Q1 2021 Athene Holding Ltd Earnings Call
[music].
Good morning, My name is Samantha and I will be your conference operator today.
At this time I would like to welcome everyone to the Athene first quarter 2021 earnings conference call and webcast.
All participant lines have been placed in a listen only mode to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question at that time. Please press star one on your telephone keypad if.
If you should need operator assistance, Please press star zero.
I will now turn the call over to Noah Gunn head of Investor Relations. Please go ahead.
Thanks, Samantha and welcome everyone to our first quarter 2021 earnings call. Joining me. This morning are Jim Boulardii, Chairman and CEO, Bill Wheeler, President and Marty Klein, our Chief Financial Officer earlier. This morning, we issued a press release slide presentation and financial supplement which are available on our website. In addition, a preliminary.
Terry Joint proxy statement and prospectus was filed yesterday in connection with our previously announced merger transaction with Apollo.
Our Investor Relations website contain important information that is and will be available to investors relating to the proposed merger and the interest of our directors officers and employees, who may participate in the solicitation of proxies from shareholders.
As a reminder, today's earnings call May include forward looking statements and projections, 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.
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 and you'll find reconciliations of these metrics within our earnings materials available at IR Dot Athene dot com and with that I will now turn the call over to Jim.
Hey, Thanks, Noah and good morning, everyone.
Thank you for joining us and for your continued interest in Athene.
We are incredibly pleased with our first quarter results.
With showcase the power of our spread based business model.
And the very strong levels of profitability it can produce.
As many of you are aware approximately two months ago, we announced a merger transaction with our long standing strategic partner Apollo.
Before discussing our business achievements during the first quarter I'd like to take a moment to explain why I'm extremely excited about our prospects for accelerating growth and continued success as a combined entity.
By now it's fairly well understood that athene has grown into the preeminent platform in the retirement services industry.
With our market leadership position across all of our organic and inorganic business channels.
We have generated record levels of growth underwritten to very strong returns and.
And I could not be prouder of our team for their incredible efforts in executing our strategy over more than a decade, and particularly over the past year.
At the same time it is important to recognize that on things ability to achieve long term success.
It has been built upon a foundation of best in class asset management capabilities Cup.
Coupled with strategic guidance and significant resources, all of which Apollo has provided since our founding.
While we have been aligned as partners for more than a decade.
We expect that moving to a fully aligned model will carry many strategic benefits and help unlock athene value potential.
Our merger with Apollo will create one large scale financial juggernaut.
That is stronger and more creditworthy on a combined basis.
Thereby improving our ability to pursue continued profitable growth while remaining a source of strength for the individuals and institutions that we serve.
Importantly, we remain cognizant of the significance of our role in the broader financials ecosystem.
We serve hundreds of thousands of individuals retirees as well as many institutions and their constituents.
Since athene as founding we have not wavered in our commitment to delivering greater financial security to policyholders.
And helping our partners to manage long term liabilities and that will not change.
We are more confident than ever that the path forward offered by this transaction is the natural appropriate and logical next step for things business.
We are hopeful that you our shareholders can share our level of excitement and belief in the benefits of this transaction.
We will offer your support in the upcoming voting process.
Turning to our very strong first quarter results.
We demonstrated superb execution on both sides of the balance sheet with.
With strong organic growth and asset outperformance combined to drive record profitability.
Athene generated $8 $2 billion of growth gross organic inflows, marking our second highest quarterly total ever.
This result reflects the significant scale that we have built across each of our diversified funding channels.
As well as the continued strength of our balance sheet to support new business growth.
Taken together these two factors allowed us to be opportunistic on our approach to liabilities sourcing amid.
Amid competitive market dynamics, while maintaining pricing discipline to achieve our targeted returns.
On a record quarterly adjusted operating income driven by particularly strong alternative investment income, which I'll discuss on a moment.
Drove athene adjusted book value to nearly $63 per share.
This result continues a consistent upward climb of 16% per year since our inception 12 years ago.
Three times the industry average over that period.
On the asset side of the balance sheet.
We continue to be intently focused on maximizing earnings while maintaining our risk discipline.
To this end, we purchased $17 billion of investments in the first quarter.
And despite the persistently low interest rate environment the yield on our fixed income purchases was approximately 75 basis points higher net of fees than the triple B corporate bond index.
This outperformance demonstrates both the expanding scale and consistent alpha generating nature of our active investment management partnership with Apollo.
Our purchase activity for the quarter can be summarized across three primary buckets.
First we are seeing attractive opportunities for structured securities such as CLO and asset backs, which in aggregate accounted for 40% of our purchases.
As a reminder, we focus on the senior investment grade tranches of these structured securities.
Which benefit from significant credit enhancement and enabled us to pick up a substantial amount of incremental yield at a similarly high ratings profile to our corporate purchases.
For example, the average rating of the CLO has repurchased during the quarter with single a.
Second despite the continued tight spread environment, we are still seeing attractive enough investable spreads in public and private corporate bonds.
Which accounted for approximately 30% of our purchases.
And third alternative investments accounted for roughly five per cent of our purchases in line with our target allocation.
Key transactions. This quarter included the completion and funding of our previously announced acquisition of Donlin from Hertz.
Besides the day to day execution of our growth strategy. We are focused on two near term priorities that we have spoken about recently to help drive our forward earnings power.
First we made significant progress on reducing our previously elevated cash balance.
Having ended the first quarter with two and a half a billion dollars of cash on hand in line with our desired levels.
As such we expect the average cash balance will normalize in the second quarter and continue to aid our portfolio yield.
Second we are nearing completion of the redeployment of the inherited Jackson portfolio.
To bring it in line with Athene Alpha generating asset allocation strategy.
Through April we have reinvested nearly $18 billion or roughly 85 per cent of the volumes in our redeployment plan.
Successfully raising the yield on the portfolio by approximately 160 basis points and 11 months.
We continue to expect that our redeployment activity will be substantially complete by the middle of this year.
And we estimate that we will be able to increase the gross yield on the portfolio by approximately an additional 50 basis points.
This will largely materialized through continuing to align the Jackson portfolio.
With Athene overall asset allocation, which includes a 5% allocation to alternatives.
As a reminder, our allocation to alternatives is very similar in magnitude to the average allocation held by the broader industry.
However.
The way, we invest in all of <unk> is very differentiated.
While others predominantly invest in traditional hedge funds and private equity funds.
We make investments that tend to have a defensive orientation.
Such as strategic operating businesses possessing attractive cash flow characteristics.
That may offer the additional benefit of sourcing directly originated fixed income investment is well suited for various parts of our portfolio.
Our alternative investing strategy had been very successful.
With a portfolio generating positive returns each year over the past decade.
Despite a couple down years for broader equity markets and the long term average net average annual net return for us is more than 11%.
During the first quarter robust alternative investment income propelled the quarter's operating profitability to record levels.
With an annualized net return of 39%.
While we certainly do not expect this elevated level of return to recur quarterly.
We have observed that periods of stronger than average all performance on a repeatable in consecutive quarters or even consecutive years.
Particularly if some of our maturing investments are building value or unlocking value upon a monetization event.
As I've mentioned previously.
We have a track record of strategically planning seed corn buying.
By investing directly in businesses, we believe in <unk>.
Helping them grow over a multi year period.
While earning income along the way and then harvesting a strong return upon achieving significant growth or an exit.
In the first quarter, we experienced a confluence of tailwind include.
Including the impact of continued broader market appreciation.
As well as a few investment specific drivers.
These included large gains on our investments in Venerable apparel home and mid cap.
Which generated a combined $425 million of investment income in the first quarter.
In line with the dynamic I just described we monetize our eight year investment in a matter of home.
By selling it to a strategic buyer as previously announced.
Demonstrating the accretive opportunity to unlock value upon an exit.
At Venerable the value of our investment increased significantly due to their transformative business growth, resulting from the pending reinsurance transaction with equitable.
Venerable as an example of an alternative investment which continues to season nicely as the business scales.
And mid cap, which has been and continues to be a very successful investment for us.
Recognize incremental value because of our recent capital raise which was priced at a higher valuation than our previous mark.
Importantly, like our alpha generation on the fixed income side, our alternative investing results also directly benefit from the unique sourcing on diligence capabilities provided by our partnership with Apollo.
The record results in the first quarter were fueled by gains in businesses, we would not have otherwise had access to investing.
This illustrates that the relationship between our two businesses has been.
And we'll continue to be a meaningful competitive advantage with massively come bounding compounding benefits for both companies.
Finally.
I'd like to touch on an area of increasing importance to athene.
Last month, we published the 2020 <unk>.
Edition of our corporate social responsibility report.
Which is available on our website and showcases the tremendous progress we have made in our approach to CSR across the company.
Within the report you will find numerous examples.
And accolades of how our more than 1300 team members are working together.
To create a lasting positive impact.
Particularly in the communities in which we work and live.
During a year, which prompted much reflection.
We moved to place a greater priority around diversity equity and inclusion.
By defining goals setting objectives, and beginning to alter policies to achieve our desired objectives.
The senior leadership team and I are fully committed to championing and supporting our efforts in these important areas.
With that I'd like to turn the call over to Bill for an overview of our origination activities.
Thanks, Jim.
Our organic growth engine continues to perform very well building upon the strength, we demonstrated last year.
In the first quarter, we generated more than 8 billion of total inflows as Jim highlighted.
Driving net annualized organic growth exceeding 8%.
This is a very attractive results for athene on especially when compared to the pace of organic growth of other financial services companies.
Importantly, blended underwritten return on our inflows.
Squarely in line with our spread on profitability targets.
A high mid teens or better bar, but we continue to manage to even in the persistent low interest rate environment.
Turning to each of the channels.
Retail we've generated one 8 billion of inflows in the first quarter, representing a 41% year over year growth.
More than 90% of our retail inflows were generated by EFI as during the quarter.
Which resulted in our best first quarter FIA sales today.
In addition.
According to limb Rob Athene placed first in the industry for RFID sales in the fourth quarter of 2020, and we believe the strength of our first quarter results. We'll see has retained its market leadership position.
Highlights included the launch of RFID products on PNC Bank platform in February where.
Where we saw significant volume building on our strong existing relationship to expand beyond micro products for the first time.
We also observed good initial traction with accu, Max our new single from accumulation F. I E, which went live on March 27th and has been endorsed by advisors itself, one of the largest and most reputable independent marketing organizations.
Away from that probably as the price environment for traditional fixed rate annuity, they're micro product.
Becoming significantly more challenging as.
As we discussed on our February call several competitors have become more aggressive on driving micro business to break even or even negative returns by our estimates against this backdrop, we chose to maintain our pricing discipline by emphasizing more profitable products.
In terms of distribution growth.
<unk> 40 per cent of our retail sales on the first quarter were generated through the bank and broker dealer channel.
Which is a strong indication of the inroads we have made despite the decline in Mike activity.
Inflows were up 55 per cent and 86% year over year for banks and brokers respectively.
This was largely driven by a significant increase from the traction we are seeing from RFID products outside of the IMO channel.
Bearing in mind that the first quarter is typically the seasonally weakest quarter for our retail business are relatively strong result signals that the year is off to a great start.
Turning to the PRT channel, we generated $2 9 billion of inflows, which marks our second highest quarterly total debate.
This was driven by a large scale transaction with JC Penny that we closed in March where we were selected to provide annuity benefits to approximately 30000 pension plan participants.
Importantly, this transaction resulted in participants benefits being fully preserve cash.
There's other scenarios, which would've seen benefits with us.
The J C. Penney transaction at the long list of Counterparties that we serve.
Including large well known companies such as Bristol Myers, Lockheed Martin M. G E among others.
Helping these clients manage their long term pension obligations and servicing them well highlights the progress we have made in becoming a capable and trusted solutions provider for both client sponsors and retiree.
We won this exclusive opportunity with jcpenney because of our ability to structure a solution that met their needs.
Our very strong financial we are perceived as a very strong financial and credit worthy partner.
And we were recommended by an independent fiduciary.
Regarding market dynamics, except for the largest JC penney transaction, but broader PRT market experienced a relatively light first quarter.
That said.
Given the visibility we have into the pipeline. We are optimistic that 2021 could shape up to be the best year on record for the U S. P. A R T market.
Which may help drive new highs for our business.
In terms of funding agreement activity, we generated $3 2 billion of inflows.
Our strongest quarterly result per day.
Representing a nearly fourfold increase year over year, and nearly 50% sequential growth from.
On a strong fourth quarter levels.
One of the drivers of activity as we continue to expand our funding agreement backed note program with Canadian and European markets with three foreign currency denominated issuances.
Similar to last year, the market remains accommodated issue at attractive spreads and returns and.
And we are seeing continued interest from institutional investors.
In return we are optimistic that our inflows will match last year's strong activity and we're selling and we've shown continued momentum on the second quarter with over $1 billion of issuance so far.
Lastly.
Our third party flow reinsurance channel activity remained subdued in line with what we expected after observing market trends in the fourth quarter.
For various reasons flow reinsurance activity can fluctuate depending on the appetite of the counterparty to supply capital and internalize the business or their willingness to accept pricing conditions that align with our target return threshold.
During the first quarter quarter, we saw more of the latter at play.
Significant portion of our volume in this channel is related to reinsurance micro business.
The terms on myeloid business become more competitive reinsurance market flows become incrementally more difficult.
Looking ahead, we remain optimistic that activity on our flow reinsurance business will increase as we progress through the year in part because we expect to reinsure more FIA product. So the recovery will depend upon pricing conditions in the market relative to our target.
In summary, while the pace of organic growth may fluctuate a bit quarter to quarter, depending on the activity levels in certain channels.
We expect healthy organic growth to continue in 2021.
These inflows will be underwritten to our targeted returns.
On the inorganic front, we see significant opportunities to deploy our excess capital at attractive returns.
Armed with more than 8 billion of deployable capital.
<unk> to roughly 100 billion of liabilities purchasing power.
We are still open for business amid the backdrop of our pending merger with Apollo.
We've been talking for some time about the insurance industry restructure and trend.
This is the thesis that we think remains very much intact.
Simply observing the financial press illustrates that there is no shortage of activity going on.
In terms of the pipeline, we believe that there could be several sizable opportunities that come to market. This year complemented by activity at the small and medium sized end of the spectrum.
We are among the best positioned solution providers in the retirement services landscape, given our resources flexibility and willingness to play our part in this activity.
We will of course maintain our long standing commitment to our shareholders to be a disciplined buyer.
To deploy capital in a manner consistent with our return targets.
With that I'd now like to call the turn the call over to Marty who will discuss our financial results.
Thanks, Bill and good morning, everybody.
This morning on provides.
Context around our record results and also discuss some forward perspective.
Clearly the profitability of our spread based on market remains very compelling and in the first quarter. We saw the significant alpha which alternative investments can generate for our portfolio continuing the trend we saw in the back half of 2020 and expect to see again over time.
We reported GAAP net income of $578 million or $2 94 per diluted share for the first quarter.
Our adjusted operating income available to common shareholders was a record $748 million or $3 80 per share.
Excluding notable items of $8 million.
As well as our strategic Apollo investment total adjusted operating income was $759 million or $3 86 per share, resulting in an adjusted operating Roe.
26%.
Let's cover the key components of our operating results starting at the top of the income statement.
Our large enforced business producers, they mostly system and predictable fixed income yield.
As we've previously communicated we expected some sequential moderation in fixed income here in the quarters result of $3 five 7% was essentially in line with our expectations given the current state of the interest rate curve and credit spreads.
On the margin asset deployment yield and the other items, such as reduced cash drag and accretive Jackson redeployment.
We believe the fixed income Nir has reached an inflection point, we expect that it will trend around the three 6% level for the foreseeable future with the potential to increase steadily if long term interest rates continue their trajectory as well as if the short end of the curve experiences some lift.
To reiterate a point that we discussed last quarter remember that since assets from new business flows also carrier commensurately lower cost of funds.
Our ability to generate target net spreads on earnings growth remains intact.
Turning to alternatives, we experienced a third consecutive quarter of very strong performance generating a 38% annualized nir.
As Jim mentioned this was driven primarily by three key holdings vulnerable mirror home and mid cap.
As well as market appreciation tailwind.
Looking forward, we expect that our alternatives performance in the second quarter will be a bit stronger than our normalized 10% annualized return threshold.
Which would mark our fourth consecutive quarter of above average performance.
As you would expect considering the tremendous start we've had to the year, we anticipate that the alts portfolio will generate a meaningfully better return in 2020 one than our long term average of nearly 11%.
Moving next to cost of funds and starting with the cost of crediting component.
Our reported crediting rate decreased.
Two 176 basis points down 10 basis points from the prior quarter.
This was driven primarily by lower rates on new business.
Partially upset by a growing institutional liability mix.
As we've discussed in prior quarters all else equal.
Our growing institutional mix tends to push the crediting rate higher and Paul other liability costs lower.
Is that essentially all of the funding costs for PRT and funding agreements business are reflected within cost of crediting.
Looking ahead, we continue to expect cost of crediting to be approximately 175 to 180 basis points in 2021.
This is driven by our continued expectation of strong growth in institutional channels coming in at lower marginal cost.
Well as continued rate actions on deferred annuity renewals.
Turning to other liability costs or O L C, which represent the other component of our cost of funds for our deferred annuities recall that we observed quarterly fluctuations that can occur as a result of factors such as market movements or DAC amortization impacts from higher or lower gross profit.
In the first quarter OFC increased to 90 basis points up 12 basis points sequentially.
This is mostly due to higher DAC amortization, which was driven by the strong alternative investment income we got in the quarter.
Looking ahead, we continue to expect that the baseline run rate for other liability costs is approximately 80 basis points.
Subject to swings in profitability market impacts and channel mix.
Shifting to our platform costs, our G&A expense ratio was stable both sequentially and compared to the prior year quarter at 26 basis points.
Which was in line with our expectations.
Looking ahead, we expect that our operating expense ratio will decline slightly through the remainder of the year into the low 20 basis point area as we realize the benefits of increasing scale across our business.
Turning to taxes as a reminder, our tax rate is a function of the proportion of income we generate in our Bermuda subsidiaries versus our U S subsidiaries.
With the strong operating income performance in the first quarter, largely driven by significant strength in alternatives, our operating tax rate came in at 8%.
Looking ahead, we estimate that our normalized tax rate. This year will remain around 10% for the remainder of the year subject to shifts in the mix of income generated.
Putting all the pieces together, it's clear that we started up 2021 and a much better position versus a year ago.
For additional perspective on the earnings momentum, we are generating consider that our adjusted operating income of approximately $750 million on the first quarter exceeds what we earn through the first nine months of last year.
If the current environment remains intact.
We were posted new annual highs for earnings and realized substantial growth and book value.
Before wrapping up our prepared remarks, let me comment on capital.
The team remains exceedingly well capitalized with approximately 18 billion of aggregate regulatory capital and an under Levered balance sheet.
We currently have more than 8 billion of deployable capital net of what is earmarked for Jackson.
This is comprised of excess equity capital untapped debt capacity of nearly $3 billion and $1 6 billion of available commitments for Acura.
As a reminder, I per our priorities for holding this excess capital on our first supporting organic growth.
Supporting and executing inorganic growth.
Third supporting ratings upgrades and fourth opportunistic share repurchases.
Of course, we are continuing to execute on the organic side.
We're seeing some interest.
As far as inorganic opportunities are concerned.
On the rating agency front I'm pleased to note a recent positive development with Fitch revising our rating outlook to stable in late February given the strength, we exhibited through the pandemic.
We continue to expect that our robust capital levels are strong and diversified growth and increasing profitability can support additional positive ratings developments this year.
With that I will turn the call over to the operator and open the line for your questions.
Yeah.
At this time, if you would 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.
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In order to ensure everyone receives the turn we ask that you. Please limit yourself to one question on the first go round and hop back in the queue, if you'd like to ask a follow up.
We'll now take our first question from the line of Ryan Krueger with K B W.
Hi, Good morning, I had a question about access to capital and.
In particular.
How much how much of the Apollo shares that you own that are currently counted in your excess capital and how should we think about the pro forma impact of that on your capital position after the deal closes.
Marty.
Hey, Ryan Thanks for your question.
The way we look at it we if you think about the overall.
Paulo, holding we assume that about 40% to 45% of that is really kind of required capital. So it's really the excess over that that would represent kind of excess capital and so that number at the end of the quarter was decently north of $700 million.
We're working with our colleagues at Apollo and I'm not going to get too specific on this call, but I think it's fair to assume that.
On or in advance of the merger that the a O T shares Athene currently holds will be replaced in a way that's capital neutral.
More developments on that are in later calls.
Got it thank you.
Your next question comes from the line of Andrew Klingerman with Credit Suisse.
Great Good morning.
Hey, Bill you expressed some optimism about.
Inorganic market per M and Hayes.
You've got a few blocks could be coming on sizable blocks any more granularity you can provide there.
Good morning, Andrew.
You know.
Yeah.
I'm trying to think about how granular debate [laughter] look I guess, I'd say that probably I cant be more specific I just think there's going to continue to be a lot of activity.
Some of which we already know about some of which we're expecting.
It's also possible that you know we may do something that's a little.
You know either out of the ordinary a little bit in other markets, okay, especially on.
You know potentially Japan, and the U K.
And wasn't that a block or the big pension deal or whatever it's.
You know I think we continue to expand our horizons about you know what's in scope.
And so we're.
We're excited about that.
And with regard to the.
Influx.
Other private equity players in the market do you worry that it's just a bit too competitive now here in the U S or for big blocks of annuities and the like.
Well it can be you know it's.
We've what we've seen is that the smaller ended up and maybe even sometimes its a medium sized market. We have seen it become very competitive right and we've talked about that before.
Where pricing seems to aggressive people are hungry to do that first deal.
And.
And you know what at the large end of the market, where we really spend our time.
Given our capital position and given our ratings were still kind of in the pole position, we think in terms of being able to execute on bigger deals and I think the competition. There is still going to be a lot less.
But yes, we look we have we have been anticipating.
These other companies entering the market for some time.
But now I think just about all of them have done a deal.
And so and sometimes they're still absorbing that deal are trying to you know.
Adjusted and so we're so I think we're encouraged we're.
We're not gonna have this market to ourselves.
But I, but I feel good about our chances.
Your next question comes from the line of Erik bass with Autonomous research.
Hi, Thank you I'm on the Apollo call Mark mentioned that Athene may look to use third party capital to fund a portion of organic growth going forward I'm, just wondering how you're thinking about the funding mix for future growth and what this could mean for your annual capital generation.
Bill.
Yes sure.
Well you know today, we use.
Acura right to which we owned roughly a third of a little more than a third to.
On the fund M&A and in much of our PRT volume and.
And I think you know we like this structure, we think it works well.
And our expectation is that we'll continue to use book the existing accurate deal and maybe you know a subsequent one.
To fund not only those types of business, but also you know more of our organic volumes.
And and I think that's important because as you know so could potentially retail potentially funding everything.
And and it may we may not use it.
We made on sort of 100%, there, but probably more than we have now.
And I think that's important because one it's really capital efficient to do that.
Obviously and secondly, it helps us remain very tax efficient.
In terms of new business pricing.
And I think that's a that's going to be important for our competitive position. So so that's I think the color behind that idea.
Eric I would just add to that.
Very excited about our growth prospects going forward.
Just like we've been a big growth company in the past, we expect to be a big growth company in the future.
Thank you and if I could sneak in one more on the merger.
Joining me on the Pollo enhance your ability to acquire new origination platforms in source private assets and are there any barriers that maybe existed before that there won't be going forward.
Look I think of Apollo and Athene have been the leaders in our direct origination and will continue to be so.
Fully aligned.
One company only helps that and.
Any conflicts in the past fees et cetera, I think.
We will be in the past and.
I think the path is.
Wide open so I expect a bigger and bigger volumes of directly originated as Mark says front end assets, that's really the key to.
Teens growth in.
And.
That's a great thing.
Thank you.
Yeah.
Your next question comes from the line of Humphrey Lee with Dowling and partners.
Good morning, and thank you for taking my questions. My first question is related to P. O T. I belief, having tea has publicly talked about their interest in growing the PRT market.
On global Atlantic recently hired someone for a P O T from doing so.
No.
I think so far the PRT market, it's been mostly a mountain view in some of the traditional life insurers.
Your thoughts on some of these kind of private equity backed players entering into the space and can you talk about how you see the competitiveness with the trends going forward.
Hey, Bill.
Yeah sure Humphrey I look I think there's I think there might be a bit of an evolution going on in the PRT market I think some of the traditional players their enthusiasm to put more capital.
Isn't it that market is maybe softened a little bit and and some new guys that are coming in or you know where.
You know.
We ended up last year as the market share leader in this business and and I think I I.
Feel good about our chances going forward.
Remember I said my prepared remarks.
We think this is going to be the best PRT or whatever.
And in terms of volume and and and I don't think that.
Yeah, that's a trend that's just going to continue because there's just a lot of pent up demand in corporate America to do something with their pension plan. So.
You know what.
I'd like to get all of that growth business.
But you know I got on if I can get that greedy I might it might be okay, I have to share a little bit on people [laughter]. So.
So in this kind of market I think we feel really good that GAAP, even if they're ours on the margin maybe a little more competition where.
We're still going to be very successful.
Got it and I think bill you talked about in the retail on the retail side and flow reinsurance side, there's definitely some aggressive pricing going on someone some of them price them breakeven.
But do you see them trending worse or are they like can you just give us a little bit more color in terms of what you're seeing over there and then oh.
People are getting more aggressive.
I actually think well I don't I look I think comfort so aggressive it's not sustainable.
I think some people really wanted to get some business.
Especially in the first quarter, we saw a Israeli starting in the fourth quarter.
Because you know they had been very quiet during the pandemic and are the early days of the pandemic.
And so they wanted to come back into the market and make a splash.
So.
It's not sustainable we're already starting to see a cool off a little bit you know.
The cool off more.
From a little more rational, but you know these things don't last forever.
So with this kind of pricing so it's.
So I you know I don't want to get too optimistic that the myeloid business is going to come Roaring back for US I think we have to be.
Cautious about that but it strikes me as it's already getting better.
Got it thank you.
Your next question comes from the line of John Barnidge with Piper Sandler.
Thank you very much there've been a number of PRT industry participants that historically had been large.
PRT that are pursuing strategic reviews can you talk about maybe bats change the competitive dynamics in the backdrop of an expectation for a record year. Thank you.
Yeah sounds good it doesn't have a job they have.
[laughter] look you know.
Uh huh.
Consistent with the theme we've talked about the life insurance sector forever, many traditional domestic life companies.
Including those PRT participants have kind of said you know we need to change our business mix, we need to be more capital light.
You know, we're not getting an adequate return.
And and you know and we just you know.
So we need to think about things hard.
And it's.
And and I get it why they're kind of doing that you know we're in a different spot.
You know, we generate you know more alpha asset performance, which is very important in PRT.
More and more efficient.
And so you know we can earn appropriate returns by the way you know given our operating admin strategy, which is also a differentiator.
Lower costs than they are.
So we can get those returns while they struggle.
And so I think they're saying to themselves you know I like this business.
But you know I'm on.
Just to also be capital light, what am I going to do and therefore I think that's why you're getting these reviews.
How they ultimately come out I I don't want to predict now but.
But you know there it's clear their enthusiasm is.
Lessened.
In the face of what I think going to be a terrific volume year, you know we're pretty excited.
And.
So on so.
That's why I think we're a little we're bullish on the marketplace.
Thank you.
Your next question comes from the line of Elyse Greenspan with Wells Fargo.
Hi, Thanks on my first question on Nozomi.
Pipeline like we've seen on a recent rise in interest rates have you seen on kind of the bid ask spread narrow or you know can you kind of give us a baseline of where interest rates need to go on for that you know potentially lead you on more transactions getting consummated.
Yeah.
Hum.
You know it.
I don't know if I.
Interest rates, obviously have already bounced up.
You know there is sort of back to where they were you know it you know at the beginning of last year more or less.
On it.
It's.
I don't think this is what really drives executives.
Executive decision, making about whether or not to do a block to sell a block deal to sell a piece of their business I think it's it's broader than that it kind of goes back to what I was just saying about this this capital light ideas and getting out of capital intensive businesses, where they really can't earn on them you know an appropriate return anymore.
And just being more aggressive about managing the balance sheet.
Higher interest rates, just make it a little less painful for them to do that because usually they are selling this stuff.
And you know and there's generally some sort of locked with their triggering and so if they could have been a lot minimize the last great, but I think psychologically they've already decided to be more proactive.
And I don't so I don't think it's really tied so much to.
Interest rates, because it's really tied to.
<unk> seen other companies, let's say boy.
Who has who has successfully transitioned to a capital light model and has been rewarded handsomely by the stock market for doing that.
And they say Gee I should do that.
That's probably what we should be focused on.
And so I think it's less about Oh, it's a specific interest rate environment, that's going to trigger and more about.
It's just that you know trend we're seeing is in the life insurance industry is it restructures.
You know, obviously athene is positioned to benefit from that you know what are the guys who are.
Who are who can say yeah, we can take care of that for you.
I can give you a fair price for it.
That's helpful. And then my second question I missed part of the transaction with Apollo and I'm glad it's low.
Your tax rate go up so when you look at deals and try to on.
Taking a return target.
I think that that will have an impact or are there kind of off balance do you think about on.
Putting return targets on some of your larger transaction.
Oh, you know potentially with a higher tax rate.
Yeah sure look I'll.
We're.
Ah things overall tax rate is going to probably increase.
Right, but that's mainly about the on the in force block.
And less about new business.
And that's because remember, we just talked a little bit before about you.
Using side cars like Acura from.
Much of our new business generation going forward.
And there I think we're gonna be able to retain.
You know most of our tax advantage.
And so so I think our ability to both compete for inorganic deals and also frankly, the right organic new business because it's the same factor.
Is gonna be preserved and so therefore, I think our competitive positioning is going to still be there. So I don't think we really have to.
Accept lower returns to get the wind business I think we're going to we're still going to be successful there.
Yeah.
Thank you.
Your next question comes from the line of Tom Gallagher with Evercore.
They'll just in terms of a follow up on the M&A environment are you guys still committed to sticking to fixed annuities and F. I E type blocks or willing to broaden out at all and I ask just because some of the.
P competitors you now have have gone a bit more diversified than you guys have so I'm just thinking in terms of with some of these larger deals would you be willing to broad now more and I guess just relatedly on product broadening are you looking to sell buffer annuities or have you started to to complement your.
F I E business I know number of the.
Companies that were selling fixed annuities have broadened into that product category.
Well you know, we've always been willing to look at rather.
No.
M&A transactions, but just.
Fixed annuities and we've.
But we havent consummated any of those deals.
And you know where I.
We're very tough minded about.
You know when we when we look at a deal that's got any kind of what I would call more biometric risk in it but on a fixed annuity does.
We're I think we're very disciplined about how we.
What we assume can go wrong, and you know and underwrite the deal carefully and others. I think it's just sometimes are I think let's focus on that but maybe they should be.
We structured settlements as a product category that comes to mind that sort of falls on that category.
So I think the answer is yes, we're certainly willing to look broader.
But our sweet spot obviously, there's the fixed annuity business, that's what we like and you know and that's what we think we can get the book value, but we're but we would consider broader I think for sure.
In terms of buffered annuities or we call them <unk>.
No.
Which is a registered product yeah. Those are look those are becoming much more much more popular.
There's a lot of growth in that sector of the market, where we've introduced a variety of product.
Well, it's been over a year now.
On a half maybe and we've had success with it but maybe not as much as we would like I think we have a good competitive product, but where.
But I I feel like we should you know we should be doing better in that segment of the market and I think we're gonna take steps to try to make sure we do better going forward.
Yeah.
Okay.
Yeah, Tom I would just add to what Bill said I agree with what he said, it's all about returns.
We're open to other areas within financial services, if we can get higher than mid teens returns with our appropriate assumptions. The easy thing for us on a couple of transactions would have been to keep the life business.
We didn't have confidence we can get mid teens returns. So it's really a return expectation.
Decision and so far what we've been doing we think is really consistent with our return expectations and as you can see from our results.
Thanks, Jim and if I could just sneak in a follow up.
I think last quarter, you wrote down your carrying value of the Jackson equity stake just curious did you write that back up this quarter at all just considering how strong valuations have moved up across the double the life insurance space.
Hi.
Hey, Tom Thanks for the question, we we've left it kind of alone this.
This quarter, it's really a holding that.
The private equity holding and so we kind of hold it.
The generally hold that kind of thing at cost, except when you have some kind of compelling reason market things or whatever to change that obviously in the prior quarter. We saw on some of those things and.
And wrote it down accordingly, we didn't see anything further this quarter.
Obviously.
Some of the public announcements.
Peru has made about a potential spin off in the second quarter net.
That could well change in the second quarter, but for now we've kind of left it at the same level as we had in the prior quarter.
Okay. Thanks.
Your next question comes from the line of Mike Ward with UBS.
Thanks, guys. Good morning, I was just wondering about vulnerable since you guys on our shareholder I was wondering if theres any perspective or insight you can share on their capacity or inorganic ambitions over the near term.
Yeah Yeah.
You know I was on a Investor conference a.
Microsoft go and I think I've made a crack about it I think this is going to be the year of the V. A P O.
They are that that remains true [laughter] they are.
Better ball is obviously, just a fantastic homerun.
And at a the good news is is there there's a lot more to do in that market.
I think every major life insurer, that's got to be a block is probably studying what they should be doing.
Because of the success.
First Hartford did but then obviously, a buoy out and and equitable have done with their transactions. So I you know it was so I think we.
I think venerable it's going to.
It would be very active and.
And obviously, we love being you know significant shareholder there.
Cause they performed very very well.
Super helpful. Thanks, Don and then just on PRT, but from a little different angle.
I was wondering if you think part of the reason for the incremental PRT competition could be the idea that some of the life insurers that have done some of the bigger deals within the last few years now have to kind of keep doing deals to offset the earnings loss from the natural run off of the deals they've already done do you think that could be driving some of the aggressive competition and.
Do you think that could be maybe something you pay it at some point down the road. Thanks.
This is with regard to PRT or specifically, yes.
I think Dr. T has been very competitive you know honestly you know it varies.
It's funny, it's a seasonal thing.
First early in the year PRT deals seem to be price pretty tough.
And that I think what happens is people get their quota.
You know in America, I'm, like Oh, God and in the fourth quarter or even late in the third when there's a lot more volume on a lot more deals to do.
Suddenly, it's a target rich environment.
And it are in terms of our ability to get terrific pricing and get a lot of volume and I think.
It looks like that's what's going to happen again this year, that's what certainly happened last year.
In terms of you know the deal volumes, we did in the fourth quarter total returns we wrote them too. So so I think the environment is actually pretty good yeah. The interesting thing about P. R. T by the way is.
The run off from those blocks is.
Much slower than I would say traditional fixed annuity business.
So it.
And it's.
And so they they tend to just stay outstanding longer there's the run off profile is much lower so I don't think that.
I don't think you know.
Run off in the last earnings as necessarily replacing.
It's what's motivating people to get on the market.
Thanks, a lot.
Your next question comes from the line of she needs to come off with Citi.
Thanks, Good morning, I'm Martin could you give us the marks on the three alternative investments that you have.
Highlighted and give us a sense of what the alternative return was excluding those three investment.
Well.
Yeah, I would say that we probably across the board Sydney had stronger than normal returns. Even if you exclude that I think some very positive market backdrops.
That helped all but then obviously we had some very specific things, but the three that we've called out this morning that were ex particularly outsized.
But really I think generally across the board to kind of quote unquote better than normal you can kind of see the dollars that we reported for the three and if you back those out of the old dollars. The returns you can kind of figure out what the return is but it's still a.
Decently better number than the kind of what's been a more normalized 10% to 11% rate.
And in specific the Venerable because I think you said that was a big one how how do you arrive at that Mark.
What is the process that you go through.
Well, we you know the venerable team and are working closely with Apollo's team kind of look at the valuation and go through it it has been very volatile, but it's gone up a ton over time.
With some volatility along the way I think.
This particular uptick really the reinsurance transaction.
That was recently announced venerable inequitable and the magnitude of that obviously, that's had a very positive impact on the federal business, but it also impacts the go forward.
<unk> earnings profile and return profile of vulnerable as well so theres a working with the Apollo in Venerable guys. We are and using their particular model, but also reflecting on.
This new transaction, which is very significant really increase the valuation quite a lot.
Remember also that equitable is buying an equity stake in venerable.
You know, it's sort of a third party transactions that also keyed into our value wise.
Yeah and there they are in discussions right now so that hasnt been consummated on I think most of our valuation increase is really around the reinsurance transaction mindful that there's the potential equity investment that they may make but.
That has not been consummated yet.
And we will leave it to them to talk about that in more detail obviously.
Okay.
Yeah.
Your next question comes from the line of Ryan Krueger with K B W.
Hey, Thanks, I just had a quick follow up on the original Apollo and Athene deal call. It was mentioned that.
Positive purchase accounting adjustments could potentially offset the negative headwinds from the higher tax rate.
You gave an update on that and if that's still your expectation.
Well, Ryan if you wait through the 600 plus page.
The S. Four filing that went out last night, you can kind of see the pro forma financials in there.
And you know I would say that at this point reflects ours in apollo's.
Dustin reasonable estimate of what things will look like but I would say, we'll continue to evaluate that.
Over time and the other thing is the.
Pro forma financials presented in.
In the S. Four filing that went out last night are really kind of going back to 2020 and remarking everything at that point in time with a series of assumptions and a balance sheet that we had obviously when we do P. GAAP for real in January.
After the deal closes it'll be based on where market conditions are at that time on what our balance sheet. It looks like at that time, but you can get a sense of it at least for now by looking at the proxy and looking at the.
The P. GAAP adjustments and then we have reported in the proxy kind of a 21% statutory rate as far as Texas, obviously, the current statutory rate.
Setting aside at the moment with the button administration, they do with her.
Made in America tax plan.
As we think about it.
That 21% statutory rate, we are looking at a variety of different approaches and structures that may find some efficiencies.
But more to come on that over time.
Thanks.
Sounds like on some fun weekend reading yeah.
Absolutely.
Yeah.
That concludes the Q&A portion of today's call I will now turn the floor back over to Noah Gunn for any additional or closing remarks.
Great. Thanks, everyone for joining us this morning and for your continued interest in Athene. If you have any follow up questions regarding our results or anything we discussed on today's call. Please feel free to reach out to us and we look forward to speaking with you again next quarter.
Yeah.
This does conclude today's athene.
Dean Holdings' first quarter 2021 earnings call and webcast. Please disconnect. Your line at this time and have a wonderful day.
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Yeah.