| | UNITED STATES SECURITIES AND EXCHANGE COMMISSION | | | | | | | | | | | | |
Washington, D.C. 20549 | | | | | | | | | | | | |
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FORM 10-Q | | | | | | | | | | | | |
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| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended June 30, 2018 | |
| For the quarterly period ended March 31, 2019 | | For the quarterly period ended March 31, 2019 |
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OR | | | | | | | | | | | | |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| | | 001-37963 | | | | 001-37963 | | |
(Commission file number) | | | | | | | | | | | | |
ATHENE HOLDING LTD. | (Exact name of registrant as specified in its charter) | | | | | | | | | | | | |
| | Bermuda | | | 98-0630022 | | Bermuda | | | 98-0630022 | |
| | (State or other jurisdiction of | | | (I.R.S. Employer | | (State or other jurisdiction of | | | (I.R.S. Employer | |
| | incorporation or organization) | | | Identification Number) | | incorporation or organization) | | | Identification Number) | |
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96 Pitts Bay Road | Pembroke, HM08, Bermuda | (441) 279-8400 | (Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) | | | | | | | | | | | | |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ | Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ | Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ |
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ | |
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 ¨ |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | | |
| | Large accelerated filer x | | Accelerated filer ¨ | | Large accelerated filer x | | Accelerated filer ¨ | |
| | Non-accelerated filer ¨ (Do not check if a smaller reporting company) | | Smaller reporting company ¨ | | Non-accelerated filer ¨ | | Smaller reporting company ¨ | |
| | | | | Emerging growth company ¨ | | | | Emerging growth company ¨ | |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ |
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| Securities registered pursuant to Section 12(b) of the Act: | | Securities registered pursuant to Section 12(b) of the Act: |
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| | | | Title of each class | Trading Symbol | | Name of each exchange on which registered | |
| | | | Class A common shares | ATH | | New York Stock Exchange | |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x | Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x | Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x |
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| | | The number of shares of each class of our common stock outstanding is set forth in the table below, as of June 30, 2018: | | | The number of shares of each class of our common stock outstanding is set forth in the table below, as of April 5, 2019: | |
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| | | Class A common shares | 164,734,282 |
| | Class M-2 common shares | 851,103 |
| | | Class A common shares | 161,698,498 |
| | Class M-2 common shares | 841,011 |
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| | | Class B common shares | 25,483,107 |
| | Class M-3 common shares | 1,001,110 |
| | | Class B common shares | 25,433,465 |
| | Class M-3 common shares | 1,001,110 |
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| | | Class M-1 common shares | 3,388,890 |
| | Class M-4 common shares | 4,354,425 |
| | | Class M-1 common shares | 3,339,890 |
| | Class M-4 common shares | 4,074,026 |
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TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
PART II—OTHER INFORMATION
As used in this Quarterly Report on Form 10-Q (report), unless the context otherwise indicates, any reference to “Athene,” “our Company,” “the Company,” “us,” “we” and “our” refer to Athene Holding Ltd. together with its consolidated subsidiaries and any reference to “AHL” refers to Athene Holding Ltd. only.
Forward-Looking Statements
Certain statements in this 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,report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 (Securities Act), as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act).
You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “seek,” “assume,” “believe,” “may,” “will,” “should,” “could,” “would,” “likely” and other words and terms of similar meaning, including the negative of these or similar words and terms, in connection with any discussion of the timing or nature of future operating or financial performance or other events. However, not all forward-looking statements contain these identifying words. Forward-looking statements appear in a number of places throughout and give our current expectations and projections relating to our business, financial condition, results of operations, plans, strategies, objectives, future performance business and other matters.
We caution you that forward-looking statements are not guarantees of future performance and that our actual consolidated financial condition, liquidity, results of operations, liquidity and cash 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 financial condition, liquidity, results of operations and cash 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–Item 1A. Risk Factors included in this report and Part I–Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2017 (20172018 (2018 Annual Report). Factors that could cause actual results or conditions to differ from those reflected in the forward-looking statements contained in this report include:
the accuracy of management’s assumptions and estimates;
variability in the amount of statutory capital that our insurance and reinsurance subsidiaries have or are required to hold;
interest rate and/or foreign currency fluctuations;
our potential need for additional capital in the future and the potential unavailability of such capital to us on favorable terms or at all;
changes in relationships with important parties in our product distribution network;
the activities of our competitors and our ability to grow our retail business in a highly competitive environment;
the impact of general economic conditions on our ability to sell our products and on the fair value of our investments;
our ability to successfully acquire new companies or businesses and/or integrate such acquisitions into our existing framework;
downgrades, potential downgrades or other negative actions by rating agencies;
our dependence on key executives and inability to attract qualified personnel, or the potential loss of Bermudian personnel as a result of Bermuda employment restrictions;
market and credit risks that could diminish the value of our investments;
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;
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 LLC (AAM) of its investment management agreements with us and limitations on our ability to terminate such arrangements;
AAM’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,AHL, 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;licenses or our inability to procure licenses associated with new products or services;
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)AHL or any of its non-U.S.non-United States (U.S.) subsidiaries becoming subject to U.S. federal income taxation;
adverse changes in U.S. tax law;
our being subject to U.S. withholding tax under the Foreign Account Tax Compliance Act (FATCA);
our potential inability to pay dividends or distributions; and
other risks and factors listed under Part II—Item 1A. Risk Factors includeddiscussed elsewhere in this report, Part I—Item 1A. Risk Factors included
in our 20172018 Annual Report and those discussed elsewhere in this report and in our 20172018 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:
Entities
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| Term or Acronym | | Definition |
| A-A Mortgage | | A-A Mortgage Opportunities, L.P. |
| AAA | | AP Alternative Assets, L.P. |
AAA Investor | | AAA Guarantor – Athene, L.P. |
AADE | | Athene Annuity & Life Assurance Company |
| AAIA | | Athene Annuity and Life Company |
| AAM | | Athene Asset Management LLC |
AGERAARe | | AGERAthene Annuity Re Ltd., a Bermuda Holdingreinsurance subsidiary |
| ACRA | | Athene Co-Invest Reinsurance Affiliate 1A Ltd., now known as Athora Holding Ltd. and formerly a consolidated subsidiary |
| ADIP | | Apollo/Athene Dedicated Investment Program |
| AGM | | Apollo Global Management, LLC |
| AHL | | Athene Holding Ltd. |
ALIC | | Athene Life Insurance Company |
ALR | | ALR Aircraft Investment Ireland Limited |
| ALRe | | Athene Life Re Ltd., a Bermuda reinsurance subsidiary |
| AmeriHome | | AmeriHome Mortgage Company, LLC |
| 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 AGER Bermuda Holding Ltd. and formerly a consolidated subsidiary |
CoInvest OtherBMA | | AAA Investments (Other), L.P.Bermuda Monetary Authority |
| CoInvest VI | | AAA Investments (Co-Invest VI), L.P. |
| CoInvest VII | | AAA Investments (Co-Invest VII), L.P. |
DOLLIMRA | | United States Department of LaborLife Insurance and Market Research Association |
| MidCap | | MidCap FinCo Limited |
| NAIC | | National Association of Insurance Commissioners |
NCL LLC | | NCL Athene, LLC |
| NYSDFS | | New York State Department of Financial Services |
SprintRLI | | Apollo Asia Sprint Co-Investment Fund, L.P.ReliaStar Life Insurance Company |
| Treasury | | United States Department of the Treasury |
| Voya | | Voya Financial, Inc. |
| VIAC | | Voya Insurance and Annuity Company |
| Venerable | | Venerable Holdings, Inc., together with its subsidiaries |
Certain Terms & Acronyms
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| | |
| Term or Acronym | | Definition |
| ABS | | Asset-backed securities |
| ACL | | Authorized control level risk-based capitalRBC as defined by the model created by the National Association of Insurance Commissioners |
| ALM | | Asset liability management |
| ALRe RBC | | The risk-based capital ratio of ALRe, when applying the National Association of Insurance CommissionersNAIC risk-based capital factors |
AUM | | Assets under managementfactors. |
| Alternative investments | | Alternative investments, including investment funds, collateralized loan obligationCLO 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 risk-based capital as defined by the model created by the National Association of Insurance Commissioners |
Capital ratio | | Ratios calculated (1) with respect to our U.S. insurance subsidiaries, by reference to 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 solvency capital requirements |
| CLO | | Collateralized loan obligation |
| CMBS | | Commercial mortgage-backed securities |
| CML | | Commercial mortgage loans |
| Cost of crediting | | The interest credited to the policyholders on our fixed annuities, including, with respect to our fixed indexed annuities, option costs, as well as institutional costs related to institutional products, presented on an annualized basis for interim periods |
| Cost of funds | | Cost of funds includes liability costs related to cost of crediting on both deferred annuities and institutional products, as well as other liability costs. Cost of funds is computed as the total liability costs divided by the average invested assets for the relevant period. Presented on an annualized basis for interim periods. |
| DAC | | Deferred acquisition costs |
| Deferred annuities | | Fixed indexed annuities, annual reset annuities and multi-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 | | An insurance contract that offers tax-deferred growth and the opportunity to produce a guaranteed stream of retirement income for the lifetime of its policyholder |
| Flow reinsurance | | A transaction in which the ceding company cedes a portion of newly issued policies to the reinsurer |
| GAAP | | Accounting principles generally accepted in the United States of America |
| GLWB | | Guaranteed lifetime withdrawal benefit |
| GMDB | | Guaranteed minimum death benefit |
| IMA | | Investment management agreement |
| IMO | | Independent marketing organization |
| Invested assets | | The sum of (a) total investments on the consolidated balance sheet with AFSavailable-for-sale securities at amortized cost, excluding derivatives, (b) cash and cash equivalents and restricted cash, (c) investments in related parties, (d) accrued investment income, (e) consolidated variable interest entities’ assets, liabilities and noncontrolling interest and (f) policy loans ceded (which offset the direct policy loans in total investments). Invested assets includes investments supporting assumed funds withheld and modco agreements and excludes assets associated with funds withheld liabilities related to business exited through reinsurance agreements and derivative collateral (offsetting the related cash positions) |
| Investment margin | | Investment margin applies to deferred annuities and is the excess of our net investment earned rate over the cost of crediting to our policyholders, presented on an annualized basis for interim periods |
| Liability outflows | | The aggregate of withdrawals on our deferred annuities, maturities of our funding agreements, payments on payout annuities, and pension risk benefit payments |
| MMS | | Minimum margin of solvency |
| Modco | | Modified coinsurance |
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| | |
| Term or Acronym | | Definition |
LIMRA | | Life Insurance and Market Research Association |
MCR | | Minimum capital requirements |
MMS | | Minimum margin of solvency |
Modco | | Modified coinsurance |
| MVA | | Market value adjustment |
| MYGA | | Multi-year guaranteed annuity |
| 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 |
| Net investment spread | | Net investment spread measures our investment performance less the total cost of our liabilities, presented on an annualized basis for interim periods |
| 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, on a GAAP or non-GAAP basis, as specified |
| Payout annuities | | Annuities with a current cash payment component, which consist primarily of SPIAs,single premium immediate annuities, supplemental contracts and structured settlements |
| Policy loan | | A loan to a policyholder under the terms of, and which is secured by, a policyholder’s policy |
| PRT | | Pension risk transfer |
| RBC | | Risk-based capital |
| Reserve liabilities | | The sum of (a) interest sensitive contract liabilities, (b) future policy benefits, (c) dividends payable to policyholders, and (d) other policy claims and benefits, offset by reinsurance recoverable, excluding policy loans ceded. 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 lifetime withdrawal benefits and guaranteed minimum death benefits reserves |
| RMBS | | Residential mortgage-backed securities |
| RML | | Residential mortgage loan |
| Sales | | All money paid into an individual annuity, including money paid into new contracts with initial purchase occurring in the specified period and existing contracts with initial purchase occurring prior to the specified period (excluding internal transfers) |
| SPIA | | Single premium immediate annuity |
| Surplus assets | | Assets in excess of policyholder obligations, determined in accordance with the applicable domiciliary jurisdiction’s statutory accounting principles |
| TAC | | Total adjusted capital as defined by the model created by the NAIC |
| U.S. RBC Ratio | | The CAL RBC ratio for AADE, our parent U.S. insurance company |
| VIE | | Variable interest entity |
| VOBA | | Value of business acquired |
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) | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| Assets | | | | | | |
| Investments | | | | | | |
| Fixed maturity securities, at fair value | | | | |
| Available-for-sale securities (amortized cost: 2018 – $59,445 and 2017 – $58,506) | $ | 59,762 |
| | $ | 61,012 |
| |
| Trading securities | 2,053 |
| | 2,196 |
| |
| Available-for-sale securities, at fair value (amortized cost: 2019 – $63,440 and 2018 – $60,025) | | $ | 64,655 |
| | $ | 59,265 |
|
| Trading securities, at fair value | | 2,256 |
| | 1,949 |
|
| Equity securities, at fair value | 216 |
| | 790 |
| 252 |
| | 216 |
|
| Mortgage loans, net of allowances (portion at fair value: 2018 – $38 and 2017 – $41) | 7,609 |
| | 6,233 |
| |
| Investment funds (portion at fair value: 2018 – $126 and 2017 – $145) | 633 |
| | 699 |
| |
| Mortgage loans, net of allowances (portion at fair value: 2019 – $32 and 2018 – $32) | | 11,042 |
| | 10,340 |
|
| Investment funds (portion at fair value: 2019 – $159 and 2018 – $182) | | 683 |
| | 703 |
|
| Policy loans | 504 |
| | 530 |
| 487 |
| | 488 |
|
| Funds withheld at interest (portion at fair value: 2018 – $150 and 2017 – $312) | 7,700 |
| | 7,085 |
| |
| Funds withheld at interest (portion at fair value: 2019 – $446 and 2018 – $57) | | 15,241 |
| | 15,023 |
|
| Derivative assets | 1,929 |
| | 2,551 |
| 1,920 |
| | 1,043 |
|
| Real estate (portion held for sale: 2017 – $32) | — |
| | 624 |
| |
| Short-term investments, at fair value (cost: 2018 – $289 and 2017 – $201) | 289 |
| | 201 |
| |
| Other investments (portion at fair value: 2018 – $50 and 2017 – $0) | 123 |
| | 133 |
| |
| Short-term investments, at fair value | | 155 |
| | 191 |
|
| Other investments (portion at fair value: 2019 – $52 and 2018 – $52) | | 121 |
| | 122 |
|
| Total investments | 80,818 |
| | 82,054 |
| 96,812 |
| | 89,340 |
|
| Cash and cash equivalents | 3,608 |
| | 4,888 |
| 3,021 |
| | 2,911 |
|
| Restricted cash | 178 |
| | 105 |
| 497 |
| | 492 |
|
| Investments in related parties | | | | | | |
| Fixed maturity securities, at fair value | | | | |
| Available-for-sale securities (amortized cost: 2018 – $958 and 2017 – $399) | 956 |
| | 406 |
| |
| Trading securities | 278 |
| | 307 |
| |
| Investment funds (portion at fair value: 2018 – $198 and 2017 – $30) | 1,836 |
| | 1,310 |
| |
| Funds withheld at interest (portion at fair value: 2018 – $162) | 14,221 |
| | — |
| |
| Short-term investments, at fair value (cost: 2018 – $172 and 2017 – $52) | 172 |
| | 52 |
| |
| Available-for-sale securities, at fair value (amortized cost: 2019 – $1,696 and 2018 – $1,462) | | 1,684 |
| | 1,437 |
|
| Trading securities, at fair value | | 239 |
| | 249 |
|
| Equity securities, at fair value | | 301 |
| | 120 |
|
| Mortgage loans | | 291 |
| | 291 |
|
| Investment funds (portion at fair value: 2019 – $232 and 2018 – $201) | | 2,290 |
| | 2,232 |
|
| Funds withheld at interest (portion at fair value: 2019 – $214 and 2018 – $(110)) | | 13,683 |
| | 13,577 |
|
| Other investments | 388 |
| | 238 |
| 387 |
| | 386 |
|
| Accrued investment income (related party: 2018 – $24 and 2017 – $10) | 662 |
| | 652 |
| |
| Reinsurance recoverable (related party: 2018 – $4; portion at fair value: 2018 – $1,717 and 2017 – $1,824) | 4,847 |
| | 4,972 |
| |
| Accrued investment income (related party: 2019 – $22 and 2018 – $25) | | 751 |
| | 682 |
|
| Reinsurance recoverable (related party: 2019 – $334 and 2018 – $344; portion at fair value: 2019 – $1,737 and 2018 – $1,676) | | 5,647 |
| | 5,534 |
|
| Deferred acquisition costs, deferred sales inducements and value of business acquired | 4,715 |
| | 2,930 |
| 5,619 |
| | 5,907 |
|
| Other assets | 1,265 |
| | 969 |
| |
| Other assets (related party: 2019 – $4 and 2018 – $357) | | 962 |
| | 1,635 |
|
| Assets of consolidated variable interest entities | | | | | | |
| Investments | | | | | | |
| Fixed maturity securities, trading, at fair value – related party | 48 |
| | 48 |
| |
| Trading securities, at fair value – related party | | 34 |
| | 35 |
|
| Equity securities, at fair value – related party | 163 |
| | 240 |
| 6 |
| | 50 |
|
| Investment funds (related party: 2018 – $542 and 2017 – $571; portion at fair value: 2018 – $542 and 2017 – $549) | 593 |
| | 571 |
| |
| Investment funds (related party: 2019 – $580 and 2018 – $583; portion at fair value: 2019 – $564 and 2018 – $567) | | 619 |
| | 624 |
|
| Cash and cash equivalents | 2 |
| | 4 |
| 2 |
| | 2 |
|
| Other assets | 5 |
| | 1 |
| 12 |
| | 1 |
|
| Total assets | $ | 114,755 |
| | $ | 99,747 |
| $ | 132,857 |
| | $ | 125,505 |
|
(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) | June 30, 2018 | | December 31, 2017 |
| Liabilities and Equity | | | |
| Liabilities | | | |
| Interest sensitive contract liabilities (related party: 2018 – $17,742; portion at fair value: 2018 – $9,008 and 2017 – $8,929) | $ | 87,052 |
| | $ | 67,708 |
|
| Future policy benefits (related party: 2018 – $928; portion at fair value: 2018 – $2,249 and 2017 – $2,428) | 13,970 |
| | 17,507 |
|
| Other policy claims and benefits (related party: 2018 – $2) | 136 |
| | 211 |
|
| Dividends payable to policyholders | 118 |
| | 1,025 |
|
| Short-term debt | 183 |
| | — |
|
| Long-term debt | 991 |
| | — |
|
| Derivative liabilities | 137 |
| | 134 |
|
| Payables for collateral on derivatives | 1,746 |
| | 2,323 |
|
| Funds withheld liability (portion at fair value: 2018 – $4 and 2017 – $22) | 389 |
| | 407 |
|
| Other liabilities (related party: 2018 – $69 and 2017 – $64) | 1,524 |
| | 1,222 |
|
| Liabilities of consolidated variable interest entities | 4 |
| | 2 |
|
| Total liabilities | 106,250 |
| | 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 – 164,734,282 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 – 3,388,890 and 2017 – 3,388,890 shares | — |
| | — |
|
| Class M-2 – par value $0.001 per share; contingently convertible to Class A; authorized: 2018 and 2017 – 5,000,000 shares; issued and outstanding: 2018 – 851,103 and 2017 – 851,103 shares | — |
| | — |
|
| Class M-3 – par value $0.001 per share; contingently convertible to Class A; authorized: 2018 and 2017 – 7,500,000 shares; issued and outstanding: 2018 – 1,001,110 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 – 4,354,425 and 2017 – 4,711,743 shares | — |
| | — |
|
| Additional paid-in capital | 3,492 |
| | 3,472 |
|
| Retained earnings | 4,887 |
| | 4,321 |
|
| Accumulated other comprehensive income (related party: 2018 – $(2) and 2017 – $48) | 126 |
| | 1,415 |
|
| Total shareholders' equity | 8,505 |
| | 9,208 |
|
| Total liabilities and equity | $ | 114,755 |
| | $ | 99,747 |
|
|
| | | | | | | |
| (In millions, except per share data) | March 31, 2019 | | December 31, 2018 |
| Liabilities and Equity | | | |
| Liabilities | | | |
| Interest sensitive contract liabilities (related party: 2019 – $16,533 and 2018 – $16,850; portion at fair value: 2019 – $10,085 and 2018 – $8,901) | $ | 98,452 |
| | $ | 96,610 |
|
| Future policy benefits (related party: 2019 – $1,347 and 2018 – $1,259; portion at fair value: 2019 – $2,226 and 2018 – $2,173) | 19,016 |
| | 16,704 |
|
| Other policy claims and benefits (related party: 2019 – $15 and 2018 – $10) | 162 |
| | 142 |
|
| Dividends payable to policyholders | 118 |
| | 118 |
|
| Long-term debt | 991 |
| | 991 |
|
| Derivative liabilities | 85 |
| | 85 |
|
| Payables for collateral on derivatives | 1,781 |
| | 969 |
|
| Funds withheld liability (related party: 2019 – $327 and 2018 – $337; portion at fair value: 2019 – $12 and 2018 – $(1)) | 724 |
| | 721 |
|
| Other liabilities (related party: 2019 – $51 and 2018 – $59) | 1,410 |
| | 888 |
|
| Liabilities of consolidated variable interest entities | 1 |
| | 1 |
|
| Total liabilities | 122,740 |
| | 117,229 |
|
| Commitments and Contingencies (Note 9) | | | |
| Equity | | | |
| Common stock | | | |
| Class A – par value $0.001 per share; authorized: 2019 and 2018 – 425.0 shares; issued and outstanding: 2019 – 161.5 and 2018 – 162.4 shares | — |
| | — |
|
| Class B – par value $0.001 per share; convertible to Class A; authorized: 2019 and 2018 – 325.0 shares; issued and outstanding: 2019 – 25.4 and 2018 – 25.4 shares | — |
| | — |
|
| Class M-1 – par value $0.001 per share; convertible to Class A; authorized: 2019 and 2018 – 7.1 shares; issued and outstanding: 2019 – 3.4 and 2018 – 3.4 shares | — |
| | — |
|
| Class M-2 – par value $0.001 per share; convertible to Class A; authorized: 2019 and 2018 – 5.0 shares; issued and outstanding: 2019 – 0.8 and 2018 – 0.8 shares | — |
| | — |
|
| Class M-3 – par value $0.001 per share; convertible to Class A; authorized: 2019 and 2018 – 7.5 shares; issued and outstanding: 2019 – 1.0 and 2018 – 1.0 shares | — |
| | — |
|
| Class M-4 – par value $0.001 per share; convertible to Class A; authorized: 2019 and 2018 – 7.5 shares; issued and outstanding: 2019 – 4.1 and 2018 – 4.1 shares | — |
| | — |
|
| Additional paid-in capital | 3,448 |
| | 3,462 |
|
| Retained earnings | 5,963 |
| | 5,286 |
|
| Accumulated other comprehensive income (loss) (related party: 2019 – $(12) and 2018 – $(25)) | 706 |
| | (472 | ) |
| Total shareholders’ equity | 10,117 |
| | 8,276 |
|
| Total liabilities and equity | $ | 132,857 |
| | $ | 125,505 |
|
(Concluded)
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Income (Unaudited)
| | | | Three months ended June 30, | | Six months ended June 30, | Three months ended March 31, |
| (In millions, except per share data) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| Revenues | | | | | | | | | | |
| Premiums (related party of $582 for the three and six months ended June 30, 2018) | $ | 726 |
| | $ | 379 |
| | $ | 1,004 |
| | $ | 431 |
| |
| Product charges (related party of $5 for the three and six months ended June 30, 2018) | 106 |
| | 85 |
| | 202 |
| | 166 |
| |
| Net investment income (related party investment income of $67 and $73 for the three months ended and $143 and $129 for the six months ended June 30, 2018 and 2017, respectively, and related party investment expense of $86 and $76 for the three months ended and $169 and $154 for the six months ended June 30, 2018 and 2017, respectively) | 958 |
| | 821 |
| | 1,813 |
| | 1,607 |
| |
| Investment related gains (losses) (related party of $2 and $3 for the three months ended and $19 and $(8) for the six months ended June 30, 2018 and 2017, respectively) | (2 | ) | | 460 |
| | (238 | ) | | 1,142 |
| |
| Premiums (related party: 2019 – $66 and 2018 – $0) | | $ | 1,966 |
| | $ | 278 |
|
| Product charges (related party: 2019 – $14 and 2018 – $0) | | 125 |
| | 96 |
|
| Net investment income (related party investment income: 2019 – $183 and 2018 – $76; and related party investment expense: 2019 – $92 and 2018 – $83) | | 1,066 |
| | 855 |
|
| Investment related gains (losses) (related party: 2019 – $317 and 2018 – $17) | | 1,772 |
| | (236 | ) |
| Other-than-temporary impairment investment losses | | | | | | | | | | |
| Other-than-temporary impairment losses | — |
| | (12 | ) | | (3 | ) | | (12 | ) | (2 | ) | | (3 | ) |
| Other-than-temporary impairment losses reclassified to (from) other comprehensive income | — |
| | 1 |
| | — |
| | — |
| 1 |
| | — |
|
| Net other-than-temporary impairment losses | — |
| | (11 | ) | | (3 | ) |
| (12 | ) | (1 | ) |
| (3 | ) |
| Other revenues | 6 |
| | 8 |
| | 12 |
| | 16 |
| 12 |
| | 6 |
|
| Revenues of consolidated variable interest entities | | | | | | | | | | |
| Net investment income (related party of $14 and $10 for the three months ended and $24 and $20 for the six months ended June 30, 2018 and 2017, respectively) | 14 |
| | 10 |
| | 24 |
| | 20 |
| |
| Investment related gains (losses) (related party of $(11) and $11 for the three months ended and $(6) and $12 for the six months ended June 30, 2018 and 2017, respectively) | (11 | ) | | 11 |
| | (6 | ) | | 12 |
| |
| Net investment income (related party: 2019 – $16 and 2018 – $10) | | 16 |
| | 10 |
|
| Investment related gains (losses) (related party: 2019 – $4 and 2018 – $5) | | 5 |
| | 5 |
|
| Total revenues | 1,797 |
| | 1,763 |
| | 2,808 |
| | 3,382 |
| 4,961 |
| | 1,011 |
|
| Benefits and expenses | | | | | | | | | | |
| Interest sensitive contract benefits (related party of $20 for the three and six months ended June 30, 2018) | 332 |
| | 553 |
| | 351 |
| | 1,245 |
| |
| Interest sensitive contract benefits (related party: 2019 – $183 and 2018 – $0) | | 1,516 |
| | 31 |
|
| Amortization of deferred sales inducements | 23 |
| | 11 |
| | 43 |
| | 29 |
| 5 |
| | 20 |
|
| Future policy and other policy benefits (related party of $580 for the three and six months ended June 30, 2018) | 857 |
| | 578 |
| | 1,258 |
| | 792 |
| |
| Future policy and other policy benefits (related party: 2019 – $106 and 2018 – $0) | | 2,295 |
| | 401 |
|
| Amortization of deferred acquisition costs and value of business acquired | 92 |
| | 67 |
| | 181 |
| | 171 |
| 231 |
| | 82 |
|
| Dividends to policyholders | 9 |
| | 49 |
| | 22 |
| | 81 |
| 9 |
| | 13 |
|
| Policy and other operating expenses (related party of $3 and $2 for the three months ended and $5 and $6 for the six months ended June 30, 2018 and 2017, respectively) | 153 |
| | 168 |
| | 295 |
| | 321 |
| |
| Operating expenses of consolidated variable interest entities | 1 |
| | — |
| | 1 |
| | — |
| |
| Policy and other operating expenses (related party: 2019 – $8 and 2018 – $2) | | 165 |
| | 142 |
|
| Total benefits and expenses | 1,467 |
| | 1,426 |
| | 2,151 |
| | 2,639 |
| 4,221 |
| | 689 |
|
| Income before income taxes | 330 |
| | 337 |
| | 657 |
| | 743 |
| 740 |
| | 322 |
|
| Income tax expense | 66 |
| | 11 |
| | 125 |
| | 33 |
| 32 |
| | 45 |
|
| Net income | $ | 264 |
| | $ | 326 |
| | $ | 532 |
| | $ | 710 |
| $ | 708 |
| | $ | 277 |
|
| | | | | | | | | | | |
| Earnings per share | | | | | | | | | | |
| Basic – Classes A, B, M-1, M-2, M-3 and M-4 | $ | 1.34 |
| | $ | 1.66 |
| | $ | 2.70 |
| | $ | 3.66 |
| $ | 3.65 |
| | $ | 1.40 |
|
| Diluted – Class A | 1.33 |
| | 1.65 |
| | 2.69 |
| | 3.59 |
| 3.64 |
| | 1.40 |
|
| Diluted – Class B | 1.34 |
| | 1.66 |
| | 2.70 |
| | 3.66 |
| 3.65 |
| | 1.40 |
|
| Diluted – Class M-1 | 1.34 |
| | 1.66 |
| | 2.70 |
| | 3.66 |
| 3.65 |
| | 1.40 |
|
| Diluted – Class M-2 | 1.33 |
| | 1.64 |
| | 2.67 |
| | 1.80 |
| 3.65 |
| | 1.39 |
|
| Diluted – Class M-3 | 1.34 |
| | 1.00 |
| | 2.67 |
| | 1.08 |
| 3.65 |
| | 1.38 |
|
| Diluted – Class M-4 | 1.04 |
| | 0.76 |
| | 1.98 |
| | 0.98 |
| 3.15 |
| | 0.97 |
|
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
| | | | Three months ended June 30, | | Six months ended June 30, | Three months ended March 31, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| Net income | $ | 264 |
| | $ | 326 |
| | $ | 532 |
| | $ | 710 |
| $ | 708 |
| | $ | 277 |
|
| Other comprehensive income (loss), before tax | | | | | | | | | | |
| Unrealized investment gains (losses) on available-for-sale securities | (667 | ) | | 582 |
| | (1,577 | ) | | 1,001 |
| 1,478 |
| | (891 | ) |
| Noncredit component of other-than-temporary impairment losses on available-for-sale securities | — |
| | (1 | ) | | — |
| | — |
| (1 | ) | | — |
|
| Unrealized gains (losses) on hedging instruments | 101 |
| | (33 | ) | | 45 |
| | (38 | ) | (8 | ) | | (56 | ) |
| Pension adjustments | — |
| | (1 | ) | | 3 |
| | (1 | ) | (1 | ) | | 3 |
|
| Foreign currency translation adjustments | (2 | ) | | 8 |
| | (10 | ) | | 10 |
| 1 |
| | (8 | ) |
| Other comprehensive income (loss), before tax | (568 | ) | | 555 |
| | (1,539 | ) | | 972 |
| 1,469 |
| | (952 | ) |
| Income tax expense (benefit) related to other comprehensive income | (109 | ) | | 168 |
| | (292 | ) | | 279 |
| |
| Income tax expense (benefit) related to other comprehensive income (loss) | | 291 |
| | (179 | ) |
| Other comprehensive income (loss) | (459 | ) | | 387 |
| | (1,247 | ) | | 693 |
| 1,178 |
| | (773 | ) |
| Comprehensive income (loss) | $ | (195 | ) | | $ | 713 |
| | $ | (715 | ) | | $ | 1,403 |
| $ | 1,886 |
| | $ | (496 | ) |
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 | | Total Athene Holding Ltd. shareholders' equity | | Noncontrolling interest | | Total equity | Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Total shareholders’ equity |
| Balance at December 31, 2016 | $ | — |
| | $ | 3,421 |
| | $ | 3,070 |
| | $ | 367 |
| | $ | 6,858 |
| | $ | 1 |
| | $ | 6,859 |
| |
| Net income | — |
| | — |
| | 710 |
| | — |
| | 710 |
| | — |
| | 710 |
| |
| Other comprehensive income | — |
| | — |
| | — |
| | 693 |
| | 693 |
| | — |
| | 693 |
| |
| Stock-based compensation | — |
| | 31 |
| | — |
| | — |
| | 31 |
| | — |
| | 31 |
| |
| Retirement or repurchase of shares | — |
| | — |
| | (8 | ) | | — |
| | (8 | ) | | — |
| | (8 | ) | |
| Other changes in equity of noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) | |
| Balance at June 30, 2017 | $ | — |
| | $ | 3,452 |
| | $ | 3,772 |
| | $ | 1,060 |
| | $ | 8,284 |
| | $ | — |
| | $ | 8,284 |
| |
| | | | | | | | | | | | | | | |
| Balance at December 31, 2017 | $ | — |
| | $ | 3,472 |
| | $ | 4,321 |
| | $ | 1,415 |
| | $ | 9,208 |
| | $ | — |
| | $ | 9,208 |
| $ | — |
| | $ | 3,472 |
| | $ | 4,255 |
| | $ | 1,449 |
| | $ | 9,176 |
|
Adoption of accounting standards1 | — |
| | — |
| | 39 |
| | (42 | ) | | (3 | ) | | — |
| | (3 | ) | |
| Adoption of accounting standards | | — |
| | — |
| | 39 |
| | (42 | ) | | (3 | ) |
| Net income | — |
| | — |
| | 532 |
| | — |
| | 532 |
| | — |
| | 532 |
| — |
| | — |
| | 277 |
| | — |
| | 277 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | (1,247 | ) | | (1,247 | ) | | — |
| | (1,247 | ) | — |
| | — |
| | — |
| | (773 | ) | | (773 | ) |
| Issuance of shares, net of expenses | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| — |
| | 1 |
| | — |
| | — |
| | 1 |
|
| Stock-based compensation | — |
| | 19 |
| | — |
| | — |
| | 19 |
| | — |
| | 19 |
| — |
| | 12 |
| | — |
| | — |
| | 12 |
|
| Retirement or repurchase of shares | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) | | — |
| | (5 | ) | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
| Balance at June 30, 2018 | $ | — |
| | $ | 3,492 |
| | $ | 4,887 |
| | $ | 126 |
| | $ | 8,505 |
| | $ | — |
| | $ | 8,505 |
| |
| Balance at March 31, 2018 | | $ | — |
| | $ | 3,485 |
| | $ | 4,568 |
| | $ | 634 |
| | $ | 8,687 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
1 See discussion of adoptions in Note 1 – Business, Basis of Presentation and Significant Accounting Policies. | |
| Balance at December 31, 2018 | | $ | — |
| | $ | 3,462 |
| | $ | 5,286 |
| | $ | (472 | ) | | $ | 8,276 |
|
| Net income | | — |
| | — |
| | 708 |
| | — |
| | 708 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | 1,178 |
| | 1,178 |
|
| Issuance of shares, net of expenses | | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
| Stock-based compensation | | — |
| | 5 |
| | — |
| | — |
| | 5 |
|
| Retirement or repurchase of shares | | — |
| | (20 | ) | | (31 | ) | | — |
| | (51 | ) |
| Balance at March 31, 2019 | | $ | — |
| | $ | 3,448 |
| | $ | 5,963 |
| | $ | 706 |
| | $ | 10,117 |
|
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
|
| | | | | | | |
| | Six months ended June 30, |
| (In millions) | 2018 | | 2017 |
| Cash flows from operating activities | | | |
| Net income | $ | 532 |
| | $ | 710 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Amortization of deferred acquisition costs and value of business acquired | 181 |
| | 171 |
|
| Amortization of deferred sales inducements | 43 |
| | 29 |
|
| Accretion of net investment premiums, discounts, and other | (99 | ) | | (101 | ) |
| Payment at inception of reinsurance agreements, net (related party: 2018 – $(407)) | (394 | ) | | — |
|
| Stock-based compensation | 13 |
| | 29 |
|
| Net investment income (related party: 2018 – $(50) and 2017 – $(43)) | (32 | ) | | (43 | ) |
| Net recognized (gains) losses on investments and derivatives (related party: 2018 – $(18) and 2017 – $3) | 161 |
| | (882 | ) |
| Policy acquisition costs deferred | (311 | ) | | (248 | ) |
| Changes in operating assets and liabilities: | | | |
| Accrued investment income (related party: 2018 – $(14)) | (47 | ) | | (9 | ) |
| Interest sensitive contract liabilities (related party: 2018 – $15) | 7 |
| | 1,140 |
|
| Future policy benefits, other policy claims and benefits, dividends payable to policyholders and reinsurance recoverable (related party: 2018 – $15) | 352 |
| | 387 |
|
| Funds withheld assets and liabilities (related party: 2018 – $23) | (32 | ) | | (222 | ) |
| Other assets and liabilities | 139 |
| | 124 |
|
| Consolidated variable interest entities related: | | | |
| Net recognized (gains) losses on investments and derivatives (related party: 2018 – $5 and 2017 – $(12)) | 5 |
| | (12 | ) |
| Other operating activities, net | 1 |
| | — |
|
| Net cash provided by operating activities | 519 |
| | 1,073 |
|
| Cash flows from investing activities | | | |
| Sales, maturities and repayments of: | | | |
| Fixed maturity securities | | | |
| Available-for-sale securities (related party: 2018 – $97 and 2017 – $73) | 6,309 |
| | 5,987 |
|
| Trading securities (related party: 2018 – $22 and 2017 – $26) | 288 |
| | 83 |
|
| Equity securities (related party: 2018 – $0 and 2017 – $22) | 2 |
| | 455 |
|
| Mortgage loans | 686 |
| | 632 |
|
| Investment funds (related party: 2018 – $143 and 2017 – $172) | 252 |
| | 221 |
|
| Derivative instruments and other invested assets | 1,062 |
| | 713 |
|
| Short-term investments | 220 |
| | 226 |
|
| Purchases of: | | | |
| Fixed maturity securities | | | |
| Available-for-sale securities (related party: 2018 – $(211) and 2017 – $(64)) | (8,953 | ) | | (9,111 | ) |
| Trading securities | (81 | ) | | (66 | ) |
| Equity securities | (62 | ) | | (492 | ) |
| Mortgage loans | (1,924 | ) | | (1,184 | ) |
| Investment funds (related party: 2018 – $(556) and 2017 – $(179)) | (654 | ) | | (227 | ) |
| Derivative instruments and other invested assets (related party: 2018 – $(150) and 2017 – $0) | (659 | ) | | (376 | ) |
| Real estate | — |
| | (13 | ) |
| Short-term investments (related party: 2018 – $(121) and 2017 – $(28)) | (429 | ) | | (177 | ) |
| Consolidated variable interest entities related: | | | |
| Sales, maturities and repayments of investments (related party: 2018 – $103 and 2017 – $7) | 103 |
| | 7 |
|
| Purchases of investments (related party: 2018 – $0 and 2017 – $(22)) | (52 | ) | | (22 | ) |
| Deconsolidation of AGER Bermuda Holding Ltd. and its subsidiaries | (296 | ) | | — |
|
| Cash settlement of derivatives | (2 | ) | | 4 |
|
| Other investing activities, net | 286 |
| | 748 |
|
| Net cash used in investing activities | (3,904 | ) | | (2,592 | ) |
| | | | (Continued) |
|
| See accompanying notes to the unaudited condensed consolidated financial statements | | | |
|
| | | | | | | |
| | Three months ended March 31, |
| (In millions) | 2019 | | 2018 |
| Cash flows from operating activities | | | |
| Net income | $ | 708 |
| | $ | 277 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Amortization of deferred acquisition costs and value of business acquired | 231 |
| | 82 |
|
| Amortization of deferred sales inducements | 5 |
| | 20 |
|
| Accretion of net investment premiums, discounts and other | (33 | ) | | (45 | ) |
| Net investment (income) loss (related party: 2019 – $18 and 2018 – $(43)) | 25 |
| | (29 | ) |
| Net recognized (gains) losses on investments and derivatives (related party: 2019 – $0 and 2018 – $(24)) | (944 | ) | | 209 |
|
| Policy acquisition costs deferred | (173 | ) | | (122 | ) |
| Changes in operating assets and liabilities: | | | |
| Accrued investment income (related party: 2019 – $3 and 2018 – $0) | (69 | ) | | (27 | ) |
| Interest sensitive contract liabilities (related party: 2019 – $167 and 2018 – $0) | 1,403 |
| | (189 | ) |
| Future policy benefits, other policy claims and benefits, dividends payable to policyholders and reinsurance recoverable (related party: 2019 – $95 and 2018 – $0) | 653 |
| | 333 |
|
| Funds withheld assets and liabilities (related party: 2019 – $(500) and 2018 – $0) | (1,011 | ) | | (7 | ) |
| Other assets and liabilities | 220 |
| | 77 |
|
| Consolidated variable interest entities related: | | | |
| Net recognized (gains) losses on investments and derivatives (related party: 2019 – $(5) and 2018 – $(6)) | (6 | ) | | (6 | ) |
| Net cash provided by operating activities | 1,009 |
| | 573 |
|
| Cash flows from investing activities | | | |
| Sales, maturities and repayments of: | | | |
| Available-for-sale securities (related party: 2019 – $50 and 2018 – $57) | 2,231 |
| | 3,017 |
|
| Trading securities (related party: 2019 – $0 and 2018 – $1) | 31 |
| | 24 |
|
| Equity securities | 10 |
| | 2 |
|
| Mortgage loans | 354 |
| | 396 |
|
| Investment funds (related party: 2019 – $87 and 2018 – $52) | 131 |
| | 83 |
|
| Derivative instruments and other invested assets | 256 |
| | 551 |
|
| Short-term investments | 104 |
| | 103 |
|
| Purchases of: | | | |
| Available-for-sale securities (related party: 2019 – $(280) and 2018 – $(158)) | (4,470 | ) | | (5,907 | ) |
| Trading securities (related party: 2019 – $(3) and 2018 – $0) | (284 | ) | | (25 | ) |
| Equity securities (related party: 2019 – $(177) and 2018 – $0) | (205 | ) | | (9 | ) |
| Mortgage loans | (1,049 | ) | | (463 | ) |
| Investment funds (related party: 2019 – $(152) and 2018 – $(182)) | (185 | ) | | (213 | ) |
| Derivative instruments and other invested assets | (287 | ) | | (224 | ) |
| Short-term investments (related party: 2019 – $0 and 2018 – $(72)) | (67 | ) | | (209 | ) |
| Consolidated variable interest entities related: | | | |
| Sales, maturities and repayments of investments (related party: 2019 – $51 and 2018 – $59) | 53 |
| | 59 |
|
| Deconsolidation of Athora Holding Ltd. | — |
| | (296 | ) |
| Other investing activities, net | 601 |
| | 227 |
|
| Net cash used in investing activities | (2,776 | ) | | (2,884 | ) |
| | | | (Continued) |
|
| See accompanying notes to the unaudited condensed consolidated financial statements | | | |
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
| | | | Six months ended June 30, | Three months ended March 31, |
| (In millions) | 2018 | | 2017 | 2019 | | 2018 |
| Cash flows from financing activities | | | | | | |
| Capital contributions | $ | 1 |
| | $ | — |
| |
| Proceeds from short-term debt | 183 |
| | — |
| |
| Proceeds from long-term debt | 998 |
| | — |
| $ | — |
| | $ | 998 |
|
| Deposits on investment-type policies and contracts (related party: 2018 – $128) | 4,375 |
| | 4,727 |
| |
| Withdrawals on investment-type policies and contracts (related party: 2018 – $(37)) | (2,839 | ) | | (2,607 | ) | |
| Deposits on investment-type policies and contracts (related party: 2019 – $101 and 2018 – $0) | | 2,793 |
| | 1,774 |
|
| Withdrawals on investment-type policies and contracts (related party: 2019 – $(106) and 2018 – $0) | | (1,638 | ) | | (1,474 | ) |
| Payments for coinsurance agreements on investment-type contracts, net | (12 | ) | | (15 | ) | (25 | ) | | (10 | ) |
| Net change in cash collateral posted for derivative transactions | (577 | ) | | 477 |
| 812 |
| | (1,178 | ) |
| Repurchase of common stock | (5 | ) | | (8 | ) | (51 | ) | | (3 | ) |
| Other financing activities, net | 52 |
| | (5 | ) | (9 | ) | | 32 |
|
| Net cash provided by financing activities | 2,176 |
| | 2,569 |
| 1,882 |
| | 139 |
|
| Effect of exchange rate changes on cash and cash equivalents | — |
| | 19 |
| |
| Net (decrease) increase in cash and cash equivalents | (1,209 | ) | | 1,069 |
| |
| Net increase (decrease) in cash and cash equivalents | | 115 |
| | (2,172 | ) |
Cash and cash equivalents at beginning of year1 | 4,997 |
| | 2,516 |
| 3,405 |
| | 4,997 |
|
Cash and cash equivalents at end of period1 | $ | 3,788 |
| | $ | 3,585 |
| $ | 3,520 |
| | $ | 2,825 |
|
| | | | | | | |
| Supplementary information | | | | | | |
| Non-cash transactions | | | | | | |
| Deposits on investment-type policies and contracts through reinsurance agreements (related party: 2018 – $17,525) | $ | 18,247 |
| | $ | 385 |
| |
| Withdrawals on investment-type policies and contracts through reinsurance agreements (related party: 2018 – $155) | 341 |
| | 285 |
| |
| Deposits on investment-type policies and contracts through reinsurance agreements (related party: 2019 – $45 and 2018 – $0) | | $ | 208 |
| | $ | 108 |
|
| Withdrawals on investment-type policies and contracts through reinsurance agreements (related party: 2019 – $429 and 2018 – $0) | | 888 |
| | 91 |
|
| Investments received from settlements on reinsurance agreements | 8 |
| | 36 |
| 12 |
| | — |
|
| Investments received from pension risk transfer premiums | | 1,363 |
| | — |
|
| Investment in Athora Holding Ltd. received upon deconsolidation | 108 |
| | — |
| — |
| | 108 |
|
| | | | | | | |
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. | 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.United States (U.S.) states and the District of Columbia.
We conduct business primarily through the following consolidated subsidiaries:
Our non-U.S. reinsurance subsidiaries, to which AHL’s other insurance subsidiaries and third partythird-party ceding companies directly and indirectly reinsure a portion of their liabilities, including Athene Life Re Ltd. (ALRe), a Bermuda exempted company; and
Athene USA Corporation, an Iowa corporation and(together with its subsidiaries, (AtheneAthene USA).
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.beneficiary.
Basis of Presentation—We have prepared the accompanying condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the United States Securities and Exchange Commission’s rules and regulations for Form 10-Q and Article 10 of Regulation S-X. The accompanying condensed consolidated financial statements are unaudited and reflect all adjustments, consisting only of normal recurring items, considered necessary for fair statement of the results for the interim periods presented. All significant intercompany accounts and transactions have been eliminated. Interim operating results are not necessarily indicative of the results expected for the entire year.
The condensed consolidated balance sheet as of December 31, 20172018 has been derived from the audited financial statements, but does not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017.2018. 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.
Deconsolidation – AGER Bermuda Holding Ltd. and its subsidiaries, now known as Athora Holding Ltd. (Athora), was our consolidated subsidiary for the year ended December 31, 2017. In April 2017, in 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 held 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 upon deconsolidation in 2018.
Adopted Accounting Pronouncements
Revenue RecognitionLeases (ASU 2017-13,2019-01, ASU 2016-20,2018-20, ASU 2016-12,2018-11, ASU 2016-11,2018-10, ASU 2016-10,2018-01, ASU 2016-08, ASU 2015-142017-13 and ASU 2014-09)2016-02)
These updates are basedincrease transparency and comparability for lease transactions. ASU 2016-02 requires a lessee to recognize a right-of-use asset and lease liability on the core principle thatbalance sheet for all leases with an entity shouldoriginal term longer than twelve months and disclose key information about leasing arrangements. Lessor accounting is largely unchanged.
ASU 2016-02 requires the adoption on a modified retrospective basis. However, ASU 2018-11 provides the option to recognize revenuethe cumulative effect as an adjustment to depict the transferopening balance of promised goods or servicesretained earnings in the year of adoption, while continuing to customers in an amount that reflectspresent all prior periods under the consideration to which the entity expects to be entitled in exchange for those goods or services.previous lease guidance. 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. also provide optional practical expedients in transition.
We adopted these updates on a modified retrospective basis effective January 1, 2018. The adoptions2019 by recording a lease liability and right-of-use asset related to office space, copiers, reserved areas and equipment at data centers, and other agreements. We will continue to present all prior periods under the previous lease guidance. We elected the “package of practical expedients,” which permits us to maintain our prior conclusions about lease identification, classification and initial direct costs. We also elected the short-term lease exception, which allows us to exclude contracts with a lease term of 12 months or less, including any reasonably certain renewal options, from consideration under the new guidance. This update did not have a material effect on our consolidated financial statements.
Derivatives and Hedging – Targeted Improvements (ASU 2017-12)2018-16)
The amendments in this update contain improvementsallow entities to use the Overnight Index Swap rate based on the Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge accounting purposes, in addition to 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.previously acceptable rates. We early adopted this update effectiveprospectively for qualifying new or redesignated hedging relationships entered into on or after January 1, 2018, and the adoption2019. This update did not have a materialan effect on our consolidated financial statements.
Gains and Losses from the Derecognition of Nonfinancial AssetsStock Compensation – Nonemployee Share-Based Payments (ASU 2017-05)2018-07)
The amendments in this update clarifysimplify the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets.share-based payments to nonemployees by aligning with the accounting for share-based payments to employees, with certain exceptions. We adopted this update on a modified retrospective basis effective January 1, 2018. The adoption2019. This update did not have a material effect on our consolidated financial statements.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Statement of Cash FlowsRecently Issued Accounting Pronouncements
Financial Instruments – Restricted CashCredit Losses (ASU 2016-18)2019-04, ASU 2018-19 and ASU 2016-13)
This update requires amounts generally described as restrictedis 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 or restricted cash equivalentsflows of credit-deteriorated securities will be included with cash and cash equivalents when reconcilingrecognized immediately in the beginning-of-period and end-of-period amounts shown onincome statement. Available-for-sale (AFS) securities are not in scope of the consolidated statementsnew credit loss model, but will undergo targeted improvements to the current reporting model including the establishment of cash flows.a valuation allowance for credit losses versus the current direct write down approach. We adoptedwill be required to adopt this update effective January 1, 2018, and have changed2020. We are currently evaluating the presentation on the consolidated statementsimpact 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 MeasurementCollaborative Arrangements (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
Stock Compensation – Nonemployee Share-Based Payments (ASU 2018-07)2018-18)
The amendments in this update simplifyprovide guidance on whether certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606, providing comparability in the accountingpresentation of revenue for share-based paymentscertain transactions. The update is effective January 1, 2020. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
Consolidation (ASU 2018-17)
The amendments in this update expand certain discussions in the VIE guidance, including considerations necessary for determining when a decision-making fee is a variable interest. We will be required to nonemployees by aligningadopt this update retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. The update is effective January 1, 2020. Early adoption is permitted. 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 accountingrequirements for share-based payments to employees, with certain exceptions.capitalizing implementation costs incurred for internal-use software. We will be required to adopt this update on a modified retrospective basis effective January 1, 2019.2020, and we can elect to adopt this update either prospectively or retrospectively. Early adoption is permitted. We do not expectare currently evaluating the adoptionimpact of this update will have a material effectguidance on our consolidated financial statements.
LeasesFair Value Measurement – Disclosure Requirements (ASU 2018-11, ASU 2018-10, ASU 2018-01, ASU 2017-132018-13)
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 ASU 2016-02)depending on the specific amendment will be required to adopt prospectively or retrospectively. We early adopted the removal and modification of certain disclosures as permitted. We are currently evaluating the impact of the remaining guidance on our consolidated financial statements.
These updates are intended
Insurance – Targeted Improvements to increase transparencythe Accounting for Long-Duration Contracts (ASU 2018-12)
This update amends four key areas pertaining to the accounting and comparabilitydisclosures for lease transactions. ASU 2016-02, among other things,long-duration insurance and investment contracts.
The update requires a lesseecash flow assumptions used to recognize an asset and ameasure the liability for all lease arrangementsfuture policy benefits to be updated at least annually and no longer than 12 months. Lessor accountingallows a provision for adverse deviation. The remeasurement of the liability associated with the update of assumptions is largely unchanged. ASU 2016-02 required to be recognized in net income. Loss recognition testing is eliminated for traditional and limited-payment contracts. The update also requires the adoptiondiscount 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.
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 standarddefinition 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. However, with the issuance of ASU 2018-11, we are allowed the option to recognize the cumulative effect of applying the new standard 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. The standard is effective January 1, 2019 and earlyEarly adoption is permitted. We have reviewed our existing lease contracts and our implementation efforts are primarily focused on assessingcurrently evaluating the financial impact of these updatesthis guidance on our consolidated financial statements.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Intangibles – Simplifying the Test for Goodwill Impairment (ASU 2017-04)
The amendments in this update simplify the subsequent measurement of goodwill by eliminating the comparison of the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill to determine the goodwill impairment loss. With the adoption of this guidance, a goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of the goodwill allocated to that reporting unit. Entities 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 update prospectively effective January 1, 2020. Early adoption is permitted. We do not expect the adoption of this update will 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. 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 update 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.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
2. Investments
Available-for-saleAFS Securities—The following table represents the amortized cost, gross unrealized gains and losses, fair value and other-than-temporary impairments (OTTI) in AOCI of our AFS investments by asset type. Our AFS investment portfolio includes directbonds, collateralized loan obligations (CLO), asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS) and redeemable preferred stock. Our AFS investment portfolio includes related party investments in affiliatesthat are primarily a result of investments over which Apollo Global Management, LLC (AGM and, together with its subsidiaries, Apollo) where Apollo can exercise significant influence over the affiliates.influence. These investments are presented as investments in related parties on the condensed consolidated balance sheets, and are separately disclosed below. |
| | | | | | | | | | | | | | | | | | | |
| | June 30, 2018 |
| (In millions) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | OTTI in AOCI |
| Available-for-sale securities | | | | | | | | | |
| U.S. government and agencies | $ | 143 |
| | $ | — |
| | $ | (1 | ) | | $ | 142 |
| | $ | — |
|
| U.S. state, municipal and political subdivisions | 1,152 |
| | 124 |
| | (5 | ) | | 1,271 |
| | — |
|
| Foreign governments | 203 |
| | 1 |
| | (5 | ) | | 199 |
| | — |
|
| Corporate | 37,258 |
| | 481 |
| | (885 | ) | | 36,854 |
| | 1 |
|
| CLO | 5,355 |
| | 21 |
| | (24 | ) | | 5,352 |
| | — |
|
| ABS | 4,727 |
| | 32 |
| | (43 | ) | | 4,716 |
| | 1 |
|
| CMBS | 2,343 |
| | 28 |
| | (47 | ) | | 2,324 |
| | 1 |
|
| RMBS | 8,264 |
| | 648 |
| | (8 | ) | | 8,904 |
| | 10 |
|
| Total AFS securities | 59,445 |
| | 1,335 |
| | (1,018 | ) | | 59,762 |
| | 13 |
|
| Available-for-sale securities – related party | | | | | | | | | |
| CLO | 473 |
| | 2 |
| | (3 | ) | | 472 |
| | — |
|
| ABS | 485 |
| | 2 |
| | (3 | ) | | 484 |
| | — |
|
| Total AFS securities – related party | 958 |
| | 4 |
| | (6 | ) | | 956 |
| | — |
|
| Total AFS securities, including related party | $ | 60,403 |
| | $ | 1,339 |
| | $ | (1,024 | ) | | $ | 60,718 |
| | $ | 13 |
|
The following table represents the amortized cost, gross unrealized gains and losses, fair value and other than temporary impairments (OTTI) in accumulated other comprehensive income (AOCI) of our AFS investments by asset type:
| | | | December 31, 2017 | March 31, 2019 |
| (In millions) | 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 | $ | 63 |
| | $ | 1 |
| | $ | (2 | ) | | $ | 62 |
| | $ | — |
| $ | 48 |
| | $ | 2 |
| | $ | — |
| | $ | 50 |
| | $ | — |
|
| U.S. state, municipal and political subdivisions | 996 |
| | 171 |
| | (2 | ) | | 1,165 |
| | — |
| 1,209 |
| | 161 |
| | (5 | ) | | 1,365 |
| | — |
|
| Foreign governments | 2,575 |
| | 116 |
| | (8 | ) | | 2,683 |
| | — |
| 262 |
| | 9 |
| | — |
| | 271 |
| | — |
|
| Corporate | 35,173 |
| | 1,658 |
| | (171 | ) | | 36,660 |
| | — |
| 40,727 |
| | 1,218 |
| | (534 | ) | | 41,411 |
| | — |
|
| CLO | 5,039 |
| | 53 |
| | (8 | ) | | 5,084 |
| | — |
| 6,320 |
| | 6 |
| | (184 | ) | | 6,142 |
| | — |
|
| ABS | 3,945 |
| | 53 |
| | (27 | ) | | 3,971 |
| | 1 |
| 5,023 |
| | 85 |
| | (33 | ) | | 5,075 |
| | 1 |
|
| CMBS | 1,994 |
| | 48 |
| | (21 | ) | | 2,021 |
| | 1 |
| 2,394 |
| | 50 |
| | (20 | ) | | 2,424 |
| | 7 |
|
| RMBS | 8,721 |
| | 652 |
| | (7 | ) | | 9,366 |
| | 11 |
| 7,457 |
| | 480 |
| | (20 | ) | | 7,917 |
| | 12 |
|
| Total fixed maturity securities | 58,506 |
| | 2,752 |
| | (246 | ) | | 61,012 |
| | 13 |
| |
Equity securities1 | 271 |
| | 7 |
| | (1 | ) | | 277 |
| | — |
| |
| Total AFS securities | 58,777 |
| | 2,759 |
| | (247 | ) | | 61,289 |
| | 13 |
| 63,440 |
| | 2,011 |
| | (796 | ) | | 64,655 |
| | 20 |
|
| Available-for-sale securities – related party | | | | | | | | | | |
| AFS securities – related party | | | | | | | | | | |
| Corporate | | 3 |
| | — |
| | — |
| | 3 |
| | — |
|
| CLO | 353 |
| | 7 |
| | — |
| | 360 |
| | — |
| 654 |
| | — |
| | (16 | ) | | 638 |
| | — |
|
| ABS | 46 |
| | — |
| | — |
| | 46 |
| | — |
| 1,039 |
| | 11 |
| | (7 | ) | | 1,043 |
| | — |
|
| Total AFS securities – related party | 399 |
| | 7 |
| | — |
| | 406 |
| | — |
| 1,696 |
| | 11 |
| | (23 | ) | | 1,684 |
| | — |
|
| 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. | |
| Total AFS securities including related party | | $ | 65,136 |
| | $ | 2,022 |
| | $ | (819 | ) | | $ | 66,339 |
| | $ | 20 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| (In millions) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | OTTI in AOCI |
| AFS securities | | | | | | | | | |
| U.S. government and agencies | $ | 57 |
| | $ | — |
| | $ | — |
| | $ | 57 |
| | $ | — |
|
| U.S. state, municipal and political subdivisions | 1,183 |
| | 117 |
| | (7 | ) | | 1,293 |
| | — |
|
| Foreign governments | 162 |
| | 2 |
| | (3 | ) | | 161 |
| | — |
|
| Corporate | 38,018 |
| | 394 |
| | (1,315 | ) | | 37,097 |
| | 1 |
|
| CLO | 5,658 |
| | 2 |
| | (299 | ) | | 5,361 |
| | — |
|
| ABS | 4,915 |
| | 53 |
| | (48 | ) | | 4,920 |
| | — |
|
| CMBS | 2,390 |
| | 27 |
| | (60 | ) | | 2,357 |
| | 7 |
|
| RMBS | 7,642 |
| | 413 |
| | (36 | ) | | 8,019 |
| | 11 |
|
| Total AFS securities | 60,025 |
|
| 1,008 |
|
| (1,768 | ) |
| 59,265 |
|
| 19 |
|
| AFS securities – related party | | | | | | | | | |
| CLO | 587 |
| | — |
| | (25 | ) | | 562 |
| | — |
|
| ABS | 875 |
| | 4 |
| | (4 | ) | | 875 |
| | — |
|
| Total AFS securities – related party | 1,462 |
| | 4 |
| | (29 | ) | | 1,437 |
| | — |
|
| Total AFS securities including related party | $ | 61,487 |
| | $ | 1,012 |
| | $ | (1,797 | ) | | $ | 60,702 |
| | $ | 19 |
|
The amortized cost and fair value of fixed maturity AFS securities, including related party, are shown by contractual maturity below: | | | | June 30, 2018 | March 31, 2019 |
| (In millions) | Amortized Cost | | Fair Value | Amortized Cost | | Fair Value |
| AFS securities | | | | |
| Due in one year or less | $ | 1,146 |
| | $ | 1,145 |
| $ | 1,081 |
| | $ | 1,082 |
|
| Due after one year through five years | 8,521 |
| | 8,517 |
| 8,855 |
| | 8,988 |
|
| Due after five years through ten years | 11,461 |
| | 11,261 |
| 11,209 |
| | 11,339 |
|
| Due after ten years | 17,628 |
| | 17,543 |
| 21,101 |
| | 21,688 |
|
| CLO, ABS, CMBS and RMBS | 20,689 |
| | 21,296 |
| 21,194 |
| | 21,558 |
|
| Total AFS fixed maturity securities | 59,445 |
| | 59,762 |
| |
| Fixed maturity securities – related party, CLO and ABS | 958 |
| | 956 |
| |
| Total AFS fixed maturity securities, including related party | $ | 60,403 |
| | $ | 60,718 |
| |
| Total AFS securities | | 63,440 |
| | 64,655 |
|
| AFS securities – related party | | | | |
| Due after five years through ten years | | 3 |
| | 3 |
|
| CLO and ABS | | 1,693 |
| | 1,681 |
|
| Total AFS securities – related party | | 1,696 |
| | 1,684 |
|
| Total AFS securities including related party | | $ | 65,136 |
| | $ | 66,339 |
|
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.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Unrealized Losses on AFS Securities—The following summarizes the fair value and gross unrealized losses for AFS securities including related party, aggregated by class of security and length of time the fair value has remained below amortized cost:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2018 |
| | 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 |
| Available-for-sale securities | | | | | | | | | | | |
| U.S. government and agencies | $ | 139 |
| | $ | (1 | ) | | $ | 1 |
| | $ | — |
| | $ | 140 |
| | $ | (1 | ) |
| U.S. state, municipal and political subdivisions | 125 |
| | (1 | ) | | 77 |
| | (4 | ) | | 202 |
| | (5 | ) |
| Foreign governments | 103 |
| | (2 | ) | | 45 |
| | (3 | ) | | 148 |
| | (5 | ) |
| Corporate | 17,178 |
| | (526 | ) | | 5,105 |
| | (359 | ) | | 22,283 |
| | (885 | ) |
| CLO | 2,270 |
| | (21 | ) | | 267 |
| | (3 | ) | | 2,537 |
| | (24 | ) |
| ABS | 1,689 |
| | (22 | ) | | 678 |
| | (21 | ) | | 2,367 |
| | (43 | ) |
| CMBS | 880 |
| | (20 | ) | | 382 |
| | (27 | ) | | 1,262 |
| | (47 | ) |
| RMBS | 380 |
| | (4 | ) | | 248 |
| | (4 | ) | | 628 |
| | (8 | ) |
| Total AFS securities | 22,764 |
| | (597 | ) | | 6,803 |
| | (421 | ) | | 29,567 |
| | (1,018 | ) |
| Available-for-sale securities – related party | | | | | | | | | | | |
| CLO | 214 |
| | (3 | ) | | — |
| | — |
| | 214 |
| | (3 | ) |
| ABS | 127 |
| | — |
| | 86 |
| | (3 | ) | | 213 |
| | (3 | ) |
| Total AFS securities – related party | 341 |
| | (3 | ) | | 86 |
| | (3 | ) | | 427 |
| | (6 | ) |
| Total AFS securities, including related party | $ | 23,105 |
| | $ | (600 | ) | | $ | 6,889 |
| | $ | (424 | ) | | $ | 29,994 |
| | $ | (1,024 | ) |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2019 |
| | Less than 12 months | | 12 months or more | | Total |
| (In millions) | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses |
| AFS securities | | | | | | | | | | | |
| U.S. government and agencies | $ | 2 |
| | $ | — |
| | $ | 7 |
| | $ | — |
| | $ | 9 |
| | $ | — |
|
| U.S. state, municipal and political subdivisions | 19 |
| | — |
| | 75 |
| | (5 | ) | | 94 |
| | (5 | ) |
| Foreign governments | 8 |
| | — |
| | 19 |
| | — |
| | 27 |
| | — |
|
| Corporate | 4,840 |
| | (141 | ) | | 8,191 |
| | (393 | ) | | 13,031 |
| | (534 | ) |
| CLO | 4,782 |
| | (179 | ) | | 161 |
| | (5 | ) | | 4,943 |
| | (184 | ) |
| ABS | 719 |
| | (10 | ) | | 562 |
| | (23 | ) | | 1,281 |
| | (33 | ) |
| CMBS | 439 |
| | (8 | ) | | 463 |
| | (12 | ) | | 902 |
| | (20 | ) |
| RMBS | 942 |
| | (16 | ) | | 138 |
| | (4 | ) | | 1,080 |
| | (20 | ) |
| Total AFS securities | 11,751 |
| | (354 | ) | | 9,616 |
| | (442 | ) | | 21,367 |
| | (796 | ) |
| AFS securities – related party | | | | | | | | | | | |
| Corporate | — |
| | — |
| | 3 |
| | — |
| | 3 |
| | — |
|
| CLO | 553 |
| | (16 | ) | | — |
| | — |
| | 553 |
| | (16 | ) |
| ABS | 324 |
| | (6 | ) | | 72 |
| | (1 | ) | | 396 |
| | (7 | ) |
| Total AFS securities – related party | 877 |
| | (22 | ) | | 75 |
| | (1 | ) | | 952 |
| | (23 | ) |
| Total AFS securities including related party | $ | 12,628 |
| | $ | (376 | ) | | $ | 9,691 |
| | $ | (443 | ) | | $ | 22,319 |
| | $ | (819 | ) |
| | | | December 31, 2017 | December 31, 2018 |
| | Less than 12 months | | 12 months or more | | 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 | $ | 34 |
| | $ | (1 | ) | | $ | 9 |
| | $ | (1 | ) | | $ | 43 |
| | $ | (2 | ) | $ | 32 |
| | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | 34 |
| | $ | — |
|
| U.S. state, municipal and political subdivisions | 50 |
| | (1 | ) | | 39 |
| | (1 | ) | | 89 |
| | (2 | ) | 139 |
| | (2 | ) | | 82 |
| | (5 | ) | | 221 |
| | (7 | ) |
| Foreign governments | 435 |
| | (6 | ) | | 76 |
| | (2 | ) | | 511 |
| | (8 | ) | 97 |
| | (2 | ) | | 15 |
| | (1 | ) | | 112 |
| | (3 | ) |
| Corporate | 3,992 |
| | (49 | ) | | 2,457 |
| | (122 | ) | | 6,449 |
| | (171 | ) | 20,213 |
| | (942 | ) | | 4,118 |
| | (373 | ) | | 24,331 |
| | (1,315 | ) |
| CLO | 414 |
| | (2 | ) | | 340 |
| | (6 | ) | | 754 |
| | (8 | ) | 5,054 |
| | (297 | ) | | 90 |
| | (2 | ) | | 5,144 |
| | (299 | ) |
| ABS | 515 |
| | (5 | ) | | 549 |
| | (22 | ) | | 1,064 |
| | (27 | ) | 1,336 |
| | (23 | ) | | 506 |
| | (25 | ) | | 1,842 |
| | (48 | ) |
| CMBS | 460 |
| | (8 | ) | | 179 |
| | (13 | ) | | 639 |
| | (21 | ) | 932 |
| | (27 | ) | | 497 |
| | (33 | ) | | 1,429 |
| | (60 | ) |
| RMBS | 506 |
| | (3 | ) | | 210 |
| | (4 | ) | | 716 |
| | (7 | ) | 1,417 |
| | (31 | ) | | 140 |
| | (5 | ) | | 1,557 |
| | (36 | ) |
| Total fixed maturity securities | 6,406 |
| | (75 | ) | | 3,859 |
| | (171 | ) | | 10,265 |
| | (246 | ) | |
Equity securities1 | 134 |
| | (1 | ) | | — |
| | — |
| | 134 |
| | (1 | ) | |
| Total AFS securities | 6,540 |
| | (76 | ) | | 3,859 |
| | (171 | ) | | 10,399 |
| | (247 | ) | 29,220 |
|
| (1,324 | ) |
| 5,450 |
|
| (444 | ) |
| 34,670 |
|
| (1,768 | ) |
| Available-for-sale securities – related party | | | | | | | | | | | | |
| AFS securities – related party | | | | | | | | | | | | |
| CLO | 29 |
| | — |
| | — |
| | — |
| | 29 |
| | — |
| 534 |
| | (25 | ) | | — |
| | — |
| | 534 |
| | (25 | ) |
| ABS | 42 |
| | — |
| | — |
| | — |
| | 42 |
| | — |
| 306 |
| | (2 | ) | | 116 |
| | (2 | ) | | 422 |
| | (4 | ) |
| Total AFS securities – related party | 71 |
| | — |
| | — |
| | — |
| | 71 |
| | — |
| 840 |
| | (27 | ) | | 116 |
| | (2 | ) | | 956 |
| | (29 | ) |
| 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. | |
| Total AFS securities including related party | | $ | 30,060 |
| | $ | (1,351 | ) | | $ | 5,566 |
| | $ | (446 | ) | | $ | 35,626 |
| | $ | (1,797 | ) |
As of June 30, 2018,March 31, 2019, we held 3,5172,638 AFS securities that were in an unrealized loss position. Of this total, 8081,377 were in an unrealized loss position 12 months or more. As of June 30, 2018,March 31, 2019, we held 1738 related party AFS securities that were in an unrealized loss position. Of this total, foursix were in an unrealized loss position 12 months or more. The unrealized losses on AFS securities can primarily be attributed to changes in market interest rates since acquisition. We did not recognize the unrealized losses in income as we intend to hold these securities and it is not more likely than not we will be required to sell a security before the recovery of its amortized cost.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Other-Than-Temporary Impairments—For the sixthree months ended June 30, 2018,March 31, 2019, we incurred $3$1 million of net OTTI, none of which $2 million related to intent-to-sell impairments. These securities were impaired to fair value as of the impairment date. The remaining net OTTI of $1 million related to credit impairments where a portion was 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’ total OTTI was recognized in AOCI:
|
| | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 |
| Beginning balance | $ | 7 |
| | $ | 16 |
| | $ | 7 |
| | $ | 16 |
|
| Initial impairments – credit loss OTTI recognized on securities not previously impaired | — |
| | 6 |
| | 1 |
| | 6 |
|
| Reduction in impairments from securities sold, matured or repaid | — |
| | (6 | ) | | (1 | ) | | (6 | ) |
| Ending balance | $ | 7 |
| | $ | 16 |
| | $ | 7 |
| | $ | 16 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | |
| | Three months ended March 31, |
| (In millions) | 2019 | | 2018 |
| Beginning balance | $ | 10 |
| | $ | 14 |
|
| Initial impairments – credit loss OTTI recognized on securities not previously impaired | — |
| | 1 |
|
| Additional impairments – credit loss OTTI recognized on securities previously impaired | 1 |
| | — |
|
| Reduction in impairments from securities sold, matured or repaid | — |
| | (8 | ) |
| Ending balance | $ | 11 |
| | $ | 7 |
|
Net Investment Income—Net investment income by asset class consists of the following:
| | | | Three months ended June 30, | | Six months ended June 30, | Three months ended March 31, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| Fixed maturity securities | | | | | | | | |
| AFS securities | $ | 719 |
| | $ | 635 |
| | $ | 1,387 |
| | $ | 1,255 |
| $ | 753 |
| | $ | 668 |
|
| Trading securities | 54 |
| | 53 |
| | 98 |
| | 103 |
| 42 |
| | 44 |
|
| Equity securities | 2 |
| | 2 |
| | 4 |
| | 5 |
| 3 |
| | 2 |
|
| Mortgage loans | 104 |
| | 90 |
| | 195 |
| | 175 |
| 151 |
| | 91 |
|
| Investment funds | 58 |
| | 65 |
| | 123 |
| | 120 |
| 10 |
| | 65 |
|
| Funds withheld at interest | 86 |
| | 34 |
| | 132 |
| | 70 |
| 163 |
| | 46 |
|
| Other | 23 |
| | 21 |
| | 46 |
| | 38 |
| 39 |
| | 23 |
|
| Investment revenue | 1,046 |
| | 900 |
| | 1,985 |
| | 1,766 |
| 1,161 |
| | 939 |
|
| Investment expenses | (88 | ) | | (79 | ) | | (172 | ) | | (159 | ) | (95 | ) | | (84 | ) |
| Net investment income | $ | 958 |
| | $ | 821 |
| | $ | 1,813 |
| | $ | 1,607 |
| $ | 1,066 |
| | $ | 855 |
|
Investment Related Gains (Losses)—Investment related gains (losses) by asset class consists of the following:
| | | | Three months ended June 30, | | Six months ended June 30, | Three months ended March 31, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| AFS securities | | | | | | | | | | |
| Gross realized gains on investment activity | $ | 51 |
| | $ | 35 |
| | $ | 72 |
| | $ | 63 |
| $ | 17 |
| | $ | 21 |
|
| Gross realized losses on investment activity | (37 | ) | | (13 | ) | | (43 | ) | | (21 | ) | (13 | ) | | (6 | ) |
| Net realized investment gains on AFS securities | 14 |
| | 22 |
| | 29 |
| | 42 |
| 4 |
| | 15 |
|
| Net realized investment gains (losses) on trading securities | (76 | ) | | 42 |
| | (165 | ) | | 28 |
| |
| Net realized investment gains on equity securities | 3 |
| | 2 |
| | 4 |
| | 20 |
| |
| Net recognized investment gains (losses) on trading securities | | 49 |
| | (89 | ) |
| Net recognized investment gains on equity securities | | 18 |
| | 1 |
|
| Derivative gains (losses) | 46 |
| | 406 |
| | (138 | ) | | 1,060 |
| 1,692 |
| | (184 | ) |
| Other gains (losses) | 11 |
| | (12 | ) | | 32 |
| | (8 | ) | |
| Other gains | | 9 |
| | 21 |
|
| Investment related gains (losses) | $ | (2 | ) | | $ | 460 |
| | $ | (238 | ) | | $ | 1,142 |
| $ | 1,772 |
| | $ | (236 | ) |
Proceeds from sales of AFS securities were $2,365$1,253 million and $1,235$1,547 million for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively, and $4,002 million and $2,766 millionrespectively. Proceeds from sales of AFS securities for the sixthree months ended June 30,March 31, 2018 and 2017, respectively.have been revised for immaterial misstatements to be comparable to current year balances.
The following table summarizes the change in unrealized gains (losses) on trading and equity securities, including related party, we still held as of the respective period end:
|
| | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 |
| Trading securities | $ | 30 |
| | $ | 48 |
| | $ | (39 | ) | | $ | 59 |
|
| Trading securities – related party | (4 | ) | | 12 |
| | (6 | ) | | — |
|
| Equity securities | 4 |
| | (2 | ) | | 4 |
| | 13 |
|
Purchased Credit Impaired (PCI) Investments—The following table summarizes our PCI investments:
|
| | | | | | | | | | | | | | | |
| | June 30, 2018 | | December 31, 2017 | | June 30, 2018 | | December 31, 2017 |
| (In millions) | Fixed maturity securities | | Mortgage loans |
| Contractually required payments receivable | $ | 8,695 |
| | $ | 9,690 |
| | $ | 1,198 |
| | $ | 1,140 |
|
Less: Cash flows expected to be collected1 | (7,689 | ) | | (8,188 | ) | | (1,164 | ) | | (1,090 | ) |
| Non-accretable difference | $ | 1,006 |
| | $ | 1,502 |
| | $ | 34 |
| | $ | 50 |
|
| | | | | | | | |
Cash flows expected to be collected1 | $ | 7,689 |
| | $ | 8,188 |
| | $ | 1,164 |
| | $ | 1,090 |
|
| Less: Amortized cost | (5,905 | ) | | (6,168 | ) | | (860 | ) | | (817 | ) |
| Accretable difference | $ | 1,784 |
| | $ | 2,020 |
| | $ | 304 |
| | $ | 273 |
|
| | | | | | | | |
| Fair value | $ | 6,426 |
| | $ | 6,703 |
| | $ | 909 |
| | $ | 844 |
|
| Outstanding balance | 7,250 |
| | 8,026 |
| | 992 |
| | 946 |
|
| | | | | | | | |
1 Represents the undiscounted principal and interest cash flows expected. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table summarizes the change in unrealized gains (losses) on trading and equity securities, including related party and consolidated VIEs, we still held as of the respective period end:
|
| | | | | | | |
| | Three months ended March 31, |
| (In millions) | 2019 | | 2018 |
| Trading securities | $ | 71 |
| | $ | (69 | ) |
| Trading securities – related party | (3 | ) | | (2 | ) |
| VIE trading securities – related party | 1 |
| | — |
|
| Equity securities | 18 |
| | — |
|
| Equity securities – related party | 3 |
| | — |
|
| VIE equity securities – related party | — |
| | 25 |
|
Purchased Credit Impaired (PCI) Investments—The following table summarizes our PCI investments:
|
| | | | | | | | | | | | | | | |
| | Fixed maturity securities | | Mortgage loans |
| (In millions) | March 31, 2019 | | December 31, 2018 | | March 31, 2019 | | December 31, 2018 |
| Contractually required payments receivable | $ | 7,931 |
| | $ | 8,179 |
| | $ | 2,870 |
| | $ | 2,675 |
|
Less: Cash flows expected to be collected1 | (6,968 | ) | | (7,195 | ) | | (2,829 | ) | | (2,628 | ) |
| Non-accretable difference | $ | 963 |
| | $ | 984 |
| | $ | 41 |
| | $ | 47 |
|
| | | | | | | | |
Cash flows expected to be collected1 | $ | 6,968 |
| | $ | 7,195 |
| | $ | 2,829 |
| | $ | 2,628 |
|
| Less: Amortized cost | (5,392 | ) | | (5,518 | ) | | (2,117 | ) | | (1,931 | ) |
| Accretable difference | $ | 1,576 |
| | $ | 1,677 |
| | $ | 712 |
| | $ | 697 |
|
| | | | | | | | |
| Fair value | $ | 5,774 |
| | $ | 5,828 |
| | $ | 2,138 |
| | $ | 1,933 |
|
| Outstanding balance | 6,619 |
| | 6,773 |
| | 2,395 |
| | 2,210 |
|
| | | | | | | | |
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:
| | | | June 30, 2018 | March 31, 2019 |
| (In millions) | Fixed maturity securities | | Mortgage loans | Fixed maturity securities | | Mortgage loans |
| Contractually required payments receivable | $ | 405 |
| | $ | 89 |
| $ | 66 |
| | $ | 382 |
|
| Cash flows expected to be collected | 381 |
| | 87 |
| 51 |
| | 382 |
|
| Fair value | 310 |
| | 68 |
| 44 |
| | 292 |
|
The following table summarizes the activity for the accretable yield on PCI investments: | | | | Three months ended June 30, 2018 | | Six months ended June 30, 2018 | Three months ended March 31, 2019 |
| (In millions) | Fixed maturity securities | | Mortgage loans | | Fixed maturity securities | | Mortgage loans | Fixed maturity securities | | Mortgage loans |
| Beginning balance | $ | 1,912 |
| | $ | 291 |
| | $ | 2,020 |
| | $ | 273 |
| |
| Beginning balance at January 1 | | $ | 1,677 |
| | $ | 697 |
|
| Purchases of PCI investments, net of sales | 28 |
| | 16 |
| | 44 |
| | 14 |
| 8 |
| | 40 |
|
| Accretion | (105 | ) | | (11 | ) | | (205 | ) | | (21 | ) | (91 | ) | | (32 | ) |
| Net reclassification from (to) non-accretable difference | (51 | ) | | 8 |
| | (75 | ) | | 38 |
| (18 | ) | | 7 |
|
| Ending balance | $ | 1,784 |
| | $ | 304 |
| | $ | 1,784 |
| | $ | 304 |
| |
| Ending balance at March 31 | | $ | 1,576 |
| | $ | 712 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Mortgage Loans, including related party—Mortgage loans, net of allowances, consists of the following:
| | | (In millions) | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| Commercial mortgage loans | $ | 6,197 |
| | $ | 5,223 |
| $ | 7,693 |
| | $ | 7,217 |
|
| Commercial mortgage loans under development | 37 |
| | 24 |
| 86 |
| | 80 |
|
| Total commercial mortgage loans | 6,234 |
| | 5,247 |
| 7,779 |
| | 7,297 |
|
| Residential mortgage loans | 1,375 |
| | 986 |
| 3,554 |
| | 3,334 |
|
| Mortgage loans, net of allowances | $ | 7,609 |
| | $ | 6,233 |
| $ | 11,333 |
| | $ | 10,631 |
|
We primarily invest in commercial mortgage loans on income producing properties including office and retail buildings, hotels, industrial properties and retail and office buildings.apartments. 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:
| | | | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| (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 | $ | 1,769 |
| | 28.4 | % | | $ | 1,187 |
| | 22.6 | % | $ | 2,527 |
| | 32.4 | % | | $ | 2,221 |
| | 30.5 | % |
| Retail | 1,710 |
| | 27.4 | % | | 1,223 |
| | 23.3 | % | 1,797 |
| | 23.1 | % | | 1,660 |
| | 22.7 | % |
| Hotels | 895 |
| | 14.4 | % | | 928 |
| | 17.7 | % | 1,040 |
| | 13.4 | % | | 1,040 |
| | 14.3 | % |
| Industrial | 858 |
| | 13.8 | % | | 944 |
| | 18.0 | % | 1,232 |
| | 15.8 | % | | 1,196 |
| | 16.4 | % |
| Apartment | 545 |
| | 8.7 | % | | 525 |
| | 10.0 | % | 899 |
| | 11.6 | % | | 791 |
| | 10.8 | % |
| Other commercial | 457 |
| | 7.3 | % | | 440 |
| | 8.4 | % | 284 |
| | 3.7 | % | | 389 |
| | 5.3 | % |
| Total commercial mortgage loans | $ | 6,234 |
| | 100.0 | % | | $ | 5,247 |
| | 100.0 | % | $ | 7,779 |
| | 100.0 | % | | $ | 7,297 |
| | 100.0 | % |
| | | | | | | | | | | | | | | |
| U.S. Region | | | | | | | | | | | | | | |
| East North Central | $ | 921 |
| | 14.8 | % | | $ | 643 |
| | 12.3 | % | $ | 846 |
| | 10.9 | % | | $ | 855 |
| | 11.7 | % |
| East South Central | 160 |
| | 2.6 | % | | 144 |
| | 2.7 | % | 200 |
| | 2.6 | % | | 295 |
| | 4.0 | % |
| Middle Atlantic | 1,025 |
| | 16.4 | % | | 909 |
| | 17.3 | % | 1,434 |
| | 18.4 | % | | 1,131 |
| | 15.5 | % |
| Mountain | 512 |
| | 8.2 | % | | 492 |
| | 9.4 | % | 603 |
| | 7.8 | % | | 616 |
| | 8.4 | % |
| New England | 144 |
| | 2.3 | % | | 162 |
| | 3.1 | % | 373 |
| | 4.8 | % | | 374 |
| | 5.1 | % |
| Pacific | 1,362 |
| | 21.9 | % | | 991 |
| | 18.9 | % | 1,791 |
| | 23.0 | % | | 1,540 |
| | 21.1 | % |
| South Atlantic | 1,362 |
| | 21.8 | % | | 873 |
| | 16.6 | % | 1,518 |
| | 19.5 | % | | 1,468 |
| | 20.2 | % |
| West North Central | 189 |
| | 3.0 | % | | 233 |
| | 4.4 | % | 158 |
| | 2.0 | % | | 173 |
| | 2.4 | % |
| West South Central | 559 |
| | 9.0 | % | | 655 |
| | 12.5 | % | 856 |
| | 11.0 | % | | 845 |
| | 11.6 | % |
| Total U.S. Region | 6,234 |
| | 100.0 | % | | 5,102 |
| | 97.2 | % | 7,779 |
| | 100.0 | % | | 7,297 |
| | 100.0 | % |
| International Region | — |
| | — | % | | 145 |
| | 2.8 | % | |
| Total commercial mortgage loans | $ | 6,234 |
| | 100.0 | % | | $ | 5,247 |
| | 100.0 | % | $ | 7,779 |
| | 100.0 | % | | $ | 7,297 |
| | 100.0 | % |
Our residential mortgage loan portfolio includes first lien residential mortgage loans collateralized by properties located in the U.S. Asand is summarized in the following table:
|
| | | | | |
| | March 31, 2019 | | December 31, 2018 |
| California | 33.7 | % | | 30.3 | % |
| Florida | 15.7 | % | | 16.3 | % |
| New York | 7.2 | % | | 7.7 | % |
| Texas | 6.4 | % | | 3.3 | % |
Other1 | 37.0 | % | | 42.4 | % |
| Total residential mortgage loan percentage | 100.0 | % | | 100.0 | % |
| | | | |
1Represents all other states, with each individual state comprising less than 5% of the portfolio. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements June 30, 2018(Unaudited), California and Florida represented 33.3% and 16.7%, respectively, of the portfolio, and the remaining 50.0% represented all other states, with each individual state comprising less than 5% of the portfolio. As of December 31, 2017, California, Florida and New York represented 34.3%, 15.6% and 6.0%, respectively, of the portfolio, and the remaining 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 $1$2 million as of June 30, 2018March 31, 2019 and$2 million as of December 31, 2017.2018. We did not record any material activity in the valuation allowance during the sixthree months ended June 30, 2018March 31, 2019 or 20172018.
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 June 30, 2018March 31, 2019 and December 31, 2017, $352018, $56 million and $28$48 million, respectively, of our residential mortgage loans were non-performing.nonperforming.
Commercial mortgage loans – As of June 30, 2018March 31, 2019 and December 31, 2017,2018, none of our commercial mortgage loans were 30 days or more past due.
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) | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| Less than 50% | $ | 1,952 |
| | $ | 1,841 |
| $ | 2,060 |
| | $ | 1,883 |
|
| 50% to 60% | 1,607 |
| | 1,390 |
| 1,986 |
| | 1,988 |
|
| 61% to 70% | 1,989 |
| | 1,691 |
| 2,856 |
| | 2,394 |
|
| 71% to 100% | 649 |
| | 301 |
| |
| 71% to 80% | | 702 |
| | 898 |
|
| 81% to 100% | | 89 |
| | 54 |
|
| Commercial mortgage loans | $ | 6,197 |
| | $ | 5,223 |
| $ | 7,693 |
| | $ | 7,217 |
|
The debt service coverage ratio, based upon the most recent financial statements, is expressed as a percentage of a property’s net operating income to its debt service payments. A debt service ratio of less than 1.0 indicates a property’s operations do not generate enough income to cover debt payments. The following represents the debt service coverage ratio of the commercial mortgage loan portfolio, excluding those under development, net of valuation allowances: | | | (In millions) | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| Greater than 1.20x | $ | 5,776 |
| | $ | 4,742 |
| $ | 7,057 |
| | $ | 6,576 |
|
| 1.00x – 1.20x | 302 |
| | 297 |
| 360 |
| | 474 |
|
| Less than 1.00x | 119 |
| | 184 |
| 276 |
| | 167 |
|
| Commercial mortgage loans | $ | 6,197 |
| | $ | 5,223 |
| $ | 7,693 |
| | $ | 7,217 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Investment Funds—Our investment fund portfolio consists of funds that employ various strategies and include investments in real estate and other real assets, credit, private equity, natural resources and hedge funds. Investment funds typicallycan meet the definition of VIEsVIEs. Our investment funds do not specify timing of distributions on the funds’ underlying assets.
The following summarizes our investment funds, including related party and are discussed further in Note 4 – Variable Interest Entities.those owned by consolidated VIEs:
|
| | | | | | | | | | | | | |
| | March 31, 2019 | | December 31, 20181 |
| (In millions, except for percentages and years) | Carrying value | | Percent of total | | Carrying value | | Percent of total |
| Investment funds | | | | | | | |
| Real estate | $ | 224 |
| | 32.8 | % | | $ | 215 |
| | 30.6 | % |
| Credit funds | 155 |
| | 22.7 | % | | 172 |
| | 24.5 | % |
| Private equity | 239 |
| | 35.0 | % | | 253 |
| | 36.0 | % |
| Real assets | 64 |
| | 9.4 | % | | 56 |
| | 7.9 | % |
| Natural resources | 1 |
| | 0.1 | % | | 4 |
| | 0.6 | % |
| Other | — |
| | — | % | | 3 |
| | 0.4 | % |
| Total investment funds | 683 |
| | 100.0 | % | | 703 |
| | 100.0 | % |
| Investment funds – related parties | | | | | | | |
| Differentiated investments | | | | | | | |
AmeriHome Mortgage Company, LLC (AmeriHome)2 | 436 |
| | 19.0 | % | | 463 |
| | 20.7 | % |
| Catalina Holdings Ltd. (Catalina) | 232 |
| | 10.1 | % | | 233 |
| | 10.4 | % |
Athora Holding Ltd. (Athora)2 | 124 |
| | 5.4 | % | | 105 |
| | 4.7 | % |
Venerable Holdings, Inc. (Venerable)2 | 87 |
| | 3.8 | % | | 92 |
| | 4.1 | % |
| Other | 171 |
| | 7.5 | % | | 162 |
| | 7.3 | % |
| Total differentiated investments | 1,050 |
| | 45.8 | % | | 1,055 |
| | 47.2 | % |
| Real estate | 498 |
| | 21.8 | % | | 506 |
| | 22.7 | % |
| Credit funds | 340 |
| | 14.8 | % | | 341 |
| | 15.3 | % |
| Private equity | 52 |
| | 2.3 | % | | 18 |
| | 0.8 | % |
| Real assets | 144 |
| | 6.3 | % | | 145 |
| | 6.5 | % |
| Natural resources | 123 |
| | 5.4 | % | | 104 |
| | 4.7 | % |
| Public equities | 83 |
| | 3.6 | % | | 63 |
| | 2.8 | % |
| Total investment funds – related parties | 2,290 |
| | 100.0 | % | | 2,232 |
| | 100.0 | % |
| Investment funds owned by consolidated VIEs | | | | | | | |
MidCap FinCo Limited (MidCap)2 | 550 |
| | 88.8 | % | | 552 |
| | 88.4 | % |
| Credit funds | 1 |
| | 0.2 | % | | 1 |
| | 0.2 | % |
| Real estate | 29 |
| | 4.7 | % | | 30 |
| | 4.8 | % |
| Real assets | 39 |
| | 6.3 | % | | 41 |
| | 6.6 | % |
| Total investment funds owned by consolidated VIEs | 619 |
| | 100.0 | % | | 624 |
| | 100.0 | % |
| Total investment funds including related parties and funds owned by consolidated VIEs | $ | 3,592 |
| | | | $ | 3,559 |
| | |
| | | | | | | | |
1 Certain reclassifications have been made to conform with current year presentation. |
2 See further discussions on AmeriHome, Athora, Venerable and MidCap in Note 8 – Related Parties. |
The following table presents the carrying value by ownership percentage of equity method investment funds, including related party investment funds and investment funds owned by consolidated VIEs:
|
| | | | | | | |
| (In millions) | March 31, 2019 | | December 31, 2018 |
| Ownership Percentage | | | |
| 100% | $ | 15 |
| | $ | 17 |
|
| 50% – 99% | 1,017 |
| | 1,044 |
|
| 3% – 49% | 1,684 |
| | 1,617 |
|
| Equity method investment funds | $ | 2,716 |
| | $ | 2,678 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table presents the carrying value by ownership percentage of investment funds where we elected the fair value option, including related party investment funds and investment funds owned by consolidated VIEs:
|
| | | | | | | |
| (In millions) | March 31, 2019 | | December 31, 2018 |
| Ownership Percentage | | | |
| 3% – 49% | $ | 699 |
| | $ | 687 |
|
| Less than 3% | 177 |
| | 194 |
|
| Fair value option investment funds | $ | 876 |
| | $ | 881 |
|
Non-Consolidated Securities and Investment Funds
Fixed maturity securities – We invest in securitization entities as a debt holder or an investor in the residual interest of the securitization vehicle. These entities are deemed VIEs due to insufficient equity within the structure and lack of control by the equity investors over the activities that significantly impact the economics of the entity. In general, we are a debt investor within these entities and, as such, hold a variable interest; however, due to the debt holders’ lack of ability to control the decisions within the trust that significantly impact the entity, and the fact the debt holders are protected from losses due to the subordination of the equity tranche, the debt holders are not deemed the primary beneficiary. Securitization vehicles in which we hold the residual tranche are not consolidated because we do not unilaterally have substantive rights to remove the general partner, or when assessing related party interests, we are not under common control, as defined by GAAP, with the related party, nor are substantially all of the activities conducted on our behalf; therefore, we are not deemed the primary beneficiary. Debt investments and investments in the residual tranche of securitization entities are considered debt instruments and are held at fair value on the balance sheet and classified as AFS or trading.
Investment funds – Investment funds include non-fixed income, alternative investments in the form of limited partnerships or similar legal structures.
Equity securities – We invest in preferred equity securities issued by entities deemed to be VIEs due to insufficient equity within the structure.
Our risk of loss associated with our non-consolidated investments depends on the investment. Investment funds, equity securities and trading securities are limited to the carrying value plus unfunded commitments. AFS securities are limited to amortized cost plus unfunded commitments.
The following summarizes the carrying value and maximum loss exposure of these non-consolidated investments:
|
| | | | | | | | | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
| (In millions) | Carrying Value | | Maximum Loss Exposure | | Carrying Value | | Maximum Loss Exposure |
| Investment funds | $ | 683 |
| | $ | 1,271 |
| | $ | 703 |
| | $ | 1,329 |
|
| Investment in related parties – investment funds | 2,290 |
| | 4,301 |
| | 2,232 |
| | 4,331 |
|
| Assets of consolidated VIEs – investment funds | 619 |
| | 722 |
| | 624 |
| | 727 |
|
| Investment in fixed maturity securities | 22,107 |
| | 21,748 |
| | 21,188 |
| | 21,139 |
|
| Investment in related parties – fixed maturity securities | 1,920 |
| | 2,010 |
| | 1,686 |
| | 1,788 |
|
| Investment in related parties – equity securities | 301 |
| | 301 |
| | 120 |
| | 120 |
|
| Total non-consolidated investments | $ | 27,920 |
| | $ | 30,353 |
| | $ | 26,553 |
| | $ | 29,434 |
|
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 54 – Fair Value for information about the fair value hierarchy for derivatives.
The following table presents the notional amount and fair value of derivative instruments:
| | | | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| | 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 | 1,713 |
| | $ | 28 |
| | $ | 102 |
| | 928 |
| | $ | 1 |
| | $ | 99 |
| 2,275 |
| | $ | 68 |
| | $ | 49 |
| | 2,041 |
| | $ | 83 |
| | $ | 55 |
|
| Interest rate swaps | — |
| | — |
| | — |
| | 302 |
| | — |
| | — |
| |
| Foreign currency forwards | | 154 |
| | 2 |
| | — |
| | 85 |
| | — |
| | 1 |
|
| Total derivatives designated as hedges | | | 28 |
| | 102 |
| | | | 1 |
| | 99 |
| | | 70 |
| | 49 |
| | | | 83 |
| | 56 |
|
| Derivatives not designated as hedges | | | | | | | | | | | | | | | | | | | | | | |
| Equity options | 34,189 |
| | 1,875 |
| | 13 |
| | 31,460 |
| | 2,500 |
| | 19 |
| 49,566 |
| | 1,824 |
| | 22 |
| | 49,821 |
| | 942 |
| | 11 |
|
| Futures | 4 |
| | 3 |
| | — |
| | 1,134 |
| | 7 |
| | — |
| 6 |
| | 8 |
| | 1 |
| | 4 |
| | 9 |
| | 3 |
|
| Total return swaps | 61 |
| | 1 |
| | — |
| | 114 |
| | 5 |
| | — |
| 60 |
| | 4 |
| | — |
| | 62 |
| | — |
| | 3 |
|
| Foreign currency swaps | 42 |
| | 3 |
| | 4 |
| | 41 |
| | 21 |
| | 3 |
| 38 |
| | 3 |
| | 1 |
| | 38 |
| | 3 |
| | 2 |
|
| Interest rate swaps | 480 |
| | — |
| | 1 |
| | 385 |
| | — |
| | 2 |
| 310 |
| | — |
| | 1 |
| | 326 |
| | — |
| | 1 |
|
| Credit default swaps | 10 |
| | — |
| | 5 |
| | 10 |
| | — |
| | 5 |
| 10 |
| | — |
| | 4 |
| | 10 |
| | — |
| | 4 |
|
| Foreign currency forwards | 595 |
| | 19 |
| | 12 |
| | 1,139 |
| | 17 |
| | 6 |
| 795 |
| | 11 |
| | 7 |
| | 646 |
| | 6 |
| | 5 |
|
| Embedded derivatives | | | | | | | | | | | | | | | | | | | | | | |
| Funds withheld | — |
| | 312 |
| | 4 |
| | — |
| | 312 |
| | 22 |
| |
| Funds withheld including related party | | — |
| | 660 |
| | 12 |
| | — |
| | (53 | ) | | (1 | ) |
| Interest sensitive contract liabilities | — |
| | — |
| | 8,065 |
| | — |
| | — |
| | 7,436 |
| — |
| | — |
| | 9,106 |
| | — |
| | — |
| | 7,969 |
|
| Total derivatives not designated as hedges | | | 2,213 |
| | 8,104 |
| | | | 2,862 |
| | 7,493 |
| | | 2,510 |
| | 9,154 |
| | | | 907 |
| | 7,997 |
|
| Total derivatives | | | $ | 2,241 |
| | $ | 8,206 |
| | | | $ | 2,863 |
| | $ | 7,592 |
| | | $ | 2,580 |
| | $ | 9,203 |
| | | | $ | 990 |
| | $ | 8,053 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Derivatives Designated as HedgesNon-Consolidated Securities and Investment Funds
Foreign currency swapsFixed maturity securities – –We use foreign currency swaps to convert foreign currency denominated cash flowsinvest in securitization entities as a debt holder or an investor in the residual interest of an investment to U.S. dollars to reduce cash flow fluctuationsthe securitization vehicle. These entities are deemed VIEs due to changes in currency exchange rates. Certaininsufficient 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 swaps are designated and accounted for as cash flow hedges, which will expire by December 2045. During the three months ended June 30, 2018 and 2017, we had foreign currency swap gains of$101 million and losses of $33 million, respectively, recorded in AOCI. During the six months ended June 30, 2018 and 2017, we had foreign currency swap gains of $45 million and losses of $38 million, respectively, recorded in AOCI. There were no amounts reclassified to income during the six months ended June 30, 2018 and2017,entities and, as such, hold a variable interest; however, due to the debt holders’ lack of June 30, 2018, no amounts are expectedability to be reclassified to incomecontrol the decisions within the next 12 months.trust that significantly impact the entity, and the fact the debt holders are protected from losses due to the subordination of the equity tranche, the debt holders are not deemed the primary beneficiary. Securitization vehicles in which we hold the residual tranche are not consolidated because we do not unilaterally have substantive rights to remove the general partner, or when assessing related party interests, we are not under common control, as defined by GAAP, with the related party, nor are substantially all of the activities conducted on our behalf; therefore, we are not deemed the primary beneficiary. Debt investments and investments in the residual tranche of securitization entities are considered debt instruments and are held at fair value on the balance sheet and classified as AFS or trading.
Derivatives Not Designated as HedgesInvestment funds – Investment funds include non-fixed income, alternative investments in the form of limited partnerships or similar legal structures.
Equity optionssecurities – – We useinvest in preferred equity indexed optionssecurities issued by entities deemed to economically hedge fixed indexed annuity products that guaranteebe VIEs due to insufficient equity within the return of principal to the policyholder and credit interest based on a percentage of the gain in a specified market index, primarily the S&P 500. To hedge against adverse changes in equity indices, we enter into contracts to buy equity indexed options. The contracts are net settled in cash based on differentials in the indices at the time of exercise and the strike price.structure.
Futures –Futures contractsOur risk of loss associated with our non-consolidated investments depends on the investment. Investment funds, equity securities and trading securities are purchased to hedge the growth in interest creditedlimited 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 whocarrying value plus unfunded commitments. AFS securities are members of a trading exchange. Under exchange-traded futures contracts, we agreelimited 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.
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.
Total return swaps – We purchase total rate of return swaps to gain exposure and benefit from a reference asset or index without ownership. Total rate of return swaps are contracts in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of the underlying asset or index, which includes both the income it generates and any capital gains.
Credit default swaps – Credit default swaps provide a measure of protection against the default of an issuer or allow us to gain credit exposure to an issuer or traded index. We use credit default swaps coupled with a bond to synthetically create the characteristics of a reference bond. These transactions have a loweramortized cost and are generally more liquid relative to the cash market. We receive a periodic premium for these transactions as compensation for accepting credit risk.
Hedging credit risk involves buying protection for existing credit risk. The exposure resulting from the agreements, which is usually the notional amount, is equal to the maximum proceeds that must be paid by a counterparty for a defaulted security. If a credit event occurs on a reference entity, then a counterparty who sold protection is required to pay the buyer the trade notional amount less any recovery value of the security.
Foreign currency forwards – We use foreign currency forward contracts to hedge certain exposures to foreign currency risk. The price is agreed upon at the time of the contract and payment is made at a specified future date.
Embedded derivatives – We have embedded derivatives which are required to be separated from their host contracts and reported as derivatives. Host contracts include reinsurance agreements structured on a modified coinsurance (modco) or funds withheld basis and indexed annuity products.plus unfunded commitments.
The following is a summarysummarizes the carrying value and maximum loss exposure of the gains (losses) related to derivatives not designated as hedges:these non-consolidated investments:
|
| | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 |
| Equity options | $ | 89 |
| | $ | 259 |
| | $ | (53 | ) | | $ | 787 |
|
| Futures | 1 |
| | (4 | ) | | (4 | ) | | (14 | ) |
| Swaps | (9 | ) | | 9 |
| | (7 | ) | | 14 |
|
| Foreign currency forwards | 14 |
| | 19 |
| | 7 |
| | 20 |
|
| Embedded derivatives on funds withheld | (49 | ) | | 123 |
| | (81 | ) | | 253 |
|
| Amounts recognized in investment related gains (losses) | 46 |
| | 406 |
| | (138 | ) | | 1,060 |
|
Embedded derivatives in indexed annuity products1 | (54 | ) | | (302 | ) | | 184 |
| | (733 | ) |
| Total gains (losses) on derivatives not designated as hedges | $ | (8 | ) | | $ | 104 |
| | $ | 46 |
| | $ | 327 |
|
| | | | | | | | |
1 Included in interest sensitive contract benefits. |
|
| | | | | | | | | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
| (In millions) | Carrying Value | | Maximum Loss Exposure | | Carrying Value | | Maximum Loss Exposure |
| Investment funds | $ | 683 |
| | $ | 1,271 |
| | $ | 703 |
| | $ | 1,329 |
|
| Investment in related parties – investment funds | 2,290 |
| | 4,301 |
| | 2,232 |
| | 4,331 |
|
| Assets of consolidated VIEs – investment funds | 619 |
| | 722 |
| | 624 |
| | 727 |
|
| Investment in fixed maturity securities | 22,107 |
| | 21,748 |
| | 21,188 |
| | 21,139 |
|
| Investment in related parties – fixed maturity securities | 1,920 |
| | 2,010 |
| | 1,686 |
| | 1,788 |
|
| Investment in related parties – equity securities | 301 |
| | 301 |
| | 120 |
| | 120 |
|
| Total non-consolidated investments | $ | 27,920 |
| | $ | 30,353 |
| | $ | 26,553 |
| | $ | 29,434 |
|
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.3. Derivative Instruments
We use a variety of derivative instruments to manage risks, primarily equity, interest rate, credit, risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties. Where possible, we maintain collateral arrangementsforeign currency and use master netting agreements that provide for a single net payment from one counterparty to another at each due date and upon termination.market volatility. We have also established counterparty exposure limits, where possible, in order to evaluate if there is sufficient collateral to support the net exposure.
Collateral arrangements typically require the posting of collateral in connection with its derivative instruments. Collateral agreements often contain posting thresholds, some of which may vary depending on the posting party’s financial strength ratings. Additionally, a decrease in our financial strength rating to a specified level can result in settlement of the derivative position.
The estimated fair value of our net derivative and other financial assets and liabilities after the application of master netting agreements and collateral were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Gross amounts not offset on the condensed consolidated balance sheets | | | | | | |
| (In millions) | Gross amount recognized1 | | Financial instruments2 | | Collateral received/pledged | | Net amount | | Off-balance sheet securities collateral3 | | Net amount after securities collateral |
| June 30, 2018 | | | | | | | | | | | |
| Derivative assets | $ | 1,929 |
| | $ | (59 | ) | | $ | (1,746 | ) | | $ | 124 |
| | $ | (111 | ) | | $ | 13 |
|
| Derivative liabilities | (137 | ) | | 59 |
| | 56 |
| | (22 | ) | | — |
| | (22 | ) |
| | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | |
| Derivative assets | $ | 2,551 |
| | $ | (59 | ) | | $ | (2,323 | ) | | $ | 169 |
| | $ | (221 | ) | | $ | (52 | ) |
| 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 June 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 VIEsSee —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), NCL Athene, LLC (NCL LLC), Apollo Asia Sprint Co-Investment Fund, L.P. (Sprint) and ALR Aircraft Investment Ireland Limited (ALR), which are investment funds. We are the only limited partner, 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, 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 criteriaNote 4 – Fair Value 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 electedinformation about the fair value optionhierarchy for certain fixed maturity and equity securities, and investment funds, which are reported in the consolidated variable interest entity sections on the condensed consolidated balance sheets.
CoInvest VI, CoInvest VII and CoInvest Other were formed to make investments, including co-investments alongside private equity funds sponsored by Apollo. We received our interests in CoInvest VI, CoInvest VII and CoInvest Other as part of a contribution agreement in 2012 with AAA Guarantor – Athene, L.P. (AAA Investor) and its subsidiary, Apollo Life Re Ltd., in order to provide a capital base to support future acquisitions.
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 June 30, 2018 and December 31, 2017, we had $14 million due to MidCap under the subordinated participation agreement which is reflected as a secured borrowing in other liabilities on the condensed consolidated balance sheets. In addition, we have advanced amounts under a subordinated debt facility to MidCap and, as of June 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.
NCL LLC was formed to hold the investment in Norwegian Cruise Line Holdings Ltd. (NCLH) shares, which 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 equity securities. We are the primary beneficiary and consolidate NCL LLC, as substantially all of its activities are conducted on our behalf.
We have a 100% limited partnership interest in Sprint, an entity formed to make a co-investment alongside private equity funds sponsored by Apollo. The underlying investment is a structured credit facility on a nearly complete skyscraper in Southeast Asia. We are the primary beneficiary and consolidate Sprint, as substantially all of its activities are conducted on our behalf.
During the first quarter of 2018, we invested in profit participating notes of ALR. ALR was formed to invest in a joint venture that provides airplane lease financing to a major commercial airline. We are the only investor in the profit participating notes and, as substantially all of the activities of ALR are conducted on our behalf, we are the primary beneficiary and consolidate ALR.
Trading securities – related party – Trading securities represents investments in fixed maturity 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. Trading securities held by CoInvest VI and CoInvest VII are related party investments because Apollo affiliates exercise significant influence over the operations of these investees.
Equity securities – related party – Changes in fair value of equity securities are recognized in investment related gains (losses) within revenues of consolidated variable interest entities on the condensed consolidated statements of income. Prior period unrealized changes in fair value of equity securities designated as AFS were recognized in OCI. Equity securities held by CoInvest VI, CoInvest VII, CoInvest Other and NCL LLC are related party investments because Apollo affiliates exercise significant influence over the operations of these investees.derivatives.
The following table summarizespresents the change in unrealized gains (losses) on tradingnotional amount and equity securitiesfair value of our consolidated variable interest entities still held as of the respective period end:derivative instruments:
|
| | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 |
| Trading securities – related party | $ | 1 |
| | $ | 1 |
| | $ | 1 |
| | $ | 1 |
|
| Equity securities – related party | (14 | ) | | 9 |
| | (39 | ) | | 5 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
| | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| (In millions) | | Assets | | Liabilities | | | Assets | | Liabilities |
| Derivatives designated as hedges | | | | | | | | | | | |
| Foreign currency swaps | 2,275 |
| | $ | 68 |
| | $ | 49 |
| | 2,041 |
| | $ | 83 |
| | $ | 55 |
|
| Foreign currency forwards | 154 |
| | 2 |
| | — |
| | 85 |
| | — |
| | 1 |
|
| Total derivatives designated as hedges | | | 70 |
| | 49 |
| | | | 83 |
| | 56 |
|
| Derivatives not designated as hedges | | | | | | | | | | | |
| Equity options | 49,566 |
| | 1,824 |
| | 22 |
| | 49,821 |
| | 942 |
| | 11 |
|
| Futures | 6 |
| | 8 |
| | 1 |
| | 4 |
| | 9 |
| | 3 |
|
| Total return swaps | 60 |
| | 4 |
| | — |
| | 62 |
| | — |
| | 3 |
|
| Foreign currency swaps | 38 |
| | 3 |
| | 1 |
| | 38 |
| | 3 |
| | 2 |
|
| Interest rate swaps | 310 |
| | — |
| | 1 |
| | 326 |
| | — |
| | 1 |
|
| Credit default swaps | 10 |
| | — |
| | 4 |
| | 10 |
| | — |
| | 4 |
|
| Foreign currency forwards | 795 |
| | 11 |
| | 7 |
| | 646 |
| | 6 |
| | 5 |
|
| Embedded derivatives | | | | | | | | | | | |
| Funds withheld including related party | — |
| | 660 |
| | 12 |
| | — |
| | (53 | ) | | (1 | ) |
| Interest sensitive contract liabilities | — |
| | — |
| | 9,106 |
| | — |
| | — |
| | 7,969 |
|
| Total derivatives not designated as hedges | | | 2,510 |
| | 9,154 |
| | | | 907 |
| | 7,997 |
|
| Total derivatives | | | $ | 2,580 |
| | $ | 9,203 |
| | | | $ | 990 |
| | $ | 8,053 |
|
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:
|
| | | | | | | | | | | | | | | | | | | |
| | June 30, 2018 |
| (In millions) | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 |
| Assets of consolidated variable interest entities | | | | | | | | | |
| Investments | | | | | | | | | |
| Fixed maturity securities, trading | $ | 48 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 48 |
|
| Equity securities | 163 |
| | — |
| | 137 |
| | — |
| | 26 |
|
| Investment funds | 542 |
| | 541 |
| | — |
| | — |
| | 1 |
|
| Cash and cash equivalents | 2 |
| | — |
| | 2 |
| | — |
| | — |
|
| Total assets of consolidated VIEs measured at fair value | $ | 755 |
| | $ | 541 |
| | $ | 139 |
| | $ | — |
| | $ | 75 |
|
| | | | | | | | | | |
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) | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 |
| Assets of consolidated variable interest entities | | | | | | | | | |
| Investments | | | | | | | | | |
| Fixed maturity securities, trading | $ | 48 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 48 |
|
| Equity securities | 240 |
| | — |
| | 212 |
| | — |
| | 28 |
|
| Investment funds | 549 |
| | 528 |
| | — |
| | — |
| | 21 |
|
| Cash and cash equivalents | 4 |
| | — |
| | 4 |
| | — |
| | — |
|
| Total assets of consolidated VIEs measured at fair value | $ | 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. |
Fair Value Valuation Methods – See Note 5 – Fair Value for the valuation methods used to determine the fair value of trading securities, equity securities, investment funds and cash and cash equivalents.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Level 3 Financial Instruments – The following is a reconciliation for all VIE Level 3 assets and liabilities measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 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 |
| Assets of consolidated variable interest entities | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | |
| Trading securities | $ | 47 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 48 |
| | $ | 1 |
|
| Equity securities | 28 |
| | (2 | ) | | — |
| | — |
| | — |
| | 26 |
| | (2 | ) |
| Investment funds | 20 |
| | (3 | ) | | — |
| | (16 | ) | | — |
| | 1 |
| | (3 | ) |
| Total Level 3 assets of consolidated VIEs | $ | 95 |
| | $ | (4 | ) | | $ | — |
| | $ | (16 | ) | | $ | — |
| | $ | 75 |
| | $ | (4 | ) |
| | | | | | | | | | | | | | |
1 Related to instruments held at end of period. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 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 variable interest entities | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | |
| Trading securities | $ | 50 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 51 |
| | $ | — |
|
| Equity securities | 32 |
| | (2 | ) | | — |
| | — |
| | — |
| | 30 |
| | (2 | ) |
| Investment funds | 38 |
| | — |
| | 1 |
| | (7 | ) | | — |
| | 32 |
| | — |
|
| Total Level 3 assets of consolidated VIEs | $ | 120 |
| | $ | (1 | ) | | $ | 1 |
| | $ | (7 | ) | | $ | — |
| | $ | 113 |
| | $ | (2 | ) |
| | | | | | | | | | | | | | |
1 Related to instruments held at end of period. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 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 |
| Assets of consolidated variable interest entities | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | |
| Trading securities | $ | 48 |
| | $ | 1 |
| | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | 48 |
| | $ | 1 |
|
| Equity securities | 28 |
| | (2 | ) | | — |
| | — |
| | — |
| | 26 |
| | (2 | ) |
| Investment funds | 21 |
| | (3 | ) | | — |
| | (17 | ) | | — |
| | 1 |
| | (3 | ) |
| Total Level 3 assets of consolidated VIEs | $ | 97 |
| | $ | (4 | ) | | $ | — |
| | $ | (18 | ) | | $ | — |
| | $ | 75 |
| | $ | (4 | ) |
| | | | | | | | | | | | | | |
1 Related to instruments held at end of period. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 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 variable interest entities | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | |
| Trading securities | $ | 50 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 51 |
| | $ | 1 |
|
| Equity securities | 43 |
| | (13 | ) | | — |
| | — |
| | — |
| | 30 |
| | (13 | ) |
| Investment funds | 38 |
| | — |
| | 1 |
| | (7 | ) | | — |
| | 32 |
| | — |
|
| Total Level 3 assets of consolidated VIEs | $ | 131 |
| | $ | (12 | ) | | $ | 1 |
| | $ | (7 | ) | | $ | — |
| | $ | 113 |
| | $ | (12 | ) |
| | | | | | | | | | | | | | |
1 Related to instruments held at end of period. |
There were no transfers between Level 1 or Level 2 during the three and six months ended June 30, 2018 and 2017.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Significant Unobservable Inputs– For certain Level 3 trading securities and investment funds, the valuations have significant unobservable inputs, which may include, but are not limited to, comparable multiples and weighted average cost of capital rates applied in the valuation models. These inputs in isolation can cause significant increases or decreases in fair value. For example, the comparable multiples may be multiplied by the underlying investment’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. A comparable multiple consistent with the implied trading multiple of public industry peers or relevant recent private transactions are used when available.
For other Level 3 trading securities, valuations are performed using a discounted cash flow model. For a discounted cash flow model, the significant input is the discount rate applied to present value the projected cash flows. An increase in the discount rate can significantly lower the fair value; a decrease in the discount rate can significantly increase the fair value. The discount rate may 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 June 30, | | Six months ended June 30, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 |
| Trading securities | $ | 1 |
| | $ | 1 |
| | $ | 1 |
| | $ | 1 |
|
| Investment funds | 3 |
| | — |
| | 9 |
| | 5 |
|
| Total gains (losses) | $ | 4 |
| | $ | 1 |
| | $ | 10 |
| | $ | 6 |
|
Fair Value of Financial Instruments Not Held at Fair Value – Assets of consolidated variable interest entities includes $51 million and $22 million of investment funds accounted for under the equity method and not carried at fair value as of June 30, 2018 and December 31, 2017, respectively; however, the carrying amount approximates fair value.
Non-Consolidated Securities and Investment Funds
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.vehicle. These entities are deemed VIEs due to insufficient equity within the structure and lack of control by the equity investors over the activities that significantly impact the economics of the entity. In general, we are a debt investor within these entities and, as such, hold a variable interest; however, due to the debt holders’ lack of ability to control the decisions within the trust that significantly impact the entity, and the fact the debt holders are protected from losses due to the subordination of the equity tranche, the debt holders are not deemed the primary beneficiary. Securitization vehicles in which we hold the residual tranche are not consolidated because we do not unilaterally have substantive rights to remove the general partner, or when assessing related party interests, we are not under common control, as defined by GAAP, with the related party, nor are substantially all of the activities conducted on our behalf; therefore, we are not deemed the primary beneficiary. Debt investments and investments in the residual tranche of securitization entities are considered debt instruments and are held at fair value on the balance sheet and classified as AFS or trading.
Investment funds – Investment funds include non-fixed income, alternative investments in the form of limited partnerships or similar legal structures.
Equity securities – We invest in preferred equity securities issued by entities deemed to be VIEs due to insufficient equity within the structure.
Our risk of loss associated with our non-consolidated investments is limited and depends on the investment, including any unfunded commitments, as follows: (1) investmentinvestment. Investment funds, accounted for under the equity method are limited to our capital contributions, net of return of capital; (2) investment funds under the fair value option are limited to the fair value; (3) AFS securities and other investments are limited to 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 investments:
|
| | | | | | | | | | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
| (In millions) | Carrying Value | | Maximum Loss Exposure | | Carrying Value | | Maximum Loss Exposure |
| Investment funds | $ | 633 |
| | $ | 1,242 |
| | $ | 699 |
| | $ | 1,036 |
|
| Investment in related parties – investment funds | 1,836 |
| | 3,644 |
| | 1,310 |
| | 2,598 |
|
| Assets of consolidated variable interest entities – investment funds | 593 |
| | 594 |
| | 571 |
| | 594 |
|
| Investment in fixed maturity securities | 21,879 |
| | 21,272 |
| | 21,022 |
| | 20,278 |
|
| Investment in related parties – fixed maturity securities | 1,234 |
| | 1,321 |
| | 713 |
| | 792 |
|
| Total non-consolidated investments | $ | 26,175 |
| | $ | 28,073 |
| | $ | 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:
|
| | | | | | | | | | | | | | | | | | | | | |
| | June 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 |
| Investment funds | | | | | | | | | | | | | | | |
| Private equity | $ | 237 |
| | 37.4 | % | | 0 | – | 6 | | $ | 271 |
| | 38.8 | % | | 0 | – | 7 |
| Real estate and other real assets | 179 |
| | 28.3 | % | | 0 | – | 7 | | 161 |
| | 23.0 | % | | 1 | – | 7 |
| Natural resources | 4 |
| | 0.6 | % | | 0 | – | 0 | | 4 |
| | 0.6 | % | | 1 | – | 1 |
| Hedge funds | 53 |
| | 8.4 | % | | 0 | – | 2 | | 61 |
| | 8.7 | % | | 0 | – | 3 |
| Credit funds | 160 |
| | 25.3 | % | | 0 | – | 4 | | 202 |
| | 28.9 | % | | 0 | – | 5 |
| Total investment funds | 633 |
| | 100.0 | % | | | | | | 699 |
| | 100.0 | % | | | | |
| Investment funds – related parties | | | | | | | | | | | | | | | |
Private equity – A-A Mortgage1 | 432 |
| | 23.5 | % | | 4 | – | 4 | | 403 |
| | 30.8 | % | | 5 | – | 5 |
| Private equity – other | 441 |
| | 24.0 | % | | 0 | – | 6 | | 180 |
| | 13.7 | % | | 0 | – | 10 |
| Real estate and other real assets | 499 |
| | 27.2 | % | | 0 | – | 10 | | 297 |
| | 22.7 | % | | 0 | – | 7 |
| Natural resources | 91 |
| | 5.0 | % | | 3 | – | 4 | | 74 |
| | 5.6 | % | | 4 | – | 6 |
| Hedge funds | 98 |
| | 5.3 | % | | 0 | – | 11 | | 93 |
| | 7.1 | % | | 9 | – | 9 |
| Credit funds | 275 |
| | 15.0 | % | | 0 | – | 3 | | 263 |
| | 20.1 | % | | 2 | – | 4 |
| Total investment funds – related parties | 1,836 |
| | 100.0 | % | | | | | | 1,310 |
| | 100.0 | % | | | | |
| Investment funds owned by consolidated VIEs | | | | | | | | | | | | | | | |
Private equity – MidCap2 | 541 |
| | 91.2 | % | | N/A | | 528 |
| | 92.5 | % | | N/A |
| Credit funds | 1 |
| | 0.2 | % | | 0 | – | 2 | | 21 |
| | 3.7 | % | | 0 | – | 3 |
| Real estate and other real assets | 51 |
| | 8.6 | % | | 0 | – | 4 | | 22 |
| | 3.8 | % | | 2 | – | 3 |
| Total investment funds owned by consolidated VIEs | 593 |
| | 100.0 | % | | | | | | 571 |
| | 100.0 | % | | | | |
| Total investment funds including related parties and funds owned by consolidated VIEs | $ | 3,062 |
| | | | | | | | $ | 2,580 |
| | | | | | |
| | | | | | | | | | | | | | | | |
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 $604 million and $455 million as of June 30, 2018 and December 31, 2017, respectively. |
2 Our total investment in MidCap, including amounts advanced under credit facilities, was $779 million and $766 million as of June 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) | June 30, 2018 | | December 31, 2017 |
| Ownership Percentage | | | |
| 100% | $ | 15 |
| | $ | 35 |
|
| 50% – 99% | 837 |
| | 520 |
|
| 3% – 49% | 1,399 |
| | 1,301 |
|
| Equity method investment funds | $ | 2,251 |
| | $ | 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) | June 30, 2018 | | December 31, 2017 |
| Ownership Percentage | | | |
| 50% – 99% | $ | — |
| | $ | — |
|
| 3% – 49% | 678 |
| | 590 |
|
| Less than 3% | 133 |
| | 134 |
|
| Fair value option investment funds | $ | 811 |
| | $ | 724 |
|
|
| | | | | | | | | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
| (In millions) | Carrying Value | | Maximum Loss Exposure | | Carrying Value | | Maximum Loss Exposure |
| Investment funds | $ | 683 |
| | $ | 1,271 |
| | $ | 703 |
| | $ | 1,329 |
|
| Investment in related parties – investment funds | 2,290 |
| | 4,301 |
| | 2,232 |
| | 4,331 |
|
| Assets of consolidated VIEs – investment funds | 619 |
| | 722 |
| | 624 |
| | 727 |
|
| Investment in fixed maturity securities | 22,107 |
| | 21,748 |
| | 21,188 |
| | 21,139 |
|
| Investment in related parties – fixed maturity securities | 1,920 |
| | 2,010 |
| | 1,686 |
| | 1,788 |
|
| Investment in related parties – equity securities | 301 |
| | 301 |
| | 120 |
| | 120 |
|
| Total non-consolidated investments | $ | 27,920 |
| | $ | 30,353 |
| | $ | 26,553 |
| | $ | 29,434 |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
5.3. Derivative Instruments
We use a variety of derivative instruments to manage risks, primarily equity, interest rate, credit, foreign currency and market volatility. See Note 4 – Fair Value for information about the fair value hierarchy for derivatives.
The following table presents the notional amount and fair value of derivative instruments:
|
| | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
| | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| (In millions) | | Assets | | Liabilities | | | Assets | | Liabilities |
| Derivatives designated as hedges | | | | | | | | | | | |
| Foreign currency swaps | 2,275 |
| | $ | 68 |
| | $ | 49 |
| | 2,041 |
| | $ | 83 |
| | $ | 55 |
|
| Foreign currency forwards | 154 |
| | 2 |
| | — |
| | 85 |
| | — |
| | 1 |
|
| Total derivatives designated as hedges | | | 70 |
| | 49 |
| | | | 83 |
| | 56 |
|
| Derivatives not designated as hedges | | | | | | | | | | | |
| Equity options | 49,566 |
| | 1,824 |
| | 22 |
| | 49,821 |
| | 942 |
| | 11 |
|
| Futures | 6 |
| | 8 |
| | 1 |
| | 4 |
| | 9 |
| | 3 |
|
| Total return swaps | 60 |
| | 4 |
| | — |
| | 62 |
| | — |
| | 3 |
|
| Foreign currency swaps | 38 |
| | 3 |
| | 1 |
| | 38 |
| | 3 |
| | 2 |
|
| Interest rate swaps | 310 |
| | — |
| | 1 |
| | 326 |
| | — |
| | 1 |
|
| Credit default swaps | 10 |
| | — |
| | 4 |
| | 10 |
| | — |
| | 4 |
|
| Foreign currency forwards | 795 |
| | 11 |
| | 7 |
| | 646 |
| | 6 |
| | 5 |
|
| Embedded derivatives | | | | | | | | | | | |
| Funds withheld including related party | — |
| | 660 |
| | 12 |
| | — |
| | (53 | ) | | (1 | ) |
| Interest sensitive contract liabilities | — |
| | — |
| | 9,106 |
| | — |
| | — |
| | 7,969 |
|
| Total derivatives not designated as hedges | | | 2,510 |
| | 9,154 |
| | | | 907 |
| | 7,997 |
|
| Total derivatives | | | $ | 2,580 |
| | $ | 9,203 |
| | | | $ | 990 |
| | $ | 8,053 |
|
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 July 2049. During the three months ended March 31, 2019 and 2018, we had foreign currency swap losses of $8 million and $56 million, respectively, recorded in AOCI. There were no amounts reclassified to income and no amounts deemed ineffective for the three months ended March 31, 2019 and2018. As of March 31, 2019, no amounts are expected to be reclassified to income within the next 12 months.
Foreign currency forwards – We use foreign currency forward contracts to hedge certain exposures to foreign currency risk. The price is agreed upon at the time of the contract and payment is made at a specified future date. Certain of these forwards entered into during the fourth quarter of 2018 are designated and accounted for as fair value hedges. As of March 31, 2019 andDecember 31, 2018, the carrying amount of the hedged AFS securities – CLOs was$154 million and $88 million, respectively, and the cumulative amount of fair value hedging adjustments included in the hedged AFS securities – CLOs included gains of $2 million and $1 million, respectively. The gains and losses on derivatives and the related hedged items in fair value hedge relationships are recorded in investment related gains (losses) on the condensed consolidated statements of income. The derivatives had gains of $3 million during the three months ended March 31, 2019, and the related hedged items had losses of $3 million during the three months ended March 31, 2019.
Derivatives Not Designated as Hedges
Equity options – We use equity indexed options to economically hedge fixed indexed annuity products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specified market index, primarily the S&P 500. To hedge against adverse changes in equity indices, we enter into contracts to buy equity indexed options. The contracts are net settled in cash based on differentials in the indices at the time of exercise and the strike price.
Futures –Futures contracts are purchased to hedge the growth in interest credited to the customer as a direct result of increases in the related indices. We enter into exchange-traded futures with regulated futures commission clearing brokers who are members of a trading exchange. Under exchange-traded futures contracts, we agree to purchase a specified number of contracts with other parties and to post variation margin on a daily basis in an amount equal to the difference in the daily fair values of those contracts.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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.
Embedded derivatives – We have embedded derivatives which are required to be separated from their host contracts and reported as derivatives. Host contracts include reinsurance agreements structured on a modified coinsurance (modco) or funds withheld basis and indexed annuity products.
The following is a summary of the gains (losses) related to derivatives not designated as hedges:
|
| | | | | | | |
| | Three months ended March 31, |
| (In millions) | 2019 | | 2018 |
| Equity options | $ | 849 |
| | $ | (142 | ) |
| Futures | (11 | ) | | (5 | ) |
| Swaps | 18 |
| | 2 |
|
| Foreign currency forwards | 6 |
| | (7 | ) |
| Embedded derivatives on funds withheld | 830 |
| | (32 | ) |
| Amounts recognized in investment related gains (losses) | 1,692 |
| | (184 | ) |
Embedded derivatives in indexed annuity products1 | (1,017 | ) | | 247 |
|
| Total gains (losses) on derivatives not designated as hedges | $ | 675 |
| | $ | 63 |
|
| | | | |
1 Included in interest sensitive contract benefits. |
Credit Risk—We may be exposed to credit-related losses in the event of counterparty nonperformance on derivative financial instruments. Generally, the current credit exposure of our derivative contracts is the fair value at the reporting date less any collateral received from the counterparty.
We manage credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties. Where possible, we maintain collateral arrangements and use master netting agreements that provide for a single net payment from one counterparty to another at each due date and upon termination. We have also established counterparty exposure limits, where possible, in order to evaluate if there is sufficient collateral to support the net exposure.
Collateral arrangements typically require the posting of collateral in connection with its derivative instruments. Collateral agreements often contain posting thresholds, some of which may vary depending on the posting party’s financial strength ratings. Additionally, a decrease in our financial strength rating to a specified level can result in settlement of the derivative position.
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 | | | | | | |
| (In millions) | Gross amount recognized1 | | Financial instruments2 | | Collateral received/pledged | | Net amount | | Off-balance sheet securities collateral3 | | Net amount after securities collateral |
| March 31, 2019 | | | | | | | | | | | |
| Derivative assets | $ | 1,920 |
| | $ | (65 | ) | | $ | (1,781 | ) | | $ | 74 |
| | $ | (3 | ) | | $ | 71 |
|
| Derivative liabilities | (85 | ) | | 65 |
| | 14 |
| | (6 | ) | | — |
| | (6 | ) |
| | | | | | | | | | | | | |
| December 31, 2018 | | | | | | | | | | | |
| Derivative assets | $ | 1,043 |
| | $ | (52 | ) | | $ | (969 | ) | | $ | 22 |
| | $ | (4 | ) | | $ | 18 |
|
| Derivative liabilities | (85 | ) | | 52 |
| | 24 |
| | (9 | ) | | — |
| | (9 | ) |
| | | | | | | | | | | | | |
1 | The gross amounts of recognized derivative assets and derivative liabilities are reported on the condensed consolidated balance sheets. As of March 31, 2019 and December 31, 2018, 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. Fair Value
Fair value is the price we would receive to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market participants. We determine fair value based on the following fair value hierarchy:
Level 1 – Unadjusted quoted prices for identical assets or liabilities in an active market.
Level 2 – Quoted prices for inactive markets or valuation techniques that require observable direct or indirect inputs for substantially the full term of the asset or liability. Level 2 inputs include the following:
Quoted prices for similar assets or liabilities in active markets,
Observable inputs other than quoted market prices, and
Observable inputs derived principally from market data through correlation or other means.
Level 3 – Prices or valuation techniques with unobservable inputs significant to the overall fair value estimate. These valuations use critical assumptions not readily available to market participants. Level 3 valuations are based on market standard valuation methodologies, including discounted cash flows, matrix pricing or other similar techniques.
NAV – Investment funds are typically measured using NAV as a practical expedient in determining fair value and are not classified in the fair value hierarchy. The underlying investments of the investment funds may have significant unobservable inputs, which may include but are not limited to, comparable multiples and weighted average cost of capital rates applied in valuation models or a discounted cash flow model.
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the instrument’s fair value measurement.
We use a number of valuation sources to determine fair values. Valuation sources can include quoted market prices; third-party commercial pricing services; third-party brokers; industry-standard, vendor modeling software that uses market observable inputs; and other internal modeling techniques based on projected cash flows. We periodically review the assumptions and inputs of third-party commercial pricing services through internal valuation price variance reviews, comparisons to internal pricing models, back testing to recent trades, or monitoring trading volumes.
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: | | | | June 30, 2018 | March 31, 2019 |
| (In millions) | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 | Total | | NAV | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | | | |
| U.S. government and agencies | $ | 142 |
| | $ | — |
| | $ | 140 |
| | $ | 2 |
| | $ | — |
| $ | 50 |
| | $ | — |
| | $ | 49 |
| | $ | 1 |
| | $ | — |
|
| U.S. state, municipal and political subdivisions | 1,271 |
| | — |
| | — |
| | 1,271 |
| | — |
| 1,365 |
| | — |
| | — |
| | 1,365 |
| | — |
|
| Foreign governments | 199 |
| | — |
| | — |
| | 199 |
| | — |
| 271 |
| | — |
| | — |
| | 271 |
| | — |
|
| Corporate | 36,854 |
| | — |
| | — |
| | 35,892 |
| | 962 |
| 41,411 |
| | — |
| | — |
| | 40,376 |
| | 1,035 |
|
| CLO | 5,352 |
| | — |
| | — |
| | 5,071 |
| | 281 |
| 6,142 |
| | — |
| | — |
| | 6,032 |
| | 110 |
|
| ABS | 4,716 |
| | — |
| | — |
| | 3,265 |
| | 1,451 |
| 5,075 |
| | — |
| | — |
| | 3,461 |
| | 1,614 |
|
| CMBS | 2,324 |
| | — |
| | — |
| | 2,127 |
| | 197 |
| 2,424 |
| | — |
| | — |
| | 2,250 |
| | 174 |
|
| RMBS | 8,904 |
| | — |
| | — |
| | 8,897 |
| | 7 |
| 7,917 |
| | — |
| | — |
| | 7,860 |
| | 57 |
|
| Total AFS securities | 59,762 |
| | — |
| | 140 |
| | 56,724 |
| | 2,898 |
| 64,655 |
| | — |
| | 49 |
| | 61,616 |
| | 2,990 |
|
| Trading securities | | | | | | | | | | | | | | | | | | |
| U.S. government and agencies | 5 |
| | — |
| | 3 |
| | 2 |
| | — |
| 5 |
| | — |
| | 3 |
| | 2 |
| | — |
|
| U.S. state, municipal and political subdivisions | 127 |
| | — |
| | — |
| | 110 |
| | 17 |
| 130 |
| | — |
| | — |
| | 130 |
| | — |
|
| Foreign governments | | 17 |
| | — |
| | — |
| | 17 |
| | — |
|
| Corporate | 1,338 |
| | — |
| | — |
| | 1,334 |
| | 4 |
| 1,555 |
| | — |
| | — |
| | 1,545 |
| | 10 |
|
| CLO | 26 |
| | — |
| | — |
| | — |
| | 26 |
| 20 |
| | — |
| | — |
| | 12 |
| | 8 |
|
| ABS | 89 |
| | — |
| | — |
| | — |
| | 89 |
| 100 |
| | — |
| | — |
| | 94 |
| | 6 |
|
| CMBS | 49 |
| | — |
| | — |
| | 49 |
| | — |
| 50 |
| | — |
| | — |
| | 50 |
| | — |
|
| RMBS | 419 |
| | — |
| | — |
| | 115 |
| | 304 |
| 379 |
| | — |
| | — |
| | 293 |
| | 86 |
|
| Total trading securities | 2,053 |
| | — |
| | 3 |
| | 1,610 |
| | 440 |
| 2,256 |
| | — |
| | 3 |
| | 2,143 |
| | 110 |
|
| Equity securities | 216 |
| | — |
| | 20 |
| | 194 |
| | 2 |
| 252 |
| | — |
| | 47 |
| | 202 |
| | 3 |
|
| Mortgage loans | 38 |
| | — |
| | — |
| | — |
| | 38 |
| 32 |
| | — |
| | — |
| | — |
| | 32 |
|
| Investment funds | 126 |
| | 95 |
| | — |
| | — |
| | 31 |
| 159 |
| | 134 |
| | — |
| | — |
| | 25 |
|
| Funds withheld at interest – embedded derivative | 150 |
| | — |
| | — |
| | — |
| | 150 |
| 446 |
| | — |
| | — |
| | — |
| | 446 |
|
| Derivative assets | 1,929 |
| | — |
| | 3 |
| | 1,926 |
| | — |
| 1,920 |
| | — |
| | 8 |
| | 1,912 |
| | — |
|
| Short-term investments | 289 |
| | — |
| | 58 |
| | 231 |
| | — |
| 155 |
| | — |
| | 50 |
| | 105 |
| | — |
|
| Other investments | 50 |
| | — |
| | — |
| | 50 |
| | — |
| 52 |
| | — |
| | — |
| | 52 |
| | — |
|
| Cash and cash equivalents | 3,608 |
| | — |
| | 3,608 |
| | — |
| | — |
| 3,021 |
| | — |
| | 3,021 |
| | — |
| | — |
|
| Restricted cash | 178 |
| | — |
| | 178 |
| | — |
| | — |
| 497 |
| | — |
| | 497 |
| | — |
| | — |
|
| Investments in related parties | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | | | |
| Corporate | | 3 |
| | — |
| | — |
| | 3 |
| | — |
|
| CLO | 472 |
| | — |
| | — |
| | 433 |
| | 39 |
| 638 |
| | — |
| | — |
| | 638 |
| | — |
|
| ABS | 484 |
| | — |
| | — |
| | 438 |
| | 46 |
| 1,043 |
| | — |
| | — |
| | 546 |
| | 497 |
|
| Total AFS securities – related party | 956 |
| | — |
| | — |
| | 871 |
| | 85 |
| 1,684 |
| | — |
| | — |
| | 1,187 |
| | 497 |
|
| Trading securities | | | | | | | | | | | | | | | | | | |
| CLO | 114 |
| | — |
| | — |
| | — |
| | 114 |
| 101 |
| | — |
| | — |
| | 46 |
| | 55 |
|
| ABS | 164 |
| | — |
| | — |
| | — |
| | 164 |
| 138 |
| | — |
| | — |
| | — |
| | 138 |
|
| Total trading securities – related party | 278 |
| | — |
| | — |
| | — |
| | 278 |
| 239 |
| | — |
| | — |
| | 46 |
| | 193 |
|
| Equity securities | | 301 |
| | — |
| | — |
| | — |
| | 301 |
|
| Investment funds | 198 |
| | 93 |
| | — |
| | — |
| | 105 |
| 232 |
| | 108 |
| | — |
| | — |
| | 124 |
|
| Funds withheld at interest – embedded derivative | 162 |
| | — |
| | — |
| | — |
| | 162 |
| 214 |
| | — |
| | — |
| | — |
| | 214 |
|
| Short-term investments | 172 |
| | — |
| | — |
| | 162 |
| | 10 |
| |
| Reinsurance recoverable | 1,717 |
| | — |
| | — |
| | — |
| | 1,717 |
| 1,737 |
| | — |
| | — |
| | — |
| | 1,737 |
|
| Assets of consolidated VIEs | | | | | | | | | | |
| Trading securities | | 34 |
| | — |
| | — |
| | — |
| | 34 |
|
| Equity securities | | 6 |
| | — |
| | — |
| | — |
| | 6 |
|
| Investment funds | | 564 |
| | 550 |
| | — |
| | — |
| | 14 |
|
| Cash and cash equivalents | | 2 |
| | — |
| | 2 |
| | — |
| | — |
|
| Total assets measured at fair value | $ | 71,882 |
| | $ | 188 |
| | $ | 4,010 |
| | $ | 61,768 |
| | $ | 5,916 |
| $ | 78,458 |
| | $ | 792 |
| | $ | 3,677 |
| | $ | 67,263 |
| | $ | 6,726 |
|
| | | | | | | | | | (Continued) |
| | | | | | | | | (Continued) |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | | | June 30, 2018 | March 31, 2019 |
| (In millions) | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 | Total | | NAV | | Level 1 | | Level 2 | | Level 3 |
| Liabilities | | | | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | | | | |
| Embedded derivative | $ | 8,065 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 8,065 |
| $ | 9,106 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 9,106 |
|
| Universal life benefits | 943 |
| | — |
| | — |
| | — |
| | 943 |
| 979 |
| | — |
| | — |
| | — |
| | 979 |
|
| Future policy benefits | | | | | | | | | | | | | | | | | | |
| AmerUs Closed Block | 1,490 |
| | — |
| | — |
| | — |
| | 1,490 |
| |
| ILICO Closed Block and life benefits | 759 |
| | — |
| | — |
| | — |
| | 759 |
| |
| AmerUs Life Insurance Company (AmerUs) Closed Block | | 1,483 |
| | — |
| | — |
| | — |
| | 1,483 |
|
| Indianapolis Life Insurance Company (ILICO) Closed Block and life benefits | | 743 |
| | — |
| | — |
| | — |
| | 743 |
|
| Derivative liabilities | 137 |
| | — |
| | — |
| | 132 |
| | 5 |
| 85 |
| | — |
| | 1 |
| | 80 |
| | 4 |
|
| Funds withheld liability – embedded derivative | 4 |
| | — |
| | — |
| | 4 |
| | — |
| 12 |
| | — |
| | — |
| | 12 |
| | — |
|
| Total liabilities measured at fair value | $ | 11,398 |
| | $ | — |
| | $ | — |
| | $ | 136 |
| | $ | 11,262 |
| $ | 12,408 |
| | $ | — |
| | $ | 1 |
| | $ | 92 |
| | $ | 12,315 |
|
| | | | | | | | | | | | | | | | | | | (Concluded) |
|
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy. | |
| | | | | | | | | | (Concluded) |
| |
| | | | December 31, 2017 | December 31, 2018 |
| (In millions) | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 | Total | | NAV | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | | | |
| U.S. government and agencies | $ | 62 |
| | $ | — |
| | $ | 26 |
| | $ | 36 |
| | $ | — |
| $ | 57 |
| | $ | — |
| | $ | 54 |
| | $ | 3 |
| | $ | — |
|
| U.S. state, municipal and political subdivisions | 1,165 |
| | — |
| | — |
| | 1,165 |
| | — |
| 1,293 |
| | — |
| | — |
| | 1,293 |
| | — |
|
| Foreign governments | 2,683 |
| | — |
| | — |
| | 2,683 |
| | — |
| 161 |
| | — |
| | — |
| | 161 |
| | — |
|
| Corporate | 36,660 |
| | — |
| | — |
| | 36,082 |
| | 578 |
| 37,097 |
| | — |
| | — |
| | 36,199 |
| | 898 |
|
| CLO | 5,084 |
| | — |
| | — |
| | 5,020 |
| | 64 |
| 5,361 |
| | — |
| | — |
| | 5,254 |
| | 107 |
|
| ABS | 3,971 |
| | — |
| | — |
| | 2,510 |
| | 1,461 |
| 4,920 |
| | — |
| | — |
| | 3,305 |
| | 1,615 |
|
| CMBS | 2,021 |
| | — |
| | — |
| | 1,884 |
| | 137 |
| 2,357 |
| | — |
| | — |
| | 2,170 |
| | 187 |
|
| RMBS | 9,366 |
| | — |
| | — |
| | 9,065 |
| | 301 |
| 8,019 |
| | — |
| | — |
| | 7,963 |
| | 56 |
|
| Total AFS securities | 61,012 |
| | — |
| | 26 |
| | 58,445 |
| | 2,541 |
| 59,265 |
| | — |
| | 54 |
| | 56,348 |
| | 2,863 |
|
| Trading securities | | | | | | | | | | | | | | | | | | |
| U.S. government and agencies | 3 |
| | — |
| | 3 |
| | — |
| | — |
| 5 |
| | — |
| | 3 |
| | 2 |
| | — |
|
| U.S. state, municipal and political subdivisions | 138 |
| | — |
| | — |
| | 121 |
| | 17 |
| 126 |
| | — |
| | — |
| | 126 |
| | — |
|
| Corporate | 1,475 |
| | — |
| | — |
| | 1,475 |
| | — |
| 1,287 |
| | — |
| | — |
| | 1,287 |
| | — |
|
| CLO | 27 |
| | — |
| | — |
| | 10 |
| | 17 |
| 9 |
| | — |
| | — |
| | 8 |
| | 1 |
|
| ABS | 94 |
| | — |
| | — |
| | 17 |
| | 77 |
| 87 |
| | — |
| | — |
| | 87 |
| | — |
|
| CMBS | 51 |
| | — |
| | — |
| | 51 |
| | — |
| 49 |
| | — |
| | — |
| | 49 |
| | — |
|
| RMBS | 408 |
| | — |
| | — |
| | 66 |
| | 342 |
| 386 |
| | — |
| | — |
| | 252 |
| | 134 |
|
| Total trading securities | 2,196 |
| | — |
| | 3 |
| | 1,740 |
| | 453 |
| 1,949 |
| | — |
| | 3 |
| | 1,811 |
| | 135 |
|
| Equity securities | | 216 |
| | — |
| | 40 |
| | 173 |
| | 3 |
|
| Mortgage loans | | 32 |
| | — |
| | — |
| | — |
| | 32 |
|
| Investment funds | | 182 |
| | 153 |
| | — |
| | — |
| | 29 |
|
| Funds withheld at interest – embedded derivative | | 57 |
| | — |
| | — |
| | — |
| | 57 |
|
| Derivative assets | | 1,043 |
| | — |
| | 9 |
| | 1,034 |
| | — |
|
| Short-term investments | | 191 |
| | — |
| | 66 |
| | 125 |
| | — |
|
| Other investments | | 52 |
| | — |
| | — |
| | 52 |
| | — |
|
| Cash and cash equivalents | | 2,911 |
| | — |
| | 2,911 |
| | — |
| | — |
|
| Restricted cash | | 492 |
| | — |
| | 492 |
| | — |
| | — |
|
| | | | | | | | | | (Continued) |
| | | | | | | | | (Continued) |
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| (In millions) | Total | | NAV1 | | Level 1 | | Level 2 | | Level 3 |
| Equity securities | 790 |
| | — |
| | 18 |
| | 764 |
| | 8 |
|
| Mortgage loans | 41 |
| | — |
| | — |
| | — |
| | 41 |
|
| Investment funds | 145 |
| | 104 |
| | — |
| | — |
| | 41 |
|
| Funds withheld at interest – embedded derivative | 312 |
| | — |
| | — |
| | — |
| | 312 |
|
| Derivative assets | 2,551 |
| | — |
| | 7 |
| | 2,544 |
| | — |
|
| Short-term investments | 201 |
| | — |
| | 40 |
| | 161 |
| | — |
|
| Cash and cash equivalents | 4,888 |
| | — |
| | 4,888 |
| | — |
| | — |
|
| Restricted cash | 105 |
| | — |
| | 105 |
| | — |
| | — |
|
| Investments in related parties | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | |
| AFS securities | | | | | | | | | |
| CLO | 360 |
| | — |
| | — |
| | 360 |
| | — |
|
| ABS | 46 |
| | — |
| | — |
| | 46 |
| | — |
|
| Total AFS securities – related party | 406 |
| | — |
| | — |
| | 406 |
| | — |
|
| 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 | 1,824 |
| | — |
| | — |
| | — |
| | 1,824 |
|
| Total assets measured at fair value | $ | 74,860 |
| | $ | 134 |
| | $ | 5,087 |
| | $ | 64,314 |
| | $ | 5,325 |
|
| Liabilities | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | |
| Embedded derivative | $ | 7,436 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 7,436 |
|
| Universal life benefits | 1,005 |
| | — |
| | — |
| | — |
| | 1,005 |
|
| Unit-linked contracts | 488 |
| | — |
| | — |
| | 488 |
| | — |
|
| Future policy benefits | | | | | | | | | |
| AmerUs Closed Block | 1,625 |
| | — |
| | — |
| | — |
| | 1,625 |
|
| ILICO Closed Block and life benefits | 803 |
| | — |
| | — |
| | — |
| | 803 |
|
| Derivative liabilities | 134 |
| | — |
| | — |
| | 129 |
| | 5 |
|
| Funds withheld liability – embedded derivative | 22 |
| | — |
| | — |
| | 22 |
| | — |
|
| Total liabilities measured at fair value | $ | 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. |
| | | | | | | | | | (Concluded) |
|
See Note 4 – Variable Interest Entities for fair value disclosures associated with consolidated VIEs. |
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| (In millions) | Total | | NAV | | Level 1 | | Level 2 | | Level 3 |
| Investments in related parties | | | | | | | | | |
| AFS securities | | | | | | | | | |
| CLO | 562 |
| | — |
| | — |
| | 562 |
| | — |
|
| ABS | 875 |
| | — |
| | — |
| | 547 |
| | 328 |
|
| Total AFS securities – related party | 1,437 |
| | — |
| | — |
| | 1,109 |
| | 328 |
|
| Trading securities | | | | | | | | | |
| CLO | 100 |
| | — |
| | — |
| | 22 |
| | 78 |
|
| ABS | 149 |
| | — |
| | — |
| | — |
| | 149 |
|
| Total trading securities – related party | 249 |
| | — |
| | — |
| | 22 |
| | 227 |
|
| Equity securities | 120 |
| | — |
| | — |
| | — |
| | 120 |
|
| Investment funds | 201 |
| | 96 |
| | — |
| | — |
| | 105 |
|
| Funds withheld at interest - embedded derivative | (110 | ) | | — |
| | — |
| | — |
| | (110 | ) |
| Reinsurance recoverable | 1,676 |
| | — |
| | — |
| | — |
| | 1,676 |
|
| Assets of consolidated VIEs | | | | | | | | | |
| Trading securities | 35 |
| | — |
| | — |
| | — |
| | 35 |
|
| Equity securities | 50 |
| | — |
| | 37 |
| | — |
| | 13 |
|
| Investment funds | 567 |
| | 552 |
| | — |
| | — |
| | 15 |
|
| Cash and cash equivalents | 2 |
| | — |
| | 2 |
| | — |
| | — |
|
| Total assets measured at fair value | $ | 70,617 |
| | $ | 801 |
| | $ | 3,614 |
| | $ | 60,674 |
| | $ | 5,528 |
|
| Liabilities | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | |
| Embedded derivative | $ | 7,969 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 7,969 |
|
| Universal life benefits | 932 |
| | — |
| | — |
| | — |
| | 932 |
|
| Future policy benefits | | | | | | | | | |
| AmerUs Closed Block | 1,443 |
| | — |
| | — |
| | — |
| | 1,443 |
|
| ILICO Closed Block and life benefits | 730 |
| | — |
| | — |
| | — |
| | 730 |
|
| Derivative liabilities | 85 |
| | — |
| | 3 |
| | 78 |
| | 4 |
|
| Funds withheld liability – embedded derivative | (1 | ) | | — |
| | — |
| | (1 | ) | | — |
|
| Total liabilities measured at fair value | $ | 11,158 |
| | $ | — |
| | $ | 3 |
| | $ | 77 |
| | $ | 11,078 |
|
| | | | | | | | | | (Concluded) |
|
Fair Value Valuation Methods—We used the following valuation methods and assumptions to estimate fair value:
Fixed maturity –AFS and trading securities – We obtain the fair value for most marketable securities without an active market from several commercial pricing services. These are classified as Level 2 assets. The pricing services incorporate a variety of market observable information in their valuation techniques, including benchmark yields, trading activity, credit quality, issuer spreads, bids, offers and other reference data. This category typically includes U.S. and non-U.S. corporate bonds, U.S. agency and government guaranteed securities, CLO, ABS, CMBS and RMBS.
We also have fixed maturity securities priced based on indicative broker quotes or by employing market accepted valuation models. For certain fixed maturity securities, the valuation model uses significant unobservable inputs and are included in Level 3 in our fair value hierarchy. Significant unobservable inputs used include: issue specific credit adjustments, material non-public financial information, estimation of future earnings and cash flows, default rate assumptions, liquidity assumptions and indicative quotes from market makers. These inputs are usually considered unobservable, as not all market participants have access to this data.
We value privately placed fixed maturity securities based on the credit quality and duration of comparable marketable securities, which may be securities of another issuer with similar characteristics. In some instances, we use a matrix-based pricing model. These models consider the current level of risk-free interest rates, corporate spreads, credit quality of the issuer and cash flow characteristics of the security. We also consider additional factors such as net worth of the borrower, value of collateral, capital structure of the borrower, presence of guarantees and our evaluation of the borrower’s ability to compete in its relevant market. Privately placed fixed maturity securities are classified as Level 2 or 3.
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)
Investment funds – Certain investment funds for which we elected the fair value option are included in Level 3 and are priced based on market accepted valuation models. The valuation models use significant unobservable inputs, which include material non-public financial information, estimation of future distributable earnings and demographic assumptions. These inputs are usually considered unobservable, as not all market participants have access to this data.
Funds withheld (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 obligations to the closed block business. This component is the present value of the projected release of required capital and future earnings before income taxes on required capital supporting the AmerUs Closed Block, discounted at a rate which represents a market participant’s required rate of return, less the initial required capital. Unobservable inputs include estimates for these items. The AmerUs Closed Block policyholder liabilities and any corresponding reinsurance recoverable are classified as Level 3.
ILICO Closed Block – We elected the fair value option for the ILICO Closed Block. Our valuation technique is to set the fair value of policyholder liabilities equal to the fair value of assets. There is an additional component which captures the fair value of the open block’s obligations to the closed block business. This component uses the present value of future cash flows which include commissions, administrative expenses, reinsurance premiums and benefits, and an explicit cost of capital. The discount rate includes a margin to reflect the business and non-performancenonperformance risk. Unobservable inputs include estimates for these items. The ILICO Closed Block policyholder liabilities and corresponding reinsurance recoverable are classified as Level 3.
Universal life liabilities and other life benefits – We elected the fair value option for certain blocks of universal and other life business ceded to Global Atlantic Financial Group Limited (together with its subsidiaries, Global Atlantic).Atlantic. We use a present value of liability cash flows. Unobservable inputs include estimates of mortality, persistency, expenses, premium payments and a risk margin used in the discount rates that reflects the riskiness of the business. These universal life policyholder liabilities and corresponding reinsurance recoverable are classified as Level 3.
Fair Value Option—The following represents the gains (losses) recorded for instruments for which we have elected the fair value option:
|
| | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 |
| Trading securities | $ | (76 | ) | | $ | 41 |
| | $ | (165 | ) | | $ | 27 |
|
| Investment funds, including related party investment funds | 10 |
| | 7 |
| | 6 |
| | 14 |
|
| Future policy benefits | 51 |
| | (19 | ) | | 135 |
| | (15 | ) |
| Total gains (losses) | $ | (15 | ) | | $ | 29 |
| | $ | (24 | ) | | $ | 26 |
|
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, including related parties and consolidated VIEs:
|
| | | | | | | |
| | Three months ended March 31, |
| (In millions) | 2019 | | 2018 |
| Trading securities | $ | 50 |
| | $ | (89 | ) |
| Investment funds | (4 | ) | | 2 |
|
| Future policy benefits | (40 | ) | | 84 |
|
| Total gains (losses) | $ | 6 |
| | $ | (3 | ) |
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) | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| Unpaid principal balance | $ | 37 |
| | $ | 40 |
| $ | 30 |
| | $ | 30 |
|
| Mark to fair value | 1 |
| | 1 |
| 2 |
| | 2 |
|
| Fair value | $ | 38 |
| | $ | 41 |
| $ | 32 |
| | $ | 32 |
|
There were no fair value option mortgage loans 90 days or more past due as of June 30, 2018March 31, 2019 and December 31, 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 six months ended June 30, 2018 and 2017, there were no transfers between Level 1 and Level 2.2018.
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 June 30, 2018 | Three months ended March 31, 2019 |
| | | | Total realized and unrealized gains (losses) | | | | Transfers | | | | | | | Total realized and unrealized gains (losses) | | | | Transfers | | | | |
| (In millions) | Beginning Balance | | Included in income | | Included in OCI | | Net purchases, issuances, sales and settlements | | 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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate | $ | 681 |
| | $ | (8 | ) | | $ | (5 | ) | | $ | 290 |
| | $ | 28 |
| | $ | (24 | ) | | $ | 962 |
| | $ | — |
| $ | 898 |
| | $ | (2 | ) | | $ | 5 |
| | $ | 165 |
| | $ | — |
| | $ | (31 | ) | | $ | 1,035 |
| | $ | — |
|
| CLO | 167 |
| | — |
| | — |
| | 211 |
| | 32 |
| | (129 | ) | | 281 |
| | — |
| 107 |
| | — |
| | 2 |
| | 30 |
| | — |
| | (29 | ) | | 110 |
| | — |
|
| ABS | 1,294 |
| | 3 |
| | (9 | ) | | 273 |
| | — |
| | (110 | ) | | 1,451 |
| | — |
| 1,615 |
| | 3 |
| | 16 |
| | 57 |
| | 19 |
| | (96 | ) | | 1,614 |
| | — |
|
| CMBS | 63 |
| | — |
| | 1 |
| | 152 |
| | — |
| | (19 | ) | | 197 |
| | — |
| 187 |
| | — |
| | 2 |
| | (6 | ) | | 8 |
| | (17 | ) | | 174 |
| | — |
|
| RMBS | 38 |
| | — |
| | — |
| | — |
| | — |
| | (31 | ) | | 7 |
| | — |
| 56 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | 57 |
| | — |
|
| Trading securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
| |
| Corporate | — |
| | — |
| | — |
| | 4 |
| | — |
| | — |
| | 4 |
| | — |
| — |
| | — |
| | — |
| | — |
| | 10 |
| | — |
| | 10 |
| | — |
|
| CLO | 1 |
| | — |
| | — |
| | — |
| | 26 |
| | (1 | ) | | 26 |
| | — |
| 1 |
| | — |
| | — |
| | — |
| | 7 |
| | — |
| | 8 |
| | 1 |
|
| ABS | — |
| | — |
| | — |
| | — |
| | 89 |
| | — |
| | 89 |
| | — |
| — |
| | — |
| | — |
| | 6 |
| | — |
| | — |
| | 6 |
| | — |
|
| RMBS | 321 |
| | (17 | ) | | — |
| | — |
| | — |
| | — |
| | 304 |
| | 3 |
| 134 |
| | (3 | ) | | — |
| | — |
| | 38 |
| | (83 | ) | | 86 |
| | 2 |
|
| Equity securities | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | 2 |
| | 1 |
| 3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
| | — |
|
| Mortgage loans | 41 |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
| | 38 |
| | — |
| 32 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 32 |
| | — |
|
| Investment funds | 25 |
| | 6 |
| | — |
| | — |
| | — |
| | — |
| | 31 |
| | 6 |
| 29 |
| | (3 | ) | | — |
| | (1 | ) | | — |
| | — |
| | 25 |
| | (3 | ) |
| Funds withheld at interest – embedded derivative | 207 |
| | (57 | ) | | — |
| | — |
| | — |
| | — |
| | 150 |
| | — |
| 57 |
| | 389 |
| | — |
| | — |
| | — |
| | — |
| | 446 |
| | — |
|
| Investments in related parties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | |
| CLO | 62 |
| | — |
| | — |
| | 38 |
| | — |
| | (61 | ) | | 39 |
| | — |
| |
| ABS | — |
| | — |
| | — |
| | 46 |
| | — |
| | — |
| | 46 |
| | — |
| |
| AFS securities, ABS | | 328 |
| | — |
| | — |
| | 169 |
| | — |
| | — |
| | 497 |
| | — |
|
| Trading securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| CLO | 91 |
| | (1 | ) | | — |
| | — |
| | 24 |
| | — |
| | 114 |
| | 1 |
| 78 |
| | (1 | ) | | — |
| | — |
| | — |
| | (22 | ) | | 55 |
| | 4 |
|
| ABS | 171 |
| | (7 | ) | | — |
| | — |
| | — |
| | — |
| | 164 |
| | (7 | ) | 149 |
| | (11 | ) | | — |
| | — |
| | — |
| | — |
| | 138 |
| | (11 | ) |
| Equity securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| 120 |
| | 4 |
| | — |
| | 177 |
| | — |
| | — |
| | 301 |
| | 4 |
|
| Investment funds | 111 |
| | (6 | ) | | — |
| | — |
| | — |
| | — |
| | 105 |
| | (6 | ) | 105 |
| | — |
| | — |
| | 19 |
| | — |
| | — |
| | 124 |
| | — |
|
| Funds withheld at interest – embedded derivative | — |
| | 162 |
| | — |
| | — |
| | — |
| | — |
| | 162 |
| | — |
| (110 | ) | | 324 |
| | — |
| | — |
| | — |
| | — |
| | 214 |
| | — |
|
| Short-term investments | — |
| | — |
| | — |
| | 10 |
| | — |
| | — |
| | 10 |
| | — |
| |
| Reinsurance recoverable | 1,713 |
| | 4 |
| | — |
| | — |
| | — |
| | — |
| | 1,717 |
| | — |
| 1,676 |
| | 61 |
| | — |
| | — |
| | — |
| | — |
| | 1,737 |
| | — |
|
| Investments of consolidated VIEs | | | | | | | | | | | | | | | | |
| Trading securities | | 35 |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | 34 |
| | — |
|
| Equity securities | | 13 |
| | (3 | ) | | — |
| | (4 | ) | | — |
| | — |
| | 6 |
| | — |
|
| Investment funds | | 15 |
| | (1) |
| | — |
| | — |
| | — |
| | — |
| | 14 |
| | — |
|
| Total Level 3 assets | $ | 5,003 |
| | $ | 80 |
| | $ | (13 | ) | | $ | 1,022 |
| | $ | 199 |
| | $ | (375 | ) | | $ | 5,916 |
| | $ | (2 | ) | $ | 5,528 |
| | $ | 757 |
| | $ | 26 |
| | $ | 611 |
| | $ | 82 |
| | $ | (278 | ) | | $ | 6,726 |
| | $ | (3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Embedded derivative | $ | (7,254 | ) | | $ | (54 | ) | | $ | — |
| | $ | (757 | ) | | $ | — |
| | $ | — |
| | $ | (8,065 | ) | | $ | — |
| $ | (7,969 | ) | | $ | (1,017 | ) | | $ | — |
| | $ | (120 | ) | | $ | — |
| | $ | — |
| | $ | (9,106 | ) | | $ | — |
|
| Universal life benefits | (934 | ) | | (9 | ) | | — |
| | — |
| | — |
| | — |
| | (943 | ) | | — |
| (932 | ) | | (47 | ) | | — |
| | — |
| | — |
| | — |
| | (979 | ) | | — |
|
| Future policy benefits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AmerUs Closed Block | (1,541 | ) | | 51 |
| | — |
| | — |
| | — |
| | — |
| | (1,490 | ) | | — |
| (1,443 | ) | | (40 | ) | | — |
| | — |
| | — |
| | — |
| | (1,483 | ) | | — |
|
| ILICO Closed Block and life benefits | (764 | ) | | 5 |
| �� | — |
| | — |
| | — |
| | — |
| | (759 | ) | | — |
| (730 | ) | | (13 | ) | | — |
| | — |
| | — |
| | — |
| | (743 | ) | | — |
|
| Derivative liabilities | (5 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (5 | ) | | — |
| (4 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (4 | ) | | — |
|
| Total Level 3 liabilities | $ | (10,498 | ) | | $ | (7 | ) | | $ | — |
| | $ | (757 | ) | | $ | — |
| | $ | — |
| | $ | (11,262 | ) | | $ | — |
| $ | (11,078 | ) | | $ | (1,117 | ) | | $ | — |
| | $ | (120 | ) | | $ | — |
| | $ | — |
| | $ | (12,315 | ) | | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 June 30, 2017 |
| | | | Total realized and unrealized gains (losses) | | | | Transfers | | | | |
| (In millions) | 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 | | | | | | | | | | | | | | | |
| Foreign governments | $ | 13 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 14 |
| | $ | — |
|
| Corporate | 490 |
| | 3 |
| | 4 |
| | 28 |
| | — |
| | (73 | ) | | 452 |
| | — |
|
| CLO | 100 |
| | — |
| | 4 |
| | 17 |
| | 11 |
| | (51 | ) | | 81 |
| | — |
|
| ABS | 1,222 |
| | 5 |
| | 3 |
| | 11 |
| | — |
| | (148 | ) | | 1,093 |
| | — |
|
| CMBS | 147 |
| | 1 |
| | — |
| | 13 |
| | 48 |
| | (87 | ) | | 122 |
| | — |
|
| RMBS | 60 |
| | 1 |
| | 2 |
| | 6 |
| | 243 |
| | — |
| | 312 |
| | — |
|
| Trading Securities | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
|
| CLO | 27 |
| | — |
| | — |
| | — |
| | — |
| | (5 | ) | | 22 |
| | 1 |
|
| RMBS | 82 |
| | (4 | ) | | — |
| | 22 |
| | — |
| | — |
| | 100 |
| | — |
|
| Equity securities | 5 |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | 6 |
| | — |
|
| Mortgage loans | 44 |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | 43 |
| | — |
|
| Funds withheld at interest – embedded derivative | 212 |
| | 67 |
| | — |
| | — |
| | — |
| | — |
| | 279 |
| | — |
|
| Investments in related parties | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | |
| Trading securities, CLO | 131 |
| | 5 |
| | — |
| | (12 | ) | | 31 |
| | (32 | ) | | 123 |
| | 5 |
|
| Short-term investments | 20 |
| | — |
| | — |
| | 8 |
| | — |
| | — |
| | 28 |
| | — |
|
| Reinsurance recoverable | 1,738 |
| | 44 |
| | — |
| | — |
| | — |
| | — |
| | 1,782 |
| | — |
|
| Total Level 3 assets | $ | 4,308 |
| | $ | 123 |
| | $ | 13 |
| | $ | 93 |
| | $ | 333 |
| | $ | (396 | ) | | $ | 4,474 |
| | $ | 6 |
|
| | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | |
| Embedded derivative | $ | (5,793 | ) | | $ | (302 | ) | | $ | — |
| | $ | (112 | ) | | $ | — |
| | $ | — |
| | $ | (6,207 | ) | | $ | — |
|
| Universal life benefits | (910 | ) | | (44 | ) | | — |
| | — |
| | — |
| | — |
| | (954 | ) | | — |
|
| Future policy benefits | | | | | | | | | | | | | | | |
| AmerUs Closed Block | (1,602 | ) | | (19 | ) | | — |
| | — |
| | — |
| | — |
| | (1,621 | ) | | — |
|
| ILICO Closed Block and life benefits | (813 | ) | | 1 |
| | — |
| | — |
| | — |
| | — |
| | (812 | ) | | — |
|
| Derivative liabilities | (7 | ) | | 1 |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | — |
|
| Total Level 3 liabilities | $ | (9,125 | ) | | $ | (363 | ) | | $ | — |
| | $ | (112 | ) | | $ | — |
| | $ | — |
| | $ | (9,600 | ) | | $ | — |
|
| | | | | | | | | | | | | | | | |
1 Related to instruments held at end of period. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | | | Six months ended June 30, 2018 | Three months ended March 31, 2018 |
| | | | Total realized and unrealized gains (losses) | | | | Transfers | | | | | | | Total realized and unrealized gains (losses) | | | | Transfers | | | | |
| (In millions) | Beginning Balance | | Included in income | | Included in OCI | | Net purchases, issuances, sales and settlements | | 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 | | | | | | | | | | | | | | | | |
| AFS Securities | | | | | | | | | | | | | | | | |
| Corporate | $ | 578 |
| | $ | (3 | ) | | $ | (9 | ) | | $ | 340 |
| | $ | 64 |
| | $ | (8 | ) | | $ | 962 |
| | $ | — |
| 578 |
| | 4 |
| | (4 | ) | | 58 |
| | 53 |
| | (8 | ) | | 681 |
| | — |
|
| CLO | 64 |
| | — |
| | 2 |
| | 226 |
| | 17 |
| | (28 | ) | | 281 |
| | — |
| 64 |
| | — |
| | 2 |
| | 131 |
| | — |
| | (30 | ) | | 167 |
| | — |
|
| ABS | 1,461 |
| | 5 |
| | (17 | ) | | 157 |
| | — |
| | (155 | ) | | 1,451 |
| | — |
| 1,457 |
| | 2 |
| | (7 | ) | | (104 | ) | | — |
| | (58 | ) | | 1,290 |
| | — |
|
| CMBS | 137 |
| | 1 |
| | (3 | ) | | 152 |
| | — |
| | (90 | ) | | 197 |
| | — |
| 137 |
| | — |
| | (1 | ) | | — |
| | — |
| | (73 | ) | | 63 |
| | — |
|
| RMBS | 301 |
| | 3 |
| | (8 | ) | | (19 | ) | | 7 |
| | (277 | ) | | 7 |
| | — |
| 301 |
| | 1 |
| | (5 | ) | | 23 |
| | 7 |
| | (289 | ) | | 38 |
| | — |
|
| Trading securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
| 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
|
| Corporate | — |
| | — |
| | — |
| | 4 |
| | — |
| | — |
| | 4 |
| | — |
| |
| CLO | 17 |
| | (1 | ) | | — |
| | — |
| | 10 |
| | — |
| | 26 |
| | — |
| 17 |
| | — |
| | — |
| | 1 |
| | — |
| | (17 | ) | | 1 |
| | — |
|
| ABS | 77 |
| | (4 | ) | | — |
| | — |
| | 16 |
| | — |
| | 89 |
| | (3 | ) | 77 |
| | — |
| | — |
| | — |
| | — |
| | (77 | ) | | — |
| | (3 | ) |
| RMBS | 342 |
| | (38 | ) | | — |
| | — |
| | — |
| | — |
| | 304 |
| | 2 |
| 342 |
| | (21 | ) | | — |
| | — |
| | — |
| | — |
| | 321 |
| | — |
|
| Equity securities | 8 |
| | 1 |
| | — |
| | (7) |
| | — |
| | — |
| | 2 |
| | — |
| |
| Equity Securities | | 8 |
| | — |
| | — |
| | (8 | ) | | — |
| | — |
| | — |
| | — |
|
| Mortgage loans | 41 |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
| | 38 |
| | — |
| 41 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 41 |
| | — |
|
| Investment funds | 41 |
| | (3 | ) | | — |
| | (7 | ) | | — |
| | — |
| | 31 |
| | (3 | ) | 41 |
| | (9 | ) | | — |
| | (7 | ) | | — |
| | — |
| | 25 |
| | — |
|
| Funds withheld at interest – embedded derivative | 312 |
| | (162 | ) | | — |
| | — |
| | — |
| | — |
| | 150 |
| | — |
| 312 |
| | (105 | ) | | — |
| | — |
| | — |
| | — |
| | 207 |
| | — |
|
| Investments in related parties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | |
| AFS Securities | | | | | | | | | | | | | | | | |
| CLO | — |
| | — |
| | — |
| | 39 |
| | — |
| | — |
| | 39 |
| | — |
| — |
| | — |
| | — |
| | 62 |
| | — |
| | — |
| | 62 |
| | — |
|
| ABS | — |
| | — |
| | — |
| | 46 |
| | — |
| | — |
| | 46 |
| | — |
| 4 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
|
| Trading securities | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| CLO | 105 |
| | (2 | ) | | — |
| | (18 | ) | | 29 |
| | — |
| | 114 |
| | 1 |
| 105 |
| | 1 |
| | — |
| | (1 | ) | | 18 |
| | (32 | ) | | 91 |
| | (1 | ) |
| ABS | — |
| | — |
| | — |
| | — |
| | 164 |
| | — |
| | 164 |
| | — |
| — |
| | — |
| | — |
| | — |
| | 171 |
| | — |
| | 171 |
| | — |
|
| Investment funds | — |
| | (3 | ) | | — |
| | 108 |
| | — |
| | — |
| | 105 |
| | (3 | ) | — |
| | 3 |
| | — |
| | 108 |
| | — |
| | — |
| | 111 |
| | 3 |
|
| Funds withheld at interest – embedded derivative | — |
| | 162 |
| | — |
| | — |
| | — |
| | — |
| | 162 |
| | — |
| |
| Short-term investments | — |
| | — |
| | — |
| | 10 |
| | — |
| | — |
| | 10 |
| | — |
| |
| Reinsurance recoverable | 1,824 |
| | (107 | ) | | — |
| | — |
| | — |
| | — |
| | 1,717 |
| | — |
| 1,824 |
| | (111 | ) | | — |
| | — |
| | — |
| | — |
| | 1,713 |
| | — |
|
| Investments of consolidated VIEs | | | | | | | | | | | | | | | | |
| Trading securities | | 48 |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | 47 |
| | — |
|
| Equity securities | | 28 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 28 |
| | — |
|
| Investment funds | | 21 |
| | 1 |
| | — |
| | (2 | ) | | — |
| | — |
| | 20 |
| | 1 |
|
| Total Level 3 assets | $ | 5,325 |
| | $ | (151 | ) | | $ | (35 | ) | | $ | 1,028 |
| | $ | 307 |
| | $ | (558 | ) | | $ | 5,916 |
| | $ | (6 | ) | $ | 5,422 |
| | $ | (234 | ) | | $ | (15 | ) | | $ | 260 |
| | $ | 249 |
| | $ | (584 | ) | | $ | 5,098 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Embedded derivative | $ | (7,436 | ) | | $ | 184 |
| | $ | — |
| | $ | (813 | ) | | $ | — |
| | $ | — |
| | $ | (8,065 | ) | | $ | — |
| $ | (7,411 | ) | | $ | 247 |
| | $ | — |
| | $ | (56 | ) | | $ | — |
| | $ | — |
| | $ | (7,220 | ) | | $ | — |
|
| Universal life benefits | (1,005 | ) | | 62 |
| | — |
| | — |
| | — |
| | — |
| | (943 | ) | | — |
| (1,005 | ) | | 71 |
| | — |
| | — |
| | — |
| | — |
| | (934 | ) | | — |
|
| Future policy benefits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AmerUs Closed Block | (1,625 | ) | | 135 |
| | — |
| | — |
| | — |
| | — |
| | (1,490 | ) | | — |
| (1,625 | ) | | 84 |
| | — |
| | — |
| | — |
| | — |
| | (1,541 | ) | | — |
|
| ILICO Closed Block and life benefits | (803 | ) | | 44 |
| | — |
| | — |
| | — |
| | — |
| | (759 | ) | | — |
| (803 | ) | | 39 |
| | — |
| | — |
| | — |
| | — |
| | (764 | ) | | — |
|
| Derivative liabilities | (5 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (5 | ) | | — |
| (5 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (5 | ) | | — |
|
| Total Level 3 liabilities | $ | (10,874 | ) | | $ | 425 |
| | $ | — |
| | $ | (813 | ) | | $ | — |
| | $ | — |
| | $ | (11,262 | ) | | $ | — |
| $ | (10,849 | ) | | $ | 441 |
| | $ | — |
| | $ | (56 | ) | | $ | — |
| | $ | — |
| | $ | (10,464 | ) | | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, 2017 |
| | | | Total realized and unrealized gains (losses) | | | | Transfers | | | | |
| (In millions) | 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 | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | $ | 5 |
| | $ | 16 |
| | $ | (1 | ) | | $ | (20 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Foreign governments | 14 |
| | 1 |
| | — |
| | (1 | ) | | — |
| | — |
| | 14 |
| | — |
|
| Corporate | 370 |
| | 4 |
| | 10 |
| | 105 |
| | — |
| | (37 | ) | | 452 |
| | — |
|
| CLO | 158 |
| | — |
| | 9 |
| | 7 |
| | 11 |
| | (104 | ) | | 81 |
| | — |
|
| ABS | 1,160 |
| | 9 |
| | 17 |
| | 42 |
| | — |
| | (135 | ) | | 1,093 |
| | — |
|
| CMBS | 152 |
| | 1 |
| | (3 | ) | | 13 |
| | 17 |
| | (58 | ) | | 122 |
| | — |
|
| RMBS | 17 |
| | 1 |
| | — |
| | 6 |
| | 296 |
| | (8 | ) | | 312 |
| | — |
|
| Trading securities | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
|
| CLO | 43 |
| | (1 | ) | | — |
| | (15 | ) | | — |
| | (5 | ) | | 22 |
| | 2 |
|
| RMBS | 96 |
| | (9 | ) | | — |
| | 24 |
| | — |
| | (11 | ) | | 100 |
| | (1 | ) |
| Equity Securities | 5 |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | 6 |
| | — |
|
| Mortgage loans | 44 |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | 43 |
| | — |
|
| Funds withheld at interest – embedded derivative | 140 |
| | 139 |
| | — |
| | — |
| | — |
| | — |
| | 279 |
| | — |
|
| Investments in related parties | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | |
| AFS Securities | | | | | | | | | | | | | | | |
| ABS | 56 |
| | — |
| | 1 |
| | (4 | ) | | — |
| | (53 | ) | | — |
| | — |
|
| Trading securities | | | | | | | | | | | | |
| | |
| CLO | 195 |
| | (3 | ) | | — |
| | (26 | ) | | — |
| | (43 | ) | | 123 |
| | (1 | ) |
| Short-term investments | — |
| | — |
| | — |
| | 28 |
| | — |
| | — |
| | 28 |
| | — |
|
| Reinsurance recoverable | 1,692 |
| | 90 |
| | — |
| | — |
| | — |
| | — |
| | 1,782 |
| | — |
|
| Total Level 3 assets | $ | 4,164 |
| | $ | 248 |
| | $ | 33 |
| | $ | 159 |
| | $ | 324 |
| | $ | (454 | ) | | $ | 4,474 |
| | $ | — |
|
| | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | |
| Embedded derivative | $ | (5,283 | ) | | $ | (733 | ) | | $ | — |
| | $ | (191 | ) | | $ | — |
| | $ | — |
| | $ | (6,207 | ) | | $ | — |
|
| Universal life benefits | (883 | ) | | (71 | ) | | — |
| | — |
| | — |
| | — |
| | (954 | ) | | — |
|
| Future policy benefits | | | | | | | | | | | | | | | |
| AmerUs Closed Block | (1,606 | ) | | (15 | ) | | — |
| | — |
| | — |
| | — |
| | (1,621 | ) | | — |
|
| ILICO Closed Block and life benefits | (794 | ) | | (18 | ) | | — |
| | — |
| | — |
| | — |
| | (812 | ) | | — |
|
| Derivative liabilities | (7 | ) | | 1 |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | 1 |
|
| Total Level 3 liabilities | $ | (8,573 | ) | | $ | (836 | ) | | $ | — |
| | $ | (191 | ) | | $ | — |
| | $ | — |
| | $ | (9,600 | ) | | $ | 1 |
|
| | | | | | | | | | | | | | | | |
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 June 30, 2018 |
| (In millions) | Purchases | | Issuances | | Sales | | Settlements | | Net purchases, issuances, sales and settlements |
| Assets | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | |
| AFS securities | | | | | | | | | |
| Corporate | $ | 300 |
| | $ | — |
| | $ | (2 | ) | | $ | (8 | ) | | $ | 290 |
|
| CLO | 211 |
| | — |
| | — |
| | — |
| | 211 |
|
| ABS | 347 |
| | — |
| | — |
| | (74 | ) | | 273 |
|
| CMBS | 152 |
| | — |
| | — |
| | — |
| | 152 |
|
| Trading securities | | | | | | | | | |
| Corporate | 4 |
| | — |
| | — |
| | — |
| | 4 |
|
| Equity securities | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| Mortgage loans | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) |
| Investments in related parties | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | |
| AFS securities | | | | | | | | | |
| CLO | 38 |
| | — |
| | — |
| | — |
| | 38 |
|
| ABS | 46 |
| | — |
| | — |
| | — |
| | 46 |
|
| Trading securities, CLO | 30 |
| | — |
| | (30 | ) | | — |
| | — |
|
| Short-term investments | 10 |
| | — |
| | — |
| | — |
| | 10 |
|
| Total Level 3 assets | $ | 1,139 |
| | $ | — |
| | $ | (32 | ) | | $ | (85 | ) | | $ | 1,022 |
|
| | | | | | | | | | |
| Liabilities | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | |
| Embedded derivative | $ | — |
| | $ | (858 | ) | | $ | — |
| | $ | 101 |
| | $ | (757 | ) |
| Total Level 3 liabilities | $ | — |
| | $ | (858 | ) | | $ | — |
| | $ | 101 |
| | $ | (757 | ) |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2019 |
| (In millions) | Purchases | | Issuances | | Sales | | Settlements | | Net purchases, issuances, sales and settlements |
| Assets | | | | | | | | | |
| AFS securities | | | | | | | | | |
| Corporate | $ | 238 |
| | $ | — |
| | $ | (1 | ) | | $ | (72 | ) | | $ | 165 |
|
| CLO | 30 |
| | — |
| | — |
| | — |
| | 30 |
|
| ABS | 189 |
| | — |
| | (33 | ) | | (99 | ) | | 57 |
|
| CMBS | — |
| | — |
| | — |
| | (6 | ) | | (6 | ) |
| Trading securities, ABS | 6 |
| | — |
| | — |
| | — |
| | 6 |
|
| Investment funds | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Investments in related parties | | | | | | | | | |
| AFS securities, ABS | 170 |
| | — |
| | — |
| | (1 | ) | | 169 |
|
| Equity securities | 177 |
| | — |
| | — |
| | — |
| | 177 |
|
| Investment funds | 19 |
| | — |
| | — |
| | — |
| | 19 |
|
| Investments of consolidated VIEs | | | | | | | | | |
| Trading securities | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Equity securities | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| Total Level 3 assets | $ | 829 |
| | $ | — |
| | $ | (39 | ) | | $ | (179 | ) | | $ | 611 |
|
| | | | | | | | | | |
| Liabilities | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | |
| Embedded derivative | $ | — |
| | $ | (233 | ) | | $ | — |
| | $ | 113 |
| | $ | (120 | ) |
| Total Level 3 liabilities | $ | — |
| | $ | (233 | ) | | $ | — |
| | $ | 113 |
| | $ | (120 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2017 |
| (In millions) | Purchases | | Issuances | | Sales | | Settlements | | Net purchases, issuances, sales and settlements |
| Assets | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | |
| AFS securities | | | | | | | | | |
| Corporate | $ | 30 |
| | $ | — |
| | $ | (1 | ) | | $ | (1 | ) | | $ | 28 |
|
| CLO | 24 |
| | — |
| | (5 | ) | | (2 | ) | | 17 |
|
| ABS | 99 |
| | — |
| | — |
| | (88 | ) | | 11 |
|
| CMBS | 13 |
| | — |
| | — |
| | — |
| | 13 |
|
| RMBS | 7 |
| | — |
| | — |
| | (1 | ) | | 6 |
|
| Trading securities | | | | | | | | | |
| RMBS | 22 |
| | — |
| | — |
| | — |
| | 22 |
|
| Equity securities | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| Mortgage loans | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Investments in related parties | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | |
| Trading securities, CLO | — |
| | — |
| | (12 | ) | | — |
| | (12 | ) |
| Short-term investments | 8 |
| | — |
| | — |
| | — |
| | 8 |
|
| Total Level 3 assets | $ | 204 |
| | $ | — |
| | $ | (18 | ) | | $ | (93 | ) | | $ | 93 |
|
| | | | | | | | | | |
| Liabilities | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | |
| Embedded derivative | $ | — |
| | $ | (160 | ) | | $ | — |
| | $ | 48 |
| | $ | (112 | ) |
| Total Level 3 liabilities | $ | — |
| | $ | (160 | ) | | $ | — |
| | $ | 48 |
| | $ | (112 | ) |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, 2018 |
| (In millions) | Purchases | | Issuances | | Sales | | Settlements | | Net purchases, issuances, sales and settlements |
| Assets | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | |
| AFS securities | | | | | | | | | |
| Corporate | $ | 358 |
| | $ | — |
| | $ | (5 | ) | | $ | (13 | ) | | $ | 340 |
|
| CLO | 231 |
| | — |
| | (5 | ) | | — |
| | 226 |
|
| ABS | 356 |
| | — |
| | (21 | ) | | (178 | ) | | 157 |
|
| CMBS | 153 |
| | — |
| | — |
| | (1 | ) | | 152 |
|
| RMBS | — |
| | — |
| | — |
| | (19 | ) | | (19 | ) |
| Trading securities | | | | | | | | | |
| Corporate | 4 |
| | — |
| | — |
| | — |
| | 4 |
|
| CLO | 7 |
| | — |
| | (7 | ) | | — |
| | — |
|
| Equity securities | 1 |
| | — |
| | (8) |
| | — |
| | (7 | ) |
| Mortgage loans | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) |
| Investment funds | — |
| | — |
| | — |
| | (7 | ) | | (7 | ) |
| Investments in related parties | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | |
| AFS securities | | | | | | | | | |
| CLO | 39 |
| | — |
| | — |
| | — |
| | 39 |
|
| ABS | 46 |
| | — |
| | — |
| | — |
| | 46 |
|
| Trading securities, CLO | 30 |
| | — |
| | (48 | ) | | — |
| | (18 | ) |
| Investment funds | 108 |
| | — |
| | — |
| | — |
| | 108 |
|
| Short-term investments | 10 |
| | — |
| | — |
| | — |
| | 10 |
|
| Total Level 3 assets | $ | 1,343 |
| | $ | — |
| | $ | (94 | ) | | $ | (221 | ) | | $ | 1,028 |
|
| | | | | | | | | | |
| Liabilities | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | |
| Embedded derivative | $ | — |
| | $ | (984 | ) | | $ | — |
| | $ | 171 |
| | $ | (813 | ) |
| Total Level 3 liabilities | $ | — |
| | $ | (984 | ) | | $ | — |
| | $ | 171 |
| | $ | (813 | ) |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | | | Six months ended June 30, 2017 | Three months ended March 31, 2018 |
| (In millions) | Purchases | | Issuances | | Sales | | Settlements | | Net purchases, issuances, sales and settlements | Purchases | | Issuances | | Sales | | Settlements | | Net purchases, issuances, sales and settlements |
| Assets | | | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities | | | | | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | $ | — |
| | $ | — |
| | $ | — |
| | $ | (20 | ) | | $ | (20 | ) | |
| Foreign governments | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) | |
| Corporate | 110 |
| | — |
| | (2 | ) | | (3 | ) | | 105 |
| $ | 68 |
| | $ | — |
| | $ | (5 | ) | | $ | (5 | ) | | $ | 58 |
|
| CLO | 24 |
| | — |
| | (2 | ) | | (15 | ) | | 7 |
| 131 |
| | — |
| | — |
| | — |
| | 131 |
|
| ABS | 182 |
| | — |
| | — |
| | (140 | ) | | 42 |
| 40 |
| | — |
| | (20 | ) | | (124 | ) | | (104 | ) |
| CMBS | 13 |
| | — |
| | — |
| | — |
| | 13 |
| |
| RMBS | 7 |
| | — |
| | — |
| | (1 | ) | | 6 |
| 31 |
| | — |
| | — |
| | (8 | ) | | 23 |
|
| Trading securities, CLO | | 13 |
| | — |
| | — |
| | (12 | ) | | 1 |
|
| Equity securities | | — |
| | — |
| | (8 | ) | | — |
| | (8 | ) |
| Investment funds | | — |
| | — |
| | — |
| | (7 | ) | | (7 | ) |
| Investments in related parties | | | | | | | | | | |
| AFS securities, CLO | | 62 |
| | — |
| | — |
| | — |
| | 62 |
|
| Trading securities, CLO | | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Investment funds | | 108 |
| | — |
| | — |
| | — |
| | 108 |
|
| Investments of consolidated VIEs | | | | | | | | | | |
| Trading securities | | | | | | | | | | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| CLO | — |
| | — |
| | (15 | ) | | — |
| | (15 | ) | |
| RMBS | 24 |
| | — |
| | — |
| | — |
| | 24 |
| |
| Equity securities | 1 |
| | — |
| | — |
| | — |
| | 1 |
| |
| Mortgage loans | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) | |
| Investments in related parties | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | |
| AFS securities, ABS | 5 |
| | — |
| | — |
| | (9 | ) | | (4 | ) | |
| Trading securities, CLO | — |
| | — |
| | (26 | ) | | — |
| | (26 | ) | |
| Short-term investments | 28 |
| | — |
| | — |
| | — |
| | 28 |
| |
| Investment funds | | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
| Total Level 3 assets | $ | 394 |
| | $ | — |
| | $ | (45 | ) | | $ | (190 | ) | | $ | 159 |
| $ | 453 |
| | $ | — |
| | $ | (37 | ) | | $ | (156 | ) | | $ | 260 |
|
| | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | |
| Interest sensitive contract liabilities | | | | | | | | | | | | | | | | | | |
| Embedded derivative | $ | — |
| | $ | (270 | ) | | $ | — |
| | $ | 79 |
| | $ | (191 | ) | $ | — |
| | $ | (126 | ) | | $ | — |
| | $ | 70 |
| | $ | (56 | ) |
| Total Level 3 liabilities | $ | — |
| | $ | (270 | ) | | $ | — |
| | $ | 79 |
| | $ | (191 | ) | $ | — |
| | $ | (126 | ) | | $ | — |
| | $ | 70 |
| | $ | (56 | ) |
Significant Unobservable Inputs—Significant unobservable inputs occur when we could not obtain or corroborate the quantitative detail of the inputs. This applies to fixed maturity securities, equity securities, mortgage loans and certain derivatives, as well as embedded derivatives in liabilities. Additional significant unobservable inputs are described below.
ATHENE HOLDING LTD.
Fixed maturityNotes to Condensed Consolidated Financial Statements (Unaudited)
AFS and trading securities – For certain fixed maturity securities, internal models are used to calculate the fair value. We use a discounted cash flow approach. The discount rate is the significant unobservable input due to the determined credit spread being internally developed, illiquid, or as a result of other adjustments made to the base rate. The base rate represents a market comparable rate for securities with similar characteristics. As of June 30, 2018,March 31, 2019, discounts ranged from 6%4% to 9%7%, and as of December 31, 2017,2018, discounts ranged from 2%5% to 6%9%. 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-performanceNonperformance risk – For contracts we issue, we use the credit spread, relative to the U.S. treasuryDepartment of the Treasury (Treasury) curve, based on our public credit rating as of the valuation date. This represents our credit risk for use in the estimate of the fair value of embedded derivatives. |
| |
| 2. | Option budget – We assume future hedge costs in the derivative’s fair value estimate. The level of option budgets determines the future costs of the options and impacts future policyholder account value growth. |
| |
| 3. | Policyholder behavior – We regularly review the lapse and withdrawal assumptions (surrender rate). These are based on our initial pricing assumptions updated for actual experience. Actual experience may be limited for recently issued products. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following summarizes the unobservable inputs for the embedded derivatives of fixed indexed annuities:
| | | | June 30, 2018 | March 31, 2019 |
| (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 | $ | 8,065 |
| Option budget method | Non-performance risk | 0.4 | % | – | 1.4% | Decrease | $ | 9,106 |
| Option budget method | Nonperformance risk | 0.1 | % | – | 1.3% | Decrease |
| | | | Option budget | 0.8 | % | – | 3.7% | Increase | | | Option budget | 0.7 | % | – | 3.7% | Increase |
| | | | Surrender rate | 4.7 | % | – | 11.0% | Decrease | | | Surrender rate | 3.6 | % | – | 7.5% | Decrease |
| | | | December 31, 2017 | December 31, 2018 |
| (In millions, except for percentages) | Fair value | Valuation technique | Unobservable inputs | Input/range of
inputs | Impact of an increase in the input on fair value | Fair value | Valuation technique | Unobservable inputs | Input/range of
inputs | Impact of an increase in the input on fair value |
| Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives | $ | 7,436 |
| Option budget method | Non-performance risk | 0.2 | % | – | 1.2% | Decrease | $ | 7,969 |
| Option budget method | Nonperformance risk | 0.3 | % | – | 1.5% | Decrease |
| | | | Option budget | 0.7 | % | – | 3.7% | Increase | | | Option budget | 0.7 | % | – | 3.7% | Increase |
| | | | Surrender rate | 1.5 | % | – | 19.4% | Decrease | | | Surrender rate | 3.6 | % | – | 7.3% | 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:
| | | | June 30, 2018 | March 31, 2019 |
| (In millions) | Carrying Value | | Fair Value | | NAV1 | | Level 1 | | Level 2 | | Level 3 | Carrying Value | | Fair Value | | NAV | | Level 1 | | Level 2 | | Level 3 |
| Financial Assets | | | | | | | | | | | | |
| Financial assets | | | | | | | | | | | | |
| Mortgage loans | $ | 7,571 |
| | $ | 7,713 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 7,713 |
| $ | 11,010 |
| | $ | 11,190 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 11,190 |
|
| Investment funds | 507 |
| | 507 |
| | 507 |
| | — |
| | — |
| | — |
| 524 |
| | 524 |
| | 524 |
| | — |
| | — |
| | — |
|
| Policy loans | 504 |
| | 504 |
| | — |
| | — |
| | 504 |
| | — |
| 487 |
| | 487 |
| | — |
| | — |
| | 487 |
| | — |
|
| Funds withheld at interest | 7,550 |
| | 7,550 |
| | — |
| | — |
| | — |
| | 7,550 |
| 14,795 |
| | 14,795 |
| | — |
| | — |
| | — |
| | 14,795 |
|
| Other investments | 73 |
| | 73 |
| | — |
| | — |
| | — |
| | 73 |
| 69 |
| | 69 |
| | — |
| | — |
| | — |
| | 69 |
|
| Investments in related parties | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage loans | | 291 |
| | 286 |
| | — |
| | — |
| | — |
| | 286 |
|
| Investment funds | 1,638 |
| | 1,638 |
| | 1,638 |
| | — |
| | — |
| | — |
| 2,058 |
| | 2,058 |
| | 2,058 |
| | — |
| | — |
| | — |
|
| Funds withheld at interest | 14,059 |
| | 14,059 |
| | — |
| | — |
| | — |
| | 14,059 |
| 13,469 |
| | 13,469 |
| | — |
| | — |
| | — |
| | 13,469 |
|
| Other investments | 388 |
| | 371 |
| | — |
| | — |
| | — |
| | 371 |
| 387 |
| | 389 |
| | — |
| | — |
| | — |
| | 389 |
|
| Assets of consolidated VIEs | | | | | | | | | | | | |
| Investment funds | | 55 |
| | 55 |
| | 55 |
| | — |
| | — |
| | — |
|
| Total financial assets not carried at fair value | $ | 32,290 |
| | $ | 32,415 |
| | $ | 2,145 |
| | $ | — |
| | $ | 504 |
| | $ | 29,766 |
| $ | 43,145 |
| | $ | 43,322 |
| | $ | 2,637 |
| | $ | — |
| | $ | 487 |
| | $ | 40,198 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Financial Liabilities | | | | | | | | | | | | |
| Financial liabilities | | | | | | | | | | | | |
| Interest sensitive contract liabilities | $ | 46,586 |
| | $ | 43,972 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 43,972 |
| $ | 55,220 |
| | $ | 53,504 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 53,504 |
|
| Short-term debt | 183 |
| | 183 |
| | — |
| | — |
| | 183 |
| | — |
| |
| Long-term debt | 991 |
| | 924 |
| | — |
| | — |
| | 924 |
| | — |
| 991 |
| | 962 |
| | — |
| | — |
| | 962 |
| | — |
|
| Funds withheld liability | 385 |
| | 385 |
| | — |
| | — |
| | 385 |
| | — |
| 712 |
| | 712 |
| | — |
| | — |
| | 712 |
| | — |
|
| Total financial liabilities not carried at fair value | $ | 48,145 |
| | $ | 45,464 |
| | $ | — |
| | $ | — |
| | $ | 1,492 |
| | $ | 43,972 |
| $ | 56,923 |
| | $ | 55,178 |
| | $ | — |
| | $ | — |
| | $ | 1,674 |
| | $ | 53,504 |
|
| | | | | | | | | | | | | |
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 | December 31, 2018 |
| (In millions) | Carrying Value | | Fair Value | | NAV1 | | Level 1 | | Level 2 | | Level 3 | Carrying Value | | Fair Value | | NAV | | Level 1 | | Level 2 | | Level 3 |
| Financial Assets | | | | | | | | | | | | |
| Financial assets | | | | | | | | | | | | |
| Mortgage loans | $ | 6,192 |
| | $ | 6,342 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6,342 |
| $ | 10,308 |
| | $ | 10,424 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 10,424 |
|
| Investment funds | 554 |
| | 554 |
| | 554 |
| | — |
| | — |
| | — |
| 521 |
| | 521 |
| | 521 |
| | — |
| | — |
| | — |
|
| Policy loans | 530 |
| | 530 |
| | — |
| | — |
| | 530 |
| | — |
| 488 |
| | 488 |
| | — |
| | — |
| | 488 |
| | — |
|
| Funds withheld at interest | 6,773 |
| | 6,773 |
| | — |
| | — |
| | — |
| | 6,773 |
| 14,966 |
| | 14,966 |
| | — |
| | — |
| | — |
| | 14,966 |
|
| Other investments | 133 |
| | 133 |
| | — |
| | — |
| | 58 |
| | 75 |
| 70 |
| | 70 |
| | — |
| | — |
| | — |
| | 70 |
|
| Investments in related parties | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage loans | | 291 |
| | 290 |
| | — |
| | — |
| | — |
| | 290 |
|
| Investment funds | 1,280 |
| | 1,280 |
| | 1,280 |
| | — |
| | — |
| | — |
| 2,031 |
| | 2,031 |
| | 2,031 |
| | — |
| | — |
| | — |
|
| Funds withheld at interest | | 13,687 |
| | 13,687 |
| | — |
| | — |
| | — |
| | 13,687 |
|
| Other investments | 238 |
| | 259 |
| | — |
| | — |
| | — |
| | 259 |
| 386 |
| | 361 |
| | — |
| | — |
| | — |
| | 361 |
|
| Assets of consolidated VIEs | | | | | | | | | | | | |
| Investment funds | | 57 |
| | 57 |
| | 57 |
| | — |
| | — |
| | — |
|
| Total financial assets not carried at fair value | $ | 15,700 |
| | $ | 15,871 |
| | $ | 1,834 |
| | $ | — |
| | $ | 588 |
| | $ | 13,449 |
| $ | 42,805 |
| | $ | 42,895 |
| | $ | 2,609 |
| | $ | — |
| | $ | 488 |
| | $ | 39,798 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Financial Liabilities | | | | | | | | | | | | |
| Financial liabilities | | | | | | | | | | | | |
| Interest sensitive contract liabilities | $ | 31,586 |
| | $ | 31,656 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 31,656 |
| $ | 54,655 |
| | $ | 51,655 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 51,655 |
|
| Long-term debt | | 991 |
| | 910 |
| | — |
| | — |
| | 910 |
| | — |
|
| Funds withheld liability | 385 |
| | 385 |
| | — |
| | — |
| | 385 |
| | — |
| 722 |
| | 722 |
| | — |
| | — |
| | 722 |
| | — |
|
| Total financial liabilities not carried at fair value | $ | 31,971 |
| | $ | 32,041 |
| | $ | — |
| | $ | — |
| | $ | 385 |
| | $ | 31,656 |
| $ | 56,368 |
| | $ | 53,287 |
| | $ | — |
| | $ | — |
| | $ | 1,632 |
| | $ | 51,655 |
|
| | | | | | | | | | | | | |
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 and funds withheld at interest and liability, 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.
Long-term debt – We obtain the fair value of long-term debt from commercial pricing services. These are classified as Level 2. The pricing services incorporate a variety of market observable information in their valuation techniques including benchmark yields, trading activity, credit quality, issuer spreads, bids, offers and other reference data.
6.5. Deferred Acquisition Costs, Deferred Sales Inducements and Value of Business Acquired
The following represents a rollforward of deferred acquisition costs (DAC), deferred sales inducements (DSI) and value of business acquired (VOBA):
| | | (In millions) | DAC | | DSI | | VOBA | | Total | DAC | | DSI | | VOBA | | Total |
| Balance at December 31, 2017 | $ | 1,354 |
| | $ | 520 |
| | $ | 1,056 |
| | $ | 2,930 |
| |
| Balance at December 31, 2018 | | $ | 3,921 |
| | $ | 799 |
| | $ | 1,187 |
| | $ | 5,907 |
|
| Additions | 1,607 |
| | 120 |
| | — |
| | 1,727 |
| 173 |
| | 60 |
| | — |
| | 233 |
|
| Amortization | (81 | ) | | (43 | ) | | (100 | ) | | (224 | ) | (226 | ) | | (5 | ) | | (5 | ) | | (236 | ) |
| Impact of unrealized investment (gains) losses | 100 |
| | 42 |
| | 140 |
| | 282 |
| (149 | ) | | (49 | ) | | (87 | ) | | (285 | ) |
| Balance at June 30, 2018 | $ | 2,980 |
| | $ | 639 |
| | $ | 1,096 |
| | $ | 4,715 |
| |
| Balance at March 31, 2019 | | $ | 3,719 |
| | $ | 805 |
| | $ | 1,095 |
| | $ | 5,619 |
|
| | | (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 | | $ | 1,375 |
| | $ | 520 |
| | $ | 1,077 |
| | $ | 2,972 |
|
| Additions | 248 |
| | 80 |
| | — |
| | 328 |
| 122 |
| | 46 |
| | — |
| | 168 |
|
| Amortization | (98 | ) | | (29 | ) | | (73 | ) | | (200 | ) | (33 | ) | | (20 | ) | | (49 | ) | | (102 | ) |
| Impact of unrealized investment (gains) losses | (65 | ) | | (28 | ) | | (89 | ) | | (182 | ) | 67 |
| | 22 |
| | 79 |
| | 168 |
|
| Balance at June 30, 2017 | $ | 1,227 |
| | $ | 485 |
| | $ | 1,174 |
| | $ | 2,886 |
| |
| Balance at March 31, 2018 | | $ | 1,531 |
| | $ | 568 |
| | $ | 1,107 |
| | $ | 3,206 |
|
7. Reinsurance
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 – Related Parties. Additionally, we entered into modco agreements with ReliaStar Life Insurance Company (RLI), a subsidiary of Voya Financial, Inc. (Voya), to reinsure a block of 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. |
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.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 June 30, | | Six months ended June 30, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 |
| Premiums | | | | | | | |
| Direct | $ | 114 |
| | $ | 423 |
| | $ | 432 |
| | $ | 528 |
|
| Reinsurance assumed | 651 |
| | 7 |
| | 656 |
| | 12 |
|
| Reinsurance ceded | (39 | ) | | (51 | ) | | (84 | ) | | (109 | ) |
| Total premiums | $ | 726 |
| | $ | 379 |
| | $ | 1,004 |
| | $ | 431 |
|
| | | | | | | | |
| Future policy and other policy benefits | | | | | | | |
| Direct | $ | 284 |
| | $ | 658 |
| | $ | 736 |
| | $ | 999 |
|
| Reinsurance assumed | 655 |
| | 15 |
| | 664 |
| | 23 |
|
| Reinsurance ceded | (82 | ) | | (95 | ) | | (142 | ) | | (230 | ) |
| Total future policy and other policy benefits | $ | 857 |
| | $ | 578 |
| | $ | 1,258 |
| | $ | 792 |
|
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 $11 million and $20 million for the three months ended June 30, 2018 and six months ended June 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 matures on August 24, 2018 and carries an interest rate of 2.16%, with interest due at maturity. In connection with such borrowing, the FHLB requires the borrower to purchase member stock and post sufficient collateral to secure the borrowing. To satisfy these requirements, we purchased an additional $7 million of FHLB stock; however, we were not required to post additional collateral. See Note 13 – Commitments and Contingencies for further discussion regarding existing collateral posting with the FHLB.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
9.6. Earnings Per Share
The following represents our basic and diluted earnings per share (EPS) calculations:
| | | | Three months ended June 30, 2018 | Three months ended March 31, 2019 |
| (In millions, except share and per share data) | Class A | | Class B | | Class M-1 | | Class M-2 | | Class M-3 | | Class M-4 | |
| (In millions, except per share data) | | Class A | | Class B | | Class M-1 | | Class M-2 | | Class M-3 | | Class M-4 |
| Net income – basic and diluted | $ | 220 |
| | $ | 34 |
| | $ | 5 |
| | $ | 1 |
| | $ | 1 |
| | $ | 3 |
| $ | 589 |
| | $ | 93 |
| | $ | 12 |
| | $ | 3 |
| | $ | 3 |
| | $ | 8 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Basic weighted average shares outstanding | 164,458,153 |
| | 25,483,236 |
| | 3,388,890 |
| | 844,449 |
| | 1,003,528 |
| | 2,121,647 |
| 161.3 |
| | 25.4 |
| | 3.4 |
| | 0.8 |
| | 1.0 |
| | 2.1 |
|
| Dilutive effect of stock compensation plans | 369,955 |
| | — |
| | — |
| | 6,307 |
| | — |
| | 594,331 |
| 0.4 |
| | — |
| | — |
| | — |
| | — |
| | 0.3 |
|
| Diluted weighted average shares outstanding | 164,828,108 |
| | 25,483,236 |
| | 3,388,890 |
| | 850,756 |
| | 1,003,528 |
| | 2,715,978 |
| 161.7 |
| | 25.4 |
| | 3.4 |
| | 0.8 |
| | 1.0 |
| | 2.4 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Earnings per share1 | | | | | | | | | | | | | | | | | | | | | | |
| Basic | $ | 1.34 |
| | $ | 1.34 |
| | $ | 1.34 |
| | $ | 1.34 |
| | $ | 1.34 |
| | $ | 1.34 |
| $ | 3.65 |
| | $ | 3.65 |
| | $ | 3.65 |
| | $ | 3.65 |
| | $ | 3.65 |
| | $ | 3.65 |
|
| Diluted | $ | 1.33 |
| | $ | 1.34 |
| | $ | 1.34 |
| | $ | 1.33 |
| | $ | 1.34 |
| | $ | 1.04 |
| $ | 3.64 |
| | $ | 3.65 |
| | $ | 3.65 |
| | $ | 3.65 |
| | $ | 3.65 |
| | $ | 3.15 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
1 Calculated using whole figures. | 1 Calculated using whole figures. | 1 Calculated using whole figures. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 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 – basic | $ | 177 |
| | $ | 138 |
| | $ | 6 |
| | $ | 2 |
| | $ | 1 |
| | $ | 2 |
|
| Effect of stock compensation plans on allocated net income | 4 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net income – diluted | $ | 181 |
| | $ | 138 |
| | $ | 6 |
| | $ | 2 |
| | $ | 1 |
| | $ | 2 |
|
| | | | | | | | | | | | |
| Basic weighted average shares outstanding | 106,299,230 |
| | 82,927,000 |
| | 3,409,515 |
| | 905,105 |
| | 740,883 |
| | 1,438,871 |
|
| Dilutive effect of stock compensation plans | 2,706,762 |
| | — |
| | — |
| | 15,000 |
| | 491,292 |
| | 1,718,314 |
|
| Diluted weighted average shares outstanding | 109,005,992 |
| | 82,927,000 |
| | 3,409,515 |
| | 920,105 |
| | 1,232,175 |
| | 3,157,185 |
|
| | | | | | | | | | | | |
Earnings per share1 | | | | | | | | | | | |
| Basic | $ | 1.66 |
| | $ | 1.66 |
| | $ | 1.66 |
| | $ | 1.66 |
| | $ | 1.66 |
| | $ | 1.66 |
|
| Diluted | $ | 1.65 |
| | $ | 1.66 |
| | $ | 1.66 |
| | $ | 1.64 |
| | $ | 1.00 |
| | $ | 0.76 |
|
| | | | | | | | | | | | |
1 Calculated using whole figures. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 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 | $ | 422 |
| | $ | 90 |
| | $ | 9 |
| | $ | 2 |
| | $ | 3 |
| | $ | 6 |
|
| | | | | | | | | | | | |
| Basic weighted average shares outstanding | 156,619,575 |
| | 33,246,955 |
| | 3,388,890 |
| | 842,739 |
| | 1,026,216 |
| | 2,093,581 |
|
| Dilutive effect of stock compensation plans | 381,446 |
| | — |
| | — |
| | 7,642 |
| | 10,286 |
| | 761,780 |
|
| Diluted weighted average shares outstanding | 157,001,021 |
| | 33,246,955 |
| | 3,388,890 |
| | 850,381 |
| | 1,036,502 |
| | 2,855,361 |
|
| | | | | | | | | | | | |
Earnings per share1 | | | | | | | | | | | |
| Basic | $ | 2.70 |
| | $ | 2.70 |
| | $ | 2.70 |
| | $ | 2.70 |
| | $ | 2.70 |
| | $ | 2.70 |
|
| Diluted | $ | 2.69 |
| | $ | 2.70 |
| | $ | 2.70 |
| | $ | 2.67 |
| | $ | 2.67 |
| | $ | 1.98 |
|
| | | | | | | | | | | | |
1 Calculated using whole figures. |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | | | Six months ended June 30, 2017 | Three months ended March 31, 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 | $ | 337 |
| | $ | 354 |
| | $ | 13 |
| | $ | 2 |
| | $ | 1 |
| | $ | 3 |
| |
| Effect of stock compensation plans on allocated net income | 6 |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Net income – diluted | $ | 343 |
| | $ | 354 |
| | $ | 13 |
| | $ | 2 |
| | $ | 1 |
| | $ | 3 |
| |
| (In millions, except per share data) | | Class A | | Class B | | Class M-1 | | Class M-2 | | Class M-3 | | Class M-4 |
| Net income – basic and diluted | | $ | 209 |
| | $ | 58 |
| | $ | 5 |
| | $ | 1 |
| | $ | 1 |
| | $ | 3 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Basic weighted average shares outstanding | 92,350,216 |
| | 96,772,641 |
| | 3,430,840 |
| | 476,070 |
| | 372,488 |
| | 723,410 |
| 148.7 |
| | 41.1 |
| | 3.4 |
| | 0.8 |
| | 1.0 |
| | 2.1 |
|
| Dilutive effect of stock compensation plans | 3,242,336 |
| | — |
| | — |
| | 493,213 |
| | 884,760 |
| | 1,971,060 |
| 0.3 |
| | — |
| | — |
| | — |
| | — |
| | 0.9 |
|
| Diluted weighted average shares outstanding | 95,592,552 |
| | 96,772,641 |
| | 3,430,840 |
| | 969,283 |
| | 1,257,248 |
| | 2,694,470 |
| 149.0 |
| | 41.1 |
| | 3.4 |
| | 0.8 |
| | 1.0 |
| | 3.0 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Earnings per share1 | | | | | | | | | | | | | | | | | | | | | | |
| Basic | $ | 3.66 |
| | $ | 3.66 |
| | $ | 3.66 |
| | $ | 3.66 |
| | $ | 3.66 |
| | $ | 3.66 |
| $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.40 |
|
| Diluted | $ | 3.59 |
| | $ | 3.66 |
| | $ | 3.66 |
| | $ | 1.80 |
| | $ | 1.08 |
| | $ | 0.98 |
| $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.39 |
| | $ | 1.38 |
| | $ | 0.97 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
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 to each class of our common stock. Our Class M shares did not become eligible to participate in dividends until a return of investment (ROI) condition had been met for each class. Once eligible, each class of our common stock has equal dividend rights. The ROI condition was 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. For purposes of calculating diluted weighted average shares outstanding, shares are deemed dilutive as of the beginning of the period.
Dilutive shares are calculated using the treasury stock method. For Class A shares, this method takes into account shares that can be settled into Class A shares, net of a conversion price. The diluted EPS calculations for Class A shares excluded the following shares, restricted stock units (RSUs) and options:
| | | | Three months ended June 30, | | Six months ended June 30, | Three months ended March 31, |
| | 2018 | | 2017 | | 2018 | | 2017 | |
| (In millions) | | 2019 | | 2018 |
| Antidilutive shares, RSUs and options excluded from diluted EPS calculation | 35,078,635 |
| | 74,650,807 |
| | 35,078,635 |
| | 73,792,976 |
| 34.7 |
| | 35.2 |
|
| Shares, RSUs and options excluded from diluted EPS calculation as a performance condition had not been met | 280,030 |
| | 1,448,998 |
| | 280,030 |
| | 1,448,998 |
| 0.1 |
| | 0.3 |
|
| Total shares, RSUs and options excluded from diluted EPS calculation | 35,358,665 |
| | 76,099,805 |
| | 35,358,665 |
| | 75,241,974 |
| 34.8 |
| | 35.5 |
|
| | | | | | | | | | | |
Note: Shares, RSUs and options are as of period end. |
10. Accumulated7. Equity
Share Repurchase Authorization—In December 2018, our board of directors approved an authorization for the repurchase of our Class A shares under our repurchase program. In the first quarter of 2019, our board of directors approved an additional authorization, which was conditioned upon the further approval by a committee of our board of directors. Such further approval was granted during the second quarter of 2019. We may repurchase shares in open market transactions, in privately negotiated transactions or otherwise. The size and timing of repurchases will depend on legal requirements, market and economic conditions and other factors, and are solely at our discretion. The program has no expiration date, but may be modified, suspended or terminated by the board at any time.
The following summarizes the activity on our share repurchase authorization:
|
| | | |
| (In millions) | |
| Initial authorization | $ | 250 |
|
| Repurchases | (100 | ) |
| Remaining authorization at December 31, 2018 | 150 |
|
| Repurchases | (47 | ) |
| Remaining authorization at March 31, 2019 | 103 |
|
| Additional authorization | 247 |
|
| Remaining authorization at May 7, 2019 | $ | 350 |
|
Accumulated Other Comprehensive Income
(Loss)—The following is a detailprovides the details of 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.AOCI:
| | | (In millions) | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| AFS securities | $ | 328 |
| | $ | 2,577 |
| $ | 1,223 |
| | $ | (766 | ) |
| DAC, DSI, VOBA, future policy benefits and dividends payable to policyholders adjustments on AFS securities | (116 | ) | | (744 | ) | |
| DAC, DSI, VOBA and future policy benefits adjustments on AFS securities | | (357 | ) | | 154 |
|
| Noncredit component of OTTI losses on AFS securities | (13 | ) | | (13 | ) | (20 | ) | | (19 | ) |
| Hedging instruments | (50 | ) | | (95 | ) | 43 |
| | 51 |
|
| Pension adjustments | (2 | ) | | (5 | ) | (3 | ) | | (2 | ) |
| Foreign currency translation adjustments | (2 | ) | | 8 |
| (2 | ) | | (3 | ) |
| Accumulated other comprehensive income, before taxes | 145 |
| | 1,728 |
| |
| Accumulated other comprehensive income (loss), before taxes | | 884 |
| | (585 | ) |
| Deferred income taxes | (19 | ) | | (313 | ) | (178 | ) | | 113 |
|
| Accumulated other comprehensive income | $ | 126 |
| | $ | 1,415 |
| |
| Accumulated other comprehensive income (loss) | | $ | 706 |
| | $ | (472 | ) |
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Changes in AOCI are presented below:
| | | | Three months ended June 30, | | Six months ended June 30, | Three months ended March 31, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| Unrealized investment gains (losses) on AFS securities | | | | | | | | | | |
| Unrealized investment gains (losses) on AFS securities | $ | (889 | ) | | $ | 735 |
| | $ | (2,171 | ) | | $ | 1,251 |
| $ | 1,982 |
| | $ | (1,282 | ) |
| Change in DAC, DSI, VOBA, future policy benefits and dividends payable to policyholders adjustment | 233 |
| | (141 | ) | | 624 |
| | (223 | ) | |
| Change in DAC, DSI, VOBA and future policy benefits adjustment | | (511 | ) | | 410 |
|
Less: Reclassification adjustment for gains (losses) realized in net income1 | 11 |
| | 12 |
| | 30 |
| | 27 |
| (7 | ) | | 19 |
|
| Less: Income tax expense (benefit) | (138 | ) | | 179 |
| | (301 | ) | | 292 |
| 293 |
| | (159 | ) |
| Net unrealized investment gains (losses) on AFS securities | (529 | ) | | 403 |
| | (1,276 | ) | | 709 |
| 1,185 |
| | (732 | ) |
| Noncredit component of OTTI losses on AFS securities | | | | | | | | | | |
| Noncredit component of OTTI losses on AFS securities | 1 |
| | 1 |
| | — |
| | 2 |
| (1 | ) | | (1 | ) |
Less: Reclassification adjustment for losses realized in net income1 | 1 |
| | 2 |
| | — |
| | 2 |
| — |
| | (1 | ) |
| Net noncredit component of OTTI losses on AFS securities | — |
| | (1 | ) | | — |
| | — |
| (1 | ) | | — |
|
| Unrealized gains (losses) on hedging instruments | | | | | | | | | | |
| Unrealized gains (losses) on hedging instruments | 101 |
| | (33 | ) | | 45 |
| | (38 | ) | (8 | ) | | (56 | ) |
| Less: Income tax expense (benefit) | 29 |
| | (11 | ) | | 9 |
| | (13 | ) | |
| Less: Income tax benefit | | (2 | ) | | (20 | ) |
| Net unrealized gains (losses) on hedging instruments | 72 |
| | (22 | ) | | 36 |
| | (25 | ) | (6 | ) | | (36 | ) |
| Pension adjustments | — |
| | (1 | ) | | 3 |
| | (1 | ) | (1 | ) | | 3 |
|
| Foreign currency translation adjustments | (2 | ) | | 8 |
| | (10 | ) | | 10 |
| 1 |
| | (8 | ) |
| Change in AOCI from other comprehensive income (loss) | (459 | ) | | 387 |
| | (1,247 | ) | | 693 |
| 1,178 |
| | (773 | ) |
| Adoption of ASU 2016-01 | — |
| | — |
| | (42 | ) | | — |
| |
| Adoption of accounting standards | | — |
| | (42 | ) |
| Change in AOCI | $ | (459 | ) | | $ | 387 |
| | $ | (1,289 | ) | | $ | 693 |
| $ | 1,178 |
| | $ | (815 | ) |
| | | | | | | | | | | |
1 Recognized in investment related gains (losses) on the condensed consolidated statements of income. | 1 Recognized in investment related gains (losses) on the condensed consolidated statements of income. | 1 Recognized in investment related gains (losses) on the condensed consolidated statements of income. |
11. Income Taxes
Our effective tax rates were 20% and 3% for the three months ended June 30, 2018 and 2017, respectively, and 19% and 4% for the six months ended June 30, 2018 and 2017, respectively. Our effective tax rates may vary period to period depending upon the relationship of income and loss subject to tax compared to consolidated income and loss before income taxes. With the enactment of Public Law no. 115-97, an Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 (Tax Act), the U.S. statutory tax rate declined to 21% from 35%; however, the Base Erosion and Anti-Abuse Tax (BEAT) was established, which may subject payments to our non-U.S. reinsurance subsidiaries to a tax of 5%, which would increase to 10% in 2019. The income tax expense for the three and six months ended June 30, 2018 assumes that we have taken steps so that the BEAT is not applicable to such payments and thereby assumes that more income is subject to U.S. income tax.
The Internal Revenue Service is currently auditing the 2013 consolidated tax return filed by Athene USA, and is also conducting a limited scope audit of the 2015 consolidated tax return filed by Athene Annuity & Life Assurance Company (AADE). No material proposed adjustments have been issued with respect to either exam. See discussion of ongoing tax examinations relating to Aviva USA Corporation (Aviva USA) in Note 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 that, in the event of any such taxes being imposed, we will be exempted from taxation until the year 2035.
12.8. Related Parties
Athene Asset Management
Investment related expenses – Substantially all of our investments are managed by Athene Asset Management 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 June 30, 2018,March 31, 2019, AAM directly managed $81,750$90,287 million of our investment portfolio assets, of which 86% 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, subject to certain limited exceptions. Additionally, AAM recharges the sub-advisory fees it incurs with respect to our sub-advised assets to us. Historically,We currently pay 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, subject to our bye-laws, we entered into the Fifth Amendedcertain discounts 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%)exceptions, on all assets that ApolloAAM 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) up to $65,846 million and 0.30% per year on assets managed 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.such amount.
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.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The MSAAs cover services rendered by Apollo-affiliated sub-advisors relating to the following investments:
| | | (In millions, except for percentages) | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| Fixed maturity securities | | | | |
| AFS securities | | | | | | |
| Foreign governments | $ | 151 |
| | $ | 152 |
| $ | 240 |
| | $ | 153 |
|
| Corporate | 3,226 |
| | 2,934 |
| 3,680 |
| | 3,398 |
|
| CLO | 5,630 |
| | 5,166 |
| 6,487 |
| | 5,703 |
|
| ABS | 613 |
| | 681 |
| 654 |
| | 663 |
|
| CMBS | 878 |
| | 872 |
| 1,011 |
| | 880 |
|
| Trading securities | 115 |
| | 121 |
| 88 |
| | 87 |
|
| Equity securities | | 2 |
| | 2 |
|
| Mortgage loans | 2,701 |
| | 2,232 |
| 3,856 |
| | 3,507 |
|
| Investment funds | 27 |
| | 26 |
| 309 |
| | 157 |
|
| Funds withheld at interest | 1,831 |
| | 1,737 |
| 4,935 |
| | 4,126 |
|
| Other investments | 73 |
| | 75 |
| 69 |
| | 70 |
|
| Total assets sub-advised by Apollo affiliates | $ | 15,245 |
| | $ | 13,996 |
| $ | 21,331 |
| | $ | 18,746 |
|
| Percent of assets sub-advised by Apollo affiliates to total AAM-managed assets | 16 | % | | 18 | % | 19 | % | | 18 | % |
During the second quarter of 2017, AAM and certain otherpays 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 retroactivemillion, subject to January 1, 2017.certain exceptions.
Asset management and sub-advisory fees—The following summarizes the asset management fees and sub-advisory fees we have incurred related to AAM and other Apollo affiliates:
| | | | Three months ended June 30, | | Six months ended June 30, | Three months ended March 31, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| Asset management fees | $ | 72 |
| | $ | 64 |
| | $ | 142 |
| | $ | 126 |
| $ | 75 |
| | $ | 70 |
|
| Sub-advisory fees | 14 |
| | 12 |
| | 27 |
| | 28 |
| 17 |
| | 13 |
|
The management and sub-advisory fees are included within net investment income on the condensed consolidated statements of income. As of June 30, 2018March 31, 2019 and December 31, 2017,2018, the management fees payable was $33$35 million and $28$34 million, respectively, and the sub-advisory fees payable was $15$16 million and $13$20 million, respectively. Both the management and sub-advisory fees payables are included in other liabilities on the condensed consolidated balance sheets.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The investment management agreements with AAM have no stated term and any party can terminate upon notice. However, ourOur bye-laws currently provide that we may not, and will cause our subsidiaries not exerciseto, terminate any investment management agreement (IMA) among us or any of our termination rights undersubsidiaries, on the agreements until October 31, 2018 orone hand, and AAM, on the other hand, before any annual anniversary thereafterof October 31 (each such date, an IMA (Investment Management Agreement) Termination Election Date) and any termination thereonon an IMA Termination Election Date requires (i) the approval of two-thirds of our Independent Directors (as defined in the bye-laws) and (ii) prior written notice thereof to ApolloAAM of such termination at least 30 days.days’ prior to an IMA Termination Election Date. If theour Independent Directors make such election to terminate and notice of such noticetermination is timely delivered, the termination will be effective on the second anniversary of the applicable IMA Termination Election Date (an IMA(IMA Termination Effective Date). Notwithstanding the foregoing, (1) the(A) except as set forth in (B) below, our Independent Directors may only elect to terminate an investment management agreement or advisory agreementIMA on an IMA Termination Election Date if two-thirds of theour 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 ApolloAAM or (ii) the fees being charged by ApolloAAM 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 ApolloAAM and Apollo shallAAM will have until the applicable IMA Termination Effective Date to address such concerns, and provided, further, that in the case of such a determination that the fees being charged by Apollo are unfair and excessive, Apollo has the right to lower its fees to match the fees of such comparable asset manager) and (2)(B) upon the determination by two-thirds of theour Independent Directors, we or our subsidiaries may also terminate an investment management agreement or advisory agreementIMA with ApolloAAM as a result of either (i) a material violation of law relating to Apollo’sAAM’s advisory business, or (ii) Apollo’sAAM’s gross negligence, willful misconduct or reckless disregard of its obligations under the relevant agreement, and in either case, (i) or (ii), the delivery of written notice 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.period (the events described in the foregoing clauses (A) and (B) are referred to in more detail in our bye-laws as “AHL Cause”).
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.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 AAM, receives substantial remuneration from acting as Chief Executive Officer of AAM, and owns a 5% profits interest in AAM. Additionally, fivesix of the thirteenfifteen members of our board of directors are employees of or consultants to Apollo (including Mr. Belardi). In order to protect against potential conflicts of interest resulting from transactions into which we have entered and will continue to enter into with the Apollo Group, our bye-laws require us to maintain a conflicts committee comprised solely of three of our directors who are not officers or employees of any member of the Apollo Group. The conflicts committee reviews and approves material transactions between us and the Apollo Group, subject to certain exceptions.
Other related party transactions
A-A Mortgage Opportunities, L.P. (A-A Mortgage) – We have an equity method investment of $436 million and $463 million as of March 31, 2019 and December 31, 2018, respectively, in A-A Mortgage, which has an investment in AmeriHome Mortgage Company, LLC (AmeriHome).AmeriHome. We have a loan purchase agreement with 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 $167$0 million and $0$44 million of residential mortgage loans under this agreement during the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively. We purchased $211 million and $1 million of residential mortgage loans under this agreement during the six months ended June 30, 2018 and 2017, respectively. Additionally, wealso have made loanscommitments to make additional equity investments in A-A Mortgage affiliates in the principal amount of $172 million and $52$169 million as of June 30, 2018March 31, 2019.
andMidCap – AAA Investment (Co Invest VII), L.P. (CoInvest VII) holds a significant investment in MidCap, which is included in investment funds of consolidated VIEs on the condensed consolidated balance sheets. We have also advanced amounts under a subordinated debt facility to Midcap and, as of March 31, 2019 and December 31, 2017,2018, the principal balance was $245 million, which is included in other related party investments on the condensed consolidated balance sheets. Our total investment in MidCap, including amounts advanced under credit facilities, was $789 million and $791 million as of March 31, 2019 and December 31, 2018, respectively. Additionally, we purchased ABS and CLO securities issued by MidCap affiliates during the three months ended March 31, 2019 and 2018 of $2 million and $62 million, respectively, and thesewhich are included in related party short-term investmentsAFS securities on the condensed consolidated balance sheets.
Athora–On January 1, 2018, in order to align our interests with those of Athora, in connection with the Closing, we entered into We have 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 beare 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 provideprovides us and our subsidiaries with a right of first refusal to pursue acquisition and reinsurance transactions in North America and the United Kingdom. Our investment in Athora, which is included in related party investment funds on the condensed consolidated balance sheets, was $124 million and $105 million as of March 31, 2019 and December 31, 2018, respectively. Additionally, as of June 30,March 31, 2019 and December 31, 2018,, we had $170$163 million and $166 million of funding agreements outstanding to Athora which were issued. We also have commitments to make additional equity investments in Athora prior to Closingof $300 million as of .March 31, 2019.
VA Capital and Venerable Holdings, Inc. (Venerable) – In connection with theour coinsurance and modco agreements with Voya reinsurance transactions,Insurance and Annuity Company (VIAC), we made a$75have an $87 million minority equity investment in VA Capital Company LLC (VA Capital), which is included in investments in related parties –party investment funds on the condensed consolidated balance sheets and accounted for as an equity method investment. VA Capital is owned by a consortium of investors, led by affiliates of AGM, Crestview Partners and Reverence Capital Partners, and is the holding company of Venerable. Additionally, we provided Venerable withhave a $150$148 million, 15-year term loan receivable from Venerable, which is held at amortized cost and included in investment in related parties –party other investments on the condensed consolidated balance sheets. It has aWhile management views the overall transactions with VIAC and Venerable as favorable to us, the stated interest rate of 6.257%, which on the term loan to Venerable represents a below-market interest rate, and management considered itsuch 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 (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. As of March 31, 2019 and December 31, 2018, we had $16 million of investments under the Strategic Partnership and these investments are classified as investment funds of consolidated VIEs.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
13.9. Commitments and Contingencies
Contingent Commitments—We had commitments to make investments, primarily capital contributions to investment funds, inclusive of related party commitments discussed previously, of $3,036$2,938 million and $2,358$3,036 million as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. We expect most of our current commitments will be invested over the next five years; however, these commitments could become due any time upon counterparty request.
Funding Agreements—We are a member of the FHLBFederal Home Loan Bank (FHLB) and, through membership, we have issued funding agreements to the FHLB in exchange for cash advances. As of June 30, 2018March 31, 2019 and December 31, 2017,2018, we had $701$926 million and $573 million, respectively, of FHLB funding agreements outstanding with the FHLB.outstanding. We are required to provide collateral in excess of the funding agreement amounts outstanding, considering any discounts to the securities posted and prepayment penalties.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
We have a funding agreement backed notes (FABN) program, which allows Athene Global Funding, a special-purpose, unaffiliated statutory trust to offer up to $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 asAs of June 30, 2018March 31, 2019 and December 31, 2017.2018, we had $2,700 million of FABN funding agreements outstanding.
Pledged Assets and Funds in Trust (Restricted Assets)—The total restricted assets included on the condensed consolidated balance sheets are as follows:
| | | (In millions) | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| Fixed maturity securities | | | | |
| AFS securities | $ | 4,452 |
| | $ | 1,572 |
| $ | 6,543 |
| | $ | 5,439 |
|
| Trading securities | 52 |
| | — |
| 277 |
| | 68 |
|
| Equity securities | 3 |
| | 36 |
| 2 |
| | 2 |
|
| Mortgage loans | 943 |
| | 914 |
| 1,967 |
| | 1,830 |
|
| Investment funds | 29 |
| | 20 |
| 56 |
| | 53 |
|
| Derivative assets | | 68 |
| | 24 |
|
| Short-term investments | 73 |
| | 10 |
| 56 |
| | 77 |
|
| Other investments | 45 |
| | — |
| 47 |
| | 47 |
|
| Restricted cash | 178 |
| | 105 |
| 497 |
| | 492 |
|
| Total restricted assets | $ | 5,775 |
| | $ | 2,657 |
| $ | 9,513 |
| | $ | 8,032 |
|
The restricted assets are primarily related to reinsurance trusts established in accordance with coinsurance agreements, and the FHLB funding agreements described above.
Letter of Credit—We have an unused letter of credit for$219 million as of March 31, 2019. This letter of credit was issued for our reinsurance program and expires by December 31, 2020.
Litigation, Claims and Assessments
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. An amended complaint was filed on December 18, 2015. The complaint asserts claims against AHL, Athene 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 wide basis. Terms of the settlement, which have been preliminarily approved by the court, 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 preliminary approval hearing is set for October 13, 2018.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Internal Revenue Service (IRS) Matters – The IRS completed its examinations of the 2006 through 2010 Aviva USA tax years with Aviva USA agreeing to all proposed adjustments 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 was 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.
Corporate-owned Life Insurance (COLI) Matter – In 2000 and 2001, two insurance companies, which were subsequently merged into AAIAAthene Annuity and Life Company (AAIA), purchased from American General Life Insurance Company (American General) broad based variable COLI policies that, as of June 30, 2018,March 31, 2019, had an asset value of $359$373 million, and is included in other assets on the condensed consolidated balance sheets. In January 2012, the COLI policy administrator delivered to AAIA a supplement to the existing COLI policies and advised that American General and ZC Resource Investment Trust (ZC Trust) had unilaterally implemented changes set forth in the supplement that if effective, would: (1) potentially negatively impact the crediting rate for the policies and (2) change the exit and surrender protocols set forth in the policies. In March 2013, AAIA filed suit against American General, ZC Trust, and ZC Resource LLC in Chancery Court in Delaware, seeking, among other relief, a declaration that the changes set forth in the supplement were ineffectual and in breach of the parties’ agreement. The parties filed cross motions for judgment as a matter of law, and the court granted defendants’ motion and dismissed without prejudice on ripeness grounds. The issue that negatively impacts the crediting rate for one of the COLI policies has subsequently been triggered and on April 3, 2018, we filed suit against the same defendants in Chancery Court in Delaware seeking substantially similar relief, which the defendants have moved to dismiss. The Court heard oral arguments on February 13, 2019 and has taken the matter under advisement. 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 $174$185 million as of June 30, 2018March 31, 2019.
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.
Regulatory MatterMatters – 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.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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.
On January 23, 2019, we received a letter from the NYSDFS, with respect to a recent pension risk transfer (PRT) transaction, which expressed concerns with our interpretation and reliance upon certain exemptions from licensing in New York in connection with certain activities performed by employees in our PRT channel, including specific activities performed within New York. We are currently in discussions with the NYSDFS to identify approaches to resolve its concerns. Reasonably possible losses, if any, cannot be estimated at this time.
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, movehas moved to dismiss the complaint. On January 21, 2019, plaintiffs filed an amended complaint, against it.which revised certain allegations about jurisdiction, venue and the merits of the plaintiffs’ claims. We have renewed our motion to dismiss and the matter is fully briefed. 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.
14.10. 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 StatesU.S. and Bermuda operations, which issue and reinsure retirement savings products and institutional products. Retirement Services has retail operations, which provide annuity retirement solutions to our policyholders. Retirement Services also has reinsurance operations, which reinsure multi-year guaranteed annuities, fixed indexed annuities, traditional one-year guarantee fixed deferred annuities, immediate annuities and institutional products from our reinsurance partners. In addition, our institutional operations, including funding agreements and pension risk transfer (PRT) obligations,group annuities, are included in our Retirement Services segment.
Corporate and Other—Corporate and Other includes certain other operations related to our corporate activities, includingactivities. Included in Corporate and Other are 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,addition, we also hold capital in excess of the level of capital we hold in Retirement Services to support our operating strategy. Prior to the deconsolidation of Athora on January 1, 2018, Corporate and Other included our German operations, which were primarily comprised of participating long-duration savings products. See Note 1 – Business, Basis of Presentation and Significant Accounting Policies for discussion on the deconsolidation of our German operations in 2018.
Financial Measures—Segment adjusted operating income is an internal measure used by the chief operating decision maker to evaluate and assess the results of our segments.
Adjusted operating revenue is a component of adjusted operating income and excludes market volatility and adjustments for other non-operating activity. Our adjusted operating revenue equals our total revenue, adjusted to eliminate the impact of the following non-operating adjustments:
Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets;
Investment gains (losses), net of offsets;
VIE expenses and noncontrolling interest; and
Other adjustments to revenues.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The table below reconciles segment adjusted operating revenues to total revenues presented on the condensed consolidated statements of income:
| | | | Three months ended June 30, | | Six months ended June 30, | Three months ended March 31, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| Retirement Services | $ | 1,868 |
| | $ | 1,254 |
| | $ | 3,125 |
| | $ | 2,142 |
| $ | 3,306 |
| | $ | 1,257 |
|
| Corporate and Other | 26 |
| | 103 |
| | 53 |
| | 171 |
| 32 |
| | 27 |
|
| Non-operating adjustments | | | | | | | | | | |
| Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets | 97 |
| | 266 |
| | (61 | ) | | 802 |
| 940 |
| | (158 | ) |
| Investment gains (losses), net of offsets | (149 | ) | | 138 |
| | (255 | ) | | 263 |
| 713 |
| | (106 | ) |
| VIE expenses and noncontrolling interest | 2 |
| | — |
| | 2 |
| | — |
| |
| Other adjustments to revenues | (47 | ) | | 2 |
| | (56 | ) | | 4 |
| (30 | ) | | (9 | ) |
| Total revenues | $ | 1,797 |
| | $ | 1,763 |
| | $ | 2,808 |
| | $ | 3,382 |
| $ | 4,961 |
| | $ | 1,011 |
|
Adjusted operating income 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 equals net income 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 to net income presented on the condensed consolidated statements of income:
| | | | Three months ended June 30, | | Six months ended June 30, | Three months ended March 31, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| Retirement Services | $ | 289 |
| | $ | 267 |
| | $ | 524 |
| | $ | 542 |
| $ | 286 |
| | $ | 239 |
|
| Corporate and Other | 1 |
| | 13 |
| | 3 |
| | 4 |
| 1 |
| | 2 |
|
| Non-operating adjustments | | | | | | | | | | |
| Investment gains (losses), net of offsets | (74 | ) | | 58 |
| | (107 | ) | | 115 |
| 458 |
| | (33 | ) |
| Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets | 75 |
| | 15 |
| | 170 |
| | 109 |
| (27 | ) | | 86 |
|
| Integration, restructuring and other non-operating expenses | (8 | ) | | (11 | ) | | (16 | ) | | (20 | ) | (1 | ) | | (8 | ) |
| Stock-based compensation, excluding LTIP | (2 | ) | | (13 | ) | | (5 | ) | | (23 | ) | (3 | ) | | (3 | ) |
| Income tax (expense) benefit – non-operating | (17 | ) | | (3 | ) | | (37 | ) | | (17 | ) | (6 | ) | | (6 | ) |
| Net income | $ | 264 |
| | $ | 326 |
| | $ | 532 |
| | $ | 710 |
| $ | 708 |
| | $ | 277 |
|
The following represents total assets by segment:
| | | (In millions) | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| Total assets by segment | | | | |
| Retirement Services | $ | 111,512 |
| | $ | 91,335 |
| $ | 130,965 |
| | $ | 123,498 |
|
| Corporate and Other | 3,243 |
| | 8,412 |
| 1,892 |
| | 2,007 |
|
| Total assets | $ | 114,755 |
| | $ | 99,747 |
| $ | 132,857 |
| | $ | 125,505 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a leading retirement services company that issues, reinsures and acquires retirement savings products designed for the increasing number of individuals and institutions seeking to fund retirement needs. We generate attractive financial results for our policyholders and shareholders by combining our two core competencies of (1) sourcing long-term, generally illiquid liabilities and (2) investing in a high-quality investment portfolio, which takes advantage of the illiquid nature of our liabilities. Our steady and significant base of earnings generates capital that we opportunistically invest across our business to source attractively-priced liabilities and capitalize on opportunities. 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 around the world, as well as Apollo’s global asset management infrastructure that supports 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’ 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 June 30, 2018,March 31, 2019, have an expected Retirement Services annual net investment marginspread, which measures our investment performance less the total cost of 2-3%our liabilities, of 1–2% over the 8.29.6 year weighted-average life of our deferred annuities, which make up a substantial portion of our reserve liabilities. As of June 30, 2018, theThe weighted-average life of all products, which includes deferred annuities, PRT group annuities, funding agreements, payout annuities PRT obligations, funding agreements and other products, was 9.0 years.
We are diligent in setting our return targets based on market conditions and risks inherent to our products offered and acquisitions or block reinsurance transactions. Specific return targets are established with due consideration to the facts and circumstances surrounding each growth opportunity and may be higher or lower than those that we 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 to a product or transaction create return profiles that are not acceptableto us, we generally will not sacrifice our profitability merely to facilitate growth.products.
We operate our core business strategies out of one reportable segment, Retirement Services. In addition to Retirement Services, we report certain other operations in Corporate and Other. Retirement Services is comprised of our U.S. and Bermuda operations which issue and reinsure retirement savings products and institutional products. Corporate and Other includes certain other operations related to our corporate activities and previously included our former German operations, which were primarily comprised of participating long-duration savings products.activities.
Our consolidated annualized ROE for the sixthree months ended June 30, 2018March 31, 2019 and the year ended December 31, 20172018 was 12.4%30.8% and 18.0%12.1%, respectively, and our consolidated annualized adjusted operating ROE was 12.9%12.8% and 15.8%13.9%, respectively. As a result of our focus on issuing, reinsuring and acquiring attractively-priced liabilities, our differentiated investment strategy and our significant scale, forFor the sixthree months ended June 30, 2018March 31, 2019 and the year ended December 31, 2017,2018, in our Retirement Services segment, we generated an annualized net investment spread of 1.36% and 1.70%, respectively, and an annualized adjusted operating ROE of 14.4% and 18.4%, respectively. Our Retirement Services segment generated an annualized investment margin on deferred annuities of 2.79%2.23% and 2.82%, respectively,2.65% for the three months ended March 31, 2019 and annualized adjusted operating ROEthe year ended December 31, 2018, respectively. As of 18.0%March 31, 2019, our deferred annuities had a weighted-average life of 9.0 years and 22.5%, respectively.made up a significant portion of our reserve liabilities. We currently maintain what we believe to be high capital ratios for our rating and, as of June 30, 2018,March 31, 2019, hold approximately $2.0$1 billion of excess capital, andwhich we view this excess as strategic capital available to reinvest into organic and inorganic growth opportunities.
The following table presents the deposits generated from our organic and inorganic channels:
|
| | | | | | | |
| | Three months ended March 31, |
| (In millions) | 2019 | | 2018 |
| Retail sales | $ | 1,816 |
| | $ | 1,286 |
|
| Flow reinsurance | 1,020 |
| | 204 |
|
| Funding agreements | — |
| | 300 |
|
| Pension risk transfer | 1,923 |
| | 266 |
|
| Total organic deposits | 4,759 |
| | 2,056 |
|
| Inorganic deposits | — |
| | — |
|
| Total deposits | $ | 4,759 |
| | $ | 2,056 |
|
Our organic channels, including retail, flow reinsurance and institutional products, provided deposits of $4.7$4.8 billion and $5.1$2.1 billion forin the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, respectively. Withdrawals on our deferred annuities, maturities of our funding agreements, payments on payout annuities and pension risk benefit payments (collectively, liability outflows), in the aggregate, were $3.6$2.8 billion and $3.1$1.8 billion for the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, respectively. We believe that our improving credit profile, our current product offerings 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 grow our existing organic channels and allow us to source additional volumes of profitably underwritten liabilities in various market environments.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We plan to continue to grow organically by expanding each of our retail, flow reinsurance and institutional distribution channels. We believe that we have the right people, infrastructure and scale to position us for continued growth.
Within our retail channel, we had fixed annuity sales of $3.4$1.8 billion and $2.7$1.3 billion for the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, respectively. The increase in our retail channel was driven by significant growth in our bank channel andincluding 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 70 Independent Marketing Organizations55 independent marketing organizations (IMO) and; more than 38,00040,000 independent agents.agents; and our growing network of 10 small and mid-sized banks and 79 regional broker-dealers. Our strong financial position and capital efficient products allow us to be a dependable partnerpartners with IMOs, banks and broker-dealers as well as 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 tobroker-dealer channels. We have recently implemented a new distribution channels, including small to mid-sized banks and regional broker-dealers. We are implementing the necessary technology platform for our retail business and continue to expand our capabilities. Additionally, we focus on hiring and training a specialized sales force and have createdcontinuously create products to capture new potential distribution opportunities.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 $677 million$1.1 billion and $380$204 million for the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, respectively. The increase in our flow reinsurance channel was driven by the addition of new partners, new product launches by our partners and the rising rate environment. As we continue to source additional reinsurance partners, we expect to further diversify our flow reinsurance channel andWe expect that our improving credit profile will help us attractcontinue to source additional reinsurance partners. partners, which will further diversify our flow reinsurance channel.
Within our institutional channel, we generated deposits of $745$1.9 billion and $566 million and $2.0 billion for the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, respectively. The decreaseincrease in our institutional channel is driven by higher PRT deposits. During the unfavorable market conditions for funding agreements. We issued funding agreements in the aggregate principal amount of $425 million and $1.7 billion for the sixthree months ended June 30, 2018 and 2017, respectively. During the six months ended June 30, 2018,March 31, 2019, we closed two PRT transactions and issued group annuity contracts in the aggregate principal amount of $320 million,$1.9 billion, compared to $327$266 million during the three months ended March 31, 2018. Unfavorable market conditions have limited our issuances of funding agreements. We issued funding agreements in 2017.the aggregate principal amount of $0 million and $300 million for the three months ended March 31, 2019 and 2018, respectively. We expect to grow our institutional channel by continuing to engage in PRT transactions and opportunistic issuances of funding agreements and by continuing to engage in PRT transactions.agreements.
Our inorganic channels, including acquisitionschannel has contributed significantly to our growth and in 2018, we generated $27.0 billion of deposits driven by two block reinsurance provided deposits of $19.1 billion for the six months ended June 30, 2018.transactions. On June 1, 2018, we closed on the Voya reinsurance transaction pursuant to which we entered into coinsurance and modco agreements with VIAC and RLIReliaStar Life Insurance Company (RLI) to reinsure a block of fixed and fixed indexed annuities providing $19.1 billion of deposits. On December 7, 2018, we entered into a modified coinsurance agreement with Lincoln, with an effective date of October 1, 2018, to reinsure an 80% quota share of fixed deferred and fixed indexed annuities providing $7.9 billion of deposits. Our inorganic channels have contributed significantly to our growth.growth, and we expect that these channels will continue to be important sources of profitable growth in the future. We believe our internal acquisitionstransactions 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 a competitive counterparty for acquisition or block reinsurance transactions.
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 Policiesideal partner to the condensed consolidated financial statements for further details of the deconsolidation of our German operations. The deconsolidation of Athora decreased our total assets by $6.3 billion and our invested assets by $6.0 billion. The impact of this deconsolidation has an effect on the comparability of our historical results and therefore historical discussions of changes between periods are not necessarily indicative of future results. To enhance the comparability of our June 30, 2018 and 2017 results, we highlight the financial results applicableinsurance companies seeking to the deconsolidation of Athora where meaningful. As of and after January 1, 2018, our investment in Athora is reflected as an alternative investment.restructure their business.
Industry Trends and Competition
Market Conditions
WhileAfter its March meeting, the U.S. Federal Reserve has continuedbrought its processtightening monetary policy to an end, while also abandoning projections of policyany future rate normalization, longer dated interest Treasury yields have risen, but not in step with shorter term rates, and as a consequence,hikes for the yield curve has flattened notablycurrent year. Additionally, over the past twelve months.last few months, the ongoing flattening of the Treasury curve at one point gave way to a curve inversion. Whether signaling low long-term inflation expectations, or a coming curve inversion,an impending recession, or simply due to supply dynamics in the global search for asset yield, the level of longer dated Treasury yields affects the yield that 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 levels of global trade, the future path of the Federal Reserve’s quantitative tightening or easing, along with uncertainty about the Federal Reserve’s ability to manage its normalization process and the impact on inflation and wage growth, may trigger continued volatility across financial markets. Volatility, as seen recently in themarkets, and specifically equity markets,market volatility, which may adversely affect the hedging costs of our liability policy hedging program. Credit market volatility, which may widen credit spreads, benefits our investment purchases but may negatively affect the valuations of our in-force investment portfolio.
A volatile market environment may affect our ability to produce liability products that are profitable, have theour desired risk profile, to the company, and be desired byare desirable to consumers. As a company with strong retirement, investment management and insurance capabilities, we expect that over the long term, market conditions resulting in higher Treasury yields and credit spreads will enhance the attractiveness of our portfolio of annuity products. We continue to monitor the behavior of our customers and other factors whichthat react to market conditions, including mortality rates, morbidity rates, annuitization rates and lapse rates, in order to best serve our customers and generate strong profitability to our shareholders.
Item 2. Management’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 theThe Federal Reserve increasing federal fundsdid not increase rates again in JuneMarch and also changed expectations of 2018, interesta further increase for the current year. 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 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 $17.3$20.2 billion of floating rate investments, or 18% of our total invested assets as of June 30, 2018.March 31, 2019. The percentage of floating rate investments decreasedincreased from December 31, 2017,2018 due to the redeployment of the Lincoln reinsurance investment portfolio, received in the Voya reinsurance transaction having a lower proportionas well as block growth.
Item 2. Management’s Discussion and a refinement in our definition to include only short duration securities that are directly tied or linked to an index. As partAnalysis of our reinvestment strategy for the investment portfoliosFinancial Condition and Results of 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.Operations
If prevailing interest rates were to rise, we believe our products would be more attractive to consumers and our sales would likely increase. In periods of prolonged low interest rates, the net investment margin earned on deferred annuitiesspread 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 June 30, 2018,March 31, 2019, most of our products were fixed annuities with 27%24% of our FIAs at the minimum guarantees and 52%45% of our fixed rate annuities at the minimum crediting rates. As of June 30, 2018,March 31, 2019, minimum guarantees on all of our deferred annuities, including those with crediting rates already at their minimum guarantees, were, on average, 90100 to 100110 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 20172018 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. 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Competition
We operate in highly competitive markets. We face a variety of large and small industry participants, including diversified financial institutions and insurance and reinsurance companies. These companies compete in one form or another for the growing pool of retirement assets driven by a number of external factors such as the continued aging of the population and the reduction in safety nets provided by governments and private employers. In the markets in which we operate, scale and the ability to provide value-added services and build long-term relationships are important factors to compete effectively. We believe that our leading presence in the retirement market, diverse range of capabilities and broad distribution network uniquely position us to effectively serve consumers’ increasing demand for retirement solutions, particularly in the FIA market.
According to LIMRA, total fixed annuity market sales in the United States were $27.2$133.5 billion for the three monthsyear ended MarchDecember 31, 2018. LIMRA made adjustments to its fixed annuity sales estimate and the updated total fixed annuity market sales in the United States were $27.1 billion for the three months ended March 31,2018, a 26.8% increase over 2017. The increase in fixed annuity market sales in 2018 compared to 2017 was driven by an increase in FIA products of $1.4 billion, or 10.7% over prior year, offset by a decrease in traditional fixed rate deferred annuities of $1.4 billion, or 13.9% over prior year. In the total fixed annuity market, for the three monthsyear ended MarchDecember 31, 2018 (the most recent period for which specific market share data is available), we were the 5th largest company based on sales withof $7.5 billion, translating to a 4.7%5.6% market share and $1.3 billion in sales.share. For the three monthsyear ended MarchDecember 31, 2017, our market share was 4.1%5.1% with sales of $1.1$5.4 billion.
FIAs have been one of the fastest growing annuity products, having grown from $27.3 billion in sales for the year ended December 31, 2005 to $57.6$69.6 billion in sales for the year ended December 31, 2017.2018. According to LIMRA data, for the three monthsyear ended MarchDecember 31, 2018 (the most recent period for which specific market share data is available), we were the 2nd largest provider of FIAs in termsbased on sales of sales,$6.6 billion, and our market share for the same period was 8.3% with9.4%. For the year ended December 31, 2017, we were the 2nd largest provider of FIAs based on sales of $1.2 billion. For the three months ended March 31, 2017, our$4.9 billion, translating to an 8.8% market share was 7.7% with sales of $1.0 billion.share.
RegulatoryRecent Developments
We continueIn order to face material uncertainty regardingenhance our capital position and further support our stated business objectives, including continued profitable organic growth, acting as a solutions provider in the ultimate impacts of tax reform to our business. On December 22, 2017, President Trump signed the Tax Act into law, which introduced significant changes to the Internal Revenue Code. While our expectations may be subject to change as we continue to evaluate the impactrestructuring of the Tax Act onfixed annuity industry, maintaining capital for opportunistic investment, pursuing ratings upgrades and facilitating the repurchase of our business,common shares at attractive returns, we expect that ALRe would enter into a framework agreement (the Framework Agreement) with Athene Co-Invest Reinsurance Affiliate 1A Ltd. (ACRA). Under 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,Framework Agreement and related transaction documents, ACRA would receive capital commitments from ALRe and funds referred to as the BEAT,Apollo/Athene Dedicated Investment Program (ADIP), which taxes modified taxable income atare managed by AGM. Entry into the Framework Agreement and related agreements are subject to ADIP’s continuing private fundraising efforts and final approvals from a ratespecial committee of 5% beginningour board of directors, acting under authority granted by our board of directors.
For a period expiring approximately three years following the one-year anniversary of the first ADIP fund closing (subject to two one-year extension periods by ADIP, the Commitment Period), ACRA would have the right to participate (through itself or other legal entities formed pursuant to the Framework Agreement for purposes of entering into such transactions) in 2018, increasing to 10% in 2019any legal entity acquisition transactions, third-party block reinsurance transactions and 12.5% in 2026. In general, modified taxable income is calculated by adding back topension risk transfer transactions involving a taxpayer’s regular taxable income thesizable amount of certain “base erosion tax benefits” with respect to payments to foreign affiliates,liabilities, as well as certain flow reinsurance transactions with third-party counterparties (each, a Qualifying Transaction). ALRe would be permitted to offer ACRA the “base erosion percentage” of any net operating loss deductions. The BEAT applies onlyright 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.participate in other smaller acquisitions, block 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, to the extent that any such premiums are paid.
Within the context of affiliated modco arrangements, which is how much of our internal reinsurance is structured,and pension risk transfer transactions, and it is our beliefanticipated that all such transactions would be offered to ACRA for the BEAT was generally intendedforeseeable future. ALRe may also offer ACRA the right to require the add back of the net amount paid or accrued by our U.S. subsidiaries to our non-U.S.participate in flow 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, we have begun to take actions that would allow us to mitigate the potential effect of the BEAT on our results of operations should the BEAT apply on a gross basis. Our overall tax rate will depend on the ultimate interpretation of the Tax Act and the actions that we take. We currently expect that, absent any further mitigating efforts, our overall tax rate will be between 14–15%, on average, of each of pre-tax income and pre-tax adjusted operating income; however, we may experience significant fluctuations in the overall tax rate as a percentage of pre-tax income from period-to-period,transactions with certain periods falling outside of our expected range. In addition, we are undertaking certain additional actions and exploring various alternatives intended to further mitigate the potential effect of the BEAT on our results of operations. If these actions are successful, we expect our overall tax rate will be more in line with our overall tax rate prior to the enactment of the Tax Act of approximately 11%, on average, of each of pre-tax income and pre-tax adjusted operating income, with significant fluctuations in the overall tax rate as a percentage of pre-tax income, as discussed above.
The estimated future overall tax rates presented above incorporate various assumptions and actual results may vary. See Item 1A. Risk Factors–Our business, financial condition, liquidity, results of operations and cash flows depend on the accuracy of our management’s assumptions and estimates, and we could face significant losses if these assumptions and estimates differ significantly from actual results–BEAT Mitigating Actions and Item 1A. Risk Factors–Risks Relating to Taxation–The BEAT may significantly increase our tax liability and our efforts to mitigate the cost of the BEAT may be unnecessary, inefficient, ineffective, or counterproductive, each included in Part II of this report.
existing
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Risk-based capital—In its meeting held on June 28, 2018,third-party counterparties and reinsurance transactions involving new funding agreements from time to time, subject to certain conditions. ACRA’s election to participate in Qualifying Transactions would be determined by the NAIC Capital Adequacy Task Force approved updates toTransaction Committee of ACRA, which would be a committee of the RBC factors to reflect the change in the corporate income tax rate from 35% to 21% resulting from the Tax Act. With the change in RBC factors,board of directors of ACRA comprised of our RBC ratios, along withrepresentatives and those of AGM. If ACRA elects not to participate in a Qualifying Transaction, we would have the right to pursue the Qualifying Transaction without ACRA. ACRA’s right to participate in Qualifying Transactions would be subject to capital requirements and other fixed annuity writersterms and life insurersconditions.
ACRA would be jointly owned (directly or indirectly) by ALRe and ADIP. It is expected that ALRe would hold shares representing 100% of the voting power and 33% of the economic interests in general, areACRA and that ADIP would hold non-voting shares representing the remaining 67% of the economic interests in ACRA. These economic ownership percentages have been sized based on our current and expected to decrease. Ifcapital position during the changes were applied toCommitment Period, after considering the full array of our RBC ratios as of June 30, 2018, we estimate a minimal decrease to our onshore U.S. RBC ratiogrowth and approximately 12% decrease to our offshore ALRe RBC ratio. Our capital ratios under the various rating agency models are notobjectives. ACRA is expected to be materially impactedour consolidated subsidiary and managed consistent with our operating model and environment for all of our subsidiaries.
In connection with each transaction in which ACRA elects to participate (each, a Participating Transaction), subject to the applicable terms and conditions of the Framework Agreement and related transaction documents, ACRA would pay ALRe a fee (Wrap Fee) expected to be approximately 15 basis points per annum multiplied by the change in tax rate, and those models are an important consideration in determiningtotal reserves with respect to the appropriate levels of capital to run our business. Our initial assessmentassumed or acquired business, under a schedule where the Wrap Fee increases from 10 basis points as business assumed or acquired by ACRA increases.
In general, (a) on the 10th anniversary of the leveleffective date of capital that we deem appropriate to run our business has not been impacted materially byany Participating Transaction (other than a flow reinsurance transaction) or (b) on the change in tax rate.
Target returns—The Tax Act may cause a reduction10th anniversary of the returnsdate on which reinsurance is terminated as to new business under any Participating Transaction that we realize on our in-force business, depending onis a flow reinsurance transaction (which would occur no later than the success of our mitigating actions. See Part II–Item 1A. Risk Factors–Risks Relating to Taxation–The BEAT may significantly increase our tax liability and our efforts to mitigate the costend of the BEAT may be unnecessary, inefficient, ineffective,Commitment Period), ALRe or counterproductive forits applicable affiliate would have the right (Commutation Right) to terminate ACRA’s participation in such Participating Transaction based on a discussion regarding the mitigating actions being undertaken.
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 bebook value pricing mechanism and subject to U.S. federal income taxation at ordinary income rates on our undistributed earningsADIP achieving a minimum return with respect to such Participating Transaction. If ALRe does not exercise the Commutation Right with respect to a Participating Transaction, then ACRA’s obligation to pay the Wrap Fee in connection with such Participating Transaction would terminate, and, profits, adoptionsubject to certain exceptions (and the applicable terms and conditions of the Tax Act resultedFramework Agreement and related transaction documents), ALRe would be required to pay ACRA a fee calculated in certain changes affecting the determinationsame manner as the Wrap Fee. In addition, if ACRA fails to whether an entity constitutes a Controlled Foreign Corporation (CFC). Being treated as a CFC couldsatisfy minimum aggregate capital requirements, ALRe would have adverse tax consequencesthe right to certain of our shareholders. To reduce the likelihood of such a result, we have restructured certainrecapture or assign to another of our subsidiaries so that Athene USA, our U.S. holding company subsidiary, is now a wholly owned subsidiaryportion of ALRe.
the business retroceded to ACRA (and/or any of its insurance or reinsurance subsidiaries) to the extent necessary to cure such failure.
Other provisionsALRe currently retrocedes, and following any sale by ALRe of an economic interest in ACRA to ADIP would continue to retrocede, to ACRA 100% of approximately $8 billion of certain fixed deferred and fixed indexed annuities. In connection with future Participating Transactions, ACRA would draw from ADIP and from ALRe their respective share of the Tax Act could significantly increaseamount of capital necessary to consummate such Participating Transactions.
ACRA is expected to have a board of directors comprised of eleven directors (the ACRA Board). ALRe would be permitted to nominate seven directors to serve on the tax liabilityACRA Board: (i) one would be the Chairman, (ii) one would be a representative of AGM, (iii) one would be our representative, (iv) two would be representatives of AGM or us and (v) two would be independent directors. ADIP would be permitted to nominate the other four directors to serve on the ACRA Board.
In addition, ACRA is expected to agree to pay a monthly fee to AAM for asset management services in an amount equal to the marginal base investment management fees and sub-advisory fees we expect to pay to AAM following the approval of such fees by our shareholders, as more fully described in “Proposal 9: Approval of the Twelfth Amended and Restated Bye-laws of the Company–IMA Termination Provisions” of our U.S. subsidiaries in future tax periods by accelerating items of income or deferring deductions. Althoughdefinitive proxy statement filed with the acceleration of an item of income or deferral of a deduction in one tax period allows a taxpayer to recognize less taxable income in a future period, there can be no assurance that we will be able to utilize any resulting deferred tax assets in future tax periods.
The foregoing represents our current expectations of certain of the effects of the Tax Act and may be subject to change as additional guidance is made available and as we continue to evaluate the effect of this legislationSecurities Exchange Commission on our business. See Part II–Item 1A. Risk Factors–Risks Relating to Taxation for further information on how the Tax Act could impact us.April 22, 2019.
Key Operating and Non-GAAP Measures
In addition to our results presented in accordance with GAAP, our results of operations includewe present certain financial information that includes non-GAAP measures commonly used in our industry.measures. Management believes the use of these non-GAAP measures, together with the relevant GAAP measures, provides information that may enhance an investor’s understanding of our results of operations and the underlying profitability drivers of our business. The majority of these non-GAAP measures are intended to remove from the results of operations the impact of market volatility (other than with respect to alternative investments) as well as integration, restructuring and certain other expenses which are not part of our underlying profitability drivers, or likely to re-occur in the foreseeable future, as such items fluctuate from period to period in a manner inconsistent with these drivers. These measures should be considered supplementary to our results in accordance with GAAP and should not be viewed as a substitute for the corresponding GAAP measures. See Non-GAAP Measure Reconciliations for the appropriate reconciliations to the corresponding GAAP measures.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Adjusted Operating Income
Adjusted operating income 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 equals net income 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 withheldfair value of reinsurance embedded derivatives,assets, 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 OTTIother-than-temporary impairment (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-linked reserves related to the corresponding trading securities. Investment gains and losses are net of offsets related to DAC, DSI, and VOBA amortization and changes to guaranteed lifetime withdrawal benefit (GLWB) and guaranteed minimum death benefitsbenefit (GMDB) reserves (together, GLWB and GMDB reserves represent rider reserves) as well as the MVAs market value adjustments (MVA) associated with surrenders or terminations of contracts.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Change in Fair Values of Derivatives and Embedded Derivatives – FIAs, Net of Offsets—Impacts related to the fair value accounting for derivatives hedging the FIA index credits and the related embedded derivative liability fluctuatefluctuations from period to period. The index reserve is measured at fair value for the current period and all periods beyond the current policyholder index term. However, the FIA hedging derivatives are purchased to hedge only the current index period. Upon policyholder renewal at the end of the period, new FIA hedging derivatives are purchased to align with the new term. The difference in duration between the FIA hedging derivatives and the index credit reserves creates a timing difference in earnings. This timing difference of the FIA hedging derivatives and index credit reserves is included as a non-operating adjustment, net of offsets related to DAC, DSI, and VOBA amortization and changes to rider reserves.
We primarily hedge with options that align with the index terms of our FIA products (typically 1–2 years). From an economic basis, we believe this is suitable because policyholder accounts are credited with index performance at the end of each index term. However, because the “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 acquisitions and block reinsurance costs as well as certain other expenses which are not part ofrelated to our core operationsunderlying profitability drivers or likely to re-occur in the foreseeable future.
Stock Compensation Expense—Stock compensation expenses associated with our share incentive plans, excluding our long termlong-term incentive plan, are not part ofrelated to our core operating expensesunderlying profitability drivers 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 withrelated to our core operations.underlying profitability drivers.
Income TaxesTax (Expense) Benefit – Non-operating—The non-operating income tax expense represents the income tax effect of non-operating adjustments and is comprised ofcomputed by applying the appropriate jurisdiction’s tax rate applied to the non-operating adjustments that are subject to income tax.
We consider these non-operating adjustments to be meaningful adjustments to net income for the reasons discussed in greater detail above. Accordingly, we believe using a measure which excludes the impact of these items is effectiveuseful in analyzing our business performance and the trends in our results of operations. Together with net income, we believe adjusted operating income, provides a meaningful financial metric that helps investors understand our underlying results and profitability. Adjusted operating income should not be used as a substitute for net income.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Adjusted ROE, Adjusted Operating ROE and Adjusted Net Income
Adjusted ROE, adjusted operating ROE and adjusted net income are non-GAAP measures used to evaluate our financial performance excluding the impacts of AOCI and the cumulative change in fair value of funds withheld and modco reinsurance unrealized gains and losses,assets, 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 the cumulative change in fair value of funds withheld and modco reinsurance unrealized gains and losses.assets. 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 the change in fair value of funds withheld and modco reinsurance unrealized gains and losses,assets, 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 reinvestedExcept with respect to reinvestment activity relating to acquired blocks of businesses, we typically buy and hold AFS investments to maturity throughout the duration of market fluctuations, therefore, the period-over-period impacts in unrealized gains and losses are not necessarily indicative of current adjusted operating fundamentals or future performance. Accordingly, we believe using measures which exclude AOCI and the cumulative change in fair value of funds withheld and modco reinsurance unrealized gains and lossesassets are useful in analyzing trends in our operating results. To enhance the ability to analyze these measures across periods, interim periods are annualized. Adjusted ROE, adjusted operating ROE and adjusted net income should not be used as a substitute for ROE and net income. However, we believe the adjustments to equity are significant to gaining an understanding of our overall results of operations.financial performance.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Adjusted Operating Earnings Per Share, Weighted Average Shares Outstanding – Adjusted Operating and Adjusted Book Value Per Share
Adjusted operating earnings per share, weighted average shares outstanding – adjusted operating and adjusted book value per share are non-GAAP measures used to evaluate our financial performance and financial condition. The non-GAAP measures adjust the number of shares included in the corresponding GAAP measures to reflect the conversion or settlement of all shares and other stock-based awards outstanding. We believe using these measures represents an economic view of our share counts and provides a simplified and consistent view of our outstanding shares. Adjusted operating earnings per share is calculated as the adjusted operating income, over the weighted average shares outstanding – adjusted operating. Adjusted book value per share is calculated as the adjusted shareholders’ equity divided by the adjusted operating 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 payment of the conversion price. In calculating Class A diluted earnings per share on a GAAP basis, we are required to apply sequencing rules to determine the dilutive impacts, if any, of our Class B common shares, Class M common shares and any other stock-based awards. To the extent our Class B common shares, Class M common shares and/or any other stock-based awards are not dilutive, after considering the dilutive effects of the more dilutive securities in the sequence, they are excluded. Weighted average shares outstanding – adjusted operating and adjusted operating common shares outstanding assume conversion or settlement of all outstanding items that are able to be converted to or settled in Class A common shares, including the impacts of Class B common shares on a one-for-one basis, the impacts of all Class M common shares net of the conversion price and any other stock-based awards, but excluding any awards for which the exercise or conversion price exceeds the market value of our Class A common shares on the applicable measurement date. For certain historical periods, Class M shares were not included due to issuance restrictions which were contingent upon our IPO. Adjusted operating earnings per share, weighted average shares outstanding – adjusted operating and adjusted book value per share 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 conditioncapital structure excluding the impacts of AOCI and the cumulative change in fair value of funds withheld and modco reinsurance unrealized gains and losses,assets, net of DAC, DSI, rider reserve and tax offsets. Adjusted debt to capital ratio is calculated as total debt excluding consolidated VIEsvariable interest entities (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 total debt and shareholders’ equity are significant to gaining an understanding of our overall results of operationscapitalization, debt utilization, and financial condition.debt capacity.
Retirement Services Net Investment Earned Rate, Cost of Crediting andSpread, Investment Margin on Deferred Annuities and Operating Expenses
Investment marginNet investment spread is a key measurement of the financial health of our Retirement Services core deferred annuities. Investment margin onprofitability. Net investment spread measures our deferred annuities is generated frominvestment performance less the excesstotal cost of our net investment earned rate over the cost of crediting to our policyholders.liabilities. Net investment earned rate is a key measure of our investment returns andperformance, while cost of creditingfunds is a key measure of the cost of our policyholder benefits and liabilities. Investment margin on our deferred annuities. annuities measures our investment performance less the cost of crediting for our deferred annuities, which make up a significant portion of our reserve liabilities.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net investment earned rate is a non-GAAP measure we use to evaluate the performance of our 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 fair value of reinsurance embedded derivatives.assets. We include the income and assets supporting our assumedchange in fair value of reinsurance assets by evaluating the underlying investments of the funds withheld at interest receivables and we include the net investment income from those underlying investments which does not correspond to the GAAP presentation of change in fair value of reinsurance embedded derivatives.assets. We exclude the income and assets supporting business that we have exited through ceded reinsurance including funds withheld agreements. We believe the adjustments for reinsurance provide a net investment earned rate on the assets for which we have economic exposure.
Cost of funds includes liability costs related to cost of crediting on both deferred annuities and institutional products as well as other liability costs. Cost of funds is computed as the total liability costs divided by the average invested assets for the relevant period. To enhance the ability to analyze these measures across periods, interim periods are annualized.
Cost of crediting includes the costs for both deferred annuities and institutional products. Cost of crediting on deferred annuities is the interest credited to the policyholders on our fixed strategies as well as the option costs on the indexed annuity strategies. With respect to FIAs, the cost of providing index credits includes the expenses incurred to fund the annual index credits, and where applicable, minimum guaranteed interest credited. TheCost of crediting on institutional products is comprised of PRT costs including interest credited, benefit payments and other reserve changes, net of premiums received when issued, as well as funding agreement costs including the interest payments and other reserve changes. Cost of crediting is computed as the cost of crediting for deferred annuities and institutional products divided by the average invested assets for the relevant periods. Cost of crediting on deferred annuities is computed as the interest credited on fixed strategies and option costs on indexed annuity strategies are divided by the average account value of our deferred annuities. Cost of crediting on institutional products is computed as the PRT and funding agreement costs divided by the average institutional reserve liabilities. Our average invested assets, account values and institutional reserve liabilities are averaged over the number of quarters in the relevant period to obtain our associated cost of crediting for such period. To enhance the ability to analyze these measures across periods, interim periods are annualized.
Other liability costs include DAC, DSI and VOBA amortization, change in rider reserves, the cost of liabilities on products other than deferred annuities and institutional products, excise taxes, premiums, product charges and other revenues. We believe a measure like other liability costs is useful in analyzing the trends of our core business operations and profitability. While we believe other liability costs is a meaningful financial metric and enhances our understanding of the underlying profitability drivers of our business, it should not be used as a substitute for total benefits and expenses presented under GAAP.
Net investment earned rate, cost of creditingfunds, net investment spread 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 85% of our Retirement Services reserve liabilities as of June 30, 2018. We believe measures like net investment earned rate, cost of crediting and investment margin on deferred annuitiesthese metrics are effectiveuseful in analyzing the trends of our core business operations, profitability and pricing discipline. While we believe net investment earned rate, costeach of crediting and investment margin on deferred annuitiesthese metrics are meaningful financial metrics and enhance our understanding of the underlying profitability drivers of our business, they should not be used as a substitute for net investment income, and interest sensitive contract benefits or total benefits and expenses presented under GAAP.
Item 2. Management’s Discussionour core business operations and Analysisprofitability. While we believe operating expenses is a meaningful financial metric and enhances our understanding of Financial Conditionthe underlying profitability drivers of our business, it should not be used as a substitute for policy and Results of Operations
other operating expenses presented under GAAP.
Invested Assets
In managing our business we analyze invested assets, which dodoes not correspond to total investments, including investments in related parties, as disclosed in our consolidated financial statements and notes thereto. Invested assets representrepresents the investments that directly back our policyholderreserve 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 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’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 June 30, | | Six months ended June 30, |
| (In millions, except percentages) | 2018 | | 2017 | | 2018 | | 2017 |
| Revenues | $ | 1,797 |
| | $ | 1,763 |
| | $ | 2,808 |
| | $ | 3,382 |
|
| Benefits and expenses | 1,467 |
| | 1,426 |
| | 2,151 |
| | 2,639 |
|
| Income before income taxes | 330 |
| | 337 |
| | 657 |
| | 743 |
|
| Income tax expense (benefit) | 66 |
| | 11 |
| | 125 |
| | 33 |
|
| Net income | $ | 264 |
| | $ | 326 |
| | $ | 532 |
| | $ | 710 |
|
| | | | | | | | |
| Net income | $ | 264 |
| | $ | 326 |
| | $ | 532 |
| | $ | 710 |
|
| Non-operating adjustments | | | | | | | |
| Realized gains (losses) on sale of AFS securities | 11 |
| | 24 |
| | 28 |
| | 35 |
|
| Unrealized, impairments and other investment gains (losses) | 10 |
| | (15 | ) | | 16 |
| | (12 | ) |
| Assumed modco and funds withheld reinsurance embedded derivatives | (129 | ) | | 65 |
| | (207 | ) | | 133 |
|
| Offsets to investment gains (losses) | 34 |
| | (16 | ) | | 56 |
| | (41 | ) |
| Investment gains (losses), net of offsets | (74 | ) | | 58 |
| | (107 | ) | | 115 |
|
| Change in fair values of derivatives and embedded derivatives – FIAs, net of offsets | 75 |
| | 15 |
| | 170 |
| | 109 |
|
| Integration, restructuring and other non-operating expenses | (8 | ) | | (11 | ) | | (16 | ) | | (20 | ) |
| Stock compensation expense | (2 | ) | | (13 | ) | | (5 | ) | | (23 | ) |
| Income tax (expense) benefit – non-operating | (17 | ) | | (3 | ) | | (37 | ) | | (17 | ) |
| Less: Total non-operating adjustments | (26 | ) | | 46 |
| | 5 |
| | 164 |
|
| Adjusted operating income | $ | 290 |
| | $ | 280 |
| | $ | 527 |
| | $ | 546 |
|
| | | | | | | | |
| Adjusted operating income by segment | | | | | | | |
| Retirement Services | $ | 289 |
| | $ | 267 |
| | $ | 524 |
| | $ | 542 |
|
| Corporate and Other | 1 |
| | 13 |
| | 3 |
| | 4 |
|
| Adjusted operating income | $ | 290 |
| | $ | 280 |
| | $ | 527 |
| | $ | 546 |
|
| | | | | | | | |
| ROE | 12.3 | % | | 16.4 | % | | 12.4 | % | | 18.7 | % |
| Adjusted ROE | 17.5 | % | | 16.2 | % | | 16.6 | % | | 18.4 | % |
| Adjusted operating ROE | 14.2 | % | | 16.2 | % | | 12.9 | % | | 16.2 | % |
We operate our core business strategies out of one reportable segment, Retirement Services. In addition to Retirement Services, we report certain other operations in Corporate and Other. See Results of Operations by Segment for further detail on the results of the segments. |
| | | | | | | |
| | Three months ended March 31, |
| (In millions, except percentages) | 2019 | | 2018 |
| Revenues | $ | 4,961 |
| | $ | 1,011 |
|
| Benefits and expenses | 4,221 |
| | 689 |
|
| Income before income taxes | 740 |
| | 322 |
|
| Income tax expense | 32 |
| | 45 |
|
| Net income | $ | 708 |
| | $ | 277 |
|
| | | | |
| ROE | 30.8 | % | | 12.4 | % |
| Adjusted ROE | 14.5 | % | | 17.1 | % |
Three Months Ended June 30, 2018March 31, 2019 Compared to the Three Months Ended June 30, 2017March 31, 2018
In this section, references to 2019 refer to the three months ended March 31, 2019 and references to 2018 refer to the three months ended June 30,March 31, 2018 and references to 2017 refer to the three months ended June 30, 2017.
Net Income
Net income decreasedincreased by $62431 million, or 19%156%, to $264$708 million in 2019 from $277 million in 2018. ROE increased to 30.8% from $326 million12.4% in 2017. ROE decreased to 12.3% from 16.4% in 20172018, and adjusted ROE increaseddecreased to 17.5%14.5% from 16.2%17.1% in 20172018. The decreaseincrease in net income was driven by unfavorable assumed reinsurance embedded derivative impacts and higher tax expensea $4.0 billion increase in revenues, partially offset by a favorable net changean increase of $3.5 billion in FIA derivatives. Assumed reinsurance embedded derivative impacts were unfavorable duebenefits and expenses.
Revenues
Revenues increased by $4.0 billion to increases$5.0 billion in U.S treasury rates, growth2019 from $1.0 billion in the reinsurance block attributed to the Voya reinsurance transaction and credit spreads widening.2018. The net change in FIA derivativesincrease was driven by the favorablean increase in discount ratesinvestment related gains and losses, increase in premiums, higher net investment income and higher product charges.
Investment related gains and losses increased by $2.0 billion to $1.8 billion in 2019 from $(236) million in the prior year, primarily due to the change in fair value of FIA hedging derivatives, the change in fair value of reinsurance assets and a favorable change in fair value of trading securities. The change in fair value of FIA hedging derivatives increased $991 million driven by the strong 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 increased 13.1% in 2019, compared to 2017, partially offseta decrease of 1.2% in 2018. The change in fair value of reinsurance assets increased by $862 million primarily driven by the change in performancethe value of the equity indicesunderlying assets related to which our FIA policies are linkedthe decrease in U.S. Treasury rates and credit spreads tightening. The favorable change in fair value of trading securities of $138 million was comprised primarily by an increase in AmerUs Closed Block assets of $106 million related to higher gains resulting from a decrease in U.S. Treasury rates and credit spreads tightening compared to 2017.prior year.
The decreasePremiums increased by $1.7 billion to $2.0 billion in ROE was primarily2019 from $278 million in the prior period, driven by unfavorable assumed reinsurance embedded derivative impacts. Adjusted ROE, which excludes these impacts, increased primarily due to the favorable net changehigher PRT premiums and an increase in FIA derivatives.
premiums from flow reinsurance.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Adjusted Operating Income
Adjusted operating income increased by $10 million or 4%, to $290 million in 2018 from $280 million in the prior period. Adjusted operating ROE was 14.2%, down from 16.2% in 2017. The increase in adjusted operating income was primarily driven by an increase in investment income partially offset by higher cost of crediting, other liability costs and income tax expense. The increase in investment income was driven by invested asset growth, earnings from the Voya reinsurance transaction 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. Other liability costs increased driven by higher rider reserve and DAC amortization related to less favorable equity market performance compared to 2017, actuarial out of period adjustments in 2017 and growth in the deferred annuity block of business.
Our consolidated net investment earned rate was 4.71% in 2018, a decrease from 4.72% in 2017, primarily attributed to 2017 benefiting from strong alternatives performance of 12.69% compared to 9.37% in 2018. Fixed and other net investment earned rate of 4.49% increased from 4.34% in 2017 driven by higher floating rate investment income in the quarter 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 $34 million to $1.8 billion in 2018 from $1.8 billion in 2017. The increase was driven by an increase in premiums, higher net investment income and an increase in product charges, which were largely offset by a decrease in investment related gains and losses and a decrease in VIE investment related gains and losses.
Premiums increased by $347 million to $726 million in 2018 from $379 million in the prior period, driven by the Voya reinsurance inception premiums attributed to payout annuities with life contingencies partially offset by higher PRT premiums in the prior year.
Net investment income increased by $137$211 million to $958$1.1 billion in 2019 from $855 million in 2018 from $821 million in 2017, primarily driven by earnings from growth in our investment portfolio attributed to the Voya and Lincoln reinsurance transactions, as well as a strong increase in deposits over the prior twelve months, $44 million ofmonths. Additionally, net investment earnings from the Voya reinsurance transaction andincome increased due to higher floating rate investment income of $26$17 million duerelated to higher short-term interest rates, partially offset by the deconsolidation of Germany in 2018.rates.
Product charges increased by $21$29 million to $106$125 million in 20182019 from $85$96 million in the prior period,2018, primarily driven by growth in the block of business and charges related to the addition of the Voya reinsurance transaction.
Investment related gains and losses decreased by $462 million to $(2) million in 2018 from $460 million in the prior year, primarily due to the change in assumed reinsurance embedded derivatives, the change in fair value of FIA hedging derivatives and the unfavorable change in unrealized gains and losses on trading securities. The unfavorable change in assumed reinsurance embedded derivatives decreased by $190 million, driven by a change in the underlying assets related to the increase in U.S. treasury rates, an increase in the reinsurance block related to the Voya reinsurance transaction and credit spreads widening compared to the prior year benefiting from credit spreads tightening. The change in fair value of FIA hedging derivatives decreased by $167 million driven by the performance of the indices upon which our call options are based. Although the S&P performed slightly higher than the prior year (2.9% increase in 2018 compared to a 2.6% increase in 2017), we have fewer options which are directly linked to the S&P compared to prior year. The change in unrealized gains and losses on trading securities was comprised of an unfavorable decrease in AmerUs Closed Block assets of $70 million related to higher unrealized losses in the quarter due to the increase in U.S. treasury rates.
VIE investment related gains and losses decreased by $22 million to $(11) million in 2018 from $11 million in the prior year, primarily due to the decline in the market value of public equity positions in one of our funds.liabilities.
Benefits and Expenses
Total benefitsBenefits and expenses increased by $41 million$3.5 billion to $1.5$4.2 billion in 20182019 from $1.4 billion$689 million in 20172018. The increase was driven by an increase in future policy benefits, and amortization of DAC and VOBA, partially offset by a decreasean increase in interest sensitive contract benefits, and a decreasean increase in dividends to policyholders.amortization of DAC and VOBA.
Future policy and other policy benefits increased by $279 million$1.9 billion to $857$2.3 billion in 2019 from $401 million in 2018, from $578 million in 2017, primarily attributable to the Voya reinsurance policyholder obligations at inception related to payout annuities with life contingencies partially offset by higher PRT premiums in the prior year, a decreaseobligations, an increase in the change in AmerUs Closed Block fair value liability, and $56 million relatedhigher benefits for payout annuities with life contingencies due to the deconsolidation of our former German subsidiaries.Voya reinsurance transaction. The favorableunfavorable change in the AmerUs Closed Block fair value liability of $71$124 million was primarily driven by the increase in unrealized lossesgains on the underlying investments duerelated to the increasechange in U.S. treasury rates.
DAC, DSI, and VOBA amortization increased by $37 millionTreasury rates compared to $115 million in 2018 from $78 million in the prior year primarily due to unfavorable investment related gains and losses and an increase in the DAC asset balance related to block growth and unfavorable impacts due to unfavorable changes in equity market performance compared to 2017, partially offset by an increase in the net change in FIA derivatives.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
credit spreads tightening.
Interest sensitive contract benefits decreasedincreased by $221 million$1.5 billion to $332$1.5 billion in 2019 from $31 million in 2018 from $553 million in 2017, driven by a decreasean increase in FIA fair value embedded derivatives of $231 million.$1.4 billion and growth in the block of business. The decreasechange in the FIA fair value embedded derivatives was due to the performance of the equity indices to which our FIA policies are linked, primarily the S&P 500 index, which experienced a favorable13.1% increase in 2019, compared to a decrease of 1.2% in 2018, as well as an unfavorable change in discount rates used in our embedded derivative calculations as the current quarter experienced an increasea decrease in discount rates compared to 2017,2018, which experienced a decreasean increase in discount rates. The decrease was
DAC, DSI, and VOBA amortization increased by $149 million to $231 million in 2019 from $82 million in 2018, primarily due to the change in investment related gains and losses as a result of a favorable change in reinsurance embedded derivatives, partially offset by an increase related to the performance of the equity indices to which ourunfavorable net change in FIA policies are linked.
Dividends to policyholders decreased by $40 million to $9 million in 2018 from $49 million in the prior year, primarily attributed to the deconsolidation of our former German subsidiaries.derivatives.
Taxes
Income tax expense increaseddecreased by $55$13 million to $66$32 million in 2019 from $45 million in 2018 from $11 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 assumes that we have taken steps so that2019 reflects the BEAT is not applicable to such payments and thereby assumes that more income is subject to U.S. income tax.implementation of additional reinsurance arrangements in the third quarter of 2018, which are common in the insurance industry.
Our effective tax rates wererate in the first quarter of 20%2019 was 4% and 14% in 2018 and 3% in 2017. The effective tax rate excludes the impacts of excise taxes of $0 million in 2018 and $12 million in 2017. Our effective tax rates may vary period to period depending upon the relationship of income and loss subject to tax compared to consolidated income and loss before income taxes.
Six Months Ended June 30, 2018 Compared to the Six Months Ended June 30, 2017
In this section, references to 2018 refer to the six months ended June 30, 2018 and references to 2017 refer to the six months ended June 30, 2017.
Net Income
Net income decreased by $178 million, or 25%, to $532 million in 2018 from $710 million in 2017. ROE decreased to 12.4% from 18.7% in 2017 and adjusted ROE decreased to 16.6% from 18.4% in 2017. The decrease in net income was driven by a $19 million decrease in adjusted operating income and unfavorable assumed reinsurance embedded derivative impacts partially offset by a favorable net change in FIA derivatives. Assumed reinsurance embedded derivative impacts were unfavorable due to increases in U.S treasury rates, growth in the reinsurance block attributed to the Voya reinsurance transaction and credit spreads widening. The net change in FIA derivatives was driven by the favorable increase in discount rates compared to 2017, partially offset by the change in performance of the equity indices to which our FIA policies are linked compared to 2017.
Adjusted Operating Income
Adjusted operating income decreased by $19 million, or 3%, to $527 million in 2018 from $546 million in the prior period. Adjusted operating ROE was 12.9%, down from 16.2% in 2017. The decrease in adjusted operating income was primarily driven by higher other liability costs, an increase in cost of crediting and higher income tax expense, partially offset by an increase in investment income. Other liability costs increased primarily due to higher rider reserves and DAC amortization related to less favorable equity market performance compared to 2017, actuarial out of period adjustments in 2017 and growth in the deferred annuity block of business. Cost of crediting was higher driven by block growth, including the addition of Voya liabilities. The increase in investment income was primarily due to invested asset growth, earnings from the Voya reinsurance transaction and increased floating rate investment income related to higher short-term interest rates.
Our consolidated net investment earned rate was 4.66% in 2018, an increase from 4.60% in 2017. Fixed and other net investment earned rate of 4.41% increased from 4.31% 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, lower returns on assets from the Voya reinsurance transaction and elevated levels of cash compared to 2017. Our alternative investment net investment earned rate was 9.78%, a decrease from 10.40% in 2017, primarily due to the strong performance of Amerihome experienced in 2017.
Revenues
Total revenue decreased by $574 million to $2.8 billion in 2018 from $3.4 billion in 2017. The decrease was driven by unfavorable changes in investment related gains and losses, partially offset by an increase in premiums, higher net investment income and an increase in product charges.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Investment related gains and losses decreased by $1.4 billion to $(238) million in 2018 from $1.1 billion in the prior period, primarily due to the change in fair value of FIA hedging derivatives, the change in assumed reinsurance embedded derivatives and the unfavorable change in unrealized gains and losses on trading securities. The change in fair value of FIA hedging derivatives decreased by $832 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 1.7% increase in 2018, compared to an 8.2% increase in 2017. The assumed reinsurance embedded derivatives decreased by $367 million driven by a change in the underlying assets related to the increase in U.S. treasury rates, an increase in the reinsurance block related to the Voya reinsurance transaction and credit spreads widening compared to the prior year benefiting from credit spreads tightening. The change in unrealized gains and losses on trading securities was comprised of an unfavorable decrease in AmerUs Closed Block assets of $134 million related to higher unrealized losses in the first quarter of 2018 due to the increase in U.S. treasury rates.
Premiums increased by $573 million to $1.0 billion in 2018 from $431 million in the prior period, driven by the Voya reinsurance inception premiums attributed to payout annuities with life contingencies.
Net investment income increased by $206 million to $1.8 billion in 2018 from $1.6 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, $44 million of investment earnings from the Voya reinsurance transaction and higher floating rate investment income due to higher short-term interest rates, partially offset by the deconsolidation of our former German subsidiaries. The increase in alternative investment income was primarily due to higher income in one of our hedge funds, partially offset by lower credit fund income.
Product charges increased by $36 million to $202 million in 2018 from $166 million in the prior period, primarily driven by growth in the block of business and charges related to the addition of the Voya reinsurance transaction.
Benefits and Expenses
Total benefits and expenses decreased by $488 million to $2.2 billion in 2018 from $2.6 billion in 2017. The decrease was driven by a decrease in interest sensitive contract benefits, a decrease in dividends payable to policyholders, and a decrease to policy and other operating expenses, partially offset by an increase in future policy and other policy benefits.
Interest sensitive contract benefits decreased by $894 million to $351 million in 2018 from $1.2 billion in 2017, primarily due to the change in FIA fair value embedded derivatives. The change in FIA fair value embedded derivatives decreased by $898 million primarily driven by the performance of the equity indices to which our FIA policies are linked, primarily the S&P 500 index, which experienced a 1.7% increase in 2018, compared to a 8.2% increase in 2017. Additionally, the FIA fair value embedded derivatives were impacted by a favorable change in discount rates used in our embedded derivative calculations as the current period experienced an increase in discount rates compared to 2017, which experienced a decrease in discount rates.
Dividends to policyholders decreased by $59 million to $22 million in 2018 from $81 million in the prior year, primarily attributed to the deconsolidation of our former German subsidiaries.
Policy and other operating expenses decreased by $26 million to $295 million in 2018 from $321 million in the prior year, primarily driven by lower stock compensation expense of $18 million and $31 million related to the deconsolidation of Germany, partially offset by debt costs related to our inaugural debt issuance in January.
Future policy and other policy benefits increased by $466 million to $1.3 billion in 2018 from $792 million in 2017, primarily attributable to the Voya reinsurance policyholder obligations at inception related to payout annuities with life contingencies and an increase in rider reserves, partially offset by a decrease in the change in AmerUs Closed Block fair value liability and $108 million related to the deconsolidation of our former German subsidiaries. The increase in rider reserves of $37 million was primarily driven by growth in the block of business and unfavorable impacts related to the change in equity market performance compared to 2017 resulting in decreased index credits to policyholder accounts which increased the amount needed to fund the rider reserve. The favorable change in the AmerUs Closed Block fair value liability of $148 million was primarily driven by the increase in unrealized losses on the underlying investments driven related to the increase in U.S. treasury rates.
Taxes
Income tax expense increased by $92 million to $125 million in 2018 from $33 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 assumes that we have taken steps so that the BEAT is not applicable to such payments and thereby assumes that more income is subject to U.S. income tax.
Our effective tax rates were 19% in 2018 and 4% in 2017. The effective tax rate excludes the impacts of excise taxes of $0 million in 2018 and $25 million in 2017. Our effective tax rates may vary period to period depending upon the relationship of income and loss subject to tax compared to consolidated income and loss before income taxes.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations by Segment
The following summarizes our adjusted operating income by segment:
| | | | Three months ended June 30, | | Six months ended June 30, | Three months ended March 31, |
| (In millions, except percentages) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| Adjusted operating income by segment | | | | | | | | |
| Net income | | $ | 708 |
| | $ | 277 |
|
| | | | | |
| Non-operating adjustments | | | | |
| Realized gains (losses) on sale of AFS securities | | 12 |
| | 17 |
|
| Unrealized, impairments and other investment gains (losses) | | 29 |
| | 6 |
|
| Change in fair value of reinsurance assets | | 616 |
| | (78 | ) |
| Offsets to investment gains (losses) | | (199 | ) | | 22 |
|
| Investment gains (losses), net of offsets | | 458 |
| | (33 | ) |
| Change in fair values of derivatives and embedded derivatives – FIAs, net of offsets | | (27 | ) | | 86 |
|
| Integration, restructuring and other non-operating expenses | | (1 | ) | | (8 | ) |
| Stock compensation expense | | (3 | ) | | (3 | ) |
| Income tax (expense) benefit – non-operating | | (6 | ) | | (6 | ) |
| Less: Total non-operating adjustments | | 421 |
| | 36 |
|
| Adjusted operating income | | $ | 287 |
| | $ | 241 |
|
| | | | | |
| Adjusted operating income (loss) by segment | | | | |
| Retirement Services | $ | 289 |
| | $ | 267 |
| | $ | 524 |
| | $ | 542 |
| $ | 286 |
| | $ | 239 |
|
| Corporate and Other | 1 |
| | 13 |
| | 3 |
| | 4 |
| 1 |
| | 2 |
|
| Adjusted operating income | $ | 290 |
| | $ | 280 |
| | $ | 527 |
| | $ | 546 |
| $ | 287 |
| | $ | 241 |
|
| | | | | | | | | | | |
| Adjusted operating ROE | | 12.8 | % | | 12.4 | % |
| Retirement Services adjusted operating ROE | 19.8 | % | | 22.0 | % | | 18.0 | % | | 23.1 | % | 14.4 | % | | 17.8 | % |
Three Months Ended March 31, 2019 Compared to the Three Months Ended March 31, 2018
Adjusted operating income increased by $46 million, or 19%, to $287 million in 2019 from $241 million in 2018. Adjusted operating ROE was 12.8%, up from 12.4% in 2018. The increase in adjusted operating income was primarily driven by an increase in our Retirement Services segment of $47 million, while Corporate and Other decreased $1 million.
Our consolidated net investment earned rate was 4.28% in 2019, a decrease from 4.60% in 2018, primarily due to the lower alternative investment performance as well as slightly lower fixed and other investment performance. Alternative net investment earned rate was 4.36% in 2019, a decrease from 10.38% in 2018, driven by the lower credit fund income, partially offset by an increase in market value of public equity positions in OneMain Holdings, Inc. (OneMain) and Caesars Entertainment Corporation (Caesars). Fixed and other net investment earned rate was 4.28% in 2019, a decrease from 4.32% in 2018, driven by cash drags from significant asset growth in both the fourth quarter of 2018 and first quarter of 2019, and lower returns on assets from the Voya and Lincoln reinsurance transactions, partially offset by higher floating rate investment income in 2019.
Non-operating Adjustments
Non-operating adjustments increased by $385 million to $421 million in 2019 from $36 million in 2018. The increase in non-operating adjustments was primarily driven by favorable change in fair value of reinsurance assets, partially offset by unfavorable FIA fair value embedded derivatives. Change in fair value of reinsurance assets impacts were favorable by $694 million due to a decrease in U.S. Treasury rates, credit spreads tightening, and growth in the reinsurance block from the Voya and Lincoln transactions. FIA fair value embedded derivatives were unfavorable by $113 million due to an unfavorable change in discount rates used in our embedded derivative calculations as the current quarter experienced a decrease in discount rates compared to 2018, partially offset by the performance of the equity indices to which our FIA policies are linked, primarily the S&P 500 index, which experienced a 13.1% increase in 2019, compared to a decrease of 1.2% in 2018.
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 (MYGA), FIAs, MYGAs, traditional one year guarantee fixed deferred annuities, immediate annuities and institutional products from our reinsurance partners. In addition, our institutional operations, including funding agreements and PRT obligations, are included in our Retirement Services segment.
Three Months Ended June 30, 2018 Compared to the Three Months Ended June 30, 2017
In this section, references to 2018 refer to the three months ended June 30, 2018 and references to 2017 refer to the three months ended June 30, 2017.
Adjusted Operating Income
Adjusted operating income increased by $22 million, or 8%, to $289 million in 2018, from $267 million in 2017. Adjusted operating ROE was 19.8%, down from 22.0% in the prior period. The increase in adjusted operating income was primarily driven by an increase in net investment earnings partially offset by higher cost of crediting, other liability costs and income tax expense.
Net investment earnings increased $162 million primarily driven by earnings from growth in invested assets of $27.6 billion attributed to the Voya reinsurance transaction and a strong increase in deposits over the prior twelve months. Additionally, floating rate investment income was higher $26 million related to higher short-term interest rates.
Cost of crediting increased $54 million driven by block growth, including the addition of Voya liabilities.
Other liability costs increased $44 million driven by higher rider reserve and DAC amortization related to unfavorable impacts related to equity market performance resulting in favorable $13 million impact in 2018 compared to a $44 million benefit from equity market performance and actuarial out of period adjustments in 2017, as well as growth in the deferred annuity block of business and the addition of Voya liabilities. Although the S&P performed slightly higher than the prior year (2.9% increase in 2018 compared to a 2.6% increase in 2017), we have fewer options which are directly linked to the S&P compared to prior year.
Investment Margin on Deferred Annuities
|
| | | | | |
| | Three months ended June 30, |
| | 2018 | | 2017 |
| Net investment earned rate | 4.74 | % | | 4.85 | % |
| Cost of crediting | 1.92 | % | | 1.89 | % |
| Investment margin on deferred annuities | 2.82 | % | | 2.96 | % |
Investment margin on deferred annuities decreased by 14 basis points to 2.82% in 2018, from 2.96% in 2017. The decrease in the investment margin on deferred annuities was driven by the decrease in net investment earned rate of 11 basis points, and an unfavorable increase in cost of crediting of 3 basis points.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Three Months Ended March 31, 2019 Compared to the Three Months Ended March 31, 2018
Adjusted Operating Income
Adjusted operating income increased by $47 million, or 20%, to $286 million in 2019, from $239 million in 2018. Adjusted operating ROE was 14.4%, down from 17.8% in the prior period. The increase in adjusted operating income was driven by $37.6 billion of growth in our invested assets delivering net investment spread accretion over prior year primarily attributed to inorganic deposits from the Voya and Lincoln reinsurance transactions as well as strong organic deposits over the prior twelve months. Net investment earnings also benefited from higher floating rate income of $17 million related to higher short-term interest rates. Cost of funds benefited from lower rider reserves and DAC amortization related to equity market performance and lower than expected gross profits, partially offset by actuarial experience on certain policies. Alternative investment income decreased primarily as a result of a decrease in one of our credit funds related to unrealized gains recognized in 2018. Additionally, credit fund income was lower due to credit spreads widening in Q4 2018 impacting alternative investments reported on a lag.
Net Investment Spread
|
| | | | | |
| | Three months ended March 31, |
| | 2019 | | 2018 |
| Net investment earned rate | 4.21 | % | | 4.63 | % |
| Cost of funds | 2.85 | % | | 2.84 | % |
| Net investment spread | 1.36 | % | | 1.79 | % |
Net investment spread, which measures the spread on our investment performance less the total cost of our liabilities, decreased 43 basis points to 1.36% in 2019 from 1.79% in 2018. Net investment earned rate decreased due to a decline in our alternative net investment earned rate as well as a slight decline in thedecrease in fixed and other net investment earned rates andrate. The alternative net investmentinvestments earned rates.rate decreased in 2019 to 2.13% from 12.34% in 2018, driven by lower credit fund income. The fixed and other net investment earned rate decreased in 20182019, to 4.49%4.28% from 4.55%4.32% in 20172018 primarily attributed to lower new money rates overcash drag from significant asset growth in both the past year,fourth quarter of 2018 and first quarter of 2019, and lower returns on the assets from the Voya and Lincoln reinsurance transaction and lower mortgage principal paydowns,transactions, partially offset by higher floating rate investment incomeincome.
Cost of funds increased by one basis point to 2.85% in the quarter. The alternative investment net investments earned rate remained strong2019, from 2.84% in 2018, at 11.28%primarily driven by strong MidCap performance for the quarter returning 14.51%. The alternative investment net investment earned rate decreased from 12.28%growth in 2017 as a result of the prior year benefiting from the strong performance of AmeriHome which experienced an earned rate of 23.76% in prior year, compared to 12.14% in 2018.
Cost of crediting on deferred annuities increased by 3 basis points to 1.92% in 2018, from 1.89% in 2017. The increase in cost of crediting was driven byour institutional channel at a higher rate and actuarial experience on the Voya reinsurance liabilities.certain policies, partially offset by lower rider reserves and DAC amortization related to equity market performance and lower than expected gross profits. 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.
Six Months Ended June 30, 2018 Compared to the Six Months Ended June 30, 2017
In this section, references to 2018 refer to the six months ended June 30, 2018 and references to 2017 refer to the six months ended June 30, 2017.
Adjusted Operating Income
Adjusted operating income decreased by $18 million, or 3%, to $524 million in 2018, from $542 million in 2017. Adjusted operating ROE was 18.0%, down from 23.1% in the prior period. The decrease in adjusted operating income was primarily driven by an increase in other liability costs, cost of crediting and income tax expense, partially offset by higher net investment earnings.
Other liability costs increased $123 million driven by unfavorable impacts related to equity market performance resulting in an unfavorable $2 million impact in 2018 compared to a benefit of $77 million in 2017, as well as growth in our deferred annuity block of business, partially offset by lower excise taxes in 2018.
Cost of crediting increased $66 million driven by block growth, including the addition of Voya liabilities.
Net investment earnings increased $248 million driven primarily by earnings from growth in invested assets of $27.6 billion attributed to the Voya reinsurance transaction and a strong increase in deposits over the prior twelve months. Additionally, floating rate investment income increased by $60 million related to higher short-term interest rates, partially offset by a benefit in the prior year of $14 million from proceeds on the recovery of a bond previously written down and lower mortgage principal paydowns in 2018.
Investment Margin on Deferred Annuities
| | | | Six months ended June 30, | Three months ended March 31, |
| | 2018 | | 2017 | 2019 | | 2018 |
| Net investment earned rate | 4.68 | % | | 4.80 | % | 4.21 | % | | 4.63 | % |
| Cost of crediting | 1.89 | % | | 1.90 | % | |
| Cost of crediting on deferred annuities | | 1.98 | % | | 1.87 | % |
| Investment margin on deferred annuities | 2.79 | % | | 2.90 | % | 2.23 | % | | 2.76 | % |
Investment margin on deferred annuities, which measures our investment performance less the cost of crediting for our deferred annuities, decreased by 1153 basis points to 2.79%2.23% in 2019, from 2.76% in 2018, from 2.90% in 2017. The decrease in the investment margin on deferred annuities wasprimarily driven by thea decrease in net investment earned rate of 12 basis points, partially offset by a favorable decreaseas well as an increase in cost of crediting of 1 basis point.
Net investment earned rate decreased due to the decrease in fixed and other net investment earned rate. The fixed and other net investment earned rate decreased in 2018, to 4.40% from 4.53% in 2017 primarily attributed to lower new money rates over the past year, lower returns on the assets from the Voya reinsurance transaction, lower mortgage principal paydowns, elevated levels of cash during 2018 and 2017 benefiting from proceeds from a bond previously written down. The decreases were partially offset by higher floating rate investment income in the quarter. The alternative investments net investments earned rate increased in 2018 to 11.64% from 11.48% in 2017, reflecting higher income in one of our hedge funds and strong performance from MidCap.
deferred annuities. Cost of crediting on deferred annuities decreased by 1increased 11 basis pointpoints primarily due to 1.89% in 2018, from 1.90% in 2017. The decrease inhigher option costs as a result of higher volatility and short-term interest rates and a higher cost of crediting was driven by rate actions on business that renewed in 2017, partially offset by a higher rate on the Voya reinsurance liabilities and an increase in option costs due to higher volatility and short-term interest rates.liabilities.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Corporate and Other
Corporate and Other includes certain other operations related to our corporate activities, includingactivities. Included in Corporate and Other are 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,addition, 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.strategy
Adjusted Operating Income
Adjusted operating income decreased by $12$1 million to $1 million in the three months ended June 30, 2018,2019, from $13$2 million in the three months ended June 30, 2017.2018. The decrease in adjusted operating income was mainly driven by lower alternative investment incomeearnings from a decrease in excess capital due to the decline indeployment into inorganic opportunities and share buybacks, offset by the market value of public equity positions in one of our funds and lower credit fund income. Our former German operations, which deconsolidated on January 1, 2018, had an operating loss of $8 million in the three months ended June 30, 2017.
Adjusted operating income decreased by $1 million to $3 million in the six months ended June 30, 2018, from $4 million in the six months ended June 30, 2017. The decrease in adjusted operating income, excluding Germany, was mainly driven by lower alternative investment income related to the declineincrease in market value of public equity positions in onetwo of our fundsfunds.
Item 2. Management’s Discussion and debt costs from our inaugural debt issuance in January, partially offset by higher fixedAnalysis of Financial Condition and other investment income primarily related to the increase in excess capital. Our former German operations, which deconsolidated on January 1, 2018, had an operating lossResults of $11 million in the six months ended June 30, 2017.Operations
Consolidated Investment Portfolio
We had consolidated investments, including related parties, of $98.7$115.7 billion and $84.4$107.6 billion as of June 30, 2018March 31, 2019 and December 31, 2017,2018, 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 majoritySubstantially all of our investment portfolio is managed by AAM, an indirect subsidiary of Apollo founded for the express purpose of managing our portfolio.Apollo. 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 assists 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%5–10% of our portfolio to alternative investments where we primarily focus on fixed income-like, cash flow-based investments.
Our invested assets, which are those whichthat directly back our policyholderreserve liabilities as well as surplus assets (as previously discussed in Key Operating and Non-GAAP Measures), were $98.6$113.8 billion and $82.3$111.0 billion as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. AAM manages,managed, directly and indirectly, $97.0 billion of investments, which in the aggregate constitute the vast majoritysubstantially all of our investment portfolioinvested assets as of June 30, 2018,March 31, 2019, 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’s ratings. In addition, our investment portfolio is constrained by its scenario-based capital ratio limit and its stressed liquidity limit.
The following table presents the carrying values of our total investments and investments in related parties:
|
| | | | | | | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
| (In millions, except percentages) | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total |
| AFS securities, at fair value | $ | 64,655 |
| | 55.9 | % | | $ | 59,265 |
| | 55.1 | % |
| Trading securities, at fair value | 2,256 |
| | 2.0 | % | | 1,949 |
| | 1.8 | % |
| Equity securities, at fair value | 252 |
| | 0.2 | % | | 216 |
| | 0.2 | % |
| Mortgage loans, net of allowances | 11,042 |
| | 9.5 | % | | 10,340 |
| | 9.6 | % |
| Investment funds | 683 |
| | 0.6 | % | | 703 |
| | 0.6 | % |
| Policy loans | 487 |
| | 0.4 | % | | 488 |
| | 0.4 | % |
| Funds withheld at interest | 15,241 |
| | 13.2 | % | | 15,023 |
| | 14.0 | % |
| Derivative assets | 1,920 |
| | 1.7 | % | | 1,043 |
| | 1.0 | % |
| Short-term investments, at fair value | 155 |
| | 0.1 | % | | 191 |
| | 0.2 | % |
| Other investments | 121 |
| | 0.1 | % | | 122 |
| | 0.1 | % |
| Total investments | 96,812 |
| | 83.7 | % | | 89,340 |
| | 83.0 | % |
| Investment in related parties | | | | | | | |
| AFS securities, at fair value | 1,684 |
| | 1.5 | % | | 1,437 |
| | 1.3 | % |
| Trading securities, at fair value | 239 |
| | 0.2 | % | | 249 |
| | 0.2 | % |
| Equity securities, at fair value | 301 |
| | 0.3 | % | | 120 |
| | 0.1 | % |
| Mortgage loans | 291 |
| | 0.2 | % | | 291 |
| | 0.3 | % |
| Investment funds | 2,290 |
| | 2.0 | % | | 2,232 |
| | 2.1 | % |
| Funds withheld at interest | 13,683 |
| | 11.8 | % | | 13,577 |
| | 12.6 | % |
| Other investments | 387 |
| | 0.3 | % | | 386 |
| | 0.4 | % |
| Total related party investments | 18,875 |
| | 16.3 | % | | 18,292 |
| | 17.0 | % |
| Total investments including related party | $ | 115,687 |
| | 100.0 | % | | $ | 107,632 |
| | 100.0 | % |
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:
|
| | | | | | | | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
| (In millions, except percentages) | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total |
| Fixed maturity securities, at fair value | | | | | | | |
| AFS securities | $ | 59,762 |
| | 60.6 | % | | $ | 61,012 |
| | 72.3 | % |
| Trading securities | 2,053 |
| | 2.1 | % | | 2,196 |
| | 2.6 | % |
| Equity securities | 216 |
| | 0.2 | % | | 790 |
| | 0.9 | % |
| Mortgage loans, net of allowances | 7,609 |
| | 7.7 | % | | 6,233 |
| | 7.4 | % |
| Investment funds | 633 |
| | 0.6 | % | | 699 |
| | 0.8 | % |
| Policy loans | 504 |
| | 0.5 | % | | 530 |
| | 0.6 | % |
| Funds withheld at interest | 7,700 |
| | 7.8 | % | | 7,085 |
| | 8.4 | % |
| Derivative assets | 1,929 |
| | 2.0 | % | | 2,551 |
| | 3.0 | % |
| Real estate | — |
| | — | % | | 624 |
| | 0.7 | % |
| Short-term investments | 289 |
| | 0.3 | % | | 201 |
| | 0.2 | % |
| Other investments | 123 |
| | 0.1 | % | | 133 |
| | 0.2 | % |
| Total investments | 80,818 |
| | 81.9 | % | | 82,054 |
| | 97.1 | % |
| Investment in related parties | | | | | | | |
| Fixed maturity securities, at fair value | | | | | | | |
| AFS securities | 956 |
| | 1.0 | % | | 406 |
| | 0.5 | % |
| Trading securities | 278 |
| | 0.3 | % | | 307 |
| | 0.4 | % |
| Investment funds | 1,836 |
| | 1.8 | % | | 1,310 |
| | 1.6 | % |
| Funds withheld at interest | 14,221 |
| | 14.4 | % | | — |
| | — | % |
| Short-term investments | 172 |
| | 0.2 | % | | 52 |
| | 0.1 | % |
| Other investments | 388 |
| | 0.4 | % | | 238 |
| | 0.3 | % |
| Total related party investments | 17,851 |
| | 18.1 | % | | 2,313 |
| | 2.9 | % |
| Total investments, including related party | $ | 98,669 |
| | 100.0 | % | | $ | 84,367 |
| | 100.0 | % |
The increase in our total investments, including related party, as of June 30, 2018March 31, 2019 of $14.3$8.1 billion compared to December 31, 20172018 was mainly driven by $18.0 billion of assets from the Voya reinsurance transaction, growth from organic deposits of $4.7$4.8 billion less liability outflows of $3.6$2.8 billion, and reinvestment of earnings. These were partially offset by the deconsolidation of $5.9 billion related to our former German operations, the changean increase in unrealized gains and losses on AFS securities and a decrease in derivative assets. Unrealized gains and losses on AFS securities decreased $2.2of $2.0 billion attributed to the increasedecrease in U.S. treasuryTreasury rates and credit spreads widening. Derivativetightening, an increase in derivatives assets decreased by $622 million primarily attributeddue to higher maturities than purchases in the current period, partially offset byfavorable equity market performance as the S&P 500 index increased by 1.7% during the year.and reinvestment of earnings.
Our investment portfolio consists largely of high quality fixed maturity securities, loans and short-term investments, as well as additional opportunistic holdings in investment funds and other instruments, including a small amount of equity holdings. Fixed maturity securities and loans include publicly issued corporate bonds, government and other sovereign bonds, privately placed corporate bonds and loans, mortgage loans, CMBS, RMBS, CLOs, and other asset-backed securities (ABS).ABS.
While the substantial majority of our investment portfolio has been allocated to corporate bonds and structured credit products, a key component of our investment strategy is the opportunistic acquisition of investment funds with attractive risk and return profiles. Our investment fund portfolio consists of funds that employ various strategies including real estate and other real asset funds, credit funds and private equity funds and hedge funds. We have a strong preference for assets that have some or all of the following characteristics, among others: (1) investments that constitute a direct investment or an investment in a fund with a high degree of co-investment; (2) investments with credit- or debt-like characteristics (for example, a stipulated maturity and par value), or alternatively, investments with reduced volatility when compared to pure equity; or (3) investments that have less downside risk. We acquired certain investment funds from AAA InvestorGuarantor – Athene, L.P. (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 received 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 forof our AFS portfolio,securities, net of related DAC, DSI and VOBA amortization and the change in rider reserves, are charged or credited to other comprehensive income, net of tax. 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:
|
| | | | | | | | | | | | | | | | | | |
| | June 30, 2018 |
| (In millions, except percentages) | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Fair Value | | Percent of Total |
| AFS securities | | | | | | | | | |
| U.S. government and agencies | $ | 143 |
| | $ | — |
| | $ | (1 | ) | | $ | 142 |
| | 0.2 | % |
| U.S. state, municipal and political subdivisions | 1,152 |
| | 124 |
| | (5 | ) | | 1,271 |
| | 2.1 | % |
| Foreign governments | 203 |
| | 1 |
| | (5 | ) | | 199 |
| | 0.3 | % |
| Corporate | 37,258 |
| | 481 |
| | (885 | ) | | 36,854 |
| | 60.7 | % |
| CLO | 5,355 |
| | 21 |
| | (24 | ) | | 5,352 |
| | 8.8 | % |
| ABS | 4,727 |
| | 32 |
| | (43 | ) | | 4,716 |
| | 7.8 | % |
| CMBS | 2,343 |
| | 28 |
| | (47 | ) | | 2,324 |
| | 3.8 | % |
| RMBS | 8,264 |
| | 648 |
| | (8 | ) | | 8,904 |
| | 14.7 | % |
| Total AFS securities | 59,445 |
| | 1,335 |
| | (1,018 | ) | | 59,762 |
| | 98.4 | % |
| AFS securities – related party | | | | | | | | | |
| CLO | 473 |
| | 2 |
| | (3 | ) | | 472 |
| | 0.8 | % |
| ABS | 485 |
| | 2 |
| | (3 | ) | | 484 |
| | 0.8 | % |
| Total AFS securities – related party | 958 |
| | 4 |
| | (6 | ) | | 956 |
| | 1.6 | % |
| Total AFS securities, including related party | $ | 60,403 |
| | $ | 1,339 |
| | $ | (1,024 | ) | | $ | 60,718 |
| | 100.0 | % |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The distribution of our AFS securities, including related parties, by type is as follows:
| | | | December 31, 2017 | March 31, 2019 |
| (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 | $ | 63 |
| | $ | 1 |
| | $ | (2 | ) | | $ | 62 |
| | 0.1 | % | $ | 48 |
| | $ | 2 |
| | $ | — |
| | $ | 50 |
| | 0.1 | % |
| U.S. state, municipal and political subdivisions | 996 |
| | 171 |
| | (2 | ) | | 1,165 |
| | 1.9 | % | 1,209 |
| | 161 |
| | (5 | ) | | 1,365 |
| | 2.1 | % |
| Foreign governments | 2,575 |
| | 116 |
| | (8 | ) | | 2,683 |
| | 4.3 | % | 262 |
| | 9 |
| | — |
| | 271 |
| | 0.4 | % |
| Corporate | 35,173 |
| | 1,658 |
| | (171 | ) | | 36,660 |
| | 59.5 | % | 40,727 |
| | 1,218 |
| | (534 | ) | | 41,411 |
| | 62.4 | % |
| CLO | 5,039 |
| | 53 |
| | (8 | ) | | 5,084 |
| | 8.2 | % | 6,320 |
| | 6 |
| | (184 | ) | | 6,142 |
| | 9.2 | % |
| ABS | 3,945 |
| | 53 |
| | (27 | ) | | 3,971 |
| | 6.4 | % | 5,023 |
| | 85 |
| | (33 | ) | | 5,075 |
| | 7.7 | % |
| CMBS | 1,994 |
| | 48 |
| | (21 | ) | | 2,021 |
| | 3.3 | % | 2,394 |
| | 50 |
| | (20 | ) | | 2,424 |
| | 3.7 | % |
| RMBS | 8,721 |
| | 652 |
| | (7 | ) | | 9,366 |
| | 15.2 | % | 7,457 |
| | 480 |
| | (20 | ) | | 7,917 |
| | 11.9 | % |
| Total fixed maturity securities | 58,506 |
| | 2,752 |
| | (246 | ) | | 61,012 |
| | 98.9 | % | |
Equity securities1 | 271 |
| | 7 |
| | (1 | ) | | 277 |
| | 0.4 | % | |
| Total AFS securities | 58,777 |
| | 2,759 |
| | (247 | ) | | 61,289 |
| | 99.3 | % | 63,440 |
| | 2,011 |
| | (796 | ) | | 64,655 |
| | 97.5 | % |
| AFS securities – related party | | | | | | | | | | | | | | | | | | |
| Corporate | | 3 |
| | — |
| | — |
| | 3 |
| | 0.0 | % |
| CLO | 353 |
| | 7 |
| | — |
| | 360 |
| | 0.6 | % | 654 |
| | — |
| | (16 | ) | | 638 |
| | 0.9 | % |
| ABS | 46 |
| | — |
| | — |
| | 46 |
| | 0.1 | % | 1,039 |
| | 11 |
| | (7 | ) | | 1,043 |
| | 1.6 | % |
| Total AFS securities – related party | 399 |
| | 7 |
| | — |
| | 406 |
| | 0.7 | % | 1,696 |
| | 11 |
| | (23 | ) | | 1,684 |
| | 2.5 | % |
| 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. | |
| Total AFS securities including related party | | $ | 65,136 |
| | $ | 2,022 |
| | $ | (819 | ) | | $ | 66,339 |
| | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| (In millions, except percentages) | Cost or Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Percent of Total |
| AFS securities | | | | | | | | | |
| U.S. government and agencies | $ | 57 |
| | $ | — |
| | $ | — |
| | $ | 57 |
| | 0.1 | % |
| U.S. state, municipal and political subdivisions | 1,183 |
| | 117 |
| | (7 | ) | | 1,293 |
| | 2.1 | % |
| Foreign governments | 162 |
| | 2 |
| | (3 | ) | | 161 |
| | 0.3 | % |
| Corporate | 38,018 |
| | 394 |
| | (1,315 | ) | | 37,097 |
| | 61.1 | % |
| CLO | 5,658 |
| | 2 |
| | (299 | ) | | 5,361 |
| | 8.8 | % |
| ABS | 4,915 |
| | 53 |
| | (48 | ) | | 4,920 |
| | 8.1 | % |
| CMBS | 2,390 |
| | 27 |
| | (60 | ) | | 2,357 |
| | 3.9 | % |
| RMBS | 7,642 |
| | 413 |
| | (36 | ) | | 8,019 |
| | 13.2 | % |
| Total AFS securities | 60,025 |
| | 1,008 |
| | (1,768 | ) | | 59,265 |
| | 97.6 | % |
| AFS securities – related party | | | | | | | | | |
| CLO | 587 |
| | — |
| | (25 | ) | | 562 |
| | 0.9 | % |
| ABS | 875 |
| | 4 |
| | (4 | ) | | 875 |
| | 1.5 | % |
| Total AFS securities – related party | 1,462 |
| | 4 |
| | (29 | ) | | 1,437 |
| | 2.4 | % |
| Total AFS securities including related party | $ | 61,487 |
| | $ | 1,012 |
| | $ | (1,797 | ) | | $ | 60,702 |
| | 100.0 | % |
Item 2. Management’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:
| | | | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| (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 | $ | 11,772 |
| | 19.4 | % | | $ | 12,026 |
| | 19.6 | % | $ | 13,235 |
| | 19.9 | % | | $ | 11,706 |
| | 19.3 | % |
| Financial | 11,783 |
| | 19.4 | % | | 11,824 |
| | 19.3 | % | 13,020 |
| | 19.6 | % | | 11,809 |
| | 19.5 | % |
| Utilities | 8,740 |
| | 14.4 | % | | 8,296 |
| | 13.5 | % | 10,218 |
| | 15.4 | % | | 9,055 |
| | 14.9 | % |
| Communication | 2,438 |
| | 4.0 | % | | 2,607 |
| | 4.2 | % | 2,518 |
| | 3.8 | % | | 2,313 |
| | 3.8 | % |
| Transportation | 2,121 |
| | 3.5 | % | | 1,907 |
| | 3.1 | % | 2,423 |
| | 3.7 | % | | 2,214 |
| | 3.6 | % |
| Total corporate | 36,854 |
| | 60.7 | % | | 36,660 |
| | 59.7 | % | 41,414 |
| | 62.4 | % | | 37,097 |
| | 61.1 | % |
| Other government-related securities | | | | | | | | | | | | | | |
| U.S. state, municipal and political subdivisions | 1,271 |
| | 2.1 | % | | 1,165 |
| | 1.9 | % | 1,365 |
| | 2.1 | % | | 1,293 |
| | 2.1 | % |
| Foreign governments | 199 |
| | 0.3 | % | | 2,683 |
| | 4.4 | % | 271 |
| | 0.4 | % | | 161 |
| | 0.3 | % |
| U.S. government and agencies | 142 |
| | 0.2 | % | | 62 |
| | 0.1 | % | 50 |
| | 0.1 | % | | 57 |
| | 0.1 | % |
| Total non-structured securities | 38,466 |
| | 63.3 | % | | 40,570 |
| | 66.1 | % | 43,100 |
| | 65.0 | % | | 38,608 |
| | 63.6 | % |
| Structured securities | | | | | | | | | | | | | | |
| CLO | 5,824 |
| | 9.6 | % | | 5,444 |
| | 8.9 | % | 6,780 |
| | 10.1 | % | | 5,923 |
| | 9.8 | % |
| ABS | 5,200 |
| | 8.6 | % | | 4,017 |
| | 6.5 | % | 6,118 |
| | 9.3 | % | | 5,795 |
| | 9.5 | % |
| CMBS | 2,324 |
| | 3.8 | % | | 2,021 |
| | 3.3 | % | 2,424 |
| | 3.7 | % | | 2,357 |
| | 3.9 | % |
| RMBS | | | | | | | | | | | | | | |
| Agency | 115 |
| | 0.2 | % | | 87 |
| | 0.1 | % | 60 |
| | 0.1 | % | | 59 |
| | 0.1 | % |
| Non-agency | 8,789 |
| | 14.5 | % | | 9,279 |
| | 15.1 | % | 7,857 |
| | 11.8 | % | | 7,960 |
| | 13.1 | % |
| Total structured securities | 22,252 |
| | 36.7 | % | | 20,848 |
| | 33.9 | % | 23,239 |
| | 35.0 | % | | 22,094 |
| | 36.4 | % |
| Total AFS fixed maturity securities, including related party | $ | 60,718 |
| | 100.0 | % | | $ | 61,418 |
| | 100.0 | % | |
| Total AFS securities including related party | | $ | 66,339 |
| | 100.0 | % | | $ | 60,702 |
| | 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 $60.7$66.3 billion and $61.4$60.7 billion as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. The decreaseincrease was mainly driven by the deconsolidation of $5.9 billion related to our former German operations and the change in unrealized gains and losses on AFS securities.securities as well as strong growth in deposits over liability outflows. Unrealized gains and losses on AFS securities decreasedincreased attributed to the increasedecrease in U.S. treasuryTreasury rates and credit spreads widening. These were partially offset by strong growth in deposits over liability outflows in assets from the Voya reinsurance transaction.tightening.
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. WithSubject to the important exceptions discussed below, if a security has been rated by a Nationally Recognized Statistical Rating Organization (NRSRO), the SVO utilizes that rating and assigns an NAIC designation based upon the following system:system (General Ratings Process):
|
| | |
| NAIC designation | | NRSRO equivalent rating |
| 1 | | AAA/AA/A |
| 2 | | BBB |
| 3 | | BB |
| 4 | | B |
| 5 | | CCC |
| 6 | | CC and lower |
Item 2. Management’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’s methodology explicitly considers amortized cost and the likelihood of recovery of our investment,such amount, we view the NAIC’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, theThe SVO has developed a ratings process and provides instruction on both modeled and non-modeled LBaSS. TheFor modeled LBaSS, the process is specific to the non-agency RMBS and CMBS asset classes. In order to establish ratings at the individual security level, the SVO obtains loan-level analysis of each RMBS and CMBS using a selected vendor’s proprietary financial model. The SVO ensures that the vendor has extensive internal quality-control processes in place and the SVO conducts its own quality-control checks of the selected vendor’s valuation process. The SVO has retained the services of Blackrock, Inc. (Blackrock) to model non-agency RMBS and CMBS owned by U.S. insurers for all years presented herein. Blackrock provides five prices (breakpoints), based on each U.S. insurer’s statutory book value price, to utilize in determining the NAIC designation for each modeled LBaSS. For
Prior to January 1, 2019, certain non-modeled LBaSS (including CLOs and ABS, other than RMBS and CLOs) withCMBS) underwent ratings evaluation by an NAIC credit rating provider (CRP). Such securities were subject to an exemption from the initialGeneral Ratings Process (MFE Exemption) and received NAIC designations through a prescribed process (MFE Process). Pursuant to the MFE Process, CRP ratings were translated to an NAIC designation equivalent. If the translation process resulted in an NAIC designation equivalent of NAIC 1 or NAIC 6, then such designation was considered the final NAIC designation. If the translation process resulted in an NAIC designation remains the same through the life of the security. For non-modeled LBaSS with the initial designationequivalent of NAIC 2 through NAIC 5, the selected vendors are not utilized andthen the NAIC designations are set usingdesignation equivalent was used to select the appropriate breakpoint from a standardized table of breakpoints provided by the SVO for applicationpricing matrix and such breakpoint was applied to the insurer’s statutory bookamortized cost or fair value price. (in each instance, as a percentage of par), as applicable, to determine the final NAIC designation. Effective January 1, 2019, the MFE Exemption was eliminated, and as a result, NAIC designations for all non-modeled LBaSS are thereafter determined through the General Ratings Process.
The NAIC designation determines the associated level of RBCrisk-based capital (RBC) that an insurer is required to hold for modeled LBaSS owned by the insurer. In general, under both the modeled LBass process and, prior to January 1, 2019, the non-modeled LBaSS processes, the larger the discount to par value at the strongertime of determination, the higher 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) is as follows:
| | | | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| (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 | $ | 30,419 |
| | $ | 31,056 |
| | 51.2 | % | | $ | 30,906 |
| | $ | 32,447 |
| | 52.8 | % | $ | 32,944 |
| | $ | 34,021 |
| | 51.3 | % | | $ | 31,106 |
| | $ | 31,311 |
| | 51.6 | % |
| 2 | 26,268 |
| | 26,017 |
| | 42.8 | % | | 24,147 |
| | 25,082 |
| | 40.9 | % | 28,457 |
| | 28,659 |
| | 43.2 | % | | 26,682 |
| | 25,871 |
| | 42.6 | % |
| Total investment grade | 56,687 |
| | 57,073 |
| | 94.0 | % | | 55,053 |
| | 57,529 |
| | 93.7 | % | 61,401 |
| | 62,680 |
| | 94.5 | % | | 57,788 |
| | 57,182 |
| | 94.2 | % |
| 3 | 2,876 |
| | 2,832 |
| | 4.7 | % | | 2,978 |
| | 3,040 |
| | 5.0 | % | 2,757 |
| | 2,711 |
| | 4.1 | % | | 2,866 |
| | 2,746 |
| | 4.5 | % |
| 4 | 707 |
| | 679 |
| | 1.1 | % | | 789 |
| | 765 |
| | 1.2 | % | 720 |
| | 689 |
| | 1.0 | % | | 591 |
| | 533 |
| | 0.9 | % |
| 5 | 125 |
| | 124 |
| | 0.2 | % | | 70 |
| | 66 |
| | 0.1 | % | 250 |
| | 248 |
| | 0.4 | % | | 235 |
| | 232 |
| | 0.4 | % |
| 6 | 8 |
| | 10 |
| | 0.0 | % | | 15 |
| | 18 |
| | 0.0 | % | 8 |
| | 11 |
| | 0.0 | % | | 7 |
| | 9 |
| | 0.0 | % |
| Total below investment grade | 3,716 |
| | 3,645 |
| | 6.0 | % | | 3,852 |
| | 3,889 |
| | 6.3 | % | 3,735 |
| | 3,659 |
| | 5.5 | % | | 3,699 |
| | 3,520 |
| | 5.8 | % |
| Total fixed maturity securities, including related party | $ | 60,403 |
| | $ | 60,718 |
| | 100.0 | % | | $ | 58,905 |
| | $ | 61,418 |
| | 100.0 | % | |
| Total AFS securities including related party | | $ | 65,136 |
| | $ | 66,339 |
| | 100.0 | % | | $ | 61,487 |
| | $ | 60,702 |
| | 100.0 | % |
Substantially all of our AFS fixed maturity portfolio, 94.0%94.5% and 93.7%94.2% as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively, was invested in assets considered investment grade with a NAIC designation of 1 or 2.
Item 2. Management’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:
| | | | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| (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 | $ | 20,704 |
| | 34.1 | % | | $ | 21,448 |
| | 34.9 | % | $ | 22,804 |
| | 34.3 | % | | $ | 19,690 |
| | 32.4 | % |
| BBB | 23,837 |
| | 39.3 | % | | 23,572 |
| | 38.4 | % | 25,773 |
| | 38.9 | % | | 23,326 |
| | 38.4 | % |
Non-rated1 | 6,932 |
| | 11.4 | % | | 6,592 |
| | 10.7 | % | 9,723 |
| | 14.7 | % | | 9,624 |
| | 15.9 | % |
| Total investment grade | 51,473 |
| | 84.8 | % | | 51,612 |
| | 84.0 | % | 58,300 |
| | 87.9 | % | | 52,640 |
| | 86.7 | % |
| BB | 2,878 |
| | 4.7 | % | | 3,091 |
| | 5.0 | % | 2,729 |
| | 4.1 | % | | 2,670 |
| | 4.4 | % |
| B | 1,096 |
| | 1.8 | % | | 1,198 |
| | 2.0 | % | 888 |
| | 1.3 | % | | 875 |
| | 1.4 | % |
| CCC | 3,004 |
| | 5.0 | % | | 2,696 |
| | 4.4 | % | 2,253 |
| | 3.4 | % | | 2,340 |
| | 3.9 | % |
| CC and lower | 1,572 |
| | 2.6 | % | | 2,302 |
| | 3.8 | % | 1,320 |
| | 2.0 | % | | 1,296 |
| | 2.1 | % |
Non-rated1 | 695 |
| | 1.1 | % | | 519 |
| | 0.8 | % | 849 |
| | 1.3 | % | | 881 |
| | 1.5 | % |
| Total below investment grade | 9,245 |
| | 15.2 | % | | 9,806 |
| | 16.0 | % | 8,039 |
| | 12.1 | % | | 8,062 |
| | 13.3 | % |
| Total fixed maturity securities, including related party | $ | 60,718 |
| | 100.0 | % | | $ | 61,418 |
| | 100.0 | % | |
| Total AFS securities including related party | | $ | 66,339 |
| | 100.0 | % | | $ | 60,702 |
| | 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’s Investor Service, (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 15.2%12.1% and 16.0%13.3% as of June 30, 2018March 31, 2019 and December 31, 2017,2018, 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 tois the difference in methodologies between the NRSRO and NAIC for RMBS due to investments acquired and/or carried at a discount to par value, as discussed above.
As of June 30, 2018each of March 31, 2019 and December 31, 2017,2018, the non-rated securities shown above were comprised of 45% and 44%, respectively,56% of corporate private placement securities for which we have not sought individual ratings from the NRSROsNRSRO, and 38%29% and 42%30%, 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 June 30, 2018each of March 31, 2019 and December 31, 2017, 91% and 93%, respectively,2018, 92% 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 cash flows from various types of business equipment. TheseOur AFS ABS holdings were $5.2$6.1 billion and $4.0$5.8 billion as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. The increase in our AFS ABS portfolio is mainly due to attractive investments made during the period as new deposits and the Voya and Lincoln investment portfolios are deployed. As of June 30, 2018March 31, 2019 and December 31, 2017,2018, our AFS ABS portfolio included $4.9$5.5 billion (95%(90% of the total) and $3.8$5.4 billion (94%(92% of the total), respectively, of securities that are considered investment grade based on NAIC designations, while $4.7$5.5 billion (90% of the total) and $3.6$5.2 billion (89% of the total), respectively, of securities were considered investment grade based on NRSRO ratings.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Collateralized Loan Obligations – We also invest in CLOs which pay principal and interest from cash flows received from underlying corporate loans. These holdings were $5.8$6.8 billion and $5.4$5.9 billion as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively.
A summary of our AFS CLO portfolio, including related parties, by NAIC designations and NRSRO quality ratings is as follows:
|
| | | | | | | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
| (In millions, except percentages) | Fair Value | | Percent of Total | | Fair Value | | Percent of Total |
| NAIC designation | | | | | | | |
| 1 | $ | 3,577 |
| | 52.7 | % | | $ | 3,005 |
| | 50.7 | % |
| 2 | 3,029 |
| | 44.7 | % | | 2,498 |
| | 42.2 | % |
| Total investment grade | 6,606 |
| | 97.4 | % | | 5,503 |
| | 92.9 | % |
| 3 | 146 |
| | 2.2 | % | | 393 |
| | 6.7 | % |
| 4 | 21 |
| | 0.3 | % | | 20 |
| | 0.3 | % |
| 5 | 7 |
| | 0.1 | % | | 7 |
| | 0.1 | % |
| 6 | — |
| | — | % | | — |
| | — | % |
| Total below investment grade | 174 |
| | 2.6 | % | | 420 |
| | 7.1 | % |
| Total AFS CLO including related party | $ | 6,780 |
| | 100.0 | % | | $ | 5,923 |
| | 100.0 | % |
| | | | | | | | |
| NRSRO rating agency designation | | | | | | | |
| AAA/AA/A | $ | 3,567 |
| | 52.6 | % | | $ | 2,921 |
| | 49.3 | % |
| BBB | 3,039 |
| | 44.8 | % | | 2,829 |
| | 47.8 | % |
| Total investment grade | 6,606 |
| | 97.4 | % | | 5,750 |
| | 97.1 | % |
| BB | 146 |
| | 2.2 | % | | 146 |
| | 2.4 | % |
| B | 21 |
| | 0.3 | % | | 27 |
| | 0.5 | % |
| CCC | 7 |
| | 0.1 | % | | — |
| | — | % |
| CC and lower | — |
| | — | % | | — |
| | — | % |
| Total below investment grade | 174 |
| | 2.6 | % | | 173 |
| | 2.9 | % |
| Total AFS CLO including related party | $ | 6,780 |
| | 100.0 | % | | $ | 5,923 |
| | 100.0 | % |
As of June 30, 2018March 31, 2019 and December 31, 2017,2018, a majority of our AFS CLO portfolio, 97.4% and 92.9%, respectively, was invested in assets considered to be investment grade based upon an application of the NAIC’s methodology. As of March 31, 2019 and December 31, 2018, 97.4% and 97.1%, respectively, of of our AFS CLO portfolio was considered investment grade based on NRSRO ratings.
Commercial Mortgage-backed Securities– A portion of our AFS portfolio is invested in CMBS. CMBS are constructed from pools of commercial mortgages. These holdings were $2.4 billion as of each of March 31, 2019 and December 31, 2018. As of March 31, 2019 and December 31, 2018, our AFS CMBS portfolio included $5.3$2.2 billion (91% of the total) and $4.6$2.1 billion (85%(91% of the total), respectively, of securities that are considered investment grade based on NAIC designations, while $5.5$1.6 billion (95%(67% of the total) and $4.8$1.6 billion (88% of the total), respectively, of securities were considered investment grade based on NRSRO ratings.
Item 2. Management’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 $2.3 billion and $2.0 billion as of June 30, 2018 and December 31, 2017, respectively. As of June 30, 2018 and December 31, 2017, our CMBS portfolio included $2.1 billion (89% of the total) and $1.9 billion (95% of the total), respectively, of securities that are considered investment grade based on NAIC designations, while $1.5 billion (65% of the total) and $1.4 billion (70%(66% 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 $8.9$7.9 billion and $9.4$8.0 billion as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. Excluding limitations on access to lending
Item 2. Management’s Discussion and other extraordinary economic conditions, prepaymentsAnalysis of principal on the underlying loans can be expected to accelerate with decreases in market interest ratesFinancial Condition 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 are generally considered investment grade based on NAIC designations, given the likelihood that we ultimately receive principal and interest distributions in an amount at least equal to our amortized cost.Results of Operations
A summary of our AFS RMBS portfolio by NAIC designations and NRSRO quality ratings is as follows:
| | | | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| (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 | $ | 8,219 |
| | 92.4 | % | | $ | 8,714 |
| | 93.0 | % | $ | 7,236 |
| | 91.4 | % | | $ | 7,415 |
| | 92.5 | % |
| 2 | 385 |
| | 4.3 | % | | 360 |
| | 3.8 | % | 318 |
| | 4.0 | % | | 269 |
| | 3.3 | % |
| Total investment grade | 8,604 |
| | 96.7 | % | | 9,074 |
| | 96.8 | % | 7,554 |
| | 95.4 | % | | 7,684 |
| | 95.8 | % |
| 3 | 189 |
| | 2.1 | % | | 213 |
| | 2.3 | % | 222 |
| | 2.8 | % | | 207 |
| | 2.6 | % |
| 4 | 109 |
| | 1.2 | % | | 73 |
| | 0.8 | % | 118 |
| | 1.5 | % | | 106 |
| | 1.3 | % |
| 5 | 1 |
| | 0.0 | % | | 6 |
| | 0.1 | % | 22 |
| | 0.3 | % | | 22 |
| | 0.3 | % |
| 6 | 1 |
| | 0.0 | % | | — |
| | — | % | 1 |
| | 0.0 | % | | — |
| | — | % |
| Total below investment grade | 300 |
| | 3.3 | % | | 292 |
| | 3.2 | % | 363 |
| | 4.6 | % | | 335 |
| | 4.2 | % |
| Total RMBS | $ | 8,904 |
| | 100.0 | % | | $ | 9,366 |
| | 100.0 | % | |
| Total AFS RMBS | | $ | 7,917 |
| | 100.0 | % | | $ | 8,019 |
| | 100.0 | % |
| | | | | | | | | | | | | | | |
| NRSRO rating agency designation | | | | | | | | | | | | | | |
| AAA/AA/A | $ | 528 |
| | 5.9 | % | | $ | 335 |
| | 3.6 | % | $ | 496 |
| | 6.3 | % | | $ | 487 |
| | 6.1 | % |
| BBB | 268 |
| | 3.0 | % | | 347 |
| | 3.7 | % | 270 |
| | 3.4 | % | | 220 |
| | 2.7 | % |
Non-rated1 | 2,750 |
| | 30.9 | % | | 2,866 |
| | 30.6 | % | 2,874 |
| | 36.3 | % | | 2,932 |
| | 36.6 | % |
| Total investment grade | 3,546 |
| | 39.8 | % | | 3,548 |
| | 37.9 | % | 3,640 |
| | 46.0 | % | | 3,639 |
| | 45.4 | % |
| BB | 352 |
| | 4.0 | % | | 415 |
| | 4.4 | % | 325 |
| | 4.1 | % | | 332 |
| | 4.1 | % |
| B | 401 |
| | 4.5 | % | | 417 |
| | 4.5 | % | 279 |
| | 3.5 | % | | 301 |
| | 3.8 | % |
| CCC | 2,904 |
| | 32.6 | % | | 2,580 |
| | 27.5 | % | 2,163 |
| | 27.3 | % | | 2,259 |
| | 28.2 | % |
| CC and lower | 1,568 |
| | 17.6 | % | | 2,298 |
| | 24.5 | % | 1,315 |
| | 16.6 | % | | 1,292 |
| | 16.1 | % |
Non-rated1 | 133 |
| | 1.5 | % | | 108 |
| | 1.2 | % | 195 |
| | 2.5 | % | | 196 |
| | 2.4 | % |
| Total below investment grade | 5,358 |
| | 60.2 | % | | 5,818 |
| | 62.1 | % | 4,277 |
| | 54.0 | % | | 4,380 |
| | 54.6 | % |
| Total RMBS | $ | 8,904 |
| | 100.0 | % | | $ | 9,366 |
| | 100.0 | % | |
| Total AFS RMBS | | $ | 7,917 |
| | 100.0 | % | | $ | 8,019 |
| | 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 AFS RMBS portfolio, 96.7%95.4% and 96.8%95.8% as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively, was invested in assets considered to be investment grade based 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 resultedresults in an investment grade NAIC designation. In contrast, our understanding is that in setting ratings, NRSROs focus on the likelihood of recovery ofrecovering all contractual payments including principal at par value. As a result of a fundamental difference in approach, as of June 30, 2018March 31, 2019 and December 31, 2017, NRSROs2018, NRSRO characterized 39.8%46.0% and 37.9%45.4%, respectively, of our AFS RMBS portfolio as investment grade.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unrealized Losses
Our investments in fixed maturityAFS securities, including related parties, are reported at fair value with changes in fair value recorded in other comprehensive income. Certain of our fixed maturityAFS securities, including related parties, have experienced declines in fair value that we consider temporary in nature. As of June 30,March 31, 2019, our AFS securities, including related party, had a fair value of $66.3 billion, which was 1.8% above amortized cost of $65.1 billion. As of December 31, 2018, our fixed maturityAFS securities, including related party, had a fair value of $60.7 billion, which was 0.5% above1.3% below amortized cost of $60.4 billion. As of December 31, 2017, our fixed maturity securities, including related party, had a fair value of $61.4 billion, which was 4.3% above amortized cost of $58.9$61.5 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:
|
| | | | | | | | | | | | | | | | | | | | | |
| | June 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 |
| NAIC designation | | | | | | | | | | | |
| 1 | $ | 13,387 |
| | $ | (345 | ) | | $ | 13,042 |
| | 97.4 | % | | $ | 31,056 |
| | (1.1 | )% |
| 2 | 15,446 |
| | (563 | ) | | 14,883 |
| | 96.4 | % | | 26,017 |
| | (2.2 | )% |
| Total investment grade | 28,833 |
| | (908 | ) | | 27,925 |
| | 96.9 | % | | 57,073 |
| | (1.6 | )% |
| 3 | 1,704 |
| | (72 | ) | | 1,632 |
| | 95.8 | % | | 2,832 |
| | (2.5 | )% |
| 4 | 440 |
| | (43 | ) | | 397 |
| | 90.2 | % | | 679 |
| | (6.3 | )% |
| 5 | 39 |
| | (1 | ) | | 38 |
| | 97.4 | % | | 124 |
| | (0.8 | )% |
| 6 | 2 |
| | — |
| | 2 |
| | 100.0 | % | | 10 |
| | — | % |
| Total below investment grade | 2,185 |
| | (116 | ) | | 2,069 |
| | 94.7 | % | | 3,645 |
| | (3.2 | )% |
| Total | $ | 31,018 |
| | $ | (1,024 | ) | | $ | 29,994 |
| | 96.7 | % | | $ | 60,718 |
| | (1.7 | )% |
|
| | | | | | | | | | | | | | | | | | | | | |
| | 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 |
| NAIC designation | | | | | | | | | | | |
| 1 | $ | 4,901 |
| | $ | (100 | ) | | $ | 4,801 |
| | 98.0 | % | | $ | 32,447 |
| | (0.3 | )% |
| 2 | 4,284 |
| | (82 | ) | | 4,202 |
| | 98.1 | % | | 25,082 |
| | (0.3 | )% |
| Total investment grade | 9,185 |
| | (182 | ) | | 9,003 |
| | 98.0 | % | | 57,529 |
| | (0.3 | )% |
| 3 | 881 |
| | (19 | ) | | 862 |
| | 97.8 | % | | 3,040 |
| | (0.6 | )% |
| 4 | 451 |
| | (40 | ) | | 411 |
| | 91.1 | % | | 765 |
| | (5.2 | )% |
| 5 | 60 |
| | (5 | ) | | 55 |
| | 91.7 | % | | 66 |
| | (7.6 | )% |
| 6 | 5 |
| | — |
| | 5 |
| | 100.0 | % | | 18 |
| | — | % |
| Total below investment grade | 1,397 |
| | (64 | ) | | 1,333 |
| | 95.4 | % | | 3,889 |
| | (1.6 | )% |
| Total | $ | 10,582 |
| | $ | (246 | ) | | $ | 10,336 |
| | 97.7 | % | | $ | 61,418 |
| | (0.4 | )% |
The gross unrealized losses on AFS fixed maturity securities, including related party, were $1.0 billion and $246 million as of June 30, 2018 and December 31, 2017, respectively. The increase in unrealized losses was driven by the increase in U.S. treasury rates and credit spreads widening for the six months ended June 30, 2018.
As of June 30, 2018 and December 31, 2017, we held $4.5 billion and $4.4 billion, respectively, in energy sector fixed maturity securities, or 7% of total AFS fixed maturity securities, including related party, as of each period. The gross unrealized capital losses on these securities were $127 million and $33 million, or 12% and 13%, respectively, of the total unrealized losses.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following tables reflect the unrealized losses on the AFS portfolio, including related parties, by NAIC designations:
|
| | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2019 |
| (In millions, except percentages) | Amortized Cost of AFS Securities with Unrealized Loss | | Gross Unrealized Losses | | Fair Value of AFS Securities with Unrealized Loss | | Fair Value to Amortized Cost Ratio | | Fair Value of Total AFS Securities | | Gross Unrealized Losses to Total AFS Fair Value |
| NAIC designation | | | | | | | | | | | |
| 1 | $ | 8,572 |
| | $ | (216 | ) | | $ | 8,356 |
| | 97.5 | % | | $ | 34,021 |
| | (0.6 | )% |
| 2 | 12,336 |
| | (451 | ) | | 11,885 |
| | 96.3 | % | | 28,659 |
| | (1.6 | )% |
| Total investment grade | 20,908 |
| | (667 | ) | | 20,241 |
| | 96.8 | % | | 62,680 |
| | (1.1 | )% |
| 3 | 1,596 |
| | (91 | ) | | 1,505 |
| | 94.3 | % | | 2,711 |
| | (3.4 | )% |
| 4 | 446 |
| | (53 | ) | | 393 |
| | 88.1 | % | | 689 |
| | (7.7 | )% |
| 5 | 186 |
| | (8 | ) | | 178 |
| | 95.7 | % | | 248 |
| | (3.2 | )% |
| 6 | 2 |
| | — |
| | 2 |
| | 100.0 | % | | 11 |
| | — | % |
| Total below investment grade | 2,230 |
| | (152 | ) | | 2,078 |
| | 93.2 | % | | 3,659 |
| | (4.2 | )% |
| Total | $ | 23,138 |
| | $ | (819 | ) | | $ | 22,319 |
| | 96.5 | % | | $ | 66,339 |
| | (1.2 | )% |
|
| | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| (In millions, except percentages) | Amortized Cost of AFS Securities with Unrealized Loss | | Gross Unrealized Losses | | Fair Value of AFS Securities with Unrealized Loss | | Fair Value to Amortized Cost Ratio | | Fair Value of Total AFS Securities | | Gross Unrealized Losses to Total AFS Fair Value |
| NAIC designation | | | | | | | | | | | |
| 1 | $ | 15,373 |
| | $ | (545 | ) | | $ | 14,828 |
| | 96.5 | % | | $ | 31,311 |
| | (1.7 | )% |
| 2 | 19,152 |
| | (1,035 | ) | | 18,117 |
| | 94.6 | % | | 25,871 |
| | (4.0 | )% |
| Total investment grade | 34,525 |
| | (1,580 | ) | | 32,945 |
| | 95.4 | % | | 57,182 |
| | (2.8 | )% |
| 3 | 2,308 |
| | (147 | ) | | 2,161 |
| | 93.6 | % | | 2,746 |
| | (5.4 | )% |
| 4 | 500 |
| | (65 | ) | | 435 |
| | 87.0 | % | | 533 |
| | (12.2 | )% |
| 5 | 88 |
| | (5 | ) | | 83 |
| | 94.3 | % | | 232 |
| | (2.2 | )% |
| 6 | 2 |
| | — |
| | 2 |
| | 100.0 | % | | 9 |
| | — | % |
| Total below investment grade | 2,898 |
| | (217 | ) | | 2,681 |
| | 92.5 | % | | 3,520 |
| | (6.2 | )% |
| Total | $ | 37,423 |
| | $ | (1,797 | ) | | $ | 35,626 |
| | 95.2 | % | | $ | 60,702 |
| | (3.0 | )% |
The gross unrealized losses on AFS securities, including related parties, were $819 million and $1.8 billion as of March 31, 2019 and December 31, 2018, respectively. The decrease in unrealized losses was driven by the decrease in U.S. Treasury rates and credit spreads tightening during the three months ended March 31, 2019.
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 sixthree months ended June 30,March 31, 2019 and 2018, we recorded $1 million and $3 million, respectively, of OTTI losses, comprised of $2 millionprimarily related to corporate fixed maturities and $1 million related to RMBS. Of the OTTI losses recognized for the six months ended June 30, 2018, there were no OTTI losses related to the energy sector. During the six months ended June 30, 2017, we recorded $12 million of OTTI losses comprised of $8 million related to corporate fixed maturities, $3 million related to mortgage loans and $1 million related to ABS. Of the OTTI losses recognized during the six months ended June 30, 2017, there were no OTTI losses related to the energy sector.maturities. The annualized OTTI losses we have experienced for the sixthree months ended June 30,March 31, 2019 and 2018 and 2017 translate into less than 1 basis point and 32 basis points, respectively, of average invested assets.
International Exposure
A portion of our fixed maturityAFS securities isare invested in securities with international exposure. As of June 30, 2018March 31, 2019 and December 31, 2017,2018, 31% and 30% and 33% of the carrying value of our fixed maturityAFS 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table presents our international exposure in our fixed maturity securitiesAFS portfolio, including related parties, by country or region:
| | | | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| (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 | $ | 526 |
| | $ | 512 |
| | 2.8 | % | | $ | 498 |
| | $ | 511 |
| | 2.6 | % | $ | 631 |
| | $ | 624 |
| | 3.1 | % | | $ | 578 |
| | $ | 552 |
| | 3.0 | % |
| Italy | 36 |
| | 36 |
| | 0.2 | % | | 59 |
| | 64 |
| | 0.3 | % | 36 |
| | 36 |
| | 0.2 | % | | 36 |
| | 35 |
| | 0.2 | % |
| Spain | 56 |
| | 57 |
| | 0.3 | % | | 209 |
| | 225 |
| | 1.1 | % | 67 |
| | 68 |
| | 0.3 | % | | 62 |
| | 62 |
| | 0.4 | % |
| Portugal | — |
| | — |
| | — | % | | 1 |
| | 1 |
| | 0.0 | % | |
Total Ireland, Italy, Greece, Spain and Portugal1 | 618 |
| | 605 |
| | 3.3 | % | | 767 |
| | 801 |
| | 4.0 | % | 734 |
| | 728 |
| | 3.6 | % | | 676 |
| | 649 |
| | 3.6 | % |
| Other Europe | 6,072 |
| | 5,989 |
| | 33.2 | % | | 8,087 |
| | 8,395 |
| | 42.0 | % | 6,597 |
| | 6,639 |
| | 32.4 | % | | 6,335 |
| | 6,133 |
| | 33.3 | % |
| Total Europe | 6,690 |
| | 6,594 |
| | 36.5 | % | | 8,854 |
| | 9,196 |
| | 46.0 | % | 7,331 |
| | 7,367 |
| | 36.0 | % | | 7,011 |
| | 6,782 |
| | 36.9 | % |
| Non-U.S. North America | 8,864 |
| | 8,855 |
| | 49.0 | % | | 8,048 |
| | 8,220 |
| | 41.2 | % | 10,126 |
| | 10,016 |
| | 48.9 | % | | 9,261 |
| | 8,906 |
| | 48.4 | % |
| Australia & New Zealand | 1,647 |
| | 1,620 |
| | 9.0 | % | | 1,443 |
| | 1,481 |
| | 7.4 | % | 1,864 |
| | 1,888 |
| | 9.2 | % | | 1,731 |
| | 1,696 |
| | 9.2 | % |
| Central & South America | 409 |
| | 411 |
| | 2.3 | % | | 481 |
| | 508 |
| | 2.6 | % | 442 |
| | 457 |
| | 2.2 | % | | 448 |
| | 445 |
| | 2.4 | % |
| Africa & Middle East | 227 |
| | 223 |
| | 1.2 | % | | 193 |
| | 196 |
| | 1.0 | % | 247 |
| | 255 |
| | 1.3 | % | | 228 |
| | 226 |
| | 1.2 | % |
| Asia/Pacific | 364 |
| | 355 |
| | 2.0 | % | | 321 |
| | 327 |
| | 1.6 | % | 474 |
| | 485 |
| | 2.4 | % | | 351 |
| | 345 |
| | 1.9 | % |
| Supranational | — |
| | — |
| | — | % | | 39 |
| | 41 |
| | 0.2 | % | |
| Total | $ | 18,201 |
| | $ | 18,058 |
| | 100.0 | % | | $ | 19,379 |
| | $ | 19,969 |
| | 100.0 | % | $ | 20,484 |
| | $ | 20,468 |
| | 100.0 | % | | $ | 19,030 |
| | $ | 18,400 |
| | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
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 or Portugal. | | 1 As of each of the respective periods, we had no holdings in Greece or Portugal. |
Approximately 92.3%95.3% and 90.9%93.9% of these securities are investment grade by NAIC designation as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. As of June 30, 2018, 9%March 31, 2019, 10% of our fixed maturity securities, including related parties, were invested in CLOs of Cayman Islands issuers (for which underlying investments are largely loans to U.S. issuers) and 21% were invested in securities of 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 $605$728 million and $801$649 million as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively, of exposure in these countries.
As of June 30, 2018,March 31, 2019, we held United Kingdom and Channel Islands fixed maturityAFS securities of $2.2$2.5 billion, or 3.6%3.7% of the total fixed maturitiesour AFS securities, including related parties. As of June 30, 2018,March 31, 2019, these securities were in ana net unrealized loss position of $51$4 million. Our investment managers analyze each holding for credit risk by economic and other factors of each country and industry.
Trading Securities
Trading securities, including related parties, were $2.3$2.5 billion and $2.5$2.2 billion as of June 30, 2018March 31, 2019 and December 31, 20172018, 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
82
The following is a summary of our mortgage loan portfolio by collateral type:
|
| | | | | | | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
| (In millions, except percentages) | Net Carrying Value | | Percent of Total | | Net Carrying Value | | Percent of Total |
| Property type | | | | | | | |
| Office building | $ | 2,527 |
| | 22.3 | % | | $ | 2,221 |
| | 20.9 | % |
| Retail | 1,797 |
| | 15.8 | % | | 1,660 |
| | 15.6 | % |
| Hotels | 1,040 |
| | 9.2 | % | | 1,040 |
| | 9.8 | % |
| Industrial | 1,232 |
| | 10.9 | % | | 1,196 |
| | 11.2 | % |
| Apartment | 899 |
| | 7.9 | % | | 791 |
| | 7.4 | % |
Other commercial1 | 284 |
| | 2.5 | % | | 389 |
| | 3.7 | % |
| Total net commercial mortgage loans | 7,779 |
| | 68.6 | % | | 7,297 |
| | 68.6 | % |
| Residential loans | 3,554 |
| | 31.4 | % | | 3,334 |
| | 31.4 | % |
| Total mortgage loans, net of allowances | $ | 11,333 |
| | 100.0 | % | | $ | 10,631 |
| | 100.0 | % |
| | | | | | | | |
1 Other commercial loans include investments in nursing homes, other healthcare institutions, parking garages, storage facilities and other commercial properties. |
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:
|
| | | | | | | | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
| (In millions, except percentages) | Net Carrying Value | | Percent of Total | | Net Carrying Value | | Percent of Total |
| Property type | | | | | | | |
| Office building | $ | 1,769 |
| | 23.2 | % | | $ | 1,187 |
| | 19.0 | % |
| Retail | 1,710 |
| | 22.4 | % | | 1,223 |
| | 19.6 | % |
| Hotels | 895 |
| | 11.8 | % | | 928 |
| | 14.9 | % |
| Industrial | 858 |
| | 11.3 | % | | 944 |
| | 15.2 | % |
| Apartment | 545 |
| | 7.2 | % | | 525 |
| | 8.4 | % |
Other commercial1 | 457 |
| | 6.0 | % | | 440 |
| | 7.1 | % |
| Total net commercial mortgage loans | 6,234 |
| | 81.9 | % | | 5,247 |
| | 84.2 | % |
| Residential loans | 1,375 |
| | 18.1 | % | | 986 |
| | 15.8 | % |
| Total mortgage loans, net of allowances | $ | 7,609 |
| | 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. |
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 $7.6$11.3 billion and $6.2$10.6 billion as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. This included $2.0$2.2 billion and $1.8$2.1 billion of mezzanine mortgage loans as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. The increase in mortgage loans is mainly driven by an increase in commercial mortgage loan (CML) and residential mortgage loan (RML) purchases during the period. 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 loansCMLs on income producing properties including hotels, apartments, retail and office buildings, and other commercial and industrial properties. Our RML portfolio primarily consists of first lien RMLs collateralized by properties located in the U.S. Loan-to-value ratios at the time of loan approval are generally 75% or less.
Our mortgage loans are primarily stated at unpaid principal balance, adjusted for any unamortized premium or discount, and net of valuation allowances. Interest income is accrued on the principal amount of the loan based on the loan’s contractual interest rate. Amortization of premiums and discounts is recorded using the effective interest method. Interest income, amortization of premiums and discounts, and prepayment fees are reported in net investment income.
It is our policy to cease to accrue interest on loans that are over 90 days delinquent. For loans less than 90 days delinquent, interest is accrued unless it is determined that the accrued interest is not collectible. If a loan becomes over 90 days delinquent, it is our general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current is in place. As of June 30,March 31, 2019 and December 31, 2018, we had $35$56 million and $48 million, respectively, of mortgage loans that were 90 days past due, of which $20 million and $9$15 million, in the process of foreclosure. As of December 31, 2017, we had $28 million of mortgage loans thatrespectively, were 90 days past due and $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 June 30, 2018March 31, 2019 and December 31, 2017,2018, we had not recorded any new specific loan valuation allowancesallowances. For each of the three months ended March 31, 2019 and 2018, we recorded $0 million and $3 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 June 30, 2018each of March 31, 2019 and December 31, 2017, respectively, attributable to loans acquired in connection with the acquisition of Aviva USA.2018.
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, among others: (1) investments that constitute a direct investment or an investment in a fund with a high degree of co-investment; (2) investments with credit- or debt-like characteristics (for example, a stipulated maturity and par value), or alternatively, investments with reduced volatility when compared to pure equity; or (3) investments that have less downside risk. A portion 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. 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 June 30, 2018, the assets consisted of $137 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of 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: | | | | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| (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 | | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | |
| Trading securities | $ | 48 |
| | 5.9 | % | | $ | 48 |
| | 5.5 | % | $ | 34 |
| | 5.0 | % | | $ | 35 |
| | 4.9 | % |
| Equity securities | 163 |
| | 20.1 | % | | 240 |
| | 27.8 | % | 6 |
| | 0.9 | % | | 50 |
| | 7.0 | % |
| Investment funds | 593 |
| | 73.2 | % | | 571 |
| | 66.1 | % | 619 |
| | 92.0 | % | | 624 |
| | 87.7 | % |
| Cash and cash equivalents | 2 |
| | 0.2 | % | | 4 |
| | 0.5 | % | 2 |
| | 0.3 | % | | 2 |
| | 0.3 | % |
| Other assets | 5 |
| | 0.6 | % | | 1 |
| | 0.1 | % | 12 |
| | 1.8 | % | | 1 |
| | 0.1 | % |
| Total assets of consolidated VIEs | $ | 811 |
| | 100.0 | % | | $ | 864 |
| | 100.0 | % | $ | 673 |
| | 100.0 | % | | $ | 712 |
| | 100.0 | % |
| | | | | | | | | | | | | | | |
| Liabilities of consolidated VIEs | | | | | | | | | | | | | | |
| Other liabilities | $ | 4 |
| | 100.0 | % | | $ | 2 |
| | 100.0 | % | $ | 1 |
| | 100.0 | % | | $ | 1 |
| | 100.0 | % |
| Total liabilities of consolidated VIEs | $ | 4 |
| | 100.0 | % | | $ | 2 |
| | 100.0 | % | $ | 1 |
| | 100.0 | % | | $ | 1 |
| | 100.0 | % |
The assets
Item 2. Management’s Discussion and $864 million asAnalysis of June 30, 2018Financial Condition and December 31, 2017, respectively. The liabilitiesResults of consolidated VIEs were $4 million and $2 million as of June 30, 2018 and December 31, 2017, respectively.Operations
The following table illustrates our investment funds, including related party positions of our non-consolidated VIEs and investment funds owned by consolidated VIEs:
|
| | | | | | | | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
| (In millions, except percentages) | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total |
| Investment funds | | | | | | | |
| Private equity | $ | 237 |
| | 7.7 | % | | $ | 271 |
| | 10.5 | % |
| Real estate and other real assets | 179 |
| | 5.9 | % | | 161 |
| | 6.2 | % |
| Natural resources | 4 |
| | 0.1 | % | | 4 |
| | 0.2 | % |
| Hedge funds | 53 |
| | 1.7 | % | | 61 |
| | 2.4 | % |
| Credit funds | 160 |
| | 5.2 | % | | 202 |
| | 7.8 | % |
| Total investment funds | 633 |
| | 20.6 | % | | 699 |
| | 27.1 | % |
| Investment funds – related parties | | | | | | | |
| Private equity – A-A Mortgage | 432 |
| | 14.1 | % | | 403 |
| | 15.6 | % |
| Private equity | 441 |
| | 14.4 | % | | 180 |
| | 7.0 | % |
| Real estate and other real assets | 499 |
| | 16.3 | % | | 297 |
| | 11.5 | % |
| Natural resources | 91 |
| | 3.0 | % | | 74 |
| | 2.9 | % |
| Hedge funds | 98 |
| | 3.2 | % | | 93 |
| | 3.6 | % |
| Credit funds | 275 |
| | 9.0 | % | | 263 |
| | 10.2 | % |
| Total investment funds – related parties | 1,836 |
| | 60.0 | % | | 1,310 |
| | 50.8 | % |
| Investment funds owned by consolidated VIEs | | | | | | | |
| Private equity – MidCap | 541 |
| | 17.7 | % | | 528 |
| | 20.4 | % |
| Credit funds | 1 |
| | — | % | | 21 |
| | 0.8 | % |
| Real estate and other real assets | 51 |
| | 1.7 | % | | 22 |
| | 0.9 | % |
| Total investment funds owned by consolidated VIEs | 593 |
| | 19.4 | % | | 571 |
| | 22.1 | % |
| Total investment funds, including related parties and VIEs | $ | 3,062 |
| | 100.0 | % | | $ | 2,580 |
| | 100.0 | % |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
| | | | | | | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
| (In millions, except percentages) | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total |
| Investment funds | | | | | | | |
| Real estate | $ | 224 |
| | 6.2 | % | | $ | 215 |
| | 6.0 | % |
| Credit funds | 155 |
| | 4.3 | % | | 172 |
| | 4.8 | % |
| Private equity | 239 |
| | 6.7 | % | | 253 |
| | 7.1 | % |
| Real assets | 64 |
| | 1.8 | % | | 56 |
| | 1.6 | % |
| Natural resources | 1 |
| | 0.0 | % | | 4 |
| | 0.1 | % |
| Other | — |
| | — | % | | 3 |
| | 0.1 | % |
| Total investment funds | 683 |
| | 19.0 | % | | 703 |
| | 19.7 | % |
| Investment funds – related parties | | | | | | | |
| Differentiated investments | | | | | | | |
| AmeriHome | 436 |
| | 12.1 | % | | 463 |
| | 13.0 | % |
| Catalina | 232 |
| | 6.5 | % | | 233 |
| | 6.5 | % |
| Athora | 124 |
| | 3.5 | % | | 105 |
| | 3.0 | % |
| Venerable | 87 |
| | 2.4 | % | | 92 |
| | 2.6 | % |
| Other | 171 |
| | 4.8 | % | | 162 |
| | 4.6 | % |
| Total differentiated investments | 1,050 |
| | 29.3 | % | | 1,055 |
| | 29.7 | % |
| Real estate | 498 |
| | 13.9 | % | | 506 |
| | 14.2 | % |
| Credit funds | 340 |
| | 9.5 | % | | 341 |
| | 9.6 | % |
| Private equity | 52 |
| | 1.4 | % | | 18 |
| | 0.5 | % |
| Real assets | 144 |
| | 4.0 | % | | 145 |
| | 4.1 | % |
| Natural resources | 123 |
| | 3.4 | % | | 104 |
| | 2.9 | % |
| Public equities | 83 |
| | 2.3 | % | | 63 |
| | 1.8 | % |
| Total investment funds – related parties | 2,290 |
| | 63.8 | % | | 2,232 |
| | 62.8 | % |
| Investment funds owned by consolidated VIEs | | | | | | | |
| MidCap | 550 |
| | 15.3 | % | | 552 |
| | 15.5 | % |
| Credit funds | 1 |
| | 0.0 | % | | 1 |
| | 0.0 | % |
| Real estate | 29 |
| | 0.8 | % | | 30 |
| | 0.8 | % |
| Real assets | 39 |
| | 1.1 | % | | 41 |
| | 1.2 | % |
| Total investment funds owned by consolidated VIEs | 619 |
| | 17.2 | % | | 624 |
| | 17.5 | % |
| Total investment funds, including related parties and funds owned by consolidated VIEs | $ | 3,592 |
| | 100.0 | % | | $ | 3,559 |
| | 100.0 | % |
Overall, the total investment funds, including related party and consolidated VIEs, were $3.1 billion and $2.6$3.6 billion as of June 30, 2018each of March 31, 2019 and December 31, 2017, respectively.2018. See Note 42 – Variable Interest EntitiesInvestments to the condensed consolidated financial statements for further discussion regarding how we account for our investment funds. Our investment fund portfolio is subject to a number of market related risks including interest rate risk and equity market risk. Interest rate risk represents the potential for changes in the investment fund’s net asset values resulting from changes in the general level of interest rates. Equity market risk represents potential for changes in the investment fund’s net asset values resulting from changes in equity markets or from other external factors which influence equity markets. We actively monitor our exposureOur investment funds are subject to the risks inherent in these investments which could materially and adversely affect our results of operations and financial condition. The interest rate risk and equity market risksrisk which expose us to potential volatility in our earnings period-over-period relatedperiod-over-period. We actively monitor our exposure to these investment funds.risks.
Funds Withheld at Interest
Funds withheld at interest represents a receivable for amounts contractually withheld by ceding companies in accordance with modco and funds withheld reinsurance agreements in which we act as the reinsurer. Generally, assets equal to statutory reserves are withheld and legally owned by the ceding company. We hold funds withheld at interest receivables with related parties including those held with VIAC. As of June 30, 2018,March 31, 2019, the significant majority of the ceding companies holding the assets pursuant to such reinsurance agreements had a financial strength rating of A- or better.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The funds withheld at interest is comprised of the host contract and an embedded derivative. We are subject to the investment performance on the withheld assets with the total return directly impacting the host contract and the embedded derivative. Interest accrues at a risk-free rate on the host receivable and is recorded as net investment income in the condensed consolidated statements of income. The change in the embedded derivative in our reinsurance agreements which is similar to a total return swap on the income generated by the underlying assets held by the ceding companies,companies. The change in the embedded derivative is recorded in investment related gains (losses). Although we do not directly control the underlying investments in the funds withheld at interest, in each instance the ceding company has hired AAM to manage the withheld assets in accordance with our investment guidelines.
The following summarizes the underlying investment composition of the funds withheld at interest, including related party:parties:
| | | | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| (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 | $ | 77 |
| | 0.4 | % | | $ | — |
| | — | % | $ | 55 |
| | 0.2 | % | | $ | 77 |
| | 0.3 | % |
| U.S. state, municipal and political subdivisions | 507 |
| | 2.3 | % | | 117 |
| | 1.6 | % | 556 |
| | 1.9 | % | | 563 |
| | 2.0 | % |
| Foreign governments | 122 |
| | 0.6 | % | | — |
| | — | % | 179 |
| | 0.6 | % | | 145 |
| | 0.5 | % |
| Corporate | 11,615 |
| | 53.0 | % | | 2,095 |
| | 29.6 | % | 15,787 |
| | 54.6 | % | | 16,267 |
| | 56.9 | % |
| CLO | 767 |
| | 3.5 | % | | 669 |
| | 9.4 | % | 2,420 |
| | 8.4 | % | | 1,990 |
| | 7.0 | % |
| ABS | 1,269 |
| | 5.8 | % | | 886 |
| | 12.5 | % | 2,023 |
| | 7.0 | % | | 1,601 |
| | 5.6 | % |
| CMBS | 839 |
| | 3.8 | % | | 290 |
| | 4.1 | % | 615 |
| | 2.1 | % | | 575 |
| | 2.0 | % |
| RMBS | 2,054 |
| | 9.4 | % | | 1,551 |
| | 21.9 | % | 1,924 |
| | 6.7 | % | | 1,876 |
| | 6.6 | % |
| Equity securities | 51 |
| | 0.2 | % | | 28 |
| | 0.4 | % | 242 |
| | 0.8 | % | | 66 |
| | 0.2 | % |
| Mortgage loans | 3,476 |
| | 15.8 | % | | 792 |
| | 11.2 | % | 3,929 |
| | 13.6 | % | | 3,815 |
| | 13.3 | % |
| Investment funds | 486 |
| | 2.2 | % | | 376 |
| | 5.3 | % | 591 |
| | 2.0 | % | | 660 |
| | 2.3 | % |
| Derivative assets | 289 |
| | 1.3 | % | | 78 |
| | 1.1 | % | 174 |
| | 0.6 | % | | 77 |
| | 0.3 | % |
| Short-term investments | 332 |
| | 1.5 | % | | 16 |
| | 0.2 | % | 514 |
| | 1.8 | % | | 641 |
| | 2.2 | % |
| Cash and cash equivalents | 311 |
| | 1.4 | % | | 132 |
| | 1.9 | % | 373 |
| | 1.3 | % | | 455 |
| | 1.6 | % |
| Other assets and liabilities | (274 | ) | | (1.2 | )% | | 55 |
| | 0.8 | % | (458 | ) | | (1.6 | )% | | (208 | ) | | (0.8 | )% |
| Total funds withheld at interest, including related party | $ | 21,921 |
| | 100.0 | % | | $ | 7,085 |
| | 100.0 | % | |
| Total funds withheld at interest including related party | | $ | 28,924 |
| | 100.0 | % | | $ | 28,600 |
| | 100.0 | % |
As of June 30, 2018March 31, 2019 and December 31, 2017,2018, we held $21.9$28.9 billion and $7.1$28.6 billion, respectively, of funds withheld at interest receivables, 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 95.4%96.1% and 94.2%96.6% of the fixed maturity securities within the funds withheld at interest are investment grade by NAIC designation as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively.
Derivative Instruments
We hold derivative instruments for economic hedging purposes to reduce our exposure to cash flow variability of assets and liabilities, equity market risk, interest rate risk, credit risk and foreign exchange risk. The types of derivatives we may use include interest rate swaps, foreign currency swaps and forward contracts, total return swaps, credit default swaps, variance swaps, futures and fixed indexed options.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
A presentation ofdiscussion regarding our derivative instruments along with a discussion of the business strategy involved with our derivativesand how such instruments are used to manage risk is included in Note 3 – Derivative Instruments to the condensed consolidated financial statements. This includes:
| |
▪ | a comprehensive description of the derivatives instruments as well as the strategies to manage risk; |
| |
▪ | the notional amounts and estimated fair value by derivative instruments; and |
| |
▪ | impacts on the condensed consolidated statement of net income. |
As part of our risk management strategies, management continually evaluates our derivative instrument holdings and the effectiveness of such holdings in addressing risks identified in our operations.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Invested Assets
The following summarizes our invested assets:
| | | | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| (In millions, except percentages) | Invested Asset Value1 | | Percent of Total | | U.S. and Bermuda Invested Asset Value | | Germany Invested Asset Value | | Invested Asset Value1 | | Percent of Total | Invested Asset Value1 | | Percent of Total | | Invested Asset Value1 | | Percent of Total |
| Corporate | $ | 50,217 |
| | 51.0 | % | | $ | 37,059 |
| | $ | 1,536 |
| | $ | 38,595 |
| | 46.9 | % | $ | 57,142 |
| | 50.2 | % | | $ | 55,772 |
| | 50.2 | % |
| CLO | 6,286 |
| | 6.4 | % | | 5,914 |
| | — |
| | 5,914 |
| | 7.2 | % | 9,192 |
| | 8.1 | % | | 8,275 |
| | 7.5 | % |
| Credit | 56,503 |
| | 57.4 | % | | 42,973 |
| | 1,536 |
| | 44,509 |
| | 54.1 | % | 66,334 |
| | 58.3 | % | | 64,047 |
| | 57.7 | % |
| RMBS | 10,557 |
| | 10.7 | % | | 10,532 |
| | — |
| | 10,532 |
| | 12.8 | % | 9,636 |
| | 8.5 | % | | 9,814 |
| | 8.9 | % |
| Mortgage loans | 11,088 |
| | 11.2 | % | | 6,858 |
| | 165 |
| | 7,023 |
| | 8.5 | % | 15,207 |
| | 13.3 | % | | 14,423 |
| | 13.0 | % |
| CMBS | 3,188 |
| | 3.2 | % | | 2,322 |
| | — |
| | 2,322 |
| | 2.8 | % | 3,046 |
| | 2.7 | % | | 3,018 |
| | 2.7 | % |
| Real estate held for investment | — |
| | — | % | | — |
| | 625 |
| | 625 |
| | 0.8 | % | |
| Real estate | 24,833 |
| | 25.1 | % | | 19,712 |
| | 790 |
| | 20,502 |
| | 24.9 | % | 27,889 |
| | 24.5 | % | | 27,255 |
| | 24.6 | % |
| ABS | 6,589 |
| | 6.7 | % | | 4,824 |
| | — |
| | 4,824 |
| | 5.9 | % | 8,294 |
| | 7.3 | % | | 7,706 |
| | 6.9 | % |
| Alternative investments | 3,913 |
| | 4.0 | % | | 3,692 |
| | 137 |
| | 3,829 |
| | 4.6 | % | 4,390 |
| | 3.9 | % | | 4,492 |
| | 4.1 | % |
| State, municipal, political subdivisions and foreign government | 2,055 |
| | 2.1 | % | | 1,347 |
| | 2,411 |
| | 3,758 |
| | 4.5 | % | 2,256 |
| | 2.0 | % | | 2,122 |
| | 1.9 | % |
| Unit-linked assets | — |
| | — | % | | — |
| | 407 |
| | 407 |
| | 0.5 | % | |
| Equity securities | 289 |
| | 0.3 | % | | 192 |
| | 128 |
| | 320 |
| | 0.4 | % | 832 |
| | 0.7 | % | | 467 |
| | 0.4 | % |
| Short-term investments | 736 |
| | 0.7 | % | | 228 |
| | — |
| | 228 |
| | 0.3 | % | 613 |
| | 0.5 | % | | 765 |
| | 0.7 | % |
| U.S. government and agencies | 221 |
| | 0.2 | % | | 29 |
| | 35 |
| | 64 |
| | 0.1 | % | 102 |
| | 0.1 | % | | 134 |
| | 0.1 | % |
| Other investments | 13,803 |
| | 14.0 | % | | 10,312 |
| | 3,118 |
| | 13,430 |
| | 16.3 | % | 16,487 |
| | 14.5 | % | | 15,686 |
| | 14.1 | % |
| Cash and equivalents | 2,353 |
| | 2.4 | % | | 2,504 |
| | 296 |
| | 2,800 |
| | 3.4 | % | 1,853 |
| | 1.6 | % | | 2,881 |
| | 2.6 | % |
| Policy loans and other | 1,117 |
| | 1.1 | % | | 761 |
| | 296 |
| | 1,057 |
| | 1.3 | % | 1,208 |
| | 1.1 | % | | 1,165 |
| | 1.0 | % |
| Total invested assets | $ | 98,609 |
| | 100.0 | % | | $ | 76,262 |
| | $ | 6,036 |
| | $ | 82,298 |
| | 100.0 | % | $ | 113,771 |
| | 100.0 | % | | $ | 111,034 |
| | 100.0 | % |
| | | | | | | | | | | | | | | | | | | |
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. | 1 See Key Operating and Non-GAAP Measures for the definition of invested assets. |
Our total invested assets were $98.6$113.8 billion and $82.3$111.0 billion as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. As of June 30, 2018,March 31, 2019, our total invested assets were mainly comprised of 51.0%50.2% of corporate securities, 27.0%26.6% of structured securities, 11.2%13.3% of mortgage loans and 4.0%3.9% of alternative investments. Corporate securities within our U.S. and Bermuda portfolio included $13.6$15.2 billion of private placements, which represented 14%13.4% of our total invested assets. The increase in total invested assets as of June 30, 2018March 31, 2019 from December 31, 20172018 was primarily driven by $17.7 billion of invested assets from the Voya reinsurance transaction, strong growth in deposits overwhich exceeded liability outflows and reinvestment of earnings, partially offset by the deconsolidation of our former Germany operations.outflows.
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 policyholderreserve 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Invested assets is utilized by management to evaluate our investment portfolio. Invested asset figures are used in the computation of net investment earned rate, which allows us to analyze the profitability of our investment portfolio. Invested assets is also used in our risk management processes for asset purchases, product design and underwriting, stress scenarios, liquidity, and ALM.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Alternative Investments
The following summarizes our alternative investments:
|
| | | | | | | | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
| (In millions, except percentages) | Invested Asset Value | | Percent of Total | | Invested Asset Value | | Percent of Total |
| Credit funds | $ | 659 |
| | 16.8 | % | | $ | 784 |
| | 20.4 | % |
| Private equity – MidCap | 541 |
| | 13.8 | % | | 528 |
| | 13.8 | % |
| Private equity – A-A Mortgage (AmeriHome) | 530 |
| | 13.5 | % | | 496 |
| | 12.9 | % |
| Private equity – other | 764 |
| | 19.6 | % | | 554 |
| | 14.5 | % |
| Mortgage and real assets | 883 |
| | 22.6 | % | | 643 |
| | 16.8 | % |
| Hedge funds | 179 |
| | 4.6 | % | | 467 |
| | 12.2 | % |
| Public equities | 121 |
| | 3.1 | % | | 171 |
| | 4.5 | % |
| Natural resources and other real assets | 236 |
| | 6.0 | % | | 186 |
| | 4.9 | % |
| Total alternative investments | $ | 3,913 |
| | 100.0 | % | | $ | 3,829 |
| | 100.0 | % |
|
| | | | | | | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
| (In millions, except percentages) | Invested Asset Value | | Percent of Total | | Invested Asset Value | | Percent of Total |
| Retirement Services | | | | | | | |
| Differentiated investments | | | | | | | |
| AmeriHome | $ | 535 |
| | 12.2 | % | | $ | 568 |
| | 12.6 | % |
| MidCap | 550 |
| | 12.5 | % | | 552 |
| | 12.3 | % |
| Catalina | 232 |
| | 5.3 | % | | 232 |
| | 5.2 | % |
| Venerable | 87 |
| | 2.0 | % | | 92 |
| | 2.1 | % |
| Other | 207 |
| | 4.7 | % | | 195 |
| | 4.3 | % |
| Total differentiated investments | 1,611 |
| | 36.7 | % | | 1,639 |
| | 36.5 | % |
| Real estate | 955 |
| | 21.8 | % | | 1,024 |
| | 22.8 | % |
| Credit | 550 |
| | 12.5 | % | | 563 |
| | 12.5 | % |
| Private equity | 309 |
| | 7.0 | % | | 279 |
| | 6.2 | % |
| Real assets | 283 |
| | 6.4 | % | | 276 |
| | 6.2 | % |
| Natural resources | 55 |
| | 1.3 | % | | 55 |
| | 1.2 | % |
| Other | 2 |
| | 0.0 | % | | 4 |
| | 0.1 | % |
| Total Retirement Services alternative investments | 3,765 |
| | 85.7 | % | | 3,840 |
| | 85.5 | % |
| Corporate and Other | | | | | | | |
| Athora | 131 |
| | 3.0 | % | | 130 |
| | 2.9 | % |
| Credit | 194 |
| | 4.4 | % | | 203 |
| | 4.5 | % |
| Natural resources | 215 |
| | 4.9 | % | | 213 |
| | 4.8 | % |
Public equities1 | 83 |
| | 1.9 | % | | 100 |
| | 2.2 | % |
| Other | 2 |
| | 0.1 | % | | 6 |
| | 0.1 | % |
| Total Corporate and Other alternative investments | 625 |
| | 14.3 | % | | 652 |
| | 14.5 | % |
| Total alternative investments | $ | 4,390 |
| | 100.0 | % | | $ | 4,492 |
| | 100.0 | % |
| | | | | | | | |
1 As of March 31, 2019, public equities primarily includes an investment in OneMain Holdings, Inc. (ticker: OMF). |
Alternative investments were $3.9$4.4 billion and $3.8$4.5 billion as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively, representing 4.0%3.9% and 4.6%4.1% of our total invested assets portfolio as of June 30, 2018March 31, 2019 and December 31, 2017,2018, 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 AmeriHome, both of which, from time to time, provide us with access to assets for our investment portfolio.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MidCap
Our equity investment in MidCap is held indirectly through an investment fund, AAA Investment (Co Invest VII), L.P. (CoInvest VII),CoInvest VII, of which MidCap constitutes substantially all the fund’s investments. MidCap is a commercial finance company that provides various financial products to middle-market businesses in multiple industries, primarily located in the U.S. MidCap primarily originates and invests in commercial and industrial loans, including senior secured corporate loans, working capital loans collateralized mainly by accounts receivable and inventory, senior secured loans collateralized by portfolios of commercial and consumer loans and related products and secured loans to highly capitalized pharmaceutical and medical device companies, and commercial real estate loans, including multifamily independent-living properties, assisted living, skilled nursing and medical office properties, warehouse, office building, hotel and other commercial use properties and multifamily properties. MidCap originates and acquires loans using borrowings under financing arrangements that it has in place with numerous financial institutions. MidCap’s earnings are primarily driven by the difference between the interest earned on its loan portfolio and the interest accrued under its outstanding borrowings. As a result, MidCap is primarily exposed to the credit risk of its loan counterparties and prepayment risk. Additionally, financial results are influenced by related levels of middle-market business investment and interest rates.
Our alternative investment in CoInvest VII is substantially comprised of its investment in MidCap, which was $541had a carrying value of $550 million and $528$552 million as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. Our investment in CoInvest VII largely reflects any contributions to and distributions from CoInvest VII and the fair value of MidCap. CoInvest VII returned a net investment earned rate of 14.51%9.50% and 8.13%11.79% for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively, and 13.15% and 9.93% for the six months ended June 30, 2018 and 2017, respectively. Alternative investment income from CoInvest VII was $21$14 million and $12$16 million for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively, and $37 million and $28 million for the six months ended June 30, 2018 and 2017, respectively. The increase in alternative investment income for both periods was driven by higher loan volumes and increased assets under management.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
AmeriHome
Our equity investment in AmeriHome is held indirectly through an investment fund, A-A Mortgage, Opportunities, LP (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 was $530had a carrying value of $535 million and $496$568 million as of June 30, 2018March 31, 2019 and December 31, 2017,2018, 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 12.14%14.27% and 23.76%13.75% for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively, and 12.93% and 17.18% for the six months ended June 30, 2018 and 2017, respectively. Alternative investment income from A-A Mortgage was $16$20 million and $29$18 million for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively, and $34 million and $40 million for the six months ended June 30, 2018 and 2017, respectively. The decreaseincrease in alternative investment income for the three months ended June 30, 2018March 31, 2019 compared to 20172018 was attributed to 2017 reflecting outperformance in the prior year driven by higher loan origination related to lower interest rates.gain on sale of mortgage service rights.
Public Equities
We indirectly hold public equity positions through our equity investments in a few alternative investments. Although the carrying value of these securities is minor, such securities have resulted in volatility in our statements of income in recent periods. As of March 31, 2019 and December 31, 2018, we indirectly held public equity positions of $83 million and $100 million, respectively. As of March 31, 2019 and December 31, 2018, we held approximately 2.8 million and 2.8 million shares of OneMain, respectively, with a market value of $83 million and $63 million, respectively. As of December 31, 2018, we held approximately 5.5 million shares of Caesars, with a market value of $37 million. Caesars was held indirectly through our investment in AAA Investment (Co Invest VI), L.P. (CoInvest VI). In the first quarter of 2019, CoInvest VI sold its remaining shares of Caesars.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Non-GAAP Measure Reconciliations
The reconciliations to the nearest GAAP measure for adjusted operating income 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 ROE, is as follows:
| | | (In millions) | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| Total shareholders’ equity | $ | 8,505 |
| | $ | 9,208 |
| $ | 10,117 |
| | $ | 8,276 |
|
| Less: AOCI | 126 |
| | 1,415 |
| 706 |
| | (472 | ) |
| Less: Accumulated reinsurance unrealized gains and losses | 12 |
| | 161 |
| |
| Less: Accumulated change in fair value of reinsurance assets | | 309 |
| | (75 | ) |
| Total adjusted shareholders’ equity | $ | 8,367 |
| | $ | 7,632 |
| $ | 9,102 |
| | $ | 8,823 |
|
| | | | | | | |
| Segment adjusted shareholders’ equity | | | | | | |
| Retirement Services | $ | 6,114 |
| | $ | 5,304 |
| $ | 8,201 |
| | $ | 7,807 |
|
| Corporate and Other | 2,253 |
| | 2,328 |
| 901 |
| | 1,016 |
|
| Total adjusted shareholders’ equity | $ | 8,367 |
| | $ | 7,632 |
| $ | 9,102 |
| | $ | 8,823 |
|
The reconciliation of average shareholders’ equity to average adjusted shareholders’ equity, which is included in adjusted ROE and adjusted operating ROE is as follows:
|
| | | | | | | |
| | Three months ended March 31, |
| (In millions) | 2019 | | 2018 |
| Average shareholders’ equity | $ | 9,197 |
| | $ | 8,932 |
|
| Less: Average AOCI | 117 |
| | 1,042 |
|
| Less: Average accumulated change in fair value of reinsurance assets | 117 |
| | 134 |
|
| Average adjusted shareholders’ equity | $ | 8,963 |
| | $ | 7,756 |
|
| | | | |
| Segment average adjusted shareholders’ equity | | | |
| Retirement Services | $ | 8,004 |
| | $ | 5,366 |
|
| Corporate and Other | 959 |
| | 2,390 |
|
| Average adjusted shareholders’ equity | $ | 8,963 |
| | $ | 7,756 |
|
The reconciliation of net income to adjusted net income, which is included in adjusted ROE is as follows:
| | | | Three months ended June 30, | | Six months ended June 30, | Three months ended March 31, |
| (In millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| Net income | $ | 264 |
| | $ | 326 |
| | $ | 532 |
| | $ | 710 |
| $ | 708 |
| | $ | 277 |
|
| Reinsurance unrealized gains and losses | 95 |
| | (45 | ) | | 149 |
| | (88 | ) | |
| Change in fair value of reinsurance assets | | (384 | ) | | 54 |
|
| Adjusted net income | $ | 359 |
| | $ | 281 |
| | $ | 681 |
| | $ | 622 |
| $ | 324 |
| | $ | 331 |
|
Item 2. Management’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 June 30, | | Six months ended June 30, | Three months ended March 31, |
| | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| (In millions, except percentages) | Dollar | | Rate | | Dollar | | Rate | | Dollar | | Rate | | Dollar | | Rate | Dollar | | Rate | | Dollar | | Rate |
| GAAP net investment income | $ | 958 |
| | 4.47 | % | | $ | 821 |
| | 4.38 | % | | $ | 1,813 |
| | 4.44 | % | | $ | 1,607 |
| | 4.35 | % | $ | 1,066 |
| | 3.79 | % | | $ | 855 |
| | 4.41 | % |
| Reinsurance embedded derivative impacts | 72 |
| | 0.34 | % | | 52 |
| | 0.28 | % | | 117 |
| | 0.29 | % | | 97 |
| | 0.26 | % | |
| Change in fair value of reinsurance assets | | 132 |
| | 0.47 | % | | 45 |
| | 0.22 | % |
| Net VIE earnings | 1 |
| | 0.00 | % | | 21 |
| | 0.11 | % | | 16 |
| | 0.04 | % | | 32 |
| | 0.09 | % | 21 |
| | 0.08 | % | | 15 |
| | 0.08 | % |
| Alternative income gain (loss) | (1 | ) | | (0.00 | )% | | 6 |
| | 0.03 | % | | — |
| | — | % | | (7 | ) | | (0.02 | )% | (5 | ) | | (0.02 | )% | | 1 |
| | 0.01 | % |
| Held for trading amortization | (21 | ) | | (0.10 | )% | | (15 | ) | | (0.08 | )% | | (44 | ) | | (0.11 | )% | | (30 | ) | | (0.08 | )% | (11 | ) | | (0.04 | )% | | (23 | ) | | (0.12 | )% |
| Total adjustments to arrive at net investment earnings/earned rate | 51 |
| | 0.24 | % | | 64 |
| | 0.34 | % | | 89 |
| | 0.22 | % | | 92 |
| | 0.25 | % | 137 |
| | 0.49 | % | | 38 |
| | 0.19 | % |
| Total net investment earnings/earned rate | $ | 1,009 |
| | 4.71 | % | | $ | 885 |
| | 4.72 | % | | $ | 1,902 |
| | 4.66 | % | | $ | 1,699 |
| | 4.60 | % | $ | 1,203 |
| | 4.28 | % | | $ | 893 |
| | 4.60 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Retirement Services | $ | 983 |
| | 4.74 | % | | $ | 821 |
| | 4.85 | % | | $ | 1,849 |
| | 4.68 | % | | $ | 1,601 |
| | 4.80 | % | $ | 1,171 |
| | 4.21 | % | | $ | 866 |
| | 4.63 | % |
| Corporate and Other | 26 |
| | 3.71 | % | | 64 |
| | 3.53 | % | | 53 |
| | 4.01 | % | | 98 |
| | 2.71 | % | 32 |
| | 13.19 | % | | 27 |
| | 3.76 | % |
| Total net investment earnings/earned rate | $ | 1,009 |
| | 4.71 | % | | $ | 885 |
| | 4.72 | % | | $ | 1,902 |
| | 4.66 | % | | $ | 1,699 |
| | 4.60 | % | $ | 1,203 |
| | 4.28 | % | | $ | 893 |
| | 4.60 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Retirement Services average invested assets | $ | 82,879 |
| | | | $ | 67,577 |
| | | | $ | 79,000 |
| | | | $ | 66,635 |
| | | $ | 111,443 |
| | | | $ | 74,735 |
| | |
| Corporate and Other average invested assets | 2,848 |
| | | | 7,345 |
| | | | 2,646 |
| | | | 7,258 |
| | | 959 |
| | | | 2,844 |
| | |
| Consolidated average invested assets | $ | 85,727 |
| | | | $ | 74,922 |
| | | | $ | 81,646 |
| | | | $ | 73,893 |
| | | $ | 112,402 |
| | | | $ | 77,579 |
| | |
The reconciliation of interest sensitive contract benefits to Retirement Services’ cost of crediting, on deferred annuities, and the respective rates, is as follows:
| | | | Three months ended June 30, | | Six months ended June 30, | Three months ended March 31, |
| | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| (In millions, except percentages) | Dollar | | Rate | | Dollar | | Rate | | Dollar | | Rate | | Dollar | | Rate | Dollar | | Rate | | Dollar | | Rate |
| GAAP interest sensitive contract benefits | $ | 332 |
| | 2.00 | % | | $ | 553 |
| | 3.95 | % | | $ | 351 |
| | 1.12 | % | | $ | 1,245 |
| | 4.48 | % | $ | 1,516 |
| | 5.44 | % | | $ | 31 |
| | 0.16 | % |
| Interest credited other than deferred annuities | (41 | ) | | (0.25 | )% | | (42 | ) | | (0.30 | )% | | (81 | ) | | (0.26 | )% | | (68 | ) | | (0.24 | )% | |
| Interest credited other than deferred annuities and institutional products | | 55 |
| | 0.20 | % | | 7 |
| | 0.04 | % |
| FIA option costs | 206 |
| | 1.25 | % | | 149 |
| | 1.07 | % | | 380 |
| | 1.21 | % | | 294 |
| | 1.05 | % | 278 |
| | 1.00 | % | | 174 |
| | 0.93 | % |
| Product charges (strategy fees) | (23 | ) | | (0.14 | )% | | (17 | ) | | (0.12 | )% | | (45 | ) | | (0.14 | )% | | (34 | ) | | (0.12 | )% | (28 | ) | | (0.10 | )% | | (22 | ) | | (0.12 | )% |
| Reinsurance embedded derivative impacts | 3 |
| | 0.02 | % | | 9 |
| | 0.06 | % | | 6 |
| | 0.02 | % | | 18 |
| | 0.06 | % | 15 |
| | 0.05 | % | | 3 |
| | 0.02 | % |
| Change in fair value of embedded derivatives – FIAs | (168 | ) | | (1.01 | )% | | (399 | ) | | (2.85 | )% | | (35 | ) | | (0.11 | )% | | (933 | ) | | (3.35 | )% | (1,311 | ) | | (4.70 | )% | | 121 |
| | 0.65 | % |
| Negative VOBA amortization | 7 |
| | 0.04 | % | | 10 |
| | 0.07 | % | | 17 |
| | 0.05 | % | | 22 |
| | 0.08 | % | 12 |
| | 0.04 | % | | 10 |
| | 0.05 | % |
| Unit-linked change in reserves | — |
| | — | % | | 1 |
| | 0.01 | % | | — |
| | — | % | | (17 | ) | | (0.06 | )% | |
| Other changes in interest sensitive contract liabilities | 2 |
| | 0.01 | % | | — |
| | — | % | | — |
| | — | % | | — |
| | — | % | (2 | ) | | (0.01 | )% | | (2 | ) | | (0.01 | )% |
| Total adjustments to arrive at cost of crediting on deferred annuities | (14 | ) | | (0.08 | )% | | (289 | ) | | (2.06 | )% | | 242 |
| | 0.77 | % | | (718 | ) | | (2.58 | )% | |
| Total adjustments to arrive at cost of crediting | | (981 | ) | | (3.52 | )% | | 291 |
| | 1.56 | % |
| Retirement Services cost of crediting | | $ | 535 |
| | 1.92 | % | | $ | 322 |
| | 1.72 | % |
| | | | | | | | | |
| Retirement Services cost of crediting on deferred annuities | $ | 318 |
| | 1.92 | % | | $ | 264 |
| | 1.89 | % | | $ | 593 |
| | 1.89 | % | | $ | 527 |
| | 1.90 | % | $ | 444 |
| | 1.98 | % | | $ | 275 |
| | 1.87 | % |
| Retirement Services cost of crediting on institutional products | | 91 |
| | 3.69 | % | | 47 |
| | 3.14 | % |
| Retirement Services cost of crediting | | $ | 535 |
| | 1.92 | % | | $ | 322 |
| | 1.72 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Average account value | $ | 66,241 |
| | | | $ | 56,001 |
| | | | $ | 62,694 |
| | | | $ | 55,627 |
| | | |
| Retirement Services average invested assets | | $ | 111,443 |
| | | | $ | 74,735 |
| | |
| Average account value on deferred annuities | | $ | 89,809 |
| | | | $ | 58,993 |
| | |
| Average institutional reserve liabilities | | $ | 9,809 |
| | | | $ | 5,955 |
| | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The reconciliation of GAAP benefits and expenses to other liability costs is as follows: |
| | | | | | | |
| | Three months ended March 31, |
| (In millions) | 2019 | | 2018 |
| GAAP benefits and expenses | $ | 4,221 |
| | $ | 689 |
|
| Premiums | (1,966 | ) | | (278 | ) |
| Product charges | (125 | ) | | (96 | ) |
| Other revenues | (12 | ) | | (6 | ) |
| Cost of crediting | (242 | ) | | (145 | ) |
| Change in fair value of embedded derivatives – FIA, net of offsets | (1,260 | ) | | 66 |
|
| DAC, DSI and VOBA amortization related to investment gains and losses | (173 | ) | | 20 |
|
| Rider reserves related to investment gains and losses | (28 | ) | | 1 |
|
| Policy and other operating expenses, excluding policy acquisition expenses | (103 | ) | | (97 | ) |
| AmerUs closed block fair value liability | (53 | ) | | 54 |
|
| Other | 1 |
| | — |
|
| Total adjustments to arrive at other liability costs | (3,961 | ) | | (481 | ) |
| Other liability costs | $ | 260 |
| | $ | 208 |
|
| | | | |
| Retirement Services | $ | 260 |
| | $ | 208 |
|
| Corporate and Other | — |
| | — |
|
| Consolidated other liability costs | $ | 260 |
| | $ | 208 |
|
The reconciliation of policy and other operating expenses to operating expenses is as follows: |
| | | | | | | |
| | Three months ended March 31, |
| (In millions) | 2019 | | 2018 |
| Policy and other operating expenses | $ | 165 |
| | $ | 142 |
|
| Interest expense | (17 | ) | | (13 | ) |
| Policy acquisition expenses, net of deferrals | (62 | ) | | (45 | ) |
| Integration, restructuring and other non-operating expenses | (1 | ) | | (8 | ) |
| Stock compensation expenses | (3 | ) | | (3 | ) |
| Total adjustments to arrive at operating expenses | (83 | ) | | (69 | ) |
| Operating expenses | $ | 82 |
| | $ | 73 |
|
| | | | |
| Retirement Services | $ | 62 |
| | $ | 58 |
|
| Corporate and Other | 20 |
| | 15 |
|
| Consolidated operating expenses | $ | 82 |
| | $ | 73 |
|
The reconciliation of total investments, including related parties, to invested assets is as follows:
|
| | | | | | | |
| (In millions) | March 31, 2019 | | December 31, 2018 |
| Total investments, including related parties | $ | 115,687 |
| | $ | 107,632 |
|
| Derivative assets | (1,920 | ) | | (1,043 | ) |
| Cash and cash equivalents (including restricted cash) | 3,518 |
| | 3,403 |
|
| Accrued investment income | 751 |
| | 682 |
|
| Payables for collateral on derivatives | (1,781 | ) | | (969 | ) |
| Reinsurance funds withheld and modified coinsurance | (578 | ) | | 223 |
|
| VIE and VOE assets, liabilities and noncontrolling interest | 676 |
| | 718 |
|
| Unrealized (gains) losses | (1,254 | ) | | 808 |
|
| Ceded policy loans | (283 | ) | | (281 | ) |
| Net investment receivables (payables) | (1,045 | ) | | (139 | ) |
| Total adjustments to arrive at invested assets | (1,916 | ) | | 3,402 |
|
| Total invested assets | $ | 113,771 |
| | $ | 111,034 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The reconciliation of total investments, including related parties, to invested assets is as follows:
|
| | | | | | | |
| (In millions) | June 30, 2018 | | December 31, 2017 |
| Total investments, including related parties | $ | 98,669 |
| | $ | 84,367 |
|
| Derivative assets | (1,929 | ) | | (2,551 | ) |
| Cash and cash equivalents (including restricted cash) | 3,786 |
| | 4,993 |
|
| Accrued investment income | 662 |
| | 652 |
|
| Payables for collateral on derivatives | (1,746 | ) | | (2,323 | ) |
| Reinsurance funds withheld and modified coinsurance | (130 | ) | | (579 | ) |
| VIE and VOE assets, liabilities and noncontrolling interest | 809 |
| | 862 |
|
| AFS unrealized (gain) loss | (370 | ) | | (2,794 | ) |
| Ceded policy loans | (284 | ) | | (296 | ) |
| Net investment receivables (payables) | (858 | ) | | (33 | ) |
| Total adjustments to arrive at invested assets | (60 | ) | | (2,069 | ) |
| Total invested assets | $ | 98,609 |
| | $ | 82,298 |
|
The reconciliation of total investment funds, including related parties and VIEs, to alternative investments within invested assets is as follows:
| | | (In millions) | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| Investment funds, including related parties and VIEs | $ | 3,062 |
| | $ | 2,580 |
| $ | 3,592 |
| | $ | 3,559 |
|
| CLO equities included in trading securities | 139 |
| | 182 |
| 124 |
| | 125 |
|
| Financial Credit Investment special-purpose vehicle included in trading securities related party | — |
| | 287 |
| |
| Investment funds within funds withheld at interest | 463 |
| | 416 |
| 591 |
| | 660 |
|
| Royalties, other assets included in other investments and other assets | 72 |
| | 76 |
| |
| Royalties and other assets included in other investments | | 69 |
| | 71 |
|
| Net assets of the VIE, excluding investment funds | 177 |
| | 288 |
| 18 |
| | 50 |
|
| Unrealized (gains) losses and other adjustments | | (4) |
| | 27 |
|
| Total adjustments to arrive at alternative investments | 851 |
| | 1,249 |
| 798 |
| | 933 |
|
| Alternative investments | $ | 3,913 |
| | $ | 3,829 |
| $ | 4,390 |
| | $ | 4,492 |
|
The reconciliation of total liabilities to reserve liabilities is as follows:
| | | (In millions) | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| Total liabilities | $ | 106,250 |
| | $ | 90,539 |
| $ | 122,740 |
| | $ | 117,229 |
|
| Short-term debt | (183 | ) | | — |
| |
| Long-term debt | (991 | ) | | — |
| (991 | ) | | (991 | ) |
| Derivative liabilities | (137 | ) | | (134 | ) | (85 | ) | | (85 | ) |
| Payables for collateral on derivatives | (1,746 | ) | | (2,323 | ) | (1,781 | ) | | (969 | ) |
| Funds withheld liability | (389 | ) | | (407 | ) | (724 | ) | | (721 | ) |
| Other liabilities | (1,524 | ) | | (1,222 | ) | (1,410 | ) | | (888 | ) |
| Liabilities of consolidated VIEs | (4 | ) | | (2 | ) | (1 | ) | | (1 | ) |
| Reinsurance ceded receivables | (4,847 | ) | | (4,972 | ) | (5,647 | ) | | (5,534 | ) |
| Policy loans ceded | (284 | ) | | (296 | ) | (283 | ) | | (281 | ) |
| Other | (5) |
| | — |
| (27 | ) | | (27 | ) |
| Total adjustments to arrive at reserve liabilities | (10,110 | ) | | (9,356 | ) | (10,949 | ) | | (9,497 | ) |
| Total reserve liabilities | $ | 96,140 |
| | $ | 81,183 |
| $ | 111,791 |
| | $ | 107,732 |
|
Liquidity and Capital Resources
There are two forms of liquidity relevant to our business, funding liquidity and balance sheet liquidity. Funding liquidity relates to the ability to fund operations. Balance sheet liquidity relates to our ability to liquidate or rebalance our balance sheet without incurring significant costs from fees, bid-offer spreads, or market impact. We manage our liquidity position by matching projected cash demands with adequate sources of cash and other liquid assets. Our principal sources of liquidity, in the ordinary course of business, are operating cash flows and holdings of cash, cash equivalents and other readily marketable assets.
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 June 30, 2018March 31, 2019 was $51.7$54.3 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 iswas undrawn as of the date hereofMarch 31, 2019 and has a remaining term of approximately threetwo years. On January 3, 2018, we filed aOur registration statement on Form S-3 ASR (Shelf Registration Statement), which, provides us access to the capital markets, 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.factors. In addition, through our membership in the FHLB, we are eligible to borrow under variable rate short-term federal funds arrangements to provide additional liquidity.
We proactively manage our liquidity position to meet cash needs while minimizing adverse impacts on investment returns. We analyze our cash-flow liquidity over the upcoming 12 months by modeling potential demands on liquidity under a variety of scenarios, taking into account the provisions of our policies and contracts in force, our cash flow position, and the volume of cash and readily marketable securities in our portfolio. 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 enough cash, cash equivalents and other discounted liquid limit assets to cover 12 months of AHL’s and Athene USA’s projected obligations, including debt servicing costs
| |
| ▪ | minimum of 50% of expenses and 100% of debt servicing to be held in cash and cash equivalents at AHL operating accounts |
| |
| ▪ | minimum of 50% of any required AHL – Athene USA inter-company loan commitments to be held in cash and cash equivalents by AHL |
| |
| ▪ | dividends required 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; orabove and CMBS with weighted average lives less than three years rated AAA- or above |
we seek to maintain sufficient capital and surplus at ALRe to meet the following collateral and capital maintenance calls under a substantial stress event, such as the failure of a major financial institution (Lehman event):
| |
| ▪ | collateral calls from modco and ALRe third-party reinsurance contracts |
| |
| ▪ | Athene Annuity Re Ltd. (AARe) capital maintenance calls arising from AARe collateral calls from modco reinsurance contracts; and |
| |
| ▪ | U.S. regulated entity capital maintenance calls from nonmodco activity. |
Insurance Subsidiaries’ Liquidity
Operations
The primary cash flow sources for our insurance subsidiaries include retirement services product inflows (premiums), investment income, principal repayments on our investments, and net transfers from separate accounts and financial product deposits. Uses of cash include investment purchases, payments to policyholders for surrenders and withdrawals, maturity payments on funding agreements, policy acquisition costs, and general operating costs.
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 market value adjustments (MVA),MVAs, which are intended to protect us from early withdrawals. As of June 30, 2018each of March 31, 2019 and December 31, 2017,2018, approximately 81% and 86% 78%, respectively, of our deferred annuity liabilities were subject to penalty upon surrender. In addition, as of June 30, 2018March 31, 2019 and December 31, 2017,2018, approximately 67%64% and 72%65%, respectively of policies contained MVAs that may also have the effect of limiting early withdrawals if interest rates increase. Our funding agreements, PRT obligationsgroup annuities and payout annuities are generally non-surrenderable.
Membership in Federal Home Loan Bank
Through our membership in the FHLB, we are eligible to borrow under variable rate short-term federal funds arrangements to provide additional liquidity. The borrowings must be secured by eligible collateral such as mortgage loans, eligible CMBS or RMBS, government or agency securities and guaranteed loans. There were no outstanding borrowings under these arrangements as of March 31, 2019 or December 31, 2018.
We have issued funding agreements to the FHLB in exchange for cash advances. These funding agreements were issued in an investment spread strategy, consistent with other investment spread operations. As of March 31, 2019 and December 31, 2018, we had funding agreements outstanding with the FHLB in the aggregate principal amount of $926 million.
The maximum FHLB indebtedness by a member is determined by the amount of collateral pledged, and cannot exceed a specified percentage of the member’s total statutory assets dependent on the internal credit rating assigned to the member by the FHLB. As of March 31, 2019, the total maximum borrowings under the FHLB facility were limited to $17.4 billion. However, our ability to borrow under the facility is constrained by the availability of assets that qualify as eligible collateral under the facility and by the Iowa Code requirement that we maintain funds equivalent to our legal reserve in certain permitted investments, from which we exclude pledged assets. Considering these limitations, we estimate that as of March 31, 2019 we had the ability to draw up to a total of approximately $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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cash Flows
Our cash flows were as follows:
| | | | Six months ended June 30, | Three months ended March 31, |
| (In millions) | 2018 | | 2017 | 2019 | | 2018 |
| Net income | $ | 532 |
| | $ | 710 |
| $ | 708 |
| | $ | 277 |
|
| Payment at inception of reinsurance agreements, net | (394 | ) | | — |
| |
| Non-cash revenues and expenses | 381 |
| | 363 |
| 301 |
| | 296 |
|
| Net cash provided by operating activities | 519 |
| | 1,073 |
| 1,009 |
| | 573 |
|
| | | | | |
| Sales, maturities and repayment of investments | 8,922 |
| | 8,324 |
| |
| Purchases and acquisitions of investments | (12,814 | ) | | (11,668 | ) | |
| Sales, maturities and repayments of investments | | 3,170 |
| | 4,235 |
|
| Purchases of investments | | (6,547 | ) | | (7,050 | ) |
| Other investing activities | (12 | ) | | 752 |
| 601 |
| | (69 | ) |
| Net cash used in investing activities | (3,904 | ) | | (2,592 | ) | (2,776 | ) | | (2,884 | ) |
| | | | | |
| Deposits on investment-type policies and contracts | 4,375 |
| | 4,727 |
| 2,793 |
| | 1,774 |
|
| Withdrawals on investment-type policies and contracts | (2,839 | ) | | (2,607 | ) | (1,638 | ) | | (1,474 | ) |
| Net change in cash collateral posted for derivative transactions | (577 | ) | | 477 |
| 812 |
| | (1,178 | ) |
| Net proceeds and repayment of debt | 1,181 |
| | — |
| — |
| | 998 |
|
| Other financing activities | 36 |
| | (28 | ) | (85 | ) | | 19 |
|
| Net cash provided by financing activities | 2,176 |
| | 2,569 |
| 1,882 |
| | 139 |
|
| Effect of exchange rate changes on cash and cash equivalents | — |
| | 19 |
| |
Net (decrease) increase in cash and cash equivalents1 | $ | (1,209 | ) | | $ | 1,069 |
| |
Net increase (decrease) in cash and cash equivalents1 | | $ | 115 |
| | $ | (2,172 | ) |
| | | | | | | |
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 VIEs. | | 1 Includes cash and cash equivalents, restricted cash, and cash and cash equivalents of consolidated VIEs. |
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 $519$1.0 billion and $573 million and $1.1 billion for the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, respectively. The decreaseincrease in cash provided by operating activities 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 increasegrowth in our investment portfolio attributed to the strong growthand an increase in deposits.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 $3.9$2.8 billion and $2.6$2.9 billion for the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, respectively. The change in cash used in investing activities was primarily attributed to the purchasedeconsolidation of investments related to the increaseGermany in deposits over liability outflows,2018 as well as the investment of proceeds from our debt issuance the deconsolidation of AGER Bermuda Holding Ltd. and its subsidiaries and the reinvestment of earnings.in 2018.
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 $2.2$1.9 billion and $2.6 billion$139 million for the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, respectively. The change in cash provided from financing activities was primarily attributed to the change in cash collateral posted for derivative transactions driven by favorable equity market performance in 2019 and lower funding agreement issuances in 2018higher investment-type deposits from retail and flow reinsurance deposits, partially offset by 2018 proceeds from the issuance of debt.debt and the repurchase of common stock in 2019.
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.
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
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
permitted by statute in any twelve month period are considered to be extraordinary dividends, and the approval of the appropriate regulator is required prior to payment. In addition, dividends from U.S. insurance subsidiaries to AHL would result in a 30% withholding tax. AHL does not currently plan on having the U.S. subsidiaries pay any dividends to AHL. 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 Bermuda Monetary Authority (BMA) an affidavit attesting that a dividend in excess of this amount would not cause ALRe to fail to meet its relevant margins. In certain instances, ALRe would also be required to provide prior notice to the BMA in advance of the payment of dividends. In the event that such an affidavit is submitted to the BMA in accordance with the Bermuda Insurance Act, and further subject to ALRe meeting its relevant margins, ALRe is permitted to distribute up to the sum of 100% of statutory surplus and an amount less than 15% of its total statutory capital. Distributions in excess of this amount require the approval of the BMA.
The maximum distribution permitted by law or contract is not necessarily indicative of our actual ability to pay such distributions, which may be further restricted by business and other considerations, such as the 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. Specifically, our credit facility prohibits us from incurring any debt if, on a pro-forma basis, the debt would cause us to exceed a Consolidated Debt to Capitalization Ratio (as such term is defined in the credit facility) of 35%. Certain other sources of liquidity potentially available at the holding company level are discussed below.
Shelf Registration
On January 3, 2018, we filedUnder 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 BankIntercompany Note
We areAHL has an unsecured revolving note payable with ALRe, which permits AHL to borrow up to $1 billion with a memberfixed interest rate of the FHLBDM1.25% and the FHLBI. Membership in a FHLB requires the member to purchase FHLB common stock based on a percentagematurity date of the dollar amountMarch 31, 2024. As of advances outstanding, subject to the investment being greater than or equal to a minimum level. We owned a total of $50 million and $36 million of FHLB common stock as of June 30, 2018March 31, 2019 and December 31, 2017, respectively.
Through our membership in2018, 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. Werevolving note payable had an outstanding borrowings under these arrangementsbalance of $183$174 million and $0$105 million, as of June 30, 2018 and December 31, 2017, respectively.
On August 11, 2016, we provided notice to the FHLBI that Athene Life Insurance Company (ALIC) is withdrawing its membership thereto. The FHLBI confirmed receipt of our request on the following day. Pursuant to the FHLBI’s capital plan, ALIC’s membership will be withdrawn as of the fifth anniversary of the FHLBI’s receipt of our notice. Until such time that ALIC’s membership is withdrawn, ALIC continues to have all of the rights and obligations of being a member of the FHLBI, except that with respect to some or all of the FHLBI stock that ALIC owns, we will be entitled to a lower dividend amount, to the extent that the FHLBI declares a dividend. ALIC may continue to borrow from the FHLBI, provided that without the consent of the FHLBI, the transaction must mature or otherwise terminate prior to ALIC’s withdrawal of membership.
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 June 30, 2018 and December 31, 2017, we had funding agreements outstanding with the FHLB in the aggregate principal amount of $701 million and $573 million, respectively.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The maximum FHLB indebtedness by a member is determined by the amount of collateral pledged, and cannot exceed a specified percentage of the member’s total statutory assets, dependent on the internal credit rating assigned to the member by the FHLB. As of June 30, 2018, the total maximum borrowings under the FHLBDM facility were limited to $16.5 billion. However, our ability to borrow under the facility is constrained by the availability of assets that qualify as eligible collateral under the facility and by the Iowa Code requirement that we maintain funds equivalent to our legal reserve in certain permitted investments, from which we exclude pledged assets. Considering these limitations, we estimate that, as of June 30, 2018, we had the ability to draw up to a total of approximately $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, 20172018 and 2016,2017, our U.S. insurance companies’ TAC,total adjusted capital (TAC), as defined by the NAIC, was $1.9$2.2 billion and $1.8$1.9 billion, respectively, and our ALRe statutory capital, as defined by the BMA, was $7.0 billion and $6.1 billion, respectively. As of December 31, 2017 and 2016, our U.S. RBC ratio was 490%421% and 478%, respectively, and our Bermuda Solvency Capital Requirement (BSCR) ratio was 354% and 228%, respectively, all above our internal targets.490%. Each U.S. domestic insurance subsidiary’s state of domicile imposes minimum RBC requirements that were developed by the NAIC. The formulas for determining the amount of RBC specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of TAC to its authorized control level RBC (ACL). Our TAC was significantly in excess of all regulatory standards and above our internal targets as of June 30, 2018, December 31, 2018 and 2017, respectively.
Item 2. Management’s Discussion and 2016,Analysis of Financial Condition and Results of Operations
ALRe statutory capital was $9.7 billion and $7.0 billion as of December 31, 2018 and 2017, respectively. During 2018, AHL contributed its wholly owned subsidiary, Athene USA, to ALRe. ALRe adheres to BMA regulatory capital requirements to maintain statutory capital and surplus to meet the Minimum Margin of Solvency (MMS)MMS and maintain minimum economic balance sheet (EBS)EBS capital and surplus to meet the Enhanced Capital Requirement (ECR).enhanced capital requirement. Under the EBS framework, ALRe’s assets are recorded at market value and its insurance reserves are determined by reference to nine prescribed scenarios, with the scenario resulting in the highest reserve balance being ultimately required to be selected. The ALReALRe’s EBS capital and surplus was $7.7$12.0 billion and $4.4$7.7 billion, resulting in a BSCR ratio of 354%340% and 228%354% as of December 31, 2018 and 2017, and 2016, respectively. The MRCAn insurer must have a BSCR ratio of 100% or greater to be considered solvent by the BMA is 100%.BMA. As of June 30, 2018, December 31, 20172018 and 2016,2017, 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, 2018 and 2017, our ALRe RBC was 405% and 2016,562%, respectively. The decrease in ALRe RBC was driven by the capital charges related to the Voya and Lincoln reinsurance agreements, alternative investment deployment, the increase in deposits and impacts resulting from the Tax Act. Although the updates to the RBC factors to reflect the reduction in the corporate income tax rate from 35% to 21% lowered our ALRe RBC ratio, was 562% and 529%, respectively, both abovewe do not believe this materially impacted the level of capital that we deem appropriate to run our internal targets.business. 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
Share Repurchase Program
In December 2018, our board of directors approved an authorization for the repurchase of up to $250 million of our Class A shares. In the first quarter of 2019, our board of directors approved an authorization for the purchase of up to an additional $247 million of our Class A shares under our share repurchase program, which was conditioned upon the further approval by a committee of our board of directors. Such further approval was granted during the second quarter of 2019. Pursuant to our share repurchase program, we have repurchased 3.7 million Class A shares for $147 million as of March 31, 2019, of which 1.2 million Class A shares were repurchased in U.S. tax rates under the Tax Act may impact our RBC ratios. See Part I—Item 1. Business–Regulation–United States–Tax Reform2019 in our 2017 Annual Report for further discussion.$47 million. As of May 7, 2019, we have $350 million of repurchase authorization remaining.
Balance Sheet and Other Arrangements
Contractual Obligations
The following table summarizes estimated future payments onThere have been no material changes to our contractual obligations as of June 30, 2018:
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (In millions) | Total | | 2018 | | 2019-2020 | | 2021-2022 | | 2023 and thereafter |
| Interest sensitive contract liabilities | $ | 87,052 |
| | $ | 7,270 |
| | $ | 16,377 |
| | $ | 17,314 |
| | $ | 46,091 |
|
| Future policy benefits | 13,970 |
| | 187 |
| | 500 |
| | 510 |
| | 12,773 |
|
| Other policy claims and benefits | 136 |
| | 136 |
| | — |
| | — |
| | — |
|
| Dividends payable to policyholders | 118 |
| | 5 |
| | 9 |
| | 9 |
| | 95 |
|
Short-term debt1 | 184 |
| | 184 |
| | — |
| | — |
| | — |
|
Long-term debt1 | 1,413 |
| | 21 |
| | 83 |
| | 83 |
| | 1,226 |
|
| Total | $ | 102,873 |
| | $ | 7,803 |
| | $ | 16,969 |
| | $ | 17,916 |
| | $ | 60,185 |
|
| | | | | | | | | | |
1 The obligations for short- and long-term debt payments include contractual maturities of principal and estimated future interest payments based on the terms of the debt agreements, 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’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 $111 million and $221 million as of June 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 $568 million and $259 million as of June 30, 2018 and December 31, 2017, respectively, of collateral on behalf of our reinsurers.
None.
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 20172018 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 2.7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 20172018 Annual Report; however, due to the significance of the Voya reinsurance transactions, the following updates and replaces those tables provided in the 2017 Annual Report:Report.
Future Policy Benefits—Liabilities for Guaranteed Living Withdrawal Benefits and Guaranteed Minimum Death Benefits
As of June 30, 2018, the GLWB and GMDB liability balance, including the impacts of shadow adjustments, totaled $2.9 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) | June 30, 2018 |
| +10% assessments | $ | (83 | ) |
| –10% assessments | 92 |
|
| +100 bps discount rate | 82 |
|
| –100 bps discount rate | (102 | ) |
| 1% lower annual equity growth | 58 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Derivatives—Valuation of Embedded Derivatives on FIAs
As of June 30, 2018, we had embedded derivative liabilities classified as Level 3 in the fair value hierarchy of $8.1 billion. The increase (decrease) to the embedded derivatives on FIA products from hypothetical changes in discount rates is summarized as follows:
|
| | | |
| (In millions) | June 30, 2018 |
| +100 bps discount rate | $ | (574 | ) |
| –100 bps discount rate | 647 |
|
Deferred Acquisition Costs, Deferred Sales Inducements, and Value of Business Acquired—As of June 30, 2018, DAC, DSI and VOBA totaled $4.7 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:
|
| | | | | | | | | | | | | | | |
| | June 30, 2018 |
| (In millions) | DAC | | DSI | | VOBA | | Total |
| +10% estimated future gross profits | $ | 37 |
| | $ | 15 |
| | $ | 48 |
| | $ | 100 |
|
| –10% estimated future gross profits | (44 | ) | | (19 | ) | | (53 | ) | | (116 | ) |
| +100 bps discount rate | (67 | ) | | (29 | ) | | (36 | ) | | (132 | ) |
| –100 bps discount rate | 73 |
| | 36 |
| | 45 |
| | 154 |
|
See Note 1 – Business, Basis of Presentation and Significant Accounting Policies to the condensed consolidated financial statements for adoption of new and future accounting pronouncements.
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 20172018 Annual Report.
There have been no material changes to our market risk exposures from those previously disclosed in the 20172018 Annual Report, except as described below. The following updates and replaces the information provided in the 2017 Annual Report:
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 June 30, 2018, the estimated point-in-time impact to our pre-tax consolidated statements of income would have been a decrease of $196 million as of June 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 transaction 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 June 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 is expected to be relatively unchanged from the sensitivities shown in Part II—Item 7A. Quantitative and Qualitative Disclosures About Market Risk of the 2017 Annual Report, as there were minimal floating rate assets added 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 these simulations will likely be different from the actual changes experienced under any given interest rate scenarios and these differences may be material. Because we actively manage our assets and liabilities, the net exposure to interest rates can vary over time. However, any such decreases in the fair value of fixed maturity securities, unless related to 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.
Public Equity Risk
Assuming all other factors are constant, we estimate that a decline in public equity market prices of 10% would be relatively unchanged from the sensitivities shown in Part II—Item 7A. Quantitative and Qualitative Disclosures About Market Risk of the 2017 Annual Report.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as such term is defined under Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation, as of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at attaining the level of reasonable assurance noted above. In light
Changes in Internal Control Over Financial Reporting
During the quarter ended March 31, 2019, management designed and implemented a new control to address the material weakness described in Part II—Item 9A. Controls and Procedures included in our 2018 Annual Report. This new control operated effectively and based upon management’s evaluation of the overlap between disclosure controls and procedures and internalnewly implemented control, over financial reporting, our evaluation of disclosure controls and procedures excluded an assessment of those disclosure controls and procedures related tomanagement assessed the Voya reinsurance transactions discussed in Note 7 – Reinsurance tomaterial weakness was remediated during the condensed consolidated financial statements that are subsumed by internal control over financial reporting.quarter ended March 31, 2019.
In connection with the closing of the Voya reinsurance transactions discussed in Note 7 – Reinsurance to the condensed consolidated financial statements, we designed and implemented controls over block reinsurance accounting, including data, modeling, reconciliation and review procedures. Other than the changes relating to the Voya reinsurance transactions, thereThere were no other changes to our internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the quarter ended June 30, 2018,March 31, 2019, 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. The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. There is significant judgment required in assessing both the probability of an adverse outcome and the determination as to whether an exposure can be reasonably estimated. In management’s opinion, the ultimate disposition of any current legal proceedings or claims brought against us will not have a material effect on our financial condition, results of operations or cash flows. Litigation is, however, inherently uncertain and an adverse outcome from such litigation could have a material effect on the operating results of a particular reporting period.
From time to time, in the ordinary course of business and like others in the insurance and financial services industries, we receive requests for information from government agencies in connection with such agencies’ regulatory or investigatory authority. Such requests can include financial or market conduct examinations, subpoenas or demand letters for documents to assist the government in audits or investigations. We and each of our U.S. insurance subsidiaries review such requests and notices and take appropriate action. We have been subject to certain requests for information and investigations in the past and could be subject to them in the future.
For a description of certain legal proceedings affecting us, see Note 139 – 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 2017 Annual Report. Other than as described in this Item 1A, thereThere have been no material changes to our risk factors from the risk factors previously disclosed in our 2017 Annual Report.
The following updates and replaces the last paragraph of the similarly named risk factor included in our 2017 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, we are undertaking certain actions and exploring various alternatives intended to mitigate the potential effect of the BEAT on our results of operations in the event it is determined that none of the amounts paid or accrued by our non-U.S. reinsurance subsidiaries to our U.S. subsidiaries are taken into account in the calculation of “base erosion payments” or “base erosion tax benefit.” We have made estimates regarding the overall tax rate we expect to experience as a result of undertaking such actions. The determination of each such figure, or range of figures, involves numerous estimates and assumptions regarding the efficacy of such actions in bringing about the desired outcomes and the magnitude of such outcomes to be experienced. Such estimates and assumptions may prove incorrect in the event that we receive conflicting guidance regarding the proper interpretation of the Tax Act. To the extent that actual experience differs from the estimates and assumptions inherent in our projections, our future overall tax rate may deviate materially from the estimates provided and our financial condition and results of operations may be materially less favorable than are implied by the projections provided.
The following updates and replaces the third paragraph of the similarly named risk factor included in our 2017 Annual Report:
We rely significantly on third parties for investment services and certain other services related to our policies, and we may be held responsible for obligations that arise from the acts or omissions of third parties under their respective agreements with us if they are deemed to have acted on our behalf.
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, 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 NYSDFS, 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.
The following updates and replaces the similarly named section of risk factors included in our 2017 Annual Report:
Risks Relating to Taxation
The BEAT may significantly increase our tax liability and our efforts to mitigate the cost of the 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.” 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.
Moreover, our non-U.S. reinsurance subsidiaries pay or accrue substantial amounts to our U.S. subsidiaries under our reinsurance agreements for increases in policy reserves and to reimburse our U.S. subsidiaries for payments of benefits to our policyholders. It is not clear whether such amounts should be netted against the amounts our U.S. subsidiaries pay or accrue to our non-U.S. reinsurance subsidiaries under our reinsurance agreements for purposes of calculating their “base erosion payments” and “base erosion tax benefits.” No assurance can be given that any such amounts will be netted. If the amounts cannot be netted and we do not take sufficient action to mitigate or eliminate the BEAT, or if the IRS successfully challenges the tax treatment of any such mitigating actions, the tax liability of our subsidiaries that are subject to U.S. taxation will increase and our results of operations will be materially adversely affected.
In light of the possibility of material additional tax cost to our U.S. subsidiaries due to the lack of clear guidance regarding the application of the BEAT, we are taking steps intended to mitigate the potential effect of the BEAT on our results of operations in the event it is determined that none of the amounts paid or accrued by a non-U.S. reinsurance subsidiary to our U.S. subsidiaries are taken into account in the calculation of “base erosion payments” or “base erosion tax benefit.” Our efforts may not succeed. Additionally, it is possible that we will be required to take further action before the uncertainty regarding the BEAT is resolved, and accordingly 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.
In light of the uncertainties described above and the possibility of material additional tax cost to our U.S. subsidiaries, we continue to explore various alternatives intended to mitigate the potential effect of the BEAT on our results of operations. Such actions may have adverse tax consequences to our business, such as subjecting profit from our affiliate reinsurance to a layer of withholding tax up to 30%, which would not be payable under our current structure. There can be no assurances that we will be able to complete these actions as they are conditioned upon factors beyond our control, such as regulatory approval. In addition, it is possible that we will be required to take action before the uncertainty regarding the BEAT is resolved, and accordingly any action we take may, in hindsight, prove to have been unnecessary, inefficient, ineffective or counterproductive.
AHL or its non-U.S. subsidiaries may be subject to U.S. federal income taxation.
AHL and its non-U.S. subsidiaries are incorporated under the laws of non-U.S. jurisdictions, including Bermuda, and currently intend to operate in a manner that will not cause either to be treated as being engaged in a trade or business within the 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 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 enactment of the Tax Act. See Part I—Item 1. Business–Regulation–United States–Tax Reform 1A. Risk Factorsin our 20172018 Annual Report. In particular, the Tax Act:
Imposes the BEAT (as described above);
Amends the calculation of tax reserves for U.S. life insurance companies and requires affected companies to include the resulting change in income over an 8-year period beginning in 2018;
Amends the treatment of “specified policy acquisition expenses” incurred by U.S. life insurance companies under Section 848 of the Internal Revenue Code;
Restricts the “active insurance” exception to PFIC treatment to “qualifying insurance corporations;”
Eliminates the prohibition on “downward attribution” from non-U.S. persons to U.S. persons under Section 958(b)(4) of the Internal Revenue Code for purposes of determining constructive stock ownership under the CFC rules (as described above); and
Amends the definition of “U.S. Shareholder” to include U.S. persons that own (or are treated as owning) 10% or more of the value of a foreign corporation.
There is significant uncertainty regarding how these and other provisions of the Tax Act will be interpreted, and guidance may not be forthcoming. In addition, it is possible that a “technical corrections” bill may be passed during 2018 that could alter or clarify the Tax Act, likely with retroactive effect. Any changes to, clarifications of, or guidance under the Tax Act could add significant expense and have a material adverse effect on our results of operations.
Finally, the tax treatment of non-U.S. companies and their U.S. and non-U.S. insurance subsidiaries may be the subject of further tax legislation. No prediction can be made as to whether any particular proposed legislation will be enacted or, if enacted, what the specific provisions or the effective date of any such legislation would be, or whether it would have any effect on us. As such, we cannot assure you that future legislative, administrative or judicial developments will not result in an increase in the amount of U.S. tax payable by us or by an investor in our Class A common shares or reduce the attractiveness of our products. If any such developments occur, our business, financial condition and results of
operation could be materially and adversely affected and such developments could have a material and adverse effect on your investment in our common shares.
Changes in U.S. tax law might adversely affect demand for our products.
Many of the products that we sell and reinsure benefit from one or more forms of tax-favored status under current U.S. federal and state income tax regimes. For example, we sell and reinsure annuity contracts that allow the policyholders to defer the recognition of taxable income earned within the contract. The changes in U.S. federal tax law made by the Tax Act, or future changes in U.S. federal or state tax law, could reduce or eliminate the attractiveness of such products, which could affect the sale of our products or increase the expected lapse rate with respect to products that have already been sold.
There is U.S. income tax risk associated with reinsurance between U.S. insurance companies and their Bermuda affiliates.
If a reinsurance agreement is entered into among related parties, the IRS is permitted to reallocate or recharacterize income, deductions or certain other items, and to make any other adjustment, to reflect the proper amount, source or character of the taxable income of each of the parties. If the IRS were to successfully challenge our reinsurance arrangements, our financial condition and results of operations could be adversely affected and the price of our Class A common shares could be adversely affected.
We may not be able to use our deferred tax asset attributes or admit them into statutory capital as a result of the Tax Act.
Under the Tax Act, net operating losses generated in 2018 and thereafter may be carried forward indefinitely but may not be carried back to offset taxable income in prior tax periods. Historically, a portion of our admitted deferred tax asset has reflected our ability to carry net operating losses back to prior tax periods. In the future, the amount of deferred tax asset we are able to admit may be reduced due to the elimination of the carry back period. Because the ability to admit deferred tax assets into statutory capital is dependent in part on our ability to carry losses back to prior tax periods, we may not be able to admit into statutory capital a portion of deferred tax assets that are generated in future tax periods.
We may have fewer investable assets and earn less investment income as a result of the Tax Act.
Certain of the changes made by the Tax Act are expected to increase the amount of our current tax expense. Although the increase in current tax expense from these changes may be largely offset by an increase in the amount of our deferred tax assets, we may have fewer investable assets and thus may earn less investment income.
We may become subject to U.S. withholding tax under certain U.S. tax provisions commonly known as FATCA.
Certain U.S. tax provisions commonly known as the Foreign Account Tax Compliance Act (FATCA) impose a 30% withholding tax on certain payments of U.S. source income and the proceeds from the disposition after December 31, 2018, of property of a type that can produce U.S. source interest or dividends, in each case, to certain “foreign financial institutions” and “non-financial foreign entities.” The withholding tax also applies to certain “foreign passthru payments” made by foreign financial institutions after December 31, 2018. The U.S. government has signed an intergovernmental agreement to facilitate the implementation of FATCA with the government of Bermuda (Bermuda IGA). AHL and its foreign subsidiaries intend to comply with the obligations imposed on them under FATCA and the Bermuda IGA, as applicable, to avoid being subject to withholding under FATCA on payments made to them or penalties. However, no assurance can be provided in this regard. We may become subject to withholding tax or penalties if we are unable to comply with FATCA.
If AHL is treated as engaged in a U.S. trade or business in any taxable year, all or a portion of the dividends on our Class A common shares may be treated as U.S. source income and may be subject to withholding and information reporting under FATCA unless a shareholder (and any intermediaries through which the shareholder holds its shares) establishes an exemption from such withholding and information reporting. In addition, any gross proceeds from the sale or other disposition of our Class A common shares after December 31, 2018, might also be subject to withholding and information reporting under FATCA in such circumstances, absent an exemption. As discussed above, we currently intend to limit our U.S. activities so that AHL is not considered to be engaged in a U.S. trade or business, although no assurances can be provided in this regard.
We are subject to the risk that Bermuda tax laws may change and that we may become subject to new Bermuda taxes following the expiration of a current exemption after 2035.
The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, as amended, has given us an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to us or any of our operations, shares, debentures or other obligations until March 31, 2035, except insofar as such tax applies to persons ordinarily resident in Bermuda or to any taxes payable by us in respect of real property owned or leased by us in Bermuda. Given the limited duration of the Bermuda Minister of Finance’s assurance, we cannot assure you that we will not be subject to any Bermuda tax after March 31, 2035.
The impact of the OECD’s recommendations on base erosion and profit shifting is uncertain and could impose adverse tax consequences on us.
In 2015, the OECD published final recommendations on base erosion and profit shifting (BEPS). These BEPS recommendations propose the development of rules directed at counteracting the effects of tax havens and preferential tax regimes in countries around the world. Beginning with 2017, some countries in which we do business, including Bermuda and the U.S., require certain multinational enterprises, including ours, to report detailed information regarding allocation of revenue, profit, and other information, on a country-by-country basis, which could increase scrutiny by foreign tax authorities.
The BEPS recommendations also include revisions to the definition of a “permanent establishment” and the rules for attributing profit to a permanent establishment. Other recommended actions relate to the goal of ensuring that transfer pricing outcomes are in line with value creation, noting that the current rules may facilitate the transfer of risks or capital away from countries where the economic activity takes place. We expect many countries to change their tax laws in response to this project, and several countries (including the U.S.) have already changed or proposed changes to their tax laws. Changes to tax laws could increase their complexity and the burden and costs of compliance. Additionally, such changes could also result in significant modifications to the existing transfer pricing rules and could potentially have an impact on our taxable profits in various jurisdictions.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Securities
Purchases of common stock made by or on behalf of us or our affiliates during the three months ended June 30, 2018March 31, 2019 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 |
| April 1 – April 30, 2018 | 1,475 |
| $ | 47.84 |
| — |
| $ | — |
|
| May 1 – May 31, 2018 | 12 |
| $ | 46.71 |
| — |
| $ | — |
|
| June 1 – June 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 June 30, 2018, 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 share | (c) Total number of shares purchased as part of publicly announced programs1,2 | (d) Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs2 |
| January 1 – January 31, 2019 | 1,199,445 |
| $ | 40.84 |
| 1,162,262 |
| $ | 102,632,284 |
|
| February 1 – February 28, 2019 | 175 |
| $ | 44.33 |
| — |
| $ | 102,632,284 |
|
| March 1 – March 31, 2019 | 60,728 |
| $ | 44.54 |
| — |
| $ | 102,632,284 |
|
| | | | | |
1 Differences in amounts between column (a) and (c) relate to shares withheld (under the terms of employee stock-based compensation plans) to offset tax withholding obligations that occur upon the delivery of outstanding shares underlying equity awards or upon the exercise of stock options. |
2 On December 10, 2018, we announced that our board of directors had approved an authorization for the repurchase of up to $250 million of our Class A shares (Previous Authorization). On May 7, 2019, we announced that our board of directors had approved an authorization for the repurchase of up to $350 million of our Class A shares, inclusive of the remaining shares authorized for repurchase under the Previous Authorization. Neither authorization has a definitive expiration date, but may be terminated at any time at the sole discretion of our board of directors. See Note 7 – Equity to the condensed consolidated financial statements for more information. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
EXHIBIT INDEX
|
| |
| Exhibit No. | Description |
3.1 | |
10.1 | |
10.2 | |
10.3 | |
10.4 | |
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. |
| |
* As revised from the version filed as Exhibit 3.2 to the Form 8-K filed on June 6, 2018 to incorporate certain technical corrections. |
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: August 3, 2018May 7, 2019 | /s/ Martin P. Klein |
| | Martin P. Klein |
| | Executive Vice President and Chief Financial Officer |
| | (principal financial officer and duly authorized signatory) |