Q2 2021 Athene Holding Ltd Earnings Call
Good morning, My name is Stephanie and I will be your conference operator today at this time I would like to welcome everyone to Athene second quarter 2021 earnings conference call and webcast. All participant lines have been placed on listen only mode to prevent any background noise. After the speakers' remarks, there will be a question and.
And answer session. If you would like to ask a question and at that time. Please press star 1 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.
Thanks, Stephanie and welcome everyone to our second quarter 2021 earnings call as usual 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.
As a reminder of today's earnings call May include forward, looking statements and projections, which not guarantee of 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 disc.
<unk> 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 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.
Of that I will now turn the call over to Jim.
Thanks, Noah and good morning, everyone.
We are incredibly pleased with our second quarter results.
Which were of headlined by $1 billion of adjusted operating income.
This is a new record for athene underpinned by a powerful combination of strong organic growth.
Excellent management of both sides of the balance sheet.
And a robust quarter of performance from our investment and Apollo.
These factors drove our adjusted book value to more than $67 per share.
Which increased our compound annual adjusted book value growth rate since inception to 17% and.
And represents 32% year over year growth.
As we draw closer to the completion of our merger with the Pollo.
Which remains on track for January.
And I'm proud to say that of the themes business has never been more impressive.
Our team has built a powerful platform that is proven and its ability to produce profitable growth through a variety of economic conditions.
While remaining disciplined and serving as the source of strength.
For our policyholders.
And business partners.
I am more confident than ever that Athene has the best days are ahead.
And that the momentum we have built will accelerate upon fully aligning our business with the pollo through the merger.
And the second quarter Athene generated $7.6 billion of organic inflows, marking our third highest quarterly total ever.
And the process.
And we held leading market share positions in our retail funding agreement backed note and pension risk transfer channels during the quarter.
Which is a testament to the scale of efficiency and solutions driven product suite.
Our team has built over the past 12 years.
Another important factor that propelled us forward in the second quarter of what are the attainment of a ratings upgrade from standard and poors and may.
We have discussed at length, the benefits that the credit rating improvements provide to athene and.
In terms of pricing our products, our product distribution and potential and our cost of capital.
I'm very pleased to say that S&P raised its financial strength rating.
And issue of credit ratings on our operating entities to a plus from a with a stable outlook and.
And raised the rating on our holding company to a minus from Triple B plus with a positive outlook.
This achievement speaks volumes about the strength of the themes of balance sheet.
And our solid operating performance.
Particularly when facing volatile market conditions.
Yeah.
On the asset side of the balance sheet, we focus on generating alpha through asset selection, while maintaining our risk discipline.
With this in mind, we purchased over $14 billion of the investments in the second quarter.
Marking our second highest level of quarterly asset purchases.
Importantly.
Despite the low interest rate environment, the yield on our fixed income purchases of course, nearly 90 basis points higher.
Net of fees than the Triple B corporate bond index.
This highlights the benefit that we were able to capture by investing across asset classes.
Including and structured securities.
Through our active alpha generating investment management for a lot of partnership with Apollo.
Most of our purchase activity for the second quarter fell into 3 primary object categories.
First we found attractive opportunities of the structured securities like Clo's and asset backs.
Which collectively accounted for 36% of our purchases.
As we fill our target allocations across the portfolio.
As a reminder, we focus on the seat and your investment grade tranches of the securities.
Which benefited from significant credit enhancements and enable us to pick up a substantial amount of incremental yield and.
Similarly high ratings profile to our corporate purchases.
For example, the average NTIC rating of our structure security purchases was the 1.5.
Solidly within the investment grade territory.
Second despite the tight credit spread environment.
We continued to find attractive enough investable spreads and public and private corporate bonds.
Which accounted for almost 33% of our purchases.
And third the Apollo source significant volumes of commercial and residential mortgage loans.
Which accounted for 22% of our purchases.
And specifically regarding the <unk>, we've invested more than $1 billion year to date and attractive senior loans.
Within the European real estate market, and we have an attractive pipeline to invest more.
These investments backing office and industrial properties outside of the U S. Further diversify our CML portfolio.
While offering attractive yields.
Regarding the Jackson redeployment effort.
With our asset purchases and the second quarter, we have invested more than 94% of our targeted and redeployment of Mt.
Affectively completing redeployment of the fixed income portion of the portfolio.
And successfully raising the yield on the portfolio of by approximately 180 basis points and roughly 1 year.
This is a noteworthy achievement, especially considering the interest rate and credit spread dynamics since the time of the transaction.
We expect that the remaining portion of the Jackson redeployment will be accomplished through funding of alternative investments.
And that we've already sourced and allocated to the portfolio.
Our total portfolio of alternative investments posted its fourth consecutive quarter of above average performance.
With an annualized net return of approximately 17% and Q2.
And 24% over the last 12 months.
Following robust performance and some of our largest larger positions as well as favorable market tailwind.
These results support our long term track record for alternative investment performance of low double digits annually with lower volatility and equity indices.
And the second quarter, we saw broad based strength across the portfolio.
Highlights by strong returns from our natural resources and private credit allocations.
As well as our investments and venerable and of Florida.
Regarding venerable we saw valuation increase driven by the recently completed reinsurance agreement with incredible.
As well as the pricing of of third party of investment and vegetables business.
Meanwhile, a thorough as appreciation during the quarter was driven by the ongoing strength of their operating performance.
As we have discussed in the past kind of approach to alternative investments is differentiated relative to your traditional hedge funds and private equity strategies.
We make alternative investments that tend to have a defensive orientation and are less prone to binary outcomes.
Such as and the strategic well hedged operating businesses, which possess attractive cash flow characteristics.
And may offer the additional benefit.
Of sourcing directly originated investments that are well suited for various parts of our portfolio.
And July we announced the notable transaction with foundation home loans that fits into our model of and alternative investing.
FHL as a specialist of U K based mortgage lender.
Which we acquired from funds managed by affiliates of fortress investment group.
Like the Dol and and add knock deals that we completed in 2020.
This transaction continues our long standing strategy of working alongside of Apollo.
To identify and invest in attractive businesses.
Which also add direct origination asset sourcing capabilities to our alpha generating investment portfolio.
I would note that athene is existing residential mortgage portfolio exceeds $13 billion.
And we expect that the acquisition of the FHL will augment our existing expertise.
And geographic diversification and this asset class.
And help us source of additional high quality of investments.
It goes without saying that athene, and we're not been able to complete this transaction and without the unique sourcing and diligence capabilities provided by our partnership with Apollo and.
And advantage that we will only look to capitalize upon further after the completion of our merger.
Now I'd like to turn the call over to Bill for an overview of our origination activities.
Thanks, Jim.
The themes organic growth engine continues to perform very well and in the second quarter.
And as Jim mentioned, we generated $7.6 billion of total organic inflows and the second quarter driving $15.8 billion of total organic inflows year to date.
This resulted in annualized net organic growth of 5 per cent and 7% and the second quarter and year to date, respectively, which compares favorably to other comparable financial services company.
The blended underwritten return on our inflows from the second quarter exceeded our spread and profitability targets, which we have characterized the mid teens or better even with the persistent low interest rate environment.
Turning to each of the channel.
And retail we generated $1.7 by the end of it flows which is roughly in line with the level, we obtained and the first quarter and and the prior year quarter I'm.
And I'm pleased to say that our retail inflows for the first half of 2021 or 15% stronger compared to the first half of 2000 and flooding and.
And there are also several positive dynamics that are becoming increasingly evident and our retail business.
First <unk>.
Like last quarter over 90% of our retail inflows were generated by EFI. As this resulted in Athene second quarter FIA sales Luckily match and the first quarter's level.
This is the product of the ongoing competitive dynamic that we have observed and the micro market.
Since the end of last year and.
The response to this environment.
Most of maintaining our pricing discipline by emphasizing more profitable, let by age which resulted in the continuation of lower Mike of volumes.
Second the momentum we have built and our FIA business is impressive.
Liberate data released in May for the first quarter highlighted that athene was able to maintain the number 1 industry ranking for F. I E sales for the fourth consecutive quarter and.
And our first place of market share and the I M O channel for the second quarter and the world.
With our strong level of FIA yourselves and the second quarter. We once again expect the hold onto our leading market share position and the second quarter of limit that is the least later this summer.
In terms of distribution and roughly 40% of our retail sales and the second quarter were generated through the bank and broker dealer channel.
While this represents a slight decrease from the first quarter and year over year. It also reflects the significant headway. We have made in terms of selling more of our FIA product through the independent broker dealer channel.
And third the overall quality of our retail inflows has been very strong.
We have a diversified mix of FIA product that allows us to maintain the leading market share even though our products are more distributed and their relative rankings are.
The highest single product ranking by sales volume of places just 10 and the league table highlighting the fact that we are not relying on only 1 or 2 flagship offerings to drive results.
In addition, and increasing the majority of our retail products are based on alternative indices, which are performed well recently and compare favorably versus standard index is in many cases for our policyholders.
In addition, most of our retail annuities do not carry of guaranteed income riders, which allow us the main thing to manage duration risk more effectively.
Taken together these characteristics illustrates that our retail franchise is very high quality in terms of the product breadth.
Differentiation and profitability.
Looking forward, we expect that our retail inflows will increase from second quarter levels through the back half of the year.
However year over year comparisons may still be skewed due to the particular strength and Mike is that we saw and the second half of 2000 and flooding.
Turning to the PRT channel, we generated 1 and a half billion of inflows driven by 2 transactions.
We executed the $900 million trend that transaction was sort of 1 of the largest diversified global packaging couple of things, where we were selected to provide annuity benefits to approximately 8300 pension plan participants.
The other transaction totaled 600 buy and and was executed with the leading home improvement of building products company.
Since the end of the second quarter, we have remained active and signed 2 more transactions and the third quarter.
And July we completed a 1 billion transaction with the well known auto parts manufacturer.
And in August we closed our largest single PRT transactions a day with Lockheed Martin for approximately 5 billion. Another landmark deal that builds upon our position as a capable and trusted solutions provider for both the client sponsors and retirees.
With these 2 transactions and the third quarter, we will of closed on approximately $10 billion of PRT transactions year to date and.
More than 25 billion of aggregate since we entered the business just for years ago.
Turning to funding agreement activity I'm pleased to report the we generated $4.1 billion of inflows and the second quarter.
This marks our strongest quarterly results of day, having surpassed the previous record, we set last quarter by 26% and <unk>.
At present, the 55 per cent year over year increase.
This was the result also means that Athene was the number 1 issue of funding agreement backed notes for both the second quarter and the first half of 2021.
And now has the third largest overall I think the and program and in terms of the totally true.
The significant driver of our success and the second quarter was the issuance of our first so for length of funding agreement, which saw tremendous demand and reached the total deal size of 1 of the half but.
In addition, we continued to benefit from the expansion of our funding agreement backed note program within the Canadian and European markets.
As we completed several foreign currency denominated issuances during the quarter.
Also having issued 7.3 billion of funding agreement backed notes through the first half of 2021, we have already surpassed our full year 2020 for sure.
As we anticipated the ratings upgrade we received from S&P and a result of the increased demand for funding of agreements from the Investor community.
Helped drive improved spreads and strong returns for much of our second quarter of issuance.
Accommodative market conditions continue we expect new issuance to remain active and the second half of the year.
Lastly, and our third party flow reinsurance channel activity remained subdued.
Which corresponds to the market trends related to the buying a business that we have observed for the past few quarters.
As we have stated flow reinsurance activity can fluctuate depending upon the appetite of the counterparty of internalize the business or the willingness to accept pricing conditions that align with our target return threshold.
As we saw and the first quarter of pricing dynamics relating the buying of flows for a limiting factor and we.
Prioritized our return targets over volume.
In terms of the outlook, we are continuing to make progress towards adding flow arrangements for FIA product.
As well as out of new clients.
We recently signed the letter of intent with the new partner and the Japanese market.
We expect the launch by the end of the third quarter.
This opportunity was cultivated by entering the Japanese market last year, and having success, adding value for our first partner and the country.
In addition, we have established other new relationships to facilitate increased reinsurance of FIA flows.
Which we expect to come online early in 2022.
In summary, we have continued to manage our business channel through shifting market dynamics.
Amid the persistent low interest rate environment and.
The 2 of the strongest level of of total organic and flows through the first 6 months of the year since the themes founding.
With this level of performance, we feel the we will comfortably exceed our previous estimate of 25 billion and.
Total our organic inflows for the year and we now expect the total organic and flows will likely meet or exceed $30 billion for 2021.
On the inorganic front, we were pleased to be able the source of unique and exciting transaction. After the quarter ended with our agreement in July to acquire of strategic minority economic interest of 18% and challenger limited from existing shareholders.
Challenges, the preeminent platform and Australia for both the annuities and investment management, making it very well positioned to capitalize on the evolving market opportunity there.
Entering the Australian market for a long term investment and a well capitalized highly rated established franchise with the strong local presence further diversifies our business mix and.
And increases our global reach.
This investment represents and entry into a new market that we have been studying for some time, we and.
Tend to be supportive minority shareholders and we are optimistic that there may be ways in which we can work closely together and the future.
Athene committed 225 million and towards the minority investment and challenger, which we expect will be included on our balance sheet and alternative investments and the third quarter.
Regarding the overall market as evidenced by the recent number of well publicized transactions.
The insurance industry restructuring trend is continuing.
In terms of the pipeline and we are continuing to attract numerous opportunities that may come and the market. This year.
We remain among the best positioned solution providers and the retirement services landscape, given our expertise and.
The robust levels of deployable capital, which can support 100 billion of liability purchasing power.
With that I'd now like to turn the call over to Marty who will discuss our financial results.
Thanks, Bill and good morning, everybody.
This morning, I will provide context around our results and discuss our forward perspectives.
We reported record GAAP net income of $1.4 billion for $6.97 per diluted share for the first quarter.
The adjusted operating income available to common shareholders was also a record of $1 billion or $5 and <unk> per share.
Excluding notable items of $55 million as well as our strategic investment and Apollo total adjusted operating income was $572 million for.
For $2.88 per share, resulting in an adjusted operating ROE of 18%.
Our business model continues to deliver compelling levels of net spread with a consolidated adjusted operating return on assets of 160 basis points during the quarter excluding Apollo.
This is particularly strong result benefited from various items within our near and cost of funds, which I will discuss momentarily.
But even excluding these items the <unk>.
Just an operating ROA of the business was very strong on a core basis.
Our large in force business produces and mostly consistent and predictable fixed income yield.
As we stated last quarter, we had expected that are fixed and year that is the net investment earned rate would rebound somewhat from first quarter levels.
And our fixed income portfolio performed generally in line with our expectations, but the $3.7 5% result was bolstered by an approximately 12 basis point nonrecurring uplift from prepayments related to our investments and Hertz and mid cap.
Looking forward, we clearly have experienced a large influx of cash driven by our strong organic inflows and the first half of the year as well of $6 billion of additional PRT wins, so far and the third quarter.
These higher cash balances and addition to the current lower interest rate and tight credit spread environment.
And will create a slight <unk> will create a slight near term drag on our fixed and the ear.
Since these inflows were written to our target returns are better we expect to see corresponding offsets overtime and our cost of funds.
We now expect our fixed nir to be in the range of 3.5 and 5.2 to 3.6% for the remainder of this year versus our prior expectation of 3.6%.
This near term drag can of course, dissipate and turn into a benefit depending on the ultimate trajectory of rates and spreads as well as the speed with which we invested cash and R. R.
Organic cash flow results this year and demonstrate the strength of our spread lending business model.
Which continues to generate attractive net spreads and line with or better than our targets, leading to continuing and substantial earnings and book value growth.
Turning to alternatives as Jim mentioned, we experienced the fourth consecutive quarter of strong performance.
Generating of 17% annualized and here as we expected we saw significant benefit from the investments marked on a lagged basis.
And as well as the continued strong and benefit from our investment and vulnerable.
Performance from the portion of the portfolio marked on the real time basis was more in line with our long term expectations.
Courted by strength and our private credit investments as well as the thora among others.
Looking ahead.
The specter of annualized Alts, nier and the second half of this year to be approximately 10% on an annualized basis closer to its longer term historical performance.
Moving next to cost of funds and starting with the cost of crediting component of it.
Reported crediting rate decreased to 173 basis points down 3 basis points from the prior quarter.
This was driven primarily by lower rates on new business, partially offset by our growing institutional liability mix.
As we've discussed in prior quarters, all else equal of growing institutional mix tends to push the crediting rate higher since essentially all of the funding costs for PRT and funding agreement business are reflected within the cost of crediting.
Looking ahead for the full year, we now expect our cost of credit aimed to be closer to the low end of our previously guided range or approximately of 175 basis points.
This is driven by our expectation of strong growth in the institutional channels coming in at lower marginal cost.
Which as Bill mentioned has been partially helped by our recent ratings upgrades.
And with continued rate actions on deferred annuity renewals.
Yeah.
Turning to other liability costs or O L C, which represent the other component of cost of funds for our deferred annuities recall that we observed quarterly fluctuations that can occur as the result of factors such as market movements or DAC amortization and impacts from higher or lower gross profit.
And the second quarter, and we'll see came in lower than we expected at 63 basis points.
Down 27 basis points sequentially.
I would note that of this 27 basis point sequential decline.
And at least 12 basis points was due to favorable equity market performance over the past few quarters.
And if not for these factors will see would've been closer to our prior expectation of approximately 80 basis points.
Looking ahead, we expect that our baseline run rate for other liability costs will be around 70 to 75 basis points subject to swings in profitability and market impacts.
Shifting to our platform costs, our G&A expense ratio declined both sequentially and compared to the prior year.
Quarter to 24 basis points on a consolidated basis as expected.
Looking ahead, we expect that our operating expenses and the second half of the year will be roughly equivalent to what we saw and the first half and <unk>.
All of the terms.
As we continued to drive operating leverage across the business.
Turning to taxes as a reminder, our tax rate is the function of the proportion of income, we generate and our Bermuda subsidiaries versus the income and our U S subs.
And the second quarter, our operating tax rate came in lower than expected at 3.6%.
This was due to above average performance from alternatives, which tends to drive our tax rate down and and adjustment to reflect our new expected full year tax rate, which is in the mid to high single digit area versus our prior expectation of approximately 10%.
Tying all of this together, it's increasingly apparent that the benefits of Athene significant scale combined with our strong management of both sides of the balance sheet and differentiated investment capabilities are compounding to drive extraordinary momentum.
Consider that our adjusted operating income, excluding our investment and Apollo totaled approximately $1.4 billion through only of the first half of 2020, 1 and the amount that exceeds what we have earned through any calendar year and the team's history.
As I mentioned last quarter, we continue to be on pace for record annual earnings and of reaching impressive new highs and adjusted book value per share.
Before wrapping up for our prepared remarks, let me comment on capital Athene continues to be exceedingly well capitalized with approximately $18.3 billion of aggregate regulatory capital and and under Levered balance sheet.
We currently have more than $8 billion of deployable capital, which is comprised of excess equity capital untapped debt capacity of nearly $3 billion and 1 and a half a billion dollars of available commitments for Acura.
Our priorities for holding this excess capital continued to be supporting strong organic growth.
Supporting and executing inorganic growth.
Supporting additional ratings upgrades and opportunistic share repurchases.
As you can see we've continued to execute on the organic side and as Bill discussed there are numerous developments and the market regarding inorganic opportunities.
We also are just starting to experience the benefits of our most recent ratings upgrade which has served as the tailwind for a variety of areas across the business.
With that I'll turn the call over to the operator, and we'll open the line for questions.
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In order to ensure everyone receives the turn and we ask you. Please limit yourself to 1 question on the first go round and hop back into queue, if you'd like to ask the follow up.
We will now take our first question from Zach of buyer with autonomous research.
Hi, Thank you just a quick question on Apollo's recent earnings call. They mentioned the desire to develop a solution for.
The retail investors to access Apollo funds.
And they have noted that there'll be launching 2 yield based products and this channel kind of and the latter half of the year.
Are there ways for you to incorporate a pile of funds into the retail products and could this be a way for you to differentiate your product and the marketplace.
Yeah.
Yeah Zach.
And so it's.
We've studied the challenges.
You know you need a.
You need and index too and if you think about our indexed annuities and they're using some kind of a fall of fun and you need is you need and index to kind of hedge those annuities or hedge those Apollo funds and that's.
Yeah, that's tricky, especially with you know with the private investment.
We are continuing the study this and see if there are things we can do.
And and we're also I would say generally.
Coordinating with the Polish retail effort.
You know they'll be selling their products through many of the same channels that we do are or 1 of the penetrate so.
I see us working together on this going forward.
And it may be possible to.
To put some kind of of Apollo fund and and some product, but he's got some kind of and annuity wrapper around it.
Awesome.
And my second question is on competitive dynamics and the PRT market. So.
You've seen the some great volume in third quarter with the Lockheed transaction I'm, just curious kind of what's enabled you to capture leading market share and a little bit more specifically on the jumbo transactions kind of any color you have on dynamics of that size of the market.
Okay.
Yeah, well the theirs.
And I'd say sort of 2 things going on and 1 is you know we're a strong competitor we have a really good mousetrap here of the thin in terms of our investment performance.
Or are you know our operating efficiencies.
You know, we we for instance.
Relative to the rest of the industry chose to take and outsourcing of admin and strategy with leading pension.
Pension and administrators, who are much bigger than any of the insurance companies that has lowered our cost increase their capabilities. It was a good move.
So you know were a tough competitor.
In terms of pricing.
But the second thing is.
I think of Athene has been a lot more willing to.
And the focus on trying to figure out solutions for clients.
Not every pension deal. It's just the nice simple vanilla retiree deal a lot of them have issues that have to be solved and I think historically the industry was unwilling to tackle those.
And and we have not been you know and there and that was true and the Bristol Myers deal. It was true and the Jcpenney deal and I think anytime that there's any complexity you know we're now of the easily the first call right. In terms of you know can you help us figure out the solution here.
And so it's really the combination of those 2 things I think that have made us number 1.
Look it's.
Well, yeah, we've already had a remarkable year in terms of the PRT and the truth is as we're only now getting into the heavy part of the season, Okay in terms of the volumes of deal.
So this is good and up you know and I think what's interesting about that is.
It's clear to me that this year and sort of marking of step up and you know in terms of PRT and size of market and I expect this to kind of continue going forward because I see more plan sponsors are going to get proactive about their old pension liabilities.
Thank you.
There are no additional questions at this time I would like to turn it back over to Noah Gunn for closing remarks.
Thanks, Stephanie and thanks, everyone for joining us this morning and for your continued interest and Athene. If you of any follow ups based on anything we discussed on today's call. Please feel free to reach out to us as usual and we look forward to speaking with you again next quarter.
Thank you. This concludes today's conference call and thank you for joining the Athene holding second quarter 2021 earnings call and webcast. Please disconnect. Your line at this time and have a wonderful day.
Okay.
Okay.
And.
And.
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And then.
And the dividend.
Moving on.
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