Athene Holding Ltd. 7.250% Fixe Q2 FY2021 earnings call

Key managerial messages and operational highlights:

• Strong Q2 results with $1 billion of adjusted operating income, a new record. Adjusted book value was over $67 per share, 32% year-over-year growth.
• Ratings upgrade from S&P in May, with financial strength rating and operating entities' rating raised to A+ and holding company rating to A-.
• Purchased over $14 billion of investments in Q2, second highest quarterly level. Structured securities (36%), public/private corporate bonds (33%), and commercial/residential mortgage loans (22%) were primary categories.
• Jackson redeployment effort: Over 94% of targeted redeployment amount invested, fixed income portion completed, yield raised by ~180 basis points.
• Retail inflows in Q2 were $1.7 billion, with over 90% from FIAs, maintaining leading market share in FIA sales.
• PRT channel had strong inflows with significant transactions, and active in Q3 with large deals like Lockheed Martin.
• Funding agreement activity saw $4.1 billion inflows in Q2, #1 issuer for the quarter and H1 2021.
• Alternatives had fourth consecutive quarter of above-average performance, with annualized net return of 17% in Q2.

In the second quarter, Athene's segments performed as follows:

• Retail: Generated $1.7 billion of inflows. Over 90% of retail inflows were from FIAs. Athene maintained the #1 industry ranking for FIA sales for the fourth consecutive quarter and led in the IMO channel. Retail inflows had a strong quality with a diversified mix of FIA products.
• PRT (Pension Risk Transfer): Generated $1.5 billion of inflows from transactions like $900 million with Sonoco and $600 million with a leading home improvement company. Year-to-date, $10 billion of PRT transactions were closed, with more than $25 billion aggregate since entering the business 4 years ago.
• Funding agreement-backed notes: Generated $4.1 billion of inflows in Q2, the strongest quarterly result to date, #1 issuer for Q2 and H1 2021. Issued first SOFR-linked funding agreement, with foreign currency-denominated issuances in Canadian and European markets.
• Alternatives: Total portfolio of alternative investments had fourth consecutive quarter of above-average performance, with annualized net return of approximately 17% in Q2 and 24% over last 12 months.

Management's forward-looking guidance:

• Expect total organic inflows to meet or exceed $30 billion for 2021, comfortably exceeding previous estimate of $25 billion.
• Fixed NIER expected to be in the range of 3.55% to 3.6% for the remainder of 2021, down from prior expectation of 3.6%.
• Annualized Alts NIER in the second half of 2021 expected to be approximately 10%, closer to longer-term historical performance.
• Cost of crediting expected to be closer to the low end of the previously guided range or approximately 175 basis points for the full year.
• Baseline run rate for other liability costs expected to be around 70 to 75 basis points, subject to swings in profitability and market impacts.

Potential risks discussed:

• Market volatility and interest rate changes could impact financial performance.
• Competitive dynamics in the insurance and PRT markets could affect market share and business results.
• Uncertainties related to the integration of Apollo and execution of strategic initiatives.

Q: On Apollo's recent earnings call, they mentioned a desire to develop solutions for retail investors to access Apollo funds and launching 2 yield-based products in the latter half of the year. Are there ways for you to incorporate Apollo funds into your retail products? And could this be a way for you to differentiate your products in the marketplace?

A: Bill Wheeler responded that they've studied it, but the challenge is needing an index to hedge annuities with Apollo funds. They're continuing to study and coordinating with Apollo's retail effort, potentially putting an Apollo fund in a product with an annuity wrapper.

Q: On competitive dynamics in the PRT market. You've seen great volume in third quarter with the Lockheed transaction. Just curious kind of what's enabled you to capture leading market share and a little bit more specifically on the jumbo transactions, kind of any color you have on dynamics in that size of the market?

A: Bill Wheeler said it's a combination of being a strong competitor with good investment performance and operating efficiencies, including outsourcing admin with leading pension administrators. Also, being willing to focus on solving clients' complex issues, which has made them the first call for complex pension deals, contributing to leading market share in PRT.