Q3 2020 Athene Holding Ltd Earnings Call
This time I would like to welcome everyone to the theme third quarter 2020 earnings conference call and webcast.
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Thank you I.
I will now turn the call over to know what that had.
Head of Investor Relations. Please go ahead.
Welcome to our third quarter 2020 earnings call. Joining me. This morning are jumble, arty, 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 did 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 will be discussing certain non-GAAP measures on this call, which we believe are 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 got a theme dotcom.
With that I will now turn the call over to Jim Belardi.
Thanks, Noah and good morning, everyone.
Thank you for joining us on this election day and the U.S.
And for your continued interest in a thing.
We are incredibly proud of the strategic progress we have made.
And building, our business and generating a track record of.
Have consistent excellence.
With tremendous execution on both sides of the balance sheet this year.
Our business is firing on all cylinders.
Our third quarter results demonstrate that our teams differentiated investment spread model.
He is incredibly resilient.
And getting stronger through this period of market dislocation that uncertainty.
We remain extremely well capitalized with approximately $14.5 billion of regulatory capital.
And an under Levered clean balance sheet.
Since our founding we emphasize the importance of holding excess capital with a view that profitable growth.
Is most available when capital is most scarce.
Others in the industry without our significant deployable capital and strategic asset management advantage.
Are being forced to pull back from new business origination.
This dynamic allowed us to generate consecutive quarters of record organic growth at very strong returns.
As we've said many times, we are incentivized by profitability other thing not volume.
By simply executing our business strategy.
Which include maintaining our pricing discipline.
Pivoting opportunistically to deploy capital across our funding channels.
We were able to generate organic volumes of more than $7 billion at returns in excess of our targets.
While we are diligently executing in our day to day organic channels. We're also looking for additional opportunities.
Act as a solutions provider amid the ongoing restructuring across the insurance industry.
The 29 billion dollar transaction, we executed with Jackson National in June is squarely in line with this objective.
And I am confident we will continue to serve as a solutions provider.
For the industry for years to come.
The full power of our business model is realized when we concurrently execute organically and inorganically as we have done this year.
Through October.
We had exceeded $50 billion of combined gross organic and inorganic growth and 2020.
Our best year ever.
Generating this level of growth with strong profitability through this extraordinary period is a remarkable achievement achievement.
We are intently focused on maximizing earnings while maintaining our risk discipline.
To this end, we purchased a record $14 billion of investments in the third quarter.
At a yield premium for fixed income assets of nearly 60 basis points net of fees to.
To the Triple B corporate Bond index.
This outperformance demonstrates the alpha generating nature of our active investment management partnership with Apollo.
Similar to last quarter, our activity can be summarized across three primary buckets.
First despite the continued decline in yields we saw in the third quarter.
We are still seeing attractive enough investable spreads in public and private corporate bonds.
Which accounted for about 65% of our purchases.
Allowing us to transact quickly and in size.
Second we are seeing attractive opportunities for structured securities such as Filos, RMBS and asset backs.
That accounted for nearly 20% of our purchases.
As a reminder, we focus on the senior investment grade tranches of the structured securities.
Which benefit from significant credit enhancement.
And enable us to pick up a substantial amount of incremental yield at a similar rating profile to our corporate purchases.
In the third bucket, we have differentiated solutions.
These are but spoke investment opportunities that come up.
Through our affiliation with Apollo.
This quarter, we participated in an Apollo led consortium to form a real estate investment partnership for assets owned.
Oh and by the Abu Dhabi National Oil company Adnoc.
I've been deployed 1.4 billion of capital into this investment opportunity for long term credit tenant lease assets with a duration of more than 10 years.
At an attractive yield with a double a plus rated counterparty.
Terrific, which matches very well with our liability profile.
We are presently focused on to in house priorities to drive forward or.
First we continue to make progress on redeploying the inherited Jackson portfolio to bring it in line with the themes alpha generating asset allocation strategy.
I'm pleased to report that through mid October Weve reinvested more than $10 billion.
Or more than 40% of the volumes in our redeployment plan successfully raising the yield on the portfolio by approximately 90 basis points and just over four months.
Our redeployment activity will be largely complete by the middle of next year.
We underwrote the transaction to our attractive target returns for inorganic inorganic growth.
And in line with our prior communication.
We expect to deliver meaningful earnings accretion when our efforts are complete.
Second we are quickly reducing our elevated cash balance of approximately $6.5 billion that we held at quarter end.
We expect to return our cash level to a more normalized on balance sheet level of approximately 2 billion.
In the coming weeks.
Deploying excess cash balances will increase annualized investment income by approximately $135 million.
Which should increase our overall fixed income yield by approximately nine basis points on a run rate basis.
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Overall, the credit quality of Athene investment portfolio has remained strong.
We have experienced a de minimis impairments of two basis points in our investment portfolio year to date.
And our current seasonal reserves already reflect the base case recession.
Our portfolio has experienced minimal downgrade year to date.
Which net of upgrades has resulted in only 16 points of drag on RBC ratios.
Which remain very strong in the high four hundreds including capital at the holding company.
Importantly.
We expect to we continue to expect that any potential credit losses, resulting from the current environment will be very manageable.
[noise] given the strong performance of our alternative investments in the quarter I'd like to spend a moment focusing on this asset class.
Alternative investments currently comprised 5% of our portfolio and as a reminder.
Our all star differentiated relative to your traditional hedge fund and private equity investments.
Possessing a more defensive orientation that is less prone to binary outcomes.
Our largest holdings, our direct investments in high performing strategic operating businesses.
Our alternatives portfolio has exhibited less volatility than public markets in the first nine months of 2020, given our strategy.
I am pleased to report that the portfolio is performing very well.
Appreciating more than 10% over the past two quarters or 21% annualized.
Driving our year to date returns into positive territory. Following the sharp declines felt in the first quarter.
In the third quarter, we saw broad based strength across the portfolio.
Which benefited from two dynamics first.
The lag effect of rebounding markets in the second quarter being realized in the third quarter as expected.
Investments marked on a lag basis, comprising approximately 60% of the portfolio generated a 14% annualized return.
Second.
Approximately 40% of our portfolio, which is marked on a real time basis.
Performs very well generating a 26% annualized net return in the quarter.
[noise] within that result is amerihome are.
Our largest single alternative investment.
Which delivered a particularly strong quarter appreciating 46% on an annualized basis.
We benefited from the continued strong operating performance of its business, which has been driven by elevated origination and refinance volumes from low interest rates.
As the largest equity owner of Amerihome.
We fully support the evolution and continued success of its business as it seeks to see to access additional sources of capital.
[noise] another strong contributor in the third quarter flora.
Which is viewed by some as an early stage of Thene in Continental Europe.
Produced its best quarter of income ever.
If you recall a thought to close this transformative acquisition of V. bought back in April.
And following an additional capital raise around that event.
The valuation of the company grew.
We look forward remaining partnered with your door team going forward as they pursue additional growth.
Finally, I'd like to highlight our investment in Venerable.
The variable annuity company created as part of our reinsurance transaction, we did with Voya and 2018.
The business has performed been performing very well to date generating capital.
And the team has been actively looking for attractive inorganic opportunities.
Last week Venerable announced its first strategic transaction with equitable holdings that will double the size of its managed business.
This milestone transaction is a positive development that will drive meaningful value creation for its platform going forward.
Now I'd like to turn the call over to bill to discuss our liability origination activities.
Thanks, Jim.
As you can see from our results our organic growth engine continued to perform very strongly in the third quarter. Despite a fragile economic environment and historically low interest rates.
These results continue to demonstrate the strength and resilience of our differentiated multi channel distribution model.
As Jim discussed we generated record deposits for the second consecutive quarter totaling 7.4 billion.
An aggregate basis underwritten returns on the quarter's activity came in well above our targets.
As many competitors continued to be constrained by challenging operating backdrop or the desire to conserve capital a theater remains a source of strength in the marketplace and we were awarded with profitable growth.
Turning to each of the channels in retail we generated two and a half billion of deposits in the quarter up nearly 28% year over year, and 38% sequentially, representing a quarterly record for the channel.
Well industry Fiats sales have moderated significantly year to date, we remain well positioned with our numerous competitive advantages that are driving a much different result for us than others are experiencing.
According to LIMRA.
The in place first for fixed indexed annuity industry sales in the second quarter and we believe our strong third quarter result will place us in a similar position.
Since we prioritize returns over volume and do not chase market share.
Our racking was particularly noteworthy considering that the competitor we displaced had led industry F.I. sales every quarter for 11 years.
Our fixed rate annuities or MYGA business generated strong sales and drove approximately one third of our activity in the third quarter.
We're on pace to have our best year of MYGA sales in 2020, a trend that is being driven by our growing presence in the financial institutions distribution channel that allows us to have a product position and leading digital platforms.
As a point of reference nearly 50% of our total retail annuity sales in the first nine months of 2020 are generated through the bank and broker dealer channels, which compared to less than 30% in the first nine months of 2019.
Well. This years result has been partially driven by pandemic related disruption in the IMO channel. We believe the distribution inroads we've made within financial institutions are very meaningful exposure.
Expanding distribution of financial institutions, particularly a large platforms such as LTL and trust, where we are benefiting from the maturation of new relationships.
Offers attractive upside for future sales activity and drives greater diversification and stability for our retail business.
And flow reinsurance.
Record quarterly deposits of 2.3 billion in the third quarter came in more than threefold higher than the year ago period.
Strong result was driven by another quarter of outsized retailer duty sales from key partners, particularly those with a strong digital presence.
In the face of tightening spreads are differentiated asset management and sourcing capabilities allowed us to offer competitive pricing.
Stroke, particularly strong growth at attractive returns.
As we announced at our prior call we entered the Japanese fixed annuity market at the end of July.
Fixed annuity flow reinsurance partnership with a large Japanese financial institution.
We are pleased to report that this new relationship is seeing good early momentum with steady volumes in the third quarter and we believe it has the potential to contribute even more to future periods.
While we are very pleased with the strong third quarter results for our flow business. As you know quarterly volumes can fluctuate based on counterparty appetite in quota share levels given some of the visibility we have into our activities of our clients.
Like flow reinsurance volumes will remain healthy, but moderate by approximately 50% of the near term following consecutive quarters of record setting activity.
Turning to the institutional business, we generated 2.6 billion of deposit source through funding agreements. The quarter's activity was driven by funding agreements issued in three different currencies, including one in U.S. dollars, our second euro denominated issuance and our first Canadian dollar issuance.
Well, all our non U.S.P. activity as being swapped back to dollars, we're issuing in various currencies as market opportunities warrant and by doing this we are attracting a broader set of investors and diversifying our activity.
As the spread environment continued to tighten in the third quarter, we took advantage of the opportunity to issue it achieved very attractive returns.
We remain active thus far in the fourth quarter with two issuances in October, including our first Swiss franc denominated note as well as one of U.S. dollars totaling nearly 900 million combined.
Impure acai activity a crack across the industry was quiet during the quarter as expected but.
That is increased sharply as we head into year end.
So far in the fourth quarter, we have closed several transactions totaling 1.6 billion and we will evaluate additional transactions that are expected to come into market in November and December.
Putting it all together with more than 18 billion of organic deposits year to date plus.
Plus the known fourth quarter activity within institutional we.
We will exceed our previously increased guidance of 20 billion and organic volume in 2020.
In the context of today's economic backdrop in industry fixed annuity sales trends.
For us to generate a record year of volume underwritten to watch, but also maybe record returns is a truly remarkable result.
On the inorganic front.
Following the close of the successful reinsurance transaction with Jackson in June.
We have been busy discussing other potential win win transactions with various counterparties, including American equity life as well as publicized.
Well, we saw the potential to consummate an attractive transaction for all parties involved in our NGL proposal.
We have said many times that execution is ultimately dependent on the counterparties willingness to transact.
Importantly, we had 7.6 billion of deployable capital available net of what is earmarked for Jackson portfolio repositioning.
Which translates to more than 90 billion of liability purchasing power.
As we look to our pipeline, we believe there will be numerous opportunities to deploy this capital over the near term.
Our long standing commitment to our shareholders to be a disciplined buyer and deploy capital in a manner consistent with our attractive return targets has not changed and we will continue to execute our inorganic growth strategy.
With that I'd now like to turn the call over to Marty will discuss our financial results.
Thanks, Bill and good morning, everybody.
In the context of our financial results I'd like to Echo a point that shouldn't expressed at the start of the call which is that our operating performance demonstrated track record of consistent excellence over a long period of time and through a variety of macroeconomic conditions.
For the third quarter, we reported GAAP net income of 622 million or $3.16 per diluted share. Our adjusted operating income available to common shareholders for the quarter was 302 million or $1.53 per share.
Excluding notable items of 27 million as well as our strategic Apollo investment.
Total adjusted operating income was 356 million or $2 10 per share or two.
Armed services adjusted operating income excluding notables it was 334 million.
Resulting in an adjusted operating or are we excluding notables of 19% for the segment.
The profitability of our spread based model remains very compelling even in a low interest rate environment as we continued to originate business, which meets or exceeds our target returns.
Our third quarter results also benefited from strong performance in our alternative investments as Jim discussed earlier.
I'll now spend some time, taking you through the key components of our operating results.
Starting at the top of the income statement, our large in force business produces and mostly consistent and predictable fixed income near.
That said there are numerous factors, including macro and business developments that can cause it to move.
Quarter over quarter impacts that caused the fixed near to decline driven by expected factors.
Pruning lower floating rate income and the full quarter impact of Onboarding, the Jackson asset portfolio.
Partially offsetting these items was the rebound in bond call income from low second quarter levels as.
As well as the one time benefit from an adjustment on a derivatives collateral account.
Given the various levers that can move to fixed income near let me walk you through the trends, we expect to emerge in the fourth quarter and beyond.
Our fourth quarter earnings will benefit from two items.
Putting excess cash and continued redeployment of the Jackson portfolio.
Our efforts for both these items will ultimately be depended on the investment opportunities, we can source and the overarching credit spread environment.
We saw continued tightening in the third quarter and we ended the quarter with more cash on hand, due in part to record organic deposits.
As a result, we expect to fix near to remain around the corps third quarter rate were approximately 3.6% in the fourth quarter.
Well on the margin investment yields faced pressure in the current rate and spread environment. It's very important to note that the new business volumes, we're writing in aggregate exceed our return targets because of the lower on the margin cost of funds.
Turning to alternatives as we expected we saw a benefit from the investments marked on a lag basis, reflecting the market rebound from the second quarter.
We also saw very strong performance in a portion of our portfolio Mark on a real time basis, which is driven by strength in our investments in Amerihome authority and Catalina among others.
If markets hold their current levels and given the benefits of lagged income from the third quarter. We estimate there are alternatives portfolio will generate another strong result in the fourth quarter net investment earned rate of 11% to 13%.
Moving next to cost of crediting our reported rate increased seven basis points quarter over quarter, which was expected given the full quarter impact of Onboarding to Jackson reserves.
As we've mentioned previously the Jackson liabilities have a somewhat higher crediting rates than our in force.
They also have a meaningfully lower level of other liability costs.
The increase in the cost of crediting was partially upset by prudent rate actions on retail enforce renewals.
We currently expect cost to crediting to remain around current levels between 180 to 185 basis points as.
As continued rate actions in deferred annuities are somewhat offset by further expected growth in institutional, particularly PRT, which bears a relatively higher cost within the crediting line.
Turning to other liability costs, which represent the other side of the cost of funds for our deferred annuities, we observed quarterly fluctuations that can occur as a result of market movements are actuarial adjustments as well as the impact of the annual assumption unlocking.
In the third quarter of the liability costs had a modest favorable benefit from unlocking.
We prudently reduced our long term investment yield and interest rate assumptions would that impact offset by favorable actuarial experience and policies with income writers.
Our long term near assumption now contemplates grading to a rate consistent with the 10 year Treasury assumption of approximately 2.65 per cent in eight years.
We strive to keep or assumptions updated and aligned with the interest rate environment and his experience emerges.
In the quarter logo liability costs increased 25 basis points sequentially, primarily due to a couple of factors, including normalization from a particularly low second quarter result.
As well as greater DAC amortization, resulting from higher gross profits.
You'll recall that when we have higher levels of profitability, our DAC amortization accelerates and it decelerates, if we have lower levels of profitability.
Quarterly swings of investment income from alternatives can be a driver of higher or lower or the liability costs any given period as we saw this quarter.
Shifting to our platform costs, our GE, an expense ratio fell six basis points quarter over quarter as that line benefited from the full quarter impact of Jackson Onboarding to our highly scalable platform as well as lower legal expenses and some long term incentive compensation.
While we expect some normalization of this quarter's larger sequential decline the ratio of GE, an $8 to our assets has been steadily declining overtime and we expect this long term trend to continue as we realized further benefits of scale.
Turning to taxes as reminder, our tax rate is a function of how much income we generate in our Bermuda sub degrees versus or U.S. subsidiaries with.
With a strong operating income performance in the third quarter, largely driven by strength in alternatives, our tax rate came in a bit better than our mid teens expectations.
Stronger earnings expected in the back half of the year offsetting a lower first half we now expect our tax rate may settle into the low teens territory for the full year 2020.
Concluding with capital the feed remains very well positioned with $14.5 billion of regulatory capital and 7.6 billion of total deployable capital.
Which is comprised of $3.2 billion of excess equity capital 2.6 billion of untapped debt capacity and 1.8 billion of available Undrawn third party capital remaining Frac right.
We expect to deploy capital in line with the four primary uses we've outlaid generating strong organic growth closing additional inorganic opportunities.
Supporting ratings upgrades and opportunistically executing accretive share repurchases.
As we head to 2021, our in force business is expected to generate about 2 billion of capital from earnings in run off and we expect to deploy about the same amount of capital into new organic business in asset redeployment.
In addition, it's very clear to us that are shares remain undervalued relative to our strong operating performance.
So we plan to continue to you know utilizing share repurchases as an instrument to generate shareholder value.
With that I will turn the call over to the operator, and we'll open the line for your questions.
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Wanted to ensure everyone received.
We ask that you please limit yourselves to one question on the first round and hop back in the queue.
If you'd like to have a follow up.
Question.
One moment. Please for your first question.
And your first question comes from the line of Ryan Krueger with KBW.
Hi, Good morning, I guess, when you put together all the different pieces of of your outlook last quarter you talked about.
Earning an hour away in 2021 that was similar to 2019 I was hoping you could give an update on that and if you still still view that range is achievable next year Mark.
Marty.
Thanks, Jim Thanks for your question Ryan, Yes, I think we're still on track for that.
I think that there's a lot of focus that people have on the fixed income here and I think sometimes the overlook some of the other line items that impact our overall profitability in a lower rate environment. Obviously, it does put pressure on our fixed income near but we're originating liabilities at significantly lower overall cost of funds.
Note that.
Since the second quarter second third quarter together, we've probably originated [noise] about 25 billion of liabilities with an overall cost of funds, maybe about 50 basis points lawyer lower than what we reported last year and are operating results. So that's very very beneficial and we also expect our tax rate to kind of normalize and get further expense.
The reduction so yeah, we feel very good about next year and I think it would be very profitable business. We put on the books. This year you know, we'll provide line item guidance that maybe at some future time, but I would just say at this point as we head towards 2021, we'd expect operating income excluding our stake in Apollo to exceed.
Slide $8 a share.
Great. Thanks Marni.
Your next question comes from the line of capacity with autonomous.
Autonomy research.
Hi, can you discuss the competitive landscape and flow reinsurance and it sounds like there are a number of new competitors entering the market, but how significant are the barriers to entry in practice and do you see much risk to your volumes going forward.
Bill Yeah.
Yeah.
Hi, Eric.
So there have been some competitors who have made some inroads we used to have.
Have you know sort of inevitable, we used to have almost a 100% of the market do ourselves [laughter], it's not quite that great.
Obviously, our volumes far out way, there's an i. I don't expect that to change.
You know the competitive landscape.
I guess barriers to entry.
They really have to do with capital and with ratings I mean, obviously these people are picking a counterparty that they expect to do business with for many years.
And and you know when we get new.
<unk> primary companies, who are kind of conducting sort of.
A competitive process to pick the counterparty.
We find that.
Some people are are very aggressive, but they're also the kinds of companies that you would think twice about in terms of as somebody you give it for the long run you know they they obviously are hungry, but they but it would make you nervous.
You know, we just went through a review process with it with a very nice very high profile Oh.
A carrier or who and we won the auction process the business won't start until you.
You know late and 21.
But but that was a very competitive process and we still win it so.
So I guess I would say you know track.
Track record a ratings.
Obviously, our current market position all all are gonna have a big impact going forward.
And I started and I would say there if you think about other potential counterparties or more is still in the pop up pipeline.
So you know to the extent volumes moderate it's not really going to be because of competitive pressures. It's really just going to be what's going on at the primary carriers you know in terms of their their performance or you know how they're participating in the fixed annuity market.
Thank you and can you just remind us how much low reinsurance you have with eight yellen is any of that at risk given its announced partnerships and plans to launch its own offshore reinsure.
Well.
We you know we historically you had a good relationship with them and and had built over a decent size position I don't think that's at risk, but we haven't got received.
Significant read reinsurance flows from a l. for.
A number of years.
Got it thank you.
Your next question comes from the line of Tom Gallagher with Evercore.
Uh huh.
I guess a follow up on on a l. massmutual situation can can you comment at all.
You know what your view is from here I assume it's you're moving on given given what ails announced but just curious if you have that view on that and then also in terms of you mentioned Bill I think numerous other opportunities to deploy capital should we expect them to be more of the Jackson variety kind of Smes.
Baller.
Or is it maybe mid sized transactions.
Or are there potentially larger ones I think there's been some high profile other announcements made in across the industry that that could be larger would you be looking at potentially larger deals.
Yeah sure. So first with regard to a oh, yeah, we are moving on.
You know the board their board has decided to follow a different path and we respect that and.
And you know we're going to move on.
The in real terms of deals just you said you know a mid sized deals like Jackson remember Jackson was the largest.
You know I think in terms of assets reinsurance deal ever done.
And we haven't found the bigger one [laughter]. So it's so that was big are there bigger ones that yeah. There are [laughter], it's a and so and yeah. You know you just have to pay attention to what's going on in the newspaper to take to figure that out.
<unk> I would say, we'll look at all kinds you know we we've talked about this many times said at the smaller end of the market it tends to be more competitive.
But interestingly you know if you look at what we're working on now.
You know this is a smaller deals where frankly it doesn't appear to be a lot of competition and I guess, maybe that's because of the market environment, where we think we can get you know our target returns. So we're so we're even you know relatively smaller stuff. We will look at its all frankly in our minds about you.
You know, what's you know working we earn the returns we need to be successful and Ah. So good.
Could be some smaller deals could be more Jackson size deals and yes, there are there.
There is potential for even larger transactions. So there's you know the reality is our corporate development group is very busy and.
And you know I expect this to be active.
Okay. Thanks.
Your next question comes from the line of Andrew Lieberman with Credit Suisse.
Okay.
Just a little kind of.
Getting my composure here because on that comment that you are going to move on.
It's somewhat surprising so.
I'll just ask a basic question about the.
The near and.
This 3.6% then it kind of settled in around and maybe you could just give a little color on the new money rates that you're seeing.
And with the Jackson kind of transitioning of the portfolio can you stay at 3.6 or get a little higher as we as we get into 2021.
Yeah, I'll start and then I'll, let Marty.
Sure Andrew Hi.
Look on the margin right now on a 10 year.
Near net investment earned rate.
About on a gross basis about 4%.
After keys and a shift in losses et cetera.
360 somewhere around that range.
The Jackson redeployment is going very well or quite a bit ahead of volume pace said yields are right now is a little less than we had forecast in our redeployment plan given the drop in yields in general since we've done since we did Jackson.
But I think what's really going to true it up to where we need it needed to be to bake in the economics that were underwritten on the DLR allocations of all EPS and private credit into that portfolio that we haven't done yet and we got a.
Very robust pipeline of both in fairly short order so.
We think there's a lot of upside there from what we've achieved so far but Marty anything else you want to add.
Yeah, I would just note yeah, Andrew that in addition to thinking about the fixed income near its obviously you know the other the flip side of low interest rates is that there's low cost of funds. So as I said earlier, you know we've been our cost of funds and what we're doing these days is like in the low to <unk> to 40.
And the two for you something like that so that compares very favourably, but you know, it's still even though a lower.
Yield that we get heading into next year again home will in a future call give more guidance, but yeah. I think there's a few basis points of upside from this kind of 360 level.
You know, we expect or is the environment normalizes, we'd expect to carry less cash.
So going have some cash drag in this quarter the fourth quarter that were going to work down as Jim said do a couple of billion by the end of the year and we expect to operate at that level or the economy normalizes and you know the Jackson redeployment will help.
To some extent offset by somebody on the margin stuff, we're doing but again most of that on the merchant assets are going against the new liabilities that or at least the last couple of quarters have been extremely profitable.
One last thing just just to follow and the last question where were Bill had said that you know.
Everything depends on the Counterparties willingness to do transactions could you potentially come back and make it more more compelling to to make that counterparty willing where you're just moving on like you said.
Well look ill.
We made of what we thought was a very attractive offer and I don't think anybody would debate that [laughter] really except maybe a the payoffs board [laughter] and so.
So look it up and that you know that didnt sway them and you know from the from there the path they want to stay on and so it just strikes me as it makes its prudent to move forward. Thanks.
Thanks, Phil.
Your next question comes from the line of Humphrey Lee with Dowling and partners.
Good morning, Thank you for taking my question I.
I guess just a quick clarification question. So Marty said he in terms of the earnings outlook for 2021.
Dollar per share excluding Apollo do you mean, excluding the Apollo.
Stock appreciation performance or do you really referring to the X T O G, meaning kind of stripping out the the shares issued to two to Apollo the way that you you showed in the slide deck.
Yeah, I mean stripping out the earnings impact that we get from Apollo.
But that he including the share count.
Inclusive, including Oversold D. the share count from the she has alluded to Apollo.
I believe including the current share count, but just excluding the earnings impact.
Okay.
Alright, thank you.
Your next question comes from the line of John Barnidge with Piper Sandler.
Thank you very much you can Japan funding agreement business seems to be coming online quickly can you talk about where you see that growing to in the near and intermediate term and then opportunities for further product in those markets.
Yeah sure sure John.
So.
It just to be clear, where we're acting as a reinsurer bulk annuity business in the UK, we have printed one deal.
Early in the first part of this year was fairly quiet, but things are picked just like in the U.S. things are picking up a lot in the UK now and so were so we're participating in other situations is sort of you know helping their primary carriers compete for business.
And we're doing that with several other carriers, but but so far we haven't won anything and and so it's you know this major this reinsurance is it's a little hit or Miss and so I would guess I would say you know we're hoping that this gets to be.
No crudely too bad a year kind of volumes, but well see.
You know you can do that on one deal frankly, and you know with regard of Japan.
You know we've I think we've said previously we expect this to be you know sort of 500 million of volume. This one relates flow relationship a year.
I think that's right that's still that's still a good number but there are other potential relationships and so that too could easily be a you know in the near term a $2 billion a year kind of a run rate you know we are having discussions with other potential partners in Japan.
To test flow reinsurance arrangements with them as well so I think it's.
So I think both of those are going to be growing markets for us and and you know where you know where we can earn good returns.
And tested and then a follow up on policyholder behavior withdraw activity was the lowest rate since Fourq. You 19 do you believe it will be persist at these levels until maybe the pandemics in the rearview mirror.
Thank you Bill.
Well I.
It's you know it it it really has to do with interest rates I think interest rates being so low I don't think policyholders you know have many other options frankly that look attractive to them at the moment, so but a lot of this is just frankly about is I would say a much longer term sort of view of policyholder behavior.
Sure you know based on a track record over a number of years. So that's really not necessarily pandemic related I just feel like there I.
I think it has a lot more to do with just you know the general decline in interest rates and therefore, you know lower lesser reducing their options for other things to do with their money. So so I feel like yeah.
Yeah, this sort of policyholder behavior will probably persist.
Once again, if you would like to ask an audio question. Please press star one on your Touchtone phone you.
Your next question comes from the line of Suneet Kamath with Citi.
Thanks, Good morning, I wanted to circle back to the 14 billion you referenced in the slide deck of incremental investments, where you're generating spreads I guess 60 basis points above triple B I think you had a similar disclosure last quarter that number was around 11 billion. So I'm. Just curious first is there a limit.
In terms of how much of these assets you can identify.
And then related Lee can you provide some color on the 65% that's public and private corporate so I'm just trying to understand why those are truly differentiated and if there's an issue. If there is an ability of other for other insurance companies to be able to pursue those types of investments. Thanks.
Yeah sure Suneet.
Thanks for the question.
So I think the point of mentioning the 14 billion, it's just too.
Show how active in size, we are in investing all the flow.
And liability cash flow that we're generating.
And Weve really ramped up to.
Apollo and insurance solutions group aspects of our business.
Is there a limit to it like we have a very scalable model both on the liability side on the asset side is being demonstrated as we speak given our growth.
So I'm not going to say, there's there's a limit I mean, there's it's difficult to find the alpha generating assets and that's why we we said like 65% of the 14 billion.
We're in corporates, both public and private I think the answer to your second question.
The privates or more differentiated and the public's there's more often the privates.
We're not buying the index and the publics, but you know we're being smart about named we buy et cetera, but there's just there's just less alpha there its a very liquid efficiently priced market.
So other than <unk>.
Being smart about industries, focusing on defensive industries picking the right names and publics.
Yeah, most companies do that.
Well you significantly ramping up our privates, we've added to staff and and and portfolio managers across the Apollo platform and they're doing a very good job.
But the real call out I think and the Big point was.
Last quarter I think we mentioned at the end that they re transaction that we did this quarter are mentioning the adnoc transaction there.
Theres, others were not mentioning and I think the real differentiator for a theme is apollo's ability to source directly.
Senior secured assets with downside protection across the globe. The deal we mentioned here that the middle East Middle Eastern deal.
And we're doing more and more outside the U.S., while still increasing significantly our U.S. activity on asset. So that's a real differentiator for athene versus others I don't think anyone else.
I don't know I know the firm that's investing the time and money that Apollo has in ramping up direct origination capabilities ability to buy platforms and source ongoing assets that way you know, we're bypassing the middle man.
And that's what gives rise to the the better the main reason.
Our investment results are better than others, just because of that activity and just kind of building and and 2021 will be significantly more than we did in 20 of this so.
That I don't think its replicatable right now, but the real liquid efficiently price sectors, yes, others can do that.
And once again.
We appreciate your questions and we ask that you ask one question. If you have a follow up you may come back into queue by pressing star. One again. Your next question comes from the line of Jimmy Birla Birla with JP Morgan.
Hi, Thanks, Good morning, first I just had a question on.
Buybacks, you bought a decent amount of stock in CQ and I guess part of it is you have kept them and part of its stock valuations depressed and it's still around the same level that sort of covered a little bit today, but still around the same level as it wasn't PQ and pretty depressed versus book value, So where do buybacks fall in New York sort of.
Hi, Odeon deploying capital versus.
Organic sales and deal opportunities.
Yeah. Thanks, Jimmy this is Jim so.
We've got just to remind you we've bought back over $400 million stock this year, so pretty aggressive.
No doubt <unk>, absolutely understand how compelling the value is given where the stocks trading I mean under four times earnings I mean, it's been.
Ridiculous.
So that is one of them using capital to buy back stock as Marty said is one of the four ways, we deploy capital the other three being.
Supporting our organic growth, our inorganic growth and then holding capital for ratings upgrades. All four of those are compelling and we are accretive for shareholder value.
So we will on a go forward basis continue do permit across those different ways to use capital to what we think is the best opportunity we expect to do all of it in.
In sum amount.
I'll just remind you that as you know that.
[laughter] buyback shares is not franchise enhancing.
Supporting organic and inorganic growth is at.
And getting ratings upgrades, which were very optimistic we're going to be getting here in relatively short order.
For more than one rating agency is also franchise enhancing so I think you know everything else equal. It never is we would err on the side of.
Supporting the first three more so than stock buybacks, but stock buybacks has a place it has in the past it will in the future and we'll evaluate as we have in the past going forward.
Okay, and maybe if I could just ask one more on a potential change in administration, if the Democrats to Dick and Phil is there anything that concerns you as it relates to the possible sort of new renewed deal a fiduciary standard.
In case, the Republicans lose the election.
Ill.
Hi.
Hi, Jimmy had no. The short answer is is that they you know if you listen to what you know the Democrats, leaving.
People in Congress, and then obviously a potential.
Potential by the administration and what they've talked about I don't think there's.
Real concerned about that or a renewed initiative you know what's happened since the.
The deal was old fiduciary rule is you know the FCC and the any I see it really stepped up and put in place. You know rules that are you know governing these subjects and and I think there you know they work much better frankly, and and and our effective and so I don't think there'll be a renewed push.
To.
To kind of revisit that with a in the deal well so no I think were at.
But by the way even if there were I think we feel like we would be able to deal with it just like we were ready to deal with it the last time. So it. So we're not we're not very concerned about that.
[noise], so you're right.
If I may just work on this but I just wanted to clarify something when I responded to Humphrey's question earlier, the the $8 per share for next year that we'd be able to expect to to beat per share actually excludes the associated or Apollo shares, which are about 20 million. So again we.
We expect to exceed $8 per share and that excludes 28 million associated with Apollo just wanted to be clear on it.
Your next question comes from the line of Emmys Greenspan with Wells Fargo.
Hi, Thanks. Good morning. My question I was just hoping to get some more color on the topic.
Did you ever going to be around the second quarter level, obviously, a good amount of that so just on how we should think about the fourth quarter and that he then I'm thinking about trend into 2021, and then one clarification on the $8 per share earnings for 2021 is that on assuming.
Anything for inorganic opportunities. Thank you.
How about Bill and then Marty.
So highly so yeah with regard to retail well, yeah. We frankly, the third quarter ended up stronger than I think we were feeling really good our second quarter call. We think that's a.
And it has a lot to do frankly with.
The competitive environment is still relatively benign.
And and as we move into the fourth quarter. You know what's happened now is you know a new money yields have declined because of you know even you know lower rates, but also lower spreads and.
And so you know the business you know people have had to him reprice their portfolio offerings and we have to.
Or their product offerings, and and so I would say volumes feel like they're moderating a little bit in retail, but there's still very good right. So and so we expect a good solid fourth quarter and we expect that will carry on into two.
2021.
And part of the reason we have confidence about that is really because of the success. We're having you know.
Growing our bank and broker dealer, you know brinker broker dealer customers or clients, where Ah you know that's where the growth is in the fixed annuity business and and so we think that that's you know.
That's where our focus will be and we're gonna have continued high levels of production or higher levels of production. So.
So you know, even though the IMO business by getting more competitive maybe.
Maybe we'll I think we feel like we're going to be in good shape and 21.
He is at least it's Marty on the other question you had on the $8 per share for next year, which again I think we expected.
Expect to exceed that.
Really just reflects what we have right now and then a continued organic volumes and probably about the same clip we've not modeled in a an additional inorganic transactions for that number obviously as bill had commented earlier, we feel pretty good about the pipeline and we feel very good about our ability to hit on all cylinders, but that number right.
What it does not reflect an additional inorganic deal in the next year.
Your next question comes from the might not the line of Mark Hughes with two list.
Yes. Thank you good morning related to that what should disruption there are still in the I.M. mode channel how much do you think across the sector sales are down.
When does that recover.
And then also any.
<unk> design and product innovation that maybe driving the market share gains.
No.
Hi, Mark.
No.
Our you know I'm not sure are experiencing the IMO channel is indicative of what's going on overall were Ah ourselves there are down somewhat somewhat in the IMO channel, but not nearly as much as I think where the industry is.
So we clearly picked up market share there I you.
No I don't think there's any doubt that that I am most sales, which are a lot of times are really you know face to face across the kitchen table kind of transactions are that there's still affected and so you know you you'd have to say they are probably going to continue to be affected until you know the pandemic is reaches a different.
Phase.
Lets you know every you know your guess is as good as by when that really is you know, but obviously not until.
Later, yeah. So.
Sometime next year. So I think I'm a business is is probably going to come back a little bit this quarter, because I imos are scrambling to figure out how to you know sell digitally or so you know in some kind of a remote environment.
But they're but I still think they'll be affected until Gee you know.
So mid year next year.
You know like the IMO channel is still very important to us and it's you know and it's and it's a it's very important frankly to many of our competitors. So I. So I think it's going to be tough for a little while yet.
Your next question comes from the line of Brian Meredith will you be yes.
Thanks, guys. This is Mike Ward on for Brian I, just had a question on what you guys are seeing in the credit world. Some other life insurers have mentioned forecasting potentially more credit migration in losses in 21 than this year I'm kind of driven by the fed actions kinda delaying losses. There just wondering if you had any update on your view.
Heading into next year, maybe if you're expecting that to or maybe you're making any allocation changes that you might want to discuss thanks.
Yeah sure Mike Thanks for the question.
Well for our portfolio, we continue to think as we've been saying all along we've always had more downgrade risk.
Meaning capital needed to support that than actual default risk.
The numbers are clear evidence that that's the case I mean, when two basis points of OTI T. <unk> through the first nine months of this year.
Oh really haven't had many defaults I think there could be another leg down.
You know [laughter] cases aren't a decreasing their increasing so definitely could be another leg down that would cause perhaps.
Overtime, some additional downgrades I think.
Nothing we've seen so far has changed our allocation I mean, we've been subtle.
For the last year and a half two years upgrading the credit quality of our portfolio I think thats really bearing fruit now in the teeth of the crisis as evidenced by the low default and [noise].
Very modest amount of downgrades, but definitely can see more downgrades.
And a small amount of the falls just like we've experienced today, but haven't really changed our allocation because of that when we there are not many things are cheap when they are we lennane in size.
But you know we're still doing more in the corporate land, which from a lot of our purchases more in single play than we traditionally had down still doing a healthy amount of triple BS as well I'm not all triple BS are created equal [noise] yeah.
Yeah, there's still focusing on defensive industries, and I think thats.
Good play book up to now and that's what we'll continue to do but yes definitely is a possibility maybe probability of another leg down.
And presenters data all the questions that we have for today.
And I would like to turn the floor back over to Noah Gunn for any additional closing remarks Craig.
Great. Thanks, everyone for joining us this morning and for your continued interest in a scene. If you have any follow up questions on anything we said on today's call feel free to reach out to us and we look forward to speaking with you again next quarter.
This concludes todays theme holdings third quarter 2020 earnings call and webcast. Please disconnect. Your line at this time and have a wonderful day.
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