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Athene (ATH) Q1 2019 Earnings Call Transcript

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Athene (NYSE: ATH)
Q1 2019 Earnings Call
May. 07, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning. My name is Samantha, and I will be your conference operator today. At this time, I would like to welcome everyone to Athene's first-quarter 2019 earnings conference call and webcast. [Operator instructions] Thank you.

I will now turn the call over to Noah Gunn, head of investor relations. Please go ahead.

Noah Gunn -- Head of Investor Relations

Thanks, Samantha, and welcome to our first-quarter 2019 earnings call. Joining me this morning are Jim Belardi, chairman and CEO; Bill Wheeler, president; and Marty Klein, our chief financial officer. As a reminder, this call may include forward-looking statements and projections, which do not guarantee future events or performance. We do not 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'll be discussing certain non-GAAP measures on this call, which we believe are relevant in assessing the financial performance of the business. Reconciliations of these non-GAAP measures can be found in our earnings presentation and financial supplement, which are available at ir.athene.com. I will now turn the call over to Jim Belardi.

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Jim Belardi -- Chairman and Chief Executive Officer

Thanks, Noah, and good morning, everyone. Earlier this morning, we released our first-quarter results and made an important strategic announcement regarding capital. As part of the announcement, we posted a presentation on our website, and I'll begin our prepared remarks this morning speaking to this presentation. If we step back for a moment and think about how we're creating value at Athene, we believe the primary driver of long-term shareholder value is the efficiency of capital allocation.

Of course, we can drive some level of return for each dollar of capital we allocate, but our challenge is doing it as efficiently as possible so that we maximize returns and are able to execute repeatedly. We've been very successful to date, compounding book value by 17% annually over the past decade, and we believe our strategy can maintain that strong track record over the long term. Today, we are fortunate to be provided with an abundance of opportunity to deploy capital at attractive returns. We sum up this opportunity set in four primary categories: organic growth, acquisitions, share buybacks and ratings upgrades.

As you know, we originated more than $13 billion of liabilities last year across our channels at attractive ROEs. We allocated more than $1 billion of capital to support that activity. On the acquisition front, underwrote $27 billion of liabilities across two inorganic transactions which were also down at attractive ROEs. We allocated approximately $1.7 billion of capital to support those deals.

Next, given the compelling value we've seen in our stock, our board doubled our share repurchase capacity, authorizing a total of $500 million over the past five months. We showed immediate progress by repurchasing nearly 4 million shares at an average price of $40 per share or 90% of adjusted book value. We will increase our authorization even further if the market continues to offer us a low-risk way of capturing high teens or greater returns. With the recent news of Fitch upgrading us to A, we are now A across the board, and we will remain focused on getting A-plus ratings.

We want to be able to sustain and perhaps improve our ratings profile amid economic volatility. Higher ratings will allow us to profitably grow even more quickly in our various channels and further reduce our funding costs in certain areas. Lastly, given that the greatest shareholder value is often created during times when capital is most scarce, during times of economic stress or volatility, we also want to retain capacity to be opportunistic. All these opportunities are worthwhile consumers of capital, and each may offer attractive returns at different times or all at the same time.

To understand the scope of what we're evaluating, it's important to understand our targets. Each year, we're presented a choice on how we deploy the capital we generate across these various avenues. In a [Inaudible] of terms, that sum is approximately $2 billion annually across our earnings stream and capital release from runoff. As a prudent allocator of shareholder capital, we aim for the highest risk-adjusted returns on the board.

In the current environment, we're seeing a growing number of opportunities to deploy capital at mid- to high-teens returns. There are attractive acquisition opportunities as we continue to serve as-a-solutions provider to the industry, innovative PRT deals to be done, a growing retail franchise, a cheap stock. And as we've communicated in the past, retaining capital to deploy opportunistically in times of volatility is paramount to our long-term ability to create shareholder value. We debate how to allocate our $2 billion of annual deployable capital generation.

But frankly, the significance of the opportunity exceeds our current capacity, which means that these attractive deployment opportunities only exist within the constraints of having the capital necessary. Like any capital allocator, we want to take advantage of our opportunities. To do this, we must acknowledge the balance between increasing our capital base to fund tomorrow's opportunity while also having the ability to act today. We don't believe these paths are mutually exclusive.

We've seen that the greatest opportunities for shareholder value creation emerge during turmoil, so we believe it's prudent to have a strong balance sheet that is ready to pounce during those periods of volatility, and we also believe it's possible to deploy capital into accretive opportunities along the way. We have proven an ability to successfully navigate the tension between balance sheet strength and return generation. If our strategy is to execute on all of the above, how do we accomplish our goals? One option is to access the public equity markets which comes with a fairly high cost, namely shareholder dilution and return drag as we prefund and wait to deploy the capital. For more efficient option in our minds is to create a structured solution which enables us to concurrently fund growth, buy back stock and strengthen our balance sheet.

Today, we're excited to announce the formation of a strategic and shareholder-friendly capital solution called ACRA, which is shorthand for Athene Co-Invest Reinsurance Affiliate. ACRA is an on-demand, long-term capital vehicle, which allows us to opportunistically fund inorganic growth, increase our flexibility around various accretive forms of capital deployment, including share repurchases, and augment our balance sheet strength by removing some of the excess capital burden we would otherwise bear ourselves. ACRA will be capitalized by third-party fund commitments raised by our strategic partner, Apollo. These commitments will be raised within a commingled fund called AADIP, which is shorthand for Apollo/Athene Dedicated Investment Program.

Approximately $1 billion of capital commitments have been raised through AADIP to date, and AADIP is targeting to raise $4 billion of commitments in total by the end of the third quarter. All sizable, inorganic and PRT transactions, as well as flow reinsurance and funding agreements, will be shared with ACRA. Importantly, ACRA will be fully aligned and controlled by Athene. We will manage it to the same high standards we manage other parts of our business.

All qualifying transactions will pass through ACRA with Athene supplying one-third of the capital and AADIP investors supplying two-thirds of the capital. All transactions will be underwritten by Athene to Athene standards. The beauty of the ACRA structure is that it is packaged in a very shareholder-friendly way. ACRA offers just-in-time capital without the dilutive impact of primary issuance and no drag to ROE from unspent capital.

In fact, the successful completion of ACRA and potential successor vehicles should eliminate any need we would foresee to issue additional primary shares in the future. Notably, there's a strong alignment of interest embedded within the structure, particularly in the areas of underwriting, governance and operations, whereby, all investors benefit from Athene's business activity on a level-playing field. The more business activity we generate with ACRA, the more our earnings power will grow. That is partially driven by the fact that Athene will receive a wrap fee on all the ACRA reserves attributable to AADIP investors, which compensates us for our oversight and platform and the additional complexity.

In our presentation, we illustrated that if we are successful in deploying just our current deployable capital on hand today of $3 billion, as well as the $4 billion from ACRA, we would grow our earnings by approximately $2.25 per share or 40%. Furthermore, no one in the industry has $7 billion of firepower, not even us on a stand-alone basis. We fully expect to maintain our discipline. And in fact, by being a strategic capital provider on large transactions, we believe we can reduce our cost of funds.

In summary, the formation of ACRA is consistent with what we've been doing all along, which is acting as a supplier and allocator of capital to our industry. We have a track record of working with our strategic partner, Apollo, to provide solutions for others, and this one happens of being attractive solution for ourselves. The flexibility we are afforded with this solution cannot be understated. If we are successful and we fund all our inorganic growth through ACRA, we reserve the flexibility to call transactions back over time to the extent we become capital heavy.

This means when all is said and done, ACRA may simply be an accretive bridge to the future. Greater optionality, greater flexibility, greater earnings power and greater value for shareholders are all the ways we would characterize the impact of this important initiative. With that, Bill and Marty will continue to discuss other aspects of ACRA in a few minutes. But before I turn it over to them, I'd like to briefly touch on our first-quarter results and provide some context around investment performance.

During the first quarter, we continued to compound book value at the long-term, high-teens level I cited earlier. We grew total invested assets nicely with nearly $5 billion of organic growth underwritten to mid-teens returns, and we repurchased approximately $50 million of our stock at very accretive levels. Investment trends within our business remained solid. Due to the strong organic growth in the quarter, we invested approximately $8 billion of flows, an 11% increase to the year-ago quarter.

Moreover, based on our internal estimates, we invested these higher levels of flows at an approximately 50 basis points higher net investment earned rate than what we were able to achieve in the year-ago quarter while continuing to position the portfolio in a slightly more defensive posture. Consistent with our philosophy as active asset managers, our internal estimates also show that our purchases this quarter, representing a meaningful approximately 40- to 50-basis-point premium to the triple B corporate index. All in all, as I said, we had a solid investing quarter. Notwithstanding these achievements, earned rates experienced some volatility in the quarter driven largely by lagged alternative returns.

As a reminder, our alternative strategy is very much intentional and remains differentiated in its makeup. While we emphasize downside protection and nonbinary outcomes, it doesn't mean we're completely immune to volatility. In recent years, our alternative investments have driven significant income and been very accretive for shareholders, but quarterly returns can vary. Since almost two-thirds of our alts are marked on a lag basis, the impact we saw on the first quarter was principally driven by significant equity market weakness and spread widening that occurred in the fourth quarter of 2018.

This phenomenon had a 29-basis-point downward impact on our earned rates in Q1. Given rebounding markets and tighter spreads in the first quarter, we would expect some return recovery in the near term that is in line with the double-digit alt returns we've generated historically. In the broader fixed income portfolio, we found attractive risk/return opportunities in residential and commercial mortgage loans, asset-backed securities and triple net lease assets. We've also been active in the investment-grade portions of aircraft, haul business and container securitization markets among others.

The redeployment of the Voya and Lincoln assets is continuing, and we still expect to complete those efforts over the few quarters. Although the yield environment for redeployment is currently lower than we had initially forecasted given the downward move in the yield curve, we have continued to make progress on increasing the earned rates of these portfolios. In addition, as rates have moved lower, we've realized gains on the existing assets in the portfolio. With that, I'll turn the call over to Bill to provide comments around our liability origination activities.

Bill Wheeler -- President

Thanks, Jim. In the first quarter, we continued our track record of strong organic liability growth with total organic deposits of nearly $5 billion. As Jim mentioned, this was driven by broad-based strength across our channels. Importantly, we maintained our underwriting discipline by continuing to price our new business to mid-teens returns on an aggregate basis.

We remained opportunistic, continuing to grow in a manner consistent with our desired levels of profitability. Our retail channel generated $1.8 billion of deposits, a 41% increase over the prior year. Growth was driven by the introduction of new products over the past year and expanding distributions through financial institutions, which comprise roughly 30% of retail sales in the quarter, compared to just 14% in the year-ago quarter. Said another way, financial institutions accounted for 67% of the deposit growth from the year-ago period.

An important part of our retail strategy is also the expansion of our product lines, and we expect to launch our first-ever buffered annuity product, Amplify, later this year. Turning to our PRT channel. We kicked off the year with tremendous momentum, closing two deals totaling $1.9 billion of assets in the first quarter. This activity included a $1.5 billion transaction of Weyerhaeuser, one of the world's largest owners of timberlands.

In terms of the outlook, while we remain active and looking at the variety of new transaction opportunities, we would expect the strong first-quarter volumes to moderate in the near term but pick up again in the third quarter upon the closing of our previously announced deal with Bristol-Myers Squibb. In our third-party flow reinsurance channel, we generated $1.1 billion of volume in the first quarter, up significantly from the prior year, due to strong volumes from our recently added flow partnerships. In summary, even though quarterly results in each organic channel can ebb and flow, we are encouraged by the strong first step in 2019 to meet or exceed our 2018 organic deposit volumes. Turning to our inorganic channel, we are continuing to see a number of opportunities to deploy capital with our target returns.

We look to serve as-a-solutions provider to the industry, and the pipeline of acquisition opportunities remains substantial. The industry is still going through a significant restructuring. Companies are making fundamental changes to their business models, and we are seeing continued evidence of this -- of that as they seek to reduce exposure to complex liabilities, shed non-core businesses or exit hold businesses in hopes of redeploying the freed up capital in a more accretive faction. As Jim mentioned, ACRA will help us capitalize on these prospects by funding opportunistic growth and by building out our reinsurance and PRT channels.

Importantly, ACRA will be fully aligned and controlled by Athene, and all transactions will be underwritten by Athene to Athene standards. We will maintain our strict underwriting and pricing discipline, targeting mid- to high-teens unlevered returns to generate significant shareholder value. The combination of Athene's strong balance sheet and the additional capacity from ACRA will significantly widen the spectrum of potential deployment opportunities, strategically increasing our purchasing power to take advantage of the industry's restructuring. This means that we can transact in greater size and with more frequency than we could before and certainly more so than other acquirers.

Now I'd like to turn the call over to Marty, who will discuss our financial results.

Marty Klein -- Chief Financial Officer

Thanks, Bill, and good morning, everybody. Before I discuss the drivers of our results this quarter, I'd like to start out with some brief call-outs on our disclosures. First, we've changed the presentation framework for our liability-related funding costs. We now show our overall cost of funds as well as its two components: interest credited and other liability costs.

While the proportions of the two components vary greatly by channel and by transaction, overall cost of funds among the businesses are more comparable. For example, fixed index annuities with writers have lower crediting costs but also have DAC amortization and rider reserve accretion costs. In a rapidly growing institutional channel, which includes funding agreements and PRT, there are no rider reserves and negligible acquisition costs. However, the interest credited rates are higher than for fixed index annuities.

As we manage our business to mid- to high-teen returns, cost of funds is a key focus for us, and it should be a helpful measure for investors in understanding our results. Historically, we included institutional-related costs within the other liability costs line item. We have now moved those institutional costs into our cost of crediting line item. As you can see in our financial supplement, we are now delineating between the cost of crediting on deferred annuities and the cost of crediting on institutional products and other liability costs.

Collectively, we will refer to these items as cost of funds. While this change is simply historical and prospective geographic shift, we believe this change will give the investment community a better framework for analyzing our spread-based business model. To supplement this change, we also are now disclosing an adjusted operating ROA or return on assets measure, which we think will also help analyze our operating earnings in a spread-based context. Lastly, to provide even more transparency around the strong credit quality of our asset portfolio, we've included in the financial supplement new information on a credit quality of total invested assets as well as the largest components of our structured securities portfolio.

Turning to results, we reported GAAP net income of $708 million or $3.64 per diluted share for the first quarter of the year. This particularly strong result was primarily driven by the favorable change in fair value of reinsurance assets, which is reflected in our GAAP income statement on a mark-to-market basis but adjusted out of our operating results to be treated like all our other available-for-sale investments. Our adjusted operating income for the quarter was $287 million or $1.50 per share, representing growth of 22% over both the prior quarter as well as the year-ago quarter. That said, our operating results came in lighter than what we would consider a normalized run rate, principally due to unusually volatile alternative investment income, as Jim mentioned.

Our consolidated net investment earned rate in the quarter was 4.28%, a decrease of 32 basis points from prior year, primarily driven by the volatile alt returns, which accounted for 25 basis points of the year-over-year decline. Earned rates versus the prior year were also impacted by lower onboarded rates on the Voya and Lincoln assets. Additionally, we experienced approximately 5 basis points of headwind during the quarter from some cash drag due to the timing of cash received from PRT deals as well as some nonrecurring income accrual true-ups. These items were partially offset by increasing floating rate investment income when compared to prior year.

As it relates to NIERs as we move forward, in fixed income, we expect mixed trends, which include an uplift from ongoing yields expansion efforts in the Voya and Lincoln portfolios, largely offset by the dynamics of redeploying into the lower forward curve as well as the impact of moderating income on floating rate securities. As we've previously communicated, for every 25-basis-point increase or decrease in short-term interest rates, we experienced a $25 million to $30 million savings in adjusted operating income. The dollar sensitivity has a greater impact at the near level with offsets within other liability costs. For alternatives, while these investments are certainly subject to quarterly variability, we currently expect a recovery to our historical average return of approximately 10% for the remainder of the year versus the 2% we experienced in retirement services in the first quarter.

Other results could be impacted by significant capital markets volatility. Moving to the cost side of our spread model, our total cost of funds for the quarter was $795 million or 2.85% of average invested assets. This reflects a 1-basis-point increase from the prior-year quarter, primarily driven by higher cost of crediting, which increased due to higher option cost on deferred annuities from rising volatility passing through rising interest rates, policyholders and growth in our institutional business. As I mentioned earlier, our institutional business carries a higher credited rate versus deferred annuities since essentially all the costs related to institutional are reflected in the crediting line.

With the inclusion of institutional in the cost of crediting, the quarterly variability in this line can trend with the mix and timing of institutional deposits in the period. For the quarter, other liability costs were $260 million or 93 basis points. This reflects a decrease of 19 basis points from the prior year due to favorable equity market performance compared to the prior-year quarter as well as modestly less DAC amortization this quarter due to lower alternative NIERs. Putting this together, our net investment spread in Retirement Services, which is the difference between our net investment earned rate and our cost of funds, was $376 million or 1.36% of average invested assets.

If we then add in our platform costs, including G&A, debt service and taxes, as well as our corporate segment, our adjusted operating ROA for the quarter was 102 basis points. Of course, we would expect a higher operating spread when generating more typical returns and alternatives. Before opening the line for questions, I'd like to wrap up our prepared remarks by reinforcing the financial benefits of ACRA. First, our earnings power is stronger with ACRA.

This is, principally due to our enhanced strategic flexibility as well as the enhanced returns we receive on the transactions we execute. As Jim alluded to, we will receive a wrap fee of approximately 15 basis points on all ACRA's reserves owned by AADIP. This fee is in place to compensate us for the use of our scaled platform and our sourcing capability. Since capital will be supplied by one-third by Athene and two-thirds by AADIP, wrap fee is equivalent to approximately 30 basis points or 350 basis points of ROE left over the life of a transaction when viewed against just Athene's capital contribution.

Second, we have a call right on transactions seated to ACRA, which is 10 years out by design. However, there's nothing precluding us from recapturing business sooner than 10 years if both Athene and AADIP are motivated to transact. And when the restructuring of the insurance industry has slowed and as Athene's earnings power and capital base grows, we may have an opportunity in several years to buy out the other two-thirds of ACRA. Finally, ACRA will enable Athene to continue to grow while also continuing to increase our financial strength, which, in turn, should help with gaining further ratings upgrades.

While we're very pleased to now have single A ratings across the board, additional upgrades will help us grow more quickly and more profitably in our organic channels. To assist in launching ACRA, the inaugural transaction in which ACRA will participate will be the block reinsurance transaction we closed with Lincoln in the fourth quarter of 2018. When ACRA is effective, currently expected on July 1, we will cede a pro-rata share of liabilities and receive a pro-rata share of the capital in return. Our current expectation is that all qualifying transactions closed from this point forward will be dually supported by Athene and ACRA.

With that, we'll now turn the call back to the operator and open the line for your questions.

Questions & Answers:


Operator

[Operator instructions] We'll now take our first question from the line of Alex Scott with Goldman Sachs.

Alex Scott -- Goldman Sachs -- Analyst

I guess on the new structure and how you're thinking about the $2 billion of capital that you have to deploy, should we think about the $350 million buyback authorization is over any time period in particular? Is it more opportunistic and independent on the pipeline? And I guess how did your view of how robust the pipeline currently is impacts the decision in terms of the sizing of it?

Marty Klein -- Chief Financial Officer

On the buybacks, I think what ACRA does is it increases our long-term earnings power, but it also provides us more flexibility and capital allocation. We've really got currently $3 billion of deployable capital, $1 billion of excess equity capital, a couple of billion of debt, which is a lot. I think we're better positioned just for that than others in the industry are, but it's not nearly enough for us to hit all of the kind of four competing objectives that Jim talked about. So I think the buyback increase to now $350 million total, a second authorization of $250 million total, so far, authorized by the board of $500 million, is a chance for us to kind of buy back shares when it's a compelling opportunity.

Buying back shares is not part of an ongoing strategy for Athene. We're very much able to commit our capital of mid-teens returns, which is very unique in our industry. But when our stock price is trading at levels below book value, it can provide a very compelling opportunity for our shareholders for us to get high-teens returns. And so I think we look at it as an opportunistic way to add value.

We don't really have a timetable on it. When the shares are providing compelling value, we'll buy. And when they don't, we will focus that capital on other sources where there's good returns.

Jim Belardi -- Chairman and Chief Executive Officer

Yes. I'll just add to what Marty said. That's correct. There's no expiration on the authorization for share buybacks.

And I want to emphasize if the stock doesn't cooperate and reflect what we think is really the franchise value of the company, we'll do even more than what we've already authorized. So we feel strongly about that, and ACRA is part of the package that allows us to do that.

Alex Scott -- Goldman Sachs -- Analyst

Got it. And then if I could follow up, with just the commentary on the direction of the net earned yield on -- I guess the base yields really and the 24 bps that was discussed last quarter as you're reallocating Lincoln and Voya, I was just interested if you could help dimension. It sounded like maybe it was more flattish going forward. So just interested in the different moving pieces.

I know you mentioned three-month LIBOR moving and obviously the new money yields lower, but any kind of color you can provide in terms of how we should expect that to trend.

Marty Klein -- Chief Financial Officer

Sure. Listen, I think Jim and the AAM team have done a very good job of redeploying the portfolio against both Voya and Lincoln. Those are very far long, and I think we're pleased with how that's gone. And we've added -- I think the near -- actually this quarter reflected overall another 2 or 3 basis points of lift from that offset by some of the headwinds that I mentioned.

I would just say that on the go-forward NIER, let me just hit the fixed income side, for this year, there's a little bit of upside from where we are but not a lot because while we're going to continue to redeploy both Lincoln and Voya, we're doing that in a flatter yield curve lower-rate environment. And then also, we're not getting a lift on floaters that we thought before. So I think the NIER made rise very modestly from here on fixed income side, but we got a little bit of headwind. We're still getting the great spreads overall, and these transactions are actually performing pretty much with how we thought they would from an IR standpoint.

The other thing I would note is that alternatives, as I said, they're very subject to quarterly volatility. They've had very good returns historically. I think what happened in the first quarter was almost entirely planning with some other couple of headwinds. But as we look at the alts portfolio, it's performing pretty much as we've expected.

And so as I mentioned, we'd expect that it would get back to kind of 10%-or-so returns over the rest of this year. Obviously, there's going to be some variability, and those returns are subject to market volatility.

Alex Scott -- Goldman Sachs -- Analyst

Thanks for the responses.

Operator

Your next question comes from the line of Ryan Krueger with KBW.

Ryan Krueger -- KBW -- Analyst

Hi. Thanks. Good morning. Going forward, will every block transaction that you do go into ACRA until, I think, all $6 billion of the total capital is deployed? Or will there be any transactions that would be outside of that?

Bill Wheeler -- President

I think as a practical matter, all will go in. Theoretically, they -- we could approve a transaction that we want to do, and ACRA might not, right? They may choose not to, but I think that's highly unlikely. And so I do expect all blocks to go that we acquire to go into ACRA. And the reason for that is that we need to make sure nothing gets cherry-picked, right? So -- but also, I think it's the right move for us.

This is what's going to keep our capital supply available for other uses if we use ACRA extensively.

Ryan Krueger -- KBW -- Analyst

And then just related to that, $6 billion is a large amount of volume. I think you've talked about $1 billion of free cash flow generation now net of organic growth, so it seems like your capital could be building at the same time. So I guess the $350 million buyback, while a step-up is still relatively small versus the capital generation that you have, so I guess to what extent as capital builds would you consider making the buyback, I guess, a more significant part of the capital deployment plan?

Bill Wheeler -- President

I would say a couple of things. One is buybacks are going to be opportunistic. And if the stock doesn't act better, volumes are going to -- buyback volumes are going to increase, right? And I think that's very likely. Also, look, the reality is you're right.

$6 billion is a lot, but -- and we're generating a lot of excess capital today. We're also growing really fast, and we're growing faster than I think even we were last couple of years. And so there are going to be other demands on our capital, and so I -- I mean, it's a great problem to have to -- a lot of capital to deploy. But -- and my guess is that there's going to be a lot of uses for it.

Marty Klein -- Chief Financial Officer

Yes. Just remind folks that if we did $13 billion to $15 billion of volume this year, that will ease pretty much all the stead earnings that we generate. We will have from runoff probably another roughly $1 billion of capital that kicks off, so I would expect year over year for us to continue to grow capital. But as we do inorganic transactions, they ease off a lot.

Last year, in the fourth quarter, we used $700 million in capital against -- on a Lincoln transaction. That was a -- for $8 billion of liabilities, that was a very big use of capital. We also did another $150 million of share buybacks. So we're generating a lot of capital, but we have a lot of places to put it to work and big numbers.

Jim Belardi -- Chairman and Chief Executive Officer

Yes. Just to close one more time, our initial stock buyback authorization was $250 million. We now have a second $250 million, which gives us $350 million to deploy now. But as Bill and everybody have said, we'll do more than that.

The authorizations are really not an issue. We'll get what we need to buy stock back at appropriate prices in size. So yes, the $250 million is just a place over. We'll do more if we need to.

And just as I said in the remarks, so right now, we have $1 billion of excess equity capital, a $2 billion of unused debt capacity and then with the $4 billion of ACRA, total of $7 billion of firepower the way we see it right now.

Operator

Your next question comes from the line of Erik Bass with Autonomous Research.

Erik Bass -- Autonomous Research -- Analyst

Hi. Thank you. Just want to follow up on the eligible transactions that would be funded by ACRA. In addition to the block deals, am I right that all of the flow reinsurance, PRT and funding agreements would also go into that? And is it correct that that would start in the third quarter?

Bill Wheeler -- President

It is incorrect. I think the key word is sizable. So a large PRT transaction economically is like doing a block reinsurance deal. So the idea is that large PRT deals would go in, potentially flow reinsurance, potentially funding agreements, but the expectation is that this is really going to be -- ACRA is really an inorganic vehicle for growth.

Erik Bass -- Autonomous Research -- Analyst

Got it. I mean, is there a threshold that's sizable in your view?

Bill Wheeler -- President

Well, we joke about what sizable means. [Inaudible] I mean, it's not -- we're not going to put every little deal into ACRA.

Jim Belardi -- Chairman and Chief Executive Officer

Yes. So most of the flow trees [Sp] we have are not going to go in. There's one or two that we're looking at that are more sizable that are being considered. But for the most part, most of the flow trees [Sp] would just stay with Athene as an example.

Erik Bass -- Autonomous Research -- Analyst

Got it. And on the Bristol-Myers deal, since that's closing in 3Q, is that included or excluded?

Bill Wheeler -- President

It would be included. Keep in mind something about how this works, right? Bristol-Myers is being written by our Iowa domestic insurance company, and then a portion of that -- those liabilities will be reinsured through either ALRe, Athene Life Re or to ACRA, right? So that's the expectation. Now I think at the end of the day, given the existence of ACRA, it will now -- a portion of Bristol-Myers will now go to ACRA, but the -- but it starts with it's an Iowa company.

Erik Bass -- Autonomous Research -- Analyst

Got it. And then just two technical questions. I mean, you mentioned the opportunity to potentially acquire assets from AADIP in the future. Are there any scenarios where Athene would be forced to acquire assets? And then finally, are there any implications for your tax rate given that you're reinsuring the business?

Bill Wheeler -- President

So, no. We are never forced to buy something. We -- the expectation is that we will, after a period of time, eventually call some of this back, and there's a predetermined formula on how to do that, which is a very middle-of-the-road formula. And the -- and we have the -- we certainly have the opportunity to buy back stuff early, if we chose to.

Again, it would be at a negotiated rate, but we're never forced to buy back stuff. And -- oh, yes, tax rate. The -- no. It doesn't have any effect on our tax rate.

We still enjoy our tax advantages that we wouldn't otherwise have either before or after ACRA.

Jim Belardi -- Chairman and Chief Executive Officer

The one thing it could help longer term with tax rate is that it obviously gives us that much more firepower on inorganic deals. And if we're able to do those deals direct to Bermuda, then that will have over time a lower tax rate impact, yes. But nothing otherwise that technically changes the tax rate.

Erik Bass -- Autonomous Research -- Analyst

Got it. Thank you.

Operator

Your next question comes from the line of Tom Gallagher with Evercore.

Tom Gallagher -- Evercor ISI -- Analyst

Good morning. Just a few follow-ups on ACRA. First one is the -- I guess the full $4 billion is projected to be raised by 3Q '19. From a timing standpoint, should I take that to mean that sizable transactions are probably more likely a 2020 event? Or should we not necessarily -- do you not need to close that before you would necessarily announce or execute sizable M&A deals?

Bill Wheeler -- President

Well, just in case you didn't pick up on it, so we already -- we've raised the bill, right? So we can close on at least some of it tomorrow. So I don't expect to spend the full $4 billion between now and the end of the year, though it is possible. I do think you should understand that -- take Lincoln as an example. We can move on transactions very fast, right? And so I wouldn't assume anything about sizable transactions between now and year-end.

Operator

Your next question comes from the line of John Nadel with UBS.

John Nadel -- UBS -- Analyst

Good morning. So there's a lot that seems like if the margin has changed about the business model as I compare things to last year's investor day. And so if I take 1Q as an example and we adjust for weaker alternative investment income, then your typical expectation. Even if I normalize for that, the operating ROA this quarter was only about 120 basis points, and that's well below the 135, the 145-basis-point range that you guys have laid out last year for 2019.

I think, clearly, the Lincoln acquisition, the block reinsurance deal puts some downward pressure on that. I think we all sort of get that. But how should we think about, on a go-forward basis, what the right range is for an adjusted operating ROA?

Marty Klein -- Chief Financial Officer

Well, it's Marty. I think it starts -- I actually don't think that much has changed about our business model generally, other than now we've added a new capital source. It's a powerful macro that will help us grow. But mechanically, we're running the business the way that we have, and actually we've raised the bar a little bit on the returns we're getting.

So we did close to $5 billion, as an example, this quarter of organic volume at mid-teens returns using the same pricing we've always had. We've actually up the [Inaudible] a little bit to another point of return goal for this year. That $5 billion and close of liabilities will generate another $50 million of earnings annually from this point forward, so I think that kind of stuff is very accretive. Our expense ratios continue to improve as we grow, so our expense ratios dropped in basis points by 9 basis points year over year.

So I think we're becoming more powerful. I think one of the things that -- when we had investor day is, obviously there was a lot of lift that we're expecting to get from floaters, floaters, just like alternatives. Some of the things we've done at floaters has been very intentional, but in a rate environment where over the last few weeks and a couple of months, things have kind of lightened up there and the curve has flattened. I think in the shorter term, that could depress earnings.

But I think our long-term earnings power is probably greater than it was even at investor day. We're clearly going to have a little bit of pressure for 2019 versus what we thought at investor day. Some of that's absolutely lower rates than where we are. I think ACRA is going to be very powerful and very earnings accretive over time, but there'll be a very modest impact on our ratings this year as we contribute Lincoln and AADIP investors participate in that chair, but I think that's a pretty modest impact.

John Nadel -- UBS -- Analyst

So if I net all of that out, Marty, if we think about the adjusted ROA being somewhat below that original targeted range, is it fair to think, though, that the actual dollar amount of earnings is likely to be better just because your invested asset growth has been better?

Marty Klein -- Chief Financial Officer

Absolutely, absolutely. I mean, the biggest way that we grow is by growing our balance sheet at mid-teens returns. We're about $35 billion larger this year than we were a year ago through what we did organically and inorganically, and we're getting a very nice spread on that, getting 15%returns on that. So I think that the biggest way to grow is that.

Incrementally, we get also further scale on expenses, so that is helpful. That's a secondary benefit where it's important. The margin expansion in the current environment that we're in is not as easy to come by. If people decide the economy is not looking at recession, which I think, over the last few weeks, people coming around, maybe rates will start to go up.

But as you know, John, the curve has been pretty flat, and some rates are lower than they were a number of weeks ago, and LIBOR is a bit lower. So that has a little bit of a short-term impact.

John Nadel -- UBS -- Analyst

OK. Understood. And then I have just one other question related to buybacks.

Marty Klein -- Chief Financial Officer

By the way, one other thing real quick on ROA that I did not mention that I should because the other part of ROA is obviously the cost of funds. So the flip side of rates not being up as much is I think our crediting rates are not going to be really going up. And the part to note is we have 9 basis points year over year because short-term rates and volatility was higher, and we saw that it reflect higher hedging costs. That's really not the environment we're in now.

So I really expect cost of crediting on deferred annuities to be kind of relatively stable at this point. I don't think our cost of funds in aggregate is really expected to change a whole lot this year. It might creep up a couple of basis points over the rest of the year. So the flip side NIER is not going up as much on the fixed income side is that I think our cost of crediting is going to be relatively stable, and not really go up a whole lot from here made a couple of basis points over the year.

I think it's important as you're thinking about ROA.

John Nadel -- UBS -- Analyst

Appreciate that. And then if I can just follow up on buybacks. The buybacks you've executed thus far, and I realize it's been a relatively short period of time, but on a price-to-book multiple base, does it look like probably averaged between 80% and 90% of book value, somewhere in that range? But I also heard you guys talk about below book value. Is there a threshold we should be aware of in terms of how you're thinking about maybe pace and even turning it on versus turning it off?

Marty Klein -- Chief Financial Officer

I'd say that we want to be opportunistic and do it when it's value add versus the other places we can put capital. We think for our franchise value, putting money to work in our business is the best way to go, and we're doing that at mid-teens returns. If we can do it inorganically at mid to high teens, even better. So I think the way we look at it, John, is when we feel like we can do high teens or better than high teens with share buybacks, we'll do it, and then we can kind of translate into what that means as the price to book.

It obviously is going to mean a level below book. But rather than putting out for The Street some threshold of x percent of book value or some kind of price target, we're just basically looking at it. If we can get high-teens returns or better on a buyback and it compares then favorably with these other ways we can allocate capital, that's when we'll do it.

Operator

[Operator instructions] Your next question comes from the line of Tom Gallagher with Evercore.

Tom Gallagher -- Evercor ISI -- Analyst

The question that wanted to come back to ACRA, the Lincoln deal you mentioned. That's going to be funded by ACRA. So now I guess that means less of your own capital is going to be deployed into that transaction. So my question is does that change at all your initial economics you've guided to there given that change? And also, won't it -- I'm imagining if most of your larger PRT deals and block transactions will also be funded one-third by you, two-thirds by ACRA, it's going to mean your free cash flow probably gets a bit better, any thoughts on that?

Marty Klein -- Chief Financial Officer

Yes. I think -- listen, I think the pricing fundamentals of Lincoln haven't really changed a whole lot. Obviously, rates have moved around. I think the IRR is pretty close to where we thought it would be because redeployment is little bit lower rate, but capital -- more capital upfront with gains.

For Lincoln, the way it works with ACRA is AADIP shareholders from this date, once they take possession of it, which we anticipate would be July 1, two-thirds of the earnings, we'll get back about two-thirds of the capital we allocated. So we'll probably get back about $450 million capital from AADIP investors for them to buy their stake of ACRA and sharing the Lincoln economics. We're also going to get on those two-thirds of the reserves in Lincoln, which is, again, just shy of $8 billion, on the two-thirds of those, we're going to get 15 basis points on two-thirds of those reserves, which is equivalent to about 30 basis points on the Lincoln we have, and that's probably another ROE lift for us on the capital we will have allocated on Lincoln post-ACRA, probably another 3.5 points. So the dollars of earnings will be a little bit less, but the kind of ROE impact will be very accretive and obviously a lot more capital flexibility as we get capital back and we can deploy it elsewhere at good returns.

Bill Wheeler -- President

The interesting thing, Tom, is you're absolutely right. In a static environment, we -- free cash flow should go up, right, because we're spending more of our inorganic business to ACRA, and so we don't have to deploy such capital there. I think the reality is there are other organic businesses continuing to grow. It surprises us -- continues to surprise us how fast it grows, and so that gets the potential to chew up more capital at very good returns.

And also, again, we'll spend a meaningful amount of buybacks if it's appropriate. So I think that there'll be -- even though we'll -- yes, we'll probably have higher free cash flow, there are more calls on our capital going forward. Obviously, this is part of the reason we're doing ACRA, and so I think it's going to be a very positive thing.

Jim Belardi -- Chairman and Chief Executive Officer

Yes. I think it's obvious, Tom, that this is a hugely bullish sign from us as far as our prospects going forward. And as Marty said, that wrap fee is pretty compelling, adding several points of IRR to every deal that goes into ACRA that wouldn't otherwise flow to us is a big deal. And as you know, we always emphasize returns over volume, and this is completely consistent with that.

Tom Gallagher -- Evercor ISI -- Analyst

And, Jim, just my follow-up on that point is -- and now because you're going to get higher IRRs on effectively all capital deployed, in part, just based on the -- how much you're going to earn on the sidecar, does that raise the bar as you evaluate your share repurchase versus deploying capital into transactions since you're going to be getting higher IRRs in transactions? Does that raise the bar for buyback? Or do you think it's cheap enough that it's still an attractive return for you?

Jim Belardi -- Chairman and Chief Executive Officer

We're very comfortable with the economics we generated from the buybacks we've completed. I think as Marty said, the high-teens threshold with risk execution is really the bar. I don't think that's changed with ACRA. So, no.

I think we're going to be appropriately aggressive in buybacks when we can achieve those IRRs and the stock isn't performing the way we should. I don't think we're going to be raising the bar versus what we've -- the bar we've had in the past on buybacks. I think it's still where it should be.

Marty Klein -- Chief Financial Officer

It creates the flexibility to do those buybacks and do all these other things that we wanted to do. That's what changed.

Operator

Your next question comes from the line of John Barnidge with Sandler O'Neill.

John Barnidge -- Sandler O'Neill Partners -- Analyst

Yes. Very impressive operating expense ratio in the quarter. Do you see that kind of as a run rate number? Where do you think you could fall to over time?

Marty Klein -- Chief Financial Officer

It's a good question. I think it's going to continue to drop as we grow. It's -- our fixed expenses don't change a whole lot. They go up just a little bit every year.

We have a pretty built-out platform. There are some things we're doing in finance [Inaudible] to make things more automated [Inaudible] investment that will pay a lot of dividends over time. But our -- and we were investing in our distribution technology and electronic onboarding of customers, all those investments to make us better at what we do. But by and large, our operating expenses were relatively locked in for our build-out platform.

So as we grow organically and as we grow inorganically and partner with ACRA, which has strengthened our ability, it can go down a lot. And it's a sort of simple math. Just add several billion dollars and donate a whole lot of dollars in expenses, it goes down pretty precipitously.

Bill Wheeler -- President

Yes. What you don't see in that expense ratio, it is very good, but underneath that is, is we're doing a lot of investing and growing out of the financial institutions channel, which isn't just people. It's technology, We're upgrading a lot of our internal systems, so we're not -- it's not like we're squeaking out here. We're investing for the long term in terms of building out our infrastructure.

So, yes, so there's a lot of leverage in that number.

John Barnidge -- Sandler O'Neill Partners -- Analyst

Great. And then my follow-up. Can you kind of talk about how consumer behavior has changed this year as compared to maybe a year ago?

Bill Wheeler -- President

That's an interesting question. The -- I'll answer that by saying, we saw last year a big jump in the sale of annuities. And where the year before, there was actually, I think, a macro -- a modest decline in the annuity -- total annuity sales. And I think that has a lot to do with volatility.

When the market is volatile, you'll see people kind of gravitate toward the safety of something like a fixed annuity because they can't lose principal, right? This is their retirement savings we're talking about, right? So they really can't do that number go down, and they like the safety of it, though, they still want a better return than they can get from, let's say, a bank CD. And obviously, it's more tax efficient. So this sort of choppiness in the market is probably good for the annuity business. The -- now -- so you can kind of predict what -- how '19 turns out in terms of how does the equity market perform.

So far, we have -- we've obviously had a very nice rally. Maybe that says that overall annuity sales would moderate a little bit. We'll see. Retirement flows continue to grow.

In terms of interest rates, we're -- at some point, and then I think we've now -- that window is maybe closed because of the tick-down in interest rates. At some point, people will consider rolling their fixed annuities and repricing those more -- maybe more aggressively and lapsing, but we're not even close that now. We're a long ways away from it. So I think there -- so just on -- in terms of interest rate environment and how that' is affecting behavior, I don't see change, honestly, and we're going to have to get into a very different environment before you see much of a change in consumer behavior.

Operator

Your next question comes from the line of Suneet Kamath with Citi.

Suneet Kamath -- Citi -- Analyst

Thnaks. Good morning. Marty, I just want to come back to the alternatives for a second. I think you had said that you expect roughly 10% return on the balance of the year.

But shouldn't we expect sort of a bounce in 2Q given the lag impact and the strong markets in the first quarter?

Marty Klein -- Chief Financial Officer

Listen, I think it could be, hopefully so. We'll see. We really kind of don't play for the bounces. We -- a lot of our alts really are not your typical alts.

Some are as you see. And obviously, things would come back, so I think we -- I think credit funds are a good example, Suneet, where we have, call it, $500 million in credit funds, almost all of which are lagged one, two, three months. None of them were -- hardly any of them reported real time. Those credit funds in what was a really horrible fixed income environment is very risk-off environment for a quarter, they lost about $22 million in the quarter, the reported quarter for the first quarter, really a negative 10% return.

And obviously, we expected 10% return over time on those or better. So that would be $22 million to deposits. That's just [Inaudible] an earnings of $44 million. So it's certainly positive.

We kind of don't think about it all that way, but I think there's going to be -- the markets are going to be volatile. There's going to be good quarters and bad quarters, not just in the equity markets, but also I think it's important to think about the fixed income environment, what happens in spreads. That would create some volatility. We're not trying to call that, but we did think that, on a normalized basis, about 10% is what we'd expect as we kind of reevaluate our portfolio.

And what happened in the quarter, obviously lower returns we would have wanted, but everything is kind of performing as we would have thought. And most of the issue was a lag. One thing I note is we probably have about $500 million of alts that are, we think, going to return a lot over time, Venerable, Athora as examples. And in the quarter, we didn't really get any income on.

So basically, you have about $0.5 billion of a $3.8 billion portfolio, not for timing reasons so much, but just returning basically 0. And we expect those alts to do 10% or better, actually, over time. So I think most of what we saw in the first quarter was lag effects. There's also some of these other alts that are -- have yet to really kick in because they're newer investments, but we think 10% of this year is about the right level given the volatility and market volatility.

And you'll have to make adjustments before things going to happen in the market, but I would note that if and as you do that, you should think that's about what's happening in the public equity markets but also what's happening in the world of fixed income.

Suneet Kamath -- Citi -- Analyst

Got it. And then just a broader question on ACRA. I guess as we think about the competitive landscape, it seems like there are a lot of companies that are sort of following the same model that you guys built around, spread-based liability growth. So one of the takeaways from this announcement that given giving competition, you're just going to need to focus on bigger deals that others can't do versus the stuff that you guys have done historically?

Bill Wheeler -- President

Yes. I think -- you know what's interesting? I think we've talked many times that where the competition is in the M&A side of the businesses is on the very small vanilla blocks that don't have a lot of complexity, and there's a lot of hunger for those blocks. And we don't -- and the pricing just doesn't seem to make very much sense to us. When you move away from that, a lot of our competition falls away.

It's not 0 competition, but it's close. And so ACRA is -- I think it does open more opportunities up in terms of how much money we can put to work because, obviously, it's hard to -- when you're -- it's hard to use your stock as a currency given where the valuations are today. But if we have more -- a lot more cash available, we can certainly look at different sets of targets. So I think that creates more opportunities for us.

But in terms of the competitive environment, I think the right way to think about it is we've just opened up a bigger distance between us and the rest of the field, right? I don't know if -- I don't who, really, in this industry, and I'm talking about everybody, really has $6 billion available in cash to do acquisitions. That would be a very short list. And so we're putting ourselves in a sort of a different game, and that's part of our intention here.

Operator

Your next question comes from the line of Andrew Kligerman with Credit Suisse.

Andrew Kligerman -- Credit Suisse -- Analyst

Hey, good morning. Looking at this new structure, let's say I'm modeling for deposits of $17 billion, $18 billion a year, and organic is roughly half of that, I don't know if you think that's a good ballpark, but what now happens to the trajectory of the inorganic components, whether it be flow reinsurance, PRTs, deals? I mean, what should we be thinking and modeling in a very rough sense?

Bill Wheeler -- President

Look, I'll try to give you a feel for it, Andrew. I don't know if I'm going to give a very satisfactory answer right now. When we talk about inorganic versus organic, just to clear the air a little bit here. So obviously, M&A, and that could be big block reinsurance and large PRT deals, will go into ACRA.

That wouldn't be in our -- we've told the world, we expect to grow $13 billion to $15 billion this year or it's going to -- there's going to be -- there's upward pressure on that number, but that's -- but none of that would -- that block stuff wouldn't be in there. I mean, the -- any block stuff we do. So the $13 billion to $15 billion isn't touched by that. What we may --

Marty Klein -- Chief Financial Officer

We do some PRT deals that are impacted by that, of the $13 billion to $15 billion.

Bill Wheeler -- President

Could be, could be, but there -- but what's really required to go in so that we have sort of this -- an aligned set of strategies and incentives with ACRA is that the large PRT deals and M&A will go in. The -- what we're considering is some block or some flow reinsurance deals and then I guess eventually some funding agreement deals and some smaller PRT deals, which might go in as well, but we don't know yet. And so I guess I'd have to say in terms of flow and how you model it, you'll have to -- you might assume some modest amount goes in today, but I would probably just stay tuned. And when we -- and when we're ready to make a decision about what -- this other stuff that goes in, we'll let you know.

The thing, by the way, on the modeling is, yes, some liabilities are moving over, but we're also going to get an offsetting wrap fee and obviously more freed up capital.

Marty Klein -- Chief Financial Officer

But the organic grow $13 billion to $15 billion, a lot of that's retail. That's not going in. As I said, most of the flow contracts are not going to go in. Some might, but most will not, and we've already evaluated.

And PRT is going to be there, and we're still looking at the -- typically the bigger deals. So almost all of that -- most of that $13 billion to $15 billion [Inaudible] will just kind of not go into ACRA instead of [Inaudible], but some a little bit might.

Andrew Kligerman -- Credit Suisse -- Analyst

I see. I see.

Marty Klein -- Chief Financial Officer

And then all inorganic will basically go in because that's usually sizable.

Andrew Kligerman -- Credit Suisse -- Analyst

I see. OK. So that makes sense. So it seems like you could probably get where I may have been modeling.

I mean, no guarantees. But it seems like you could still get in that direction, even with the ACRA component. And then that makes me think about just the timing of this. It just sort of came pretty suddenly in my view.

And I'm just wondering what was the thing -- I mean, and again, I skimmed through the deck on ACRA, so I can see the logic there. But what was kind of the impetus to do that? Do you see a lot of big deals out there that you think you could do in the near to intermediate term?

Jim Belardi -- Chairman and Chief Executive Officer

Yes. Andrew, this is Jim. A couple of things. I think in my remarks, I comment on a couple of these things.

But the formation of ACRA is evidence of how confident Athene is in its growth trajectory at appropriate returns. And one thing I want to talk about just briefly, as we've talked about, is the organic deposits business for us at the end of last year, heading into '19, we increased our return criteria across the board, both organic and inorganically, modestly, but an increase nonetheless from what has been in the past. We talked about in the first quarter, $5 billion of organic deposit. I mean, we're not saying annualize that, but that's a pretty good start to the year, even with those higher-return criteria.

So we've really built a powerful organic engine that, as Bill said, in general, there's more upside than downside on that in our three channels. And it's the -- I have to say, I mean, it's doing very, very well. We've built the company on inorganic transactions, and I think the pipeline is about as robust as we've seen it across the board. And so when you add up the organic business that we're doing at appropriate returns, the inorganic opportunities, the stock buyback, in our view, requirements to get to where the stock is appropriately valued and then our ongoing and consistent goal of ratings upgrades with latest good evidence from Fitch to the single A to get to A plus, we need more capital.

And so I wouldn't think too much about the timing here. I mean, this is -- we talk about capital all the time, think about capital all the time. This is a culmination of some of those discussions because as we look around our business, we've never been more opportunistic -- more optimistic about every part of our business growth and return-wise than we've ever been. And so I think that's really what the impetus for [Inaudible].

We have so many places to deploy capital. We need more. And this is the best way to do it. It means we don't have to issue dilutively in the public capital markets.

And then I think that from every single aspect, it made a ton of sense. If capital grows too much, and we're wrong, we can't deploy it, we can buyback ACRA, take out the investors and add those assets to our balance sheet. We don't anticipate that be happening, but that is a flexible portion and aspect of ACRA.

Operator

Your next question comes from the line of Humphrey Lee with Dowling & Partners.

Humphrey Lee -- Dowling and Partners -- Analyst

Good morning. Just a question related to how we think about deal -- kind of distribution deals now with ACRA in place. Because obviously, in the past, you have a lot of tug and pull between different -- various capital deployment opportunities. And like you said, the ACRA structure will provide additional flexibility for you going forward? Should we anticipate any kind of acceleration of distribution build among kind of financial institutions and things like that so that could lead to stronger retail sales potential going forward?

Bill Wheeler -- President

Well, look, we've been driving retail sales about as fast as we can because the key is we don't focus on sales volume so much as we want to make sure we always get our returns. So the governor -- there's been a governor on retail sales, so they're still obviously growing. It's been making sure that we get mid-teens returns on that business. I think the right way to think -- I wouldn't say retail, but I think one way to think about ACRA is it allows us to be more aggressive and bullish just on organic generally, right? The organic business is obviously growing.

I think, at times, we've been concerned about how fast it's growing actually, even though we're still getting our margins. And so we -- if anything, I think this just gives us more confidence that we're going to be able to support strong growth on the organic side of the business.

Marty Klein -- Chief Financial Officer

The only thing I'd add, Humphrey, is that with ACRA, it's, I think, very powerful from a flexibility standpoint. But also, I think it should be credit positive, all things being equal, as we do deals in the future, if we didn't have ACRA, put more -- use a lot more of our own equity and potentially a lot of our own debt capacity. So with ACRA, we can have -- maintain more equity within Athene and that's happened to our debt. So that's, I think, very credit positive.

And one of the keys to getting into those additional channels is further ratings upgrades, which will help us grow and also hopefully reduce our cost of funds in some of those channels, but it could take a while.

Humphrey Lee -- Dowling and Partners -- Analyst

Shifting gears to flow reinsurance. You clearly have a very strong quarter this quarter, but how should we think about this level of production in terms of your four reinsurance trees?

Bill Wheeler -- President

Given I've said a lot these days, the -- look, it's -- business is really good now. This pace looks like it's -- we're continuing on this pace at the moment. I would say this, though. Flow reinsurance depends on -- it's not just our decision.

It's also the decision of our partner. And sometimes, partners decide to switch gears later in the year, and they may choose to be less aggressive in terms of what they're doing. So $1 billion run rate a year, that could happen. It could -- there could be some pullback, too.

Operator

Your next question comes from the line of Jimmy Bhullar from J.P. Morgan.

Jimmy Bhullar -- J.P. Morgan -- Analyst

Good morning. And so I had a couple of questions. First, just following up on the point on alternative investment income. All of the things that sort of pressured the results in 1Q are sort of -- a majority of that is a function of what happened last quarter with the markets being weak, credit spreads blowing up.

But that -- most of that actually, the worst than 1Q, and in some cases, even more than the pressure you would have felt in 4Q. So why wouldn't the 2Q alternative investment income number be just as much higher than normal as 1Q was lower than normal. So I don't know if you have any sort of specific as we -- I'm assuming you've got pretty good visibility into what's in there. And a lot of it is reported on the lag, so you should have some idea on how it's looking already.

So unless there's specific positions that haven't recovered or you've had losses in this quarter. So that's one question. And then I've got another question just on the economics of the ACRA business. But I guess I can ask that after you've done answering the first one.

Marty Klein -- Chief Financial Officer

Yes. I would note it's pretty early in the second quarter, right? We're like, what, five weeks in, so we've got another -- rest of this month and next month to go. So I -- it's hard to really know what's going to happen in markets. But, yes, Jimmy, obviously, favorable markets to this point has been helpful, and I think that's going to be helpful to overall returns.

I still think of that $500 million and some of those other things we talked about and some of those more insurance-related things are probably still going to have close to 0 return in the quarter so that will dampen things to some extent. So I think 10% is a reasonable number. Could it be higher if these market gains and these spread tightening holds for the quarter? Yes, absolutely. I think the other thing is it's relatively modest amounts, but it creates some volatility.

But certainly, people can see it is that we've had a couple of common public stock positions that added some amount of volatility, CZR and OneMain. CZR has actually now been liquidated, but we continue to hold OneMain. So that's incorporated and that does create some volatility, and that's kind of single stock. And you can always watch that on your own and kind of track it.

Jimmy Bhullar -- J.P. Morgan -- Analyst

Yes. And then the other question I had was just on the economics of the business or acquired business or blocks on your own balance sheet versus on ACRA. So you do give up some income as you transfer something or put something on ACRA instead of your own balance sheet but better ROE because of the wrap fee. And obviously, if you deploy all of the capital that's there, then net-net, it would actually be certainly accretive on ROE and maybe neutral or so on earnings.

But is there a possibility that in the short term until a majority of that capital is deployed that you would actually see dilution on EPS because you are giving up some of the better ROE but some dilution on EPS in the short term as business is being transferred or put on -- or being put on ACRA?

Marty Klein -- Chief Financial Officer

I think the dollars of earnings in the short term might be a tiny bit less to the extent we have more flexibility to do buybacks and obviously is accretive to EPS because we're buying back shares. So I think it's hard to generalize an EPS. I do think the dollars of earnings might go down a little bit, for example, Lincoln. But I think, over time, we think it's going to very earnings accretive and helpful on an ROE perspective as well.

Jimmy Bhullar -- J.P. Morgan -- Analyst

And just lastly, if you think about --

Marty Klein -- Chief Financial Officer

The scenario where we don't grow, right, hard to fathom that scenario, the inorganic stuff we did last year, all the pipeline we see and the fact that we'll continue to grow organically. So I think we envision the scenarios where we continue to grow. In a scenario where there's nothing to do and we're not really growing, then as we said in our prepared remarks, we can buy back, call back or buy back ACRA. We don't want to sit around in a [Inaudible] capital.

If there's really nothing going on and we're not able to grow, then we would kind of buy back some stuff that went into ACRA over time.

Jimmy Bhullar -- J.P. Morgan -- Analyst

And then just lastly, on your confidence in being able to deploy the capital that's going into ACRA and also your own balance sheet, you've had some excess capital for the last several years, but -- and despite some -- you're doing some buybacks fairly modest overall. You haven't been able to deploy all the capital that you already have currently. So what's your sort of level of confidence in being able to use this extra capital that you have to do incremental deals?

Bill Wheeler -- President

Come on, man, give us a break. Last -- in the last 24 months, we've had inorganic capital deployment of about $2 billion, right?

Marty Klein -- Chief Financial Officer

More or less.

Bill Wheeler -- President

And so I agree. We have not deployed all of it, but that's pretty good relative to, I don't know, virtually anybody. So they -- and at the same time, obviously, the organic business continues to increase in size. Look, we're not going to deploy all of ACRA in a year.

I'd be very surprised if we did that. I mean, but there's lots of stuff going on in this industry, and the market environment is pretty benign, right? If for some reason, the market environment gets crappier, I think the opportunities only accelerate.

Marty Klein -- Chief Financial Officer

That's one of the powerful things about ACRA, too, is that, as we've said, and this we've kind of talked about at our investor day. Jim mentioned it, Marc Rowan mentioned it is that when there's a recession and an economic slowdown, that's when the most lucrative opportunities arise. Well, without ACRA and heading into it, we have $1 billion of excess equity capital, a couple of million debt capacity heading into a recession, obviously during an equity raise environment, [Inaudible] current stock price as much, so this could look like in recession. And you have limited -- we don't have a huge amount of debt capacity.

So some of those bigger, more higher-returning opportunities could loom large. And having ACRA now and then access now for on-demand capital is powerful, first of all, because we've got the capital before we head into a recession. Second of all, it's not sitting on our balance sheet, dragging down returns, right? I mean, we could do some kind of capital raise now without ACRA and all that capital sitting there for the next few years. ACRA is $4 billion of on-demand capital, which is very powerful.

Jim Belardi -- Chairman and Chief Executive Officer

Jimmy, I'll just add to the point that both Bill and Marty made that, look, just in 2018, adding $13 billion of organic growth, $27 billion in two inorganic deals, we deployed over $3 billion of capital on that year alone, our biggest capital deployment year ever. Our business model, however, and business plan is to always have some excess capital available to be opportunistic because opportunistic is the key part of our business model. So that's exactly why we're doing ACRA. We're very confident we're going to deploy the capital, and we always want capital to deploy when things are cheap.

Things were cheap when we started Athene, and things will be cheaper than they are today. At some point in the future, we want the capital to lean in and buy more when things are cheap. So you should not think it unusual to always have some capital available for Athene because that's always what it's going to be.

Operator

There are no further questions at this time. I would now like to turn the call back over to Noah Gunn for any additional or closing remarks.

Noah Gunn -- Head of Investor Relations

Great. Thanks, everyone, for joining and for your continued interest in Athene. If you have any follow-ups on earnings, feel free to reach out to myself or Paige Hart, and we'll talk to you again next quarter.

Operator

[Operator signoff]

Duration: 83 minutes

Call participants:

Noah Gunn -- Head of Investor Relations

Jim Belardi -- Chairman and Chief Executive Officer

Bill Wheeler -- President

Marty Klein -- Chief Financial Officer

Alex Scott -- Goldman Sachs -- Analyst

Ryan Krueger -- KBW -- Analyst

Erik Bass -- Autonomous Research -- Analyst

Tom Gallagher -- Evercor ISI -- Analyst

John Nadel -- UBS -- Analyst

John Barnidge -- Sandler O'Neill Partners -- Analyst

Suneet Kamath -- Citi -- Analyst

Andrew Kligerman -- Credit Suisse -- Analyst

Humphrey Lee -- Dowling and Partners -- Analyst

Jimmy Bhullar -- J.P. Morgan -- Analyst

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