Q4 2020 Athene Holding Ltd Earnings Call
Good morning, My name is Lori and I'll be your conference operator today at this time I would like to welcome everyone to the Athene fourth quarter and full year, 'twenty and 'twenty earnings conference call and webcast.
All participant lines have been placed and listen only mode to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question at that time. Please press star one on your telephone keypad. If you should need operator assistance. Please press star zero and thank you I will now turn the call.
Over to Noah Gunn head of Investor Relations. Please go ahead.
Welcome to our fourth quarter and full year 2020 earnings call. Joining me. This morning are gimbal already chairman and CEO, Bill Wheeler, President and Marty Klein, our Chief Financial Officer earlier. This morning, we issued a press release and slide presentation, which are available on our website. As a reminder, this call may include forward looking statements and <unk>.
Jackson's which do not guarantee future events or performance, we do not undertake any duty to 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 <unk>.
From materially from those expressed or implied.
We will be discussing certain non-GAAP measures on this call, which we believe are relevant and assessing the financial performance of the business and you'll find reconciliations of these metrics within our earnings materials available at IR Dot Athene Dot com with that I will now turn the call over to Jim.
Thanks, Noah and good morning, everyone.
Thank you for joining us and for your continued interest and Athene.
We are incredibly proud of the strategic progress, we've made and building our business.
And generating a track record of consistent excellence.
Despite the pandemic, we've been executing our business plan with tremendous focus and discipline.
And as a result, our team has produced remarkable achievements.
In 'twenty and 'twenty, we generated a record 56 billion of total inflows across our diversified funding channels.
This result was made possible by record organic inflows.
That saw each of our channels earn expected first place market share for the first time ever.
And as well as our execution of the largest reinsurance transaction to date.
As I've said before when we can combine organic and inorganic growth simultaneously.
Our business is truly firing on all cylinders.
And the results are powerful.
As a net spread business, even more important than our robust growth are the returns regenerate.
I am pleased to report that across all of the years organic activity.
Our blended underwritten return on new business was 19%.
Well in access of our already above average targets.
This result aligned with our long standing view that profitable growth is most available when capital is most scarce.
And we certainly saw a retrenchment of capital and the marketplace amid the volatility of the past year.
Since we possess significant capital resources and flexibility.
We were well prepared to drive outsized profitable growth during this unique period.
Next we continued on track record of top tier investment performance and yield generation.
We are intently focused on maximizing earnings while maintaining our risk discipline.
Even in a low interest rate environment, we continue to capture yields at a premium to the broader market.
Consistent with our philosophy to generate excess return as active asset managers the.
And the yield on our fixed income purchases and the year was approximately 40 basis points higher net of fees and then the triple B corporate index.
This outperformance demonstrates the alpha generating nature of our active investment management partnership with Apollo.
Over the course of 2020, we invested a total of $46 billion.
And most we've ever done.
One of the most important areas of focus hasn't seen today is working with Apollo to source senior directly originated.
High grade Alpha credit investments.
This type of investing can take a variety of forms.
Ultimately the goal is the same.
Provide incremental return without assuming incremental credit risk by controlling the underwriting process and capturing illiquidity size and complexity premiums.
Instead of simply investing and the low spread low absolute yield opportunities readily available to everyone on the market.
We are working hard alongside Apollo to source, the alpha assets that differentiate our business model.
Given the size of our balance sheet, we can serve as a sole or majority buyer to a financing and counterparty SPIE.
Speaking for whole transactions, if the situation warrants it.
It provides a meaningful advantage when sourcing attractive and basket and investments.
During 2020, there are numerous examples and the public domain of bespoke hi.
Hi, Great Alpha asset transactions.
Some of which we've highlighted in our earnings presentation.
On average these transactions typically target approximately 100 to 200 basis points of incremental yield.
First is comparably rated public credit.
Combining these bespoke transactions with assets from bearing and platforms we invested.
Approximately $7 billion or 15% of our aggregate deployment.
Indirectly originated assets and 2020.
These figures compare to three and a half billion or a little more than 10% of our total deployment and 2019.
Illustrating the growing focus we and Apollo are placing on these investment capabilities.
When stepping back and reflecting on the environment and which we've been operating recently our achievements in 2020 are even more significant.
As an operator, who drives profitability from manufacturing spread.
One might conclude our business is not able to cope with persistent persistently low interest rates.
On the contrary athene.
Things spread manufacturing capability.
He is ideally positioned to.
And already has.
Thrived and a variety of interest rate and economic environments.
And the spread based business, we do not require higher rates to deliver compelling earnings and book value growth.
And our performance over the past few years demonstrates this.
And 2020, the average yield on the 10 year Treasury was approximately 200 basis points lower.
And then it was in 2018.
Amid this backdrop.
Some may have expected our pace of growth to slow and our returns to compress.
But in fact, the opposite was true.
As we employed our disciplined strategy grew profitably and produce new records.
For example, our organic inflows have doubled since 2018.
We've executed a large scale inorganic transaction our average net invested assets have grown at a compound annual rate.
Of 20%.
And our earnings are poised to reach new Heights from all this growth in 'twenty and 'twenty one.
And as you will see and our earnings presentation the spread on our inflows has actually increased.
During a period when the 10 year treasury yield declined by over 200 basis points.
These achievements demonstrate that our ability to grow significantly and profitably are not dependent on a higher rate environment.
Besides the day to day execution of our growth strategy, we continue to be focused on to near term priorities.
Which will help drive forward earnings power.
First we continue to make progress and redeploying the inherited Jackson and portfolio to bring it in line with Athene Alpha generating asset allocation strategy.
I am pleased to report that through January we have been reinvested $14 billion or roughly 70% of the volumes and our redeployment plan.
Successfully raising the yield on the portfolio by approximately 130 basis points and just seven months.
We continue to expect that our redeployment activity will be substantially complete.
By the middle of the year.
Yeah.
Second we are reducing our elevated cash balance of approximately five and of course 1 billion that we held at year end.
We expect to return our cash level to a more normalized on balance sheet level of approximately $2 billion.
Deploying excess cash balances will increase annualized investment income.
Approximately $100 million.
And our overall fixed income yields by approximately seven basis points on a run rate basis.
Importantly, the credit quality of the themes overall investment portfolio has remained strong throughout the pandemic.
Testament to our disciplined risk appetite and apollo's underwriting standards.
We have experienced negligible intent to sell impairments in 2020.
Totaling just one basis point of our average net invested assets and.
And we continue to expect.
And that any potential credit losses from this point forward will be very manageable.
Given the strong performance of our alternative investments and the quarter I'd.
I'd like to spend a moment focusing on this asset class.
Alternative investments currently comprise 5% of our portfolio.
And as a reminder, our alts are differentiated relative to your traditional hedge fund and private equity investments.
<unk> and more defensive orientation.
There's less prone to binary outcomes.
Our largest holdings, our direct investments and high performing strategic operating businesses.
I am pleased to report that despite the market volatility and 2020.
Portfolio is performing very well and.
And the strong annualized return of 20% and the fourth quarter.
Drive the full year return to be close to our long term double digit return baseline forecast.
And the fourth quarter, we saw broad range broad based strength across the portfolio.
Which benefited from relatively balanced performance between holdings marked on a lag and real time basis.
And they're at home our largest single alternative investment.
And I, particularly strong quarter, resulting from the continued strong operating performance of their business.
As you May have announced may have seen announced yesterday, a merrill homes being acquired by Western Alliance and.
A significant premium to our current holding value.
This sale was a fantastic outcome for Athene and.
And helps our shareholders realize the value of our differentiated alternative strategy.
Recall that part of our investing alternative and investing approach.
Strategically plant seed corn buying.
By investing directly and businesses, we believe and.
Help them grow over a multiyear period.
While learning and income along the way and then harvest the strong return upon exit.
As a result of the announced and Meera home sale, we expect additional revenue and the near term.
That Marty will walk you through shortly.
And another strong contributor to fourth quarter alternative performance with Venerable.
And the variable annuity company created as part of the reinsurance transaction, we did with Voya and 2018.
The business has been performing very well to date generating capital and the team recently announced its first strategic transaction with equitable.
It is expected to close later this year.
Other differentiated all holding such as a thorough and Catalina also performed well complementing the strength of our diversified holdings across other pockets of alternatives and.
<unk> real real estate real assets credit and natural resources.
Turning to capital.
We remain extremely well capitalized with approximately $16 billion of aggregate regulatory capital and and under Levered clean balance sheet with no legacy issues.
Characteristics, which meaningfully set us apart from the field.
And 2020, we deployed close to $3 billion of capital to support our record organic growth at very strong returns are large scale inorganic transaction with Jackson and.
And accretive share repurchases.
We also grew our excess capital over the past year amid the pandemic crisis.
To be well positioned from additional growth opportunities and to continue our ratings upgrade trajectory.
We firmly believe that efficient capital to deploy and that drives growth franchise enhancement and ultimately value creation for shareholders.
Heading into 2020, we are extremely well positioned with close to 8 billion of total deployable capital.
To support the four primary uses of capital we have outlined.
At the present time, we see an abundance of fertile ground on the organic front as well as numerous opportunities to act as a solutions provider.
Through inorganic transactions.
And we expect ratings or outlook improvement from all three rating agencies this year.
We ended the year with and adjusted book value of approximately $57 per share.
And by efficiently deploying capital we have achieved a long term track record.
And of compounding our book value by a substantial 16% per year.
Three times the industry average since 2009.
<unk> has now exceeded $200 billion of total assets for the first time.
2021 is setting up to be our best year ever.
We believe we have achieved number one status and all five of our organic and inorganic funding channels.
Best in class asset performance with Apollo.
And we have a growing worldwide presence with business significant investments or operations and the U S. Bermuda, Canada, the U K Continental Europe and Japan.
A large excess capital position and access to additional capital.
I guess, the best positioned company to continue to take advantage of the accelerating restructuring and the life insurance industry.
For those of you that are shareholders. We appreciate your recognition of our performance and unique positioning for future profitable growth.
With that I'll turn the call over to bill to provide additional details on our organic and inorganic growth activity.
Thanks, Jim.
As you can see from our results on organic growth engine continues to perform very strongly and the fourth quarter, which drove a record quarterly and annual results.
These results continue to demonstrate the strength and resilience of our diversified funding model, which.
And this has been built over more than a decade to source low cost predictable long term liabilities.
We've generated record inflows for the third consecutive quarter totaling more than 9 billion and the fourth quarter.
Helped drive a record 28 billion of gross inflows for the full year.
Our blended underwritten return on this activity came in well above our targets at 19% for the full year.
Representing our second best year of profitability on new organic business.
Despite these remarkable results and it seems to us and our differentiated highly profitable and accelerating organic growth capabilities are not fully appreciated by the market today.
To provide additional transparency and perspective, we have introduced some disclosure enhancements, which define our net organic growth.
Metric includes the impact of the relatively consistent and predictable organic run off that we experienced as policies mature over time.
Inclusive of these are organic outflows, our net organic growth was 21 billion and 2020, resulting in a net organic growth rate of 27 per cent.
Looking at our production longer term rather than just a single year, you'll see that our multi year production is very similar with the average net organic growth rate of 26 per se.
When survey and the competitive landscape, including other fixed annuity issuers.
As well as broader financial services sector.
And it quickly becomes apparent that our organic growth production is very compelling.
This is especially true when considering the relative duration of our inflows, which have a weighted average life of eight to nine years, when they come and the door versus other businesses may be subject to the penalty free daily monthly or quarterly redemption.
Turning to each of the channels and retail we generated a nearly 8 billion of inflows in 2020, including $2 3 billion and the fourth quarter.
Our full year retail inflows represent 15% year over year growth.
Like the environment.
Or industry FIA sales moderated significantly amid the pandemic.
We were well positioned with our numerous competitive advantages that are driving a much different result for us and others are experiencing.
According to Libera Athene place first for fixed index annuity industry sales and the second and third quarters and we believe our strong fourth quarter result will place us in a similar position when the full year industry results are published.
Our fixed rate annuities or micro business generated relatively strong sales and drove nearly 20% of our activity and the fourth quarter.
We delivered on our best year of bike yourselves and 2020, a trend that is being driven by our growing presence and the financial institution's distribution channel.
It allows us to have product positions on the leading digital platforms.
In terms of distribution trends, 50% of our total retail annuity sales in 2020 were generated through the bank and broker dealer channels.
Which compares to less than 30% and 2019.
While the 2020 result has been partially driven by pandemic related disruption and the channel.
We believe that distribution and inroads we have made within the financial institutions channel are very meaningful.
Expanding distribution and financial institutions, particularly on large platforms, such as LPL and truest, where we are benefiting from the maturation of new relationships.
Offers attractive attractive upside for future sales activity and drives greater diversification and stability for our retail business.
Looking ahead to 2021, we.
We expect our retail inflows will pay some pressure.
From an increasingly competitive environment.
And we're observing numerous issues, becoming more aggressive on driving new business at levels that would imply breakeven or negative spread.
You should expect that we will maintain our pricing discipline and we will not sacrifice shareholder returns to maintain a certain level of market share.
Turning to our PRT channel, we generated on our second best year of pension Closeouts on the exceeded by 2019, which included the marquee Bristol Myers transaction.
Given that the PRT market was disrupted disrupted by the pandemic, which delayed activity across the industry and the middle part of the year.
We saw a flurry of activity and the fourth quarter with inflows totaling more than 4 billion across six transactions.
For the year, we closed five and a half billions of transactions, which we estimate accounted for approximately 20% of the U S market activity in 2000 and flooding.
Solidifying our position as the market leader.
Looking ahead, we expect our PRT business to remain active and 2021 is the cadence of industry activity normalizes.
While it is too early to predict the deal volume for the year. The pipeline currently looks to be in good shape.
Of all our organic channels, we generated the most significant year over year growth and funding agreements and our inflows and this channel increased sixfold totaling more than 8 billion for the full year, including $2 billion and the fourth quarter.
One of the drivers of our robust growth and funding agreements during the year with the expansion of our funding agreement backed note program to reach Canadian and European market.
While all our non USD activity and swap back the dollars we are.
Issuing and various currencies as market opportunities warrant and by doing this we are attracting a broader set of investors and diversifying our activity.
And the spread environment continues to tighten as the year progressed.
We took advantage of the opportunity the issue and achieve very attractive returns.
We are optimistic funding on agreements will have another strong year and we're off to a good start.
With over 2 billion of issuance, thus far and the first quarter.
Lastly, and our third party flow reinsurance channel, we generated record activity for the year was 6 billion of inflows, primarily driven by our ability to serve as a source of strength for our flow reinsurance partners and the immediate aftermath of the pandemic during the second and third quarters.
As the environment improved fourth quarter activity moderated significantly as expected given.
Given the visibility we have with key partners for various reasons flow.
Flow reinsurance activity can increase and decrease depending on the appetite of the counterparty to supply capital and internalize the business or.
Or their willingness to accept pricing conditions that align with our target return thresholds.
During the quarter, we saw a bit of both dynamics at play.
As we look ahead to 2021, we expect that our flow reinsurance channel will generate strong and close although we will likely moderate from 2020 is given some of the unique market dynamics dynamics that were and play during the past year.
In summary, we anticipate healthy organic growth to continue and be underwritten to our targeted mid teen returns or better.
Our current baseline estimate is that organic inflows could total approximately 25 billion and 2021.
On the inorganic from.
We continue to see significant opportunities to deploy our excess capital at attractive returns.
You've likely observed are large reinsurance transaction with Jackson and June seemed to kick off and increase in deal activity across the industry.
We've seen a mix of block reinsurance transactions as well as whole company acquisitions.
Sellers realign their businesses to achieve desired strategic objectives and <unk>.
<unk> recognized the long term value of businesses like ours.
We have been talking for some time about the insurance industry restructure and trend.
And we're well positioned to play our part and this activity.
Our deep expertise swift execution capabilities and.
And that's deployable capital position and flexibility to structure win win outcomes position us as a preferred solutions provider.
And importantly, as Jim mentioned, we have $7 7 billion of deployable capital available net of what is earmarked for the 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 in 2021 and beyond.
And our longstanding commitment to our shareholders to be a disciplined buyer and deploy capital in a manner consistent with our attractive return target has not changed and we will continue to execute our inorganic growth strategy.
With that I'd.
Like now to turn the call over to Marty who will discuss our financial results.
Thanks, Bill and good morning, everybody.
We delivered particularly strong financial performance and the fourth quarter, which closed out and outstanding year for Athene in light of the macro volatility.
Morning, I'll provide some additional context around our results while also discussing some of our forward perspectives and the near term and for 2021.
For the fourth quarter, we reported GAAP net income of $1 $1 billion or $5.44 per diluted share.
Our adjusted operating income available to common shareholders for the quarter was $558 million or $2 85 per share.
Excluding notable items and 41 million as well as our strategic Apollo investment total adjusted operating income was $404 million or $2 and <unk> per share.
Retirement services adjusted operating income, excluding notables was $452 million.
Resulting in an adjusted operating ROE, excluding notables of 24 per cent for the segment.
The profitability of our spread based model remains very compelling even and the low interest rate environment. As we continued to originate business meeting or exceeding our target returns with an even higher spreads and we saw a couple of years ago and a higher rate environment.
Our fourth quarter results also benefited from strong performance from our alternatives portfolio as Jim discussed earlier.
Let's cover the key components of our operating results starting at the top of the income statement.
Our large enforced business produces the mostly consistent and predictable fixed income yield.
And the fourth quarter, we saw some of the continued benefits of the Jackson and redeployment efforts being realized as well as higher call income from bonds and mortgage loans.
These two drivers resulted in the fixed income nir coming in above our expectations. Despite continued cash drag from the very strong organic deposits and a quarter.
Looking forward, our fixed income here and will benefit from two items deployment of excess cash and continued redeployment of the Jackson portfolio.
The fruits of our effort from both of these items will ultimately be dependent on the investment opportunities, we can source and the overarching credit spread environment.
We saw continued tightening in the fourth quarter and we ended the quarter with more cash on hand, and previously anticipated.
As a result, we expect to fixed and Nir will drift toward our prior expected level for the fourth quarter or approximately three 6% and and near term.
Sure new money yields remain the same.
And with organic volume similar to 2020 levels, we would expect and fixed near level to hold more or less throughout the year of 2021.
While the continued redeployment of the Jackson portfolio and reduction and excess cash will benefit the fixed and here.
On the margin and fix yields on new and flows are lower and the current environment.
However, these inflows have commensurately lower cost of funds as we meet or beat our return targets.
Said, another way our ability to generate target net spreads and earnings growth remains intact. Despite lower on the margin and fixed income nears and I'll speak.
To the offsetting cost of funds dynamics and just a moment.
Turning to alternatives, we experienced the second consecutive quarter, a particularly robust performance saw a broad based strength across the portfolio and generated a 20% annualized and near.
Market tailwind is that emerged in November and December were helpful to a continued recovery and old performance. Following a volatile first half of the year.
Along with strong underlying performance and several key holdings.
Looking ahead, we expect alternatives to continue their strength and the near term with two expected drivers and play.
First the impact of strong fourth quarter markets will provide a tailwind for approximately 50% of the old portfolio, which is marked on a lagged basis.
And the announced sale of a mirror home, which Jim mentioned earlier is occurring at a price well above our ear and Mark and we expect this will drive approximately $175 million of incremental investment income that we will recognize during the first quarter.
Considering these tailwind and assuming markets hold their current levels.
We would expect the first quarter alternative and ear to be 17% to 20% on an annualized basis.
With this strong start we estimate their alternatives portfolio will generate and meaningfully better return in 'twenty and 'twenty, one that our normalized 10% baseline expectation.
Moving next to cost of funds and starting with the cost of credit and component.
Ported crediting rate remained relatively in line with the prior quarter, demonstrating our disciplined pricing as well as prudent rate actions on retail enforce renewals.
And so you've discussed before.
Institutional mix is one of the items that will push the crediting rate higher since essentially all of the funding costs for PRT and funding agreements are reflected within cost of crediting.
And each of these institutional channels have generated strong inflows.
Looking ahead, we expect cost of crediting to decline and be approximately 175 to 180 basis points in 'twenty and 'twenty one.
And there's further expected growth and these institutional channels is offset by new institutional inflows coming in at lower marginal cost.
As well as continued rate actions on deferred annuity renewals.
The ultimate crediting rate in 'twenty and 'twenty, one will be impacted by the rate environment and its impact on new business rates as well as on business mix.
Turning to other liability costs, which represent the other component of cost of funds for our deferred annuities recall that we observed quarterly fluctuations and it can occur as a result of factors such as market movements or DAC amortization impacts from higher or lower gross profit.
And the quarter other liability costs decreased 15 basis points sequentially due to a favorable benefit of about 13 basis points from equity market appreciation impacts and actuarial adjustments, which was partially offset by four basis points for higher DAC amortization from higher investment income.
Looking ahead, we expect other liability costs to be the component of cost of funds, where you will see the more favorable leverage.
Given our record organic growth and a lower marginal cost of funds and our in force the reinsurance of the Jackson block, which carries a lower other liability costs right and.
And higher mix of institutional business we.
We believe our go forward baseline run rate for other liability costs is now approximately 80 basis points meaningfully lower than the 100 basis points, we had indicated historically.
Shifting to our platform costs, our G&A expense ratio increased four basis points quarter over quarter as we experienced some normalization from an unusually light third quarter.
Part of the sequential increase was driven by a higher long term incentive compensation that is tied to our financial results, which improved a mirror strong fourth quarter earnings and organic growth results.
Looking ahead, we expect operating expenses will remain at or above the 25 basis point level and the near term.
And then decline later in the year as we benefit from increasing scale.
Moving to taxes as a reminder, our tax rate is a function of the proportion of income, we generate and our Bermuda subs versus our U S subs.
Within this strong operating income performance and the fourth quarter, largely driven by strength and alternatives.
Our tax rate came in at 12% for the year.
Looking ahead.
The more normal income mix and anticipated for 'twenty and 'twenty one.
We expect our tax rate should normalize around it and 10% level.
Given the focus investors have on the impact of the current low yield environment and future results I'd like to offer some additional perspectives.
When we originate new business, our pricing is based on a cheaper book yields in the current environment and then we set our cost of funds appropriately upon and underwriting to achieve our target net spreads and returns.
The impact of lower new money inflows and the impact of lower new money yields on new inflows and run off of higher yielding assets are almost entirely offset by lower cost of funds on new inflows and run off of older business with higher cost of funds.
And to that our continued management actions such as redeploying the Jackson portfolio.
Investing excess cash and resetting rates on legacy annuity business.
And we expect the cumulative effect of these items to modestly benefit our run rate for net investment spreads.
While 2020 and turned out to be a much different years and we all initially anticipated we continued to execute on our core strategy of growing very profitably. The record inflows. We added in the past year with materialize and our earnings power and 'twenty 'twenty, one and beyond.
When we consider this as the substantial size of our in force block.
Ongoing benefits of our organic growth engine and the opportunity for inorganic deals.
We expect to generate solid earnings and book value growth and the year ahead.
With that I'll turn the call back over to the operator, and we will open the line for any of your questions.
Thank you at this time, if you'd like to ask a question. Please press star one on your telephone keypad, if you wish to remove yourself from the queue. You may do so by pressing the pound key.
Remind you to please on mute your line when introduced and if possible pick up your handset or optimal sound quality. We also ask that you. Please limit yourself to one question and one follow up our first question will come from the line of Ryan Krueger of K B W.
Hi, good morning.
Could you comment on the.
On your on the lack of buyback in the quarter and your thoughts going forward and in particular was it more driven by the.
Recovery and your stock price or was it more of a function of the.
Deployment opportunities organically and inorganic inorganically that you see.
Yeah, Thanks, Brian and this is Jim.
And more of the ladder.
Yeah, we have four uses of capital as we've outlined to support organic inorganic growth.
Ratings upgrades and then stock buybacks of those four.
On the most franchise enhancing is is our organic growth.
And the least is buybacks now even at today's prices. The returns are compelling from stock repurchases, but you're right. It was just a matter of we put a lot of capital work supporting our record organic and inorganic deals this year and.
And since both of those and and especially organic our franchise enhancing we think we should emphasize those as opposed to and emphasizing stock buybacks, but it is a compelling value at these prices.
I'm, sorry, and the mix going forward, but we'd rather do things that enhance our franchise.
Yeah.
Thanks, and then can you provide any additional commentary on.
He type of inorganic opportunities that you're seeing and the market at this point.
Go ahead bill.
Sure Ryan.
And look where we continue to be busy you know you know theres a lot of activity.
And what we're seeing is when management teams, you know restructure their business and free up capital.
You know getting out of low return businesses, even if they have to you know.
You don't take a one time loss theyre getting their stocks are getting rewarded.
And you know people get the joke you know that so so there's a lot more of that kind of activity going on and.
And and you know we're in the middle of it so I wouldn't say, it's any different than what we've sort of seen over the past year. It just seems to be more you know more.
More of the same.
Understood. Thank you.
Your next question comes from the line of Humphrey Lee of Dowling and partners.
Good morning, and thank you for taking my questions.
I guess my first question as you continue to talk about looking for potential rating upgrades from.
Given your kind of closer to 8 billion of excess capital and like how much capital do you leaning need full on kind of potential upgrades.
Well yeah. Thanks for the question Humphrey and.
Look we think we've been operating on a company and much higher than our current ratings levels.
And I think the rating agencies agree which is the support for my statement in my script, where I said, we expect ratings improvements and or outlook upgrades from all three rating agencies. This year.
So we're excited about that and and we're.
And you know, we're having our annual review discussions with the agencies over the next few days and.
And they're very complementary of everything we've done and diversity of our different channels.
So we're very optimistic about improvement so I think we have enough capital on as we speak for upgrades and and that's what we're expecting.
Okay.
And then my second question is on.
Regarding kind of on the deposit and I'll look for 'twenty and 'twenty, one and Bill's prepared remarks, he talked about like based on where you look right now on 25 billing day policy in 'twenty and 'twenty one.
I think you also mentioned that there was some of the pricing kind of that you see in the marketplace seems to be irrational. Maybe just can you talk a little bit more about what you saw in the marketplace from for both retail and flow reinsurance and and how we think about those two pieces into 'twenty 'twenty one.
Yeah Yeah.
Yeah sure Humphrey it's looked at.
Okay.
You know some guys are really trying to.
Make a statement and the way they do that is by setting very high rates on micro business, Okay, which is sort of a commodity and of the market. So we're seeing a we're literally seeing micro rates today that are offered.
Offered to customers that are higher than ours.
Investment grade achievable right.
So you know what that tells you is is that business is being price.
You know break even or frankly, maybe even at a loss on the split.
Net basis. So it's you know never mind, what you know you know commission talks on it and all that so its so.
And you're seeing a lot of aggressive behavior and the buying a business.
Good news is it's.
It's pretty much limited to the micro business and what's the sort of you know, which you know we some comes and goes you know in terms of its competitiveness.
So that has an impact on some part of our retail business.
Where it really has an impact on flow right and flow reinsurance because a lot of our activity there is market driven.
And that will this persist.
And usually it doesn't.
Usually the market you know with terms and the normal because people really can't keep doing this forever.
And and so.
But I do expect some softness there and.
And I do also think by the way that the other parts of our distribution, which are all very important you know and are at least as big as the retail business are going to step up.
And had very good years, and where the pricing there is frankly very rational.
The pension business the funding agreement business. So I think they're both going to do very well this year and.
But you know just like they did and the fourth quarter.
So should we think about this is that the mix is going to be skewed towards the institutional side from 'twenty 'twenty one.
I think so you know if you think about last year it was very well balanced.
And I think it's gonna be a little bit more skewed.
Towards the pension and funding agreements this year.
Got it and I appreciate the color.
Your next question comes from the line of Andrew <unk> of Credit Suisse.
Hey, good morning.
On the M&A question Bill So we saw two big transactions.
Allstate and American financial.
You know is the is the competitive environment.
Environment heating up to a point, where you know it.
It's making it difficult for athene to meet its return hurdles and is it getting more challenging for you. Despite the touristic pipeline and maybe a little color around that.
Yeah sure Andrew.
And that's an important question right as you know has something really changed or is our competitive position, which has been very strong.
Is it now you know less differentiated and look you know we now have a number of.
Competitors, who you know.
And have some sort of a platform with you know generally some kind of and offshore structure element to it.
And I look at that that's one piece of the puzzle right. That's one step and there are a lot of other pieces and no particular order right. You know we have higher ratings than most of these peers, we have significantly more available capital than almost anyone which allows us to go after opportunities others can't.
We have you know a very strong organic distribution. Most of these peers have either no or got extra sure. You spoke of are frankly, they're only selling fixed annuities and the IMF channel.
You know, we're a solutions provider, which means you know for example.
We have the ability to analyze and takeover VA blocks through our partner vegetable and that's a very rare skill, which frankly is very much into bad these days.
We have the we have scale and we have the lowest expense ratio and the industry. That's just as important as tax.
And our competitive positioning.
And then finally, maybe most importantly, you know we have multiple assets generating platforms, which are you know, which create you know much more attractive returns at the same level of risk. So you know.
It's I'd love to say this is just about all our you've got enough offshore.
On a structure and that's how you compete you know the reality is it's much more complicated that it's much harder.
And so execution with all those capabilities is important so I think it's.
You know is it maybe a little more competitive and it was yeah.
Oh do we still operate at a significant competitive advantage I think we do.
But I think what sets us apart is we're also very disciplined about price right. So you know we don't chase stuff, we've said that many times and sort of have the track record of proven and so it's.
So I think that's kind of the situation today and the market.
So upbeat looking into 'twenty one for free.
From closing on some big deals Yeah. We are you know where you know we think there's a lot more to do you know the restructuring.
And we've talked about for a few years here I mean, it's.
It's just finally, starting to really pick up steam.
So I think there's going to be a lot more activity.
Got it and then just one technical one and say, it's like kind of look at the operating expense ratio coming in at about I don't know about 20 basis points from the second half of the year and I know you use third parties to do a lot of your admin, but each year. This operating expense ratio has come down and is there any.
Expectation that that can continue to decline or does it holding 20, what's your thinking around what that ratio is going to do as you grow assets.
Yeah, Andrew I think it does come down overtime and no doubt about it because you know.
Most of our infrastructure is kind of built out and so and the channels that we operate in and we're just continuing to add business and Theres really pretty low incremental cost I mean, when we get on board and new distributor and retail for example, there is some kind of upfront cost typically but by and large were pretty well built out so we'd expect it.
Get more leverage kind of over time by reduced operating <unk>.
The expense ratio and so we'd expect that to really continue and then obviously it just.
It gets another boost even more when we do inorganic deals as we did and 'twenty and 'twenty with the Jackson deal, but even with just our pretty strong organic growth, we would expect that on a number to trend down over time.
So there's a little bit on.
After the year, just because of you know less like other companies less travel because of Covid, we had and the earlier a little bit lower incentive comp and the third quarter. It boosted up a little bit and the fourth quarters and things like that but but overtime, we would expect that to go down.
And maybe even into the teens.
Yeah, I think of it as you know two to three years out to putting on them.
And with more quickly we grow I think I think so.
Great. Thanks, a lot.
Yep.
Our next question comes from the line of Elyse Greenspan of Wells Fargo.
Hi, Thanks, Good morning on my first question on on the inorganic side going back to the discussion there on the pipeline with M&A.
You know in terms of just really large transactions on.
We've seen and.
Increase and kind of jumbo and larger deal today within your pipeline.
And you know what you would've said on you know.
Six to 12 months ago.
Well is it is there an increase and jumbo.
Probably not you know I think what was you know if I think about what sort of and the shop now it's theirs.
Sort of a mix of smaller stuff medium sized stuff and you know there's still jumbo deals there, but it's but I think it's probably it's probably a little more balance.
Yeah.
Okay. Thanks, and then my second question on.
Talk about talk about the potential for weighting of Queen potentially from some of the agencies this year on.
And so can you just talk about the impact it back and have on your on you know on.
Organic on business trends.
Specifically within the retail channel from a distribution standpoint, and help us think how big it could be.
Due to deposit deposits you can see you know weather in 'twenty, and 'twenty, one or perhaps a little longer term on depending upon the kind of leading change and perhaps into 2022.
Go ahead Bill Yeah. So you know it really helps you know all of our businesses, but I'll just quickly I'll talk about retail first.
You know it.
It allows us to get into the national wire houses and a bigger presence you know where we have sort of been kept out because of our ratings.
We're making progress there, but that'll accelerate but that's probably a longer term impact not really this year's.
Impact so much but into 'twenty two it should matter.
It helps immediately and the funding agreement business, which is low as you know with better ratings and lowers the cost of our funding and helps returns and that'll help immediately and.
And in the pension business and our reinsurance business and you know and also Inorganically book.
Look we already compete pretty well against the number of people because of our ratings.
Especially on reinsurance, but their but now it would become even more pronounced and and I think it would also help on the pension business you know, even though you know and now we're getting companies like general electric who are using us as a counterparty.
But I think that can I think there's still potential for improvement there. So it really.
No it really touches all of our businesses.
And yet and the 25 billion outlook that you gave for this year that assumes on no rating changes.
Well not really it doesn't you know I think that if there depending on how significant they are you know in terms of what the rating agency say.
Do they just change outlook. So they really change ratings you know it could have it and its potential that there's upside there.
Okay. Thanks for the color.
Your next question comes from John Barnidge of Piper Sandler.
Thanks can you talk about maybe how we should be thinking about politics and policy holder behavior perspective.
And I asked that because withdrawal rate increased back to.
And to two 3% from two 1% and the corner.
Yeah.
Yes.
You know a lot of this has to do with always about you know what's going on with different cohorts of business in terms of lapse rates and stuff are our laps.
Right behaviors has been very steady and and essentially what we predicted.
You know if you see though a.
That's substantial increase and the rates you know sort of it and on when I say substantial I'm really talking about 100 basis point move and on.
Underlying rates.
You know could you will probably see more lapse activity.
And.
And but you know, it's something that we model and stress test all the time to make sure that you know even on a stress case that our returns are still gonna be attractive. So I'm. So I think it's.
I think it's gonna be OK and of course, the benefits of having 100 basis point higher rates far outweigh.
No you know what's going to happen to lapses.
Hey, Bill and John and I would just note that for the most part this year on.
Our lapses were within our range of expectations, but probably on the lower side, probably in the middle of the pack and the fourth quarter, one thing I know it and the fourth quarters.
And to see an uptick because of the required minimum distribution. So if you reflect that it's kind of and very much in line with our expectations.
Great. Thank you for your answers.
Your next question comes from the line of Brian Meredith of UBS.
Thanks, guys. Good morning. This is Mike Ward on for Brian.
I just had a question on Venerable since you guys are a shareholder I was just wondering if you have maybe any perspective on their capacity or their ambitions going forward and how it can actually benefit of Athene you know they've continued to grow by themselves and doing some deals, but just wondering if you could maybe frame their vision.
And could you theoretically become or could they become and asset source or for you to the extent they identify identifying maybe a VA block that's been associated with a fixed block is that how the relationship could work. Thanks.
Yeah, so on and M&A perspective, Mike that's exactly right right you know, we and if you think about how the Jackson deal began that was sort of the conversations we were having originally it was both.
You know it was a it was a lot of VA conversations as well as fixed that ultimately gravitate into a fixed deal but.
I would say without venerable there on our side I'm not sure. We would have we would've had the same kind of opportunity.
It and and there will be other opportunities like that.
And if you think about the Voyager deal. That's the situation. We were on the Venerable has actually you know they've only done one deal right beyond the original Voya deal, which is equitable.
There are a lot of companies out there who are looking for some kind of a V. A solution and I think and follow the industry you heard management team and say that.
Whether that comes with a fixed block or not you know we hope it does.
We partner with them on looking at that sort of thing.
And that's the thing I would just say is is that I will turn out to be a great all right for us and in terms of its performance.
And you know this is a you know.
And there they're doing very well from a you know from.
From a return perspective, and so it's so that's you know that's part of the benefit as well.
Thanks, and then I know, it's early but I was just wondering about fads vs. L. D. T. I changes, but just wondering if you have any early estimates or maybe quantification on the potential impact on your GAAP financials, and if not do you think as the industry evaluates the impact do you think it could serve as a catalyst for you guys whether it's in.
Organic growth or flow reinsurance.
I don't think there's any doubt.
You know, we're hearing comments from management teams Dow about.
Okay, well you know, okay, that's a pretty big negative ceding commission, but I'm going to record that anyway.
And when I, you know and I take my L. D. T. I charge you know two years from now three months from now or whenever it's going to be so it's already factoring into their thinking.
And in terms of what they have to do because you know they might as well.
No.
And now get the capital release, you know and and move forward. So I feel like that's you know that's helping our business and that's and that factor is probably only going to grow as a.
Part of the M&A story.
I would just add that as far as we can tell.
And that the impact on us is probably going to be different and probably.
Better for our financials and it is on others I'd expect by and large they're gonna be and equity hit for other.
Insurance companies from it and I don't think there's going to be the case with us so much we're pretty far along with it.
We're actually very far along with it because we actually at one point, we were thinking about early adopting and I don't think we're going to do that at this point.
But and the back half of this year early next and he will be and are positioned to disclose the impacts, but if you think about our rider reserves as we've talked about in the past, we think theyre pretty conservatively and realistically says so we don't think they'll DTI is going to have a really.
Really having a negative impact on us to an extent, but I think it's different for others as Bill mentioned.
Thanks, guys.
Your next question comes from the line of Tresiba and <unk> of Barclays.
Thank you and good morning on.
Are you seeing frothy on pricing on block transactions as alternative asset managers are trying to sell their platforms for the first time, where they may be paying a premium to do that and how would you compete with that dynamic.
Yeah.
I don't think there's any doubt that some theres been some property pricing.
You know and the second half of the year.
And you know that.
The real answer is we don't try to compete with it right. You know we have a lot of advantages, but you know we're very disciplined about our.
And on making sure we hit on returns and if we are in it for something and if somebody really wants to get get something because they feel like you know I gotta get this capability then so be it.
We'll we'll just move on to the next one.
And and I think the good news is.
You know I think most of the major alternative asset managers, who are contemplating getting into this business have now on their deal.
And now frankly.
And I'm expecting them to be much more rational competitors, because they're good buyers generally and in terms of.
Transactions and I suspect, they're going to be a lot more discipline going forward.
And and we still as you know as I said, a little earlier you know, we still have a lot of advantages over those guys and the marketplace for inorganic deals so I.
And that's part of why I feel confident about our capabilities.
Okay great.
And just wanted to touch on F. I E and I was like the hot product a number of years.
Seems like folks are really focusing more on structured annuity and I'm just wondering your market scanning on okay.
Is it more your contrarian view that product and <unk>.
And I still think and pricing remains attractive and and maybe just to tag on to that like why you're not seeing the same traction on that structure and annuity side and product that you've also recently and Terry.
Okay.
Yeah. So it's a good question.
So yeah, so far has had a soft year.
After a lot of growth after being sort of the fastest product category for the last five years.
And that has a lot to do with the eye about channel where most of the parties are sold.
And having such a soft here because of the bad and dynamic right, but I do it's pretty clear that they have.
M O distributors are now kind of managing around the pandemic and and and you and were seeing that were seeing FIA. So starting to recover even in the fourth quarter and.
And.
And that's so that's good.
On the structured product you mentioned, what we often call those wireless okay. All right and those are essentially another form of and indexed annuity right. It's the same product there they're categorized with V age because it's a registered product, but they're really a fixed annuity product.
And another phenomenon and the industry is is that many care insurance carriers, who used to sell a lot of D. A.
Are now trying to transition to arrive a product and a lot of producers who used to sell V. A R selling our rail our product.
And this is about where you are and channel. This is why ratings are important because a lot of those kinds of V. A former V. A sellers you know producers.
City National wire houses and they're the ones, making that transition and they're oftentimes selling that the carrier that used to sell them V a and they're not selling her islands.
And and so on <unk> sales are not you know, where we want them to be.
That's been the hottest growth area of the you know what I would call. The index annuity business and you know we have a good product, it's very competitive in terms of pricing and and features.
But we got to get it and the right channels and and that's a that's an important goal for us over the next couple of years.
Thank you.
Your next question comes from the line of Lee Cooperman of Omega family Office.
Thank you and let me first congratulate you guys on and excellent performance.
And every day I also say before I pose my question for be it from me to advise you because I think he goes and smart, but I would like to pose a question. Your 83 per cent of book value you've compounds and book you said its 60 per cent. The last number of years. So your performance does not reflect and the stock price.
If you thought about a cash dividend and it's an indication from management day, just your confidence and the recurring nature of your earning power.
The way I look at it and if you had a 10% pay out or a dollar dividend he would be holding well in excess of the market yield and you would have 90 per cent of your capital retained to finance future growth.
And what do you think about that.
And thanks Lee Thanks for the nice a nice comment deserve to get good to talk to you again.
But we're a growth company and you're seeing how quickly. They groan. So it was Microsoft and has a yield no I hear you.
No problem I understand.
We think there's better use from a capital then returning some of that.
Some of them are shareholder capital back to them.
Which is consistent with my comment on stock buyback is one of the uses we have for capital.
It's not franchise enhancing like the other three uses we have for Dar and true.
And some extent I view dividends the same way I mean, our operating performance speaks for itself I agree, we're way undervalued and our stock price and.
Trying to figure out how best to to achieve value and the stock price that's focused on mowers every day.
But right now I don't think a even a modest dividend as and and using the cards from us, but I hear the point and I. Appreciate the comments you know well not net.
Not to kind of belabor the point, but you don't want to buy back stock because you think that organic and acquisition opportunities are superior.
On the market clearly doesn't believe your business model, which is why it's b price to wage priced.
Two way of evidence and confidence and the recurring nature of your earnings and a business and it's volatile is to have a consistent dividend and I think.
10, and a dollar dividend.
We'd be a 2.1% yield.
And price decks and the price that you're at which would be I think 60 basis points ahead of the market and your statement about your confidence about the outlook and it wouldn't change anything the way to look and just take this capital gain and you have on the sale of the asset is listen that for every share you buy back your buying back 50 years of dividends.
And you know we said we were talking about a modest approach, but anyway I hear you I'm very comfortable where you're running the company just a suggestion and thank you very well know I hear no I really I appreciate the comments I would just say.
As far as evidence of our confidence and we just look at our track record since we started 12 years ago and.
And you say growing.
Book value at a 16% or.
Per year rate.
Every year I mean, that's.
Foreign access and the English insurance industry, and just that alone you would think on multiple of these far different than it is now, but you guys and I guess like all right and then looking at fault or even looking at forward earnings and it should be quite hard and as you're right. You're smart guys put yourself into a room sit down and and discuss why are we selling what we're selling and the conclusion is people don't have conflicts and recurring nature of your earnings and.
The business so.
One way to underscore your conflict and the nature of the business is to a recurring dividend enough said, but congratulations you'd like they try here I I hear Ya and everything's on the table, but we're pretty comfortable with our strategy, but always looking for enhancements.
I appreciate your your confidence and nationally and as a shareholder.
Ladies and gentlemen, we have reached the allotted time for questions and answers on our turn the call to Noah Gunn for any additional or closing comments.
Thanks, Laurie and thanks, everyone for joining us this morning and for your continued interest and Athene. If you have any follow up questions regarding our results or anything we discussed on today's call. Please reach out to us and we look forward to speaking with you again next quarter.
This does conclude today's athene holding's fourth quarter, and full year, 'twenty and 'twenty earnings call and webcast. Please disconnect. Your lines at this time and have a wonderful day.
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