Athene Holding Ltd.
Q4 2017 Earnings Call Transcript

Published: 22 Feb 2018

[Operator:]

Thank you for joining us today for Athene's Conference Call. [Operator Instructions] Please note that this call is being recorded and is the property of Athene and that any unauthorized broadcast of this call in any form is prohibited. An audio replay of this call will be available on athene.com. I will now turn the call over to Paige Hart. Ms. Hart, you may begin.

[Paige Hart:]

Thank you, operator. Good morning, everyone, and welcome to Athene's conference call to discuss Fourth Quarter and Full Year 2017 Earnings. Our earnings release, presentation materials and financial supplement, which we will be referring to during the call, 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 the Athene management team are Jim Belardi, Chairman and CEO; Bill Wheeler, President; and Marty Klein, Chief Financial Officer. I'd like to mention a few changes to our fourth quarter materials. To comply with recent SEC guidance on non-GAAP financial measures, we have changed our operating income, net of tax label to adjusted operating income in every manner in which it was previously presented. The calculation of this measure has not changed. We'd 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 the actual results to differ materially from those expressed or implied. Factors that could cause the actual results to differ materially 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. Also, please note that any comparisons will be made versus the same period of the prior year, unless otherwise noted. And now, I’d like to turn the call over to Jim Belardi.

[Jim Belardi:]

Thank you, Paige and welcome to our fourth quarter and full year 2017 earnings call. 2017 was a milestone year for Athene. In our first year as a public company, we executed all four of our distribution channels for the first time; generated record net income of $1.4 billion and adjusted operating income of $1.1 billion; posted full year ROEs for Athene of 18% and for Retirement Services of 22%; and continue to set the stage for long-term strategic growth. We generated a record $11.5 billion of new organic deposits, including record retail deposits of $5.4 billion as we expanded both our product offerings and our distribution relationships. And within flow reinsurance, we signed Lincoln Financial as a new partner. Of particular note in 2017 was our success in our institutional channel, which generated $5.3 billion of new deposits. This was comprised of $3 billion of funding agreements and $2.3 billion of pension risk transfer obligations, both sources of deposits we did not have in 2016. In December, we announced a $19 billion reinsurance transaction of fixed and fixed index and liabilities from Voya Financial. This transaction demonstrates Athene and Apollo's expertise and financial capability to provide creative, customized solutions to take advantage of the ongoing restructuring of the life insurance industry. This is the latest step in our plan to become a solutions provider to the overall financial services industry. The economics of the deal are even better now than at announcement, given the rise in yields. Our invested assets will be approximately $100 billion after closing the transaction, and we are currently pursuing additional acquisition opportunities. In January, for the first time, we issued $1 billion of holding company debt to replenish our excess capital that would have been reduced to support the Voya transaction. This reinforces our commitment to better ratings and confirms our optimism around prospects to execute additional transactions. Along with record deposits, we invested record volumes of $22 billion last year and generated an investment margin of 2.82%, an increase from 2016, in what continued to be a challenging asset spread environment. Our efficient operating platform supported this significant growth, and we continue to decrease our operating expenses as a percentage of invested assets. With respect to tax reform, we expect that Athene's tax rate in 2018 will be approximately 14%, a small increase from our historical rate. We expect that the company's tax-efficient structure will allow it to maintain a competitive advantage in the marketplace. Going forward, we are confident in our ability to successfully compete in all of our channels. By design, Athene is not a traditional insurance company. Our focus is on the retirement savings business. Our operating structure, our asset management expertise, in conjunction with Apollo, our earnings, returns and growth are all different, and by that, we mean better. We embrace volatility at these locations because we have the capital to take advantage of those situations. Interest rates are rising, which helps all aspects of our company. We are perfectly positioned for a great 2018 and remain very confident and optimistic about our growth prospects. Now, I'll turn it over to Bill to discuss our distribution channels.

[Bill Wheeler:]

Thanks, Jim. In 2017, we executed against our goals of growth and diversification as we build a strong foundation for future growth and earnings momentum. As Jim noted, the fourth quarter and 2017 overall were milestones for Athene, having successfully executed our growth strategy across all four of our distribution channels. We have built a multi-channel distribution platform that allows us to source attractive liabilities, and we have a strong capital position and scalable and efficient business model that can support meaningful growth at attractive rates of return. In the fourth quarter, we generated new deposits of $3.5 billion, an increase of 91% over the prior year. For the full year 2017, we generated a record $11.5 billion of new deposits, significantly exceeding the $8.8 billion of deposits we generated in 2016. Our strong growth this year was primarily driven by the expansion of our institutional channel. In our retail business, in the fourth quarter, we generated sales of approximately $1.3 billion, a decrease from the prior year. For the full year 2017, we generated new deposits of $5.4 billion, up 1% over the prior year, despite the broader fixed annuity market being down for the same period. We continue to gain market share as a result of our expanded distribution, strong sales platform and reputation for quality service. We remain one of the largest and fastest-growing writers of fixed indexed annuities, and we're the Number 2 writer of FIAs for the 12 months ending September 30 according to LIMRA. Turning to our flow reinsurance business. We generated new deposits of $305 million in the fourth quarter and $875 million for the full year. While flows during the quarter remained under pressure, we are seeing improvement. We remain committed to this channel and expect to maintain our leadership position in the market. Moving to our institutional channel. 2017 was a breakthrough year for us, having generated $5.3 billion of new deposits, in a channel that we were not previously active in. Deposits sourced in this channel have lower transaction costs and diversify our risk and liability profile. With respect to funding agreements, we did not issue in the fourth quarter but issued a total of $3 billion in 2017, making us the third largest U.S. dollar-denominated issuer for the year. We expect to be a consistent but disciplined issuer in this market and are always monitoring for opportunities to issue into strong demand. We were also very successful in the pension risk transfer market, generating $1.9 billion of new deposits in the fourth quarter, bringing our total deposits for 2017 to $2.3 billion. We have quickly established ourselves as an influential market participant and are optimistic about our potential to continue to gain market share. With rising interest rates and positive impacts from tax reform, we think plan sponsors are incentivized to come to market and expect a healthy number of deals will be executed in 2018. And we are committed to providing clients with solutions to help them achieve their pension risk objectives. Turning to our inorganic channel. As Jim mentioned, in December, we announced an agreement with Voya to reinsure $19 billion of fixed and fixed indexed annuities. This transaction provides a holistic solution for a complex annuity block; delivers Athene an attractive set of liabilities, which will provide meaningful earnings accretion; expands our organic growth potential; and establishes a platform for future deals. Along with the reinsurance transaction, we secured two additional opportunities, which could increase our organic production. The first is to reinsure future flow from annuitizations of variable annuities at Venerable to fixed payout annuities. We expect this to generate approximately $8 billion of flow over the life of the variable annuity block that was acquired by Venerable. The second opportunity was to pursue Voya's current fixed annuity distribution arrangements. We have determined the appropriate reinsurance structure for the deal and continue to expect to achieve our targeted mid-teen returns. We are working closely with Voya and the regulators and are confident the deal will close in the second or third quarter of 2018. Turning to our liability profile. As of December 31, 2017, our reserve liabilities increased by $10 billion from the prior year to $81 billion. We believe we conservatively underwrite our liabilities, and the expansion of our institutional channel diversifies our liability risks and increases the persistency and predictability of our overall liability profile. All of our funding agreements, PRT and payout annuities are non-surrenderable, meaning they have no lapse risk. As of December 31, 86% of our deferred annuity policies included surrender charges, and 72% were subject to market value adjustments, both of which may increase the probability that a policy will remain in-force from one period to the next. All of these factors, along with our disciplined approach to underwriting, complement our unique asset management capabilities. Turning to our outlook for 2018. Our priorities remain the same

[Jim Belardi:]

Yes, thanks, Bill. Athene's asset management is a key competitive advantage. Our investment philosophy takes advantage of our low-cost and stable liabilities, which enable us to underwrite complexity and liquidity risk in addition to credit risk and help us achieve 2% to 3% investment margin with significant downside protection. Our high-quality investment portfolio performed very well during the year, and the yield on our floating rate securities, which are 29% of our portfolio as of January 1, is materially increasing with the large increases in LIBOR rates. We ended 2017 with approximately $82 billion of total invested assets, a 15% 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 Q4 was 4.57%. For the full year, we had a net investment earned rate of 4.70% in our Retirement Services segment. Our floating rate assets increased investment income by $64 million. The alternatives portfolio in this segment generated a return of 10.01% for the year, driven by higher income from AmeriHome and real estate. The credit quality of our investment portfolio remains very high. At year-end, approximately 94% of our available for sale fixed maturity securities were NAIC 1 or 2, the two highest categories. In 2017, our annualized OTTI as a percentage of total average invested assets was only four basis points. We invested a record volume of $22 billion in 2017, approximately 22% more than in 2016, in a very difficult environment. 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 corporates and typically have superior covenants. We purchased just under $3 billion of corporate privates in 2017, diversified across a variety of borrowers. We expect a very strong 2018 in this sector. Structured securities provide us with attractive yields and downside protection and are also highly rated and very capital efficient. While we see U.S. housing fundamentals as favorable, spreads in RMBS CUSIPs have tightened to post-crisis tights, making current prices on the majority of new assets unattractive. Instead, within real estate, we are focusing on non-CUSIP lending with assets that have attractive capital charges. We purchased $1.8 billion of investment-grade, asset-backed securities during the year, focusing on aircraft and whole business securitizations. We expect to significantly increase volumes in this space in 2018. Our alternatives portfolio, which is currently 5% of invested assets, is a source of outperformance. 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. In the long-term, we expect a 5% to 10% allocation to alternatives with a bias towards the higher end. However, in the near-term, given our substantial growth, including the on-boarding of $19 billion of assets from our reinsurance transaction with Voya, we anticipate maintaining a 5% to 6% allocation by meaningfully increasing the dollars invested in this space. 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 assets that can generate attractive assets for our balance sheet. We expect to control many asset originators that will consistently source assets for us in all different economic environments. 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 and will perform even better in a higher interest rate environment. Now Marty will review our financial performance and strong balance sheet.

[Marty Klein:]

Thanks, Jim and good morning, everybody. As we did throughout 2017, in the fourth quarter, we again delivered strong growth and financial performance and further strengthened our balance sheet and capital position. For the fourth quarter, net income increased 27% over the prior year to $464 million or $2.35 per diluted share, and adjusted operating income increased 19% over the prior year to $332 million or $1.69 per adjusted operating share, generating an adjusted operating ROE, excluding AOCI, of 17.4%. In our Retirement Services segment, we generated adjusted operating income of $306 million resulting in an adjusted operating ROE, excluding AOCI, of 22.6%. adjusted operating income increased 26% over the prior year, driven by higher fixed and other investment income. Fixed and other investment income increased due to invested asset growth of $9.4 billion as well as from higher short-term interest rates increasing floating rate investment income by 10 basis points or $18 million versus last year. The alternatives portfolio yielded an annualized net investment earned rate of 7.92% in the quarter versus 16.25% in the prior year. Results in the prior year were driven by an increase in the fair value of two funds reflecting the removal of liquidity discounts related to marketability assumption used in the determination of the fair value. Moving to our liability costs. Our cost of crediting was 1.87%, eight basis points lower than the prior year. Our cost of crediting continued to decline as a result of rate actions and lower option costs. Our investment margin on deferred annuities for the quarter was 2.70%, resulting from our diligent management on both sides of the balance sheet. Other liability costs for the fourth quarter included a benefit of approximately $53 million related to lower writer reserves and debt amortization, primarily due to favorable equity market performance as well as an immaterial out-of-period actuarial adjustments. Turning to Corporate and Other. Adjusted operating income was $26 million in the quarter as compared to $38 million in the prior year. The decrease was driven by lower alternative investment income as well as higher corporate operating expenses. Our German subsidiary had adjusted operating income of $30 million, primarily driven by favorable policyholder dividends as a result of the unwind timing differences in recognition of participating income under U.S. GAAP compared to German GAAP. As noted in the third quarter, Germany had an adjusted operating loss of – when Germany had an adjusted operating loss of $17 million, this is primarily driven by this timing difference. Net income for the fourth quarter was $464 million, an increase of $100 million or 27% over the prior year. I’ll note that during the quarter, we had a $7 million tax benefit related to the decrease in our net deferred tax liabilities as a result of the reduction in our future income tax rate related to the U.S. tax reform bill. Turning to our full year results. Net income increased 89% to $1.4 billion and adjusted operating income increased 52% to a record $1.1 billion. Excluding unlocking and the 2016 tax adjustment, adjusted operating income increased 44%. In our Retirement Services segment, we increased adjusted operating income by 41% to $1.1 billion, resulting in an adjusted operating ROE, excluding AOCI, of 22%. Excluding unlocking and the 2016 tax adjustment, adjusted operating income increased 33%. The increase is driven by higher investment income as a result of invested assets growing by 15% and higher short-term interest rates increasing floating rate investment income by approximately $64 million. Other liability costs in 2017 were lower than prior year benefiting by approximately $100 million of lower writer reserves and debt amortization versus the prior year as a result of the favorable equity market performance and immaterial out-of-period actuarial adjustments. For 2017, we had a slight increase in operating expenses. However, operating expenses as a percentage of average invested assets actually decreased, demonstrating our efficient and scalable operating platform's capacity to support meaningful growth. In 2017, our investment margin on deferred annuities was 2.82%, an increase of six basis points over the prior year. Corporate and Other. Adjusted operating income was $17 million, an increase of $66 million compared to the prior year. This is mainly driven by higher alternative investment income, which is lower in the prior year due to a decline in market value of public equity positions in one of our funds. Turning to our strong capital position. At year-end, shareholders equity excluding AOCI, increased 20% to $7.8 billion. We continue to have more than $1.5 billion of excess equity capital, which we expect will contribute to our growth and ratings improvements over time. As noted in December, we expect to deploy about $1 billion of excess capital for the Voya fixed annuity reinsurance transaction, and in early January, we completed our inaugural debt financing of $1 billion. As a result, of this capital raise, excess capital is not expected to change materially following the close of the Voya transaction. We see strong ratings as integral to our organic growth strategy and expect our excess capital position to contribute to ratings improvement over time. Turning to our capital ratios. At year-end, our Bermuda estimated RBC ratio was strong at 562%, and our U.S. RBC ratio was also very strong at 490%, both figures well above our 400% threshold. As of year-end, our BSCR for our Bermuda platform was 354%. Our operating platform generated an increase in combined statutory capital and surplus of approximately $924 million in 2017. So to wrap up on 2017 results. We delivered very strong operating and financial results. Looking ahead, we are excited about our near and longer-term prospects and our ability to produce growth and an attractive return on equity. Before turning to our outlook for 2018, I'd like to provide an update on our current perspectives around tax reform. In December, on our business update call, I provided an early read on the impact to our tax rate from the final bill. As a reminder, the Tax Act reduced the corporate income tax to 21% beginning in January of this year. The Act also imposes a new Global Minimum Tax, also referred to as the BEAT, or Base Erosion and Anti-abuse Tax, which would apply a 10% tax rate to modified taxable income, although that rate is 5% in 2018 and increases to 12.5% in 2026. Modified taxable income is defined as the sum of regular taxable income plus deductible amounts paid to related foreign parties. As a result, the BEAT, which only applies to the extent it exceeds the regular tax, would subject payments to our Bermuda subsidiary from our U.S. companies through this tax. Notably, the BEAT does not apply to income, which originates from our offshore entities, which currently represents about 15% to 20% of our pre-tax income. This income includes profits on flow reinsurance from third parties direct to ALRe and investment income on surplus assets in Bermuda. We continue to believe the BEAT was intended to apply to the net reinsurance settlement payments made by our U.S. subsidiaries to our Bermuda subsidiary, which comprised of premiums and investment income, net of claims, reserve changes and expenses. However, we acknowledge there are significant uncertainties around how the tax reform bill ultimately will be interpreted, including whether the BEAT applies to net or gross payments. Depending on the ultimate interpretation of the tax bill, we expect our overall tax rate, combining U.S. income tax, the continuance of the excise tax and the BEAT, will be somewhere between 12% and 16%. Until there is more clarity on the tax code changes, we currently anticipate our quarterly reported results in 2018 will reflect an overall tax rate of 14% to 15%. The tax rate changes had no material impact on our statutory capital and RBC ratios at year-end 2017. With respect to RBC ratios, depending on the actions ultimately taken by the NAIC, the change in the tax rate from 35% to 21% could result in a reduction in industry RBC ratios. We currently estimate that if the corporate tax rate had been in effect as of December 31, 2017 and the RBC calculation employed the 21% tax rate, our overall NAIC RBC ratios would be approximately 10% to 15% lower. Our capital ratios under the various ratings entity models are not expected to be materially impacted by the change in tax rate. And those models have been and continue to be the primary considerations in our views of appropriate capitals to run our business. As such, we are – while we are still assessing potential impacts, at this time, we do not currently believe the new tax code has impacted our views on our excess capital levels. With regards to our expectations for 2018, as a growth company, we expect that our organic channels will generate new deposits in excess of the $11.5 billion produced in 2017. As we've stated previously, we do not have volume requirements for our channels, and our new deposit mix will be a function of where we see the best opportunity to generate our target returns. As a result, sequential or annual comparisons of our deposit mix are not necessarily indicative of the strength of our businesses. Turning to our investment portfolio. We expect consolidated fixed and other income mirrors to be slightly higher than in 2017, benefiting from the deconsolidation of $6 billion of German invested assets, offset by mid-year onboarding of lower year Voya assets. With respect to our alternative investment, we expect to meaningfully increase our dollars invested to maintain a 5% to 6% allocation, including the Voya assets, which we will redeploy. For 2018, we expect that alternatives on our Retirement Services segment will return approximately 10% for the year, and of course, those returns will vary likely quarter-by-quarter. We expect our cost of crediting to remain relatively stable and we will continue to target a 2% to 3% investment margin on deferred annuities in 2018. Consolidated general and administrative expenses as a percentage of average invested assets are expected to decrease as we experience efficiencies from our operating platform as well as the mid-year closing of the Voya transaction, although liability costs within Retirement Services in 2018 are expected to be higher than in 2017, which benefited by 15 to 20 basis points from equity markets outperforming our expectations. As we discussed previously, when equity markets outperform our expectations as in 2017, our operating earnings can benefit in the period in two ways. First, as policyholders’ account values are higher than expected due to incremental indexed credits, more of the associated rider benefits are funded by their account values, which favorably impact the change in rider reserves. And second, with a higher-than-expected account value, we recognize an increase in invested assets and related income, which slows down on rider reserve changes and DAC amortization. We continue to estimate an additional $25 million to $30 million of adjusted operating income for every 25 basis points change in interest rates. For 2018, we expect the Retirement Services segment to generate mid to high-teen adjusted operating ROE. For our Corporate and Other segment, which starting in 2018 will include debt service costs, we expect adjusted operating income to be breakeven in 2018. Let me move to the topic of share lockups. On March 3, 2018, we have approximately 49 million shares coming off lockup, of which approximately 25 million shares are held by AAA and the remainder by officers, directors and employees of Athene and Apollo. This will be our final share distribution to AAA. 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'd note that in December of 2017, we had approximately 25 million shares come off lockup, essentially all held by AAA investors, and we did not see significant resulting volatility. 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 shareholders over the long-term. We're excited about our prospects and look forward to updating you on our progress.

[Paige Hart:]

Thanks, Marty. We will now begin the question-and-answer portion of the call. We ask that you please limit yourself to one question and one follow-up then requeue for additional questions. Operator, we will now open it up for questions.

[Operator:]

Thank you. [Operator Instructions] The first question will come from Erik Bass of Autonomous Research. Please go ahead. Erik Bass Hi good morning, thank you. I guess, first, can you provide more detail on how to model the effective tax rate? And what should we assume as the tax rate you show? And how much gets captured in other liability costs? And also, should we assume that the tax rate increases from 2018 to 2019, given the step-up in the GMT? Marty Klein It's – I would say that the geography of that is going to really kind of depend. And quite frankly, I can't really be too precise on the geography other than the ultimate tax rate. I would note that if you think about 2017 in prior years, we really had two aspects of overall tax. We had U.S. income tax, which is easy to pick out in the tax line, and we had, in other liability costs, the excise tax. The combination of those two historically was sort of in the, call it, 10% to 12%. Going forward, at least for this year, until there's more clarity on the bill, we expect to be accruing tax at, let's call it, around, 15% rate, give or take. And so that'll be really a function of some tax that shows up in U.S. income tax in the tax line, and then the rest will be in other liability costs. I think what I'd suggest is it's reflecting a decrease in the U.S. income tax from a 35% rate to the 21% rate. And then the rest of it to get to an overall, call it, 15%, I would put – just putting in other liability costs. Erik Bass Thank you. And then on the move from 2018 to 2019? Marty Klein Say again, please, Erik? Erik Bass Just should we – or would you anticipate to move higher in 2019 given the step-up in the Global Minimum Tax, the 10% to 5%? Marty Klein Well, so I wouldn't – no, I would not expect that. I think that we'd not expect that to increase from 2018 to 2019. I'd also note that we'll presumably have an update, and now I don't think about 2019, later in the year, when there's a little bit – if and when there's a little bit more clarity on the net versus gross issue. But I would anticipate that, that kind of 15% rate would really hold pretty steady as part of what we accrue in our income until there's more clarity. When there's more clarity, and for example, if the clarity is that it is indeed net, at that point in time, I think we'll have a benefit in our tax rate that'll probably go to the lower end of the range we gave, call it, 12% to 13%. And so we benefit from that in 2018, should there be clarity in 2018. Erik Bass Thank you. And then, Jim, I think you alluded to this at the – beginning in your comments, but with interest rates moving higher, does this change how you think about the accretion from the Voya acquisition and how quickly you may be able to reshape the portfolio or get the target spreads? Jim Belardi Well, we have a lot of experience in redeploying acquired portfolios, principally, the $45 billion of EBIT portfolio, which we did in essentially less than two years. We expect most – certainly, more than 60% of the deployment will occur this year, in the last half of this year. And essentially, all of it will be done in less than a year. So we're optimistic on the speed of deployment. We expect to deploy that – we look at the market every day and look where we think the best value is. But we expect to essentially allocate assets as we have in the past. And in general, same categories to our existing portfolio. So but the point is, I mean, our economics are better when yields are higher, and they are higher than when we announced the transaction. So that's part of the reason why we think our economics are better. But we won't be precise as far as what the returns will be, but they'll more than exceed or more than meet our expected returns of mid to high teens. Erik Bass Great, thank you.

[Operator:]

The next question will be from Tom Gallagher of Evercore ISI. Please go ahead. Tom Gallagher Good morning. Can you talk about competitive environment in lieu of the updated tax guidance? Can you talk a bit about what the – what's more optimal in terms of focusing on – is it retail FIAs? Is it funding agreements, PRT, flow reinsurance? I guess, flow reinsurance has a lower tax rate. Do you have an opportunity for any of the other businesses to benefit from lower tax rates? Bill Wheeler Hey, Tom, it's Bill Wheeler. So I'll start with the competitive environment and given the changes in tax. It might end up differing a little bit by market, whether we're talking about annuities or pension closeouts. I could easily see those sort of diverging, but for a variety of reasons. We've already seen this year pretty meaningful increase in interest rates, and I think that's caused some of our competitors to improve their pricing and in the indexed annuity business. And so the year started off with, I would say, some fairly aggressive pricing moves. Now was that caused by interest rates? Or was it caused by tax reform? It's really hard for us to say. But we're going to see higher – we're going to see better pricing this year because of interest rates. And whether I can really pull out tax issues out of it, hard – it will be difficult. PRT is kind of completely different. There's a new reserve valuation method that's being implemented this year for pension deals. It's going to change pricing across the board for people. And so I think it will – so even though, obviously, interest – higher interest rates will have an impact there, too, it's unclear what will go on. In general, I don't know if the tax benefit that the industry will get will immediately reflect itself and more aggressive pricing. I tend to think that companies will try to hold on to that improved margin and improve their returns, but in the long run, it might get competed away. But I think their first instinct will be to try to hold on to it. Tom Gallagher Got you. And PRT, is that being written onshore? Is that offshore? Bill Wheeler Well, all PRT is onshore, or at least for us it starts off onshore. Obviously, then we reinsure a portion of the liability to Bermuda, but it all starts onshore. Tom Gallagher Got it. And then just a follow-up on M&A. Can we expect that the type of future deals you're looking at would – would you say the pipeline is largely venerable-affiliated or related? Or would you think most of the opportunities would be something different? Bell Wheeler Well, I don't know if I – I would say there's going to be opportunities in sort of both types of transactions. I definitely think there are more venerable-like deals out there. But I also think that there are – there's going to be just straight blocks that are available for reinsurance as well that are just fixed block. So I think – and I would say based on sort of discussions that we've been having, it looks like it's going to be a pretty active year. Tom Gallagher Okay, thanks.

[Operator:]

The next question will come from Ryan Krueger of KBW. Please go ahead. Ryan Krueger Hi, thanks, good morning. Could you help us think a little bit more about other liability costs? If we exclude the equity market impacts, it was kind of in the 135 basis point range in 2017, and you said it would be higher in 2018. But any kind of more guidance around how much higher that could be would be helpful? Marty Klein I’m sorry, Ryan, how much higher it would be? Ryan Krueger And just how to think about the potential magnitude of the increase in other liability costs that you're expecting in 2018. Marty Klein Well, yes, we saw, obviously, a big benefit throughout many of the quarters in 2017. Frankly, the fourth quarter where, I think, the S&P was up a little over 6%. So in times where – in quarters where the equity markets are going up 1.5% to 2%, that's kind of in the ballpark of what our reserving natural assumptions are per quarter. So if you have significant equity market growth ahead of that, that's where we'll begin to see the benefit because then account values tend to grow there more quickly than what is in our models, and so we benefit in the rider reserves and so forth. So we try to call out. Obviously, if you look at the magnitude of the overall S&P in 2017, this was like 20% or something like that, obviously, a pretty good year in the equity markets. And so that’s why we try to call it, I wouldn't expect that to repeat. So if the market is more of a normal – normalized 5.6%, 6% on price and excluding dividends on price depreciation, then I think you're not going to see any equity market impact, and that's kind of the guidance we gave for 2018. If you see a lift in the equity markets over that, that's when you begin to see some benefit the liability costs. Ryan Krueger Got it, all right. So you're not necessarily saying you're expecting an increase outside of the equity market impact. It's more just the normalization from the equity market, it sounds like? Marty Klein That’s right, that’s right. Obviously, the dollars of other liability costs are increasing because our other liabilities are increasing as we're growing. But as a percentage, I think that's right. It's expected to be relatively stable, and it bounces around for that equity market dynamic we talked about. Ryan Krueger Understood. And then on your comments on the slightly higher consolidated fixed income yield, did you assume any further increase in short-term interest rates in that comment? Marty Klein Yes, there’s certainly a bit of that, absolutely, as we think about going forward. And if you think about just what's happening here in the first quarter, varying market rise in interest rates, which helps us both in our operating earnings. It also helps us a lot in, I think, in the markets over time and makes fixed products, fixed annuities look that much more attractive. But I think that's in there, but I think the biggest – a big part of it is we have $6 billion of assets from the German business that are deconsolidating. And obviously, given where German interest rates are and the euro, that's pretty low-yielding stuff in dollar terms. And so that rolls off, that will be a bit of a decrease. We also have the Voya assets coming on, which, middle of the year, second or third quarter, once we close that deal, have about $19 billion. In those assets, which Jim and the team will redeploy over the next year or two, will perform a lot better, but initially, when they come on, they're not going to be the highest-yielding kind of assets. Ryan Krueger Okay, thank you.

[Operator:]

The next question will be from Suneet Kamath of Citi. Please go ahead. Suneet Kamath Thanks. I just want to go back to the tax rate for a second. I'm not sure I understand the difference between the 14% to 15% for 2018 and then the estimated overall tax rate of 12% to 16%. So can you just help me think through that? Marty Klein Sure, absolutely. So we don't know, ultimately, if it's net or gross with respect to how the BEAT will be applied. And so that creates a bit of the uncertainty in the tax rate range. If it's – so we think the overall range is going to be in or between 12 on the low side and 16 on the high side. If it ends up being net, as we've said before, we think that the tax rate will be, call it, 12% to 13% in the absence of any other mitigating actions. So it'll be on the low end. If it ends up being gross, the actions we're taking and we plan to take would put us on the higher end of that 15% to 16%. So basically, that 12% to 16% range kind of is the range for both scenarios. 12% to 13%, if it's net. It'll be on the higher side if it ends up being gross, given the actions that we're taking. In our financial statements, until there's clarity, we'll be accruing at that kind of higher level. And soon as there is clarity, then obviously, we and others will kind of make the adjustments in the financials. But until there's clarity, we'll be accruing tax at that kind of higher level sort of assuming that it trips to the gross outcome. If it ends up being net, that will be a good guy for tax, obviously, from what we've been assuming in the financials. Suneet Kamath Okay, got it. And then just on your comments about the lockup issue, I guess, given the strength of your excess capital position and, frankly, the amount of capital that you're generating, would you consider using some of that excess capital to absorb some of the shares that might be for sale through some sort of share repurchase activity? Marty Klein We want to do the best thing for shareholders over to, but we do think we're a growth company. We think – I don't want to comment too much on the share price, but I think maybe, perhaps, the uncertainty on tax and maybe the overhang of lockups has put a bit of a decrease on it. So those are temporary phenomenons, and I think we feel very good our ability to deal with both those things over time and continue to grow at very attractive rates. So we really don't anticipate buying back any shares in the near-term. I think we feel very good about our organic growth capabilities for this year going forward. Even with tax reform, we think it's going to have – not have a big impact, if anything, really on our overall volume. And we also feel very good, as Bill has said, about what we can do inorganically. We think there's a lot of other deals to be done out there, and we want to make sure we have the right dry powder for it. And we think that will be the better returns for shareholders over time. Suneet Kamath All right, thanks Marty.

[Operator:]

The next question will be from Mark Hughes of SunTrust. Please go ahead. Mark Hughes Yes, thank you. Good morning. You guided increased liability outflows this year. And it seems like your experience lately on that has actually been quite good. Is there any sort of a step function in terms of the aging of the block that is influencing that? Or is that more of a pro forma comment and if you really do think it's going to increase any sense of the magnitude? Bill Wheeler Mark. It's Bill. So look, we look at the aging of the block, the cohort of business that is coming off, surrender charge because, as you know, when a block becomes – or years worth of production finally ages to the point where the surrender charges go over, there's generally some kind of shock lapse. And the good news this year is we did see – we expected to see an increase in lapses because of this cohort of business that was aging out, but the truth is that lapse experience was lower than we had assumed, which is good. It was still up a little bit year-over-year, we're sort of in, I would say, the high end of these last few years of the business that was written a decade ago by predecessor companies where they're finally coming off of surrender charge. So we expect to see another tick-up this year. And with higher rates, maybe we'll see a little bit more lapse experience that we did. But this is all sort of planned for in our models and stuff like that and where we think earnings are going to be. All of this is very controllable relative to what else is going on inside of Athene in terms of balance sheet growth. So it's – the good news is that the experience is just what we expected. It's actually a little better. Mark Hughes Thank you.

[Operator:]

The next question will be from John Barnidge of Sandler O'Neill. Please go ahead. John Barnidge Thank you. One question. How are you seeing buyer behavior changing in the retail space so far this year, whether it be from tax reform, more savings or volatility in the financial markets in the last several weeks? Bill Wheeler I don't have a good answer for you yet other than that the – in our mind, the market looks similar to what it did in the fourth quarter in that conditions are a little tight. Annuity market dropped. I haven't seen the fourth quarter number that yet, but there'll be – the annuity market dropped almost 10% last year in fixed annuities. And obviously, VA has dropped even more. I think – and I think a lot of that had to do with a very strong stock market. And so I think this little hiccup we had a little bit ago with the spike in volatility and the sudden drop in the stock market, I just think that has a way of reminding consumers, oh, yes, you can lose money in the stock market. And oh, yes, maybe annuity makes sense because especially when you're talking about your retirement savings because you're principal protected. And so I think that would – I suspect that a little hiccup in the market probably is good for annuity sales, but it's just too early to draw any conclusions. John Barnidge And then my other question about market dynamics. With the internal control charge on pension risk transfers, has that changed the market dynamics at all? I mean, I know it's relatively recent, but is there anything you could offer that would be great? Thank you. Bill Wheeler Too early to tell, honestly. I think a lot of things will drive the market just besides that issue. There continues to be a lot of reasons why people want to close out their own pension plan, which they no longer use as an employee benefit. And given where interest rates are and what's happened with the equity markets in recent years, I just think – I think those factors are going to continue to really drive the activity in that market. And last year was a very good pension close that year, and I would just say based on visible pipeline, we think this year is going to be probably better. John Barnidge Great, thank you.

[Operator:]

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back to Paige Hart for closing remarks.

[Paige Hart:]

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

[Operator:]

Thank you. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation at this time, you may disconnect your lines.