Athene Holding Ltd

Economic and Market Conditions

As a leading financial services company specializing in retirement services, we are affected by the condition of global financial markets and the economy. Price fluctuations within equity, credit, commodity and foreign exchange markets, as well as interest rates and global inflation, 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.

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 conflicts in the Middle East and between Ukraine and Russia, and corresponding sanctions imposed on Russia 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.

We carefully monitor economic and market conditions that could potentially give rise to global market volatility and affect our business operations, investment portfolios and derivatives, which includes global inflation. The global financial system experienced increased volatility in 2023 due to the failure of certain financial institutions, primarily US regional banks. The current macroeconomic environment, recent bank failures and consolidations, changes in business and consumer behavior and other events affecting financial institutions, have also contributed to volatility in the commercial real estate market, and concerns regarding commercial real estate liquidity, financing availability and asset values, particularly in the office subsector. The potential impacts of rising interest rates and continued deposit outflows on global markets, financial institutions and macroeconomic conditions, generally, remain uncertain. Episodes of increased economic and market volatility may continue to occur and could worsen if there are additional instances of actual or threatened bank failures. For further information on the risks related to market or economic conditions and commercial real estate, see Part I–Item 1A. Risk Factors.

US inflation eased but remained modestly elevated in 2023 as the US Federal Reserve continued its interest rate hiking cycle, given the Consumer Price Index persisted above the 2% target. The US Bureau of Labor Statistics reported that the annual US inflation rate decreased to 3.4% as of December 31, 2023, compared to 6.5% as of December 31, 2022, following action from the US Federal Reserve to temper inflation. The heightened US inflation rate persists due to a combination of supply and demand factors. The US Federal Reserve finished the year with a benchmark interest rate target range of 5.25% to 5.50%, unchanged from its July 2023 meeting.

Equity market performance rallied in 2023. Volatility in the bond market remained, however credit-sensitive debt and high yield bonds performed well in 2023. In the US, the S&P 500 Index increased by 24.2% in 2023, following a decrease of 19.4% in 2022. In terms of economic conditions in the US, the Bureau of Economic Analysis reported real GDP increased at an annual rate of 2.5% in 2023, following an increase of 1.9% in 2022. As of January 2024, the International Monetary Fund estimated that the US economy will expand by 2.1% in 2024 and 1.7% in 2025. The US Bureau of Labor Statistics reported that the US unemployment rate increased to 3.7% as of December 31, 2023, compared to 3.5% as of December 31, 2022. Oil finished 2023 down 10.7% from 2022, after spiking in October in the wake of geopolitical risks.

Foreign exchange rates can materially impact the valuations of our investments and liabilities that are denominated in currencies other than the US dollar. The US dollar weakened in 2023 compared to the euro. Relative to the US dollar, the euro appreciated 3.1% in 2023, after depreciating 5.9% in 2022. We generally undertake hedging activities to eliminate or mitigate foreign exchange currency risk.

Interest Rate Environment

Rates ended the year flat during a volatile 2023, with the US 10-year Treasury yield ending where it started the year at 3.88%. This was following a significant selloff and subsequent rally in the fourth quarter of 2023 as geopolitical fears gave way to macroeconomic optimism. The US 2-year and 10-year Treasury yield curves remain inverted. Despite the magnitude of the inversion having decreased recently, recessionary concerns remain.

Our investment portfolio consists predominantly of fixed maturity investments. See –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 significantly, 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 of December 31, 2023, our net invested asset portfolio included $42.5 billion of floating rate investments, or 20% of our net invested assets, and our net reserve liabilities included $17.7 billion of floating rate liabilities at notional, or 8% of our net invested assets, resulting in $24.8 billion of net floating rate assets, or 12% of our net invested assets.

If prevailing interest rates were to rise, we believe our products would be more attractive to consumers and our sales would likely increase. If prevailing interest rates were to decline, it is likely that our products would be less attractive to consumers and our sales would likely decrease. In periods of prolonged low interest rates, the net investment spread may be negatively impacted by reduced investment income to the extent that we are unable to adequately reduce policyholder crediting rates due to policyholder guarantees in the form of minimum crediting rates or otherwise due to market conditions. As of December 31, 2023, most of our products were deferred annuities with 17% of our FIAs at the minimum guarantees and 19% of our fixed rate annuities at the minimum crediting rates. As of December 31, 2023, minimum guarantees on all of our deferred annuities, including those with crediting rates already at their minimum guarantees, were, on average, greater than 200 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 or institution. 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 Item 7A. Quantitative and Qualitative Disclosures About Market Risks, which includes a discussion regarding interest rate and other significant risks and our strategies for managing these risks.

Demographics

Over the next four decades, the retirement-age population is expected to experience unprecedented growth. Technological advances and improvements in healthcare are projected to continue to contribute to increasing average life expectancy, and aging individuals must be prepared to fund retirement periods that will last longer than ever before. Further, many working households in the US 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 fixed annuity market.

According to LIMRA, total annuity market sales in the US were $269.6 billion for the nine months ended September 30, 2023, a 20.7% increase from the same time period in 2022, as higher interest rates spurred continued growth in the US annuity market. In the total annuity market, for the nine months ended September 30, 2023 (the most recent period for which specific market share data is available), we were the largest provider of annuities based on sales of $22.0 billion, translating to an 8.2% market share. For the nine months ended September 30, 2022, we were the third largest provider of annuities based on sales of $12.9 billion, translating to a 5.8% market share.

According to LIMRA, total fixed annuity market sales in the US were $196.1 billion for the nine months ended September 30, 2023, a 36.9% increase from the same time period in 2022. In the total fixed annuity market, for the nine months ended September 30, 2023 (the most recent period for which specific market share data is available), we were the largest provider of fixed annuities based on sales of $21.4 billion, translating to a 10.9% market share. For the nine months ended September 30, 2022, we were the largest provider of fixed annuities based on sales of $12.3 billion, translating to an 8.6% market share.

According to LIMRA, total fixed indexed annuity market sales in the US were $71.0 billion for the nine months ended September 30, 2023, a 23.5% increase from the same time period in 2022. For the nine months ended September 30, 2023 (the most recent period for which specific market share data is available), we were the second largest provider of FIAs based on sales of $7.6 billion, translating to a 10.7% market share. For the nine months ended September 30, 2022, we were the largest provider of FIAs based on sales of $7.1 billion, translating to a 12.4% market share.

According to LIMRA, total RILA market sales in the US were $34.4 billion for the nine months ended September 30, 2023, an 11.1% increase from the same time period in 2022. For the nine months ended September 30, 2023 (the most recent period for which specific market share data is available), we were the eleventh largest provider of RILAs based on sales of $650 million, translating to a 1.9% market share. For the nine months ended September 30, 2022, we were the twelfth largest provider of RILAs based on sales of $678 million, translating to a 2.2% market share. We believe RILAs represent a significant growth opportunity for Athene.