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Variable Interest Entities
 9 Months Ended
Sep. 30, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Variable Interest Entities
4. Variable Interest Entities

Our investment funds typically meet the definition of a VIE, and in certain cases these investment funds are consolidated in our financial statements because we meet the criteria of the primary beneficiary.

Consolidated VIEs—We consolidate AAA Investments (Co-Invest VI), L.P. (CoInvest VI), AAA Investments (Co-Invest VII), L.P. (CoInvest VII), AAA Investments (Other), L.P. (CoInvest Other), NCL Athene, LLC (NCL LLC) and ALR Aircraft Investment Ireland Limited (ALR), which are investment funds. We are the only limited partner, Class A member or holder of profit participating notes in these investment funds and receive all of the economic benefits and losses, other than management fees and carried interest, as applicable, paid to the general partner in each entity, or a related entity, which are related parties. We do not have any voting rights as limited partner and, as the limited partner, Class A member or holder of profit participating notes, do not solely satisfy the power criteria to direct the activities that significantly impact the economics of the VIE. However, the criteria for the primary beneficiary are satisfied by our related party group and, because substantially all of the activities are conducted on our behalf, we consolidate the investment funds.

No arrangement exists requiring us to provide additional funding in excess of our committed capital investment, liquidity, or the funding of losses or an increase to our loss exposure in excess of our investment in the VIEs. We elected the fair value option for certain fixed maturity and equity securities, and investment funds, which are reported in the consolidated variable interest entity sections on the condensed consolidated balance sheets.

CoInvest VI, CoInvest VII and CoInvest Other were formed to make investments, including co-investments alongside private equity funds sponsored by Apollo. Investments held by CoInvest VI, CoInvest VII and CoInvest Other are related party investments because Apollo affiliates exercise significant influence over the management or operations of the investees. We received our interests in CoInvest VI, CoInvest VII and CoInvest Other as part of a contribution agreement in 2012 with AAA Guarantor – Athene, L.P. (AAA Investor) and its subsidiary, Apollo Life Re Ltd., in order to provide a capital base to support future acquisitions.

CoInvest VII holds a significant investment in MidCap FinCo Limited (MidCap), which is included in investment funds of consolidated VIEs on the condensed consolidated balance sheets. We have purchased pools of loans sourced by MidCap and contemporaneously sold subordinated participation interests in the loans to a subsidiary of MidCap. As of September 30, 2018 and December 31, 2017, we had $0 million and $14 million, respectively, due to MidCap under the subordinated participation agreement which was reflected as a secured borrowing in other liabilities on the condensed consolidated balance sheets. In addition, we have advanced amounts under a subordinated debt facility to MidCap and, as of September 30, 2018 and December 31, 2017, the principal balance was $245 million, and this is included in other related party investments on the condensed consolidated balance sheets.

NCL LLC was formed to hold the investment in Norwegian Cruise Line Holdings Ltd. (NCLH) shares, which were previously held by CoInvest VI. NCL LLC is subject to the same management fees, selling restrictions with respect to shares of NCLH, and carried interest calculation as CoInvest VI. NCL LLC classifies its NCLH shares as related party equity securities. We are the primary beneficiary and consolidate NCL LLC, as substantially all of its activities are conducted on our behalf.

During the first quarter of 2018, we invested in profit participating notes of ALR. ALR was formed to invest in a joint venture that provides airplane lease financing to a major commercial airline. We are the only investor in the profit participating notes and, as substantially all of the activities of ALR are conducted on our behalf, we are the primary beneficiary and consolidate ALR.

Trading securities – related party – Trading securities represents investments in fixed maturity securities with changes in fair value recognized in investment related gains (losses) within revenues of consolidated variable interest entities on the condensed consolidated statements of income.

Equity securities – related party – Changes in fair value of equity securities are recognized in investment related gains (losses) within revenues of consolidated variable interest entities on the condensed consolidated statements of income. Prior period unrealized changes in fair value of equity securities designated as AFS were recognized in OCI.

The following table summarizes the change in unrealized gains (losses) on trading and equity securities of our consolidated variable interest entities still held as of the respective period end:
 
Three months ended September 30,
 
Nine months ended September 30,
(In millions)
2018
 
2017
 
2018
 
2017
Trading securities – related party
$
—

 
$
1

 
$
1

 
$
2

Equity securities – related party
13

 
7

 
(26
)
 
12



Investment funds, including related party – Investment funds include non-fixed income, alternative investments in the form of limited partnerships or similar legal structures that meet the definition of VIEs; however, our consolidated VIEs are not considered the primary beneficiary of these investment funds. Changes in fair value for these investment funds are included in investment related gains (losses) within revenues of consolidated variable interest entities on the condensed consolidated statements of income.
Fair Value—See Note 5 – Fair Value for a description of the levels of our fair value hierarchy and our process for determining the level we assign our assets and liabilities carried at fair value.

The following represents the hierarchy for assets and liabilities of our consolidated VIEs measured at fair value on a recurring basis:
 
September 30, 2018
(In millions)
Total
 
NAV1
 
Level 1
 
Level 2
 
Level 3
Assets of consolidated VIEs
 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
 
Fixed maturity securities, trading
$
48

 
$
—

 
$
—

 
$
—

 
$
48

Equity securities
176

 
—

 
151

 
—

 
25

Investment funds
564

 
549

 
—

 
—

 
15

Cash and cash equivalents
2

 
—

 
2

 
—

 
—

Total assets of consolidated VIEs measured at fair value
$
790

 
$
549

 
$
153

 
$
—

 
$
88

 
 
 
 
 
 
 
 
 
 
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy.


 
December 31, 2017
(In millions)
Total
 
NAV1
 
Level 1
 
Level 2
 
Level 3
Assets of consolidated VIEs
 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
 
Fixed maturity securities, trading
$
48

 
$
—

 
$
—

 
$
—

 
$
48

Equity securities
240

 
—

 
212

 
—

 
28

Investment funds
549

 
528

 
—

 
—

 
21

Cash and cash equivalents
4

 
—

 
4

 
—

 
—

Total assets of consolidated VIEs measured at fair value
$
841

 
$
528

 
$
216

 
$
—

 
$
97

 
 
 
 
 
 
 
 
 
 
1 Investments measured at NAV as a practical expedient in determining fair value have not been classified in the fair value hierarchy.


Fair Value Valuation Methods – See Note 5 – Fair Value for the valuation methods used to determine the fair value of trading securities, equity securities, investment funds and cash and cash equivalents.

Level 3 Financial Instruments – The following is a reconciliation for all consolidated VIE Level 3 assets and liabilities measured at fair value on a recurring basis:
 
Three months ended September 30, 2018
(In millions)
Beginning Balance
 
Total realized and unrealized gains (losses)
included in income
 
Purchases
 
Sales
 
Transfers in (out)
 
Ending Balance
 
Total gains (losses) included in earnings1
Assets of consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities
$
48

 
$
—

 
$
—

 
$
—

 
$
—

 
$
48

 
$
—

Equity securities
26

 
(1
)
 
—

 
—

 
—

 
25

 
(1
)
Investment funds
1

 
—

 
14

 
—

 
—

 
15

 
—

Total Level 3 assets of consolidated VIEs
$
75

 
$
(1
)
 
$
14

 
$
—

 
$
—

 
$
88

 
$
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 Related to instruments held at end of period.
 
Three months ended September 30, 2017
(In millions)
Beginning Balance
 
Total realized and unrealized gains (losses)
included in income
 
Purchases
 
Sales
 
Transfers in (out)
 
Ending Balance
 
Total gains (losses) included in earnings1
Assets of consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities
$
51

 
$
—

 
$
—

 
$
(1
)
 
$
—

 
$
50

 
$
—

Equity securities
30

 
(1
)
 
—

 
—

 
—

 
29

 
(1
)
Investment funds
33

 
—

 
—

 
—

 
—

 
33

 
—

Total Level 3 assets of consolidated VIEs
$
114

 
$
(1
)
 
$
—

 
$
(1
)
 
$
—

 
$
112

 
$
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 Related to instruments held at end of period.
 
Nine months ended September 30, 2018
(In millions)
Beginning Balance
 
Total realized and unrealized gains (losses)
included in income
 
Purchases
 
Sales
 
Transfers in (out)
 
Ending Balance
 
Total gains (losses) included in earnings1
Assets of consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities
$
48

 
$
1

 
$
—

 
$
(1
)
 
$
—

 
$
48

 
$
1

Equity securities
28

 
(3
)
 
—

 
—

 
—

 
25

 
(3
)
Investment funds
21

 
(3
)
 
14

 
(17
)
 
—

 
15

 
(3
)
Total Level 3 assets of consolidated VIEs
$
97

 
$
(5
)
 
$
14

 
$
(18
)
 
$
—

 
$
88

 
$
(5
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 Related to instruments held at end of period.

 
Nine months ended September 30, 2017
(In millions)
Beginning Balance
 
Total realized and unrealized gains (losses)
included in income
 
Purchases
 
Sales
 
Transfers in (out)
 
Ending Balance
 
Total gains (losses) included in earnings1
Assets of consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities
$
50

 
$
1

 
$
—

 
$
(1
)
 
$
—

 
$
50

 
$
1

Equity securities
43

 
(15
)
 
1

 
—

 
—

 
29

 
(15
)
Investment funds
38

 
—

 
1

 
(6
)
 
—

 
33

 
—

Total Level 3 assets of consolidated VIEs
$
131

 
$
(14
)
 
$
2

 
$
(7
)
 
$
—

 
$
112

 
$
(14
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 Related to instruments held at end of period.


There were no transfers between Level 1 or Level 2 during the three and nine months ended September 30, 2018 and 2017.

Significant Unobservable Inputs – For certain Level 3 trading and equity securities and investment funds, the valuations have significant unobservable inputs, which may include, but are not limited to, comparable multiples and weighted average cost of capital rates. These inputs in isolation can cause significant increases or decreases in fair value. Comparable multiples may be multiplied by the underlying investment’s earnings before interest, tax, depreciation and amortization or by some other applicable financial metric to establish the total enterprise value of the underlying investments. A comparable multiple consistent with the implied trading multiple of public industry peers or relevant recent private transactions are used when available.

For certain other Level 3 trading securities, valuations are performed using a discounted cash flow model. For a discounted cash flow model, the significant input is the discount rate applied to determine the present value of the projected cash flows. An increase in the discount rate can significantly lower the fair value; a decrease in the discount rate can significantly increase the fair value. The discount rate may be determined by considering the weighted average cost of capital calculation of companies in similar industries with comparable debt to equity ratios.

Fair Value Option – The following represents the gains (losses) recorded for instruments within the consolidated VIEs for which we have elected the fair value option:
 
Three months ended September 30,
 
Nine months ended September 30,
(In millions)
2018
 
2017
 
2018
 
2017
Trading securities
$
—

 
$
—

 
$
1

 
$
1

Investment funds
9

 
—

 
18

 
5

Total gains (losses)
$
9

 
$
—

 
$
19

 
$
6



Fair Value of Financial Instruments Not Held at Fair Value – Assets of consolidated variable interest entities includes $41 million and $22 million of investment funds accounted for under the equity method and not carried at fair value as of September 30, 2018 and December 31, 2017, respectively; however, the carrying amount approximates fair value.

Non-Consolidated Securities and Investment Funds

Fixed maturity securities – We invest in securitization entities as a debt holder or an investor in the residual interest of the securitization vehicle, which are included in fixed maturity securities on the condensed consolidated balance sheets. These entities are deemed VIEs due to insufficient equity within the structure and lack of control by the equity investors over the activities that significantly impact the economics of the entity. In general, we are a debt investor within these entities and, as such, hold a variable interest; however, due to the debt holders’ lack of ability to control the decisions within the trust that significantly impact the entity, and the fact the debt holders are protected from losses due to the subordination of the equity tranche, the debt holders are not deemed the primary beneficiary. Securitization vehicles in which we hold the residual tranche are not consolidated because we do not unilaterally have substantive rights to remove the general partner, or when assessing related party interests, we are not under common control, as defined by GAAP, with the related party, nor are substantially all of the activities conducted on our behalf; therefore, we are not deemed the primary beneficiary. Debt investments and investments in the residual tranche of securitization entities are considered debt instruments and are held at fair value on the balance sheet and classified as AFS or trading.

Investment funds – Investment funds include non-fixed income, alternative investments in the form of limited partnerships or similar legal structures.

Our risk of loss associated with our non-consolidated investments depends on the investment. Investment funds and trading securities are limited to the carrying value plus unfunded commitments. AFS securities are limited to amortized cost plus unfunded commitments. The following summarizes the carrying value and maximum loss exposure of these non-consolidated investments:
 
September 30, 2018
 
December 31, 2017
(In millions)
Carrying Value
 
Maximum Loss Exposure
 
Carrying Value
 
Maximum Loss Exposure
Investment funds
$
692

 
$
1,284

 
$
699

 
$
1,036

Investment in related parties – investment funds
2,093

 
4,439

 
1,310

 
2,598

Assets of consolidated variable interest entities – investment funds
605

 
606

 
571

 
594

Investment in fixed maturity securities
21,554

 
21,010

 
21,022

 
20,278

Investment in related parties – fixed maturity securities
1,502

 
1,631

 
713

 
792

Total non-consolidated investments
$
26,446

 
$
28,970

 
$
24,315

 
$
25,298



The following summarizes our investment funds, including related party investment funds and investment funds owned by consolidated VIEs:
 
September 30, 2018
 
December 31, 2017
(In millions, except for percentages and years)
Carrying value
 
Percent of total
 
Remaining life in years
 
Carrying value
 
Percent of total
 
Remaining life in years
Investment funds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private equity
$
254

 
36.7
%
 
0
–
5
 
$
271

 
38.8
%
 
0
–
7
Real estate and other real assets
205

 
29.6
%
 
0
–
6
 
161

 
23.0
%
 
1
–
7
Natural resources
4

 
0.6
%
 
0
–
0
 
4

 
0.6
%
 
1
–
1
Hedge funds
50

 
7.2
%
 
0
–
1
 
61

 
8.7
%
 
0
–
3
Credit funds
179

 
25.9
%
 
0
–
4
 
202

 
28.9
%
 
0
–
5
Total investment funds
692

 
100.0
%
 
 
 
 
 
699

 
100.0
%
 
 
 
 
Investment funds – related parties
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private equity – A-A Mortgage1
449

 
21.5
%
 
5
–
5
 
403

 
30.8
%
 
5
–
5
Private equity – other
680

 
32.5
%
 
0
–
9
 
180

 
13.7
%
 
0
–
10
Real estate and other real assets
499

 
23.8
%
 
0
–
10
 
297

 
22.7
%
 
0
–
7
Natural resources
95

 
4.5
%
 
3
–
4
 
74

 
5.6
%
 
4
–
6
Hedge funds
98

 
4.7
%
 
11
–
11
 
93

 
7.1
%
 
9
–
9
Credit funds
272

 
13.0
%
 
0
–
3
 
263

 
20.1
%
 
2
–
4
Total investment funds – related parties
2,093

 
100.0
%
 
 
 
 
 
1,310

 
100.0
%
 
 
 
 
Investment funds owned by consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private equity – MidCap2
549

 
90.7
%
 
N/A
 
528

 
92.5
%
 
N/A
Credit funds
1

 
0.2
%
 
0
–
1
 
21

 
3.7
%
 
0
–
3
Real estate and other real assets
55

 
9.1
%
 
0
–
6
 
22

 
3.8
%
 
2
–
3
Total investment funds owned by consolidated VIEs
605

 
100.0
%
 
 
 
 
 
571

 
100.0
%
 
 
 
 
Total investment funds including related parties and funds owned by consolidated VIEs
$
3,390

 
 
 
 
 
 
 
$
2,580

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 A-A Mortgage Opportunities, L.P. (A-A Mortgage) is a platform to originate residential mortgage loans and mortgage servicing rights. Our total investment in A-A Mortgage, including amounts loaned to A-A Mortgage affiliates, was $459 million and $455 million as of September 30, 2018 and December 31, 2017, respectively.
2 Our total investment in MidCap, including amounts advanced under credit facilities, was $788 million and $766 million as of September 30, 2018 and December 31, 2017, respectively.


Summarized Ownership of Investment Funds—The following table presents the carrying value by ownership percentage of equity method investment funds, including related party investment funds and investment funds owned by consolidated VIEs:
(In millions)
September 30, 2018
 
December 31, 2017
Ownership Percentage
 
 
 
100%
$
16

 
$
35

50% – 99%
1,039

 
520

3% – 49%
1,515

 
1,301

Equity method investment funds
$
2,570

 
$
1,856



The following table presents the carrying value by ownership percentage of investment funds where we elected the fair value option, including related party investment funds and investment funds owned by consolidated VIEs:
(In millions)
September 30, 2018
 
December 31, 2017
Ownership Percentage
 
 
 
3% – 49%
$
685

 
$
590

Less than 3%
135

 
134

Fair value option investment funds
$
820

 
$
724