Athene Holding Ltd. Q1 FY2020 earnings call

• Acknowledged the health and safety of everyone and thanked health care professionals and Athene employees for their efforts during the pandemic. - Mentioned the business rapidly adjusted to remote work to maintain continuity. - Highlighted the business model's stability, with value - generating savings products having principal protection and investing in almost entirely investment - grade assets. - Organic channels sourced nearly $4 billion of new deposits in the first quarter, with 8% sequential growth. - Retail annuity and flow reinsurance had over $2 billion in deposits in the quarter, with over half in March. - Institutional business saw nearly $2 billion in deposits in pension risk transfer and funding agreement channels, with PRT solidifying its market leader position and funding agreement activity in the first quarter. - Confidence in the alternatives portfolio, with various components like AmeriHome, MidCap, PK AirFinance, real estate portfolio, and strategic stakes in insurance companies performing well and mark - to - market fluctuations seen as temporary.

In the Retirement Services segment, the core spread - based business generated an attractive 18.5% return in the first quarter. Organic deposits in the first quarter had returns in the high - teens level, above mid - teens pricing targets. Retail annuity and flow reinsurance businesses combined to generate more than $2 billion of deposits in the quarter. For the institutional business, nearly $2 billion of deposits were generated across pension risk transfer and funding agreement channels. In PRT, the company continues to solidify its market leader position. Funding agreement activity saw approximately $800 million in the first quarter, a strong result considering $1.4 billion was issued in all of 2019. Revenue contribution percentages were not explicitly stated in absolute terms for each segment but the focus was on the financial performance details of each segment's operations.

• Organic growth activity is expected to continue to be strong, with aggregate organic growth activity anticipated to remain strong, maintaining prior expectation that organic volumes in 2020 will be consistent with 2019 activity, excluding the outsized PRT volume of last year, or approximately $15 billion to $16 billion. - Estimates that fixed income NIER, based on today's forward curve, will be approximately 4% for the full year of 2020. - Best estimate is that total crediting costs will continue to drift downward by approximately 5 basis points by the end of the year. - Expect the full year tax rate to be temporarily elevated around the mid to high - teens level and revert back to roughly 10% or lower as the environment normalizes.

• Market volatility can impact the marking - to - market of the alternatives portfolio, although the team believes marks are temporary. - Potential credit losses resulting from the recessionary environment, but manageable given strong excess capital position. - Volatility in CLOs with potential downgrades but no permanent impairments expected in the CLO portfolio. - Economic recession may lead to OTTI, with potential cumulative losses of 1% to 2% of net invested assets in baseline and deep recession cases.

Q: Can you talk about your views on the real estate market and your exposures and risks across the portfolio, particularly in the alternatives and on the commercial mortgage loans?

A: Sure, we have a $16 billion commercial mortgage loan portfolio. The average loan - to - value is 60%. 73 quarters of the portfolio is stable. Concerns are in hospitality (about 10% of portfolio, loan - to - value 54%) and retail (about 16% of portfolio, loan - to - value 53%). If impairments occur, they would likely be in these two areas but are well covered through CECL.

Q: Jim, so far, we've heard most of the life insurers say they think the majority of credit will be ratings migration and non - impairments. I mean, in my view that seems pretty optimistic given the level of uncertainty here. Curious, what you're thinking on that is at a high level. And I guess just also to focus on your stress loss scenarios. To the earlier question, I think a lot of people are focused on commercial mortgage loans, I think you addressed that. But that end CLOs have gotten a lot of attention, but that's a very small piece of your expected stress losses. And I guess just, sorry for rambling, but the final piece to this, when I hear you say you're improving liquidity to $10 billion, I think previously you were talking about $5 billion. That sounds certainly more cautious on credit, but anyway, any thoughts you have on this topics would be helpful. Thanks.

A: Yes, our building of liquidity is part of playing defense. Regarding impairments versus downgrades, we agree there may be downgrades and causes more capital allocation, but we're well protected with our capital position. We've been aggressive in allocating potential for losses in CECL and OTTI continues to be very low. We're ready to play offense now while being covered in liquidity and capital positions.

Q: On the 4% fixed income yield expected for 2020, can you say how much of a drag there is from the excess liquidity you're holding? And then also just on the clarification on the five basis point decline in cost of crediting, is that relative to 2019 or relative to the first quarter? Thank you.

A: On fixed income, the 4% expected for the full year is almost equally split between lower interest rates and additional cash drag. The cash drag is due to holding a lot of liquidity. The five basis point decline in cost of crediting is from the first quarter level.

Q: Many companies have disclosed their mortality, morbidity sensitivity from a 100,000 U.S. deaths. Can you provide your sensitivity on the longevity risk in PRT? Because I believe it would be a benefit?

A: It is probably going to be a benefit but not very material. We're skeptical about how much it will really affect our in - force and are still debating internally.

Q: Jim, you've talked about the ability to play offense and then you've also mentioned wanting to hold about $10 billion of liquidity. And then you did a terrific 319 million of share purchases in the quarter, first quarter. So, I'm wondering what the timeline and appetite is for share repurchases as your stock trades. It's roughly 50% of book going forward for the year.

A: Yes, the returns from buying back shares at these prices are extraordinary. We have over $300 million of available authorized capacity for additional stock buyback. We continue to evaluate it going forward but are still in the early to mid - innings of the crisis and keep it under consideration.

Q: Hey, good morning. So, Jim, you've talked about the ability to play offense and then you've also mentioned wanting to hold about $10 billion of liquidity. And then you did a terrific 319 million of share purchases in the quarter, first quarter. So, I'm wondering what the timeline and appetite is for share repurchases as your stock trades. It's roughly 50% of book going forward for the year.

A: Yes, the returns from buying back shares at these prices are extraordinary. We have over $300 million of available authorized capacity for additional stock buyback. We continue to evaluate it going forward but are still in the early to mid - innings of the crisis and keep it under consideration.

Q: My question on your prepared remarks, you guys pointed to total deposits kind of being in line with last year's level ex kind of that outsized PRT volume, which is in line with the commentary you guys kind of gave us last quarter. But it sounds like you're going to - there's some headwinds on PRT, some of the PRT and the funding backed notes. So I'm just trying to get a sense of the pushes and the pulls of the slides and changes. Is that maybe the deposits in the retail channel are a bit better than what you thought? If you can just kind of help me triangulate that a little bit better.

A: Yes. Our run rate in retail is going to be higher than what we did in the first quarter. Retail is going to be good. Flow is clearly better due to virtual purchases and attractive rates. In the pension business, activity will be roughly consistent with our plan. With regard to funding agreements, FABN market is weaker but we'll do a lot of issuance with the Federal Home Loan Bank and margins may be better.

Q: Good morning. Thank you for taking my questions. Just looking at your total deposits for the quarter, it doesn't look like you transferred some of the PRT to ACRA this time around. I was just wondering if you can provide some color on the rationale.

A: It's a two - step process. ACRA doesn't always take PRT deals. There were a couple they didn't take last year. They tend not to take low - risk, straightforward plan design deals. We tend to do better in pension deals with more complexity and get better returns there. ACRA will probably take more PRT deals going forward.

Q: Hey, thanks. This is Mike Ward, on for Brian. I just have a question on CLOs. So my understanding is that a portion of the kind of CCC loans in the average CLO is now almost 12%, which is kind of like above the threshold that triggers over - collateralization tests. Just curious if you could comment on how your CLOs might be performing because it seems like the values have been coming down, not just for you guys, but more so than corporate bonds. And I think that's kind of reflecting the idea that the loans underneath them are often from smaller private equity sponsored businesses and not really supported by Fed actions. So just kind of curious your thoughts on how CLOs are doing.

A: CLOs are not mark - to - market through our income statement like alternatives are. We're very senior in the capital structure with large subordination below us. We don't see permanent impairments in our CLO portfolio but expect some downgrades. It's more of a downgrade risk than a permanent impairment risk.

Q: Thanks. Good morning. Just looking at your supplement, it looks like MidCap was marked down about 7% in the quarter. So curious what was going on there? And then related to PK AirFinance, we did notice that another air lease company signaled that a larger percentage of their lessees were deferring payments, at least in part. So just curious what you're seeing, if you're seeing something similar in terms of PK AirFinance.

A: For MidCap, it was marked down due to the new CECL guidance requiring a provision for future credit losses. PK AirFinance is performing very well. Even under severely adverse stress scenarios, we don't see investment - grade tranches taking write - downs and have a positive yield expectation. We're lenders to lessors with two layers of defense and feel good about its performance.

Q: Thanks. Just I know you had previously indicated that the M&A transactions you're considering are on the large side. How are you - are you still thinking that way? And how are you thinking about balancing out having all this dry powder? And then if you do deploy substantial capital into a deal, potentially your capital becomes more vulnerable, just in case credit really does deteriorate more substantially. Thanks.

A: Yes, we are focused on large deals. The capital we would deploy is comfortably in our wheelhouse as two thirds of the capital for a transaction will come from outside ACRA investors. It's hard to put all capital into a single deal and the deal environment for big transactions is attractive with good outlook.

Q: Hey, thank you for getting me back in. I just want to finish my first question. Jim, it sounded to me like你 were being cautious in that you're not turning off the share repurchases, that you're monitoring the situation and that you very well could do buybacks. It just seems like you're being cautious and monitoring at the moment, but we could potentially see something in the second quarter. Is that the proper read?

A: Yes. Potentially. We haven't committed to do any more share repurchases as of now. We're in the crisis and are trying to be flexible in deploying capital while being prudent stewards. We have a lot of capital giving us options.

Q: Hey, thanks for taking the follow - up. Just had one more on the credit side, I think when we do our various screens of your portfolio, one of the things that stands out is just the allocation to private debt versus public debt. And I'd just be interested to hear any commentary on how that's performing. If there's anything unique about the way the pandemic is impacting small businesses and your exposure there as a result of having more private debt. How you'd expect that to play out, to the extent that that's all factored into the OTTI disclosure that you've given us?

A: Our corporate private category is about 17% of our portfolio, well - performing and heavily covenanted. Impairments from there are manageable and provisioned for. We've done a bottoms - up review of the portfolio and feel good about it, with allowances set up to cover expected events and plenty of capital to do so.