Athene Holding Ltd. | Annual Report | 2017
Jim Belardi rings the first trade bell on
opening day at the New York Stock Exchange.
Letter from Athene Chairman, CEO, CIO and Co-Founder, Jim Belardi
Athene’s Book Value per Share
Growth (excl. AOCI)
$39.58
23.1% CAGR
$7.50
2009
2017
To the Shareholders of Athene Holding Ltd.:
I am pleased to be writing Athene’s inaugural annual shareholder letter and
establishing an important line of communication that will continue for years
to come. We founded Athene to be different from the typical life insurance
company, and we strive to approach each aspect of our business model with
a differentiated mindset. Each year, I hope to use this letter to explain our
differentiated approach and candidly reflect on our successes and failures.
When we founded Athene in 2009, it was a unique time in the financial
markets. Rates were low, spreads were wide, and opportunities to deploy
capital were plentiful. To truly take advantage of the significant opportunity
in front of us, we understood that Athene needed to break from the pack
and establish a differentiated model for the insurance industry – one which
prioritized economics, rather than growth for growth’s sake. Living by
this model has driven our success to date, enabling us to amass a highly
profitable portfolio approaching $100 billion of in-force liabilities and
grow our book value per share from $7.50 at our founding to $39.58 as of
December 31, 2017.
Front Cover: Athene Holding Ltd. began trading on the New York Stock Exchange on December 9, 2016.
Athene Annual Report 2017 | 1
As we have grown, our spread-based business model has remained
straightforward: our asset yield, less our cost of funds, less our infrastructure
costs, equals the profit we earn. Our ability to generate attractive returns for
our shareholders is a function of our ability to optimize across each of these
levers.
Scalable Spread-based Business Model
1
2
3
4
Unique Investment
Capabilities
+
Attractively Priced
Liabilities
+
Efficient & Scalable
Structure
=
Attractive ROE
with Strong Earnings
Growth Potential
Investment Margin of 2.82%
(1)
1
470 bps
2
188 bps
2
84 bps
22.0%
Retirement Services
Adjusted Op.
ROE ex. AOCI
3
40 bps
4
158 bps
Net Investment
Earned Rate
Cost of Crediting as
a % of Account Value
(1)
Other Liability
Costs
(2)
Operating and Other
Expenses
Adjusted Operating
Earnings
(1) Cost of crediting based on average account value of deferred annuities. Investment margin based on net investment earned rates less cost of crediting.
(2) For illustrative purposes, includes adjustment due to convention of calculating cost of crediting based on average account value of deferred annuities.
Excluding these adjustments, other liability costs would be 117 bps of average invested assets.
On the liability side, our most significant cost (our cost of funding, defined
as our cost of crediting plus other liability costs) is highly stable and
determinable at the time we underwrite a liability, and we strive to keep
this cost as low as possible through prudent underwriting and product
features. As simple as this seems in concept, the life insurance industry has
often prioritized volume over cost and profitability, in part by offering new
products with complex and mispriced policyholder rider features solely to
boost sales. This is a trap we will not fall into at Athene. On the asset side,
we have been able to drive profitability by focusing where others do not. I
am consistently surprised at how little attention investors and equity analysts
pay to the value-added differentiation our asset portfolio provides. I am also
surprised by our competitors who have thousands of employees focused
on the liability side of the balance sheet, but a mere fraction of that focused
on the investment portfolio. At Athene, we have balanced this dynamic by
partnering with Athene Asset Management (“AAM”), a subsidiary of Apollo
Global Management (“Apollo”), a premier credit asset manager which brings
over 1,100 global employees focused on our investment portfolio every
day. The result has been differentiated asset performance without sacrificing
credit quality. And finally, we have invested in a highly scalable and efficient
G&A infrastructure to support our assets and liabilities. Our infrastructure not
only allows us to onboard incremental business at a low marginal cost, but
2 | Athene Annual Report 2017
“ We founded Athene to be
different from the typical life
insurance company . . .
one which prioritized
economics, rather than
growth for growth’s sake.”
also allows for a high proportion of our spread-based
earnings to translate into adjusted operating income
and directly into book value per share growth. Our
consistent focus on all prongs of our spread-based
earnings model is a key differentiator for Athene.
The platform we have established enables us to
write new business organically at mid-teens returns
in most market environments. To support our ability
to do so, we have established multiple channels
across both sides of our balance sheet: on the liability
side, we originate liabilities through three organic
channels, and on the asset side, we benefit from the
sourcing capabilities of AAM, Apollo, and strategic
asset originators including MidCap Financial and
AmeriHome. To the extent one channel or asset class
is mispriced, we maintain the flexibility to pivot and
redeploy capital into a channel or asset class that offers
a better risk-return proposition.
Across all of our organic channels, we evaluate the
profitability of new business versus alternative uses for
our capital including inorganic growth, expansion into
new product lines and liability types – and we prioritize
the use that delivers the best return on our capital. At
times of market exuberance and mispricing, we will
remain patient and disciplined, and if we cannot find
profitable growth, then we will not grow.
Our unwavering focus on profitability has served us
well. It has enabled us to amass a stable and persistent
portfolio of in-force liabilities with a nine-year weighted
average life (“WAL”), which generated $1.1 billion of
earnings in 2017. These earnings supplement our
current excess capital base of over $1.5 billion and
enable us to continue to deliver the opportunistic
growth that has built our business to date. As I have
consistently said, excess capital is an extremely
important part of Athene’s business model. History
has shown that when growth is most profitable, capital
is most scarce. As such, we manage Athene with an
excess capital buffer to enable us to move the instant
we see a “fat pitch” – whether the opportunity has
been created as a result of complexity, which others
can’t underwrite, market volatility or significant industry
changes.
Our philosophy on excess capital is simple – it is a
tool to be deployed to generate outsized shareholder
returns. On the liability side, we look to deploy our
excess capital when we can underwrite mispriced
liabilities that offer us a favorable return, relative to the
risk they present. If we see a more accretive use of our
excess capital on the liability side of our balance sheet,
we maintain the flexibility to pivot across channels and
liability structures to deploy our capital in the most
prudent way possible. In all markets, we maintain
our liability underwriting focus on being adequately
compensated for the risk we take. This discipline was of
utmost importance in 2017, a year when we saw new
entrants looking to gain a toehold in the space bid
down plain vanilla fixed annuity M&A transactions to
single-digit returns – wholly inadequate compensation
for the risk assumed. We chose instead to deploy
capital in our institutional channel as well as in a more
complex inorganic opportunity.
Athene Annual Report 2017 | 3
On the asset side of our balance sheet, we aim to
invest in unique opportunities that will enable us to
generate sustainable, safe, attractive returns for our
shareholders. Historically, these opportunities have
taken two main forms:
i.
Bespoke Trades:
a. From time to time, we find a potential investment
opportunity of scale that will enable us to deploy
into a differentiated asset. For instance, in 2016
in connection with the merger of two Apollo
REITs, we purchased $1.1 billion of legacy non-
agency residential mortgage-backed securities
(“RMBS”) at a 5.23% loss-adjusted yield. This was
approximately 300 bps wider than comparably
rated corporate bonds and in a size that we
couldn’t replicate on our own.
b. In order to increase our excess capital and
generate attractive long-term economics, near
the end of 2012, Apollo’s permanent capital
vehicle (“AAA”) contributed all of its non-Athene
assets, approximately $800 million, into Athene
in exchange for Athene shares. In addition, over
time these private investments have yielded over
$500 million of income to Athene, an annual
earned rate of 18%. This transaction resulted in
the cheapest source of equity capital in Athene’s
history and allowed us to close the game-
changing Aviva acquisition in 2013.
ii.
Strategic Investments: In recent years, we have
become increasingly focused on investing in
4 | Athene Annual Report 2017
strategic vehicles. We differentiate strategic
vehicles from other investments by the dual
purpose they serve; strategic vehicles are both (i)
attractive investments in and of themselves; but
also (ii) provide us the opportunity to scale our
balance sheet with either assets or liabilities that
present an attractive risk-return.
On the liability side, the opportunity Apollo sourced
in Venerable Holdings – the newly capitalized
insurance vehicle, formed to consolidate blocks
of variable annuities – provides a prime example
of a strategic investment. We believe our equity
investment in Venerable to be an attractive risk-
return alternative investment on its own merit, and
we were also able to capitalize on the opportunity
to establish a broader strategic reinsurance
relationship with Venerable. As a result of this
strategic relationship, we will be able to scale our
balance sheet through reinsuring liabilities that will
be created from the subsequent annuitization of
certain of Venerable’s variable annuities to fixed
payout annuities, which is estimated to total $8
billion over the life of the block. Combined with
our upfront reinsurance of $19 billion of fixed
annuities, this go-forward relationship will enable us
to significantly scale our balance sheet with well-
priced and well-underwritten liabilities.
On the asset side, we are very focused on investing
in and establishing strategic relationships with
origination vehicles. The wall of passive money that
has entered the CUSIP-based fixed income space
over the last five years has materially degraded the risk-return proposition
of plain vanilla securities. We have made a concerted effort to fight the
tide, investing in vehicles such as MidCap Financial and AmeriHome,
which provide directly-originated asset flow for Athene.
Today’s pipeline for inorganic growth and attractive asset opportunities is
as robust as I have seen in a long time. With the help of AAM and Apollo,
we are evaluating investments in a long-list of direct origination vehicles in
the commercial finance, consumer finance and real estate sectors. The Voya
transaction and our strategic relationship with Venerable Holdings have
opened doors for Athene on the liability side of the balance sheet as well,
positioning us to be the premier solutions provider for the life insurance
industry’s ongoing restructuring. As always, we will continue to evaluate the
opportunities we source with discipline and will be responsible stewards of
your capital in 2018.
2017 – A Year in Review
2017 was another very fruitful year for Athene, as we continued to execute
on the same principles that have led to our historical success. We grew our
book value per share (excluding AOCI) by 20%, from $33.05 to $39.58.
We generated an attractive net investment margin of 2.82%, which when
combined with our low operating expenses, generated a 22.0% return
on equity (excluding AOCI) in our core Retirement Services segment and
adjusted operating income of $1.1 billion, a 52% increase over 2016.
As in prior years, our relationship with AAM and Apollo proved valuable, as
we were able to invest $22 billion of assets and achieve a net investment
earned rate of 4.70% within our Retirement Services segment. Our
investment performance was driven in part by favorable interest rate moves
in 2017, on which we were uniquely positioned to capitalize due to our
portfolio composition. Approximately 28% of our investment portfolio is in
floating rate securities, and in 2017 higher interest rates increased floating
rate investment income by approximately $64 million. In 2017, we saw the
most actionable opportunities in corporate privates and non-CUSIP real
estate lending, where we invested $2.9 billion and $2.6 billion respectively.
As a reminder, we do not achieve investment differentiation through taking
outsized credit risk. As of December 31, 2017, 94% of our available for
sale fixed maturity portfolio was designated NAIC 1 or 2, which is in line
with the life insurance industry at large. On an ongoing basis, we subject
our entire portfolio to both moderate and severe stress scenario analysis,
including mark to market and other-than-temporary-impairment impacts.
Our 5% allocation to alternatives – while in line with the rest of the industry
– is differentiated through its high degree of downside protection, as
we prioritize cash-flowing, pull-to-par, non-binary outcome alternative
investments. Rather than taking outsized credit risk, we achieve investment
AHL Shareholders’ Equity
(excl. AOCI) ($bn)
$7.8
$6.5
$5.6
2015
2016
2017
Increase in New Deposits ($bn)
$11.5
$8.8
$3.9
2015
2016
2017
Total Invested Assets ($bn)
$82.3
$71.8
$67.0
2015
2016
2017
Athene Annual Report 2017 | 5
differentiation through underwriting liquidity and complexity risk. While the
credit ratings of our portfolio are very much in line with the industry, our
security composition is not. Through our relationship with Apollo and AAM,
we have a unique ability to underwrite illiquidity – appropriate for the sticky
nature of our liability stream – and complexity, driving higher investment
yields without sacrificing credit quality.
On the liability side, through our organic distribution channels we added
$11.5 billion in new deposits, underwritten to mid-teens unlevered returns
in the aggregate. We have now reached scale in two new channels – funding
agreements and pension risk transfer – which accounted for $5.3 billion of
our total new deposits last year. Consistent with our focus on profitability,
we were able to grow in these new channels while underwriting liabilities to
mid-teens returns. Across our organic sourcing platform, our volumes in 2017
reflect levels that we could profitably underwrite to target returns (and were
not based on a set market share target), and we continue to evaluate new
potential liability sourcing channels that offer a similarly attractive risk-return
proposition for our shareholders.
As in every year, we looked at many potential acquisitions and passed on
almost all of them. Valuation levels for plain vanilla fixed annuity transactions
were at all-time highs in 2017, and yet capital still entered the fixed annuity
space. Unsurprisingly, we do not like that risk-return proposition and
viewed most opportunities we evaluated during 2017 as mispriced and not
aligning with our disciplined perspective on capital deployment. However,
in leveraging our ability to embrace complexity to pursue large scale and
financially compelling transactions, we entered into transactions with Voya.
The Voya transactions are landmark deals, involving a consortium of investors
and a sophisticated structure. Partnering with Apollo and other co-investors,
we were able to offer Voya a full risk-transfer solution for its annuities
business – a solution no other company was able to provide. As part of the
Voya transaction, Athene will reinsure $19 billion of Voya’s fixed annuities.
Voya’s variable annuity business will be acquired by Venerable, which will
focus on running Voya’s variable annuity block and rolling up similar variable
annuity blocks in the market. We were able to underwrite the fixed annuity
liabilities assumed at a mid-teens return, on an unlevered basis, primarily
due to our ability to offer a full risk-transfer solution for Voya by partnering
with Venerable. Voya presented a much more attractive opportunity for our
company than any other transaction we evaluated this year and is expected
to increase our adjusted operating income by 7-9% on a run-rate basis.
Outlook
As mentioned at the beginning of this letter, I expect to be able to reflect
upon successful financial results for many years to come and continue
to share our enthusiasm for our business with shareholders. To do so,
6 | Athene Annual Report 2017
we must adapt to changing market conditions,
remain disciplined and opportunistic, and utilize our
differentiated abilities on both sides of the balance
sheet to drive outperformance.
As we analyze the market today and assess potential
headwinds and tailwinds going forward, we see
a number of trends that could have a significant
impact on our business. The first is volatility. While we
have recently enjoyed an unprecedented period of
stability in the financial markets, history implies that
this will not last forever and that periods of stability
will be matched with future periods of volatility. As a
reminder, at Athene, we believe that market instability
benefits our business, and we welcome it. We offer
products with guaranteed minimum crediting rates
for retirees, which become more valuable in a volatile
market relative to other products that are subject to
large (and often downward) swings in performance.
Additionally, through our relationship with AAM
and Apollo, periods of market volatility are the most
active periods of investing for Athene, during which
we leverage our collective expertise to find areas of
the market that offer compelling risk-return profiles.
While we have proven our ability to perform in today’s
benign markets, we remain focused on maintaining
ample capital and liquidity to allow us to achieve future
outperformance when the market opportunity arises.
Secondly, in this bull market, it is abundantly clear that
in order to grow profitably we will need to embrace
complexity and continue to look for new ways to
expand our sourcing platform. On the organic side, we
began this build-out years ago and have successfully
brought our funding agreement and pension risk
transfer products to scale. We have supplemented
our existing organic channels through strategic
relationships with Athora, a specialist solutions provider
in the European insurance market, and Venerable,
which we expect will provide reinsurance flow for
our business in the future. In the coming year, we
will continue to look for opportunities to enhance
our organic sourcing platform across any spread-
based liabilities on which we can earn an attractive
return, which should be significantly bolstered by
our expectation of higher ratings for Athene. And of
course, we maintain an excess capital buffer of over
$1.5 billion, and untapped debt capacity of more than
$1 billion, to enable us to move quickly if we identify an
inorganic opportunity that compensates us for the risk
we assume. The inability of traditional insurers to earn
spread has resulted in a fundamental reexamination
of their business strategy. As the market reaction to
the Voya transaction showed, public shareholders
are wary of business lines that create quarterly GAAP
volatility and that are asset heavy in the context of a
publicly traded, diversified insurance company. As
such, I expect a significant industry realignment over
the coming 24 months. Our strategic relationship
with Apollo, through which together we can provide
a home for much of the sellers’ desired divestitures,
allows us to offer one-stop shopping to prospective
sellers. We are confident that our unique combination
of regulatory credibility and ability to source,
underwrite and close transactions will position us as
Athene Annual Report 2017 | 7
Notable Recognition
2017 North America IPO
of the Year by Thomson
Reuters’ International
Financing Review
Military Friendly®
Employer, 2018
Military Spouse
Friendly® Employer, 2018
Top Workplace,
2015, 2016, 2017
the solutions provider of choice to the industry and allow us to capitalize on
these inorganic opportunities going forward.
Thirdly, on the asset side, notwithstanding the recent rise in rates, the spread
environment remains at historical lows. As alluded to above, we believe this
is in large part the byproduct of significant passive money flows into CUSIP-
based securities, which has pressured all-in yields. It is imperative that we
continue to build out our capabilities to source off-the-run, directly originated
assets in size, which offer us a better risk-return than what is available in the
syndicated market for debt securities.
Finally, it is worth briefly addressing the comprehensive U.S. tax reform bill
that was passed in 2017 and its impact on our business. The Tax Cuts and
Jobs Act of 2017 served to (i) lower U.S. corporate rates to 21%, and (ii)
impose a base erosion and anti-abuse tax, or BEAT. The combination of these
two factors will slightly reduce our historic tax rate advantage. However,
the tax reform bill does not impact all of our distribution channels equally,
and business conducted directly between our Bermuda subsidiaries and a
third party will not be subject to the BEAT. In addition, we are taking steps
which should further mitigate the impact of tax reform. As such, we expect
to maintain a significant tax rate advantage, and we plan to continue to grow
profitably, as we have in the past.
Closing
As we look back at Athene’s performance in 2017, we believe our results
reflect our differentiated abilities and focus on both sides of the balance
sheet. We have a stellar management team that competes with passion
every day in the marketplace. As the retirement services sector has evolved
since we entered the market in 2009, Athene has been able to maintain
its competitive advantage and outperform. We have become one of the
premier solutions providers to the retirement services market, and we have
been able to do so in a profitable manner. Looking ahead, we are confident
that we will be able to meet the challenges presented and indeed embrace
them to drive value for our shareholders. We thank you for your continued
support of our company, and we look forward to another successful year
together.
of Central Iowa
Sincerely,
United Way
Spirit Award, 2017
Jim Belardi
Chairman and Chief Executive Officer
Athene Holding Ltd.
Awarded “Best Carrier”
at the Structured Retail
Products Indexed Insurance
Conference
8 | Athene Annual Report 2017
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
001-37963
(Commission file number)
ATHENE HOLDING LTD.
(Exact name of registrant as specified in its charter)
Bermuda
(State or other jurisdiction of
incorporation or organization)
98-0630022
(I.R.S. Employer
Identification Number)
96 Pitts Bay Road
Pembroke, HM08, Bermuda
(441) 279-8400
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A Common Shares, par value $0.001
Name of exchange on which registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part II of this Form 10-K or
any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging
growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of
the Exchange Act.
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
As of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-
voting common equity held by non-affiliates of the registrant was approximately $5.7 billion. For purposes of this calculation, we define affiliates as directors,
executive officers and shareholders possessing greater than 10% of our aggregate voting power. Class M common shares are excluded from this calculation.
The number of shares of each class of our common stock outstanding is set forth in the table below, as of January 31, 2018:
Class A common shares
Class B common shares
Class M-1 common shares
142,449,265 Class M-2 common shares
47,421,940 Class M-3 common shares
3,388,890 Class M-4 common shares
851,103
1,088,000
4,701,866
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive proxy statement for the 2018 Annual General Meeting of
Shareholders to be filed by the registrant with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the year ended
December 31, 2017.
TABLE OF CONTENTS
PART I
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Exhibits, Financial Statement Schedules
PART IV
8
43
71
71
71
71
72
74
77
125
128
202
202
202
203
203
203
205
205
206
GLOSSARY OF SELECTED TERMS
Unless otherwise indicated in this Annual Report on Form 10-K, the following terms have the meanings set forth below:
Entities
Term or Acronym
A-A Mortgage
AAA
AAA Investor
AADE
AAIA
AAM
AAME
ADKG
AGER
AHL
ALIC
ALRe
AmeriHome
Apollo
Apollo Group
Athene USA
Athora
CoInvest Other
CoInvest VI
CoInvest VII
DLD
DOL
Definition
A-A Mortgage Opportunities, LP
AP Alternative Assets, L.P.
AAA Guarantor – Athene, L.P.
Athene Annuity & Life Assurance Company
Athene Annuity and Life Company
Athene Asset Management, L.P.
Apollo Asset Management Europe, LLP (together with certain of its affiliates)
Athene Deutschland Holding GmbH & Co. KG
AGER Bermuda Holding Ltd., now known as Athora Holding Ltd.
Athene Holding Ltd.
Athene Life Insurance Company
Athene Life Re Ltd.
AmeriHome Mortgage Company, LLC
Apollo Global Management, LLC
(1) Apollo, (2) the AAA Investor, (3) any investment fund or other collective investment vehicle whose general
partner or managing member is owned, directly or indirectly, by Apollo or one or more of Apollo’s subsidiaries,
(4) BRH Holdings GP, Ltd. and its shareholders and (5) any affiliate of any of the foregoing (except that AHL
and its subsidiaries and employees of AHL, its subsidiaries or AAM are not members of the Apollo Group)
Athene USA Corporation
Athora Holding Ltd., formerly known as AGER Bermuda Holding Ltd.
AAA Investments (Other), L.P.
AAA Investments (Co-Invest VI), L.P.
AAA Investments (Co-Invest VII), L.P.
Delta Lloyd Deutschland AG, now known as Athene Deutschland GmbH
United States Department of Labor
German Group Companies Athene Deutschland GmbH, Athene Deutschland Holding GmbH & Co. KG, Athene Deutschland Verwaltungs
GmbH, Athene Lebensversicherung AG and Athene Pensionskasse AG
London Prime
London Prime Apartments Guernsey Holdings Limited
MidCap
NAIC
NCL LLC
NYSDFS
Sprint
Voya
VIAC
MidCap FinCo Limited
National Association of Insurance Commissioners
NCL Athene, LLC
New York State Department of Financial Services
Apollo Asia Sprint Co-Investment Fund, L.P.
Voya Financial, Inc.
Voya Insurance and Annuity Company
Venerable
Venerable Holdings, Inc.
3
Certain Terms & Acronyms
Term or Acronym
ABS
Definition
Asset-backed securities
ACL
ALM
ALRe RBC
AUM
Authorized control level RBC as defined by the model created by the National Association of Insurance
Commissioners
Asset liability management
The risk-based capital ratio of ALRe, when applying the NAIC risk-based capital factors.
Assets under management
Alternative investments
Alternative investments, including investment funds, CLO equity positions and certain other debt instruments
considered to be equity-like
Base of earnings
BEAT
Bermuda capital
Block reinsurance
BMA
BSCR
CAL
Capital ratio
CLO
CMBS
CML
Cost of crediting
Earnings generated from our results of operations and the underlying profitability drivers of our business
Base Erosion and Anti-Abuse Tax
The capital of ALRe calculated under U.S. statutory accounting principles, including that for policyholder
reserve liabilities which are subjected to U.S. cash flow testing requirements, but excluding certain items that do
not exist under our applicable Bermuda requirements, such as interest maintenance reserves
A transaction in which the ceding company cedes all or a portion of a block of previously issued annuity
contracts through a reinsurance agreement
Bermuda Monetary Authority
Bermuda Solvency Capital Requirement
Company action level RBC as defined by the model created by the National Association of Insurance
Commissioners
Ratios calculated (1) with respect to our U.S. insurance subsidiaries, by reference to RBC, (2) with respect to
ALRe, by reference to BSCR, and (3) with respect to our German Group Companies, by reference to SCR
Collateralized loan obligation
Commercial mortgage-backed securities
Commercial mortgage loans
The interest credited to the policyholders on our fixed annuities, including, with respect to our fixed indexed
annuities, option costs, presented on an annualized basis for interim periods
DAC
Deferred acquisition costs
Deferred annuities
Fixed indexed annuities, annual reset annuities and multi-year guaranteed annuities
DSI
Excess capital
FIA
Fixed annuities
Fixed rate annuity
Deferred sales inducement
Capital in excess of the level management believes is needed to support our current operating strategy
Fixed indexed annuity, which is an insurance contract that earns interest at a crediting rate based on a specified
index on a tax-deferred basis
FIAs together with fixed rate annuities
An insurance contract that offers tax-deferred growth and the opportunity to produce a guaranteed stream of
retirement income for the lifetime of its policyholder
Flow reinsurance
A transaction in which the ceding company cedes a portion of newly issued policies to the reinsurer
GAAP
GLWB
GMDB
IMA
IMO
Invested assets
Investment margin
Liability outflows
Accounting principles generally accepted in the United States of America
Guaranteed lifetime withdrawal benefit
Guaranteed minimum death benefit
Investment management agreement
Independent marketing organization
The sum of (a) total investments on the consolidated balance sheet with AFS securities at amortized cost,
excluding derivatives, (b) cash and cash equivalents and restricted cash, (c) investments in related parties, (d)
accrued investment income, (e) consolidated variable interest entities’ assets, liabilities and noncontrolling
interest and (f) policy loans ceded (which offset the direct policy loans in total investments). Invested assets
includes investments supporting assumed funds withheld and modco agreements and excludes assets associated
with funds withheld liabilities related to business exited through reinsurance agreements and derivative collateral
(offsetting the related cash positions)
Investment margin applies to deferred annuities and is the excess of our net investment earned rate over the cost
of crediting to our policyholders, presented on an annualized basis for interim periods
The aggregate of withdrawals on our deferred annuities, maturities of our funding agreements, payments on
payout annuities, and pension risk benefit payments
4
Term or Acronym
LIMRA
Definition
Life Insurance and Market Research Association
MCR
MMS
Modco
MVA
MYGA
Minimum capital requirements
Minimum margin of solvency
Modified coinsurance
Market value adjustment
Multi-year guaranteed annuity
Net investment earned rate
Income from our invested assets divided by the average invested assets for the relevant period, presented on an
annualized basis for interim periods
Other liability costs
OTTI
Overall tax rate
Payout annuities
Policy loan
PRT
RBC
Reserve liabilities
Other liability costs include DAC, DSI and VOBA amortization and change in GLWB and GMDB reserves for
all products, the cost of liabilities on products other than deferred annuities including offsets for premiums,
product charges and other revenues
Other-than-temporary impairment
Tax rate including corporate income taxes, the BEAT and excise taxes
Annuities with a current cash payment component, which consist primarily of SPIAs, supplemental contracts and
structured settlements
A loan to a policyholder under the terms of, and which is secured by, a policyholder’s policy
Pension risk transfer
Risk-based capital
The sum of (a) interest sensitive contract liabilities, (b) future policy benefits, (c) dividends payable to
policyholders, and (d) other policy claims and benefits, offset by reinsurance recoverable, excluding policy loans
ceded. Reserve liabilities also includes the reserves related to assumed modco agreements in order to
appropriately match the costs incurred in the consolidated statements of income with the liabilities. Reserve
liabilities is net of the ceded liabilities to third-party reinsurers as the costs of the liabilities are passed to such
reinsurers and therefore we have no net economic exposure to such liabilities, assuming our reinsurance
counterparties perform under our agreements
Rider reserves
Guaranteed living withdrawal benefits and guaranteed minimum death benefits reserves
RMBS
RML
Sales
SPIA
Surplus assets
TAC
U.S. RBC Ratio
VIE
VOBA
Residential mortgage-backed securities
Residential mortgage loan
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)
Single premium immediate annuity
Assets in excess of policyholder obligations, determined in accordance with the applicable domiciliary
jurisdiction’s statutory accounting principles
Total adjusted capital as defined by the model created by the NAIC
The CAL RBC ratio for AADE, our parent U.S. insurance company
Variable interest entity
Value of business acquired
5
As used in this Form 10-K, unless the context otherwise indicates, any reference to “Athene,” “our Company,” “the Company,” “us,” “we”
and “our” refer to Athene Holding Ltd. together with its consolidated subsidiaries and any reference to “AHL” refers to Athene Holding Ltd.
only.
Forward-Looking Statements
Certain statements in this Annual Report on Form 10-K (report), other than purely historical information, including estimates, projections,
statements relating to our business plans, objectives and expected operating results and the assumptions upon which those statements are based,
are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act).
You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may
include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “seek,” “assume,” “believe,” “may,” “will,” “should,”
“could,” “would,” “likely” and other words and terms of similar meaning, including the negative of these or similar words and terms, in
connection with any discussion of the timing or nature of future operating or financial performance or other events. However, not all forward-
looking statements contain these identifying words. Forward-looking statements appear in a number of places throughout and give our current
expectations and projections relating to our financial condition, results of operations, plans, strategies, objectives, future performance, business
and other matters.
We caution you that forward-looking statements are not guarantees of future performance and that our actual consolidated results of operations,
financial condition and liquidity may differ materially from those made in or suggested by the forward-looking statements contained in this
report. There can be no assurance that actual developments will be those anticipated by us. In addition, even if our consolidated results of
operations, financial condition and liquidity are consistent with the forward-looking statements contained in this report, those results or
developments may not be indicative of results or developments in subsequent periods. A number of important factors could cause actual results
or conditions to differ materially from those contained or implied by the forward-looking statements, including the risks discussed in Item 1A.
Risk Factors. Factors that could cause actual results or conditions to differ from those reflected in the forward-looking statements contained in
this report include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the accuracy of management’s assumptions and estimates;
variability in the amount of statutory capital that our insurance and reinsurance subsidiaries have or are required to hold;
interest rate fluctuations;
our potential need for additional capital in the future and the potential unavailability of such capital to us on favorable terms or at all;
changes in relationships with important parties in our product distribution network;
the activities of our competitors and our ability to grow our retail business in a highly competitive environment;
the impact of general economic conditions on our ability to sell our products and the fair value of our investments;
our ability to successfully acquire new companies or businesses and/or integrate such acquisitions into our existing framework;
downgrades, potential downgrades or other negative actions by rating agencies;
our dependence on key executives and inability to attract qualified personnel, or the potential loss of Bermudian personnel as a result
of Bermuda employment restrictions;
market and credit risks that could diminish the value of our investments;
foreign currency fluctuations;
the impact of changes to the creditworthiness of our reinsurance and derivative counterparties;
changes in consumer perception regarding the desirability of annuities as retirement savings products;
potential litigation (including class action litigation), enforcement investigations or regulatory scrutiny against us and our subsidiaries,
which we may be required to defend against or respond to;
the impact of new accounting rules or changes to existing accounting rules on our business;
interruption or other operational failures in telecommunication and information technology and other operating systems, as well as our
ability to maintain the security of those systems;
the termination by Athene Asset Management, L.P. (AAM) of its investment management agreements with us and limitations on our
ability to terminate such arrangements;
AAM’s dependence on key executives and inability to attract qualified personnel;
increased regulation or scrutiny of alternative investment advisers and certain trading methods;
potential changes to regulations affecting, among other things, transactions with our affiliates, the ability of our subsidiaries to make
dividend payments or distributions to us, acquisitions by or of us, minimum capitalization and statutory reserve requirements for
insurance companies and fiduciary obligations on parties who distribute our products;
suspension or revocation of our subsidiaries’ insurance and reinsurance licenses;
increases in our tax liability resulting from the Base Erosion and Anti-Abuse Tax (BEAT) or unnecessary, ineffective or
counterproductive efforts undertaken to mitigate the cost of the BEAT;
improper interpretation or application of Public Law no. 115-97, the Act to provide for reconciliation pursuant to titles II and V of the
concurrent resolution on the budget for fiscal year 2018 (Tax Act) or subsequent changes to, clarifications of or guidance under the
Tax Act that is counter to our interpretation and has retroactive effect;
Athene Holding Ltd. (AHL) or Athene Life Re Ltd. (ALRe) becoming subject to U.S. federal income taxation;
adverse changes in U.S. tax law;
our being subject to U.S. withholding tax under Foreign Account Tax Compliance Act;
6
•
•
our potential inability to pay dividends or distributions; and
other risks and factors listed under Item 1A. Risk Factors.
We caution you that the important factors referenced above may not be exhaustive. In addition, we cannot assure you that we will realize the
results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our
operations in the way we expect or anticipate. In light of these risks, you should not place undue reliance upon any forward-looking statements
contained in this report. The forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation,
except as may be required by law, to publicly update or revise any forward-looking statement as a result of new information, future events or
otherwise. Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future
performance, unless expressed as such, and should only be viewed as historical data.
7
9
11
12
15
18
19
20
20
21
21
22
23
23
42
Item 1. Business
Overview
Growth Strategy
Products
Distribution Channels
Investment Management
Reserves
Outsourcing
Affiliated Reinsurance
Hedging and Derivatives
Financial Strength Ratings
Competition
Employees
Regulation
Available Information
PART I
Index to Business
8
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Item 1. Business
Overview
We are a leading retirement services company that issues, reinsures and acquires retirement savings products designed for the increasing number
of individuals and institutions seeking to fund retirement needs. We generate attractive financial results for our policyholders and shareholders
by combining our two core competencies of (1) sourcing long-term, generally illiquid liabilities and (2) investing in a high quality investment
portfolio, which takes advantage of the illiquid nature of our liabilities. Our steady and significant base of earnings generates capital that we
opportunistically invest across our business to source attractively-priced liabilities and capitalize on opportunities. Our differentiated investment
strategy benefits from our strategic relationship with Apollo Global Management, LLC (Apollo) and its indirect subsidiary, AAM. AAM
provides a full suite of services for our investment portfolio, including direct investment management, asset allocation, mergers and acquisition
asset diligence and certain operational support services, including investment compliance, tax, legal and risk management support. Our
relationship with Apollo and AAM also provides us with access to Apollo’s investment professionals around the world as well as Apollo’s global
asset management infrastructure across a broad array of asset classes. We are led by a highly skilled management team with extensive industry
experience. We are based in Bermuda with our United States (U.S.) subsidiaries’ headquarters located in Iowa.
We began operating in 2009 when the burdens of the financial crisis and resulting capital demands caused many companies to exit the retirement
market, creating the need for a well-capitalized company with an experienced management team to fill the void. Taking advantage of this market
dislocation, we have been able to acquire substantial blocks of long-duration liabilities and reinvest the related investments to produce profitable
returns.
We operate our core business strategies out of one reportable segment, Retirement Services. In addition to Retirement Services, we report certain
other operations in Corporate and Other. Retirement Services is comprised of our U.S. and Bermuda operations, which issue and reinsure
retirement savings products and institutional products. Retirement Services has retail operations, which provide annuity retirement solutions to
our policyholders. Retirement Services also has reinsurance operations, which reinsure multi-year guaranteed annuities (MYGA), fixed indexed
annuities (FIA), traditional one year guarantee fixed deferred annuities, immediate annuities and institutional products from our reinsurance
partners. In addition, our funding agreement activities and our pension risk transfer (PRT) operations are included in our Retirement Services
segment. Corporate and Other includes certain other operations related to our corporate activities, including corporate allocated expenses,
merger and acquisition costs, debt costs, certain integration and restructuring costs, certain stock-based compensation and intersegment
eliminations. Prior to the deconsolidation of AGER Bermuda Holding Ltd. (AGER) as discussed in greater detail below under –Products–
German Products, Corporate and Other included our German operations, which were primarily comprised of participating long-duration savings
products. In Corporate and Other we also hold strategic capital in excess of the level of capital we hold in Retirement Services to support our
operating strategy. See Note 19 – Segment Information to the consolidated financial statements for additional discussion regarding our segments
and related financial information.
We believe we hold a sufficient amount of capital in our Retirement Services segment to support our core operating strategies. This level
of capital may fluctuate depending on the mix of both our assets and our liabilities, and reflects the level of capital needed to support or improve
our current ratings as well as our risk appetite based on our internal risk models. The level of capital we currently allocate to our Corporate non-
reportable segment is our U.S. subsidiaries’ statutory capital in excess of a risk-based capital (RBC) ratio of 400%, as well as the Bermuda
capital for ALRe in excess of 400% RBC, when applying National Association of Insurance Commissioners (NAIC) RBC factors (ALRe RBC).
See –Regulation–United States–Tax Reform for discussion regarding the impact of tax reform on our allocation of capital. We view this excess
as strategic capital, which we expect to deploy for additional organic and inorganic growth opportunities. For example, in December 2017, we
entered into a transaction with Voya Financial, Inc. (Voya), pursuant to which we agreed to reinsure approximately $19 billion of fixed annuities.
That transaction, which is expected to close in the second or third quarter of 2018, subject to regulatory approval and customary closing
conditions, is expected to result in the deployment of approximately $1 billion of excess capital. In January 2018, we issued $1 billion in
aggregate principal amount of our 4.125% Senior Notes due 2028 for general corporate purposes, including to replenish our excess capital in a
low interest rate environment. We expect to deploy our excess capital in connection with future growth opportunities and further expect our
excess capital position to contribute to ratings improvements over time. We manage our capital to levels which we believe would remain
consistent with our current ratings in a recessionary environment.
We have developed organic and inorganic channels to address the retirement services market and grow our assets and liabilities. By focusing on
the retirement services market, we believe that we will benefit from several demographic and economic trends, including the increasing number
of retirees in the U.S., the lack of tax advantaged alternatives for people trying to save for retirement and expectations of a rising interest rate
environment. To date, most of our products sold and acquired have been fixed annuities, which offer people saving for retirement a product that
is tax advantaged, has a minimum guaranteed rate of return or minimum cash value and provides protection against investment loss. Our
policies often include surrender charges (86% of our deferred annuity products, as of December 31, 2017) or market value adjustments (MVA)
(72% of our deferred annuity products, as of December 31, 2017), both of which may increase persistency and protect our ability to meet our
obligations to policyholders.
9
Item 1. Business
Within our organic channels, we have focused on developing a diverse suite of products that allow us to meet our risk and return profiles, even
in today’s low rate environment. Our organic channels currently include: (1) retail, from which we provide retirement solutions to our
policyholders primarily through approximately 65 independent marketing organizations (IMOs); (2) flow reinsurance, which provides a
diversified channel for us to source long-term liabilities with attractive crediting rates; and (3) institutional, which includes funding agreements
and PRT transactions. Our inorganic channel, acquisitions and block reinsurance, contributed significantly to our growth. We believe our
internal transaction team, with support from Apollo, has an industry-leading ability to source, underwrite and expeditiously close transactions,
which makes us a competitive counterparty for acquisition or block reinsurance transactions. We are highly selective in the transactions we
pursue, ultimately closing only those that are well aligned with our core competencies and pricing discipline.
We intend to maintain a presence within each of our distribution channels. However, we do not have any market share targets across our
organization, which we believe provides us flexibility to respond to changing market conditions in one or more channels and to opportunistically
grow liabilities that generate our desired levels of profitability. In a rising interest rate environment, we believe we will be able to profitably
increase the volumes generated through our organic channels, while we believe that more challenging market environments give rise to
increased growth through our inorganic channel.
Through our efficient corporate structure and operations, we believe we have built a cost-effective platform to support our growth opportunities.
We believe our fixed operating cost structure supports our ability to maintain an attractive financial profile across market environments.
Additionally, we believe we have designed our platform to be highly scalable and support growth without significant incremental investment in
infrastructure, which allows us to scale our business production up or down because of our cost-effective platform. As a result, we believe we
will be able to convert a significant portion of our new business spread into adjusted operating income.
Relationship with Apollo
We have a strategic relationship with Apollo which allows us to leverage the scale of its asset management platform. Apollo’s indirect
subsidiary, AAM, serves as our investment manager. In addition to co-founding the Company, Apollo assists us in identifying and capitalizing
on acquisition opportunities that have been critical to our ability to significantly grow our business. The Apollo Group consists of (1) Apollo,
(2) AAA Guarantor – Athene, L.P. (AAA Investor), (3) any investment fund or other collective investment vehicle whose general partner or
managing member is owned, directly or indirectly, by Apollo or one or more of Apollo’s subsidiaries, (4) BRH Holdings GP, Ltd. and its
shareholders and (5) any affiliate of any of the foregoing (except that AHL and its subsidiaries and employees of AHL, its subsidiaries or AAM
are not members of the Apollo Group). Members of the Apollo Group are significant owners of our common shares and Apollo employees serve
on our board of directors. We expect our strategic relationship with Apollo to continue for the foreseeable future. See Item 13. Certain
Relationships and Related Transactions, and Director Independence.
The Apollo Group controls and is expected to continue to control 45% of the total voting power of AHL and five of our twelve directors are
employees of or consultants to Apollo, including our Chairman, Chief Executive Officer and Chief Investment Officer who is a dual employee
of both AHL and AAM. Further, our bye-laws generally limit the voting power of our Class A common shares (and certain other of our voting
securities) such that no person owns (or is treated as owning) more than 9.9% of the total voting power of our common shares (with certain
exceptions). See Item 1A. Risk Factors–Risks Relating to Investment in Our Class A Common Shares–The interest of the Apollo Group, which
controls and is expected to continue to control 45% of the total voting power of AHL and holds a number of the seats on our board of directors,
may conflict with those of other shareholders and could make it more difficult for you and other shareholders to influence significant corporate
decisions.
10
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Item 1. Business
Growth Strategy
The key components of our growth strategy are as follows:
•
•
•
Expand Our Organic Distribution Channels. We plan to grow organically by expanding our retail, flow reinsurance and
institutional distribution channels. We believe we have the right people, infrastructure and scale to position us for continued growth.
We aim to grow our retail channel in the U.S. by deepening our relationships with our approximately 65 IMOs and more than 34,000
independent agents. Our strong financial position and capital efficient products allow us to be a dependable partner with IMOs and
consistently write new business. We work with our IMOs to develop customized, and at times exclusive, products that help drive sales.
We expect our retail channel to continue to benefit from our improving credit profile and our product design capabilities, which allow
us to provide a competitive suite of products. We believe this should support growth in sales at our desired cost of crediting through
increased volumes via current IMOs and access to new distribution channels, including small to mid-sized banks and regional broker-
dealers. We are implementing the necessary technology platform, hiring and training a specialized sales force, and have created
products to capture new potential distribution opportunities.
Within our flow reinsurance channel, we target reinsurance business consistent with our preferred liability characteristics, and as such,
flow reinsurance provides another opportunistic channel for us to source long-term liabilities with attractive crediting rates. We expect
our improving credit profile and growing reputation as a reliable reinsurance counterparty will enable us to attract additional flow
reinsurance partners.
We expect to grow our institutional channel by continuing to engage in opportunistic issuances of funding agreements and pursuing
additional PRT transactions. We continue to enhance our capabilities in the PRT channel and view this channel, and the funding
agreement channel, as sources of future growth. See –Distribution Channels–Institutional–Pension Risk Transfer for further
discussion regarding PRT transactions.
Pursue Attractive Inorganic Growth Opportunities. We plan to continue leveraging our expertise in sourcing and evaluating
inorganic transactions to grow our business profitably. From our founding through December 31, 2017, we have grown to total assets
of $99.7 billion, primarily through acquisitions and block reinsurance transactions. We believe that our demonstrated ability to
successfully consummate complex transactions, as well as our relationship with Apollo, provides us with distinct advantages relative
to other acquirers and block reinsurance counterparties. Furthermore, our business has achieved sufficient scale to provide meaningful
operational synergies for the businesses and blocks of business that we acquire and reinsure, respectively. Consequently, we believe
we are often sought out by companies looking to transact in the acquisitions and block reinsurance markets.
For example, in December 2017 a consortium of investors, led by affiliates of Apollo, and certain other investors, agreed to purchase
Voya Insurance and Annuity Company (VIAC), including its closed block variable annuity segment, and create a newly formed
standalone entity, Venerable Holdings, Inc. (Venerable), that will be the holding company of VIAC. We committed to make a $75
million minority equity investment in VA Capital Company LLC, the holding company of Venerable, and provide financing to
Venerable of $150 million, in each case, subject to certain closing adjustments. In connection with these transactions, we agreed to
reinsure approximately $19 billion of fixed annuities. These transactions are expected to close in the second or third quarter of 2018
and are subject to regulatory approvals and customary closing conditions.
In furtherance of our strategy of growth through acquisitions and block reinsurance transactions, we routinely review and conduct
investigations of potential acquisitions of business or reinsurance of blocks of business, some of which may be material. When we
believe a favorable opportunity exists, we seek to enter into discussions with target companies or sellers regarding the possibility of
such acquisitions or reinsurance relationships. At any given time, we may be in discussions with one or more counterparties. There can
be no assurance that any such negotiations will lead to definitive agreements, or if such agreements are reached, that any transactions
would be consummated.
Expand Our Product Offering. Our efforts to date have focused on developing and sourcing retirement savings products and we are
continuing such efforts by expanding our retail product offerings. In April 2016, we launched our largest new retail product initiative
where we: (1) enhanced our most popular accumulation product, Performance Elite, with two new indices, (2) announced a new
MYGA product designed for the bank and broker-dealer channel and (3) introduced an income-focused product, Ascent Pro. With the
introduction of our new MYGA product and Ascent Pro, our retail channel is now competing in a much broader segment of the overall
retirement market. For the twelve months ended December 31, 2017, new MYGA sales in the IMO and financial institution channels
were $486 million and Ascent Pro sales were $1.2 billion.
11
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Item 1. Business
•
•
Leverage Our Unique Relationship with Apollo and AAM. We intend to continue leveraging our unique relationship with Apollo
and AAM to source high-quality assets with attractive risk-adjusted returns. Apollo’s global scale and reach provide us with broad
market access across environments and geographies and allow us to actively source assets that exhibit our preferred risk and return
characteristics. For instance, through our relationship with Apollo and AAM, we have indirectly invested in companies including
MidCap FinCo Limited (MidCap) and AmeriHome Mortgage Company, LLC (AmeriHome). See Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations–Consolidated Investment Portfolio–Alternative Investments for further
discussion of MidCap and AmeriHome.
Our relationship with Apollo also allows us to offer creative solutions to insurance companies seeking to restructure their businesses
and may enable us source additional volumes of attractively-priced liabilities. For example, the transactions involving Voya described
above are expected to provide Voya with a comprehensive solution to its variable annuity exposure, while providing us with a
substantial block of fixed annuities, which are well aligned with our core business, without requiring that we acquire Voya’s variable
annuity business.
Allocate Assets during Market Dislocations. As we have done successfully in the past, we plan to fully capitalize on future market
dislocations to opportunistically reposition our portfolio to capture incremental yield. For example, regulatory changes in the wake of
the financial crisis have made it more expensive for banks and other traditional lenders to hold certain illiquid and complex assets,
notwithstanding the fact that these assets may have prudent credit characteristics. The repressed demand for these asset classes has
provided opportunities for investors to acquire high-quality assets that offer attractive returns. For example, we see emerging
opportunities as banks retreat from direct mortgage lending, structured and asset-backed products, and middle-market commercial
loans. We intend to maintain a flexible approach to asset allocation, which will allow us to act quickly on similar opportunities that
may arise in the future across a wide variety of asset types.
• Maintain Risk Management Discipline. Our risk management strategy is to proactively manage our exposure to risks associated
with interest rate duration, credit risk and structural complexity of our invested assets. We address interest rate duration and liquidity
risks through managing the duration of the liabilities we source with the assets we acquire, and through asset liability management
(ALM) modeling. We assess credit risk by modeling our liquidity and capital under a range of stress scenarios. We manage the risks
related to the structural complexity of our invested assets through AAM’s modeling efforts. The goal of our risk management
discipline is to be able to continue to grow and achieve profitable results across various market environments.
Products
We principally offer two product lines: annuities and funding agreements. Our primary product line is annuities and includes fixed, payout and
PRT annuities. We also offer funding agreements, including those issued to institutional investors and those issued to a special-purpose
unaffiliated trust in connection with our funding agreement backed notes (FABN) program.
The following summarizes our total premiums and deposits, comprised of all products deposits, which generally are not included in revenues on
the consolidated statements of income, and premiums collected. Premiums and deposits by product, including those assumed through
reinsurance and net of those ceded through reinsurance, are as follows:
(In millions)
Annuities
Fixed indexed annuities
Fixed rate annuities
Payout annuities
Pension risk transfer annuities
Total annuities products
Funding agreements
Life and other (excluding German products)
German products
Total premiums and deposits, net of ceded
Years ended December 31,
2017
2016
2015
$
5,480
$
5,322
$
2,808
873
129
2,188
8,670
3,054
84
203
3,565
128
—
9,015
—
31
212
883
219
—
3,910
250
72
81
$
12,011
$
9,258
$
4,313
Reserve liabilities represents our policyholder liability obligations, including liabilities assumed through reinsurance and net of liabilities ceded
through reinsurance, and therefore does not correspond to interest sensitive contract liabilities, future policy benefits, dividends payable to
policyholders and other policy claims and benefits as disclosed on our consolidated balance sheets. Reserve liabilities includes the reserves
related to assumed modified coinsurance (modco) and funds withheld agreements to appropriately match the costs incurred in the consolidated
statements of income with the liabilities. Reserve liabilities is net of the ceded liabilities to third-party reinsurers as the costs of the liabilities are
passed to such reinsurers and, therefore, we have no net economic exposure to such liabilities, assuming our reinsurance counterparties perform
under our agreements. The majority of our ceded reinsurance is a result of reinsuring large blocks of life business following acquisitions.
12
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Item 1. Business
The following summarizes our reserve liabilities by product:
(In millions, except percentages)
Annuities
Fixed indexed annuities
Fixed rate annuities
Payout annuities
Pension risk transfer annuities
Total annuities products
Funding agreements
Life and other (excluding German products)
German products
Intersegment eliminations
Total reserve liabilities
Annuities
December 31,
2017
2016
$
$
48,431
13,412
5,216
2,252
69,311
3,786
2,281
5,979
(174)
81,183
59.7 % $
16.5 %
6.4 %
2.8 %
85.4 %
4.7 %
2.7 %
7.4 %
(0.2)%
100.0 % $
43,527
13,490
5,443
—
62,460
1,109
2,176
5,381
(152)
70,974
61.3 %
19.0 %
7.6 %
— %
87.9 %
1.6 %
3.1 %
7.6 %
(0.2)%
100.0 %
We offer deferred and immediate annuities, which are focused on meeting the needs and objectives of people preparing for, approaching or
living in retirement. The combination of financial strength, innovative product design and an effective sales strategy enables us to compete
successfully in the market and meet the evolving needs of the rapidly growing population of retirees.
Fixed Indexed Annuities
The majority of our reserve liabilities are FIAs. An FIA is a type of insurance contract in which the policyholder makes one or more premium
deposits which earn interest at a crediting rate based on a specified market index on a tax deferred basis and is entitled to receive periodic or
lump sum payments a specified number of years after the contract is issued. FIAs allow policyholders the possibility of earning such interest
without risk to principal, unless the contract is surrendered during a surrender charge period. A market index tracks the performance of a specific
group of stocks or other assets representing a particular segment of the market, or in some cases, an entire market. Our FIAs include a provision
for a minimum guaranteed surrender value calculated in accordance with applicable law, as well as death benefits as required by non-forfeiture
regulations. We generally buy options on the indices to which the FIAs are tied to hedge the associated market risk. The cost of the option is
priced into the overall economics of the product as an option budget.
The value to the policyholder of an FIA contract is equal to the sum of premiums paid, premium bonuses, if any, and index credits based on the
change in the relevant market index, subject to a cap (a maximum rate that may be credited), spread (a credited rate determined by deducting a
specific rate from the index return) and/or a participation rate (a credited rate equal to a percentage of the index return), less any fees for riders.
Caps on our FIA products generally range from 2% to 5% when measured annually and 0.5% to 2.0% when measured monthly. Participation
rates generally range from 25% to 150% of the performance of the applicable market index. Caps, spreads and participation rates can typically
be reset no more frequently than annually, and in some instances no more frequently than every two to four years, at the relevant U.S. insurance
subsidiary’s discretion, subject to stated policy minimums. Certain riders provide a variety of benefits, such as lifetime income or additional
liquidity, for a set charge. As this charge is fixed, the policyholder may lose principal if the index credits received do not exceed the amount of
such charge.
We generate income on FIA products by earning an investment margin, which is based on the difference between income earned on the
investments supporting the liabilities and the interest credited to customers, and by charging fees for riders. For the year ended December 31,
2017, retail sales of FIA products were $4.9 billion and flow reinsurance of FIA products was $514 million. According to sales information from
participating members of LIMRA, for the nine months ended September 30, 2017 (the most recent period that data is currently available), we
were the 2nd largest FIA provider in the U.S. based on retail FIA sales. For the year ended December 31, 2016, retail sales of FIA products were
$4.5 billion and flow reinsurance of FIA products was $686 million. According to sales information from participating members of LIMRA, for
the year ended December 31, 2016, we were the 3rd largest FIA provider in the U.S. based on retail FIA sales and we were the 3rd largest FIA
provider based on fixed indexed deferred annuity assets (exclusive of reinsurance).
13
Item 1. Business
Fixed Rate Annuities
Fixed rate annuities include annual reset annuities and MYGAs. Unlike FIAs, fixed rate annuities earn interest at a set rate (or declared crediting
rate), rather than a rate that may vary based on an index. Fixed rate annual reset annuities have a crediting rate that is guaranteed for one year.
After such period, we have the ability to change the crediting rate at our discretion once annually to any rate at or above a guaranteed minimum
rate. MYGAs are similar to annual reset annuities except that the initial crediting rate is guaranteed for a specified number of years, rather than
just one year, before it may be changed at our discretion. On April 11, 2016, we introduced our first MYGA product designed for the financial
institutions channel. For the year ended December 31, 2017, we had retail sales of $6 million of annual reset annuities and $487 million of
MYGAs, as well as flow reinsurance of $361 million of MYGAs. For the year ended December 31, 2016, we had retail sales of $6 million of
annual reset annuities and $772 million of MYGAs, as well as flow reinsurance of $2.8 billion of MYGAs. As of December 31, 2017, crediting
rates on outstanding annual reset annuities ranged from 1% to 6% and crediting rates on outstanding MYGAs ranged from 1% to 6%. As of
December 31, 2017, 58% of our fixed rate annuities were set at the guaranteed minimum crediting rate.
Income Riders to Fixed Annuity Products
We broadly characterize the income riders on our deferred annuities as either guaranteed or participating. Guaranteed income riders provide
policyholders with a guaranteed lifetime withdrawal benefit (GLWB), the amount of which is determined based upon the age of the policyholder
when the policy is purchased and when the lifetime income is elected. Riders providing GLWB features permit policyholders to elect to receive
guaranteed payments for life from their contract without having to annuitize their policies, which provides policyholders with greater flexibility
in the future. Participating income riders tend to have lower levels of guaranteed income but provide policyholders the opportunity to receive
greater levels of income if the policies’ indexed crediting strategies perform well.
Income riders, particularly on FIAs, have become very popular among policyholders. LIMRA estimates that 59% of FIA premium for the nine
months ended September 30, 2017 (the most recent period that specific market share data is currently available) included an income rider. Much
of our in-force block of deferred annuities contains policies with income riders, which were sourced through retail and reinsurance operations as
well as acquisitions, such as the substantial block of these policies acquired with Aviva USA Corporation (Aviva USA). Many of our in-force
deferred annuities contain policies that provide GLWB. Of the deferred annuities issued through our retail channel or reinsured through our flow
reinsurance channel, for the year ended December 31, 2017, 15% contained participating income riders and 18% contained guaranteed income
riders.
Withdrawal Options for Deferred Annuities
After the first year following the issuance of a deferred annuity, the policyholder is typically permitted to make withdrawals up to 5% or 10%
(depending on the contract) of the prior year’s value without a surrender charge or MVA, subject to certain limitations. Withdrawals in excess of
the allowable amounts are assessed a surrender charge and MVA if such withdrawals are made during the surrender charge period of the policy.
For the years ended December 31, 2017, 2016 and 2015, withdrawals on our deferred annuities were $4.5 billion, 4.2 billion and $4.4 billion,
respectively. The surrender charge of most of our products is typically between 8% and 15% of the contract value at contract inception and
generally decreases by approximately one percentage point per year during the surrender charge period. The surrender charge period of our most
popular products ranges from 3 to 15 years. The average surrender charge (excluding the impact of MVAs) is 7.3% for our deferred annuities as
of December 31, 2017.
At maturity, the policyholder may elect to receive proceeds in the form of a single payment or an annuity. If the annuity option is selected, the
policyholder will receive a series of payments either over his or her lifetime or over a fixed number of years, depending upon the terms of the
contract. Some contracts permit annuitization prior to maturity. In addition to the foregoing rights, a policyholder may also elect to purchase a
guaranteed minimum withdrawal benefit rider which provides the policyholder with a guaranteed minimum withdrawal benefit for the life of the
contract.
Payout Annuities
Payout annuities primarily consist of single premium immediate annuities (SPIA), supplemental contracts and structured settlements. Payout
annuities provide a series of periodic payments for a fixed period of time or for the life of the policyholder, based upon the policyholder’s
election at the time of issuance. The amounts, frequency and length of time of the payments are fixed at the outset of the annuity contract. SPIAs
are often purchased by persons at or near retirement age who desire a steady stream of payments over a future period of years. Supplemental
contracts are typically created upon the conversion of a death claim or the annuitization of a deferred annuity. Structured settlements generally
relate to legal settlements.
Pension Risk Transfer Annuities
PRT transactions usually involve a single premium group annuity contract issued for discharging certain pension plan liabilities. Our PRT
annuities are nonparticipating contracts. The assets supporting the guaranteed benefits for each contract may be held in a separate account. The
group annuity benefits may be purchased for current, retired and/or terminated employees covered under terminating or ongoing pension plans.
Both immediate and deferred annuities may be purchased by a single premium at issue. There are generally no cash surrender rights, with some
exceptions, including certain contracts that include liabilities for cash balance pension plans or lump sums.
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Item 1. Business
Funding Agreements
We focus on opportunistically issuing funding agreements at attractive risk-adjusted funding costs to institutional investors. Funding agreements
are negotiated privately between an investor and an insurance company. They are designed to provide an agreement holder with a guaranteed
return of principal and periodic interest payments, while offering competitive yields and predictable returns. The interest rate can be fixed or
floating. If the interest rate is a floating rate, it may be linked to the London Interbank Offered Rate (LIBOR), the federal funds rate or other
major index. See Item 1A. Risk Factors–Risks Relating to Our Business–Uncertainty relating to the LIBOR calculation process and potential
phasing out of LIBOR after 2021 may adversely affect the value of our investment portfolio and may further affect our ability to issue funding
agreements bearing a floating rate of interest.
Life and Other (Excluding German Products)
Life and other products include other retail products, including run-off or ceded business, statutory closed blocks and ceded life insurance.
German Products
Prior to the deconsolidation of AGER discussed below, German products included the annuity, life insurance and unit-linked products managed
by the Athene Deutschland GmbH, Athene Deutschland Holding GmbH & Co. KG (ADKG), Athene Deutschland Verwaltungs GmbH, Athene
Lebensversicherung AG (ALV) and Athene Pensionskasse AG (APK) (collectively, German Group Companies). The primary German product
type was endowment policies, which were traditional German life insurance policies that included legally guaranteed interest, the right of
policyholders to participate in certain portions of ALV’s results and a death benefit.
AGER Deconsolidation
We previously determined that in order to fully capitalize on the opportunity presented by the European market, we would need to commit
capital at a level in excess of our targeted investment size, which created the need for third party capital to support growth. We, together with
Apollo, undertook a process whereby AGER sought to raise capital as part of a private offering of its equity securities in order to pursue
expansion opportunities in Europe. In April 2017, in connection with that private offering, AGER entered into subscription agreements with us,
certain affiliates of Apollo and a number of other third-party investors pursuant to which AGER secured commitments from such parties to
purchase new common shares in AGER (AGER Offering), subject to required regulatory approval and certain other customary closing
conditions.
In November 2017, the AGER board of directors approved resolutions authorizing the closing of the AGER Offering (Closing) to occur on
January 1, 2018 and approving a capital call from all of the AGER investors, excluding us. In connection with the Closing and the issuance of
shares in respect of the capital call, each of which occurred on January 1, 2018, our equity interest in AGER was exchanged for common shares
of AGER. As a result, on January 1, 2018, we held 10% of the aggregate voting power of and less than 50% of the economic interest in AGER
and, as such, it is thereafter held as an investment rather than a consolidated subsidiary. Two of our employees have been elected to serve on
AGER’s board of directors.
In order to align our interests with those of AGER, in connection with the Closing, we entered into a cooperation agreement with AGER,
pursuant to which, among other things, (1) we will have the right to reinsure approximately 20% of the spread business written or reinsured by
any insurance or reinsurance company owned or acquired by AGER, (2) AGER’s insurance subsidiaries will be required to purchase certain
funding agreements and/or other spread instruments issued by our insurance subsidiaries, (3) we will provide the AGER Group with a right of
first refusal to pursue acquisition and reinsurance transactions in Europe (other than the United Kingdom) and (4) the AGER Group will provide
us and our subsidiaries with a right of first refusal to pursue acquisition and reinsurance transactions in North America and the United Kingdom.
Distribution Channels
We have developed four dedicated distribution channels: retail, flow reinsurance, institutional and acquisitions and block reinsurance, which
support opportunistic origination across differing market environments and which we believe enable us to achieve stable asset growth while
maintaining attractive returns.
Retail
We have built a scalable platform that allows us to originate and rapidly grow our business in fixed annuity products directly from our customers
despite today’s low-rate environment. We have developed a suite of retirement savings products, distributed through our network of more than
34,000 independent agents in all 50 states. Sales of fixed annuities were $5.4 billion, $5.3 billion and $2.5 billion for the years ended
December 31, 2017, 2016 and 2015, respectively. We expect that our improving credit profile will continue to allow us to increase our share
with existing IMOs and enter into new relationships with regional banks, broker-dealers and other financial institutions, resulting in a potential
increase in annual sales at an attractive cost of crediting. We are focused in every aspect of our retail channel on providing high quality products
and service to our policyholders and maintaining appropriate financial protection over the life of their policies.
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Item 1. Business
Flow Reinsurance
Reinsurance is an arrangement under which an insurance company, the reinsurer, agrees to indemnify another insurance company, the ceding
company or cedant, for all or a portion of the insurance risks underwritten by the ceding company. Reinsurance is designed to (1) reduce the net
amount at risk on individual risks, thereby enabling the ceding company to increase the volume of business it can underwrite, as well as increase
the maximum risk it can underwrite on a single risk, (2) stabilize operating results by reducing volatility in the ceding company’s loss
experience, (3) assist the ceding company in meeting applicable regulatory requirements and (4) enhance the ceding company’s financial
strength and surplus position. In general, annuity reinsurance is executed in the form of either a flow transaction or a block transaction.
We conduct the majority of our reinsurance transactions through our subsidiary, ALRe. Founded on June 9, 2009, ALRe is licensed as a Class E
insurer carrying on long-term business in Bermuda; one of the largest reinsurance markets in the world by reserves, with a regulatory regime
deemed equivalent to the European Union’s Directive (2009/138/EC) (Solvency II) for commercial insurers. As a fixed annuity reinsurer, ALRe
partners with life and annuity insurance companies to develop solutions to their capital requirements, enhance their presence in the retirement
market and improve their financial results. The specific liabilities ALRe targets to reinsure include FIAs, MYGAs, traditional one-year
guarantee fixed deferred annuities, immediate annuities and institutional products. ALRe only targets business consistent with our preferred
liability characteristics, and as such, reinsurance provides another opportunistic channel for us to source long-term liabilities with attractive
crediting rates. For various transaction-related reasons, from time to time, our U.S. insurance subsidiaries, in particular Athene Annuity & Life
Assurance Company (AADE), will reinsure business from third-party ceding companies and retrocede a portion of the reinsured business to
ALRe. Our flow reinsurance channel generated deposits of $875 million, $3.5 billion, and $1.1 billion for the years ended December 31, 2017,
2016 and 2015, respectively.
ALRe has been involved in reinsurance and retrocession transactions with 18 third-party cedants. As of December 31, 2017, ALRe had on-going
flow reinsurance and retrocession treaties involving seven third-party cedants, each rated A- or better, for a quota share of such cedants’ new
deposits, including both FIAs and MYGAs.
Institutional
Funding Agreements
We participate in a FABN program, which is a medium-term note program under which funding agreements are issued to a special-purpose trust
that issues marketable notes. The notes are underwritten and marketed by major investment banks’ broker-dealer operations and are sold to
institutional investors. The proceeds of the issuance of notes are used by the trust to acquire a funding agreement from us with matching interest
and maturity payment terms. We are also a member of the Federal Home Loan Bank (FHLB) of Des Moines (FHLBDM) and Indianapolis
(FHLBI) and, through membership, we have issued funding agreements to the FHLB in exchange for cash advances. The following represents
the aggregate principal amount of funding agreement deposits:
(In millions)
FABN
FHLB
Total funding agreement deposits
Years ended December 31,
2017
2016
2015
$
$
2,750
250
3,000
$
$
— $
—
— $
250
—
250
As of December 31, 2017, we had funding agreements of $3.0 billion outstanding under our FABN program and $573 million outstanding with
the FHLB. We have submitted a notice to withdraw our membership in the FHLBI. See Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations–Liquidity and Capital Resources–Membership in the Federal Home Loan Bank for additional
discussion regarding our withdrawal from the FHLBI.
Pension Risk Transfer
Through PRT, we partner with institutions seeking to transfer and thereby reduce their obligation to pay future pension benefits to retirees. We
have built an experienced team and continue to enhance our capabilities in this channel. We work with advisors, brokers and consultants to
source PRT transactions and design solutions that meet the needs of prospective PRT counterparties. We are focused on medium- and large-sized
deals where we believe we can be competitive. We entered this channel during 2017 and for the year ended December 31, 2017, PRT generated
premiums of $2.3 billion. We believe we have established ourselves as a trusted PRT counterparty and expect that our public company status and
improving credit profile will enable us to continue to source and execute PRT transactions.
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Item 1. Business
Acquisitions and Block Reinsurance
Acquisitions
Acquisitions are an important source of growth in our business. We have a proven ability to acquire businesses in complex transactions at terms
favorable to us, manage the liabilities that we acquire and reinvest the associated assets. Through December 31, 2017, we have closed four
acquisition transactions in the U.S.: Liberty Life Insurance Corporation (Liberty Life), Investors Insurance Corporation, Presidential Life
Corporation and Aviva USA; and one international acquisition, Delta Lloyd Deutschland AG (DLD), collectively representing reserve liabilities
backed by approximately $65.9 billion in total assets (net of $9.3 billion in assets ceded through reinsurance).
The acquisition of Aviva USA marked a significant milestone in our history. As a result of the acquisition we grew to approximately four times
our size immediately prior to the acquisition (as measured by total assets). The acquisition significantly enhanced our retail channel, increased
our scale, improved our infrastructure and further demonstrated our integration abilities, in this case having successfully integrated a company
with a significantly larger employee headcount and IT and operational footprint.
In October 2015, we acquired the German life insurance business of Delta Lloyd N.V., an Amsterdam-based financial services provider. The
German life insurance businesses acquired have been in run-off since the beginning of 2010 by action of the predecessor owner. Accordingly,
our German insurance subsidiaries do not write new life insurance business, except for a limited number of new co-insurance policies, and all
distribution partner contracts have been terminated.
We plan to continue leveraging our expertise in sourcing and evaluating transactions to profitably grow our business. We believe our
demonstrated ability to source transactions, consummate complex transactions and reinvest assets into higher yielding investments as well as our
relationship with Apollo provides us with distinct advantages relative to other acquirers.
In general, we seek to reinsure or otherwise dispose of those portions of the target company’s business that we do not wish to retain, if any. Our
largest reinsurance agreements ceding the obligations of such businesses are described below.
Global Atlantic Financial Group Limited (Global Atlantic) – As part of our acquisition of Aviva USA, we transferred the risk of substantially all
of Aviva USA’s life insurance business by reinsuring such business to subsidiaries of Global Atlantic. A description of the transactions is as
follows:
We entered into a 100% coinsurance and assumption agreement with Accordia Life and Annuity Company (Accordia), a subsidiary of Global
Atlantic. The agreement covers all open block life insurance business issued by Athene Annuity and Life Company (AAIA), except for
enhanced guarantee universal life insurance products. Under the terms of the agreement, Accordia maintains a custody account with assets equal
to or greater than an agreed-upon required statutory balance that as of December 31, 2017 was $1.9 billion. The agreement provides separate
excess of loss coverage for policy liabilities of AAIA related to the former AmerUs Life Insurance Company (AmerUs) closed block (AmerUs
Closed Block) that are also subject to existing reinsurance through Athene Re IV, a captive reinsurer that is a subsidiary of AAIA. As of
December 31, 2017, outstanding obligations ceded pursuant to this arrangement which remained unnovated amounted to $1.5 billion in statutory
reserves. We have no continuing contractual obligations with respect to policies that have been novated.
We entered into a 100% coinsurance agreement with Accordia to cede all policy liabilities for the closed block established in connection with
the demutualization of Indianapolis Life Insurance Company (ILICO), which had been previously acquired by Aviva USA. The ILICO Closed
Block consists primarily of participating whole life insurance policies. Effective December 1, 2015, Accordia retroceded substantially all of the
policy liabilities for the ILICO Closed Block to Ameritas Life Insurance Corp. (Ameritas). Under the terms of the retrocession agreement,
Ameritas maintains a trust account with assets equal to or greater than a required statutory balance that as of December 31, 2017 was $675
million. AAIA is permitted to withdraw funds from the trust account under certain circumstances. As of December 31, 2017, outstanding
obligations ceded pursuant to this arrangement amounted to $722 million in statutory reserves.
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Item 1. Business
We entered into the following coinsurance and funds withheld agreements with First Allmerica Financial Life Insurance Company (FAFLIC), a
subsidiary of Global Atlantic, to cede substantially all policy liabilities for the below described life insurance policies.
•
•
•
•
Athene Life Insurance Company of New York (ALICNY) entered into a 100% funds withheld coinsurance agreement with FAFLIC
covering certain term and universal life policies which have reserves that are subject to financing arrangements. Under the terms of the
agreement, ALICNY maintains a funds withheld account with an agreed-upon statutory balance that as of December 31, 2017 was
$263 million.
ALICNY entered into a 100% coinsurance agreement with FAFLIC covering certain term and universal life policies which have
reserves that are not subject to financing arrangements. Under the terms of the agreement, FAFLIC maintains a trust account with an
agreed-upon required statutory balance that as of December 31, 2017 was $359 million.
ALICNY entered into a 100% coinsurance and assumption agreement with FAFLIC covering substantially all of ALICNY’s in-force
life business that is not ceded pursuant to the agreements described in the preceding two paragraphs. Under the terms of the
agreement, FAFLIC maintains a trust account with an agreed-upon required statutory balance that as of December 31, 2017 was $422
million.
As of December 31, 2017, outstanding obligations ceded pursuant to the three FAFLIC reinsurance agreements discussed above
amounted to $1,238 million in statutory reserves.
We continue to have the primary legal obligation to satisfy claims and obligations relating to those policies not novated to Accordia or FAFLIC.
As a consequence, if Accordia or FAFLIC were unable to satisfy its reinsurance obligations on such life policies, we would be responsible for
satisfying those contractual obligations reinsured by Accordia or FAFLIC, respectively. We do not maintain a security interest in the custody
account discussed above, and therefore in the event of an Accordia insolvency, the assets of the custody account may be available to satisfy the
claims of Accordia’s general creditors. In addition, in the event of an Accordia insolvency, our claims against Accordia would be subordinated to
those of its policyholders. As of December 31, 2017, both Accordia and FAFLIC were rated A- by A.M. Best.
Protective Life Insurance Company (Protective) – On April 29, 2011, AADE ceded substantially all of its life and health business to Protective
under a coinsurance agreement. As part of this transaction, we transferred assets backing reserves and miscellaneous other liabilities on the life
and health business. The reserve assets were placed in a trust account maintained by Protective for our benefit to secure the obligations of the
reinsurer of the acquired business. As of December 31, 2017, the statutory book value of assets in this trust was $1.5 billion and the outstanding
obligations ceded pursuant to the arrangement amounted to $1.5 billion. In the event that Protective is unable to satisfy its reinsurance
obligations with respect to the policies ceded and the trust assets prove insufficient to satisfy the resulting obligations, we would have the
primary legal obligation to satisfy such deficiency. In the event of a Protective insolvency, our claim against Protective would be subordinated to
those of its policyholders. As of December 31, 2017, Protective was rated A+ by A.M. Best.
Block Reinsurance
Unlike acquisitions in which we must acquire the assets or stock of a target company, block reinsurance allows us to contractually assume assets
and liabilities associated with a certain book of business. In doing so, we contractually assume responsibility for only that portion of the business
that we deem desirable, without assuming additional liabilities. The benefit of the block reinsurance structure was highlighted in the transaction
with Voya, pursuant to which we agreed to reinsure approximately $19 billion in fixed annuities without assuming any of Voya’s variable
annuities.
Investment Management
Investment activities are an integral part of our business and our net investment income is a significant component of our total revenues. Our
investment philosophy is to invest a portion of our assets in securities that earn us incremental yield by taking liquidity risk and complexity risk
and capitalizing on our long-dated and persistent liability profile to prudently achieve higher net investment earned rates, rather than assuming
solely credit risk. Because we have remained disciplined in underwriting attractively priced liabilities, we have the ability to invest in a broad
range of high quality assets to generate attractive earnings.
Our differentiated investment strategy benefits from our strategic relationship with Apollo and its indirect subsidiary, AAM. AAM provides a
full suite of services for our investment portfolio, including direct investment management, asset allocation, mergers and acquisition asset
diligence and certain operational support services, including investment compliance, tax, legal and risk management support. AAM provides
portfolio management services for substantially all of our invested assets, excluding Germany. As of December 31, 2017, of the total assets
AAM managed, 82% were direct asset selection and 18% were indirect through sub-advising to Apollo and its affiliates, in order to access
additional sourcing and underwriting capabilities. Substantially all of our assets subject to a sub-advisory arrangement are sub-advised by
Apollo affiliates. AAM allocates portions of our asset portfolio to sub-advisors to manage based on market opportunities.
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Item 1. Business
Through our relationship with Apollo, AAM has identified unique investment opportunities for us. AAM’s knowledge of our funding structure
and regulatory requirements allows it to design bespoke strategies and investments for our portfolio. For example, we hold a significant
investment in MidCap through a consolidated investment fund managed by Apollo, together with loans made directly to MidCap. When we
originally invested in MidCap Financial Holdings, LLC (MidCap Financial) in November 2013, MidCap Financial was a specialty finance
company which primarily originated lending opportunities in the healthcare sector. With the assistance of Apollo, MidCap Financial entered new
lending markets, raised substantial equity capital and restructured as MidCap in January 2015. MidCap represents a unique investment in an
origination platform made available to us through our relationship with Apollo and, from time to time, provides us with access to assets for our
investment portfolio. As of December 31, 2017, the value of our equity investment in MidCap had appreciated by 31% since our original
investment in November 2013.
We are downside focused and our asset allocations reflect the results of stress testing. Additionally, we establish risk thresholds which in turn
define risk tolerance across a wide range of factors, including credit risk, liquidity risk, concentration risk and caps on specific asset classes.
We protect against rising interest rates, as our assets are generally shorter in effective duration than our liabilities, resulting in a risk profile that
we believe could sustain substantial increases in rates over and above what is implied by current futures markets without sustaining net losses.
See –Hedging Program and Derivatives for further discussion. As of December 31, 2017, 28% of our invested assets were floating rate
investments which would allow us the flexibility to quickly increase our crediting rates in a rising interest rate environment, if desired.
AAM’s investment team and Apollo’s credit portfolio managers employ their deep experience to assist us in sourcing and underwriting complex
asset classes. AAM has selected a diverse array of corporate bonds and more structured, but highly rated, asset classes. We also maintain
holdings in floating rate and less rate-sensitive investments, including collateralized loan obligations (CLO), non-agency RMBS and various
types of structured products. These asset classes permit us to earn incremental yield by assuming liquidity risk and complexity risk, rather than
assuming solely credit risk.
In addition to our core fixed income portfolio, we opportunistically allocate 5-10% of our portfolio to alternative investments where we
primarily focus on fixed income-like, cash flow-based investments. Our alternative investment strategy is inherently opportunistic rather than
being derived from allocating a fixed percentage of assets to the asset class and the strategy is subject to internal concentration limits. Individual
alternative investments are selected based on the investment’s risk-reward profile, incremental effect on diversification and potential for
attractive returns due to sector and/or market dislocations. We have a strong preference for alternative investments that have some or all of the
following characteristics, among others: (1) investments that constitute a direct investment or an investment in a fund with a high degree of co-
investment; (2) investments with credit- or debt-like characteristics (for example, a stipulated maturity and par value), or alternatively,
investments with reduced volatility when compared to pure equity; or (3) investments that have less downside risk. In general, we target returns
for alternative investments of 10% or higher on an internal rate of return basis over the expected lives of such investments.
Our asset portfolio is managed within the limits and constraints set forth in our Investment and Credit Risk Policy. Under this policy, we set
limits on investments in our portfolio by asset class, such as corporate bonds, emerging markets securities, municipal bonds, non-agency RMBS,
commercial mortgage-backed securities (CMBS), CLO, commercial mortgage whole loans and mezzanine loans and alternative investments. We
also set credit risk limits for exposure to a single issuer that vary based on ratings. In addition, our asset portfolio is constrained by its scenario-
based capital ratio limit and its stressed liquidity limit.
Reserves
We establish and carry actuarially-determined reserves that are calculated to meet our future obligations, which require us to make certain
assumptions regarding expenses, investment yields, mortality, morbidity and persistency, with a provision for adverse deviation as appropriate.
Each of the relevant assumptions is initially determined as of the date of issue or acquisition. The assumptions used require considerable
judgment. We review overall policyholder experience at least annually and update these assumptions when deemed necessary based on
additional information that becomes available. For immediate annuity products, assumptions used in the reserve calculation can only be changed
if the reserve is deemed to be insufficient. For all other insurance products, current assumptions are used in the updated calculation of reserves.
For FIAs, the aggregate initial liability is equal to the deposit received plus a bonus, if applicable, and is split into a host component and an
embedded derivative component. Thereafter, the host contract accretion rate is updated each quarter so that the present value of actual and
expected guaranteed cash flows is equal to the initial host value and the embedded derivative liability is recognized at fair value, with the change
in fair value recorded in interest sensitive contract benefits in our consolidated statements of income. Changes in, or deviations from, the
assumptions used to set our reserves can significantly affect our reserve levels and related results of operations. See Item 1A. Risk Factors–Risks
Relating to Our Business–Our business, financial condition, liquidity, results of operations and cash flows depend on the accuracy of our
management’s assumptions and estimates, and we could face significant losses if these assumptions and estimates differ significantly from actual
results for additional discussion regarding risks related to assumptions and estimates.
Persistency is the probability that a policy will remain in force from one period to the next. We make assumptions about persistency based on
expected policyholder behavior in future periods, including full and partial contract surrenders. Policyholder behavior is influenced by a number
of factors including, but not limited to, recent and current performance of the policy, contractual guarantees contained within the policy,
availability of alternative products and general economic conditions.
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Item 1. Business
A surrender rate is the percentage of account value surrendered by the policyholder. Our estimate of surrender behavior is based on assumptions
reflecting actual experience and we believe that, over the duration of the policies, we may experience a wide range of policyholder behavior and
market conditions.
Mortality is the incidence of death among policyholders triggering the payment of underlying insurance benefits by the insurer. Mortality also
refers to the ceasing of payments on life-contingent annuities due to the death of the annuitant. We utilize a combination of actual and industry
experience when setting our mortality assumptions.
We also set reserves for the guaranteed minimum benefits for some of our products. The assumptions used to establish the liabilities for our
product guarantees require considerable judgment. At issue, and at each subsequent valuation, we determine the present value of the cost of
guaranteed minimum benefits contained in our policies in excess of benefits that are funded by the account value. We also calculate the expected
value of the future cost of providing these benefits. In making these projections, a number of assumptions are made and we update these
assumptions as experience emerges, when required. We have limited experience to date on policyholder behavior for our guaranteed minimum
benefit products which our acquirees began issuing in 2006, and as a result, future experience could lead to significant changes in our
assumptions. If emerging experience deviates from our assumptions on utilizations of these benefits, such deviations could have a significant
effect on our reserve levels and related results of operations. We periodically review these assumptions and, if necessary, update them based on
additional information that becomes available. Changes in or deviations from the assumptions used can significantly affect our reserve levels
and related results of operations.
To the extent actual experience differs from assumptions and estimates used to establish reserves, we may be required to increase or decrease
our reserves to reflect changes in our expectations. Any such increase could cause a material increase in our liabilities and a reduction in our
profitability, including operating losses and a reduction of capital.
Outsourcing
With regard to our U.S. business, we outsource some portion or all of each of the following functions to third-party service providers:
•
•
•
•
•
•
•
hosting of financial systems;
service of existing policies;
custody;
administration of annuities issued in support of PRT transactions;
information technology development and maintenance;
investment management; and
call centers.
We closely manage our outsourcing partners and integrate their services into our operations. We believe that outsourcing such functions allows
us to focus capital and our employees on our core business operations and perform differentiating functions, such as actuarial, product
development and risk management functions. In addition, we believe an outsourcing model provides predictable pricing, service levels and
volume capabilities and allows us to benefit from technological developments that enhance our customer self-service and sales processes that we
would not otherwise be able to take advantage of without reinvesting more of our own capital.
For our retail annuity business, all aspects of new business, including call centers and administration is handled in-house. For some closed in-
force blocks of business we partner with Alliance – One Services, Inc., Concentrix Insurance Administrative Solutions Corporation and Infosys
McCamish Systems, LLC to provide policy administration services. For annuities issued in support of PRT transactions, we partner with
Conduent to provide administration services. For information technology services, we use some providers for managed services or supplemental
labor, including Tata Consulting Services Limited and UST Global Inc., and for data center, infrastructure and related services we use a
combination of OneNeck (a TDS company) for hosting and UST Global Inc. for managed services. For investment management services, we
use AAM and Apollo. We believe we have a good relationship with our principal outsource service providers.
Affiliated Reinsurance
Our U.S. insurance subsidiaries participate in reinsurance arrangements pursuant to which each cedes certain insurance risks to ALRe. ALRe is a
fully licensed, operational and fully equity capitalized reinsurance company with third-party clients. Our U.S. insurance subsidiaries have
entered into modco agreements with ALRe under which they cede to ALRe a 100% quota share of their respective obligations to repay the
principal upon maturity or earlier termination and to make periodic interest payments under funding agreements issued by them. Our U.S.
insurance subsidiaries have similar arrangements with ALRe with respect to substantially all of their other core business, under which generally
80% of all such business is ceded to ALRe on a modco basis. To support these internal reinsurance arrangements, ALRe holds the substantial
majority of our capital with $7.0 billion of statutory capital as of December 31, 2017. ALRe had a Bermuda Solvency Capital Requirement
(BSCR) ratio of 354% as of December 31, 2017. As a result of the passage of the Tax Act, we may take actions that result in a change in the
manner in which our affiliate reinsurance arrangements are structured. See –Regulation–United States–Tax Reform and Item 1A. Risk Factors–
Risks Relating to Taxation–Our efforts to mitigate the cost of the BEAT may be unnecessary, ineffective or counterproductive.
20
Hedging Program and Derivatives
We use, and may continue to use, derivatives, including swaps, options, futures and forward contracts, and reinsurance contracts to hedge risks
such as current or future changes in the fair value of our assets and liabilities, current or future changes in cash flows, changes in interest rates,
equity markets, currency fluctuations and changes in longevity. In particular, we purchase options and equity futures to hedge the market risk
exposure inherent in our FIA products, which have crediting rates tied to certain market indices. Our hedging program is focused on hedging our
economic risk exposures and reducing the variation in our realized investment margin.
We use a combination of equity options, equity index futures, and variance, interest rate and currency swaps to hedge the risks from the equity
derivatives embedded in our FIAs. Through our hedging strategy, we are able to minimize the net impact on capital and surplus of market
variations affecting our embedded derivatives.
In addition to hedging the risks from embedded derivatives, we also use currency swaps and futures to hedge mismatches between the currency
of our liability cash flows and our assets. Although cash-flow matching and ALM analyses are employed to manage our interest rate and funding
exposures, we may also use interest rate derivatives to ensure that our net economic interest rate exposure is within our risk tolerances.
Financial Strength Ratings
Financial strength and credit ratings directly affect our ability to access funding and the related cost of borrowing, the attractiveness of certain of
our products to customers, our attractiveness as a reinsurer to potential ceding companies and requirements for derivatives collateral posting.
Such ratings are periodically reviewed by the rating agencies.
Credit ratings represent the opinions of rating agencies regarding an entity’s ability to repay its indebtedness. Financial strength ratings represent
the opinions of rating agencies regarding the financial ability of an insurer or reinsurer to meet its obligations under an insurance policy or
reinsurance arrangement and generally involve quantitative and qualitative evaluations by rating agencies of a company’s financial condition
and operating performance. Generally, rating agencies base their financial strength ratings upon information furnished to them by the respective
company and upon their own investigations, studies and assumptions. Financial strength ratings are based upon factors of concern to
policyholders, agents, intermediaries and ceding companies and are not directed toward the protection of investors. Credit and financial strength
ratings are not recommendations to buy, sell or hold securities and they may be revised or revoked at any time at the sole discretion of the rating
organization.
As of December 31, 2017, Fitch Ratings (Fitch), Standard & Poor’s Rating Services (S&P) and A.M. Best Company (A.M. Best) had issued
credit or financial strength ratings and outlook statements regarding us as follows:
Company
Athene Holding Ltd.
Issuer Credit Rating/Counterparty Credit Rating/Issuer Default Rating
Outlook
Athene Life Re Ltd.
Financial Strength Rating
Outlook
Athene Annuity & Life Assurance Company
Financial Strength Rating
Outlook
Athene Annuity & Life Assurance Company of New York
Financial Strength Rating
Outlook
Athene Annuity and Life Company
Financial Strength Rating
Outlook
Athene Life Insurance Company of New York
Financial Strength Rating
Outlook
A.M. Best
S&P
Fitch
bbb
Stable
A
Stable
A
Stable
A
Stable
A
Stable
A
Stable
BBB
Positive
A-
Positive
A-
Positive
A-
Positive
A-
Positive
BBB
Stable
A-
Stable
A-
Stable
A-
Stable
A-
Stable
Not Rated
Not Rated
Not Rated
Not Rated
21
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Item 1. Business
Rating Agency
A.M. Best1
S&P2
Fitch3
Financial Strength
Rating Scale
“A++” to “S”
“AAA” to “R”
“AAA” to “C”
Senior Unsecured Notes
Credit Rating Scale
“aaa” to “rs”
“AAA” to “D”
“AAA” to “D”
1 A.M. Best’s financial strength rating is an independent opinion of an insurer’s or reinsurer’s financial strength and ability to meet its ongoing
insurance policy and contract obligations. It is based on a comprehensive quantitative and qualitative evaluation of a company’s balance sheet
strength, operating performance and business profile or, where appropriate, the specific nature and details of a security. The analysis may
include comparisons to peers, industry standards and proprietary benchmarks as well as assessments of operating plans, philosophy,
management, risk appetite and the implicit or explicit support of a parent or affiliate. A.M. Best’s long-term credit ratings reflect its assessment
of the ability of an obligor to pay interest and principal in accordance with the terms of the obligation. Ratings from “aa” to “ccc” may be
enhanced with a “+” (plus) or “-“ (minus) to indicate whether credit quality is near the top or bottom of a category. A.M. Best’s short-term
credit rating is an opinion as to the ability of the rated entity to meet its senior financial commitments on obligations maturing in generally
less than one year.
2 S&P’s insurer financial strength rating is a forward-looking opinion about the financial security characteristics of an insurance organization
with respect to its ability to pay under its insurance policies and contracts in accordance with their terms. Generic rating categories range
from “AAA” to “D”. A “+” or “-“ indicates relative strength within a generic category. An S&P credit rating is an assessment of default risk,
but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Short-term issuer credit ratings reflect the
obligor’s creditworthiness over a short-term time horizon.
3 Fitch’s financial strength ratings provide an assessment of the financial strength of an insurance organization. The National Insurer
Financial Strength Rating is assigned to the insurance company’s policyholder obligations, including assumed reinsurance obligations and
policyholder obligations, such as guaranteed investment contracts. Within long-term and short-term ratings, a “+” or a “-” may be appended
to a rating to denote relative status within major rating categories.
In addition to the financial strength ratings, rating agencies use an outlook statement to indicate a medium or long-term trend which, if
continued, may lead to a rating change. A positive outlook indicates a rating may be raised and a negative outlook indicates a rating may be
lowered. A stable outlook is assigned when ratings are not likely to be changed. Outlooks should not be confused with expected stability of the
issuer’s financial or economic performance. A rating may have a stable outlook to indicate that the rating is not expected to change, but a stable
outlook does not preclude a rating agency from changing a rating at any time without notice.
A.M. Best, S&P and Fitch review their ratings of insurance companies from time to time. There can be no assurance that any particular rating
will continue for any given period of time or that it will not be changed or withdrawn entirely if, in their judgment, circumstances so warrant.
While the degree to which ratings adjustments will affect sales and persistency is unknown, we believe if our ratings were to be negatively
adjusted for any reason, we could experience a material decline in the sales of our products and the persistency of our existing business. See
Item 1A. Risk Factors–Risks Relating to Our Business–A financial strength rating downgrade, potential downgrade or any other negative action
by a rating agency could make our product offerings less attractive, inhibit our ability to acquire future business through acquisitions or
reinsurance and increase our cost of capital, which could have a material adverse effect on our business for further discussion about risks
associated with financial strength ratings.
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. As a result, scale and the ability to provide value-added services and build long-term relationships are important factors to compete
effectively. See Item 1A. Risk Factors–Risks Relating to Our Business–We operate in a highly competitive industry that includes a number of
competitors, many of which are larger and more well-known than we are, which could limit our ability to achieve our growth strategies and
could materially and adversely affect our business, financial condition, results of operations, cash flows and prospects for further discussion on
competitive risks. 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.
We face competition in the FIA market from traditional insurance carriers such as Allianz Life Insurance Company of North America (Allianz)
and American Equity Investment Life Insurance Company (AEL). Principal competitive factors for FIAs are initial crediting rates, reputation for
renewal crediting action, product features, brand recognition, customer service, cost, distribution capabilities and financial strength ratings of the
provider. Competition may affect, among other matters, both business growth and the pricing of our products and services. According to
LIMRA, for the nine months ended September 30, 2017 (the most recent period specific market share data is currently available), we were
the 2nd leading provider of FIAs with a market share of 8.6%, behind Allianz with a market share of 13.6%. The aggregate market share of the
top ten providers of FIAs for the same period was 63.2%. According to LIMRA, for the year ended December 31, 2016, the leading two
providers of FIAs were Allianz and AEL with market shares of 16.7% and 9.4%, respectively. The aggregate market share of the top ten
providers of FIAs for the same period was 65.1%. For the year ended December 31, 2016, we were the 3rd largest FIA provider in the U.S.
based on retail FIA sales, with a market share of 7.4%.
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Item 1. Business
Reinsurance markets are highly competitive, as well as cyclical by product and market. As a reinsurer, ALRe competes on the basis of many
factors, including, among other things, financial strength, pricing and other terms and conditions of reinsurance agreements, reputation, service
and experience in the types of business underwritten. The market impact of these and other factors related to reinsurance is generally not
consistent across lines of business, domestic and international geographical areas and distribution channels. ALRe’s competition includes other
insurance and reinsurance companies, such as Reinsurance Group of America, Incorporated and Global Atlantic.
We face strong competition within our institutional channel. With respect to funding agreements, namely those issued in connection with our
FABN program, we compete with other insurers that have active FABN programs, such as MetLife, Inc. (MetLife) and American International
Group, Inc. Within the funding agreement market, we compete primarily on the basis of perceived financial strength, interest rates and term.
With respect to group annuities issued in connection with PRT transactions, we compete with other insurers that offer PRT annuities, such as
MetLife and Prudential Financial, Inc. Within the PRT market, we compete primarily on the basis of price, underwriting and investment
capabilities.
Finally, we face competition in the market for acquisition targets and profitable blocks of insurance. Such competition is likely to intensify as
insurance businesses become more attractive acquisition targets for both other insurance companies and financial and other institutions and as
the already substantial consolidation in the financial services industry continues. We believe that our demonstrated ability to source and
consummate complex transactions is a competitive advantage over other similar acquirers. We also compete for potential acquisition and block
reinsurance opportunities based on a number of factors including perceived financial strength, brand recognition, reputation and the pricing we
are able to offer, which, to the extent we determine to finance a transaction, is in turn dependent on our ability to do so on suitable terms.
It is unclear at this time what impact, if any, the Tax Act will have on the competitive environment of the markets in which we compete. If U.S.-
based competitors use some or all of their tax savings to offset reductions in product pricing, we could see increased price competition, which
would place downward pressure on our return targets and on volumes within each of our distribution channels. See –Regulation–United States–
Tax Reform.
Employees
As of January 1, 2018, we had approximately 1,125 employees located in Bermuda and the United States. We believe our employee relations are
good. None of our employees located in Bermuda or the United States are subject to collective bargaining agreements and we are not aware of
any current efforts to implement such agreements.
Regulation
Our U.S. insurance subsidiaries are licensed to transact insurance business in, and are subject to regulation and supervision by, all 50 states of
the United States and the District of Columbia. ALRe, a Bermuda domiciled insurer, is subject to regulation and supervision by the Bermuda
Monetary Authority (BMA) and compliance with all applicable Bermuda law and Bermuda insurance statutes and regulations, including but not
limited to Bermuda’s Insurance Act 1978 (Bermuda Insurance Act). Our U.S. insurance subsidiaries are licensed, regulated and supervised in all
jurisdictions where they conduct insurance business. The extent of such regulation varies, however; most jurisdictions have regulations and laws
that require insurers and agents to be licensed and set standards of solvency and business conduct to be maintained by the insurer. Additionally,
state statutes and regulations often require state approval of policy forms, policy language, rates and in some instances, marketing materials.
Most states’ statutes and regulations prescribe permitted types and concentrations of investments. Our U.S. insurance subsidiaries are required to
file detailed annual financial statements with supervisory agencies in each of the jurisdictions in which they transact an insurance business.
From time to time, in the ordinary course of business and like others in the insurance and financial services industries, our U.S. insurance
subsidiaries receive requests for information from government agencies in connection with such agencies’ regulatory or investigatory authority.
Such requests can include market conduct examinations, subpoenas or demand letters for documents to assist the government in audits or
investigations. Each such subsidiary reviews such requests and notices and takes appropriate action. Our U.S. insurance subsidiaries have been
subject to certain requests for information and investigations in the past and could be subject to them in the future.
United States
General
Each of our U.S. insurance subsidiaries is organized and domiciled in one of the following states: Delaware, Iowa, or New York (each, an
Athene Domiciliary State) and is also licensed in such state as an insurer. The insurance department of each Athene Domiciliary State regulates
the applicable U.S. insurance subsidiary, and each U.S. insurance subsidiary is regulated by each of the insurance regulators in the other states
where such company is authorized to transact insurance business. The primary purpose of such regulatory supervision is to protect policyholders
rather than holders of any securities, such as the AHL common shares.
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Item 1. Business
In addition, as part of our acquisition of Aviva USA, we acquired a special-purpose insurance company, Athene Re IV, which is a subsidiary of
AAIA. Athene Re IV is domiciled in Vermont and provides reinsurance to AAIA in order to facilitate the reserve financing associated with a
closed block of policies resulting from the demutualization of a prior insurance company currently part of AAIA. As part of the acquisition of
AAIA, the liabilities associated with such closed block of insurance policies, including any exposure to payments due from such special-purpose
insurance company subsidiary, were reinsured to Accordia. We do not write business that requires the use of captive reinsurers. The substantial
majority of all policyholder obligations written or held by our insurance subsidiaries are reinsured to ALRe, a fully licensed, operational and
fully equity capitalized reinsurance company with third-party clients.
Generally, insurance products underwritten by our U.S. insurance subsidiaries must be approved by the insurance regulators in each state in
which they are sold. Those products are also substantially affected by federal and state tax laws. For example, changes in tax law could reduce
or eliminate the tax-deferred accumulation of interest credited on the premiums paid by the holders of annuities and life insurance products,
which could make such products less attractive to potential purchasers. A shift away from annuity products could reduce the investment income
that our U.S. insurance subsidiaries earn on premiums or deposits received from the sale of such products, as well as the assets upon which our
U.S. insurance subsidiaries earn income. In addition, certain insurance policies may also be subject to the Employee Retirement Income Security
Act of 1974, as amended (ERISA).
State insurance authorities have broad administrative powers over our U.S. insurance subsidiaries with respect to all aspects of their insurance
business including: (1) licensing to transact business; (2) licensing of producers; (3) prescribing which assets and liabilities are to be considered
in determining statutory surplus; (4) regulating premium rates for certain insurance products; (5) approving policy forms and certain related
materials; (6) determining whether a reasonable basis exists as to the suitability of the annuity purchase recommendations producers make;
(7) regulating unfair trade and claims practices; (8) establishing reserve requirements, solvency standards and minimum capital requirements
(MCR); (9) regulating the amount of dividends that may be paid in any year; (10) regulating the availability of reinsurance or other substitute
financing solutions, the terms thereof and the ability of an insurer to take credit on its financial statements for insurance ceded to reinsurers or
other substitute financing solutions; (11) fixing maximum interest rates on life insurance policy loans, minimum crediting rates on accumulation
products and minimum allowable surrender values; (12) regulating the type, amounts and valuations of investments permitted; (13) setting
parameters for transactions with affiliates; and (14) regulating other matters.
The rates, forms, terms and conditions of our U.S. insurance subsidiaries’ reinsurance agreements with unaffiliated third parties generally are not
directly subject to regulation by any state insurance department in the United States. This contrasts with primary insurance where, as discussed
above, the policy forms and premium rates are generally regulated by state insurance departments.
From time to time, increased scrutiny has been placed upon the U.S. insurance regulatory framework, and a number of state legislatures have
considered or enacted legislative measures that alter, and in many cases increase, state authority to regulate insurance and reinsurance
companies. In addition to legislative initiatives of this type, the NAIC and state insurance regulators are regularly involved in a process of
reexamining existing laws and regulations and their application to insurance and reinsurance companies.
Furthermore, while the federal government in most contexts currently does not directly regulate the insurance business, federal legislation and
administrative policies in a number of areas, such as employee benefits regulation, age, sex and disability-based discrimination, financial
services regulation and federal taxation, can significantly affect the insurance business. It is not possible to predict the future impact of changing
regulation on our operations. See Item 1A. Risk Factors–Risks Relating to Insurance and Other Regulatory Matters.
NAIC
The NAIC is an organization, the mandate of which is to benefit state insurance regulatory authorities and consumers by promulgating model
insurance laws and regulations for adoption by the states. The NAIC also provides standardized insurance industry accounting and reporting
guidance through the NAIC Accounting Manual. However, model insurance laws and regulations are only effective when adopted by the states,
and statutory accounting and reporting principles continue to be established by individual state laws, regulations and permitted practices.
Changes to the NAIC Accounting Manual or modifications by the various state insurance departments may affect the statutory capital and
surplus of our U.S. insurance subsidiaries. AHL has entered into capital maintenance agreements with each of its material U.S. insurance
subsidiaries, pursuant to which AHL agrees to provide capital to the subsidiary to the extent that the capital of the subsidiary falls below a
specified threshold as set with the applicable subsidiary’s domestic regulator.
Some of the NAIC pronouncements, particularly as they affect accounting issues, take effect automatically in the various states without
affirmative action by the states. Statutes, regulations and interpretations may be applied with retroactive impact, particularly in areas such as
accounting and reserve requirements. Also, regulatory actions with prospective impact can potentially have a significant impact on currently
sold products. The NAIC continues to work to reform state regulation in various areas, including comprehensive reforms relating to life
insurance reserves.
24
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Item 1. Business
Pursuant to its “Solvency Modernization Initiative,” the NAIC reviewed the U.S. financial regulatory system and all aspects of financial
regulation affecting insurance companies. Though broad in scope, the Solvency Modernization Initiative focused on: (1) capital requirements;
(2) corporate governance and risk management; (3) group supervision; (4) statutory accounting and financial reporting; and (5) reinsurance. This
initiative resulted in the adoption by the NAIC of the Own Risk and Solvency Assessment (ORSA) Model Act, which has been enacted by each
Athene Domiciliary State, and requires insurance companies to assess the adequacy of their and their group’s risk management and current and
future solvency position. Under the ORSA Model Act, certain insurers must undertake an internal risk management review no less often than
annually (but also at any time when there are significant changes to the risk profile of the insurer or its insurance group), in accordance with the
NAIC’s ORSA Guidance Manual, and prepare an ORSA Report assessing the adequacy of the insurer’s risk management and capital in light of
its current and future business plans. The ORSA Report is required to be filed with a company’s lead state regulator and made available to other
domiciliary regulators within the holding company system.
In December 2012, the NAIC approved a new valuation manual containing a principle-based approach to life insurance company reserves.
Principle-based reserving is designed to tailor the reserving process to specific products in an effort to create a principle-based modeling
approach to reserving rather than the factor-based approach historically employed. Pursuant to the NAIC’s Standard Valuation Law (SVL)
principle-based reserving became effective prospectively on January 1, 2017. Delaware and Iowa have each adopted a form of the SVL.
Although the New York State Department of Financial Services (NYSDFS) previously announced that New York would adopt principle-based
reserving effective January 1, 2018, New York has not yet adopted any legislation (or proposed regulations) concerning principle-based
reserving.
In November 2014, the NAIC adopted the Corporate Governance Annual Disclosure Model Act and Model Regulation (together, the Corporate
Governance Model Act), which requires an insurer to provide an annual disclosure regarding its corporate governance practices to its lead state
and/or domestic regulator. As adopted by the NAIC, the requirements of the Corporate Governance Model Act were intended to be effective
January 1, 2016, with the first annual disclosure due by June 1, 2016. The Corporate Governance Model Act must be adopted by the individual
states for the new requirements to apply, and specifically in Delaware, Iowa and New York for the changes to apply to our U.S. insurance
subsidiaries. Both Delaware and Iowa have adopted forms of the Corporate Governance Annual Disclosure Model Act. To date, New York has
not adopted the Corporate Governance Model Act, and it is not possible to predict whether New York will adopt the Corporate Governance
Model Act in the future; however, the NAIC has made the Corporate Governance Model Act part of its accreditation standards for state solvency
regulation, which may motivate New York to adopt the Corporate Governance Model Act.
Insurance Holding Company Regulation
Each direct and indirect parent of our U.S. insurance subsidiaries (including AHL) is subject to the insurance holding company laws of each of
the Athene Domiciliary States. These laws generally require an insurance holding company and insurers that are members of such holding
company system to register with their U.S. insurance regulators and to file certain reports with those authorities, including information
concerning their capital structure, ownership, financial condition, certain intercompany transactions and general business operations. Generally,
under these laws, transactions between our U.S. insurance subsidiaries and their affiliates, including any reinsurance transactions, must be fair
and reasonable and, if material or of a specified category, require prior notice and approval or non-disapproval by the insurance department of
each applicable Athene Domiciliary State.
Most states, including each of the Athene Domiciliary States, have insurance laws that require regulatory approval of a direct or indirect change
of control of an insurer, which would include a change of control of its holding company. Laws such as these prevent any person from acquiring
direct or indirect control of any of our U.S. insurance subsidiaries or their holding companies unless that person has filed a statement with
specified information with the commissioner or director of the insurance department of the applicable Athene Domiciliary State (each, a
Commissioner) and has obtained the Commissioner’s prior approval. Under most states’ statutes, including those of each of the Athene
Domiciliary States, acquiring 10% or more of a voting interest in an insurance company or its parent company is presumptively considered a
change of control, although such presumption may be rebutted. Accordingly, any person who acquires 10% or more of a voting interest in a
direct or indirect parent of any of our U.S. insurance subsidiaries (or AHL) without the prior approval of the Commissioner of the applicable
Athene Domiciliary State will be in violation of the applicable Athene Domiciliary State’s law and may be subject to injunctive action requiring
the disposition or seizure of those securities by the Commissioner or prohibiting the voting of those securities and to other actions determined by
the Commissioner. Further, a willful violation of these laws is punishable in each Athene Domiciliary State as a criminal offense. In addition, the
Model Insurance Holding Company System Regulatory Act (Amended Holding Company Model Act) requires any controlling person of a U.S.
insurer seeking to divest its controlling interest in the insurance company to file with the relevant insurance commissioner a confidential notice
of the proposed divestiture at least thirty days prior to the cessation of control (unless a person acquiring control from the divesting party has
filed notice of the proposed acquisition of control with the Commissioner). After receipt of the notice, the Commissioner must determine those
instances in which the parties seeking to divest or to acquire a controlling interest will be required to file for or obtain approval of the
transaction. These laws may discourage potential acquisition proposals and may delay, deter or prevent an acquisition of control of a direct or
indirect parent of any of our U.S. insurance subsidiaries (including AHL) (in particular through an unsolicited transaction), even if the
shareholders of such parent consider such transaction to be desirable. Our bye-laws include limitations on the voting power exercisable by
shareholders of the Company other than the Apollo Group so that certain persons or groups (Control Groups) are deemed not to hold more than
9.9% of the total voting power conferred by our shares.
25
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Item 1. Business
Holding company system regulations currently in effect in New York require prospective acquirers of New York domiciled insurers to provide
detailed disclosure with respect to intended changes to the business operations of the insurer, and expressly authorize the NYSDFS to impose
additional conditions on such acquisitions. Pursuant to these regulations, the NYSDFS may limit the changes that the acquirer may make to the
insurer’s business operations for a specified period of time following the acquisition without the NYSDFS’ prior approval. In particular, the
regulation provides the NYSDFS with the specific authority to require acquirers of New York domiciled life insurers to post assets in a trust
account for the benefit of the target company’s policyholders. In making such determination, the NYSDFS may consider whether the acquirer is,
or is controlled by or under common control with, an investment manager such as Apollo. The NAIC’s former Private Equity Issues Working
Group, which was formed to develop best practice recommendations relating to acquisitions of control of insurance or reinsurance companies by
private equity and hedge funds, adopted narrative guidance for state insurance examiners to consider in reviewing applications for an acquisition
of an insurer. Such guidance has been adopted by the NAIC and is included in the NAIC’s Financial Analysis Handbook.
Although Athene Re IV is not subject to insurance holding company laws, the Vermont insurance regulator may use all or a part of the holding
company law framework described above in determining whether to approve a proposed change of control.
In December 2010, the NAIC adopted the Amended Holding Company Model Act. The Amended Holding Company Model Act introduces the
concept of “enterprise risk” within an insurance holding company system and imposes more extensive informational requirements on parents
and other affiliates of licensed insurers or reinsurers, with the purpose of protecting the licensed companies from enterprise risk, including
requiring an annual enterprise risk report by each ultimate controlling person identifying the material risks within the insurance holding
company system that could pose enterprise risk to the licensed companies. An enterprise risk is an activity or event involving affiliates of an
insurer that could have a material adverse effect on the insurer or the insurer’s holding company system. The Amended Holding Company
Model Act must be adopted by the individual states for the new requirements to apply. Iowa, Delaware and New York have each adopted a form
of the Amended Holding Company Model Act.
In December 2014, the NAIC adopted additional amendments to the Amended Holding Company Model Act for consideration by the various
states that address the authority of an insurance commissioner to act as the group-wide supervisor for an internationally active insurance group
or to acknowledge the authority of another regulatory official, from another jurisdiction, to so act. These changes to the Amended Holding
Company Model Act must be enacted by the individual states before they will become effective, and specifically in Delaware, Iowa and New
York for the changes to apply to our U.S. insurance subsidiaries. Delaware has adopted a form of these changes to the Amended Holding
Company Model Act, and Iowa has adopted similar provisions under a predecessor statute. It is not possible to predict with any degree of
certainty the additional capital requirements, compliance costs or other burdens these changes may impose in the future.
In addition, the NAIC has adopted a revised Suitability in Annuity Transactions Model Regulation (SAT), which places new responsibilities
upon issuing insurance companies with respect to the suitability of annuity sales, including responsibilities for training agents. Many states,
including Athene Domiciliary States, have already enacted laws and/or regulations based on SAT, thus imposing suitability standards with
respect to sales of FIAs and variable annuities. The NYSDFS issued a circular letter emphasizing insurers’ obligations under laws and
regulations based on SAT when replacing a deferred annuity contract with an immediate annuity contract. The NAIC is also considering
amendments to the SAT to incorporate a “best interest” standard with respect to the suitability of annuity sales. On December 27, 2017, the
NYSDFS proposed amendments to its regulation based on SAT to incorporate a “best interest” standard with respect to the suitability of life
insurance and annuity sales. Future changes in such laws and regulations, including those that impose a “best interest” standard or otherwise
result from any delay, repeal or modification of the U.S. Department of Labor (DOL) fiduciary rule, could adversely impact the way we market
and sell our annuity products. See –ERISA below for further discussion regarding the DOL fiduciary rule.
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Item 1. Business
Restrictions on Dividends and Other Distributions
Current law of two of the Athene Domiciliary States, Delaware and Iowa, permits the payment of dividends or distributions which, together with
dividends or distributions paid during the preceding twelve months do not exceed the greater of (a) 10% of the insurer’s surplus as regards
policyholders as of the immediately preceding year end or (b) the net gain from operations of the insurer for the preceding twelve-month period
ending as of the immediately preceding year end. Current law of New York permits the payment of dividends or distributions which, together
with dividends or distributions paid during any calendar year, (1) is out of earned surplus and does not exceed the greater of (a) 10% of the
insurer’s surplus as regards policyholders as of the end of the immediately preceding calendar year or (b) the net gain from operations of the
insurer for the immediately preceding calendar year, not including realized capital gains, not to exceed 30% of the insurer’s surplus as regards
policyholders as of the end of the immediately preceding calendar year or (2) do not exceed the lesser of (a) 10% of the insurer’s surplus as
regards policyholders as of the end of the immediately preceding calendar year or (b) the net gain from operations of the insurer for the
immediately preceding calendar year, not including realized capital gains. Any proposed dividend in excess of these amounts is considered an
extraordinary dividend or extraordinary distribution and may not be paid until it has been approved, or a 30-day waiting period has passed
during which it has not been disapproved, by the Commissioner. Additionally, under current law of the Athene Domiciliary States, AAIA may
only pay dividends from the insurer’s earned profits on its business, which shall not include contributed capital or contributed surplus, and
AADE may only pay dividends from that part of its available and accumulated surplus funds which is derived from realized net operating profits
on its business and realized capital gains, and ALICNY may only pay dividends pursuant to the “greater of” standard described above from that
part of its positive unassigned funds, excluding 85% of the change in net unrealized capital gains or losses less capital gains tax, for the
immediately preceding calendar year. Further, as a condition to approval of Athene’s acquisition of Aviva USA, Athene agreed not to cause
ALICNY or AAIA to declare, distribute or pay any dividend for five years from the date of acquisition of control without the prior written
consent of the NYSDFS or the Iowa Insurance Division (IID), as applicable. The Athene Domiciliary States’ insurance laws and regulations also
require that each of our U.S. insurance subsidiaries’ surplus as regards policyholders following any dividend or distribution be reasonable in
relation to such U.S. insurance subsidiary’s outstanding liabilities and adequate to meet its financial needs.
Credit for Reinsurance Ceded
The ability of a ceding insurer to take reserve and capital credit for the reinsurance purchased from reinsurance companies is a significant
component of reinsurance regulation. Typically, a ceding insurer will only enter into a reinsurance agreement if it can obtain credit on its
statutory basis financial statements against its reserves (report lower net reserves) and/or toward its MCR (the denominator in its RBC
calculation) for the reinsurance ceded to the reinsurer. With respect to U.S.-domiciled ceding companies, credit is usually granted when the
reinsurer is licensed or accredited in the state where the ceding company is domiciled. States also generally permit ceding insurers to take credit
for reinsurance if the reinsurer: (1) is domiciled in a state with a credit for reinsurance law that is substantially similar to the credit for
reinsurance law in the ceding insurer’s state of domicile, and (2) meets certain financial requirements. Credit for reinsurance purchased from a
reinsurer that does not meet the foregoing conditions is generally allowed to the extent that such reinsurer secures its obligations with qualified
collateral.
ALRe has provided, and may in the future provide, reinsurance to our U.S. insurance subsidiaries in the normal course of business. Our U.S.
insurance subsidiaries have entered into modco agreements with ALRe under which they will cede to ALRe a 100% quota share of their
respective obligations to repay the principal upon maturity or earlier termination and to make periodic interest payments under funding
agreements issued by them. Our U.S. insurance subsidiaries have similar arrangements with ALRe with respect to substantially all of their other
core business, under which between 80% and 100% of all such business is ceded to ALRe on a modco basis, net of third party reinsurance.
ALRe is not licensed, accredited or approved in any state in the United States and, consequently, ALRe must collateralize its obligations to our
U.S. insurance subsidiaries or any third-party cedant in order for any of our U.S. insurance subsidiaries or any third-party cedant to obtain credit
against its reserves on its statutory basis financial statements (unless the basis for such reinsurance transaction is modco). ALRe is domiciled in
Bermuda, one of the largest reinsurance markets in the world by reserves with a regulatory regime deemed by the European Commission (EC) in
November 2015 to be equivalent to the European Union (EU) Solvency II. The delegated act granting Bermuda equivalency under Solvency II
was approved by the European Parliament and Council in March 2016.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) provides that only the state in which a ceding
insurer is domiciled may regulate the financial statement credit for reinsurance taken by that ceding insurer; other states are no longer able to
require additional collateral from unauthorized reinsurers or otherwise impose their own credit for reinsurance laws on ceding insurers that are
licensed, but not domiciled, in such other states.
In November 2011, the NAIC adopted amendments to its Credit for Reinsurance Model Law and Regulation to implement reinsurance collateral
reform. Under the amended Credit for Reinsurance Model Law and Regulation, collateral requirements may be reduced from 100% for
unauthorized or non-accredited reinsurers meeting certain criteria as to financial strength and reliability that are domiciled in jurisdictions that
are found to have strong systems of insurance regulation (each, a “Qualified Jurisdiction”). Once a state legislature enacts the amendments to the
Credit for Reinsurance Model Law and Regulation and the standards become operative in that state, such reinsurers will be eligible to apply for
“certified reinsurer” status and reinsurers that become so certified will be permitted to post collateral at reduced levels in that state. The new
collateral levels will apply on a prospective basis only. The NAIC recently made the reinsurance collateral reform provisions of the amended
Credit for Reinsurance Model Law and Regulation an accreditation standard. Delaware and Iowa have adopted the reduced collateral
requirements under the Credit for Reinsurance Model Law and Regulation, and New York has adopted the reduced collateral requirements under
a predecessor statute.
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Item 1. Business
In December 2014, the NAIC approved Bermuda as a “Qualified Jurisdiction,” effective January 1, 2015, with respect to certain classes of
insurers, including Class E insurers such as ALRe. The recognition of Bermuda as a Qualified Jurisdiction permits ALRe to apply for “certified
reinsurer” status with the ability (if so certified) to post reduced collateral for coverage provided by ALRe to ceding insurers in the United States
(including our U.S. insurance subsidiaries). The amount of collateral required to be posted by an insurer with this designation varies based upon
the insurers’ credit rating. ALRe has been approved by the Delaware Department of Insurance as a certified reinsurer and is therefore eligible to
post reduced collateral equal to 50% of statutory reserves ceded under coinsurance agreements with ceding companies domiciled in the state of
Delaware, including AADE. ALRe has not been approved as a certified reinsurer in any other jurisdiction.
Statutory Investment Valuation Reserves
Life insurance companies domiciled in the U.S. are required to establish an asset valuation reserve (AVR) to stabilize statutory policyholder
surplus from fluctuations in the market value of investments. The AVR consists of two components: (1) a “default component” for possible
credit-related losses on fixed maturity investments and (2) an “equity component” for possible market-value losses on all types of equity
investments, including real estate-related investments. Although future additions to the AVR will reduce the future statutory capital and surplus
of our U.S. insurance subsidiaries, we do not believe that the impact under current regulations of such reserve requirements will materially affect
our U.S. insurance subsidiaries. Insurers domiciled in the U.S. also are required to establish an interest maintenance reserve (IMR) for net
realized capital gains and losses, net of tax, on fixed maturity investments where such gains and losses are attributable to changes in interest
rates, as opposed to credit-related causes. The IMR is required to be amortized into statutory earnings on a basis reflecting the remaining period
to maturity of the fixed maturity securities. These reserves are required by state insurance regulatory authorities to be established as liabilities on
a life insurer’s statutory financial statements and may also be included in the liabilities assumed by our U.S. insurance subsidiaries pursuant to
their reinsurance agreements with U.S.-based life insurer ceding companies.
Policy and Contract Reserve Adequacy Analysis
The Athene Domiciliary States and other states have adopted laws and regulations with respect to policy and contract reserve sufficiency. Under
applicable insurance laws, our U.S. insurance subsidiaries are each required to annually conduct an analysis of the adequacy of all life insurance
and annuity statutory reserves. A qualified actuary appointed by each such subsidiary’s board must submit an opinion annually for each such
subsidiary which states that the statutory reserves make adequate provision, according to accepted actuarial standards of practice, for the
anticipated cash flows resulting from the contractual obligations and related expenses of such subsidiary. The adequacy of the statutory reserves
is considered in light of the assets held by such U.S. insurance subsidiary with respect to such reserves and related actuarial items, including, but
not limited to, the investment earnings on such assets and the consideration anticipated to be received and retained under the related policies and
contracts. At a minimum, such testing is done over a number of economic scenarios prescribed by the states, with the scenarios designed to
stress anticipated cash flows for higher and/or lower future levels of interest rates. Our U.S. insurance subsidiaries may find it necessary to
increase reserves, which may decrease their statutory surplus, in order to pass additional cash flow testing requirements.
U.S. Statutory Reports and Regulatory Examinations
Our U.S. insurance subsidiaries are required to file detailed annual reports, including financial statements, in accordance with prescribed
statutory accounting rules, with regulatory officials in the jurisdictions in which they conduct business. In addition, each U.S. insurance
subsidiary is required to file quarterly reports prepared on the same basis, though with considerably less detail.
As part of their routine regulatory oversight process, state insurance departments conduct periodic detailed examinations, generally once every
three to five years, of the books, records, accounts and operations of insurance companies that are domiciled in their states. Examinations are
generally carried out in cooperation with the insurance departments of other, non-domiciliary states under guidelines promulgated by the NAIC.
In late 2017, the Delaware Department of Insurance sent notice of an exam of AADE and Athene Life Insurance Company (ALIC) for the period
January 1, 2014 through December 31, 2017, which will begin on April 1, 2018. The exam will be conducted in coordination with joint exams
conducted by the Iowa Insurance Division for AAIA and Structured Annuity Reinsurance Company (STAR), and by the NYSDFS for Athene
Annuity & Life Assurance Company of New York (AANY) and ALICNY covering the same time period.
Vermont insurance laws and regulations applicable to Athene Re IV require it to file financial statements with the Commissioner of the
Insurance Division of the Vermont Department of Financial Regulation. Additionally, Athene Re IV is subject to periodic financial examinations
by the Insurance Division of the Vermont Department of Financial Regulation.
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Item 1. Business
Market Conduct Regulation
State insurance laws and regulations include numerous provisions governing the marketplace activities of insurers, including provisions
governing claims settlement practices, the form and content of disclosure to consumers, illustrations, advertising, sales and complaint process
practices. State regulatory authorities generally enforce these provisions through periodic market conduct examinations. In addition, our U.S.
insurance subsidiaries must file, and in many jurisdictions and for some lines of business obtain regulatory approval for, rates and forms relating
to the insurance written in the jurisdictions in which they operate. Our U.S. insurance subsidiaries are currently undergoing the following market
conduct examinations, each in the ordinary course of business: (1) the Missouri Department of Insurance, Financial Institutions & Professional
Registration is conducting a market conduct examination of AAIA, (2) the NYSDFS is conducting a triennial examination of AANY, (3) the
NYSDFS is conducting a market conduct examination of ALICNY, (4) the New York Office of the State Comptroller is conducting an audit of
AANY and ALICNY regarding abandoned property and (5) the Massachusetts Division of Insurance is conducting a limited scope market
conduct examination of AADE. The California Department of Insurance is completing a review of the rating and underwriting practices of
AAIA, AADE and AANY.
State insurance regulators have been scrutinizing claims settlement practices of insurance companies with regard to payment of death benefits.
Through their authority to regulate market conduct, including claims settlement practices, state insurance regulators have been examining the
use by insurance companies of the U.S. Social Security Administration’s Social Security Death Index (Death Master File) to identify deceased
persons and the processes by which insurance companies search for beneficiaries of life and annuity contracts. In particular, these regulators
have been looking at how insurance companies handle unreported deaths, maturity of life insurance and annuity contracts, and contracts that
have exceeded limiting age to determine if the companies are appropriately identifying when death benefits or other payments under the
contracts should be made. Several states have enacted new laws or adopted new regulations mandating the use by insurance companies of the
Death Master File or other similar databases to identify deceased persons and more rigorous processes to find beneficiaries.
In 2013, prior to our acquisition of Aviva USA, it entered into multi-state settlement agreements with the insurance regulators and treasurers for
48 states in connection with certain of its subsidiaries’ use of the Death Master File. As part of the settlement, AAIA and its subsidiary ALICNY
agreed to pay a $4 million assessment for examination, compliance and monitoring costs without admitting any liability or wrongdoing, and
further agreed to adopt policies and procedures reasonably designed to ensure timely payment of valid claims to beneficiaries in accordance with
insurance laws and to timely report and remit unclaimed proceeds to the appropriate states in connection with unpaid property laws. Our U.S.
insurance subsidiaries could continue to be subject to risks related to unpaid benefits, the Death Master File, and the procedures required by the
prior multi-state settlement as they relate to our annuity business. Furthermore, administrative challenges associated with implementing the
procedures described above may make compliance with the multi-state settlement and applicable law difficult and could have a material and
adverse effect on our results of operations. AADE is currently undergoing a multi-state unclaimed property examination led by Verus Financial,
on behalf of California, Florida, Georgia, Indiana, Louisiana, North Carolina, Ohio, Pennsylvania, Tennessee and Texas. Further, AADE is also a
defendant in a lawsuit filed by the West Virginia Treasurer, State of West Virginia ex rel. John D. Perdue v. Liberty Life Ins. Co., Case No. 12-
C-419, pursuant to which the Treasurer alleges that Liberty Life, now known as AADE, failed to adopt reasonable procedures, such as using the
Death Master File, to identify deceased insureds with unpaid death benefits and timely escheat those unclaimed benefits to the state. The
Treasurer accordingly seeks to recover unpaid death benefits, statutory interest and penalties.
Another area of focus by state insurance regulators has been on the use of third-party administrators (TPAs) to administer insurance policies.
Our U.S. insurance subsidiaries rely on TPAs to service certain annuity and life insurance policies and have experienced increased service and
administration complaints related to the conversion and administration of the Aviva USA life insurance policies reinsured to affiliates of Global
Atlantic by the TPA retained by such Global Atlantic affiliates to provide services on such policies, as well as on certain annuity policies that
were on Aviva USA’s life systems that were also converted to and are being administered by the same TPA. As a result of these increased
complaints and service-related issues, our U.S. insurance subsidiaries have been and may in the future be subject to increased regulatory
scrutiny, which could result in fines and penalties, as well as policyholder litigation. See Item 1A. Risk Factors—Risks Relating to Our Business
—We rely significantly on third parties for investment services and certain other services related to our policies, and we may be held responsible
for obligations that arise from the acts or omissions of third parties under their respective agreements with us if they are deemed to have acted
on our behalf and Note 18 – Commitments and Contingencies – Litigation, Claims and Assessments to the consolidated financial statements.
Capital Requirements
Regulators of each state have discretionary authority in connection with our U.S. insurance subsidiaries’ continued licensing to limit or prohibit
sales to policyholders within their respective states if, in their judgment, the regulators determine that such entities have not maintained the
required level of minimum surplus or capital or that the further transaction of business would be hazardous to policyholders.
In order to enhance the regulation of insurers’ solvency, the NAIC adopted a model law to implement RBC requirements for life, health and
property and casualty insurance and reinsurance companies. All states have adopted the NAIC’s model law or a substantively similar law. The
NAIC Risk-Based Capital for Insurers Model Act requires life insurance companies to submit an annual report (the Risk-Based Capital Report),
which compares an insurer’s total adjusted capital (TAC) to its authorized control level RBC (ACL), each such term as defined pursuant to
applicable state law. A company’s RBC is calculated by using a specified formula that applies factors to various risks inherent in the insurer’s
operations, including risks attributable to its assets, underwriting experience, interest rates and other business expenses. The factors are higher
for those items deemed to have greater underlying risk and lower for items deemed to have less underlying risk. Statutory RBC is measured on
two bases, with ACL calculated as one-half company action level RBC (CAL). Regulators typically use ACL in assessing companies and
reviewing solvency requirements. Companies themselves typically report and are compared using the CAL standard.
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Item 1. Business
The Risk-Based Capital Report is used by regulators to set in motion appropriate regulatory actions relating to insurers that show indications of
weak or deteriorating conditions. RBC is an additional standard for MCR that insurers must meet to avoid being placed in rehabilitation or
liquidation by regulators. The annual Risk-Based Capital Report, and the information contained therein, is not intended by the NAIC as a means
to rank insurers.
RBC is a method of measuring the level of capital appropriate for an insurance company to support its overall business operations, in light of its
size and risk profile. It provides a means of assessing capital adequacy, where the degree of risk taken by the insurer is the primary determinant.
The value of an insurer’s TAC in relation to its RBC, together with its trend in its TAC, is used as a basis for determining regulatory action that a
state insurance regulator may be authorized or required to take with respect to an insurer. The four action levels include:
•
•
CAL: The insurer is required to submit a plan for corrective action when its TAC is equal to or less than 200% of ACL;
Regulatory Action Level: The insurer is required to submit a plan for corrective action and is subject to examination, analysis and
specific corrective action when its TAC is equal to or less than 150% of ACL;
ACL: Regulators may place the insurer under regulatory control when its TAC is equal to or less than 100% of ACL; and
•
• Mandatory Control Level: Regulators are required to place the insurer under regulatory control when its TAC is equal to or less than
70% of ACL.
TAC and RBC are calculated annually by insurers, as of December 31 of each year. As of December 31, 2017, each of our U.S. insurance
subsidiaries’ TAC was significantly in excess of the levels that would prompt regulatory action under the laws of the Athene Domiciliary States.
As of December 31, 2017, the CAL RBC ratio of AADE (U.S. RBC ratio) was 490%. The calculation of RBC requires certain judgments to be
made, and, accordingly, our U.S. insurance subsidiaries’ current RBC may be greater or less than the RBC calculated as of any date of
determination.
Under U.S. statutory accounting principles, our U.S. domiciled subsidiaries defer the portion of realized capital gains and losses on fixed
maturity securities attributable to changes in the general level of interest rates into an IMR. The IMR amortizes into future year statutory
operating results based on a formula prescribed by the NAIC. The IMR provides a buffer to our statutory capital and surplus in the event we
have to sell securities in an unrealized loss position. As of December 31, 2017 and 2016, our aggregate IMR balance was $211 million and $217
million, respectively.
Insurance Regulatory Information System Ratios
The NAIC has established the Insurance Regulatory Information System (IRIS) to assist state insurance departments in their oversight of the
financial condition of insurance companies operating in their respective states. IRIS is a series of financial ratios calculated by the NAIC based
on financial information submitted by insurers on an annual basis. Each ratio has an established “usual range” of results. The NAIC shares the
IRIS ratios calculated for each insurer with the interested state insurance departments. Generally, an insurance company will be required to
explain ratios that fall outside the usual range, and may be subject to regulatory scrutiny and action if one or more of its ratios fall outside the
specified ranges. None of our U.S. insurance subsidiaries are currently subject to non-ordinary course regulatory scrutiny based on their IRIS
ratios.
Regulation of Investments
Each of our U.S. insurance subsidiaries is subject to laws and regulations in each Athene Domiciliary State that require diversification of its
investment portfolio and limit the amounts of investments in certain asset categories, such as below-investment grade fixed income securities,
real estate-related equity, partnerships, other equity investments, derivatives and alternative investments. Failure to comply with these laws and
regulations would cause investments exceeding regulatory limitations to be treated as non-admitted assets for purposes of measuring statutory
surplus and, in some instances, could require the divestiture of such non-qualifying investments. Accordingly, the investment laws in the Athene
Domiciliary States could prevent our U.S. insurance subsidiaries from pursuing investment opportunities which they believe are beneficial to
their shareholders, which could in turn preclude Athene from realizing its investment objectives.
Guaranty Associations
All 50 states and the District of Columbia have insurance guaranty fund laws requiring insurance companies doing business within those
jurisdictions to participate in guaranty associations. Guaranty associations are organized to cover, subject to limits, contractual obligations under
insurance policies issued by life insurance companies which later become impaired or insolvent. These associations levy assessments, up to
prescribed limits, on each member insurer doing business in a particular state on the basis of their proportionate share of the premiums written
by all member insurers in the lines of business in which the impaired or insolvent insurer previously engaged. Most states limit assessments in
any year to 2% of the insurer’s average annual premium for the three years preceding the calendar year in which the impaired insurer became
impaired or insolvent. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets, usually over
a period of years. Assessments levied against our U.S. insurance subsidiaries by guaranty associations during each of the past five years have not
been material. While Athene cannot accurately predict the amount of future assessments or future insolvencies of competitors which would lead
to such assessments, Athene believes that assessments with respect to pending insurance company impairments and insolvencies will not have a
material effect on Athene’s financial condition or results of operations.
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Item 1. Business
Federal Oversight
Although the insurance business in the United States is primarily regulated by the states, federal initiatives can affect the businesses of our U.S.
insurance subsidiaries in a variety of ways. From time to time, federal measures are proposed which may significantly affect the insurance
business. These areas include financial services regulation, securities regulation, derivatives regulation, pension regulation, money laundering,
privacy regulation, taxation and the economic and trade sanctions implemented by the Office of Foreign Assets Control (OFAC). OFAC
maintains and enforces economic sanctions against certain foreign countries and groups and prohibits U.S. persons from engaging in certain
transactions with certain persons or entities. OFAC has imposed civil penalties on persons, including insurance and reinsurance companies,
arising from violations of its economic sanctions program. In addition, various forms of direct and indirect federal regulation of insurance have
been proposed from time to time, including proposals for the establishment of an optional federal charter for insurance companies.
Title I of the Dodd-Frank Act established the Financial Stability Oversight Council (FSOC) and authorized the FSOC to designate non-bank
financial companies as systemically important financial institutions (SIFIs), thereby subjecting them to enhanced prudential standards and
supervision by the Board of Governors of the Federal Reserve System (Federal Reserve). The prudential standards for non-bank SIFIs include
enhanced RBC requirements, leverage limits, liquidity requirements, single counterparty exposure limits, governance requirements for risk
management, stress test requirements, special debt-to-equity limits for certain companies, early remediation procedures, and recovery and
resolution planning. On April 21, 2017, the President of the United States issued an executive memorandum (Executive Memorandum) to the
Secretary of the U.S. Department of the Treasury (Treasury Department), directing the Secretary of the Treasury Department to conduct a review
of, and report to the President regarding, FSOC processes and imposing a temporary moratorium on non-emergency SIFI determinations and
designations pending completion of such review and receipt of such report. The requested report, which the Treasury Department published on
November 17, 2017, recommends significant changes to the FSOC processes for making SIFI determinations and designations. As a result, there
is considerable uncertainty as to the future of federal regulation of non-bank SIFIs. If the FSOC were to determine that Athene USA Corporation
(Athene USA) or any of our U.S. subsidiaries is a non-bank SIFI, such entity would become subject to certain of these enhanced prudential
standards.
The Dodd-Frank Act, which effected the most far-reaching overhaul of financial regulation in the U.S. in decades, established the Federal
Insurance Office within the Treasury Department. While currently not having a general supervisory or regulatory authority over the business of
insurance, the Director of the Federal Insurance Office performs various functions with respect to insurance, including serving as a non-voting
member of the FSOC and making recommendations to the FSOC regarding non-bank financial companies to be designated as SIFIs. The
Federal Insurance Office has been charged with providing reports to the U.S. Congress on (1) the global reinsurance market (provided in
January 2015), (2) modernization of U.S. insurance regulation and possible federal involvement in supervision of insurance group holding
companies (provided in December 2013) and (3) state regulators’ ability to access reinsurance information (provided in November 2013). Such
reports could ultimately lead to changes in the regulation of insurers and reinsurers in the United States, including insurance group holding
companies.
The Dodd-Frank Act also authorizes the Federal Insurance Office to assist the Secretary of the Treasury Department in negotiating covered
agreements. A covered agreement is an agreement between the United States and one or more foreign governments, authorities or regulatory
entities, regarding prudential measures with respect to insurance or reinsurance. The Federal Insurance Office is further charged with
determining, in accordance with the procedures and standards established under the Dodd-Frank Act, whether state laws are preempted by a
covered agreement. Pursuant to this authority, in September 2017, the U.S. and the European Union signed a covered agreement to address,
among other things, reinsurance collateral requirements (Covered Agreement). The Covered Agreement became provisionally effective on
November 7, 2017, following completion of the European Union’s procedural requirements, but must be approved by the European Parliament
before it is treated as fully effective. The reinsurance collateral provisions of the Covered Agreement may increase competition, in particular
with respect to pricing for reinsurance transactions, by lowering the cost at which competitors of ALRe are able to provide reinsurance to U.S.
insurers. We cannot predict with any certainty what impact the Covered Agreement will have on our business, whether the Covered Agreement
will be implemented or what the impact of such implementation will be on our business.
FIAs
In recent years, the United States Securities and Exchange Commission (SEC) and state securities regulators have questioned whether FIAs,
such as those sold by our U.S. insurance subsidiaries, should be treated as securities under the federal and state securities laws rather than as
insurance products exempted from such laws. On December 17, 2008, the SEC voted to approve Rule 151A, and apply federal securities
oversight to FIAs issued on or after January 12, 2011. On July 12, 2010, the District of Columbia Circuit Court of Appeals vacated Rule 151A.
Under the Dodd-Frank Act, annuities that meet specific requirements are specifically exempted from being treated as securities by the SEC. We
expect that the types of FIAs our U.S. insurance subsidiaries currently sell will meet applicable requirements for exemption from treatment as
securities and therefore will remain exempt from being treated as securities by the SEC and state securities regulators. However, there can be no
assurance that federal or state securities laws or state insurance laws and regulations will not be amended or interpreted to impose further
requirements on FIAs. Treatment of these products as securities would require additional registration and licensing of these products and the
agents selling them, as well as cause our U.S. insurance subsidiaries to seek new or additional marketing relationships for these products, any of
which may impose significant restrictions on their ability to conduct business as currently operated.
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Item 1. Business
Unclaimed Property Laws
Each of our U.S. insurance subsidiaries is subject to the laws and regulations of states and other jurisdictions concerning the identification,
reporting and escheatment of abandoned or unclaimed money or property. State treasurers, controllers and revenue departments have been
scrutinizing escheatment practices of life insurance companies with regard to unclaimed life insurance and annuity death benefits. As with state
insurance regulators, state revenue authorities have been looking at how life insurance companies handle unreported deaths, maturity of life
insurance and annuity contracts, and contracts that have exceeded limiting age to determine if the companies are appropriately determining
when death benefits or other payments under the contracts should be treated as unclaimed property. State treasurers, controllers and revenue
departments have audited life insurance companies, required escheatments and imposed interest penalties on amounts escheated for failure to
escheat death benefits or other contract benefits when beneficiaries could not be found at the expiration of statutory dormancy periods.
Regulation of OTC Derivatives
We use derivatives to mitigate a wide range of risks in connection with our businesses, including options purchased to hedge the derivatives
embedded in the FIAs that we have issued, and swaps, futures and/or options may be used to manage the impact of increased benefit exposures
from our annuity products that offer guaranteed benefits. Title VII of the Dodd-Frank Act creates a comprehensive framework for the federal
oversight and regulation of the OTC derivatives market and entities, such as us, that participate in the market and requires U.S. regulators to
promulgate rules and regulations implementing its provisions. Regulations have been finalized and implemented in many areas and are being
finalized for implementation in others.
The Dodd-Frank Act divides the regulatory responsibility for swaps in the United States between the SEC and the Commodity Futures Trading
Commission (CFTC). The CFTC regulates swaps and swap entities, and the SEC regulates security-based swaps and security-based swap
entities. The CFTC and the SEC have jointly finalized certain regulations under the Dodd-Frank Act, including critical rulemakings on the
definitions of “swap,” “security-based swap,” “swap dealer,” “security-based swap dealer,” “major swap participant” and “major security-based
swap participant.” In addition, the CFTC has substantially finalized its required rulemaking under the Dodd-Frank Act, including regulations
relating to the registration and regulation of swap dealers, major swap participants and swap execution facilities, reporting, recordkeeping,
mandatory clearing, mandatory on-facility trade execution and mandatory minimum margin requirements. The SEC has yet to implement its
regulatory regime for security-based swaps and market participants transacting in security-based swaps, including security-based swap dealers
and major security-based swap participants subject to the SEC’s oversight. As a result of this bifurcation and the different pace at which the
agencies have promulgated and implemented regulations, different transactions are subject to different levels of regulation.
The Dodd-Frank Act and the CFTC rules thereunder require us, in connection with certain swap transactions, to comply with mandatory clearing
and on-facility trade execution requirements, and it is anticipated that the types of swaps subject to these requirements will be expanded over
time. In addition, new regulations require us to comply with mandatory minimum margin requirements for uncleared swaps and, in some
instances, uncleared security-based swaps. Derivative clearing requirements and mandatory margin requirements could increase the cost of our
risk mitigation and could have other implications. For example, increased margin requirements, combined with netting restrictions and
restrictions on securities that qualify as eligible collateral, could reduce our liquidity and require increased holdings of cash and highly liquid
securities with lower yields causing a reduction in income. In addition, the requirement that certain trades be centrally cleared through
clearinghouses subjects us to documentation that is significantly more counterparty-favorable and may entitle counterparties to unilaterally
change terms such as trading limits and the amount of margin required. The ability of any such counterparty to take such actions could create
trading disruptions and liquidity concerns. Finally, the requirement that certain trades be centrally cleared through clearinghouses concentrates
counterparty risk in both clearinghouses and clearing members. The failure of a clearinghouse could have a significant impact on the financial
system. Even if a clearinghouse does not fail, large losses could force significant capital calls on clearinghouse members during a financial
crisis, which could lead clearinghouse members to default. Because clearinghouses are still developing and the related bankruptcy process is
untested, it is difficult to anticipate or identify all risks related to the default of a clearinghouse.
The Dodd-Frank Act and new regulations thereunder and similar regulations issued by non-U.S. jurisdictions that may indirectly apply to us
could significantly increase the cost of derivative contracts, reduce the availability of derivatives to protect against risks we encounter, reduce
our ability to monetize or restructure our existing derivative contracts, and increase our credit risk exposure. If we reduce our use of derivatives
as a result of the Dodd-Frank Act and the regulations thereunder and other similar regulations, our results of operations may become more
volatile and our cash flows may be less predictable which could adversely affect our financial performance. Additionally, we have always been
subject to the risk that hedging and other management procedures might prove ineffective in reducing the risks to which insurance policies
expose us or that unanticipated policyholder behavior or mortality, combined with adverse market events, could produce economic losses
beyond the scope of the risk management techniques employed. Any such losses could be increased by the increased cost of entering into
derivatives and the reduced availability of customized derivatives that might result from the implementation of the Dodd-Frank Act.
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Item 1. Business
Notwithstanding the foregoing, the future of Title VII of the Dodd-Frank Act and the related regulations implemented by the CFTC and the SEC
and their impact on us remain uncertain and unpredictable, particularly in light of actions taken by the Trump administration. On February 3,
2017, President Trump signed an Executive Order that establishes core principles for regulating the U.S. financial system and provides a
framework for comprehensive change to current financial regulation (Financial Order), and on February 24, 2017, President Trump also signed
an Executive Order that requires federal agencies to designate a “Regulatory Reform Officer” and a “Regulatory Reform Task Force” to evaluate
existing regulations and make recommendations to repeal, replace or modify regulations that, among others, inhibit job creation, are ineffective
or impose costs that exceed benefits (Reform Order, and collectively with the Financial Order, Executive Orders). As of the date of this filing,
there have not been any further announcements or actions by the CFTC or SEC relating to the regulatory reform, if any, that will be
implemented as a result of the Executive Orders. Thus, at this point it is difficult to predict the impact of the Executive Orders on Title VII of the
Dodd-Frank Act, derivatives regulatory schemes in other jurisdictions and our derivatives activities.
Consumer Protection Laws and Privacy and Data Security Regulation
Numerous other federal and state laws also affect Athene’s earnings and activities, including federal and state consumer protection laws. As part
of the Dodd-Frank Act, Congress established the Consumer Financial Protection Bureau (CFPB) to supervise and regulate institutions that
provide certain financial products and services to consumers. Although the consumer financial services subject to the CFPB’s jurisdiction
generally exclude insurance business of the kind in which our U.S. insurance subsidiaries engage, the CFPB does have authority to regulate non-
insurance consumer services which are offered by issuers of securities in our U.S. insurance subsidiaries’ investment portfolio.
Federal and state laws and regulations require financial institutions, including insurers, to protect the security and confidentiality of nonpublic
personal information, including certain health-related and customer information, and to notify customers and other individuals about their
policies and practices relating to their collection and disclosure of health-related and customer information and their practices relating to
protecting the security and confidentiality of that information. State laws regulate use and disclosure of Social Security numbers and federal and
state laws require notice to affected individuals, law enforcement, regulators and others if there is a breach of the security of certain nonpublic
personal information, including Social Security numbers. In addition, state laws and regulations restrict the disclosure of the medical record and
health status information obtained by insurers.
Federal and state lawmakers and regulatory bodies may be expected to consider additional or more detailed regulation regarding these subjects
and the privacy and security of nonpublic personal information. Furthermore, the issues surrounding data security and the safeguarding of
consumers’ protected information are under increasing regulatory scrutiny by state and federal regulators, particularly in light of the number and
severity of recent U.S. companies’ data breaches. The Federal Trade Commission, the Federal Bureau of Investigation, the Federal
Communications Commission, the NYSDFS and the NAIC have undertaken various studies, reports and actions regarding data security for
entities under their respective supervision. Some states have recently enacted new insurance laws that require certain regulated entities to
implement and maintain comprehensive information security programs to safeguard the personal information of insureds and enrollees.
The new cybersecurity regulation published by the NYSDFS, which became effective on March 1, 2017, with ongoing compliance deadlines
over the following 24 months, requires banks, insurance companies, and other financial services institutions regulated by the NYSDFS,
including us, to establish and maintain a cybersecurity program “designed to protect consumers and ensure the safety and soundness of New
York State’s financial services industry.” We are working to implement the requirements of the regulation and may be required to incur
significant expense in order to meet its requirements. We anticipate that the NYSDFS will examine the cybersecurity programs of financial
institutions in the future and that may result in additional regulatory scrutiny, expenditure of resources and possible regulatory actions and
reputational harm. We are in the process of updating processes and procedures to comply with the new requirements. We cannot predict the
effect or the amount of compliance costs that will be incurred if state and federal regulators pursue investigations and increase the regulatory
requirements for the security of protected information.
In October 2017, the NAIC adopted a new Insurance Data Security Model Law, which is intended to establish the standards for data security and
standards for the investigation and notification of data breaches applicable to insurance licensees in states adopting such law, with provisions
that are generally consistent with the NYSDFS cybersecurity regulation discussed above. As with all NAIC model laws, this model law must be
adopted by a state before becoming law in such state. Neither Delaware nor Iowa has adopted a version of the Insurance Data Security Model
Law. The NAIC has also adopted a guidance document that sets forth twelve principles for effective insurance regulation of cybersecurity risks
based on similar regulatory guidance adopted by the Securities Industry and Financial Markets Association and the “Roadmap for Cybersecurity
Consumer Protections,” which describes the protections to which the NAIC believes consumers should be entitled from their insurance
companies, agents and other businesses concerning the collection and maintenance of consumers’ personal information, as well as what
consumers should expect when such information has been involved in a data breach. We expect cybersecurity risk management, prioritization
and reporting to continue to be an area of significant regulatory focus by such regulatory bodies and self-regulatory organizations.
Further, the Gramm-Leach-Bliley Act of 1999, which implemented fundamental changes in the regulation of the financial services industry in
the United States, includes privacy requirements for financial institutions, including obligations to protect and safeguard consumers’ nonpublic
personal information and records, and limitations on the re-disclosure and re-use of such information.
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Item 1. Business
Finally, our investment in a limited partnership which is in the business of originating residential mortgage loans (RML), as well as our direct
investment in any residential or other mortgage loans, may expose us to various environmental and other regulation. For example, to the extent
that we hold whole mortgage loans as part of our investment portfolio, we may be responsible for certain tax payments or subject to liabilities
under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980. Additionally, we may be subject to
regulation by the CFPB as a mortgage holder or property owner. We are currently unable to predict the impact of such regulation on our
business.
Broker-dealers
Our securities operations, principally conducted by our limited purpose SEC-registered broker-dealer, Athene Securities, LLC, are subject to
federal and state securities and related laws, and are regulated principally by the SEC, state securities authorities and FINRA. Athene Securities,
LLC does not hold customer funds or safekeep customer securities or otherwise engage in any securities transactions. Athene Securities, LLC
was the principal underwriter of a block of variable annuity contracts which has been closed to new investors since 2002. The closed block of
variable annuity contracts was issued by a predecessor of AAIA. Athene Securities, LLC continues to receive concessions on those variable
annuity contracts. Athene Securities, LLC also provides supervisory oversight to Athene employees who are registered representatives.
Employees or personnel registered with Athene Securities, LLC are subject to the Exchange Act and to regulation and examination by the SEC,
FINRA and state securities commissioners. The SEC and other governmental agencies and self-regulatory organizations, as well as state
securities commissions in the United States, have the power to conduct administrative proceedings that can result in censure, fines, cease-and-
desist orders or suspension, termination or limitation of the activities of the regulated entity or its employees.
As a registered broker-dealer and member of various self-regulatory organizations, Athene Securities, LLC is subject to the SEC’s net capital
rule, which specifies the minimum level of net capital a broker-dealer is required to maintain and requires a minimum part of its assets to be kept
in relatively liquid form. These net capital requirements are designed to measure the financial soundness and liquidity of broker-dealers. The net
capital rule imposes certain requirements that may have the effect of preventing a broker-dealer from distributing or withdrawing capital and
may require that prior notice to the regulators be provided prior to making capital withdrawals. Compliance with net capital requirements could
limit operations that require the intensive use of capital, such as trading activities and underwriting, and may limit the ability of our broker-
dealer subsidiaries to pay dividends to us.
ERISA
We also may be subject to regulation by the DOL when providing a variety of products and services to employee benefit plans governed by
ERISA. ERISA is a comprehensive federal statute that applies to U.S. employee benefit plans sponsored by private employers and labor unions.
Plans subject to ERISA include pension and profit sharing plans and welfare plans, including health, life and disability plans. Among other
things, ERISA imposes reporting and disclosure obligations, prescribes standards of conduct that apply to plan fiduciaries and prohibits
transactions known as “prohibited transactions,” such as conflict-of-interest transactions, self-dealing and certain transactions between a benefit
plan and a “party in interest.” ERISA also provides for a scheme of civil and criminal penalties and enforcement. Our insurance businesses
provide services to employee benefit plans subject to ERISA. We are also subject to ERISA’s prohibited transaction rules for transactions with
ERISA plans, which may affect our ability to, or the terms upon which we may, enter into transactions with those plans, even in businesses
unrelated to those giving rise to “party in interest” status. The applicable provisions of ERISA and the U.S. Internal Revenue Code of 1986, as
amended (Internal Revenue Code) are subject to enforcement by the DOL, the Internal Revenue Service (IRS) and the U.S. Pension Benefit
Guaranty Corporation. Severe penalties are imposed for breach of duties under ERISA.
On April 6, 2016, the DOL issued the fiduciary rule which imposes upon third parties who sell annuities within ERISA plans or to individual
retirement account (IRA) holders a fiduciary duty to retirement investors. For the year ended December 31, 2017, of our total deposits of $11.5
billion from our organic channels, 33% were associated with sales of FIAs to employee benefit plans and IRAs and 3% were associated with
traditional fixed annuities sold to employee benefit plans and IRAs. The requirements of the fiduciary rule were originally scheduled to begin to
be implemented on April 10, 2017, with full implementation on January 1, 2018. The DOL delayed the applicability date of the fiduciary rule for
60-days to June 9, 2017 and, in addition to delaying the applicability date, the DOL adjusted the exemption requirements that apply to sales in
the interim period starting June 9, 2017 until the full compliance date of January 1, 2018. On July 6, 2017, the DOL issued a request for
information regarding the fiduciary rule. The DOL indicated that the information gathered from the responses to the request for information
“could form the basis of new exemptions or changes/revisions”. Along with the request for comments about the fiduciary rule and its impact, the
DOL asked for commentary regarding the potential impact of extending the January 1, 2018 full compliance date. At the end of November 2017,
the DOL published an amendment to the rule extending the full compliance date from January 1, 2018 to July 1, 2019.
We cannot predict with any certainty the impact of the regulation and exemptions, but the regulation and exemptions could alter the way our
products and services are marketed and sold, particularly to purchasers of IRAs and individual retirement annuities. If fully implemented in its
current form in July 2019, the DOL fiduciary rule could have an adverse effect on our ability to write new business.
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Item 1. Business
The SEC has indicated that it will work with the DOL to propose rules creating a uniform standard of conduct applicable to broker-dealers and
investment advisers, which, if adopted, may affect the distribution of our products. In addition, the NAIC is working to propose changes to the
SAT to include best interest. Should the SEC or NAIC rules, if adopted, not align with the finalized DOL fiduciary rule related to conflicts of
interest in the provision of investment advice, the distribution of our products could be further complicated. The DOL has also issued a number
of regulations recently, and may issue similar additional regulations, that increase the level of disclosure that must be provided to plan sponsors
and participants. These ERISA disclosure requirements will likely increase the regulatory and compliance burden on us, resulting in increased
costs.
Tax Reform
On December 22, 2017, President Trump signed the Tax Act into law, which introduced significant changes to the Internal Revenue Code. While
our expectations may be subject to change as we continue to evaluate the impact of the Tax Act on our business, we expect the following notable
impacts:
•
•
•
•
Overall tax rate – Although the Tax Act reduces corporate income tax rates to 21% beginning in 2018, it also imposes a new minimum
tax, referred to as the BEAT, which taxes modified taxable income at a rate of 5% beginning in 2018, increasing to 10% in 2019 and
12.5% in 2026. In general, modified taxable income is calculated by adding back to a taxpayer’s regular taxable income the amount of
certain “base erosion tax benefits” with respect to payments to foreign affiliates, as well as the “base erosion percentage” of any net
operating loss deductions. The BEAT applies only to the extent it exceeds a taxpayer’s regular corporate income tax liability
(determined without regard to certain tax credits). The BEAT is expected to apply to our U.S. subsidiaries with respect to payments to
our Bermuda subsidiary, ALRe. The BEAT does not apply to premium paid to ALRe directly by unaffiliated ceding companies or
investment income earned on ALRe’s surplus assets, which together currently represent approximately 15-20% of our pre-tax income.
In addition to the BEAT, the 1% excise tax (which is included in policy and other operating expenses on the consolidated statements of
income) that we currently pay will remain in place for reinsurance payments to ALRe.
Within the context of affiliated modco arrangements, which is how much of our internal reinsurance is structured, it is our belief that
the BEAT was generally intended to require the add back of the net amount paid or accrued by our U.S. subsidiaries to ALRe for
premiums, investment income, reserve changes, other consideration and expenses (net basis). However, there is significant uncertainty
regarding the computation of the BEAT in the context of affiliated modco arrangements, including whether the BEAT applies on a net
basis or instead requires the add back of the gross amount paid or accrued, without reduction for claims or other expenses. In light of
this uncertainty, we have begun to take actions that would allow us to mitigate the potential effect of the BEAT on our results of
operations should the BEAT require the add back of the gross amounts in this manner. Depending on the ultimate interpretation of the
Tax Act and the actions that we take, we currently expect that our overall tax rate will be between 12 – 16%, on average, beginning in
2019. Until there is more clarity regarding the computation of the BEAT in the context of modco arrangements, we anticipate that our
2018 annual financial results will reflect an overall tax rate of approximately 14 – 15%.
The estimated future overall tax rates presented above incorporate various assumptions and actual results may vary. See Item 1A. Risk
Factors–Risks Relating to Our Business–Our business, financial condition, liquidity, results of operations and cash flows depend on
the accuracy of our management’s assumptions and estimates, and we could face significant losses if these assumptions and estimates
differ significantly from actual results and Item IA. Risk Factors–Risks Relating to Taxation–Our efforts to mitigate the cost of the
BEAT may be unnecessary, ineffective or counterproductive.
Risk-based capital – Depending on the reaction of the NAIC to the passage of the Tax Act, the change in the corporate income tax rate
from 35% to 21% could result in a reduction of our RBC ratios. At present, the NAIC RBC calculations employ the statutory corporate
tax rate of 35% in calculating several aspects of RBC. If the NAIC RBC calculations simply employ the new statutory corporate tax
rate of 21% with no other adjustments, our RBC ratios, along with those of other fixed annuity writers and life insurers in general, are
expected to decrease. If such were the case as of December 31, 2017, we estimate the decrease to our overall NAIC RBC ratios would
have been approximately 10 – 15%. Our capital ratios under the various rating agency models are not expected to be materially
impacted by the change in tax rate, and those models are an important consideration in determining the appropriate levels of capital to
run our business. Our initial assessment of the level of capital that we deem appropriate to run our business has not been impacted
materially by the change in tax rate.
Deferred tax assets and liabilities – As a result of the reduction in the corporate income tax rate, we recorded a $7 million decrease to
our deferred tax liability in our consolidated financial statements as of December 31, 2017. See Note 15 – Income Taxes to the
consolidated financial statements.
Target returns – Historically, we have generally targeted mid-teen returns for sources of organic growth and mid-teen or higher returns
for sources of inorganic growth. The Tax Act may alter the way that we price our products or otherwise impact targeted returns on
organic production and may further affect the returns that we target for sources of inorganic growth, in each case, potentially resulting
in a decrease of our targeted returns on a temporary or permanent basis. In addition, we expect that the Tax Act will cause a reduction
of the returns that we realize on our in-force business.
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Item 1. Business
Other provisions of the Tax Act could significantly increase the tax liability of our U.S. subsidiaries in future tax periods by accelerating items of
income or deferring deductions. Although the acceleration of an item of income or deferral of a deduction in one tax period allows a taxpayer to
recognize less taxable income in a future period, there can be no assurance that we will be able to utilize any resulting deferred tax assets in
future tax periods.
The foregoing represents our initial expectations of certain of the effects of the Tax Act and may be subject to change as additional guidance is
made available and as we continue to evaluate the effect of this legislation on our business. See Item 1A. Risk Factors–Risks Relating to
Taxation for further information on how the Tax Act could impact us.
Bermuda
General
The Bermuda Insurance Act regulates the insurance business of ALRe, and provides that no person may carry on any insurance business in or
from within Bermuda unless registered as an insurer under the Bermuda Insurance Act by the BMA. The BMA is required by the Bermuda
Insurance Act to determine whether the applicant is a fit and proper body to be engaged in the insurance business and, in particular, whether it
has, or has available to it, adequate knowledge and expertise to operate an insurance business. See –Fit and Proper Controllers below.
The continued registration of an insurer is subject to the insurer complying with the terms of its registration and such other conditions as the
BMA may impose from time to time. The Bermuda Insurance Act also grants to the BMA powers to supervise, investigate and intervene in the
affairs of insurance companies.
The Bermuda Insurance Act imposes on Bermuda insurance companies solvency standards as well as auditing and reporting requirements.
Certain significant aspects of the Bermuda insurance regulatory framework are set forth below.
Classification of Insurers
The Bermuda Insurance Act distinguishes between insurers carrying on long-term business, insurers carrying on special purpose business and
insurers carrying on general business. Long-term business is generally defined as life, annuity and accident and health insurance, while general
business broadly includes all types of insurance that are not long-term business (property and casualty business). Special purpose business is
fully funded insurance business approved by the BMA to be written by a company registered as a Special Purpose Insurer. There are five
classifications of insurers carrying on long-term business, ranging from Class A insurers (pure captives) to Class E insurers (larger commercial
carriers). Class A insurers are subject to the lightest regulation and Class E insurers are subject to the strictest regulation.
ALRe, which is incorporated to carry on long-term business, is registered as a Class E insurer which is the license class for long-term insurers
and reinsurers with total assets of more than $500 million that are not registrable as a single-parent or multi-owner long-term captive insurer or
reinsurer. ALRe is not licensed to conduct general business and has not sought authorization as a reinsurer in any state or jurisdiction of the U.S.
Consequently, in order for its ceding companies to receive statutory reserve or RBC credit for the reinsurance provided by ALRe; ALRe
typically structures its reinsurance transactions in one of three ways: (1) coinsurance, where ALRe’s liabilities to ceding companies in
connection with reinsurance transactions are secured by assets held in trust for the benefit of the applicable ceding company, (2) funds withheld,
where, although ALRe recognizes an insurance reserve liability, the assets to secure such liabilities are held and maintained by the applicable
ceding company, or (3) modco, where both the insurance reserves and assets supporting the reserves are retained by the applicable ceding
company.
Cancellation of Insurer’s Registration
The BMA could revoke or suspend ALRe’s license in circumstances in which (1) it is shown that false, misleading or inaccurate information has
been supplied to the BMA by ALRe or on its behalf for the purposes of any provision of the Bermuda Insurance Act, (2) ALRe has ceased to
carry on business, (3) ALRe has persistently failed to pay fees due under the Bermuda Insurance Act, (4) ALRe has been shown to have not
complied with a condition attached to its registration or with a requirement made of it under the Bermuda Insurance Act, (5) ALRe is convicted
of an offense against a provision of the Bermuda Insurance Act or (6) ALRe is, in the opinion of the BMA, found not to have been carrying on
business in accordance with sound insurance principles.
Head Office and Principal Representative
An insurer is required to establish and maintain its head and principal office in Bermuda, which requires certain officers and a director to reside
in Bermuda, and to appoint and maintain a principal representative in Bermuda. It is the duty of the principal representative to forthwith notify
the BMA where the principal representative believes there is a likelihood of the insurer becoming insolvent or that a reportable “event” has, to
the principal representative’s knowledge, occurred or is believed to have occurred. Examples of such a reportable “event” include failure by the
insurer to comply substantially with a condition imposed upon the insurer by the BMA relating to a solvency margin or other ratio or a
significant loss which is likely to cause the insurer to fail to comply with its Enhanced Capital Requirement (ECR), as discussed below.
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Item 1. Business
Public Disclosure
The Bermuda Insurance Act provides the BMA with powers to set standards on public disclosure. Using this power, the BMA requires all
commercial insurers and insurance groups, subject to certain exceptions, to prepare and publish a Financial Condition Report on their website.
Independent Approved Auditor
Insurers must appoint an independent auditor who will annually audit and report on the insurer’s statutory financial statements (Bermuda
Financial Statements) and financial statements prepared in accordance with accounting principles generally accepted in the U.S. (GAAP) or
International Financial Reporting Standards (IFRS), each of which are required to be filed annually with the BMA. The auditor must be
approved by the BMA as the independent auditor of the insurer.
Approved Actuary
Long-term insurers must appoint an actuary approved by the BMA. In order to be approved, the actuary must be a member in good standing of
either the Canadian Institute of Actuaries, the Casualty Actuarial Society, the Institute of Actuaries of Australia, the Institute and Faculty of
Actuaries (for the United Kingdom (UK)), the Society of Actuaries, the American Academy of Actuaries or a member of an actuarial body
recognized by the BMA. Additionally, the actuary must be qualified to provide an opinion in accordance with the requirements of the Bermuda
Insurance Act.
A Class E insurer is required to submit annually an opinion of its approved actuary with its capital and solvency return. The approved actuary’s
opinion must state, among other things, whether or not the aggregate amount of technical provisions shown in the statutory economic balance
sheet as of the end of the relevant financial year meets the requirements of the Bermuda Insurance Act and makes reasonable provision for the
total technical provisions of the insurer under the terms of its insurance contracts and agreements.
Non-insurance Business
Pursuant to the Bermuda Insurance Act, as a Class E insurer, ALRe is not permitted to engage in non-insurance business unless that non-
insurance business is ancillary to its core business. Non-insurance business means any business other than insurance business and includes
carrying on investment business, managing an investment fund as operator, carrying on business as a fund administrator, carrying on banking
business, underwriting debt or securities or otherwise engaging in investment banking, engaging in commercial or industrial activities and
carrying on the business of management, sales or leasing of real property.
Annual Financial Statements, Annual Statutory Financial Return and Annual Capital and Solvency Return
Class E insurers must file annual Bermuda Financial Statements and financial statements prepared in accordance with GAAP or IFRS within
four months of the end of each fiscal year, unless such deadline is specifically extended. The Bermuda Insurance Act prescribes rules for the
preparation and substance of statutory financial returns, which include, in statutory form, an insurer information sheet, an auditor’s report, a
balance sheet, income statement, a statement of capital and surplus and notes thereto. The Bermuda Financial Statements include detailed
information and analysis regarding premiums, claims, reinsurance and investments of the insurer.
In addition, each year a Class E insurer is required to file with the BMA a capital and solvency return along with its annual statutory financial
return. The prescribed form of capital and solvency return is comprised of: the insurer’s BSCR model or an approved internal capital model in
lieu thereof; a statutory economic balance sheet; the approved actuary’s opinion; and several prescribed schedules, including a schedule of fixed
income and equity investments by BSCR rating, a schedule of funds held by ceding reinsurers in segregated accounts/trusts by BSCR rating, a
schedule of risk management and a schedule of eligible capital, among others.
The capital and solvency return is not available for public inspection.
Minimum Margin of Solvency (MMS), ECR and Restrictions on Dividends and Distributions
Class E insurers must at all times maintain an MMS and an ECR in accordance with the provisions of the Bermuda Insurance Act. The Bermuda
Insurance Act mandates certain actions and filings with the BMA if an insurer fails to meet and/or maintain its ECR or MMS including the filing
of a written report detailing the circumstances giving rise to the failure and the manner and time within which the insurer intends to rectify the
failure.
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Item 1. Business
An insurer is prohibited from declaring or paying a dividend if in breach of its ECR or MMS or if the declaration or payment of such dividend
would cause such a breach. Where an insurer fails to meet its MMS on the last day of any financial year, it is prohibited from declaring or
paying any dividends during the next financial year without the approval of the BMA. Under the Bermuda Insurance Act, ALRe is prohibited
from paying a dividend in an amount exceeding 25% of the prior year’s total statutory capital and surplus, unless at least two members of
ALRe’s board of directors and its principal representative sign and submit to the BMA an affidavit attesting that a dividend in excess of this
amount would not cause ALRe to fail to meet its relevant margins. In certain instances, ALRe would also be required to provide prior notice to
the BMA in advance of the payment of dividends. In the event that such an affidavit is submitted to the BMA in accordance with the Bermuda
Insurance Act, and further subject to ALRe meeting its MMS and ECR, 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.
Further, ALRe must obtain the BMA’s prior approval before reducing its total statutory capital as shown in its previous financial year statutory
balance sheet by 15% or more. ALRe is also prohibited from declaring or paying any dividends unless the value of its long-term business assets
exceeds its long-term business liabilities, as certified by its approved actuary, by the amount of the dividend and at least the MMS. These
restrictions on declaring or paying dividends and distributions under the Bermuda Insurance Act are in addition to those under Bermuda’s
Companies Act 1981 (the Companies Act) which apply to all Bermuda companies.
At the time of filing its statutory financial statements, a Class E insurer is also required to deliver to the BMA a declaration of compliance, in
such form and with such content as may be prescribed by the BMA, declaring whether or not the Class E insurer has, with respect to the
preceding financial year (1) complied with all requirements of the minimum criteria applicable to it; (2) complied with the MMS as of its
financial year end; (3) complied with the applicable enhanced capital requirements as of its financial year end; and (4) complied with applicable
conditions, directions and restrictions imposed on, or approvals granted to, the Class E insurer. The declaration of compliance is required to be
signed by two directors of the Class E insurer and if the Class E insurer has failed to comply with any of the requirements referenced in
(1) through (4) above or observe any limitations, restrictions or conditions imposed upon the issuance of its license, if applicable, the Class E
insurer will be required to provide the BMA with details of such failure in writing. A Class E insurer shall be subject to a civil penalty in the
form of a fine for failure to comply with a duty imposed on it in connection with the delivery of the declaration of compliance.
The MMS a Class E insurer is required to maintain with respect to its long-term business is the greater of (1) $8 million, (2) 2% of the first $500
million of assets plus 1.5% of applicable assets above $500 million or (3) 25% of the ECR as reported at the end of the relevant year.
The BMA has embedded an economic balance sheet (EBS) framework as part of the Capital and Solvency Return that forms the basis for an
insurer’s ECR. The premise underlying the EBS framework is the idea that assets and liabilities should be valued on a consistent economic
basis. Under the Bermuda Regulatory Framework there are two solvency calculations: (1) a Class E Insurer must have total statutory capital and
surplus as reported on the insurer’s statutory balance sheet greater than the MMS calculated pursuant to the Insurance Account Rules 2016; and
(2) under the Insurance (Prudential Standards) (Class C, Class D and Class E Solvency Requirement) Rules 2011 an insurer is required to
maintain available statutory economic capital and surplus to an amount that is equal to or exceeds the value of its ECR.
A Class E insurer is required to maintain available statutory capital and surplus at a level equal to or in excess of its ECR which is established by
reference to the Class E BSCR model. The BSCR model provides a method for determining an insurer’s capital requirements (statutory capital
and surplus) by taking into account the risk characteristics of different aspects of the insurer’s business. The BSCR formula establishes capital
requirements for fourteen categories of risk: fixed income investment risk, equity investment risk, long-term interest rate/liquidity risk, currency
risk, concentration risk, credit risk, operational risk and seven categories of long-term insurance risk. For each category, the capital requirement
is determined by applying factors to asset, premium, reserve, creditor, probable maximum loss and operation items, with higher factors applied
to items with greater underlying risk and lower factors for less risky items.
As of December 31, 2017 and 2016, ALRe’s EBS capital and surplus resulted in BSCR ratios of 354% and 228%, respectively. While not
specifically referred to in the Bermuda Insurance Act, target capital level (TCL) is also an important threshold for statutory capital and surplus.
TCL is equal to 120% of ECR as calculated pursuant to the BSCR formula. TCL serves as an early warning tool for the BMA. If an insurer fails
to maintain statutory capital at least equal to its TCL, such failure will likely result in increased regulatory oversight by the BMA. A Class E
insurer which at any time fails to meet its applicable ECR shall, upon becoming aware of such failure or upon having reason to believe that such
a failure has occurred, immediately notify the BMA in writing. Within 14 days of such notification, such Class E insurer shall file with the BMA
a written report containing details of the circumstances leading to the failure and a plan detailing the specific actions to be taken to rectify the
failure, and the time within which the Class E insurer intends to rectify the failure. Within 45 days of becoming aware of such failure, or of
having reason to believe that such a failure has occurred, such Class E insurer shall furnish the BMA with (1) unaudited statutory economic
balance sheets and unaudited interim statutory financial statements prepared in accordance with GAAP covering such period as the BMA may
require; (2) an opinion of the approved actuary in relation to total long-term business insurance technical provisions as set out in the statutory
economic balance sheet, where applicable; (3) a long-term business solvency certificate in respect of the financial statements; and (4) a capital
and solvency return reflecting an ECR prepared using post-failure data where applicable.
All Bermuda companies must comply with the provisions of the Companies Act regulating the payment of dividends and making distributions
from contributed surplus. A company may not declare or pay a dividend, or make a distribution out of contributed surplus, if there are reasonable
grounds for believing that: (1) the company is, or would after the payment be, unable to pay its liabilities as they become due, or (2) the
realizable value of the company’s assets would thereby be less than its liabilities.
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Item 1. Business
Eligible Capital
To enable the BMA to better assess the quality of the insurer’s capital resources, a Class E insurer is required to disclose the makeup of its
capital in accordance with the ‘3-tiered capital system.’ Under this system, all of the insurer’s capital instruments must be classified as either
basic or ancillary capital. All capital instruments are further classified into one of three tiers based on their “loss absorbency” characteristics.
Highest quality capital will be classified as Tier 1 Capital, lesser quality capital will be classified as either Tier 2 Capital or Tier 3 Capital. Under
this regime, up to certain specified percentages of Tier 1, Tier 2 and Tier 3 Capital may be used to support the insurer’s MMS, ECR and TCL.
The Bermuda Insurance Act requires that Class E insurers have Tier 1 Capital equal to or greater than 50% of the value of its ECR, Tier 2
Capital not greater than Tier 1 Capital and Tier 3 Capital of not more than 17.65% of the aggregate of its Tier 1 Capital and Tier 2 Capital.
The characteristics of the capital instruments that must be satisfied to qualify as Tier 1, Tier 2 and Tier 3 Capital are set out in the Insurance
(Eligible Capital) Rules 2012, and any amendments thereto. Under these rules, Tier 1, Tier 2 and Tier 3 Capital may, until January 1, 2024,
include capital instruments that do not satisfy the requirement that the instrument be non-redeemable or settled only with the issuance of an
instrument of equal or higher quality upon a breach, or that the coupon payment on the instrument be cancellable or deferrable indefinitely, upon
breach, or if it would cause a breach, of the ECR.
Where the BMA has previously approved the use of certain instruments for capital purposes, the BMA’s consent will need to be obtained if such
instruments are to remain eligible for use in satisfying the MMS and the ECR. We do not currently use any such instruments.
Code of Conduct
Every Bermuda registered insurer must comply with the Insurance Code of Conduct (Code of Conduct) which prescribes the duties and
standards that must be complied with to ensure sound corporate governance, risk management and internal controls are implemented. The BMA
will assess an insurer’s compliance with the Code of Conduct in a proportionate manner relative to the nature, scale and complexity of its
business. Failure to comply with the requirements of the Code of Conduct will be taken into account by the BMA in determining whether an
insurer is conducting its business in a sound and prudent manner as prescribed by the Bermuda Insurance Act and may result in the BMA
exercising its powers of intervention and investigation (see below) and, in the case of ALRe, as a Class E insurer, will be a factor in calculating
the operational risk charge under the insurer’s BSCR or approved internal model.
Fit and Proper Controllers
The BMA maintains supervision over the “controllers” of all registered insurers in Bermuda. For these purposes, a “controller” includes (1) the
managing director of the registered insurer or its parent company, (2) the chief executive of the registered insurer or of its parent company, (3) a
shareholder controller, and (4) any person in accordance with whose directions or instructions the directors of the registered insurer or its parent
company are accustomed to act.
The definition of shareholder controller is set out in the Bermuda Insurance Act but generally refers to (1) a person who holds 10% or more of
the shares carrying rights to vote at a shareholders’ meeting of the registered insurer or its parent company, (2) a person who is entitled to
exercise 10% or more of the voting power at any shareholders’ meeting of such registered insurer or its parent company or (3) a person who is
able to exercise significant influence over the management of the registered insurer or its parent company by virtue of its shareholding or its
entitlement to exercise, or control the exercise of, the voting power at any shareholders’ meeting.
Under the Bermuda Insurance Act, shareholder controller ownership is defined as follows:
Actual Shareholder Controller Voting Power
10% or more but less than 20%
20% or more but less than 33%
33% or more but less than 50%
50% or more
Defined Shareholder Controller Voting Power
10%
20%
33%
50%
Where the shares of a registered insurer, or the shares of its parent company, are traded on a recognized stock exchange, and such shareholder
becomes a 10%, 20%, 33%, or 50% shareholder controller of the insurer, that shareholder shall, within 45 days, notify the BMA in writing that
such shareholder has become, or as a result of a disposition ceased to be, a controller of any such category.
Under our bye-laws, we have imposed restrictions on the ownership by holders of our Class A common shares (other than the Apollo Group)
controlling more than 9.9% of the voting power associated with our common shares. The voting rights exercisable by shareholders of the
Company other than the Apollo Group will be limited so that Control Groups are not deemed to hold more than 9.9% of the total voting power
conferred by our shares. In addition, our board of directors retains certain discretion to make adjustments to the aggregate number of votes
attaching to the shares of any person or group that they consider fair and reasonable in all the circumstances to ensure that such person or group
will not hold more than 9.9% of the total voting power represented by our then outstanding shares. As such, other than the Apollo Group (at the
33% shareholder controller level), no shareholder will be considered, according to the Bermuda Insurance Act, a shareholder controller of
ALRe.
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Item 1. Business
Any person or entity who contravenes the Bermuda Insurance Act by failing to give notice or knowingly becoming a controller of any
description before the required 45 days has elapsed is guilty of an offense under Bermuda law and liable to a fine of $25,000 on summary
conviction.
The BMA may file a notice of objection to any person or entity who has become a controller of any description where it appears that such
person or entity is not, or is no longer, fit and proper to be a controller of the registered insurer. Before issuing a notice of objection, the BMA is
required to serve upon the person or entity concerned a preliminary written notice stating the BMA’s intention to issue formal notice of
objection. Upon receipt of the preliminary written notice, the person or entity served may, within 28 days, file written representations with the
BMA which shall be taken into account by the BMA in making its final determination. Any person or entity who continues to be a controller of
any description after having received a notice of objection is guilty of an offense and liable on summary conviction to a fine of $25,000 (and a
continuing fine of $500 per day for each day that the offense is continuing) or, if convicted on indictment, to a fine of $100,000 and/or 2 years in
prison.
Notice of Change of Controllers and Officers
All registered insurers are required to give written notice to the BMA of the fact that a person has become, or ceased to be, a controller or officer
of the registered insurer within 45 days of becoming aware of such fact. An officer in relation to a registered insurer means a director, chief
executive or senior executive performing duties of underwriting, actuarial, risk management, compliance, internal audit, finance or investment
matters.
Notification of Material Changes
All registered insurers are required to give notice to the BMA of their intention to effect a material change within the meaning of the Bermuda
Insurance Act. For the purposes of the Bermuda Insurance Act, the following changes are material: (1) the transfer or acquisition of insurance
business, including portfolio transfers or corporate restructurings, pursuant to a court-approved scheme of arrangement under Section 25 of the
Bermuda Insurance Act or Section 99 of the Companies Act, (2) the amalgamation with or acquisition of another firm, (3) engaging in
unaffiliated, third-party business that is retail business, (4) the acquisition of a controlling interest in an undertaking that is engaged in non-
insurance business which offers services and products to persons who are not affiliates of the insurer, (5) outsourcing all or substantially all of
the company’s actuarial, risk management and compliance or internal audit functions, (6) outsourcing all or a material part of an insurer’s
underwriting activity, (7) the transfer other than by way of reinsurance of all or substantially all of a line of business, (8) the expansion into a
material new line of business, (9) the sale of an insurer and (10) outsourcing of an “officer” role, as such term is defined by the Bermuda
Insurance Act.
As a registered insurer, ALRe may not take any steps to give effect to such a material change unless it has first served notice on the BMA that it
intends to effect such material change and before the end of 30 days, either the BMA has notified ALRe in writing that it has no objection to
such change or that period has lapsed without the BMA having issued a notice of objection.
Before issuing a notice of objection, the BMA would be required to serve upon ALRe a preliminary written notice stating the BMA’s intention to
issue formal notice of objection. Upon receipt of the preliminary written notice, ALRe could, within 28 days, file written representations with
the BMA which the BMA would be required to take into account in making its final determination.
Supervision, Investigation and Intervention
The BMA may appoint an inspector with powers to investigate the affairs of an insurer if the BMA believes that an investigation is required in
the interests of the insurer’s policyholders or potential policyholders. In order to verify or supplement information otherwise provided to the
inspector, the BMA may direct an insurer to produce documents or information relating to matters connected with its business.
If it appears to the BMA that there is a risk of an insurer becoming insolvent, or that it is in breach of the Bermuda Insurance Act or any
conditions imposed upon its registration, the BMA may, among other things, direct the insurer (1) not to take on any new insurance business,
(2) not to vary any insurance contract if the effect would be to increase its liabilities, (3) not to make certain investments, (4) to realize certain
investments, (5) to maintain or transfer to the custody of a specified bank, certain assets, (6) not to declare or pay any dividends or other
distributions or to restrict the making of such payments, (7) to limit its premium income, (8) not to enter into any specified transaction with any
specified persons or persons of a specified class, (9) to provide such written particulars relating to the financial circumstances of the insurer as
the BMA thinks fit, (10) to obtain the opinion of an actuary loss reserve specialist and to submit it to the BMA, and (11) to remove a controller
or officer.
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Item 1. Business
Group Supervision
The BMA may, in respect of an insurance group, determine whether it is appropriate for it to act as its group supervisor. An insurance group is
defined as a group of companies that conducts exclusively, or mainly, insurance business. The BMA may make such determination where it
ascertains that (1) the group is headed by a “specified insurer” (that is to say, it is headed by either a Class 3A, Class 3B or Class 4 general
business insurer or a Class C, Class D or Class E long-term insurer or another class of insurer designated by order of the BMA); or (2) where the
insurance group is not headed by a “specified insurer,” where it is headed by a parent company which is incorporated in Bermuda or (3) where
the parent company of the group is not a Bermuda company, in circumstances where the BMA is satisfied that the insurance group is directed
and managed from Bermuda or the insurer with the largest balance sheet total is a specified insurer.
Where the BMA determines that it should act as the group supervisor, it shall designate a specified insurer that is a member of the insurance
group to be the designated insurer (Designated Insurer) and it shall give to the Designated Insurer and other competent authorities written notice
of its intention to act as group supervisor. Once the BMA has been designated as group supervisor, the Designated Insurer must ensure that an
approved group actuary is appointed to provide an opinion as to the adequacy of the insurance group’s insurance reserves as reported in its
group statutory financial returns.
Pursuant to its powers under the Bermuda Insurance Act, the BMA will maintain a register of particulars for every insurance group for which it
acts as the group supervisor detailing, among other things, the names and addresses of the Designated Insurer, each member company of the
insurance group falling within the scope of group supervision, the principal representative of the insurance group in Bermuda, other competent
authorities supervising other member companies of the insurance group, and the insurance group auditors. The Designated Insurer must notify
the BMA of any changes to the above details entered on the register of an insurance group.
As group supervisor, the BMA will perform a number of supervisory functions including (1) coordinating the gathering and dissemination of
information which is of importance for the supervisory task of other competent authorities, (2) carrying out a supervisory review and assessment
of the insurance group, (3) carrying out an assessment of the insurance group’s compliance with the rules on solvency, risk concentration, intra-
group transactions and good governance procedures, (4) planning and coordinating, with other competent authorities, supervisory activities in
respect of the insurance group, both as a going concern and in emergency situations, (5) coordinating any enforcement action that may need to
be taken against the insurance group or any of its members and (6) planning and coordinating meetings of colleges of supervisors (consisting of
insurance regulators) in order to facilitate the carrying out of the functions described above.
In carrying out its functions, the BMA may make rules for (1) assessing the financial situation and the solvency position of the insurance group
and/or its members and (2) regulating intra-group transactions, risk concentration, governance procedures, risk management and regulatory
reporting and disclosure.
The BMA has not yet designated any long-term life reinsurers, such as ALRe, for group supervision, accordingly, we are not currently subject to
group supervision. The BMA may, however, exercise its authority to act as our group supervisor in the future.
Disclosure of Information
In addition to powers under the Bermuda Insurance Act to investigate the affairs of an insurer, the BMA may require certain information from an
insurer (or certain other persons) to be produced to the BMA. Further, the BMA has been given powers to assist other regulatory authorities,
including foreign insurance regulatory authorities, with their investigations involving insurance and reinsurance companies in Bermuda but
subject to restrictions. For example, the BMA must be satisfied that the assistance being requested is in connection with the discharge of
regulatory responsibilities of the foreign regulatory authority. Further, the BMA must consider whether cooperation is in the public interest. The
grounds for disclosure are limited and the Bermuda Insurance Act provides for sanctions for breach of the statutory duty of confidentiality.
Certain Other Bermuda Law Considerations
All Bermuda “exempted companies” are exempt from certain Bermuda laws restricting the percentage of share capital that may be held by non-
Bermudians. However, exempted companies may not participate in certain business transactions, including (1) the acquisition or holding of land
in Bermuda except that which is required for their business and held by way of lease or tenancy for terms of not more than 50 years or, with the
consent of the Bermuda Minister of Finance, land which is used to provide accommodation or recreational facilities for officers and employees
for a term not exceeding 21 years, (2) the taking of mortgages on land in Bermuda to secure an amount in excess of $50,000 without the consent
of the Bermuda Minister of Finance, (3) the acquisition of any bonds or debentures secured by any land in Bermuda, other than certain types of
Bermuda government securities or securities issued by Bermuda public authorities or (4) the carrying on of business of any kind in Bermuda,
except in furtherance of the business carried on outside Bermuda or under license granted by the Bermuda Minister of Finance. Generally it is
not permitted without a special license granted by the Bermuda Minister of Finance to insure Bermuda domestic risks or risks of persons of, in
or based in Bermuda.
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Item 1. Business
Exchange Control
The permission of the BMA is required, pursuant to the provisions of the Exchange Control Act 1972 and related regulations, for all issuances
and transfers of shares (which includes the Class A common shares) of Bermuda companies to or from a non-resident of Bermuda for exchange
control purposes, other than in cases where the BMA has granted a general permission. The BMA, in its notice to the public dated June 1, 2005,
has granted a general permission for the issue and subsequent transfer of any securities of a Bermuda company from and/or to a non-resident of
Bermuda for exchange control purposes for so long as any “Equity Securities” of the company (which includes the Class A common shares) are
listed on an “Appointed Stock Exchange” (which includes the New York Stock Exchange (NYSE)). The BMA accepts no responsibility for our
financial soundness or the correctness of any of the statements made or opinions expressed in this report.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to
Sections 13(a) and 15(d) of the Exchange Act are made available, free of charge, on or through the “Investor Relations” portion of our website
www.athene.com. Information contained on our website is not part of, nor is it incorporated by reference in, this report or any of our periodic
reports. The public may read and copy any materials we have filed with the SEC at the SEC’s Public Reference Room located at 100 F Street,
NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 800-
SEC-0330. Reports filed with or furnished to the SEC will also be available as soon as reasonably practicable after they are filed with or
furnished to the SEC and are available at the SEC’s website at www.sec.gov.
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Item 1A. Risk Factors
Risks Relating to Our Business
Our business, financial condition, liquidity, results of operations and cash flows depend on the accuracy of our management’s assumptions
and estimates, and we could face significant losses if these assumptions and estimates differ significantly from actual results.
We make and rely on certain assumptions and estimates regarding many items, including interest rates, investment returns, expenses and
operating costs, tax assets and liabilities, business mix, surrender activity, mortality and contingent liabilities, related to our business and
anticipated results that affect amounts reported in our consolidated financial statements and notes thereto. We also use these assumptions and
estimates to make decisions crucial to our business operations, including establishing pricing, target returns and expense structures for our
insurance subsidiaries’ products, determining the amount of reserves we are required to hold for our policy liabilities, the price we will pay to
acquire or reinsure business, the hedging strategies to manage risks to our business and operations and the amount of regulatory and rating
agency capital that our insurance subsidiaries must hold to support their businesses. The factors influencing these business decisions cannot be
predicted with certainty and if our assumptions and estimates differ significantly from actual outcomes and results, our business, financial
condition, liquidity, results of operations and cash flows may be materially and adversely affected.
Insurance Products and Liabilities
Pricing of our annuity and other insurance products, whether issued by us or acquired through reinsurance or acquisitions, is based upon
assumptions about persistency. A factor which may affect persistency for some of our products is the value of guaranteed minimum benefits. An
increase in the value of guaranteed minimum benefits could result in our policies remaining in force longer than we have estimated, which could
adversely affect our results of operations. This could be caused by extended periods of poor equity market performance and/or low interest rates,
developments affecting customer perception and other factors outside our control. Alternatively, our persistency estimates could be negatively
affected during periods of rising equity markets or interest rates or by other factors outside our control, which could result in fewer policies
remaining in force than estimated. Therefore, our results will vary based on differences between actual and expected withdrawals from our
subsidiaries’ products.
Certain of our deferred annuity products also contain optional benefit riders, including guaranteed lifetime income or death benefits, that may be
exercised at certain points of time under the terms of a contract. We set prices for such products using assumptions about mortality, the rate of
election of deferred annuity living benefits and other optional benefits offered to our policyholders. The profitability of these products may be
lower than expected if actual policyholder utilization of these benefits varies adversely from our assumptions.
We license analytic software with actuarial modeling capabilities from third parties to facilitate the pricing of our products, make projections of
our in-force business for planning purposes and objectively assess the risks in our subsidiaries’ insurance and reinsurance asset and liability
portfolios. These actuarial models help us to measure and control risk accumulation, inform management and other stakeholders of capital
requirements and manage the risk/return profile and amount of capital required to cover the risks in each of our subsidiaries’ insurance and
reinsurance contracts and our overall portfolio of insurance and reinsurance contracts. However, given the inherent uncertainty of modeling
techniques and the application of such techniques, these models and databases may not accurately address the emergence of a variety of matters
which might impact certain of our subsidiaries’ products. Accordingly, these models may inaccurately predict the exposures that our subsidiaries
are assuming and our financial results may be adversely impacted, perhaps significantly.
If emerging or actual experience deviates from our assumptions regarding any of the above factors, such deviations could have a significant
effect on our reserve levels and our related results of operations and financial condition. For example, a significant portion of our in-force and
newly issued products contain riders that offer guaranteed lifetime income or death benefits. These riders expose us to mortality, longevity and
policyholder behavior risks. If actual utilization of certain rider benefits is adverse when compared to our estimates used in setting our reserves
for future policy benefits, these reserves may prove to be inadequate and we may be required to increase them. Conversely, if policies lapse at a
significantly higher rate than expected, we may need to accelerate the amortization of deferred acquisition costs (DAC), value of business
acquired (VOBA) and deferred sales inducement (DSI) balances. More generally, deviations from our pricing expectations could result in our
subsidiaries earning less of a spread between the investment income earned on our subsidiaries’ assets and the interest credited to such products
and other costs incurred in servicing the products, or may require our subsidiaries to make more payments under certain products than our
subsidiaries had projected. We have limited experience to date on policyholder behavior for our guaranteed minimum benefit products. As a
result, future experience could deviate significantly from our assumptions. Such acceleration of expense amortization, reduced spread or
increased payments could materially and adversely affect our financial condition, results of operations or cash flows.
Determination of Fair Value
As defined under GAAP, fair value is the price that would be received to sell an asset or paid to transfer a liability between market participants
in the principal market or in the most advantageous market when no principal market exists. Adjustments to transaction prices or quoted market
prices may be required in illiquid or disorderly markets in order to estimate fair value. Different valuation techniques may be appropriate under
the circumstances to determine the value that would be received to sell an asset or paid to transfer a liability in an orderly transaction. Market
participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not under duress. Nonperformance or
credit risk is considered in determining fair value. Considerable judgment may be required in interpreting market data used to develop the
estimates of fair value. Accordingly, estimates of fair value are not necessarily indicative of the amounts that could be realized in a current or
future market exchange.
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Item 1A. Risk Factors
For example, the valuation of investments involves considerable judgment, is subject to considerable variability and is revised as additional
information becomes available. As such, changes in, or deviations from, the assumptions used in such valuations can significantly affect our
financial statements. During periods of market disruption, including periods of rapidly changing credit spreads or illiquidity, if trading becomes
less frequent or market data becomes less observable, it has been and will likely continue to be difficult to value certain of our investments, such
as certain of our real-estate related investments, structured products and alternative investments. There may be certain asset classes in active
markets with significant observable data that could become illiquid in a difficult financial environment. Further, rapidly changing credit and
equity market conditions could materially impact the valuation of investments as reported within our financial statements, and the period-to-
period changes in value could vary significantly. Our ability to sell investments, or the price ultimately realized for investments, depends upon
the demand and liquidity in the market and increases the use of judgment in determining the estimated fair value of certain investments. Even if
our assumptions and valuations are accurate at the time that they are made, the same factors influencing our valuations of such investments
could cause the market value of these investments to decline, which could materially and adversely impact our financial condition, results of
operations or cash flows.
Additionally, we also use, and may in the future use, derivatives, including swaps, options, futures and forward contracts, and reinsurance
contracts to hedge risks such as current or future changes in the fair value of our assets and liabilities, current or future changes in cash flows,
changes in interest rates, equity markets and credit spreads, the occurrence of credit defaults, currency fluctuations and changes in mortality and
longevity. We use equity derivatives to hedge the liabilities associated with our FIAs. Our hedging strategies also rely on assumptions and
projections regarding our assets, liabilities (including with respect to the optional benefits offered as part of our products), general market factors
and the creditworthiness of our counterparties that may prove to be incorrect or inadequate. Accordingly, our hedging activities may not have the
desired beneficial impact on our financial condition or results of operations. Hedging strategies involve transaction and other costs, and if we
terminate any hedging arrangements, including reinsurance contracts, we may also be required to pay additional costs, such as transaction fees
or breakage costs. We may also incur losses on transactions after taking into account our hedging strategies, which may have a material and
adverse effect on our financial condition and cash flows.
Financial Statements and Results
The preparation of our consolidated financial statements and notes thereto in accordance with GAAP requires management to make various
estimates and assumptions that affect the reported amounts in our financial statements. These estimates include, but are not limited to, the fair
value of investments, impairment of investments and valuation allowances, the valuation of derivatives, including embedded derivatives, DAC,
DSI and VOBA, future policy benefit reserves, valuation allowances on deferred tax assets, and stock-based compensation. For example, the
calculations we use to estimate DAC, DSI and VOBA are necessarily complex and involve analyzing and interpreting large quantities of data.
The assumptions and estimates required for these calculations involve judgment and by their nature are imprecise and subject to changes and
revisions over time. Accordingly, our results may be adversely affected from time to time by actual results differing from assumptions, changes
in estimates and changes resulting from implementing more sophisticated administrative systems and procedures that facilitate the calculation of
more precise estimates. Any of these inaccuracies could require us, among other things, to accelerate the amortization of DAC, DSI and VOBA,
which would result in a charge to earnings, or in a restatement of our historical financial statements or other material adjustments to our
financial statements. Additionally, the potential for unforeseen developments, including changes in laws, may result in losses and loss expenses
materially different from the reserves initially established, which could also materially and adversely impact our business, financial condition,
results of operations and prospects.
BEAT Mitigating Actions
In light of the possibility of material additional tax cost to our U.S. subsidiaries and the lack of clear guidance regarding the appropriate method
by which to compute the BEAT, we are undertaking certain actions and exploring various alternatives intended to mitigate the potential effect of
the BEAT on our results of operations in the event it is determined that none of the amounts paid or accrued by ALRe to our U.S. subsidiaries
are taken into account in the calculation of “base erosion payments” or “base erosion tax benefit.” We have made estimates regarding the overall
tax rate we expect to experience as a result of undertaking such actions. The determination of each such figure, or range of figures, involves
numerous estimates and assumptions regarding the efficacy of such actions in bringing about the desired outcomes and the magnitude of such
outcomes to be experienced. To the extent that actual experience differs from the estimates and assumptions inherent in our projections, our
future overall tax rate may deviate materially from the estimates provided and our financial condition and results of operations may be
materially less favorable than are implied by the projections provided.
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Item 1A. Risk Factors
The amount of statutory capital that our insurance and reinsurance subsidiaries have, or that they are required to hold, can vary
significantly from time to time and is sensitive to a number of factors outside of our control.
Our U.S. insurance subsidiaries are subject to state regulations that provide for MCR based on RBC formulas for life insurance companies
relating to insurance, business, asset, interest rate and certain other risks. Similarly, ALRe is subject to MCR imposed by the BMA through its
ECR and MMS. The BSCR is based on the BMA’s Economic Balance Sheet (EBS) regulatory framework, which was granted equivalency to
Solvency II in March 2016.
In any particular year, our subsidiaries’ capital ratios and/or statutory surplus amounts may increase or decrease depending on a variety of
factors, most of which are outside of our control, including, but not limited to, the following:
•
•
•
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•
•
•
•
•
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•
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the amount of statutory income or losses generated by our insurance subsidiaries (which itself is sensitive to equity, credit, and real
estate market conditions);
the amount of additional capital our insurance subsidiaries must hold to support their business growth;
changes in reserve requirements applicable to our insurance subsidiaries;
changes in market value of certain securities in our investment portfolio;
recognition of write-downs or other losses on investments held in our investment portfolio;
changes in the credit ratings of investments held in our investment portfolio;
the value of certain derivative instruments;
changes in interest rates;
credit market volatility;
changes in policyholder behavior;
changes to the RBC formulas and interpretations of the NAIC instructions with respect to RBC calculation methodologies; and
changes to the ECR, BSCR, or TCL formulas and interpretations of the BMA’s instructions with respect to ECR, BSCR, or TCL
calculation methodologies.
The financial strength and credit ratings of our insurance subsidiaries are significantly influenced by their statutory surplus amounts and these
MCRs. NRSROs may also implement changes to their internal models, which differ from the RBC and BSCR capital models, that have the
effect of increasing or decreasing the amount of statutory capital our subsidiaries must hold in order to maintain their current ratings. Additional
statutory reserves may be required as the result of mandatory annual asset adequacy analysis, and rising or falling interest rates and widening
credit spreads could alter this cash flow testing analysis. In addition, NRSROs may downgrade the investments held in our portfolio, which
could result in impairments and therefore a reduction of the RBC ratios of our U.S. domiciled insurance subsidiaries or an increase in the ECR
of ALRe. Lower corporate tax rates may also impact capital and capital ratios such as RBC ratios, as lower tax rates reduce the value of deferred
tax assets and may lower the calculated RBC ratio. However, following the adoption of the recent tax changes, the NAIC and the rating agencies
have yet to promulgate changes to their capital models and factors.
To the extent that one of our insurance subsidiary’s solvency or capital ratios is deemed to be insufficient by one or more NRSROs, we may take
actions either to increase the capitalization of the insurer or to reduce the capitalization requirements. If we are unable to accomplish such
actions, NRSROs may view this as a reason for a ratings downgrade. If a subsidiary’s solvency or capital ratios reach certain minimum levels, it
could subject us to further examination or corrective action imposed by our insurance regulators, including limitations on our subsidiaries’
ability to write additional business, supervision by regulators, seizure or liquidation, each of which could materially and adversely affect our
business, financial condition, results of operations, cash flows and prospects.
The BMA released consultation papers in November 2016, March 2017 and November 2017 that propose further updates to certain aspects of
the EBS framework. The BMA is expected to release final guidance mid-2018 after reviewing industry trial run results of these changes. The
final rules are expected to take effect on January 1, 2019. If the final guidance, when completed and adopted, materially increases the ECR, it
could materially and adversely affect our BSCR ratio and, correspondingly, our capital in excess of BMA requirements.
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Item 1A. Risk Factors
Interest rate fluctuations could adversely affect our business, financial condition, liquidity, results of operations and cash flows.
Interest rate risk is a significant market risk for us. We define interest rate risk as the risk of an economic loss due to changes in interest rates.
This risk arises from our holdings in interest rate-sensitive assets and liabilities, primarily as a result of issuing or reinsuring fixed deferred and
immediate annuities and investing primarily in fixed income assets. As of December 31, 2017, reserves for fixed deferred and immediate
annuities net of reinsurance made up the substantial majority of our reserve liabilities. Substantial and sustained increases or decreases in market
interest rates can affect the profitability of our insurance products and the fair value of our investments. These fluctuations could materially and
adversely affect our business, financial condition, liquidity, results of operations and cash flows, including in the following respects:
•
•
•
•
•
•
•
Significant changes in interest rates expose us to the risk of not realizing anticipated spreads between overall net investment earned
rates and the crediting rates to our policyholders, which are a significant source of our adjusted operating income. We have the ability
to adjust crediting rates, including caps and participation rates for FIAs, on many of our annuity liabilities (subject to minimum
guaranteed values). However, we may not be able to adjust such rates in a timely manner or to the extent desired to adequately
respond to the effect that changes in interest rates may have on the returns on our investments. Many of our annuity products have
surrender and withdrawal penalty provisions designed to prevent early policyholder withdrawals in rising interest rate environments
and to help ensure targeted spreads are earned. However, competitive factors, including the need or desire to manage levels of
surrenders and withdrawals, may limit our ability to adjust or maintain crediting rates at levels necessary to avoid narrowing of
spreads under certain market conditions.
Changes in interest rates may also negatively affect the value of our assets and our ability to realize gains or avoid losses from the sale
of those assets, all of which also ultimately affect our earnings and/or capital. Significant volatility in interest rates may have a larger
adverse impact on certain assets in our investment portfolio which are highly structured or have limited liquidity, including our real
estate-related assets, structured products and alternative investments, which may not have active trading markets, making the
disposition of such assets difficult.
Changes in interest rates may also affect changes in prepayment rates on certain of the real estate-related assets, structured products
and alternative investments in which we invest. For instance, falling interest rates may accelerate the rate of prepayment on mortgage
loans, while rising interest rates may decrease such prepayments below the level of our expectations. At the same time, falling interest
rates may result in the lengthening of duration for our policies and liabilities due to the guaranteed minimum benefits contained in our
products, while rising interest rates could lead to increased policyholder withdrawals and a shortening of duration for our liabilities. In
either case, we could experience a mismatch in our assets and liabilities and potentially incur economic losses, which may have an
adverse effect on our financial condition, results of operations and cash flows.
During periods of declining interest rates or a prolonged period of low interest rates, life insurance and annuity products may be
relatively more attractive to consumers due to minimum guarantees that are mandated by law or by regulators at the time that we price
these products, resulting in a higher persistency than we anticipated, potentially resulting in greater claims costs on our guaranteed
minimum benefit riders than we expected and cash flow mismatches between our assets and liabilities. In addition, the surrender and
withdrawal penalties we impose on certain of our annuity products may further increase persistency during such periods. Certain
statutory capital and reserve requirements are based on formulas or models that consider interest rates, and an extended period of low
interest rates may increase the statutory capital we are required to hold and the amount of assets we must allocate to support statutory
reserves, which could decrease the spread income that we are able to earn from these products. This reduced spread could also force us
to accelerate amortization of DAC and/or VOBA, which would have an adverse effect on our financial condition and results of
operations.
Additionally, during periods of declining interest rates, we may have to reinvest the cash we receive as interest or return of principal
on our investments into lower-yielding high-grade instruments or seek lower-credit instruments in order to maintain comparable
returns, each of which could have a material and adverse effect on our financial condition and results of operations.
Certain securitized financial assets are accounted for based on expectations of future cash flows. To the extent the coupon on these
instruments or the underlying collateral is based on a reference rate (for example, LIBOR), we use the market observed forward curve
in our cash flow projections. As of December 31, 2017, we held $22.4 billion of securitized financial assets that have floating rate
coupons or adjustable rate collateral. To the extent interest rates are lower than we have projected, we will experience slower accretion
of discounts on these assets and will have a lower yield on our portfolio, which would adversely affect our financial condition and
results of operations.
An extended period of declining interest rates or a prolonged period of low interest rates may cause us to change our long-term view
of the interest rates that we can earn on our investments, causing us to change the long-term interest rate that we assume in our
evaluation of our insurance liabilities, reducing the attractiveness of our subsidiaries’ products.
46
(cid:3)
(cid:3)
(cid:3)
Item 1A. Risk Factors
•
•
In periods of rapidly increasing interest rates, withdrawals from and/or surrenders of annuity contracts may increase as policyholders
choose to seek higher investment returns elsewhere. Obtaining cash to satisfy these obligations may require our insurance subsidiaries
to liquidate fixed income investments at a time when market prices for those assets are depressed because of increases in interest rates.
This may result in realized investment losses. Regardless of whether we realize an investment loss, such cash payments would result
in a decrease in total invested assets and may decrease our levels of profitability or results of operations. Premature withdrawals or
unexpected surrenders may also cause us to accelerate amortization of DAC and/or VOBA, which would also adversely affect our
financial condition and results of operations.
An increase in market interest rates could also reduce the value of certain of our alternative investments held as collateral under
reinsurance agreements and create a need for ALRe to provide additional collateral to support the reserve requirements of our ceding
companies, thereby reducing our available capital and potentially creating a need for additional capital which may not be available to
us on favorable terms, or at all, when needed.
We operate in a highly competitive industry that includes a number of competitors, many of which are larger and more well-known than we
are, which could limit our ability to achieve our growth strategies and could materially and adversely affect our business, financial
condition, results of operations, cash flows and prospects.
We operate in highly competitive markets and compete with large and small industry participants. These companies compete for an increasing
pool of retirement assets, driven primarily by aging of the U.S. population and the reduction in, and concerns about the viability of, financial
safety nets historically provided by governments and employers. In each of our subsidiaries’ businesses we face intense competition, including
from U.S. and non-U.S. insurance and reinsurance companies, broker-dealers, financial advisors, asset managers and diversified financial
institutions, both for customers for our subsidiaries’ products and in the acquisition and block reinsurance markets. We compete based on a
number of factors including perceived financial strength, credit ratings, brand recognition, reputation, quality of service, performance of our
products, product features, scope of distribution and price. A decline in our competitive position as to one or more of these factors could
adversely affect our profitability. In addition, we may in the future sacrifice our competitive or market position in order to improve our short-
term profitability, particularly in the highly competitive retail markets, which may adversely affect our long-term growth and results of
operations. Alternatively, we may sacrifice short-term profitability to maintain market share and long-term growth.
In recent years, there has been substantial consolidation among companies in the financial services industry due to economic turmoil resulting in
increased competition from large, efficient, well-capitalized financial services firms. Many of our competitors are large and well-established and
some have greater market share or breadth of distribution, offer a broader range of products, services or features, assume a greater level of risk
while maintaining financial strength ratings or have higher financial strength, claims-paying or credit ratings than we do. Our competitors may
also have lower operating costs or return on capital requirements than we do which may allow them to price products, reinsurance arrangements
or acquisitions more competitively. The competitive pressures arising from consolidation could result in increased pressure on the pricing of
certain of our products and services, and could harm our ability to maintain or increase profitability. In addition, if our financial strength and
credit ratings remain lower than the ratings of certain of our competitors, we may experience increased surrenders and/or an inability to reach
sales targets, which may have a material and adverse effect on our growth, business, financial condition, results of operations, cash flows and
prospects.
A significant portion of our retail annuities are sold through a proprietary distribution network.
We distribute annuity products through independent producers affiliated with certain IMOs. A significant portion of our retail annuity production
results from sales of product in our BalancedChoice Annuity product series, which contains certain product features that are licensed from a
third-party actuarial firm. Only IMOs which are affiliated with the Annexus Group are permitted to distribute the BalancedChoice Annuity
product series. If we experienced a disruption in our relationship with the Annexus Group, it could have an adverse effect for a period of time on
our annuity sales of this product series.
We are subject to general economic conditions, including prevailing interest rates, levels of unemployment and financial and equity and
credit market performance, which may affect, among other things, our ability to sell our products, the fair value of our investments and
whether such investments become impaired and the surrender rate and profitability of our policies.
Factors such as equity prices, equity market volatility, interest rates, counterparty risks, availability of credit, inflation rates, economic
uncertainty, changes in laws or regulations (including laws relating to the financial markets generally or the taxation or regulation of the
insurance industry), trade barriers, commodity prices, currency exchange rates and controls and national and international political
circumstances (including governmental instability, wars, terrorist acts or security operations) can have a material impact on the value of our
investment portfolio and our subsidiaries’ ability to sell their products. Equity market volatility can negatively affect our revenues and
profitability in various ways, particularly as a result of guaranteed minimum withdrawal or surrender benefits in our products. The estimated
cost of providing guaranteed minimum withdrawal benefits incorporates various assumptions about the overall performance of equity markets
over certain time periods. Periods of significant and sustained downturns in equity markets, increased equity volatility or reduced interest rates
could result in an increase in the valuation of the future policy benefit or policyholder account balance liabilities associated with such products,
resulting in a reduction in our revenues and net income. The rate of amortization of DAC and VOBA costs relating to FIA products and the cost
of providing guaranteed minimum withdrawal or surrender benefits could also increase if equity market performance is worse than assumed,
which could have a material and adverse effect on our growth, business, financial condition, results of operations and cash flows.
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Item 1A. Risk Factors
Our investments are subject to market and credit risks that could diminish their value and these risks could be greater during periods of
extreme volatility or disruption in the financial and credit markets, which could adversely impact our business, financial condition, liquidity
and results of operations.
Our investments and derivative financial instruments are subject to risks of credit defaults and changes in market values. Periods of
macroeconomic weakness or recession, heightened volatility or disruption in the financial and credit markets could increase these risks,
potentially resulting in other than temporary impairment of assets in our investment portfolio. We are also subject to the risk that cash flows
resulting from payments on assets that serve as collateral underlying the structured products we own may differ from our expectations in timing
or size. In addition, many of our classes of investments, but in particular our alternative investments, may produce investment income that
fluctuates from period to period and is more variable than may be the case with other asset classes, such as corporate bonds. Any event reducing
the estimated fair value of these securities, other than on a temporary basis, could have a material and adverse effect on our business, results of
operations, financial condition and cash flows. If our investment manager, AAM, fails to react appropriately to difficult market, economic and
geopolitical conditions, our investment portfolio could incur material losses. Some of our investments are more vulnerable to these risks than
others, as described more fully below.
As of December 31, 2017, 81% of our total invested assets were invested in fixed maturity securities, equity securities, and short-term
investments, including our investments in investment grade and high-yield corporate bonds and structured products, which include RMBS and
CLOs. As of December 31, 2017, 48% of our total invested assets were invested in non-structured investment grade bonds, 3% in high-yield
non-structured securities, and 6% in structured securities (other than CMBS, RMBS and CLOs). Issuers or guarantors of such fixed income
securities may default on principal or interest payments they owe us, or the underlying collateral may default on such payments, causing an
adverse change in cash flows. An economic downturn affecting the issuers or underlying collateral of these securities, a ratings downgrade
affecting the issuers or guarantors of such securities, or similar trends and issues could cause the estimated fair value of our fixed income
securities portfolio and our earnings to decline and the default rates of the fixed income securities in our portfolio to increase.
As of December 31, 2017, 7% of our total invested assets were invested in senior and mezzanine tranches issued by CLOs and 0.2% were
invested in equity tranches issued by CLOs. As of December 31, 2017, 95% of our investments in CLOs were managed by Apollo and its
affiliates other than AAM. CLOs are a form of securitization where payments from multiple large business loans, generally below investment
grade, are pooled together and sold to different classes of owners in various tranches. Senior tranches of CLOs have some protection from credit
losses by more junior tranches while junior tranches often have higher yields than those of the collateral loans and receive higher coupons to
compensate for higher risk. CLOs thus provide investment opportunities with varying risk/return profiles and diversified exposure to multiple
borrowers. Control over the CLOs in which we invest is exercised through collateral managers, who may take actions that could adversely affect
our interests, and we may not have the right to direct collateral management. There may also be less information available to us regarding the
underlying debt instruments held by CLOs than if we had invested directly in the debt of the underlying companies. Additionally, as
subordinated interests, the estimated fair values of CLOs tend to be much more sensitive to adverse economic downturns and underlying
borrower defaults than those of more senior securities. For example, as the secondary market pricing of the loans underlying CLOs deteriorated
during the fourth quarter of 2008, it is our understanding that many investors were forced to raise cash by selling their interests in performing
loans which resulted in a forced deleveraging cycle of price declines, compulsory sales and further price declines. While loan prices have
recovered from the low levels experienced during the financial crisis, conditions in the large corporate leveraged loan market may deteriorate
again, which may cause pricing levels to decline. Furthermore, our investments in CLOs are also subject to liquidity risk as there is a limited
market for CLOs. Accordingly, we may suffer unrealized depreciation and could incur realized losses in connection with the sale of our CLO
interests, which could have a material adverse effect on our business, financial condition and results of operations.
We have a risk management framework in place to identify, assess and prioritize risks, including the market and credit risks to which our
investments are subject. As part of that framework, we test our investment portfolio based on various market scenarios. Under certain stressed
market scenarios, unrealized losses on our investment portfolio could lead to material reductions in its carrying value. Under some extreme
scenarios, total AHL shareholders’ equity could be negative for the period of time prior to any potential market recovery. See Item 7A.
Quantitative and Qualitative Disclosures About Market Risks.
A decline in fair value below the amortized cost of a security requires management to assess whether an other-than-temporary impairment
(OTTI) has occurred. The decision on whether to record an OTTI is determined in part by our assessment of the financial condition and
prospects of a particular issuer, projections of future cash flows and recoverability of the particular security as well as management’s assertion of
whether it is more likely than not that we will sell the particular security before recovery.
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Item 1A. Risk Factors
Our investments linked to real estate are subject to credit risk, market risk, servicing risk, loss from catastrophic events and other risks,
which could diminish the value that we obtain from such investments.
As of December 31, 2017, 25% of our invested assets were linked to real estate, including 16% fixed maturity and equity securities, such as
CMBS and RMBS, 8% commercial mortgage loans (CML) and RML, and 1% real estate held for investment. Defaults by third parties in the
payment or performance of their obligations underlying these assets could reduce our investment income and realized investment gains or result
in the recognition of investment losses. For example, the value of our real estate-related assets depends in part on the financial condition of the
borrowers, the value of the real properties underlying the mortgages and, for commercial properties, the financial condition of the tenants of the
properties underlying those mortgages, as well as general and specific economic trends affecting the overall default rate. An unexpectedly high
rate of default on mortgages held by a CMBS or RMBS may limit substantially the ability of the issuer of such security to make payments to
holders of such securities, reducing the value of those securities or rendering them worthless. The risk of such defaults is generally higher in the
case of mortgage securitizations that include “sub-prime” or “alt-A” mortgages. As of December 31, 2017, 29% of our holdings in assets linked
to real estate were invested in such “sub-prime” mortgages and “alt-A” mortgages. Changes in laws and other regulatory developments relating
to mortgage loans may impact the investments of our portfolio linked to real estate in the future. Additionally, cash flow variability arising from
an unexpected acceleration in mortgage prepayment behavior can be significant, and could cause a decline in the estimated fair value of certain
“interest only” securities or loans.
The CML we hold, and CML underlying the CMBS that we hold, face both default and delinquency risk. For CML that we hold directly, we
establish loan specific estimated impairments at each balance sheet date based on the excess carrying value of a loan over the present value of
expected future cash flows discounted at the loan’s original effective interest rate, the estimated fair value of the loan’s collateral if the loan is in
the process of foreclosure or otherwise collateral dependent, or the loan’s observable market price. We also establish valuation allowances for
loan losses when it is probable that a credit event has occurred and the amount of loss can be reasonably estimated. As of December 31, 2017,
our CML investments comprised 7% of our total invested assets, of which 0.01% were in the process of foreclosure. Legislative proposals that
would allow or require modifications to the terms of CML, an increase in the delinquency or default rate of our CML portfolio or geographic or
sector concentration within our CML portfolio could materially and adversely impact our financial condition and results of operations.
Our investments in RML and RMBS also present credit risk. Higher than expected rates of default or loss severities on our RML investments
and the RML underlying our RMBS investments may adversely affect the value of such investments. A significant number of the mortgages
underlying our RML and RMBS investments are concentrated in certain geographic areas. Certain markets within those areas experienced
significant decreases in home values during the financial crisis of 2007-2008 and the years thereafter. Any event that adversely affects the
economic or real estate market in any of these areas could have a disproportionately adverse effect on our RML and RMBS investments. While
we actively monitor our exposure to these and other risks inherent in this strategy, we cannot assure you that our hedging and risk management
strategies will be effective; any failure to manage these risks effectively could materially and adversely affect our results of operations and
financial condition. A rise in home prices, the concern over further introduction of or changes to government policies aimed at altering
prepayment behavior, and an increased availability of housing-related credit could combine to increase expected or actual prepayment speeds,
which would likely lower the valuations of RML and the valuations of RMBS that we carry at a premium to par prices or are structured as
interest only securities and inverse interest only securities. In general, any significant weakness in the broader macro economy or significant
problems in a particular real estate market may cause a decline in the value of residential properties securing the mortgages in that market,
thereby increasing the risk of delinquency, default and foreclosure. This could, in turn, have a material adverse effect on our credit loss
experience.
Control over the underlying assets in all of our real estate-related investments is exercised through a servicer that we do not control. If a servicer
is not vigilant in seeing that borrowers make their required periodic payments, borrowers may be less likely to make these payments, resulting in
a higher frequency of delinquency and default. If a servicer takes longer to liquidate non-performing mortgages, our losses related to those loans
may be higher than we expected. Any failure by a servicer to service RMLs in which we are invested in a prudent, commercially reasonable
manner or which underlie a RMBS in which we are invested could negatively impact the value of our investments in the related RML or RMBS.
Our investments in assets linked to real estate are also subject to loss in the event of catastrophic events, such as earthquakes, hurricanes, floods,
tornadoes and fires. We have significant concentrations of real estate investments and collateral underlying investments linked to real estate in
areas of the United States prone to catastrophe, including California, sections of the northeastern U.S., the South Atlantic states and the Gulf
Coast. While loss experience in the event of a catastrophic event is contingent upon many factors, including the insured status of the underlying
property and the seniority of our investment, in the case of structured securities, a catastrophic event impacting one or more of the
aforementioned regions may cause some portion of the invested assets invested in assets linked to real estate to become impaired, which may
have a material adverse impact on our financial condition and results of operations.
In addition to the credit and market risk that we face in relation to all of our real estate-related investments, certain of these investments may
expose us to various environmental, regulatory and other risks. For example, our investment in RML could result in claims being assessed
against us as a mortgage holder or property owner, including assignee liability, responsibility for tax payments, environmental hazards and other
liabilities, including liabilities under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980. We may
continue to be liable under such claims after foreclosing on a property securing a mortgage loan held by us. Additionally, we may be subject to
regulation by the CFPB as a mortgage holder or property owner. We are currently unable to predict the impact of such regulation on our
business. Any adverse environmental claim or regulatory action against us resulting from our investment in RML could adversely impact our
reputation, business, financial condition and results of operations.
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Item 1A. Risk Factors
Many of our invested assets are relatively illiquid and we may fail to realize profits from these assets for a considerable period of time, or
lose some or all of the principal amount we invest in these assets if we are required to sell our invested assets at a loss at inopportune times
to cover policyholder withdrawals or to meet our insurance, reinsurance or other obligations.
We offer certain products that allow policyholders to withdraw their funds under defined circumstances. In order to meet such obligations, we
seek to manage our liabilities and configure our investment portfolios to provide and maintain sufficient liquidity to support expected
withdrawal demands and contract benefits and maturities. However, in order to provide necessary long-term returns and to achieve our strategic
goals, a certain portion of our assets are relatively illiquid. Many of our investments are in securities that are not publicly traded or that
otherwise lack liquidity, such as our privately placed fixed maturity securities, below investment grade securities, investments in mortgage loans
and alternative investments.
We record our relatively illiquid types of investments at fair value. If we were forced to sell certain of our assets, there can be no assurance that
we would be able to sell them for the prices at which we have recorded them and we might be forced to sell them at significantly lower prices.
In many cases, we may be prohibited by contract or applicable securities laws from selling such securities for a period of time. When we hold a
security or position, it is vulnerable to price and value fluctuations and may experience losses if we are unable to timely sell, hedge or transfer
the position. Thus, it may be impossible or costly for us to liquidate positions rapidly in order to meet unexpected withdrawal or recapture
obligations. This potential mismatch between the liquidity of our assets and liabilities could have a material and adverse effect on our business,
financial condition, results of operations and cash flows.
Our investment portfolio may be subject to concentration risk, particularly with respect to single issuers, including MidCap and AmeriHome,
industries, including financial services, and asset classes, including real estate.
Concentration risk arises from exposure to significant asset defaults of a single issuer, industry or class of securities, based on economic
conditions, geography or as a result of adverse regulatory or court decisions. When an investor’s assets are concentrated and that particular asset
or class of assets experiences significant defaults, the default of such assets could threaten the investor’s financial condition. Our most
significant potential exposures to concentration risk are our investments in MidCap, a provider of revolving and term debt facilities to middle
market companies in North America and Europe, and in A-A Mortgage and its indirect investment in AmeriHome, a mortgage lender and
mortgage servicer. As of December 31, 2017, our exposure, including loaned amounts, to MidCap was $766 million, which represented 1% of
our total invested assets and 8% of total AHL shareholders’ equity. As of December 31, 2017, our exposure to A-A Mortgage was $496 million,
which represented less than 1% of our total invested assets and 5% of total AHL shareholders’ equity. To the extent that we suffer a significant
loss on our investment in MidCap or A-A Mortgage, our financial condition and results of operations could be adversely affected.
Our significant single issuer holdings, including MidCap and AmeriHome, are concentrated largely in the financial services industry and such
businesses’ activities largely focus upon providing financing to both individuals and entities. As a result, we have significant exposure to credit
risk, which may be adversely impacted by changes in macroeconomic conditions, regulation and other factors. To the extent that such changes
occur and cause a deterioration in the creditworthiness of the counterparties of these investees, we may suffer significant losses on our
investments in these entities and our financial condition and results of operations could be adversely affected. In addition to the concentration
risk arising from our investments in single issuers within the financial services industry, we have significant exposure to this industry as a result
of the composition of investments in our broader investment portfolio. As of December 31, 2017, 17% of our total invested assets were invested
in issuers within the financial services industry, excluding CLOs. Any macroeconomic, regulatory or other changes having an adverse impact on
the financial services industry more broadly, could have a material and adverse effect on our business, financial condition, results of operations
and cash flows.
As of December 31, 2017, 25% of our total invested assets were invested in real estate-related assets. Any significant decline in the value of real
estate generally or the occurrence of any of the risks described above with respect to our real estate-related investments could materially and
adversely affect our financial condition and results of operations.
Our investment portfolio may include investments in securities of issuers based outside the U.S., including emerging markets, which may be
riskier than securities of U.S. issuers.
We may invest in securities of issuers organized or based outside the U.S. that may involve heightened risks in comparison to the risks of
investing in U.S. securities, including unfavorable changes in currency rates and exchange control regulations, reduced and less reliable
information about issuers and markets, less stringent accounting standards, illiquidity of securities and markets, higher brokerage commissions,
transfer taxes and custody fees, local economic or political instability and greater market risk in general. In particular, investing in securities of
issuers located in emerging market countries involves additional risks, such as exposure to economic structures that are generally less diverse
and mature than, and to political systems that can be expected to have less stability than, those of developed countries, national policies that
restrict investment by foreigners in certain issuers or industries of that country, the absence of legal structures governing foreign investment and
private property and an increased risk of foreclosure on collateral located in such countries, a lack of liquidity due to the small size of markets
for securities of issuers located in emerging markets and price volatility.
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Item 1A. Risk Factors
As of December 31, 2017, 33% of the carrying value of our AFS fixed maturity securities, including related parties, was comprised of securities
of issuers based outside of the U.S. and debt securities of foreign governments. Of our total AFS fixed maturity securities, including related
parties as of December 31, 2017, 8% were invested in CLOs of Cayman Islands issuers (where underlying assets are largely loans to U.S.
issuers), 6% were invested in securities of non-U.S. issuers by our German Group Companies and 19% were invested in other non-U.S. issuers.
While we invest in securities of non-U.S. issuers, the currency denominations of such securities usually match the currency denominations of
the liabilities that the assets support. When the currency denominations of the assets and liabilities do not match, we generally undertake
hedging activities to eliminate or mitigate currency mismatch risk. See Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations–Consolidated Investment Portfolio for further information on international exposure.
Our growth strategy includes acquiring business through acquisitions of other insurance companies and reinsurance of insurance
obligations written by unaffiliated insurance companies, and our ability to consummate these acquisitions on economically advantageous
terms acceptable to us in the future is unknown.
We have grown and intend to grow our business in the future in part by acquisitions of other insurance companies and businesses, and through
block reinsurance, which could require additional capital, systems development and skilled personnel. We may experience challenges
identifying, financing, consummating and integrating such acquisitions and block reinsurance transactions. While we have reviewed various
opportunities and have successfully completed transactions in the past to facilitate our growth, competition exists in the market for profitable
blocks of insurance and businesses. Such competition is likely to intensify as insurance businesses become more attractive targets. It is also
possible that merger and acquisition transactions will become less frequent, which could also make it more difficult for us to implement our
growth strategy as we have done in the past. Thus, in the future, we may not be able to find suitable acquisition or block reinsurance
opportunities that are available at attractive valuations, if at all. Even if we do find suitable opportunities, we may not be able to consummate the
transactions on commercially acceptable terms. In addition, to the extent we determine to finance an acquisition or block reinsurance
transaction, suitable financing arrangements may not be available on acceptable terms, on a timely basis, or at all. Our acquisition and block
reinsurance transaction activities may also divert the attention of our management from our business, which may have an adverse effect on our
business and results of operations.
Occasionally we may acquire or seek to acquire an insurance company or business that writes traditional life insurance business or other
businesses that are not core to our business. In the past, except in limited circumstances, we have arranged for the sale or transfer, through
reinsurance or otherwise, of such business prior to or following our acquisitions to the extent that we did not want to retain these non-core
businesses. As we grow, the ability of our management to transfer or source sufficient reasonably priced reinsurance for traditional life insurance
or other non-core businesses that we may acquire and want to dispose of may be limited. As we acquire new businesses and write a larger
volume of business, it may be difficult to find buyers or reinsurers willing to assume increased risk, and added reinsurance may increase the
associated costs. Ultimately, we may not be able to find buyers or source adequate reinsurance at all. In the event that we were unable to find
buyers or purchase adequate reinsurance, we would have to accept an increase in our net risk exposures, revise our pricing to reflect higher
reinsurance premiums, or otherwise modify our acquisitions and product offerings, each of which could have an adverse effect on our business,
financial condition, results of operations and cash flows.
In furtherance of our strategy of growth through acquisitions, we routinely review and conduct investigations of potential acquisitions or block
reinsurance transactions, some of which may be material. When we believe a favorable opportunity exists, we seek to enter into discussions with
target companies or sellers regarding the possibility of such transactions. At any given time, we may be in discussions with one or more
counterparties. There can be no assurance that any such negotiations will lead to definitive agreements, or if such agreements are reached, that
any transactions would be consummated.
If we are unable to attract and retain IMOs and agents, sales of our products may be adversely affected.
We distribute our annuity products through a variable cost distribution network which currently includes approximately 65 IMOs and more than
34,000 independent agents. Insurance companies compete vigorously for productive and profitable agents. We must attract and retain such
marketers and agents to sell our products. We compete with other life insurance companies for marketers and agents primarily on the basis of
our financial position, support services, compensation and product features. Such marketers and agents may promote products offered by other
life insurance companies that may offer a larger variety of products than we do. Our competitiveness for such marketers and agents also depends
upon the long-term relationships we develop with them. There can be no assurance that such relationships will continue in the future. In
addition, our growth plans include increasing the distribution of annuity products through small and mid-size banks and regional broker-dealers.
If we are unable to attract and retain sufficient marketers and agents to sell our products or we are not successful in expanding our distribution
channels within the bank and broker-dealer markets, our ability to compete and our sales volumes and results of operations could be adversely
affected.
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Item 1A. Risk Factors
Repurchase agreement programs subject us to potential liquidity and other risks.
We may engage in repurchase agreement 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. These repurchase agreements
provide us with liquidity and in certain instances also allow us to earn spread income. Under such agreements we may be required to deliver
additional securities or cash as margin to the counterparty if the value of the securities sold decreases prior to the repurchase date. The cash
proceeds received by us under such repurchase agreements are typically invested in fixed income securities and may not be available to be
returned prior to the scheduled repurchase date, and it is possible that we will enter into other repurchase transactions and use cash proceeds
from such transactions to pay the repurchase prices on maturing repurchase transactions. Repurchase agreements, however, are generally not
committed arrangements, and market and other conditions on the repurchase date or at other times may limit our ability to enter into new
repurchase transactions or to enter into transactions on favorable terms. To the extent that we are not able to enter into new transactions or to
enter into sufficient new transactions, we may need to find other sources to pay the repurchase prices under these transactions, which may or
may not be available to us. Additionally, during difficult market situations, we may not be able to access funds under such repurchase
agreements, which may require us to sell securities on unfavorable terms in order to ensure short-term liquidity.
In some cases, the maturity of the securities purchased by us with the cash proceeds received in the repurchase transaction may exceed the term
of the related transaction and/or the market value of securities sold in such repurchase transactions may fall below stipulated margin
requirements in the applicable repurchase agreement. If we are required to return significant amounts of cash collateral or post cash or securities
as margin on short notice and we are forced to sell securities to meet such obligations, we may have difficulty doing so in a timely manner, may
be forced to sell securities in a volatile or illiquid market for less than they otherwise would have been able to realize under normal market
conditions, or both. In addition, under adverse capital market and economic conditions, liquidity may broadly deteriorate, which would further
restrict our ability to sell securities.
A financial strength rating downgrade, potential downgrade or any other negative action by a rating agency could make our product
offerings less attractive, inhibit our ability to acquire future business through acquisitions or reinsurance and increase our cost of capital,
which could have a material adverse effect on our business.
Various NRSROs review the financial performance and condition of insurers and reinsurers, including our subsidiaries, and publish their
financial strength ratings as indicators of an insurer’s ability to meet policyholder obligations. These ratings are important to maintaining public
confidence in our insurance subsidiaries’ products, our insurance subsidiaries’ ability to market their products and our competitive position.
Factors that could negatively influence this analysis include:
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changes to our business practices or organizational business plan in a manner that no longer supports our ratings;
unfavorable financial or market trends;
a need to increase reserves to support our outstanding insurance obligations;
our inability to retain our senior management and other key personnel;
rapid or excessive growth, especially through large reinsurance transactions or acquisitions, beyond the bounds of capital sufficiency
or management capabilities as judged by the NRSROs;
significant losses to our investment portfolio; and
changes in NRSROs’ capital adequacy assessment methodologies in a manner that would adversely affect the financial strength ratings
of our insurance subsidiaries.
Some other factors may also relate to circumstances outside of our control, such as views of the NRSRO and general economic conditions. Any
downgrade or other negative action by a NRSRO with respect to the financial strength ratings of our insurance subsidiaries, or an entity we
acquire, or our credit ratings, could materially adversely affect us and our ability to compete in many ways, including the following:
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reducing new sales of insurance products;
harming relationships with or perceptions of distributors, IMOs and sales agents;
increasing the number or amount of policy lapses or surrenders and withdrawals of funds, which may result in a mismatch of our
overall asset and liability position;
requiring us to offer higher crediting rates or greater policyholder guarantees on our insurance products in order to remain competitive;
increase our borrowing costs;
reducing our level of profitability and capital position generally or hindering our ability to raise new capital; or
requiring us to collateralize obligations under or result in early or unplanned termination of hedging agreements and harming our
ability to enter into new hedging agreements.
In order to improve or maintain their financial strength ratings, our subsidiaries may attempt to implement business strategies to improve their
capital ratios. We cannot guarantee any such measures will be successful. We cannot predict what actions NRSROs may take in the future, and
failure to improve or maintain current financial strength ratings could materially and adversely affect our business, financial condition, results of
operations and cash flows.
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Item 1A. Risk Factors
We are subject to significant operating and financial restrictions imposed by our credit agreement and we are also subject to certain
operating restrictions imposed by the indenture to which we are a party.
The credit agreement dated January 22, 2016, by and among AHL, ALRe and Athene USA, as borrowers, each lender from time to time party
thereto and Citibank, N.A., as administrative agent (Credit Facility) contains various restrictive covenants which limit, among other things,
AHL’s, ALRe’s and Athene USA’s ability, and in certain instances, some or all of their subsidiaries’ ability, to:
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incur additional indebtedness, make guarantees and enter into derivative arrangements;
create liens on our or such subsidiaries’ assets;
make fundamental changes;
engage in certain transactions with affiliates;
make changes in the nature of our business; and
pay dividends and distributions or repurchase our common shares.
These covenants, some of which are financial, may prevent or restrict us from capitalizing on business opportunities, including making
additional acquisitions or growing our business. In addition, if AHL undergoes a “change of control” as defined in the Credit Facility, the lenders
under the Credit Facility will have the right to terminate the facility and/or accelerate the maturity of all outstanding loans. As of December 31,
2017, AHL was in compliance with all covenants and no borrowings under the Credit Facility were outstanding. As a result of these restrictions
and their effects on us, we may be limited in how we conduct our business and may be unable to raise additional debt financing to compete
effectively or to take advantage of new business opportunities.
In addition to the covenants to which we are subject pursuant to our Credit Facility, AHL is also subject to certain limited covenants pursuant to
the Indenture, dated January 12, 2018, by and between us and U.S. Bank National Association, as trustee (Base Indenture), as supplemented by
the First Supplemental Indenture, dated as of January 12, 2018, by and among us and U.S. Bank National Association, as trustee (together with
the Base Indenture, Indenture). The Indenture was entered into in connection with AHL’s issuance of its 4.125% Senior Notes due 2028 and
contains restrictive covenants which limit, subject to certain exceptions, AHL’s and, in certain instances, some or all of its subsidiaries’ ability to
make fundamental changes, create liens on any capital stock of certain of AHL’s subsidiaries, and sell or dispose of the stock of certain of AHL’s
subsidiaries. These covenants may prevent or restrict takeovers or business combinations that our shareholders might consider in their best
interest.
The terms of any future indebtedness we may incur may contain additional restrictive covenants.
We are subject to the credit risk of our counterparties, including ceding companies who reinsure business to ALRe, reinsurers who assume
liabilities from our subsidiaries and derivative counterparties.
Our insurance subsidiaries may cede insurance and transfer related assets and certain liabilities to third-party insurance companies through
reinsurance. Under such reinsurance agreements, our insurance subsidiaries will be liable for losses on insurance risks if such reinsurers fail to
perform under their respective reinsurance agreements with our subsidiaries.
In connection with the acquisitions of our two largest U.S. insurance subsidiaries, we entered into reinsurance agreements with Protective and
Global Atlantic. As part of our acquisition of AADE, we effected a sale of substantially all of AADE’s life insurance business by reinsuring such
business to Protective. Similarly, in connection with our acquisition of Aviva USA, we effectuated a sale of substantially all of Aviva USA’s life
insurance business by reinsuring such business to Global Atlantic. Because these agreements involve reinsurance of entire business segments,
each covers a much larger volume of business than a traditional reinsurance agreement. Additionally, although certain of Protective’s financial
obligations under its reinsurance agreement with us are secured by assets placed in a trust for our benefit and Global Atlantic is obligated to
maintain assets in custody accounts for our benefit to support substantially all of its financial obligations under its reinsurance agreements with
us, as each of Protective and Global Atlantic are the only counterparties under each respective agreement, we face a heightened risk of default
with respect to those reinsurers in particular. In addition, we do not have a security interest in the assets in the custody accounts supporting the
Global Atlantic reinsurance agreements. Therefore, in the event of an insolvency of the Global Atlantic insurance company acting as reinsurer,
our claims would be subordinated to those of such insurance company’s policyholders and the assets in the relevant custody accounts may be
available to satisfy the claims of such insurance company’s general creditors in addition to us. As with any other reinsurance agreement, we
remain liable to our policyholders even if Protective or Global Atlantic fail to perform. Although each agreement provides that Protective and
Global Atlantic, respectively, agree to indemnify us for losses sustained in connection with their respective performances of each agreement,
such indemnification may not be adequate to compensate us for losses actually incurred in the event that Protective or Global Atlantic are either
unable or unwilling to perform according to the agreements’ terms. In addition to possible losses that could be incurred if our subsidiaries are
forced to recapture these blocks, such subsidiaries may also face a substantial shortfall in capital to support the recaptured business, possibly
resulting in material declines to the insurer’s RBC ratio and/or creditworthiness and potentially expose the insurer to ratings downgrades,
regulatory intervention, increased policyholder withdrawals or other negative effects.
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Item 1A. Risk Factors
Conversely, ALRe and certain of our U.S. insurance subsidiaries assume liabilities from other insurance companies. Changes in the ratings,
creditworthiness or market perception of such ceding companies or in the administration of policies reinsured to us could cause policyholders of
contracts reinsured to us to surrender or lapse their policies in unexpected amounts. In addition, to the extent such ceding companies do not
perform under their reinsurance agreements with us, we may not achieve the results we intended and could suffer unexpected losses. In either
case, we have exposure to our subsidiaries’ reinsurance counterparties which could materially adversely affect our business, financial condition,
results of operations and cash flows. In particular, should the $19 billion reinsurance transaction with Voya close, we will be subject to risks
associated with impairments in Voya’s financial strength and perceived financial strength, an impairment to either of which may result in the
surrender of policies earlier and in quantities greater than expected at the time the transaction was priced. In addition, Venerable, directly or
through VIAC, will administer the fixed annuity block being reinsured. To the extent that Venerable fails to perform under our reinsurance
agreement and associated arrangements, we may not achieve the return targets expected at the time the transaction was priced and our financial
position and results of operations may thereby or otherwise be adversely affected.
Finally, we are exposed to credit loss in the event of nonperformance by our counterparties on derivative agreements. We seek to further reduce
the risk associated with such agreements by entering into such agreements with large, well-established financial institutions. In addition, rules
recently adopted by the CFTC and the prudential regulators will require us and our swap dealer counterparties to collect and post initial and
variation margin with respect to non-cleared swaps. Any initial margin required to be posted to our swap dealer counterparties under these rules
will be segregated with a third-party custodian. However, there can be no assurance that we will not suffer losses in the event a counterparty or
custodian fails to perform or is subject to a bankruptcy or similar proceeding.
We rely significantly on third parties for investment services and certain other services related to our policies, and we may be held
responsible for obligations that arise from the acts or omissions of third parties under their respective agreements with us if they are deemed
to have acted on our behalf.
We rely significantly on various third parties to provide investment services to us as well as to sell, distribute and provide administrative services
for our subsidiaries’ policies. As such, our results may be affected by the performance of those parties. Additionally, our operations are
dependent on various service providers and on various technologies, some of which are provided or maintained by certain key outsourcing
partners and other parties.
Many of our subsidiaries’ products and services are sold through third-party intermediaries. In particular, our insurance businesses are reliant on
such intermediaries to describe and explain these products and services to potential customers, and although we take precautions to avoid this
result, such intermediaries may be deemed to have acted on our behalf. If that occurs, the intentional or unintentional misrepresentation of our
subsidiaries’ products and services in advertising materials or other external communications, or inappropriate activities by our personnel or an
intermediary could result in liability for us and have an adverse effect on our reputation and business prospects, as well as lead to potential
regulatory actions or litigation involving or against us. In addition, we rely on TPAs to administer a portion of our annuity contracts, as well as
our legacy life insurance business. We currently rely on these TPAs to administer a number of our policies. Some of our reinsurers also use TPAs
to administer business reinsured to them by us. To the extent any of these TPAs do not administer such business appropriately, we have and may
in the future experience customer complaints, regulatory intervention and other adverse impacts, which could affect our future growth and
profitability. If any of these TPAs or their employees are found to have made material misrepresentations to our policyholders, violated
applicable insurance, privacy or other laws and regulations or otherwise engaged in misconduct, we could be held liable for their actions, which
could adversely affect our reputation and business prospects, as well as lead to potential regulatory actions or litigation against us.
Our U.S. insurance subsidiaries have experienced increased service and administration complaints related to the conversion and administration
of the block of life insurance business acquired in connection with our acquisition of Aviva USA and reinsured to affiliates of Global Atlantic by
the TPA retained by such Global Atlantic affiliates to provide services on such policies, as well as on certain annuity policies that were on Aviva
USA’s legacy policy administration systems that were also converted to and are being administered by the same TPA. On April 5, 2017, we
received notification from the NYSDFS that it planned to undertake a market conduct examination of ALICNY for the period of January 1, 2012
through March 31, 2017 (NYSDFS Market Conduct Examination), and on May 31, 2017, we received notification from the Texas Department
of Insurance that it intended to undertake an enforcement proceeding, in each case, relating to the treatment of policyholders subject to our
reinsurance agreements with affiliates of Global Atlantic and the conversion of such annuity policies, including the administration of such
blocks by such TPA. On November 15, 2017, we received notification from the NYSDFS that its examination of ALICNY had resulted in the
identification of a significant number of asserted violations of New York insurance law associated with the life block reinsured to affiliates of
Global Atlantic, who have also been overseeing policyholder administration and the TPA servicing the policies in the block, with a significant
number of such violations not subject to dispute by the relevant affiliates of Global Atlantic or by us. On January 30, 2018, we received a draft
report regarding the NYSDFS Market Conduct Examination from the NYSDFS, which identified in more detail the violations asserted in the
November 15, 2017 letter as well as certain other violations. We and Global Atlantic are currently in discussions with the NYSDFS to resolve
this matter, but there is no assurance that we will be able to resolve this matter in a manner favorable to us. In addition to the foregoing, we have
received inquiries, and expect to continue to receive inquiries, from other regulatory authorities regarding the conversion matter. It is possible
that other jurisdictions may pursue similar formal examinations, inquiries or enforcement proceedings and that any examinations, inquiries and/
or enforcement proceedings may result in fines, administrative penalties and payments to policyholders. We are not currently able to estimate the
amount of any such fines, penalties or payments arising from these matters with reasonable certainty, but it is possible that such amounts may be
material.
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Item 1A. Risk Factors
Additionally, past or future misconduct by agents that distribute our subsidiaries’ products or employees of our vendors could result in violations
of law by us, regulatory sanctions and/or serious reputational or financial harm and the precautions we take to prevent and detect this activity
may not be effective in all cases. Although we employ controls and procedures designed to monitor associates’ business decisions and to prevent
us from taking excessive or inappropriate risks, associates may take such risks regardless of such controls and procedures. In addition, annuity
sales to seniors have been the subject of increased scrutiny by FINRA and state insurance regulators, and have been the source of industry
litigation in situations where annuity sales have allegedly been unsuitable for the financial needs of seniors.
Our distribution partners are subject to the interim requirements of the fiduciary rule. See Item 1. Business–Regulation–United States–ERISA for
further discussion regarding the fiduciary rule. We are assisting our distribution partners with such requirements.
The fiduciary rule’s obligations for distributors of products to retirement accounts may result in additional compliance costs to us, regulatory
scrutiny and litigation, as well as reduced product sales. Since the fiduciary rule is in the process of being implemented, we are not able to assess
the actual impact that such regulations may have on us and our associates. If the fiduciary rule is fully implemented in its current form, our
results of operations and financial condition may be negatively impacted as we implement the fiduciary rule’s numerous requirements.
Foreign currency fluctuations may reduce our net income and our capital levels, adversely affecting our financial condition.
We are exposed to foreign currency exchange rate risk through the investments in our investment portfolio that are denominated in currencies
other than the U.S. dollar or are issued by entities which primarily conduct their business outside of the U.S. We may employ various strategies
(including hedging) to manage our exposure to foreign currency exchange risk. To the extent that these exposures are not fully hedged or the
hedges are ineffective, our results or equity may be reduced by fluctuations in foreign currency exchange rates that could materially adversely
affect our financial condition and results of operations.
Our business in Bermuda could be adversely affected by Bermuda employment restrictions.
As of December 31, 2017, we employed 24 non-Bermudians in our Bermuda office (other than spouses of Bermudians, holders of permanent
residents’ certificates, and holders of working residents’ certificates). We may hire additional non-Bermudians as our business grows. Under
Bermuda law, non-Bermudians (other than spouses of Bermudians, holders of permanent residents’ certificates, and holders of working
residents’ certificates) generally may not engage in any gainful occupation in Bermuda without a valid government work permit (with certain
exceptions). A work permit is generally granted or renewed upon showing that, after proper public advertisement, no Bermudian, spouse of a
Bermudian, or holder of a permanent resident’s or working resident’s certificate who meets the minimum standards reasonably required by the
employer has applied for the job. Work permit terms that are available for request range from three months to five years. We may not be able to
use the services of one or more of our non-Bermudian employees if we are not able to obtain work permits for them, which could have a
material adverse effect on our business, financial condition and results of operations.
Interruption or other operational failures in telecommunications, information technology and other operational systems or a failure to
maintain the security, integrity, confidentiality or privacy of sensitive data residing on those systems, including as a result of human error,
could have a material adverse effect on our business.
We are highly dependent on automated and information technology systems to record and process our internal transactions and transactions
involving our customers, as well as to calculate reserves, value our investment portfolio and complete certain other components of our financial
statements. We could experience a failure of one of these systems, our employees or agents could fail to monitor and implement enhancements
or other modifications to a system in a timely and effective manner or our employees or agents could fail to complete all necessary data
reconciliation or other conversion controls when implementing a new software system or modifications to an existing system. Additionally,
anyone who is able to circumvent our security measures and penetrate our information technology systems could access, view, misappropriate,
alter or delete information in the systems, including personally identifiable customer information and proprietary business information.
Information security risks also exist with respect to the use of portable electronic devices, such as laptops, which are particularly vulnerable to
loss and theft.
We believe that we have established and implemented appropriate security measures, controls and procedures to safeguard our information
technology systems and to prevent unauthorized access to such systems and any data processed or stored in such systems, and we periodically
evaluate and test the adequacy of such systems, controls and procedures. In addition, we have established a business continuity plan which is
designed to ensure that we are able to maintain all aspects of our key business processes functioning in the midst of certain disruptive events,
including any disruptions to or breaches of our information technology systems. Despite the implementation of security and back-up measures,
our information technology systems may be vulnerable to physical or electronic intrusions, viruses or other attacks, programming errors and
similar disruptions. We may also be subject to disruptions of any of these systems arising from events that are wholly or partially beyond our
control (for example, natural disasters, acts of terrorism, epidemics, computer viruses and electrical or telecommunications outages). All of these
risks are also applicable where we rely on outside vendors to provide services to us and/or our customers. The failure of any one of these
systems for any reason, or errors made by our employees or agents, could in each case cause significant interruptions to our operations, which
could harm our reputation, adversely affect our internal control over financial reporting or have a material adverse effect on our business,
financial condition and results of operations.
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Item 1A. Risk Factors
We retain confidential information in our information technology systems and those of our business partners, and we rely on industry standard
commercial technologies to maintain the security of those systems. Despite our implementation of network security measures, our servers could
be subject to physical and electronic intrusions, and similar disruptions from unauthorized tampering with our computer systems. While we
perform penetration tests and have adopted a number of measures to protect the security of customer and company data, and to our knowledge
have not experienced a successful cyber attack that has resulted in any material compromise in the security of our information technology
systems, there is no guarantee that such an attack will not occur or be successful in the future.
In addition, an increasing number of jurisdictions require that customers be notified if a security breach results in the disclosure of personally
identifiable customer information. Any compromise of the security of our information technology systems that results in inappropriate
disclosure or use of personally identifiable customer information could damage the reputation of our brand in the marketplace, deter purchases
of our products, subject us to heightened regulatory scrutiny or significant civil and criminal liability and require us to incur significant
technical, legal and other expenses.
Even in the absence of a compromise in the security of our information technology systems, inappropriate disclosure or use of personally
identifiable customer information may occur in the event of a compromise in the security of the information technology systems of our third-
party advisors or business partners with whom we share such data. Any such inappropriate disclosure or use could likewise damage the
reputation of our brand in the marketplace, deter purchases of our products, subject us to heightened regulatory scrutiny or significant civil and
criminal liability and require us to incur significant technical, legal and other expenses.
We may be the target or subject of, and may be required to defend against or respond to, litigation (including class action litigation),
enforcement investigations or regulatory scrutiny.
We, like other financial services companies, are involved in litigation and arbitration in the ordinary course of business. More generally, we
operate in an industry in which various practices are subject to regulatory scrutiny and potential litigation, including class actions and
enforcement investigations. Plaintiffs may seek large or indeterminate amounts of damages, including compensatory, liquidated, treble and/or
punitive damages. In addition, we sell our products through third parties, including IMOs, whose activities may be difficult to monitor. Civil
jury verdicts have been returned against insurers and other financial services companies involving sales, underwriting practices, product design,
product disclosure, administration, denial or delay of benefits, charging excessive or impermissible fees, recommending unsuitable products to
customers, breaching fiduciary or other duties to customers, refund or claims practices, alleged agent misconduct, failure to properly supervise
representatives, relationships with agents or other persons with whom the insurer does business, payment of sales or other contingent
commissions and other matters. Such lawsuits can result in substantial judgments that are disproportionate to actual damages, including material
amounts of punitive or non-economic compensatory damages. In some states, juries, judges and arbitrators have substantial discretion in
awarding punitive, or non-economic, compensatory damages, which creates the potential for unpredictable material adverse judgments or
awards in any given lawsuit or arbitration. Arbitration awards are subject to very limited appellate review. In addition, in some class action and
other lawsuits, financial services companies have made material settlement payments. Given the large or indeterminate amounts sometimes
sought, and the inherent unpredictability of litigation, it is also possible that in certain cases an ultimate unfavorable resolution of one or more
pending litigation matters could have a material and adverse effect on our financial condition. See Item 3. Legal Proceedings.
Certain of our investments in RMBS securities may experience a decline in value if trustees are permitted to withhold funds to meet expenses
and/or claims incurred in connection with litigation against such trustees
In June 2017, Wells Fargo, National Association (Wells Fargo), as trustee of certain pre-crisis residential mortgage-backed securities (Legacy
RMBS) transactions, notified certificateholders that it withheld a portion of the funds received during related clean-up calls to meet litigation
expenses (both incurred and anticipated) and/or claims in connection with Blackrock, et al. v. Wells Fargo (Blackrock Litigation). The Blackrock
Litigation is one of a series of cases various parties have brought against trustees of Legacy RMBS transactions for the alleged failure of such
trustees to perform their respective duties and obligations under the related transaction documents.
In July 2017, various funds managed by Pacific Investment Management Company, LLC (collectively, PIMCO) brought a declaratory judgment
action in the Supreme Court of New York against Wells Fargo seeking to prevent Wells Fargo from paying any portion of the defense costs of
the Blackrock Litigation from the trusts at issue in the litigation, and claiming that Wells Fargo, as trustee, breached certain duties to investors.
In September 2017, Wells Fargo filed a motion to dismiss the claims brought by PIMCO and in November 2017, the motion was granted in its
entirety. In January 2018, PIMCO filed its notice to appeal that decision.
Following the PIMCO action, Royal Park Investments SA/NV (Royal Park) similarly brought purported class actions in the Southern District of
New York seeking damages, and declaratory and injunctive relief against Deutsche Bank National Trust Company (Deutsche Bank) and U.S.
Bank National Association (U.S. Bank), as trustees of certain Legacy RMBS transactions. Royal Park asserted that Deutsche Bank and U.S.
Bank were not entitled to pay any portion of the defense costs from trusts at issue in Royal Park’s underlying litigations against these trustees for
alleged breaches of certain duties to investors. Deutsche Bank’s motion to dismiss Royal Park’s most recent action is fully briefed, but the court
has not ruled on a request for oral argument or on the merits of the motion to dismiss. Royal Park’s most recent action against U.S. Bank has
been consolidated with the underlying litigation, and U.S. Bank has indicated it intends to seek dismissal of Royal Park’s complaint or,
alternatively, a stay of the complaint until the resolution of the underlying litigation.
We hold a substantial Legacy RMBS portfolio, the ratings, yield and value of which could be adversely affected if any of these or other Legacy
RMBS trustees are able to set aside or use trust funds for indemnification and defense costs related to the underlying trustee litigations.
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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 and may further affect our ability to issue funding agreements bearing a floating rate of interest.
Regulators and law enforcement agencies in the UK and elsewhere are conducting civil and criminal investigations into whether the banks that
contribute to the British Bankers’ Association (BBA) in connection with the calculation of daily LIBOR may have been under-reporting or
otherwise manipulating or attempting to manipulate LIBOR. A number of BBA member banks have entered into settlements with their
regulators and law enforcement agencies with respect to this alleged manipulation of LIBOR.
Actions by the BBA, regulators or law enforcement agencies may result in changes to the manner in which LIBOR is determined or the
establishment of alternative reference rates. For example, on July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to
stop persuading or compelling banks to submit LIBOR rates after 2021. At this time, it is not possible to predict the effect of any such changes,
any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted in the UK or elsewhere. Uncertainty as to
the nature of such potential changes, alternative reference rates or other reforms may adversely affect the trading market for LIBOR-based
securities, including those held in our investment portfolio and may further adversely affect our ability to issue funding agreements bearing a
floating rate of interest. As of December 31, 2017, 28% of our invested assets were floating rate investments, some of which were referenced to
LIBOR.
Risks Relating to Our Investment Manager
We rely on our investment management agreements with AAM for the management of our investment portfolio. AAM may terminate these
arrangements at any time, and there are limitations on our ability to terminate such arrangements, which may adversely affect our
investment results.
We rely on AAM to provide us with investment management services pursuant to various investment management agreements (IMAs). AAM
relies in part on its ability to attract and retain key people, and the loss of services of one or more of the members of AAM’s senior management
could delay or prevent AAM from fully implementing our investment strategy.
IMA Termination Rights
Our bye-laws currently provide that we may not, and will cause our subsidiaries not to, terminate any IMA among us or any of our subsidiaries,
on the one hand, and AAM, on the other hand, before October 31, 2018 (or any anniversary thereafter) (each such date, an IMA Termination
Election Date) and any termination on an IMA Termination Election Date requires (i) the approval of two-thirds of our Independent Directors
(as defined below) and (ii) written notice to AAM of such termination at least 30 days’ prior to an IMA Termination Election Date. If our
Independent Directors make any such election to terminate and notice of such termination is delivered, the termination will be effective on the
second anniversary of the applicable IMA Termination Election Date (IMA Termination Effective Date). Notwithstanding the foregoing, (A) our
Independent Directors may only elect to terminate an IMA on an IMA Termination Election Date if two-thirds of our Independent Directors
determine, in their sole discretion and acting in good faith, that either (i) there has been unsatisfactory long-term performance materially
detrimental to us by AAM, or (ii) the fees being charged by AAM are unfair and excessive compared to a comparable asset manager (provided,
that in either case such Independent Directors must deliver notice of any such determination to AAM and AAM will have until the applicable
IMA Termination Effective Date to address such concerns, and provided, further, that in the case of such a determination that the fees being
charged by AAM are unfair and excessive, AAM has the right to lower its fees to match the fees of such comparable asset manager) and (B)
upon the determination by two-thirds of our Independent Directors, we or our subsidiaries may also terminate an IMA with AAM as a result of
either (i) a material violation of law relating to AAM’s investment management business, or (ii) AAM’s gross negligence, willful misconduct or
reckless disregard of AAM’s obligations under the relevant agreement, and in either case the delivery of written notice at least 30 days’ prior to
such termination and such termination will be effective at the end of such 30-day period (the events described in the foregoing clauses (A) and
(B)(cid:3)are referred to in more detail in our bye-laws as “AHL Cause”). For purposes of these provisions of the bye-laws, an “Independent Director”(cid:3)
cannot be (x) an officer or employee of ours or any of our subsidiaries or (y) an officer or employee of (1) any member of the Apollo Group(cid:3)
described in clauses (i) through (iv) of the definition of “Apollo Group” as set forth in our bye-laws or (2) AGM or any of its subsidiaries
(excluding any subsidiary that constitutes any portfolio company (or investment) of (A) an investment fund or other investment vehicle whose(cid:3)
general partner, managing member or similar governing person is owned, directly or indirectly, by AGM or by one or more of its subsidiaries or(cid:3)
(B)(cid:3)a managed account agreement (or similar arrangement) whereby AGM or one or more of its subsidiaries serves as general partner, managing(cid:3)
member or in a similar governing position).
Our organizational documents give our Independent Directors complete discretion, while acting in good faith, as to whether to determine if an
AHL Cause event has occurred with respect to any IMA with AAM, and therefore our Independent Directors are under no obligation to make,
and therefore may exercise their discretion never to make, such a determination.
The boards of directors of AHL’s subsidiaries may terminate an IMA with AAM relating to the applicable subsidiary if such subsidiary’s board
of directors determines that such termination is required in the exercise of its fiduciary duties. If our subsidiaries do elect to terminate any such
agreement, other than as provided above, we may be in breach of our bye-laws, which could subject us to regulatory scrutiny, expose us to
shareholder lawsuits and could have a negative effect on our financial condition and results of operations.
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Item 1A. Risk Factors
Investment Management Fees
Further, except in limited circumstances, we currently pay AAM 0.40% per year on assets managed up to $65.8 billion and 0.30% per year on
assets managed in excess of such amount. We pay additional fees to Apollo and its affiliates for providing sub-advisory services and acting as
manager of investment funds in which we invest. Any such fees may be higher than what other investment managers may be willing to charge us
currently for investment services. Because of the services and the unique acquisition opportunities provided by AAM and Apollo that we are
able to access that many other companies cannot access, we do not currently expect our board of directors or our Independent Directors would
elect to terminate any IMA. These limitations on our ability to terminate the IMAs with AAM could have a negative effect on our financial
condition and results of operations.
Termination by AAM
Conversely, we may be adversely affected if AAM elects to terminate an IMA at a time when such agreement remains advantageous to us. We
depend upon AAM to implement our investment strategy. However, AAM does not face the restrictions described above with regards to its
ability to terminate any of its agreements with us and may terminate such agreements at any time. If AAM chooses to terminate such
agreements, there is no assurance that we could find a suitable replacement or that certain of the opportunities made available to us as a result of
our relationship with AAM and Apollo would be offered by a suitable replacement, and therefore our results of operations and financial
condition could be adversely impacted by our failure to retain a satisfactory investment manager.
Interruption or other operational failures in telecommunications, information technology and other operational systems at AAM or a failure
to maintain the security, integrity, confidentiality or privacy of sensitive data residing on AAM’s systems, including as a result of human
error, could have a material adverse effect on our business.
We are highly dependent on AAM, as our investment manager, to maintain information technology and other operational systems to record and
process its transactions with respect to our investment portfolio, which includes providing information that enables us to value our investment
portfolio and may affect our financial statements. AAM could experience a failure of one of these systems, its employees or agents could fail to
monitor and implement enhancements or other modifications to a system in a timely and effective manner or its employees or agents could fail
to complete all necessary data reconciliation or other conversion controls when implementing a new software system or modifications to an
existing system. Additionally, anyone who is able to circumvent AAM’s security measures and penetrate its information technology systems
could access, view, misappropriate, alter or delete information in the systems, including proprietary information relating to our investment
portfolio. The maintenance and implementation of these systems at AAM is not within our control. Should AAM’s systems fail to accurately
record information pertaining to our investment portfolio, we may inadvertently include inaccurate information in our financial statements and
experience a lapse in our internal control over financial reporting. The failure of any one of these systems at AAM for any reason, or errors made
by its employees or agents, could cause significant interruptions to its operations, which could adversely affect our internal control over
financial reporting or have a material adverse effect on our business, financial condition and results of operations.
The historical performance of AAM should not be considered as indicative of the future results of our investment portfolio, our future
results or any returns expected on our common shares.
Our investment portfolio’s returns have benefited historically from investment opportunities and general market conditions that currently may
not exist and may not repeat themselves, and there can be no assurance AAM will be able to avail itself of profitable investment opportunities in
the future. Furthermore, the historical returns of our investments managed by AAM are not directly linked to returns on our common shares,
which are affected by various factors, one of which is the value of our investment portfolio. In addition, AAM is compensated based solely on
our assets it manages, rather than by investment return targets. Accordingly, there can be no guarantee AAM will be able to achieve any
particular return for our investment portfolio in the future.
Increased regulation or scrutiny of alternative investment advisers and certain trading methods may affect AAM’s ability to manage our
investment portfolio or affect our business reputation.
The regulatory environment for investment managers is evolving, and changes in the regulation of investment managers may adversely affect
the ability of AAM to effect transactions that use leverage or to pursue their strategies in managing our investment portfolio. In addition, the
securities and futures markets are subject to comprehensive statutes, regulations and margin requirements. The SEC, other regulators and self-
regulatory organizations and exchanges are authorized to take extraordinary actions in the event of market emergencies. Due to our reliance on
AAM to manage our investment portfolio, any regulatory action or enforcement against AAM could have an adverse effect on our financial
condition. Additionally, the regulation of derivatives transactions is an evolving area of law and is subject to modification by government and
judicial action. Any future regulatory change could have a significant negative impact on our financial condition and results of operations.
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Item 1A. Risk Factors
Risks Relating to Insurance and Other Regulatory Matters
Our industry is highly regulated and we are subject to significant legal restrictions, regulations and regulatory oversight in connection with
the operations of our business, including the discretion of various governmental entities in applying such restrictions and regulations. These
restrictions may have a material adverse effect on our business, financial condition, liquidity, results of operations, cash flows and prospects.
U.S. Laws and Regulations
Our U.S. subsidiaries’ insurance, annuity, retirement and investment products are subject to a complex and extensive array of laws and
regulations that are administered and enforced by state insurance regulators, state securities administrators, state banking authorities, the SEC,
FINRA, the DOL, the IRS and the Office of the Comptroller of the Currency. See Item 1. Business–Regulation–United States for a summary of
certain of the U.S. state and federal laws and regulations applicable to our business. Failure to comply with these laws and regulations could
subject us to administrative penalties imposed by a particular governmental or self-regulatory authority, unanticipated costs associated with
remedying such failure or other claims, harm to our reputation, interruption of our operations or an adverse impact on our financial position or
results of operations.
We may be subject to regulation by the DOL when providing a variety of products and services to employee benefit plans governed by ERISA.
Severe penalties are imposed for breach of duties under ERISA. In addition, we will be subject to regulation by the DOL with respect to
recommendations involving an IRA.
In addition to the foregoing risks, the financial services industry is the focus of increased regulatory scrutiny as various state and federal
governmental agencies and self-regulatory organizations conduct inquiries and investigations into the products and practices of the financial
services industries. The 2008 economic crisis has changed the way the financial services industry is regulated. Governmental authorities in the
United States and worldwide have become increasingly interested in potential risks posed by the insurance industry as a whole, and to
commercial and financial systems in general. Among the proposals that are presently being considered is the possible introduction of global
regulatory standards for the amount of capital that insurance groups must maintain across the group. While we cannot predict the exact nature,
timing or scope of possible governmental initiatives, there may be increased regulatory intervention in the insurance and financial services
industry in the future.
Bermuda Laws and Regulations
Because we are a Bermuda company, we are subject to changes in Bermuda law and regulation that may have an adverse impact on our
operations, including through the imposition of tax liability or increased regulatory supervision. As a holding company, AHL is not subject to the
laws of Bermuda governing insurance companies; however, ALRe is registered in Bermuda under the Bermuda Insurance Act as a Class E
insurer and is subject to the Bermuda Insurance Act and the rules and regulations promulgated thereunder. See Item 1. Business–Regulation–
Bermuda for a summary of certain of the Bermuda laws and regulations applicable to our business. Failure to comply with these laws and
regulations could subject us to monetary penalties imposed by the BMA, unanticipated costs associated with remedying such failure or other
claims, harm to our reputation, interruption of our operations or an adverse impact on our financial position or results of operations.
Our failure to obtain or maintain approval of insurance regulators and other regulatory authorities as required for the operations of our
insurance subsidiaries may have a material adverse effect on our business, financial condition, results of operations, liquidity and prospects.
U.S. state regulators retain the authority to license insurers in their states and an insurer generally may not operate in a state in which it is not
licensed. We have U.S. domiciled insurance subsidiaries that are currently licensed to do business in all 50 states and the District of Columbia.
Our ability to retain these licenses depends on our and our subsidiaries’ ability to meet requirements established by the NAIC and adopted by
each state such as RBC standards and surplus requirements.
Some of the factors influencing these licensing requirements, particularly factors such as changes in equity market levels, the value of certain
derivative instruments that do not receive hedge accounting, the value and credit ratings of certain fixed-income and equity securities in our
investment portfolio, interest rate changes and changes to the RBC formulas and the interpretation of the NAIC’s instructions with respect to
RBC calculation methodologies, are out of our control. If these factors adversely affect us and we are unable to meet the requirements above,
our subsidiaries could lose their licenses to do business in certain states, be subject to additional regulatory oversight, have their licenses
suspended or be subject to seizure of assets. A loss or suspension of any of our subsidiaries’ licenses may negatively impact our reputation in the
insurance market and result in our subsidiaries’ inability to write new business, distribute funds or pursue our investment/overall business
strategy.
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Item 1A. Risk Factors
ALRe, as a Bermuda domiciled insurer, is also required to maintain licenses. ALRe is licensed as a reinsurer only in Bermuda. Bermuda
insurance statutes and regulations and policies of the BMA require that ALRe, among other things, maintain a minimum level of capital and
surplus, satisfy solvency standards, restrict dividends and distributions, obtain prior approval or provide notification to the BMA, as the case
may be, of ownership, transfer and disposition of Shareholder Controller shares, maintain a head office, and have certain officers and a director
resident in Bermuda, appoint and maintain a principal representative in Bermuda and provide for the performance of certain periodic
examinations of itself and its financial conditions. A failure to meet these conditions may result in the suspension or revocation of ALRe’s
license to do business as a reinsurance company in Bermuda, which would mean that ALRe would not be able to enter into any new reinsurance
contracts until the suspension ended or it became licensed in another jurisdiction. For any or a number of reasons, the BMA could revoke or
suspend ALRe’s license. Any such suspension or revocation of ALRe’s license would negatively impact its and our reputation in the reinsurance
marketplace and could have a material adverse effect on our results of operations.
The process of obtaining licenses is time consuming and costly, and we may not be able to become licensed in jurisdictions other than those in
which our subsidiaries are currently licensed. The modification of the conduct of our business resulting from our and our subsidiaries becoming
licensed in certain jurisdictions could significantly and negatively affect our business. In addition, our inability to comply with insurance statutes
and regulations could significantly and adversely affect our business by limiting our ability to conduct business as well as subjecting us to
penalties and fines.
Changes in the laws and regulations governing the insurance industry or otherwise applicable to our business, including the DOL fiduciary
rule, may have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.
Certain of the laws and regulations to which we are subject are summarized in Item 1. Business–Regulation. Changes in the laws and regulations
relevant to our business may have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.
Certain of the risks associated with changes in these laws and regulations are discussed in greater detail below.
The 2008 economic crisis has resulted in numerous changes to regulation and oversight of the financial industry, the full impact of which has yet
to be realized. The Dodd-Frank Act makes sweeping changes to the regulation of financial services entities, products and markets. Historically,
the federal government has not regulated the insurance business, however, the Dodd-Frank Act generally provides for enhanced federal
supervision of financial institutions, including insurance companies in certain circumstances, and financial activities that represent a systemic
risk to financial stability or the economy. Certain provisions of the Dodd-Frank Act are or may become applicable to us, our competitors or
those entities with which we do business, including, but not limited to: the establishment of a comprehensive federal regulatory regime with
respect to derivatives; the establishment of consolidated federal regulation and resolution authority over SIFIs; the establishment of the Federal
Insurance Office; changes to the regulation of broker-dealers and investment advisors; changes to the regulation of reinsurance; changes to
regulations affecting the rights of shareholders; the imposition of additional regulation over credit rating agencies; the imposition of
concentration limits on financial institutions that restrict the amount of credit that may be extended to a single person or entity; and mandatory
on-facility execution and clearing of certain derivative contracts.
Numerous provisions of the Dodd-Frank Act require the adoption or implementation of rules or regulations. The process of adopting such
implementing rules and/or regulations have in some instances been delayed beyond the time frames imposed by the Dodd-Frank Act. Further,
changes in general political, economic or market conditions, including as a result of the most recent U.S. presidential and congressional
elections, could affect the scope, timing and final implementation of the Dodd-Frank Act. Until the various final regulations are promulgated,
the full impact of the regulations on the Company will remain unclear. In addition, the Dodd-Frank Act mandated multiple studies, which could
result in additional legislation or regulation applicable to the insurance industry, us, our competitors or those entities with which we do business.
Legislative or regulatory requirements imposed by or promulgated in connection with the Dodd-Frank Act may impact us in many ways,
including, but not limited to: placing us at a competitive disadvantage relative to our competition or other financial services entities; changing
the competitive landscape of the financial services sector or the insurance industry; making it more expensive for us to conduct our business;
requiring the reallocation of significant company resources to government affairs; increasing our legal and compliance related activities and the
costs associated therewith as the Dodd-Frank Act may permit the preemption of certain state laws when inconsistent with international
agreements, such as the Covered Agreement; and otherwise having a material adverse effect on the overall business climate as well as our
financial condition and results of operations.
Heightened standards of conduct as a result of the DOL fiduciary rule, any rules proposed by SEC or other similar proposed rules or regulations
could also increase the compliance and regulatory burdens on our representatives, and could lead to increased litigation and regulatory risks,
changes to our business model, a decrease in the number of our securities-licensed representatives and a reduction in the products we offer to
our clients, any of which could have a material adverse effect on our business, financial condition and results of operations.
In addition, we expect the worldwide demographic trend of population aging will cause policymakers to continue to focus on the framework of
U.S. and non-U.S. retirement systems, which may drive additional changes regarding the manner in which individuals plan for and fund their
retirement, the extent of government involvement in retirement savings and funding, the regulation of retirement products and services and the
oversight of industry participants. Any incremental requirements, costs and risks imposed on us in connection with such current or future
legislative or regulatory changes, may constrain our ability to market our products and services to potential customers, and could negatively
impact our profitability and make it more difficult for us to pursue our growth strategy.
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Item 1A. Risk Factors
Although our businesses are subject to regulation in each state in which they conduct business, in many instances the state insurance laws and
regulations emanate from the NAIC. State insurance regulators and the NAIC regularly re-examine existing laws and regulations applicable to
insurance companies and their products. Any proposed or future legislation or NAIC initiatives, if adopted, may be more restrictive on our
ability to conduct business than current regulatory requirements or may result in higher costs or increased statutory capital and reserve
requirements. Changes in these laws and regulations or interpretations thereof are often made for the benefit of the consumer and at the expense
of the insurer and could have a material adverse effect on our domestic insurance subsidiaries’ businesses, operations and financial conditions.
We and they are also subject to the risk that compliance with any particular regulator’s interpretation of a legal or accounting issue may not
result in compliance with another regulator’s interpretation of the same issue, particularly when compliance is judged in hindsight. There is an
additional risk that any particular regulator’s interpretation of a legal or accounting issue may change over time to our detriment, or that changes
to the overall legal or market environment, even absent any change of interpretation by a particular regulator, may cause us to change our views
regarding the actions we need to take from a legal risk management perspective, which could necessitate changes to our practices that may, in
some cases, limit our ability to grow and improve profitability.
Risks Relating to Taxation
The Base Erosion and Anti-Abuse Tax may significantly increase our tax liability.
The Tax Act introduced a new tax called the Base Erosion and Anti-Abuse Tax (BEAT). The BEAT operates as a minimum tax and is generally
calculated as a percentage (5% in 2018, 10% in 2019-2025, and 12.5% in 2026 and thereafter) of the “modified taxable income” of an
“applicable taxpayer.” Modified taxable income is calculated by adding back to a taxpayer’s regular taxable income the amount of certain “base
erosion tax benefits” with respect to certain payments made to foreign affiliates of the taxpayer, as well as the “base erosion percentage” of any
net operating loss deductions. The BEAT applies for a taxable year only to the extent it exceeds a taxpayer’s regular corporate income tax
liability for such year (determined without regard to certain tax credits).
Certain of our reinsurance agreements require our U.S. subsidiaries to pay or accrue substantial amounts to ALRe that would be characterized as
“base erosion payments” with respect to which there are “base erosion tax benefits.” Accordingly, the BEAT could significantly increase the tax
liability of our U.S. subsidiaries and have a material adverse effect on our results of operations.
Moreover, ALRe pays or accrues substantial amounts to our U.S. subsidiaries under our reinsurance agreements for increases in policy reserves
and to reimburse our U.S. subsidiaries for payments of benefits to our policyholders. It is not clear whether such amounts should be netted
against the amounts our U.S. subsidiaries pay or accrue to ALRe under our reinsurance agreements for purposes of calculating their “base
erosion payments” and “base erosion tax benefits.” No assurance can be given that any such amounts will be netted. If the amounts cannot be
netted and we do not take our planned or other actions to mitigate or eliminate the BEAT, the tax liability of our U.S. subsidiaries will increase
and our results of operations will be materially adversely affected.
The application of the BEAT to our reinsurance arrangements could be affected by further legislative action (including possibly a “technical
corrections” bill), administrative guidance or court decisions. Any such legislative action, administrative guidance or court decisions are not
likely to be available at the time that we are required to determine the amount of federal income tax incurred by our U.S. subsidiaries for the first
quarter of 2018, and they could have retroactive effect. Tax authorities may later disagree with our BEAT calculations, or the interpretations on
which those calculations are based, and assess additional taxes, interest and penalties, and the uncertainty regarding the correct interpretation of
the BEAT may make such disagreements more likely. We will determine the appropriateness of our tax provision in accordance with GAAP.
However, there can be no assurance that this provision will accurately reflect the amount of federal income tax that our U.S. subsidiaries
ultimately pay, as that amount could differ materially from our estimate.
Our efforts to mitigate the cost of the BEAT may be unnecessary, ineffective or counterproductive.
In light of the possibility of material additional tax cost to our U.S. subsidiaries and the lack of clear guidance regarding the appropriate method
by which to compute the BEAT, we are undertaking certain actions and exploring various alternatives intended to mitigate the potential effect of
the BEAT on our results of operations in the event it is determined that none of the amounts paid or accrued by ALRe to our U.S. subsidiaries
are taken into account in the calculation of “base erosion payments” or “base erosion tax benefit.” Such actions may have adverse consequences
to our business, such as subjecting profit from our affiliate reinsurance to a layer of withholding tax of up to 30%, which would not be payable
under our current structure. There can be no assurances that our efforts to eliminate or mitigate the BEAT will be successful, and our
consideration of actions may be expensive and time consuming. Further, there can be no assurances that we will be able to complete these
actions as they are conditioned upon factors beyond our control, such as regulatory approval. In addition, it is likely that we will be required to
take action before the uncertainty regarding the BEAT is resolved, and accordingly any action we take may, in hindsight, prove to have been
unnecessary, ineffective or counterproductive.
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Item 1A. Risk Factors
AHL or ALRe may be subject to U.S. federal income taxation.
AHL and ALRe are incorporated under the laws of Bermuda and currently intend to operate in a manner that will not cause either to be treated
as being engaged in a trade or business within the U.S. or subject to current U.S. federal income taxation on their net income. However, because
there is considerable uncertainty as to when a foreign corporation is engaged in a trade or business within the United States, as the law is unclear
and the determination is highly factual and must be made annually, there can be no assurance that the IRS will not successfully contend that
AHL or ALRe is engaged in a trade or business in the U.S. In addition, although AHL and ALRe currently intend to operate in a manner that
would not cause them to be treated as engaged in a trade or business within the U.S., the recent enactment of the BEAT, the reduction of the
federal income tax rate applicable to corporations included in the Tax Act, and other factors may cause AHL or ALRe to conduct their business
differently. If AHL or ALRe were considered to be engaged in a trade or business in the U.S., it could be subject to U.S. federal income taxation
on a net basis on its income that is effectively connected with such U.S. trade or business (including branch profits tax on the portion of its
earnings and profits that is attributable to such income). Any such U.S. federal income taxation could result in substantial tax liabilities and
consequently could have a material adverse effect on our financial condition and results of future operations.
U.S. persons who own our Class A common shares may be subject to U.S. federal income taxation at ordinary income rates on our
undistributed earnings and profits.
AHL’s bye-laws generally limit the voting power of our Class A common shares (and certain other of our voting securities) such that no person
owns (or is treated as owning) more than 9.9% of the total voting power of our common shares (with certain exceptions). AHL’s bye-laws also
currently reduce the voting power of Class B common shares held by certain holders if (A) one or more U.S. persons that own (or are treated as
owning) more than 9.9% of the total voting power of our common shares own (or are treated as owning) individually or in the aggregate more
than 24.9% of the voting power or the value of our common shares or (B) a U.S. person that is classified as an individual, an estate or a trust for
U.S. federal income tax purposes owns (or is treated as owning) more than 9.9% of the total voting power of our common shares. Additionally,
AHL’s bye-laws require the board of AHL to refer certain decisions with respect to our non-U.S. subsidiaries to our shareholders, and to vote our
shares in those subsidiaries accordingly. These provisions were intended to reduce the likelihood that AHL or ALRe will be treated as a
controlled foreign corporation (CFC), other than for purposes of taking into account related person insurance income (RPII). However, the
relevant attribution rules are complex and there is no definitive legal authority on whether the voting provisions included in AHL’s
organizational documents are effective for purposes of the CFC provisions.
Moreover, the Tax Act eliminated the prohibition on “downward attribution” from non-U.S. persons to U.S. persons under Section 958(b)(4) of
the Internal Revenue Code for purposes of determining constructive stock ownership under the CFC rules. As a result, our U.S. subsidiaries are
deemed to own all of the ALRe stock held by AHL for CFC purposes. Accordingly, ALRe is currently treated as a CFC, without regard to
whether the provisions of our bye-laws described above are effective for purposes of the CFC provisions. The legislative history under the Tax
Act indicates that this change was not intended to cause ALRe to be treated as a CFC with respect to a 10% U.S. Shareholder (as defined below)
that is not related to our U.S. subsidiaries. However, it is not clear whether the IRS or a court would interpret the change made by the Tax Act in
a manner consistent with such indicated intent.
For any taxable year in which AHL or ALRe is treated as a CFC, each U.S. person treated as a “10% U.S. Shareholder” with respect to AHL or
ALRe that held our common shares directly or indirectly through non-U.S. entities as of the last day in such taxable year that AHL or ALRe was
a CFC would generally be required to include in gross income as ordinary income its pro rata share of AHL’s or ALRe’s insurance and
reinsurance income and certain other investment income, regardless of whether that income was actually distributed to such U.S. person (with
certain adjustments). For tax years beginning on or after January 1, 2018, a “10% U.S. Shareholder” of a non-U.S. corporation includes any U.S.
person that owns (or is treated as owning) stock of the non-U.S. corporation possessing 10% or more of the total voting power or total value of
such non-U.S. corporation’s stock. Any U.S. person that owns (or is treated as owning) 10% or more of the value of AHL should consult with
their tax advisor regarding their investment in AHL.
In general, a non-U.S. corporation is a CFC if 10% U.S. Shareholders, in the aggregate, own (or are treated as owning) stock of the non-U.S.
corporation possessing more than 50% of the voting power or value of such corporation’s stock. However, this threshold is lowered to more than
25% for purposes of taking into account the insurance income of a non-U.S. corporation. Special rules apply for purposes of taking into account
any RPII of a non-U.S. corporation, as described below.
In addition, if a U.S. person disposes of shares in a non-U.S. corporation and the U.S. person was a 10% U.S. Shareholder at any time when the
corporation was a CFC during the five-year period ending on the date of disposition, any gain from the disposition will generally be treated as a
dividend to the extent of the U.S. person’s share of the corporation’s undistributed earnings and profits that were accumulated during the period
or periods that the U.S. person owned the shares while the corporation was a CFC (with certain adjustments). Also, a U.S. person may be
required to comply with specified reporting requirements, regardless of the number of shares owned.
Because of the limitations in AHL’s bye-laws referred to above, among other factors, we believe it is unlikely that any U.S. person that is treated
as owning less than 10% of the total value of AHL would be a 10% U.S. Shareholder of AHL or ALRe. However, because the relevant
attribution rules are complex and there is no definitive legal authority on whether the voting provisions included in AHL’s organizational
documents are effective for purposes of the CFC provisions, there can be no assurance that this will be the case. Further, our ability to obtain
information that would permit us to enforce the limitation described above may be limited. We will take reasonable steps to obtain such
information, but there can be no assurance that such steps will be adequate or that we will be successful in this regard. Accordingly, we may not
be able to fully enforce the limitation described above.
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Item 1A. Risk Factors
U.S. persons who own our Class A common shares may be subject to U.S. federal income taxation at ordinary income rates on a
disproportionate share of our undistributed earnings and profits attributable to RPII.
If ALRe is treated as recognizing RPII in a taxable year and ALRe is treated as a CFC for such taxable year, each U.S. person that owns our
Class A common shares directly or indirectly through non-U.S. entities as of the last day in such taxable year must generally include in gross
income its pro rata share of the RPII, determined as if the RPII were distributed proportionately only to all such U.S. persons, regardless of
whether that income is distributed (with certain adjustments). For this purpose, ALRe generally will be treated as a CFC if U.S. persons in the
aggregate are treated as owning 25% or more of the total voting power or value of ALRe’s stock at any time during the taxable year. We believe
that ALRe will be treated as a CFC for this purpose based on the current and expected ownership of our shares.
RPII generally is any income of a non-U.S. corporation attributable to insuring or reinsuring risks of a U.S. person that owns (or is treated as
owning) stock of such non-U.S. corporation, or risks of a person that is “related” to such a U.S. person. For this purpose, (1) a person is
“related” to another person if such person “controls,” or is “controlled” by, such other person, or if both are “controlled” by the same persons,
and (2) “control” of a corporation means ownership (or deemed ownership) of stock possessing more than 50% of the total voting power or
value of such corporation’s stock and “control” of a partnership, trust or estate for U.S. federal income tax purposes means ownership (or
deemed ownership) of more than 50% by value of the beneficial interests in such partnership, trust or estate.
Athene and Apollo have considerable overlap in ownership. If it is determined that the same persons “control” both us and Apollo through
owning (or being treated as owning) more than 50% of the vote or value of Athene and Apollo, substantially all of ALRe’s income might
constitute RPII. This would trigger the adverse RPII consequences described above to all U.S. persons that hold our Class A common shares
directly or indirectly through non-U.S. entities and would have a material adverse effect on the value of their investment in our Class A common
shares.
Existing voting restrictions set forth in AHL’s bye-laws are generally intended to prevent a person who owns (or is treated as owning) shares in
Apollo from owning (or being treated as owning) any of the voting power of our Class A common shares, thus preventing persons who own (or
are treated as owning) both AHL and Apollo from owning (or being treated as owning) more than 50% of the voting power of our stock.
However, these restrictions do not prevent members of the Apollo Group from retaining the right to vote on newly acquired Class A common
shares, should they choose to do so, nor do they prevent persons who own (or are treated as owning) both AHL and Apollo from owning (or
being treated as owning) more than 50% of the value of our stock. AHL’s bye-laws also generally provide that no person (nor certain direct or
indirect beneficial owners or related persons to such person) who owns our common shares, other than a member of the Apollo Group, may
acquire any shares of Apollo or otherwise make any investment that would cause such person, or any other person that is a U.S. person, to own
(or be treated as owning) more than 50% of the vote or value of AHL’s stock. Any holder of our common shares that violates this provision may
be required, at the board’s discretion, to sell its common shares or take any other reasonable action that the board deems necessary.
Because of the restrictions described above, among other factors, we believe it is likely that one or more exceptions under the RPII rules will
apply such that U.S. persons will not be required to include any RPII in their gross income with respect to ALRe. However, there can be no
assurance that this will be the case. Further, our ability to obtain information that would permit us to enforce the restrictions described above
may be limited. We will take reasonable steps to obtain such information, but there can be no assurance that such steps will be adequate or that
we will be successful in this regard. Accordingly, we may not be able to fully enforce these restrictions.
U.S. persons who dispose of our Class A common shares may be required to treat any gain as ordinary income for U.S. federal income tax
purposes and comply with other specified reporting requirements.
If a U.S. person disposes of shares in a non-U.S. corporation that is an insurance company that had RPII and the 25% threshold described above
is met at any time when the U.S. person owned any shares in the corporation during the five-year period ending on the date of disposition, any
gain from the disposition will generally be treated as a dividend to the extent of the U.S. person’s share of the corporation’s undistributed
earnings and profits that were accumulated during the period that the U.S. person owned the shares (possibly whether or not those earnings and
profits are attributable to RPII). In addition, the shareholder will be required to comply with specified reporting requirements, regardless of the
amount of shares owned. We believe that these rules should not apply to a disposition of our Class A common shares because AHL is not itself
directly engaged in the insurance business. We cannot assure you, however, that the IRS will not successfully assert that these rules apply to a
disposition of our Class A common shares.
U.S. tax-exempt organizations that own our Class A common shares may recognize unrelated business taxable income.
A U.S. tax-exempt organization that directly or indirectly owns our Class A common shares generally will recognize unrelated business taxable
income and be subject to additional U.S. tax filing obligations to the extent such tax-exempt organization is required to take into account any of
our insurance income or RPII pursuant to the CFC and RPII rules described above. U.S. tax-exempt organizations should consult their own tax
advisors regarding the risk of recognizing unrelated business taxable income as a result of the ownership of our Class A common shares.
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Item 1A. Risk Factors
U.S. persons who own our Class A common shares may be subject to adverse tax consequences if AHL is considered a passive foreign
investment company for U.S. federal income tax purposes.
If AHL is considered a passive foreign investment company (PFIC) for U.S. federal income tax purposes, a U.S. person who directly or, in
certain cases, indirectly owns our Class A common shares could be subject to adverse tax consequences, including a greater tax liability than
might otherwise apply, an interest charge on certain taxes that are deemed deferred as a result of AHL’s non-U.S. status and additional U.S. tax
filing obligations, regardless of the number of shares owned.
We currently do not expect that AHL will be a PFIC for U.S. federal income tax purposes in the current taxable year or the foreseeable future
because AHL, through its insurance subsidiaries, intends to qualify for the “active insurance” exception to PFIC treatment. The “active
insurance” exception was recently amended by the Tax Act, and we believe that AHL will qualify for the exception as amended. However, there
is significant uncertainty regarding how the Tax Act will be interpreted and guidance may not be forthcoming. Therefore, we cannot assure you
that AHL will not be treated as a PFIC. If AHL is treated as a PFIC, the adverse tax consequences described above generally would also apply
with respect to a U.S. person’s indirect ownership interest in any PFICs in which AHL directly or, in certain cases, indirectly, owns an interest.
Changes in U.S. tax law might adversely affect us or our shareholders.
The tax treatment of non-U.S. companies and their U.S. and non-U.S. insurance subsidiaries has been significantly altered by the enactment of
the Tax Act. See Item 1. Business–Regulation–United States–Tax Reform. In particular, the Tax Act:
•
•
•
•
•
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Imposes the BEAT (as described above);
Amends the calculation of tax reserves for U.S. life insurance companies and requires affected companies to include the resulting
change in income over an 8-year period beginning in 2018;
Amends the treatment of “specified policy acquisition expenses” incurred by U.S. life insurance companies under Section 848 of the
Internal Revenue Code;
Restricts the “active insurance” exception to PFIC treatment to “qualifying insurance corporations;”
Eliminates the prohibition on “downward attribution” from non-U.S. persons to U.S. persons under Section 958(b)(4) of the Internal
Revenue Code for purposes of determining constructive stock ownership under the CFC rules (as described above); and
Amends the definition of “U.S. Shareholder” to include U.S. persons that own (or are treated as owning) 10% or more of the value of
a foreign corporation.
There is significant uncertainty regarding how these and other provisions of the Tax Act will be interpreted, and guidance may not be
forthcoming. In addition, it is possible that a “technical corrections” bill may be passed during 2018 that could alter or clarify the Tax Act, likely
with retroactive effect. Any changes to, clarifications of, or guidance under the Tax Act could add significant expense and have a material
adverse effect on our results of operations.
Finally, the tax treatment of non-U.S. companies and their U.S. and non-U.S. insurance subsidiaries may be the subject of further tax legislation.
No prediction can be made as to whether any particular proposed legislation will be enacted or, if enacted, what the specific provisions or the
effective date of any such legislation would be, or whether it would have any effect on us. As such, we cannot assure you that future legislative,
administrative or judicial developments will not result in an increase in the amount of U.S. tax payable by us or by an investor in our Class A
common shares or reduce the attractiveness of our products. If any such developments occur, our business, financial condition and results of
operation could be materially and adversely affected and such developments could have a material and adverse effect on your investment in our
common shares.
Changes in U.S. tax law might adversely affect demand for our products.
Many of the products that we sell and reinsure benefit from one or more forms of tax-favored status under current U.S. federal and state income
tax regimes. For example, we sell and reinsure annuity contracts that allow the policyholders to defer the recognition of taxable income earned
within the contract. The changes in U.S. federal tax law made by the Tax Act, or future changes in U.S. federal or state tax law, could reduce or
eliminate the attractiveness of such products, which could affect the sale of our products or increase the expected lapse rate with respect to
products that have already been sold.
There is U.S. income tax risk associated with reinsurance between U.S. insurance companies and their Bermuda affiliates.
If a reinsurance agreement is entered into among related parties, the IRS is permitted to reallocate or recharacterize income, deductions or
certain other items, and to make any other adjustment, to reflect the proper amount, source or character of the taxable income of each of the
parties. If the IRS were to successfully challenge our reinsurance arrangements, our financial condition and results of operations could be
adversely affected and the price of our Class A common shares could be adversely affected.
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Item 1A. Risk Factors
We may not be able to use our deferred tax asset attributes or admit them into statutory capital as a result of the Tax Act.
Under the Tax Act, net operating losses generated in 2018 and thereafter may be carried forward indefinitely but may not be carried back to
offset taxable income in prior tax periods. Historically, a portion of our admitted deferred tax asset has reflected our ability to carry net operating
losses back to prior tax periods. In the future, the amount of deferred tax asset we are able to admit may be reduced due to the elimination of the
carry back period. Because the ability to admit deferred tax assets into statutory capital is dependent in part on our ability to carry losses back to
prior tax periods, we may not be able to admit into statutory capital a portion of deferred tax assets that are generated in future tax periods.
We may have fewer investable assets and earn less investment income as a result of the Tax Act.
Certain of the changes made by the Tax Act are expected to increase the amount of our current tax expense. Although the increase in current tax
expense from these changes may be largely offset by an increase in the amount of our deferred tax assets, we may have fewer investable assets
and thus may earn less investment income.
We may become subject to U.S. withholding tax under certain U.S. tax provisions commonly known as FATCA.
Certain U.S. tax provisions commonly known as the Foreign Account Tax Compliance Act (FATCA) impose a 30% withholding tax on certain
payments of U.S. source income and the proceeds from the disposition after December 31, 2018, of property of a type that can produce U.S.
source interest or dividends, in each case, to certain “foreign financial institutions” and “non-financial foreign entities.” The withholding tax also
applies to certain “foreign passthru payments” made by foreign financial institutions after December 31, 2018. The U.S. government has signed
an intergovernmental agreement to facilitate the implementation of FATCA with the government of Bermuda (Bermuda IGA). AHL and its
foreign subsidiaries intend to comply with the obligations imposed on them under FATCA and the Bermuda IGA, as applicable, to avoid being
subject to withholding under FATCA on payments made to them or penalties. However, no assurance can be provided in this regard. We may
become subject to withholding tax or penalties if we are unable to comply with FATCA.
If AHL is treated as engaged in a U.S. trade or business in any taxable year, all or a portion of the dividends on our Class A common shares may
be treated as U.S. source income and may be subject to withholding and information reporting under FATCA unless a shareholder (and any
intermediaries through which the shareholder holds its shares) establishes an exemption from such withholding and information reporting. In
addition, any gross proceeds from the sale or other disposition of our Class A common shares after December 31, 2018, might also be subject to
withholding and information reporting under FATCA in such circumstances, absent an exemption. As discussed above, we currently intend to
limit our U.S. activities so that AHL is not considered to be engaged in a U.S. trade or business, although no assurances can be provided in this
regard.
We are subject to the risk that Bermuda tax laws may change and that we may become subject to new Bermuda taxes following the
expiration of a current exemption after 2035.
The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, as amended, has given us an
assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset,
gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to us or
any of our operations, shares, debentures or other obligations until March 31, 2035, except insofar as such tax applies to persons ordinarily
resident in Bermuda or to any taxes payable by us in respect of real property owned or leased by us in Bermuda. Given the limited duration of
the Bermuda Minister of Finance’s assurance, we cannot assure you that we will not be subject to any Bermuda tax after March 31, 2035.
The impact of the OECD’s recommendations on base erosion and profit shifting is uncertain and could impose adverse tax consequences on
us.
In 2015, the OECD published final recommendations on base erosion and profit shifting (BEPS). These BEPS recommendations propose the
development of rules directed at counteracting the effects of tax havens and preferential tax regimes in countries around the world. Beginning
with 2017, some countries in which we do business, including Bermuda and the U.S., require certain multinational enterprises, including ours, to
report detailed information regarding allocation of revenue, profit, and other information, on a country-by-country basis, which could increase
scrutiny by foreign tax authorities.
The BEPS recommendations also include revisions to the definition of a “permanent establishment” and the rules for attributing profit to a
permanent establishment. Other recommended actions relate to the goal of ensuring that transfer pricing outcomes are in line with value
creation, noting that the current rules may facilitate the transfer of risks or capital away from countries where the economic activity takes place.
We expect many countries to change their tax laws in response to this project, and several countries (including the U.S.) have already changed or
proposed changes to their tax laws. Changes to tax laws could increase their complexity and the burden and costs of compliance. Additionally,
such changes could also result in significant modifications to the existing transfer pricing rules and could potentially have an impact on our
taxable profits in various jurisdictions.
65
Item 1A. Risk Factors
Risks Relating to Investment in Our Class A Common Shares
There may be sales of a substantial amount of our common shares by our current shareholders as certain restrictions on sale expire, and
these sales could cause the price of our common shares to fall.
Our directors, executive officers and shareholders holding 100% of our common shares outstanding prior to our initial public offering (IPO)
agreed that they would not sell any shares prior to the expiration of certain time periods after the date upon which the SEC declared the
registration statement for our IPO effective (effective date). The remaining lock-up expiration period applicable to existing holders ends on
March 3, 2018, provided that certain of our shareholders and directors representing approximately 8.9% of our common shares, as of December
31, 2017, have agreed not to sell any shares until December 8, 2018. Approximately 48,977,760 and 16,134,546 of our common shares will be
eligible for future sale on March 3, 2018 and December 8, 2018, respectively. These restrictions are subject to waiver by our board of directors,
including in the event that we permit holders to sell their shares in follow-on registered offerings. As these lock-up periods end, the market price
of our common shares could decline if the holders of those shares sell them or are perceived by the market as intending to sell them.
Additionally, existing holders of our common shares have registration rights under the Third Amended and Restated Registration Rights
Agreement (Registration Rights Agreement), subject to certain conditions, which require us to file registration statements covering the sale of
their shares or to include their shares in registration statements that we may file for ourselves or other shareholders in the future.
The interest of the Apollo Group, which controls and is expected to continue to control 45% of the total voting power of AHL and holds a
number of the seats on our board of directors, may conflict with those of other shareholders and could make it more difficult for you and
other shareholders to influence significant corporate decisions.
The Apollo Group controls and is expected to continue to control 45% of the total voting power of AHL. As a result, the Apollo Group could
exercise significant influence over all matters requiring shareholder approval for the foreseeable future, including approval of significant
corporate transactions, appointment of members of our management, election of directors, approval of the termination of our IMAs and
determination of our corporate policies, which may reduce the market price of our common shares. Even if the Apollo Group reduces its
beneficial ownership below its current holdings or we raise additional equity from investors other than members of the Apollo Group, because of
its control over 45% of our aggregate voting power, for so long as any member of the Apollo Group owns at least one Class B common share,
such member will still be able to assert significant influence over our board of directors and certain corporate actions.
The interests of our existing shareholders, particularly members of the Apollo Group, may conflict with the interests of our other shareholders.
Actions that members of the Apollo Group take as shareholders may not be favorable to our other shareholders. For example, the concentration
of voting power held by the Apollo Group, the significant representation on our board of directors by the Apollo Group, or the limitations on our
ability to terminate any IMA with AAM could delay, defer or prevent a change of control of us or impede a merger, takeover or other business
combination which another shareholder may otherwise view favorably. Members of the Apollo Group may, in their role as shareholders, vote in
favor of a merger, takeover or other business combination transaction which our other shareholders might not consider in their best interests. In
addition, as long as a business combination transaction were deemed to be in the best interests of the Company, our charter and bye-laws would
not prevent us from entering into a business combination transaction that provided for the payment of differential consideration to holders of the
Class B common shares, which are held by the Apollo Group or its affiliates, and the Class A common shares.
Our conflicts committee and our disinterested directors with respect to a transaction analyze certain of these conflicts to protect against potential
harm resulting from conflicts of interest in connection with transactions that we have entered into or will enter into with Apollo or its affiliates.
Specifically, our bye-laws require that the conflicts committee (in accordance with its charter and procedures) approve certain material
transactions by and between us and Apollo or its affiliates, including entering into material agreements or the imposition of any new fee or
increase in the rate at which fees are charged to us, subject to certain exceptions. See Item 13. Certain Relationships and Related Transactions,
and Director Independence. In addition, our conflicts committee may exclusively rely on information provided by AAM, including with respect
to fees charged by AAM or Apollo or its affiliates, and with respect to the historical performance or fees of unrelated service providers used for
comparison purposes, and may not independently verify the information so provided. However, these conflicts provisions will not, by
themselves, prohibit transactions with Apollo or its affiliates.
Additionally, our investment manager, AAM, is an indirect subsidiary of Apollo and charges us management fees based on our assets. Under our
IMAs with AAM, substantially all of our invested assets are managed by AAM. Our investment policies permit AAM to invest in securities of
issuers affiliated with Apollo, including funds managed by Apollo, and to retain on our behalf and at our cost sub-advisors, including Apollo.
AAM may make such investments or retain such sub-advisors at its discretion, subject only to the approval of our conflicts committee in certain
cases and/or certain regulatory approvals. Accordingly, AAM may have a conflict of interest in managing our investments, including by
retaining its affiliate, Apollo, to act as its sub-advisor, which would increase amounts payable by us for investment advisory services or could
cause us to receive less return on our investments than if our investment portfolio was managed by another party. In addition, asset management
fees are paid based on the amount of our AUM regardless of the results of our operations. Therefore, Apollo could be incentivized to exercise its
influence to cause us to increase our AUM, which may have an adverse impact on our financial condition or results of operations.
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Item 1A. Risk Factors
Certain of our investments are managed by other Apollo affiliates retained as sub-advisors by AAM to manage such investments. Currently,
substantially all of the assets subject to sub-advisory arrangements are managed by Apollo affiliates. In addition, we have made investments in
collective investment vehicles managed by Apollo affiliates, including seed investments in new investment vehicles or investment strategies
offered by Apollo which have limited track records, as well as junior and subordinated tranches of structured investment vehicles which may
assist Apollo in meeting certain regulatory requirements applicable to Apollo as the sponsor of such vehicles. Such Apollo affiliates charge us a
sub-advisory fee, or charge such vehicles management fees, that independently, or when taken together with the fees charged by AAM, may not
be the lowest fee available for similar sub-advisory or investment management services offered by unrelated managers. In addition, it is possible
that such unrelated managers may perform better than the Apollo affiliates retained by AAM as sub-advisors or which manage such collective
investment funds. Apollo is not obligated to devote any specific amount of time to the affairs of our company, or to the funds in which we are
invested and we have limited rights to terminate any IMA or sub-advisory arrangement. Affiliates of Apollo manage and expect to continue to
manage other client accounts, some of which have objectives similar to ours, including collective investment vehicles managed by Apollo and in
which Apollo may have an equity interest. We will compete with other Apollo clients not only in terms of time spent on management of our
portfolio, but also for allocation of assets that do not have significant supply. In addition, there may be different investment teams for AAM and
Apollo investing in the same strategies for different clients, including us. As a result, we may compete with other Apollo clients for the same
investment opportunities, potentially disadvantaging us. Apollo may also manage accounts whose advisory fee schedules, investment objectives
and policies differ from ours, which may cause Apollo to allocate securities in a manner that may have an adverse effect on our ability to source
appropriate assets and meet our strategic objectives. In addition, where AAM has retained an Apollo affiliate as our sub-advisor, it is possible
that due to the fees charged by such sub-advisor in addition to the AAM fees that we pay, we may either experience a reduced return on an
investment or may forego purchasing an investment that we would have purchased if such investment opportunity were sourced directly by
AAM.
From time to time, AAM or Apollo may acquire investments on our behalf which are senior or junior to other instruments of the same issuer that
are held by, or acquired for, another AAM or Apollo client (for example, we may acquire junior debt while another Apollo client may acquire
senior debt). In the event such an issuer enters bankruptcy or becomes otherwise insolvent, the client holding securities which are senior in
preference may have the right to aggressively pursue the issuer’s assets to fully satisfy the issuer’s indebtedness to the client, and the client
holding the investment which is junior in the capital structure may not have access to sufficient assets of the issuer to completely satisfy its
claim against the issuer and may suffer a loss. AAM and Apollo have adopted procedures that are designed to enable AAM and Apollo to
address such conflicts and to ensure that clients are treated fairly and equitably in these situations. However, given AAM’s or Apollo’s fiduciary
obligations to the other client, AAM and Apollo may be unable to manage our investment in the same manner as would have been possible
without the conflict of interest. In such event, we may receive less return on such investment than if another AAM or Apollo client was not in a
different part of the capital structure of the issuer.
Apollo and its affiliates have diverse and expansive private equity, credit and real estate investment platforms, investing in numerous companies
across many industries. If Apollo acquires or forms a company with a business strategy competing with ours, additional conflicts may arise
between us and Apollo or between us and such company in executing our plans, including with respect to the allocation of investments or the
ability to execute on corporate opportunities. Our bye-laws provide that Apollo and its members and affiliates (including certain of our directors)
generally have no duty to refrain from engaging, directly or indirectly, in the same or similar business activities or lines of business that we do.
Apollo and its affiliates regularly obtain material non-public information regarding various potential acquisition or trading targets. When Apollo
and its affiliates obtain material non-public information regarding a potential acquisition or trading target, AAM and Apollo become restricted
from trading such acquisition or trading target’s outstanding securities. Some of such securities may be potential investment opportunities for us,
or may be owned by us and be potential disposition opportunities. The inability of AAM or Apollo to purchase or sell such investments on our
behalf as a result of these restrictions may result in us acquiring investments that may otherwise underperform the restricted investments that
AAM or Apollo would have acquired, or incurring losses on investments that AAM or Apollo would have sold, on our behalf, had such
restrictions not been in place.
Certain of AAM’s executives and employees have incentive compensation tied to our financial performance. This compensation arrangement
may incentivize such executives and employees to invest in riskier assets in an attempt to achieve higher returns. James R. Belardi, our Chief
Executive Officer, also serves as Chief Executive Officer of AAM, owns a profits interest in the equity of AAM and receives compensation from
AAM for services he provides to AAM. Accordingly, his involvement as a member of our board of directors and management team and as an
officer and director of AAM may lead to a conflict of interest. Furthermore, certain members of our board of directors also serve on the board of
directors of AAM or are employees of Apollo or its affiliates, which could also lead to potential conflicts of interest. See Item 13. Certain
Relationships and Related Transactions, and Director Independence.
Our bye-laws contain provisions that cause a holder of Class A common shares to lose the right to vote the shares if the holder owns an
equity interest in Apollo, AP Alternative Assets, L.P. (AAA) or certain other entities.
Our bye-laws contain provisions that impose restrictions on certain Class A common shares in order to reduce the likelihood that U.S. persons
that directly or indirectly own our common shares will experience adverse tax consequences attributable to RPII. These provisions could cause a
holder to lose the right to vote its Class A common shares if the holder or one of its affiliates owns (or is treated as owning) any equity interests
(or instruments treated as equity interests) in Apollo or AAA, if the holder or one of its affiliates owns (or is treated as owning) any of our Class
B common shares or if the holder or one of its affiliates is a member of the Apollo Group. These restrictions do not affect the transferability of
Class A common shares and do not apply unless the holder or one of its affiliates meets one of these conditions.
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Item 1A. Risk Factors
Investors may experience dilution in the future.
We have issued restricted Class M common shares and stock options to certain of our employees and to employees of AAM which enable them,
upon meeting certain vesting criteria, to acquire Class A common shares at prices below the NYSE trading price of our Class A common shares.
To the extent the outstanding restricted Class M common shares and stock options are ultimately exercised and/or to the extent we issue
additional equity in the future, there may be dilution to investors.
Our bye-laws contain provisions that could discourage takeovers and business combinations that our shareholders might consider in their
best interests, including provisions that prevent a holder of Class A common shares from having a significant stake in Athene.
Our bye-laws include certain provisions that could have the effect of delaying, deferring, preventing or rendering more difficult a change of
control that holders of our Class A common shares might consider in their best interests. For example, our bye-laws prohibit holders of our
Class A common shares and certain other classes of our common shares (other than those owned by the Apollo Group) from having more than
9.9% of the total voting power of our common shares. Subject to certain exceptions determined by our board on the basis set forth in our bye-
laws, the votes attributable to a holder of Class A common shares above 9.9% of the total voting power of our common shares are redistributed
to other holders of Class A common shares pro rata based on the then current voting power of each holder. Such adjustments are likely to result
in a shareholder having voting rights in excess of its pro rata share of the voting power of our Class A common shares. Therefore, a
shareholder’s voting rights may increase above 5% of the aggregate voting power of the outstanding common shares, thereby possibly resulting
in the shareholder becoming a reporting person subject to Schedule 13D or 13G filing requirements under the Exchange Act. These requirements
could discourage any potential investment in our Class A common shares. In addition, our board is classified into three classes of directors, with
directors of each class serving staggered three-year terms. Any change in the number of directors is required by our bye-laws to be apportioned
among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class
elected to fill a vacancy resulting from an increase in such class or from the removal of a director will hold such directorship for a term that
coincides with the remaining term of that class. Moreover, our bye-laws require specific advance notice procedures and other protocols for
holders of common shares to make shareholder proposals and nominate directors. Among other requirements, a shareholder must meet the
minimum requirements for eligible shareholders to submit shareholder proposals under Rule 14a-8 of the Exchange Act, and submit specific
information and make specific undertakings in relation to the shareholder proposal or director nomination.
Any or all of these provisions could prevent holders of our Class A common shares from receiving the benefit from any premium to the market
price of our Class A common shares offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of any of
these provisions could adversely affect the prevailing market price of our Class A common shares if they were viewed as discouraging takeover
attempts in the future.
AHL is a holding company with limited operations of its own. As a consequence, AHL’s ability to pay dividends on its common shares and to
make timely payments on its debt obligations will depend on the ability of its subsidiaries to make distributions or other payments to it, which
may be restricted by law.
AHL is a holding company with limited business operations of its own. AHL’s primary subsidiaries are insurance and reinsurance companies
that own substantially all of its assets and conduct substantially all of its operations. Accordingly, AHL’s payment of dividends and ability to
make timely payments on its debt obligations is dependent, to a significant extent, on the generation of cash flow by its subsidiaries and their
ability to make such cash or other assets available to it, by dividend or otherwise. Dividends or distributions that may be paid by AHL’s
insurance subsidiaries to it are limited or restricted by applicable insurance or other laws that are based in part on the prior year’s statutory
income and surplus, or other sources. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations–
Liquidity–Holding Company Liquidity.
AHL’s subsidiaries may not be able to, or may not be permitted to, make distributions to enable AHL to meet its obligations and pay dividends.
In particular, as a condition to the New York State Department of Financial Services’ (NYSDFS) approval of our acquisition of ALICNY in
connection with the broader Aviva USA acquisition, we agreed not to cause ALICNY to declare, distribute or pay any dividend for five years
from the date of acquisition of control of ALICNY without the prior written consent of the NYSDFS, which period expires on October 2, 2018.
Similarly, as a condition to the approval of the IID of our acquisition of Aviva USA’s Iowa-domiciled subsidiaries, we agreed not to cause AAIA
to pay any dividend or other distribution to shareholders for five years, which period expires on August 15, 2018, without the prior approval of
the IID. Further, any dividends paid to AHL by its U.S. subsidiaries would be subject to a 30% withholding tax under the Internal Revenue
Code, which creates a significant disincentive for AHL’s subsidiaries to pay such dividends and could have the effect of significantly reducing
dividends or other amounts payable to AHL by its U.S. subsidiaries. These limitations on AHL’s U.S. subsidiaries’ abilities to pay dividends to it
as a shareholder may negatively impact AHL’s financial condition, results of operations and cash flows.
Each subsidiary is a distinct legal entity and legal and contractual restrictions may also limit AHL’s ability to obtain cash from its subsidiaries. In
addition to the specific restrictions described above, AHL’s subsidiaries, as members of its insurance holding company system, are subject to
various statutory and regulatory restrictions on their ability to pay dividends to AHL, as further described in Item 1. Business–Regulation–
United States–Insurance Holding Company Regulation.
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Item 1A. Risk Factors
AHL may in the future incur indebtedness in order to pay dividends to shareholders. If AHL did determine to incur additional indebtedness in
order to pay dividends, such dividends would be subject to the terms of AHL’s existing indebtedness as well as any credit agreement that AHL
may enter into in the future. AHL does not currently anticipate paying any regular cash dividends on its common shares. Any decision to declare
and pay dividends in the future will be made at the discretion of AHL’s board of directors and will depend on, among other things, AHL’s results
of operations, financial condition, cash requirements, excess capital position, alternative uses of capital, contractual restrictions and other factors
that AHL’s board of directors may deem relevant. Therefore, any return on investment in AHL’s common stock may be solely dependent upon
the appreciation of the price of AHL’s common stock on the open market, which may not occur.
Holders of our shares may have difficulty effecting service of process on us or enforcing judgments against us in the United States.
AHL is incorporated pursuant to the laws of Bermuda and is domiciled in Bermuda. In addition, certain of our directors and officers reside
outside the United States, and a substantial portion of our assets are located in jurisdictions outside the United States. As such, we have been
advised that there is doubt as to whether:
•
•
a holder of our shares would be able to enforce, in the courts of Bermuda, judgments of U.S. courts against us or against persons who
reside in Bermuda based upon the civil liability provisions of the U.S. federal securities laws; or
a holder of our shares would be able to bring an original action in the Bermuda courts to enforce liabilities against us or our directors
and officers who reside outside the United States based solely upon U.S. federal securities laws.
Further, we have been advised that there is no treaty in effect between the United States and Bermuda providing for the enforcement of
judgments of U.S. courts, and there are grounds upon which Bermuda courts may not enforce judgments of U.S. courts. Because judgments of
U.S. courts are not automatically enforceable in Bermuda, it may be difficult for you to recover against us based upon such judgments.
Additionally, we have been advised that the United States and Bermuda do not currently have a treaty providing for reciprocal recognition and
enforcement of judgments in civil and commercial matters. A Bermuda court may, however, impose civil liability on us or our directors or
officers in a suit brought in the Supreme Court of Bermuda provided that the facts alleged constitute or give rise to a cause of action under
Bermuda law. Certain remedies available under the laws of U.S. jurisdictions, including certain remedies under the U.S. federal securities laws,
would not be allowed in Bermuda courts to the extent that they are contrary to public policy.
Our choice of forum provisions in our bye-laws may limit your ability to bring suits against us or our directors and officers.
Our bye-laws currently provide that if any dispute arises concerning the Companies Act or out of or in connection with our bye-laws, including
any question regarding the existence and scope of any bye-law and/or whether there has been a breach of the Companies Act or our bye-laws by
an officer or director (whether or not such a claim is brought in the name of a shareholder or in the name of the Company), any such dispute
shall be subject to the exclusive jurisdiction of the Supreme Court of Bermuda. This choice of forum provision may limit a shareholder’s ability
to bring a claim in a judicial forum that the shareholder believes is favorable for disputes with us or our directors or officers, which may
discourage lawsuits against us and our directors and officers. Alternatively, if a court were to find this provision of our bye-laws inapplicable to,
or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with
resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.
U.S. persons who own our shares may have more difficulty in protecting their interests than U.S. persons who are shareholders of a U.S.
corporation.
The Companies Act, which applies to AHL, differs in certain material respects from laws generally applicable to U.S. corporations and their
shareholders. Set forth below is a summary of certain significant provisions of the Companies Act and our bye-laws which differ in certain
respects from provisions of Delaware corporate law. Because the following statements are summaries, they do not discuss all aspects of
Bermuda law that may be relevant to us and our shareholders.
Interested Directors
Bermuda law provides that we cannot void any transaction we enter into in which a director has an interest, nor can such director be liable to us
for any profit realized pursuant to such transaction, provided the nature of the interest is disclosed at the first opportunity at a meeting of
directors, or in writing, to the directors. Under Delaware law such transaction would not be voidable if:
•
•
•
the material facts as to such interested director’s relationship or interests were disclosed or were known to the board of directors and
the board of directors had in good faith authorized the transaction by the affirmative vote of a majority of the disinterested directors;
such material facts were disclosed or were known to the shareholders entitled to vote on such transaction and the transaction was
specifically approved in good faith by vote of the majority of shares entitled to vote thereon; or
the transaction was fair to the corporation as of the time it was authorized, approved or ratified.
Under Delaware law, the interested director could be held liable for a transaction in which the director derived an improper personal benefit.
69
Item 1A. Risk Factors
Shareholders’ Suits
The rights of shareholders under Bermuda law are not as extensive as the rights of shareholders in many U.S. jurisdictions. Class actions and
derivative actions are generally not available to shareholders under the laws of Bermuda. However, the Bermuda courts ordinarily would be
expected to follow English case law precedent, which would permit a shareholder to commence an action in the name of the company to remedy
a wrong done to the company where an act is alleged to be beyond the corporate power of the company, is illegal or would result in the violation
of our memorandum of association or bye-laws. Furthermore, a court would consider acts that are alleged to constitute a fraud against the
minority shareholders or acts requiring the approval of a greater percentage of our shareholders than actually approved it. The winning party in
such an action generally would be able to recover a portion of attorneys’ fees incurred in connection with such action. Class actions and
derivative actions generally are available to shareholders under Delaware law for, among other things, breach of fiduciary duty, corporate waste
and actions not taken in accordance with applicable law. In such actions, the court has discretion to permit the winning party to recover
attorneys’ fees incurred in connection with such action.
Indemnification of Directors
We have entered into indemnification agreements with our directors and officers which provide that we will indemnify our directors and officers
or any person appointed to any committee by the board of directors acting in their capacity as such for any loss arising or liability attaching to
them by virtue of any rule of law in respect of any negligence, default, breach of duty or breach of trust of which such person may be guilty in
relation to Athene other than in respect of his own fraud or dishonesty. We are also required to indemnify our directors and officers in any
proceeding in which they are successful. The indemnification agreements are limited to those payments that are lawful under Bermuda law.
Furthermore, pursuant to our bye-laws, our shareholders have agreed to waive any claim or right of action such shareholder may have, whether
individually or by or in right of AHL, against any director or officer of AHL on account of any action taken by such director or officer, or the
failure of such director or officer to take any action in the performance of his or her duties with or for AHL or any subsidiary of AHL; provided
that such waiver does not extend to any matter in respect of any fraud or dishonesty which may attach to such director or officer.
70
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We own our headquarters for U.S. operations, which is located in West Des Moines, IA and we lease our head office for Bermuda operations,
which is located in Pembroke, Bermuda. Our Retirement Services segment includes our Iowa and Bermuda offices. We believe that for the
foreseeable future our West Des Moines and Bermuda properties will be sufficient for us to conduct our current operations.
Item 3. Legal Proceedings
We are subject to litigation arising in the ordinary course of our business, including litigation principally relating to our FIA business. We cannot
assure you that our insurance coverage will be adequate to cover all liabilities arising out of such claims. The outcomes of legal proceedings and
claims brought against us are subject to significant uncertainty. There is significant judgment required in assessing both the probability of an
adverse outcome and the determination as to whether an exposure can be reasonably estimated. In management’s opinion, the ultimate
disposition of any current legal proceedings or claims brought against us will not have a material effect on our financial condition, results of
operations or cash flows. Litigation is, however, inherently uncertain and an adverse outcome from such litigation could have a material effect
on the operating results of a particular reporting period.
From time to time, in the ordinary course of business and like others in the insurance and financial services industries, we receive requests for
information from government agencies in connection with such agencies’ regulatory or investigatory authority. Such requests can include
financial or market conduct examinations, subpoenas or demand letters for documents to assist the government in audits or investigations. We
and each of our U.S. insurance subsidiaries review such requests and notices and take appropriate action. We have been subject to certain
requests for information and investigations in the past and could be subject to them in the future.
For a description of certain legal proceedings affecting us, see Note 18 – Commitments and Contingencies – Litigations, Claims and
Assessments to the consolidated financial statements.
Item 4. Mine Safety Disclosures
Not applicable.
71
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our Class A common shares began trading on the NYSE under the symbol “ATH” on December 9, 2016.
The following table summarizes high and low closing prices for our Class A common shares on the NYSE for the periods indicated:
High
Low
High
Low
Shareholders
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2017
$
$
$
$
53.72 $
45.90 $
54.30 $
48.79 $
2016
54.34 $
48.85 $
55.02
46.69
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
— $
— $
— $
— $
— $
— $
47.99
44.05
As of January 31, 2018, there were 142,449,265 Class A common shares outstanding and held of record by 495 shareholders, 47,421,940 Class
B common shares outstanding and held of record by 13 shareholders, 3,388,890 Class M-1 common shares outstanding and held of record by 4
shareholders, 851,103 Class M-2 common shares outstanding and held of record by 2 shareholders, 1,088,000 Class M-3 common shares are
outstanding and held of record by 3 shareholders, and 4,701,866 Class M-4 common shares outstanding and held of record by 120 shareholders.
Dividends
We do not currently pay dividends on any of our common shares and we currently intend to retain all available funds and any future earnings for
use in the operation of our business. We may, however, pay cash dividends on our common shares, including our Class A common shares, in the
future. Any future determination to pay dividends will be made at the discretion of our board of directors and will depend upon many factors,
including our financial condition, earnings, legal and regulatory requirements, restrictions in our debt agreements and other factors our board of
directors deems relevant. While we do not currently have any preference shares, if we issue such shares in the future, our board of directors may
declare and pay a dividend on one or more classes of shares to the extent one or more classes of shares ranks senior to or has a priority over
another class of shares. Our ability to pay dividends on our Class A common shares is limited by the terms of our existing indebtedness and may
be restricted by the terms of any future credit agreement or any future debt or preferred securities of ours or of our subsidiaries. See Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity and Capital Resources and Note 10 – Debt
to the consolidated financial statements for further discussion.
Furthermore, AHL is a holding company and has no direct operations. All of AHL’s business operations are conducted through its subsidiaries.
Any dividends AHL pays will depend upon its funds legally available for distribution, including dividends from its subsidiaries. AHL’s U.S.
insurance subsidiaries are highly regulated and are required to comply with various conditions before they are able to pay dividends or make
distributions to AHL. See Item 1. Business–Regulation and Note 16 – Statutory Requirements to the consolidated financial statements for further
discussion. In addition, any dividends payable to AHL by its U.S. insurance subsidiaries, if permitted, would be subject to a withholding tax of
up to 30%.
Securities Authorized for Issuance under Equity Compensation Plans
See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters–Share Incentive Plan
Information for information regarding our equity compensation plans.
Recent Sales of Unregistered Securities
None.
72
Issuer Purchases of Securities
Purchases of common stock made by or on behalf of us or our affiliates during the three months ended December 31, 2017 are set forth below:
Period
October 1 – October 31, 2017
November 1 – November 30, 2017
December 1 – December 31, 2017
(a) Total number of
shares purchased1
(b) Average price paid
per share1
(c) Total number of
shares purchased as part
of publicly announced
programs2
(d) Maximum number
(or approximate dollar
value) of shares that may
yet be purchased under
the plans or programs2
215 $
18 $
2,019 $
53.84
48.92
51.50
— $
— $
— $
—
—
—
1 Purchases relate to shares withheld (under the terms of employee stock-based compensation plans) to offset tax withholding obligations that occur upon the
delivery of outstanding shares underlying equity awards or upon the exercise of stock options.
2 As of December 31, 2017, our Board of Directors had not authorized any purchases of common stock in connection with a publicly announced plan or
program.
73
Item 6. Selected Financial Data
The following tables set forth our selected historical consolidated financial data, which should be read in conjunction with Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data. The
information has been derived from our historical consolidated financial statements. In addition, the summary historical consolidated financial
data presented below for the years ended December 31, 2014 and 2013 gives effect to the correction of certain immaterial errors. Our historical
results are not necessarily indicative of future results.
20132
$
1,748
(In millions, except percentages, share, and per share data)
20171
Consolidated Statements of Income Data
Years ended December 31,
20151,2
20161
2014
Total revenues
Total benefits and expenses
Income before income taxes
Net income available to AHL shareholders
Adjusted operating income (a non-GAAP measure)
ROE
ROE excluding AOCI (a non-GAAP measure)
Adjusted operating ROE excluding AOCI (a non-GAAP measure)
Earnings per share3
Basic
Diluted – Class A common shares
Adjusted operating earnings per share (a non-GAAP measure)
Weighted average common shares outstanding
Basic3
Diluted – Class A common shares3
Adjusted operating common shares (a non-GAAP measure)4
Consolidated Balance Sheets Data
Investments, including related parties
Investments of consolidated variable interest entities
Total assets
Interest sensitive contract liabilities
Future policy benefits
Notes payable, including related party notes payable
Borrowings of consolidated variable interest entities
Total liabilities
Total AHL shareholders’ equity
Book value per share
Book value per share, excluding AOCI (a non-GAAP measure)
Common shares outstanding5
Adjusted operating common shares outstanding (a non-GAAP
measure)4
$
$
$
$
8,727
7,192
1,535
1,448
1,109
18.0%
20.3%
15.5%
7.41
7.37
5.66
$
$
$
$
4,105
3,389
716
768
728
12.6%
12.7%
12.1%
4.11
4.02
3.77
$
$
$
$
2,618
2,028
590
562
738
11.4%
11.9%
15.6%
3.21
3.21
4.21
$
$
$
$
4,101
3,577
524
456
785
12.5%
13.8%
23.8%
3.52
3.47
5.97
$
$
$
762
986
913
775
39.5%
42.1%
35.7%
8.04
7.93
6.73
195,334,176
186,751,109
175,091,802
129,519,108
113,506,457
111,005,641
53,530,476
41,301,248
131,608,464
115,110,030
195,884,650
193,371,496
175,178,648
131,608,464
115,110,030
20171
20161
December 31,
20151,2
2014
20132
$
84,367
$
72,433
$
64,525
$
60,631
$
859
99,747
67,708
17,507
—
—
90,539
9,208
46.76
39.58
$
$
901
86,699
61,532
14,592
—
—
79,840
6,858
35.66
33.05
$
$
1,565
80,846
57,289
14,547
—
500
75,493
5,352
28.76
30.04
$
$
3,409
82,737
60,639
11,143
—
2,017
78,159
4,545
32.22
27.21
$
$
$
$
58,156
4,348
80,805
60,384
10,714
351
2,413
77,953
2,758
23.96
22.34
196,905,841
192,315,819
186,115,240
141,035,628
115,099,947
196,863,799
196,400,281
186,115,240
143,347,480
120,341,882
1 In the third quarter of 2015, we amended portions of reinsurance agreements between us and Global Atlantic, which changed the reinsurance agreements from
funds withheld coinsurance to coinsurance agreements. In addition, beginning in the third quarter of 2015 and through the year ended December 31, 2017, we
agreed to novate certain open blocks of business ceded to Global Atlantic. See Note 7 – Reinsurance of the consolidated financial statements.
2 Reflects the acquisition of DLD from October 1, 2015 and the acquisition of Aviva USA from October 2, 2013.
3 Basic earnings per share, including basic weighted average shares outstanding, includes all classes eligible to participate in dividends for each period
presented. Diluted earnings per share on Class A shares, including diluted Class A weighted average shares outstanding, includes the dilutive impacts, if any, of
Class B shares, Class M shares and any other stock-based awards. See Note 13 – Earnings Per Share of the consolidated financial statements for additional
information regarding basic and diluted earnings per share.
4 Represents Class A shares outstanding or weighted average shares outstanding assuming conversion or settlement of all outstanding items that are able to be
converted to or settled in Class A shares, including the impacts of Class B shares, Class M shares and any other stock-based awards. For December 31, 2015
and prior, Class M shares were not included due to issuance restrictions which were contingent upon our IPO. See Note 12 – Stock-based Compensation of the
consolidated financial statements for additional information regarding the IPO issuance restriction.
5 Represents shares outstanding for all classes eligible to participate in dividends for each period presented. See Note 13 – Earnings Per Share of the
consolidated financial statements for additional information regarding classes eligible to participate in dividends as of each period.
74
Item 6. Selected Financial Data
Non-GAAP Measures—In addition to our results presented in accordance with GAAP, our results of operations include certain non-GAAP
measures commonly used in our industry. Management believes the use of these non-GAAP measures, together with the relevant GAAP
measures, provides information that may enhance an investor’s understanding of our results of operations and the underlying profitability drivers
of our business. These measures should be considered supplementary to our results in accordance with GAAP and should not be viewed as a
substitute for the GAAP measures. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations–Key
Operating and Non-GAAP Measures for additional discussions regarding non-GAAP measures.
The following are reconciliations of adjusted operating income, weighted average shares outstanding – adjusted operating, and adjusted
operating earnings per share to their corresponding GAAP measures, net income available to AHL shareholders, basic weighted average shares
outstanding – Class A common shares, and basic earnings per share – Class A common shares, respectively:
(In millions)
Adjusted operating income
Non-operating adjustments
Investment gains (losses), net of offsets
Change in fair values of derivatives and embedded derivatives –
FIAs, net of offsets
Integration, restructuring and other non-operating expenses
Stock compensation expense
Bargain purchase gain
Income tax (expense) benefit – non-operating
Total non-operating adjustments
Years ended December 31,
2017
2016
2015
2014
2013
$
1,109
$
728
$
738
$
785
$
775
199
266
(68)
(33)
—
(25)
339
47
95
(22)
(82)
—
2
40
(56)
(25)
(58)
(67)
—
30
(176)
562
$
152
(30)
(279)
(148)
—
(24)
(329)
456
$
(5)
154
(184)
—
152
21
138
913
Net income available to AHL shareholders
$
1,448
$
768
$
2017
2016
2015
2014
2013
Years ended December 31,
Basic weighted average shares outstanding – Class A
107,682,569
52,086,945
41,214,402
11,105,082
494,201
Conversion of Class B shares to Class A shares
81,596,697
134,445,840
133,877,400
118,414,026
113,012,256
Conversion of Class M shares to Class A shares
Effect of other stock compensation plans
Effect of equity swap
6,147,968
457,416
—
6,609,590
229,121
—
—
86,846
—
11
—
9
—
2,089,345
1,603,564
Weighted average shares outstanding – adjusted operating
195,884,650
193,371,496
175,178,648
131,608,464
115,110,030
2017
2016
2015
2014
2013
Years ended December 31,
Adjusted operating earnings per share
$
5.66
$
3.77
$
4.21
$
5.97
$
6.73
Non-operating adjustments
Investment gains (losses), net of offsets
Change in fair values of derivatives and embedded derivatives –
FIAs, net of offsets
Integration, restructuring and other non-operating expenses
Stock compensation expense
Bargain purchase gain
Income tax (expense) benefit – non-operating
Total non-operating adjustments
Effect of items convertible to or settled in Class A common shares
Basic earnings per share – Class A common shares
$
1.02
1.36
(0.35)
(0.17)
—
(0.13)
1.73
0.02
7.41
$
0.24
0.50
(0.12)
(0.42)
—
0.01
0.21
0.13
4.11
$
(0.33)
(0.14)
(0.33)
(0.38)
—
0.17
(1.01)
0.01
3.21
$
1.16
(0.24)
(2.12)
(1.12)
—
(0.18)
(2.50)
0.05
3.52
$
(0.04)
1.33
(1.61)
—
1.33
0.19
1.20
0.11
8.04
75
Item 6. Selected Financial Data
The following is a reconciliation of total AHL shareholders’ equity excluding AOCI, which is used in calculating ROE excluding AOCI and
book value per share excluding AOCI, to its corresponding GAAP measure, total AHL shareholders’ equity:
(In millions)
Total AHL shareholders’ equity
Less: AOCI
Total AHL shareholders’ equity excluding AOCI
December 31,
2017
2016
2015
2014
2013
$
$
9,208
1,415
7,793
$
$
6,858
367
6,491
$
$
5,352
(237)
5,589
$
$
4,545
644
3,901
$
$
2,758
70
2,688
The following is a reconciliation of adjusted operating common shares outstanding to its corresponding GAAP measure, Class A common shares
outstanding.
2017
2016
2015
2014
2013
December 31,
Class A common shares outstanding
142,156,255
77,035,785
50,151,265
15,752,736
494,200
Conversion of Class B shares to Class A shares
47,422,399
111,805,829
135,963,975
125,282,892
114,605,747
Conversion of Class M shares to Class A shares
Effect of other stock compensation plans
Effect of equity swap
6,371,502
913,643
—
6,809,252
749,415
—
—
—
—
—
—
—
—
2,311,852
5,241,935
Adjusted operating common shares outstanding
196,863,799
196,400,281
186,115,240
143,347,480
120,341,882
The following is a reconciliation of book value per share excluding AOCI to its corresponding GAAP measure, book value per share.
Book value per share
AOCI
Effect of items convertible to or settled in Class A common shares
Book value per share excluding AOCI
December 31,
2017
2016
2015
2014
2013
$
$
46.76
$
35.66
$
28.76
$
32.22
$
(7.19)
0.01
(1.91)
(0.70)
1.28
—
(4.56)
(0.45)
39.58
$
33.05
$
30.04
$
27.21
$
23.96
(0.60)
(1.02)
22.34
76
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Industry Trends and Competition
Key Operating and Non-GAAP Measures
Results of Operations
Consolidated Investment Portfolio
Non-GAAP Measure Reconciliations
Liquidity and Capital Resources
Balance Sheet and Other Arrangements
Critical Accounting Estimates and Judgments
78
79
82
85
92
108
111
115
116
77
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Forward-Looking
Statements, Item 1A. Risk Factors, Item 6. Selected Financial Data, and Item 8. Financial Statements included within this report.
Overview
We are a leading retirement services company that issues, reinsures and acquires retirement savings products designed for the increasing number
of individuals and institutions seeking to fund retirement needs. We generate attractive financial results for our policyholders and shareholders
by combining our two core competencies of (1) sourcing long-term, generally illiquid liabilities and (2) investing in a high quality investment
portfolio, which takes advantage of the illiquid nature of our liabilities. Our steady and significant base of earnings generates capital that we
opportunistically invest across our business to source attractively-priced liabilities and capitalize on opportunities. Our differentiated investment
strategy benefits from our strategic relationship with Apollo and its indirect subsidiary, AAM. AAM provides a full suite of services for our
investment portfolio, including direct investment management, asset allocation, mergers and acquisition asset diligence and certain operational
support services, including investment compliance, tax, legal and risk management support. Our relationship with Apollo and AAM also
provides us with access to Apollo’s investment professionals around the world as well as Apollo’s global asset management infrastructure that,
as of December 31, 2017, supported more than $248 billion of AUM across a broad array of asset classes. We are led by a highly skilled
management team with extensive industry experience. We are based in Bermuda with our U.S. subsidiaries’ headquarters located in Iowa.
We began operating in 2009 when the burdens of the financial crisis and resulting capital demands caused many companies to exit the retirement
market, creating the need for a well-capitalized company with an experienced management team to fill the void. Taking advantage of this market
dislocation, we have been able to acquire substantial blocks of long-duration liabilities and reinvest the related investments to produce profitable
returns. We have established a significant base of earnings and as of December 31, 2017, have an expected annual investment margin of 2-3%
over the 8.2 year weighted-average life of our deferred annuities, which make up a substantial portion of our reserve liabilities. As of
December 31, 2017, the weighted-average life all products, excluding Germany, which includes deferred annuities, payout annuities, PRT
obligations, funding agreements and other products was 9.2 years.
We are diligent in setting our return targets based on market conditions and risks inherent to our products offered and acquisitions or block
reinsurance transactions. Specific return targets are established with due consideration to the facts and circumstances surrounding each growth
opportunity and may be higher or lower than those that we target more generally. Factors that we consider in establishing return targets for a
given growth opportunity include, but are not limited to, the certainty of the return profile, the strategic nature of the opportunity, the size and
scale of the opportunity, the alignment and fit of the opportunity with our existing business, the opportunity for risk diversification and the
existence of increased opportunities for higher returns or growth. If market conditions or risks inherent to a product or transaction create return
profiles that are not acceptable to us, we generally will not sacrifice our profitability merely to facilitate growth
We operate our core business strategies out of one reportable segment, Retirement Services. In addition to Retirement Services, we report certain
other operations in Corporate and Other. Retirement Services is comprised of our U.S. and Bermuda operations which issue and reinsure
retirement savings products and institutional products. Corporate and Other includes certain other operations related to our corporate activities
and our former German operations, which is primarily comprised of participating long-duration savings products.
Our consolidated ROE for the year ended December 31, 2017 was 18.0% and our consolidated adjusted operating ROE excluding AOCI was
15.5%. As a result of our focus on issuing, reinsuring and acquiring attractively-priced liabilities, our differentiated investment strategy and our
significant scale, for the year ended December 31, 2017, in our Retirement Services segment, we generated an investment margin on deferred
annuities of 2.82% and adjusted operating ROE excluding AOCI of 22.0%. We currently maintain what we believe to be high capital ratios for
our rating and, as of December 31, 2017, hold more than $1.5 billion of excess capital, and view this excess as strategic capital available to
reinvest into organic and inorganic growth opportunities.
Our organic channels, including retail, flow reinsurance and institutional products, provided deposits of $11.5 billion, $8.8 billion and $5.8
billion for the years ended December 31, 2017, 2016 and 2015, respectively. Withdrawals on our deferred annuities, maturities of our funding
agreements, payments on payout annuities, and pension risk benefit payments (collectively, liability outflows), in the aggregate, were $5.8
billion, $5.4 billion and $5.3 billion for the years ended December 31, 2017, 2016 and 2015, respectively. We believe that our improving credit
profile, our current product offerings, product design capabilities and 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. Our inorganic channels, including acquisitions and block reinsurance, have
contributed significantly to our growth. We believe our internal acquisitions team, with support from Apollo, has an industry-leading ability to
source, underwrite, and expeditiously close transactions, which makes us a competitive counterparty for acquisition or block reinsurance
transactions.
We plan to grow organically by expanding our retail, flow reinsurance and institutional distribution channels. We believe that we have the right
people, infrastructure and scale to position us for continued growth. Within our retail channel we had fixed annuity sales of $5.4 billion, $5.3
billion and $2.5 billion for the years ended December 31, 2017, 2016 and 2015, respectively. We aim to grow our retail channel in the United
States by deepening our relationships with our approximately 65 IMOs and more than 34,000 independent agents. Our strong financial position
and capital efficient products allow us to be a dependable partner with IMOs and consistently write new business. We work with our IMOs to
develop customized, and at times exclusive, products that help drive sales. We expect our retail channel to continue to benefit from our
improving credit profile and recent product launches. We believe this should support growth in sales at our desired cost of crediting through
increased volumes via current IMOs and access to new distribution channels, including small to mid-sized banks and regional broker-dealers.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We are implementing the necessary technology platform, hiring and training a specialized sales force, and have created products to capture new
potential distribution opportunities. In our flow reinsurance channel, we target reinsurance business consistent with our preferred liability
characteristics, and as such, flow reinsurance provides another opportunistic channel for us to source long-term liabilities with attractive
crediting rates. We generated deposits through our flow reinsurance channel of $875 million, $3.5 billion and $1.1 billion for the years ended
December 31, 2017, 2016 and 2015, respectively. We believe the decrease in flow reinsurance has been impacted by the recent decline in overall
MYGA volumes reflective of tighter investment spreads, the recent stock market rally and expectations of higher interest rates. As we continue
to source additional reinsurance partners, we expect to further diversify our flow reinsurance channel and expect that our improving credit
profile will help us attract additional reinsurance partners. Within our institutional channel, we generated deposits of $5.3 billion, $0 million and
$250 million for the years ended December 31, 2017, 2016 and 2015, respectively. Our ability to issue funding agreements, namely those issued
through our FABN program, has benefited from our public company status and improving credit profile, allowing us to generate deposits in the
aggregate principal amount of $3.0 billion, $0 million and $250 million for the years ended December 31, 2017, 2016 and 2015, respectively. In
addition, growth in our institutional channel was attributed to our entry into the PRT market in 2017, during which we closed four transactions
and issued group annuity contracts in the aggregate principal amount of $2.3 billion. We expect to grow our institutional channel by continuing
to engage in opportunistic issuances of funding agreements and by continuing to engage in PRT transactions.
Acquisition Summary Included in Results of Operations
On October 1, 2015, we acquired 100% of the outstanding shares of DLD from Delta Lloyd N.V., an Amsterdam-based financial services
provider. As a result of the acquisition, we acquired $5.9 billion of assets and $5.9 billion of liabilities (as of the acquisition date) and began
operating in Germany. The impact of this transaction has an effect on the comparability of our historical results. For this reason in particular,
historical discussions of changes between periods are not necessarily indicative of future results. To enhance comparability of December 31,
2017, 2016 and 2015 results, we highlight the financial results applicable to the acquisition of DLD where meaningful.
On January 1, 2018, in connection with the closing of the AGER Offering, our equity interest in the AGER Group was exchanged for common
shares of AGER. See Note 1 – Business, Basis of Presentation and Significant Accounting Policies to the consolidated financial statements for
further details of the deconsolidation of our German operations. Since the deconsolidation did not occur until January 1, 2018, AGER remains
consolidated in our financial results and within Corporate and Other for segment reporting for the years ended December 31, 2017, 2016 and
2015. Our future results will reflect our investment in AGER as an alternative investment.
Industry Trends and Competition
Market Conditions
Our business and results of operations are materially affected by conditions in the global capital markets and the economy generally. A general
economic slowdown could adversely affect us in the form of changes in consumer behavior and decreases in the returns on and value of our
investment portfolio. Concerns over U.S. economic growth rates, unemployment, inflation levels, low or negative interest rates, the U.S.
housing market, future fiscal policies, geopolitical issues, stability of the EU, currency fluctuations and volatility, and the availability and cost of
credit may contribute to increased volatility for the economy and the markets. Global economic growth rates and resultant diverging paths of
monetary policy could increase volatility in the credit markets, potentially impacting the availability and cost of credit. Factors such as equity
prices, equity market volatility, interest rates, counterparty risks, availability of credit, inflation rates, economic uncertainty, changes in laws or
regulations (including laws relating to the financial markets generally or the taxation or regulation of the insurance industry), trade barriers,
commodity prices, currency exchange rates and controls and national and international political circumstances (including governmental
instability, wars, terrorist acts or security operations) can have a material impact on the value of our investment portfolio and our ability to sell
our products. We continuously monitor and enhance our product portfolio with regards to changes in the economic environment, the behavior of
customers and other factors, including mortality rates, morbidity rates, cap rates, rollup rates, annuitization rates and lapse rates, which can vary
in response to changes in market conditions. We believe continued economic growth, stable financial markets and a potentially rising interest
rate environment may ultimately enhance the attractiveness of our product portfolio. However, we remain exposed to potential slowdowns in
economic activity, which could be characterized by rising unemployment, falling interest rates, widening credit spreads and an increase in
corporate credit and real estate-related defaults.
Interest Rate Environment
As a retirement services company focused on issuing and reinsuring fixed annuities, we are affected by the monetary policy of the Federal
Reserve in the United States as well as other central banks around the world. In spite of the Federal Reserve increasing federal funds rates in
March, June and again in December 2017, interest rates in the United States remain lower than historical levels. The lower interest rates in part
are due to a number of actions taken in recent years by the Federal Reserve in an effort to stimulate economic activity. Any future increases in
federal funds rates are uncertain and will depend on the economic outlook.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our investment portfolio consists predominantly of fixed maturity investments. See –Consolidated Investment Portfolio. If prevailing interest
rates were to rise, we believe the yield on our new investment purchases may also rise and our investment income from floating rate investments
would increase while the value of our existing investments may decline. If prevailing interest rates were to decline, it is likely that the yield on
our new investment purchases may decline and our investment income from floating rate investments would decrease while the value of our
existing investments may increase. We address interest rate risk through managing the duration of the liabilities we source with assets we
acquire and through ALM modeling. We endeavor to limit reinvestment risk related to cash flows by managing our asset portfolio to ensure it
provides adequate cash flows to meet our expected policyholder benefit cash flows to within tolerable risk management limits. Our strategy is to
achieve sustainable yields that allow us to maintain an attractive investment margin. As part of our investment strategy, we purchase floating rate
investments, which we expect will perform well in a rising interest rate environment. Our investment portfolio includes $22.8 billion of floating
rate investments, or approximately 28% of our total invested assets as of December 31, 2017. As part of our reinvestment strategy for the
investment portfolios of our acquired companies, we generally seek to reinvest assets at yields higher than the related assets being liquidated for
reinvestment. We continuously seek to optimize our investment portfolio to achieve favorable returns over the long term.
If prevailing interest rates were to rise, we believe our products would be more attractive to consumers and our sales would likely increase. In
periods of prolonged low interest rates, the investment margin earned on deferred annuities may be negatively impacted by reduced investment
income to the extent that we are unable to adequately reduce policyholder crediting rates due to policyholder guarantees in the form of minimum
crediting rates or otherwise due to market conditions. As of December 31, 2017, most of our products were fixed annuities with approximately
35% of our FIAs at the minimum guarantees and approximately 48% of our fixed rate annuities at the minimum crediting rates. As of
December 31, 2017, minimum guarantees on all of our deferred annuities, including those with crediting rates already at their minimum
guarantees, were, on average, 85 to 95 basis points below the crediting rates on such deferred annuities, allowing us room to reduce rates before
reaching the minimum guarantees. Our remaining liabilities are associated with immediate annuities, pension risk transfer obligations, funding
agreements or life contracts for which we have little to no discretionary ability to change the rates of interest payable to the respective
policyholder. A significant majority of our products have crediting rates that we may reset annually upon renewal following the expiration of the
current guaranteed period. While we have the contractual ability to lower these crediting rates to the guaranteed minimum levels, our
willingness to do so may be limited by competitive pressures.
See Item 7A. Quantitative and Qualitative Disclosures About Market Risks, which includes a discussion regarding interest rate and other
significant risks and our strategies for managing these risks.
Demographics
Over the next four decades, the retirement-age population is expected to experience unprecedented growth. Technological advances and
improvements in healthcare are projected to continue to contribute to increasing average life expectancy, and aging individuals must be prepared
to fund retirement periods that will last longer than ever before. Further, many working households in the United States do not have adequate
retirement savings. As a tool for addressing the unmet need for retirement planning, we believe that many Americans have begun to look to tax-
efficient savings products with low-risk or guaranteed return features and potential equity market upside. Our tax-efficient savings products are
well positioned to meet this increasing customer demand.
We believe that our strong presence in the FIA market and strength of our relationships with IMOs position us to effectively serve consumers’
demand in the rapidly growing retirement savings market. We expect that our retail channel will continue to benefit from our improving credit
profile and recent product launches. We believe this should help us to grow sales at our desired cost of crediting through increased volumes via
current IMOs and access to new distribution channels, including small to mid-sized banks and regional broker-dealers. We also believe that our
improving credit profile has enabled and will continue to enable us to increase penetration in our existing organic channels, such as flow
reinsurance and funding agreements, while also helping us to increase our presence in the PRT market.
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.
It is unclear at this time what impact, if any, the Tax Act will have on the competitive environment of the markets in which we compete. If U.S.-
based competitors use some or all of their tax savings to offset reductions in product pricing, we could see increased price competition, which
would place downward pressure on our return targets and on volumes within each of our distribution channels. See Item 1. Business–
Regulation–United States–Tax Reform.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
According to LIMRA, total fixed annuity market sales in the United States were $81.7 billion for the nine months ended September 30, 2017, an
11.0% decrease from the same time period in 2016. This decrease was driven by a decrease in traditional fixed rate deferred annuities of $4.3
billion, or 13.9% over prior year fixed rate deferred annuities, and a decrease in FIA products of $4.0 billion, or 8.5% over prior year FIAs. In
the total fixed annuity market, for the nine months ended September 30, 2017 (the most recent period for which specific market share data is
available), we were the 5th largest company based on sales with a 5.0% market share and $4.1 billion in sales. For the nine months ended
September 30, 2016, our market share was 4.2% with sales of $3.8 billion.
FIAs are one of the fastest growing annuity products having grown from $27.3 billion in 2005 to $60.9 billion in sales for the year ended
December 31, 2016. According to LIMRA, for the nine months ended September 30, 2017 (the most recent period for which specific market
share data is available), we were the 2nd largest provider of FIAs in terms of sales, and our market share for the same period was 8.6% with
sales of $3.7 billion. For the nine months ended September 30, 2016, we were the 3rd largest provider of FIAs in terms of sales, and our market
share was 6.9% with sales of $3.2 billion.
Regulatory Developments
We continue to face material uncertainty regarding the substance and timing of the DOL fiduciary rule and regarding the ultimate impacts of tax
reform to our business. See Item 1. Business–Regulation–United States–ERISA for further discussion regarding the DOL fiduciary rule.
Tax Reform
On December 22, 2017, President Trump signed the Tax Act into law, which introduced significant changes to the Internal Revenue Code. While
our expectations may be subject to change as we continue to evaluate the impact of the Tax Act on our business, we expect the following notable
impacts:
•
•
Overall tax rate – Although the Tax Act reduces corporate income tax rates to 21% beginning in 2018, it also imposes a new minimum
tax, referred to as the BEAT, which taxes modified taxable income at a rate of 5% beginning in 2018, increasing to 10% in 2019 and
12.5% in 2026. In general, modified taxable income is calculated by adding back to a taxpayer’s regular taxable income the amount of
certain “base erosion tax benefits” with respect to payments to foreign affiliates, as well as the “base erosion percentage” of any net
operating loss deductions. The BEAT applies only to the extent it exceeds a taxpayer’s regular corporate income tax liability
(determined without regard to certain tax credits). The BEAT is expected to apply to our U.S. subsidiaries with respect to payments to
our Bermuda subsidiary, ALRe. The BEAT does not apply to premium paid to ALRe directly by unaffiliated ceding companies or
investment income earned on ALRe’s surplus assets, which together currently represent approximately 15-20% of our pre-tax income.
In addition to the BEAT, the 1% excise tax (which is included in policy and other operating expenses on the consolidated statements of
income) that we currently pay will remain in place for reinsurance payments to ALRe.
Within the context of affiliated modco arrangements, which is how much of our internal reinsurance is structured, it is our belief that
the BEAT was generally intended to require the add back of the net amount paid or accrued by our U.S. subsidiaries to ALRe for
premiums, investment income, reserve changes, other consideration and expenses (net basis). However, there is significant uncertainty
regarding the computation of the BEAT in the context of affiliated modco arrangements, including whether the BEAT applies on a net
basis or instead requires the add back of the gross amount paid or accrued, without reduction for claims or other expenses. In light of
this uncertainty, we have begun to take actions that would allow us to mitigate the potential effect of the BEAT on our results of
operations should the BEAT require the add back of the gross amounts in this manner. Depending on the ultimate interpretation of the
Tax Act and the actions that we take, we currently expect that our overall tax rate will be between 12 – 16%, on average, beginning in
2019. Until there is more clarity regarding the computation of the BEAT in the context of modco arrangements, we anticipate that our
2018 annual financial results will reflect an overall tax rate of approximately 14 – 15%.
The estimated future overall tax rates presented above incorporate various assumptions and actual results may vary. See Item 1A. Risk
Factors–Risks Relating to Our Business–Our business, financial condition, liquidity, results of operations and cash flows depend on
the accuracy of our management’s assumptions and estimates, and we could face significant losses if these assumptions and estimates
differ significantly from actual results and Item IA. Risk Factors–Risks Relating to Taxation–Our efforts to mitigate the cost of the
BEAT may be unnecessary, ineffective or counterproductive.
Risk-based capital – Depending on the reaction of the NAIC to the passage of the Tax Act, the change in the corporate income tax rate
from 35% to 21% could result in a reduction of our RBC ratios. At present, the NAIC RBC calculations employ the statutory corporate
tax rate of 35% in calculating several aspects of RBC. If the NAIC RBC calculations simply employ the new statutory corporate tax
rate of 21% with no other adjustments, our RBC ratios, along with those of other fixed annuity writers and life insurers in general, are
expected to decrease. If such were the case as of December 31, 2017, we estimate the decrease to our overall NAIC RBC ratios would
have been approximately 10 – 15%. Our capital ratios under the various rating agency models are not expected to be materially
impacted by the change in tax rate, and those models are an important consideration in determining the appropriate levels of capital to
run our business. Our initial assessment of the level of capital that we deem appropriate to run our business has not been impacted
materially by the change in tax rate.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
•
•
Deferred tax assets and liabilities – As a result of the reduction in the corporate income tax rate, we recorded a $7 million decrease to
our deferred tax liability in our consolidated financial statements as of December 31, 2017. See Note 15 – Income Taxes to the
consolidated financial statements.
Target returns – Historically, we have generally targeted mid-teen returns for sources of organic growth and mid-teen or higher returns
for sources of inorganic growth. The Tax Act may alter the way that we price our products or otherwise impact targeted returns on
organic production and may further affect the returns that we target for sources of inorganic growth, in each case, potentially resulting
in a decrease of our targeted returns on a temporary or permanent basis. In addition, we expect that the Tax Act will cause a reduction
of the returns that we realize on our in-force business.
Other provisions of the Tax Act could significantly increase the tax liability of our U.S. subsidiaries in future tax periods by accelerating items of
income or deferring deductions. Although the acceleration of an item of income or deferral of a deduction in one tax period allows a taxpayer to
recognize less taxable income in a future period, there can be no assurance that we will be able to utilize any resulting deferred tax assets in
future tax periods.
The foregoing represents our initial expectations of certain of the effects of the Tax Act and may be subject to change as additional guidance is
made available and as we continue to evaluate the effect of this legislation on our business. See Item 1A. Risk Factors–Risks Relating to
Taxation for further information on how the Tax Act could impact us.
Key Operating and Non-GAAP Measures
In addition to our results presented in accordance with GAAP, our results of operations include certain non-GAAP measures commonly used in
our industry. Management believes the use of these non-GAAP measures, together with the relevant GAAP measures, provides information that
may enhance an investor’s understanding of our results of operations and the underlying profitability drivers of our business. The majority of
these non-GAAP measures are intended to remove from the results of operations the impact of market volatility (other than with respect to
alternative investments) as well as integration, restructuring and certain other expenses which are not part of our underlying profitability drivers
or likely to re-occur in the foreseeable future, as such items fluctuate from period-to-period in a manner inconsistent with these drivers. These
measures should be considered supplementary to our results in accordance with GAAP and should not be viewed as a substitute for the GAAP
measures. See Non-GAAP Measure Reconciliations for the appropriate reconciliations to the GAAP measures.
Adjusted Operating Income
Adjusted operating income (formerly operating income, net of tax) is a non-GAAP measure used to evaluate our financial performance
excluding market volatility and expenses related to integration, restructuring, stock compensation, and other expenses. Our adjusted operating
income equals net income available to AHL’s shareholders adjusted to eliminate the impact of the following (collectively, the “non-operating
adjustments”):
•
•
Investment Gains (Losses), Net of Offsets—Investment gains (losses), net of offsets, consist of the realized gains and losses on
the sale of AFS securities, the change in assumed modco and funds withheld reinsurance embedded derivatives, unrealized gains
and losses, impairments, and other investment gains and losses. Unrealized, impairments and other investment gains and losses
are comprised of the fair value adjustments of trading securities (other than CLOs) and investments held under the fair value
option, derivative gains and losses not hedging FIA index credits, and the net OTTI impacts recognized in operations net of the
change in AmerUs Closed Block fair value reserve related to the corresponding change in fair value of investments and the
change in unit 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 GLWB and guaranteed minimum death benefits (GMDB) reserves
(together, GLWB and GMDB reserves represent rider reserves) as well as the MVAs associated with surrenders or terminations of
contracts.
Change in Fair Values of Derivatives and Embedded Derivatives – FIAs, Net of Offsets—Impacts related to the fair value
accounting for derivatives hedging the FIA index credits and the related embedded derivative liability fluctuate from period-to-
period. The index reserve is measured at fair value for the current period and all periods beyond the current policyholder index
term. However, the FIA hedging derivatives are purchased to hedge only the current index period. Upon policyholder renewal at
the end of the period, new FIA hedging derivatives are purchased to align with the new term. The difference in duration between
the FIA hedging derivatives and the index credit reserves creates a timing difference in earnings. This timing difference of the
FIA hedging derivatives and index credit reserves is included as a non-operating adjustment, net of offsets related to DAC, DSI,
and VOBA amortization and changes to rider reserves.
We primarily hedge with options that align with the index terms of our FIA products (typically 1-2 years). From an economic
basis, we believe this is suitable because policyholder accounts are credited with index performance at the end of each index
term. However, because the “value of an embedded derivative” in an FIA contract is longer-dated, there is a duration mismatch
which may lead to mismatches for accounting purposes.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
•
•
•
•
Integration, Restructuring, and Other Non-operating Expenses—Integration, restructuring, and other non-operating expenses
consist of restructuring and integration expenses related to acquisitions and block reinsurance costs as well as certain other
expenses which are not part of our core operations or likely to re-occur in the foreseeable future.
Stock Compensation Expense—Stock compensation expenses associated with our share incentive plans, excluding our long
term incentive plan, are not part of our core operating expenses and fluctuate from time to time due to the structure of our plans.
Bargain Purchase Gain—Bargain purchase gains associated with acquisitions are adjustments to net income as they are not
consistent with our core operations.
Income Taxes (Expense) Benefit – Non-operating—The non-operating income tax expense is comprised of the appropriate
jurisdiction’s tax rate applied to the non-operating adjustments that are subject to income tax.
We consider these non-operating adjustments to be meaningful adjustments to net income available to AHL’s shareholders for the reasons
discussed in greater detail above. Accordingly, we believe using a measure which excludes the impact of these items is effective in analyzing the
trends in our results of operations. Together with net income available to AHL’s shareholders, we believe adjusted operating income, provides a
meaningful financial metric that helps investors understand our underlying results and profitability. Adjusted operating income, should not be
used as a substitute for net income available to AHL’s shareholders.
ROE Excluding AOCI and Adjusted Operating ROE Excluding AOCI
ROE excluding AOCI and adjusted operating ROE excluding AOCI are non-GAAP measures used to evaluate our financial performance
excluding the impacts of AOCI. AOCI fluctuates period-to-period in a manner inconsistent with our underlying profitability drivers as the
majority of such fluctuation is related to the market volatility of the unrealized gains and losses associated with our AFS securities. Once we
have reinvested acquired blocks of businesses, we typically buy and hold AFS investments to maturity throughout the duration of market
fluctuations, therefore, the period-over-period impacts in unrealized gains and losses are not necessarily indicative of current adjusted operating
fundamentals or future performance. Accordingly, we believe using measures which exclude AOCI is useful in analyzing the trends of our
operations. To enhance the ability to analyze these measures across periods, interim periods are annualized. ROE excluding AOCI and adjusted
operating ROE excluding AOCI should not be used as a substitute for ROE. However, we believe the adjustments to equity are significant to
gaining an understanding of our overall results of operations.
Adjusted Operating Earnings Per Share, Weighted Average Shares Outstanding - Adjusted Operating and Book Value Per Share Excluding
AOCI
Adjusted operating earnings per share, weighted average shares outstanding - adjusted operating and book value per share excluding AOCI are
non-GAAP measures used to evaluate our financial performance and financial condition. The non-GAAP measures adjust the number of shares
included in the corresponding GAAP measures to reflect the conversion or settlement of all shares and other stock-based awards outstanding.
We believe using these measures represent an economic view of our share counts and provide a simplified and consistent view of our
outstanding shares. Adjusted operating earnings per share is calculated as the adjusted operating income, over the weighted average shares
outstanding - adjusted operating. Book value per share excluding AOCI is calculated as the ending AHL shareholders’ equity excluding AOCI
divided by the adjusted operating common shares outstanding. Our Class B common shares are economically equivalent to Class A common
shares and can be converted to Class A common shares on a one-for-one basis at any time. Our Class M common shares are in the legal form of
shares but economically function as options as they are convertible into Class A shares after vesting and 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 are not dilutive they are excluded. Weighted average shares outstanding - adjusted
operating and adjusted operating common shares outstanding assume conversion or settlement of all outstanding items that are able to be
converted to or settled in Class A common shares, including the impacts of Class B common shares on a one-for-one basis, the impacts of all
Class M common shares net of the conversion price and any other stock-based awards, but excluding any awards for which the exercise or
conversion price exceeds the market value of our Class A common shares on the applicable measurement date. For certain historical periods,
Class M shares were not included due to issuance restrictions which were contingent upon our IPO. Adjusted operating earnings per share,
weighted average shares outstanding - adjusted operating and book value per share excluding AOCI should not be used as a substitute for basic
earnings per share - Class A common shares, basic weighted average shares outstanding - Class A or book value per share. However, we believe
the adjustments to the shares and equity are significant to gaining an understanding of our overall results of operations and financial condition.
Retirement Services Net Investment Earned Rate, Cost of Crediting and Investment Margin on Deferred Annuities
Investment margin is a key measurement of the financial health of our Retirement Services core deferred annuities. Investment margin on our
deferred annuities is generated from the excess of our net investment earned rate over the cost of crediting to our policyholders. Net investment
earned rate is a key measure of investment returns and cost of crediting is a key measure of the policyholder benefits on our deferred annuities.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net investment earned rate is a non-GAAP measure we use to evaluate the performance of our invested assets that does not correspond to GAAP
net investment income. Net investment earned rate is computed as the income from our invested assets divided by the average invested assets
for the relevant period. To enhance the ability to analyze these measures across periods, interim periods are annualized. The adjustments to
arrive at our net investment earned rate add alternative investment gains and losses, gains and losses related to trading securities for CLOs, net
VIE impacts (revenues, expenses and noncontrolling interest) and the change in reinsurance embedded derivatives. We include the income and
assets supporting our assumed reinsurance by evaluating the underlying investments of the funds withheld at interest receivables and we include
the net investment income from those underlying investments which does not correspond to the GAAP presentation of reinsurance embedded
derivatives. We exclude the income and assets supporting business that we have exited through ceded reinsurance including funds withheld
agreements. We believe the adjustments for reinsurance provide a net investment earned rate on the assets for which we have economic
exposure.
Cost of crediting is the interest credited to the policyholders on our fixed strategies as well as the option costs on the index annuity strategies.
With respect to FIAs, the cost of providing index credits includes the expenses incurred to fund the annual index credits, and where applicable,
minimum guaranteed interest credited. The interest credited on fixed strategies and option costs on index annuity strategies are divided by the
average account value of our deferred annuities. Our average account values are averaged over the number of quarters in the relevant period to
obtain our cost of crediting for such period. To enhance the ability to analyze these measures across periods, interim periods are annualized.
Net investment earned rate, cost of crediting and investment margin on deferred annuities are non-GAAP measures we use to evaluate the
profitability of our core deferred annuities business. Deferred annuities include our fixed rate annuities and FIAs, which account for
approximately 76% of our Retirement Services reserve liabilities as of December 31, 2017. We believe measures like net investment earned rate,
cost of crediting and investment margin on deferred annuities are effective in analyzing the trends of our core business operations, profitability
and pricing discipline. While we believe net investment earned rate, cost of crediting and investment margin on deferred annuities are
meaningful financial metrics and enhance our understanding of the underlying profitability drivers of our business, they should not be used as a
substitute for net investment income and interest sensitive contract benefits presented under GAAP.
Invested Assets
In managing our business we analyze invested assets, which do not correspond to total investments, including investments in related parties, as
disclosed in our consolidated financial statements and notes thereto. Invested assets represent the investments that directly back our policyholder
liabilities as well as surplus assets. Invested assets is used in the computation of net investment earned rate, which allows us to analyze the
profitability of our investment portfolio. Invested assets includes (a) total investments on the consolidated balance sheets with AFS securities at
cost or amortized cost, excluding derivatives, (b) cash and cash equivalents and restricted cash, (c) investments in related parties, (d) accrued
investment income, (e) the consolidated VIE assets, liabilities and noncontrolling interest, (f) net investment payables and receivables and (g)
policy loans ceded (which offset the direct policy loans in total investments). Invested assets also excludes assets associated with funds withheld
liabilities related to business exited through reinsurance agreements and derivative collateral (offsetting the related cash positions). We include
the underlying investments supporting our assumed funds withheld and modco agreements in our invested assets calculation in order to match
the assets with the income received. We believe the adjustments for reinsurance provide a view of the assets for which we have economic
exposure. Our invested assets are averaged over the number of quarters in the relevant period to compute our net investment earned rate for such
period.
Reserve Liabilities
In managing our business we also analyze reserve liabilities, which does not correspond to total liabilities as disclosed in our consolidated
financial statements and notes thereto. Reserve liabilities represents our policyholder liability obligations net of reinsurance and is used to
analyze the costs of our liabilities. Reserve liabilities includes (a) the interest sensitive contract liabilities, (b) future policy benefits, (c)
dividends payable to policyholders, and (d) other policy claims and benefits, offset by reinsurance recoverable, excluding policy loans ceded.
Reserve liabilities is net of the ceded liabilities to third-party reinsurers as the costs of the liabilities are passed to such reinsurers and therefore
we have no net economic exposure to such liabilities, assuming our reinsurance counterparties perform under our agreements. The majority of
our ceded reinsurance is a result of reinsuring large blocks of life business following acquisitions. For such transactions, GAAP requires the
ceded liabilities and related reinsurance recoverables to continue to be recorded in our consolidated financial statements despite the transfer of
economic risk to the counterparty in connection with the reinsurance transaction.
Sales
Sales statistics do not correspond to revenues under GAAP, but are used as relevant measures to understand our business performance as it
relates to deposits generated during a specific period of time. Our sales statistics include deposits for fixed rate annuities and FIAs and align
with the LIMRA definition of all money paid into an individual annuity, including money paid into new contracts with initial purchase occurring
in the specified period and existing contracts with initial purchase occurring prior to the specified period (excluding internal transfers).
84
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Results of Operations
The following summarizes the consolidated results of operations:
(In millions, except percentages)
Revenues
Benefits and expenses
Income before income taxes
Income tax expense (benefit)
Net income
Less: Net income attributable to noncontrolling interests
Net income available to AHL shareholders
Adjusted operating income by segment
Retirement Services
Corporate and Other
Adjusted operating income
Non-operating adjustments
Realized gains (losses) on sale of AFS securities
Unrealized, impairments, and other investment gains (losses)
Assumed modco and funds withheld reinsurance embedded derivatives
Offsets to investment gains (losses)
Investment gains (losses), net of offsets
Change in fair values of derivatives and embedded derivatives – FIAs, net of offsets
Integration, restructuring and other non-operating expenses
Stock compensation expense
Income tax (expense) benefit – non-operating
Total non-operating adjustments
Net income available to AHL shareholders
ROE
ROE excluding AOCI
Adjusted operating ROE excluding AOCI
Years ended December 31,
2017
2016
2015
$
$
$
$
8,727
7,192
1,535
87
1,448
—
1,448
$
4,105
3,389
716
(52)
768
—
768
$
$
1,092
$
777
$
17
1,109
137
(7)
152
(83)
199
266
(68)
(33)
(25)
339
(49)
728
77
(56)
68
(42)
47
95
(22)
(82)
2
40
$
1,448
$
768
$
18.0%
20.3%
15.5%
12.6%
12.7%
12.1%
2,618
2,028
590
12
578
16
562
767
(29)
738
83
(30)
(75)
(34)
(56)
(25)
(58)
(67)
30
(176)
562
11.4%
11.9%
15.6%
We operate our core business strategies out of one reportable segment, Retirement Services. In addition to Retirement Services, we report certain
other operations in Corporate and Other. See Results of Operations by Segment for further detail on the results of the segments.
Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016
In this section, references to 2017 refer to the year ended December 31, 2017 and references to 2016 refer to the year ended December 31, 2016.
Net Income Available to AHL Shareholders
Net income available to AHL shareholders increased by $680 million, or 89%, to $1.4 billion in 2017 from $768 million in 2016. ROE and ROE
excluding AOCI increased to 18.0% and 20.3%, respectively, from 12.6% and 12.7% in 2016, respectively. The increase in net income available
to AHL shareholders was driven by a $381 million increase in adjusted operating income, a favorable net change in FIA derivatives, favorable
assumed reinsurance embedded derivative impacts and a $50 million gain on the sale of equity securities. The net change in FIA derivatives was
primarily driven by the performance of the equity indices to which our FIA policies are linked, partially offset by an unfavorable decrease in
discount rates. Assumed reinsurance embedded derivative impacts were favorable due to RMBS credit spreads tightening.
85
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Adjusted Operating Income
Adjusted operating income increased by $381 million, or 52%, to $1.1 billion in 2017 from $728 million in 2016. Adjusted operating ROE
excluding AOCI was 15.5%, up from 12.1% in the prior period. The increase in adjusted operating income, was primarily driven by a strong
increase in investment income and lower other liability costs, partially offset by higher income tax expense attributed to the 2016 deferred tax
valuation allowance release of $102 million as well as higher operating expenses. The increase in net investment earnings was primarily due to
growth in our Retirement Services invested assets of $9.4 billion, higher short-term interest rates resulting in higher floating rate investment
income and higher alternative investment income, partially offset by lower bond call income. The higher alternative investment income was
driven by a decline in the 2016 market value of public equity positions in one of our funds, higher real estate income and higher AmeriHome
income, partially offset by lower credit fund income, lower hedge fund income as well as 2016 benefiting from an increase in the fair value of
certain underlying investments of three funds which reflected the removal of liquidity discounts related to marketability assumptions used in the
determination of the fair value. Cost of crediting was higher by $47 million due to growth in our deferred annuity block of business which was
partially offset by rate actions and lower option costs. The lower other liability costs were primarily due to lower DAC, DSI, VOBA
amortization and rider reserves attributed to unlocking of assumptions and favorable equity market performance and immaterial out of period
adjustments, partially offset by growth in the block of business.
Our consolidated net investment earned rate was 4.47% in 2017, an increase from 4.35% in 2016, primarily attributed to strong performance
from our fixed and other investment portfolios and our alternative investment portfolio. Our alternative investment net investment earned rate
was 8.72% in 2017, an increase from 7.64% in 2016, primarily attributed to the lower alternative returns in 2016 due to a decline in the market
value of public equity positions in one of our funds, higher real estate income and higher AmeriHome income, partially offset by lower credit
fund income, lower hedge fund income as well as 2016 benefiting from an increase in the fair value of certain underlying investments of three
funds which reflected the removal of liquidity discounts related to marketability assumptions used in the determination of the fair value.
Revenues
Total revenue increased by $4.6 billion to $8.7 billion in 2017 from $4.1 billion in 2016. The increase was driven by an increase in premiums,
favorable changes in investment related gains and losses, an increase in net investment income and an increase in VIE investment related gains
and losses.
Premiums increased by $2.2 billion to $2.5 billion in 2017 from $240 million in 2016, driven by $2.3 billion of premiums from PRT transactions
as we entered the PRT market in 2017.
Investment related gains and losses increased by $1.9 billion to $2.6 billion in 2017 from $652 million in 2016, primarily due to the change in
fair value of FIA hedging derivatives, the change in assumed reinsurance embedded derivatives, and higher realized gains on AFS securities.
The change in fair value of FIA hedging derivatives increased by $1.6 billion driven by the performance of the indices upon which our call
options are based. The majority of our call options are based on the S&P 500 index which experienced a 19.4% increase in 2017, compared to an
9.5% increase in 2016. The assumed reinsurance embedded derivatives increased by $145 million driven by unrealized gains due to credit
spreads tightening primarily on RMBS as well as a favorable change in FIA hedging derivatives backing the reinsurance block as well as growth
in the reinsurance block. Realized gains on AFS securities increased primarily due to a $50 million gain on the sale of equity securities.
Net investment income increased by $355 million to $3.3 billion in 2017 from $2.9 billion in 2016, primarily driven by a strong increase in
fixed and other investment income driven by earnings from growth in our investment portfolio attributed to a strong increase in deposits during
the year, and higher short-term interest rates resulting in higher floating rate investment income, partially offset by lower bond call income.
VIE investment related gains and losses increased by $88 million to $35 million in 2017 from $(53) million in 2016, primarily driven by losses
in 2016 resulting from a decline in market value of public equity positions in one of our funds, partially offset by 2016 benefiting from an
increase of $82 million in the fair value of certain underlying investments in three of our consolidated VIEs, reflecting the removal of liquidity
discounts related to marketability assumptions used in the determination of the fair value.
Benefits and Expenses
Total benefits and expenses increased by $3.8 billion to $7.2 billion in 2017 from $3.4 billion in 2016. The increase was driven by an increase in
interest sensitive contract benefits, an increase in future policy and other policy benefits, an increase in DAC, DSI and VOBA amortization, an
increase in dividends payable to policyholders and higher policy and other operating expenses.
Interest sensitive contract benefits increased by $1.5 billion to $2.8 billion in 2017 from $1.3 billion in 2016, primarily due to the change in FIA
fair value embedded derivatives and higher interest credited to policyholders related to strong growth in deposits. The change in FIA fair value
embedded derivatives increased by $1.5 billion primarily driven by the performance of the equity indices to which our FIA policies are linked,
primarily the S&P 500 index, which experienced a 19.4% increase in 2017, compared to a 9.5% increase in 2016. Additionally, the FIA fair
value embedded derivatives were impacted by a decrease in discount rates used in our embedded derivative calculations compared to 2016.
86
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Future policy and other policy benefits increased by $2.1 billion to $3.2 billion in 2017 from $1.1 billion in 2016, primarily attributable to $2.3
billion of policyholder obligations from our PRT transactions, partially offset by a favorable change in the rider reserves. The favorable change
in rider reserves of $155 million was primarily driven by a decrease related to our annual unlocking of assumptions of $84 million and favorable
equity market performance compared to 2016 resulting in increased index credits to policyholder accounts, which lowered the amount needed to
fund the rider reserve. The favorable change in rider reserves was partially offset by growth in the block of business and an increase related to
the net change in FIA derivatives. Unlocking in 2017 was unfavorable $49 million related to impacts of the net investment earned rate and
mortality assumptions, while 2016 unlocking impacts were unfavorable by $133 million.
DAC, DSI and VOBA amortization increased by $56 million to $413 million in 2017 from $357 million in 2016, primarily due to an increase
related to the net change in FIA derivatives and growth in the DAC asset balance related to block growth, partially offset by $54 million
favorable change in unlocking of assumptions as well as favorable equity market performance. Unlocking in 2017 was favorable $16 million
primarily related to impacts of the net investment earned rate and mortality assumptions, while the 2016 unlocking impacts were unfavorable by
$38 million.
Dividends to policyholders increased by $81 million to $118 million in 2017 from $37 million in 2016, primarily attributed to higher Germany
dividends to policyholders due to higher participation in realized gains in 2017 and unrealized gains related to foreign currency forwards.
Policy and other operating expenses increased by $45 million to $672 million in 2017 from $627 million in 2016, primarily attributed to higher
integration, restructuring and other non-operating expenses mainly due to Germany restructuring costs, and higher costs associated with
acquisition and block reinsurance opportunities in 2017, partially offset by lower stock compensation expense due to the accelerated vesting of
Class M restricted shares in 2016. The remaining increase was primarily attributed to growing our business and expanding our distribution
channels.
Taxes
Income tax expense increased by $139 million to $87 million in 2017 from a benefit of $52 million in 2016. The increase was primarily driven
by the release of a deferred tax valuation allowance in 2016 of $102 million related to a tax plan that, when implemented, will allow us to use a
significant portion of the U.S. non-life insurance companies’ net operating losses. Additionally, the increase in income tax expense was
attributed to an increase in income subject to U.S. income taxes of $138 million, or approximately $49 million increase of tax based on a 35%
U.S. statutory rate, primarily driven by higher investment realized gains, higher net change in FIA derivatives and favorable and lower DAC,
DSI, VOBA and rider reserves attributed to unlocking of assumptions and favorable equity market performance. The impact from U.S. tax
reform enacted in December of 2017 was a benefit to net income of $7 million due to the lower U.S. tax rate impacts on our net deferred tax
liabilities at the date of enactment.
Our effective tax rates were 6% in 2017 and (7)% in 2016. Our effective tax rates may vary year-to-year depending upon the relationship of
income and loss subject to tax compared to consolidated income and loss before income taxes.
Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015
In this section, references to 2016 refer to the year ended December 31, 2016 and references to 2015 refer to the year ended December 31, 2015.
Net Income Available to AHL Shareholders
Net income available to AHL shareholders increased by $206 million, or 37%, to $768 million in 2016 from $562 million in 2015. ROE and
ROE excluding AOCI increased to 12.6% and 12.7%, respectively, from 11.4% and 11.9% in 2015, respectively, benefiting from the increase in
net income available to AHL shareholders. ROE and ROE excluding AOCI were each adversely impacted by our drawing of the remaining $1.1
billion of capital raise proceeds in April 2015, catalyzing a ratings upgrade and providing us with significant excess capital to reinvest into
market opportunities. The increase in net income available to AHL shareholders was driven by a strong increase in net investment income, a
favorable net change in FIA derivatives, a favorable change in assumed reinsurance embedded derivatives and a release of a deferred tax
valuation allowance. The increase in net investment income was primarily driven by higher bond call and mortgage prepayment income,
earnings from growth in our investment portfolio reflecting strong growth in deposits, the reinvestment of the Aviva USA acquired investments
into higher yielding investments during 2015 and an increase in alternative investment income. The net change in FIA derivatives was primarily
driven by the performance of the equity indices to which our FIA policies are linked. The change in assumed reinsurance embedded derivatives
was driven by credit spreads tightening in 2016 compared to credit spreads widening in 2015.
These increases were partially offset by an unfavorable change in the rider reserves, an increase in DAC, DSI and VOBA amortization, the
change in VIE investment related gains and losses and higher expenses. The unfavorable change in the rider reserves and an increase in DAC,
DSI and VOBA amortization were driven by the unfavorable change in unlocking of assumptions of our rider reserves and our DAC, DSI and
VOBA assets as well as growth in the FIA block. The VIE investment related gains and losses decrease was attributed to the decline in market
value of public equity positions in one of our funds. Expenses were higher primarily attributed to growing our business and expanding our
distribution channels.
87
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Adjusted Operating Income
Adjusted operating income decreased by $10 million, or 1%, to $728 million in 2016 from $738 million in 2015. Adjusted operating ROE
excluding AOCI was 12.1%, down from 15.6% in the prior period, as we drew the remaining $1.1 billion of capital raise proceeds in April 2015,
catalyzing a ratings upgrade and providing us with significant excess capital to reinvest into market opportunities. The decrease in adjusted
operating income was primarily driven by an unfavorable change of $182 million attributed to our annual unlocking of assumptions in our rider
reserves and our DAC, DSI and VOBA assets, combining for an expense of $158 million in 2016 compared to a benefit of $24 million in 2015.
A higher cost of crediting due to higher option costs and a change in the mix of business related to MYGA growth, an increase in DAC and
VOBA amortization related to growth in our FIA block of business, an unfavorable change in rider reserves primarily due to higher than
expected persistency as well as higher operating expenses attributed to growing our business and expanding our distribution channels, also
contributed to the decrease in adjusted operating income.
These decreases were offset by an increase in fixed income and other investment income, an increase in alternative investment income and a tax
benefit of $102 million related to the release of a deferred tax valuation allowance. The increase in fixed income and other investment income
was due to higher bond call and mortgage prepayment income, earnings from growth in our Retirement Services invested assets of $4.9 billion
over the prior period reflecting strong growth in deposits, and the reinvestment of the Aviva USA acquired investments. The increase in
alternative investment income was driven by higher credit fund income due to credit spread tightening in 2016 compared to credit spreads
widening in 2015 and a $60 million favorable increase in the fair value of certain underlying investments in three of our funds, reflecting the
removal of liquidity discounts related to marketability assumptions used in the determination of the fair value of certain of the investments,
resulting in $82 million of gains in 2016 compared to $22 million of gains in 2015, which were partially offset by the decline in market value of
public equity positions in one of our funds.
Our consolidated net investment earned rate was 4.35% in 2016, an increase from 4.24% in 2015, primarily attributed to a strong increase in our
fixed income and other investment portfolios driven by higher bond call and mortgage prepayment income and the reinvestment of the Aviva
USA acquired investments into higher yielding investments. These increases were partially offset by a decrease of approximately 18 basis points
related to the acquisition of DLD which contributed lower net investment earned rates reflecting the different economic environment and the
yield adjustments related to purchase accounting. Our alternative investment net investment earned rate was 7.64% in 2016, an increase from
6.22% in 2015, primarily attributed to higher credit fund income and a favorable increase in the fair value of three of our investment funds,
reflecting the removal of liquidity discounts related to marketability assumptions used in the determination of the fair value of certain of the
investments, partially offset by the decline in market value of public equity positions in one of our funds.
Revenues
Total revenue increased by $1.5 billion to $4.1 billion in 2016 from $2.6 billion in 2015. The increase was driven by favorable changes in
investment related gains and losses, an increase in net investment income and an increase in premiums. These increases were partially offset by
the unfavorable change in VIE investment related gains and losses.
The change in investment related gains and losses increased by $1.1 billion to $652 million in 2016 from $(430) million in 2015, primarily due
to the change in fair value of FIA hedging derivatives, the change in assumed reinsurance embedded derivatives and the change in unrealized
gains and losses on trading securities. The change in fair value of FIA hedging derivatives increased by $691 million driven by the performance
of the indices upon which our call options are based. The majority of our call options are based on the S&P 500 index which experienced a 9.5%
increase in 2016, compared to an 0.7% decrease in 2015. The assumed reinsurance embedded derivatives are based on the change in the fair
value of the underlying investments held in modco and funds withheld portfolios (see Note 3 – Derivative Instruments to the consolidated
financial statements) which increased by $251 million as a result of $141 million of net unrealized gains during the year ended December 31,
2016, primarily due to credit spreads tightening in 2016 compared to credit spreads widening in 2015 as well as significant growth in the flow
reinsurance channel. The favorable change in unrealized gains and losses on trading securities was primarily attributed to an increase in AmerUs
Closed Block assets of $166 million primarily driven by credit spreads tightening in 2016 compared to credit spreads widening in 2015.
Net investment income increased by $404 million to $2.9 billion in 2016 from $2.5 billion in 2015, primarily driven by a strong increase in
fixed income and other investment income, an increase in alternative investment income and the acquisition of DLD in October 2015
contributing $72 million of higher net investment income in 2016 compared to one quarter in 2015. The increase in fixed income and other
investment income was driven by higher bond call and mortgage prepayment income of $74 million in 2016 compared to 2015, earnings from
growth in our investment portfolio attributed to strong growth in deposits and the reinvestment of the Aviva USA acquired investments into
higher yielding strategies. The increase in alternative investment income was primarily driven by higher credit fund income due to credit spread
tightening in 2016 compared to compared to credit spreads widening in 2015.
Premiums increased by $45 million to $240 million in 2016 from $195 million in 2015, primarily due to the acquisition of DLD contributing an
increase of $113 million of premiums in 2016, compared to one quarter in 2015. The increase was partially offset by a decrease in AmerUs
Closed Block premiums as well as a decrease in other life premiums.
88
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The change in VIE investment related gains and losses decreased by $86 million to $(53) million in 2016 from $33 million in 2015, primarily
driven by a decline in market value of public equity positions in one of our funds, as the share prices of these public equity positions decreased
in 2016 compared to 2015. The decrease was partially offset by a $60 million favorable increase in the fair value of certain underlying
investments in three of our consolidated VIEs, reflecting the removal of liquidity discounts related to marketability assumptions used in the
determination of the fair value of certain of the investments, resulting in $82 million of gains in 2016 compared to $22 million of gains in 2015.
Benefits and Expenses
Total benefits and expenses increased by $1.4 billion to $3.4 billion in 2016 from $2.0 billion in 2015. The increase was driven by an
unfavorable change in interest sensitive contract benefits, an unfavorable increase in future policy and other policy benefits, an increase in DAC,
DSI and VOBA amortization and higher policy and other operating expenses.
Interest sensitive contract benefits increased by $607 million to $1.3 billion in 2016 from $689 million in 2015, primarily due to the change in
FIA fair value embedded derivatives and higher interest credited to policyholders related to strong growth in deposits and a change in the mix of
business related to MYGA growth. The change in FIA fair value embedded derivatives increased by $566 million primarily driven by the
performance of the equity indices to which our FIA policies are linked, primarily the S&P 500 index, which experienced a 9.5% increase in
2016, compared to a 0.7% decrease in 2015. Also contributing to the increase was a decrease in the discount rates used in our embedded
derivative calculations which increased the FIA embedded derivatives in 2016 compared to an increase in discount rates in 2015 partially offset
by a decrease in the credit spread, included in the discount rate determination, following our rating upgrades to A- in the second quarter of 2015.
Future policy and other policy benefits increased by $541 million to $1.1 billion in 2016 from $518 million in 2015, primarily attributable to an
unfavorable change in the rider reserves, an increase in the change in AmerUs Closed Block fair value liability, 2015 benefiting from favorable
mortality experience and the acquisition of DLD, which increased our benefits by $163 million in 2016 compared to one quarter in 2015. The
unfavorable change in rider reserves of $254 million was driven by the unfavorable change of $181 million attributed to our annual unlocking of
assumptions. The unlocking impacts in 2016 of $133 million related to a decrease in projected net investment earned rates and lower projected
lapse rate assumptions while the 2015 unlocking impacts were favorable by $48 million. The remaining unfavorable change in rider reserves
was attributed to an increase in gross profits in 2016 and higher than expected persistency increasing the projected excess benefits, partially
offset by favorable equity market performance in 2016 compared to 2015. The increase in the change in AmerUs Closed Block fair value
liability of $159 million was primarily driven by the increase in unrealized gains on the underlying investments driven by credit spreads
tightening in 2016 compared to credit spreads widening in 2015. We have elected the fair value option to value the AmerUs Closed Block
whereby the fair value of liabilities is the sum of the fair value of the assets plus our cost of capital in the AmerUs Closed Block.
DAC, DSI and VOBA amortization increased by $130 million to $357 million in 2016 from $227 million in 2015, primarily attributable to
growth in the FIA block increasing our DAC asset, an increase in gross profits in 2016 and the $3 million unfavorable change in unlocking of
assumptions of our DAC, DSI and VOBA assets. The unlocking impacts in 2016 of $38 million primarily related to a decrease in projected net
investment earned rates partially offset by lower projected lapse rate assumptions while the 2015 unlocking impacts were unfavorable by $35
million.
Policy and other operating expenses increased by $78 million to $627 million in 2016 from $549 million in 2015, primarily attributed to
growing our business, expanding our distribution channels, an increase in stock compensation expense, project spend and expenses attributable
to our Germany operations. These increases were partially offset by lower integration expenses related to the acquisition of DLD in the prior
period.
Taxes
Income tax expense (benefit) decreased by $64 million to $(52) million in 2016 from $12 million in 2015. The decrease was primarily driven by
the change in deferred tax valuation allowance of $110 million in 2016 compared to 2015. The decrease in income tax expense was partially
offset by an increase in U.S. income subject to U.S. income tax of $61 million, or approximately $21 million of tax based on a 35% U.S.
statutory rate, primarily driven by an increase in net investment income and the favorable net change in FIA derivatives. During 2016, we
identified a tax plan that, when implemented, will allow us to use a significant portion of the U.S. non-life insurance companies’ net operating
losses, which are scheduled to expire beginning in 2022, and other deductible temporary differences. As a result, we released $102 million of
deferred tax valuation allowance, as it is more likely than not that these attributes will be realized. During 2016, we also released $11 million of
deferred tax valuation allowance related to our Germany operations as a result of an increase in future projected income for such operations.
Our effective tax rates were (7)% in 2016 and 2% in 2015. Our effective tax rates may vary year-to-year depending upon the relationship of
income and loss subject to tax compared to consolidated income and loss before income taxes.
89
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations by Segment
The following summarizes our adjusted operating income by segment:
(In millions, except percentages)
Adjusted operating income by segment
Retirement Services
Corporate and Other
Adjusted operating income
Years ended December 31,
2017
2016
2015
$
$
1,092
17
1,109
$
$
777
(49)
728
$
$
767
(29)
738
Retirement Services adjusted operating ROE excluding AOCI
22.0%
18.5%
22.7%
Retirement Services
Retirement Services is comprised of our United States and Bermuda operations which issue and reinsure retirement savings products and
institutional products. Retirement Services has retail operations, which provide annuity retirement solutions to our policyholders. Retirement
Services also has reinsurance operations, which reinsure MYGAs, FIAs, traditional one year guarantee fixed deferred annuities, immediate
annuities and institutional products from our reinsurance partners. In addition, our institutional operations, including funding agreements and
PRT obligations, are included in our Retirement Services segment.
Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016
Adjusted Operating Income
Adjusted operating income increased by $315 million, or 41%, to $1.1 billion in 2017, from $777 million in 2016. Adjusted operating ROE
excluding AOCI was 22.0%, up from 18.5% in the prior period. The increase in adjusted operating income was primarily driven by an increase
in fixed and other investment income and lower other liability costs, partially offset by higher adjusted operating income tax expense attributed
to the 2016 deferred tax valuation allowance release of $102 million, lower alternative investment income and higher cost of crediting.
Net investment earnings increased $288 million driven primarily by earnings from growth in invested assets of $9.4 billion attributed to a strong
increase in deposits during the year and higher short-term interest rates resulting in higher floating rate investment income, partially offset by
lower bond call income. Alternative investment income was lower mainly driven by 2016 benefiting from a $37 million increase in the fair
value of MidCap and a $15 million increase of certain underlying investments of another fund which reflected the removal of liquidity discounts
related to marketability assumptions used in the determination of the fair value, as well as lower hedge fund income, partially offset by 2017
reflecting higher real estate income and higher AmeriHome income.
Other liability costs decreased $190 million driven by lower unlocking of assumptions, $100 million lower rider reserves and DAC amortization
related to favorable equity market performance impacts and immaterial actuarial out of period adjustments, partially offset by growth in the
block of business. Our annual unlocking of assumptions resulted in an increase to other liability costs of $20 million compared to an increase of
$158 million in the prior year.
Cost of crediting increased $47 million driven by growth in our deferred annuity block of business which was partially offset by rate actions and
lower option costs.
Investment Margin on Deferred Annuities
Net investment earned rate
Cost of crediting
Investment margin on deferred annuities
Years ended December 31,
2017
2016
4.70%
1.88%
2.82%
4.72%
1.96%
2.76%
Investment margin on deferred annuities increased by 6 basis points to 2.82% in 2017, from 2.76% in 2016. The increase in the investment
margin on deferred annuities was driven by a favorable decrease in cost of crediting of 8 basis points, partially offset by a slight decrease in net
investment earned rate of 2 basis points.
Cost of crediting on deferred annuities decreased by 8 basis points to 1.88% in 2017, from 1.96% in 2016. The decrease in cost of crediting was
driven by rate actions and lower option costs. We continue to focus on pricing discipline, managing interest rates credited to policyholders and
managing the cost of options to fund the annual index credits on our FIA products.
90
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net investment earned rate decreased by 2 basis points to 4.70% from 4.72% in 2016. Although fixed and other investment net investment
earned rates increased over the prior year, this was more than offset by lower alternative investment income earned rates. The alternative
investments net investments earned rate decreased to 10.01% from 12.26% in the prior period, mainly due to 2016 benefiting from an increase
in the fair value of MidCap and another fund which reflected the removal of liquidity discounts related to marketability assumptions used in the
determination of the fair value, as well as lower hedge fund income, partially offset by 2017 reflecting higher real estate income and higher
AmeriHome income. Fixed and other net investment earned rates increased in 2017 to 4.48% from 4.41% in the prior period primarily attributed
to higher short-term interest rates resulting in higher floating rate investment income, and higher cash balances during the prior year, partially
offset by lower bond call income.
Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015
Adjusted Operating Income
Adjusted operating income increased by $10 million, or 1%, to $777 million in 2016, from $767 million in 2015. Adjusted operating ROE
excluding AOCI was 18.5%, down from 22.7% in the prior period, reflecting the increase in equity allocated to Retirement Services as we
increased our capital within Retirement Services which management considered necessary to support the segment’s growth and ratings
aspirations, partially offset by an increase in adjusted operating income. The increase in adjusted operating income was primarily driven by the
increase in net investment earnings related to higher bond call and mortgage prepayment income, earnings from growth in the segment’s
invested assets, reinvestment of the Aviva USA acquired investments throughout 2015 and an increase in alternative investment income.
Additionally, we recognized a tax benefit of $102 million related to the release of a deferred tax valuation allowance. The increases in adjusted
operating income were partially offset by an unfavorable change of $182 million attributed to our annual unlocking of assumptions in our rider
reserves and our DAC, DSI and VOBA assets, an increase in cost of crediting due to a change in the mix of business related to MYGA growth
and an increase in option costs, an increase in DAC, DSI and VOBA amortization, the unfavorable change in rider reserves and higher operating
expenses of $40 million primarily attributed to growing our business, expanding our distribution channels and project spend.
Net investment earnings increased $379 million primarily driven by a $286 million increase in fixed income and other investment income
attributed to higher bond call and mortgage prepayment income of $74 million in 2016 compared to 2015, earnings from growth in the
segment’s invested assets of $4.9 billion over prior period reflecting strong growth in deposits and the favorable reinvestment of the Aviva USA
acquired investments into higher yielding strategies. Alternative investment income increased $93 million related to higher credit fund income
due to credit spread tightening in 2016 compared to credit spreads widening in 2015 and a $41 million favorable increase in the fair value of two
of the segment’s investment funds, reflecting the removal of liquidity discounts related to marketability assumptions used in the determination of
the fair value of certain of the investments, resulting in $52 million of gains in 2016 compared to $11 million of gains in 2015. Additionally, an
increase in the value of our equity investment in A-A Mortgage contributed to the higher alternative income.
The change in rider reserves increased by $225 million driven by the unfavorable change of $178 million attributed to our annual unlocking of
assumptions. The unlocking impact in 2016 of $126 million related to a decrease in projected net investment earned rates and lower projected
lapse rate assumptions while the 2015 unlocking impacts were favorable by $52 million. Additionally, the change in rider reserves increased due
to an increase in gross profits in 2016 and higher than expected persistency increasing the projected excess benefits, partially offset by favorable
equity market performance in 2016 compared to 2015.
Amortization of DAC, DSI and VOBA increased by $64 million driven by the growth in DAC and DSI asset balance from growth in the FIA
block, an increase in gross profits in 2016 and the unfavorable change of $4 million attributed to our annual unlocking of assumptions. The
unlocking impact in 2016 of $32 million related to a decrease in projected net investment earned rates partially offset by lower projected lapse
rate assumptions while the 2015 unlocking impacts were unfavorable by $28 million.
Investment Margin on Deferred Annuities
Net investment earned rate
Cost of crediting
Investment margin on deferred annuities
Years ended December 31,
2016
2015
4.72%
1.96%
2.76%
4.37%
1.92%
2.45%
Investment margin on deferred annuities increased by 31 basis points to 2.76% in 2016, from 2.45% in 2015. The increase in the investment
margin on deferred annuities was driven by the increase in net investment earned rate of 35 basis points, showing strength in our investment
portfolio, partially offset by an unfavorable increase in cost of crediting of 4 basis points.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net investment earned rate increased due to the increase in our fixed income and other investment income as well as an increase in alternative
investment income. The fixed income and other net investment earned rate increased throughout 2016, to 4.41% from 4.17% in 2015 primarily
driven by higher bond call and mortgage prepayment income and the reinvestment of the Aviva USA acquired investments into higher yielding
strategies with a focus on liquidity and complexity risk rather than assuming solely credit risk. Although we were substantially complete with
our reinvestment of the Aviva USA acquired investments as of December 31, 2015, our net investment earned rates for 2016 were impacted as
we reinvested sizable portions of the portfolio throughout the year. The net investment earned rates continue to reflect impacts of holding
approximately 29% of total invested assets in floating rate investments and 2% of invested assets in cash holdings to opportunistically capitalize
on market dislocations. The alternative investments net investments earned rate increased to 12.26% in 2016, from 9.49% in 2015 driven by
higher credit fund income due to credit spread tightening in 2016 compared to credit spreads widening in 2015 and a favorable increase in the
fair value of two of the segment’s investment funds related to the removal of liquidity discounts related to marketability assumptions used in the
determination of the fair value of certain of the investments.
Cost of crediting on deferred annuities increased by 4 basis points to 1.96% in 2016, from 1.92% in 2015. The increase in cost of crediting was
driven by a change in the mix of business related to MYGA growth and an increase in option costs on our index annuity strategies.
Corporate and Other
Corporate and Other includes certain other operations related to our corporate activities and our former German operations, which are primarily
comprised of participating long-duration savings products. In addition to our former German operations, included in Corporate and Other are
corporate allocated expenses, merger and acquisition costs, debt costs, certain integration and restructuring costs, certain stock-based
compensation and intersegment eliminations. In Corporate and Other, we also hold capital in excess of the level of capital we hold in Retirement
Services to support our operating strategy.
Adjusted Operating Income (Loss)
Adjusted operating income (loss) increased by $66 million to $17 million in 2017, from $(49) million in 2016. The increase in adjusted
operating income (loss) was mainly driven by higher alternative investment income and higher allocation of fixed and other investment income,
partially offset by higher Corporate operating expenses and lower Germany adjusted operating income of $2 million, a decrease of $14 million
over 2016. Alternative investment income increased primarily due to losses in 2016 related to a decline in the market value of public equity
positions in one of our funds, partially offset by lower credit fund income and 2016 benefiting from a $29 million increase in the fair value of
certain underlying investments of one fund which reflected the removal of liquidity discounts related to marketability assumptions used in the
determination of the fair value.
Adjusted Operating (loss) increased by $20 million, or 69%, to $(49) million in 2016, from $(29) million in 2015. The increase in adjusted
operating (loss) was driven by lower alternative investment income partially offset by a $9 million increase in Germany’s adjusted operating
income. Alternative investment income decreased by $40 million primarily due to decline in market value of public equity positions in one of
our funds, as the share prices of these public equity positions decreased in 2016 compared to 2015. Partially offsetting the decrease in alternative
investment income was the higher credit fund income, mainly CLOs, as a result of credit spreads tightening in 2016 compared to credit spreads
widening in 2015 and a $19 million favorable increase in the fair value of one of our investment funds, reflecting the removal of liquidity
discounts related to marketability assumptions used in the determination of the fair value of certain of the investments.
Consolidated Investment Portfolio
We had consolidated investments, including related parties, of $84.4 billion and $72.4 billion as of December 31, 2017 and 2016, respectively.
Our investment strategy seeks to achieve sustainable risk-adjusted returns through disciplined managing of investment characteristics with our
long-duration liabilities and the diversification of risk. The investment strategies utilized by our investment managers focus primarily on a buy
and hold asset allocation strategy that may be adjusted periodically in response to changing market conditions and the nature of our liability
profile. The majority of our investment portfolio, excluding investments of our former German subsidiary, are managed by AAM, an indirect
subsidiary of Apollo founded for the express purpose of managing Athene’s portfolio. AAM provides a full suite of services for our investment
portfolio, including direct investment management, asset allocation, mergers and acquisition asset diligence, and certain operational support
services, including investment compliance, tax, legal and risk management support. Our relationship with AAM and Apollo allows us to take
advantage of our generally illiquid liability profile by identifying investment opportunities with an emphasis on earning incremental yield by
taking liquidity and complexity risk rather than assuming solely credit risk. The deep experience of the AAM investment team and Apollo’s
credit portfolio managers assist us in sourcing and underwriting complex asset classes. AAM has selected a diverse array of corporate bonds and
more structured, but highly rated asset classes. We also maintain holdings in floating rate and less rate-sensitive instruments, including CLOs,
non-agency RMBS and various types of structured products. In addition to our fixed income portfolio, we opportunistically allocate 5-10% of
our portfolio to alternative investments where we primarily focus on fixed income-like, cash flow-based investments.
92
(cid:3)
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our invested assets, which are those which directly back our policyholder liabilities as well as surplus assets (as previously discussed in Key
Operating and Non-GAAP Measures), were $82.3 billion and $71.8 billion as of December 31, 2017 and 2016, respectively. AAM manages,
directly and indirectly, approximately $76.3 billion and AAME and affiliates sub-advised approximately $5.4 billion, which in the aggregate
constitute the vast majority of our investment portfolio as of December 31, 2017, comprising a diversified portfolio of fixed maturity and other
securities. Through our relationship with Apollo, AAM has identified unique investment opportunities for us. AAM’s knowledge of our funding
structure and regulatory requirements allows it to design customized strategies and investments for our portfolio.
Our asset portfolio is managed within the limits and constraints set forth in our Investment and Credit Risk Policy. Under this policy, we set
limits on investments in our portfolio by asset class, such as corporate bonds, emerging markets securities, municipal bonds, non-agency RMBS,
CMBS, CLOs, commercial mortgage whole loans and mezzanine loans and investment funds. We also set credit risk limits for exposure to a
single issuer that vary based on the issuer’s ratings. In addition, our investment portfolio is constrained by its scenario-based capital ratio limit
and its stressed liquidity limit.
The following table presents the carrying values of our total investments and investments in related parties:
(In millions, except percentages)
AFS securities, at fair value
Fixed maturity securities
Equity securities
Trading securities, at fair value
Mortgage loans, net of allowances
Investment funds
Policy loans
Funds withheld at interest
Derivative assets
Real estate
Short-term investments
Other investments
Total investments
Investment in related parties
AFS securities at fair value
Fixed maturity securities
Equity securities
Trading securities, at fair value
Investment funds
Short-term investments
Other investments
Total related party investments
Total investments, including related party
December 31, 2017
December 31, 2016
Carrying Value
Percent
of Total
Carrying Value
Percent
of Total
$
61,012
72.3% $
52,033
71.8%
277
2,709
6,233
699
530
7,085
2,551
624
201
133
0.3%
3.2%
7.4%
0.8%
0.6%
8.4%
3.0%
0.7%
0.2%
0.2%
353
2,581
5,470
689
602
6,538
1,370
542
189
81
0.5%
3.6%
7.5%
1.0%
0.8%
9.0%
1.9%
0.7%
0.3%
0.1%
82,054
97.1%
70,448
97.2%
406
—
307
1,310
52
238
2,313
0.5%
—%
0.4%
1.6%
0.1%
0.3%
2.9%
335
20
195
1,198
—
237
1,985
0.5%
—%
0.3%
1.7%
—%
0.3%
2.8%
$
84,367
100.0% $
72,433
100.0%
The increase in our total investments, including related parties, as of December 31, 2017 of $11.9 billion compared to 2016 was driven by strong
growth in deposits, unrealized gains on AFS securities including related parties, an increase in derivative assets and reinvestment of earnings.
The strong growth in deposits was attributed to $11.5 billion of growth in organic deposits for the year ended December 31, 2017, partially
offset by liability outflows of $5.8 billion. Unrealized gains on AFS securities including related parties were $1.7 billion attributed to credit
spreads tightening, partially offset by an increase in U.S. treasury rates for the year ended December 31, 2017. Derivative assets increased by
$1.2 billion primarily attributed to an increase in equity markets during 2017 as the S&P 500 index increased by 19.4%.
Our investment portfolio consists largely of high quality fixed maturity securities, loans and short-term investments, as well as additional
opportunistic holdings in investment funds and other instruments, including a small amount of equity holdings. Fixed maturity securities and
loans include publicly issued corporate bonds, government and other sovereign bonds, privately placed corporate bonds and loans, mortgage
loans, CMBS, RMBS, CLOs, and other asset-backed securities (ABS).
93
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
While the substantial majority of our investment portfolio has been allocated to corporate bonds and structured credit products, a key component
of our investment strategy is the opportunistic acquisition of investment funds with attractive risk and return profiles. Our investment fund
portfolio consists of funds that employ various strategies including real estate and other real asset funds, credit funds, private equity funds and
hedge funds. We have a preference for investments that are fixed-income-like or income producing and that have embedded downside
protection. We also prefer investment funds that have a high degree of co-investment, have a stated maturity value or have reduced volatility
versus pure equity. We acquired certain investment funds from AAA Investor (which are classified as private equity investments and
consolidated VIEs) as a one-time capital contribution by our largest shareholder in advance of the Aviva USA acquisition. With respect to
investment fund portfolios that we receive in these transactions, we actively reinvest these investments in our preferred credit-oriented strategies
over time as we liquidate these holdings.
We hold derivatives for economic hedging purposes to reduce our exposure to the cash flow variability of assets and liabilities, equity market
risk, interest rate risk, credit risk, and to a lesser extent, foreign exchange risk. Our primary use of derivative instruments relates to providing the
income needed to fund the annual indexed credits on our FIA products. We primarily use fixed indexed options to economically hedge FIA
products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specific market index.
With respect to derivative positions, we transact with highly rated counterparties, and do not expect the counterparties to fail to meet their
obligations under the contracts. We generally use industry standard agreements and annexes with bilateral collateral provisions to further reduce
counterparty credit exposure.
AFS Securities
We invest with the intent to hold investments to maturity. In selecting investments, we attempt to source investments that match our future cash
flow needs. However, we may sell any of our investments in advance of maturity in order to timely satisfy our liabilities as they become due or
in order to respond to a change in the credit profile or other characteristics of the particular investment.
AFS fixed maturity securities are carried at fair value on our consolidated balance sheets. Changes in fair value for our AFS portfolio, net of
related DAC, DSI and VOBA amortization and the change in rider reserves, are charged or credited to other comprehensive income, net of tax.
Declines in fair value that are other than temporary are recorded as realized losses in the consolidated statements of income, net of any
applicable non-credit component of the loss, which is recorded as an adjustment to other comprehensive income.
The distribution of our AFS securities, including related parties, by type is as follows:
(In millions, except percentages)
Fixed maturity securities
U.S. government and agencies
U.S. state, municipal and political subdivisions
Foreign governments
Corporate
CLO
ABS
CMBS
RMBS
Total fixed maturity securities
Equity securities
Total AFS securities
Fixed maturity securities – related parties
CLO
ABS
Total fixed maturity securities – related party
Equity securities – related party
Total AFS securities – related parties
December 31, 2017
Cost or
Amortized
Cost
Unrealized
Gain
Unrealized
Loss
Fair Value
Percent
of Total
$
63
$
1
$
(2) $
996
2,575
35,173
5,039
3,945
1,994
8,721
58,506
271
58,777
353
46
399
—
399
171
116
1,658
53
53
48
652
2,752
7
2,759
7
—
7
—
7
(2)
(8)
62
1,165
2,683
0.1%
1.9%
4.3%
(171)
36,660
59.5%
(8)
(27)
(21)
(7)
(246)
(1)
(247)
—
—
—
—
—
5,084
3,971
2,021
9,366
61,012
277
61,289
360
46
406
—
406
8.2%
6.4%
3.3%
15.2%
98.9%
0.4%
99.3%
0.6%
0.1%
0.7%
—%
0.7%
Total AFS securities, including related parties
$
59,176
$
2,766
$
(247) $
61,695
100.0%
94
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except percentages)
Fixed maturity securities
U.S. government and agencies
U.S. state, municipal and political subdivisions
Foreign governments
Corporate
CLO
ABS
CMBS
RMBS
Total fixed maturity securities
Equity securities
Total AFS securities
Fixed maturity securities – related parties
CLO
ABS
Total fixed maturity securities – related party
Equity securities – related party
Total AFS securities - related parties
December 31, 2016
Cost or
Amortized
Cost
Unrealized
Gain
Unrealized
Loss
Fair Value
Percent
of Total
$
59
$
1
$
— $
1,024
2,098
29,433
4,950
2,980
1,835
8,731
51,110
319
51,429
284
57
341
20
361
117
143
901
14
25
38
313
1,552
35
1,587
1
—
1
—
1
(1)
(6)
(314)
(142)
(69)
(26)
(71)
(629)
(1)
(630)
(6)
(1)
(7)
—
(7)
60
1,140
2,235
0.1%
2.2%
4.2%
30,020
57.0%
4,822
2,936
1,847
8,973
52,033
353
52,386
279
56
335
20
355
9.1%
5.6%
3.5%
17.0%
98.7%
0.7%
99.4%
0.5%
0.1%
0.6%
—%
0.6%
Total AFS securities, including related parties
$
51,790
$
1,588
$
(637) $
52,741
100.0%
95
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Fixed Maturity Securities
We maintain a diversified AFS portfolio of corporate fixed maturity securities across industries and issuers, and a diversified portfolio of
structured securities. The composition of our AFS fixed maturity securities, including related parties, is as follows:
(In millions, except percentages)
Corporate
Industrial other1
Financial
Utilities
Communication
Transportation
Total corporate
Other government-related securities
U.S. state, municipal and political subdivisions
Foreign governments
U.S. government and agencies
Total non-structured securities
Structured securities
CLO
ABS
CMBS
RMBS
Agency
Non-agency
Total structured securities
Total fixed maturity securities, including related parties
December 31, 2017
December 31, 2016
Fair Value
Percent
of Total
Fair Value
Percent
of Total
$
$
12,026
11,824
8,296
2,607
1,907
19.6% $
10,645
19.3%
13.5%
4.2%
3.1%
9,156
6,588
2,235
1,396
20.3%
17.5%
12.6%
4.3%
2.7%
36,660
59.7%
30,020
57.4%
1,165
2,683
62
1.9%
4.4%
0.1%
1,140
2,235
60
2.2 %
4.3%
0.1%
40,570
66.1%
33,455
64.0%
5,444
4,017
2,021
87
9,279
20,848
61,418
8.9%
6.5%
3.3%
0.1%
15.1%
33.9%
100.0% $
5,101
2,992
1,847
112
8,861
18,913
52,368
9.7%
5.7%
3.5%
0.2%
16.9%
36.0%
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 total fixed maturity securities, including related parties, was $61.4 billion and $52.4 billion as of December 31, 2017 and
2016, respectively. The increase was driven by strong growth in deposits over liability outflows, unrealized gains on AFS securities including
related parties due to credit spreads tightening, partially offset by an increase in U.S. treasury rates in the year ended December 31, 2017 as well
as reinvestment of earnings.
The Securities Valuation Office (SVO) of the NAIC is responsible for the credit quality assessment and valuation of securities owned by state
regulated insurance companies. Insurance companies report ownership of securities to the SVO when such securities are eligible for filing on the
relevant schedule of the NAIC Financial Statement Blank. The SVO conducts credit analysis on these securities for the purpose of assigning an
NAIC designation and/or unit price. With important exceptions discussed below, if a security has been rated by an NRSRO, the SVO utilizes
that rating and assigns an NAIC designation based upon the following system:
NAIC designation
NRSRO equivalent rating
1
2
3
4
5
6
AAA/AA/A
BBB
BB
B
CCC
CC and lower
96
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The NRSRO ratings methodology is focused on the likelihood of recovery of all contractual payments, including principal at par, regardless of
an investor’s carrying value. In effect, the NRSRO rating assumes that the holder is the original purchaser at par. In contrast, the SVO’s loan-
backed and structured securities (LBaSS) methodology is focused on determining the risk associated with the recovery of the amortized cost of
each security. Because the NAIC’s methodology explicitly considers amortized cost and the likelihood of recovery of our investment, we view
the NAIC’s methodology as the most appropriate way to view our fixed maturity portfolio for purposes of evaluating credit quality since a large
portion of our holdings were purchased and are carried at significant discounts to par.
Specific to LBaSS, the SVO has developed a ratings process and provides instruction on both modeled and non-modeled LBaSS. The modeled
LBaSS process is specific to the non-agency RMBS and CMBS asset classes. In order to establish ratings at the individual security level, the
SVO obtains loan-level analysis of each RMBS and CMBS using a selected vendor’s proprietary financial model. The SVO ensures that the
vendor has extensive internal quality-control processes in place and the SVO conducts its own quality-control checks of the selected vendor’s
valuation process. The SVO has retained the services of Blackrock to model non-agency RMBS and CMBS owned by U.S. insurers for all years
presented herein. Blackrock provides five prices (breakpoints), based on each U.S. insurer’s statutory book value price, to utilize in determining
the NAIC designation for each modeled LBaSS. For non-modeled LBaSS (including ABS and CLOs) with the initial designation of NAIC 1 or
NAIC 6, the designation remains the same through the life of the security. For non-modeled LBaSS with the initial designation of NAIC 2
through NAIC 5, the selected vendors are not utilized and the NAIC designations are set using a standardized table of breakpoints provided by
the SVO for application to the insurer’s statutory book value price. The NAIC designation determines the associated level of RBC that an
insurer is required to hold for modeled LBaSS owned by the insurer. In general, under both the modeled and non-modeled LBaSS processes, the
larger the discount to par value, the stronger the NAIC designation the LBaSS will have.
A summary of our AFS fixed maturity securities, including related parties, by NAIC designation (with our German operations applying NRSRO
ratings to map to NAIC designations as noted above) is as follows:
(In millions, except percentages)
NAIC designation
1
2
Total investment grade
3
4
5
6
December 31, 2017
December 31, 2016
Amortized
Cost
Fair Value
Percent of
Total
Amortized
Cost
Fair Value
Percent of
Total
$
30,906
$
32,447
52.8% $
29,477
$
30,211
24,147
55,053
2,978
789
70
15
25,082
57,529
3,040
765
66
18
40.9%
93.7%
5.0%
1.2%
0.1%
—%
6.3%
18,348
47,825
2,871
647
87
21
18,617
48,828
2,812
622
82
24
3,626
3,540
57.7%
35.5%
93.2%
5.4%
1.2%
0.2%
—%
6.8%
Total below investment grade
3,852
3,889
Total fixed maturity securities, including related parties
$
58,905
$
61,418
100.0% $
51,451
$
52,368
100.0%
Substantially all of our AFS fixed maturity portfolio, 93.7% and 93.2% as of December 31, 2017 and 2016, respectively, was invested in assets
considered investment grade with a NAIC designation of 1 or 2.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
A summary of our AFS fixed maturity securities, including related parties, by NRSRO ratings is set forth below:
(In millions, except percentages)
NRSRO rating agency designation
AAA/AA/A
BBB
Non-rated1
Total investment grade
BB
B
CCC
CC and lower
Non-rated1
Total below investment grade
December 31, 2017
December 31, 2016
Fair Value
Percent of
Total
Fair Value
Percent of
Total
$
21,448
23,572
6,592
51,612
3,091
1,198
2,696
2,302
519
9,806
34.9% $
38.4%
10.7%
84.0%
5.0%
2.0%
4.4%
3.8%
0.8%
16.0%
18,791
18,002
5,650
42,443
3,286
1,372
2,374
2,404
489
9,925
35.9 %
34.4 %
10.8%
81.1%
6.3%
2.6%
4.5%
4.6%
0.9%
18.9 %
100.0%
Total fixed maturity securities, including related parties
$
61,418
100.0% $
52,368
1 Securities denoted as non-rated by the NRSRO were classified as investment or non-investment grade according to the security’s respective NAIC
designation.
Consistent with the NAIC Process and Procedures Manual, an NRSRO rating was assigned based on the following criteria: (a) the equivalent
S&P rating where the security is rated by one NRSRO; (b) the equivalent S&P rating of the lowest NRSRO when the security is rated by two
NRSROs; and (c) the equivalent S&P rating of the second lowest NRSRO if the security is rated by three or more NRSROs. If the lowest two
NRSRO ratings are equal, then such rating will be the assigned rating. NRSRO ratings available for the periods presented were S&P, Fitch,
Moody’s Investor Service (Moody’s), DBRS, and Kroll Bond Rating Agency, Inc. (KBRA).
The portion of our AFS fixed maturity portfolio that was considered below investment grade based on NRSRO ratings was 16.0% and 18.9% as
of December 31, 2017 and 2016, respectively. The primary driver of the difference in the percentage of securities considered below investment
grade by NRSROs as compared to the securities considered below investment grade by the NAIC relates to the difference in methodologies
between the NRSRO and NAIC for RMBS due to investments acquired at a discount to par value, as discussed above.
As of December 31, 2017 and 2016, the non-rated securities shown above were comprised of 44% and 43%, respectively, of corporate private
placement securities for which we have not sought individual ratings from the NRSROs and 42% and 44%, respectively, of RMBS, many of
which were acquired at a significant discount to par. We rely on internal analysis of credit risk and designations assigned by the NAIC. As of
December 31, 2017 and 2016, 93% and 92%, 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. These holdings were
$4.0 billion and $3.0 billion as of December 31, 2017 and 2016, respectively. As of December 31, 2017 and 2016 our ABS portfolio included
approximately $3.8 billion (94% of the total) and $2.7 billion (91% of the total), respectively, of securities that are considered investment grade
based on NAIC designations, while approximately $3.6 billion (89% of the total) and $2.5 billion (85% of the total), respectively, of securities
were considered investment grade based on NRSRO ratings.
Collateralized Loan Obligations – We also invest in CLOs which pay principal and interest from cash flows received from underlying corporate
loans. These holdings were $5.4 billion and $5.1 billion as of December 31, 2017 and 2016, respectively. As of December 31, 2017 and 2016,
our CLO portfolio included approximately $4.6 billion (85% of the total) and $4.2 billion (83% of the total), respectively, of securities that are
considered investment grade based on NAIC designations while approximately $4.8 billion (88% of the total) and $4.2 billion (82% of the total),
respectively, of securities were considered investment grade based on NRSRO ratings.
98
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Commercial Mortgage-backed Securities – A portion of our fixed maturity AFS portfolio is invested in CMBS. CMBS are constructed from
pools of commercial mortgages. These holdings were $2.0 billion and $1.8 billion as of December 31, 2017 and 2016, respectively. As of
December 31, 2017 and 2016, our CMBS portfolio included approximately $1.9 billion (95% of the total) and $1.8 billion (97% of the total),
respectively, of securities that are considered investment grade based on NAIC designations while approximately $1.4 billion (70% of the total)
and $1.1 billion (60% of the total), respectively, of securities were considered investment grade based on NRSRO ratings.
Residential Mortgage-backed Securities – As part of our core investment strategy, a portion of our fixed maturity AFS portfolio is invested in
RMBS. RMBS are securities constructed from pools of residential mortgages and backed by payments from those pools. These holdings were
$9.4 billion and $9.0 billion as of December 31, 2017 and 2016, respectively. Excluding limitations on access to lending and other extraordinary
economic conditions, prepayments of principal on the underlying loans can be expected to accelerate with decreases in market interest rates and
diminish with increases in interest rates. Our investments in RMBS are primarily non-agency RMBS having a significant focus on assets with
attractive entry prices, which are generally considered investment grade based on NAIC designations, given the likelihood that we ultimately
receive principal and interest distributions in an amount at least equal to our amortized cost.
A summary of our AFS RMBS portfolio by NAIC designations and NRSRO quality ratings is as follows:
(In millions, except percentages)
NAIC designation
1
2
Total investment grade
3
4
5
6
Total below investment grade
Total RMBS
NRSRO rating agency designation
AAA/AA/A
BBB
Non-rated1
Total investment grade
BB
B
CCC
CC and lower
Non-rated1
Total below investment grade
Total RMBS
December 31, 2017
December 31, 2016
Fair Value
Percent of
Total
Fair Value
Percent of
Total
$
$
$
$
8,714
360
9,074
213
73
6
—
292
9,366
335
347
2,866
3,548
415
417
2,580
2,298
108
5,818
9,366
93.0% $
3.8%
96.8%
2.3%
0.8%
0.1%
—%
3.2%
100.0% $
3.6% $
3.7%
30.6%
37.9%
4.4%
4.5%
27.5%
24.5%
1.2%
62.1%
100.0% $
8,652
140
8,792
96
29
54
2
181
8,973
345
245
2,638
3,228
419
567
2,280
2,395
84
5,745
8,973
96.4 %
1.6 %
98.0%
1.1 %
0.3 %
0.6 %
— %
2.0 %
100.0 %
3.8 %
2.7 %
29.5%
36.0%
4.7%
6.3%
25.4%
26.7%
0.9%
64.0 %
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.
A significant majority of our RMBS portfolio, 96.8% and 98.0% as of December 31, 2017 and 2016, respectively, was invested in assets
considered to be investment grade based upon an application of the NAIC’s methodology to our holdings of RMBS. The NAIC’s methodology
with respect to RMBS gives explicit effect to the amortized cost at which an insurance company carries each such investment. Because we
invested in RMBS after the stresses related to 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 resulted in an investment grade NAIC designation. In contrast, our
understanding is that in setting ratings, NRSRO’s focus on the likelihood of recovery of all contractual payments including principal at par
value. As a result of a fundamental difference in approach, as of December 31, 2017 and 2016, NRSRO’s characterized 37.9% and 36.0%,
respectively, of our RMBS as investment grade.
99
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unrealized Losses
Our investments in fixed maturity securities, including related parties, are reported at fair value with changes in fair value recorded in other
comprehensive income. Certain of our fixed maturity securities, including related parties, have experienced declines in fair value that we
consider temporary in nature. As of December 31, 2017, our fixed maturity securities, including related parties, had a fair value of $61.4 billion,
which was approximately 4.3% above amortized cost of $58.9 billion. As of December 31, 2016, our fixed maturity securities, including related
parties, had a fair value of $52.4 billion, which was approximately 1.8% above amortized cost of $51.5 billion. These investments are held to
support our product liabilities and we currently have the intent and ability to hold these securities until sale or maturity, and believe the securities
will recover the amortized cost basis prior to sale or maturity.
The following tables reflect the unrealized losses on the AFS fixed maturity portfolio, including related parties, by NAIC designations:
Total
$
10,582
$
(246) $
(In millions, except percentages)
NAIC designation
1
2
Total investment grade
3
4
5
6
Total below investment grade
(In millions, except percentages)
NAIC designation
1
2
Total investment grade
3
4
5
6
Total below investment grade
December 31, 2017
Amortized
Cost of
Securities with
Unrealized
Loss
Gross
Unrealized
Loss
Fair Value of
Securities with
Unrealized
Loss
Fair Value to
Amortized
Cost Ratio
Fair Value of
Total AFS
Fixed Maturity
Securities
Percent of Loss
to Total AFS
Fair Value
NAIC
Designation
$
4,901
$
(100) $
4,284
9,185
881
451
60
5
1,397
(82)
(182)
(19)
(40)
(5)
—
(64)
4,801
4,202
9,003
862
411
55
5
1,333
10,336
98.0% $
98.1%
98.0%
97.8%
91.1%
91.7%
100.0%
95.4%
97.7% $
32,447
25,082
57,529
3,040
765
66
18
3,889
61,418
(0.3)%
(0.3)%
(0.3)%
(0.6)%
(5.2)%
(7.6)%
— %
(1.6)%
(0.4)%
December 31, 2016
Amortized
Cost of
Securities with
Unrealized
Loss
Gross
Unrealized
Loss
Fair Value of
Securities with
Unrealized
Loss
Fair Value to
Amortized
Cost Ratio
Fair Value of
Total AFS
Fixed Maturity
Securities
Percent of Loss
to Total AFS
Fair Value
NAIC
Designation
$
8,805
$
(272) $
6,156
14,961
1,769
329
34
1
2,133
(220)
(492)
(103)
(35)
(6)
—
(144)
8,533
5,936
14,469
1,666
294
28
1
1,989
16,458
96.9% $
96.4%
96.7%
94.2%
89.4%
82.4%
100.0%
93.2%
96.3% $
30,211
18,617
48,828
2,812
622
82
24
3,540
52,368
(0.9)%
(1.2)%
(1.0)%
(3.7)%
(5.6)%
(7.3)%
— %
(4.1)%
(1.2)%
Total
$
17,094
$
(636) $
The gross unrealized losses on AFS fixed maturity securities, including related parties, were $246 million and $636 million as of December 31,
2017 and 2016, respectively. The decrease in unrealized losses was driven by credit spreads tightening during year ended December 31, 2017,
resulting in an increase in unrealized gains.
As of December 31, 2017 and 2016, we held $4.4 billion and $3.6 billion, respectively, in energy sector fixed maturity securities, or 7% of the
total fixed maturity securities, including related parties for each period. The gross unrealized capital losses on these securities were $33 million
and $73 million, or 13% and 11% of the total unrealized losses, respectively.
100
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Other-Than-Temporary Impairments
For our OTTI policy and the identification of securities that could potentially have impairments, see Note 1 – Business, Basis of Presentation
and Significant Accounting Policies and Note 2 – Investments to the consolidated financial statements, as well as Critical Accounting Estimates
and Judgments.
During the year ended December 31, 2017, we recorded $33 million of OTTI losses comprised of $13 million related to corporate fixed
maturities, $7 million related to real estate, $5 million related to mortgage loans foreclosed, $3 million related to mortgage loans, $2 million
related to equity securities, $2 million related to RMBS, and $1 million related to ABS. Of the OTTI losses recognized during year ended
December 31, 2017, $1 million related to the energy sector. During the year ended December 31, 2016, we recorded $30 million of OTTI losses
comprised of $13 million related to state, municipal and political subdivisions, $6 million related to corporate fixed maturities, $6 million
related to ABS, $2 million related to RMBS, $2 million related to CLOs and $1 million related to other assets. Of the OTTI losses recognized
during 2016, $4 million related to the energy sector. During the year ended December 31, 2015, we recorded $30 million of OTTI losses
comprised of $20 million related to corporate fixed maturities, $8 million related to state, municipal, and other political subdivisions, $1 million
related to RMBS and $1 million related to mortgage loans. Of the OTTI losses recognized, $17 million related to the energy sector. The
annualized OTTI losses we have experienced for the years ended December 31, 2017, 2016 and 2015 translate into 4 basis points, 4 basis points
and 5 basis points, respectively, of average invested assets.
International Exposure
A portion of our fixed maturity securities are invested in securities with international exposure. As of December 31, 2017 and 2016, 33% and
32%, respectively, of the carrying value of our fixed maturity securities, including related parties was comprised of securities of issuers based
outside of the United States and debt securities of foreign governments. These securities are either denominated in U.S. dollars or do not expose
us to significant foreign currency risk as a result of foreign currency swap arrangements.
The following table presents our international exposure in our fixed maturity securities portfolio, including related parties, by country or region:
(In millions, except percentages)
Country of risk
Ireland
Italy
Spain
Portugal
Total Portugal, Ireland, Italy, Greece and Spain1
Other Europe
Total Europe
Non-U.S. North America
Australia & New Zealand
Central & South America
Africa & Middle East
Asia/Pacific
Supranational
Total
December 31, 2017
December 31, 2016
Amortized
Cost
Fair Value
Percent of
Total
Amortized
Cost
Fair Value
Percent of
Total
$
498
$
59
209
1
767
8,087
8,854
8,048
1,443
481
193
321
39
511
64
225
1
801
8,395
9,196
8,220
1,481
508
196
327
41
2.6% $
0.3%
1.1%
—%
4.0%
42.0%
46.0%
41.2%
7.4%
2.6%
1.0%
1.6%
0.2%
$
510
90
175
—
775
6,336
7,111
7,185
1,283
456
164
216
26
516
92
190
—
798
6,512
7,310
7,105
1,304
467
167
218
27
3.1%
0.6%
1.1%
—%
4.8%
39.2%
44.0%
42.8%
7.9%
2.8%
1.0%
1.3%
0.2%
$
19,379
$
19,969
100.0% $
16,441
$
16,598
100.0%
1 As of each of the respective periods, we had no holdings in Greece.
Approximately 90.9% and 89.7% of these securities are investment grade by NAIC designation as of December 31, 2017 and 2016, respectively.
As of December 31, 2017, 8% of our fixed maturity securities, including related parties, were invested in CLOs of Cayman Islands issuers (for
which underlying investments are largely loans to U.S. issuers), 6% were invested in securities of non-U.S. issuers by our former German Group
Companies and 19% were invested in other non-U.S. issuers.
Portugal, Ireland, Italy, Greece and Spain continue to represent credit risk as economic conditions in these countries continue to be volatile,
especially within the financial and banking sectors. We had $801 million and $798 million as of December 31, 2017 and 2016, respectively, of
exposure in these countries, of which $156 million and $237 million, respectively, were a result of investments acquired from the DLD
acquisition in 2015.
101
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As of December 31, 2017, we held United Kingdom and Channel Islands fixed maturity securities of $1.9 billion, or 3.0% of the total fixed
maturities including related parties. As of December 31, 2017, these securities were in an unrealized gain position of $54 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 $3.0 billion and $2.8 billion as of each of December 31, 2017 and 2016, respectively. Trading
securities are primarily comprised of AmerUs Closed Block securities for which we have elected the fair value option valuation, CLO equity
tranche securities, structured securities with embedded derivatives, and investments which support various reinsurance arrangements.
Mortgage Loans
The following is a summary of our mortgage loan portfolio by collateral type:
(In millions, except percentages)
Property type
Office building
Retail
Hotels
Industrial
Apartment
Other commercial 1
Total net mortgage loans
Residential loans
Total mortgage loans, net of allowances
December 31, 2017
December 31, 2016
Net Carrying
Value
Percent of
Total
Net Carrying
Value
Percent of
Total
$
$
1,187
1,223
928
944
525
440
5,247
986
6,233
19.0% $
19.6%
14.9%
15.2%
8.4%
7.1%
84.2%
15.8%
100.0% $
1,217
1,135
1,025
742
616
397
5,132
338
5,470
22.2 %
20.7 %
18.7 %
13.6 %
11.3 %
7.3%
93.8%
6.2%
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 $6.2 billion and $5.5 billion as of December 31, 2017 and 2016, respectively.
This included $1.8 billion and $1.5 billion of mezzanine mortgage loans for the respective periods. The increase in residential loans was
primarily due to the closing of re-performing loan transactions during the year. We have acquired mortgage loans through acquisitions and
reinsurance arrangements, as well as through an active program to invest in new mortgage loans. We invest in mortgage loans on income
producing properties including hotels, apartments, retail and office buildings, and other commercial and industrial properties. Loan-to-value
ratios at the time of loan approval are generally 75% or less.
Our mortgage loans are primarily stated at unpaid principal balance, adjusted for any unamortized premium or discount, and net of valuation
allowances. Interest income is accrued on the principal amount of the loan based on the loan’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 December 31, 2017, we had $0 million of
mortgage loans that were 90 days past due and $1 million in the process of foreclosure. As of December 31, 2016, we had $21 million of
mortgage loans that were 90 days past due and $20 million in the process of foreclosure.
See Note 2 – Investments to the consolidated financial statements for information regarding valuation allowance for collection loss, impairments,
loan-to-value, and debt service coverage.
As of December 31, 2017 and 2016, we had not recorded any new specific loan valuation allowances and we recorded $3 million and $0
million, respectively, of OTTI through net income. We have established a general and specific loan valuation allowance in the aggregate amount
of $2 million as of December 31, 2017 and 2016, attributable to loans acquired in connection with the acquisition of Aviva USA.
102
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Investment Funds and Variable Interest Entities
Our investment funds investment strategy primarily focuses on funds with core holdings of credit assets, real assets, real estate, preferred equity
and income producing assets. Our investment strategy focuses on sourcing assets with some or all of the following characteristics, among others:
(1)(cid:3)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(cid:3)
compared to pure equity; or (3) investments that have less downside risk. A portion of our current investment funds and VIE holdings are(cid:3)
comprised of certain investment funds contributed by the AAA Investor (AAA Contribution) as further described in Note 4 – Variable Interest(cid:3)
Entities to the consolidated financial statements.
At the time of the AAA Contribution, the contributed assets largely consisted of co-investments with Apollo private equity funds. However, the
attributes of the contributed assets have changed significantly since the initial transaction primarily due to the initial public offering of two
underlying fund investment holdings. As of December 31, 2017, the assets consisted of $212 million of publicly-traded equity securities, a
substantial portion of which is in the process of being liquidated. These public equity securities have resulted in volatility in our statement of
income in recent periods. At the end of the third quarter of 2016, Norwegian Cruise Line Holdings Ltd. (NCLH) was distributed from
CoInvest VI to NCL Athene, LLC (NCL LLC), resulting in the investment being classified as an AFS security with any unrealized gains and
losses recognized in AOCI, thereby reducing further volatility in our statement of income from this fund. See Note 4 – Variable Interest Entities
to the consolidated financial statements for further discussion of NCL LLC.
Our investment funds generally meet the definition of a VIE, and in certain cases these investment funds are consolidated in our financial
statements because we meet the criteria of the primary beneficiary. See Note 4 – Variable Interest Entities to the consolidated financial
statements for further discussion on our investment funds that meet the criteria for consolidation and the accounting treatment for them.
The following table illustrates our consolidated VIE positions:
(In millions, except percentages)
Assets of consolidated VIEs
Investments
Available-for-sale securities
Equity securities
Trading securities
Investment funds
Cash and cash equivalents
Other assets
Total assets of consolidated VIEs
Liabilities of consolidated VIEs
Other liabilities
Total liabilities of consolidated VIEs
December 31, 2017
December 31, 2016
Carrying Value
Percent of
Total
Carrying Value
Percent of
Total
$
$
$
$
142
146
571
4
1
864
2
2
16.4% $
16.9%
66.1%
0.5%
0.1%
100.0% $
100.0% $
100.0% $
161
167
573
14
6
921
34
34
17.5%
18.1%
62.2%
1.5%
0.7%
100.0%
100.0%
100.0%
The assets of consolidated VIEs were $864 million and $921 million as of December 31, 2017 and 2016, respectively. The liabilities of
consolidated VIEs were $2 million and $34 million as of December 31, 2017 and 2016, respectively.
103
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table illustrates our investment funds, including related party positions of our non-consolidated VIEs and investment funds owned
by consolidated VIEs:
(In millions, except percentages)
Investment funds
Private equity
Real estate and other real assets
Natural resources
Hedge funds
Credit funds
Total investment funds
Investment funds – related parties
Private equity – A-A Mortgage
Private equity
Real estate and other real assets
Natural resources
Hedge funds
Credit funds
December 31, 2017
December 31, 2016
Carrying Value
Percent of
Total
Carrying Value
Percent of
Total
$
271
161
4
61
202
699
403
180
297
74
93
263
1,310
528
21
22
571
2,580
10.5% $
6.2%
0.2%
2.4%
7.8%
27.1%
15.6%
7.0%
11.5%
2.9%
3.6%
10.2%
50.8%
20.4%
0.8%
0.9%
22.1%
100.0% $
268
118
5
72
226
689
343
131
247
49
192
236
1,198
524
38
11
573
2,460
10.9%
4.8 %
0.2 %
2.9 %
9.2 %
28.0 %
13.9 %
5.3 %
10.1 %
2.0 %
7.8 %
9.6 %
48.7%
21.3%
1.6%
0.4 %
23.3%
100.0%
Total investment funds – related parties
Investment funds owned by consolidated VIEs
Private equity – MidCap1
Credit funds
Real estate and other real assets
Total investment funds owned by consolidated VIEs
Total investment funds, including related parties and VIEs
$
Overall, the total investment funds, including related parties and consolidated VIEs, were $2.6 billion and $2.5 billion as of December 31, 2017
and 2016, respectively. See Note 4 – Variable Interest Entities to the 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 rates and equity
market risk. Interest rate risk represents the potential for changes in the investment fund’s net asset values resulting from changes in the general
level of interest rates. Equity market risk represents potential for changes in the investment fund’s net asset values resulting from changes in
equity markets or from other external factors which influence equity markets. We actively monitor our exposure to the risks inherent in these
investments which could materially and adversely affect our results of operations and financial condition. The interest and equity market risks
expose us to potential volatility in our earnings year-over-year related to these investment funds.
Funds Withheld at Interest
Funds withheld at interest represents a receivable for amounts contractually withheld by ceding companies in accordance with modco and funds
withheld reinsurance agreements in which we act as the reinsurer. Generally, assets equal to statutory reserves are withheld and legally owned by
the ceding company. As of December 31, 2017, the ceding companies holding the assets pursuant to such reinsurance agreements had a financial
strength rating of A- or better.
The funds withheld at interest is comprised of the host contract and an embedded derivative. We are subject to the investment performance on
the withheld assets with the total return directly impacting the host contract and the embedded derivative. Interest accrues at a risk free rate on
the host receivable and is recorded as net investment income in the consolidated statements of income. The change in the embedded derivative
in our reinsurance agreements are similar to a total return swap on the income generated by the underlying assets held by the ceding companies
and is recorded in investment related gains (losses). Although we do not directly control the underlying investments in the funds withheld at
interest, in each instance the ceding company has hired AAM to manage the withheld assets in accordance with our investment guidelines.
104
Item 7. 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:
(In millions, except percentages)
Fixed maturity securities
December 31, 2017
December 31, 2016
Carrying Value
Percent of
Total
Carrying Value
Percent of
Total
U.S. state, municipal and political subdivisions
$
Corporate
CLO
ABS
CMBS
RMBS
Equity securities
Mortgage loans
Investment funds
Derivative assets
Short-term investments
Cash and cash equivalents
Other assets and liabilities
Total funds withheld at interest
117
2,095
669
886
290
1,551
28
792
376
78
16
132
55
1.6% $
29.6%
9.4%
12.5%
4.1%
21.9%
0.4%
11.2%
5.3%
1.1%
0.2%
1.9%
0.8%
118
1,800
591
736
292
1,551
29
773
329
53
80
105
81
1.8%
27.6%
9.0%
11.3%
4.5%
23.7%
0.4%
11.8%
5.0%
0.8%
1.2%
1.6%
1.3%
$
7,085
100.0% $
6,538
100.0%
As of December 31, 2017 and 2016, we held $7.1 billion and $6.5 billion of funds withheld at interest receivables, respectively. Approximately
94.2% and 93.6% of the fixed maturity securities within the funds withheld at interest are investment grade by NAIC designation as of
December 31, 2017 and 2016, respectively.
Derivative Instruments
We hold derivative instruments for economic hedging purposes to reduce our exposure to cash flow variability of assets and liabilities, equity
market risk, interest rate risk, credit risk and foreign exchange risk. The types of derivatives we may use include interest rate swaps, foreign
currency swaps and forward contracts, total return swaps, credit default swaps, variance swaps, futures and fixed indexed options.
A presentation of our derivative instruments along with a discussion of the business strategy involved with our derivatives is included in
Note 3 – Derivative Instruments to the consolidated financial statements. This includes:
a comprehensive description of the derivatives instruments as well as the strategies to manage risk;
the notional amounts and estimated fair value by derivative instruments; and
impacts on the consolidated statement of net income.
As part of our risk management strategies, management continually evaluates our derivative instrument holdings and the effectiveness of such
holdings in addressing risks identified in our operations.
105
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Invested Assets
The following summarizes our invested assets:
State, municipal, political subdivisions
and foreign government
1,347
2,411
December 31, 2017
December 31, 2016
U.S. and
Bermuda
Invested
Asset Value
Germany
Invested
Asset Value
Total
Invested
Asset
Value1
Percent of
Total
U.S. and
Bermuda
Invested
Asset Value
Germany
Invested
Asset Value
Total
Invested
Asset
Value1
Percent of
Total
$
37,059
$
1,536
$
38,595
46.9% $
31,000
$
1,682
$
32,682
5,914
42,973
10,532
6,858
2,322
—
19,712
4,824
3,692
—
1,536
—
165
—
625
790
—
137
—
192
228
29
407
128
—
35
5,914
44,509
10,532
7,023
2,322
625
7.2%
54.1%
12.8%
8.5%
2.8%
0.8%
5,798
36,798
10,619
6,145
2,202
—
20,502
24.9%
18,966
4,824
3,829
3,758
407
320
228
64
5.9%
4.6%
4.5%
0.5%
0.4%
0.3%
0.1%
3,873
3,297
1,387
—
199
250
32
9,038
1,111
631
—
1,682
—
95
—
542
637
—
128
1,936
363
185
—
27
5,798
38,480
10,619
6,240
2,202
542
45.4%
8.1%
53.5%
14.8%
8.7%
3.1%
0.8%
19,603
27.4%
3,873
3,425
3,323
363
384
250
59
5.4%
4.8%
4.6%
0.5%
0.5%
0.3%
0.1%
(In millions, except percentages)
Corporate
CLO
Credit
RMBS
Mortgage loans
CMBS
Real estate held for investment
Real estate
ABS
Alternative investments
Unit linked assets
Equity securities
Short-term investments
U.S. government and agencies
Other investments
Cash and equivalents
Policy loans and other
Total invested assets
10,312
3,118
13,430
16.3%
2,504
761
296
296
2,800
1,057
3.4%
1.3%
2,639
11,677
16.2%
111
221
1,222
852
1.7%
1.2%
$
76,262
$
6,036
$
82,298
100.0% $
66,544
$
5,290
$
71,834
100.0%
1 See Key Operating and Non-GAAP Measures for the definition of invested assets.
Our total invested assets were $82.3 billion and $71.8 billion as of December 31, 2017 and 2016, respectively. As of December 31, 2017, our
total invested assets were mainly comprised of 46.9% of corporate securities, 28.7% of structured securities, 8.5% of mortgage loans and 4.6%
of alternative investments. Corporate securities within our U.S. and Bermuda portfolio included $9.5 billion of private placements, which
represented approximately 12% of our total U.S. and Bermuda invested assets. The increase in total invested assets as of December 31, 2017
from 2016 was primarily driven by strong growth in deposits over liability outflows and reinvestment of earnings.
In managing our business we utilize invested assets as presented in the above table. Invested assets do not correspond to the total investments,
including related parties, on our consolidated balance sheets, as discussed previously in Key Operating and Non-GAAP Measures. Invested
assets represent the investments that directly back our policyholder liabilities and surplus assets. We believe this view of our portfolio provides a
view of the assets for which we have economic exposure. We adjust the presentation for funds withheld and modco transactions to include or
exclude the underlying investments based upon the contractual transfer of economic exposure to such underlying investments. We also
deconsolidate any VIEs in order to show the net investment in the funds, which therefore are included in the alternative investments line above.
The Germany investment portfolio composition differs from the U.S. and Bermuda portfolio primarily due to the geographic location, regulatory
environment and participating nature of the German products and therefore the portfolio is managed separately from our U.S. and Bermuda
portfolios. The German invested assets are predominantly invested in foreign government securities, corporate fixed income securities, real
estate held for investment and assets backing our unit linked policies. The German invested assets are predominantly invested in Euro-
denominated securities and investments. On January 1, 2018, our German operations were deconsolidated in connection with the AGER
Offering, the result of which was the removal of these assets from our balance sheet as of that date.
Invested assets is utilized by management to evaluate our investment portfolio. Invested asset figures are used in the computation of net
investment earned rate, which allows us to analyze the profitability of our investment portfolio. Invested assets is also used in our risk
management processes for asset purchases, product design and underwriting, stress scenarios, liquidity, and ALM.
106
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Alternative Investments
The following summarizes our alternative investments:
(In millions, except percentages)
Credit funds
Private equity – MidCap
Private equity – A-A Mortgage (AmeriHome)
Private equity – other
Mortgage and real assets
Hedge funds
Public equities
Natural resources and other real assets
Total alternative investments
December 31, 2017
December 31, 2016
Invested Asset
Value
Percent of
Total
Invested Asset
Value
Percent of
Total
$
784
528
496
554
643
467
171
186
20.4% $
13.8%
12.9%
14.5%
16.8%
12.2%
4.5%
4.9%
834
524
417
519
470
311
215
135
24.3%
15.3%
12.2%
15.2%
13.7%
9.1%
6.3%
3.9%
$
3,829
100.0% $
3,425
100.0%
Alternative investments were $3.8 billion and $3.4 billion as of December 31, 2017 and 2016, respectively, representing 4.6% and 4.8% of our
total invested assets portfolio as of December 31, 2017 and 2016, respectively.
Alternative investments do not correspond to the total investment funds, including related parties and VIEs, on our consolidated balance sheets.
As discussed above in the invested assets section, we adjust the GAAP presentation for funds withheld and modco and de-consolidate VIEs. We
also include CLO equity tranche securities in alternative investments due to their underlying characteristics and equity-like features.
Through our relationship with Apollo and AAM, we have indirectly invested in companies that meet the key characteristics we look for in
alternative investments. Two of our largest alternative investments are in asset originators, MidCap and AmeriHome, both of which, from time
to time, provide us with access to assets for our investment portfolio.
MidCap
Our equity investment in MidCap is held indirectly through an investment fund, AAA Investment (Co Invest VII), L.P. (CoInvest VII), of which
MidCap constitutes substantially all the fund’s investments. MidCap is a commercial finance company that provides various financial products
to middle-market businesses in multiple industries, primarily located in the U.S. MidCap primarily originates and invests in commercial and
industrial loans, including senior secured corporate loans, working capital loans collateralized mainly by accounts receivable and inventory,
senior secured loans collateralized by portfolios of commercial and consumer loans and related products and secured loans to highly capitalized
pharmaceutical and medical device companies, and commercial real estate loans, including multifamily independent-living properties, assisted
living, skilled nursing and medical office properties, warehouse, office building, hotel and other commercial use properties and multifamily
properties. MidCap originates and acquires loans using borrowings under financing arrangements that it has in place with numerous financial
institutions. MidCap’s earnings are primarily driven by the difference between the interest earned on its loan portfolio and the interest accrued
under its outstanding borrowings. As a result, MidCap is primarily exposed to the credit risk of its loan counterparties and prepayment risk.
Additionally, financial results are influenced by related levels of middle-market business investment and interest rates.
Our alternative investment in CoInvest VII is substantially comprised of its investment in MidCap, which was $528 million and $524 million as
of December 31, 2017 and 2016, respectively. Our investment in CoInvest VII largely reflects any contributions to and distributions from
CoInvest VII and the fair value of MidCap. CoInvest VII returned a net investment earned rate of 8.93%, 15.15% and 15.98% for the years
ended December 31, 2017, 2016 and 2015, respectively. Alternative investment income from CoInvest VII was $50 million, $79 million and
$78 million for the years ended December 31, 2017, 2016 and 2015, respectively. The decrease in alternative investment income of $29 million,
or 37%, for 2017 compared to 2016, was due to 2016 benefiting from a $37 million increase in the fair value of MidCap related to the removal
of liquidity discounts related to marketability assumptions used in the determination of MidCap’s fair value. Alternative investment income
increased $1 million, or 1%, for 2016 compared to 2015.
107
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
AmeriHome
Our equity investment in AmeriHome is held indirectly through an investment fund, A-A Mortgage Opportunities, LP (A-A Mortgage), of which
AmeriHome is currently the fund’s only investment. AmeriHome is a mortgage origination platform and an aggregator of mortgage servicing
rights. AmeriHome acquires mortgage loans from retail originators and re-sells the loans to the Federal National Mortgage Association, the
Federal Home Loan Mortgage Corporation, the Government National Mortgage Association and other investors. AmeriHome retains the
mortgage servicing rights on the loans that it sells and employs a subservicer to perform servicing operations, including payment collection.
AmeriHome’s earnings are primarily driven by two sources: gains or losses on sale of mortgage loans and the difference between the fee that it
charges for mortgage servicing and the fee charged by the subservicer. As a result, AmeriHome’s financial results are influenced by interest rates
and related housing demand. AmeriHome is primarily exposed to credit risk related to the accuracy of the representations and warranties in the
loans that AmeriHome acquires and prepayment risk, which prematurely terminates fees related to mortgage servicing.
Our alternative investment in A-A Mortgage was $496 million and $417 million as of December 31, 2017 and 2016, respectively. Our
investment in A-A Mortgage represents our proportionate share of its net asset value, which largely reflects any contributions to and
distributions from A-A Mortgage and the fair value of AmeriHome. A-A Mortgage returned a net investment earned rate of 12.01%, 11.62% and
14.05% for the years ended December 31, 2017, 2016 and 2015, respectively. Alternative investment income from A-A Mortgage was
$58 million, $41 million and $20 million for the years ended December 31, 2017, 2016 and 2015, respectively. The increase in alternative
investment income of $17 million, or 41%, for 2017 compared to 2016 was driven by increases in its overall balance sheet size, origination
volumes and retained mortgage servicing rights. The increase in alternative investment income of $21 million, or 102%, for 2016 compared to
2015 was primarily due to 2015 reflecting increased funding of AmeriHome throughout the year, startup costs and the investment achieving
scale in the second half of the year.
Non-GAAP Measure Reconciliations
The reconciliations to the nearest GAAP measure for adjusted operating income is included in the Consolidated Results of Operations section.
The reconciliation of AHL shareholders’ equity to AHL shareholders’ equity excluding AOCI included in the ROE excluding AOCI and adjusted
operating income ROE excluding AOCI is as follows:
(In millions)
Total AHL shareholders’ equity
Less: AOCI
Total AHL shareholders’ equity excluding AOCI
Retirement Services
Corporate and Other
Total AHL shareholders’ equity excluding AOCI
December 31,
2017
2016
2015
$
$
$
$
9,208
$
6,858
$
1,415
367
7,793
$
6,491
$
5,465
$
4,448
$
2,328
2,043
7,793
$
6,491
$
5,352
(237)
5,589
3,964
1,625
5,589
108
Item 7. 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:
(In millions, except percentages)
GAAP net investment income
Reinsurance embedded derivative impacts
Net VIE earnings
Alternative income gain (loss)
Held for trading amortization
Total adjustments to arrive at net investment earnings/earned rate
Total net investment earnings/earned rate
Retirement Services
Corporate and Other
Total net investment earnings/earned rate
Retirement Services average invested assets
Corporate and Other average invested assets
Consolidated average invested assets
Years ended December 31,
2017
2016
2015
Dollar
Rate
Dollar
Rate
Dollar
Rate
$
3,269
4.27 % $
2,914
4.19 % $
2,510
191
77
(20)
(94)
154
0.25 %
0.10 %
(0.03)%
(0.12)%
0.20 %
189
1
(39)
(35)
116
0.27 %
— %
(0.06)%
(0.05)%
0.16 %
84
67
(42)
(9)
100
3,423
4.47 % $
3,030
4.35 % $
2,610
3,241
182
3,423
69,016
7,541
76,557
4.70 % $
2,953
4.72 % $
2,574
2.42 %
77
1.08 %
36
4.47 % $
3,030
4.35 % $
2,610
$
$
62,558
7,113
69,671
$
$
58,924
2,567
61,491
$
$
$
$
$
4.06 %
0.15 %
0.11 %
(0.07)%
(0.01)%
0.18 %
4.24 %
4.37 %
1.38 %
4.24 %
The reconciliation of interest sensitive contract benefits to Retirement Services cost of crediting on deferred annuities, and the respective rates,
is as follows:
’
Years ended December 31,
2017
2016
2015
(In millions, except percentages)
Dollar
Rate
Dollar
Rate
Dollar
Rate
GAAP interest sensitive contract benefits
$
2,826
4.99 % $
1,296
2.49 % $
Interest credited other than deferred annuities
(146)
(0.26)%
(108)
(0.21)%
FIA option costs
Product charges (strategy fees)
Reinsurance embedded derivative impacts
607
(73)
37
1.07 %
(0.13)%
0.07 %
559
(53)
29
1.08 %
(0.10)%
0.06 %
689
(98)
510
(33)
18
1.42 %
(0.20)%
1.04 %
(0.07)%
0.04 %
Change in fair value of embedded derivatives – FIAs
(2,196)
(3.88)%
(735)
(1.42)%
(169)
(0.35)%
Negative VOBA amortization
Unit linked change in reserves
Other changes in interest sensitive contract liabilities
40
(29)
—
0.07 %
(0.05)%
— %
48
(15)
(2)
0.09 %
(0.03)%
— %
Total adjustments to arrive at cost of crediting on deferred annuities
(1,760)
(3.11)%
(277)
(0.53)%
68
(27)
(18)
251
940
0.14 %
(0.06)%
(0.04)%
0.50 %
1.92 %
Retirement Services cost of crediting on deferred annuities
Average account value
$
$
1,066
1.88 % $
1,019
1.96 % $
56,589
$
51,921
$
48,956
109
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The reconciliation of total investments, including related parties, to invested assets is as follows:
(In millions)
Total investments, including related parties
Derivative assets
Cash and cash equivalents (including restricted cash)
Accrued investment income
Payables for collateral on derivatives
Reinsurance funds withheld and modified coinsurance
VIE assets, liabilities and noncontrolling interest
AFS unrealized (gain) loss
Ceded policy loans
Net investment receivables (payables)
Total adjustments to arrive at invested assets
Total invested assets
December 31,
2017
2016
$
84,367
$
(2,551)
4,993
652
(2,323)
(579)
862
(2,794)
(296)
(33)
(2,069)
72,433
(1,370)
2,502
554
(1,383)
(414)
886
(1,030)
(344)
—
(599)
$
82,298
$
71,834
The reconciliation of total investment funds, including related parties and VIEs, to alternative investments within invested assets is as follows:
(In millions)
Investment funds, including related parties and VIEs
CLO equities included in trading securities
Financial Credit Investment special-purpose vehicle included in trading securities related party
Investment funds within funds withheld at interest
Royalties, other assets included in other investments and other assets
Net assets of the VIE, excluding investment funds
Total adjustments to arrive at alternative investments
Alternative investments
The reconciliation of total liabilities to reserve liabilities is as follows:
(In millions)
Total liabilities
Derivative liabilities
Payables for collateral on derivatives
Funds withheld liability
Other liabilities
Liabilities of consolidated VIEs
Reinsurance ceded receivables
Policy loans ceded
Other
Total adjustments to arrive at reserve liabilities
Total reserve liabilities
December 31,
2017
2016
$
2,580
$
2,460
182
287
416
76
288
1,249
3,829
$
December 31,
2017
2016
90,539
$
$
$
(134)
(2,323)
(407)
(1,222)
(2)
(4,972)
(296)
—
(9,356)
$
81,183
$
260
—
329
81
295
965
3,425
79,840
(40)
(1,383)
(380)
(688)
(34)
(6,001)
(344)
4
(8,866)
70,974
110
Item 7. 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 as of December 31, 2017 was approximately $51.7 billion. Although our investment
portfolio does contain assets that are generally considered illiquid for liquidity monitoring purposes (primarily mortgage loans, policy loans, real
estate, investment funds, and affiliated common stock), there is some ability to raise cash from these assets if needed. In periods of economic
downturn we may maintain higher cash balances than required to manage our liquidity risk and to take advantage of market dislocations as they
arise. We have access to additional liquidity through our $1.0 billion revolving credit facility, which is undrawn as of the date hereof and has a
remaining term of approximately three years. In January 2018, we filed a registration statement on Form S-3 ASR (Shelf Registration
Statement), which, subject to market conditions and other factors, provides us with access to the capital markets and on January 12, 2018 we
issued $1.0 billion of senior unsecured debt under our Shelf Registration Statement. In addition, through our membership in the FHLB, we are
eligible to borrow under variable rate short-term federal funds arrangements to provide additional liquidity.
We proactively manage our liquidity position to meet cash needs while minimizing adverse impacts on investment returns. We analyze our cash-
flow liquidity over the upcoming 12 months by modeling potential demands on liquidity under a variety of scenarios, taking into account the
provisions of our policies and contracts in force, our cash flow position, and the volume of cash and readily marketable securities in our
portfolio. By policy, we maintain sufficient liquidity not only to meet our cash-flow requirements over the succeeding 12-month period in a
moderately severe scenario (for example, a recessionary environment), but also to have excess liquidity available to invest into potential
investment opportunities created from market dislocations. We also monitor our liquidity profile under more severe scenarios.
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 AUSA’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 - AUSA inter-company loan commitments to be held in cash and cash equivalents by
AHL
dividends required from ALRe must be available under moderate and substantial stress
for purposes of administering this test, liquid limit assets are discounted by 25% and include public corporate bonds rated A-
or above, liquid ABS (defined as prime auto, auto floorplan, Tier 1 subprime auto, auto lease, prime credit cards, equipment
lease or utility stranded assets) and RMBS with weighted average lives less than three years rated A- or above; or CMBS
with weighted average lives less than three years rated AAA- or above
we seek to maintain sufficient capital and surplus at ALRe to meet collateral calls from modco and third-party reinsurance
contracts under a substantial stress event, such as the failure of a major financial institution (Lehman event).
Insurance Subsidiaries’ Liquidity
The primary cash flow sources for our insurance subsidiaries include retirement services product inflows (premiums), investment income,
principal repayments on our investments, and net transfers from separate accounts and financial product deposits. Uses of cash include
investment purchases, payments to policyholders for surrenders and withdrawals, policy acquisition costs, and general operating costs.
Our policyholder obligations are generally long-term in nature. However, one liquidity risk is an extraordinary level of early policyholder
withdrawals. We include provisions within our annuity policies, such as surrender charges and MVAs, which are intended to protect us from
early withdrawals. As of each of December 31, 2017 and 2016, approximately 86% of our deferred annuity liabilities were subject to penalty
upon surrender. In addition, as of December 31, 2017 and 2016, approximately 72% and 73%, respectively, of policies contained MVAs that also
have the effect of limiting early withdrawals if interest rates increase.
111
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cash Flows
Our cash flows were as follows:
(In millions)
Net income
Non-cash revenues and expenses
Net cash provided by operating activities
Sales, maturities, and repayment of investments
Purchases and acquisitions of investments
Other investing activities
Net cash used in investing activities
Capital contributions
Deposits on investment-type policies and contracts
Withdrawals on investment-type policies and contracts
Net changes of cash collateral posted for derivative transactions
Net proceeds and repayment of debt
Consolidated VIE repayment on borrowings
Other financing activities
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents1
1 Includes cash and cash equivalents of consolidated VIEs
Cash flows from operating activities
Years ended December 31,
2017
2016
2015
$
1,448
$
1,722
3,170
17,893
(24,165)
455
(5,817)
1
9,056
(4,843)
940
—
—
(106)
5,048
32
$
768
431
1,199
13,783
(16,293)
(92)
(2,602)
1
5,791
(4,617)
516
—
(500)
(36)
1,155
(13)
$
2,433
$
(261) $
578
471
1,049
14,512
(14,991)
427
(52)
1,116
3,460
(4,783)
(535)
(4)
—
(198)
(944)
(4)
49
The primary cash inflows from operating activities include net investment income, annuity considerations and insurance premiums. The primary
cash outflows from operating activities are comprised of benefit payments, interest credited to policyholders, and operating expenses. Our
operating activities generated cash flows totaling $3.2 billion, $1.2 billion and $1.0 billion for the years ended December 31, 2017, 2016 and
2015, respectively. The increase in cash provided by operating activities for the year ended December 31, 2017 compared to 2016 was primarily
driven by an increase in premiums due to $2.3 billion of PRT premiums and both of the years ended December 31, 2017 compared to 2016 and
2016 compared to 2015 increased due to an increase in net investment income reflecting an increase in our investment portfolio attributed to the
strong growth in deposits.
Cash flows from investing activities
The primary cash inflows from investing activities are the sales, maturities and repayments of investments. The primary cash outflows from
investing activities are the purchases and acquisitions of new investments. Our investing activities used cash flows totaling $5.8 billion, $2.6
billion and $52 million for the years ended December 31, 2017, 2016 and 2015, respectively. The change in cash used in investing activities for
the year ended December 31, 2017 compared to 2016 was primarily attributed to the purchase of investments related to the increase in deposits
over liability outflows as well as the reinvestment of earnings. The increase in cash used from investing activities for the year ended December
31, 2016 compared to 2015, was primarily attributed to $1.1 billion of primarily non-agency RMBS purchased in the third quarter of 2016, as
well as an increase in our investment portfolio attributed to the growth in retail sales surpassing withdrawals.
112
Item 7. 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 and repayments from borrowing activities. Our
financing activities provided cash flows totaling $5.0 billion and $1.2 billion for the years ended December 31, 2017 and 2016, respectively and
used cash flows totaling $944 million for the year ended December 31, 2015. The change in cash provided from financing activities for the year
ended December 31, 2017 was primarily attributed to the increase in annuity and funding agreement deposits over liability outflows, the
favorable change in cash collateral posted for derivative transactions and the settling of borrowings of our CMBS VIE funds in the prior year.
The increase in cash provided from financing activities in 2016 was primarily attributed to the growth in retail sales surpassing withdrawals and
the favorable change in cash collateral posted for derivative transactions, partially offset by capital raise proceeds drawn and funded in April
2015 and the settling of borrowing of our CMBS VIE funds.
Holding Company Liquidity
AHL is a holding company whose primary liquidity needs include the cash-flow requirements relating to its corporate activities, including its
day-to-day operations 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 U.S. insurance subsidiaries are permitted to pay
ordinary dividends based on calculations specified under insurance laws of the relevant state of domicile. Any distributions above the amount
permitted by statute in any twelve month period are considered to be extraordinary dividends, and the approval of the appropriate regulator is
required prior to payment. In addition, dividends from U.S. insurance subsidiaries to AHL would result in a 30% withholding tax. AHL does not
currently plan on having the U.S. subsidiaries pay any dividends to AHL. As a result, dividends from ALRe are projected to be the primary
source of AHL’s liquidity.
Under the Bermuda Insurance Act, ALRe is prohibited from paying a dividend in an amount exceeding 25% of the prior year’s statutory capital
and surplus, unless at least two members of ALRe’s board of directors and its principal representative in Bermuda sign and submit to the BMA
an affidavit attesting that a dividend in excess of this amount would not cause ALRe to fail to meet its relevant margins. In certain instances,
ALRe would also be required to provide prior notice to the BMA in advance of the payment of dividends. In the event that such an affidavit is
submitted to the BMA in accordance with the Bermuda Insurance Act, and further subject to ALRe meeting its relevant margins, ALRe is
permitted to distribute up to the sum of 100% of statutory surplus and an amount less than 15% of its total statutory capital. Distributions in
excess of this amount require the approval of the BMA.
The following table summarizes the dividends and other distributions our insurance subsidiaries were permitted to pay to AHL without the need
for insurance regulatory approval and without regard to any withholding tax, subject to meeting solvency requirements when applicable:
(In millions)
Subsidiary name (jurisdiction of domicile)
Athene Life Re Ltd. (Bermuda)
Athene Annuity & Life Assurance Company (Delaware)
Athene Lebensversicherung (Germany)
Athene Pensionskasse AG (Germany)
December 31,
2017
2016
$
5,022
$
103
—
—
2,479
127
—
—
As of December 31, 2017, the maximum dividend that AADE could pay absent regulatory approval from the Delaware Department of Insurance
was $135 million. However, another regulation requiring AADE to hold surplus outside of surplus in subsidiaries effectively limits the amount
that AADE can dividend while staying in compliance with such state regulations. Pursuant to such regulations and requirements, AADE could
dividend up to $103 million as of December 31, 2017. Any dividends from AHL’s other U.S. statutory entities in excess of the amounts allowed
for AADE would not be able to be remitted to AHL without regulatory approval from the Delaware Department of Insurance. Additionally, we
have agreed with the IID not to cause AAIA to pay dividends until August 15, 2018; therefore, we currently consider AAIA’s dividend capacity
as zero.
113
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The maximum distribution permitted by law or contract is not necessarily indicative of our actual ability to pay such distributions, which may be
further restricted by business and other considerations, such as the potential imposition of withholding tax and the impact of such distributions
on surplus, which could affect our ratings or competitive position and the amount of premiums that can be written. Specifically, the level of
capital needed to maintain desired financial strength ratings from rating agencies, including S&P, A.M. Best and Fitch, is of particular concern
when determining the amount of capital available for distributions. AHL believes its insurance subsidiaries have sufficient statutory capital and
surplus, combined with additional capital available to be provided by AHL, to meet their financial strength ratings objectives. Finally state
insurance laws and regulations require that the statutory surplus of our insurance subsidiaries following any dividend or distribution must be
reasonable in relation to their outstanding liabilities and adequate for the insurance subsidiaries’ financial needs.
Other Sources of Funding
If needed, we may seek to secure additional funding at the holding company level by means other than dividends from subsidiaries, such as by
drawing on our undrawn $1.0 billion credit facility or by pursuing future issuances of debt or equity securities to third-party investors. However,
such additional funding may not be available on terms favorable to us or at all, depending on our financial condition or results of operations or
prevailing market conditions. In addition, certain covenants in our credit facility prohibit us from incurring any debt not expressly permitted
thereby, which may limit our ability to pursue future issuances of debt.
Shelf Registration
On January 3, 2018, we filed our Shelf Registration Statement with the SEC, which became effective upon filing. Under our Shelf Registration
Statement, we have the ability to issue, in indeterminate amounts, debt securities, preferred shares, depositary shares, Class A common shares,
warrants and units. On January 12, 2018 we issued $1.0 billion in aggregate principal amount of 4.125% Senior Notes due January 2028 under
our Shelf Registration Statement.
Membership in Federal Home Loan Bank
We are a member of the FHLBDM and the FHLBI. Membership in a FHLB requires the member to purchase FHLB common stock based on a
percentage of the dollar amount of advances outstanding, subject to the investment being greater than or equal to a minimum level. We owned a
total of $36 million and $40 million of FHLB common stock as of December 31, 2017 and 2016, respectively.
Through our membership in the FHLBDM and FHLBI, we are eligible to borrow under variable rate short-term federal funds arrangements to
provide additional liquidity. The borrowings must be secured by eligible collateral such as mortgage loans, eligible CMBS or RMBS,
government or agency securities and guaranteed loans. There were no outstanding borrowings under these arrangements as of December 31,
2017 or 2016.
On August 11, 2016, we provided notice to the FHLBI that ALIC is withdrawing its membership thereto. The FHLBI confirmed receipt of our
request on the following day. Pursuant to the FHLBI’s capital plan, ALIC’s membership will be withdrawn as of the fifth anniversary of the
FHLBI’s receipt of our notice. Until such time that ALIC’s membership is withdrawn, ALIC continues to have all of the rights and obligations of
being a member of the FHLBI, except that with respect to some or all of the FHLBI stock that ALIC owns, we will be entitled to a lower
dividend amount, to the extent that the FHLBI declares a dividend. ALIC may continue to borrow from the FHLBI, provided that without the
consent of the FHLBI, the transaction must mature or otherwise terminate prior to ALIC’s withdrawal of membership.
We have issued funding agreements to the FHLB in exchange for cash advances. These funding agreements were issued in an investment spread
strategy, consistent with other investment spread operations. As of December 31, 2017 and 2016, we had an aggregate of $573 million and $691
million, respectively, of outstanding FHLB funding agreements.
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 December 31, 2017, the
total maximum borrowings under the FHLBDM facility were limited to $15.5 billion. However, our ability to borrow under the facility is
constrained by the availability of assets that qualify as eligible collateral under the facility and by the Iowa Code requirement that we maintain
funds equivalent to our legal reserve in certain permitted investments, from which we exclude pledged assets. Considering these limitations, we
estimate that as of December 31, 2017 we had the ability to draw up to a total of approximately $1.5 billion, inclusive of borrowings then
outstanding. This estimate is based on our internal analysis and assumptions, and may not accurately measure collateral which is ultimately
acceptable to the FHLB. Drawing such amounts would have an adverse impact on AAIA’s RBC ratio, which may further restrict our ability or
willingness to draw up to our estimated capacity.
114
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Use of Captives
While our business strategy does not involve the use of captives, as a result of the Aviva USA acquisition, we acquired a captive reinsurer that
was formed in 2011 and domiciled in the state of Vermont and we ceded certain liabilities to this captive reinsurer. The statutory reserves of the
affiliated captive reinsurer are supported by a combination of funds withheld receivable assets and letters of credit issued by an unaffiliated
financial institution. The reinsurance activities within the captive reinsurer are eliminated in consolidation. As discussed in Note 16 – Statutory
Requirements to the consolidated financial statements, a prescribed practice of the state of Vermont allows the captive to include the face amount
of issued and outstanding letters of credit in the amount of $153 million as of December 31, 2017 and 2016 as admitted assets in its statutory
financial statements.
The NAIC and certain state insurance departments have scrutinized insurance companies’ use of affiliated captive reinsurers. It is uncertain
what, if any, regulatory changes will result from this heightened scrutiny. A potential outcome, although not considered likely, is the prohibition
on the continued use of captive reinsurance subsidiaries. If the use of existing captive reinsurance subsidiaries were discontinued, we would
likely incur early termination fees with respect to the financing structure and diminished statutory capital position. The effect of potential
regulatory changes regarding the use of captives on our consolidated financial condition and results of operations, although believed unlikely to
be material, is uncertain at this time.
Capital Resources
As of December 31, 2017 and 2016, our U.S. insurance companies’ TAC, as defined by the NAIC, was $1.9 billion and $1.8 billion,
respectively, and our ALRe statutory capital as defined by the BMA, was $7.0 billion and $6.1 billion, respectively. As of December 31, 2017
and 2016, our U.S. RBC ratio was 490% and 478%, respectively, and our BSCR ratio was 354% and 228%, respectively, all above our internal
targets. Each U.S. domestic insurance subsidiary’s state of domicile imposes minimum RBC requirements that were developed by the NAIC.
The formulas for determining the amount of RBC specify various weighting factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of TAC to ACL. Our TAC was significantly in
excess of all regulatory standards and above our internal targets as of December 31, 2017 and 2016. ALRe adheres to BMA regulatory capital
requirements to maintain statutory capital and surplus to meet the MMS and maintain minimum EBS capital and surplus to meet the ECR.
Under the EBS framework, ALRe’s assets are recorded at market value and its insurance reserves are determined by reference to nine prescribed
scenarios, with the scenario resulting in the highest reserve balance being ultimately required to be selected. The ALRe EBS capital and surplus
was $7.7 billion and $4.4 billion resulting in a BSCR ratio of 354% and 228% as of December 31, 2017 and 2016, respectively. The MRC ratio
to be considered solvent by the BMA is 100%. As of December 31, 2017 and 2016, ALRe held the appropriate capital to adhere to these
regulatory standards. In evaluating our capital position and the amount of capital needed to support our Retirement Services segment, we review
our ALRe capital by applying the NAIC RBC factors. As of December 31, 2017 and 2016, our ALRe RBC was 562% and 529%, respectively,
both above our internal targets. Our German Group Companies were required to adhere to the regulatory capital requirements set forth by BaFin.
Our German Group Companies held the appropriate capital to adhere to these regulatory standards as of December 31, 2017. We believe that we
enjoy a strong capital position in light of our risks and that we are well positioned to meet policyholder and other obligations. We also believe
that our strong capital position, as well as our excess capital position, provides us the opportunity to take advantage of market dislocations as
they arise. Changes in U.S. tax rates under the Tax Act may impact our RBC ratios. See Item 1. Business–Regulation–United States–Tax Reform
for further discussion.
Balance Sheet and Other Arrangements
Balance Sheet Arrangements
Contractual Obligations
The following table displays our contractual obligations as of December 31, 2017:
(In millions)
Interest sensitive contract liabilities
Future policy benefits
Other policy claims and benefits
Dividends payable to policyholders
Total
Payments Due by Period
Total
Less Than 1
Year
1-3 Years
3-5 Years
After 5 Years
$
$
67,708
$
4,552
$
12,088
$
14,303
$
17,507
211
1,025
540
142
99
1,187
9
93
1,181
8
22
36,765
14,599
52
811
86,451
$
5,333
$
13,377
$
15,514
$
52,227
Subsequent to December 31, 2017, AHL issued $1.0 billion of unsecured senior notes due in January 2028. The senior notes have a 4.125%
coupon rate, payable semi-annually.
115
We also have other obligations related to collateral on derivatives and investment fund commitments which have not been included in the above
table as the timing and amount of both the return on the collateral and the fulfillment of the commitments are uncertain. See Note 18 –
Commitments and Contingencies to the 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 consolidated financial statements.
Off Balance Sheet Arrangements
Collateral for Derivatives
We enter into derivatives for risk management purposes. We hold non-cash collateral from counterparties for our derivatives, which has not been
recorded on our consolidated balance sheets. These amounts were $221 million and $26 million as of December 31, 2017 and 2016,
respectively.
Collateral for Reinsurance
We hold collateral for and provide collateral to counterparties for our reinsurance agreements. We held $259 million and $49 million as of
December 31, 2017 and 2016, respectively, of collateral on behalf of our reinsurers. As of each of December 31, 2017 and 2016, our reinsurers
held collateral of $4 million on our behalf.
Critical Accounting Estimates and Judgments
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period. Amounts based on such estimates involve numerous
assumptions subject to varying and potentially significant degrees of judgment and uncertainty, particularly related to the future performance of
the underlying business, and will likely change in the future as additional information becomes available. Critical estimates and assumptions are
evaluated on an ongoing basis based on historical developments, market conditions, industry trends and other information that is reasonable
under the circumstances. There can be no assurance that actual results will conform to estimates and assumptions and that reported results of
operations will not be materially affected by the need to make future accounting adjustments to reflect periodic changes in these estimates and
assumptions. Critical accounting estimates are impacted significantly by our methods, judgments and assumptions used in the preparation of the
consolidated financial statements and should be read in conjunction with our significant accounting policies described in Note 1 – Business,
Basis of Presentation and Significant Accounting Policies to the consolidated financial statements. The following summary of our critical
accounting estimates is intended to enhance the ability to assess our financial condition and results of operations and the potential volatility due
to changes in estimates.
Investments
We are responsible for the fair value measurement of certain investments presented in our consolidated financial statements. We perform regular
analysis and review of our valuation techniques, assumptions and inputs utilized in determining fair value to evaluate if the valuation approaches
are appropriate and consistently applied, and the various assumptions are reasonable. We also perform quantitative and qualitative analysis and
review of the information and prices received from commercial pricing services and broker-dealers, to verify it represents a reasonable estimate
of the fair value of each investment. In addition, we utilize both internally-developed and commercially-available cash flow models to analyze
the reasonableness of fair values utilizing credit spread and other market assumptions, where appropriate.
116
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Valuation of Fixed Maturity and Equity Investments
The following table presents the fair value of fixed maturity and equity securities, including those with related parties, by pricing source and fair
value hierarchy:
(In millions)
AFS securities
Priced via commercial pricing services
Priced via independent broker-dealer quotations
Priced via other methods
Total AFS securities, including related parties
Trading securities
Priced via commercial pricing services
Priced via independent broker-dealer quotations
Priced via other methods
Total trading securities, including related parties
December 31, 2017
Total
Level 1
Level 2
Level 3
$
49,666
$
11,578
451
61,695
1,534
1,304
178
3,016
44
—
—
44
—
3
—
3
47
$
49,431
$
9,615
56
59,102
1,534
743
178
2,455
191
1,963
395
2,549
—
558
—
558
$
61,557
$
3,107
Total AFS and trading securities, including related parties
$
64,711
$
Percent of total, including related parties
100.0%
0.1%
95.1%
4.8%
In addition to the table above, our consolidated VIEs have fixed maturity and equity securities. As of December 31, 2017, our consolidated VIEs
had fixed maturity and equity securities classified in the fair value hierarchy as Level 1 of $212 million, Level 2 of $0 million, and Level 3 of
$76 million.
We measure the fair value of our investments based on assumptions used by market participants in pricing the assets, which may include
inherent risk, restrictions on the sale or use of an asset, or nonperformance risk. The estimate of fair value is the price that would be received to
sell an investment in an orderly transaction between market participants in the principal market, or the most advantageous market in the absence
of a principal market, for that investment. Market participants are assumed to be independent, knowledgeable, able and willing to transact an
exchange while not under duress. The valuation of investments involves considerable judgment, is subject to considerable variability and is
revised as additional information becomes available. As such, changes in, or deviations from, the assumptions used in such valuations can
significantly affect our consolidated financial statements. Financial markets are susceptible to severe events evidenced by rapid depreciation in
investment values accompanied by a reduction in asset liquidity. Our ability to sell investments, or the price ultimately realized upon the sale of
investments, depends upon the demand and liquidity in the market and increases the use of judgment in determining the estimated fair value of
certain investments. Accordingly, estimates of fair value are not necessarily indicative of the amounts that could be realized in a current or future
market exchange.
As of December 31, 2017, fixed maturity securities, including those with related parties, totaled $63.7 billion. For fixed maturity securities, we
obtain the fair values, when available, based on quoted prices in active markets that are regularly and readily obtainable. Generally, these are
liquid investments and the valuation does not require significant management judgment. When quoted prices in active markets are not available,
fair value is based on market standard valuation techniques, giving priority to observable inputs. We obtain the fair value for most marketable
bonds without an active market from several commercial pricing services. The pricing services incorporate a variety of market observable
information in their valuation techniques, including benchmark yields, broker-dealer quotes, credit quality, issuer spreads, bids, offers, and other
reference data. For certain fixed maturity securities without an active market, an internally-developed discounted cash flow or other approach is
utilized to calculate the fair value. A discount rate is used, which adjusts a market comparable base rate for securities with similar characteristics
for credit spread, market illiquidity or other adjustments. The fair value of privately placed fixed maturity securities are 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, which considers 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.
As of December 31, 2017, equity securities, including those with related parties, totaled $790 million. For equity securities, we obtain the fair
value, when available, based on quoted market prices. Other equity securities, typically private equities or equity securities not traded on an
exchange, are valued based on other sources, such as commercial pricing services or brokers.
117
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Valuation of Investment Funds
Investment funds, including those with related parties and of our consolidated VIEs, for which we elect the fair value option, are valued based
on net asset value information provided by the general partner or related asset manager. As of December 31, 2017, we had investment funds,
including those with related parties and of our consolidated VIEs, of $724 million carried at fair value on the consolidated balance sheet. These
partnership interests usually include multiple underlying investments for which either observable market prices or other valuation methods are
used to determine the fair value. Investment funds include several private equity and debt funds that typically invest in a diverse pool of
investments, using investment strategies including leveraged buyouts, energy, real estate, hedge funds, mezzanine debt, and senior debt.
The underlying investments 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. These inputs in isolation can cause significant increases or decreases in fair
value. For example, the comparable multiples may be multiplied by the underlying investment’s earnings before interest, tax, depreciation, and
amortization or by some other applicable financial metric to establish the total enterprise value of the underlying investments. A comparable
multiple consistent with the implied trading multiple of public industry peers or relevant recent private transactions are used when available.
Similarly, for certain underlying investments a discounted cash flow model may be used. An increase in the discount rate can significantly lower
the fair value; a decrease in the discount rate can significantly increase the fair value. The discount rate may be determined by considering the
weighted average cost of capital of companies in similar industries with comparable debt to equity ratios.
Other-Than-Temporary Impairments
The evaluation of investments for OTTIs is a quantitative and qualitative process done on a case-by-case basis, 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.
We review and analyze all investments on an ongoing basis for changes in market interest rates, credit issues, changes in business climate,
management changes, litigation, government actions, and other similar factors. Indicators of impairment may include changes in the issuers’
credit ratings and outlook, the frequency of late payments, pricing levels, key financial ratios, financial statements, revenue forecasts and cash
flow projections. We consider relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is
other-than-temporary. Relevant facts and circumstances include: (1) the extent and length of time the fair value has been below cost; (2) the
reasons for the decline in fair value; (3) the issuer’s financial position and access to capital; and (4) for fixed maturity securities, our ability and
intent to sell a security or whether it is more-likely-than-not we will be required to sell the security before the recovery of its cost or amortized
cost which, in some cases, may extend to maturity and for equity securities, our ability and intent to hold the security for a period of time that
allows for the recovery in value. An extended and severe unrealized loss position on a fixed maturity security may not have any impact on the
ability of the issuer to service all scheduled principal and interest payments. Accordingly, such an unrealized loss position may not impact our
evaluation of recoverability of all contractual cash flows or the ability to recover an amount at least equal to the investment’s cost or amortized
cost based on the present value of the expected future cash flows to be collected. To the extent we determine a security is deemed to be other-
than-temporarily impaired, an impairment loss is recognized.
Impairment losses on equity securities are recognized in investment related gains (losses) on the consolidated statements of income. The
recognition of impairment losses on fixed maturity securities on the consolidated financial statements is dependent on the facts and
circumstances related to the specific security. If 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 cost or amortized cost, less any recorded credit loss, we recognize a loss in other-than-temporary impairment
losses on the consolidated statements of income for the difference between cost or amortized cost and fair value. If neither of these two
conditions exists, then the recognition of the loss is bifurcated and we recognize the credit loss portion in other-than-temporary impairment
losses on the consolidated statements of income and the non-credit loss portion in AOCI on the consolidated balance sheets.
We estimate the amount of the credit loss component of a fixed maturity security impairment as the difference between amortized cost and the
present value of the expected cash flows of the security. The present value is determined using estimated cash flows discounted at the effective
interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating-rate security. The techniques
and assumptions for establishing the estimated cash flows vary depending on the type of security. 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. 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.
118
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Future Policy Benefits
The future policy benefit liabilities associated with long duration contracts include endowment contracts, term and whole-life products, accident
and health, disability, and deferred and immediate annuities with life contingencies. Liabilities for non-participating long duration contracts are
established using accepted actuarial valuation methods which require us to make certain assumptions regarding expenses, investment yields,
mortality, morbidity, and persistency, with a provision for adverse deviation, at the date of issue or acquisition. As of December 31, 2017, the
reserve investment yield assumptions for non-participating contracts range from 3.31% to 5.44% and are specific to our expected earned rate on
the asset portfolio supporting the reserves. Liabilities for participating long duration contracts are established using acceptable actuarial
valuation methods, which require the use of guaranteed interest and mortality assumptions. As of December 31, 2017, the reserve guaranteed
interest assumptions range from 0.90% to 4.00% and are based on interest rates guaranteed to policyholders. We base other key assumptions,
such as mortality and morbidity, on industry standard data adjusted to align with actual company experience, if necessary. Premium deficiency
tests are performed periodically using current assumptions, without provisions for adverse deviation, in order to test the appropriateness of the
established reserves. If the reserves using current assumptions are greater than the existing reserves, the excess is recorded and the initial
assumptions are revised.
Liabilities for Guaranteed Living Withdrawal Benefits and Guaranteed Minimum Death Benefits
We issue and reinsure deferred annuity contracts which contain GLWB and GMDB riders. We establish future policy benefits for GLWB and
GMDB by estimating the expected value of withdrawal and death benefits in excess of the projected account balance and recognizing the excess
proportionally over the accumulation period based on total expected assessments. The methods we use to estimate the liabilities have
assumptions about policyholder behavior, which includes lapses, withdrawals and utilization of the benefit riders; mortality; and market
conditions affecting the account balance growth.
Policyholder lapses and withdrawal assumptions are set at the product level by grouping individual policies sharing similar features and
guarantees and reviewed periodically against experience. Base lapse rates consider the level of surrender charges and are dynamically adjusted
based on the level of current interest rates relative to the guaranteed rates and the amount by which any rider guarantees are in a net positive
position. Rider utilization assumptions consider the number and timing of policyholders electing the riders. We track this assumption as
experience emerges and update our assumption as experience deviates. Mortality assumptions are set at the product level and generally based on
standard industry tables, adjusted for historical experience and a provision for mortality improvement. Projected guaranteed benefit amounts in
excess of the underlying account balances are considered over a range of scenarios in order to capture our exposure to the guaranteed
withdrawal and death benefits.
The assessments used to accrue liabilities are based on interest margins, rider charges, surrender charges and realized gains (losses). As such,
future reserve changes are sensitive to changes in investment results and the impacts of shadow adjustments, which represent the impact of
assuming unrealized gains (losses) are realized in future periods. As of December 31, 2017, the GLWB and GMDB liability balance, including
the impacts of shadow adjustments, totaled $2.4 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)
+10% assessments
–10% assessments
+100 bps discount rate
–100 bps discount rate
1% lower annual equity growth
Derivatives
Valuation of Embedded Derivatives on FIAs
December 31, 2017
$
(91)
102
84
(95)
55
We issue and reinsure products, primarily FIA products, or purchase investments that contain embedded derivatives. If we determine the
embedded derivative has economic characteristics not clearly and closely related to the economic characteristics of the host contract, and a
separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host contract
and accounted for separately unless the fair value option is elected on the host contract. Under the fair value option, bifurcation of the embedded
derivative is not necessary as all related gains and losses on the host contract and derivative will be reflected within investment related gains
(losses) on the consolidated statements of income. Embedded derivatives are carried on the consolidated balance sheets at fair value in the same
line item as the host contract.
119
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FIA and indexed universal life insurance contracts allow the policyholder to elect a fixed interest rate return or an equity market component
where interest credited is based on the performance of common stock market indices. The equity market option is an embedded derivative,
similar to a call option. The benefit reserve is equal to the sum of the fair value of the embedded derivative and the host (or guaranteed)
component of the contracts. The fair value of embedded derivatives is computed as the present value of benefits attributable to the excess of the
projected policy contract values over the projected minimum guaranteed contract values. The projections of policy contract values are based on
assumptions for future policy growth, which include assumptions for expected index credits on the next policy anniversary date, future equity
option costs, volatility, interest rates, and policyholder behavior. The projections of minimum guaranteed contract values include the same
assumptions for policyholder behavior as were used to project policy contract values. For contracts we issue directly to policyholders, the
embedded derivative cash flows are discounted using a rate that reflects our own credit rating. For contracts assumed through funds withheld
and modco reinsurance contracts, we do not use a credit spread as the funds are backed by the cedant’s collateral. The host contract is
established at contract inception as the initial account value less the initial fair value of the embedded derivative and accreted over the policy’s
life. The host contract accretion rate is updated each quarter so that the present value of actual and expected guaranteed cash flows is equal to
the initial host value. Changes in the fair value of embedded derivatives associated with fixed indexed annuities and indexed universal life
insurance contracts are reflected in interest sensitive contract benefits on the consolidated statements of income.
In general, the change in the fair value of the embedded derivatives will not directly correspond to the change in fair value of the hedging
derivative assets. The derivatives are intended to hedge the index credits expected to be granted at the end of the current term, typically one year.
The options valued in the embedded derivatives represent the rights of the policyholder to receive index credits over the entire period the FIAs
are expected to be in force, which are typically much longer than the current term of the options. From an economic basis we believe it is
suitable to hedge with options that align with index terms of our FIA products because policyholder accounts are credited with index
performance at the end of each index term. However, because the value of an embedded derivative in an FIA contract is longer-dated, there is a
duration mismatch which may lead to mismatches for accounting purposes.
The most sensitive assumption in determining policy liabilities for FIAs is the vector of rates used to discount the excess projected contract
values. The change in risk free rates is expected to drive most of the movement in the discount rates between periods. Changes to credit spreads
for a given credit rating as well as any change to our credit rating requiring a revised level of non-performance risk would also be factors in the
changes to the discount rate. If the discount rates used to discount the excess projected contract values were to fluctuate, there would be a
resulting change in reserves for FIAs recorded through the consolidated statements of income.
As of December 31, 2017, we had embedded derivative liabilities classified as Level 3 in the fair value hierarchy of $7.4 billion. The increase
(decrease) to the embedded derivatives on FIA products from hypothetical changes in discount rates is summarized as follows:
(In millions)
+100 bps discount rate
–100 bps discount rate
December 31, 2017
$
(555)
624
However, these estimated effects do not take into account potential changes in other variables, such as equity price levels and market volatility,
which can also contribute significantly to changes in carrying values. Therefore, the table does not necessarily reflect the ultimate impact on the
consolidated financial statements under the discount rate variance scenarios presented above. In determining the ranges, we have considered
current market conditions, as well as the market level of discount rates that can reasonably be anticipated over the near-term. For additional
information regarding sensitivities to the embedded derivative balance, see Item 7A. Quantitative and Qualitative Disclosures About Market
Risks.
Valuation of Embedded Derivatives in Modco or Funds Withheld
Reinsurance agreements written on a funds withheld or modco basis contain embedded derivatives. The right to receive or obligation to pay the
total return on the assets supporting the funds withheld at interest or funds withheld liability, respectively, represents a total return swap with a
floating rate leg. The fair value of the embedded derivatives on funds withheld and modco agreements is computed as the unrealized gain (loss)
on the underlying assets and is included in funds withheld at interest and funds withheld liability on the consolidated balance sheets for assumed
and ceded agreements, respectively. The change in the fair value of the embedded derivatives is recorded in investment related gains (losses) on
the consolidated statements of income.
120
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Valuation of Derivative Contracts
Derivative contracts can be exchange-traded or OTC. Exchange-traded derivative contracts (for example, futures) typically fall within Level 1 of
the fair value hierarchy depending on trading activity. OTC derivative contracts (for example, swaps) are valued using valuation models or an
income approach using third-party broker-dealer 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 derivative liabilities. The majority of our derivatives trade in liquid markets;
therefore, we can verify model inputs and model selection does not involve significant judgment. As of December 31, 2017, we had derivative
contract assets classified in the fair value hierarchy as Level 1 of $7 million, Level 2 of $2.5 billion and Level 3 of $0 million. As of
December 31, 2017, we had derivative contract liabilities classified in the fair value hierarchy as Level 1 of $0 million, Level 2 of $129 million
and Level 3 of $5 million.
Deferred Acquisition Costs, Deferred Sales Inducements, and Value of Business Acquired
Costs related directly to the successful acquisition of new or renewal insurance or investment contracts are deferred to the extent they are
recoverable from future premiums or gross profits. These costs consist of commissions and policy issuance costs, as well as sales inducements
credited to policyholder account balances. We perform periodic tests to determine if the deferred costs remain recoverable, including at issue. If
financial performance significantly deteriorates to the point where the deferred costs are not recoverable, we record a cumulative charge to the
current period.
Deferred costs related to universal life-type policies and investment contracts with significant revenue streams from sources other than
investment of the policyholder funds are amortized over the lives of the policies, in relation to the present value of gross profits including
investment spread margins, surrender charge income, policy administration, changes in the GLWB and GMDB reserves, and realized gains
(losses) on investments. Current period gross profits for FIAs also include the change in fair value of both freestanding and embedded
derivatives.
Current period amortization includes unlocking adjustments when actual gross profits and margins differ from prior estimates and may include
further adjustments due to revisions of estimates of future gross profits and margins. Our estimates of future gross profits and margins are based
on assumptions using accepted actuarial methods related to policyholder behavior and mortality, yields on investments supporting the liabilities,
future interest credited amounts (including indexed related credited amounts on FIA products), surrender and other policy charges as applicable,
and the level of expenses necessary to maintain the policies over their entire lives. Revisions to the gross profits are made each period based on
historical results and also periodically through changing our assumptions to reflect our estimate of future experience.
We establish VOBA for blocks of insurance contracts acquired through the acquisition of insurance entities. The fair value of the liabilities
purchased is determined using market participant assumptions at the time of acquisition and represents the amount an acquirer would expect to
be compensated to assume the contracts. We record the fair value of the liabilities assumed in two components: reserves and VOBA. Reserves
are established using our best estimate assumptions, as previously discussed in future policy benefits. VOBA is the difference between the fair
value of the liabilities and the reserves. VOBA can be either positive or negative. Any negative VOBA is recorded to the same line on the
consolidated balance sheets as the associated reserves. Positive VOBA is recorded in DAC, DSI and VOBA on the consolidated balance sheets.
VOBA associated with investment contracts without significant revenue streams from sources other than investment of the policyholder funds is
amortized using the effective interest method. VOBA associated with immediate annuity contracts classified as long-duration contracts is
amortized at a constant rate in relation to net policyholder liabilities. For universal life-type policies and investment contracts with significant
revenue streams from sources other than investment of policyholder funds, VOBA is amortized in relation to the present value of estimated
gross profits using methods consistent with those used to amortize DAC and DSI. Negative VOBA is amortized at a constant rate in relation to
applicable net policyholder liabilities.
Estimated future gross profits vary based on a number of factors, but are typically most sensitive to changes in investment spread margins,
which are the most significant component of gross profits. If estimated gross profits for all future years on business in force were to change,
including the impacts of shadow adjustments, there would be a resulting increase or decrease to the balances of DAC, DSI and VOBA recorded
as an increase or decrease to amortization of DAC, DSI, and VOBA on the consolidated statements of income or AOCI.
Actual gross profits will depend on actual margins, including the changes in the value of embedded derivatives. The most sensitive assumption
in determining the value of the embedded derivative is the vector of rates used to discount the excess projected contract values. If the discount
rates used to discount the excess projected contract values were to change, there would be a resulting increase or decrease to the balances of
DAC, DSI and VOBA recorded as an increase or decrease in amortization of DAC, DSI, and VOBA on the consolidated statements of income.
121
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As of December 31, 2017, DAC, DSI and VOBA totaled $2.9 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:
(In millions)
+10% estimated future gross profits
–10% estimated future gross profits
+100 bps discount rate
–100 bps discount rate
Stock-based Compensation
December 31, 2017
DAC
DSI
VOBA
Total
$
37
$
15
$
54
$
(45)
(61)
68
(19)
(29)
34
(61)
(44)
49
106
(125)
(134)
151
We have adopted various stock-based compensation plans in order to align incentive compensation to our employees, our directors and
employees of AAM with our long term performance. See Note 11 – Common Stock and Note 12 – Stock-based Compensation to the consolidated
financial statements for additional information regarding our stock-based compensation plans, and Note 17 – Related Parties to the consolidated
financial statements regarding our relationship with AAM. Under these stock-based compensation plans, we may issue non-qualified stock
options, incentive stock options, rights to purchase shares, restricted shares, restricted stock units (RSUs), and other awards which may be
settled in, or based upon, our Class A common shares.
We have issued Class M common shares and RSUs, which will be settled in Class A common shares assuming that such awards are exchanged
for Class A common shares upon payment of a conversion price. Under the terms of the plans, a portion of the Class M common shares and
RSUs is subject to time-based vesting conditions (Tranche 1), and the remainder (Tranche 2) is subject to vesting conditions based on the
proceeds realized or deemed to be realized by certain holders of our Class A common shares, as defined in each incentive plan (Relevant
Investors), except for the Tranche 2 Class M-1, M-2 and M-3 common shares, which became fully vested upon modification in 2016.
Additionally, certain Class M-4 common shares were issued with time-based vesting conditions and market hurdles based on the price of our
Class A common shares attaining certain targets following our initial public offering. We have also issued long-term incentive plan (LTIP)
awards that consist of time and performance-based RSUs and time-based stock options for Class A common shares. The performance-based
LTIP awards vest upon the Company meeting certain adjusted operating income and ROE targets.
We recognize the fair value of stock-based compensation over a participant’s requisite service period through a charge to compensation expense
and a corresponding entry to equity or a liability based on the vesting criteria and other pertinent terms of the awards. The compensation
expense for Tranche 1 Class M common shares, Tranche 1 Class M RSUs and LTIP awards is generally recognized ratably over the vesting
period. The compensation expense for Tranche 2 Class M common shares, other than those vested upon modification, and Tranche 2 Class M
RSUs is recognized based on a combination of the probability of the Relevant Investors achieving certain performance hurdles and the assumed
period to attain those performance hurdles. The Class M-4 common shares with share price market hurdles were entirely contingent on the
completion of our initial public offering, therefore, expense recognition commenced upon completion of our initial public offering and will
continue over the derived service period. Changes in our estimates and assumptions, including the number of stock awards that ultimately vest,
may cause us to realize material changes in stock-based compensation expense in the future.
Our stock-based compensation plans also allow for the purchase by certain of our employees and directors and our affiliates of Class A common
shares at either fair market value or a discounted price as approved by our compensation committee. Additionally, we may issue restricted Class
A common shares to management and our affiliates. Class A common shares are accounted for as equity awards and the related compensation
expense is recognized ratably over the vesting period, if any. The compensation expense for Class A common shares is calculated based on the
grant date fair value of the Class A common shares less the purchase price, multiplied by the number of shares awarded.
Valuation Methodology and Assumptions
We determine the fair value of the Class M common shares, RSUs and LTIP stock options using the Black-Scholes option pricing model. To
estimate an award’s fair value using the Black-Scholes option pricing model, it is necessary to develop assumptions of the expected term,
expected volatility, expected dividend yield and the risk-free interest rate. The expected term and expected volatility assumptions are generally
the most sensitive of the assumptions in the Black-Scholes model with variability in these assumptions having a more significant impact on the
award’s fair value than the assumptions on the expected dividend yield or risk-free interest rate, if all other assumptions are held equal. We have
assumed no dividends as we have not declared any common stock dividends to date and do not expect to declare common stock dividends in the
near future. The risk-free interest rate is derived from the U.S. Constant Maturity Treasury yield at the valuation date, with maturity
corresponding to the weighted-average expected term.
Expected Term
The Black-Scholes model uses a single input for the award’s expected term (the weighted average expected term), the anticipated time period
between the valuation date and the exercise date or post-vesting cancellation date, to estimate an employee award’s fair value. Developing the
expected term assumption is highly subjective as employees may exercise options at widely varying times. A change in the expected term may
have a significant effect on the fair value of the award. For more information regarding our expected term assumptions, see Note 12 – Stock-
based Compensation to the consolidated financial statements.
122
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Expected Volatility
Volatility is a statistical measurement of the magnitude of stock’s price variance over a given historical period and is used to determine the
expected variability of the returns on a company’s stock. Volatility may have a significant impact on the fair value of a share-based event. Given
that a more volatile stock has greater upside potential than a less volatile stock, an award tied to a high volatility stock has greater value than an
award tied to a low-volatility stock, assuming all other assumptions are equal.
Absent an established history in a public market for our shares, we have estimated volatility of our share price based on the published historical
volatilities of publicly-traded insurance company peers. For more information regarding our expected volatility assumptions, see Note 12 –
Stock-based Compensation to the consolidated financial statements.
Consolidation
We consolidate all entities in which we hold a controlling financial interest as of the financial statement date whether through a majority voting
interest or otherwise, including those investment funds that meet the definition of a VIE in which we are determined to be the primary
beneficiary. If we are not the primary beneficiary, the general partner or another limited partner may consolidate the investment fund, and we
record the investment as an equity-method investment. See Note 4 – Variable Interest Entities to the consolidated financial statements.
The determination as to whether an entity qualifies as a VIE depends on the underlying facts and circumstances surrounding each entity. Our
assessment of whether an entity is a VIE may require significant judgment. Those judgments may include, but are not limited to: (1) determining
whether the total equity investment at risk is sufficient to permit the entity to finance its activities without additional subordinated financial
support; (2) evaluating whether the holders of the equity investment at risk, as a group, lack any characteristics of a controlling financial interest,
such as the obligation to absorb losses, right to receive expected residual returns or the ability to make decisions that have a significant effect on
the success of the entity; and (3) determining whether the equity investors’ voting rights are not proportional to their economic rights, and
whether substantially all of the activities of the entity either involve or are conducted on behalf of an investor with disproportionately fewer
voting rights.
Judgments are also made in determining whether we, as a variable interest holder, are required to consolidate the VIE as its primary beneficiary.
Determining whether we are the primary beneficiary may require significant judgment. Generally, the primary beneficiary is the party that has
both the power to direct the activities that most significantly impact the VIE’s economic performance and the right to receive benefits or
obligation to absorb losses that could be potentially significant to the VIE. This analysis considers related party and de-facto agent relationships,
as well as indirect interests we may hold in the entity being evaluated. For example, we may not be deemed to control the VIE; however, to the
extent the controlling party is a related party or a de-facto agent, we perform an additional assessment to determine if substantially all of the
activities of the VIE are conducted on our behalf and are therefore the primary beneficiary. This assessment is primarily qualitative and focused
on the relationship between us and the VIE being evaluated, but also includes an analysis of the VIE’s economic impacts we receive.
Additionally, in situations where the related parties share power or are under common control, we evaluate the nature of the relationship and
activities of the parties involved to determine which party within the related-party group is most closely associated with the VIE and therefore
required to consolidate.
Additionally, determining whether a VIE meets the criteria of an investment company is qualitative in nature and may involve significant
judgment. The significance of this distinction relates to whether the investment fund retains the specialized accounting afforded investment
companies.
To be deemed an investment company an entity must, at a minimum, meet the following fundamental criteria: (1) obtain funds from one or more
investors and provides the investor(s) with defined investment management services, (2) commit to its investor(s) that its business purpose and
only substantive activities are investing funds solely for returns from capital appreciation, investment income, or both, and (3) it or its affiliates
do not obtain or have the objective of obtaining returns or benefits from an investee or its affiliates that are not normally attributable to
ownership interests or that are other than capital appreciation or investment income.
If the three fundamental characteristics are met, we evaluate whether the entity possesses some or all of the following typical characteristics that
are generally associated with an investment company: (1) has more than one investment, (2) has more than one investor, (3) has investors that
are not related parties of the parent entity (if there is a parent) and the investment manager, (4) has ownership interests in the form of equity or
partnership interests, and (5) manages substantially all of its investments on a fair value basis. Lacking one or more of these characteristics does
not preclude an entity from being considered an investment company. All relevant facts and circumstances are taken into consideration in
making a final determination.
123
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Income Taxes
In determining our income taxes, management is required to interpret complex income tax laws and regulations. We are subject to examinations
by federal, state, local and foreign income tax authorities that may give rise to different interpretations of these complex laws and regulations.
Due to the nature of the examination process, it generally takes years before these examinations are completed and these matters are resolved.
We recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on
examination by the relevant taxing authorities based on the technical merits of our position. The aggregate amount of any additional income tax
liabilities that may result from these examinations, if any, is not expected to have a material impact on our consolidated financial results. For
more information regarding income taxes, see Note 15 – Income Taxes to the consolidated financial statements.
Accounting for income taxes represents our estimate of various events and transactions based on management’s judgment and interpretation of
the laws and regulations enacted as of the reporting date. Deferred tax assets and liabilities resulting from temporary differences between the
financial reporting and tax basis of assets and liabilities are measured at the balance sheet date using enacted tax rates expected to apply to
taxable income in the years the temporary differences are expected to reverse. We routinely evaluate the likelihood of realizing the benefit of our
deferred tax assets and may record a valuation allowance if, based on all available evidence, we determine that it is more-likely-than-not some
portion of the tax benefit will not be realized. We have deferred tax assets primarily related to reserve valuation differences, net operating losses,
DAC and employee benefit plans.
On a quarterly basis, we test the value of deferred tax assets for impairment at the taxpaying-component level within each tax jurisdiction.
Significant judgment and estimates are required in determining whether valuation allowances should be established as well as the amount of
such allowances. When making such determination, consideration is given to, among other things, the following:
•
•
•
•
sufficient taxable income within the allowed carryback or carryforward periods;
future reversals of existing taxable temporary differences, including any tax planning strategies that could be utilized;
nature or character (e.g., ordinary vs. capital) of the deferred tax assets and liabilities; and
future taxable income exclusive of reversing temporary differences and carryforwards.
We may be required to change the provision for income taxes in certain circumstances. Examples of such circumstances include when the
ultimate deductibility of certain items is challenged by taxing authorities, when it becomes clear that certain items will not be challenged, when
forecasted results used in determining valuation allowances on deferred tax assets significantly change, or when receipt of new information
indicates the need for adjustment in valuation allowances. Additionally, future events such as changes in tax legislation could have an impact on
the provision for income tax and the effective tax rate. Any such changes could significantly affect the amounts reported in our consolidated
financial statements in the period to which these changes apply.
We have not provided for withholding taxes on undistributed earnings of our U.S. and German subsidiaries on our consolidated financial
statements as of December 31, 2017. Although withholding taxes may apply in the event a dividend is paid by our U.S. subsidiaries or German
subsidiaries, we have not accrued withholding taxes as we do not intend to remit these earnings. The cumulative amount subject to withholding
tax, if distributed, as well as the determination of the associated tax liability, is not practicable to compute; however, it may be material to our
consolidated financial condition and results of operations. Any dividends remitted to AHL from ALRe are not subject to withholding tax.
Impact of Recent Accounting Pronouncements
For a discussion of new accounting pronouncements affecting us, see Note 1 – Business, Basis of Presentation and Significant Accounting
Policies to the consolidated financial statements.
124
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
Risk Management Framework
The function of our risk management framework is to identify, assess and prioritize risks to ensure that both senior management and the board of
directors understand and can manage our risk profile. The processes supporting risk management are designed to ensure that our risk profile is
consistent with our stated risk appetite and that we maintain sufficient capital to support our corporate plan, while meeting the requirements
imposed by our policyholders, shareholders, and regulators. Risk management strives to enable us to maximize the value of our existing
business platform to shareholders, preserve our ability to realize business and market opportunities under moderately stressful market
conditions, and to withstand the impact of severely adverse events.
The risk management framework includes a governance committee structure that supports accountability in current risk-based decision making,
and effective risk management. Governance committees are established at three levels: the board of directors, AHL management, and subsidiary
management. We utilize a host of assessment tools to monitor and assess our risk profile, results of which are shared with senior management
periodically at management level committees such as the management risk committee (MRC) and the management investment committee (MIC)
and with the board of directors quarterly. Business management retains the primary responsibility for day-to-day management of risk.
Risk Management
The risk management team structure consists of an enterprise risk management (ERM) team, a derivatives trading team and an asset risk team.
The risk management team is led by our Chief Risk Officer, who reports to the chair of the AHL Risk Committee. Our risk management team is
comprised of approximately 30 dedicated, full-time employees.
Asset and Liability Management
Asset and liability risk management is a joint effort that spans business management and the entire risk management team. Processes established
to analyze and manage the risks of our assets and liabilities include but are not limited to:
•
•
•
•
•
•
•
•
analyzing our liabilities to ascertain their sensitivity to behavioral variations and changes in market conditions and actuarial
assumptions;
analyzing interest rate risk, cash flow mismatch, and liquidity risk management;
performing scenario and stress analyses to examine their impacts on capital and earnings;
performing cash flow testing and capital modeling;
modeling the values of the derivatives embedded in our policy liabilities so that they can be effectively hedged;
hedging unwanted risks, including from embedded derivatives, interest rate exposures and currency risks;
reviewing our corporate plan and strategic objectives, and identifying prospective risks to those objectives under normal and stressed
economic, behavioral and actuarial conditions; and
providing appropriate risk reports that show consolidated risk exposures from assets and liabilities as well as the economic
consequences of stress events and scenarios.
Market Risk and Management of Market Risk Exposures
Market risk is the risk of incurring losses due to adverse changes in market rates and prices. Included in market risk are potential losses in value
due to credit and counterparty risk, interest rate risk, currency risk, commodity price risk and equity price risk. We are primarily exposed to
credit risk, interest rate risk and, to a lesser extent, equity price risk.
Credit Risk and Counterparty Risk
In order to operate our business model, which is based on earning spread income, we must bear credit risk. However, as we assume credit risk
through our investment, reinsurance and hedging activities, we endeavor to ensure that risk exposures remain diversified, that we are adequately
compensated for the risks we assume and that the level of risk is consistent with our risk appetite and objectives.
Credit risk is a key risk taken in the asset portfolio, as the credit spread on our investments is what drives our spread income. We manage credit
risk by avoiding idiosyncratic risk concentrations, understanding and managing our systematic exposure to economic and market conditions
through stress testing, monitoring investment activity daily and distinguishing between price and default risk from credit exposures.
Concentration and portfolio limits are designed to ensure that exposure to default and impairment risk is sufficiently modest so as to not
represent a solvency risk to us, even in severe economic conditions.
The investment teams within AAM, which manage substantially all of our fixed income assets, focus on in-depth, bottom-up portfolio
construction, and disciplined risk management. Their approach to taking credit risk is formulated based on:
•
•
•
•
a fundamental view on existing and potential opportunities at the security level;
an assessment of the current risk/reward proposition for each market segment;
identification of downside risks and assigning a probability for those risks; and
establishing a plan for best execution of the investment action.
125
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
A dedicated set of AHL risk managers, who are on-site with AAM, monitor the asset risks to ensure that such risks are consistent with our risk
appetite, standards for committing capital, and overall strategic objectives. Our risk management team is also a key contributor to the OTTI/
credit impairment evaluation process.
In addition to credit-risk exposures from our investment portfolio, we are also exposed to credit risk from our counterparty exposures from our
derivative hedging and reinsurance activities. Derivative counterparty risk is managed by trading on a collateralized basis with counterparties
under International Swaps and Derivatives Association (“ISDA”) documents with a credit support annex having low or zero-dollar collateral
thresholds.
We utilize reinsurance to mitigate risks that are inconsistent with our strategy or objectives. For example, we have reinsured much of the
mortality risk we would otherwise have accumulated through our various acquisitions, allowing us to focus on our core annuity business. These
reinsurance agreements expose us to the credit risk of our counterparties. We manage this risk to avoid counterparty risk concentrations through
various mechanisms: utilization of reinsurance structures such as funds withheld or modco so as to retain ownership of the assets and limit
counterparty risk to the cost of replacing the counterparty; diversification across counterparties; and when possible, novating policies to
eliminate counterparty risk altogether.
Interest Rate Risk
Significant interest rate risk may arise from mismatches in the timing of cash flows from our assets and liabilities. Management of interest rate
risk at the company-wide level, and at the various operating company levels, is one of the main risk management activities in which senior
management engages.
Depending upon the materiality of the risk and our assessment of how we would perform across a spectrum of interest rate environments, we
may seek to mitigate interest rate risk using on-balance-sheet strategies (portfolio management) or off-balance-sheet strategies (derivative
hedges such as interest rate swaps and futures). We monitor ALM metrics (such as key-rate durations and convexity) and employ quarterly cash
flow testing requirements across all of our insurance companies to assure the asset and liability portfolios are managed to maintain net interest
rate exposures at levels that are consistent with our risk appetite. We have established a set of exposure and stress limits to communicate our risk
tolerance and to ensure adherence to those risk tolerance levels. Risk management personnel and the MRC and MIC (together, management
committees) are notified in the event that risk tolerance levels are exceeded. Depending on the specific risk threshold that is exceeded, the
appropriate management committee then makes a decision as to what actions, if any, should be undertaken.
Active portfolio management is performed by the investment managers at AAM, with direction from the management committees. ALM risk is
also managed by the management committees. The performance of our investment portfolio managed by AAM is reviewed periodically by the
management committees and the board of directors. The management committees strive to improve returns to shareholders and protect
policyholders, while dynamically managing the risk within our expectations.
Equity Risk
Our FIAs require us to make payments to policyholders that are dependent on the performance of equity market indices. We seek to minimize
the equity risk from our liabilities by economically defeasing this equity exposure with granular, policy-level-based hedging. In addition, our
investment portfolio can be invested in strategies involving public and private equity positions, though in general, we have limited appetite for
passive, public equity investments.
The equity index hedging framework implemented is one of static core hedges with dynamic overlays. Unique policy-level liability options are
matched with static OTC options. Residual risk arising from policyholder behavior and other trading constraints (for example minimum trade
size) are managed dynamically by decomposing the risk of the portfolio (asset and liability positions) into market risk measures which are
managed to pre-established risk limits. The portfolio risks are measured overnight and rebalanced daily to ensure that the risk profile remains
within risk appetite. Valuation is done at the position level, and risks are aggregated and shown at the level of each underlying index. Risk
measures that have term structure sensitivity, such as index volatility risk, and interest rate risk, are monitored and risk managed along the
term structure.
We are also exposed to equity risk in our alternative investment portfolio. The form of those investments is typically a limited partnership
interest in a fund. We currently target fund investments that have characteristics resembling fixed income investments versus those resembling
pure equity investments, but as holders of partnership positions, our investments are generally held as equity positions. Alternative investments
are comprised of several categories, including at the most liquid end of the spectrum “liquid strategies,” (which is mostly exposure to publicly
traded equities), followed by “hedge funds,” “credit funds,” “private equity,” and “real assets.”
Our investment mandate in our alternative investment portfolio is inherently opportunistic. Each investment is examined and analyzed on its
own merits to gain a full understanding of the risks present, and with a view toward determining likely return scenarios, including the ability to
withstand stress in a downturn. We have a strong preference for alternative investments that have some or all of the following characteristics,
among others: (1) investments that constitute a direct investment or an investment in a fund with a high degree of co-investment; (2) investments
with credit- or debt-like characteristics (for example, a stipulated maturity and par value), or alternatively, investments with reduced volatility
when compared to pure equity; or (3) investments that have less downside risk.
126
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
Alternative investments are monitored in real-time across the variety of markets that they span. The alternative investment portfolio is monitored
to ensure diversification across asset classes and strategy, and the portfolio’s performance under stress scenarios is evaluated routinely as part of
management and board of director reviews. Since alternative investments are marked-to-market on our balance sheet, risk analyses focus on
potential changes in market value across a variety of market stresses. In cases where investment performance has not met expectations, or where
the balance of risk and reward has shifted against us, we will seek to exit the investment as quickly as possible, and minimize our downside
exposure in doing so.
Currency Risk
We manage our currency risk so as to maintain minimal exposure to currency fluctuations. We attempt to hedge completely the currency risk
arising in our investment portfolio or FIA products. In general, we match currency exposure of assets and liabilities. When the currency
denominations of the assets and liabilities do not match, we generally undertake hedging activities to eliminate or mitigate currency mismatch
risk.
Scenario Analysis
We evaluate our exposure to market risk through internally defined modeling of our portfolio performance during times of economic stress. We
manage our business, capital and liquidity needs to withstand stress scenarios and target capital we believe will maintain our current ratings in a
moderate recession scenario and will allow us to continue to be rated investment grade under a substantially severe financial crisis akin to the
Lehman scenario in 2008. In the recession scenario, we calibrate recessionary shocks to several key risk factors (including but not limited to,
S&P 500, BBB corporate spreads, high yield corporate spreads and 2 year and 10 year U.S. Treasury yields) using data from the 1991, 2001, and
2008 recessions, and estimate mark to market impacts to the various sectors in our portfolio using regression analysis of their credit spreads to
the key risk factors. To estimate OTTI impacts, we use historical default, stressed recovery, and ratings migration rates from the aforementioned
recessionary periods. In the Lehman scenario, we use credit spread and interest rate movements between September 12, 2008 and December 15,
2008 to estimate mark to market changes, and we use one-year default probabilities from 2008, along with stressed recovery and ratings
migration rates, to estimate OTTI impacts. We review the impacts of our stress test analyses quarterly with management.
Sensitivities
Interest Rate Risk
We assess interest rate exposures for financial assets, liabilities and derivatives using hypothetical stress tests and exposure analyses. Assuming
all other factors are constant, if there was an immediate, parallel increase in interest rates of 25 basis points from levels as of December 31,
2017, the estimated point-in-time impact to our pre-tax consolidated statements of income would have been an increase of $18 million as of
December 31, 2017. If there were a similar parallel increase in interest rates from levels as of December 31, 2016, the estimated point-in-time
impact to our pre-tax consolidated statements of income would have been an increase of $5 million as of December 31, 2016. The increase
compared to prior year was driven primarily by growth of the assumed reinsurance embedded derivative. An immediate, parallel decline in
interest rates of 25 basis points is estimated to decrease our pre-tax consolidated statements of income as of December 31, 2017 and 2016 by
similar amounts to the increases shown above.
Assuming a 25 basis points increase in interest rates persists for a 12-month period, the estimated impact to adjusted operating income would be
an increase of approximately $25 – $30 million. This is driven by an increase in investment income from floating rate assets, offset by DAC,
DSI and VOBA amortization and rider reserve change, all calculated without regard to future changes to assumptions. The estimated impact to
adjusted operating income excludes any effects related to the Tax Act. The increase to adjusted operating income would be lower to the extent
that we experience an increase in our effective tax rate. See Item 1. Business–Regulation–United States–Tax Reform for further discussion
regarding the impact of tax reform on our business. The models used to estimate the impact of a 25 basis point change in market interest rates
incorporate numerous assumptions, require significant estimates and assume an immediate change in interest rates without any discretionary
management action to counteract such a change. Consequently, potential changes in our valuations indicated by these simulations will likely be
different from the actual changes experienced under any given interest rate scenarios and these differences may be material. Because we actively
manage our assets and liabilities, the net exposure to interest rates can vary over time. However, any such decreases in the fair value of fixed
maturity securities, unless related to credit concerns of the issuer requiring recognition of an OTTI, would generally be realized only if we were
required to sell such securities at losses to meet liquidity needs.
Public Equity Risk
Assuming all other factors are constant, we estimate that a decline in public equity market prices of 10% would cause a decrease to our pre-tax
consolidated statements of income of $187 million as of December 31, 2017 compared to $118 million as of December 31, 2016.
127
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Note 1. Business, Basis of Presentation and Significant Accounting Policies
Note 2. Investments
Note 3. Derivative Instruments
Note 4. Variable Interest Entities
Note 5. Fair Value
Note 6. Business Combinations
Note 7. Reinsurance
Note 8. Deferred Acquisition Costs, Deferred Sales Inducements and Value of Business Acquired
Note 9. Closed Block
Note 10. Debt
Note 11. Common Stock
Note 12. Stock-based Compensation
Note 13. Earnings Per Share
Note 14. Accumulated Other Comprehensive Income
Note 15. Income Taxes
Note 16. Statutory Requirements
Note 17. Related Parties
Note 18. Commitments and Contingencies
Note 19. Segment Information
Note 20. Quarterly Results of Operations (Unaudited)
128
129
130
132
133
134
135
138
138
149
156
158
164
175
175
177
177
179
179
181
185
186
187
190
192
195
197
201
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of Athene Holding Ltd.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Athene Holding Ltd. and its subsidiaries as of December 31, 2017 and 2016,
and the related consolidated statements of income, comprehensive income (loss), equity, and cash flows for each of the three years in the period
ended December 31, 2017, including the related notes and financial statement schedules listed in the index appearing under Item 15.2
(collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial
reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on
Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated
financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and
whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation
of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Des Moines, Iowa
February 26, 2018
We have served as the Company’s auditor since 2015.
129
ATHENE HOLDING LTD.
Consolidated Balance Sheets
(In millions)
Assets
Investments
Available-for-sale securities, at fair value
December 31,
2017
2016
Fixed maturity securities (amortized cost: 2017 – $58,506 and 2016 – $51,110)
$
61,012
$
52,033
Equity securities (cost: 2017 – $271 and 2016 – $319)
Trading securities, at fair value
Mortgage loans, net of allowances (portion at fair value: 2017 – $41 and 2016 – $44)
Investment funds (portion at fair value: 2017 – $145 and 2016 – $99)
Policy loans
Funds withheld at interest (portion at fair value: 2017 – $312 and 2016 – $140)
Derivative assets
Real estate (portion held for sale: 2017 – $32 and 2016 – $23)
Short-term investments, at fair value (cost: 2017 – $201 and 2016 – $189)
Other investments
Total investments
Cash and cash equivalents
Restricted cash
Investments in related parties
Available-for-sale securities, at fair value
Fixed maturity securities (amortized cost: 2017 – $399 and 2016 – $341)
Equity securities (cost: 2017 – $0 and 2016 – $20)
Trading securities, at fair value
Investment funds (portion at fair value: 2017 – $30 and 2016 – $0)
Short-term investments, at fair value (cost: 2017 – $52 and 2016 – $0)
Other investments
Accrued investment income (related party: 2017 – $10 and 2016 – $9)
Reinsurance recoverable (portion at fair value: 2017 – $1,824 and 2016 – $1,692)
Deferred acquisition costs, deferred sales inducements and value of business acquired
Other assets
Assets of consolidated variable interest entities
Investments
Available-for-sale securities, at fair value
Equity securities – related party (cost: 2017 – $101 and 2016 – $143)
Trading securities, at fair value – related party
Investment funds (related party: 2017 – $571 and 2016 – $562; portion at fair value: 2017 – $549
and 2016 – $562)
Cash and cash equivalents
Other assets
Total assets
See accompanying notes to consolidated financial statements
277
2,709
6,233
699
530
7,085
2,551
624
201
133
82,054
4,888
105
406
—
307
1,310
52
238
652
4,972
2,930
969
142
146
571
4
1
353
2,581
5,470
689
602
6,538
1,370
542
189
81
70,448
2,445
57
335
20
195
1,198
—
237
554
6,001
2,940
1,348
161
167
573
14
6
$
99,747
$
86,699
(Continued)
130
ATHENE HOLDING LTD.
Consolidated Balance Sheets
(In millions, except share and per share data)
Liabilities and Equity
Liabilities
Interest sensitive contract liabilities (portion at fair value: 2017 – $8,929 and 2016 – $6,574)
$
Future policy benefits (portion at fair value: 2017 – $2,428 and 2016 – $2,400)
Other policy claims and benefits
Dividends payable to policyholders
Derivative liabilities
Payables for collateral on derivatives
Funds withheld liability (portion at fair value: 2017 – $22 and 2016 – $6)
Other liabilities (related party: 2017 – $64 and 2016 – $56)
Liabilities of consolidated variable interest entities
Total liabilities
Commitments and Contingencies (Note 18)
Equity
Common stock
Class A – par value $0.001 per share; authorized: 2017 and 2016 – 425,000,000 shares; issued and
outstanding: 2017 – 142,386,704 and 2016 – 77,319,381 shares
Class B – par value $0.001 per share; convertible to Class A; authorized: 2017 and 2016 – 325,000,000
shares; issued and outstanding: 2017 – 47,422,399 and 2016 – 111,805,829 shares
Class M-1 – par value $0.001 per share; contingently convertible to Class A; authorized: 2017 and
2016 – 7,109,560 shares; issued and outstanding: 2017 – 3,388,890 and 2016 – 3,474,205 shares
Class M-2 – par value $0.001 per share; contingently convertible to Class A; authorized: 2017 and
2016 – 5,000,000 shares; issued and outstanding: 2017 – 851,103 and 2016 – 1,067,747 shares
Class M-3 – par value $0.001 per share; contingently convertible to Class A; authorized: 2017 and
2016 – 7,500,000 shares; issued and outstanding: 2017 – 1,092,000 and 2016 – 1,346,300 shares
Class M-4 – par value $0.001 per share; contingently convertible to Class A; authorized: 2017 and
2016 – 7,500,000 shares; issued and outstanding: 2017 – 4,711,743 and 2016 – 5,397,802 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (related party: 2017 – $48 and 2016 – $12)
Total Athene Holding Ltd. shareholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
December 31,
2017
2016
67,708
$
17,507
211
1,025
134
2,323
407
1,222
2
90,539
—
—
—
—
—
—
3,472
4,321
1,415
9,208
—
9,208
61,532
14,592
217
974
40
1,383
380
688
34
79,840
—
—
—
—
—
—
3,421
3,070
367
6,858
1
6,859
86,699
$
99,747
$
See accompanying notes to consolidated financial statements
(Concluded)
131
ATHENE HOLDING LTD.
Consolidated Statements of Income
(In millions, except per share data)
Revenues
Premiums
Product charges
Net investment income (related party investment income: 2017 – $220, 2016 – $226 and 2015 – $168; and
related party investment expense: 2017 – $318, 2016 – $295 and 2015 – $268)
Investment related gains (losses) (related party: 2017 – $(16), 2016 – $(38) and 2015 – $(19))
Other-than-temporary impairment investment losses
Other-than-temporary impairment losses
Other-than-temporary impairment losses reclassified to (from) other comprehensive income
Net other-than-temporary impairment losses
Other revenues
Revenues of consolidated variable interest entities
Net investment income (related party: 2017 – $42, 2016 – $44 and 2015 – $37)
Investment related gains (losses) (related party: 2017 – $35, 2016 – $(25) and 2015 – $46)
Total revenues
Benefits and Expenses
Interest sensitive contract benefits
Amortization of deferred sales inducements
Future policy and other policy benefits
Amortization of deferred acquisition costs and value of business acquired
Dividends to policyholders
Policy and other operating expenses (related party: 2017 – $13, 2016 – $22 and 2015 – $18)
Operating expenses of consolidated variable interest entities
Total benefits and expenses
Income before income taxes
Income tax expense (benefit)
Net income
Less: Net income attributable to noncontrolling interests
Net income available to Athene Holding Ltd. shareholders
Earnings per share
Basic – Classes A, B, M-1, M-2, M-3 and M-41
Diluted – Class A
Diluted – Class B
Diluted – Class M-11
Diluted – Class M-21
Diluted – Class M-31
Diluted – Class M-41
Years ended December 31,
2017
2016
2015
$
2,465
$
340
3,269
2,572
(29)
(4)
(33)
37
42
35
$
240
281
2,914
652
(32)
2
(30)
34
67
(53)
195
248
2,510
(430)
(40)
10
(30)
25
67
33
8,727
4,105
2,618
2,826
63
3,163
350
118
672
—
7,192
1,535
87
1,448
—
1,296
39
1,059
318
37
627
13
689
21
518
206
28
549
17
3,389
2,028
716
(52)
768
—
$
$
1,448
$
768
$
$
7.41
7.37
7.41
7.41
5.38
4.12
3.31
$
4.11
4.02
4.11
0.20
N/A
N/A
N/A
590
12
578
16
562
3.21
3.21
3.21
N/A
N/A
N/A
N/A
N/A – Not applicable
1 Basic and diluted earnings per share for Class M-1 was applicable only for the years ended December 31, 2017 and 2016. Basic and diluted earnings per
share for Class M-2, M-3 and M-4 were applicable only for the year ended December 31, 2017. See Note 13 – Earnings Per Share for further discussion.
See accompanying notes to consolidated financial statements
132
ATHENE HOLDING LTD.
Consolidated Statements of Comprehensive Income (Loss)
(In millions)
Net income
Other comprehensive income (loss), before tax
Unrealized investment gains (losses) on available-for-sale securities
Noncredit component of other-than-temporary impairment losses on available-for-sale
securities
Unrealized gains (losses) on hedging instruments
Pension adjustments
Foreign currency translation adjustments
Other comprehensive income (loss), before tax
Income tax expense (benefit) related to other comprehensive income
Other comprehensive income (loss)
Comprehensive income (loss)
Less: Comprehensive income attributable to noncontrolling interests
Years ended December 31,
2017
2016
2015
$
1,448
$
768
$
578
1,269
4
(105)
(1)
20
1,187
326
861
2,309
—
878
(2)
(5)
—
(8)
863
259
604
1,372
—
(1,314)
(10)
11
12
(4)
(1,305)
(424)
(881)
(303)
16
(319)
Comprehensive income (loss) available to Athene Holding Ltd. shareholders
$
2,309
$
1,372
$
See accompanying notes to consolidated financial statements
133
ATHENE HOLDING LTD.
Consolidated Statements of Equity
(In millions)
Common
stock
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Total Athene
Holding Ltd.
shareholders'
equity
Noncontrolling
interest
Total
equity
Balance at December 31, 2014
$
— $
2,153
$
1,748
$
644
$
4,545
$
Net income
Other comprehensive loss
Issuance of shares, net of expenses
Stock-based compensation
Retirement or repurchase of shares
Other changes in equity of
noncontrolling interests
Balance at December 31, 2015
Net income
Other comprehensive income
Issuance of shares, net of expenses
Stock-based compensation
Retirement or repurchase of shares
Balance at December 31, 2016
Net income
Other comprehensive income
Issuance of shares, net of expenses
Stock-based compensation
Retirement or repurchase of shares
Reclassification of taxes1
Other changes in equity of
noncontrolling interests
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,112
17
(1)
—
3,281
—
—
1
153
(14)
3,421
—
—
1
50
—
—
—
562
—
—
—
(2)
—
2,308
768
—
—
—
(6)
3,070
1,448
—
—
—
(10)
(187)
—
—
(881)
—
—
—
—
562
(881)
1,112
17
(3)
—
(237)
5,352
—
604
—
—
—
367
—
861
—
—
—
187
—
768
604
1
153
(20)
6,858
1,448
861
1
50
(10)
—
—
33
16
—
—
—
—
(48)
1
—
—
—
—
—
1
—
—
—
—
—
—
(1)
$
4,578
578
(881)
1,112
17
(3)
(48)
5,353
768
604
1
153
(20)
6,859
1,448
861
1
50
(10)
—
(1)
Balance at December 31, 2017
$
— $
3,472
$
4,321
$
1,415
$
9,208
$
— $
9,208
1 See discussion of Accounting Standards Update 2018-02 adoption in Note 1 – Business, Basis of Presentation and Significant Accounting Policies.
See accompanying notes to consolidated financial statements
134
ATHENE HOLDING LTD.
Consolidated Statements of Cash Flows
(In millions)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred acquisition costs and value of business acquired
Amortization of deferred sales inducements
Accretion of net investment premiums, discounts, and other
Payment at inception of coinsurance agreement
Stock-based compensation
Net investment (income) loss (related party: 2017 – $(63), 2016 – $(51) and 2015 – $(6))
Net recognized (gains) losses on investments and derivatives (related party: 2017 – $8, 2016 – $34 and
2015 – $42)
Policy acquisition costs deferred
Changes in operating assets and liabilities:
Accrued investment income
Interest sensitive contract liabilities
Future policy benefits, other policy claims and benefits, dividends payable to policyholders and
reinsurance recoverable
Funds withheld assets and liabilities
Other assets and liabilities
Consolidated variable interest entities related:
Net recognized (gains) losses on investments and derivatives (related party: 2017 – $(36), 2016 – $3
and 2015 – $(46))
Other operating activities, net
Net cash provided by operating activities
See accompanying notes to consolidated financial statements
Years ended December 31,
2017
2016
2015
$
1,448
$
768
$
578
350
63
(192)
—
45
(53)
(2,180)
(493)
(91)
2,513
1,993
(419)
219
(36)
3
3,170
318
39
(172)
—
84
(25)
(342)
(601)
(34)
925
344
(128)
(33)
206
21
(77)
(10)
67
8
520
(288)
38
874
(573)
(278)
(10)
25
31
1,199
(35)
8
1,049
(Continued)
135
ATHENE HOLDING LTD.
Consolidated Statements of Cash Flows
(In millions)
Cash flows from investing activities
Sales, maturities and repayments of:
Available-for-sale securities
Years ended December 31,
2017
2016
2015
Fixed maturity securities (related party: 2017 – $131, 2016 – $78 and 2015 – $65)
$
12,634
$
9,211
$
10,424
Equity securities (related party: 2017 – $22, 2016 – $0 and 2015 – $0)
Trading securities (related party: 2017 – $55, 2016 – $26 and 2015 – $72)
Mortgage loans
Investment funds (related party: 2017 – $349, 2016 – $293 and 2015 – $99)
Derivative instruments and other invested assets
Real estate
Short-term investments (related party: 2017 – $65, 2016 – $55 and 2015 – $130)
Purchases of:
Available-for-sale securities
687
454
1,669
496
1,503
4
351
350
748
1,176
420
468
36
870
53
1,226
788
343
1,151
63
207
Fixed maturity securities (related party: 2017 – $(186), 2016 – $(82) and 2015 – $(64))
(18,883)
(11,797)
(11,069)
Equity securities (related party: 2017 – $0, 2016 – $(20) and 2015 – $0)
Trading securities (related party: 2017 – $0, 2016 – $(39) and 2015 – $(52))
Mortgage loans
Investment funds (related party: 2017 – $(509), 2016 – $(441) and 2015 – $(510))
Derivative instruments and other invested assets
Real estate
Short-term investments (related party: 2017 – $(117), 2016 – $0 and 2015 – $(85))
Consolidated variable interest entities related:
Sales, maturities, and repayments of investments (related party: 2017 – $85, 2016 – $22 and 2015 – $244)
Purchases of investments (related party: 2017 – $(23), 2016 – $(19) and 2015 – $(17))
Acquisition of subsidiaries, net of cash acquired
Cash settlement of derivatives
Change in restricted cash
Other investing activities, net
Net cash used in investing activities
See accompanying notes to consolidated financial statements
(540)
(396)
(319)
(868)
(2,428)
(1,157)
(660)
(738)
(76)
(421)
95
(23)
—
(4)
(48)
507
(5,817)
(535)
(686)
(39)
(873)
504
(19)
—
34
59
(185)
(2,602)
(239)
(1,409)
(672)
(614)
(698)
(6)
(267)
257
(17)
162
25
(39)
279
(52)
(Continued)
136
Years ended December 31,
2017
2016
2015
$
1,116
$
$
1
—
9,056
(4,843)
(33)
—
—
940
(10)
(63)
5,048
32
2,433
2,459
1
—
5,791
(4,617)
(89)
(500)
—
516
(20)
73
1,155
(13)
(261)
2,720
$
$
4,892
$
2,459
$
$
64
—
$
31
9
663
482
73
—
334
26
—
3,441
448
47
—
—
—
—
(4)
3,460
(4,783)
(153)
—
(30)
(535)
(3)
(12)
(944)
(4)
49
2,671
2,720
34
22
1,182
373
75
473
—
—
920
(Concluded)
ATHENE HOLDING LTD.
Consolidated Statements of Cash Flows
(In millions)
Cash flows from financing activities
Capital contributions
Repayment of note payables
Deposits on investment-type policies and contracts
Withdrawals on investment-type policies and contracts
Payments for coinsurance agreements on investment-type contracts, net
Consolidated variable interest entities related:
Repayment on borrowings
Capital distributions to noncontrolling interests
Net change in cash collateral posted for derivative transactions
Repurchase of common stock
Other financing activities, net
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year1
Cash and cash equivalents at end of period1
Supplementary information
Cash refunded for taxes
Cash paid for interest
Non-cash transactions
Deposits on investment-type policies and contracts through reinsurance agreements
Withdrawals on investment-type policies and contracts through reinsurance agreements
Investments received from settlements on reinsurance agreements
Investment funds acquired in exchange for non-cash assets and liabilities
Investments received from pension risk transfer premiums
Other investments exchanged for related party investment funds
Reduction in investments and other assets and liabilities relating to reinsurance
1 Includes cash and cash equivalents of consolidated variable interest entities
See accompanying notes to consolidated financial statements
137
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
1. Business, Basis of Presentation and Significant Accounting Policies
Athene Holding Ltd. (AHL), a Bermuda exempted company, together with its subsidiaries (collectively, Athene, we, our, us, or the Company), is
a leading retirement services company that issues, reinsures and acquires retirement savings products in all U.S. states, the District of Columbia
and Germany.
We conduct business primarily through the following consolidated subsidiaries:
•
•
•
Athene Life Re Ltd. (ALRe), a Bermuda exempted company to which AHL’s other insurance subsidiaries and third party ceding
companies directly and indirectly reinsure a portion of their liabilities;
Athene USA Corporation, an Iowa corporation and its subsidiaries (Athene USA); and
AGER Bermuda Holding Ltd. and its subsidiaries (AGER), which includes Athene Deutschland GmbH & Co. KG, a German
partnership and its subsidiaries (ADKG). We deconsolidated AGER effective January 1, 2018, as discussed below.
In addition, we consolidate certain variable interest entities (VIEs), for which we determined we are the primary beneficiary, as discussed in
Note 4 – Variable Interest Entities.
Consolidation and Basis of Presentation—Our consolidated financial statements include our wholly-owned subsidiaries, investees we control
and any VIEs where we are the primary beneficiary. Investments in entities that we do not control, but have the ability to exercise significant
influence over operating and financing decisions, other than investments for which we have elected the fair value option, are accounted for
under the equity method. Intercompany balances and transactions have been eliminated.
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 the Company. We include the aggregate of the income or loss and corresponding equity that is not owned by the Company in
noncontrolling interests in the consolidated financial statements.
We report investments in related parties and assets and liabilities of consolidated VIEs separately, as further described in the accounting policies
that follow.
We have prepared the consolidated financial statements in accordance with accounting principles generally accepted in the United States of
America (GAAP), which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during the period. Actual experience could materially differ from
these estimates and assumptions. Our principal estimates impact:
•
•
•
•
•
•
•
fair value of investments;
impairment of investments and valuation allowances;
derivatives valuation, including embedded derivatives;
deferred acquisition costs (DAC), deferred sales inducements (DSI) and value of business acquired (VOBA);
future policy benefit reserves;
valuation allowances on deferred tax assets; and
stock-based compensation.
Additional details around these principal estimates and assumptions are discussed in the significant accounting policies that follow and the
related footnote disclosures.
AGER Deconsolidation – In April 2017, in connection with a private offering, AGER entered into subscription agreements with AHL, certain
affiliates of Apollo Global Management, LLC (AGM and, together with its subsidiaries, Apollo) and a number of other third-party investors
pursuant to which AGER secured commitments from such parties to purchase new common shares in AGER (AGER Offering). In November
2017, the AGER board of directors approved resolutions authorizing the closing of the AGER Offering (Closing) to occur on January 1, 2018
and approving a capital call from all of the AGER investors, excluding us. In connection with the Closing and the issuance of shares in respect
of the capital call, each of which occurred on January 1, 2018, our equity interest in AGER was exchanged for common shares of AGER. As a
result, on January 1, 2018, we held 10% of the aggregate voting power of and less than 50% of the economic interest in AGER and, as such, it is
thereafter held as an investment rather than a consolidated subsidiary. We did not recognize a material amount in the consolidated statements of
income upon deconsolidation in 2018. AGER Bermuda Holding Ltd. has subsequently been renamed Athora Holding Ltd.
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Notes to Consolidated Financial Statements
Summary of Significant Accounting Policies
Investments
Fixed Maturity and Equity Securities – Fixed maturity securities includes bonds, collateralized loan obligations (CLO), asset-backed securities
(ABS), residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS) and redeemable preferred stock.
Equity securities includes common stock, mutual funds and non-redeemable preferred stock. We classify fixed maturity and equity securities as
available-for-sale (AFS) or trading at the time of purchase and subsequently carry them at fair value. Fair value hierarchy and valuation
methodologies are discussed in Note 5 – Fair Value. Classification is dependent on a variety of factors including our expected holding period,
election of the fair value option and asset and liability matching.
AFS Securities – Unrealized gains and losses on AFS securities, net of tax and adjustments to DAC, DSI, VOBA and future policy benefits, if
applicable, are generally reflected in accumulated other comprehensive income (loss) (AOCI) on the consolidated balance sheets. Unrealized
gains or losses relating to identified risks within AFS securities in fair value hedging relationships are reflected in investment related gains
(losses) on the consolidated statements of income.
Trading Securities – We elected the fair value option for certain fixed maturity securities. These fixed maturity securities are classified as
trading, with changes to fair value included in investment related gains (losses) on the consolidated statements of income. Although the
securities are classified as trading, the trading activity related to these investments is primarily focused on asset and liability matching activities
and is not intended to be an income strategy based on active trading. As such, the activity related to these investments on the consolidated
statements of cash flows is classified as investing activities. Trading securities include mutual funds supporting unit-linked investment contracts.
We generally record security transactions on a trade date basis, with any unsettled trades recorded in other assets or other liabilities on the
consolidated balance sheets. For those security transactions not recorded on a trade date basis, such as investment fund purchases, we record on
a settlement date basis.
Purchased Credit Impaired (PCI) Investments – We purchase certain structured securities, primarily RMBS and re-performing mortgage loans,
having deterioration in credit quality since their issuance which meet the definition of PCI investments. We determined, based on our
expectations as to the timing and amount of cash flows expected to be received, that it was probable at acquisition that we would not collect all
contractually required payments, including both principal and interest, while also considering the effects of any prepayments for these PCI
investments. Based on these assumptions, the difference between the undiscounted expected future cash flows of the PCI investment and the
recorded investment represents the initial accretable yield, which is accreted into investment income, net of related expenses, over its remaining
life on a level-yield basis. The difference between the contractually required payments on the PCI investment and the undiscounted expected
future cash flows represents the non-accretable difference at acquisition. Over time, based on actual payments received and changes in estimates
of undiscounted expected future cash flows, the accretable yield and the non-accretable difference can change. PCI investments are presented on
the consolidated financial statements consistent with AFS securities or mortgage loans depending on the underlying investment.
Quarterly, we evaluate the undiscounted expected future cash flows associated with PCI investments based on updates to key assumptions.
Changes to undiscounted expected future cash flows due solely to the changes in the contractual benchmark interest rates on variable rate PCI
investments will change the accretable yield prospectively. Declines in undiscounted expected future cash flows due to further credit
deterioration, as well as changes in the expected timing of the cash flows, can result in the recognition of an other-than-temporary impairment
(OTTI) charge for PCI securities or a valuation allowance for PCI loans. Significant increases in undiscounted expected future cash flows are
recognized prospectively as an adjustment to the accretable yield.
Mortgage Loans – Mortgage loans are primarily stated at unpaid principal balance, adjusted for any unamortized premium or discount, and net
of valuation allowances. Interest income is accrued on the principal amount of the loan based on its contractual interest rate. We record
amortization of premiums and discounts using the effective yield 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 days past due. Interest income, amortization of premiums and discounts
and prepayment fees are reported in net investment income on the consolidated statements of income. We have also elected the fair value option
on a portion of our mortgage loans.
Investment Funds – We invest in certain non-fixed income, alternative investments in the form of limited partnerships or similar legal structures
(investment funds). For investment funds in which we have determined we are not the primary beneficiary, and therefore not required to
consolidate, we typically record these investments using the equity method of accounting, where the cost is recorded as an investment in the
fund, or we have elected the fair value option. Adjustments to the carrying amount reflect our pro rata ownership percentage of the operating
results as indicated by net asset value (NAV) in the investment fund financial statements, which can be on a lag of up to three months when
investee information is not received in a timely manner.
We record our proportionate share of investment fund income within net investment income on the consolidated statements of income.
Contributions paid or distributions received by us are recorded directly to the investment fund balance as an increase to carrying value or as a
return of capital, thus reducing our carrying value.
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Notes to Consolidated Financial Statements
Policy Loans – Policy loans are funds provided to policyholders in return for a claim on the policy’s account value. The funds provided are
limited to a specified percentage of the account balance. The majority of policy loans do not have a stated maturity and the balances and accrued
interest are repaid with proceeds from the policy account balance. Policy loans are reported at the unpaid principal balance. Interest income is
recorded as earned using the contract interest rate and is reported in net investment income on the consolidated statements of income.
Funds Withheld at Interest – Funds withheld at interest represents a receivable for amounts contractually withheld by ceding companies in
accordance with funds withheld coinsurance (funds withheld) and modified coinsurance (modco) reinsurance agreements in which we act as
reinsurer. Generally, assets equal to statutory reserves are withheld and legally owned by the ceding company, and any excess or shortfall is
settled periodically. The underlying agreements contain embedded derivatives as discussed below.
Real Estate – Real estate investments are stated at cost less accumulated depreciation. Depreciation is recorded on a straight-line basis over the
estimated useful life of the asset, which is typically 40 years, and is included in net investment income on the consolidated statements of income.
We periodically review our real estate investments for impairment and test for recoverability when events or changes in circumstances indicate
the carrying value may not be recoverable and exceeds its estimated fair value. We recognize an impairment to fair value if the carrying amount
of a property exceeds the expected undiscounted cash flows.
Real estate investments for which we have committed to a plan to sell within one year and are actively marketing are classified as held for sale.
Real estate held for sale is stated at the lower of depreciated cost as of the date we committed to a plan to sell or estimated fair value less
expected disposition costs.
Short-term Investments – Short-term investments consists of financial instruments with maturities of greater than three months but less than
twelve months when purchased. Short-term debt securities are accounted for as trading or AFS consistent with our policies for those
investments. Short-term loans are carried at amortized cost. Fair values are determined consistent with policies described in Note 5 – Fair Value
for the respective investment type.
Investment Income – We recognize investment income as it accrues or is legally due, net of investment management and custody fees.
Investment income on fixed maturity securities includes coupon interest, as well as the amortization of any premium and the accretion of any
discount. Investment income on equity securities represents dividend income and preferred coupons interest. Realized gains and losses on sales
of investments are included in investment related gains (losses) on the consolidated statements of income. Realized gains and losses on
investments sold are determined based on a first-in first-out method.
Other-Than-Temporary Impairment – We identify fixed maturity and equity securities that could potentially have impairments that are other-
than-temporary by monitoring market events for changes in market interest rates, credit issues, changes in business climate, management
changes, litigation, government actions and other similar factors. Indicators of impairment may include changes in the issuers’ credit ratings and
outlook, frequency of late payments, pricing levels, key financial ratios, financial statements, revenue forecasts and cash flow projections.
We review all securities on a case-by-case basis to determine whether an other-than-temporary decline in value exists and whether losses should
be recognized. We consider relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is
other-than-temporary. Relevant facts and circumstances include: (1) the extent and length of time the fair value has been below cost; (2) the
reasons for the decline in fair value; (3) the issuer’s financial position and access to capital; and (4) for fixed maturity securities, our ability and
intent to sell a security or whether it is more likely than not that we will be required to sell the security before the recovery of its cost or
amortized cost which, in some cases, may extend to maturity and for equity securities, our ability and intent to hold the security for a period of
time that allows for the recovery in value. To the extent we determine that a security is other-than-temporarily impaired, an impairment loss is
recognized.
The recognition of impairment losses on fixed maturity securities is dependent upon the facts and circumstances related to the specific security.
If 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 cost or amortized
cost less any recorded credit loss, we recognize a loss in other-than-temporary impairment losses on the consolidated statements of income for
the difference between cost or amortized cost and fair value. If neither of these two conditions exists, then the recognition of the loss is
bifurcated and we recognize the credit loss portion in other-than-temporary impairment losses on the consolidated statements of income and the
non-credit loss portion in AOCI on the consolidated balance sheets.
We estimate the amount of the credit loss component of a fixed maturity security impairment as the difference between amortized cost and the
present value of the expected cash flows of the security. The present value is determined using the estimated cash flows discounted at the
effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security. The
techniques and assumptions for establishing the estimated cash flows vary depending on the type of security. 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. 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.
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Notes to Consolidated Financial Statements
In periods after an OTTI is recognized on a fixed maturity security, we report the impaired security as if it had been purchased on the date it was
impaired and continue to estimate the present value of the estimated cash flows of the security. Accordingly, the discount (or reduced premium)
based on the new cost basis is accreted into net investment income over the remaining term of the fixed maturity security in a prospective
manner based on the amount and timing of estimated future cash flows.
We impair a mortgage loan when it is probable we will not collect all amounts due under the agreement. We establish a general valuation
allowance on mortgage loans based on loss history. Additionally, we establish a valuation allowance on individual loans based on expected
losses from future dispositions or settlement, including foreclosures. We calculate the allowance based on how much the carrying value exceeds
one of these values:
•
•
•
the present value of expected future cash flows discounted at the loan’s original effective interest rate;
the value of the loan’s collateral if it is in the process of foreclosure or otherwise collateral dependent; or
the loan’s fair value if the loan is being sold.
We first apply any interest accrued or received on the net carrying amount of the impaired loan to the principal of the loan, and once the
principal is repaid, we include amounts received in net investment income. We limit accrued interest income on impaired loans to 90 days of
interest. Once accrued interest on the impaired loan is received, we recognize interest income on a cash basis. Loans deemed uncollectible or in
foreclosure are charged off against the valuation allowances, and subsequent recoveries, if any, are credited to the valuation allowances.
Changes in valuation allowances are reported in investment related gains (losses) on the consolidated statements of income.
The cost of other invested assets is adjusted for impairments in value deemed to be other-than-temporary in the period in which the
determination is made. These impairments are included within other-than-temporary impairment losses on the consolidated statements of
income, and the cost basis of the investment securities is reduced accordingly. We do not change the revised cost basis for subsequent recoveries
in value.
Derivative Instruments—We invest in derivatives to hedge the risks experienced in our ongoing operations, such as equity risk, interest rate
risk, cash flow risks or for other risk management purposes, which primarily involve managing liability risks associated with our indexed
annuity products and reinsurance agreements. Derivatives are financial instruments whose values are derived from interest rates, foreign
exchange rates, financial indices or other underlying notional amounts. Derivative assets and liabilities are carried at fair value on the
consolidated balance sheets. We elect to present any derivatives subject to master netting provisions as a gross asset or liability and gross of
collateral. Disclosures regarding balance sheet presentation of derivatives subject to master netting agreements are discussed in Note 3 –
Derivative Instruments. We may designate derivatives as cash flow or fair value hedges.
Hedge Documentation and Hedge Effectiveness – To qualify for hedge accounting, at the inception of the hedging relationship, we formally
document our risk management objective and strategy for undertaking the hedging transaction, as well as our designation of the hedge as a cash
flow or fair value hedge. In this documentation, we identify how the hedging instrument is expected to hedge the designated risks related to the
hedged item, the method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness and the method
which will be used to measure ineffectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in
offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and periodically throughout the life of
the designated hedging relationship.
For a cash flow hedge, changes in the fair value of the hedging derivative measured as effective are reported within AOCI, and the related gains
or losses on the derivative are reclassified into the consolidated statements of income when the cash flows of the hedged item affect earnings.
Any ineffectiveness is reported in investment related gains (losses) on the consolidated statements of income each reporting period as
effectiveness is assessed.
For a fair value hedge, changes in the fair value of the hedging derivative, including any amounts measured as ineffective, and changes in the
fair value of the hedged item related to the designated risk being hedged, are reported on the consolidated statements of income according to the
nature of the risk being hedged.
We discontinue hedge accounting prospectively when: (1) we determine the derivative is no longer highly effective in offsetting changes in the
estimated cash flows or fair value of a hedged item; (2) the derivative expires, is sold, terminated, or exercised; or (3) the derivative is de-
designated as a hedging instrument. When hedge accounting is discontinued, the derivative continues to be carried on the consolidated balance
sheets at fair value, with changes in fair value recognized in investment related gains (losses) on the consolidated statements of income.
For a derivative not designated as a hedge, changes in the derivative’s fair value and any income received or paid on derivatives at the settlement
date are included in investment related gains (losses) on the consolidated statements of income.
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Notes to Consolidated Financial Statements
Embedded Derivatives – We issue and reinsure products, primarily fixed indexed annuity products, or purchase investments that contain
embedded derivatives. If we determine the embedded derivative has economic characteristics not clearly and closely related to the economic
characteristics of the host contract, and a separate instrument with the same terms would qualify as a derivative instrument, the embedded
derivative is bifurcated from the host contract and accounted for separately, unless the fair value option is elected on the host contract. Under the
fair value option, bifurcation of the embedded derivative is not necessary as all related gains and losses on the host contract and derivative are
included within investment related gains (losses) on the consolidated statements of income. Embedded derivatives are carried on the
consolidated balance sheets at fair value in the same line item as the host contract.
Fixed indexed annuity and indexed universal life insurance contracts allow the policyholder to elect a fixed interest rate return or an equity
market component where interest credited is based on the performance of common stock market indices. The equity market option is an
embedded derivative, similar to a call option. The benefit reserve is equal to the sum of the fair value of the embedded derivative and the host
(or guaranteed) component of the contracts. The fair value of embedded derivatives is computed as the present value of benefits attributable to
the excess of the projected policy contract values over the projected minimum guaranteed contract values. The projections of policy contract
values are based on assumptions for future policy growth, which include assumptions for expected index credits on the next policy anniversary
date, future equity option costs, volatility, interest rates and policyholder behavior. The projections of minimum guaranteed contract values
include the same assumptions for policyholder behavior as were used to project policy contract values. For contracts we issue directly to
policyholders, the embedded derivative cash flows are discounted using a rate that reflects our credit rating. For contracts assumed through
funds withheld and modco reinsurance contracts, we do not use a credit spread as the funds are backed by the cedant’s collateral. The host
contract is established at contract inception as the initial account value less the initial fair value of the embedded derivative and accreted over the
policy’s life. The host contract accretion rate is updated each quarter so that the present value of actual and expected guaranteed cash flows is
equal to the initial host value. Changes in the fair value of embedded derivatives associated with fixed indexed annuities and indexed universal
life insurance contracts are included in interest sensitive contract benefits on the consolidated statements of income.
Additionally, reinsurance agreements written on a funds withheld or modco basis contain embedded derivatives. The right to receive or
obligation to pay the total return on the assets supporting the funds withheld at interest or funds withheld liability, respectively, represents a total
return swap with a floating rate leg. The fair value of embedded derivatives on funds withheld and modco agreements is computed as the
unrealized gain (loss) on the underlying assets and is included in the funds withheld at interest and funds withheld liability lines on the
consolidated balance sheets for assumed and ceded agreements, respectively. The change in the fair value of the embedded derivatives is
recorded in investment related gains (losses) on the consolidated statements of income. Assumed and ceded earnings from funds withheld at
interest, funds withheld liability and changes in the fair value of embedded derivatives are reported in operating activities on the consolidated
statements of cash flows. Contributions to and withdrawals from funds withheld at interest and funds withheld liability are reported in operating
activities on the consolidated statements of cash flows.
Variable Interest Entities—An entity that does not have sufficient equity to finance its activities without additional financial support, or in
which the equity investors, as a group, do not have the characteristics typically afforded to common shareholders is a VIE. The determination as
to whether an entity qualifies as a VIE depends on the facts and circumstances surrounding each entity and may require significant judgment.
Our investment funds generally qualify as VIEs and are evaluated for consolidation under the VIE model.
We are required to consolidate a VIE if we are the primary beneficiary, defined as the variable interest holder with both the power to direct the
activities that most significantly impact the VIE’s economic performance and rights to receive benefits or obligations to absorb losses that could
be potentially significant to the VIE. We determine whether we are the primary beneficiary of an entity based on a qualitative assessment of the
VIE’s capital structure, contractual terms, nature of the VIE’s operations and purpose and our relative exposure to the related risks of the VIE.
Since affiliates of Apollo, a related party, are the decision makers in certain of the investment funds, we and a member of our related party group
may together have the characteristics of the primary beneficiary of an investment fund. In this situation, we have concluded we are not under
common control, as defined by GAAP, with the related party, and therefore consolidate in the circumstances when substantially all of the
activities of the VIE are conducted on our behalf. We reassess the VIE and primary beneficiary determinations on an ongoing basis.
If we are not the primary beneficiary, but are able to exert significant influence over the VIE’s operations, we record the VIE as an equity
method investment. If we are not able to exercise significant influence, generally on investment funds in which we own a less than a 3% interest,
we elect the fair value option.
See Note 4 – Variable Interest Entities for discussion of our interest in entities that meet the definition of a VIE.
Business Combinations and Goodwill—Business combination transactions are accounted for under the acquisition method. Accordingly, the
purchase consideration is allocated to assets and liabilities based on their estimated fair value at the acquisition date. The consideration for the
net assets acquired is determined prior to the assessment of the fair value of the net assets at the acquisition date. We have identified several
intangible assets acquired in business combinations including VOBA, acquired distribution channels and state licenses. We value VOBA as
described below under Deferred Acquisition Costs, Deferred Sales Inducements and Value of Business Acquired. We value distribution channels
using the multi-period excess earnings method under the income approach and the state licenses using the market approach. Distribution
channels and state licenses are included in other assets on the consolidated balance sheets.
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Notes to Consolidated Financial Statements
Goodwill represents the excess of purchase consideration over the acquisition date fair value of net assets acquired and is included in the other
assets on the consolidated balance sheets. Goodwill is not amortized but reviewed for impairment annually or more frequently if events occur or
circumstances change indicating potential impairment has occurred. If the acquisition date fair value of the net assets acquired exceeds the
purchase consideration in a business combination, a bargain purchase gain is recorded on the consolidated statements of income. See Note 6 –
Business Combinations for details of business combination transactions.
Reinsurance—We assume and cede insurance and investment contracts under coinsurance, funds withheld and modco. We follow reinsurance
accounting for transactions that provide indemnification against loss or liability relating to insurance risk (risk transfer). To meet risk transfer
requirements, a reinsurance agreement must include insurance risk consisting of underwriting, investment, timing risk and any other significant
risks. Cessions under reinsurance do not discharge our obligations as the primary insurer, unless the requirements of assumption reinsurance
have been met. We generally have the right of offset on reinsurance contracts, but have elected to present reinsurance settlement amounts due to
and from the Company on a gross basis.
Assets and liabilities assumed or ceded under coinsurance, funds withheld, or modco are presented gross on the consolidated balance sheets. For
investment contracts, the change in assumed and ceded reserves, deposits and withdrawals are presented net in interest sensitive contract
benefits on the consolidated statements of income. For insurance contracts, the change in assumed and ceded reserves and benefits are presented
net in future policy and other policy benefits on the consolidated statements of income. Assumed or ceded premiums are included in premiums
on the consolidated statements of income.
Accounting for reinsurance requires the use of assumptions, particularly related to the future performance of the underlying business and the
potential impact of counterparty credit risks. We attempt to minimize our counterparty credit risk through the structuring of the terms of our
reinsurance agreements, including the use of trusts, and we monitor credit ratings of counterparties for signs of declining credit quality. When a
ceding company does not report information on a timely basis, we record accruals based on the best available information at the time, which
includes the reinsurance agreement terms and historical experience. We periodically compare actual and anticipated experience to the
assumptions used to establish reinsurance assets and liabilities. See Note 7 – Reinsurance for more information.
Funds Withheld and ModCo – For business assumed or ceded on a funds withheld or modco basis, a funds withheld segregated portfolio,
comprised of invested assets and other assets is maintained by the ceding entity, which is sufficient to support the current balance of statutory
reserves. The fair value of the funds withheld is recorded as a funds withheld asset or liability and any excess or shortfall in relation to statutory
reserves is settled periodically.
Cash and Cash Equivalents—Cash and cash equivalents include deposits and short-term highly liquid investments with a maturity of less than
90 days from the date of acquisition. Amounts included are readily convertible to known amounts of cash and are subject to an insignificant risk
of change in value.
Restricted Cash—Restricted cash primarily consists of cash and cash equivalents held in funds in trust as part of certain coinsurance
agreements to secure statutory reserves and liabilities of the coinsured parties. Restricted cash is reported separately on the consolidated balance
sheets. Changes in the restricted cash balance are reported in investing activities on the consolidated statements of cash flows.
Investments in Related Parties—Investments in related parties and associated earnings, other comprehensive income and cash flows are
separately identified on the consolidated financial statements and accounted for consistently with the policies described above for each category
of investment.
Deferred Acquisition Costs, Deferred Sales Inducements and Value of Business Acquired
Deferred Acquisition Costs and Deferred Sales Inducements – Costs related directly to the successful acquisition of new, or renewal of,
insurance or investment contracts are deferred to the extent they are recoverable from future premiums or gross profits. These costs consist of
commissions and policy issuance costs, as well as sales inducements credited to policyholder account balances, and are included in deferred
acquisition costs, deferred sales inducements and value of business acquired on the consolidated balance sheets. We perform periodic tests to
determine if the deferred costs remain recoverable, including at issue. If financial performance significantly deteriorates to the point where the
deferred costs are not recoverable, we record a cumulative charge to the current period.
Deferred costs related to universal life-type policies and investment contracts with significant revenue streams from sources other than
investment of the policyholder funds are amortized over the lives of the policies, in relation to the present value of gross profits including
investment spread margins, surrender charge income, policy administration, changes in the guaranteed lifetime withdrawal benefit (GLWB) and
guaranteed minimum death benefit (GMDB) reserves and realized gains and losses on investments. Current period gross profits for fixed
indexed annuities also include the change in fair value of both freestanding and embedded derivatives. Estimates of the future gross profits are
based on assumptions using accepted actuarial methods. Each reporting period, we update estimated gross profits with actual gross profits as
part of the amortization process and adjust the DAC and DSI balances due to the other comprehensive income (OCI) effects of unrealized
investment gains and losses on AFS securities. We also periodically revise the key assumptions used in the calculation of the amortization of
DAC and DSI which results in revisions to the estimated future gross profits. The effects of changes in assumptions are recorded as unlocking in
the period in which the changes are made.
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Notes to Consolidated Financial Statements
Deferred costs related to investment contracts without significant revenue streams from sources other than investment of the policyholder funds
are amortized using the effective interest method. The effective interest method amortizes the deferred costs by discounting the future liability
cash flows at a break-even rate. The break-even rate is solved such that the present value of future liability cash flows is equal to the net liability
at the inception of the contract.
Value of Business Acquired – We establish VOBA for blocks of insurance contracts acquired through the acquisition of insurance entities. We
record the fair value of the liabilities assumed in two components: reserves and VOBA. Reserves are established using our best estimate
assumptions consistent with the policies described below for future policy benefits and interest sensitive contract liabilities. VOBA is the
difference between the fair value of the liabilities and the reserves. VOBA can be either positive or negative. Any negative VOBA is recorded to
the same financial statement line on the consolidated balance sheets as the associated reserves. Positive VOBA is recorded in deferred
acquisition costs, deferred sales inducements and value of business acquired on the consolidated balance sheets. We perform periodic tests to
determine if the VOBA remains recoverable. If financial performance significantly deteriorates to the point where VOBA is not recoverable, we
record a cumulative charge to the current period.
VOBA associated with investment contracts without significant revenue streams from sources other than investment of the policyholder funds is
amortized using the effective interest method. VOBA associated with immediate annuity contracts classified as long duration contracts is
amortized at a constant rate in relation to net policyholder liabilities. For universal life-type policies and investment contracts with significant
revenue streams from sources other than investment of policyholder funds, VOBA is amortized in relation to the present value of estimated
gross profits using methods consistent with those used to amortize DAC and DSI. Negative VOBA is amortized at a constant rate in relation to
applicable net policyholder liabilities.
See Note 8 – Deferred Acquisition Costs, Deferred Sales Inducements and Value of Business Acquired for further discussion.
Interest Sensitive Contract Liabilities—Universal life-type policies and investment contracts include fixed indexed and traditional fixed
annuities in the accumulation phase, funding agreements, universal life insurance, fixed indexed universal life insurance, unit-linked contracts
and immediate annuities without significant mortality risk. We carry liabilities for fixed annuities, universal life insurance, unit-linked contracts
and funding agreements at the account balances without reduction for potential surrender or withdrawal charges, except for a block of universal
life business ceded to Global Atlantic Financial Group Limited (together with its subsidiaries, Global Atlantic) which we carry at fair value.
Liabilities for immediate annuities without significant mortality risk are calculated as the present value of future liability cash flows and policy
maintenance expenses discounted at contractual interest rates. For a discussion regarding our indexed products, refer above to the embedded
derivative discussion.
Changes in the interest sensitive contract liabilities, excluding deposits and withdrawals, are recorded in interest sensitive contract benefits or
product charges on the consolidated statements of income. Interest sensitive contract liabilities are not reduced for amounts ceded under
reinsurance agreements which are reported as reinsurance recoverable on the consolidated balance sheets. See Note 7 – Reinsurance for more
information on reinsurance.
Future Policy Benefits—We issue contracts classified as long-duration, which includes endowments, term and whole life, accident and health,
disability, and deferred and immediate annuit ies with life contingencies. Liabilities for non-participating long-duration contracts are established
using accepted actuarial valuation methods which require the use of assumptions related to expenses, investment yields, mortality, morbidity and
persistency, with a provision for adverse deviation, at the date of issue or acquisition. As of December 31, 2017, the reserve investment yield
assumptions for non-participating contracts range from 3.31% to 5.44% and are specific to our expected earned rate on the asset portfolio
supporting the reserves. Liabilities for participating long-duration contracts are established using accepted actuarial valuation methods, which
require the use of guaranteed interest and mortality assumptions. As of December 31, 2017, the reserve guaranteed interest assumptions for
participating contracts range from 0.90% to 4.00% and are based on interest rates guaranteed to our policyholders. We base other key
assumptions, such as mortality and morbidity, on industry standard data adjusted to align with actual company experience, if necessary.
For long-duration contracts, the assumptions are locked in at contract inception and only modified if we deem the reserves to be inadequate. We
periodically review actual and anticipated experience compared to the assumptions used to establish policy benefits. If the net GAAP liability
(gross reserves less DAC, DSI and VOBA) is less than the gross premium liability, impairment is deemed to have occurred, and the DAC, DSI
and VOBA asset balances are reduced until the net GAAP liability is equal to the gross premium liability. If the DAC, DSI and VOBA asset
balances are completely written off and the net GAAP liability is still less than the gross premium liability, then an additional liability is
recorded to arrive at the gross premium liability.
We issue and reinsure deferred annuity contracts which contain GLWB and GMDB riders. We establish future policy benefits for GLWB and
GMDB by estimating the expected value of withdrawal and death benefits in excess of the projected account balance. We recognize the excess
proportionally over the accumulation period based on total expected assessments. The methods we use to estimate the liabilities have
assumptions about policyholder behavior, mortality and market conditions affecting the account balance growth.
Future policy benefits includes liabilities for no-lapse guarantees on universal life insurance and fixed indexed universal life insurance. We
establish future policy benefits for no-lapse guarantees by estimating the expected value of death benefits paid after policyholder account
balances have been exhausted. We recognize these benefits proportionally over the life of the contracts based on total expected assessments. The
methods we use to estimate the liabilities have assumptions about policyholder behavior, mortality and market conditions affecting the account
balance growth.
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ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
For the liabilities associated with GLWB and GMDB riders and no-lapse guarantees, each reporting period, we update expected excess benefits
and assessments with actual excess benefits and assessments and adjust the liability balances due to the OCI effects of unrealized investment
gains and losses on AFS securities. We also periodically revise the key assumptions used in the calculation of the liabilities which results in
revisions to the expected excess benefits and assessments. The effects of changes in assumptions are recorded as unlocking in the period in
which the changes are made.
Changes in future policy benefits other than the adjustment for the OCI effects of unrealized investment gains and losses on AFS securities, are
recorded in future policy and other policy benefits on the consolidated statements of income. Future policy benefits are not reduced for amounts
ceded under reinsurance agreements which are reported as reinsurance recoverable on the consolidated balance sheets. See Note 7 – Reinsurance
for more information on reinsurance.
Closed Block Business—Two closed blocks of policies were established in connection with the reorganization of two predecessor subsidiaries
from mutual companies to stock companies, collectively referred to as the Closed Blocks, and individually referred to as the AmerUs Life
Insurance Company (AmerUs) closed block (AmerUs Closed Block) and the Indianapolis Life Insurance Company (ILICO) closed block
(ILICO Closed Block). Insurance policies which had a dividend scale in effect as of each closed block establishment date were included in the
respective closed block. The Closed Blocks were designed to give reasonable assurance to owners of insurance policies included therein that,
after the reorganization, assets would be available to maintain the dividend scales and interest credits in effect prior to the reorganization, if the
experience underlying such scales and crediting continued. The assets, including related revenue, allocated to the Closed Blocks will accrue
solely to the benefit of the policyholders included in the Closed Blocks until they no longer exist. A policyholder dividend obligation is required
to be established for earnings in the Closed Blocks that are not available to the shareholders. We have elected the fair value option for the
AmerUs Closed Block and the ILICO Closed Block. See Note 9 – Closed Block for more information on the Closed Blocks.
Other Policy Claims and Benefits—Other policy claims and benefits include amounts payable relating to in course of settlements (ICOS) and
incurred but not reported (IBNR) liabilities associated with interest sensitive contract liabilities and future policy benefits. For traditional life
and universal life policies, ICOS claim liabilities are established when we are notified of the death of the policyholder but the claim has not been
paid as of the reporting date. For immediate annuities and supplemental contracts, ICOS claim liabilities are established to accrue suspended
benefit payments between the date of notification of death and the date of verification of death.
We determine IBNR claim liabilities using studies of past experience. The time that elapses from the death or claim date to when the claim is
reported to us can vary significantly by product type, but generally ranges between one to six months for life business. We estimate IBNR claims
on an undiscounted basis, using actuarial estimates of historical claims expense, adjusted for current trends and conditions. These estimates are
continually reviewed and the ultimate liability may vary significantly from the amount recognized.
Dividends Payable to Policyholders—Participating policies entitle the policyholders to receive dividends based on actual interest, mortality,
morbidity and expense experience for the year. Dividends are distributed to the policyholders through annual or terminal dividends which the
Board of Directors of the applicable insurance subsidiary approves. As of December 31, 2017 and 2016, 90% and 88%, respectively, of
traditional life policies inclusive of ceded policies were paying dividends, and the related liability is recorded in dividends payable to
policyholders on the consolidated balance sheets. Premiums related to policies paying dividends represented 52%, 45% and 22% of total life
insurance direct premiums and deposits for the years ended December 31, 2017, 2016 and 2015, respectively. Traditional life policies inclusive
of ceded policies represented 88% and 81% of the Company’s individual life policies in force as of December 31, 2017 and 2016, respectively.
As of December 31, 2017 and 2016, all of the non-separate account unit-linked policies were paying dividends, and the related liability is
recorded in dividends payable to policyholders on the consolidated balance sheets. There were no material deposits related to non-separate
account unit-linked policies paying dividends for the years ended December 31, 2017, 2016 and 2015. Non-separate account unit-linked policies
represented an insignificant percentage of our interest sensitive contracts in force as of December 31, 2017 and 2016.
Policyholder dividend liabilities are recorded in dividends payable to policyholders on the consolidated balance sheets and policyholder
dividends are recorded in dividends to policyholders on the consolidated statements of income. For participating policies issued by our German
subsidiaries, dividends payable to policyholders includes an adjustment to recognize timing differences between GAAP and local statutory
earnings that reverse and enter into future calculations of dividends to policyholders. Except for changes due to unrealized gains or losses on
AFS securities, the change in this adjustment is recorded in dividends to policyholders on the consolidated statements of income. Changes in
this adjustment due to unrealized gains or losses on AFS securities are recorded in OCI.
Stock-Based Compensation—We have compensation plans under which stock-based awards may be granted to our employees and directors
and employees of Athene Asset Management, L.P. (AAM) as described in Note 12 – Stock-based Compensation. We recognize the fair value of
stock-based compensation over a participant’s requisite service period through a charge to compensation expense and a corresponding entry to
equity or a liability based on vesting criteria and other pertinent terms of the awards. Stock-based awards are accounted for as equity awards in
instances where the awards’ vesting are linked to a market, performance or service condition. Equity awards to employees are generally
expensed based on the grant date fair value. For equity awards issued to non-employees, the fair value is remeasured through completion of
counterparty performance. Employee and non-employee stock-based awards are accounted for as liabilities in instances where the awards’
vesting criteria are linked to a factor other than a market, performance or service condition. Liability awards are remeasured each reporting
period until settlement. In the event of an award modification, we recognize any additional value arising from the modification as compensation
cost and determine whether the modified award should be accounted for prospectively as an equity or liability award.
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ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Earnings Per Share—We compute basic earnings per share (EPS) by dividing unrounded net income available to Athene Holding Ltd.
shareholders by the weighted average number of common shares eligible for earnings and outstanding for the period. As a result, it may not be
possible to recalculate EPS as presented in our consolidated financial statements. Diluted earnings per share includes the effect of all potentially
dilutive instruments, such as common shares, options and restricted stock units (RSUs), outstanding during the period. See Note 13 – Earnings
Per Share for further information.
Foreign Currency—The accounts of foreign-based subsidiaries are measured using the functional currency of the subsidiary. Revenue and
expenses of these businesses are translated into United States dollars at the average exchange rate for the period. Assets and liabilities are
translated at the exchange rate as of the end of the reporting period. The resulting translation adjustments are included in equity as a component
of AOCI. Gains or losses arising from transactions denominated in a currency other than the functional currency of the entity that is party to the
transaction are included in net income.
Recognition of Revenues and Related Expenses—Revenues for universal life-type policies and investment contracts, including surrender and
market value adjustments, costs of insurance, policy administration, GMDB, GLWB and no-lapse guarantee charges, are earned when assessed
against policyholder account balances during the period. Interest credited to policyholder account balances and the change in fair value of
embedded derivatives within fixed indexed annuity contracts is included in interest sensitive contract benefits on the consolidated statements of
income.
For certain assumed reinsurance transactions involving in force blocks of business, the ceding company may pay a premium equal to the initial
required reserve (future policy benefit). In such transactions, we net the expense associated with the establishment of the reserve against the
premiums from the transaction in interest sensitive contract benefits on the consolidated statements of income.
Premiums for long-duration contracts, including products with fixed and guaranteed premiums and benefits, are recognized as revenue when due
from policyholders. When premiums are due over a significantly shorter period than the period over which benefits are provided, any gross
premium in excess of the net premium (i.e., the portion of the gross premium required to provide for all expected future benefits and expenses)
is generally deferred and recognized into revenue in a constant relationship to the benefit reserves.
All insurance related revenue is reported net of reinsurance ceded.
Income Taxes—We compute income taxes using the asset and liability method, under which deferred income taxes are provided for the
temporary differences between the financial statement carrying amounts and the tax basis of our assets and liabilities using estimated tax rates
expected to be in effect for the year in which the differences are expected to reverse. Such temporary differences are primarily due to the tax
basis of reserves, DAC, unrealized investment gains/losses, reinsurance related differences, embedded derivatives and net operating loss
carryforwards. Changes in deferred income tax assets and liabilities associated with components of OCI are recorded directly to OCI. We
evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available
evidence, we determine that it is more likely than not that some portion of the tax benefit will not be realized. We adjust the valuation allowance
if, based on our evaluation, there is a change in the amount of deferred income tax assets that are deemed more likely than not to be realized.
Changes in deferred tax assets and liabilities attributable to changes in enacted income tax rates are recorded through net income in the period of
enactment. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on
examination by the relevant taxing authorities, based on the technical merits of our position. We recognize any income tax interest and penalties
in income tax expense.
See Note 15 – Income Taxes for discussion on withholding taxes for undistributed earnings of subsidiaries.
Reclassifications—Certain reclassifications have been made to conform with current year presentation.
Adopted Accounting Pronouncements
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02)
This update allows a reclassification from AOCI to retained earnings for stranded tax effects resulting from Public Law no. 115-97, an Act to
provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 (Tax Act), which was enacted
on December 22, 2017. The effect of a change in income tax rates on deferred tax assets and liabilities is required to be recognized in income on
the date of enactment, even if the deferred tax was originally recorded in other comprehensive income. Prior to the adoption of this update,
application of prior guidance resulted in an amount being stranded in AOCI related to the difference between historical and enacted tax rates.
The update allows an entity to reclassify the difference related to the Tax Act from AOCI to retained earnings. The update is required to be
adopted January 1, 2019, and early adoption is permitted for any interim or annual period for which financial statements have not yet been filed.
We elected to early adopt this update effective October 1, 2017, and have elected to reclassify stranded amounts associated with the Tax Act,
resulting in a reclassification of $187 million from AOCI to retained earnings.
Stock Compensation – Scope of Modification Accounting (ASU 2017-09)
The amendments in this update clarify and simplify when to apply modification accounting for a change to the terms or conditions of a share-
based payment award. These amendments are required to be adopted prospectively to awards modified after the date of adoption. We elected to
early adopt this update effective April 1, 2017, and the adoption did not have an impact on our consolidated financial statements.
146
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Receivables – Nonrefundable Fees and Other Costs (ASU 2017-08)
The amendments in this update shorten the amortization period for certain callable debt securities held at a premium to the earliest call date.
These amendments are required to be adopted on a modified retrospective basis. We elected to early adopt this update effective January 1, 2017,
and the adoption did not have a material impact on our consolidated financial statements.
Business Combinations – Clarifying the Definition of a Business (ASU 2017-01)
The amendments in this update clarify the definition of a business with the objective of assisting entities with evaluating whether transactions
should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting
including acquisitions, disposals, goodwill and consolidation. These amendments are required to be adopted prospectively to any transactions
after the date of adoption. We elected to early adopt this update effective April 1, 2017, and the adoption did not have an impact on our
consolidated financial statements.
Consolidation – Interest Held through Related Parties under Common Control (ASU 2016-17)
This update amends the consolidation guidance to change how indirect interests in VIEs are evaluated by a reporting entity when determining
whether or not it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial
interest in a VIE and, therefore, consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related
party that, in turn, has a direct interest in the VIE. Previously, if a single decision maker and its related parties were under common control, the
single decision maker was required to consider indirect interests held through related parties to be the equivalent of direct interests in their
entirety. The amendments change the evaluation of indirect interests to be considered on a proportionate basis. We adopted this update effective
January 1, 2017, and the adoption did not have a material effect on our consolidated financial statements.
Improvements to Employee Share-Based Payment Accounting (ASU 2016-09)
This update simplifies several aspects of the accounting for share-based payment award transactions, including income tax consequences,
forfeitures and classification on the statement of cash flows. The update requires entities to make an entity-wide accounting policy election to
either estimate the number of awards that are expected to vest or account for forfeitures when they occur. We have elected to account for
forfeitures when they occur. We adopted this update effective January 1, 2017, and the adoption did not have a material effect on our
consolidated financial statements.
Equity Method and Joint Ventures (ASU 2016-07)
This update eliminates the retroactive adjustments to an investment upon it qualifying for the equity method of accounting as a result of an
increase in the level of ownership interest or degree of influence by the investor. We adopted this update effective January 1, 2017, and the
adoption did not have a material effect on our consolidated financial statements.
Derivatives and Hedging – Contingent Put and Call Options (ASU 2016-06)
This update is intended to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of
principal on debt instruments are clearly and closely related to debt hosts. We adopted this update effective January 1, 2017, and the adoption
did not have a material effect on our consolidated financial statements.
Derivatives and Hedging – Effects of Derivative Contract Novation (ASU 2016-05)
This update is intended to clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument
does not, in and of itself, require a de-designation of that hedging relationship provided all other hedge accounting criteria continue to be met.
We adopted this update effective January 1, 2017, and the adoption did not have a material effect on our consolidated financial statements.
Recently Issued Accounting Pronouncements
Derivatives and Hedging – Targeted Improvements (ASU 2017-12)
The amendments in this update contain improvements to the financial reporting of hedging relationships that more closely reflect the economic
results of an entity’s risk management activities in its financial statements. Additionally, the amendments in this update make certain targeted
improvements to simplify the application of hedge accounting. We will be required to adopt this update effective January 1, 2019. Early
adoption is permitted. We are currently evaluating the impact of this update on our consolidated financial statements.
Gains and Losses from the Derecognition of Nonfinancial Assets (ASU 2017-05)
The amendments in this update clarify the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. We will
adopt this update on a modified retrospective basis effective January 1, 2018. We do not expect the adoption of this update will 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 will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying
amount of the goodwill allocated to that reporting unit. Entities will continue to have the option to perform a qualitative assessment to determine
if a quantitative impairment test is necessary. We will be required to adopt this update prospectively effective January 1, 2020. Early adoption is
permitted. We do not expect the adoption of this update will have a material effect on our consolidated financial statements.
147
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Revenue Recognition (ASU 2017-13, ASU 2016-20, ASU 2016-12, ASU 2016-11, ASU 2016-10, ASU 2016-08, ASU 2015-14 and ASU 2014-09)
These updates are based on the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. These
updates replace all general and most industry-specific revenue recognition guidance, excluding insurance contracts, leases, financial instruments
and guarantees, which have been scoped out of these updates. Since the guidance does not apply to revenue on contracts accounted for under the
financial instruments or insurance contracts standards, only a portion of our revenues are impacted by this guidance. We will adopt these updates
on a modified retrospective basis effective January 1, 2018. We do not expect the adoption of these updates will have a material effect on our
consolidated financial statements.
Statement of Cash Flows – Restricted Cash (ASU 2016-18)
This update requires amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents
when reconciling the beginning-of-period and end-of-period amounts shown on the consolidated statements of cash flows. We will be required
to adopt this update retrospectively for each period presented effective January 1, 2018. The adoption of this update will require us to change the
presentation on the consolidated statements of cash flows for restricted cash or restricted cash equivalents; however, we do not expect the
adoption of this update will have a material effect on our consolidated financial statements.
Income Taxes – Intra-Entity Transfers (ASU 2016-16)
This update requires the immediate recognition of current and deferred income tax effects of intra-entity transfers of assets, other than inventory.
Currently, recognition of the income tax consequence is not recognized until the asset is sold to an outside party. We will adopt this update on a
modified retrospective basis effective January 1, 2018. We do not expect the adoption of this update will have a material effect on our
consolidated financial statements.
Statement of Cash Flows (ASU 2016-15)
This update provides specific guidance to clarify how entities should classify certain cash receipts and cash payments on the statement of cash
flows. The update also clarifies the application of the predominance principle when cash receipts and cash payments have aspects of more than
one class of cash flows. We will adopt this update effective January 1, 2018. We do not expect the adoption of this update will have a material
effect on our consolidated financial statements.
Financial Instruments – Credit Losses (ASU 2016-13)
This update is designed to reduce complexity by limiting the number of credit impairment models used for different assets. The model will result
in accelerated credit loss recognition on assets held at amortized cost, which includes our commercial and residential mortgage investments. The
identification of credit-deteriorated securities will include all assets that have experienced a more-than-insignificant deterioration in credit since
origination. Additionally, any changes in the expected cash flows of credit-deteriorated securities will be recognized immediately in the income
statement. Available-for-sale (AFS) fixed maturity securities are not in scope of the new credit loss model, but will undergo targeted
improvements to the current reporting model including the establishment of a valuation allowance for credit losses versus the current direct
write down approach. We will be required to adopt this update effective January 1, 2020. Early adoption is permitted effective January 1, 2019.
We are currently evaluating the impact of this guidance on our consolidated financial statements.
Leases (ASU 2018-1, ASU 2017-13 and ASU 2016-02)
These updates are intended to increase transparency and comparability for lease transactions. A lessee is required to recognize an asset and a
liability for all lease arrangements longer than 12 months. Lessor accounting is largely unchanged. We will be required to adopt these updates on
a modified retrospective basis effective January 1, 2019. Early adoption is permitted. We have reviewed our existing lease contracts and our
implementation efforts are primarily focused on assessing the financial impact of these updates on our consolidated financial statements.
Financial Instruments – Recognition and Measurement (ASU 2016-01)
This update changes the current accounting for certain equity investments, the presentation of changes in the fair value of liabilities measured
under the fair value option due to instrument-specific credit risk, and certain disclosures. For liabilities measured under the fair value option,
changes in fair value attributable to instrument-specific credit risk will no longer affect net income, but will be recognized separately in OCI.
Additionally, this update requires equity investments to be measured at fair value with subsequent changes recognized in net income, except for
those accounted for under the equity method or requiring consolidation. We currently recognize changes in fair value related to AFS equity
securities in accumulated other comprehensive income (AOCI) on the consolidated balance sheets. We will adopt this update effective
January 1, 2018. Upon adoption, we will recognize a cumulative-effect increase to beginning retained earnings of $42 million and a
corresponding decrease to AOCI.
148
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
2. Investments
Available-for-sale Securities—The following table represents the cost or amortized cost, gross unrealized gains and losses, fair value and OTTI
in AOCI of our AFS investments by asset type. Our AFS investment portfolio includes direct investments in affiliates of Apollo where Apollo
can exercise significant influence over the affiliates. These investments are presented as investments in related parties on the consolidated
balance sheets, and are separately disclosed below.
(In millions)
Fixed maturity securities
Cost or
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
OTTI
in AOCI
December 31, 2017
U.S. government and agencies
$
63
$
1
$
(2) $
62
$
U.S. state, municipal and political subdivisions
Foreign governments
Corporate
CLO
ABS
CMBS
RMBS
Total fixed maturity securities
Equity securities
Total AFS securities
Fixed maturity securities – related party
CLO
ABS
Total fixed maturity securities – related party
996
2,575
35,173
5,039
3,945
1,994
8,721
58,506
271
58,777
353
46
399
171
116
1,658
53
53
48
652
2,752
7
2,759
7
—
7
(2)
(8)
(171)
(8)
(27)
(21)
(7)
(246)
(1)
(247)
—
—
—
1,165
2,683
36,660
5,084
3,971
2,021
9,366
61,012
277
61,289
360
46
406
Total AFS securities including related party
$
59,176
$
2,766
$
(247) $
61,695
$
(In millions)
Fixed maturity securities
Cost or
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
OTTI
in AOCI
December 31, 2016
U.S. government and agencies
$
59
$
1
$
— $
60
$
U.S. state, municipal and political subdivisions
Foreign governments
Corporate
CLO
ABS
CMBS
RMBS
Total fixed maturity securities
Equity securities
Total AFS securities
Fixed maturity securities – related party
CLO
ABS
Total fixed maturity securities – related party
Equity securities – related party
Total AFS securities – related party
1,024
2,098
29,433
4,950
2,980
1,835
8,731
51,110
319
51,429
284
57
341
20
361
117
143
901
14
25
38
313
1,552
35
1,587
1
—
1
—
1
(1)
(6)
(314)
(142)
(69)
(26)
(71)
(629)
(1)
(630)
(6)
(1)
(7)
—
(7)
1,140
2,235
30,020
4,822
2,936
1,847
8,973
52,033
353
52,386
279
56
335
20
355
Total AFS securities including related party
$
51,790
$
1,588
$
(637) $
52,741
$
—
—
—
—
—
1
1
11
13
—
13
—
—
—
13
—
—
—
2
—
—
—
15
17
—
17
—
—
—
—
—
17
149
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
The amortized cost and fair value of fixed maturity AFS securities, including related party, are shown by contractual maturity below:
(In millions)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
CLO, ABS, CMBS and RMBS
Total AFS fixed maturity securities
Fixed maturity securities – related party, CLO and ABS
Total AFS fixed maturity securities including related party
December 31, 2017
Amortized Cost
Fair Value
$
972
$
8,543
11,224
18,068
19,699
58,506
399
$
58,905
$
975
8,699
11,548
19,348
20,442
61,012
406
61,418
Actual maturities can differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties.
Unrealized Losses on AFS Securities—The following summarizes the fair value and gross unrealized losses for AFS securities, including related
party, aggregated by class of security and length of time the fair value has remained below cost or amortized cost:
(In millions)
Fixed maturity securities
December 31, 2017
Less than 12 months
12 months or greater
Total
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
U.S. government and agencies
$
U.S. state, municipal and political subdivisions
$
34
50
Foreign governments
Corporate
CLO
ABS
CMBS
RMBS
Total fixed maturity securities
Equity securities
Total AFS securities
Fixed maturity securities – related party
CLO
ABS
Total fixed maturity securities – related party
435
3,992
414
515
460
506
6,406
134
6,540
29
42
71
$
(1)
(1)
(6)
(49)
(2)
(5)
(8)
(3)
(75)
(1)
(76)
—
—
—
$
9
39
76
2,457
340
549
179
210
3,859
—
3,859
—
—
—
(1)
(1)
(2)
(122)
(6)
(22)
(13)
(4)
(171)
—
(171)
—
—
—
$
$
43
89
511
6,449
754
1,064
639
716
10,265
134
10,399
29
42
71
(2)
(2)
(8)
(171)
(8)
(27)
(21)
(7)
(246)
(1)
(247)
—
—
—
Total AFS securities including related party
$
6,611
$
(76)
$
3,859
$
(171)
$
10,470
$
(247)
150
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
(In millions)
Fixed maturity securities
U.S. government and agencies
$
U.S. state, municipal and political subdivisions
Foreign governments
Corporate
CLO
ABS
CMBS
RMBS
Total fixed maturity securities
Equity securities
Total AFS securities
Fixed maturity securities – related party
CLO
ABS
Total fixed maturity securities – related party
Equity securities – related party
Total AFS securities – related party
Less than 12 months
12 months or greater
Total
December 31, 2016
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
1
85
137
6,136
388
865
576
1,143
9,331
179
9,510
68
—
68
14
82
$
— $
— $
— $
(1)
(5)
(228)
(2)
(17)
(18)
(19)
(290)
(1)
(291)
—
—
—
—
—
2
9
1,113
3,102
767
183
1,727
6,903
—
6,903
100
56
156
—
156
—
(1)
(86)
(140)
(52)
(8)
(52)
(339)
—
(339)
(6)
(1)
(7)
—
(7)
$
1
87
146
7,249
3,490
1,632
759
2,870
16,234
179
16,413
168
56
224
14
238
—
(1)
(6)
(314)
(142)
(69)
(26)
(71)
(629)
(1)
(630)
(6)
(1)
(7)
—
(7)
Total AFS securities including related party
$
9,592
$
(291)
$
7,059
$
(346)
$
16,651
$
(637)
As of December 31, 2017, we held 1,639 AFS securities that were in an unrealized loss position. Of this total, 591 were in an unrealized loss
position longer than 12 months. As of December 31, 2017, we held four related party AFS securities that were in an unrealized loss position less
than 12 months. The unrealized losses on AFS securities can primarily be attributed to changes in market interest rates since acquisition. We did
not recognize the unrealized losses in income as we intend to hold these securities and it is not more likely than not we will be required to sell a
security before the recovery of its amortized cost.
Other-Than-Temporary Impairments—For the year ended December 31, 2017, we incurred $33 million of net OTTI, of which $5 million
related to intent-to-sell impairments. These securities were impaired to fair value as of the impairment date. The remaining net OTTI of $28
million related to credit impairments, of which $11 million related to credit loss impairments that we impaired to fair value and did not bifurcate
a portion of the impairment in AOCI. Any credit loss impairments not bifurcated in AOCI are excluded from the rollforward below.
The following table represents a rollforward of the cumulative amounts recognized on the consolidated statements of income for OTTI related to
pre-tax credit loss impairments on AFS fixed maturity securities, for which a portion of the securities’ total OTTI was recognized in AOCI:
(In millions)
Beginning balance
Initial impairments – credit loss OTTI recognized on securities not previously impaired
Additional impairments – credit loss OTTI recognized on securities previously impaired
Reduction in impairments from securities sold, matured or repaid
Reduction for credit loss that no longer has a portion of the OTTI loss recognized in AOCI
Ending balance
Years ended December 31,
2017
2016
2015
$
$
16
17
—
(13)
(6)
$
22
$
8
3
(9)
(8)
14
$
16
$
8
19
1
(2)
(4)
22
151
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Net Investment Income—Net investment income by asset class consists of the following:
7
196
320
111
54
44
2,783
(273)
2,510
150
(86)
64
—
—
—
(228)
(277)
11
(430)
(In millions)
AFS securities
Fixed maturity securities
Equity securities
Trading securities
Mortgage loans, net of allowances
Investment funds
Funds withheld at interest
Other
Investment revenue
Investment expenses
Net investment income
Years ended December 31,
2017
2016
2015
$
2,579
$
2,293
$
2,051
10
204
371
211
148
78
3,601
(332)
9
238
355
178
82
62
3,217
(303)
$
3,269
$
2,914
$
Investment Related Gains (Losses)—Investment related gains (losses) by asset class consists of the following:
(In millions)
AFS fixed maturity securities
Gross realized gains on investment activity
Gross realized losses on investment activity
Net realized investment gains on fixed maturity securities
AFS equity securities
Gross realized gains on investment activity
Gross realized losses on investment activity
Net realized investment gains on equity securities
Net realized investment gains (losses) on trading securities
Derivative gains (losses)
Other gains (losses)
Investment related gains (losses)
Years ended December 31,
2017
2016
2015
$
169
$
138
$
(72)
97
55
(1)
54
63
2,377
(19)
(54)
84
—
—
—
(33)
596
5
$
2,572
$
652
$
Proceeds from sales of AFS securities were $6,023 million, $4,662 million and $6,899 million for the years ended December 31, 2017, 2016 and
2015, respectively.
The change in unrealized gains and losses on trading securities we still held as of the respective period end resulted in unrealized gains of $139
million and $38 million, and unrealized losses of $133 million during the years ended December 31, 2017, 2016 and 2015, respectively, which
are included in net realized investment gains (losses) on trading securities in the table above. The change in unrealized gains and losses on
related party trading securities we still held as of the respective period end resulted in related party unrealized losses of $3 million, $10 million
and $10 million during the years ended December 31, 2017, 2016 and 2015, respectively, which are included in net realized investment gains
(losses) on trading securities in the table above.
152
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Purchased Credit Impaired (PCI) Investments—The following table summarizes our PCI investments:
(In millions)
Contractually required payments receivable
Less: Cash flows expected to be collected2
Non-accretable difference
Cash flows expected to be collected2
Less: Amortized cost
Accretable difference
Fair value
Outstanding balance
2017
20161
2017
20161
Fixed maturity securities
Mortgage loans
December 31,
$
$
$
$
$
$
$
$
$
$
9,690
(8,188)
1,502
8,188
(6,168)
2,020
6,703
8,026
$
$
$
$
$
8,912
(7,948)
964
7,948
(5,868)
2,080
6,049
7,275
$
$
$
$
$
1,140
(1,090)
50
1,090
(817)
273
844
946
1 Balances have been revised for immaterial misstatements to be comparable to current year balances.
2 Represents the undiscounted principal and interest cash flows expected.
During the respective year, we acquired PCI investments with the following amounts at the time of purchase:
2017
20161
2017
20161
December 31,
(In millions)
Fixed maturity securities
Mortgage loans
Contractually required payments receivable
$
2,161
$
2,407
$
Cash flows expected to be collected
Fair value
1,790
1,428
2,053
1,497
$
894
857
633
1 Balances have been revised for immaterial misstatements to be comparable to current year balances.
The following table summarizes the activity for the accretable yield on PCI investments:
(In millions)
Beginning balance at January 1
Purchases of PCI investments, net of sales
Accretion
Net reclassification from (to) non-accretable difference
Ending balance at December 31
2017
20161
2017
20161
Fixed maturity securities
Mortgage loans
2,080
$
1,753
$
70
$
264
(400)
76
534
(325)
118
216
(24)
11
2,020
$
2,080
$
273
$
$
$
303
(290)
13
290
(220)
70
221
249
304
290
220
—
70
—
—
70
1 Balances have been revised for immaterial misstatements to be comparable to current year balances.
Mortgage Loans—Mortgage loans, net of allowances, consists of the following:
(In millions)
Commercial mortgage loans
Commercial mortgage loans under development
Total commercial mortgage loans
Residential mortgage loans
Mortgage loans, net of allowances
December 31,
2017
2016
5,223
$
24
5,247
986
6,233
$
5,058
74
5,132
338
5,470
$
$
We primarily invest in commercial mortgage loans on income producing properties including hotels, industrial properties and retail and office
buildings. We diversify the commercial mortgage loan portfolio by geographic region and property type to reduce concentration risk. We
evaluate mortgage loans based on relevant current information to confirm if properties are performing at a consistent and acceptable level to
secure the related debt.
153
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
The distribution of commercial mortgage loans, including those under development, net of valuation allowances, by property type and
geographic region, is as follows:
(In millions, except for percentages)
Property type
Office building
Retail
Hotels
Industrial
Apartment
Other commercial
Total commercial mortgage loans
U.S. Region
East North Central
East South Central
Middle Atlantic
Mountain
New England
Pacific
South Atlantic
West North Central
West South Central
Total U.S. Region
International Region
Total commercial mortgage loans
December 31,
2017
2016
Net Carrying
Value
Percentage of
Total
Net Carrying
Value
Percentage of
Total
$
$
$
$
1,187
1,223
928
944
525
440
5,247
643
144
909
492
162
991
873
233
655
5,102
145
5,247
22.6% $
23.3%
17.7%
18.0%
10.0%
8.4%
100.0% $
12.3% $
2.7%
17.3%
9.4%
3.1%
18.9%
16.6%
4.4%
12.5%
97.2%
2.8%
100.0% $
1,217
1,135
1,025
742
616
397
5,132
450
158
628
543
194
833
1,284
306
662
5,058
74
5,132
23.7%
22.1%
20.0%
14.5%
12.0%
7.7%
100.0%
8.8%
3.1%
12.2%
10.6%
3.8%
16.2%
25.0%
6.0%
12.9%
98.6%
1.4%
100.0%
Our residential mortgage loan portfolio includes first lien residential mortgage loans collateralized by properties located in the U.S. As of
December 31, 2017, California, Florida and New York represented 34.3%, 15.6% and 6.0%, respectively, of the portfolio, and the remaining
44.1% represented all other states, with each individual state comprising less than 5% of the portfolio. As of December 31, 2016, California,
Florida and New York represented 38.9%, 9.1% and 5.1%, respectively, of the portfolio, and the remaining 46.9% represented all other states,
with each individual state comprising less than 5% of the portfolio.
Mortgage Loan Valuation Allowance—The assessment of mortgage loan impairments and valuation allowances is substantially the same for
residential and commercial mortgage loans. The valuation allowance was $2 million as of December 31, 2017 and 2016. We did not record any
material activity in the valuation allowance during the years ended December 31, 2017, 2016 or 2015.
Residential mortgage loans – The primary credit quality indicator of residential mortgage loans is loan performance. Nonperforming residential
mortgage loans are 90 days or more past due and/or are in non-accrual status. As of December 31, 2017, $28 million of our residential mortgage
loans were non-performing. As of December 31, 2016, all of our residential mortgage loans were performing.
Commercial mortgage loans – The following provides the aging of our commercial mortgage loan portfolio, including those under development,
net of valuation allowances:
(In millions)
Current (less than 30 days past due)
Over 90 days past due
Total commercial mortgage loans
December 31,
2017
2016
$
$
5,247
—
5,247
$
$
5,111
21
5,132
154
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
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.
The loan-to-value ratio is expressed as a percentage of the amount of the loan relative to the value of the underlying property. A loan-to-value
ratio in excess of 100% indicates the unpaid loan amount exceeds the underlying collateral. The following represents the loan-to-value ratio of
the commercial mortgage loan portfolio, excluding those under development, net of valuation allowances:
(In millions)
Less than 50%
50% to 60%
61% to 70%
71% to 100%
Greater than 100%
Commercial mortgage loans
December 31,
2017
2016
$
$
1,841
$
1,390
1,691
301
—
5,223
$
1,787
1,337
1,401
492
41
5,058
The debt service coverage ratio, based upon the most recent financial statements, is expressed as a percentage of a property’s net operating
income to its debt service payments. A debt service ratio of less than 1.0 indicates a property’s operations do not generate enough income to
cover debt payments. The following represents the debt service coverage ratio of the commercial mortgage loan portfolio, excluding those under
development, net of valuation allowances:
(In millions)
Greater than 1.20x
1.00x – 1.20x
Less than 1.00x
Commercial mortgage loans
December 31,
2017
2016
$
$
4,742
$
297
184
5,223
$
4,378
353
327
5,058
Investment Funds—Our investment fund portfolio consists of funds that employ various strategies and include investments in real estate and
other real assets, credit, private equity, natural resources and hedge funds. Investment funds typically meet the definition of VIEs and are
discussed further in Note 4 – Variable Interest Entities.
155
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
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 1 – Business, Basis of Presentation and Significant Accounting Policies for a description of our accounting policies for derivatives and
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:
(In millions)
Derivatives designated as hedges
Foreign currency swaps
Interest rate swaps
Total derivatives designated as hedges
Derivatives not designated as hedges
Equity options
Futures
Total return swaps
Foreign currency swaps
Interest rate swaps
Credit default swaps
Foreign currency forwards
Embedded derivatives
Funds withheld
Interest sensitive contract liabilities
Total derivatives not designated as hedges
Total derivatives
Derivatives Designated as Hedges
December 31,
2017
Fair Value
Assets
Liabilities
Notional
Amount
2016
Fair Value
Assets
Liabilities
Notional
Amount
$
$
928
302
$
1
—
1
31,460
1,134
114
41
385
10
1,139
—
—
2,500
7
5
21
—
—
17
312
—
2,862
$
2,863
$
99
—
99
19
—
—
3
2
5
6
22
7,436
7,493
7,592
$
$
289
302
$
11
—
11
26,822
1,336
—
41
43
568
10
805
—
—
9
2
5
1
—
6
140
—
1,499
$
1,510
$
4
14
18
—
—
—
—
5
7
10
6
5,283
5,311
5,329
Foreign currency swaps – We use foreign currency swaps to convert foreign currency denominated cash flows of an investment to U.S. dollars
to reduce cash flow fluctuations due to changes in currency exchange rates. Certain of these swaps are designated and accounted for as cash
flow hedges, which will expire by December 2045. During the years ended December 31, 2017, 2016 and 2015, we had foreign currency swap
losses of $105 million and $5 million and gains of $9 million, respectively, recorded in AOCI. There were no amounts reclassified to income
and no amounts deemed ineffective for the years ended December 31, 2017, 2016 or 2015. As of December 31, 2017, no amounts are expected
to be reclassified to income within the next 12 months.
Interest rate swaps – We use interest rate swaps to reduce market risks from interest rate changes and to alter interest rate exposure arising from
duration mismatches between assets and liabilities. Certain of these swaps entered into during the fourth quarter of 2016 are designated as fair
value hedges. With an interest rate swap, we agree with another party to exchange the difference between fixed-rate and floating-rate interest
amounts tied to an agreed-upon notional principal amount at specified intervals.
The following table represents the gains and losses on derivatives and the related hedged items in fair value hedge relationships, recorded in
interest sensitive contract benefits on the consolidated statements of income:
(In millions)
Gains (losses) recognized on derivative
Gains (losses) recognized on hedged item
Ineffectiveness recognized on fair value hedges
Derivatives Not Designated as Hedges
Years ended December 31,
2017
2016
$
$
2
$
(2)
— $
(14)
14
—
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.
156
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Futures – Futures contracts are purchased to hedge the growth in interest credited to the customer as a direct result of increases in the related
indices. We enter into exchange-traded futures with regulated futures commission clearing brokers who are members of a trading exchange.
Under exchange-traded futures contracts, we agree to purchase a specified number of contracts with other parties and to post variation margin on
a daily basis in an amount equal to the difference in the daily fair values of those contracts.
Total return swaps – We purchase total rate of return swaps to gain exposure and benefit from a reference asset or index without ownership.
Total rate of return swaps are contracts in which one party makes payments based on a set rate, either fixed or variable, while the other party
makes payments based on the return of the underlying asset or index, which includes both the income it generates and any capital gains.
Credit default swaps – Credit default swaps provide a measure of protection against the default of an issuer or allow us to gain credit exposure to
an issuer or traded index. We use credit default swaps coupled with a bond to synthetically create the characteristics of a reference bond. These
transactions have a lower cost and are generally more liquid relative to the cash market. We receive a periodic premium for these transactions as
compensation for accepting credit risk.
Hedging credit risk involves buying protection for existing credit risk. The exposure resulting from the agreements, which is usually the notional
amount, is equal to the maximum proceeds that must be paid by a counterparty for a defaulted security. If a credit event occurs on a reference
entity, then a counterparty who sold protection is required to pay the buyer the trade notional amount less any recovery value of the security.
Foreign currency forwards – We use foreign currency forward contracts to hedge certain exposures to foreign currency risk. The price is agreed
upon at the time of the contract and payment is made at a specified future date.
Embedded derivatives – We have embedded derivatives which are required to be separated from their host contracts and reported as derivatives.
Host contracts include reinsurance agreements structured on a modco or funds withheld basis and indexed annuity products.
The following is a summary of the gains (losses) related to derivatives not designated as hedges:
(In millions)
Equity options
Futures
Swaps
Foreign currency forwards
Embedded derivatives on funds withheld
Amounts recognized in investment related gains (losses)
Embedded derivatives in indexed annuity products1
Total gains (losses) for derivatives not designated as hedges
1 Included in interest sensitive contract benefits.
Years ended December 31,
2017
2016
2015
1,939
$
325
$
(24)
27
28
407
2,377
(1,758)
619
$
(19)
18
(2)
274
596
(324)
272
$
(372)
(3)
8
21
69
(277)
171
(106)
$
$
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.
157
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
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
consolidated balance sheets
Gross amount
recognized1
Financial
instruments2
Collateral
received/pledged
Net amount
Off-balance sheet
securities
collateral3
Net amount after
securities collateral
2,551
$
(134)
1,370
$
(40)
(59) $
59
(8) $
8
(2,323) $
63
(1,383) $
25
169
$
(12)
(21) $
(7)
(221) $
—
(26) $
—
(52)
(12)
(47)
(7)
(In millions)
December 31, 2017
Derivative assets
Derivative liabilities
December 31, 2016
Derivative assets
Derivative liabilities
$
$
1 The gross amounts of recognized derivative assets and derivative liabilities are reported on the consolidated balance sheets. As of December 31, 2017 and
2016, amounts not subject to master netting or similar agreements were immaterial.
2 Represents amounts offsetting derivative assets and derivative liabilities that are subject to an enforceable master netting agreement or similar agreement that
are not netted against the gross derivative assets or gross derivative liabilities for presentation on the 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.
Certain derivative instruments contain provisions for credit-related events, such as downgrades in our credit ratings or for a negative credit event
of a credit default swap’s reference entity. If a credit event were to occur, we may be required to settle an outstanding liability. The following is a
summary of our exposure to credit-related events:
(In millions)
Fair value of derivative liabilities with credit related provisions
$
Maximum exposure for credit default swaps
December 31,
2017
2016
$
5
10
7
10
As of December 31, 2017 and 2016, no additional collateral would be required if a default or termination event were to occur.
4. Variable Interest Entities
Our investment funds typically meet the definition of a VIE, and in certain cases these investment funds are consolidated in our financial
statements because we meet the criteria of the primary beneficiary.
Consolidated VIEs—We consolidate AAA Investments (Co-Invest VI), L.P. (CoInvest VI), AAA Investments (Co-Invest VII), L.P. (CoInvest
VII), AAA Investments (Other), L.P. (CoInvest Other), London Prime Apartments Guernsey Holdings Limited (London Prime), NCL Athene,
LLC (NCL LLC) and Apollo Asia Sprint Co-Investment Fund, L.P. (Sprint), which are investment funds. We are the only limited partner or
Class A member in these investment funds and receive all of the economic benefits and losses, other than management fees and carried interest,
as applicable, paid to the general partner in each entity, or a related entity, which are related parties. We do not have any voting rights as limited
partner and, as the limited partner or Class A member, do not solely satisfy the power criteria to direct the activities that significantly impact the
economics of the VIE. However, the criteria for the primary beneficiary are satisfied by our related party group and, because substantially all of
the activities are conducted on our behalf, we consolidate the investment funds.
No arrangement exists requiring us to provide additional funding in excess of our committed capital investment, liquidity, or the funding of
losses or an increase to our loss exposure in excess of our investment in the VIEs. We elected the fair value option for certain fixed maturity and
equity securities, and investment funds, which are reported in the consolidated variable interest entity sections on the consolidated balance
sheets.
CoInvest VI, CoInvest VII and CoInvest Other were formed to make investments, including co-investments alongside private equity funds
sponsored by Apollo. We received our interests in CoInvest VI, CoInvest VII and CoInvest Other as part of a contribution agreement in 2012
with AAA Guarantor – Athene, L.P. and its subsidiary, Apollo Life Re Ltd., in order to provide a capital base to support future acquisitions.
London Prime was formed for the purpose of investing in Prime London Ventures Limited, a Guernsey limited company, which purchases rental
residential assets across prime central London.
CoInvest VII holds a significant investment in MidCap FinCo Limited (MidCap), which is included in investment funds of consolidated VIEs on
the consolidated balance sheets. We have purchased pools of loans sourced by MidCap and contemporaneously sold subordinated participation
interests in the loans to a subsidiary of MidCap. As of December 31, 2017 and 2016, we had $14 million due to MidCap under the subordinated
participation agreement, which is reflected as a secured borrowing in other liabilities on the consolidated balance sheets.
158
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
During the third quarter of 2016, CoInvest VI contributed its largest investment, Norwegian Cruise Line Holdings Ltd. (NCLH) shares, to a
newly formed entity, NCL LLC, in exchange for 100% of the membership interests in this entity. Subsequent to this contribution, CoInvest VI
distributed its Class A membership interests in NCL LLC to us and the Class B membership interests in NCL LLC to the general partner of
CoInvest VI. NCL LLC is subject to the same management fees, selling restrictions with respect to shares of NCLH, and carried interest
calculation as CoInvest VI. NCL LLC classifies its NCLH shares as AFS equity securities. We are the primary beneficiary and consolidate NCL
LLC, as substantially all of its activities are conducted on our behalf.
During the first quarter of 2017, we acquired a 100% limited partnership interest in Sprint, an entity formed to make a co-investment alongside
private equity funds sponsored by Apollo. The underlying investment is a structured credit facility on a nearly completed skyscraper in
Southeast Asia. We are the primary beneficiary and consolidate Sprint, as substantially all of its activities are conducted on our behalf.
We previously consolidated 2012 CMBS-I Fund L.P., a Delaware limited partnership, and 2012 CMBS-II Fund L.P., a Delaware limited
partnership (collectively, CMBS Funds). The CMBS Funds were originally formed with the objective of generating high risk-adjusted
investment returns by investing primarily in a portfolio of eligible CMBS and using leverage through repurchase agreements treated as
collateralized financing. During the third quarter of 2016, the CMBS Funds each sold investments to fully settle the borrowings under their
respective repurchase agreements of $500 million. The remaining investments of $167 million were distributed directly to us. During the fourth
quarter of 2016, the CMBS Funds were fully dissolved.
Trading securities – related party – Trading securities represents investments in fixed maturity and equity securities with changes in fair value
recognized in investment related gains (losses) within revenues of consolidated variable interest entities on the consolidated statements of
income. The change in unrealized gains and losses on trading securities we still held as of the respective period end resulted in unrealized gains
of $29 million and unrealized losses of $78 million and $33 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Trading securities held by CoInvest VI, CoInvest VII and CoInvest Other are related party investments because Apollo affiliates exercise
significant influence over the operations of these investees.
Investment funds – including related party – Investment funds include non-fixed income, alternative investments in the form of limited
partnerships or similar legal structures that meet the definition of VIEs; however, our consolidated VIEs are not considered the primary
beneficiary of these investment funds. Changes in fair value for certain of these investment funds are included in investment related gains
(losses) within revenues of consolidated variable interest entities on the consolidated statements of income. Investment funds held by CoInvest
VII, CoInvest Other and Sprint are related party investments as they are sponsored or managed by Apollo affiliates.
159
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Fair Value—See Note 5 – Fair Value for a description of the levels of our fair value hierarchy and our process for determining the level we
assign our assets and liabilities carried at fair value.
The following represents the hierarchy for assets and liabilities of our consolidated VIEs measured at fair value on a recurring basis:
(In millions)
Assets of consolidated variable interest entities
Investments
AFS securities
Equity securities
Trading securities
Fixed maturity securities
Equity securities
Investment funds
Cash and cash equivalents
Total
NAV1
Level 1
Level 2
Level 3
December 31, 2017
$
142
$
— $
142
$
— $
48
98
549
4
—
—
528
—
—
70
—
4
—
—
—
—
Total assets of consolidated VIEs measured at fair value
$
841
$
528
$
216
$
— $
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy.
(In millions)
Assets of consolidated variable interest entities
Investments
AFS securities
Equity securities
Trading securities
Fixed maturity securities
Equity securities
Investment funds
Cash and cash equivalents
Total
NAV1
Level 1
Level 2
Level 3
December 31, 2016
$
161
$
— $
161
$
— $
50
117
562
14
—
—
524
—
—
74
—
14
—
—
—
—
—
48
28
21
—
97
—
50
43
38
—
Total assets of consolidated VIEs measured at fair value
$
904
$
524
$
249
$
— $
131
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy.
Fair Value Valuation Methods – See Note 5 – Fair Value for the valuation methods used to determine the fair value of AFS securities, trading
securities, investment funds and cash and cash equivalents.
160
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Level 3 Financial Instruments – The following is a reconciliation for all VIE Level 3 assets and liabilities measured at fair value on a recurring
basis:
(In millions)
Assets of consolidated variable interest entities
Trading securities
Fixed maturity securities
Equity securities
Investment funds
Total Level 3 assets of consolidated VIEs
1 Related to instruments held at end of period.
(In millions)
Assets of consolidated variable interest entities
Trading securities
Fixed maturity securities
Equity securities
Investment funds2
Total Level 3 assets of consolidated VIEs
$
$
$
$
Year ended December 31, 2017
Total realized
and unrealized
gains (losses)
included in
income
Beginning
Balance
Purchases
Sales
Transfers
in (out)
Ending
Balance
Total gains
(losses)
included in
earnings1
$
1
$
— $
(3) $
— $
50
43
38
(16)
1
131
$
(14) $
1
1
2
—
(19)
—
—
$
(22) $
— $
48
28
21
97
$
$
1
(16)
1
(14)
Year ended December 31, 2016
Total realized
and unrealized
gains (losses)
included in
income
Beginning
Balance
Purchases
Sales
Transfers
in (out)
Ending
Balance
53
38
34
125
$
$
(1) $
— $
(2) $
— $
3
7
9
$
2
17
19
—
(20)
—
—
$
(22) $
— $
131
$
Total gains
(losses)
included in
earnings1
(1)
3
—
2
$
50
43
38
1 Related to instruments held at end of period.
2 Prior period balances have been revised for immaterial misstatements to be comparable to current year balances.
There were no transfers between Level 1 or Level 2 during the years ended December 31, 2017 and 2016.
Significant Unobservable Inputs – For certain Level 3 trading securities and investment funds, the valuations have significant unobservable
inputs, which may include, but are not limited to, comparable multiples and weighted average cost of capital rates applied in the valuation
models. These inputs in isolation can cause significant increases or decreases in fair value. For example, the comparable multiples may be
multiplied by the underlying investment’s earnings before interest, tax, depreciation and amortization or by some other applicable financial
metric to establish the total enterprise value of the underlying investments. A comparable multiple consistent with the implied trading multiple
of public industry peers or relevant recent private transactions are used when available.
For other Level 3 trading securities, valuations are performed using a discounted cash flow model. For a discounted cash flow model, the
significant input is the discount rate applied to present value the projected cash flows. An increase in the discount rate can significantly lower the
fair value; a decrease in the discount rate can significantly increase the fair value. The discount rate may be determined by considering the
weighted average cost of capital calculation of companies in similar industries with comparable debt to equity ratios.
Fair Value Option – The following represents the gains (losses) recorded for instruments within the consolidated VIEs for which we have
elected the fair value option:
(In millions)
Trading securities
Fixed maturity securities
Equity securities
Investment funds
Total gains (losses)
Years ended December 31,
2017
2016
2015
$
$
$
1
9
5
15
$
(1) $
(78)
49
(30) $
(5)
(4)
12
3
Fair Value of Financial Instruments Not Held at Fair Value – Assets of consolidated variable interest entities includes $22 million and $11
million of investment funds accounted for under the equity method and not carried at fair value as of December 31, 2017 and 2016, respectively;
however, the carrying amount approximates fair value.
161
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Commitments and Contingencies – Assets of CoInvest VI included equity investments in publicly traded shares of Caesars Entertainment
Corporation (CEC) and Caesars Acquisition Company (CAC). We received the CEC and CAC shares as part of a contribution agreement in
2012 with AAA Guarantor – Athene, L.P. and its subsidiary, Apollo Life Re Ltd., in order to provide a capital base to support future acquisitions.
Claims had been pending (which now have been dismissed with prejudice) against CEC, CAC and/or others, related to certain guaranties issued
for debt of Caesars Entertainment Operating Company, Inc. (CEOC) and/or certain transactions involving CEOC and certain of its subsidiaries
(collectively, Debtors), CEC, CAC and others. CEC and the Debtors announced on or about September 26, 2016 that CEC and CEOC had
received confirmations from representatives of CEOC’s major creditor groups of those groups’ support for a term sheet that describes the key
economic terms of a proposed consensual chapter 11 plan for the Debtors. The plan, containing such terms and further including such other
terms respecting, among other things, the merger of CAC into CEC, that CoInvest VI and others will not retain their pre-merger CEC shares,
that CoInvest VI and others will retain the value of their CAC shares when receiving shares in the merged CEC, and that CoInvest VI and others
will receive releases to the fullest extent permitted by law, was confirmed by the Bankruptcy Court by order dated January 17, 2017. Conditions
precedent to the effective date of the plan included regulatory approvals from the various gaming regulators, CEC and CAC shareholders’
approval of the proposed merger between CEC and CAC with CEC being the surviving entity, and securing required financings. All of the
conditions precedent to the effective date of the plan were fulfilled, and the plan became effective on October 6, 2017. On or about October 6,
2017, CoInvest VI resolved its liability of $42 million with its pre-merger CEC shares and received 5,465,733 shares in the post-merger CEC,
derived from the value of CoInvest VI’s investment in CAC.
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,
which are included in fixed maturity securities on the consolidated balance sheets. These entities are deemed VIEs due to insufficient equity
within the structure and lack of control by the equity investors over the activities that significantly impact the economics of the entity. In
general, we are a debt investor within these entities and, as such, hold a variable interest; however, due to the debt holders’ lack of ability to
control the decisions within the trust that significantly impact the entity, and the fact the debt holders are protected from losses due to the
subordination by the equity tranche, the debt holders are not deemed the primary beneficiary. Securitization vehicles in which we hold the
residual tranche are not consolidated because we do not unilaterally have substantive rights to remove the general partner, or when assessing
related party interests, we are not under common control, as defined by GAAP, with the related party, nor are substantially all of the activities
conducted on our behalf; therefore, we are not deemed the primary beneficiary. Debt investments and investments in the residual tranche of
securitization entities are considered debt instruments and are held at fair value on the balance sheet and classified as AFS or trading.
Investment funds – Investment funds include non-fixed income, alternative investments in the form of limited partnerships or similar legal
structures.
Our risk of loss associated with our non-consolidated investments is limited and depends on the investment, including any unfunded
commitments, as follows: (1) investment funds accounted for under the equity method are limited to our initial investment; (2) investment funds
under the fair value option are limited to the fair value; (3) AFS securities and other investments are limited to cost or amortized cost; and (4)
trading securities are limited to carrying value.
The following summarizes the carrying value and maximum loss exposure of these non-consolidated investments:
(In millions)
Investment funds
Investment in related parties – investment funds
Assets of consolidated variable interest entities – investment funds
Investment in fixed maturity securities
Investment in related parties – fixed maturity securities
Total non-consolidated investments
December 31,
2017
2016
Carrying Value
Maximum Loss
Exposure
Carrying Value
Maximum Loss
Exposure
$
$
699
$
1,036
$
689
$
1,310
571
21,022
713
2,598
594
20,278
792
1,198
573
19,171
530
24,315
$
25,298
$
22,161
$
1,026
1,485
593
19,090
536
22,730
162
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
The following summarizes our investment funds, including related party investment funds and investment funds owned by consolidated VIEs:
(In millions, except for percentages and years)
Investment funds
Private equity
Real estate and other real assets
Natural resources
Hedge funds
Credit funds
Total investment funds
Investment funds – related parties
Private equity – A-A Mortgage1
Private equity – other
Real estate and other real assets
Natural resources
Hedge funds
Credit funds
Total investment funds – related parties
Investment funds owned by consolidated VIEs
Private equity – MidCap2
Credit funds
Real estate and other real assets
Total investment funds owned by consolidated VIEs
Total investment funds including related parties and funds owned by
consolidated VIEs
December 31,
2017
2016
Carrying
value
Percent
of total
Remaining
life in years
Carrying
value
Percent of
total
Remaining
life in years
$
271
161
4
61
202
699
403
180
297
74
93
263
1,310
528
21
22
571
38.8%
23.0%
0.6%
8.7%
28.9%
100.0%
30.8%
13.7%
22.7%
5.6%
7.1%
20.1%
100.0%
$
0 – 7
1 – 7
1 – 1
0 – 3
0 – 5
5 – 5
0 – 10
0 – 7
4 – 6
9 – 9
2 – 4
268
118
5
72
226
689
343
131
247
49
192
236
38.9%
17.2%
0.7%
10.4%
32.8%
100.0%
28.6%
11.0%
20.6%
4.1%
16.0%
19.7%
0 – 7
0 – 4
1 – 2
0 – 3
0 – 5
3 – 3
0 – 10
1 – 4
5 – 5
9 – 9
2 – 3
1,198
100.0%
92.5%
N/A
3.7%
3.8%
100.0%
0 – 3
2 – 3
524
38
11
573
91.4%
N/A
6.7%
1.9%
100.0%
0 – 3
2 – 3
$
2,580
$
2,460
1 A-A Mortgage Opportunities, LP (A-A Mortgage) is a platform to originate residential mortgage loans and mortgage servicing rights.
2 Our total investment in MidCap, including amounts advanced under credit facilities, totaled $766 million and $761 million as of December 31, 2017 and 2016,
respectively, which was less than 10% of total AHL shareholder’s equity at December 31, 2017, but greater than 10% at December 31, 2016.
Summarized Ownership of Investment Funds—The following is the aggregated summarized financial information of equity method
investees, including those for which we elected the fair value option and would otherwise be accounted for as an equity method investment, and
may be presented on a lag due to the availability of financial information from the investee:
(In millions)
Assets
Liabilities
Equity
December 31,
2017
20161
$
19,729
$
6,566
13,163
21,033
7,340
13,693
1 Balances have been revised for immaterial misstatements to be comparable to current year balances to exclude the effects of those fair value option entities
that would not otherwise receive equity method accounting.
(In millions)
Net income
Years ended December 31,
20161
20151
2017
$
1,475
$
694
$
1,050
1 Balances have been revised for immaterial misstatements to be comparable to current year balances to exclude the effects of those fair value option entities
that would not otherwise receive equity method accounting.
163
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
The following table presents the carrying value by ownership percentage of equity method investment funds, including related party investment
funds and investment funds owned by consolidated VIEs:
(In millions)
Ownership Percentage
100%
50% – 99%
3% – 49%
Equity method investment funds
December 31,
2017
2016
$
$
35
$
520
1,301
1,856
$
27
478
1,294
1,799
The following table presents the carrying value by ownership percentage of investment funds where we elected the fair value option, including
related party investment funds and investment funds owned by consolidated VIEs:
(In millions)
Ownership Percentage
3% – 49%
Less than 3%
Fair value option investment funds
5. Fair Value
December 31,
2017
2016
$
$
590
134
724
$
$
562
99
661
Fair value is the price we would receive to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market
participants. We determine fair value based on the following fair value hierarchy:
Level 1 – Unadjusted quoted prices for identical assets or liabilities in an active market.
Level 2 – Quoted prices for inactive markets or valuation techniques that require observable direct or indirect inputs for substantially the
full term of the asset or liability. Level 2 inputs include the following:
• Quoted prices for similar assets or liabilities in active markets,
• Observable inputs other than quoted market prices, and
• Observable inputs derived principally from market data through correlation or other means.
Level 3 – Prices or valuation techniques with unobservable inputs significant to the overall fair value estimate. These valuations use critical
assumptions not readily available to market participants. Level 3 valuations are based on market standard valuation methodologies,
including discounted cash flows, matrix pricing or other similar techniques.
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level
is based on the lowest priority level input that is significant to the instrument’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.
164
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
The following represents the hierarchy for our assets and liabilities measured at fair value on a recurring basis:
(In millions)
Assets
AFS securities
Fixed maturity securities
Total
NAV1
Level 1
Level 2
Level 3
December 31, 2017
U.S. government and agencies
$
62
$
— $
U.S. state, municipal and political subdivisions
Foreign governments
Corporate
CLO
ABS
CMBS
RMBS
Total AFS fixed maturity securities
Equity securities
Total AFS securities
Trading securities
Fixed maturity securities
U.S. government and agencies
U.S. state, municipal and political subdivisions
Corporate
CLO
ABS
CMBS
RMBS
Total trading fixed maturity securities
Equity securities
Total trading securities
Mortgage loans
Investment funds
Funds withheld at interest – embedded derivative
Derivative assets
Short-term investments
Cash and cash equivalents
Restricted cash
Investments in related parties
AFS, fixed maturity securities
CLO
ABS
Total AFS securities – related party
Trading securities
CLO
ABS
Total trading securities – related party
Investment funds
Short-term investments
Reinsurance recoverable
1,165
2,683
36,660
5,084
3,971
2,021
9,366
61,012
277
61,289
3
138
1,475
27
94
51
408
2,196
513
2,709
41
145
312
2,551
201
4,888
105
360
46
406
132
175
307
30
52
1,824
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
104
—
—
—
—
—
—
—
—
—
—
—
30
—
—
26
—
—
—
—
—
—
—
26
18
44
3
—
—
—
—
—
—
3
—
3
—
—
—
7
40
4,888
105
—
—
—
—
—
—
—
—
—
$
36
$
1,165
2,683
36,082
5,020
2,510
1,884
9,065
58,445
251
58,696
—
121
1,475
10
17
51
66
1,740
513
2,253
—
—
—
2,544
161
—
—
360
46
406
27
175
202
—
52
—
Total assets measured at fair value
$
74,860
$
134
$
5,087
$
64,314
$
165
—
—
—
578
64
1,461
137
301
2,541
8
2,549
—
17
—
17
77
—
342
453
—
453
41
41
312
—
—
—
—
—
—
—
105
—
105
—
—
1,824
5,325
(Continued)
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
(In millions)
Liabilities
Interest sensitive contract liabilities
Embedded derivative
Universal life benefits
Unit-linked contracts
Future policy benefits
AmerUs Closed Block
ILICO Closed Block and life benefits
Derivative liabilities
Funds withheld liability – embedded derivative
Total
NAV1
Level 1
Level 2
Level 3
December 31, 2017
$
7,436
$
— $
— $
— $
1,005
488
1,625
803
134
22
—
—
—
—
—
—
—
—
—
—
—
—
—
488
—
—
129
22
7,436
1,005
—
1,625
803
5
—
Total liabilities measured at fair value
$
11,513
$
— $
— $
639
$
10,874
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy.
(Concluded)
(In millions)
Assets
AFS securities
Fixed maturity securities
Total
NAV1
Level 1
Level 2
Level 3
December 31, 2016
U.S. government and agencies
$
60
$
— $
U.S. state, municipal and political subdivisions
Foreign governments
Corporate
CLO
ABS
CMBS
RMBS
Total AFS fixed maturity securities
Equity securities
Total AFS securities
Trading securities
Fixed maturity securities
U.S. government and agencies
U.S. state, municipal and political subdivisions
Corporate
CLO
ABS
CMBS
RMBS
Total trading fixed maturity securities
Equity securities
Total trading securities
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,140
2,235
30,020
4,822
2,936
1,847
8,973
52,033
353
52,386
3
137
1,423
43
82
81
387
2,156
425
2,581
166
29
—
—
—
—
—
—
—
29
79
108
3
—
—
—
—
—
—
3
—
3
$
31
$
1,135
2,221
29,650
4,664
1,776
1,695
8,956
50,128
269
50,397
—
120
1,423
—
82
81
291
1,997
425
2,422
—
5
14
370
158
1,160
152
17
1,876
5
1,881
—
17
—
43
—
—
96
156
—
156
(Continued)
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
(In millions)
Mortgage loans
Investment funds
Funds withheld at interest – embedded derivative
Derivative assets
Short-term investments
Cash and cash equivalents
Restricted cash
Investments in related parties
AFS, fixed maturity securities
CLO
ABS
Total AFS fixed maturity securities
AFS, equity securities
Total AFS securities – related party
Trading securities, CLO
Reinsurance recoverable
Total assets measured at fair value
Liabilities
Interest sensitive contract liabilities
Embedded derivative
Universal life benefits
Unit-linked contracts
Future policy benefits
AmerUs Closed Block
ILICO Closed Block and life benefits
Derivative liabilities
Funds withheld liability – embedded derivative
Total
NAV1
Level 1
Level 2
Level 3
December 31, 2016
44
99
140
1,370
189
2,445
57
279
56
335
20
355
195
1,692
61,553
$
—
99
—
—
—
—
—
—
—
—
—
—
—
—
99
—
—
—
9
19
2,445
57
—
—
—
20
20
—
—
—
—
—
1,361
170
—
—
279
—
279
—
279
—
—
$
2,661
$
54,629
$
5,283
$
— $
— $
— $
883
408
1,606
794
40
6
—
—
—
—
—
—
—
—
—
—
—
—
—
408
—
—
33
6
$
$
44
—
140
—
—
—
—
—
56
56
—
56
195
1,692
4,164
5,283
883
—
1,606
794
7
—
Total liabilities measured at fair value
$
9,020
$
— $
— $
447
$
8,573
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy.
(Concluded)
See Note 4 – Variable Interest Entities for fair value disclosures associated with consolidated VIEs.
Fair Value Valuation Methods—We used the following valuation methods and assumptions to estimate fair value:
AFS and trading securities
Fixed maturity – We obtain the fair value for most marketable securities without an active market from several commercial pricing services.
These are classified as Level 2 assets. The pricing services incorporate a variety of market observable information in their valuation techniques,
including benchmark yields, trading activity, credit quality, issuer spreads, bids, offers and other reference data. This category typically includes
U.S. and non-U.S. corporate bonds, U.S. agency and government guaranteed securities, ABS, CMBS and RMBS.
We value privately placed fixed maturity securities based on the credit quality and duration of comparable marketable securities, which may be
securities of another issuer with similar characteristics. In some instances, we use a matrix-based pricing model. These models consider the
current level of risk-free interest rates, corporate spreads, credit quality of the issuer and cash flow characteristics of the security. We also
consider additional factors such as net worth of the borrower, value of collateral, capital structure of the borrower, presence of guarantees and
our evaluation of the borrower’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.
167
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Funds withheld (embedded derivative) – We estimate the fair value of the embedded derivative based on the change in the fair value of the assets
supporting the funds withheld payable under the combined coinsurance, modco and coinsurance funds withheld reinsurance agreements. As a
result, the fair value of the embedded derivative is classified as Level 2 or 3 based on the valuation methods used for the assets held in trust
supporting the reinsurance agreements.
Derivatives – Derivative contracts can be exchange traded or over-the-counter. Exchange-traded derivatives typically fall within Level 1 of the
fair value hierarchy depending on trading activity. Over-the-counter derivatives are valued using valuation models or an income approach using
third-party broker valuations. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit
curves, measures of volatility, prepayment rates and correlation of the inputs. We consider and incorporate counterparty credit risk in the
valuation process through counterparty credit rating requirements and monitoring of overall exposure. We also evaluate and include our own
nonperformance risk in valuing derivatives. The majority of our derivatives trade in liquid markets; therefore, we can verify model inputs and
model selection does not involve significant management judgment. These are typically classified within Level 2 of the fair value hierarchy.
Cash and cash equivalents – including restricted cash – The carrying amount for cash equals fair value. We estimate the fair value for cash
equivalents based on quoted market prices. These assets are classified as Level 1.
Interest sensitive contract liabilities (embedded derivative) – Embedded derivatives related to interest sensitive contract liabilities with fixed
indexed annuity products are classified as Level 3. The valuations include significant unobservable inputs associated with economic
assumptions and actuarial assumptions for policyholder behavior.
Unit-linked contracts – Unit-linked contracts are valued based on the fair value of the investments supporting the contract. The underlying
investments are trading securities comprised primarily of mutual funds. The valuations of these are based on quoted market prices for similar
assets and are classified as Level 2, resulting in a corresponding classification for the unit-linked contracts.
AmerUs Closed Block – We elected the fair value option for the future policy benefits liability in the AmerUs Closed Block. Our valuation
technique is to set the fair value of policyholder liabilities equal to the fair value of assets. There is an additional component which captures the
fair value of the open block’s obligations to the closed block business. This component is the present value of the projected release of required
capital and future after tax earnings on required capital supporting the AmerUs Closed Block, discounted at a rate which represents a market
participant’s required rate of return, less the initial required capital. Unobservable inputs include estimates for these items. The AmerUs Closed
Block policyholder liabilities and any corresponding reinsurance recoverable are classified as Level 3.
ILICO Closed Block – We elected the fair value option for the ILICO Closed Block. Our valuation technique is to set the fair value of
policyholder liabilities equal to the fair value of assets. There is an additional component which captures the fair value of the open block’s
obligations to the closed block business. This component uses the present value of future cash flows which include commissions, administrative
expenses, reinsurance premiums and benefits, and an explicit cost of capital. The discount rate includes a margin to reflect the business and non-
performance 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.
168
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Fair Value Option—The following represents the gains (losses) recorded for instruments for which we have elected the fair value option:
(In millions)
Trading securities
Mortgage loans
Investment funds, including related party investment funds
Future policy benefits
Total gains (losses)
Years ended December 31,
2017
2016
2015
63
$
(33) $
(1)
30
(19)
—
5
(25)
73
$
(53) $
(313)
—
(8)
134
(187)
$
$
Gains and losses on trading securities are recorded in investment related gains (losses) on the 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 consolidated statements of income. Gains and losses related to investment funds, including related party investment funds, are
recorded in net investment income on the consolidated statements of income. We record the change in fair value of future policy benefits to
future policy and other policy benefits on the consolidated statements of income.
The following summarizes information for fair value option mortgage loans:
(In millions)
Unpaid principal balance
Mark to fair value
Fair value
December 31,
2017
2016
$
$
40
1
41
$
$
42
2
44
There were no fair value option mortgage loans 90 days or more past due as of December 31, 2017 and 2016.
Transfers Between Levels—Transfers into Level 3 generally represent securities that were valued using pricing sources which, due to changing
market conditions, were less observable than in prior periods as indicated by the increased volatility, which was reflected in vendor prices
obtained for individual securities. Additionally, changes in pricing sources also led to securities transferring into Level 3.
Transfers out of Level 3 generally represent securities that were valued using pricing sources which, due to changing market conditions, were
more observable than in prior periods as indicated by decreased volatility, which was reflected in vendor prices obtained for individual
securities. Additionally, changes in pricing sources also led to securities transferring into Level 2.
Transfers into or out of any level are assumed to occur at the end of the period. For the years ended December 31, 2017 and 2016, there were no
transfers between Level 1 and Level 2.
169
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Level 3 Financial Instruments—The following is a reconciliation for all Level 3 assets and liabilities measured at fair value on a recurring
basis:
Year ended December 31, 2017
Total realized and
unrealized gains (losses)
Beginning
Balance
Included in
income
Included in
OCI
Purchases,
issuances, sales and
settlements, net
Transfers
In
(Out)
Ending
Balance
Total gains
(losses) included
in earnings1
(In millions)
Assets
AFS securities
Fixed maturity
U.S. state, municipal
and political
subdivisions
$
Foreign governments
Corporate
CLO
ABS
CMBS
RMBS
Equity securities
Trading securities
Fixed maturity
U.S. state, municipal
and political
subdivisions
CLO
ABS
RMBS
Mortgage loans
Investment funds
Funds withheld at interest –
embedded derivative
Investments in related parties
AFS securities, fixed
maturity, ABS
Trading securities, CLO
Reinsurance recoverable
$
5
14
370
158
1,160
152
17
5
17
43
—
96
44
—
16
—
13
1
26
1
1
—
—
(4)
—
(19)
(1)
—
140
172
56
195
1,692
—
(8)
132
330
$
Total Level 3 assets
$
4,164
$
Liabilities
Interest sensitive contract
liabilities
$
(1) $
(20) $
— $
— $
— $
—
15
10
29
(4)
1
—
—
—
—
—
—
—
—
1
—
—
51
—
177
(31)
163
28
2
3
—
(12)
—
70
(2)
—
—
(10)
(55)
—
—
29
28
93
51
289
—
—
—
77
195
—
41
—
—
—
—
(14)
(26)
(102)
(10)
(91)
(9)
—
—
(10)
—
—
—
—
—
(47)
(27)
—
—
578
64
1,461
137
301
8
17
17
77
342
41
41
312
—
105
1,824
$
313
$
803
$
(336) $
5,325
$
Embedded derivative
$
(5,283) $
(1,758) $
— $
(395) $
— $
— $
(7,436) $
Universal life benefits
(883)
(122)
Future policy benefits
AmerUs Closed Block
(1,606)
ILICO Closed Block and
life benefits
Derivative liabilities
(794)
(7)
(19)
(9)
2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,005)
(1,625)
(803)
(5)
Total Level 3 liabilities
$
(8,573) $
(1,906) $
— $
(395) $
— $
— $
(10,874) $
1 Related to instruments held at end of period.
170
—
—
—
—
—
—
—
—
—
1
—
7
(1)
—
—
—
(5)
—
2
—
—
—
—
2
2
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Year ended December 31, 2016
Total realized and
unrealized gains (losses)
Beginning
balance
Included in
income
Included in
OCI
Purchases,
issuances, sales and
settlements, net
Transfers
In
Out
Ending
balance
Total gains
(losses) included
in earnings1
$
— $
— $
— $
— $
(In millions)
Assets
AFS securities
Fixed maturity
U.S. state, municipal
and political
subdivisions
Foreign governments
Corporate
CLO
ABS
CMBS
RMBS
Equity securities
Trading securities
Fixed maturity
U.S. state, municipal
and political
subdivisions
Corporate
CLO
ABS
RMBS
Mortgage loans
Funds withheld at interest –
embedded derivative
Investments in related parties
AFS securities
Fixed maturity
CLO
ABS
Trading securities, CLO
Reinsurance recoverable
17
636
517
1,813
67
758
9
17
16
108
98
29
48
36
7
60
191
2,377
—
—
4
81
1
3
—
—
—
(2)
(16)
(23)
—
104
—
—
(33)
(685)
(1)
20
55
(12)
—
19
—
—
—
—
—
—
—
—
1
—
—
—
82
(2)
(36)
(46)
(635)
39
(297)
(4)
—
(4)
(63)
—
144
(4)
—
—
(4)
7
—
5
—
—
72
104
91
—
—
—
—
—
—
—
—
—
—
—
30
—
$
— $
—
(250)
(444)
(191)
(46)
(466)
—
—
(12)
—
(82)
(54)
—
—
(8)
—
—
—
$
5
14
370
158
1,160
152
17
5
17
—
43
—
96
44
140
—
56
195
1,692
Total Level 3 assets
$
6,804
$
(566) $
Liabilities
Interest sensitive contract
liabilities
$
(905) $
302
$
(1,553) $
4,164
$
Embedded derivative
$
(4,464) $
(324) $
— $
(495) $
— $
— $
(5,283) $
Universal life benefits
(1,464)
581
Future policy benefits
AmerUs Closed Block
(1,581)
ILICO Closed Block and
life benefits
Derivative liabilities
(897)
(7)
(25)
103
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(883)
(1,606)
(794)
(7)
Total Level 3 liabilities
$
(8,413) $
335
$
— $
(495) $
— $
— $
(8,573) $
1 Related to instruments held at end of period.
171
—
—
—
—
—
—
—
—
—
4
11
—
(9)
—
—
—
—
23
—
29
—
—
—
—
—
—
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
The following represents the gross components of purchases, issuances, sales and settlements, net, shown above:
Purchases
Issuances
Sales
Settlements
Purchases,
issuances, sales and
settlements, net
Year ended December 31, 2017
(In millions)
Assets
AFS securities
Fixed maturity
U.S. state, municipal and political
subdivisions
$
— $
— $
— $
(20) $
Corporate
CLO
ABS
CMBS
RMBS
Equity securities
Trading securities, fixed maturity
CLO
RMBS
Mortgage loans
Investments in related parties
AFS securities, fixed maturity, ABS
Trading securities, CLO
Total Level 3 assets
Liabilities
Interest sensitive contract liabilities
Embedded derivative
Total Level 3 liabilities
$
$
$
(In millions)
Assets
AFS securities
Fixed maturity
228
15
577
29
4
3
4
70
—
5
—
—
—
—
—
—
—
—
—
—
—
—
(36)
(2)
—
—
—
—
(16)
—
—
—
(55)
(15)
(44)
(414)
(1)
(2)
—
—
—
(2)
(15)
—
935
$
— $
(109) $
(513) $
(20)
177
(31)
163
28
2
3
(12)
70
(2)
(10)
(55)
313
— $
— $
(600) $
(600) $
— $
— $
205
205
$
$
(395)
(395)
Purchases
Issuances
Sales
Settlements
Purchases,
issuances, sales and
settlements, net
Year ended December 31, 2016
Foreign governments
$
— $
— $
— $
(2) $
Corporate
CLO
ABS
CMBS
RMBS
Equity securities
Trading securities, fixed maturity
Corporate
CLO
RMBS
Mortgage loans
Investments in related parties
AFS securities, fixed maturity, ABS
Trading securities, CLO
Total Level 3 assets
Liabilities
Interest sensitive contract liabilities
Embedded derivative
Total Level 3 liabilities
$
$
$
95
24
261
40
8
—
—
4
144
—
—
33
—
—
—
—
—
—
—
—
—
—
—
—
(68)
(29)
—
—
—
(4)
—
(67)
—
—
—
(26)
(63)
(41)
(896)
(1)
(305)
—
(4)
—
—
(4)
(4)
—
609
$
— $
(194) $
(1,320) $
— $
— $
(641) $
(641) $
— $
— $
146
146
$
$
172
(2)
(36)
(46)
(635)
39
(297)
(4)
(4)
(63)
144
(4)
(4)
7
(905)
(495)
(495)
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Significant Unobservable Inputs—Significant unobservable inputs occur when we could not obtain or corroborate the quantitative detail of the
inputs. This applies to AFS securities, trading securities, mortgage loans and certain derivatives, as well as embedded derivatives in liabilities.
Additional significant unobservable inputs are described below.
Fixed maturity securities – For certain fixed maturity securities, internal models are used to calculate the fair value. We use a discounted cash
flow approach. The discount rate is the significant unobservable input due to the determined credit spread being internally developed, illiquid, or
as a result of other adjustments made to the base rate. The base rate represents a market comparable rate for securities with similar
characteristics. As of December 31, 2017, discounts ranged from 2% to 6%, and as of December 31, 2016, discounts ranged from 4% to
8%. This excludes assets for which significant unobservable inputs are not developed internally, primarily consisting of broker quotes.
Interest sensitive contract liabilities – embedded derivative – Significant unobservable inputs we use in the fixed indexed annuities embedded
derivative of the interest sensitive contract liabilities valuation include:
1. Non-performance risk – For contracts we issue, we use the credit spread from the U.S. treasury curve based on our public credit rating
as of the valuation date. This represents our credit risk for use in the estimate of the fair value of embedded derivatives. For contracts
reinsured through funds withheld reinsurance, the cedant company holds collateral against its exposure; therefore, immaterial non-
performance risk is ascribed to these contracts.
2. Option budget – We assume future hedge costs in the derivative’s fair value estimate. The level of option budgets determines the
3.
future costs of the options and impacts future policyholder account value growth.
Policyholder behavior – We regularly review the lapse and withdrawal assumptions (surrender rate). These are based on our initial
pricing assumptions updated for actual experience. Actual experience may be limited for recently issued products.
The following summarizes the unobservable inputs for the embedded derivatives of fixed indexed annuities:
(In millions, except for percentages)
Fair value
Valuation technique
Unobservable inputs
Input/range of
inputs
Impact of an
increase in the input
on fair value
December 31, 2017
Interest sensitive contract liabilities – fixed
indexed annuities embedded derivatives
$
7,436 Option budget method
Non-performance risk
0.2% – 1.2%
Option budget
0.7% – 3.7%
Surrender rate
1.5% – 19.4%
December 31, 2016
Decrease
Increase
Decrease
(In millions, except for percentages)
Fair value
Valuation technique
Unobservable inputs
Input/range of
inputs
Impact of an
increase in the input
on fair value
Interest sensitive contract liabilities – fixed
indexed annuities embedded derivatives
$
5,283 Option budget method
Non-performance risk
0.7% – 1.5%
Option budget
0.8% – 3.8%
Surrender rate
0.0% – 16.3%
Decrease
Increase
Decrease
173
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Fair Value of Financial Instruments Not Carried at Fair Value—The following represents our financial instruments not carried at fair value
on the consolidated balance sheets:
(In millions)
Assets
Mortgage loans
Investment funds
Policy loans
Funds withheld at interest
Other investments
Investments in related parties
Investment funds
Other investments
Total assets not carried at fair value
Liabilities
Interest sensitive contract liabilities
Funds withheld liability
$
$
Total liabilities not carried at fair value
$
Carrying Value
Fair Value
NAV1
Level 1
Level 2
Level 3
December 31, 2017
$
6,192
$
6,342
$
— $
— $
— $
6,342
554
530
6,773
133
1,280
238
15,700
31,586
385
31,971
$
$
$
554
530
6,773
133
1,280
259
15,871
31,656
385
32,041
$
$
$
554
—
—
—
1,280
—
—
—
—
—
—
—
—
530
—
58
—
—
—
—
6,773
75
—
259
1,834
$
— $
588
$
13,449
— $
—
— $
— $
—
— $
— $
31,656
385
385
—
$
31,656
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy.
(In millions)
Assets
Mortgage loans
Investment funds
Policy loans
Funds withheld at interest
Other investments
Investments in related parties
Investment funds
Other investments
Total assets not carried at fair value
Liabilities
Interest sensitive contract liabilities
Funds withheld liability
$
$
Total liabilities not carried at fair value
$
Carrying Value
Fair Value
NAV1
Level 1
Level 2
Level 3
December 31, 2016
$
5,426
$
5,560
$
— $
— $
— $
5,560
590
602
6,398
81
1,198
237
14,532
27,628
374
28,002
$
$
$
590
602
6,398
81
1,198
262
14,691
26,930
374
27,304
$
$
$
590
—
—
—
1,198
—
—
—
—
—
—
—
—
602
—
—
—
—
—
—
6,398
81
—
262
1,788
$
— $
602
$
12,301
— $
—
— $
— $
—
— $
— $
26,930
374
374
—
$
26,930
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy.
We estimate the fair value for financial instruments not carried at fair value using the same methods and assumptions as those we carry at fair
value. The financial instruments presented above are reported at carrying value on the consolidated balance sheets; however, in the case of
policy loans, funds withheld at interest and liability, and other investments, the carrying amount approximates fair value.
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.
174
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
6. Business Combinations
Delta Lloyd Deutschland AG (DLD)—Effective October 1, 2015, we acquired 100% of the voting equity interests of DLD and $50 million of
intercompany loans from Delta Lloyd N.V. for a cash purchase price of $74 million. DLD was a Germany-domiciled insurance group with an in
force book of business primarily made up of participating long-duration savings products. We acquired DLD to expand our business into
Germany. Following the acquisition, DLD was renamed Athene Deutschland GmbH.
The following summarizes the fair values of the assets acquired and liabilities assumed in the DLD acquisition:
(In millions)
Investments
Cash and cash equivalents
Accrued investment income
Reinsurance recoverable
Other assets
Total identifiable assets acquired
Interest sensitive contract liabilities
Future policy benefits
Other policy claims and benefits
Dividends payable to policyholders
Other liabilities
Total identifiable liabilities assumed
Net assets acquired
October 1, 2015
5,539
236
67
4
83
5,929
403
4,519
55
771
107
5,855
74
$
$
DLD contributed $129 million of revenue and $6 million of net income during the year ended December 31, 2015. Transaction costs incurred
during the year ended December 31, 2015 for this acquisition were $15 million, and are included in policy and other operating expenses on the
consolidated statements of income.
The following unaudited pro forma revenue and net income assumes a January 1, 2014 acquisition date for DLD:
(In millions)
Revenue
Net income
Year ended December 31, 2015
$
3,004
579
See Note 1 – Business, Basis of Presentation and Significant Accounting Policies for further information regarding the subsequent
deconsolidation of our German operations in 2018.
7. Reinsurance
The following summarizes the effect of reinsurance on premiums and future policy and other policy benefits on the consolidated statements of
income:
(In millions)
Premiums
Direct
Reinsurance assumed
Reinsurance ceded
Total premiums
Future policy and other policy benefits
Direct
Reinsurance assumed
Reinsurance ceded
Total future policy and other policy benefits
Years ended December 31,
2017
2016
2015
$
$
$
$
2,639
$
448
$
21
(195)
20
(228)
2,465
$
240
$
3,350
$
1,434
$
37
(224)
82
(457)
3,163
$
1,059
$
445
24
(274)
195
1,030
42
(554)
518
175
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Reinsurance typically provides for recapture rights on the part of the ceding company for certain events of default. Additionally, some
agreements require us to place assets in trust accounts for the benefit of the ceding entity. As of December 31, 2017 and 2016, we held assets in
trusts of $1,238 million and $1,148 million, respectively. Although we own the assets placed in trust, their use is restricted based on the trust
agreement terms. If the statutory book value of the assets, or in certain cases fair value, in a trust declines because of impairments or other
reasons, we may be required to contribute additional assets to the trust. In addition, the assets within a trust may be subject to a pledge in favor
of the applicable reinsurance company.
Global Atlantic ceded reinsurance transactions—We have a 100% coinsurance and assumption agreement with Global Atlantic. The
agreement ceded all existing open block life insurance business issued by Athene Annuity and Life Company (AAIA), with the exception of
enhanced guarantee universal life insurance products. We also entered into a 100% coinsurance agreement with Global Atlantic to cede all
policy liabilities of the ILICO Closed Block. The ILICO Closed Block consists primarily of participating whole life insurance policies. We also
have an excess of loss arrangement with Global Atlantic to reimburse us for any payments required from our general assets to meet the
contractual obligations of the AmerUs Closed Block not covered by existing reinsurance through Athene Re USA IV. The AmerUs Closed Block
consists primarily of participating whole life insurance policies. Since all liabilities were covered by the existing reinsurance at close, no
reinsurance premiums were ceded. The assets backing the AmerUs Closed Block are managed, on AAIA’s behalf, by Goldman Sachs Asset
Management, an affiliate of Global Atlantic.
During the years ended December 31, 2017 and 2016, we novated certain open blocks of business ceded to Global Atlantic, in accordance with
the terms of the coinsurance and assumption agreement. The following summarizes the decreases in amounts on the consolidated balance sheets
as a result of the novations:
(In millions)
Interest sensitive contract liabilities
Future policy benefits
Policy loans
Reinsurance recoverable
Years ended December 31,
2017
2016
$
$
945
190
34
1,101
1,006
188
33
1,161
During the third quarter of 2015, portions of the reinsurance agreements between us and Global Atlantic were amended to change the
reinsurance agreements from funds withheld to coinsurance, which resulted in a $930 million decrease to funds withheld liability and a
corresponding decrease to assets, primarily consisting of investments.
As of December 31, 2017 and 2016, Global Atlantic maintained a series of trust and custody accounts under the terms of these agreements with
assets equal to or greater than a required aggregate statutory balance of $3,350 million and $4,122 million, respectively.
Protective Life Insurance Company (Protective) ceded reinsurance transactions—We reinsured substantially all of the existing life and
health business of Athene Annuity & Life Assurance Company (AADE) to Protective under a coinsurance agreement in 2011. As of
December 31, 2017 and 2016, Protective maintained a trust for our benefit with assets having a fair value of $1,688 million and $1,664 million,
respectively.
Ceded Reinsurance Transactions—The following summarizes our reinsurance recoverable from the following:
(In millions)
Global Atlantic
Protective
Other1
Reinsurance recoverable
1Represents all other reinsurers, with no single reinsurer having a carrying value in excess of 5% of total recoverable.
December 31,
2017
2016
$
$
3,128
$
1,693
151
4,972
$
3,914
1,723
364
6,001
176
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
8. Deferred Acquisition Costs, Deferred Sales Inducements and Value of Business Acquired
The following represents a rollforward of DAC, DSI and VOBA:
(In millions)
Balance at December 31, 2014
Additions
Unlocking
Amortization
Impact of unrealized investment (gains) losses
Balance at December 31, 2015
Additions
Unlocking
Amortization
Impact of unrealized investment (gains) losses
Balance at December 31, 2016
Additions
Unlocking
Amortization
Impact of unrealized investment (gains) losses
Balance at December 31, 2017
DAC
DSI
VOBA
Total
$
$
424
288
(6)
(35)
34
705
601
(12)
(114)
(38)
1,142
493
13
(194)
(100)
188
136
(2)
(19)
17
320
200
(3)
(36)
(19)
462
161
4
(67)
(40)
$
1,610
$
—
(27)
(138)
182
1,627
—
(23)
(169)
(99)
1,336
—
(1)
(168)
(111)
$
1,354
$
520
$
1,056
$
2,222
424
(35)
(192)
233
2,652
801
(38)
(319)
(156)
2,940
654
16
(429)
(251)
2,930
The expected amortization of VOBA for the next five years is as follows:
(In millions)
2018
2019
2020
2021
2022
9. Closed Block
Expected Amortization
$
127
107
94
86
80
We pay guaranteed benefits under all policies included in the Closed Blocks. In the event the performance of the Closed Blocks’ assets is
insufficient to maintain dividend scales and interest credits, we may reduce the policyholder dividend scales. In the event dividends have been
reduced to zero and the Closed Blocks’ assets remain insufficient to fund the Closed Blocks’ guaranteed benefits, we would use assets
supporting open block policies or surplus to meet the contractual benefits of the Closed Blocks’ policyholders. The ILICO Closed Block has
been ceded to Global Atlantic. Therefore, Global Atlantic would be required to provide funding for any asset insufficiency related to the ILICO
Closed Block. Additionally, the AmerUs Closed Block has a letter of credit and tail risk reinsurance agreement in place that limits our exposure
to potential asset insufficiency.
We elected the fair value option for the AmerUs Closed Block. The fair value of liabilities of the AmerUs Closed Block was derived at election
as the sum of the fair value of the AmerUs Closed Block assets plus our cost of capital in the AmerUs Closed Block. The cost of capital was then
determined to be the present value of the projected release of required capital and future after tax earnings 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. At
each reporting period, we record the fair value of the AmerUs Closed Block by adjusting the change in liabilities, exclusive of the cost of
capital, to equal the change in assets. We do not record additional policyholder dividend obligations, as there are no future GAAP earnings
available to the policyholders.
The excess of the fair value of the liabilities over the fair value of the assets represents our cost of capital in the AmerUs Closed Block. The
maximum amount of future earnings from the assets and liabilities of the AmerUs Closed Block is represented by the reduction in the cost of
capital in future years based on the operations of the AmerUs Closed Block and recalculation of the cost of capital each reporting period.
177
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Summarized financial information of the AmerUs Closed Block is presented below.
(In millions)
Liabilities
Future policy benefits
Other policy claims and benefits
Dividends payable to policyholders
Other liabilities
Total liabilities
Assets
Trading securities
Mortgage loans, net of allowances
Policy loans
Total investments
Cash and cash equivalents
Accrued investment income
Reinsurance recoverable
Other assets
Total assets
Maximum future earnings to be recognized from AmerUs Closed Block
The following represents the contribution from AmerUs Closed Block.
(In millions)
Revenues
Premiums
Net investment income
Investment related gains (losses)
Total revenues
Benefits and Expenses
Future policy and other policy benefits
Dividends to policyholders
Total benefits and expenses
Contribution from (to) AmerUs Closed Block before income taxes
Income tax expense (benefit)
Contribution from (to) AmerUs Closed Block, net of income taxes
December 31,
2017
2016
$
1,625
$
1,607
19
92
15
1,751
1,377
41
168
1,586
48
36
25
—
$
1,695
56
$
Years ended December 31,
2017
2016
2015
$
$
$
58
79
61
198
144
51
195
3
(5)
8
$
$
24
84
42
150
107
40
147
3
3
— $
25
96
23
1,751
1,380
44
183
1,607
23
27
29
1
1,687
64
58
86
(124)
20
(24)
45
21
(1)
1
(2)
178
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
10. Debt
Credit Facility—In 2016, AHL, ALRe and Athene USA entered into a five-year revolving credit agreement (Credit Facility) with Citibank,
N.A., as administrative agent. The borrowing capacity under the Credit Facility is $1 billion. In connection with the Credit Facility, AHL and
Athene USA guaranteed all of the obligations of AHL, ALRe and Athene USA under this facility, and ALRe guaranteed certain of the
obligations of AHL and Athene USA under this facility. The Credit Facility contains various standard covenants with which we must comply,
including the following:
1. Consolidated debt to capitalization ratio of not greater than 35%;
2. Minimum consolidated net worth of no less than the sum of (a) $3.7 billion and (b) an amount equal to 50% of the net cash proceeds
received in any equity issuances occurring after January 22, 2016; and
3. Restrictions on our ability to incur debt and liens and to declare or pay dividends, in each case with certain exceptions.
As of December 31, 2017, we had no amounts outstanding under the Credit Facility and were in compliance with all covenants under this
facility.
Interest accrues on outstanding borrowings at the London Interbank Offered Rate (LIBOR) plus a margin or a base rate plus a margin, with the
applicable margin varying based on AHL’s issuer credit rating. The Credit Facility has a commitment fee that is determined by reference to
AHL’s issuer credit rating, and ranges from 0.15% to 0.50% of the unused commitment. As of December 31, 2017, the commitment fee was
equal to 0.225% of the unused commitment.
Senior Notes—In the first quarter of 2018, AHL issued $1 billion of unsecured senior notes due in January 2028. The senior notes have a
4.125% coupon rate, payable semi-annually. The senior notes are callable at any time prior to October 12, 2027 by AHL, at a price equal to the
greater of (1) 100% of the principal and any accrued and unpaid interest and (2) an amount equal to the sum of the present values of remaining
scheduled payments, discounted from the scheduled payment date to the redemption date at the Treasury Rate (as defined in the prospectus
supplement relating to the senior notes, dated January 9, 2018) plus 25 basis points, and any accrued and unpaid interest. Additionally, if our
transaction with Voya Financial Inc. (Voya), as described further in Note 18 – Commitments and Contingencies, does not close, AHL will be
required to redeem the senior notes at 101% of the principal and any accrued and unpaid interest.
11. Common Stock
We have six classes of common stock: Class A, Class B, Class M-1, Class M-2, Class M-3 and Class M-4. The Class M-1, Class M-2, Class M-3
and Class M-4 shares are collectively referred to as Class M shares.
Class A shares collectively represent 55% of the total voting power of the Company. Class B shares collectively represent the remaining 45% of
the total voting power of the Company, and are beneficially owned by shareholders who are members of the Apollo Group, as defined in our
bye-laws. Class B shares can be converted to Class A shares on a one-to-one basis at any time upon notice to us. Class M shares are restricted,
non-voting shares issued under equity incentive plans. Our bye-laws place certain restrictions on Class A shares such that (1) a holder of Class A
shares, including its affiliates, 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 a 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, (2) the total voting power held by members of our management and employees of the Apollo Group is limited to
3% and (3) Class A shares may be deemed non-voting when owned by a shareholder who owns Class B shares, has an equity interest in certain
Apollo entities, or is a member of the Apollo Group.
Share Activities
2017
•
•
•
2016
In the fourth quarter, a total of 21,403,203 Class B shares were converted into Class A shares pursuant to a distribution of common
shares from AP Alternative Assets, L.P. (AAA) to AAA unitholders.
As a result of the lockup releases during the year, 1,260,894 Class B shares were converted into Class A shares.
During the year, we completed two follow-on offerings of our Class A common shares. Shareholders sold 50,255,000 existing Class A
shares through the offerings. We did not sell any shares in the follow-on offerings. A total of 41,719,333 Class B shares were
converted into Class A shares on a one-for-one basis in order to participate in the follow-on offerings.
• We issued 3,098,946 Class A shares during the fourth quarter of 2016 from conversion of Class M-1, M-2, M-3 and M-4 shares and
settlement of Class M-4 RSUs. All conversions were settled in shares net of the conversion price and, as a result, no proceeds were
received from the conversions.
On December 14, 2016, we completed the initial public offering (IPO) of our Class A common shares. Shareholders sold 31,050,000
existing Class A shares through the offering. We did not sell any shares in the IPO. A total of 24,158,146 Class B shares were
converted into Class A shares on a one-for-one basis in order to participate in the IPO.
•
179
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
2015
• We received $1,038 million to settle remaining capital commitments executed on April 4, 2014 in connection with a private placement
offered to accredited investors. As a result, we issued 31,564,339 Class A shares and 8,369,230 Class B shares at $26.00 per share.
• We received commitments and issued an additional 2,315,113 Class A shares at $26.02 per share, resulting in proceeds received of $60
•
million.
In satisfaction of our final obligations under the Transaction Advisory Services Agreement (TASA) earned by Apollo in 2014, we
issued 2,311,853 Class B shares.
As of December 31, 2017, we had 150,000,000 shares of capital stock authorized which remain undesignated.
The table below shows the changes in each class of shares issued and outstanding:
Years ended December 31,
2017
2016
2015
Class A
Beginning balance
Issued shares
Forfeited shares
Repurchased shares
Converted from Class B shares
Ending balance
Class B
Beginning balance
Issued shares
Converted to Class A shares
Ending balance
Class M-1
Beginning balance
Converted to Class A shares
Forfeited shares
Repurchased shares
Ending balance
Class M-2
Beginning balance
Converted to Class A shares
Forfeited shares
Repurchased shares
Ending balance
Class M-3
Beginning balance
Converted to Class A shares
Forfeited shares
Repurchased shares
Ending balance
Class M-4
Beginning balance
Issued shares
Converted to Class A shares
Forfeited shares
Repurchased shares
Ending balance
77,319,381
731,490
(4,660)
(42,937)
64,383,430
142,386,704
50,151,265
3,360,471
(37,188)
(313,313)
24,158,146
77,319,381
111,805,829
135,963,975
—
(64,383,430)
47,422,399
—
(24,158,146)
111,805,829
3,474,205
(85,315)
—
—
3,388,890
1,067,747
(216,644)
—
—
851,103
1,346,300
(240,300)
(14,000)
—
1,092,000
5,397,802
—
(217,020)
(104,567)
(364,472)
4,711,743
5,198,273
(1,155,303)
(270,543)
(298,222)
3,474,205
3,125,869
(1,788,998)
(161,474)
(107,650)
1,067,747
3,110,000
(1,443,700)
(224,000)
(96,000)
1,346,300
5,038,443
990,650
(79,031)
(452,528)
(99,732)
5,397,802
15,752,736
34,498,220
—
(99,691)
—
50,151,265
125,282,892
10,681,083
—
135,963,975
5,198,273
—
—
—
5,198,273
3,125,869
—
—
—
3,125,869
3,350,000
—
(216,000)
(24,000)
3,110,000
—
5,316,751
—
(242,050)
(36,258)
5,038,443
180
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
12. Stock-based Compensation
We adopted share incentive plans in 2009, 2012 and 2014. The 2009 and 2012 share incentive plans were amended and restated in 2014 (2014
Modification), along with the adoption of the 2014 share incentive plan (2014 Plan). In 2016, we modified certain share agreements (2016
Modification) and adopted the 2016 share incentive plan (2016 Plan). With the adoption of the 2016 Plan, the 2009, 2012 and 2014 share
incentive plans were frozen and no additional awards may be granted under those plans.
The purpose of our share incentive plans is to provide an incentive to achieve long-term company goals and align the interests of our employees,
our directors and AAM employees with those of our shareholders. See Note 17 – Related Parties regarding our relationship with AAM. Under
the share incentive plans, we may issue nonqualified stock options, incentive stock options, rights to purchase shares, restricted shares, RSUs
and other awards which may be settled in, or based upon, our common shares. The aggregate number of shares authorized for issuance under the
2016 Plan is 3,500,000 Class A shares. Shares issued upon settlement of an award are newly issued shares.
Through the share incentive plans, we have issued the following categories of stock-based compensation: long-term incentive plan (LTIP) awards
and Class M awards.
LTIP awards—We issued awards consisting of time and performance-based RSUs and time-based stock options for Class A shares. RSUs
represent a contractual right to receive Class A shares and may be settled in shares or cash at our election. Stock options represent a right to
purchase Class A shares at a specified exercise price.
Vesting – Time-based RSUs and stock options vest in one-third increments on the first through third anniversaries of the vesting inception date.
The performance-based RSUs have three-year cliff vesting based on meeting company-specific performance thresholds.
Contractual terms – Stock options expire on the tenth anniversary of the date of grant.
Stock Options – A rollforward of activity for the year ended December 31, 2017 for stock options is as follows:
(In millions, except share and per share data)
Outstanding at January 1, 2017
Granted
Exercised
Forfeited
Outstanding at December 31, 2017
Vested and expected to vest1 at December 31, 2017
Exercisable at December 31, 2017
Options
Weighted Average
Exercise Price
Aggregate Intrinsic
Value
470,644
$
322,981
(15,721)
(19,496)
758,408
758,408
141,149
$
$
$
33.95
51.31
33.95
39.83
41.19
41.19
33.95
$
$
8
3
1 Expected to vest are unvested options for which the requisite service period has not been rendered but that are expected to vest based on the achievement of a
performance condition.
The weighted average grant date fair value of stock options granted during the years ended December 31, 2017 and 2016 was $9.44 and $5.83,
respectively. The total intrinsic value of stock options exercised during the year ended December 31, 2017 was $1 million. No options were
exercised or exercisable during the year ended December 31, 2016.
Valuation Assumptions – We determine the fair value at grant date for stock options using the Black-Scholes option pricing model. The
following represents the assumptions used for the fair value at grant date:
Assumptions used
Risk-free interest rate
Expected dividend yield
Expected volatility
Expected term (in years)
Years ended December 31,
2017
1.5%
—%
25.0% – 28.4%
2.34 – 2.81
2016
1.0%
—%
25.0%
2.63
The risk-free interest rate is derived from U.S. Constant Maturity Treasury yield at the valuation date, with maturity corresponding to weighted-
average expected term. The expected dividend yield is based on our historical and expected dividend payments, which have been zero to date.
Absent sufficient historical experience of our shares being traded on a public market, we have estimated volatility of our share price based on
the published historical volatilities of comparable publicly-traded companies over a period consistent with the expected life of the award being
valued. The expected term represents the weighted average period of time that awards granted are expected to be outstanding as determined at
the grant date of the award.
181
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
RSUs – The following represents the activity of nonvested LTIP RSUs for the year ended December 31, 2017:
Nonvested at January 1, 2017
Granted
Vested
Forfeited
Nonvested at December 31, 2017
RSUs
Weighted Average Grant
Date Fair Value
328,127
$
245,010
(40,940)
(25,221)
506,976
$
33.95
51.28
33.95
39.88
42.03
The fair value of the award is determined based on the fair value of our Class A shares on the grant date. The weighted average grant date fair
value of LTIP RSUs granted during the year ended December 31, 2016 was $33.95. During the year ended December 31, 2017, the total intrinsic
value of LTIP RSUs converted was $2 million. As of December 31, 2016, no LTIP RSUs were vested.
Class M awards—We have issued Class M shares and RSUs concurrently with the timing of capital raises, in order to align management
incentives with shareholder investments.
Class M shares function similar to options in that they are exchangeable into Class A shares upon payment of a conversion price and other
conditions being met. The settlement value of the RSUs is based upon the value of the Class A shares at the time of settlement after deducting
the conversion price of the RSUs. RSUs may be settled either in cash or Class A shares at our election. A portion of the Class M shares and
RSUs is subject to time vesting conditions (Tranche 1), and the remainder is subject to certain performance-based vesting conditions
(Tranche 2). Vesting conditions are further described below.
The nature and terms of the Class M shares are generally consistent across each class. In October 2015, we issued Class M-4 shares with a
different Tranche 2 performance condition than the original Class M-4 award. These shares are referred to as Class M-4 Prime. This vesting
condition and any other significant differences between classes are separately identified in the following discussion.
Class M share vesting – Tranche 1 shares generally vest in 20% increments on the first through fifth anniversaries of the earlier of the date of
grant or vesting inception date. Tranche 1 shares also automatically vest upon the sale of the Company or change in control, prior to the
participant’s termination or within six months following a qualifying termination. Unvested Tranche 1 shares are forfeited upon a participant’s
termination.
Tranche 2 awards vest if certain performance hurdles are met, described as follows:
•
•
Class M-4 (excluding M-4 Prime) – The vesting performance hurdle for Class M-4 shares is based on the rate of return and realized
cash received by certain holders of our shares (Relevant Investors), as defined in the incentive plan, upon sale of their shares prior to
or during an IPO or within a 15 month period thereafter. Vesting may also occur if the performance hurdles are met based on deemed
sales by Relevant Investors on the dates 7.5, 12 and 15 months after an IPO, and monthly thereafter, through the contractual term, at a
price equal to the volume weighted average closing trading price during the 90 day period prior to such date. Based on the results of
the performance hurdle calculations, the vesting percentages of the Tranche 2 awards can range from 0% to 100%. Upon a
participant’s qualifying termination, unvested Tranche 2 awards remain outstanding and eligible to vest for a period of 18 months
following the later of the IPO date or date of a qualifying termination. Any unvested Tranche 2 shares remaining at the end of this 18
month period are forfeited. See 2016 Modification below for further information on Tranche 2 awards vesting for M-1, M-2 and M-3
award agreements.
Class M-4 Prime – The vesting performance hurdle is based on the attainment of specified Class A share prices following an IPO.
Vesting will also occur upon a sale of the Company or change in control in which Class A Shares are valued at the respective hurdle
share price. Any unvested Tranche 2 shares remaining as of the tenth anniversary of the grant date are forfeited.
Contractual Terms – Unvested Class M-4 shares will be forfeited on March 8, 2022.
Although the Class M shares function similar to options, they are equity shares, and have dividend rights upon satisfaction of certain conditions
and no expiration date once vested. Prior to vesting, if Class M shares are eligible for dividends, any dividends paid would accrue on the
unvested M shares; however, if the M share is forfeited, the accrued dividend would also be forfeited.
Conversion to Class A shares – Vested Class M shares are eligible for conversion to Class A shares subject to payment of the conversion price
for each Class M share converted. A holder of vested Class M shares may elect to exchange vested shares for an equivalent number of Class A
shares upon payment, in cash or shares, of the conversion price less the amount of any dividends paid by the Company on Class A shares
subsequent to the granting of Class M shares. Following a conversion to Class A shares, shares can be sold subject to contractual transfer or
legal restrictions, such as lockups, blackout periods or affiliate sale volume caps.
182
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
2016 Modification – On September 30, 2016, we modified Class M-1, M-2 and M-3 share agreements to vest all Tranche 2 performance-based
shares. The compensation committee approved the modification given that vesting of the shares in the near future was probable. We also
amended the conversion option, which previously allowed conversion of vested shares only subsequent to an IPO. Under the modified
conversion terms, individuals with certain limited exceptions were able elect up to three conversion options including conversion at a specified
date prior to an IPO, on the date of an IPO, or ratably each month for six months after an IPO. The modifications impacted 27 individuals.
As a result of the modifications, we recorded an $83 million increase to additional paid-in capital, due to the reclassification of the Tranche 2
shares from liability awards to equity awards. We also recorded a $42 million charge to stock-based compensation expense and additional paid-
in capital for the vesting of Tranche 2 shares, primarily related to the acceleration of previously unrecognized compensation expense.
Valuation Assumptions for Class M Shares—The fair value of the Class M shares is determined using the Black-Scholes option pricing
model, with application of a Monte-Carlo simulation to determine the value of the Tranche 2 Class M shares. No Tranche 2 Class M shares were
granted during the year ended December 31, 2017. Grant date assumptions used for valuation of Class M share awards for the years ended
December 31, 2016 and 2015 were:
Assumptions used
Athene Class A share value
Risk-free interest rate
Expected dividend yield
Expected volatility
Expected term (in years)
Years ended December 31,
2016
$32.90
2015
$34.23
0.5% – 1.8%
0.9% – 1.1%
—%
30.0%
3.00
—%
25.9%
2.42
The fair value of the Class A shares subsequent to our IPO is determined based on the publicly traded closing price on the New York Stock
Exchange. During 2016 and 2015, prior to our IPO, the fair value was determined based on a GAAP book value multiple approach. Under this
approach, we used a comparable peer set of public companies and their share price to book value ratio, less applicable discounts for lack of
marketability of AHL, in order to determine the AHL Class A share price.
The expected term represents the weighted average period of time that awards granted are expected to be outstanding. The expected term is
determined from the modification date, the grant date or the period end date, depending on the accounting treatment for each award.
In addition, the Tranche 2 Class M share assumptions include an estimate of the probability of the vesting conditions being met. This assumption
is developed by using a Monte-Carlo simulation to generate the possible future value of the Company’s equity at a liquidity event to determine
the percentage of Tranche 2 Class M shares that vest for each simulated path. The fair value of the Tranche 2 Class M shares is then estimated
by averaging the value for all simulated paths and discounting the results at the risk-free interest rate to the valuation date.
The basis for determining the remaining assumptions is consistent with those discussed for LTIP awards above.
Award activity for Class M Shares—A rollforward of award activity for the year ended December 31, 2017 of the Class M shares is as
follows:
(In millions, except share and per
share data)
Class M
Shares
Tranche 1
Weighted
Average
Conversion
Price
Aggregate
Intrinsic
Value
Class M
Shares
Tranche 2
Weighted
Average
Conversion
Price
Aggregate
Intrinsic
Value
Class M
Shares
Total
Weighted
Average
Conversion
Price
Outstanding at January 1, 2017
4,468,585
$
Converted
Forfeited
Repurchased
Outstanding at December 31, 2017
Vested and expected to vest1 at
December 31, 2017
Convertible at December 31, 2017
(447,123)
(88,086)
(51,272)
3,882,104
3,882,104
2,791,394
$
$
$
18.27
15.14
25.66
30.80
18.30
6,347,832
$
(249,065)
(25,534)
(246,386)
5,826,847
$
$
$
19.52
14.69
33.13
30.90
19.19
10,816,417
$
(696,188)
(113,620)
(297,658)
9,708,951
$
19.00
14.98
27.34
30.88
18.83
19.19
16.07
$
$
190
156
18.30
14.33
$
$
130
104
5,826,847
4,385,045
1 Expected to vest are unvested shares for which the requisite service period has not been rendered but that are expected to vest based on the achievement of a
performance condition.
183
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
The following represents the activity of nonvested Class M shares for the year ended December 31, 2017:
Tranche 1
Tranche 2
Total
Class M Shares
Weighted
Average Grant
Date Fair Value
Class M Shares
Weighted
Average Grant
Date Fair Value
Class M Shares
Weighted
Average Grant
Date Fair Value
Nonvested at January 1, 2017
Vested
Forfeited
1,837,043
$
(658,247)
(88,086)
Nonvested at December 31, 2017
1,090,710
$
8.67
10.31
5.12
7.97
3,040,135
$
(1,572,799)
(25,534)
1,441,802
$
11.36
9.15
8.89
13.81
4,877,178
$
(2,231,046)
(113,620)
2,532,512
$
10.34
9.49
5.97
11.29
The weighted average grant date fair value of Class M share awards granted during the years ended December 31, 2016 and 2015 was $10.43
and $8.66, respectively.
The total fair value of vested Tranche 1 Class M shares was $16 million, $92 million and $98 million during the years ended December 31,
2017, 2016 and 2015, respectively. The total fair value of vested Tranche 2 Class M shares was $40 million, $122 million and $28 million
during the years ended December 31, 2017, 2016 and 2015, respectively.
The total intrinsic value of M shares converted during the years ended December 31, 2017 and 2016 was $29 million and $117 million,
respectively. No shares were converted or convertible during the year ended December 31, 2015.
Employee Stock Purchase Plan—Eligible employees may participate in our 2017 Employee Stock Purchase Plan (ESPP), which provides the
opportunity to purchase our Class A shares at a discount from the market price through payroll deductions. Pursuant to the ESPP, employees are
permitted to purchase shares at a price equal to 85% of the fair value of such shares as determined by reference to the closing price of our
Class A shares on the New York Stock Exchange on the last day of the relevant purchase period. Under the ESPP we may make available for
sale up to 3,800,000 Class A shares over the term of the ESPP, which may extend for up to 10 years. During the year ended December 31, 2017,
we sold 13,266 shares under the ESPP for a weighted average price of $43.95. We received proceeds of $1 million related to the sale of shares
under the ESPP during the year ended December 31, 2017.
Compensation expense—Compensation expense is recognized based on the number of awards expected to vest, which represents the awards
granted less actual forfeitures when they occur, if any.
Class M shares with Tranche 1 vesting requirements are accounted for as equity awards and related compensation expense is recognized ratably
over the vesting period. The expense for Tranche 1 shares issued to employees is calculated based on grant date fair value multiplied by the
number of shares awarded. The expense for Tranche 1 shares issued to non-employees (i.e. AAM participants) is recognized initially at the grant
date fair value multiplied by the number of shares. However, the fair value of the awards are revalued each reporting period through completion
of counterparty performance to coincide with the fair value of the services provided by the non-employees. The result of the revaluation is
recognized in the period in which the revaluation occurs.
Employee and non-employee Tranche 2 shares, excluding M-4 Prime, are accounted for as liability awards. Compensation expense for all
participants is remeasured each reporting period through settlement at the fair value of the awards, factoring in the probability of achieving the
vesting targets described above. Upon vesting of Tranche 2 shares, the liability is reclassified to equity because the vesting condition which
resulted in liability classification is no longer present, and is measured at fair value on the date of reclassification.
Tranche 2 M-4 Prime shares are accounted for as equity awards with expense recognition having commenced upon completion of our IPO.
Compensation expense is calculated based on the grant date fair value of such awards multiplied by the number of shares awarded.
LTIP awards are accounted for as equity awards. Expense for time-based RSUs and options is recognized ratably over the vesting period based
on the number of shares expected to vest. Expense for performance-based RSUs is further adjusted by the performance factor most likely to be
achieved, as estimated by management at the end of the performance period.
Components of stock compensation expense recorded on the consolidated statements of income are as follows:
(In millions)
Class M – Tranche 1
Class M – Tranche 2
LTIP and other equity awards
Stock-based compensation expense
Years ended December 31,
2017
2016
2015
$
$
8
21
16
45
$
$
11
69
4
84
$
$
12
50
5
67
184
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
As of December 31, 2017, the Class M shares had unrecognized compensation cost of $9 million for Tranche 1 and $8 million for Tranche 2.
The cost is expected to be recognized over a weighted-average period of 1.3 years and 0.8 years, respectively. Unrecognized compensation cost
of $15 million for LTIP awards is expected to be recognized over a weighted-average period of 0.7 years.
13. Earnings Per Share
The following represents our basic and diluted EPS calculations:
(In millions, except share and per share data)
Class A
Class B
Class M-1
Class M-2
Class M-3
Class M-4
Year ended December 31, 2017
Net income available to AHL shareholders – basic
Effect of stock compensation plans on allocated net
income
Net income available to AHL shareholders – diluted
Basic weighted average shares outstanding
Dilutive effect of stock compensation plans
Diluted weighted average shares outstanding
Earnings per share1
Basic
Diluted
1 Calculated using whole figures.
$
$
$
$
798
$
605
$
25
$
5
$
5
$
20
—
818
$
605
$
—
25
$
—
5
$
—
5
$
10
—
10
107,682,569
81,596,697
3,409,692
3,323,072
—
—
111,005,641
81,596,697
3,409,692
664,326
250,426
914,752
684,021
546,943
1,230,964
1,296,871
1,611,526
2,908,397
7.41
7.37
$
$
7.41
7.41
$
$
7.41
7.41
$
$
7.41
5.38
$
$
7.41
4.12
$
$
7.41
3.31
(In millions, except share and per share data)
Net income available to AHL shareholders – basic
Effect of stock compensation plans on allocated net income
Net income available to AHL shareholders – diluted
Basic weighted average shares outstanding
Dilutive effect of stock compensation plans
Diluted weighted average shares outstanding
Earnings per share1
Basic
Diluted
1 Calculated using whole figures.
Years ended December 31,
Class A
2016
Class B
2015
Class M-1
Classes A and B
214
1
215
$
$
553
—
553
$
$
1
—
1
$
$
562
—
562
52,086,945
134,445,840
218,324
175,091,802
1,443,531
—
53,530,476
134,445,840
4,246,074
4,464,398
86,846
175,178,648
4.11
4.02
$
$
4.11
4.11
$
$
4.11
0.20
$
$
3.21
3.21
$
$
$
$
185
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
We use the two-class method for allocating net income available to AHL shareholders to each class of our common stock. Our Class M shares
do not become eligible to participate in dividends until a return of investment (ROI) condition has been met for each class. Once eligible, each
class of our common stock has equal dividend rights. Prior to the fourth quarter of 2016, the ROI condition had not been met for any of our
Class M shares and, as a result, no earnings were attributable to those classes. In conjunction with our IPO in the fourth quarter of 2016, the ROI
condition for Class M-1 was met. The ROI conditions were subsequently met for Class M-2 on March 28, 2017, and for Class M-3 and Class
M-4 on April 20, 2017. For purposes of calculating basic weighted average shares outstanding and the allocation of basic income, shares are
deemed to be participating in earnings for only the portion of the period after the condition is met. For purposes of calculating diluted weighted
average shares outstanding, shares are deemed dilutive as of the beginning of the period.
Dilutive shares are calculated using the treasury stock method. For Class A common shares, this method takes into account shares that can be
settled into Class A common shares, net of a conversion price. The diluted EPS calculations for Class A shares excluded the following shares,
RSUs and options:
Antidilutive shares, RSUs and options excluded from diluted EPS calculation
50,886,246
113,497,613
Shares, RSUs and options excluded from diluted EPS calculation as a performance condition had not been met
1,435,192
2,533,768
—
—
Shares, RSUs and options excluded from diluted EPS calculation as issuance restrictions had not been satisfied
as of the end of the year
Total shares, RSUs and options excluded from diluted EPS calculation
Note: Shares, RSUs and options are as of year end.
—
—
16,653,624
52,321,438
116,031,381
16,653,624
Years ended December 31,
2017
2016
2015
14. Accumulated Other Comprehensive Income
The following is a detail of AOCI:
(In millions)
AFS securities
DAC, DSI, VOBA, future policy benefits and dividends payable to policyholders adjustments on AFS securities
Noncredit component of OTTI losses on AFS securities
Hedging instruments
Pension adjustments
Foreign currency translation adjustments
Accumulated other comprehensive income, before taxes
Deferred income tax liability
Accumulated other comprehensive income
December 31,
2017
2016
$
2,577
$
(744)
(13)
(95)
(5)
8
1,728
(313)
$
1,415
$
972
(408)
(17)
10
(4)
(12)
541
(174)
367
186
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Changes in AOCI are presented below:
(In millions)
Unrealized investment gains (losses) on AFS securities
Unrealized investment gains (losses) on AFS securities
Change in DAC, DSI, VOBA, future policy benefits and dividends payable to policyholders adjustment
Less: Reclassification adjustment for gains (losses) realized in net income1
Less: Income tax expense (benefit)
Net unrealized investment gains (losses) on AFS securities
Noncredit component of OTTI losses on AFS securities
Noncredit component of OTTI losses on AFS securities
Less: Reclassification adjustment for losses realized in net income1
Less: Income tax expense
Net noncredit component of OTTI losses on AFS securities
Unrealized gains (losses) on hedging instruments
Unrealized gains (losses) on hedging instruments
Less: Income tax expense (benefit)
Net unrealized gains (losses) on hedging instruments
Pension adjustments
Pension adjustments
Less: Income tax expense (benefit)
Net pension adjustments
Foreign currency translation adjustments
Change in AOCI from comprehensive income
Reclassification of taxes2
Change in AOCI
Years ended December 31,
2017
2016
2015
$
1,680
$
1,397
$
(1,661)
(336)
75
347
922
(5)
(9)
1
3
(105)
(22)
(83)
(1)
—
(1)
20
861
187
(499)
20
261
617
(9)
(7)
—
(2)
(5)
(2)
(3)
—
—
—
(8)
604
—
$
1,048
$
604
$
1 Recognized in investment related gains (losses) on the consolidated statements of income.
2 See discussion of ASU 2018-02 adoption in Note 1 – Business, Basis of Presentation and Significant Accounting Policies.
15. Income Taxes
Income tax expense consists of the following:
(In millions)
Current
Deferred
Income tax expense (benefit)
Years ended December 31,
2017
2016
2015
$
$
5
82
87
$
$
(33) $
(19)
(52) $
Income tax expense was calculated based on the following components of income before income taxes:
(In millions)
Income before income taxes – Bermuda
Income before income taxes – Germany
Income before income taxes – U.S.
Income before income taxes
Years ended December 31,
2017
2016
2015
1,237
$
565
$
25
273
1,535
$
16
135
716
$
$
$
187
419
72
(428)
(886)
(13)
(3)
(4)
(6)
11
4
7
12
4
8
(4)
(881)
—
(881)
(19)
31
12
508
8
74
590
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
The expected tax provision computed on pre-tax income at the weighted average tax rate has been calculated as the sum of the pre-tax income in
each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate. Statutory tax rates of 0%, 31% and 35% have been used for
Bermuda, Germany and the United States, respectively, for the years ended December 31, 2017, 2016 and 2015. A reconciliation of the
difference between the expected tax provision at the weighted average tax rate and income tax expense (benefit) is as follows:
(In millions)
Years ended December 31,
2017
2016
2015
Expected tax provision computed on pre-tax income at weighted average income tax rate
$
104
$
52
$
Increase (decrease) in income taxes resulting from:
Deferred tax valuation allowance
Prior year true-up
Corporate owned life insurance
Stock compensation expense
Change in statutory tax rates
State taxes and other
Income tax expense (benefit)
Effective tax rate
(5)
(6)
(8)
5
(7)
4
87
6%
(116)
8
(7)
5
—
6
$
(52)
$
(7)%
$
28
(6)
2
(7)
—
—
(5)
12
2%
The Tax Act was enacted on December 22, 2017 and made key changes to the U.S. tax law, including the reduction of the U.S. statutory tax rate
from 35% to 21%. As such, the December 31, 2017 deferred tax balances were remeasured to reflect the reduction in rate and the resulting
decrease to the net deferred tax liability is included in change in statutory tax rates of the reconciliation above.
Total income taxes were as follows:
(In millions)
Income tax expense (benefit)
Income tax expense (benefit) from OCI
Total income taxes
Years ended December 31,
2017
2016
2015
$
$
87
326
413
$
$
(52) $
259
207
$
12
(424)
(412)
Current income tax recoverable and deferred tax assets are included in other assets on the consolidated balance sheets, and current income tax
payable and deferred tax liabilities are included in other liabilities on the consolidated balance sheets. Current and deferred income tax assets
and liabilities were as follows:
(In millions)
Current income tax recoverable
Current income tax payable
Net current income tax recoverable
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets (liabilities)
December 31,
2017
2016
$
$
$
29
9
20
3
41
(38) $
107
1
106
372
4
368
$
$
$
$
188
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Deferred income tax assets and liabilities consisted of the following:
(In millions)
Deferred tax assets
Insurance liabilities
Net operating and capital loss carryforwards
Tax credits
VOBA
Fixed assets
Employee benefits
Other
Total deferred tax assets
Valuation allowance2
Deferred tax assets, after valuation allowance
Deferred tax liabilities
Investments, including derivatives
Net unrealized gains on AFS
VOBA
DAC
Other
Total deferred tax liabilities
Net deferred tax assets (liabilities)
December 31,
20171
2016
$
1,322
$
151
6
78
26
36
10
1,629
(64)
1,565
781
317
328
174
3
$
1,603
(38) $
1,483
221
18
69
—
52
27
1,870
(72)
1,798
668
178
346
232
6
1,430
368
1 Deferred tax balances were remeasured as of December 22, 2017 using the reduced U.S. statutory income tax rate as a result of the Tax Act.
2 A portion of the valuation allowance reduction was recorded in other comprehensive income.
As of December 31, 2017, we have gross deferred tax assets associated with U.S. federal and state net operating losses of $721 million, which
will begin to expire in 2024.
The valuation allowance consists of the following:
(In millions)
U.S. federal and state net operating losses and other deferred tax assets
German other deferred tax assets
Total valuation allowance
December 31,
2017
2016
$
$
14
50
64
$
$
22
50
72
During the third quarter of 2016, we identified a tax plan that, when implemented, will allow us to use a significant portion of the U.S. non-life
insurance companies’ net operating losses and other deductible temporary differences. As a result, we released the corresponding deferred tax
valuation allowance of $102 million, as it is more likely than not that these attributes will be realized.
AHL and its Bermuda subsidiaries file protective U.S. income tax returns and its U.S. subsidiaries file income tax returns with the U.S. federal
government and various U.S. state governments. AADE is not subject to U.S. federal and state examinations by tax authorities for years prior to
2007, while Athene Annuity & Life Assurance Company of New York (AANY) and Athene Life Insurance Company (ALIC) are not subject to
examinations for years prior to 2011 and 2014, respectively. The Internal Revenue Service is currently auditing the 2013 consolidated tax return
filed by Athene USA Corporation, and recently initiated a limited scope audit of the 2015 consolidated tax return filed by AADE. No material
adverse proposed adjustments have been issued with respect to either exam. See discussion of ongoing tax examinations relating to Aviva USA
and subsidiaries in Note 18 – Commitments and Contingencies.
Under current Bermuda law, we are not required to pay any taxes in Bermuda on either income or capital gains. We have received an
undertaking from the Bermuda Minister of Finance that, in the event of any such taxes being imposed, the Company will be exempted from
taxation until the year 2035.
189
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Withholding taxes have not been provided on undistributed earnings of AHL’s U.S. and German subsidiaries as of December 31, 2017 or 2016.
Although withholding taxes may apply in the event a dividend is paid by AHL’s U.S. or German subsidiaries, we have not accrued withholding
taxes as we do not intend to remit these earnings. The cumulative amount subject to withholding tax, if distributed, as well as the determination
of the associated tax liability, is not practicable to compute; however, it may be material to the Company’s financial position and results of
operations. Any dividends remitted to AHL from ALRe are not subject to withholding tax.
16. Statutory Requirements
AHL’s insurance and reinsurance subsidiaries are subject to insurance laws and regulations in the jurisdictions in which they operate including
Bermuda, all U.S. states, the District of Columbia and Germany. Certain regulations include restrictions that limit the dividends or other
distributions, such as loans or cash advances, available to shareholders without prior approval of the insurance regulatory authorities. The
differences between financial statements prepared for insurance regulatory authorities and GAAP financial statements vary by jurisdiction.
Bermuda statutory requirements—ALRe is licensed by the Bermuda Monetary Authority (BMA) as a long term insurer and is subject to the
Insurance Act 1978, as amended (Bermuda Insurance Act) and regulations promulgated thereunder. Effective January 1, 2016, the BMA
implemented the Economic Balance Sheet (EBS) framework into the Bermuda Solvency Capital Requirement (BSCR), which was granted
equivalency to the European Union’s Directive (2009/138/EC) (Solvency II).
Under the Bermuda Insurance Act, ALRe is required to maintain minimum statutory capital and surplus to meet the minimum margin of
solvency (MMS) and the Enhanced Capital Requirement (ECR). The MMS is equal to the greater of $8 million or 2% of the first $500 million
of statutory assets plus 1.5% of statutory assets above $500 million. The ECR is calculated based on a risk-based capital model where risk factor
charges are applied to the EBS. As of December 31, 2017, the MMS and the ECR were $924 million and $2,181 million, respectively, and ALRe
was in excess of these required minimums.
Under the EBS framework, statutory financial statements are generally equivalent to GAAP financial statements, with the exception of
permitted practices granted by the BMA. ALRe has permission in the statutory financial statements to use amortized cost instead of fair value as
the basis for certain investments. Additionally, ALRe uses U.S. statutory reserving principles for the calculation of insurance reserves instead of
GAAP, subject to the reserves being proved adequate based on cash flow testing. The impact to the statutory financial statements of these
permitted practices is a decrease of $187 million to capital and surplus as of December 31, 2017 and a decrease of $1,281 million to statutory
net income for the year ended December 31, 2017.
Under the Bermuda Insurance Act, ALRe is prohibited from paying a dividend in an amount exceeding 25% of the prior year’s statutory capital
and surplus, unless at least two members of ALRe’s board of directors and its principal representative in Bermuda sign and submit to the BMA
an affidavit attesting that a dividend in excess of this amount would not cause ALRe to fail to meet its relevant margins. In certain instances,
ALRe would also be required to provide prior notice to the BMA in advance of the payment of dividends. In the event that such an affidavit is
submitted to the BMA in accordance with the Bermuda Insurance Act, and further subject to ALRe meeting its MMS and ECR, ALRe is
permitted to distribute up to the sum of 100% of statutory surplus and an amount less than 15% of statutory capital. Distributions in excess of
this amount require the approval of the BMA. As of December 31, 2017 and 2016, the maximum distribution ALRe was permitted to pay AHL
without the need for prior approval was $5,022 million and $2,479 million, respectively.
Germany statutory requirements—Our primary German insurance entity, Athene Lebensversicherung AG (ALV), is regulated by the Federal
Financial Supervisory Authority of Germany as a private insurance undertaking and is subject to the Insurance Supervision Act and regulations
promulgated thereunder. Effective January 1, 2016, ALV became subject to Solvency II minimum capital requirements (MCR) and solvency
capital requirements (SCR) interpreted by the relevant regulatory authorities. ALV is obliged to meet these requirements in order to be able to
fulfill, subject to a certain confidence level of 99.5% for SCR, or 85% for MCR, over a one-year period, all obligations arising from existing
business, as well as the new business expected to be written over the following 12 months. Failure to maintain adequate capital levels may result
in regulatory action. As of December 31, 2017, statutory capital and surplus as calculated under Solvency II was $714 million, while MCR and
SCR were $125 million and $278 million, respectively.
ALV is restricted as to the payment of dividends pursuant to calculations, which are based upon the analysis of current euro swap rates against
existing policyholder guarantees. As of December 31, 2017, ALV did not exceed the relevant threshold and no amounts were available for
distribution.
190
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
U.S. statutory requirements—AHL’s regulated U.S. subsidiaries and the corresponding insurance regulatory authorities are as follows:
Subsidiary
AADE
ALIC
AANY
ALICNY
AAIA
Structured Annuity Reinsurance Company (STAR)
Regulatory Authority
Delaware Department of Insurance
Delaware Department of Insurance
New York Department of Financial Services
New York Department of Financial Services
Iowa Insurance Division
Iowa Insurance Division
Athene Re USA IV
State of Vermont Department of Financial Regulation
Each entity’s statutory statements are presented on the basis of accounting practices determined by the respective regulatory authority. The
regulatory authority recognizes only statutory accounting practices prescribed or permitted by the corresponding state for determining and
reporting the financial condition and results of operations of an insurance company and for determining its solvency under insurance law.
The maximum dividend these subsidiaries can pay to shareholders, without prior approval of the respective state insurance department, is
subject to restrictions relating to statutory surplus or net gain from operations. The maximum dividend payment over a twelve-month period may
not, without prior approval, be paid from a source other than earned surplus and may not exceed the greater of (1) the prior year’s net gain from
operations or (2) 10% of policyholders’ surplus. Based on these restrictions, the maximum dividend AADE could pay to Athene USA, and
ultimately to AHL’s shareholders, absent regulatory approval was $135 million and $127 million as of December 31, 2017 and 2016,
respectively. Other requirements limit the amount that could be withdrawn from AADE and the maximum AADE could dividend while staying
in compliance with these state regulations, which was $103 million and $80 million as of December 31, 2017 and 2016, respectively. Any
dividends from AHL’s other U.S. statutory entities in excess of the amounts allowed for AADE would not be able to be remitted to AHL without
regulatory approval from the Delaware Department of Insurance. Additionally, we have agreed with the Iowa Insurance Division not to cause
AAIA to pay dividends until August 15, 2018; therefore, we currently consider AAIA’s dividend capacity as zero.
As of December 31, 2017, AHL’s U.S. subsidiaries’ solvency, liquidity and risk-based capital amounts were significantly in excess of the
minimum levels required.
In some instances, the states of domicile of our U.S. subsidiaries have adopted prescribed accounting practices that differ from the required
accounting outlined in National Association of Insurance Commissioners (NAIC) Statutory Accounting Principles (SAP). These subsidiaries
also have certain accounting practices permitted by the states of domicile that differ from those found in NAIC SAP. These prescribed and
permitted practices are described as follows:
AAIA – Among the products issued by AAIA are indexed universal life insurance and fixed indexed annuities. These products allow a portion of
the premium to earn interest based on certain indices, primarily the S&P 500. We purchase call options, futures and variance swaps to hedge the
growth in interest credited to the customer as a direct result of increases in the related index. The Iowa Insurance Division allows an insurer to
elect (1) to use an amortized cost method to account for certain derivative instruments, such as call options, purchased to hedge the growth in
interest credited to the customer on indexed insurance products and (2) to use an indexed annuity reserve calculation methodology under which
call options associated with the current index interest crediting term are valued at zero. AAIA has elected to apply this option to its over-the-
counter call options and reserve liabilities. As a result, AAIA’s statutory surplus decreased by $66 million and $17 million as of December 31,
2017 and 2016, respectively.
Athene Re USA IV – AAIA has ceded the AmerUs Closed Block to Athene Re USA IV on a 100% funds withheld basis. A permitted practice in
the State of Vermont allows Athene Re USA IV to include as admitted assets the face amount of all issued and outstanding letters of credit used
to fund its reinsurance obligations to AAIA in its statutory financial statements. If Athene Re USA IV had not followed this permitted practice,
then it would not have exceeded authorized control level risk based capital requirements. As of December 31, 2017 and 2016, the face amount of
the letters of credit was $153 million.
Statutory reinsurance agreement – We have an agreement with Hannover Life Reassurance Company of America, which is treated as
reinsurance under statutory accounting practices and as a financing arrangement under GAAP. The statutory surplus benefit under this
agreement is eliminated under GAAP and the associated charges are recorded as risk charges and included in policy and other operating
expenses on the consolidated statements of income. The transaction became effective October 1, 2016 and is a coinsurance agreement for
statutory purposes covering 80% of the GLWB rider on 2016, 2017 and 2018 sales of certain fixed indexed annuity products. The reserve credit
recorded on a statutory basis was $200 million and $91 million as of December 31, 2017 and 2016, respectively.
191
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Statutory capital and surplus and net income (loss)—The following table presents, for each of our insurance subsidiaries, the statutory capital
and surplus and the statutory net income (loss), based on the most recently filed statutory financial statements filed with insurance regulators:
Statutory capital & surplus
December 31,
Statutory net income (loss)
Years ended December 31,
2017
2016
2017
2016
2015
$
6,972
$
1,348
6,124
$
1,272
80
268
76
1,164
90
25
79
231
78
1,113
80
50
828
$
460
$
24
1
29
6
239
3
(3)
71
1
1
10
100
17
7
461
68
1
8
14
597
4
1
(In millions)
ALRe
AADE
ALIC
AANY
ALICNY
AAIA
STAR
Athene Re USA IV
17. Related Parties
Athene Asset Management
Investment related expenses – Substantially all of our investments, with the exception of the investments of ADKG, are managed by AAM, a
subsidiary of AGM. AAM provides direct investment management, asset allocation, mergers and acquisition asset diligence and certain
operational support services for our investment portfolio, including investment compliance, tax, legal and risk management support. As of
December 31, 2017, AAM directly managed $62,343 million of our investment portfolio assets, of which 90% are designated one or two (the
two highest designations) by the NAIC.
For the services it renders, AAM earns a fee on all assets managed in accounts owned by or related to us, including sub-advised assets, but
excluding assets of ADKG and certain other limited exceptions. Additionally, AAM recharges the sub-advisory fees it incurs with respect to our
sub-advised assets to us. Historically, AAM generally earned an annual fee of 0.40% of assets under management. In the second quarter of 2017,
following shareholder approval of an amendment to our bye-laws, we entered into the Fifth Amended and Restated Fee Agreement (Revised Fee
Agreement), retroactive to January 1, 2017. The Revised Fee Agreement amended certain fee arrangements we previously had in place with
AAM to provide for, among other things, an annual fee of 0.30% (reduced from 0.40%) on all assets that Apollo manages in accounts owned by
us in the U.S. and Bermuda or in accounts supporting reinsurance ceded to our U.S. and Bermuda subsidiaries by third-party insurers (North
American Accounts) in excess of $65,846 million (the level of assets in the North American Accounts as of December 31, 2016). The fee to be
paid by us to AAM on the first $65,846 million of assets in the North American Accounts remains 0.40% per year, subject to certain discounts
and exceptions.
For certain assets which require specialized sourcing and underwriting capabilities, AAM has chosen to mandate sub-advisors rather than
building out in-house capabilities. AAM has entered into Master Sub-Advisory Agreements (MSAAs) with certain Apollo affiliates to sub-
advise AAM with respect to a portion of our assets, with the fees recharged to us, in addition to the gross fee paid to AAM as described above.
The MSAAs cover services rendered by Apollo-affiliated sub-advisors relating to the following investments:
(In millions, except for percentages)
Fixed maturity securities
U.S. state, municipal and political subdivisions
Foreign governments
Corporate
CLO
ABS
CMBS
Mortgage loans
Investment funds
Trading securities
Funds withheld at interest
Other investments
December 31,
2017
2016
$
— $
152
2,934
5,166
681
872
2,232
26
121
1,737
75
Total assets sub-advised by Apollo affiliates
Percent of assets sub-advised by Apollo affiliates to total AAM-managed assets
$
13,996
$
18%
192
5
149
2,032
4,727
911
975
1,767
23
126
1,682
81
12,478
19%
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
During the second quarter of 2017, AAM and certain other Apollo affiliates entered into addendums to the MSAAs currently in effect, pursuant
to which, with limited exceptions, Apollo will earn 0.40% per year on all assets in the North American Accounts explicitly sub-advised by
Apollo up to $10,000 million, 0.35% per year on all assets in such accounts explicitly sub-advised by Apollo in excess of $10,000 million up to
$12,441 million (the level of fee-paying sub-advised assets in the North American Accounts at December 31, 2016), 0.40% per year on all assets
in such accounts explicitly sub-advised by Apollo in excess of $12,441 million up to $16,000 million, and 0.35% per year on all assets in such
accounts explicitly sub-advised by Apollo in excess of $16,000 million. The addendums were retroactive to January 1, 2017.
Apollo Asset Management Europe
ADKG has an investment advisory agreement with Apollo Asset Management Europe (together with certain of its affiliates, AAME), also a
subsidiary of AGM. AAME provides advisory services for all of ADKG’s investment portfolio other than operating cash, mortgage loans
secured by residential and commercial properties that are not identified and advised by AAME, and assets related to unit-linked policies. Also
excluded are assets held in German special investment funds managed or advised by Apollo, AAM and any of the respective affiliates of Apollo,
AAM or AAME, to the extent the entity receives a management or advisory fee in connection with the fund. In providing these services, AAME
has access to Apollo’s European expertise and capabilities. The ADKG investments sub-advised by AAME consist primarily of corporate and
sovereign bonds, as compared to the more diverse range of assets managed by AAM or those held in the German special investment funds. As
compensation for the investment advisory services rendered, AAME receives a fee of 0.10% per year on the assets it sub-advises. Affiliates of
AAME receive an advisory fee of 0.35% per year on certain German special investment funds and our investment in a sub-fund of Apollo
Capital Efficient Fund I (ACE fund), as well as a pro rata share of operating expenses up to 0.30% on the ACE fund. As of December 31, 2017
and 2016, the German special investment funds totaled $1,190 million and $258 million, respectively, and the ACE fund totaled $97 million and
$84 million, respectively. The fees incurred for management of these funds are included in sub-advisory fees in the table below.
The following represents the assets sub-advised by AAME:
(In millions)
Fixed maturity securities
Foreign governments
Corporate
Equity securities
Investment funds
Policy loans
Real estate
Other investments
Cash and cash equivalents
Total assets sub-advised by AAME
December 31,
2017
2016
$
2,160
$
1,003
95
40
5
624
176
50
2,062
1,567
187
34
6
541
153
25
$
4,153
$
4,575
The following summarizes the asset management fees and sub-advisory fees we have incurred related to AAM, AAME and other Apollo
affiliates:
(In millions)
Asset management fees
Sub-advisory fees
Years ended December 31,
2017
2016
2015
$
261
$
57
229
$
66
226
42
The management and sub-advisory fees are included within net investment income on the consolidated statements of income. As of
December 31, 2017 and 2016, the management fees payable was $28 million and $28 million, respectively, and the sub-advisory fees payable
was $13 million and $11 million, respectively. Both the management and sub-advisory fees payables are included in other liabilities on the
consolidated balance sheets.
193
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
The investment management or advisory agreements with AAM or AAME have no stated term and any party can terminate upon notice.
However, our bye-laws provide that we will not exercise our termination rights under the agreements until October 31, 2018 or any annual
anniversary thereafter (each such date, an IMA Termination Election Date) and any termination thereon requires the approval of two-thirds of
our Independent Directors (as defined in the bye-laws) and prior written notice thereof to Apollo of at least 30 days. If the Independent Directors
make such election and such notice is timely delivered, the termination will be effective on the second anniversary of the applicable IMA
Termination Election Date (an IMA Termination Effective Date). Notwithstanding the foregoing, (1) the Independent Directors may only elect to
terminate an investment management agreement or advisory agreement on an IMA Termination Election Date if two-thirds of the Independent
Directors determine in their sole discretion acting in good faith that either (i) there has been unsatisfactory long-term performance materially
detrimental to us by Apollo or (ii) the fees being charged by Apollo are unfair and excessive compared to a comparable asset manager (provided,
that in either case such Independent Directors must deliver notice of any such determination to Apollo and Apollo shall have until the applicable
IMA Termination Effective Date to address such concerns, and provided, further, that in the case of such a determination that the fees being
charged by Apollo are unfair and excessive, Apollo has the right to lower its fees to match the fees of such comparable asset manager) and (2)
upon the determination by two-thirds of the Independent Directors, we may also terminate an investment management agreement or advisory
agreement with Apollo as a result of either (i) a material violation of law relating to Apollo’s advisory business, or (ii) Apollo’s gross negligence,
willful misconduct or reckless disregard of its obligations under the relevant agreement, and in either case (i) or (ii), the delivery at least 30
days’ prior written notice to Apollo of such termination and such termination will be effective at the end of such 30-day period.
We have a management investment committee, which includes members of our senior management and reports to the risk committee of our
board of directors. The committee focuses on strategic decisions involving our investment portfolio, such as approving investment limits, new
asset classes and our allocation strategy, reviewing large asset transactions, as well as monitoring our credit risk, and the management of our
assets and liabilities.
A significant voting interest in the Company is held by shareholders who are members of the Apollo Group, as defined in our bye-laws. Also,
James Belardi, our Chief Executive Officer, is also an employee of AAM, receives substantial remuneration from acting as Chief Executive
Officer of AAM, and owns a 5% profits interest in AAM. Additionally, five of the twelve 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 created a conflicts committee consisting of three of our
directors who are not officers or employees of any member of the Apollo Group. The conflicts committee reviews and a majority of the
committee members must approve material transactions between us and the Apollo Group, subject to certain exceptions.
Other related party transactions—We have a loan purchase agreement with AmeriHome Mortgage Company, LLC (AmeriHome), an investee
of A-A Mortgage, an equity method investee. The agreement allows us to purchase residential mortgage loans which they have purchased from
correspondent sellers and pooled for sale in the secondary market. AmeriHome retains the servicing rights to the sold loans. We purchased $57
million, $22 million and $83 million of residential mortgage loans under this agreement during the years ended December 31, 2017, 2016 and
2015, respectively.
During the third quarter of 2016, we completed a series of transactions with Apollo Commercial Real Estate Finance, Inc. (ARI), a related party
managed by an affiliate of Apollo. Pursuant to an agreement between ARI and Apollo Residential Mortgage, Inc. (AMTG), another related party
managed by an Apollo affiliate, AMTG merged with and into ARI. In accordance with an Asset Purchase and Sale Agreement between us and
ARI, we purchased $1,090 million of primarily non-agency RMBS from ARI subsequent to its merger with AMTG. We also provided ARI with
a secured short-term $175 million loan to consummate the merger, which was subsequently repaid with the proceeds of the sale of such RMBS.
Finally, subsequent to the merger, we purchased $20 million of ARI shares of common stock pursuant to a stock purchase agreement that
required such purchase if ARI’s common stock price fell below a specified price, which was the per share value used in determining the
purchase price under the merger agreement between ARI and AMTG, during the 30 trading days following the closing of the merger.
On January 1, 2018, in order to align our interests with those of AGER, in connection with the Closing, we entered into a cooperation agreement
with AGER, pursuant to which, among other things, (1) we will have the right to reinsure approximately 20% of the spread business written or
reinsured by any insurance or reinsurance company owned or acquired by AGER, (2) AGER’s insurance subsidiaries will be required to
purchase certain funding agreements and/or other spread instruments issued by our insurance subsidiaries, (3) we will provide the AGER Group
with a right of first refusal to pursue acquisition and reinsurance transactions in Europe (other than the United Kingdom) and (4) the AGER
Group will provide us and our subsidiaries with a right of first refusal to pursue acquisition and reinsurance transactions in North America and
the United Kingdom.
194
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
18. Commitments and Contingencies
Contingent Commitments—We had commitments to make investments, primarily capital contributions to investment funds, inclusive of the
equity and financing transactions described below, of $2,358 million and $962 million as of December 31, 2017 and 2016, respectively. We
expect most of our current commitments will be invested over the next five years; however, these commitments could become due any time
upon counterparty request.
In December 2017, we entered into a transaction with Voya, pursuant to which we agreed to reinsure approximately $19 billion of fixed
annuities. Additionally, a consortium of investors, led by affiliates of Apollo, and certain other investors, agreed to purchase Voya Insurance and
Annuity Company (VIAC), including its closed block variable annuity segment, and create a newly formed standalone entity, Venerable
Holdings, Inc. (Venerable) that will be the holding company of VIAC. We committed to make a $75 million minority equity investment in VA
Capital Company LLC, the holding company of Venerable, and provide financing to Venerable of $150 million, in each case, subject to certain
closing adjustments. These transactions are expected to close in the second or third quarter of 2018, subject to regulatory approval and
customary closing conditions.
Funding Agreements—We are a member of the Federal Home Loan Bank (FHLB) and, through membership, we have issued funding
agreements to the FHLB in exchange for cash advances. As of December 31, 2017 and 2016, we had $573 million and $691 million,
respectively, of funding agreements outstanding with the FHLB. We are required to provide collateral in excess of the funding agreements,
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 up to $5 billion of its senior secured medium-term notes. Athene Global Funding uses the net proceeds from each sale to purchase
one or more funding agreements from us. Funding agreements outstanding under this program had a carrying value of $2,996 million and $246
million as of December 31, 2017 and 2016, respectively.
Pledged Assets and Funds in Trust (Restricted Assets)—The total restricted assets included on the consolidated balance sheets are as follows:
(In millions)
AFS securities
Fixed maturity
Equity
Investment funds
Mortgage loans
Short-term investments
Restricted cash
Total restricted assets
December 31,
2017
2016
$
$
1,572
$
36
20
914
10
105
2,657
$
1,535
40
25
1,003
15
57
2,675
The restricted assets are primarily related to reinsurance trusts established in accordance with coinsurance agreements and the FHLB funding
agreements described above.
Litigation, Claims and Assessments
Husdon Matter–On June 12, 2015, Don Hudson, on behalf of himself and others similarly situated, filed a putative class action complaint
against us in the United States District Court for the Northern District of California. The complaint, which was similar to complaints recently
filed against other large insurance companies, primarily alleged that captive reinsurance and other transactions had the effect of misrepresenting
the financial condition of Athene Annuity and Life Company (AAIA). The complaint purported to be brought on behalf of a class of purchasers
of annuity products issued by AAIA between 2007 and the present and asserts claims against AHL, ALRe, AUSA and AAIA in addition to
Apollo and AAM. There were also various allegations related to the purchase of Aviva USA and concerning entry into a modco transaction with
ALRe in October 2013. The suit asserted claims of violation of the Racketeer Influenced and Corrupt Organizations Act and sought
compensatory damages, trebled, in an amount to be determined, costs and attorneys’ fees. On March 25, 2016, the matter was transferred to the
United States District Court for the Southern District of Iowa (S.D. IA Court). On May 25, 2016, the court granted plaintiff’s motion to file an
amended complaint dropping plaintiff Silva and defendant Aviva plc. We moved to dismiss the amended complaint on June 30, 2016. On May
11, 2017, the putative class action complaint filed by Don Hudson, on behalf of himself and others similarly situated, against us was dismissed
in a written decision by the S.D. IA Court. Plaintiff did not appeal the district court’s decision and this matter is concluded.
195
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Griffiths Matter–On July 27, 2015, John Griffiths, on behalf of himself and others similarly situated, filed a putative class action complaint
against us in the United States District Court for the District of Massachusetts. An amended complaint was filed on December 18, 2015. The
complaint asserts claims against AHL, AAIA and Athene London Assignment Corporation (Athene London), in addition to an Aviva defendant.
AHL is a named defendant due to its purchase of Aviva USA, and AAIA and Athene London are named as successors to Aviva Life Insurance
Company and Aviva London Assignment Corporation, respectively. The complaint alleges a putative class of all persons who are the beneficial
owners of assets which were used to purchase structured settlement annuities that Aviva Life Insurance Company, Aviva London Assignment
Corporation, and Aviva International Insurance Limited (collectively, the Aviva Entities) or their predecessors, as applicable, delivered to
purchasers on or after April 1, 2003 that were backed by a capital maintenance agreement issued by Aviva International Insurance Limited or its
predecessor (the CMA). The complaint alleges that the Aviva Entities sold structured settlement annuities to the public on the basis that such
products were backed by the CMA, which was alleged to be a source of great financial strength. The complaint further alleges that the Aviva
Entities used the CMA to enhance the sales volume and raise the price of the annuities. The complaint claims that, as a result of Aviva USA’s
sale to AHL, the CMA terminated. According to the complaint, no notice of this termination was provided to the owners of the structured
settlement annuities. The complaint alleges that the termination of the CMA gave rise to claims for breach of contract, breach of fiduciary duty,
promissory estoppel, and unjust enrichment. AHL and plaintiff recently agreed to a term sheet settlement on a class wide basis. Terms of the
settlement, which is subject to court approval, include: (1) AHL entering into a capital maintenance agreement with Athene London requiring
AHL to provide capital to Athene London upon a missed structured settlement payment that is not timely cured and (2) AHL paying a monetary
amount that is immaterial to us.
IRS Matters–The Internal Revenue Service (IRS) completed its examinations of the 2006 through 2010 Aviva USA tax years with Aviva USA
agreeing to all proposed adjustments with two exceptions: (1) AAIA’s treatment of call options used to hedge fixed indexed annuity (FIA)
liabilities for the tax years 2008–2010 and (2) the disallowance of offsetting tax deductions taken by AAIA and taxable income reported by the
non-life subgroup with respect to unpaid independent marketing organization commissions. The first adjustment to which Aviva USA did not
agree would disallow deductions of $191 million, $154 million and $76 million for 2008, 2009 and 2010, respectively. The second adjustment to
which Aviva USA did not agree would increase non-life net operating losses and decrease AAIA net operating losses by $16 million in each of
2009 and 2010. Taxes, penalties and interest with respect to these two issues for the years under audit are subject to indemnification by Aviva plc
under the Stock Purchase Agreement (SPA) between Aviva plc and AHL, dated December 21, 2012 assuming the SPA requirements are satisfied.
Athene USA was unable to negotiate a favorable settlement of this issue with the IRS, and is contesting the adjustment in federal court. If the
IRS position is upheld in federal court, Athene USA expects that it would owe tax of $120 million, plus interest, for tax years ending on or
before October 2, 2013, which are subject to indemnification by Aviva plc as described above.
The IRS also recently completed its examination of the 2011 through 2012 Aviva USA tax years, proposing adjustments that would increase
taxable income by approximately $16 million in the aggregate for these two tax years. Athene USA agreed to all adjustments that were proposed
with respect to those tax years except for adjustments relating to the same two issues that were not agreed to during the prior examination as
discussed above. The first adjustment to which Athene USA did not agree would disallow deductions of $16 million in 2011 and increase
deductions by $12 million in 2012. The second adjustment to which Athene USA did not agree would increase non-life net operating losses and
decrease AAIA net operating losses by $15 million in 2011 and $12 million in 2012. Taxes, penalties and interest with respect to these two tax
years are subject to indemnification by Aviva plc under the SPA, assuming the SPA requirements are satisfied. The treatment of FIA hedges is a
recurring issue as to the timing of the related deductions and could affect the current income tax incurred in periods after October 2, 2013, which
are not subject to indemnification by Aviva plc. Given that the disallowance of a deduction in one period results in an increased deduction in a
future period, we do not expect that there will be any material impact to our financial condition resulting from this issue.
Corporate-owned Life Insurance (COLI) Matter–In 2000 and 2001, two insurance companies which were subsequently merged into AAIA
purchased from American General Life Insurance Company (American General) broad based variable COLI policies that, as of December 31,
2017, had an asset value of $349 million, and is included in other assets on the 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 been triggered and we will pursue further adjudication. If the supplement is ultimately deemed to
be effective, the purported changes to the policies could impair AAIA’s ability to access the value of guarantees associated with the policies. The
value of the guarantees included within the asset value reflected above is $164 million as of December 31, 2017.
Holzer Matter–On September 12, 2016, Jack Holzer and Mary Bruesh-Holzer filed suit in Jackson County, Missouri against several defendants,
including AADE, as successor-in-interest to Business Men’s Assurance Company of America. Mr. Holzer allegedly sustained injuries due to
asbestos exposure from 1966–1973 while working in an office building in Kansas City, Missouri, then owned by Business Men’s Assurance
Company of America. Plaintiffs assert strict liability and negligence claims against AADE, and AADE is one of the last remaining defendants.
AADE is insured for costs, fees and compensatory damages under several primary and excess general liability policies issued to Business Men’s
Assurance Company of America, and has rights to indemnity for costs, fees and damages, including punitive damages. The matter is calendared
for trial on March 6, 2018. We do not currently expect this matter to have a material impact on our consolidated financial statements. However,
in light of the inherent uncertainties involved in this matter, it is possible that the ultimate outcome could have a material impact on our
consolidated financial statements.
196
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Regulatory Matter–Our U.S. insurance subsidiaries have experienced increased service and administration complaints related to the conversion
and administration of the block of life insurance business acquired in connection with our acquisition of Aviva USA and reinsured to affiliates of
Global Atlantic by the TPA retained by such Global Atlantic affiliates to provide services on such policies, as well as on certain annuity policies
that were on Aviva USA’s legacy policy administration systems that were also converted to and are being administered by the same TPA. On
April 5, 2017, we received notification from the New York State Department of Financial Services (NYSDFS) that it planned to undertake a
market conduct examination of ALICNY for the period of January 1, 2012 through March 31, 2017 (NYSDFS Market Conduct Examination),
and on May 31, 2017, we received notification from the Texas Department of Insurance that it intended to undertake an enforcement proceeding,
in each case, relating to the treatment of policyholders subject to our reinsurance agreements with affiliates of Global Atlantic and the
conversion of such annuity policies, including the administration of such blocks by such TPA. On November 15, 2017, we received notification
from the NYSDFS that its examination of ALICNY had resulted in the identification of a significant number of asserted violations of New York
insurance law associated with the life block reinsured to affiliates of Global Atlantic, who have also been overseeing policyholder administration
and the TPA servicing the policies in the block, with a significant number of such violations not subject to dispute by the relevant affiliates of
Global Atlantic or by us. On January 30, 2018, we received a draft report regarding the NYSDFS Market Conduct Examination from the
NYSDFS, which identified in more detail the violations asserted in the November 15, 2017 letter as well as certain other violations. We and
Global Atlantic are currently in discussions with the NYSDFS to resolve this matter, but there is no assurance that we will be able to resolve this
matter in a manner favorable to us. In addition to the foregoing, we have received inquiries, and expect to continue to receive inquiries, from
other regulatory authorities regarding the conversion matter. It is possible that other jurisdictions may pursue similar formal examinations,
inquiries or enforcement proceedings and that any examinations, inquiries and/or enforcement proceedings may result in fines, administrative
penalties and payments to policyholders. We are not currently able to estimate the amount of any such fines, penalties or payments arising from
these matters with reasonable certainty, but it is possible that such amounts may be material.
19. Segment Information
We operate our core business strategies out of one reportable segment, Retirement Services. In addition to Retirement Services, we report certain
other operations in Corporate and Other.
Retirement Services—Retirement Services is comprised of our United States and Bermuda operations, which issue and reinsure retirement
savings products and institutional products. Retirement Services has retail operations, which provide annuity retirement solutions to our
policyholders. Retirement Services also has reinsurance operations, which reinsure multi-year guaranteed annuities, fixed indexed annuities,
traditional one-year guarantee fixed deferred annuities, immediate annuities and institutional products from our reinsurance partners. In addition,
our institutional operations, including funding agreements and pension risk transfer obligations, are included in our Retirement Services
segment.
Corporate and Other—Corporate and Other includes certain other operations related to our corporate activities and our former German
operations, which are primarily comprised of participating long-duration savings products. In addition to our former German operations,
included in Corporate and Other are corporate allocated expenses, merger and acquisition costs, debt costs, certain integration and restructuring
costs, certain stock-based compensation and intersegment eliminations. In Corporate and Other, we also hold capital in excess of the level of
capital we hold in Retirement Services to support our operating strategy. See Note 1 – Business, Basis of Presentation and Significant
Accounting Policies for discussion on the deconsolidation of our German operations in 2018.
Financial Measures—Segment adjusted operating income and net investment earnings are internal measures used by the chief operating
decision maker to evaluate and assess the results of our segments.
Operating revenue is a component of adjusted operating income and excludes market volatility and adjustments for other non-operating activity.
Our operating revenue equals our total revenue, adjusted to eliminate the impact of the following non-operating adjustments:
•
•
•
•
Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets;
Investment gains (losses), net of offsets;
VIE expenses and noncontrolling interest; and
Other adjustments to revenues.
197
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
The table below reconciles segment operating revenues to total revenues presented on the consolidated statements of income:
(In millions)
Operating revenue by segment
Retirement Services
Corporate and Other
Total segment operating revenues
Non-operating adjustments
Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets
Investment gains (losses), net of offsets
VIE expenses and noncontrolling interest
Other adjustments to revenues
Total non-operating adjustments
Total revenues
Years ended December 31,
2017
2016
2015
$
5,960
$
3,330
$
368
6,328
1,990
461
—
(52)
2,399
268
3,598
324
164
13
6
507
$
8,727
$
4,105
$
2,979
112
3,091
(390)
(132)
33
16
(473)
2,618
Adjusted operating income is an internal measure used to evaluate our financial performance excluding market volatility and expenses related to
integration, restructuring, stock compensation and certain other expenses. Our adjusted operating income equals net income available to AHL’s
shareholders adjusted to eliminate the impact of the following non-operating adjustments:
•
•
•
•
•
Investment gains (losses), net of offsets;
Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets;
Integration, restructuring and other non-operating expenses;
Stock-based compensation, excluding LTIP; and
Income tax (expense) benefit – non-operating.
The table below reconciles segment adjusted operating income to net income available to Athene Holding Ltd. shareholders presented on the
consolidated statements of income:
(In millions)
Adjusted operating income by segment
Retirement Services
Corporate and other
Total segment adjusted operating income
Non-operating adjustments
Investment gains (losses), net of offsets
Change in fair values of derivatives and embedded derivatives – index annuities, net of offsets
Integration, restructuring and other non-operating expenses
Stock-based compensation, excluding LTIP
Income tax (expense) benefit – non-operating
Total non-operating adjustments
Years ended December 31,
2017
2016
2015
$
1,092
$
777
$
17
1,109
199
266
(68)
(33)
(25)
339
(49)
728
47
95
(22)
(82)
2
40
Net income available to Athene Holding Ltd. shareholders
$
1,448
$
768
$
767
(29)
738
(56)
(25)
(58)
(67)
30
(176)
562
198
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
Net investment earnings used to evaluate the performance of our segments is an internal measure that does not correspond to GAAP net
investment income. Adjustments are made to GAAP net investment income to arrive at a net investment earnings measure that reflects the
profitability of our core deferred annuities business. Accordingly, we adjust net investment income to include earnings from our consolidated
VIEs and earnings on certain alternative investments (primarily CLOs) classified in investment related gains (losses) on the consolidated
statements of income. Additionally, we adjust for impacts of reinsurance embedded derivatives on net investment income. The table below
reconciles segment net investment earnings to net investment income presented on the consolidated statements of income:
(In millions)
Net investment earnings by segment
Retirement Services
Corporate and Other
Total net investment earnings
Adjustments to net investment income
Reinsurance embedded derivative impacts
Net VIE earnings
Alternative income (gains) losses
Held for trading amortization
Total adjustments to arrive at net investment income
Net investment income
Years ended December 31,
2017
2016
2015
$
3,241
$
2,953
$
182
3,423
(191)
(77)
20
94
(154)
77
3,030
(189)
(1)
39
35
(116)
$
3,269
$
2,914
$
2,574
36
2,610
(84)
(67)
42
9
(100)
2,510
Adjusted operating income excludes the income tax impact of the taxable non-operating adjustments presented above. The income tax expense
of non-operating income adjustments is comprised of the appropriate jurisdiction’s tax rate applied to the non-operating adjustments subject to
income tax, as well as the amount recorded for the change in the U.S. statutory rate resulting from the recently enacted Tax Act. The table below
reconciles segment provision for income taxes – operating to income tax expense presented on the consolidated statements of income:
(In millions)
Provision for income taxes – operating by segment
Retirement Services
Corporate and Other
Total segment income tax expense (benefit) – operating
Income tax (expense) benefit – non-operating
Income tax expense (benefit)
The following represents total assets by segment:
(In millions)
Total assets by segment
Retirement Services
Corporate and Other
Total assets
Years ended December 31,
2017
2016
2015
64
$
(46) $
(2)
62
25
87
(4)
(50)
(2)
$
(52) $
39
3
42
(30)
12
December 31,
2017
2016
2015
91,335
8,412
99,747
$
$
79,298
7,401
86,699
$
$
73,702
7,144
80,846
$
$
$
$
199
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
We market annuity products, primarily fixed rate and fixed indexed annuities. Deposits, which are generally not included in revenues on the
consolidated statements of income, and premiums collected are as follows:
(In millions)
Fixed indexed annuities
Fixed rate annuities
Payouts without life contingencies
Funding agreements
Life and other deposits
Total deposits
Payouts with life contingencies
Life and other premiums
Total premiums
Years ended December 31,
2017
2016
2015
$
5,480
$
5,322
$
2,808
873
106
3,054
33
9,546
2,211
254
2,465
3,565
107
—
24
9,018
21
219
240
883
166
250
11
4,118
53
142
195
Total premiums and deposits, net of ceded
$
12,011
$
9,258
$
4,313
Deposits and premiums collected by the geographical location are as follows:
(In millions)
United States
Bermuda
Germany
Total premiums and deposits, net of ceded
Years ended December 31,
2017
2016
2015
$
$
11,156
$
5,617
$
652
203
3,429
212
12,011
$
9,258
$
3,097
1,135
81
4,313
200
ATHENE HOLDING LTD.
Notes to Consolidated Financial Statements
20. Quarterly Results of Operations (Unaudited)
The unaudited quarterly results of operations for the years ended December 31, 2017 and 2016 are summarized in the table below:
(In millions, except per share data)
March 31
June 30
September 30
December 31
Three months ended
2017
Total revenues
Total benefits and expenses
Net income available to Athene Holding Ltd. shareholders
Earnings per share
Basic – Classes A, B, M-1, M-2, M-3, and M-41
Diluted – Class A
Diluted – Class B
Diluted – Class M-1
Diluted – Class M-2
Diluted – Class M-3
Diluted – Class M-4
2016
Total revenues
Total benefits and expenses
Net income available to Athene Holding Ltd. shareholders
Earnings per share
Basic – Classes A, B and M-11
Diluted – Class A
Diluted – Class B
Diluted – Class M-1
Diluted – Classes M-2, M-3 and M-4
N/A – Not applicable.
$
$
$
$
1,619
$
1,763
$
1,473
$
1,213
384
2.00
1.92
2.00
2.00
0.08
N/A
N/A
722
637
85
0.46
0.46
0.46
N/A
N/A
$
$
$
$
1,426
326
1.66
1.65
1.66
1.66
1.64
1.00
0.76
$
1,179
274
1.40
1.39
1.40
1.40
1.39
1.07
0.79
1,045
$
1,272
$
$
837
193
1.04
1.04
1.04
N/A
N/A
1,234
126
0.68
0.68
0.68
N/A
N/A
$
3,872
3,374
464
2.36
2.35
2.36
2.36
2.34
2.10
1.49
1,066
681
364
1.92
1.78
1.92
0.46
N/A
1 Class M-1 was eligible to participate in dividends beginning in the three months ended December 31, 2016, Class M-2 was eligible to participate in dividends
beginning in the three months ended March 31, 2017, and Class M-3 and Class M-4 were eligible to participate in dividends beginning in the three months
ended June 30, 2017. Prior to being eligible to participate in dividends, no earnings were attributable to those classes. See Note 13 – Earnings Per Share for
further discussion.
During the three months ended June 30, September 30, and December 31, 2017, we recorded out-of-period adjustments primarily related to
DAC and VOBA amortization and actuarial reserves, which increased consolidated net income by $16 million, $16 million, and $21 million,
respectively. The three months ended September 30 and December 31, 2017 include income tax adjustments which decreased income tax
expense by $3 million and $14 million, respectively. These adjustments were primarily attributed to the consolidated statements of income for
the years ended December 31, 2016 and 2015. We evaluated these out-of-period adjustments and determined they were not material to the
consolidated financial statements for the current period, or any other previously reported period.
201
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as such term is defined under Exchange Act Rule 13a-15(e), that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and
evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily is required to
apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation, as of the
end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at
attaining the level of reasonable assurance noted above.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act). A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
GAAP. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on criteria established in the Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 Framework). Based on our evaluation, management has concluded that our internal control
over financial reporting was effective as of December 31, 2017.
Attestation Report of the Company’s Registered Public Accounting Firm
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited our financial statements included in this annual
report on Form 10-K, has issued its report on the effectiveness of our internal control over financial reporting. The report is included in Item 8.
Financial Statements and Supplementary Data.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting during the quarter ended December 31, 2017, that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
202
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information called for by this Item is incorporated herein by reference to the sections entitled “Management,” “Proposal 1: Election of
Directors of the Company,” “Corporate Governance – Classified Board of Directors,” “Corporate Governance – Committees of the Board of
Directors” and “Corporate Governance – Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for our
2018 Annual General Meeting of Shareholders to be filed by us with the SEC pursuant to Regulation 14A within 120 days after the year ended
December 31, 2017 (2018 Proxy Statement).
Board of Directors
On February 24, 2018, our board of directors determined that Ms. Hope Taitz did not meet the independence requirements of the NYSE listing
rules. As a result, our board of directors elected to replace Ms. Taitz on the Nominating and Corporate Governance Committee and the Audit
Committee with Mr. Marc Beilinson and Mr. Robert Borden, respectively, each of whom is currently on our board of directors and meets the
independence requirements of the NYSE listing rules. Mr. Arthur Wrubel, also an independent director on our board of directors, has been
appointed by the board of directors to be the chairperson of the Nominating and Corporate Governance Committee. Ms. Taitz has resigned from
her position as Lead Independent Director of the board of directors and the board of directors have appointed Mr. Beilinson as the Lead
Independent Director. Ms. Taitz remains in her position as a member of the Conflicts Committee.
As a result of this determination, as of the date of this report, a majority of our directors are not independent directors as required by the NYSE
listing rules. We have notified the NYSE of this non-compliance in accordance with applicable NYSE listing rules and we plan to remediate this
non-compliance by appointing an additional independent director to the board of directors imminently. Giving effect to the change in the
composition of the committees described above, we are not in violation of any applicable SEC rule or other NYSE listing rule as a result of this
determination.
Corporate Governance Guidelines and Code of Business Conduct and Ethics
We have adopted corporate governance guidelines and a code of business conduct and ethics that applies to all of our directors, officers and
employees. These documents are available at www.athene.com. Information contained on our website or connected thereto does not constitute a
part of, and is not incorporated by reference into, this report. We intend to satisfy our disclosure obligations under Item 5.05 of Form 8-K by
posting information about amendments to, or waivers from a provision of, our code of business conduct and ethics that apply to our Chief
Executive Officer, Chief Financial Officer and Chief Accounting Officer on our website at the address given above.
Item 11. Executive Compensation
The information called for by this Item is incorporated herein by reference to the sections entitled “Compensation of Executive Officers and
Directors,” “Corporate Governance – Compensation Committee Interlocks and Insider Participation,” and “Corporate Governance – Committees
of the Board of Directors” in our 2018 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information called for by this Item pertaining to security ownership of certain beneficial owners and management is incorporated herein by
reference to the section entitled “Security Ownership of Certain Beneficial Owners” in our 2018 Proxy Statement.
203
Share Incentive Plan Information
The table below shows information regarding awards outstanding and shares of common stock available for issuance as of December 31, 2017
under the Share Incentive Plans:
Plan Category
Share Incentive Plans Approved by Security Holders
Share Incentive Plans Not Approved by Security Holders4
Total
Number of Securities to
Be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights1
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights2
Number of Securities
Remaining Available for
Future Issuance Under
Share Incentive
Plans3
552,722
10,824,766
11,377,488
$
$
51.31
19.75
20.67
6,696,043
—
6,696,043
1 Consists of Class A shares underlying options, time-based RSUs, performance-based RSUs and Class M common shares. Class M common shares, once vested,
are convertible into Class A shares subject to payment of the conversion price. Performance-based RSUs are included at their target value. Class M common
shares are included based on the assumption that 100% of such shares vest and are converted into Class A shares on a one-for-one basis.
2 Includes options, Class M common shares and the RSUs issued in conjunction with the Class M-4 common shares. Does not include other time-based RSUs or
performance-based RSUs, as they do not have exercise prices.
3 Includes 3,786,734 shares remaining available for issuance under the 2017 Employee Stock Purchase Plan and 2,909,309 shares remaining available for
issuance under the 2016 Share Incentive Plan.
4 Includes securities to be issued pursuant to our 2009, 2012, and 2014 share incentive plans. See Note 12 – Stock-based Compensation to the consolidated
financial statements for a discussion regarding the material features of these plans.
204
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information called for by this Item is incorporated herein by reference to the sections entitled “Certain Relationships and Related
Transactions” and “Corporate Governance – Director Independence” in our 2018 Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information called for by this Item is incorporated herein by reference to the sections entitled “Additional Information and Matters –
Principal Accountant Fees and Services” and “Corporate Governance – Committees of the Board of Directors” in our 2018 Proxy Statement.
205
PART IV
Item 15. Exhibits, Financial Statement Schedules
The following documents are filed as part of this report:
1. Financial Statements—Item 8. Financial Statements and Supplementary Data
2. Financial Statement Schedules
Schedule I—Summary of Investments Other Than Investments in Related Parties as of December 31, 2017
Schedule II—Condensed Financial Information of Registrant (Parent Company Only)
Schedule II—Balance Sheets as of December 31, 2017 and 2016
Schedule II—Statements of Income and Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015
Schedule II—Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Schedule II—Notes to Condensed Financial Information of Registrant for the years ended December 31, 2017, 2016 and 2015
Schedule III—Supplementary Insurance Information for the years ended December 31, 2017, 2016 and 2015
Schedule IV—Reinsurance for the years ended December 31, 2017, 2016 and 2015
Schedule V—Valuation and Qualifying Accounts for the years ended December 31, 2017, 2016 and 2015
Any remaining schedules are omitted because they are inapplicable.
3. Exhibits
See the accompanying Exhibit Index.
128
207
208
208
209
210
211
212
213
214
215
206
ATHENE HOLDING LTD.
Schedule I — Summary of Investments — Other Than Investments in Related Parties
(In millions)
Available-for-sale securities
Fixed maturity securities
U.S government and agencies
U.S. state, municipal and political subdivisions
Foreign governments
Public utilities
Other corporate
CLO
ABS
CMBS
RMBS
Redeemable preferred stock
Total fixed maturity securities
Equity securities
Banks, trust and insurance companies common stock
Industrial, miscellaneous and all other common stock
Nonredeemable preferred stocks
Total equity securities
Total available-for-sale securities
Trading securities, at fair value
Mortgage loans, net of allowances
Investment funds
Policy loans
Funds withheld at interest
Derivative assets
Real estate
Short-term investments, at fair value
Other investments
Total investments
December 31, 2017
Cost or Amortized
Cost
Fair Value
Amount Shown on
Consolidated
Balance Sheet
$
63
$
62
$
996
2,575
5,124
30,010
5,039
3,945
1,994
8,721
39
58,506
37
130
104
271
1,165
2,683
5,384
31,235
5,084
3,971
2,021
9,366
41
61,012
37
129
111
277
58,777
$
61,289
2,475
6,232
693
530
7,085
1,673
624
201
133
62
1,165
2,683
5,384
31,235
5,084
3,971
2,021
9,366
41
61,012
37
129
111
277
61,289
2,709
6,233
699
530
7,085
2,551
624
201
133
$
78,423
$
82,054
207
ATHENE HOLDING LTD.
Schedule II — Condensed Financial Information of Registrant (Parent Company Only) — Balance Sheets
(In millions, except share and per share data)
Assets
Investments
Available-for-sale, fixed maturity securities, at fair value (amortized cost: 2017 – $35 and 2016 – $27)
Cash and cash equivalents
Other assets
Notes receivable from subsidiaries
Intercompany receivable
Investments in subsidiaries
Total assets
Liabilities and Equity
Liabilities
Payables for collateral on derivatives
Other liabilities
Intercompany payable
Total liabilities
Equity
Common stock
Class A – par value $0.001 per share; authorized: 2017 and 2016 – 425,000,000 shares; issued and outstanding:
2017 – 142,386,704 and 2016 – 77,319,381 shares
Class B – par value $0.001 per share; convertible to Class A; authorized: 2017 and 2016 – 325,000,000 shares;
issued and outstanding: 2017 – 47,422,399 and 2016 – 111,805,829 shares
Class M-1 – par value $0.001 per share; contingently convertible to Class A; authorized: 2017 and
2016 – 7,109,560 shares; issued and outstanding: 2017 – 3,388,890 and 2016 – 3,474,205 shares
Class M-2 – par value $0.001 per share; contingently convertible to Class A; authorized: 2017 and
2016 – 5,000,000 shares; issued and outstanding: 2017 – 851,103 and 2016 – 1,067,747 shares
Class M-3 – par value $0.001 per share; contingently convertible to Class A; authorized: 2017 and
2016 – 7,500,000 shares; issued and outstanding: 2017 – 1,092,000 and 2016 – 1,346,300 shares
Class M-4 – par value $0.001 per share; contingently convertible to Class A; authorized: 2017 and
2016 – 7,500,000 shares; issued and outstanding: 2017 – 4,711,743 and 2016 – 5,397,802 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total Athene Holding Ltd. shareholders’ equity
Total liabilities and equity
See accompanying notes to condensed financial information of registrant (parent company only)
December 31,
2017
2016
$
$
$
38
$
142
3
44
2
9,118
9,347
$
— $
132
7
139
—
—
—
—
—
—
3,472
4,321
1,415
9,208
$
9,347
$
28
189
15
—
—
6,665
6,897
6
32
1
39
—
—
—
—
—
—
3,421
3,070
367
6,858
6,897
208
ATHENE HOLDING LTD.
Schedule II — Condensed Financial Information of Registrant (Parent Company Only)
Statements of Income and Comprehensive Income (Loss)
(In millions)
Revenue
Net investment income (related party: 2017 – $3, 2016 – $8 and 2015 – $(5))
$
Investment related gains (losses)
Total revenues
Benefits and Expenses
Operating expenses (related party: 2017 – $8, 2016 – $16 and 2015 – $16)
Total benefits and expenses
Loss before income taxes and equity earnings in subsidiaries
Provision for income taxes
Equity earnings in subsidiaries
Net income available to Athene Holding Ltd. shareholders
Other comprehensive income (loss)
Years ended December 31,
2017
2016
2015
5
$
(7)
(2)
142
142
(144)
—
1,592
1,448
861
10
$
4
14
145
145
(131)
—
899
768
604
Comprehensive income (loss) available to Athene Holding Ltd. shareholders
$
2,309
$
1,372
$
See accompanying notes to condensed financial information of registrant (parent company only)
—
—
—
130
130
(130)
—
692
562
(881)
(319 )
209
ATHENE HOLDING LTD.
Schedule II — Condensed Financial Information of Registrant (Parent Company Only) — Statements of Cash Flows
(In millions)
Net cash used in operating activities
Cash flows from investing activities
Capital contributions to subsidiary
Receipts on loans to subsidiaries
Issuances of loans to subsidiaries
Investment in note receivable
Sales, maturities, and repayments of:
Available-for-sale, fixed maturity securities
Purchases of:
Available-for-sale, fixed maturity securities
Cash settlement of derivatives
Other investing activities, net
Net cash provided by (used in) investing activities
Cash flows from financing activities
Capital contributions
Net change in cash collateral posted for derivative transactions
Repurchase of common stock
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplementary information
Non-cash transactions
Non-cash capital contribution to ALRe
Issuance of capital for payment of liabilities
Years ended December 31,
2017
2016
2015
$
(54 ) $
(45 ) $
(82 )
—
—
(44)
—
9
(17)
(8)
82
22
1
(6)
(10)
(15)
(47)
189
142
—
—
$
(34)
20
—
—
5
(3)
5
(5)
(12)
1
6
(21)
(14)
(71)
260
189
—
—
$
(506)
188
(103)
(5)
17
(423)
—
—
(832)
1,116
—
(3)
1,113
199
61
260
708
2
$
See accompanying notes to condensed financial information of registrant (parent company only)
210
ATHENE HOLDING LTD.
Schedule II — Condensed Financial Information of Registrant (Parent Company Only)
Notes to Condensed Financial Information of Registrant
1. Basis of Presentation
The accompanying condensed financial statements of Athene Holding Ltd. (AHL) should be read in conjunction with the consolidated financial
statements and notes of AHL and its subsidiaries (consolidated financial statements).
For purposes of these condensed financial statements, AHL’s wholly owned and majority owned subsidiaries are presented under the equity
method of accounting. Under this method, the assets and liabilities of subsidiaries are not consolidated. The investments in subsidiaries are
recorded on the condensed balance sheets. The income from subsidiaries is reported on a net basis as equity earnings of subsidiaries on the
condensed statements of income.
2. Intercompany Transactions
Unsecured Revolving Notes Receivable—AHL has unsecured revolving notes receivable from subsidiaries Athene USA Corporation (Athene
USA), AGER Bermuda Holding Ltd. (AGER) and Athene Life Re Ltd. (ALRe).
The unsecured revolving notes receivable from Athene USA has a borrowing capacity of $250 million and $100 million and an outstanding
balance of $16 million and $0 million as of December 31, 2017 and 2016, respectively. Interest accrues at the U.S. short-term applicable federal
rate per year, and the balance is due on June 1, 2020, or earlier at AHL’s request.
The unsecured revolving notes receivable from AGER has a borrowing capacity of €25 million and an outstanding balance of $29 million as of
December 31, 2017. Interest accrues at the U.S. short-term applicable federal rate per year, and the balance is due on the date as of which AHL’s
ownership percentage of AGER is reduced such that AGER and its subsidiaries are no longer consolidated subsidiaries of AHL, or earlier at
AHL’s request. AHL deconsolidated AGER effective January 1, 2018. See Note 1 – Business, Basis of Presentation and Significant Accounting
Policies to the consolidated financial statements for further information regarding the deconsolidation of AGER. In conjunction with the AGER
deconsolidation, the outstanding balance was repaid to AHL in the first quarter of 2018.
The unsecured revolving notes receivable from ALRe has a borrowing capacity of $250 million and had no outstanding balance as of
December 31, 2017. Interest accrues at a fixed rate of 1.25% and has a maturity date of June 1, 2020, or earlier at AHL’s request.
Unsecured Revolving Notes Payable—In addition to the unsecured revolving notes receivable described above, AHL has an unsecured
revolving note payable with ALRe, which permits AHL to borrow an amount not to exceed $250 million with a fixed interest rate of 1.25% and
a maturity date of June 1, 2020. As of December 31, 2017, there was no balance outstanding under this agreement.
Funds in Trust (Restricted Assets)—AHL has agreed to maintain the authorized control level risk-based capital (RBC) of its subsidiary,
Athene Life Insurance Company of New York (ALICNY), at an amount not less than 450%. As a result, AHL has established a separate
backstop trust account with a fair value of $39 million and $36 million as of December 31, 2017 and 2016, respectively, consisting of available-
for-sale investments and cash. If ALICNY’s authorized control level RBC falls below 450%, the funds in the backstop trust account would be
used to replenish ALICNY’s authorized control level RBC to at least 450%.
3. Debt and Guarantees
AHL has guaranteed certain of the obligations of Athene USA and ALRe in connection with its revolving credit facility. Additionally, AHL has
issued senior notes in the first quarter of 2018. See Note 10 – Debt to the consolidated financial statements for further discussion on the credit
facility and senior notes.
4. Dividends, Return of Capital and Capital Contributions
There were no dividends or return of capital received from subsidiaries during the years ended December 31, 2017, 2016 and 2015. See
Note 16 – Statutory Requirements to the consolidated financial statements for additional information on subsidiary dividend restrictions.
211
ATHENE HOLDING LTD.(cid:3)
Schedule III
Supplementary Insurance Information
DAC,
DSI, and
VOBA
Future policy
benefits, losses,
claims and loss
expenses1
Other policy
claims and
benefits
Premiums
Net
investment
income
Benefits,
claims,
losses, and
settlement
expenses2
Amortization of
DAC and
VOBA
Policy and
other
operating
expenses
2017
Retirement Services
Corporate and other
Total
2016
Retirement Services
Corporate and other
Total
2015
Retirement Services
Corporate and other
Total
$
$
$
$
$
$
2,930
—
2,930
2,940
—
2,940
2,652
—
2,652
$
$
$
$
$
$
80,377
4,838
85,215
71,810
4,314
76,124
67,211
4,625
71,836
$
$
$
$
$
$
137
74
211
148
69
217
167
67
234
$
$
$
$
$
$
2,286
179
2,465
53
187
240
121
74
195
$
$
$
$
$
$
3,087
182
3,269
2,837
77
2,914
2,475
35
2,510
$
$
$
$
$
$
5,831
339
6,170
2,165
266
2,431
1,150
106
1,256
$
$
$
$
$
$
350
—
350
318
—
318
206
—
206
$
$
$
$
$
$
444
228
672
430
197
627
402
147
549
1 Represents interest sensitive contract liabilities and future policy benefits on the consolidated balance sheets.
2 Represents interest sensitive contract benefits, amortization of deferred sales inducements, future policy and other policy benefits, and dividends to
policyholders on the consolidated statements of income.
212
ATHENE HOLDING LTD.(cid:3)
Schedule IV
Reinsurance
(In millions)
Year ended December 31, 2017
Gross amount
Ceded to other
companies1
Assumed from
other companies
Net amount
Percentage of
amount assumed
to net
Life insurance in force at end of year(cid:3)
$
43,267
$
49,860
$
8,551
$
Premiums
Year ended December 31, 2016
Life insurance in force at end of year
Premiums
Year ended December 31, 2015
Life insurance in force at end of year
Premiums
2,639
56,356
448
77,994
445
195
63,894
228
82,284
274
21
9,591
20
10,123
24
1,958
2,465
2,053
240
5,833
195
436.7%
0.9%
467.2%
8.3%
173.5%
12.3%
1 Prior period amounts for life insurance in force have been revised for immaterial misstatements to be comparable to current year amounts.
213
ATHENE HOLDING LTD.(cid:3)
Schedule V
Valuation and Qualifying Accounts
(In millions)
Description
Reserves deducted from assets to which they apply
Year ended December 31, 2017
Valuation allowance on deferred tax assets
$
Valuation allowance on mortgage loans
Year ended December 31, 2016
Valuation allowance on deferred tax assets
Valuation allowance on mortgage loans
Year ended December 31, 2015
Valuation allowance on deferred tax assets
Valuation allowance on mortgage loans
Additions
Balance at
beginning of
year
Charged to
costs and
expenses
Assumed
through
acquisitions1
Deductions
Balance at end
of year
$
72
2
193
2
133
1
9
—
—
—
7
—
$
— $
—
—
—
66
1
(17) $
—
(121)
—
(13)
—
64
2
72
2
193
2
1 Assumed through acquisitions represents the valuation allowances recorded related to the acquisition of DLD in October 2015.
214
Exhibit No. Description
EXHIBIT INDEX
2.1
3.1
3.2
3.2.1
3.3
4.1
4.2
4.3
4.4
4.5
4.6
10.1
10.2
10.3
10.4.1
10.4.2
10.4.3
10.4.4
10.5
10.6
Share Purchase and Transfer Agreement, dated as of January 14, 2015, among Delta Lloyd N.V., Blitz 14-164 GmbH and
Athene Holding Ltd. (incorporated by reference to Exhibit 2.1 to the Form S-1 filed on October 25, 2016).
Certificate of Incorporation of Athene Holding Ltd. (incorporated by reference to Exhibit 3.1 to the Form S-1 filed on May 9,
2016).
Memorandum of Association of Athene Holding Ltd. (incorporated by reference to Exhibit 3.2 to the Form S-1 filed on May 9,
2016).
Form of Certificate of Deposit of Memorandum of Increase of Share Capital (incorporated by reference to Exhibit 3.2.1 to
the Form S-1 filed on November 10, 2016).
Tenth Amended and Restated Bye-laws of Athene Holding Ltd., effective June 8, 2017 (incorporated by reference to Exhibit
3.2 to the Current Report on Form 8-K filed on June 9, 2017).
Form of Athene Holding Ltd. Class A common share certificate (incorporated by reference to Exhibit 4.1 to the Form S-1 filed
on November 10, 2016).
Third Amended and Restated Registration Rights Agreement, dated as of April 4, 2014, among Athene Holding Ltd. and the
shareholders party thereto (incorporated by reference to Exhibit 4.2 to the Form S-1 filed on October 25, 2016).
First Amendment to Third Amended and Restated Registration Rights Agreement, dated as of October 6, 2015, among Athene
Holding Ltd. and the shareholders party thereto (incorporated by reference to Exhibit 4.3 to the Form S-1 filed on October 25,
2016).
Second Amendment to Third Amended and Restated Registration Rights Agreement, dated as of November 22, 2016, among
Athene Holding Ltd. and the shareholders party thereto (incorporated by reference to Exhibit 4.4 to the Form 10-K filed on
March 16, 2017).
Indenture for Debt Securities, dated as of January 12, 2018, by and between Athene Holding Ltd. and U.S. Bank National
Association, as trustee (incorporated by reference to Exhibit 4.1 to the Form 8-K filed on January 12, 2018).
First Supplemental Indenture, dated January 12, 2018, by and between Athene Holding Ltd. and U.S. Bank National
Association, as trustee (incorporated by reference to Exhibit 4.2 to the Form 8-K filed on January 12, 2018).
Commitment Letter, dated as of February 26, 2016, from Athene USA Corporation to Apollo Commercial Real Estate Finance,
Inc. (incorporated by reference to Exhibit 10.1 to the Form S-1 filed on October 25, 2016).
Asset Purchase and Sale Agreement, dated as of February 26, 2016, among Athene Annuity and Life Company, Athene
Annuity & Life Assurance Company and Apollo Commercial Real Estate Finance, Inc. (incorporated by reference to Exhibit
10.2 to the Form S-1 filed on October 25, 2016).
Stock Purchase Agreement, dated as of February 26, 2016, between Athene USA Corporation and Apollo Commercial Real
Estate Finance, Inc. (incorporated by reference to Exhibit 10.3 to the Form S-1 filed on October 25, 2016).
Shared Services and Cost Sharing Agreement, dated as of October 2, 2013, among Athene Holding Ltd., Athene USA
Corporation, Athene Life Re Ltd., Athene Annuity & Life Assurance Company, Athene Life Insurance Company, Investors
Insurance Corporation, Aviva Life and Annuity Company (now known as Athene Annuity and Life Company), Structured
Annuity Reinsurance Company, Aviva Re USA IV, Inc. (now known as Athene Re USA IV, Inc.) and Athene Asset
Management LLC (incorporated by reference to Exhibit 10.4.1 to the Form S-1 filed on October 25, 2016).
Amendment One to Shared Services and Cost Sharing Agreement, effective as of October 2, 2013, among Athene Holding
Ltd., Athene USA Corporation, Athene Life Re Ltd., Athene Annuity & Life Assurance Company, Athene Life Insurance
Company, Athene Annuity & Life Assurance Company (as successor by merger of Investors Insurance Corporation), Aviva
Life and Annuity Company (now known as Athene Annuity and Life Company), Structured Annuity Reinsurance Company,
Aviva Re USA IV, Inc. (now known as Athene Re USA IV, Inc.) and Athene Asset Management LLC (incorporated by
reference to Exhibit 10.4.2 to the Form S-1 filed on October 25, 2016).
Shared Services and Cost Sharing Agreement, dated as of October 2, 2013, among Athene Holding Ltd., Athene USA
Corporation, Athene Life Re Ltd., Athene Annuity & Life Assurance Company, Aviva Life and Annuity Company (now known
as Athene Annuity and Life Company), Athene Asset Management LLC, Presidential Life Insurance Company (now known as
Athene Annuity & Life Assurance Company of New York) and Aviva Life and Annuity Company of New York (now known as
Athene Life Insurance Company of New York) (incorporated by reference to Exhibit 10.4.3 to the Form S-1 filed on October
25, 2016).
Amendment One to Shared Services and Cost Sharing Agreement, effective as of October 2, 2013, among Athene Holding
Ltd., Athene USA Corporation, Athene Life Re Ltd., Athene Annuity & Life Assurance Company, Aviva Life and Annuity
Company (now known as Athene Annuity and Life Company), Athene Asset Management LLC, Athene Annuity & Life
Assurance Company of New York (formerly known as Presidential Life Insurance Company) and Aviva Life and Annuity
Company of New York (now known as Athene Life Insurance Company of New York) (incorporated by reference to Exhibit
10.4.4 to the Form S-1 filed on October 25, 2016).
Credit Agreement, dated as of January 22, 2016, among Athene Holding Ltd., Athene Life Re Ltd. and Athene USA
Corporation, as Borrowers, the lenders from time to time party thereto, and Citibank, N.A., as Administrative Agent
(incorporated by reference to Exhibit 10.5 to the Form S-1 filed on October 25, 2016).
Guaranty, dated as of January 22, 2016, among Athene Holding Ltd., Athene Life Re Ltd. and Athene USA Corporation, as
Guarantors, and Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.6 to the Form S-1 filed on
October 25, 2016).
Exhibit No. Description
10.7.1
10.7.2
10.8
10.9
10.10
10.11
10.12
10.13
10.14.1
10.14.2
10.14.3
10.14.4
10.15.1
10.15.2
10.15.3
10.15.4
10.15.5
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23.1
10.23.2
Fifth Amended and Restated Fee Agreement, dated as of June 8, 2017, between Athene Asset Management, L.P. and Athene
Holding Ltd. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on June 9, 2017).
Applicable 2016 Liability Fee Discount, effective as of September 30, 2016, between Athene Asset Management, L.P. and
Athene Holding Ltd. (incorporated by reference to Exhibit 10.7.2 to the Form S-1 filed on October 25, 2016).
Amended and Restated Coinsurance Agreement, dated as of July 31, 2015, between Athene Life Insurance Company of New
York and First Allmerica Financial Life Insurance Company (regarding certain term and universal life policies) (incorporated
by reference to Exhibit 10.9 to the Form S-1 filed on October 25, 2016).
Coinsurance and Assumption Agreement, dated as of October 1, 2013, between Aviva Life and Annuity Company (now known
as Athene Annuity and Life Company) and Presidential Life Insurance Company - USA (now known as Accordia Life and
Annuity Insurance Company) (incorporated by reference to Exhibit 10.10 to the Form S-1 filed on October 25, 2016).
Amended and Restated Coinsurance and Assumption Agreement, dated as of July 31, 2015, between Athene Life Insurance
Company of New York and First Allmerica Financial Life Insurance Company (regarding certain policies described therein)
(incorporated by reference to Exhibit 10.11 to the Form S-1 filed on October 25, 2016).
Amended and Restated Coinsurance Agreement, dated as of December 28, 2015, between Athene Annuity and Life Company
and Accordia Life and Annuity Company (formerly known as Presidential Life Insurance Company-USA) (regarding the
ILICO closed block) (incorporated by reference to Exhibit 10.12 to the Form S-1 filed on October 25, 2016).
Funds Withheld Coinsurance Agreement, dated as of October 1, 2013, between Aviva Life and Annuity Company of New York
(now known as Athene Life Insurance Company of New York) and First Allmerica Financial Life Insurance Company
(regarding certain term and universal life policies) (incorporated by reference to Exhibit 10.13 to the Form S-1 filed on
October 25, 2016).
Coinsurance Agreement, dated as of April 29, 2011, between Liberty Life Insurance Company (now known as Athene Annuity
& Life Assurance Company) and Protective Life Insurance Company (incorporated by reference to Exhibit 10.14 to the Form
S-1 filed on October 25, 2016).
Employment Agreement, dated as of February 27, 2013, between Athene Holding Ltd. and James R. Belardi (incorporated by
reference to Exhibit 10.15.1 to the Form S-1 filed on October 25, 2016).
Employment Agreement, dated as of September 7, 2015, between Athene Holding Ltd. and William J. Wheeler (incorporated
by reference to Exhibit 10.15.2 to the Form S-1 filed on October 25, 2016).
Employment Agreement, dated as of October 12, 2015, between Athene Holding Ltd. and Martin P. Klein (incorporated by
reference to Exhibit 10.15.3 to the Form S-1 filed on October 25, 2016).
Employment Agreement, dated as of April 26, 2016, between Athene Holding Ltd. and Grant Kvalheim (incorporated by
reference to Exhibit 10.15.4 to the Form S-1 filed on October 25, 2016).
Amended and Restated Athene Holding Ltd. 2009 Share Incentive Plan (incorporated by reference to Exhibit 10.16.1 to
the Form S-1 filed on October 25, 2016).
Amended and Restated Athene Holding Ltd. 2012 Share Incentive Plan (incorporated by reference to Exhibit 10.16.2 to
the Form S-1 filed on October 25, 2016).
Athene Holding Ltd. 2014 Share Incentive Plan (incorporated by reference to Exhibit 10.16.3 to the Form S-1 filed on October
25, 2016).
Amendment No. 1 to 2014 Share Incentive Plan (incorporated by reference to Exhibit 10.16.4 to the Form S-1 filed on October
25, 2016).
Athene Holding Ltd. 2016 Share Incentive Plan (incorporated by reference to Exhibit 10.16.5 to the Form S-1 filed on October
25, 2016).
Form of Amended and Restated Restricted Share Award Agreement (Class M-1 common shares) (incorporated by reference to
Exhibit 10.17 to the Form S-1 filed on October 25, 2016).
Form of Amended and Restated Restricted Share Award Agreement (Class M-2 common shares) (incorporated by reference to
Exhibit 10.18 to the Form S-1 filed on October 25, 2016).
Form of Amended and Restated Restricted Share Award Agreement (Class M-3 common shares) (incorporated by reference to
Exhibit 10.19 to the Form S-1 filed on October 25, 2016).
Form of Amended and Restated Restricted Share Award Agreement (Class M-4 common shares) (incorporated by reference to
Exhibit 10.20 to the Form S-1 filed on November 10, 2016).
Form of Amended and Restated Restricted Share Unit Award Agreement (similar to Class M-4 common shares) (incorporated
by reference to Exhibit 10.21 to the Form S-1 filed on November 10, 2016).
Form of Amended and Restated Restricted Share Award Agreement (Class M-4 Prime common shares) (incorporated by
reference to Exhibit 10.22 to the Form S-1 filed on November 10, 2016).
Form of Amended and Restated Restricted Share Unit Award Agreement (similar to Class M-4 Prime common shares)
(incorporated by reference to Exhibit 10.23 to the Form S-1 filed on November 10, 2016).
Form of Amended and Restated Class A Share Award Agreement (Class A common shares issued at $13.46 per share)
(incorporated by reference to Exhibit 10.24.1 to the Form S-1 filed on November 10, 2016).
Form of Amendment Letter to the Amended and Restated Class A Share Award Agreement (Class A common shares issued at
$13.46 per share) (incorporated by reference to Exhibit 10.24.2 to the Form S-1 filed on November 10, 2016).
Exhibit No. Description
10.24.1
10.24.2
10.25.1
10.25.2
10.26.1
10.26.2
10.27.1
10.27.2
10.28.1
10.28.2
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39.1
10.39.2
10.39.3
10.39.4
10.39.5
10.39.6
10.39.7
Form of Restricted Share Award Agreement (Class A common shares) (incorporated by reference to Exhibit 10.25.1 to
the Form S-1 filed on November 10, 2016).
Form of Amendment Letter to the Restricted Share Award Agreement (Class A common shares) (incorporated by reference to
Exhibit 10.25.2 to the Form S-1 filed on November 10, 2016).
Form of Class A Share Award Agreement (Class A common shares issued at fair market value) (incorporated by reference to
Exhibit 10.26.1 to the Form S-1 filed on November 10, 2016).
Form of Amendment Letter to Class A Share Award Agreement (Class A common shares issued at fair market value)
(incorporated by reference to Exhibit 10.26.2 to the Form S-1 filed on November 10, 2016).
Form of 2014 Share Incentive Plan Nonqualified Stock Option Award Notice and Nonqualified Stock Option Agreement
(incorporated by reference to Exhibit 10.27 to the Form S-1 filed on October 25, 2016).
Form of 2016 Share Incentive Plan Nonqualified Stock Option Award Notice and Nonqualified Stock Option Agreement.
Form of 2014 Share Incentive Plan Restricted Share Unit Award Notice (Performance-Based Vesting) and Restricted Share
Unit Award Agreement (incorporated by reference to Exhibit 10.28 to the Form S-1 filed on October 25, 2016).
Form of 2016 Share Incentive Plan Restricted Share Unit Award Notice (Performance-Based Vesting) and Restricted Share
Unit Award Agreement.
Form of 2014 Share Incentive Plan Restricted Share Unit Award Notice (Time-Based Vesting) and Restricted Share Unit
Award Agreement (incorporated by reference to Exhibit 10.29 to the Form S-1 filed on October 25, 2016).
Form of 2016 Share Incentive Plan Restricted Share Unit Award Notice (Time-Based Vesting) and Restricted Share Unit
Award Agreement.
Form of Amended and Restated Restricted Share Award Agreement (2014 awards to certain non-employee directors)
(incorporated by reference to Exhibit 10.30 to the Form S-1 filed on November 10, 2016).
Form of Restricted Share Award Agreement (2015 awards to certain non-employee directors) (incorporated by reference to
Exhibit 10.31 to the Form S-1 filed on November 10, 2016).
Form of 2016 Share Incentive Plan Restricted Share Award Notice and Restricted Share Award Agreement.
Form of 2016 Share Incentive Plan Restricted Share Award Notice (Performance-Based Vesting) and Restricted Share Award
Agreement.
Form of Director Retention Letter.
Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.33 to the Form S-1 filed on October 25,
2016).
Separation Agreement and General Release, dated as of May 20, 2015, between Athene Holding Ltd. and Brenda Cushing
(incorporated by reference to Exhibit 10.34 to the Form S-1 filed on October 25, 2016).
Separation Agreement and General Release, dated as of June 21, 2016, between Athene Holding Ltd. and Stephen E. Cernich
(incorporated by reference to Exhibit 10.35 to the Form S-1 filed on October 25, 2016).
Letter Agreement, dated as of April 4, 2014, among Athene Holding Ltd., Apollo Global Management, LLC, Procific and AHL
2014 Investor, L.P. (incorporated by reference to Exhibit 10.36 to the Form S-1 filed on October 25, 2016).
Letter Agreement, dated as of December 4, 2012, among Athene Holding Ltd., Apollo Global Management, LLC and Procific
(incorporated by reference to Exhibit 10.37 to the Form S-1 filed on October 25, 2016).
Amended and Restated Master Sub-Advisory Agreement, dated as of April 1, 2014, among Athene Asset Management L.P.,
Apollo Capital Management, L.P., Apollo Global Real Estate Management, L.P., ARM Manager LLC, Apollo Longevity, LLC
and Apollo Emerging Markets, LLC (incorporated by reference to Exhibit 10.39.1 to the Form S-1 filed on October 25, 2016).
Master Sub-Advisory Agreement Addendum One, dated as of November 24, 2015, between Athene Asset Management L.P.
and Apollo Emerging Markets, LLC (incorporated by reference to Exhibit 10.39.2 to the Form S-1 filed on October 25, 2016).
Master Sub-Advisory Agreement Addendum Two, dated June 8, 2017, by and among AAM, Apollo Capital Management, L.P.,
Apollo Global Real Estate Management, L.P., ARM Manager LLC, Apollo Longevity, LLC and Apollo Emerging Markets,
LLC (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on June 9, 2017).
Second Amended and Restated Master Sub-Advisory Agreement, dated as of April 1, 2014, among Athene Asset Management
L.P., Apollo Capital Management, L.P., Apollo Global Real Estate Management, L.P., ARM Manager LLC, Apollo Longevity,
LLC, Apollo Royalties Management, LLC and Apollo Emerging Markets, LLC (incorporated by reference to Exhibit 10.39.3
to the Form S-1 filed on October 25, 2016).
Master Sub-Advisory Agreement Addendum One, dated as of November 24, 2015, between Athene Asset Management L.P.
and Apollo Emerging Markets, LLC (incorporated by reference to Exhibit 10.39.4 to the Form S-1 filed on October 25, 2016).
Master Sub-Advisory Agreement Addendum Two, dated June 8, 2017, by and among AAM, Apollo Capital Management, L.P.,
Apollo Global Real Estate Management, L.P., ARM Manager LLC, Apollo Longevity, LLC, Apollo Royalties Management,
LLC and Apollo Emerging Markets, LLC (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed
on June 9, 2017).
Second Amended and Restated Master Sub-Advisory Agreement, dated as of January 1, 2015, among Athene Asset
Management L.P., Apollo Capital Management, L.P., Apollo Global Real Estate Management, L.P., ARM Manager LLC and
Apollo Longevity, LLC (incorporated by reference to Exhibit 10.39.5 to the Form S-1 filed on October 25, 2016).
Exhibit No. Description
10.39.8
Master Sub-Advisory Agreement Addendum One, dated June 8, 2017, by and among AAM, Apollo Capital Management, L.P.,
Apollo Global Real Estate Management, L.P., ARM Manager LLC and Apollo Longevity, LLC (incorporated by reference to
Exhibit 10.4 to the Current Report on Form 8-K filed on June 9, 2017).
10.40
10.41
12.1
21.1
23.1
24.1
31.1
31.2
32.1
32.2
Separation Agreement and General Release, dated as of December 19, 2016, between Athene Holding Ltd. and Guy Smith III
(incorporated by reference to Exhibit 10.40 to the Form 10-K filed on March 16, 2017).
Cooperation Agreement, dated as of January 1, 2018, between AGER Bermuda Holding Ltd. and Athene Holding Ltd.
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on January 2, 2018).
Statement of Ratio of Earnings to Fixed Charges.
Subsidiaries of the Registrant.
Consent of PricewaterhouseCoopers LLP regarding Athene Holding Ltd. financial statements.
Power of Attorney (included on the signature page hereto)
Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Principal Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Principal Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
XBRL Instance Document.
XBRL Taxonomy Extension Schema.
XBRL Taxonomy Extension Calculation Linkbase.
XBRL Taxonomy Extension Label Linkbase.
XBRL Taxonomy Extension Presentation Linkbase.
XBRL Taxonomy Extension Definition Linkbase.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNATURES
Date: February 26, 2018
ATHENE HOLDING LTD.
/s/ Martin P. Klein
Martin P. Klein
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James R. Belardi, Martin
P. Klein and William Eckert as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him
or her and in his or her name, place and stead, in any and all capacities, to sign this Annual Report on Form 10-K, and all amendments thereto,
and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents and each of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitutes or substitute, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant in the capacities indicated below:
Signatures
/s/ James R. Belardi
James R. Belardi
/s/ Martin P. Klein
Martin P. Klein
/s/ William J. Eckert, IV
William J. Eckert, IV
/s/ Marc Beilinson
Marc Beilinson
/s/ Robert Borden
Robert Borden
/s/ Brian Leach
Brian Leach
/s/ Gernot Lohr
Gernot Lohr
/s/ H. Carl McCall
H. Carl McCall
/s/ Matthew R. Michelini
Matthew R. Michelini
/s/ Dr. Manfred Puffer
Dr. Manfred Puffer
Title
Date
Chairman and Chief Executive Officer
February 26, 2018
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
February 26, 2018
(Principal Financial Officer)
Senior Vice President and Controller
February 26, 2018
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
Signatures
/s/ Marc Rowan
Marc Rowan
/s/ Lawrence J. Ruisi
Lawrence J. Ruisi
/s/ Hope Schefler Taitz
Hope Schefler Taitz
/s/ Arthur Wrubel
Arthur Wrubel
Title
Director
Director
Director
Director
Date
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
Common Stock Performance Graph
The graph and table below compare the total return on our common shares with the total return on the S&P 500
and S&P 500 Financials indices, respectively, for the period from December 9, 2016, our initial public offering
date, to December 31, 2017. The graph and table show the total return on a hypothetical $100 investment in our
common shares and in each index, respectively, at the close of market on December 9, 2016, including the
reinvestment of all dividends. The graph and table below shall not be deemed to be “soliciting material” or to be
“filed,” or to be incorporated by reference in future filings with the SEC, or to be subject to the liabilities of
Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a
document filed under the Securities Act or the Exchange Act.
$130
$120
$110
$100
$90
12/9/2016
12/31/2016
3/31/2017
6/30/2017
9/30/2017
12/31/2017
Athene Holding Ltd.
S&P 500
S&P 500 Financials
Athene Holding Ltd. common stock . . . . . . . . .
S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S&P 500 Financials . . . . . . . . . . . . . . . . . . . . . .
$100.00
100.00
100.00
$108.94
99.18
98.35
$113.48
105.20
100.84
$112.62
108.45
105.12
$122.22
113.31
110.63
$117.39
120.83
120.13
12/9/2016
12/31/2016
3/31/2017
6/30/2017
9/30/2017
12/31/2017
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[THIS PAGE INTENTIONALLY LEFT BLANK]
Executive Management and Board of Directors
As of March 31, 2018
Executive Management Team
Board of Directors
James R. Belardi
Chief Executive Officer and
Chief Investment Officer
John M. Rhodes
Executive Vice President
and Chief Risk Officer
James R. Belardi
Chairman
Athene Holding Ltd.
Matthew R. Michelini
Partner
Apollo Global Management
William J. Wheeler
President
Grant A. Kvalheim
Chief Executive Officer
and President
Athene USA
Martin P. Klein
Executive Vice President
and Chief Financial Officer
Frank L. Gillis
Chief Executive Officer
Athene Life Re
Michael S. Downing
Executive Vice President
and Chief Actuary
Marc Beilinson*
Managing Director
Beilinson Advisory Group
Dr. Manfred Puffer
Senior Advisor
Apollo Global Management
Randall W. Epright
Executive Vice President
and Chief Information
Officer
John L. Golden
Executive Vice President,
Legal
Kristi Kaye Burma
Executive Vice President,
Human Resources
Robert L. Borden
Chief Executive Officer and
Chief Investment Officer
Delegate Advisors, LLC
Marc Rowan
Co-Founder and
Senior Managing Director
Apollo Global Management
Brian Leach
Former Head of Franchise
Risk & Strategy
Citigroup
Lawrence J. Ruisi
Former President and Chief
Executive Officer
Loews Cineplex Entertainment
Gernot Lohr
Senior Partner
Apollo Global Management
Hope Schefler Taitz
Chief Executive Officer
ELY Capital
Individual represents Athene Holding Ltd. unless otherwise noted.
H. Carl McCall
Chairman
State University of New York
Board of Trustees
Arthur Wrubel
Founder
Wesley Capital Management, LLC
Fehmi Zeko
Former Vice Chairman
Bank of America Merrill Lynch
Shareholder Information
Headquarters
Athene Holding Ltd.
Chesney House, First Floor
96 Pitts Bay Road
Pembroke, HM08
Bermuda
Annual Meeting
Shareholders are invited to Athene
Holding Ltd.’s annual meeting
which will be held on June 6, 2018,
beginning at 8:00 a.m. ADT.
The meeting will be held at:
Hamilton Princess & Beach Club
76 Pitts Bay Road
Pembroke, HM08
Bermuda
Stock Listing
The common stock is listed on the
New York Stock Exchange under the
symbol “ATH.”
Transfer Agent
Correspondence should be mailed to:
Computershare
P.O. Box 505000
Louisville, KY 40233
Overnight correspondence
should be sent to:
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
Phone:
U.S.: 800.736.3011
Non-U.S.: 781.575.3100
Website:
Computershare.com
Investor Relations
You can contact our Investor Relations
department via email at IR@athene.com
or by visiting the Investor Relations section
of our website at IR.Athene.com.
Communications
For media inquiries please contact
CorporateCommunications@athene.com
or visit our website for the most recent
news at Athene.com.
*Lead Independent Director
Athene Annual Report 2017 |
Athene Holding Ltd.
Chesney House, First Floor
96 Pitts Bay Road
Pembroke, HM08
Bermuda
Athene.com