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Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-02-21 · 302 added, 132 removed, 318 unchanged (58% of the section changed)

ITEM 7 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Item 1 - Business , Item 1A - Risk Factors , Item 6 - Selected Financial Data and Item 8 - Financial Statements and Supplementary Data .

Federated is one of the largest investment managers in the U.S.

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Item 1- Business, Item 1A - Risk Factors and Item 8 - Financial Statements and Supplementary Data.

Federated Hermes is one of the largest investment managers in the U.S.

with $619.4 billion in managed assets as of December 31, 2020.

The majority of Federated's revenue is derived from advising Federated Funds and Separate Accounts in both domestic and international markets.

Federated also derives revenue from providing administrative and other fund-related services (including distribution and shareholder servicing) and stewardship services.

For additional information on Federated's markets, see Item 1 - Business under the caption Distribution Channels and Product Markets .

The majority of Federated Hermes' revenue is derived from advising Federated Hermes Funds and Separate Accounts in both domestic and international markets.

Federated Hermes also derives revenue from providing administrative and other fund-related services (including distribution and shareholder servicing) and stewardship and real estate development services.

For additional information on Federated Hermes' markets, see Item 1 - Business under the caption Distribution Channels and Product Markets.

Investment advisory fees, administrative service fees and certain fees for other services, such as distribution and shareholder service fees, are contract-based fees that are generally calculated as a percentage of the average net assets of managed investment portfolios.

Federated's revenue is primarily dependent upon factors that affect the value of managed assets including market conditions and the ability to attract and retain assets.

Generally, managed assets in Federated's investment products and strategies can be redeemed or withdrawn at any time with no advance notice requirement.

Fee rates for Federated's services generally vary by asset and service type and may vary based on changes in asset levels.

Generally, management-fee rates charged for advisory services provided to equity and multi-asset products and strategies are higher than management-fee rates charged to fixed-income and alternative/private markets products and strategies, which in turn are higher than management-fee rates charged to money market products and strategies.

Likewise, Federated Funds typically have a higher management-fee rate than Separate Accounts.

Federated Hermes' revenue is primarily dependent upon factors that affect the value of managed assets, including market conditions and the ability to attract and retain assets.

Generally, managed assets in Federated Hermes' investment products and strategies can be redeemed or withdrawn at any time with no advance notice requirement.

Fee rates for Federated Hermes' services generally vary by asset and service type and may vary based on changes in asset levels.

Generally, advisory fees charged for services provided to equity and multi-asset products and strategies are higher than advisory fees charged to fixed-income and alternative/private markets products and strategies, which in turn are higher than advisory fees charged to money market products and strategies.

Likewise, Federated Hermes Funds typically have higher advisory fees than Separate Accounts.

Similarly, revenue is also dependent upon the relative composition of average AUM across both asset and product types.

Federated may implement Fee Waivers for competitive reasons such as to maintain certain fund expense ratios, to meet regulatory requirements or to meet contractual requirements.

Since Federated's products are largely distributed and serviced through financial intermediaries, Federated pays a portion of fees earned from sponsored products to the financial intermediaries that sell these products and strategies.

Federated Hermes may implement Fee Waivers for competitive reasons such as to maintain certain fund expense ratios, to maintain positive or zero net yields, to meet regulatory requirements or to meet contractual requirements.

Since Federated Hermes' products are largely distributed and serviced through financial intermediaries, Federated Hermes pays a portion of fees earned from sponsored products to the financial intermediaries that sell these products and strategies.

These payments are generally calculated as a percentage of net assets attributable to the applicable financial intermediary and represent the vast majority of Distribution expense on the Consolidated Statements of Income.

Certain components of Distribution expense can vary depending upon the asset type, distribution channel and/or the size of the customer relationship.

Federated generally pays out a larger portion of the revenue earned from managed assets in money market and multi-asset funds than the revenue earned from managed assets in equity, fixed-income and alternative/private markets funds.

Federated's most significant operating expenses are Compensation and Related expense and Distribution expense.

Federated Hermes generally pays out a larger portion of the revenue earned from managed assets in money market and multi-asset funds than the revenue earned from managed assets in equity, fixed-income and alternative/private markets funds.

Federated Hermes' most significant operating expenses are Compensation and Related expense and Distribution expense.

Compensation and Related expense includes base salary and wages, incentive compensation and other employee expenses including payroll taxes and benefits.

Incentive compensation, which includes stock-based compensation, can vary depending on various factors including, but not limited to, the overall results of operations of Federated, investment management performance and sales performance.

The discussion and analysis of Federated's financial condition and results of operations are based on Federated's Consolidated Financial Statements.

Management evaluates Federated's performance at the consolidated level.

Therefore, Federated operates in one operating segment, the investment management business .

Incentive compensation, which includes stock-based compensation, can vary depending on various factors including, but not limited to, the overall results of operations of Federated Hermes, investment management performance and sales performance.

The discussion and analysis of Federated Hermes' financial condition and results of operations are based on Federated Hermes' Consolidated Financial Statements.

Management evaluates Federated Hermes' performance at the consolidated level.

Therefore, Federated Hermes operates in one operating segment, the investment management business.

Management analyzes all expected revenue and expenses and considers market demands in determining an overall fee structure for services provided and in evaluating the addition of new business.

Federated's growth and profitability are dependent upon its ability to attract and retain AUM and upon the profitability of those assets, which is impacted, in part, by Fee Waivers .

Federated Hermes' growth and profitability are dependent upon its ability to attract and retain AUM and upon the profitability of those assets, which is impacted, in part, by Fee Waivers.

Fees for mutual fund-related services are ultimately subject to the approval of the independent directors or trustees of the mutual funds.

Management believes that meaningful indicators of Federated's financial performance include AUM, gross and net product sales, total revenue and net income, both in total and per diluted share.

Management believes that meaningful indicators of Federated Hermes' financial performance include AUM, gross and net product sales, total revenue and net income, both in total and per diluted share.

Business Developments

Covid-19 Pandemic

The outbreak of the Covid-19 respiratory disease was first detected in China in late 2019 and spread internationally in 2020.

Covid-19 has resulted in travel bans, closing of borders, changes to the ways in which healthcare workers prepare and deliver services, enhanced monitoring and increased health screenings/testing, increased data analytics, efforts to develop effective vaccines and identify effective therapeutics, enhanced disinfection and contamination procedures, stay-at-home orders, quarantines, cancellations and disruptions to supply chains, workflow operations and customer activity, as well as general concern and uncertainty.

Covid-19 also has resulted in economic uncertainty, market volatility, trading halts, market illiquidity and declining and variable stock prices, among other effects.

See Item 1A - Risk Factors under the caption General Risk Factors - Other General Risks - Potential Adverse Effects of Unpredictable Events or Consequences (including Covid-19) for additional information regarding the impacts, and potential impacts, resulting from Covid-19.

Policymakers responded to certain apparent and acute economic and market consequences with monetary and fiscal policy actions.

Regulators have taken actions focused on facilitating market function and preserving market integrity, as well as providing guidance and relief to market participants affected by Covid-19.

S ee Item 1 - Business under the caption Regulatory Matters for additional information regarding the monetary and fiscal policy actions taken by governmental authorities.

While vaccines have been developed and are beginning to be disseminated in various countries, economic, market, regulatory and other uncertainty persists.

As national, state/provincial and local governments have begun to lessen or remove requirements for staying-at-home, quarantining, and travel, as well as other Covid-19 imposed restrictions, a new variant of Covid-19 was first identified in the UK, and later in the U.S., a second variant was identified in South Africa and a third variant was identified in Brazil.

These variants are reportedly more contagious and potentially more deadly than the initial strain.

Certain jurisdictions (particularly in the U.S.

and the UK) also have seen a spike in the number of diagnosed Covid-19 cases and hospitalizations.

These new variants and spikes have resulted in the re-imposition of certain Covid-19 restrictions, although in many cases not to the extent of those initially imposed.

As a result, while certain governments are taking action to open economies, economic uncertainty and market volatility has continued, but in many cases not to the degree initially seen in late first quarter and early second quarter 2020.

Federated Hermes has not instituted its business continuity plans in its U.S.

offices as there has not been a significant disruption of its business processes, allowing it to remain fully operational and to continue to provide services to its customers.

Federated Hermes' London office, which includes the international business of Federated Hermes, did implement its business continuity plans on March 20, 2020 to support the transition to a remote working environment per the advice of the UK's government and regulators.

Federated Hermes designated an internal task force (which continues to meet regularly) to address events related to Covid-19 that have impacted or that can impact Federated Hermes' business.

Federated Hermes also implemented a number of other prudent steps to provide for the safety of our employees, to seek to ensure the resiliency of Federated Hermes' business and to keep our customers informed through the related market volatility.

For example, Federated Hermes is complying with the requirements applicable to Federated Hermes under relevant Federal and state government orders, as well as the requirements applicable to Federated Hermes under the CDC's and state health departments' guidance and enhanced disinfection and decontamination procedures.

These steps continue to be implemented, reviewed and, in certain cases, revised or enhanced.

Technology investments in laptops for employees, expanded internet bandwidth, and new video conferencing and collaboration software have allowed Federated Hermes to remain fully operational while implementing remote working arrangements, supporting physical distancing, and continuing to deliver Federated Hermes' investment products and services to customers, while at the same time taking steps to safeguard the health and safety of employees.

Among other actions, Federated Hermes has taken the following steps:

• As a result of a travel advisory issued by the CDC, the company instituted a travel ban to certain countries, including those designated as high risk by the CDC on February 27, 2020.

Federated Hermes now recommends to employees that they follow national, state/provincial, local and CDC recommendations for self-quarantining and testing after travel.

• No commercial air travel occurred in the second quarter of 2020.

Limited hotel and car rental reservations resumed in June 2020 and continued throughout the remaining months of 2020.

Limited commercial air travel re-commenced in the third quarter of 2020.

Commercial air travel in the fourth quarter of 2020 was also minimal.

• While Federated Hermes' U.S.

offices remain open, and limited, physically distanced, in-person meetings have begun to occur more frequently, remote working arrangements continue to be implemented for much of our global workforce with approximately 95 percent of Federated Hermes' employees working from home successfully.

Federated Hermes has increased usage and reliance on virtual meeting tools and prioritized the deployment of additional equipment and technology to provide enhanced remote-work options.

• Federated Hermes Fund Board meetings held in August and November 2020 were held in person as well as via teleconference allowing those who preferred to participate remotely to do so.

Federated Hermes held the May 2020 Federated Hermes Fund Board meetings, via teleconference, rather than in person.

Federated Hermes had previously held its April 2020 annual shareholder meeting via teleconference and plans to hold its April 2021 annual shareholder meeting in the same manner.

Offshore fund and subsidiary board meetings are being held via telephone or video conference.

• Federated Hermes has continued to on-board new hires, shipping necessary equipment to them and conducting training remotely.

• Federated Hermes investment professionals and strategists are frequently publishing fresh content to the Insights section of Federated Hermes' website offering customers unique perspectives during these difficult markets.

Federated Hermes is also prepared to continue to implement a variety of other strategies to ensure the resiliency of our business.

Examples include transferring processes to alternate personnel, prioritizing technology resources to service critical processing, and leveraging service providers and counterparties for the most efficient delivery of services.

In addition to the implementation of advanced cleaning protocols and other measures, Federated Hermes has made provisions for hand sanitizer stations and is encouraging everyone to take standard precautions such as physically distancing, washing their hands with soap and water, wearing face masks, avoiding shaking hands and staying home if sick.

Federated Hermes is evaluating options and considering details of its plans for when and how to bring more employees back to our offices.

For example, Federated Hermes developed and implemented a series of return to the office protocols intended to assure employees that Federated Hermes is taking the safety and well-being of our employees seriously as more employees begin to return to the office.

The company plans to take a measured approach that involves implementing procedures aimed at safeguarding employee health while continuing to provide a high level of client service.

Federated Hermes expects those procedures and related timelines to vary by location in order to meet local regulatory guidelines and support community health practices.

As of December 31, 2020, Federated Hermes has advised its employees that it is delaying a significant return to the office for U.S.

employees until mid- to late-April 2021.

In the UK, in accordance with government guidance, Federated Hermes' London office remains open only for those employees who are unable to work from home and will continue to be limited until government guidance is updated.

Federated Hermes continues to monitor the ongoing global health situation through contact with the CDC, the SEC, the World Health Organization and the Securities Industry and Financial Markets Association (SIFMA), a financial services industry trade association, among others.

As of December 31, 2020, while Federated Hermes' stock price has fluctuated and been lower than it was at the beginning of 2020 prior to Covid-19 amidst the volatility in stock prices on major exchanges, and Federated Hermes' business operations have had to adapt to a remote working environment, Covid-19 has not materially affected Federated Hermes' financial condition or cash flows.

See Item 1A - Risk Factors under the caption General Risk Factors - Other General Risks - Potential Adverse Effects of Unpredictable Events or Consequences (including Covid-19) for information regarding the risks to Federated Hermes presented by Covid-19.

Low Short-Term Interest Rates

In March 2020, in response to disrupted economic activity as a result of Covid-19, FOMC decreased the federal funds target rate range to 0% - 0.25%.

The federal funds target rate drives short-term interest rates.

As a result of the near-zero interest-rate environment, the gross yield earned by certain money market funds is not sufficient to cover all of the fund's operating expenses.

Beginning in the first quarter 2020, Federated Hermes began to implement Voluntary Yield-related Fee Waivers.

These Voluntary Yield-related Fee Waivers have been partially offset by related reductions in distribution expense as a result of Federated Hermes' mutual understanding and agreement with third-party intermediaries to share the impact of the Voluntary Yield-related Fee Waivers.

For the year ended December 31, 2020, Voluntary Yield-related Fee Waivers totaled $ 113.0 million.

These fee waivers were partially offset by related reductions in distribution expenses of $ 98.4 million, such that the net negative pre-tax impact to Federated Hermes was $ 14.6 million.

Assuming asset levels and mix remain constant and based on recent and expected market conditions, including potential additional government measures to further stimulate the economy, Voluntary Yield-related Fee Waivers for the first quarter of 2021 may result in a negative pre-tax impact on income of approximately $14 million.

While the level of these fee waivers is impacted by various factors, increases in short-term interest rates that result in higher yields on securities purchased in money

market fund portfolios would likely reduce the negative pre-tax impact of these fee waivers.

The actual amount of future Voluntary Yield-related Fee Waivers and the resulting negative impact of these fee waivers could vary significantly from management's estimates as they are contingent on a number of variables including, but not limited to, changes in assets within the money market funds, changes in yields on instruments available for purchase by the money market funds, changes due to the level of government measures to further stimulate the economy which could result in the issuance of additional Treasury debt instruments, actions by the FOMC, the U.S.

Department of Treasury, the SEC, FSOC and other governmental entities, changes in fees and expenses of the money market funds, changes in the mix of money market customer assets, changes in customer relationships, changes in money market product structures and offerings, demand for competing products, changes in distribution models, changes in the distribution fee arrangements with third parties, Federated Hermes' willingness to continue the Voluntary Yield-related Fee Waivers and changes in the extent to which the impact of these fee waivers is shared by any one or more third parties.

Current Regulatory Environment

Federated and its investment management business are subject to extensive regulation both in and outside the U.S.

Federated and its products, such as the Federated Funds, and strategies are subject to:

Federated Hermes and its investment management business are subject to extensive regulation both within and outside the U.S.

Federated Hermes and its products, such as t he Federated Hermes Funds, and strategies are subject to:

federal securities laws, principally the 1933 Act, the 1934 Act, the 1940 Act and the Advisers Act;

2 unchanged sentences

and foreign laws, regulations or other rules promulgated by foreign regulatory or other authorities.

See Item 1 - Business under the caption Regulatory Matters and Item 1A - Risk Factors under the caption Potential Adverse Effects of Changes in Laws, Regulations and Other Rules on Federated's Investment Management Business for additional information.

See Item 1 - Business under the caption Regulatory Matters and Item 1A - Risk Factors under the caption General Risk Factors - Regulatory and Legal Risks - Potential Adverse Effects of Changes in Laws, Regulations and Other Rules for additional information.

Asset Highlights

2 unchanged sentences

By Asset Class

Equity $ 91,788 $ 89,011 3 %

Fixed-Income 84,277 69,023 22

Alternative / Private Markets 1

19,084 18,102 5

Multi-Asset 3,948 4,199 (6)

Total Long-Term Assets 199,097 180,335 10

Money Market 420,333 395,539 6

Total Managed Assets $ 619,430 $ 575,874 8 %

By Product Type

Equity $ 54,312 $ 48,112 13 %

Fixed-Income 53,557 44,223 21

Alternative / Private Markets 1

12,100 11,389 6

Multi-Asset 3,744 4,000 (6)

Total Long-Term Assets 123,713 107,724 15

Money Market 301,855 286,612 5

Total Fund Assets 425,568 394,336 8

Separate Accounts:

Equity 37,476 40,899 (8)

Fixed-Income 30,720 24,800 24

Alternative / Private Markets

6,984 6,713 4

Multi-Asset 204 199 3

Total Long-Term Assets 75,384 72,611 4

Money Market 118,478 108,927 9

Total Separate Account Assets 193,862 181,538 7

Total Managed Assets $ 619,430 $ 575,874 8 %

The balance at December 31, 2019 and 2018 includes $8.2 billion and $8.3 billion , respectively, of fund assets managed by a non-consolidated entity, Hermes GPE LLP, in which Hermes holds an equity method investment.

1 The balance at December 31, 2019 includes $8.2 billion of fund assets managed by a previously non-consolidated entity, HGPE, in which Federated Hermes held an equity method investment.

Effective March 1, 2020, HGPE became a consolidated subsidiary.

See Note (3) to the Consolidated Financial Statements for additional information.

Average Managed Assets

1 unchanged sentence

By Asset Class

Equity $ 80,591 $ 81,212 $ 70,680 (1) % 15 %

Fixed-Income 74,403 65,375 63,454 14 3

Alternative / Private Markets 1

18,206 17,896 9,397 2 90

Multi-Asset 3,813 4,192 4,764 (9) (12)

Total Long-Term Assets 177,013 168,675 148,295 5 14

Money Market 436,895 340,505 267,093 28 27

Total Average Managed Assets $ 613,908 $ 509,180 $ 415,388 21 % 23 %

By Product Type

Equity $ 45,585 $ 42,712 $ 36,984 7 % 15 %

Fixed-Income 46,899 41,938 40,952 12 2

Alternative / Private Markets 1

11,424 11,317 5,784 1 96

Multi-Asset 3,622 4,003 4,554 (10) (12)

Total Long-Term Assets 107,530 99,970 88,274 8 13

Money Market 324,490 238,876 182,828 36 31

Total Average Fund Assets 432,020 338,846 271,102 27 25

Separate Accounts:

Equity 35,006 38,500 33,696 (9) 14

Fixed-Income 27,504 23,437 22,502 17 4

Alternative / Private Markets

6,782 6,579 3,613 3 82

Multi-Asset 191 189 210 1 (10)

Total Long-Term Assets 69,483 68,705 60,021 1 14

Money Market 112,405 101,629 84,265 11 21

Total Average Separate Account Assets 181,888 170,334 144,286 7 18

Total Average Managed Assets $ 613,908 $ 509,180 $ 415,388 21 % 23 %

The average for the years ended December 31, 2019 and 2018 includes $8.2 billion and $4.1 billion , respectively, of average fund assets managed by a non-consolidated entity, Hermes GPE LLP, in which Hermes holds an equity method investment.

1 The average for the year ended December 31, 2019 includes $8.2 billion of average fund assets managed by a previously non-consolidated entity, HGPE, in which Federated Hermes held an equity method investment.

Effective March 1, 2020, HGPE became a consolidated subsidiary.

See Note (3) to the Consolidated Financial Statements for additional information.

Changes in Equity Fund and Separate Account Assets

1 unchanged sentence

Beginning Assets $ 48,112 $ 36,584

Sales 14,457 12,380

Redemptions (15,675) (11,757)

Net Sales (Redemptions) (1,218) 623

Net Exchanges (64) 181

Acquisition-Related

Acquisitions 0 2,191

Impact of Foreign Exchange 1

4 unchanged sentences

Redemptions 3

(11,046) (10,037)

Net Sales (Redemptions) 3

(5,040) (2,195)

Net Exchanges (6) 0

Acquisition-Related

Acquisitions/(Dispositions) (71) 53

Impact of Foreign Exchange 1

2 unchanged sentences

Beginning Assets $ 89,011 $ 72,497

20,463 20,222

Redemptions 3

(26,721) (21,794)

Net Sales (Redemptions) 3

(6,258) (1,572)

Net Exchanges (70) 181

Acquisition-Related

Acquisitions/(Dispositions) (71) 2,244

Impact of Foreign Exchange 1

4 unchanged sentences

dollars for reporting purposes.

Reporting only contains foreign exchange separately beginning in 2019, previously included in Market Gains and (Losses).

Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions, net investment income and the impact of changes in foreign exchange rates for 2018.

2 Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.

3 For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.

3 unchanged sentences

Beginning Assets $ 44,223 $ 40,490

Sales 29,453 16,730

Redemptions (22,564) (16,311)

Net Sales (Redemptions) 6,889 419

Net Exchanges (16) (98)

Acquisition-Related

Acquisitions 0 450

Impact of Foreign Exchange 1

4 unchanged sentences

Redemptions 3,4

(3,574) (5,232)

Net Sales (Redemptions) 3,4

Net Exchanges 1 (110)

Acquisition-Related

Acquisitions/(Dispositions) (1) 0

Impact of Foreign Exchange 1

3 unchanged sentences

Beginning Assets $ 69,023 $ 63,158

37,283 21,424

Redemptions 3,4

(26,138) (21,543)

Net Sales (Redemptions) 3,4

Net Exchanges (15) (208)

Acquisition-Related

Acquisitions/(Dispositions) (1) 450

Impact of Foreign Exchange 1

4 unchanged sentences

dollars for reporting purposes.

Reporting only contains foreign exchange separately beginning in 2019, previously included in Market Gains and (Losses).

2 Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.

3 For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.

4 For one fixed-income Separate Account, Sales, Redemptions, Net Sales (Redemptions) and Market Gains and (Losses) were previously incorrectly reported for the quarters ended March 31, 2020 and June 30, 2020.

Total assets were reported correctly and are not impacted.

The nine months ended September 30, 2020 included corrections that increased Redemptions by $390 million and decreased Sales by $1.1 billion, with the offset increasing Market Gains and (Losses) by $1.5 billion.

Changes in Alternative / Private Markets Fund and Separate Account Assets

2 unchanged sentences

Beginning Assets $ 11,389 $ 11,365

Sales 2,277 1,062

Redemptions (2,047) (1,721)

Net Sales (Redemptions) 230 (659)

Net Exchanges (4) (65)

Acquisition-Related

Impact of Foreign Exchange 2

5 unchanged sentences

Net Sales (Redemptions) 4

Acquisition-Related

Acquisitions 452 0

Impact of Foreign Exchange 2

4 unchanged sentences

Redemptions 4

(2,615) (2,459)

Net Sales (Redemptions) 4

Net Exchanges (4) (65)

Acquisition-Related

Acquisitions 452 0

Impact of Foreign Exchange 2

1 unchanged sentence

Ending Assets $ 19,084 $ 18,102

1 The balance at December 31, 2019 includes $8.2 billion of fund assets managed by a previously non-consolidated entity, HGPE, in which Federated Hermes held an equity method investment.

Effective March 1, 2020, HGPE became a consolidated subsidiary.

See Note (3) to the Consolidated Financial Statements for additional information.

2 Reflects the impact of translating non-U.S.

1 unchanged sentence

dollars for reporting purposes.

Reporting only contains foreign exchange separately beginning in 2019, previously included in Market Gains and (Losses).

3 Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.

4 For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.

3 unchanged sentences

Beginning Assets $ 4,000 $ 3,920

Sales 214 317

Redemptions (688) (864)

Net Sales (Redemptions) (474) (547)

Net Exchanges (19) 55

Acquisition-Related

Acquisitions 0 11

Market Gains and (Losses) 1

4 unchanged sentences

Net Sales (Redemptions) 2

Net Exchanges (1) 0

Impact of Foreign Exchange 3

Market Gains and (Losses) 1

5 unchanged sentences

Net Exchanges (20) 55

Acquisition-Related

Acquisitions 0 11

Impact of Foreign Exchange 3

Market Gains and (Losses) 1

2 unchanged sentences

2 For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.

3 Reflects the impact of translating non-U.S.

dollar denominated AUM into U.S.

dollars for reporting purposes.

Changes in Total Long-Term Assets

2 unchanged sentences

Beginning Assets $ 107,724 $ 92,359

Sales 46,401 30,489

Redemptions (40,974) (30,653)

Net Sales (Redemptions) 5,427 (164)

Net Exchanges (103) 73

Acquisition-Related

Acquisitions 0 2,652

Impact of Foreign Exchange 2

3 unchanged sentences

Beginning Assets $ 72,611 $ 65,707

14,426 12,932

Redemptions 4,5

(15,224) (16,036)

Net Sales (Redemptions) 4,5

(798) (3,104)

Net Exchanges (6) (110)

Acquisition-Related

Acquisitions/(Dispositions) 380 53

Impact of Foreign Exchange 2

3 unchanged sentences

Beginning Assets $ 180,335 $ 158,066

60,827 43,421

Redemptions 4,5

(56,198) (46,689)

Net Sales (Redemptions) 4,5

4,629 (3,268)

Net Exchanges (109) (37)

Acquisition-Related

Acquisitions/(Dispositions) 380 2,705

Impact of Foreign Exchange 2

Market Gains and (Losses) 3,5

11,861 22,143

Ending Assets $ 199,097 $ 180,335

1 The balance at December 31, 2019 includes $8.2 billion of fund assets managed by a previously non-consolidated entity, HGPE, in which Federated Hermes held an equity method investment.

Effective March 1, 2020, HGPE became a consolidated subsidiary.

See Note (3) to the Consolidated Financial Statements for additional information.

2 Reflects the impact of translating non-U.S.

1 unchanged sentence

dollars for reporting purposes.

Reporting only contains foreign exchange separately beginning in 2019, previously included in Market Gains and (Losses).

3 Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.

4 For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.

Changes in Federated's average asset mix year-over-year across both asset classes and product types have a direct impact on Federated's operating income.

Asset mix impacts Federated's total revenue due to the difference in the fee rates earned on each asset class and product type per invested dollar and certain components of distribution expense can vary depending upon the asset class, distribution channel and/or the size of the customer relationship.

5 For one fixed-income Separate Account, Sales, Redemptions, Net Sales (Redemptions) and Market Gains and (Losses) were previously incorrectly reported for the quarters ended March 31, 2020 and June 30, 2020.

Total assets were reported correctly and are not impacted.

Changes in Federated Hermes' average asset mix year-over-year across both asset classes and product types have a direct impact on Federated Hermes' operating income.

Asset mix impacts Federated Hermes' total revenue due to the difference in the fee rates earned on each asset class and product type per invested dollar and certain components of distribution expense can vary depending upon the asset class, distribution channel and/or the size of the customer relationship.

The following table presents the relative composition of average managed assets and the percent of total revenue derived from each asset class and product type over the last three years:

Percent of Total Average Managed Assets

Percent of Total Revenue

Percent of Total Average Managed Assets Percent of Total Revenue

2020 2019 2018 2020 2019 2018

By Asset Class

Money Market 71 % 67 % 64 % 40 % 40 % 37 %

Equity 13 % 16 % 17 % 38 % 40 % 41 %

Fixed-Income 12 % 13 % 16 % 13 % 14 % 16 %

Alternative / Private Markets 3 % 3 % 2 % 6 % 3 % 2 %

Multi-Asset 1 % 1 % 1 % 2 % 2 % 3 %

Other 0 % 0 % 0 % 1 % 1 % 1 %

By Product Type

Money Market 53 % 47 % 44 % 37 % 37 % 34 %

Equity 7 % 8 % 9 % 29 % 30 % 31 %

Fixed-Income 8 % 8 % 10 % 11 % 12 % 14 %

Alternative / Private Markets 2 % 2 % 1 % 3 % 1 % 1 %

Multi-Asset 1 % 1 % 1 % 2 % 2 % 3 %

Other 0 % 0 % 0 % 0 % 0 % 0 %

Separate Accounts:

Money Market 18 % 20 % 20 % 3 % 3 % 3 %

Equity 6 % 8 % 8 % 9 % 10 % 10 %

Fixed-Income 4 % 5 % 6 % 2 % 2 % 2 %

Alternative / Private Markets 1 % 1 % 1 % 3 % 2 % 1 %

Multi-Asset 0 % 0 % 0 % 0 % 0 % 0 %

Other 0 % 0 % 0 % 1 % 1 % 1 %

Total managed assets represent the balance of AUM at a point in time.

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Average managed assets increased 21% for 2020 as compared to 2019.

Period-end managed assets increased 25% at December 31, 2019 as compared to December 31, 2018 primarily due to an increase in money market and equity assets.

Average money market assets increased 27% for 2019 compared to 2018 .

Period-end managed assets increased 8% at December 31, 2020 as compared to December 31, 2019 primarily due to an increase in money market assets and, to a lesser extent, an increase in fixed-income assets.

Total average money market assets increased 28% for 2020 compared to 2019.

Period-end money market assets increased 6% at December 31, 2020 as compared to December 31, 2019.

Average equity assets increased 15% for 2019 as compared to 2018 .

Period-end equity assets increased 23% at December 31, 2019 as compared to December 31, 2018 primarily due to market appreciation.

Average equity assets decreased 1% for 2020 as compared to 2019.

Period-end equity assets increased 3% at December 31, 2020 as compared to December 31, 2019 primarily due to market appreciation, partially offset by net redemptions.

Average fixed income assets increased 14% for 2020 as compared to 2019.

Period-end fixed-income assets increased 9% at December 31, 2019 as compared to December 31, 2018 , primarily due to market appreciation.

During 2019, the combination of fading recession fears, easing trade tensions and Federal Reserve easing helped push equity markets to new highs, with the S&P 500 increasing 31.5% on a total return basis for its best year since 2013.

Muted inflation pressures and three 0.25% reductions in the Federal Reserve's target funds rate in the second half of the year also helped drive bond yields down over the course of the year, with the 10-year Treasury yield declining from 2.69% at the end of 2018 to 1.92% at the end of 2019.

For all of 2019, the Bloomberg Barclays U.S.

Aggregate Bond Index returned 8.7%, its best year since 2002.

For an explanation of the changes in managed assets at December 31, 2018 compared to December 31, 2017 and changes in average managed assets for 2018 as compared to 2017, see Federated's Annual Report on Form 10-K for the year ended December 31, 2018 , Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption Asset Highlights.

Period-end fixed-income assets increased 22% at December 31, 2020 as compared to December 31, 2019, primarily due to net sales and market appreciation.

Even though 2020 was a presidential election year, market activity was dominated by the Covid-19 pandemic.

Its near simultaneous arrival around the world in the first quarter of 2020 pushed the global economy into recession, spurring a steep sell-off in risk assets, pushing the equity markets into a bear market at the fastest pace in history and challenging credit markets as investors flocked to U.S.

Treasuries and cash.

The Fed and Congress responded with unprecedented monetary and fiscal stimulus, actions mirrored by policymakers the world over, helping to stem the economic slide and boost risk assets on expectations for stronger economic growth and earnings.

By year's end, the domestic equity markets were setting new highs, with the technology-laden Nasdaq Composite Index returning 44.92% for the year ended December 31, 2020, the S&P 500 rising 18.40% and the Dow Jones Industrial Average climbing 9.72%.

In fixed-income, the 10-year Treasury yield plunged 128 basis points in the first quarter on pandemic worries before settling into a narrow trading range through summer and fall before drifting higher to end 2020 at 0.92%, a percentage point below where it started the year.

After the FOMC dropped its federal funds target range in March to 0-0.25%,

short-term rates remained anchored at historic lows on the central bank's pledge to hold benchmark rates near zero-bound through at least 2022 or until average inflation hits and holds at 2%.

For an explanation of the changes in managed assets at December 31, 2019 compared to December 31, 2018 and changes in average managed assets for 2019 as compared to 2018, see Federated Hermes' Annual Report on Form 10-K for the year ended December 31, 2019, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption Asset Highlights.

Results of Operations

For an explanation of changes for 2018 as compared to 2017, see Federated's Annual Report on Form 10-K for the year ended December 31, 2018 , Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption Results of Operations.

Revenue increased $191.2 million in 2019 as compared to 2018 primarily due to (1) an increase in money market revenue of $114.6 million primarily due to higher average money market assets and (2) $96.4 million of Hermes activity being included in the Consolidated Financial Statements for two additional quarters in 2019 as compared to 2018 ( Hermes Full Year Impact ).

These increases in revenue were partially offset by decreases of $6.5 million and $5.1 million from lower average equity and multi-asset assets (excluding the Hermes Full Year Impact ), respectively.

Federated's ratio of revenue to average managed assets for 2019 was 0.26% as compared to 0.27% for 2018 .

For an explanation of changes for 2019 as compared to 2018, see Federated Hermes' Annual Report on Form 10-K for the year ended December 31, 2019, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption Results of Operations.

Revenue increased $121.4 million in 2020 as compared to 2019 primarily due to (1) an increase in money market revenue of $41.5 million primarily due to higher average money market assets (includes a decrease in revenue related to $113.0 million in Voluntary Yield-related Fee Waivers) (see Business Developments - Low Short-Term Interest Rates for additional information, including the impact to expense and the net pre-tax impact), (2) an increase in alternative/private market revenue of $33.0 million primarily due to the revenue of a previously nonconsolidated entity being recorded in operating revenue beginning in March 2020, (3) an increase in equity revenue of $18.6 million due to a change in the mix of average assets, (4) an increase in fixed-income revenue of $16.8 million due to higher average assets and (5) an increase in performance fees of $15.6 million.

Federated Hermes' ratio of revenue to average managed assets for 2020 was 0.23% as compared to 0.26% for 2019.

The decrease in the rate was primarily due to the reduction of revenue from Voluntary Yield-related Fee Waivers and the result of a lower proportion of revenue earned on average equity assets during 2020 as compared to 2019.

Operating Expenses.

Total operating expenses for 2020 increased $51.2 million compared to 2019.

Compensation and Related expense increased $87.4 million in 2019 as compared to 2018 primarily related to the Hermes Full Year Impact of $61.4 million and an increase in incentive compensation of $15.5 million driven primarily by international efforts and investment management performance.

Distribution expense increased $53.1 million in 2019 as compared to 2018 primarily due to higher average money market fund assets.

Systems and Communications expense increased $13.1 million in 2019 compared to 2018 primarily related to $8.3 million resulting from the Hermes Full Year Impact and $4.2 million due to increased market data services.

The remaining operating expenses for 2019 increased $20.0 million compared to 2018 primarily due to the Hermes Full Year Impact .

Compensation and Related expense increased $61.3 million in 2020 as compared to 2019 primarily related to (1) an increase in incentive compensation of $28.2 million driven primarily by sales efforts and investment management performance and (2) a $23.7 million increase due to the activity related to first quarter 2020 acquisitions being included in the Consolidated Financial Statements.

Distribution expense decreased $22.3 million primarily related to $98.4 million in Voluntary Yield-related Fee Waivers (see Business Developments - Low Short-Term Interest Rates for additional information, including the impact to revenue and the net pre-tax impact), partially offset by an increase in distribution expense of $80.2 million due to higher average money market fund assets.

Systems and Communications expense increased $11.7 million in 2020 compared to 2019 primarily related to $7.3 million due to increased market data services.

Professional Service Fees expense increased $11.4 million primarily due to technology-related projects.

Travel and Related expenses decreased $12.1 million due to decreased travel during the year as a result of Covid-19.

Nonoperating Income (Expenses).

Nonoperating Income (Expenses), net, increased $10.6 million in 2020 as compared to 2019.

The increase is primarily due to (1) a $29.0 million loss, recorded in Other, net in 2018, related to two derivative financial instruments associated with the Hermes Acquisition and (2) an increase of $9.1 million of private equity carried interest income on assets managed by a nonconsolidated entity, recorded in Other, net on the Consolidated Statements of Income.

In addition, Gain (Loss) on Securities, net increased $9.3 million due primarily to an increase in the market value of investments primarily held by consolidated investment companies.

The increase is primarily due to (1) an increase of $13.1 million to Gain (Loss) on Securities, net due primarily to an increase in the market value of investments, and (2) a $7.5 million gain recorded in Nonoperating Income (Expenses) - Other, net from a fair value adjustment to the equity investment of a previously nonconsolidated entity recorded in the first quarter of 2020.

These increases were partially offset by a decrease of $10.6 million related to the income of this previously nonconsolidated entity no longer being recorded in Nonoperating Income (Expenses) - Other, net beginning in March 2020.

Income Taxes.

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Net Income Attributable to Federated Hermes, Inc.

Net income increased $52.0 million in 2019 as compared to 2018 primarily as a result of the changes in revenues, operating expenses, nonoperating income (expenses) and income taxes noted above.

Net income increased $54.0 million in 2020 as compared to 2019 primarily as a result of the changes in revenue, operating expenses, nonoperating income (expenses) and income taxes noted above.

Diluted earnings per share for 2020 increased $0.54 as compared to 2019 primarily due to increased net income.

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The change in liquid assets is discussed below.

At December 31, 2019 , Federated's liquid assets included investments in certain money market and fluctuating-value Federated Funds that may have direct and/or indirect exposures to international sovereign debt and currency risks.

Federated continues to actively monitor its investment portfolios to manage sovereign debt and currency risks with respect to certain European countries (such as the UK in light of Brexit), China and certain other countries subject to economic sanctions.

Federated's experienced portfolio managers and analysts work to evaluate credit risk through quantitative and fundamental analysis.

Further, regarding international exposure, certain money market funds (approximately $212 million ), that meet the requirement of Rule 2a-7 or operate in accordance with requirements similar to those in Rule 2a-7, include holdings with indirect short-term exposures invested primarily in high-quality international bank names that are subject to Federated's credit analysis process.

At December 31, 2020, Federated Hermes' liquid assets included investments in certain money market and fluctuating-value Federated Hermes Funds that may have direct and/or indirect exposures to international sovereign debt and currency risks.

Federated Hermes continues to actively monitor its investment portfolios to manage sovereign debt and currency risks with respect to certain European countries (such as the UK in light of Brexit), China and certain other countries subject to economic sanctions.

Federated Hermes' experienced portfolio managers and analysts work to evaluate credit risk through quantitative and fundamental analysis.

Further, regarding international exposure, certain money market funds (representing approximately $231 million), that meet the requirement of Rule 2a-7 or operate in accordance with requirements similar to those in Rule 2a-7, include holdings with indirect short-term exposures invested primarily in high-quality international bank names that are subject to Federated Hermes' credit analysis process.

Cash Provided by Operating Activities.

Net cash provided by operating activities totaled $373.2 million for 2020 as compared to $334.9 million for 2019.

The increase of $128.6 million was primarily due to (1) an increase in cash received related to the $191.2 million increase in revenue previously discussed, (2) a decrease of $65.0 million in cash paid for incentive compensation (primarily related to Hermes employees in the third quarter of 2018) and (3) a decrease of $29.0 million in cash paid due to the settlement of two derivative financial instruments associated with the Hermes Acquisition in 2018.

These were partially offset by (1) a decrease due to additional cash paid related to the $53.1 million increase in distribution related expenses previously discussed, (2) an increase of $43.1 million in cash paid for net purchases of investments by consolidated Federated

Funds , (3) an increase of $25.9 million in cash paid for compensation (excluding incentive compensation) primarily related to the Hermes Full Year Impact and (4) an increase of $11.0 million in cash paid for taxes primarily due to an increase in pretax book income.

The increase of $38.3 million was primarily due to (1) an increase in cash received related to the $121.4 million increase in revenue previously discussed less $11.8 million in accrued performance fees at December 31, 2020, (2) a decrease in cash paid related to the $22.3 million decrease in Distribution expense previously discussed and (3) a decrease of $13.5 million in cash paid for trading securities as compared to 2019.

These increases were partially offset by (1) an increase of $30.7 million in cash paid for incentive compensation for the year ended December 31, 2020 as compared to 2019, (2) an increase of $26.1 million in cash paid for taxes primarily due to higher taxable income for the year ended December 31, 2020 as compared to 2019 and (3) an increase in cash paid related to the $23.7 million increase in compensation expense related to first quarter 2020 acquisitions.

Cash Used by Investing Activities.

In 2019 , net cash used by investing activities was $94.7 million which primarily represented (1) $103.4 million in cash paid for purchases of investments, (2) $58.0 million in cash paid for indefinite-lived rights to manage fund assets acquired in connection with the acquisition of certain components of the PNC Capital Advisors LLC investment management business and (3) $15.0 million in cash paid for property and equipment, partially offset by $81.1 million in proceeds from the redemption of investments.

In 2020, net cash used by investing activities was $24.8 million which primarily represented $25.5 million paid for purchases of Investments—Affiliates and Other and $13.5 million paid for property and equipment, partially offset by $11.5 million in cash received from redemptions of Investments—Affiliates and Other.

Cash Used by Financing Activities.

In 2020, net cash used by financing activities was $295.1 million.

Of this amount, Federated paid $109.1 million or $1.08 per share in dividends to holders of its common shares, paid $43.8 million in connection with its debt obligations and paid $15.7 million to repurchase shares of Class B common stock primarily in connection with its stock repurchase program (see Note (15) to the Consolidated Financial Statements for additional information).

This activity was partially offset by $8.8 million borrowed from Federated's revolving credit facility.

In 2017, Federated entered into an unsecured Third Amended and Restated Credit Agreement by and among Federated, certain of its subsidiaries as guarantors party thereto, a syndicate of ten banks as Lenders party thereto, PNC Bank, National Association as administrative agent, PNC Capital Markets LLC, as sole bookrunner and joint lead arranger, Citigroup Global Markets, Inc., as joint lead arranger, Citibank, N.A.

Of this amount, Federated Hermes paid $207.8 million or $2.08 per share in dividends to holders of its common shares, paid $125.0 million in connection with its debt obligations and paid $66.8 million to repurchase shares of Class B common stock primarily in connection with its stock repurchase program (see Note (15) to the Consolidated Financial Statements for additional information).

This activity was partially offset by $100.0 million borrowed from Federated Hermes' revolving credit facility.

In 2017, Federated Hermes entered into an unsecured Third Amended and Restated Credit Agreement by and among Federated Hermes, certain of its subsidiaries as guarantors party thereto, a syndicate of ten banks as Lenders party thereto, PNC Bank, National Association as administrative agent, PNC Capital Markets LLC, as sole bookrunner and joint lead arranger, Citigroup Global Markets, Inc., as joint lead arranger, Citibank, N.A.

as syndication agent, and TD Bank, N.A.

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The original proceeds were used for general corporate purposes including cash payments related to acquisitions, dividends, investments and share repurchases.

As of December 31, 2019 , Federated has $275 million available to borrow under the Credit Agreement .

As of December 31, 2020, Federated Hermes has $300 million available to borrow under the Credit Agreement.

See Note (12) to the Consolidated Financial Statements for additional information.

The Credit Agreement includes an interest coverage ratio covenant (consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) to consolidated interest expense) and a leverage ratio covenant (consolidated debt to consolidated EBITDA) as well as other customary terms and conditions.

Federated was in compliance with all of its covenants, including its interest coverage and leverage ratios at and during the year ended December 31, 2019 .

An interest coverage ratio of at least 4 to 1 is required and, as of December 31, 2019 , Federated's interest coverage ratio was 94 to 1.

A leverage ratio of no more than 3 to 1 is required and, as of December 31, 2019 , Federated's leverage ratio was 0.2 to 1.

Federated Hermes was in compliance with all of its covenants, including its interest coverage and leverage ratios at and during the year ended December 31, 2020.

An interest coverage ratio of at least 4 to 1 is required and, as of December 31, 2020, Federated Hermes' interest coverage ratio was 223 to 1.

A leverage ratio of no more than 3 to 1 is required and, as of December 31, 2020, Federated Hermes' leverage ratio was 0.16 to 1.

The Credit Agreement also has certain stated events of default and cross default provisions which would permit the lenders/counterparties to accelerate the repayment of debt outstanding if not cured within the applicable grace periods.

The events of default generally include breaches of contract, failure to make required loan payments, insolvency, cessation of business, notice of lien or assessment, and other proceedings, whether voluntary or involuntary, that would require the repayment of amounts borrowed.

Cash dividends of $109.1 million , $106.9 million and $101.5 million were paid in 2019 , 2018 and 2017 respectively, to holders of Federated common stock.

Cash dividends of $207.8 million, $109.1 million and $106.9 million were paid in 2020, 2019 and 2018 respectively, to holders of Federated Hermes common stock.

Of the amount paid in 2020, $99.3 million represented a $1.00 per share special dividend paid in the fourth quarter.

All dividends were considered ordinary dividends for tax purposes.

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In addition to the contractual obligations described below, management expects that principal uses of cash will include funding business acquisitions and global expansion, funding distribution expenditures, paying incentive and base compensation, paying shareholder dividends, repaying debt obligations, paying taxes, repurchasing company stock, developing and seeding new products and strategies, modifying existing products, strategies and relationships, and funding property and equipment (including technology).

Any number of factors may cause Federated's future cash needs to increase.

Any number of factors may cause Federated Hermes' future cash needs to increase.

As a result of the highly regulated nature of the investment management business, management anticipates that aggregate expenditures for compliance and investment management personnel, compliance systems and technology and related professional and consulting fees may continue to increase.

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The dividend was payable to shareholders of record as of February 5, 2021, resulting in $26.8 million being paid on February 12, 2021.

After evaluating Federated's existing liquid assets, expected continuing cash flow from operations, its borrowing capacity under the Credit Agreement and its ability to obtain additional financing arrangements and issue debt or stock, management believes it will have sufficient liquidity to meet its present and reasonably foreseeable cash needs.

After evaluating Federated Hermes' existing liquid assets, expected continuing cash flow from operations, its borrowing capacity under the Credit Agreement and its ability to obtain additional financing arrangements and issue debt or stock, management believes it will have sufficient liquidity to meet its present and reasonably foreseeable cash needs.

Financial Position

The following discussion summarizes significant changes in assets and liabilities that are not discussed elsewhere in Management's Discussion and Analysis of Financial Condition and Results of Operations.

Goodwill at December 31, 2019 decreased $35.1 million from December 31, 2018 primarily due to the final purchase price adjustment related to the Hermes Acquisition (see Note (3) to the Consolidated Financial Statements).

Intangible Assets, net at December 31, 2019 increased $106.6 million from December 31, 2018 primarily due to $58.0 million of indefinite-lived rights to manage fund assets acquired in connection with the acquisition of certain components of the PNC Capital Advisors LLC investment management business .

The remaining difference primarily related to the final purchase price adjustment related to the Hermes Acquisition (see Note (3) to the Consolidated Financial Statements).

The following line items increased as a result of the adoption of the new lease guidance effective January 1, 2019:

(1) Right-of-Use Assets, net ( $100.5 million ), (2) Lease Liabilities ( $13.6 million ) and (3) Long-Term Lease Liabilities ( $107.5 million ).

In addition, Other Long-Term Liabilities at December 31, 2019 decreased $16.6 million from December 31, 2018 primarily due to the reclassification of certain lease-related liabilities into the right-of-use (ROU) asset in accordance with this adoption.

See Note (2) and Note (18) to the Consolidated Financial Statements for additional information.

This discussion excludes certain material fluctuations primarily due to the HCL Acquisition.

See Note (3) to the Consolidated Financial Statements for additional information.

Investments—Consolidated Investment Companies at December 31, 2020 increased $26.8 million from December 31, 2019 primarily due to (1) an increase of $15.2 million due to the consolidation of two variable interest entities (VIE) and a voting rights entity (VRE) during 2020, (2) an increase of $15.0 million related to net purchases in existing consolidated products and (3) an increase of $12.6 million of market appreciation for existing consolidated products, partially offset by a $16.0 million decrease related to the deconsolidation of a VRE and the liquidation of a VIE during the first half of 2020.

Investments—Affiliates and Other at December 31, 2020 increased $18.7 million from December 31, 2019 primarily due to net purchases of $9.0 million, an increase of $5.9 million of market appreciation and the deconsolidation of a VRE in the first half of 2020 which reclassified Federated Hermes' investment of $2.5 million into Investments—Affiliates and Other.

Right-of-Use Assets, net at December 31, 2020 increased $21.6 million from December 31, 2019 and Long-Term Lease Liabilities at December 31, 2020 increased $14.4 million from December 31, 2019 primarily due to a new lease for office space in London.

Accrued Compensation and Benefits at December 31, 2020 increased $33.2 million from December 31, 2019 primarily due to 2020 incentive compensation accruals recorded at December 31, 2020 ($134.5 million), partially offset by the 2019 accrued annual incentive compensation being paid in the first quarter of 2020 ($107.0 million).

Long-Term Deferred Tax Liability, net at December 31, 2020 increased $22.6 million from December 31, 2019 primarily due to certain tax amortization deductions being in excess of book amortization ($7.9 million) and an increase in intangible assets associated with first quarter 2020 acquisitions ($5.5 million).

Off-Balance Sheet Arrangements

As of December 31, 2019 and 2018 , Federated did not have any material off-balance sheet arrangements.

As of December 31, 2020 and 2019, Federated Hermes did not have any material off-balance sheet arrangements.

Contractual Obligations

The following table presents, as of December 31, 2019 , Federated's significant minimum noncancelable contractual obligations by payment date.

The following table presents, as of December 31, 2020, Federated Hermes' significant minimum noncancelable contractual obligations by payment date.

The payments represent amounts contractually due to the recipient and do not include any carrying value adjustments.

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Payments Due in

in millions 2021 2022-2023 2024-2025 After 2025 Total

Long-Term Debt Obligations

$ 0.0 $ 75.0 $ 0.0 $ 0.0 $ 75.0

Operating Lease Obligations

19.8 40.5 33.6 63.1 157.0

Purchase Obligations

33.3 17.4 6.9 5.8 63.4

Other Obligations

2.5 0.7 0.0 0.0 3.2

Total $ 55.6 $ 133.6 $ 40.5 $ 68.9 $ 298.6

Long-Term Debt Obligations.

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The interest is variable, based on LIBOR plus a 112.5 basis point spread, in accordance with the Credit Agreement.

Assuming management's current plan for repayment of the Credit Agreement and LIBOR as of December 31, 2019 , Federated's interest payments are estimated to be $2.6 million and $2.3 million for 2020 and 2021-2022 , respectively.

Assuming management's current plan for repayment of the Credit Agreement and LIBOR as of December 31, 2020, Federated Hermes' interest payments are estimated to be $0.8 million and $0.2 million for 2021 and 2022, respectively.

Any changes in future cash needs can impact the projected repayment schedule.

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See Note (18) to the Consolidated Financial Statements for additional information.

Purchase Obligations.

Federated is a party to various contracts pursuant to which it receives certain services, including services for marketing and information technology, access to various fund-related information systems and research databases, trade order transmission and recovery services as well as other services.

Purchase Obligati ons.

Federated Hermes is a party to various contracts pursuant to which it receives certain services, including services for marketing and information technology, access to various fund-related information systems and research databases, trade order transmission and recovery services as well as other services.

These contracts contain certain minimum noncancelable payments, cancellation provisions and renewal terms.

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Variable Interest Entities

Federated is involved with various entities in the normal course of business that may be deemed to be variable interest entities ( VIE s).

Federated determined that it was the primary beneficiary of certain Federated Fund VIEs and, as a result, consolidated the assets, liabilities and operations of these VIEs in its Consolidated Financial Statements.

Federated Hermes is involved with various entities in the normal course of business that may be deemed to be VIEs.

Federated Hermes determined that it was the primary beneficiary of certain Federated Hermes Fund VIEs and, as a result, consolidated the assets, liabilities and operations of these VIEs in its Consolidated Financial Statements.

See Note (6) to the Consolidated Financial Statements for more information.

Recent Accounting Pronouncements

For a complete list of new accounting standards applicable to Federated, see Note (2) to the Consolidated Financial Statements.

For a complete list of new accounting standards applicable to Federated Hermes, see Note (2) to the Consolidated Financial Statements.

Critical Accounting Policies

Federated's Consolidated Financial Statements have been prepared in accordance with U.S.

Federated Hermes' Consolidated Financial Statements have been prepared in accordance with U.S.

generally accepted accounting principles (GAAP).

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Actual results may differ from those estimates made by management and those differences may be material.

Of the significant accounting policies described in Note (1) to the Consolidated Financial Statements, management believes that its policies regarding accounting for asset acquisitions and business combinations, goodwill and intangible assets and Hermes redeemable noncontrolling interest involves a higher degree of judgment and complexity.

Of the significant accounting policies described in Note (1) to the Consolidated Financial Statements, management believes that its policies regarding accounting for asset acquisitions and business combinations, goodwill and intangible assets and HFML redeemable noncontrolling interest involves a higher degree of judgment and complexity.

Asset Acquisitions and Business Combinations.

Federated performs an analysis to determine whether a transaction meets the definition of a business under U.S.

Federated Hermes performs an analysis to determine whether a transaction meets the definition of a business under U.S.

When determining whether a set of assets and activities constitute a business, management considers whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets.

If this threshold is met, these assets and activities do not meet the definition of a business and the transaction is accounted for as an asset acquisition.

If it is not met, management then evaluates whether these assets and activities meet the requirement of a business including, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs.

If not met, management then evaluates whether these assets and activities meet the requirement of a business including, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs.

If these assets and activities do not meet these requirements, the transaction is accounted for as an asset acquisition.

A transaction that does not meet this definition of a business is accounted for as an asset acquisition.

A transaction that does not meet the definition of a business is accounted for as an asset acquisition.

Asset acquisitions are accounted for using a cost accumulation and allocation method where the cost of the transaction is allocated on a relative fair value basis to the qualifying assets acquired and liabilities assumed on the acquisition date.

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No goodwill is recognized in an asset acquisition.

A transaction that meets this definition of a business is accounted for as a business combination under the acquisition method of accounting.

The consideration transferred to the seller in a business combination is measured at fair value and calculated as the sum of the acquisition date fair values of the assets transferred by Federated, the liabilities incurred by Federated to the acquirer and any equity interests issued by Federated.

A transaction that meets the definition of a business is accounted for as a business combination under the acquisition method of accounting.

The consideration transferred to the seller in a business combination is measured at fair value and calculated as the sum of the acquisition date fair values of the assets transferred by Federated Hermes, the liabilities incurred by Federated Hermes from the seller and any equity interests issued by Federated Hermes.

Direct transaction costs are expensed as incurred in a business combination.

Results of operations of an acquired business are included in Federated's results from the date of acquisition.

Results of operations of an acquired business are included in Federated Hermes' results from the date of acquisition.

Rights to manage fund assets and trade names acquired in a business combination are recorded at fair value.

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(2) projected AUM;

(3) projected revenue growth rates;

(4) projected pre-tax profit margins;

(3) projected revenue growth rates;(4) projected pre-tax profit margins;

(5) tax rates;

(6) discount rates and (7) in the case of a trade name valuation, a royalty rate.

Federated has determined that certain acquired assets, primarily certain rights to manage fund assets and trade names, have indefinite useful lives.

effects of obsolescence, demand, competition and other economic factors that could impact the assets' fair value.

Federated Hermes has determined that certain acquired assets, primarily certain rights to manage fund assets and trade names, have indefinite useful lives.

In reaching this conclusion, management considered the acquired assets' legal, regulatory and agreed-upon provisions, the highest and best use of the asset, the level of cost and effort required in agreed-upon renewals, and the effects of obsolescence, demand, competition and other economic factors that could impact the assets' fair value.

Management estimates a rate of change for underlying managed assets based on a combination of an estimated rate of market appreciation or depreciation and an estimated net redemption or sales rate.

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In addition, finite-lived intangible assets could require an acceleration in amortization expense.

These adjustments could have a material adverse effect on Federated's business, results of operations and financial condition.

These adjustments could have a material adverse effect on Federated Hermes' business, results of operations and financial condition.

Goodwill is reviewed for impairment annually as of June 30, or when indicators of a potential impairment exist.

Federated has a single reporting unit, consistent with Federated's single operating segment, to which all goodwill has been assigned.

Federated first performs a qualitative analysis and considers various factors including macroeconomic and entity-specific considerations, industry and market conditions, and overall financial performance.

A quantitative impairment test is performed if there are indications that it is more likely than not that the fair value of the reporting unit is less than its carrying value.

At December 31, 2019 , Federated had $774.5 million in goodwill recorded on its Consolidated Balance Sheets .

Federated Hermes has a single reporting unit, consistent with Federated Hermes' single operating segment, to which all goodwill has been assigned.

Federated Hermes first performs a qualitative analysis and considers various factors including macroeconomic and entity-specific considerations, industry and market conditions, and overall financial performance.

A quantitative impairment

test is performed if there are indications that it is more likely than not that the fair value of the reporting unit is less than its carrying value.

At December 31, 2020, Federated Hermes had $800.3 million in goodwill recorded on its Consolidated Balance Sheets.

No impairments were recorded during the years ended December 31, 2020, 2019 or 2018.

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Management may use a qualitative or quantitative approach which requires the weighting of positive and negative evidence collected through the consideration of various factors to determine whether it is more likely than not that an indefinite-lived intangible asset or asset group is impaired.

In 2019, management used a quantitative approach.

In 2020, management used both a quantitative and qualitative approach.

Management considers macroeconomic and entity-specific factors, including projected AUM, projected revenue growth rates, projected pre-tax profit margins, tax rates, discount rates and, in the case of a trade name valuation, a royalty rate.

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Indicators of a possible change in useful life monitored by management generally include changes in the expected use of the asset, a significant decline in the level of managed assets, changes to legal, regulatory or contractual provisions of the rights to manage fund assets, the effects of obsolescence, demand, competition and other economic factors that could impact the funds' projected performance and existence, and significant reductions in underlying operating cash flows.

The continued uncertainty caused by Covid-19 resulted in management determining that an indicator of potential impairment existed as of each quarter end in 2020 for certain indefinite-lived intangible assets totaling £150.3 million ($205.5 million as of December 31, 2020) acquired in connection with the 2018 HFML Acquisition.

A discounted cash flow analysis resulted in no impairment as of each quarter end for 2020 since the estimated fair value of these intangible assets exceeded the carrying value.

An additional discounted cash flow analysis prepared as of December 31, 2020 resulted in the estimated fair value exceeding the carrying value by approximately 8%.

The key assumptions in the discounted cash flow analysis include revenue growth rates, pre-tax profit margins and the discount rate applied to the projected cash flows.

The risk of future impairment increases with a decrease in projected cash flows and/or an increase in the discount rate.

As of December 31, 2020, an increase or decrease of 10% in projected revenue growth rates would result in a corresponding change to estimated fair value of approximately 7%.

An increase or decrease of 10% in pre-tax profit margins would result in a corresponding change to estimated fair value of approximately 12%.

An increase or decrease in the discount rate of 25 basis points would result in an inverse change to estimated fair value of approximately 3%.

The market volatility and other events related to Covid-19 could further reduce the AUM, revenues and earnings associated with these intangible assets and may result in subsequent impairment tests being based upon updated assumptions and future cash flow projections, which may result in an impairment.

For additional information on risks related to Covid-19, see Part I, Item 1A - Risk Factors under the caption General Risk Factors - Other General Risks - Potential Adverse Effects of Unpredictable Events or Consequences (including Covid-19).

Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives.

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Impairment is indicated when the carrying value of the intangible asset exceeds its fair value.

At December 31, 2019 , Federated had $446.2 million in intangible assets recorded on its Consolidated Balance Sheets .

At December 31, 2020, Federated Hermes had $481.8 million in intangible assets recorded on its Consolidated Balance Sheets.

No impairments were recorded during the years ended December 31, 2020, 2019 or 2018.

Hermes Redeemable Noncontrolling Interest.

The Hermes noncontrolling interest represents equity which is subject to the terms of a Put and Call Option Deed, redeemable at the option of either the noncontrolling party or Federated at future predetermined dates and, therefore, not entirely within Federated's control.

The subsidiary's net income or loss and related dividends are allocated to Federated and the noncontrolling interest holder based on their relative ownership percentages.

The Hermes noncontrolling interest carrying value is adjusted on a quarterly basis to the higher of the carrying value or current redemption value (fair value), as of the balance sheet date, through a corresponding adjustment to retained earnings.

HFML Redeemable Noncontrolling Interest.

The HFML noncontrolling interest represents equity which is subject to the terms of a Put and Call Option Deed, redeemable at the option of either the noncontrolling party or Federated Hermes at future predetermined dates and, therefore, not entirely within Federated Hermes' control.

The subsidiary's net income or loss and any related dividends are allocated to Federated Hermes and the noncontrolling interest holder based on their relative ownership percentages.

The HFML redeemable noncontrolling interest carrying value is adjusted on a quarterly basis to the higher of the carrying value or current redemption value (fair value), as of the balance sheet date, through a corresponding adjustment to retained earnings.

Management may use an independent valuation expert to assist in estimating the current redemption value (fair value) using three methodologies:

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The discount rate is estimated at the current market rate of return.

At December 31, 2019 , Federated had $192.2 million in Redeemable Noncontrolling Interest in Subsidiaries related to Hermes recorded on its Consolidated Balance Sheets.

At December 31, 2020, Federated Hermes had $212.7 million in Redeemable Noncontrolling Interest in Subsidiaries related to HFML recorded on its Consolidated Balance Sheets.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis