Adjusted debt to capital ratio is a non-GAAP measure used to evaluate our capital structure excluding the impacts of AOCI and the cumulative change in fair value of funds withheld and modco reinsurance assets, net of DAC, DSI, rider reserve and tax offsets. Adjusted debt to capital ratio is calculated as total debt excluding debt of consolidated variable interest entities (VIEs) divided by adjusted AHL shareholders’ equity. Adjusted debt to capital ratio should not be used as a substitute for the debt to capital ratio. However, we believe the adjustments to total debt and shareholders’ equity are significant to gaining an understanding of our capitalization, debt utilization and debt capacity.
Sales statistics do not correspond to revenues under GAAP but are used as relevant measures to understand our business performance as it relates to deposits generated during a specific period of time. Our sales statistics include deposits for fixed rate annuities and FIAs and align with the LIMRA definition of all money paid into an individual annuity, including money paid into new contracts with initial purchase occurring in the specified period and existing contracts with initial purchase occurring prior to the specified period (excluding internal transfers). 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.
Revenues increased by $9.6 billion to $16.3 billion in 2019 from $6.6 billion in 2018. The increase was driven by an increase in investment related gains and losses, an increase in premiums, higher net investment income and higher product charges.
Policy and other operating expenses increased by $118 million to $744 million in 2019 from $626 million in 2018, primarily driven by growth in our business, higher non-operating expenses related to costs not expected to reoccur and costs related to ACRA.
Net investment spread, which measures the spread on our investment performance less the total cost of our liabilities, decreased 24 basis points to 1.70% in 2018, from 1.94% in 2017. Net investment earned rate decreased due to a decline in our fixed and other net investment earned rate, partially offset by an increase in our alternative net investment earned rate. The fixed and other net investment earned rates decreased to 4.36% in 2018 from 4.48% in 2017 primarily attributed to lower returns on the assets from the Voya and Lincoln reinsurance transactions, lower new money rates on purchases compared to maturities over the past year and higher levels of cash during 2018, partially offset by higher floating rate investment income. The alternative net investment earned rate increased to 11.15% in 2018 from 10.01% in 2017, reflecting strong MidCap and AmeriHome performance and higher income in one of our hedge funds.
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.
A significant majority of our AFS portfolio, 94.4% and 94.2% as of December 31, 2019 and 2018, respectively, was invested in assets considered investment grade with a NAIC designation of 1 or 2.
The reconciliations to the nearest GAAP measure for adjusted operating income available to common shareholders is included in the Consolidated Results of Operations section. See Item 6. Selected Financial Data - Non-GAAP Measures for additional reconciliations.
Our policyholder obligations are generally long-term in nature. However, one liquidity risk is an extraordinary level of early policyholder withdrawals. We include provisions within our annuity policies, such as surrender charges and MVAs, which are intended to protect us from early withdrawals. As of each of December 31, 2019 and 2018, approximately 78% of our deferred annuity liabilities were subject to penalty upon surrender. In addition, as of December 31, 2019 and 2018, approximately 64% and 65%, respectively, of policies contained MVAs that may also have the effect of limiting early withdrawals if interest rates increase. Our funding agreements, group annuities and payout annuities are generally non-surrenderable.
Collateral arrangements typically require the posting of collateral in connection with its derivative instruments. Collateral agreements often contain posting thresholds, some of which may vary depending on the posting party’s financial strength ratings. Additionally, a decrease in our financial strength rating to a specified level can result in settlement of the derivative position.
Short-term Borrowings-In the fourth quarter of 2019, we borrowed $475 million from the Federal Home Loan Bank (FHLB) through their variable rate short-term federal funds program. As of December 31, 2019, the borrowings had maturity dates ranging from February 10, 2020 to May 11, 2020 and a weighted average interest rate of 1.79%, with interest due at maturity. In connection with short-term borrowings, the FHLB requires the borrower to purchase member stock and post sufficient collateral to secure the borrowings. See Note 15 - Commitments and Contingencies for further discussion regarding existing collateral posting with the FHLB.
0.00% of the market value of cash and cash equivalents, U.S. treasuries, non-preferred equities and alternatives.
During the fourth quarter of 2018, we entered into a coinsurance agreement with ALV to reinsure endowment contracts and annuities, in which we assumed liabilities of $325 million. ALV coinsurance assets were recorded as receivable in other assets on the December 31, 2018 consolidated balance sheet, as the assets were not received prior to December 31, 2018. We then retroceded these endowment contracts and annuities through a modco agreement to ARE, in which we recorded a funds withheld liability of $337 million. ARE modco assets were recorded as reinsurance recoverable on the consolidated balance sheets. During the fourth quarter of 2019, we novated the reinsurance agreement for the ALV endowment contracts and annuities to ARE, which resulted in a decrease of $663 million of liabilities and related assets on the consolidated balance sheets.