 |
| | — |
| 1,692 |
| | 46 |
| | — |
| | — |
| | — |
| | — |
| | 1,738 |
| | — |
|
| Total Level 3 assets | $ | 6,804 |
| | $ | (337 | ) | | $ | (44 | ) | | $ | (507 | ) | | $ | 921 |
| | $ | (498 | ) | | $ | 6,339 |
| | $ | 2 |
| $ | 4,164 |
| | $ | 160 |
| | $ | 25 |
| | $ | 140 |
| | $ | 100 |
| | $ | (281 | ) | | $ | 4,308 |
| | $ | (12 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Embedded derivative | $ | (4,477 | ) | | $ | (22 | ) | | $ | — |
| | $ | (104 | ) | | $ | — |
| | $ | — |
| | $ | (4,603 | ) | | $ | — |
| $ | (5,283 | ) | | $ | (431 | ) | | $ | — |
| | $ | (79 | ) | | $ | — |
| | $ | — |
| | $ | (5,793 | ) | | $ | — |
|
| Universal life liabilities | (1,464 | ) | | 345 |
| | — |
| | — |
| | — |
| | — |
| | (1,119 | ) | | — |
| |
| Universal life benefits | | (883 | ) | | (27 | ) | | — |
| | — |
| | — |
| | — |
| | (910 | ) | | — |
|
| Future policy benefits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AmerUs Closed Block | (1,581 | ) | | (53 | ) | | — |
| | — |
| | — |
| | — |
| | (1,634 | ) | | — |
| (1,606 | ) | | 4 |
| | — |
| | — |
| | — |
| | — |
| | (1,602 | ) | | — |
|
| ILICO Closed Block and life benefits | (897 | ) | | 20 |
| | — |
| | — |
| | — |
| | — |
| | (877 | ) | | — |
| (794 | ) | | (19 | ) | | — |
| | — |
| | — |
| | — |
| | (813 | ) | | — |
|
| Derivative liabilities | (7 | ) | | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (8 | ) | | — |
| (7 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (7 | ) | | — |
|
| Total Level 3 liabilities | $ | (8,426 | ) | | $ | 289 |
| | $ | — |
| | $ | (104 | ) | | $ | — |
| | $ | — |
| | $ | (8,241 | ) | | $ | — |
| $ | (8,573 | ) | | $ | (473 | ) | | $ | — |
| | $ | (79 | ) | | $ | — |
| | $ | — |
| | $ | (9,125 | ) | | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1 Related to instruments held at end of period. | 1 Related to instruments held at end of period. | 1 Related to instruments held at end of period. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
The following represents the gross components of purchases, issuances, sales and settlements, net, shown above:
| | | | Three months ended March 31, 2017 | Three months ended March 31, 2018 |
| (In millions) | Purchases | | Issuances | | Sales | | Settlements | | Purchases, issuances, sales and settlements, net | Purchases | | Issuances | | Sales | | Settlements | | Purchases, issuances, sales and settlements, net |
| Assets | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | $ | — |
| | $ | — |
| | $ | — |
| | $ | (20 | ) | | $ | (20 | ) | |
| Foreign governments | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) | |
| Corporate | 94 |
| | — |
| | — |
| | (2 | ) | | 92 |
| $ | 68 |
| | $ | — |
| | $ | (5 | ) | | $ | (5 | ) | | $ | 58 |
|
| CLO | 13 |
| | — |
| | (2 | ) | | (8 | ) | | 3 |
| 131 |
| | — |
| | — |
| | — |
| | 131 |
|
| ABS | 103 |
| | — |
| | — |
| | (28 | ) | | 75 |
| 40 |
| | — |
| | (20 | ) | | (124 | ) | | (104 | ) |
| RMBS | | 31 |
| | — |
| | — |
| | (8 | ) | | 23 |
|
| Trading securities | | | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | |
| CLO | — |
| | — |
| | (15 | ) | | — |
| | (15 | ) | 13 |
| | — |
| | — |
| | (12 | ) | | 1 |
|
| RMBS | 2 |
| | — |
| | — |
| | — |
| | 2 |
| |
| Equity securities | | — |
| | — |
| | (8) |
| | — |
| | (8 | ) |
| Investment funds | | — |
| | — |
| | — |
| | (7 | ) | | (7 | ) |
| Investments in related parties | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | |
| ABS | 5 |
| | — |
| | — |
| | (7 | ) | | (2 | ) | |
| Trading securities, CLO | — |
| | — |
| | (14 | ) | | — |
| | (14 | ) | |
| Short-term investments | 20 |
| | — |
| | — |
| | — |
| | 20 |
| |
| CLO | | 62 |
| | — |
| | — |
| | — |
| | 62 |
|
| Trading securities | | | | | | | | | | |
| CLO | | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Investment funds | | 108 |
| | — |
| | — |
| | — |
| | 108 |
|
| Total Level 3 assets | $ | 237 |
| | $ | — |
| | $ | (31 | ) | | $ | (66 | ) | | $ | 140 |
| $ | 453 |
| | $ | — |
| | $ | (34 | ) | | $ | (156 | ) | | $ | 263 |
|
| | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | | | | |
| Embedded derivative | $ | — |
| | $ | (110 | ) | | $ | — |
| | $ | 31 |
| | $ | (79 | ) | $ | — |
| | $ | (126 | ) | | $ | — |
| | $ | 70 |
| | $ | (56 | ) |
| Total Level 3 liabilities | $ | — |
| | $ | (110 | ) | | $ | — |
| | $ | 31 |
| | $ | (79 | ) | $ | — |
| | $ | (126 | ) | | $ | — |
| | $ | 70 |
| | $ | (56 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2016 |
| (In millions) | Purchases | | Issuances | | Sales | | Settlements | | Purchases, issuances, sales and settlements, net |
| Assets | | | | | | | | | |
| AFS securities | | | | | | | | | |
| Fixed maturity | | | | | | | | | |
| Foreign governments | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | (1 | ) |
| Corporate | 10 |
| | — |
| | (21 | ) | | (1 | ) | | (12 | ) |
| ABS | 41 |
| | — |
| | — |
| | (551 | ) | | (510 | ) |
| CMBS | 29 |
| | — |
| | — |
| | — |
| | 29 |
|
| RMBS | 13 |
| | — |
| | — |
| | (76 | ) | | (63 | ) |
| Trading securities | | | | | | | | | |
| Fixed maturity | | | | | | | | | |
| Corporate | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| RMBS | 48 |
| | — |
| | — |
| | — |
| | 48 |
|
| Mortgage loans | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) |
| Investments in related parties | | | | | | | | | |
| AFS securities | | | | | | | | | |
| Fixed maturity | | | | | | | | | |
| ABS | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Trading securities, CLO | 25 |
| | — |
| | (16 | ) | | — |
| | 9 |
|
| Total Level 3 assets | $ | 166 |
| | $ | — |
| | $ | (41 | ) | | $ | (632 | ) | | $ | (507 | ) |
| | | | | | | | | | |
| Liabilities | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | |
| Embedded derivative | $ | — |
| | $ | (144 | ) | | $ | — |
| | $ | 40 |
| | $ | (104 | ) |
| Total Level 3 liabilities | $ | — |
| | $ | (144 | ) | | $ | — |
| | $ | 40 |
| | $ | (104 | ) |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2017 |
| (In millions) | Purchases | | Issuances | | Sales | | Settlements | | Purchases, issuances, sales and settlements, net |
| Assets | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | |
| AFS securities | | | | | | | | | |
| U.S. state, municipal and political subdivisions | $ | — |
| | $ | — |
| | $ | — |
| | $ | (20 | ) | | $ | (20 | ) |
| Foreign governments | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Corporate | 94 |
| | — |
| | — |
| | (2 | ) | | 92 |
|
| CLO | 13 |
| | — |
| | (2 | ) | | (8 | ) | | 3 |
|
| ABS | 103 |
| | — |
| | — |
| | (28 | ) | | 75 |
|
| Trading securities | | | | | | | | | |
| CLO | — |
| | — |
| | (15 | ) | | — |
| | (15 | ) |
| RMBS | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
| Investments in related parties | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | |
| AFS securities, ABS | 5 |
| | — |
| | — |
| | (7 | ) | | (2 | ) |
| Trading securities, CLO | — |
| | — |
| | (14 | ) | | — |
| | (14 | ) |
| Short-term investments | 20 |
| | — |
| | — |
| | — |
| | 20 |
|
| Total Level 3 assets | $ | 237 |
| | $ | — |
| | $ | (31 | ) | | $ | (66 | ) | | $ | 140 |
|
| | | | | | | | | | |
| Liabilities | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | |
| Embedded derivative | $ | — |
| | $ | (110 | ) | | $ | — |
| | $ | 31 |
| | $ | (79 | ) |
| Total Level 3 liabilities | $ | — |
| | $ | (110 | ) | | $ | — |
| | $ | 31 |
| | $ | (79 | ) |
Significant Unobservable Inputs—Significant unobservable inputs occur when we could not obtain or corroborate the quantitative detail of the inputs. This applies to AFSfixed maturity securities, tradingequity securities, mortgage loans and credit default swaps.certain derivatives, as well as embedded derivatives in liabilities. Additional significant unobservable inputs are described below.
Fixed maturity securities – For certain fixed maturity securities, internal models are used to calculate the fair value. We use a discounted cash flow approach. The discount rate is the significant unobservable input due to the determined credit spread being internally developed, illiquid, or as a result of other adjustments made to the base rate. The base rate represents a market comparable rate for securities with similar characteristics. As of March 31, 2017,2018, discounts ranged from 3% to 7%9%, and as of December 31, 2017, discounts ranged from 2% to 6%. This excludes assets for which significant unobservable inputs are not developed internally, primarily consisting of broker quotes.
Interest sensitive contract liabilities – embedded derivative – Significant unobservable inputs we use in the fixed indexed annuities embedded derivative of the interest sensitive contract liabilities valuation include:
| |
| 1. | Non-performance risk – For contracts we issue, we use the credit spread from the U.S. treasury curve based on our public credit rating as of the valuation date. This represents our credit risk for use in the estimate of the fair value of embedded derivatives. For contracts reinsured through funds withheld reinsurance, the cedant company holds collateral against its exposure; therefore, immaterial non-performance risk is ascribed to these contracts. |
| |
| 2. | Option budget – We assume future hedge costs in the derivative'sderivative’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. |
The following summarizes the unobservable inputs for the embedded derivatives of fixed indexed annuities:
| | | | March 31, 2017 | March 31, 2018 |
| (In millions, except for percentages) | Fair value | Valuation technique | Unobservable inputs | Input/range of
inputs | Impact of an increase in the input on fair value | Fair value | Valuation technique | Unobservable inputs | Input/range of
inputs | Impact of an increase in the input on fair value |
| Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives | $ | 5,793 |
| Option budget method | Non-performance risk | 0.5 | % | – | 1.5% | Decrease | $ | 7,254 |
| Option budget method | Non-performance risk | 0.5 | % | – | 1.3% | Decrease |
| | | | Option budget | 0.8 | % | – | 3.8% | Increase | | | Option budget | 0.8 | % | – | 3.7% | Increase |
| | | | Surrender rate | 0.0 | % | – | 15.8% | Decrease | | | Surrender rate | 1.6 | % | – | 20.7% | Decrease |
|
| | | | | | | | | | |
| | December 31, 2016 |
| (In millions, except for percentages) | Fair value | Valuation technique | Unobservable inputs | Input/range of
inputs | Impact of an increase in the input on fair value |
| Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives | $ | 5,283 |
| Option budget method | Non-performance risk | 0.7 | % | – | 1.5% | Decrease |
| | | | Option budget | 0.8 | % | – | 3.8% | Increase |
| | | | Surrender rate | 0.0 | % | – | 16.3% | Decrease |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
|
| | | | | | | | | | |
| | December 31, 2017 |
| (In millions, except for percentages) | Fair value | Valuation technique | Unobservable inputs | Input/range of
inputs | Impact of an increase in the input on fair value |
| Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives | $ | 7,436 |
| Option budget method | Non-performance risk | 0.2 | % | – | 1.2% | Decrease |
| | | | Option budget | 0.7 | % | – | 3.7% | Increase |
| | | | Surrender rate | 1.5 | % | – | 19.4% | Decrease |
Fair Value of Financial Instruments Not Carried at Fair Value—The following represents our financial instruments not carried at fair value on the condensed consolidated balance sheets:
| | | | | March 31, 2017 | | December 31, 2016 | March 31, 2018 |
| (In millions) | Fair Value Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | Carrying Value | | Fair Value | | NAV1 | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | | | | | | | | | | | | | |
| Mortgage loans | 3 | | $ | 5,409 |
| | $ | 5,555 |
| | $ | 5,426 |
| | $ | 5,560 |
| $ | 6,098 |
| | $ | 6,275 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6,275 |
|
| Investment funds | NAV1 | | 592 |
| | 592 |
| | 590 |
| | 590 |
| 516 |
| | 516 |
| | 516 |
| | — |
| | — |
| | — |
|
| Policy loans | 2 | | 579 |
| | 579 |
| | 602 |
| | 602 |
| 510 |
| | 510 |
| | — |
| | — |
| | 510 |
| | — |
|
| Funds withheld at interest | 3 | | 6,381 |
| | 6,381 |
| | 6,398 |
| | 6,398 |
| 6,886 |
| | 6,886 |
| | — |
| | — |
| | — |
| | 6,886 |
|
| Other investments | 3 | | 82 |
| | 82 |
| | 81 |
| | 81 |
| 74 |
| | 74 |
| | — |
| | — |
| | — |
| | 74 |
|
| Investments in related parties | | | | | | | | | | | | | | | | | | | |
| Investment funds | NAV1 | | 1,253 |
| | 1,253 |
| | 1,198 |
| | 1,198 |
| 1,346 |
| | 1,346 |
| | 1,346 |
| | — |
| | — |
| | — |
|
| Other investments | 3 | | 238 |
| | 265 |
| | 237 |
| | 262 |
| 238 |
| | 258 |
| | — |
| | — |
| | — |
| | 258 |
|
| Total assets not carried at fair value | | $ | 14,534 |
| | $ | 14,707 |
| | $ | 14,532 |
| | $ | 14,691 |
| $ | 15,668 |
| | $ | 15,865 |
| | $ | 1,862 |
| | $ | — |
| | $ | 510 |
| | $ | 13,493 |
|
| | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | 3 | | $ | 28,163 |
| | $ | 27,469 |
| | $ | 27,628 |
| | $ | 26,600 |
| $ | 31,878 |
| | $ | 30,892 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 30,892 |
|
| Long-term debt | | 992 |
| | 962 |
| | — |
| | — |
| | 962 |
| | — |
|
| Funds withheld liability | 2 | | 371 |
| | 371 |
| | 374 |
| | 374 |
| 384 |
| | 384 |
| | — |
| | — |
| | 384 |
| | — |
|
| Total liabilities not carried at fair value | | $ | 28,534 |
| | $ | 27,840 |
| | $ | 28,002 |
| | $ | 26,974 |
| $ | 33,254 |
| | $ | 32,238 |
| | $ | — |
| | $ | — |
| | $ | 1,346 |
| | $ | 30,892 |
|
| | | | | | | | | | | | | | | | | | | | |
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. | 1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. | 1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| (In millions) | Carrying Value | | Fair Value | | NAV1 | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | | | | |
| Mortgage loans | $ | 6,192 |
| | $ | 6,342 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6,342 |
|
| Investment funds | 554 |
| | 554 |
| | 554 |
| | — |
| | — |
| | — |
|
| Policy loans | 530 |
| | 530 |
| | — |
| | — |
| | 530 |
| | — |
|
| Funds withheld at interest | 6,773 |
| | 6,773 |
| | — |
| | — |
| | — |
| | 6,773 |
|
| Other investments | 133 |
| | 133 |
| | — |
| | — |
| | 58 |
| | 75 |
|
| Investments in related parties | | | | | | | | | | | |
| Investment funds | 1,280 |
| | 1,280 |
| | 1,280 |
| | — |
| | — |
| | — |
|
| Other investments | 238 |
| | 259 |
| | — |
| | — |
| | — |
| | 259 |
|
| Total assets not carried at fair value | $ | 15,700 |
| | $ | 15,871 |
| | $ | 1,834 |
| | $ | — |
| | $ | 588 |
| | $ | 13,449 |
|
| | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | |
| Interest sensitive contract liabilities | $ | 31,586 |
| | $ | 31,656 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 31,656 |
|
| Funds withheld liability | 385 |
| | 385 |
| | — |
| | — |
| | 385 |
| | — |
|
| Total liabilities not carried at fair value | $ | 31,971 |
| | $ | 32,041 |
| | $ | — |
| | $ | — |
| | $ | 385 |
| | $ | 31,656 |
|
| | | | | | | | | | | | |
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. |
We estimate the fair value for financial instruments not carried at fair value using the same methods and assumptions as those we carry at fair value. The financial instruments presented above are reported at carrying value on the condensed consolidated balance sheets; however, in the case of policy loans, funds withheld at interest and liability, and other investments, the carrying amount approximates fair value.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Investment in related parties – Other investments – The fair value of related party other investments is determined using a discounted cash flow model using discount rates for similar investments.
Interest sensitive contract liabilities – The carrying and fair value of interest sensitive contract liabilities above includes fixed indexed and traditional fixed annuities without mortality or morbidity risks, funding agreements and payout annuities without life contingencies. The embedded derivatives within fixed indexed annuities without mortality or morbidity risks are excluded, as they are carried at fair value. The valuation of these investment contracts is based on discounted cash flow methodologies using significant unobservable inputs. The estimated fair value is determined using current market risk-free interest rates, adding a spread to reflect our nonperformance risk and subtracting a risk margin to reflect uncertainty inherent in the projected cash flows.
6. Reinsurance
DuringLong-term debt – We obtain the three months ended March 31, 2017, we novated certain open blocksfair value of business ceded to Global Atlantic,long-term debt from commercial pricing services. These are classified as Level 2. The pricing services incorporate a variety of market observable information in accordance with the terms of the coinsurancetheir valuation techniques, including benchmark yields, trading activity, credit quality, issuer spreads, bids, offers and assumption agreement. As a result of the novation, interest sensitive contract liabilities decreased $106 million, future policy benefits decreased $4 million, policy loans decreased $4 million, and reinsurance recoverable decreased $106 million.other reference data.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
7.6. Deferred Acquisition Costs, Deferred Sales Inducements and Value of Business Acquired
The following represents a rollforward of deferred acquisition costs (DAC), deferred sales inducements (DSI) and value of business acquired (VOBA):
| | | (In millions) | DAC | | DSI | | VOBA | | Total | DAC | | DSI | | VOBA | | Total |
| Balance at December 31, 2016 | $ | 1,148 |
| | $ | 462 |
| | $ | 1,354 |
| | $ | 2,964 |
| |
| Balance at December 31, 2017 | | $ | 1,354 |
| | $ | 520 |
| | $ | 1,056 |
| | $ | 2,930 |
|
| Additions | 105 |
| | 37 |
| | — |
| | 142 |
| 122 |
| | 46 |
| | — |
| | 168 |
|
| Amortization | (59 | ) | | (18 | ) | | (49 | ) | | (126 | ) | (37 | ) | | (20 | ) | | (52 | ) | | (109 | ) |
| Impact of unrealized investment (gains) losses | (27 | ) | | (13 | ) | | (45 | ) | | (85 | ) | 52 |
| | 22 |
| | 79 |
| | 153 |
|
| Balance at March 31, 2017 | $ | 1,167 |
| | $ | 468 |
| | $ | 1,260 |
| | $ | 2,895 |
| |
| Balance at March 31, 2018 | | $ | 1,491 |
| | $ | 568 |
| | $ | 1,083 |
| | $ | 3,142 |
|
| | | (In millions) | DAC | | DSI | | VOBA | | Total | DAC | | DSI | | VOBA | | Total |
| Balance at December 31, 2015 | $ | 707 |
| | $ | 321 |
| | $ | 1,635 |
| | $ | 2,663 |
| |
| Balance at December 31, 2016 | | $ | 1,142 |
| | $ | 462 |
| | $ | 1,336 |
| | $ | 2,940 |
|
| Additions | 97 |
| | 37 |
| | — |
| | 134 |
| 105 |
| | 37 |
| | — |
| | 142 |
|
| Amortization | (6 | ) | | (4 | ) | | (22 | ) | | (32 | ) | (58 | ) | | (18 | ) | | (46 | ) | | (122 | ) |
| Impact of unrealized investment (gains) losses | (7 | ) | | (4 | ) | | (38 | ) | | (49 | ) | (27 | ) | | (13 | ) | | (45 | ) | | (85 | ) |
| Balance at March 31, 2016 | $ | 791 |
| | $ | 350 |
| | $ | 1,575 |
| | $ | 2,716 |
| |
| Balance at March 31, 2017 | | $ | 1,162 |
| | $ | 468 |
| | $ | 1,245 |
| | $ | 2,875 |
|
8. Common Stock7. Debt
DuringSenior Notes—In the first quarter of 2018, AHL issued $1 billion of unsecured senior notes due in January 2028. The senior notes have a 4.125% coupon rate, payable semi-annually. The senior notes are callable at any time prior to October 12, 2027 by AHL, at a price equal to the greater of (1) 100% of the principal and any accrued and unpaid interest and (2) an amount equal to the sum of the present values of remaining scheduled payments, discounted from the scheduled payment date to the redemption date at the Treasury Rate (as defined in the prospectus supplement relating to the senior notes, dated January 9, 2018) plus 25 basis points, and any accrued and unpaid interest. Additionally, if our transaction with Voya Financial Inc. (Voya), as described further in Note 12 – Commitments and Contingencies, does not close, AHL will be required to redeem the senior notes at 101% of the principal and any accrued and unpaid interest. Interest expense on long-term debt was $9 million for the three months ended March 31, 2017, a total of 24,030,251 Class B shares were converted to Class A shares in connection with the distribution of Class B shares by AP Alternative Assets, L.P. to its unitholders, or in order to participate in the follow-on offering of our Class A shares, which was priced on March 28, 2017. We did not sell any shares in the offering.
Stock-based Compensation—Stock-based compensation was an expense of $16 million and a benefit of $15 million for the three months ended March 31, 2017, and 2016, respectively. The stock-based compensation benefit during the three months ended March 31, 2016 was a result of a reduction in the valuation of our Class A shares from $34.23 per share as of December 31, 2015, to $30.44 per share as of March 31, 2016, due to industry market movements. This resulted in a lower Class M share value at March 31, 2016, compared to December 31, 2015, and thus resulted in a benefit, primarily with respect to our performance-based M-1, M-2 and M-3 liability awards, which were remeasured to fair value each reporting period. As the performance-based M-1, M-2 and M-3 shares were fully vested in the third quarter of 2016, they are no longer subject to remeasurement.2018.
AsShort-term Debt—In the second quarter of 2018, we borrowed $183 million from the March 31, 2017Federal Home Loan Bank (FHLB) of Des Moines through their variable rate short-term federal funds program. The borrowing matures on August 24, 2018 and carries an interest rate of 2.16%, with interest due at maturity. In connection with such borrowing, the stock-based compensation plans had unrecognized compensation expenseFHLB requires the borrower to purchase member stock and post sufficient collateral to secure the borrowing. To satisfy these requirements, we purchased an additional $7 million of FHLB stock; however, we were not required to post additional collateral. See $57 millionNote 12 – Commitments and Contingencies. The cost is expected to be recognized over a weighted-average period of 1.3 years. for further discussion regarding existing collateral posting with the FHLB.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
9.8. Earnings Per Share
The following represents our basic and diluted earnings per share (EPS) calculations:
| | | | Three months ended March 31, 2017 | Three months ended March 31, 2018 |
| (In millions, except share and per share data) | Class A | | Class B | | Class M-1 | | Class M-22 | Class A | | Class B | | Class M-1 | | Class M-2 | | Class M-3 | | Class M-4 |
| Net income available to AHL shareholders | $ | 152 |
| | $ | 214 |
| | $ | 7 |
| | $ | — |
| |
| Net income | | $ | 202 |
| | $ | 56 |
| | $ | 5 |
| | $ | 1 |
| | $ | 1 |
| | $ | 3 |
|
| | | | | | | | | | | | | | | | | | | |
| Basic weighted average shares outstanding | 78,246,213 |
| | 110,772,123 |
| | 3,452,402 |
| | 42,267 |
| 148,693,902 |
| | 41,096,937 |
| | 3,388,890 |
| | 841,011 |
| | 1,049,157 |
| | 2,065,204 |
|
| Dilutive effect of stock compensation plans | 3,051,380 |
| | — |
| | — |
| | 971,427 |
| 258,203 |
| | — |
| | — |
| | 8,976 |
| | 20,572 |
| | 929,228 |
|
| Diluted weighted average shares outstanding | 81,297,593 |
| | 110,772,123 |
| | 3,452,402 |
| | 1,013,694 |
| 148,952,105 |
| | 41,096,937 |
| | 3,388,890 |
| | 849,987 |
| | 1,069,729 |
| | 2,994,432 |
|
| | | | | | | | | | | | | | | | | | | |
Earnings per share1 | | | | | | | | | | | | | | | | | | |
| Basic | $ | 1.94 |
| | $ | 1.94 |
| | $ | 1.94 |
| | $ | 1.94 |
| $ | 1.36 |
| | $ | 1.36 |
| | $ | 1.36 |
| | $ | 1.36 |
| | $ | 1.36 |
| | $ | 1.36 |
|
| Diluted | $ | 1.87 |
| | $ | 1.94 |
| | $ | 1.94 |
| | $ | 0.08 |
| $ | 1.36 |
| | $ | 1.36 |
| | $ | 1.36 |
| | $ | 1.34 |
| | $ | 1.33 |
| | $ | 0.94 |
|
| | | | | | | | | | | | | | | | | | | |
1 Calculated using whole figures. | 1 Calculated using whole figures. | 1 Calculated using whole figures. |
2 Net income available to AHL shareholders allocated to Class M-2 common shares rounded to $0 million for the three months ended March 31, 2017. However, earnings per share is calculated using whole figures. | |
| | | | Three months ended March 31, 2016 | Three months ended March 31, 2017 |
| (In millions, except share and per share data) | Class A | | Class B | Class A | | Class B | | Class M-1 | | Class M-22 | | Class M-3 | | Class M-4 |
| Net income available to AHL shareholders | $ | 23 |
| | $ | 64 |
| |
| Net income | | $ | 156 |
| | $ | 221 |
| | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | |
| Basic weighted average shares outstanding | 50,028,933 |
| | 135,963,975 |
| 78,246,213 |
| | 110,772,123 |
| | 3,452,402 |
| | 42,267 |
| | — |
| | — |
|
| Dilutive effect of stock compensation plans | 52,832 |
| | — |
| 3,051,380 |
| | — |
| | — |
| | 971,427 |
| | — |
| | — |
|
| Diluted weighted average shares outstanding | 50,081,765 |
| | 135,963,975 |
| 81,297,593 |
| | 110,772,123 |
| | 3,452,402 |
| | 1,013,694 |
| | — |
| | — |
|
| | | | | | | | | | | | | | | |
Earnings per share1 | | | | | | | | | | | | | | |
| Basic | $ | 0.47 |
| | $ | 0.47 |
| $ | 2.00 |
| | $ | 2.00 |
| | $ | 2.00 |
| | $ | 2.00 |
| | N/A | | N/A |
| Diluted | $ | 0.47 |
| | $ | 0.47 |
| $ | 1.92 |
| | $ | 2.00 |
| | $ | 2.00 |
| | $ | 0.08 |
| | N/A | | N/A |
| | | | | | | | | | | | | | | |
| N/A – Not applicable | | N/A – Not applicable | | | | |
1 Calculated using whole figures. | 1 Calculated using whole figures. | | | 1 Calculated using whole figures. |
2 Net income allocated to Class M-2 common shares rounded to $0 million for the three months ended March 31, 2017. However, earnings per share is calculated using whole figures. | | 2 Net income allocated to Class M-2 common shares rounded to $0 million for the three months ended March 31, 2017. However, earnings per share is calculated using whole figures. |
We use the two-class method for allocating net income available to AHL shareholders to each class of our common stock. Our Class M shares do not become eligible to participate in dividends until a return of investment (ROI) condition has been met for each class. Once eligible, each class of our common stock has equal dividend rights. Prior to the fourth quarter of 2016, the The ROI condition had not been met for any of our Class M shares and as a result, no earnings were attributable to those classes. In conjunction with our IPO in the fourth quarter of 2016, the ROI condition for Class M-1 was met and the ROI condition for Class M-2 was subsequently met on March 28, 2017, and for Class M-3 and Class M-4 on April 20, 2017. For purposes of calculating basic weighted average shares outstanding and the allocation of basic income, shares are deemed to be participating in earnings for only the portion of the period after the condition is met. However, asFor purposes of calculating diluted weighted average shares outstanding, shares are considereddeemed dilutive as of the beginning of the period, the resulting diluted EPS is comparatively lower if the ROI condition is met after the beginning of the period than it would have been had the ROI condition been met at the beginning of the period.
Class M-3 and Class M-4 shares remained ineligible for dividends as of March 31, 2017; however, on April 20, 2017, the ROI condition was met for Class M-3 and Class M-4 shares. The basic EPS calculations above reflect only those classes of stock eligible to participate in earnings during each respective period.
Dilutive shares are calculated using the treasury stock method. For Class A common shares, this method takes into account shares that can be settled into Class A common shares, net of a conversion price.
The diluted EPS calculationcalculations for Class A shares excluded 94,429,888the following shares, restricted stock units (RSUs) and 152,766,540 shares, RSUs and options outstanding as of March 31, 2017 and 2016, respectively. The excluded shares as of March 31, 2017 were comprised of 91,666,275 shares considered antidilutive and 2,763,613 shares for which a performance condition had not been met. The excluded shares as of March 31, 2016 were comprised of 135,963,975 shares considered antidilutive and options:16,802,565 shares for which issuance restrictions had not been satisfied as of the end of the period.
|
| | | | | |
| | Three months ended March 31, |
| | 2018 | | 2017 |
| Antidilutive shares, RSUs and options excluded from diluted EPS calculation | 35,212,154 |
| | 91,666,275 |
|
| Shares, RSUs and options excluded from diluted EPS calculation as a performance condition had not been met | 279,992 |
| | 2,763,613 |
|
| Total shares, RSUs and options excluded from diluted EPS calculation | 35,492,146 |
| | 94,429,888 |
|
| | | | |
| Note: Shares, RSUs and options are as of period end. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
10.9. Accumulated Other Comprehensive Income
The following is a detail of AOCI:AOCI and changes in AOCI. Prior period balances include equity securities that were classified as AFS securities prior to the adoption of ASU 2016-01.
| | | (In millions) | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| AFS securities | $ | 1,473 |
| | $ | 972 |
| $ | 1,228 |
| | $ | 2,577 |
|
| DAC, DSI, VOBA, future policy benefits and dividends payable to policyholders adjustments on AFS securities | (490 | ) | | (408 | ) | (349 | ) | | (744 | ) |
| Noncredit component of OTTI losses on AFS securities | (16 | ) | | (17 | ) | (13 | ) | | (13 | ) |
| Hedging instruments | 5 |
| | 10 |
| (151 | ) | | (95 | ) |
| Pension adjustments | (4 | ) | | (4 | ) | (2 | ) | | (5 | ) |
| Foreign currency translation adjustments | (10 | ) | | (12 | ) | — |
| | 8 |
|
| Accumulated other comprehensive income, before taxes | 958 |
| | 541 |
| 713 |
| | 1,728 |
|
| Deferred income tax liability | (285 | ) | | (174 | ) | |
| Deferred income taxes | | (128 | ) | | (313 | ) |
| Accumulated other comprehensive income | $ | 673 |
| | $ | 367 |
| $ | 585 |
| | $ | 1,415 |
|
Changes in AOCI are presented below:
|
| | | | | | | |
| | Three months ended March 31, |
| (In millions) | 2017 | | 2016 |
| Unrealized gains (losses) on AFS securities | | | |
| Unrealized holding net gains arising during the period | $ | 516 |
| | $ | 545 |
|
| Change in DAC, DSI, VOBA, future policy benefits and dividends payable to policyholders adjustment | (82 | ) | | (264 | ) |
Less: Reclassification adjustment for gains (losses) realized in net income1 | 15 |
| | (22 | ) |
| Less: Income tax expense | 113 |
| | 105 |
|
| Change in unrealized net gains on AFS securities | 306 |
| | 198 |
|
| Noncredit component of OTTI losses on AFS securities | | | |
| Noncredit component of OTTI losses on AFS securities recognized during the period | 1 |
| | (12 | ) |
| Less: Income tax expense (benefit) | — |
| | (4 | ) |
| Change in noncredit component of OTTI losses on AFS securities | 1 |
| | (8 | ) |
| Unrealized gains (losses) on hedging instruments | | | |
| Change in hedging instruments during the period | (5 | ) | | (10 | ) |
| Less: Income tax benefit | (2 | ) | | (3 | ) |
| Change in hedging instruments | (3 | ) | | (7 | ) |
| Pension adjustments during the period | — |
| | (1 | ) |
| Foreign currency translation adjustments during the period | 2 |
| | 3 |
|
| Change in AOCI | $ | 306 |
| | $ | 185 |
|
| | | | |
1 Recognized in investment related gains (losses) on the condensed consolidated statements of income. |
|
| | | | | | | |
| | Three months ended March 31, |
| (In millions) | 2018 | | 2017 |
| Unrealized investment gains (losses) on AFS securities | | | |
| Unrealized investment gains (losses) on AFS securities | $ | (1,282 | ) | | $ | 516 |
|
| Change in DAC, DSI, VOBA, future policy benefits and dividends payable to policyholders adjustment | 391 |
| | (82 | ) |
Less: Reclassification adjustment for gains (losses) realized in net income1 | 19 |
| | 15 |
|
| Less: Income tax expense (benefit) | (163 | ) | | 113 |
|
| Net unrealized investment gains (losses) on AFS securities | (747 | ) | | 306 |
|
| Noncredit component of OTTI losses on AFS securities | | | |
| Noncredit component of OTTI losses on AFS securities | (1 | ) | | 1 |
|
Less: Reclassification adjustment for losses realized in net income1 | (1 | ) | | — |
|
| Net noncredit component of OTTI losses on AFS securities | — |
| | 1 |
|
| Unrealized gains (losses) on hedging instruments | | | |
| Unrealized gains (losses) on hedging instruments | (56 | ) | | (5 | ) |
| Less: Income tax benefit | (20 | ) | | (2 | ) |
| Net unrealized gains (losses) on hedging instruments | (36 | ) | | (3 | ) |
| Pension adjustments | 3 |
| | — |
|
| Foreign currency translation adjustments | (8 | ) | | 2 |
|
| Change in AOCI from other comprehensive income (loss) | (788 | ) | | 306 |
|
| Adoption of ASU 2016-01 | (42 | ) | | — |
|
| Change in AOCI | $ | (830 | ) | | $ | 306 |
|
| | | | |
1 Recognized in investment related gains (losses) on the condensed consolidated statements of income. |
11.10. Income Taxes
Our effective tax rates were 6%18% and 1%5% for the three months ended March 31, 20172018, and 20162017, respectively. Our effective tax rates may vary year-to-yearperiod to period depending upon the relationship of income and loss subject to tax compared to consolidated income and loss before income taxes. With the enactment of Public Law no. 115-97, an Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 (Tax Act), the U.S. statutory tax rate declined to 21% from 35%; however, the Base Erosion and Anti-Abuse Tax (BEAT) was established, which may subject payments to our non-U.S. reinsurance subsidiaries to a tax of 5%, which would increase to 10% in 2019. The income tax expense for the three months ended March 31, 2018 assumes that we have taken steps so that the BEAT is not applicable to such payments and thereby assumes that more income is subject to U.S. income tax.
The Internal Revenue Service is currently auditing the 2013 consolidated tax return filed by Athene USA, and is also conducting a limited scope audit of the 2015 consolidated tax return filed by Athene Annuity & Life Assurance Company (AADE). No material proposed adjustments have been issued with respect to either exam. See discussion of ongoing tax examinations relating to Aviva USA Corporation (Aviva USA) in Note 12 – Commitments and Contingencies.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Under current Bermuda law, we are not required to pay any taxes in Bermuda on either income or capital gains. We have received an undertaking from the Bermuda Minister of Finance in Bermuda that, in the event of any such taxes being imposed, we will be exempted from taxation until the year 2035.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
12.11. Related Parties
Athene Asset Management
Investment related expenses – Substantially all of our investments with the exception of the investments of ADKG, are managed by Athene Asset Management L.P.LLC (AAM), a subsidiary of AGM. AAM provides direct investment management, asset allocation, mergers and acquisition asset diligence and certain operational support services for our investment portfolio, including investment compliance, tax, legal and risk management support. As of March 31, 2017,2018, AAM directly managed $54,539$62,051 million of our investment portfolio assets, of which 86%90% are rateddesignated one or two (the two highest designations) by the National Association of Insurance Commissioners (NAIC). For certain assets which require specialized sourcing and underwriting capabilities, AAM has chosen to mandate sub-advisors rather than building out in-house capabilities.
For the services related to these investments,it renders, AAM earns a fee of 0.40% per year, subject to certain discounts, on all assets managed in accounts owned by or related to us, including sub-advised assets but excluding assets of ADKG and certain other limited exceptions. Additionally, AAM recharges the sub-advisory fees it incurs with respect to our sub-advised assets to us.
Historically, AAM has entered into a Master Sub-Advisory Agreement (MSAA) with certain Apollo affiliates to sub-advise AAM with respect to a portion of our assets, with the fees recharged to us, in addition to the grossgenerally earned an annual fee of 0.40% per year paid to AAM as described above. The MSAA covers services rendered by Apollo-affiliated sub-advisors relating to the following investments:
|
| | | | | | | |
| (In millions, except for percentages) | March 31, 2017 | | December 31, 2016 |
| Fixed maturity securities | | | |
| U.S. state, municipal and political subdivisions | $ | — |
| | $ | 5 |
|
| Foreign governments | 156 |
| | 149 |
|
| Corporate | 2,279 |
| | 2,032 |
|
| CLO | 4,947 |
| | 4,727 |
|
| ABS | 887 |
| | 911 |
|
| CMBS | 947 |
| | 975 |
|
| Mortgage loans | 1,713 |
| | 1,767 |
|
| Investment funds | 24 |
| | 23 |
|
| Trading securities | 111 |
| | 126 |
|
| Funds withheld at interest | 1,752 |
| | 1,682 |
|
| Other investments | 82 |
| | 81 |
|
| Total assets sub-advised by Apollo affiliates | $ | 12,898 |
| | $ | 12,478 |
|
| Percent of assets sub-advised by Apollo affiliates to total AAM-managed assets | 19 | % | | 19 | % |
of assets under management. In the firstsecond quarter of 2017, following shareholder approval of an amendment to our bye-laws, we announced an agreemententered into the Fifth Amended and Restated Fee Agreement (Revised Fee Agreement), retroactive to amendJanuary 1, 2017. The Revised Fee Agreement amended certain fee arrangements we havepreviously had in place with AAM and Apollo relating to investment management fees and sub-advisory fees that are paid by us to AAM and Apollo. More specifically, we and Apollo have agreed to enter into a revised fee agreement, which providesprovide for, among other things, aan annual fee of 0.30% per year (reduced from 0.40% per year)) on all assets that Apollo manages in accounts owned by us in the U.S. and Bermuda or in accounts supporting reinsurance ceded to our U.S. and Bermuda subsidiaries by third-party insurers (North American Accounts) in excess of $65,846 million (the level of assets in the North American Accounts as of December 31, 2016). The fee to be paid by us to ApolloAAM on the first $65,846 million of assets in the North American Accounts remains 0.40% per year, subject to certain discounts and exceptions.
InFor certain assets which require specialized sourcing and underwriting capabilities, AAM has chosen to mandate sub-advisors rather than building out in-house capabilities. AAM has entered into Master Sub-Advisory Agreements (MSAAs) with certain Apollo affiliates to sub-advise AAM with respect to a portion of our assets, with the fees recharged to us, in addition weto the gross fee paid to AAM as described above. The MSAAs cover services rendered by Apollo-affiliated sub-advisors relating to the following investments:
|
| | | | | | | |
| (In millions, except for percentages) | March 31, 2018 | | December 31, 2017 |
| Fixed maturity securities | | | |
| AFS securities | | | |
| Foreign governments | $ | 121 |
| | $ | 152 |
|
| Corporate | 3,178 |
| | 2,934 |
|
| CLO | 5,859 |
| | 5,166 |
|
| ABS | 643 |
| | 681 |
|
| CMBS | 845 |
| | 872 |
|
| Trading securities | 121 |
| | 121 |
|
| Mortgage loans | 2,419 |
| | 2,232 |
|
| Investment funds | 26 |
| | 26 |
|
| Funds withheld at interest | 1,726 |
| | 1,737 |
|
| Other investments | 74 |
| | 75 |
|
| Total assets sub-advised by Apollo affiliates | $ | 15,012 |
| | $ | 13,996 |
|
| Percent of assets sub-advised by Apollo affiliates to total AAM-managed assets | 19 | % | | 18 | % |
During the second quarter of 2017, AAM and certain other Apollo have also agreedaffiliates entered into addendums to amend the sub-advisory agreements that areMSAAs currently in place with Apollo, whereby,effect, pursuant to which, with limited exceptions, Apollo will earn 0.40% per year on all assets in the North American Accounts explicitly sub-advised by Apollo up to $10,000 million, 0.35% per year on all assets in such accounts explicitly sub-advised by Apollo in excess of $10,000 million up to $12,441 million (the level of fee-paying sub-advised assets in the North American Accounts at December 31, 2016), 0.40% per year on all assets in such accounts explicitly sub-advised by Apollo in excess of $12,441 million up to $16,000 million, and 0.35% per year on all assets in such accounts explicitly sub-advised by Apollo in excess of $16,000 million.
The amendments to the investment management fees and sub-advisory fees are subject to the approval by our shareholders at our 2017 annual general meeting of shareholders of certain amendments to our bye-laws relating to the term and termination of the investment management agreements between us and Apollo. However, upon such shareholder approval, the amendments to the investment management fees and sub-advisory fees will be effectiveaddendums were retroactive to January 1, 2017.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Apollo Asset Management Europe
ADKG has an investment advisory agreement with Apollo Asset Management Europe (together with certain of its affiliates, AAME), also a subsidiary of AGM. AAME provides advisory services for all of ADKG's investment portfolio other than operating cash, mortgage loans secured by residential and commercial properties that are not identified and advised by AAME, and assets related to unit-linked policies. Also excluded are assets held in German special investment funds managed or advised by Apollo, AAM and any of the respective affiliates of Apollo, AAM or AAME, to the extent the entity receives a management or advisory fee in connection with the fund. In providing these services, AAME has access to Apollo's European expertise and capabilities. The ADKG investments sub-advised by AAME consist primarily of corporate and sovereign bonds, as compared to the more diverse range of assets managed by AAM or those held in the German special investment funds. As compensation for the investment advisory services rendered, AAME receives a fee of 0.10% per year on the assets it sub-advises. Affiliates of AAME receive an advisory fee of 0.35% per year on certain German special investment funds and our investment in a sub-fund of Apollo Capital Efficient Fund I (ACE fund), as well as a pro rata share of operating expenses up to 0.30% on the ACE fund. As of March 31, 2017 and December 31, 2016, the German special investment funds totaled $449 million and $258 million, respectively and the ACE fund totaled $87 million and $84 million, respectively. The fees incurred for management of these funds are included in sub-advisory fees in the table below.
The following represents the assets sub-advised by AAME:
|
| | | | | | | |
| (In millions) | March 31, 2017 | | December 31, 2016 |
| Fixed maturity securities | | | |
| Foreign governments | $ | 1,848 |
| | $ | 2,062 |
|
| Corporate | 1,475 |
| | 1,567 |
|
| Equity securities | 259 |
| | 187 |
|
| Investment funds | 33 |
| | 34 |
|
| Policy loans | 6 |
| | 6 |
|
| Real estate | 553 |
| | 541 |
|
| Other investments | 154 |
| | 153 |
|
| Cash and cash equivalents | 26 |
| | 25 |
|
| Total assets sub-advised by AAME | $ | 4,354 |
| | $ | 4,575 |
|
The following summarizes the asset management fees and sub-advisory fees we have incurred related to AAM AAME and other Apollo affiliates:
| | | | Three months ended March 31, | Three months ended March 31, |
| (In millions) | 2017 | | 2016 | 2018 | | 2017 |
| Asset management fees | $ | 62 |
| | $ | 58 |
| $ | 70 |
| | $ | 62 |
|
| Sub-advisory fees | 16 |
| | 23 |
| 13 |
| | 16 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The management and sub-advisory fees are included within net investment income on the condensed consolidated statements of income. TheAs of March 31, 2018 and December 31, 2017, the management fees payable as of March 31, 2017 and December 31, 2016, were $31was $50 million and $28 million, respectively. Therespectively, and the sub-advisory fees payable as of March 31, 2017 and December 31, 2016, were $16was $17 million and $11$13 million, respectively. Both the management and sub-advisory fees payables are included in other liabilities on the condensed consolidated balance sheets.
The investment management or advisory agreements with AAM or AAME have no stated term and any party can terminate upon notice. However, our bye-laws provide that we will not exercise our termination rights under the agreements except that any agreement may only be terminated onuntil October 31, 2018 or any thirdannual anniversary thereafter. Anythereafter (each such date, an IMA Termination Election Date) and any termination on that date without causethereon requires (1)the approval of our board of directors and the holderstwo-thirds of our common shares that hold a majority of total voting power (giving effect toIndependent Directors (as defined in the voting allocation provisions set forth in our bye-laws) and prior written notice thereof to Apollo of at least 30 days. If the Independent Directors make such election and such notice is timely delivered, the termination will be effective on the second anniversary of the applicable IMA Termination Election Date (an IMA Termination Effective Date). Notwithstanding the foregoing, (1) the Independent Directors may only elect to terminate an investment management agreement or advisory agreement on an IMA Termination Election Date if two-thirds of the Independent Directors determine in their sole discretion acting in good faith that either (i) there has been unsatisfactory long-term performance materially detrimental to us by Apollo or (ii) the fees being charged by Apollo are unfair and excessive compared to a comparable asset manager (provided, that in either case such Independent Directors must deliver notice of any such determination to Apollo and Apollo shall have until the applicable IMA Termination Effective Date to address such concerns, and provided, further, that in the case of such a determination that the fees being charged by Apollo are unfair and excessive, Apollo has the right to lower its fees to match the fees of such comparable asset manager) and (2) six months'upon the determination by two-thirds of the Independent Directors, we may also terminate an investment management agreement or advisory agreement with Apollo as a result of either (i) a material violation of law relating to Apollo’s advisory business, or (ii) Apollo’s gross negligence, willful misconduct or reckless disregard of its obligations under the relevant agreement, and in either case (i) or (ii), the delivery at least 30 days’ prior written notice to AAM or AAMEApollo of termination. We may terminatesuch termination and such termination will be effective at the investment management or advisory agreements for cause, with the approvalend of our board of directors.such 30-day period.
We have a management investment committee, which includes members of our senior management and reports to the risk committee of our board of directors. The committee focuses on strategic decisions involving our investment portfolio, such as approving investment limits, new asset classes and our allocation strategy, reviewing large asset transactions, as well as monitoring our credit risk, and the management of our assets and liabilities.
A significant voting interest in the Company is held by shareholders who are members of the Apollo Group, as defined in our bye-laws. Also, James Belardi, our Chief Executive Officer, is also an employee of andAAM, receives substantial remuneration from acting as Chief Executive Officer of AAM, and owns a 5% profits interest in AAM. Additionally, five of the twelvethirteen members of our board of directors are employees of or consultants to Apollo (including Mr. Belardi). In order to protect against potential conflicts of interest resulting from transactions into which we have entered and will continue to enter into with the Apollo Group, our bye-laws createdrequire us to maintain a conflicts committee consistingcomprised solely of three of our directors who are not officers or employees of any member of the Apollo Group. The conflicts committee reviews and a majority of the committee members must approveapproves material transactions between us and the Apollo Group, subject to certain exceptions.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Other related party transactions—We have a loan purchase agreement with AmeriHome Mortgage Company, LLC (AmeriHome), an investee of A-A Mortgage, an equity method investee. The agreement allows us to purchase residential mortgage loans which they have purchased from correspondent sellers and pooled for sale in the secondary market. AmeriHome retains the servicing rights to the sold loans. We purchased $1$44 million and $15$1 million of residential mortgage loans under this agreement during the three months ended March 31, 2018 and 2017, respectively. Additionally, we have made loans to Aris Holdco, which owns 100% of the equity interests in AmeriHome, in the principal amount of $123 million and 2016, respectively.$52 million as of March 31, 2018and December 31, 2017, respectively, and these are included in related party short-term investments on the condensed consolidated balance sheets.
On January 1, 2018, in order to align our interests with those of Athora, in connection with the Closing, we entered into a cooperation agreement with Athora, pursuant to which, among other things, (1) we will have the right to reinsure approximately 20% of the spread business written or reinsured by any insurance or reinsurance company owned or acquired by Athora, (2) Athora’s insurance subsidiaries will be required to purchase certain funding agreements and/or other spread instruments issued by our insurance subsidiaries, (3) we will provide Athora with a right of first refusal to pursue acquisition and reinsurance transactions in Europe (other than the United Kingdom) and (4) Athora will provide us and our subsidiaries with a right of first refusal to pursue acquisition and reinsurance transactions in North America and the United Kingdom. Additionally, as of March 31, 2018, we had $178 million of funding agreements outstanding to Athora, which were issued to Athora prior to Closing.
13.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
12. Commitments and Contingencies
Contingent Commitments—We had commitments to make investments, primarily capital contributions to investment funds, inclusive of the equity and financing transactions described below, of $1,140$2,366 million and $962$2,358 million as of March 31, 20172018 and December 31, 2016,2017, respectively. We expect most of our current commitments will be invested over the next five years; however, these commitments could become due any time upon counterparty request.
In December 2017, we entered into a transaction with Voya, pursuant to which we agreed to reinsure approximately $19 billion of fixed annuities. Additionally, a consortium of investors, led by affiliates of Apollo, and certain other investors, agreed to purchase Voya Insurance and Annuity Company (VIAC), including its closed block variable annuity segment, and create a newly formed standalone entity, Venerable Holdings, Inc. (Venerable) that will be the holding company of VIAC. We committed to make a $75 million minority equity investment in VA Capital Company LLC, the holding company of Venerable, and provide financing to Venerable of $150 million, in each case, subject to certain closing adjustments. These transactions are expected to close in the second or third quarter of 2018, subject to regulatory approval and customary closing conditions.
Funding Agreements—We are a member of the Federal Home Loan Bank (FHLB) of IndianapolisFHLB and, Des Moines. Throughthrough membership, we have issued funding agreements with a carrying value of $459 million and $691 million as of March 31, 2017 and December 31, 2016, respectively, to the FHLB in exchange for cash advances. The decrease in carrying value during the three months ended As of March 31, 2018 and December 31, 2017, was a resultwe had $616 million and $573 million, respectively, of maturities and payments onfunding agreements outstanding with the outstanding funding agreements. FHLB. We are required to provide collateral in excess of the funding agreements,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, non-affiliated statutory-trustspecial-purpose, unaffiliated statutory trust to offer up to $5 billion of its senior secured medium-term notes. Athene Global Funding uses the net proceeds from each sale to purchase one or more funding agreements from us. Funding agreements issuedoutstanding under this program havehad a carrying value of $896 million and $246$2,996 million as of March 31, 20172018 and December 31, 2016, respectively. The increase in carrying value during the first quarter of 2017 was a result of additional issuances of $650 million under this program.2017.
Pledged Assets and Funds in Trust (Restricted Assets)—The total restricted assets included on the condensed consolidated balance sheets are as follows:
| | | (In millions) | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| AFS securities | | | | |
| Fixed maturity | $ | 1,505 |
| | $ | 1,382 |
| |
| Equity | 31 |
| | 40 |
| |
| Fixed maturity securities, AFS securities | | $ | 1,537 |
| | $ | 1,572 |
|
| Equity securities | | — |
| | 36 |
|
| Mortgage loans | | 858 |
| | 914 |
|
| Investment funds | 24 |
| | 25 |
| 15 |
| | 20 |
|
| Mortgage loans | 911 |
| | 1,003 |
| |
| Short-term investments | 13 |
| | — |
| 7 |
| | 10 |
|
| Other investments | | 35 |
| | — |
|
| Restricted cash | 73 |
| | 57 |
| 87 |
| | 105 |
|
| Total restricted assets | $ | 2,557 |
| | $ | 2,507 |
| $ | 2,539 |
| | $ | 2,657 |
|
The restricted assets are primarily a result ofrelated to reinsurance trusts established in accordance with coinsurance agreements, and the FHLB funding agreements described above. Additionally, we have established reinsurance trusts of assets in accordance with coinsurance agreements, which are typically based on corresponding statutory reserves.
Litigation, Claims and Assessments—On June 12, 2015, Don Hudson, on behalf of himself and others similarly situated, filed a putative class action complaint in the United States District Court, Northern District of California against us. The complaint, which is similar to complaints recently filed against other large insurance companies, primarily alleges that captive reinsurance and other transactions had the effect of misrepresenting the financial condition of Athene Annuity and Life Company (AAIA). The complaint purports to be brought on behalf of a class of purchasers of annuity products issued by AAIA between 2007 and the present and asserts claims against AHL, ALRe, AUSA and AAIA in addition to Apollo and AAM. There are also various allegations related to the purchase of Aviva USA and concerning entry into a modco transaction with ALRe in October 2013. The suit asserts claims of violation of the Racketeer Influenced and Corrupt Organizations Act and seeks compensatory damages, trebled, in an amount to be determined, costs and attorneys' fees. On March 25, 2016, the matter was transferred to the United States District Court, Southern District of Iowa (S.D. IA Court). On May 25, 2016, the court granted plaintiff’s motion to file an amended complaint dropping plaintiff Silva and defendant Aviva plc. We moved to dismiss that complaint on June 30, 2016, and the motion was fully briefed as of September 8, 2016. On November 14, 2016, the court stayed consideration of the motion to dismiss pending a ruling from the United States Court of Appeals for the Eighth Circuit in a similar case which will likely affect the disposition of our motion. See Ludwick v. Harbinger Grp., Inc., 161 F. Supp. 3d 769 (W.D. Mo. 2016), appeal docketed, No. 16-1561 (8th Cir.). On April 13, 2017, the Eighth Circuit affirmed the district court's dismissal of the claims in Ludwick, and Athene has advised the S.D. IA Court. We believe we have meritorious defenses to the claims set forth in the amended complaint and intend to vigorously defend the litigation and, as mentioned, have sought dismissal of the amended complaint. In light of the inherent uncertainties involved in this matter, reasonably possible losses, if any, cannot be estimated at this time.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial StatementsGriffiths Matter (Unaudited)
– On July 27, 2015, John Griffiths, on behalf of himself and others similarly situated, filed a putative class action complaint against us in the United States District Court for the District of Massachusetts, against us.Massachusetts. An amended complaint was filed on December 18, 2015. The complaint asserts claims against AHL, AAIA and Athene London Assignment Corporation (Athene London), in addition to an Aviva defendant. AHL is a named defendant due to its purchase of Aviva USA, and AAIA and Athene London are named as successors to Aviva Life Insurance Company and Aviva London Assignment Corporation, respectively. The complaint alleges a putative class action on behalf of all persons who are the beneficial owners of assets which were used to purchase structured settlement annuities that Aviva Life Insurance Company, Aviva London Assignment Corporation, and Aviva International Insurance Limited (Aviva(collectively, the Aviva Entities) or their predecessors, as applicable, delivered to purchasers on or after April 1, 2003.2003 that were backed by a capital maintenance agreement issued by Aviva International Insurance Limited or its predecessor (the CMA). The complaint alleges that the Aviva Entities sold structured settlement annuities to the public on the basis that such products were backed by a capital maintenance agreement by Aviva International Insurance Limited or its predecessor,the CMA, which was alleged asto be a source of great financial strength. The complaint further alleges that the Aviva Entities used this capital maintenance agreementthe CMA to enhance the sales volume and raise the price of the annuities. The complaint claims that, as a result of Aviva USA’s sale to AHL, the capital maintenance agreementCMA terminated. According to the complaint, no notice of this termination was provided to the owners of the structured settlement annuities andannuities. The complaint alleges that the termination of the CMA gave rise to claims for breach of contract, breach of fiduciary duty, promissory estoppel, and unjust enrichment. AHL and plaintiff recently agreed to a term sheet settlement on a class wide basis. Terms of the settlement, which is subject to court approval, include: (1) AHL entering into a capital maintenance agreement constitutedwith Athene London requiring AHL to provide capital to Athene London upon a breach of contract,missed structured settlement payment that is not timely cured and the plaintiff further asserts other causes of action. The defendants have answered and are engaged in the discovery process. We believe(2) AHL paying a monetary amount that we have meritorious defensesis immaterial to the claims set forth in the complaint and intend to vigorously defend the litigation. In light of the inherent uncertainties involved in this matter, reasonably possible losses, if any, cannot be estimated at this time.us.
The
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Internal Revenue Service (IRS) hasMatters – The IRS completed its examinations of the 2006 through 2010 Aviva USA tax years.years with Aviva USA agreedagreeing to all adjustments that were proposed with respect to those tax yearsadjustments with two exceptions: (1) AAIA’s treatment of call options used to hedge fixed indexed annuity (FIA) liabilities for the tax years 2008–2010 and (2) the disallowance of offsetting tax deductions taken by AAIA and taxable income reported by the non-life subgroup with respect to unpaid independent marketing organization commissions. The first adjustment to which Aviva USA did not agree would disallow deductions of $191 million, $154 million and $76 million for 2008, 2009 and 2010, respectively. The second adjustment to which Aviva USA did not agree would increase non-life net operating losses and decrease AAIA net operating losses by $16 million in each of 2009 and 2010. Taxes, penalties and interest with respect to these two issues for the years under audit are subject to indemnification by Aviva plc under the Stock Purchase Agreement (SPA) between Aviva plc and AHL, dated December 21, 2012 assuming the SPA requirements are satisfied. Athene USA has beenwas unable to negotiate a favorable settlement of this issue with the IRS, and intends to contestis contesting the adjustment in federal court. If the IRS position is upheld in federal court, Athene USA expects that it would owe tax of $120 million, plus interest, for tax years ending on or before October 2, 2013, which are subject to indemnification by Aviva plc as described above.
The IRS also recently completed its examination of the 2011 through 2012 Aviva USA tax years, proposing adjustments that would increase taxable income by approximately $16 million in the aggregate for these two tax years. Athene USA agreed to all adjustments that were proposed with respect to those tax years except for adjustments relating to the same two issues that were not agreed to during the prior examination as discussed above. The first adjustment to which Athene USA did not agree would disallow deductions of $16 million in 2011 and increase deductions by $12 million in 2012. The second adjustment to which Athene USA did not agree would increase non-life net operating losses and decrease AAIA net operating losses by $15 million in 2011 and $12 million in 2012. Taxes, penalties and interest with respect to these two tax years are subject to indemnification by Aviva plc under the SPA, assuming the SPA requirements are satisfied. The treatment of FIA hedges is a recurring issue as to the timing of the related deductions and could affect the current income tax incurred in periods after October 2, 2013, which are not subject to indemnification by Aviva plc. Given that the disallowance of a deduction in one period results in an increased deduction in a future period, we do not expect that there will be any material impact to our financial condition resulting from this issue.
Corporate-owned Life Insurance (COLI) Matter – In 2000 and 2001, two insurance companies which were subsequently merged into AAIA purchased from American General Life Insurance Company (American General) broad based variable corporate-owned life insurance (COLI)COLI policies that, as of March 31, 2017,2018, had an asset value of $333$354 million, and is included in other assets on the condensed consolidated balance sheets. In January 2012, the COLI policy administrator delivered to AAIA a supplement to the existing COLI policies and advised that American General and ZC Resource Investment Trust (ZC Trust) had unilaterally implemented changes set forth in the supplement that if effective, would: (1) potentially negatively impact the crediting rate for the policies and (2) change the exit and surrender protocols set forth in the policies. In March 2013, AAIA filed suit against American General, ZC Trust, and ZC Resource LLC in Chancery Court in Delaware, seeking, among other relief, a declaration that the changes set forth in the supplement were ineffectual and in breach of the parties’ agreement. The parties filed cross motions for judgment as a matter of law, and the court granted defendants’ motion and dismissed without prejudice on ripeness grounds. The issue that negatively impacts the crediting rate for one of the COLI policies has subsequently been triggered and on April 3, 2018, we will pursue further adjudication.filed suit against the same defendants in Chancery Court in Delaware seeking substantially similar relief. If the supplement is ultimately deemed to be effective, the purported changes to the policies could impair AAIA’s ability to access the value of guarantees associated with the policies. The value of the guarantees included within the asset value reflected above are $160is $171 million as of March 31, 2017.2018.
Holzer Matter – On September 12, 2016, Jack Holzer and Mary Bruesh-Holzer filed suit in Jackson County, Missouri against several defendants, including AADE, as successor-in-interest to Business Men’s Assurance Company of America. Mr. Holzer allegedly sustained injuries due to asbestos exposure from 1966–1973 while working in an office building in Kansas City, Missouri, then owned by Business Men’s Assurance Company of America. Plaintiffs asserted strict liability and negligence claims against AADE. On February 26, 2018, an agreement was reached that resulted in the settlement of this matter. The settlement had no impact on our financial condition, results of operations or cash flows.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
14.Regulatory Matter – Our U.S. insurance subsidiaries have experienced increased service and administration complaints related to the conversion and administration of the block of life insurance business acquired in connection with our acquisition of Aviva USA and reinsured to affiliates of Global Atlantic by the third-party administrator (TPA) retained by such Global Atlantic affiliates to provide services on such policies, as well as on certain annuity policies that were on Aviva USA’s legacy policy administration systems that were also converted to and are being administered by the same TPA. On April 5, 2017, we received notification from the New York State Department of Financial Services (NYSDFS) that it planned to undertake a market conduct examination of Athene Life Insurance Company of New York (ALICNY) for the period of January 1, 2012 through March 31, 2017 (NYSDFS Market Conduct Examination), and on May 31, 2017, we received notification from the Texas Department of Insurance that it intended to undertake an enforcement proceeding, in each case, relating to the treatment of policyholders subject to our reinsurance agreements with affiliates of Global Atlantic and the conversion of such annuity policies, including the administration of such blocks by such TPA. On November 15, 2017, we received notification from the NYSDFS that its examination of ALICNY had resulted in the identification of a significant number of asserted violations of New York insurance law associated with the life block reinsured to affiliates of Global Atlantic, who have also been overseeing policyholder administration and the TPA servicing the policies in the block, with a significant number of such violations not subject to dispute by the relevant affiliates of Global Atlantic or by us. On January 30, 2018, we received a draft report regarding the NYSDFS Market Conduct Examination from the NYSDFS, which identified in more detail the violations asserted in the November 15, 2017 letter as well as certain other violations. We believe we are nearing a resolution of the NYDFS Market Conduct Examination, but there are no assurances that a definitive agreement will be finalized and executed by the parties. We currently expect that the resolution will not have a material impact on our financial condition, results of operations or cash flows. To the extent we are unable to reach a final agreement with the NYSDFS, it is possible that we may incur fines or penalties which could have a material adverse effect on our financial condition, results of operations or cash flows. In addition to the foregoing, we have received inquiries, and expect to continue to receive inquiries, from other regulatory authorities regarding the conversion matter. It is possible that other jurisdictions 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. Other than as described above, we are not currently able to estimate the amount of any such fines, penalties or payments arising from these matters with reasonable certainty, but it is possible that such amounts may be material.
13. Segment Information
We operate our core business strategies out of one reportable segment, Retirement Services. In addition to Retirement Services, we report certain other operations in Corporate and Other.
Retirement Services—Retirement Services is comprised of our United States and Bermuda operations, which issue and reinsure retirement savings products and institutional products. Retirement Services has retail operations, which provide annuity retirement solutions to our policyholders. Retirement Services also has reinsurance operations, which reinsure multi-year guaranteed annuities, fixed indexed annuities, traditional one-year guarantee fixed deferred annuities, immediate annuities and institutional products from our reinsurance partners. In addition, our institutional operations, including funding agreements and pension risk transfer (PRT) obligations, are included in our Retirement Services segment.
Corporate and Other—Corporate and Other includes certain other operations related to our corporate activities, and our German operations, which is primarily comprised of participating long-duration savings products. In addition to our German operations, included in Corporate and Other areincluding corporate allocated expenses, merger and acquisition costs, debt costs, certain integration and restructuring costs, certain stock-based compensation and intersegment eliminations. In Corporate and Other, we also hold capital in excess of the level of capital we hold in Retirement Services to support our operating strategy. Prior to the deconsolidation of Athora on January 1, 2018, Corporate and Other included our German operations, which were primarily comprised of participating long-duration savings products. See Note 1 – Business, Basis of Presentation and Significant Accounting Policies for discussion on the deconsolidation of our German operations in 2018.
Financial Measures—Segment adjusted operating income net of tax, is an internal measure used by the chief operating decision maker to evaluate and assess the results of our segments.
Operating revenue is a component of adjusted operating income net of tax, and excludes market volatility and adjustments for other non-operating activity. Our operating revenue equals our total revenue, adjusted to eliminate the impact of the following non-operating adjustments:
Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets;
Investment gains (losses), net of offsets;
VIE expenses and noncontrolling interest; and
Other adjustments to revenues.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The table below reconciles segment adjusted operating revenues to total revenues presented on the condensed consolidated statements of income:
| | | | Three months ended March 31, | Three months ended March 31, |
| (In millions) | 2017 | | 2016 | 2018 | | 2017 |
| Operating revenue by segment | | | | |
| Adjusted operating revenue by segment | | | | |
| Retirement Services | $ | 888 |
| | $ | 786 |
| $ | 1,257 |
| | $ | 888 |
|
| Corporate and Other | 68 |
| | 31 |
| 27 |
| | 68 |
|
| Total segment operating revenues | 956 |
| | 817 |
| |
| Total segment adjusted operating revenues | | 1,284 |
| | 956 |
|
| Non-operating adjustments | | | | | | |
| Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets | 536 |
| | (118 | ) | (158 | ) | | 536 |
|
| Investment gains (losses), net of offsets | 125 |
| | 18 |
| (106 | ) | | 125 |
|
| VIE expenses and noncontrolling interest | — |
| | 4 |
| |
| Other adjustments to revenues | 2 |
| | 1 |
| (9 | ) | | 2 |
|
| Total non-operating adjustments | 663 |
| | (95 | ) | (273 | ) | | 663 |
|
| Total revenues | $ | 1,619 |
| | $ | 722 |
| $ | 1,011 |
| | $ | 1,619 |
|
OperatingAdjusted operating income net of tax, is an internal measure used to evaluate our financial performance excluding market volatility and expenses related to integration, restructuring, stock compensation and certain other expenses. Our adjusted operating income net of tax, equals net income available to AHL's shareholders adjusted to eliminate the impact of the following non-operating adjustments:
Investment gains (losses), net of offsets;
Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets;
Integration, restructuring and other non-operating expenses;
Stock-based compensation, excluding LTIP;the long-term incentive plan (LTIP); and
Income tax (expense) benefit – non-operating.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The table below reconciles segment adjusted operating income net of tax, to net income available to Athene Holding Ltd. shareholders presented on the condensed consolidated statements of income:
| | | | Three months ended March 31, | Three months ended March 31, |
| (In millions) | 2017 | | 2016 | 2018 | | 2017 |
| Operating income, net of tax by segment | | | | |
| Adjusted operating income (loss) by segment | | | | |
| Retirement Services | $ | 267 |
| | $ | 197 |
| $ | 235 |
| | $ | 275 |
|
| Corporate and other | (9 | ) | | (45 | ) | 2 |
| | (9 | ) |
| Total segment operating income, net of tax | 258 |
| | 152 |
| |
| Total segment adjusted operating income | | 237 |
| | 266 |
|
| Non-operating adjustments | | | | | | |
| Investment gains (losses), net of offsets | 57 |
| | (19 | ) | (33 | ) | | 57 |
|
| Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets | 94 |
| | (69 | ) | 95 |
| | 94 |
|
| Integration, restructuring and other non-operating expenses | (9 | ) | | (1 | ) | (8 | ) | | (9 | ) |
| Stock-based compensation, excluding LTIP | (13 | ) | | 15 |
| (3 | ) | | (10 | ) |
| Income tax (expense) benefit – non-operating | (14 | ) | | 9 |
| (20 | ) | | (14 | ) |
| Total non-operating adjustments | 115 |
| | (65 | ) | 31 |
| | 118 |
|
| Net income available to Athene Holding Ltd. shareholders | $ | 373 |
| | $ | 87 |
| |
| Net income | | $ | 268 |
| | $ | 384 |
|
The following represents total assets by segment:
| | | (In millions) | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| Total assets by segment | | | | | | |
| Retirement Services | $ | 81,827 |
| | $ | 79,319 |
| $ | 90,115 |
| | $ | 91,335 |
|
| Corporate and Other | 7,393 |
| | 7,401 |
| 3,442 |
| | 8,412 |
|
| Total assets | $ | 89,220 |
| | $ | 86,720 |
| $ | 93,557 |
| | $ | 99,747 |
|
15. Subsequent Events
On April 14, 2017, in connection with a private offering, AGER Bermuda Holding Ltd. (AGER), a Bermuda domiciled holding company and the holding company of ADKG, entered into subscription agreements with AHL, certain affiliates of AGM and a number of other third-party investors pursuant to which AGER secured commitments from such parties to purchase new common shares in AGER (AGER Offering). AHL's capital commitment includes the valuation of the AGER Group (comprised of our European operations which includes ADKG) at approximately €90 million, which also approximates our invested capital in the AGER Group. Additionally, AHL has committed to purchase an additional €285 million of common shares (which may be reduced to €260 million if certain conditions are met), as well as an additional profits interest in securities which, upon meeting certain vesting triggers, will be convertible into additional common shares.
Upon closing of the AGER Offering, the aggregate voting power held by AHL in AGER will be reduced to 10%. The completion of the AGER Offering is conditioned upon obtaining certain regulatory approvals, and other customary terms and conditions. We expect that AGER's initial material capital call will result in the issuance by AGER of new common shares to affiliates of Apollo and other third-party investors, such that our interest in the AGER Group will be reduced so the AGER Group will be held as an investment rather than a consolidated subsidiary of AHL.
The valuation of the AGER Group was fixed at €90 million as of April 14, 2017, and is unaffected by any profit or loss or other increase or decrease in value of the AGER Group during the period between April 14, 2017 and the date on which the AGER Group is deconsolidated, which we expect to be nine months or longer. As a result, to the extent that our invested capital and/or the fair value of our AGER Group increases or decreases during such time period, we may incur a gain or loss upon deconsolidation.
We also expect AAME to continue to act as investment adviser in regards to the investment portfolio of the AGER Group, though the services provided and fees charged may differ from the existing arrangement.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Index to Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a leading retirement services company that issues, reinsures and acquires retirement savings products designed for the increasing number of individuals and institutions seeking to fund retirement needs. We generate attractive financial results for our policyholders and shareholders by combining our two core competencies of (1) sourcing long-term, generally illiquid liabilities and (2) investing in a high quality investment portfolio, which takes advantage of the illiquid nature of our liabilities. Our steady and significant base of earnings generates capital that we opportunistically invest across our business to source attractively-priced liabilities and capitalize on opportunities. Our differentiated investment strategy benefits from our strategic relationship with Apollo and its indirect subsidiary, AAM. AAM provides a full suite of services for our investment portfolio, including direct investment management, asset allocation, mergers and acquisition asset diligence and certain operational support services, including investment compliance, tax, legal and risk management support. Our relationship with Apollo and AAM also provides us with access to Apollo’s investment professionals acrossaround the world, as well as Apollo’s global asset management infrastructure that as of March 31, 2017, supported more than $197 billion of AUM acrosssupports a broad array of asset classes. We are led by a highly skilled management team with extensive industry experience. We are based in Bermuda with our U.S. subsidiaries'subsidiaries’ headquarters located in Iowa.
We began operating in 2009 when the burdens of the financial crisis and resulting capital demands caused many companies to exit the retirement market, creating the need for a well-capitalized company with an experienced management team to fill the void. Taking advantage of this market dislocation, we have been able to acquire substantial blocks of long-duration liabilities and reinvest the related investments to produce profitable returns. We have established a significant base of earnings and, as of March 31, 2017,2018, have an expected annual investment margin of 2-3% over the 7.98.3 year weighted-average life of our deferred annuities, which make up a substantial portion of our reserve liabilities. Even as we have grown to $75.1 billion in investments, including related parties, $73.6 billion in invested assets and $89.2 billion of total assets asAs of March 31, 2017,2018, the weighted-average life of all products, which includes deferred annuities, payout annuities, PRT obligations, funding agreements and other products, was 9.2 years.
We are diligent in setting our return targets based on market conditions and risks inherent to our products offered and acquisitions or block reinsurance transactions. Specific return targets are established with due consideration to the facts and circumstances surrounding each growth opportunity and may be higher or lower than those that we have continuedtarget more generally. Factors that we consider in establishing return targets for a given growth opportunity include, but are not limited to, approach both sidesthe certainty of the balance sheetreturn profile, the strategic nature of the opportunity, the size and scale of the opportunity, the alignment and fit of the opportunity with an opportunistic mindset because we believe quickly identifying and capitalizing on market dislocations allows us to generate attractive, risk-adjusted returnsour existing business, the opportunity for our shareholders. Further, our multiple distribution channels support growing origination across market environments and better enable us to achieve continued balance sheet growth while maintaining attractive profitability. We believe that in a typical market environment, we will be able to profitably grow through our organic channels, including retail, flow reinsurance and institutional products. In more challenging market environments, we believe that we will see additional opportunities to grow through our inorganic channels, including acquisitions and block reinsurance, due to market stress during those periods.
As a result of our focus on issuing, reinsuring and acquiring attractively-priced liabilities, our differentiated investment strategy and our significant scale, for the three months ended March 31, 2017risk diversification and the year ended the year ended December 31, 2016,existence of increased opportunities for higher returns or growth. If market conditions or risks inherent to a product or transaction create return profiles that are not acceptableto us, we generated an annualized investment margin on deferred annuities of 2.85% and 2.77%, respectively and annualized operating ROE excluding AOCI of 22.8% and 19.1%, respectively forgenerally will not sacrifice our Retirement Services segment. We currently maintain what we believeprofitability merely to be high capital ratios for our rating and hold more than $1.5 billion of excess capital, and view this excess as strategic capital available to reinvest into organic and inorganic growth opportunities. Because we hold such strategic capital to implement our opportunistic strategy and to enable us to explore deployment opportunities as they arise, and because we are investing for future growth, our consolidated annualized ROE for the three months ended March 31, 2017 and the year ended December 31, 2016 was 20.6% and 13.1%, respectively and our consolidated annualized operating ROE excluding AOCI was 15.3% and 12.5%, respectively.facilitate growth.
We operate our core business strategies out of one reportable segment, Retirement Services. In addition to Retirement Services, we report certain other operations in Corporate and Other. Retirement Services is comprised of our U.S. and Bermuda operations which issue and reinsure retirement savings products and institutional products. Corporate and Other includes certain other operations related to our corporate activities and previously included our former German operations, which iswere primarily comprised of participating long-duration savings products.
Our consolidated annualized ROE for the three months ended March 31, 2018 and the year ended December 31, 2017 was 12.0% and 18.0%, respectively, and our consolidated annualized adjusted operating ROE was 12.1% and 15.8%, respectively. As a result of our focus on issuing, reinsuring and acquiring attractively-priced liabilities, our differentiated investment strategy and our significant scale, for the three months ended March 31, 2018 and the year ended December 31, 2017, in our Retirement Services segment, we generated an annualized investment margin on deferred annuities of 2.76% and 2.82%, respectively, and annualized adjusted operating ROE of 17.3% and 22.5%, respectively. We have developed organic and inorganic channels to address the retirement services market and grow our assets and liabilities. By focusing on the retirement services market,currently maintain what we believe that we will benefit from several demographicto be high capital ratios for our rating and, economic trends, including the increasing number of retirees in the United States, the lack of tax advantaged alternatives for people trying to save for retirement and expectations of a rising interest rate environment. To date, most of our products sold and acquired have been fixed annuities, which offer people saving for retirement a product that is tax advantaged, has a minimum guaranteed rate of return or minimum cash value and provides protection against investment loss. Our policies often include surrender charges (86% of our deferred annuity products, as of March 31, 2017) or MVAs (73%2018, hold approximately $2.0 billion of our deferred annuity products,excess capital, and view this excess as of March 31, 2017), both of which increase persistencystrategic capital available to reinvest into organic and protect our ability to meet our obligations to policyholders. inorganic growth opportunities.
Our organic channels, including retail, flow reinsurance and institutional products, provided deposits of $1.9$2.1 billion and $1.6$1.9 billion for the three months ended March 31, 2018 and 2017, respectively. Withdrawals on our deferred annuities, maturities of our funding agreements, payments on payout annuities and 2016,pension risk benefit payments (collectively, liability outflows), in the aggregate, were $1.8 billion and $1.7 billion for the three months ended March 31, 2018 and 2017, respectively. We believe the recent upgrade by A.M. Best to A in April 2017that our improving credit profile, our current product offerings and the 2015 upgrade of our financial strength ratings to A- by each of S&P, Fitch and A.M. Bestproduct design capabilities and our recent FIAgrowing reputation as both a seasoned funding agreement issuer and MYGA new product launches, have enabled anda reliable PRT counterparty will continue to enable us to increase penetration ingrow our existing organic channels and access new markets within our retail channel, such as financial institutions. This increased penetration will allow us to source additional volumes of profitably underwritten liabilities.liabilities in various market environments. Our inorganic channels, including acquisitions and block reinsurance, have contributed significantly to our growth. We believe our internal acquisitions team, with support from Apollo, has an industry-leading ability to source, underwrite and expeditiously close transactions, which makes us a competitive counterparty for acquisition or block reinsurance transactions. The aggregate purchase price
Contents
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
We plan to grow organically by expanding our retail, flow reinsurance and institutional product distribution channels. We believe that we have the right people, infrastructure and scale to position us for continued growth. Within our retail channel, we had fixed annuity sales of $1.1$1.3 billion and $663 million$1.1 billion for the three months ended March 31, 20172018 and 2016,2017, respectively. We aim to grow our retail channel in the United States by deepening our relationships with our approximately 6570 IMOs and approximately 33,000more than 36,000 independent agents. Our strong financial position and capital efficient products allow us to be a dependable partner with IMOs and consistently write new business. We work with our IMOs to develop customized, and at times exclusive, products that help drive sales. We expect our retail channel to continue to benefit from the ratings upgrade in 2017 by A.M. Best, our improving credit profile and recent product launches. We believe this should support growth in sales at our desired cost of crediting through increased volumes via current IMOs and access to new distribution channels, including small to mid-sized banks and regional broker-dealers. We are implementing the necessary technology platform, hiring and training a specialized sales force, and have created products to capture new potential distribution opportunities. WithinIn our flow reinsurance channel, we target reinsurance business consistent with our preferred liability characteristics and, as such, flow reinsurance provides another opportunistic channel for us to source long-term liabilities with attractive crediting rates. We generated deposits through our flow reinsurance channel of $166$204 million and $912$166 million for the three months ended March 31, 2018 and 2017, and 2016, respectively. We believe the decrease in flow reinsurance has been impacted by the recent decline in overall MYGA volumes over the last several months, reflective of the recent stock market rally and expectations of higher interest rates. As we continue to source additional reinsurance partners, we expect to further diversify our flow reinsurance channel and expect that our recent ratings upgrade by A.M. Best and our improving credit profile will help us attract additional reinsurance partners. InWithin our institutional channel, we sold our firstgenerated deposits of $566 million and $650 million for the three months ended March 31, 2018 and 2017, respectively. Our ability to issue funding agreement underagreements, namely those issued through our FABN program, has benefited from our public company status and improving credit profile, allowing us to generate deposits in 2015.the aggregate principal amount of $300 million and $650 million for the three months ended March 31, 2018 and 2017, respectively. In addition, growth in our institutional channel was attributed to continued success in the PRT channel during the quarter. During the three months ended March 31, 20172018, we closed one transaction and during April of 2017, we issued funding agreementsgroup annuity contracts in the aggregate principal amount of $650 million and $1.1 billion, respectively.$266 million. We expect to grow our institutional channel by continuing to continue to grow over time as we issue additionalengage in opportunistic issuances of funding agreements and pursue pension risk transfer opportunities.by continuing to engage in PRT transactions.
In December 2017, we entered into a transaction with Voya, pursuant to which we agreed to reinsure approximately $19 billion of fixed and fixed indexed annuity liabilities. Additionally, a consortium of investors, led by affiliates of Apollo, and certain other investors, agreed to purchase VIAC, including its closed block variable annuity segment, and create a newly formed standalone entity, Venerable, that will be the holding company of VIAC. We committed to make a $75 million minority equity investment in VA Capital Company LLC, the holding company of Venerable, and provide financing to Venerable of $150 million, in each case, subject to certain closing adjustments. These transactions are expected to close in the second or third quarter of 2018, subject to regulatory approval and customary closing conditions. Our results of operations will not reflect the impacts of these transactions until the close of the transaction.
Acquisition Summary Included in Results of Operations
On January 1, 2018, in connection with the closing of the Athora Offering, our equity interest in the Athora was exchanged for common shares of Athora. See Note 1 – Business, Basis of Presentation and Significant Accounting Policies to the condensed consolidated financial statements for further details of the deconsolidation of our German operations. The deconsolidation of Athora decreased our total assets by $6.3 billion and our invested assets by $6.0 billion. The impact of this deconsolidation has an effect on the comparability of our historical results and therefore historical discussions of changes between periods are not necessarily indicative of future results. To enhance the comparability of our March 31, 2018 and 2017 results, we highlight the financial results applicable to the deconsolidation of Athora where meaningful. As of January 1, 2018, our investment in Athora is reflected as an alternative investment.
Industry Trends and Competition
Market Conditions
Our businessWhile the U.S. Federal Reserve has continued its process of policy rate normalization, longer dated interest Treasury yields have risen, but not in step with shorter term rates, and results of operations are materially affected by conditionsas a consequence, the yield curve has flattened notably over the past twelve months. Whether signaling low long-term inflation expectations, or a coming curve inversion, or simply due to supply dynamics in the global capital markets and the economy generally. A general economic slowdown could adversely affect us in the form of changes in consumer behavior and decreases in the returns on and value of our investment portfolio. Concerns over the slow economic recovery,search for asset yield, the level of U.S. national debt, currency fluctuationslonger dated Treasury yields affects the yield we earn on invested assets. The appreciable rise in such longer dated yields to date in 2018 has benefited such yields on new purchases. While current economic fundamentals appear strong, uncertainty about future fiscal policy, changes in tax policy, the scope of potential deregulation, and volatility,levels of global trade, along with uncertainty about the stability of the EU, BrexitFederal Reserve’s ability to manage its normalization process and the potential exitimpact on inflation and wage growth, may trigger continued volatility across financial markets. Volatility as seen recently in the equity markets, may adversely affect the hedging costs of certain other EU members,our liability policy hedging program. Credit market volatility, during which time credit spreads may widen, benefits our investment purchases but may negatively affect the ratevaluations of growth of Chinaour in-force investment portfolio.
A volatile market environment may affect our ability to produce liability products that are profitable, have the desired risk profile to the company, and other Asian economies, unemployment, the availabilitybe desired by consumers. As a company with strong retirement, investment management and cost of credit, the U.S. housing market, inflation levels, low or negative interest rates, energy costs and geopolitical issues have contributed to increased volatility and diminished expectations for the economy and the markets. Market conditions have generally improved since the U.S. elections in November on hopes of improved economic growth, howeverinsurance capabilities, we expect that over the long term, outlook remains uncertain. Declining economic growth rates globallymarket conditions resulting in higher Treasury yields and resultant diverging paths of monetary policy could increase volatility incredit spreads will enhance the credit markets, potentially impacting the availability and cost of credit. Factors such as equity prices, equity market volatility, interest rates, counterparty risks, availability of credit, inflation rates, economic uncertainty, changes in laws or regulations (including laws relating to the financial markets generally or the taxation or regulation of the insurance industry), trade barriers, commodity prices, currency exchange rates and controls and national and international political circumstances (including governmental instability, wars, terrorist acts or security operations) can have a material impact on the valueattractiveness of our investment portfolio and our ability to sell ourof annuity products. We adjust the structure of our products depending on the economic environment,continue to monitor the behavior of our customers and other factors which react to market conditions, including mortality rates, morbidity rates, cap rates, rollup rates, annuitization rates and lapse rates, which can vary in responseorder to changes in market conditions. We believe continued economic growth, stable financial marketsbest serve our customers and a potentially rising interest rate environment may ultimately enhance the attractivenessgenerate strong profitability to our shareholders.
Item 2. Management’s Discussion and an increase in corporate creditAnalysis of Financial Condition and real estate-related defaults.Results of Operations
Interest Rate Environment
As a retirement services company focused on issuing and reinsuring fixed annuities, we are affected by the monetary policy of the Federal Reserve in the United States as well as other central banks around the world. In spite of the Federal Reserve's recent increases inReserve increasing federal funds rates again in March 2017, December 2016 and December 2015,of 2018, interest rates in the United States remain lower than historical levels. The lower interest rates in part are due to a number of actions taken in recent years by the Federal Reserve in an effort to stimulate economic activity. Any future increases in federal funds rates are uncertain and will depend on the economic outlook.
Our investment portfolio consists predominantly of fixed maturity investments. See –Consolidated Investment Portfolio. If prevailing interest rates were to rise, we believe the yield on our new investment purchases wouldmay 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 wouldmay decline and our investment income from floating rate investments would decrease, while the value of our existing investments may increase. We address interest rate risk through managing the duration of the liabilities we source with assets we acquire and through ALMasset liability management (ALM) modeling. We endeavor to limit reinvestment risk related to cash flows by managing our asset portfolio to ensure it provides adequate cash flows to meet our expected policyholder benefit cash flows to within tolerable risk management limits. Our strategy is to achieve sustainable yields that allow us to maintain an attractive investment margin. As part of our investment strategy, we purchase floating rate investments, which we expect will perform well in a rising interest rate environment. Our investment portfolio includes $21.5$17.1 billion of floating rate investments, or approximately 29%22% of our total invested assets as of March 31, 2017.2018. The percentage of floating rate investments decreased from December 31, 2017, due to a refinement in our definition to only include short duration securities that are directly tied or linked to an index. As part of our reinvestment strategy for the investment portfolios of our acquired companies we acquire or blocks we reinsure, we generally seek to reinvest assets at yields higher than the related assets being liquidated for reinvestment. We continuously seek to optimize our investment portfolio to achieve favorable returns over the long term.
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. In periods of prolonged low interest rates, the investment margin earned on deferred annuities may be negatively impacted by reduced investment income as well as to the extent our abilitythat we are unable to adequately reduce policyholder crediting rates are limited bydue to policyholder guarantees in the form of minimum crediting rates.rates or otherwise due to market conditions. As of March 31, 2017,2018, most of our products were fixed annuities with approximately 37%34% of our FIAs at the minimum guarantees and approximately 50%47% of our fixed rate annuities at the minimum crediting rates. As of March 31, 2017,2018, minimum guarantees on all of our deferred annuities, including those with crediting rates already at their minimum guarantees, were, on average, 7590 to 85100 basis points below the crediting rates on such deferred annuities, allowing us room to reduce rates before reaching the minimum guarantees. TheOur remaining liabilities are associated with immediate annuities, pension risk transfer obligations, funding agreements or life contracts for which we have creditinglittle to no discretionary ability to change the rates or costs that are less sensitive or insensitiveof interest payable to interest rate movements.the respective policyholder. A significant majority of our products have crediting rates that we may reset annually upon renewal following the expiration of the current guaranteed period. While we have the contractual ability to lower these crediting rates to the guaranteed minimum levels, our willingness to do so may be limited by competitive pressures.
See Part II—Item 7A. Quantitative and Qualitative Disclosures About Market Risks in our 20162017 Annual Report, which includes a discussion regarding interest rate and other significant risks and our strategies for managing these risks.
Demographics
Over the next four decades, the retirement-age population is expected to experience unprecedented growth. Technological advances and improvements in healthcare are projected to continue to contribute to increasing average life expectancy, and aging individuals must be prepared to fund retirement periods that will last longer than ever before. Further, many working households in the United States do not have adequate retirement savings. As a tool for addressing the unmet need for retirement planning, we believe that many Americans have begun to look to tax-efficient savings products with low-risk or guaranteed return features and potential equity market upside, particularly as federal, state and local marginal tax rates have increased.upside. Our tax-efficient savings products are well positioned to meet this increasing customer demand. The impact of this growth in demand may be offset to some extent by asset outflows as an increasing percentage of the population begins withdrawing assets to convert their savings into income.
We believe that our strong presence in the FIA market and strength of our relationships with IMOs position us to effectively serve consumers'consumers’ demand in the rapidly growing retirement savings market. We expect that our retail channel will continue to benefit from rating agency upgrades as well as our improving credit profile and recent product launches. We believe this should help us to grow sales at our desired cost of crediting through increased volumes via current IMOs and access to new distribution channels, including small to mid-sized banks and regional broker-dealers. We also believe that the 2015 financial strength upgrades, as well as our upgrade to A by A.M. Best in April 2017, haveimproving credit profile has enabled and will continue to enable us to increase penetration in our existing organic channels, such as flow reinsurance and will helpfunding agreements, while also helping us to enterincrease our presence in the pension risk transferPRT market.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Competition
We operate in highly competitive markets. We face a variety of large and small industry participants, including diversified financial institutions and insurance and reinsurance companies. These companies compete in one form or another for the growing pool of retirement assets driven by a number of external factors such as the continued aging of the population and the reduction in safety nets provided by governments and private employers. In many segments, product differentiation is difficult as product development and life cycles have shortened. In addition,the markets in which we have experienced pressure on fees as product unbundling and lower cost alternatives have emerged. As a result,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.
It is unclear at this time what impact, if any, the Tax Act will have on the competitive environment of the markets in which we compete. If U.S.-based competitors use some or all of their tax savings to offset reductions in product pricing, we could see increased price competition, which would place downward pressure on our return targets and on volumes within each of our distribution channels. See –Regulatory Developments–Tax Reform below.
According to LIMRA, total fixed annuity market sales in the United States were $117.4$107.9 billion for the twelve monthsyear ended December 31, 2016, a 14.0% increase2017, an 8.1% decrease from the same time period in 2015.2016. This increasedecrease was driven by an increasea decrease in traditional fixed rate deferred annuities of $7.8$4.5 billion, or 25.2%11.6% over prior year, traditional fixed rate deferred annuities, and an increasea decrease in FIA products of $6.4$3.3 billion, or 11.7%5.4% over prior year FIAs.year. In the total fixed annuity market, for the twelve monthsyear ended December 31, 2016,2017 (the most recent period for which specific market share data is available), we were the 5th largest company based on sales with a 4.5%5.0% market share and $5.3$5.4 billion in sales. For the twelve monthsyear ended December 31, 2015,2016, our market share was 2.4%4.5% with sales of $2.5$5.3 billion.
Despite the decline experienced recently, over the longer-term FIAs arehave been one of the fastest growing annuity products, having grown from $27.3 billion in 2005 to $60.9$57.6 billion in sales for the year ended December 31, 2016.2017. According to LIMRA, for the twelve monthsyear ended December 31, 2016,2017 (the most recent period for which specific market share data is available), we were the 3rd2nd largest provider of FIAs in terms of sales, and our market share for the same period was 8.4% with sales of $4.9 billion. For the year ended December 31, 2016, our market share was 7.4% with sales of $4.5 billion. For the twelve months ended December 31, 2015, our market share was 4.5% with sales of $2.4 billion.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Regulatory Developments
We continue to face material uncertainty regarding the ultimate impacts of tax reform to our business and regarding the substance, timing, and applicability of the DOL fiduciary rule.
Tax Reform
On December 22, 2017, President Trump signed the Tax Act into law, which introduced significant changes to the Internal Revenue Code. While our expectations may be subject to change as we continue to evaluate the impact of the Tax Act on our business, we expect the following notable impacts:
Overall tax rate—Although the Tax Act reduces corporate income tax rates to 21% beginning in 2018, it also imposes a new minimum tax, referred to as the BEAT, which taxes modified taxable income at a rate of 5% beginning in 2018, increasing to 10% in 2019 and 12.5% in 2026. In general, modified taxable income is calculated by adding back to a taxpayer’s regular taxable income the amount of certain “base erosion tax benefits” with respect to payments to foreign affiliates, as well as the “base erosion percentage” of any net operating loss deductions. The BEAT applies only to the extent it exceeds a taxpayer’s regular corporate income tax liability (determined without regard to certain tax credits). The BEAT is expected to apply to our U.S. subsidiaries with respect to payments to our non-U.S. reinsurance subsidiaries. The BEAT does not apply to premium paid to ALRe directly by unaffiliated ceding companies or investment income earned on our non-U.S. reinsurance subsidiaries’ surplus assets, which together currently represent approximately 20–25% of our pre-tax adjusted operating income. In addition to the BEAT, the 1% excise tax that we have historically paid will continue to apply to premiums paid to our Bermuda subsidiaries that are not subject to U.S. taxation, to the extent that any such premiums are paid.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Within the context of affiliated modco arrangements, which is how much of our internal reinsurance is structured, it is our belief that the BEAT was generally intended to require the add back of the net amount paid or accrued by our U.S. subsidiaries to our non-U.S. reinsurance subsidiaries for premiums, investment income, reserve changes, other consideration and expenses (net basis). However, there is significant uncertainty regarding the computation of the BEAT in the context of affiliated modco arrangements, including whether the BEAT applies on a net basis or instead requires the add back of the gross amount paid or accrued, without reduction for claims or other expenses. In light of this uncertainty, we have begun to take actions that would allow us to mitigate the potential effect of the BEAT on our results of operations should the BEAT require the add back of the gross amounts in this manner. Our overall tax rate will depend on the ultimate interpretation of the Tax Act and the actions that we take. We currently expect that, beginning in 2019, our overall tax rate will be between 12–16%, on average, of each of pre-tax income and pre-tax adjusted operating income; however, we may experience significant fluctuations in the overall tax rate as a percentage of pre-tax income from period-to-period, with certain periods falling outside of our expected range. Until there is more clarity regarding the computation of the BEAT in the context of modco arrangements, and until we execute additional actions to mitigate its impact, we currently expect that our 2018 annual financial results will reflect an overall tax rate of between 14–15%, on average, of each of pre-tax income and pre-tax adjusted operating income, with our overall tax rate as a percentage of pre-tax income experiencing great volatility from period-to-period, as discussed above.
The estimated future overall tax rates presented above incorporate various assumptions and actual results may vary. See Item 1A. Risk Factors–Our business, financial condition, liquidity, results of operations and cash flows depend on the accuracy of our management’s assumptions and estimates, and we could face significant losses if these assumptions and estimates differ significantly from actual results–BEAT Mitigating Actions and Item IA. Risk Factors–Risks Relating to Taxation–The BEAT may significantly increase our tax liability and our efforts to mitigate the cost of the BEAT may be unnecessary, inefficient, ineffective, or counterproductive, each included in Part II of this report.
Risk-based capital—Depending on the reaction of the NAIC to the passage of the Tax Act, the change in the corporate income tax rate from 35% to 21% could result in a reduction of our RBC ratios. At present, the NAIC RBC calculations employ the statutory corporate tax rate of 35% in calculating several aspects of RBC. If the NAIC RBC calculations simply employ the new statutory corporate tax rate of 21% with no other adjustments, our RBC ratios, along with those of other fixed annuity writers and life insurers in general, are expected to decrease. If such were the case as of March 31, 2018, we estimate the decrease to our overall NAIC RBC ratios would have been approximately 10–15%. Our capital ratios under the various rating agency models are not expected to be materially impacted by the change in tax rate, and those models are an important consideration in determining the appropriate levels of capital to run our business. Our initial assessment of the level of capital that we deem appropriate to run our business has not been impacted materially by the change in tax rate.
Target returns—Historically, we have generally targeted mid-teen returns for sources of organic growth and mid-teen or higher returns for sources of inorganic growth. The Tax Act may alter the way that we price our products or otherwise impact targeted returns on organic production, and may further affect the returns that we target for sources of inorganic growth, in each case, potentially resulting in a decrease of our targeted returns on a temporary or permanent basis. In addition, we expect that the Tax Act will cause a reduction of the returns that we realize on our in-force business.
Controlled Foreign Corporation—As discussed more fully at Part II–Item 1A. Risk Factors–Risks Relating to Taxation–U.S. persons who own our Class A common shares may be subject to U.S. federal income taxation at ordinary income rates on our undistributed earnings and profits, adoption of the Tax Act resulted in certain changes affecting the determination as to whether an entity constitutes a Controlled Foreign Corporation (CFC). Being treated as a CFC could have adverse tax consequences to certain of our shareholders. To reduce the likelihood of such a result, we have restructured certain of our subsidiaries so that Athene USA, our U.S. holding company subsidiary, is now a wholly owned subsidiary of ALRe.
Other provisions of the Tax Act could significantly increase the tax liability of our U.S. subsidiaries in future tax periods by accelerating items of income or deferring deductions. Although the acceleration of an item of income or deferral of a deduction in one tax period allows a taxpayer to recognize less taxable income in a future period, there can be no assurance that we will be able to utilize any resulting deferred tax assets in future tax periods.
The foregoing represents our current expectations of certain of the effects of the Tax Act and may be subject to change as additional guidance is made available and as we continue to evaluate the effect of this legislation on our business. See Part II–Item 1A. Risk Factors–Risks Relating to Taxation for further information on how the Tax Act could impact us.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
U.S. Department of Labor (DOL) Fiduciary Rule
On April 6, 2016, the U.S. DepartmentDOL issued the fiduciary rule which imposes upon third parties who sell annuities within Employee Retirement Income Security Act of Labor (DOL) issued a new regulation more broadly defining the circumstances under which a person is considered1974 (as amended, ERISA) plans or to beindividual retirement account (IRA) holders a fiduciary by reason of giving investment advice or recommendations to an employee benefit plan or a plan’s participants or to IRA holders. In addition to releasing the investment advice regulation, the DOL: (1) issued a new prohibited transaction class exemption titled the “Best Interest Contract Exemption,” to be used in connection with the sale of FIAs or variable annuities, and (2) updated the previously prohibited transaction class exemption 84-24, to be used in connection with the sale of traditional fixed rate annuities. The requirements of the regulation were scheduled to begin to be implemented on April 10, 2017, with full implementation on January 1, 2018; however, the DOL has published an amendment to the regulation that delays the applicability date for 60 days to allow the DOL to review the potential impact of the regulation on the ability of Americans to gain accessduty to retirement information and financial advice in accordance with an executive memorandum signed by President Trump on February 3, 2017. In addition to delayinginvestors. The DOL delayed the applicability date of the DOL regulation, the DOL revised certain prohibited transaction exemptions, most notably allowing all annuity products, fixed, FIAs and variable annuities,fiduciary rule to rely on an updated version of prohibited transaction class exemption 84-24 from June 9, 2017 through Januaryand the full compliance date to July 1, 2019. On March 15, 2018, at which time full implementationthe U.S. Court of Appeals for the Fifth Circuit issued an opinion vacating, in their entirety, the DOL fiduciary rule and its associated package of new and amended prohibited transaction exemptions. In late April, the American Association of Retired Persons (AARP) and top legal officials in California, New York and Oregon filed a petition in the Fifth Circuit Court of Appeals asking for the court’s permission to intervene in the lawsuit to appeal the opinion. The Fifth Circuit ruling is scheduled to take effect on May 7, 2018 absent any petition for rehearing or motion to stay by the DOL or an approval of the request to intervene. We will continue to abide by the fiduciary rule unless and until the Fifth Circuit’s ruling becomes effective.
The U.S. Securities and Exchange Commission (SEC) has indicated that it will work with the DOL regulation is required. The DOL also openedto propose rules creating a 45-dayuniform standard of conduct applicable to broker-dealers and investment advisers, which, if adopted, may affect the distribution of our products. On April 18, 2018, the SEC released three new proposed rules addressing a uniform best interest standard of conduct with the public comment period which closed on April 17, 2017, to collect responses toending 90 days after publication of the questions raiseddocuments in the executive memorandum. We anticipate a possible replacement ofFederal Register. In addition, the regulation thatNAIC is less burdensome but still requires salesworking to be in the best interest of clients. However, such a change is not guaranteed, and we continue to move forward in preparation for the delayed applicability date and full implementation on January 1, 2018, assuming the regulation remains unchanged.
Both the U.S. Congress and President Trump’s administration have indicated a desire to reform the Internal Revenue Code. Although the 2016 U.S. House of Representatives Blueprint, “A Better Way” and President Trump's recently proposed tax reform plan do not align on all tax reform proposals, substantial proposedpropose changes to the U.S. corporate tax regime include: reduction ofSuitability in Annuity Transactions Model Regulation (SAT) to include best interest. Should the maximum corporate tax rate, repeal ofSEC or NAIC rules, if adopted, not align, the corporate alternative minimum tax, elimination of net operating loss carryback, immediate expensing of business assets, and elimination of a deduction for net interest expense as well as substantial changes to the international tax system including border tax adjustments, a destination based cash flow tax and moving to a territorial based tax system. A reduction in the corporate tax rate would have a positive impact on the earnings and cash flowdistribution of our U.S. companies, but itproducts could also reduce the value of our deferred tax assets. Although it is not known at this time how border tax adjustments will (if enacted) be applied to insurers and reinsurers, it is possible that such adjustments will involve denying a deduction to U.S. insurance companies for reinsurance premium paid to a foreign reinsurer, which would materially increase our overall U.S. tax expense. In addition, it is not yet known whether potential tax reform will include further changes impacting the current tax treatment of insurance companies under the Internal Revenue Code. At this time, it is not possible to determine the impact of potential legislative changes on our financial condition and results of operations.complicated.
Key Operating and Non-GAAP Measures
In addition to our results presented in accordance with GAAP, our results of operations include certain non-GAAP measures commonly used in our industry. Management believes the use of these non-GAAP measures, together with the relevant GAAP measures, provides a betterinformation that may enhance an investor’s understanding of our results of operations and the underlying profitability drivers of our business. The majority of these non-GAAP measures are intended to remove from the results of operations the impact of market volatility (other than with respect to alternative investments) as well as integration, restructuring and certain other expenses which are not part of our underlying profitability drivers or likely to re-occur in the foreseeable future, as such items fluctuate from period-to-periodperiod to period in a manner inconsistent with these drivers. These measures should be considered supplementary to our results in accordance with GAAP and should not be viewed as a substitute for the GAAP measures. See Non-GAAP Measure Reconciliations for the appropriate reconciliations to the GAAP measures.
Adjusted Operating Income Net of Tax
OperatingAdjusted operating income net of tax, a commonly used operating measure in the life insurance industry, is a non-GAAP measure used to evaluate our financial performance excluding market volatility and expenses related to integration, restructuring, stock compensation, and other expenses. Our adjusted operating income net of tax, equals net income available to AHL’s shareholders adjusted to eliminate the impact of the following (collectively, the “non-operating adjustments”):
Investment Gains (Losses), Net of Offsets—Investment gains (losses), net of offsets, consist of the realized gains and losses on the sale of AFS securities, the change in assumed modco and funds withheld reinsurance embedded derivatives, unrealized gains and losses, impairments, and other investment gains and losses. Unrealized, impairments and other investment gains and losses are comprised of the fair value adjustments of trading securities (other than CLOs) and investments held under the fair value option, derivative gains and losses not hedging FIA index credits, and the net OTTI impacts recognized in operations net of the change in AmerUs Closed Block fair value reserve related to the corresponding change in fair value of investments and the change in unit linkedunit-linked reserves related to the corresponding trading securities. Investment gains and losses are net of offsets related to DAC, DSI, and VOBA amortization and changes to GLWBguaranteed lifetime withdrawal benefit (GLWB) and guaranteed minimum death benefits (GMDB) reserves (together, GLWB and GMDB reserves represent rider reserves)as well as the MVAs associated with surrenders or terminations of contracts.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Change in Fair Values of Derivatives and Embedded Derivatives – FIAs, Net of Offsets—Impacts related to the fair value accounting for derivatives hedging the FIA index credits and the related embedded derivative liability fluctuate from period-to-period.period to period. The index reserve is measured at fair value for the current period and all periods beyond the current policyholder index term. However, the FIA hedging derivatives are purchased to hedge only the current index period. Upon policyholder renewal at the end of the period, new FIA hedging derivatives are purchased to align with the new term. The difference in duration between the FIA hedging derivatives and the index credit reserves creates a timing difference in earnings. This timing difference of the FIA hedging derivatives and index credit reserves is included as a non-operating adjustment, net of offsets related to DAC, DSI, and VOBA amortization and changes to rider reserves.
We primarily hedge with options that align with the index terms of our FIA products (typically 1-2 years). From an economic basis, we believe this is suitable because policyholder accounts are credited with index performance at the end of each index term. However, because the “value of an embedded derivative” in an FIA contract is longer-dated, there is a duration mismatch which may lead to mismatches for accounting purposes.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Integration, Restructuring, and Other Non-operating Expenses—Integration, restructuring, and other non-operating expensesconsist ofrestructuring and integration expenses related to mergersacquisitions and acquisitionsblock reinsurance costs as well as certain other expenses which are not part of our core operations or likely to re-occur in the foreseeable future.
Stock Compensation Expense—To date, stockStock compensation expenses associated with our share incentive plans, excluding our long term incentive plan, are not part of our core operating expenses and fluctuate from time to time due to the structure of our plans.
Bargain Purchase Gain—Bargain purchase gains associated with acquisitions are adjustments to net income as they are not consistent with our core operations.
Income Taxes (Expense) Benefit – Non-operating—The non-operating income tax expense is comprised of the appropriate jurisdiction'sjurisdiction’s tax rate applied to the non-operating adjustments that are subject to income tax.
We consider these non-operating adjustments to be meaningful adjustments to net income available to AHL's shareholders for the reasons discussed in greater detail above. Accordingly, we believe using a measure which excludes the impact of these items is effective in analyzing the trends in our results of operations. Together with net income, available to AHL's shareholders, we believe adjusted operating income, net of tax, provides a meaningful financial metric that helps investors understand our underlying results and profitability. OperatingAdjusted operating income net of tax, should not be used as a substitute for net income available to AHL's shareholders.income.
Adjusted ROE, Excluding AOCI andAdjusted Operating ROE Excluding AOCIand Adjusted Net Income
Adjusted ROE, excluding AOCI andadjusted operating ROE excluding AOCIand adjusted net income are non-GAAP measures used to evaluate our financial performance excluding the impacts of AOCI. AOCI fluctuates period-to-periodand funds withheld and modco reinsurance unrealized gains and losses, net of DAC, DSI, rider reserve and tax offsets. Adjusted ROE is calculated as adjusted net income, divided by adjusted shareholders’ equity. Adjusted shareholders’ equity is calculated as the ending shareholders’ equity excluding AOCI and funds withheld and modco reinsurance unrealized gains and losses. Adjusted operating ROE is calculated as the adjusted operating income, divided by adjusted shareholders’ equity. Adjusted net income is calculated as net income excluding funds withheld and modco reinsurance unrealized gains and losses, net of DAC, DSI, rider reserve and tax offsets. These adjustments fluctuate period to period in a manner inconsistent with our underlying profitability drivers as the majority of such fluctuation is related to the market volatility of the unrealized gains and losses associated with our AFS securities. Once we have reinvested acquired blocks of businesses, we typically buy and hold AFS investments to maturity throughout the duration of market fluctuations, therefore, the period-over-period impacts in unrealized gains and losses are not necessarily indicative of current adjusted operating fundamentals or future performance. Accordingly, we believe using measures which exclude AOCI is more effectiveand funds withheld and modco reinsurance unrealized gains and losses are useful in analyzing the trends ofin our operations.operating results. To enhance the ability to analyze these measures across periods, interim periods are annualized. Adjusted ROE, excluding AOCI andadjusted operating ROE excluding AOCIand adjusted net income should not be used as a substitute for ROE.ROE and net income. However, we believe the adjustments to equity are significant to gaining an understanding of our overall results of operations.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Adjusted Operating Earnings Per Share, - Operating Diluted Class A, Weighted Average Shares Outstanding -– Adjusted Operating Diluted Class A Common Shares and Adjusted Book Value Per Share Excluding AOCI
OperatingAdjusted operating earnings per share, - operating diluted Class A, weighted average shares outstanding -– adjusted operating diluted Class A common shares and adjusted book value per share excluding AOCI are non-GAAP measures used to evaluate our financial performance and financial condition. The non-GAAP measures adjust the number of shares included in the corresponding GAAP measures to reflect the conversion or settlement of all shares and other stock-based awards outstanding. We believe using these measures representrepresents an economic view of our share counts and provideprovides a simplified and consistent view of our outstanding shares. OperatingAdjusted operating earnings per share - operating diluted Class A is calculated as the adjusted operating income, net of tax over the weighted average shares outstanding - operating diluted Class A common shares. Book– adjusted operating. Adjusted book value per share excluding AOCI is calculated as the ending AHL shareholders'adjusted shareholders’ equity excluding AOCI divided by the adjusted operating diluted Class A common shares outstanding. Our Class B common shares are economically equivalent to Class A common shares and can be converted to Class A common shares on a one-for-one basis at any time. Our Class M common shares are in the legal form of shares but economically function as options as they are convertible into Class A shares after vesting and settlementpayment of the conversion price. In calculating Class A diluted earnings per share on a GAAP basis, we are required to apply sequencing rules to determine the dilutive impacts, if any, of our Class B common shares, Class M common shares and any other stock-based awards. To the extent our Class B common shares, Class M common shares and/or any other stock-based awards are not dilutive they are excluded. Weighted average shares outstanding -– adjusted operating diluted Class A common shares and adjusted operating diluted Class A common shares outstanding assume conversion or settlement of all outstanding items that are able to be converted to or settled in Class A common shares, including the impacts of Class B common shares on a one-for-one basis, the impacts of all Class M common shares net of the conversion price and any other stock-based awards.awards, but excluding any awards for which the exercise or conversion price exceeds the market value of our Class A common shares on the applicable measurement date. For certain historical periods, Class M shares were not included due to issuance restrictions which were contingent upon our IPO. OperatingAdjusted operating earnings per share, - operating diluted Class A, weighted average shares outstanding -– adjusted operating diluted Class A common shares and adjusted book value per share excluding AOCI should not be used as a substitute for basic earnings per share -– Class A common shares, basic weighted average shares outstanding -– Class A or book value per share. However, we believe the adjustments to the shares and equity are significant to gaining an understanding of our overall results of operations and financial condition.
Adjusted Debt to Capital Ratio
Adjusted debt to capital ratio is a non-GAAP measure used to evaluate our financial condition excluding the impacts of AOCI and funds withheld and modco reinsurance unrealized gains and losses, net of DAC, DSI, rider reserve and tax offsets. Adjusted debt to capital ratio is calculated as total debt excluding consolidated VIEs divided by adjusted shareholders’ equity. Adjusted debt to capital ratio should not be used as a substitute for the debt to capital ratio. However, we believe the adjustments to shareholders’ equity are significant to gaining an understanding of our overall results of operations and financial condition.
Retirement Services Net Investment Earned Rate, Cost of Crediting and Investment Margin on Deferred Annuities
Investment margin is a key measurement of the financial health of our Retirement Services core deferred annuities. Investment margin on our deferred annuities is generated from the excess of our net investment earned rate over the cost of crediting to our policyholders. Net investment earned rate is a key measure of investment returns and cost of crediting is a key measure of the policyholder benefits on our deferred annuities.
Net investment earned rate is a non-GAAP measure we use to evaluate the performance of our invested assets that does not correspond to GAAP net investment income. Net investment earned rate is computed as the income from our invested assets divided by the average invested assets for the relevant period. To enhance the ability to analyze these measures across periods, interim periods are annualized. The adjustments to arrive at our net investment earned rate add alternative investment gains and losses, gains and losses related to trading securities for CLOs, net VIE impacts (revenues, expenses and noncontrolling interest) and the change in reinsurance embedded derivatives. We include the income and assets supporting our assumed reinsurance by evaluating the underlying investments of the funds withheld at interest receivables and we include the net investment income from those underlying investments which does not correspond to the GAAP presentation of reinsurance embedded derivatives. We exclude the income and assets supporting business that we have exited through ceded reinsurance including funds withheld agreements. We believe the adjustments for reinsurance provide a net investment earned rate on the assets for which we have economic exposure.
Cost of crediting is the interest credited to the policyholders on our fixed strategies as well as the option costs on the indexindexed annuity strategies. With respect to FIAs, the cost of providing index credits includes the expenses incurred to fund the annual index credits, and where applicable, minimum guaranteed interest credited. The interest credited on fixed strategies and option costs on indexindexed annuity strategies are divided by the average account value of our deferred annuities. Under GAAP, deposits and withdrawals for fixed indexed and fixed rate annuities are reported as deposit liabilities (or policyholder funds). Our average account values are averaged over the number of quarters in the relevant period to obtain our cost of crediting for such period. To enhance the ability to analyze these measures across periods, interim periods are annualized.
Net investment earned rate, cost of crediting and investment margin on deferred annuities are non-GAAP measures we use to evaluate the profitability of our core deferred annuities business.Deferred annuities include our fixed rate annuities and FIAs, which account for approximately 80%82% of our Retirement Services reserve liabilities as of March 31, 20172018. We believe measures like net investment earned rate, cost of crediting and investment margin on deferred annuities are effective in analyzing the trends of our core business operations, profitability and pricing discipline. While we believe net investment earned rate, cost of crediting and investment margin on deferred annuities are meaningful financial metrics and enhance our understanding of the underlying profitability drivers of our business, they should not be used as a substitute for net investment income and interest sensitive contract benefits presented under GAAP.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Invested Assets
In managing our business we analyze invested assets, which do not correspond to total investments, including investments in related parties, as disclosed in our consolidated financial statements and notes thereto. Invested assets represent the investments that directly back our policyholder liabilities as well as surplus assets. Invested assets is used in the computation of net investment earned rate, which allows us to analyze the profitability of our investment portfolio. Invested assets includes (a) total investments on the consolidated balance sheets with AFS securities at cost or amortized cost, excluding derivatives, (b) cash and cash equivalents and restricted cash, (c) investments in related parties, (d) accrued investment income, (e) the consolidated VIE assets, liabilities and noncontrolling interest, (f) net investment payables and (f)receivables and (g) policy loans ceded (which offset the direct policy loans in total investments). Invested assets also excludes assets associated with funds withheld liabilities related to business exited through reinsurance agreements and derivative collateral (offsetting the related cash positions). We include the underlying investments supporting our assumed funds withheld and modco agreements in our invested assets calculation in order to match the assets with the income received. We believe the adjustments for reinsurance provide a view of the assets for which we have economic exposure. Our invested assets are averaged over the number of quarters in the relevant period to compute our net investment earned rate for such period.
Reserve Liabilities
In managing our business we also analyze reserve liabilities, which does not correspond to total liabilities as disclosed in our consolidated financial statements and notes thereto. Reserve liabilities represents our policyholder liability obligations net of reinsurance. Reserve liabilitiesreinsurance and is used to analyze the costs of our liabilities. Reserve liabilities includes (a) the interest sensitive contract liabilities, (b) future policy benefits, (c) dividends payable to policyholders, and (d) other policy claims and benefits, offset by reinsurance recoverables,recoverable, excluding policy loans ceded. Reserve liabilities is net of the ceded liabilities to third-party reinsurers as the costs of the liabilities are passed to such reinsurers and therefore we have no net economic exposure to such liabilities, assuming our reinsurance counterparties perform under our agreements. The majority of our ceded reinsurance is a result of reinsuring large blocks of life business following acquisitions. For such transactions, GAAP requires the ceded liabilities and related reinsurance recoverables to continue to be recorded in our consolidated financial statements despite the transfer of economic risk to the counterparty in connection with the reinsurance transaction.
Sales
Sales statistics do not correspond to revenues under GAAP, but are used as relevant measures of understandingto understand our business performance.performance as it relates to deposits generated during a specific period of time. Our sales statistics include deposits for fixed rate annuities and FIAs and align with the LIMRA definition of all money paid into an individual annuity, including money paid into new contracts with initial purchase occurring in the specified period and existing contracts with initial purchase occurring prior to the specified period (excluding internal transfers).
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Results of Operations
The following summarizes the consolidated results of operations:
| | | | Three months ended March 31, | Three months ended March 31, |
| (In millions, except percentages) | 2017 | | 2016 | 2018 | | 2017 |
| Revenues | $ | 1,619 |
| | $ | 722 |
| $ | 1,011 |
| | $ | 1,619 |
|
| Benefits and expenses | 1,224 |
| | 634 |
| 684 |
| | 1,213 |
|
| Income before income taxes | 395 |
| | 88 |
| 327 |
| | 406 |
|
| Income tax expense (benefit) | 22 |
| | 1 |
| 59 |
| | 22 |
|
| Net income | 373 |
| | 87 |
| $ | 268 |
| | $ | 384 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | — |
| |
| Net income available to AHL shareholders | $ | 373 |
| | $ | 87 |
| |
| | | | | | | |
| Operating income, net of tax by segment | | | | |
| Adjusted operating income by segment | | | | |
| Retirement Services | $ | 267 |
| | $ | 197 |
| $ | 235 |
| | $ | 275 |
|
| Corporate and Other | (9 | ) | | (45 | ) | 2 |
| | (9 | ) |
| Operating income, net of tax | 258 |
| | 152 |
| |
| Adjusted operating income | | 237 |
| | 266 |
|
| Non-operating adjustments | | | | | | |
| Realized gains (losses) on sale of AFS securities | 11 |
| | 8 |
| 17 |
| | 11 |
|
| Unrealized, impairments, and other investment gains (losses) | 3 |
| | (25 | ) | 6 |
| | 3 |
|
| Assumed modco and funds withheld reinsurance embedded derivatives | 68 |
| | (3 | ) | (78 | ) | | 68 |
|
| Offsets to investment gains (losses) | (25 | ) | | 1 |
| 22 |
| | (25 | ) |
| Investment gains (losses), net of offsets | 57 |
| | (19 | ) | (33 | ) | | 57 |
|
| Change in fair values of derivatives and embedded derivatives – FIAs, net of offsets | 94 |
| | (69 | ) | 95 |
| | 94 |
|
| Integration, restructuring and other non-operating expenses | (9 | ) | | (1 | ) | (8 | ) | | (9 | ) |
| Stock compensation expense | (13 | ) | | 15 |
| (3 | ) | | (10 | ) |
| Income tax (expense) benefit – non-operating | (14 | ) | | 9 |
| (20 | ) | | (14 | ) |
| Total non-operating adjustments | 115 |
| | (65 | ) | 31 |
| | 118 |
|
| Net income available to AHL shareholders | $ | 373 |
| | $ | 87 |
| |
| Net income | | $ | 268 |
| | $ | 384 |
|
| | | | | | | |
| ROE | 20.6 | % | | 6.3 | % | 12.0 | % | | 21.3 | % |
| ROE excluding AOCI | 22.2 | % | | 6.2 | % | |
| Operating ROE excluding AOCI | 15.3 | % | | 10.8 | % | |
| Adjusted ROE | | 16.5 | % | | 20.7 | % |
| Adjusted operating ROE | | 12.1 | % | | 16.1 | % |
We operate our core business strategies out of one reportable segment, Retirement Services. In addition to Retirement Services, we report certain other operations in Corporate and Other. See Results of Operations by Segment for further detail on the results of the segments.
Three Months Ended March 31, 20172018 Compared to the Three Months Ended March 31, 20162017
In this section, references to 2018 refer to the three months ended March 31, 2018 and references to 2017 refer to the three months ended March 31, 2017 and references to 2016 refer to the three months ended March 31, 2016.2017.
Net Income Available to AHL Shareholders
Net income available to AHL shareholders increaseddecreased by $286$116 million, or 329%30%, to $373$268 million in 20172018 from $87$384 million in 2016.2017. ROE and adjusted ROE excluding AOCI increaseddecreased to 20.6%12.0% and 22.2%16.5%, respectively, from 6.3%21.3% and 6.2%20.7% in 2016,2017, respectively. The increasedecrease in net income available to AHL shareholders was driven by a $106$29 million increasedecrease in adjusted operating income net of tax, a favorable netand an unfavorable change in FIA derivativesinvestment gain and a favorable change inlosses related to the assumed reinsurance embedded derivatives.derivative. The net change in FIA derivatives wasthe assumed reinsurance embedded derivative impacts were unfavorable primarily driven by the performance of the equity indices to which our FIA policies are linked and favorable changesincrease in discountU.S. treasury rates compared to prior year. The change in assumed reinsurance embedded derivatives was driven by credit spreadsspread tightening in 2017.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Adjusted Operating Income Net of Tax
OperatingAdjusted operating income net of tax increaseddecreased by $106$29 million, or 70%11%, to $258$237 million in 20172018 from $152$266 million in 2016. Operating ROE excluding AOCI was 15.3%, up from 10.8% in the prior period. Adjusted operating ROE was 12.1%, down from 16.1% in 2017. The increasedecrease in adjusted operating income net of tax was primarily driven by a stronghigher other liability costs, an increase in netcost of crediting, and higher income tax expense partially offset by an increase in investment earningsincome. Other liability costs increased primarily due to higher fixed income and other investment income and higher alternative investment income as well as favorable rider reserves and DAC amortization duerelated to strongunfavorable equity market performance partially offset by higher cost of crediting. The increase in fixed income and other investment income was primarily duecompared to 2017, as well as growth in our Retirement Services invested assetsthe deferred annuity block of $5.8 billion, higher interest rates and proceeds from a bond previously written down. The increase in alternative investment income was due to strength across the alternative portfolio. In 2016, fixed income and other investment income benefited from $45 million of bond call income from a large redemption partially offset by lower alternative investment income driven by lower credit fund income due to credit spreads widening and a decline in market value of public equity positions in one of our funds.business. Cost of crediting was higher by $20 million due to growth in our deferred annuity block of business which was partially offset by recent rate actions on business that renewed in 2017, which reduced the crediting rate from the prior period. The increase in investment income was primarily due to growth in our Retirement Services invested assets of $8.9 billion over 2017, increased floating rate investment income due to higher short-term interest rates and lower option costs. Other liability costs werestrong performance in line with prior year having benefited by approximately $40 million of rider reserve changes and favorable DAC amortizationalternative investments. The increase in alternative investment income was primarily driven by strong equity market performancehigher income in 2017 compared to 2016 offset by growth in the blockone of business.our hedge funds.
Our consolidated net investment earned rate was 4.60% in 2018, an increase from 4.48% in 2017, an increase from 4.03% in 2016, primarily attributed to a strong performance from our alternative investment portfolio, and an increase in our fixedfloating rate investment income and other investment portfolios.the deconsolidation of our former German subsidiaries. Our alternative investment net investment earned rate was 10.38%, an increase from 8.06% in 2017, an increase from (0.37)% in 2016, primarily attributedattributable to lower income in 2016 reflecting credit spread widening as well as a decline in market value of public equity positions in one of our funds.higher hedge fund income.
Revenues
Total revenue increaseddecreased by $897$608 million to $1.0 billion in 2018 from $1.6 billion in 2017 from $722 million in 2016.2017. The increasedecrease was driven by favorableunfavorable changes in investment related gains and losses, partially offset by an increase in premiums and higher net investment income and a favorable change in VIE investment related gains and losses.income.
The change in investmentInvestment related gains and losses increaseddecreased by $764$918 million to $(236) million in 2018 from $682 million in 2017 from $(82) million in 2016,the prior period, primarily due to the change in fair value of FIA hedging derivatives, and the change in assumed reinsurance embedded derivatives.derivatives and the unfavorable change in unrealized gains and losses on trading securities. The change in fair value of FIA hedging derivatives increaseddecreased by $637 $665 million driven driven by the performance of the indices upon which our call options are based. The majority of our call options are based on the S&P 500 index which experienceda 5.5% increase1.2% decrease in 2017,2018, compared to an 0.8%a 5.5% increase in 20162017. The assumed reinsurance embedded derivatives are based on thedecreased by $177 million driven by a change in the fair value of the underlying investments held in modco and funds withheld portfolios (seeNote 3 – Derivative Instrumentsassets related to the condensed consolidated financial statements) which increased by $90 millionincrease in U.S. treasury rates as a result of $93 million of net investment income adjustment duringwell as the three months ended March 31, 2017, primarily due toprior year benefiting from credit spreads tightening in 2017 compared to credit spreads widening in 2016tightening. The . The change in unrealized gains and losses on trading securities was comprised of an unfavorable decrease in AmerUs Closed Block assets of $39$64 million related to higher unrealized gainslosses in 2016the first quarter of 2018 due to the decreaseincrease in U.S. treasury rates rates.partially offset
Premiums increased by $30$226 million of gains related to unit-linked investments attributed to a decrease$278 million in rates.2018 from $52 million in the prior period, driven by PRT premiums from the first quarter 2018.
Net investment income increased by $94$69 million to $855 million in 2018 from $786 million in 2017, from $692 million in 2016, primarily driven by a strongan increase in fixed income and other investment income and an increase in alternative investment income. The increase in fixed income and other investment income was driven by earnings from growth in our investment portfolio attributed to a strong increase in deposits over the prior twelve months $14 millionand higher short-term interest rates resulting in higher floating rate investment income, partially offset by the deconsolidation of our former German subsidiaries and the prior year benefiting from proceeds fromon the recovery of a bond previously written down and higher income on floating rate securities related to an increase in interest rates, partially offset by lower bond call and mortgage prepayment income of $39 million related to a large redemption in 2016 of $45 million.down. The increase in alternative investment income was primarily driven by higher credit fund income due to credit spread tightening in 2017 compared to credit spreads widening in 2016.
The change in VIE investment related gains and losses increased by $24 million to $1 million in 2017 from $(23) million in 2016, primarily driven by a decline in market value of public equity positionshigher income in one of our hedge funds, in 2016.partially offset by lower credit fund income.
Benefits and Expenses
Total benefits and expenses increaseddecreased by $590$529 million to $684 million in 2018 from $1.2 billion in 2017 from $634 million in 2016.2017. The increasedecrease was driven by an unfavorablea favorable change in interest sensitive contract benefits, an increasea decrease in dividends payable to policyholders, a decrease in DAC, DSI and VOBA amortization and higherlower policy and other operating expenses.expenses, partially offset by an increase in future policy and other policy benefits.
Interest sensitive contract benefits increaseddecreased by $443$673 million to $696$19 million in 20172018 from $253$692 million in 2016,2017, primarily due to the change in FIA fair value embedded derivatives and higher interest credited to policyholders related to strong growth in deposits.derivatives. The change in FIA fair value embedded derivatives increaseddecreased by $398$667 million primarily driven by the performance of the equity indices to which our FIA policies are linked, primarily the S&P 500 index, which experienced a 1.2% decrease in 2018, compared to a 5.5% increase in 2017, compared to a 0.8% increase in 2016 as well as2017. Additionally, the FIA fair value embedded derivatives were impacted by a favorable change in discount rates used in our embedded derivative calculations as the current quarter experienced an increase in discount rates compared to 2017, which experienced a decrease in 2016 discount rates was larger thanrates.
Dividends to policyholders decreased by $19 million to $13 million in 2018 from $32 million in the slight decrease in 2017.prior year, primarily attributed to the deconsolidation of our former German subsidiaries.
DAC, DSI and VOBA amortization increaseddecreased by $94$13 million to $126$109 million in 20172018 from $32$122 million in 2016,the prior period, primarily due to the favorable net change in FIA derivatives, the favorable change inunfavorable investment related gains and losses, andpartially offset by growth in the DAC asset balancesbalance related to block growth offset by the strongand unfavorable impacts related to unfavorable equity market performance in 2017 compared to 2016.2017.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Policy and other operating expenses increased by $52 million to $156 million in 2017 from $104 million in 2016, primarily attributed to $28 million increase in stock compensation expense reflecting a benefit in 2016 attributed to the decline in share price of our peer subgroup used to value our common share price. The remaining increase was primarily attributed to growing our business and expanding our distribution channels.
Future policy and other policy benefits decreasedincreased by $10$187 million to $401 million in 2018 from $214 million in 2017, from $224 million in 2016, primarily attributable to the increase in policyholder obligations from the PRT transaction in the first quarter 2018 as well as an unfavorable change in the rider reserves, partially offset by a decrease in the change in AmerUs Closed Block fair value liability partially offset by anand $52 million related to the deconsolidation of our former German subsidiaries. The unfavorable change in rider reserves of $32 million was primarily driven by growth in the block of business and unfavorable impacts related to the equity market performance compared to 2017 resulting in decreased index credits to policyholder accounts, which increased the amount needed to fund the rider reserves.reserve. The favorable change in the AmerUs Closed Block fair value liability of $59$78 million was primarily driven by the increase in unrealized gainslosses on the underlying investments driven by higher unrealized gainslosses in 20162018 due to the decreaseincrease in U.S. treasury rates. We have elected the fair value option to value the AmerUs Closed Block whereby the fair value of liabilities is the sum of the fair value of the assets plus our cost of capital in the AmerUs Closed Block. The unfavorable change in rider reserves of $41 million was primarily driven by the growth in the block of business and an increase related to the net change in FIA derivatives partially offset by the strong equity market performance in 2017 compared to 2016 resulting in increased index credits to policyholder accounts, which lowered the amount needed to fund the rider reserve.
Taxes
Income tax expense increased by $21$37 million to $59 million in 2018 from $22 million in 20172017. With the enactment of the Tax Act, the U.S. statutory tax rate declined to 21% from $1 million35%; however, the BEAT was established, which may subject payments to our non-U.S. reinsurance subsidiaries to a tax of 5%, which would increase to 10% in 2016.2019. The increase was primarily driven byincome tax expense for 2018 assumes that we have taken steps so that the increase inBEAT is not applicable to such payments and thereby assumes that more income is subject to U.S. income taxes of $54 million, or approximately $19 million of tax based on a 35% U.S. statutory rate.tax.
Our effective tax rates were 6%18% in 20172018 and 1%5% in 2016.2017. Our effective tax rates may vary year-to-yearperiod to period depending upon the relationship of income and loss subject to tax compared to consolidated income and loss before income taxes.
Results of Operations by Segment
The following summarizes our adjusted operating income net of tax by segment:
| | | | Three months ended March 31, | Three months ended March 31, |
| (In millions, except percentages) | 2017 | | 2016 | 2018 | | 2017 |
| Operating income, net of tax by segment | | | | |
| Adjusted operating income by segment | | | | |
| Retirement Services | $ | 267 |
| | $ | 197 |
| $ | 235 |
| | $ | 275 |
|
| Corporate and Other | (9 | ) | | (45 | ) | 2 |
| | (9 | ) |
| Operating income, net of tax | $ | 258 |
| | $ | 152 |
| |
| Adjusted operating income | | $ | 237 |
| | $ | 266 |
|
| | | | | | | |
| Retirement Services operating ROE excluding AOCI | 22.8 | % | | 19.7 | % | |
| Retirement Services adjusted operating ROE | | 17.3 | % | | 24.1 | % |
Retirement Services
Retirement Services is comprised of our United States and Bermuda operations which issue and reinsure retirement savings products and institutional products. Retirement Services has retail operations, which provide annuity retirement solutions to our policyholders. Retirement Services also has reinsurance operations, which reinsure MYGAs, FIAs, traditional one year guarantee fixed deferred annuities, immediate annuities and institutional products from our reinsurance partners. In addition, our institutional operations, including funding agreements and PRT obligations, are included in our Retirement Services segment.
Three Months Ended March 31, 20172018 Compared to the Three Months Ended March 31, 20162017
Adjusted Operating Income Net of Tax
OperatingAdjusted operating income net of tax increaseddecreased by $70$40 million, or 36%15%, to $267$235 million in 2017,2018, from $197$275 million in 2016. Operating2017. Adjusted operating ROE excluding AOCI was 22.8%17.3%, updown from 19.7%24.1% in the prior period. The increasedecrease in adjusted operating income net of tax was primarily driven by an increase in net investmentother liability costs, cost of crediting and income from strong fixed income and other investment income and strong alternative investment income as well as favorable rider reserves and DAC amortization due to strong equity market performancetax expense, partially offset by higher cost of crediting. The increase in net investment income wasearnings.
Net investment earnings increased $86 million driven mainlyprimarily by earnings from growth in invested assets of $5.8$8.9 billion attributed to a strong increase in deposits over the prior twelve months and increased floating rate investment income of $21 million due to higher short-term interest rates, partially offset by the prior year benefiting $14 million from proceeds fromon the recovery of a bond previously written down and strength$10 million related to an elevated level of cash from sizable deposits in the alternatives portfolio. In 2016, fixed income and other investment income benefited from $45fourth quarter of 2017.
Other liability costs increased $79 million driven by unfavorable impacts related to equity market performance resulting in an unfavorable $14 million impact compared to approximately $40 million favorable impact in the prior year, as well as growth in our deferred annuity block of bond call income from a large redemptionbusiness, partially offset by lower alternative investment income driven by lower credit fund income due to credit spreads widening. excise taxes in 2018.
Cost of crediting was higherincreased $12 million driven by $20 million due to growth in our deferred annuity block of business which was partially offset by recent rate actions and lower option costs. Other liability costs were in line with prior year having benefited by approximately $40 million of rider reserve changes and favorable DAC amortization driven by strong equity market performanceon business that renewed in 2017, compared to 2016 offset by growth inwhich reduced the blockcrediting rate from the prior period.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Net investment income increased $89 million primarily driven by a $55 million increase in fixed income and other investment income attributed earnings from growth in invested assets of $5.8 billion attributed to a strong increase in deposits over the prior twelve months, $14 million of proceeds on the recovery of a bond previously written down and higher income on floating rate securities related to an increase in interest rates, partially offset by lower bond call and mortgage prepayment income of $39 million related to a large redemption in 2016 of $45 million. The increase in alternative investment income was primarily driven by higher credit fund income due to credit spread tightening in 2017 compared to credit spreads widening in 2016.
Investment Margin on Deferred Annuities
| | | | Three months ended March 31, | Three months ended March 31, |
| | 2017 | | 2016 | 2018 | | 2017 |
| Net investment earned rate | 4.76 | % | | 4.59 | % | 4.63 | % | | 4.76 | % |
| Cost of crediting | 1.91 | % | | 1.96 | % | 1.87 | % | | 1.91 | % |
| Investment margin on deferred annuities | 2.85 | % | | 2.63 | % | 2.76 | % | | 2.85 | % |
Investment margin on deferred annuities increaseddecreased by 229 basis points to 2.76% in 2018, from 2.85% in 2017, from 2.63% in 2016.2017. The increasedecrease in the investment margin on deferred annuities was driven by the increasedecrease in net investment earned rate of 1713 basis points, showing strength in our investment portfolio, andpartially offset by a favorable decrease in cost of crediting of 54 basis points.
Net investment earned rate increaseddecreased due to the increasedecrease in alternativefixed and other net investment incomeearned rate. The fixed and other net investment earned rate decreased in 2018, to 4.32% from 4.52% in 2017 primarily attributed to 2017 benefiting from proceeds from a bond previously written down and an elevated level of cash from sizable deposits in the fourth quarter of 2017, partially offset by a slight decrease in fixed income and otherhigher floating rate investment income earned rate.in the quarter. The alternative investments net investments earned rate increased in 2018 to 10.58%12.34% from 10.59% in 2017, reflecting 2017, from 5.79% in 2016 driven by lowerhigher income in 2016 reflecting credit spread widening. The fixed income and other net investment earned rate decreased slightly in 2017, to 4.52% from 4.54% in 2016 primarily drivenone of our hedge funds, partially offset by lower bond call and mortgage prepaymentcredit fund income related to a large redemption of 30 basis points in 2016 partially offset by the proceeds from a bond previously written down and higher income on floating rate securities related to an increase in interest rates. The net investment earned rates continue to reflect impacts of holding approximately 29% of total invested assets in floating rate investments and 1% of invested assets in cash holdings to opportunistically capitalize on market dislocations..
Cost of crediting on deferred annuities decreased by 54 basis points to 1.91%1.87% in 20172018, from 1.96%1.91% in 20162017. The decrease in cost of crediting was driven by recent rate actions and lower option costs.on business that renewed in 2017. We continue to focus on pricing discipline, managing interest rates credited to policyholders and managing the cost of options to fund the annual index credits on our FIA products.
Corporate and Other
Corporate and Other includes certain other operations related to our corporate activities, and our German operations, which is primarily comprised of participating long-duration savings products. In addition to our German operations, included in Corporate and Other areincluding corporate allocated expenses, merger and acquisition costs, debt costs, certain integration and restructuring costs, certain stock-based compensation and intersegment eliminations. In Corporate and Other, we also hold capital in excess of the level of capital we hold in Retirement Services to support our operating strategy. Prior to the deconsolidation of Athora on January 1, 2018, Corporate and Other included our German operations, which were primarily comprised of participating long-duration savings products.
Adjusted Operating Income (Loss), Net of Tax
OperatingAdjusted operating income (loss), net of tax decreased increased by $36$11 million or 80%, to $2 million in 2018, from $(9) million in 2017, from $(45) million2017. The increase in 2016. The decrease inadjusted operating (loss), net of taxincome, excluding Germany, was mainly driven by anhigher fixed and other investment income primarily related to the increase in excess capital and higher alternative investment income, attributed to lower credit fund income in 2016 due to credit spread widening and a decline in market value of public equity positions in one of our funds in 2016. This was partially offset by debt costs from our inaugural debt issuance in January. Our former German operations, which deconsolidated on January 1, 2018, had an $11operating loss of $3 million unfavorable change in fair value within one of our funds in 2017. Results in the quarter for our German business were in line with those in the prior year.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Investment Portfolio
We had consolidated investments, including related parties, of $75.1$80.3 billion and $72.4$84.4 billion as of March 31, 20172018 and December 31, 2016,2017, respectively. Our investment strategy seeks to achieve sustainable risk-adjusted returns through disciplined managing of investment characteristics with our long-duration liabilities and the diversification of risk. The investment strategies utilized by our investment managers focus primarily on a buy and hold asset allocation strategy that may be adjusted periodically in response to changing market conditions and the nature of our liability profile. The majority of our investment portfolio excluding investments of our German subsidiary, areis managed by AAM, an indirect subsidiary of Apollo founded for the express purpose of managing Athene’sour portfolio. AAM provides a full suite of services for our investment portfolio, including direct investment management, asset allocation, mergers and acquisition asset diligence, and certain operational support services, including investment compliance, tax, legal and risk management support. Our relationship with AAM and Apollo allows us to take advantage of our generally illiquid liability profile by identifying investment opportunities with an emphasis on earning incremental yield by taking liquidity and complexity risk rather than assuming solely credit risk. The deep experience of the AAM investment team and Apollo’s credit portfolio managers assistassists us in sourcing and underwriting complex asset classes. AAM has selected a diverse array of corporate bonds and more structured, but highly rated asset classes. We also maintain holdings in floating rate and less rate-sensitive instruments, including CLOs, non-agency RMBS and various types of structured products. In addition to our fixed income portfolio, we opportunistically allocate 5-10% of our portfolio to alternative investments where we primarily focus on fixed income-like, cash flow-based investments.
Our invested assets, which are those which directly back our policyholder liabilities as well as surplus assets (as previously discussed in Key Operating and Non-GAAP Measures), were $73.6$78.7 billion and $71.8$82.3 billion as of March 31, 20172018 and December 31, 2016,2017, respectively. AAM manages, directly and indirectly, approximately $67.4$77.1 billion and AAME and affiliates sub-advises approximately $4.9 billion,of investments, which in the aggregate constitute the vast majority of our investment portfolio as of March 31, 2017,2018, comprising a diversified portfolio of fixed maturity and other securities. Through our relationship with Apollo, AAM has identified unique investment opportunities for us. AAM’s knowledge of our funding structure and regulatory requirements allows it to design customized strategies and investments for our portfolio.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our asset portfolio is managed within the limits and constraints set forth in our Investment and Credit Risk Policy. Under this policy, we set limits on investments in our portfolio by asset class, such as corporate bonds, emerging markets securities, municipal bonds, non-agency RMBS, CMBS, CLOs, commercial mortgage whole loans and mezzanine loans and investment funds. We also set credit risk limits for exposure to a single issuer that vary based on the issuer’s ratings. In addition, our investment portfolio is constrained by its scenario-based capital ratio limit and its stressed liquidity limit.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following table presents the carrying values of our total investments and investments in related parties:
| | | | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| (In millions, except percentages) | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total |
| AFS securities, at fair value | | | | | | | | |
| Fixed maturity securities | $ | 54,225 |
| | 72.2 | % | | $ | 52,033 |
| | 71.8 | % | |
| Fixed maturity securities, at fair value | | | | | | | | |
| AFS securities | | $ | 58,575 |
| | 73.1 | % | | $ | 61,012 |
| | 72.3 | % |
| Trading securities | | 2,088 |
| | 2.6 | % | | 2,196 |
| | 2.6 | % |
| Equity securities | 422 |
| | 0.6 | % | | 353 |
| | 0.5 | % | 160 |
| | 0.2 | % | | 790 |
| | 0.9 | % |
| Trading securities, at fair value | 2,595 |
| | 3.5 | % | | 2,581 |
| | 3.6 | % | |
| Mortgage loans, net of allowances | 5,453 |
| | 7.2 | % | | 5,470 |
| | 7.5 | % | 6,139 |
| | 7.7 | % | | 6,233 |
| | 7.4 | % |
| Investment funds | 689 |
| | 0.9 | % | | 689 |
| | 1.0 | % | 647 |
| | 0.8 | % | | 699 |
| | 0.8 | % |
| Policy loans | 579 |
| | 0.8 | % | | 602 |
| | 0.8 | % | 510 |
| | 0.6 | % | | 530 |
| | 0.6 | % |
| Funds withheld at interest | 6,593 |
| | 8.8 | % | | 6,538 |
| | 9.0 | % | 7,093 |
| | 8.8 | % | | 7,085 |
| | 8.4 | % |
| Derivative assets | 1,708 |
| | 2.3 | % | | 1,370 |
| | 1.9 | % | 2,031 |
| | 2.5 | % | | 2,551 |
| | 3.0 | % |
| Real estate | 553 |
| | 0.7 | % | | 542 |
| | 0.7 | % | — |
| | — | % | | 624 |
| | 0.7 | % |
| Short-term investments | 166 |
| | 0.2 | % | | 189 |
| | 0.3 | % | 235 |
| | 0.3 | % | | 201 |
| | 0.2 | % |
| Other investments | 82 |
| | 0.1 | % | | 81 |
| | 0.1 | % | 113 |
| | 0.1 | % | | 133 |
| | 0.2 | % |
| Total investments | 73,065 |
| | 97.3 | % | | 70,448 |
| | 97.2 | % | 77,591 |
| | 96.7 | % | | 82,054 |
| | 97.1 | % |
| Investment in related parties | | | | | | | | | | | | | | |
| AFS securities at fair value | | | | | | | | |
| Fixed maturity securities | 361 |
| | 0.5 | % | | 335 |
| | 0.5 | % | |
| Equity securities | — |
| | — | % | | 20 |
| | — | % | |
| Trading securities, at fair value | 169 |
| | 0.2 | % | | 195 |
| | 0.3 | % | |
| Fixed maturity securities, at fair value | | | | | | | | |
| AFS securities | | 505 |
| | 0.6 | % | | 406 |
| | 0.5 | % |
| Trading securities | | 305 |
| | 0.4 | % | | 307 |
| | 0.4 | % |
| Investment funds | 1,276 |
| | 1.7 | % | | 1,198 |
| | 1.7 | % | 1,499 |
| | 1.9 | % | | 1,310 |
| | 1.6 | % |
| Short-term investments | | 123 |
| | 0.1 | % | | 52 |
| | 0.1 | % |
| Other investments | 238 |
| | 0.3 | % | | 237 |
| | 0.3 | % | 238 |
| | 0.3 | % | | 238 |
| | 0.3 | % |
| Short-term investments | 20 |
| | — | % | | — |
| | — | % | |
| Total related party investments | 2,064 |
| | 2.7 | % | | 1,985 |
| | 2.8 | % | 2,670 |
| | 3.3 | % | | 2,313 |
| | 2.9 | % |
| Total investments, including related party | $ | 75,129 |
| | 100.0 | % | | $ | 72,433 |
| | 100.0 | % | $ | 80,261 |
| | 100.0 | % | | $ | 84,367 |
| | 100.0 | % |
The increasedecrease in our total investments, including related parties,party, as of March 31, 20172018 of $2.7$4.1 billion compared to December 31, 20162017 was mainly driven by the deconsolidation of $5.9 billion related to our former German operations, the change in unrealized gains and losses on AFS securities including related parties, issuances of funding agreement backed notes, anand a decrease in derivative assets. Unrealized gains and losses on AFS securities decreased $1.3 billion attributed to the increase in derivativesU.S. treasury rates and reinvestment of earnings. Unrealized gains on investments were $516credit spreads widening. Derivative assets decreased by $520 million primarily attributed to credit spreads tightening during 2017. Derivative assets increased by $338 million primarily attributed to an increasethe decrease in equity markets during 2017 as the S&P 500 index increased decreased by 5.5%.1.2% in the quarter. These were partially offset by the deployment of cash, strong growth in deposits of $2.1 billion less liability outflows of $1.8 billion and the reinvestment of earnings.
Our investment portfolio consists largely of high quality fixed maturity securities, loans and short-term investments, as well as additional opportunistic holdings in investment funds and other instruments, including a small amount of equity holdings. Fixed maturity securities and loans include publicly issued corporate bonds, government and other sovereign bonds, privately placed corporate bonds and loans, mortgage loans, CMBS, RMBS, CLOs, and other asset-backed securities (ABS).
While the substantial majority of our investment portfolio has been allocated to corporate bonds and structured credit products, a key component of our investment strategy is the opportunistic acquisition of investment funds with attractive risk and return profiles. Our investment fund portfolio consists of funds that employ various strategies including mortgagereal estate and other real estateasset funds, credit funds, private equity funds and hedge funds. We currently targethave a strong preference for assets that have some or all of the following characteristics, among others: (1) investments that are fixed-income-likeconstitute a direct investment or income producing and that have embedded downside protection. We also preferan investment funds that havein a fund with a high degree of co-investment, haveco-investment; (2) investments with credit- or debt-like characteristics (for example, a statedstipulated maturity valueand par value), or havealternatively, investments with reduced volatility versuswhen compared to pure equity. A majority of ourequity; or (3) investments in traditional private equity investments and hedge funds are a result of the acquisition of Aviva USA, which had existing private equity and hedge fund investment portfolios at the time of acquisition.that have less downside risk. We also acquired certain investment funds from AAA Investor (which are classified as private equity investments and consolidated VIEs) as a one-time capital contribution by our largest shareholder in advance of the Aviva USA acquisition. With respect to investment fund portfolios that we receivereceived in these transactions, we actively reinvest these investments in our preferred credit-oriented strategies over time as we liquidate these holdings.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We hold derivatives for economic hedging purposes to reduce our exposure to the cash flow variability of assets and liabilities, equity market risk, interest rate risk, credit risk, and to a lesser extent, foreign exchange risk. Our primary use of derivative instruments relates to providing the income needed to fund the annual indexed credits on our FIA products. We primarily use fixed indexed options primarily to economically hedge FIA products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specific market index.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
With respect to derivative positions, we transact with highly rated counterparties, and do not expect the counterparties to fail to meet their obligations under the contracts. We generally use industry standard agreements and annexes with bilateral collateral provisions to further reduce counterparty credit exposure.
AFS Securities
We invest with the intent to hold investments to maturity. In selecting investments we attempt to source investments that match our future cash flow needs. However, we may sell any of our investments in advance of maturity in order to timely satisfy our liabilities as they become due or in order to respond to a change in the credit profile or other characteristics of the particular investment.
AFS fixed maturity securities are carried at fair value on our condensed consolidated balance sheets. Changes in fair value for our AFS portfolio, net of related DAC, DSI and VOBA amortization and the change in rider reserves, are charged or credited to other comprehensive income, net of tax. Declines in fair value that are other than temporary are recorded as realized losses in the condensed consolidated statements of income, net of any applicable non-credit component of the loss, which is recorded as an adjustment to other comprehensive income.
The distribution of our AFS securities, including related parties, by type is as follows:
| | | | March 31, 2017 | March 31, 2018 |
| (In millions, except percentages) | Cost or Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Fair Value | | Percent of Total | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Fair Value | | Percent of Total |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities | | | | | | | | | | |
| U.S. government and agencies | $ | 59 |
| | $ | 1 |
| | $ | — |
| | $ | 60 |
| | 0.1 | % | $ | 25 |
| | $ | — |
| | $ | — |
| | $ | 25 |
| | 0.0 | % |
| U.S. state, municipal, and political subdivisions | 1,016 |
| | 125 |
| | (1 | ) | | 1,140 |
| | 2.1 | % | |
| U.S. state, municipal and political subdivisions | | 995 |
| | 140 |
| | (3 | ) | | 1,132 |
| | 1.9 | % |
| Foreign governments | 1,959 |
| | 87 |
| | (15 | ) | | 2,031 |
| | 3.7 | % | 137 |
| | 2 |
| | (3 | ) | | 136 |
| | 0.2 | % |
| Corporate | 30,806 |
| | 1,021 |
| | (260 | ) | | 31,567 |
| | 57.3 | % | 35,489 |
| | 875 |
| | (497 | ) | | 35,867 |
| | 60.7 | % |
| CLO | 5,039 |
| | 34 |
| | (52 | ) | | 5,021 |
| | 9.1 | % | 5,617 |
| | 36 |
| | (11 | ) | | 5,642 |
| | 9.5 | % |
| ABS | 3,279 |
| | 34 |
| | (53 | ) | | 3,260 |
| | 5.9 | % | 4,595 |
| | 44 |
| | (32 | ) | | 4,607 |
| | 7.8 | % |
| CMBS | 1,835 |
| | 46 |
| | (21 | ) | | 1,860 |
| | 3.4 | % | 1,981 |
| | 32 |
| | (34 | ) | | 1,979 |
| | 3.3 | % |
| RMBS | 8,857 |
| | 458 |
| | (29 | ) | | 9,286 |
| | 16.9 | % | 8,532 |
| | 666 |
| | (11 | ) | | 9,187 |
| | 15.7 | % |
| Total fixed maturity securities | 52,850 |
| | 1,806 |
| | (431 | ) | | 54,225 |
| | 98.5 | % | |
| Equity securities | 381 |
| | 42 |
| | (1 | ) | | 422 |
| | 0.8 | % | |
| Total AFS securities | 53,231 |
| | 1,848 |
| | (432 | ) | | 54,647 |
| | 99.3 | % | 57,371 |
| | 1,795 |
| | (591 | ) | | 58,575 |
| | 99.1 | % |
| Fixed maturity securities – related parties | | | | | | | | | | |
| AFS securities – related party | | | | | | | | | | |
| CLO | 304 |
| | 3 |
| | (1 | ) | | 306 |
| | 0.6 | % | 456 |
| | 4 |
| | — |
| | 460 |
| | 0.8 | % |
| ABS | 55 |
| | — |
| | — |
| | 55 |
| | 0.1 | % | 45 |
| | — |
| | — |
| | 45 |
| | 0.1 | % |
| Total fixed maturity securities – related party | 359 |
| | 3 |
| | (1 | ) | | 361 |
| | 0.7 | % | |
| Equity securities – related party | — |
| | — |
| | — |
| | — |
| | — | % | |
| Total AFS securities – related parties | 359 |
| | 3 |
| | (1 | ) | | 361 |
| | 0.7 | % | |
| Total AFS securities, including related parties | $ | 53,590 |
| | $ | 1,851 |
| | $ | (433 | ) | | $ | 55,008 |
| | 100.0 | % | |
| Total AFS securities – related party | | 501 |
| | 4 |
| | — |
| | 505 |
| | 0.9 | % |
| Total AFS securities, including related party | | $ | 57,872 |
| | $ | 1,799 |
| | $ | (591 | ) | | $ | 59,080 |
| | 100.0 | % |
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
| | | | December 31, 2016 | December 31, 2017 |
| (In millions, except percentages) | Cost or Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Fair Value | | Percent of Total | Cost or Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Fair Value | | Percent of Total |
| Fixed maturity securities | | | | | | | | | | | | | | | | | | |
| U.S. government and agencies | $ | 59 |
| | $ | 1 |
| | $ | — |
| | $ | 60 |
| | 0.1 | % | $ | 63 |
| | $ | 1 |
| | $ | (2 | ) | | $ | 62 |
| | 0.1 | % |
| U.S. state, municipal, and political subdivisions | 1,024 |
| | 117 |
| | (1 | ) | | 1,140 |
| | 2.2 | % | |
| U.S. state, municipal and political subdivisions | | 996 |
| | 171 |
| | (2 | ) | | 1,165 |
| | 1.9 | % |
| Foreign governments | 2,098 |
| | 143 |
| | (6 | ) | | 2,235 |
| | 4.2 | % | 2,575 |
| | 116 |
| | (8 | ) | | 2,683 |
| | 4.3 | % |
| Corporate | 29,433 |
| | 901 |
| | (314 | ) | | 30,020 |
| | 57.0 | % | 35,173 |
| | 1,658 |
| | (171 | ) | | 36,660 |
| | 59.5 | % |
| CLO | 4,950 |
| | 14 |
| | (142 | ) | | 4,822 |
| | 9.1 | % | 5,039 |
| | 53 |
| | (8 | ) | | 5,084 |
| | 8.2 | % |
| ABS | 2,980 |
| | 25 |
| | (69 | ) | | 2,936 |
| | 5.6 | % | 3,945 |
| | 53 |
| | (27 | ) | | 3,971 |
| | 6.4 | % |
| CMBS | 1,835 |
| | 38 |
| | (26 | ) | | 1,847 |
| | 3.5 | % | 1,994 |
| | 48 |
| | (21 | ) | | 2,021 |
| | 3.3 | % |
| RMBS | 8,731 |
| | 313 |
| | (71 | ) | | 8,973 |
| | 17.0 | % | 8,721 |
| | 652 |
| | (7 | ) | | 9,366 |
| | 15.2 | % |
| Total fixed maturity securities | 51,110 |
| | 1,552 |
| | (629 | ) | | 52,033 |
| | 98.7 | % | 58,506 |
| | 2,752 |
| | (246 | ) | | 61,012 |
| | 98.9 | % |
| Equity securities | 319 |
| | 35 |
| | (1 | ) | | 353 |
| | 0.7 | % | 271 |
| | 7 |
| | (1 | ) | | 277 |
| | 0.4 | % |
| Total AFS securities | 51,429 |
| | 1,587 |
| | (630 | ) | | 52,386 |
| | 99.4 | % | 58,777 |
| | 2,759 |
| | (247 | ) | | 61,289 |
| | 99.3 | % |
| Fixed maturity securities – related parties | | | | | | | | | | |
| Fixed maturity securities – related party | | | | | | | | | | |
| CLO | 284 |
| | 1 |
| | (6 | ) | | 279 |
| | 0.5 | % | 353 |
| | 7 |
| | — |
| | 360 |
| | 0.6 | % |
| ABS | 57 |
| | — |
| | (1 | ) | | 56 |
| | 0.1 | % | 46 |
| | — |
| | — |
| | 46 |
| | 0.1 | % |
| Total fixed maturity securities – related party | 341 |
| | 1 |
| | (7 | ) | | 335 |
| | 0.6 | % | |
| Equity securities – related party | 20 |
| | — |
| | — |
| | 20 |
| | — | % | |
| Total AFS securities - related parties | 361 |
| | 1 |
| | (7 | ) | | 355 |
| | 0.6 | % | |
| Total AFS securities, including related parties | $ | 51,790 |
| | $ | 1,588 |
| | $ | (637 | ) | | $ | 52,741 |
| | 100.0 | % | |
| Total AFS securities – related party | | 399 |
| | 7 |
| | — |
| | 406 |
| | 0.7 | % |
| Total AFS securities, including related party | | $ | 59,176 |
| | $ | 2,766 |
| | $ | (247 | ) | | $ | 61,695 |
| | 100.0 | % |
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Fixed Maturity Securities
We maintain a diversified AFS portfolio of corporate fixed maturity securities across industries and issuers, and a diversified portfolio of structured securities. The composition of our AFS fixed maturity securities, including related parties, is as follows:
| | | | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| (In millions, except percentages) | Fair Value | | Percent of Total | | Fair Value | | Percent of Total | Fair Value | | Percent of Total | | Fair Value | | Percent of Total |
| Corporate | | | | | | | | | | | | | | |
Industrial other1 | $ | 11,167 |
| | 20.5 | % | | $ | 10,645 |
| | 20.3 | % | $ | 11,533 |
| | 19.5 | % | | $ | 12,026 |
| | 19.6 | % |
| Financial | 9,724 |
| | 17.8 | % | | 9,156 |
| | 17.5 | % | 11,475 |
| | 19.4 | % | | 11,824 |
| | 19.3 | % |
| Utilities | 6,843 |
| | 12.5 | % | | 6,588 |
| | 12.6 | % | 8,400 |
| | 14.2 | % | | 8,296 |
| | 13.5 | % |
| Communication | 2,313 |
| | 4.2 | % | | 2,235 |
| | 4.3 | % | 2,447 |
| | 4.2 | % | | 2,607 |
| | 4.2 | % |
| Transportation | 1,520 |
| | 2.8 | % | | 1,396 |
| | 2.7 | % | 2,012 |
| | 3.4 | % | | 1,907 |
| | 3.1 | % |
| Total corporate | 31,567 |
| | 57.8 | % | | 30,020 |
| | 57.4 | % | 35,867 |
| | 60.7 | % | | 36,660 |
| | 59.7 | % |
| Other government-related securities | | | | | | | | | | | | | | |
| State, municipal and political subdivisions | 1,140 |
| | 2.1 | % | | 1,140 |
| | 2.2 | % | |
| U.S. state, municipal and political subdivisions | | 1,132 |
| | 1.9 | % | | 1,165 |
| | 1.9 | % |
| Foreign governments | 2,031 |
| | 3.7 | % | | 2,235 |
| | 4.3 | % | 136 |
| | 0.3 | % | | 2,683 |
| | 4.4 | % |
| U.S. treasuries | 60 |
| | 0.1 | % | | 60 |
| | 0.1 | % | |
| U.S. government and agencies | | 25 |
| | 0.0 | % | | 62 |
| | 0.1 | % |
| Total non-structured securities | 34,798 |
| | 63.7 | % | | 33,455 |
| | 64.0 | % | 37,160 |
| | 62.9 | % | | 40,570 |
| | 66.1 | % |
| Structured securities | | | | | | | | | | | | | | |
| CLO | 5,327 |
| | 9.8 | % | | 5,101 |
| | 9.7 | % | 6,102 |
| | 10.3 | % | | 5,444 |
| | 8.9 | % |
| ABS | 3,315 |
| | 6.1 | % | | 2,992 |
| | 5.7 | % | 4,652 |
| | 7.9 | % | | 4,017 |
| | 6.5 | % |
| CMBS | 1,860 |
| | 3.4 | % | | 1,847 |
| | 3.5 | % | 1,979 |
| | 3.3 | % | | 2,021 |
| | 3.3 | % |
| RMBS | | | | | | | | | | | | | | |
| Agency | 106 |
| | 0.2 | % | | 112 |
| | 0.2 | % | 81 |
| | 0.1 | % | | 87 |
| | 0.1 | % |
| Non-agency | 9,180 |
| | 16.8 | % | | 8,861 |
| | 16.9 | % | 9,106 |
| | 15.5 | % | | 9,279 |
| | 15.1 | % |
| Total structured securities | 19,788 |
| | 36.3 | % | | 18,913 |
| | 36.0 | % | 21,920 |
| | 37.1 | % | | 20,848 |
| | 33.9 | % |
| Total fixed maturity securities, including related parties | $ | 54,586 |
| | 100.0 | % | | $ | 52,368 |
| | 100.0 | % | |
| Total fixed maturity securities, including related party | | $ | 59,080 |
| | 100.0 | % | | $ | 61,418 |
| | 100.0 | % |
| | | | | | | | | | | | | | | |
1 Includes securities within various industry segments including capital goods, basic industry, consumer cyclical, consumer non-cyclical, industrial, and technology. | |
1 Includes securities within various industry segments including capital goods, basic industry, consumer cyclical, consumer non-cyclical, industrial and technology. | | 1 Includes securities within various industry segments including capital goods, basic industry, consumer cyclical, consumer non-cyclical, industrial and technology. |
The fair value of our total fixed maturity securities, including related parties, was $54.6$59.1 billion and $52.4$61.4 billion as of March 31, 20172018 and December 31, 2016,2017, respectively. The increasedecrease was mainly driven by the deconsolidation of $5.9 billion related to our former German operations and the change in unrealized gains and losses on AFS securities. Unrealized gains and losses on AFS securities including related partiesdecreased $1.3 billion attributed to the increase in U.S. treasury rates and credit spreads tightening during 2017widening. These were partially offset by the deployment of cash, strong growth in deposits of $2.1 billion less liability outflows of $1.8 billion and issuancesthe reinvestment of funding agreement backed notes.earnings.
The Securities Valuation Office (SVO) of the NAIC is responsible for the credit quality assessment and valuation of securities owned by state regulated insurance companies. Insurance companies report ownership of securities to the SVO when such securities are eligible for filing on the relevant schedule of the NAIC Financial Statement Blank. The SVO conducts credit analysis on these securities for the purpose of assigning an NAIC designation and/or unit price. Typically,With important exceptions discussed below, if a security has been rated by an NRSRO,Nationally Recognized Statistical Rating Organization (NRSRO), the SVO utilizes that rating and assigns an NAIC designation based upon the following system:
|
| | |
| NAIC designation | | NRSRO equivalent rating |
| 1 | | AAA/AA/A |
| 2 | | BBB |
| 3 | | BB |
| 4 | | B |
| 5 | | CCC |
| 6 | | CC and lower |
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The NRSRO ratings methodology is focused on the likelihood of recovery of all contractual payments, including principal at par, regardless of an investor’s carrying value. In effect, the NRSRO rating assumes that the holder is the original purchaser at par. In contrast, the SVO’s loan-backed and structured securities (LBaSS) methodology is focused on determining the risk associated with the recovery of the amortized cost of each security. In contrast,Because the NRSRO ratingsNAIC’s methodology is focused on the likelihood of recovery of all contractual payments, including principal at par regardless of entry price. The NRSRO rating assumes that the holder is the original purchaser at par whereas the modeled and non-modeled LBaSS ratings are focused on the recovery of current amortized cost. As the NAIC ratings methodologyexplicitly considers our investment and amortized cost and the likelihood of recovery of that book value as opposed to the likelihood of default of the security,our investment, we view the NAIC ratingsNAIC’s methodology as the most appropriate way to view our fixed maturity portfolio from a ratings perspectivefor purposes of evaluating credit quality since a large portion of our holdings were purchased and are carried at a significant discountdiscounts to par.
Specific to LBaSS, the SVO has developed a ratings process and provides instruction on both modeled and non-modeled LBaSS. The modeled LBaSS process is specific to the non-agency RMBS and CMBS asset classes. In order to establish ratings at the individual security level, the SVO obtains loan-level analysis of each RMBS and CMBS using a selected vendor’s proprietary financial model. The SVO ensures that the vendor has extensive internal quality-control processes in place and the SVO conducts its own quality-control checks of the selected vendor’s valuation process. The SVO has retained the services of Blackrock to model non-agency RMBS and CMBS owned by U.S. insurers for all years presented.presented herein. Blackrock provides five prices (breakpoints), based on each U.S. insurer'sinsurer’s statutory book value price, to utilize in determining the NAIC designation for each modeled LBaSS. For non-modeled LBaSS (ABS(including ABS and CLOs) with the initial ratingdesignation of NAIC 1 or NAIC 6, the ratingdesignation remains the same through the life of the security. For non-modeled LBaSS with the initial ratingdesignation of NAIC 2 through NAIC 5, the selected vendors are not utilized and the NAIC designations are set using a standardized table of breakpoints provided by the SVO for application to the insurer’s statutory book value price. The NAIC designation determines the associated level of RBC that an insurer is required to hold for modeled LBaSS owned by the insurer. In general, under both the modeled and non-modeled LBaSS processes, the larger the discount to par value, the stronger the NAIC ratingdesignation the LBaSS will have.
A summary of our AFS fixed maturity securities, including related parties, by NAIC designation (with our German operations applying NRSRO ratings to map to NAIC ratings as noted above)designations) is as follows:
| | | | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| (In millions, except percentages) | Amortized Cost | | Fair Value | | Percent of Total | | Amortized Cost | | Fair Value | | Percent of Total | Amortized Cost | | Fair Value | | Percent of Total | | Amortized Cost | | Fair Value | | Percent of Total |
| NAIC designation | | | | | | | | | | | | | | | | | | | | | | |
| 1 | $ | 29,687 |
| | $ | 30,635 |
| | 56.2 | % | | $ | 29,477 |
| | $ | 30,211 |
| | 57.7 | % | $ | 28,792 |
| | $ | 29,740 |
| | 50.4 | % | | $ | 30,906 |
| | $ | 32,447 |
| | 52.8 | % |
| 2 | 19,677 |
| | 20,109 |
| | 36.8 | % | | 18,348 |
| | 18,617 |
| | 35.5 | % | 25,451 |
| | 25,744 |
| | 43.6 | % | | 24,147 |
| | 25,082 |
| | 40.9 | % |
| Total investment grade | 49,364 |
| | 50,744 |
| | 93.0 | % | | 47,825 |
| | 48,828 |
| | 93.2 | % | 54,243 |
| | 55,484 |
| | 94.0 | % | | 55,053 |
| | 57,529 |
| | 93.7 | % |
| 3 | 3,113 |
| | 3,110 |
| | 5.7 | % | | 2,871 |
| | 2,812 |
| | 5.4 | % | 2,913 |
| | 2,910 |
| | 4.9 | % | | 2,978 |
| | 3,040 |
| | 5.0 | % |
| 4 | 625 |
| | 624 |
| | 1.1 | % | | 647 |
| | 622 |
| | 1.2 | % | 633 |
| | 608 |
| | 1.0 | % | | 789 |
| | 765 |
| | 1.2 | % |
| 5 | 92 |
| | 91 |
| | 0.2 | % | | 87 |
| | 82 |
| | 0.2 | % | 76 |
| | 69 |
| | 0.1 | % | | 70 |
| | 66 |
| | 0.1 | % |
| 6 | 15 |
| | 17 |
| | — | % | | 21 |
| | 24 |
| | — | % | 7 |
| | 9 |
| | 0.0 | % | | 15 |
| | 18 |
| | 0.0 | % |
| Total below investment grade | 3,845 |
| | 3,842 |
| | 7.0 | % | | 3,626 |
| | 3,540 |
| | 6.8 | % | 3,629 |
| | 3,596 |
| | 6.0 | % | | 3,852 |
| | 3,889 |
| | 6.3 | % |
| Total fixed maturity securities, including related parties | $ | 53,209 |
| | $ | 54,586 |
| | 100.0 | % | | $ | 51,451 |
| | $ | 52,368 |
| | 100.0 | % | |
| Total fixed maturity securities, including related party | | $ | 57,872 |
| | $ | 59,080 |
| | 100.0 | % | | $ | 58,905 |
| | $ | 61,418 |
| | 100.0 | % |
Substantially all of our AFS fixed maturity portfolio, 93.0%94.0% and 93.2%93.7% as of March 31, 20172018 and December 31, 2016,2017, respectively, was invested in assets considered investment grade with a NAIC ratingdesignation of 1 or 2.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
A summary of our AFS fixed maturity securities, including related parties, by NRSRO ratings is set forth below:
| | | | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| (In millions, except percentages) | Fair Value | | Percent of Total | | Fair Value | | Percent of Total | Fair Value | | Percent of Total | | Fair Value | | Percent of Total |
| NRSRO rating agency designation | | | | | | | | | | | | | | |
| AAA/AA/A | $ | 19,069 |
| | 34.8 | % | | $ | 18,791 |
| | 35.9 | % | $ | 19,353 |
| | 32.7 | % | | $ | 21,448 |
| | 34.9 | % |
| BBB | 19,352 |
| | 35.5 | % | | 18,002 |
| | 34.4 | % | 23,989 |
| | 40.6 | % | | 23,572 |
| | 38.4 | % |
Non-rated1 | 5,936 |
| | 10.9 | % | | 5,650 |
| | 10.8 | % | 6,488 |
| | 11.0 | % | | 6,592 |
| | 10.7 | % |
| Total investment grade | 44,357 |
| | 81.2 | % | | 42,443 |
| | 81.1 | % | 49,830 |
| | 84.3 | % | | 51,612 |
| | 84.0 | % |
| BB | 3,349 |
| | 6.1 | % | | 3,286 |
| | 6.3 | % | 2,981 |
| | 5.1 | % | | 3,091 |
| | 5.0 | % |
| B | 1,286 |
| | 2.4 | % | | 1,372 |
| | 2.6 | % | 1,016 |
| | 1.7 | % | | 1,198 |
| | 2.0 | % |
| CCC | 2,438 |
| | 4.5 | % | | 2,374 |
| | 4.5 | % | 3,202 |
| | 5.4 | % | | 2,696 |
| | 4.4 | % |
| CC and lower | 2,576 |
| | 4.7 | % | | 2,404 |
| | 4.6 | % | 1,591 |
| | 2.7 | % | | 2,302 |
| | 3.8 | % |
Non-rated1 | 580 |
| | 1.1 | % | | 489 |
| | 0.9 | % | 460 |
| | 0.8 | % | | 519 |
| | 0.8 | % |
| Total below investment grade | 10,229 |
| | 18.8 | % | | 9,925 |
| | 18.9 | % | 9,250 |
| | 15.7 | % | | 9,806 |
| | 16.0 | % |
| Total fixed maturity securities, including related parties | $ | 54,586 |
| | 100.0 | % | | $ | 52,368 |
| | 100.0 | % | |
| Total fixed maturity securities, including related party | | $ | 59,080 |
| | 100.0 | % | | $ | 61,418 |
| | 100.0 | % |
| | | | | | | | | | | | | | | |
1 Securities denoted as non-rated by the NRSRO were classified as investment or non-investment grade according to the security's respective NAIC rating. | |
1 Securities denoted as non-rated by the NRSRO were classified as investment or non-investment grade according to the security’s respective NAIC designation. | | 1 Securities denoted as non-rated by the NRSRO were classified as investment or non-investment grade according to the security’s respective NAIC designation. |
Consistent with the NAIC Process and Procedures Manual, an NRSRO rating was assigned based on the following criteria: (a) the equivalent S&P rating where the security is rated by one NRSRO; (b) the equivalent S&P rating of the lowest NRSRO when the security is rated by two NRSROs; and (c) the equivalent S&P rating of the second lowest NRSRO if the security is rated by three or more NRSROs. If the lowest two NRSRO ratings are equal, then such rating will be the assigned rating. NRSRO ratings available for the periods presented were S&P, Fitch, Moody'sMoody’s Investor Service (Moody's)(Moody’s), DBRS, and Kroll Bond Rating Agency, Inc. (KBRA).
The portion of our AFS fixed maturity portfolio that was considered below investment grade based on NRSRO ratings was 18.8%15.7% and 18.9%16.0% as of March 31, 20172018 and December 31, 2016,2017, respectively. The primary driver of the difference in the percentage of securities considered below investment grade by NRSROs as compared to the securities considered below investment grade by the NAIC relates to the difference in ratings methodologies between the NRSRO and NAIC for RMBS due to investments acquired at a discount to par value, as discussed above.
As of March 31, 20172018 and December 31, 2016,2017, the non-rated securities shown above were comprised of 40%45% and 43%44%, respectively, of corporate private placement securities for which we have not sought individual ratings from the NRSROs and 43% and 44%42%, respectively, of RMBS, many of which were acquired at a significant discount to par. We rely on internal analysis of credit risk and ratingsdesignations assigned by the NAIC. As of each of March 31, 20172018 and December 31, 2016, 91% and 92%, respectively,2017, 93% of the non-rated securities were designated NAIC 1 or 2.
Asset-backed Securities – We invest in ABS which are securitized by pools of assets such as consumer loans, automobile loans, student loans, insurance-linked securities, operating cash flows of corporations and corporate debt.cash flows from various types of business equipment. These holdings were $3.3$4.7 billion and 3.0$4.0 billion as of March 31, 20172018 and December 31, 2016,2017, respectively. As of March 31, 20172018 and December 31, 2016,2017, our ABS portfolio included approximately $3.0$4.4 billion (90%(94% of the total) and $2.7$3.8 billion (91%(94% of the total), respectively, of securities that are considered investment grade based on NAIC ratings,designations, while approximately $2.8$4.2 billion (85%(90% of the total) and $2.5$3.6 billion (85%(89% of the total), respectively, of securities were considered investment grade based on NRSRO ratings.
Collateralized Loan Obligations – We also invest in CLOs which pay principal and interest from cash flows received from underlying corporate loans. These holdings were $5.3$6.1 billion and $5.1$5.4 billion as of March 31, 20172018 and December 31, 2016,2017, respectively. As of March 31, 20172018 and December 31, 2016,2017, our CLO portfolio included approximately $4.3$5.4 billion (81%(89% of the total) and $4.2$4.6 billion (83%(85% of the total), respectively, of securities that are considered investment grade based on NAIC ratingsdesignations, while approximately $4.4$5.7 billion (83%(93% of the total) and $4.2$4.8 billion (82%(88% of the total), respectively, of securities were considered investment grade based on NRSRO ratings.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Commercial Mortgage-backed Securities – A portion of our fixed maturity AFS portfolio is invested in CMBS. CMBS are constructed from pools of commercial mortgages. These holdings were $1.9 billion and $1.8$2.0 billion as of each of March 31, 20172018 and December 31, 2016, respectively.2017. As of March 31, 20172018 and December 31, 2016,2017, our CMBS portfolio included approximately $1.8$1.9 billion (97%(96% of the total) and $1.8$1.9 billion (97%(95% of the total), respectively, of securities that are considered investment grade based on NAIC ratingsdesignations, while approximately $1.1$1.4 billion (61%(68% of the total) and $1.1$1.4 billion (60%(70% of the total), respectively, of securities were considered investment grade based on NRSRO ratings.
Residential Mortgage-backed Securities – As part of our core investment strategy, a portion of our fixed maturity AFS portfolio is invested in RMBS. RMBS are securities constructed from pools of residential mortgages and backed by payments from those pools. These holdings were $9.2 billion and $9.4 billion as of March 31, 2018 and December 31, 2017, respectively. Excluding limitations on access to lending and other extraordinary economic conditions, prepayments of principal on the underlying loans can be expected to accelerate with decreases in market interest rates and diminish with increases in interest rates. Our investments in RMBS are primarily non-agency RMBS having a significant focus on assets with attractive entry prices, which in general results inare generally considered investment grade ratings by thebased on NAIC designations, given the likelihood that we ultimately receive principal and interest distributions in an amount at least equal to our amortized cost. These holdings were $9.3 billion and $9.0 billion as of March 31, 2017 and December 31, 2016, respectively.
A summary of our AFS RMBS portfolio by NAIC designations and NRSRO quality ratings is as follows:
| | | | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| (In millions, except percentages) | Fair Value | | Percent of Total | | Fair Value | | Percent of Total | Fair Value | | Percent of Total | | Fair Value | | Percent of Total |
| NAIC designation | | | | | | | | | | | | | | |
| 1 | $ | 8,884 |
| | 95.7 | % | | $ | 8,652 |
| | 96.4 | % | $ | 8,460 |
| | 92.1 | % | | $ | 8,714 |
| | 93.0 | % |
| 2 | 197 |
| | 2.1 | % | | 140 |
| | 1.6 | % | 422 |
| | 4.6 | % | | 360 |
| | 3.8 | % |
| Total investment grade | 9,081 |
| | 97.8 | % | | 8,792 |
| | 98.0 | % | 8,882 |
| | 96.7 | % | | 9,074 |
| | 96.8 | % |
| 3 | 124 |
| | 1.3 | % | | 96 |
| | 1.1 | % | 198 |
| | 2.2 | % | | 213 |
| | 2.3 | % |
| 4 | 25 |
| | 0.3 | % | | 29 |
| | 0.3 | % | 102 |
| | 1.1 | % | | 73 |
| | 0.8 | % |
| 5 | 54 |
| | 0.6 | % | | 54 |
| | 0.6 | % | 5 |
| | 0.0 | % | | 6 |
| | 0.1 | % |
| 6 | 2 |
| | — | % | | 2 |
| | — | % | |
| Total below investment grade | 205 |
| | 2.2 | % | | 181 |
| | 2.0 | % | 305 |
| | 3.3 | % | | 292 |
| | 3.2 | % |
| Total RMBS | $ | 9,286 |
| | 100.0 | % | | $ | 8,973 |
| | 100.0 | % | $ | 9,187 |
| | 100.0 | % | | $ | 9,366 |
| | 100.0 | % |
| | | | | | | | | | | | | | | |
| NRSRO rating agency designation | | | | | | | | | | | | | | |
| AAA/AA/A | $ | 325 |
| | 3.5 | % | | $ | 345 |
| | 3.8 | % | $ | 353 |
| | 3.8 | % | | $ | 335 |
| | 3.6 | % |
| BBB | 276 |
| | 3.0 | % | | 245 |
| | 2.7 | % | 385 |
| | 4.2 | % | | 347 |
| | 3.7 | % |
Non-rated1 | 2,708 |
| | 29.1 | % | | 2,638 |
| | 29.5 | % | 2,886 |
| | 31.4 | % | | 2,866 |
| | 30.6 | % |
| Total investment grade | 3,309 |
| | 35.6 | % | | 3,228 |
| | 36.0 | % | 3,624 |
| | 39.4 | % | | 3,548 |
| | 37.9 | % |
| BB | 443 |
| | 4.8 | % | | 419 |
| | 4.7 | % | 371 |
| | 4.0 | % | | 415 |
| | 4.4 | % |
| B | 524 |
| | 5.6 | % | | 567 |
| | 6.3 | % | 364 |
| | 4.0 | % | | 417 |
| | 4.5 | % |
| CCC | 2,336 |
| | 25.2 | % | | 2,280 |
| | 25.4 | % | 3,110 |
| | 33.9 | % | | 2,580 |
| | 27.5 | % |
| CC and lower | 2,569 |
| | 27.7 | % | | 2,395 |
| | 26.7 | % | 1,587 |
| | 17.3 | % | | 2,298 |
| | 24.5 | % |
Non-rated1 | 105 |
| | 1.1 | % | | 84 |
| | 0.9 | % | 131 |
| | 1.4 | % | | 108 |
| | 1.2 | % |
| Total below investment grade | 5,977 |
| | 64.4 | % | | 5,745 |
| | 64.0 | % | 5,563 |
| | 60.6 | % | | 5,818 |
| | 62.1 | % |
| Total RMBS | $ | 9,286 |
| | 100.0 | % | | $ | 8,973 |
| | 100.0 | % | $ | 9,187 |
| | 100.0 | % | | $ | 9,366 |
| | 100.0 | % |
| | | | | | | | | | | | | | | |
1 Securities denoted as non-rated by the NRSRO were classified as investment or non-investment grade according to the security's respective NAIC rating. | |
1 Securities denoted as non-rated by the NRSRO were classified as investment or non-investment grade according to the security’s respective NAIC designations. | | 1 Securities denoted as non-rated by the NRSRO were classified as investment or non-investment grade according to the security’s respective NAIC designations. |
A significant majority of our RMBS portfolio, 97.8%96.7% and 98.0%96.8% as of March 31, 20172018 and December 31, 2016,2017, respectively, was invested in assets considered to be investment grade bybased upon an application of the NAIC’s methodology to our holdings of RMBS. The NAIC’s methodology with respect to RMBS gives explicit effect to the amortized cost at which an insurance company carries each such investment. Because we invested in RMBS after the stresses related to U.S. housing had caused significant downward pressure on prices of RMBS, we carry most of our investments in RMBS at significant discounts to par value, which resulted in an investment grade NAIC with a NAIC rating of 1 or 2. As NRSROdesignation. In contrast, our understanding is that in setting ratings, are focusedNRSROs focus on the likelihood of recovery of all contractual payments including principal at par insteadvalue. As a result of the recovery of the amortized cost, the portion considered investment grade by NRSRO rating agencies of 35.6% and 36.0%a fundamental difference in approach, as of March 31, 20172018 and December 31, 2016,2017, NRSROs characterized 39.4% and 37.9%, respectively, were lower than the NAIC ratings. As we focus on acquiringof our RMBS assets with attractive entry prices, someas investment grade.
Contents
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Unrealized Losses
Our investments in fixed maturity securities, including related parties, are reported at fair value with changes in fair value recorded in other comprehensive income. Certain of our fixed maturity securities, including related parties, have experienced declines in fair value that we consider temporary in nature. As of March 31, 2018, our fixed maturity securities, including related party, had a fair value of $59.1 billion, which was 2.1% above amortized cost of $57.9 billion. As of December 31, 2017, our fixed maturity securities, including related parties,party, had a fair value of $54.6$61.4 billion, which was approximately 2.6%4.3% above amortized cost of $53.2 billion. As of December 31, 2016, our fixed maturity securities, including related parties, had a fair value of $52.4 billion, which was approximately 1.8% above amortized cost of $51.5$58.9 billion. These investments are held to support our product liabilities and we currently have the intent and ability to hold these securities until sale or maturity, and believe the securities will recover the amortized cost basis prior to sale or maturity.
The following tables reflect the unrealized losses on the AFS fixed maturity portfolio, including related parties, by NAIC quality ratings:designations:
| | | | March 31, 2017 | March 31, 2018 |
| (In millions, except percentages) | Amortized Cost of Securities with Unrealized Loss | | Gross Unrealized Loss | | Fair Value of Securities with Unrealized Loss | | Fair Value to Amortized Cost Ratio | | Fair Value of Total AFS Fixed Maturity Securities | | Percent of Loss to Total AFS Fair Value NAIC Rating | Amortized Cost of Securities with Unrealized Loss | | Gross Unrealized Loss | | Fair Value of Securities with Unrealized Loss | | Fair Value to Amortized Cost Ratio | | Fair Value of Total AFS Fixed Maturity Securities | | Percent of Loss to Total AFS Fair Value NAIC Designation |
| NAIC designation | | | | | | | | | | | | | | | | | | | | | | |
| 1 | $ | 6,573 |
| | $ | (198 | ) | | $ | 6,375 |
| | 97.0 | % | | $ | 30,635 |
| | (0.6 | )% | $ | 8,903 |
| | $ | (204 | ) | | $ | 8,699 |
| | 97.7 | % | | $ | 29,740 |
| | (0.7 | )% |
| 2 | 4,814 |
| | (154 | ) | | 4,660 |
| | 96.8 | % | | 20,109 |
| | (0.8 | )% | 11,121 |
| | (289 | ) | | 10,832 |
| | 97.4 | % | | 25,744 |
| | (1.1 | )% |
| Total investment grade | 11,387 |
| | (352 | ) | | 11,035 |
| | 96.9 | % | | 50,744 |
| | (0.7 | )% | 20,024 |
| | (493 | ) | | 19,531 |
| | 97.5 | % | | 55,484 |
| | (0.9 | )% |
| 3 | 1,569 |
| | (61 | ) | | 1,508 |
| | 96.1 | % | | 3,110 |
| | (2.0 | )% | 1,483 |
| | (47 | ) | | 1,436 |
| | 96.8 | % | | 2,910 |
| | (1.6 | )% |
| 4 | 221 |
| | (17 | ) | | 204 |
| | 92.3 | % | | 624 |
| | (2.7 | )% | 409 |
| | (43 | ) | | 366 |
| | 89.5 | % | | 608 |
| | (7.1 | )% |
| 5 | 37 |
| | (2 | ) | | 35 |
| | 94.6 | % | | 91 |
| | (2.2 | )% | 66 |
| | (8 | ) | | 58 |
| | 87.9 | % | | 69 |
| | (11.6 | )% |
| 6 | 4 |
| | — |
| | 4 |
| | 100.0 | % | | 17 |
| | — | % | — |
| | — |
| | — |
| | — | % | | 9 |
| | — | % |
| Total below investment grade | 1,831 |
| | (80 | ) | | 1,751 |
| | 95.6 | % | | 3,842 |
| | (2.1 | )% | 1,958 |
| | (98 | ) | | 1,860 |
| | 95.0 | % | | 3,596 |
| | (2.7 | )% |
| Total | $ | 13,218 |
| | $ | (432 | ) | | $ | 12,786 |
| | 96.7 | % | | $ | 54,586 |
| | (0.8 | )% | $ | 21,982 |
| | $ | (591 | ) | | $ | 21,391 |
| | 97.3 | % | | $ | 59,080 |
| | (1.0 | )% |
| | | | December 31, 2016 | December 31, 2017 |
| (In millions, except percentages) | Amortized Cost of Securities with Unrealized Loss | | Gross Unrealized Loss | | Fair Value of Securities with Unrealized Loss | | Fair Value to Amortized Cost Ratio | | Fair Value of Total AFS Fixed Maturity Securities | | Percent of Loss to Total AFS Fair Value NAIC Rating | Amortized Cost of Securities with Unrealized Loss | | Gross Unrealized Loss | | Fair Value of Securities with Unrealized Loss | | Fair Value to Amortized Cost Ratio | | Fair Value of Total AFS Fixed Maturity Securities | | Percent of Loss to Total AFS Fair Value NAIC Designation |
| NAIC designation | | | | | | | | | | | | | | | | | | | | | | |
| 1 | $ | 8,805 |
| | $ | (272 | ) | | $ | 8,533 |
| | 96.9 | % | | $ | 30,211 |
| | (0.9 | )% | $ | 4,901 |
| | $ | (100 | ) | | $ | 4,801 |
| | 98.0 | % | | $ | 32,447 |
| | (0.3 | )% |
| 2 | 6,156 |
| | (220 | ) | | 5,936 |
| | 96.4 | % | | 18,617 |
| | (1.2 | )% | 4,284 |
| | (82 | ) | | 4,202 |
| | 98.1 | % | | 25,082 |
| | (0.3 | )% |
| Total investment grade | 14,961 |
| | (492 | ) | | 14,469 |
| | 96.7 | % | | 48,828 |
| | (1.0 | )% | 9,185 |
| | (182 | ) | | 9,003 |
| | 98.0 | % | | 57,529 |
| | (0.3 | )% |
| 3 | 1,769 |
| | (103 | ) | | 1,666 |
| | 94.2 | % | | 2,812 |
| | (3.7 | )% | 881 |
| | (19 | ) | | 862 |
| | 97.8 | % | | 3,040 |
| | (0.6 | )% |
| 4 | 329 |
| | (35 | ) | | 294 |
| | 89.4 | % | | 622 |
| | (5.6 | )% | 451 |
| | (40 | ) | | 411 |
| | 91.1 | % | | 765 |
| | (5.2 | )% |
| 5 | 34 |
| | (6 | ) | | 28 |
| | 82.4 | % | | 82 |
| | (7.3 | )% | 60 |
| | (5 | ) | | 55 |
| | 91.7 | % | | 66 |
| | (7.6 | )% |
| 6 | 1 |
| | — |
| | 1 |
| | 100.0 | % | | 24 |
| | — | % | 5 |
| | — |
| | 5 |
| | 100.0 | % | | 18 |
| | — | % |
| Total below investment grade | 2,133 |
| | (144 | ) | | 1,989 |
| | 93.2 | % | | 3,540 |
| | (4.1 | )% | 1,397 |
| | (64 | ) | | 1,333 |
| | 95.4 | % | | 3,889 |
| | (1.6 | )% |
| Total | $ | 17,094 |
| | $ | (636 | ) | | $ | 16,458 |
| | 96.3 | % | | $ | 52,368 |
| | (1.2 | )% | $ | 10,582 |
| | $ | (246 | ) | | $ | 10,336 |
| | 97.7 | % | | $ | 61,418 |
| | (0.4 | )% |
The gross unrealized losses on AFS fixed maturity securities, including related parties,party, were $432$591 million and $636$246 million as of March 31, 20172018 and December 31, 2016,2017, respectively. The decreaseincrease in unrealized losses was driven by the increase in U.S. treasury rates and credit spreads tighteningwidening during 2017 resulting in an increase in unrealized gains.three months ended March 31, 2018.
As of March 31, 20172018 and December 31, 2016,2017, we held $3.8$4.5 billion and $3.6$4.4 billion, respectively, in energy sector fixed maturity securities, or 8% and 7% of the total fixed maturity securities, in both periods, including related parties, for each period.respectively. The gross unrealized capital losses on these securities were $45$75 million and $73$33 million, or 10%13% and 11%13% of the total unrealized losses, respectively.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Other-Than-Temporary Impairments
For our OTTI policy and the identification of securities that could potentially have impairments, see Note 1 – Business, Basis of Presentation and Significant Accounting Policies and Note 2 – Investments to the condensed consolidated financial statements, as well as Critical Accounting Estimates and Judgments.
During the three months ended March 31, 2018, we recorded $3 million of OTTI losses comprised of $2 million related to corporate fixed maturities and $1 million related to RMBS. Of the OTTI losses recognized during three months ended March 31, 2018, there were no OTTI losses related to the energy sector. During the three months ended March 31, 2017, we recorded $1 million of OTTI losses, all of which related to ABS. Of the OTTI losses recognized during 2017, there were no OTTI losses related to the energy sector. During the three months ended March 31, 2016, we recorded $10 million of OTTI losses comprised of $5 million related to ABS, $3 million related to corporate fixed maturities and $2 million related to RMBS. Of the OTTI losses recognized during 2016, $3 million related to the energy sector. The annualized OTTI losses we have experienced for the three months ended March 31, 20172018 and 2016,2017, translate into 2 basis points and 1 basis point, and 6 basis points, respectively, of average invested assets.
International Exposure
A portion of our fixed maturity securities areis invested in securities with international exposure. As of March 31, 20172018 and December 31, 2016, 32%2017, 30% and 33% of the carrying value of our fixed maturity securities, including related parties, was comprised of securities of issuers based outside of the United States and debt securities of foreign governments. These securities are either denominated in U.S. dollars or do not expose us to significant foreign currency risk as a result of foreign currency swap arrangements.
The following table presents our international exposure in our fixed maturity securities portfolio, including related parties, by country or region:
| | | | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| (In millions, except percentages) | Amortized Cost | | Fair Value | | Percent of Total | | Amortized Cost | | Fair Value | | Percent of Total | Amortized Cost | | Fair Value | | Percent of Total | | Amortized Cost | | Fair Value | | Percent of Total |
| Country of risk | | | | | | | | | | | | | | | | | | | | | | |
| Ireland | $ | 486 |
| | $ | 490 |
| | 2.8 | % | | $ | 510 |
| | $ | 516 |
| | 3.1 | % | $ | 537 |
| | $ | 530 |
| | 3.0 | % | | $ | 498 |
| | $ | 511 |
| | 2.6 | % |
| Italy | 94 |
| | 95 |
| | 0.5 | % | | 90 |
| | 92 |
| | 0.6 | % | 37 |
| | 39 |
| | 0.2 | % | | 59 |
| | 64 |
| | 0.3 | % |
| Spain | 188 |
| | 198 |
| | 1.1 | % | | 175 |
| | 190 |
| | 1.1 | % | 32 |
| | 35 |
| | 0.2 | % | | 209 |
| | 225 |
| | 1.1 | % |
Total Portugal, Ireland, Italy, Greece and Spain1 | 768 |
| | 783 |
| | 4.4 | % | | 775 |
| | 798 |
| | 4.8 | % | |
| Portugal | | — |
| | — |
| | — | % | | 1 |
| | 1 |
| | 0.0 | % |
Total Ireland, Italy, Greece, Spain and Portugal1 | | 606 |
| | 604 |
| | 3.4 | % | | 767 |
| | 801 |
| | 4.0 | % |
| Other Europe | 6,682 |
| | 6,830 |
| | 39.6 | % | | 6,336 |
| | 6,512 |
| | 39.2 | % | 5,713 |
| | 5,805 |
| | 32.6 | % | | 8,087 |
| | 8,395 |
| | 42.0 | % |
| Total Europe | 7,450 |
| | 7,613 |
| | 44.0 | % | | 7,111 |
| | 7,310 |
| | 44.0 | % | 6,319 |
| | 6,409 |
| | 36.0 | % | | 8,854 |
| | 9,196 |
| | 46.0 | % |
| Non-U.S. North America | 7,434 |
| | 7,497 |
| | 43.4 | % | | 7,185 |
| | 7,105 |
| | 42.8 | % | 8,814 |
| | 8,888 |
| | 49.9 | % | | 8,048 |
| | 8,220 |
| | 41.2 | % |
| Australia & New Zealand | 1,233 |
| | 1,263 |
| | 7.3 | % | | 1,283 |
| | 1,304 |
| | 7.9 | % | 1,586 |
| | 1,586 |
| | 8.9 | % | | 1,443 |
| | 1,481 |
| | 7.4 | % |
| Central & South America | 461 |
| | 482 |
| | 2.8 | % | | 456 |
| | 467 |
| | 2.8 | % | 398 |
| | 408 |
| | 2.3 | % | | 481 |
| | 508 |
| | 2.6 | % |
| Africa & Middle East | 167 |
| | 174 |
| | 1.0 | % | | 164 |
| | 167 |
| | 1.0 | % | 190 |
| | 189 |
| | 1.1 | % | | 193 |
| | 196 |
| | 1.0 | % |
| Asia/Pacific | 220 |
| | 226 |
| | 1.3 | % | | 216 |
| | 218 |
| | 1.3 | % | 333 |
| | 329 |
| | 1.8 | % | | 321 |
| | 327 |
| | 1.6 | % |
| Supranational | 26 |
| | 27 |
| | 0.2 | % | | 26 |
| | 27 |
| | 0.2 | % | — |
| | — |
| | — | % | | 39 |
| | 41 |
| | 0.2 | % |
| Total | $ | 16,991 |
| | $ | 17,282 |
| | 100.0 | % | | $ | 16,441 |
| | $ | 16,598 |
| | 100.0 | % | $ | 17,640 |
| | $ | 17,809 |
| | 100.0 | % | | $ | 19,379 |
| | $ | 19,969 |
| | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
1 As of each of March 31, 2017 and December 31, 2016, we had no holdings in Portugal or Greece. | |
1 As of each of the respective periods, we had no holdings in Greece. | | 1 As of each of the respective periods, we had no holdings in Greece. |
Approximately 89.1%91.5% and 89.7%90.9% of these securities are investment grade by NAIC designation as of March 31, 20172018 and December 31, 2016,2017, respectively. As of March 31, 2017, 9%2018, 10% of our fixed maturity securities, including related parties, were invested in CLOs of Cayman Islands issuers (for which underlying investments are largely loans to U.S. issuers), 6% and 20% were invested in securities of non-U.S. issuers by our German Group Companies and 17% were invested in other non-U.S. issuers.
Portugal, Ireland, Italy, Greece and Spain continue to represent credit risk as economic conditions in these countries continue to be volatile, especially within the financial and banking sectors. We had $783$604 million and $798$801 million as of March 31, 20172018 and December 31, 2016,2017, respectively, of exposure in these countries.
As of March 31, 2017 and December 31, 2016, we had $228 million and $237 million, respectively, of exposure to sovereign issuers in Spain, Ireland and Italy as a result of investments acquired from the DLD acquisition in 2015.
The effects on our investments in non-U.S. securities as a result of Brexit is unknown at this time, but the effects of Brexit are likely to lead to greater volatility in global financial markets in the near term. As of March 31, 2017,2018, we held United Kingdom and Channel Islands fixed maturity securities of $1.7$2.0 billion, or 3.0%3.4% of the total fixed maturities including related parties. As of March 31, 2017,2018, these securities were in an unrealized gain position of $31$11 million. Our investment managers analyze each holding for credit risk by economic and other factors of each country and industry.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Trading Securities
Trading securities, including related parties, were $2.8$2.4 billion and $2.5 billion as of each of March 31, 20172018 and December 31, 2016, 2017, respectively. Trading securities are primarily comprised of AmerUs Closed Block securities for which we have elected the fair value option valuation, CLO equity tranche securities, structured securities with embedded derivatives, and investments which support various reinsurance arrangements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Mortgage Loans
The following is a summary of our mortgage loan portfolio by collateral type:
| | | | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| (In millions, except percentages) | Net Carrying Value | | Percent of Total | | Net Carrying Value | | Percent of Total | Net Carrying Value | | Percent of Total | | Net Carrying Value | | Percent of Total |
| Property type | | | | | | | | | | | | | | |
| Office building | | $ | 1,389 |
| | 22.6 | % | | $ | 1,187 |
| | 19.0 | % |
| Retail | | 1,167 |
| | 19.0 | % | | 1,223 |
| | 19.6 | % |
| Hotels | $ | 998 |
| | 18.3 | % | | $ | 1,025 |
| | 18.7 | % | 935 |
| | 15.2 | % | | 928 |
| | 14.9 | % |
| Retail | 1,138 |
| | 20.8 | % | | 1,135 |
| | 20.7 | % | |
| Office building | 1,139 |
| | 20.9 | % | | 1,217 |
| | 22.2 | % | |
| Industrial | 682 |
| | 12.5 | % | | 742 |
| | 13.6 | % | 789 |
| | 12.9 | % | | 944 |
| | 15.2 | % |
| Apartment | 572 |
| | 10.5 | % | | 616 |
| | 11.3 | % | 441 |
| | 7.2 | % | | 525 |
| | 8.4 | % |
Other commercial 1 | 450 |
| | 8.3 | % | | 397 |
| | 7.3 | % | 412 |
| | 6.7 | % | | 440 |
| | 7.1 | % |
| Total net mortgage loans | 4,979 |
| | 91.3 | % | | 5,132 |
| | 93.8 | % | |
| Total net commercial mortgage loans | | 5,133 |
| | 83.6 | % | | 5,247 |
| | 84.2 | % |
| Residential loans | 474 |
| | 8.7 | % | | 338 |
| | 6.2 | % | 1,006 |
| | 16.4 | % | | 986 |
| | 15.8 | % |
| Total mortgage loans, net of allowances | $ | 5,453 |
| | 100.0 | % | | $ | 5,470 |
| | 100.0 | % | $ | 6,139 |
| | 100.0 | % | | $ | 6,233 |
| | 100.0 | % |
| | | | | | | | | | | | | | | |
1 Other commercial loans include investments in nursing homes, other healthcare institutions, parking garages, storage facilities and other commercial properties. | 1 Other commercial loans include investments in nursing homes, other healthcare institutions, parking garages, storage facilities and other commercial properties. | 1 Other commercial loans include investments in nursing homes, other healthcare institutions, parking garages, storage facilities and other commercial properties. |
We invest a portion of our investment portfolio in mortgage loans, which are generally comprised of high quality commercial first lien and mezzanine real estate loans. Our mortgage loan holdings were $5.5$6.1 billion and $6.2 billion as of each of March 31, 20172018 and December 31, 2016.2017, respectively. This included $1.5$1.8 billion of mezzanine mortgage loans for both of the respective periods. We have acquired mortgage loans through acquisitions and reinsurance arrangements, as well as through an active program to invest in new mortgage loans. We invest in mortgage loans on income producing properties including hotels, apartments, retail and office buildings, and other commercial and industrial properties. Loan-to-value ratios at the time of loan approval are generally 75% or less.
Our mortgage loans are primarily stated at unpaid principal balance, adjusted for any unamortized premium or discount, and net of valuation allowances. Interest income is accrued on the principal amount of the loan based on the loan'sloan’s contractual interest rate. Amortization of premiums and discounts is recorded using the effective interest method. Interest income, amortization of premiums and discounts, and prepayment fees are reported in net investment income.
It is our policy to cease to accrue interest on loans that are over 90 days delinquent. For loans less than 90 days delinquent, interest is accrued unless it is determined that the accrued interest is not collectible. If a loan becomes over 90 days delinquent, it is our general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current is in place. As of March 31, 2017,2018, we had $17$37 million of mortgage loans that were 90 days past due and $18$8 million in the process of foreclosure. As of December 31, 2016,2017, we had $21$28 million of mortgage loans that were 90 days past due and $20$1 million in the process of foreclosure.
See Note 2 – Investments to the condensed consolidated financial statements for information regarding valuation allowance for collection loss, impairments, loan-to-value, and debt service coverage.
As of March 31, 20172018 and December 31, 2016,2017, we had not recorded any new specific loan valuation allowances and we recorded no$0 million and $3 million, respectively, of OTTI through net income. We have established a general and specific loan valuation allowance in the aggregate amount of $1 million and $2 million as of each of March 31, 20172018 and December 31, 2016,2017, respectively, attributable to loans acquired in connection with the acquisition of Aviva USA.
Investment Funds and Variable Interest Entities
Our investment funds investment strategy primarily focuses on funds with core holdings of credit assets, real assets, real estate, preferred equity and income producing assets. Our investment strategy focuses on sourcing assets with some or all of the following characteristics:characteristics, among others: (1) investments that constitute a direct investment or an investment in a fund with a high degree of co-investment; (2) investments with credit- or debt-like characteristics (for example, a stipulated maturity and par value), or alternatively, investments with reduced volatility when compared to pure equity; andor (3) investments including some elementthat have less downside risk. A portion of downside protection as compared to a pure directional investment. Ourour current investment funds and VIE holdings are significantly influenced by the contributioncomprised of certain investment funds fromcontributed by the AAA Investor (AAA Contribution) as further described in Note 4 – Variable Interest Entities to the condensed consolidated financial statements, and investment funds we acquired in the Aviva USA acquisition.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
statements. At the time of the AAA Contribution, the contributed assets largely consisted of co-investments with Apollo private equity funds. However, the attributes of the contributed assets have changed significantly since the initial transaction primarily due to the initial public offering of two underlying fund investment holdings. As of March 31, 2017,2018, the assets consisted of $275$149 million of publicly-traded equity securities, a substantial portion of which is in the process of being liquidated. These public equity securities have resulted in volatility in our statement of income in recent periods. At the end
Item 2. Management’s Discussion and Analysis of 2016, Norwegian Cruise Line Holdings Ltd. (NCLH) was distributed from CoInvest VI to NCL Athene, LLC (NCL LLC), whereby the investment is classified as an AFS security with any unrealized gainsFinancial Condition and losses recognized in AOCI, thereby reducing further volatility in our statementResults of income from this fund. See Note 4 – Variable Interest Entities to the condensed consolidated financial statements for further discussion of NCL LLC.Operations
Our investment funds generally meet the definition of a VIE, and in certain cases these investment funds are consolidated in our financial statements because we meet the criteria of the primary beneficiary. See Note 4 – Variable Interest Entities to the condensed consolidated financial statements for further discussion on our investment funds that meet the criteria for consolidation and the accounting treatment for them.
The following table illustrates our consolidated VIE positions: | | | | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| (In millions, except percentages) | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total |
| Assets of consolidated VIEs | | | | | | | | | | | | | | |
| Investments | | | | | | | | | | | | | | |
| Available-for-sale securities | | | | | | | | |
| Fixed maturity securities | | | | | | | | |
| Trading securities | | $ | 47 |
| | 5.8 | % | | $ | 48 |
| | 5.5 | % |
| Equity securities | $ | 191 |
| | 19.8 | % | | $ | 161 |
| | 17.5 | % | 177 |
| | 21.8 | % | | 240 |
| | 27.8 | % |
| Trading securities | 166 |
| | 17.3 | % | | 167 |
| | 18.1 | % | |
| Investment funds | 599 |
| | 62.2 | % | | 573 |
| | 62.2 | % | 582 |
| | 71.8 | % | | 571 |
| | 66.1 | % |
| Cash and cash equivalents | 2 |
| | 0.2 | % | | 14 |
| | 1.5 | % | 3 |
| | 0.4 | % | | 4 |
| | 0.5 | % |
| Other assets | 5 |
| | 0.5 | % | | 6 |
| | 0.7 | % | 2 |
| | 0.2 | % | | 1 |
| | 0.1 | % |
| Total assets of consolidated VIEs | $ | 963 |
| | 100.0 | % | | $ | 921 |
| | 100.0 | % | $ | 811 |
| | 100.0 | % | | $ | 864 |
| | 100.0 | % |
| | | | | | | | | | | | | | | |
| Liabilities of consolidated VIEs | | | | | | | | | | | | | | |
| Other liabilities | 37 |
| | 100.0 | % | | 34 |
| | 100.0 | % | $ | 1 |
| | 100.0 | % | | $ | 2 |
| | 100.0 | % |
| Total liabilities of consolidated VIEs | $ | 37 |
| | 100.0 | % | | $ | 34 |
| | 100.0 | % | $ | 1 |
| | 100.0 | % | | $ | 2 |
| | 100.0 | % |
The assets of consolidated VIEs were $963$811 million and $921$864 million as of March 31, 20172018 and December 31, 2016,2017, respectively. The liabilities of consolidated VIEs were $37$1 million and $34$2 million as of March 31, 20172018 and December 31, 2016,2017, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following table illustrates our investment funds, including related party positions of our non-consolidated VIEs and investment funds owned by consolidated VIEs:
| | | | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| (In millions, except percentages) | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total |
| Investment funds | | | | | | | | | | | | | | |
| Private equity | $ | 245 |
| | 9.6 | % | | $ | 268 |
| | 10.9 | % | $ | 240 |
| | 8.8 | % | | $ | 271 |
| | 10.5 | % |
| Mortgage and real estate | 143 |
| | 5.6 | % | | 118 |
| | 4.8 | % | |
| Real estate and other real assets | | 174 |
| | 6.4 | % | | 161 |
| | 6.2 | % |
| Natural resources | 5 |
| | 0.2 | % | | 5 |
| | 0.2 | % | 4 |
| | 0.1 | % | | 4 |
| | 0.2 | % |
| Hedge funds | 69 |
| | 2.7 | % | | 72 |
| | 2.9 | % | 56 |
| | 2.1 | % | | 61 |
| | 2.4 | % |
| Credit funds | 227 |
| | 8.9 | % | | 226 |
| | 9.2 | % | 173 |
| | 6.3 | % | | 202 |
| | 7.8 | % |
| Total investment funds | 689 |
| | 27.0 | % | | 689 |
| | 28.0 | % | 647 |
| | 23.7 | % | | 699 |
| | 27.1 | % |
| Investment funds – related parties | | | | | | | | | | | | | | |
| Private equity – A-A Mortgage | 366 |
| | 14.3 | % | | 343 |
| | 13.9 | % | 418 |
| | 15.3 | % | | 403 |
| | 15.6 | % |
| Private equity | 152 |
| | 5.9 | % | | 131 |
| | 5.3 | % | 283 |
| | 10.4 | % | | 180 |
| | 7.0 | % |
| Mortgage and real estate | 262 |
| | 10.1 | % | | 247 |
| | 10.1 | % | |
| Real estate and other real assets | | 322 |
| | 11.8 | % | | 297 |
| | 11.5 | % |
| Natural resources | 76 |
| | 3.0 | % | | 49 |
| | 2.0 | % | 98 |
| | 3.6 | % | | 74 |
| | 2.9 | % |
| Hedge funds | 180 |
| | 7.0 | % | | 192 |
| | 7.8 | % | 99 |
| | 3.6 | % | | 93 |
| | 3.6 | % |
| Credit funds | 240 |
| | 9.4 | % | | 236 |
| | 9.6 | % | 279 |
| | 10.3 | % | | 263 |
| | 10.2 | % |
| Total investment funds – related parties | 1,276 |
| | 49.7 | % | | 1,198 |
| | 48.7 | % | 1,499 |
| | 55.0 | % | | 1,310 |
| | 50.8 | % |
| Investment funds owned by consolidated VIEs | | | | | | | | | | | | | | |
Private equity – MidCap1 | 528 |
| | 20.6 | % | | 524 |
| | 21.3 | % | |
| Private equity – MidCap | | 534 |
| | 19.6 | % | | 528 |
| | 20.4 | % |
| Credit funds | 39 |
| | 1.5 | % | | 38 |
| | 1.6 | % | 20 |
| | 0.7 | % | | 21 |
| | 0.8 | % |
| Mortgage and real assets | 32 |
| | 1.2 | % | | 11 |
| | 0.4 | % | |
| Real estate and other real assets | | 28 |
| | 1.0 | % | | 22 |
| | 0.9 | % |
| Total investment funds owned by consolidated VIEs | 599 |
| | 23.3 | % | | 573 |
| | 23.3 | % | 582 |
| | 21.3 | % | | 571 |
| | 22.1 | % |
| Total investment funds, including related parties and VIEs | $ | 2,564 |
| | 100.0 | % | | $ | 2,460 |
| | 100.0 | % | $ | 2,728 |
| | 100.0 | % | | $ | 2,580 |
| | 100.0 | % |
| | | | | | | | | |
1 MidCap is an underlying investment of one of our consolidated VIE investment funds. | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overall, the total investment funds, including related partiesparty and consolidated VIEs, were $2.6$2.7 billion and $2.5$2.6 billion as of March 31, 20172018 and December 31, 2016,2017, respectively. See Note 4 – Variable Interest Entities to the condensed consolidated financial statements for further discussion regarding how we account for our investment funds. Our investment fund portfolio is subject to a number of market related risks including interest ratesrate and equity market risk. Interest rate risk represents the potential for changes in the investment fund'sfund’s net asset values resulting from changes in the general level of interest rates. Equity market risk represents potential for changes in the investment fund'sfund’s net asset values resulting from changes in equity markets or from other external factors which influence equity markets. We actively monitor our exposure to the risks inherent in these investments which could materially and adversely affect our results of operations and financial condition. The interest rate and equity market risks expose us to potential volatility in our earnings year-over-yearperiod-over-period related to these investment funds.
Funds Withheld at Interest
Funds withheld at interest represents a receivable for amounts contractually withheld by ceding companies in accordance with modco and funds withheld reinsurance agreements in which we act as the reinsurer. Generally, assets equal to statutory reserves are withheld and legally owned by the ceding company. As of March 31, 2017,2018, the ceding companies holding the assets pursuant to such reinsurance agreements had a financial strength rating of A- or better.
The funds withheld at interest is comprised of the host contract and an embedded derivative. We are subject to the investment performance on the withheld assets with the total return directly impacting the host contract and the embedded derivative. Interest accrues at a risk free rate on the host receivable and is recorded as net investment income in the condensed consolidated statements of income. The change in the embedded derivative in our reinsurance agreements, arewhich is similar to a total return swap on the income generated by the underlying assets held by the ceding companies, and is recorded in investment related gains (losses). Although we do not directly control the underlying investments in the funds withheld at interest, in each instance the ceding company has hired AAM to manage the withheld assets in accordance with our investment guidelines.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following summarizes the underlying investment composition of the funds withheld at interest:
| | | | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| (In millions, except percentages) | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total |
| Fixed maturity securities | | | | | | | | | | | | | | |
| U.S. state, municipal, and political subdivisions | $ | 116 |
| | 1.8 | % | | $ | 118 |
| | 1.8 | % | |
| U.S. state, municipal and political subdivisions | | $ | 111 |
| | 1.6 | % | | $ | 117 |
| | 1.6 | % |
| Corporate | 1,901 |
| | 28.8 | % | | 1,800 |
| | 27.6 | % | 2,164 |
| | 30.5 | % | | 2,095 |
| | 29.6 | % |
| CLO | 668 |
| | 10.1 | % | | 591 |
| | 9.0 | % | 618 |
| | 8.7 | % | | 669 |
| | 9.4 | % |
| ABS | 756 |
| | 11.5 | % | | 736 |
| | 11.3 | % | 938 |
| | 13.2 | % | | 886 |
| | 12.5 | % |
| CMBS | 288 |
| | 4.4 | % | | 292 |
| | 4.5 | % | 287 |
| | 4.0 | % | | 290 |
| | 4.1 | % |
| RMBS | 1,603 |
| | 24.3 | % | | 1,551 |
| | 23.7 | % | 1,515 |
| | 21.4 | % | | 1,551 |
| | 21.9 | % |
| Equity securities | 29 |
| | 0.4 | % | | 29 |
| | 0.4 | % | 28 |
| | 0.4 | % | | 28 |
| | 0.4 | % |
| Mortgage loans | 768 |
| | 11.6 | % | | 773 |
| | 11.8 | % | 788 |
| | 11.1 | % | | 792 |
| | 11.2 | % |
| Investment funds | 328 |
| | 5.0 | % | | 329 |
| | 5.0 | % | 454 |
| | 6.4 | % | | 376 |
| | 5.3 | % |
| Derivative assets | 58 |
| | 0.9 | % | | 53 |
| | 0.8 | % | 56 |
| | 0.8 | % | | 78 |
| | 1.1 | % |
| Short-term investments | 31 |
| | 0.5 | % | | 80 |
| | 1.2 | % | 35 |
| | 0.5 | % | | 16 |
| | 0.2 | % |
| Cash and cash equivalents | 61 |
| | 0.9 | % | | 105 |
| | 1.6 | % | 65 |
| | 0.9 | % | | 132 |
| | 1.9 | % |
| Other assets and liabilities | (14 | ) | | (0.2 | )% | | 81 |
| | 1.3 | % | 34 |
| | 0.5 | % | | 55 |
| | 0.8 | % |
| Total funds withheld at interest | $ | 6,593 |
| | 100.0 | % | | $ | 6,538 |
| | 100.0 | % | $ | 7,093 |
| | 100.0 | % | | $ | 7,085 |
| | 100.0 | % |
As of each of March 31, 20172018 and December 31, 2016,2017, we held $6.6 billion and $6.5$7.1 billion of funds withheld at interest receivables, respectively.receivables. Approximately 93.8%94.9% and 93.6%94.2% of the fixed maturity securities within the funds withheld at interest are investment grade by NAIC designation as of March 31, 20172018 and December 31, 2016,2017, respectively.
Derivative Instruments
We hold derivative instruments for economic hedging purposes to reduce our exposure to cash flow variability of assets and liabilities, equity market risk, interest rate risk, credit risk and foreign exchange risk. The types of derivatives we may use include interest rate swaps, foreign currency swaps and forward contracts, total return swaps, credit default swaps, variance swaps, futures and fixed indexed options.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
A presentation of our derivative instruments along with a discussion of the business strategy involved with our derivatives is included in Note 3 – Derivative Instruments to the condensed consolidated financial statements. This includes:
| |
| ▪ | a comprehensive description of the derivatives instruments as well as the strategies to manage risk; |
| |
| ▪ | the notional amounts and estimated fair value by derivative instruments; and |
| |
| ▪ | impacts on the condensed consolidated statement of net income. |
As part of our risk management strategies, management continually evaluates our derivative instrument holdings and the effectiveness of such holdings in addressing risks identified in our operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Invested Assets
The following summarizes our invested assets:
| | | | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| (In millions, except percentages) | U.S. and Bermuda Invested Asset Value | | Germany Invested Asset Value | | Total Invested Asset Value1 | | Percent of Total | | U.S. and Bermuda Invested Asset Value | | Germany Invested Asset Value | | Total Invested Asset Value1 | | Percent of Total | Invested Asset Value1 | | Percent of Total | | U.S. and Bermuda Invested Asset Value | | Germany Invested Asset Value | | Invested Asset Value1 | | Percent of Total |
| Corporate | $ | 32,345 |
| | $ | 1,789 |
| | $ | 34,134 |
| | 46.3 | % | | $ | 31,000 |
| | $ | 1,682 |
| | $ | 32,682 |
| | 45.4 | % | $ | 38,896 |
| | 49.4 | % | | $ | 37,059 |
| | $ | 1,536 |
| | $ | 38,595 |
| | 46.9 | % |
| CLO | 5,978 |
| | — |
| | 5,978 |
| | 8.1 | % | | 5,798 |
| | — |
| | 5,798 |
| | 8.1 | % | 6,241 |
| | 7.9 | % | | 5,914 |
| | — |
| | 5,914 |
| | 7.2 | % |
| Credit | 38,323 |
| | 1,789 |
| | 40,112 |
| | 54.4 | % | | 36,798 |
| | 1,682 |
| | 38,480 |
| | 53.5 | % | 45,137 |
| | 57.3 | % | | 42,973 |
| | 1,536 |
| | 44,509 |
| | 54.1 | % |
| RMBS | 10,758 |
| | — |
| | 10,758 |
| | 14.6 | % | | 10,619 |
| | — |
| | 10,619 |
| | 14.8 | % | 10,288 |
| | 13.1 | % | | 10,532 |
| | — |
| | 10,532 |
| | 12.8 | % |
| Mortgage loans | 6,122 |
| | 94 |
| | 6,216 |
| | 8.4 | % | | 6,145 |
| | 95 |
| | 6,240 |
| | 8.7 | % | 6,925 |
| | 8.8 | % | | 6,858 |
| | 165 |
| | 7,023 |
| | 8.5 | % |
| CMBS | 2,187 |
| | — |
| | 2,187 |
| | 3.0 | % | | 2,202 |
| | — |
| | 2,202 |
| | 3.1 | % | 2,311 |
| | 2.9 | % | | 2,322 |
| | — |
| | 2,322 |
| | 2.8 | % |
| Real estate held for investment | — |
| | 553 |
| | 553 |
| | 0.8 | % | | — |
| | 542 |
| | 542 |
| | 0.8 | % | — |
| | — | % | | — |
| | 625 |
| | 625 |
| | 0.8 | % |
| Real estate | 19,067 |
| | 647 |
| | 19,714 |
| | 26.8 | % | | 18,966 |
| | 637 |
| | 19,603 |
| | 27.4 | % | 19,524 |
| | 24.8 | % | | 19,712 |
| | 790 |
| | 20,502 |
| | 24.9 | % |
| ABS | 4,187 |
| | — |
| | 4,187 |
| | 5.7 | % | | 3,873 |
| | — |
| | 3,873 |
| | 5.4 | % | 5,852 |
| | 7.5 | % | | 4,824 |
| | — |
| | 4,824 |
| | 5.9 | % |
| Alternative investments | 3,341 |
| | 131 |
| | 3,472 |
| | 4.7 | % | | 3,297 |
| | 128 |
| | 3,425 |
| | 4.8 | % | 3,615 |
| | 4.6 | % | | 3,692 |
| | 137 |
| | 3,829 |
| | 4.6 | % |
| State, municipal, political subdivisions and foreign government | 1,379 |
| | 1,795 |
| | 3,174 |
| | 4.3 | % | | 1,387 |
| | 1,936 |
| | 3,323 |
| | 4.6 | % | 1,309 |
| | 1.7 | % | | 1,347 |
| | 2,411 |
| | 3,758 |
| | 4.5 | % |
| Unit-linked assets | | — |
| | — | % | | — |
| | 407 |
| | 407 |
| | 0.5 | % |
| Equity securities | 171 |
| | 257 |
| | 428 |
| | 0.6 | % | | 199 |
| | 185 |
| | 384 |
| | 0.5 | % | 194 |
| | 0.2 | % | | 192 |
| | 128 |
| | 320 |
| | 0.4 | % |
| Unit linked assets | — |
| | 370 |
| | 370 |
| | 0.5 | % | | — |
| | 363 |
| | 363 |
| | 0.5 | % | |
| Short-term investments | 188 |
| | — |
| | 188 |
| | 0.3 | % | | 250 |
| | — |
| | 250 |
| | 0.3 | % | 339 |
| | 0.4 | % | | 228 |
| | — |
| | 228 |
| | 0.3 | % |
| U.S. government and agencies | 30 |
| | 29 |
| | 59 |
| | 0.1 | % | | 32 |
| | 27 |
| | 59 |
| | 0.1 | % | 32 |
| | 0.0 | % | | 29 |
| | 35 |
| | 64 |
| | 0.1 | % |
| Other investments | 9,296 |
| | 2,582 |
| | 11,878 |
| | 16.2 | % | | 9,038 |
| | 2,639 |
| | 11,677 |
| | 16.2 | % | 11,341 |
| | 14.4 | % | | 10,312 |
| | 3,118 |
| | 13,430 |
| | 16.3 | % |
| Cash and equivalents | 896 |
| | 113 |
| | 1,009 |
| | 1.4 | % | | 1,111 |
| | 111 |
| | 1,222 |
| | 1.7 | % | 1,732 |
| | 2.2 | % | | 2,504 |
| | 296 |
| | 2,800 |
| | 3.4 | % |
| Policy loans and other | 645 |
| | 215 |
| | 860 |
| | 1.2 | % | | 631 |
| | 221 |
| | 852 |
| | 1.2 | % | 989 |
| | 1.3 | % | | 761 |
| | 296 |
| | 1,057 |
| | 1.3 | % |
| Total invested assets | $ | 68,227 |
| | $ | 5,346 |
| | $ | 73,573 |
| | 100.0 | % | | $ | 66,544 |
| | $ | 5,290 |
| | $ | 71,834 |
| | 100.0 | % | $ | 78,723 |
| | 100.0 | % | | $ | 76,262 |
| | $ | 6,036 |
| | $ | 82,298 |
| | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
1 Refer to Key Operating and Non-GAAP Measures for the definition of invested assets. | |
1 See Key Operating and Non-GAAP Measures for the definition of invested assets. | | 1 See Key Operating and Non-GAAP Measures for the definition of invested assets. |
Our total invested assets were $73.6$78.7 billion and $71.8$82.3 billion as of March 31, 20172018 and December 31, 2016,2017, respectively. As of March 31, 2017,2018, our total invested assets were mainly comprised of 46.3%49.4% of corporate securities, 31.4% of structured securities, 8.4%8.8% of mortgage loans and 4.7%4.6% of alternative investments. Corporate securities within our U.S. and Bermuda portfolio included $8.5$9.9 billion of private placements, which represented approximately 12%13% of our total U.S. and Bermuda invested assets. The increasedecrease in total invested assets as of March 31, 20172018 from December 31, 20162017 was primarily driven by issuancesthe deconsolidation of funding agreement backed notesour former Germany operations, partially offset by the strong growth in deposits over liability outflows and reinvestment of earnings.
In managing our business we utilize invested assets as presented in the above table. Invested assets do not correspond to the total investments, including related parties, on our condensed consolidated balance sheets, as discussed previously in Key Operating and Non-GAAP Measures. Invested assets represent the investments that directly back our policyholder liabilities and surplus assets. We believe this view of our portfolio provides a view of the assets for which we have economic exposure. We adjust the presentation for funds withheld and modco transactions to include or exclude the underlying investments based upon the contractual transfer of economic exposure to such underlying investments. We also deconsolidate any VIEs in order to show the net investment in the funds, which therefore are included in the alternative investments line above.
The Germany investment portfolio composition differs from the U.S.
Item 2. Management’s Discussion and Bermuda portfolio primarily due to the geographic location, regulatory environmentAnalysis of Financial Condition and participating natureResults of the German products and therefore the portfolio is managed separately from our U.S. and Bermuda portfolios. The German invested assets are predominantly invested in foreign government securities, corporate fixed income securities, real estate held for investment and assets backing our unit linked policies. The German invested assets are predominantly invested in Euro-denominated securities and investments.Operations
Invested assets is utilized by management to evaluate our investment portfolio. Invested asset figures are used in the computation of net investment earned rate, which allows us to analyze the profitability of our investment portfolio. Invested assets is also used in our risk management processes for asset purchases, product design and underwriting, stress scenarios, liquidity, and ALM.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Alternative Investments
The following summarizes our alternative investments:
| | | | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| (In millions, except percentages) | Invested Asset Value | | Percent of Total | | Invested Asset Value | | Percent of Total | Invested Asset Value | | Percent of Total | | Invested Asset Value | | Percent of Total |
| Credit funds | $ | 800 |
| | 23.0 | % | | $ | 834 |
| | 24.3 | % | $ | 720 |
| | 19.9 | % | | $ | 784 |
| | 20.4 | % |
| Private equity – MidCap | 528 |
| | 15.2 | % | | 524 |
| | 15.3 | % | 534 |
| | 14.8 | % | | 528 |
| | 13.8 | % |
| Private equity – A-A Mortgage | 449 |
| | 12.9 | % | | 417 |
| | 12.2 | % | |
| Private equity – A-A Mortgage (AmeriHome) | | 514 |
| | 14.2 | % | | 496 |
| | 12.9 | % |
| Private equity – other | 491 |
| | 14.1 | % | | 519 |
| | 15.2 | % | 619 |
| | 17.1 | % | | 554 |
| | 14.5 | % |
| Mortgage and real assets | 512 |
| | 14.7 | % | | 470 |
| | 13.7 | % | 678 |
| | 18.8 | % | | 643 |
| | 16.8 | % |
| Hedge funds | 297 |
| | 8.7 | % | | 311 |
| | 9.1 | % | 184 |
| | 5.1 | % | | 467 |
| | 12.2 | % |
| Public equities | 226 |
| | 6.5 | % | | 215 |
| | 6.3 | % | 124 |
| | 3.4 | % | | 171 |
| | 4.5 | % |
| Natural resources and other real assets | 169 |
| | 4.9 | % | | 135 |
| | 3.9 | % | 242 |
| | 6.7 | % | | 186 |
| | 4.9 | % |
| Total alternative investments | $ | 3,472 |
| | 100.0 | % | | $ | 3,425 |
| | 100.0 | % | $ | 3,615 |
| | 100.0 | % | | $ | 3,829 |
| | 100.0 | % |
Alternative investments were $3.5$3.6 billion and $3.4$3.8 billion as of March 31, 20172018 and December 31, 2016,2017, respectively, representing 4.7% and 4.8%4.6% of our total invested assets portfolio as of each of March 31, 20172018 and December 31, 2016, respectively.2017.
Alternative investments do not correspond to the total investment funds, including related parties and VIEs, on our condensed consolidated balance sheets. As discussed above in the invested assets section, we adjust the GAAP presentation for funds withheld and modco and de-consolidate VIEs. We also include CLO equity tranche securities in alternative investments due to their underlying characteristics and equity-like features.
Through our relationship with Apollo and AAM, we have indirectly invested in companies that meet the key characteristics we look for in alternative investments. Two of our largest alternative investments are in asset originators, MidCap and A-A Mortgage,AmeriHome, both of which, from time to time, provide us with access to assets for our investment portfolio.
MidCap
Our equity investment in MidCap is held indirectly through an investment fund, AAA Investment (Co Invest VII), L.P. (CoInvest VII), of which MidCap constitutes substantially all the fund’s investments. MidCap is a commercial finance company that provides various financial products to middle-market businesses in multiple industries, primarily located in the U.S. MidCap primarily originates and invests in commercial and industrial loans, including senior secured corporate loans, working capital loans collateralized mainly by accounts receivable and inventory, senior secured loans collateralized by portfolios of commercial and consumer loans and related products and secured loans to highly capitalized pharmaceutical and medical device companies, and commercial real estate loans, including multifamily independent-living properties, assisted living, skilled nursing and medical office properties, warehouse, office building, hotel and other commercial use properties and multifamily properties. MidCap originates and acquires loans using borrowings under financing arrangements that it has in place with numerous financial institutions. MidCap’s earnings are primarily driven by the difference between the interest earned on its loan portfolio and the interest accrued under its outstanding borrowings. As a result, MidCap is primarily exposed to the credit risk of its loan counterparties and prepayment risk. Additionally, financial results are influenced by related levels of middle-market business investment and interest rates.
Our alternative investment in CoInvest VII is substantially comprised of its investment in MidCap, which was $534 million and $528 million as of March 31, 2018 and December 31, 2017, werespectively. Our investment in CoInvest VII largely reflects any contributions to and distributions from CoInvest VII and the fair value of MidCap. CoInvest VII returned a net investment earned rate of 11.79% and 11.74% for the three months ended March 31, 2018 and 2017, respectively. Alternative investment income from CoInvest VII was $16 million and $16 million for the three months ended March 31, 2018 and 2017, respectively.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
AmeriHome
Our equity investment in AmeriHome is held equity positions in MidCapindirectly through an investment fund, A-A Mortgage Opportunities, LP (A-A Mortgage), of $528 million. MidCapwhich AmeriHome is currently the fund’s only investment. AmeriHome is a leading originatormortgage origination platform and an aggregator of senior debt capitalmortgage servicing rights. AmeriHome acquires mortgage loans from retail originators and re-sells the loans to the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National Mortgage Association and other investors. AmeriHome retains the mortgage servicing rights on the loans that it sells and employs a subservicer to perform servicing operations, including payment collection. AmeriHome’s earnings are primarily driven by two sources: gains or losses on sale of mortgage loans and the difference between the fee that it charges for mortgage servicing and the fee charged by the subservicer. As a result, AmeriHome’s financial results are influenced by interest rates and related housing demand. AmeriHome is primarily exposed to credit risk related to the accuracy of the representations and warranties in the middle-market with expertise in asset-backed loans leveraged loans, real estate loans, discount loansthat AmeriHome acquires and venture loans. MidCap represents a uniqueprepayment risk, which prematurely terminates fees related to mortgage servicing.
Our alternative investment in an origination platform made available to us through our relationship with Apollo. AsA-A Mortgage was $514 million and $496 million as of March 31, 2018 and December 31, 2017, we held an equity positionrespectively. Our investment in A-A Mortgage represents our proportionate share of $449 million.its net asset value, which largely reflects any contributions to and distributions from A-A Mortgage has an indirectand the fair value of AmeriHome. A-A Mortgage returned a net investment earned rate of 13.75% and 10.11% for the three months ended March 31, 2018 and 2017, respectively. Alternative investment income from A-A Mortgage was $18 million and $11 million for the three months ended March 31, 2018 and 2017, respectively. The increase in AmeriHome, which originates RMLsalternative investment income of $7 million over 2017 was driven by increases in its overall balance sheet size, origination volumes and retained mortgage servicing rights.
Non-GAAP Measure Reconciliations
The reconciliations to the nearest GAAP measure for adjusted operating income net of tax is included in the Consolidated Results of Operations section.
The reconciliation of AHL shareholders’ equity to AHLadjusted shareholders’ equity excluding AOCI included in the adjusted book value per share, adjusted debt to capital ratio, adjusted ROE excluding AOCI and adjusted operating income ROE excluding AOCI is as follows:
| | | (In millions) | March 31, 2017 | | March 31, 2016 | March 31, 2018 | | December 31, 2017 |
| Total AHL shareholders' equity | $ | 7,597 |
| | $ | 5,638 |
| |
| Total shareholders’ equity | | $ | 8,695 |
| | $ | 9,208 |
|
| Less: AOCI | 673 |
| | (52 | ) | 585 |
| | 1,415 |
|
| Total AHL shareholders' equity excluding AOCI | $ | 6,924 |
| | $ | 5,690 |
| |
| Less: Reinsurance unrealized gains and losses | | 107 |
| | 161 |
|
| Total adjusted shareholders’ equity | | $ | 8,003 |
| | $ | 7,632 |
|
| | | | | | | |
| Segment adjusted shareholders’ equity | | | | |
| Retirement Services | $ | 4,853 |
| | $ | 4,071 |
| $ | 5,552 |
| | $ | 5,304 |
|
| Corporate and Other | 2,071 |
| | 1,619 |
| 2,451 |
| | 2,328 |
|
| Total AHL shareholders' equity excluding AOCI | $ | 6,924 |
| | $ | 5,690 |
| |
| Total adjusted shareholders’ equity | | $ | 8,003 |
| | $ | 7,632 |
|
The reconciliation of net income to adjusted net income included in adjusted ROE is as follows:
|
| | | | | | | |
| | Three months ended March 31, |
| (In millions) | 2018 | | 2017 |
| Net income | $ | 268 |
| | $ | 384 |
|
| Reinsurance unrealized gains and losses | 54 |
| | (43 | ) |
| Adjusted net income | $ | 322 |
| | $ | 341 |
|
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The reconciliation of net investment income to net investment earnings and earned rate is as follows:
| | | | Three months ended March 31, | Three months ended March 31, |
| | 2017 | | 2016 | 2018 | | 2017 |
| (In millions, except percentages) | Dollar | | Rate | | Dollar | | Rate | Dollar | | Rate | | Dollar | | Rate |
| GAAP net investment income | $ | 786 |
| | 4.32 | % | | $ | 692 |
| | 4.10 | % | $ | 855 |
| | 4.41 | % | | $ | 786 |
| | 4.32 | % |
| Reinsurance embedded derivative impacts | 45 |
| | 0.25 | % | | 36 |
| | 0.21 | % | 45 |
| | 0.22 | % | | 45 |
| | 0.25 | % |
| Net VIE earnings | 11 |
| | 0.06 | % | | (16 | ) | | (0.09 | )% | 15 |
| | 0.08 | % | | 11 |
| | 0.06 | % |
| Alternative income gain (loss) | (13 | ) | | (0.07 | )% | | (32 | ) | | (0.19 | )% | 1 |
| | 0.01 | % | | (13 | ) | | (0.07 | )% |
| Held for trading amortization | (15 | ) | | (0.08 | )% | | — |
| | — | % | (23 | ) | | (0.12 | )% | | (15 | ) | | (0.08 | )% |
| Total adjustments to arrive at net investment earnings/earned rate | 28 |
| | 0.16 | % | | (12 | ) | | (0.07 | )% | 38 |
| | 0.19 | % | | 28 |
| | 0.16 | % |
| Total net investment earnings/earned rate | $ | 814 |
| | 4.48 | % | | $ | 680 |
| | 4.03 | % | $ | 893 |
| | 4.60 | % | | $ | 814 |
| | 4.48 | % |
| | | | | | | | | | | | | | | |
| Retirement Services | $ | 780 |
| | 4.76 | % | | $ | 691 |
| | 4.59 | % | $ | 866 |
| | 4.63 | % | | $ | 780 |
| | 4.76 | % |
| Corporate and Other | 34 |
| | 1.88 | % | | (11 | ) | | (0.62 | )% | 27 |
| | 3.76 | % | | 34 |
| | 1.88 | % |
| Total net investment earnings/earned rate | $ | 814 |
| | 4.48 | % | | $ | 680 |
| | 4.03 | % | $ | 893 |
| | 4.60 | % | | $ | 814 |
| | 4.48 | % |
| | | | | | | | | | | | | | | |
| Retirement Services average invested assets | $ | 65,580 |
| | | | $ | 60,259 |
| | | $ | 74,735 |
| | | | $ | 65,576 |
| | |
| Corporate and Other average invested assets | 7,123 |
| | | | 7,153 |
| | | 2,844 |
| | | | 7,123 |
| | |
| Consolidated average invested assets | $ | 72,703 |
| | | | $ | 67,412 |
| | | $ | 77,579 |
| | | | $ | 72,699 |
| | |
The reconciliation of interest sensitive contract benefits to Retirement Services'Services’ cost of crediting on deferred annuities, and the respective rates, is as follows:
| | | | Three months ended March 31, | Three months ended March 31, |
| | 2017 | | 2016 | 2018 | | 2017 |
| (In millions, except percentages) | Dollar | | Rate | | Dollar | | Rate | Dollar | | Rate | | Dollar | | Rate |
| GAAP interest sensitive contract benefits | $ | 696 |
| | 5.05 | % | | $ | 253 |
| | 2.03 | % | $ | 19 |
| | 0.13 | % | | $ | 692 |
| | 5.02 | % |
| Interest credited other than deferred annuities | (30 | ) | | (0.22 | )% | | (29 | ) | | (0.23 | )% | (40 | ) | | (0.27 | )% | | (26 | ) | | (0.19 | )% |
| FIA option costs | 145 |
| | 1.04 | % | | 136 |
| | 1.11 | % | 174 |
| | 1.18 | % | | 145 |
| | 1.04 | % |
| Product charges (strategy fees) | (17 | ) | | (0.12 | )% | | (11 | ) | | (0.09 | )% | (22 | ) | | (0.15 | )% | | (17 | ) | | (0.12 | )% |
| Reinsurance embedded derivative impacts | 9 |
| | 0.07 | % | | 6 |
| | 0.05 | % | 3 |
| | 0.02 | % | | 9 |
| | 0.07 | % |
| Change in fair value of embedded derivatives – FIAs | (534 | ) | | (3.87 | )% | | (136 | ) | | (1.10 | )% | 133 |
| | 0.90 | % | | (534 | ) | | (3.87 | )% |
| Negative VOBA amortization | 12 |
| | 0.09 | % | | 9 |
| | 0.07 | % | 10 |
| | 0.07 | % | | 12 |
| | 0.09 | % |
| Unit linked change in reserves | (18 | ) | | (0.13 | )% | | 15 |
| | 0.12 | % | |
| Unit-linked change in reserves | | — |
| | — | % | | (18 | ) | | (0.13 | )% |
| Other changes in interest sensitive contract liabilities | | (2 | ) | | (0.01 | )% | | — |
| | — | % |
| Total adjustments to arrive at cost of crediting on deferred annuities | (433 | ) | | (3.14 | )% | | (10 | ) | | (0.07 | )% | 256 |
| | 1.74 | % | | (429 | ) | | (3.11 | )% |
| Retirement Services cost of crediting on deferred annuities | $ | 263 |
| | 1.91 | % | | $ | 243 |
| | 1.96 | % | $ | 275 |
| | 1.87 | % | | $ | 263 |
| | 1.91 | % |
| | | | | | | | | | | | | | | |
| Average account value | $ | 55,154 |
| | | | $ | 49,626 |
| | | $ | 58,993 |
| | | | $ | 55,154 |
| | |
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The reconciliation of total investments, including related parties, to invested assets is as follows:
| | | (In millions) | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| Total investments, including related parties | $ | 75,129 |
| | $ | 72,433 |
| $ | 80,261 |
| | $ | 84,367 |
|
| Derivative assets | (1,708 | ) | | (1,370 | ) | (2,031 | ) | | (2,551 | ) |
| Cash and cash equivalents (including restricted cash) | 2,636 |
| | 2,502 |
| 2,822 |
| | 4,993 |
|
| Accrued investment income | 575 |
| | 554 |
| 620 |
| | 652 |
|
| Payables for collateral on derivatives | (1,681 | ) | | (1,383 | ) | (1,145 | ) | | (2,323 | ) |
| Reinsurance funds withheld and modified coinsurance | (410 | ) | | (414 | ) | (467 | ) | | (579 | ) |
| VIE assets, liabilities and noncontrolling interest | 926 |
| | 886 |
| 810 |
| | 862 |
|
| AFS unrealized (gain) loss | (1,561 | ) | | (1,030 | ) | (1,332 | ) | | (2,794 | ) |
| Ceded policy loans | (333 | ) | | (344 | ) | (286 | ) | | (296 | ) |
| Net investment receivables (payables) | | (529 | ) | | (33 | ) |
| Total adjustments to arrive at invested assets | (1,556 | ) | | (599 | ) | (1,538 | ) | | (2,069 | ) |
| Total invested assets | $ | 73,573 |
| | $ | 71,834 |
| $ | 78,723 |
| | $ | 82,298 |
|
The reconciliation of total investment funds, including related parties and VIEs, to alternative investments within invested assets is as follows:
| | | (In millions) | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| Investment funds, including related parties and VIEs | $ | 2,564 |
| | $ | 2,460 |
| $ | 2,728 |
| | $ | 2,580 |
|
| CLO equities included in trading securities | 218 |
| | 260 |
| 163 |
| | 182 |
|
| Financial Credit Investment special-purpose vehicle included in trading securities related party | | — |
| | 287 |
|
| Investment funds within funds withheld at interest | 328 |
| | 329 |
| 454 |
| | 416 |
|
| Royalties, other assets included in other investments and other assets | 82 |
| | 81 |
| 74 |
| | 76 |
|
| Net assets of the VIE, excluding investment funds | 280 |
| | 295 |
| 196 |
| | 288 |
|
| Total adjustments to arrive at alternative investments | 908 |
| | 965 |
| 887 |
| | 1,249 |
|
| Alternative investments | $ | 3,472 |
| | $ | 3,425 |
| $ | 3,615 |
| | $ | 3,829 |
|
The reconciliation of total liabilities to reserve liabilities is as follows:
| | | (In millions) | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| Total liabilities | $ | 81,623 |
| | $ | 79,814 |
| $ | 84,862 |
| | $ | 90,539 |
|
| Long-term debt | | (992 | ) | | — |
|
| Derivative liabilities | (32 | ) | | (40 | ) | (186 | ) | | (134 | ) |
| Payables for collateral on derivatives | (1,681 | ) | | (1,383 | ) | (1,145 | ) | | (2,323 | ) |
| Funds withheld liability | (382 | ) | | (380 | ) | (395 | ) | | (407 | ) |
| Other liabilities | (999 | ) | | (685 | ) | (1,277 | ) | | (1,222 | ) |
| Liabilities of consolidated VIEs | (37 | ) | | (34 | ) | (1 | ) | | (2 | ) |
| Reinsurance ceded receivables | (5,960 | ) | | (6,001 | ) | (4,834 | ) | | (4,972 | ) |
| Policy loans ceded | (333 | ) | | (344 | ) | (286 | ) | | (296 | ) |
| Other | 3 |
| | 4 |
| |
| Total adjustments to arrive at reserve liabilities | (9,421 | ) | | (8,863 | ) | (9,116 | ) | | (9,356 | ) |
| Total reserve liabilities | $ | 72,202 |
| | $ | 70,951 |
| $ | 75,746 |
| | $ | 81,183 |
|
Liquidity and Capital Resources
Liquidity is the abilityThere are two forms of liquidity relevant to generate sufficient cash flows to meet the cash requirements ofour business, operations or to rebalance our investment portfolio without incurring significant costs.funding liquidity and balance sheet liquidity. Funding liquidity relates to the ability to fund operations. Balance sheet liquidity reflects therelates to our ability to liquidate or rebalance the company’sour balance sheet without incurring significant costs from fees, bid-offer spreads, or market impact. We manage our liquidity position by matching projected cash demands with adequate sources of cash and other liquid assets. Our principal sources of liquidity, in the ordinary course of business, are operating cash flows and holdings of cash, cash equivalents and other readily marketable assets.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Our investment portfolio is structured to ensure a strong liquidity position over time in order to permit timely payment of policy and contract benefits without requiring asset sales at inopportune times or at depressed prices. In general, liquid assets include cash and cash equivalents, highly rated corporate bonds, unaffiliated preferred stock and unaffiliated public common stock, all of which generally have liquid markets with a large number of buyers. The carrying value of these assets as of March 31, 20172018 was approximately $45.6$48.8 billion. Although our investment portfolio does contain assets that are generally considered illiquid for liquidity monitoring purposes (primarily mortgage loans, policy loans, real estate, investment funds, and affiliated common stock), there is some ability to raise cash from these assets if needed. Along with these liquid assets, inIn periods of economic downturn we may maintain higher cash balances than required to manage our liquidity risk and to take advantage of market dislocations as they arise. We have anaccess to additional liquidity cushion through aour $1.0 billion revolving credit facility, which is undrawn as of the date hereof.hereof and has a remaining term of approximately three years. On January 3, 2018, we filed a registration statement on Form S-3 ASR (Shelf Registration Statement), which, subject to market conditions and other factors, provides us with access to the capital markets and on January 12, 2018, we issued $1.0 billion of senior unsecured notes under our Shelf Registration Statement. In addition, through our membership in the FHLBDM and the FHLBI,FHLB, we are eligible to borrow under variable rate short-term federal funds arrangements to provide additional liquidity.
We proactively manage our liquidity position to meet cash needs while minimizing adverse impacts on investment returns. We analyze our cash-flow liquidity over the upcoming 12 months by modeling potential demands on liquidity under a variety of scenarios, modeling potential demands on liquidity, taking into account the provisions of our policies and contracts in force, our cash flow position, and the volume of cash and readily marketable securities in our portfolio. By policy, we maintain sufficient liquidity not only to meet our cash-flow requirements over the succeeding 12-month period in a moderately severe scenario (for example, a recessionary environment), but also to have excess liquidity available to invest into potential investment opportunities created from market dislocations. We also monitor our liquidity profile under more severe scenarios.
We perform a number of stress tests and analyses to assess our ability to meet our cash flow requirements, as well as the ability of our reinsurance and insurance subsidiaries to meet their collateral obligations. Among these analyses, we manage to the following ALM limits:
our projected net cumulative cash flows, including both new business and target levels of new investments under a “plan scenario” and a “moderately severe scenario” event, are non-negative over a rolling 12-month horizon;
we hold at least $250 million inenough cash, and cash equivalents across the group; and at least $150 million in the aggregate in securities with the following characteristics:other discounted liquid limit assets to cover 12 months of AHL’s and Athene USA’s projected obligations, including debt servicing costs
| |
| ▪ | public corporate bonds rated A- or above;minimum of 50% of expenses and 100% of debt servicing to be held in cash and cash equivalents at AHL operating accounts |
| |
| ▪ | minimum of 50% of any required AHL – Athene USA inter-company loan commitments to be held in cash and cash equivalents by AHL |
| |
| ▪ | dividends required from ALRe must be available under moderate and substantial stress |
| |
| ▪ | for purposes of administering this test, liquid limit assets are discounted by 25% and include public corporate bonds rated A- or above, liquid ABS (defined as prime auto, auto floorplan, Tier 1 subprime auto, auto lease, prime credit cards, equipment lease or utility stranded assets) and RMBS with weighted average lives less than three years rated A- or above; or |
| |
▪ | CMBS with weighted average lives less than three years rated AAA- or above;above |
we maintain assets that can be liquidated in one quarter under normal market conditions equalseek to 25% of the policyholder obligations that are deemed to be most liquid, which is defined as policies with a cash surrender value, no income rider, no MVA, with lower than 5% surrender charge protection and lower than 3% minimum floor guarantee, if any; and
we maintain sufficient capital and surplus at ALRe to meet collateral calls from modco and third-party reinsurance contracts under a substantial stress event, such as the failure of a major financial institution (Lehman event).
Insurance Subsidiaries'Subsidiaries’ Liquidity
The primary cash flow sources for our insurance subsidiaries include retirement services product inflows (premiums), investment income, principal repayments on our investments, and net transfers from separate accounts and financial product deposits. Uses of cash include investment purchases, payments to policyholders for surrenders and withdrawals, policy acquisition costs, and general operating costs.
Our policyholder obligations are generally long-term in nature. However, one liquidity risk is an extraordinary level of early policyholder withdrawals. We include provisions within our annuity policies, such as surrender charges and MVAs, which are intended to protect us from early withdrawals. As of each of March 31, 20172018 and December 31, 2016,2017, approximately 86% of our deferred annuity liabilities were subject to penalty upon surrender. In addition, as of each of March 31, 20172018 and December 31, 2016,2017, approximately 73%72% of policies contained MVAs that also have the effect of limiting early withdrawals if interest rates increase. Our funding agreements, PRT obligations and payout annuities are generally non-surrenderable.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Cash Flows
Our cash flows were as follows:
| | | | Three months ended March 31, | Three months ended March 31, |
| (In millions) | 2017 | | 2016 | 2018 | | 2017 |
| Net income | $ | 373 |
| | $ | 87 |
| $ | 268 |
| | $ | 384 |
|
| Non-cash revenues and expenses | 56 |
| | 301 |
| 305 |
| | 45 |
|
| Net cash provided by operating activities | 429 |
| | 388 |
| 573 |
| | 429 |
|
| | | | | | | |
| Sales, maturities, and repayment of investments | 3,688 |
| | 3,158 |
| 4,242 |
| | 3,688 |
|
| Purchases and acquisitions of investments | (5,185 | ) | | (3,176 | ) | (7,057 | ) | | (5,171 | ) |
| Other investing activities | 357 |
| | 133 |
| (69 | ) | | 355 |
|
| Net cash (used in) provided by investing activities | (1,140 | ) | | 115 |
| |
| Net cash used in investing activities | | (2,884 | ) | | (1,128 | ) |
| | | | | | | |
| Capital contributions | — |
| | 1 |
| |
| Deposits on investment-type policies and contracts | 1,925 |
| | 784 |
| 1,774 |
| | 1,925 |
|
| Withdrawals on investment-type policies and contracts | (1,403 | ) | | (1,185 | ) | (1,474 | ) | | (1,399 | ) |
| Net changes of cash collateral posted for derivative transactions | 298 |
| | (106 | ) | |
| Net change in cash collateral posted for derivative transactions | | (1,178 | ) | | 298 |
|
| Net proceeds and repayment of debt | | 998 |
| | — |
|
| Other financing activities | (7 | ) | | 10 |
| 19 |
| | (7 | ) |
| Net cash provided by (used in) financing activities | 813 |
| | (496 | ) | |
| Net cash provided by financing activities | | 139 |
| | 817 |
|
| Effect of exchange rate changes on cash and cash equivalents | 4 |
| | 10 |
| — |
| | 4 |
|
Net increase in cash and cash equivalents1 | $ | 106 |
| | $ | 17 |
| |
Net (decrease) increase in cash and cash equivalents1 | | $ | (2,172 | ) | | $ | 122 |
|
| | | | | | | |
1 Includes cash and cash equivalents of consolidated VIEs | |
1 Includes cash and cash equivalents, restricted cash, and cash and cash equivalents of consolidated variable interest entities. | | 1 Includes cash and cash equivalents, restricted cash, and cash and cash equivalents of consolidated variable interest entities. |
Cash flows from operating activities
The primary cash inflows from operating activities include net investment income, annuity considerations and insurance premiums. The primary cash outflows from operating activities are comprised of benefit payments, interest credited to policyholders, operating expenses and taxoperating expenses. Our operating activities generated cash flows totaling $429$573 million and $388$429 million for the three months ended March 31, 20172018 and 2016,2017, respectively. The increase in cash provided by operating activities for the three months ended March 31, 20172018 compared to 20162017 was primarily driven by thean increase in premiums due to $266 million of PRT premiums and an increase in net investment income reflecting an increase in our investment portfolio attributed to the strong growth in deposits over the prior twelve months.deposits.
Cash flows from investing activities
The primary cash inflows from investing activities are the sales, maturities and repayments of investments. The primary cash outflows from investing activities are the purchases and acquisitions of new investments. Our investing activities used cash flows totaling $2.9 billion and $1.1 billion for the three months ended March 31, 2018 and 2017, and provided cash flows totaling $115 million for the three months ended March 31, 2016.respectively. The change in cash used in investing activities for the three months ended March 31, 20172018 compared to 20162017 was primarily attributed to the purchase of investments related to the increase in deposits over withdrawalsliability outflows, the investment of proceeds from our debt issuance and maturities andthe reinvestment of earnings.
Cash flows from financing activities
The primary cash inflows from financing activities are deposits on our investment-type policies, changes of cash collateral posted for derivative transactions, capital contributions and proceeds from borrowing activities. The primary cash outflows from financing activities are withdrawals on our investment-type policies, changes of cash collateral posted for derivative transactions and repayments from borrowing activities. Our financing activities provided cash flows totaling $813$139 million and $817 million for the three months ended March 31, 2018 and 2017, and used cash flows totaling $496 million for the three months ended March 31, 2016.respectively. The change in cash provided from financing activities for the three months ended March 31, 20172018 was primarily attributed to the increase in deposits over withdrawals and maturities and the favorable change in cash collateral posted for derivative transactions.transactions, partially offset by proceeds from the issuance of debt.
Holding Company Liquidity
AHL is a holding company whose primary liquidity needs include the cash-flow requirements ofrelating to its insurance subsidiaries to support retail annuity sales, reinsurancecorporate activities, including its day-to-day operations and strategic transactions, acquisition opportunities and new investments, and interest payments.such as acquisitions. The primary source of AHL’s cash flow is dividends from its subsidiaries, which are expected to be adequate to fund cash flow requirements based on current estimates of future obligations. As
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The ability of AHL’s insurance subsidiaries to pay dividends is limited by applicable laws and regulations of the jurisdictions where the subsidiaries are domiciled, as well as agreements entered into with regulators. These laws and regulations require, among other things, the insurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay.
Subject to these limitations and prior notification to the appropriate regulatory agency, the U.S. insurance subsidiaries are permitted to pay ordinary dividends based on calculations specified under insurance laws of the relevant state of domicile, subject to prior notification to the appropriate regulatory agency.domicile. Any distributions above the amount permitted by statute in any twelve month period are considered to be extraordinary dividends, and the approval of the appropriate regulator is required prior to payment. In addition, dividends from U.S. insurance subsidiaries to AHL would result in a 30% withholding tax. AHL does not currently plan on having the U.S. subsidiaries pay any dividends to AHL. ALV and APK (the life insurance entities of our German Group Companies) are regulated by BaFin. ALV and APK are restricted as to the payment of dividends pursuant to calculations, which are based upon the analysis of current euro swap rates against existing policyholder guarantees. As of March 31, 2017, ALV and APK did not exceed this threshold and, therefore, no amounts are available for distribution to AHL. As a result, dividends from ALRe are projected to be the primary source of AHL’s liquidity.
Under the Bermuda Insurance Act, ALRe is prohibited from paying a dividend in an amount exceeding 25% of the prior year’s statutory capital and surplus, unless at least two members of ALRe’s board of directors and its principal representative in Bermuda sign and submit to the BMA an affidavit attesting that a dividend in excess of this amount would not cause ALRe to fail to meet its relevant margins. In certain instances, ALRe would also be required to provide prior notice to the BMA in advance of the payment of dividends. In the event that such an affidavit is submitted to the BMA in accordance with the Bermuda Insurance Act, and further subject to ALRe meeting its relevant margins, ALRe is permitted to distribute up to the sum of 100% of statutory surplus and an amount less than 15% of its total statutory capital. Distributions in excess of this amount require the approval of the BMA.
The maximum distribution permitted by law or contract is not necessarily indicative of an insurer’sour actual ability to pay such distributions, which may be constrainedfurther restricted by business and other considerations, such as the potential imposition of withholding tax and the impact of such distributions on surplus, which could affect the insurer’sour ratings or competitive position and the amount of premiums that can be writtenwritten. Specifically, the level of capital needed to maintain desired financial strength ratings from rating agencies, including S&P, A.M. Best and Fitch, is of particular concern when determining the abilityamount of capital available for distributions. AHL believes its insurance subsidiaries have sufficient statutory capital and surplus, combined with additional capital available to pay future dividends or make other distributions. Further, be provided by AHL, to meet their financial strength ratings objectives. Finally
state insurance laws and regulations require that the statutory surplus of our insurance subsidiaries following any dividend or distribution must be reasonable in relation to their outstanding liabilities and adequate for the insurance subsidiaries’ financial needs. Along with solvency regulations, another primary consideration in determining the amount of capital used for dividends is the level of capital needed to maintain desired financial strength ratings from rating agencies, including S&P, A.M. Best and Fitch. Given recent economic events that have affected the insurance industry, both regulators and rating agencies could become more conservative in their methodology and criteria, including increasing capital requirements for insurance subsidiaries. AHL believes its insurance subsidiaries have sufficient statutory capital and surplus, combined with additional capital available to be provided by AHL, to meet this financial strength rating objective.
Other Sources of Funding
If needed, we may seek to secure additional funding at the holding company level by means other than dividends from subsidiaries, such as by drawing on our undrawn $1.0 billion credit facility andor by pursuing future issuances of debt or equity securities to third-party investors. However, such additional funding may not be available on terms favorable to us or at all, depending on our financial condition or results of operations or prevailing market conditions. In addition, certain covenants in our credit facility prohibit us from incurring any debt not expressly permitted thereby, which may limit our ability to pursue future issuances of debt.
Shelf Registration
On January 3, 2018, we filed our Shelf Registration Statement with the United States Securities and Exchange Commission (SEC), which became effective upon filing. Under our Shelf Registration Statement, we have the ability to issue, in indeterminate amounts, debt securities, preferred shares, depositary shares, Class A common shares, warrants and units. On January 12, 2018 we issued $1.0 billion in aggregate principal amount of 4.125% Senior Notes due January 2028 under our Shelf Registration Statement.
Membership in Federal Home Loan Bank
We are a member of the FHLBDM and the FHLBI. Membership in a FHLB requires the member to purchase FHLB common stock based on a percentage of the dollar amount of advances outstanding, subject to the investment being greater than or equal to a minimum level. We owned a total of $31$39 million and $40$36 million of FHLB common stock as of March 31, 20172018 and December 31, 2016,2017, respectively. In the second quarter of 2018, we purchased an additional $7 millionin FHLB common stock in conjunction with a short-term borrowing.
Through our membership in the FHLBDM and FHLBI, we are eligible to borrow under variable rate short-term federal funds arrangements to provide additional liquidity. The borrowings must be secured by eligible collateral such as mortgage loans, eligible CMBS or RMBS, government or agency securities and guaranteed loans.guaranteed loans. There were no outstanding borrowings under these arrangements as of March 31, 20172018 or December 31, 2016.2017. In the second quarter of 2018, we borrowed $183 million from the FHLBDM through their variable rate short-term federal funds program.
On August 11, 2016, we provided notice to the FHLBI that ALICAthene Life Insurance Company (ALIC) is withdrawing its membership thereto. The FHLBI confirmed receipt of our request on the following day. Pursuant to the FHLBI’s capital plan, ALIC’s membership will be withdrawn as of the fifth anniversary of the FHLBI’s receipt of our notice. Until such time that ALIC’s membership is withdrawn, ALIC continues to have all of the rights and obligations of being a member of the FHLBI, except that with respect to some or all of the FHLBI stock that ALIC owns, we will be entitled to a lower dividend amount, to the extent that the FHLBI declares a dividend. ALIC may continue to borrow from the FHLBI, provided that without the consent of the FHLBI, the transaction must mature or otherwise terminate prior to ALIC’s withdrawal of membership.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
In addition, weWe have issued funding agreements to the FHLB in exchange for cash advances. These funding agreements were issued in an investment spread strategy, consistent with other investment spread operations. As of March 31, 20172018 and December 31, 2016,2017, we had an aggregate of $459$616 million and $691$573 million, respectively, of outstanding FHLB funding agreements. Refer toSee Note 1312 – Commitments and Contingencies to the condensed consolidated financial statements for details of issued funding agreements and related collateral.
The maximum FHLB indebtedness by a member is determined by the amount of collateral pledged, and cannot exceed a specified percentage of the member'smember’s total statutory assets dependent on the internal credit rating assigned to the member by the FHLB. As of March 31, 2017 and December 31, 2016,2018, the total maximum borrowings under the FHLBDM facility were limited to $14.4 billion and $14.0 billion, respectively.$16.5 billion. However, our ability to borrow under the facility is constrained by the availability of assets that qualify as eligible collateral under the facility and by the Iowa Code requirement that we maintain funds equivalent to our legal reserve in certain permitted investments, from which we exclude pledged assets. WeConsidering these limitations, we estimate that, as of each of March 31, 2017 and December 31, 2016,2018, we had the ability to draw up to a total of approximately $4.2 billion and $4.5$1.5 billion, inclusive of borrowings then outstanding.outstanding, but excluding the borrowing occurring during the second quarter of 2018 discussed above. This estimate is based on our internal analysis and assumptions, and may not accurately measure collateral which is ultimately acceptable to the FHLB. Drawing such amounts would have an adverse impact on AAIA’s RBC ratio, which may further restrict our ability or willingness to draw up to our estimated capacity.
Capital Resources
As of December 31, 20162017 and 2015,2016, our U.S. insurance companies'companies’ TAC, as defined by the NAIC, was $1.8$1.9 billion and $1.7$1.8 billion, respectively, and our ALRe statutory capital as defined by the BMA, was $6.1$7.0 billion and $5.7$6.1 billion, respectively. As of December 31, 20162017 and 2015,2016, our U.S. RBC ratio was 478%490% and 552%478%, respectively, and our BSCR ratio was 228%354% and 323%228%, respectively, all above our internal targets. The change in our U.S. RBC as of December 31, 2016 compared to December 31, 2015 was primarily driven by our investment of capital to organically grow our retail channel, which increased significantly during 2016. Each U.S. domestic insurance subsidiary’s state of domicile imposes minimum RBC requirements that were developed by the NAIC. The formulas for determining the amount of RBC specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of TAC to ACL. Our TAC was significantly in excess of all regulatory standards and above our internal targets as of March 31, 2017,2018, December 31, 20162017 and 2015,2016, respectively. ALRe adheres to BMA regulatory capital requirements to maintain statutory capital and surplus to meet the MMS and maintain minimum EBSeconomic balance sheet (EBS) capital and surplus to meet the ECR. Effective January 1, 2016, in connection with the implementation of its broader regulatory regime, the BMA integrated the EBS framework into the determination of BSCR. The European Commission has granted the BMA's regulatory regime for reinsurance, group solvency calculation and group supervision full equivalence to Solvency II.Enhanced Capital Requirement (ECR). Under the EBS framework, ALRe'sALRe’s assets are recorded at market value and its insurance reserves are determined by reference to nine prescribed scenarios, with the scenario resulting in the highest reserve balance being ultimately required to be selected. The ALRe EBS capital and surplus was $7.7 billion and $4.4 billion resulting in a BSCR ratio of 354% and 228%, as of December 31, 2016. Although the calculation of the ECR was unchanged from prior year, the BSCR ratios for December 31,2017 and 2016, and 2015 are not comparable as the 2015 calculation applied to ALRe's statutory capital and the 2016 calculation now applies to the EBS capital and surplus. Consistent with the previous regime therespectively. The MRC ratio to be considered solvent by the BMA is 100%. As of March 31, 2017,2018, December 31, 20162017 and 2015,2016, ALRe held the appropriate capital to adhere to these regulatory standards. In evaluating our capital position and the amount of capital needed to support our Retirement Services segment, we review our ALRe capital by applying the NAIC RBC factors. As of December 31, 20162017 and 2015,2016, our ALRe RBC ratio was 529%562% and 468%529%, respectively, both above our internal targets. Our German Group Companies adhere to the regulatory capital requirements set forth by BaFin. Our German Group Companies held the appropriate capital to adhere to these regulatory standards as of December 31, 2016. Effective January 1, 2016, our German Group Companies became subject to Solvency II MCR requirements interpreted by the relevant regulatory authorities. We believe that we enjoy a strong capital position in light of our risks and that we are well positioned to meet policyholder and other obligations. We also believe that our strong capital position, as well as operating withour excess capital position, provides us the opportunity to take advantage of market dislocations as they arise. Changes in U.S. tax rates under the Tax Act may impact our RBC ratios. See Part I—Item 1. Business–Regulation–United States–Tax Reform in our 2017 Annual Report for further discussion.
Balance Sheet and Other Arrangements
Balance Sheet Arrangements
Contractual Obligations
As of March 31, 2017,2018, there have been no significant changes to contractual obligations since December 31, 2016.2017, except for the addition of long-term debt as presented below. See Part II—Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations in our 20162017 Annual Report.
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (In millions) | Total | | 2018 | | 2019-2020 | | 2021-2022 | | 2023 and thereafter |
| Long-term debt | $ | 1,413 |
| | $ | 21 |
| | $ | 83 |
| | $ | 83 |
| | $ | 1,226 |
|
Other
In the normal course of business, we invest in various investment funds which are considered VIEs, and we consolidate a VIE when we are considered the primary beneficiary of the entity. For further discussion of our involvement with VIEs, see Note 4 – Variable Interest Entities to the condensed consolidated financial statements.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Estimates and Judgments
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Amounts based on such estimates involve numerous assumptions subject to varying and potentially significant degrees of judgment and uncertainty, particularly related to the future performance of the underlying business, and will likely change in the future as additional information becomes available. Critical estimates and assumptions are evaluated on an ongoing basis based on historical developments, market conditions, industry trends and other information that is reasonable under the circumstances. There can be no assurance that actual results will conform to estimates and assumptions and that reported results of operations will not be materially affected by the need to make future accounting adjustments to reflect periodic changes in these estimates and assumptions. Critical accounting estimates are impacted significantly by our methods, judgments and assumptions used in the preparation of the consolidated financial statements and should be read in conjunction with our significant accounting policies described in Note 1 – Business, Basis of Presentation and Significant Accounting Policies to the consolidated financial statements of our 20162017 Annual Report. The most critical accounting estimates and judgments include those used in determining:
fair value of investments;
impairment of investments and valuation allowances;
future policy benefit reserves;
derivatives valuation, including embedded derivatives;
deferred acquisition costs, deferred sales inducements and value of business acquired;
stock-based compensation;
consolidation of VIEs; and
valuation allowances on deferred tax assets.
The above critical accounting estimates and judgments are discussed in detail in Part II—Item 7. Management's2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 20162017 Annual Report.
See Note 1 – Business, Basis of Presentation and Significant Accounting Policies to the condensed consolidated financial statements included in Part I—Item 1. Financial Statementsfor adoption of new and future accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
We regularly analyze our exposure to market risks, which reflect potential losses in value due to credit and counterparty risk, interest rate risk, currency risk, commodity price risk and equity price risk. As a result of that analysis, we have determined that we are primarily exposed to credit risk, interest rate risk and to a lesser extent, equity price risk. A description of our market risk exposures, including strategies used to manage our exposure to market risk, may be found under Part II—Item 7A. Quantitative and Qualitative Disclosures About Market Risk of the 20162017 Annual Report.
There have been no material changes to our market risk exposures from the market risk exposuresthose previously disclosed in the 20162017 Annual Report.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures as such term is defined under Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation, as of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at attaining the level of reasonable assurance noted above.
There were no changes to the Company’sour internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the quarter ended March 31, 2017,2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to litigation arising in the ordinary course of our business, including litigation principally relating to our FIA business. We cannot assure you that our insurance coverage will be adequate to cover all liabilities arising out of such claims. WeThe outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. There is significant judgment required in assessing both the probability of an adverse outcome and the determination as to whether an exposure can be reasonably estimated. In management’s opinion, the ultimate disposition of any current legal proceedings or claims brought against us will not engaged in any legal proceeding that we believe will behave a material toeffect on our business, financial condition, results of operations or cash flows. Litigation is, however, inherently uncertain and an adverse outcome from such litigation could have a material effect on the operating results of a particular reporting period.
From time to time, in the ordinary course of business and like others in the insurance and financial services industries, we receive requests for information from government agencies in connection with such agencies’ regulatory or investigatory authority. Such requests can include financial or market conduct examinations, subpoenas or demand letters for documents to assist the government in audits or investigations. We and each of our U.S. insurance subsidiaries review such requests and notices and take appropriate action. We have been subject to certain requests for information and investigations in the past and could be subject to them in the future.
For a description of certain legal proceedings affecting us, refer tosee Note 1312 – Commitments and Contingencies – Litigation, Claims and Assessments to the condensed consolidated financial statements.
Item 1A. Risk Factors
The following should be read in conjunction with, and supplements and amends, the factors that may affect our business or operations described in Part I—Item 1A. Risk Factors of our 20162017 Annual Report. Other than as described in this Item 1A, there have been no material changes to our risk factors from the risk factors previously disclosed in our 20162017 Annual Report.
Risks Relating to Our Business
The following updates and replaces the second and fourth paragraphslast paragraph of the similarly named risk factor included in our 20162017 Annual Report.Report:
Our business, financial condition, liquidity, results of operations and cash flows depend on the accuracy of our management’s assumptions and estimates, and we could face significant losses if these assumptions and estimates differ significantly from actual results
BEAT Mitigating Actions
In light of the possibility of material additional tax cost to our U.S. subsidiaries and the lack of clear guidance regarding the appropriate method by which to compute the BEAT, we are undertaking certain actions and exploring various alternatives intended to mitigate the potential effect of the BEAT on our results of operations in the event it is determined that none of the amounts paid or accrued by our non-U.S. reinsurance subsidiaries to our U.S. subsidiaries are taken into account in the calculation of “base erosion payments” or “base erosion tax benefit.” We have made estimates regarding the overall tax rate we expect to experience as a result of undertaking such actions. The determination of each such figure, or range of figures, involves numerous estimates and assumptions regarding the efficacy of such actions in bringing about the desired outcomes and the magnitude of such outcomes to be experienced. To the extent that actual experience differs from the estimates and assumptions inherent in our projections, our future overall tax rate may deviate materially from the estimates provided and our financial condition and results of operations may be materially less favorable than are implied by the projections provided.
The following updates and replaces the third paragraph of the similarly named risk factor included in our 2017 Annual Report:
We rely significantly on third parties for investment services and certain other services related to our policies, and we may be held responsible for obligations that arise from the acts or omissionomissions of third parties under their respective agreements with us if they are deemed to have acted on our behalf.
Many of our subsidiaries’ products and services are sold through third-party intermediaries. In particular, our insurance businesses are reliant on such intermediaries to describe and explain their products to potential customers, and although we take precautions to avoid this result, such intermediaries may be deemed to have acted on our behalf. If that occurs, the intentional or unintentional misrepresentation of our subsidiaries’ products and services in advertising materials or other external communications, or inappropriate activities by our personnel or an intermediary could result in liability for us and have an adverse effect on our reputation and business prospects, as well as lead to potential regulatory actions or litigation. In addition, as a result of our acquisitions, we rely on TPAs to administer a portion of our annuity contracts, as well as a small amount of legacy life insurance business. We currently rely on these TPAs to administer a number of our policies. Some of our reinsurers also use TPAs to administer business reinsured to them by us. To the extent any of these TPAs do not administer such business appropriately, we may experience customer complaints, regulatory intervention and other adverse impacts, which could affect our future growth and profitability. If any of these TPAs or their employees are found to have made material misrepresentations to our policyholders, violated applicable insurance, privacy or other laws and regulations or otherwise engaged in misconduct, we could be held liable for their actions, which could adversely affect our reputation and business prospects, as well as lead to potential regulatory actions or litigation. Our U.S. insurance subsidiaries have experienced increased service and administration complaints related to the conversion and administration of the block of life insurance business acquired in connection with our acquisition of Aviva USA life insurance policiesand reinsured to affiliates of Global Atlantic by the TPA retained by such Global Atlantic affiliates to provide services on such policies, as well as on certain annuity policies that were on Aviva USA’s lifelegacy policy administration systems that were also converted to and are being administered by the same TPA. As a result of these increased complaints and service-related issues, our U.S. insurance subsidiaries may be subject to increased regulatory scrutiny, including fines and penalties, and policyholder litigation. Recently,On April 5, 2017, we received notification from the New York State Department of Financial Services notified usNYSDFS that it intendsplanned to undertake a market conduct examination of Athene LifeALICNY for the period of January 1, 2012 through March 31, 2017 (NYSDFS Market Conduct Examination), and on May 31, 2017, we received notification from the Texas Department of Insurance Company of New York, the primary purpose of which isthat it intended to reviewundertake an enforcement proceeding, in each case, relating to the treatment of policyholders subject to our reinsurance agreements with First Allmerica Financial Life Insurance Company,affiliates of Global Atlantic and the conversion of such annuity policies, including the administration of such businessblocks by such TPA. On November 15, 2017, we received notification from the NYSDFS that its examination of ALICNY had resulted in the identification of a TPA. Additionally, if anysignificant number of asserted violations of New York insurance law associated with the life block reinsured to affiliates of Global Atlantic, who have also been overseeing policyholder administration and the TPA servicing the policies in the block, with a significant number of such violations not subject to dispute by the relevant affiliates of Global Atlantic or by us. On January 30, 2018, we received a draft report regarding the NYSDFS Market Conduct Examination from the NYSDFS, which identified in more detail the violations asserted in the November 15, 2017 letter as well as certain other violations. We believe we are nearing a resolution of the NYDFS Market Conduct Examination, but there are no assurances that a definitive agreement will be finalized and executed by the parties. We currently expect that the resolution will not have a material impact on our TPAs failsfinancial condition, results of operations or cash flows. To the extent we are unable to perform in accordancereach a final agreement with our standards,the NYSDFS, it is possible that we may incur additional costs in connection with finding and retaining new TPAs,fines or penalties which may divert the time and attentioncould have a material adverse effect on our financial condition, results of our senior management from our business.
Further, on April 6, 2016, the DOL issued a new regulation which imposes upon third parties who sell annuities within ERISA plansoperations or to individual retirement account IRA holders a fiduciary duty to the retirement investor. For the year ended December 31, 2016, of our total deposits of $8.8 billion from our organic channels, 42% was associated with sales of FIAs to employee benefit plans and IRAs and 14% was associated with traditional fixed annuities sold to employee benefit plans and IRAs. The requirements of the regulation were scheduled to begin to be implemented on April 10, 2017, with full implementation on January 1, 2018; however, the DOL has published an amendment to the regulation that delays the applicability date for 60 days to allow the DOL to review the potential impact of the regulation on the ability of Americans to gain access to retirement information and financial advice in accordance with an executive memorandum signed by President Trump on February 3, 2017.cash flows. In addition to delaying the applicability date of the DOL regulation, the DOL revised certain prohibited transaction exemptions, most notably allowing all annuity products, fixed, FIAsforegoing, we have received inquiries, and variable annuities,expect to rely on an updated version of prohibited transaction class exemption 84-24 from June 9, 2017 through January 1, 2018, at which time full implementation of the DOL regulation is required. The DOL also opened a 45-day comment period, which closed on April 17, 2017, to collect responses to the questions raised in the executive memorandum. We anticipate a possible replacement of the regulation that is less burdensome but still requires sales to be in the best interest of clients. However, such a change is not guaranteed, and we continue to move forwardreceive inquiries, from other regulatory authorities regarding the conversion matter. It is possible that other jurisdictions may pursue similar formal examinations, inquiries or enforcement proceedings and that any examinations, inquiries and/or enforcement proceedings may result in preparation forfines, administrative penalties and payments to policyholders. Other than as described above, we are not currently able to estimate the delayed applicability date and full implementation on January 1, 2018, assuming the regulation remains unchanged.
Risks Relating to Insurance and Other Regulatory Mattersamount of any such fines, penalties or payments arising from these matters with reasonable certainty, but it is possible that such amounts may be material.
The following updates and replaces the specified paragraphssimilarly named section of risk factors included in our 2017 Annual Report:
Risks Relating to Taxation
The BEAT may significantly increase our tax liability and our efforts to mitigate the cost of the similarly named sectionsBEAT may be unnecessary, inefficient, ineffective, or counterproductive.
The Tax Act introduced a new tax called the BEAT. The BEAT operates as a minimum tax and is generally calculated as a percentage (5% in 2018, 10% in 2019-2025, and 12.5% in 2026 and thereafter) of the risk factor entitled “Changes in“modified taxable income” of an “applicable taxpayer.” Modified taxable income is calculated by adding back to a taxpayer’s regular taxable income the laws and regulations governingamount of certain “base erosion tax benefits” with respect to certain payments made to foreign affiliates of the insurance industrytaxpayer, as well as the “base erosion percentage” of any net operating loss deductions. The BEAT applies for a taxable year only to the extent it exceeds a taxpayer’s regular corporate income tax liability for such year (determined without regard to certain tax credits).
Certain of our reinsurance agreements require our U.S. subsidiaries to pay or otherwise applicableaccrue substantial amounts to our business, includingnon-U.S. reinsurance subsidiaries that would be characterized as “base erosion payments” with respect to which there are “base erosion tax benefits.” Accordingly, the DOL fiduciary regulation, mayBEAT could significantly increase the tax liability of our U.S. subsidiaries and have a material adverse effect on our business, financial condition, liquidity,results of operations.
Moreover, our non-U.S. reinsurance subsidiaries pay or accrue substantial amounts to our U.S. subsidiaries under our reinsurance agreements for increases in policy reserves and to reimburse our U.S. subsidiaries for payments of benefits to our policyholders. It is not clear whether such amounts should be netted against the amounts our U.S. subsidiaries pay or accrue to our non-U.S. reinsurance subsidiaries under our reinsurance agreements for purposes of calculating their “base erosion payments” and “base erosion tax benefits.” No assurance can be given that any such amounts will be netted. If the amounts cannot be netted and we do not take action to mitigate or eliminate the BEAT, the tax liability of our U.S. subsidiaries will increase and our results of operations will be materially adversely affected.
In light of the possibility of material additional tax cost to our U.S. subsidiaries due to the lack of clear guidance regarding the application of the BEAT, we have taken steps intended to mitigate the potential effect of the BEAT on our results of operations in the event it is determined that none of the amounts paid or accrued by a non-U.S. reinsurance subsidiary to our U.S. subsidiaries are taken into account in the calculation of “base erosion payments” or “base erosion tax benefit.” It is possible that we will be required to take further action before the uncertainty regarding the BEAT is resolved, and prospects” includedaccordingly our actions may, in our 2016 Annual Report. Therehindsight, prove to have been no material changes to other sections of such risk factor, which include: “Non-Bank SIFIs,” “FIAs,” “U.S. Consumer Protection Lawsunnecessary and Privacy and Data Security Regulation,” and “NAIC.”inefficient.
U.S. Federal Oversight
The following updates and replaces the third paragraph89
On April 6, 2016, the DOL issued a new regulation more broadly defining the circumstances under which a person is considered to be a fiduciary by reason of giving investment advice or recommendations to an employee benefit plan or a plan’s participants or to IRA holders. In addition to releasing the investment advice regulation, the DOL: (1) issued a new prohibited transaction class exemption, referred to as BICE, to be used in connection with the sale of FIAs or variable annuities, and (2) updated the previously prohibited transaction class exemption 84-24, to be used in connection with the sale of traditional fixed rate annuities. The April 10, 2017 applicability date for the DOL regulation has been delayed to June 9, 2017, in response to a recent memorandum issued to the DOL by President Trump. In addition to delaying the applicability date of the DOL regulation, the DOL revised both exemptions, most notably allowing all annuity products, fixed, FIAs and variable annuities, to rely on an updated version of the prohibited transaction class exemption 84-24 from June 9, 2017 through January 1, 2018, at which time full implementation of the DOL regulation is required. For the year ended December 31, 2016, of Athene’s total deposits of approximately $8.8 billion from its organic channels, 42% was associated with sales of FIAs to employee benefit plans and IRAs and 14% was associated with traditional fixed annuities sold to employee benefit plans and IRAs. We cannot predict with any certainty the impact of the new regulation and exemptions, but the regulation and exemptions could alter the way our products and services are marketed and sold, particularly to purchasers of IRAs and individual retirement annuities. If implemented in its current form, the DOL regulation could have an adverse effect on our ability to write new business. The SEC also has indicated that it may propose rules creating a uniform standard of conduct applicable to broker-dealers and investment advisers, which, if adopted may affect the distribution of our products. Should the SEC rules, if adopted, not align with the finalized DOL regulations related to conflicts of interest in the provision of investment advice, the distribution of our products could be further complicated.Contents
RegulationThe application of Over-The-Counter (“OTC”) Derivativesthe BEAT to our reinsurance arrangements could be affected by further legislative action, administrative guidance or court decisions. Any such legislative action, administrative guidance or court decisions may not be available at the time that we are required to determine the amount of federal income tax incurred by our U.S. subsidiaries for subsequent quarters, and they could have retroactive effect. Tax authorities may later disagree with our BEAT calculations, or the interpretations on which those calculations are based, and assess additional taxes, interest and penalties, and the uncertainty regarding the correct interpretation of the BEAT may make such disagreements more likely. We will determine the appropriateness of our tax provision in accordance with GAAP. However, there can be no assurance that this provision will accurately reflect the amount of federal income tax that our U.S. subsidiaries ultimately pay, as that amount could differ materially from our estimate.
The following updates and replaces the third paragraphIn light of the “Regulationuncertainties described above and the possibility of Over-The-Counter (“OTC”) Derivatives subsection includedmaterial additional tax cost to our U.S. subsidiaries, we continue to explore various alternatives intended to mitigate the potential effect of the BEAT on our results of operations. Such actions may have adverse tax consequences to our business, such as subjecting profit from our affiliate reinsurance to a layer of withholding tax up to 30%, which would not be payable under our current structure. There can be no assurances that we will be able to complete these actions as they are conditioned upon factors beyond our control, such as regulatory approval. In addition, it is possible that we will be required to take action before the uncertainty regarding the BEAT is resolved, and accordingly any action we take may, in hindsight, prove to have been unnecessary, inefficient, ineffective or counterproductive.
AHL or its non-U.S. subsidiaries may be subject to U.S. federal income taxation.
AHL and its non-U.S. subsidiaries are incorporated under the laws of non-U.S. jurisdictions, including Bermuda, and currently intend to operate in a manner that will not cause either to be treated as being engaged in a trade or business within the 2016 Annual Report:
The Dodd-FrankU.S. or subject to current U.S. federal income taxation on their net income. However, because there is considerable uncertainty as to when a foreign corporation is engaged in a trade or business within the United States, as the law is unclear and the determination is highly factual and must be made annually, there can be no assurance that the IRS will not successfully contend that AHL or one of its non-U.S. subsidiaries is engaged in a trade or business in the U.S. In addition, although AHL and its non-U.S. subsidiaries currently intend to operate in a manner that would not cause them to be treated as engaged in a trade or business within the U.S., the recent enactment of the BEAT, the reduction of the federal income tax rate applicable to corporations included in the Tax Act, and other factors may cause the CFTC rules thereunder require us,companies to conduct their business differently. If AHL or one of its non-U.S. subsidiaries were considered to be engaged in connection with certain swap transactions, to comply with mandatory clearing and on-facilitya trade execution requirements, andor business in the U.S., it is anticipated that the types of swapscould be subject to these requirements will be expanded over time. In addition, new regulations require usU.S. federal income taxation on a net basis on its income that is effectively connected with such U.S. trade or business (including branch profits tax on the portion of its earnings and profits that is attributable to comply with mandatory minimum margin requirements for uncleared swaps and, in some instances, uncleared security-based swaps. Uncleared swap variation margin regulations issued bysuch income). Any such U.S. bank prudential regulators, the CFTC and regulators in certain other jurisdictions, such as the European Union and Canada, generally took effect on March 1, 2017. These regulations require market participants to enter into agreements consistent with the requirements thereunder and a failure to do sofederal income taxation could result in trading disruptions. Derivative clearing requirementssubstantial tax liabilities and mandatory margin requirements could increase the cost of our risk mitigation and could have other implications. For example, increased margin requirements, combined with netting restrictions and restrictions on securities that qualify as eligible collateral, could reduce our liquidity and require increased holdings of cash and highly liquid securities with lower yields causing a reduction in income. In addition, the requirement that certain trades be centrally cleared through clearinghouses subjects us to documentation that is significantly more counterparty-favorable and may entitle counterparties to unilaterally change such terms as trading limits and the amount of margin required. The ability of any such counterparty to take such actions could create trading disruptions and liquidity concerns. Finally, the requirement that certain trades be centrally cleared through clearinghouses concentrates counterparty risk in both clearinghouses and clearing members. The failure of a clearinghouseconsequently could have a significant impactmaterial adverse effect on our financial condition and results of future operations.
U.S. persons who own our Class A common shares may be subject to U.S. federal income taxation at ordinary income rates on our undistributed earnings and profits.
AHL’s bye-laws generally limit the financial system. Evenvoting power of our Class A common shares (and certain other of our voting securities) such that no person owns (or is treated as owning) more than 9.9% of the total voting power of our common shares (with certain exceptions). AHL’s bye-laws also currently reduce the voting power of Class B common shares held by certain holders if (A) one or more U.S. persons that own (or are treated as owning) more than 9.9% of the total voting power of our common shares own (or are treated as owning) individually or in the aggregate more than 24.9% of the voting power or the value of our common shares or (B) a clearinghouse doesU.S. person that is classified as an individual, an estate or a trust for U.S. federal income tax purposes owns (or is treated as owning) more than 9.9% of the total voting power of our common shares. Additionally, AHL’s bye-laws require the board of AHL to refer certain decisions with respect to our non-U.S. subsidiaries to our shareholders, and to vote our shares in those subsidiaries accordingly. These provisions were intended to reduce the likelihood that AHL or its non-U.S. subsidiaries will be treated as a CFC, other than for purposes of taking into account related person insurance income (RPII). However, the relevant attribution rules are complex and there is no definitive legal authority on whether the voting provisions included in AHL’s organizational documents are effective for purposes of the CFC provisions.
Moreover, the Tax Act eliminated the prohibition on “downward attribution” from non-U.S. persons to U.S. persons under Section 958(b)(4) of the Internal Revenue Code for purposes of determining constructive stock ownership under the CFC rules. As a result, our U.S. subsidiaries are deemed to own all of the stock of AHL’s non-U.S. subsidiaries held by AHL for CFC purposes. Accordingly, AHL’s non-U.S. subsidiaries are currently treated as CFCs, without regard to whether the provisions of our bye-laws described above are effective for purposes of the CFC provisions. The legislative history under the Tax Act indicates that this change was not fail, large losses could force significant capital calls on clearinghouse members duringintended to cause any of AHL’s non-U.S. subsidiaries to be treated as a financial crisis, which could lead clearinghouse membersCFC with respect to default. Because clearinghouses are still developing and thea 10% U.S. Shareholder (as defined below) that is not related bankruptcy process is untested,to our U.S. subsidiaries. However, it is difficultnot clear whether the IRS or a court would interpret the change made by the Tax Act in a manner consistent with such indicated intent.
For any taxable year in which AHL or one of its non-U.S. subsidiaries is treated as a CFC, each U.S. person treated as a “10% U.S. Shareholder” with respect to anticipateAHL or identify all actual risks relatedits non-U.S. subsidiaries that held our common shares directly or indirectly through non-U.S. entities as of the last day in such taxable year that the relevant company was a CFC would generally be required to include in gross income as ordinary income its pro rata share of the defaultrelevant company’s insurance and reinsurance income and certain other investment income, regardless of whether that income was actually distributed to such U.S. person (with certain adjustments). For tax years beginning on or after January 1, 2018, a “10% U.S. Shareholder” of a clearinghouse.non-U.S. corporation includes any U.S. person that owns (or is treated as owning) stock of the non-U.S. corporation possessing 10% or more of the total voting power or total value of such non-U.S. corporation’s stock. Any U.S. person that owns (or is treated as owning) 10% or more of the value of AHL should consult with their tax advisor regarding their investment in AHL.
In general, a non-U.S. corporation is a CFC if 10% U.S. Shareholders, in the aggregate, own (or are treated as owning) stock of the non-U.S. corporation possessing more than 50% of the voting power or value of such corporation’s stock. However, this threshold is lowered to more than 25% for purposes of taking into account the insurance income of a non-U.S. corporation. Special rules apply for purposes of taking into account any RPII of a non-U.S. corporation, as described below.
In addition, if a U.S. person disposes of shares in a non-U.S. corporation and the U.S. person was a 10% U.S. Shareholder at any time when the corporation was a CFC during the five-year period ending on the date of disposition, any gain from the disposition will generally be treated as a dividend to the extent of the U.S. person’s share of the corporation’s undistributed earnings and profits that were accumulated during the period or periods that the U.S. person owned the shares while the corporation was a CFC (with certain adjustments). Also, a U.S. person may be required to comply with specified reporting requirements, regardless of the number of shares owned.
Because of the limitations in AHL’s bye-laws referred to above, among other factors, we believe it is unlikely that any U.S. person that is treated as owning less than 10% of the total value of AHL would be a 10% U.S. Shareholder of AHL or its non-U.S. subsidiaries. However, because the relevant attribution rules are complex and there is no definitive legal authority on whether the voting provisions included in AHL’s organizational documents are effective for purposes of the CFC provisions, there can be no assurance that this will be the case. Further, our ability to obtain information that would permit us to enforce the limitation described above may be limited. We will take reasonable steps to obtain such information, but there can be no assurance that such steps will be adequate or that we will be successful in this regard. Accordingly, we may not be able to fully enforce the limitation described above.
U.S. persons who own our Class A common shares may be subject to U.S. federal income taxation at ordinary income rates on a disproportionate share of our undistributed earnings and profits attributable to RPII.
If any of AHL’s non-U.S. subsidiaries is treated as recognizing RPII in a taxable year and is also treated as a CFC for such taxable year, each U.S. person that owns our Class A common shares directly or indirectly through non-U.S. entities as of the last day in such taxable year must generally include in gross income its pro rata share of the RPII, determined as if the RPII were distributed proportionately only to all such U.S. persons, regardless of whether that income is distributed (with certain adjustments). For this purpose, a non-U.S. subsidiary generally will be treated as a CFC if U.S. persons in the aggregate are treated as owning 25% or more of the total voting power or value of the relevant company’s stock at any time during the taxable year. We believe that our non-U.S. subsidiaries will be treated as a CFC for this purpose based on the current and expected ownership of our shares.
RPII generally is any income of a non-U.S. corporation attributable to insuring or reinsuring risks of a U.S. person that owns (or is treated as owning) stock of such non-U.S. corporation, or risks of a person that is “related” to such a U.S. person. For this purpose, (1) a person is “related” to another person if such person “controls,” or is “controlled” by, such other person, or if both are “controlled” by the same persons, and (2) “control” of a corporation means ownership (or deemed ownership) of stock possessing more than 50% of the total voting power or value of such corporation’s stock and “control” of a partnership, trust or estate for U.S. federal income tax purposes means ownership (or deemed ownership) of more than 50% by value of the beneficial interests in such partnership, trust or estate.
Athene and Apollo have considerable overlap in ownership. If it is determined that the same persons “control” both us and Apollo through owning (or being treated as owning) more than 50% of the vote or value of Athene and Apollo, substantially all of the income of AHL’s non-U.S. reinsurance subsidiaries might constitute RPII. This would trigger the adverse RPII consequences described above to all U.S. persons that hold our Class A common shares directly or indirectly through non-U.S. entities and would have a material adverse effect on the value of their investment in our Class A common shares.
Existing voting restrictions set forth in AHL’s bye-laws are generally intended to prevent a person who owns (or is treated as owning) shares in Apollo from owning (or being treated as owning) any of the voting power of our Class A common shares, thus preventing persons who own (or are treated as owning) both AHL and Apollo from owning (or being treated as owning) more than 50% of the voting power of our stock. However, these restrictions do not prevent members of the Apollo Group from retaining the right to vote on newly acquired Class A common shares, should they choose to do so, nor do they prevent persons who own (or are treated as owning) both AHL and Apollo from owning (or being treated as owning) more than 50% of the value of our stock. AHL’s bye-laws also generally provide that no person (nor certain direct or indirect beneficial owners or related persons to such person) who owns our common shares, other than a member of the Apollo Group, may acquire any shares of Apollo or otherwise make any investment that would cause such person, or any other person that is a U.S. person, to own (or be treated as owning) more than 50% of the vote or value of AHL’s stock. Any holder of our common shares that violates this provision may be required, at the board’s discretion, to sell its common shares or take any other reasonable action that the board deems necessary.
Because of the restrictions described above, among other factors, we believe it is likely that one or more exceptions under the RPII rules will apply such that U.S. persons will not be required to include any RPII in their gross income with respect to AHL’s non-U.S. subsidiaries. However, there can be no assurance that this will be the case. Further, our ability to obtain information that would permit us to enforce the restrictions described above may be limited. We will take reasonable steps to obtain such information, but there can be no assurance that such steps will be adequate or that we will be successful in this regard. Accordingly, we may not be able to fully enforce these restrictions.
U.S. persons who dispose of our Class A common shares may be required to treat any gain as ordinary income for U.S. federal income tax purposes and comply with other specified reporting requirements.
If a U.S. person disposes of shares in a non-U.S. corporation that is an insurance company that had RPII and the 25% threshold described above is met at any time when the U.S. person owned any shares in the corporation during the five-year period ending on the date of disposition, any gain from the disposition will generally be treated as a dividend to the extent of the U.S. person’s share of the corporation’s undistributed earnings and profits that were accumulated during the period that the U.S. person owned the shares (possibly whether or not those earnings and profits are attributable to RPII). In addition, the shareholder will be required to comply with specified reporting requirements, regardless of the amount of shares owned. We believe that these rules should not apply to a disposition of our Class A common shares because AHL is not itself directly engaged in the insurance business. We cannot assure you, however, that the IRS will not successfully assert that these rules apply to a disposition of our Class A common shares.
U.S. tax-exempt organizations that own our Class A common shares may recognize unrelated business taxable income.
A U.S. tax-exempt organization that directly or indirectly owns our Class A common shares generally will recognize unrelated business taxable income and be subject to additional U.S. tax filing obligations to the extent such tax-exempt organization is required to take into account any of our insurance income or RPII pursuant to the CFC and RPII rules described above. U.S. tax-exempt organizations should consult their own tax advisors regarding the risk of recognizing unrelated business taxable income as a result of the ownership of our Class A common shares.
U.S. persons who own our Class A common shares may be subject to adverse tax consequences if AHL is considered a passive foreign investment company for U.S. federal income tax purposes.
If AHL is considered a passive foreign investment company (PFIC) for U.S. federal income tax purposes, a U.S. person who directly or, in certain cases, indirectly owns our Class A common shares could be subject to adverse tax consequences, including a greater tax liability than might otherwise apply, an interest charge on certain taxes that are deemed deferred as a result of AHL’s non-U.S. status and additional U.S. tax filing obligations, regardless of the number of shares owned.
We currently do not expect that AHL will be a PFIC for U.S. federal income tax purposes in the current taxable year or the foreseeable future because AHL, through its insurance subsidiaries, intends to qualify for the “active insurance” exception to PFIC treatment. The “active insurance” exception was recently amended by the Tax Act, and we believe that AHL will qualify for the exception as amended. However, there is significant uncertainty regarding how the Tax Act will be interpreted and guidance may not be forthcoming. Therefore, we cannot assure you that AHL will not be treated as a PFIC. If AHL is treated as a PFIC, the adverse tax consequences described above generally would also apply with respect to a U.S. person’s indirect ownership interest in any PFICs in which AHL directly or, in certain cases, indirectly, owns an interest.
Changes in U.S. tax law might adversely affect us or our shareholders.
The tax treatment of non-U.S. companies and their U.S. and non-U.S. insurance subsidiaries has been significantly altered by the enactment of the Tax Act. See Part I—Item 1. Business–Regulation–United States–Tax Reform in our 2017 Annual Report. In particular, the Tax Act:
Imposes the BEAT (as described above);
Amends the calculation of tax reserves for U.S. life insurance companies and requires affected companies to include the resulting change in income over an 8-year period beginning in 2018;
Amends the treatment of “specified policy acquisition expenses” incurred by U.S. life insurance companies under Section 848 of the Internal Revenue Code;
Restricts the “active insurance” exception to PFIC treatment to “qualifying insurance corporations;”
Eliminates the prohibition on “downward attribution” from non-U.S. persons to U.S. persons under Section 958(b)(4) of the Internal Revenue Code for purposes of determining constructive stock ownership under the CFC rules (as described above); and
Amends the definition of “U.S. Shareholder” to include U.S. persons that own (or are treated as owning) 10% or more of the value of a foreign corporation.
There is significant uncertainty regarding how these and other provisions of the Tax Act will be interpreted, and guidance may not be forthcoming. In addition, it is possible that a “technical corrections” bill may be passed during 2018 that could alter or clarify the Tax Act, likely with retroactive effect. Any changes to, clarifications of, or guidance under the Tax Act could add significant expense and have a material adverse effect on our results of operations.
Finally, the tax treatment of non-U.S. companies and their U.S. and non-U.S. insurance subsidiaries may be the subject of further tax legislation. No prediction can be made as to whether any particular proposed legislation will be enacted or, if enacted, what the specific provisions or the effective date of any such legislation would be, or whether it would have any effect on us. As such, we cannot assure you that future legislative, administrative or judicial developments will not result in an increase in the amount of U.S. tax payable by us or by an investor in our Class A common shares or reduce the attractiveness of our products. If any such developments occur, our business, financial condition and results of operation could be materially and adversely affected and such developments could have a material and adverse effect on your investment in our common shares.
Changes in U.S. tax law might adversely affect demand for our products.
Many of the products that we sell and reinsure benefit from one or more forms of tax-favored status under current U.S. federal and state income tax regimes. For example, we sell and reinsure annuity contracts that allow the policyholders to defer the recognition of taxable income earned within the contract. The changes in U.S. federal tax law made by the Tax Act, or future changes in U.S. federal or state tax law, could reduce or eliminate the attractiveness of such products, which could affect the sale of our products or increase the expected lapse rate with respect to products that have already been sold.
There is U.S. income tax risk associated with reinsurance between U.S. insurance companies and their Bermuda affiliates.
If a reinsurance agreement is entered into among related parties, the IRS is permitted to reallocate or recharacterize income, deductions or certain other items, and to make any other adjustment, to reflect the proper amount, source or character of the taxable income of each of the parties. If the IRS were to successfully challenge our reinsurance arrangements, our financial condition and results of operations could be adversely affected and the price of our Class A common shares could be adversely affected.
We may not be able to use our deferred tax asset attributes or admit them into statutory capital as a result of the Tax Act.
Under the Tax Act, net operating losses generated in 2018 and thereafter may be carried forward indefinitely but may not be carried back to offset taxable income in prior tax periods. Historically, a portion of our admitted deferred tax asset has reflected our ability to carry net operating losses back to prior tax periods. In the future, the amount of deferred tax asset we are able to admit may be reduced due to the elimination of the carry back period. Because the ability to admit deferred tax assets into statutory capital is dependent in part on our ability to carry losses back to prior tax periods, we may not be able to admit into statutory capital a portion of deferred tax assets that are generated in future tax periods.
We may have fewer investable assets and earn less investment income as a result of the Tax Act.
Certain of the changes made by the Tax Act are expected to increase the amount of our current tax expense. Although the increase in current tax expense from these changes may be largely offset by an increase in the amount of our deferred tax assets, we may have fewer investable assets and thus may earn less investment income.
We may become subject to U.S. withholding tax under certain U.S. tax provisions commonly known as FATCA.
Certain U.S. tax provisions commonly known as the Foreign Account Tax Compliance Act (FATCA) impose a 30% withholding tax on certain payments of U.S. source income and the proceeds from the disposition after December 31, 2018, of property of a type that can produce U.S. source interest or dividends, in each case, to certain “foreign financial institutions” and “non-financial foreign entities.” The withholding tax also applies to certain “foreign passthru payments” made by foreign financial institutions after December 31, 2018. The U.S. government has signed an intergovernmental agreement to facilitate the implementation of FATCA with the government of Bermuda (Bermuda IGA). AHL and its foreign subsidiaries intend to comply with the obligations imposed on them under FATCA and the Bermuda IGA, as applicable, to avoid being subject to withholding under FATCA on payments made to them or penalties. However, no assurance can be provided in this regard. We may become subject to withholding tax or penalties if we are unable to comply with FATCA.
If AHL is treated as engaged in a U.S. trade or business in any taxable year, all or a portion of the dividends on our Class A common shares may be treated as U.S. source income and may be subject to withholding and information reporting under FATCA unless a shareholder (and any intermediaries through which the shareholder holds its shares) establishes an exemption from such withholding and information reporting. In addition, any gross proceeds from the sale or other disposition of our Class A common shares after December 31, 2018, might also be subject to withholding and information reporting under FATCA in such circumstances, absent an exemption. As discussed above, we currently intend to limit our U.S. activities so that AHL is not considered to be engaged in a U.S. trade or business, although no assurances can be provided in this regard.
We are subject to the risk that Bermuda tax laws may change and that we may become subject to new Bermuda taxes following the expiration of a current exemption after 2035.
The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, as amended, has given us an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to us or any of our operations, shares, debentures or other obligations until March 31, 2035, except insofar as such tax applies to persons ordinarily resident in Bermuda or to any taxes payable by us in respect of real property owned or leased by us in Bermuda. Given the limited duration of the Bermuda Minister of Finance’s assurance, we cannot assure you that we will not be subject to any Bermuda tax after March 31, 2035.
The impact of the OECD’s recommendations on base erosion and profit shifting is uncertain and could impose adverse tax consequences on us.
In 2015, the OECD published final recommendations on base erosion and profit shifting (BEPS). These BEPS recommendations propose the development of rules directed at counteracting the effects of tax havens and preferential tax regimes in countries around the world. Beginning with 2017, some countries in which we do business, including Bermuda and the U.S., require certain multinational enterprises, including ours, to report detailed information regarding allocation of revenue, profit, and other information, on a country-by-country basis, which could increase scrutiny by foreign tax authorities.
The BEPS recommendations also include revisions to the definition of a “permanent establishment” and the rules for attributing profit to a permanent establishment. Other recommended actions relate to the goal of ensuring that transfer pricing outcomes are in line with value creation, noting that the current rules may facilitate the transfer of risks or capital away from countries where the economic activity takes place. We expect many countries to change their tax laws in response to this project, and several countries (including the U.S.) have already changed or proposed changes to their tax laws. Changes to tax laws could increase their complexity and the burden and costs of compliance. Additionally, such changes could also result in significant modifications to the existing transfer pricing rules and could potentially have an impact on our taxable profits in various jurisdictions.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Securities
Purchases of common stock made by or on behalf of us or our affiliates during the three months ended March 31, 20172018 are set forth below:
|
| | | | | | | | | | |
| Period | (a) Total number of shares purchased2 | (b) Average price paid per share2 | (c) Total number of shares purchased as part of publicly announced programs1 | (d) Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs1 |
| January 1 – January 31, 2017 | 30,444 |
| $ | 47.99 |
| — |
| $ | — |
|
| February 1 – February 28, 2017 | 719 |
| $ | 51.27 |
| — |
| $ | — |
|
| March 1 – March 31, 2017 | 3,277 |
| $ | 49.97 |
| — |
| $ | — |
|
| | | | | |
1 As of March 31, 2017, our Board of Directors had not authorized any purchases of common stock in connection with a publicly announced plan or program. |
2 Purchases relate to shares withheld (under the terms of employee stock compensation plans) to offset tax withholding obligations that occur upon the delivery of outstanding shares underlying restricted stock units or upon the exercise of stock options. |
|
| | | | | | | | | | |
| Period | (a) Total number of shares purchased1 | (b) Average price paid per share1 | (c) Total number of shares purchased as part of publicly announced programs2 | (d) Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs2 |
| January 1 – January 31, 2018 | 28,327 |
| $ | 51.71 |
| — |
| $ | — |
|
| February 1 – February 28, 2018 | 223 |
| $ | 49.02 |
| — |
| $ | — |
|
| March 1 – March 31, 2018 | 3,010 |
| $ | 47.86 |
| — |
| $ | — |
|
| | | | | |
1 Purchases relate to shares withheld (under the terms of employee stock compensation plans) to offset tax withholding obligations that occur upon the delivery of outstanding shares underlying restricted stock awards or units or upon the exercise of stock options. |
2 As of March 31, 2018, our Board of Directors had not authorized any purchases of common stock in connection with a publicly announced plan or program. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
EXHIBIT INDEX
|
| |
| Exhibit No. | Description |
| 4.1 | |
| 4.2 | |
| 4.3 | |
| 10.1 | Second Amendment to Credit Agreement, dated as of March 14, 2018, by and among Athene Holding Ltd., Athene Life Re Ltd., Athene USA Corporation, Athene Annuity Re Ltd., the lenders party thereto, and Citibank, N.A., as administrative agent. |
| 10.2 | |
| 10.3 | |
| 12.1 | |
| 31.1 | |
| 31.2 | |
| 32.1 | |
| 32.2 | |
| 101.INS | XBRL Instance Document. |
| 101.SCH | XBRL Taxonomy Extension Schema. |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase. |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase. |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase. |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| |
| | ATHENE HOLDING LTD. |
| | |
Date: May 11, 20174, 2018 | /s/ Martin P. Klein |
| | Martin P. Klein |
| | Executive Vice President and Chief Financial Officer |
| | (principal financial officer and duly authorized signatory) |
EXHIBIT INDEX
|
| |
Exhibit No. | Description |
10.1 | Subscription Agreement, dated as of April 14, 2017, between AGER Bermuda Holding Ltd. and Apollo Principal Holdings IX, L.P. |
10.2 | Subscription Agreement, dated as of April 14, 2017, between AGER Bermuda Holding Ltd. and Palmetto Athene Holdings (Cayman), L.P. |
10.3 | Side Letter, dated as of April 14, 2017, between AGER Bermuda Holding Ltd. and Palmetto Athene Holdings (Cayman), L.P. |
10.4 | Subscription Agreement, dated as of April 14, 2017, between AGER Bermuda Holding Ltd. and Apollo/Cavenham European Managed Account II, L.P. |
10.5 | Voting Consent Letter, dated as of April 14, 2017, by Apollo Palmetto Athene Partnership, L.P. to Apollo Management Holdings, L.P. |
10.6 | Voting Consent Letter, dated as of April 14, 2017, by Cavenham Diversifier to Apollo Management Holdings, L.P. |
10.7 | Subscription Agreement, dated as of April 14, 2017, between AGER Bermuda Holding Ltd. and Procific. |
10.8 | Side Letter, dated as of April 14, 2017, between AGER Bermuda Holding Ltd. and Procific. |
10.9 | Side Letter, dated as of April 14, 2017, among Apollo Principal Holdings IX, L.P., Athene Holding Ltd. and Procific. |
31.1 | Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Principal Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 | Principal Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | XBRL Instance Document. |
101.SCH | XBRL Taxonomy Extension Schema. |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase. |
101.LAB | XBRL Taxonomy Extension Label Linkbase. |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase. |
101.DEF | XBRL Taxonomy Extension Definition Linkbase. |