Bogdan Ignaschenko, Partner, Private Equity: Affiliated inherently has nothing to do with risk-reward. The affiliate definition is just the factory that it was manufactured in.

Mike Downing, Co-President of Athene USA & Chief Operating Officer of Athene Holding: Bogdan, good to see you.

Bogdan Ignaschenko: Great to see you, Mike.

Mike Downing: Here in New York. And we're going to talk about affiliated assets.

Bogdan Ignaschenko: Absolutely.

Mike Downing: So, what is actually an affiliated asset – kind of take me through the basics.

Bogdan Ignaschenko: If you think about an analogy – an asset being a product, the affiliate label is effectively the factory where it was produced and really it just tells you about the relationship between the originator of the asset and the ultimate holder of the asset.

If we take a step back, actually, Apollo manages the entirety of Athene's balance sheet and is responsible for asset selection across the entire portfolio. However, if we exclude the most commoditized assets that are available in the market, so think public, investment grade treasuries, cash, what we define as Apollo originated, i.e., assets where Apollo's actively involved with procuring and placing those assets on the balance sheet, that's actually 73% of Athene's balance sheet. Affiliated assets and related party are all subsets within that and ultimately, they tie to very specific definitions. So affiliated assets is actually a definition used by insurance regulators. So it comes from U.S. Stat. And if you apply that term across the entirety of Athene's balance sheet, including non-U.S. entities, you end up with 17% of Athene's balance sheet being affiliated. A further subset of that is related party, and that is a U.S. GAAP definition.

Interestingly, what you will see when you look at those are blue-chip household names that everyone will be familiar with. For example, the largest affiliated asset that is not a related party asset is a large loan that we made to Intel.

Mike Downing: Interesting. And if we take that concept because for a number of our assets, Apollo might be the manufacturer, as you talked about, or the factory, Athene might own half the asset and the other half might be owned by two or three other insurance companies. So for Athene, our piece is an affiliated asset, but if another insurance company had another sliver of that, what does it look like from that other insurer's balance sheet?

Bogdan Ignaschenko: It just looks like any other asset. And it's not deemed affiliated.

Mike Downing: And so I think what you hit on then is really this notion that it is purely an accounting construct. Because from a risk standpoint, whether we buy the asset or another insurance company buys the asset, if we both feel it's appropriate for the insurance balance sheet, we're taking the same view on its appropriate for the risk, probably an investment-grade asset.

Bogdan Ignaschenko: Absolutely. And the investment-grade construct applies to affiliated and unaffiliated assets equally for Athene, because ultimately 95% of Athene's balance sheet is investment grade.

Affiliated inherently has nothing to do with the risk-reward. The affiliate definition is just the factory that it was manufactured in. It’s the location of the factory. It tells you nothing about the underlying product itself.

Mike Downing: So, if you were a policyholder, then what would you really be looking for? Should you even be looking at affiliated versus non-affiliated, or should you be more focused on the underlying risks?

Bogdan Ignaschenko: I think as a policyholder, all you really care about is the underlying risk and the underlying return, because ultimately what you want is to ensure that you are getting the appropriate amount of income to support your retirement through these products.

I think the affiliate definition still has some value in the sense that not all affiliated assets are equal, just as not all unaffiliated assets are equal. And we at Athene have actually been at the tip of the spear around the disclosures that we offer to the market around the granularity of what those affiliated assets are. And it shows what we do own and even more importantly, what we don't own.

Mike Downing: So, I think you hit on a really important distinction, right, in terms of the notion of affiliate as a general term and needing to drill down to understanding what it really is. So for companies like ours, where most of those also have participation with other insurance companies investing in the same investment-grade assets, the place to watch out for are companies in which it's 100%, it's an equity that's 100% owned by the company.

Bogdan Ignaschenko: Exactly. So there is no third-party participation. And the reason why the equity is important is because even on some of the assets where there may not be third-party participation, but they're loans, those are generally investment grade. So you have the ratings agencies that while are not a definitive predictor of risk, are certainly an indicator. And you have that additional layer of transparency and oversight.

Mike Downing: Right. And what makes these assets attractive?  I mean clearly they have to meet the investment grade criteria to get onto our balance sheet in the first place. But after that, what makes these assets attractive?

Bogdan Ignaschenko: Ultimately it goes down to the basics of risk-return and structuring. Because of the historic relationship between Apollo and Athene, Apollo as an originator has a very good understanding of what assets work and don't work for an insurance balance sheet and correspondingly for policyholders’ best interest.

Mike Downing: And is some of what we see coming out of affiliated assets, an elimination of sort of the middleman concept? Does the affiliated asset strategy help preserve some of that?

Bogdan Ignaschenko: Yeah, in the sense that, again, going back to basics. What does affiliated mean? All it means is that Apollo originated the asset. So any time you take out a middleman and Apollo is able to directly originate an asset, that's more spread that a policyholder can keep. But it means it's originated by Apollo and therefore it gets classified as affiliated.

Mike Downing: Right. And so that extra spread and what we've been doing from a pricing standpoint, to your point, we're able to put that directly into our competitive product and actually create more value for customers.

Bogdan Ignaschenko: It's more value which means more dollars of income for retirees, which is ultimately what we are trying to maximize while maintaining a prudent level of risk.

Mike Downing: Is there any extra care that goes into the process for buying affiliated assets and whether they're appropriate for an Athene balance sheet?

Bogdan Ignaschenko: On top of all the traditional underwriting that happens, there is a third-party, independent valuation process. Also, given most of these assets are investment grade, they go through a ratings process and then we separately provide very specific, tailored disclosure around affiliated assets to Athene's regulators.

And if you look at the history, one of the things that's very interesting is that the performance on the credit side has actually been much better for Athene on affiliated assets than non-affiliated assets.

Mike Downing: Yeah, and as a member of Athene's investment committee, I can attest to the fact that we've got clear guidelines. We only allow assets that make sense for our balance sheet. And all those safeguards are clearly working, because our assets are performing great. To your point, defaults are lower than industry average and it works. It's a system that works.

Bogdan, well, thanks for putting that into context for me. It's been a great conversation. Always love talking about insurance.

Bogdan Ignaschenko: Absolutely. Thank you, Mike.