Q1 2020 Earnings Call
Good morning, My name is Laurie and they'll be were conference operator today at this time I would like to welcome everyone to be Athena first quarter 2020, <unk> earnings conference call and webcast. All participant lines have been placed any listen only mode to prevent any background noise. After the speakers.
Remarks, there will be a question and answer session. If you would like to ask the question at that time. Please press star one on your telephone keypad. If you should need operator assistance. Please press star zero.
I'll now turn the call over to know what gun head of Investor Relations. Please go ahead.
Thanks, Laurie and good morning, everyone welcome to our first quarter 2020 earnings call.
Joining me this morning, our Jim Belardi, Chairman and CEO, Bill Wheeler, President and Marty Klein, 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 do not revise or update such statements to reflect new information subsequent events or changes in strategy.
Please refer to our most recent quarterly and annual reports and other SEC filings for a discussion of the factors that could cause actual results to differ materially from those expressed or implied.
We'll be discussing certain non-GAAP measures on this call, which we believe a 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 at IR data theme dotcom.
With that I'll now turn the call over to Jim velocity.
Thanks, Noah and good morning, everybody.
Before discussing our business.
I'd like to start by acknowledging that we hope you and your families are healthy unsafe during these challenging times.
On behalf of our team, we'd like to extend our deepest thanks.
To all the health care professionals, and others, who are on the front lines are battling to covert 19 pandemic.
We are supporting their tremendous effort in various ways.
Including the recent donations of math to a local Des_moines hospital.
Near our U.S. had headquarters.
As well as leading a joint effort to purchase much needed ventilators for hospitals and Bermuda.
I'd also like to thank our team of more than 1300 Athene employees for their continued hard work and commitment to the company.
In the face of extraordinary circumstances.
The enduring stability of our business and our mission to provide retirement savings solutions for hundreds of thousands of our customers would not be possible without all of their individual contributions.
As we mentioned during our special Investor call in late March our team at a thiede rapidly adjusted to working remotely.
Crisis unfolded preserving crucial business continuity that has allowed us to remain fully operational over the past couple of months.
Our team remains focused on executing and serving our 1 million policyholders.
As well as our business partners at a high standard.
Clearly the extraordinary circumstances around cobot 19 out of related market volatility.
Has disrupted nearly every corner of the market.
Many companies are facing the reality that is zero revenue in the short run.
I have seen.
Our business model is structurally insulated from some of the pressures this crisis is causing.
For example, our value generating savings products provide consumers with principal protection features.
That have the durability to perform through economic disruptions.
We invest the assets backing policyholder guarantees and almost entirely indefinitely great assets.
And liabilities, we manage our long term persistent and low cost in nature.
By definition that seems core spread based business model is highly stable and predictable.
Sources of earnings volatility from several areas that you'd expect would have an impact on our first quarter results.
Should be viewed as transitory.
The reality is that the long term earnings power of our core business is growing.
Amid the current market volatility and should increase substantially as we deployed a significant amounts of capital.
That all disposal.
I think is one of the best capitalize business in the life and annuity industry.
And we have a growing amount of deployable capital firepower.
Which provides us with a very high degree of flexibility.
To be opportunistic for inorganic inorganic growth when it matters most.
In the meantime.
Our organic growth engine continues to originate strong volumes at very profitable returns.
Increasing market share despite heightened volatility had historically low interest rates.
Importantly, we continue to expect that any potential credit losses, resulting from this recessionary environment.
Well be manageable.
Given our strong excess capital position and superior financial flexibility.
I wanted to take a moment to comment on the market conditions heading into the March 31st quarter end.
Since our last earnings call on February 18th until March 23rd.
We saw equity market declines of more than 30%.
We saw a fourfold increase in volatility.
And we saw credit spreads blow out to levels not seen in recent years.
The week, leading into quarter end represented a bottom kicking of today's economic environment.
And while that impacted it marks on the temporary basis.
Given our low cost a stable funding our core earnings model. Nevertheless, outperformed during those two weeks of volatility.
We view this as a testament to the resiliency of a themes business model.
To that end, we wanted to provide you with a clear illustration of how to think about the core earnings power of the things model.
When markets are volatile the primary impact on our operating earnings will be a marking to market of our alternatives portfolio.
However, so long as the underlying positions are not impaired.
The mark to market as most appropriately viewed as a temporary phenomenon.
Rather than an indication of permanent impairment.
I have been through our alternatives portfolio in detail.
And I believe it isn't fundamentally sound shape.
In fact, we've already seen a very meaningful rebound in alternative asset values following quarter end.
Very consistent with what were you seeing what we're seeing happening more broadly.
Across the investment portfolio for reinsurance reinsured assets.
And the unrealized gain or loss position for the entire portfolio.
Marty will comment more about that later.
Normalizing for the impact of volatile equity markets alternatives.
Our other liability cost and our tax rate our business generated an attractive 18.5% return in the first quarter in our retirement services segment.
At this time are going to have the call over to Bill and then I'll be back to discuss other important topics rounding out performance and how we're positioning for offense in the current environment.
Ill.
Thanks, Jim.
As we communicated on our March 20, Threerd shareholder call I'm pleased to report that our business operations continue to function extraordinarily well under the circumstances.
Our efforts to source new liabilities through our organic channels for quite successful in the first quarter.
We generated new deposits of nearly 4 billion, resulting in a percent sequential growth driven by strong activity across all channels.
In the face of shark macroeconomic disruption in the latter part of the corridor as well as a historically low interest rate environment.
These results demonstrate the strength and resilience of our multichannel distribution model.
Importantly, we maintained our underwriting discipline by continuing to price new business to our targeted returns.
On an aggregate basis returns on organic deposits in the first quarter came at a high teens level above our mid teens pricing targets.
The primary driver behind this is our ability to invest in a wider spread environment against attractive funding costs.
Because we are well capitalized and maintain a consistent and growing presence in the marketplace.
You know serving as a source a strike for policyholders in reinsurance partners.
Our retail annuity and flow reinsurance business, whose combined to generate more than 2 billion of deposits in the quarter.
But it's worth highlighting that we observed more than half of these sales in March alone.
Mid recent peaks in volatility.
This confirms two of our longstanding assertions when equity markets exhibit choppiness and volatility spikes.
First the principal protection features in our core products become increasingly valuable to consumers and second competitors, who aren't as well capitalized or who's been mispricing product in the pursuit of market share gains will likely be forced the pullback meaningfully.
When these market conditions exist it plays to our strikes.
Importantly, consumer lapsing surrender behavior in our deferred annuity book continues to remain consistent with our normal course expectations.
If you look at the run off figure for the first quarter. It is identical to the year ago corridor.
So in summary, we think our combined production at retail in flow reinsurance can increase from first quarter levels and will likely support our organic growth in the near to medium term.
Turning to the institutional business, we generated nearly 2 billion of deposits ticket across our pension risk transfer in funding agreement channels.
And PR team, we continue to solidify our position as a market leader, while generating attractive returns across a range of transaction types and sizes.
Following the 1 billion dollar deal with Armstrong World Industries completed in February we closed a 230 million dollar transaction with a large packaging company in April.
Well, we remain active in bidding for transactions that come to market and believe we will win our fair share.
We are observing got the pipeline of industry activity is slowing them at the market downdraft.
As the funded status of their plans decline sponsors are less likely to transact, which leads us to believe that industry transaction volumes in the U.S. This year, maybe approximately half of what they were in 2019.
That said given the situation is fluid and plan sponsors could improve their funded status status with attractive financing available in today's market.
We believe that some part of the market will forge ahead to find a risk transfer solution.
In the UK market, where we recently made inroads we are continuing to make progress and expect that we can see another transaction sometime later this year.
Oh read of the UK market is that it may prove more resilient in terms of volumes in the U.S. Since UK plans are generally better hedged with regard respect to interest rates.
And plan Fiduciaries helped drive decision, making.
In terms of funny agreements, we completed approximately 800 million of activity in the first quarter, which has a very strong result, considering we issued 1.4 billion and all of 2019.
While we were optimistic about funding agreement back note issuances during the first half of these of this year the sharp decline in markets and associated spread widening has made it less attractive to issue.
If the rebound we observed in April continues and we experience for the recovery in spread tightening where we will be ready to return.
More broadly we see opportunities to remain active on the federal home loan bank side as well as explore opportunities with other institutions.
[noise] [noise] [laughter].
Well channel by channel dynamics will clearly very this year amid the market dislocation.
We anticipate our aggregate organic growth activity will continue to be strong.
Accordingly, we maintain our prior expectation that organic volumes in 2020 will be consistent with 2019 activity, excluding the outsized component of last year's PRT volume.
Or approximately 15 to 16 billion.
On the inorganic side, we continue to see significant opportunity to deploy our excess capital at attractive returns and we are actively evaluating opportunities.
Of course, we are unable to control the speed of M&A processes in the willingness of Counterparties to transact. So it's difficult to determine the likelihood and timing of transactions that might be consummated.
We were seeing a range of potential targets in the marketplace and for various reasons the market disruption, maybe having more or less of an impact on their ability to or desire to transact.
We are seeing some counterparties pull back and wait for economic clarity.
We're seeing other counterparties remain engaged despite the recent volatility because their desired outcome may be more strategic or long term accretive.
We are identifying some potential counterparties, who may want to transact as a result of the crisis.
With all these potential types of opportunities considered.
We remain optimistic on the current public.
We believe we are well positioned as a preferred solutions provider possessing deep expertise swift execution capabilities and significant deployable capital through our unique partnership inaccurate.
Now I'd like to turn the call over to Marty who will discuss our financial results.
Thanks, Bill good morning, everybody.
What are the key messages, we'd like to reinforce that view today is the theme has a very resilient business model with long term stability in firepower to support or existing business and drive additional growth.
We had value on the asset side of our business by generating Alpha in a book a well diversified fixed income oriented assets that we match against long term predictable liabilities, which are valued using prudent assumptions.
We support this activity without significant capital, which we aim to allocate effectively to drive long term shareholder value.
Now, let's walk through our first quarter results.
To assist in understanding we provided additional detail in our earnings presentation. This quarter.
After cutting through the noise created by market related impacts in the quarter, you'll see that the core spread based insurance business is performing solidly within a reasonable range of expectations.
The biggest variance versus expectations was driven by alternatives many of which were marked as of March 31st through the piano as Jim mentioned essentially bottom ticking the market environment.
Starting at the top of the income statement, our fixed income nears, our very stable within a relatively narrow band quarter over quarter impacts were driven by known factors, including a decline in short term interest rates as well as cash drag from the additional liquidity, we've chosen to hold in the current environment.
When evaluating the outlook for fixed income near we consider several drivers, including but not limited to implied forward interest rates.
Potential drag from holding additional liquidity and upside for more attractive on the margin investing spreads.
Given the slow rate environment, along with a high levels of liquidity, we're holding we estimate that fixed income here based on today's forward curve will be approximately 4% for the full year 2020.
Turning to alternatives as Jim described earlier, we believe our marks in the first quarter or temporary and do not reflect permanent impairment of those assets.
Economic values have rebounded since March 31st.
That said volatility from the first quarter environment will also be reflected in the second quarter due to the lag the timing of marks on approximately 60% of our portfolio.
Accordingly markets hold their current level, our best estimate is that the alternatives portfolio will be down 5% to 7% on annualized.
In the second quarter, principally driven by 10% to 12% headwind on the lag portion.
We currently expect that did not result of quarterly fluctuations in the first half for the year.
Including more normalize double digit returns in the back half suggest there alternative near maybe close to breakeven for the full year of 2020.
Moving next to cost of crediting well reported percentage was mostly flat to last quarter. We view this as a stable and downward trend in component of cost of funds.
Cost of crediting on deferred annuities declined by four basis points from the prior quarter driven by actions taken reflecting the low rate environment.
This was offset by a normalizing increase in cost of crediting on institutional products, which you'll recall benefited from a nonrecurring positive adjustment on our PR keep block in the fourth quarter.
Assuming implied forward interest rates, our best estimate is that total crediting costs will continue to drift downward by approximately five basis points by the end of the year.
For other liability costs, which represent the other component of cost of funds for our deferred annuities.
We observed quarterly fluctuations that can occur.
Significant short term market movements DTV deviating from a long term assumptions of annual equity value increases of about 6% annually can prompt more noticeable adjustments, which tend to bounce out overtime.
For example, when the S&P 500 jumped over 8% in the fourth quarter, we saw lower than average other liability costs.
With shark market declines this quarter of the liability costs were higher than normal.
On a normalized basis, we continue to expect baseline run rate for the liability costs to be approximately 1% of average invested assets.
Shifting from product related costs to our platform costs DNA expenses or another highly stable line item with a downward trend expected overtime.
As we grow or G.N. $8 grow, but more slowly because of the scalable nature of our platform.
The ratio of GE and $8 to our assets has been steadily declining over time.
When expressed as a ratio of average invested assets. We expect operating expenses will remain relatively stable around 28 basis points for the remainder of the year.
Shifting to taxes as a reminder, or tax rates a function of how much income we generally in our Bermuda subsidiaries versus our onshore subsidiaries.
During the first quarter, we had a higher percentage over profits in our onshore subsidiaries due to the lower profitability, we had in the quarter, which in turn drove a higher than normal tax rate of approximately 14% despite less dollars of actual tax being accrued.
Notably if we'd experienced more normal levels of operating earnings our tax rate would have been in line with our prior guidance of 9% to 10%.
Since our mix of business and our mix of income are being skewed by the market volatility and in particular the impact on alternatives. We expect our full year tax rate to be temporarily elevated around the mid to high teens level and revert back to roughly 10% or lower as the environment normalizes.
When we step back and put all these pieces together our normalized earnings power on the core business heading into the heading into the pandemic was trending above a record 1.3 billion of operating income we reported in 2019, reflecting a return of assets of approximately 110 to 120 basis points and a mid to high teens return.
And on equity.
This market environment has not changed our longer term expectations for this business. In fact, we may be able to add to further value from attractive inorganic opportunities and asset purchases in this environment.
As well as from continued steady organic growth at our target returns or better as we saw this quarter.
As you know we closed our previously announced transaction with our strategic partner Apollo at the end of February.
We now own and 7% equity interest in Apollo operating group entities or A.O.G.
Not withstanding volatility we experienced in March this is a strategic asset that provided us with approximately $1 billion a capital on the even if the market turmoil. So it was well timed.
Our equity interest in it with GE is mark to market and the after tax impact if any change in fair value is accounted for in a single line item within our operating results.
The price of oppose publicly traded common stock provides the basis for evaluating our investment in the energy units.
From the close of the transaction through March 30, Onest Apollo share price declined approximately $9 per share.
In addition liquidity discount of 13% was applied given the heightened volatility.
Net of a tax benefit amounting to approximately 20%.
The mark to market impact of our stake was $239 million in the quarter or $1.36 per share.
Through yesterday Apollo share prices rebounded entirely implying a recapture of approximately 195 million or one dollar per share net at a similar liquidity just discount in tax considerations.
Before handing the call the Jim I'd like to provide some context or non operating results given the sizable declined in the quarter.
The largest driver within non operating results in the quarter is the investment gains and losses line item generally speaking for insurance companies fixed income portfolios impact earnings on a book value basis, the changes in value running through AOCI right, but not the income statement.
However for business, we have originated through reinsurance even on the economics are the same as direct written business changes in the value of fixed income securities are reflected in net income.
While required under GAAP reporting this treatment is both a logical and inconsistent with the treatment for directly written business and further it has zero impact on the earnings power of the business or our capital position.
This impact roughly 25 billion of assets, we've reinsured to the previously announced Voya and Lincoln transactions as well as from other counterparties in or flow reinsurance channel.
During the first quarter, we saw a sizable mark to market decrease in the value of the assets, we reinsure consistent with our overall portfolio.
This draw the 1.3 billion dollar mark to market decline.
Which is reflected in net income below the operating income line.
At quarter end, we've seen this number rebound significantly as it has for our available for sale securities portfolio.
For the month of April we estimate the change in fair value of reinsurance assets is an increase of approximately $600 million and those assets are now in unrealized gain position of almost $100 million.
We reflect these marks and net income is nonoperating item and we exclude these marks from adjusted book value as we do for AOCI.
The fair value of our available for sale Securities remarks are reflected in AOCI Guy has also rebounded from March 31st levels, increasing by approximately $2.6 billion at the end of April to an unrealized gain position of about $400 million.
We've also adopted this quarter, the new gap standards diesel, which requires setting up a provision for future potential credit losses, not just those incurred.
Limiting the standard caused our provision for credit losses to increase.
But note that are actually experienced a TTR this quarter was consistent with our past experience I.
I'll now turn the call back over to Jim.
Yeah. Thanks Marty.
We have three more topics I'd like to touch on before we take your questions, including our alternatives portfolio.
A reminder of our stress scenarios.
And finally capital, including our preparations for offense.
As you know approximately 5% of our 120 billion dollar investment portfolio is in credit oriented cash flowing alternative investments.
And allocation, which is in line with the industry average.
While our waiting and alternatives, maybe similar to others.
We employ a differentiated strategy that has a defensive orientation.
And is less prone to binary outcomes.
That's a some element of downside protection.
And emphasize it investments in operating companies.
Versus purely third party managed commingled funds.
During the first quarter are also and I are was modestly negative.
Howard This does not reflect the true economics of what we saw since a significant portion of our office portfolios marked on the lag basis as Marty described.
We estimate that if we were to Mark all are all saw a real time basis in the first quarter.
The markdown would've been about 10% on on annualized basis.
Which compares favorably to the performance of benchmark indicate indicators, such as equity markets being down 20%.
In high yield bonds down 9%.
Therefore alternative investments performed very much in line with fixed income indices.
And vastly outperform equity indices in the period.
Which is a testament to our strategy and consistent with our expectations.
[noise] fundamentally we believe the long term outlook for alternative portfolio is excellent.
And our larger positions to drive that view.
At Amerihome, the first quarter was the most profitable quarter in their history.
As they benefited from heightened refinance activity in origination volumes.
Mid cap.
Middle market lender is currently benefiting from its focus on senior secured positions in the capital structure.
And from having dealt ample liquidity to whether the current downturn.
Teekay Air Finance, our aircraft lessor position.
Benefits from an attractive detach point in the mid Fiftys LTV to metal value and the underlying aircraft.
And ample liquidity to sustain the current economy.
In the current economy.
Our triple net lease portfolio within our real estate allocation is defensively positioned.
With tenant concentration connected to household staples, such as grocery in pharmacy.
And lastly.
Our portfolio of strategic Stakes in insurance companies continues to hold up well.
Catalina PNC reinsurer has seen low instances a permanent loss.
And the underlying business model remains intact and unaffected by coal, but thus far.
General the variable annuity company expects to no degradation in book value.
A testament to the hedging strategy employed by that team.
And the flora, which is viewed by some.
As an earlier stage a theme in continental Europe.
Close their transform a transformative acquisition of Vivox in early April.
Raise more capital to pursue additional growth.
And it actually posted a significant mark to market solvency gain in the current environment.
In summary.
We remain very confident in the strength of our office portfolio and expect these mark to market fluctuations to be temporary.
Rather than permanent impairment.
This brings us to the big question, which many of you are likely wondering.
Well, where well markets and the economy go from here.
As it relates to our business, we're intently focused on this question.
And probably most acutely when it comes to risk.
In our presentation materials. We included two important summary, slide that we shared with you in late March.
Which summarizes the stress inputs, we applied to our portfolio.
And the potential OTI tie that could emerge over time.
We have a couple important caveats. These O T I M backs do not assume potential offsets from intervening management actions.
Andy that they do not factor in the offset from earnings through the recognition period.
Both of which.
We'll be meaningful.
While we aren't any better than you have predicting the ultimate severity and length of the current dislocation.
We believe our various assumptions in the stress our relevant.
Through the lens of past economic stress.
Our analysis illustrates that potential OTI T.I. without mitigating factors.
Total $1 billion net of offsets in a baseline recession case and 2 billion.
Net of offsets in a deep recession case, implying cumulative losses of 1% to 2% of net invested assets.
I'd like to reiterate that we will actively manage our way through this challenging environment and there was no doubt, we'll see some level of O T I.
In a recessionary environment as well as well all insurance companies.
However, our team is confident that the level of old <unk> at a theme will be within our risk appetite.
And you could be comforted that we have been extremely transparent around this topic and provided the same information to our board regulators and rating agencies.
To understand why we are confident in our ability to whether the current environment.
It's important to understand that we manage our business with significant excess capital and low leverage.
Today, we benefit from a ratings and over $12 billion or statutory capital.
Our ratio of statutory capital to reserves.
His more than 30% greater than the industry average.
Included within our statutory capital is $2.7 billion of excess equity capital.
Which represents cushion above and beyond our targeted 370% RBC ratio.
We had approximately $7.5 billion of deployable capital.
Which includes the 2.7 billion in excess equity capital I just mentioned.
Plus 2.3 billion of unused debt capacity.
And over 2.4 billion of Undrawn third party capital in our strategic Sidecar vehicle Acura.
In addition, we have approximately $909 preferred equity capacity.
We are significantly under levered with a debt to capital debt to adjusted capital ratio of 12%.
Which is approximately half the level of higher rated a plus and double a minus peers.
Our untapped debt capacity of 2.3 billion if utilized.
We'd only increase our leverage to the industry average level of approximately 25%.
Beyond our historical practice of managing the business conservatively one of the primary reasons a theme has such a strong capital position today.
Because we had been actively preparing for dislocation.
Between forming an innovative sidecar solution.
Completing two cost affected preferred offerings.
Executing to strategic transaction with Apollo.
And our recent parent debt deal in total we opportunistically raised approximately $6 billion of capital.
In less than 18 months.
We also feel very good about our liquidity position.
We brought in record cash through organic growth last year and the strength continued in the first quarter.
Outflows from normal course run off our stable.
We ended the quarter with more than 5 billion of cash.
Which provides the foundation for nearly $7 billion of total liquidity at the end of April.
Nevertheless, given the importance of liquidity to any business.
We are proactively looking to supplement our amount of immediately available liquidity.
Targeting $10 billion, which we are on track to hit in the next two months.
Our significant pool of liquidity a supplement it further by 33 billion dollar portfolio of liquid public corporates.
Hoarding Capitol building liquidity and re underwriting our investment portfolio are examples of intentional maneuvers on our part.
To position ourselves defensively.
While also preparing for off hubs.
As bill touched on earlier I first steps on offense will be to capture the healthy safe returns.
That are available and today's dislocated markets.
Our strong on the margin inflows.
Have been investing some of these dislocated assets and we anticipate more of this in the weeks and months to come.
With very attractive funding costs unsafe assets operating wider yield.
Our recent on the margin net investment spread is approximately 35% better.
Then it was on average in the first quarter.
As you know.
We founded the company in the wake up market turmoil.
And we took advantage of acquisition opportunities in the period that followed the 2008 2009 financial crisis.
Armed with a significant capital resources I just described.
Including almost seven and a half doing enough deployable capital.
We have the ability to add nearly $90 billion of growth to our existing platform of nearly $130 billion of growth invested assets.
None of this upside.
None is currently reflected in our stock price.
While the opportunity to create value will change month by month or even week by week in today's market.
Guiding principle remain the same.
Be disciplined stewards of capital focusing on appropriate returns and be as flexible as possible to respond to the shifting market conditions.
Given that we have generated book value growth of 16% annually.
We believe this strategy has served us.
And our shareholders very well.
Thank you and I'd now like to turn the call over to the operator to begin the Q and a portion of today's call.
Thank you at this time, if you would like to ask your question. Please press star one on your telephone keypad. If you wish for MS yourself from the Q you may do so by pressing the pound key we remind you to please UN mute your line when introduced and if possible pick up your handset for optimal sound quality in order to ensure.
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Your first question comes from the line of Erik bass of Autonomous research.
Hi, Thank you I'm can you talk about your views on the real estate market and your exposures and risks across the portfolio, particularly in the alternatives and on the commercial mortgage loans.
Sure.
Sure Hi, Eric.
We have a 16 billion dollar commercial mortgage loan portfolio.
The average loan to value on that portfolio, 60%.
[noise].
73 quarters of that portfolio is it.
Yes, pretty predictable residential office industrial mixed use health care and self storage space.
As far as.
So it's been a very high performing well performing portfolio stable.
Some we've acquired a you know two acquisitions.
As I mentioned low loan to value.
As far as a current comment.
In April.
<unk> expenses were paid and collections were received on 99.7% of the portfolio.
And we expect in May based on what we see so far that another 99% of the monthly payments do would be collected what would be collected then.
So all in all we think very I can think that's in a very good position and very good shape.
The two areas that particular concern our hospitality and retail.
And in hospitality.
We are kind of about 10% of the portfolio there the loan to value there is a low 54%.
And in retail we had about 16% of the portfolio there.
And the loan to value there was even lower at 53%.
You know if if we were going to see impairments, they would probably be and those two areas.
But I think there oh well covered in in the allocation and the set up that we've already had through seasonal.
Your next question comes from the line of Tom Gallagher of Evercore.
Thanks.
Jim So far we we've heard most of the life insurers say they think the majority of.
Credit will be a ratings migration and non impairments I mean in mind and my view that seems pretty optimistic given the level of uncertainty here.
Curious what you're thinking on that is.
At a high level and I guess, just also to focus on your stress loss scenarios.
You know to the earlier question I take a lot of people are focused on commercial mortgage loans I think you address that.
But that and yellows have gotten a lot of attention, but that's a very small piece of your expected stress losses.
And I guess, just sorry for rambling, but the final piece to this when I hear you say, you're improving liquidity to 10 billion. I think previously you were talking about 5 billion that sounds certainly more cautious on credit but.
Anyway, any any thoughts you have on this topic should be helpful. Thanks.
Yeah, maybe I'll go on just a random order Tom.
Thanks for the question.
Look our building of liquidity I think we may have used the $10 billion number as well and the March 25th.
Presentation.
We are building too and that's still there still the case, that's just part of.
Playing defense first, but but we're playing offense now too much we can talk about a little bit more.
Regarding.
Impairments versus downgrades look I think.
I think we would agree if that's been the market sentiment from insurance companies.
We have more risk to downgrades than we do do impairments.
And any impairments that will come.
Well I think both whether there's downgrades in causes more capital D.A.
Allocated.
And our permanent impairments I think we're well protected with our capital position, we've done I think aggressive and allocating the potential for losses and in Cecil and you know as we speak ROTC I continued to be very low as Marty said so.
Look you know we.
We've entered.
We prepared for this dislocation for a while we think we know how to handle this is how we were in the middle and when we started our company 12 years ago never be perfectly prepared but I think we're in really good position now and we're ready to play offense now.
So.
While we play defense, we think were covered in general <unk> allocations on liquidity in our capital position, but but we're ready to play offense, though.
Hey, Jim It's Marty I would just add could you referenced c. So a couple of times in is I think folks know cecil's, the new accounting standard or interesting time to implement a new accounting standard on credit losses.
But listen you know as Jim said in his remarks, we don't really know better than anybody else, who is going to have that economy, but it seems very clear to us that we're in a recession, 15% unemployment and month of April or close to it. So weve provided for that in our financials through a Cecil reserves. So at this point in our first quarter, we have fully baked in future.
Credit losses future impairments of over $500 million that is reflected in our net income results and our GAAP equity that's pretty much in line with the a baseline recession scenario a risk guys had that overall losses. The Jim's quoted is not just.
Fixed income a loans is also alternatives. So if you look at that stress scenario.
Oh that calls for about $600 million and impairments and we basically book to close to that in our GAAP financials as we speak so yeah, we'll have to see what happens obviously, if the environment proves will have good guys that come through the quarter. If we are in fact in a recession as we think we are and we haven't permits we've already provided for.
Over 500 million of that in our financials.
Just want to make sure folks understand that 'cause seasonals, a new thing for folks and companies aren't talking about it hold I don't recall.
Your next question comes mine of Ryan Krueger of KBW.
Hi, Thanks, good morning.
I need the 4% fixed income yield expected for 2020 can you.
Say how much of a.
Drag there is from the excess liquidity are holding and then also.
Just on the a clarification on the five basis point decline in cost of credit and is that relative to 2019 or relative to the first quarter. Thank you. So I had Marty.
Thanks, Jim I'm sure Ryan you're doing well.
So on fixed income you know we were at 420 for this quarter, we expect will be about 4% for the full year, obviously, it's a bit of a fluid environment, but we think it's pretty predictable and there's really two drivers primarily one is.
The decrease in interest rates, which are kind of expecting to kind of remain at these levels looking at the forward curve and really is also sitting on a fair amount of cash. We've got we're assuming we're going to sit on you know probably $5 billion or so of cash probably more than that as the year progresses. So I think that overall, 4% for the.
Full year is really.
Kind of almost equally split between just lower rates, which will impact our floating rate income and additional cash drag or the cash correct, obviously in our control.
We might as if things get a whole lot better and we might find opportunities to invest maybe that will go down but our view right. Now is that will hold a lot of liquidity throughout the full year and that's how we get that 4% overall.
On the cost of crediting question, a that five basis point decline over the years really from the first quarter level.
Your next question comes from the line of John Barnidge of Piper Sandler.
Yeah. Many companies have discloser mortality morbidity sensitivities from 100000 U.S. Das can you provide your sensitivity on the longevity risk in PRT, because I believe it will be a benefit.
Bill Yeah.
Yes, it is probably going to be a benefit.
Yep.
But I don't think it's gonna be very material.
And and I think time will tell you know we've been sort of debating this internally about how much of this how much are we going to see in terms of him.
Improved longevity and and I just don't.
I, just don't know how much to put up against it yet the obviously the you know there's there are more movements in mortality.
But will they really affect our enforce very much.
I think were more skeptical.
Your next question comes from the line of Andrew <unk> of Credit Suisse.
Hey, good morning.
So so Jim you talked about the ability to play off since then you also mentioned.
Wanting to hold about 10 billion insecurity and then you did a terrific 319 million share repurchases in the quarter first quarter. So I'm wondering what the timeline and an appetite is for share repurchases as your stock trades at roughly 50% of book going forward for the year.
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Yeah, Hi, Andrew Thanks for the question Yeah look.
The returns you get from buying back your shares that at these prices is extraordinary but I and we recognize that then we have over $300 million of available authorized capacity to.
Do additional stock buyback, but we have done a material amount in the past.
And we continue evaluate that going forward, but like worst cells.
So it's early innings to maybe.
Mid innings and in this whole.
Global crisis and pandemic and.
We're not wanting to rush to do anything that's essentially outside our business model and a button that guy we recognize the compelling value in our shares.
And we'll factor that into uses of capital as we always do and.
And evaluated on a consistent basis, but yeah. We are still we think early to mid innings in <unk> in the crisis here.
And we keep that in mind.
Your next question comes from the line of Alex <unk> of Goldman Sachs.
Hi, good morning.
First question I had was on the commercial mortgage loans I think some of the company is at the given disclosure around forbearance and how much has been requested a in granted through April as soon as just interested if you if you provide any clarity there.
Yeah, Alex I I mentioned before maybe it doesn't answer your question, particularly but in April 99.7% of expected payments were received and so far in a commercial mortgage portfolio and right now may we expect another 99% to be received so.
I haven't seen much fall go through our portfolio right now and people are paying so and entities are paying right now.
Your next question comes minus the lease Greenspan Wells Fargo.
Hi, Good morning My question.
Prepared remarks.
Thank you too.
Total deposits on kind of being.
In mind.
Curious level.
You know kind of outside PRT volume, which is in line with the commentary hide kind of gave us last quarter, but.
But it sounds like.
Some.
Headwinds on PRT.
Some of that PRT in the funding back no. So I'm just trying to get a sense of the parties in the polls on why changes is that.
The deposits in the retail channel or a bit better than what you thought you can just kind of help help me triangulate that a little bit better. Thank you.
Yeah Bill.
Yeah.
Hi lease they are.
I think region, our run rate in retail is gonna be higher than what we did in the first quarter. I mean, you know as much as you can predict if you just look at.
March and April were clearly a.
Where we're clearly clicking on a pretty good level.
I would guess at the end of the day, even if cautiously.
Off electronic platforms, and so or virtual <unk>, you know virtual purchases if you will so it's.
So that's part of the reason we're so strong as an obviously are are are the rates were working you know providing dark counterparties, they're also attractive.
So <unk>.
Flow is clearly going to be better it's just a matter of how much better.
We were fairly conscious into pension business in terms of what we forecasted for the year.
And and unfortunately, that's going to turn out to be I think of a pretty accurate. So even though I'm I'm I'm kind of pessimistic on pension volume's in the U.S. at least I do think it's.
I I do think that they're going to be.
Roughly consistent are activity will be roughly consistent with our plan.
And then with regard to funding grievance S.A.B.N.'s are yeah. The F.B.B.N. market is clearly weaker but that but we're going to do a lot of issuance with the federal home loan bank and and it's and what kind of those those deals are always very attractive for us and so.
That might make up for it and even though volumes and overall for S.A.B.N.'s or for you know funding agreement related transactions might be.
Slightly lower the margins are probably going to be better.
So so that's a little bit why we're staying consistent with you know our previous forecast to 15 to 16 billion.
I kind of youth I Kinda think there's more upside there than that side.
[noise] My next question.
<unk>.
Yelling and partners.
Good morning thinking of taking my question.
Smoking is you're totally pockets called a quarter.
Doesn't look like returns for some of the T.I.T. <unk> this time around.
I was just wondering you can provide some color on the rationale.
Yeah.
Yeah sure I forget.
It's a two step process. It you know even though we have an agreement to give a ACRA first look on P.R.T.D.L.'s. They don't always take them that they were a couple they didn't take last year, either they tend not to be.
Deals that I say are you know low risk right. You know total retiree deals very straightforward plan design you know so the rest levels are low and therefore, a pricing is consistent with that.
No accurate doesn't you know reflect that so much they're they're kind of just looking at you know their overall returns you know net of you know the fees they get paid so occasionally they find a P.R.T. deal that they they think doesn't quite meet their criteria, but we're still comfortable with it and that would and that was clear.
The case with the Armstrong deal that we did in the first quarter very straightforward transaction.
They want that will always be the case, though you know we tend to do better in pension deals, where there's a little more complexity and and and frankly, we get generally get better returns there and so I I think accurate will probably take more P.R.T. deals going forward.
Oh My next question.
Yeah.
Thanks, guys. This is this is Mike word on for Brian.
I just had a question on <unk>. So my understanding is that a portion of the kinda triple see loans in average yellow is now almost tall per cent, which is kind of like above this threshold that triggers a overcollateralization tests just curious if it could comment on how your seal those might be performing because it seems like.
The values that men coming down not just for you guys, but you know more so than corporate bonds and I think that's kinda, reflecting the idea that the loans underneath them are often from smaller private equity sponsor businesses and not really supported by set actions. So just kind of curious your thoughts on how seal those are doing.
Yeah. Thanks, Mike.
So.
Sales are not not mark to market.
To our income statement.
Alternatives are but.
Obviously do marked and just in general for intelligence et cetera, Yeah. When we are any.
Oh.
Space, we noticed Gandhi volatility in marks.
<unk> is that going to be permanent impairment and.
We don't see permanent impairments an hour channel portfolio, a very senior in the capital structure, how many large degree if subordination below us.
We we do expect to see some downgrade and we have any most anymore of the underlying collateral.
So again, especially when my previous comments.
<unk> overall portfolio, we'll see some experiments more more of a capital requirement. We think is for us again to come from downgrades, which we're prepared to handle.
And that.
The case as well with yellows don't let me see much if any permanent apparently now she a little portfolio.
Just in general high quality, we have almost nothing and investment grade and not investment grade it's all.
General high quality and for the whole portfolio highly rated.
But you know the unlikely at all it's going to suffer some downgrades and and we and then the structures can be downgrading at some point as well but.
But and that's that's what I would say, it's more of a downgrade rest on a permanent apparently risk.
The next question.
<unk>.
<unk>.
I think the morning, just linear supplement it looks like mid cap was marked down about seven per cent into quarters. So curious what was going on there and then related to P. care finance, Yeah, we didn't notice that another here at least company signal that up.
Larger percentage of their lessees were differing payments at least in part just curious what you're seeing if you're seeing something similar in terms of that you care finance. Thanks.
Yeah, she or something <unk> for mid cap.
[noise] marked down there.
Some loan losses.
Expectation plus comparable or [noise].
Using a higher discount rate to cash to discount cash flows.
And the cat actually [noise] race, an equity here as we speak as an insurance policy getting in the range of possible economic outcomes.
And also generates liquidity you know that help with an unprecedented voluntarily.
But make caps doing great and by the way of being participated in that most recent.
Equity offering by mid cap and.
We thought it was probably the best risk return trade off in the alternative space, we see so that's a <unk>.
Evidence of mid cap, playing defense and before they pay more offhand, but.
<unk>, we think as we speak mid cap is earning at a double digit rate.
Right now and going forward that's that's after the.
And a relatively small right down we took in the first quarter. So we think it's very healthy and.
It's a big part of our our business.
Well, what what was yet Oh, then on P.K.
Yeah, that's performing very well even under their severely adverse stressed scenario, we don't see any of the investment away Traunches, which is most of what we did taking a write down and even in that and we also have a ballpark 300 million alternative in that P.K. or finance portfolio.
Even in a severely adverse stress tests and they're already run we still see a positive yield of just under 9% from the old under that very difficult scenario.
Of the keys. There is this p. care finance, you know where we're not.
We don't all in the planes you know, we're a lender to lessen words, if you will so we have to.
Layers of defense before we we would get hit both the airline has to default as well as the the last summer has to.
Has to walk away and with a attachment point and testing L.T.V.L.T.V. in the mid fifties, we have a lot of cushion and and support below us. So you know really good about P.K. and is performing as we would expect it to.
<unk>, Jim I've, just add on on a mid cap that they had the same phenomenon that we did where with this new Cecil guidance you'd have to provide a provision for future credit losses that was really the big driver for Midcaps declines just that provision for future.
So it's kind of that accounting change if you will.
[noise], we're next question.
Tom Gallagher I've ever core.
Thanks, just I know you would previously indicated that did the M&A transactions, you're considering are on the large side. How how we are you still thinking that way and how are you thinking about balancing out having all this dry powder.
And then you know if you do deploy a substantial capital into a deal potentially your capital becomes more vulnerable just in case credit really does deteriorate more more substantially thanks.
No problem, Tom as far as a second question go ahead, they'll just kidding.
<unk> <unk> <unk>, yes, we are focused on large deals.
I will say you know, even you know even given what sort of in our line of sight.
The capital that we would deploy it is still very comfortably in our wheelhouse remember two thirds of the capital that we are.
Putting forward on a transaction actually will come from act outside ACRA investors, you know and so so in terms of you know depleting our cushion to do other transactions. It's it won't be as impactful, but the reality is is we're holding so much capital now that it it would be damn hard to.
Put it all and and and do a single deal, but where but you know it's.
You know the deal environments, especially for Big transactions, you know, we think is very attractive and.
And the outlook is good.
Or next question comes from the line of Andrew quicker than I've credits. Please.
Okay. Thank you for getting me back you and I just want to finish my first question <unk>. It sounded to me like you were.
You were being cautious in that you're not turning lost this year repurchases that you're you're monitoring the situation and.
And that you know you very well could do buybacks. It just seems like you you're being cautious in money <unk> the moment, but we could potentially see something in the second quarter is that the proper read.
Yeah, I think that's right yeah, potentially we haven't committed to do any more as we speak.
Think we turn it off from the right reasons.
In the crisis and.
And we're still in the crisis, but that's right and who I mean, we're trying to be you know flexible and how we deploy capital.
You know prudent stewards of our capital when you do have a lot of it. So it gives us a lot of options and but yeah, absolutely that that's still under consideration.
Your final question today will come down the line of Alex Scott of Goldman Sachs.
You think sticking to follow just had one more on the credit side, you know I think when when we do our various screens your portfolio or you know one of the things that stands out as just the allocation to private.
First public debt and I'd just be interested to hear any commentary on you know how that's performing.
There's anything unique about you know the way the pandemics impacting small businesses and your exposure there as a result of having more private debt, how you'd expect that to play out and you know to the extent of that's all factored into you know the O.T.T.I. digits.
Given us.
Yeah. So.
Did you say private dad main our our corporate privates categories about 17% of our portfolio and.
It's a very well performing heavily covenanted.
Allocation for us.
Not a liquid partial obviously because his private but.
He's performing well I mean, we don't it's just.
Any impairments that come from there are are manageable and and allowed for or or provision for essentially from from what we can tell now so.
Yeah, that's how I'd answer we we've gone through a bottoms up line by line item review with Apollo.
And reviews and each segment of this portfolio and and every portfolio we have and.
Very good about it and and like I said, the allowances that we've set up we think more than cover what what we expect to happen and we have plenty of capital covered it so.
Yeah, I mean, a corporate privates I don't think is an outsized portfolio and it's pretty <unk>, it's very predictable and a.
Proper coverage is so in general.
Feel good about it.
Thank you Oh, now or turn the floor it back over to know a gun for any additional are closing remarks.
Great. Thanks, Laurie and thanks, everyone else for joining us this morning and for your interest in a thing if you have any follow up questions related to our results or anything discussed on today's called please reach out to myself or soon we ended up for to speaking with you again next quarter. Thank you.
This does conclude today's a theme holdings first quarter 2020 earnings calling web cast. Please just connect her lines at this time and have a wonderful day.
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