Item 1. Financial Statements
Index to Condensed Consolidated Financial Statements (unaudited)
ATHENE HOLDING LTD.
Condensed Consolidated Balance Sheets (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
September 30, 2020
|
|
December 31, 2019
|
Assets
|
|
|
|
Investments
|
|
|
|
Available-for-sale securities, at fair value (amortized cost: 2020 – $69,160 and 2019 – $67,479; allowance for credit losses: 2020 – $140)
|
$
|
73,988
|
|
|
$
|
71,374
|
|
Trading securities, at fair value (consolidated variable interest entities: 2020 – $0 and 2019 – $16)
|
2,069
|
|
|
2,070
|
|
Equity securities (portion at fair value: 2020 – $265 and 2019 – $247)
|
697
|
|
|
247
|
|
Mortgage loans (allowance for credit losses: 2020 – $313 and 2019 – $11; portion at fair value: 2020 – $19 and 2019 – $27; consolidated variable interest entities: 2020 – $1,879 and 2019 – $0)
|
14,591
|
|
|
14,306
|
|
Investment funds (portion at fair value: 2020 – $156 and 2019 – $154; consolidated variable interest entities: 2020 – $0 and 2019 – $19)
|
723
|
|
|
750
|
|
Policy loans
|
387
|
|
|
417
|
|
Funds withheld at interest (portion at fair value: 2020 – $1,259 and 2019 – $801)
|
48,593
|
|
|
15,181
|
|
Derivative assets
|
2,771
|
|
|
2,888
|
|
Short-term investments (portion at fair value: 2020 – $165 and 2019 – $406)
|
165
|
|
|
596
|
|
Other investments (allowance for credit losses: 2020 – $8; portion at fair value: 2020 – $109 and 2019 – $93)
|
949
|
|
|
158
|
|
Total investments
|
144,933
|
|
|
107,987
|
|
Cash and cash equivalents (consolidated variable interest entities: 2020 – $0 and 2019 – $3)
|
7,548
|
|
|
4,240
|
|
Restricted cash
|
1,226
|
|
|
402
|
|
Investments in related parties
|
|
|
|
Available-for-sale securities, at fair value (amortized cost: 2020 – $4,861 and 2019 – $3,783; allowance for credit losses: 2020 – $2)
|
4,857
|
|
|
3,804
|
|
Trading securities, at fair value
|
1,397
|
|
|
785
|
|
Equity securities, at fair value (consolidated variable interest entities: 2020 – $0 and 2019 – $6)
|
50
|
|
|
64
|
|
Mortgage loans (allowance for credit losses: 2020 – $15 and 2019 – $0)
|
640
|
|
|
653
|
|
Investment funds (portion at fair value: 2020 – $1,850 and 2019 – $819; consolidated variable interest entities: 2020 – $0 and 2019 – $664)
|
4,808
|
|
|
3,550
|
|
Funds withheld at interest (portion at fair value: 2020 – $721 and 2019 – $594)
|
13,053
|
|
|
13,220
|
|
|
|
|
|
Other investments (allowance for credit losses: 2020 – $5)
|
467
|
|
|
487
|
|
Accrued investment income (related party: 2020 – $38 and 2019 – $27)
|
796
|
|
|
807
|
|
Reinsurance recoverable (portion at fair value: 2020 – $2,155 and 2019 – $1,821)
|
5,104
|
|
|
4,863
|
|
Deferred acquisition costs, deferred sales inducements and value of business acquired
|
5,165
|
|
|
5,008
|
|
Other assets (consolidated variable interest entities: 2020 – $1 and 2019 – $20)
|
1,044
|
|
|
1,005
|
|
Total assets
|
$
|
191,088
|
|
|
$
|
146,875
|
|
(Continued)
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Balance Sheets (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share data)
|
September 30, 2020
|
|
December 31, 2019
|
Liabilities and Equity
|
|
|
|
Liabilities
|
|
|
|
Interest sensitive contract liabilities (related party: 2020 – $14,352 and 2019 – $15,285; portion at fair value: 2020 – $13,104 and 2019 – $11,992)
|
$
|
141,207
|
|
|
$
|
102,745
|
|
Future policy benefits (related party: 2020 – $1,527 and 2019 – $1,302; portion at fair value: 2020 – $2,354 and 2019 – $2,301)
|
24,823
|
|
|
23,330
|
|
Other policy claims and benefits (related party: 2020 – $2 and 2019 – $13)
|
118
|
|
|
138
|
|
Dividends payable to policyholders
|
110
|
|
|
113
|
|
Short-term debt
|
—
|
|
|
475
|
|
Long-term debt
|
1,487
|
|
|
992
|
|
Derivative liabilities
|
147
|
|
|
97
|
|
Payables for collateral on derivatives and securities to repurchase
|
3,742
|
|
|
3,255
|
|
Funds withheld liability (portion at fair value: 2020 – $50 and 2019 – $31)
|
440
|
|
|
408
|
|
Other liabilities (related party: 2020 – $92 and 2019 – $79; consolidated variable interest entities: 2020 – $134 and 2019 – $0)
|
1,897
|
|
|
1,181
|
|
Total liabilities
|
173,971
|
|
|
132,734
|
|
Commitments and Contingencies (Note 12)
|
|
|
|
Equity
|
|
|
|
Preferred stock
|
|
|
|
Series A – par value $1 per share; $863 aggregate liquidation preference; authorized, issued and outstanding: 2020 and 2019 – 0.0 shares
|
—
|
|
|
—
|
|
Series B – par value $1 per share; $345 aggregate liquidation preference; authorized, issued and outstanding: 2020 and 2019 – 0.0 shares
|
—
|
|
|
—
|
|
Series C – par value $1 per share; $600 aggregate liquidation preference; authorized, issued and outstanding: 2020 – 0.0 shares
|
—
|
|
|
—
|
|
Common stock
|
|
|
|
Class A – par value $0.001 per share; authorized: 2020 and 2019 – 425.0 shares; issued and outstanding: 2020 – 191.5 and 2019 – 143.2 shares
|
—
|
|
|
—
|
|
Class B – par value $0.001 per share; convertible to Class A; authorized: 2020 – 0.0 and 2019 – 325.0 shares; issued and outstanding: 2020 – 0.0 and 2019 – 25.4 shares
|
—
|
|
|
—
|
|
Class M-1 – par value $0.001 per share; convertible to Class A; authorized: 2020 – 0.0 and 2019 – 7.1 shares; issued and outstanding: 2020 – 0.0 and 2019 – 3.3 shares
|
—
|
|
|
—
|
|
Class M-2 – par value $0.001 per share; convertible to Class A; authorized: 2020 – 0.0 and 2019 – 5.0 shares; issued and outstanding: 2020 – 0.0 and 2019 – 0.8 shares
|
—
|
|
|
—
|
|
Class M-3 – par value $0.001 per share; convertible to Class A; authorized: 2020 – 0.0 and 2019 – 7.5 shares; issued and outstanding: 2020 – 0.0 and 2019 – 1.0 shares
|
—
|
|
|
—
|
|
Class M-4 – par value $0.001 per share; convertible to Class A; authorized: 2020 – 0.0 and 2019 – 7.5 shares; issued and outstanding: 2020 – 0.0 and 2019 – 4.0 shares
|
—
|
|
|
—
|
|
Additional paid-in capital
|
6,045
|
|
|
4,171
|
|
Retained earnings
|
7,010
|
|
|
6,939
|
|
Accumulated other comprehensive income (related party: 2020 – $(19) and 2019 – $17)
|
2,888
|
|
|
2,281
|
|
Total Athene Holding Ltd. shareholders’ equity
|
15,943
|
|
|
13,391
|
|
Noncontrolling interests
|
1,174
|
|
|
750
|
|
Total equity
|
17,117
|
|
|
14,141
|
|
Total liabilities and equity
|
$
|
191,088
|
|
|
$
|
146,875
|
|
(Concluded)
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Income (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(In millions, except per share data)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Revenues
|
|
|
|
|
|
|
|
Premiums (related party of $71 and $51 for the three months ended and $234 and $173 for the nine months ended September 30, 2020 and 2019, respectively)
|
$
|
112
|
|
|
$
|
2,688
|
|
|
$
|
1,607
|
|
|
$
|
5,475
|
|
Product charges (related party of $13 and $14 for the three months ended and $41 and $42 for the nine months ended September 30, 2020 and 2019, respectively)
|
144
|
|
|
135
|
|
|
425
|
|
|
392
|
|
Net investment income (related party investment income of $239 and $175 for the three months ended and $515 and $528 for the nine months ended September 30, 2020 and 2019, respectively; consolidated variable interest entities of $18 and $20 for the three months ended and $34 and $57 for the nine months ended September 30, 2020 and 2019, respectively; and related party investment expense of $111 and $127 for the three months ended and $362 and $313 for the nine months ended September 30, 2020 and 2019, respectively)
|
1,209
|
|
|
1,090
|
|
|
3,290
|
|
|
3,354
|
|
Investment related gains (losses) (related party of $299 and $273 for the three months ended and $429 and $1,025 for the nine months ended September 30, 2020 and 2019, respectively; and consolidated variable interest entities of $26 and $2 for the three months ended and $20 and $10 for the nine months ended September 30, 2020 and 2019, respectively)
|
1,797
|
|
|
665
|
|
|
773
|
|
|
3,754
|
|
Other revenues
|
13
|
|
|
6
|
|
|
29
|
|
|
27
|
|
Total revenues
|
3,275
|
|
|
4,584
|
|
|
6,124
|
|
|
13,002
|
|
Benefits and expenses
|
|
|
|
|
|
|
|
Interest sensitive contract benefits (related party of $43 and $97 for the three months ended and $143 and $394 for the nine months ended September 30, 2020 and 2019, respectively)
|
1,225
|
|
|
801
|
|
|
1,982
|
|
|
3,411
|
|
Amortization of deferred sales inducements
|
48
|
|
|
20
|
|
|
37
|
|
|
38
|
|
Future policy and other policy benefits (related party of $106 and $70 for the three months ended and $298 and $267 for the nine months ended September 30, 2020 and 2019, respectively)
|
439
|
|
|
2,955
|
|
|
2,469
|
|
|
6,395
|
|
Amortization of deferred acquisition costs and value of business acquired
|
299
|
|
|
323
|
|
|
247
|
|
|
815
|
|
Dividends to policyholders
|
9
|
|
|
12
|
|
|
29
|
|
|
30
|
|
Policy and other operating expenses (related party of $14 and $10 for the three months ended and $41 and $30 for the nine months ended September 30, 2020 and 2019, respectively)
|
231
|
|
|
194
|
|
|
637
|
|
|
544
|
|
Total benefits and expenses
|
2,251
|
|
|
4,305
|
|
|
5,401
|
|
|
11,233
|
|
Income before income taxes
|
1,024
|
|
|
279
|
|
|
723
|
|
|
1,769
|
|
Income tax expense (benefit)
|
140
|
|
|
(14)
|
|
|
124
|
|
|
48
|
|
Net income
|
884
|
|
|
293
|
|
|
599
|
|
|
1,721
|
|
Less: Net income attributable to noncontrolling interests
|
232
|
|
|
—
|
|
|
151
|
|
|
—
|
|
Net income attributable to Athene Holding Ltd. shareholders
|
652
|
|
|
293
|
|
|
448
|
|
|
1,721
|
|
Less: Preferred stock dividends
|
30
|
|
|
17
|
|
|
67
|
|
|
17
|
|
Net income available to Athene Holding Ltd. common shareholders
|
$
|
622
|
|
|
$
|
276
|
|
|
$
|
381
|
|
|
$
|
1,704
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
Basic – Class A
|
$
|
3.22
|
|
|
$
|
1.50
|
|
|
$
|
2.78
|
|
|
$
|
8.97
|
|
Basic – Classes B, M-1, M-2, M-3 and M-4
|
N/A
|
|
1.50
|
|
|
(3.87)
|
|
|
8.97
|
|
Diluted – Class A
|
3.16
|
|
|
1.50
|
|
|
2.73
|
|
|
8.95
|
|
Diluted – Class B
|
N/A
|
|
1.50
|
|
|
(3.87)
|
|
|
8.97
|
|
Diluted – Class M-1
|
N/A
|
|
1.50
|
|
|
(3.87)
|
|
|
8.97
|
|
Diluted – Class M-2
|
N/A
|
|
1.50
|
|
|
(3.87)
|
|
|
8.97
|
|
Diluted – Class M-3
|
N/A
|
|
1.50
|
|
|
(3.87)
|
|
|
8.97
|
|
Diluted – Class M-4
|
N/A
|
|
1.29
|
|
|
(3.87)
|
|
|
7.77
|
|
|
|
|
|
|
|
|
|
N/A – Not applicable. See Notes 9 – Earnings Per Share and 10 – Equity for further information.
|
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net income
|
$
|
884
|
|
|
$
|
293
|
|
|
$
|
599
|
|
|
$
|
1,721
|
|
Other comprehensive income (loss), before tax
|
|
|
|
|
|
|
|
Unrealized investment gains (losses) on available-for-sale securities, net of offsets
|
1,043
|
|
|
735
|
|
|
710
|
|
|
3,473
|
|
Unrealized gains (losses) on hedging instruments
|
(178)
|
|
|
124
|
|
|
140
|
|
|
171
|
|
Foreign currency translation and other adjustments
|
10
|
|
|
(1)
|
|
|
9
|
|
|
(2)
|
|
Other comprehensive income, before tax
|
875
|
|
|
858
|
|
|
859
|
|
|
3,642
|
|
Income tax expense related to other comprehensive income
|
157
|
|
|
176
|
|
|
165
|
|
|
728
|
|
Other comprehensive income
|
718
|
|
|
682
|
|
|
694
|
|
|
2,914
|
|
Comprehensive income
|
1,602
|
|
|
975
|
|
|
1,293
|
|
|
4,635
|
|
Less: Comprehensive income attributable to noncontrolling interests
|
246
|
|
|
—
|
|
|
232
|
|
|
—
|
|
Comprehensive income attributable to Athene Holding Ltd. shareholders
|
$
|
1,356
|
|
|
$
|
975
|
|
|
$
|
1,061
|
|
|
$
|
4,635
|
|
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Equity (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
(In millions)
|
Preferred stock
|
|
Common stock
|
|
Additional paid-in capital
|
|
Retained earnings
|
|
Accumulated other comprehensive income (loss)
|
|
Total Athene Holding Ltd. shareholders’ equity
|
|
Noncontrolling interests
|
|
Total shareholders’ equity
|
Balance at June 30, 2020
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,090
|
|
|
$
|
6,437
|
|
|
$
|
2,184
|
|
|
$
|
14,711
|
|
|
$
|
928
|
|
|
$
|
15,639
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
652
|
|
|
—
|
|
|
652
|
|
|
232
|
|
|
884
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
704
|
|
|
704
|
|
|
14
|
|
|
718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
Retirement or repurchase of shares
|
—
|
|
|
—
|
|
|
(48)
|
|
|
(49)
|
|
|
—
|
|
|
(97)
|
|
|
—
|
|
|
(97)
|
|
Preferred stock dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
(30)
|
|
|
—
|
|
|
(30)
|
|
|
—
|
|
|
(30)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2020
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,045
|
|
|
$
|
7,010
|
|
|
$
|
2,888
|
|
|
$
|
15,943
|
|
|
$
|
1,174
|
|
|
$
|
17,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,144
|
|
|
$
|
6,461
|
|
|
$
|
1,760
|
|
|
$
|
12,365
|
|
|
$
|
—
|
|
|
$
|
12,365
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
293
|
|
|
—
|
|
|
293
|
|
|
—
|
|
|
293
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
682
|
|
|
682
|
|
|
—
|
|
|
682
|
|
Issuance of preferred shares, net of expenses
|
—
|
|
|
—
|
|
|
333
|
|
|
—
|
|
|
—
|
|
|
333
|
|
|
—
|
|
|
333
|
|
Issuance of common shares, net of expenses
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
8
|
|
Retirement or repurchase of shares
|
—
|
|
|
—
|
|
|
(52)
|
|
|
(69)
|
|
|
—
|
|
|
(121)
|
|
|
—
|
|
|
(121)
|
|
Preferred stock dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
(17)
|
|
|
—
|
|
|
(17)
|
|
|
—
|
|
|
(17)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,435
|
|
|
$
|
6,668
|
|
|
$
|
2,442
|
|
|
$
|
13,545
|
|
|
$
|
—
|
|
|
$
|
13,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
(In millions)
|
Preferred stock
|
|
Common stock
|
|
Additional paid-in capital
|
|
Retained earnings
|
|
Accumulated other comprehensive income (loss)
|
|
Total Athene Holding Ltd. shareholders’ equity
|
|
Noncontrolling interests
|
|
Total shareholders’ equity
|
Balance at December 31, 2019
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,171
|
|
|
$
|
6,939
|
|
|
$
|
2,281
|
|
|
$
|
13,391
|
|
|
$
|
750
|
|
|
$
|
14,141
|
|
Adoption of accounting standard
|
—
|
|
|
—
|
|
|
—
|
|
|
(117)
|
|
|
(6)
|
|
|
(123)
|
|
|
(2)
|
|
|
(125)
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
448
|
|
|
—
|
|
|
448
|
|
|
151
|
|
|
599
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
613
|
|
|
613
|
|
|
81
|
|
|
694
|
|
Issuance of preferred shares, net of expenses
|
—
|
|
|
—
|
|
|
583
|
|
|
—
|
|
|
—
|
|
|
583
|
|
|
—
|
|
|
583
|
|
Issuance of common shares, net of expenses
|
—
|
|
|
—
|
|
|
1,509
|
|
|
—
|
|
|
—
|
|
|
1,509
|
|
|
—
|
|
|
1,509
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
14
|
|
Retirement or repurchase of shares
|
—
|
|
|
—
|
|
|
(232)
|
|
|
(193)
|
|
|
—
|
|
|
(425)
|
|
|
—
|
|
|
(425)
|
|
Preferred stock dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
(67)
|
|
|
—
|
|
|
(67)
|
|
|
—
|
|
|
(67)
|
|
Contributions from noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
240
|
|
|
240
|
|
Distributions to noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(46)
|
|
|
(46)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2020
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,045
|
|
|
$
|
7,010
|
|
|
$
|
2,888
|
|
|
$
|
15,943
|
|
|
$
|
1,174
|
|
|
$
|
17,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,462
|
|
|
$
|
5,286
|
|
|
$
|
(472)
|
|
|
$
|
8,276
|
|
|
$
|
—
|
|
|
$
|
8,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
1,721
|
|
|
—
|
|
|
1,721
|
|
|
—
|
|
|
1,721
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,914
|
|
|
2,914
|
|
|
—
|
|
|
2,914
|
|
Issuance of preferred shares, net of expenses
|
—
|
|
|
—
|
|
|
1,172
|
|
|
—
|
|
|
—
|
|
|
1,172
|
|
|
—
|
|
|
1,172
|
|
Issuance of common shares, net of expenses
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
23
|
|
|
—
|
|
|
23
|
|
Retirement or repurchase of shares
|
—
|
|
|
—
|
|
|
(226)
|
|
|
(322)
|
|
|
—
|
|
|
(548)
|
|
|
—
|
|
|
(548)
|
|
Preferred stock dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
(17)
|
|
|
—
|
|
|
(17)
|
|
|
—
|
|
|
(17)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,435
|
|
|
$
|
6,668
|
|
|
$
|
2,442
|
|
|
$
|
13,545
|
|
|
$
|
—
|
|
|
$
|
13,545
|
|
See accompanying notes to the unaudited condensed consolidated financial statements
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
Cash flows from operating activities
|
|
|
|
Net income
|
$
|
599
|
|
|
$
|
1,721
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Amortization of deferred acquisition costs and value of business acquired
|
247
|
|
|
815
|
|
Amortization of deferred sales inducements
|
37
|
|
|
38
|
|
Accretion of net investment premiums, discounts and other
|
(139)
|
|
|
(60)
|
|
Payment at recapture of reinsurance agreement
|
(723)
|
|
|
—
|
|
Net investment income (related party: 2020 – $(72) and 2019 – $(95); consolidated variable interest entities: 2020 – $(24), 2019 – $0)
|
(90)
|
|
|
(94)
|
|
Net recognized (gains) losses on investments and derivatives (related party: 2020 – $15 and 2019 – $(26); consolidated variable interest entities: 2020 – $6 and 2019 – $(10))
|
462
|
|
|
(1,682)
|
|
Policy acquisition costs deferred
|
(470)
|
|
|
(521)
|
|
Changes in operating assets and liabilities:
|
|
|
|
Accrued investment income (related party: 2020 – $(18) and 2019 – $(3))
|
(27)
|
|
|
(99)
|
|
Interest sensitive contract liabilities (related party: 2020 – $135 and 2019 – $338)
|
1,691
|
|
|
3,086
|
|
Future policy benefits, other policy claims and benefits, dividends payable to policyholders and reinsurance recoverable (related party: 2020 – $209 and 2019 – $223)
|
338
|
|
|
973
|
|
Funds withheld assets and liabilities (related party: 2020 – $(644) and 2019 – $(1,261))
|
(856)
|
|
|
(2,488)
|
|
Other assets and liabilities
|
(144)
|
|
|
296
|
|
Net cash provided by operating activities
|
925
|
|
|
1,985
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
Sales, maturities and repayments of:
|
|
|
|
Available-for-sale securities (related party: 2020 – $238 and 2019 – $101)
|
8,850
|
|
|
8,344
|
|
Trading securities (related party: 2020 – $31 and 2019 – $65; consolidated variable interest entities: 2020 – $10 and 2019 – $33)
|
133
|
|
|
195
|
|
Equity securities (related party: 2020 – $4 and 2019 – $51; consolidated variable interest entities: 2020 – $0 and 2019 – $51)
|
6
|
|
|
120
|
|
Mortgage loans (related party: 2020 – $0 and 2019 – $4)
|
1,593
|
|
|
1,513
|
|
Investment funds (related party: 2020 – $408 and 2019 – $196; consolidated variable interest entities: 2020 – $20 and 2019 – $8)
|
465
|
|
|
309
|
|
Derivative instruments and other invested assets
|
1,331
|
|
|
1,008
|
|
Short-term investments (related party: 2020 – $28 and 2019 – $0)
|
766
|
|
|
274
|
|
Purchases of:
|
|
|
|
Available-for-sale securities (related party: 2020 – $(1,526) and 2019 – $(1,065))
|
(14,071)
|
|
|
(11,413)
|
|
Trading securities (related party: 2020 – $(150) and 2019 – $(6))
|
(188)
|
|
|
(425)
|
|
Equity securities (related party: 2020 – $(3) and 2019 – $(243))
|
(481)
|
|
|
(421)
|
|
Mortgage loans (related party: 2020 – $(17) and 2019 – $(366))
|
(2,971)
|
|
|
(5,013)
|
|
Investment funds (related party: 2020 – $(914) and 2019 – $(637); consolidated variable interest entities: 2020 – $0 and 2019 – $(27))
|
(970)
|
|
|
(765)
|
|
Derivative instruments and other invested assets
|
(1,451)
|
|
|
(853)
|
|
Short-term investments (related party: 2020 – $(28) and 2019 – $0)
|
(449)
|
|
|
(653)
|
|
|
|
|
|
Deconsolidation of previously consolidated variable interest entities
|
(3)
|
|
|
—
|
|
Other investing activities, net
|
341
|
|
|
521
|
|
Net cash used in investing activities
|
(7,099)
|
|
|
(7,259)
|
|
|
|
|
(Continued)
|
See accompanying notes to the unaudited condensed consolidated financial statements
|
|
|
|
ATHENE HOLDING LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
Cash flows from financing activities
|
|
|
|
Issuance of common stock
|
$
|
350
|
|
|
$
|
—
|
|
|
|
|
|
Repayment of short-term debt
|
(75)
|
|
|
—
|
|
Proceeds from long-term debt
|
499
|
|
|
—
|
|
|
|
|
|
Deposits on investment-type policies and contracts (related party: 2020 – $63 and 2019 – $130)
|
13,994
|
|
|
8,879
|
|
Withdrawals on investment-type policies and contracts (related party: 2020 – $(292) and 2019 – $(332))
|
(5,320)
|
|
|
(4,846)
|
|
Payments for coinsurance agreements on investment-type contracts, net
|
(17)
|
|
|
(39)
|
|
Capital contributions from noncontrolling interests
|
240
|
|
|
—
|
|
Capital distributions to noncontrolling interests
|
(46)
|
|
|
—
|
|
Net change in cash collateral posted for derivative transactions and securities to repurchase
|
487
|
|
|
1,354
|
|
Issuance of preferred stock, net of expenses
|
583
|
|
|
1,172
|
|
Preferred stock dividends
|
(67)
|
|
|
(17)
|
|
Repurchase of common stock
|
(425)
|
|
|
(548)
|
|
Other financing activities, net
|
131
|
|
|
(51)
|
|
Net cash provided by financing activities
|
10,334
|
|
|
5,904
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(28)
|
|
|
—
|
|
Net increase in cash and cash equivalents
|
4,132
|
|
|
630
|
|
Cash and cash equivalents at beginning of year1
|
4,642
|
|
|
3,405
|
|
Cash and cash equivalents at end of period1
|
$
|
8,774
|
|
|
$
|
4,035
|
|
|
|
|
|
Supplementary information
|
|
|
|
Non-cash transactions
|
|
|
|
Deposits on investment-type policies and contracts through reinsurance agreements (related party: 2020 – $252 and 2019 – $159)
|
$
|
29,876
|
|
|
$
|
619
|
|
Withdrawals on investment-type policies and contracts through reinsurance agreements (related party: 2020 – $1,063 and 2019 – $1,351)
|
3,313
|
|
|
2,764
|
|
Investments received from settlements on reinsurance agreements
|
53
|
|
|
56
|
|
Investments received from settlements on related party reinsurance agreements
|
—
|
|
|
97
|
|
|
|
|
|
Investments received from pension risk transfer premiums
|
829
|
|
|
4,506
|
|
|
|
|
|
|
|
|
|
Related party investment funds exchanged for related party investments
|
516
|
|
|
—
|
|
Reduction in investments and other assets and liabilities relating to recapture of reinsurance agreement
|
4,298
|
|
|
—
|
|
|
|
|
|
Related party investments received in exchange for the issuance of Class A common shares
|
1,147
|
|
|
—
|
|
|
|
|
|
1 Includes cash and cash equivalents and restricted cash.
|
(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 the United States (US) and internationally.
We conduct business primarily through the following consolidated subsidiaries:
•Our non-US reinsurance subsidiaries, to which AHL’s other insurance subsidiaries and third-party ceding companies directly and indirectly reinsure a portion of their liabilities, including Athene Life Re Ltd. (ALRe), a Bermuda exempted company, and Athene Life Re International Ltd. (ALReI); and
•Athene USA Corporation, an Iowa corporation (together with its subsidiaries, Athene USA).
In addition, we consolidate certain variable interest entities (VIEs) for which we have determined we are the primary beneficiary. See Note 4 – Variable Interest Entities for further information on VIEs.
Consolidation and Basis of Presentation—We have prepared the accompanying condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the United States Securities and Exchange Commission’s rules and regulations for Form 10-Q and Article 10 of Regulation S-X. The accompanying condensed consolidated financial statements are unaudited and reflect all adjustments, consisting only of normal recurring items, considered necessary for fair statement of the results for the interim periods presented. All intercompany accounts and transactions have been eliminated. Interim operating results are not necessarily indicative of the results expected for the entire year, particularly in light of the material risks and uncertainties surrounding the spread of the Coronavirus Disease of 2019 (COVID-19), which has resulted in significant volatility in the financial markets.
For entities that are consolidated, but not 100% owned, we allocate a portion of the income or loss and corresponding equity to the owners other than us. We include the aggregate of the income or loss and corresponding equity that is not owned by us in noncontrolling interests in the consolidated financial statements.
The condensed consolidated balance sheet as of December 31, 2019 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, 2019. The preparation of financial statements requires the use of management estimates. Our estimates may vary as more information about the extent to which COVID-19 and the resulting impact on economic conditions and the financial markets become known. Actual results may differ from estimates used in preparing the condensed consolidated financial statements.
Summary of Significant Accounting Policies
The following accounting policies have been updated for the adoption of Accounting Standards Update (ASU) 2016-13 and related ASUs, and apply for reporting periods beginning January 1, 2020.
Investments
Purchased Credit Deteriorated (PCD) Investments – We purchase certain structured securities, primarily residential mortgage backed securities (RMBS), and re-performing mortgage loans having experienced a more-than-insignificant deterioration in credit quality since their origination which upon our assessment have been determined to meet the definition of PCD investments. Additionally, structured securities classified as beneficial interests follow the initial measurement guidance for PCD investments if there is a significant difference between contractual cash flows adjusted for expected prepayments and expected cash flows at the date of recognition. The initial allowance for credit losses for PCD investments is recorded through a gross-up adjustment to the initial amortized cost. For mortgage loans, the initial allowance is determined using the methodology described in the Credit Losses – Assets Held at Amortized Cost and Off-Balance Sheet Credit Exposures section. For structured securities classified as beneficial interests, the initial allowance is calculated as the present value of the difference between contractual cash flows adjusted for expected prepayments and expected cash flows at the date of recognition. The non-credit purchase discount or premium is amortized into investment income using the effective interest method. The credit discount, represented by the allowance for expected credit losses, is remeasured each period following the policies for measuring credit losses described in the Credit Losses – Assets Held at Amortized Cost and Off-Balance Sheet Credit Exposures and Credit Losses – Available-for-Sale Securities sections below.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Credit Losses – Assets Held at Amortized Cost and Off-Balance Sheet Credit Exposures – We establish an allowance for expected credit losses at the time of purchase for assets held at amortized cost, which primarily includes our residential and commercial mortgage loan portfolios, but also includes certain other loans and reinsurance assets. The allowance for expected credit losses represents the portion of the asset's amortized cost basis that we do not expect to collect due to credit losses over the asset's contractual life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions or macroeconomic forecasts. We use a quantitative probability of default and loss given default methodology to develop our estimate of expected credit loss. We develop the estimate on a collective basis factoring in the risk characteristics of the assets in the portfolio. If an asset does not share similar risk characteristics with other assets, the asset is individually assessed.
Allowance estimates are highly dependent on expectations of future economic conditions and macroeconomic forecasts, which involve significant judgment and subjectivity. We use quantitative modeling to develop the allowance for expected credit losses. Key inputs into the model include data pertaining to the characteristics of the assets, historical losses and current market conditions. Additionally, the model incorporates management’s expectations around future economic conditions and macroeconomic forecasts over a reasonable and supportable forecast period, after which the model reverts to historical averages. These inputs, the reasonable and supportable forecast period, and reversion to historical average technique are subject to a formal governance and review process by management. Additionally, management considers qualitative adjustments to the model output to the extent that any relevant information regarding the collectability of the asset is available and not already considered in the quantitative model. If we determine that a financial asset has become collateral dependent, which we determine to be when foreclosure is probable, the allowance is measured as the difference between amortized cost and the fair value of the collateral, less any expected costs to sell.
The initial allowance for invested assets held at amortized cost other than for PCD investments, and subsequent changes in the allowance including PCD investments, are recorded through a charge to credit loss expense within investment related gains (losses) on the condensed consolidated statements of income. Credit loss expense for reinsurance assets held at amortized cost is recorded through policy and other operating expenses on the condensed consolidated statements of income.
We limit accrued interest income on loans to 90 days of interest. Once a loan becomes 90 days past due, the loan is put on non-accrual status and any accrued interest is written off. Once a loan is on non-accrual status, we first apply any payments received to the principal of the loan, and once the principal is repaid, we include amounts received in net investment income. We have elected to present accrued interest receivable separately in accrued investment income on the condensed consolidated balance sheets. We have also elected the practical expedient to exclude the accrued interest receivable from the amortized cost balance used to calculate the allowance given our policy to write off such balances in a timely manner. Any write-off of accrued interest is recorded through a reversal of net investment income on the condensed consolidated statements of income.
Upon determining that all or a portion of the amortized cost of an asset is uncollectible, which is generally when all efforts for collection are exhausted, the amortized cost is written off against the existing allowance. Any write off in excess of the existing allowance is recorded through credit loss expense within investment related gains (losses) on the condensed consolidated statements of income.
We also have certain off-balance sheet credit exposures for which we establish a liability for expected future credit losses. These exposures primarily relate to commitments to fund commercial or residential mortgage loans that are not unconditionally cancelable. The methodology for estimating the liability for these credit exposures is consistent with that described above, with the additional consideration pertaining to the probability of funding. At the time the commitment expires or is funded, the liability is reversed and an allowance for expected credit losses is established, as applicable. The liability for off-balance sheet credit exposures is included in other liabilities on the condensed consolidated balance sheets. The establishment of the initial liability and all subsequent changes are recorded through credit loss expense within investment related gains (losses) on the condensed consolidated statements of income.
Credit Losses – Available-for-Sale Securities – We evaluate available-for-sale (AFS) securities with a fair value that has declined below amortized cost to determine how the decline in fair value should be recognized. If we determine, based on the facts and circumstances related to the specific security, that we intend to sell a security or it is more likely than not that we would be required to sell a security before the recovery of its amortized cost, any existing allowance for credit losses is reversed and the amortized cost of the security is written down to fair value. If neither of these conditions exist, we evaluate whether the decline in fair value has resulted from a credit loss or other factors.
For non-structured AFS securities, we qualitatively consider relevant facts and circumstances in evaluating whether a decline below fair value is credit-related. Relevant facts and circumstances include but are not limited to: (1) the extent to which the fair value is less than amortized cost; (2) changes in agency credit ratings, (3) adverse conditions related to the security’s industry or geographical area, (4) failure to make scheduled payments, and (5) other known changes in the financial condition of the issuer or quality of any underlying collateral or credit enhancements. For structured AFS securities meeting the definition of beneficial interests, the qualitative assessment is bypassed, and any securities having experienced a decline in fair value below amortized cost move directly to a quantitative analysis.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
If upon completion of this analysis it is determined that a potential credit loss exists, an allowance for expected credit losses is established equal to the amount by which the present value of expected cash flows is less than amortized cost, limited by the amount by which fair value is less than amortized cost. A non-structured security’s cash flow estimates are derived from scenario-based outcomes of expected corporate restructurings or the disposition of assets using security-specific facts and circumstances including timing, security interests and loss severity. A structured security’s cash flow estimates are based on security-specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity, prepayments and structural support, including subordination and guarantees. The expected cash flows are discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete a structured security. For securities with a contractual interest rate that varies based on changes in an independent factor, such as an index or rate, the effective interest rate is calculated based on the factor as it changes over the life of the security. Inherently under the discounted cash flow model, both the timing and amount of cash flows affect the measurement of the allowance for expected credit losses.
The allowance for expected credit losses is remeasured each period for the passage of time, any change in expected cash flows, and changes in the fair value of the security. All impairments, whether intent or requirement to sell or credit-related, are recorded through a charge to credit loss expense within investment related gains (losses) on the condensed consolidated statements of income. All changes in the allowance for expected credit losses are recorded through credit loss expense within investment related gains (losses) on the condensed consolidated statements of income.
We have elected to present accrued interest receivable separately in accrued investment income on the condensed consolidated balance sheets. We have also elected the practical expedient to exclude the accrued interest receivable from the amortized cost balance used to calculate the allowance for expected credit losses, as we have a policy to write off such balances in a timely manner, when they become 90 days past due. Any write-off of accrued interest is recorded through a reversal of net investment income on the condensed consolidated statements of income.
Upon determining that all or a portion of the amortized cost of an asset is uncollectible, which is generally when all efforts for collection are exhausted, the amortized cost is written off against the existing allowance. Any write off in excess of the existing allowance is recorded through credit loss expense within investment related gains (losses) on the condensed consolidated statements of income.
Adopted Accounting Pronouncements
Financial Instruments – Credit Losses (ASU 2019-05, ASU 2019-04, ASU 2018-19 and ASU 2016-13)
This update limits the number of credit impairment models used for different assets and results in accelerated credit loss recognition on assets held at amortized cost, which primarily includes our commercial and residential mortgage loans, but also includes certain other loans and reinsurance assets. The identification of PCD financial assets includes all assets that have experienced a more-than-insignificant deterioration in credit since origination. Additionally, changes in the expected cash flows of purchased credit-deteriorated financial assets are recognized immediately in the income statement. AFS securities are not in scope of the new credit loss model, but were subject to targeted improvements including the establishment of a valuation allowance for credit losses versus the previous direct write down approach. We adopted this update effective January 1, 2020 with a cumulative-effect adjustment that decreased retained earnings by $117 million net of tax and offsetting impacts to DAC, DSI, VOBA and the SOP 03-1 reserve. The adjustment to retained earnings primarily relates to the establishment of an allowance on our commercial mortgage loan portfolio, which represented 1.59% of the amortized cost of the portfolio, but also includes immaterial impacts relating to other assets in scope, including residential mortgage loans, funds withheld at interest, and reinsurance recoverable.
Additionally, the update requires investments previously considered purchased credit impaired (PCI), which includes certain of our residential mortgage loans and RMBS to become subject to a modified PCD framework at the transition date. Any required allowance at transition for these assets is to be recorded through a gross-up of the amortized cost, rather than a charge to retained earnings. Additionally, under the AFS impairment model, the recording of an allowance is prohibited in instances where fair value exceeds amortized cost as such securities are not considered impaired under the AFS impairment model. Therefore, no allowance was recorded at transition for PCI RMBS that were in an unrealized gain position. The transition increase of amortized cost and corresponding valuation allowance for residential mortgage loans and RMBS was $36 million and $17 million, respectively.
Collaborative Arrangements (ASU 2018-18)
The amendments in this update provide guidance on whether certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606, providing comparability in the presentation of revenue for certain transactions. We adopted this update effective January 1, 2020. This update did not have a material effect 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 adopted this update effective January 1, 2020. The adoption of this update did not have a material effect on our consolidated financial statements.
Cloud Computing Arrangements (ASU 2018-15)
The amendments in this update align the requirements for capitalizing implementation costs incurred in a cloud computing service arrangement with the requirements for capitalizing implementation costs incurred for internal-use software. We adopted this update on a prospective basis effective January 1, 2020. This update did not have a material effect on our consolidated financial statements.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Fair Value Measurement – Disclosure Requirements (ASU 2018-13)
The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. On October 1, 2018, we early adopted the removal and modification of certain disclosures as permitted. The additional disclosures in the update were adopted effective January 1, 2020. The adoption of this update did not have a material effect on our consolidated financial statements.
Intangibles – Simplifying the Test for Goodwill Impairment (ASU 2017-04)
The amendments in this update simplify the subsequent measurement of goodwill by eliminating the comparison of the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill to determine the goodwill impairment loss. With the adoption of this guidance, a goodwill impairment is 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 continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. We do not have material goodwill and adopted this update on a prospective basis effective January 1, 2020. The adoption of this update did not have a material effect on our consolidated financial statements.
Recently Issued Accounting Pronouncements
Codification Improvements to Subtopic 310-20, Receivables–Nonrefundable Fees and Other Costs (ASU 2020-08)
The amendments in this update clarify that callable debt securities should be reevaluated each reporting period to determine if the amortized cost exceeds the amount repayable by the issuer at the next earliest call date and, if so, the excess should be amortized to the next call date. We will be required to adopt this update January 1, 2021 and apply it on a prospective basis for existing or newly purchased callable debt securities. Early adoption is not permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
Insurance – Targeted Improvements to the Accounting for Long-Duration Contracts (ASU 2019-09, ASU 2018-12)
These updates amend four key areas pertaining to the accounting and disclosures for long-duration insurance and investment contracts.
•The update requires cash flow assumptions used to measure the liability for future policy benefits to be updated at least annually and no longer allows a provision for adverse deviation. The remeasurement of the liability associated with the update of assumptions is required to be recognized in net income. Loss recognition testing is eliminated for traditional and limited-payment contracts. The update also requires the discount rate used in measuring the liability to be an upper-medium grade fixed-income instrument yield, which is to be updated at each reporting date. The change in liability due to changes in the discount rate is to be recognized in other comprehensive income.
•The update simplifies the amortization of deferred acquisition costs and other balances amortized in proportion to premiums, gross profits, or gross margins, requiring such balances to be amortized on a constant level basis over the expected term of the contracts. Deferred costs are required to be written off for unexpected contract terminations but are not subject to impairment testing.
•The update requires certain contract features meeting the definition of market risk benefits to be measured at fair value. Among the features included in this definition are the guaranteed lifetime withdrawal benefits (GLWB) and guaranteed minimum death benefit (GMDB) riders attached to our annuity products. The change in fair value of the market risk benefits is to be recognized in net income, excluding the portion attributable to changes in instrument-specific credit risk which is recognized in other comprehensive income.
•The update also introduces disclosure requirements around the liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities, and deferred acquisition costs. This includes disaggregated rollforwards of these balances and information about significant inputs, judgments, assumptions and methods used in their measurement.
While we are currently required to adopt these updates on January 1, 2022, the Financial Accounting Standards Board has proposed a deferral to the adoption date, which, if codified, would require adoption on January 1, 2023. Certain provisions of the update are required to be adopted on a fully retrospective basis, while others may be adopted on a modified retrospective basis. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
Income Taxes – Simplifying the Accounting for Income Taxes (ASU 2019-12)
The amendments in this update simplify the accounting for income taxes by eliminating certain exceptions to the tax accounting guidance related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities related to foreign investment ownership changes. It also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating consolidated income taxes to separate financial statements of entities not subject to income tax. We will be required to adopt this update January 1, 2021 and apply certain aspects of the update retrospectively while other aspects will be applied on a modified retrospective basis. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
2. Investments
AFS Securities—Our AFS investment portfolio includes bonds, collateralized loan obligations (CLO), asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), RMBS and redeemable preferred stock. Our AFS investment portfolio includes related party investments that are primarily comprised of investments over which Apollo can exercise significant influence. These investments are presented as investments in related parties on the condensed consolidated balance sheets, and are separately disclosed below.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table represents the amortized cost, allowance for credit losses, gross unrealized gains and losses and fair value of our AFS investments by asset type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
(In millions)
|
Amortized Cost
|
|
Allowance for Credit Losses
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
AFS securities
|
|
|
|
|
|
|
|
|
|
US government and agencies
|
$
|
71
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
73
|
|
US state, municipal and political subdivisions
|
765
|
|
|
—
|
|
|
163
|
|
|
(1)
|
|
|
927
|
|
Foreign governments
|
311
|
|
|
—
|
|
|
29
|
|
|
—
|
|
|
340
|
|
Corporate
|
46,424
|
|
|
(30)
|
|
|
5,094
|
|
|
(359)
|
|
|
51,129
|
|
CLO
|
8,621
|
|
|
(1)
|
|
|
68
|
|
|
(318)
|
|
|
8,370
|
|
ABS
|
4,255
|
|
|
(3)
|
|
|
136
|
|
|
(188)
|
|
|
4,200
|
|
CMBS
|
2,279
|
|
|
(19)
|
|
|
68
|
|
|
(89)
|
|
|
2,239
|
|
RMBS
|
6,434
|
|
|
(87)
|
|
|
397
|
|
|
(34)
|
|
|
6,710
|
|
Total AFS securities
|
69,160
|
|
|
(140)
|
|
|
5,957
|
|
|
(989)
|
|
|
73,988
|
|
AFS securities – related party
|
|
|
|
|
|
|
|
|
|
Corporate
|
780
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
784
|
|
CLO
|
1,365
|
|
|
(2)
|
|
|
11
|
|
|
(30)
|
|
|
1,344
|
|
ABS
|
2,716
|
|
|
—
|
|
|
62
|
|
|
(49)
|
|
|
2,729
|
|
Total AFS securities – related party
|
4,861
|
|
|
(2)
|
|
|
77
|
|
|
(79)
|
|
|
4,857
|
|
Total AFS securities including related party
|
$
|
74,021
|
|
|
$
|
(142)
|
|
|
$
|
6,034
|
|
|
$
|
(1,068)
|
|
|
$
|
78,845
|
|
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, 2019
|
(In millions)
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
OTTI
in AOCI
|
AFS securities
|
|
|
|
|
|
|
|
|
|
US government and agencies
|
$
|
35
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
36
|
|
|
$
|
—
|
|
US state, municipal and political subdivisions
|
1,322
|
|
|
220
|
|
|
(1)
|
|
|
1,541
|
|
|
—
|
|
Foreign governments
|
298
|
|
|
29
|
|
|
—
|
|
|
327
|
|
|
—
|
|
Corporate
|
44,106
|
|
|
3,332
|
|
|
(210)
|
|
|
47,228
|
|
|
1
|
|
CLO
|
7,524
|
|
|
21
|
|
|
(196)
|
|
|
7,349
|
|
|
—
|
|
ABS
|
5,018
|
|
|
124
|
|
|
(24)
|
|
|
5,118
|
|
|
4
|
|
CMBS
|
2,304
|
|
|
104
|
|
|
(8)
|
|
|
2,400
|
|
|
1
|
|
RMBS
|
6,872
|
|
|
513
|
|
|
(10)
|
|
|
7,375
|
|
|
19
|
|
Total AFS securities
|
67,479
|
|
|
4,344
|
|
|
(449)
|
|
|
71,374
|
|
|
25
|
|
AFS securities – related party
|
|
|
|
|
|
|
|
|
|
Corporate
|
18
|
|
|
1
|
|
|
—
|
|
|
19
|
|
|
—
|
|
CLO
|
951
|
|
|
3
|
|
|
(18)
|
|
|
936
|
|
|
—
|
|
ABS
|
2,814
|
|
|
37
|
|
|
(2)
|
|
|
2,849
|
|
|
—
|
|
Total AFS securities – related party
|
3,783
|
|
|
41
|
|
|
(20)
|
|
|
3,804
|
|
|
—
|
|
Total AFS securities including related party
|
$
|
71,262
|
|
|
$
|
4,385
|
|
|
$
|
(469)
|
|
|
$
|
75,178
|
|
|
$
|
25
|
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The amortized cost and fair value of AFS securities, including related party, are shown by contractual maturity below:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
(In millions)
|
Amortized Cost
|
|
Fair Value
|
AFS securities
|
|
|
|
Due in one year or less
|
$
|
876
|
|
|
$
|
885
|
|
Due after one year through five years
|
7,209
|
|
|
7,636
|
|
Due after five years through ten years
|
11,799
|
|
|
12,771
|
|
Due after ten years
|
27,687
|
|
|
31,177
|
|
CLO, ABS, CMBS and RMBS
|
21,589
|
|
|
21,519
|
|
Total AFS securities
|
69,160
|
|
|
73,988
|
|
AFS securities – related party
|
|
|
|
|
|
|
|
Due after one year through five years
|
34
|
|
|
36
|
|
|
|
|
|
Due after ten years
|
746
|
|
|
748
|
|
CLO and ABS
|
4,081
|
|
|
4,073
|
|
Total AFS securities – related party
|
4,861
|
|
|
4,857
|
|
Total AFS securities including related party
|
$
|
74,021
|
|
|
$
|
78,845
|
|
Actual maturities can differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Unrealized Losses on AFS Securities—The following summarizes the fair value and gross unrealized losses for AFS securities, including related party, for which an allowance for credit losses has not been recorded, aggregated by asset type and length of time the fair value has remained below amortized cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
(In millions)
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
US government and agencies
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
US state, municipal and political subdivisions
|
50
|
|
|
—
|
|
|
8
|
|
|
(1)
|
|
|
58
|
|
|
(1)
|
|
Foreign governments
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
Corporate
|
5,899
|
|
|
(248)
|
|
|
414
|
|
|
(57)
|
|
|
6,313
|
|
|
(305)
|
|
CLO
|
2,475
|
|
|
(73)
|
|
|
3,118
|
|
|
(232)
|
|
|
5,593
|
|
|
(305)
|
|
ABS
|
1,238
|
|
|
(130)
|
|
|
82
|
|
|
(26)
|
|
|
1,320
|
|
|
(156)
|
|
CMBS
|
685
|
|
|
(60)
|
|
|
23
|
|
|
(20)
|
|
|
708
|
|
|
(80)
|
|
RMBS
|
540
|
|
|
(16)
|
|
|
25
|
|
|
(1)
|
|
|
565
|
|
|
(17)
|
|
Total AFS securities
|
10,900
|
|
|
(527)
|
|
|
3,670
|
|
|
(337)
|
|
|
14,570
|
|
|
(864)
|
|
AFS securities – related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLO
|
766
|
|
|
(15)
|
|
|
232
|
|
|
(15)
|
|
|
998
|
|
|
(30)
|
|
ABS
|
1,534
|
|
|
(49)
|
|
|
—
|
|
|
—
|
|
|
1,534
|
|
|
(49)
|
|
Total AFS securities – related party
|
2,300
|
|
|
(64)
|
|
|
232
|
|
|
(15)
|
|
|
2,532
|
|
|
(79)
|
|
Total AFS securities including related party
|
$
|
13,200
|
|
|
$
|
(591)
|
|
|
$
|
3,902
|
|
|
$
|
(352)
|
|
|
$
|
17,102
|
|
|
$
|
(943)
|
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following summarizes the fair value and gross unrealized losses for AFS securities, including related party, aggregated by asset type and length of time the fair value has remained below amortized cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 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
|
|
|
|
|
|
|
|
|
|
|
|
US government and agencies
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
US state, municipal and political subdivisions
|
78
|
|
|
(1)
|
|
|
10
|
|
|
—
|
|
|
88
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
2,898
|
|
|
(140)
|
|
|
902
|
|
|
(70)
|
|
|
3,800
|
|
|
(210)
|
|
CLO
|
1,959
|
|
|
(38)
|
|
|
3,241
|
|
|
(158)
|
|
|
5,200
|
|
|
(196)
|
|
ABS
|
642
|
|
|
(6)
|
|
|
255
|
|
|
(18)
|
|
|
897
|
|
|
(24)
|
|
CMBS
|
220
|
|
|
(4)
|
|
|
41
|
|
|
(4)
|
|
|
261
|
|
|
(8)
|
|
RMBS
|
445
|
|
|
(6)
|
|
|
163
|
|
|
(4)
|
|
|
608
|
|
|
(10)
|
|
Total AFS securities
|
6,245
|
|
|
(195)
|
|
|
4,612
|
|
|
(254)
|
|
|
10,857
|
|
|
(449)
|
|
AFS securities – related party
|
|
|
|
|
|
|
|
|
|
|
|
CLO
|
362
|
|
|
(7)
|
|
|
242
|
|
|
(11)
|
|
|
604
|
|
|
(18)
|
|
ABS
|
357
|
|
|
(2)
|
|
|
—
|
|
|
—
|
|
|
357
|
|
|
(2)
|
|
Total AFS securities – related party
|
719
|
|
|
(9)
|
|
|
242
|
|
|
(11)
|
|
|
961
|
|
|
(20)
|
|
Total AFS securities including related party
|
$
|
6,964
|
|
|
$
|
(204)
|
|
|
$
|
4,854
|
|
|
$
|
(265)
|
|
|
$
|
11,818
|
|
|
$
|
(469)
|
|
As of September 30, 2020, we held 1,748 AFS securities that were in an unrealized loss position. Of this total, 353 were in an unrealized loss position 12 months or more. As of September 30, 2020, we held 60 related party AFS securities that were in an unrealized loss position. Of this total, nine 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.
Allowance for Credit Losses—The following table summarizes the activity in the allowance for credit losses for AFS securities by asset type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2020
|
|
|
|
Additions
|
|
Reductions
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Beginning balance
|
|
Initial credit losses
|
|
Initial credit losses on PCD securities
|
|
Securities sold during the period
|
|
|
|
|
|
|
|
Additions (reductions) to previously impaired securities
|
|
Ending Balance
|
AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
$
|
31
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(2)
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
30
|
|
CLO
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
1
|
|
ABS
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
1
|
|
|
3
|
|
CMBS
|
10
|
|
|
12
|
|
|
—
|
|
|
(1)
|
|
|
|
|
|
|
|
|
(2)
|
|
|
19
|
|
RMBS
|
129
|
|
|
2
|
|
|
—
|
|
|
(12)
|
|
|
|
|
|
|
|
|
(32)
|
|
|
87
|
|
Total AFS securities
|
173
|
|
|
15
|
|
|
—
|
|
|
(15)
|
|
|
|
|
|
|
|
|
(33)
|
|
|
140
|
|
AFS securities – related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLO
|
2
|
|
|
1
|
|
|
—
|
|
|
(1)
|
|
|
|
|
|
|
|
|
—
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AFS securities – related party
|
2
|
|
|
1
|
|
|
—
|
|
|
(1)
|
|
|
|
|
|
|
|
|
—
|
|
|
2
|
|
Total AFS securities including related party
|
$
|
175
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
(16)
|
|
|
|
|
|
|
|
|
$
|
(33)
|
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2020
|
|
|
|
Additions
|
|
Reductions
|
|
|
|
|
(In millions)
|
Beginning balance
|
|
Initial credit losses
|
|
Initial credit losses on PCD securities
|
|
Securities sold during the period
|
|
|
|
|
|
|
|
Additions (reductions) to previously impaired securities
|
|
Ending Balance
|
AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
$
|
—
|
|
|
$
|
32
|
|
|
$
|
—
|
|
|
$
|
(2)
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
30
|
|
CLO
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
1
|
|
ABS
|
—
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
(2)
|
|
|
3
|
|
CMBS
|
—
|
|
|
21
|
|
|
—
|
|
|
(1)
|
|
|
|
|
|
|
|
|
(1)
|
|
|
19
|
|
RMBS
|
17
|
|
|
50
|
|
|
61
|
|
|
(14)
|
|
|
|
|
|
|
|
|
(27)
|
|
|
87
|
|
Total AFS securities
|
17
|
|
|
109
|
|
|
61
|
|
|
(17)
|
|
|
|
|
|
|
|
|
(30)
|
|
|
140
|
|
AFS securities – related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLO
|
—
|
|
|
2
|
|
|
—
|
|
|
(1)
|
|
|
|
|
|
|
|
|
1
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AFS securities – related party
|
—
|
|
|
2
|
|
|
—
|
|
|
(1)
|
|
|
|
|
|
|
|
|
1
|
|
|
2
|
|
Total AFS securities including related party
|
$
|
17
|
|
|
$
|
111
|
|
|
$
|
61
|
|
|
$
|
(18)
|
|
|
|
|
|
|
|
|
$
|
(29)
|
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income—Net investment income by asset class consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
AFS securities
|
$
|
776
|
|
|
$
|
760
|
|
|
$
|
2,403
|
|
|
$
|
2,276
|
|
Trading securities
|
47
|
|
|
48
|
|
|
137
|
|
|
139
|
|
Equity securities
|
4
|
|
|
4
|
|
|
10
|
|
|
11
|
|
Mortgage loans
|
184
|
|
|
173
|
|
|
545
|
|
|
483
|
|
Investment funds
|
148
|
|
|
96
|
|
|
242
|
|
|
245
|
|
Funds withheld at interest
|
81
|
|
|
106
|
|
|
165
|
|
|
403
|
|
Other
|
83
|
|
|
32
|
|
|
158
|
|
|
116
|
|
Investment revenue
|
1,323
|
|
|
1,219
|
|
|
3,660
|
|
|
3,673
|
|
Investment expenses
|
(114)
|
|
|
(129)
|
|
|
(370)
|
|
|
(319)
|
|
Net investment income
|
$
|
1,209
|
|
|
$
|
1,090
|
|
|
$
|
3,290
|
|
|
$
|
3,354
|
|
Investment Related Gains (Losses)—Investment related gains (losses) by asset class consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
AFS securities
|
|
|
|
|
|
|
|
Gross realized gains on investment activity
|
$
|
192
|
|
|
$
|
47
|
|
|
$
|
424
|
|
|
$
|
120
|
|
Gross realized losses on investment activity
|
(178)
|
|
|
(21)
|
|
|
(378)
|
|
|
(38)
|
|
Net realized investment gains on AFS securities
|
14
|
|
|
26
|
|
|
46
|
|
|
82
|
|
Net recognized investment gains (losses) on trading securities
|
24
|
|
|
48
|
|
|
(8)
|
|
|
183
|
|
Net recognized investment gains (losses) on equity securities
|
12
|
|
|
(4)
|
|
|
(8)
|
|
|
15
|
|
Derivative gains
|
1,648
|
|
|
620
|
|
|
959
|
|
|
3,493
|
|
Provision for credit losses
|
84
|
|
|
—
|
|
|
(205)
|
|
|
—
|
|
Other gains (losses)
|
15
|
|
|
(25)
|
|
|
(11)
|
|
|
(19)
|
|
Investment related gains (losses)
|
$
|
1,797
|
|
|
$
|
665
|
|
|
$
|
773
|
|
|
$
|
3,754
|
|
Proceeds from sales of AFS securities were $3,940 million and $852 million for the three months ended September 30, 2020 and 2019, respectively, and $7,525 million and $4,063 million for the nine months ended September 30, 2020 and 2019, respectively.
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 we held as of the respective period end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Trading securities
|
$
|
19
|
|
|
$
|
46
|
|
|
$
|
81
|
|
|
$
|
215
|
|
Trading securities – related party
|
1
|
|
|
4
|
|
|
(42)
|
|
|
(11)
|
|
Equity securities
|
11
|
|
|
—
|
|
|
(9)
|
|
|
20
|
|
Equity securities – related party
|
—
|
|
|
—
|
|
|
—
|
|
|
(2)
|
|
Purchased Financial Assets with Credit Deterioration—The following table summarizes our PCD investment purchases with the following amounts at the time of purchase:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2020
|
|
Nine months ended September 30, 2020
|
(In millions)
|
Fixed maturity securities
|
|
Mortgage loans
|
|
Fixed maturity securities
|
|
Mortgage loans
|
Purchase price
|
$
|
—
|
|
|
$
|
142
|
|
|
$
|
239
|
|
|
$
|
142
|
|
Allowance for credit losses at acquisition
|
—
|
|
|
3
|
|
|
61
|
|
|
3
|
|
Discount (premiums) attributable to other factors
|
—
|
|
|
—
|
|
|
34
|
|
|
—
|
|
Par value
|
$
|
—
|
|
|
$
|
145
|
|
|
$
|
334
|
|
|
$
|
145
|
|
Repurchase Agreements—The following table summarizes the maturities of our repurchase agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
Remaining Contractual Maturity
|
(In millions)
|
Overnight and continuous
|
|
Less than 30 days
|
|
30-90 days
|
|
91 days – 1 year
|
|
Greater than 1 year
|
|
Total
|
Payables for repurchase agreements1
|
$
|
—
|
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
598
|
|
|
$
|
1,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Included in payables for collateral on derivatives and securities to repurchase on the condensed consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Remaining Contractual Maturity
|
(In millions)
|
Overnight and continuous
|
|
Less than 30 days
|
|
30-90 days
|
|
91 days – 1 year
|
|
Greater than 1 year
|
|
Total
|
Payables for repurchase agreements1
|
$
|
—
|
|
|
$
|
102
|
|
|
$
|
200
|
|
|
$
|
210
|
|
|
$
|
—
|
|
|
$
|
512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Included in payables for collateral on derivatives and securities to repurchase on the condensed consolidated balance sheets.
|
The following table summarizes the securities pledged as collateral for repurchase agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
(In millions)
|
Amortized Cost
|
|
Fair Value
|
|
Amortized Cost
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS securities – Corporate
|
$
|
1,085
|
|
|
$
|
1,249
|
|
|
$
|
498
|
|
|
$
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse Repurchase Agreements—Reverse repurchase agreements represent the purchase of investments from a seller with the agreement that the investments will be repurchased by the seller at a specified price and date or within a specified period of time. The investments purchased, which represent collateral on a secured lending arrangement, are not reflected in our condensed consolidated balance sheets; however, the secured lending arrangement is recorded as a short-term investment for the principal amount loaned under the agreement. As of September 30, 2020 and December 31, 2019, amounts loaned under reverse repurchase agreements were $0 million and $190 million, respectively, and collateral backing the agreement was $0 million and $630 million, respectively.
Other Investments—Other investments includes, but is not limited to, term loans collateralized by mortgages on residential and commercial real estate. Mortgage collateralized term loans are stated at unpaid principal balance, adjusted for any unamortized premium or discount, and net of allowance for credit losses. Interest income is accrued on the principal amount of the loan based on its contractual interest rate. We record amortization of premiums and discounts using the effective interest method and contractual cash flows on the underlying loan. We accrue interest on loans until it is probable we will not receive interest or the loan is 90 day past due. Interest income, amortization of premiums and discounts, and prepayment and other fees are reported in net investment income on the consolidated statements of income.
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)
|
September 30, 2020
|
|
December 31, 2019
|
Commercial mortgage loans
|
$
|
11,194
|
|
|
$
|
10,422
|
|
Commercial mortgage loans under development
|
196
|
|
|
93
|
|
Total commercial mortgage loans
|
11,390
|
|
|
10,515
|
|
Allowance for credit losses on commercial mortgage loans
|
(232)
|
|
|
(10)
|
|
Commercial mortgage loans, net of allowances
|
11,158
|
|
|
10,505
|
|
Residential mortgage loans
|
4,169
|
|
|
4,455
|
|
Allowance for credit losses on residential mortgage loans
|
(96)
|
|
|
(1)
|
|
Residential mortgage loans, net of allowances
|
4,073
|
|
|
4,454
|
|
Mortgage loans, net of allowances
|
$
|
15,231
|
|
|
$
|
14,959
|
|
We primarily invest in commercial mortgage loans on income producing properties including office and retail buildings, apartments, hotels and industrial properties. We diversify the commercial mortgage loan portfolio by geographic region and property type to reduce concentration risk. We evaluate mortgage loans based on relevant current information to confirm if properties are performing at a consistent and acceptable level to secure the related debt.
The distribution of commercial mortgage loans, including those under development, net of allowances, by property type and geographic region, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
(In millions, except for percentages)
|
Net Carrying Value
|
|
Percentage of Total
|
|
Net Carrying Value
|
|
Percentage of Total
|
Property type
|
|
|
|
|
|
|
|
Office building
|
$
|
3,526
|
|
|
31.6
|
%
|
|
$
|
2,899
|
|
|
27.6
|
%
|
Retail
|
2,029
|
|
|
18.2
|
%
|
|
2,182
|
|
|
20.8
|
%
|
Apartment
|
2,335
|
|
|
20.9
|
%
|
|
2,142
|
|
|
20.4
|
%
|
Hotels
|
1,182
|
|
|
10.6
|
%
|
|
1,104
|
|
|
10.5
|
%
|
Industrial
|
1,407
|
|
|
12.6
|
%
|
|
1,448
|
|
|
13.8
|
%
|
Other commercial
|
679
|
|
|
6.1
|
%
|
|
730
|
|
|
6.9
|
%
|
Total commercial mortgage loans
|
$
|
11,158
|
|
|
100.0
|
%
|
|
$
|
10,505
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
US Region
|
|
|
|
|
|
|
|
East North Central
|
$
|
1,176
|
|
|
10.5
|
%
|
|
$
|
1,036
|
|
|
9.9
|
%
|
East South Central
|
404
|
|
|
3.6
|
%
|
|
428
|
|
|
4.1
|
%
|
Middle Atlantic
|
3,058
|
|
|
27.4
|
%
|
|
2,580
|
|
|
24.6
|
%
|
Mountain
|
482
|
|
|
4.3
|
%
|
|
528
|
|
|
5.0
|
%
|
New England
|
330
|
|
|
3.0
|
%
|
|
340
|
|
|
3.2
|
%
|
Pacific
|
2,577
|
|
|
23.1
|
%
|
|
2,502
|
|
|
23.8
|
%
|
South Atlantic
|
1,848
|
|
|
16.6
|
%
|
|
1,920
|
|
|
18.3
|
%
|
West North Central
|
147
|
|
|
1.3
|
%
|
|
146
|
|
|
1.4
|
%
|
West South Central
|
642
|
|
|
5.8
|
%
|
|
791
|
|
|
7.5
|
%
|
Total US Region
|
10,664
|
|
|
95.6
|
%
|
|
10,271
|
|
|
97.8
|
%
|
International Region
|
494
|
|
|
4.4
|
%
|
|
234
|
|
|
2.2
|
%
|
Total commercial mortgage loans
|
$
|
11,158
|
|
|
100.0
|
%
|
|
$
|
10,505
|
|
|
100.0
|
%
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Our residential mortgage loan portfolio includes first lien residential mortgage loans collateralized by properties in various geographic locations and is summarized by proportion of the portfolio in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
US States
|
|
|
|
California
|
25.8
|
%
|
|
27.0
|
%
|
Florida
|
13.2
|
%
|
|
12.7
|
%
|
Texas
|
4.8
|
%
|
|
6.2
|
%
|
New York
|
5.2
|
%
|
|
3.3
|
%
|
Other1
|
36.5
|
%
|
|
38.4
|
%
|
Total US residential mortgage loan percentage
|
85.5
|
%
|
|
87.6
|
%
|
International – Ireland
|
13.9
|
%
|
|
12.4
|
%
|
International – Other2
|
0.6
|
%
|
|
—
|
%
|
Total residential mortgage loan percentage
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
1 Represents all other states, with each individual state comprising less than 5% of the portfolio.
|
2 Represents all other countries, with each individual country comprising less than 5% of the portfolio.
|
Loan Valuation Allowance—The allowances for our mortgage loan portfolio and other loans is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2020
|
|
Nine months ended September 30, 2020
|
(In millions)
|
Commercial Mortgage
|
|
Residential Mortgage
|
|
Other Investments
|
|
Total
|
|
Commercial Mortgage
|
|
Residential Mortgage
|
|
Other Investments
|
|
Total
|
Beginning balance
|
$
|
294
|
|
|
$
|
85
|
|
|
$
|
20
|
|
|
$
|
399
|
|
|
$
|
10
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
11
|
|
Adoption of accounting standard
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
167
|
|
|
43
|
|
|
11
|
|
|
221
|
|
Provision (reversal) for expected credit losses
|
(62)
|
|
|
8
|
|
|
(7)
|
|
|
(61)
|
|
|
55
|
|
|
50
|
|
|
2
|
|
|
107
|
|
Initial credit losses on PCD loans
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
Loans charged-off
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
$
|
232
|
|
|
$
|
96
|
|
|
$
|
13
|
|
|
$
|
341
|
|
|
$
|
232
|
|
|
$
|
96
|
|
|
$
|
13
|
|
|
$
|
341
|
|
Residential mortgage loans – Our allowance model for residential mortgage loans is based on the characteristics of the loans in our portfolio, historical economic data and loss information, and current and forecasted economic conditions. Key loan characteristics affecting the estimate include, among others: time to maturity, delinquency status, original credit scores and loan-to-value ratios. Key macroeconomic variables include unemployment rates and the housing price index. Management reviews and approves forecasted macroeconomic variables, along with the reasonable and supportable forecast period and mean reversion technique. Management also evaluates assumptions from independent third parties and these assumptions have a high degree of subjectivity. The mean reversion technique varies by macroeconomic variable and may vary by geographic location. As of September 30, 2020, our reasonable and supportable forecast period was one year, after which, we revert to the 30-year or greater historical average over a period of up to one year and then continue at those averages through the contractual life of the loan.
Commercial mortgage loans – Our allowance model for commercial mortgage loans is based on the characteristics of the loans in our portfolio, historical economic data and loss information, and current and forecasted economic conditions. Key loan characteristics affecting the estimate include, among others: time to maturity, delinquency status, loan-to-value ratios, debt service coverage ratios, etc. Key macroeconomic variables include unemployment rates, rent growth, capitalization rates, and the housing price index. Management reviews and approves forecasted macroeconomic variables, along with the reasonable and supportable forecast period and mean reversion technique. Management also evaluates assumptions from independent third parties and these assumptions have a high degree of subjectivity. The mean reversion technique varies by macroeconomic variable and may vary by geographic location. As of September 30, 2020, our reasonable and supportable forecast period ranged from one year to two years, after which, we revert to the 30-year or greater historical average over a period of up to eight years.
Other investments – The allowance model for the loans included in other investments and related party other investments derives an estimate based on historical loss data available for similarly rated unsecured corporate debt obligations, while also incorporating management’s expectations around prepayment. See Note 11 – Related Parties for further information on the related party loans.
Credit Quality Indicators
Residential mortgage loans – The underwriting process for our residential mortgage loans includes an evaluation of relevant credit information including past loan performance, credit scores, loan-to-value and other relevant information. Subsequent to purchase or origination, we closely monitor economic conditions and loan performance to manage and evaluate our exposure to credit risk in our residential mortgage loan portfolio. The primary credit quality indicator monitored for residential mortgage loans is loan performance. Nonperforming residential mortgage loans are 90 days or more past due and/or are in non-accrual status.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following represents our residential loan portfolio by origination year and performance status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Prior
|
|
Total
|
Current (less than 30 days past due)
|
$
|
384
|
|
|
$
|
1,016
|
|
|
$
|
1,852
|
|
|
$
|
507
|
|
|
$
|
144
|
|
|
$
|
7
|
|
|
$
|
3,910
|
|
30 to 59 days past due
|
23
|
|
|
20
|
|
|
35
|
|
|
39
|
|
|
8
|
|
|
—
|
|
|
125
|
|
60 to 89 days past due
|
6
|
|
|
11
|
|
|
21
|
|
|
9
|
|
|
6
|
|
|
—
|
|
|
53
|
|
Over 90 days past due
|
1
|
|
|
12
|
|
|
21
|
|
|
32
|
|
|
13
|
|
|
2
|
|
|
81
|
|
Total residential mortgages
|
$
|
414
|
|
|
$
|
1,059
|
|
|
$
|
1,929
|
|
|
$
|
587
|
|
|
$
|
171
|
|
|
$
|
9
|
|
|
$
|
4,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019, $67 million of our residential mortgage loans were nonperforming.
The following represents our residential loan portfolio in non-accrual status:
|
|
|
|
|
|
(In millions)
|
September 30, 2020
|
Beginning amortized cost of residential mortgage loans in non-accrual status
|
$
|
67
|
|
Ending amortized cost of residential mortgage loans in non-accrual status
|
81
|
|
Amortized cost of residential mortgage loans in non-accrual status without a related allowance for credit losses
|
8
|
|
During the three months and nine months ended September 30, 2020, we recognized $2 million and $3 million, respectively, of interest income on residential mortgage loans in non-accrual status.
Commercial mortgage loans – The following represents our commercial mortgage loan portfolio by origination year and loan performance status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Prior
|
|
Total
|
Current (less than 30 days past due)
|
$
|
1,398
|
|
|
$
|
4,399
|
|
|
$
|
2,750
|
|
|
$
|
1,047
|
|
|
$
|
131
|
|
|
$
|
1,546
|
|
|
$
|
11,271
|
|
30 to 59 days past due
|
98
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
98
|
|
60 to 89 days past due
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial mortgages
|
$
|
1,496
|
|
|
$
|
4,399
|
|
|
$
|
2,750
|
|
|
$
|
1,047
|
|
|
$
|
131
|
|
|
$
|
1,567
|
|
|
$
|
11,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019, none of our commercial loans were 30 days or more past due.
The following represents our commercial mortgage loan portfolio in non-accrual status:
|
|
|
|
|
|
(In millions)
|
September 30, 2020
|
Beginning amortized cost of commercial mortgage loans in non-accrual status
|
$
|
—
|
|
Ending amortized cost of commercial mortgage loans in non-accrual status
|
39
|
|
Amortized cost of commercial mortgage loans in non-accrual status without a related allowance for credit losses
|
—
|
|
During the three months and nine months ended September 30, 2020, no interest income was recognized on commercial mortgage loans in non-accrual status.
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 value of the underlying collateral. Loan-to-value information is updated annually as part of the re-underwriting process supporting the NAIC risk based capital rating criteria. The following represents the loan-to-value ratio of the commercial mortgage loan portfolio, excluding those under development, by origination year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Prior
|
|
Total
|
Less than 50%
|
$
|
282
|
|
|
$
|
611
|
|
|
$
|
207
|
|
|
$
|
200
|
|
|
$
|
45
|
|
|
$
|
1,250
|
|
|
$
|
2,595
|
|
50% to 60%
|
249
|
|
|
1,215
|
|
|
733
|
|
|
277
|
|
|
40
|
|
|
162
|
|
|
2,676
|
|
61% to 70%
|
539
|
|
|
1,978
|
|
|
1,430
|
|
|
475
|
|
|
46
|
|
|
71
|
|
|
4,539
|
|
71% to 80%
|
331
|
|
|
574
|
|
|
287
|
|
|
95
|
|
|
—
|
|
|
45
|
|
|
1,332
|
|
81% to 100%
|
13
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
Greater than 100%
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39
|
|
|
39
|
|
Commercial mortgage loans
|
$
|
1,414
|
|
|
$
|
4,378
|
|
|
$
|
2,657
|
|
|
$
|
1,047
|
|
|
$
|
131
|
|
|
$
|
1,567
|
|
|
$
|
11,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following represents the loan-to-value ratio of the commercial mortgage loan portfolio, excluding those under development, net of valuation allowances:
|
|
|
|
|
|
(In millions)
|
December 31, 2019
|
Less than 50%
|
$
|
2,640
|
|
50% to 60%
|
2,486
|
|
61% to 70%
|
4,093
|
|
71% to 80%
|
1,162
|
|
81% to 100%
|
31
|
|
|
|
Commercial mortgage loans
|
$
|
10,412
|
|
The debt service coverage ratio is expressed as a percentage of a property’s net operating income to its debt service payments. A debt service ratio of less than 1.0 indicates a property’s operations do not generate enough income to cover debt payments. Debt service coverage ratios are updated as more recent financial statements become available, at least annually or as frequently as quarterly in some cases. The following represents the debt service coverage ratio of the commercial mortgage loan portfolio, excluding those under development, by origination year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Prior
|
|
Total
|
Greater than 1.20x
|
$
|
1,039
|
|
|
$
|
3,413
|
|
|
$
|
2,657
|
|
|
$
|
993
|
|
|
$
|
130
|
|
|
$
|
1,494
|
|
|
$
|
9,726
|
|
1.00x – 1.20x
|
375
|
|
|
965
|
|
|
—
|
|
|
31
|
|
|
1
|
|
|
66
|
|
|
1,438
|
|
Less than 1.00x
|
—
|
|
|
—
|
|
|
—
|
|
|
23
|
|
|
—
|
|
|
7
|
|
|
30
|
|
Commercial mortgage loans
|
$
|
1,414
|
|
|
$
|
4,378
|
|
|
$
|
2,657
|
|
|
$
|
1,047
|
|
|
$
|
131
|
|
|
$
|
1,567
|
|
|
$
|
11,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following represents the debt service coverage ratio of the commercial mortgage loan portfolio, excluding those under development, net of valuation allowances:
|
|
|
|
|
|
(In millions)
|
December 31, 2019
|
Greater than 1.20x
|
$
|
9,212
|
|
1.00x – 1.20x
|
1,166
|
|
Less than 1.00x
|
34
|
|
Commercial mortgage loans
|
$
|
10,412
|
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Investment Funds—Our investment fund portfolio consists of funds that employ various strategies and include investments in real estate, real assets, credit, equity and natural resources. Investment funds can meet the definition of VIEs. Our investment funds do not specify timing of distributions on the funds’ underlying assets.
The following summarizes our investment funds, including related party:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
(In millions, except for percentages)
|
Carrying value
|
|
Percent of total
|
|
Carrying value
|
|
Percent of total
|
Investment funds
|
|
|
|
|
|
|
|
Real estate
|
$
|
290
|
|
|
40.2
|
%
|
|
$
|
277
|
|
|
36.9
|
%
|
Credit funds
|
110
|
|
|
15.2
|
%
|
|
153
|
|
|
20.4
|
%
|
Private equity
|
257
|
|
|
35.5
|
%
|
|
236
|
|
|
31.5
|
%
|
Real assets
|
66
|
|
|
9.1
|
%
|
|
83
|
|
|
11.1
|
%
|
Natural resources
|
—
|
|
|
—
|
%
|
|
1
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
Total investment funds
|
723
|
|
|
100.0
|
%
|
|
750
|
|
|
100.0
|
%
|
Investment funds – related parties
|
|
|
|
|
|
|
|
Differentiated investments
|
|
|
|
|
|
|
|
MidCap FinCo Designated Activity Company (MidCap)1
|
—
|
|
|
—
|
%
|
|
547
|
|
|
15.4
|
%
|
AmeriHome Mortgage Company, LLC (AmeriHome)2
|
666
|
|
|
13.9
|
%
|
|
487
|
|
|
13.7
|
%
|
Catalina Holdings Ltd. (Catalina)
|
317
|
|
|
6.6
|
%
|
|
271
|
|
|
7.6
|
%
|
Athora Holding Ltd. (Athora)1
|
572
|
|
|
11.9
|
%
|
|
132
|
|
|
3.7
|
%
|
Venerable Holdings, Inc. (Venerable)1
|
108
|
|
|
2.2
|
%
|
|
99
|
|
|
2.8
|
%
|
Other
|
272
|
|
|
5.7
|
%
|
|
222
|
|
|
6.3
|
%
|
Total differentiated investments
|
1,935
|
|
|
40.3
|
%
|
|
1,758
|
|
|
49.5
|
%
|
Real estate
|
686
|
|
|
14.3
|
%
|
|
853
|
|
|
24.0
|
%
|
Credit funds
|
373
|
|
|
7.7
|
%
|
|
370
|
|
|
10.4
|
%
|
Private equity
|
257
|
|
|
5.3
|
%
|
|
105
|
|
|
3.0
|
%
|
Real assets
|
196
|
|
|
4.1
|
%
|
|
182
|
|
|
5.1
|
%
|
Natural resources
|
101
|
|
|
2.1
|
%
|
|
163
|
|
|
4.6
|
%
|
Public equities
|
62
|
|
|
1.3
|
%
|
|
119
|
|
|
3.4
|
%
|
Investment in Apollo1
|
1,198
|
|
|
24.9
|
%
|
|
—
|
|
|
—
|
%
|
Total investment funds – related parties
|
4,808
|
|
|
100.0
|
%
|
|
3,550
|
|
|
100.0
|
%
|
Total investment funds including related party
|
$
|
5,531
|
|
|
|
|
$
|
4,300
|
|
|
|
|
|
|
|
|
|
|
|
1 See further discussion on MidCap, Athora, Venerable and our investment in Apollo in Note 11 – Related Parties.
|
2 Our AmeriHome investment is held indirectly through A-A Mortgage Opportunities, L.P. (A-A Mortgage). See further discussion on A-A Mortgage and AmeriHome in Note 11 – Related Parties.
|
Summarized Ownership of A-A Mortgage—The following is the summarized income statement information of our equity method investee, A-A Mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
Net income
|
$
|
334
|
|
|
$
|
88
|
|
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.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Investment funds – Investment funds include non-fixed income, alternative investments in the form of limited partnerships or similar legal structures.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
(In millions)
|
Carrying Value
|
|
Maximum Loss Exposure
|
|
Carrying Value
|
|
Maximum Loss Exposure
|
Investment funds
|
$
|
723
|
|
|
$
|
1,183
|
|
|
$
|
750
|
|
|
$
|
1,265
|
|
Investment in related parties – investment funds
|
4,808
|
|
|
7,256
|
|
|
3,550
|
|
|
5,955
|
|
Investment in fixed maturity securities
|
21,930
|
|
|
22,000
|
|
|
22,694
|
|
|
22,170
|
|
Investment in related parties – fixed maturity securities
|
6,218
|
|
|
6,586
|
|
|
4,570
|
|
|
4,878
|
|
Investment in related parties – equity securities
|
50
|
|
|
50
|
|
|
58
|
|
|
58
|
|
Total non-consolidated investments
|
$
|
33,729
|
|
|
$
|
37,075
|
|
|
$
|
31,622
|
|
|
$
|
34,326
|
|
3. Derivative Instruments
We use a variety of derivative instruments to manage risks, primarily equity, interest rate, credit, foreign currency and market volatility. See Note 5 – Fair Value for information about the fair value hierarchy for derivatives.
The following table presents the notional amount and fair value of derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Notional Amount
|
|
Fair Value
|
|
Notional Amount
|
|
Fair Value
|
(In millions)
|
|
Assets
|
|
Liabilities
|
|
|
Assets
|
|
Liabilities
|
Derivatives designated as hedges
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency swaps
|
3,268
|
|
|
$
|
243
|
|
|
$
|
45
|
|
|
3,158
|
|
|
$
|
113
|
|
|
$
|
56
|
|
Foreign currency forwards
|
1,736
|
|
|
15
|
|
|
1
|
|
|
717
|
|
|
1
|
|
|
9
|
|
Foreign currency forwards on net investments
|
136
|
|
|
—
|
|
|
1
|
|
|
139
|
|
|
—
|
|
|
2
|
|
Total derivatives designated as hedges
|
|
|
258
|
|
|
47
|
|
|
|
|
114
|
|
|
67
|
|
Derivatives not designated as hedges
|
|
|
|
|
|
|
|
|
|
|
|
Equity options
|
53,997
|
|
|
2,401
|
|
|
26
|
|
|
49,549
|
|
|
2,746
|
|
|
5
|
|
Futures
|
16
|
|
|
48
|
|
|
4
|
|
|
8
|
|
|
10
|
|
|
1
|
|
Total return swaps
|
72
|
|
|
1
|
|
|
—
|
|
|
106
|
|
|
6
|
|
|
—
|
|
Foreign currency swaps
|
1,510
|
|
|
25
|
|
|
8
|
|
|
35
|
|
|
2
|
|
|
1
|
|
Interest rate swaps
|
911
|
|
|
11
|
|
|
41
|
|
|
776
|
|
|
3
|
|
|
4
|
|
Credit default swaps
|
10
|
|
|
—
|
|
|
5
|
|
|
10
|
|
|
—
|
|
|
3
|
|
Foreign currency forwards
|
2,963
|
|
|
27
|
|
|
16
|
|
|
1,924
|
|
|
7
|
|
|
16
|
|
Embedded derivatives
|
|
|
|
|
|
|
|
|
|
|
|
Funds withheld including related party
|
|
|
1,980
|
|
|
50
|
|
|
|
|
1,395
|
|
|
31
|
|
Interest sensitive contract liabilities
|
|
|
—
|
|
|
11,741
|
|
|
|
|
—
|
|
|
10,942
|
|
Total derivatives not designated as hedges
|
|
|
4,493
|
|
|
11,891
|
|
|
|
|
4,169
|
|
|
11,003
|
|
Total derivatives
|
|
|
$
|
4,751
|
|
|
$
|
11,938
|
|
|
|
|
$
|
4,283
|
|
|
$
|
11,070
|
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Derivatives Designated as Hedges
Foreign currency swaps – We use foreign currency swaps to convert foreign currency denominated cash flows of an investment to US 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 December 2050. During the three months ended September 30, 2020 and 2019, we had foreign currency swap losses of $178 million and gains of $124 million, respectively, recorded in AOCI. During the nine months ended September 30, 2020 and 2019, we had foreign currency swap gains of $140 million and $171 million, respectively, recorded in AOCI. There were no amounts reclassified to income and no amounts deemed ineffective during the nine months ended September 30, 2020 and 2019. As of September 30, 2020, 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 are designated and accounted for as fair value hedges. As of September 30, 2020 and December 31, 2019, the carrying amount of the hedged AFS securities was $1,739 million and $456 million, respectively, and the cumulative amount of fair value hedging adjustments included in the hedged AFS securities included gains of $60 million and $1 million, respectively.
The following is a summary of the gains (losses) related to the derivatives and related hedged items in fair value hedge relationships, which are included in investment related gains (losses) on the condensed consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Derivatives
|
$
|
(52)
|
|
|
$
|
13
|
|
|
$
|
(60)
|
|
|
$
|
13
|
|
Related AFS securities
|
50
|
|
|
(11)
|
|
|
59
|
|
|
(12)
|
|
Total gains (losses) on derivatives and related hedged items
|
$
|
(2)
|
|
|
$
|
2
|
|
|
$
|
(1)
|
|
|
$
|
1
|
|
Foreign currency forwards on net investments – We have foreign currency forwards designated as net investment hedges. These forwards hedge the foreign currency exchange rate risk of our investments in subsidiaries that have a reporting currency other than the US dollar. We assess hedge effectiveness based on the changes in forward rates. During the three months and nine months ended September 30, 2020, these derivatives had gains of $3 million and $5 million, respectively, which are included in foreign currency translation and other adjustments on the condensed consolidated statements of comprehensive income. As of September 30, 2020 and December 31, 2019, the cumulative foreign currency translation recorded in AOCI related to these net investment hedges were gains of $3 million and losses of $2 million, respectively. During the three and nine months ended September 30, 2020, there were no amounts deemed ineffective.
Derivatives Not Designated as Hedges
Equity options – We use equity indexed options to economically hedge fixed indexed annuity products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specified market index, primarily the S&P 500. To hedge against adverse changes in equity indices, we enter into contracts to buy equity indexed options. The contracts are net settled in cash based on differentials in the indices at the time of exercise and the strike price.
Futures – Futures contracts are purchased to hedge the growth in interest credited to the customer as a direct result of increases in the related indices. We enter into exchange-traded futures with regulated futures commission clearing brokers who are members of a trading exchange. Under exchange-traded futures contracts, we agree to purchase a specified number of contracts with other parties and to post variation margin on a daily basis in an amount equal to the difference in the daily fair values of those contracts.
Total return swaps – We purchase total rate of return swaps to gain exposure and benefit from a reference asset or index without ownership. Total rate of return swaps are contracts in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of the underlying asset or index, which includes both the income it generates and any capital gains.
Interest rate swaps – We use interest rate swaps to reduce market risks from interest rate changes and to alter interest rate exposure arising from duration mismatches between assets and liabilities. With an interest rate swap, we agree with another party to exchange the difference between fixed-rate and floating-rate interest amounts tied to an agreed-upon notional principal amount at specified intervals.
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.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 September 30,
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Equity options
|
$
|
606
|
|
|
$
|
77
|
|
|
$
|
(303)
|
|
|
$
|
1,365
|
|
Futures
|
50
|
|
|
(3)
|
|
|
63
|
|
|
(17)
|
|
Swaps
|
29
|
|
|
8
|
|
|
9
|
|
|
37
|
|
Foreign currency forwards
|
(114)
|
|
|
42
|
|
|
(70)
|
|
|
47
|
|
Embedded derivatives on funds withheld
|
1,077
|
|
|
496
|
|
|
1,260
|
|
|
2,061
|
|
Amounts recognized in investment related gains (losses)
|
1,648
|
|
|
620
|
|
|
959
|
|
|
3,493
|
|
Embedded derivatives in indexed annuity products1
|
(553)
|
|
|
(265)
|
|
|
(910)
|
|
|
(1,920)
|
|
Total gains (losses) on derivatives not designated as hedges
|
$
|
1,095
|
|
|
$
|
355
|
|
|
$
|
49
|
|
|
$
|
1,573
|
|
|
|
|
|
|
|
|
|
1 Included in interest sensitive contract benefits on the condensed consolidated statements of income.
|
Credit Risk—We may be exposed to credit-related losses in the event of counterparty nonperformance on derivative financial instruments. Generally, the current credit exposure of our derivative contracts is the fair value at the reporting date less any collateral received from the counterparty.
We manage credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties. Where possible, we maintain collateral arrangements and use master netting agreements that provide for a single net payment from one counterparty to another at each due date and upon termination. We have also established counterparty exposure limits, where possible, in order to evaluate if there is sufficient collateral to support the net exposure.
Collateral arrangements typically require the posting of collateral in connection with its derivative instruments. Collateral agreements often contain posting thresholds, some of which may vary depending on the posting party’s financial strength ratings. Additionally, a decrease in our financial strength rating to a specified level can result in settlement of the derivative position.
The estimated fair value of our net derivative and other financial assets and liabilities after the application of master netting agreements and collateral were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross amounts not offset on the condensed consolidated balance sheets
|
|
|
|
|
|
|
(In millions)
|
Gross amount recognized1
|
|
Financial instruments2
|
|
Collateral (received)/pledged
|
|
Net amount
|
|
Off-balance sheet securities collateral3
|
|
Net amount after securities collateral
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
$
|
2,771
|
|
|
$
|
(61)
|
|
|
$
|
(2,564)
|
|
|
$
|
146
|
|
|
$
|
(41)
|
|
|
$
|
105
|
|
Derivative liabilities
|
(147)
|
|
|
61
|
|
|
77
|
|
|
(9)
|
|
|
—
|
|
|
(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
$
|
2,888
|
|
|
$
|
(67)
|
|
|
$
|
(2,743)
|
|
|
$
|
78
|
|
|
$
|
(145)
|
|
|
$
|
(67)
|
|
Derivative liabilities
|
(97)
|
|
|
67
|
|
|
31
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
The gross amounts of recognized derivative assets and derivative liabilities are reported on the condensed consolidated balance sheets. As of September 30, 2020 and December 31, 2019, 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.
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
4. Variable Interest Entities
VIE Deconsolidation—During the first quarter 2020, as a result of the Apollo Global Management, Inc. (AGM and, together with its subsidiaries, Apollo) share transaction discussed further in Note 11 – Related Parties, we reassessed the consolidation conclusions for the following VIEs, which are managed by Apollo affiliates:
•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);
•Entities included under our agreement to purchase funds managed by Apollo entities (Strategic Partnership).
Following the share transaction, we determined that we are no longer the primary beneficiary of these entities, as a result of Apollo receiving significant economics of these entities through their increased economic ownership in us. We did not recognize a gain or loss upon deconsolidation, as the deconsolidated VIEs accounted for their assets and liabilities at fair value. The investments remaining from the deconsolidated VIEs are included at net asset value (NAV) in related party investment funds on the condensed consolidated balance sheets after March 31, 2020.
Commercial Mortgage Loan Securitization Trust—During the second quarter of 2020, we formed Hamlet Securitization Trust 2020-CRE1 (Hamlet) to securitize a portion of our commercial mortgage loan portfolio as CMBS securities, which are held by AHL subsidiaries and third-party cedant portfolios. Securitization of these commercial mortgage loans allows us to retain the full economics of these assets while being able to pledge these assets as collateral to the Federal Home Loan Bank (FHLB) under the funding agreement program. As substantially all of the activities and economics of Hamlet are conducted on our behalf, we are the primary beneficiary and consolidate Hamlet and the assets are included in mortgage loans on the condensed consolidated balance sheets. Additionally, as Hamlet is in the form of a trust, the commercial mortgage loan assets are included in the pledged assets and funds in trust table in Note 12 – Commitments and Contingencies.
ALR Aircraft Investment Ireland Limited (ALR)—ALR was formed to invest in a joint venture that provides airplane lease financing to a major commercial airline. We were the only investor in the profit participating notes and, as substantially all of the activities of ALR were conducted on our behalf, we were the primary beneficiary and consolidated ALR. During the second quarter of 2020, we received final payment on the profit participating notes and no longer consolidate ALR.
5. Fair Value
Fair value is the price we would receive to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market participants. We determine fair value based on the following fair value hierarchy:
Level 1 – Unadjusted quoted prices for identical assets or liabilities in an active market.
Level 2 – Quoted prices for inactive markets or valuation techniques that require observable direct or indirect inputs for substantially the full term of the asset or liability. Level 2 inputs include the following:
•Quoted prices for similar assets or liabilities in active markets,
•Observable inputs other than quoted market prices, and
•Observable inputs derived principally from market data through correlation or other means.
Level 3 – Prices or valuation techniques with unobservable inputs significant to the overall fair value estimate. These valuations use critical assumptions not readily available to market participants. Level 3 valuations are based on market standard valuation methodologies, including discounted cash flows, matrix pricing or other similar techniques.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
(In millions)
|
Total
|
|
NAV
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
|
|
AFS securities
|
|
|
|
|
|
|
|
|
|
US government and agencies
|
$
|
73
|
|
|
$
|
—
|
|
|
$
|
73
|
|
|
$
|
—
|
|
|
$
|
—
|
|
US state, municipal and political subdivisions
|
927
|
|
|
—
|
|
|
—
|
|
|
893
|
|
|
34
|
|
Foreign governments
|
340
|
|
|
—
|
|
|
—
|
|
|
339
|
|
|
1
|
|
Corporate
|
51,129
|
|
|
—
|
|
|
—
|
|
|
50,229
|
|
|
900
|
|
CLO
|
8,370
|
|
|
—
|
|
|
—
|
|
|
8,179
|
|
|
191
|
|
ABS
|
4,200
|
|
|
—
|
|
|
—
|
|
|
3,221
|
|
|
979
|
|
CMBS
|
2,239
|
|
|
—
|
|
|
—
|
|
|
2,169
|
|
|
70
|
|
RMBS
|
6,710
|
|
|
—
|
|
|
—
|
|
|
6,710
|
|
|
—
|
|
Total AFS securities
|
73,988
|
|
|
—
|
|
|
73
|
|
|
71,740
|
|
|
2,175
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
US government and agencies
|
11
|
|
|
—
|
|
|
8
|
|
|
3
|
|
|
—
|
|
US state, municipal and political subdivisions
|
115
|
|
|
—
|
|
|
—
|
|
|
115
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
1,532
|
|
|
—
|
|
|
—
|
|
|
1,526
|
|
|
6
|
|
CLO
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
ABS
|
119
|
|
|
—
|
|
|
—
|
|
|
84
|
|
|
35
|
|
CMBS
|
52
|
|
|
—
|
|
|
—
|
|
|
52
|
|
|
—
|
|
RMBS
|
237
|
|
|
—
|
|
|
—
|
|
|
178
|
|
|
59
|
|
Total trading securities
|
2,069
|
|
|
—
|
|
|
8
|
|
|
1,958
|
|
|
103
|
|
Equity securities
|
265
|
|
|
—
|
|
|
29
|
|
|
220
|
|
|
16
|
|
Mortgage loans
|
19
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19
|
|
Investment funds
|
156
|
|
|
139
|
|
|
—
|
|
|
—
|
|
|
17
|
|
Funds withheld at interest – embedded derivative
|
1,259
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,259
|
|
Derivative assets
|
2,771
|
|
|
—
|
|
|
48
|
|
|
2,723
|
|
|
—
|
|
Short-term investments
|
165
|
|
|
—
|
|
|
45
|
|
|
110
|
|
|
10
|
|
Other investments
|
109
|
|
|
—
|
|
|
—
|
|
|
109
|
|
|
—
|
|
Cash and cash equivalents
|
7,548
|
|
|
—
|
|
|
7,548
|
|
|
—
|
|
|
—
|
|
Restricted cash
|
1,226
|
|
|
—
|
|
|
1,226
|
|
|
—
|
|
|
—
|
|
Investments in related parties
|
|
|
|
|
|
|
|
|
|
AFS securities
|
|
|
|
|
|
|
|
|
|
Corporate
|
784
|
|
|
—
|
|
|
—
|
|
|
20
|
|
|
764
|
|
CLO
|
1,344
|
|
|
—
|
|
|
—
|
|
|
1,333
|
|
|
11
|
|
ABS
|
2,729
|
|
|
—
|
|
|
—
|
|
|
666
|
|
|
2,063
|
|
Total AFS securities – related party
|
4,857
|
|
|
—
|
|
|
—
|
|
|
2,019
|
|
|
2,838
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
CLO
|
52
|
|
|
—
|
|
|
—
|
|
|
24
|
|
|
28
|
|
ABS
|
1,345
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,345
|
|
Total trading securities – related party
|
1,397
|
|
|
—
|
|
|
—
|
|
|
24
|
|
|
1,373
|
|
Equity securities
|
50
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
50
|
|
Investment funds
|
1,850
|
|
|
80
|
|
|
—
|
|
|
—
|
|
|
1,770
|
|
Funds withheld at interest – embedded derivative
|
721
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
721
|
|
Reinsurance recoverable
|
2,155
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,155
|
|
Total assets measured at fair value
|
$
|
100,605
|
|
|
$
|
219
|
|
|
$
|
8,977
|
|
|
$
|
78,903
|
|
|
$
|
12,506
|
|
|
|
|
|
|
|
|
|
|
(Continued)
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
(In millions)
|
Total
|
|
NAV
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities
|
|
|
|
|
|
|
|
|
|
Embedded derivative
|
$
|
11,741
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,741
|
|
Universal life benefits
|
1,363
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,363
|
|
Future policy benefits
|
|
|
|
|
|
|
|
|
|
AmerUs Life Insurance Company (AmerUs) Closed Block
|
1,577
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,577
|
|
Indianapolis Life Insurance Company (ILICO) Closed Block and life benefits
|
777
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
777
|
|
Derivative liabilities
|
147
|
|
|
—
|
|
|
5
|
|
|
137
|
|
|
5
|
|
Funds withheld liability – embedded derivative
|
50
|
|
|
—
|
|
|
—
|
|
|
50
|
|
|
—
|
|
Total liabilities measured at fair value
|
$
|
15,655
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
187
|
|
|
$
|
15,463
|
|
|
|
|
|
|
|
|
|
|
(Concluded)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(In millions)
|
Total
|
|
NAV
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
|
|
AFS securities
|
|
|
|
|
|
|
|
|
|
US government and agencies
|
$
|
36
|
|
|
$
|
—
|
|
|
$
|
36
|
|
|
$
|
—
|
|
|
$
|
—
|
|
US state, municipal and political subdivisions
|
1,541
|
|
|
—
|
|
|
—
|
|
|
1,501
|
|
|
40
|
|
Foreign governments
|
327
|
|
|
—
|
|
|
—
|
|
|
327
|
|
|
—
|
|
Corporate
|
47,228
|
|
|
—
|
|
|
—
|
|
|
46,503
|
|
|
725
|
|
CLO
|
7,349
|
|
|
—
|
|
|
—
|
|
|
7,228
|
|
|
121
|
|
ABS
|
5,118
|
|
|
—
|
|
|
—
|
|
|
3,744
|
|
|
1,374
|
|
CMBS
|
2,400
|
|
|
—
|
|
|
—
|
|
|
2,354
|
|
|
46
|
|
RMBS
|
7,375
|
|
|
—
|
|
|
—
|
|
|
7,375
|
|
|
—
|
|
Total AFS securities
|
71,374
|
|
|
—
|
|
|
36
|
|
|
69,032
|
|
|
2,306
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
US government and agencies
|
11
|
|
|
—
|
|
|
8
|
|
|
3
|
|
|
—
|
|
US state, municipal and political subdivisions
|
135
|
|
|
—
|
|
|
—
|
|
|
135
|
|
|
—
|
|
Corporate
|
1,456
|
|
|
—
|
|
|
—
|
|
|
1,456
|
|
|
—
|
|
CLO
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
ABS
|
108
|
|
|
—
|
|
|
—
|
|
|
92
|
|
|
16
|
|
CMBS
|
51
|
|
|
—
|
|
|
—
|
|
|
51
|
|
|
—
|
|
RMBS
|
303
|
|
|
—
|
|
|
—
|
|
|
251
|
|
|
52
|
|
Total trading securities
|
2,070
|
|
|
—
|
|
|
8
|
|
|
1,988
|
|
|
74
|
|
Equity securities
|
247
|
|
|
—
|
|
|
43
|
|
|
201
|
|
|
3
|
|
Mortgage loans
|
27
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
27
|
|
Investment funds
|
154
|
|
|
132
|
|
|
—
|
|
|
—
|
|
|
22
|
|
Funds withheld at interest – embedded derivative
|
801
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
801
|
|
Derivative assets
|
2,888
|
|
|
—
|
|
|
10
|
|
|
2,878
|
|
|
—
|
|
Short-term investments
|
406
|
|
|
—
|
|
|
46
|
|
|
319
|
|
|
41
|
|
Other investments
|
93
|
|
|
—
|
|
|
—
|
|
|
93
|
|
|
—
|
|
Cash and cash equivalents
|
4,240
|
|
|
—
|
|
|
4,240
|
|
|
—
|
|
|
—
|
|
Restricted cash
|
402
|
|
|
—
|
|
|
402
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
(Continued)
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(In millions)
|
Total
|
|
NAV
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Investments in related parties
|
|
|
|
|
|
|
|
|
|
AFS securities
|
|
|
|
|
|
|
|
|
|
Corporate
|
19
|
|
|
—
|
|
|
—
|
|
|
19
|
|
|
—
|
|
CLO
|
936
|
|
|
—
|
|
|
—
|
|
|
936
|
|
|
—
|
|
ABS
|
2,849
|
|
|
—
|
|
|
—
|
|
|
525
|
|
|
2,324
|
|
Total AFS securities – related party
|
3,804
|
|
|
—
|
|
|
—
|
|
|
1,480
|
|
|
2,324
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
CLO
|
74
|
|
|
—
|
|
|
—
|
|
|
36
|
|
|
38
|
|
ABS
|
711
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
711
|
|
Total trading securities – related party
|
785
|
|
|
—
|
|
|
—
|
|
|
36
|
|
|
749
|
|
Equity securities
|
64
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
64
|
|
Investment funds
|
819
|
|
|
687
|
|
|
—
|
|
|
—
|
|
|
132
|
|
Funds withheld at interest – embedded derivative
|
594
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
594
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverable
|
1,821
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,821
|
|
Total assets measured at fair value
|
$
|
90,589
|
|
|
$
|
819
|
|
|
$
|
4,785
|
|
|
$
|
76,027
|
|
|
$
|
8,958
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities
|
|
|
|
|
|
|
|
|
|
Embedded derivative
|
$
|
10,942
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,942
|
|
Universal life benefits
|
1,050
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,050
|
|
Future policy benefits
|
|
|
|
|
|
|
|
|
|
AmerUs Closed Block
|
1,546
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,546
|
|
ILICO Closed Block and life benefits
|
755
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
755
|
|
Derivative liabilities
|
97
|
|
|
—
|
|
|
1
|
|
|
93
|
|
|
3
|
|
Funds withheld liability – embedded derivative
|
31
|
|
|
—
|
|
|
—
|
|
|
31
|
|
|
—
|
|
Total liabilities measured at fair value
|
$
|
14,421
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
124
|
|
|
$
|
14,296
|
|
|
|
|
|
|
|
|
|
|
(Concluded)
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Fair Value Valuation Methods—We used the following valuation methods and assumptions to estimate fair value:
AFS and trading securities – We obtain the fair value for most marketable securities without an active market from several commercial pricing services. These are classified as Level 2 assets. The pricing services incorporate a variety of market observable information in their valuation techniques, including benchmark yields, trading activity, credit quality, issuer spreads, bids, offers and other reference data. This category typically includes US and non-US corporate bonds, US agency and government guaranteed securities, CLO, ABS, CMBS and RMBS.
We also have fixed maturity securities priced based on indicative broker quotes or by employing market accepted valuation models. For certain fixed maturity securities, the valuation model uses significant unobservable inputs and are included in Level 3 in our fair value hierarchy. Significant unobservable inputs used include: issue specific credit adjustments, material non-public financial information, estimation of future earnings and cash flows, default rate assumptions, liquidity assumptions and indicative quotes from market makers. These inputs are usually considered unobservable, as not all market participants have access to this data.
We value privately placed fixed maturity securities based on the credit quality and duration of comparable marketable securities, which may be securities of another issuer with similar characteristics. In some instances, we use a matrix-based pricing model. These models consider the current level of risk-free interest rates, corporate spreads, credit quality of the issuer and cash flow characteristics of the security. We also consider additional factors such as net worth of the borrower, value of collateral, capital structure of the borrower, presence of guarantees and our evaluation of the borrower’s ability to compete in its relevant market. Privately placed fixed maturity securities are classified as Level 2 or 3.
Equity securities – Fair values of publicly traded equity securities are based on quoted market prices and classified as Level 1. Other equity securities, typically private equities or equity securities not traded on an exchange, we value based on other sources, such as commercial pricing services or brokers, and are classified as Level 2 or 3.
Mortgage loans – Mortgage loans for which we have elected the fair value option or those held for sale are carried at fair value. We estimate fair value on a monthly basis using discounted cash flow analysis and rates being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. The discounted cash flow model uses unobservable inputs, including estimates of discount rates and loan prepayments. Mortgage loans are classified as Level 3.
Investment funds – Certain investment funds for which we elected the fair value option are included in Level 3 and are priced based on market accepted valuation models. The valuation models use significant unobservable inputs, which include material non-public financial information, estimation of future distributable earnings and demographic assumptions. These inputs are usually considered unobservable, as not all market participants have access to this data.
Funds withheld at interest embedded derivative – We estimate the fair value of the embedded derivative based on the change in the fair value of the assets supporting the funds withheld payable under modco and funds withheld reinsurance agreements. As a result, the fair value of the embedded derivative is classified as Level 2 or 3 based on the valuation methods used for the assets held supporting the reinsurance agreements.
Derivatives – Derivative contracts can be exchange traded or over-the-counter. Exchange-traded derivatives typically fall within Level 1 of the fair value hierarchy depending on trading activity. Over-the-counter derivatives are valued using valuation models or an income approach using third-party broker valuations. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlation of the inputs. We consider and incorporate counterparty credit risk in the valuation process through counterparty credit rating requirements and monitoring of overall exposure. We also evaluate and include our own nonperformance risk in valuing derivatives. The majority of our derivatives trade in liquid markets; therefore, we can verify model inputs and model selection does not involve significant management judgment. These are typically classified within Level 2 of the fair value hierarchy.
Cash and cash equivalents, including restricted cash – The carrying amount for cash equals fair value. We estimate the fair value for cash equivalents based on quoted market prices. These assets are classified as Level 1.
Interest sensitive contract liabilities embedded derivative – Embedded derivatives related to interest sensitive contract liabilities with fixed indexed annuity products are classified as Level 3. The valuations include significant unobservable inputs associated with economic assumptions and actuarial assumptions for policyholder behavior.
AmerUs Closed Block – We elected the fair value option for the future policy benefits liability in the AmerUs Closed Block. Our valuation technique is to set the fair value of policyholder liabilities equal to the fair value of assets. There is an additional component which captures the fair value of the open block’s obligations to the closed block business. This component is the present value of the projected release of required capital and future earnings before income taxes on required capital supporting the AmerUs Closed Block, discounted at a rate which represents a market participant’s required rate of return, less the initial required capital. Unobservable inputs include estimates for these items. The AmerUs Closed Block policyholder liabilities and any corresponding reinsurance recoverable are classified as Level 3.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
ILICO Closed Block – We elected the fair value option for the ILICO Closed Block. Our valuation technique is to set the fair value of policyholder liabilities equal to the fair value of assets. There is an additional component which captures the fair value of the open block’s obligations to the closed block business. This component uses the present value of future cash flows which include commissions, administrative expenses, reinsurance premiums and benefits, and an explicit cost of capital. The discount rate includes a margin to reflect the business and nonperformance risk. Unobservable inputs include estimates for these items. The ILICO Closed Block policyholder liabilities and corresponding reinsurance recoverable are classified as Level 3.
Universal life liabilities and other life benefits – We elected the fair value option for certain blocks of universal and other life business ceded to Global Atlantic. We use a present value of liability cash flows. Unobservable inputs include estimates of mortality, persistency, expenses, premium payments and a risk margin used in the discount rates that reflects the riskiness of the business. These universal life policyholder liabilities and corresponding reinsurance recoverable are classified as Level 3.
Fair Value Option—The following represents the gains (losses) recorded for instruments for which we have elected the fair value option, including related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Trading securities
|
$
|
24
|
|
|
$
|
48
|
|
|
$
|
(8)
|
|
|
$
|
183
|
|
Mortgage loans
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Investment funds
|
(57)
|
|
|
3
|
|
|
109
|
|
|
3
|
|
Future policy benefits
|
(4)
|
|
|
(37)
|
|
|
(31)
|
|
|
(129)
|
|
Total gains (losses)
|
$
|
(37)
|
|
|
$
|
14
|
|
|
$
|
70
|
|
|
$
|
58
|
|
Gains and losses on trading securities are recorded in investment related gains (losses) on the condensed consolidated statements of income. For fair value option mortgage loans, we record interest income in net investment income and subsequent changes in fair value in investment related gains (losses) on the condensed consolidated statements of income. Gains and losses related to investment funds, including related party investment funds, are recorded in net investment income on the condensed consolidated statements of income. We record the change in fair value of future policy benefits to future policy and other policy benefits on the condensed consolidated statements of income.
The following summarizes information for fair value option mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
September 30, 2020
|
|
December 31, 2019
|
Unpaid principal balance
|
$
|
17
|
|
|
$
|
25
|
|
Mark to fair value
|
2
|
|
|
2
|
|
Fair value
|
$
|
19
|
|
|
$
|
27
|
|
There were no fair value option mortgage loans 90 days or more past due as of September 30, 2020 and December 31, 2019.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Level 3 Financial Instruments—The following tables are reconciliations for all Level 3 assets and liabilities measured at fair value on a recurring basis. All transfers in and out of Level 3 are based on changes in the availability of pricing sources, as described in the valuation methods above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2020
|
|
|
|
Total realized and unrealized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Beginning balance
|
|
Included in income
|
|
Included in OCI
|
|
Net purchases, issuances, sales and settlements
|
|
Net transfers in (out)
|
|
Ending balance
|
|
Total gains (losses) included in earnings1
|
|
Total gains (losses) included in OCI1
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US state, municipal and political subdivisions
|
$
|
40
|
|
|
$
|
—
|
|
|
$
|
(1)
|
|
|
$
|
(5)
|
|
|
$
|
—
|
|
|
$
|
34
|
|
|
$
|
—
|
|
|
$
|
(1)
|
|
Foreign governments
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Corporate
|
874
|
|
|
(26)
|
|
|
62
|
|
|
39
|
|
|
(49)
|
|
|
900
|
|
|
—
|
|
|
75
|
|
CLO
|
160
|
|
|
—
|
|
|
2
|
|
|
(7)
|
|
|
36
|
|
|
191
|
|
|
—
|
|
|
2
|
|
ABS
|
868
|
|
|
(4)
|
|
|
12
|
|
|
(44)
|
|
|
147
|
|
|
979
|
|
|
—
|
|
|
13
|
|
CMBS
|
49
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
16
|
|
|
70
|
|
|
—
|
|
|
5
|
|
RMBS
|
16
|
|
|
—
|
|
|
2
|
|
|
(2)
|
|
|
(16)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
—
|
|
CLO
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
ABS
|
—
|
|
|
—
|
|
|
—
|
|
|
35
|
|
|
—
|
|
|
35
|
|
|
—
|
|
|
—
|
|
RMBS
|
55
|
|
|
(3)
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
59
|
|
|
—
|
|
|
—
|
|
Equity securities
|
6
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
16
|
|
|
2
|
|
|
—
|
|
Mortgage loans
|
25
|
|
|
—
|
|
|
—
|
|
|
(6)
|
|
|
—
|
|
|
19
|
|
|
—
|
|
|
—
|
|
Investment funds
|
17
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17
|
|
|
—
|
|
|
—
|
|
Funds withheld at interest – embedded derivative
|
763
|
|
|
496
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,259
|
|
|
—
|
|
|
—
|
|
Short-term investments
|
114
|
|
|
—
|
|
|
—
|
|
|
(16)
|
|
|
(88)
|
|
|
10
|
|
|
—
|
|
|
—
|
|
Investments in related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
—
|
|
|
1
|
|
|
2
|
|
|
761
|
|
|
—
|
|
|
764
|
|
|
—
|
|
|
2
|
|
CLO
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
—
|
|
ABS
|
2,061
|
|
|
8
|
|
|
25
|
|
|
(31)
|
|
|
—
|
|
|
2,063
|
|
|
—
|
|
|
25
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLO
|
45
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
(20)
|
|
|
28
|
|
|
3
|
|
|
—
|
|
ABS
|
824
|
|
|
14
|
|
|
—
|
|
|
507
|
|
|
—
|
|
|
1,345
|
|
|
13
|
|
|
—
|
|
Equity securities
|
52
|
|
|
—
|
|
|
—
|
|
|
(2)
|
|
|
—
|
|
|
50
|
|
|
1
|
|
|
—
|
|
Investment funds
|
1,810
|
|
|
(56)
|
|
|
—
|
|
|
16
|
|
|
—
|
|
|
1,770
|
|
|
—
|
|
|
—
|
|
Funds withheld at interest – embedded derivative
|
560
|
|
|
161
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
721
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverable
|
2,099
|
|
|
56
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,155
|
|
|
—
|
|
|
—
|
|
Total Level 3 assets
|
$
|
10,447
|
|
|
$
|
650
|
|
|
$
|
109
|
|
|
$
|
1,267
|
|
|
$
|
33
|
|
|
$
|
12,506
|
|
|
$
|
19
|
|
|
$
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative
|
$
|
(11,140)
|
|
|
$
|
(553)
|
|
|
$
|
—
|
|
|
$
|
(48)
|
|
|
$
|
—
|
|
|
$
|
(11,741)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Universal life benefits
|
(1,323)
|
|
|
(40)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,363)
|
|
|
—
|
|
|
—
|
|
Future policy benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AmerUs Closed Block
|
(1,573)
|
|
|
(4)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,577)
|
|
|
—
|
|
|
—
|
|
ILICO Closed Block and life benefits
|
(761)
|
|
|
(16)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(777)
|
|
|
—
|
|
|
—
|
|
Derivative liabilities
|
(5)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5)
|
|
|
—
|
|
|
—
|
|
Total Level 3 liabilities
|
$
|
(14,802)
|
|
|
$
|
(613)
|
|
|
$
|
—
|
|
|
$
|
(48)
|
|
|
$
|
—
|
|
|
$
|
(15,463)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Related to instruments held at end of period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2019
|
|
|
|
|
|
Total realized and unrealized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Beginning balance
|
|
Included in income
|
|
Included in OCI
|
|
Net purchases, issuances, sales and settlements
|
|
Net transfers in (out)
|
|
Ending balance
|
|
Total gains (losses) included in earnings1
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US state, municipal and political subdivisions
|
$
|
40
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
821
|
|
|
(3)
|
|
|
10
|
|
|
189
|
|
|
(70)
|
|
|
947
|
|
|
—
|
|
|
|
CLO
|
200
|
|
|
—
|
|
|
1
|
|
|
34
|
|
|
(104)
|
|
|
131
|
|
|
—
|
|
|
|
ABS
|
1,396
|
|
|
1
|
|
|
12
|
|
|
16
|
|
|
(137)
|
|
|
1,288
|
|
|
—
|
|
|
|
CMBS
|
206
|
|
|
—
|
|
|
3
|
|
|
195
|
|
|
(73)
|
|
|
331
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6)
|
|
|
—
|
|
|
—
|
|
|
|
CLO
|
7
|
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
|
ABS
|
6
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
78
|
|
|
83
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS
|
46
|
|
|
(5)
|
|
|
—
|
|
|
15
|
|
|
35
|
|
|
91
|
|
|
(2)
|
|
|
|
Equity securities
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2)
|
|
|
1
|
|
|
—
|
|
|
|
Mortgage loans
|
32
|
|
|
—
|
|
|
—
|
|
|
(4)
|
|
|
—
|
|
|
28
|
|
|
—
|
|
|
|
Investment funds
|
25
|
|
|
(1)
|
|
|
—
|
|
|
(2)
|
|
|
—
|
|
|
22
|
|
|
(1)
|
|
|
|
Funds withheld at interest – embedded derivative
|
704
|
|
|
100
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
804
|
|
|
—
|
|
|
|
Short-term investments
|
45
|
|
|
—
|
|
|
—
|
|
|
181
|
|
|
—
|
|
|
226
|
|
|
—
|
|
|
|
Investments in related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLO
|
37
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(37)
|
|
|
—
|
|
|
—
|
|
|
|
ABS
|
399
|
|
|
—
|
|
|
8
|
|
|
587
|
|
|
—
|
|
|
994
|
|
|
—
|
|
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLO
|
95
|
|
|
(5)
|
|
|
—
|
|
|
(7)
|
|
|
(23)
|
|
|
60
|
|
|
—
|
|
|
|
ABS
|
218
|
|
|
4
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
224
|
|
|
5
|
|
|
|
Equity securities
|
350
|
|
|
6
|
|
|
—
|
|
|
31
|
|
|
—
|
|
|
387
|
|
|
—
|
|
|
|
Investment funds
|
141
|
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
140
|
|
|
1
|
|
|
|
Funds withheld at interest – embedded derivative
|
501
|
|
|
154
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
655
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverable
|
1,834
|
|
|
120
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,954
|
|
|
—
|
|
|
|
Total Level 3 assets
|
$
|
7,112
|
|
|
$
|
369
|
|
|
$
|
34
|
|
|
$
|
1,236
|
|
|
$
|
(339)
|
|
|
$
|
8,412
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative
|
$
|
(9,905)
|
|
|
$
|
(265)
|
|
|
$
|
—
|
|
|
$
|
(103)
|
|
|
$
|
—
|
|
|
$
|
(10,273)
|
|
|
$
|
—
|
|
|
|
Universal life benefits
|
(1,051)
|
|
|
(91)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,142)
|
|
|
—
|
|
|
|
Future policy benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AmerUs Closed Block
|
(1,535)
|
|
|
(37)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,572)
|
|
|
—
|
|
|
|
ILICO Closed Block and life benefits
|
(769)
|
|
|
(28)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(797)
|
|
|
—
|
|
|
|
Derivative liabilities
|
(4)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4)
|
|
|
—
|
|
|
|
Total Level 3 liabilities
|
$
|
(13,264)
|
|
|
$
|
(421)
|
|
|
$
|
—
|
|
|
$
|
(103)
|
|
|
$
|
—
|
|
|
$
|
(13,788)
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Related to instruments held at end of period.
|
|
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2020
|
|
|
|
Total realized and unrealized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Beginning balance
|
|
Included in income
|
|
Included in OCI
|
|
Net purchases, issuances, sales and settlements
|
|
Net transfers in (out)
|
|
Ending balance
|
|
Total gains (losses) included in income1
|
|
Total gains (losses) included in OCI1
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US state, municipal and political subdivisions
|
$
|
40
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(6)
|
|
|
$
|
—
|
|
|
$
|
34
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign governments
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Corporate
|
725
|
|
|
1
|
|
|
(1)
|
|
|
118
|
|
|
57
|
|
|
900
|
|
|
—
|
|
|
(1)
|
|
CLO
|
121
|
|
|
—
|
|
|
—
|
|
|
56
|
|
|
14
|
|
|
191
|
|
|
—
|
|
|
—
|
|
ABS
|
1,374
|
|
|
19
|
|
|
(71)
|
|
|
(301)
|
|
|
(42)
|
|
|
979
|
|
|
—
|
|
|
(69)
|
|
CMBS
|
46
|
|
|
(5)
|
|
|
(5)
|
|
|
(5)
|
|
|
39
|
|
|
70
|
|
|
—
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
6
|
|
|
—
|
|
|
—
|
|
CLO
|
6
|
|
|
(3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
(1)
|
|
|
—
|
|
ABS
|
16
|
|
|
—
|
|
|
—
|
|
|
19
|
|
|
—
|
|
|
35
|
|
|
—
|
|
|
—
|
|
RMBS
|
52
|
|
|
(4)
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
59
|
|
|
5
|
|
|
—
|
|
Equity securities
|
3
|
|
|
3
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
16
|
|
|
3
|
|
|
—
|
|
Mortgage loans
|
27
|
|
|
—
|
|
|
—
|
|
|
(8)
|
|
|
—
|
|
|
19
|
|
|
—
|
|
|
—
|
|
Investment funds
|
22
|
|
|
(5)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17
|
|
|
(4)
|
|
|
—
|
|
Funds withheld at interest – embedded derivative
|
801
|
|
|
458
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,259
|
|
|
—
|
|
|
—
|
|
Short-term investments
|
41
|
|
|
—
|
|
|
—
|
|
|
(31)
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
—
|
|
Investments in related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
—
|
|
|
1
|
|
|
2
|
|
|
761
|
|
|
—
|
|
|
764
|
|
|
—
|
|
|
2
|
|
CLO
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
—
|
|
ABS
|
2,324
|
|
|
9
|
|
|
(20)
|
|
|
(85)
|
|
|
(165)
|
|
|
2,063
|
|
|
—
|
|
|
(20)
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLO
|
38
|
|
|
(11)
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
28
|
|
|
(11)
|
|
|
—
|
|
ABS
|
711
|
|
|
(13)
|
|
|
—
|
|
|
647
|
|
|
—
|
|
|
1,345
|
|
|
(14)
|
|
|
—
|
|
Equity securities
|
64
|
|
|
(5)
|
|
|
—
|
|
|
(3)
|
|
|
(6)
|
|
|
50
|
|
|
(5)
|
|
|
—
|
|
Investment funds
|
132
|
|
|
113
|
|
|
—
|
|
|
1,525
|
|
|
—
|
|
|
1,770
|
|
|
113
|
|
|
—
|
|
Funds withheld at interest – embedded derivative
|
594
|
|
|
127
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
721
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverable
|
1,821
|
|
|
334
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,155
|
|
|
—
|
|
|
—
|
|
Total Level 3 assets
|
$
|
8,958
|
|
|
$
|
1,019
|
|
|
$
|
(95)
|
|
|
$
|
2,710
|
|
|
$
|
(86)
|
|
|
$
|
12,506
|
|
|
$
|
86
|
|
|
$
|
(93)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative
|
$
|
(10,942)
|
|
|
$
|
(910)
|
|
|
$
|
—
|
|
|
$
|
111
|
|
|
$
|
—
|
|
|
$
|
(11,741)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Universal life benefits
|
(1,050)
|
|
|
(313)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,363)
|
|
|
—
|
|
|
—
|
|
Future policy benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AmerUs Closed Block
|
(1,546)
|
|
|
(31)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,577)
|
|
|
—
|
|
|
—
|
|
ILICO Closed Block and life benefits
|
(755)
|
|
|
(22)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(777)
|
|
|
—
|
|
|
—
|
|
Derivative liabilities
|
(3)
|
|
|
(2)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5)
|
|
|
(2)
|
|
|
—
|
|
Total Level 3 liabilities
|
$
|
(14,296)
|
|
|
$
|
(1,278)
|
|
|
$
|
—
|
|
|
$
|
111
|
|
|
$
|
—
|
|
|
$
|
(15,463)
|
|
|
$
|
(2)
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Related to instruments held at end of period.
|
|
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2019
|
|
|
|
|
|
Total realized and unrealized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Beginning balance
|
|
Included in income
|
|
Included in OCI
|
|
Net purchases, issuances, sales and settlements
|
|
Net transfers in (out)
|
|
Ending balance
|
|
Total gains (losses) included in earnings1
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US state, municipal and political subdivisions
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40
|
|
|
$
|
—
|
|
|
$
|
40
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
898
|
|
|
(2)
|
|
|
20
|
|
|
164
|
|
|
(133)
|
|
|
947
|
|
|
—
|
|
|
|
CLO
|
107
|
|
|
—
|
|
|
3
|
|
|
60
|
|
|
(39)
|
|
|
131
|
|
|
—
|
|
|
|
ABS
|
1,615
|
|
|
6
|
|
|
43
|
|
|
43
|
|
|
(419)
|
|
|
1,288
|
|
|
—
|
|
|
|
CMBS
|
187
|
|
|
1
|
|
|
7
|
|
|
154
|
|
|
(18)
|
|
|
331
|
|
|
—
|
|
|
|
RMBS
|
56
|
|
|
—
|
|
|
4
|
|
|
2
|
|
|
(62)
|
|
|
—
|
|
|
—
|
|
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLO
|
1
|
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
6
|
|
|
6
|
|
|
|
ABS
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
78
|
|
|
83
|
|
|
—
|
|
|
|
RMBS
|
134
|
|
|
(13)
|
|
|
—
|
|
|
15
|
|
|
(45)
|
|
|
91
|
|
|
3
|
|
|
|
Equity securities
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2)
|
|
|
1
|
|
|
—
|
|
|
|
Mortgage loans
|
32
|
|
|
1
|
|
|
—
|
|
|
(5)
|
|
|
—
|
|
|
28
|
|
|
1
|
|
|
|
Investment funds
|
29
|
|
|
(2)
|
|
|
—
|
|
|
(5)
|
|
|
—
|
|
|
22
|
|
|
(2)
|
|
|
|
Funds withheld at interest – embedded derivative
|
57
|
|
|
747
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
804
|
|
|
—
|
|
|
|
Short-term investments
|
—
|
|
|
—
|
|
|
—
|
|
|
226
|
|
|
—
|
|
|
226
|
|
|
—
|
|
|
|
Investments in related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS securities, ABS
|
328
|
|
|
—
|
|
|
21
|
|
|
748
|
|
|
(103)
|
|
|
994
|
|
|
—
|
|
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLO
|
113
|
|
|
(7)
|
|
|
—
|
|
|
(54)
|
|
|
8
|
|
|
60
|
|
|
2
|
|
|
|
ABS
|
149
|
|
|
(13)
|
|
|
—
|
|
|
(15)
|
|
|
103
|
|
|
224
|
|
|
(13)
|
|
|
|
Equity securities
|
133
|
|
|
15
|
|
|
—
|
|
|
239
|
|
|
—
|
|
|
387
|
|
|
(2)
|
|
|
|
Investment funds
|
120
|
|
|
1
|
|
|
—
|
|
|
19
|
|
|
—
|
|
|
140
|
|
|
3
|
|
|
|
Funds withheld at interest – embedded derivative
|
(110)
|
|
|
765
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
655
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverable
|
1,676
|
|
|
278
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,954
|
|
|
—
|
|
|
|
Total Level 3 assets
|
$
|
5,528
|
|
|
$
|
1,776
|
|
|
$
|
98
|
|
|
$
|
1,636
|
|
|
$
|
(626)
|
|
|
$
|
8,412
|
|
|
$
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative
|
$
|
(7,969)
|
|
|
$
|
(1,920)
|
|
|
$
|
—
|
|
|
$
|
(384)
|
|
|
$
|
—
|
|
|
$
|
(10,273)
|
|
|
$
|
—
|
|
|
|
Universal life benefits
|
(932)
|
|
|
(210)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,142)
|
|
|
—
|
|
|
|
Future policy benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AmerUs Closed Block
|
(1,443)
|
|
|
(129)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,572)
|
|
|
—
|
|
|
|
ILICO Closed Block and life benefits
|
(730)
|
|
|
(67)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(797)
|
|
|
—
|
|
|
|
Derivative liabilities
|
(4)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4)
|
|
|
—
|
|
|
|
Total Level 3 liabilities
|
$
|
(11,078)
|
|
|
$
|
(2,326)
|
|
|
$
|
—
|
|
|
$
|
(384)
|
|
|
$
|
—
|
|
|
$
|
(13,788)
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, and net transfers in (out) shown above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2020
|
(In millions)
|
Purchases
|
|
Issuances
|
|
Sales
|
|
Settlements
|
|
Net purchases, issuances, sales and settlements
|
|
Transfers in
|
|
Transfers out
|
|
Net transfers in (out)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US state, municipal and political subdivisions
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(5)
|
|
|
$
|
—
|
|
|
$
|
(5)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign governments
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Corporate
|
58
|
|
|
—
|
|
|
—
|
|
|
(19)
|
|
|
39
|
|
|
157
|
|
|
(206)
|
|
|
(49)
|
|
CLO
|
12
|
|
|
—
|
|
|
(18)
|
|
|
(1)
|
|
|
(7)
|
|
|
36
|
|
|
—
|
|
|
36
|
|
ABS
|
47
|
|
|
—
|
|
|
(43)
|
|
|
(48)
|
|
|
(44)
|
|
|
218
|
|
|
(71)
|
|
|
147
|
|
CMBS
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39
|
|
|
(23)
|
|
|
16
|
|
RMBS
|
—
|
|
|
—
|
|
|
(1)
|
|
|
(1)
|
|
|
(2)
|
|
|
—
|
|
|
(16)
|
|
|
(16)
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS
|
35
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
(1)
|
|
|
7
|
|
Equity securities
|
10
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Mortgage loans
|
—
|
|
|
—
|
|
|
—
|
|
|
(6)
|
|
|
(6)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
1
|
|
|
—
|
|
|
(7)
|
|
|
(10)
|
|
|
(16)
|
|
|
—
|
|
|
(88)
|
|
|
(88)
|
|
Investments in related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
761
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
761
|
|
|
—
|
|
|
—
|
|
|
—
|
|
CLO
|
11
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
—
|
|
ABS
|
2
|
|
|
—
|
|
|
(10)
|
|
|
(23)
|
|
|
(31)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLO
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
(24)
|
|
|
(20)
|
|
ABS
|
517
|
|
|
—
|
|
|
(10)
|
|
|
—
|
|
|
507
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity securities
|
2
|
|
|
—
|
|
|
(1)
|
|
|
(3)
|
|
|
(2)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Investment funds
|
16
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 assets
|
$
|
1,473
|
|
|
$
|
—
|
|
|
$
|
(95)
|
|
|
$
|
(111)
|
|
|
$
|
1,267
|
|
|
$
|
462
|
|
|
$
|
(429)
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities – embedded derivative
|
$
|
—
|
|
|
$
|
(202)
|
|
|
$
|
—
|
|
|
$
|
154
|
|
|
$
|
(48)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 liabilities
|
$
|
—
|
|
|
$
|
(202)
|
|
|
$
|
—
|
|
|
$
|
154
|
|
|
$
|
(48)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2019
|
(In millions)
|
Purchases
|
|
Issuances
|
|
Sales
|
|
Settlements
|
|
Net purchases, issuances, sales and settlements
|
|
Transfers in
|
|
Transfers out
|
|
Net transfers in (out)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
$
|
199
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(10)
|
|
|
$
|
189
|
|
|
$
|
1
|
|
|
$
|
(71)
|
|
|
$
|
(70)
|
|
CLO
|
37
|
|
|
—
|
|
|
—
|
|
|
(3)
|
|
|
34
|
|
|
—
|
|
|
(104)
|
|
|
(104)
|
|
ABS
|
64
|
|
|
—
|
|
|
(21)
|
|
|
(27)
|
|
|
16
|
|
|
—
|
|
|
(137)
|
|
|
(137)
|
|
CMBS
|
251
|
|
|
—
|
|
|
(4)
|
|
|
(52)
|
|
|
195
|
|
|
—
|
|
|
(73)
|
|
|
(73)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6)
|
|
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS
|
—
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
(1)
|
|
|
78
|
|
|
—
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS
|
15
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
35
|
|
|
—
|
|
|
35
|
|
Equity securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2)
|
|
|
(2)
|
|
Mortgage loans
|
—
|
|
|
—
|
|
|
—
|
|
|
(4)
|
|
|
(4)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Investment funds
|
—
|
|
|
—
|
|
|
(2)
|
|
|
—
|
|
|
(2)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Short-term investments
|
200
|
|
|
—
|
|
|
—
|
|
|
(19)
|
|
|
181
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Investments in related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLO
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(37)
|
|
|
(37)
|
|
ABS
|
587
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
587
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLO
|
—
|
|
|
—
|
|
|
(7)
|
|
|
—
|
|
|
(7)
|
|
|
—
|
|
|
(23)
|
|
|
(23)
|
|
ABS
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity securities
|
31
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
31
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 assets
|
$
|
1,386
|
|
|
$
|
—
|
|
|
$
|
(34)
|
|
|
$
|
(116)
|
|
|
$
|
1,236
|
|
|
$
|
114
|
|
|
$
|
(453)
|
|
|
$
|
(339)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities – embedded derivative
|
$
|
—
|
|
|
$
|
(222)
|
|
|
$
|
—
|
|
|
$
|
119
|
|
|
$
|
(103)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 liabilities
|
$
|
—
|
|
|
$
|
(222)
|
|
|
$
|
—
|
|
|
$
|
119
|
|
|
$
|
(103)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2020
|
(In millions)
|
Purchases
|
|
Issuances
|
|
Sales
|
|
Settlements
|
|
Net purchases, issuances, sales and settlements
|
|
Transfers in
|
|
Transfers out
|
|
Net transfers in (out)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US state, municipal and political subdivisions
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(5)
|
|
|
$
|
(1)
|
|
|
$
|
(6)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign governments
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Corporate
|
245
|
|
|
—
|
|
|
—
|
|
|
(127)
|
|
|
118
|
|
|
97
|
|
|
(40)
|
|
|
57
|
|
CLO
|
90
|
|
|
—
|
|
|
(25)
|
|
|
(9)
|
|
|
56
|
|
|
36
|
|
|
(22)
|
|
|
14
|
|
ABS
|
95
|
|
|
—
|
|
|
(6)
|
|
|
(390)
|
|
|
(301)
|
|
|
64
|
|
|
(106)
|
|
|
(42)
|
|
CMBS
|
—
|
|
|
—
|
|
|
(4)
|
|
|
(1)
|
|
|
(5)
|
|
|
39
|
|
|
—
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS
|
35
|
|
|
—
|
|
|
(16)
|
|
|
—
|
|
|
19
|
|
|
—
|
|
|
—
|
|
|
—
|
|
RMBS
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
(1)
|
|
|
11
|
|
Equity securities
|
10
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Mortgage loans
|
—
|
|
|
—
|
|
|
—
|
|
|
(8)
|
|
|
(8)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
1
|
|
|
—
|
|
|
(7)
|
|
|
(25)
|
|
|
(31)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Investments in related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
761
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
761
|
|
|
—
|
|
|
—
|
|
|
—
|
|
CLO
|
11
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
—
|
|
ABS
|
7
|
|
|
—
|
|
|
(15)
|
|
|
(77)
|
|
|
(85)
|
|
|
—
|
|
|
(165)
|
|
|
(165)
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLO
|
13
|
|
|
—
|
|
|
(12)
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
ABS
|
671
|
|
|
—
|
|
|
(10)
|
|
|
(14)
|
|
|
647
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity securities
|
3
|
|
|
—
|
|
|
(2)
|
|
|
(4)
|
|
|
(3)
|
|
|
—
|
|
|
(6)
|
|
|
(6)
|
|
Investment funds
|
1,525
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,525
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 assets
|
$
|
3,468
|
|
|
$
|
—
|
|
|
$
|
(102)
|
|
|
$
|
(656)
|
|
|
$
|
2,710
|
|
|
$
|
254
|
|
|
$
|
(340)
|
|
|
$
|
(86)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities – embedded derivative
|
$
|
—
|
|
|
$
|
(964)
|
|
|
$
|
—
|
|
|
$
|
1,075
|
|
|
$
|
111
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 liabilities
|
$
|
—
|
|
|
$
|
(964)
|
|
|
$
|
—
|
|
|
$
|
1,075
|
|
|
$
|
111
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2019
|
(In millions)
|
Purchases
|
|
Issuances
|
|
Sales
|
|
Settlements
|
|
Net purchases, issuances, sales and settlements
|
|
Transfers in
|
|
Transfers out
|
|
Net transfers in (out)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US state, municipal and political subdivisions
|
$
|
40
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
277
|
|
|
—
|
|
|
(2)
|
|
|
(111)
|
|
|
164
|
|
|
1
|
|
|
(134)
|
|
|
(133)
|
|
CLO
|
64
|
|
|
—
|
|
|
—
|
|
|
(4)
|
|
|
60
|
|
|
—
|
|
|
(39)
|
|
|
(39)
|
|
ABS
|
260
|
|
|
—
|
|
|
(41)
|
|
|
(176)
|
|
|
43
|
|
|
—
|
|
|
(419)
|
|
|
(419)
|
|
CMBS
|
252
|
|
|
—
|
|
|
(4)
|
|
|
(94)
|
|
|
154
|
|
|
—
|
|
|
(18)
|
|
|
(18)
|
|
RMBS
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
(62)
|
|
|
(62)
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLO
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
ABS
|
6
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
5
|
|
|
78
|
|
|
—
|
|
|
78
|
|
RMBS
|
15
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
34
|
|
|
(79)
|
|
|
(45)
|
|
Equity securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2)
|
|
|
(2)
|
|
Mortgage loans
|
—
|
|
|
—
|
|
|
—
|
|
|
(5)
|
|
|
(5)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Investment funds
|
—
|
|
|
—
|
|
|
(5)
|
|
|
—
|
|
|
(5)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
248
|
|
|
—
|
|
|
—
|
|
|
(22)
|
|
|
226
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Investments in related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS securities, ABS
|
757
|
|
|
—
|
|
|
—
|
|
|
(9)
|
|
|
748
|
|
|
—
|
|
|
(103)
|
|
|
(103)
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLO
|
—
|
|
|
—
|
|
|
(54)
|
|
|
—
|
|
|
(54)
|
|
|
43
|
|
|
(35)
|
|
|
8
|
|
ABS
|
—
|
|
|
—
|
|
|
—
|
|
|
(15)
|
|
|
(15)
|
|
|
103
|
|
|
—
|
|
|
103
|
|
Equity securities
|
243
|
|
|
—
|
|
|
(4)
|
|
|
—
|
|
|
239
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Investment funds
|
19
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 assets
|
$
|
2,183
|
|
|
$
|
—
|
|
|
$
|
(110)
|
|
|
$
|
(437)
|
|
|
$
|
1,636
|
|
|
$
|
265
|
|
|
$
|
(891)
|
|
|
$
|
(626)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities – embedded derivative
|
$
|
—
|
|
|
$
|
(756)
|
|
|
$
|
—
|
|
|
$
|
372
|
|
|
$
|
(384)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 liabilities
|
$
|
—
|
|
|
$
|
(756)
|
|
|
$
|
—
|
|
|
$
|
372
|
|
|
$
|
(384)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Significant Unobservable Inputs—Significant unobservable inputs occur when we could not obtain or corroborate the quantitative detail of the inputs. This applies to fixed maturity securities, equity securities, mortgage loans and certain derivatives, as well as embedded derivatives in liabilities. Additional significant unobservable inputs are described below.
AFS and trading securities – For certain fixed maturity securities, internal models are used to calculate the fair value. We use a discounted cash flow approach. The discount rate is the significant unobservable input due to the determined credit spread being internally developed, illiquid, or as a result of other adjustments made to the base rate. The base rate represents a market comparable rate for securities with similar characteristics. This excludes assets for which significant unobservable inputs are not developed internally, primarily consisting of broker quotes.
Interest sensitive contract liabilities – embedded derivative – Significant unobservable inputs we use in the fixed indexed annuities embedded derivative of the interest sensitive contract liabilities valuation include:
1.Nonperformance risk – For contracts we issue, we use the credit spread, relative to the US Department of the Treasury (Treasury) curve, based on our public credit rating as of the valuation date. This represents our credit risk for use in the estimate of the fair value of embedded derivatives.
2.Option budget – We assume future hedge costs in the derivative’s fair value estimate. The level of option budgets determines the future costs of the options and impacts future policyholder account value growth.
3.Policyholder behavior – We regularly review the lapse and withdrawal assumptions (surrender rate). These are based on our initial pricing assumptions updated for actual experience. Actual experience may be limited for recently issued products.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following summarizes the unobservable inputs for AFS and trading securities and the embedded derivatives of fixed indexed annuities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
(In millions, except for percentages)
|
|
Fair value
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Minimum
|
|
Maximum
|
|
Weighted average
|
|
Impact of an increase in the input on fair value
|
AFS and trading securities
|
|
$
|
5,468
|
|
|
Discounted cash flow
|
|
Discount
|
|
2.0
|
%
|
|
35.0
|
%
|
|
5.7
|
%
|
1
|
|
Decrease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives
|
|
$
|
11,741
|
|
|
Option budget method
|
|
Nonperformance risk
|
|
0.1
|
%
|
|
1.5
|
%
|
|
0.8
|
%
|
2
|
|
Decrease
|
|
|
|
|
|
|
Option budget
|
|
0.6
|
%
|
|
3.6
|
%
|
|
1.9
|
%
|
3
|
|
Increase
|
|
|
|
|
|
|
Surrender rate
|
|
5.3
|
%
|
|
9.7
|
%
|
|
7.1
|
%
|
4
|
|
Decrease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Fair value
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Minimum
|
|
Maximum
|
|
Weighted average
|
|
Impact of an increase in the input on fair value
|
AFS and trading securities
|
|
$
|
1,289
|
|
|
Discounted cash flow
|
|
Discount
|
|
3.0
|
%
|
|
9.0
|
%
|
|
6.6
|
%
|
1
|
|
Decrease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities – fixed indexed annuities embedded derivatives
|
|
$
|
10,942
|
|
|
Option budget method
|
|
Nonperformance risk
|
|
0.2
|
%
|
|
1.1
|
%
|
|
0.6
|
%
|
2
|
|
Decrease
|
|
|
|
|
|
|
Option budget
|
|
0.7
|
%
|
|
3.7
|
%
|
|
1.9
|
%
|
3
|
|
Increase
|
|
|
|
|
|
|
Surrender rate
|
|
3.5
|
%
|
|
8.1
|
%
|
|
7.1
|
%
|
4
|
|
Decrease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 The discount weighted average is calculated based on the relative fair values of the securities.
|
2 The nonperformance risk weighted average is based on the projected excess benefits of reserves used in the calculation of the embedded derivative.
|
3 The option budget weighted average is calculated based on the indexed account values.
|
4 The surrender rate weighted average is calculated based on projected account values.
|
Financial Instruments Without Readily Determinable Fair Values—We have elected the measurement alternative for certain equity securities that do not have a readily determinable fair value. The equity securities are held at cost less any impairment. The carrying amount of the equity securities was $433 million with no recorded impairment as of September 30, 2020.
Fair Value of Financial Instruments Not Carried at Fair Value—The following represents our financial instruments not carried at fair value on the condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
(In millions)
|
Carrying Value
|
|
Fair Value
|
|
NAV
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
$
|
14,572
|
|
|
$
|
15,114
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,114
|
|
Investment funds
|
567
|
|
|
567
|
|
|
567
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Policy loans
|
387
|
|
|
387
|
|
|
—
|
|
|
—
|
|
|
387
|
|
|
—
|
|
Funds withheld at interest
|
47,334
|
|
|
47,334
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
47,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
840
|
|
|
852
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
852
|
|
Investments in related parties
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
640
|
|
|
628
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
628
|
|
Investment funds
|
2,958
|
|
|
2,958
|
|
|
2,958
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Funds withheld at interest
|
12,332
|
|
|
12,332
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,332
|
|
Other investments
|
467
|
|
|
489
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
489
|
|
Total financial assets not carried at fair value
|
$
|
80,097
|
|
|
$
|
80,661
|
|
|
$
|
3,525
|
|
|
$
|
—
|
|
|
$
|
387
|
|
|
$
|
76,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities
|
$
|
92,088
|
|
|
$
|
96,125
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
96,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
1,487
|
|
|
1,099
|
|
|
—
|
|
|
—
|
|
|
1,099
|
|
|
—
|
|
Securities to repurchase
|
1,098
|
|
|
1,098
|
|
|
—
|
|
|
—
|
|
|
1,098
|
|
|
—
|
|
Funds withheld liability
|
390
|
|
|
390
|
|
|
—
|
|
|
—
|
|
|
390
|
|
|
—
|
|
Total financial liabilities not carried at fair value
|
$
|
95,063
|
|
|
$
|
98,712
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,587
|
|
|
$
|
96,125
|
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(In millions)
|
Carrying Value
|
|
Fair Value
|
|
NAV
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
$
|
14,279
|
|
|
$
|
14,719
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,719
|
|
Investment funds
|
596
|
|
|
596
|
|
|
596
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Policy loans
|
417
|
|
|
417
|
|
|
—
|
|
|
—
|
|
|
417
|
|
|
—
|
|
Funds withheld at interest
|
14,380
|
|
|
14,380
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,380
|
|
Short-term investments
|
190
|
|
|
190
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
190
|
|
Other investments
|
65
|
|
|
65
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
65
|
|
Investments in related parties
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
653
|
|
|
641
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
641
|
|
Investment funds
|
2,731
|
|
|
2,731
|
|
|
2,731
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Funds withheld at interest
|
12,626
|
|
|
12,626
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,626
|
|
Other investments
|
487
|
|
|
537
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
537
|
|
Total financial assets not carried at fair value
|
$
|
46,424
|
|
|
$
|
46,902
|
|
|
$
|
3,327
|
|
|
$
|
—
|
|
|
$
|
417
|
|
|
$
|
43,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities
|
$
|
57,272
|
|
|
$
|
58,027
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
58,027
|
|
Short-term debt
|
475
|
|
|
475
|
|
|
—
|
|
|
—
|
|
|
475
|
|
|
—
|
|
Long-term debt
|
992
|
|
|
1,036
|
|
|
—
|
|
|
—
|
|
|
1,036
|
|
|
—
|
|
Securities to repurchase
|
512
|
|
|
512
|
|
|
—
|
|
|
—
|
|
|
512
|
|
|
—
|
|
Funds withheld liability
|
377
|
|
|
377
|
|
|
—
|
|
|
—
|
|
|
377
|
|
|
—
|
|
Total financial liabilities not carried at fair value
|
$
|
59,628
|
|
|
$
|
60,427
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,400
|
|
|
$
|
58,027
|
|
We estimate the fair value for financial instruments not carried at fair value using the same methods and assumptions as those we carry at fair value. The financial instruments presented above are reported at carrying value on the condensed consolidated balance sheets; however, in the case of policy loans, funds withheld at interest and liability, short-term investments, short-term debt, and securities to repurchase, 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.
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. Reinsurance
Reinsurance transactions—On June 18, 2020, we entered into a funds withheld coinsurance agreement effective June 1, 2020 with Jackson National Life Insurance Company (Jackson) to reinsure a block of fixed and fixed indexed annuities. Additionally, as part of the transaction, we made a $500 million equity investment in an indirect parent of Jackson, which closed on July 17, 2020. The following summarizes the transaction:
|
|
|
|
|
|
(In millions)
|
Funds Withheld
|
Liabilities assumed
|
$
|
27,439
|
|
Less: Net consideration received
|
28,805
|
|
Unearned revenue reserve1
|
$
|
(1,366)
|
|
|
|
1 Included within interest sensitive contract liabilities on the condensed consolidated balance sheets.
|
Unearned revenue reserve balances are amortized over the life of the reinsurance agreements on a basis consistent with our DAC amortization policy.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Effective July 1, 2020, we restructured our reinsurance agreement with Mass Mutual Life Insurance Company (MassMutual). MassMutual recaptured the existing coinsurance agreement and we immediately entered into a new funds withheld coinsurance agreement with our ALRe subsidiary. As a result, we recorded a $5,021 million increase in funds withheld at interest and a corresponding decrease in assets, primarily consisting of investments and cash.
The following summarizes the effect of reinsurance on premiums and future policy and other policy benefits on the condensed consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Premiums
|
|
|
|
|
|
|
|
Direct
|
$
|
42
|
|
|
$
|
2,661
|
|
|
$
|
1,424
|
|
|
$
|
5,405
|
|
Reinsurance assumed
|
101
|
|
|
57
|
|
|
284
|
|
|
193
|
|
Reinsurance ceded
|
(31)
|
|
|
(30)
|
|
|
(101)
|
|
|
(123)
|
|
Total premiums
|
$
|
112
|
|
|
$
|
2,688
|
|
|
$
|
1,607
|
|
|
$
|
5,475
|
|
|
|
|
|
|
|
|
|
Future policy and other policy benefits
|
|
|
|
|
|
|
|
Direct
|
$
|
385
|
|
|
$
|
3,025
|
|
|
$
|
2,404
|
|
|
$
|
6,481
|
|
Reinsurance assumed
|
161
|
|
|
77
|
|
|
370
|
|
|
313
|
|
Reinsurance ceded
|
(107)
|
|
|
(147)
|
|
|
(305)
|
|
|
(399)
|
|
Total future policy and other policy benefits
|
$
|
439
|
|
|
$
|
2,955
|
|
|
$
|
2,469
|
|
|
$
|
6,395
|
|
7. Deferred Acquisition Costs, Deferred Sales Inducements and Value of Business Acquired
The following represents a rollforward of deferred acquisition costs (DAC), deferred sales inducements (DSI) and value of business acquired (VOBA):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
DAC
|
|
DSI
|
|
VOBA
|
|
Total
|
Balance at December 31, 2019
|
$
|
3,274
|
|
|
$
|
820
|
|
|
$
|
914
|
|
|
$
|
5,008
|
|
Adoption of accounting standard
|
12
|
|
|
5
|
|
|
5
|
|
|
22
|
|
Additions
|
470
|
|
|
124
|
|
|
—
|
|
|
594
|
|
Unlocking
|
(36)
|
|
|
(13)
|
|
|
(11)
|
|
|
(60)
|
|
Amortization
|
(175)
|
|
|
(24)
|
|
|
(25)
|
|
|
(224)
|
|
Impact of unrealized investment (gains) losses
|
(116)
|
|
|
(45)
|
|
|
(14)
|
|
|
(175)
|
|
Balance at September 30, 2020
|
$
|
3,429
|
|
|
$
|
867
|
|
|
$
|
869
|
|
|
$
|
5,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
DAC
|
|
DSI
|
|
VOBA
|
|
Total
|
Balance at December 31, 2018
|
$
|
3,921
|
|
|
$
|
799
|
|
|
$
|
1,187
|
|
|
$
|
5,907
|
|
Additions
|
521
|
|
|
187
|
|
|
—
|
|
|
708
|
|
Unlocking
|
(117)
|
|
|
(9)
|
|
|
(24)
|
|
|
(150)
|
|
Amortization
|
(637)
|
|
|
(29)
|
|
|
(37)
|
|
|
(703)
|
|
Impact of unrealized investment (gains) losses
|
(458)
|
|
|
(141)
|
|
|
(203)
|
|
|
(802)
|
|
Balance at September 30, 2019
|
$
|
3,230
|
|
|
$
|
807
|
|
|
$
|
923
|
|
|
$
|
4,960
|
|
8. Debt
Short-term Borrowing—During the second quarter of 2020, we converted $400 million of short-term debt outstanding with the FHLB to funding agreements. See Note 12 – Commitments and Contingencies for further discussion regarding FHLB funding agreements.
Senior Notes—During the second quarter of 2020, we issued $500 million of senior unsecured notes due April 3, 2030. The senior notes have a 6.150% coupon rate, payable semi-annually. We can call the senior notes, in whole or in part, at any time prior to January 3, 2030, 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 second supplemental indenture, dated April 3, 2020) plus 50 basis points, and any accrued and unpaid interest. Thereafter, we can call the notes, in whole or in part, at a price equal to 100% of the principal and any accrued and unpaid interest.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
In the fourth quarter of 2020, we issued $500 million of senior unsecured notes due January 15, 2031. The senior notes have a 3.500% coupon rate, payable semi-annually. We can call the senior notes, in whole or in part, at any time prior to October 15, 2030, 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 third supplemental indenture, dated October 8, 2020) plus 45 basis points, and any accrued and unpaid interest. Thereafter, we can call the notes, in whole or in part, at a price equal to 100% of the principal and any accrued and unpaid interest.
9. Earnings Per Share
The following represents our basic and diluted earnings per share (EPS) calculations, which are calculated using unrounded amounts:
|
|
|
|
|
|
|
Three months ended September 30, 2020
|
(In millions, except per share data)
|
Class A
|
Net income available to Athene Holding Ltd. common shareholders – basic and diluted
|
$
|
622
|
|
|
|
Basic weighted average shares outstanding
|
193.1
|
|
Dilutive effect of stock compensation plans
|
4.0
|
|
Diluted weighted average shares outstanding
|
197.1
|
|
|
|
Earnings per share
|
|
Basic
|
$
|
3.22
|
|
Diluted
|
$
|
3.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 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
|
Net income available to Athene Holding Ltd. common shareholders – basic and diluted
|
$
|
227
|
|
|
$
|
38
|
|
|
$
|
5
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
151.6
|
|
|
25.4
|
|
|
3.3
|
|
|
0.8
|
|
|
1.0
|
|
|
2.2
|
|
Dilutive effect of stock compensation plans
|
0.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
Diluted weighted average shares outstanding
|
152.0
|
|
|
25.4
|
|
|
3.3
|
|
|
0.8
|
|
|
1.0
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.50
|
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
Diluted
|
$
|
1.50
|
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
|
$
|
1.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2020
|
(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 (loss) available to Athene Holding Ltd. common shareholders – basic and diluted
|
$
|
508
|
|
|
$
|
(98)
|
|
|
$
|
(13)
|
|
|
$
|
(3)
|
|
|
$
|
(4)
|
|
|
$
|
(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
182.8
|
|
|
25.4
|
|
|
3.3
|
|
|
0.8
|
|
|
1.0
|
|
|
2.4
|
|
Dilutive effect of stock compensation plans
|
3.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted weighted average shares outstanding
|
185.9
|
|
|
25.4
|
|
|
3.3
|
|
|
0.8
|
|
|
1.0
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
2.78
|
|
|
$
|
(3.87)
|
|
|
$
|
(3.87)
|
|
|
$
|
(3.87)
|
|
|
$
|
(3.87)
|
|
|
$
|
(3.87)
|
|
Diluted
|
$
|
2.73
|
|
|
$
|
(3.87)
|
|
|
$
|
(3.87)
|
|
|
$
|
(3.87)
|
|
|
$
|
(3.87)
|
|
|
$
|
(3.87)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2019
|
(In millions, except per share data)
|
Class A
|
|
Class B
|
|
Class M-1
|
|
Class M-2
|
|
Class M-3
|
|
Class M-4
|
Net income available to Athene Holding Ltd. common shareholders – basic and diluted
|
$
|
1,411
|
|
|
$
|
228
|
|
|
$
|
30
|
|
|
$
|
7
|
|
|
$
|
9
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
157.2
|
|
|
25.4
|
|
|
3.3
|
|
|
0.8
|
|
|
1.0
|
|
|
2.2
|
|
Dilutive effect of stock compensation plans
|
0.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
Diluted weighted average shares outstanding
|
157.6
|
|
|
25.4
|
|
|
3.3
|
|
|
0.8
|
|
|
1.0
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
8.97
|
|
|
$
|
8.97
|
|
|
$
|
8.97
|
|
|
$
|
8.97
|
|
|
$
|
8.97
|
|
|
$
|
8.97
|
|
Diluted
|
$
|
8.95
|
|
|
$
|
8.97
|
|
|
$
|
8.97
|
|
|
$
|
8.97
|
|
|
$
|
8.97
|
|
|
$
|
7.77
|
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
During the first quarter of 2020, as a result of the closing of the share transaction discussed further in Note 11 – Related Parties, we converted outstanding Class B shares to Class A shares and Class M shares were converted to Class A shares and warrants. As a result, the EPS calculation for the nine months ended September 30, 2020 allocates all net income for the second and third quarters to Class A shares. For the first quarter, the EPS calculation used only the weighted average shares for the first quarter to allocate first quarter net income for Class B and Class M shares; however, for Class B and Class M shares, the weighted average shares outstanding represent only that period of time that the shares were outstanding. The warrants issued as part of the conversion of the Class M shares are evaluated for dilution within the dilutive effect of stock compensation plans.
We use the two-class method for allocating net income available to Athene Holding Ltd. common shareholders to each class of our common stock. 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 2.8 million and 32.0 million shares, restricted stock units, options and warrants as of September 30, 2020 and 2019, respectively.
10. Equity
Preferred Stock—We have three series of preferred stock: 6.35% Fixed-to-Floating Rate Perpetual Non-Cumulative Preference Shares, Series A (Series A); 5.625% Fixed Rate Perpetual Non-Cumulative Preference Shares, Series B (Series B); and 6.375% Fixed-Rate Reset Perpetual Non-Cumulative Preference Shares, Series C (Series C) as summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
Series B
|
|
Series C
|
Authorized, issued and outstanding
|
34,500
|
|
|
13,800
|
|
|
24,000
|
|
Liquidation preference per share
|
$
|
25,000
|
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
The following summarizes dividends declared and paid per preferred stock share by series:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(Per share)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Series A
|
$
|
396.87
|
|
|
$
|
485.07
|
|
|
$
|
1,190.63
|
|
|
$
|
485.07
|
|
Series B
|
351.57
|
|
|
—
|
|
|
1,054.69
|
|
|
—
|
|
Series C
|
482.55
|
|
|
—
|
|
|
482.55
|
|
|
—
|
|
The following summarizes dividends declared and paid in the aggregate on the preferred stock by series:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Series A
|
$
|
14
|
|
|
$
|
17
|
|
|
$
|
41
|
|
|
$
|
17
|
|
Series B
|
4
|
|
|
—
|
|
|
14
|
|
|
—
|
|
Series C
|
12
|
|
|
—
|
|
|
12
|
|
|
—
|
|
Total dividends declared and paid
|
$
|
30
|
|
|
$
|
17
|
|
|
$
|
67
|
|
|
$
|
17
|
|
Preferred stock dividends are payable on a non-cumulative basis only when, as and if declared, quarterly in arrears on the 30th day of March, June, September and December of each year. Preferred stock ranks senior to our common stock with respect to dividends, to the extent declared, and in liquidation, to the extent of the liquidation preference.
Common Stock—During the first quarter of 2020, shareholders approved amendments to our bye-laws which eliminated our multi-class share structure at the closing of the share transaction with Apollo. See Note 11 – Related Parties for further information on this transaction. On February 28, 2020, all Class B shares were converted to Class A shares on a one-to-one basis. Class M shares were converted to Class A shares representing 5% of the Class M value and warrants representing 95% of the Class M value. The warrants were issued with substantially the same terms, including the same economic terms, as the Class M shares.
Our bye-laws place certain restrictions on Class A shares such that a holder of Class A shares, except for shareholders permitted by our board of directors, which include members of the Apollo Group, as defined in our bye-laws, cannot control greater than 9.9% of the total outstanding vote and if a holder of Class A shares were to control greater than 9.9%, then such holder’s voting power is automatically reduced to 9.9% and the other holders of Class A shares would vote the remainder on a prorated basis.
Share Repurchase Authorization
Our board of directors has approved authorizations of $1,567 million for the repurchase of our Class A shares under our repurchase program. 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.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following summarizes the activity on our share repurchase authorization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
Beginning balance
|
$
|
640
|
|
|
$
|
150
|
|
Additional authorization
|
—
|
|
|
717
|
|
Repurchases
|
(416)
|
|
|
(544)
|
|
Ending balance
|
$
|
224
|
|
|
$
|
323
|
|
The table below shows the changes in each class of shares issued and outstanding:
|
|
|
|
|
|
|
|
(In millions)
|
Nine months ended September 30, 2020
|
|
|
|
|
Class A
|
|
|
|
Beginning balance
|
143.2
|
|
|
|
Issued shares
|
35.9
|
|
|
|
Forfeited shares
|
(0.1)
|
|
|
|
Repurchased shares
|
(13.2)
|
|
|
|
Converted from Class B shares
|
25.4
|
|
|
|
Converted from Class M shares
|
0.3
|
|
|
|
Ending balance
|
191.5
|
|
|
|
Class B
|
|
|
|
Beginning balance
|
25.4
|
|
|
|
|
|
|
|
|
|
|
|
Converted to Class A shares
|
(25.4)
|
|
|
|
|
|
|
|
Ending balance
|
—
|
|
|
|
Class M-1
|
|
|
|
Beginning balance
|
3.3
|
|
|
|
Converted to Class A shares
|
(0.2)
|
|
|
|
|
|
|
|
|
|
|
|
Converted to warrants
|
(3.1)
|
|
|
|
Ending balance
|
—
|
|
|
|
Class M-2
|
|
|
|
Beginning balance
|
0.8
|
|
|
|
|
|
|
|
Converted to Class A shares
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
Converted to warrants
|
(0.8)
|
|
|
|
Ending balance
|
—
|
|
|
|
Class M-3
|
|
|
|
Beginning balance
|
1.0
|
|
|
|
|
|
|
|
Converted to Class A shares
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
Converted to warrants
|
(1.0)
|
|
|
|
Ending balance
|
—
|
|
|
|
Class M-4
|
|
|
|
Beginning balance
|
4.0
|
|
|
|
|
|
|
|
Converted to Class A shares
|
(0.1)
|
|
|
|
|
|
|
|
Converted to warrants
|
(3.6)
|
|
|
|
Repurchased shares
|
(0.3)
|
|
|
|
Ending balance
|
—
|
|
|
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Accumulated Other Comprehensive Income (Loss)—The following provides the details of AOCI and changes in AOCI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Unrealized investment gains (losses) on AFS securities without a credit allowance
|
|
Unrealized investment gains (losses) on AFS securities with a credit allowance
|
|
DAC, DSI, VOBA and future policy benefits adjustments on AFS securities
|
|
Unrealized gains (losses) on hedging instruments
|
|
Foreign currency translation and other adjustments
|
|
Accumulated other comprehensive income (loss)
|
Balance at June 30, 2020
|
$
|
3,444
|
|
|
$
|
(702)
|
|
|
$
|
(873)
|
|
|
$
|
320
|
|
|
$
|
(5)
|
|
|
$
|
2,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
646
|
|
|
768
|
|
|
(306)
|
|
|
(178)
|
|
|
10
|
|
|
940
|
|
Less: Reclassification adjustments for gains (losses) realized in net income (loss)1
|
85
|
|
|
—
|
|
|
(20)
|
|
|
—
|
|
|
—
|
|
|
65
|
|
Less: Income tax expense (benefit)
|
107
|
|
|
153
|
|
|
(61)
|
|
|
(42)
|
|
|
—
|
|
|
157
|
|
Less: Other comprehensive income (loss) attributable to NCI
|
(10)
|
|
|
14
|
|
|
—
|
|
|
8
|
|
|
2
|
|
|
14
|
|
Balance at September 30, 2020
|
$
|
3,908
|
|
|
$
|
(101)
|
|
|
$
|
(1,098)
|
|
|
$
|
176
|
|
|
$
|
3
|
|
|
$
|
2,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Recognized in investment related gains (losses) on the condensed consolidated statements of income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Unrealized investment gains (losses) on AFS securities
|
|
|
|
DAC, DSI, VOBA and future policy benefits adjustments on AFS securities
|
|
|
|
Unrealized gains (losses) on hedging instruments
|
|
Foreign currency translation and other adjustments
|
|
Accumulated other comprehensive income (loss)
|
Balance at June 30, 2019
|
$
|
2,349
|
|
|
|
|
$
|
(661)
|
|
|
|
|
$
|
77
|
|
|
$
|
(5)
|
|
|
$
|
1,760
|
|
Other comprehensive income (loss) before reclassifications
|
1,132
|
|
|
|
|
(392)
|
|
|
|
|
124
|
|
|
(1)
|
|
|
863
|
|
Less: Reclassification adjustments for gains (losses) realized in net income (loss)1
|
7
|
|
|
|
|
(2)
|
|
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Less: Income tax expense (benefit)
|
232
|
|
|
|
|
(82)
|
|
|
|
|
26
|
|
|
—
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019
|
$
|
3,242
|
|
|
|
|
$
|
(969)
|
|
|
|
|
$
|
175
|
|
|
$
|
(6)
|
|
|
$
|
2,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Recognized in investment related gains (losses) on the condensed consolidated statements of income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Unrealized investment gains (losses) on AFS securities without a credit allowance
|
|
Unrealized investment gains (losses) on AFS securities with a credit allowance
|
|
DAC, DSI, VOBA and future policy benefits adjustments on AFS securities
|
|
Unrealized gains (losses) on hedging instruments
|
|
Foreign currency translation and other adjustments
|
|
Accumulated other comprehensive income (loss)
|
Balance at December 31, 2019
|
$
|
3,102
|
|
|
$
|
—
|
|
|
$
|
(879)
|
|
|
$
|
61
|
|
|
$
|
(3)
|
|
|
$
|
2,281
|
|
Adoption of accounting standards
|
4
|
|
|
(4)
|
|
|
(6)
|
|
|
—
|
|
|
—
|
|
|
(6)
|
|
Other comprehensive income (loss) before reclassifications
|
1,403
|
|
|
(116)
|
|
|
(358)
|
|
|
140
|
|
|
9
|
|
|
1,078
|
|
Less: Reclassification adjustments for gains (losses) realized in net income (loss)1
|
306
|
|
|
—
|
|
|
(87)
|
|
|
—
|
|
|
—
|
|
|
219
|
|
Less: Income tax expense (benefit)
|
213
|
|
|
(23)
|
|
|
(58)
|
|
|
33
|
|
|
—
|
|
|
165
|
|
Less: Other comprehensive income (loss) attributable to NCI
|
82
|
|
|
4
|
|
|
—
|
|
|
(8)
|
|
|
3
|
|
|
81
|
|
Balance at September 30, 2020
|
$
|
3,908
|
|
|
$
|
(101)
|
|
|
$
|
(1,098)
|
|
|
$
|
176
|
|
|
$
|
3
|
|
|
$
|
2,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Recognized in investment related gains (losses) on the condensed consolidated statements of income.
|
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Unrealized investment gains (losses) on AFS securities
|
|
|
|
DAC, DSI, VOBA and future policy benefits adjustments on AFS securities
|
|
|
|
Unrealized gains (losses) on hedging instruments
|
|
Foreign currency translation and other adjustments
|
|
Accumulated other comprehensive income (loss)
|
Balance at December 31, 2018
|
$
|
(628)
|
|
|
|
|
$
|
121
|
|
|
|
|
$
|
39
|
|
|
$
|
(4)
|
|
|
$
|
(472)
|
|
Other comprehensive income (loss) before reclassifications
|
4,889
|
|
|
|
|
(1,391)
|
|
|
|
|
171
|
|
|
(2)
|
|
|
3,667
|
|
Less: Reclassification adjustments for gains (losses) realized in net income (loss)1
|
35
|
|
|
|
|
(10)
|
|
|
|
|
—
|
|
|
—
|
|
|
25
|
|
Less: Income tax expense (benefit)
|
984
|
|
|
|
|
(291)
|
|
|
|
|
35
|
|
|
—
|
|
|
728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019
|
$
|
3,242
|
|
|
|
|
$
|
(969)
|
|
|
|
|
$
|
175
|
|
|
$
|
(6)
|
|
|
$
|
2,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Recognized in investment related gains (losses) on the condensed consolidated statements of income.
|
11. Related Parties
Apollo
Current fee structure – Substantially all of our investments are managed by Apollo, which 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.
During the second quarter of 2019, we entered into the Seventh Amended and Restated Fee Agreement, dated as of June 10, 2019, between us and AGM’s subsidiary, Apollo Insurance Solutions Group LP (ISG) (Fee Agreement). Under the Fee Agreement, effective retroactive to January 1, 2019, we pay Apollo:
(1)a base management fee equal to the sum of (i) 0.225% per year of the lesser of (A) the aggregate market value of substantially all of the assets in substantially all of the investment accounts of or relating to us (collectively, the Accounts) on December 31, 2018 of $103.4 billion (Backbook Value) and (B) the aggregate market value of substantially all of the assets in the Accounts at the end of the respective month, plus (ii) 0.15% per year of the amount, if any (Incremental Value), by which the aggregate market value of substantially all of the assets in the Accounts at the end of the respective month exceeds the Backbook Value; plus
(2)with respect to each asset in an Account, subject to certain exceptions, that is managed by Apollo and that belongs to a specified asset class tier (Core, Core Plus, Yield, and High Alpha), a sub-allocation fee as follows, which will, in the case of assets acquired after January 1, 2019, be subject to a cap of 10% of the applicable asset’s gross book yield:
(i)0.065% of the market value of Core assets, which include public investment grade corporate bonds, municipal securities, agency RMBS or CMBS, and obligations of governmental agencies or government sponsored entities that are not expressly backed by the US government;
(ii)0.13% of the market value of Core Plus assets, which include private investment grade corporate bonds, fixed rate first lien commercial mortgage loans (CML), and certain obligations issued or assumed by financial institutions and determined by Apollo to be “Tier 2 Capital” under Basel III, a set of recommendations for international banking regulations developed by the Bank for International Settlements;
(iii)0.375% of the market value of Yield assets, which include non-agency RMBS, investment grade CLO, CMBS and other ABS (other than RMBS and CLO), emerging market investments, below investment grade corporate bonds, subordinated debt obligations, hybrid securities or surplus notes issued or assumed by a financial institution, rated preferred equity, residential mortgage loans (RML), bank loans, investment grade infrastructure debt, and floating rate CMLs on slightly transitional or stabilized traditional real estate;
(iv)0.70% of the market value of High Alpha assets, which include subordinated CML, below investment grade CLO, unrated preferred equity, debt obligations originated by MidCap, CMLs for redevelopment or construction loans or secured by non-traditional real estate, below investment grade infrastructure debt, certain loans originated directly by Apollo (other than MidCap loans), and agency mortgage derivatives; and
(v)0.00% of the market value of cash and cash equivalents, US treasuries, non-preferred equities and alternatives.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following represents assets based on the above sub-allocation structure:
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(In millions, except percentages)
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September 30, 2020
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Percent of Total
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December 31, 2019
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Percent of Total
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Core
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$
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48,409
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28.7
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%
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$
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32,474
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25.5
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%
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Core Plus
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39,543
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23.4
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%
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30,155
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23.6
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%
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Yield
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58,791
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34.8
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%
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48,557
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38.0
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%
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High Alpha
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6,776
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4.0
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%
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5,062
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4.0
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%
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Other
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15,289
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9.1
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%
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11,302
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8.9
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%
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Total sub-allocation assets
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$
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168,808
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100.0
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%
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$
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127,550
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100.0
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%
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Additionally, the Fee Agreement provides for a possible payment by Apollo to us, or a possible payment by us to Apollo, equal to 0.025% of the Incremental Value as of the end of each year, beginning on December 31, 2019, depending upon the percentage of our investments that consist of Core and Core Plus assets. If more than 60% of our invested assets that are subject to the sub-allocation fees are invested in Core and Core Plus assets, we will receive a 0.025% fee reduction on the Incremental Value. If less than 50% of our invested assets that are subject to the sub-allocation fee are invested in Core and Core Plus assets, we will pay an additional fee of 0.025% on Incremental Value.
During the three months ended September 30, 2020 and 2019, we incurred management fees, inclusive of the base and sub-allocation fees, of $111 million and $127 million, respectively. During the nine months ended September 30, 2020 and 2019, we incurred management fees, inclusive of the base and sub-allocation fees, of $362 million and $313 million, respectively. Management fees are included within net investment income on the condensed consolidated statements of income. As of September 30, 2020 and December 31, 2019, management fees payable were $31 million and $42 million, respectively, and are included in other liabilities on the condensed consolidated balance sheets.
In addition to the assets on our condensed consolidated balance sheets managed by Apollo, Apollo manages the assets underlying our funds withheld receivable. For these assets, the third-party cedants pay Apollo fees based upon the same fee construct we have with Apollo. Such fees directly reduce the settlement payments that we receive from the third-party cedant and, as such, we indirectly pay those fees. Finally, Apollo charges management fees and carried interest on Apollo-managed funds and other entities in which we invest. Neither the fees paid by such third-party cedants nor the fees or carried interest paid by such Apollo-managed funds or other entities are included in the investment management fee amounts cited above.
Investment management agreement (IMA) termination – Our bye-laws currently provide that we may not, and will cause our subsidiaries not to, terminate any IMA among us or any of our subsidiaries, on the one hand, and a member of the Apollo Group (as defined in our bye-laws), on the other hand, other than on June 4, 2023 or any two year anniversary of such date (each such date, an IMA Termination Election Date) and any termination on an IMA Termination Election Date requires (i) the approval of two-thirds of our Independent Directors (as defined in the bye-laws) and (ii) prior written notice to the applicable Apollo subsidiary of such termination at least 30 days, but not more than 90 days, prior to an IMA Termination Election Date. If our Independent Directors make such election to terminate and notice of such termination is delivered, the termination will be effective no earlier than the second anniversary of the applicable IMA Termination Election Date (IMA Termination Effective Date). Notwithstanding the foregoing, (A) except as set forth in clause (B) below, our board of directors may only elect to terminate an IMA on an IMA Termination Election Date if two-thirds of our Independent Directors determine, in their sole discretion and acting in good faith, that either (i) there has been unsatisfactory long-term performance materially detrimental to us by the applicable Apollo subsidiary or (ii) the fees being charged by the applicable Apollo subsidiary are unfair and excessive compared to a comparable asset manager (provided, that in either case such Independent Directors must deliver notice of any such determination to the applicable Apollo subsidiary and the applicable Apollo subsidiary will have until the applicable IMA Termination Effective Date to address such concerns, and provided, further, that in the case of such a determination that the fees being charged by the applicable Apollo subsidiary are unfair and excessive, the applicable Apollo subsidiary has the right to lower its fees to match the fees of such comparable asset manager) and (B) upon the determination by two-thirds of our Independent Directors, we or our subsidiaries may also terminate an IMA with the applicable Apollo subsidiary, on a date other than an IMA Termination Effective Date, as a result of either (i) a material violation of law relating to the applicable Apollo subsidiary’s advisory business, or (ii) the applicable Apollo subsidiary’s gross negligence, willful misconduct or reckless disregard of its obligations under the relevant agreement, in each case of this clause (B), that is materially detrimental to us, and in either case of this clause (B), subject to the delivery of written notice at least 30 days prior to such termination; provided, that in connection with an event described in clause (B)(i) or (B)(ii), the applicable Apollo subsidiary shall have the right to dispute such determination of the Independent Directors within 30 days after receiving notice from us of such determination, in which case the matter will be submitted to binding arbitration and such IMA shall continue to remain in effect during the period of the arbitration (the events described in the foregoing clauses (A) and (B) are referred to in more detail in our bye-laws as “AHL Cause”).
Governance – We have a management investment committee, which includes members of our senior management and reports to the risk committee of our board of directors. The committee focuses on strategic decisions involving our investment portfolio, such as approving investment limits, new asset classes and our allocation strategy, reviewing large asset transactions, as well as monitoring our credit risk, and the management of our assets and liabilities.
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. Also, James Belardi, our Chief Executive Officer, is an employee of ISG and receives remuneration from acting as Chief Executive Officer of ISG. Mr. Belardi also owns a 5% profit interest in ISG (Interest). It is expected that the Interest will be revised such that Mr. Belardi will receive a lesser interest in the equity of ISG and also receive a specified percentage of other fee streams earned by Apollo, potentially comprised of or including the sub-allocation fees. Additionally, six of the sixteen members of our board of directors are employees of or consultants to Apollo (including Mr. Belardi). In order to protect against potential conflicts of interest resulting from transactions into which we have entered and will continue to enter into with the Apollo Group, our bye-laws require us to maintain a conflicts committee comprised solely of directors who are not officers or employees of any member of the Apollo Group. The conflicts committee reviews and approves material transactions between us and the Apollo Group, subject to certain exceptions.
Other related party transactions
A-A Mortgage – We have an equity method investment of $666 million and $487 million as of September 30, 2020 and December 31, 2019, respectively, in A-A Mortgage, which has an investment in AmeriHome. We have a loan purchase agreement with AmeriHome. The agreement allows us to purchase residential mortgage loans which AmeriHome has purchased from correspondent sellers and pooled for sale in the secondary market. AmeriHome retains the servicing rights to the sold loans. We purchased $0 million and $254 million of residential mortgage loans under this agreement during the three months ended September 30, 2020 and 2019, respectively. We purchased $169 million and $254 million of residential mortgage loans under this agreement during the nine months ended September 30, 2020 and 2019, respectively. Additionally, we hold ABS securities issued by AmeriHome affiliates of $165 million and $170 million as of September 30, 2020 and December 31, 2019, respectively, which are included in related party AFS securities on the condensed consolidated balances sheets. We also have commitments to make additional equity investments in A-A Mortgage of $125 million as of September 30, 2020. Additionally, on October 26, 2020, we invested in $195 million of unsecured notes issued by AmeriHome.
MidCap – During the third quarter of 2020, AAA Investment (Co Invest VII), L.P. (CoInvest VII) was dissolved. CoInvest VII held a significant investment in MidCap. CoInvest VII was included in related party investment funds on the condensed consolidated balance sheets and was reflected as a consolidated VIE prior to the first quarter of 2020. Subsequent to the dissolution of CoInvest VII, we now hold MidCap directly as profit participating notes, which are included in related party trading ABS securities on the condensed consolidated balance sheets. We have also advanced amounts under a subordinated debt facility to MidCap. During the second quarter of 2020, we invested $67 million in MidCap redeemable preferred stock. The subordinated debt facility and redeemable preferred stock are included in related party other investments and related party trading securities, respectively, on the condensed consolidated balance sheets. The following summarizes these investments in MidCap:
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(In millions)
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September 30, 2020
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December 31, 2019
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Investment fund
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$
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—
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$
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547
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Profit participating notes
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532
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—
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Subordinated debt facility
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322
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339
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Redeemable preferred stock
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77
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—
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Total investment in MidCap
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$
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931
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$
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886
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Additionally, we hold ABS and CLO securities issued by MidCap affiliates of $537 million and $624 million as of September 30, 2020 and December 31, 2019, respectively, which are included in related party AFS securities on the condensed consolidated balance sheets.
Athora – We have a cooperation agreement with Athora, pursuant to which, among other things, (1) for a period of 30 days from the receipt of notice of a cession, we have the right of first refusal to reinsure (i) up to 50% of the liabilities ceded from Athora’s reinsurance subsidiaries to Athora Life Re Ltd. and (ii) up to 20% of the liabilities ceded from a third party to any of Athora’s insurance subsidiaries, subject to a limitation in the aggregate of 20% of Athora’s liabilities, (2) Athora agreed to cause its insurance subsidiaries to consider the purchase of certain funding agreements and/or other spread instruments issued by our insurance subsidiaries, subject to a limitation that the fair market value of such funding agreements purchased by any of Athora’s insurance subsidiaries may generally not exceed 3% of the fair market value of such subsidiary’s total assets, (3) we provide Athora with a right of first refusal to pursue acquisition and reinsurance transactions in Europe (other than the United Kingdom (UK)) and (4) Athora provides us and our subsidiaries with a right of first refusal to pursue acquisition and reinsurance transactions in North America and the UK. Notwithstanding the foregoing, pursuant to the cooperation agreement, Athora is only required to use its reasonable best efforts to cause its subsidiaries to adhere to the provisions set forth in the cooperation agreement and therefore Athora’s ability to cause its subsidiaries to act pursuant to the cooperation agreement may be limited by, among other things, legal prohibitions or the inability to obtain the approval of the board of directors or other applicable governing body of the applicable subsidiary, which approval is solely at the discretion of such governing body. As of September 30, 2020, we have not exercised our right of first refusal to reinsure liabilities ceded to Athora’s insurance or reinsurance subsidiaries.
Our investment in Athora, which is included in related party investment funds on the condensed consolidated balance sheets, was $572 million and $132 million as of September 30, 2020 and December 31, 2019, respectively. During the second quarter of 2020, we contributed capital of $361 million to Athora. Additionally, as of September 30, 2020 and December 31, 2019, we had $117 million and $146 million, respectively, of funding agreements outstanding to Athora. We also have commitments to make additional equity investments in Athora of $370 million as of September 30, 2020.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Venerable – We have coinsurance and modco agreements with Venerable Insurance and Annuity Company (VIAC, formerly Voya Insurance and Annuity Company). VIAC is a related party due to our minority equity investment in its holding company’s parent, VA Capital Company LLC (VA Capital), which was $108 million and $99 million as of September 30, 2020 and December 31, 2019, respectively. The minority equity investment in VA Capital is included in related party investment funds on the condensed consolidated balance sheets and accounted for as an equity method investment. VA Capital is owned by a consortium of investors, led by affiliates of AGM, Crestview Partners and Reverence Capital Partners, and is the parent of Venerable, which is the parent of VIAC. Additionally, we have a 15-year term loan receivable from Venerable due in 2033, which is included in related party other investments on the condensed consolidated balance sheets. The loan is held at the principal balance less allowances and was $145 million and $148 million as of September 30, 2020 and December 31, 2019, respectively. While management views the overall transactions with Venerable as favorable to us, the stated interest rate of 6.257% on the term loan to Venerable represents a below-market interest rate, and management considered such rate as part of its evaluation and pricing of the reinsurance transactions.
Strategic Partnership – We have an agreement pursuant to which we may invest up to $2.5 billion over three years in funds managed by Apollo entities (Strategic Partnership). This arrangement is intended to permit us to invest across the Apollo alternatives platform into credit-oriented, strategic and other alternative investments in a manner and size that is consistent with our existing investment strategy. Fees for such investments payable by us to Apollo would be more favorable to us than market rates, and consistent with our existing alternative investments, investments made under the Strategic Partnership require approval of ISG and remain subject to our existing governance processes, including approval by our conflicts committee where applicable. As of September 30, 2020 and December 31, 2019, we had $137 million and $97 million, respectively, of investments under the Strategic Partnership and these investments are included in related party investment funds on the condensed consolidated balance sheets and were reflected as consolidated VIEs in prior periods.
PK AirFinance – During the fourth quarter of 2019, we and Apollo purchased PK AirFinance (PK), an aviation lending business, including PK’s in force loan portfolio (Aviation Loans), from the Aviation Services Unit of GE Capital (GE). The Aviation Loans are generally fully secured by aircraft leases and aircraft. In connection with such transaction, Apollo acquired the PK loan origination platform, including personnel and systems and, pursuant to certain agreements entered into between us, Apollo, and certain entities managed by Apollo (collectively, PK Transaction Agreements), the existing Aviation Loans were acquired and securitized by a newly formed SPV for which Apollo acts as ABS manager (ABS-SPV). The ABS-SPV issued tranches of senior notes and subordinated notes, which are secured by the Aviation Loans.
In connection with the acquisition of the existing Aviation Loans by the ABS-SPV (i) a tranche of senior notes was acquired by third-party investors and (ii) we purchased mezzanine tranches of the senior notes and the subordinated notes. As of September 30, 2020 and December 31, 2019, our investment in securitizations of loans originated by PK was $1,244 million and $1,282 million, respectively, and are included in related party AFS or trading securities on the condensed consolidated balance sheets. We also have commitments to make additional investment in securitizations of loans originated by PK of $215 million as of September 30, 2020.
In addition to the investment in the senior notes and subordinated notes, we also have a right to acquire, whether directly, through the ABS-SPV or through a similar vehicle, all Aviation Loans originated by PK (Forward Flow Loans). All servicing and administrative costs and expenses of Apollo (determined at cost, without mark-up) that are incurred in connection with the sourcing, origination, servicing and maintaining the Forward Flow Loans, net of any service fees and servicing and administrative cost and expense reimbursement amounts received directly from the ABS-SPV or other entities investing in the Forward Flow Loans are allocated to, and reimbursed by the ABS-SPV or us, as applicable, subject to an agreed-upon annual cap.
In addition to the payment of the expenses described in the preceding paragraph and the base management fee paid to Apollo on all assets managed by Apollo, we have paid or expect to pay the following fees to Apollo or certain service providers that are affiliates of, or are companies managed by, Apollo in connection with the PK Transaction Agreements:
(A)To Apollo, sub-allocation fees on the senior notes based on the rates applicable to Yield assets and sub-allocation fees on the subordinated notes based on the rates applicable to High Alpha assets.
(B)To Redding Ridge Asset Management LLC, a company in which certain funds managed by Apollo have an interest, as consideration for assistance with the structuring, monitoring, support and maintenance of the securitization transactions, a one-time structuring fee, as well as ongoing support fees equal to 1.5 bps on the total capitalization amount and certain other fees, which may become due upon the occurrence of certain events; and
(C)To Merx Aviation Servicing Limited, a company externally managed by Apollo Investment Management, L.P., with respect to certain diligence, technical support and enforcement, remarketing and restructuring services with respect to the existing Aviation Loans and the Forward Flow Loans, a one-time servicing fee, as well as certain special situations fees, which may become due upon the occurrence of certain events.
Apollo/Athene Dedicated Investment Program (ADIP) – Our subsidiary, Athene Co-Invest Reinsurance Affiliate 1A Ltd. (together with its subsidiaries, ACRA) is partially owned by ADIP, which is managed by AGM. As of March 31, 2020, ADIP owned 67% of the equity interests, while we retained 100% of the voting power and 33% of the equity interests in ACRA. On April 1, 2020, ALRe purchased 14,000 newly issued ACRA shares for $66 million, which resulted in ALRe holding 36.55% of the economic interests in ACRA. The remaining 63.45% of the economic interests in ACRA are held by ADIP. During the nine months ended September 30, 2020, we received a capital contribution of $240 million from ADIP and paid a dividend of $46 million to ADIP.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Apollo Share Exchange and Related Transactions – On February 28, 2020, we closed a strategic transaction with AGM and certain affiliates of AGM which collectively comprise the Apollo Operating Group (AOG), pursuant to which we sold 27,959,184 newly issued Class A common shares to the AOG for an investment in Apollo of 29,154,519 newly issued AOG units valued at $1.1 billion and we sold 7,575,758 newly issued Class A common shares to the AOG for $350 million. Pursuant to the underlying transaction agreements, among other things (1) AGM has the right to purchase additional Class A common shares until August 26, 2020 to the extent AOG and certain affiliates, employees and consultants of AGM do not beneficially own at least 35% of the issued and outstanding Class A common shares (inclusive of Class A common shares over which any such persons have a valid proxy), on a fully diluted basis, in a number to achieve such 35% ownership level at a price based upon a weighted average price during the 30 days prior to the exercise of the purchase right and (2) Apollo Management Holdings, L.P. (AMH) has the right to purchase up to that number of Class A common shares that would increase by 5 percentage points the percentage of the issued and outstanding Class A common shares beneficially owned by the AOG and certain affiliates, employees and consultants of AGM (inclusive of Class A common shares over which any such persons have a valid proxy), calculated on a fully diluted basis. In connection with the closing of the transaction, we made certain amendments to our bye-laws which, among other things, eliminated our multi-class share structure.
Concurrent with our entry into the transaction agreements, AMH, James Belardi, our Chief Executive Officer, and William Wheeler, our President (each an “Other Shareholder”), entered into a voting agreement, pursuant to which each Other Shareholder irrevocably appointed AMH as its proxy and attorney-in-fact (Proxy) to vote all of such Other Shareholder’s Class A common shares at any meeting of our shareholders occurring following the closing date and in connection with any written consent of our shareholders following the closing date. The Proxy will be of no force and effect if Apollo and certain affiliates thereof cease to hold some minimum level of ownership not to exceed 7.5% of our Class A common shares.
AA Infrastructure Fund 1 LLC (AA Infrastructure) – We have an investment in preferred shares of AA Infrastructure, which is a fund managed by ISG. As of September 30, 2020 and December 31, 2019, we held $50 million and $58 million, respectively, of preferred shares, which are included in related party equity securities on the condensed consolidated balance sheets, and also held AA Infrastructure ABS securities of $293 million and $267 million, respectively, which are included in related party trading securities on the condensed consolidated balance sheets. We also have commitments to make additional investments in AA Infrastructure of $51 million as of September 30, 2020.
12. 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 $5,848 million and $4,793 million as of September 30, 2020 and December 31, 2019, respectively. We expect most of our current commitments will be invested over the next five years; however, these commitments could become due any time upon counterparty request.
Funding Agreements—We are a member of the FHLB and, through membership, we have issued funding agreements to the FHLB in exchange for cash advances. As of September 30, 2020 and December 31, 2019, we had $2,101 million and $1,226 million, respectively, of FHLB funding agreements outstanding. We are required to provide collateral in excess of the funding agreement amounts outstanding, considering any discounts to the securities posted and prepayment penalties.
We have a funding agreement backed notes (FABN) program, which allows Athene Global Funding, a special-purpose, unaffiliated statutory trust, to offer its senior secured medium-term notes. Athene Global Funding uses the net proceeds from each sale to purchase one or more funding agreements from us. As of September 30, 2020 and December 31, 2019, we had $6,523 million and $3,700 million, respectively, of FABN funding agreements outstanding. We had $2,392 million of FABN capacity remaining as of September 30, 2020.
During the third quarter of 2020, we established a secured funding agreement backed repurchase agreement (FABR) program, in which a special-purpose, unaffiliated entity entered into repurchase agreements with a bank and the proceeds of the repurchase agreements were used by the special purpose entity to purchase funding agreements from us. As of September 30, 2020, we had $1,000 million of FABR funding agreements outstanding.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Pledged Assets and Funds in Trust (Restricted Assets)—The total restricted assets included on the condensed consolidated balance sheets are as follows:
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(In millions)
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September 30, 2020
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December 31, 2019
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AFS securities
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$
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9,928
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$
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9,369
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Trading securities
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54
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45
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Equity securities
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24
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22
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Mortgage loans
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4,715
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2,535
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Investment funds
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55
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84
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Derivative assets
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95
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105
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Short-term investments
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5
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92
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Other investments
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104
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88
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Restricted cash
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1,226
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402
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Total restricted assets
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$
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16,206
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$
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12,742
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The restricted assets are primarily related to reinsurance trusts established in accordance with coinsurance agreements and the FHLB and FABR funding agreements described above.
Letters of Credit—We have undrawn letters of credit totaling $1,413 million as of September 30, 2020. These letters of credit were issued for our reinsurance program and expire between December 10, 2020 and June 19, 2023.
Litigation, Claims and Assessments
Corporate-owned Life Insurance (COLI) Matter – In 2000 and 2001, two insurance companies, which were subsequently merged into Athene Annuity and Life Company (AAIA), purchased broad based variable COLI policies from American General Life Insurance Company (American General) that, as of September 30, 2020, had an asset value of $401 million, and is included in other assets on the condensed consolidated balance sheets. In January 2012, the COLI policy administrator delivered to AAIA a supplement to the existing COLI policies and advised that American General and ZC Resource Investment Trust (ZC Trust) had unilaterally implemented changes set forth in the supplement that, if effective, would: (1) potentially negatively impact the crediting rate for the policies and (2) change the exit and surrender protocols set forth in the policies. In March 2013, AAIA filed suit against American General, ZC Trust, and ZC Resource LLC in Chancery Court in Delaware, seeking, among other relief, a declaration that the changes set forth in the supplement were ineffectual and in breach of the parties’ agreement. The parties filed cross motions for judgment as a matter of law, and the court granted defendants’ motion and dismissed without prejudice on ripeness grounds. The issue that negatively impacts the crediting rate for one of the COLI policies has subsequently been triggered and, on April 3, 2018, we filed suit against the same defendants in Chancery Court in Delaware seeking substantially similar relief. Defendants moved to dismiss and the court heard oral arguments on February 13, 2019. The court issued an opinion on July 31, 2019 that did not address the merits, but found that the Chancery Court did not have jurisdiction over our claims and directed us to either amend our complaint or transfer the matter to Delaware Superior Court. The matter has been transferred to the Delaware Superior Court. Defendants renewed their motion to dismiss and the Superior Court heard oral arguments on December 18, 2019. The Superior Court issued an opinion on May 18, 2020 in which it granted in part and denied in part defendants’ motion. The Superior Court denied defendants’ motion with respect to the issue that negatively impacts the crediting rate for one of the COLI policies, which issue will proceed to discovery. The Superior Court granted defendants’ motion and dismissed without prejudice on ripeness grounds claims related to the exit and surrender protocols set forth in the policies, and dismissed defendant ZC Resource LLC. If the supplement is ultimately deemed to be effective, the purported changes to the policies could impair AAIA’s ability to access the value of guarantees associated with the policies. The parties have served initial document requests and interrogatories and are currently in early stage discovery. An initial scheduling conference is set for November 10, 2020. The value of the guarantees included within the asset value reflected above is $196 million as of September 30, 2020.
Regulatory Matters – Beginning in 2015, our US insurance subsidiaries have experienced increased complaints related to the conversion and administration of the block of life insurance business acquired in connection with our acquisition of Aviva USA and reinsured to affiliates of Global Atlantic. The life insurance policies included in this block have been and are currently being administered by AllianceOne Inc. (AllianceOne), a subsidiary of DXC Technology Company, which was retained by such Global Atlantic affiliates to provide third party administration services on such policies. AllianceOne also administers a small block of annuity policies that were on Aviva USA’s legacy policy administration systems that were also converted in connection with the acquisition of Aviva USA and have experienced some similar service and administration issues, but to a lesser degree.
As a result of the difficulties experienced with respect to the administration of such policies, we have received notifications from several state regulators, including but not limited to New York State Department of Financial Services (NYSDFS), the California Department of Insurance (CDI) and the Texas Department of Insurance, indicating, in each case, that the respective regulator planned to undertake a market conduct examination or enforcement proceeding of the applicable US insurance subsidiary relating to the treatment of policyholders subject to our reinsurance agreements with affiliates of Global Atlantic and the conversion of the life and annuity policies, including the administration of such blocks by AllianceOne. We have entered into consent orders with several states, including the NYSDFS and the CDI, to resolve underlying matters in those states. All fines and costs, including those associated with remediation plans, paid in connection with the consent orders are subject to indemnification by Global Atlantic or affiliates of Global Atlantic.
ATHENE HOLDING LTD.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 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. On April 13, 2020, we entered into a consent order with the NYSDFS to resolve this matter. Pursuant to the consent order, the NYSDFS imposed a fine of $45 million, which was accrued in other liabilities on the consolidated balance sheets as of December 31, 2019, and paid during the second quarter of 2020.
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. Athene amended its writ on October 16, 2018. The trial court denied two separate motions to dismiss made by defendant Caldera on June 28, 2018 and by the former officer and former director defendants on January 14, 2019. On September 20, 2019, the Bermuda Court of Appeal affirmed both trial court rulings and dismissed the defendants’ appeal. Defendants have not further pursued an appeal of this decision to the Judicial Committee of the Privy Council, the court of final appeal for matters litigated in Bermuda. On March 17, 2020, we filed an application for leave to amend the complaint to more broadly assert defendants’ breaches of duties and that motion was approved by Order dated September 20, 2020.
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 has moved to dismiss the complaint. On January 21, 2019, plaintiffs filed an amended complaint, which revised certain allegations about jurisdiction, venue and the merits of the plaintiffs’ claims. We have renewed our motion to dismiss and, on December 20, 2019, the court granted our motion to dismiss. Plaintiffs have filed an appeal, but failed to timely effectuate the appeal. Unless plaintiffs belatedly try to perfect their appeal, or to extend their time to do so, and are successful in such efforts, we believe that this litigation is concluded.
13. Segment Information
We operate our core business strategies out of one reportable segment, Retirement Services. In addition to Retirement Services, we report certain other operations in Corporate and Other.
Retirement Services—Retirement Services is comprised of our US and Bermuda operations, which issue and reinsure retirement savings products and institutional products. Retirement Services has retail operations, which provide annuity retirement solutions to our policyholders. Retirement Services also has reinsurance operations, which reinsure multi-year guaranteed annuities, fixed indexed annuities, traditional one-year guarantee fixed deferred annuities, immediate annuities and institutional products from our reinsurance partners. In addition, our institutional operations, including funding agreements and group annuities, are included in our Retirement Services segment.
Corporate and Other—Corporate and Other includes certain other operations related to our corporate activities such as corporate allocated expenses, merger and acquisition costs, debt costs, preferred stock dividends, certain integration and restructuring costs, certain stock-based compensation and intersegment eliminations. In addition, we also hold capital in excess of the level of capital we hold in Retirement Services to support our operating strategy.
Financial Measures—Segment adjusted operating income available to common shareholders is an internal measure used by the chief operating decision maker to evaluate and assess the results of our segments.
Adjusted operating revenue is a component of adjusted operating income available to common shareholders and excludes market volatility and adjustments for other non-operating activity. Our adjusted operating revenue equals our total revenue, adjusted to eliminate the impact of the following non-operating adjustments:
•Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets;
•Investment gains (losses), net of offsets; and
•VIE expenses, noncontrolling interests 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 September 30,
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Retirement Services
|
$
|
1,711
|
|
|
$
|
4,096
|
|
|
$
|
5,769
|
|
|
$
|
9,650
|
|
Corporate and Other
|
(15)
|
|
|
28
|
|
|
101
|
|
|
84
|
|
Non-operating adjustments
|
|
|
|
|
|
|
|
Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets
|
637
|
|
|
84
|
|
|
(280)
|
|
|
1,490
|
|
Investment gains (losses), net of offsets
|
468
|
|
|
373
|
|
|
29
|
|
|
1,768
|
|
VIE expenses, noncontrolling interests and other adjustments to revenues
|
474
|
|
|
3
|
|
|
505
|
|
|
10
|
|
Total revenues
|
$
|
3,275
|
|
|
$
|
4,584
|
|
|
$
|
6,124
|
|
|
$
|
13,002
|
|
Adjusted operating income available to common shareholders is an internal measure used to evaluate our financial performance excluding market volatility and expenses related to integration, restructuring, stock compensation and certain other expenses. Our adjusted operating income available to common shareholders equals net income available to Athene Holding Ltd. common shareholders adjusted to eliminate the impact of the following non-operating adjustments:
•Investment gains (losses), net of offsets;
•Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets;
•Integration, restructuring and other non-operating expenses;
•Stock-based compensation, excluding the long-term incentive plan (LTIP); and
•Income tax (expense) benefit – non-operating.
The table below reconciles segment adjusted operating income available to common shareholders to net income available to Athene Holding Ltd. common shareholders presented on the condensed consolidated statements of income:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Retirement Services
|
$
|
361
|
|
|
$
|
256
|
|
|
$
|
773
|
|
|
$
|
918
|
|
Corporate and Other
|
(59)
|
|
|
(13)
|
|
|
(89)
|
|
|
(18)
|
|
Non-operating adjustments
|
|
|
|
|
|
|
|
Investment gains (losses), net of offsets
|
346
|
|
|
166
|
|
|
(18)
|
|
|
1,041
|
|
Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets
|
72
|
|
|
(117)
|
|
|
(268)
|
|
|
(201)
|
|
Integration, restructuring and other non-operating expenses
|
—
|
|
|
(34)
|
|
|
(13)
|
|
|
(46)
|
|
Stock-based compensation, excluding LTIP
|
(1)
|
|
|
(3)
|
|
|
(11)
|
|
|
(9)
|
|
Income tax (expense) benefit – non-operating
|
(97)
|
|
|
21
|
|
|
7
|
|
|
19
|
|
Net income available to Athene Holding Ltd. common shareholders
|
$
|
622
|
|
|
$
|
276
|
|
|
$
|
381
|
|
|
$
|
1,704
|
|
The following represents total assets by segment:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
September 30, 2020
|
|
December 31, 2019
|
Retirement Services
|
$
|
186,400
|
|
|
$
|
143,881
|
|
Corporate and Other
|
4,688
|
|
|
2,994
|
|
Total assets
|
$
|
191,088
|
|
|
$
|
146,875
|
|
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.
We have established a significant base of earnings and, as of September 30, 2020, have an expected annual net investment spread for our Retirement Services segment, which measures our investment performance less the total cost of our liabilities, of 1–2% over the 9.0 year weighted-average life of our reserve liabilities. The weighted-average life includes deferred annuities, PRT group annuities, funding agreements, payout annuities and other products.
We operate our core business strategies out of one reportable segment, Retirement Services. In addition to Retirement Services, we report certain other operations in Corporate and Other. Retirement Services is comprised of our US and Bermuda operations which issue and reinsure retirement savings products and institutional products. Corporate and Other includes certain other operations related to our corporate activities.
Our consolidated annualized ROE for the nine months ended September 30, 2020 and the year ended December 31, 2019 was 3.5% and 19.7%, respectively, and our consolidated annualized adjusted operating ROE was 9.1% and 14.1%, respectively. For the nine months ended September 30, 2020 and the year ended December 31, 2019, in our Retirement Services segment, we generated an annualized net investment spread of 1.14% and 1.50%, respectively, and an annualized adjusted operating ROE of 14.0% and 17.3%, respectively. Our Retirement Services segment generated an annualized investment margin on deferred annuities of 1.96% and 2.46% for the nine months ended September 30, 2020 and the year ended December 31, 2019, respectively. As of September 30, 2020, our deferred annuities had a weighted-average life of 8.6 years and made up a significant portion of our reserve liabilities.
The following table presents the deposits generated from our organic and inorganic channels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Retail sales
|
$
|
2,465
|
|
|
$
|
1,921
|
|
|
$
|
5,502
|
|
|
$
|
5,646
|
|
Flow reinsurance
|
2,317
|
|
|
609
|
|
|
5,443
|
|
|
2,754
|
|
Funding agreements1
|
2,619
|
|
|
503
|
|
|
6,078
|
|
|
802
|
|
Pension risk transfer
|
—
|
|
|
2,604
|
|
|
1,246
|
|
|
5,233
|
|
Total organic deposits
|
7,401
|
|
|
5,637
|
|
|
18,269
|
|
|
14,435
|
|
Inorganic deposits
|
—
|
|
|
—
|
|
|
28,792
|
|
|
—
|
|
Gross deposits
|
7,401
|
|
|
5,637
|
|
|
47,061
|
|
|
14,435
|
|
Deposits attributable to ACRA noncontrolling interest
|
—
|
|
|
—
|
|
|
(18,268)
|
|
|
—
|
|
Net deposits
|
$
|
7,401
|
|
|
$
|
5,637
|
|
|
$
|
28,793
|
|
|
$
|
14,435
|
|
|
|
|
|
|
|
|
|
1 Funding agreements are comprised of funding agreements issued under our FABN and FABR programs, funding agreements issued to the FHLB and long-term repurchase agreements.
|
Our organic channels, including retail, flow reinsurance and institutional products, provided deposits of $18.3 billion and $14.4 billion in the nine months ended September 30, 2020 and 2019, respectively, which were underwritten to attractive, at-or-above target returns despite the historically low interest rate environment. Organic deposits increased $3.8 billion, or 27%, reflecting the strength of our multi-channel distribution platform despite a challenging macroeconomic backdrop amidst the ongoing COVID-19 crisis. 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 $8.7 billion and $8.5 billion for the nine months ended September 30, 2020 and 2019, respectively. We believe that our credit profile, our current product offerings and product design capabilities as well as our growing reputation as both a seasoned funding agreement issuer and a reliable PRT counterparty will continue to enable us to grow our existing organic channels and allow us to source additional volumes of profitably underwritten liabilities in various market environments. We plan to continue to grow organically by expanding each of our retail, flow reinsurance and institutional distribution channels. We believe that we have the right people, infrastructure, scale and capital discipline to position us for continued growth.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Within our retail channel, we had fixed annuity sales of $5.5 billion and $5.6 billion for the nine months ended September 30, 2020 and 2019, respectively. The decrease in our retail channel was primarily driven by a significant decline in industry-wide sales volumes as a result of the economic impacts of the spread of COVID-19, as well as the mitigation measures undertaken to combat the spread, which has complicated the sales process. The decrease was largely offset by very strong performance in the bank and broker-dealer channels including an increase in MYGA sales, and demonstrate strong sales execution despite the challenging sales environment. Despite the significant headwinds, we have maintained our disciplined approach to pricing, including with respect to targeted underwritten returns. We aim to grow our retail channel by deepening our relationships with our approximately 54 independent marketing organizations (IMO); approximately 56,000 independent agents; and our growing network of 16 small and mid-sized banks and 101 regional broker-dealers. Our strong financial position and capital efficient products allow us to be dependable partners with IMOs, banks and broker-dealers as well as consistently write new business. We expect our retail channel to continue to benefit from our credit profile and recent product launches. We believe this should support growth in sales at our desired cost of funds through increased volumes via current IMOs, while also allowing us to continue to expand our bank and broker-dealer channels. Additionally, we are focusing on hiring and training a specialized sales force and creating products to capture new potential distribution opportunities.
In our flow reinsurance channel, we target reinsurance business consistent with our preferred liability characteristics and, as such, flow reinsurance provides another opportunistic channel for us to source liabilities with attractive crediting rates. We generated deposits through our flow reinsurance channel of $5.4 billion and $2.8 billion for the nine months ended September 30, 2020 and 2019, respectively. The increase in our flow reinsurance channel from prior year was driven by strong volumes with existing partnerships as well as favorable MYGA sales during the year. In July we established a new flow reinsurance partnership with a large Japanese financial institution, marking our entry into the large Japanese annuity market. We expect that our credit profile and our reputation as a solutions provider will help us continue to source additional reinsurance partners, which will further diversify our flow reinsurance channel.
Within our institutional channel, we generated deposits of $7.3 billion and $6.0 billion for the nine months ended September 30, 2020 and 2019, respectively. The increase in our institutional channel was driven by higher funding agreement deposits, partially offset by lower PRT deposits. We issued funding agreements in the aggregate principal amount of $6.1 million and $802 million for the nine months ended September 30, 2020 and 2019, respectively, including our inaugural non-US dollar denominated FABN transaction in the second quarter, followed by additional non-US dollar denominated issuances in the third quarter. Funding agreements are comprised of funding agreements issued under our FABN and FABR programs, funding agreements issued to the FHLB and repurchase agreements with maturities exceeding one year at issuance with deposits in the aggregate principal amount of $4.6 billion, $875 million and $598 million, respectively, for the nine months ended September 30, 2020. During the nine months ended September 30, 2020, we closed two PRT transactions and issued group annuity contracts in the aggregate principal amount of $1.2 billion, compared to $5.2 billion during the nine months ended September 30, 2019. Since entering the PRT channel in 2017 through September 30, 2020, we have closed 18 deals involving more than 181,000 plan participants resulting in the issuance of group annuities of $12.1 billion. We expect to grow our institutional channel by continuing to engage in PRT transactions and opportunistic issuances of funding agreements.
Our inorganic channel has contributed significantly to our growth through both acquisitions and block reinsurance transactions. On June 18, 2020, we entered into an agreement with Jackson, effective June 1, 2020, pursuant to which we agreed to reinsure a block of fixed and fixed indexed annuities on a funds withheld coinsurance basis providing $28.8 billion of gross deposits. Utilizing the strategic benefits of ACRA, approximately 63% of the total capital deployment for the transaction will be funded by third-party investors and approximately 37% will be funded by ALRe. Additionally, as part of the transaction, ACRA made a $500 million equity investment in an indirect parent of Jackson, which closed on July 17, 2020. We expect that our inorganic channel will continue to be an important source of profitable growth in the future. We believe our internal transactions team, with support from Apollo, has an industry-leading ability to source, underwrite and expeditiously close transactions. With support from Apollo, we are a solutions provider with a proven track record of closing transactions, which we believe makes us the ideal partner to insurance companies seeking to restructure their business.
Executing our growth strategy requires that we have sufficient capital available to deploy. We believe that we have significant capital available to us to support our growth aspirations. As of September 30, 2020, we estimate that we have approximately $7.6 billion in capital available to deploy, consisting of approximately $3.2 billion in excess capital, $2.6 billion in untapped debt capacity (assuming a peer average adjusted debt to capitalization ratio of 25%) and $1.8 billion in available uncalled capital at ACRA, subject, in the case of debt capacity, to favorable market conditions and general availability.
In order to support our growth strategies and capital deployment opportunities, we established ACRA as a long-duration, on-demand capital vehicle. Effective April 1, 2020, ALRe purchased additional shares in ACRA increasing our ownership from the original 33% to 36.55% of the economic interests, with the remaining 63.45% of the economic interests being owned by ADIP, a series of funds managed by an affiliate of Apollo. ACRA is expected to participate in qualifying transactions and certain other transactions by drawing a portion of the required capital for such transactions from third-party investors equal to ADIP’s proportionate economic interest in ACRA. This shareholder-friendly, strategic capital solution is expected to allow us the flexibility to simultaneously deploy capital across multiple accretive avenues, while maintaining a strong financial position.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Strategic Transaction with Apollo
On February 28, 2020, we closed a transaction with Apollo in which Apollo acquired an incremental stake in us for AOG units valued at $1.1 billion, upon close, and $350 million of cash. Additionally, we converted our Class B common shares to Class A common shares and our Class M common shares to Class A common shares and warrants, eliminating our multi-class share structure. Changes in the value of the AOG units are reflected within the change in fair value of Apollo investment, net of tax line item and may present future volatility in our results of operations due to changes in the valuation of the AOG units. See Note 11 – Related Parties to the consolidated financial statements for further discussion.
Industry Trends and Competition
Market Conditions
During the third quarter, there was a considerable divergence between the performance of the broader economy and the performance of the financial markets. While equity markets hit an all-time high in early September and credit spreads continued the compression that began in the second quarter, the economy remained in distress as jobless claims, while improving month over month, remained at record highs, nonfarm payroll employment remained depressed and consumer sentiment and retail sales followed similar patterns. Many economic sectors remain at lower levels of activity, particularly those associated with leisure, travel and consumer durables. There are some well performing sectors within the broader economy, notably consumer staples and large regional pockets of the housing market, but the performance of these sectors has not been sufficient to shift higher forward expectations for growth and rates. A significant portion of the disconnect between economic and financial market performance appears to be a result of monetary stimulus. The Federal Reserve (Fed) has nearly doubled its balance sheet since the beginning of the year, in particular with significant increases in holdings of Treasuries and MBS. These Fed actions are likely a significant contributor to buoyant valuations of risk assets and continued low rates. The 10-year treasury yield has remained under 70 basis points for much of the quarter. In direct contrast to the aggressive actions of the Fed, Congress has been unable to reach agreement on additional fiscal stimulus, and the fiscal stimulus measures signed late in the first quarter have begun to run off. As we enter the fourth quarter, there are a number of events on the horizon that are likely to keep markets volatile through year-end. Among these are near-term risks related to the election and associated challenges with passage of additional fiscal stimulus and a resurgence of COVID-19 as we transition to the fall season. Heightened equity market volatility may adversely affect the hedging costs of our liability hedging program and create greater volatility in earnings due to changes in the value of alternative investments, the AOG units that we hold and FIA derivatives and associated embedded derivatives, as well as changes in other liability costs. Heightened credit market volatility may lead to increased credit spreads. See -Interest Rate Environment and Part I—Item 3. Quantitative and Qualitative Disclosures About Market Risks—Sensitivities for further discussion regarding how heightened volatility might impact our business.
Interest Rate Environment
Both as a result of significant central bank intervention and a continued flight-to-quality trade (coupled with the ongoing global search for yield), interest rates remained close to all-time lows throughout the quarter. Importantly, yields outside of the US, which had been close to zero, and in some cases negative, moved even lower, exacerbating demand. Communications from global central banks suggest that market support will continue, although there remains significant additional purchasing to complete relating to previously announced programs, both in the US and elsewhere.
The environment for yield focused buyers remains challenging. Quality names and structures will remain well-bid ensuring that yields on these assets remains relatively low. Credit spreads have a good amount of room to tighten before they come close to the lows of the last three years (approximately 40-50 basis points on US investment grade credit, for example), and so will likely continue to attract buyers. On the supply side, the new issues market remains robust, even considering the current credit spread environment. Therefore, deployment challenges are likely to persist.
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. Year-to-date trends have entailed decreasing interest rates leading to a decrease in our investment income from floating rate investments, whereas widening credit spreads have resulted in an overall increase in asset yields, which we expect would result in an increase in the yield on our new investment purchases and a decline in the value of our existing investments.
We address interest rate risk through managing the duration of the liabilities we source with assets we acquire through ALM modeling. As part of our investment strategy, we purchase floating rate investments, which we expect would perform well in a rising interest rate environment and which we expect would underperform in a declining rate environment, which has been experienced during the first nine months of 2020. Our investment portfolio includes $25.3 billion of floating rate investments, or 18% of our net invested assets as of September 30, 2020.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
If prevailing interest rates were to rise, we believe our products would be more attractive to consumers and our sales would likely increase. If prevailing interest rates were to decline, it is likely that our products would be less attractive to consumers and our sales would likely decrease. In periods of prolonged low interest rates, the net investment spread may be negatively impacted by reduced investment income to the extent that we are unable to adequately reduce policyholder crediting rates due to policyholder guarantees in the form of minimum crediting rates or otherwise due to market conditions. As of September 30, 2020, most of our products were fixed annuities with 23% of our FIAs at the minimum guarantees and 38% of our fixed rate annuities at the minimum crediting rates. As of September 30, 2020, minimum guarantees on all of our deferred annuities, including those with crediting rates already at their minimum guarantees, were, on average, greater than 100 basis points below the crediting rates on such deferred annuities, allowing us room to reduce rates before reaching the minimum guarantees. Our remaining liabilities are associated with immediate annuities, pension risk transfer obligations, funding agreements and life contracts for which we have little to no discretionary ability to change the rates of interest payable to the respective policyholder. A significant majority of our deferred annuity products have crediting rates that we may reset annually upon renewal, following the expiration of the current guaranteed period. While we have the contractual ability to lower these crediting rates to the guaranteed minimum levels, our willingness to do so may be limited by competitive pressures.
See Part I—Item 3. Quantitative and Qualitative Disclosures About Market Risks to this report and Part II—Item 7A. Quantitative and Qualitative Disclosures About Market Risks in our 2019 Annual Report, which includes a discussion regarding interest rate and other significant risks and our strategies for managing these risks.
COVID-19
The spread of COVID-19 has resulted in significant volatility in the financial markets. The extent to which COVID-19 and the resulting impact on economic conditions and the financial markets may impact our business will depend on future developments and represents a material uncertainty to our business.
Risks and Mitigation Measures
The spread of COVID-19 presents three principal risks to our business: 1) business continuity risk; 2) market risk and 3) liquidity risk, including that resulting from policyholder behavior.
Business Continuity Risk. The spread of COVID-19 threatens the health and safety of our most valuable asset, our people. To mitigate the risk that the virus infects members of our workforce, to ensure the continuity of our operations throughout the duration of this pandemic and to ensure uninterrupted servicing of the policyholders who have entrusted us for their retirement needs, during March 2020 we implemented our business continuity plan. Pursuant to that plan, we implemented remote work protocols pursuant to which the significant majority of our employees worked remotely, with only certain operationally essential employees working at our facilities, to the extent lawfully permitted. For the operationally essential employees who continued working at our facilities, we implemented new safety protocols that incorporated recommendations, guidelines and regulations from the Center for Disease Control and other national, state and local health authorities, including mandated temperature screenings upon entering the building; the appropriate practice of social distancing, which includes but is not limited to a reduction in the number of people allowed in conference rooms and limiting elevator car capacity; the requirement to wear face coverings; and limitations on movement in the building, among other requirements designed to reduce the risk of transmission between employees (collectively, Safety Protocols). In addition, we implemented enhanced cleaning protocols, which include increased staff to clean common areas; availability of cleaning supplies, face coverings and hand sanitizer throughout our facilities that are operational; and actively encouraging our employees to adopt enhanced hygiene practices. On June 1, 2020, we commenced our repopulation plan with the first wave of employees returning to the office. Thereafter, employees returned in three additional waves, with each wave following the prior by at least two weeks. As of October 31, 2020, substantially all of our workforce had returned to the office. Prior to the commencement of our repopulation plan, all employees were required to complete a comprehensive training covering our repopulation plan and our Safety Protocols. We have implemented case investigation and contact tracing procedures to appropriately identify and quarantine those individuals who have been or may have been exposed to the virus. As of October 31, 2020, we had ten employees who had been certified as contact tracers through Johns Hopkins University. We have been successful in implementing our business continuity and repopulation plans and to date have experienced no material impairment to our business operations. We continue to closely monitor our situation and the recommendations and guidelines issued by national, state and local health authorities.
Market Risk. The effects of the spread of COVID-19 on economic conditions and the financial markets may trigger or increase the market risks to which we are subject, namely interest rate risk, credit risk and public equity risk. The spread of COVID-19 and the Federal Reserve’s responsive measures have resulted in abrupt and significant decreases in interest rates and abrupt and significant increases in credit spreads. Changes in interest rates and credit spreads may result in a decrease in the value of our invested assets. To the extent that we needed to sell assets at these decreased values in order to satisfy our obligations, we would realize losses. However, approximately 75% of our deferred annuities have surrender charges, which we believe greatly reduce the likelihood and magnitude of unexpected withdrawals. Further, our PRT and funding agreement obligations are predominantly non-surrenderable. In addition, we mitigate interest rate risk by managing the effective duration of our assets and liabilities. In doing so, we closely monitor and manage our net duration mismatch as well as our cash inflows and outflows. Decreases in interest rates impact the interest income that we receive on our floating rate assets. For the nine months ended September 30, 2020, we recognized $181 million less in floating rate income than we recognized for the nine months ended September 30, 2019, primarily as a result of the declines in interest rates occurring during the nine months ended September 30, 2020.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
A greater proportion of the companies that issued the securities that we hold in our investment portfolio are more likely to experience financial hardship as a result of the economic effects of COVID-19. We mitigate such risk by actively managing our investment portfolio and attempting to exit or reduce exposures we deem to carry disproportionate risk when compared to their return profile.
We are exposed to public equity risk through the index crediting on our FIA products, our AOG unit holdings and our common stock holdings in OneMain Holdings, Inc. (OneMain). We effectively eliminate the public equity risk arising from the index crediting on our FIA products by hedging the relevant index performance over the crediting period. Though this results in an effective hedge for economic purposes, because the instruments used to hedge the index crediting period are for a shorter term than the FIA contract, the hedge is not deemed effective for accounting purposes and results in the recognition of gains and losses from period to period. The public equity volatility arising from our holdings of AOG Units and OneMain stock is unhedged. During the nine months ended September 30, 2020, we recognized an income statement impact of $(201) million resulting from our FIA products (net of offsets) and decreases in the market value of our OneMain holding, partially offset by an increase in the market value of our AOG holding, as the share price rebounded following market value decreases in the first quarter.
Liquidity Risk. In the current market environment, liquidity risk can arise in several areas of our business, including but not limited to asset-liability mismatch and policyholder behavior risk. As noted above, most of our deferred annuities have surrender charges, which reduce the likelihood and magnitude of expected withdrawals, and our PRT and funding agreement obligations are predominantly non-surrenderable.
To be prepared to capitalize on growth opportunities that may arise in the current market environment as well as to manage any near-term liquidity risk, we have strategically increased our available liquidity. As of September 30, 2020, we had approximately $10.9 billion of available liquidity comprised of $7.5 billion of cash and approximately $3.4 billion of undrawn capacity under various committed financing facilities. We have taken measures to increase our financial flexibility, including negotiating new committed lending facilities. We have also entered into several new securities repurchase arrangements with different financial institutions to provide access to additional short-term liquidity, to the extent available. As economic conditions have begun to stabilize, we have begun to invest our excess liquidity in yield producing assets.
With a record number of individuals finding themselves abruptly out of work and searching for sources of liquidity, we face policyholder behavior risk in the form of increased withdrawal levels and lapse rates. We have been closely monitoring policyholder behavior on a daily basis. As of October 31, 2020, we had noticed no material adverse change in policyholder behavior. We mitigate policyholder behavior risk by monitoring and projecting cash inflows and outflows and by maintaining greater levels of available liquidity.
Emerging Trends
As a result of the spread of COVID-19, the resulting impact on economic conditions and the financial markets and the mitigation efforts we have undertaken in response, we expect to see several trends impacting our future operating results.
First, we have held a greater proportion of our invested assets in cash and other liquid assets which has lowered our net investment earned rates and net investment spread. While we have begun to invest our excess cash in yield producing assets, we expect that our holdings of cash and other liquid assets may remain elevated in the near-term. We expect that as we deploy these holdings and redeploy the Jackson investment portfolio, we will experience increases in net investment earned rates and net investment spread.
Second, we expect that the current market environment will cause certain issuers of securities held in our investment portfolio to experience financial hardship, which could result in the recognition of increased credit losses. During the nine months ended September 30, 2020, we increased our reserve for credit losses, net of noncontrolling interests, by $202 million, post-adoption of the new accounting standard regarding accounting for current expected credit losses, more commonly referred to as “CECL.” We cannot predict the duration or severity of the current economic downturn. However, our ultimate loss experience resulting therefrom could be material and could cause our financial position, results of operations, cash flows and liquidity to differ materially from that presented herein.
Third, we have experienced increased volatility in the valuation of our alternative investments. In light of the current market environment, we may continue to experience such volatility in future periods. Given that approximately 60% of our alternative investments are accounted for on a one to three month lag, our financial results as they relate to the performance of our alternative investments may not be reflective of the economic conditions of a particular reporting period.
Fourth, the substantial decrease in interest rates during the nine months ended September 30, 2020 will have a negative impact on adjusted operating income if the current rates persist for a prolonged period. Currently, we estimate that a 25 basis point decrease in interest rates that persists for a 12-month period will result in an approximate $35 – $45 million decrease in adjusted operating income.
The spread of COVID-19, the resulting impact on economic conditions and the financial markets and the mitigating efforts we have and will undertake may have consequences to our business that are unforeseen at this time. The emerging trends identified above do not purport to be complete and actual experience may differ materially from our current expectations.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Discontinuation of LIBOR
The UK Financial Conduct Authority (FCA) has announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. It is expected that a number of private-sector banks currently reporting information used to set LIBOR will stop doing so after 2021 when their current reporting commitment ends, which could either cause LIBOR to stop publication immediately or cause the FCA to determine that the quality of LIBOR has degraded to the degree that LIBOR is no longer representative of its underlying market. With an estimated $200 trillion in notional transactions referencing USD LIBOR in the cash and derivatives markets, including more than $35 trillion extending past 2021, the discontinuation of LIBOR could have a significant impact on the financial markets and represents a material uncertainty to our business.
To manage the uncertainty surrounding the discontinuation of LIBOR we have established a plan, which involves the following six phases: (1) identify and quantify our exposure to LIBOR; (2) establish a counterparty communication strategy; (3) evaluate the specific risks to our business arising as a result of the transition; (4) identify actions that we can take to mitigate the risks identified in phase 3; (5) monitor market developments regarding the adoption of a replacement rate; and (6) transition to the market consensus rate or rates once such rate or rates emerge and are operational.
The phases of our plan are not discrete and need not occur in chronological order. Our plan is subject to change as we gain additional information. We have created an Executive Steering Committee composed of senior executives to coordinate and oversee the execution of our plan.
The effect of the discontinuation of LIBOR on legacy or new contracts to which we have exposure or the activities in our businesses will vary depending on (1) the character of existing fallback provisions in individual contracts and (2) whether, how, and when industry participants develop and widely adopt new reference rates and fallbacks for both legacy and new contracts. Accordingly, it is difficult to predict the full impact of the transition away from LIBOR on our contracts whose value is tied to LIBOR. The value or profitability of these contracts may be adversely affected.
As of September 30, 2020, we had contracts tied to LIBOR in the notional amounts set forth in the table below:
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|
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|
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(In millions)
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Total Exposure
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Extending Beyond 2021
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Investments
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$
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24,761
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|
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$
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21,416
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Product Liabilities
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14,022
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|
|
4,906
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Derivatives Hedging Product Liabilities
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17,553
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|
|
1,193
|
|
Other Derivatives
|
478
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|
|
478
|
|
Other Contracts
|
2,963
|
|
|
2,663
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|
Total notional of contracts tied to LIBOR
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$
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59,777
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|
|
$
|
30,656
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|
|
|
|
|
|
|
|
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Investments
As of September 30, 2020, our investments tied to LIBOR were in the following asset classes:
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(In millions)
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Total Exposure
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|
Extending Beyond 2021
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Multi-lateral Arrangements
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|
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Corporates
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$
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851
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|
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$
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487
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RMBS
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3,975
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|
|
3,826
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CMBS
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400
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|
|
80
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|
CLO
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12,206
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|
|
12,026
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ABS
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1,887
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|
|
1,825
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Bank Loans
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478
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|
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356
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Total Multi-lateral Arrangements
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19,797
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18,600
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Bi-lateral Arrangements
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CML
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4,812
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|
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2,664
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RML
|
152
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|
|
152
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Total Bi-lateral Arrangements
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4,964
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|
|
2,816
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Total investments tied to LIBOR
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$
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24,761
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|
|
$
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21,416
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Of the total notional value of investment-related contracts tied to LIBOR, extending beyond 2021, $18.6 billion or 86.9% relate to multi-lateral arrangements. These arrangements are typically characterized by a large, diverse set of unrelated holders, the majority or all of whom must consent to amendments to the terms of the underlying investment instrument. Generally, when the amendments concern a material term such as the determination of interest, consent must be unanimous. Given the collective action issues inherent in such structures, such consent is typically impracticable and beyond our control. The existence and character of fallback provisions affected by the discontinuation of LIBOR vary widely from instrument to instrument. Many of our legacy contracts may not contemplate the discontinuation of LIBOR and upon LIBOR’s discontinuation may result in the conversion of the instrument from a floating- to a fixed-rate instrument or may involve a significant degree of uncertainty as to the method of determining interest. To the extent that such legacy arrangements do not contemplate the permanent discontinuation of LIBOR, we would most likely look to some broad-based solution, such as the Alternative Reference Rates Committee’s proposed New York law amendment, to rectify such deficiency. In the absence of such a solution, we would likely be required to undertake a re-evaluation of affected investments, which might result in the disposition of individual positions. To the extent that individual positions are retained, we may incur adverse financial consequences, including any mark-to-market impacts resulting from those investments that convert from a floating to a fixed rate. To the extent that the fallback rates ultimately used to determine interest payable on structured securities do not align with the fallback rates used to determine interest payable on the underlying assets, economic losses could be sustained on the overall structure.
The remaining notional value of investment-related contracts tied to LIBOR extending beyond 2021 of $2.8 billion or 13.1% relates to bi-lateral arrangements that are capable of being amended through negotiation with the relevant counterparty.
As our investment manager, Apollo maintains the documentation associated with the assets in our investment portfolio. We are therefore dependent upon Apollo for the successful completion of our LIBOR transition efforts relating to our investment portfolio. See Part II–Item 1A. Risk Factors–Uncertainty relating to the LIBOR Calculation process and potential phasing out of LIBOR after 2021 may adversely affect the value of our investment portfolio, our ability to achieve our hedging objectives and our ability to issue funding agreements bearing a floating rate of interest. Apollo’s failure to fulfill its responsibilities could have an adverse impact on our results of operations and ability to timely report accurate financial information.
Product Liabilities and Associated Hedging Instruments
As of September 30, 2020, we had product liabilities with a notional value of approximately $14.0 billion for which LIBOR is a component in the determination of interest credited, of which we expect $4.9 billion to extend beyond 2021. Generally, there are two categories of indices that use LIBOR in the determination of interest credited, “excess return” indices (return of index in excess of LIBOR) and indices that use LIBOR as a means to control volatility. The indices to which these products are tied are primarily proprietary indices for which key inputs are determined by the index sponsor. The index sponsor generally has the right to unilaterally change the reference rate upon the discontinuation of LIBOR. As a result, we do not anticipate any administrative concerns in connection with the transition from LIBOR to a replacement rate with respect to these products.
As of September 30, 2020, we held derivatives with a notional value of approximately $17.6 billion to hedge our exposure to these product liabilities, of which we expect $1.2 billion to extend beyond 2021. Included within this category are $3.1 billion of Eurodollar futures, of which we expect $1.2 billion to extend beyond 2021. Exchange traded products such as Eurodollar futures will follow the CME Group Inc.’s approach regarding the discontinuation of LIBOR. The remaining derivatives in this category are primarily purchased to hedge the current crediting period. We expect that substantially all of such derivatives will expire before the end of 2021. We will be required to purchase new derivatives in future periods to hedge future crediting periods associated with the related existing product liabilities, which will expose us to potential basis mismatch to the extent that the reference rate for the product liability is not the same as the reference rate for the derivative instrument.
Other Derivatives
Our other derivative contracts tied to LIBOR are generally entered into pursuant to an ISDA Master Agreement. ISDA published the ISDA 2020 IBOR Fallbacks Protocol (Protocol) and released Supplement 70 to the 2006 ISDA Definitions (Supplement) on October 23, 2020. The Protocol and Supplement include appropriate fallbacks that contemplate the permanent discontinuation of LIBOR. We are currently evaluating the Protocol and Supplement and expect to join industry peers by adhering to the Protocol and Supplement prior to the effective date of January 25, 2021. To the extent that the fallbacks ultimately incorporated into our other derivative contracts result in the use of a replacement rate that differs from that employed in the contract being hedged, we may experience basis mismatch. The Protocol contains templates for possible bilateral amendments to legacy contracts for situations in which the fallbacks contemplated by the Protocol give rise to potential basis risk. We intend to evaluate whether and the extent to which we are subject to such basis risk, as well as the possibility of using the available templates to mitigate such risk.
Other Contracts and Other Sources of Exposure
Other contracts is comprised of our credit agreement, floating rate funding agreements and fixed-to-float Series A preference shares, all of which contemplate the permanent discontinuation of LIBOR or have fallback provisions in place that provide for the determination of interest after the discontinuation of LIBOR. In addition to the other contracts for which we have quantified our exposure, we are party to contracts that are tied to LIBOR based upon the occurrence of some remote contingency, such as the accrual of penalty interest, or for which LIBOR is otherwise not a material term of the contract. These contracts do not lend themselves to quantification and are lower in priority in our LIBOR remediation efforts. Finally, LIBOR is used as a component in our internal derivative valuation models. We intend to transition the benchmark yield curve in such models from LIBOR to the Secured Overnight Financing Rate prior to the discontinuation of LIBOR. Such transition may affect the valuation of our derivative instruments.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We can provide no assurance that we will be successful at completing all the phases of our plan prior to the discontinuation of LIBOR. Completion of certain phases of our plan are contingent upon market developments and are therefore not fully within our control. To the extent management effort and attention is focused on other matters, such as responding to the risks posed by COVID-19, the timely completion of our plan could become more difficult. Failure to complete all phases of our plan prior to the discontinuation of LIBOR may have a material adverse effect on our business, financial position, results of operations and cash flows and on our ability to timely report accurate financial information.
Demographics
Over the next four decades, the retirement-age population is expected to experience unprecedented growth. Technological advances and improvements in healthcare are projected to continue to contribute to increasing average life expectancy, and aging individuals must be prepared to fund retirement periods that will last longer than ever before. Further, many working households in the United States do not have adequate retirement savings. As a tool for addressing the unmet need for retirement planning, we believe that many Americans have begun to look to tax-efficient savings products with low-risk or guaranteed return features and potential equity market upside. Our tax-efficient savings products are well positioned to meet this increasing customer demand.
Competition
We operate in highly competitive markets. We face a variety of large and small industry participants, including diversified financial institutions and insurance and reinsurance companies. These companies compete in one form or another for the growing pool of retirement assets driven by a number of external factors such as the continued aging of the population and the reduction in safety nets provided by governments and private employers. In the markets in which we operate, scale and the ability to provide value-added services and build long-term relationships are important factors to compete effectively. We believe that our leading presence in the retirement market, diverse range of capabilities and broad distribution network uniquely position us to effectively serve consumers’ increasing demand for retirement solutions, particularly in the FIA market.
According to LIMRA, total fixed annuity market sales in the United States were $57.6 billion for the six months ended June 30, 2020, a 24.3% decrease from the same time period in 2019 as interest rates pulled down crediting rates in all fixed product lines. In the total fixed annuity market, for the six months ended June 30, 2020 (the most recent period for which specific market share data is available), we were the 5th largest company based on sales of $3.0 billion, translating to a 5.1% market share. For the six months ended June 30, 2019, our market share was 4.9% with sales of $3.7 billion.
According to LIMRA, total fixed annuity sales in the United States were $139.8 billion for the year ended December 31, 2019, a 4.7% increase from the year ended December 31, 2018. In the total fixed annuity market, for the year ended December 31, 2019, we were the 5th largest company based on sales of $6.8 billion, translating to a 4.8% market share. For the year ended December 31, 2018, our market share was 5.6% with sales of $7.5 billion.
FIAs have been one of the fastest growing annuity products. According to LIMRA, total FIA sales in the United States were $73.5 billion for the year ended December 31, 2019, a 5.6% increase from the year ended December 31, 2018. According to LIMRA data, for the six months ended June 30, 2020 (the most recent period for which specific market share data is available), we were the 2nd largest provider of FIAs based on sales of $2.5 billion, and our market share for the same period was 8.8%. For the six months ended June 30, 2019, we were the 2nd largest provider of FIAs based on sales of $3.4 billion, translating to an 8.9% market share.
According to LIMRA, for the year ended December 31, 2019, we were the 2nd largest provider of FIAs based on sales of $6.1 billion, and our market share for the same period was 8.3%. For the year ended December 31, 2018, we were the 2nd largest provider of FIAs based on sales of $6.6 billion, translating to a 9.4% market share.
Key Operating and Non-GAAP Measures
In addition to our results presented in accordance with GAAP, we present certain financial information that includes non-GAAP measures. Management believes the use of these non-GAAP measures, together with the relevant GAAP measures, provides information that may enhance an investor’s understanding of our results of operations and the underlying profitability drivers of our business. The majority of these non-GAAP measures are intended to remove from the results of operations the impact of market volatility (other than with respect to alternative investments) as well as integration, restructuring and certain other expenses which are not part of our underlying profitability drivers, as such items fluctuate from period to period in a manner inconsistent with these drivers. These measures should be considered supplementary to our results in accordance with GAAP and should not be viewed as a substitute for the corresponding GAAP measures.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Adjusted Operating Income (Loss) Available to Common Shareholders
Adjusted operating income (loss) available to common shareholders is a non-GAAP measure used to evaluate our financial performance excluding market volatility and expenses related to integration, restructuring, stock compensation and other expenses. Our adjusted operating income (loss) available to common shareholders equals net income (loss) available to AHL common shareholders adjusted to eliminate the impact of the following (collectively, the non-operating adjustments):
•Investment Gains (Losses), Net of Offsets—Consists of the realized gains and losses on the sale of AFS securities, the change in fair value of reinsurance assets, unrealized gains and losses, allowances, and other investment gains and losses. Unrealized, allowances and other investment gains and losses are comprised of the fair value adjustments of trading securities (other than CLOs) and investments held under the fair value option, derivative gains and losses not hedging FIA index credits, and the change in credit loss allowances recognized in operations net of the change in AmerUs Closed Block fair value reserve related to the corresponding change in fair value of investments and the change in unit-linked reserves related to the corresponding trading securities. Investment gains and losses are net of offsets related to DAC, DSI, and VOBA amortization and changes to guaranteed lifetime withdrawal benefit (GLWB) and guaranteed minimum death benefit (GMDB) reserves (together, GLWB and GMDB reserves represent rider reserves) as well as the market value adjustments (MVA) associated with surrenders or terminations of contracts.
•Change in Fair Values of Derivatives and Embedded Derivatives – FIAs, Net of Offsets—Consists of impacts related to the fair value accounting for derivatives hedging the FIA index credits and the related embedded derivative liability fluctuations from period to period. The index reserve is measured at fair value for the current period and all periods beyond the current policyholder index term. However, the FIA hedging derivatives are purchased to hedge only the current index period. Upon policyholder renewal at the end of the period, new FIA hedging derivatives are purchased to align with the new term. The difference in duration between the FIA hedging derivatives and the index credit reserves creates a timing difference in earnings. This timing difference of the FIA hedging derivatives and index credit reserves is included as a non-operating adjustment, net of offsets related to DAC, DSI, and VOBA amortization and changes to rider reserves.
We primarily hedge with options that align with the index terms of our FIA products (typically 1–2 years). 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 term of an embedded derivative in an FIA contract is longer-dated, there is a duration mismatch which may lead to mismatches for accounting purposes.
•Integration, Restructuring, and Other Non-operating Expenses—Consists of restructuring and integration expenses related to acquisitions and block reinsurance costs as well as certain other expenses, which are not predictable or related to our underlying profitability drivers.
•Stock Compensation Expense—Consists of stock compensation expenses associated with our share incentive plans, excluding our long-term incentive plan, which are not related to our underlying profitability drivers and fluctuate from time to time due to the structure of our plans.
•Bargain Purchase Gain—Consists of adjustments to net income (loss) available to AHL common shareholders as they are not related to our underlying profitability drivers.
•Income Tax (Expense) Benefit – Non-operating—Consists of the income tax effect of non-operating adjustments and is computed by applying the appropriate jurisdiction’s tax rate to the non-operating adjustments that are subject to income tax.
We consider these non-operating adjustments to be meaningful adjustments to net income (loss) available to AHL common shareholders for the reasons discussed in greater detail above. Accordingly, we believe using a measure which excludes the impact of these items is useful in analyzing our business performance and the trends in our results of operations. Together with net income (loss) available to AHL common shareholders, we believe adjusted operating income (loss) available to common shareholders provides a meaningful financial metric that helps investors understand our underlying results and profitability. Adjusted operating income (loss) available to common shareholders should not be used as a substitute for net income (loss) available to AHL common shareholders.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Adjusted Operating ROE
Adjusted operating ROE is a non-GAAP measure used to evaluate our financial performance excluding the impacts of AOCI and the cumulative change in fair value of funds withheld and modco reinsurance assets, net of DAC, DSI, rider reserve and tax offsets. Adjusted AHL common shareholders’ equity is calculated as the ending AHL shareholders’ equity excluding AOCI, the cumulative change in fair value of funds withheld and modco reinsurance assets and preferred stock. Adjusted operating ROE is calculated as the adjusted operating income (loss) available to common shareholders, divided by average adjusted AHL common shareholders’ equity. These adjustments fluctuate period to period in a manner inconsistent with our underlying profitability drivers as the majority of such fluctuation is related to the market volatility of the unrealized gains and losses associated with our AFS securities. Except with respect to reinvestment activity relating to acquired blocks of businesses, we typically buy and hold AFS investments to maturity throughout the duration of market fluctuations, therefore, the period-over-period impacts in unrealized gains and losses are not necessarily indicative of current operating fundamentals or future performance. Accordingly, we believe using measures which exclude AOCI and the cumulative change in fair value of funds withheld and modco reinsurance assets are useful in analyzing trends in our operating results. To enhance the ability to analyze these measures across periods, interim periods are annualized. Adjusted operating ROE should not be used as a substitute for ROE. However, we believe the adjustments to net income (loss) available to AHL common shareholders equity are significant to gaining an understanding of our overall financial performance.
Adjusted Operating Earnings (Loss) Per Common Share, Weighted Average Common Shares Outstanding – Adjusted Operating and Adjusted Book Value Per Common Share
Adjusted operating earnings (loss) per common share, weighted average common shares outstanding – adjusted operating and adjusted book value per common share are non-GAAP measures used to evaluate our financial performance and financial condition. The non-GAAP measures adjust the number of shares included in the corresponding GAAP measures to reflect the conversion or settlement of all shares and other stock-based awards outstanding. We believe using these measures represent an economic view of our share counts and provide a simplified and consistent view of our outstanding shares. Adjusted operating earnings (loss) per common share is calculated as the adjusted operating income (loss) available to common shareholders, over the weighted average common shares outstanding – adjusted operating. Adjusted book value per common share is calculated as the adjusted AHL common shareholders’ equity divided by the adjusted operating common shares outstanding. Effective February 28, 2020, all Class B common shares were converted into Class A common shares and all Class M common shares were converted into warrants and Class A common shares. Our Class B common shares were economically equivalent to Class A common shares and could have been converted to Class A common shares on a one-for-one basis at any time. Our Class M common shares were in the legal form of shares but economically functioned as options as they were convertible into Class A common shares after vesting and settlement of the conversion price. In calculating Class A diluted earnings per share on a GAAP basis, we are required to apply sequencing rules to determine the dilutive impacts, if any, of our Class B common shares, Class M common shares and any other stock-based awards. To the extent our Class B common shares, Class M common shares and/or any other stock-based awards were not dilutive, after considering the dilutive effects of the more dilutive securities in the sequence, they were excluded. Weighted average common shares outstanding – adjusted operating and adjusted operating common shares outstanding assume conversion or settlement of all outstanding items that are able to be converted to or settled in Class A common shares, including the impacts of Class B common shares on a one-for-one basis, the impacts of all Class M common shares net of the conversion price and any other stock-based awards, but excluding any awards for which the exercise or conversion price exceeds the market value of our Class A common shares on the applicable measurement date. For certain historical periods, Class M shares were not included due to issuance restrictions which were contingent upon our IPO. Adjusted operating earnings (loss) per common share, weighted average common shares outstanding – adjusted operating and adjusted book value per common share should not be used as a substitute for basic earnings (loss) per share – Class A common shares, basic weighted average common shares outstanding – Class A or book value per common share. However, we believe the adjustments to the shares and equity are significant to gaining an understanding of our overall results of operations and financial condition.
Adjusted Debt to Capital Ratio
Adjusted debt to capital ratio is a non-GAAP measure used to evaluate our capital structure excluding the impacts of AOCI and the cumulative change in fair value of funds withheld and modco reinsurance assets, net of DAC, DSI, rider reserve and tax offsets. Adjusted debt to capital ratio is calculated as total debt divided by adjusted AHL shareholders’ equity. Adjusted debt to capital ratio should not be used as a substitute for the debt to capital ratio. However, we believe the adjustments to total debt and shareholders’ equity are significant to gaining an understanding of our capitalization, debt utilization and debt capacity.
Retirement Services Net Investment Spread, Investment Margin on Deferred Annuities and Operating Expenses
Net investment spread is a key measurement of the profitability of our Retirement Services segment. Net investment spread measures our investment performance less the total cost of our liabilities. Net investment earned rate is a key measure of our investment performance, while cost of funds is a key measure of the cost of our policyholder benefits and liabilities. Investment margin on our deferred annuities measures our investment performance less the cost of crediting for our deferred annuities, which make up a significant portion of our net reserve liabilities.
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 net invested assets that does not correspond to GAAP net investment income. Net investment earned rate is computed as the income from our net invested assets divided by the average net invested assets, excluding the impacts of our investment in Apollo, for the relevant period. To enhance the ability to analyze these measures across periods, interim periods are annualized. The adjustments to arrive at our net investment earned rate add (a) alternative investment gains and losses, (b) gains and losses related to trading securities for CLOs, (c) net VIE impacts (revenues, expenses and noncontrolling interest), (d) forward points gains and losses on foreign exchange derivative hedges and (e) the change in fair value of reinsurance assets, and removes the proportionate share of the ACRA net investment income associated with the ACRA noncontrolling interest as well as the gain or loss on our investment in Apollo. We include the income and assets supporting our change in fair value of reinsurance assets by evaluating the underlying investments of the funds withheld at interest receivables and we include the net investment income from those underlying investments which does not correspond to the GAAP presentation of change in fair value of reinsurance assets. We exclude the income and assets supporting business that we have exited through ceded reinsurance including funds withheld agreements. We believe the adjustments for reinsurance provide a net investment earned rate on the assets for which we have economic exposure.
Cost of funds includes liability costs related to cost of crediting on both deferred annuities and institutional products as well as other liability costs, but does not include the proportionate share of the ACRA cost of funds associated with the noncontrolling interest. Cost of funds is computed as the total liability costs divided by the average net invested assets, excluding our investment in Apollo, for the relevant period. To enhance the ability to analyze these measures across periods, interim periods are annualized.
Cost of crediting includes the costs for both deferred annuities and institutional products. Cost of crediting on deferred annuities is the interest credited to the policyholders on our fixed strategies as well as the option costs on the indexed annuity strategies. With respect to FIAs, the cost of providing index credits includes the expenses incurred to fund the annual index credits, and where applicable, minimum guaranteed interest credited. Cost of crediting on institutional products is comprised of 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 net invested assets, excluding the investment in Apollo, for the relevant periods. Cost of crediting on deferred annuities is computed as the net interest credited on fixed strategies and option costs on indexed annuity strategies divided by the average net account value of our deferred annuities. Cost of crediting on institutional products is computed as the PRT and funding agreement costs divided by the average net institutional reserve liabilities. Our average net invested assets, excluding our investment in Apollo, net account values and net institutional reserve liabilities are averaged over the number of quarters in the relevant period to obtain our associated cost of crediting for such period. To enhance the ability to analyze these measures across periods, interim periods are annualized.
Other liability costs include DAC, DSI and VOBA amortization, change in rider reserves, the cost of liabilities on products other than deferred annuities and institutional products, excise taxes, premiums, product charges and other revenues. We believe a measure like other liability costs is useful in analyzing the trends of our core business operations and profitability. While we believe other liability costs is a meaningful financial metric and enhances our understanding of the underlying profitability drivers of our business, it should not be used as a substitute for total benefits and expenses presented under GAAP.
Net investment earned rate, cost of funds, net investment spread and investment margin on deferred annuities are non-GAAP measures we use to evaluate the profitability of our business. We believe these metrics are useful in analyzing the trends of our business operations, profitability and pricing discipline. While we believe each of these metrics are meaningful financial metrics and enhance our understanding of the underlying profitability drivers of our business, they should not be used as a substitute for net investment income, interest sensitive contract benefits or total benefits and expenses presented under GAAP.
Operating expenses excludes integration, restructuring and other non-operating expenses, stock compensation expense, interest expense and policy acquisition expenses. We believe a measure like operating expenses is useful in analyzing the trends of our core business operations and profitability. While we believe operating expenses is a meaningful financial metric and enhances our understanding of the underlying profitability drivers of our business, it should not be used as a substitute for policy and other operating expenses presented under GAAP.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net Invested Assets
In managing our business, we analyze net invested assets, which does not correspond to total investments, including investments in related parties, as disclosed in our consolidated financial statements and notes thereto. Net invested assets represents the investments that directly back our net reserve liabilities as well as surplus assets. Net invested assets, excluding our investment in Apollo, is used in the computation of net investment earned rate, which allows us to analyze the profitability of our investment portfolio. Net invested assets includes (a) total investments on the consolidated balance sheets with AFS securities at cost or amortized cost, excluding derivatives, (b) cash and cash equivalents and restricted cash, (c) investments in related parties, (d) accrued investment income, (e) VIE assets, liabilities and noncontrolling interest adjustments, (f) net investment payables and receivables, (g) policy loans ceded (which offset the direct policy loans in total investments) and (h) an allowance for credit losses. Net invested assets also excludes assets associated with funds withheld liabilities related to business exited through reinsurance agreements and derivative collateral (offsetting the related cash positions). We include the underlying investments supporting our assumed funds withheld and modco agreements in our net invested assets calculation in order to match the assets with the income received. We believe the adjustments for reinsurance provide a view of the assets for which we have economic exposure. Net invested assets includes our proportionate share of ACRA investments, based on our economic ownership, but does not include the proportionate share of investments associated with the noncontrolling interest. Net invested assets also includes our investment in Apollo. Our net invested assets, excluding our investment in Apollo, are averaged over the number of quarters in the relevant period to compute our net investment earned rate for such period. While we believe net invested assets is a meaningful financial metric and enhances our understanding of the underlying drivers of our investment portfolio, it should not be used as a substitute for total investments, including related parties, presented under GAAP.
Net Reserve Liabilities
In managing our business, we also analyze net reserve liabilities, which does not correspond to total liabilities as disclosed in our consolidated financial statements and notes thereto. Net reserve liabilities represent our policyholder liability obligations net of reinsurance and is used to analyze the costs of our liabilities. Net reserve liabilities include (a) the interest sensitive contract liabilities, (b) future policy benefits, (c) dividends payable to policyholders, and (d) other policy claims and benefits, offset by reinsurance recoverable, excluding policy loans ceded. Net reserve liabilities include our proportionate share of ACRA reserve liabilities, based on our economic ownership, but does not include the proportionate share of reserve liabilities associated with the noncontrolling interest. Net reserve liabilities is net of the ceded liabilities to third-party reinsurers as the costs of the liabilities are passed to such reinsurers and, therefore, we have no net economic exposure to such liabilities, assuming our reinsurance counterparties perform under our agreements. 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. While we believe net reserve liabilities 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 liabilities presented under GAAP.
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). While we believe sales is a meaningful metric and enhances our understanding of our business performance, it should not be used as a substitute for premiums presented under GAAP.
Consolidated Results of Operations
The following summarizes the consolidated results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(In millions, except percentages)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Revenues
|
$
|
3,275
|
|
|
$
|
4,584
|
|
|
$
|
6,124
|
|
|
$
|
13,002
|
|
Benefits and expenses
|
2,251
|
|
|
4,305
|
|
|
5,401
|
|
|
11,233
|
|
Income before income taxes
|
1,024
|
|
|
279
|
|
|
723
|
|
|
1,769
|
|
Income tax expense (benefit)
|
140
|
|
|
(14)
|
|
|
124
|
|
|
48
|
|
Net income
|
884
|
|
|
293
|
|
|
599
|
|
|
1,721
|
|
Less: Net income attributable to noncontrolling interests
|
232
|
|
|
—
|
|
|
151
|
|
|
—
|
|
Net income attributable to Athene Holding Ltd.
|
652
|
|
|
293
|
|
|
448
|
|
|
1,721
|
|
Less: Preferred stock dividends
|
30
|
|
|
17
|
|
|
67
|
|
|
17
|
|
Net income available to AHL common shareholders
|
$
|
622
|
|
|
$
|
276
|
|
|
$
|
381
|
|
|
$
|
1,704
|
|
|
|
|
|
|
|
|
|
ROE
|
16.2
|
%
|
|
8.5
|
%
|
|
3.5
|
%
|
|
20.8
|
%
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019
In this section, references to 2020 refer to the three months ended September 30, 2020 and references to 2019 refer to the three months ended September 30, 2019.
Net Income Available to AHL Common Shareholders
Net income available to AHL common shareholders increased by $346 million, or 125%, to $622 million in 2020 from $276 million in 2019. ROE increased to 16.2% from 8.5% in 2019. The increase in net income available to AHL common shareholders was driven by a decrease of $2.1 billion in benefits and expenses, partially offset by a $1.3 billion decrease in revenues, $232 million in noncontrolling interests, a $154 million increase in income tax expense, and a $13 million increase in preferred stock dividends.
Revenues
Revenues decreased by $1.3 billion to $3.3 billion in 2020 from $4.6 billion in 2019. The decrease was driven by a decrease in premium, partially offset by an increase in investment related gains and losses and an increase in net investment income.
Premiums decreased by $2.6 billion to $112 million in 2020 from $2.7 billion in the prior year, driven by lower PRT premiums compared to prior year.
Investment related gains and losses increased by $1.1 billion to $1.8 billion in 2020 from $665 million in the prior year, primarily due to the change in fair value of reinsurance assets, the change in fair value of FIA hedging derivatives and the change in provision for credit losses. The change in fair value of reinsurance assets increased $581 million primarily driven by the change in the value of the underlying assets related to credit spreads tightening, partially offset by less of a decrease in US Treasury rates. The change in fair value of FIA hedging derivatives increased $529 million driven by the favorable 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 8.5% in 2020, compared to an increase of 1.2% in 2019. The favorable change in the provision for credit losses of $84 million was primarily due to favorable changes in prepayment assumptions.
Net investment income increased by $119 million to $1.2 billion in 2020 from $1.1 billion in the prior year, primarily driven by favorable alternative investment performance and investment earnings attributed to the Jackson reinsurance transaction as well as a non-recurring adjustment on derivative collateral, partially offset by an unrealized loss on our investment in Apollo of $101 million mainly due to the decrease in valuation price and $80 million of lower floating rate investment income due to the lower interest rate environment.
Benefits and Expenses
Benefits and expenses decreased by $2.1 billion to $2.3 billion in 2020 from $4.3 billion in 2019. The decrease was driven by a decrease in future policy and other policy benefits, partially offset by an increase in interest sensitive contract benefits and an increase in DAC, DSI and VOBA amortization. Our annual unlocking of assumptions resulted in a decrease in benefits and expenses of $77 million, compared to an increase of $165 million in 2019. The 2020 unlocking was driven by a decrease of $110 million in FIA embedded derivative liabilities and an increase of $33 million related to DAC, DSI, VOBA and rider reserves, compared to an increase of $76 million in FIA embedded derivative liabilities and an increase of $89 million related to DAC, DSI, VOBA and rider reserves in 2019.
Future policy and other policy benefits decreased by $2.5 billion to $439 million in 2020 from $3.0 billion in 2019, primarily attributable to lower PRT obligations, partially offset by an increase in the change in rider reserves. The change in rider reserves of $80 million was primarily due to favorable net change in FIA derivatives and a $34 million unfavorable change in unlocking of assumptions. Unlocking in 2020 was favorable by $26 million related to favorable income rider experience and mortality experience, partially offset by changes in lapse assumptions and long-term net investment earned rate assumptions. The 2019 unlocking impacts were favorable by $61 million related to changes in lapse assumptions, partially offset by changes in the long-term net investment earned rate assumption.
Interest sensitive contract benefits increased by $424 million to $1.2 billion in 2020 from $801 million in 2019, driven by an increase in FIA fair value embedded derivatives of $294 million and growth in the block of business including the Jackson reinsurance transaction. The change in the FIA fair value embedded derivatives was primarily due to the performance of the equity indices to which our FIA policies are linked, primarily the S&P 500 index, which experienced an increase of 8.5% in 2020, compared to an increase of 1.2% in 2019, partially offset by a favorable change in unlocking of assumption of $186 million and an unfavorable change in discount rates used in our embedded derivative calculations as the current year experienced a smaller decrease in discount rates compared to 2019. Unlocking in 2020 was $110 million favorable primarily due to lowering future option budgets, while 2019 unlocking was $76 million unfavorable mainly attributed to changes in lapse assumptions.
DAC, DSI and VOBA amortization increased by $4 million to $347 million in 2020 from $343 million in 2019, reflecting unfavorable net change in FIA derivatives and growth in the block of business, offset by a $90 million change in unlocking of assumptions and an unfavorable change in investment related gains. Unlocking in 2020 was $60 million unfavorable primarily related to changes in the long-term net investment earned rate assumptions and mortality experience, partially offset by lapse assumptions, while 2019 unlocking was $150 million unfavorable primarily related to changes in the long-term net investment earned rate and lapse assumptions.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Taxes
Income tax expense (benefit) increased by $154 million to $140 million in 2020 from $(14) million in 2019. The income tax expense for 2020 was primarily driven by higher income subject to tax resulting from the favorable change in fair value of reinsurance assets and net investment income.
Our effective tax rate in the third quarter of 2020 was 14% and (5)% in 2019. 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.
Noncontrolling Interest
Noncontrolling interest increased by $232 million to $232 million in 2020 from $0 million in 2019, driven by net income related to noncontrolling interests in ACRA following the sale of a 67% interest in ACRA to ADIP on October 1, 2019. Effective April 1, 2020, ALRe purchased additional shares in ACRA increasing our ownership from 33% to 36.55%. There was no significant noncontrolling interest prior to the ACRA sale to ADIP.
Preferred Stock Dividends
Preferred stock dividends increased by $13 million to $30 million in 2020 from $17 million in 2019, driven by dividends paid on the preferred stock we issued in June of 2020.
Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019
In this section, references to 2020 refer to the nine months ended September 30, 2020 and references to 2019 refer to the nine months ended September 30, 2019.
Net Income Available to AHL Common Shareholders
Net income available to AHL common shareholders decreased by $1.3 billion, or 78%, to $381 million in 2020 from $1.7 billion in 2019. ROE decreased to 3.5% from 20.8% in 2019. The decrease in net income available to AHL common shareholders was driven by a $6.9 billion decrease in revenues, a $151 million increase in noncontrolling interests, a $76 million increase in income tax expense and a $50 million increase in preferred stock dividends, partially offset by a decrease of $5.8 billion in benefits and expenses.
Revenues
Revenues decreased by $6.9 billion to $6.1 billion in 2020 from $13.0 billion in 2019. The decrease was driven by a decrease in premiums, a decrease in investment related gains and losses, and a decrease in net investment income.
Premiums decreased by $3.9 billion to $1.6 billion in 2020 from $5.5 billion in the prior year, driven by lower PRT premiums compared to prior year, partially offset by an increase in flow reinsurance payout annuities with life contingencies.
Investment related gains and losses decreased by $3.0 billion to $773 million in 2020 from $3.8 billion in the prior year, primarily due to the change in fair value of FIA hedging derivatives, the change in fair value of reinsurance assets, the change in provision for credit losses, the change in fair value of trading securities and a decrease in equity securities reflecting the decline in financial markets. The change in fair value of FIA hedging derivatives decreased $1.7 billion driven by the less favorable 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 4.1% in 2020, compared to an increase of 18.7% in 2019. The change in fair value of reinsurance assets decreased $801 million primarily driven by the change in the value of the underlying assets related to credit spreads widening, partially offset by the decrease in US Treasury rates. The unfavorable change in gross provision for credit losses of $205 million was primarily a result of the forecasted economic downturn from the spread of COVID-19. The unfavorable change in fair value of trading securities of $191 million was comprised primarily of a decrease in AmerUs Closed Block assets of $87 million, CLO equity securities, non-redeemable preferred stock and other trading securities mainly due to credit spreads widening, partially offset by the decrease in US Treasury rates.
Net investment income decreased by $64 million to $3.3 billion in 2020 from $3.4 billion in the prior year, primarily driven by $181 million less in floating rate investment income due to the lower short-term interest rates, higher investment management expenses and less favorable alternative investment performance, partially offset by a gain on our investment in Apollo of $83 million due to the increase in valuation price.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Benefits and Expenses
Benefits and expenses decreased by $5.8 billion to $5.4 billion in 2020 from $11.2 billion in 2019. The decrease was driven by a decrease in future policy and other policy benefits, a decrease in interest sensitive contract benefits and a decrease in DAC, DSI and VOBA amortization, partially offset by an increase in policy and other operating expenses. Our annual unlocking of assumptions resulted in a decrease in benefits and expenses of $77 million, compared to an increase of $165 million in 2019. The unlocking was driven by a decrease of $110 million in FIA embedded derivative liabilities and an increase of $33 million related to DAC, DSI, VOBA and rider reserves, compared to an increase of $76 million in FIA embedded derivative liabilities and an increase of $89 million related to DAC, DSI, VOBA and rider reserves in 2019.
Future policy and other policy benefits decreased by $3.9 billion to $2.5 billion in 2020 from $6.4 billion in 2019, primarily attributable to lower PRT obligations, a decrease in the change in AmerUs Closed Block fair value liability and a decrease in the change in rider reserves. The favorable change in the AmerUs Closed Block fair value liability of $97 million was primarily driven by the lower unrealized gains on the underlying investments related to credit spreads widening, partially offset by the decrease in US Treasury rates compared to prior year. The favorable change in rider reserve of $38 million was primarily due to the unfavorable change in fair value of reinsurance assets derivatives, partially offset by growth in the block of business and a $34 million unfavorable change in unlocking of assumptions. Unlocking in 2020 was favorable $26 million related to favorable income rider experience and mortality experience, partially offset by changes in lapse assumptions and long-term net investment earned rate assumptions. The 2019 unlocking impacts were favorable by $61 million related to changes in lapse assumptions, partially offset by changes in the long-term net investment earned rate assumption.
Interest sensitive contract benefits decreased by $1.4 billion to $2.0 billion in 2020 from $3.4 billion in 2019, driven by a decrease in FIA fair value embedded derivatives of $1.6 billion, partially offset by growth in the block of business including the Jackson reinsurance transaction. The change in the FIA fair value embedded derivatives was primarily due the performance of the equity indices to which our FIA policies are linked, primarily the S&P 500 index, which experienced an increase of 4.1% in 2020, compared to an increase of 18.7% in 2019, as well as a favorable change in discount rates used in our embedded derivative calculations as the current year experienced less of a decrease in rates compared to 2019. Additionally, FIA fair value embedded derivatives unlocking in 2020 was $110 million favorable primarily due to lowering future option budgets, while 2019 was $76 million unfavorable mainly attributed to changes in lapse assumptions.
DAC, DSI and VOBA amortization decreased by $569 million to $284 million in 2020 from $853 million in 2019, primarily due to the unfavorable change in investment related gains and losses as a result of an unfavorable change in fair value of reinsurance assets, partially offset by a $90 million change in unlocking of assumptions and growth in the block of business. Unlocking in 2020 was $60 million unfavorable primarily related to changes in the long-term net investment earned rate assumptions and mortality experience, partially offset by lapse assumptions, while 2019 unlocking was $150 million unfavorable related to changes in the long-term net investment earned rate and lapse assumptions.
Policy and other operating expenses increased by $93 million in 2020 to $637 million from $544 million in 2019, primarily due to the significant growth in the business and higher interest expense related to recent debt issuances and repurchase agreements.
Taxes
Income tax expense (benefit) increased by $76 million to $124 million in 2020 from $48 million in 2019. The income tax expense for 2020 was primarily driven by higher income subject to income tax including the unrealized gains on our investment in Apollo.
Our effective tax rate in 2020 was 17% and 3% in 2019. 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.
Noncontrolling Interest
Noncontrolling interest increased by $151 million to $151 million in 2020 from $0 million in 2019, driven by net income related to noncontrolling interests in ACRA following the sale of a 67% interest in ACRA to ADIP on October 1, 2019. Effective April 1, 2020, ALRe purchased additional shares in ACRA increasing our ownership in ACRA from 33% to 36.55%. There was no significant noncontrolling interest prior to the ACRA sale to ADIP.
Preferred Stock Dividends
Preferred stock dividends increased by $50 million to $67 million in 2020 from $17 million in 2019, driven by dividends we paid on preferred stock we issued in June of 2020.
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 (loss) available to common shareholders by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(In millions, except percentages)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net income available to AHL common shareholders
|
$
|
622
|
|
|
$
|
276
|
|
|
$
|
381
|
|
|
$
|
1,704
|
|
|
|
|
|
|
|
|
|
Non-operating adjustments
|
|
|
|
|
|
|
|
Realized gains (losses) on sale of AFS securities
|
(11)
|
|
|
46
|
|
|
(10)
|
|
|
99
|
|
Unrealized, allowances and other investment gains (losses)
|
49
|
|
|
(31)
|
|
|
(268)
|
|
|
8
|
|
Change in fair value of reinsurance assets
|
434
|
|
|
314
|
|
|
270
|
|
|
1,500
|
|
Offsets to investment losses
|
(126)
|
|
|
(163)
|
|
|
(10)
|
|
|
(566)
|
|
Investment gains (losses), net of offsets
|
346
|
|
|
166
|
|
|
(18)
|
|
|
1,041
|
|
Change in fair values of derivatives and embedded derivatives – FIAs, net of offsets
|
72
|
|
|
(117)
|
|
|
(268)
|
|
|
(201)
|
|
Integration, restructuring and other non-operating expenses
|
—
|
|
|
(34)
|
|
|
(13)
|
|
|
(46)
|
|
Stock compensation expense
|
(1)
|
|
|
(3)
|
|
|
(11)
|
|
|
(9)
|
|
Income tax (expense) benefit – non-operating
|
(97)
|
|
|
21
|
|
|
7
|
|
|
19
|
|
Less: Total non-operating adjustments
|
320
|
|
|
33
|
|
|
(303)
|
|
|
804
|
|
Adjusted operating income available to common shareholders
|
$
|
302
|
|
|
$
|
243
|
|
|
$
|
684
|
|
|
$
|
900
|
|
|
|
|
|
|
|
|
|
Adjusted operating income (loss) available to common shareholders by segment
|
|
|
|
|
|
|
|
Retirement Services
|
$
|
361
|
|
|
$
|
256
|
|
|
$
|
773
|
|
|
$
|
918
|
|
Corporate and Other
|
(59)
|
|
|
(13)
|
|
|
(89)
|
|
|
(18)
|
|
Adjusted operating income available to common shareholders
|
$
|
302
|
|
|
$
|
243
|
|
|
$
|
684
|
|
|
$
|
900
|
|
|
|
|
|
|
|
|
|
Adjusted operating ROE
|
11.7
|
%
|
|
10.6
|
%
|
|
9.1
|
%
|
|
13.3
|
%
|
Retirement Services adjusted operating ROE
|
20.2
|
%
|
|
13.5
|
%
|
|
14.0
|
%
|
|
16.0
|
%
|
Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019
Adjusted Operating Income Available to Common Shareholders
Adjusted operating income available to common shareholders increased by $59 million, or 24%, to $302 million in 2020 from $243 million in 2019. Adjusted operating ROE was 11.7%, up from 10.6% in 2019. Adjusted operating income available to common shareholders excluding the investment in Apollo, net of tax was $383 million in 2020. The increase in adjusted operating income available to common shareholders was primarily driven by an increase in our Retirement Services segment of $105 million, partially offset by a decrease in our Corporate and Other segment of $46 million.
Our consolidated net investment earned rate was 4.41% in 2020, an increase from 4.35% in 2019, primarily due to the favorable performance in our alternative investment portfolio, partially offset by less favorable performance in our fixed and other investment portfolio. Alternative net investment earned rate was 19.44% in 2020, an increase from 9.26% in 2019, primarily driven by the favorable performance of alternatives mainly due to favorable AmeriHome performance, favorable credit income, higher income from private equities and an increase in Catalina. Fixed and other net investment earned rate was 3.70% in 2020, a decrease from 4.11% in 2019, driven by lower floating rate investment income, lower returns on the assets from the Jackson reinsurance transaction and higher levels of cash than in the prior year, partially offset by a non-recurring adjustment on derivative collateral.
Non-operating Adjustments
Non-operating adjustments increased by $287 million to $320 million in 2020 from $33 million in 2019. The increase in non-operating adjustments was primarily driven by the favorable change in net FIA derivatives, the favorable change in fair value of reinsurance assets and a favorable change in provision for credit losses of $79 million (net of noncontrolling interests). Net FIA derivatives were favorable by $189 million primarily due to the favorable change in unlocking of $97 million, the favorable performance of the equity indices to which our FIA policies are linked, primarily the S&P 500 index, and a favorable change in discount rates used in our embedded derivative calculations. FIA embedded derivative unlocking, net of DAC, DSI, VOBA, rider reserve and noncontrolling interest offsets, was favorable by $32 million primarily driven by lowering future option budgets, compared to an unfavorable unlocking of $65 million in 2019, which was mainly attributed to changes in lapse assumptions. The change in fair value of reinsurance assets were favorable by $120 million primarily due to credit spreads tightening, partially offset by less of a decrease in US Treasury rates than the prior year.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019
Adjusted Operating Income Available to Common Shareholders
Adjusted operating income available to common shareholders decreased by $216 million, or 24%, to $684 million in 2020 from $900 million in 2019. Adjusted operating ROE was 9.1%, down from 13.3% in 2019. Adjusted operating income available to common shareholders excluding the investment in Apollo, net of tax was $632 million in 2020. The decrease in adjusted operating income available to common shareholders was primarily driven by a decrease in our Retirement Services segment of $145 million, as well as a decrease in our Corporate and Other segment of $71 million.
Our consolidated net investment earned rate was 3.87% in 2020, a decrease from 4.43% in 2019, primarily due to lower returns in our fixed and other investment portfolio and the unfavorable performance in our alternative portfolio. Fixed and other net investment earned rate was 3.87% in 2020, a decrease from 4.21% in 2019, driven by lower floating rate investment income, higher levels of cash than in the prior year and lower returns on the assets from the Jackson reinsurance transaction. Alternative net investment earned rate was 3.74% in 2020, a decrease from 9.30% in 2019, driven by unfavorable performance in the first quarter of 2020 reflecting the economic downturn from the spread of COVID-19, a decrease in market value of the equity position in OneMain and lower MidCap returns, partially offset by favorable AmeriHome performance.
Non-operating Adjustments
Non-operating adjustments decreased by $1.1 billion to $(303) million in 2020 from $804 million in 2019. The decrease in non-operating adjustments was primarily driven by the unfavorable change in fair value of reinsurance assets, change in provision for credit losses, lower realized gains (losses) on the sale of AFS securities and the unfavorable change in net FIA derivatives. The change in fair value of reinsurance assets were unfavorable $1.2 billion due to credit spreads widening, partially offset by a decrease in US Treasury rates. The unfavorable change in net provision for credit loss in 2020 of $202 million, net of noncontrolling interest, was primarily a result of the forecasted economic downturn from the spread of COVID-19. Realized gains (losses) on sale of AFS securities decreased $109 million due to realized gains recognized in 2019 reflecting favorable economic conditions. Net FIA derivatives were unfavorable by $67 million primarily due to the unfavorable performance of the equity indices to which our FIA policies are linked, primarily the S&P 500 index, partially offset by the favorable change in discount rates used in our embedded derivative calculations as well as the favorable change in unlocking of $97 million. The FIA embedded derivative unlocking, net of DAC, DSI, VOBA, rider reserve and noncontrolling interest offsets, was favorable by $32 million primarily driven by lowering future option budgets, compared to an unfavorable unlocking of $65 million in 2019, which was mainly attributed to changes in lapse assumptions.
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 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 September 30, 2020 Compared to the Three Months Ended September 30, 2019
Adjusted Operating Income Available to Common Shareholders
Adjusted operating income available to common shareholders increased by $105 million, or 41%, to $361 million in 2020, from $256 million in 2019. Adjusted operating ROE was 20.2%, up from 13.5% in the prior period. The increase in adjusted operating income available to common shareholders was driven by higher net investment earnings, partially offset by higher cost of funds and higher operating tax expense primarily driven by higher taxable earnings in 2020. Net investment earnings increased $180 million primarily driven by $19.5 billion of growth in our average net invested assets from prior year attributed to a strong growth in deposits and the Jackson reinsurance transaction, as well as favorable alternative investment performance and a non-recurring adjustment on derivative collateral, partially offset by lower floating rate income and higher levels of cash than in the prior year related to strong deposits in the quarter and raising liquidity in response to the economic downturn. Cost of funds were $26 million higher primarily related to growth in the block of business, including the Jackson reinsurance transaction, partially offset by a decrease in rider reserves and DAC amortization. Rider reserves and DAC amortization decreased primarily due to a favorable change in unlocking of $54 million, partially offset by higher gross profits. Unlocking, net of noncontrolling interest, was favorable by $6 million primarily driven by favorable income rider experience and mortality updates, largely offset by long-term net investment earned rate and lapse assumptions, compared to an unfavorable unlocking of $48 million in 2019, which was mainly attributable to changes in the long-term net investment earned rate and lapse assumptions.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net Investment Spread
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
2020
|
|
2019
|
Net investment earned rate
|
4.22
|
%
|
|
4.31
|
%
|
Cost of funds
|
2.81
|
%
|
|
3.18
|
%
|
Net investment spread
|
1.41
|
%
|
|
1.13
|
%
|
Net investment spread, which measures the spread on our investment performance less the total cost of our liabilities, increased 28 basis points to 1.41% in 2020 from 1.13% in 2019. Net investment earned rate decreased due to a decline in the fixed and other net investment earned rate, partially offset by a higher alternative net investment earned rate. The fixed and other net investment earned rate decreased in 2020 to 3.70% from 4.11% in 2019, primarily attributed to lower floating rate investment income, lower returns on the assets from the Jackson reinsurance transaction and higher levels of cash compared to the prior year, partially offset by a non-recurring adjustment on derivative collateral. The alternative net investments earned rate increased in 2020 to 17.24% from 8.90% in 2019, driven by higher AmeriHome returns mainly due to an increase in valuation reflecting higher origination volumes and increased gains on sale margins, as well as favorable performance on alternatives reported on a lag reflecting the favorable economic conditions in the second quarter.
Cost of funds decreased by 37 basis points to 2.81% in 2020, from 3.18% in 2019, primarily driven by lower other liability costs and lower cost of crediting. Other liability costs decreased 28 basis points primarily driven by a favorable change in unlocking of $54 million, favorable other liability costs from the Jackson reinsurance transaction, partially offset by higher gross profits impacting rider reserves and DAC amortization. Cost of crediting decreased 9 basis points primarily driven by a decrease in floating rate funding agreements, as well as lower rates on those recently issued, and lower rates on recent PRT transactions.
Investment Margin on Deferred Annuities
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
2020
|
|
2019
|
Net investment earned rate
|
4.22
|
%
|
|
4.31
|
%
|
Cost of crediting on deferred annuities
|
1.98
|
%
|
|
1.98
|
%
|
Investment margin on deferred annuities
|
2.24
|
%
|
|
2.33
|
%
|
Investment margin on deferred annuities, which measures our investment performance less the cost of crediting for our deferred annuities, decreased by 9 basis points to 2.24% in 2020, from 2.33% in 2019, driven by a decrease in the net investment earned rate, while the cost of crediting on deferred annuities was consistent with the prior year as we continue to focus on pricing discipline, managing interest rates credited to policyholders and managing the cost of options to fund the annual index credits on our FIA products.
Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019
Adjusted Operating Income Available to Common Shareholders
Adjusted operating income available to common shareholders decreased by $145 million, or 16%, to $773 million in 2020, from $918 million in 2019. Adjusted operating ROE was 14.0%, down from 16.0% in the prior period. The decrease in adjusted operating income available to common shareholders was primarily driven by lower net investment earnings and higher cost of funds. Net investment earnings decreased $53 million primarily driven by lower floating rate investment income, unfavorable alternative investment performance and higher levels of cash than in the prior year, partially offset by $12.2 billion of growth in our average net invested assets from prior year attributed to a strong growth in deposits and the Jackson reinsurance transaction. Cost of funds was higher $46 million primarily due to higher cost of crediting, partially offset by lower other liability costs. Cost of crediting increased $82 million primarily due to growth in the block of business, growth in the institutional channel at higher rates, partially offset by a decrease in floating rate funding agreements, lower rates on recently issued funding agreements and PRT transactions and lower deferred annuity rates related to favorable rate actions and lower option costs. Other liability costs decreased primarily due to favorable rider reserves and DAC amortization related to a favorable change in unlocking of $54 million and lower gross profits, partially offset by unfavorable impacts from equity market performance and growth in the block of business.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net Investment Spread
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
2020
|
|
2019
|
Net investment earned rate
|
3.90
|
%
|
|
4.38
|
%
|
Cost of funds
|
2.76
|
%
|
|
3.00
|
%
|
Net investment spread
|
1.14
|
%
|
|
1.38
|
%
|
Net investment spread, which measures the spread on our investment performance less the total cost of our liabilities, decreased 24 basis points to 1.14% in 2020 from 1.38% in 2019. Net investment earned rate decreased due to a decline in the fixed and other net investment earned rate and the alternative net investment earned rate. The fixed and other net investment earned rate decreased to 3.87% in 2020 from 4.21% in 2019, primarily attributed to lower floating rate investment income, higher levels of cash than in the prior year and lower returns on the assets from the Jackson reinsurance transaction. The alternative net investments earned rate decreased in 2020 to 4.57% from 8.63% in 2019, primarily driven by unfavorable performance as a result of the economic downturn from the spread of COVID-19 in the first quarter of 2020 and a lower MidCap return mainly due to a decrease in valuation reflecting an increase in loan loss assumptions and lower origination volumes reflecting the current interest rate environment, partially offset by higher AmeriHome returns mainly due to an increase in valuation reflecting higher origination volumes and increased gains on sale margins.
Cost of funds decreased by 24 basis points to 2.76% in 2020, from 3.00% in 2019, primarily driven by lower cost of crediting and other liability costs. Cost of crediting decreased 10 basis points primarily driven by a decrease in floating rate funding agreements, lower rates on recently issued funding agreements and PRT transactions and lower deferred annuity rates related to favorable rate actions and lower option costs. Other liability costs decreased 14 basis points primarily driven by favorable rider reserves and DAC amortization related to a favorable change in unlocking, lower Jackson other liability costs and lower gross profits, partially offset by unfavorable impacts from equity market performance.
Investment Margin on Deferred Annuities
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
2020
|
|
2019
|
Net investment earned rate
|
3.90
|
%
|
|
4.38
|
%
|
Cost of crediting on deferred annuities
|
1.94
|
%
|
|
1.98
|
%
|
Investment margin on deferred annuities
|
1.96
|
%
|
|
2.40
|
%
|
Investment margin on deferred annuities, which measures our investment performance less the cost of crediting for our deferred annuities, decreased by 44 basis points to 1.96% in 2020, from 2.40% in 2019, driven by a decrease in the net investment earned rate, partially offset by a decrease in the cost of crediting on deferred annuities from the prior year related to favorable rate actions and lower option costs, as we continue to focus on pricing discipline, managing interest rates credited to policyholders and managing the cost of options to fund the annual index credits on our FIA products.
Corporate and Other
Corporate and Other includes certain other operations related to our corporate activities such as corporate allocated expenses, merger and acquisition costs, debt costs, preferred stock dividends, certain integration and restructuring costs, certain stock-based compensation and intersegment eliminations. In addition, we also hold capital in excess of the level of capital we hold in Retirement Services to support our operating strategy.
Adjusted Operating Loss Available to Common Shareholders
Adjusted operating loss available to common shareholders increased by $46 million to $59 million from $13 million for the three months ended September 30, 2020 and 2019, respectively. The increase in adjusted operating loss available to common shareholders was primarily driven by an $81 million loss on our investment in Apollo, net of tax, partially offset by favorable alternative investment performance from our investment in Athora, an increase in the market value of our equity position in OneMain and the favorable performance on alternatives reported on a lag reflecting the favorable economic conditions in the second quarter of 2020.
Adjusted operating loss available to common shareholders increased by $71 million to $89 million from $18 million for the nine months ended September 30, 2020 and 2019, respectively. The increase in adjusted operating loss available to common shareholders was primarily driven by unfavorable alternative investment performance as a result of the economic downturn from the spread of COVID-19 in the first quarter of 2020 and a decline in the market value of our equity position in OneMain, as well as higher preferred stock dividends, partially offset by a $52 million gain on our investment in Apollo, net of tax.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Investment Portfolio
We had consolidated investments, including related parties, of $170.2 billion and $130.6 billion as of September 30, 2020 and December 31, 2019, respectively. Our investment strategy seeks to achieve sustainable risk-adjusted returns through the disciplined management of our investment portfolio against our long-duration liabilities, coupled with the diversification of risk. The investment strategies utilized by our investment manager focuses 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. Substantially all of our investment portfolio is managed by Apollo, which provides a full suite of services, 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 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. Apollo’s investment team and credit portfolio managers utilize their deep experience to assist us in sourcing and underwriting complex asset classes. Apollo 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 approximately 5% of our portfolio to alternative investments where we primarily focus on fixed income-like, cash flow-based investments.
Net investment income on the condensed consolidated statements of income included management fees under our investment management arrangements with Apollo, inclusive of base and sub-allocation fees, of $111 million and $127 million, respectively, during the three months ended September 30, 2020 and 2019, and $362 million and $313 million, respectively, during the nine months ended September 30, 2020 and 2019. The total amounts we have incurred, directly and indirectly, from Apollo and its affiliates were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Investment management agreements1,2
|
$
|
163
|
|
|
$
|
133
|
|
|
$
|
454
|
|
|
$
|
377
|
|
Fund investments3
|
31
|
|
|
18
|
|
|
42
|
|
|
59
|
|
Other4
|
15
|
|
|
7
|
|
|
37
|
|
|
19
|
|
Gross fees
|
209
|
|
|
158
|
|
|
533
|
|
|
455
|
|
ACRA noncontrolling interest5
|
18
|
|
|
—
|
|
|
32
|
|
|
—
|
|
Net fees
|
$
|
191
|
|
|
$
|
158
|
|
|
$
|
501
|
|
|
$
|
455
|
|
|
|
|
|
|
|
|
|
1 Excludes $1 million and $0 million of sub-advisory fees paid to ISG for the benefit of third-party sub-advisors for the three months ended September 30, 2020 and 2019, respectively, and excludes $2 million and $2 million for the nine months ended September 30, 2020 and 2019, respectively.
|
2 Includes $56 million and $7 million of fees charged by Apollo to third-party cedants for the three months ended September 30, 2020 and 2019, respectively, and $104 million and $67 million for the nine months ended September 30, 2020 and 2019, respectively, with respect to assets supporting obligations reinsured to us. Third-party cedants bear legal responsibility for payment of the investment management fees charged; however, we are the beneficiaries of the services performed and the fees ultimately reduce the settlement payments received from such third-party cedants.
|
3 Includes total management fees, carried interest (including unrealized but accrued carried interest fees) and other fees, including with respect to those investments we hold as equity method investments.
|
4 Other primarily relates to fees resulting from shared services, advisory and other agreements with Apollo or its affiliates.
|
5 Represents those fees incurred directly and indirectly attributable to ACRA, based upon the economic ownership of the noncontrolling interest in ACRA.
|
Our net invested assets, which are those that directly back our net reserve liabilities as well as surplus assets, were $142.8 billion and $117.5 billion as of September 30, 2020 and December 31, 2019, respectively. Apollo’s knowledge of our funding structure and regulatory requirements allows it to design customized strategies and investments for our portfolio. Apollo manages our asset portfolio within the limits and constraints set forth in our Investment and Credit Risk Policy. Under this policy, we set limits on investments in our portfolio by asset class, such as corporate bonds, emerging markets securities, municipal bonds, non-agency RMBS, CMBS, CLOs, commercial mortgage whole loans and mezzanine loans and investment funds. We also set credit risk limits for exposure to a single issuer that vary based on the issuer’s ratings. In addition, our investment portfolio is constrained by its scenario-based capital ratio limit and its stressed liquidity limit.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table presents the carrying values of our total investments and investments in related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
(In millions, except percentages)
|
Carrying Value
|
|
Percent of Total
|
|
Carrying Value
|
|
Percent of Total
|
AFS securities, at fair value
|
$
|
73,988
|
|
|
43.5
|
%
|
|
$
|
71,374
|
|
|
54.7
|
%
|
Trading securities, at fair value
|
2,069
|
|
|
1.2
|
%
|
|
2,070
|
|
|
1.6
|
%
|
Equity securities
|
697
|
|
|
0.4
|
%
|
|
247
|
|
|
0.2
|
%
|
Mortgage loans, net of allowances
|
14,591
|
|
|
8.6
|
%
|
|
14,306
|
|
|
11.0
|
%
|
Investment funds
|
723
|
|
|
0.4
|
%
|
|
750
|
|
|
0.6
|
%
|
Policy loans
|
387
|
|
|
0.2
|
%
|
|
417
|
|
|
0.3
|
%
|
Funds withheld at interest
|
48,593
|
|
|
28.5
|
%
|
|
15,181
|
|
|
11.6
|
%
|
Derivative assets
|
2,771
|
|
|
1.6
|
%
|
|
2,888
|
|
|
2.2
|
%
|
Short-term investments
|
165
|
|
|
0.1
|
%
|
|
596
|
|
|
0.5
|
%
|
Other investments
|
949
|
|
|
0.6
|
%
|
|
158
|
|
|
0.1
|
%
|
Total investments
|
144,933
|
|
|
85.1
|
%
|
|
107,987
|
|
|
82.8
|
%
|
Investments in related parties
|
|
|
|
|
|
|
|
AFS securities, at fair value
|
4,857
|
|
|
2.9
|
%
|
|
3,804
|
|
|
2.9
|
%
|
Trading securities, at fair value
|
1,397
|
|
|
0.8
|
%
|
|
785
|
|
|
0.6
|
%
|
Equity securities, at fair value
|
50
|
|
|
—
|
%
|
|
64
|
|
|
—
|
%
|
Mortgage loans, net of allowances
|
640
|
|
|
0.4
|
%
|
|
653
|
|
|
0.5
|
%
|
Investment funds
|
4,808
|
|
|
2.8
|
%
|
|
3,550
|
|
|
2.7
|
%
|
Funds withheld at interest
|
13,053
|
|
|
7.7
|
%
|
|
13,220
|
|
|
10.1
|
%
|
|
|
|
|
|
|
|
|
Other investments, net of allowances
|
467
|
|
|
0.3
|
%
|
|
487
|
|
|
0.4
|
%
|
Total related party investments
|
25,272
|
|
|
14.9
|
%
|
|
22,563
|
|
|
17.2
|
%
|
Total investments including related party
|
$
|
170,205
|
|
|
100.0
|
%
|
|
$
|
130,550
|
|
|
100.0
|
%
|
The increase in our total investments, including related party, as of September 30, 2020 of $39.7 billion compared to December 31, 2019 was primarily driven by an increase in funds withheld at interest assets as a result of the Jackson reinsurance transaction that occurred in June, growth from gross organic deposits of $18.3 billion in excess of liability outflows of $8.7 billion, an increase in unrealized gains on AFS securities of $1.3 billion attributed to a decrease in US Treasury rates, partially offset by a widening of credit spreads, an increase in investment funds driven by our investment in Apollo of $1.2 billion and an additional investment in Athora and our equity investment in Jackson. These were partially offset by the establishment of the allowance for credit losses.
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 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 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. 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 we believe have less downside risk.
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 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.
With respect to derivative positions, we transact with highly rated counterparties, and expect the counterparties to fulfill their obligations under the contracts. We generally use industry standard agreements and annexes with bilateral collateral provisions to further reduce counterparty credit exposure.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
AFS Securities
We invest in AFS securities 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 securities are carried at fair value, less allowances for expected credit losses, on our condensed consolidated balance sheets. Changes in fair value of our AFS 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. All changes in the allowance for expected credit losses, whether due to passage of time, change in expected cash flows, or change in fair value are recorded through credit loss expense within investment related gains (losses) on the condensed consolidated statements of income.
The distribution of our AFS securities, including related parties, by type is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
(In millions, except percentages)
|
Amortized Cost
|
|
Allowance for Credit Losses
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Fair Value
|
|
Percent of Total
|
AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
US government and agencies
|
$
|
71
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
73
|
|
|
0.1
|
%
|
US state, municipal and political subdivisions
|
765
|
|
|
—
|
|
|
163
|
|
|
(1)
|
|
|
927
|
|
|
1.2
|
%
|
Foreign governments
|
311
|
|
|
—
|
|
|
29
|
|
|
—
|
|
|
340
|
|
|
0.4
|
%
|
Corporate
|
46,424
|
|
|
(30)
|
|
|
5,094
|
|
|
(359)
|
|
|
51,129
|
|
|
64.9
|
%
|
CLO
|
8,621
|
|
|
(1)
|
|
|
68
|
|
|
(318)
|
|
|
8,370
|
|
|
10.6
|
%
|
ABS
|
4,255
|
|
|
(3)
|
|
|
136
|
|
|
(188)
|
|
|
4,200
|
|
|
5.3
|
%
|
CMBS
|
2,279
|
|
|
(19)
|
|
|
68
|
|
|
(89)
|
|
|
2,239
|
|
|
2.8
|
%
|
RMBS
|
6,434
|
|
|
(87)
|
|
|
397
|
|
|
(34)
|
|
|
6,710
|
|
|
8.5
|
%
|
Total AFS securities
|
69,160
|
|
|
(140)
|
|
|
5,957
|
|
|
(989)
|
|
|
73,988
|
|
|
93.8
|
%
|
AFS securities – related party
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
780
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
784
|
|
|
1.0
|
%
|
CLO
|
1,365
|
|
|
(2)
|
|
|
11
|
|
|
(30)
|
|
|
1,344
|
|
|
1.7
|
%
|
ABS
|
2,716
|
|
|
—
|
|
|
62
|
|
|
(49)
|
|
|
2,729
|
|
|
3.5
|
%
|
Total AFS securities – related party
|
4,861
|
|
|
(2)
|
|
|
77
|
|
|
(79)
|
|
|
4,857
|
|
|
6.2
|
%
|
Total AFS securities including related party
|
$
|
74,021
|
|
|
$
|
(142)
|
|
|
$
|
6,034
|
|
|
$
|
(1,068)
|
|
|
$
|
78,845
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(In millions, except percentages)
|
Amortized Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Fair Value
|
|
Percent of Total
|
AFS securities
|
|
|
|
|
|
|
|
|
|
US government and agencies
|
$
|
35
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
36
|
|
|
—
|
%
|
US state, municipal and political subdivisions
|
1,322
|
|
|
220
|
|
|
(1)
|
|
|
1,541
|
|
|
2.1
|
%
|
Foreign governments
|
298
|
|
|
29
|
|
|
—
|
|
|
327
|
|
|
0.4
|
%
|
Corporate
|
44,106
|
|
|
3,332
|
|
|
(210)
|
|
|
47,228
|
|
|
62.8
|
%
|
CLO
|
7,524
|
|
|
21
|
|
|
(196)
|
|
|
7,349
|
|
|
9.8
|
%
|
ABS
|
5,018
|
|
|
124
|
|
|
(24)
|
|
|
5,118
|
|
|
6.8
|
%
|
CMBS
|
2,304
|
|
|
104
|
|
|
(8)
|
|
|
2,400
|
|
|
3.2
|
%
|
RMBS
|
6,872
|
|
|
513
|
|
|
(10)
|
|
|
7,375
|
|
|
9.8
|
%
|
Total AFS securities
|
67,479
|
|
|
4,344
|
|
|
(449)
|
|
|
71,374
|
|
|
94.9
|
%
|
AFS securities – related party
|
|
|
|
|
|
|
|
|
|
Corporate
|
18
|
|
|
1
|
|
|
—
|
|
|
19
|
|
|
—
|
%
|
CLO
|
951
|
|
|
3
|
|
|
(18)
|
|
|
936
|
|
|
1.3
|
%
|
ABS
|
2,814
|
|
|
37
|
|
|
(2)
|
|
|
2,849
|
|
|
3.8
|
%
|
Total AFS securities – related party
|
3,783
|
|
|
41
|
|
|
(20)
|
|
|
3,804
|
|
|
5.1
|
%
|
Total AFS securities including related party
|
$
|
71,262
|
|
|
$
|
4,385
|
|
|
$
|
(469)
|
|
|
$
|
75,178
|
|
|
100.0
|
%
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 securities, including related parties, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
(In millions, except percentages)
|
Fair Value
|
|
Percent of Total
|
|
Fair Value
|
|
Percent of Total
|
Corporate
|
|
|
|
|
|
|
|
Industrial other1
|
$
|
17,984
|
|
|
22.8
|
%
|
|
$
|
14,956
|
|
|
19.9
|
%
|
Financial
|
15,769
|
|
|
20.0
|
%
|
|
15,286
|
|
|
20.3
|
%
|
Utilities
|
12,161
|
|
|
15.4
|
%
|
|
11,217
|
|
|
14.9
|
%
|
Communication
|
2,893
|
|
|
3.7
|
%
|
|
2,739
|
|
|
3.7
|
%
|
Transportation
|
3,106
|
|
|
3.9
|
%
|
|
3,049
|
|
|
4.1
|
%
|
Total corporate
|
51,913
|
|
|
65.8
|
%
|
|
47,247
|
|
|
62.9
|
%
|
Other government-related securities
|
|
|
|
|
|
|
|
US state, municipal and political subdivisions
|
927
|
|
|
1.2
|
%
|
|
1,541
|
|
|
2.1
|
%
|
Foreign governments
|
340
|
|
|
0.4
|
%
|
|
327
|
|
|
0.4
|
%
|
US government and agencies
|
73
|
|
|
0.1
|
%
|
|
36
|
|
|
—
|
%
|
Total non-structured securities
|
53,253
|
|
|
67.5
|
%
|
|
49,151
|
|
|
65.4
|
%
|
Structured securities
|
|
|
|
|
|
|
|
CLO
|
9,714
|
|
|
12.3
|
%
|
|
8,285
|
|
|
11.0
|
%
|
ABS
|
6,929
|
|
|
8.8
|
%
|
|
7,967
|
|
|
10.6
|
%
|
CMBS
|
2,239
|
|
|
2.9
|
%
|
|
2,400
|
|
|
3.2
|
%
|
RMBS
|
|
|
|
|
|
|
|
Agency
|
23
|
|
|
—
|
%
|
|
3
|
|
|
—
|
%
|
Non-agency
|
6,687
|
|
|
8.5
|
%
|
|
7,372
|
|
|
9.8
|
%
|
Total structured securities
|
25,592
|
|
|
32.5
|
%
|
|
26,027
|
|
|
34.6
|
%
|
Total AFS securities including related party
|
$
|
78,845
|
|
|
100.0
|
%
|
|
$
|
75,178
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
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 AFS securities, including related parties, was $78.8 billion and $75.2 billion as of September 30, 2020 and December 31, 2019, respectively. The increase was mainly driven by strong growth from organic deposits in excess of liability outflows, with the resulting funds used to purchase a variety of investments as well as an increase in unrealized gains on AFS securities of $1.3 billion attributed to a decrease in US Treasury rates, partially offset by a widening of credit spreads. These were partially offset by a restructuring of an existing agreement with a reinsurance partner and the establishment of the allowance for credit losses.
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. The SVO conducts credit analysis on these securities for the purpose of assigning an NAIC designation and/or unit price. Generally, the process for assigning an NAIC designation varies based upon whether a security is considered “filing exempt” (General Designation Process). Subject to certain exceptions, a security is typically considered “filing exempt” if it has been rated by a Nationally Recognized Statistical Rating Organization (NRSRO). For securities that are not “filing exempt,” insurance companies assign temporary designations based upon a subjective evaluation of credit quality. The insurance company generally must then submit the securities to the SVO within 120 days of acquisition to receive an NAIC designation. For securities considered “filing exempt,” the SVO utilizes the NRSRO rating and assigns an NAIC designation based upon the following system:
|
|
|
|
|
|
|
|
|
NAIC designation
|
|
NRSRO equivalent rating
|
1
|
|
AAA/AA/A
|
2
|
|
BBB
|
3
|
|
BB
|
4
|
|
B
|
5
|
|
CCC
|
6
|
|
CC and lower
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
An important exception to the General Designation Process occurs in the case of certain loan-backed and structured securities (LBaSS). 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 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 such amount, we view the NAIC’s methodology as the most appropriate means of evaluating the credit quality of our fixed maturity portfolio since a large portion of our holdings were purchased and are carried at significant discounts to par.
The SVO has developed a designation process and provides instruction on modeled LBaSS. For 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 US insurers for all years presented herein. Blackrock provides five prices (breakpoints), based on each US insurer’s statutory book value price, to utilize in determining the NAIC designation for each modeled LBaSS.
The NAIC designation determines the associated level of risk-based capital (RBC) that an insurer is required to hold for all securities owned by the insurer. In general, under the modeled LBaSS process, the larger the discount to par value at the time of determination, the higher the NAIC designation the LBaSS will have.
A summary of our AFS securities, including related parties, by NAIC designation is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
(In millions, except percentages)
|
Amortized Cost
|
|
Fair Value
|
|
Percent of Total
|
|
Amortized Cost
|
|
Fair Value
|
|
Percent of Total
|
NAIC designation
|
|
|
|
|
|
|
|
|
|
|
|
1
|
$
|
36,459
|
|
|
$
|
39,246
|
|
|
49.8
|
%
|
|
$
|
36,392
|
|
|
$
|
38,667
|
|
|
51.4
|
%
|
2
|
32,342
|
|
|
34,614
|
|
|
43.9
|
%
|
|
30,752
|
|
|
32,336
|
|
|
43.0
|
%
|
Total investment grade
|
68,801
|
|
|
73,860
|
|
|
93.7
|
%
|
|
67,144
|
|
|
71,003
|
|
|
94.4
|
%
|
3
|
4,192
|
|
|
4,021
|
|
|
5.1
|
%
|
|
3,237
|
|
|
3,300
|
|
|
4.4
|
%
|
4
|
894
|
|
|
845
|
|
|
1.1
|
%
|
|
740
|
|
|
740
|
|
|
1.0
|
%
|
5
|
101
|
|
|
86
|
|
|
0.1
|
%
|
|
102
|
|
|
94
|
|
|
0.1
|
%
|
6
|
33
|
|
|
33
|
|
|
0.0
|
%
|
|
39
|
|
|
41
|
|
|
0.1
|
%
|
Total below investment grade
|
5,220
|
|
|
4,985
|
|
|
6.3
|
%
|
|
4,118
|
|
|
4,175
|
|
|
5.6
|
%
|
Total AFS securities including related party
|
$
|
74,021
|
|
|
$
|
78,845
|
|
|
100.0
|
%
|
|
$
|
71,262
|
|
|
$
|
75,178
|
|
|
100.0
|
%
|
A significant majority of our AFS portfolio, 93.7% and 94.4% as of September 30, 2020 and December 31, 2019, 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 securities, including related parties, by NRSRO ratings is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
(In millions, except percentages)
|
Fair Value
|
|
Percent of Total
|
|
Fair Value
|
|
Percent of Total
|
NRSRO rating agency designation
|
|
|
|
|
|
|
|
AAA/AA/A
|
$
|
30,541
|
|
|
38.7
|
%
|
|
$
|
28,299
|
|
|
37.7
|
%
|
BBB
|
29,268
|
|
|
37.1
|
%
|
|
29,032
|
|
|
38.6
|
%
|
Non-rated1
|
10,798
|
|
|
13.7
|
%
|
|
10,014
|
|
|
13.3
|
%
|
Total investment grade
|
70,607
|
|
|
89.5
|
%
|
|
67,345
|
|
|
89.6
|
%
|
BB
|
3,920
|
|
|
5.0
|
%
|
|
3,403
|
|
|
4.5
|
%
|
B
|
1,009
|
|
|
1.3
|
%
|
|
813
|
|
|
1.1
|
%
|
CCC
|
1,698
|
|
|
2.2
|
%
|
|
1,981
|
|
|
2.6
|
%
|
CC and lower
|
988
|
|
|
1.2
|
%
|
|
1,076
|
|
|
1.4
|
%
|
Non-rated1
|
623
|
|
|
0.8
|
%
|
|
560
|
|
|
0.8
|
%
|
Total below investment grade
|
8,238
|
|
|
10.5
|
%
|
|
7,833
|
|
|
10.4
|
%
|
Total AFS securities including related party
|
$
|
78,845
|
|
|
100.0
|
%
|
|
$
|
75,178
|
|
|
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. With respect to modeled LBaSS, the NAIC designation methodology differs in significant respects from the NRSRO rating methodology.
|
Consistent with the NAIC Process and Procedures Manual, an NRSRO rating was assigned based on the following criteria: (a) the equivalent S&P rating when 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 when 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, DBRS, and Kroll Bond Rating Agency, Inc, as well as NAIC SVO Private Letter designations.
The portion of our AFS portfolio that was considered below investment grade based on NRSRO ratings was 10.5% and 10.4% as of September 30, 2020 and December 31, 2019, 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 is 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 September 30, 2020 and December 31, 2019, non-rated securities were comprised 66% and 61%, respectively, of corporate private placement securities for which we have not sought individual ratings from the NRSRO, and 21% and 24%, respectively, were comprised of RMBS, many of which were acquired at a significant discount to par. We rely on internal analysis and designations assigned by the NAIC to evaluate the credit risk of our portfolio. As of September 30, 2020 and December 31, 2019, 95% and 95%, respectively, of the non-rated securities were designated NAIC 1 or 2.
Asset-backed Securities – We invest in ABS which are securitized by pools of assets such as consumer loans, automobile loans, student loans, insurance-linked securities, operating cash flows of corporations and cash flows from various types of business equipment. Our ABS holdings were $6.9 billion and $8.0 billion as of September 30, 2020 and December 31, 2019, respectively. The decrease in our ABS portfolio is mainly driven by sales in excess of purchases as well as net unrealized losses due to credit spreads widening, partially offset by the lower interest rate environment. As of September 30, 2020 and December 31, 2019, our ABS portfolio included $6.3 billion (91% of the total) and $7.4 billion (92% of the total), respectively, of securities that are considered investment grade based on NAIC designations, while $6.2 billion (90% of the total) and $7.4 billion (92% 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 $9.7 billion and $8.3 billion as of September 30, 2020 and December 31, 2019, respectively.
A summary of our AFS CLO portfolio, including related parties, by NAIC designations and NRSRO quality ratings is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
(In millions, except percentages)
|
Fair Value
|
|
Percent of Total
|
|
Fair Value
|
|
Percent of Total
|
NAIC designation
|
|
|
|
|
|
|
|
1
|
$
|
5,869
|
|
|
60.4
|
%
|
|
$
|
4,626
|
|
|
55.9
|
%
|
2
|
3,512
|
|
|
36.2
|
%
|
|
3,499
|
|
|
42.2
|
%
|
Total investment grade
|
9,381
|
|
|
96.6
|
%
|
|
8,125
|
|
|
98.1
|
%
|
3
|
322
|
|
|
3.3
|
%
|
|
133
|
|
|
1.6
|
%
|
4
|
8
|
|
|
0.1
|
%
|
|
20
|
|
|
0.2
|
%
|
5
|
3
|
|
|
—
|
%
|
|
7
|
|
|
0.1
|
%
|
6
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Total below investment grade
|
333
|
|
|
3.4
|
%
|
|
160
|
|
|
1.9
|
%
|
Total AFS CLO including related party
|
$
|
9,714
|
|
|
100.0
|
%
|
|
$
|
8,285
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
NRSRO rating agency designation
|
|
|
|
|
|
|
|
AAA/AA/A
|
$
|
5,869
|
|
|
60.4
|
%
|
|
$
|
4,626
|
|
|
55.9
|
%
|
BBB
|
3,512
|
|
|
36.2
|
%
|
|
3,499
|
|
|
42.2
|
%
|
Non-rated
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Total investment grade
|
9,381
|
|
|
96.6
|
%
|
|
8,125
|
|
|
98.1
|
%
|
BB
|
322
|
|
|
3.3
|
%
|
|
133
|
|
|
1.6
|
%
|
B
|
8
|
|
|
0.1
|
%
|
|
20
|
|
|
0.2
|
%
|
CCC
|
3
|
|
|
—
|
%
|
|
7
|
|
|
0.1
|
%
|
CC and lower
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Non-rated
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Total below investment grade
|
333
|
|
|
3.4
|
%
|
|
160
|
|
|
1.9
|
%
|
Total AFS CLO including related party
|
$
|
9,714
|
|
|
100.0
|
%
|
|
$
|
8,285
|
|
|
100.0
|
%
|
As of September 30, 2020 and December 31, 2019, a substantial majority of our AFS CLO portfolio, 96.6% and 98.1%, respectively, was invested in assets considered to be investment grade based upon application of the NAIC’s methodology and based on NRSRO ratings. The increase in our CLO portfolio is mainly driven by additional asset purchases, partially offset by net unrealized losses due to credit spreads widening.
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 $2.2 billion and $2.4 billion as of September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020 and December 31, 2019, our CMBS portfolio included $2.0 billion (91% of the total) and $2.1 billion (89% of the total), respectively, of securities that are considered investment grade based on NAIC designations, while $1.7 billion (75% of the total) and $1.7 billion (72% of the total), respectively, of securities were considered investment grade based on NRSRO ratings.
Residential Mortgage-backed Securities – A portion of our AFS portfolio is invested in RMBS, which are securities constructed from pools of residential mortgages. These holdings were $6.7 billion and $7.4 billion as of September 30, 2020 and December 31, 2019, respectively.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
A summary of our AFS RMBS portfolio by NAIC designations and NRSRO quality ratings is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
(In millions, except percentages)
|
Fair Value
|
|
Percent of Total
|
|
Fair Value
|
|
Percent of Total
|
NAIC designation
|
|
|
|
|
|
|
|
1
|
$
|
6,189
|
|
|
92.2
|
%
|
|
$
|
6,701
|
|
|
90.9
|
%
|
2
|
210
|
|
|
3.2
|
%
|
|
330
|
|
|
4.5
|
%
|
Total investment grade
|
6,399
|
|
|
95.4
|
%
|
|
7,031
|
|
|
95.4
|
%
|
3
|
257
|
|
|
3.8
|
%
|
|
289
|
|
|
3.9
|
%
|
4
|
50
|
|
|
0.7
|
%
|
|
52
|
|
|
0.7
|
%
|
5
|
4
|
|
|
0.1
|
%
|
|
3
|
|
|
—
|
%
|
6
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Total below investment grade
|
311
|
|
|
4.6
|
%
|
|
344
|
|
|
4.6
|
%
|
Total AFS RMBS
|
$
|
6,710
|
|
|
100.0
|
%
|
|
$
|
7,375
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
NRSRO rating agency designation
|
|
|
|
|
|
|
|
AAA/AA/A
|
$
|
665
|
|
|
9.9
|
%
|
|
$
|
715
|
|
|
9.7
|
%
|
BBB
|
531
|
|
|
7.9
|
%
|
|
606
|
|
|
8.2
|
%
|
Non-rated1
|
2,312
|
|
|
34.5
|
%
|
|
2,428
|
|
|
32.9
|
%
|
Total investment grade
|
3,508
|
|
|
52.3
|
%
|
|
3,749
|
|
|
50.8
|
%
|
BB
|
229
|
|
|
3.4
|
%
|
|
281
|
|
|
3.8
|
%
|
B
|
260
|
|
|
3.9
|
%
|
|
232
|
|
|
3.2
|
%
|
CCC
|
1,617
|
|
|
24.1
|
%
|
|
1,890
|
|
|
25.6
|
%
|
CC and lower
|
987
|
|
|
14.7
|
%
|
|
1,074
|
|
|
14.6
|
%
|
Non-rated1
|
109
|
|
|
1.6
|
%
|
|
149
|
|
|
2.0
|
%
|
Total below investment grade
|
3,202
|
|
|
47.7
|
%
|
|
3,626
|
|
|
49.2
|
%
|
Total AFS RMBS
|
$
|
6,710
|
|
|
100.0
|
%
|
|
$
|
7,375
|
|
|
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. The NAIC designation methodology differs in significant respects from the NRSRO rating methodology.
|
A significant majority of our RMBS portfolio, 95.4% and 95.4% as of September 30, 2020 and December 31, 2019, respectively, was invested in assets considered to be investment grade based upon an application of the NAIC designations. 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 US housing had caused significant downward pressure on prices of RMBS, we carry most of our investments in RMBS at significant discounts to par value, which results in an investment grade NAIC designation. In contrast, our understanding is that in setting ratings, NRSROs focus on the likelihood of recovering all contractual payments including principal at par value. As a result of a fundamental difference in approach, as of September 30, 2020 and December 31, 2019, NRSRO characterized 52.3% and 50.8%, respectively, of our RMBS portfolio as investment grade.
Unrealized Losses
Our investments in AFS securities, including related parties, are reported at fair value with changes in fair value recorded in other comprehensive income. Certain of our AFS securities, including related parties, have experienced declines in fair value that we consider temporary in nature. As of September 30, 2020, our AFS securities, including related party, had a fair value of $78.8 billion, which was 6.5% above amortized cost of $74.0 billion. As of December 31, 2019, our AFS securities, including related party, had a fair value of $75.2 billion, which was 5.5% above amortized cost of $71.3 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.
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, for which an allowance for credit losses has not been recorded, by NAIC designations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
(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
|
$
|
7,727
|
|
|
$
|
(239)
|
|
|
$
|
7,488
|
|
|
96.9
|
%
|
|
$
|
39,246
|
|
|
(0.6)
|
%
|
2
|
7,627
|
|
|
(381)
|
|
|
7,246
|
|
|
95.0
|
%
|
|
34,614
|
|
|
(1.1)
|
%
|
Total investment grade
|
15,354
|
|
|
(620)
|
|
|
14,734
|
|
|
96.0
|
%
|
|
73,860
|
|
|
(0.8)
|
%
|
3
|
2,127
|
|
|
(242)
|
|
|
1,885
|
|
|
88.6
|
%
|
|
4,021
|
|
|
(6.0)
|
%
|
4
|
502
|
|
|
(70)
|
|
|
432
|
|
|
86.1
|
%
|
|
845
|
|
|
(8.3)
|
%
|
5
|
61
|
|
|
(11)
|
|
|
50
|
|
|
82.0
|
%
|
|
86
|
|
|
(12.8)
|
%
|
6
|
1
|
|
|
—
|
|
|
1
|
|
|
100.0
|
%
|
|
33
|
|
|
—
|
%
|
Total below investment grade
|
2,691
|
|
|
(323)
|
|
|
2,368
|
|
|
88.0
|
%
|
|
4,985
|
|
|
(6.5)
|
%
|
Total
|
$
|
18,045
|
|
|
$
|
(943)
|
|
|
$
|
17,102
|
|
|
94.8
|
%
|
|
$
|
78,845
|
|
|
(1.2)
|
%
|
The following tables reflect the unrealized losses on the AFS portfolio, including related parties, by NAIC designations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 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
|
$
|
5,672
|
|
|
$
|
(160)
|
|
|
$
|
5,512
|
|
|
97.2
|
%
|
|
$
|
38,667
|
|
|
(0.4)
|
%
|
2
|
5,252
|
|
|
(223)
|
|
|
5,029
|
|
|
95.8
|
%
|
|
32,336
|
|
|
(0.7)
|
%
|
Total investment grade
|
10,924
|
|
|
(383)
|
|
|
10,541
|
|
|
96.5
|
%
|
|
71,003
|
|
|
(0.5)
|
%
|
3
|
945
|
|
|
(41)
|
|
|
904
|
|
|
95.7
|
%
|
|
3,300
|
|
|
(1.2)
|
%
|
4
|
338
|
|
|
(34)
|
|
|
304
|
|
|
89.9
|
%
|
|
740
|
|
|
(4.6)
|
%
|
5
|
79
|
|
|
(11)
|
|
|
68
|
|
|
86.1
|
%
|
|
94
|
|
|
(11.7)
|
%
|
6
|
1
|
|
|
—
|
|
|
1
|
|
|
100.0
|
%
|
|
41
|
|
|
—
|
%
|
Total below investment grade
|
1,363
|
|
|
(86)
|
|
|
1,277
|
|
|
93.7
|
%
|
|
4,175
|
|
|
(2.1)
|
%
|
Total
|
$
|
12,287
|
|
|
$
|
(469)
|
|
|
$
|
11,818
|
|
|
96.2
|
%
|
|
$
|
75,178
|
|
|
(0.6)
|
%
|
The gross unrealized losses on AFS securities, including related parties, were $943 million and $469 million as of September 30, 2020 and December 31, 2019, respectively. The increase in unrealized losses was driven by credit spreads widening, partially offset by the decrease in US Treasury rates during the nine months ended September 30, 2020.
As of September 30, 2020 and December 31, 2019, we held $6.3 billion and $5.6 billion, respectively, in energy sector fixed maturity securities, or 8% and 7%, respectively, of the total fixed maturity securities, including related parties. The gross unrealized capital losses on these securities were $143 million and $65 million, or 15% and 14% of the total unrealized losses, respectively.
Provision for Credit Losses
For our credit loss accounting policies and the assumptions used in the allowances, 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.
As of September 30, 2020, we held an allowance for credit loss on AFS securities of $142 million. During the nine months ended September 30, 2020, we recorded a change in provision for credit losses on AFS securities of $125 million, of which $64 million had an income statement impact. These changes were primarily driven by an increase in RMBS and corporate allowances. The intent-to-sell impairments for the nine months ended September 30, 2020 were $16 million primarily related to corporates. During the nine months ended September 30, 2019, we recorded $32 million of OTTI impairments.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
International Exposure
A portion of our AFS securities are invested in securities with international exposure. As of September 30, 2020 and December 31, 2019, 34% and 32% of the carrying value of our AFS 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 US dollars or do not expose us to significant foreign currency risk as a result of foreign currency swap arrangements.
The following table presents our international exposure in our AFS portfolio, including related parties, by country or region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
(In millions, except percentages)
|
Amortized Cost
|
|
Fair Value
|
|
Percent of Total
|
|
Amortized Cost
|
|
Fair Value
|
|
Percent of Total
|
Country of risk
|
|
|
|
|
|
|
|
|
|
|
|
Ireland
|
$
|
1,963
|
|
|
$
|
2,047
|
|
|
7.7
|
%
|
|
$
|
1,109
|
|
|
$
|
1,137
|
|
|
4.7
|
%
|
Italy
|
6
|
|
|
7
|
|
|
—
|
%
|
|
6
|
|
|
7
|
|
|
—
|
%
|
Spain
|
64
|
|
|
70
|
|
|
0.3
|
%
|
|
66
|
|
|
71
|
|
|
0.2
|
%
|
Total Ireland, Italy, Greece, Spain and Portugal1
|
2,033
|
|
|
2,124
|
|
|
8.0
|
%
|
|
1,181
|
|
|
1,215
|
|
|
4.9
|
%
|
Other Europe
|
7,223
|
|
|
7,783
|
|
|
29.3
|
%
|
|
7,333
|
|
|
7,711
|
|
|
32.1
|
%
|
Total Europe
|
9,256
|
|
|
9,907
|
|
|
37.3
|
%
|
|
8,514
|
|
|
8,926
|
|
|
37.0
|
%
|
Non-US North America
|
11,986
|
|
|
11,888
|
|
|
44.7
|
%
|
|
11,650
|
|
|
11,670
|
|
|
48.5
|
%
|
Australia & New Zealand
|
1,870
|
|
|
2,051
|
|
|
7.7
|
%
|
|
1,853
|
|
|
1,966
|
|
|
8.2
|
%
|
Central & South America
|
514
|
|
|
542
|
|
|
2.0
|
%
|
|
473
|
|
|
501
|
|
|
2.1
|
%
|
Africa & Middle East
|
1,577
|
|
|
1,644
|
|
|
6.2
|
%
|
|
350
|
|
|
379
|
|
|
1.6
|
%
|
Asia/Pacific
|
531
|
|
|
561
|
|
|
2.1
|
%
|
|
580
|
|
|
616
|
|
|
2.6
|
%
|
Total
|
$
|
25,734
|
|
|
$
|
26,593
|
|
|
100.0
|
%
|
|
$
|
23,420
|
|
|
$
|
24,058
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
1 As of each of the respective periods, we had no holdings in Greece or Portugal.
|
Approximately 94.5% and 95.8% of these securities are investment grade by NAIC designation as of both September 30, 2020 and December 31, 2019. As of September 30, 2020, 10% of our AFS securities, including related parties, were invested in CLOs of Cayman Islands issuers (included in Non-US North America) for which underlying investments are largely loans to US issuers and 24% were invested in securities of other non-US 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 $2.1 billion and $1.2 billion of exposure in these countries as of September 30, 2020 and December 31, 2019, respectively.
As of September 30, 2020, we held United Kingdom and Channel Islands AFS securities of $3.2 billion, or 4.0% of our AFS securities, including related parties. As of September 30, 2020, these securities were in a net unrealized gain position of $177 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 $3.5 billion and $2.9 billion as of September 30, 2020 and December 31, 2019. The increase in trading securities was primarily driven by the dissolution of CoInvest VII during the quarter, which resulted in MidCap being held directly as a trading security. Trading securities are primarily comprised of AmerUs Closed Block securities for which we have elected the fair value option valuation, CLO and ABS equity tranche securities, MidCap profit participating notes, structured securities with embedded derivatives, and investments which support various reinsurance arrangements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Mortgage Loans
The following is a summary of our mortgage loan portfolio by collateral type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
(In millions, except percentages)
|
Net Carrying Value
|
|
Percent of Total
|
|
Net Carrying Value
|
|
Percent of Total
|
Property type
|
|
|
|
|
|
|
|
Office building
|
$
|
3,526
|
|
|
23.2
|
%
|
|
$
|
2,899
|
|
|
19.3
|
%
|
Retail
|
2,029
|
|
|
13.3
|
%
|
|
2,182
|
|
|
14.6
|
%
|
Apartment
|
2,335
|
|
|
15.3
|
%
|
|
2,142
|
|
|
14.3
|
%
|
Hotels
|
1,182
|
|
|
7.8
|
%
|
|
1,104
|
|
|
7.4
|
%
|
Industrial
|
1,407
|
|
|
9.2
|
%
|
|
1,448
|
|
|
9.7
|
%
|
Other commercial1
|
679
|
|
|
4.5
|
%
|
|
730
|
|
|
4.9
|
%
|
Total net commercial mortgage loans
|
11,158
|
|
|
73.3
|
%
|
|
10,505
|
|
|
70.2
|
%
|
Residential loans
|
4,073
|
|
|
26.7
|
%
|
|
4,454
|
|
|
29.8
|
%
|
Total mortgage loans, net of allowances
|
$
|
15,231
|
|
|
100.0
|
%
|
|
$
|
14,959
|
|
|
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 $15.2 billion and $15.0 billion as of September 30, 2020 and December 31, 2019, respectively. This included $2.0 billion and $1.9 billion of mezzanine mortgage loans as of September 30, 2020 and December 31, 2019, respectively. 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 CMLs 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 US. 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 credit loss 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 September 30, 2020 and December 31, 2019, we had $81 million and $67 million, respectively, of mortgage loans that were 90 days past due, of which $34 million and $33 million, respectively, were in the process of foreclosure. We will continue to evaluate these policies with regard to the economic downturn brought about by the spread of COVID-19. Our ability to initiate foreclosure proceedings may be limited by legislation passed and executive orders issued in response to the spread of COVID-19.
See Note 2 – Investments to the condensed consolidated financial statements for information regarding credit loss allowance for collection loss, loan-to-value, and debt service coverage.
As of September 30, 2020, we had a valuation allowance of $328 million comprising of $232 million of CML and $96 million of RML allowances. During the nine months ended September 30, 2020, we recorded a change in provision for credit losses on CMLs of $55 million and RMLs of $50 million. The increase in provision for credit losses was primarily a result of the adoption of CECL and the economic downturn experienced from the spread of COVID-19. As of December 31, 2019, we had a valuation allowance of $11 million.
Investment Funds
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 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table illustrates our investment funds, including related party:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
(In millions, except percentages)
|
Carrying Value
|
|
Percent of Total
|
|
Carrying Value
|
|
Percent of Total
|
Investment funds
|
|
|
|
|
|
|
|
Real estate
|
$
|
290
|
|
|
5.3
|
%
|
|
$
|
277
|
|
|
6.4
|
%
|
Credit funds
|
110
|
|
|
2.0
|
%
|
|
153
|
|
|
3.6
|
%
|
Private equity
|
257
|
|
|
4.6
|
%
|
|
236
|
|
|
5.5
|
%
|
Real assets
|
66
|
|
|
1.2
|
%
|
|
83
|
|
|
2.0
|
%
|
Natural resources
|
—
|
|
|
—
|
%
|
|
1
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
Total investment funds
|
723
|
|
|
13.1
|
%
|
|
750
|
|
|
17.5
|
%
|
Investment funds – related parties
|
|
|
|
|
|
|
|
Differentiated investments
|
|
|
|
|
|
|
|
MidCap
|
—
|
|
|
—
|
%
|
|
547
|
|
|
12.7
|
%
|
AmeriHome
|
666
|
|
|
12.1
|
%
|
|
487
|
|
|
11.3
|
%
|
Catalina
|
317
|
|
|
5.7
|
%
|
|
271
|
|
|
6.3
|
%
|
Athora
|
572
|
|
|
10.3
|
%
|
|
132
|
|
|
3.1
|
%
|
Venerable
|
108
|
|
|
2.0
|
%
|
|
99
|
|
|
2.3
|
%
|
Other
|
272
|
|
|
4.9
|
%
|
|
222
|
|
|
5.2
|
%
|
Total differentiated investments
|
1,935
|
|
|
35.0
|
%
|
|
1,758
|
|
|
40.9
|
%
|
Real estate
|
686
|
|
|
12.4
|
%
|
|
853
|
|
|
19.8
|
%
|
Credit funds
|
373
|
|
|
6.8
|
%
|
|
370
|
|
|
8.6
|
%
|
Private equity
|
257
|
|
|
4.6
|
%
|
|
105
|
|
|
2.4
|
%
|
Real assets
|
196
|
|
|
3.5
|
%
|
|
182
|
|
|
4.2
|
%
|
Natural resources
|
101
|
|
|
1.8
|
%
|
|
163
|
|
|
3.8
|
%
|
Public equities
|
62
|
|
|
1.1
|
%
|
|
119
|
|
|
2.8
|
%
|
Investment in Apollo
|
1,198
|
|
|
21.7
|
%
|
|
—
|
|
|
—
|
%
|
Total investment funds – related parties
|
4,808
|
|
|
86.9
|
%
|
|
3,550
|
|
|
82.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment funds including related parties
|
$
|
5,531
|
|
|
100.0
|
%
|
|
$
|
4,300
|
|
|
100.0
|
%
|
Overall, the total investment funds, including related party, were $5.5 billion and $4.3 billion, respectively, as of September 30, 2020 and December 31, 2019. See Note 2 – Investments 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. These risks expose us to potential volatility in our earnings period-over-period. We actively monitor our exposure to these risks. The increase in investment funds, including related party, was primarily driven by our investment in Apollo of $1.2 billion as of September 30, 2020 as well as an increase in our investment in Athora, partially offset by the dissolution of CoInvest VII, which resulted in MidCap profit participating notes being held directly as a trading security.
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, including those held with VIAC, Lincoln and Jackson. As of September 30, 2020, the majority of the ceding companies holding the assets pursuant to such reinsurance agreements had a financial strength rating of A or better (based on an A.M. Best scale).
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 embedded derivative in our reinsurance agreements is similar to a total return swap on the income generated by the underlying assets held by the ceding companies. The change in the embedded derivative is recorded in investment related gains (losses). Although we do not legally own the underlying investments in the funds withheld at interest, in each instance the ceding company has hired Apollo to manage the withheld assets in accordance with our investment guidelines.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following summarizes the underlying investment composition of the funds withheld at interest, including related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
(In millions, except percentages)
|
Carrying Value
|
|
Percent of Total
|
|
Carrying Value
|
|
Percent of Total
|
Fixed maturity securities
|
|
|
|
|
|
|
|
US government and agencies
|
$
|
15
|
|
|
—
|
%
|
|
$
|
15
|
|
|
0.1
|
%
|
US state, municipal and political subdivisions
|
524
|
|
|
0.8
|
%
|
|
482
|
|
|
1.7
|
%
|
Foreign governments
|
291
|
|
|
0.5
|
%
|
|
143
|
|
|
0.5
|
%
|
Corporate
|
37,939
|
|
|
61.5
|
%
|
|
14,590
|
|
|
51.4
|
%
|
CLO
|
4,610
|
|
|
7.5
|
%
|
|
2,586
|
|
|
9.1
|
%
|
ABS
|
3,851
|
|
|
6.2
|
%
|
|
2,510
|
|
|
8.8
|
%
|
CMBS
|
2,398
|
|
|
3.9
|
%
|
|
756
|
|
|
2.7
|
%
|
RMBS
|
2,289
|
|
|
3.7
|
%
|
|
1,482
|
|
|
5.2
|
%
|
Equity securities
|
96
|
|
|
0.2
|
%
|
|
74
|
|
|
0.3
|
%
|
Mortgage loans
|
7,003
|
|
|
11.4
|
%
|
|
4,357
|
|
|
15.3
|
%
|
Investment funds
|
974
|
|
|
1.6
|
%
|
|
807
|
|
|
2.8
|
%
|
Derivative assets
|
183
|
|
|
0.3
|
%
|
|
224
|
|
|
0.8
|
%
|
Short-term investments
|
1,024
|
|
|
1.7
|
%
|
|
157
|
|
|
0.6
|
%
|
Other investments
|
15
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Cash and cash equivalents
|
809
|
|
|
1.3
|
%
|
|
239
|
|
|
0.8
|
%
|
Other assets and liabilities
|
(375)
|
|
|
(0.6)
|
%
|
|
(21)
|
|
|
(0.1)
|
%
|
Total funds withheld at interest including related party
|
$
|
61,646
|
|
|
100.0
|
%
|
|
$
|
28,401
|
|
|
100.0
|
%
|
As of September 30, 2020 and December 31, 2019, we held $61.6 billion and $28.4 billion, respectively, of funds withheld at interest receivables, including related party. Approximately 94.6% and 94.4% of the fixed maturity securities within the funds withheld at interest are investment grade by NAIC designation as of September 30, 2020 and December 31, 2019, respectively. The increase in funds withheld at interest, including related party, was primarily driven by a $28.8 billion increase in assets as a result of the Jackson reinsurance transaction, the restructuring of a coinsurance agreement to a funds withheld agreement with an existing reinsurance partner and net unrealized gains attributed to a decrease in US Treasury rates, partially offset by a widening of credit spreads.
Derivative Instruments
We hold derivative instruments for economic hedging purposes to reduce our exposure to cash flow variability of assets and liabilities, equity market risk, interest rate risk, credit risk and foreign exchange risk. The types of derivatives we may use include interest rate swaps, foreign currency swaps and forward contracts, total return swaps, credit default swaps, variance swaps, futures and fixed indexed options.
A discussion regarding our derivative instruments and how such instruments are used to manage risk is included in Note 3 – Derivative Instruments to the condensed consolidated financial statements.
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
Net Invested Assets
The following summarizes our net invested assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
(In millions, except percentages)
|
Net Invested Asset Value1
|
|
Percent of Total
|
|
Net Invested Asset Value1
|
|
Percent of Total
|
Corporate
|
$
|
68,479
|
|
|
47.9
|
%
|
|
$
|
55,077
|
|
|
46.9
|
%
|
CLO
|
12,958
|
|
|
9.1
|
%
|
|
10,223
|
|
|
8.7
|
%
|
Credit
|
81,437
|
|
|
57.0
|
%
|
|
65,300
|
|
|
55.6
|
%
|
RMBS
|
8,278
|
|
|
5.8
|
%
|
|
8,394
|
|
|
7.1
|
%
|
CML
|
16,210
|
|
|
11.3
|
%
|
|
14,038
|
|
|
12.0
|
%
|
RML
|
4,243
|
|
|
3.0
|
%
|
|
4,490
|
|
|
3.8
|
%
|
CMBS
|
3,379
|
|
|
2.4
|
%
|
|
2,930
|
|
|
2.5
|
%
|
Real estate
|
32,110
|
|
|
22.5
|
%
|
|
29,852
|
|
|
25.4
|
%
|
ABS
|
10,423
|
|
|
7.3
|
%
|
|
10,317
|
|
|
8.8
|
%
|
Alternative investments
|
6,448
|
|
|
4.5
|
%
|
|
5,586
|
|
|
4.8
|
%
|
State, municipal, political subdivisions and foreign government
|
2,057
|
|
|
1.4
|
%
|
|
2,260
|
|
|
1.9
|
%
|
Equity securities
|
406
|
|
|
0.3
|
%
|
|
365
|
|
|
0.3
|
%
|
Short-term investments
|
685
|
|
|
0.5
|
%
|
|
624
|
|
|
0.5
|
%
|
US government and agencies
|
85
|
|
|
0.1
|
%
|
|
49
|
|
|
—
|
%
|
Other investments
|
20,104
|
|
|
14.1
|
%
|
|
19,201
|
|
|
16.3
|
%
|
Cash and equivalents
|
6,682
|
|
|
4.7
|
%
|
|
1,958
|
|
|
1.7
|
%
|
Policy loans and other
|
1,304
|
|
|
0.9
|
%
|
|
1,175
|
|
|
1.0
|
%
|
Net invested assets excluding investment in Apollo
|
141,637
|
|
|
99.2
|
%
|
|
117,486
|
|
|
100.0
|
%
|
Investment in Apollo
|
1,198
|
|
|
0.8
|
%
|
|
—
|
|
|
—
|
%
|
Net invested assets
|
$
|
142,835
|
|
|
100.0
|
%
|
|
$
|
117,486
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
1 See Key Operating and Non-GAAP Measures for the definition of net invested assets.
|
Our net invested assets were $142.8 billion and $117.5 billion as of September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020, our net invested assets were mainly comprised of 47.9% of corporate securities, 24.6% of structured securities, 14.3% of mortgage loans and 4.5% of alternative investments. Corporate securities included $18.1 billion of private placements, which represented 12.6% of our net invested assets. The increase in net invested assets as of September 30, 2020 from December 31, 2019 was primarily driven by a $10.1 billion increase in assets, net of the ACRA noncontrolling interest, as a result of the Jackson reinsurance transaction, our investment in Apollo of $1.2 billion, growth in deposits over liability outflows and reinvestment of earnings.
In managing our business we utilize net invested assets as presented in the above table. Net invested assets do not correspond to total investments, including related parties, on our condensed consolidated balance sheets, as discussed previously in Key Operating and Non-GAAP Measures. Net invested assets represent the investments that directly back our net reserve 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 adjust for VIEs in order to show the net investment in the funds, which are included in the alternative investments line above as well as adjust for the allowance for credit losses. Net invested assets includes our proportionate share of ACRA investments, based on our economic ownership, but excludes the proportionate share of investments associated with the noncontrolling interest.
Net invested assets is utilized by management to evaluate our investment portfolio. Net invested assets, excluding our strategic investment in Apollo, is used in the computation of net investment earned rate, which allows us to analyze the profitability of our investment portfolio. Net invested assets 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
Net Alternative Investments
The following summarizes our alternative investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
(In millions, except percentages)
|
Net Invested Asset Value
|
|
Percent of Total
|
|
Net Invested Asset Value
|
|
Percent of Total
|
Retirement Services
|
|
|
|
|
|
|
|
Differentiated investments
|
|
|
|
|
|
|
|
AmeriHome
|
$
|
818
|
|
|
12.7
|
%
|
|
$
|
595
|
|
|
10.7
|
%
|
MidCap
|
609
|
|
|
9.4
|
%
|
|
547
|
|
|
9.8
|
%
|
Catalina
|
317
|
|
|
4.9
|
%
|
|
271
|
|
|
4.9
|
%
|
Venerable
|
108
|
|
|
1.7
|
%
|
|
99
|
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
Other
|
318
|
|
|
4.9
|
%
|
|
208
|
|
|
3.7
|
%
|
Total differentiated investments
|
2,170
|
|
|
33.6
|
%
|
|
1,720
|
|
|
30.9
|
%
|
Real estate
|
1,268
|
|
|
19.7
|
%
|
|
1,430
|
|
|
25.6
|
%
|
Credit
|
917
|
|
|
14.2
|
%
|
|
968
|
|
|
17.3
|
%
|
Private equity
|
570
|
|
|
8.8
|
%
|
|
378
|
|
|
6.8
|
%
|
Real assets
|
378
|
|
|
5.9
|
%
|
|
349
|
|
|
6.2
|
%
|
Natural resources
|
48
|
|
|
0.7
|
%
|
|
51
|
|
|
0.9
|
%
|
Other
|
—
|
|
|
—
|
%
|
|
58
|
|
|
1.0
|
%
|
Total Retirement Services alternative investments
|
5,351
|
|
|
82.9
|
%
|
|
4,954
|
|
|
88.7
|
%
|
Corporate and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Athora
|
553
|
|
|
8.6
|
%
|
|
140
|
|
|
2.5
|
%
|
Credit
|
94
|
|
|
1.5
|
%
|
|
128
|
|
|
2.3
|
%
|
Natural resources
|
230
|
|
|
3.6
|
%
|
|
245
|
|
|
4.4
|
%
|
Equities1
|
220
|
|
|
3.4
|
%
|
|
119
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
Total Corporate and Other alternative investments
|
1,097
|
|
|
17.1
|
%
|
|
632
|
|
|
11.3
|
%
|
Net alternative investments
|
$
|
6,448
|
|
|
100.0
|
%
|
|
$
|
5,586
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
1 As of September 30, 2020, equities includes our private equity investment in Jackson and a public equity position in OneMain Holdings, Inc. (ticker: OMF). As of December 31, 2019, equities includes a public equity position in OMF.
|
Net alternative investments were $6.4 billion and $5.6 billion as of September 30, 2020 and December 31, 2019, respectively, representing 4.5% and 4.8% of our net invested assets portfolio as of September 30, 2020 and December 31, 2019, respectively.
Net 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 net invested assets section, we adjust the GAAP presentation for funds withheld, modco and VIEs. The investment in Apollo is excluded from our alternative investments, while we include CLO and ABS equity tranche securities in alternative investments due to their underlying characteristics and equity-like features.
Through our relationship with Apollo, we have indirectly invested in companies that meet the key characteristics we look for in net 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.
MidCap
MidCap is a commercial finance company that provides various financial products to middle-market businesses in multiple industries, primarily located in the US. 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our alternative investment in MidCap had a carrying value of $609 million and $547 million as of September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020 and December 31, 2019, this alternative investment is comprised of our investment in MidCap, of $532 million and $547 million, respectively, and redeemable preferred stock of $77 million and $0 million, respectively. The dissolution of CoInvest VII during the quarter resulted in the former position in MidCap held by CoInvest VII being held directly as profit participating notes, which are included in related party trading securities on the condensed consolidated balance sheets rather than an investment fund. MidCap returned a net investment earned rate of 10.79% and 14.90% for the three months ended September 30, 2020 and 2019, respectively, and 0.47% and 13.32% for the nine months ended September 30, 2020 and 2019, respectively. Alternative investment income from MidCap was $15 million and $21 million for the three months ended September 30, 2020 and 2019, respectively, and $4 million and $56 million for the nine months ended September 30, 2020 and 2019, respectively. The decrease in alternative investment income for the three months ended September 30, 2020 compared to 2019 was mainly due to lower origination volumes due to the current interest rate environment. The decrease in alternative investment income for the nine months ended September 30, 2020 compared to 2019 was mainly due to a decrease in valuation in the first quarter reflecting an increase in loan loss assumptions and lower origination volumes due to the current interest rate environment. The redeemable preferred stock returned a net investment earned rate of 15.70% and 0.00% for the three months ended September 30, 2020 and 2019, respectively, and 47.93% and 0.00% for the nine months ended September 30, 2020 and 2019, respectively. Alternative investment income from the redeemable preferred stock was $3 million and $0 million for the three months ended September 30, 2020 and 2019, respectively, and $14 million and $0 million for the nine months ended September 30, 2020 and 2019, respectively. The increase in alternative investment income from the redeemable preferred stock was primarily driven by favorable profit interests.
AmeriHome
Our equity investment in AmeriHome is held indirectly through A-A Mortgage, of which AmeriHome is currently the fund’s only investment. AmeriHome is a mortgage origination platform and an aggregator of mortgage servicing rights. AmeriHome acquires mortgage loans from retail originators and re-sells the loans to the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National Mortgage Association and other investors. AmeriHome retains the mortgage servicing rights on the loans that it sells and employs a subservicer to perform servicing operations, including payment collection. AmeriHome’s earnings are primarily driven by two sources: gains or losses on the sale of mortgage loans and the difference between the fee that it charges for mortgage servicing and the fee charged by the subservicer. As a result, AmeriHome’s financial results are influenced by interest rates and related housing demand. AmeriHome is primarily exposed to credit risk related to the accuracy of the representations and warranties in the loans that AmeriHome acquires and prepayment risk, which prematurely terminates fees related to mortgage servicing.
Our alternative investment in A-A Mortgage had a carrying value of $818 million and $595 million as of September 30, 2020 and December 31, 2019, 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 45.32% and 14.03% for the three months ended September 30, 2020 and 2019, respectively, and 42.58% and 13.90% for the nine months ended September 30, 2020 and 2019, respectively. Alternative investment income from A-A Mortgage was $88 million and $20 million for the three months ended September 30, 2020 and 2019, respectively, and $223 million and $59 million for the nine months ended September 30, 2020 and 2019, respectively. The increase in alternative investment income for both the three and nine months ended September 30, 2020 compared to 2019 was mainly due to an increase in valuation driven by strong earnings reflecting increased origination volumes and increased gains on sales to secondary markets.
Public Equities
We indirectly hold public equity positions through our equity investments in a few alternative investments. Although the net invested asset value of these securities is minor, such securities have resulted in volatility in our statements of income in recent periods. As of September 30, 2020 and December 31, 2019, we indirectly held equity positions of $220 million and $119 million, respectively. As of September 30, 2020 and December 31, 2019, we held approximately 2.8 million shares of OneMain with a market value of $62 million and $119 million, respectively. The decrease in market value is driven by the decline in share price, partially offset by dividend received in 2020.
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 (loss) available to common shareholders is included in the Consolidated Results of Operations section.
The reconciliation of total AHL shareholders’ equity to total adjusted AHL common shareholders’ equity, which is included in adjusted book value per common share, adjusted debt to capital ratio and adjusted operating ROE, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
September 30, 2020
|
|
December 31, 2019
|
Total AHL shareholders’ equity
|
$
|
15,943
|
|
|
$
|
13,391
|
|
Less: Preferred stock
|
1,755
|
|
|
1,172
|
|
Total AHL common shareholders’ equity
|
14,188
|
|
|
12,219
|
|
Less: AOCI
|
2,888
|
|
|
2,281
|
|
Less: Accumulated change in fair value of reinsurance assets
|
778
|
|
|
493
|
|
Total adjusted AHL common shareholders’ equity
|
$
|
10,522
|
|
|
$
|
9,445
|
|
|
|
|
|
Segment adjusted AHL common shareholders’ equity
|
|
|
|
Retirement Services
|
$
|
7,321
|
|
|
$
|
7,443
|
|
Corporate and Other
|
3,201
|
|
|
2,002
|
|
Total adjusted AHL common shareholders’ equity
|
$
|
10,522
|
|
|
$
|
9,445
|
|
The reconciliation of average AHL shareholders’ equity to average adjusted AHL common shareholders’ equity, which is included in adjusted operating ROE is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Average AHL shareholders’ equity
|
$
|
15,327
|
|
|
$
|
12,955
|
|
|
$
|
14,667
|
|
|
$
|
10,911
|
|
Less: Average preferred stock
|
1,755
|
|
|
1,006
|
|
|
1,464
|
|
|
586
|
|
Less: Average AOCI
|
2,536
|
|
|
2,101
|
|
|
2,585
|
|
|
985
|
|
Less: Average accumulated change in fair value of reinsurance assets
|
697
|
|
|
683
|
|
|
636
|
|
|
326
|
|
Average adjusted AHL common shareholders’ equity
|
$
|
10,339
|
|
|
$
|
9,165
|
|
|
$
|
9,982
|
|
|
$
|
9,014
|
|
|
|
|
|
|
|
|
|
Segment average adjusted AHL common shareholders’ equity
|
|
|
|
|
|
|
|
Retirement Services
|
$
|
7,139
|
|
|
$
|
7,598
|
|
|
$
|
7,381
|
|
|
$
|
7,651
|
|
Corporate and Other
|
3,200
|
|
|
1,567
|
|
|
2,601
|
|
|
1,363
|
|
Average adjusted AHL common shareholders’ equity
|
$
|
10,339
|
|
|
$
|
9,165
|
|
|
$
|
9,982
|
|
|
$
|
9,014
|
|
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 September 30,
|
|
Nine months ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
(In millions, except percentages)
|
Dollar
|
|
Rate
|
|
Dollar
|
|
Rate
|
|
Dollar
|
|
Rate
|
|
Dollar
|
|
Rate
|
GAAP net investment income
|
$
|
1,209
|
|
|
3.48
|
%
|
|
$
|
1,090
|
|
|
3.67
|
%
|
|
$
|
3,290
|
|
|
3.42
|
%
|
|
$
|
3,354
|
|
|
3.87
|
%
|
Change in fair value of reinsurance assets
|
444
|
|
|
1.28
|
%
|
|
199
|
|
|
0.67
|
%
|
|
932
|
|
|
0.97
|
%
|
|
492
|
|
|
0.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alternative income gain (loss)
|
23
|
|
|
0.07
|
%
|
|
6
|
|
|
0.02
|
%
|
|
(22)
|
|
|
(0.02)
|
%
|
|
13
|
|
|
0.01
|
%
|
ACRA noncontrolling interest
|
(196)
|
|
|
(0.56)
|
%
|
|
—
|
|
|
—
|
%
|
|
(349)
|
|
|
(0.36)
|
%
|
|
—
|
|
|
—
|
%
|
Apollo investment (income) loss
|
101
|
|
|
0.29
|
%
|
|
—
|
|
|
—
|
%
|
|
(83)
|
|
|
(0.09)
|
%
|
|
—
|
|
|
—
|
%
|
Held for trading amortization and other
|
(51)
|
|
|
(0.15)
|
%
|
|
(3)
|
|
|
(0.01)
|
%
|
|
(47)
|
|
|
(0.05)
|
%
|
|
(19)
|
|
|
(0.02)
|
%
|
Total adjustments to arrive at net investment earnings/earned rate
|
321
|
|
|
0.93
|
%
|
|
202
|
|
|
0.68
|
%
|
|
431
|
|
|
0.45
|
%
|
|
486
|
|
|
0.56
|
%
|
Total net investment earnings/earned rate
|
$
|
1,530
|
|
|
4.41
|
%
|
|
$
|
1,292
|
|
|
4.35
|
%
|
|
$
|
3,721
|
|
|
3.87
|
%
|
|
$
|
3,840
|
|
|
4.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Services
|
$
|
1,444
|
|
|
4.22
|
%
|
|
$
|
1,264
|
|
|
4.31
|
%
|
|
$
|
3,703
|
|
|
3.90
|
%
|
|
$
|
3,756
|
|
|
4.38
|
%
|
Corporate and Other
|
86
|
|
|
17.59
|
%
|
|
28
|
|
|
7.28
|
%
|
|
18
|
|
|
1.32
|
%
|
|
84
|
|
|
8.92
|
%
|
Total net investment earnings/earned rate
|
$
|
1,530
|
|
|
4.41
|
%
|
|
$
|
1,292
|
|
|
4.35
|
%
|
|
$
|
3,721
|
|
|
3.87
|
%
|
|
$
|
3,840
|
|
|
4.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Services average net invested assets
|
$
|
136,852
|
|
|
|
|
$
|
117,338
|
|
|
|
|
$
|
126,563
|
|
|
|
|
$
|
114,391
|
|
|
|
Corporate and Other average net invested assets ex. Apollo investment
|
1,945
|
|
|
|
|
1,567
|
|
|
|
|
1,785
|
|
|
|
|
1,262
|
|
|
|
Consolidated average net invested assets ex. Apollo investment
|
$
|
138,797
|
|
|
|
|
$
|
118,905
|
|
|
|
|
$
|
128,348
|
|
|
|
|
$
|
115,653
|
|
|
|
The reconciliation of interest sensitive contract benefits to Retirement Services’ cost of crediting, and the respective rates, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
(In millions, except percentages)
|
Dollar
|
|
Rate
|
|
Dollar
|
|
Rate
|
|
Dollar
|
|
Rate
|
|
Dollar
|
|
Rate
|
GAAP interest sensitive contract benefits
|
$
|
1,225
|
|
|
3.58
|
%
|
|
$
|
801
|
|
|
2.73
|
%
|
|
$
|
1,982
|
|
|
2.09
|
%
|
|
$
|
3,411
|
|
|
3.98
|
%
|
Interest credited other than deferred annuities and institutional products
|
73
|
|
|
0.21
|
%
|
|
63
|
|
|
0.21
|
%
|
|
211
|
|
|
0.22
|
%
|
|
168
|
|
|
0.19
|
%
|
FIA option costs
|
284
|
|
|
0.83
|
%
|
|
282
|
|
|
0.96
|
%
|
|
821
|
|
|
0.86
|
%
|
|
840
|
|
|
0.98
|
%
|
Product charges (strategy fees)
|
(34)
|
|
|
(0.10)
|
%
|
|
(31)
|
|
|
(0.10)
|
%
|
|
(100)
|
|
|
(0.11)
|
%
|
|
(88)
|
|
|
(0.10)
|
%
|
Reinsurance embedded derivative impacts
|
14
|
|
|
0.04
|
%
|
|
14
|
|
|
0.05
|
%
|
|
43
|
|
|
0.05
|
%
|
|
43
|
|
|
0.05
|
%
|
Change in fair value of embedded derivatives – FIAs
|
(779)
|
|
|
(2.28)
|
%
|
|
(560)
|
|
|
(1.91)
|
%
|
|
(1,009)
|
|
|
(1.06)
|
%
|
|
(2,739)
|
|
|
(3.19)
|
%
|
Negative VOBA amortization
|
3
|
|
|
0.01
|
%
|
|
9
|
|
|
0.03
|
%
|
|
15
|
|
|
0.02
|
%
|
|
28
|
|
|
0.03
|
%
|
ACRA noncontrolling interest
|
(151)
|
|
|
(0.44)
|
%
|
|
—
|
|
|
—
|
%
|
|
(226)
|
|
|
(0.24)
|
%
|
|
—
|
|
|
—
|
%
|
Other changes in interest sensitive contract liabilities
|
5
|
|
|
0.02
|
%
|
|
(2)
|
|
|
(0.01)
|
%
|
|
3
|
|
|
—
|
%
|
|
(5)
|
|
|
(0.01)
|
%
|
Total adjustments to arrive at cost of crediting
|
(585)
|
|
|
(1.71)
|
%
|
|
(225)
|
|
|
(0.77)
|
%
|
|
(242)
|
|
|
(0.26)
|
%
|
|
(1,753)
|
|
|
(2.05)
|
%
|
Retirement Services cost of crediting
|
$
|
640
|
|
|
1.87
|
%
|
|
$
|
576
|
|
|
1.96
|
%
|
|
$
|
1,740
|
|
|
1.83
|
%
|
|
$
|
1,658
|
|
|
1.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Services cost of crediting on deferred annuities
|
$
|
506
|
|
|
1.98
|
%
|
|
$
|
453
|
|
|
1.98
|
%
|
|
$
|
1,379
|
|
|
1.94
|
%
|
|
$
|
1,345
|
|
|
1.98
|
%
|
Retirement Services cost of crediting on institutional products
|
134
|
|
|
2.95
|
%
|
|
123
|
|
|
3.68
|
%
|
|
361
|
|
|
3.03
|
%
|
|
313
|
|
|
3.71
|
%
|
Retirement Services cost of crediting
|
$
|
640
|
|
|
1.87
|
%
|
|
$
|
576
|
|
|
1.96
|
%
|
|
$
|
1,740
|
|
|
1.83
|
%
|
|
$
|
1,658
|
|
|
1.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Services average net invested assets
|
$
|
136,852
|
|
|
|
|
$
|
117,338
|
|
|
|
|
$
|
126,563
|
|
|
|
|
$
|
114,391
|
|
|
|
Average account value on deferred annuities
|
102,144
|
|
|
|
|
91,467
|
|
|
|
|
94,600
|
|
|
|
|
90,638
|
|
|
|
Average net institutional reserve liabilities
|
18,162
|
|
|
|
|
13,320
|
|
|
|
|
15,882
|
|
|
|
|
11,200
|
|
|
|
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 September 30,
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
GAAP benefits and expenses
|
$
|
2,251
|
|
|
$
|
4,305
|
|
|
$
|
5,401
|
|
|
$
|
11,233
|
|
Premiums
|
(112)
|
|
|
(2,688)
|
|
|
(1,607)
|
|
|
(5,475)
|
|
Product charges
|
(144)
|
|
|
(135)
|
|
|
(425)
|
|
|
(392)
|
|
Other revenues
|
(13)
|
|
|
(6)
|
|
|
(29)
|
|
|
(27)
|
|
Cost of crediting
|
(342)
|
|
|
(280)
|
|
|
(876)
|
|
|
(775)
|
|
Change in fair value of embedded derivatives – FIA, net of offsets
|
(863)
|
|
|
(497)
|
|
|
(852)
|
|
|
(2,574)
|
|
DAC, DSI and VOBA amortization related to investment gains and losses
|
(86)
|
|
|
(151)
|
|
|
16
|
|
|
(505)
|
|
Rider reserves related to investment gains and losses
|
(21)
|
|
|
(9)
|
|
|
9
|
|
|
(61)
|
|
Policy and other operating expenses, excluding policy acquisition expenses
|
(132)
|
|
|
(130)
|
|
|
(394)
|
|
|
(350)
|
|
|
|
|
|
|
|
|
|
AmerUs closed block fair value liability
|
(15)
|
|
|
(46)
|
|
|
(70)
|
|
|
(158)
|
|
ACRA noncontrolling interest
|
(193)
|
|
|
—
|
|
|
(269)
|
|
|
—
|
|
Other changes in benefits and expenses
|
(10)
|
|
|
(5)
|
|
|
(27)
|
|
|
(3)
|
|
Total adjustments to arrive at other liability costs
|
(1,931)
|
|
|
(3,947)
|
|
|
(4,524)
|
|
|
(10,320)
|
|
Other liability costs
|
$
|
320
|
|
|
$
|
358
|
|
|
$
|
877
|
|
|
$
|
913
|
|
|
|
|
|
|
|
|
|
Retirement Services
|
$
|
320
|
|
|
$
|
358
|
|
|
$
|
877
|
|
|
$
|
913
|
|
Corporate and Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consolidated other liability costs
|
$
|
320
|
|
|
$
|
358
|
|
|
$
|
877
|
|
|
$
|
913
|
|
The reconciliation of policy and other operating expenses to operating expenses is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
GAAP policy and other operating expenses
|
$
|
231
|
|
|
$
|
194
|
|
|
$
|
637
|
|
|
$
|
544
|
|
Interest expense
|
(34)
|
|
|
(15)
|
|
|
(83)
|
|
|
(47)
|
|
Policy acquisition expenses, net of deferrals
|
(99)
|
|
|
(63)
|
|
|
(243)
|
|
|
(194)
|
|
Integration, restructuring and other non-operating expenses
|
—
|
|
|
(34)
|
|
|
(13)
|
|
|
(46)
|
|
Stock compensation expenses
|
(1)
|
|
|
(3)
|
|
|
(11)
|
|
|
(9)
|
|
ACRA noncontrolling interest
|
(16)
|
|
|
—
|
|
|
(39)
|
|
|
—
|
|
Other changes in policy and other operating expenses
|
(3)
|
|
|
—
|
|
|
(3)
|
|
|
—
|
|
Total adjustments to arrive at operating expenses
|
(153)
|
|
|
(115)
|
|
|
(392)
|
|
|
(296)
|
|
Operating expenses
|
$
|
78
|
|
|
$
|
79
|
|
|
$
|
245
|
|
|
$
|
248
|
|
|
|
|
|
|
|
|
|
Retirement Services
|
$
|
63
|
|
|
$
|
67
|
|
|
$
|
202
|
|
|
$
|
197
|
|
Corporate and Other
|
15
|
|
|
12
|
|
|
43
|
|
|
51
|
|
Consolidated operating expenses
|
$
|
78
|
|
|
$
|
79
|
|
|
$
|
245
|
|
|
$
|
248
|
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The reconciliation of total investments, including related parties, to net invested assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
September 30, 2020
|
|
December 31, 2019
|
Total investments, including related parties
|
$
|
170,205
|
|
|
$
|
130,550
|
|
Derivative assets
|
(2,771)
|
|
|
(2,888)
|
|
Cash and cash equivalents (including restricted cash)
|
8,774
|
|
|
4,639
|
|
Accrued investment income
|
796
|
|
|
807
|
|
Payables for collateral on derivatives and other secured transactions
|
(2,644)
|
|
|
(2,743)
|
|
Reinsurance funds withheld and modified coinsurance
|
(1,441)
|
|
|
(1,440)
|
|
VIE and VOE assets, liabilities and noncontrolling interest
|
(130)
|
|
|
25
|
|
Unrealized (gains) losses
|
(5,211)
|
|
|
(4,095)
|
|
Ceded policy loans
|
(221)
|
|
|
(235)
|
|
Net investment receivables (payables)
|
(705)
|
|
|
(57)
|
|
Allowance for credit losses
|
484
|
|
|
—
|
|
Total adjustments to arrive at gross invested assets
|
(3,069)
|
|
|
(5,987)
|
|
Gross invested assets
|
167,136
|
|
|
124,563
|
|
ACRA noncontrolling interest
|
(24,301)
|
|
|
(7,077)
|
|
Net invested assets
|
$
|
142,835
|
|
|
$
|
117,486
|
|
The reconciliation of total investment funds, including related parties, to net alternative investments within net invested assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
September 30, 2020
|
|
December 31, 2019
|
Investment funds, including related parties
|
$
|
5,531
|
|
|
$
|
4,300
|
|
Equity securities
|
222
|
|
|
78
|
|
CLO and ABS equities included in trading securities
|
973
|
|
|
405
|
|
Investment in Apollo
|
(1,198)
|
|
|
—
|
|
Investment funds within funds withheld at interest
|
974
|
|
|
807
|
|
Royalties and other assets included in other investments
|
59
|
|
|
67
|
|
|
|
|
|
Unrealized (gains) losses and other adjustments
|
(10)
|
|
|
8
|
|
ACRA noncontrolling interest
|
(103)
|
|
|
(79)
|
|
Total adjustments to arrive at alternative investments
|
917
|
|
|
1,286
|
|
Net alternative investments
|
$
|
6,448
|
|
|
$
|
5,586
|
|
The reconciliation of total liabilities to net reserve liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
September 30, 2020
|
|
December 31, 2019
|
Total liabilities
|
$
|
173,971
|
|
|
$
|
132,734
|
|
Short-term debt
|
—
|
|
|
(475)
|
|
Long-term debt
|
(1,487)
|
|
|
(992)
|
|
|
|
|
|
Derivative liabilities
|
(147)
|
|
|
(97)
|
|
Payables for collateral on derivatives and securities to repurchase
|
(3,144)
|
|
|
(3,255)
|
|
Funds withheld liability
|
(440)
|
|
|
(408)
|
|
Other liabilities
|
(1,897)
|
|
|
(1,181)
|
|
|
|
|
|
Reinsurance ceded receivables
|
(5,104)
|
|
|
(4,863)
|
|
Policy loans ceded
|
(221)
|
|
|
(235)
|
|
ACRA noncontrolling interest
|
(23,762)
|
|
|
(6,574)
|
|
Other
|
(2)
|
|
|
(2)
|
|
Total adjustments to arrive at net reserve liabilities
|
(36,204)
|
|
|
(18,082)
|
|
Net reserve liabilities
|
$
|
137,767
|
|
|
$
|
114,652
|
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
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, excluding assets within modified coinsurance and funds withheld portfolios, as of September 30, 2020 was $66.2 billion. Assets included in modified coinsurance and funds withheld portfolios are available to fund the benefits for the associated obligations but are restricted from other uses. The carrying value of the underlying assets in these modified coinsurance and funds withheld portfolios that we consider liquid as of September 30, 2020 was $40.9 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, such as the one brought about by the spread of COVID-19, 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 $1.25 billion credit agreement, which was undrawn as of September 30, 2020 and had a remaining term of more than four years, subject to up to two one-year extensions. We also have access to a $1.0 billion committed repurchase facility. Our registration statement on Form S-3 ASR (Shelf Registration Statement) provides us access to the capital markets, subject to market conditions and other factors. We are also party to repurchase agreements with several different financial institutions, pursuant to which we may obtain short-term liquidity, to the extent available. 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. We also monitor our liquidity profile under more severe scenarios.
We perform a number of stress tests and analyses to assess our ability to meet our cash flow requirements, as well as the ability of our reinsurance and insurance subsidiaries to meet their collateral obligations. Among these analyses, we manage to the following ALM limits:
•our projected net cumulative cash flows, including both new business and target levels of new investments under a “plan scenario” and a “moderately severe scenario” event, are non-negative over a rolling 12-month horizon;
•we hold 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 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); RMBS with weighted average lives less than three years rated A- or above 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 third-party reinsurance contracts
▪AARe capital maintenance calls arising from AARe collateral calls from modco reinsurance contracts; and
▪US 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, net transfers from separate accounts and financial product deposits. Uses of cash include investment purchases, payments to policyholders for surrenders, withdrawals and payout benefits, interest and principal payments on funding agreements, PRT obligations, policy acquisition costs and general operating costs.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our policyholder obligations are generally long-term in nature. However, one liquidity risk is an extraordinary level of early policyholder withdrawals. We include provisions within our annuity policies, such as surrender charges and MVAs, which are intended to protect us from early withdrawals. As of September 30, 2020 and December 31, 2019, approximately 75% and 78%, respectively, of our deferred annuity liabilities were subject to penalty upon surrender. In addition, as of September 30, 2020 and December 31, 2019, approximately 57% and 64%, respectively, of policies contained MVAs that may also have the effect of limiting early withdrawals if interest rates increase, but may encourage early withdrawals by effectively subsidizing a portion of surrender charges when interest rates decrease. Our funding agreements, group 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. As of September 30, 2020 and December 31, 2019, we had $0 million and $475 million, respectively, of outstanding borrowings under these arrangements.
We have issued funding agreements to the FHLB. These funding agreements were issued in an investment spread strategy, consistent with other investment spread operations. As of September 30, 2020 and December 31, 2019, we had funding agreements outstanding with the FHLB in the aggregate principal amount of $2.1 billion and $1.2 billion, respectively.
The maximum FHLB indebtedness by a member is determined by the amount of collateral pledged, and cannot exceed a specified percentage of the member’s total statutory assets dependent on the internal credit rating assigned to the member by the FHLB. As of September 30, 2020, the total maximum borrowings under the FHLB facilities were limited to $30.7 billion. However, our ability to borrow under the facilities is constrained by the availability of assets that qualify as eligible collateral under the facilities and certain other limitations. Considering these limitations, we estimate that as of September 30, 2020 we had the ability to draw up to a total of approximately $3.5 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 AADE’s and/or AAIA’s RBC ratio, which may further restrict our ability or willingness to draw up to our estimated capacity.
Securities Repurchase Agreements
We engage in repurchase transactions whereby we sell fixed income securities to third parties, primarily major brokerage firms or commercial banks, with a concurrent agreement to repurchase such securities at a determined future date. We require that, at all times during the term of the repurchase agreements, we maintain sufficient cash or other liquid assets sufficient to allow us to fund substantially all of the repurchase price. Proceeds received from the sale of securities pursuant to these arrangements are generally invested in short-term investments, with the offsetting obligation to repurchase the security included within payables for collateral on derivatives and securities to repurchase on the condensed consolidated balance sheets. As per the terms of the repurchase agreements, we monitor the market value of the securities sold and may be required to deliver additional collateral (which may be in the form of cash or additional securities) to the extent that the value of the securities sold decreases prior to the repurchase date.
As of September 30, 2020, the fair value of securities and collateral held by counterparties and payables for repurchase agreements was $1.2 billion and $1.1 billion, respectively.
On May 1, 2020, we signed a $1.0 billion committed repurchase facility with BNP Paribas. The facility has an initial commitment period of 12 months and automatically renews for successive 12-month periods until terminated by either party. During the commitment period, we may sell and BNP Paribas is required to purchase eligible investment grade corporate bonds pursuant to repurchase transactions at pre-agreed discounts in exchange for a 41 basis points per annum commitment fee. As of September 30, 2020, we had no outstanding payables under this facility.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cash Flows
Our cash flows were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
(In millions)
|
2020
|
|
2019
|
Net income
|
$
|
599
|
|
|
$
|
1,721
|
|
Payment at recapture of reinsurance agreements
|
(723)
|
|
|
—
|
|
Non-cash revenues and expenses
|
1,049
|
|
|
264
|
|
Net cash provided by operating activities
|
925
|
|
|
1,985
|
|
Sales, maturities and repayments of investments
|
13,144
|
|
|
11,763
|
|
Purchases of investments
|
(20,581)
|
|
|
(19,543)
|
|
|
|
|
|
Other investing activities
|
338
|
|
|
521
|
|
Net cash used in investing activities
|
(7,099)
|
|
|
(7,259)
|
|
Issuance of common stock
|
350
|
|
|
—
|
|
Net proceeds and repayments of debt
|
424
|
|
|
—
|
|
Deposits on investment-type policies and contracts
|
13,994
|
|
|
8,879
|
|
Withdrawals on investment-type policies and contracts
|
(5,320)
|
|
|
(4,846)
|
|
Net capital contributions and distributions to/from noncontrolling interests
|
194
|
|
|
—
|
|
Net change in cash collateral posted for derivative transactions and securities to repurchase
|
487
|
|
|
1,354
|
|
Issuance of preferred stock, net of expenses
|
583
|
|
|
1,172
|
|
Preferred stock dividends
|
(67)
|
|
|
(17)
|
|
Repurchase of common stock
|
(425)
|
|
|
(548)
|
|
|
|
|
|
Other financing activities
|
114
|
|
|
(90)
|
|
Net cash provided by financing activities
|
10,334
|
|
|
5,904
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(28)
|
|
|
—
|
|
Net increase in cash and cash equivalents1
|
$
|
4,132
|
|
|
$
|
630
|
|
|
|
|
|
1 Includes cash and cash equivalents and restricted cash.
|
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 and operating expenses. Our operating activities generated cash flows totaling $925 million and $2.0 billion for the nine months ended September 30, 2020 and 2019, respectively. The decrease in cash provided by operating activities was primarily driven by the restructuring of a coinsurance agreement to a funds withheld agreement with an existing reinsurance partner, lower cash received from PRT transactions and a decrease in net investment income.
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 $7.1 billion and $7.3 billion for the nine months ended September 30, 2020 and 2019, respectively. The decrease in cash used in investing activities was primarily attributed to higher sales of investments, mainly offset by an increase in purchases attributed to deploying the deposits received and redeployment of the investment portfolio associated with the Jackson reinsurance transaction.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, repayments of outstanding borrowings, repurchases of common stock and payment of preferred stock dividends. Our financing activities provided cash flows totaling $10.3 billion and $5.9 billion for the nine months ended September 30, 2020 and 2019, respectively. The increase in cash provided by financing activities was primarily attributed to higher investment-type deposits from retail, flow reinsurance and funding agreement deposits net of withdrawals, proceeds of $499 million of long-term debt, the issuance of stock in connection with the strategic transaction with Apollo and net capital contributions from noncontrolling interests, partially offset by the change in cash collateral posted for derivative transactions driven by unfavorable equity market performance in 2020, lower preferred stock issuances than prior year, the repayment of short-term debt and the payment of preferred stock dividends.
Holding Company Liquidity
Dividends from Subsidiaries
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, preferred stock dividend payments 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.
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 US insurance subsidiaries are permitted to pay ordinary dividends based on calculations specified under insurance laws of the relevant state of domicile. Any distributions above the amount permitted by statute in any twelve month period are considered to be extraordinary dividends, and require the approval of the appropriate regulator prior to payment. AHL does not currently plan on having the US subsidiaries pay any dividends to ALRe.
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 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 $1.25 billion credit agreement or by pursuing future issuances of debt or equity securities to third-party investors. Certain other sources of liquidity potentially available at the holding company level are discussed below.
Shelf Registration – Under our Shelf Registration Statement, subject to market conditions, we have the ability to issue, in indeterminate amounts, debt securities, preference shares, depositary shares, Class A common shares, warrants and units.
Debt – On January 12, 2018, we issued $1.0 billion in aggregate principal amount of 4.125% Senior Notes due 2028 (2028 Notes). On April 3, 2020, we issued $500 million in aggregate principal amount of 6.150% senior unsecured notes due 2030 (2030 Notes). On October 8, 2020, we issued $500 million in aggregate principal amount of 3.500% senior unsecured notes due 2031 (2031 Notes).
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Preferred Stock – On June 10, 2019, we issued 34,500 6.35% Fixed-to-Floating Rate Perpetual Non-Cumulative Preference Shares, Series A, par value of $1.00 per share with a liquidation preference of $25,000 per share, for aggregate proceeds of $839 million, net of the underwriters’ discount and estimated expenses.
On September 19, 2019, we issued 13,800 5.625% Fixed Rate Perpetual Non-Cumulative Preference shares, Series B, par value of $1.00 per share with a liquidation preference of $25,000 per share, for aggregate proceeds of $333 million, net of the underwriters’ discount and estimated expenses.
On June 11, 2020, we issued 24,000 6.375% Fixed Rate Reset Perpetual Non-Cumulative Preference shares, Series C, par value of $1.00 per share with a liquidation preference of $25,000 per share, for aggregate proceeds of $583 million, net of underwriters’ discount and estimated expenses. See Note 10 – Equity to the condensed consolidated financial statements for further information.
Intercompany Note – AHL has an unsecured revolving note payable with ALRe, which permits AHL to borrow up to $1 billion with a fixed interest rate of 1.25% and a maturity date of March 31, 2024. As of September 30, 2020 and December 31, 2019, the revolving note payable had an outstanding balance of $280 million and $38 million, respectively.
In light of the spread of COVID-19 and the resulting impact on economic conditions and the financial markets, additional funding of the type described above may not be available on terms favorable to us or at all. As a result of the economic consequences of the spread of COVID-19, we have observed an increase in our cost of debt. Though this trend has moderated as economic conditions have begun to stabilize, credit spreads remain elevated when compared to pre-COVID-19 levels. At the time of issuance, our 2028 Notes had a yield to maturity of 4.14% and a spread to benchmark treasury of T + 160 basis points. At the time of issuance, our 2030 Notes had a yield to maturity of 6.18% and a spread to benchmark treasury of T + 550 basis points. At the time of issuance, our 2031 Notes had a yield to maturity of 3.67% and a spread to benchmark treasury of T + 290 basis points. In addition, certain covenants in our credit agreement prohibit us from maintaining debt in excess of specified thresholds. Specifically, our credit agreement prohibits us from permitting the Consolidated Debt to Capitalization Ratio (as such term is defined in the credit agreement) to exceed 35% as of the end of any quarter.
Capital Resources
As of December 31, 2019 and 2018, our US insurance companies’ TAC, as defined by the NAIC, was $2.4 billion and $2.2 billion, respectively, and our US RBC ratio was 429% and 421%, respectively. Each US 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 as of December 31, 2019 and 2018, respectively.
Bermuda capital for ALRe was $11.0 billion and $9.7 billion as of December 31, 2019 and 2018, respectively. ALRe adheres to BMA regulatory capital requirements to maintain statutory capital and surplus to meet the minimum margin of solvency and maintain minimum economic balance sheet (EBS) capital and surplus to meet the 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. ALRe’s EBS capital and surplus was $14.1 billion and $12.0 billion, resulting in a BSCR ratio of 310% and 340% as of December 31, 2019 and 2018, respectively. An insurer must have a BSCR ratio of 100% or greater to be considered solvent by the BMA. As of December 31, 2019 and 2018, ALRe held the appropriate capital to adhere to these regulatory standards.
As of December 31, 2019 and 2018, our ALRe RBC was 443% and 405%, respectively. We believe that we have 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 and access to uncalled capital commitments at ACRA, may provide us the opportunity to take advantage of market dislocations as they arise. We exclude our interests in the AOG units and other subsidiary holding companies from our capital base for purposes of calculating ALRe RBC, but do reflect such interests within our excess capital calculations, net of risk charges.
The RBC ratios we calculate for our US and for our Bermuda subsidiaries (under US methodologies for our US insurance subsidiaries and our ALRe RBC ratio methodology for our Bermuda insurance subsidiaries) are typically used to determine the capital needed to support our Retirement Services segment. We generally find that this methodology reflects the amount of capital required as determined by our internal capital models and the capital models of our three rating agencies, S&P, A.M. Best and Fitch.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Repurchase of Securities
Share Repurchase Program
In December 2018, our board of directors established a share repurchase program with an initial authorization for the repurchase of up to $250 million of our Class A shares. In 2019, our board of directors approved four additional authorizations under our share repurchase program for the purchase of up to an additional $1.3 billion of our Class A common shares, in the aggregate, for a total authorization of $1.6 billion. Pursuant to our share repurchase program, we repurchased 13.2 million Class A common shares for $416 million during the nine months ended September 30, 2020. As of November 3, 2020, we have repurchased, in the aggregate, 35.5 million Class A common shares for $1.3 billion since inception of our share repurchase program and have $224 million of repurchase authorization remaining. The timing and amount of share repurchases, if any, will be determined by management in accordance with the authority delegated by our board of directors.
Repurchase of Other Securities
We may from time to time seek to retire or purchase our other outstanding debt or equity securities through cash purchases and/or exchanges for other securities, purchases in the open market, privately negotiated transactions or otherwise. Any such repurchases will be dependent upon several factors, including our liquidity requirements, contractual restrictions, general market conditions and applicable regulatory, legal and accounting factors. Whether or not we repurchase any of our other securities and the size and timing of any such repurchases will be determined at our discretion.
Balance Sheet and Other Arrangements
Balance Sheet Arrangements
Contractual Obligations
The following table summarizes estimated future payments on our contractual obligations as of September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
(In millions)
|
Total
|
|
2020
|
|
2021-2022
|
|
2023-2024
|
|
2025 and thereafter
|
Interest sensitive contract liabilities
|
$
|
141,207
|
|
|
$
|
14,204
|
|
|
$
|
28,384
|
|
|
$
|
24,770
|
|
|
$
|
73,849
|
|
Future policy benefits
|
24,823
|
|
|
545
|
|
|
1,118
|
|
|
1,143
|
|
|
22,017
|
|
Other policy claims and benefits
|
118
|
|
|
118
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Dividends payable to policyholders
|
110
|
|
|
5
|
|
|
10
|
|
|
10
|
|
|
85
|
|
Long-term debt1
|
2,117
|
|
|
15
|
|
|
144
|
|
|
144
|
|
|
1,814
|
|
Securities to repurchase2
|
1,161
|
|
|
505
|
|
|
26
|
|
|
26
|
|
|
604
|
|
Total
|
$
|
169,536
|
|
|
$
|
15,392
|
|
|
$
|
29,682
|
|
|
$
|
26,093
|
|
|
$
|
98,369
|
|
|
|
|
|
|
|
|
|
|
|
1 The obligations for long-term debt payments include contractual maturities of principal and estimated future interest payments based on the terms of the debt agreements, as described in Note 8 – Debt to the condensed consolidated financial statements.
|
2 The obligations for securities to repurchase payments include contractual maturities of principal and estimated future interest payments based on the terms of the agreements.
|
We also have other obligations related to collateral on derivatives, investment fund commitments and funds withheld liabilities which have not been included in the above table as the timing and amount of each of the return on the collateral, the fulfillment of the commitments and the funds withheld liabilities are uncertain. See Note 12 – Commitments and Contingencies to the condensed consolidated financial statements for further discussion on the investment fund commitments.
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.
Off Balance Sheet Arrangements
None.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Estimates and Judgments
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Amounts based on such estimates involve numerous assumptions subject to varying and potentially significant degrees of judgment and uncertainty, particularly related to the future performance of the underlying business, and will likely change in the future as additional information becomes available. Critical estimates and assumptions are evaluated on an ongoing basis based on historical developments, market conditions, industry trends and other information that is reasonable under the circumstances. There can be no assurance that actual results will conform to estimates and assumptions and that reported results of operations will not be materially affected by the need to make future accounting adjustments to reflect periodic changes in these estimates and assumptions, particularly as more information about the extent to which COVID-19 and the resulting impact on economic conditions and the financial markets become known. 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 2019 Annual Report. The most critical accounting estimates and judgments include those used in determining:
•fair value of investments;
•credit loss allowances;
•future policy benefit reserves;
•derivatives valuation, including embedded derivatives;
•deferred acquisition costs, deferred sales inducements and value of business acquired;
•consolidation of VIEs; and
•valuation allowances on deferred tax assets.
Except as described below, the above critical accounting estimates and judgments are discussed in detail in Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates and Judgments of our 2019 Annual Report. Due to the adoption of CECL in the first quarter 2020 and the significance of the Jackson reinsurance transaction in the second quarter 2020, the following updates and replaces the substantively similar information provided in the 2019 Annual Report.
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.
Investments
Credit Loss Allowances
Establishing allowances for expected credit losses is a quantitative and qualitative process, which is subject to risks and uncertainties and involves significant estimates and judgments by management. Changes in the estimates and judgments used in such analysis can have a significant impact on our consolidated results of operations.
The allowance for expected credit losses on assets held at amortized cost and off-balance sheet credit exposures is established utilizing quantitative modeling. Key inputs into the model include data pertaining to the characteristics of the assets, historical losses and current market conditions. Additionally, the model incorporates management’s expectations around future economic conditions and macroeconomic forecasts over a reasonable and supportable forecast period, after which the model reverts to historical averages. For residential mortgage loans, key loan characteristics impacting the estimate include among others: time to maturity, delinquency status, original credit scores and loan-to-value ratios. Key macroeconomic variables include unemployment rates and the housing price index. For commercial mortgage loans, key loan characteristics impacting the estimate include among others: time to maturity, delinquency status, loan-to-value ratios and debt service coverage ratios. Key macroeconomic variables include unemployment rates, rent growth, capitalization rates, and the housing price index. These inputs, the reasonable and supportable forecast period, and reversion to historical average technique are subject to a formal governance and review process by management. Additionally, management considers qualitative adjustments to the model output to the extent that any relevant information regarding the collectability of the asset is available and not already considered in the quantitative model. If we determine that a financial asset has become collateral dependent, which we determine to occur when foreclosure is probable, the allowance is measured as the difference between amortized cost and the fair value of the collateral, less any expected costs to sell.
We evaluate AFS securities with a fair value that has declined below amortized cost to determine how the decline in fair value should be recognized. If we determine, based on the facts and circumstances related to the specific security, that we intend to sell a security or it is more likely than not that we would be required to sell a security before the recovery of its amortized cost, any existing allowance for credit losses is reversed and the amortized cost of the security is written down to fair value. If neither of these conditions exist, we evaluate whether the decline in fair value has resulted from a credit loss or other factors.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
For non-structured AFS securities, we qualitatively consider relevant facts and circumstances in evaluating whether a decline below fair value is credit-related. Relevant facts and circumstances include but are not limited to: (1) the extent to which the fair value is less than amortized cost; (2) changes in agency credit ratings, (3) adverse conditions related to the security’s industry or geographical area, (4) failure to make scheduled payments, and (5) other known changes in the financial condition of the issuer or quality of any underlying collateral or credit enhancements. For structured AFS securities meeting the definition of beneficial interests, the qualitative assessment is bypassed, and any securities having experienced a decline in fair value below amortized cost is subject solely to a quantitative analysis.
If upon completion of this analysis it is determined that a potential credit loss exists, an allowance for expected credit losses is established equal to the amount by which the present value of expected cash flows is less than amortized cost, limited by the amount by which fair value is less than amortized cost. A non-structured security’s cash flow estimates are derived from scenario-based outcomes of expected corporate restructurings or the disposition of assets using security-specific facts and circumstances including timing, security interests and loss severity. A structured security’s cash flow estimates are based on security-specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity, prepayments and structural support, including subordination and guarantees. The expected cash flows are discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete a structured security. For securities with a contractual interest rate that varies based on changes in an independent factor, such as an index or rate, the effective interest rate is calculated based on the factor as it changes over the life of the security. Inherently under the discounted cash flow model, both the timing and amount of cash flows affect the measurement of the allowance for expected credit losses.
Future Policy Benefits—Liabilities for Guaranteed Living Withdrawal Benefits and Guaranteed Minimum Death Benefits
As of September 30, 2020, the GLWB and GMDB liability balance, including the impacts of shadow adjustments, totaled $4.8 billion. The increase (decrease) to the GLWB and GMDB liability balance, including the impacts of shadow adjustments from hypothetical changes in projected assessments, changes in the discount rate and annual equity growth is summarized as follows:
|
|
|
|
|
|
(In millions)
|
September 30, 2020
|
+10% assessments
|
$
|
(155)
|
|
–10% assessments
|
172
|
|
+100 bps discount rate
|
139
|
|
–100 bps discount rate
|
(172)
|
|
1% higher annual equity growth
|
(48)
|
|
1% lower annual equity growth
|
45
|
|
Derivatives—Valuation of Embedded Derivatives on FIAs
As of September 30, 2020, we had embedded derivative liabilities classified as Level 3 in the fair value hierarchy of $11.7 billion. The increase (decrease) to the embedded derivatives on FIA products from hypothetical changes in discount rates is summarized as follows:
|
|
|
|
|
|
(In millions)
|
September 30, 2020
|
+100 bps discount rate
|
$
|
(957)
|
|
–100 bps discount rate
|
1,094
|
|
Deferred Acquisition Costs, Deferred Sales Inducements, and Value of Business Acquired—As of September 30, 2020, DAC, DSI and VOBA totaled $5.2 billion. The increases (decreases) to DAC, DSI and VOBA from hypothetical changes in estimated future gross profits and the embedded derivative discount rate are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
(In millions)
|
DAC
|
|
DSI
|
|
VOBA
|
|
Total
|
+10% estimated future gross profits
|
$
|
149
|
|
|
$
|
35
|
|
|
$
|
54
|
|
|
$
|
238
|
|
–10% estimated future gross profits
|
(171)
|
|
|
(41)
|
|
|
(59)
|
|
|
(271)
|
|
+100 bps discount rate
|
(158)
|
|
|
(58)
|
|
|
(39)
|
|
|
(255)
|
|
–100 bps discount rate
|
183
|
|
|
68
|
|
|
44
|
|
|
295
|
|