Q4 2019 Earnings Call
Good morning, My name is see they will be your conference operator today at this time I would like to welcome everyone to the themes fourth quarter and full year 2019 earnings conference call. The webcast. All participants' lines have been placed on listen only mode to prevent any background noise. After the speaker's remarks, there will be a question and answer session.
If he would like to ask a question at that time. Please press star one on your telephone keypad. If you should need operator assistance. Please press star zero. Thank you I'll now turn the call over to know gun head of Investor Relations. Please go ahead.
Thanks, Yeah, and welcome to our fourth quarter and full year 29 clean earnings call. Joining me. This morning are gimbal, arty, Chairman and CEO, Bill Wheeler, President and Marty client, our Chief Financial Officer.
As a reminder, this call may include forward looking statements and projections, which do not guarantee future events or performance.
We cannot revise or update such statements to reflect new information subsequent events or changes in strategy.
Please refer to our most recent quarterly and annual report and other SEC filings for a discussion of the factors that could cause actual results could differ materially from those expressed or implied.
We'll be discussing certain non-GAAP measures on this call, which we believe our relevant in assessing the financial performance of the business.
Reconciliations of these non-GAAP measures can be found in our earnings presentation and financial supplement which are available and I are got a theme dotcom.
I'll now turn the call over to Jim Blarney.
Thanks, Noah and good morning, everyone.
Our robust fourth quarter results capped the year record adjusted operating earnings.
And record organic growth for a theme.
Strong operating performance combined with our focus on effective capital allocation.
As a powerful tandem and driving long term shareholder value.
2019 feature numerous accomplishments worth highlighting.
First our strong financial results drove 18% year over year growth in adjusted book value to $54 per share.
Exceeding our historical compound annual growth rate up 17% since inception.
This translated to a consolidated adjusted operating orally or 14% for the full year.
Achieving our target of at least mid teen returns.
Despite our excess equity capital and the challenging macro environment.
Second we demonstrated the strength of our multichannel distribution model generating record organic deposits of $18 billion at very attractive returns.
That were above our historical average.
While retail sales were impacted by low interest rates.
We more than made up for it with record deposits across our pension risk transfer inflow reinsurance channels.
And reemerging activity in funding agreements.
On the inorganic side, we remain disciplined in evaluating various opportunities.
And while there weren't any new deal announcements in 2019.
We acted strategically by laying the groundwork for potentially larger and more numerous transactions through the creation of MACRA.
As we have demonstrated in the past.
Our teams model has great potential for transformative growth.
When we were able to combine organic and inorganic growth simultaneously.
Third we continued our track record of top tier investment performance and yield generation.
Even in a low interest rate environment, we continue to achieve fixed income yield at a premium to the broader market.
Consistent with our philosophy as active asset managers.
The yield on our fixed income purchases in the year was 35 basis points higher net of fees.
Then the Triple B corporate index.
Over the course of the year, we invested more than $32 billion a flows the most we've never done.
One of the most important areas of focus that a theme today is working with our partners at Apollo.
The build out senior secured direct origination capabilities that generate attractive net investment spreads.
Without assuming incremental credit risk.
The latest example of the progress we've made the acquisition of a large aircraft lease portfolio from PK Air Finance.
Which closed in December.
In total we invested nearly $3.5 billion or 11% of our aggregate deployment.
In directly originated senior secured assets in 2019.
And we expect to bolster our origination capabilities to do significantly more volume in this area in 2020.
Finally, we took two important steps.
To bridge the gap between our superior operating performance.
And our discounted share price.
First.
We worked with our partners at Apollo to eliminate Athenes multi class year structure.
Over the past few months the market appears to have rewarded us for taking this important steps.
With both companies experiencing appreciation since the deal was announced.
We recently received shareholder approval for the proposed transaction.
And upon closing, which is expected to occur in the coming weeks at the end will be fully eligible for inclusion in a major S&P index such as the S&P 500.
Importantly, this transaction will broaden our appeal to a wider range of both active and passive investors.
We do view our investment in Apollo as strategic in nature, and look forward to participating and Apollo is robust growth profitability and yield characteristics.
Second, we judiciously allocated more than $900 million of capital for share repurchases.
Including nearly 300 million in the fourth quarter alone.
Which allowed us to Opportunistically secure high teens returns with virtually no execution risk.
Across our primary uses of capital today, we believe our undervalued stock is one of the best investments we can make.
And so we expect to restart our activity tomorrow, when our trading window opens.
Of course, we will continue to evaluate our pace on an opportunistic basis.
Balancing other deployment opportunities along the way such as accretive inorganic transactions.
When stepping back and reflecting on the environment in which we've been operating recently.
Our achievements in 2019 or even more significant.
As an operator, who drives profitability for manufacturing spread.
One might say our business is easier to execute in a higher interest rate environment.
However, a themes resilient business model is ideally positioned to thrive in a variety of interest rate and economic environments.
We do not require higher rates to deliver compelling earnings and book value growth.
And our performance over the past few years is a Prime example.
In 2019, the average yield on 10 year treasuries was approximately 20 basis points lower than it was in 2017.
So, although there's been relative peaks and troughs in rates during that time overall yield levels have declined.
Some may have expected our business to contract in this type of environment.
But in fact, the opposite as true.
As we employed our disciplined strategy grew profitably and reached new Heights.
Since 2017, adjusted operating EPS has compounded at nearly 14%.
Adjusted book value perfect per share has compounded at 19%.
Average net investment assets have compounded at 23%.
And we've generated record annual gross organic deposit activity and close to inorganic transactions.
These results demonstrate the fact that our ability to execute in thrive are not dependent on a higher rate environment.
I'd like to close my prepared remarks by quickly referral, reflecting on how far we've come in creating significant value for all our stakeholders.
As you May know at being celebrated its 10 year anniversary as a company in 2019.
In just a decade, we've grown from a grand total of seven employees with no clients.
To a public company with more than 1300 employees hundreds of thousands of customers.
And managing $120 billion of net invested assets, which have driven driven leading adjusted book value growth and returns.
Of course, none of this would be possible without our unwavering commitment to our shareholders employees and the communities in which we operate.
Which is at the core of everything we do.
As a recent example in January we published our inaugural corporate responsibility report.
Which highlights the many ways a theme is making an impact in the communities in which we work and live.
I'm very pleased that our mantra driven to do more deeply embedded in our culture.
That is why when it comes to corporate responsibility our team consistently strives to make a difference.
Volunteer service.
Philanthropic, giving and community outreach, which speaks volumes about who we are.
I encourage everyone to read the report which is available on our website.
And we look forward to making continued progress in this important area.
With that I'll turn the call over to bill to provide comments around liability origination activities and outlook.
Thanks, Jim.
Our fourth quarter results capped a strong year of organic growth for a theme.
Constraining the strength of our multichannel liability origination model.
As Jim mentioned, we generated growth organic deposits of 18 billion a record level I'm, 37% higher than 2018, driven by healthy activity across all our channels importantly, we did not sacrifice profitability to achieve record volume.
We continue to price Mi business fine with our historical mid to high teens return targets and then the end we rewarded for our discipline as the outcome was even better than our initial pricing indicated as we posted a record blended return on organic origination.
Provided you with some context on this activity as well as some insight on our outlook.
I'd like to share some detail by business channel.
Our retail business drove nearly 7 billion or close to 40% of our aggregate deposits from 2009.
And our targeted mid teens returns. So this was approximately 10% below the level we saw in the prior year.
The primary driver of lower sales was the result of a more muted overall sales activity in in the industry in the lower rate backdrop, coupled with a slow down and less profitable MYGA sales amid rising competition.
It's worth noting that enough I products, which are our core strengths and account for 90% of our retail business.
Sales for the year were down only modestly while we maintain discipline on pricing.
As we previewed on our prior call retail sales moderated in the fourth quarter due to prudent pricing actions, we made in the third quarter.
In interest rates depth and the impact of the lag effect will be associated slow down and new policy applications.
Looking ahead to 2020, we expect retail so could continue to face near term pressure as we maintain our pricing discipline in a competitive market.
However, we.
We are cautiously optimistic that recent favorable pricing adjustments made in February will benefit retail volume through the back half of the first quarter with further room to improve as the year progressive.
Importantly, we continue to expand our product distribution footprint, particularly among financial institutions.
For example, we signed 24, new broker dealer and bank relationships and Onboarded 19 during the year.
This concludes the household names like PNC Bank, BBM, Keybanc and LPL financial more recently.
Financial institution star comprise more than a quarter of our retail sales and we anticipate was channel could continue to grow with stronger near term growth like we would come from broker dealers.
Additionally, we are actively enhancing our product set.
As an example, we recently bolstered our fixed indexed annuity product offering with the addition of a NASDAQ index, which uses patent pending intra day balancing for increased efficiency and performance as well as the U.S. equity index, which is powered by I'd be EMS Watson artificial intelligence capabilities to identify invest.
Consider poised for growth within a broader large cap equity strategy.
This new first to market feature as a good example that constant product innovation, taking place with nothing.
We expect the addition of technology forward index designed to further strengthen our market leading a fight a franchise.
Overall, we remain confident in the fundamental strength of our retail business and expect to retain our position as an industry leader in the fixed index annuity market.
Turning to our PRC channel, we had a record year of pension Closeouts solidifying our position as a market leader, while generating attack attractive returns.
For the year, we closed 6 billion of transactions more than doubling the volumes in 2018 and significantly expanding our market share.
Importantly in the fourth quarter, we announced our inaugural PRT transaction in the UK.
Closing 2019 on a high though.
We're pleased with the completion of this initial step and we remain optimistic that the UK PR t. market could be an attractive long term growth opportunity for a theme, particularly given that the UK market as it currently transacting more annual volumes than the U.S.
Looking ahead, we expect overall PR key growth to remain healthy, although 2020 results could face a tough year over year comparable given the large Bristol Myers transaction and elevated overall industry volumes in 2019.
While it is too early to predict the deal volume for the year. The pipeline currently looks to be in decent shape.
Most importantly, we will maintain our pricing discipline, despite a competitive market environment.
And our third party flow reinsurance channel, we generated approximately 4 billion a volume for the year up more than 60% year over year.
As we expected the fourth quarter result of 1.2 billion rebounded substantially quarter over quarter and return to the strong levels. We saw in the first half of 2019.
This was in response to favorable pricing adjustments, we made in the third quarter and stronger volumes with key partnerships established within the past 18 months.
That said, we anticipate our go forward flow reinsurance farms will likely moderate from the particularly strong fourth quarter results as some partners adjust their quota share levels.
Positive though.
Beyond the Mets of several negotiations for potential new partnerships, which may provide upside in the back half of 2020 and beyond.
With respect to funding agreements, we issued a total of 1.3 billion in 2019, reflecting an improving spread environment that has not been in our favor for most of 2018.
Notably we issued our first of all of your funding agreement back note during the fourth quarter, which totaled 500, Brian.
In general the F. baby hands, we've done where the more common five year, but no five year maturity notes and so we were encouraged by the investor receptivity for a longer dated product, which pairs nicely with our longer term approach in managing our asset portfolio.
We are optimistic on the issuance pipeline for funding agreements and we have already begun to execute by closing a fix shuttered and 25 million issuance in January.
We anticipate 2020 volumes could meaningfully exceed 2019 particular, partially driven by a likely expansion into non U.S. dollar denominated deals.
In summary, we anticipate healthy organic activity to continue in 2020.
And be underwritten to targeted mid teens returns with mix likely more balanced across channels.
On the inorganic side, we continue to see opportunities to deploy our excess capital at attractive returns.
While we did not announce any inorganic transactions during the year, we actively evaluating numerous opportunities some of which were continuing to evaluate now.
Since we are unable to control the speed of M&A processes, and the willingness of Counterparties to transact.
It's difficult to determine the likelihood of and timing of transactions that might be consummated.
That said we are optimistic on the current pipeline and we believe we are well positioned as a preferred solutions provider.
In an industry that continues to go through significant restructuring.
As evidenced by several announced transactions and just the last few months.
We differentiate ourselves with our deep expertise swift execution capability.
An unmatched deployable capital position.
To date paid up is closed on 3.2 billion of third party capital commitments for investment into ACRA, and we anticipate additional commitments to be signed within the next couple of months.
Combining a theme standalone excess capital in bed capacity with third party Ada capital as well as the pro forma excess capital, we expect to generate from the strategic transaction with the Paulo.
We estimate the total deployable capital will approximate of approximately 8 billion.
Support nearly 100 billion of acquired liabilities, which we would expect to generate significant incremental run rate earnings power.
Now I'd like to turn the call over to Marty will discuss our financial results.
Thanks, Bill and good morning, everybody.
We delivered strong performance in the fourth quarter, including record adjusted operating income closing out a strong year for theme.
This morning, I'll walk you through our fourth quarter results and discuss how we view our forward earnings power, including some perspectives on 2020.
Before getting into the details as a reminder October 1st we closed the sale of 67% of ACRA through the third party investors in the aided fund, which resulted in 575 million of capital being transferred to a theme.
Exchange for the economic interest in approximately 6.1 billion of reserves for which the theme began earning fees as the manager of ACRA.
Our GAAP financials now include this non controlling interest.
Well our management the results focus on results for Thene on a net basis.
For example, you'll see that our disclosure now includes referenced two items such as gross invested assets, including the piece of ACRA attributable to third party investors and net invested assets, which aligns with the themes ownership on a standalone basis.
Importantly, the moving pieces in the quarter had relatively modest net reduction of roughly five cents per share on earnings results.
Which was mostly offset by share repurchase accretion.
Turning to our results for the quarter, we reported GAAP net income of $432 million or $2.42 per diluted share.
Our adjusted operating income excuse me.
Okay.
Available to common shareholders for the quarter was a record $389 million.
Our $2.21 per share, which drove a strong adjusted operating or are we have 16.7%.
Notable items totaled $47 million pre tax in the quarter, including 25 million of equity market impacts and $22 million a favorable actuarial update.
Excluding notable items total adjusted operating income was 346 million or $1.97 per share.
Our consolidated net investment earned rate or near in the quarter was 4.62%, which rebounded significantly from 4.35% in the third quarter.
As you may recall, the prior quarter was impacted by declining floating rate investment income as well as lower than expected discount accretion in RMBS portfolio from lower prepayments.
In the fourth quarter, we updated our RMBS model to adjust for prepayment speeds and improvement in the underlying credit profile, which we expect will lead to additional investment income on that portfolio over time.
These adjustments benefited our fixed income earned rate in a quarter as did hire bond call and bank loan income.
The tailwinds collectively amounted to 15 basis points, including about eight to 10 basis points, which we view as quite favorable in nature.
Lower floating rate investment income was a five basis point drag on the fixed income nearing the quarter.
Principally driven by 37 and 25.
At this point sequential declines in average one month and three month LIBOR rates respectively.
Which have trended down a bit more since year end.
As a reminder, 18% of our portfolio is in floating rate securities, mostly in COO, and RMBS assets, which have been meaningfully accretive to our investment spread over time.
So we anticipate quarterly upticks and Downticks of investment income depending on the movements in rates.
Corresponding impacts to crediting rates play out over several quarters.
Turning to our alternatives portfolio, we generated strong annualized returns of roughly 11%.
Particular strength in Venerable the private variable annuity company established as part of the Voya transaction.
As well as one means financial and various real estate investments are real asset investments.
Robust returns from vulnerable were driven in part by the payment of dividends significantly ahead of expectations as result of solid business performance.
Our alternative strategy remains differentiated in its makeup and is generated strong returns historically, although quarterly results vary.
Moving to the liability side, our total cost of funds for the fourth quarter was 2.73% of average invested assets in retirement services.
This reflects a 45 basis point decrease from the prior quarter, which is elevated due to an unfavorable impact from our annual actuarial assumption unlocking.
Within total cost of funds or cost of crediting decreased 13 basis points quarter over quarter, which was primarily driven by an approximately eight basis point reduction from a nonrecurring favorable actuarial update for reserves in our PRT business.
Our deferred annuity cost of crediting also decreased three basis points sequentially, driven primarily by rate actions and enforce renewals and run off of higher rate business.
In other liability costs, the rate decreased 32 basis points quarter over quarter, primarily reflecting a normalization from the third quarter result, which was impacted by our annual unlocking process.
As a reminder, last quarter, we revised our long term interest rate assumption to a rate, which is now about 100 basis points below the levels generally assumed in the life insurance industry.
This reflects our prudent and disciplined approach to underwriting and balance sheet management.
So if we were to bring our assumptions in line with the industry. There would be a very significant favorable impact on earnings measured in hundreds of millions of dollars.
Other liability costs also benefited from favorable ride reserves and DAC amortization.
As a result of strong equity market performance with the S&P 500 up 8.5% in the quarter.
Moving to operating expenses, the operating expense ratio in the fourth quarter was 30 basis points up three basis points quarter over quarter, primarily due to the timing of expenses and the decrease in average invested assets related to ACRA.
Despite the uptick in operating expenses as measured by dollars in the fourth quarter.
Full year 2019 expense ratio of 29 basis points declined four basis points year over year amounting to approximately $46 million the savings.
Lastly, as expected our tax rate in the quarter increased from the particularly low level in the third quarter fourth quarter adjusted operating tax rate of 11% was primarily driven by higher taxable income from a nonrecurring item.
As well as from a mix of onshore offshore business, which can fluctuate in any given quarter.
Turning to capital our capital ratios remained strong at the end of the year with Ale re estimated RBC ratio of 443%.
In the us estimated RBC ratio of 429%.
We ended the quarter with approximately 2 billion of excess capital and two and a half billion of untapped debt capacity.
Our and tapped debt capacity assumes repayment in the second quarter of approximately 475 million in short term financing, we drew down related to closing PK or finance.
Summing up our results 2018 was a year, where we continue to execute on our core strategy of profitable growth as our earnings power and to access to capital reached New Heights.
When you consider the substantial size or enforced block the ongoing benefits of our organic growth engine the opportunity for inorganic deals now further enhanced by Acura.
As well as accretion from opportunistic share repurchases.
We expect to generate solid earnings and book value growth in the year ahead.
Our current outlook for 2020 incorporates the following.
We expect our baseline fixed income near in the first quarter to normalize to a level, which excludes the 810 basis points, a favorable fourth quarter items I mentioned earlier.
As well as some additional drag of a couple of basis points from floaters given year to date declines.
Further we expect alternative returns of approximately 10% to 11% in 2020, excluding the performance of our investment in Apollo.
Given the favorable market conditions in the fourth quarter, we expect our alternative investments, which report on the lag to drive a stronger than usual first quarter.
On the deposit front, we expect organic volumes to be roughly similar to 2019 levels. Excluding the outsized to 2.6 billion Bristol Myers deal as we maintain our pricing discipline in the low interest rate environment.
We also expect Inforce decker minutes of approximately 9% to 10% consistent with recent trends.
Moving to cost of funds, we would anticipate the cost of crediting on deferred annuities to remain fairly stable to slightly lower with flexibility to move down further if theres continued pressure on interest rates.
For the institutional crediting rate, we expect to reach a normalized in the near term from an abnormally low fourth quarter to a level around the prior run rate of approximately 370 basis points on the existing business.
Another liability costs, we continue to view 100 basis points as a good quarterly run rate. Although the result can fluctuate quarter to quarter, depending on a variety of factors, including the level of gross profitability equity market performance and other actuarial experience updates and unlocking.
Regarding expenses, while we expect to benefit from our highly scalable platform over time.
Expense ratio in 2020 may remain roughly stable given the timing of the capitalization of certain expenses from prior years.
Costs related to accounting standard implementations, such as Cecil and Ldpr side.
As well as ongoing investments in process automation and other elements of infrastructure that we expected to drive additional efficiencies over time.
We expected tax rate of roughly 9% on a core business, although the actual results could vary significantly by quarter, depending on the mix of business ultimately generating profits.
Finally overall, we expect these components to drive an adjusted return on assets of 110 to 120 basis points. In addition to continued opportunistic share repurchase activity.
Finally, as Jim noted, we announced the strategic transaction with Apollo to close in the coming weeks.
In terms of near term financial impact, we anticipate that any gain or loss on required Apollo shares between announcement in closing will go directly into GAAP equity.
Subsequent Apollo share price changes the dividends reflected in investment income net of appropriate liquidity discounts and taxes.
We will be holding Nonlisted Apollo operating group or A.O.G. units. So we currently expect to apply a liquidity discount on a quarterly valuation.
In addition, as an AG equity holder in the underlying cash flows of the various Apollo partnership entities.
We currently anticipate than any appreciation and dividend income from Apollo will have an associated tax rate of approximately 20%.
Which will vary depending on the mix of results among the entities.
We expect the dividends in quarterly valuation changes on our strategic Apollo investment to repeat to be reflected in our corporate and other segment.
With that we'll now turn the call back to the operator and open the line for your questions.
At this time, if he would like to ask your question. Please press star one on your telephone keypad, if you wish to remove yourself from the Q you may do so by pressing the pound key.
We remind you to please on mute your line when introduce and if possible pick up your handset for optimal sound quality.
We appreciate all your interest in questions.
In order to ensure everyone. We seem to turn we ask that you. Please limit yourself to one question on the first go round and hop back in acute if you'd like to ask a follow up.
The first question is from Andrew quicker men with credit Suisse.
Hey, good morning.
First question is around.
One way.
Interest.
Our needs to two additional why do you think you said one rate would be seven we normalize we slipped to normalize might be.
We did see suites back down actuarial updates so on the institutional I'd, just like to get a sense of.
Just a little clarification on this can be 17, why you've seen saddle Butte level number and then it looks like.
Detailed crediting interest dropping off we did some the corner and I'm thinking going forward, one to two basis points quarter, we've been happy right.
Hey, Andrew it's Marty yes, so on the institutional side. It does move around I'd remind you that an institutional costa crediting.
It's really kind of impacts everything that's in there so for front agreements, it's basically the interest we pay and funding agreements.
For our PRT business.
It also includes that kind of implied investment credit on the on the reserves we have in any of the reserve changes in any mortality fluctuations that we may have quarter to quarter rumors is a little bit of longevity risk that a lot, but a little bit in PRT.
So, yes, I'd say that it bounces around a little bit a few basis points quarter to quarter in or in the PRT line in particular.
It could be in a normal quarter anywhere from 350 355 basis points to 370 375, we think threeseventy is probably a decent run rate with a few basis points volatility on either side of that.
On the deferred annuity side.
Yes, I think if rates held where they were right now we might expect the overall cost accrediting in deferred annuities to maybe go down like a basis point and so obviously if rates continue to drop through the year from these levels, we'd expect probably do your your point another couple of basis points of lift than maybe as much as giving that per key.
Order if rates kept going down from a combination of rate resets downward on business coming up for renewal as well as potentially lower hedging costs does that help.
Very helpful and then just on.
Share repurchases, so I actually build called out at the end.
Okay.
In the U.S dollars in.
Deployable capital capacity, so as I think about $640 million optimization does it it seems like an announcement.
We would likely be inclined to do.
To utilize glide this transaction activity. So maybe you could talk about.
Your inclination to deploy that and if possible potential time.
Yeah, Andrew the highest Jim.
[music].
Yes look out of repurchasing our shares as one of the highest and best uses of capital at the share prices.
I mentioned on the call that we find a back in the market the tomorrow.
And but it's all about the returns that we can achieve by buying back the shares.
And very successful in what we've done in the past, but we expect to.
Could you just judiciously allocate capital across our share repurchases.
Supporting organic growth and holding capital for ratings upgrades as we've said in the past with.
The inorganic capital kind of two thirds from our.
Eight it third party money.
One third of it hasn't come from us as well so yes, we.
We expect to be in the market repurchasing our shares going forward.
And the 640, you think you could deploy that this year.
All depends on the price and.
And which correlates to the return that we can generate test.
We're not going to give me.
Right how much because we have we have that much authorized that is correct. We could spend the duff the share price was low enough and provide attractive return we absolutely have the capacity to spend that this year Andrew.
And you considering the current share price slow.
Well, it's been moving around [laughter] pillow, but as left a little bit it was a day or two ago.
No I said look we seem to stocks doing today, and we expect to be in the market tomorrow buying shares.
Okay.
Thank you.
Ladies and gentlemen, as a friendly reminder, please limit yourself to one question. The next question will come from Ryan Krueger with KBW. Please go ahead.
Hi, Thanks, good morning.
Can you as we're now in 2020 can you give us an update on your expected.
Capital generation as you have I guess in the past for 2019.
Yes, it's Marty.
You know I think I'd expect that in 2020, we'd have roughly another.
Close to $2 billion of earnings coming off the in force.
Nomination of statutory earnings and.
Capital at least on the run off.
And then we've been typically investing about a billion dollars of that into organic.
So I would expect year over year, we'd have kind of a net increase maybe a 1 billion. We also may ramp up alternatives little bit, which uses up a little bit that excess capital, but you know I I'd expect Texas capital away from doing inorganic deals and away from share repurchases to grow.
Maybe half a billion dollars, maybe little bit more one thing I'd note is that in 2019, our full year statutory earnings and kind of a normalized basis were about 1 billion for so that's a really strong statutory earnings number considering how quickly will growing we continue to create very strong statutory results.
So net net would be.
Would be about 1 billion, but then there's some other impacts some offset.
Maybe a little bit less that yet maybe half a billion to 1 billion from activity, we see organic growth and investments somewhere in that neighborhood got it.
Thank you.
The next question will come from Brian Meredith would you be US. Please go ahead.
Thanks, guys. Good morning. This is my cord on for Brian Meredith.
Just another question on retail sales there are a little softer in Fourq, two which makes sense given those pricing actions and I think we can see that benefit kind of falling through cost of funds, but just wondering like for how long you would expect those those sales to be a little bit pressured in the retail channel.
I know you mentioned you expected.
The actions could help in the back half of I think one Q, but would you say kind of this level. This for Q levels, a good run rate going in in the near term.
I'd like it fell I actually think we'll probably do better than the Fourq you run rate, it's just how much better.
If you know our expectation is that.
Best case sales are probably flat year over year, which means the rough fourth quarter run rate would have to improve and I do expect that Pete.
Remember a couple of things happened this.
We don't have industry data yet for five days sales, but the anecdotal information is that the it was a soft quarter, which it often is when the stock market does really well.
Even though you've started to see a link to lower if I may sales and the market gets choppier, if I sell tend to improve when consumers remember that they can actually lose money and they might want that principle protected.
So I think they yoga, you'll see some improvement both in the overall macro environment for five days and then obviously I think our our results are going to look a little better too because of these relationships that we've sort of just implemented with some key distributors and also because we've just.
We took some pricing action here in February.
Thanks, That's helpful. And then just a quick follow up.
Just wondering if you could provide an update on the M&A pipeline I know you guys are always out there and evaluating potential deals, but just curious.
How maybe the macro environment is impacting valuations or how that pipeline looks relative to prior to the last few quarters. Thank you.
Sure well you know.
To some extent lower interest rates.
Obviously, lower valuations, which probably doesn't help doesn't help sellers too much but the reality is if you look at what we're working on and look at the are visible pipeline were quite busy.
And so there's still a lot of people who.
For oftentimes you are unique motives, one or restructure their company a want to get ahead of LPI.
Looking to generate capital so that they can do buybacks when valuations are low.
So there's reasons why people are still out there.
Considering transactions and that those are the motors. The people were looking at so I would say you know the pipeline is good.
The next question Michael.
Mike It's Marty one thing I might offer and your first question is that Bill commented on the rate pressures the impact on retail, but the flip side of that is that save environment, which may reduce volumes to some extent in or annuity business tends to be beneficial to the front agreements because of low spread tape.
It means moneygram has become a very attractive source of funds that we can actually right pretty profitable for an agreement notes in that environment. So.
Well, if theres any kind of pressure on retail sales and we don't know if there will be or not this early but.
Good chunk of that would be offset foreign agreements, we would expect.
The next question will come from Tom Gallagher with Evercore ISI. Please go ahead.
Good morning, Bill just a follow up on on your M&A comments, it's is still fair to assume that.
You'd be looking to deploy.
Most of your access into one big deal or a would you say you know it's a possibility you might do multiple midsized deals.
Hi.
No.
I think what makes us deliver unique in the M&A market because we're not the only people who are chasing these types of liabilities.
As we have the ability to do large transactions when almost we don't have we probably don't have zero competition for large transactions, but it's close.
So I would say you know.
Given that I think it's just it's hard to true up mid size deal is a big deal.
I think there's a good chance that will we may very well do a big deal.
And when we and we should be able to do it you know it.
You know at an attractive rate of return.
Because I think the competitive environment isn't that frothy at the high end so.
So I think you know the opportunity is clearly there for large transactions.
The next question will come from Alex Scott with Goldman Sachs.
Hey, good morning. This is roughly how we're going for Alex just a question on capital generation, if I just think about.
The Delta between the 2 billion of excess capital this quarter and 1.8 last quarter. After considering the 575 generated from MACRA and about 280 share repurchases.
Points still like a $100 million of net capital consumption from organic growth net of runoff and stat earnings, but I think there might have been some other moving pieces. There you could just provides some detailed the moving pieces that bridge that delta.
Sure a couple of other moving pieces was we had very strong that's great results from the fourth quarter.
Little stronger than usual and that kind of help the billion for that we have normalized overall, so that was probably close to $500 million in the quarter.
We also had a little bit of a an offset as we close out Decaire finance.
So we had the usual puts and takes what the putting business to work in inorganic.
And cap released on run off, but particularly strong stat earnings quarter, but then also and we had ACRA and the check from eight at that we got for that and then the other not typical thing, although we hope that becomes much more typical expect it was closing on things like Decaire finance.
The next question is from John Barnidge with Piper Sandler. Please go ahead.
Thanks can you talk about the PRP market in the UK, you closing nodule transaction and maybe how you see developing.
Sure John.
So.
Just to remind everybody you know a the pension closeout market or pension risk transfer in the UK is actually bigger market.
And it isn't the U.S.
There was a fairly limited number of players in that market.
And.
And that volumes I mean there.
There are challenged by how much capital they really have available to handle the volumes.
So they have a we've had conversations with everybody who participates in that market and I would say that would be consistent messages. We sure would like some other additional sources of capital via reinsurance.
Where we so that we can so that we can get ODU more business volume and and you know and get good returns.
And so that's how we're participating we're having discussions with all of these players in the UK market about how we can partner with them and bring in new pension volume as well as deal with other existing pension.
Transaction, we just did was.
Slightly different than that but but very similar where it was again a reinsurance transaction to Bermuda.
I would say what's interesting about this market is.
While the U.S. market feels very competitive right now.
And because I think everybody's woken up and realize this is a good market demand.
The UK market is doesnt feel is comprised it doesn't feel as competitive.
And it also started feels like it market, where we can run very good returns so.
To kind of back to Marty's pointed out this use this opportunity to say you know.
Yes, please don't think of Affinion as a fixed annuity company and that said you know this that we have multi channel distribution in different product categories different end markets.
And I view the two markets that are really got to help us this year about funding agreement up back now.
And the UK PRT business.
So I expect significant volumes, there expect significant volumes at attractive returns.
So at so that's thats exciting.
The next question is from Erik bass with Autonomous Research. Please go ahead.
Hi, Thank you.
Party when you're talking about a 110 120 basis points our away what are you assuming for the return on Apollo shares as part of that.
You know, we should really leave it to Apollo kinda give the guidance on how they think results to do what we've kind of assumed to sort of a long term return that's in line.
Maybe somewhat better but in line with our alternative results and then at this point as I've said earlier, we expect a tax rate is probably going to be around 20%, although it could be a little volatile as well some discount that we're likely to apply it but it was certainly in a return that.
You know if I did ballpark it in our long term assumptions is probably a pre tax basis close to 12%.
Pre tax pre discount and that's a combination of dividends as well as stock price change there, obviously stock price changes very hard to predict data can be somewhat volatile.
The next question is from Jamie Mueller with JP Morgan. Please go ahead.
Okay.
Hi, Good morning, So I had a question just first on.
This competition for in the retail sales market. How have you. If you could talk about but you have done in terms of crediting rates for retail annuity sales given the decline in interest rates.
And are you seeing competitors and produce crediting rates as well given the drop in rates.
Sure Jim <unk>.
So with regard to Mike as you know our our market crediting rates are now are so low they're not they're not very attractive and so our sales retail sales of mygas or.
Approaching zero [laughter]. So there are now indexed annuity business has different right at a you know between new products and some new pricing actions do you know in recent quarters remember I think on our my last caller said, if anything we probably overdone, the the pricing and we that we've sort of river.
For some of that.
You know as sort of the as the tenure as combat it still low but it's come down.
[noise] others have finally, followed suit in terms of crediting rates since and then so I think there you know <unk> the the playing field feels a little more level than it maybe that a couple of months ago that said you know it's hard to tell what's going out on that because it's clear that industry sales were lower in the fourth quarter.
And and so we'll have to life to see you know.
Oh 2020 shakes out from a macro perspective.
The next question is from Humphrey Lee with selling and partners. Please go ahead.
Money and thank him for taking my question is on appreciate the color in terms of the near I'll look and some of the moving pieces I think.
Drew down a little bit more further I'm looking at different asset classes classes like there's notable improvement quarter over quarter on the specifically for CMBS. So you talked about some of the changes from B.S., but I was just wondering if there's something kind of different for CMBS. This quarter in terms of the asset class.
Right.
Yeah, Humphrey, it's Marty, which you see in that CMBS rates that you're looking at is some of the bond call income that we had which was.
A little more favorable than we might typically expect a some of that came through in CMBS redemptions, and so that kind of popped up to near in CMBS in the fourth quarter. So that said that's kind of a tailwind.
We wouldn't expect to continue quite as much as part of the overall eight to 10 basis points of favorability that probably won't repeat necessarily.
The next question is from Suneet came up with Citi. Please go ahead.
Thanks, I guess from Marty just to walk through the outlook for 2020, it sounds like on the near side.
Results in the fourth quarter, where it will better than what you're guiding to in Threeq you. It sounds like maybe there's a change to.
The prepayment speeds.
And also I apologize if I recall, maybe you pick up your alternative return expectations for next year versus what we're expecting for this year. So.
You maintained your overall Aro a guidance of the 100 tend to hundred Twentys I just want to see if I have those pieces right and then are there some offsets that we should be thinking about or do you think you'll be more towards the upper end of that rate.
No you can you get those pieces right to need I think you know I don't think our expense ratio, which typically drops each year is going to really dropped this year as we're making some investments or get more efficiencies over time and we're adopting these.
Accounting things the other thing as they expect a slightly higher tax rate this year of call it 9% versus say, 8% in the quarter or any year really for 2018. So I think the combination of those things.
Slightly offsetting two or the other kind of good guys that you mentioned.
The next question is from Mark Hughes with Suntrust. Please go ahead.
Yes. Thank you good morning, the funding agreement sounds like.
The outlook is very healthy there could you talk about the kind of how much you've got in the near term pipeline and Ah kind of more broadly what is driving that.
Well before we have this call velocity was bragging about letting things.
Thank you for looking really bright future with somebody who is going to afterwards, Dave but they're a it's a.
Look we.
You know you.
Always hard to know how markets could turn on you later in the year, but right now it's a is an attractive market as we've had since we've done public would you agree with that too.
I would mark I would just add I think you should think of this funding agreement.
Product for us in three different pieces, there's the capital markets funding agreement back notes.
We talked about we get our for seven year most recently.
Five years, probably our sweet spot in general, but haven't done anything that three year spot in awhile and.
The easiest to execute can you can do it in size, but 357 antennas really the market for that.
Then there's the private.
Funding agreement issue to the federal home loan Bank.
Which is essentially secured borrowing at comes with higher returns because the cost of funding is lower.
Well, we're going to do some of that probably more of that this quarter than we've ever done.
And then there's.
Funding agreement is not pending of acknowledgment funding agreements.
Okay. That's the second sadness the third as non dollar currency.
Funding agreement back notes issued off our program that we've done none of yet.
But optimistic go we'll do some of that this quarter as well so those three pieces you.
We think we should execute on this quarter and that that leads to our optimism.
The next question is from Ian Ryan with Bank of America. Please go ahead.
Thank you for taking my question my questions on the minimum guarantees for deferred annuities. So if you look at the cap value of the.
Account of the accounts that actually at minimum guarantees it's declined a bit year over year I would've expected the percentage to kind of go up as you kind of take gradual rate action on the book just wanted to get some perspective on that and where you think thats trending.
Well, if it's pretty stable actually mainly because remember we're issuing new business all the time as well and art and we're not at men that right where.
Or whatever the market is at the moment so.
You know there's all this stuff, which is rolling off at a lot of that old stuff is really was all about you know all at minimum.
New stuff, we're selling today, which is not.
But you're right. We're also taking rate action on the existing enforce which is causing it to pick that well, there's really sort of three moving pieces here.
And and that's why it's.
Ill.
It actually probably got a little better this quarter.
The next question is from E. Lee screen Greenspan with Wells Fargo. Please go ahead.
Hi, Thanks. Good morning. My question is on backlog. So on you guys got the funding up there to 3.2 billion in the quarter I'm, assuming the goal is on to keep ways raising funds. There. If you can just provide an update and my second question would be within on the early guide you guys gave for 2020.
What's the assumption that you guys have further Steve jobs that you're going to earn on on Aquila.
So with regard to pack the fund raising that you know were 3.2 by then.
Having you know.
I would say kind of closing discussions with a couple other investors.
So we expect that number to grow.
You know.
The original goal was 4 billion.
I don't know quite get before not before we finally stopped but at all it will just kind of depend.
But they are but in our mind for effectively.
Right, we as we might raise some you know and we're moving forward we might right, we're certainly going to raise more than three too but.
When we get all the way to four idle now so that's kind of our that's kind of where that stands and then with regard to fees by the way I would just though we've already had close to 600 million of Aker capital or eight of capital I should say deployed into Acura with respect to management fee is actually had a couple of million the management fees in the four.
Third quarter or with the closing of ACRA sale, the eight up at the beginning this quarter.
You know, that's roughly 15 basis points on the reserves, where the aided shareholders have been beneficial interest and we'd get about 15 basis points and that the biggest driver of increases and that's going to be how ACRA grows and.
You know any guidance that we gave we didn't build in any inorganic transaction in that guidance, obviously, that's going to move around the guidance quite a lot. If there were a deal, particularly a large deal.
But it will we do expected PRT business that we do a good chunk of that most of those deals if not all those deals would go into ACRA, so, but I don't expect the fees by the ended the year in the absence of an inorganic deal to be all that oh that meaningful.
Maybe two to 3 million Bucks a quarter.
In the absence of a.
Inorganic transaction.
Our final question is a follow up from Tom Gallagher with Evercore ISI. Please go ahead.
Thanks, Yeah, Hey, Jim just a question on credit I noticed some other companies I cover have taken energy and some retail related credit impairments in the in the last quarter too and just curious what you all are seeing.
On the credit side, you know what kind of losses, you've seen I presume that haven't been large but is there I don't know can you quantify.
Both OTI T.I.s and realized losses that you've seen and.
What your outlook is heading into 2020 in any area state your particularly focused on.
Yeah sure Tom.
Look we think our portfolios in good shape, we've been I.
I think pretty vocal about.
Our efforts to upgrade in general the credit quality that portfolio.
Yes.
Buying.
More cingulate than we had in the past compare to triple B within Triple B is upgrading them to the higher levels of Triple B.
Yeah look I think Monday may add may add something on impairments, but but that in general they've been pretty consistent low levels, even with a growing portfolio.
I think in general our view, especially in our corporate portfolio Tom is.
Theres more risks to downgrade, meaning more capital of acquiring and there is to last for permanent impairments.
You know being investment grade public corporate bond space.
Most of the issuers are triple B, so to be in that space, you get olin's of triple B, but not on triple B ease of the same obviously and.
I can tell accompanied with high capital ratios et cetera. So.
There's nothing really noteworthy to comment on as far as our expectations of of losses is increasing.
Back that continuing to be diligent on continuing to upgrade the credit quality of the portfolio. It's Marty I would just noted for the year, we had a call it three basis points of impairments for the year call. It's in dollar terms radthree at nine Bucks most of that is actually in energy companies.
Another notable pharmaceutical on but I think you're right Tom in the fourth quarter, we didn't have any energy related impairments, but we did certainly see some of that earlier in the year and that's probably the biggest chunk of the three deeps that we had for the full year. Yeah. Just further to close out the comment within energy, 92% of our bonds and energy are any I see.
Two or higher.
And we really focused on the at the midstream space, which we think is that more insulated than others or is that a lot of recapitalisations going on in the space. So.
Look at it all the time, but we feel very good about energy exposure.
At this time I would like to turn the conference back over to NOLA gone for any closing comment.
Thanks, everyone for joining this morning, if you have any follow up questions regarding our results or anything discussed on todays call. Please reach out to myself or Soo Lee.
And we look forward to speaking with you all again next quarter. Thank you.
This does conclude todays seen holdings fourth quarter and full year 2019 earnings call and webcast. Please disconnect. Your lines at this time and have a wonderful day.
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