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ATHENE HOLDING LTD – 10-Q – 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 55
Industry Trends and Competition 57
Key Operating and Non-GAAP Measures 61
Results of Operations 64
Investment Portfolio 67
Non-GAAP Measure Reconciliations 86
Liquidity and Capital Resources 89
Critical Accounting Estimates and Judgments 95
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview We are a leading financial services company specializing in retirement services 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 shareholder 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. EffectiveJanuary 1, 2022 , as a result of the closing of the merger involving us and Apollo, Apollo Global Management, Inc. (NYSE: APO) became the beneficial owner of 100% of our Class A common shares and controls all of the voting power to elect members to our board of directors. We have established a significant base of earnings and, as ofMarch 31, 2022 , have an expected annual net investment spread, which measures our investment performance less the total cost of our liabilities, of 1-2% over the 8.4 year weighted-average life of our net reserve liabilities. The weighted-average life includes deferred annuities, pension group annuities, funding agreements, payout annuities and other products.
Our total assets have grown to
three months ended
generated an annualized net investment spread of 1.86% and 1.94%, respectively.
The following table presents the inflows generated from our organic and
inorganic channels:
Successor Predecessor
Three months
ended March 31, Three months ended
(In millions) 2022 March 31, 2021
Retail $ 2,865 $ 1,757
Flow reinsurance 1,001 299
Funding agreements1 5,696 3,226
Pension group annuities 1,994 2,893
Gross organic inflows 11,556 8,175
Gross inorganic inflows - -
Total gross inflows 11,556 8,175
Gross outflows2 (4,883) (4,122)
Net flows $ 6,673 $ 4,053
Inflows attributable to Athene $ 9,333 $ 6,705
Inflows attributable to ACRA noncontrolling interest 2,223 1,470
Total gross inflows 11,556 8,175
Outflows attributable to Athene (4,072) (3,481)
Outflows attributable to ACRA noncontrolling interest (811) (641)
Total gross outflows2 $ (4,883) $ (4,122)
1 Funding agreements are comprised of funding agreements issued under our FABN and FABR programs, funding
agreements issued to the FHLB and long-term repurchase agreements. 2 Gross outflows consist of full and
partial policyholder withdrawals on deferred annuities, death benefits, pension group annuity benefit
payments, payments on payout annuities and funding agreement maturities.
Our organic channels, including retail, flow reinsurance and institutional
products, provided gross inflows of $11.6 billion and $8.2 billion for the three
months ended March 31, 2022 and 2021, respectively, which were underwritten to
attractive, above target returns despite the low interest rate environment.
Gross organic inflows increased $3.4 billion , or 41% from the prior year,
reflecting the strength of our multi-channel distribution platform and our
ability to quickly pivot into optimal and profitable channels as opportunities
arise. Withdrawals on our deferred annuities, maturities of our funding
agreements, payments on payout annuities and pension group annuity payments
(collectively, gross outflows), in the aggregate were $4.9 billion and $4.1
billion for the three months ended March 31, 2022 and 2021, respectively. The
increase in gross outflows was primarily driven by the maturity of a funding
agreement issuance. We believe that our credit profile, our current product
offerings and product design capabilities as well as our growing reputation as
both a seasoned funding agreement issuer and a reliable pension group annuity
counterparty will continue to enable us to grow our existing organic channels
and allow us to source additional volumes of profitably underwritten liabilities
in various market environments. We plan to continue to grow organically by
expanding each of our retail, flow reinsurance and institutional distribution
channels. We believe that we have the right people, infrastructure, scale and
capital discipline to position us for continued growth.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Within our retail channel, we had fixed annuity sales of$2.9 billion and$1.8 billion for the three months endedMarch 31, 2022 and 2021, respectively. The increase in our retail channel was primarily driven by the strong performance of our index annuity products in the independent marketing organizations (IMO) and broker-dealer channels, exhibiting strong sales execution despite the challenging sales environment, and higher MYGA sales. We have maintained our disciplined approach to pricing, including with respect to targeted underwritten returns. We aim to grow our retail channel by deepening our relationships with our approximately 53 IMOs; approximately 68,000 independent agents; and our growing network of 18 banks and 119 regional broker-dealers. Our strong financial position and diverse, capital efficient products allow us to be dependable partners with IMOs, banks and broker-dealers as well as consistently write new business. We expect our retail channel to continue to benefit from our credit profile and recent product launches. We believe this should support growth in sales at our desired cost of funds through increased volumes via current IMOs, while also allowing us to continue to expand our bank and broker-dealer channels. Additionally, we continue to focus on hiring and training a specialized sales force and creating products to capture new potential distribution opportunities. In our flow reinsurance channel, we target reinsurance business consistent with our preferred liability characteristics and, as such, flow reinsurance provides another opportunistic channel for us to source liabilities with attractive crediting rates. We generated inflows through our flow reinsurance channel of$1.0 billion and$299 million for the three months endedMarch 31, 2022 and 2021, respectively. The increase in our flow reinsurance channel from prior year was driven by strong volumes with existing partnerships, including volumes from our new Japanese partner that was added during second half of 2021. We expect that our credit profile and our reputation as a solutions provider will help us continue to source additional reinsurance partners, which will further diversify our flow reinsurance channel. Within our institutional channel, we generated inflows of$7.7 billion and$6.1 billion for the three months endedMarch 31, 2022 and 2021, respectively. The increase in our institutional channel was driven by higher funding agreements, partially offset by lower pension group annuity inflows. We issued funding agreements in the aggregate principal amount of$5.7 billion and$3.2 billion for the three months endedMarch 31, 2022 and 2021, respectively, which included seven FABN issuances in three different currencies during the quarter. Funding agreements are comprised of funding agreements issued under our FABN and FABR programs, funding agreements issued to the FHLB and repurchase agreements with maturities exceeding one year at issuance, with inflows in the aggregate principal amount of$3.5 billion ,$1.0 billion ,$495 million and$750 million , respectively, for the three months endedMarch 31, 2022 . During the three months endedMarch 31, 2022 , we closed two pension group annuity transactions and issued annuity contracts in the aggregate principal amount of$2.0 billion , compared to$2.9 billion during the three months endedMarch 31, 2021 . Since entering the pension group annuity channel in 2017, we have closed 35 deals involving more than 390,000 plan participants resulting in the issuance or reinsurance of group annuities of$32.2 billion to date. We expect to grow our institutional channel by continuing to engage in pension group annuity transactions and programmatic issuances of funding agreements. Our inorganic channel has contributed significantly to our growth through both acquisitions and block reinsurance transactions. We believe our internal transactions team, with support from Apollo, has an industry-leading ability to source, underwrite and expeditiously close transactions. With support from Apollo, we are a solutions provider with a proven track record of closing transactions, which we believe makes us the ideal partner to insurance companies seeking to restructure their business. We expect that our inorganic channel will continue to be an important source of profitable growth in the future. Executing our growth strategy requires that we have sufficient capital available to deploy. We believe that we have significant capital available to us to support our growth aspirations. As ofMarch 31, 2022 , we estimate that we have approximately$7.3 billion in capital available to deploy, consisting of approximately$3.3 billion in excess capital,$2.9 billion in untapped debt capacity (assuming a peer average adjusted debt to capitalization ratio of 25%) and$1.1 billion in available undrawn capital at ACRA, subject, in the case of debt capacity, to favorable market conditions and general availability. In order to support our growth strategies and capital deployment opportunities, we established ACRA as a long-duration, on-demand capital vehicle. We own 36.55% of the economic interests in ACRA, with the remaining 63.45% of the economic interests being owned by ADIP, a series of funds managed by an affiliate of Apollo. ACRA participates in certain transactions by drawing a portion of the required capital for such transactions from third-party investors equal to ADIP's proportionate economic interest in ACRA. This shareholder-friendly, strategic capital solution allows us the flexibility to simultaneously deploy capital across multiple accretive avenues, while maintaining a strong financial position. Merger with Apollo OnJanuary 1, 2022 , we completed our merger with AGM and are now a direct wholly owned subsidiary of AGM. The total consideration for the transaction was$13.1 billion . The consideration was calculated based on historical AGM'sDecember 31, 2021 closing share price multiplied by the AGM common shares issued in the share exchange, as well as the fair value of stock-based compensation awards replaced, fair value of warrants converted to AGM common shares and other equity consideration, and effective settlement of pre-existing relationships and other consideration. At the closing of the merger with AGM, each issued and outstanding AHL Class A common share (other than shares held by Apollo, the AOG or the respective direct or indirect wholly owned subsidiaries of Athene or the AOG) was converted automatically into 1.149 shares of AGM common shares with cash paid in lieu of any fractional AGM common shares. In connection with the merger, AGM issued to AHL Class A common shareholders 158.2 million AGM common shares in exchange for 137.6 million AHL Class A common shares that were issued and outstanding as of the acquisition date, exclusive of the 54.6 million shares previously held by Apollo immediately before the acquisition date. 56
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
AAA Investment OnApril 1, 2022 , we contributed certain of our alternative investments toAAA in exchange for limited partnership interests inAAA . Apollo establishedAAA for the purpose of providing a single vehicle through which we and third-party investors can participate in a portfolio of alternative investments. Additionally,AAA enhances Apollo's ability to increase alternatives assets under management (AUM) by raising capital from 3rd parties, which will allow Athene to achieve greater scale and diversification for alternatives. Third-party investors are expected to invest inAAA at a later date. Also in connection with theAAA investment, onApril 1, 2022 , we entered into theAAA Facility , pursuant to which we may provide loans toAAA to fund, among other things, withdrawals from and investments byAAA .The AAA Facility replaces our previous contingent commitments related to the investments we contributed, among others. Interest on any loans made pursuant to theAAA Facility accrues at a fixed rate of 8% per year, and has a maturity date ofApril 1, 2032 , subject to extension.AAA is managed exclusively by Apollo, and investment advisory services are provided toAAA under the terms of an investment management agreement with Apollo.
Industry Trends and Competition
Market Conditions
As a leading financial services company specializing in retirement services, we are affected by numerous factors, including the condition of global financial markets and the economy. Price fluctuations within equity, credit, commodity and foreign exchange markets, as well as interest rates, which may be volatile and mixed across geographies, can significantly impact the performance of our business including but not limited to the valuation of investments and related income we may recognize. We carefully monitor economic and market conditions that could potentially give rise to global market volatility and affect our business operations, investment portfolio and derivatives, which includes global inflation. We have seen US inflation continue to rise during 2022, which has been driven by various factors, including supply chain disruptions, consumer demand, employment levels, low (but rising) mortgage interest rates and a severely distorted supply/demand housing imbalance, and residential vacancy rates. During the first quarter of 2022, the US Federal Reserve (Federal Reserve ) indicated its plan to be more aggressive at the beginning of the tightening cycle to lessen inflation transpiring widely through the US economy, resulting in considerable market volatility. As a result, theFederal Reserve voted to increase the federal funds rate during the first quarter of 2022. TheUS Bureau of Labor Statistics reported the annual US inflation rate increased to 8.5% as ofMarch 31, 2022 , compared to 7.0% as ofDecember 2021 and continues to be the highest rate since the 1980s. Adverse economic conditions may result from domestic and global economic and political developments, including plateauing or decreasing economic growth and business activity, civil unrest, geopolitical tensions or military action, such as the armed conflict betweenUkraine andRussia and corresponding sanctions imposed by the US and other countries, and new or evolving legal and regulatory requirements on business investment, hiring, migration, labor supply and global supply chains. Coupled with the drop in equity markets in the first quarter of 2022, theBureau of Economic Analysis reported real GDP decreased at an annual rate of 1.4% in the first quarter of 2022. As ofApril 2022 , theInternational Monetary Fund estimated the US will expand by 4.0% in 2022 and 2.6% in 2023. TheUS Bureau of Labor Statistics reported the US unemployment rate decreased to 3.9% as of the end of the first quarter of 2022. Although some pressure on oil prices eased in late 2021, oil price per barrel rose during the first quarter of 2022 and is expected to continue to rise throughout 2022.
Interest Rate Environment
The endpoint for the move higher in rates is difficult to predict and will take a delicate balancing act by theFederal Reserve to engineer. There are elements of inflation that seem to be COVID-related or otherwise transitory, but geopolitical conditions including theRussia invasion ofUkraine , and other factors may persist longer and contribute to inflation absentFederal Reserve actions. Generally higher rates are reasonable to expect for the remainder of the year. While higher rates are beneficial for reinvestment opportunities across an insurance balance sheet and would boost investment income, unrealized losses will increase. It is plausible that inflation pressures could cause theFederal Reserve to raise rates more dramatically, which might ultimately result in an economic recession, although inflation pressures andFederal Reserve actions, along with other geopolitical issues, are difficult to predict. 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 through ALM modeling. As part of our investment strategy, we purchase floating rate investments, which we expect would perform well in a rising interest rate environment and which we expect would underperform in a declining rate environment as experienced in the prior year. Our investment portfolio includes$36.9 billion of floating rate investments, or 20% of our net invested assets as ofMarch 31, 2022 . 57
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
If prevailing interest rates were to rise, we believe our products would be more attractive to consumers and our sales would likely increase. If prevailing interest rates were to decline, it is likely that our products would be less attractive to consumers and our sales would likely decrease. In periods of prolonged low interest rates, the net investment spread may be negatively impacted by reduced investment income to the extent that we are unable to adequately reduce policyholder crediting rates due to policyholder guarantees in the form of minimum crediting rates or otherwise due to market conditions. As ofMarch 31, 2022 , most of our products were deferred annuities with 21% of our FIAs at the minimum guarantees and 37% of our fixed rate annuities at the minimum crediting rates. As ofMarch 31, 2022 , minimum guarantees on all of our deferred annuities, including those with crediting rates already at their minimum guarantees, were, on average, greater than 100 basis points below the crediting rates on such deferred annuities, allowing us room to reduce rates before reaching the minimum guarantees. Our remaining liabilities are associated with immediate annuities, pension group annuity obligations, funding agreements and life contracts for which we have little to no discretionary ability to change the rates of interest payable to the respective policyholder. A significant majority of our deferred annuity products have crediting rates that we may reset annually upon renewal, following the expiration of the current guaranteed period. While we have the contractual ability to lower these crediting rates to the guaranteed minimum levels, our willingness to do so may be limited by competitive pressures. See Part I-Item 3. Quantitative and Qualitative Disclosures About Market Risks to this report and Part II-Item 7A. Quantitative and Qualitative Disclosures About Market Risks in our 2021 Annual Report, which includes a discussion regarding interest rate and other significant risks and our strategies for managing these risks.
Discontinuation of LIBOR
OnDecember 31, 2021 , (1) most LIBOR settings (i.e., 24 out of 35, including 1-week and 2-month US Dollar (USD) LIBOR as well as all other non-USD LIBOR settings) ceased to be published and (2) a few of the most widely used GBP and JPY LIBOR settings (i.e., 1-, 3- and 6- month GBP and JPY LIBOR settings) were deemed permanently unrepresentative, but will continue to be published on a synthetic basis, for a limited time period for the purpose of all legacy contracts (except for cleared derivatives). The remaining USD LIBOR settings (i.e., 1-, 3-, 6- and 12-month USD LIBOR settings) will continue to be published, subject to limitations on use, and cease or become unrepresentative onJune 30, 2023 . Without the intervention of theUK Financial Conduct Authority using enhanced powers provided by theUK Government to compel continued panel bank contribution by the IBA, the LIBOR administrator, LIBOR will cease publication afterJune 30, 2023 . The discontinuation of LIBOR could have a significant impact on the financial markets and represents a material uncertainty to our business. To manage the uncertainty surrounding the discontinuation of LIBOR, we have established a LIBOR transition team and a transition plan. We have created anExecutive Steering Committee composed of senior executives to coordinate and oversee the execution of our plan. It is difficult to predict the full impact of the transition away from LIBOR on our contracts whose value is tied to LIBOR. The value or profitability of these contracts may be adversely affected. As ofMarch 31, 2022 , we had contracts tied to LIBOR in the notional amounts set forth in the table below: Extending Beyond (In millions) Total Exposure June 30, 2023 Investments$ 35,211 $ 30,036 Product Liabilities 17,297 5,267 Derivatives Hedging Product Liabilities 20,103 6,870 Other Derivatives 3,530 3,530 Other Contracts 1,663 1,113 Total notional of contracts tied to LIBOR$ 77,804 $ 46,816 58
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
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Investments As ofMarch 31, 2022 , our investments tied to LIBOR were in the following asset classes: (In millions) Total Exposure Extending Beyond June 30, 2023 Multi-lateral Arrangements Corporates $ 823 $ 623 RMBS 3,076 2,981 CMBS 632 476 CLO 15,191 14,832 ABS 7,213 6,269 Bank Loans 1,400 1,206 Total Multi-lateral Arrangements 28,335 26,387 Bi-lateral Arrangements CML 6,750 3,523 RML 126 126 Total Bi-lateral Arrangements 6,876 3,649 Total investments tied to LIBOR$ 35,211 $
30,036
Of the total notional value of investment-related contracts tied to LIBOR extending beyondJune 30, 2023 ,$26.4 billion or 87.9% relate to multi-lateral arrangements. These arrangements are typically characterized by a large, diverse set of unrelated holders, the majority or all of whom must consent to amendments to the terms of the underlying investment instrument. Generally, when the amendments concern a material term such as the determination of interest, consent must be unanimous. Given the collective action issues inherent in such structures, such consent is typically impracticable and beyond our control. The existence and character of fallback provisions affected by the discontinuation of LIBOR vary widely from instrument to instrument. Many of our legacy contracts may not contemplate the permanent discontinuation of LIBOR and upon LIBOR's discontinuation may result in the conversion of the instrument from a floating- to a fixed-rate instrument or may involve a significant degree of uncertainty as to the method of determining interest. To the extent that such legacy arrangements do not contemplate the permanent discontinuation of LIBOR, we would most likely look to some broad-based solution, such as theNew York or US federal LIBOR transition law, to rectify such deficiency. To the extent that such a solution is ineffective, for example as a result of being ruled unconstitutional, we would likely be required to undertake a re-evaluation of affected investments, which might result in the disposition of individual positions. To the extent that individual positions are retained, we may incur adverse financial consequences, including any mark-to-market impacts resulting from those investments that convert from a floating to a fixed rate. To the extent that the fallback rates ultimately used to determine interest payable on structured securities do not align with the fallback rates used to determine interest payable on the underlying assets, economic losses could be sustained on the overall structure.
The remaining notional value of investment-related contracts tied to LIBOR
extending beyond
arrangements that are capable of being amended through negotiation with the
relevant counterparty.
As our investment manager, Apollo maintains the documentation associated with the assets in our investment portfolio. We are therefore dependent upon Apollo for the successful completion of our LIBOR transition efforts relating to our investment portfolio. See Part I-Item 1A. Risk Factors-Risks Relating to Our Business Operations-Uncertainty relating to the LIBOR Calculation process and the phasing out of LIBOR after a future date may adversely affect the value of our investment portfolio, our ability to achieve our hedging objectives and our ability to issue funding agreements bearing a floating rate of interest included in our 2021 Annual Report. Apollo's failure to fulfill its responsibilities could have an adverse impact on our results of operations and ability to timely report accurate financial information.
Product Liabilities and Associated Hedging Instruments
As ofMarch 31, 2022 , we had product liabilities with a notional value of approximately$17.3 billion for which LIBOR is a component in the determination of interest credited, of which we expect$5.3 billion to have a current crediting term that extends beyondJune 30, 2023 . For purposes of evaluating our exposure to LIBOR, we only consider our exposure to the current crediting term, which is typically one to two years. Upon renewal of the crediting term, we have the ability to migrate policyholders into new strategies not involving LIBOR. Generally, there are two categories of indices that use LIBOR in the determination of interest credited, "excess return" indices (return of index in excess of LIBOR) and indices that use LIBOR as a means to control volatility. The indices to which these products are tied are primarily proprietary indices for which key inputs are determined by the index sponsor. The index sponsor generally has the right to unilaterally change the reference rate upon the discontinuation of LIBOR. As a result, we do not anticipate any administrative concerns in connection with the transition from LIBOR to a replacement rate with respect to these products. 59
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As ofMarch 31, 2022 , we held derivatives with a notional value of approximately$20.1 billion to hedge our exposure to these product liabilities, of which we expect$6.9 billion to extend beyondJune 30, 2023 . Included within this category are$6.0 billion of Eurodollar futures, of which we expect$2.5 billion to extend beyondJune 30, 2023 . Exchange traded products, such as Eurodollar futures, will follow the CME Group Inc.'s approach regarding the discontinuation of LIBOR. The remaining derivatives in this category are primarily purchased to hedge the current crediting period. We will be required to purchase new derivatives in future periods to hedge future crediting periods associated with the related existing product liabilities, which will expose us to potential basis mismatch to the extent that the reference rate for the product liability is not the same as the reference rate for the derivative instrument. These derivatives are entered into pursuant to an ISDA Master Agreement and will transition to the Secured Overnight Financing Rate (SOFR) in accordance with the process described below under the caption Other Derivatives.
Other Derivatives
Our other derivative contracts tied to LIBOR are generally entered into pursuant to an ISDA Master Agreement. ISDA published the ISDA 2020 IBOR Fallbacks Protocol (Protocol) and released Supplement 70 to the 2006 ISDA Definitions (Supplement) onOctober 23, 2020 . The Protocol and Supplement include appropriate fallbacks that contemplate the permanent discontinuation of LIBOR. InJanuary 2021 , we joined industry peers by adhering to the Protocol and terms of the Supplement, each of which became effective onJanuary 25, 2021 . With respect to future transactions, we anticipate adoption of the 2021 ISDA Interest Rate Definitions. To the extent that the fallbacks incorporated into our other derivative contracts result in the use of a replacement rate that differs from that employed in the contract being hedged, we may experience basis mismatch. The Protocol contains templates for possible bilateral amendments to legacy contracts for situations in which the fallbacks contemplated by the Protocol give rise to potential basis risk. We intend to evaluate whether and the extent to which we are subject to such basis risk, as well as the possibility of using the available templates to mitigate such risk.
Other Contracts and Other Sources of Exposure
The "Other Contracts" category is comprised of our LIBOR-based floating rate funding agreements, fixed-to-float Series A preference shares, and our credit agreement, if any amounts were to be outstanding, all of which contemplate the permanent discontinuation of LIBOR. These agreements are tied to LIBOR in a manner that is not expected to have a significant impact upon LIBOR's discontinuation or have fallback provisions in place that provide for the determination of interest after the discontinuation of LIBOR. In addition to the other contracts for which we have quantified our exposure, we are party to contracts that are tied to LIBOR based upon the occurrence of some remote contingency, such as the accrual of penalty interest, or for which LIBOR is otherwise not a material term of the contract. These contracts do not lend themselves to quantification and are lower in priority in our LIBOR remediation efforts. Finally, LIBOR is used as a component in our internal derivative valuation models. We are in the process of transitioning the benchmark yield curve in such models from LIBOR to SOFR and we expect to complete the transition prior to the discontinuation of LIBOR. Such transition may affect the valuation of our derivative instruments. We can provide no assurance that we will be successful at fully implementing our plan prior to the discontinuation of LIBOR. Completion of certain components of our plan are contingent upon market developments and are therefore not fully within our control. To the extent management effort and attention is focused on other matters, such as responding to the risks posed by COVID-19, the timely completion of our plan could become more difficult. Failure to fully implement our plan prior to the discontinuation of LIBOR may have a material adverse effect on our business, financial position, results of operations and cash flows and on our ability to timely report accurate financial information.
Demographics
Over the next four decades, the retirement-age population is expected to experience unprecedented growth. Technological advances and improvements in healthcare are projected to continue to contribute to increasing average life expectancy, and aging individuals must be prepared to fund retirement periods that will last longer than ever before. Further, many working households inthe United States do not have adequate retirement savings. As a tool for addressing the unmet need for retirement planning, we believe that many Americans have begun to look to tax-efficient savings products with low-risk or guaranteed return features and potential equity market upside. Our tax-efficient savings products are well positioned to meet this increasing customer demand.
Competition
We operate in highly competitive markets. We face a variety of large and small industry participants, including diversified financial institutions, insurance and reinsurance companies and private equity firms. These companies compete in one form or another for the growing pool of retirement assets driven by a number of external factors such as the continued aging of the population and the reduction in safety nets provided by governments and private employers. In the markets in which we operate, scale and the ability to provide value-added services and build long-term relationships are important factors to compete effectively. We believe that our leading presence in the retirement market, diverse range of capabilities and broad distribution network uniquely position us to effectively serve consumers' increasing demand for retirement solutions, particularly in the FIA market. According to LIMRA, total fixed annuity market sales inthe United States were$129.3 billion for the year endedDecember 31, 2021 , a 7.4% increase from the same time period in 2020, as a rise in interest rates driven by the economic recovery spurred continued growth in the US annuity market. In the total fixed annuity market, for the year endedDecember 31, 2021 (the most recent period for which specific market share data is available), we were the fourth largest company based on sales of$8.3 billion , translating to a 6.4% market share. For the year endedDecember 31, 2020 , our market share was 6.4% with sales of$7.7 billion . 60
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According to LIMRA, total fixed-indexed annuity market sales inthe United States were$63.7 billion for the year endedDecember 31, 2021 , a 14.8% increase from the same time period in 2020. For the year endedDecember 31, 2021 (the most recent period for which specific market share data is available), we were the largest provider of FIAs based on sales of$7.7 billion , and our market share for the same period was 12.1%. For the year endedDecember 31, 2020 , we were the largest provider of FIAs based on sales of$5.8 billion , translating to a 10.5% market share. According to LIMRA, total registered indexed linked annuity (RILA) market sales inthe United States were$38.7 billion for the year endedDecember 31, 2021 , a 62.1% increase from the same time period in 2020. For the year endedDecember 31, 2021 (the most recent period for which specific market share data is available), we were the ninth largest provider of RILAs based on sales of$566 million , and our market share for the same period was 1.5%. For the year endedDecember 31, 2020 , we were the ninth largest provider of RILAs based on sales of$187 million , translating to a 0.8% market share. We believe RILAs represent a significant opportunity for Athene.
Key Operating and Non-GAAP Measures
In addition to our results presented in accordance with GAAP, we present certain financial information that includes non-GAAP measures. Management believes the use of these non-GAAP measures, together with the relevant GAAP measures, provides information that may enhance an investor's understanding of our results of operations and the underlying profitability drivers of our business. The majority of these non-GAAP measures are intended to remove from the results of operations the impact of market volatility (other than with respect to alternative investments) as well as integration, restructuring and certain other expenses which are not part of our underlying profitability drivers, as such items fluctuate from period to period in a manner inconsistent with these drivers. These measures should be considered supplementary to our results in accordance with GAAP and should not be viewed as a substitute for the corresponding GAAP measures.
Spread Related Earnings (SRE)
Spread related earnings is a pre-tax non-GAAP measure used to evaluate our financial performance excluding market volatility and expenses related to integration, restructuring, stock compensation and other expenses. Our spread related earnings equals net income (loss) available to AHL common shareholder adjusted to eliminate the impact of the following: •Investment Gains (Losses), Net of Offsets-Consists of the realized gains and losses on the sale of AFS securities, the change in fair value of reinsurance assets, unrealized gains and losses, changes in the credit loss allowance, and other investment gains and losses. Unrealized, allowances and other investment gains and losses are comprised of the fair value adjustments of trading securities (other than CLOs) and mortgage loans, investments held under the fair value option and our investment in Apollo, derivative gains and losses not hedging FIA index credits, and the change in credit loss allowances recognized in operations net of the change in AmerUs Closed Block fair value reserve related to the corresponding change in fair value of investments. Investment gains and losses are net of offsets related to DAC and DSI amortization and changes to guaranteed lifetime withdrawal benefit (GLWB) and guaranteed minimum death benefit (GMDB) reserves (together, GLWB and GMDB reserves represent rider reserves) as well as the market value adjustments (MVA) associated with surrenders or terminations of contracts. •Change in Fair Values of Derivatives and Embedded Derivatives - FIAs, Net of Offsets-Consists of impacts related to the fair value accounting for derivatives hedging the FIA index credits and the related embedded derivative liability fluctuations from period to period. The index reserve is measured at fair value for the current period and all periods beyond the current policyholder index term. However, the FIA hedging derivatives are purchased to hedge only the current index period. Upon policyholder renewal at the end of the period, new FIA hedging derivatives are purchased to align with the new term. The difference in duration between the FIA hedging derivatives and the index credit reserves creates a timing difference in earnings. This timing difference of the FIA hedging derivatives and index credit reserves is included as a non-operating adjustment, net of offsets related to DAC and DSI 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). On an economic basis, we believe this is suitable because policyholder accounts are credited with index performance at the end of each index term. However, because the term of an embedded derivative in an FIA contract is longer-dated, there is a duration mismatch which may lead to mismatches for accounting purposes.
•Integration, Restructuring, and Other Non-operating Expenses-Consists of
restructuring and integration expenses related to acquisitions and block
reinsurance costs as well as certain other expenses, which are not predictable
or related to our underlying profitability drivers.
•Stock Compensation Expense-Consists of stock compensation expenses associated
with our share incentive plans, including long-term incentive expenses, which
are not related to our underlying profitability drivers and fluctuate from time
to time due to the structure of our plans.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
•Income Tax (Expense) Benefit -Consists of the income tax effect of all income statement adjustments, including our Apollo investment, and is computed by applying the appropriate jurisdiction's tax rate to all adjustments subject to income tax. We consider these adjustments to be meaningful adjustments to net income (loss) available to AHL common shareholder for the reasons discussed in greater detail above. Accordingly, we believe using a measure which excludes the impact of these items is useful in analyzing our business performance and the trends in our results of operations. Together with net income (loss) available to AHL common shareholder, we believe spread related earnings provides a meaningful financial metric that helps investors understand our underlying results and profitability. Spread related earnings should not be used as a substitute for net income (loss) available to AHL common shareholder.
Adjusted Debt to Capital Ratio
Adjusted debt to capital ratio is a non-GAAP measure used to evaluate our capital structure excluding the impacts of AOCI and the cumulative changes in fair value of funds withheld and modco reinsurance assets as well as mortgage loan assets, net of DAC, DSI, rider reserve and tax offsets. Adjusted debt to capital ratio is calculated as total long-term and short-term debt at notional value divided by adjusted capitalization. Adjusted capitalization includes our adjusted AHL common shareholder's equity, preferred stock and the notional value of our debt. Adjusted AHL common shareholder's equity is calculated as the ending AHL shareholders' equity excluding AOCI, the cumulative changes in fair value of funds withheld and modco reinsurance assets and mortgage loan assets as well as preferred stock. These adjustments fluctuate period to period in a manner inconsistent with our underlying profitability drivers as the majority of such fluctuation is related to the market volatility of the unrealized gains and losses associated with our AFS securities. Except with respect to reinvestment activity relating to acquired blocks of businesses, we typically buy and hold AFS investments to maturity throughout the duration of market fluctuations, therefore, the period-over-period impacts in unrealized gains and losses are not necessarily indicative of current operating fundamentals or future performance. Accordingly, we believe using measures which exclude AOCI and the cumulative changes in fair value of funds withheld and modco reinsurance assets as well as mortgage loan assets are useful in analyzing trends in our operating results. Adjusted debt to capital ratio should not be used as a substitute for the debt to capital ratio. However, we believe the adjustments to shareholders' equity are significant to gaining an understanding of our capitalization, debt utilization and debt capacity.
Net Investment Spread and Other Operating Expenses
Net investment spread is a key measure of profitability. Net investment spread
measures our investment performance plus our strategic capital management fees
from ACRA, less our total cost of funds. Net investment earned rate is a key
measure of our investment performance while cost of funds is a key measure of
the cost of our policyholder benefits and liabilities.
Net investment earned rate is a non-GAAP measure we use to evaluate the
performance of our net invested assets that does not correspond to GAAP net
investment income. Net investment earned rate is computed as the income from our
net invested assets divided by the average net invested assets, for the relevant
period. To enhance the ability to analyze these measures across periods, interim
periods are annualized. The adjustments to net investment income to arrive at
our net investment earned rate add (a) alternative investment gains and losses,
(b) gains and losses related to trading securities for CLOs, (c) net VIE impacts
(revenues, expenses and noncontrolling interest), (d) forward points gains and
losses on foreign exchange derivative hedges and (e) the change in fair value of
reinsurance assets, and removes the proportionate share of the ACRA net
investment income associated with the ACRA noncontrolling interest. We include
the income and assets supporting our change in fair value of reinsurance assets
by evaluating the underlying investments of the funds withheld at interest
receivables and we include the net investment income from those underlying
investments which does not correspond to the GAAP presentation of change in fair
value of reinsurance assets. We exclude the income and assets supporting
business that we have exited through ceded reinsurance including funds withheld
agreements. We believe the adjustments for reinsurance provide a net investment
earned rate on the assets for which we have economic exposure.
Cost of funds includes liability costs related to cost of crediting on both
deferred annuities and institutional products as well as other liability costs,
but does not include the proportionate share of the ACRA cost of funds
associated with the noncontrolling interest. Cost of crediting on deferred
annuities is the interest credited to the policyholders on our fixed strategies
as well as the option costs on the indexed annuity strategies. With respect to
FIAs, the cost of providing index credits includes the expenses incurred to fund
the annual index credits, and where applicable, minimum guaranteed interest
credited. Cost of crediting on institutional products is comprised of (i)
pension group annuity costs, including interest credited, benefit payments and
other reserve changes, net of premiums received when issued, and (ii) funding
agreement costs, including the interest payments and other reserve changes.
Other liability costs include DAC, DSI and VOBA amortization, change in rider
reserves, the cost of liabilities on products other than deferred annuities and
institutional products, premiums, product charges and other revenues. Cost of
funds is computed as the total liability costs divided by the average net
invested assets, for the relevant period. To enhance the ability to analyze
these measures across periods, interim periods are annualized. We believe a
measure like cost of funds is useful in analyzing the trends of our core
business operations and profitability. While we believe cost of funds is a
meaningful financial metric and enhances our understanding of the underlying
profitability drivers of our business, it should not be used as a substitute for
total benefits and expenses presented under GAAP.
Net investment earned rate, cost of funds, and net investment spread are
non-GAAP measures we use to evaluate the profitability of our business. We
believe these metrics are useful in analyzing the trends of our business
operations, profitability and pricing discipline. While we believe each of these
metrics are meaningful financial metrics and enhance our understanding of the
underlying profitability drivers of our business, they should not be used as a
substitute for net investment income, interest sensitive contract benefits or
total benefits and expenses presented under GAAP.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Other operating expenses excludes integration, restructuring and other non-operating expenses, stock compensation and long-term incentive plan expenses, interest expense and policy acquisition expenses. We believe a measure like other operating expenses is useful in analyzing the trends of our core business operations and profitability. While we believe other operating expenses is a meaningful financial metric and enhances our understanding of the underlying profitability drivers of our business, it should not be used as a substitute for policy and other operating expenses presented under GAAP.
Net Invested Assets
In managing our business, we analyze net invested assets, which does not correspond to total investments, including investments in related parties, as disclosed in our consolidated financial statements and notes thereto. Net invested assets represents the investments that directly back our net reserve liabilities as well as surplus assets. Net invested assets is used in the computation of net investment earned rate, which allows us to analyze the profitability of our investment portfolio. Net invested assets includes (a) total investments on the consolidated balance sheets with AFS securities at cost or amortized cost, excluding derivatives, (b) cash and cash equivalents and restricted cash, (c) investments in related parties, (d) accrued investment income, (e) VIE assets, liabilities and noncontrolling interest adjustments, (f) net investment payables and receivables, (g) policy loans ceded (which offset the direct policy loans in total investments) and (h) an allowance for credit losses. Net invested assets also excludes assets associated with funds withheld liabilities related to business exited through reinsurance agreements and derivative collateral (offsetting the related cash positions). We include the underlying investments supporting our assumed funds withheld and modco agreements in our net invested assets calculation in order to match the assets with the income received. We believe the adjustments for reinsurance provide a view of the assets for which we have economic exposure. Net invested assets includes our proportionate share of ACRA investments, based on our economic ownership, but does not include the proportionate share of investments associated with the noncontrolling interest. Net invested assets also includes our investment in Apollo for prior periods. Our net invested assets are averaged over the number of quarters in the relevant period to compute our net investment earned rate for such period. While we believe net invested assets is a meaningful financial metric and enhances our understanding of the underlying drivers of our investment portfolio, it should not be used as a substitute for total investments, including related parties, presented under GAAP.
Net Reserve Liabilities
In managing our business, we also analyze net reserve liabilities, which does not correspond to total liabilities as disclosed in our consolidated financial statements and notes thereto. Net reserve liabilities represent our policyholder liability obligations net of reinsurance and is used to analyze the costs of our liabilities. Net reserve liabilities include (a) interest sensitive contract liabilities, (b) future policy benefits, (c) dividends payable to policyholders, and (d) other policy claims and benefits, offset by reinsurance recoverable, excluding policy loans ceded. Net reserve liabilities include our proportionate share of ACRA reserve liabilities, based on our economic ownership, but does not include the proportionate share of reserve liabilities associated with the noncontrolling interest. Net reserve liabilities is net of the ceded liabilities to third-party reinsurers as the costs of the liabilities are passed to such reinsurers and, therefore, we have no net economic exposure to such liabilities, assuming our reinsurance counterparties perform under our agreements. The majority of our ceded reinsurance is a result of reinsuring large blocks of life business following acquisitions. For such transactions, GAAP requires the ceded liabilities and related reinsurance recoverables to continue to be recorded in our consolidated financial statements despite the transfer of economic risk to the counterparty in connection with the reinsurance transaction. While we believe net reserve liabilities is a meaningful financial metric and enhances our understanding of the underlying profitability drivers of our business, it should not be used as a substitute for total liabilities presented under GAAP.
Sales
Sales statistics do not correspond to revenues under GAAP but are used as
relevant measures to understand our business performance as it relates to
inflows generated during a specific period of time. Our sales statistics include
inflows for fixed rate annuities and FIAs and align with the LIMRA definition of
all money paid into an individual annuity, including money paid into new
contracts with initial purchase occurring in the specified period and existing
contracts with initial purchase occurring prior to the specified period
(excluding internal transfers). While we believe sales is a meaningful metric
and enhances our understanding of our business performance, it should not be
used as a substitute for premiums presented under GAAP.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations We completed our merger with AGM onJanuary 1, 2022 and have elected pushdown accounting in which we will use AGM's basis of accounting that reflects the fair market value of our assets and liabilities as of the date of the merger. The resulting change in the value of our assets and liabilities limits the comparability of our financial results for the Predecessor and Successor periods.
The following summarizes the consolidated results of operations for two periods,
Predecessor and Successor, which relate to the period preceding and period
succeeding our merger with AGM, respectively.
Successor Predecessor
Three months
ended March 31, Three months ended
(In millions) 2022 March 31, 2021
Revenues $ (269) $ 4,391
Benefits and expenses 2,504 4,252
Income (loss) before income taxes (2,773) 139
Income tax expense (benefit) (407) 62
Net income (loss) (2,366) 77
Less: Net loss attributable to noncontrolling interests (883) (537)
Net income (loss) attributable to Athene Holding Ltd. (1,483) 614
Less: Preferred stock dividends 35 36
Net income (loss) available to AHL common shareholder
$ 578
Three Months Ended
2021
In this section, references to 2022 refer to the three months ended
2022
Net Income (Loss) Available to AHL Common Shareholder
Net income (loss) available to AHL common shareholder decreased by$2.1 billion , or 363%, to$(1.5) billion in 2022 from$578 million in 2021. The decrease in net income (loss) available to AHL common shareholder was driven by a$4.7 billion decrease in revenues, partially offset by an decrease of$1.7 billion in benefits and expenses, a$346 million decrease in noncontrolling interests and a$469 million decrease in income tax expense.
Revenues
Revenues decreased by$4.7 billion to$(269) million in 2022 from$4.4 billion in 2021. The decrease was driven by a decrease in investment related gains and (losses) and a decrease in premiums, partially offset by a slight increase in net investment income. Investment related gains and (losses) decreased by$3.8 billion to$(4.2) billion in 2022 from$(422) million in the prior year, primarily due to the changes in fair value of reinsurance assets, mortgage loans, trading securities, FIA hedging derivatives and provision for credit losses as well as higher realized losses on AFS securities driven by unfavorable economics, partially offset by foreign exchange gains on derivatives. The change in fair value of reinsurance assets decreased$1.4 billion primarily driven by the change in the value of the underlying assets mainly related to credit spread widening compared to credit spread tightening in the prior year. The$704 million unfavorable change in mortgage loans was primarily due to credit spread widening and an increase inUS Treasury rates in the current year. Additionally, at the beginning of the year, and in conjunction with our merger with Apollo, we elected the fair value option on our mortgage loans, while in prior periods they were stated at unpaid principal, net of an allowance for credit losses. The unfavorable change in fair value of trading securities of$138 million was mainly due to credit spread widening compared to credit spread tightening in the prior year. The change in fair value of FIA hedging derivatives decreased$1.3 billion primarily driven by the unfavorable 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 decreased 4.9% in 2022, compared to an increase of 5.8% in 2021. The unfavorable change in the provision for credit losses of$184 million was primarily driven by unfavorable economics, including impacts from the conflict betweenRussia andUkraine . The increase in foreign exchange gains on derivatives reflects additional business denominated in foreign currencies including recent funding agreement issuances. Premiums decreased by$901 million to$2.1 billion in 2022 from$3.0 billion in the prior year, driven by lower pension group annuity premiums compared to the prior year. 64
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Net investment income increased by$14 million to$1.7 billion in 2022 from$1.7 billion in the prior year, primarily driven by growth in our investment portfolio attributed to strong inflows during the previous twelve months, partially offset by less favorable alternative investment performance compared to the prior year and lower new money rates reflecting the prolonged lower interest rate environment. As a result of purchase accounting, the book value of our investment portfolio was marked up to fair value resulting in an adverse impact to our net investment income.
Benefits and Expenses
Benefits and expenses decreased by$1.7 billion to$2.5 billion in 2022 from$4.3 billion in 2021. The decrease was driven by a decrease in future policy and other policy benefits, a decrease in interest sensitive contract benefits and a decrease in DAC, DSI and VOBA amortization, partially offset by an increase in policy and other operating expenses. Future policy and other policy benefits decreased by$1.2 billion to$2.1 billion in 2022 from$3.3 billion in 2021, primarily attributable to lower pension group annuity obligations, a decrease in the change in rider reserves and higher negative VOBA amortization resulting from purchase accounting. The favorable change in rider reserves of$284 million was primarily driven by the unfavorable change in reinsurance assets and net FIA derivatives. Interest sensitive contract benefits decreased by$435 million to$(41) million in 2022 from$394 million in 2021 driven by a decrease in the change in FIA fair value embedded derivatives of$391 million and higher negative VOBA amortization resulting from purchase accounting, partially offset by growth in the block of business. As a result of purchase accounting, we marked our reserve liabilities to fair value resulting in a favorable impact to our interest sensitive contract benefits. The change in the FIA fair value embedded derivatives was primarily due to the performance of the equity indices to which our FIA policies are linked, primarily the S&P 500 index, which experienced a decrease of 4.9% in 2022, compared to an increase of 5.8% in 2021, partially offset by the change in discount rates and economics impacting the policyholder cash flow projections. DAC, DSI and VOBA amortization decreased by$123 million to$125 million in 2022 from$248 million in 2021, primarily due to the impacts from purchase accounting reflecting the removal of historical DAC and DSI, partially offset by the establishment of new a VOBA asset. Policy and other operating expenses increased by$42 million to$335 million in 2022 from$293 million in 2021, primarily driven by significant growth in the business and the amortization of newly established intangible assets as a result of the merger, partially offset by the costs incurred in the prior year related to our merger with Apollo. Taxes Income tax expense (benefit) decreased by$469 million to$(407) million in 2022 from$62 million in 2021. The income tax benefit for 2022 was calculated by applying the 21% US statutory rate to the income of our US and foreign subsidiaries (net of noncontrolling interests), and was primarily driven by the unfavorable changes in fair value of reinsurance assets and mortgage loans. Our effective tax rate in the first quarter of 2022 was a benefit of 15% and an expense of 45% in 2021. The effective tax rate in 2022 was due to the change in fair value of reinsurance assets subject to tax compared to a significantly higher effective tax rate in 2021 which was primarily due to the change in fair value of reinsurance assets within our reinsurance investment portfolios that were not subject to tax. Noncontrolling Interests Noncontrolling interests decreased by$346 million to$(883) million in 2022 from$(537) million in 2021, primarily due to the unfavorable change in fair value of reinsurance assets as a result of more unrealized losses within reinsurance investment portfolios. 65
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Summary of Non-GAAP Earnings
The following summarizes our spread related earnings:
Successor Predecessor
Three months ended Three months ended
(In millions) March 31, 2022 March 31, 2021
Fixed income and other investment income, net $ 1,207 $ 1,286
Alternative investment income 448 712
Net investment earnings 1,655 1,998
Strategic capital management fees 12 9
Cost of funds (826) (1,010)
Net investment spread 841 997
Other operating expenses (109) (90)
Interest and other financing costs (62) (62)
Spread related earnings $ 670 $ 845
Three Months Ended
2021
Spread Related Earnings SRE decreased by$175 million , or 20.7%, to$670 million in 2022 from$845 million in 2021. The decrease in SRE was driven by lower net investment earnings, partially offset by lower cost of funds. Net investment earnings decreased$343 million primarily driven by less favorable alternative investment performance compared to prior year, unfavorable purchase accounting adjustments (a decrease of approximately 50 basis points or$165 million ) and lower new money rates reflecting the prolonged lower interest rate environment, partially offset by$29.8 billion of growth in our average net invested assets. Cost of funds were$184 million lower primarily driven by favorable purchase accounting adjustments (a decrease of approximately 52 basis points or$192 million ), lower rates on recent funding agreement issuances and pension group annuity transactions and favorable rate actions on deferred annuities, partially offset by growth in the block of business and an unfavorable change in actuarial experience and market impacts.
Net Investment Spread
Successor Predecessor
Three months ended Three months ended
March 31, 2022 March 31, 2021
Fixed income and other investment earned rate 2.83 % 3.57 %
Alternative investment earned rate 16.61 % 38.51 %
Net investment earned rate 3.65 % 5.27 %
Strategic capital management fees 0.03 % 0.02 %
Cost of funds 1.82 % 2.66 %
Net investment spread 1.86 % 2.63 %
Net investment spread decreased 77 basis points to 1.86% in 2022 from 2.63% in
2021. Our net investment earned rate was 3.65% in 2022, a decrease from 5.27% in
2021, primarily due to less favorable performance in our alternative investment
portfolio compared to prior year as well as lower returns in our fixed and other
investment portfolio. Alternative net investment earned rate was 16.61% in 2022,
a decrease from 38.51% in 2021, primarily driven by significant outperformance
in the prior year, partially offset by strong real estate returns and a higher
Athora return in the current period. Prior year outperformance was mainly due to
a higher AmeriHome return related to a valuation increase resulting from the
eventual sale in the second quarter of 2021, higher Venerable returns attributed
to a valuation increase driven by a reinsurance agreement with Equitable
Financial Life Insurance Company , favorable credit returns related to CLO
equities and a MidCap valuation increase related to a capital raise price at a
premium. Fixed and other net investment earned rate was 2.83% in 2022, a
decrease from 3.57% in 2021, primarily driven by unfavorable purchase accounting
impacts and lower new money rates reflecting the prolonged lower interest rate
environment.
Cost of funds decreased by 84 basis points to 1.82% in 2022, from 2.66% in 2021,
primarily driven by favorable purchase accounting impacts and lower cost of
crediting rates on recent funding agreement issuances and pension group annuity
transactions as well as favorable rate actions on deferred annuities.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Adjustments to Net Income (Loss) Available to Athene Holding Ltd. Common
Shareholder
Adjustments to net income (loss) available to AHL common shareholder are comprised of investment gains (losses), net of offsets, change in fair value of derivatives and embedded derivatives - FIAs, net of offsets, integration, restructuring and other non-operating expenses and stock compensation expense. The decrease in adjustments to net income (loss) available to AHL common shareholder compared to 2021 was primarily driven by the change in investment related gains and losses and the net change in FIA derivatives. The change in investment related gains and losses was primarily due to the change in fair value of reinsurance assets, the change in fair value of mortgage loan assets, the change to the provision for credit losses and realized losses on the sale of AFS securities related to unfavorable economics in the current period. The change in fair value of reinsurance assets was unfavorable$792 million primarily due to credit spread widening compared to credit spread tightening in the prior year. The unfavorable change in the fair value of mortgage loans was primarily due to credit spread widening and an increase inUS Treasury rates in the current year. Additionally, at the beginning of the year, and in conjunction with our merger with Apollo, we elected the fair value option on our mortgage loans, while in prior periods they were stated at unpaid principal, net of an allowance for credit losses. The unfavorable change in the provision for credit losses of$176 million (net of noncontrolling interests) was primarily driven by unfavorable economics, including impacts from the conflict betweenRussia andUkraine as well as exposure toChina's real estate market. Net FIA derivatives were unfavorable$569 million primarily due to the change in discount rates and economics impacting the policyholder cash flow projections, as well as an unfavorable performance of the equity indices to which our FIA policies are linked, primarily the S&P 500 index, which experienced a decrease of 4.9% in 2022, compared to an increase of 5.8% in 2021. Investment Portfolio We had consolidated investments, including related parties and VIEs, of$214.4 billion and$212.5 billion as ofMarch 31, 2022 andDecember 31, 2021 , respectively. Our investment strategy seeks to achieve sustainable risk-adjusted returns through the disciplined management of our investment portfolio against our long-duration liabilities, coupled with the diversification of risk. The investment strategies utilized by our investment manager focuses primarily on a buy and hold asset allocation strategy that may be adjusted periodically in response to changing market conditions and the nature of our liability profile. Substantially all of our investment portfolio is managed by Apollo, which provides a full suite of services, including direct investment management, asset allocation, mergers and acquisition asset diligence, and certain operational support services, including investment compliance, tax, legal and risk management support. Our relationship with Apollo allows us to take advantage of our generally illiquid liability profile by identifying investment opportunities with an emphasis on earning incremental yield by taking liquidity and complexity risk rather than assuming solely credit risk. Apollo's investment team and credit portfolio managers utilize their deep experience to assist us in sourcing and underwriting complex asset classes. Apollo has selected a diverse array of corporate bonds and more structured, but highly rated asset classes. We also maintain holdings in floating rate and less rate-sensitive instruments, including CLOs, non-agency RMBS and various types of structured products. In addition to our fixed income portfolio, we opportunistically allocate approximately 5%-6% of our portfolio to alternative investments where we primarily focus on fixed income-like, cash flow-based investments. Net investment income on the condensed consolidated statements of income (loss) included management fees under our investment management arrangements with Apollo. We incurred management fees, inclusive of base and sub-allocation fees, of$186 million and$144 million , respectively, during the three months endedMarch 31, 2022 and 2021. The total amounts we incurred, directly and indirectly, from Apollo and its affiliates were$299 million , and$242 million , respectively, for the three months endedMarch 31, 2022 and 2021. Such amounts include (1) fees associated with investment management agreements, which exclude sub-advisory fees paid to ISG for the benefit of third-party sub-advisors but include fees charged by Apollo to third-party cedants with respect to assets supporting obligations reinsured to us (such fees directly reduce the settlement payments that we receive from the third-party cedant and, as such, we, as beneficiaries of the services performed, indirectly pay such fees), (2) fees associated with fund investments, which include total management fees, carried interest (including unrealized but accrued carried interest fees) and other fees on Apollo-managed funds and our other alternative investments and (3) other fees resulting from shared services, advisory and other agreements with Apollo or its affiliates; net of fees incurred directly and indirectly attributable to ACRA, based upon the economic ownership of the noncontrolling interest in ACRA. Our net invested assets, which are those that directly back our net reserve liabilities as well as surplus assets, were$184.3 billion and$175.3 billion as ofMarch 31, 2022 andDecember 31, 2021 , respectively. Apollo's knowledge of our funding structure and regulatory requirements allows it to design customized strategies and investments for our portfolio. Apollo manages our asset portfolio within the limits and constraints set forth in our Investment and Credit Risk Policy. Under this policy, we set limits on investments in our portfolio by asset class, such as corporate bonds, emerging markets securities, municipal bonds, non-agency RMBS, CMBS, CLOs, commercial mortgage whole loans and mezzanine loans and investment funds. We also set credit risk limits for exposure to a single issuer that vary based on the issuer's ratings. In addition, our investment portfolio is constrained by its scenario-based capital ratio limit and its stressed liquidity limit. 67
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following table presents the carrying values of our total investments
including related party and VIEs:
Successor Predecessor
March 31, 2022 December 31, 2021
Carrying Value Percent of Carrying Value Percent of
(In millions, except percentages) Total Total
AFS securities, at fair value $ 96,899 45.2 % $ 100,159 47.1 %
Trading securities, at fair value 1,852 0.9 % 2,056 1.0 %
Equity securities 1,154 0.5 % 1,170 0.5 %
Mortgage loans 23,696 11.1 % 20,748 9.8 %
Investment funds 1,243 0.6 % 1,178 0.6 %
Policy loans 296 0.1 % 312 0.1 %
Funds withheld at interest 41,173 19.2 % 43,907 20.7 %
Derivative assets 3,668 1.7 % 4,387 2.1 %
Short-term investments 175 0.1 % 139 0.1 %
Other investments 1,214 0.6 % 1,473 0.7 %
Total investments 171,370 80.0 % 175,529 82.7 %
Investments in related parties
AFS securities, at fair value 8,324 3.9 % 10,402 4.9 %
Trading securities, at fair value 262 0.1 % 1,781 0.8 %
Equity securities, at fair value 166 0.1 % 284 0.1 %
Mortgage loans 1,456 0.7 % 1,360 0.6 %
Investment funds 3,088 1.4 % 7,391 3.5 %
Funds withheld at interest 11,431 5.3 % 12,207 5.7 %
Short-term investments, at fair value 53 - % - - %
Other investments 255 0.1 % 222 0.1 %
Total related party investments 25,035 11.6 % 33,647 15.7 %
Total investments including related party 196,405 91.6 % 209,176 98.4 %
Investments owned by consolidated VIEs
Mortgage loans 1,880 0.9 % 2,040 1.0 %
Investment funds 13,568 6.3 % 1,297 0.6 %
Other investments 2,567 1.2 % - - %
Total investments owned by consolidated VIEs 18,015 8.4 % 3,337 1.6 %
Total investments including related party and
VIEs $ 214,420 100.0 % $ 212,513 100.0 %
The increase in our total investments, including related party and VIEs, as of
March 31, 2022 of $1.9 billion compared to December 31, 2021 was primarily
driven by growth from gross organic inflows of $11.6 billion in excess of gross
liability outflows of $4.1 billion as well as an increase in investments from
the consolidation of additional VIEs in conjunction with our merger with Apollo.
This was partially offset by unrealized losses on AFS securities in the three
months ended March 31, 2022 of $6.7 billion , unrealized losses within our funds
withheld portfolio and a decrease in the change in fair value of mortgage loan
assets of $704 million all attributed to an increase in US Treasury rates and
credit spread widening.
Our investment portfolio consists largely of high quality fixed maturity
securities, loans and short-term investments, as well as additional
opportunistic holdings in investment funds and other instruments, including
equity holdings. Fixed maturity securities and loans include publicly issued
corporate bonds, government and other sovereign bonds, privately placed
corporate bonds and loans, mortgage loans, CMBS, RMBS, CLOs and ABS.
While the substantial majority of our investment portfolio has been allocated to
corporate bonds and structured credit products, a key component of our
investment strategy is the opportunistic acquisition of investment funds with
attractive risk and return profiles. Our investment fund portfolio consists of
funds that employ various strategies including real estate and other real asset
funds, credit funds and private equity funds. We have a strong preference for
assets that have some or all of the following characteristics, among others: (1)
investments that constitute a direct investment or an investment in a fund with
a high degree of co-investment; (2) investments with credit- or debt-like
characteristics (for example, a stipulated maturity and par value), or
alternatively, investments with reduced volatility when compared to pure equity;
or (3) investments that we believe have less downside risk.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
We hold derivatives for economic hedging purposes to reduce our exposure to the cash flow variability of assets and liabilities, equity market risk, interest rate risk, credit risk and 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 index annuity products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specific market index. With respect to derivative positions, we transact with highly rated counterparties, and expect the counterparties to fulfill their obligations under the contracts. We generally use industry standard agreements and annexes with bilateral collateral provisions to further reduce counterparty credit exposure.
Related Party Investments
We hold investments in related party assets primarily comprised of AFS securities, trading securities, investment funds and funds withheld at interest reinsurance receivables which are primarily a result of investments over which Apollo can exercise influence. As ofMarch 31, 2022 , these investments totaled$28.1 billion , or 11.3% of our total assets. Related party AFS and trading securities primarily consist of structured securities for which Apollo is the manager of the underlying securitization vehicle and securities issued by Apollo direct origination platforms including Wheels/Donlen, PK AirFinance and MidCap. In each case, the underlying collateral, borrower or other credit party is generally unaffiliated with us. Related party investment funds include strategic investments in direct origination platforms and insurance companies and investments in Apollo managed funds. The funds withheld at interest related party amounts are primarily comprised of the Venerable reinsurance portfolios, which are considered related party even though a significant majority of the underlying assets within the investment portfolios do not have a related party affiliation. A summary of our related party investments reflecting the nature of the affiliation is as follows: Successor Predecessor March 31, 2022 December 31, 2021 Percent of Percent of (In millions, except percentages) Carrying Value Total Assets Carrying Value Total Assets Venerable funds withheld reinsurance portfolio$ 11,431 4.6 % $ 12,207 5.2 % Securitizations of unaffiliated assets where Apollo is manager 8,932 3.6 % 9,495 4.0 % Investments in Apollo funds 1,227 0.5 % 3,785 1.6 % Strategic investments in Apollo direct origination platforms 4,689 1.9 % 5,704 2.4 % Strategic investment in Apollo - - % 2,112 0.9 % Strategic investments in insurance companies 1,820 0.7 % 1,626 0.7 % Other 16 - % 17 - % Total related party investments$ 28,115 11.3 % $ 34,946 14.8 % As ofMarch 31, 2022 , an$11.4 billion funds withheld reinsurance asset with Venerable was included in our GAAP related party assets. Venerable is a related party due to our minority equity investment in its holding company's parent,VA Capital . For GAAP, each funds withheld and modified coinsurance reinsurance portfolio is treated as one asset rather than reporting the underlying investments in the portfolio. For our non-GAAP measure of net invested assets, we provide visibility into the underlying assets within these reinsurance portfolios. The below table looks through to the underlying assets within our reinsurance portfolios to determine the related party status. As ofMarch 31, 2022 ,$25.1 billion , or 13.6% of our total net invested assets were related party investments. Of these,$12.7 billion , or 6.9% of our net invested assets were structured securities for which Apollo or an affiliated direct origination platform was the manager of the underlying securitization vehicle, but the underlying collateral, borrower or other credit party is generally unaffiliated with us. Related party investments in strategic affiliated companies or Apollo funds represented$12.3 billion , or 6.7% of our net invested assets. 69
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A summary of our related party net invested assets reflecting the nature of the
affiliation is as follows:
Successor Predecessor
March 31, 2022 December 31, 20211
Net Invested Percent of Net Net Invested Percent of Net
(In millions, except percentages) Asset Value Invested Assets Asset Value Invested Assets
Securitizations of unaffiliated assets where
Apollo is manager $ 12,749 6.9 % $ 13,736 7.8 %
Investments in Apollo funds 4,480 2.4 % 3,802 2.2 %
Strategic investments in Apollo direct
origination platforms 6,033 3.3 % 6,074 3.5 %
Strategic investment in Apollo - - % 2,112 1.2 %
Strategic investments in insurance companies 1,820 1.0 % 1,626 0.9 %
Other 16 - % 17 - %
Total related party investments $ 25,098 13.6 % $ 27,367 15.6 %
1 Prior year related party net invested asset values have been revised.
We invest in AFS securities and attempt to source investments that match our
future cash flow needs. However, we may sell any of our investments in advance
of maturity to timely satisfy our liabilities as they become due or in order to
respond to a change in the credit profile or other characteristics of the
particular investment.
AFS securities are carried at fair value, less allowances for expected credit
losses, on our condensed consolidated balance sheets. Changes in fair value of
our AFS securities, net of related DAC and DSI amortization and the change in
rider reserves, are charged or credited to other comprehensive income, net of
tax. All changes in the allowance for expected credit losses, whether due to
passage of time, change in expected cash flows, or change in fair value are
recorded through credit loss expense within investment related gains (losses) on
the condensed consolidated statements of income (loss).
The distribution of our AFS securities, including related parties, by type is as
follows:
Successor
March 31, 2022
Allowance for Unrealized Percent of
(In millions, except percentages) Amortized Cost Credit Losses Unrealized Gains
Losses Fair Value Total AFS securities US government and agencies $ 3,123 $ - $ 1$ (163) $ 2,961 2.8 % US state, municipal and political subdivisions 1,209 - - (117) 1,092 1.0 % Foreign governments 1,173 (66) 11 (107) 1,011 1.0 % Corporate 65,935 (55) 34 (5,675) 60,239 57.2 % CLO 14,282 (18) 3 (239) 14,028 13.3 % ABS 9,572 (11) 4 (281) 9,284 8.8 % CMBS 2,883 (6) 14 (144) 2,747 2.6 % RMBS 6,045 (312) 8 (204) 5,537 5.3 % Total AFS securities 104,222 (468) 75 (6,930) 96,899 92.0 % AFS securities - related party Corporate 948 - 10 (26) 932 0.9 % CLO 2,776 (3) 2 (43) 2,732 2.6 % ABS 4,705 (17) 4 (32) 4,660 4.5 % Total AFS securities - related party 8,429 (20) 16 (101) 8,324 8.0 % Total AFS securities including related party$ 112,651 $ (488) $ 91$ (7,031) $ 105,223 100.0 % 70
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Predecessor
December 31, 2021
Amortized Cost Allowance for Unrealized Gains Unrealized Fair Value Percent of
(In millions, except percentages) Credit Losses Losses Total
AFS securities
US government and agencies $ 231 $ - $ 2 $ (10) $ 223 0.2 %
US state, municipal and political
subdivisions 1,081 - 134 (2) 1,213 1.1 %
Foreign governments 1,110 - 35 (17) 1,128 1.0 %
Corporate 62,817 - 4,060 (651) 66,226 59.9 %
CLO 13,793 - 44 (185) 13,652 12.4 %
ABS 8,890 (17) 151 (35) 8,989 8.1 %
CMBS 2,764 (3) 56 (59) 2,758 2.5 %
RMBS 5,772 (103) 326 (25) 5,970 5.4 %
Total AFS securities 96,458 (123) 4,808 (984) 100,159 90.6 %
AFS securities - related party
Corporate 842 - 19 (2) 859 0.8 %
CLO 2,573 - 5 (29) 2,549 2.3 %
ABS 6,986 - 61 (53) 6,994 6.3 %
Total AFS securities - related party 10,401 - 85 (84) 10,402 9.4 %
Total AFS securities including related
party $ 106,859 $ (123) $ 4,893 $ (1,068) $ 110,561 100.0 %
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We maintain a diversified AFS portfolio of corporate fixed maturity securities
across industries and issuers, and a diversified portfolio of structured
securities. The composition of our AFS securities, including related parties, is
as follows:
Successor Predecessor
March 31, 2022 December 31, 2021
Fair Value Percent of Fair Value Percent of
(In millions, except percentages) Total Total
Corporate
Industrial other1 $ 21,527 20.5 % $ 23,882 21.6 %
Financial 19,623 18.7 % 21,537 19.5 %
Utilities 12,955 12.3 % 14,290 12.9 %
Communication 2,992 2.8 % 3,492 3.2 %
Transportation 4,074 3.9 % 3,884 3.5 %
Total corporate 61,171 58.2 % 67,085 60.7 %
Other government-related securities
US state, municipal and political subdivisions 1,092 1.0 % 1,213 1.1 %
Foreign governments 1,011 1.0 % 1,128 1.0 %
US government and agencies 2,961 2.8 % 223 0.2 %
Total non-structured securities 66,235 63.0 % 69,649 63.0 %
Structured securities
CLO 16,760 15.9 % 16,201 14.7 %
ABS 13,944 13.3 % 15,983 14.4 %
CMBS 2,747 2.6 % 2,758 2.5 %
RMBS
Agency 15 - % 23 - %
Non-agency 5,522 5.2 % 5,947 5.4 %
Total structured securities 38,988 37.0 % 40,912 37.0 %
Total AFS securities including related party $ 105,223 100.0 % $ 110,561 100.0 %
1 Includes securities within various industry segments including capital goods, basic industry, consumer cyclical, consumer non-cyclical,
industrial and technology.
The fair value of our AFS securities, including related parties, was$105.2 billion and$110.6 billion as ofMarch 31, 2022 andDecember 31, 2021 , respectively. The decrease was mainly driven by unrealized losses on AFS securities in the three months endedMarch 31, 2022 of$6.7 billion attributed to an increase inUS Treasury rates and credit spread widening as well as the elimination of$2.0 billion of AFS securities issued by VIEs that we consolidated as ofMarch 31, 2022 as a result of reassessing consolidation conclusions for VIEs after the merger. These decreases were partially offset by growth from organic inflows in excess of liability outflows. The Securities Valuation Office (SVO) of the NAIC is responsible for the credit quality assessment and valuation of securities owned by state regulated insurance companies. Insurance companies report ownership of securities to the SVO when such securities are eligible for filing on the relevant schedule of the NAIC Financial Statement. The SVO conducts credit analysis on these securities for the purpose of assigning an NAIC designation and/or unit price. Generally, the process for assigning an NAIC designation varies based upon whether a security is considered "filing exempt" (General Designation Process). Subject to certain exceptions, a security is typically considered "filing exempt" if it has been rated by aNationally Recognized Statistical Rating Organization (NRSRO). For securities that are not "filing exempt," insurance companies assign temporary designations based upon a subjective evaluation of credit quality. The insurance company generally must then submit the securities to the SVO within 120 days of acquisition to receive an NAIC designation. For securities considered "filing exempt," the SVO utilizes the NRSRO rating and assigns an NAIC designation based upon the following system: NAIC designation NRSRO equivalent rating 1A-G AAA /AA/A 2 A-C BBB 3 A-C BB 4 A-C B 5 A-C CCC 6 CC and lower 72
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An important exception to the General Designation Process occurs in the case of
certain loan-backed and structured securities (LBaSS). The NRSRO ratings
methodology is focused on the likelihood of recovery of all contractual
payments, including principal at par, regardless of an investor's carrying
value. In effect, the NRSRO rating assumes that the holder is the original
purchaser at par. In contrast, the SVO's LBaSS methodology is focused on
determining the risk associated with the recovery of the amortized cost of each
security. Because the NAIC's methodology explicitly considers amortized cost and
the likelihood of recovery of such amount, we view the NAIC's methodology as the
most appropriate means of evaluating the credit quality of our fixed maturity
portfolio since a large portion of our holdings were purchased and are carried
at significant discounts to par.
The SVO has developed a designation process and provides instruction on modeled
LBaSS. For modeled LBaSS, the process is specific to the non-agency RMBS and
CMBS asset classes. In order to establish ratings at the individual security
level, the SVO obtains loan-level analysis of each RMBS and CMBS using a
selected vendor's proprietary financial model. The SVO ensures that the vendor
has extensive internal quality-control processes in place and the SVO conducts
its own quality-control checks of the selected vendor's valuation process. The
SVO has retained the services of Blackrock, Inc. (Blackrock) to model non-agency
RMBS and CMBS owned by US insurers for all years presented herein. Blackrock
provides five prices (breakpoints), based on each US insurer's statutory book
value price, to utilize in determining the NAIC designation for each modeled
LBaSS.
The NAIC designation determines the associated level of risk-based capital that
an insurer is required to hold for all securities owned by the insurer. In
general, under the modeled LBaSS process, the larger the discount to par value
at the time of determination, the higher the NAIC designation the LBaSS will
have.
A summary of our AFS securities, including related parties, by NAIC designation
is as follows:
Successor Predecessor
March 31, 2022 December 31, 2021
Amortized Cost Fair Value Percent of Amortized Cost Fair Value Percent of
(In millions, except percentages) Total Total
NAIC designation
1 A-G $ 56,099 $ 52,696 50.1 % $ 49,639 $ 51,514 46.6 %
2 A-C 50,955 47,270 44.9 % 51,587 53,398 48.3 %
Total investment grade 107,054 99,966 95.0 % 101,226 104,912 94.9 %
3 A-C 4,175 3,949 3.7 % 4,199 4,247 3.8 %
4 A-C 1,079 1,005 1.0 % 1,113 1,100 1.0 %
5 A-C 151 91 0.1 % 94 88 0.1 %
6 192 212 0.2 % 227 214 0.2 %
Total below investment grade 5,597 5,257 5.0 % 5,633 5,649 5.1 %
Total AFS securities including
related party $ 112,651 $ 105,223 100.0 % $ 106,859 $ 110,561 100.0 %
A significant majority of our AFS portfolio, 95.0% and 94.9% as of
2022
investment grade with a NAIC designation of 1 or 2.
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A summary of our AFS securities, including related parties, by NRSRO ratings is
set forth below:
Successor Predecessor
March 31, 2022 December 31, 2021
Fair Value Percent of Fair Value Percent of
(In millions, except percentages) Total Total
NRSRO rating agency designation
AAA/AA/A $ 46,144 43.9 % $ 44,501 40.2 %
BBB 42,120 40.0 % 47,636 43.1 %
Non-rated1 9,904 9.4 % 10,754 9.7 %
Total investment grade 98,168 93.3 % 102,891 93.0 %
BB 3,460 3.3 % 3,713 3.4 %
B 837 0.8 % 946 0.9 %
CCC 1,218 1.2 % 1,356 1.2 %
CC and lower 687 0.6 % 755 0.7 %
Non-rated1 853 0.8 % 900 0.8 %
Total below investment grade 7,055 6.7 % 7,670 7.0 %
Total AFS securities including related party
100.0 % $ 110,561 100.0 %
1 Securities denoted as non-rated by the NRSRO were classified as investment or non-investment grade according to the security's respective NAIC
designation. With respect to modeled LBaSS, the NAIC designation methodology differs in significant respects from the NRSRO rating methodology.
Consistent with the NAIC Process and Procedures Manual, an NRSRO rating was assigned based on the following criteria: (a) the equivalent S&P rating when the security is rated by one NRSRO; (b) the equivalent S&P rating of the lowest NRSRO when the security is rated by two NRSROs; and (c) the equivalent S&P rating of the second lowest NRSRO when the security is rated by three or more NRSROs. If the lowest two NRSRO ratings are equal, then such rating will be the assigned rating. NRSRO ratings available for the periods presented were S&P, Fitch, Moody's Investor Service, DBRS, andKroll Bond Rating Agency, Inc. The portion of our AFS portfolio that was considered below investment grade based on NRSRO ratings was 6.7% and 7.0% as ofMarch 31, 2022 andDecember 31, 2021 , respectively. The primary driver of the difference in the percentage of securities considered below investment grade by NRSRO as compared to the securities considered below investment grade by the NAIC is the difference in methodologies between the NRSRO and NAIC for RMBS due to investments acquired and/or carried at a discount to par value, as discussed above. As ofMarch 31, 2022 andDecember 31, 2021 , non-rated securities were comprised of 81% and 73%, respectively, of corporate private placement securities for which we have not sought individual ratings from an NRSRO, and 17% for each ofMarch 31, 2022 andDecember 31, 2021 , of RMBS, many of which were acquired at a significant discount to par. We rely on internal analysis and designations assigned by the NAIC to evaluate the credit risk of our portfolio. As of each ofMarch 31, 2022 andDecember 31, 2021 , 92% of the non-rated securities were designated NAIC 1 or 2. Asset-backed Securities - We invest in ABS which are securitized by pools of assets such as consumer loans, automobile loans, student loans, insurance-linked securities, operating cash flows of corporations and cash flows from various types of business equipment. Our ABS holdings were$13.9 billion and$16.0 billion as ofMarch 31, 2022 andDecember 31, 2021 , respectively. 74
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A summary of our ABS portfolio, including related parties, by NAIC designations
and NRSRO quality ratings is as follows:
Successor Predecessor
March 31, 2022 December 31, 2021
Fair Value Percent of Fair Value Percent of
(In millions, except percentages) Total Total
NAIC designation
1 A-G $ 8,971 64.3 % $ 8,089 50.6 %
2 A-C 4,123 29.6 % 7,047 44.1 %
Total investment grade 13,094 93.9 % 15,136 94.7 %
3 A-C 650 4.7 % 643 4.0 %
4 A-C 196 1.4 % 200 1.3 %
5 A-C 4 - % 4 - %
6 - - % - - %
Total below investment grade 850 6.1 % 847 5.3 %
Total AFS ABS including related party $ 13,944 100.0 % $ 15,983 100.0 %
NRSRO rating agency designation
AAA/AA/A $ 8,946 64.2 % $ 7,892 49.4 %
BBB 4,074 29.2 % 6,975 43.5 %
Non-rated 71 0.5 % 232 1.5 %
Total investment grade 13,091 93.9 % 15,099 94.4 %
BB 653 4.7 % 680 4.3 %
B 196 1.4 % 200 1.3 %
CCC 4 - % 4 - %
CC and lower - - % - - %
Non-rated - - % - - %
Total below investment grade 853 6.1 % 884 5.6 %
Total AFS ABS including related party $ 13,944 100.0 % $ 15,983 100.0 %
As of March 31, 2022 and December 31, 2021 , a substantial majority of our AFS
ABS portfolio, 93.9% and 94.7%, respectively, was invested in assets considered
to be investment grade based upon application of the NAIC's methodology while
93.9% and 94.4%, respectively, of securities were considered investment grade
based on NRSRO ratings. The decrease in our ABS portfolio was primarily driven
by unrealized losses due to an increase in US Treasury rates and credit spread
widening as well as an unfavorable change in the allowance for credit losses on
ABS securities.
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Collateralized Loan Obligations - We also invest in CLOs which pay principal and
interest from cash flows received from underlying corporate loans. These
holdings were
A summary of our AFS CLO portfolio, including related parties, by NAIC
designations and NRSRO quality ratings is as follows:
Successor Predecessor
March 31, 2022 December 31, 2021
Fair Value Percent of Fair Value Percent of
(In millions, except percentages) Total Total
NAIC designation
1 A-G $ 10,320 61.6 % $ 9,957 61.5 %
2 A-C 6,295 37.5 % 6,096 37.6 %
Total investment grade 16,615 99.1 % 16,053 99.1 %
3 A-C 126 0.8 % 124 0.8 %
4 A-C 19 0.1 % 24 0.1 %
5 A-C - - % - - %
6 - - % - - %
Total below investment grade 145 0.9 % 148 0.9 %
Total AFS CLO including related party $ 16,760 100.0 % $ 16,201 100.0 %
NRSRO rating agency designation
AAA/AA/A $ 10,315 61.5 % $ 9,943 61.4 %
BBB 6,295 37.6 % 6,101 37.6 %
Non-rated - - % - - %
Total investment grade 16,610 99.1 % 16,044 99.0 %
BB 128 0.8 % 130 0.8 %
B 22 0.1 % 27 0.2 %
CCC - - % - - %
CC and lower - - % - - %
Non-rated - - % - - %
Total below investment grade 150 0.9 % 157 1.0 %
Total AFS CLO including related party $ 16,760 100.0 % $ 16,201 100.0 %
As of each of
portfolio was invested in assets considered to be investment grade based upon
application of the NAIC's methodology.
Commercial Mortgage-backed Securities - A portion of our AFS portfolio is invested in CMBS. CMBS are constructed from pools of commercial mortgages. These holdings were$2.7 billion and$2.8 billion as ofMarch 31, 2022 andDecember 31, 2021 , respectively. As ofMarch 31, 2022 andDecember 31, 2021 , our CMBS portfolio included$2.1 billion (75% of the total) and$2.0 billion (74% of the total), respectively, of securities that are considered investment grade based on NAIC designations, while as of each ofMarch 31, 2022 andDecember 31, 2021 ,$2.1 billion (75% of the total) of securities were considered investment grade based on NRSRO ratings. 76
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Residential Mortgage-backed Securities - A portion of our AFS portfolio is invested in RMBS, which are securities constructed from pools of residential mortgages. These holdings were$5.5 billion and$6.0 billion as ofMarch 31, 2022 andDecember 31, 2021 , respectively. A summary of our AFS RMBS portfolio by NAIC designations and NRSRO quality ratings is as follows: Successor Predecessor March 31, 2022 December 31, 2021 Fair Value Percent of Fair Value Percent of (In millions, except percentages) Total Total NAIC designation 1 A-G$ 4,727 85.4 % $ 5,097 85.4 % 2 A-C 330 6.0 % 331 5.5 % Total investment grade 5,057 91.4 % 5,428 90.9 % 3 A-C 286 5.2 % 327 5.5 % 4 A-C 161 2.9 % 172 2.9 % 5 A-C 32 0.5 % 29 0.5 % 6 1 - % 14 0.2 % Total below investment grade 480 8.6 % 542 9.1 % Total AFS RMBS$ 5,537 100.0 % $ 5,970 100.0 % NRSRO rating agency designation AAA/AA/A$ 1,249 22.6 % $ 1,110 18.6 % BBB 441 8.0 % 522 8.7 % Non-rated1 1,545 27.9 % 1,648 27.6 % Total investment grade 3,235 58.5 % 3,280 54.9 % BB 84 1.5 % 184 3.1 % B 139 2.5 % 193 3.2 % CCC 1,142 20.6 % 1,281 21.5 % CC and lower 676 12.2 % 733 12.3 % Non-rated1 261 4.7 % 299 5.0 % Total below investment grade 2,302 41.5 % 2,690 45.1 % Total AFS RMBS$ 5,537 100.0 % $ 5,970 100.0 %
1 Securities denoted as non-rated by the NRSRO were classified as investment or non-investment grade according to the security's
respective NAIC designations. The NAIC designation methodology differs in significant respects from the NRSRO rating methodology.
A significant majority of our RMBS portfolio, 91.4% and 90.9% as ofMarch 31, 2022 andDecember 31, 2021 , respectively, was invested in assets considered to be investment grade based upon an application of the NAIC designations. The NAIC's methodology with respect to RMBS gives explicit effect to the amortized cost at which an insurance company carries each such investment. Because we invested in RMBS after the stresses related to US housing had caused significant downward pressure on prices of RMBS, we carry most of our investments in RMBS at significant discounts to par value, which results in an investment grade NAIC designation. In contrast, our understanding is that in setting ratings, NRSROs focus on the likelihood of recovering all contractual payments including principal at par value. As a result of a fundamental difference in approach, as ofMarch 31, 2022 andDecember 31, 2021 , NRSRO characterized 58.5% and 54.9%, respectively, of our RMBS portfolio as investment grade.
Unrealized Losses
Our investments in AFS securities, including related parties, are reported at fair value with changes in fair value recorded in other comprehensive income. Certain of our AFS securities, including related parties, have experienced declines in fair value that we consider temporary in nature. These investments are held to support our product liabilities, and we currently have the intent and ability to hold these securities until recovery of the amortized cost basis prior to sale or maturity. As ofMarch 31, 2022 , our AFS securities, including related party, had a fair value of$105.2 billion , which was 6.6% below amortized cost of$112.7 billion . As ofDecember 31, 2021 , our AFS securities, including related party, had a fair value of$110.6 billion , which was 3.5% above amortized cost of$106.9 billion . Our fair value of AFS securities as ofMarch 31, 2022 was below amortized cost as the investment portfolio was marked to fair value onJanuary 1, 2022 in conjunction with purchase accounting, and subsequently interest rates increased and credit spreads widened during the quarter. 77
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The following tables reflect the unrealized losses on the AFS portfolio,
including related party, for which an allowance for credit losses has not been
recorded, by NAIC designations:
Successor
March 31, 2022
Amortized Cost of Gross Fair Value of AFS Fair Value to Fair Value of Gross Unrealized
(In millions, except AFS Securities with Unrealized Securities with Amortized Cost Total AFS Losses to Total
percentages) Unrealized Loss Losses Unrealized Loss Ratio Securities AFS Fair Value
NAIC designation
1 A-G $ 48,523 $ (3,104) $ 45,419 93.6 % $ 52,696 (5.9) %
2 A-C 46,887 (3,552) 43,335 92.4 % 47,270 (7.5) %
Total investment grade 95,410 (6,656) 88,754 93.0 % 99,966 (6.7) %
3 A-C 3,550 (200) 3,350 94.4 % 3,949 (5.1) %
4 A-C 700 (41) 659 94.1 % 1,005 (4.1) %
5 A-C 66 (4) 62 93.9 % 91 (4.4) %
6 31 (4) 27 87.1 % 212 (1.9) %
Total below investment grade 4,347 (249) 4,098 94.3 % 5,257 (4.7) %
Total $ 99,757 $ (6,905) $ 92,852 93.1 % $ 105,223 (6.6) %
Predecessor
December 31, 2021
Amortized Cost of Gross Unrealized Fair Value of AFS Fair Value to Fair Value of Gross Unrealized
(In millions, except AFS Securities with Losses Securities with Amortized Cost Total AFS Losses to Total
percentages) Unrealized Loss Unrealized Loss Ratio Securities AFS Fair Value
NAIC designation
1 A-G $ 19,369 $ (338) $ 19,031 98.3 % $ 51,514 (0.7) %
2 A-C 20,849 (475) 20,374 97.7 % 53,398 (0.9) %
Total investment grade 40,218 (813) 39,405 98.0 % 104,912 (0.8) %
3 A-C 1,494 (82) 1,412 94.5 % 4,247 (1.9) %
4 A-C 410 (26) 384 93.7 % 1,100 (2.4) %
5 A-C 41 (6) 35 85.4 % 88 (6.8) %
6 61 (14) 47 77.0 % 214 (6.5) %
Total below investment grade 2,006 (128) 1,878 93.6 % 5,649 (2.3) %
Total $ 42,224 $ (941) $ 41,283 97.8 % $ 110,561 (0.9) %
The gross unrealized losses on AFS securities, including related party, were
$6.9 billion and $941 million as of March 31, 2022 and December 31, 2021 ,
respectively. The increase in unrealized losses on AFS securities was driven by
the increase in US Treasury rates and credit spread widening experienced in the
current year.
As of March 31, 2022 and December 31, 2021 , we held $6.5 billion and $7.4
billion , respectively, in energy sector fixed maturity securities, or 6% and 7%,
respectively, of the total fixed maturity securities, including related party.
The gross unrealized capital losses on these securities were $520 million and
$35 million , or 8% and 4% of the total unrealized losses, respectively.
Provision for Credit Losses
For our credit loss accounting policies and the assumptions used in the
allowances, see Note 1 - Business, Basis of Presentation and Significant
Accounting Policies and Note 3 - Investments to the condensed consolidated
financial statements, as well as Critical Accounting Estimates and Judgments in
this Item 2.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As ofMarch 31, 2022 andDecember 31, 2021 , we held an allowance for credit losses on AFS securities of$488 million and$123 million , respectively. During the three months endedMarch 31, 2022 , we recorded a change in provision for credit losses on AFS securities of$177 million , of which$191 million had an income statement impact and$(14) million related to PCD securities and other changes. The remaining change in allowance relates to purchase accounting adjustments. The increase in the allowance for credit losses on AFS securities was mainly due to unfavorable economics, including impacts from the conflict betweenRussia andUkraine , as well as exposure toChina's real estate market. During the three months endedMarch 31, 2021 , we recorded a change in provision for credit losses on AFS securities of$7 million of which$9 million had an income statement impact and$(2) million related to PCD securities. The intent-to-sell impairments for each of the three months endedMarch 31, 2022 and 2021 were$0 million . International Exposure A portion of our AFS securities are invested in securities with international exposure. As ofMarch 31, 2022 andDecember 31, 2021 , 34% and 35% of the carrying value of our AFS securities, including related parties, was comprised of securities of issuers based outside ofthe United States and debt securities of foreign governments. These securities are either denominated in US dollars or do not expose us to significant foreign currency risk as a result of foreign currency swap arrangements.
The following table presents our international exposure in our AFS portfolio,
including related parties, by country or region:
Successor Predecessor
March 31, 2022 December 31, 2021
Amortized Fair Value Percent of Amortized Fair Value Percent of
(In millions, except percentages) Cost Total Cost Total
Country of risk
Ireland $ 4,720 $ 4,486 12.3 % $ 5,172 $ 5,052 13.0 %
Other Europe 9,067 8,268 22.8 % 8,864 9,218 23.7 %
Total Europe 13,787 12,754 35.1 % 14,036 14,270 36.7 %
Non-US North America 16,691 16,254 44.8 % 17,218 17,387 44.8 %
Australia & New Zealand 2,674 2,496 6.9 % 2,441 2,557 6.6 %
Central & South America 1,600 1,515 4.2 % 1,347 1,346 3.5 %
Africa & Middle East 2,223 2,096 5.8 % 1,966 2,019 5.2 %
Asia/Pacific 1,414 1,178 3.2 % 1,256 1,262 3.2 %
Total $ 38,389 $ 36,293 100.0 % $ 38,264 $ 38,841 100.0 %
Approximately 96.8% and 96.7% of these securities are investment grade by NAIC
designation as of March 31, 2022 and December 31, 2021 . As of March 31, 2022 ,
11% of our AFS securities, including related parties, were invested in CLOs of
Cayman Islands issuers (included in Non-US North America ) for which underlying
investments are largely loans to US issuers and 24% were invested in securities
of other non-US issuers.
The majority of our investments in Ireland are comprised of Euro denominated
CLOs, for which the SPV is domiciled in Ireland , but the underlying leveraged
loans involve borrowers from the broader European region.
As of March 31, 2022 , we held Russian AFS securities of $26 million , including
related parties. Our investment managers analyze each holding for credit risk by
economic and other factors of each country and industry.
Trading Securities
Trading securities, including related parties, were$2.1 billion and$3.8 billion as ofMarch 31, 2022 andDecember 31, 2021 , respectively. Trading securities are primarily comprised of AmerUs Closed Block securities for which we have elected the fair value option valuation, CLO and ABS equity tranche securities, MidCap profit participating notes, structured securities with embedded derivatives and investments which support various reinsurance arrangements. The decrease in trading securities was primarily due to the elimination of$1.5 billion of securities issued by VIEs that we consolidated as ofMarch 31, 2022 as a result of reassessing consolidation conclusions for VIEs after the merger as well as losses due to an increase inUS Treasury rates and credit spread widening. 79
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Mortgage Loans
The following is a summary of our mortgage loan portfolio by collateral type,
including assets held by related parties and consolidated VIEs:
Successor Predecessor
March 31, 2022 December 31, 2021
Net Carrying
(In millions, except percentages) Fair Value Percent of Total Value Percent of Total
Property type
Office building $ 4,857 18.0 % $ 4,870 20.1 %
Retail 2,086 7.7 % 2,022 8.4 %
Apartment 5,602 20.7 % 4,626 19.2 %
Hotels 1,731 6.4 % 1,727 7.2 %
Industrial 2,320 8.6 % 2,336 9.7 %
Other commercial1 1,794 6.6 % 1,316 5.4 %
Total net commercial mortgage loans 18,390 68.0 % 16,897 70.0 %
Residential loans 8,642 32.0 % 7,251 30.0 %
Total mortgage loans, including related
parties and VIEs $ 27,032 100.0 % $ 24,148 100.0 %
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, including related parties and consolidated VIEs, were$27.0 billion and$24.1 billion as ofMarch 31, 2022 andDecember 31, 2021 , respectively. This included$1.8 billion and$1.9 billion of mezzanine mortgage loans as ofMarch 31, 2022 andDecember 31, 2021 , respectively. We have acquired mortgage loans through acquisitions and reinsurance arrangements, as well as through an active program to invest in new mortgage loans. We invest in CMLs on income producing properties including hotels, apartments, retail and office buildings, and other commercial and industrial properties. Our RML portfolio primarily consists of first lien RMLs collateralized by properties located in the US. Loan-to-value ratios at the time of loan approval are generally 75% or less. In connection with the merger, we elected the fair value option on our mortgage loan portfolio; therefore, we no longer have an allowance for credit losses for commercial and residential loans as ofMarch 31, 2022 . Interest income is accrued on the principal amount of the loan based on the loan's contractual interest rate. Interest income and prepayment fees are reported in net investment income on the condensed consolidated statements of income (loss). Changes in the fair value of the mortgage loan portfolio are reported in investment related gains (losses) on the condensed consolidated statements of income (loss). 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 ofMarch 31, 2022 andDecember 31, 2021 , we had$914 million and$990 million , respectively, of mortgage loans that were 90 days past due, of which$118 million and$54 million , respectively, were in the process of foreclosure. As ofMarch 31, 2022 andDecember 31, 2021 ,$623 million and$856 million of mortgage loans that were 90 days past due were related toGovernment National Mortgage Association (GNMA) early buyouts that are fully or partially guaranteed and are accruing interest. We will continue to evaluate these policies with regard to the economic downturn brought about by the spread of COVID-19. Our ability to initiate foreclosure proceedings may be limited by legislation passed and executive orders issued in response to the spread of COVID-19, though certain of those provisions have begun to expire.
Investment Funds
Our investment funds investment strategy primarily focuses on funds with core
holdings of credit assets, real assets, real estate, preferred equity and income
producing assets. Our investment funds generally meet the definition of a VIE,
and in certain cases these investment funds are consolidated in our financial
statements because we meet the criteria of the primary beneficiary.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following table illustrates our investment funds, including related parties
and consolidated VIEs:
Successor Predecessor
March 31, 2022 December 31, 2021
Percent of Percent of
(In millions, except percentages) Carrying Value Total Carrying Value Total
Investment funds
Real estate $ 748 4.2 % $ 662 6.7 %
Credit funds 84 0.5 % 86 0.9 %
Private equity 353 2.0 % 343 3.5 %
Real assets 58 0.3 % 87 0.9 %
Total investment funds 1,243 7.0 % 1,178 12.0 %
Investment funds - related parties
Differentiated investments
Athora 814 4.5 % 743 7.4 %
Wheels/Donlen1 - - % 700 7.1 %
Catalina1 - - % 441 4.5 %
Venerable 230 1.3 % 219 2.2 %
Other 266 1.5 % 459 4.7 %
Total differentiated investments 1,310 7.3 % 2,562 25.9 %
Real estate 520 2.9 % 1,187 12.0 %
Credit funds 392 2.2 % 450 4.6 %
Private equity 621 3.5 % 751 7.6 %
Natural resources 89 0.5 % 172 1.7 %
Real assets 138 0.8 % 157 1.6 %
Equities 18 0.1 % - - %
Investment in Apollo - - % 2,112 21.4 %
Total investment funds - related parties 3,088 17.3 % 7,391 74.8 %
Investment funds owned by consolidated VIEs
Differentiated investments 1,350 7.5 % - - %
Private equity 981 5.5 % - - %
Natural resources 256 1.4 % - - %
Real estate 1,599 8.9 % 514 5.2 %
Credit funds 8,001 44.7 % 748 7.6 %
Real assets 1,381 7.7 % 35 0.4 %
Total investment funds owned by consolidated
VIEs 13,568 75.7 % 1,297 13.2 %
Total investment funds, including related
parties and VIEs $ 17,899 100.0 % $ 9,866 100.0 %
1 Investment is held as a consolidated VIE as of
Overall, the total investment funds, including related parties and consolidated VIEs, were$17.9 billion and$9.9 billion , respectively, as ofMarch 31, 2022 andDecember 31, 2021 . See Note 3 - Investments to the condensed consolidated financial statements for further discussion regarding how we account for our investment funds. Our investment fund portfolio is subject to a number of market related risks including interest rate risk and equity market risk. Interest rate risk represents the potential for changes in the investment fund's net asset values resulting from changes in the general level of interest rates. Equity market risk represents potential for changes in the investment fund's net asset values resulting from changes in equity markets or from other external factors which influence equity markets. These risks expose us to potential volatility in our earnings period-over-period. We actively monitor our exposure to these risks. The increase in investment funds, including related parties and consolidated VIEs, was primarily driven by the consolidation of additional VIEs in conjunction with our merger with Apollo, the deployment of organic inflows and the increase in valuation of several funds, partially offset by the distribution of our investment in Apollo to AGM following the merger. 81
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Funds Withheld at Interest Funds withheld at interest represents a receivable for amounts contractually withheld by ceding companies in accordance with modco and funds withheld reinsurance agreements in which we act as the reinsurer. Generally, assets equal to statutory reserves are withheld and legally owned by the ceding company. We hold funds withheld at interest receivables, including those held with VIAC,Lincoln and Jackson. As ofMarch 31, 2022 , the majority of the ceding companies holding the assets pursuant to such reinsurance agreements had a financial strength rating of A or better (based on anA.M. Best scale). The funds withheld at interest is comprised of the host contract and an embedded derivative. We are subject to the investment performance on the withheld assets with the total return directly impacting the host contract and the embedded derivative. Interest accrues at a risk-free rate on the host receivable and is recorded as net investment income in the condensed consolidated statements of income (loss). The embedded derivative in our reinsurance agreements is similar to a total return swap on the income generated by the underlying assets held by the ceding companies. The change in the embedded derivative is recorded in investment related gains (losses). Although we do not legally own the underlying investments in the funds withheld at interest, in each instance the ceding company has hired Apollo to manage the withheld assets in accordance with our investment guidelines.
The following summarizes the underlying investment composition of the funds
withheld at interest, including related parties:
Successor Predecessor
March 31, 2022 December 31, 2021
Percent of Percent of
(In millions, except percentages) Carrying Value Total Carrying Value Total
Fixed maturity securities
US government and agencies $ 17 - % $ 50 0.1 %
US state, municipal and political subdivisions 314 0.6 % 338 0.6 %
Foreign governments 498 1.0 % 553 1.0 %
Corporate 24,113 45.8 % 26,143 46.5 %
CLO 4,912 9.3 % 5,322 9.5 %
ABS 7,826 14.9 % 7,951 14.2 %
CMBS 1,449 2.8 % 1,661 3.0 %
RMBS 1,574 3.0 % 1,586 2.8 %
Equity securities 221 0.4 % 243 0.4 %
Mortgage loans 8,959 17.0 % 9,437 16.8 %
Investment funds 1,982 3.8 % 1,807 3.2 %
Derivative assets 159 0.3 % 208 0.4 %
Short-term investments 103 0.2 % 54 0.1 %
Cash and cash equivalents 841 1.6 % 1,049 1.9 %
Other assets and liabilities (364) (0.7) % (288) (0.5) %
Total funds withheld at interest including
related party $ 52,604 100.0 % $ 56,114 100.0 %
As of March 31, 2022 and December 31, 2021 , we held $52.6 billion and $56.1
billion , respectively, of funds withheld at interest receivables, including
related party. Approximately 93.7% and 93.5% of the fixed maturity securities
within the funds withheld at interest are investment grade by NAIC designation
as of March 31, 2022 and December 31, 2021 , respectively. The decrease in funds
withheld at interest, including related party, was primarily driven by
unrealized losses in the three months ended March 31, 2022 attributed to an
increase in US Treasury rates and credit spread widening as well as run-off of
the underlying blocks of business.
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 equity options.
A discussion regarding our derivative instruments and how such instruments are
used to manage risk is included in Note 4 - Derivative Instruments to the
condensed consolidated financial statements.
As part of our risk management strategies, management continually evaluates our
derivative instrument holdings and the effectiveness of such holdings in
addressing risks identified in our operations.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Net Invested Assets
The following summarizes our net invested assets:
Successor Predecessor
March 31, 2022 December 31, 2021
Net Invested Percent of Total Net Invested Percent of Total
(In millions, except percentages) Asset Value1 Asset Value1
Corporate $ 79,006 42.9 % $ 75,163 42.9 %
CLO 18,036 9.8 % 17,892 10.2 %
Credit 97,042 52.7 % 93,055 53.1 %
CML 23,164 12.6 % 21,438 12.2 %
RML 8,442 4.6 % 7,116 4.1 %
RMBS 7,240 3.9 % 6,969 4.0 %
CMBS 3,551 1.9 % 3,440 2.0 %
Real estate 42,397 23.0 % 38,963 22.3 %
ABS 20,332 11.0 % 20,376 11.6 %
Alternative investments 11,506 6.2 % 9,873 5.6 %
State, municipal, political subdivisions
and foreign government 2,722 1.5 % 2,505 1.4 %
Equity securities 824 0.4 % 754 0.4 %
Short-term investments 212 0.2 % 111 0.1 %
US government and agencies 2,636 1.4 % 212 0.1 %
Other investments 38,232 20.7 % 33,831 19.2 %
Cash and equivalents 5,238 2.8 % 6,086 3.5 %
Policy loans and other 1,362 0.8 % 1,296 0.7 %
Net invested assets excluding investment
in Apollo 184,271 100.0 % 173,231 98.8 %
Investment in Apollo - - % 2,112 1.2 %
Net invested assets $ 184,271 100.0 % $ 175,343 100.0 %
1 See
Our net invested assets were$184.3 billion and$175.3 billion as ofMarch 31, 2022 andDecember 31, 2021 , respectively. Corporate securities included$23.7 billion of private placements, which represented 12.9% of our net invested assets. The increase in net invested assets as ofMarch 31, 2022 fromDecember 31, 2021 was primarily driven by growth from net organic inflows over liability outflows, purchase accounting adjustments resulting in an increase in book value as our investment portfolio was marked up to fair value and an increase in valuation of several alternative investments. In managing our business, we utilize net invested assets as presented in the above table. Net invested assets do not correspond to total investments, including related parties, on our condensed consolidated balance sheets, as discussed previously in Key Operating and Non-GAAP Measures. Net invested assets represent the investments that directly back our net reserve liabilities and surplus assets. We believe this view of our portfolio provides a view of the assets for which we have economic exposure. We adjust the presentation for funds withheld and modco transactions to include or exclude the underlying investments based upon the contractual transfer of economic exposure to such underlying investments. We also adjust for VIEs to show the net investment in the funds, which are included in the alternative investments line above as well as adjust for the allowance for credit losses. Net invested assets includes our proportionate share of ACRA investments, based on our economic ownership, but excludes the proportionate share of investments associated with the noncontrolling interest. Net invested assets is utilized by management to evaluate our investment portfolio. Net invested assets is used in the computation of net investment earned rate, which allows us to analyze the profitability of our investment portfolio. Net invested assets is also used in our risk management processes for asset purchases, product design and underwriting, stress scenarios, liquidity, and ALM. 83
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Net Alternative Investments
The following summarizes our net alternative investments:
Successor Predecessor
March 31, 2022 December 31, 2021
Net Invested Net Invested
(In millions, except percentages) Asset Value Percent of Total Asset Value Percent of Total
Differentiated investments
Athora $ 836 7.3 % $ 743 7.5 %
MidCap 677 5.9 % 666 6.7 %
Wheels/Donlen 621 5.4 % 590 6.0 %
Catalina 436 3.8 % 442 4.6 %
Venerable 230 2.0 % 219 2.2 %
Other 1,527 13.3 % 1,122 11.3 %
Total differentiated investments 4,327 37.7 % 3,782 38.3 %
Real estate 2,959 25.7 % 2,673 27.1 %
Credit 1,448 12.5 % 1,281 13.0 %
Private equity 1,877 16.3 % 1,298 13.1 %
Real assets 384 3.3 % 330 3.3 %
Natural resources 388 3.4 % 353 3.7 %
Equities1 116 1.0 % 133 1.3 %
Other 7 0.1 % 23 0.2 %
Net alternative investments $ 11,506 100.0 % $ 9,873 100.0 %
1 As of
Net alternative investments were$11.5 billion and$9.9 billion as ofMarch 31, 2022 andDecember 31, 2021 , respectively, representing 6.2% and 5.6% of our net invested assets portfolio as ofMarch 31, 2022 andDecember 31, 2021 , respectively. The increase in net alternative investments was primarily driven by the deployment of growth from net organic inflows over liability outflows and an increase in valuation of several alternative investments. Net alternative investments do not correspond to the total investment funds, including related parties and consolidated VIEs, on our condensed consolidated balance sheets. As discussed above in the net invested assets section, we adjust the GAAP presentation for funds withheld, modco and VIEs. We include CLO and ABS equity tranche securities in alternative investments due to their underlying characteristics and equity-like features. Through our relationship with Apollo, we have indirectly invested in companies that meet the key characteristics we look for in net alternative investments. Our two largest alternative investments areAthora and MidCap.Athora is a strategic investment, while MidCap is an asset originator which, from time to time, provides us with access to assets for our investment portfolio.
Athora is a specialized insurance and reinsurance group fully focused on the European market.Athora's principal operational subsidiaries areAthora Netherlands N.V. inthe Netherlands ,Athora Belgium SA inBelgium ,Athora Lebensversicherung AG inGermany ,Athora Ireland plc inIreland , andAthora Life Re Ltd inBermuda .Athora deploys capital and resources to further its mission to build a stand-alone independent and integrated insurance and reinsurance business.Athora's growth is achieved primarily through acquisitions, portfolio transfers and reinsurance.Athora is building a European insurance brand and has successfully acquired, integrated, and transformed four insurance companies:Delta Lloyd Deutschland AG (2015),Aegon Ireland plc (2018),Generali Belgium SA (2019) andVIVAT NV (2020). Our alternative investment inAthora had a carrying value of$836 million and$743 million as ofMarch 31, 2022 andDecember 31, 2021 , respectively. Our investment inAthora represents our proportionate share of its net asset value, which largely reflects any contributions to and distributions fromAthora and changes in its fair value.Athora returned a net investment earned rate of 21.98% and 4.36% for the three months endedMarch 31, 2022 and 2021, respectively. Alternative investment income fromAthora was$46 million and$8 million for the three months endedMarch 31, 2022 and 2021, respectively. The increase in alternative investment income was primarily due to a valuation increase in the current year. 84
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MidCap MidCap is a commercial finance company that provides various financial products to middle-market businesses in multiple industries, primarily located in the US. MidCap primarily originates and invests in commercial and industrial loans, including senior secured corporate loans, working capital loans collateralized mainly by accounts receivable and inventory, senior secured loans collateralized by portfolios of commercial and consumer loans and related products and secured loans to highly capitalized pharmaceutical and medical device companies, and commercial real estate loans, including multifamily independent-living properties, assisted living, skilled nursing and medical office properties, warehouse, office building, hotel and other commercial use properties and multifamily properties. MidCap originates and acquires loans using borrowings under financing arrangements that it has in place with numerous financial institutions. MidCap's earnings are primarily driven by the difference between the interest earned on its loan portfolio and the interest accrued under its outstanding borrowings. As a result, MidCap is primarily exposed to the credit risk of its loan counterparties and prepayment risk. Additionally, financial results are influenced by related levels of middle-market business investment and interest rates. Our alternative investment in MidCap had a carrying value of$677 million and$666 million as ofMarch 31, 2022 andDecember 31, 2021 , respectively. As ofMarch 31, 2022 andDecember 31, 2021 , this alternative investment was comprised of our equity investment in MidCap, of$670 million and$659 million , respectively, and redeemable preferred stock of$7 million and$7 million , respectively. The MidCap equity investment returned a net investment earned rate of 17.63% and 37.48% for the three months endedMarch 31, 2022 and 2021, respectively. Alternative investment income from the equity investment in MidCap was$30 million and$52 million for the three months endedMarch 31, 2022 and 2021, respectively. The decrease in alternative investment income for the three months endedMarch 31, 2022 compared to 2021 was mainly driven by a valuation increase in the prior year associated with a capital raise priced at a slight premium. The redeemable preferred stock returned a net investment earned rate of (103.47)% and 26.83% for the three months endedMarch 31, 2022 and 2021, respectively. Alternative investment income (loss) from the redeemable preferred stock was$(2) million and$5 million for the three months endedMarch 31, 2022 and 2021, respectively. Equities We hold a public equity position in Jackson (ticker: JXN), previously held as a private equity investment, after Jackson's former parent company, Prudential plc, completed a dividend demerger transaction in September of 2021 which resulted in Jackson becoming a publicly traded company. Although the net invested asset value of this equity position is not significant, it has the ability to create volatility in our statements of income. As ofMarch 31, 2022 andDecember 31, 2021 , we held approximately 2.8 million and 3.4 million shares of Jackson, respectively, with a market value of$116 million and$133 million , net of the ACRA noncontrolling interest, respectively. Alternative investment income from Jackson was$12 million and$0 million for the three months endedMarch 31, 2022 and 2021, respectively. The increase in alternative investment income was driven by the increase in Jackson's share price in the current year, partially offset by a decrease in the number of shares held. 85
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Non-GAAP Measure Reconciliations
The reconciliation of net income available to AHL common shareholder to spread
related earnings, is as follows:
Successor Predecessor
Three months Three months
ended March 31, ended March 31,
(In millions) 2022 2021
Net income (loss) available to Athene Holding Ltd. common
shareholder
$ (1,518) $ 578 Preferred stock dividends 35 36 Net loss attributable to noncontrolling interest (883) (537) Net income (loss) (2,366) 77 Income tax expense (benefit) (407) 62 Income (loss) before income taxes (2,773) 139 Realized gains (losses) on sale of AFS securities (64) 19 Unrealized, allowances and other investment gains1 (871) 75 Change in fair value of reinsurance assets (1,657) (865) Offsets to investment gains (losses) 131 141 Investment losses, net of offsets (2,461) (630) Change in fair values of derivatives and embedded derivatives - FIAs, net of offsets (81) 488 Integration, restructuring and other non-operating expenses (34) (45) Stock compensation expense2 (12) (8) Preferred stock dividends 35 36 Noncontrolling interests - pre-tax loss (890) (547) Total adjustments to income (loss) before income taxes (3,443) (706) Spread related earnings$ 670 $ 845 1 Unrealized, allowances and other investment gains (losses) was updated to include the change in fair value of Apollo investment. 2 Stock compensation expense was updated to include our long-term incentive plan expense.
The reconciliation of total AHL shareholders' equity to total adjusted AHL
common shareholder's equity is as follows:
Successor Predecessor
(In millions) March 31, 2022 December 31, 2021
Total AHL shareholders' equity $ 11,149 $ 20,130
Less: Preferred stock 2,667 2,312
Total AHL common shareholder's equity 8,482 17,818
Less: AOCI (4,674) 2,430
Less: Accumulated change in fair value of reinsurance assets (1,241)
585
Less: Accumulated change in fair value of mortgage loan
assets
(533) - Total adjusted AHL common shareholder's equity$ 14,930 $ 14,803 86
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The reconciliation of net investment income to net investment earnings and
earned rate is as follows:
Successor Predecessor
Three months ended March 31, 2022 Three months ended March 31, 2021
(In millions, except percentages) Dollar Rate Dollar Rate
GAAP net investment income $ 1,683 3.71 % $ 1,669 4.40 %
Change in fair value of reinsurance assets 220 0.49 % 366 0.97 %
VIE earnings adjustment 79 0.17 % 37 0.09 %
Alternative gains 18 0.04 % 69 0.18 %
ACRA noncontrolling interest (305) (0.67) % (198) (0.52) %
Apollo investment gain (loss) (33) (0.07) % 25 0.07 %
Held for trading amortization and other (7) (0.02) % 30 0.08 %
Total adjustments to arrive at net investment
earnings/earned rate (28) (0.06) % 329 0.87 %
Total net investment earnings/earned rate $ 1,655 3.65 % $ 1,998 5.27 %
Average net invested assets $ 181,398 $ 151,644
The reconciliation of GAAP benefits and expenses to cost of funds is as follows:
Successor Predecessor
Three months ended March 31, 2022 Three months ended March 31, 2021
(In millions, except percentages) Dollar Rate Dollar Rate
GAAP benefits and expenses $ 2,504 5.52 % $ 4,252 11.22 %
Premiums (2,110) (4.65) % (3,011) (7.94) %
Product charges (166) (0.37) % (150) (0.40) %
Other revenues 3 0.01 % (14) (0.04) %
FIA option costs 294 0.65 % 279 0.74 %
Reinsurance embedded derivative impacts 12 0.03 % 14 0.04 %
Change in fair value of embedded derivatives
- FIA, net of offsets 350 0.77 % (298) (0.79) %
DAC and DSI amortization related to
investment gains and losses 10 0.02 % 139 0.37 %
Rider reserves related to investment gains
and losses 124 0.27 % 21 0.05 %
Policy and other operating expenses,
excluding policy acquisition expenses (247) (0.55) % (201) (0.53) %
AmerUs closed block fair value liability 127 0.28 % 93 0.24 %
ACRA noncontrolling interest (87) (0.19) % (107) (0.28) %
Other 12 0.03 % (7) (0.02) %
Total adjustments to arrive at cost of funds (1,678) (3.70) % (3,242) (8.56) %
Total cost of funds $ 826 1.82 % $ 1,010 2.66 %
Average net invested assets $ 181,398 $ 151,644
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The reconciliation of policy and other operating expenses to other operating
expenses is as follows:
Successor Predecessor
Three months
Three months ended ended March 31,
(In millions) March 31, 2022 2021
GAAP policy and other operating expenses $ 335 $ 293
Interest expense (33) (32)
Policy acquisition expenses, net of deferrals (88) (92)
Integration, restructuring and other non-operating expenses (34) (45)
Stock compensation expenses1 (12) (8)
ACRA noncontrolling interest (51) (21)
Other changes in policy and other operating expenses (8) (5)
Total adjustments to arrive at other operating expenses (226) (203)
Other operating expenses $ 109 $ 90
1 Stock compensation expense was updated to include our long-term incentive plan expense.
The reconciliation of total investments, including related parties, to net
invested assets is as follows:
Successor Predecessor
(In millions) March 31, 2022 December 31, 2021
Total investments, including related parties $ 196,405 $ 209,176
Derivative assets (3,668) (4,387)
Cash and cash equivalents (including restricted cash) 9,357 10,275
Accrued investment income 885 962
Payables for collateral on derivatives (3,105) (3,934)
Reinsurance funds withheld and modified coinsurance 2,800 (1,035)
VIE and VOE assets, liabilities and noncontrolling interest 10,314 2,958
Unrealized (gains) losses 7,985 (4,057)
Ceded policy loans (158) (169)
Net investment receivables (payables) 410 75
Allowance for credit losses 495 361
Total adjustments to arrive at gross invested assets 25,315 1,049
Gross invested assets 221,720 210,225
ACRA noncontrolling interest (37,449) (34,882)
Net invested assets $ 184,271 $ 175,343
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The reconciliation of total investment funds, including related parties and
VIEs, to net alternative investments within net invested assets is as follows:
Successor Predecessor
(In millions) March 31, 2022 December 31, 2021
Investment funds, including related parties and VIEs $ 17,899
$ 9,866 Equity securities1 732 872 CLO and ABS equities included in trading securities1 1,075 1,418 Investment in Apollo - (2,112) Investment funds within funds withheld at interest 1,982 1,807 Royalties and other assets included in other investments 48 50 Net assets of the VIE, excluding investment funds (8,632) (772) Unrealized (gains) losses and other adjustments 12 14 ACRA noncontrolling interest (1,610) (1,270) Total adjustments to arrive at alternative investments (6,393) 7 Net alternative investments $ 11,506 $ 9,873
1 Prior period has been updated to reflect a reclassification between equity securities and CLO and ABS equities
included in trading securities.
The reconciliation of total liabilities to net reserve liabilities is as
follows:
Successor Predecessor
(In millions) March 31, 2022 December 31, 2021
Total liabilities $ 232,442 $ 212,968
Long-term debt (3,287) (2,964)
Derivative liabilities (631) (472)
Payables for collateral on derivatives and short-term
repurchase agreements
(5,717) (6,446) Other liabilities (1,944) (2,975) Liabilities of consolidated VIEs (6,801) (461) Reinsurance ceded receivables (4,648) (4,594) Policy loans ceded (158) (169) ACRA noncontrolling interest (35,019) (32,933) Other (3) (3) Total adjustments to arrive at net reserve liabilities (58,208) (51,017) Net reserve liabilities$ 174,234 $ 161,951
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.
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Our investment portfolio is structured to ensure a strong liquidity position over time in order to permit timely payment of policy and contract benefits without requiring asset sales at inopportune times or at depressed prices. In general, liquid assets include cash and cash equivalents, highly rated corporate bonds, unaffiliated preferred stock and unaffiliated public common stock, all of which generally have liquid markets with a large number of buyers. The carrying value of these assets, excluding assets within modified coinsurance and funds withheld portfolios, as ofMarch 31, 2022 was$85.3 billion . Assets included in modified coinsurance and funds withheld portfolios are available to fund the benefits for the associated obligations but are restricted from other uses. The carrying value of the underlying assets in these modified coinsurance and funds withheld portfolios that we consider liquid as ofMarch 31, 2022 was$28.5 billion . Although our investment portfolio does contain assets that are generally considered illiquid for liquidity monitoring purposes (primarily mortgage loans, policy loans, real estate, investment funds, and affiliated common stock), there is some ability to raise cash from these assets if needed. In periods of economic downturn, such as the one brought about by the spread of COVID-19, we may maintain higher cash balances than required to manage our liquidity risk and to take advantage of market dislocations as they arise. We have access to additional liquidity through our$1.25 billion credit agreement, which was undrawn as ofMarch 31, 2022 and had a remaining term of more than two years, subject to up to two one-year extensions. We also have access to$2.0 billion of committed repurchase facilities. Our registration statement on Form S-3 ASR (Shelf Registration Statement) provides us access to the capital markets, subject to favorable market conditions and other factors. We are also party to repurchase agreements with several different financial institutions, pursuant to which we may obtain short-term liquidity, to the extent available. In addition, through our membership in the FHLB, we are eligible to borrow under variable rate short-term federal funds arrangements to provide additional liquidity. We proactively manage our liquidity position to meet cash needs while minimizing adverse impacts on investment returns. We analyze our cash-flow liquidity over the upcoming 12 months by modeling potential demands on liquidity under a variety of scenarios, taking into account the provisions of our policies and contracts in force, our cash flow position, and the volume of cash and readily marketable securities in our portfolio. Liquidity risk is monitored, managed and mitigated through 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, under various stress scenarios. We further seek to mitigate liquidity risk by maintaining access to alternative, external sources of liquidity as described below.
Our liquidity risk management framework is codified in the company's Liquidity
Risk Policy that is reviewed and approved by our board of directors.
Insurance Subsidiaries' Liquidity
Operations
The primary cash flow sources for our insurance subsidiaries include retirement services product inflows (premiums), investment income, principal repayments on our investments, net transfers from separate accounts and financial product inflows. Uses of cash include investment purchases, payments to policyholders for surrenders, withdrawals and payout benefits, interest and principal payments on funding agreements, payments to satisfy pension group annuity obligations, 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 ofMarch 31, 2022 andDecember 31, 2021 , approximately 74% of our deferred annuity liabilities were subject to penalty upon surrender. In addition, as of each ofMarch 31, 2022 andDecember 31, 2021 , approximately 54% of policies contained MVAs that may also have the effect of limiting early withdrawals if interest rates increase, but may encourage early withdrawals by effectively subsidizing a portion of surrender charges when interest rates decrease. Our funding agreements, group annuities and payout annuities are generally non-surrenderable which accounts for approximately 30% of our net reserve liabilities.
Membership in
Through our membership in the FHLB, we are eligible to borrow under variable rate short-term federal funds arrangements to provide additional liquidity. The borrowings must be secured by eligible collateral such as mortgage loans, eligible CMBS or RMBS, government or agency securities and guaranteed loans. As of each ofMarch 31, 2022 andDecember 31, 2021 , we had$0 million of outstanding borrowings under these arrangements. We have issued funding agreements to the FHLB. These funding agreements were issued in an investment spread strategy, consistent with other investment spread operations. As ofMarch 31, 2022 andDecember 31, 2021 , we had funding agreements outstanding with the FHLB in the aggregate principal amount of$3.2 billion and$2.8 billion , respectively. The maximum FHLB indebtedness by a member is determined by the amount of collateral pledged, and cannot exceed a specified percentage of the member's total statutory assets dependent on the internal credit rating assigned to the member by the FHLB. As ofMarch 31, 2022 , the total maximum borrowings under the FHLB facilities were limited to$43.3 billion . However, our ability to borrow under the facilities is constrained by the availability of assets that qualify as eligible collateral under the facilities and certain other limitations. Considering these limitations, we estimate that as ofMarch 31, 2022 we had the ability to draw up to a total of approximately$4.2 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. 90
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Securities Repurchase Agreements
We engage in repurchase transactions whereby we sell fixed income securities to third parties, primarily major brokerage firms or commercial banks, with a concurrent agreement to repurchase such securities at a determined future date. We require that, at all times during the term of the repurchase agreements, we maintain sufficient cash or other liquid assets sufficient to allow us to fund substantially all of the repurchase price. Proceeds received from the sale of securities pursuant to these arrangements are generally invested in short-term investments, with the offsetting obligation to repurchase the security included within payables for collateral on derivatives and securities to repurchase on the condensed consolidated balance sheets. As per the terms of the repurchase agreements, we monitor the market value of the securities sold and may be required to deliver additional collateral (which may be in the form of cash or additional securities) to the extent that the value of the securities sold decreases prior to the repurchase date. As ofMarch 31, 2022 andDecember 31, 2021 , the payables for repurchase agreements were$4.0 billion and$3.1 billion , respectively, while the fair value of securities and collateral held by counterparties backing the repurchase agreements was$4.0 billion and$3.2 billion , respectively. As ofMarch 31, 2022 , payables for repurchase agreements were comprised of$2.5 billion of short-term and$1.5 billion of long-term repurchase agreements. As ofDecember 31, 2021 , payables for repurchase agreements were comprised of$2.5 billion of short-term and$598 million of long-term repurchase agreements. We have a$1.0 billion committed repurchase facility withBNP Paribas . The facility has an initial commitment period of 12 months and automatically renews for successive 12-month periods until terminated by either party. During the commitment period, we may sell andBNP Paribas is required to purchase eligible investment grade corporate bonds pursuant to repurchase transactions at pre-agreed discounts in exchange for a commitment fee. As ofMarch 31, 2022 , we had no outstanding payables under this facility. We have a$1.0 billion committed repurchase facility with Societe Generale. The facility has a commitment term of 5 years, however, either party may terminate the facility upon 24-months' notice, in which case the facility will end upon the earlier of (1) such designated termination date, or (2)July 26, 2026 . During the commitment period, we may sell and Societe Generale is required to purchase eligible investment grade corporate bonds pursuant to repurchase transactions at pre-agreed rates in exchange for an ongoing commitment fee for the facility. As ofMarch 31, 2022 , we had no outstanding payables under this facility. Cash Flows
Our cash flows were as follows:
Successor Predecessor
Three months
ended
March 31, Three months ended
(In millions) 2022 March 31, 2021
Net income (loss) $ (2,366) $ 77
Non-cash revenues and expenses 2,521 1,549
Net cash provided by operating activities 155 1,626
Sales, maturities and repayments of investments 12,078 5,230
Purchases of investments (18,411) (12,570)
Other investing activities 168 457
Net cash used in investing activities (6,165) (6,883)
Inflows on investment-type policies and contracts 8,342 5,162
Withdrawals on investment-type policies and contracts (2,245) (1,684)
Other financing activities (634) 310
Net cash provided by financing activities 5,463 3,788
Effect of exchange rate changes on cash and cash equivalents (4) -
Net decrease in cash and cash equivalents1 $ (551) $ (1,469)
1 Includes cash and cash equivalents, restricted cash and cash and cash equivalents of consolidated variable
interest entities.
Cash flows from operating activities
The primary cash inflows from operating activities include net investment income, annuity considerations and insurance premiums. The primary cash outflows from operating activities are comprised of benefit payments and operating expenses. Our operating activities generated cash flows totaling$155 million and$1.6 billion for the three months endedMarch 31, 2022 and 2021, respectively. The decrease in cash provided by operating activities was primarily driven by lower cash received from pension group annuity transactions. 91
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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$6.2 billion and$6.9 billion for the three months endedMarch 31, 2022 and 2021, respectively. The decrease in cash used in investing activities was primarily attributable to an increase in sales, maturities and repayments of AFS securities, largely offset by an increase in purchases of investments due to the deployment of significant cash inflows from organic growth compared to prior year.
Cash flows from financing activities
The primary cash inflows from financing activities are inflows on our investment-type policies, changes of cash collateral posted for derivative transactions, capital contributions, proceeds from the issuance of stock and proceeds from borrowing activities. The primary cash outflows from financing activities are withdrawals on our investment-type policies, changes of cash collateral posted for derivative transactions, repayments of outstanding borrowings, repurchases of common stock and payment of preferred and common stock dividends. Our financing activities provided cash flows totaling$5.5 billion and$3.8 billion for the three months endedMarch 31, 2022 and 2021, respectively. The increase in cash provided by financing activities was primarily attributed to higher organic inflows from retail and funding agreements net of withdrawals. This was partially offset by the payment of the$750 million dividend to Apollo declared in the prior quarter as well as the payment of common stock dividends of$188 million in the quarter endedMarch 31, 2022 . Material Cash Obligations The following table summarizes estimated future cash obligations as ofMarch 31, 2022 : Payments Due by Period 2027 and (In millions) Total 2022 2023-2024 2025-2026 thereafter Interest sensitive contract liabilities$ 164,369 $ 13,831 $ 39,241 $ 32,335 $ 78,962 Future policy benefits 48,093 1,749 3,492 3,411 39,441 Other policy claims and benefits 146 146 - - - Dividends payable to policyholders 100 3 9 9 79 Long-term debt1 4,802 125 253 253 4,171 Securities to repurchase2 4,052 2,430 246 624 752 Total$ 221,562 $ 18,284 $ 43,241 $ 36,632 $ 123,405
1 The obligations for long-term debt payments include contractual maturities of principal and estimated future interest
payments based on the terms of the debt agreements.
2 The obligations for securities for repurchase payments include contractual maturities of principal and estimated future
interest payments based on the terms of the agreements. Future interest payments on floating rate repurchase agreements were
calculated using the
Holding Company Liquidity Common Stock Dividends We declared common stock cash dividends of$750 million onDecember 31, 2021 , payable to holders of AHL's Class A shares with a record date and payment date following the completion of our merger with AGM. The dividend payable was included in related party other liabilities on the consolidated balance sheets as ofDecember 31, 2021 . The dividend was paid onJanuary 4, 2022 . We declared common stock cash dividends of$187.5 million onMarch 30, 2022 , payable to the holders of the AHL's Class A common shares with a record date ofMarch 30, 2022 and payment date ofMarch 31, 2022 .
Dividends from Subsidiaries
AHL is a holding company whose primary liquidity needs include the cash-flow
requirements relating to its corporate activities, including its day-to-day
operations, debt servicing, preferred and common stock dividend payments and
strategic transactions, such as acquisitions. The primary source of AHL's cash
flow is dividends from its subsidiaries, which are expected to be adequate to
fund cash flow requirements based on current estimates of future obligations.
The ability of AHL's insurance subsidiaries to pay dividends is limited by
applicable laws and regulations of the jurisdictions where the subsidiaries are
domiciled, as well as agreements entered into with regulators. These laws and
regulations require, among other things, the insurance subsidiaries to maintain
minimum solvency requirements and limit the amount of dividends these
subsidiaries can pay.
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Subject to these limitations and prior notification to the appropriate regulatory agency, the US insurance subsidiaries are permitted to pay ordinary dividends based on calculations specified under insurance laws of the relevant state of domicile. Any distributions above the amount permitted by statute in any twelve month period are considered to be extraordinary dividends, and require the approval of the appropriate regulator prior to payment. AHL does not currently plan on having the US subsidiaries pay any dividends to their parents. Dividends from subsidiaries 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 inBermuda sign and submit to theBermuda Monetary Authority (BMA) an affidavit attesting that a dividend in excess of this amount would not cause ALRe to fail to meet its relevant margins. In certain instances, ALRe would also be required to provide prior notice to the BMA in advance of the payment of dividends. In the event that such an affidavit is submitted to the BMA in accordance with the Bermuda Insurance Act, and further subject to ALRe meeting its relevant margins, ALRe is permitted to distribute up to the sum of 100% of statutory surplus and an amount less than 15% of its total statutory capital. Distributions in excess of this amount require the approval of the BMA. The maximum distribution permitted by law or contract is not necessarily indicative of our actual ability to pay such distributions, which may be further restricted by business and other considerations, such as the impact of such distributions on surplus, which could affect our ratings or competitive position and the amount of premiums that can be written. Specifically, the level of capital needed to maintain desired financial strength ratings from rating agencies, including S&P,A.M. Best and Fitch, is of particular concern when determining the amount of capital available for distributions. AHL believes its insurance subsidiaries have sufficient statutory capital and surplus, combined with additional capital available to be provided by AHL, to meet their financial strength ratings objectives. Finally, state insurance laws and regulations require that the statutory surplus of our insurance subsidiaries following any dividend or distribution must be reasonable in relation to their outstanding liabilities and adequate for the insurance subsidiaries' financial needs.
Other Sources of Funding
We may seek to secure additional funding at the holding company level by means other than dividends from subsidiaries, such as by drawing on our undrawn$1.25 billion credit agreement or by pursuing future issuances of debt to third-party investors. Certain other sources of liquidity potentially available at the holding company level are discussed below. Certain covenants in our credit agreement prohibit us from maintaining debt in excess of specified thresholds. Specifically, our credit agreement prohibits us from permitting the Consolidated Debt to Capitalization Ratio (as such term is defined in the credit agreement) to exceed 35% as of the end of any quarter.
Shelf Registration - Under our Shelf Registration Statement, subject to market
conditions, we have the ability to issue, in indeterminate amounts, debt
securities, preference shares, depositary shares, Class A common shares,
warrants and units.
Debt - The following summarizes our outstanding long-term senior notes (in millions, except percentages): Issuance Issue Date Maturity Date Interest Rate Principal Balance 2028 Senior Unsecured Notes January 12, 2018 2028 4.125%$1,000 2030 Senior Unsecured Notes April 3, 2020 2030 6.150%$500 2031 Senior Unsecured Notes October 8, 2020 2031 3.500%$500 2051 Senior Unsecured Notes May 25, 2021 2051 3.950%$500 2052 Senior Unsecured Notes December 13, 2021 2052 3.450%$500
See Note 9 - Debt to the consolidated financial statements in our 2021 Annual
Report for further information on debt.
Preferred Stock - The following summarizes our perpetual non-cumulative
preferred stock issuances (in millions, except share, per share data and
percentages):
Issuance
Fixed/Floating Rate Issue Date Optional Redemption Date1 Shares Issued Par Value Per Share Liquidation Value Per Share Aggregate Net Proceeds Series A Fixed-to-Floating Rate 6.350%June 10, 2019 June 30, 2029 34,500$1.00 $25,000 $839 Series B Fixed-Rate 5.625%September 19, 2019 September 30, 2024 13,800$1.00 $25,000 $333 Series C Fixed-Rate Reset 6.375%June 11, 2020 Variable2 24,000$1.00 $25,000 $583 Series D Fixed-Rate 4.875%December 18, 2020 December 30, 2025 23,000$1.00 $25,000 $557
1 We may redeem preferred stock anytime on or after the dates set forth in this column, subject to the terms of the applicable certificate of designations.
2 We may redeem during a period from and including
See Note 10 - Equity to the consolidated financial statements in our 2021 Annual
Report for further information on preferred stock.
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Intercompany Note - AHL has an unsecured revolving note payable with ALRe, which permits AHL to borrow up to$2 billion with a fixed interest rate of 2.29% and a maturity date ofDecember 15, 2028 . As ofMarch 31, 2022 andDecember 31, 2021 , the revolving note payable had an outstanding balance of$417 million and$158 million , respectively. Capital We believe that we have a strong capital position and that we are well positioned to meet policyholder and other obligations. We measure capital sufficiency using an internal capital model which reflects management's view on the various risks inherent to our business, the amount of capital required to support our core operating strategies and the amount of capital necessary to maintain our current ratings in a recessionary environment. The amount of capital required to support our core operating strategies is determined based upon internal modeling and analysis of economic risk, as well as inputs from rating agency capital models and consideration of both NAIC RBC andBermuda capital requirements. Capital in excess of this required amount is considered excess equity capital, which is available to deploy. As ofDecember 31, 2021 and 2020, our US insurance companies' TAC, as defined by the NAIC, was$3.0 billion and$2.7 billion , respectively, and our US RBC ratio was 377% and 425%, respectively. The decrease was primarily driven by strong growth in our organic channels, a recent NAIC update to C-1 factors, higher unfunded commitments and the impairment of a COLI asset, partially offset by higher total adjusted capital largely from capital contributions. Each US domestic insurance subsidiary's state of domicile imposes minimum RBC requirements that were developed by the NAIC. The formulas for determining the amount of RBC specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of TAC to its authorized control level RBC (ACL). Our TAC was significantly in excess of all regulatory standards as ofDecember 31, 2021 and 2020, respectively.Bermuda statutory capital and surplus for ourBermuda insurance companies in aggregate was$14.6 billion and$13.5 billion as ofDecember 31, 2021 and 2020, respectively. OurBermuda insurance companies adhere to BMA regulatory capital requirements to maintain statutory capital and surplus to meet the minimum margin of solvency and maintain minimum economic balance sheet (EBS) capital and surplus to meet the enhanced capital requirement. Under the EBS framework, assets are recorded at market value and 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. TheBermuda group's EBS capital and surplus was$19.7 billion and$17.2 billion , resulting in a BSCR ratio of 232% and 254% as ofDecember 31, 2021 and 2020, respectively. The decrease was primarily driven by strong growth in our organic channels and the declared dividend. TheBermuda group's BSCR ratio includes the capital and surplus of ALRe, AARe, ALReI and all of their subsidiaries, including AUSA and its subsidiaries. An insurer must have a BSCR ratio of 100% or greater to be considered solvent by the BMA. As ofDecember 31, 2021 and 2020, ourBermuda insurance companies held the appropriate capital to adhere to these regulatory standards. As ofDecember 31, 2021 and 2020, our Bermuda RBC was 410% and 460%, respectively. The decrease was primarily driven by strong growth in our organic channels, a recent NAIC update to C-1 factors and the declared dividend. The Bermuda RBC ratio is calculated by applying the NAIC RBC factors to the statutory financial statements of our non-US reinsurance subsidiaries on an aggregate basis with certain adjustments made by management as described in the glossary. We exclude our interests in the AOG units and other subsidiary holding companies from our capital base for purposes of calculating Bermuda RBC, but do reflect such interests within our capital analysis, net of risk charges. ACRA - ACRA provides us with access to on-demand capital to support our growth strategies and capital deployment opportunities. ACRA provides a capital source to fund both our inorganic and organic channels, including PGA, funding agreements and retail channels. This shareholder-friendly, strategic capital solution allows us the flexibility to simultaneously deploy capital across multiple accretive avenues, while maintaining a strong financial position. 94
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Critical Accounting Estimates and Judgments
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Amounts based on such estimates involve numerous assumptions subject to varying and potentially significant degrees of judgment and uncertainty, particularly related to the future performance of the underlying business, and will likely change in the future as additional information becomes available. Critical estimates and assumptions are evaluated on an ongoing basis based on historical developments, market conditions, industry trends and other information that is reasonable under the circumstances. There can be no assurance that actual results will conform to estimates and assumptions and that reported results of operations will not be materially affected by the need to make future accounting adjustments to reflect periodic changes in these estimates and assumptions. Critical accounting estimates are impacted significantly by our methods, judgments and assumptions used in the preparation of the consolidated financial statements and should be read in conjunction with our significant accounting policies described in Note 1 - Business, Basis of Presentation and Significant Accounting Policies to the consolidated financial statements of our 2021 Annual Report. The following summary of our critical accounting estimates is intended to enhance one's ability to assess our financial condition and results of operations and the potential volatility due to changes in estimate. Other than as described in this Item 2, there have been no material changes to our critical accounting estimates and judgments from those previously disclosed in our 2021 Annual Report. The following updates and supplements the critical accounting estimates and judgments in our 2021 Annual Report.
Investments
We are responsible for the fair value measurement of certain investments presented in our condensed consolidated financial statements. We perform regular analysis and review of our valuation techniques, assumptions and inputs used 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 use both internally-developed and commercially-available cash flow models to analyze the reasonableness of fair values using credit spreads and other market assumptions, where appropriate. For investment funds, we typically recognize our investment, including those for which we have elected the fair value option, based on net asset value information provided by the general partner or related asset manager. For a discussion of our investment funds for which we have elected the fair value option, see Note 6 - Fair Value to the condensed consolidated financial statements.
Valuation of Mortgage Loans
EffectiveJanuary 1, 2022 , we elected the fair value option on our mortgage loan portfolio. We use independent commercial pricing services to value our mortgage loans portfolio. Discounted cash flow analysis is performed through which the loans' contractual cash flows are modeled and an appropriate discount rate is determined to discount the cash flows to arrive at a present value. Financial factors, credit factors, collateral characteristics and current market conditions are all taken into consideration when performing the discounted cash flow analysis. We perform vendor due diligence exercises annually to review vendor processes, models and assumptions. Additionally, we review price movements on a quarterly basis to ensure reasonableness.
Future Policy Benefits
The future policy benefit liabilities associated with long duration contracts include 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 ofMarch 31, 2022 , the reserve investment yield assumptions for non-participating contracts range from 2.3% to 4.1% and are specific to our expected earned rate on the asset portfolio supporting the reserves. 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. We recognize the excess proportionally over the accumulation
period based on total actual and 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.
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Projected policyholder lapse and withdrawal behavior assumptions are set in one of two ways. For certain blocks of business, this behavior is a function of our predictive analytics model which considers various observable inputs. For the remaining blocks of business, these 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 and update this assumption as experience emerges. 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 can be 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 ofMarch 31, 2022 , the GLWB and GMDB liability balance, including the impacts of shadow adjustments, totaled$5.7 billion . The relative sensitivity of the GLWB and GMDB liability balance from changes to these assumptions, including the impacts of shadow adjustments from hypothetical changes in projected assessments, changes in the discount rate and annual equity growth, has decreased following the business combination and pushdown accounting election described in Note 2 - Business Combination. Using factors consistent with those previously disclosed in our 2021 Annual Report, changes to the GLWB and GMDB liability balance from these hypothetical changes in assumptions are not significant.
Derivatives
Valuation of Embedded Derivatives on indexed annuities
We issue and reinsure products, primarily 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. Indexed annuities and indexed universal life insurance contracts allow the policyholder to elect a fixed interest rate return or an equity market component for which interest credited is based on the performance of certain 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 the embedded derivatives represents the present value of cash flows attributable to the indexed strategies. The embedded derivative cash flows 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 embedded derivative cash flows are discounted using a rate that reflects our own credit rating. 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. Contracts acquired through a business combination which contain an embedded derivative are re-bifurcated as of the acquisition date. 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. The options valued in the embedded derivatives represent the rights of the policyholder to receive index credits over the period indexed strategies are made available to the policyholder, which is typically 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 indexed annuity 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 indexed annuity contract is longer-dated, there is a duration mismatch which may lead to differences in the recognition of income and expense for accounting purposes. A significant assumption in determining policy liabilities for indexed annuities is the vector of rates used to discount indexed strategy cash flows. 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 nonperformance risk would also be factors in the changes to the discount rate. If the discount rates used to discount the indexed strategy cash flows were to fluctuate, there would be a resulting change in reserves for indexed annuities recorded through the condensed consolidated statements of income (loss). As ofMarch 31, 2022 , we had embedded derivative liabilities classified as Level 3 in the fair value hierarchy of$6.7 billion . The increase (decrease) to the embedded derivatives on FIA products from hypothetical changes in discount rates is summarized as follows: (In millions) March 31, 2022 +100 bps discount rate $ (364) -100 bps discount rate 407 96
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 quantitative impact presented in the table above does not necessarily correspond to the ultimate impact on the condensed consolidated financial statements. 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 interest rate risk and public equity risk, see Item 3 Quantitative and Qualitative Disclosures About Market Risks.
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, including at issuance, to determine if the deferred costs are recoverable. If it is determined that 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, based upon the proportion of the present value of actual and expected deferred costs to the present value of actual and expected gross profits to be earned over the life of the policies. Gross profits include 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 indexed annuities also include the change in fair value of both freestanding and embedded derivatives. Our estimates of expected gross profits and margins are based on assumptions using accepted actuarial methods related to policyholder behavior, including lapses and the utilization of benefit riders, mortality, yields on investments supporting the liabilities, future interest credited amounts (including indexed related credited amounts on fixed indexed annuity products), and other policy changes as applicable, and the level of expenses necessary to maintain the policies over their expected lives. Each reporting period, we update estimated gross profits with actual gross profits as part of the amortization process. We also periodically revise the key assumptions used in the amortization calculation 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. 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 financial statement line on the condensed consolidated balance sheets as the associated reserves. Positive VOBA is recorded in DAC, DSI and VOBA on the condensed consolidated balance sheets.
VOBA and negative VOBA are amortized in relation to applicable policyholder
liabilities. Significant assumptions which impact VOBA and negative VOBA
amortization are consistent with those which impact the measurement of
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 and DSI recorded as an increase or decrease to amortization of DAC and DSI on the condensed consolidated statements of income (loss) 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 embedded derivative cash flows. If the discount rates used to discount the embedded derivative cash flows were to change, there would be a resulting increase or decrease to the balances of DAC and DSI recorded as an increase or decrease in amortization of DAC and DSI on the condensed consolidated statements of income (loss). Following the business combination and application of pushdown accounting described in Note 2 - Business Combination, Predecessor DAC and DSI balances were eliminated. Successor DAC and DSI balances exhibit less sensitivity to hypothetical changes in estimated future gross profits and changes in the embedded derivative discount rate as they are less material following the business combination. VOBA balances no longer amortize based on estimated gross profits, and accordingly, are not sensitive to changes to actual or estimated gross profits.
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
condensed consolidated financial statements.
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Table of Contents
RADNET, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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