| | UNITED STATES SECURITIES AND EXCHANGE COMMISSION | | | | | | | | | | | | |
Washington, D.C. 20549 | | | | | | | | | | | | |
| | | | | | | | | | | |
FORM 10-Q | | | | | | | | | | | | |
| | | | | | | | | | | |
| 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 |
| | | | | | | | | | | |
| For the quarterly period ended September 30, 2017 | |
| For the quarterly period ended September 30, 2018 | | For the quarterly period ended September 30, 2018 |
| | | | | | | | | | | |
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 |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | 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) | |
| | | | | | | | | | | |
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) | | | | | | | | | | | | |
| | | | | | | | | | | |
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 ¨ |
| | | | | | | | | | | |
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨ | | Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨ |
| | | | | | | | | | | |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | | |
| | Large accelerated filer ¨ | | Accelerated filer ¨ | | Large accelerated filer x | | Accelerated filer ¨ | |
| | Non-accelerated filer x (Do not check if a smaller reporting company) | | Smaller reporting company ¨ | | Non-accelerated filer ¨ | | Smaller reporting company ¨ | |
| | | | | Emerging growth company ¨ | | Emerging growth company ¨ | | | |
| | | | | | | | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ | 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. ¨ |
| | | | | | | | | | | |
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 |
| | | | | | | | | | | |
| | | The number of shares of each class of our common stock outstanding is set forth in the table below, as of September 30, 2017: | | | The number of shares of each class of our common stock outstanding is set forth in the table below, as of September 30, 2018: | |
| | | | | | | | | | | |
| | | Class A common shares | 120,108,463 |
| | Class M-2 common shares | 867,923 |
| | | Class A common shares | 164,849,200 |
| | Class M-2 common shares | 841,011 |
| |
| | | Class B common shares | 69,544,914 |
| | Class M-3 common shares | 1,253,000 |
| | | Class B common shares | 25,483,107 |
| | Class M-3 common shares | 1,001,110 |
| |
| | | Class M-1 common shares | 3,388,890 |
| | Class M-4 common shares | 4,793,212 |
| | | Class M-1 common shares | 3,359,345 |
| | Class M-4 common shares | 4,224,071 |
| |
| | | | | | | | | | | |
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, anticipated future tax rates, 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,“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 consolidatedfinancial condition, liquidity, results of operations financial condition and liquiditycash flows 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 consolidatedfinancial condition, liquidity, results of operations financial condition and liquiditycash flows 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 creditworthiness 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;Act (FATCA);
our potential inability to pay dividends or 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
|
| | |
| Term or Acronym | | Definition |
| A-A Mortgage | | A-A Mortgage Opportunities, LPL.P. |
| 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 |
AAMEAGM | | Apollo AssetGlobal Management, Europe, LLP (together with certain of its affiliates) |
ADKG | | Athene Deutschland Holding GmbH & Co. KG |
AGER | | AGER Bermuda Holding Ltd.LLC |
| 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 |
APK | | Athene Pensionskasse AG, formerly known as Delta Lloyd Pensionskasse AG |
| Apollo | | Apollo Global Management, LLC, together with its subsidiaries |
| Apollo Group | | (1) Apollo, (2) the AAA Investor, (3) any investment fund or other collective investment vehicle whose general partner or managing member is owned, directly or indirectly, by Apollo or one or more of Apollo’s subsidiaries, (4) BRH Holdings GP, Ltd. and its shareholders 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) |
| Athene USA | | Athene USA Corporation |
| Athora | | Athora Holding Ltd., formerly known as Aviva USA CorporationAGER Bermuda Holding Ltd. and formerly a consolidated subsidiary |
| CoInvest Other | | AAA Investments (Other), L.P. |
| CoInvest VI | | AAA Investments (Co-Invest VI), L.P. |
| CoInvest VII | | AAA Investments (Co-Invest VII), L.P. |
CoInvest OtherDOL | | AAA Investments (Other), L.P. |
DLD | | Delta Lloyd Deutschland AG, now known as Athene Deutschland GmbH |
German Group Companies | | Athene Deutschland GmbH, Athene Deutschland Holding GmbH & Co. KG, Athene Deutschland Verwaltungs GmbH, Athene Lebensversicherung AG and Athene Pensionskasse AG |
London Prime | | London Prime Apartments Guernsey Holdings LimitedUnited States Department of Labor |
| MidCap | | MidCap FinCo Limited |
| NAIC | | National Association of Insurance Commissioners |
| NCL LLC | | NCL Athene, LLC |
SprintNYSDFS | | Apollo Asia Sprint Co-Investment Fund, L.P.New York State Department of Financial Services |
| Voya | | Voya Financial, Inc. |
| VIAC | | Voya Insurance and Annuity Company |
| Venerable | | Venerable Holdings, Inc. |
Certain Terms & Acronyms
|
| | |
| Term or Acronym | | Definition |
| ABS | | Asset-backed securities |
| ACL | | Authorized control level RBCrisk-based capital as defined by the model created by the National Association of Insurance Commissioners |
| ALM | | Asset liability management |
AUMALRe RBC | | Assets under managementThe risk-based capital ratio of ALRe, when applying the National Association of Insurance Commissioners risk-based capital factors |
| Alternative investments | | Alternative investments, including investment funds, CLOcollateralized loan obligation 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 |
| 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 RBCrisk-based capital 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,risk-based capital, (2) with respect to ALRe, by reference to BSCR, and (3) with respect to our former German Group Companies, by reference to SCRsolvency capital requirements |
| 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, and payments on payout annuities and pension risk benefit payments |
| LIMRA | | Life Insurance and Market Research Association |
MCR |
| | |
| Term or Acronym | | Minimum capital requirements |
MMS | | Minimum margin of solvencyDefinition |
| Modco | | Modified coinsurance |
| MVA | | Market value adjustment |
| MYGA | | Multi-year guaranteed annuity |
|
| | |
Term or Acronym | | Definition |
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, presented on an annualized basis for interim periods |
| Other liability costs | | Other liability costs include DAC, DSI and VOBA amortization, and change in GLWB and GMDBrider reserves, for all products,institutional costs, 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, in each case, to the extent applicable, as a percentage of adjusted operating income before tax |
| Payout annuities | | Annuities with a current cash payment component, which consist primarily of SPIAs, supplemental contracts and structured settlements |
PRT | | Pension risk transfer |
| 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 |
| 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 |
| Voya reinsurance transactions | | Collectively, the coinsurance and modified coinsurance agreements we entered into on June 1, 2018 with Voya Insurance and Annuity Company and ReliaStar Life Insurance Company |
Item 1. Financial Statements
Index to Condensed Consolidated Financial Statements (unaudited)
ATHENE HOLDING LTD.
Condensed Consolidated Balance Sheets(Unaudited)
|
| | | | | | | |
| (In millions) | September 30, 2017 | | December 31, 2016 |
| Assets | | | |
| Investments | | | |
| Available-for-sale securities, at fair value | | | |
| Fixed maturity securities (amortized cost: 2017 – $56,217 and 2016 – $51,110) | $ | 58,516 |
| | $ | 52,033 |
|
| Equity securities (cost: 2017 – $262 and 2016 – $319) | 318 |
| | 353 |
|
| Trading securities, at fair value | 2,709 |
| | 2,581 |
|
| Mortgage loans, net of allowances (portion at fair value: 2017 – $42 and 2016 – $44) | 6,445 |
| | 5,470 |
|
| Investment funds (portion at fair value: 2017 – $127 and 2016 – $99) | 747 |
| | 689 |
|
| Policy loans | 571 |
| | 602 |
|
| Funds withheld at interest (portion at fair value: 2017 – $303 and 2016 – $140) | 6,964 |
| | 6,538 |
|
| Derivative assets | 1,982 |
| | 1,370 |
|
| Real estate (portion held for sale: 2017 – $32 and 2016 – $23) | 621 |
| | 542 |
|
| Short-term investments, at fair value (cost: 2017 – $108 and 2016 – $189) | 108 |
| | 189 |
|
| Other investments | 77 |
| | 81 |
|
| Total investments | 79,058 |
| | 70,448 |
|
| Cash and cash equivalents | 3,607 |
| | 2,445 |
|
| Restricted cash | 100 |
| | 57 |
|
| Investments in related parties | | | |
| Available-for-sale securities, at fair value | | | |
| Fixed maturity securities (amortized cost: 2017 – $404 and 2016 – $341) | 409 |
| | 335 |
|
| Equity securities (cost: 2017 – $0 and 2016 – $20) | — |
| | 20 |
|
| Trading securities, at fair value | 140 |
| | 195 |
|
| Investment funds (portion at fair value: 2017 – $27 and 2016 – $0) | 1,330 |
| | 1,198 |
|
| Short-term investments, at fair value (cost: 2017 – $8 and 2016 – $0) | 8 |
| | — |
|
| Other investments | 238 |
| | 237 |
|
| Accrued investment income (related party: 2017 – $9 and 2016 – $9) | 626 |
| | 554 |
|
| Reinsurance recoverable (portion at fair value: 2017 – $1,783 and 2016 – $1,692) | 5,768 |
| | 6,001 |
|
| Deferred acquisition costs, deferred sales inducements and value of business acquired | 2,903 |
| | 2,940 |
|
| Current income tax recoverable | 29 |
| | 107 |
|
| Deferred tax assets | 12 |
| | 372 |
|
| Other assets | 868 |
| | 869 |
|
| Assets of consolidated variable interest entities | | | |
| Investments | | | |
| Available-for-sale securities, at fair value | | | |
| Equity securities – related party (cost: 2017 – $121 and 2016 – $143) | 173 |
| | 161 |
|
| Trading securities, at fair value – related party | 195 |
| | 167 |
|
| Investment funds (related party: 2017 – $583 and 2016 – $562; portion at fair value: 2017 – $562 and 2016 – $562) | 593 |
| | 573 |
|
| Cash and cash equivalents | 1 |
| | 14 |
|
| Other assets | 3 |
| | 6 |
|
| Total assets | $ | 96,061 |
| | $ | 86,699 |
|
|
| | | | | | | |
| (In millions) | September 30, 2018 | | December 31, 2017 |
| Assets | | | |
| Investments | | | |
| Fixed maturity securities, at fair value | | | |
| Available-for-sale securities (amortized cost: 2018 – $59,744 and 2017 – $58,506) | $ | 59,882 |
| | $ | 61,012 |
|
| Trading securities | 1,977 |
| | 2,196 |
|
| Equity securities, at fair value | 292 |
| | 790 |
|
| Mortgage loans, net of allowances (portion at fair value: 2018 – $37 and 2017 – $41) | 8,982 |
| | 6,233 |
|
| Investment funds (portion at fair value: 2018 – $127 and 2017 – $145) | 692 |
| | 699 |
|
| Policy loans | 512 |
| | 530 |
|
| Funds withheld at interest (portion at fair value: 2018 – $151 and 2017 – $312) | 7,841 |
| | 7,085 |
|
| Derivative assets | 2,515 |
| | 2,551 |
|
| Real estate (portion held for sale: 2017 – $32) | — |
| | 624 |
|
| Short-term investments, at fair value (cost: 2018 – $234 and 2017 – $201) | 234 |
| | 201 |
|
| Other investments (portion at fair value: 2018 – $43 and 2017 – $0) | 114 |
| | 133 |
|
| Total investments | 83,041 |
| | 82,054 |
|
| Cash and cash equivalents | 3,723 |
| | 4,888 |
|
| Restricted cash | 218 |
| | 105 |
|
| Investments in related parties | | | |
| Fixed maturity securities, at fair value | | | |
| Available-for-sale securities (amortized cost: 2018 – $1,250 and 2017 – $399) | 1,243 |
| | 406 |
|
| Trading securities | 259 |
| | 307 |
|
| Mortgage loans | 389 |
| | — |
|
| Investment funds (portion at fair value: 2018 – $197 and 2017 – $30) | 2,093 |
| | 1,310 |
|
| Funds withheld at interest (portion at fair value: 2018 – $91) | 13,963 |
| | — |
|
| Short-term investments, at fair value (cost: 2018 – $10 and 2017 – $52) | 10 |
| | 52 |
|
| Other investments | 386 |
| | 238 |
|
| Accrued investment income (related party: 2018 – $23 and 2017 – $10) | 686 |
| | 652 |
|
| Reinsurance recoverable (related party: 2018 – $8; portion at fair value: 2018 – $1,679 and 2017 – $1,824) | 5,201 |
| | 4,972 |
|
| Deferred acquisition costs, deferred sales inducements and value of business acquired | 4,972 |
| | 2,930 |
|
| Other assets | 1,187 |
| | 969 |
|
| Assets of consolidated variable interest entities | | | |
| Investments | | | |
| Fixed maturity securities, trading, at fair value – related party | 48 |
| | 48 |
|
| Equity securities, at fair value – related party | 176 |
| | 240 |
|
| Investment funds (related party: 2018 – $564 and 2017 – $571; portion at fair value: 2018 – $564 and 2017 – $549) | 605 |
| | 571 |
|
| Cash and cash equivalents | 2 |
| | 4 |
|
| Other assets | 2 |
| | 1 |
|
| Total assets | $ | 118,204 |
| | $ | 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) | September 30, 2017 | | December 31, 2016 |
| Liabilities and Equity | | | |
| Liabilities | | | |
| Interest sensitive contract liabilities (portion at fair value: 2017 – $8,081 and 2016 – $6,574) | $ | 67,024 |
| | $ | 61,532 |
|
| Future policy benefits (portion at fair value: 2017 – $2,427 and 2016 – $2,400) | 15,687 |
| | 14,592 |
|
| Other policy claims and benefits | 211 |
| | 217 |
|
| Dividends payable to policyholders | 1,017 |
| | 974 |
|
| Derivative liabilities | 92 |
| | 40 |
|
| Payables for collateral on derivatives | 1,896 |
| | 1,383 |
|
| Funds withheld liability (portion at fair value: 2017 – $18 and 2016 – $6) | 394 |
| | 380 |
|
| Other liabilities (related party: 2017 – $67 and 2016 – $56) | 1,024 |
| | 688 |
|
| Liabilities of consolidated variable interest entities | 47 |
| | 34 |
|
| Total liabilities | 87,392 |
| | 79,840 |
|
| Equity | | | |
| Common stock | | | |
| Class A – par value $0.001 per share; authorized: 2017 and 2016 – 425,000,000 shares; issued and outstanding: 2017 – 120,108,463 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 – 69,544,914 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 – 3,388,890 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 – 867,923 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 – 1,253,000 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 – 4,793,212 and 2016 – 5,397,802 shares | — |
| | — |
|
| Additional paid-in capital | 3,461 |
| | 3,421 |
|
| Retained earnings | 4,046 |
| | 3,070 |
|
| Accumulated other comprehensive income (related party: 2017 – $56 and 2016 – $12) | 1,162 |
| | 367 |
|
| Total Athene Holding Ltd. shareholders' equity | 8,669 |
| | 6,858 |
|
| Noncontrolling interest | — |
| | 1 |
|
| Total equity | 8,669 |
| | 6,859 |
|
| Total liabilities and equity | $ | 96,061 |
| | $ | 86,699 |
|
|
| | | | | | | |
| (In millions, except share and per share data) | September 30, 2018 | | December 31, 2017 |
| Liabilities and Equity | | | |
| Liabilities | | | |
| Interest sensitive contract liabilities (related party: 2018 – $17,367; portion at fair value: 2018 – $9,557 and 2017 – $8,929) | $ | 88,903 |
| | $ | 67,708 |
|
| Future policy benefits (related party: 2018 – $965; portion at fair value: 2018 – $2,233 and 2017 – $2,428) | 14,771 |
| | 17,507 |
|
| Other policy claims and benefits (related party: 2018 – $3) | 140 |
| | 211 |
|
| Dividends payable to policyholders | 120 |
| | 1,025 |
|
| Long-term debt | 991 |
| | — |
|
| Derivative liabilities | 124 |
| | 134 |
|
| Payables for collateral on derivatives | 2,315 |
| | 2,323 |
|
| Funds withheld liability (portion at fair value: 2018 – $3 and 2017 – $22) | 389 |
| | 407 |
|
| Other liabilities (related party: 2018 – $99 and 2017 – $64) | 1,380 |
| | 1,222 |
|
| Liabilities of consolidated variable interest entities | 2 |
| | 2 |
|
| Total liabilities | 109,135 |
| | 90,539 |
|
| Commitments and Contingencies (Note 13) | | | |
| Equity | | | |
| Common stock | | | |
| Class A – par value $0.001 per share; authorized: 2018 and 2017 – 425,000,000 shares; issued and outstanding: 2018 – 164,849,200 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 – 25,483,107 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 – 3,359,345 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 – 841,011 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 – 1,001,110 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 – 4,224,071 and 2017 – 4,711,743 shares | — |
| | — |
|
| Additional paid-in capital | 3,499 |
| | 3,472 |
|
| Retained earnings | 5,527 |
| | 4,321 |
|
| Accumulated other comprehensive income (related party: 2018 – $(7) and 2017 – $48) | 43 |
| | 1,415 |
|
| Total shareholders' equity | 9,069 |
| | 9,208 |
|
| Total liabilities and equity | $ | 118,204 |
| | $ | 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 September 30, | | Nine months ended September 30, |
| (In millions, except per share data) | 2017 | | 2016 | | 2017 | | 2016 |
| Revenues | | | | | | | |
| Premiums | $ | 72 |
| | $ | 85 |
| | $ | 503 |
| | $ | 205 |
|
| Product charges | 86 |
| | 71 |
| | 252 |
| | 206 |
|
| Net investment income (related party investment income of $50 and $62 for the three months ended and $179 and $164 for the nine months ended September 30, 2017 and 2016, respectively, and related party investment expense of $81 and $73 for the three months ended and $235 and $226 for the nine months ended September 30, 2017 and 2016, respectively) | 820 |
| | 743 |
| | 2,427 |
| | 2,137 |
|
| Investment related gains (losses) (related party of $(2) and $(2) for the three months ended and $(10) and $(32) for the nine months ended September 30, 2017 and 2016, respectively) | 473 |
| | 380 |
| | 1,615 |
| | 523 |
|
| Other-than-temporary impairment investment losses | | | | | | | |
| Other-than-temporary impairment losses | (11 | ) | | (7 | ) | | (23 | ) | | (31 | ) |
| Other-than-temporary impairment losses recognized in other comprehensive income | (2 | ) | | 1 |
| | (2 | ) | | 4 |
|
| Net other-than-temporary impairment losses | (13 | ) | | (6 | ) | | (25 | ) | | (27 | ) |
| Other revenues | 8 |
| | 8 |
| | 24 |
| | 25 |
|
| Revenues of consolidated variable interest entities | | | | | | | |
| Net investment income (related party of $10 and $0 for the three months ended and $30 and $17 for the nine months ended September 30, 2017 and 2016, respectively) | 10 |
| | 7 |
| | 30 |
| | 40 |
|
| Investment related gains (losses) (related party of $17 and $(11) for the three months ended and $29 and $(48) for the nine months ended September 30, 2017 and 2016, respectively) | 17 |
| | (16 | ) | | 29 |
| | (70 | ) |
| Total revenues | 1,473 |
| | 1,272 |
| | 4,855 |
| | 3,039 |
|
| Benefits and Expenses | | | | | | | |
| Interest sensitive contract benefits | 621 |
| | 491 |
| | 1,866 |
| | 1,081 |
|
| Amortization of deferred sales inducements | 13 |
| | 13 |
| | 42 |
| | 19 |
|
| Future policy and other policy benefits | 259 |
| | 391 |
| | 1,051 |
| | 873 |
|
| Amortization of deferred acquisition costs and value of business acquired | 80 |
| | 120 |
| | 251 |
| | 210 |
|
| Dividends to policyholders | 48 |
| | 35 |
| | 129 |
| | 65 |
|
| Policy and other operating expenses (related party of $4 and $10 for the three months ended and $10 and $18 for the nine months ended September 30, 2017 and 2016, respectively) | 158 |
| | 180 |
| | 479 |
| | 447 |
|
| Operating expenses of consolidated variable interest entities | — |
| | 4 |
| | — |
| | 13 |
|
| Total benefits and expenses | 1,179 |
| | 1,234 |
| | 3,818 |
| | 2,708 |
|
| Income before income taxes | 294 |
| | 38 |
| | 1,037 |
| | 331 |
|
| Income tax expense (benefit) | 20 |
| | (88 | ) | | 53 |
| | (73 | ) |
| Net income | 274 |
| | 126 |
| | 984 |
| | 404 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
|
| Net income available to Athene Holding Ltd. shareholders | $ | 274 |
| | $ | 126 |
| | $ | 984 |
| | $ | 404 |
|
| | | | | | | | |
| Earnings per share | | | | | | | |
Basic – Classes A, B, M-1, M-2, M-3 and M-41 | $ | 1.40 |
| | $ | 0.68 |
| | $ | 5.05 |
| | $ | 2.18 |
|
| Diluted – Class A | 1.39 |
| | 0.68 |
| | 5.00 |
| | 2.17 |
|
| Diluted – Class B | 1.40 |
| | 0.68 |
| | 5.05 |
| | 2.18 |
|
Diluted – Class M-11 | 1.40 |
| | N/A |
| | 5.05 |
| | N/A |
|
Diluted – Class M-21 | 1.39 |
| | N/A |
| | 3.26 |
| | N/A |
|
Diluted – Class M-31 | 1.07 |
| | N/A |
| | 2.27 |
| | N/A |
|
Diluted – Class M-41 | 0.79 |
| | N/A |
| | 1.91 |
| | N/A |
|
| | | | | | | | |
| N/A – Not applicable |
1 Basic and diluted earnings per share for Class M-1, M-2, M-3 and M-4 were applicable only for the periods ended September 30, 2017. Refer to Note 9 – Earnings Per Share for further discussion. |
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions, except per share data) | 2018 | | 2017 | | 2018 | | 2017 |
| Revenues | | | | | | | |
| Premiums (related party of $41 and $0 for the three months ended and $623 and $0 for the nine months ended September 30, 2018 and 2017, respectively) | $ | 531 |
| | $ | 72 |
| | $ | 1,535 |
| | $ | 503 |
|
| Products charges (related party of $14 and $0 for the three months ended and $19 and $0 for the nine months ended September 30, 2018 and 2017, respectively) | 119 |
| | 86 |
| | 321 |
| | 252 |
|
| Net investment income (related party investment income of $226 and $50 for the three months ended and $369 and $179 for the nine months ended September 30, 2018 and 2017, respectively, and related party investment expense of $88 and $81 for the three months ended and $257 and $235 for the nine months ended September 30, 2018 and 2017, respectively) | 1,070 |
| | 820 |
| | 2,883 |
| | 2,427 |
|
| Investment related gains (losses) (related party of $(27) and $(2) for the three months ended and $(8) and $(10) for the nine months ended September 30, 2018 and 2017, respectively) | 823 |
| | 473 |
| | 585 |
| | 1,615 |
|
| Other-than-temporary impairment investment losses | | | | | | | |
| Other-than-temporary impairment losses | (7 | ) | | (11 | ) | | (10 | ) | | (23 | ) |
| Other-than-temporary impairment losses reclassified to (from) other comprehensive income | 4 |
| | (2 | ) | | 4 |
| | (2 | ) |
| Net other-than-temporary impairment losses | (3 | ) | | (13 | ) | | (6 | ) |
| (25 | ) |
| Other revenues | 10 |
| | 8 |
| | 22 |
| | 24 |
|
| Revenues of consolidated variable interest entities | | | | | | | |
| Net investment income (related party of $15 and $10 for the three months ended and $39 and $30 for the nine months ended September 30, 2018 and 2017, respectively) | 15 |
| | 10 |
| | 39 |
| | 30 |
|
| Investment related gains (losses) (related party of $23 and $17 for the three months ended and $17 and $29 for the nine months ended September 30, 2018 and 2017, respectively) | 23 |
| | 17 |
| | 17 |
| | 29 |
|
| Total revenues | 2,588 |
| | 1,473 |
| | 5,396 |
| | 4,855 |
|
| Benefits and expenses | | | | | | | |
| Interest sensitive contract benefits (related party of $135 and $0 for the three months ended and $155 and $0 for the nine months ended September 30, 2018 and 2017, respectively) | 741 |
| | 621 |
| | 1,092 |
| | 1,866 |
|
| Amortization of deferred sales inducements | 23 |
| | 13 |
| | 66 |
| | 42 |
|
| Future policy and other policy benefits (related party of $58 and $0 for the three months ended and $638 and $0 for the nine months ended September 30, 2018 and 2017, respectively) | 920 |
| | 259 |
| | 2,178 |
| | 1,051 |
|
| Amortization of deferred acquisition costs and value of business acquired | 30 |
| | 80 |
| | 211 |
| | 251 |
|
| Dividends to policyholders | 10 |
| | 48 |
| | 32 |
| | 129 |
|
| Policy and other operating expenses (related party of $22 and $4 for the three months ended and $27 and $10 for the nine months ended September 30, 2018 and 2017, respectively) | 158 |
| | 158 |
| | 453 |
| | 479 |
|
| Operating expenses of consolidated variable interest entities | — |
| | — |
| | 1 |
| | — |
|
| Total benefits and expenses | 1,882 |
| | 1,179 |
| | 4,033 |
| | 3,818 |
|
| Income before income taxes | 706 |
| | 294 |
| | 1,363 |
| | 1,037 |
|
| Income tax expense | 66 |
| | 20 |
| | 191 |
| | 53 |
|
| Net income | $ | 640 |
| | $ | 274 |
| | $ | 1,172 |
| | $ | 984 |
|
| | | | | | | | |
| Earnings per share | | | | | | | |
| Basic – Classes A, B, M-1, M-2, M-3 and M-4 | $ | 3.24 |
| | $ | 1.40 |
| | $ | 5.94 |
| | $ | 5.05 |
|
| Diluted – Class A | 3.23 |
| | 1.39 |
| | 5.92 |
| | 5.00 |
|
| Diluted – Class B | 3.24 |
| | 1.40 |
| | 5.94 |
| | 5.05 |
|
| Diluted – Class M-1 | 3.24 |
| | 1.40 |
| | 5.94 |
| | 5.05 |
|
| Diluted – Class M-2 | 3.24 |
| | 1.39 |
| | 5.90 |
| | 3.26 |
|
| Diluted – Class M-3 | 3.24 |
| | 1.07 |
| | 5.90 |
| | 2.27 |
|
| Diluted – Class M-4 | 2.49 |
| | 0.79 |
| | 4.42 |
| | 1.91 |
|
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
| |
| Three months ended September 30, | | Nine months ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 |
| 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Net income | $ | 274 |
| | $ | 126 |
| | $ | 984 |
|
| $ | 404 |
| $ | 640 |
| | $ | 274 |
| | $ | 1,172 |
| | $ | 984 |
|
| Other comprehensive income, before tax | | | | | | | | |
| Other comprehensive income (loss), before tax | | | | | | | | |
| Unrealized investment gains (losses) on available-for-sale securities | 171 |
| | 499 |
| | 1,172 |
|
| 1,705 |
| (103 | ) | | 171 |
| | (1,680 | ) | | 1,172 |
|
| Noncredit component of other-than-temporary impairment losses on available-for-sale securities | 2 |
| | (1 | ) | | 2 |
|
| (4 | ) | (4 | ) | | 2 |
| | (4 | ) | | 2 |
|
| Unrealized gains (losses) on hedging instruments | (31 | ) | | (6 | ) | | (69 | ) |
| (13 | ) | 7 |
| | (31 | ) | | 52 |
| | (69 | ) |
| Pension adjustments | 1 |
| | — |
| | — |
|
| (1 | ) | — |
| | 1 |
| | 3 |
| | — |
|
| Foreign currency translation adjustments | 4 |
| | 1 |
| | 14 |
| | 1 |
| — |
| | 4 |
| | (10 | ) | | 14 |
|
| Other comprehensive income, before tax | 147 |
| | 493 |
| | 1,119 |
| | 1,688 |
| |
| Income tax expense related to other comprehensive income | 45 |
| | 142 |
| | 324 |
|
| 531 |
| |
| Other comprehensive income, after tax | 102 |
| | 351 |
| | 795 |
| | 1,157 |
| |
| Comprehensive income | 376 |
| | 477 |
| | 1,779 |
| | 1,561 |
| |
| Less: Comprehensive income attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
| |
| Comprehensive income available to Athene Holding Ltd. shareholders | $ | 376 |
| | $ | 477 |
| | $ | 1,779 |
| | $ | 1,561 |
| |
| Other comprehensive income (loss), before tax | | (100 | ) | | 147 |
| | (1,639 | ) | | 1,119 |
|
| Income tax expense (benefit) related to other comprehensive income | | (17 | ) | | 45 |
| | (309 | ) | | 324 |
|
| Other comprehensive income (loss) | | (83 | ) | | 102 |
| | (1,330 | ) | | 795 |
|
| Comprehensive income (loss) | | $ | 557 |
| | $ | 376 |
| | $ | (158 | ) | | $ | 1,779 |
|
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 |
| | $ | 2,308 |
| | $ | (237 | ) | | $ | 5,352 |
| | $ | 1 |
| | $ | 5,353 |
| |
| Net income | — |
| | — |
| | 404 |
| | — |
| | 404 |
| | — |
| | 404 |
| |
| Other comprehensive income | — |
| | — |
| | — |
| | 1,157 |
| | 1,157 |
| | — |
| | 1,157 |
| |
| Issuance of shares, net of expenses | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| |
| Stock-based compensation | — |
| | 135 |
| | — |
| | — |
| | 135 |
| | — |
| | 135 |
| |
| Retirement or repurchase of shares | — |
| | (14 | ) | | (5 | ) | | — |
| | (19 | ) | | — |
| | (19 | ) | |
| Balance at September 30, 2016 | $ | — |
| | $ | 3,403 |
| | $ | 2,707 |
| | $ | 920 |
| | $ | 7,030 |
| | $ | 1 |
| | $ | 7,031 |
| |
| | | | | | | | | | | | | | | |
| Balance at December 31, 2016 | $ | — |
| | $ | 3,421 |
| | $ | 3,070 |
| | $ | 367 |
| | $ | 6,858 |
| | $ | 1 |
| | $ | 6,859 |
| $ | — |
| | $ | 3,421 |
| | $ | 3,070 |
| | $ | 367 |
| | $ | 6,858 |
| | $ | 1 |
| | $ | 6,859 |
|
| Net income | — |
| | — |
| | 984 |
| | — |
| | 984 |
| | — |
| | 984 |
| — |
| | — |
| | 984 |
| | — |
| | 984 |
| | — |
| | 984 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | 795 |
| | 795 |
| | — |
| | 795 |
| — |
| | — |
| | — |
| | 795 |
| | 795 |
| | — |
| | 795 |
|
| Stock-based compensation | — |
| | 40 |
| | — |
| | — |
| | 40 |
| | — |
| | 40 |
| — |
| | 40 |
| | — |
| | — |
| | 40 |
| | — |
| | 40 |
|
| Retirement or repurchase of shares | — |
| | — |
| | (8 | ) | | — |
| | (8 | ) | | — |
| | (8 | ) | — |
| | — |
| | (8 | ) | | — |
| | (8 | ) | | — |
| | (8 | ) |
| Other changes in equity of noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Balance at September 30, 2017 | $ | — |
| | $ | 3,461 |
| | $ | 4,046 |
| | $ | 1,162 |
| | $ | 8,669 |
| | $ | — |
| | $ | 8,669 |
| $ | — |
| | $ | 3,461 |
| | $ | 4,046 |
| | $ | 1,162 |
| | $ | 8,669 |
| | $ | — |
| | $ | 8,669 |
|
| | | | | | | | | | | | | | | |
| 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 | | — |
| | — |
| | 1,172 |
| | — |
| | 1,172 |
| | — |
| | 1,172 |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | (1,330 | ) | | (1,330 | ) | | — |
| | (1,330 | ) |
| Issuance of shares, net of expenses | | — |
| | 2 |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
| Stock-based compensation | | — |
| | 25 |
| | — |
| | — |
| | 25 |
| | — |
| | 25 |
|
| Retirement or repurchase of shares | | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) | | — |
| | (5 | ) |
| Balance at September 30, 2018 | | $ | — |
| | $ | 3,499 |
| | $ | 5,527 |
| | $ | 43 |
| | $ | 9,069 |
| | $ | — |
| | $ | 9,069 |
|
| | | | | | | | | | | | | | | |
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)
| | | | Nine months ended September 30, | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | 2018 | | 2017 |
| Cash flows from operating activities | | | | | | |
| Net income | $ | 984 |
| | $ | 404 |
| $ | 1,172 |
| | $ | 984 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Amortization of deferred acquisition costs and value of business acquired | 251 |
| | 210 |
| 211 |
| | 251 |
|
| Amortization of deferred sales inducements | 42 |
| | 19 |
| 66 |
| | 42 |
|
| Amortization (accretion) of net investment premiums, discounts, and other | (141 | ) | | (136 | ) | |
| Accretion of net investment premiums, discounts, and other | | (143 | ) | | (141 | ) |
| Payment at inception of reinsurance agreements, net (related party: 2018 – $(407)) | | (394 | ) | | — |
|
| Stock-based compensation | 40 |
| | 61 |
| 20 |
| | 40 |
|
| Net investment income (related party: 2017 – $(66) and 2016 – $(30)) | (65 | ) | | (4 | ) | |
| Net recognized (gains) losses on investments and derivatives (related party: 2017 – $2 and 2016 – $23) | (1,271 | ) | | (226 | ) | |
| Net investment income (related party: 2018 – $(77) and 2017 – $(66)) | | (61 | ) | | (65 | ) |
| Net recognized (gains) losses on investments and derivatives (related party: 2018 – $(5) and 2017 – $2) | | (559 | ) | | (1,271 | ) |
| Policy acquisition costs deferred | (371 | ) | | (449 | ) | (495 | ) | | (371 | ) |
| Deferred income tax expense (benefit) | 50 |
| | (45 | ) | |
| Changes in operating assets and liabilities: | | | | | | |
| Accrued investment income | (67 | ) | | (20 | ) | |
| Interest sensitive contract liabilities | 1,655 |
| | 995 |
| |
| Future policy benefits, other policy claims and benefits, dividends payable to policyholders and reinsurance recoverable | 460 |
| | 222 |
| |
| Current income tax recoverable | 78 |
| | 10 |
| |
| Funds withheld assets and liabilities | (327 | ) | | (133 | ) | |
| Accrued investment income (related party: 2018 – $(13) and 2017 – $0) | | (70 | ) | | (67 | ) |
| Interest sensitive contract liabilities (related party: 2018 – $136) | | 562 |
| | 1,655 |
|
| Future policy benefits, other policy claims and benefits, dividends payable to policyholders and reinsurance recoverable (related party: 2018 – $54) | | 1,080 |
| | 460 |
|
| Funds withheld assets and liabilities (related party: 2018 – $(119)) | | (239 | ) | | (327 | ) |
| Other assets and liabilities | 51 |
| | (21 | ) | 103 |
| | 179 |
|
| Consolidated variable interest entities related: | | | | | | |
| Amortization (accretion) of net investment premiums, discounts, and other | — |
| | 3 |
| |
| Net investment loss | 1 |
| | 4 |
| |
| Net recognized (gains) losses on investments and derivatives (related party: 2017 – $(29) and 2016 – $48) | (28 | ) | | 70 |
| |
| Net recognized (gains) losses on investments and derivatives (related party: 2018 – $(18) and 2017 – $(29)) | | (18 | ) | | (28 | ) |
| Other operating activities, net | | — |
| | 1 |
|
| Net cash provided by operating activities | 1,342 |
| | 964 |
| 1,235 |
| | 1,342 |
|
| Cash flows from investing activities | | | | |
| Sales, maturities and repayments of: | | | | |
| Fixed maturity securities | | | | |
| Available-for-sale securities (related party: 2018 – $111 and 2017 – $126) | | 9,003 |
| | 9,199 |
|
| Trading securities (related party: 2018 – $30 and 2017 – $52) | | 327 |
| | 120 |
|
| Equity securities (related party: 2018 – $0 and 2017 – $22) | | 25 |
| | 743 |
|
| Mortgage loans | | 1,048 |
| | 950 |
|
| Investment funds (related party: 2018 – $197 and 2017 – $219) | | 330 |
| | 300 |
|
| Derivative instruments and other invested assets | | 1,548 |
| | 1,083 |
|
| Short-term investments (related party: 2018 – $162 and 2017 – $28) | | 430 |
| | 289 |
|
| Purchases of: | | | | |
| Fixed maturity securities | | | | |
| Available-for-sale securities (related party: 2018 – $(598) and 2017 – $(186)) | | (12,128 | ) | | (13,668 | ) |
| Trading securities | | (17 | ) | | (79 | ) |
| Equity securities | | (163 | ) | | (655 | ) |
| Mortgage loans (related party: 2018 – $(389) and 2017 – $0) | | (4,079 | ) | | (1,925 | ) |
| Investment funds (related party: 2018 – $(894) and 2017 – $(244)) | | (1,073 | ) | | (366 | ) |
| Derivative instruments and other invested assets (related party: 2018 – $(150) and 2017 – $0) | | (973 | ) | | (562 | ) |
| Real estate | | — |
| | (19 | ) |
| Short-term investments (related party: 2018 – $(121) and 2017 – $(37)) | | (421 | ) | | (222 | ) |
| Consolidated variable interest entities related: | | | | |
| Sales, maturities and repayments of investments (related party: 2018 – $103 and 2017 – $40) | | 114 |
| | 40 |
|
| Purchases of investments (related party: 2018 – $(14) and 2017 – $(22)) | | (66 | ) | | (22 | ) |
| Deconsolidation of AGER Bermuda Holding Ltd. and its subsidiaries | | (296 | ) | | — |
|
| Cash settlement of derivatives | | 5 |
| | (4 | ) |
| Other investing activities, net | | 240 |
| | 339 |
|
| Net cash used in investing activities | | (6,146 | ) | | (4,459 | ) |
| | | | (Continued) |
| | | (Continued) |
|
| See accompanying notes to the unaudited condensed consolidated financial statements | | | | | | |
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
|
| | | | | | | |
| | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 |
| Cash flows from investing activities | | | |
| Sales, maturities and repayments of: | | | |
| Available-for-sale securities | | | |
| Fixed maturity securities (related party: 2017 – $126 and 2016 – $12) | $ | 9,199 |
| | $ | 6,401 |
|
| Equity securities (related party: 2017 – $22 and 2016 – $0) | 530 |
| | 295 |
|
| Trading securities (related party: 2017 – $52 and 2016 – $16) | 333 |
| | 557 |
|
| Mortgage loans | 950 |
| | 615 |
|
| Investment funds (related party: 2017 – $219 and 2016 – $215) | 300 |
| | 277 |
|
| Derivative instruments and other invested assets (related party: 2017 – $0 and 2016 – $8) | 1,083 |
| | 226 |
|
| Real estate | — |
| | 7 |
|
| Short-term investments (related party: 2017 – $28 and 2016 – $55) | 289 |
| | 720 |
|
| Purchases of: | | | |
| Available-for-sale securities | | | |
| Fixed maturity securities (related party: 2017 – $(186) and 2016 – $0) | (13,668 | ) | | (8,306 | ) |
| Equity securities (related party: 2017 – $0 and 2016 – $(20)) | (426 | ) | | (244 | ) |
| Trading securities (related party: 2017 – $0 and 2016 – $(33)) | (308 | ) | | (698 | ) |
| Mortgage loans | (1,925 | ) | | (633 | ) |
| Investment funds (related party: 2017 – $(244) and 2016 – $(258)) | (366 | ) | | (322 | ) |
| Derivative instruments and other invested assets | (562 | ) | | (447 | ) |
| Real estate | (19 | ) | | (32 | ) |
| Short-term investments (related party: 2017 – $(37) and 2016 – $0) | (222 | ) | | (699 | ) |
| Consolidated variable interest entities related: | | | |
| Sales, maturities, and repayments of investments (related party: 2017 – $40 and 2016 – $15) | 40 |
| | 497 |
|
| Purchases of investments (related party: 2017 – $(22) and 2016 – $(10)) | (22 | ) | | (10 | ) |
| Cash settlement of derivatives | (4 | ) | | 29 |
|
| Change in restricted cash | (43 | ) | | 53 |
|
| Other investing activities, net | 339 |
| | 32 |
|
| Net cash used in investing activities | (4,502 | ) | | (1,682 | ) |
| | | | (Continued) |
|
| See accompanying notes to the unaudited condensed consolidated financial statements | | | |
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
| | | | Nine months ended September 30, | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | 2018 | | 2017 |
| Cash flows from financing activities | | | | | | |
| Capital contributions | $ | — |
| | $ | 1 |
| 2 |
| | — |
|
| Deposits on investment-type policies and contracts | 7,521 |
| | 4,189 |
| |
| Withdrawals on investment-type policies and contracts | (3,701 | ) | | (3,516 | ) | |
| Payments for coinsurance agreements on investment-type contracts, net | (17 | ) | | (66 | ) | |
| Consolidated variable interest entities related repayment on borrowings | — |
| | (500 | ) | |
| Proceeds from short-term debt | | 183 |
| | — |
|
| Repayment of short-term debt | | (183 | ) | | — |
|
| Proceeds from long-term debt | | 998 |
| | — |
|
| Deposits on investment-type policies and contracts (related party: 2018 – $140) | | 7,011 |
| | 7,521 |
|
| Withdrawals on investment-type policies and contracts (related party: 2018 – $(143)) | | (4,254 | ) | | (3,701 | ) |
| Payments from (for) coinsurance agreements on investment-type contracts, net | | 9 |
| | (17 | ) |
| Net change in cash collateral posted for derivative transactions | 513 |
| | 254 |
| (8 | ) | | 513 |
|
| Repurchase of common stock | (8 | ) | | (2 | ) | (5 | ) | | (8 | ) |
| Other financing activities, net | (29 | ) | | 207 |
| 104 |
| | (29 | ) |
| Net cash provided by financing activities | 4,279 |
| | 567 |
| 3,857 |
| | 4,279 |
|
| Effect of exchange rate changes on cash and cash equivalents | 30 |
| | (2 | ) | — |
| | 30 |
|
| Net increase (decrease) in cash and cash equivalents | 1,149 |
| | (153 | ) | |
| Net (decrease) increase in cash and cash equivalents | | (1,054 | ) | | 1,192 |
|
Cash and cash equivalents at beginning of year1 | 2,459 |
| | 2,720 |
| 4,997 |
| | 2,516 |
|
Cash and cash equivalents at end of period1 | $ | 3,608 |
| | $ | 2,567 |
| $ | 3,943 |
| | $ | 3,708 |
|
| | | | | | | |
| Supplementary information | | | | | | |
| Non-cash transactions | | | | | | |
| Deposits on investment-type policies and contracts through reinsurance agreements | $ | 511 |
| | $ | 3,089 |
| |
| Withdrawals on investment-type policies and contracts through reinsurance agreements | 390 |
| | 281 |
| |
| Deposits on investment-type policies and contracts through reinsurance agreements (related party: 2018 – $17,574) | | $ | 18,508 |
| | $ | 511 |
|
| Withdrawals on investment-type policies and contracts through reinsurance agreements (related party: 2018 – $604) | | 899 |
| | 390 |
|
| Investments received from settlements on reinsurance agreements | 36 |
| | 47 |
| 36 |
| | 36 |
|
| Purchase interests in investment funds in kind | 26 |
| | — |
| |
| Investments exchanged for related party investments | | 95 |
| | 26 |
|
| Investment in Athora Holding Ltd. received upon deconsolidation | | 108 |
| | — |
|
| | | | | | | |
1 Includes 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. | | 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. (ALRe), 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;liabilities, including Athene Life Re Ltd. (ALRe), a Bermuda exempted company; and
Athene USA Corporation, an Iowa corporation and(together with its subsidiaries, (AtheneAthene USA); and
AGER Bermuda Holding Ltd. and its subsidiaries (AGER), which includes 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, except as noted below, considered necessary for fair statement of the results for the interim periods presented. All significant intercompany accounts and transactions have been eliminated. Interim operating results are not necessarily indicative of the results expected for the entire year.
The 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 revised audited consolidated financial statements included as Exhibit 99.1 toin our CurrentAnnual Report on Form 8-K, filed on June 13,10-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.
DuringDeconsolidation – AGER Bermuda Holding Ltd. and its subsidiaries, now known as Athora Holding Ltd. (Athora), was our consolidated subsidiary for the quarteryear ended September 30,December 31, 2017. In April 2017, in connection with a private offering, Athora entered into subscription agreements with AHL, certain affiliates of Apollo Global Management, LLC (AGM and, together 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 Athora 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 shares in respect of the capital 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 recorded out-of-period adjustments that affectedheld 10% of the aggregate 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 subsidiary. We did not recognize a material amount in the condensed consolidated statements of income. These adjustments, related to DAC and VOBA amortization and actuarial reserves, increased consolidated income before taxes for the three and nine months ended September 30, 2017 by $13 million and $28 million, respectively. We evaluated these out-of-period adjustments and determined they were not material to the condensed consolidated financial statements for either the three or nine months ended September 30, 2017, or any other previously reported period.
Revisions—As part of our continuing initiative to improve controlsupon deconsolidation in our business processes and confirm the accuracy of our data relating to blocks of businesses acquired from Aviva USA as well as deposits since the acquisition, we identified an error in May 2017 relating to the impact of certain inputs used to calculate certain actuarial balances, which had the result of misstating our net investment earned rate used in the amortization calculation of deferred acquisition costs and the change in future policy benefits. We have revised our condensed consolidated financial statements and notes for the three and nine months ended September 30, 2016 as a result of correcting this error and other immaterial errors. We assessed the materiality of these errors and concluded these errors 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 reported in future periods.2018.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following is a summary of the revisions on the condensed consolidated statements of income:
|
| | | | | | | | | | | |
| | Three months ended September 30, 2016 |
| (In millions, except per share data) | As Previously Reported | | Revisions | | As Adjusted |
| Revenue | | | | | |
| Net investment income | $ | 747 |
| | $ | (4 | ) | | $ | 743 |
|
| Total revenues | 1,276 |
| | (4 | ) | | 1,272 |
|
| Benefits and Expenses | | | | | |
| Interest sensitive contract benefits | 482 |
| | 9 |
| | 491 |
|
| Amortization of deferred sales inducements | 14 |
| | (1 | ) | | 13 |
|
| Future policy and other policy benefits | 377 |
| | 14 |
| | 391 |
|
| Amortization of deferred acquisition costs and value of business acquired | 113 |
| | 7 |
| | 120 |
|
| Total benefits and expenses | 1,205 |
| | 29 |
| | 1,234 |
|
| Income before income taxes | 71 |
| | (33 | ) | | 38 |
|
| Income tax benefit | (87 | ) | | (1 | ) | | (88 | ) |
| Net income | 158 |
| | (32 | ) | | 126 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | — |
| | — |
|
| Net income available to Athene Holding Ltd. shareholders | $ | 158 |
| | $ | (32 | ) | | $ | 126 |
|
| | | | | | |
| Earnings per share on Class A and B shares | | | | | |
| Basic | $ | 0.85 |
| | $ | (0.17 | ) | | $ | 0.68 |
|
| Diluted | 0.85 |
| | (0.17 | ) | | 0.68 |
|
| | | | | | |
|
| | | | | | | | | | | |
| | Nine months ended September 30, 2016 |
| (In millions, except per share data) | As Previously Reported | | Revisions | | As Adjusted |
| Revenue | | | | | |
| Net investment income | $ | 2,143 |
| | $ | (6 | ) | | $ | 2,137 |
|
| Total revenues | 3,045 |
| | (6 | ) | | 3,039 |
|
| Benefits and Expenses | | | | | |
| Interest sensitive contract benefits | 1,068 |
| | 13 |
| | 1,081 |
|
| Amortization of deferred sales inducements | 20 |
| | (1 | ) | | 19 |
|
| Future policy and other policy benefits | 862 |
| | 11 |
| | 873 |
|
| Amortization of deferred acquisition costs and value of business acquired | 203 |
| | 7 |
| | 210 |
|
| Total benefits and expenses | 2,678 |
| | 30 |
| | 2,708 |
|
| Income before income taxes | 367 |
| | (36 | ) | | 331 |
|
| Income tax benefit | (70 | ) | | (3 | ) | | (73 | ) |
| Net income | 437 |
| | (33 | ) | | 404 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | — |
| | — |
|
| Net income available to Athene Holding Ltd. shareholders | $ | 437 |
| | $ | (33 | ) | | $ | 404 |
|
| | | | | | |
| Earnings per share on Class A and B shares | | | | | |
| Basic – Classes A and B | $ | 2.35 |
| | $ | (0.17 | ) | | $ | 2.18 |
|
| Diluted – Class A | 2.35 |
| | (0.18 | ) | | 2.17 |
|
| Diluted – Class B | 2.35 |
| | (0.17 | ) | | 2.18 |
|
| | | | | | |
We revised the condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2016 and the condensed consolidated statement of equity for the nine months ended September 30, 2016 only for the changes to net income presented above.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following is a summary of the revisions to the condensed consolidated statement of cash flows:
|
| | | | | | | | | | | |
| | Nine months ended September 30, 2016 |
| (In millions) | As Previously Reported | | Revisions | | As Adjusted |
| Cash flows from operating activities | | | | | |
| Net income | $ | 437 |
| | $ | (33 | ) | | $ | 404 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Amortization of deferred acquisition costs and value of business acquired | 203 |
| | 7 |
| | 210 |
|
| Amortization of deferred sales inducements | 20 |
| | (1 | ) | | 19 |
|
| Deferred income tax benefit | (42 | ) | | (3 | ) | | (45 | ) |
| Changes in operating assets and liabilities: | | | | | |
| Interest sensitive contract liabilities | 982 |
| | 13 |
| | 995 |
|
| Future policy benefits, other policy claims and benefits, dividends payable to policyholders and reinsurance recoverable | 211 |
| | 11 |
| | 222 |
|
| Other assets and liabilities | (23 | ) | | 2 |
| | (21 | ) |
| Net cash provided by operating activities | 968 |
| | (4 | ) | | 964 |
|
| Cash flows from investing activities | | | | | |
| Other investing activities, net | 28 |
| | 4 |
| | 32 |
|
| Net cash used in investing activities | (1,686 | ) | | 4 |
| | (1,682 | ) |
| Cash flows from financing activities | | | | | |
| Other financing activities, net | 200 |
| | 7 |
| | 207 |
|
| Net cash provided by financing activities | 560 |
| | 7 |
| | 567 |
|
| Effect of exchange rate changes on cash and cash equivalents | (2 | ) | | — |
| | (2 | ) |
| Net decrease in cash and cash equivalents | (160 | ) | | 7 |
| | (153 | ) |
Cash and cash equivalents at beginning of year1 | 2,720 |
| | — |
| | 2,720 |
|
Cash and cash equivalents at end of period1 | $ | 2,560 |
| | $ | 7 |
| | $ | 2,567 |
|
| | | | | | |
1 Includes cash and cash equivalents of consolidated variable interest entities |
Adopted Accounting Pronouncements
Stock Compensation – ScopeRevenue Recognition (ASU 2017-13, ASU 2016-20, ASU 2016-12, ASU 2016-11, ASU 2016-10, ASU 2016-08, ASU 2015-14 and ASU 2014-09)
These updates are based on the core principle that an entity should recognize revenue to depict the transfer of Modification Accounting (ASU 2017-09)
The amendmentspromised goods or services to customers in this update clarify and simplify whenan amount that reflects the consideration to apply modification accounting for a change towhich the terms or conditions of a share-based payment award. 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 prospectively to awards modified after the date of adoption. The amendments are effective January 1, 2018. Early adoption is permitted and we have elected to early adopt effective April 1, 2017. The adoption did not have an impact on our consolidated financial statements.
Receivables – Nonrefundable Fees and Other Costs (ASU 2017-08)
The amendments in this update shorten the amortization period for certain callable debt securities held at a premium to the earliest call date. These amendments are required to be adoptedthese 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.
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. These amendments are required to be adopted prospectively to any transactions after the date of adoption. The amendments are effective January 1, 2018. Early adoption is permitted and we have elected to early adopt effective April 1, 2017. The adoption did not have an 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
Derivatives and Hedging – Targeted ImprovementsConsolidation (ASU 2017-12)2018-17)
The amendments in this update contain improvements toexpand certain discussions in the financial reporting of hedging relationships that more closely reflect the economic results of an entity's risk management activities in its financial statements. Additionally, the amendments in this update make certain targeted improvements to simplify the application of hedge accounting.VIE guidance, including considerations necessary for determining when a decision-making fee is a variable interest. We will be required to adopt this standardupdate retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. The update is effective January 1, 2019.2020. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
GainsDerivatives and Losses from the Derecognition of Nonfinancial AssetsHedging (ASU 2017-05)2018-16)
The amendments in this update clarifyallow entities to use the scope of asset derecognition guidance andOvernight Index Swap rate based on the Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge accounting for partial sales of nonfinancial assets.purposes, in addition to the previously acceptable rates. We will be required to adopt this standardupdate prospectively for qualifying new or redesignated hedging relationships entered into on a retrospective or modified retrospective basisafter the date of adoption. This update is effective January 1, 2018.2019. We are currently evaluating the impact of this guidance on our consolidated financial statements.
Cloud Computing Arrangements (ASU 2018-15)
The amendments in this update align the requirements for capitalizing implementation costs incurred in a cloud computing service arrangement with the requirements for capitalizing implementation costs incurred for internal-use software. We will be required to adopt this update on January 1, 2020, and we can elect to adopt this update either prospectively or retrospectively. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
Fair Value Measurement – Disclosure Requirements (ASU 2018-13)
The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. We will be required to adopt this update on January 1, 2020, and depending on the amendment will be required to adopt prospectively or retrospectively. Early adoption is permitted for any removed or modified disclosure or for the entire update. We are currently evaluating the impact of this guidance on our consolidated financial statements.
Insurance – Targeted Improvements to the Accounting for Long-Duration Contracts (ASU 2018-12)
This update amends four key areas pertaining to the accounting and disclosures for long-duration insurance and investment contracts.
The update requires cash flow assumptions used to measure the liability for future policy benefits to be updated at least annually and no longer allows a provision for adverse deviation. The remeasurement of the liability associated with the update of assumptions is required to be recognized in net income. Loss recognition testing is eliminated for traditional and limited-payment contracts. The update also requires the discount rate utilized in measuring the liability to be an upper-medium grade fixed-income instrument yield, which is to be updated at each reporting date. The change in liability due to changes in the discount rate is to be recognized in other comprehensive income.
The update simplifies the amortization of deferred acquisition costs and other balances amortized in proportion to premiums, gross profits, or gross margins, requiring such balances to be amortized on a constant level basis over the expected term of the contracts. Deferred costs are required to be written off for unexpected contract terminations but are not subject to impairment testing.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The update requires certain contract features meeting the definition of market risk benefits to be measured at fair value. Among the features included in this definition are the guaranteed lifetime withdrawal benefits (GLWB) and guaranteed minimum death benefit (GMDB) riders attached to the Company’s annuity products. The change in fair value of the market risk benefits is to be recognized in net income, excluding the portion attributable to changes in instrument-specific credit risk which is recognized in other comprehensive income.
The update also introduces disclosure requirements around the liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities, and deferred acquisition costs. This includes disaggregated rollforwards of these balances and information about significant inputs, judgments, assumptions and methods used in their measurement.
We will be required to adopt this update effective January 1, 2021. Certain provisions of the update are required to be adopted on a fully retrospective basis, while others may be adopted on a modified retrospective basis. Early adoption is permitted effective January 1, 2019. We are currently evaluating the impact of this guidance on our consolidated financial statements.
Stock Compensation – Nonemployee Share-Based Payments (ASU 2018-07)
The amendments in this update simplify the accounting for share-based payments to nonemployees by aligning with the accounting for share-based payments to employees, with certain exceptions. We will be required to adopt this update on a modified retrospective basis effective January 1, 2019. We do not expect the adoption of this update will have a material effect on our consolidated financial statements.
Leases (ASU 2018-11, ASU 2018-10, ASU 2018-01, ASU 2017-13 and ASU 2016-02)
These updates are intended to increase transparency and comparability for lease transactions. ASU 2016-02 requires a lessee to recognize a right-of-use asset and lease liability on the balance sheet for all leases with an original term longer than twelve months and disclose key information about leasing arrangements. Lessor accounting is largely unchanged.
The updates are effective January 1, 2019. ASU 2016-02 required the adoption on a modified retrospective basis. However, with the issuance of ASU 2018-11, we have the option to recognize the cumulative effect as an adjustment to the opening balance of retained earnings in the year of adoption, while continuing to present all prior periods under the previous lease guidance. These updates provide optional practical expedients in transition. We expect to elect the ‘package of practical expedients’, which permits us to maintain our prior conclusions about lease identification, classification and initial direct costs.
We have reviewed our existing lease contracts and are now assessing the financial impact on our consolidated financial statements. Our efforts are primarily focused on quantifying the lease liability and right-of-use asset that will be recorded upon adoption related to office space, copiers, and reserved areas and equipment at data centers.
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 do not expect the adoption of this update to have a material effect 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 remaining implementation efforts are focused on less than 0.3% of our revenues and our transition approach. We do not currently expect the adoption of this update to have a material impact 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 is not recognized until the asset is sold to an outside party. We will be required to adopt this standard on a modified retrospective basis effective January 1, 2018. 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-sale (AFS)AFS 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)17
This update changes the current accounting for certain equity investments, the presentation
Contents
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
2. Investments
Available-for-saleAFS Securities—Our AFS investment portfolio includes bonds, collateralized loan obligations (CLO), asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS), and redeemable preferred stock, and equity securities. Additionally, itstock. Our AFS investment portfolio includes direct investments in affiliates of Apollo Global Management, LLC (AGM and, together with its subsidiaries, Apollo)AGM 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: | | | | September 30, 2017 | September 30, 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 | | | | | | | | | | |
| AFS securities | | | | | | | | | | |
| U.S. government and agencies | $ | 59 |
| | $ | 1 |
| | $ | (2 | ) | | $ | 58 |
| | $ | — |
| $ | 143 |
| | $ | — |
| | $ | (1 | ) | | $ | 142 |
| | $ | — |
|
| U.S. state, municipal and political subdivisions | 993 |
| | 153 |
| | (1 | ) | | 1,145 |
| | — |
| 1,142 |
| | 103 |
| | (8 | ) | | 1,237 |
| | — |
|
| Foreign governments | 2,515 |
| | 90 |
| | (16 | ) | | 2,589 |
| | — |
| 180 |
| | 3 |
| | (3 | ) | | 180 |
| | — |
|
| Corporate | 33,115 |
| | 1,520 |
| | (177 | ) | | 34,458 |
| | 1 |
| 37,819 |
| | 447 |
| | (947 | ) | | 37,319 |
| | 1 |
|
| CLO | 4,963 |
| | 47 |
| | (14 | ) | | 4,996 |
| | — |
| 5,325 |
| | 15 |
| | (38 | ) | | 5,302 |
| | — |
|
| ABS | 3,885 |
| | 57 |
| | (42 | ) | | 3,900 |
| | 1 |
| 4,869 |
| | 29 |
| | (43 | ) | | 4,855 |
| | — |
|
| CMBS | 1,849 |
| | 54 |
| | (13 | ) | | 1,890 |
| | 1 |
| 2,343 |
| | 29 |
| | (48 | ) | | 2,324 |
| | 7 |
|
| RMBS | 8,838 |
| | 650 |
| | (8 | ) | | 9,480 |
| | 12 |
| 7,923 |
| | 610 |
| | (10 | ) | | 8,523 |
| | 9 |
|
| Total fixed maturity securities | 56,217 |
| | 2,572 |
| | (273 | ) | | 58,516 |
| | 15 |
| |
| Equity securities | 262 |
| | 57 |
| | (1) |
| | 318 |
| | — |
| |
| Total AFS securities | 56,479 |
| | 2,629 |
| | (274 | ) | | 58,834 |
| | 15 |
| 59,744 |
| | 1,236 |
| | (1,098 | ) | | 59,882 |
| | 17 |
|
| Fixed maturity securities – related party | | | | | | | | | | |
| AFS securities – related party | | | | | | | | | | |
| CLO | 352 |
| | 4 |
| | — |
| | 356 |
| | — |
| 612 |
| | 1 |
| | (4 | ) | | 609 |
| | — |
|
| ABS | 52 |
| | 1 |
| | — |
| | 53 |
| | — |
| 638 |
| | 1 |
| | (5 | ) | | 634 |
| | — |
|
| Total fixed maturity securities – related party | 404 |
| | 5 |
| | — |
| | 409 |
| | — |
| |
| Total AFS securities including related party | $ | 56,883 |
| | $ | 2,634 |
| | $ | (274 | ) | | $ | 59,243 |
| | $ | 15 |
| |
| Total AFS securities – related party | | 1,250 |
| | 2 |
| | (9 | ) | | 1,243 |
| | — |
|
| Total AFS securities, including related party | | $ | 60,994 |
| | $ | 1,238 |
| | $ | (1,107 | ) | | $ | 61,125 |
| | $ | 17 |
|
| | | | 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 | | | | | | | | | | |
| AFS 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: | | | | September 30, 2017 | September 30, 2018 |
| (In millions) | Amortized Cost | | Fair Value | Amortized Cost | | Fair Value |
| Due in one year or less | $ | 984 |
| | $ | 988 |
| $ | 1,164 |
| | $ | 1,164 |
|
| Due after one year through five years | 8,048 |
| | 8,246 |
| 8,647 |
| | 8,636 |
|
| Due after five years through ten years | 11,218 |
| | 11,605 |
| 11,125 |
| | 10,909 |
|
| Due after ten years | 16,432 |
| | 17,411 |
| 18,348 |
| | 18,169 |
|
| CLO, ABS, CMBS and RMBS | 19,535 |
| | 20,266 |
| 20,460 |
| | 21,004 |
|
| Total AFS fixed maturity securities | 56,217 |
| | 58,516 |
| 59,744 |
| | 59,882 |
|
| Fixed maturity securities – related party, CLO and ABS | 404 |
| | 409 |
| 1,250 |
| | 1,243 |
|
| Total AFS fixed maturity securities including related party | $ | 56,621 |
| | $ | 58,925 |
| |
| Total AFS fixed maturity securities, including related party | | $ | 60,994 |
| | $ | 61,125 |
|
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:
| | | | September 30, 2017 | September 30, 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 | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | |
| U.S. government and agencies | $ | 17 |
| | $ | (1 | ) | | $ | 6 |
| | $ | (1) |
| | $ | 23 |
| | $ | (2 | ) | $ | 136 |
| | $ | (1 | ) | | $ | 2 |
| | $ | — |
| | $ | 138 |
| | $ | (1 | ) |
| U.S. state, municipal and political subdivisions | 81 |
| | (1 | ) | | 3 |
| | — |
| | 84 |
| | (1 | ) | 191 |
| | (4 | ) | | 82 |
| | (4 | ) | | 273 |
| | (8 | ) |
| Foreign governments | 822 |
| | (16 | ) | | 25 |
| | — |
| | 847 |
| | (16 | ) | 79 |
| | (2 | ) | | 15 |
| | (1 | ) | | 94 |
| | (3 | ) |
| Corporate | 4,127 |
| | (90 | ) | | 1,465 |
| | (87 | ) | | 5,592 |
| | (177 | ) | 19,563 |
| | (650 | ) | | 3,765 |
| | (297 | ) | | 23,328 |
| | (947 | ) |
| CLO | 303 |
| | (1 | ) | | 671 |
| | (13 | ) | | 974 |
| | (14 | ) | 3,049 |
| | (36 | ) | | 124 |
| | (2 | ) | | 3,173 |
| | (38 | ) |
| ABS | 541 |
| | (4 | ) | | 573 |
| | (38 | ) | | 1,114 |
| | (42 | ) | 1,982 |
| | (22 | ) | | 551 |
| | (21 | ) | | 2,533 |
| | (43 | ) |
| CMBS | 345 |
| | (6 | ) | | 169 |
| | (7 | ) | | 514 |
| | (13 | ) | 879 |
| | (16 | ) | | 544 |
| | (32 | ) | | 1,423 |
| | (48 | ) |
| RMBS | 393 |
| | (5 | ) | | 166 |
| | (3 | ) | | 559 |
| | (8 | ) | 437 |
| | (5 | ) | | 186 |
| | (5 | ) | | 623 |
| | (10 | ) |
| Total fixed maturity securities | 6,629 |
| | (124 | ) | | 3,078 |
| | (149 | ) | | 9,707 |
| | (273 | ) | |
| Equity securities | 72 |
| | (1) |
| | — |
| | — |
| | 72 |
| | (1 | ) | |
| Total AFS securities | 6,701 |
| | (125 | ) | | 3,078 |
| | (149 | ) | | 9,779 |
| | (274 | ) | 26,316 |
| | (736 | ) | | 5,269 |
| | (362 | ) | | 31,585 |
| | (1,098 | ) |
| Fixed maturity securities, CLO – related party | 61 |
| | — |
| | — |
| | — |
| | 61 |
| | — |
| |
| Total AFS securities including related party | $ | 6,762 |
| | $ | (125 | ) | | $ | 3,078 |
| | $ | (149 | ) | | $ | 9,840 |
| | $ | (274 | ) | |
| AFS securities – related party | | | | | | | | | | | | |
| CLO | | 306 |
| | (4 | ) | | — |
| | — |
| | 306 |
| | (4 | ) |
| ABS | | 137 |
| | (2 | ) | | 103 |
| | (3 | ) | | 240 |
| | (5 | ) |
| Total AFS securities – related party | | 443 |
| | (6 | ) | | 103 |
| | (3 | ) | | 546 |
| | (9 | ) |
| Total AFS securities, including related party | | $ | 26,759 |
| | $ | (742 | ) | | $ | 5,372 |
| | $ | (365 | ) | | $ | 32,131 |
| | $ | (1,107 | ) |
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 | | | | | | | | | | | | |
| AFS 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 September 30, 2017,2018, we held 1,4133,670 AFS securities that were in an unrealized loss position. Of this total, 432855 were in an unrealized loss position longer than 12 months.months or more. As of September 30, 2017,2018, we held one27 related party AFS securitysecurities that waswere in an unrealized loss position. Of this total, five were in an unrealized loss position less 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 nine months ended September 30, 2017,2018, we incurred $25$6 million of net OTTI, of which $6$1 million related to intent-to-sell impairments. These securities were impaired to fair value as of the impairment date. The remaining net OTTI of $19$5 million related to credit impairments of which $9 million related to credit loss impairments that we impaired to fair value and did not bifurcatewhere 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 September 30, | | Nine months ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Beginning balance | $ | 16 |
| | $ | 32 |
| | $ | 16 |
| | $ | 22 |
| $ | 7 |
| | $ | 16 |
| | $ | 7 |
| | $ | 16 |
|
| Initial impairments – credit loss OTTI recognized on securities not previously impaired | 4 |
| | — |
| | 10 |
| | 8 |
| 3 |
| | 4 |
| | 4 |
| | 10 |
|
| Additional impairments – credit loss OTTI recognized on securities previously impaired | — |
| | 1 |
| | — |
| | 3 |
| 1 |
| | — |
| | 1 |
| | — |
|
| Reduction in impairments from securities sold, matured or repaid | (2 | ) | | (9 | ) | | (8 | ) | | (9 | ) | (1 | ) | | (2 | ) | | (2 | ) | | (8 | ) |
| Reduction for credit loss that no longer has a portion of the OTTI loss recognized in AOCI | (6 | ) | | — |
| | (6 | ) | | — |
| — |
| | (6 | ) | | — |
| | (6 | ) |
| Ending balance | $ | 12 |
| | $ | 24 |
| | $ | 12 |
| | $ | 24 |
| $ | 10 |
| | $ | 12 |
| | $ | 10 |
| | $ | 12 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Net Investment Income—Net investment income by asset class consists of the following:
| | | | Three months ended September 30, | | Nine months ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 |
| 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Fixed maturity securities | | | | | | | | |
| AFS securities | | | | | | | | $ | 730 |
| | $ | 646 |
| | $ | 2,117 |
| | $ | 1,901 |
|
| Fixed maturity securities | $ | 646 |
| | $ | 563 |
| | $ | 1,901 |
| | $ | 1,703 |
| |
| Trading securities | | 52 |
| | 49 |
| | 150 |
| | 152 |
|
| Equity securities | 3 |
| | 2 |
| | 7 |
| | 6 |
| 4 |
| | 4 |
| | 8 |
| | 9 |
|
| Trading securities | 50 |
| | 59 |
| | 154 |
| | 184 |
| |
| Mortgage loans, net of allowances | 98 |
| | 93 |
| | 273 |
| | 264 |
| |
| Mortgage loans | | 120 |
| | 98 |
| | 315 |
| | 273 |
|
| Investment funds | 55 |
| | 65 |
| | 175 |
| | 122 |
| 56 |
| | 55 |
| | 179 |
| | 175 |
|
| Funds withheld at interest | 35 |
| | 22 |
| | 105 |
| | 47 |
| 169 |
| | 35 |
| | 301 |
| | 105 |
|
| Other | 18 |
| | 14 |
| | 56 |
| | 43 |
| 28 |
| | 18 |
| | 74 |
| | 56 |
|
| Investment revenue | 905 |
| | 818 |
| | 2,671 |
| | 2,369 |
| 1,159 |
| | 905 |
| | 3,144 |
| | 2,671 |
|
| Investment expenses | (85 | ) | | (75 | ) | | (244 | ) | | (232 | ) | (89 | ) | | (85 | ) | | (261 | ) | | (244 | ) |
| Net investment income | $ | 820 |
| | $ | 743 |
| | $ | 2,427 |
| | $ | 2,137 |
| $ | 1,070 |
| | $ | 820 |
| | $ | 2,883 |
| | $ | 2,427 |
|
Investment Related Gains (Losses)—Investment related gains (losses) by asset class consists of the following:
| | | | Three months ended September 30, | | Nine months ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 |
| 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| AFS fixed maturity securities | | | | | | | | |
| AFS securities | | | | | | | | |
| Gross realized gains on investment activity | $ | 31 |
| | $ | 31 |
| | $ | 94 |
| | $ | 102 |
| $ | 56 |
| | $ | 31 |
| | $ | 128 |
| | $ | 94 |
|
| Gross realized losses on investment activity | (10 | ) | | (9 | ) | | (31 | ) | | (51 | ) | (50 | ) | | (10 | ) | | (93 | ) | | (31 | ) |
| Net realized investment gains on fixed maturity securities | 21 |
| | 22 |
| | 63 |
|
| 51 |
| |
| Net realized investment gains on AFS securities | | 6 |
| | 21 |
| | 35 |
| | 63 |
|
| Net realized investment gains (losses) on trading securities | (1 | ) | | 28 |
| | 45 |
| | 93 |
| (44 | ) | | (2 | ) | | (209 | ) | | 26 |
|
| Net realized investment gains (losses) on equity securities | | (2 | ) | | 3 |
| | 2 |
| | 23 |
|
| Derivative gains | 456 |
| | 336 |
| | 1,516 |
| | 387 |
| 862 |
| | 456 |
| | 724 |
| | 1,516 |
|
| Other losses | (3 | ) | | (6 | ) | | (9 | ) | | (8 | ) | |
| Other gains (losses) | | 1 |
| | (5 | ) | | 33 |
| | (13 | ) |
| Investment related gains (losses) | $ | 473 |
| | $ | 380 |
| | $ | 1,615 |
| | $ | 523 |
| $ | 823 |
| | $ | 473 |
| | $ | 585 |
| | $ | 1,615 |
|
Proceeds from sales of AFS securities were $1,863$1,498 million and $972$1,863 million for the three months ended September 30, 20172018 and 2016,2017, respectively, and $4,629$5,500 million and $3,202$4,629 million for the nine months ended September 30, 20172018 and 2016,2017, respectively.
The following table summarizes the change in unrealized gains and losses(losses) on trading and equity securities, including related party, we still held as of the respective period end resulted in unrealized gainsend:
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 |
| Trading securities | $ | (79 | ) | | $ | 16 |
| | $ | (118 | ) | | $ | 75 |
|
| Trading securities – related party | (12 | ) | | 2 |
| | (18 | ) | | 2 |
|
| Equity securities | (2 | ) | | 2 |
| | 2 |
| | 15 |
|
Table of $18 million and $37 million during the three months ended September 30, 2017 and 2016, respectively, and unrealized gains of $90 million and $143 million during the nine months ended September 30, 2017 and 2016, respectively, which are included in net realized investment gains (losses) on trading securities in the table above. The change in unrealized gains and losses on related party trading securities we still held as of the respective period end resulted in related party unrealized gains of $2 million and $0 million during the three months ended September 30, 2017 and 2016, respectively, and related party unrealized gains of $2 million and losses of $23 million during the nine months ended September 30, 2017 and 2016, respectively, which are included in net realized investment gains (losses) on trading securities in the table above.Contents
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Purchased Credit Impaired (PCI) Investments—The following table summarizes our PCI investments:
|
| | | | | | | | | | | | | | | |
| | Fixed maturity securities | | Mortgage loans |
| (In millions) | September 30, 2017 | | December 31, 20163 | | September 30, 2017 | | December 31, 2016 |
Contractually required payments1 | $ | 11,477 |
| | $ | 11,202 |
| | $ | 1,544 |
| | $ | 424 |
|
Less: Cash flows expected to be collected2 | (8,247 | ) | | (7,948 | ) | | (1,066 | ) | | (286 | ) |
| Non-accretable difference | $ | 3,230 |
| | $ | 3,254 |
| | $ | 478 |
| | $ | 138 |
|
| | | | | | | | |
Cash flows expected to be collected2 | $ | 8,247 |
| | $ | 7,948 |
| | $ | 1,066 |
| | $ | 286 |
|
| Less: Amortized cost | (6,175 | ) | | (5,868 | ) | | (802 | ) | | (220 | ) |
| Accretable difference | $ | 2,072 |
| | $ | 2,080 |
| | $ | 264 |
| | $ | 66 |
|
| | | | | | | | |
| Fair value | $ | 6,699 |
| | $ | 6,049 |
| | $ | 831 |
| | $ | 221 |
|
| | | | | | | | |
1 Includes principal and accrued interest. |
2 Represents the undiscounted principal and interest cash flows expected. |
3 Prior period balances have been revised for immaterial misstatements to be comparable to current year balances. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | |
| | September 30, 2018 | | December 31, 2017 | | September 30, 2018 | | December 31, 2017 |
| (In millions) | Fixed maturity securities | | Mortgage loans |
| Contractually required payments receivable | $ | 8,393 |
| | $ | 9,690 |
| | $ | 2,009 |
| | $ | 1,140 |
|
Less: Cash flows expected to be collected1 | (7,402 | ) | | (8,188 | ) | | (1,971 | ) | | (1,090 | ) |
| Non-accretable difference | $ | 991 |
| | $ | 1,502 |
| | $ | 38 |
| | $ | 50 |
|
| | | | | | | | |
Cash flows expected to be collected1 | $ | 7,402 |
| | $ | 8,188 |
| | $ | 1,971 |
| | $ | 1,090 |
|
| Less: Amortized cost | (5,698 | ) | | (6,168 | ) | | (1,456 | ) | | (817 | ) |
| Accretable difference | $ | 1,704 |
| | $ | 2,020 |
| | $ | 515 |
| | $ | 273 |
|
| | | | | | | | |
| Fair value | $ | 6,193 |
| | $ | 6,703 |
| | $ | 1,481 |
| | $ | 844 |
|
| Outstanding balance | 6,993 |
| | 8,026 |
| | 1,666 |
| | 946 |
|
| | | | | | | | |
1 Represents the undiscounted principal and interest cash flows expected. |
During the period, we acquired PCI investments with the following amounts at the time of purchase:
|
| | | | | | | |
| | Nine months ended September 30, 2017 |
| (In millions) | Fixed maturity securities | | Mortgage loans |
| Contractually required principal and interest | $ | 2,230 |
| | $ | 1,194 |
|
| Expected cash flows | 1,502 |
| | 835 |
|
| Estimated fair value | 1,131 |
| | 609 |
|
|
| | | | | | | |
| | September 30, 2018 |
| (In millions) | Fixed maturity securities | | Mortgage loans |
| Contractually required payments receivable | $ | 493 |
| | $ | 923 |
|
| Cash flows expected to be collected | 450 |
| | 909 |
|
| Fair value | 364 |
| | 678 |
|
The following table summarizes the activity for the accretable yield on PCI investments:
| | | | Three months ended September 30, 2017 | | Nine months ended September 30, 2017 | Three months ended September 30, 2018 | | Nine months ended September 30, 2018 |
| (In millions) | Fixed maturity securities1 | | Mortgage loans | | Fixed maturity securities1 | | Mortgage loans | Fixed maturity securities | | Mortgage loans | | Fixed maturity securities | | Mortgage loans |
| Beginning balance | $ | 2,098 |
| | $ | 259 |
| | $ | 2,080 |
| | $ | 66 |
| $ | 1,784 |
| | $ | 304 |
| | $ | 2,020 |
| | $ | 273 |
|
| Purchases of PCI investments, net of sales | 53 |
| | 25 |
| | 289 |
| | 223 |
| 11 |
| | 208 |
| | 55 |
| | 222 |
|
| Accretion | (41 | ) | | (1 | ) | | (138 | ) | | (1 | ) | (107 | ) | | (10 | ) | | (312 | ) | | (31 | ) |
| Changes in expected cash flows | (38 | ) | | (19 | ) | | (159 | ) | | (24 | ) | |
| Net reclassification from (to) non-accretable difference | | 16 |
| | 13 |
| | (59 | ) | | 51 |
|
| Ending balance | $ | 2,072 |
| | $ | 264 |
| | $ | 2,072 |
| | $ | 264 |
| $ | 1,704 |
| | $ | 515 |
| | $ | 1,704 |
| | $ | 515 |
|
| | | | | | | | | |
1 Prior period beginning balances have been revised for immaterial misstatements to be comparable to current year balances. | |
Mortgage Loans, including related party—Mortgage loans, net of allowances, consists of the following:
| | | (In millions) | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
| Commercial mortgage loans | $ | 5,503 |
| | $ | 5,058 |
| $ | 6,596 |
| | $ | 5,223 |
|
| Commercial mortgage loans under development | — |
| | 74 |
| 74 |
| | 24 |
|
| Total commercial mortgage loans | 5,503 |
| | 5,132 |
| 6,670 |
| | 5,247 |
|
| Residential mortgage loans | 942 |
| | 338 |
| 2,701 |
| | 986 |
|
| Mortgage loans, net of allowances | $ | 6,445 |
| | $ | 5,470 |
| $ | 9,371 |
| | $ | 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:
| | | | September 30, 2017 | | December 31, 2016 | September 30, 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 | $ | 1,340 |
| | 24.4 | % | | $ | 1,217 |
| | 23.7 | % | $ | 2,168 |
| | 32.5 | % | | $ | 1,187 |
| | 22.6 | % |
| Retail | 1,130 |
| | 20.5 | % | | 1,135 |
| | 22.1 | % | 1,693 |
| | 25.4 | % | | 1,223 |
| | 23.3 | % |
| Hotels | 1,108 |
| | 20.1 | % | | 1,025 |
| | 20.0 | % | 893 |
| | 13.4 | % | | 928 |
| | 17.7 | % |
| Industrial | 940 |
| | 17.1 | % | | 742 |
| | 14.5 | % | 833 |
| | 12.5 | % | | 944 |
| | 18.0 | % |
| Apartment | 580 |
| | 10.5 | % | | 616 |
| | 12.0 | % | 684 |
| | 10.2 | % | | 525 |
| | 10.0 | % |
| Other commercial | 405 |
| | 7.4 | % | | 397 |
| | 7.7 | % | 399 |
| | 6.0 | % | | 440 |
| | 8.4 | % |
| Total commercial mortgage loans | $ | 5,503 |
| | 100.0 | % | | $ | 5,132 |
| | 100.0 | % | $ | 6,670 |
| | 100.0 | % | | $ | 5,247 |
| | 100.0 | % |
| | | | | | | | | | | | | | | |
| U.S. Region | | | | | | | | | | | | | | |
| East North Central | $ | 553 |
| | 10.0 | % | | $ | 450 |
| | 8.8 | % | $ | 893 |
| | 13.4 | % | | $ | 643 |
| | 12.3 | % |
| East South Central | 146 |
| | 2.7 | % | | 158 |
| | 3.1 | % | 157 |
| | 2.4 | % | | 144 |
| | 2.7 | % |
| Middle Atlantic | 915 |
| | 16.6 | % | | 628 |
| | 12.2 | % | 1,034 |
| | 15.5 | % | | 909 |
| | 17.3 | % |
| Mountain | 599 |
| | 10.9 | % | | 543 |
| | 10.6 | % | 636 |
| | 9.5 | % | | 492 |
| | 9.4 | % |
| New England | 163 |
| | 3.0 | % | | 194 |
| | 3.8 | % | 329 |
| | 4.9 | % | | 162 |
| | 3.1 | % |
| Pacific | 1,075 |
| | 19.5 | % | | 833 |
| | 16.2 | % | 1,558 |
| | 23.3 | % | | 991 |
| | 18.9 | % |
| South Atlantic | 1,053 |
| | 19.1 | % | | 1,284 |
| | 25.0 | % | 1,224 |
| | 18.4 | % | | 873 |
| | 16.6 | % |
| West North Central | 278 |
| | 5.1 | % | | 306 |
| | 6.0 | % | 185 |
| | 2.8 | % | | 233 |
| | 4.4 | % |
| West South Central | 635 |
| | 11.5 | % | | 662 |
| | 12.9 | % | 654 |
| | 9.8 | % | | 655 |
| | 12.5 | % |
| Total U.S. Region | 5,417 |
| | 98.4 | % | | 5,058 |
| | 98.6 | % | 6,670 |
| | 100.0 | % | | 5,102 |
| | 97.2 | % |
| International Region | 86 |
| | 1.6 | % | | 74 |
| | 1.4 | % | — |
| | — | % | | 145 |
| | 2.8 | % |
| Total commercial mortgage loans | $ | 5,503 |
| | 100.0 | % | | $ | 5,132 |
| | 100.0 | % | $ | 6,670 |
| | 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 September 30, 20172018, California and Florida represented 32.5% and New York represented 33.3%, 15.6% and 6.2%21.0%, respectively, of the portfolio, and the remaining 44.9%46.5% 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 September 30, 20172018 and$2 million as of December 31, 2016.2017. We did not record any material activity in the valuation allowance during the three or nine months ended September 30, 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 September 30, 20172018, $16 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 aging of our commercial mortgage loan portfolio, including those under development, net of valuation allowances:
|
| | | | | | | |
| (In millions) | September 30, 2017 | | December 31, 2016 |
| Current (less than 30 days past due) | $ | 5,497 |
| | $ | 5,111 |
|
| Over 90 days past due | 6 |
| | 21 |
|
| Total commercial mortgage loans | $ | 5,503 |
| | $ | 5,132 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | |
| (In millions) | September 30, 2018 | | December 31, 2017 |
| Current (less than 30 days past due) | $ | 6,663 |
| | $ | 5,247 |
|
| 61 to 90 days past due | 1 |
| | — |
|
| Over 90 days past due | 6 |
| | — |
|
| Total commercial mortgage loans | $ | 6,670 |
| | $ | 5,247 |
|
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) | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
| Less than 50% | $ | 1,836 |
| | $ | 1,787 |
| $ | 1,805 |
| | $ | 1,841 |
|
| 50% to 60% | 1,353 |
| | 1,337 |
| 1,776 |
| | 1,390 |
|
| 61% to 70% | 1,902 |
| | 1,401 |
| 2,186 |
| | 1,691 |
|
| 71% to 100% | 402 |
| | 492 |
| |
| Greater than 100% | 10 |
| | 41 |
| |
| 71% to 80% | | 764 |
| | 239 |
|
| 81% to 100% | | 65 |
| | 62 |
|
| Commercial mortgage loans | $ | 5,503 |
| | $ | 5,058 |
| $ | 6,596 |
| | $ | 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) | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
| Greater than 1.20x | $ | 4,992 |
| | $ | 4,378 |
| $ | 6,158 |
| | $ | 4,742 |
|
| 1.00x – 1.20x | 233 |
| | 353 |
| 246 |
| | 297 |
|
| Less than 1.00x | 278 |
| | 327 |
| 192 |
| | 184 |
|
| Commercial mortgage loans | $ | 5,503 |
| | $ | 5,058 |
| $ | 6,596 |
| | $ | 5,223 |
|
Investment Funds—Our investment fund portfolio consists of funds that employ various strategies and include investments in real estate and other real 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. 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:
| | | | September 30, 2017 | | December 31, 2016 | September 30, 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 | 648 |
| | $ | 1 |
| | $ | 63 |
| | 289 |
| | $ | 11 |
| | $ | 4 |
| 1,832 |
| | $ | 31 |
| | $ | 98 |
| | 928 |
| | $ | 1 |
| | $ | 99 |
|
| Interest rate swaps | 302 |
| | — |
| | — |
| | 302 |
| | — |
| | 14 |
| — |
| | — |
| | — |
| | 302 |
| | — |
| | — |
|
| Total derivatives designated as hedges | | | 1 |
| | 63 |
| | | | 11 |
| | 18 |
| | | 31 |
| | 98 |
| | | | 1 |
| | 99 |
|
| Derivatives not designated as hedges | | | | | | | | | | | | | | | | | | | | | | |
| Equity options | 30,323 |
| | 1,957 |
| | 10 |
| | 26,822 |
| | 1,336 |
| | — |
| 38,381 |
| | 2,468 |
| | 15 |
| | 31,460 |
| | 2,500 |
| | 19 |
|
| Futures | 19 |
| | 8 |
| | 1 |
| | — |
| | 9 |
| | — |
| 3 |
| | 5 |
| | — |
| | 1,134 |
| | 7 |
| | — |
|
| Total return swaps | 114 |
| | 2 |
| | — |
| | 41 |
| | 2 |
| | — |
| 62 |
| | 2 |
| | — |
| | 114 |
| | 5 |
| | — |
|
| Foreign currency swaps | 41 |
| | 3 |
| | 3 |
| | 43 |
| | 5 |
| | — |
| 38 |
| | 3 |
| | 3 |
| | 41 |
| | 21 |
| | 3 |
|
| Interest rate swaps | 406 |
| | — |
| | 2 |
| | 568 |
| | 1 |
| | 5 |
| 451 |
| | — |
| | 1 |
| | 385 |
| | — |
| | 2 |
|
| Credit default swaps | 10 |
| | — |
| | 6 |
| | 10 |
| | — |
| | 7 |
| 10 |
| | — |
| | 4 |
| | 10 |
| | — |
| | 5 |
|
| Foreign currency forwards | 1,096 |
| | 11 |
| | 7 |
| | 805 |
| | 6 |
| | 10 |
| 588 |
| | 6 |
| | 3 |
| | 1,139 |
| | 17 |
| | 6 |
|
| Embedded derivatives | | | | | | | | | | | | | | | | | | | | | | |
| Funds withheld | — |
| | 303 |
| | 18 |
| | — |
| | 140 |
| | 6 |
| — |
| | 242 |
| | 3 |
| | — |
| | 312 |
| | 22 |
|
| Interest sensitive contract liabilities | — |
| | — |
| | 6,652 |
| | — |
| | — |
| | 5,283 |
| — |
| | — |
| | 8,656 |
| | — |
| | — |
| | 7,436 |
|
| Total derivatives not designated as hedges |
| | 2,284 |
| | 6,699 |
| |
| | 1,499 |
| | 5,311 |
| | | 2,726 |
| | 8,685 |
| | | | 2,862 |
| | 7,493 |
|
| Total derivatives |
| | $ | 2,285 |
| | $ | 6,762 |
| |
| | $ | 1,510 |
| | $ | 5,329 |
| | | $ | 2,757 |
| | $ | 8,783 |
| | | | $ | 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 2044. December 2045. During the three months ended September 30, 20172018 and 2016,2017, we had foreign currency swap gains of$7 million and losses of $31 million and $6 million, respectively, recorded in AOCI. During the nine months ended September 30, 20172018 and 20162017, we had foreign currency swap gains of $52 million and losses of $69 million and $13 million, respectively, recorded in AOCI. There were no amounts reclassified to income and no amounts deemed ineffective forduring the three and nine months ended September 30, 20172018 and 20162017. As of September 30, 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.
The following table represents the gains and losses on derivatives and the related hedged items in fair value hedge relationships, recorded in interest sensitive contract benefits on the condensed consolidated statements of income:
|
| | | | | | | |
| (In millions) | Three months ended September 30, 2017 | | Nine months ended September 30, 2017 |
| Gains recognized on derivative | $ | 2 |
| | $ | 4 |
|
| Losses recognized on hedged item | (3 | ) | | (4 | ) |
| Ineffectiveness recognized on fair value hedges | $ | (1 | ) | | $ | — |
|
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.
Interest rate swaps – We use interest rate swaps to reduce market risks from interest rate changes and to alter interest rate exposure arising from duration mismatches between assets and liabilities. With an interest rate swap, we agree with another party to exchange the difference between fixed-rate and floating-rate interest amounts tied to an agreed-upon notional principal amount at specified intervals. Certain of these swaps entered into during the fourth quarter of 2016 were designated as fair value hedges. These fair value hedges were dedesignated during the second quarter of 2018 and there was no material impact as a result.
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.
Variance swaps – We use variance swaps to hedge the growth in interest credited to the customer as a direct result of changes in the volatility of the specified market index, primarily the S&P 500. In a variance swap transaction, we agree to exchange future realized volatility for current implied volatility. This type of contract pays the difference between the realized variance and a predefined strike multiplied by a notional value.
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 modcomodified coinsurance (modco) or funds withheld basis and indexed annuity products.
The following is a summary of the gains (losses) related to derivatives not designated as hedges:
| | | | Three months ended September 30, | | Nine months ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Equity options | $ | 367 |
| | $ | 197 |
| | $ | 1,154 |
| | $ | 105 |
| $ | 756 |
| | $ | 367 |
| | $ | 703 |
| | $ | 1,154 |
|
| Futures | (5 | ) | | (7 | ) | | (19 | ) | | (14 | ) | 1 |
| | (5 | ) | | (3 | ) | | (19 | ) |
| Total return swaps | 5 |
| | 2 |
| | 12 |
| | 4 |
| |
| Foreign currency swaps | 1 |
| | (1 | ) | | 7 |
| | 10 |
| |
| Interest rate swaps | 2 |
| | (2 | ) | | 1 |
| | (5 | ) | |
| Credit default swaps | — |
| | 1 |
| | 1 |
| | — |
| |
| Variance swaps | — |
| | 4 |
| | 1 |
| | — |
| |
| Swaps | | 1 |
| | 8 |
| | (6 | ) | | 22 |
|
| Foreign currency forwards | 4 |
| | 8 |
| | 24 |
| | 16 |
| 3 |
| | 4 |
| | 10 |
| | 24 |
|
| Embedded derivatives on funds withheld | 82 |
| | 134 |
| | 335 |
| | 271 |
| 101 |
| | 82 |
| | 20 |
| | 335 |
|
| Amounts recognized in investment related gains (losses) | 456 |
| | 336 |
| | 1,516 |
| | 387 |
| 862 |
| | 456 |
| | 724 |
| | 1,516 |
|
Embedded derivatives in indexed annuity products1 | (344 | ) | | (243 | ) | | (1,077 | ) | | (390 | ) | (324 | ) | | (344 | ) | | (140 | ) | | (1,077 | ) |
| Total gains (losses) for derivatives not designated as hedges | $ | 112 |
| | $ | 93 |
| | $ | 439 |
| | $ | (3 | ) | |
| Total gains (losses) on derivatives not designated as hedges | | $ | 538 |
| | $ | 112 |
| | $ | 584 |
| | $ | 439 |
|
| | | | | | | | | | | | | | | |
1 Included in interest sensitive contract benefits. | 1 Included in interest sensitive contract benefits. | 1 Included in interest sensitive contract benefits. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 September 30, 2017 and December 31, 2016, we had $50 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 | (In millions) | Gross amount recognized1 | | Financial instruments2 | | Collateral received/pledged | | Net amount | | Off-balance sheet securities collateral3 | | Net amount after securities collateral |
| September 30, 2017 | | | | | | | | | | | | |
| September 30, 2018 | | September 30, 2018 | | | | | | | | | | | |
| Derivative assets | $ | 1,982 |
| | $ | (34 | ) | | $ | (1,896 | ) | | $ | 52 |
| | $ | (19 | ) | | $ | 33 |
| Derivative assets | $ | 2,515 |
| | $ | (63 | ) | | $ | (2,315 | ) | | $ | 137 |
| | $ | (128 | ) | | $ | 9 |
|
| Derivative liabilities | (92 | ) | | 34 |
| | 50 |
| | (8 | ) | | — |
| | (8 | ) | Derivative liabilities | (124 | ) | | 63 |
| | 67 |
| | 6 |
| | — |
| | 6 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | | |
| December 31, 2017 | | December 31, 2017 | | | | | | | | | | | |
| Derivative assets | $ | 1,370 |
| | $ | (8 | ) | | $ | (1,383 | ) | | $ | (21 | ) | | $ | (26 | ) | | $ | (47 | ) | Derivative assets | $ | 2,551 |
| | $ | (59 | ) | | $ | (2,323 | ) | | $ | 169 |
| | $ | (221 | ) | | $ | (52 | ) |
| Derivative liabilities | (40 | ) | | 8 |
| | 25 |
| | (7 | ) | | — |
| | (7 | ) | Derivative liabilities | (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 September 30, 2017 and December 31, 2016, amounts not subject to master netting or similar agreements were immaterial. | |
2 Represents amounts offsetting derivative assets and derivative liabilities that are subject to an enforceable master netting agreement or similar agreement that are not netted against the gross derivative assets or gross derivative liabilities for presentation on the condensed consolidated balance sheets. | |
3 For 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. | |
1 | | The gross amounts of recognized derivative assets and derivative liabilities are reported on the condensed consolidated balance sheets. As of September 30, 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. |
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. |
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)ALR Aircraft Investment Ireland Limited (ALR), which are investment funds. We are the only limited partner, or Class A member or holder of profit participating notes 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 or holder of profit participating notes, 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. Investments held by CoInvest VI, CoInvest VII and CoInvest Other are related party investments because Apollo affiliates exercise significant influence over the management or operations of the investees. 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
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 September 30, 20172018 and December 31, 2016,2017, we had $0 million and $14 million, respectively, due to MidCap under the subordinated participation agreement which iswas 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 September 30, 2018 and December 31, 2017, the principal balance was $245 million, and this is included in other related party investments on the condensed consolidated balance sheets.
ATHENE HOLDING LTD.
NotesNCL LLC was formed to Condensed Consolidated Financial Statements (Unaudited)
Duringhold 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 AFSrelated party equity securities. We are the primary beneficiary and consolidate NCL LLC, as substantially all of its activities are conducted on our behalf.
During the first quarter of 2017,2018, we acquired a 100% limited partnership interestinvested in Sprint, an entityprofit participating notes of ALR. ALR was formed to makeinvest in a co-investment alongside private equity funds sponsored by Apollo. The underlying investment isjoint venture that provides airplane lease financing to a structured credit facilitymajor commercial airline. We are the only investor in the profit participating notes and, as substantially all of the activities of ALR are conducted on a nearly completed skyscraper in Southeast Asia. Weour behalf, 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 originally formed with the objective of generating high risk-adjusted investment returns by investing primarily in a portfolio of eligible CMBS and using leverage through repurchase agreements treated as collateralized financing. During the third quarter of 2016, the CMBS Funds each sold investments to fully settle the borrowings under their respective repurchase agreements of $500 million. The remaining investments of $167 million were distributed directly to us. During the fourth quarter of 2016, the CMBS Funds were fully dissolved.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.
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 following table summarizes the change in unrealized gains and losses(losses) on trading and equity securities weof our consolidated variable interest entities still held as of the respective period end resulted in unrealized gains of $8 million and $2 million for the three months ended September 30, 2017 and 2016, respectively, and unrealized gains of $14 million and losses of $51 million for the nine months ended September 30, 2017 and 2016, respectively. Trading securities held by CoInvest VI, CoInvest VII and CoInvest Other are related party investments because Apollo affiliates exercise significant influence over the operations of these investees.end:
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 |
| Trading securities – related party | $ | — |
| | $ | 1 |
| | $ | 1 |
| | $ | 2 |
|
| Equity securities – related party | 13 |
| | 7 |
| | (26 | ) | | 12 |
|
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 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:
| | | | September 30, 2017 | September 30, 2018 |
| (In millions) | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 |
| Assets of consolidated variable interest entities | | | | | | | | | | |
| Assets of consolidated VIEs | | | | | | | | | | |
| Investments | | | | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | |
| Equity securities | $ | 173 |
| | $ | — |
| | $ | 173 |
| | $ | — |
| | $ | — |
| |
| Trading securities | | | | | | | | | | |
| Fixed maturity securities | 50 |
| | — |
| | — |
| | — |
| | 50 |
| |
| Fixed maturity securities, trading | | $ | 48 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 48 |
|
| Equity securities | 145 |
| | — |
| | 116 |
| | — |
| | 29 |
| 176 |
| | — |
| | 151 |
| | — |
| | 25 |
|
| Investment funds | 562 |
| | 529 |
| | — |
| | — |
| | 33 |
| 564 |
| | 549 |
| | — |
| | — |
| | 15 |
|
| Cash and cash equivalents | 1 |
| | — |
| | 1 |
| | — |
| | — |
| 2 |
| | — |
| | 2 |
| | — |
| | — |
|
| Total assets of consolidated VIEs measured at fair value | $ | 931 |
| | $ | 529 |
| | $ | 290 |
| | $ | — |
| | $ | 112 |
| $ | 790 |
| | $ | 549 |
| | $ | 153 |
| | $ | — |
| | $ | 88 |
|
| | | | | | | | | | | | | | | | | | | |
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, 2016 | December 31, 2017 |
| (In millions) | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 |
| Assets of consolidated variable interest entities | | | | | | | | | | |
| Assets of consolidated VIEs | | | | | | | | | | |
| Investments | | | | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | |
| Fixed maturity securities, trading | | $ | 48 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 48 |
|
| Equity securities | $ | 161 |
| | $ | — |
| | $ | 161 |
| | $ | — |
| | $ | — |
| 240 |
| | — |
| | 212 |
| | — |
| | 28 |
|
| Trading securities | | | | | | | | | | |
| Fixed maturity securities | 50 |
| | — |
| | — |
| | — |
| | 50 |
| |
| Equity securities | 117 |
| | — |
| | 74 |
| | — |
| | 43 |
| |
Investment funds2 | 562 |
| | 524 |
| | — |
| | — |
| | 38 |
| |
| Investment funds | | 549 |
| | 528 |
| | — |
| | — |
| | 21 |
|
| Cash and cash equivalents | 14 |
| | — |
| | 14 |
| | — |
| | — |
| 4 |
| | — |
| | 4 |
| | — |
| | — |
|
| Total assets of consolidated VIEs measured at fair value | $ | 904 |
| | $ | 524 |
| | $ | 249 |
| | $ | — |
| | $ | 131 |
| $ | 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. | 1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. |
2 Prior period balances have been revised for immaterial misstatements to be comparable to current year balances. | |
Fair Value Valuation Methods – Refer toSee 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 consolidated VIE Level 3 assets and liabilities measured at fair value on a recurring basis:
| | | | Three months ended September 30, 2017 | Three months ended September 30, 2018 |
| (In millions) | Beginning Balance | | Total realized and unrealized gains (losses) included in income | | Purchases | | Sales | | Transfers in (out) | | 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 | | | | | | | | | | | | | | |
| Assets of consolidated VIEs | | | | | | | | | | | | | | |
| Trading securities | | | | | | | | | | | | | | $ | 48 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 48 |
| | $ | — |
|
| Fixed maturity securities | $ | 51 |
| | $ | — |
| | $ | — |
| | $ | (1) |
| | $ | — |
| | $ | 50 |
| | $ | — |
| |
| Equity securities | 30 |
| | (1 | ) | | — |
| | — |
| | — |
| | 29 |
| | (1 | ) | 26 |
| | (1 | ) | | — |
| | — |
| | — |
| | 25 |
| | (1 | ) |
Investment funds2 | 33 |
| | — |
| | — |
| | — |
| | — |
| | 33 |
| | — |
| |
| Investment funds | | 1 |
| | — |
| | 14 |
| | — |
| | — |
| | 15 |
| | — |
|
| Total Level 3 assets of consolidated VIEs | $ | 114 |
| | $ | (1 | ) | | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | 112 |
| | $ | (1 | ) | $ | 75 |
| | $ | (1 | ) | | $ | 14 |
| | $ | — |
| | $ | — |
| | $ | 88 |
| | $ | (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. |
2 Beginning balance has been revised for immaterial misstatements to be comparable to current year balances. | |
| | | | Three months ended September 30, 2016 | Three months ended September 30, 2017 |
| (In millions) | Beginning Balance | | Total realized and unrealized gains (losses) included in income | | Purchases | | Sales | | Transfers in (out) | | 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 | | | | | | | | | | | | | | |
| Assets of consolidated VIEs | | | | | | | | | | | | | | |
| Trading securities | | | | | | | | | | | | | | $ | 51 |
| | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | 50 |
| | $ | — |
|
| Fixed maturity securities | $ | 53 |
| | $ | (1 | ) | | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | 51 |
| | $ | — |
| |
| Equity securities | 52 |
| | (5 | ) | | — |
| | — |
| | — |
| | 47 |
| | — |
| 30 |
| | (1 | ) | | — |
| | — |
| | — |
| | 29 |
| | (1 | ) |
Investment funds2 | 38 |
| | 1 |
| | 1 |
| | (10 | ) | | — |
| | 30 |
| | — |
| |
| Investment funds | | 33 |
| | — |
| | — |
| | — |
| | — |
| | 33 |
| | — |
|
| Total Level 3 assets of consolidated VIEs | $ | 143 |
| | $ | (5 | ) | | $ | 1 |
| | $ | (11 | ) | | $ | — |
| | $ | 128 |
| | $ | — |
| $ | 114 |
| | $ | (1 | ) | | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | 112 |
| | $ | (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. |
2 Prior period balances have been revised for immaterial misstatements to be comparable to current year balances. | |
| | | | Nine months ended September 30, 2017 | Nine months ended September 30, 2018 |
| (In millions) | Beginning Balance | | Total realized and unrealized gains (losses) included in income | | Purchases | | Sales | | Transfers in (out) | | 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 | | | | | | | | | | | | | | |
| Assets of consolidated VIEs | | | | | | | | | | | | | | |
| Trading securities | | | | | | | | | | | | | | $ | 48 |
| | $ | 1 |
| | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | 48 |
| | $ | 1 |
|
| Fixed maturity securities | $ | 50 |
| | $ | 1 |
| | $ | — |
| | $ | (1) |
| | $ | — |
| | $ | 50 |
| | $ | 1 |
| |
| Equity securities | 43 |
| | (15 | ) | | 1 |
| | — |
| | — |
| | 29 |
| | (15 | ) | 28 |
| | (3 | ) | | — |
| | — |
| | — |
| | 25 |
| | (3 | ) |
Investment funds2 | 38 |
| | — |
| | 1 |
| | (6 | ) | | — |
| | 33 |
| | — |
| |
| Investment funds | | 21 |
| | (3 | ) | | 14 |
| | (17 | ) | | — |
| | 15 |
| | (3 | ) |
| Total Level 3 assets of consolidated VIEs | $ | 131 |
| | $ | (14 | ) | | $ | 2 |
| | $ | (7 | ) | | $ | — |
| | $ | 112 |
| | $ | (14 | ) | $ | 97 |
| | $ | (5 | ) | | $ | 14 |
| | $ | (18 | ) | | $ | — |
| | $ | 88 |
| | $ | (5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
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. |
2 Beginning balance has been revised for immaterial misstatements to be comparable to current year balances. | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2016 |
| (In millions) | 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 | | | | | | | | | | | | | |
| Trading securities | | | | | | | | | | | | | |
| Fixed maturity securities | $ | 53 |
| | $ | (1 | ) | | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | 51 |
| | $ | (1 | ) |
| Equity securities | 38 |
| | 8 |
| | 1 |
| | — |
| | — |
| | 47 |
| | 8 |
|
Investment funds2 | 34 |
| | 1 |
| | 9 |
| | (14 | ) | | — |
| | 30 |
| | — |
|
| Total Level 3 assets of consolidated VIEs | $ | 125 |
| | $ | 8 |
| | $ | 10 |
| | $ | (15 | ) | | $ | — |
| | $ | 128 |
| | $ | 7 |
|
| | | | | | | | | | | | | | |
1 Related to instruments held at end of period. |
2 Prior period balances have been revised for immaterial misstatements to be comparable to current year balances. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2017 |
| (In millions) | 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 VIEs | | | | | | | | | | | | | |
| Trading securities | $ | 50 |
| | $ | 1 |
| | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | 50 |
| | $ | 1 |
|
| Equity securities | 43 |
| | (15 | ) | | 1 |
| | — |
| | — |
| | 29 |
| | (15 | ) |
| Investment funds | 38 |
| | — |
| | 1 |
| | (6 | ) | | — |
| | 33 |
| | — |
|
| Total Level 3 assets of consolidated VIEs | $ | 131 |
| | $ | (14 | ) | | $ | 2 |
| | $ | (7 | ) | | $ | — |
| | $ | 112 |
| | $ | (14 | ) |
| | | | | | | | | | | | | | |
1 Related to instruments held at end of period. |
There were no transfers between Level 1 or Level 2 during the three and nine months ended September 30, 20172018 and 2016.2017.
Significant Unobservable Inputs – For certain Level 3 trading and equity securities and investment funds, the valuations have significant unobservable inputs, forwhich may include, but are not limited to, comparable multiples and weighted average cost of capital rates applied in the valuation models.rates. These inputs in isolation can cause significant increases or decreases in fair value. Specifically, the comparableComparable 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.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For certain 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 determine the present value of 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 September 30, | | Nine months ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Trading securities | | | | | | | | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 1 |
|
| Fixed maturity securities | $ | — |
| | $ | (1 | ) | | $ | 1 |
| | $ | (1 | ) | |
| Equity securities | 7 |
| | (33 | ) | | 12 |
| | (77 | ) | |
| Investment funds | — |
| | 23 |
| | 5 |
| | 31 |
| 9 |
| | — |
| | 18 |
| | 5 |
|
| Total gains (losses) | $ | 7 |
| | $ | (11 | ) | | $ | 18 |
| | $ | (47 | ) | $ | 9 |
| | $ | — |
| | $ | 19 |
| | $ | 6 |
|
Fair Value of Financial Instruments Not Held at Fair Value – Assets of consolidated variable interest entities includes $31$41 million and $11$22 million of investment funds accounted for under the equity method and not carried at fair value as of September 30, 20172018 and December 31, 2016,2017, respectively; however, the carrying amount approximates fair value.
Commitments and Contingencies – Assets of CoInvest VI included 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. Claims had been pending (which now have been dismissed with prejudice) 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 included regulatory approvals from the various gaming regulators, CEC and CAC shareholders' approval of the proposed merger between CEC and CAC with CEC being the surviving entity, and securing required financings. All of the conditions precedent to the effective date of the plan were fulfilled, and the plan became effective on October 6, 2017. As of September 30, 2017, CoInvest VI recorded a liability of $42 million for the entire carrying value of its pre-merger CEC shares. Also as of September 30, 2017, CoInvest VI's investment in CAC was carried at its fair value of $72 million. On or about October 6, 2017, CoInvest VI received 5,465,733 shares in the merged CEC derived from the value of CoInvest VI's investment in CAC.
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 VIEs for which we do not meet the criteria of primary beneficiary as described below. We also do not consolidate VOEs for which we do not have control.
Fixed Maturity Securitiesmaturity 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 byof 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.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 VOEs is limited andinvestments depends on the investment as follows: (1) investmentinvestment. Investment funds accounted for under the equity method are limited to our initial investment plus unfunded commitments; (2) investment funds under the fair value option are limited to the fair value plus unfunded commitments; (3) AFS securities and other investments are limited to cost or amortized cost; and (4) trading securities are limited to the carrying value.
value plus unfunded commitments. AFS securities are limited to amortized cost plus unfunded commitments. The following summarizes the carrying value and maximum loss exposure of these non-consolidated VIEs and VOEs:investments:
| | | | September 30, 2017 | | December 31, 2016 | September 30, 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 | $ | 747 |
| | $ | 1,154 |
| | $ | 689 |
| | $ | 1,026 |
| $ | 692 |
| | $ | 1,284 |
| | $ | 699 |
| | $ | 1,036 |
|
| Investment in related parties – investment funds | 1,330 |
| | 2,083 |
| | 1,198 |
| | 1,485 |
| 2,093 |
| | 4,439 |
| | 1,310 |
| | 2,598 |
|
| Assets of consolidated variable interest entities – investment funds | 593 |
| | 622 |
| | 573 |
| | 593 |
| 605 |
| | 606 |
| | 571 |
| | 594 |
|
| Investment in fixed maturity securities | 20,862 |
| | 20,131 |
| | 19,171 |
| | 19,090 |
| 21,554 |
| | 21,010 |
| | 21,022 |
| | 20,278 |
|
| Investment in related parties – fixed maturity securities | 549 |
| | 544 |
| | 530 |
| | 536 |
| 1,502 |
| | 1,631 |
| | 713 |
| | 792 |
|
| Total non-consolidated VIEs and VOEs | $ | 24,081 |
| | $ | 24,534 |
| | $ | 22,161 |
| | $ | 22,730 |
| |
| Total non-consolidated investments | | $ | 26,446 |
| | $ | 28,970 |
| | $ | 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:
| | | | September 30, 2017 | | December 31, 2016 | September 30, 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 | Carrying value | | Percent of total | | Remaining life in years | | Carrying value | | Percent of total | | Remaining life in years |
| Investment funds | | | | | | | | | | | | | | | | | | |
| Private equity | $ | 279 |
| | 37.3 | % | | 0 | – | 7 | | $ | 268 |
| | 38.9 | % | | 0 | – | 7 | $ | 254 |
| | 36.7 | % | | 0 | – | 5 | | $ | 271 |
| | 38.8 | % | | 0 | – | 7 |
| Real estate and other real assets | 166 |
| | 22.2 | % | | 0 | – | 6 | | 118 |
| | 17.2 | % | | 0 | – | 4 | 205 |
| | 29.6 | % | | 0 | – | 6 | | 161 |
| | 23.0 | % | | 1 | – | 7 |
| Natural resources | 5 |
| | 0.7 | % | | 0 | – | 1 | | 5 |
| | 0.7 | % | | 1 | – | 2 | 4 |
| | 0.6 | % | | 0 | – | 0 | | 4 |
| | 0.6 | % | | 1 | – | 1 |
| Hedge funds | 62 |
| | 8.3 | % | | 0 | – | 3 | | 72 |
| | 10.4 | % | | 0 | – | 3 | 50 |
| | 7.2 | % | | 0 | – | 1 | | 61 |
| | 8.7 | % | | 0 | – | 3 |
| Credit funds | 235 |
| | 31.5 | % | | 0 | – | 5 | | 226 |
| | 32.8 | % | | 0 | – | 5 | 179 |
| | 25.9 | % | | 0 | – | 4 | | 202 |
| | 28.9 | % | | 0 | – | 5 |
| Total investment funds | 747 |
| | 100.0 | % | | 689 |
| | 100.0 | % | | 692 |
| | 100.0 | % | | 699 |
| | 100.0 | % | |
| Investment funds – related parties | | | | | | | | | | | | | | | | |
Private equity – A-A Mortgage1 | 396 |
| | 29.8 | % | | 3 | – | 3 | | 343 |
| | 28.6 | % | | 3 | – | 3 | 449 |
| | 21.5 | % | | 5 | – | 5 | | 403 |
| | 30.8 | % | | 5 | – | 5 |
| Private equity – other | 176 |
| | 13.2 | % | | 0 | – | 10 | | 131 |
| | 11.0 | % | | 0 | – | 10 | 680 |
| | 32.5 | % | | 0 | – | 9 | | 180 |
| | 13.7 | % | | 0 | – | 10 |
| Real estate and other real assets | 245 |
| | 18.4 | % | | 0 | – | 7 | | 247 |
| | 20.6 | % | | 1 | – | 4 | 499 |
| | 23.8 | % | | 0 | – | 10 | | 297 |
| | 22.7 | % | | 0 | – | 7 |
| Natural resources | 78 |
| | 5.9 | % | | 5 | – | 8 | | 49 |
| | 4.1 | % | | 5 | – | 5 | 95 |
| | 4.5 | % | | 3 | – | 4 | | 74 |
| | 5.6 | % | | 4 | – | 6 |
| Hedge funds | 163 |
| | 12.2 | % | | 9 | – | 10 | | 192 |
| | 16.0 | % | | 9 | – | 9 | 98 |
| | 4.7 | % | | 11 | – | 11 | | 93 |
| | 7.1 | % | | 9 | – | 9 |
| Credit funds | 272 |
| | 20.5 | % | | 1 | – | 4 | | 236 |
| | 19.7 | % | | 2 | – | 3 | 272 |
| | 13.0 | % | | 0 | – | 3 | | 263 |
| | 20.1 | % | | 2 | – | 4 |
| Total investment funds – related parties | 1,330 |
| | 100.0 | % | | 1,198 |
| | 100.0 | % | | 2,093 |
| | 100.0 | % | | 1,310 |
| | 100.0 | % | |
| Investment funds owned by consolidated VIEs | | | | | | | | | | | | | | | | |
Private equity – MidCap2 | 529 |
| | 89.2 | % | | N/A | | 524 |
| | 91.4 | % | | N/A | 549 |
| | 90.7 | % | | N/A | | 528 |
| | 92.5 | % | | N/A |
| Credit funds | 32 |
| | 5.4 | % | | 0 | – | 3 | | 38 |
| | 6.7 | % | | 0 | – | 3 | 1 |
| | 0.2 | % | | 0 | – | 1 | | 21 |
| | 3.7 | % | | 0 | – | 3 |
| Real estate and other real assets | 32 |
| | 5.4 | % | | 2 | – | 3 | | 11 |
| | 1.9 | % | | 2 | – | 3 | 55 |
| | 9.1 | % | | 0 | – | 6 | | 22 |
| | 3.8 | % | | 2 | – | 3 |
| Total investment funds owned by consolidated VIEs | 593 |
| | 100.0 | % | | 573 |
| | 100.0 | % | | 605 |
| | 100.0 | % | | 571 |
| | 100.0 | % | |
| Total investment funds including related parties and funds owned by consolidated VIEs | $ | 2,670 |
| | | | $ | 2,460 |
| | | | $ | 3,390 |
| | | | $ | 2,580 |
| | | |
| | | | | | | | | | | | | | | | | |
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 $767 million and $761 million as of September 30, 2017 and December 31, 2016, respectively, which was less than 10% of total AHL shareholder's equity at September 30, 2017, but greater than 10% at December 31, 2016. | |
1 A-A Mortgage Opportunities, L.P. (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 A-A Mortgage affiliates, was $459 million and $455 million as of September 30, 2018 and December 31, 2017, respectively. | | 1 A-A Mortgage Opportunities, L.P. (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 A-A Mortgage affiliates, was $459 million and $455 million as of September 30, 2018 and December 31, 2017, respectively. |
2 Our total investment in MidCap, including amounts advanced under credit facilities, was $788 million and $766 million as of September 30, 2018 and December 31, 2017, respectively. | | 2 Our total investment in MidCap, including amounts advanced under credit facilities, was $788 million and $766 million as of September 30, 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) | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
| Ownership Percentage | | | | | | |
| 100% | $ | 25 |
| | $ | 27 |
| $ | 16 |
| | $ | 35 |
|
| 50% – 99% | 605 |
| | 478 |
| 1,039 |
| | 520 |
|
| Greater than 3% – 49% | 1,324 |
| | 1,294 |
| |
| 3% – 49% | | 1,515 |
| | 1,301 |
|
| Equity method investment funds | $ | 1,954 |
| | $ | 1,799 |
| $ | 2,570 |
| | $ | 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) | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
| Ownership Percentage | | | | | | |
| Greater than 3% – 49% | $ | 562 |
| | $ | 562 |
| |
| 3% or less | 154 |
| | 99 |
| |
| 3% – 49% | | $ | 685 |
| | $ | 590 |
|
| Less than 3% | | 135 |
| | 134 |
|
| Fair value option investment funds | $ | 716 |
| | $ | 661 |
| $ | 820 |
| | $ | 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: | | | | September 30, 2017 | September 30, 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 | $ | 58 |
| | $ | — |
| | $ | 26 |
| | $ | 32 |
| | $ | — |
| $ | 142 |
| | $ | — |
| | $ | 140 |
| | $ | 2 |
| | $ | — |
|
| U.S. state, municipal and political subdivisions | 1,145 |
| | — |
| | — |
| | 1,145 |
| | — |
| 1,237 |
| | — |
| | — |
| | 1,237 |
| | — |
|
| Foreign governments | 2,589 |
| | — |
| | — |
| | 2,589 |
| | — |
| 180 |
| | — |
| | — |
| | 180 |
| | — |
|
| Corporate | 34,458 |
| | — |
| | — |
| | 33,989 |
| | 469 |
| 37,319 |
| | — |
| | — |
| | 36,355 |
| | 964 |
|
| CLO | 4,996 |
| | — |
| | — |
| | 4,800 |
| | 196 |
| 5,302 |
| | — |
| | — |
| | 4,962 |
| | 340 |
|
| ABS | 3,900 |
| | — |
| | — |
| | 2,521 |
| | 1,379 |
| 4,855 |
| | — |
| | — |
| | 3,357 |
| | 1,498 |
|
| CMBS | 1,890 |
| | — |
| | — |
| | 1,803 |
| | 87 |
| 2,324 |
| | — |
| | — |
| | 2,142 |
| | 182 |
|
| RMBS | 9,480 |
| | — |
| | — |
| | 9,158 |
| | 322 |
| 8,523 |
| | — |
| | — |
| | 8,523 |
| | — |
|
| Total AFS fixed maturity securities | 58,516 |
| | — |
| | 26 |
| | 56,037 |
| | 2,453 |
| |
| Equity securities | 318 |
| | — |
| | 114 |
| | 199 |
| | 5 |
| |
| Total AFS securities | 58,834 |
| | — |
| | 140 |
|
| 56,236 |
| | 2,458 |
| 59,882 |
| | — |
| | 140 |
| | 56,758 |
| | 2,984 |
|
| Trading securities | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| U.S. government and agencies | 3 |
| | — |
| | 3 |
| | — |
| | — |
| 5 |
| | — |
| | 3 |
| | 2 |
| | — |
|
| U.S. state, municipal and political subdivisions | 137 |
| | — |
| | — |
| | 120 |
| | 17 |
| 124 |
| | — |
| | — |
| | 107 |
| | 17 |
|
| Corporate | 1,475 |
| | — |
| | — |
| | 1,475 |
| | — |
| 1,298 |
| | — |
| | — |
| | 1,298 |
| | — |
|
| CLO | 29 |
| | — |
| | — |
| | 8 |
| | 21 |
| 13 |
| | — |
| | — |
| | 10 |
| | 3 |
|
| ABS | 90 |
| | — |
| | — |
| | 90 |
| | — |
| 89 |
| | — |
| | — |
| | 89 |
| | — |
|
| CMBS | 59 |
| | — |
| | — |
| | 59 |
| | — |
| 49 |
| | — |
| | — |
| | 49 |
| | — |
|
| RMBS | 418 |
| �� | — |
| | — |
| | 317 |
| | 101 |
| 399 |
| | — |
| | — |
| | 114 |
| | 285 |
|
| Total trading fixed maturity securities | 2,211 |
| | — |
| | 3 |
| | 2,069 |
| | 139 |
| |
| Total trading securities | | 1,977 |
| | — |
| | 3 |
| | 1,669 |
| | 305 |
|
| Equity securities | 498 |
| | — |
| | — |
| | 498 |
| | — |
| 292 |
| | — |
| | 4 |
| | 286 |
| | 2 |
|
| Total trading securities | 2,709 |
| | — |
| | 3 |
| | 2,567 |
| | 139 |
| |
| Mortgage loans | 42 |
| | — |
| | — |
| | — |
| | 42 |
| 37 |
| | — |
| | — |
| | — |
| | 37 |
|
| Investment funds | 127 |
| | 127 |
| | — |
| | — |
| | — |
| 127 |
| | 97 |
| | — |
| | — |
| | 30 |
|
| Funds withheld at interest – embedded derivative | 303 |
| | — |
| | — |
| | — |
| | 303 |
| 151 |
| | — |
| | — |
| | — |
| | 151 |
|
| Derivative assets | 1,982 |
| | — |
| | 8 |
| | 1,974 |
| | — |
| 2,515 |
| | — |
| | 5 |
| | 2,510 |
| | — |
|
| Short-term investments | 108 |
| | — |
| | 39 |
| | 69 |
| | — |
| 234 |
| | — |
| | 64 |
| | 170 |
| | — |
|
| Other investments | | 43 |
| | — |
| | — |
| | 43 |
| | — |
|
| Cash and cash equivalents | 3,607 |
| | — |
| | 3,607 |
| | — |
| | — |
| 3,723 |
| | — |
| | 3,723 |
| | — |
| | — |
|
| Restricted cash | 100 |
| | — |
| | 100 |
| | — |
| | — |
| 218 |
| | — |
| | 218 |
| | — |
| | — |
|
| Investments in related parties | | | | | | | | | | | | | | | | | | |
| AFS, fixed maturity securities | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities | | | | | | | | | | |
| CLO | 356 |
| | — |
| | — |
| | 346 |
| | 10 |
| 609 |
| | — |
| | — |
| | 571 |
| | 38 |
|
| ABS | 53 |
| | — |
| | — |
| | 53 |
| | — |
| 634 |
| | — |
| | — |
| | 430 |
| | 204 |
|
| Total AFS securities – related party | 409 |
| | — |
| | — |
| | 399 |
| | 10 |
| 1,243 |
| | — |
| | — |
| | 1,001 |
| | 242 |
|
| Trading securities, CLO | 140 |
| | — |
| | — |
| | 49 |
| | 91 |
| |
| Trading securities | | | | | | | | | | |
| CLO | | 108 |
| | — |
| | — |
| | 32 |
| | 76 |
|
| ABS | | 151 |
| | — |
| | — |
| | — |
| | 151 |
|
| Total trading securities – related party | | 259 |
| | — |
| | — |
| | 32 |
| | 227 |
|
| Investment funds | 27 |
| | 27 |
| | — |
| | — |
| | — |
| 197 |
| | 92 |
| | — |
| | — |
| | 105 |
|
| Funds withheld at interest – embedded derivative | | 91 |
| | — |
| | — |
| | — |
| | 91 |
|
| Short-term investments | 8 |
| | — |
| | — |
| | — |
| | 8 |
| 10 |
| | — |
| | — |
| | — |
| | 10 |
|
| Reinsurance recoverable | 1,783 |
| | — |
| | — |
| | — |
| | 1,783 |
| 1,679 |
| | — |
| | — |
| | — |
| | 1,679 |
|
| Total assets measured at fair value | $ | 70,179 |
| | $ | 154 |
| | $ | 3,897 |
| | $ | 61,294 |
| | $ | 4,834 |
| $ | 72,678 |
| | $ | 189 |
| | $ | 4,157 |
| | $ | 62,469 |
| | $ | 5,863 |
|
| | | | | | | | | | (Continued) |
| | | | | | | | | (Continued) |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
| | | | September 30, 2017 | September 30, 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 | $ | 6,652 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6,652 |
| $ | 8,656 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 8,656 |
|
| Universal life benefits | 957 |
| | — |
| | — |
| | — |
| | 957 |
| 901 |
| | — |
| | — |
| | — |
| | 901 |
|
| Unit-linked contracts | 472 |
| | — |
| | — |
| | 472 |
| | — |
| |
| Future policy benefits | | | | | | | | | | | | | | | | | | |
| AmerUs Closed Block | 1,616 |
| | — |
| | — |
| | — |
| | 1,616 |
| 1,469 |
| | — |
| | — |
| | — |
| | 1,469 |
|
| ILICO Closed Block and life benefits | 811 |
| | — |
| | — |
| | — |
| | 811 |
| 764 |
| | — |
| | — |
| | — |
| | 764 |
|
| Derivative liabilities | 92 |
| | — |
| | 1 |
| | 85 |
| | 6 |
| 124 |
| | — |
| | — |
| | 120 |
| | 4 |
|
| Funds withheld liability – embedded derivative | 18 |
| | — |
| | — |
| | 18 |
| | — |
| 3 |
| | — |
| | — |
| | 3 |
| | — |
|
| Total liabilities measured at fair value | $ | 10,618 |
| | $ | — |
| | $ | 1 |
| | $ | 575 |
| | $ | 10,042 |
| $ | 11,917 |
| | $ | — |
| | $ | — |
| | $ | 123 |
| | $ | 11,794 |
|
| | | | | | | | | | | | | | | | | | | |
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 securities without an active market from several commercial pricing services. These are classified as Level 2 assets. The pricing services incorporate a variety of market observable information in their valuation techniques, including benchmark yields, trading activity, credit quality, issuer spreads, bids, offers and other reference data. This category typically includes U.S. and non-U.S. corporate bonds, U.S. agency and government guaranteed securities, CLO, ABS, CMBS and RMBS.
We 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 as 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 0.25% 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 September 30, | | Nine months ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Trading securities | $ | (1 | ) | | $ | 28 |
| | $ | 45 |
| | $ | 93 |
| $ | (43 | ) | | $ | (2 | ) | | $ | (208 | ) | | $ | 25 |
|
| Mortgage loans | (1 | ) | | (1 | ) | | (1 | ) | | (1 | ) | — |
| | (1 | ) | | — |
| | (1 | ) |
| Investment funds | 5 |
| | 4 |
| | 19 |
| | 4 |
| |
| Investment funds, including related party investment funds | | 4 |
| | 5 |
| | 10 |
| | 19 |
|
| Future policy benefits | 5 |
| | (28 | ) | | (10 | ) | | (129 | ) | 21 |
| | 5 |
| | 156 |
| | (10 | ) |
| Total gains (losses) | $ | 8 |
| | $ | 3 |
| | $ | 53 |
| | $ | (33 | ) | $ | (18 | ) | | $ | 7 |
| | $ | (42 | ) | | $ | 33 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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) | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
| Unpaid principal balance | $ | 40 |
| | $ | 42 |
| $ | 36 |
| | $ | 40 |
|
| Mark to fair value | 2 |
| | 2 |
| 1 |
| | 1 |
|
| Fair value | $ | 42 |
| | $ | 44 |
| $ | 37 |
| | $ | 41 |
|
There were no fair value option mortgage loans 90 days or more past due as of September 30, 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 and nine months ended September 30, 20172018 and 2016,2017, there were no material 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 September 30, 2017 | Three months ended September 30, 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 | | Net purchases, issuances, sales and settlements | | In | | (Out) | | Ending Balance | | Total gains (losses) included in earnings1 |
| Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | | |
| Foreign governments | $ | 14 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (14 | ) | | $ | — |
| | $ | — |
| |
| Corporate | 452 |
| | 5 |
| | — |
| | (13 | ) | | 37 |
| | (12 | ) | | 469 |
| | — |
| $ | 962 |
| | $ | (1 | ) | | $ | (3 | ) | | $ | 110 |
| | $ | 5 |
| | $ | (109 | ) | | $ | 964 |
| | $ | — |
|
| CLO | 81 |
| | — |
| | 1 |
| | 47 |
| | 86 |
| | (19 | ) | | 196 |
| | — |
| 281 |
| | — |
| | (1 | ) | | 52 |
| | 8 |
| | — |
| | 340 |
| | — |
|
| ABS | 1,093 |
| | 3 |
| | 1 |
| | 240 |
| | 83 |
| | (41 | ) | | 1,379 |
| | — |
| 1,451 |
| | 1 |
| | 1 |
| | 178 |
| | 161 |
| | (294 | ) | | 1,498 |
| | — |
|
| CMBS | 122 |
| | 1 |
| | (1 | ) | | (18 | ) | | 26 |
| | (43 | ) | | 87 |
| | — |
| 197 |
| | — |
| | (1 | ) | | — |
| | — |
| | (14 | ) | | 182 |
| | — |
|
| RMBS | 312 |
| | 1 |
| | 13 |
| | (11 | ) | | 14 |
| | (7 | ) | | 322 |
| | — |
| 7 |
| | — |
| | — |
| | — |
| | — |
| | (7 | ) | | — |
| | — |
|
| Trading securities | | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | | 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
|
| Corporate | | 4 |
| | — |
| | — |
| | — |
| | — |
| | (4 | ) | | — |
| | — |
|
| CLO | | 26 |
| | (2 | ) | | — |
| | (11 | ) | | — |
| | (10 | ) | | 3 |
| | 1 |
|
| ABS | | 89 |
| | 1 |
| | — |
| | — |
| | — |
| | (90 | ) | | — |
| | 1 |
|
| RMBS | | 304 |
| | (19 | ) | | — |
| | — |
| | — |
| | — |
| | 285 |
| | 2 |
|
| Equity securities | 6 |
| | (1) |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
|
| Trading securities | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
| |
| CLO | 22 |
| | (4 | ) | | — |
| | — |
| | 11 |
| | (8 | ) | | 21 |
| | (3 | ) | |
| RMBS | 100 |
| | (2 | ) | | — |
| | 4 |
| | 15 |
| | (16 | ) | | 101 |
| | 3 |
| |
| Mortgage loans | 43 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | 42 |
| | (1 | ) | 38 |
| | — |
| | — |
| | (1) |
| | — |
| | — |
| | 37 |
| | — |
|
| Investment funds | | 31 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | 30 |
| | (1 | ) |
| Funds withheld at interest – embedded derivative | 279 |
| | 24 |
| | — |
| | — |
| | — |
| | — |
| | 303 |
| | — |
| 150 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 151 |
| | — |
|
| Investments in related parties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AFS securities, fixed maturity, CLO | — |
| | — |
| | — |
| | 10 |
| | — |
| | — |
| | 10 |
| | — |
| |
| Trading securities, CLO | 123 |
| | 3 |
| | — |
| | (24 | ) | | 19 |
| | (30 | ) | | 91 |
| | 2 |
| |
| Fixed maturity securities | | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | |
| CLO | | 39 |
| | — |
| | (1) |
| | — |
| | — |
| | — |
| | 38 |
| | — |
|
| ABS | | 46 |
| | — |
| | — |
| | 158 |
| | — |
| | — |
| | 204 |
| | — |
|
| Trading securities | | | | | | | | | | | | | | | | |
| CLO | | 114 |
| | (7 | ) | | — |
| | — |
| | — |
| | (31 | ) | | 76 |
| | (5 | ) |
| ABS | | 164 |
| | (4 | ) | | — |
| | (9 | ) | | — |
| | — |
| | 151 |
| | (4 | ) |
| Investment funds | | 105 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 105 |
| | — |
|
| Funds withheld at interest – embedded derivative | | 162 |
| | (71 | ) | | — |
| | — |
| | — |
| | — |
| | 91 |
| | — |
|
| Short-term investments | 28 |
| | — |
| | — |
| | (20 | ) | | — |
| | — |
| | 8 |
| | — |
| 10 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10 |
| | — |
|
| Reinsurance recoverable | 1,782 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1,783 |
| | — |
| 1,717 |
| | (38 | ) | | — |
| | — |
| | — |
| | — |
| | 1,679 |
| | — |
|
| Total Level 3 assets | $ | 4,474 |
| | $ | 30 |
| | $ | 14 |
| | $ | 215 |
| | $ | 291 |
| | $ | (190 | ) | | $ | 4,834 |
| | $ | 1 |
| $ | 5,916 |
| | $ | (140 | ) | | $ | (5 | ) | | $ | 477 |
| | $ | 174 |
| | $ | (559 | ) | | $ | 5,863 |
| | $ | (6 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Embedded derivative | $ | (6,207 | ) | | $ | (344 | ) | | $ | — |
| | $ | (101 | ) | | $ | — |
| | $ | — |
| | $ | (6,652 | ) | | $ | — |
| $ | (8,065 | ) | | $ | (324 | ) | | $ | — |
| | $ | (267 | ) | | $ | — |
| | $ | — |
| | $ | (8,656 | ) | | $ | — |
|
| Universal life benefits | (954 | ) | | (3 | ) | | — |
| | — |
| | — |
| | — |
| | (957 | ) | | — |
| (943 | ) | | 42 |
| | — |
| | — |
| | — |
| | — |
| | (901 | ) | | — |
|
| Future policy benefits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AmerUs Closed Block | (1,621 | ) | | 5 |
| | — |
| | — |
| | — |
| | — |
| | (1,616 | ) | | — |
| (1,490 | ) | | 21 |
| | — |
| | — |
| | — |
| | — |
| | (1,469 | ) | | — |
|
| ILICO Closed Block and life benefits | (812 | ) | | 1 |
| | — |
| | — |
| | — |
| | — |
| | (811 | ) | | — |
| (759 | ) | | (5 | ) | | — |
| | — |
| | — |
| | — |
| | (764 | ) | | — |
|
| Derivative liabilities | (6 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | — |
| (5 | ) | | 1 |
| | — |
| | — |
| | — |
| | — |
| | (4 | ) | | — |
|
| Total Level 3 liabilities | $ | (9,600 | ) | | $ | (341 | ) | | $ | — |
| | $ | (101 | ) | | $ | — |
| | $ | — |
| | $ | (10,042 | ) | | $ | — |
| $ | (11,262 | ) | | $ | (265 | ) | | $ | — |
| | $ | (267 | ) | | $ | — |
| | $ | — |
| | $ | (11,794 | ) | | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 September 30, 2016 | Three months ended September 30, 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 | | Net purchases, issuances, sales and settlements | | 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 |
| | $ | — |
| | $ | 5 |
| | $ | — |
| |
| Foreign governments | 16 |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | 15 |
| | — |
| $ | 14 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (14 | ) | | $ | — |
| | $ | — |
|
| Corporate | 402 |
| | 1 |
| | 1 |
| | 24 |
| | 3 |
| | (89 | ) | | 342 |
| | — |
| 452 |
| | 5 |
| | — |
| | (13 | ) | | 37 |
| | (12 | ) | | 469 |
| | — |
|
| CLO | 285 |
| | 1 |
| | 15 |
| | 4 |
| | 11 |
| | (193 | ) | | 123 |
| | — |
| 81 |
| | — |
| | 1 |
| | 47 |
| | 86 |
| | (19 | ) | | 196 |
| | — |
|
| ABS | 1,238 |
| | 3 |
| | 11 |
| | 30 |
| | — |
| | (188 | ) | | 1,094 |
| | — |
| 1,093 |
| | 3 |
| | 1 |
| | 240 |
| | 83 |
| | (41 | ) | | 1,379 |
| | — |
|
| CMBS | 80 |
| | — |
| | 3 |
| | 4 |
| | — |
| | — |
| | 87 |
| | — |
| 122 |
| | 1 |
| | (1 | ) | | (18 | ) | | 26 |
| | (43 | ) | | 87 |
| | — |
|
| RMBS | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| 312 |
| | 1 |
| | 13 |
| | (11 | ) | | 14 |
| | (7 | ) | | 322 |
| | — |
|
| Trading securities | | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | | 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
|
| CLO | | 22 |
| | (4 | ) | | — |
| | — |
| | 11 |
| | (8 | ) | | 21 |
| | (3 | ) |
| RMBS | | 100 |
| | (2 | ) | | — |
| | 4 |
| | 15 |
| | (16 | ) | | 101 |
| | 3 |
|
| Equity securities | 10 |
| | — |
| | (1) |
| | (4 | ) | | — |
| | — |
| | 5 |
| | — |
| 6 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | 5 |
| | — |
|
| Trading securities | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
| |
| Corporate | 1 |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| |
| CLO | 104 |
| | (1 | ) | | — |
| | (44 | ) | | — |
| | — |
| | 59 |
| | 4 |
| |
| ABS | 89 |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
| | 87 |
| | — |
| |
| RMBS | 122 |
| | (4 | ) | | — |
| | 16 |
| | — |
| | (6 | ) | | 128 |
| | (1 | ) | |
| Mortgage loans | 45 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 45 |
| | — |
| 43 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | 42 |
| | (1 | ) |
| Funds withheld at interest – embedded derivative | 122 |
| | 83 |
| | — |
| | — |
| | — |
| | — |
| | 205 |
| | — |
| 279 |
| | 24 |
| | — |
| | — |
| | — |
| | — |
| | 303 |
| | — |
|
| Investments in related parties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | | |
| CLO | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| ABS | 58 |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | 57 |
| | — |
| |
| Fixed maturity securities | | | | | | | | | | | | | | | | |
| AFS securities, CLO | | — |
| | — |
| | — |
| | 10 |
| | — |
| | — |
| | 10 |
| | — |
|
| Trading securities, CLO | 211 |
| | — |
| | — |
| | — |
| | — |
| | (22 | ) | | 189 |
| | 7 |
| 123 |
| | 3 |
| | — |
| | (24 | ) | | 19 |
| | (30 | ) | | 91 |
| | 2 |
|
| Short-term investments | | 28 |
| | — |
| | — |
| | (20 | ) | | — |
| | — |
| | 8 |
| | — |
|
| Reinsurance recoverable | 1,898 |
| | (20 | ) | | — |
| | — |
| | — |
| | — |
| | 1,878 |
| | — |
| 1,782 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1,783 |
| | — |
|
| Total Level 3 assets | $ | 4,698 |
| | $ | 61 |
| | $ | 29 |
| | $ | 28 |
| | $ | 19 |
| | $ | (499 | ) | | $ | 4,336 |
| | $ | 10 |
| $ | 4,474 |
| | $ | 30 |
| | $ | 14 |
| | $ | 215 |
| | $ | 291 |
| | $ | (190 | ) | | $ | 4,834 |
| | $ | 1 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Embedded derivative | $ | (4,807 | ) | | $ | (243 | ) | | $ | — |
| | $ | (209 | ) | | $ | — |
| | $ | — |
| | $ | (5,259 | ) | | $ | — |
| $ | (6,207 | ) | | $ | (344 | ) | | $ | — |
| | $ | (101 | ) | | $ | — |
| | $ | — |
| | $ | (6,652 | ) | | $ | — |
|
| Universal life benefits | (1,059 | ) | | 9 |
| | — |
| | — |
| | — |
| | — |
| | (1,050 | ) | | — |
| (954 | ) | | (3 | ) | | — |
| | — |
| | — |
| | — |
| | (957 | ) | | — |
|
| Future policy benefits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AmerUs Closed Block | (1,682 | ) | | (28 | ) | | — |
| | — |
| | — |
| | — |
| | (1,710 | ) | | — |
| (1,621 | ) | | 5 |
| | — |
| | — |
| | — |
| | — |
| | (1,616 | ) | | — |
|
| ILICO Closed Block and life benefits | (823 | ) | | 11 |
| | — |
| | — |
| | — |
| | — |
| | (812 | ) | | — |
| (812 | ) | | 1 |
| | — |
| | — |
| | — |
| | — |
| | (811 | ) | | — |
|
| Derivative liabilities | (8 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (8 | ) | | — |
| (6 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | — |
|
| Total Level 3 liabilities | $ | (8,379 | ) | | $ | (251 | ) | | $ | — |
| | $ | (209 | ) | | $ | — |
| | $ | — |
| | $ | (8,839 | ) | | $ | — |
| $ | (9,600 | ) | | $ | (341 | ) | | $ | — |
| | $ | (101 | ) | | $ | — |
| | $ | — |
| | $ | (10,042 | ) | | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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)
| | | | Nine months ended September 30, 2017 | Nine months ended September 30, 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 | | Net purchases, issuances, sales and settlements | | 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 |
| | $ | 17 |
| | $ | (1 | ) | | $ | (21 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| Foreign governments | 14 |
| | — |
| | — |
| | — |
| | — |
| | (14 | ) | | — |
| | — |
| |
| Corporate | 370 |
| | 10 |
| | 10 |
| | 107 |
| | 23 |
| | (51 | ) | | 469 |
| | — |
| $ | 578 |
| | $ | (3 | ) | | $ | (12 | ) | | $ | 385 |
| | $ | 24 |
| | $ | (8 | ) | | $ | 964 |
| | $ | — |
|
| CLO | 158 |
| | 1 |
| | 9 |
| | 40 |
| | 53 |
| | (65 | ) | | 196 |
| | — |
| 64 |
| | 2 |
| | — |
| | 264 |
| | 10 |
| | — |
| | 340 |
| | — |
|
| ABS | 1,160 |
| | 11 |
| | 18 |
| | 237 |
| | 6 |
| | (53 | ) | | 1,379 |
| | — |
| 1,461 |
| | 6 |
| | (17 | ) | | 67 |
| | 161 |
| | (180 | ) | | 1,498 |
| | — |
|
| CMBS | 152 |
| | 1 |
| | (4 | ) | | 28 |
| | — |
| | (90 | ) | | 87 |
| | — |
| 137 |
| | 1 |
| | (2 | ) | | 137 |
| | — |
| | (91 | ) | | 182 |
| | — |
|
| RMBS | 17 |
| | 1 |
| | 1 |
| | 12 |
| | 300 |
| | (9 | ) | | 322 |
| | — |
| 301 |
| | 3 |
| | (11 | ) | | (26 | ) | | — |
| | (267 | ) | | — |
| | — |
|
| Equity securities | 5 |
| | (1) |
| | 1 |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| |
| Trading securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
| 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
|
| CLO | 43 |
| | (2 | ) | | — |
| | (12 | ) | | — |
| | (8 | ) | | 21 |
| | 1 |
| 17 |
| | (5 | ) | | — |
| | — |
| | — |
| | (9 | ) | | 3 |
| | (3 | ) |
| ABS | | 77 |
| | (4 | ) | | — |
| | — |
| | — |
| | (73 | ) | | — |
| | (2 | ) |
| RMBS | 96 |
| | (11 | ) | | — |
| | 26 |
| | 7 |
| | (17 | ) | | 101 |
| | 2 |
| 342 |
| | (57 | ) | | — |
| | — |
| | — |
| | — |
| | 285 |
| | 4 |
|
| Equity securities | | 8 |
| | — |
| | 1 |
| | (7) |
| | — |
| | — |
| | 2 |
| | 1 |
|
| Mortgage loans | 44 |
| | (1 | ) | | — |
| | (1 | ) | | — |
| | — |
| | 42 |
| | (1 | ) | 41 |
| | — |
| | — |
| | (4 | ) | | — |
| | — |
| | 37 |
| | — |
|
| Investment funds | | 41 |
| | (4 | ) | | — |
| | (7 | ) | | — |
| | — |
| | 30 |
| | — |
|
| Funds withheld at interest – embedded derivative | 140 |
| | 163 |
| | — |
| | — |
| | — |
| | — |
| | 303 |
| | — |
| 312 |
| | (161 | ) | | — |
| | — |
| | — |
| | — |
| | 151 |
| | — |
|
| Investments in related parties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | | |
| CLO | — |
| | — |
| | — |
| | 10 |
| | — |
| | — |
| | 10 |
| | — |
| — |
| | — |
| | — |
| | 38 |
| | — |
| | — |
| | 38 |
| | — |
|
| ABS | 56 |
| | — |
| | 2 |
| | (5 | ) | | — |
| | (53 | ) | | — |
| | — |
| — |
| | — |
| | — |
| | 204 |
| | — |
| | — |
| | 204 |
| | — |
|
| Trading securities, CLO | 195 |
| | (3 | ) | | — |
| | (52 | ) | | — |
| | (49 | ) | | 91 |
| | (1 | ) | |
| Trading securities | | | | | | | | | | | | | | | | |
| CLO | | 105 |
| | (8 | ) | | — |
| | (18 | ) | | 18 |
| | (21 | ) | | 76 |
| | (4 | ) |
| ABS | | — |
| | — |
| | — |
| | — |
| | 151 |
| | — |
| | 151 |
| | — |
|
| Investment funds | | — |
| | (3 | ) | | — |
| | 108 |
| | — |
| | — |
| | 105 |
| | — |
|
| Funds withheld at interest – embedded derivative | | — |
| | 91 |
| | — |
| | — |
| | — |
| | — |
| | 91 |
| | — |
|
| Short-term investments | — |
| | — |
| | — |
| | 8 |
| | — |
| | — |
| | 8 |
| | — |
| — |
| | — |
| | — |
| | 10 |
| | — |
| | — |
| | 10 |
| | — |
|
| Reinsurance recoverable | 1,692 |
| | 91 |
| | — |
| | — |
| | — |
| | — |
| | 1,783 |
| | — |
| 1,824 |
| | (145 | ) | | — |
| | — |
| | — |
| | — |
| | 1,679 |
| | — |
|
| Total Level 3 assets | $ | 4,164 |
| | $ | 277 |
| | $ | 36 |
| | $ | 377 |
| | $ | 389 |
| | $ | (409 | ) | | $ | 4,834 |
| | $ | 1 |
| $ | 5,325 |
| | $ | (287 | ) | | $ | (41 | ) | | $ | 1,151 |
| | $ | 364 |
| | $ | (649 | ) | | $ | 5,863 |
| | $ | (4 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Embedded derivative | $ | (5,283 | ) | | $ | (1,077 | ) | | $ | — |
| | $ | (292 | ) | | $ | — |
| | $ | — |
| | $ | (6,652 | ) | | $ | — |
| $ | (7,436 | ) | | $ | (140 | ) | | $ | — |
| | $ | (1,080 | ) | | $ | — |
| | $ | — |
| | $ | (8,656 | ) | | $ | — |
|
| Universal life benefits | (883 | ) | | (74 | ) | | — |
| | — |
| | — |
| | — |
| | (957 | ) | | — |
| (1,005 | ) | | 104 |
| | — |
| | — |
| | — |
| | — |
| | (901 | ) | | — |
|
| Future policy benefits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AmerUs Closed Block | (1,606 | ) | | (10 | ) | | — |
| | — |
| | — |
| | — |
| | (1,616 | ) | | — |
| (1,625 | ) | | 156 |
| | — |
| | — |
| | — |
| | — |
| | (1,469 | ) | | — |
|
| ILICO Closed Block and life benefits | (794 | ) | | (17 | ) | | — |
| | — |
| | — |
| | — |
| | (811 | ) | | — |
| (803 | ) | | 39 |
| | — |
| | — |
| | — |
| | — |
| | (764 | ) | | — |
|
| Derivative liabilities | (7 | ) | | 1 |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | 1 |
| (5 | ) | | 1 |
| | — |
| | — |
| | — |
| | — |
| | (4 | ) | | — |
|
| Total Level 3 liabilities | $ | (8,573 | ) | | $ | (1,177 | ) | | $ | — |
| | $ | (292 | ) | | $ | — |
| | $ | — |
| | $ | (10,042 | ) | | $ | 1 |
| $ | (10,874 | ) | | $ | 160 |
| | $ | — |
| | $ | (1,080 | ) | | $ | — |
| | $ | — |
| | $ | (11,794 | ) | | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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)
| | | | Nine months ended September 30, 2016 | Nine months ended September 30, 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 | | Net purchases, issuances, sales and settlements | | In | | Out | | Ending balance | | Total gains (losses) included in earnings1 |
| Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | | |
| AFS Securities | | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | 5 |
| | $ | — |
| $ | 5 |
| | $ | 17 |
| | $ | (1 | ) | | $ | (21 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Foreign governments | 17 |
| | 1 |
| | (1 | ) | | (2 | ) | | — |
| | — |
| | 15 |
| | — |
| 14 |
| | — |
| | — |
| | — |
| | — |
| | (14 | ) | | — |
| | — |
|
| Corporate | 636 |
| | 4 |
| | 27 |
| | (71 | ) | | 4 |
| | (258 | ) | | 342 |
| | — |
| 370 |
| | 10 |
| | 10 |
| | 107 |
| | 23 |
| | (51 | ) | | 469 |
| | — |
|
| CLO | 517 |
| | 3 |
| | 38 |
| | 7 |
| | 10 |
| | (452 | ) | | 123 |
| | — |
| 158 |
| | 1 |
| | 9 |
| | 40 |
| | 53 |
| | (65 | ) | | 196 |
| | — |
|
| ABS | 1,813 |
| | 78 |
| | (7 | ) | | (755 | ) | | 103 |
| | (138 | ) | | 1,094 |
| | — |
| 1,160 |
| | 11 |
| | 18 |
| | 237 |
| | 6 |
| | (53 | ) | | 1,379 |
| | — |
|
| CMBS | 67 |
| | 1 |
| | 3 |
| | 10 |
| | 53 |
| | (47 | ) | | 87 |
| | — |
| 152 |
| | 1 |
| | (4 | ) | | 28 |
| | — |
| | (90 | ) | | 87 |
| | — |
|
| RMBS | 758 |
| | 3 |
| | 16 |
| | (249 | ) | | — |
| | (528 | ) | | — |
| | — |
| 17 |
| | 1 |
| | 1 |
| | 12 |
| | 300 |
| | (9 | ) | | 322 |
| | — |
|
| Equity securities | 9 |
| | — |
| | — |
| | (4 | ) | | — |
| | — |
| | 5 |
| | — |
| |
| Trading securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
| 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
|
| Corporate | 16 |
| | — |
| | — |
| | (4 | ) | | — |
| | (12 | ) | | — |
| | 5 |
| |
| CLO | 108 |
| | (4 | ) | | — |
| | (45 | ) | | — |
| | — |
| | 59 |
| | 8 |
| 43 |
| | (2 | ) | | — |
| | (12 | ) | | — |
| | (8 | ) | | 21 |
| | 1 |
|
| ABS | 98 |
| | (11 | ) | | — |
| | — |
| | — |
| | — |
| | 87 |
| | — |
| |
| RMBS | 29 |
| | (7 | ) | | — |
| | 111 |
| | — |
| | (5 | ) | | 128 |
| | 1 |
| 96 |
| | (11 | ) | | — |
| | 26 |
| | 7 |
| | (17 | ) | | 101 |
| | 2 |
|
| Equity Securities | | 5 |
| | (1 | ) | | 1 |
| | — |
| | — |
| | — |
| | 5 |
| | — |
|
| Mortgage loans | 48 |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
| | 45 |
| | — |
| 44 |
| | (1 | ) | | — |
| | (1 | ) | | — |
| | — |
| | 42 |
| | (1 | ) |
| Funds withheld at interest – embedded derivative | 36 |
| | 169 |
| | — |
| | — |
| | — |
| | — |
| | 205 |
| | — |
| 140 |
| | 163 |
| | — |
| | — |
| | — |
| | — |
| | 303 |
| | — |
|
| Investments in related parties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | | |
| AFS Securities | | | | | | | | | | | | | | | | |
| CLO | 7 |
| | — |
| | — |
| | — |
| | — |
| | (7 | ) | | — |
| | — |
| — |
| | — |
| | — |
| | 10 |
| | — |
| | — |
| | 10 |
| | — |
|
| ABS | 60 |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
| | 57 |
| | — |
| 56 |
| | — |
| | 2 |
| | (5 | ) | | — |
| | (53 | ) | | — |
| | — |
|
| Trading securities, CLO | 191 |
| | (23 | ) | | — |
| | 17 |
| | 26 |
| | (22 | ) | | 189 |
| | 21 |
| 195 |
| | (3 | ) | | — |
| | (52 | ) | | — |
| | (49 | ) | | 91 |
| | (1 | ) |
| Short-term investments | | — |
| | — |
| | — |
| | 8 |
| | — |
| | — |
| | 8 |
| | — |
|
| Reinsurance recoverable | 2,377 |
| | (499 | ) | | — |
| | — |
| | — |
| | — |
| | 1,878 |
| | — |
| 1,692 |
| | 91 |
| | — |
| | — |
| | — |
| | — |
| | 1,783 |
| | — |
|
| Total Level 3 assets | $ | 6,804 |
| | $ | (285 | ) | | $ | 76 |
| | $ | (991 | ) | | $ | 201 |
| | $ | (1,469 | ) | | $ | 4,336 |
| | $ | 35 |
| $ | 4,164 |
| | $ | 277 |
| | $ | 36 |
| | $ | 377 |
| | $ | 389 |
| | $ | (409 | ) | | $ | 4,834 |
| | $ | 1 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Embedded derivative | $ | (4,464 | ) | | $ | (390 | ) | | $ | — |
| | $ | (405 | ) | | $ | — |
| | $ | — |
| | $ | (5,259 | ) | | $ | — |
| $ | (5,283 | ) | | $ | (1,077 | ) | | $ | — |
| | $ | (292 | ) | | $ | — |
| | $ | — |
| | $ | (6,652 | ) | | $ | — |
|
| Universal life benefits | (1,464 | ) | | 414 |
| | — |
| | — |
| | — |
| | — |
| | (1,050 | ) | | — |
| (883 | ) | | (74 | ) | | — |
| | — |
| | — |
| | — |
| | (957 | ) | | — |
|
| Future policy benefits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AmerUs Closed Block | (1,581 | ) | | (129 | ) | | — |
| | — |
| | — |
| | — |
| | (1,710 | ) | | — |
| (1,606 | ) | | (10 | ) | | — |
| | — |
| | — |
| | — |
| | (1,616 | ) | | — |
|
| ILICO Closed Block and life benefits | (897 | ) | | 85 |
| | — |
| | — |
| | — |
| | — |
| | (812 | ) | | — |
| (794 | ) | | (17 | ) | | — |
| | — |
| | — |
| | — |
| | (811 | ) | | — |
|
| Derivative liabilities | (7 | ) | | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (8 | ) | | — |
| (7 | ) | | 1 |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | 1 |
|
| Total Level 3 liabilities | $ | (8,413 | ) | | $ | (21 | ) | | $ | — |
| | $ | (405 | ) | | $ | — |
| | $ | — |
| | $ | (8,839 | ) | | $ | — |
| $ | (8,573 | ) | | $ | (1,177 | ) | | $ | — |
| | $ | (292 | ) | | $ | — |
| | $ | — |
| | $ | (10,042 | ) | | $ | 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. |
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 September 30, 2017 | Three months ended September 30, 2018 |
| (In millions) | Purchases | | Issuances | | Sales | | Settlements | | Purchases, issuances, sales and settlements, net | Purchases | | Issuances | | Sales | | Settlements | | Net purchases, issuances, sales and settlements |
| Assets | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | |
| Corporate | $ | 27 |
| | $ | — |
| | $ | (36 | ) | | $ | (4 | ) | | $ | (13 | ) | $ | 156 |
| | $ | — |
| | $ | (15 | ) | | $ | (31 | ) | | $ | 110 |
|
| CLO | 72 |
| | — |
| | — |
| | (25 | ) | | 47 |
| 79 |
| | — |
| | (8 | ) | | (19 | ) | | 52 |
|
| ABS | 275 |
| | — |
| | — |
| | (35 | ) | | 240 |
| 234 |
| | — |
| | — |
| | (56 | ) | | 178 |
|
| CMBS | — |
| | — |
| | (18 | ) | | — |
| | (18 | ) | 1 |
| | — |
| | — |
| | (1 | ) | | — |
|
| RMBS | — |
| | — |
| | — |
| | (11 | ) | | (11 | ) | |
| Trading securities, fixed maturity, RMBS | 4 |
| | — |
| | — |
| | — |
| | 4 |
| |
| Trading securities, CLO | | — |
| | — |
| | (11 | ) | | — |
| | (11 | ) |
| Mortgage loans | | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Investments in related parties | | | | | | | | | | | | | | | | | | |
| AFS securities, fixed maturity, CLO | 10 |
| | — |
| | — |
| | — |
| | 10 |
| |
| Trading securities, CLO | — |
| | — |
| | (24 | ) | | — |
| | (24 | ) | |
| Short-term investments | 8 |
| | — |
| | — |
| | (28 | ) | | (20 | ) | |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities, ABS | | 158 |
| | — |
| | — |
| | — |
| | 158 |
|
| Trading securities, ABS | | — |
| | — |
| | — |
| | (9 | ) | | (9 | ) |
| Total Level 3 assets | $ | 396 |
| | $ | — |
| | $ | (78 | ) | | $ | (103 | ) | | $ | 215 |
| $ | 628 |
| | $ | — |
| | $ | (34 | ) | | $ | (117 | ) | | $ | 477 |
|
| | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | | | | |
| Embedded derivative | $ | — |
| | $ | (142 | ) | | $ | — |
| | $ | 41 |
| | $ | (101 | ) | $ | — |
| | $ | (376 | ) | | $ | — |
| | $ | 109 |
| | $ | (267 | ) |
| Total Level 3 liabilities | $ | — |
| | $ | (142 | ) | | $ | — |
| | $ | 41 |
| | $ | (101 | ) | $ | — |
| | $ | (376 | ) | | $ | — |
| | $ | 109 |
| | $ | (267 | ) |
| | | | Three months ended September 30, 2016 | Three months ended September 30, 2017 |
| (In millions) | Purchases | | Issuances | | Sales | | Settlements | | Purchases, issuances, sales and settlements, net | Purchases | | Issuances | | Sales | | Settlements | | Net purchases, issuances, sales and settlements |
| Assets | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | |
| Foreign governments | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | (1 | ) | |
| Corporate | 25 |
| | — |
| | — |
| | (1 | ) | | 24 |
| $ | 27 |
| | $ | — |
| | $ | (36 | ) | | $ | (4 | ) | | $ | (13 | ) |
| CLO | 12 |
| | — |
| | — |
| | (8 | ) | | 4 |
| 72 |
| | — |
| | — |
| | (25 | ) | | 47 |
|
| ABS | 60 |
| | — |
| | — |
| | (30 | ) | | 30 |
| 275 |
| | — |
| | — |
| | (35 | ) | | 240 |
|
| CMBS | 4 |
| | — |
| | — |
| | — |
| | 4 |
| — |
| | — |
| | (18 | ) | | — |
| | (18 | ) |
| Equity securities | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) | |
| RMBS | | — |
| | — |
| | — |
| | (11 | ) | | (11 | ) |
| Trading securities | | | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | |
| CLO | — |
| | — |
| | (44 | ) | | — |
| | (44 | ) | |
| RMBS | 16 |
| | — |
| | — |
| | — |
| | 16 |
| 4 |
| | — |
| | — |
| | — |
| | 4 |
|
| Investments in related parties | | | | | | | | | | | | | | | | | | |
| AFS securities, fixed maturity, ABS | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) | |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities, CLO | | 10 |
| | — |
| | — |
| | — |
| | 10 |
|
| Trading securities, CLO | | — |
| | — |
| | (24 | ) | | — |
| | (24 | ) |
| Short-term investments | | 8 |
| | — |
| | — |
| | (28 | ) | | (20 | ) |
| Total Level 3 assets | $ | 117 |
| | $ | — |
| | $ | (48 | ) | | $ | (41 | ) | | $ | 28 |
| $ | 396 |
| | $ | — |
| | $ | (78 | ) | | $ | (103 | ) | | $ | 215 |
|
| | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | | | | |
| Embedded derivative | $ | — |
| | $ | (244 | ) | | $ | — |
| | $ | 35 |
| | $ | (209 | ) | $ | — |
| | $ | (142 | ) | | $ | — |
| | $ | 41 |
| | $ | (101 | ) |
| Total Level 3 liabilities | $ | — |
| | $ | (244 | ) | | $ | — |
| | $ | 35 |
| | $ | (209 | ) | $ | — |
| | $ | (142 | ) | | $ | — |
| | $ | 41 |
| | $ | (101 | ) |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
| | | | Nine months ended September 30, 2017 | Nine months ended September 30, 2018 |
| (In millions) | Purchases | | Issuances | | Sales | | Settlements | | Purchases, issuances, sales and settlements, net | Purchases | | Issuances | | Sales | | Settlements | | Net purchases, issuances, sales and settlements |
| Assets | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | $ | — |
| | $ | — |
| | $ | — |
| | $ | (21 | ) | | $ | (21 | ) | |
| Corporate | 152 |
| | — |
| | (37 | ) | | (8 | ) | | 107 |
| $ | 460 |
| | $ | — |
| | $ | (29 | ) | | $ | (46 | ) | | $ | 385 |
|
| CLO | 83 |
| | — |
| | (2 | ) | | (41 | ) | | 40 |
| 314 |
| | — |
| | (8 | ) | | (42 | ) | | 264 |
|
| ABS | 495 |
| | — |
| | — |
| | (258 | ) | | 237 |
| 476 |
| | — |
| | (21 | ) | | (388 | ) | | 67 |
|
| CMBS | 29 |
| | — |
| | — |
| | (1 | ) | | 28 |
| 138 |
| | — |
| | — |
| | (1 | ) | | 137 |
|
| RMBS | 14 |
| | — |
| | — |
| | (2 | ) | | 12 |
| — |
| | — |
| | — |
| | (26 | ) | | (26 | ) |
| Trading securities | | | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | |
| CLO | 4 |
| | — |
| | (16 | ) | | — |
| | (12 | ) | 7 |
| | — |
| | (7 | ) | | — |
| | — |
|
| RMBS | 26 |
| | — |
| | — |
| | — |
| | 26 |
| |
| Equity securities | | 1 |
| | — |
| | (8) |
| | — |
| | (7 | ) |
| Mortgage loans | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) |
| Investment funds | | — |
| | — |
| | — |
| | (7 | ) | | (7 | ) |
| Investments in related parties | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | |
| CLO | 10 |
| | — |
| | — |
| | — |
| | 10 |
| 38 |
| | — |
| | — |
| | — |
| | 38 |
|
| ABS | 5 |
| | — |
| | — |
| | (10 | ) | | (5 | ) | 204 |
| | — |
| | — |
| | — |
| | 204 |
|
| Trading securities, CLO | — |
| | — |
| | (52 | ) | | — |
| | (52 | ) | 30 |
| | — |
| | (48 | ) | | — |
| | (18 | ) |
| Investment funds | | 108 |
| | — |
| | — |
| | — |
| | 108 |
|
| Short-term investments | 37 |
| | — |
| | — |
| | (29 | ) | | 8 |
| 10 |
| | — |
| | — |
| | — |
| | 10 |
|
| Total Level 3 assets | $ | 855 |
| | $ | — |
| | $ | (107 | ) | | $ | (371 | ) | | $ | 377 |
| $ | 1,786 |
| | $ | — |
| | $ | (121 | ) | | $ | (514 | ) | | $ | 1,151 |
|
| | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | | | | |
| Embedded derivative | $ | — |
| | $ | (412 | ) | | $ | — |
| | $ | 120 |
| | $ | (292 | ) | $ | — |
| | $ | (1,360 | ) | | $ | — |
| | $ | 280 |
| | $ | (1,080 | ) |
| Total Level 3 liabilities | $ | — |
| | $ | (412 | ) | | $ | — |
| | $ | 120 |
| | $ | (292 | ) | $ | — |
| | $ | (1,360 | ) | | $ | — |
| | $ | 280 |
| | $ | (1,080 | ) |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
| | | | Nine months ended September 30, 2016 | Nine months ended September 30, 2017 |
| (In millions) | Purchases | | Issuances | | Sales | | Settlements | | Purchases, issuances, sales and settlements, net | Purchases | | Issuances | | Sales | | Settlements | | Net purchases, issuances, sales and settlements |
| Assets | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | |
| Foreign governments | $ | — |
| | $ | — |
| | $ | — |
| | $ | (2 | ) | | $ | (2 | ) | |
| U.S. state, municipal and political subdivisions | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (21 | ) | | $ | (21 | ) |
| Corporate | 47 |
| | — |
| | (55 | ) | | (63 | ) | | (71 | ) | 152 |
| | — |
| | (37 | ) | | (8 | ) | | 107 |
|
| CLO | 24 |
| | — |
| | (9 | ) | | (8 | ) | | 7 |
| 83 |
| | — |
| | (2 | ) | | (41 | ) | | 40 |
|
| ABS | 102 |
| | — |
| | — |
| | (857 | ) | | (755 | ) | 495 |
| | — |
| | — |
| | (258 | ) | | 237 |
|
| CMBS | 10 |
| | — |
| | — |
| | — |
| | 10 |
| 29 |
| | — |
| | — |
| | (1 | ) | | 28 |
|
| RMBS | — |
| | — |
| | — |
| | (249 | ) | | (249 | ) | 14 |
| | — |
| | — |
| | (2 | ) | | 12 |
|
| Equity securities | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) | |
| Trading securities | | | | | | | | | | | | | | | | | | |
| Fixed maturity | | | | | | | | | | |
| Corporate | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) | |
| CLO | — |
| | — |
| | (45 | ) | | — |
| | (45 | ) | 4 |
| | — |
| | (16 | ) | | — |
| | (12 | ) |
| RMBS | 111 |
| | — |
| | — |
| | — |
| | 111 |
| 26 |
| | — |
| | — |
| | — |
| | 26 |
|
| Mortgage loans | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Investments in related parties | | | | | | | | | | | | | | | | | | |
| AFS securities, fixed maturity, ABS | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) | |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities | | | | | | | | | | |
| CLO | | 10 |
| | — |
| | — |
| | — |
| | 10 |
|
| ABS | | 5 |
| | — |
| | — |
| | (10 | ) | | (5 | ) |
| Trading securities, CLO | 33 |
| | — |
| | (16 | ) | | — |
| | 17 |
| — |
| | — |
| | (52 | ) | | — |
| | (52 | ) |
| Short-term investments | | 37 |
| | — |
| | — |
| | (29 | ) | | 8 |
|
| Total Level 3 assets | $ | 327 |
| | $ | — |
| | $ | (133 | ) | | $ | (1,185 | ) | | $ | (991 | ) | $ | 855 |
| | $ | — |
| | $ | (107 | ) | | $ | (371 | ) | | $ | 377 |
|
| | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | | | | |
| Embedded derivative | $ | — |
| | $ | (517 | ) | | $ | — |
| | $ | 112 |
| | $ | (405 | ) | $ | — |
| | $ | (412 | ) | | $ | — |
| | $ | 120 |
| | $ | (292 | ) |
| Total Level 3 liabilities | $ | — |
| | $ | (517 | ) | | $ | — |
| | $ | 112 |
| | $ | (405 | ) | $ | — |
| | $ | (412 | ) | | $ | — |
| | $ | 120 |
| | $ | (292 | ) |
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 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 September 30, 2018, discounts ranged from 6% to 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, fromrelative to 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. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
The following summarizes the unobservable inputs for the embedded derivatives of fixed indexed annuities:
| | | | September 30, 2017 | September 30, 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 | $ | 6,652 |
| Option budget method | Non-performance risk | 0.3 | % | – | 1.3% | Decrease | $ | 8,656 |
| Option budget method | Non-performance risk | 0.2 | % | – | 1.3% | Decrease |
| | | | Option budget | 0.7 | % | – | 3.7% | Increase | | | Option budget | 0.8 | % | – | 3.7% | Increase |
| | | | Surrender rate | 0.0 | % | – | 19.6% | Decrease | | | Surrender rate | 4.4 | % | – | 7.6% | Decrease |
| | | | December 31, 2016 | 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 | 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 | $ | 7,436 |
| Option budget method | Non-performance risk | 0.2 | % | – | 1.2% | Decrease |
| | | | Option budget | 0.8 | % | – | 3.8% | Increase | | | Option budget | 0.7 | % | – | 3.7% | Increase |
| | | | Surrender rate | 0.0 | % | – | 16.3% | Decrease | | | Surrender rate | 1.5 | % | – | 19.4% | Decrease |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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:
| | | | | September 30, 2017 | | December 31, 2016 | September 30, 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 | | | | | | | | | | |
| Financial Assets | | | | | | | | | | | | |
| Mortgage loans | 3 | | $ | 6,403 |
| | $ | 6,568 |
| | $ | 5,426 |
| | $ | 5,560 |
| $ | 8,945 |
| | $ | 9,018 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 9,018 |
|
| Investment funds | NAV1 | | 620 |
| | 620 |
| | 590 |
| | 590 |
| 565 |
| | 565 |
| | 565 |
| | — |
| | — |
| | — |
|
| Policy loans | 2 | | 571 |
| | 571 |
| | 602 |
| | 602 |
| 512 |
| | 512 |
| | — |
| | — |
| | 512 |
| | — |
|
| Funds withheld at interest | 3 | | 6,661 |
| | 6,661 |
| | 6,398 |
| | 6,398 |
| 7,690 |
| | 7,690 |
| | — |
| | — |
| | — |
| | 7,690 |
|
| Other investments | 3 | | 77 |
| | 77 |
| | 81 |
| | 81 |
| 71 |
| | 71 |
| | — |
| | — |
| | — |
| | 71 |
|
| Investments in related parties | | | | | | | | | | | | | | | | | | | |
| Mortgage loans | | 389 |
| | 382 |
| | — |
| | — |
| | — |
| | 382 |
|
| Investment funds | NAV1 | | 1,303 |
| | 1,303 |
| | 1,198 |
| | 1,198 |
| 1,896 |
| | 1,896 |
| | 1,896 |
| | — |
| | — |
| | — |
|
| Funds withheld at interest | | 13,872 |
| | 13,872 |
| | — |
| | — |
| | — |
| | 13,872 |
|
| Other investments | 3 | | 238 |
| | 260 |
| | 237 |
| | 262 |
| 386 |
| | 382 |
| | — |
| | — |
| | — |
| | 382 |
|
| Total assets not carried at fair value | | $ | 15,873 |
| | $ | 16,060 |
| | $ | 14,532 |
| | $ | 14,691 |
| |
| Liabilities | | | | | | | | | |
| Total financial assets not carried at fair value | | $ | 34,326 |
| | $ | 34,388 |
| | $ | 2,461 |
| | $ | — |
| | $ | 512 |
| | $ | 31,415 |
|
| | | | | | | | | | | | | |
| Financial Liabilities | | | | | | | | | | | | |
| Interest sensitive contract liabilities | 3 | | $ | 31,328 |
| | $ | 30,932 |
| | $ | 27,628 |
| | $ | 26,930 |
| $ | 47,206 |
| | $ | 44,174 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 44,174 |
|
| Long-term debt | | 991 |
| | 936 |
| | — |
| | — |
| | 936 |
| | — |
|
| Funds withheld liability | 2 | | 376 |
| | 376 |
| | 374 |
| | 374 |
| 386 |
| | 386 |
| | — |
| | — |
| | 386 |
| | — |
|
| Total liabilities not carried at fair value | | $ | 31,704 |
| | $ | 31,308 |
| | $ | 28,002 |
| | $ | 27,304 |
| |
| Total financial liabilities not carried at fair value | | $ | 48,583 |
| | $ | 45,496 |
| | $ | — |
| | $ | — |
| | $ | 1,322 |
| | $ | 44,174 |
|
| | | | | | | | | | | | | | | | | | | | |
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 |
| Financial 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 financial assets not carried at fair value | $ | 15,700 |
| | $ | 15,871 |
| | $ | 1,834 |
| | $ | — |
| | $ | 588 |
| | $ | 13,449 |
|
| | | | | | | | | | | | |
| Financial Liabilities | | | | | | | | | | | |
| Interest sensitive contract liabilities | $ | 31,586 |
| | $ | 31,656 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 31,656 |
|
| Funds withheld liability | 385 |
| | 385 |
| | — |
| | — |
| | 385 |
| | — |
|
| Total financial 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 and short-term debt, the carrying amount approximates fair value.
Investment in related parties – Other investments – The fair value of related party other investments is determined using a discounted cash flow model using discount rates for similar investments.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial StatementsLong-term debt (Unaudited)
6. Reinsurance
During– We obtain the nine months ended September 30, 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 $278 million, future policy benefits decreased $26 million, policy loans decreased $7 million, and reinsurance recoverable decreased $297 million.other reference data.
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 | $ | 1,142 |
| | $ | 462 |
| | $ | 1,336 |
| | $ | 2,940 |
| |
| Balance at December 31, 2017 | | $ | 1,354 |
| | $ | 520 |
| | $ | 1,056 |
| | $ | 2,930 |
|
| Additions | 371 |
| | 121 |
| | — |
| | 492 |
| 1,791 |
| | 197 |
| | — |
| | 1,988 |
|
| Unlocking | 13 |
| | 4 |
| | (1 | ) | | 16 |
| 21 |
| | 7 |
| | 54 |
| | 82 |
|
| Amortization | (142 | ) | | (46 | ) | | (121 | ) | | (309 | ) | (151 | ) | | (73 | ) | | (135 | ) | | (359 | ) |
| Impact of unrealized investment (gains) losses | (90 | ) | | (36 | ) | | (110 | ) | | (236 | ) | 126 |
| | 48 |
| | 157 |
| | 331 |
|
| Balance at September 30, 2017 | $ | 1,294 |
| | $ | 505 |
| | $ | 1,104 |
| | $ | 2,903 |
| |
| Balance at September 30, 2018 | | $ | 3,141 |
| | $ | 699 |
| | $ | 1,132 |
| | $ | 4,972 |
|
| | | (In millions) | DAC | | DSI | | VOBA | | Total | DAC | | DSI | | VOBA | | Total |
| Balance at December 31, 2015 | $ | 705 |
| | $ | 320 |
| | $ | 1,627 |
| | $ | 2,652 |
| |
| Balance at December 31, 2016 | | $ | 1,142 |
| | $ | 462 |
| | $ | 1,336 |
| | $ | 2,940 |
|
| Additions | 449 |
| | 145 |
| | — |
| | 594 |
| 371 |
| | 121 |
| | — |
| | 492 |
|
| Unlocking | (12 | ) | | (3 | ) | | (23 | ) | | (38 | ) | 13 |
| | 4 |
| | (1 | ) | | 16 |
|
| Amortization | (76 | ) | | (16 | ) | | (99 | ) | | (191 | ) | (142 | ) | | (46 | ) | | (121 | ) | | (309 | ) |
| Impact of unrealized investment (gains) losses | (81 | ) | | (39 | ) | | (207 | ) | | (327 | ) | (90 | ) | | (36 | ) | | (110 | ) | | (236 | ) |
| Balance at September 30, 2016 | $ | 985 |
| | $ | 407 |
| | $ | 1,298 |
| | $ | 2,690 |
| |
| Balance at September 30, 2017 | | $ | 1,294 |
| | $ | 505 |
| | $ | 1,104 |
| | $ | 2,903 |
|
8. Common Stock
During the nine months ended September 30, 2017, a total of 42,260,915 Class B shares were converted to Class A shares, primarily in connection with two public follow-on offerings that included sales by holders of Class B shares, at which time the shares automatically converted to Class A common shares. In connection with each follow-on offering, AP Alternative Assets, L.P. distributed Class B shares to its unitholders and certain of such unitholders participated in the applicable follow-on offering. To the extent that such shares were distributed to unitholders other than a member of the Apollo Group (as defined by our bye-laws), such shares automatically converted to Class A shares. We did not sell any shares in the offerings.
Stock-based Compensation—Stock-based compensation expense was $11 million and $47 million for the three months ended September 30, 2017 and 2016, respectively, and $40 million and $61 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, the stock-based compensation plans had unrecognized compensation expense of $39 million. The cost is expected to be recognized over a weighted-average period of 1.2 years.7. Reinsurance
Employee Stock Purchase Plan Reinsurance transactions—On June 1, 2018, we entered into coinsurance and modco agreements with Voya Insurance and Annuity Company (VIAC) to reinsure a block of fixed and fixed indexed annuities. VIAC is a related party pursuant to GAAP due to our minority equity investment in its holding company’s parent, VA Capital Company LLC (VA Capital), as discussed further in Note 12 – Eligible employees may participate in our 2017 Employee Stock Purchase Plan (ESPP)Related Parties. Additionally, we entered into modco agreements with ReliaStar Life Insurance Company (RLI), which provides the opportunitya subsidiary of Voya Financial, Inc. (Voya), to purchase our Class A shares atreinsure a discount from the market price through payroll deductions. Pursuant to the ESPP, employees are permitted to purchase shares at a price equal to 85%block of the fair value of such shares as determined by reference to the closing price of our Class A shares on the New York Stock Exchange on the last day of the relevant purchase period. Under the ESPP we may make available for sale up to 3,800,000 Class A shares over the term of the ESPP, which may extend for up to 10 years. As of September 30, 2017, we had not sold any shares under the ESPP.fixed and fixed indexed annuities. The following summarizes these reinsurance transactions (collectively, Voya reinsurance transactions):
|
| | | | | | | | | | | | | | | |
| | VIAC | | RLI | | |
| (In millions) | Coinsurance | | Modco | | Modco | | Total |
| Liabilities assumed | $ | 3,667 |
| | $ | 14,911 |
| | $ | 457 |
| | $ | 19,035 |
|
| Less: Assets received | 3,478 |
| | 14,332 |
| | 445 |
| | 18,255 |
|
| Ceding commission (paid) received | (86 | ) | | (320 | ) | | 12 |
| | (394 | ) |
| Net cost of reinsurance | $ | 275 |
| | $ | 899 |
| | $ | — |
| | $ | 1,174 |
|
| | | | | | | | |
| DAC | $ | 293 |
| | $ | 999 |
| | $ | 4 |
| | $ | 1,296 |
|
Unearned revenue reserve1 | (8 | ) | | (57 | ) | | (4 | ) | | (69 | ) |
Deferred profit liability2 | (10 | ) | | (43 | ) | | — |
| | (53 | ) |
| Net cost of reinsurance | $ | 275 |
| | $ | 899 |
| | $ | — |
| | $ | 1,174 |
|
| | | | | | | | |
1 Included within interest sensitive contract liabilities on the condensed consolidated balance sheets. |
2 Included within future policy benefits on the condensed consolidated balance sheets. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
DAC and unearned revenue reserve balances are amortized over the life of the reinsurance agreements on a basis consistent with our DAC amortization policy. The deferred profit liability balance is amortized over the life of the reinsurance agreement on a constant relationship to the benefit reserves.
The following summarizes the effect of reinsurance on premiums and future policy and other policy benefits on the consolidated statements of income:
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 |
| Premiums | | | | | | | |
| Direct | $ | 527 |
| | $ | 109 |
| | $ | 959 |
| | $ | 637 |
|
| Reinsurance assumed | 46 |
| | 5 |
| | 702 |
| | 17 |
|
| Reinsurance ceded | (42 | ) | �� | (42 | ) | | (126 | ) | | (151 | ) |
| Total premiums | $ | 531 |
| | $ | 72 |
| | $ | 1,535 |
| | $ | 503 |
|
| | | | | | | | |
| Future policy and other policy benefits | | | | | | | |
| Direct | $ | 1,047 |
| | $ | 350 |
| | $ | 1,783 |
| | $ | 1,349 |
|
| Reinsurance assumed | 59 |
| | 7 |
| | 723 |
| | 30 |
|
| Reinsurance ceded | (186 | ) | | (98 | ) | | (328 | ) | | (328 | ) |
| Total future policy and other policy benefits | $ | 920 |
| | $ | 259 |
| | $ | 2,178 |
| | $ | 1,051 |
|
Global Atlantic ceded reinsurance transactions—During the quarter ended September 30, 2018, we were notified by Global Atlantic of corrections they made to balances previously provided to us related to the novated business ceded to Global Atlantic. As a result, we have recorded an out-of-period adjustment, which increased policy loans $12 million, reinsurance recoverable $354 million, interest sensitive contract liabilities $292 million, and future policy benefits $74 million on the condensed consolidated balance sheet. There was no impact to the condensed consolidated statements of income, comprehensive income, equity or cash flows. We evaluated this out-of-period adjustment and determined it was not material to the condensed consolidated financial statements as of September 30, 2018 or December 31, 2017, or any other previously reported period.
8. Debt
Senior 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. Interest expense on long-term debt was $10 million and $30 million for the three and nine months ended September 30, 2018, respectively.
Short-term Debt—In the second quarter of 2018, we borrowed $183 million from the Federal Home Loan Bank (FHLB) of Des Moines through their variable rate short-term federal funds program. The borrowing carried an interest rate of 2.16% and was repaid in the third quarter of 2018.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
9. Earnings Per Share
The following represents our basic and diluted earnings per share (EPS) calculations:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2017 |
| (In millions, except share and per share data) | Class A | | Class B | | Class M-1 | | Class M-2 | | Class M-3 | | Class M-4 |
| Net income available to AHL shareholders – basic and diluted | $ | 167 |
| | $ | 98 |
| | $ | 5 |
| | $ | 1 |
| | $ | 1 |
| | $ | 2 |
|
| | | | | | | | | | | | |
| Basic weighted average shares outstanding | 119,519,911 |
| | 69,862,355 |
| | 3,388,890 |
| | 857,831 |
| | 928,870 |
| | 1,776,455 |
|
| Dilutive effect of stock compensation plans | 372,358 |
| | — |
| | — |
| | 7,191 |
| | 289,284 |
| | 1,362,388 |
|
| Diluted weighted average shares outstanding | 119,892,269 |
| | 69,862,355 |
| | 3,388,890 |
| | 865,022 |
| | 1,218,154 |
| | 3,138,843 |
|
| | | | | | | | | | | | |
Earnings per share1 | | | | | | | | | | | |
| Basic | $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.40 |
|
| Diluted | $ | 1.39 |
| | $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.39 |
| | $ | 1.07 |
| | $ | 0.79 |
|
| | | | | | | | | | | | |
1 Calculated using whole figures. |
| | | | Three months ended September 30, 2016 | Three months ended September 30, 2018 |
| (In millions, except share and per share data) | Class A | | Class B | Class A | | Class B | | Class M-1 | | Class M-2 | | Class M-3 | | Class M-4 |
| Net income available to AHL shareholders – basic and diluted | $ | 34 |
| | $ | 92 |
| |
| Net income – basic and diluted | | $ | 534 |
| | $ | 83 |
| | $ | 11 |
| | $ | 3 |
| | $ | 3 |
| | $ | 6 |
|
| | | | | | | | | | | | | | | |
| Basic weighted average shares outstanding | 49,798,963 |
| | 135,963,975 |
| 164,527,680 |
| | 25,483,107 |
| | 3,386,963 |
| | 841,011 |
| | 1,001,110 |
| | 2,070,590 |
|
| Dilutive effect of stock compensation plans | 107,485 |
| | — |
| 529,382 |
| | — |
| | — |
| | — |
| | — |
| | 628,718 |
|
| Diluted weighted average shares outstanding | 49,906,448 |
| | 135,963,975 |
| 165,057,062 |
| | 25,483,107 |
| | 3,386,963 |
| | 841,011 |
| | 1,001,110 |
| | 2,699,308 |
|
| | | | | | | | | | | | | | | |
Earnings per share1 | | | | | | | | | | | | | | |
| Basic | $ | 0.68 |
| | $ | 0.68 |
| $ | 3.24 |
| | $ | 3.24 |
| | $ | 3.24 |
| | $ | 3.24 |
| | $ | 3.24 |
| | $ | 3.24 |
|
| Diluted | $ | 0.68 |
| | $ | 0.68 |
| $ | 3.23 |
| | $ | 3.24 |
| | $ | 3.24 |
| | $ | 3.24 |
| | $ | 3.24 |
| | $ | 2.49 |
|
| | | | | | | | | | | | | | | |
1 Calculated using whole figures. | 1 Calculated using whole figures. | | | 1 Calculated using whole figures. |
| | | | Nine months ended September 30, 2017 | Three months ended September 30, 2017 |
| (In millions, except share and per share data) | Class A | | Class B | | Class M-1 | | Class M-2 | | Class M-3 | | Class M-4 | Class A | | Class B | | Class M-1 | | Class M-2 | | Class M-3 | | Class M-4 |
| Net income available to AHL shareholders – basic | $ | 513 |
| | $ | 443 |
| | $ | 17 |
| | $ | 3 |
| | $ | 3 |
| | $ | 5 |
| |
| Effect of stock compensation plans on allocated net income | 11 |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Net income available to AHL shareholders – diluted | $ | 524 |
| | $ | 443 |
| | $ | 17 |
| | $ | 3 |
| | $ | 3 |
| | $ | 5 |
| |
| Net income – basic and diluted | | $ | 167 |
| | $ | 98 |
| | $ | 5 |
| | $ | 1 |
| | $ | 1 |
| | $ | 2 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Basic weighted average shares outstanding | 101,506,304 |
| | 87,703,973 |
| | 3,416,703 |
| | 604,722 |
| | 559,987 |
| | 1,078,282 |
| 119,519,911 |
| | 69,862,355 |
| | 3,388,890 |
| | 857,831 |
| | 928,870 |
| | 1,776,455 |
|
| Dilutive effect of stock compensation plans | 3,297,329 |
| | — |
| | — |
| | 331,206 |
| | 686,268 |
| | 1,768,169 |
| 372,358 |
| | — |
| | — |
| | 7,191 |
| | 289,284 |
| | 1,362,388 |
|
| Diluted weighted average shares outstanding | 104,803,633 |
| | 87,703,973 |
| | 3,416,703 |
| | 935,928 |
| | 1,246,255 |
| | 2,846,451 |
| 119,892,269 |
| | 69,862,355 |
| | 3,388,890 |
| �� | 865,022 |
| | 1,218,154 |
| | 3,138,843 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Earnings per share1 | | | | | | | | | | | | | | | | | | | | | | |
| Basic | $ | 5.05 |
| | $ | 5.05 |
| | $ | 5.05 |
| | $ | 5.05 |
| | $ | 5.05 |
| | $ | 5.05 |
| $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.40 |
|
| Diluted | $ | 5.00 |
| | $ | 5.05 |
| | $ | 5.05 |
| | $ | 3.26 |
| | $ | 2.27 |
| | $ | 1.91 |
| $ | 1.39 |
| | $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.39 |
| | $ | 1.07 |
| | $ | 0.79 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
1 Calculated using whole figures. | 1 Calculated using whole figures. | 1 Calculated using whole figures. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2018 |
| (In millions, except share and per share data) | Class A | | Class B | | Class M-1 | | Class M-2 | | Class M-3 | | Class M-4 |
| Net income – basic and diluted | $ | 946 |
| | $ | 182 |
| | $ | 20 |
| | $ | 5 |
| | $ | 6 |
| | $ | 13 |
|
| | | | | | | | | | | | |
| Basic weighted average shares outstanding | 159,284,577 |
| | 30,630,567 |
| | 3,388,240 |
| | 842,157 |
| | 1,017,755 |
| | 2,085,833 |
|
| Dilutive effect of stock compensation plans | 509,261 |
| | — |
| | — |
| | 5,095 |
| | 6,858 |
| | 717,426 |
|
| Diluted weighted average shares outstanding | 159,793,838 |
| | 30,630,567 |
| | 3,388,240 |
| | 847,252 |
| | 1,024,613 |
| | 2,803,259 |
|
| | | | | | | | | | | | |
Earnings per share1 | | | | | | | | | | | |
| Basic | $ | 5.94 |
| | $ | 5.94 |
| | $ | 5.94 |
| | $ | 5.94 |
| | $ | 5.94 |
| | $ | 5.94 |
|
| Diluted | $ | 5.92 |
| | $ | 5.94 |
| | $ | 5.94 |
| | $ | 5.90 |
| | $ | 5.90 |
| | $ | 4.42 |
|
| | | | | | | | | | | | |
1 Calculated using whole figures. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
| | | | Nine months ended September 30, 2016 | Nine months ended September 30, 2017 |
| (In millions, except share and per share data) | Class A | | Class B | Class A | | Class B | | Class M-1 | | Class M-2 | | Class M-3 | | Class M-4 |
| Net income available to AHL shareholders – basic and diluted | $ | 108 |
| | $ | 296 |
| |
| Net income – basic | | $ | 513 |
| | $ | 443 |
| | $ | 17 |
| | $ | 3 |
| | $ | 3 |
| | $ | 5 |
|
| Effect of stock compensation plans on allocated net income | | 11 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net income – diluted | | $ | 524 |
| | $ | 443 |
| | $ | 17 |
| | $ | 3 |
| | $ | 3 |
| | $ | 5 |
|
| | | | | | | | | | | | | | | |
| Basic weighted average shares outstanding | 49,960,549 |
| | 135,963,975 |
| 101,506,304 |
| | 87,703,973 |
| | 3,416,703 |
| | 604,722 |
| | 559,987 |
| | 1,078,282 |
|
| Dilutive effect of stock compensation plans | 92,338 |
| | — |
| 3,297,329 |
| | — |
| | — |
| | 331,206 |
| | 686,268 |
| | 1,768,169 |
|
| Diluted weighted average shares outstanding | 50,052,887 |
| | 135,963,975 |
| 104,803,633 |
| | 87,703,973 |
| | 3,416,703 |
| | 935,928 |
| | 1,246,255 |
| | 2,846,451 |
|
| | | | | | | | | | | | | | | |
Earnings per share1 | | | | | | | | | | | | | | |
| Basic | $ | 2.18 |
| | $ | 2.18 |
| $ | 5.05 |
| | $ | 5.05 |
| | $ | 5.05 |
| | $ | 5.05 |
| | $ | 5.05 |
| | $ | 5.05 |
|
| Diluted | $ | 2.17 |
| | $ | 2.18 |
| $ | 5.00 |
| | $ | 5.05 |
| | $ | 5.05 |
| | $ | 3.26 |
| | $ | 2.27 |
| | $ | 1.91 |
|
| | | | | | | | | | | | | | | |
1 Calculated using whole figures. | 1 Calculated using whole figures. | | | 1 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 dodid not become eligible to participate in dividends until a return of investment (ROI) condition hashad 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. The ROI conditions were subsequently met for Class M-2 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.
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 calculations for Class A shares excluded the following shares, restricted stock units (RSUs) and options:
| | | | Three months ended September 30, | | Nine months ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Antidilutive shares, RSUs and options excluded from diluted EPS calculation | 79,931,099 |
| | 135,963,975 |
| | 73,016,963 |
| | 135,963,975 |
| 34,908,644 |
| | 79,931,099 |
| | 34,908,644 |
| | 73,016,963 |
|
| Shares, RSUs and options excluded from diluted EPS calculation as a performance condition had not been met | 187,046 |
| | — |
| | 1,425,926 |
| | — |
| 176,935 |
| | 187,046 |
| | 176,935 |
| | 1,425,926 |
|
| Shares, RSUs and options excluded from diluted EPS calculation as issuance restrictions had not been satisfied as of the end of the period | — |
| | 12,720,694 |
| | — |
| | 12,720,694 |
| |
| Total Shares, RSUs and options excluded from diluted EPS calculation | 80,118,145 |
| | 148,684,669 |
| | 74,442,889 |
| | 148,684,669 |
| |
| Total shares, RSUs and options excluded from diluted EPS calculation | | 35,085,579 |
| | 80,118,145 |
| | 35,085,579 |
| | 74,442,889 |
|
| | | | | | | | | | | | | | | |
Note: Shares, RSUs and options are as of period end. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
10. 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) | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
| AFS securities | $ | 2,428 |
| | $ | 972 |
| $ | 148 |
| | $ | 2,577 |
|
| DAC, DSI, VOBA, future policy benefits and dividends payable to policyholders adjustments on AFS securities | (692 | ) | | (408 | ) | (39 | ) | | (744 | ) |
| Noncredit component of OTTI losses on AFS securities | (15 | ) | | (17 | ) | (17 | ) | | (13 | ) |
| Hedging instruments | (59 | ) | | 10 |
| (43 | ) | | (95 | ) |
| Pension adjustments | (4 | ) | | (4 | ) | (2 | ) | | (5 | ) |
| Foreign currency translation adjustments | 2 |
| | (12 | ) | (2 | ) | | 8 |
|
| Accumulated other comprehensive income, before taxes | 1,660 |
| | 541 |
| 45 |
| | 1,728 |
|
| Deferred income tax liability | (498 | ) | | (174 | ) | |
| Deferred income taxes | | (2 | ) | | (313 | ) |
| Accumulated other comprehensive income | $ | 1,162 |
| | $ | 367 |
| $ | 43 |
| | $ | 1,415 |
|
Changes in AOCI are presented below:
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 |
| Unrealized investment gains (losses) on AFS securities | | | | | | | |
| Unrealized investment gains (losses) on AFS securities | $ | (174 | ) | | $ | 249 |
| | $ | (2,345 | ) | | $ | 1,500 |
|
| Change in DAC, DSI, VOBA, future policy benefits and dividends payable to policyholders adjustment | 77 |
| | (61 | ) | | 701 |
| | (284 | ) |
Less: Reclassification adjustment for gains (losses) realized in net income1 | 6 |
| | 17 |
| | 36 |
| | 44 |
|
| Less: Income tax expense (benefit) | (18 | ) | | 55 |
| | (319 | ) | | 347 |
|
| Net unrealized investment gains (losses) on AFS securities | (85 | ) | | 116 |
| | (1,361 | ) | | 825 |
|
| Noncredit component of OTTI losses on AFS securities | | | | | | | |
| Noncredit component of OTTI losses on AFS securities | (4 | ) | | (7 | ) | | (4 | ) | | (5 | ) |
Less: Reclassification adjustment for losses realized in net income1 | — |
| | (9 | ) | | — |
| | (7 | ) |
| Less: Income tax expense (benefit) | (1 | ) | | 1 |
| | (1 | ) | | 1 |
|
| Net noncredit component of OTTI losses on AFS securities | (3 | ) | | 1 |
| | (3 | ) | | 1 |
|
| Unrealized gains (losses) on hedging instruments | | | | | | | |
| Unrealized gains (losses) on hedging instruments | 7 |
| | (31 | ) | | 52 |
| | (69 | ) |
| Less: Income tax expense (benefit) | 2 |
| | (11 | ) | | 11 |
| | (24 | ) |
| Net unrealized gains (losses) on hedging instruments | 5 |
| | (20 | ) | | 41 |
| | (45 | ) |
| Pension adjustments | — |
| | 1 |
| | 3 |
| | — |
|
| Foreign currency translation adjustments | — |
| | 4 |
| | (10 | ) | | 14 |
|
| Change in AOCI from other comprehensive income (loss) | (83 | ) | | 102 |
| | (1,330 | ) | | 795 |
|
| Adoption of ASU 2016-01 | — |
| | — |
| | (42 | ) | | — |
|
| Change in AOCI | $ | (83 | ) | | $ | 102 |
| | $ | (1,372 | ) | | $ | 795 |
|
| | | | | | | | |
1 Recognized in investment related gains (losses) on the condensed consolidated statements of income. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Changes in AOCI are presented below:
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 |
| Unrealized investment gains (losses) on AFS securities | | | | | | | |
| Unrealized investment gains (losses) on AFS securities | $ | 249 |
| | $ | 800 |
| | $ | 1,500 |
| | $ | 2,674 |
|
| Change in DAC, DSI, VOBA, future policy benefits and dividends payable to policyholders adjustment | (61 | ) | | (294 | ) | | (284 | ) | | (970 | ) |
Less: Reclassification adjustment for gains (losses) realized in net income1 | 17 |
| | 7 |
| | 44 |
| | (1 | ) |
| Less: Income tax expense | 55 |
| | 144 |
| | 347 |
| | 537 |
|
| Net unrealized investment gains (losses) on AFS securities | 116 |
| | 355 |
| | 825 |
| | 1,168 |
|
| Noncredit component of OTTI losses on AFS securities | | | | | | | |
| Noncredit component of OTTI losses on AFS securities | (7 | ) | | (1 | ) | | (5 | ) | | (11 | ) |
Less: Reclassification adjustment for losses realized in net income1 | (9 | ) | | — |
| | (7 | ) | | (7 | ) |
| Less: Income tax expense (benefit) | 1 |
| | (1 | ) | | 1 |
| | (2 | ) |
| Net noncredit component of OTTI losses on AFS securities | 1 |
| | — |
| | 1 |
| | (2 | ) |
| Unrealized gains (losses) on hedging instruments | | | | | | | |
| Unrealized gains (losses) on hedging instruments | (31 | ) | | (6 | ) | | (69 | ) | | (13 | ) |
| Less: Income tax benefit | (11 | ) | | (1 | ) | | (24 | ) | | (4 | ) |
| Net unrealized gains (losses) on hedging instruments | (20 | ) | | (5 | ) | | (45 | ) | | (9 | ) |
| Pension adjustments | 1 |
| | — |
| | — |
| | (1 | ) |
| Foreign currency translation adjustments | 4 |
| | 1 |
| | 14 |
| | 1 |
|
| Change in AOCI | $ | 102 |
| | $ | 351 |
| | $ | 795 |
| | $ | 1,157 |
|
| | | | | | | | |
1 Recognized in investment related gains (losses) on the condensed consolidated statements of income. |
11. Income Taxes
Our effective tax rates were 7%9% and (232)%7% for the three months ended September 30, 20172018 and 20162017, respectively, and 5%14% and (22)%5% for the nine months ended September 30, 20172018, and 20162017, respectively. Our effective tax rates may vary period-to-periodperiod to period depending upon the relationship of income and loss subject to tax compared to consolidated income and loss before income taxes. Our prior period effectiveWith 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 rates reflectrate declined to 21% from 35%; however, the significant effect of releasing $102 million of deferred tax valuation allowance. During the third quarter of 2016, we identifiedBase Erosion and Anti-Abuse Tax (BEAT) was established, which may subject payments to our non-U.S. reinsurance subsidiaries to a tax plan that, when implemented, will allow usof 5%, which would increase to use a significant portion10% in 2019. The income tax expense for the three and nine months ended September 30, 2018 reflects the impact of the U.S. non-life insurance companies’ net operating losses, which are scheduled to expire beginning in 2022,restructuring of our internal modco arrangements and other deductible temporary differences. As a result, we released the corresponding deferred tax valuation allowanceimplementing additional reinsurance arrangements common in the third quarter of 2016, as it is more likely than not that these attributes will be realized.insurance industry.
The Internal Revenue Service is currently auditing the 2013 consolidated tax return filed by Athene USA, Corporation, and recently initiatedis also conducting a limited scope audit of the 2015 consolidated tax return filed by Athene Annuity & Life Assurance Company.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 13 – Commitments and Contingencies.
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.
12. 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 September 30, 2017,2018, AAM directly managed $59,315$81,817 million of our investment portfolio assets, of which 89%85% are designated one or two (the two highest designations) by the National Association of Insurance Commissioners (NAIC).
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the services it renders, AAM earns a fee on all assets managed in accounts owned by or related to us, including sub-advised assets, but excluding assets of ADKG andsubject to certain other limited exceptions. Additionally, AAM recharges the sub-advisory fees it incurs with respect to our sub-advised assets to us. Historically, AAM generally earned an annual fee of 0.40% of assets under management. In the second quarter of 2017, following shareholder approval of an amendment to our bye-laws, we entered into the Fifth Amended and Restated Fee Agreement (Revised Fee Agreement), retroactive to January 1, 2017. The Revised Fee Agreement amended certain fee arrangements we previously had in place with AAM to provide for, among other things, an annual fee of 0.30% (reduced from 0.40%) 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 AAM on the first $65,846 million of assets in the North American Accounts remains 0.40% per year, subject to certain discounts and exceptions.
For 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 to 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) | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
| Fixed maturity securities | | | | | | |
| U.S. state, municipal and political subdivisions | $ | — |
| | $ | 5 |
| |
| AFS securities | | | | |
| Foreign governments | 153 |
| | 149 |
| $ | 173 |
| | $ | 152 |
|
| Corporate | 2,648 |
| | 2,032 |
| 3,409 |
| | 2,934 |
|
| CLO | 5,021 |
| | 4,727 |
| 5,636 |
| | 5,166 |
|
| ABS | 803 |
| | 911 |
| 652 |
| | 681 |
|
| CMBS | 869 |
| | 975 |
| 874 |
| | 872 |
|
| Trading securities | | 103 |
| | 121 |
|
| Mortgage loans | 2,284 |
| | 1,767 |
| 3,202 |
| | 2,232 |
|
| Investment funds | 25 |
| | 23 |
| 28 |
| | 26 |
|
| Trading securities | 119 |
| | 126 |
| |
| Funds withheld at interest | 1,762 |
| | 1,682 |
| 2,720 |
| | 1,737 |
|
| Other investments | 77 |
| | 81 |
| 72 |
| | 75 |
|
| Total assets sub-advised by Apollo affiliates | $ | 13,761 |
| | $ | 12,478 |
| $ | 16,869 |
| | $ | 13,996 |
|
| Percent of assets sub-advised by Apollo affiliates to total AAM-managed assets | 19 | % | | 19 | % | 17 | % | | 18 | % |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
During the second quarter of 2017, AAM and certain other Apollo affiliates entered into addendums to the MSAAs currently in 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 addendums were retroactive to January 1, 2017.
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 September 30, 2017 and December 31, 2016, the German special investment funds totaled $1,050 million and $258 million, respectively, and the ACE fund totaled $96 million and $84 million, respectively. The fees incurred for management of these funds are included in sub-advisory fees in the table below.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following represents the assets sub-advised by AAME:
|
| | | | | | | |
| (In millions) | September 30, 2017 | | December 31, 2016 |
| Fixed maturity securities | | | |
| Foreign governments | $ | 2,095 |
| | $ | 2,062 |
|
| Corporate | 1,216 |
| | 1,567 |
|
| Equity securities | 53 |
| | 187 |
|
| Investment funds | 38 |
| | 34 |
|
| Policy loans | 6 |
| | 6 |
|
| Real estate | 621 |
| | 541 |
|
| Other investments | 169 |
| | 153 |
|
| Cash and cash equivalents | 31 |
| | 25 |
|
| Total assets sub-advised by AAME | $ | 4,229 |
| | $ | 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 September 30, | | Nine months ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Asset management fees | $ | 67 |
| | $ | 61 |
| | $ | 193 |
| | $ | 176 |
| $ | 73 |
| | $ | 67 |
| | $ | 215 |
| | $ | 193 |
|
| Sub-advisory fees | 14 |
| | 12 |
| | 42 |
| | 50 |
| 15 |
| | 14 |
| | 42 |
| | 42 |
|
The management and sub-advisory fees are included within net investment income on the condensed consolidated statements of income. As of September 30, 20172018 and December 31, 2016,2017, the management fees payable was $34$39 million and $28 million, respectively, and the sub-advisory fees payable was $17$18 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 until October 31, 2018 or any annual anniversary thereafterof October 31 (each such date, an IMA (Investment Management Agreement) Termination Election Date) and any termination thereon requires the approval of two-thirds of our Independent Directors (as defined in the 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) 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 Apollo of such termination and such termination will be effective at the end of 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
A-A Mortgage – —We have an equity method investment in A-A Mortgage, which has an investment in AmeriHome Mortgage Company, LLC (AmeriHome). We have a loan purchase agreement with AmeriHome Mortgage Company, LLC (AmeriHome), an investee of A-A Mortgage, an equity method investee.AmeriHome. The agreement allows us to purchase residential mortgage loans which they haveAmeriHome has purchased from correspondent sellers and pooled for sale in the secondary market. AmeriHome retains the servicing rights to the sold loans. We purchased $21$511 million and $19$20 million of residential mortgage loans under this agreement during the three months ended September 30, 2018 and 2017, respectively. We purchased $722 million and $21 million of residential mortgage loans under this agreement during the nine months ended September 30, 2018 and 2017, respectively. Additionally, we have loans due from A-A Mortgage affiliates in the principal amount of $10 million and 2016, respectively.$52 million as of September 30, 2018and December 31, 2017, respectively, and these are included in related party short-term investments on the condensed consolidated balance sheets. We also have commitments to make additional equity investments in A-A Mortgage of $125 million as of September 30, 2018.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Athora –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 September 30, 2018, we had $169 million of funding agreements outstanding to Athora, which were issued to Athora prior to Closing.
VA Capital and Venerable Holdings, Inc. (Venerable)– In connection with the Voya reinsurance transactions, we made a$75 million minority equity investment in VA Capital, which is included in investments in related parties – investment funds on the condensed consolidated balance sheets and accounted for as an equity method investment. VA Capital is owned by a consortium of investors, led by affiliates of AGM, Crestview Partners and Reverence Capital Partners, and is the holding company of Venerable. Additionally, we provided Venerable with a $150 million, 15-year term loan, which is held at amortized cost and included in investment in related parties – other investments on the condensed consolidated balance sheets. It has a stated interest rate of 6.257%, which represents a below-market interest rate and management considered such rate as part of its evaluation and pricing of the Voya reinsurance transactions. Venerable is the holding company of VIAC.
Strategic Partnership – On October 24, 2018, we entered into an agreement pursuant to which we may invest up to $2.5 billion over three years in funds managed by Apollo entities (the “Strategic Partnership”). This arrangement is intended to permit us to invest across the Apollo alternatives platform into credit-oriented, strategic and other alternative investments in a manner and size that is consistent with our existing investment strategy. Fees for such investments payable by us to Apollo would be more favorable to us than market rates, and consistent with our existing alternative investments, investments made under the Strategic Partnership require approval of AAM and remain subject to our existing governance processes, including approval by our conflicts committee where applicable.
13. Commitments and Contingencies
Contingent Commitments—We had commitments to make investments, primarily capital contributions to investment funds exclusiveand inclusive of AGERrelated party commitments, as discussed below, of $1,761$3,123 million and $962$2,358 million as of September 30, 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.
On April 14, 2017 (Subscription Date), in connection with a private offering, AGER 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 approximated our invested capital in the AGER Group on the Subscription Date. 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.
On August 9, 2017, our Bermuda subsidiaries, AGER and NewRe Life Re Ltd. (NewRe) entered into a stock purchase agreement with Aegon Ireland Holding B.V. and Aegon Europe Holding B.V., pursuant to which NewRe agreed to purchase all of the outstanding stock of Aegon Ireland plc. Prior to the closing of the transaction, which is expected in the first quarter of 2018, subject to regulatory approvals and other customary closing conditions, AGER expects to call capital from its investors, which is expected to 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, causing the AGER Group to thereafter be held by us as an investment rather than as a consolidated subsidiary.
The valuation of the AGER Group was fixed at approximately €90 million as of the Subscription Date, and is unaffected by any profit or loss or other increase or decrease in value of the AGER Group during the period between the Subscription Date and the date on which the AGER Group is deconsolidated. As a result, to the extent that our invested capital and/or the fair value of the AGER Group increases or decreases during such time period, we may incur a gain or loss upon deconsolidation.
Funding Agreements—We are a member of the Federal Home Loan Bank (FHLB) of Indianapolis and Des MoinesFHLB and, through membership, we have issued funding agreements to the FHLB in exchange for cash advances. As of September 30, 20172018 and December 31, 2016,2017, we had $623$701 million and $691$573 million, respectively, of funding agreements outstanding with the 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$10 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 outstanding under this program had a carrying value of $2,996 million and $246 million as of September 30, 20172018 and December 31, 2016, respectively.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) | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
| Fixed maturity securities | | | | |
| AFS securities | | | | $ | 4,929 |
| | $ | 1,572 |
|
| Fixed maturity | $ | 1,479 |
| | $ | 1,535 |
| |
| Equity | 38 |
| | 40 |
| |
| Trading securities | | 51 |
| | — |
|
| Equity securities | | 2 |
| | 36 |
|
| Mortgage loans | | 1,106 |
| | 914 |
|
| Investment funds | 22 |
| | 25 |
| 31 |
| | 20 |
|
| Mortgage loans | 798 |
| | 1,003 |
| |
| Short-term investments | 13 |
| | 15 |
| 68 |
| | 10 |
|
| Other investments | | 38 |
| | — |
|
| Restricted cash | 100 |
| | 57 |
| 218 |
| | 105 |
|
| Total restricted assets | $ | 2,450 |
| | $ | 2,675 |
| $ | 6,443 |
| | $ | 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
Contents
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements(Unaudited)
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 for the Northern District of California against us. The complaint, which was similar to complaints recently filed against other large insurance companies, primarily alleged that captive reinsurance and other transactions had the effect of misrepresenting the financial condition of Athene Annuity and Life Company (AAIA). The complaint purported 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 were also various allegations related to the purchase of Aviva USA and concerning entry into a modco transaction with ALRe in October 2013. The suit asserted claims of violation of the Racketeer Influenced and Corrupt Organizations Act and sought 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 for the 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 the amended complaint on June 30, 2016. On May 11, 2017, the putative class action complaint filed by Don Hudson, on behalf of himself and others similarly situated, against us was dismissed in a written decision by the S.D. IA Court. Plaintiff did not appeal the district court’s decision and this matter is concluded.
Griffiths Matter – 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, AAIAAthene Annuity and Life Company (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 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 (collectively, the Aviva Entities) or their predecessors, as applicable, delivered to purchasers on or after April 1, 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 the CMA, which was alleged to be a source of great financial strength. The complaint further alleges that the Aviva Entities used the 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 CMA terminated. According to the complaint, no notice of this termination was provided to the owners of the structured settlement annuities. 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 wideclass-wide basis. On October 23, 2018, the court granted final approval of the settlement. Terms of the settlement which is subject to court approval, include: (1) AHL entering into a capital maintenance agreement with Athene London requiring AHL to provide capital to Athene London upon a missed structured settlement payment that is not timely cured and (2) AHL paying a monetary amount that is immaterial to us. The case against AHL has been stayed in totality and the case has been stayed against co-defendant Aviva until November 27, 2017 while the parties engage in a magistrate settlement conference.
The 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 is 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.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial StatementsCorporate-owned Life Insurance (COLI) Matter (Unaudited)
– 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 September 30, 2017,2018, had an asset value of $344$366 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, which the defendants have moved to dismiss. The Court set the hearing for February 13, 2019. If the supplement is ultimately deemed to be effective, the purported changes to the policies could impair AAIA’s ability to access the value of guarantees associated with the policies. The value of the guarantees included within the asset value reflected above is $164$176 million as of September 30, 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)
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. The life insurance policies included in this block have been and are currently being administered by AllianceOne Inc. (AllianceOne), a subsidiary of DXC Technology Company, which was retained by such Global Atlantic affiliates to provide services on such policies. AllianceOne also administers certain annuity policies that were on Aviva USA’s legacy policy administration systems that were also converted in connection with the acquisition of Aviva USA and have experienced similar service and administration issues.
As a result of the difficulties experienced with respect to the administration of such policies, we have received notifications from several state regulators, including but not limited to the New York State Department of Financial Services (NYSDFS), the California Department of Insurance (CDI) and the Texas Department of Insurance, indicating, in each case, that the respective regulator planned to undertake a market conduct examination or enforcement proceeding of the applicable U.S. insurance subsidiary relating to the treatment of policyholders subject to our reinsurance agreements with affiliates of Global Atlantic and the conversion of such annuity policies, including the administration of such blocks by AllianceOne. On June 28, 2018 we entered into a consent order with the NYSDFS resolving that matter in a manner that, when considering the indemnification received from affiliates of Global Atlantic, did not have a material impact 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. In addition to the examinations and proceedings initiated to date, it is possible that other regulators may pursue similar formal examinations, inquiries or enforcement proceedings and that any examinations, inquiries and/or enforcement proceedings may result in fines, administrative penalties and payments to policyholders. While we do not expect the amount of any such fines, penalties or payments arising from these matters to be material to our financial condition, results of operations or cash flows, it is possible that such amounts could be material.
Pursuant to the terms of the reinsurance agreements between us and the relevant affiliates of Global Atlantic, the applicable affiliates of Global Atlantic have financial responsibility for the ceded life block and are subject to significant administrative service requirements, including compliance with applicable law. The agreements also provide for indemnification to us, including for administration issues.
Caldera Matters – On May 3, 2018, AHL filed a writ commencing litigation in the Supreme Court of Bermuda against a former officer of AHL, a former director of AHL (who is also considered a former officer pursuant to Bermuda law), and Caldera Holdings, Ltd. (Caldera). AHL alleges in the writ, among other things, that the defendants breached various duties owed to AHL under Bermuda law by using AHL’s confidential information in their attempted acquisition of a company referred to in the litigation as Company A. AHL is seeking injunctive relief and damages.
On May 3, 2018, following AHL’s filing of the writ in Bermuda described above, Caldera, Caldera Life Reinsurance Company, and Caldera Shareholder, L.P., commenced an action in the Supreme Court of the State of New York, County of New York, by filing a Summons with Notice against AHL, Apollo, certain affiliates of Apollo and Leon Black, a founder of Apollo. On July 12, 2018, plaintiffs filed a complaint alleging claims for tortious interference with prospective business relations, defamation, and unfair competition related to plaintiffs’ attempt to purchase Company A and seeking alleged damages of “no less than $1.5 billion.” AHL intends to, among other things, move to dismiss the complaint against it. We believe we have meritorious defenses to the claims and intend to vigorously defend the litigation. In light of the inherent uncertainties involved in this matter, reasonably possible losses, if any, cannot be estimated at this time.
14. 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.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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.
OperatingAdjusted 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.
The table below reconciles segment adjusted operating revenues to total revenues presented on the condensed consolidated statements of income:
| | | | Three months ended September 30, | | Nine months ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Operating revenue by segment | | | | | | | | |
| Retirement Services | $ | 936 |
| | $ | 876 |
| | $ | 3,078 |
| | $ | 2,464 |
| $ | 1,776 |
| | $ | 936 |
| | $ | 4,901 |
| | $ | 3,078 |
|
| Corporate and Other | 94 |
| | 69 |
| | 265 |
| | 166 |
| 18 |
| | 94 |
| | 71 |
| | 265 |
|
| Total segment operating revenues | 1,030 |
| | 945 |
| | 3,343 |
| | 2,630 |
| |
| Non-operating adjustments | | | | | | | | | | | | | | |
| Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets | 379 |
| | 200 |
| | 1,181 |
| | 100 |
| 884 |
| | 379 |
| | 823 |
| | 1,181 |
|
| Investment gains (losses), net of offsets | 63 |
| | 121 |
| | 326 |
| | 293 |
| (82 | ) | | 63 |
| | (337 | ) | | 326 |
|
| VIE expenses and noncontrolling interest | — |
| | 4 |
| | — |
| | 13 |
| (1 | ) | | — |
| | 1 |
| | — |
|
| Other adjustments to revenues | 1 |
| | 2 |
| | 5 |
| | 3 |
| (7 | ) | | 1 |
| | (63 | ) | | 5 |
|
| Total non-operating adjustments | 443 |
| | 327 |
| | 1,512 |
| | 409 |
| |
| Total revenues | $ | 1,473 |
| | $ | 1,272 |
| | $ | 4,855 |
| | $ | 3,039 |
| $ | 2,588 |
| | $ | 1,473 |
| | $ | 5,396 |
| | $ | 4,855 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 the long-term incentive plan (LTIP); and
Income tax (expense) benefit – non-operating.
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 September 30, | | Nine months ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Operating income, net of tax by segment | | | | | | | | |
| Retirement Services | $ | 244 |
| | $ | 142 |
| | $ | 786 |
| | $ | 535 |
| $ | 389 |
| | $ | 244 |
| | $ | 913 |
| | $ | 786 |
|
| Corporate and other | (13 | ) | | (25 | ) | | (9 | ) | | (87 | ) | |
| Total segment operating income, net of tax | 231 |
| | 117 |
| | 777 |
| | 448 |
| |
| Corporate and Other | | (8 | ) | | (13 | ) | | (5 | ) | | (9 | ) |
| Non-operating adjustments | | | | | | | | | | | | | | |
| Investment gains (losses), net of offsets | 25 |
| | 58 |
| | 140 |
| | 98 |
| (48 | ) | | 25 |
| | (155 | ) | | 140 |
|
| Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets | 46 |
| | (1 | ) | | 155 |
| | (88 | ) | 380 |
| | 46 |
| | 550 |
| | 155 |
|
| Integration, restructuring and other non-operating expenses | (14 | ) | | (2 | ) | | (34 | ) | | (8 | ) | (2 | ) | | (14 | ) | | (18 | ) | | (34 | ) |
| Stock-based compensation, excluding LTIP | (7 | ) | | (46 | ) | | (30 | ) | | (59 | ) | (3 | ) | | (7 | ) | | (8 | ) | | (30 | ) |
| Income tax (expense) benefit – non-operating | (7 | ) | | — |
| | (24 | ) | | 13 |
| (68 | ) | | (7 | ) | | (105 | ) | | (24 | ) |
| Total non-operating adjustments | 43 |
| | 9 |
| | 207 |
| | (44 | ) | |
| Net income available to Athene Holding Ltd. shareholders | $ | 274 |
| | $ | 126 |
| | $ | 984 |
| | $ | 404 |
| |
| Net income | | $ | 640 |
| | $ | 274 |
| | $ | 1,172 |
| | $ | 984 |
|
The following represents total assets by segment:
| | | (In millions) | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
| Total assets by segment | | | | | | |
| Retirement Services | $ | 88,034 |
| | $ | 79,298 |
| $ | 115,260 |
| | $ | 91,335 |
|
| Corporate and Other | 8,027 |
| | 7,401 |
| 2,944 |
| | 8,412 |
|
| Total assets | $ | 96,061 |
| | $ | 86,699 |
| $ | 118,204 |
| | $ | 99,747 |
|
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 qualityhigh-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 September 30, 2017, supported more than $241 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 September 30, 2017,2018, have an expected annual investment margin of 2-3% over the 8.29.1 year weighted-average life of our deferred annuities, which make up a substantial portion of our reserve liabilities. Even as we have grown to $81.2 billion in investments, including related parties, $78.8 billion in invested assets and total assets as of $96.1 billion asAs of September 30, 2017, we have continued to approach both sides2018, the weighted-average life of the balance sheet with an opportunistic mindset because we believe quickly identifyingall products, which includes deferred annuities, payout annuities, PRT obligations, funding agreements and capitalizing on market dislocations allows us to generate attractive, risk-adjusted returns 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.other products, was 9.7 years.
We are diligent in setting our return targets based on market conditions and risks inherent to ourin the products offeredwe offer and the acquisitions orand block reinsurance transactions.transactions we undertake. Generally, we target mid-teen returns for sources of organic growth and mid-teen or higher returns for sources of inorganic growth. However, 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 target more generally. Factors that we consider in establishing return targets for a given growth opportunity include, but are not limited to, the certainty of the return profile, the strategic nature of the opportunity, the size and scale of the opportunity, the alignment and fit of the opportunity with our existing business, the opportunity for risk diversification and the existence of increased opportunities for higher returns or growth. If market conditions or risks inherent toin a product or transaction create return profiles that are not acceptable to us, we generally will not sacrifice our profitability merely to 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 nine months ended September 30, 20172018 and the year ended December 31, 20162017 was 16.9%17.1% and 12.6%18.0%, respectively, and our consolidated annualized adjusted operating ROE excluding AOCI was 14.8%14.5% and 12.1%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 nine months ended September 30, 20172018 and the year ended the year ended December 31, 2016,2017, in our Retirement Services segment, we generated an annualized investment margin on deferred annuities of 2.86%2.70% and 2.76%2.82%, respectively, and an annualized adjusted operating ROE excluding AOCI of 21.3%19.6% and 18.5%22.5%, respectively. We currently maintain what we believe to be high capital ratios for our rating and, as of September 30, 2018, hold more than $1.5approximately $2.0 billion of excess capital, and view this excess as strategic capital available to reinvest into organic and inorganic growth opportunities.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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, we believe that we will benefit from several demographic 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 September 30, 2017) or MVAs (72% of our deferred annuity products, as of September 30, 2017), both of which increase persistency and protect our ability to meet our obligations to policyholders. Our organic channels, including retail, flow reinsurance and institutional products, provided deposits of $8.0 billion and $6.9 billion forin each of the nine months ended September 30, 20172018 and 2016, respectively.2017. Withdrawals on our deferred annuities, maturities of our funding agreements, and payments on payout annuities and pension risk benefit payments (collectively, liability outflows), in the aggregate, were $4.4$5.7 billion and $4.0$4.4 billion for the nine months ended September 30, 20172018 and 2016,2017, respectively. We believe that our improving credit profile, our current product lineofferings and product design capabilities andas well as our growing reputation as both a seasoned funding agreement issuer and a reliable PRT counterparty will continue to enable us to further penetrategrow our existing organic channels and allow us to source additional volumes of profitably underwritten liabilities in various market environments. Our inorganic channels, including acquisitions
Item 2. Management’s Discussion 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,Analysis of Financial Condition and expeditiously close transactions, which makes us a competitive counterparty for acquisition or block reinsurance transactions.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 $4.1$5.5 billion and $3.8$4.1 billion for the nine months ended September 30, 2018 and 2017, respectively. The increase in our retail channel was driven by significant growth in our bank channel and 2016, respectively.the addition of new bank partners, the rising rate environment and new product introductions. We aim to grow our retail channel in the United States by deepening our relationships with our approximately 67 IMOs70 independent marketing organizations (IMO) and approximately 34,000more than 41,000 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 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, while also allowing us to continue to expand our bank and access to new distribution channels, including small to mid-sized banks and regional broker-dealers.broker-dealer channels. We are implementing the necessary technology platform, hiring and training a specialized sales force, and have created products to capture new potential distribution opportunities. In our flow reinsurance channel, we target reinsurance business consistent with our preferred liability characteristics and, as such, flow reinsurance provides another opportunistic channel for us to source long-term liabilities with attractive crediting rates. We generated deposits through our flow reinsurance channel of $1.3 billion and $570 million and $3.1 billion for the nine months ended September 30, 2018 and 2017, and 2016, respectively. We believe the decreaseThe increase in our flow reinsurance has been impactedchannel was driven by the recent decline in overall MYGA volumes overaddition of new partners, new product launches by our partners and the last several months, reflective of tighter investment spreads, the recent stock market rally and expectations of higher interest rates.rising rate environment. As we continue to source additional reinsurance partners, we expect to further diversify our flow reinsurance channel and expect that our improving credit profile will help us attract additional reinsurance partners. InWithin our institutional channel, we generated deposits of $3.3$1.2 billion and $0 million$3.3 billion for the nine months ended September 30, 2018 and 2017, and 2016, respectively. Our ability to issueThe decrease in our institutional channel is driven by the unfavorable market conditions for funding agreements. We issued funding agreements namely those issued through our FABN program, has benefited from our public company status and improving credit profile, allowing us to generate deposits in the aggregate principal amount of $3.0 billion$425 million and $0 million3.0 billion for the nine months ended September 30, 2018 and 2017, respectively. During the nine months ended September 30, 2018, we closed four PRT transactions and 2016, respectively. In addition, growthissued group annuity contracts in our institutional channel was attributedthe aggregate amount of $796 million, compared to our entry into$327 million during the PRT market in 2017, during whichnine months ended September 30, 2017. Subsequent to quarter end, we closed our inauguralfifth PRT transaction pursuant to whichof the year and in connection with the closing, we issued a group annuity contract in the aggregate principal amount of approximately $320$800 million. Additionally, subsequent to quarter-end, we entered into two PRT agreements totaling approximately $1.0 billion of pension obligations. We expect to grow our institutional channel by continuing to engage in opportunistic issuances of funding agreements and by continuing to engage in PRT transactions.
Our inorganic channels, including acquisitions and block reinsurance, provided deposits of $19.1 billion for the nine months ended September 30, 2018. On June 1, 2018, we closed on the Voya reinsurance transaction pursuant to which we entered into coinsurance and modco agreements with VIAC and RLI to reinsure a block of fixed and fixed indexed annuities providing $19.1 billion of deposits. Our inorganic channels have contributed significantly to our growth, and we expect will continue to be important sources of profitable growth in the future. We believe our internal transactions team, with support from Apollo, has an industry-leading ability to source, underwrite and expeditiously close transactions. With our relationship with Apollo, we are a solutions provider with a proven track record to close transactions, which we believe makes us the ideal partner to insurance companies seeking to restructure their business.
Deconsolidation 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. To enhance the comparability of our September 30, 2018 and 2017 results, we highlight the financial results applicable to the deconsolidation of Athora where meaningful. As of and after 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, the imposition of tariffs or other barriers to international trade 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, which may widen credit spreads, 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 our desired risk profile, and other Asian economies, unemployment, the availabilityare desirable to 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 of 2016 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'sManagement’s Discussion and Analysis of Financial Condition and 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 increasing federal funds rates again in December 2015, December 2016 and March and JuneSeptember of 2017,2018, 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 may also rise and our investment income from floating rate investments would increase, while the value of our existing investments may decline. If prevailing interest rates were to decline, it is likely that the yield on our new investment purchases may decline and our investment income from floating rate investments would decrease, while the value of our existing investments may increase. We address interest rate risk through managing the duration of the liabilities we source with assets we acquire and through asset 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 $22.0$18.5 billion of floating rate investments, or approximately 28%18% of our total invested assets as of September 30, 2017.2018. The percentage of floating rate investments decreased from December 31, 2017 due to the investment portfolio received in the Voya reinsurance transaction having a lower proportion of floating rate investments and 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.
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 to the extent that we are unable to adequately reduce policyholder crediting rates due to policyholder guarantees in the form of minimum crediting rates or otherwise due to market conditions. As of September 30, 2017,2018, most of our products were fixed annuities with approximately 36%26% of our FIAs at the minimum guarantees and approximately 49%50% of our fixed rate annuities at the minimum crediting rates. As of September 30, 2017,2018, minimum guarantees on all of our deferred annuities, including those with crediting rates already at their minimum guarantees, were, on average, 8095 to 90105 basis points below the crediting rates on such deferred annuities, allowing us room to reduce rates before reaching the minimum guarantees. Our remaining liabilities are associated with immediate annuities, pension risk transfer obligations, funding agreements or life contracts for which we have little to no discretionary ability to change the rates of interest payable to the respective policyholder. A significant majority of our products have crediting rates that we may reset annually upon renewal, following the expiration of the current guaranteed period. While we have the contractual ability to lower these crediting rates to the guaranteed minimum levels, our willingness to do so may be limited by competitive pressures.
See Part I—Item 3. Quantitative and Qualitative Disclosures About Market Risks to this report and Part II—Item 7A. Quantitative and Qualitative Disclosures About Market Risks in our 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.
We believe that our strong presence in the FIA market and strength of our relationships with IMOs position us to effectively serve consumers' demand in the rapidly growing retirement savings market. We expect that our retail channel will continue to benefit from 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 our improving credit profile has enabled and will continue to enable us to increase penetration in our existing organic channels, such as flow reinsurance and funding agreements, while also helping us to increase our presence in the PRT market.
Competition
We operate in highly competitive markets. We face a variety of large and small industry participants, including diversified financial institutions and insurance and reinsurance companies. These companies compete in one form or another for the growing pool of retirement assets driven by a number of external factors such as the continued aging of the population and the reduction in safety nets provided by governments and private employers. In the markets in which we operate, scale and the ability to provide value-added services and build long-term relationships are important factors to compete effectively. We believe that our leading presence in the retirement market, diverse range of capabilities and broad distribution network uniquely position us to effectively serve consumers’ increasing demand for retirement solutions, particularly in the FIA market.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
According to LIMRA, total fixed annuity market sales in the United States were $56.7$60.9 billion for the six months ended June 30, 2018. LIMRA made adjustments to its fixed annuity sales estimate, and the updated total fixed annuity market sales in the United States were $55.6 billion for the six months ended June 30, 2017. The increase in fixed annuity market sales in 2018 compared to 2017 a 11.1% decrease from the same time period in 2016. This decrease was mainly driven by a decreasean increase in FIA products of $4.0 billion, or 14.2% over prior year, as well as an increase in traditional fixed rate deferred annuities of $3.1$0.7 billion, or 13.8%3.6% over prior year fixed rate deferred annuities, and a decrease in FIA products of $2.7 billion, or 8.5% over prior year FIAs.year. In the total fixed annuity market, for the six months ended June 30, 20172018 (the most recent period for which specific market share data is available), we were the 5th largest company based on sales with a 4.8%5.5% market share and $2.7$3.3 billion in sales. For the six months ended June 30, 2016,2017, our market share was 2.8%4.9% with sales of $1.8$2.7 billion.
FIAs arehave been one of the fastest growing annuity products, having grown from $27.3 billion in sales for the year ended December 31, 2005 to $60.9$55.0 billion in sales for the year ended December 31, 2016.2017. According to LIMRA data, for the six months ended June 30, 20172018 (the most recent period for which specific market share data is available), we were the 2nd largest provider of FIAs in terms of sales, and our market share for the same period was 8.4%9.1% with sales of $2.5$2.9 billion. For the six months ended June 30, 2016,2017, our market share was 5.0%8.8% with sales of $1.6$2.5 billion.
Regulatory Developments
DepartmentOn 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, 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 Labor5% 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 25–30% 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.
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 (gross basis). In light of this uncertainty, during the three months ended March 31, 2018, we restructured our affiliated modco arrangements to ensure that they would not be subject to the BEAT in the event that we do not receive guidance that the BEAT applies on a net basis, and during the three months ended September 30, 2018, we implemented additional reinsurance arrangements common in the insurance industry to further mitigate the potential effect on our results of operations should the BEAT apply on a gross basis. We currently expect that each of our effective tax rate and our overall tax rate, which includes the impacts of federal income tax, the BEAT and excise tax, will be between 9 and 10%, on average, over the near and medium term; however, we may experience significant fluctuations in these tax rates period-to-period, with certain periods falling outside of our expected range. Assuming that pre-tax income and adjusted operating income before tax are equal, the primary difference between our effective tax rate and our overall tax rate is the inclusion of excise taxes within the calculation of the overall tax rate. We currently expect excise taxes will be immaterial.
On April 6, 2016,The estimated future effective tax rate and overall tax rate presented above incorporates 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 U.S. Departmentaccuracy of Labor (DOL) issued a new regulation (fiduciary rule) more broadly definingour 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 1A. Risk Factors–Risks Relating to Taxation–The BEAT may significantly increase our tax liability and our efforts to mitigate 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 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 April 10, 2017 applicability date for the fiduciary rule was delayed to June 9, 2017 in response to a memorandum issued to the DOL by President Trump. In addition to delaying the applicability datecost of the fiduciary ruleBEAT may be unnecessary, inefficient, ineffective, or counterproductive, the DOL revised both exemptions, most notably allowing all annuity products, fixed, FIAs and variable annuities, to rely on an updated versioneach included in Part II of the prohibited transaction class exemption 84-24 from June 9, 2017 through January 1, 2018, at which time full implementation of the fiduciary rule is required. On August 9, 2017, the DOL submitted to the Office of Management and Budget a proposal to extend the January 1, 2018 full implementation date to July 1, 2019. In order for the extension to become effective, the proposal must be finalized and issued in the Federal Register before January 1, 2018. We cannot predict with any certainty the impact of the new fiduciary rule and exemptions, but the fiduciary rule 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 fiduciary rule could have an adverse effect on our ability to write new business. In addition, the NAIC has implemented a working group to update the current Suitability in Annuity Transactions Model Regulation to address the fiduciary standard and the SEC has indicated that it may propose rules creating a uniform standard of conduct applicable to broker-dealers and investment advisers. If either or both of these entities create rules or standards applicable to our business, it may affect the distribution of our products. Should the SEC or NAIC rules or standards, if adopted, not align with each other or the finalized fiduciary rule, the distribution of our products could be further complicated.this report.
Tax Reform
We continueRisk-based capital—In its meeting held on June 28, 2018, the NAIC Capital Adequacy Task Force approved updates to face material uncertainty regarding the substance and timing of tax reform. See Part II—Other Information—Item1A. Risk Factors—Risks RelatingRBC factors to Taxation—Changesreflect the change in the corporate income tax rate from 35% to 21% resulting from the Tax Act. The updates will be effective December 31, 2018. With the change in RBC factors, our RBC ratios, along with those of other fixed annuity writers and life insurers in general, are expected to decrease. If the changes were applied to our RBC ratios as of September 30, 2018, we estimate a minimal decrease to our onshore U.S. RBC ratio and approximately 10 to 12% decrease to our offshore ALRe RBC ratio. Our capital ratios under the various rating agency models applicable to us are not expected to be materially impacted by the change in tax law might adversely affect us orrate, and those models are an important consideration in determining the appropriate levels of capital to run our shareholders for further discussion regardingbusiness. 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 reform.rate.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
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. See Part II–Item 1A. Risk Factors–Risks Relating to Taxation for further information on how the Tax Act could impact us.
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 information that may enhance an investor'sinvestor’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 term 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 guaranteed livinglifetime withdrawal benefitsbenefit (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.
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 1-21–2 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.
Integration, Restructuring, and Other Non-operating Expenses—Integration, restructuring, and other non-operating expenses consist of restructuring 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Stock Compensation Expense—Stock 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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. Operating income, net of tax excluding notable items equals net income available to AHL's shareholders adjusted for non-operating adjustments and certain notable items in the period that facilitate the evaluation of our underlying profitability. Accordingly, we believe using these measuresa 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, and operating income, net of tax excluding notable items provideprovides a meaningful financial metricsmetric that helphelps investors understand our underlying results and profitability. Operating income, net of tax, andAdjusted operating income net of tax excluding notable items 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, in each case net of DAC, DSI, rider reserve and tax offsets. Adjusted ROE is calculated as adjusted net income, divided by average 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 average 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 isand 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’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, 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 capitalization, debt utilization, and debt capacity.
Retirement Services Net Investment Earned Rate, Cost of Crediting, and Investment Margin on Deferred Annuities, Other Liability Costs and Operating Expenses
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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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. 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 78%85% of our Retirement Services reserve liabilities as of September 30, 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’s Discussion and Analysis of Financial Condition and Results of Operations
Other liability costs include DAC, DSI and VOBA amortization, rider reserves, institutional costs, the cost of liabilities on products other than deferred annuities, premiums, product charges and other revenues. Along with our cost of crediting, other liability costs give a view of the total costs of our liabilities. We believe a measure like other liability costs is effective in analyzing the trends of our core business operations and profitability. While we believe other liability costs is a meaningful financial metric and enhances our understanding of the underlying profitability drivers of our business, it should not be used as a substitute for total benefits and expenses presented under GAAP.
Operating expenses excludes integration, restructuring and other non-operating expenses, stock compensation expense, interest expense and policy acquisition expenses. We believe a measure like operating expenses is effective in analyzing the trends of our core business operations and profitability. While we believe operating expenses is a meaningful financial metric and enhances our understanding of the underlying profitability drivers of our business, it should not be used as a substitute for policy and other operating expenses presented under GAAP.
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 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 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 to understand our business performance as it relates to deposits generated during a specific period of time. Our sales statistics include deposits for fixed rate annuities and FIAs and align with the LIMRA definition of all money paid into an individual annuity, including money paid into new contracts with initial purchase occurring in the specified period and existing contracts with initial purchase occurring prior to the specified period (excluding internal transfers).
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 September 30, | | Nine months ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| (In millions, except percentages) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Revenues | $ | 1,473 |
| | $ | 1,272 |
| | $ | 4,855 |
| | $ | 3,039 |
| $ | 2,588 |
| | $ | 1,473 |
| | $ | 5,396 |
| | $ | 4,855 |
|
| Benefits and expenses | 1,179 |
| | 1,234 |
| | 3,818 |
| | 2,708 |
| 1,882 |
| | 1,179 |
| | 4,033 |
| | 3,818 |
|
| Income before income taxes | 294 |
| | 38 |
| | 1,037 |
| | 331 |
| 706 |
| | 294 |
| | 1,363 |
| | 1,037 |
|
| Income tax expense (benefit) | 20 |
| | (88 | ) | | 53 |
| | (73 | ) | |
| Income tax expense | | 66 |
| | 20 |
| | 191 |
| | 53 |
|
| Net income | 274 |
| | 126 |
| | 984 |
| | 404 |
| $ | 640 |
| | $ | 274 |
| | $ | 1,172 |
| | $ | 984 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
| |
| Net income available to AHL shareholders | $ | 274 |
| | $ | 126 |
| | $ | 984 |
| | $ | 404 |
| |
| | | | | | | | | | | | | | | |
| Operating income, net of tax by segment | | | | | | | | |
| Retirement Services | $ | 244 |
| | $ | 142 |
| | $ | 786 |
| | $ | 535 |
| |
| Corporate and Other | (13 | ) | | (25 | ) | | (9 | ) | | (87 | ) | |
| Operating income, net of tax | 231 |
| | 117 |
| | 777 |
| | 448 |
| |
| Net income | | $ | 640 |
| | $ | 274 |
| | $ | 1,172 |
| | $ | 984 |
|
| Non-operating adjustments | | | | | | | | | | | | | | |
| Realized gains (losses) on sale of AFS securities | 29 |
| | 18 |
| | 64 |
| | 37 |
| 5 |
| | 29 |
| | 33 |
| | 64 |
|
| Unrealized, impairments, and other investment gains (losses) | (3 | ) | | (12 | ) | | (15 | ) | | (36 | ) | |
| Unrealized, impairments and other investment gains (losses) | | 11 |
| | (3 | ) | | 27 |
| | (15 | ) |
| Assumed modco and funds withheld reinsurance embedded derivatives | 20 |
| | 73 |
| | 153 |
| | 144 |
| (93 | ) | | 20 |
| | (300 | ) | | 153 |
|
| Offsets to investment gains (losses) | (21 | ) | | (21 | ) | | (62 | ) | | (47 | ) | 29 |
| | (21 | ) | | 85 |
| | (62 | ) |
| Investment gains (losses), net of offsets | 25 |
| | 58 |
| | 140 |
| | 98 |
| (48 | ) | | 25 |
| | (155 | ) | | 140 |
|
| Change in fair values of derivatives and embedded derivatives – FIAs, net of offsets | 46 |
| | (1 | ) | | 155 |
| | (88 | ) | 380 |
| | 46 |
| | 550 |
| | 155 |
|
| Integration, restructuring and other non-operating expenses | (14 | ) | | (2 | ) | | (34 | ) | | (8 | ) | (2 | ) | | (14 | ) | | (18 | ) | | (34 | ) |
| Stock compensation expense | (7 | ) | | (46 | ) | | (30 | ) | | (59 | ) | (3 | ) | | (7 | ) | | (8 | ) | | (30 | ) |
| Income tax (expense) benefit – non-operating | (7 | ) | | — |
| | (24 | ) | | 13 |
| (68 | ) | | (7 | ) | | (105 | ) | | (24 | ) |
| Total non-operating adjustments | 43 |
| | 9 |
| | 207 |
| | (44 | ) | |
| Net income available to AHL shareholders | $ | 274 |
| | $ | 126 |
| | $ | 984 |
| | $ | 404 |
| |
| Less: Total non-operating adjustments | | 259 |
| | 43 |
| | 264 |
| | 207 |
|
| Adjusted operating income | | $ | 381 |
| | $ | 231 |
| | $ | 908 |
| | $ | 777 |
|
| | | | | | | | | |
| Adjusted operating income by segment | | | | | | | | |
| Retirement Services | | $ | 389 |
| | $ | 244 |
| | $ | 913 |
| | $ | 786 |
|
| Corporate and Other | | (8 | ) | | (13 | ) | | (5 | ) | | (9 | ) |
| Adjusted operating income | | $ | 381 |
| | $ | 231 |
| | $ | 908 |
| | $ | 777 |
|
| | | | | | | | | | | | | | | |
| ROE | 13.0 | % | | 7.5 | % | | 16.9 | % | | 8.7 | % | 29.1 | % | | 13.0 | % | | 17.1 | % | | 16.9 | % |
| ROE excluding AOCI | 14.9 | % | | 8.4 | % | | 18.7 | % | | 9.2 | % | |
| Operating ROE excluding AOCI | 12.5 | % | | 7.9 | % | | 14.8 | % | | 10.2 | % | |
| Adjusted ROE | | 31.4 | % | | 14.6 | % | | 21.8 | % | | 17.1 | % |
| Adjusted operating ROE | | 17.5 | % | | 12.8 | % | | 14.5 | % | | 15.0 | % |
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 September 30, 2017 2018Compared to the Three Months Ended September 30, 20162017
In this section, references to 20172018 refer to the three months ended September 30, 2018 and references to 2017 refer to the three months ended September 30, 2017 and references to 2016 refer to the three months ended September 30, 2016..
Net Income Available to AHL Shareholders
Net income available to AHL shareholders increased by $148$366 million, or 117%134%, to $274 million for the three months ended September 30, 2017 from $126$640 million in the prior period.2018 from $274 million in 2017. ROE increased to 29.1% from 13.0% in 2017, and adjusted ROE excluding AOCI increased to 13.0% and 14.9%, respectively,31.4% from 7.5% and 8.4%14.6% in 2016, respectively.2017. The increase in net income available to AHL shareholders was driven by a $114 million increase in operating income, net of tax, a favorable net change in FIA derivatives and a favorable decrease$150 million increase in stock compensation expense,adjusted operating income, partially offset by an unfavorable change in investment gains related to the assumed reinsurance embedded derivative.derivative impacts. The net change in FIA derivatives was primarily driven by our annual unlocking of assumptions, the change in performance of the equity indices to which our FIA policies are linked and a favorable change in model and assumption impacts compared to 2017, and the prior year. The decreasefavorable increase in stock compensation expense was primarily due to the expense resulting from the accelerated vesting of shares in 2016. The change in the assumeddiscount rates. Assumed reinsurance embedded derivative impacts were unfavorable due to growth in the reinsurance block from the Voya reinsurance transaction, increases in U.S treasury rates, partially offset by credit spreads tightening more than prior year.
Our annual process of unlocking assumptions resulted in an increase in pre-tax income of $178 million, compared to a decrease of $33 million in 2017. Unlocking in the third quarter was driven by an increase of $191 million primarily related to more favorable credit spread tighteningFIA embedded derivatives net of offsets, partially offset by a decrease of $13 million in 2016.adjusted operating income attributable to DAC, DSI and VOBA amortization and rider reserves.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Adjusted Operating Income
Adjusted operating income increased by $150 million or 65%, to $381 million in 2018 from $231 million in the prior period. Adjusted operating ROE was 17.5%, up from 12.8% in 2017. The increase in adjusted operating income was primarily driven by an increase in investment income, a tax benefit in 2018 attributed to the implementation of additional reinsurance arrangements common in the industry and the deconsolidation of our German operations which had an operating loss of $17 million in 2017, partially offset by higher cost of crediting and other liability costs. The increase in investment income was driven by earnings from the Voya reinsurance transaction, invested asset growth and increased floating rate investment income which resulted from higher short-term interest rates. Cost of crediting was higher driven by block growth, including the addition of Voya liabilities, and an increase in option costs which increased the cost of hedging. Other liability costs increased driven by block growth, partially offset by favorable rider reserve and DAC amortization related to more favorable equity market performance compared to 2017 and favorable unlocking.
Our annual process of unlocking assumptions resulted in a decrease in pre-tax income of $33 million compared to a decrease of $171 million in 2016.
Operating Income, Net of Tax
Operating income, net of tax increased by $114 million, or 97%, to $231 million for the three months ended September 30, 2017 from $117 million in the prior period. Operating income, net of tax, excluding notable items was $254 million, an increase of $85 million, or 50%, over the prior year. Operating ROE excluding AOCI was 12.5%, up from 7.9% in the prior period. The increase in operating income, net of tax, excluding notable items was driven by higher investment income. Investment income increased due to growth in our Retirement Services invested assets of $6.4 billion and higher short-term interest rates resulting in increased floating rate investment income.
Notable items for the quarter included unlocking, out of period actuarial adjustments of $13 million and a $17 million loss from our German operation compared to a loss of $7 million in the prior year. Our annual unlocking of assumptions resulted in an increase to other liability costs of $20$13 million, compared to an increase of $158$20 million in prior year. The tax effect of these notable items for the quarter was $1 million compared to $11 million in the prior year. Additionally, in 2016 we recognized a $102 million deferred tax valuation allowance release.2017.
Our consolidated net investment earned rate was 4.45%4.52% in three months ended September 30, 2017,2018, an increase from 4.40%4.45% in the prior period,2017, primarily attributeddue to the strong performance fromin our fixed income and other investment portfolios. Our alternative investmentportfolio. Fixed and other net investment earned rate was 9.07%of 4.33% increased from 4.23% in three months ended September 30, 2017, a decrease from 9.56%driven by higher floating rate investment income in the prior period asquarter and the prior year benefited from higher credit fund income due to more favorable credit spread tightening which wasdeconsolidation of Germany, partially offset by decline inlower returns on assets from the market value of public equity positions in one of our funds in the prior year.Voya reinsurance transaction.
Revenues
Total revenue increased by $201 million$1.1 billion to $2.6 billion in 2018 from $1.5 billion in the three months ended September 30, 2017 from $1.3 billion in the prior period.. The increase was driven by favorable changesan increase in premiums, increase in investment related gains and losses, an increase inhigher net investment income and a favorable changean increase in VIE investment related gainsproduct charges.
Premiums increased by $459 million to $531 million in 2018 from $72 million in the prior period, driven by higher PRT premiums and losses.an increase in premium from flow reinsurance.
Investment related gains and losses increased by $93$350 million to $823 million in 2018 from $473 million in the three months ended September 30, 2017 from $380 million in the prior period,year, primarily due to the change in fair value of FIA hedging derivatives, partially offset by the change in assumed reinsurance embedded derivatives. The change in fair value of FIA hedging derivatives increased by $167$395 million 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 experienced a 4.0% increaseincreased 7.2% in 2017,2018 compared to an 3.3%increase of 4.0% in 2017. The change in assumed reinsurance embedded derivatives increased $19 million driven by an increase in 2016.the reinsurance block related to the Voya reinsurance transactions. The assumed reinsurance embedded derivatives are based on the change in the fair value of the underlying investments held in modco and funds withheld portfolios (see Note 3 - Derivative Instruments to the condensed consolidated financial statements) which decreased by $61 million drivenwere unfavorably impacted by the change in reinsurance embedded derivatives in the three months ended September 30, 2017, primarily dueunderlying assets related to the prior year benefiting from bothincrease in U.S. treasury rates, partially offset by credit spreads tightening and a decrease in U.S. treasury rates.more than the prior year.
Net investment income increased by $77$250 million to $1.1 billion in 2018 from $820 million in the three months ended September 30, 2017 from $743 million in the prior period,, primarily driven by an increase in fixed income and other 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, investment earnings from the Voya reinsurance transaction and higher floating rate investment income of $25 million due to higher short-term interest rates, resultingpartially offset by the deconsolidation of Germany in higher floating rate investment income.2018.
VIE investment related gains and lossesProduct charges increased by $33 million to $17$119 million in the three months ended September 30, 20172018 from $(16)$86 million in the prior period, primarily driven by losseshigher rider charges related to growth in the prior year resulting from a decline in market valueblock of public equity positions in onebusiness and charges related to the addition of our funds, partially offset by the prior year benefiting from higher credit fund income due to more favorable credit spread tightening.Voya liabilities.
Benefits and Expenses
Total benefits and expenses decreasedincreased by $55$703 million to $1.2$1.9 billion in the three months ended September 30, 20172018 from $1.2 billion in the prior period.2017. The decreaseincrease was driven by a decreasean increase in future policy benefits a decrease in DAC, DSI and VOBA amortization and lower policy and other operating expenses, offset by an increase in interest sensitive contract benefits.benefits, partially offset by a decrease in amortization of DAC and VOBA and a decrease in dividends to policyholders.
Future policy and other policy benefits decreasedincreased by $132$661 million to $920 million in 2018 from $259 million in the three months ended September 30, 2017 from $391 million in the prior period,, primarily attributable to a favorable changehigher PRT premiums, an increase in the rider reserves and a favorable changean increase in AmerUs Closed Block fair value liability.reserves from flow reinsurance, partially offset by $58 million related to the deconsolidation of our former German subsidiaries. The favorable changeincrease in rider reserves of $126 million was primarily driven by a decrease of $84 millionan increase related to our annual unlocking of assumptions andof $163 million, an unfavorable impact from higher than expected persistencyincrease related to the net change in the prior year, partially offset by theFIA derivatives and growth in the block, of business.partially offset by favorable equity market performance compared to 2017 resulting in increased index credits to policyholder accounts, which lowered the amount needed to fund the rider reserve. Unlocking in the third quarter2018 was unfavorable by $212 million related to impacts in lapse assumptions partially offset by utilization of certain rider benefits, while 2017 wasunlocking impacts were unfavorable $49 million related to impacts of the net investment earned rate and mortality assumptions.
Interest sensitive contract benefits increased by $120 million to $741 million in 2018 from $621 million in 2017, driven by an increase in FIA fair value embedded derivatives of $81 million and growth in the block of business. The increase in FIA fair value embedded derivatives was due to the performance of the equity indices to which our FIA policies are linked, partially offset by unlocking of assumptions while 2016 unlocking impact was unfavorable by $133 million. Theand a favorable change in discount rates used in our embedded derivative calculations as the AmerUs Closed Blockcurrent quarter experienced an increase in discount rates compared to 2017, which experienced a decrease in discount rates. The FIA fair value liabilityembedded derivatives were favorably impacted by $309 million related to our annual unlocking of $33 millionassumptions which was primarilymainly driven by higher earnings on the blockupdating lapse assumptions.
Contents
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
DAC, DSI, and VOBA amortization decreased by $40 million to $93$53 million for the three months ended September 30, 2017in 2018 from $133$93 million in the prior period,year, primarily attributabledue to the $54 million favorable change indecrease to our annual unlocking of assumptions of our DAC, DSI$66 million, favorable equity market performance compared to 2017 and VOBA assets,unfavorable investment related gains and losses, partially offset by growthan increase in the DAC asset balance related to block growth and an increase in the net change in FIA block increasing our DAC asset.derivatives. Unlocking in the third quarter of 20172018 was favorable $81 million related to impacts in lapse assumptions, while 2017 unlocking impacts were favorable $16 million primarily related to impacts of the net investment earned rate and mortality assumptions, while the 2016 unlocking impact was unfavorableassumptions.
Dividends to policyholders decreased by $38 million.
Policy and other operating expenses decreased by $22 million to $158$10 million in 2018 from $48 million in the prior year, primarily attributed to the deconsolidation of our former German subsidiaries.
Taxes
Income tax expense increased by $46 million to $66 million in 2018 from $20 million in 2017. With the enactment of the Tax Act, the U.S. statutory tax rate declined to 21% from 35%; 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 2019. The income tax expense for 2018 reflects the restructuring of our internal modco arrangements and implementation of additional reinsurance arrangements common in the insurance industry.
For the three months ended September 30, 20172018, income tax expense includes a $42 million income tax benefit resulting from $180the reversal of previously accrued taxes during the first six months of 2018, which was partially offset by $2 million in the prior period, primarily due toof excise tax expense. The reversal of previously accrued tax expense was triggered by a decrease in stock compensation expense of $39 millionrevised full year estimated tax provision driven by the expense resulting from the accelerated vesting of sharesimplementation, in the prior year, partially offset by higher integration, restructuring and other non-operating expenses mainly due to Germany restructuring costs.
Interest sensitive contract benefits increased by $130 million to $621 million in the three months ended September 30, 2017 from $491 million in the prior period, primarily due to the change in FIA fair value embedded derivatives. The change in FIA fair value embedded derivatives increased by $138 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 4.0% increase in 2017, compared to a 3.3% increase in the prior period. Additionally, a favorable change in model and assumption impacts compared to the prior year and growth in the FIA block attributed to the increase.
Taxes
Income tax expense increased by $108 million to $20 million in the three months ended September 30, 2017 from a benefit of $88 million in the prior period. The increase was primarily driven by a release of a deferred tax valuation allowance of $102 million in third quarter, of 2016 andadditional reinsurance arrangements common in the increase in income subjectinsurance industry. The additional reinsurance arrangements were retroactively effective to U.S. income taxes of $20 million, or approximately $7 million of tax based on a 35% U.S. statutory rate. During 2016, we identified a tax plan that, when implemented, will allow us to use a significant portion of the U.S. non-life insurance companies’ net operating losses, which are scheduled to expire beginning in 2022.January 1, 2018.
Our effective tax rates were 7%9% in three months ended September 30, 20172018 and (232)%7% in 2017. The effective tax rate excludes the prior period.impacts of an excise tax benefit of $3 million in 2018 and expense of $12 million in 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.
Nine Months Ended September 30, 20172018 Compared to the Nine Months Ended September 30, 20162017
In this section, references to 20172018 refer to the nine months ended September 30, 20172018 and references to 20162017 refer to the nine months ended September 30, 2016.2017.
Net Income Available to AHL Shareholders
Net income available to AHL shareholders increased by $580$188 million, or 144%19%, to $1.2 billion in 2018 from $984 million for the nine months ended September 30, 2017 from $404 million in the prior period.2017. ROE and ROE excluding AOCI increased to 17.1% from 16.9% in 2017 and 18.7%, respectively,adjusted ROE increased to 21.8% from 8.7% and 9.2%17.1% in 2016, respectively.2017. The increase in net income available to AHL shareholders was driven by a $329$131 million increase in adjusted operating income net of tax,and a favorable net change in FIA derivatives, partially offset by unfavorable assumed reinsurance embedded derivative impacts and favorable investment gain and losses.higher tax expense. The net change in FIA derivatives was primarily driven by a favorable increase in discount rates compared to 2017 and unlocking, partially offset by the change in performance of the equity indices to which our FIA policies are linked year-over-year changecompared to 2017. Assumed reinsurance embedded derivative impacts were unfavorable due to increases in discountU.S treasury rates and a favorable change in model and assumption impactscredit spreads widening compared to the prior year. Investment gains and lossesyear, which benefited from credit spreads tightening.
Our annual process of unlocking assumptions resulted in an increase in pre-tax income of $178 million, compared to a decrease of $33 million in 2017. Unlocking in the third quarter of 2018 was favorable primarily driven by the higher realized gains on the salean increase of securities$191 million primarily related to FIA embedded derivatives net of offsets, partially offset by a decrease of $13 million in adjusted operating income attributable to DAC, DSI and favorable change in derivativeVOBA amortization and foreign currency gains and losses.rider reserves.
Adjusted Operating Income Net of Tax
OperatingAdjusted operating income net of tax increased by $329$131 million, or 73%17%, to $777$908 million for the nine months ended September 30, 2017in 2018 from $448$777 million in the prior period. OperatingAdjusted operating ROE excluding AOCI was 14.8%14.5%, updown from 10.2%15.0% in the prior period.2017. The increase in adjusted operating income net of tax, was primarily driven by a strongan increase in investment income, and lowerpartially offset by an increase in cost of crediting, other liability costs. Additionally, in 2016 we recognized a $102 million deferredcosts, interest expense and tax valuation allowance release.expense. The increase in investment income was primarily due to invested asset growth, in our Retirement Services invested assets of $6.4 billion, higher short-term interest rates resulting in higherearnings from the Voya reinsurance transaction and increased floating rate investment income proceeds from a bond previously written down andrelated to higher alternative investment income, partially offset by lower bond call income. The increase in alternative investment income was primarily driven by higher income from our investment in AmeriHome, higher real estate income and a decline in the market value of public equity positions in one of our funds in the prior year, partially offset by lower credit fund income.short-term interest rates. Cost of crediting was higher driven by $40 millionblock growth, including the addition of Voya liabilities, and an increase in option costs which increased the cost of hedging. Other liability costs increased primarily due to growth in our deferred annuitythe block, including the addition of business which wasVoya liabilities, higher rider reserves and DAC amortization related to less favorable equity market performance compared to 2017, and favorable actuarial out of period adjustments in 2017, partially offset by recent rate actions and lower option costs. The lower other liability costs were primarily due to lower DAC, DSI, VOBA and rider reserves attributed to unlockingexcise taxes and favorable impacts relatedunlocking compared to improved equity market performance, partially offset by growth in the block of business and higher gross profits. 2017.
Our annual process of unlocking of assumptions resulted in an increase toin other liability costs of $20$13 million, compared to an increase of $158$20 million in prior year.2017.
Our consolidated net investment earned rate was 4.55% in the nine months ended September 30, 2017, an increase from 4.21% in the prior period, primarily attributed to strong performance from our fixed income and other investment portfolios and our alternative investment portfolio. Our alternative investment net investment earned rate was 9.92% in the nine months ended September 30, 2017, an increase from 5.51% in the prior period, primarily attributed to the strong performance
Contents
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Our consolidated net investment earned rate was 4.61% in 2018, an increase from 4.55% in 2017, primarily due to the performance in our fixed and other portfolio. Fixed and other net investment earned rate of 4.38% increased from 4.29% in 2017 driven by higher floating rate investment income in 2018 and the deconsolidation of Germany, partially offset by lower new money rates over the past year and lower returns on assets from the Voya reinsurance transaction.
Revenues
Total revenue increased by $1.9$541 million to $5.4 billion toin 2018 from $4.9 billion in the nine months ended September 30, 2017 from $3.0 billion in the prior period.2017. The increase was driven by favorable changes in investment related gains and losses, an increase in premiums, an increase inhigher net investment income and an increase in VIEproduct charges, partially offset by unfavorable changes in investment related gains and losses.
Premiums increased by $1.0 billion to $1.5 billion in 2018 from $503 million in the prior period, driven by the Voya reinsurance inception premiums attributed to payout annuities with life contingencies, higher PRT premium and an increase in premium from flow reinsurance, partially offset by the deconsolidation of Germany.
Net investment income increased by $456 million to $2.9 billion in 2018 from $2.4 billion in 2017, primarily driven by earnings from growth in our investment portfolio attributed to a strong increase in deposits over the prior twelve months, earnings from the Voya reinsurance transaction, higher floating rate investment income of $85 million due to higher short-term interest rates and higher income in one of our hedge funds, partially offset by the deconsolidation of our former German subsidiaries.
Product charges increased by $69 million to $321 million in 2018 from $252 million in the prior period, primarily driven by higher rider charges related to growth in the block of business and charges related to the addition of the Voya liabilities.
Investment related gains and losses increaseddecreased by $1.1$1.0 billion to $585 million in 2018 from $1.6 billion in the nine months ended September 30, 2017 from $523 million in the prior period, primarily due to the change in fair value of FIA hedging derivatives, the change in assumed reinsurance embedded derivatives higher realized gains on AFS securities and other derivative and foreign currencythe unfavorable change in unrealized gains and losses.losses on trading securities. The change in fair value of FIA hedging derivatives increaseddecreased by $1.0 billion driven $437 million 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 12.5%9.0% increase in 2017,2018, compared to an 6.1%12.5% increase in 20162017. The assumed reinsurance embedded derivatives increaseddecreased by $31$315 milliondriven by a change in the value of the underlying assets related to the increase in U.S. treasury rates and credit spreads widening compared to the prior year, which benefited from credit spreads tightening. Both of these drivers were magnified by growth in the reinsurance block partially offset byrelated to the prior year benefiting from both credit spreads tightening and a decrease in U.S. treasury rates.Voya transactions. The increase in investment gains and losses was partially offset by the change in unrealized gains and losses on trading securities which was comprised of an unfavorable decrease in AmerUs Closed Block assets of $77$147 million related to higher unrealized gains in the prior yearlosses due to the decreaseincrease in U.S. treasury rates rates.partially offset by $18 million of gains related to unit-linked investments.
Premiums increased by $298 million to $503 million in the nine months ended September 30, 2017 from $205 million in the prior period, driven by approximately $320 million of premiums from our inaugural PRT transaction.
Net investment income increased by $290 million to $2.4 billion in the nine months ended September 30, 2017 from $2.1 billion in the prior period, primarily driven by a strong 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, higher short-term interest rates resulting in higher floating rate investment income and proceeds on the recovery of a bond previously written down, partially offset by lower bond call income. The increase in alternative investment income was primarily due to the strong performance in AmeriHome, driven by increases in its overall balance sheet size, origination volumes and retained mortgage servicing rights, as well as an increase in real estate income.
VIE investment related gains and losses increased by $99 million to $29 million in the nine months ended September 30, 2017 from $(70) million in the prior period, primarily driven by losses in the prior year resulting from a decline in market value of public equity positions in one of our funds, partially offset by the prior year benefiting from a favorable increase in the fair value of certain underlying investments in three of our consolidated VIEs, reflecting the removal of liquidity discounts related to marketability assumptions used in the determination of the fair value of certain of the investments.
Benefits and Expenses
Total benefits and expenses increased by $1.1$215 million to $4.0 billion toin 2018 from $3.8 billion in the nine months ended September 30, 2017 from $2.7 billion in the prior period.2017. The increase was driven by an unfavorable change in interest sensitive contract benefits, an increase in future policy and other policy benefits, an increasepartially offset by a decrease in DAC, DSI and VOBA amortization, an increaseinterest sensitive contract benefits, a decrease in dividends payable to policyholders, and highera decrease to policy and other operating expenses.
Future policy and other policy benefits increased by $1.1 billion to $2.2 billion in 2018 from $1.1 billion in 2017, primarily attributable to the Voya reinsurance policyholder obligations at inception related to payout annuities with life contingencies, higher PRT obligations and an increase in rider reserves, partially offset by $167 million related to the deconsolidation of our former German subsidiaries and a decrease in the change in AmerUs Closed Block fair value liability. The increase in rider reserves of $256 million was primarily driven by an increase related to our annual unlocking of assumptions of $163 million, an increase related to the net change in FIA derivatives and growth in the block, partially offset by more favorable equity market performance in 2017. Unlocking in 2018 was unfavorable $212 million related to impacts in lapse assumptions partially offset by utilization of certain rider benefits, while 2017 unlocking impacts were unfavorable $49 million related to impacts of the net investment earned rate and mortality assumptions. The favorable change in the AmerUs Closed Block fair value liability of $164 million was primarily driven by the increase in unrealized losses on the underlying investments related to the increase in U.S. treasury rates.
Interest sensitive contract benefits increaseddecreased by $785$774 million to $1.1 billion in 2018 from $1.9 billion in the nine months ended September 30, 2017, from $1.1 billion in the prior period, primarily due to the change in FIA fair value embedded derivatives, and higher interest credited to policyholders related to strongpartially offset by growth in deposits.the block of business. The change in FIA fair value embedded derivatives increaseddecreased by $728$817 million primarily driven by a favorable change in discount rates used in our embedded derivative calculations as the current period experienced an increase in discount rates compared to 2017, which experienced a decrease in discount rates. The change was also attributed to the performance of the equity indices to which our FIA policies are linked, primarily the S&P 500 index, which experienced a 9.0% increase in 2018, compared to a 12.5% increase in 2017, compared to a 6.1% increase in the prior period.2017. Additionally, the FIA fair value embedded derivatives were favorably impacted by a favorable change in discount rates used in our embedded derivative calculations as the decrease in the prior year were more favorable than the decrease in 2017, as well as a favorable change in model and assumption impacts compared to the prior year.
Future policy and other policy benefits increased by $178$309 million to $1.1 billion in the nine months ended September 30, 2017 from $873 million in the prior period, primarily attributable to approximately $320 million of policyholder obligations from our inaugural PRT transaction, partially offset by a favorable change in AmerUs Closed Block fair value liability and a favorable change in the rider reserves. The favorable change in the AmerUs Closed Block fair value liability of $120 million was primarily driven by higher unrealized gains in the prior year primarily due to the decrease in U.S. treasury rates and earnings on the block of business. 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 favorable change in rider reserves of $65 million was primarily driven by a decrease related to our annual unlocking of assumptions which was mainly driven by updating lapse assumptions.
Dividends to policyholders decreased by $97 million to $32 million in 2018 from $129 million in the prior year, primarily attributed to the deconsolidation of $84our former German subsidiaries.
Policy and other operating expenses decreased by $26 million and favorable impactsto $453 million in 2018 from $479 million in the prior year, primarily driven by $53 million related to improved equity market performance compared to the prior period resulting in increased index credits to policyholder accounts, which lowered the amount needed to fund the rider reserve. The favorable change in rider reserves wasdeconsolidation of Germany and lower stock compensation expense of $22 million, partially offset by growth in the block of business, higher gross profits and an increasedebt costs related to the net changeour debt issuance in FIA derivatives. Unlocking in 2017 was unfavorable $49 million related to impactsJanuary 2018.
Contents
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
DAC, DSI, and VOBA amortization increaseddecreased by $64$16 million to $277 million in 2018 from $293 million in the nine months ended September 30, 2017 from $229 million in the prior period,year, primarily due to thea favorable net change in FIA derivativesdecrease to our annual unlocking of assumptions of $66 million and growthunfavorable investment related gains and losses, partially offset by an increase in the DAC asset balance related to block growth partially offset by $54 million favorableand an increase in the net change in unlocking of assumptions as well asFIA derivatives. Unlocking in 2018 was favorable impacts$81 million related to improved equity market performance. Unlockingimpacts in lapse assumptions, while 2017 wasunlocking impacts were favorable $16 million primarily related to impacts of the net investment earned rate and mortality assumptions, while the 2016 unlocking impacts were unfavorable by $38 million.
Dividends to policyholders increased by $64 million to $129 million in the nine months ended September 30, 2017 from $65 million in the prior period, primarily attributed to higher Germany dividends to policyholders due to a timing difference in the recognition of participating income under US GAAP compared to German GAAP.
Policy and other operating expenses increased by $32 million to $479 million in 2017 from $447 million in 2016, primarily attributed to higher integration, restructuring and other non-operating expenses mainly due to Germany restructuring costs, partially offset by lower stock compensation due to the expense resulting from the accelerated vesting of shares in the prior year. The remaining increase was primarily attributed to growing our business and expanding our distribution channels.assumptions.
Taxes
Income tax expense increased by $126$138 million to $191 million in 2018 from $53 million in nine months ended September 30, 20172017. With the enactment of the Tax Act, the U.S. statutory tax rate declined to 21% from 35%; however, the BEAT was established, which may subject payments to our non-U.S. reinsurance subsidiaries to a benefittax of $73 million5%, which would increase to 10% in 2019. The income tax expense for 2018 reflects the restructuring of our internal modco arrangements and implementation of additional reinsurance arrangements common in the prior period. The increase was primarily driven by a release of a deferred tax valuation allowance of $102 million in third quarter of 2016 and the increase in income subject to U.S. income taxes of $87 million, or approximately $31 million of tax based on a 35% U.S. statutory rate, partially offset by a Germany income tax benefit in 2017.insurance industry.
Our effective tax rates were 14% in 2018 and 5% in nine months ended September 30, 20172017. The effective tax rate excludes the impacts of an excise tax benefit of $3 million in 2018 and (22)%expense of $37 million in the prior period.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 September 30, | | Nine months ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| (In millions, except percentages) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Operating income, net of tax by segment | | | | | | | | |
| Adjusted operating income by segment | | | | | | | | |
| Retirement Services | $ | 244 |
| | $ | 142 |
| | $ | 786 |
| | $ | 535 |
| $ | 389 |
| | $ | 244 |
| | $ | 913 |
| | $ | 786 |
|
| Corporate and Other | (13 | ) | | (25 | ) | | (9 | ) | | (87 | ) | (8 | ) | | (13 | ) | | (5 | ) | | (9 | ) |
| Operating income, net of tax | $ | 231 |
| | $ | 117 |
| | $ | 777 |
| | $ | 448 |
| |
| Adjusted operating income | | $ | 381 |
| | $ | 231 |
| | $ | 908 |
| | $ | 777 |
|
| | | | | | | | | | | | | | | |
| Retirement Services operating ROE excluding AOCI | 18.5 | % | | 13.0 | % | | 21.3 | % | | 16.8 | % | |
| Retirement Services adjusted operating ROE | | 23.6 | % | | 19.1 | % | | 19.6 | % | | 21.8 | % |
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,multi-year guaranteed annuities (MYGA), 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 September 30, 20172018 Compared to the Three Months Ended September 30, 20162017
Operating Income, Net of Tax
Operating income, net of tax increased by $102 million, or 72%,In this section, references to $244 million in2018 refer to the three months ended September 30, 2018 and references to 2017 refer to the three months ended September 30, 2017 from $142.
Adjusted Operating Income
Adjusted operating income increased by $145 million, or 59%, to $389 million in the prior period. Operating income, net of tax, excluding notable items2018, from $244 million in 2017. Adjusted operating ROE was $250 million, an increase of $63 million, or 34%, over the prior year. Operating ROE excluding AOCI was 18.5%23.6%, up from 13.0%19.1% in the prior period. The increase in adjusted operating income net of tax excluding notable items was primarily driven by higher fixedan increase in net investment earnings and other investment income,a tax benefit in 2018 attributed to the implementation of additional reinsurance arrangements common in the industry, partially offset by lower alternative investment income.higher cost of crediting and other liability costs.
Net investment incomeearnings increased $57$297 million primarily driven by higher fixed income and other investment income, partially offset by lower alternative investment income. Fixed income and other investment income increased primarily attributed to earnings from the Voya reinsurance transaction, invested asset growth in invested assetsreflecting strong organic deposits, higher floating rate income of $6.4 billion and$25 million related to higher short-term interest rates, resultingand strong alternative performance reflecting strong performance from MidCap and AmeriHome.
Cost of crediting increased $127 million driven by block growth, including the addition of Voya liabilities, and an increase in higher floating rate investment income. Alternative investment income decreased primarilyoption costs due to higher volatility and short-term interest rates which increased the prior year benefiting from higher credit fund income due to more favorable credit spread tightening.cost of hedging.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Notable items forOther liability costs increased $33 million driven by block growth, including the quarter included unlockingaddition of Voya liabilities, partially offset by favorable rider reserve and out of period actuarial adjustments of $13 million. Our annual unlocking of assumptionsDAC amortization related to more favorable equity market performance resulting in a favorable $38 million impact in 2018 compared to a $20 million benefit in 2017, as well as favorable unlocking. Unlocking in 2018 resulted in an increase toin other liability costs of $20$13 million compared to an increase of $158$20 million in prior year. Unlocking in the third quarter2018 related to impacts in lapse assumptions partially offset by utilization of certain rider benefits, while 2017 related to impacts of the net investment earned rate and mortality assumptions, while 2016 related to a decrease in the projected net investment earned rates and lower projected lapse rate assumptions. The tax effect of these notable items for the quarter was $1 million compared to $11 million in the prior year. Additionally, in 2016 we recognized a $102 million deferred tax valuation allowance release.
Investment Margin on Deferred Annuities
| | | | Three months ended September 30, | Three months ended September 30, |
| | 2017 | | 2016 | 2018 | | 2017 |
| Net investment earned rate | 4.64 | % | | 4.75 | % | 4.55 | % | | 4.64 | % |
| Cost of crediting | 1.88 | % | | 1.96 | % | 1.98 | % | | 1.88 | % |
| Investment margin on deferred annuities | 2.76 | % | | 2.79 | % | 2.57 | % | | 2.76 | % |
Investment margin on deferred annuities decreased by 19 basis points to 2.57% in 2018, from 2.76% in 2017. The decrease in the investment margin on deferred annuities was driven by a decrease in net investment earned rate of 9 basis points, and an unfavorable increase in cost of crediting of 10 basis points.
Net investment earned rate decreased due to the decrease in fixed and other net investment earned rates, partially offset by the increase in alternative net investment earned rates. The fixed and other net investment earned rate decreased in 2018 to 4.33% from 4.44% in 2017 primarily attributed to lower returns on the assets from the Voya reinsurance transaction, partially offset by higher floating rate investment income in the quarter. The alternative net investment earned rate remained strong in 2018 at 10.65% compared to 9.79% in 2017 driven by strong MidCap and AmeriHome performance for the quarter returning 18.23% and 14.66%, respectively.
Cost of crediting on deferred annuities increased by 10 basis points to 1.98% in 2018, from 1.88% in 2017. The increase in cost of crediting was driven by a higher rate on the Voya reinsurance liabilities as well as an increase in option costs due to higher volatility and short-term interest rates.
Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
In this section, references to 2018 refer to the nine months ended September 30, 2018 and references to 2017 refer to the nine months ended September 30, 2017.
Adjusted Operating Income
Adjusted operating income increased by $127 million, or 16%, to $913 million in 2018, from $786 million in 2017. Adjusted operating ROE was 19.6%, down from 21.8% in the prior period. The increase in adjusted operating income was primarily driven by higher net investment earnings, partially offset by an increase in cost of crediting, other liability costs, operating expenses and tax expense.
Net investment earnings increased $545 million driven primarily by earnings from growth in invested assets of $27.7 billion primarily attributed to the Voya reinsurance transaction and a strong increase in deposits over the prior twelve months, an increase of floating rate investment income of $85 million related to higher short-term interest rates and higher alternative investment income. Alternative investment income increased driven by higher income in one of our hedge funds and strong performance from MidCap.
Cost of crediting increased $193 million driven by block growth, including the addition of Voya liabilities, and an increase in option costs due to higher volatility and short-term interest rates which increased the cost of hedging.
Other liability costs increased $156 million driven by growth in the block, including the addition of Voya liabilities, higher rider reserves and DAC amortization related to less favorable equity market performance resulting in a benefit of $36 million impact in 2018 compared to a benefit of $98 million in 2017, and favorable actuarial out of period adjustments in 2017, partially offset by lower excise taxes and favorable unlocking compared to 2017.
Operating expenses increased $20 million primarily attributable to growing our business and expanding our distribution channels.
Operating tax expenses increased $47 million reflecting the enactment of the Tax Act and the restructuring of our internal modco arrangements and implementation of additional reinsurance arrangements common in the insurance industry.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Investment Margin on Deferred Annuities
|
| | | | | |
| | Nine months ended September 30, |
| | 2018 | | 2017 |
| Net investment earned rate | 4.63 | % | | 4.75 | % |
| Cost of crediting | 1.93 | % | | 1.89 | % |
| Investment margin on deferred annuities | 2.70 | % | | 2.86 | % |
Investment margin on deferred annuities decreased by 316 basis points to 2.76%2.70% in the three months ended September 30, 2017,2018, from 2.79%2.86% in the prior period.2017. The decrease in the investment margin on deferred annuities was driven by the decrease in net investment earned rate of 1112 basis points partially offset by a favorable decreaseand an unfavorable increase in cost of crediting of 84 basis points.
Net investment earned rate decreased due to the decrease in alternative investmentfixed and other net investment earned rate, partially offset by the increase in fixed income and other investment income earned rate. The fixed income and other net investment earned rate increaseddecreased in the three months ended September 30,2018, to 4.38% from 4.50% in 2017 to 4.44% from 4.36% in the prior period primarily attributed to lower returns on the assets from the Voya reinsurance transaction, lower new money rates over the past year and higher short-term interest rates resulting inlevels of cash during 2018, partially offset by higher floating rate investment income and higher cash balances during the three months ended September 30, 2016.income. The alternative investments net investments earned rate decreasedincreased in 2018 to 9.79%11.30% from 10.86% in the three months ended September 30, 2017, reflecting higher income in one of our hedge funds and strong performance from 14.26% in the prior period primarily attributed to the prior year benefiting from higher credit fund income due to more favorable credit spread tightening. The net investment earned rates continue to reflect impacts of holding approximately 28% of total invested assets in floating rate investments and 2% of invested assets in cash holdings to opportunistically capitalize on market dislocations.MidCap.
Cost of crediting on deferred annuities decreasedincreased by 48 basis points to 1.88%1.93% in the three months ended September 30, 20172018, from 1.96%1.89% in the prior period2017. The decreaseincrease in cost of crediting was driven by recenta higher rate actionson the Voya reinsurance liabilities and lower option costs. 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.
Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016
Operating Income, Net of Tax
Operating income, net of tax increased by $251 million, or 47%, to $786 million in the nine months ended September 30, 2017, from $535 million in the prior period. Operating ROE excluding AOCI was 21.3%, up from 16.8% in the prior period. The increase in operating income, net of tax, was primarily driven by an increase in net investment incomeoption costs due to higher volatility and lower other liability costs,short-term interest rates, partially offset by higher cost of crediting.
Net investment income increased $257 million driven primarily by earnings from growth in invested assets of $6.4 billion attributed to a strong increase in deposits over the prior twelve months, higher short-term interest rates resulting in higher floating rate investment income and proceeds on the recovery of a bond previously written down, partially offset by lower bond call income.
Other liability costs decreased $139 million driven by unlocking and favorable impacts related to improved equity market performance, partially offset by growth in the block of business and higher gross profits. Our annual unlocking of assumptions resulted in an increase to other liability costs of $20 million compared to an increase of $158 million in prior year. Unlocking in 2017 related to impacts of the net investment earned rate and mortality assumptions, while 2016 related to a decrease in the projected net investment earned rates and lower projected lapse rate assumptions. Additionally, in 2016 we recognized a $102 million deferred tax valuation allowance release.
Cost of crediting increased $40 million driven by growth in our deferred annuity block of business which was partially offset by recent rate actions and lower option costs.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Investment Margin on Deferred Annuities
|
| | | | | |
| | Nine months ended September 30, |
| | 2017 | | 2016 |
| Net investment earned rate | 4.75 | % | | 4.64 | % |
| Cost of crediting | 1.89 | % | | 1.97 | % |
| Investment margin on deferred annuities | 2.86 | % | | 2.67 | % |
Investment margin on deferred annuities increased by 19 basis points to 2.86%business that renewed in nine months ended September 30, 2017, from 2.67% in the prior period. The increase in the investment margin on deferred annuities was driven by the increase in net investment earned rate of 11 basis points, showing strength in our investment portfolio, and a favorable decrease in cost of crediting of 8 basis points.
Net investment earned rate increased due to the increase in fixed income and other investment income earned rate. The fixed income and other net investment earned rate increased in the nine months ended September 30, 2017, to 4.50% from 4.38% in the prior period primarily attributed to higher short-term interest rates resulting in higher floating rate investment income, higher cash balances during the prior year and the proceeds from a bond previously written down, partially offset by lower bond call income. The alternative investments net investments earned rate remained consistent with prior year, 10.86% compared to 10.85% in the prior period, as higher income from our investment in AmeriHome was offset by lower credit fund income. The net investment earned rates continue to reflect impacts of holding approximately 28% of total invested assets in floating rate investments and 2% of invested assets in cash holdings to opportunistically capitalize on market dislocations.
Cost of crediting on deferred annuities decreased by 8 basis points to 1.89% in nine months ended September 30, 2017, from 1.97% in the prior period. The decrease in cost of crediting was driven by recent rate actions and lower option costs. 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.2017.
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 loss net of tax decreased by $12$5 million to $8 million in the three months ended September 30, 2018, from $13 million in the three months ended September 30, 2017, from $25 million2017. The decrease in adjusted operating loss was mainly driven by the prior period. In the third quarter 2017,deconsolidation of our German operation had an operating loss of $17 million, primarily drivenoperations partially offset by policyholder dividends related to a timing difference in recognition of participating income under U.S. GAAP compared to German GAAP. Operating income, net of tax excluding this notable item was $4 million, compared to a loss of $18 million in the prior year, excluding $7 million operating loss from our German operation. The increase in operating income, net of tax excluding this item was driven bylower alternative investment losses inincome due to the prior year resulting from a decline in the market value of public equity positions in one of our funds, partially offset byfunds. Our former German operations, which were deconsolidated on January 1, 2018, had an adjusted operating loss of $17 million in the prior year benefiting from higher credit fund income due to more favorable credit spread tightening.three months ended September 30, 2017.
OperatingAdjusted operating loss net of tax decreased by $78$4 million to $5 million in the nine months ended September 30, 2018, from $9 million in the nine months ended September 30, 2017, from $87 million in the prior period.2017. The decrease in adjusted operating loss net of tax, was mainly driven by the deconsolidation of our German operations offset by lower alternative investment losses inincome related to the prior year resulting from a decline in the market value of public equity positions in one of our funds a declineand debt costs from our debt issuance in energy marketsJanuary 2018. Our former German operations, which deconsolidated on January 1, 2018, had an adjusted operating loss of $28 million in the prior year, and higher CMBS fund income in the prior year. The higher alternative investment income was partially offset by a $28 million operating loss from our German operations, a decline of $27 million from the prior year, primarily driven by unfavorable policyholder dividends due to timing difference in the recognition of participating income under US GAAP compared to German GAAP.nine months ended September 30, 2017.
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 $81.2$101.4 billion and $72.4$84.4 billion as of September 30, 20172018 and December 31, 2016,2017, respectively. Our investment strategy seeks to achieve sustainable risk-adjusted returns through the disciplined managingmanagement of our investment characteristics withportfolio against our long-duration liabilities, andcoupled with the diversification of risk. The investment strategies utilized by our investment managers focus primarily on a buy and hold asset allocation strategy that may be adjusted periodically in response to changing market conditions and the nature of our liability profile. The significant 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 $78.8$100.6 billion and $71.8$82.3 billion as of September 30, 20172018 and December 31, 2016,2017, respectively. AAM manages, directly and indirectly, approximately $73.1$98.7 billion and AAME and affiliates sub-advises approximately $5.4 billion,of investments, which in the aggregate constitute the vast majority of our investment portfolio as of September 30, 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.
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'sissuer’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:
| | | | September 30, 2017 | | December 31, 2016 | September 30, 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 | $ | 58,516 |
| | 72.2 | % | | $ | 52,033 |
| | 71.8 | % | |
| Fixed maturity securities, at fair value | | | | | | | | |
| AFS securities | | $ | 59,882 |
| | 59.1 | % | | $ | 61,012 |
| | 72.3 | % |
| Trading securities | | 1,977 |
| | 2.0 | % | | 2,196 |
| | 2.6 | % |
| Equity securities | 318 |
| | 0.4 | % | | 353 |
| | 0.5 | % | 292 |
| | 0.3 | % | | 790 |
| | 0.9 | % |
| Trading securities, at fair value | 2,709 |
| | 3.3 | % | | 2,581 |
| | 3.6 | % | |
| Mortgage loans, net of allowances | 6,445 |
| | 7.9 | % | | 5,470 |
| | 7.5 | % | 8,982 |
| | 8.9 | % | | 6,233 |
| | 7.4 | % |
| Investment funds | 747 |
| | 0.9 | % | | 689 |
| | 1.0 | % | 692 |
| | 0.7 | % | | 699 |
| | 0.8 | % |
| Policy loans | 571 |
| | 0.7 | % | | 602 |
| | 0.8 | % | 512 |
| | 0.5 | % | | 530 |
| | 0.6 | % |
| Funds withheld at interest | 6,964 |
| | 8.6 | % | | 6,538 |
| | 9.0 | % | 7,841 |
| | 7.7 | % | | 7,085 |
| | 8.4 | % |
| Derivative assets | 1,982 |
| | 2.4 | % | | 1,370 |
| | 1.9 | % | 2,515 |
| | 2.5 | % | | 2,551 |
| | 3.0 | % |
| Real estate | 621 |
| | 0.8 | % | | 542 |
| | 0.7 | % | — |
| | — | % | | 624 |
| | 0.7 | % |
| Short-term investments | 108 |
| | 0.1 | % | | 189 |
| | 0.3 | % | 234 |
| | 0.2 | % | | 201 |
| | 0.2 | % |
| Other investments | 77 |
| | 0.1 | % | | 81 |
| | 0.1 | % | 114 |
| | 0.1 | % | | 133 |
| | 0.2 | % |
| Total investments | 79,058 |
| | 97.4 | % | | 70,448 |
| | 97.2 | % | 83,041 |
| | 82.0 | % | | 82,054 |
| | 97.1 | % |
| Investment in related parties | | | | | | | | | | | | | | |
| AFS securities at fair value | | | | | | | | |
| Fixed maturity securities | 409 |
| | 0.5 | % | | 335 |
| | 0.5 | % | |
| Equity securities | — |
| | — | % | | 20 |
| | — | % | |
| Trading securities, at fair value | 140 |
| | 0.2 | % | | 195 |
| | 0.3 | % | |
| Fixed maturity securities, at fair value | | | | | | | | |
| AFS securities | | 1,243 |
| | 1.2 | % | | 406 |
| | 0.5 | % |
| Trading securities | | 259 |
| | 0.3 | % | | 307 |
| | 0.4 | % |
| Mortgage loans | | 389 |
| | 0.3 | % | | — |
| | — | % |
| Investment funds | 1,330 |
| | 1.6 | % | | 1,198 |
| | 1.7 | % | 2,093 |
| | 2.1 | % | | 1,310 |
| | 1.6 | % |
| Funds withheld at interest | | 13,963 |
| | 13.7 | % | | — |
| | — | % |
| Short-term investments | 8 |
| | — | % | | — |
| | — | % | 10 |
| | 0.0 | % | | 52 |
| | 0.1 | % |
| Other investments | 238 |
| | 0.3 | % | | 237 |
| | 0.3 | % | 386 |
| | 0.4 | % | | 238 |
| | 0.3 | % |
| Total related party investments | 2,125 |
| | 2.6 | % | | 1,985 |
| | 2.8 | % | 18,343 |
| | 18.0 | % | | 2,313 |
| | 2.9 | % |
| Total investments, including related party | $ | 81,183 |
| | 100.0 | % | | $ | 72,433 |
| | 100.0 | % | $ | 101,384 |
| | 100.0 | % | | $ | 84,367 |
| | 100.0 | % |
The increase in our total investments, including related parties,party, as of September 30, 20172018 of $8.8$17.0 billion compared to December 31, 20162017 was mainly driven by strong$18.0 billion of assets at inception from the Voya reinsurance transactions, growth from organic deposits of $8.0 billion less liability outflows of $5.7 billion, investment of the proceeds from our debt issuance in deposits, unrealized gains on AFS securities including related parties, an increase in derivative assetsJanuary 2018 and reinvestment of earnings. The strong growth in deposits was attributed to $8.0 billion of organic growth for the nine months ended September 30, 2017,These were partially offset by liability outflows.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 parties were $1.5decreased $2.3 billion attributed to credit spreads tightening andthe increase in U.S. treasury rates declining in the nine months ended September 30, 2017. Derivative assets increased by $612 million primarily attributed to an increase in equity markets during 2017 as the S&P 500 index increased by 12.5%.and credit spreads widening.
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).
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
While the substantial majority of our investment portfolio has been allocated to corporate bonds and structured credit products, a key component of our investment strategy is the opportunistic acquisition of investment funds with attractive risk and return profiles. Our investment fund portfolio consists of funds that employ various strategies including real estate and other real assetsasset 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.
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 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:
| | | | September 30, 2017 | September 30, 2018 |
| (In millions, except percentages) | Cost or Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Fair Value | | Percent of Total | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Percent of Total |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities | | | | | | | | | | |
| U.S. government and agencies | $ | 59 |
| | $ | 1 |
| | $ | (2 | ) | | $ | 58 |
| | 0.1 | % | $ | 143 |
| | $ | — |
| | $ | (1 | ) | | $ | 142 |
| | 0.2 | % |
| U.S. state, municipal and political subdivisions | 993 |
| | 153 |
| | (1 | ) | | 1,145 |
| | 1.9 | % | 1,142 |
| | 103 |
| | (8 | ) | | 1,237 |
| | 2.0 | % |
| Foreign governments | 2,515 |
| | 90 |
| | (16 | ) | | 2,589 |
| | 4.4 | % | 180 |
| | 3 |
| | (3 | ) | | 180 |
| | 0.3 | % |
| Corporate | 33,115 |
| | 1,520 |
| | (177 | ) | | 34,458 |
| | 58.2 | % | 37,819 |
| | 447 |
| | (947 | ) | | 37,319 |
| | 61.1 | % |
| CLO | 4,963 |
| | 47 |
| | (14 | ) | | 4,996 |
| | 8.4 | % | 5,325 |
| | 15 |
| | (38 | ) | | 5,302 |
| | 8.7 | % |
| ABS | 3,885 |
| | 57 |
| | (42 | ) | | 3,900 |
| | 6.6 | % | 4,869 |
| | 29 |
| | (43 | ) | | 4,855 |
| | 8.0 | % |
| CMBS | 1,849 |
| | 54 |
| | (13 | ) | | 1,890 |
| | 3.2 | % | 2,343 |
| | 29 |
| | (48 | ) | | 2,324 |
| | 3.8 | % |
| RMBS | 8,838 |
| | 650 |
| | (8 | ) | | 9,480 |
| | 16.0 | % | 7,923 |
| | 610 |
| | (10 | ) | | 8,523 |
| | 13.9 | % |
| Total fixed maturity securities | 56,217 |
| | 2,572 |
| | (273 | ) | | 58,516 |
| | 98.8 | % | |
| Equity securities | 262 |
| | 57 |
| | (1) |
| | 318 |
| | 0.5 | % | |
| Total AFS securities | 56,479 |
| | 2,629 |
| | (274 | ) | | 58,834 |
| | 99.3 | % | 59,744 |
| | 1,236 |
| | (1,098 | ) | | 59,882 |
| | 98.0 | % |
| Fixed maturity securities – related parties | | | | | | | | | | |
| AFS securities – related party | | | | | | | | | | |
| CLO | 352 |
| | 4 |
| | — |
| | 356 |
| | 0.6 | % | 612 |
| | 1 |
| | (4 | ) | | 609 |
| | 1.0 | % |
| ABS | 52 |
| | 1 |
| | — |
| | 53 |
| | 0.1 | % | 638 |
| | 1 |
| | (5 | ) | | 634 |
| | 1.0 | % |
| Total fixed maturity securities – related party | 404 |
| | 5 |
| | — |
| | 409 |
| | 0.7 | % | |
| Equity securities – related party | — |
| | — |
| | — |
| | — |
| | — | % | |
| Total AFS securities – related parties | 404 |
| | 5 |
| | — |
| | 409 |
| | 0.7 | % | |
| Total AFS securities, including related parties | $ | 56,883 |
| | $ | 2,634 |
| | $ | (274 | ) | | $ | 59,243 |
| | 100.0 | % | |
| Total AFS securities – related party | | 1,250 |
| | 2 |
| | (9 | ) | | 1,243 |
| | 2.0 | % |
| Total AFS securities, including related party | | $ | 60,994 |
| | $ | 1,238 |
| | $ | (1,107 | ) | | $ | 61,125 |
| | 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 Gains | | Unrealized Losses | | 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 | % | 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 | % | |
Equity securities1 | | 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 | | | | | | | | | | |
| AFS 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 | % |
| | | | | | | | | | | |
1 Included in equity securities on the condensed consolidated balance sheets. | | 1 Included in equity securities on the condensed consolidated balance sheets. |
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:
| | | | September 30, 2017 | | December 31, 2016 | September 30, 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 | $ | 11,469 |
| | 19.5 | % | | $ | 10,645 |
| | 20.3 | % | $ | 11,773 |
| | 19.3 | % | | $ | 12,026 |
| | 19.6 | % |
| Financial | 10,955 |
| | 18.6 | % | | 9,156 |
| | 17.5 | % | 12,030 |
| | 19.7 | % | | 11,824 |
| | 19.3 | % |
| Utilities | 7,705 |
| | 13.1 | % | | 6,588 |
| | 12.6 | % | 8,967 |
| | 14.7 | % | | 8,296 |
| | 13.5 | % |
| Communication | 2,556 |
| | 4.3 | % | | 2,235 |
| | 4.3 | % | 2,351 |
| | 3.8 | % | | 2,607 |
| | 4.2 | % |
| Transportation | 1,773 |
| | 3.0 | % | | 1,396 |
| | 2.7 | % | 2,198 |
| | 3.6 | % | | 1,907 |
| | 3.1 | % |
| Total corporate | 34,458 |
| | 58.5 | % | | 30,020 |
| | 57.4 | % | 37,319 |
| | 61.1 | % | | 36,660 |
| | 59.7 | % |
| Other government-related securities | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | 1,145 |
| | 1.9 | % | | 1,140 |
| | 2.2 | % | 1,237 |
| | 2.0 | % | | 1,165 |
| | 1.9 | % |
| Foreign governments | 2,589 |
| | 4.4 | % | | 2,235 |
| | 4.3 | % | 180 |
| | 0.3 | % | | 2,683 |
| | 4.4 | % |
| U.S. government and agencies | 58 |
| | 0.1 | % | | 60 |
| | 0.1 | % | 142 |
| | 0.2 | % | | 62 |
| | 0.1 | % |
| Total non-structured securities | 38,250 |
| | 64.9 | % | | 33,455 |
| | 64.0 | % | 38,878 |
| | 63.6 | % | | 40,570 |
| | 66.1 | % |
| Structured securities | | | | | | | | | | | | | | |
| CLO | 5,352 |
| | 9.1 | % | | 5,101 |
| | 9.7 | % | 5,911 |
| | 9.7 | % | | 5,444 |
| | 8.9 | % |
| ABS | 3,953 |
| | 6.7 | % | | 2,992 |
| | 5.7 | % | 5,489 |
| | 9.0 | % | | 4,017 |
| | 6.5 | % |
| CMBS | 1,890 |
| | 3.2 | % | | 1,847 |
| | 3.5 | % | 2,324 |
| | 3.8 | % | | 2,021 |
| | 3.3 | % |
| RMBS | | | | | | | | | | | | | | |
| Agency | 93 |
| | 0.2 | % | | 112 |
| | 0.2 | % | 100 |
| | 0.1 | % | | 87 |
| | 0.1 | % |
| Non-agency | 9,387 |
| | 15.9 | % | | 8,861 |
| | 16.9 | % | 8,423 |
| | 13.8 | % | | 9,279 |
| | 15.1 | % |
| Total structured securities | 20,675 |
| | 35.1 | % | | 18,913 |
| | 36.0 | % | 22,247 |
| | 36.4 | % | | 20,848 |
| | 33.9 | % |
| Total fixed maturity securities, including related parties | $ | 58,925 |
| | 100.0 | % | | $ | 52,368 |
| | 100.0 | % | |
| Total AFS fixed maturity securities, including related party | | $ | 61,125 |
| | 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 AFS fixed maturity securities, including related parties, was $58.9$61.1 billion and $52.4$61.4 billion as of September 30, 20172018 and December 31, 2016,2017, respectively. The decrease was mainly driven by the deconsolidation of our former German operations and the change in unrealized gains and losses on AFS securities. Unrealized gains and losses on AFS securities decreased attributed to the increase was drivenin U.S. treasury rates and credit spreads widening. These were partially offset by strong growth in deposits over liability outflows, unrealized gains on AFS securities including related parties due to credit spreads tighteningassets from the Voya reinsurance transactions and U.S. treasury rates decliningthe investment of the proceeds from our debt issuance in the nine months ended September 30, 2017 and reinvestment of earnings.January 2018.
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. With important exceptions discussed below, if a security has been rated by an NRSRO,a 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. Because the NAIC'sNAIC’s methodology explicitly considers amortized cost and the likelihood of recovery of our investment, we view the NAIC'sNAIC’s methodology as the most appropriate way to view our fixed maturity portfolio for purposes of evaluating credit quality since a large portion of our holdings were purchased and are carried at significant discounts 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 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 (including ABS and CLOs) with the initial designation of NAIC 1 or NAIC 6, the designation remains the same through the life of the security. For non-modeled LBaSS with the initial designation 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 designation the LBaSS will have.
A summary of our AFS fixed maturity securities, including related parties, by NAIC designation (with our former German operations applying NRSRO ratings to map to NAIC designations as noted above)designations) is as follows:
| | | | September 30, 2017 | | December 31, 2016 | September 30, 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 | $ | 30,520 |
| | $ | 31,930 |
| | 54.2 | % | | $ | 29,477 |
| | $ | 30,211 |
| | 57.7 | % | $ | 30,761 |
| | $ | 31,245 |
| | 51.1 | % | | $ | 30,906 |
| | $ | 32,447 |
| | 52.8 | % |
| 2 | 22,212 |
| | 23,063 |
| | 39.1 | % | | 18,348 |
| | 18,617 |
| | 35.5 | % | 26,503 |
| | 26,206 |
| | 42.9 | % | | 24,147 |
| | 25,082 |
| | 40.9 | % |
| Total investment grade | 52,732 |
| | 54,993 |
| | 93.3 | % | | 47,825 |
| | 48,828 |
| | 93.2 | % | 57,264 |
| | 57,451 |
| | 94.0 | % | | 55,053 |
| | 57,529 |
| | 93.7 | % |
| 3 | 3,014 |
| | 3,077 |
| | 5.2 | % | | 2,871 |
| | 2,812 |
| | 5.4 | % | 2,855 |
| | 2,822 |
| | 4.6 | % | | 2,978 |
| | 3,040 |
| | 5.0 | % |
| 4 | 750 |
| | 731 |
| | 1.3 | % | | 647 |
| | 622 |
| | 1.2 | % | 674 |
| | 648 |
| | 1.1 | % | | 789 |
| | 765 |
| | 1.2 | % |
| 5 | 78 |
| | 75 |
| | 0.1 | % | | 87 |
| | 82 |
| | 0.2 | % | 193 |
| | 194 |
| | 0.3 | % | | 70 |
| | 66 |
| | 0.1 | % |
| 6 | 47 |
| | 49 |
| | 0.1 | % | | 21 |
| | 24 |
| | — | % | 8 |
| | 10 |
| | 0.0 | % | | 15 |
| | 18 |
| | 0.0 | % |
| Total below investment grade | 3,889 |
| | 3,932 |
| | 6.7 | % | | 3,626 |
| | 3,540 |
| | 6.8 | % | 3,730 |
| | 3,674 |
| | 6.0 | % | | 3,852 |
| | 3,889 |
| | 6.3 | % |
| Total fixed maturity securities, including related parties | $ | 56,621 |
| | $ | 58,925 |
| | 100.0 | % | | $ | 51,451 |
| | $ | 52,368 |
| | 100.0 | % | |
| Total fixed maturity securities, including related party | | $ | 60,994 |
| | $ | 61,125 |
| | 100.0 | % | | $ | 58,905 |
| | $ | 61,418 |
| | 100.0 | % |
Substantially all of our AFS fixed maturity portfolio, 93.3%94.0% and 93.2%93.7% as of September 30, 20172018 and December 31, 2016,2017, respectively, was invested in assets considered investment grade with a NAIC designation 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:
| | | | September 30, 2017 | | December 31, 2016 | September 30, 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 | $ | 20,451 |
| | 34.7 | % | | $ | 18,791 |
| | 35.9 | % | $ | 21,212 |
| | 34.7 | % | | $ | 21,448 |
| | 34.9 | % |
| BBB | 21,897 |
| | 37.2 | % | | 18,002 |
| | 34.4 | % | 23,860 |
| | 39.0 | % | | 23,572 |
| | 38.4 | % |
Non-rated1 | 6,671 |
| | 11.3 | % | | 5,650 |
| | 10.8 | % | 7,035 |
| | 11.5 | % | | 6,592 |
| | 10.7 | % |
| Total investment grade | 49,019 |
| | 83.2 | % | | 42,443 |
| | 81.1 | % | 52,107 |
| | 85.2 | % | | 51,612 |
| | 84.0 | % |
| BB | 3,094 |
| | 5.2 | % | | 3,286 |
| | 6.3 | % | 2,835 |
| | 4.7 | % | | 3,091 |
| | 5.0 | % |
| B | 1,278 |
| | 2.2 | % | | 1,372 |
| | 2.6 | % | 1,036 |
| | 1.7 | % | | 1,198 |
| | 2.0 | % |
| CCC | 2,624 |
| | 4.4 | % | | 2,374 |
| | 4.5 | % | 2,951 |
| | 4.8 | % | | 2,696 |
| | 4.4 | % |
| CC and lower | 2,274 |
| | 3.9 | % | | 2,404 |
| | 4.6 | % | 1,435 |
| | 2.4 | % | | 2,302 |
| | 3.8 | % |
Non-rated1 | 636 |
| | 1.1 | % | | 489 |
| | 0.9 | % | 761 |
| | 1.2 | % | | 519 |
| | 0.8 | % |
| Total below investment grade | 9,906 |
| | 16.8 | % | | 9,925 |
| | 18.9 | % | 9,018 |
| | 14.8 | % | | 9,806 |
| | 16.0 | % |
| Total fixed maturity securities, including related parties | $ | 58,925 |
| | 100.0 | % | | $ | 52,368 |
| | 100.0 | % | |
| Total fixed maturity securities, including related party | | $ | 61,125 |
| | 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 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. | | 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 wherewhen 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 ifwhen 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 16.8%14.8% and 18.9%16.0% as of September 30, 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 methodologies between the NRSRO and NAIC for RMBS due to investments acquired at a discount to par value, as discussed above.
As of September 30, 20172018 and December 31, 2016,2017, the non-rated securities shown above were comprised of 41%46% and 43%44%, respectively, of corporate private placement securities for which we have not sought individual ratings from the NRSROs and 43%36% 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 designations assigned by the NAIC. As of September 30, 20172018 and December 31, 2016, 91%2017, 90% and 92%93%, respectively, 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 $4.0$5.5 billion and $3.0$4.0 billion as of September 30, 20172018 and December 31, 2016,2017, respectively. The increase in ABS is mainly due to attractive opportunities invested in during the year as new deposits and the Voya investment portfolio are deployed. As of September 30, 20172018 and December 31, 2016,2017, our ABS portfolio included approximately $3.6$5.1 billion (92% 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 designations, while approximately $3.5$4.8 billion (87%(88% 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 $5.4$5.9 billion and $5.1$5.4 billion as of September 30, 20172018 and December 31, 2016,2017, respectively. As of September 30, 20172018 and December 31, 2016,2017, our CLO portfolio included approximately $4.5$5.4 billion (84%(91% 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 designations, while approximately $4.6$5.7 billion (86%(96% 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$2.3 billion and $1.8$2.0 billion as of September 30, 20172018 and December 31, 2016,2017, respectively. As of September 30, 20172018 and December 31, 2016,2017, our CMBS portfolio included approximately $1.8$2.1 billion (97%(90% 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 designations, while approximately $1.3$1.5 billion (68%(65% 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 $8.5 billion and $9.4 billion as of September 30, 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 $9.5 billion and $9.0 billion as of September 30, 2017 and December 31, 2016, respectively.
A summary of our AFS RMBS portfolio by NAIC designations and NRSRO quality ratings is as follows:
| | | | September 30, 2017 | | December 31, 2016 | September 30, 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 | $ | 8,928 |
| | 94.2 | % | | $ | 8,652 |
| | 96.4 | % | $ | 7,837 |
| | 92.0 | % | | $ | 8,714 |
| | 93.0 | % |
| 2 | 238 |
| | 2.5 | % | | 140 |
| | 1.6 | % | 358 |
| | 4.2 | % | | 360 |
| | 3.8 | % |
| Total investment grade | 9,166 |
| | 96.7 | % | | 8,792 |
| | 98.0 | % | 8,195 |
| | 96.2 | % | | 9,074 |
| | 96.8 | % |
| 3 | 187 |
| | 2.0 | % | | 96 |
| | 1.1 | % | 211 |
| | 2.5 | % | | 213 |
| | 2.3 | % |
| 4 | 76 |
| | 0.8 | % | | 29 |
| | 0.3 | % | 114 |
| | 1.3 | % | | 73 |
| | 0.8 | % |
| 5 | 40 |
| | 0.4 | % | | 54 |
| | 0.6 | % | 1 |
| | 0.0 | % | | 6 |
| | 0.1 | % |
| 6 | 11 |
| | 0.1 | % | | 2 |
| | — | % | 2 |
| | 0.0 | % | | — |
| | — | % |
| Total below investment grade | 314 |
| | 3.3 | % | | 181 |
| | 2.0 | % | 328 |
| | 3.8 | % | | 292 |
| | 3.2 | % |
| Total RMBS | $ | 9,480 |
| | 100.0 | % | | $ | 8,973 |
| | 100.0 | % | $ | 8,523 |
| | 100.0 | % | | $ | 9,366 |
| | 100.0 | % |
| | | | | | | | | | | | | | | |
| NRSRO rating agency designation | | | | | | | | | | | | | | |
| AAA/AA/A | $ | 273 |
| | 2.9 | % | | $ | 345 |
| | 3.8 | % | $ | 511 |
| | 6.0 | % | | $ | 335 |
| | 3.6 | % |
| BBB | 347 |
| | 3.7 | % | | 245 |
| | 2.7 | % | 249 |
| | 2.9 | % | | 347 |
| | 3.7 | % |
Non-rated1 | 2,974 |
| | 31.3 | % | | 2,638 |
| | 29.5 | % | 2,630 |
| | 30.8 | % | | 2,866 |
| | 30.6 | % |
| Total investment grade | 3,594 |
| | 37.9 | % | | 3,228 |
| | 36.0 | % | 3,390 |
| | 39.7 | % | | 3,548 |
| | 37.9 | % |
| BB | 450 |
| | 4.7 | % | | 419 |
| | 4.7 | % | 338 |
| | 4.0 | % | | 415 |
| | 4.4 | % |
| B | 500 |
| | 5.3 | % | | 567 |
| | 6.3 | % | 356 |
| | 4.2 | % | | 417 |
| | 4.5 | % |
| CCC | 2,520 |
| | 26.6 | % | | 2,280 |
| | 25.4 | % | 2,862 |
| | 33.6 | % | | 2,580 |
| | 27.5 | % |
| CC and lower | 2,268 |
| | 23.9 | % | | 2,395 |
| | 26.7 | % | 1,432 |
| | 16.8 | % | | 2,298 |
| | 24.5 | % |
Non-rated1 | 148 |
| | 1.6 | % | | 84 |
| | 0.9 | % | 145 |
| | 1.7 | % | | 108 |
| | 1.2 | % |
| Total below investment grade | 5,886 |
| | 62.1 | % | | 5,745 |
| | 64.0 | % | 5,133 |
| | 60.3 | % | | 5,818 |
| | 62.1 | % |
| Total RMBS | $ | 9,480 |
| | 100.0 | % | | $ | 8,973 |
| | 100.0 | % | $ | 8,523 |
| | 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 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. | | 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, 96.7%96.2% and 98.0%96.8% as of September 30, 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 results in an investment grade NAIC with a NAIC designation 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 37.9% and 36.0%a fundamental difference in approach, as of September 30, 20172018 and December 31, 2016,2017, NRSROs characterized 39.7% and 37.9%, respectively, were lower than the NAIC designations. As we focus on acquiring RMBS assets with attractive entry prices, some of these assets have experienced deterioration in credit quality since their issuance and the vast majority of our purchasesRMBS as investment grade.
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 September 30, 2018, our fixed maturity securities, including related party, had a fair value of $61.1 billion, which was 0.2% above amortized cost of $61.0 billion. As of December 31, 2017, our fixed maturity securities, including related parties,party, had a fair value of $58.9$61.4 billion, which was approximately 4.1%4.3% above amortized cost of $56.6 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 designations:
| | | | September 30, 2017 | September 30, 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 Designation | Amortized Cost of Securities with Unrealized Loss | | Gross Unrealized Losses | | 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 | $ | 5,026 |
| | $ | (127 | ) | | $ | 4,899 |
| | 97.5 | % | | $ | 31,930 |
| | (0.4 | )% | $ | 14,638 |
| | $ | (401 | ) | | $ | 14,237 |
| | 97.3 | % | | $ | 31,245 |
| | (1.3 | )% |
| 2 | 3,660 |
| | (85 | ) | | 3,575 |
| | 97.7 | % | | 23,063 |
| | (0.4 | )% | 16,278 |
| | (602 | ) | | 15,676 |
| | 96.3 | % | | 26,206 |
| | (2.3 | )% |
| Total investment grade | 8,686 |
| | (212 | ) | | 8,474 |
| | 97.6 | % | | 54,993 |
| | (0.4 | )% | 30,916 |
| | (1,003 | ) | | 29,913 |
| | 96.8 | % | | 57,451 |
| | (1.7 | )% |
| 3 | 921 |
| | (21 | ) | | 900 |
| | 97.7 | % | | 3,077 |
| | (0.7 | )% | 1,734 |
| | (63 | ) | | 1,671 |
| | 96.4 | % | | 2,822 |
| | (2.2 | )% |
| 4 | 389 |
| | (35 | ) | | 354 |
| | 91.0 | % | | 731 |
| | (4.8 | )% | 540 |
| | (40 | ) | | 500 |
| | 92.6 | % | | 648 |
| | (6.2 | )% |
| 5 | 33 |
| | (4 | ) | | 29 |
| | 87.9 | % | | 75 |
| | (5.3 | )% | 46 |
| | (1 | ) | | 45 |
| | 97.8 | % | | 194 |
| | (0.5 | )% |
| 6 | 12 |
| | (1 | ) | | 11 |
| | 91.7 | % | | 49 |
| | (2.0 | )% | 2 |
| | — |
| | 2 |
| | 100.0 | % | | 10 |
| | — | % |
| Total below investment grade | 1,355 |
| | (61 | ) | | 1,294 |
| | 95.5 | % | | 3,932 |
| | (1.6 | )% | 2,322 |
| | (104 | ) | | 2,218 |
| | 95.5 | % | | 3,674 |
| | (2.8 | )% |
| Total | $ | 10,041 |
| | $ | (273 | ) | | $ | 9,768 |
| | 97.3 | % | | $ | 58,925 |
| | (0.5 | )% | $ | 33,238 |
| | $ | (1,107 | ) | | $ | 32,131 |
| | 96.7 | % | | $ | 61,125 |
| | (1.8 | )% |
| | | | 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 Designation | Amortized Cost of Securities with Unrealized Loss | | Gross Unrealized Losses | | 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 $273 million$1.1 billion and $636$246 million as of September 30, 20172018 and December 31, 2016,2017, respectively. The decreaseincrease in unrealized losses was driven by credit spreads tightening andthe increase in U.S. treasury rates declining duringand credit spreads widening for the nine months ended September 30, 2017, resulting in an increase in unrealized gains.2018.
As of September 30, 20172018 and December 31, 2016,2017, we held $4.1$4.5 billion and $3.6$4.4 billion, respectively, in energy sector fixed maturity securities, or 7% of the total AFS fixed maturity securities, in both periods, including related parties forparty, as of each period. The gross unrealized capital losses on these securities were $35$112 million and $73$33 million, or 13%10% and 11%13%, respectively, of the total unrealized losses as of September 30, 2018 and December 31, 2017, 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 nine months ended September 30, 2018 and 2017, we recorded $6 million and $25 million, respectively of OTTI losses comprised of $13 millionprimarily related to corporate fixed maturities, $5 million related to mortgage loans, $3 million related to real estate, $1 million related to ABS, $1 million related to CMBS, $1 million related to equity securities and $1 million related to RMBS. Of the OTTI losses recognized during nine months ended September 30, 2017, $1 million related to the energy sector. During the nine months ended September 30, 2016, we recorded $27 million of OTTI losses comprised of $13 million related to state, municipal and political subdivisions, $6 million related to corporate fixed maturities, $5 million related to ABS, $2 million related to RMBS and $1 million related to other assets. Of the OTTI losses recognized during 2016, $4 million related to the energy sector.maturities. The annualized OTTI losses we have experienced for the nine months ended September 30, 20172018 and 2016,2017 translate into 41 basis pointspoint and 54 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 each of September 30, 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:
| | | | September 30, 2017 | | December 31, 2016 | September 30, 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 | $ | 534 |
| | $ | 546 |
| | 2.9 | % | | $ | 510 |
| | $ | 516 |
| | 3.1 | % | $ | 526 |
| | $ | 513 |
| | 2.8 | % | | $ | 498 |
| | $ | 511 |
| | 2.6 | % |
| Italy | 49 |
| | 53 |
| | 0.3 | % | | 90 |
| | 92 |
| | 0.6 | % | 36 |
| | 36 |
| | 0.2 | % | | 59 |
| | 64 |
| | 0.3 | % |
| Spain | 224 |
| | 237 |
| | 1.2 | % | | 175 |
| | 190 |
| | 1.1 | % | 62 |
| | 62 |
| | 0.3 | % | | 209 |
| | 225 |
| | 1.1 | % |
Total Portugal, Ireland, Italy, Greece and Spain1 | 807 |
| | 836 |
| | 4.4 | % | | 775 |
| | 798 |
| | 4.8 | % | |
| Portugal | | — |
| | — |
| | — | % | | 1 |
| | 1 |
| | 0.0 | % |
Total Ireland, Italy, Greece, Spain and Portugal1 | | 624 |
| | 611 |
| | 3.3 | % | | 767 |
| | 801 |
| | 4.0 | % |
| Other Europe | 7,597 |
| | 7,847 |
| | 41.8 | % | | 6,336 |
| | 6,512 |
| | 39.2 | % | 6,244 |
| | 6,145 |
| | 33.4 | % | | 8,087 |
| | 8,395 |
| | 42.0 | % |
| Total Europe | 8,404 |
| | 8,683 |
| | 46.2 | % | | 7,111 |
| | 7,310 |
| | 44.0 | % | 6,868 |
| | 6,756 |
| | 36.7 | % | | 8,854 |
| | 9,196 |
| | 46.0 | % |
| Non-U.S. North America | 7,582 |
| | 7,726 |
| | 41.1 | % | | 7,185 |
| | 7,105 |
| | 42.8 | % | 9,011 |
| | 8,980 |
| | 48.7 | % | | 8,048 |
| | 8,220 |
| | 41.2 | % |
| Australia & New Zealand | 1,300 |
| | 1,342 |
| | 7.1 | % | | 1,283 |
| | 1,304 |
| | 7.9 | % | 1,721 |
| | 1,682 |
| | 9.1 | % | | 1,443 |
| | 1,481 |
| | 7.4 | % |
| Central & South America | 491 |
| | 521 |
| | 2.8 | % | | 456 |
| | 467 |
| | 2.8 | % | 434 |
| | 437 |
| | 2.4 | % | | 481 |
| | 508 |
| | 2.6 | % |
| Africa & Middle East | 157 |
| | 163 |
| | 0.9 | % | | 164 |
| | 167 |
| | 1.0 | % | 227 |
| | 225 |
| | 1.2 | % | | 193 |
| | 196 |
| | 1.0 | % |
| Asia/Pacific | 292 |
| | 300 |
| | 1.6 | % | | 216 |
| | 218 |
| | 1.3 | % | 360 |
| | 352 |
| | 1.9 | % | | 321 |
| | 327 |
| | 1.6 | % |
| Supranational | 53 |
| | 53 |
| | 0.3 | % | | 26 |
| | 27 |
| | 0.2 | % | — |
| | — |
| | — | % | | 39 |
| | 41 |
| | 0.2 | % |
| Total | $ | 18,279 |
| | $ | 18,788 |
| | 100.0 | % | | $ | 16,441 |
| | $ | 16,598 |
| | 100.0 | % | $ | 18,621 |
| | $ | 18,432 |
| | 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 90.4%93.1% and 89.7%90.9% of these securities are investment grade by NAIC designation as of September 30, 20172018 and December 31, 2016,2017, respectively. As of September 30, 2017, 8%2018, 9% 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 21% were invested in securities of non-U.S. issuers by our German Group Companies and 18% 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 $836$611 million and $798$801 million as of September 30, 20172018 and December 31, 2016,2017, respectively, of exposure in these countries, of which $185 million and $237 million, respectively, were a result of investments acquired from the DLD acquisition in 2015.countries.
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 September 30, 2017,2018, we held United Kingdom and Channel Islands fixed maturity securities of $1.6$2.3 billion, or 2.8%3.7% of the total fixed maturities including related parties. As of September 30, 2017,2018, these securities were in an unrealized gainloss position of $47$71 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$2.2 billion and $2.5 billion as of each of September 30, 20172018 and December 31, 20162017., 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.
Mortgage Loans
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:
| | | | September 30, 2017 | | December 31, 2016 | September 30, 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 | $ | 1,340 |
| | 20.8 | % | | $ | 1,217 |
| | 22.2 | % | $ | 2,168 |
| | 23.1 | % | | $ | 1,187 |
| | 19.0 | % |
| Retail | 1,130 |
| | 17.5 | % | | 1,135 |
| | 20.7 | % | 1,693 |
| | 18.1 | % | | 1,223 |
| | 19.6 | % |
| Hotels | 1,108 |
| | 17.2 | % | | 1,025 |
| | 18.7 | % | 893 |
| | 9.5 | % | | 928 |
| | 14.9 | % |
| Industrial | 940 |
| | 14.6 | % | | 742 |
| | 13.6 | % | 833 |
| | 8.9 | % | | 944 |
| | 15.2 | % |
| Apartment | 580 |
| | 9.0 | % | | 616 |
| | 11.3 | % | 684 |
| | 7.3 | % | | 525 |
| | 8.4 | % |
Other commercial 1 | 405 |
| | 6.3 | % | | 397 |
| | 7.3 | % | 399 |
| | 4.3 | % | | 440 |
| | 7.1 | % |
| Total net mortgage loans | 5,503 |
| | 85.4 | % | | 5,132 |
| | 93.8 | % | |
| Total net commercial mortgage loans | | 6,670 |
| | 71.2 | % | | 5,247 |
| | 84.2 | % |
| Residential loans | 942 |
| | 14.6 | % | | 338 |
| | 6.2 | % | 2,701 |
| | 28.8 | % | | 986 |
| | 15.8 | % |
| Total mortgage loans, net of allowances | $ | 6,445 |
| | 100.0 | % | | $ | 5,470 |
| | 100.0 | % | $ | 9,371 |
| | 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 $6.4$9.4 billion and $5.5$6.2 billion as of September 30, 20172018 and December 31, 2016,2017, respectively. This included $1.8$2.0 billion and $1.5$1.8 billion of mezzanine mortgage loans foras of September 30, 2018 and December 31, 2017, respectively. The increase in mortgage loans is mainly driven by an increase in RML purchases during the respective periods.year, purchases of triple net leases and the addition of mortgage loans from the Voya reinsurance transaction. 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 September 30, 2017,2018, we had $6$43 million of mortgage loans that were 90 days past due, and $1of which $13 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 $20of which $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 September 30, 20172018 and December 31, 2016,2017, we had not recorded any new specific loan valuation allowancesallowances. For the nine months ended September 30, 2018 and 2017, we recorded $5$0 million and $0$5 million, respectively, of OTTIimpairments 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 September 30, 20172018 and December 31, 2016, attributable to loans acquired in connection with the acquisition of Aviva USA.2017, respectively.
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 element ofthat have less downside protection as compared to a pure directional investment.risk. A significant amountportion of our current investment funds and VIE holdings are comprised of certain investment funds contributed 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 September 30, 2017,2018, the assets consisted of $288$151 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), resulting in the investment being 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: | | | | September 30, 2017 | | December 31, 2016 | September 30, 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 | | $ | 48 |
| | 5.8 | % | | $ | 48 |
| | 5.5 | % |
| Equity securities | $ | 173 |
| | 17.9 | % | | $ | 161 |
| | 17.5 | % | 176 |
| | 21.1 | % | | 240 |
| | 27.8 | % |
| Trading securities | 195 |
| | 20.2 | % | | 167 |
| | 18.1 | % | |
| Investment funds | 593 |
| | 61.5 | % | | 573 |
| | 62.2 | % | 605 |
| | 72.7 | % | | 571 |
| | 66.1 | % |
| Cash and cash equivalents | 1 |
| | 0.1 | % | | 14 |
| | 1.5 | % | 2 |
| | 0.2 | % | | 4 |
| | 0.5 | % |
| Other assets | 3 |
| | 0.3 | % | | 6 |
| | 0.7 | % | 2 |
| | 0.2 | % | | 1 |
| | 0.1 | % |
| Total assets of consolidated VIEs | $ | 965 |
| | 100.0 | % | | $ | 921 |
| | 100.0 | % | $ | 833 |
| | 100.0 | % | | $ | 864 |
| | 100.0 | % |
| | | | | | | | | | | | | | | |
| Liabilities of consolidated VIEs | | | | | | | | | | | | | | |
| Other liabilities | $ | 47 |
| | 100.0 | % | | $ | 34 |
| | 100.0 | % | $ | 2 |
| | 100.0 | % | | $ | 2 |
| | 100.0 | % |
| Total liabilities of consolidated VIEs | $ | 47 |
| | 100.0 | % | | $ | 34 |
| | 100.0 | % | $ | 2 |
| | 100.0 | % | | $ | 2 |
| | 100.0 | % |
The assets of consolidated VIEs were $965$833 million and $921$864 million as of September 30, 20172018 and December 31, 2016,2017, respectively. The liabilities of consolidated VIEs were $47 million and $34$2 million as of both September 30, 20172018 and December 31, 2016, respectively.2017.
Item 2. Management'sManagement’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:
| | | | September 30, 2017 | | December 31, 2016 | September 30, 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 | $ | 279 |
| | 10.5 | % | | $ | 268 |
| | 10.9 | % | $ | 254 |
| | 7.5 | % | | $ | 271 |
| | 10.5 | % |
| Real estate and other real assets | 166 |
| | 6.2 | % | | 118 |
| | 4.8 | % | 205 |
| | 6.0 | % | | 161 |
| | 6.2 | % |
| Natural resources | 5 |
| | 0.2 | % | | 5 |
| | 0.2 | % | 4 |
| | 0.1 | % | | 4 |
| | 0.2 | % |
| Hedge funds | 62 |
| | 2.3 | % | | 72 |
| | 2.9 | % | 50 |
| | 1.5 | % | | 61 |
| | 2.4 | % |
| Credit funds | 235 |
| | 8.8 | % | | 226 |
| | 9.2 | % | 179 |
| | 5.3 | % | | 202 |
| | 7.8 | % |
| Total investment funds | 747 |
| | 28.0 | % | | 689 |
| | 28.0 | % | 692 |
| | 20.4 | % | | 699 |
| | 27.1 | % |
| Investment funds – related parties | | | | | | | | | | | | | | |
| Private equity – A-A Mortgage | 396 |
| | 14.8 | % | | 343 |
| | 13.9 | % | 449 |
| | 13.3 | % | | 403 |
| | 15.6 | % |
| Private equity | 176 |
| | 6.6 | % | | 131 |
| | 5.3 | % | |
| Private equity – other | | 680 |
| | 20.1 | % | | 180 |
| | 7.0 | % |
| Real estate and other real assets | 245 |
| | 9.2 | % | | 247 |
| | 10.1 | % | 499 |
| | 14.7 | % | | 297 |
| | 11.5 | % |
| Natural resources | 78 |
| | 2.9 | % | | 49 |
| | 2.0 | % | 95 |
| | 2.8 | % | | 74 |
| | 2.9 | % |
| Hedge funds | 163 |
| | 6.1 | % | | 192 |
| | 7.8 | % | 98 |
| | 2.9 | % | | 93 |
| | 3.6 | % |
| Credit funds | 272 |
| | 10.2 | % | | 236 |
| | 9.6 | % | 272 |
| | 8.0 | % | | 263 |
| | 10.2 | % |
| Total investment funds – related parties | 1,330 |
| | 49.8 | % | | 1,198 |
| | 48.7 | % | 2,093 |
| | 61.8 | % | | 1,310 |
| | 50.8 | % |
| Investment funds owned by consolidated VIEs | | | | | | | | | | | | | | |
Private equity – MidCap1 | 529 |
| | 19.8 | % | | 524 |
| | 21.3 | % | |
| Private equity – MidCap | | 549 |
| | 16.2 | % | | 528 |
| | 20.4 | % |
| Credit funds | 32 |
| | 1.2 | % | | 38 |
| | 1.6 | % | 1 |
| | 0.0 | % | | 21 |
| | 0.8 | % |
| Real estate and other real assets | 32 |
| | 1.2 | % | | 11 |
| | 0.4 | % | 55 |
| | 1.6 | % | | 22 |
| | 0.9 | % |
| Total investment funds owned by consolidated VIEs | 593 |
| | 22.2 | % | | 573 |
| | 23.3 | % | 605 |
| | 17.8 | % | | 571 |
| | 22.1 | % |
| Total investment funds, including related parties and VIEs | $ | 2,670 |
| | 100.0 | % | | $ | 2,460 |
| | 100.0 | % | |
| | | | | | | | | |
1 MidCap is an underlying investment of one of our consolidated VIE investment funds. | |
| Total investment funds, including related parties and funds owned by consolidated VIEs | | $ | 3,390 |
| | 100.0 | % | | $ | 2,580 |
| | 100.0 | % |
Overall, the total investment funds, including related partiesparty and consolidated VIEs, were $2.7$3.4 billion and $2.5$2.6 billion as of September 30, 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 September 30, 2017,2018, the significant majority of 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 freerisk-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'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The following summarizes the underlying investment composition of the funds withheld at interest:interest, including related party:
| | | | September 30, 2017 | | December 31, 2016 | September 30, 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. government and agencies | | $ | 75 |
| | 0.3 | % | | $ | — |
| | — | % |
| U.S. state, municipal and political subdivisions | $ | 118 |
| | 1.7 | % | | $ | 118 |
| | 1.8 | % | 493 |
| | 2.3 | % | | 117 |
| | 1.6 | % |
| Foreign governments | | 111 |
| | 0.5 | % | | — |
| | — | % |
| Corporate | 2,100 |
| | 30.2 | % | | 1,800 |
| | 27.6 | % | 11,396 |
| | 52.3 | % | | 2,095 |
| | 29.6 | % |
| CLO | 665 |
| | 9.6 | % | | 591 |
| | 9.0 | % | 987 |
| | 4.5 | % | | 669 |
| | 9.4 | % |
| ABS | 797 |
| | 11.4 | % | | 736 |
| | 11.3 | % | 1,383 |
| | 6.3 | % | | 886 |
| | 12.5 | % |
| CMBS | 286 |
| | 4.1 | % | | 292 |
| | 4.5 | % | 855 |
| | 3.9 | % | | 290 |
| | 4.1 | % |
| RMBS | 1,590 |
| | 22.8 | % | | 1,551 |
| | 23.7 | % | 1,807 |
| | 8.3 | % | | 1,551 |
| | 21.9 | % |
| Equity securities | 28 |
| | 0.4 | % | | 29 |
| | 0.4 | % | 51 |
| | 0.2 | % | | 28 |
| | 0.4 | % |
| Mortgage loans | 818 |
| | 11.8 | % | | 773 |
| | 11.8 | % | 3,588 |
| | 16.5 | % | | 792 |
| | 11.2 | % |
| Investment funds | 372 |
| | 5.3 | % | | 329 |
| | 5.0 | % | 505 |
| | 2.3 | % | | 376 |
| | 5.3 | % |
| Derivative assets | 63 |
| | 0.9 | % | | 53 |
| | 0.8 | % | 302 |
| | 1.4 | % | | 78 |
| | 1.1 | % |
| Short-term investments | 7 |
| | 0.1 | % | | 80 |
| | 1.2 | % | 275 |
| | 1.3 | % | | 16 |
| | 0.2 | % |
| Cash and cash equivalents | 100 |
| | 1.4 | % | | 105 |
| | 1.6 | % | 196 |
| | 0.9 | % | | 132 |
| | 1.9 | % |
| Other assets and liabilities | 20 |
| | 0.3 | % | | 81 |
| | 1.3 | % | (220 | ) | | (1.0 | )% | | 55 |
| | 0.8 | % |
| Total funds withheld at interest | $ | 6,964 |
| | 100.0 | % | | $ | 6,538 |
| | 100.0 | % | |
| Total funds withheld at interest, including related party | | $ | 21,804 |
| | 100.0 | % | | $ | 7,085 |
| | 100.0 | % |
As of September 30, 20172018 and December 31, 2016,2017, we held $7.0$21.8 billion and $6.5$7.1 billion, respectively, of funds withheld at interest receivables, respectively.including related party. The increase funds withheld at interest is mainly due to $14.7 billion of modco reinsurance agreements from the Voya reinsurance transaction. Approximately 94.1%95.3% and 93.6%94.2% of the fixed maturity securities within the funds withheld at interest are investment grade by NAIC designation as of September 30, 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.
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'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Invested Assets
The following summarizes our invested assets:
| | | | September 30, 2017 | | December 31, 2016 | September 30, 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 | $ | 34,759 |
| | $ | 1,713 |
| | $ | 36,472 |
| | 46.3 | % | | $ | 31,000 |
| | $ | 1,682 |
| | $ | 32,682 |
| | 45.4 | % | $ | 50,272 |
| | 50.0 | % | | $ | 37,059 |
| | $ | 1,536 |
| | $ | 38,595 |
| | 46.9 | % |
| CLO | 5,774 |
| | — |
| | 5,774 |
| | 7.3 | % | | 5,798 |
| | — |
| | 5,798 |
| | 8.1 | % | 6,873 |
| | 6.8 | % | | 5,914 |
| | — |
| | 5,914 |
| | 7.2 | % |
| Credit | 40,533 |
| | 1,713 |
| | 42,246 |
| | 53.6 | % | | 36,798 |
| | 1,682 |
| | 38,480 |
| | 53.5 | % | 57,145 |
| | 56.8 | % | | 42,973 |
| | 1,536 |
| | 44,509 |
| | 54.1 | % |
| RMBS | 10,696 |
| | — |
| | 10,696 |
| | 13.6 | % | | 10,619 |
| | — |
| | 10,619 |
| | 14.8 | % | 9,996 |
| | 9.9 | % | | 10,532 |
| | — |
| | 10,532 |
| | 12.8 | % |
| Mortgage loans | 7,150 |
| | 108 |
| | 7,258 |
| | 9.2 | % | | 6,145 |
| | 95 |
| | 6,240 |
| | 8.7 | % | 12,994 |
| | 12.9 | % | | 6,858 |
| | 165 |
| | 7,023 |
| | 8.5 | % |
| CMBS | 2,181 |
| | — |
| | 2,181 |
| | 2.8 | % | | 2,202 |
| | — |
| | 2,202 |
| | 3.1 | % | 3,251 |
| | 3.2 | % | | 2,322 |
| | — |
| | 2,322 |
| | 2.8 | % |
| Real estate held for investment | — |
| | 622 |
| | 622 |
| | 0.8 | % | | — |
| | 542 |
| | 542 |
| | 0.8 | % | — |
| | — | % | | — |
| | 625 |
| | 625 |
| | 0.8 | % |
| Real estate | 20,027 |
| | 730 |
| | 20,757 |
| | 26.4 | % | | 18,966 |
| | 637 |
| | 19,603 |
| | 27.4 | % | 26,241 |
| | 26.0 | % | | 19,712 |
| | 790 |
| | 20,502 |
| | 24.9 | % |
| ABS | 4,782 |
| | — |
| | 4,782 |
| | 6.1 | % | | 3,873 |
| | — |
| | 3,873 |
| | 5.4 | % | 7,206 |
| | 7.2 | % | | 4,824 |
| | — |
| | 4,824 |
| | 5.9 | % |
| Alternative investments | 3,441 |
| | 146 |
| | 3,587 |
| | 4.5 | % | | 3,297 |
| | 128 |
| | 3,425 |
| | 4.8 | % | 4,023 |
| | 4.0 | % | | 3,692 |
| | 137 |
| | 3,829 |
| | 4.6 | % |
| State, municipal, political subdivisions and foreign government | 1,335 |
| | 2,357 |
| | 3,692 |
| | 4.7 | % | | 1,387 |
| | 1,936 |
| | 3,323 |
| | 4.6 | % | 2,004 |
| | 2.0 | % | | 1,347 |
| | 2,411 |
| | 3,758 |
| | 4.5 | % |
| Unit-linked assets | | — |
| | — | % | | — |
| | 407 |
| | 407 |
| | 0.5 | % |
| Equity securities | 241 |
| | 70 |
| | 311 |
| | 0.4 | % | | 199 |
| | 185 |
| | 384 |
| | 0.5 | % | 353 |
| | 0.4 | % | | 192 |
| | 128 |
| | 320 |
| | 0.4 | % |
| Unit linked assets | — |
| | 405 |
| | 405 |
| | 0.5 | % | | — |
| | 363 |
| | 363 |
| | 0.5 | % | |
| Short-term investments | 85 |
| | — |
| | 85 |
| | 0.1 | % | | 250 |
| | — |
| | 250 |
| | 0.3 | % | 464 |
| | 0.5 | % | | 228 |
| | — |
| | 228 |
| | 0.3 | % |
| U.S. government and agencies | 29 |
| | 31 |
| | 60 |
| | 0.1 | % | | 32 |
| | 27 |
| | 59 |
| | 0.1 | % | 220 |
| | 0.2 | % | | 29 |
| | 35 |
| | 64 |
| | 0.1 | % |
| Other investments | 9,913 |
| | 3,009 |
| | 12,922 |
| | 16.4 | % | | 9,038 |
| | 2,639 |
| | 11,677 |
| | 16.2 | % | 14,270 |
| | 14.3 | % | | 10,312 |
| | 3,118 |
| | 13,430 |
| | 16.3 | % |
| Cash and equivalents | 1,680 |
| | 229 |
| | 1,909 |
| | 2.4 | % | | 1,111 |
| | 111 |
| | 1,222 |
| | 1.7 | % | 1,823 |
| | 1.8 | % | | 2,504 |
| | 296 |
| | 2,800 |
| | 3.4 | % |
| Policy loans and other | 738 |
| | 232 |
| | 970 |
| | 1.2 | % | | 631 |
| | 221 |
| | 852 |
| | 1.2 | % | 1,141 |
| | 1.1 | % | | 761 |
| | 296 |
| | 1,057 |
| | 1.3 | % |
| Total invested assets | $ | 72,891 |
| | $ | 5,913 |
| | $ | 78,804 |
| | 100.0 | % | | $ | 66,544 |
| | $ | 5,290 |
| | $ | 71,834 |
| | 100.0 | % | $ | 100,620 |
| | 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 $78.8$100.6 billion and $71.8$82.3 billion as of September 30, 20172018 and December 31, 2016,2017, respectively. As of September 30, 2017,2018, our total invested assets were mainly comprised of 46.3%50.0% of corporate securities, 29.8%27.1% of structured securities, 9.2%12.9% of mortgage loans and 4.5%4.0% of alternative investments. Corporate securities within our U.S. and Bermuda portfolio included $9.1$13.8 billion of private placements, which represented approximately 12%14% of our total U.S. and Bermuda invested assets. The increase in total invested assets as of September 30, 20172018 from December 31, 20162017 was primarily driven by $17.7 billion of invested assets at inception from the Voya reinsurance transaction, strong growth in deposits over liability outflows, the deployment of our debt issuance in January 2018 and reinvestment of earnings.earnings, partially offset by the deconsolidation of our former Germany operations.
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. and Bermuda portfolio primarily due to the geographic location, regulatory environment and participating nature 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.
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'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Alternative Investments
The following summarizes our alternative investments:
| | | | September 30, 2017 | | December 31, 2016 | September 30, 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 | $ | 797 |
| | 22.2 | % | | $ | 834 |
| | 24.3 | % | $ | 651 |
| | 16.2 | % | | $ | 784 |
| | 20.4 | % |
| Private equity – MidCap | 529 |
| | 14.7 | % | | 524 |
| | 15.3 | % | 549 |
| | 13.6 | % | | 528 |
| | 13.8 | % |
| Private equity – A-A Mortgage | 486 |
| | 13.6 | % | | 417 |
| | 12.2 | % | |
| Private equity – A-A Mortgage (AmeriHome) | | 551 |
| | 13.7 | % | | 496 |
| | 12.9 | % |
| Private equity – other | 530 |
| | 14.8 | % | | 519 |
| | 15.2 | % | 785 |
| | 19.5 | % | | 554 |
| | 14.5 | % |
| Mortgage and real assets | 546 |
| | 15.2 | % | | 470 |
| | 13.7 | % | 949 |
| | 23.6 | % | | 643 |
| | 16.8 | % |
| Hedge funds | 274 |
| | 7.6 | % | | 311 |
| | 9.1 | % | 176 |
| | 4.4 | % | | 467 |
| | 12.2 | % |
| Public equities | 236 |
| | 6.6 | % | | 215 |
| | 6.3 | % | 119 |
| | 3.0 | % | | 171 |
| | 4.5 | % |
| Natural resources and other real assets | 189 |
| | 5.3 | % | | 135 |
| | 3.9 | % | 243 |
| | 6.0 | % | | 186 |
| | 4.9 | % |
| Total alternative investments | $ | 3,587 |
| | 100.0 | % | | $ | 3,425 |
| | 100.0 | % | $ | 4,023 |
| | 100.0 | % | | $ | 3,829 |
| | 100.0 | % |
Alternative investments were $3.6$4.0 billion and $3.4$3.8 billion as of September 30, 20172018 and December 31, 2016,2017, respectively, representing 4.5%4.0% and 4.8%4.6% of our total invested assets portfolio as of September 30, 20172018 and December 31, 2016,2017, respectively.
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 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 had a carrying value of $549 million and $528 million as of September 30, 2018 and December 31, 2017, we held equity positions in MidCap of $529 million. MidCap is a leading originator of senior debt capital in the middle-market with expertise in asset-backed loans, leveraged loans, real estate loans, discount loans and venture loans. MidCap represents a uniquerespectively. Our investment in an origination platform made availableCoInvest VII largely reflects any contributions to us through our relationship with Apollo. Asand distributions from CoInvest VII and the fair value of MidCap. CoInvest VII returned a net investment earned rate of 18.23% and 8.15% for the three months ended September 30, 2018 and 2017, we held an equity positionrespectively, and 14.86% and 9.33% for the nine months ended September 30, 2018 and 2017, respectively. Alternative investment income from CoInvest VII was $25 million and $11 million for the three months ended September 30, 2018 and 2017, respectively, and $62 million and $39 million for the nine months ended September 30, 2018 and 2017, respectively. The increase in A-A Mortgage of $486 million. A-A Mortgage has an indirectalternative investment in AmeriHome, which originates RMLsincome for both periods was driven by a favorable valuation adjustment, higher loan volumes and mortgage servicing rights.increased assets under management.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
AmeriHome
Our equity investment in AmeriHome is held indirectly through A-A Mortgage, of which AmeriHome is currently the fund’s only investment. AmeriHome is a mortgage origination platform and an aggregator of mortgage servicing rights. AmeriHome acquires mortgage loans from retail originators and re-sells the loans to the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National Mortgage Association and other investors. AmeriHome retains the mortgage servicing rights on the loans that it sells and employs a subservicer to perform servicing operations, including payment collection. AmeriHome’s earnings are primarily driven by two sources: gains or losses on the sale of mortgage loans and the difference between the fee that it charges for mortgage servicing and the fee charged by the subservicer. As a result, AmeriHome’s financial results are influenced by interest rates and related housing demand. AmeriHome is primarily exposed to credit risk related to the accuracy of the representations and warranties in the loans that AmeriHome acquires and prepayment risk, which prematurely terminates fees related to mortgage servicing.
Our alternative investment in A-A Mortgage had a carrying value of $551 million and $496 million as of September 30, 2018 and December 31, 2017, respectively. Our investment in A-A Mortgage represents our proportionate share of its net asset value, which largely reflects any contributions to and distributions from A-A Mortgage and the fair value of AmeriHome. A-A Mortgage returned a net investment earned rate of 14.66% and 6.77% for the three months ended September 30, 2018 and 2017, respectively, and 13.52% and 13.59% for the nine months ended September 30, 2018 and 2017, respectively. Alternative investment income from A-A Mortgage was $21 million and $8 million for the three months ended September 30, 2018 and 2017, respectively, and $55 million and $48 million for the nine months ended September 30, 2018 and 2017, respectively. The increase in alternative investment income for the three months ended September 30, 2018 compared to 2017 was driven by 2017 experiencing a decrease in market value of mortgage service rights related to the increased competitive environment and tighter spreads.
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 shareholders’ equity to adjusted shareholders’ equity, which is included in adjusted book value per share, adjusted debt to capital ratio, adjusted ROE and adjusted operating earnings, net of tax excluding notable items to net income available to AHL shareholdersROE is as follows:
|
| | | | | | | |
| | Three months ended September 30, |
| (In millions) | 2017 | | 2016 |
| Operating income, net of tax excluding notable items by segment | | | |
| Retirement Services operating income, net of tax excluding notable items | $ | 250 |
| | $ | 187 |
|
| Unlocking | (20 | ) | | (158 | ) |
| Actuarial out of period adjustments | 13 |
| | — |
|
| Deferred tax valuation allowance release | — |
| | 102 |
|
| Tax effects of notable items | 1 |
| | 11 |
|
| Retirement Services notable items | (6 | ) | | (45 | ) |
| Retirement Services operating income, net of tax | 244 |
| | 142 |
|
| | | | |
| Corporate and Other operating income, net of tax excluding notable items | 4 |
| | (18 | ) |
| Germany operating loss, net of tax | (17 | ) | | (7 | ) |
| Corporate and Other operating income, net of tax | (13 | ) | | (25 | ) |
| Operating income, net of tax | 231 |
| | 117 |
|
| Total non-operating adjustments | 43 |
| | 9 |
|
| Net income available to AHL shareholders | $ | 274 |
| | $ | 126 |
|
|
| | | | | | | |
| (In millions) | September 30, 2018 | | December 31, 2017 |
| Total shareholders’ equity | $ | 9,069 |
| | $ | 9,208 |
|
| Less: AOCI | 43 |
| | 1,415 |
|
| Less: Accumulated reinsurance unrealized gains and losses | (31 | ) | | 161 |
|
| Total adjusted shareholders’ equity | $ | 9,057 |
| | $ | 7,632 |
|
| | | | |
| Segment adjusted shareholders’ equity | | | |
| Retirement Services | $ | 7,105 |
| | $ | 5,304 |
|
| Corporate and Other | 1,952 |
| | 2,328 |
|
| Total adjusted shareholders’ equity | $ | 9,057 |
| | $ | 7,632 |
|
The reconciliation of AHL shareholders’ equitynet income to AHL shareholders’ equity excluding AOCIadjusted net income, which is included in theadjusted ROE excluding AOCI and operating income ROE excluding AOCI is as follows:
|
| | | | | | | |
| (In millions) | September 30, 2017 | | September 30, 2016 |
| Total AHL shareholders' equity | $ | 8,669 |
| | $ | 7,031 |
|
| Less: AOCI | 1,162 |
| | 920 |
|
| Total AHL shareholders' equity excluding AOCI | $ | 7,507 |
| | $ | 6,111 |
|
| | | | |
| Retirement Services | $ | 5,371 |
| | $ | 4,542 |
|
| Corporate and Other | 2,136 |
| | 1,569 |
|
| Total AHL shareholders' equity excluding AOCI | $ | 7,507 |
| | $ | 6,111 |
|
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 |
| Net income | $ | 640 |
| | $ | 274 |
| | $ | 1,172 |
| | $ | 984 |
|
| Reinsurance unrealized gains and losses | 43 |
| | (12 | ) | | 192 |
| | (100 | ) |
| Adjusted net income | $ | 683 |
| | $ | 262 |
| | $ | 1,364 |
| | $ | 884 |
|
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 September 30, | | Nine months ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| (In millions, except percentages) | | | | | | | | | Dollar | | Rate | | Dollar | | Rate | Dollar | | Rate | | Dollar | | Rate | | Dollar | | Rate | | Dollar | | Rate |
| GAAP net investment income | $ | 820 |
| | 4.23 | % | | $ | 743 |
| | 4.20 | % | | $ | 2,427 |
| | 4.31 | % | | $ | 2,137 |
| | 4.12 | % | $ | 1,070 |
| | 4.30 | % | | $ | 820 |
| | 4.23 | % | | $ | 2,883 |
| | 4.39 | % | | $ | 2,427 |
| | 4.31 | % |
| Reinsurance embedded derivative impacts | 40 |
| | 0.20 | % | | 55 |
| | 0.31 | % | | 137 |
| | 0.25 | % | | 144 |
| | 0.28 | % | 52 |
| | 0.20 | % | | 40 |
| | 0.20 | % | | 169 |
| | 0.26 | % | | 137 |
| | 0.25 | % |
| Net VIE earnings | 27 |
| | 0.14 | % | | (13 | ) | | (0.07 | )% | | 59 |
| | 0.10 | % | | (43 | ) | | (0.08 | )% | 39 |
| | 0.16 | % | | 27 |
| | 0.14 | % | | 55 |
| | 0.08 | % | | 59 |
| | 0.10 | % |
| Alternative income gain (loss) | (4 | ) | | (0.02 | )% | | (2 | ) | | (0.01 | )% | | (11 | ) | | (0.02 | )% | | (34 | ) | | (0.07 | )% | (14 | ) | | (0.06 | )% | | (4 | ) | | (0.02 | )% | | (14 | ) | | (0.02 | )% | | (11 | ) | | (0.02 | )% |
| Held for trading amortization | (20 | ) | | (0.10 | )% | | (6 | ) | | (0.03 | )% | | (50 | ) | | (0.09 | )% | | (21 | ) | | (0.04 | )% | (21 | ) | | (0.08 | )% | | (20 | ) | | (0.10 | )% | | (65 | ) | | (0.10 | )% | | (50 | ) | | (0.09 | )% |
| Total adjustments to arrive at net investment earnings/earned rate | 43 |
| | 0.22 | % | | 34 |
| | 0.20 | % | | 135 |
| | 0.24 | % | | 46 |
| | 0.09 | % | 56 |
| | 0.22 | % | | 43 |
| | 0.22 | % | | 145 |
| | 0.22 | % | | 135 |
| | 0.24 | % |
| Total net investment earnings/earned rate | $ | 863 |
| | 4.45 | % | | $ | 777 |
| | 4.40 | % | | $ | 2,562 |
| | 4.55 | % | | $ | 2,183 |
| | 4.21 | % | $ | 1,126 |
| | 4.52 | % | | $ | 863 |
| | 4.45 | % | | $ | 3,028 |
| | 4.61 | % | | $ | 2,562 |
| | 4.55 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Retirement Services | $ | 811 |
| | 4.64 | % | | $ | 754 |
| | 4.75 | % | | $ | 2,412 |
| | 4.75 | % | | $ | 2,155 |
| | 4.64 | % | $ | 1,108 |
| | 4.55 | % | | $ | 811 |
| | 4.64 | % | | $ | 2,957 |
| | 4.63 | % | | $ | 2,412 |
| | 4.75 | % |
| Corporate and Other | 52 |
| | 2.72 | % | | 23 |
| | 1.26 | % | | 150 |
| | 2.71 | % | | 28 |
| | 0.53 | % | 18 |
| | 3.51 | % | | 52 |
| | 2.72 | % | | 71 |
| | 3.86 | % | | 150 |
| | 2.71 | % |
| Total net investment earnings/earned rate | $ | 863 |
| | 4.45 | % | | $ | 777 |
| | 4.40 | % | | $ | 2,562 |
| | 4.55 | % | | $ | 2,183 |
| | 4.21 | % | $ | 1,126 |
| | 4.52 | % | | $ | 863 |
| | 4.45 | % | | $ | 3,028 |
| | 4.61 | % | | $ | 2,562 |
| | 4.55 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Retirement Services average invested assets | $ | 69,868 |
| | | | $ | 63,641 |
| | | | $ | 67,722 |
| | | | $ | 62,009 |
| | | $ | 97,512 |
| | | | $ | 69,868 |
| | | | $ | 85,169 |
| | | | $ | 67,722 |
| | |
| Corporate and Other average invested assets | 7,673 |
| | | | 7,089 |
| | | | 7,398 |
| | | | 7,120 |
| | | 2,103 |
| | | | 7,673 |
| | | | 2,473 |
| | | | 7,398 |
| | |
| Consolidated average invested assets | $ | 77,541 |
| | | | $ | 70,730 |
| | | | $ | 75,120 |
| | | | $ | 69,129 |
| | | $ | 99,615 |
| | | | $ | 77,541 |
| | | | $ | 87,642 |
| | | | $ | 75,120 |
| | |
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 September 30, | | Nine months ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| (In millions, except percentages) | Dollar | | Rate | | Dollar | | Rate | | Dollar | | Rate | | Dollar | | Rate | Dollar | | Rate | | Dollar | | Rate | | Dollar | | Rate | | Dollar | | Rate |
| GAAP interest sensitive contract benefits | $ | 621 |
| | 4.35 | % | | $ | 491 |
| | 3.72 | % | | $ | 1,866 |
| | 4.43 | % | | $ | 1,081 |
| | 2.83 | % | $ | 741 |
| | 3.72 | % | | $ | 621 |
| | 4.35 | % | | $ | 1,092 |
| | 2.13 | % | | $ | 1,866 |
| | 4.43 | % |
| Interest credited other than deferred annuities | (41 | ) | | (0.29 | )% | | (34 | ) | | (0.26 | )% | | (109 | ) | | (0.26 | )% | | (91 | ) | | (0.24 | )% | (44 | ) | | (0.22 | )% | | (41 | ) | | (0.29 | )% | | (125 | ) | | (0.24 | )% | | (109 | ) | | (0.26 | )% |
| FIA option costs | 154 |
| | 1.08 | % | | 141 |
| | 1.07 | % | | 448 |
| | 1.08 | % | | 416 |
| | 1.08 | % | 231 |
| | 1.16 | % | | 154 |
| | 1.08 | % | | 611 |
| | 1.19 | % | | 448 |
| | 1.08 | % |
| Product charges (strategy fees) | (19 | ) | | (0.13 | )% | | (14 | ) | | (0.11 | )% | | (53 | ) | | (0.13 | )% | | (38 | ) | | (0.10 | )% | (25 | ) | | (0.13 | )% | | (19 | ) | | (0.13 | )% | | (70 | ) | | (0.14 | )% | | (53 | ) | | (0.13 | )% |
| Reinsurance embedded derivative impacts | 9 |
| | 0.06 | % | | 8 |
| | 0.06 | % | | 27 |
| | 0.06 | % | | 21 |
| | 0.05 | % | 29 |
| | 0.14 | % | | 9 |
| | 0.06 | % | | 35 |
| | 0.07 | % | | 27 |
| | 0.06 | % |
| Change in fair value of embedded derivatives – FIAs | (464 | ) | | (3.25 | )% | | (326 | ) | | (2.47 | )% | | (1,397 | ) | | (3.32 | )% | | (669 | ) | | (1.74 | )% | (545 | ) | | (2.74 | )% | | (464 | ) | | (3.25 | )% | | (580 | ) | | (1.13 | )% | | (1,397 | ) | | (3.32 | )% |
| Negative VOBA amortization | 8 |
| | 0.06 | % | | 12 |
| | 0.09 | % | | 30 |
| | 0.07 | % | | 36 |
| | 0.09 | % | 5 |
| | 0.03 | % | | 8 |
| | 0.06 | % | | 22 |
| | 0.04 | % | | 30 |
| | 0.07 | % |
| Unit linked change in reserves | — |
| | — | % | | (20 | ) | | (0.15 | )% | | (17 | ) | | (0.04 | )% | | (1 | ) | | — | % | |
| Unit-linked change in reserves | | — |
| | — | % | | — |
| | — | % | | — |
| | — | % | | (17 | ) | | (0.04 | )% |
| Other changes in interest sensitive contract liabilities | — |
| | — | % | | 1 |
| | 0.01 | % | | — |
| | — | % | | — |
| | — | % | 3 |
| | 0.02 | % | | — |
| | — | % | | 3 |
| | 0.01 | % | | — |
| | — | % |
| Total adjustments to arrive at cost of crediting on deferred annuities | (353 | ) | | (2.47 | )% | | (232 | ) | | (1.76 | )% | | (1,071 | ) | | (2.54 | )% | | (326 | ) | | (0.86 | )% | (346 | ) | | (1.74 | )% | | (353 | ) | | (2.47 | )% | | (104 | ) | | (0.20 | )% | | (1,071 | ) | | (2.54 | )% |
| Retirement Services cost of crediting on deferred annuities | $ | 268 |
| | 1.88 | % | | $ | 259 |
| | 1.96 | % | | $ | 795 |
| | 1.89 | % | | $ | 755 |
| | 1.97 | % | $ | 395 |
| | 1.98 | % | | $ | 268 |
| | 1.88 | % | | $ | 988 |
| | 1.93 | % | | $ | 795 |
| | 1.89 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Average account value | $ | 57,050 |
| | | | $ | 52,739 |
| | | | $ | 56,102 |
| | | | $ | 51,183 |
| | | $ | 79,673 |
| | | | $ | 57,050 |
| | | | $ | 68,421 |
| | | | $ | 56,102 |
| | |
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The reconciliation of GAAP benefits and expenses to other liability costs is as follows: |
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 |
| GAAP benefits and expenses | $ | 1,882 |
| | $ | 1,179 |
| | $ | 4,033 |
| | $ | 3,818 |
|
| Premiums | (531 | ) | | (72 | ) | | (1,535 | ) | | (503 | ) |
| Product charges | (119 | ) | | (86 | ) | | (321 | ) | | (252 | ) |
| Other revenues | (10 | ) | | (8 | ) | | (22 | ) | | (24 | ) |
| Cost of crediting | (135 | ) | | (105 | ) | | (342 | ) | | (321 | ) |
| Change in fair value of embedded derivatives - FIA, net of offsets | (764 | ) | | (496 | ) | | (919 | ) | | (1,501 | ) |
| DAC, DSI and VOBA amortization related to investment gains and losses | 26 |
| | (16 | ) | | 72 |
| | (51 | ) |
| Rider reserves related to investment gains and losses | 1 |
| | (4 | ) | | 8 |
| | (9 | ) |
| Policy and other operating expenses, excluding policy acquisition expenses | (98 | ) | | (101 | ) | | (291 | ) | | (305 | ) |
| VIE operating expenses | — |
| | — |
| | (1 | ) | | — |
|
| AmerUs closed block fair value liability | 8 |
| | (4 | ) | | 98 |
| | (49 | ) |
| Other | 1 |
| | (14 | ) | | 8 |
| | (78 | ) |
| Total adjustments to arrive at other liability costs | (1,621 | ) | | (906 | ) | | (3,245 | ) | | (3,093 | ) |
| Other liability costs | $ | 261 |
| | $ | 273 |
| | $ | 788 |
| | $ | 725 |
|
| | | | | | | | |
| Retirement Services | $ | 261 |
| | $ | 228 |
| | $ | 788 |
| | $ | 632 |
|
| Corporate and Other | — |
| | 45 |
| | — |
| | 93 |
|
| Consolidated other liability costs | $ | 261 |
| | $ | 273 |
| | $ | 788 |
| | $ | 725 |
|
The reconciliation of policy and other operating expenses to operating expenses is as follows: |
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 |
| Policy and other operating expenses | $ | 158 |
| | $ | 158 |
| | $ | 453 |
| | $ | 479 |
|
| Interest expense | (15 | ) | | (2 | ) | | (44 | ) | | (10 | ) |
| Policy acquisition expenses, net of deferrals | (60 | ) | | (58 | ) | | (162 | ) | | (174 | ) |
| Integration, restructuring and other non-operating expenses | (2 | ) | | (14 | ) | | (18 | ) | | (34 | ) |
| Stock compensation expenses | (3 | ) | | (7 | ) | | (8 | ) | | (30 | ) |
| Total adjustments to arrive at operating expenses | (80 | ) | | (81 | ) | | (232 | ) | | (248 | ) |
| Operating expenses | $ | 78 |
| | $ | 77 |
| | $ | 221 |
| | $ | 231 |
|
| | | | | | | | |
| Retirement Services | $ | 63 |
| | $ | 51 |
| | $ | 177 |
| | $ | 157 |
|
| Corporate and Other | 15 |
| | 26 |
| | 44 |
| | 74 |
|
| Consolidated operating expenses | $ | 78 |
| | $ | 77 |
| | $ | 221 |
| | $ | 231 |
|
The reconciliation of total investments, including related parties, to invested assets is as follows:
| | | (In millions) | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
| Total investments, including related parties | $ | 81,183 |
| | $ | 72,433 |
| $ | 101,384 |
| | $ | 84,367 |
|
| Derivative assets | (1,982 | ) | | (1,370 | ) | (2,515 | ) | | (2,551 | ) |
| Cash and cash equivalents (including restricted cash) | 3,707 |
| | 2,502 |
| 3,941 |
| | 4,993 |
|
| Accrued investment income | 626 |
| | 554 |
| 686 |
| | 652 |
|
| Payables for collateral on derivatives | (1,896 | ) | | (1,383 | ) | (2,315 | ) | | (2,323 | ) |
| Reinsurance funds withheld and modified coinsurance | (537 | ) | | (414 | ) | (123 | ) | | (579 | ) |
| VIE assets, liabilities and noncontrolling interest | 918 |
| | 886 |
| |
| AFS unrealized (gain) loss | (2,594 | ) | | (1,030 | ) | |
| VIE and VOE assets, liabilities and noncontrolling interest | | 835 |
| | 862 |
|
| AFS unrealized (gains) losses | | (186 | ) | | (2,794 | ) |
| Ceded policy loans | (325 | ) | | (344 | ) | (299 | ) | | (296 | ) |
| Net investment receivables (payables) | (296 | ) | | — |
| (788 | ) | | (33 | ) |
| Total adjustments to arrive at invested assets | (2,379 | ) | | (599 | ) | (764 | ) | | (2,069 | ) |
| Total invested assets | $ | 78,804 |
| | $ | 71,834 |
| $ | 100,620 |
| | $ | 82,298 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The reconciliation of total investment funds, including related parties and VIEs, to alternative investments within invested assets is as follows:
| | | (In millions) | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
| Investment funds, including related parties and VIEs | $ | 2,670 |
| | $ | 2,460 |
| $ | 3,390 |
| | $ | 2,580 |
|
| CLO equities included in trading securities | 194 |
| | 260 |
| 139 |
| | 182 |
|
| Financial Credit Investment special-purpose vehicle included in trading securities related party | | — |
| | 287 |
|
| Investment funds within funds withheld at interest | 372 |
| | 329 |
| 505 |
| | 416 |
|
| Royalties, other assets included in other investments and other assets | 77 |
| | 81 |
| 72 |
| | 76 |
|
| Net assets of the VIE, excluding investment funds | 274 |
| | 295 |
| 188 |
| | 288 |
|
| Unrealized (gain) loss and other adjustments | | (271 | ) | | — |
|
| Total adjustments to arrive at alternative investments | 917 |
| | 965 |
| 633 |
| | 1,249 |
|
| Alternative investments | $ | 3,587 |
| | $ | 3,425 |
| $ | 4,023 |
| | $ | 3,829 |
|
The reconciliation of total liabilities to reserve liabilities is as follows:
| | | (In millions) | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
| Total liabilities | $ | 87,392 |
| | $ | 79,840 |
| $ | 109,135 |
| | $ | 90,539 |
|
| Long-term debt | | (991 | ) | | — |
|
| Derivative liabilities | (92 | ) | | (40 | ) | (124 | ) | | (134 | ) |
| Payables for collateral on derivatives | (1,896 | ) | | (1,383 | ) | (2,315 | ) | | (2,323 | ) |
| Funds withheld liability | (394 | ) | | (380 | ) | (389 | ) | | (407 | ) |
| Other liabilities | (1,024 | ) | | (688 | ) | (1,380 | ) | | (1,222 | ) |
| Liabilities of consolidated VIEs | (47 | ) | | (34 | ) | (2 | ) | | (2 | ) |
| Reinsurance ceded receivables | (5,768 | ) | | (6,001 | ) | (5,201 | ) | | (4,972 | ) |
| Policy loans ceded | (325 | ) | | (344 | ) | (299 | ) | | (296 | ) |
| Other | 4 |
| | 4 |
| (12 | ) | | — |
|
| Total adjustments to arrive at reserve liabilities | (9,542 | ) | | (8,866 | ) | (10,713 | ) | | (9,356 | ) |
| Total reserve liabilities | $ | 77,850 |
| | $ | 70,974 |
| $ | 98,422 |
| | $ | 81,183 |
|
Liquidity and Capital Resources
There are two forms of liquidity relevant to our business, funding liquidity and balance sheet liquidity. Funding liquidity relates to theour ability to fund operations. Balance sheet liquidity relates to our ability to liquidate or rebalance our balance sheet without incurring significant costs from fees, bid-offer spreads, or market impact. We manage our liquidity position by matching projected cash demands with adequate sources of cash and other liquid assets. Our principal sources of liquidity, in the ordinary course of business, are operating cash flows and holdings of cash, cash equivalents and other readily marketable assets.
Item 2. Management'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 September 30, 20172018 was approximately $48.7$50.8 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. In 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 access to additional liquidity through our $1.0 billion revolving credit facility, which is undrawn as of the date hereof and has a remaining term of approximately threetwo 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 FHLB, of Des Moines (FHLBDM) and Indianapolis (FHLBI), we are eligible to borrow under variable rate short-term federal funds arrangements to provide additional liquidity.
We proactively manage our liquidity position to meet cash needs while minimizing adverse impacts on investment returns. We analyze our cash-flow liquidity over the upcoming 12 months by modeling potential demands on liquidity under a variety of scenarios, taking into account the provisions of our policies and contracts in force, our cash flow position, and the volume of cash and readily marketable securities in our portfolio. 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 from ALRe sufficient to support the ongoing operations of AHL must be available under moderate and substantial stress scenarios |
| |
| ▪ | for purposes of administering this test, liquid limit assets are discounted by 25% and include public corporate bonds rated A- or above, liquid ABS (defined as prime auto, auto floorplan, Tier 1 subprime auto, auto lease, prime credit cards, equipment lease or utility stranded assets) and; RMBS with weighted average lives less than three years rated A- or above; or |
| |
▪ | above and 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 the following collateral calls from modco and third-party reinsurance contractscapital maintenance calls under a substantial stress event, such as the failure of a major financial institution (Lehman event).:
| |
| ▪ | collateral calls from modco and ALRe third-party reinsurance contracts |
| |
| ▪ | U.S. regulated entity capital maintenance calls from nonmodco activity. |
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,market value adjustments (MVA), which are intended to protect us from early withdrawals. As of each of September 30, 20172018 and December 31, 2016,2017, approximately 81% and 86% , respectively, of our deferred annuity liabilities were subject to penalty upon surrender. In addition, as of September 30, 20172018 and December 31, 2016,2017, approximately 72%67% and 73%72%, respectively of policies contained MVAs that may 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:
| | | | Nine months ended September 30, | Nine months ended September 30, |
| (In millions) | 2017 | | 2016 | 2018 | | 2017 |
| Net income | $ | 984 |
| | $ | 404 |
| $ | 1,172 |
| | $ | 984 |
|
| Payment at inception of reinsurance agreements, net | | (394 | ) | | — |
|
| Non-cash revenues and expenses | 358 |
| | 560 |
| 457 |
| | 358 |
|
| Net cash provided by operating activities | 1,342 |
| | 964 |
| 1,235 |
| | 1,342 |
|
| | | | | | | |
| Sales, maturities, and repayment of investments | 12,724 |
| | 9,595 |
| |
| Sales, maturities and repayment of investments | | 12,825 |
| | 12,724 |
|
| Purchases and acquisitions of investments | (17,518 | ) | | (11,391 | ) | (18,920 | ) | | (17,518 | ) |
| Other investing activities | 292 |
| | 114 |
| (51 | ) | | 335 |
|
| Net cash used in investing activities | (4,502 | ) | | (1,682 | ) | (6,146 | ) | | (4,459 | ) |
| | | | | | | |
| Capital contributions | — |
| | 1 |
| |
| Deposits on investment-type policies and contracts | 7,521 |
| | 4,189 |
| 7,011 |
| | 7,521 |
|
| Withdrawals on investment-type policies and contracts | (3,701 | ) | | (3,516 | ) | (4,254 | ) | | (3,701 | ) |
| Net changes of cash collateral posted for derivative transactions | 513 |
| | 254 |
| |
| Consolidated VIE repayment on borrowings | — |
| | (500 | ) | |
| Net change in cash collateral posted for derivative transactions | | (8 | ) | | 513 |
|
| Net proceeds and repayment of debt | | 998 |
| | — |
|
| Other financing activities | (54 | ) | | 139 |
| 110 |
| | (54 | ) |
| Net cash provided by financing activities | 4,279 |
| | 567 |
| 3,857 |
| | 4,279 |
|
| Effect of exchange rate changes on cash and cash equivalents | 30 |
| | (2 | ) | — |
| | 30 |
|
Net increase (decrease) in cash and cash equivalents1 | $ | 1,149 |
| | $ | (153 | ) | |
Net (decrease) increase in cash and cash equivalents1 | | $ | (1,054 | ) | | $ | 1,192 |
|
| | | | | | | |
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, and operating expenses. Our operating activities generated cash flows totaling $1.3$1.2 billion and $964 million$1.3 billion for the nine months ended September 30, 20172018 and 2016,2017, respectively. The increasedecrease in cash provided by operating activities for the nine months ended September 30, 2017 compared to 2016 was primarily driven by the ceding commission related to the Voya reinsurance transaction, higher tax refunds in 2017 and higher commissions due to strong retail sales, partially offset by an increase in net investment income reflecting an increase in our investment portfolio attributed to the strong growthand an increase in deposits over the prior twelve months.PRT premiums.
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 $4.5$6.1 billion and $1.7$4.5 billion for the nine months ended September 30, 20172018 and 2016,2017, respectively. The change in cash used in investing activities for the nine months ended September 30, 2017 compared to 2016 was primarily attributed to the purchase of investments related to the increase in deposits over liability outflows, as well asthe investment of proceeds from our debt issuance, the deconsolidation of AGER Bermuda Holding Ltd. and its subsidiaries and the 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 fromof borrowing activities. Our financing activities provided cash flows totaling $4.3$3.9 billion and $567 million$4.3 billion for the nine months ended September 30, 20172018 and 2016,2017, respectively. The change in cash provided from financing activities for the nine months ended September 30, 2017 was primarily attributed to the increase in deposits over liability outflows, the favorable change in cash collateral posted for derivative transactions and lower funding agreement issuances in 2018, partially offset by proceeds from the settlingissuance of borrowings of our CMBS VIE funds in the prior year.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
debt.
Holding Company Liquidity
AHL is a holding company whose primary liquidity needs include the cash-flow requirements relating to its corporate activities, including its day-to-day operations, debt servicing and strategic transactions, such as acquisitions. The primary source of AHL’s cash flow is dividends from its subsidiaries, which are expected to be adequate to fund cash flow requirements based on current estimates of future obligations. As
Item 2. Management’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. 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 AHLALRe would result in a 30% withholding tax. AHL does not currently plan on having the U.S. subsidiaries pay any dividends to AHL. Athene Lebensversicherung AG (ALV) and Athene Pensionskasse AG (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 September 30, 2017, ALV and APK did not exceed this threshold and, therefore, no amounts are available for distribution to AHL. As a result, dividendsALRe.
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 BMABermuda Monetary Authority (BMA) an affidavit attesting that a dividend in excess of this amount would not cause ALRe to fail to meet its relevant margins. In certain instances, ALRe would also be required to provide prior notice to the BMA in advance of the payment of dividends. In the event that such an affidavit is submitted to the BMA in accordance with the Bermuda Insurance Act, and further subject to ALRe meeting its relevant margins, ALRe is permitted to distribute up to the sum of 100% of statutory surplus and an amount less than 15% of its total statutory capital. Distributions in excess of this amount require the approval of the BMA.
The maximum distribution permitted by law or contract is not necessarily indicative of our actual ability to pay such distributions, which may be further restricted by business and other considerations, such as the potential imposition of withholding tax and the impact of such distributions on surplus, which could affect our ratings or competitive position and the amount of premiums that can be written. Specifically, the level of capital needed to maintain desired financial strength ratings from rating agencies, including S&P, A.M. Best and Fitch, is of particular concern when determining the amount of capital available for distributions. AHL believes its insurance subsidiaries have sufficient statutory capital and surplus, combined with additional capital available to be provided by AHL, to meet their financial strength ratings objectives. Finally,
state insurance laws and regulations require that the statutory surplus of our insurance subsidiaries following any dividend or distribution must be reasonable in relation to their outstanding liabilities and adequate for the insurance subsidiaries’ financial needs.
Other Sources of Funding
If needed, we may seek to secure additional funding at the holding company level by means other than dividends from subsidiaries, such as by drawing on our undrawn $1.0 billion credit facility or 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, subject to market conditions 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 FHLBDMFHLB of Des Moines (FHLBDM) and the FHLBI.FHLB of Indianapolis (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 $38$43 million and $40$36 million of FHLB common stock as of September 30, 20172018 and December 31, 2016,2017, respectively.
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. There were no outstanding borrowings under these arrangements as of September 30, 20172018 or December 31, 2016.2017.
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'sFHLBI’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
We have issued funding agreements to the FHLB in exchange for cash advances. These funding agreements were issued in an investment spread strategy, consistent with other investment spread operations. As of September 30, 20172018 and December 31, 2016,2017, we had anfunding agreements outstanding with the FHLB in the aggregate principal amount of $623$701 million and $691$573 million, respectively, of outstanding FHLB funding agreements. Refer to Note 13 – Commitments and Contingencies to the condensed consolidated financial statements for details of issued funding agreements and related collateral.respectively.
The maximum FHLB indebtedness by a member is determined by the amount of collateral pledged, and cannot exceed a specified percentage of the member'smember’s total statutory assets, dependent on the internal credit rating assigned to the member by the FHLB. As of September 30, 2017,2018, the total maximum borrowings under the FHLBDM facility waswere limited to $15.4$16.8 billion. However, our ability to borrow under the facility is constrained by the availability of assets that qualify as eligible collateral under the facility and by the Iowa Code requirement that we maintain funds equivalent to our legal reserve in certain permitted investments, from which we exclude pledged assets. Considering these limitations, we estimate that, as of September 30, 20172018, we had the ability to draw up to a total of approximately $2$1.5 billion, inclusive of borrowings then outstanding. This estimate is based on our internal analysis and assumptions, and may not accurately measure collateral which is ultimately acceptable to the FHLB. Drawing such amounts would have an adverse impact on AAIA’s RBC ratio, which may further restrict our ability or willingness to draw up to our estimated capacity.
Capital Resources
As of December 31, 20162017 and 2015,2016, our U.S. insurance companies' TAC,companies’ total adjusted capital (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 BSCRBermuda Solvency Capital Requirement (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.its authorized control level RBC (ACL). Our TAC was significantly in excess of all regulatory standards and above our internal targets as of September 30, 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 MMSminimum margin of solvency (MMS) and maintain minimum economic balance sheet (EBS) capital and surplus to meet the Enhanced Capital Requirement (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. 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 statutoryrespectively. The minimum capital and the 2016 calculation now applies to the EBS capital and surplus. Consistent with the previous regime the MRCrequirement ratio to be considered solvent by the BMA is 100%. As of September 30, 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. We believe that we enjoy a strong capital position in light of our risks and that we are well positioned to meet policyholder and other obligations. We also believe that our strong capital position, as well as our excess capital position, provides us the opportunity to take advantage of market dislocations as they arise. Changes in U.S. tax rates under the Tax Act will impact our RBC ratios beginning December 31, 2018. See Industry Trends and Competition – Regulatory Developments for further discussion.
Balance Sheet and Other Arrangements
Balance Sheet Arrangements
Contractual Obligations
AsThe following table summarizes estimated future payments on our contractual obligations as of September 30, 2017, there have been no significant changes to contractual obligations since December 31, 2016. See Part II—Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2016 Annual Report.2018:
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (In millions) | Total | | 2018 | | 2019-2020 | | 2021-2022 | | 2023 and thereafter |
| Interest sensitive contract liabilities | $ | 88,903 |
| | $ | 7,256 |
| | $ | 15,643 |
| | $ | 16,762 |
| | $ | 49,242 |
|
| Future policy benefits | 14,771 |
| | 197 |
| | 431 |
| | 467 |
| | 13,676 |
|
| Other policy claims and benefits | 140 |
| | 140 |
| | — |
| | — |
| | — |
|
| Dividends payable to policyholders | 120 |
| | 5 |
| | 10 |
| | 10 |
| | 95 |
|
Long-term debt1 | 1,413 |
| | 21 |
| | 83 |
| | 83 |
| | 1,226 |
|
| Total | $ | 105,347 |
| | $ | 7,619 |
| | $ | 16,167 |
| | $ | 17,322 |
| | $ | 64,239 |
|
| | | | | | | | | | |
1 The obligations for long-term debt payments include contractual maturities of principal and estimated future interest payments based on the terms of the debt agreement, as described in Note 8 – Debt to the condensed consolidated financial statements. |
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
Off Balance Sheet Arrangements
Collateral for Derivatives
We enter into derivatives for risk management purposes. We hold non-cash collateral from counterparties for our derivatives, which has not been recorded on our consolidated balance sheets. These amounts were $128 million and $221 million as of September 30, 2018 and December 31, 2017, respectively.
Collateral for Reinsurance
We hold collateral for and provide collateral to counterparties for our reinsurance agreements. We held $765 million and $259 million as of September 30, 2018 and December 31, 2017, respectively, of collateral on behalf of our reinsurers.
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.Report; however, due to the significance of the Voya reinsurance transactions, the following updates and replaces the corresponding tables provided in the 2017 Annual Report:
Future Policy Benefits—Liabilities for Guaranteed Living Withdrawal Benefits and Guaranteed Minimum Death Benefits
As of September 30, 2018, the GLWB and GMDB liability balance, including the impacts of shadow adjustments, totaled $3.3 billion. The increase (decrease) to the GLWB and GMDB liability balance, including the impacts of shadow adjustments from hypothetical changes in projected assessments, changes in the discount rate and annual equity growth is summarized as follows:
|
| | | |
| (In millions) | September 30, 2018 |
| +10% assessments | $ | (97 | ) |
| –10% assessments | 108 |
|
| +100 bps discount rate | 99 |
|
| –100 bps discount rate | (113 | ) |
| 1% lower annual equity growth | 44 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Derivatives—Valuation of Embedded Derivatives on FIAs
As of September 30, 2018, we had embedded derivative liabilities classified as Level 3 in the fair value hierarchy of $8.7 billion. The increase (decrease) to the embedded derivatives on FIA products from hypothetical changes in discount rates is summarized as follows:
|
| | | |
| (In millions) | September 30, 2018 |
| +100 bps discount rate | $ | (690 | ) |
| –100 bps discount rate | 792 |
|
Deferred Acquisition Costs, Deferred Sales Inducements, and Value of Business Acquired—As of September 30, 2018, DAC, DSI and VOBA totaled $5.0 billion. The increases (decreases) to DAC, DSI and VOBA from hypothetical changes in estimated future gross profits and the embedded derivative discount rate are summarized as follows:
|
| | | | | | | | | | | | | | | |
| | September 30, 2018 |
| (In millions) | DAC | | DSI | | VOBA | | Total |
| +10% estimated future gross profits | $ | 41 |
| | $ | 18 |
| | $ | 47 |
| | $ | 106 |
|
| –10% estimated future gross profits | (47 | ) | | (20 | ) | | (52 | ) | | (119 | ) |
| +100 bps discount rate | (88 | ) | | (35 | ) | | (41 | ) | | (164 | ) |
| –100 bps discount rate | 90 |
| | 42 |
| | 46 |
| | 178 |
|
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 those previously disclosed in the 2017 Annual Report, except as described below. The following updates and replaces the information provided in the 2017 Annual Report under the similarly titled headings:
Sensitivities
Interest Rate Risk
We assess interest rate exposures for financial assets, liabilities and derivatives using hypothetical stress tests and exposure analyses. Assuming all other factors are constant, if there was an immediate, parallel increase in interest rates of 25 basis points from levels as of September 30, 2018, the estimated point-in-time impact to our pre-tax consolidated statements of income would have been a decrease of $163 million as of September 30, 2018. If there were a similar parallel increase in interest rates from levels as of December 31, 2017, the estimated point-in-time impact to our pre-tax consolidated statements of income would have been an increase of $18 million as of December 31, 2017. The decrease compared to December 31, 2017 was driven by the Voya reinsurance transactions on June 1, 2018, which substantially increased our exposure to reinsurance unrealized gains and losses that are included in our pre-tax income. An immediate, parallel decline in interest rates of 25 basis points is estimated to increase our pre-tax consolidated statements of income as of September 30, 2018 and December 31, 2017 by similar amounts to the decreases shown above.
Assuming a 25 basis points increase in interest rates persists for a 12-month period, the estimated impact to adjusted operating income netis expected to be relatively unchanged from the sensitivities shown in Part II—Item 7A. Quantitative and Qualitative Disclosures About Market Risk of tax, would be an increase of approximately $25 – $30 million. This is driven by an increase in investment income fromthe 2017 Annual Report, as there were minimal floating rate assets offsetadded as a part of the Voya reinsurance transaction. The models used to estimate the impact of a 25 basis point change in market interest rates incorporate numerous assumptions, require significant estimates and assume an immediate change in interest rates without any discretionary management action to counteract such a change. Consequently, potential changes in our valuations indicated by DAC, DSIthese simulations will likely be different from the actual changes experienced under any given interest rate scenarios and VOBA amortizationthese differences may be material. Because we actively manage our assets and rider reserve change, all calculated without regardliabilities, the net exposure to future changesinterest rates can vary over time. However, any such decreases in the fair value of fixed maturity securities, unless related to assumptions.credit concerns of the issuer requiring recognition of an OTTI, would generally be realized only if we were required to sell such securities at losses to meet liquidity needs.
There have been noPublic Equity Risk
Assuming all other material changes to ourfactors are constant, we estimate that a decline in public equity market risk exposuresprices of 10% would be relatively unchanged from the market risk exposures previously disclosedsensitivities shown in Part II—Item 7A. Quantitative and Qualitative Disclosures About Market Risk of 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. In light of the overlap between disclosure controls and procedures and internal control over financial reporting, our evaluation of disclosure controls and procedures excluded an assessment of those disclosure controls and procedures related to the Voya reinsurance transactions discussed in Note 7 – Reinsurance to the condensed consolidated financial statements that are subsumed by internal control over financial reporting.
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 September 30, 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 13 – 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
Certain of our investments in RMBS securities may experience a decline in value if trustees are permitted to withhold funds to meet expenses and/or claims incurred in connection with litigation against such trustees
In June 2017, Wells Fargo, National Association (Wells Fargo), as trustee of certain pre-crisis residential mortgage-backed securities (Legacy RMBS) transactions, notified certificateholders that it withheld a portion of the funds received during related clean-up calls to meet litigation expenses (both incurred and anticipated) and/or claims in connection with Blackrock, et al. v. Wells Fargo (Blackrock Litigation). The Blackrock Litigation is one of a series of cases various parties have brought against trustees of Legacy RMBS transactions for the alleged failure of such trustees to perform their respective duties and obligations under the related transaction documents.
In July 2017, various funds managed by Pacific Investment Management Company, LLC (collectively, PIMCO) brought a declaratory judgment action in the Supreme Court of New York against Wells Fargo seeking to prevent Wells Fargo from paying any portion of the defense costs of the Blackrock Litigation from the trusts at issue in the litigation, and claiming that Wells Fargo, as trustee, breached certain duties to investors. In September 2017, Wells Fargo filed a motion to dismiss the claims brought by PIMCO.
It is not known at this time whether Wells Fargo will seek to withhold funds from other Legacy RMBS transactions or whether other RMBS trustees will attempt to take similar action. We hold a substantial Legacy RMBS portfolio, the ratings, yield and value of which could be adversely affected if Wells Fargo or other RMBS trustees have established, or attempt to establish, similar reserves in other Legacy RMBS transactions.
Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021 may adversely affect the value of our investment portfolio and may further affect our ability to issue funding agreements bearing a floating rate of interest
Regulators and law enforcement agencies in the UK and elsewhere are conducting civil and criminal investigations into whether the banks that contribute to the British Bankers’ Association (BBA) in connection with the calculation of daily LIBOR may have been under-reporting or otherwise manipulating or attempting to manipulate LIBOR. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to this alleged manipulation of LIBOR.
Actions by the BBA, regulators or law enforcement agencies may result in changes to the manner in which LIBOR is determined or the establishment of alternative reference rates. For example, on July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted in the UK or elsewhere. Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect the trading market for LIBOR-based securities, including those held in our investment portfolio and may further adversely affect our ability to issue funding agreements bearing a floating rate of interest. As of September 30, 2017, 28% of our invested assets were floating rate investments, some of which were referenced to LIBOR.
The following updates and replaces the second, fourth and fifth paragraphslast paragraph of the similarly named risk factor included in our 20162017 Annual 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, during the three months ended March 31, 2018, we restructured our affiliated modco arrangements to ensure that they would not be subject to the BEAT in the event that we do not receive guidance that the BEAT applies on a net basis, and during the three months ended September 30, 2018, we implemented additional reinsurance arrangements common in the insurance industry to further mitigate the potential effect on our results of operations should the BEAT apply on a gross basis. We have made estimates regarding the effective and overall tax rates we expect to experience as a result of undertaking these 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. Such estimates and assumptions may prove incorrect. To the extent that actual experience differs from the estimates and assumptions inherent in our projections, our future effective and overall tax rates 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 these products and services 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 involving or against us. In addition, as a result of our acquisitions, we rely on third-party administrators (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 against us. 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 AtlanticAtlantic. The life insurance policies included in this block have been and are currently being administered by the TPAAllianceOne, a subsidiary of DXC Technology Company, which was retained by such Global Atlantic affiliates to provide services on such policies, as well as onpolicies. AllianceOne also administers certain annuity policies that were on Aviva USA’s lifelegacy policy administration systems that were also converted toin connection with the acquisition of Aviva USA and are being administered by the same TPA. have experienced similar service and administration issues.
As a result of these increased complaints and service-related issues, our U.S. insurance subsidiaries may be subjectthe difficulties experienced with respect to increased regulatory scrutiny,the administration of such policies, we have received notifications from several state regulators, including fines and penalties, and policyholder litigation. To date,but not limited to the New York State Department of Financial Services is in the process of conducting a market conduct examinationNYSDFS, CDI and the Texas Department of Insurance, has notified usindicating, in each case, that it intendsthe respective regulator planned to undertake ana market conduct examination or enforcement proceeding in each case,of the applicable U.S. insurance subsidiary relating to the treatment of policyholders subject to our reinsurance agreements with affiliates of Global Atlantic and the conversion of such annuity policies, including the administration of such blocks by such TPA. Additionally, if anyAllianceOne. On June 28, 2018 we entered into a consent order with the NYSDFS resolving that matter in a manner that, when considering the indemnification received from affiliates of Global Atlantic, did not have a material impact on our TPAs fails to perform in accordance with our standards, we may incur additional costs in connection with finding and retaining new TPAs, which may divert the time and attentionfinancial condition, results of our senior management from our business.operations or cash flows.
Further, on April 6, 2016, the DOL issued the fiduciary rule which imposes upon third parties who sell annuities within Employee Retirement Income Security Act of 1974 (as amended, ERISA) plans or to individual retirement account (IRA) holders a fiduciary duty to retirement investors. 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 fiduciary rule were originally scheduled to begin to be implemented on April 10, 2017, with full implementation on January 1, 2018. The DOL delayed the applicability date of the fiduciary rule for 60-days to June 9, 2017 and, inIn addition to delaying the applicability date, the DOL adjusted the exemption requirements that applyforegoing, we have received inquiries, and expect to sales in the interim period starting June 9, 2017 until the full compliance date of January 1, 2018. On July 6, 2017, the DOL issued a request for information (RFI)continue to receive inquiries, from other regulatory authorities regarding the fiduciary rule. The DOL indicated that the information gathered from the responsesconversion matter. In addition to the RFI “could form the basis of new exemptionsexaminations and proceedings initiated to date, it is possible that other regulators may pursue similar formal examinations, inquiries or changes/revisions”. Along with the request for comments about the fiduciary ruleenforcement proceedings and its impact, the DOL asked for commentary regarding the potential impact of extending the January 1, 2018 full compliance date. On August 9, 2017, the DOL submitted to the Office of Management and Budget a proposal to extend the January 1, 2018 full implementation date to July 1, 2019. In order for the extension to become effective, the proposal must be finalized and issued in the Federal Register before January 1, 2018. We are assisting our distribution partners with the interim requirements.
The fiduciary rule's obligations for distributors of products to retirement accountsthat any examinations, inquiries and/or enforcement proceedings may result in additional compliance costsfines, administrative penalties and payments to us, regulatory scrutiny and litigation, as well as reduced product sales. Sincepolicyholders. While we do not expect the fiduciary rule is in the processamount of being implemented, we are not ableany such fines, penalties or payments arising from these matters to assess the actual impact that such regulations may have on us andbe material to our associates. If the fiduciary rule is fully implemented in its current form, ourfinancial condition, results of operations and financial condition mayor cash flows, it is possible that such amounts could be negatively impacted as we implement the fiduciary rule’s numerous requirements.material.
Risks RelatingPursuant to Insurancethe terms of the reinsurance agreements between us and Other Regulatory Mattersthe relevant affiliates of Global Atlantic, the applicable affiliates of Global Atlantic have financial responsibility for the ceded life block and are subject to significant administrative service requirements, including compliance with applicable law. The agreements also provide for indemnification to us, including for administration issues.
The following updates and replaces the specified paragraphssimilarly named risk factor included in our 2017 Annual Report:
We rely on our investment management agreements with AAM for the management of our investment portfolio. AAM may terminate these arrangements at any time, and there are limitations on our ability to terminate such arrangements, which may adversely affect our investment results.
We rely on AAM to provide us with investment management services pursuant to various investment management agreements (IMAs). AAM relies in part on its ability to attract and retain key people, and the loss of services of one or more of the similarly named sectionsmembers of AAM’s senior management could delay or prevent AAM from fully implementing our investment strategy.
IMA Termination Rights
Our bye-laws currently provide that we may not, and will cause our subsidiaries not to, terminate any IMA among us or any of our subsidiaries, on the one hand, and AAM, on the other hand, before any annual anniversary of October 31 (each such date, an IMA Termination Election Date) and any termination on an IMA Termination Election Date requires (i) the approval of two-thirds of our Independent Directors (as defined below) and (ii) written notice to AAM of such termination at least 30 days’ prior to an IMA Termination Election Date. If our Independent Directors make any such election to terminate and notice of such termination is delivered, the termination will be effective on the second anniversary of the risk factor entitled “Changesapplicable IMA Termination Election Date (IMA Termination Effective Date). Notwithstanding the foregoing, (A) our Independent Directors may only elect to terminate an IMA on an IMA Termination Election Date if two-thirds of our Independent Directors determine, in their sole discretion and acting in good faith, that either (i) there has been unsatisfactory long-term performance materially detrimental to us by AAM, or (ii) the fees being charged by AAM 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 AAM and AAM will have until the applicable IMA Termination Effective Date to address such concerns, and provided, further, that in the lawscase of such a determination that the fees being charged by AAM are unfair and regulationsexcessive, AAM has the right to lower its fees to match the fees of such comparable asset manager) and (B) upon the determination by two-thirds of our Independent Directors, we or our subsidiaries may also terminate an IMA with AAM as a result of either (i) a material violation of law relating to AAM’s investment management business, or (ii) AAM’s gross negligence, willful misconduct or reckless disregard of AAM’s obligations under the relevant agreement, and in either case the delivery of written notice at least 30 days’ prior to such termination and such termination will be effective at the end of such 30-day period (the events described in the foregoing clauses (A) and (B) are referred to in more detail in our bye-laws as “AHL Cause”). For purposes of these provisions of the bye-laws, an “Independent Director” cannot be (x) an officer or employee of ours or any of our subsidiaries or (y) an officer or employee of (1) any member of the Apollo Group described in clauses (i) through (iv) of the definition of “Apollo Group” as set forth in our bye-laws or (2) AGM or any of its subsidiaries (excluding any subsidiary that constitutes any portfolio company (or investment) of (A) an investment fund or other investment vehicle whose general partner, managing member or similar governing person is owned, directly or indirectly, by AGM or by one or more of its subsidiaries or (B) a managed account agreement (or similar arrangement) whereby AGM or one or more of its subsidiaries serves as general partner, managing member or in a similar governing position).
Our organizational documents give our Independent Directors complete discretion, while acting in good faith, as to whether to determine if an AHL Cause event has occurred with respect to any IMA with AAM, and therefore our Independent Directors are under no obligation to make, and therefore may exercise their discretion never to make, such a determination.
The boards of directors of AHL’s subsidiaries may terminate an IMA with AAM relating to the insurance industry or otherwise applicable subsidiary if such subsidiary’s board of directors determines that such termination is required in the exercise of its fiduciary duties. If our subsidiaries do elect to terminate any such agreement, other than as provided above, we may be in breach of our business, including the DOL fiduciary regulation, maybye-laws, which could subject us to regulatory scrutiny, expose us to shareholder lawsuits and could have a material adversenegative effect on our business, financial condition liquidity,and results of operations.
On September 20, 2018, we entered into a letter agreement (Letter Agreement) with AAM. In the Letter Agreement, (1) we confirmed that AHL’s Board of Directors approved, and recommended that AHL’s shareholders approve, the amendment and restatement of our bye-laws (Existing Bye-Laws) in substantially the form attached as an exhibit to the Letter Agreement (Proposed Bye-Laws) and (2) we agreed that we will seek the approval of AHL’s shareholders of the amendment and restatement of our bye-laws in substantially such form at the next annual general meeting of AHL’s shareholders.
The Proposed Bye-Laws, if adopted as our bye-laws, will amend the IMA Termination Election Date (as defined in the Existing Bye-Laws) to be the fourth anniversary of the date on which the Proposed Bye-Laws are adopted as our bye-laws and each two-year anniversary thereafter. The Proposed Bye-Laws, if adopted as our bye-laws, will continue to permit us to terminate the IMA, or any New IMA (as each such term is defined in the Existing Bye-Laws), for cause.
Investment Management Fees
Further, except in limited circumstances, we currently pay AAM 0.40% per year on assets managed up to $65.8 billion and 0.30% per year on assets managed in excess of such amount. We pay additional fees to Apollo and its affiliates for providing sub-advisory services and acting as manager of investment funds in which we invest. Any such fees may be higher than what other investment managers may be willing to charge us currently for investment services. Because of the services and the unique acquisition opportunities provided by AAM and Apollo that we are able to access that many other companies cannot access, we do not currently expect our board of directors or our Independent Directors would elect to terminate any IMA. These limitations on our ability to terminate the IMAs with AAM could have a negative effect on our financial condition and results of operations.
Termination by AAM
Conversely, we may be adversely affected if AAM elects to terminate an IMA at a time when such agreement remains advantageous to us. We depend upon AAM to implement our investment strategy. However, AAM does not face the restrictions described above with regards to its ability to terminate any of its agreements with us and may terminate such agreements at any time. If AAM chooses to terminate such agreements, there is no assurance that we could find a suitable replacement or that certain of the opportunities made available to us as a result of our relationship with AAM and Apollo would be offered by a suitable replacement, and therefore our results of operations and prospects” included infinancial condition could be adversely impacted by our 2016 Annual Report. There have been no material changesfailure to other sections of such risk factor, which include: “Non-Bank SIFIs,” “FIAs,” “U.S. Consumer Protection Laws and Privacy and Data Security Regulation,” and “NAIC.”
U.S. Federal Oversightretain a satisfactory investment manager.
The following updates and replaces the third paragraphsimilarly named section of the “U.S. Federal Oversight” subsectionrisk factors included within the 2016in our 2017 Annual Report:
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 was delayed to June 9, 2017, in response to a 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. On August 9, 2017, the DOL submitted to the Office of Management and Budget a proposal to extend the January 1, 2018 full implementation date to July 1, 2019. In order for the extension to become effective, the proposal must be finalized and issued in the Federal Register before January 1, 2018. For the year ended December 31, 2016, of our total deposits of approximately $8.8 billion from 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. In addition, the NAIC has implemented a working group to update the current Suitability in Annuity Transactions Model Regulation to address the fiduciary standard and the SEC has indicated that it may propose rules creating a uniform standard of conduct applicable to broker-dealers and investment advisers. The NAIC or SEC rules, if adopted, may affect the distribution of our products. In addition, should the SEC and NAIC rules, if adopted, not align with each other or the finalized DOL regulations, the distribution of our products could be further complicated.
Regulation of Over-The-Counter (OTC) Derivatives
The following updates and replaces the third paragraph of the "Regulation of Over-The-Counter (OTC) Derivatives" subsection included within the 2016 Annual Report:
The Dodd-Frank Act and the CFTC rules thereunder require us, in connection with certain swap transactions, to comply with mandatory clearing and on-facility trade execution requirements, and it is anticipated that the types of swaps subject to these requirements will be expanded over time. In addition, new regulations require us to comply with mandatory minimum margin requirements for uncleared swaps and, in some instances, uncleared security-based swaps. Uncleared swap variation margin regulations issued by 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 so could result in trading disruptions. Derivative clearing requirements 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 clearinghouse could have a significant impact on the financial system. Even if a clearinghouse does not fail, large losses could force significant capital calls on clearinghouse members during a financial crisis, which could lead clearinghouse members to default. Because clearinghouses are still developing and the related bankruptcy process is untested, it is difficult to anticipate or identify all actual risks related to the default of a clearinghouse.
Risks Relating to Taxation
The following updatesBEAT may significantly increase our tax liability and replacesour efforts to mitigate the similarly named risk factorcost of the BEAT 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 “modified taxable income” of an “applicable taxpayer.” Modified taxable income is calculated by adding back to a taxpayer’s regular taxable income the amount of certain “base erosion tax benefits” with respect to certain payments made to foreign affiliates of the taxpayer, as well as the “base erosion percentage” of any net operating loss deductions. The BEAT applies for a taxable year only to the extent it exceeds a taxpayer’s regular corporate income tax liability for such year (determined without regard to certain tax credits).
Certain of our reinsurance agreements require our U.S. subsidiaries to pay or accrue substantial amounts to our non-U.S. reinsurance subsidiaries that would be characterized as “base erosion payments” with respect to which there are “base erosion tax benefits.” However, it is not clear whether any amounts paid or accrued by our non-U.S. reinsurance subsidiaries to our U.S. subsidiaries under these reinsurance agreements would be netted against these amounts for purposes of calculating the “base erosion payments” and “base erosion tax benefits.” Accordingly, the BEAT could significantly increase the tax liability of our U.S. subsidiaries and have a material adverse effect on our results of operations.
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, during the three months ended March 31, 2018, we restructured our affiliated modco arrangements to ensure that they would not be subject to the BEAT in the event that we do not receive guidance that BEAT applies on a net basis, and during the three months ended September 30, 2018, we implemented additional reinsurance arrangements common in the insurance industry to further mitigate the potential effect on our results of operations should the BEAT apply on a gross basis. Our efforts may not succeed. Additionally, when the uncertainty regarding the BEAT is resolved, our actions may, in hindsight, prove to have been unnecessary and inefficient.
The term “related” is defined broadly under the BEAT and application of the definition and the tax attribution rules to which it refers can produce results that are hard to predict. We believe that other than our wholly-owned subsidiaries, none of our reinsurance counterparties should be treated as “related” to us for purposes of the BEAT, and therefore payments under our reinsurance arrangements with such counterparties are not subject to the BEAT. However, there is considerable uncertainty regarding the scope of the term “related” for BEAT purposes, and no assurances can be made that the IRS will not assert that one or more of our reinsurance counterparties are “related” to us for purposes of the BEAT. A successful challenge would have a material adverse effect on our results of operation.
The application of the 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.
Actions that we have taken to mitigate the impact of the BEAT in light of the uncertainties described above 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 have been payable under our previous structure. In addition, it is possible that we will be required to take further action before the uncertainty regarding the BEAT is resolved, and accordingly any further 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 U.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 companies to conduct their business differently. If AHL or one of its non-U.S. subsidiaries were considered to be engaged in a trade or business in the U.S., it could be subject to U.S. federal income taxation on a net basis on its income that is effectively connected with such U.S. trade or business (including branch profits tax on the portion of its earnings and profits that is attributable to such income). Any such U.S. federal income taxation could result in substantial tax liabilities and consequently could have a material adverse effect on our 2016 Annual Report: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 voting 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 U.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 ALRe’s non-U.S. subsidiaries held by ALRe for CFC purposes. Accordingly, ALRe’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 intended to cause any of AHL’s non-U.S. subsidiaries to be treated as a CFC with respect to a 10% U.S. Shareholder (as defined below) that is not related to our U.S. subsidiaries. However, it is not 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 AHL or its 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 relevant 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 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 subjectenactment of Congressional discussionthe Tax Act. See Part I—Item 2. Management’s Discussion and legislative proposals. Legislative proposals relatingAnalysis of Financial Condition and Results of Operations–Industry Trends and Competition–Regulatory Developments. 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 taxresulting 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. companies have been introduced inpersons to U.S. persons under Section 958(b)(4) of the past that could, if enacted, materially affect us. Both the U.S. Congress and President Trump’s administration have indicated a desire to reform the U.S. Internal Revenue Code for purposes of 1986,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 amended. In November, Chairman Brady (R-TX)owning) 10% or more of the House Committee on Waysvalue of a foreign corporation.
There is significant uncertainty regarding how these and Means released proposed legislation entitledother provisions of the Tax CutsAct will be interpreted, and Jobsguidance 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, 2017 (the Proposed Bill). The Proposed Bill would, if enacted, reduce corporate tax rates to 20%, impose a 20% excise tax on payments made by domestic insurers to related foreign insurersor guidance under certain circumstances, and significantly accelerate taxable income and therefore cash tax expense by the imposition of other changes which would impact life insurance companies, among others. Although a reduction in the corporate tax rate would generally have a positive impact on the earnings and cash flow of our U.S. companies, the imposition of the proposed 20% excise tax and other components of the Proposed BillTax Act could if enacted, add significant expense and have a material adverse effect on our results of operations.
The Proposed Bill also includes proposals that could, if enacted, affect whether AHL or anyFinally, the tax treatment of its non-U.S. subsidiaries are treated as a “passive foreign investment company” (PFIC) or a “controlled foreign corporation” (CFC). Whether or not the Proposed Bill is enacted, interpretations of U.S. federal income tax law, including those regarding whether a company is engaged in a trade or business (or has a permanent establishment) within the United States or is a PFIC, or whether U.S. persons are required to include in their gross income “subpart F income” or related person insurance income (RPII) of a CFC, are subject to change, possibly on a retroactive basis. Regulations regarding the application of the PFIC rules to insurance companies and regarding RPII are only in proposed form. Whether or not the Proposed Bill is enacted, new regulations or pronouncements interpreting or clarifying the existing proposed regulationstheir U.S. and non-U.S. insurance subsidiaries may be forthcoming.
It is possible that the Proposed Bill will be amended significantly before passage, that other legislative proposals could emerge in the future or that nosubject of further tax legislation is enacted in the near future. Such amendments or future proposals could also have an adverse impact on us.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. 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 September 30, 20172018 are set forth below:
|
| | | | | | | | | | |
| 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 |
| July 1 – July 31, 2017 | 232 |
| $ | 49.61 |
| — |
| $ | — |
|
| August 1 – August 31, 2017 | — |
| $ | — |
| — |
| $ | — |
|
| September 1 – September 30, 2017 | 290 |
| $ | 52.31 |
| — |
| $ | — |
|
| | | | | |
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 units or upon the exercise of stock options. |
2 As of September 30, 2017, our Board of Directors had not authorized any purchases of common stock in connection with a publicly announced plan or program. |
|
| | | | | | | | | | |
| 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 |
| July 1 – July 31, 2018 | 259 |
| $ | 44.19 |
| — |
| $ | — |
|
| August 1 – August 31, 2018 | 287 |
| $ | 49.98 |
| — |
| $ | — |
|
| September 1 – September 30, 2018 | — |
| $ | — |
| — |
| $ | — |
|
| | | | | |
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 September 30, 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.
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: November 7, 2017 | /s/ Martin P. Klein |
| Martin P. Klein |
| Chief Financial Officer |
| (principal financial officer and duly authorized signatory) |
EXHIBIT INDEX
|
| |
| Exhibit No. | Description |
| 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: November 1, 2018 | /s/ Martin P. Klein |
| Martin P. Klein |
| Executive Vice President and Chief Financial Officer |
| (principal financial officer and duly authorized signatory) |