Fixed Income Investor Conference Call Q1 2024 Transcript

Corrected Transcript

09-May-2024

Athene Holding Ltd. (ATH.PRA)

Investor Meeting - Fixed Income

	Total Pages: 13
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CORPORATE PARTICIPANTS

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OTHER PARTICIPANTS

Ravi Prakriya

Analyst, Junto Capital Management LP

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MANAGEMENT DISCUSSION SECTION

Operator: Welcome to the Athene Fixed Income Investor Call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for questions following the presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to tuthe call over to Jeanne Hess, Vice President of External Relations at Athene. Thank you. Please go ahead.

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Jeanne Hess

Vice President-External Relations, Athene Holding Ltd.

Thanks, John, and welcome, everyone. We must remind you that today's call may include forward-looking statements and projections which do not guarantee future events or performance. We do not undertake any duty to revise or update such statements to reflect new information, subsequent events, or changes in strategy. Please refer to Athene and Apollo's 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 you'll find reconciliations of these metrics within our materials available at our refreshed Investor Relations website, ir.athene.com.

Earlier today, we posted the fixed income investor presentation to our Investor Relations site, and we intend to publish revised versions of our commercial real estate and corporate structure presentations in the near-term. These presentations are an important part of our ongoing commitment to be transparent, provide leading disclosure, and be responsive to your questions.

Joining me this morning are Jim Belardi, Chairman and CEO; Grant Kvalheim, President; Marty Klein, Chief Financial Officer; and Noah Gunn, Global Head of Investor Relations for Apollo. Noah?

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Noah Gunn

Managing Director and Global Head of Investor Relations, Apollo Global Management, Inc.

Thanks, Jeanne. Athene's strong quarterly results were reported last week as part of Apollo's first quarter earnings release. Athene delivered record organic growth and continues to be a significant contributor to Apollo's growth outlook and franchise value as a $60-plus billion market cap company in financial services. As many of you are aware, Athene has been active in the bond market so far this year. At the holding company level, we raised a total of $1.6 billion in senior and hybrid debt to prefund growth at attractive spreads. And as we'll discuss, it was a record quarter for our FABN program where our spreads have outperformed year-to-date. All of this activity would not have been possible without your support of our business and confidence in our credit profile.

Our commitment to fixed income investor engagement continues with this morning's update. Jim will provide commentary on Athene's growth outlook, the vital role the company plays in the retirement landscape, and the investment portfolio. Grant will then take you through Athene's record volumes driven by diversified sourcing capabilities. And Marty will then discuss financial highlights, capital, and our sidecar program. Following these remarks, we look forward to being helpful and fielding any questions you may have.

With that, I will now tuthe call over to Jim.

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James R. Belardi

Partner-Apollo Global Management, Inc. and Co-Founder, Chairman, Chief Executive Officer & Chief Investment Officer, Athene Holding Ltd.

Yeah. Thanks, Noah, and good morning, everyone. On the heels of our record results in 2023, Athene entered 2024 extremely well-positioned with significant momentum. We delivered a very strong first quarter, highlighted by record organic growth with flows exceeding $20 billion. Continuing to demonstrate our ability to source predictable, long-term,spread-based funding across our multiple organic channels. Importantly, as always, the new business we are putting on is aligned with our retutargets of mid-teens or better. Following our strong first quarter, we remain well-positioned to achieve record annual organic volumes of $70 billion.

Demand for our products illustrates the ongoing societal need for guaranteed lifetime income. This need is prevalent everywhere in the world. The retirement crisis in the US is particularly acute, with retirees facing an estimated retirement savings shortfall of $3.7 trillion. The reason for the lack of preparedness is twofold. Not enough savings and too low of a retuon those savings. With more than 11,000 people reaching retirement age every day, there is a substantial role for Athene to play in securing their savings and providing increased financial security.

Throughout my career, I recognize that there is an increasing retirement savings crisis and we built Athene to be a big part of the solution. We believe that fixed annuities are the best retirement investment vehicle and Athene is the biggest and best provider of annuities. These savings products serve a fundamental need in retiree portfolios. Offering significant value centered around principal protection, tax deferral, flexible investment options, guaranteed income for life, and strong rates of return.

We have tremendous potential for additional growth, given the vast, global, addressable retirement savings market that is continuing to expand. We are all getting older. Whether you look at the ageing of the population, the decline of defined benefit plans, or the inadequacy of government-supported programs, retirement is going to continue to be a massive driver of our business. And of course our ability to drive growth is twofold. Resource spread-based liabilities and invest the proceeds in high-grade assets to generate net investment spread. We have a gross invested asset portfolio of nearly $300 billion, which is 95% fixed income with 5% in alternatives.

At Athene, we seek to generate alpha through illiquidity and structural premia, not incremental credit risk. Through our alignment with Apollo, we have access to proprietary asset origination that sources senior secured private investment-grade credit, designed to capture compelling levels of excess spread. We outperform on asset yields against comparable corporate benchmarks, while having lower impairments than our peers, which is a very powerful combination in our business.

For example, the average yield on our total fixed income purchases in the first quarter was more than 70 basis points higher net of fees than the average BBB corporate bond index. Within the quarter's deployment activity, there was $7.5 billion of investment-grade credit directly originated by Apollo, with attractive excess spreads of 200 to 250 basis points above comparably-rated public corporate benchmarks. These are the types of differentiated asset opportunities that drive Athene's continued ability to produce attractive growth and returns.

In total, gross asset purchases were $24 billion in the quarter, which is nearly 3 times the amount deployed in the first quarter of 2023. This activity was mainly in three categories. First, we found value in public and private corporate bonds, which accounted for approximately 40% of our purchases. Second, we found attractive opportunities in structured securities like CLOs and asset-backed securities, which accounted for nearly 30% of our purchases. As a reminder, Athene focuses on the senior investment-grade tranches of these securities, which benefit from significant credit enhancement and enable us to eaincremental yield at a similarly high ratings profile compared to our corporate purchases. Importantly, approximately 99% of our existing CLOs and 95% of our asset-backs are investment-grade.

Third, we source mortgage loans, residential and commercial, which account for approximately 25% of our purchases as we continue to see very strong relative value in absolute yield with comparably high credit quality in this asset class. While inflows and asset deployment activity were well matched in total for the quarter, the liability generation took place at a relatively even pace, but a meaningful portion of the asset origination occurred at the end of the quarter. This resulted in higher average cash balances and delayed deployment that will normalize as we move forward.

One of the most important actions we took during the first quarter was to significantly decrease Athene's allocation to floating rate securities. Our approach to managing our floating rate position is simple. When rates are low, we've been able to eaexcellent returns without maximizing current period spread related earnings by adding floating rate exposure, providing upside as rates normalize. When rates retuto more normalized levels, we reduce our exposure.

In the first quarter, we reduced our net floating rate portfolio by nearly 40% to $16 billion, reducing our earnings sensitivity to interest rates and protecting future earnings power if interest rates move significantly lower. For now, we expect our net floating rate exposure to remain around the current level and we'll reevaluate periodically in the months ahead. Floaters remain an important component of our portfolio as they help achieve our asset liability management objectives, while also mitigating the unlikely income reduction from elevated surrender activity.

In terms of credit quality, 97% of our available for sale fixed maturity securities are investment-grade. And Athene's historical credit loss experience outperforms the industry. Since the beginning of 2019, a period that has included market disruption related to COVID-19, the Russia and Ukraine war, the regional bank crisis, and a significant move higher in rates, we have sustained average annualized impairments of only 11 basis points compared to 13 basis points for the industry. In 2023, we posted impairments of 16 basis points, which again outperformed the industry average of 18 basis points.

In the current environment, one of the areas of our portfolio that is of interest is commercial real estate. As Jeanne mentioned, we will publish an updated version of our commercial real estate presentation in the near-term. To give an early look at the highlights. First, virtually all of our CRE investments are debt, in the form of commercial mortgage loans, not equity, and well-suited to match Athene's long-dated funding profile. Second, our CML portfolio is well-constructed with relatively low weighted average LTVs compared to the industry average. The portfolio consists of newer vintage loans with several years to maturity and approximately 80% is designated CM1 and CM2.

Third, we have below average concentration of investments in the office sector. Our office investments comprise only 2.5% of our net invested assets. Our long-term view on CMLs remains constructive, driven by strong underlying fundamentals within the portfolio. Within the capital impacts disclosed as part of Athene's annual stress testing, losses are conservatively assumed to occur over a 12-month timeframe, when in reality, modeled losses would likely play out over a multiyear timeframe, as loans mature and incremental capital is needed at the properties. While we've started to see some of this unfold, overall, our CMLs have been very resilient, generating only 3 basis points of losses within Athene's total investment portfolio in 2023, and just 2 basis points on average since COVID in 2020.

Regarding capital, we have always run the business holding excess capital as we are not near-term profit maximizers. We have proven over time that this approach provides strategic flexibility to be opportunistic and a prudent margin of safety when dislocation occurs. Athene continues to be exceedingly well capitalized with approximately $23 billion of net regulatory capital, including $3.6 billion of excess equity capital as of March 31st. In closing this quarter, we continued our track record of long-term, consistent excellence. We see vast opportunity in the marketplace as the growing and increasingly unprepared retirement population seeks savings products that provide solutions and certainty.

With that, I will tuit over to Grant.

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Grant Kvalheim

Partner-Apollo Global Management, Inc., Chief Executive Officer & President-Athene USA and President, Athene Holding Ltd.

Thanks, Jim, and good morning, everyone. The team's organic growth engine delivered a record quarter as our diversified sourcing capabilities provided the opportunity to capture strong growth at attractive returns. There are several highlights across the business. In retail, inflows were approximately $10 billion in the quarter, with a diversified mix of products. Impressively, we had 1,300 producers who sold an Athene annuity for the first time in the first quarter. We had quarterly records for both RILA and FIA sales with sequential quarter increases of 45% and 32%, respectively. MYGA sales were down 50%. As we've mentioned previously, MYGA sales are purely rate driven and we chose to moderate MYGA sales in the quarter.

I'd like to emphasize the importance of this mix shift. The weighted average life of our MYGAs is about five years. For our FIA suite, it ranges from 9 to 19 years with our two largest selling FIAs having weighted average lives of 10 plus and 14 plus years. Spreads are strong across all our products. But the point is we get to easpread 2 to 3 times longer on a FIA sale versus a MYGA sale, an extra 5 to 10 years or more. Our strategy in the FIA space

includes focusing on custom indices that optimize product performance and deliver superior long-term value to our clients seeking protected accumulation and guaranteed income.

On the retail distribution front, we continue to see positive momentum in adding and expanding our relationships in financial institutions. Banks and broker dealers are 70% of all retail sales. And at the end of the quarter, we launched on the Morgan Stanley platform with plans for several additional institutional launches in the second half of 2024. Sales in the IMO channel, we're also strong and represented 30% of the total. Regarding the DOL Rule, we are assessing the final rule, but do not expect a material sales impact. The demand for retirement income solutions is there. The DOL Rule may require changes in how that need is met, but it does not change the need.

Athene and other insurers prepared to comply with the original fiduciary rule seven years ago and will do so again if we are required. The first lawsuit has been filed by an industry group, and we expect there will be additional challenges. Regardless of changes in the regulatory landscape, annuities will continue to be valued by those preparing for retirement, and the features and protections provided by these products will continue to be an important tool in retirement planning. Nobody is better placed to serve that need than Athene.

Turning to flow reinsurance. Inflows in the quarter remain strong at $2.4 billion with balanced sales across our domestic and Japanese clients. We continue to leverage Athene's product expertise to expand relationships in the APAC region and we established two new flow life reinsurance partnerships in April, including our first flow partnership in Singapore.

In our pension group annuity business, while the first quarter was quiet, we continued to compete in the market and remain disciplined in pricing new business opportunities to our returequirements. We've observed heightened competitive dynamics with newer entrants and legacy players in the mix, resulting in reduced spreads and business that is not all that attractive. We also believe recent class action litigation targeting plan sponsors could cause a decline in overall pension risk transfer activity this year and for Athene, specifically.

On the other hand, funding agreements were very active with a record $8 billion of volume, including $5 billion from our FABN program, additional FABRs, FHLB issuance, and our first direct FA issuance into a municipal prepay transaction. In January, for the first time in nearly two years, we returned to the dollar FABN market with a $750 million, five-year transaction. This was followed by three non-syndicated trades, including our first euro- denominated floating rate note. We also issued in several other currencies in the first quarter, pounds, Canadian dollars, Singapore dollars. We've remained active in the second quarter, issuing $1.6 billion across three tranches just this past Monday, as well as two yen-denominated FABNs and we will continue to look for new distribution for our FABN program.

Our focus has been to execute larger deal sizes and ensure to the greatest extent possible, strong aftermarket performance. I know someone will ask what our plans are for the rest of the year for FABNs, and the answer is I don't have a forecast. But we are committed to executing in the manner I just described and I believe volumes will slow meaningfully from here. I will also point out that even with the record FABN volumes, our spreads have substantially outperformed the peer group. Our five-year has tightened 50 basis points since January, far outpacing market spread tightening. We believe the efforts we have made to engage with our investors and other market participants have made a difference. There is always more work to be done and we will continue to execute our engagement strategy to ensure our superior financial strength is understood by the market.

I'll now tuthe call over to Marty for a detailed discussion of our financial results.

Martin P. Klein

Partner-Apollo Global Management, Inc. and Executive Vice President & Chief Financial Officer, Athene Holding Ltd.

Thanks, Grant, and good morning, everybody. I'm going to start this morning with a discussion on earnings and profitability before turning to the balance sheet. In the quarter, spread-related earnings increased to $816 million at a 147-basis point net spread, reflecting robust and profitable organic growth in addition to higher alternative net investment income. SRE included a 9.1% annualized retuon our alternative investment portfolio. This quarter's retuwas driven by solid performance in Apollo funds and strategic origination platform investments, partially offset by retirement services investments.

Net spread would have been 10 basis points higher when adjusting for our long-term expectation for alternative returns of 11%. On a comparable basis, net spread declined by 9 basis points sequentially, which is driven by two factors. First, higher on the margin cost of new business, together with delayed deployment into higher yielding assets, which is primarily attributable to the timing of two large asset transactions that closed towards the end of March. Had they closed midway through the quarter, the benefit would have been 3 basis points of higher net spreads.

Second, an approximate 5-basis point spread impact associated with hedging a portion of our net floating rate position that Jim mentioned, as well as higher costs on certain in-force business. Hedging activities included swapping $8 billion of fixed rate liabilities to floating and issuing $4 billion of additional floating rate funding agreements. These actions resulted in a $9 billion decrease in our net floating rate position quarter-over-quarter. As a result, our floating rate income sensitivity declines to approximately $30 million to $40 million of annual spread-related earnings for every 25-basis point move-in rate, down from the $45 million to $55 million previously. All in, these strong results are consistent with our expectations and we're on track to deliver net spread of approximately 160 to 165 basis points and low double-digit SRE growth for the full year of 2024, excluding notable items and assuming an 11% annualized alts return, which we believe reflects the long-term run rate for our business.

Turning to capital. Our growth expectations would not be possible without the support and disciplined management of our Fortress balance sheet that contains a substantial amount of excess equity capital and liquidity. We were active in the capital markets in the quarter to prefund the growth and successfully raised a total of $1.6 billion comprised of senior and hybrid debt. Historically, we've been a regular issuer of senior debt and preferred equity. Recently, given that rating agencies have begun to treat subordinated debt more favorably and Athene's status as a US-domiciled company permits us to deduct the associated interest expense. We added subordinated debt to our capital debt stack following our first issuance in February.

Related to this evolution, we updated our definition of untapped debt capacity, a component of total deployable capital to untapped leverage capacity, a measure that includes not only senior debt but also hybrids. We target adjusted senior debt to capital of no more than mid-teens. In addition to capital markets issuances, we have multiple sources of capital to support our industry-leading growth, including spread-related earnings generation of $3.1 billion in the last 12 months excluding notable items, capital release from runoff with total of $1.7 billion in 2023, and on-demand equity capital from our sidecar program.

Our ACRA sidecars are highly strategic to our business model, and we plan to continue to use this on-demand,long-term equity capital provided by ADIP as an efficient way to fund growth while maintaining balance sheet strength. Since inception in 2019, we have deployed approximately $7 billion of total ADIP capital at mid-teens or higher returns. In the first quarter, $525 million of equity capital was deployed into our operating companies from third-party investors in ACRA, as well as from our new flow reinsurance seeding relationship with Catalina. Athene has an equity stake in Catalina, and this new reinsurance arrangement that began in the first quarter