Athene Holding Ltd. 7.250% Fixe Q1 FY2021 earnings call

Key Points - Jim Belardi expressed satisfaction with first quarter results, emphasizing the strength of the spread-based business model. - Discussed the merger with Apollo, highlighting strategic benefits such as creating a larger, stronger financial entity and unlocking value potential. - On the asset side, purchased $17 billion of investments with structured securities (40% of purchases), public/private corporate bonds (30%), and alternatives (5% of purchases). - Made progress in reducing cash balance to $2.5 billion by the end of the first quarter and nearing completion of redeploying the Jackson portfolio, with plans to increase the portfolio's yield by approximately 50 basis points by mid-year. - Alternative investments had robust income, with a 39% annualized net return in the first quarter, driven by gains in Venerable, AmeriHome, and MidCap. - Bill Wheeler discussed strong organic growth across channels, including 41% year-over-year growth in retail inflows, second-highest quarterly PRT inflows, and strong funding agreement activity. Also noted inorganic opportunities with over $8 billion of deployable capital. - Marty Klein provided details on financial results, including GAAP net income of $578 million or $2.94 per diluted share, adjusted operating income of $748 million or $3.80 per share, components like fixed income NIER, alternatives performance, cost of funds, taxes, and strong capital position with approximately $18 billion of aggregate regulatory capital.

Athene generated $8.2 billion of gross organic inflows in the first quarter, marking the second highest quarterly total ever. In the retail channel, $1.8 billion of inflows were generated, representing a 41% year-over-year growth. The PRT channel generated $2.9 billion of inflows, the second highest quarterly total to-date. Funding agreement activity brought in $3.2 billion of inflows, the strongest quarterly results to-date. The third-party flow reinsurance channel remained subdued. Adjusted operating income was a record $748 million or $3.80 per share, and adjusted book value reached nearly $63 per share. Revenue contributions varied across segments with retail, PRT, funding agreements, and reinsurance channels each playing distinct roles in the overall financial picture.

Forward-Looking Statements - Expect average cash balance to normalize in the second quarter, aiding portfolio yield. - Redeployment of the Jackson portfolio is expected to be substantially complete by mid-year, with an estimated additional ~50 basis points increase in the gross yield of the portfolio. - Adjusted operating income in the first quarter exceeded that of the first nine months of the previous year, with expectations of new annual highs for earnings and substantial growth in book value in 2021. - Cost of crediting is expected to be approximately 175-180 basis points in 2021, driven by strong growth in institutional channels and rate actions. - Operating expense ratio is expected to decline slightly to the low 20s basis point area by the end of the year.

Risk Factors - Retail and flow reinsurance markets have seen aggressive pricing, which may not be sustainable. - Some traditional life insurance industry participants are undergoing strategic reviews, potentially altering competitive dynamics in the PRT market. - Interest rate environment changes could impact the consummation of transactions, though higher interest rates may ease the pain of selling certain assets for some companies. - The tax rate increase on the in-force block, while sidecars like ACRA help preserve tax advantage for new business, could still have some impact on deal returns if not managed carefully.

Q: Ryan Krueger asked about access capital and how much of the Apollo shares held are counted in excess capital and the pro forma impact on capital position after the deal closes.

A: Marty Klein responded that about 40%-45% of the Apollo holding is considered required capital, with the excess over that representing excess capital. At the end of the quarter, it was decently north of $700 million, and on or in advance of the merger, Athene's AOG shares currently held will be replaced in a capital neutral way, with more details to come in later calls.

Q: Andrew Kligerman asked about granularity on inorganic markets for M&A.

A: Bill Wheeler said there will continue to be a lot of activity, possibly in Japan and the UK, and the company is excited about expanding horizons regarding what's in scope for M&A, including potentially big pension deals or other market activities.

Q: Erik Bass asked about the funding mix for future growth and the impact of the merger on acquiring origination platforms.

A: Bill Wheeler said they will continue to use the existing ACRA deal and possibly subsequent ones to fund not only M&A and PRT volume but also more organic volumes, as it is capital efficient and tax efficient. Jim Belardi added excitement about future growth prospects, stating the company expects to be a big growth company going forward, and Jim Belardi also mentioned that Apollo and Athene will continue to be leaders in direct origination with the merged entity, with past conflicts in fees being in the past and a wide open path for bigger volumes of directly originated front-end assets.

Q: Humphrey Lee asked about PRT market competition from private equity backed players and retail/flow reinsurance aggressive pricing.

A: Bill Wheeler said the PRT market is expected to be the best year ever in terms of volumes, and even with potential increased competition, Athene feels good about its chances. Regarding retail and flow reinsurance aggressive pricing, he said it's not sustainable and is already starting to cool off but needs to cool off more to become rational.

Q: John Barnidge asked about PRT industry participants' strategic reviews and their impact on competitive dynamics.

A: Bill Wheeler said traditional domestic life companies are undergoing strategic reviews as they aim to change their business mix to be more capital light and are struggling to earn adequate returns. Athene, with its alpha asset performance, efficiency, and lower costs, is positioned to benefit, and the company is bullish on the PRT market volume year due to pent-up demand in corporate America for pension plan solutions.

Q: Elyse Greenspan asked about interest rates' impact on inorganic pipelines and tax rate impact on deal returns.

A: Jim Belardi said higher interest rates are not the primary driver of executive decisions on selling blocks or pieces of business, as it's broader than just interest rates, related to companies' capital light strategies and balance sheet management. Bill Wheeler stated that Athene's tax rate increase is mainly on the in-force block, but sidecars like ACRA preserve tax advantage for new business, allowing the company to still compete for deals and achieve return targets without accepting lower returns.

Q: Tom Gallagher asked about M&A broadening and buffered annuities.

A: Bill Wheeler said the company is willing to look broader than just fixed annuities for M&A but is disciplined in evaluating deals with more biometric risk. Regarding buffered annuities, the company has introduced a RILA product and plans to improve its performance in that segment. Jim Belardi added that it's all about returns, and the company is open to other financial services areas if they can meet return expectations consistent with past results.

Q: Tom Gallagher asked about the valuation of the Jackson equity stake.

A: Marty Klein responded that the Jackson equity stake was left at the same level as the prior quarter in the first quarter, as it's a private equity holding generally held at cost unless there's a compelling reason like market changes. There were no changes this quarter, but potential changes could occur in the second quarter due to Venerable's potential spinoff.

Q: Mike Ward asked about Venerable's capacity and PRT competition driven by earnings runoff.

A: Bill Wheeler said Venerable is a successful investment and there's more to do in the VA deal market. Regarding PRT competition driven by earnings runoff, he said PRT deals are seasonally priced tough early in the year but become more favorable later, with a lower runoff profile compared to traditional fixed annuity business, so runoff and lost earnings aren't the main drivers of current competition.

Q: Suneet Kamath asked about alternative investments' marks and Venerable's valuation process.

A: Marty Klein said alternative investments had better-than-normal returns even excluding the three highlighted ones, with positive market backdrops helping. Jim Belardi said Venerable's valuation is done with the Apollo team, considering the re-insurance transaction with Equitable which has had a positive impact on its valuation, though the equity investment by Equitable is still in discussion and not consummated yet.