Q3 2021 Athene Holding Ltd Earnings Call
Good morning, My name is and I'll be your conference operator today at this time I would like to welcome everyone to Athene third 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 answer session. If he would 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 I will now turn the call over to Alex tells our director of Investor Relations. Please go ahead.
Thanks, Emma and welcome everyone to the themes third quarter 2021 earnings call.
With me. This morning are Jim <unk>, 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, today's earnings call May include forward, looking statements and projections, which do not guarantee future events or performance.
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 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 Youll find a reconciliation of these measures within our earnings materials are available at IR Athene Dot com.
With that I will now turn the call over to Jim.
Thanks, Alex and good morning, everyone.
Our team performed incredibly well in the third quarter.
We originated $12 billion of organic inflows.
Which marks a new quarterly record and underscores the amazing scale.
<unk> is now operating.
With this result, we have also surpassed the level of total book organic inflows, we generated in all of 2020.
Which was our previous record.
In addition, our third quarter results highlight that we are on pace to deliver our best year of annual profit ever.
These factors combined to drive the themes adjusted book value to $71 50 per share.
Which represents an impressive compound growth rate of 17% per year since inception.
A level, we believe is unmatched in the retirement services industry and.
And as one of the best in the overall financial services industry.
I am truly excited to see a theme continue this success as it fully aligned partner with Apollo.
Following the completion of our pending merger in January.
A couple of weeks ago, I had the opportunity to speak at Apollo Investor Day.
Where I outlined the history of Athene, and our business model, which at its very core is simple.
We fund ourselves by issuing re insuring and acquiring retirement savings products.
We invest those funds with Apollo into a high quality investment portfolio.
And we benefit from keeping 100% of the upside from our investments.
From the beginning we baked athene on a business model that we first executed.
At my Alma Mater Company South America.
At Sunamerica, we were rewarded for our consistently growing GAAP earnings.
And ability to capitalize on market opportunities.
The company was sold for $6 six times book value.
I think the business today is bigger is growing faster and is more profitable with higher returns in South America 20 years ago.
Our track record of profitable growth at scale is exceptional.
And as I reflect on our company's history.
It's clear that Athene has the most successful startup in the retirement services space and one of the most successful in financial services in general.
At the same time.
I believe that the market has yet to ascribe anything close to full value to athene.
Which is part of why we view the pending merger with Apollo as being a strategic imperative.
To unlock shareholder value.
Hi, I'm more confident than ever that if things best days are ahead.
And today's results illustrate the tremendous momentum we carry into the future.
With that said I'd like to touch on some additional highlights for the third quarter.
With a record level of organic inflows, we once again held leading market share position and our retail funding agreement and pension group annuity channels.
Which continues to be a testament to the scale efficiency and solutions driven product suite that our team has built over the past 12 years.
We were also able to build upon the ratings upgrade that we receive from standard and poors last quarter as Fitch revised our outlook to positive from stable in August.
This serves as another indicator of the emphasis that we have consistently placed on our interactions with rating agencies.
As well as our dedication to balance sheet quality and financial transparency.
With this in mind, we published the latest iteration of our balance sheet tutorial.
Which we are now in an annual cadence of producing.
Having released to additions of this in depth portfolio analysis amid the pandemic.
This report outlines a range of scenarios assumptions and results that form the backbone of our portfolio stress tests.
And provides individual asset class deep dives.
The report also very clearly presents the types of risk other theme does and does not take.
Which is something that we think goes beyond what others choose to publish.
Turning to the asset side of the balance sheet.
We focus on yield outperformance and downside protection.
During the third quarter, we purchased nearly $17 billion of investments.
Which marks our second highest level of quarterly asset purchases ever.
The yield on our fixed income purchases was 55 basis points higher net of fees than the triple B corporate bond index.
This highlights the benefit that we capture by investing across asset classes, including in structured securities.
Through our active alpha generating investment management partnership with Apollo.
Most of our purchase activity for the third quarter fell into three categories.
First despite the tight credit spread environment, we continued to find attractive enough relative value and public and private investment grade corporate bonds.
Which accounted for 42%.
Of our purchases.
As well as fill our target.
Allocations across the portfolio following the large influx of cash from our organic flow.
Second we found value add opportunities constructed securities like CLO and asset backs.
Which collectively accounted for 29% of our purchases.
Athene focuses on the senior investment grade tranches of these securities.
Which benefit from significant credit enhancement and.
It 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 NTIC rating of our structured security purchases was one four.
Solidly within the investment grade territory.
And third Apollo source significant volumes of commercial and residential mortgage loans.
Which accounted for approximately 20% of our purchases.
Yes.
Our portfolio of alternative investments posted its fifth consecutive quarter of above average performance.
With an annualized net return of 16% in the third quarter.
Driven by broad based strength across our investments.
Specifically, we saw strong returns from our natural resources.
Private credit and real estate allocations.
As well as our equity stake in Jackson National.
Which recently completed its independent listing.
These results were better than expected and support our long term track record for alternative investment performance of low double digits annually.
With lower volatility than equity indices.
As we've discussed in the past our approach to alternative investments is differentiated relative to traditional hedge fund and private equity strategies.
We make alternative investments that tend to have a defensive orientation.
And are less prone to binary outcome.
Such as in strategic well hedged operating businesses, which possess attractive cash flow characteristics.
And may offer the additional benefit of sourcing directly originated investments.
Well suited for various parts of our portfolio.
As discussed on our prior call during the third quarter, we announced the acquisition of foundation home loans.
A specialist UK mortgage lender.
Funds managed by affiliates of fortress investment group.
This acquisition will augment our existing expertise in this asset class.
And help us source additional high quality investments.
Then in the fourth quarter, we provided two more examples of our strategy at work.
In October we announced the acquisition of a majority stake in <unk>, a technology driven multichannel mortgage lender from.
From Warburg Pincus.
And just last week, we announced that Athene will serve as the lead investor in a strategic merger of wheels in Dongguan.
A transaction that brings together two best in class fleet management businesses.
To create a combined company with the strongest and most flexible capital base in the industry.
This transaction combines wheels 80, plus your fleet management legacy strong client base history of product innovation.
Exceptional client service and technology.
With <unk> industry, leading scale.
The newly combined company will provide a broad range of solutions to clients.
And athene will benefit from attractive opportunities for further asset origination and deployment.
Both the new Phi and wheels dollar transactions serve as examples of the leverage that athene derives from our strategic relationship with Apollo.
We benefit from Apollo's World class investment pipeline and underwriting capabilities.
Which help us to identify and invest in attractive businesses.
That can also add direct origination and asset sourcing capabilities to our alpha generating investment portfolio.
Athene and Apollo have had an incredibly successful strategic relationship since our founding.
Which will become an even greater advantage after the completion of our merger.
It has been my honor to be part of the most successful retirement services company ever based on stock price performance has done America and.
And now part of the most successful retirement services startup ever at Athene.
Since this is likely our last earnings call as a separate public company.
I want to thank you our shareholders for your confidence in us.
And we look forward to delivering great shareholder value.
As part of our Pollo going forward.
Thank you now.
Now I'd like to turn the call over to Bill for an overview of our liability origination activities.
Yeah.
Thanks, Jim.
<unk> organic growth engine produced a record $11 9 billion of total organic inflows in the third quarter.
Driving 27 7 billion of total organic inflows year to date.
This resulted in net annualized organic growth rates of 8% and 7% in the third quarter and year to date, respectively.
The blended underwritten return on our inflows.
In the third quarter was in line with our profitability targets, which we have characterized as mid teens or better even with the persistent low interest rate environment.
Turning to each of our channels.
In retail we generated $2 4 billion of inflows, which marks our second highest quarterly total per day.
This is a very impressive result capped by our strongest individual month as we saw more than $900 million of inflows in September alone.
Notably competitive dynamics in the <unk> market became more favorable due to rate increases midway through the third quarter, which.
Which improved the relative positioning of our product set.
Though we did not change our profitability targets.
This resulted in a sequential rebound in <unk> sales, which comprised 8% of our retail inflows in the third quarter.
We continue to benefit from the momentum that we have built an RFID business as FIA sales reached a quarterly record in the third quarter and comprise roughly 84% of retail inflows.
The most recent limit that are released in September for the second quarter.
Confirm that athene held the number one industry ranking for year to date FIA sales.
In terms of distribution roughly.
Roughly 50% of our retail inflows in the third quarter were generated through the bank and broker dealer channels.
This highlights the significant progress we continue to make in terms of selling more of RFA product through the independent broker dealer channel.
Importantly, our strong inflows within retail has been driven by a diverse mix of products.
For example, opinions highest single ranking by sales volume product ranking by sales volume now places 11th in league tables, which highlights. The fact that we do not rely on only one or two flagship offerings to drive results.
And second as we've said in the past.
Most of our retail products are based on alternative indices, which have performed well and are serving as a tailwind for FIA sales.
Also most of our retail annuities do not carry guaranteed income riders, which allows us to manage duration risk more effectively.
These characteristics illustrates that our retail franchise continues to be very high quality in terms of product breadth differ.
Differentiation and profitability.
Looking forward, we expect that the fourth quarter will mark a new record for retail inflows.
We have a high degree of confidence given the scale of our current pipeline. This has been driven by the broad based momentum that we're seeing across RFID products.
And bind with a full quarter benefit from the more rational pricing trends for Michael.
Turning to pension group annuities, we generated $6 6 billion of inflows, our best quarter ever for this channel.
This was driven by three transactions, including a $700 million transaction with a large building materials producer.
A 1 billion transaction with a well known auto parts manufacturer.
And a landmark for $9 billion deal with Lockheed Martin, which is our largest single transaction to date.
The Lockheed Martin Athene was selected to provide annuity benefits to approximately 18000 pension plan participants.
This is notably the second transaction that we are completed with Lockheed building. Upon our initial 800 million deal in 2018, and which we provided benefits to roughly 9000 pension plan participants.
The third quarter was also significant a significant one for the broader U S market as the confluence of tailwind made it one of the strongest quarters in recent history.
The total market pipeline is continuing to build and sell our estimating that there could be roughly 35 billion in transactions this year.
Which would be one of the strongest on record.
We expect that more large scale opportunities will come to market as equity market and interest rate factors are improving pension funding levels.
And attitudes are shifting around the concept of divestment.
With planned sparked by sponsors becoming more willing to complete transfers and larger increments.
Going forward this could drive a continuation of the near record industry volumes that we've been observing.
With this backdrop athene has never been better positioned to succeed.
Since the end of the third quarter, our pipeline has remained active we.
We signed an additional $1 4 billion transaction in October with a large telecommunications company.
Once again, demonstrating our position as a capable and trusted solutions provider for both plan sponsors and retirees.
Turning to funding agreement activity, we generated $2 3 billion of inflows in the third quarter under the very strong levels of profitability.
Having now issued $9 6 billion of funding agreement backed notes through the first three quarters of 2021.
We've already reached a new record level of issuance for athene in the calendar year.
In context of the broader market, we were the number one issue or a funding agreement backed notes in both the third quarter and year to date and.
We maintained our position as the third largest overall.
Issuer with nearly 20% market share.
We're very proud of this achievement, which has been driven by the strength of our balance sheet and the breadth of our program with issuances across multiple currencies in the North American and European markets.
We've also continued our momentum into the fourth quarter with roughly one 5 billion of issuance.
However, looking forward, having already attained record levels of organic growth in this channel, we expect to pause any new syndicated deals for the remainder of 2021.
This should allow additional demand to build up in the market, which will set us up for a strong start at the turn of the new year.
Lastly, in our third party flow reinsurance channel activity picked up in the third quarter compared to the first and second quarters, which corresponds to the market trends related to module business that we observed in our retail channel.
Unlike what we observed in the first and second quarters pricing dynamics related to reinsurance Maiga flows became more favorable towards the end of the quarter.
Which resulted in a resurgence of business from some of our larger counterparties, even though we did not deviate from our return targets.
In addition, we benefited from the launch of our newest partnership in Japan during the third quarter, which got off to a solid start with.
We have continued to make progress toward adding more partners in the U S and in Japan, and we're establishing other new relationships to facilitate increased reinsurance of FIA flows.
Which we expect to come online early in 2022.
Looking ahead.
Given some of the visibility we have into the activities of our clients, we expect flow reinsurance volumes will likely increase in the fourth quarter.
As we realize a full quarter of benefit from.
From a recent resurgence of micro related business.
Our newest Japanese slow relationship.
In summary, we are extremely proud of our third quarter results, which showcased the breadth of athene, leading market positions across all four organic channels.
With this level of performance, we feel that we will comfortably exceed the revised estimate of $30 billion in total organic inflows for the year.
Which we provided last quarter and we now expect Philippines total organic inflows will approach 35 billion.
For 2021.
On the inorganic front in terms of our pipeline, we continue to be actively involved in the marketplace and are tracking several live transactions, including sizable opportunities that were following in both the U S and Asia.
The theme is very willing to play our part in the ongoing insurance industry restructuring trend and continues to be among the best positioned solution providers in the retirement services landscape, given our expertise and robust levels of deployable capital, which can support $100 billion of liability purchasing power.
With that I'll now turn the call over to Marty who will discuss our financial results.
Great. Thanks, Bill and good morning, everybody for.
For the third quarter, we reported GAAP net income of $698 million or $3 51 per diluted share. Our adjusted operating income available to common shareholders was $541 million.
Our $2 73 per share.
Excluding notable items of $20 million as well as our strategic investment in Apollo two.
Total adjusted operating income was $511 million or $2 57 per share, resulting in an adjusted operating ROE of 15, 3%.
As Jim highlighted we remain on track to deliver our strongest year of profitability yet despite the low interest rate environment as we continue to originate business meeting or exceeding our target returns.
Our third quarter results benefited from the significant profitable growth in volumes that we saw earlier in the year.
We also saw strong performance in our alternatives portfolio, which helped offset a greater than expected decline in our fixed Nir and resulted in a consolidated adjusted operating return on assets of 126 basis points during the quarter, excluding notable items and our investment in Apollo.
Our large in force business produces mostly consistent and predictable fixed income yield.
Our third quarter results came in slightly below our prior guidance at $3 49 at 349% down 26 basis points sequentially.
This decline was driven by several factors the largest of which was a 12 basis point nonrecurring benefit from prepayments will lead to our investments in Hertz and midcap and the second quarter.
In addition, we experienced nine basis points of drag, including lower bond call income and five basis points of drag from lower on the margin yields on new deployment and higher cash balances.
As we observed last quarter the teams experienced a large influx of cash driven by our record third quarter and year to date organic inflows.
Higher cash balances in addition to the drag from new deployment amidst the current lower rate environment and tight credit spread environment.
Are creating a near term drag on our fixed nir.
However, since these inflows were written to target returns are better.
We expect to see corresponding offsets overtime in our cost of funds.
Note that while our fixed Nir is about 20 basis points lower than the third quarter of 2020, our cost of funds is about 30 basis points lower than third quarter of 2020.
We now expect our fixed year to be approximately three 5% in the fourth quarter.
Turning to alternatives as Jim mentioned, we experienced a fifth consecutive quarter of strong performance across the portfolio.
With an annualized Nir of 16, 3% in the third quarter.
Coming in above our prior expectations.
We benefited from strong returns within our natural resources private credit and real estate investments and.
In addition, we saw gain on our equity stake in Jackson National after it completed its spin off from Prudential plc for.
So the subsequent increase in Jackson share price compared to our carrying value.
Looking ahead, we expect our annualized alts nier in the fourth quarter to be approximately 11% to 12%, which is closer to our longer term average.
Moving next to cost of funds and starting with the cost of crediting component.
Our reported crediting rate was roughly stable at 172 basis points down one basis point from the prior quarter. This.
This was driven primarily by lower rates on new business, partially offset by a growing institutional liability mix.
As we've noted in the past all else equal a growing institutional mix tends to push the crediting rates higher since essentially all of the funding costs for pension group annuities and funding agreement business are reflected within the cost of crediting.
Looking forward, we expect our full year 2021 cost of crediting will be approximately 173 basis points.
This is slightly better than our prior expectation of 175 basis points.
Driven by our expectation of stronger growth in institutional channels coming in at lower marginal cost.
Combined with continued rate actions on deferred annuity renewals.
Turning to other liability costs or OLED, which represent the other component of cost of funds for our deferred annuities.
Typically observed quarterly fluctuations that can occur as a result of factors such as market movements.
<unk> amortization impacts from higher or lower gross profits.
And the impact of annual assumption unlocking.
In the third quarter <unk> was slightly lower than our prior guidance at 72 basis points, representing a nine basis point sequential increase versus the unusually low levels. We saw in the second quarter.
Nearly all of the sequential increase was driven by less favorable equity market performance factors.
I would also note that we chose to delay our typical annual review of actuarial assumptions until the fourth quarter. Just ahead of the merger when we will remark the balance sheet under purchase GAAP accounting.
So our third quarter results were not impacted by any assumption unlocking.
Looking ahead, we expect that our baseline run rate for other liability costs will be approximately 70 basis points in the fourth quarter.
Subject to swings in profitability and market impacts lower than our prior expectation of 75 basis points.
Shifting to platform costs are consolidated G&A expense ratio was roughly stable at 23 basis points as expected.
We continue to expect that our operating expenses through the second half of the year will be roughly equivalent to what we saw in the first half in dollar terms as.
As we continue to drive operating leverage across the business.
Turning to taxes, our tax rate is a function of the proportion of income we generate in our Bermuda subsidiaries versus our U S subsidiaries in.
In the third quarter, our operating tax rate came in lower than expected at one 9%.
This is due to another above average quarter of performance from alternatives, which tends to drive our tax rate down.
As a result, we.
Now expect that our full year 2021 operating tax rate will be in the mid single digit area.
Versus our prior expectation of mid to high single digits.
To summarize the theme is now beginning to realize the benefits of the leading scale and momentum that we have worked hard to build.
Our results so far this year demonstrate the strength of our spread lending business model, which continues to generate attractive net spreads in line with or above our targets.
We're confident that the record inflows we've already generated in 2021 will become a significant tailwind for our earnings power in 2022 and beyond.
Before wrapping up our prepared remarks I'll comment on capital with a key point that was also discussed at the recent Apollo Investor Day.
We believe they are the themes excess capital is a crucial element of our business strategy, both today and in the future.
Put simply holding significant excess capital allows the theme to benefit from times of market dislocation.
Becoming a forced seller of assets and having the flexibility to invest opportunistically at wider spreads than we would otherwise be able to or.
Or by pursuing organic and inorganic opportunities, which may arise.
This is a skill that we successfully demonstrated last year in the pandemic and are just beginning to benefit from today.
Athene continues to be exceedingly well capitalized with approximately $18 9 billion of aggregate regulatory capital and an under Levered balance sheet.
We currently have approximately $8 billion of deployable capital.
<unk> is comprised of $3 6 billion of excess equity capital.
Untapped debt capacity of $3 1 billion.
And $1 3 billion of available commitments for Acura.
Our four priorities for capital deployment have not changed including first supporting strong organic growth second executing on inorganic growth opportunities.
Third driving additional ratings upgrades and fourth opportunistic share repurchases.
These are clearly exciting times at Athene, especially given all of that is occurring in our business and in our channels with the upcoming Apollo merger.
I firmly believe the team's best days are ahead of us.
With that I'll turn the call over to the operator, who will open the line for your questions.
At this time, if you would like to ask a question. Please press star one on your telephone keypad.
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To ask a follow up.
We will take our first question from Erik bass Autonomous research.
Hi, Thank you can you talk about both the organic and inorganic growth opportunities that you see in Asia.
The next big growth on a tier for Athene as we look out over the next five years.
Sure Eric.
Phil.
So I think theres a couple of different opportunities.
Sure.
We're public now that we've taken minority equity stakes in both SWT.
This is a Hong Kong based life insurer with operations in a number of different Asian countries.
And also a challenger.
Which is the fixed annuity leader in the Australia market.
And my guess is there will be others.
And I think that will lead to.
Additional flow relationship deals because.
Japan is the second largest fixed annuity market in the world.
And indexed annuities are just getting started there.
We think there are products that the consumers will like in Japan.
Given the level of interest rates, especially.
So we think they're going to be more flow deals, especially in Japan, but maybe in other countries too.
We think theres going to be block opportunities, especially in Japan.
Because.
There are <unk>.
<unk> capital rules, which are coming to the Japanese market and that combined with low interest rates.
As you know is causing a lot of underperforming blocks.
And I think we've seen even though the numbers are still relatively small we are seeing a number of Japanese life insurers, both domestic and foreign.
Start restructuring their balance sheets, and do reinsurance deals for some of their in force.
And we think that thats going to.
That momentum is going to continue.
And so I think both in terms of blocks and in terms of flow.
We're going to see a lot of activity and so we're.
We and Apollo are putting more resources against this opportunity.
And.
I wouldn't be at all surprised.
We do something significant next year in terms of the transaction or.
Because there's lots going on.
Great. Thank you and good luck going forward.
Thank you.
We will take our next question from Ryan Krueger with K B W.
Hi, Thanks, good morning.
I was hoping to come up with a more interesting question in this for the last call, but I didn't so.
I guess can you give any more detail on.
The expectations you have for P GAAP and tax rate changes from from the merger given that it's.
Close to happening now.
Yes.
Hey, Ryan its Marty I'm interested in your question.
Okay.
Yes.
We just published apologist put out.
The latest S. Four proxy filing just this past Monday night so.
Ask you to reference that if you have not had a chance to already see it.
And in there there's <unk>.
So forma financials.
Is that are reflected in there that reflect the marking of our assets marking of our liabilities.
As you May recall from your acquisition Finance days, our deferred acquisition cost will get wiped out there'll be a new value of business acquired established which will be actually negative our case, which would be helpful to earnings going forward.
It referenced that you can kind of see the latest and greatest on the pro forma financials in there.
From a tax standpoint, I think Apollo has already disclosed a couple of different times that they expect the combined entity to have about 18%.
Tax rate effective tax rate and obviously that would include Athene will.
We will clearly become more of a U S taxpayer than we have in the past, but I would just say that some of our.
Business and reinsurance strategies will continue to provide some benefits post merger from a tax efficiency standpoint.
The other thing I'd note is that from a competitive standpoint in the marketplace.
As been noted several times.
We'll be continuing to use.
Acura and perhaps future side cars on accurate to or an accurate III and so forth.
It is certainly under consideration and getting capital from those side cars is really coming from a funding source that.
It is very very tax efficient so it'll help us in our overall pricing not just on inorganic transactions, but also as we increasingly use accurate to fund our organic business. This quarter, we used accurate to fund not only our PRT business, but also used it to in part fund.
Funding group business, and we'll do more of that next year, including doing some retail business.
So that overall is very helpful as well and then last but not least.
I think the increased tax.
Costs that we may vary the theme.
It's probably going to be offset or more than offset by increased wrap fees as accurate takes on more and more.
Business.
Alright, great. Thanks, and good luck going forward.
Thanks, Greg.
Our next question comes from Andrew <unk> with Credit Suisse.
Hey, good morning, I guess, just being in the last call I just want to say just what a great job you guys have done over the last decade, and executing and performing and certainly good luck with.
We've actually it sounds like the market seems that the market is now realizing good luck with that to continue on to the Polish flag.
So I guess the first question is.
As with respect to block transactions and what you're seeing out there.
<unk>.
What type of transactions are you seeing in and then in terms of the big ones are there any left.
Should we expect going forward.
So I'll start on the blockbuster.
So.
Look there has been.
Some smaller block trades theres been a couple of larger ones done.
Is that a company.
So recently.
And I would I would describe the market environment there is frothy.
And with.
With the valuations being very high we've participated in all of those processes.
But we have been I would say pretty disciplined about.
Pricing and making sure that we're going to get our returns.
And I think the buyers were much more willing to be aggressive because they strategically felt they needed a platform.
So they were willing to pay up to get that.
Even though the platform may or may not be.
Very valuable.
But there.
But.
But.
His duties in the eye of the Beholder so it.
So they are willing to stretch.
We don't need a platform we have the best platform in the business.
And we also are bringing and plenty of money organically. So.
So we certainly don't need to stretch for inorganic deals.
That's that's kind of what's been going on recently.
In terms of the.
The future, yes, there is still some big blocks out there and.
And in the states for fixed annuities and so.
And my expectation is there'll be.
Is it still going to be a number of transactions in the next year or so that will get done that are of size.
And so it.
And there may be a few more after that okay.
But.
We're probably reading.
We're certainly through the middle innings in terms of the fixed annuity block trades, we're probably in the later innings now for sure.
That's.
That's likely to be the case.
The industry is also now.
Moving on to other types of liabilities.
That also have more challenges.
And frankly our.
We will probably be very costly to restructure.
For them and if so how.
Their willingness to take the pain to do that is.
I think yet to be seen.
But their trials.
They're trying to see if they are trying to see how aggressive and how hungry. The buyers really are so we're I think our watchword is to remain disciplined.
Look for opportunity Brookfield transaction that were.
There won't be many competitors, because it's either large or complex or both.
And also frankly.
I'll spend more time in Asia.
And as we kind of broaden our scope in terms of what we're looking at.
Thank you for the nice words.
Oh, yes.
Jim.
So.
Just a quick follow up on that Bill.
The big blocks, you would define that as north of 10 billion right.
Yes.
And then with regard to pension risk transfer.
<unk>.
Given that landmark $4 9 billion Lockheed Martin transaction, what's the what's the pipeline looking at like into 'twenty, two and maybe just.
We're constantly hearing about.
That market could you size, the pension risk transfer market and and.
You mentioned the earnings on the big fixed annuity blocks.
What inning are we there I mean, the World series ended last night, So I don't know where we are.
No.
This is exciting because we're still in the very early innings of defensiveness.
So remember there are something like.
Australian dollars or more.
Well funded corporate pension plans that are no longer being used as the employee benefit right there frozen.
Close, but just sitting on corporate America's balance sheet and are well funded.
And.
They are sitting there, causing volatility in those companies' financial statements.
The assumptions could change the macro conditions change et cetera et cetera. So.
Corporate America in general, we'd like to get rid of that and they would like to do it.
Methodically because it's work.
And the biggest old corporations in America have.
50 billion of liabilities 100 billion of liabilities they've got a lot.
<unk>.
And there's no real reason why they would want to keep it forever. So.
So.
Overall market potential is quite large.
And we're on and the total <unk>.
Total CRT market. This year is going to be maybe 35 billion, maybe a little higher.
Our expectation is that's going to continue at those levels because it used to be just a couple of years ago was more like $20 billion or 25 billion. So we've taken a step up.
We could even take a further step up I think.
To some extent you could argue that market size is determined by how much the life insurance industry could absorb in a given year.
But because people like Athene are now entering the market I think the capital to put against these opportunities bigger than that.
I think people's appetite for this sort of business, which everybody realizes is good business now.
As larger so I think the overall PRT market will probably continue to grow.
And never mind, the fact that you know.
Stock markets high interest rates have bounced off the lows.
And and so it feels like it.
It feels like a good time to unload your plan.
So if so I think that youre going to see a strong market going forward.
And today with one exception general Motors deal, which was done about a decade ago.
Theres only been but most of those events that the biggest deals have been in the $5 billion range.
I think that could change I think they could get bigger.
Honestly.
I don't think its out of the question Youll start to see $10 billion deals.
<unk>.
As the market can clearly take those in my opinion and so so I think thats.
I think <unk>.
<unk> got a long way to go in terms of.
That market being developed and Oh by the way, where the market share leader by.
Quite a ways right now.
We are positioned.
To pursue these opportunities.
We'll go next to Humphrey Lee Dowling and partners.
Good morning, and thank you for taking my questions.
See any ice's, taking a look at some of the key owned insurance companies and specifically on some of the Australia transactions.
The discussion is still kind of early but have you have any thoughts in terms of how that may affect your business model and maybe on the flip side, maybe <unk> some of the imitators.
Hopefully maybe just it's Marty just ask you to say that question again to make sure. We heard it correctly I think we heard most of it we want to make sure we get it accurately.
Okay, Yes, NTIC is looking at the some of the affiliates transactions by P owned life insurance companies.
Specialty kind of related party transactions.
That discussion is still come in below the R&D at the early stages, but I was just wondering have you had any thoughts in terms of how that may affect your business model going forward, but maybe on the flip side, maybe could potentially lethal form of the lower quality indicators.
Right.
Maybe I'll start out, let's say, yes, we're very aware of it we've actually been very very involved in discussions along with others in the industry I think we've always been a very big fan of transparency frankly is more.
Kind of indicators get in it's not really necessarily surprising that some regulators are having kind of upping their scrutiny.
Ultimately, while that may be more work from a discussion and.
Disclosure standpoint for us with those regulators ultimately, it's probably a good thing for the industry.
We operate in and also frankly, a good thing for us.
We have always taken great pains.
All of our complicated larger assets weather related parties are not to review them with our regulators. So thats always been the case with us and that will continue.
I think it's partly a reaction to a particular bad accurate, which I'm not going to get into on this call and so I think thats heightened it probably somewhat appropriately so the scrutiny, but I think it will hopefully be a step that will help ensure that people maintain a pretty high bar in these things and if they don't that the regulators will become aware of it and.
And take the appropriate actions, so I don't anticipate any impacts at all related to our business model itself and so the way we invest I do think it could impact just the amount of additional <unk>.
A discussion of our disclosure, we have with our regulators, but no as I said, we've already been doing that to a very large extent.
Got it again, congratulations and best of luck.
Part of the Apollo going forward.
Thanks.
Well go next to Tom Gallagher with Evercore ISI.
Good morning, Hey, It's your last earnings call someone's got to ask a numbers question right.
So I thought I thought I would start there.
So excess equity capital went down by $400 million sequentially.
Can you can you quantify what what drove that was that mainly increased risk charges from portfolio redeployment or something else.
Hey, Tom it's Marty.
You can ask numbers questions if you'd like there are no rules on the last call.
Listen we wrote 12 billion of volume so and we were happy to do it at the returns that we got so that obviously is a lot of capital I would note a few things. One is we benefited on our statutory earnings which were pretty strong in runoff that helped us.
Probably by.
650 $700 million of results, but the capital we put to work.
Before it help for macro was probably closer to 900 million. So for the first time in a while the actual capital deployment growth before any assistance for macro was more than the earnings and runoff.
That's a phenomenon of writing a $12 billion in the quarter of very very strong results.
We did get some capital from Accra as it helped to fund some of the PRT in retail I'm.
I am sorry, PRT and funding agreement business.
So that 900 gross deployment number was offset by capital from <unk> of about 350.
So that's kind of one of the outflows as just capital put to work and then finally, putting some more work to <unk> in the quarter and then doing some hold backs around some future commitments that we've made kind of get us to the $3 six the actual excess capital number.
A couple of hundred million dollars above that but we're kind of made some commitments.
For the fourth quarter, and a little bit beyond that we're kind of holding a little bit of capital back for that so we're calling the number of $3 6 billion.
Okay. Okay. Thanks, and then Jim just one for you on.
The credit environment just curious.
What your is there anything that worries you at the moment, you've obviously had some blow ups of property developers in China recently, any any knock on effects to some areas that youre invested in or just broadly any what would the sort of watch list areas that you'd be focused on right now.
Yes, sure Tom so.
Look we've been very proactive in.
Getting rid of any potential problems in our portfolio even from.
Before the pandemic started.
So thats bearing fruit now.
Nothing in OTT.
We are particularly watching casual dining.
Hotels.
Leisure industry.
But.
Based on our underwriting.
Focusing on properties that have strong sponsors et cetera, really haven't seen any.
Any impairments there we havent shrinking watch list in general in our portfolio.
And as we're heading into the merger we've continued to be proactive in looking at things that may be a little weaker than we want any changes there.
Sure.
I would tell you, but I don't think there really isn't a concern right now overriding concern.
In our portfolio and.
I think we're heading into the merger and mitigate shape in a high quality portfolio is performing the way we wanted to actually better than what we expected before the pandemic started when we had our March 'twenty call.
So yes, we'll continue to watch the industry is under pressure airlines as well, but.
That's come back pretty quickly in our underwriting has really been strong throughout so.
Fortunately in our CLO portfolio, no losses, and just really iron clad so.
It's going very well.
Gotcha, well good luck with everything.
Thanks, Tom.
Well go next to office hung BMO capital markets.
Great. Good morning. Thanks for taking my question I was wondering if you had any update around the potential impact of <unk> on athene in and if so how might this show up in our spread related earnings that gets reported once the merger with Apollo goes through and I suppose more generally do you think this accounting change can be a catalyst.
Additional M&A. Thank you.
Sure. Thanks for the question, it's Marty I'll take a crack at that.
<unk> as you probably know.
New GAAP accounting standard that goes into effect January of 2023, and there is a number of targeted improvements that are included in it.
Simplification of DAC amortization and so forth.
Think for Athene, I would say at a high level.
A couple of different things and then I'll provide a little bit more context first of all no real impact on our excess equity capital, which is driven by regulatory capital. So there is zero impact on that.
It's really effectively not going to be any real impact on the adjusted operating income that we report to our shareholders.
And then finally, we would expect any.
Impact to our GAAP equity to be actually pretty small.
Almost negligible, perhaps depending on the final numbers and I'll provide some context.
On if you think about our overall balance sheet.
Call it $160 billion of net liabilities.
Probably about $30 billion of those are impacted by L. DTI and the other 130 billion are not impacted.
So of that $30 billion.
25 of it is in PRT 25, billions in PRT and payout annuities.
And for that type of business, along with life insurance in long term care, which we don't have any of.
Those liabilities going forward under <unk> will be marked to market at kind of a high grade corporate right now.
Now I'd note that that $25 billion was written almost entirely over the last four years at very low rates. So the impact of that probably are pretty small.
<unk> hit to GAAP equity, but probably very small given the rates environment at which we wrote that business and then I think contrast, very differently with others have been writing new business and higher rate environments, or who have a lot of long term care and so forth. So.
And that $25 billion of payout annuities and pension group annuities, maybe a small hit.
Hit to GAAP equity.
The other $5 billion of liabilities or impacted our rider reserves, which under <unk> will be marked to market.
We've said for quite some time now that we're we take a rider reserving very seriously we update our assumptions every year, we feel that our assumptions are very prudent and under <unk>.
We will actually have a benefit to GAAP equity versus our current rider Reserve holdings. So ultimately <unk> is going to impact just a small part of our balance sheet and the.
Any pressure on our GAAP equity will be offset by good guys and a writer reserves. So it's ultimately going to be we think a pretty negligible impact.
I'd also note that we are heading into a merger with Apollo. So as I think we'd mentioned earlier, we're marking all of our assets and liabilities to market with the merger.
In January so that will effectively about a year in advance of LTI get those impacts into our balance sheet, but again it's.
I won't say, it's a non event for athene, but its relatively close to it.
I do think and bill can shed some light on this I do think it creates some opportunities in the inorganic landscape because while the impact on us is quite modest.
Some companies have been holding some businesses on the balance sheet not wanting to take a hit to GAAP equity if they sell at a loss.
It hit is going to come with the adoption of L DTI or with the disclosure of the Senate Bill if you want to comment on any of that or.
Well.
Obviously <unk> has been known for a while but it's coming.
It's been delayed several times.
Kind of given.
You know the prisoner a reprieve.
Sarah.
From certain but there, but I think.
Now companies, probably over the next year or actually going to finish their calculation.
And come up with a fairly precise number of what it's going to be.
And so I think for some companies and I'm just going to be large in there.
And and I think thats going to cause them to realize that Oh, you know I really do have this kind of.
You know changed in my liability discount rate so.
The current interest rate environment has affected me that's much should I say something about it and I think some well.
Because it'll be it'll be very clear.
How exposed they are to interest rates for some of their in force and so.
So I expect there will be some transactions I don't know if there'll be a lot, but there'll be some.
And.
And so I do think that cut.
Companies are going to.
This is yet kind of another manifestation of the low interest rate environment.
Putting pressure on management teams.
Restructured our balance sheet.
I would just add that we're a big proponent of L. DTI, we wish it was adopted earlier based on our conservative reserving. We think we're going to really be a stand out to the positive compared to either so.
Good question.
Thank you.
We'll go next to Michael Ward with UBS capital.
Hey, guys. Thanks for the question.
I think we've touched on a few of the inorganic markets out there so far.
Maybe bill just curious just given your relationship with venerable in their appetite for VA.
Just wondering if you could provide any update on your view of the pipeline there heading into 'twenty two.
Yes, it looks pretty heavy.
I mean quite honestly, there's a lot going on.
I think I've I've made a crack with that got a lot of water.
All of these four earlier this year is going to be a year of the VA deal and I think only one has printed so far thanks setbacks.
A lot of activity customers.
And probably it sounds like bar going to enter the Fray. So I think the vulnerable guys are going to be very busy.
Last year and for US of course, the question is who.
Can we join with partner with them in providing a more holistic solution.
The companies that are looking at.
A broader set of issues just more than just VA, we hope so.
But.
We'll just have to wait and see I would also say that there are now.
Rising Lee.
There are new entrants into the VA business.
Who are who want to buy VA blocks. It remains a pretty small buyers club, but it's getting a little bigger.
And I think that as I think we all know managing VA blocks.
Very tricky.
<unk> is a special set of skills.
In analytic work.
So.
It may mean that there may be more difficult for others to enter but they'll available is getting some company.
Got it that's helpful. Thanks, Phil and to the rest of you guys. There. Thank you guys.
Pretty solid quarter to go out on we'll definitely Miss your insight and perspectives.
But thanks again and best of luck under the mothership.
Sure.
Thank you.
Okay.
That concludes the Q&A portion of today's call I will now turn the floor to Alex pulsar for any additional or closing remarks.
Thanks, Emma and thanks, everyone for joining us this morning and for your interest in Athene.
If you have any follow up questions regarding our results or anything discussed on today's call. Please reach out to us.
This does conclude today's athene holding's third quarter 2021 earnings call and webcast. Please disconnect. Your line at this time and have a wonderful day.
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