U.S. Markets closed

Edited Transcript of ATH.N earnings conference call or presentation 7-Nov-17 2:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 Athene Holding Ltd Earnings Call

PEMBROKE Nov 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Athene Holding Ltd earnings conference call or presentation Tuesday, November 7, 2017 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* James R. Belardi

Athene Holding Ltd. - Co-Founder, Chairman, CEO and CIO

* Martin P. Klein

Athene Holding Ltd. - CFO and EVP

* Paige Hart

* William J. Wheeler

Athene Holding Ltd. - President

================================================================================

Conference Call Participants

================================================================================

* Erik James Bass

Autonomous Research LLP - Partner of US Life Insurance

* Mark Douglas Hughes

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Sean Robert Dargan

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Suneet Laxman L. Kamath

Citigroup Inc, Research Division - MD

* Taylor Alexander Scott

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Thomas George Gallagher

Evercore ISI, Research Division - Senior MD and Fundamental Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Thank you for joining us today for Athene's conference call. (Operator Instructions)

Please note that this call is the property of Athene and that any unauthorized broadcast of this call in any form is prohibited. An audio replay will be available on athene.com. Please note this call is being recorded.

I will now turn the call over to Paige Hart. Ms. Hart, you may begin.

--------------------------------------------------------------------------------

Paige Hart, [2]

--------------------------------------------------------------------------------

Thank you, operator. Good morning, everyone, and welcome to Athene's conference call to discuss Q3 2017 earnings. Our earnings release, presentation materials and financial supplement can be found on our website at ir.athene.com. Reconciliations of non-GAAP performance measures discussed on today's call can be found in those documents.

Joining me today from Athene management team are Jim Belardi, Chairman and CEO; Bill Wheeler, President; and Marty Klein, Chief Financial Officer.

I would like to highlight that some of the comments made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. We do not revise or update such statements to reflect new information, subsequent events or changes in strategy. There are a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied. Such factors are discussed in detail in our Annual Report on Form 10-K for the year ended December 31, 2016 and our other SEC filings, which can be found at the SEC's website. An audio replay will be available on our website shortly after today's call. Please note that any comparisons made will be versus the same period of the prior year, unless otherwise noted.

And now I would like to turn the call over to Jim Belardi.

--------------------------------------------------------------------------------

James R. Belardi, Athene Holding Ltd. - Co-Founder, Chairman, CEO and CIO [3]

--------------------------------------------------------------------------------

Thank you, Paige, and welcome, everyone, to our Third Quarter 2017 Earnings Call.

I love talking about Athene, and the only thing I like better than talking about Athene is working at Athene. I'm pleased to report that, once again, Athene has delivered strong quarterly earnings. In the third quarter, we generated net income of $274 million and operating income, net of tax of $231 million, both more than double our results in 2016. After-tax operating income within Retirement Services, excluding notable items, was $250 million.

During the quarter, new deposits were $2.8 billion, driven by $1.3 billion of retail sales and $1.3 billion of funding agreement issuances. We are very confident in the organic growth from our multichannel platform, and last month, we won our second and third pension risk transfer deals, totaling approximately $1 billion of pension deposits. We expect our wholesale channel, which includes PRT and funding agreements, to be a significant growth segment for Athene.

We are confident that our product diversification will continue which, combined with our very strong capital position and excellent operating performance, makes us optimistic about additional ratings improvements. We are aggressively pursuing opportunities to deploy a significant amount of our excess equity capital and are confident about our prospects. In addition, our future operating results will be enhanced in a higher interest rate environment. We are positioned to perform extraordinarily well in the future.

Turning to the Tax Reform Bill that was proposed by the House last week. It's important to note that the bill is preliminary, and as with any significant reform bill, we expect there will be changes in what is ultimately adopted. Regarding the excise tax provision starting in 2019, it may apply to profit payments made by our U.S. subsidiaries to our Bermuda reinsurer. Importantly, our direct-to-Bermuda reinsurance business, as well as funding agreements if issued by our Bermuda subsidiary would be unaffected by the provision. Our current estimate of the provision's impact is an increase of about 4 to 5 points to our overall tax rate. From a policy standpoint, the bill would increase cost to consumers who need and buy retirement savings and other insurance products in both the life and property and casualty sectors. As a result, we believe the bill will cost jobs in the U.S. insurance industry. If this proposal becomes law, we expect to quickly and successfully adjust our business model and to continue to report strong results. We are having a great first year as a public company and plan to perform even better going forward. We expect to improve and get better every day because if we're not getting better, we're getting worse.

Now Bill will review the strength of our distribution platform and liability profile.

--------------------------------------------------------------------------------

William J. Wheeler, Athene Holding Ltd. - President [4]

--------------------------------------------------------------------------------

Thanks, Jim, and welcome, everyone. We continue to execute on our goals of growth and diversification and made great progress this quarter. As Jim said, in the third quarter, we generated total new deposits of $2.8 billion. While this is slightly less than the prior year, I'll note that in the third quarter of 2016, retail deposits benefited from being the first full quarter for 2 newly launched products, which were very successful. While competition remains strong, our multichannel distribution model enables us to profitably source liabilities by pivoting to where we feel we have the best opportunity. We do not have volume requirements for our channels. To that end, sequential or annual comparisons of the deposit mix is not necessarily indicative of the strength of our business.

In our retail business, we generated sales of approximately $1.3 billion this quarter, which is down from the prior year. We feel that these results are very solid when accounting for the strong prior year comparable, typical summer seasonality as well as the interest rate environment and strong equity market. We remain one of the largest and fastest-growing writers of fixed-indexed annuities, and we're the #2 writer of FIAs for the 12 months ending June 30, according to LIMRA, while still managing to meet our return targets.

During the quarter, we executed on our growth strategy to enhance our products and expand our distribution. For several of our accumulation products, we added a 100% equity index for which we are seeing significant interest. We also onboarded a new bank partner in the quarter, which became our largest-producing bank in the month of August. Our pipeline of potential bank and broker-dealer partners is growing and moving along at a faster pace, bolstered by our recent ratings upgrades, expanded sales team and our strong reputation for competitive products and high-quality service. Additionally, as we look for ways to maintain our leadership position in this channel, we have several products underway to make our already solid sales and service IT platform the most advanced in the industry.

With respect to the DOL rule, as you know, it has been proposed that the applicability date be extended to July 1, 2019. We continue to monitor the situation but remain encouraged that the DOL, SEC, FINRA, and the NAIC together will achieve a workable standard.

Turning to our reinsurance business. In the third quarter, we generated $190 million of new flow deposits. Flows during the second quarter remained under pressure as the convergence of factors, including tighter spreads in a booming equity market, pressured MIGA sales. We onboarded Lincoln National in August, with good momentum, and we anticipate that monthly sales will grow going forward, particularly given that the relationship includes FIAs as well as MIGAs. We expect to maintain our leadership position in the flow reinsurance market by expanding our product portfolio and adding new partners. We are already seeing a larger proportion of our flow deposits coming from FIAs, which are less sensitive to low interest rates than MIGAs.

Since the announcement of our deal with Lincoln, we are seeing increased interest from and meaningful dialogue with other potential partners. The size and scope of our reinsurance business has made us one of the best fixed annuity product partners in the market. We help counterparties improve what they're doing by developing new or tweaking current products, and we back our ideas with capital.

Moving to our institutional channel. We continue to gain momentum as we rapidly expand our reach and distribution. In the third quarter, we issued $1.3 billion of funding agreements and continue to receive a positive reception from high-quality investors. The funding agreement market remains strong, with year-to-date issuance higher than all of 2016. Beyond general market strength, the steady stream of new, high-quality investors are coming into our deals with meaningful interest, creating demand, which has driven spreads consistently tighter. We are always monitoring the market for opportunities to expand our platform by issuing into strong demand.

In the pension risk transfer market, the pipeline of deals remains healthy, and we continue to aggressively pursue opportunities. As Jim mentioned, in October, we entered into our second and third PRT agreements, representing pension obligations of approximately $1 billion, covering nearly 30,000 retirees. Our momentum in this channel is just beginning to build, and every deal won further solidifies our presence in this market. We are optimistic about our growth potential in this channel, and I'm pleased to announce that in September, we hired Sean Brennan as the new Head of PRT. Sean previously worked for Mercer, where he was a key member of their PRT practice.

In addition to organic growth, we continue to pursue opportunistic acquisitions and block transactions as they are a key part of your business model, given our expertise and balance sheet strength. The deal environment is picking up as the restructuring trend in the insurance industry continues. However, we remain disciplined in the transactions that we pursue and will continue to evaluate each opportunity in the scope of our strategic priorities.

Turning to our liability profile. In the third quarter, our reserve liabilities increased by approximately $7 billion from the prior year to $78 billion. We have limited exposure to legacy liabilities as we have priced our book to reflect the low interest rate environment. We believe we are conservative in writing our liabilities, and they are generally persistent, which complements our unique asset management capabilities. As of September 30, 86% of our deferred annuity policies include surrender charges, and 72% were subject to market value adjustments, both of which increased the probability that a policy will remain enforced from one period to the next.

Within our rapidly growing institutional channel, funding agreements have a fixed maturity, and pension risk transfer obligations have no optionality, features which enhance the persistency and predictability of our overall liability profile. Going forward, we expect to continue to diversify and expand our existing distribution as well as pursue opportunistic growth opportunities to enhance Athene's earnings momentum.

Now I'm going to turn the call back to Jim, who will review our investment portfolio in more detail.

--------------------------------------------------------------------------------

James R. Belardi, Athene Holding Ltd. - Co-Founder, Chairman, CEO and CIO [5]

--------------------------------------------------------------------------------

Yes, thanks, Bill. Our low-cost, surrender-protected, stable liability profile is the foundation for our asset management strategy, which underwrites complexity and liquidity risks rather than just credit risk. This allows us to achieve a 2% to 3% investment margin without taking excessive asset risk.

Our high-quality investment portfolio continues to perform very well. We ended the third quarter with approximately $79 billion of total invested assets, a 10% increase over the prior year, driven by strong growth in new deposits.

In terms of yield in our Retirement Services segment, our annualized net investment earned rate in Q3 was 4.64%, a decrease of 11 basis points over the prior year. Fixed and other income increased 8 basis points, benefiting from higher short-term interest rates on our floating rate securities, which comprised 28% of total invested assets. Offsetting this was lower alternative income compared to the prior year, which benefited from the removal of liquidity discounts for certain alternative investments and strong performance in some credit funds.

The credit quality of our investment portfolio remains very high. At 9/30, approximately 93% of our available-for-sale fixed maturity securities was designated NAIC 1 or 2, the 2 highest categories. Year-to-date, our annualized OTTI as a percentage of total average invested assets was only 4 basis points.

We continue to invest record volumes, approximately 20% more than the first 9 months of 2016, in a very difficult environment. In some sectors, we believe investors have become irrational based on the risk they are taking for low expected returns. We are not one of those investors. We remain disciplined and committed to our downside protection principles and an appropriate risk-return philosophy. Our investments in private corporates deliver a yield premium to public incorporates and typically have superior covenants with strong downside protection. We purchased about $1 billion in this space in Q3, diversified across a variety of borrowers.

Structured securities provide us with attractive yields, downside protection, are highly-rated and very capital-efficient. While we see U.S. housing fundamentals as favorable, spreads on RMBS have tightened to postcrisis tights, making current prices on the majority of new assets unattractive. Instead, during the quarter, we deployed approximately $500 million into ABS and $625 million into first-lien and mezzanine commercial mortgage loans.

Our alternatives portfolio, which is currently 5% of invested assets, is a source of our performance. We invest in fixed income-like funds with cash flows as opposed to equity-like funds that rely more on capital appreciation. We have not purchased traditional hedge fund or private equity investments. Athene continues to look for opportunities in asset originators, where the value of the entity is cheaper than buying the underlying assets. Recently, we have been looking at real assets like royalties and real estate strategies that have shown cyclical resiliency. We are also targeting strategic investments that can also generate attractive assets for our balance sheet. We have made new fund commitments that, when fully funded, will materially increase the size of our alternatives portfolio. We expect this bigger portfolio to continue to generate double-digit returns over the expected life of the investments.

In summary, our investment portfolio is very high-quality, performing very well, is closely matched with our liabilities and will perform even better in a higher interest rate environment.

Now Marty will review our financial performance and strong balance sheet.

--------------------------------------------------------------------------------

Martin P. Klein, Athene Holding Ltd. - CFO and EVP [6]

--------------------------------------------------------------------------------

Thanks, Jim, and good morning, everybody. In the third quarter, we again delivered strong growth and financial performance while maintaining our strong balance sheet and capital position, with significant untapped debt capacity.

For the third quarter, net income increased 117% over the prior year to $274 million, or $1.39 per diluted share, and operating income, net of tax, increased 97% over the prior year to $231 million, or $1.18 per operating diluted share, generating an operating ROE, excluding AOCI, of 12.5%. Adjusting for notable items, operating income, net of tax, was $254 million and, within Retirement Services, was $250 million, which resulted in an operating ROE, excluding AOCI, of 19.0%.

Notable items in Retirement Services included a pretax increase in other liability costs of $20 million from our annual process of unlocking, primarily related to modest impacts from updates to assumptions with a net investment earned rate and mortality, partially offset by $13 million of out-of-period actuarial adjustments. The notable items within corporate and other was an operating loss of $17 million in our German operation, which I'll discuss shortly.

In our Retirement Services segment, strong performance in fixed income and other drove investment income growth over the prior year, resulting in an annualized net investment earned rate of 4.64%. The majority of this increase is driven by invested asset growth of $6.4 billion as well as from higher short-term interest rates, resulting in 10 basis points of increased floating rate investment income. Our alternatives portfolio in this statement continued to perform in line with our expectations, yielding an annualized net investment earned rate of 9.79% versus 14.26% in the prior year, which is driven by higher credit fund income as a result of higher credit spread tightening.

Moving to our other liability costs. Our cost of crediting was 1.88%, 8 basis points lower than the prior year. Our cost of crediting continues to decline as a result of recent rate actions and lower option costs.

Our investment margin on deferred annuities for the quarter was 2.76%, resulting from our diligent management on both sides of the balance sheet.

Turning to Corporate and Other. We had an operating loss, net of tax, of $13 million in the quarter as compared to a loss of $25 million in the prior year. During the quarter, we had an operating loss of $17 million in our German operation, primarily driven by policyholder dividends related to a timing difference in recognition of participating income under U.S. GAAP compared to German GAAP. We expect this timing difference to reverse in the fourth quarter.

Net income for the third quarter was $274 million, an increase of $148 million or 117% over the prior year. Our annual process of unlocking assumptions resulted in a decrease in pretax income of $33 million compared to a decrease of $171 million in 2016.

Turning to our strong capital position. At quarter end, shareholders equity, excluding AOCI, increased 23% to $7.5 billion. We continue to have more than $1.5 billion of excess equity capital, which we expect will contribute to our growth and ratings improvement over time.

Turning to our capital ratios. At quarter end, our Bermuda estimated RBC ratio was strong at 545%, and our U.S. estimated RBC ratio was also very strong at 478%, both figures well above our 400% threshold.

So to wrap up on third quarter results. We delivered very strong operating and financial results. Turning to our outlook for the remainder of the year. It remains much the same as on our last call, the details of which you can find on Page 11 of our presentation.

Let me move to the topic of share lockups. We have successfully created liquidity for our pre-IPO shareholders through our IPO, 2 follow-on offerings as well as our lock-up release events, increasing our public float by approximately 65 million shares in the past year.

On Page 21 of our presentation, you will find some details on upcoming share releases. As part of our previously announced early release program, approximately 3.7 million shares will be released from lock-up on November 10 and December 1, respectively. On December 8, we have approximately 25 million shares coming off lock-up, all of which are currently held by AAA. Based on our estimation, approximately half of these shares are held by what could be considered affiliates of Athene and, therefore, would be subject to volume limitations when selling shares. The remaining shares will be distributed to the roughly 1,500 remaining shareholders of AAA.

Based on the ability of the market to absorb past share releases and having received no further indication of selling demand from our largest pre-IPO investors, we have no current plans for a follow-on offering before December 8.

On March 3, 2018, we have approximately 47.5 million shares coming off of lock-up, of which approximately 25 million shares are held by AAA and the remainder by officers, directors and employees of Athene and Apollo.

We will continue to assess prudent courses of action to facilitate the orderly release of these shares based on market conditions, volume and share trading, investor sentiment and other considerations.

I'll spend a few minutes now discussing Athene's current tax structure and potential impacts of the Tax Reform Bill proposed by the house last week. Today, Athene has an effective income tax rate of 6% to 7%, reflecting the current U.S. corporate tax rate of 35% on roughly 20% of onshore income. Athene also currently pays an excise tax on all reinsurance from our U.S. subsidiaries to our Bermuda reinsurer, Athene Life Reinsurance, calculated as 1% times the sum of premiums, plus net investment income, less reserve increases. This excise tax is reflected in other liability costs in our income statement and, in 2017, is expected to be approximately $50 million. While excise tax is structured very differently than income tax. If excise taxes were converted to a rate on pretax income, it would add approximately 4 to 5 points to our tax rate. As such, our overall tax rate is approximately 10% to 12% when including both income and excise taxes.

Let me provide an example of describing the potential maximum impact of the proposed provision 4303 realizing the actual bill is likely to be less -- the actual impact of the bill is likely to be less, perhaps a lot less. If the House bill were to pass in its current form, we could pay a punitive excise tax of as much as 20% on any affiliate reinsurance to Bermuda. From what we understand at this time, we estimate that this would lead to an additional annual expense of approximately $50 million to $60 million using 2017 estimates. Athene's overall tax rate would move up to 15% to 17% but not 20%, as some earnings would not be impacted. This example excludes potential onetime impacts related to the adoption of the new bill, which will depend on the specifics of the ultimate bill. Note that if the existing reinsurance agreements were to be grandfathered, Athene's current overall tax rate of 10% to 12% would gradually migrate to 15% to 17% over the next 10-plus years.

As Jim mentioned, we expect changes to the House bill as it gets debated in Congress, given the extensive nature of the proposals.

In summary, we continue to execute our straightforward business model and build out our efficient and scalable operating platform. We believe our strong financial position and multiple growth opportunities, combined with our track record of execution, will continue to create significant value for our shareholders over the long term. We're excited about our prospects and look forward to updating you on our progress.

--------------------------------------------------------------------------------

Paige Hart, [7]

--------------------------------------------------------------------------------

Thanks, Marty. We will now begin the question-and-answer portion of our call. (Operator Instructions)

Operator, we will now open up for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions)

Our first question comes from Erik Bass of Autonomous Research.

--------------------------------------------------------------------------------

Erik James Bass, Autonomous Research LLP - Partner of US Life Insurance [2]

--------------------------------------------------------------------------------

Just wanted to follow up on some of the tax comments and make sure I understand the 4- to 5-point impact. I guess, is it correct that does not assume retrospective -- or, I'm sorry, does assume retrospective adoption? And I guess, maybe, start there.

--------------------------------------------------------------------------------

Martin P. Klein, Athene Holding Ltd. - CFO and EVP [3]

--------------------------------------------------------------------------------

Sure, Erik. So in our example, we've kind of assumed, as we would go from what is now overall 10% to 12%, that we would move to 15% to 17%. I think, with respect to grandfathering, I would say that the provision, as currently proposed, it's not particularly clear-cut on whether that would be grandfathered or not. So I guess, I'd say that the tax bill is supposed to go into effect in 2019. So if nothing were grandfathered, we'd move from our current 10% to 12% rate to 15% to 17% pretty quickly. If existing business is grandfathered, then we'd expect, as I said, that our current rate of 10% to 12% would kind of gradually move up to that higher ZIP code over, say, 10, 12 years or so.

--------------------------------------------------------------------------------

Erik James Bass, Autonomous Research LLP - Partner of US Life Insurance [4]

--------------------------------------------------------------------------------

Got it. And obviously, details are a bit scant at this point, but are there potential structural workarounds you can consider that would reduce this hit?

--------------------------------------------------------------------------------

Martin P. Klein, Athene Holding Ltd. - CFO and EVP [5]

--------------------------------------------------------------------------------

Yes, I would say that, as I said in the remarks, getting to that ultimate 15% to 17% rate assumes that nothing changes in the bill. It also assumes they don't do anything. As you might imagine, we've spent a lot of time with the bill, reviewing it, thinking about things that we might do differently and could do differently to optimize value for our shareholders. But obviously, the bill is still influx, so it could change, probably, I would expect, would change a bit over time, especially as it goes over to the Senate. And then the other thing I'd say is while we have a lot of ideas on it, we don't really want to get into right now, we think it's pretty premature.

--------------------------------------------------------------------------------

Erik James Bass, Autonomous Research LLP - Partner of US Life Insurance [6]

--------------------------------------------------------------------------------

Got it. Just final question. Does the uncertainty on tax preclude you from considering larger M&A opportunities at this point?

--------------------------------------------------------------------------------

William J. Wheeler, Athene Holding Ltd. - President [7]

--------------------------------------------------------------------------------

Erik, it's Bill Wheeler. I think the short answer is no. The -- it may impact and influence how we structure the deal in terms of doing the acquisition, but I don't think this is going to preclude us.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Our next question comes from Sean Dargan of Wells Fargo.

--------------------------------------------------------------------------------

Sean Robert Dargan, Wells Fargo Securities, LLC, Research Division - Senior Analyst [9]

--------------------------------------------------------------------------------

I have another question about tax. Just your existing excise tax, Marty, I think you said it was levied against premium, but GAAP accounting obviously is different for annuities. Should we understand that to mean it's levied against deposits?

--------------------------------------------------------------------------------

Martin P. Klein, Athene Holding Ltd. - CFO and EVP [10]

--------------------------------------------------------------------------------

Yes, we're using GAAP lingo. That's right. It's kind of on a statutory construct, which is why excise taxes applies to items on a statutory basis as opposed to GAAP. So that's right a way to look basically deposits, which is basically pretty much all of our business. So $100 deposit, as example, is taxed 1% on the way in. The investment income over, let's say it's 5-year annuity, the investment income on that is taxed at 1% each year. We get a deduction for the increase in reserve on the interest credited. So for earnings, say, 4.5% and crediting, say, 2.5%, we get a deduction for the 2.5% reserve increase. And then when the policy matures and rolls off the books, we get a credit against the 1%. It's all kind of deposits and tax on income and deposits and investment income and getting credit against interest credited and then when the business rolls off. Interestingly, this is a difference between the current excise tax framework and what might be adopted under 4303. Expenses under the current framework, as you might have noticed, aren't a deduction, right? It's just all deposits and investment income and interest credited. There's no deduction for expenses. That would be different, as we understand it, in 4303 where you get a deduction for expenses.

--------------------------------------------------------------------------------

Sean Robert Dargan, Wells Fargo Securities, LLC, Research Division - Senior Analyst [11]

--------------------------------------------------------------------------------

Okay. And then, I guess, to follow up on the M&A question. So if you were to structure a deal as a reinsurance transaction, in theory you could do that directly from the Bermuda reinsurance sub and not be subject to this new tax. Is that correct?

--------------------------------------------------------------------------------

William J. Wheeler, Athene Holding Ltd. - President [12]

--------------------------------------------------------------------------------

That's right. Again, it will really -- like everything, the tax -- the new tax rules will make some structures more attractive than others and some less viable.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Our next question comes from Tom Gallagher of Evercore ISI.

--------------------------------------------------------------------------------

Thomas George Gallagher, Evercore ISI, Research Division - Senior MD and Fundamental Research Analyst [14]

--------------------------------------------------------------------------------

So the potential 4- to 5-point increase in the tax rate, does that -- is that going to change how you price your retail business at this point? Or do you have enough excess ROE that, that's not as big of an issue? And also, does this change anything else? Temporarily, will this change your strategy at all in terms of are you going to start writing funding agreements out of Bermuda or writing more reinsurance, for instance? Any commentary you can give us on kind of temporarily how you pivot?

--------------------------------------------------------------------------------

William J. Wheeler, Athene Holding Ltd. - President [15]

--------------------------------------------------------------------------------

Well, so just taking the House bill literally, right, which is probably a mistake because it's undoubtedly going to change. The -- we absolutely -- when that bill becomes law, which for the way that the House bill says it won't be till 2019, we would definitely factor in whatever the right tax rate is for the pricing of our products and adjust pricing accordingly. Now could be our return targets will change a little bit. It all depends on what the competitive environment looks like in 2019. So we might do that. With regard to shifting how we issue funding agreements, yes, you're absolutely right. I think there is an opportunity to issue those directly out of Bermuda. And we may choose to do that. That might make sense. Again, it really depends. We'll -- we have plenty of time between now and then to decide, and we -- and we'll just have to see what the ultimate rule is.

--------------------------------------------------------------------------------

James R. Belardi, Athene Holding Ltd. - Co-Founder, Chairman, CEO and CIO [16]

--------------------------------------------------------------------------------

I would just add, Tom, that if you think about our pricing an organic business, which is mid-teens, at 15% target, if we didn't change anything and you put the tax in, it might go to lower 14%, 14 1/4%. So it's not like a massive game-changer in that regard. So we'd have to kind of figure out how to best adapt as Bill said.

--------------------------------------------------------------------------------

Thomas George Gallagher, Evercore ISI, Research Division - Senior MD and Fundamental Research Analyst [17]

--------------------------------------------------------------------------------

Got you. And then just another follow-up question on outlook on cost of crediting. I know you still have considerable flexibility there, but does the competitive environment right now make that more of a challenge? Can you talk a little bit about what you plan on doing there?

--------------------------------------------------------------------------------

William J. Wheeler, Athene Holding Ltd. - President [18]

--------------------------------------------------------------------------------

Well, so 2 costs of crediting, right? MIGA sales are very competitive, and there's just not much margin, there's not much juice because of the new interest rate environment. On in-force blocks, I think, we've been pretty conservative about how we repriced business as it's come up for renewal. And obviously, that's helped us slightly lower our cost of crediting over the past year. You'd see the -- you would expect in this interest rate environment, the cost of crediting would be ticking down a little bit, and it is. And so -- and I don't think that's to what we're doing. Obviously, our lapse rates are still, frankly, below our assumptions. So we feel good about that.

--------------------------------------------------------------------------------

Martin P. Klein, Athene Holding Ltd. - CFO and EVP [19]

--------------------------------------------------------------------------------

If I could just quickly reiterate, we've adapted our lapse rates last year to trim up to our experience last year. Yes, it is about in line now, right. Based on experience last year, it has been very low.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

Our next question comes from Alex Scott of Goldman Sachs.

--------------------------------------------------------------------------------

Taylor Alexander Scott, Goldman Sachs Group Inc., Research Division - Equity Analyst [21]

--------------------------------------------------------------------------------

I guess, I just wanted to ask a question on the alternatives and your plan to increase some of that with the committed capital. Will that happen regardless to whether you're able to get deals done? Or is that some...

--------------------------------------------------------------------------------

James R. Belardi, Athene Holding Ltd. - Co-Founder, Chairman, CEO and CIO [22]

--------------------------------------------------------------------------------

Absolutely. Go ahead, sorry.

--------------------------------------------------------------------------------

Taylor Alexander Scott, Goldman Sachs Group Inc., Research Division - Equity Analyst [23]

--------------------------------------------------------------------------------

Okay. And then maybe just a follow-up on prepayments on the underlying collaterals on the structured securities. Can you just characterize how much of a tailwind that's been in the last few quarters, I guess, as prepayments have come in greater on RMBS and what are your expectation will be for that going forward?

--------------------------------------------------------------------------------

Martin P. Klein, Athene Holding Ltd. - CFO and EVP [24]

--------------------------------------------------------------------------------

Yes, sure. It's Marty. I would say the prepayments on our RMBS portfolio, they move around a bit. We don't typically call them out because it's part of the normal course of our business. We don't really call it out unless it's a very, very big move. But there is a little bit of variability that we have quarter-to-quarter. I'd say, it's a little bit of a very modest headwind in the third quarter, probably a little bit of a tailwind in the second quarter. I'm talking about something that's probably in the order of magnitude of $10 million or less with respect to pretax income, and that might have helped us a little bit in the pre-prior quarter and not -- and maybe it worked a little bit of a headwind and went the other way in the third quarter. We don't typically call it out unless it's much more significant. We called out some bond call stuff. I think the first part of the last year that was very significant, but otherwise, if it's a few million bucks, give-or-take, we don't usually call it out.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Our next question comes from Suneet Kamath of Citi.

--------------------------------------------------------------------------------

Suneet Laxman L. Kamath, Citigroup Inc, Research Division - MD [26]

--------------------------------------------------------------------------------

Just a follow-up on that excise tax of 1%. Is that paid upfront? Or is that paid over time?

--------------------------------------------------------------------------------

Martin P. Klein, Athene Holding Ltd. - CFO and EVP [27]

--------------------------------------------------------------------------------

Hey, Suneet. It's Marty. So on a business affiliated -- affected by the affiliate reinsurance, which is basically, by and large, our retail business, I would note that funding agreements are not included in that. It's sort of 1% upfront when the deposit comes in. So you pay 1% on that. And then during the life of the product, we pay 1% on the investment income, less 1% on the interest credited as part of the deduction we get for interest credited. And then you get a deduction relief when the product matures. So it's 1%, good guy coming our way on the way out. Now the way we do it is, we look at all the business in aggregate under the reinsurance that settle up between our U.S. affiliates and Bermuda and settle it up on a periodic basis during the year in aggregate, not contract-by-contract. But that's sort of how it works if you thought about it by contract.

--------------------------------------------------------------------------------

Suneet Laxman L. Kamath, Citigroup Inc, Research Division - MD [28]

--------------------------------------------------------------------------------

Okay, got it. And then just on the excess capital, would purchasing another asset originator be a potential use of that excess capital? Or are you only looking at buying insurance liabilities?

--------------------------------------------------------------------------------

James R. Belardi, Athene Holding Ltd. - Co-Founder, Chairman, CEO and CIO [29]

--------------------------------------------------------------------------------

No, look, in my comments, I think, I've been consistent in the past as well as currently. We're actively looking at asset originators in spaces that we think makes sense, particularly where we can buy the entity cheaper than we can buy the underlying assets. We've had a great experience with AmeriHome and MidCap. And so, yes, Apollo is helping us with that as well, so we're canvassing the landscape. But yes, sure, that could use some of the excess capital as well.

--------------------------------------------------------------------------------

Martin P. Klein, Athene Holding Ltd. - CFO and EVP [30]

--------------------------------------------------------------------------------

I would just add, Suneet, to Jim's comments, that the way that we work is -- we don't really probably buy one outright and consolidate onto our financials, but we might take a piece of it and so that would benefit our, obviously, our investment income as an increase in alternatives. And then because it would be typically an alternative, we have an increase in our capital requirement, and that's how we use excess capital.

--------------------------------------------------------------------------------

Suneet Laxman L. Kamath, Citigroup Inc, Research Division - MD [31]

--------------------------------------------------------------------------------

Got it. And maybe one last one just for Marty. The other liability costs, it was a little bit noisy this quarter with some of the adjustments. But can you give us a sense of maybe how much you benefited from the strong equity markets in the quarter through that line?

--------------------------------------------------------------------------------

Martin P. Klein, Athene Holding Ltd. - CFO and EVP [32]

--------------------------------------------------------------------------------

Yes. We talked about this, Suneet, in some other quarters. Year-over-year it actually didn't have much of an impact, so we didn't really call it out in comparing versus third quarter of 2016. But what happens, and again, we talked about this in the last couple of quarters, is when we have a very good equity markets, which we had again in third quarter, I think the S&P was up about 4%. What happens in our other liability cost is that more and more of the writer benefits that we have are ultimately in our projections are going to be funded by account values because the account values have ended up going up more than we would have estimated because of the higher increases in the stock market. So their index credits go up. And so when that happens and the writer -- more of the writer benefits are funded by policyholders' account values, that means the increase in our writer reserve, which is meant to fund those, doesn't have to be as high. So that does create some volatility in our other liability cost line. Again, with the stock market up 4% this year, that benefited us quite a lot. But we actually saw that benefit to a large extent in the third quarter about a year ago. So the delta or difference between the 2 is not high. I'd say for the quarter, though, that had added, that will just stay in the range of $30 million to $40 million pretax of operating income, that phenomenon. Again, we probably did the same thing in the prior quarters but to a somewhat little bit lesser extent. When I say the prior quarters, I mean, second quarter this year and first quarter this year.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

Our next question comes from Mark Hughes of SunTrust.

--------------------------------------------------------------------------------

Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [34]

--------------------------------------------------------------------------------

Did you give an indication what the magnitude of the increase in the alternatives portfolio would be if you follow through with these commitments?

--------------------------------------------------------------------------------

James R. Belardi, Athene Holding Ltd. - Co-Founder, Chairman, CEO and CIO [35]

--------------------------------------------------------------------------------

I think we've said and still plan to increase the percentage of invested assets from the current 5% up a point or 2 as the fundings occur. So I think we'd like to get it into the 7% range without anything -- any other extraordinary growth on the current organic growth prospects. So I think that'll be a reasonable assumption over the short-to-medium term.

--------------------------------------------------------------------------------

Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [36]

--------------------------------------------------------------------------------

And then you gave us the good early success in the fourth quarter in the PRT market. How does those fixed indexed annuity market look so far in the fourth quarter in terms of new sales?

--------------------------------------------------------------------------------

William J. Wheeler, Athene Holding Ltd. - President [37]

--------------------------------------------------------------------------------

I think consistent with what we've had this year, not weak, but not strong, you're not bawling out the door either. It remains, I think, a pretty competitive environment. And so, so far, so good.

--------------------------------------------------------------------------------

Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [38]

--------------------------------------------------------------------------------

And you mentioned the momentum building in the PRT channel. I think you've got some new staff there. Any kind of transition in the marketplace? Or are you just making your presence felt and seeing more of these opportunities?

--------------------------------------------------------------------------------

William J. Wheeler, Athene Holding Ltd. - President [39]

--------------------------------------------------------------------------------

Well, we've been sort of the transition has really been the last year, right? We've been participating in the market and bidding on deals and establishing our administrative partner. And I think intermediaries and planned sponsors are now, I think, gaining confidence in us. We implemented our first deal, which we sold in the second quarter. That's now been fully implemented. We did our first check mailing a number of weeks ago. Went well. So I think the market is gaining confidence in us. And we're -- our goal, I think, the proof of that, obviously, is winning this next billion. So we're -- I think we're building momentum here. This is going to end up being, I think, an important business for Athene going forward because it's a good market, right? It's not small, and so we have high expectations.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

This concludes our question-and-answer session. I would like to turn the conference back over to Paige Hart for any closing remarks.

--------------------------------------------------------------------------------

Paige Hart, [41]

--------------------------------------------------------------------------------

That completes our review this morning. On behalf of everyone at Athene, thank you for your time and consideration and we look forward to our next update.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.