Paige Hart – Director-Investor Relations Jim Belardi – Chairman and Chief Executive Officer Bill Wheeler – President Marty Klein – Chief Financial Officer.

Ryan Krueger – KBW Suneet Kamath – Citi Sean Dargan – Wells Fargo Securities Erik Bass – Autonomous Research John Barnidge – Sandler O'Neill John Nadel – UBS Tom Gallagher – Evercore Alex Scott – Goldman Sachs.

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. This call is being recorded. I will now turn the call over to Paige Hart. Ms.

Hart, you may begin..

Thanks, Denise. Good morning, everyone, and welcome to Athene's Conference Call to discuss First Quarter 2018 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 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.

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, www.sec.gov. An audio replay will be available on our website shortly after today's call.

Also, 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..

Thank you, Paige, and welcome to our first quarter 2018 earnings call, which will highlight that Athene continues to generate best-in-class operating performance. We founded Athene to be different from the typical life insurance company, and we approached each aspect of our business model with a differentiated mindset.

Our ability to generate attractive returns for shareholders is a function of our ability to optimize the components of our spread-based business model, asset-yield, cost of funds and operating expenses. We are steadfast in our pricing discipline and prioritize economics over growth for growth's sake.

Our unwavering focus on profitability has served us well. In the first quarter, we produced $247 million of Retirement Services adjusted operating income, ex notables, a 10% increase over Q1 2017. We generated an 18.2% adjusted operating ROE, ex notables, in our Retirement Services segment and grew our adjusted book value per share by 18% to $40.66.

We sourced $2.1 billion of organic deposits, an increase of 7% over Q1 2017 and, importantly, priced this business to mid-teens returns. This brings our portfolio of in- force liability to $76 billion. We have powerful earnings and growth momentum going forward.

The closing of the Voya transaction will bring our invested assets to approximately $100 billion. We will quickly redeploy appropriate parts of that asset portfolio in a disciplined and efficient process that will add to our earnings power.

Our floating rate asset portfolio produced an additional $21 million of income compared to Q1 2017 and will produce larger income increases as more of that portfolio resets to current short-term rate levels. We embrace volatility and dislocation because we have the capital, knowledge and experience to take advantage of those situations.

We have approximately $2 billion of excess equity capital. Our in-force liability has produced enough earnings to fund our organic growth, and we have limited interest expense, with only an 11% debt-to-capital ratio. Our balance sheet is very clean with no legacy issues and no exposure to long-term care or variable annuity.

Our M&A and inorganic pipeline is more robust than ever before, with household name financial services and insurance companies looking to restructure the balance sheet.

The tax reform bill does not impact all of our distribution channels equally, and business conducted directly between our Bermuda subsidiaries and the third party will not be subject to the BEAT. In addition, we have taken steps, which will further mitigate the impact of tax reform.

Therefore, we expect to maintain a significant tax rate advantage, and we plan to continue to grow very profitably. 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..

Thanks, Jim. In the first quarter of 2018, we executed against our goals of growth and diversification while maintaining our strong pricing discipline on both new premiums and in-force liabilities.

Our large in-force block produces a steady and significant base of earnings, which we expect to generate sustainable spreads and returns over its approximate nine year weighted average life.

Across all of our organic channels, we evaluate the profitability of new business versus alternative uses such as inorganic growth and expansion into new product lines and liability types.

The advantage of our multi-channel distribution platform is that to the extent one channel is mispriced, we maintain the flexibility to pivot and deploy into a channel that offers a better return proposition. Despite increased competition within the annuity markets, our model enables us to continue to profitably source liabilities.

In the first quarter, we generated new deposits of $2.1 billion, an increase of 7% over the prior year. In our retail business, in the first quarter, we generated sales of approximately $1.3 billion, an increase of 17% from the prior year, as a result of our expanded product suite and increased number of distribution relationships.

The return of premium product that we launched in the fourth quarter, which is designed for financial institutions, with a particular focus on gaining share in the bank distribution channel, has exceeded our expectations.

In the first quarter, sales from our bank channel were more than three times greater than the prior year as we continue to sign new bank partners. We have established ourselves as a market leader in the fixed annuity market, and we continue to gain market share.

We remain one of the largest and fastest-growing riders of fixed indexed annuities that have been the Number 2, rider of FIAs for the 18 months ended December 31, according to LIMRA.

We continue to view fixed and indexed – fixed indexed annuities as a significant organic growth opportunity and believe 2018 will be a good year for this market with a combination of rising rates and reduced regulatory burdens against the backdrop of shifting demographics. Turning to our flow reinsurance business.

We generated new deposits of $204 million in the first quarter, an increase of 23% from the prior year. While flows remain under pressure, we continue to see improvement and are confident that in time, this channel will again be a significant source of deposits.

We are broadening our scope of products for our reinsurance clients, shifting away from MIGAs to FIAs, which have larger spreads, and we have a strong pipeline of potential new partners. Moving to our institutional channel. We generated $566 million of new deposits in the first quarter.

With regard to funding agreements, we issued a total of $300 million in the first quarter. While this is lower than the prior year, it is consistent with the overall market, which had a 24% drop in issuance from the previous year.

We are always monitoring for opportunities to issue in the strong demand to achieve our target returns and expect to be a consistent issuer in this market but will not sacrifice our pricing discipline. In the pension risk transfer market, in the first quarter, we generated $266 million of new deposits.

The first quarter is typically seasonally light in deal closings for the PRT market. We continue to see a robust pipeline of deals and are actively involved in a number of other bidding processes and expect 2018 to be another strong year for us in this channel. In fact, last week, we won another deal, bringing our total number of deals one to six.

Turning to our inorganic channel. We continue to work closely with Voya and remain confident the deal will close in the second or third quarter of this year. We continue to pursue opportunistic acquisitions and block transactions as they are a key part of our strategy.

The deal environment is picking up as the restructuring trend in the insurance industry continues. We will remain disciplined in the transactions that we pursue, as we demonstrated in 2017 with the deals we did and did not do, evaluating each opportunity in the scope of our strategic priorities.

Given our expertise and balance sheet strength, we are well positioned to take advantage of attractive market opportunities to generate shareholder value. Turning to our liability profile. As of March 31, 2018, our reserve liabilities, excluding Germany, increased by $9 billion from the prior year to $76 billion.

We believe we conservatively underwrite our liabilities, and the expansion of our institutional channel diversifies our liability risk and increases the persistency and predictability of our overall liability profile. All of our funding agreements, PRT and payout annuities are nonsurrenderable, meaning they have no lapse risk.

As of March 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. Our diversified model allows us to focus on the lines of business that offer the most compelling returns.

And with our balance sheet strength, successful business model and conservative capital structure, we are confident in our ability to continue executing effectively. Now I'm going to turn the call back over to Jim, who will review our investment portfolio in more detail. .

bespoke trades such as the $1.1 billion non-agency RMBS transaction we did in 2016 and strategic relationships with origination vehicles. The wave of passive money that has entered the CUSIP-based fixed income space has materially degraded the risk return proposition of claims in other security.

We will continue to make concerted effort to fight the tide by investing in vehicles such as MidCap and AmeriHome, which provide directly originated asset flow for Athene. We expect to own more asset originators in our alternatives portfolio.

Our 5% allocation to alternatives, while in line with the industry, is differentiated through its high degree of downside protection as we prioritize cash flow and pull-to-par nonbinary outcome investments. We have been very successful in sourcing sizable new commitments both last year and this year.

Within our Retirement Services segment, our alternatives portfolio returned 12.3% in the first quarter. MidCap and AmeriHome returned 11.8% and 13.8%, respectively.

As we analyze the market today and assess potential headwinds and tailwinds going forward, we see a number of trends that could have a significant impact on our business, including increased volatility in a tight spread environment.

We continue to opportunistically derisk our portfolio of corporate debt and favor moving up in quality, increasing allocations to defensive sectors so that we may capitalize on opportunities that arise from post-event risk or headline volatility.

Corporate privates, which comprise 13% of our portfolio, delivered a yield premium to public corporates and have superior covenants. We purchased over $1 billion of privates in Q1. Our investments are heavily weighted towards stable, more noncyclical industries and are very diversified by creditor risk.

Approximately half of our privates are secured by assets or collateral. Structured securities, 31% of our portfolio, provide us with attractive yields, downside protection, are highly weighted and very capital efficient. Asset-backed securities continue to be an area of focus for us. 94% of our holdings are rated investment grade.

Most of our transactions are in home loan securitizations and aircraft. We expect to significantly increase volumes in this space in 2018. In our commercial mortgage loan portfolio, we prefer lower leverage transactions in both first lien and mezzanine loans.

On an ongoing basis, we subject our entire portfolio to both moderate and severe stress scenarios analysis, including mark-to-market and other than temporary impairment impacts. As a reminder, at Athene, we believe that market instability benefits our business, and we welcome it.

Periods of market volatility are the most active periods of investment for Athene, during which we leverage our collective expertise to find areas of the market that offer compelling risk return profiles.

While we've proven our ability to perform in today's benign markets, we remain focused on maintaining ample capital and liquidity to allow us to achieve future outperformance when a market opportunity arises. Now Marty will review our financial performance and strong balance sheet..

Thanks, Jim and good morning, everybody. In the first quarter, we again delivered strong performance and further strengthened our balance sheet and capital position.

For the first quarter, net income was $268 million or $1.36 per diluted share, while adjusted operating income was $237 million or $1.21 per adjusted operating share, generating an adjusted operating ROE of 12.1%.

Adjusting for notable items, adjusted operating income increased to $249 million and, within Retirement Services, increased to $247 million, resulting in an adjusted operating ROE of 18.2%.

Notable items included $14 million of unfavorable rider reserves and DAC amortization this quarter due to equity market performance, compared with a $40 million benefit in the prior year. Additionally, the prior year had a favorable $14 million of proceeds from a bond previously written down.

As we discussed previously, when equity market performance deviates from our expectations, our operating earnings can be impacted in the period in two ways.

First, as growth in policyholders’ account values is different than expected due to the level of indexed credits, more or less of the associated rider benefits are funded by their account values, which impacts the change in rider reserves.

Second, with the change in account value being different than expected, we recognize an increase or a decrease in invested assets and related income, which impacts the pattern of rider reserve change and DAC amortization. In general, we assume a long-term equity market return of approximately 6% annually.

With the equity market pressure in the first quarter of 2018, the markets underperformed this long-term expectation by approximately 3%.

In our Retirement Services segment, investment income, excluding notable items, increased by $100 million due to invested asset growth of $8.9 billion as well as higher short-term interest rates, which increased floating rate investment income by $21 million.

If rates remain at current levels, we would expect additional income from floating rate investments of approximately a $45 million for the balance of this year with a slightly increasing pattern, given that a significant portion of the portfolio did not reach that in the first quarter.

Our net investment earned rate for the quarter was 4.63%, down four basis points from the prior year, driven by a six basis points drag or about $10 million on our net investment earned rate due to an elevated level of cash in the portfolio. As you know, we had a significant amount of new deposits in the fourth quarter 2017, mainly from PRT deals.

And we also raised $1 billion of debt in the first quarter 2018, both of which increased our average cash level throughout the quarter. With the subsequent increase in yields this quarter, we have been deploying that cash at higher rates.

The alternatives portfolio yielded an annualized net investment earned rate of 12.34% in the quarter versus 10.59% in the prior year. Results in the quarter were driven by strong performance in both MidCap and AmeriHome as well as an increased valuation on a fund investment.

Our cost of crediting was 1.87%, 4 basis points lower than the prior year, as a result of rate actions on business that renewed in 2017. While market volatility and short-term interest rates have risen this quarter, the impact on our cost of crediting was insignificant.

To the extent market volatility and short-term interest rates remain at these levels and absent any management rate actions, we may begin to see a gradual and modest increase in the quarterly cost of crediting of three to five basis points for the full year.

Our investment margin on deferred annuities for the quarter was 2.76%, resulting from our diligent management on both sides of the balance sheet. Results in Retirement Services in the quarter reflected a higher tax rate of about 14.3% or $39 million.

This compares to income tax of $9 million in the first quarter 2017 as well as $12 million of excise tax in that quarter, which was reflected in other liability costs. I'll discuss tax reform impact shortly. Turning to Corporate and Other. Adjusted operating income was $2 million in the quarter.

I'll note that on January 1, we've deconsolidated our German subsidiaries, collectively known as AGER, whose results were included in the prior year's quarter.

Excluding Germany, the increase in our Corporate segment was $8 million, driven by higher fixed and other investment income, primarily related to debt proceeds and favorable alternative performance, partially offset by debt costs.

Note that when we close the Voya fixed annuity reinsurance transaction, we'll contribute the majority of debt proceeds into our operating subsidiaries, which will be reinsuring the business, and so prospective earnings on that capital will then be on our Retirement Services segment. Turning to our strong capital position.

At quarter end, adjusted shareholders' equity increased 18% to $8 billion. We have approximately $2 billion of excess capital, which we expect will contribute to our growth and ratings improvement over time.

In January, we completed our inaugural debt financing of $1 billion, which should effectively replenish the capital deployed for the impending Voya transaction. Turning to our capital ratios. At quarter end, our Athene Life reinsurance estimated RBC ratio was strong at 557% and our U.S.

RBC ratio was also very strong at 478%, both figures well above our 400% threshold. So to wrap up for the first quarter, we delivered strong operating and financial results.

We expect continued earnings momentum this year benefiting from increased income from floating rate assets, deployment of our cash balances and the closing of the Voya transaction. We're excited about both our near and longer-term prospects as well as our ability to produce growth at an attractive return on equity.

I'll now discuss three different topics. First, an adjustment we've made to some non-GAAP measures, followed by tax reform and its impact on our results and finally, an update on the Voya fixed annuity reinsurance transaction.

Starting this quarter, we've made an adjustment to our view of equity metrics previously referred to as ROE excluding AOCI, adjusted operating ROE excluding AOCI and book value per share.

In order to better analyze our business growth and profitability, we have excluded AOCI not only from our equity, but now have also excluded the cumulative impacts of our assumed reinsurance unrealized gains and losses. At the end of the first quarter 2018, reinsurance gains were $107 million.

These impacts are consistent with the market volatility included in AOCI, except that volatility is reported in our net income. These metrics are now referred to as adjusted ROE, adjusted operating ROE and adjusted book value per share, and updated reconciliations can be found in our quarterly financial supplement.

As a reminder, we adjust for the economic guidance, which introduce volatility period-over-period as it fluctuates in a manner we do not believe is consistent with our underlying profitability.

We typically buy and hold these available-for-sale investments to maturity throughout the duration of market fluctuations and therefore, the volatility created is not indicative of our operating drivers. We have retroactively applied this change to our management metrics for comparability purposes. Turning now to tax reform.

As a reminder, the tax act reduced the corporate income tax rate and also imposes a new Global Minimum Tax referred to as the BEAT or Base Erosion and Anti-abuse Tax. We continue to believe the BEAT was intended to apply to the net reinsurance settlement payments from our U.S. affiliates to our Bermuda affiliates as they are not subject to U.S.

income tax. But we recognize there was uncertainty as to its application. We currently anticipate our quarterly results in 2018 will reflect an overall tax rate on adjusted operating income of 14% to 15%. During the first quarter, our overall tax rate on adjusted operating income was14.3%.

Clarity on the application of BEAT to net settlement payments drive down our tax rate from these levels. In addition, we are evaluating actions which would decrease the tax rate further to be closer to our previous tax rates, whether or not the BEAT is on net payments. We expect to provide an updated tax reform impact later this year.

I'll note that the entirety of our tax expense this quarter is now reflected in the tax line of our income statement, and we expect that to continue until there is more clarity in the BEAT and in our potential actions.

Previously, we had some tax expense reflected in other liability costs, reflecting the 1% excise tax we paid, which, in 2017, was approximately $50 million. Importantly, the tax rate changes had no material impact in our statutory capital and our current RBC ratios. Next, I'll provide an update on the Voya reinsurance transaction.

As previously disclosed, we expect the transaction to close in the second or third quarter this year.

Depending on the exact date, after the deal closes, we currently anticipate recognizing an increase in adjusted operating income of $20 million to $25 million per quarter in 2018 and an increase in full year 2018 of $100 million to $110 million, which is expected to reflect an increasing pattern by quarter as we redeploy the invested asset.

The increase in interest rates since the Voya transaction was announced should enhance the benefit we expect to receive from the redeployment of assets.

Additionally, the increase in rates has led to a decrease in the fair value of invested assets, which may result in an increase in the amount of Athene's excess capital deployed and inception when the transaction closes.

Our outlook for the Voya transaction and net earnings over the next few years has improved since we announced the deal, and we're excited to close the transaction soon. We'll provide another update on our second quarter earnings call. Before I wrap up, let me discuss our expectations for 2018.

We continue to expect our organic channels to generate new deposits in excess of the $11.5 billion produced in 2017, significantly exceeding expected liability outflows of approximately 8% to 10% of average reserve liabilities, driving asset growth in 2018.

As we stated before, 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 deposits mix are not necessarily indicative of the strength of our business. Turning to our investment portfolio.

We expect consolidated fixed and other income years to be slightly higher in 2017, benefiting from the deconsolidation of our $6 billion of German invested assets, offset by midyear onboarding of Voya assets, which have lowered in years.

Our floating rate securities are 22% of our investment portfolio, which is lower than the 28% reported in the prior quarter. This change is merely due to a refinement in our definition to only include short-duration securities that are directly tied or linked to an index.

This refinement in definition does not impact our estimate of income sensitivity to interest rate moves, and we continue to estimate an additional $25 million to $30 million of adjusted operating income for every 25 basis points parallel change in interest rates.

With respect to our alternative investments, we expect to meaningfully increase our dollars invested to maintain a 5% to 6% allocation, including the Voya assets, which we'll redeploy.

For 2018, we expect that alternatives on our Retirement Services segment will return approximately 10% for the remainder of the year, and of course, these returns will likely vary by quarter.

Other liability costs within Retirement Services, details of which you can find on Page 11 of our earnings presentation, are expected to be approximately 1.35% to 1.45% of average invested assets in 2018. And as I've stated before, excise tax is no longer included in this line item this quarter and going forward this year.

In summary, we continue to execute on our key operating and financial objectives. 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..

Thanks, Marty. We will now begin the question-and-answer portion of the call. [Operator Instructions] Denise, we'll now open up the line for questions..

Thank you. [Operator Instructions] And your question will be from Ryan Krueger of KBW. Please go ahead..

Hi, thanks. Good morning. First, just hope we can clarify the Voya guidance relative to your prior expectation. I guess – and you've previously given 2020 guidance.

Can you help us think about what that $110 million – $100 million to $110 million will be in 2020 and how that compares to what you originally expected?.

Yes. I think, Ryan, that we gave guidance that was kind of, I think, 7% to 9% lift in income in 2018. And I'd expect that roughly to be the case. Obviously, the rising interest rates, our income expectations for 2020 are a little bit higher. But our expectations in earnings on the Voya transaction will be higher.

So I kind of expect the 2020 relative numbers we gave to generally hold about the same. But we want to give a little bit more guidance on the periods before that this year and for 2019 as well because people were trying to understand that better..

Got it, thanks. And then can you guys just generally give an update on the transaction environment, I know you've mentioned it was pretty good.

And has it improved with the 10-year now getting close to 3%?.

I think that's part of it, I think that to the extent that these liabilities are sort of off-market and have to be marked in a transaction or reinsurance deal that the charge that a company will have to take it smaller. So the pain is a little less.

And so I think that's part of why you're seeing more people coming to market with blocks this year than we have in previous years. I would just say, overall I think – and I think a lot of this has to do with the Voya deal.

Voya clearly got rewarded by the market or announcing a restructuring of its balance sheet and I think that has – a lot of management teams have noticed that, and they're considering the same sorts of things, to restructure, get a better market valuation and move forward. And we should be a big beneficiary of that activity..

Great, thanks a lot..

The next question will be from Suneet Kamath of Citi. Please go ahead..

Thanks. Just a question on the outlook for deposits and flows. Just trying to quickly do the math based on your business outlook guidance slide.

But can you just talk about your expectations for net flows in 2018 and how they compare to 2017, excluding the Voya transaction?.

Sure. So there's a couple of pieces to this. We've said a number of times that we expect overall gross deposits to be up year-over-year and that is still the case. What's happening with regard to lapses, lapses are up, but that was always in our expectation and plan. The cohort of business 10 years ago – or there was a spike in new sales.

And so what you're seeing is a significantly larger cohort of business coming off lapse charge and – or surrender charge. So when that happens, you're always going to have higher lapses, and so that's been baked into our model. Interestingly, lapses are a little below our model – our financial expectations, which is good.

So I would say that, overall, we think that outflows this year for liabilities – for our existing book, almost all of which is fixed annuities, will sort of be roughly 8% to 10% of average reserve liabilities for 2016, okay? So I think that will give you a sense of how you get to a net flow number..

Okay, got it. And then, I guess, for Jim, on the investment portfolio. If we just kind of look at kind of what's been changing over time, it does look like the ABS asset classes has increased certainly relative to a couple of years ago, and I think you mentioned that in your prepared remarks.

So any color in terms of what you're buying there? And then also, you had mentioned potentially thinking about an asset origination investment. What sort of amount of capital would you be willing to kind of contribute to something like that? Thanks..

Yes, sure. So on the asset backs, yes, we had a record year in buying those last year, and we're off to an even better start this year. So we think there'll be significant growth in that area.

I mentioned in my remarks, the whole loan securitizations and aircraft are the two predominant areas that we're – we have bought and continue to look at, although we look at a lot of different things across a lot of different sectors. But those are the two most plentiful ones that we've done.

Asset originators, if you take a step back, we really have four right now. Akin to our four organic or our four channels on the liability side, we have three organic, U.S. retail, flow reinsurance and wholesale and then one inorganic. On the asset side, we have four as well.

We have Athene Asset Management, we have Apollo, we have MidCap and we have AmeriHome. And the last two in particular have served us well, given that it's been a nice appreciating equity story for our investment as well as they source assets for our balance sheet, and we'd like to do more of that.

How much capital will be deployed though, like we would look at it, even though it would be categorized on our balance sheet as an alternative like wholesale – like AmeriHome and MidCap are. We would analyze it like any acquisition Athene Holding makes. We would not plan to have any of these things consolidated just like AmeriHome and MidCap are not.

But in normal metrics of risk return, ROE, et cetera, would all factor into what we buy plus the prospects, the sourcing things for our balance sheet, and that's an important ingredient as well..

Okay, thanks..

The next question will be from Sean Dargan of Wells Fargo Securities. Please go ahead..

Hi, I have a question about the decision-making process with capital allocation. You're sitting on $2 billion of excess capital. I'm sure that the shares are trading below what you think intrinsic value is.

Is there any chance you'd ask the board for a share repurchase authorization?.

Yes. Sean. It's Marty. Yes, I think that we want that flexibility to do that. So I think that's something we'll work with our board on. But as we've said in the past, we feel very good and I think that, even Bill commented on this, so the pipeline we see is as really, frankly, more robust than we've really ever seen the last couple of years.

So we're very mindful of that, and we feel like the best thing for our shareholders is to put that capital to work. We feel pretty good about our ability to do that. We're also mindful it would be odd to buy back shares and then have to raise equity capital if we had to do a large transaction.

But yes, we want to do the right thing for shareholders over time, and we certainly want to create that flexibility and so that we have the ability to do that at the right point in time. So while we're going to look for that flexibility from our board, we wouldn't anticipate really doing that anytime in the near-term.

We wouldn't anticipate buying back shares anytime in the near-term..

Okay. And then just for modeling purposes, the alternative allocation of 5%, what's the denominator we should be using? Because if I would just look at the average total invested assets, it was closer to 4%, the way that I'm calculating it in the first quarter..

We want it to be 5% and we're trying to grow it to 6%. But obviously, we're growing pretty rapidly and ultimately will come in levelly with the growth that we have.

So we expect to be 5% to 6% this year, but depending on the growth we have and volume and withdrawals vary a bit quarter-to-quarter, and the way it also varies quarter-to-quarter, we're underwriting very prudently and they come in sometimes in a very chunky way. So it's going to be hard to calibrate it and have it be exactly 5%.

But I'd say, Sean, that we expect to be 5% and hopefully closer to 6% over the course of this year..

But invested assets is the appropriate denominator..

Correct..

Okay.

So it's average invested assets over the quarter?.

Yes. I think that's a way to look at it. Average – also our average invested assets beginning of the period, end of period, also ending period invested assets, all those are good measures..

Okay, thanks..

The next question will be from Erik Bass of Autonomous Research. Please go ahead..

Hi, thank you. Can you provide some additional details around the decline in your fixed income yield in retirement this quarter and where you expect this to trend going forward? And I realize the cash drag was part of the story this quarter.

But is the yield on the fixed rate portfolio just coming down faster than the floating rate yields that's been resetting recently?.

Erik, are you referencing sequential or other….

Yes, I was looking at sequentially..

Sure. So sequentially, a couple of things, one of which you mentioned. I think we had a cash drag, which we called out, which was like six basis points, and it's like $10 million. The other thing, we don't typically call this out unless it's very, very extreme.

But we had a bit higher level of prepayments in the fourth quarter and more than we usually have, not extremely more as we would call it out. In this quarter, we had a little bit less, not surprised as rates are going up.

So I think the other thing, and that was probably worth another five, six basis points, maybe seven basis points, so just a relative difference in prepayments. Then, I think, on the go forward, I think that the things to think about is we strive to be fully invested in cash.

So we'd expect and hope that we wouldn't have that six basis point cash drag going forward. So I think you could kind of think prospectively about adjusting for that. And then the other thing, as I mentioned in my remarks, and Jim mentioned this as well, our floaters have a bit of a lag effect.

So there's a bit of a catch-up that we expect over the next few quarters this year, which, I think, we're going to have additional income over the course of the rest of the next few quarters of about $45 million. So we should kind of think about that as well prospectively..

And the only thing I'd add is that our on-the-margin net earned rate, the asset yield we use to price new business, has been – given the absolute level of rates increasing, has been consistently going higher this calendar year. It still rests slightly below the existing snapshot yield on the total portfolio, but it's getting pretty close.

And much more of a kick up will then start increasing the overall yield of the existing portfolio..

Got it, thank you. That's helpful. And then second was just if you could reconcile your guidance for other liability costs going forward with the historical results. In 2017, I think it was about 113 basis points for the year, but that included the $50 million of excise tax.

So is the delta versus your guidance, is it primarily the equity market? Or is it also that the costs of your institutional growth are just starting to come through in a more material way?.

It's actually both those. So we benefited a lot last year, Erik, by – if you recall, every quarter was pretty much – or equity markets were up to the races. And so we benefited in our operating income in every quarter.

We have kind of called out that amount of benefit, which really helps to reduce other liability costs, which isn't normally what we'd expect. So at 135% to 145% guidance we gave for this year kind of assumes typically normal, if you will, equity markets of maybe roughly 6% a year. So that's part of it.

And the other part of it is, yes, you're right, in other liability costs are interest credited on our institutional businesses in there. That business, we really launched in both PRT and fund agreements in a big way last year. But really, at the start of the year, we had hardly anything institutional and it's a growing business.

We had trying the success, about $500 million of institutional business last year. So that cost of crediting is now in and it was in other liability costs. But obviously, as a percent of assets, that's going to be a large and larger and growing number..

Got it. And then, I mean, as we think forward kind of beyond this year, I would assume your equity market assumption stays consistent.

But with the other liability cost percentage trend up as institutional grows further or would it sort of – at these levels?.

Yes, that’s right. The other costs stay relatively a portion of the overall balance sheet. But that piece – the piece that's related to interest crediting institutional, it's really going to grow proportionally to the way our institutional business grows.

And that's going to grow at a faster clip than the overall balance sheet just because that's – we're riding the chunk of business fairly these days. Historically, we wrote everything pretty much in fixed annuities and fixed indexed annuities.

So that will grow and I suspect to be a larger percent next year and the year after, kind of in line with how much institutional business we write..

Got it, thank you. That’s helpful..

The next question will be from John Barnidge of Sandler O'Neill. Please go ahead..

Thank you.

A question, why were the floating rates so weak given the – sorry, non-floating rates so weak given the deconsolidation of Athora given Athora is invested in very low-yielding securities?.

Well, if you look at Retirement Services, they're down a bit sequentially as we just talked about. And the reasons, as we just talked about earlier that kind of cash drag of, call it, six basis points.

And then also, the prepayment difference, which will be a bit more prepayments than we typically might expect in the fourth quarter, a little bit less than the first quarter this year, and that swing is probably worth five to six basis points. So other than that, I think we're relatively close.

Floating rate income first quarter versus fourth quarter was a few million dollars higher. There's a big lag effect that we have because we have a lot of our portfolio, and most of it is in one and three-month LIBOR. But there's a pretty decent chunk, almost 20%, that's also in six months and one-year resets.

So when you think about what happened during the first quarter, interest rates in LIBOR certainly went up. But in our one-month resets, most of that benefited but not all of it. But a lot of our three-month LIBOR resets didn’t really reset yet. We expect that to resetting in the second quarter and thereafter.

And similarly, the six-month and one-year resets, there's a big lag effect there. So the increase in interest rates in the first quarter wasn't really fully felt. It literally – it was about just a few million dollars higher in floating income quarter-over-quarter..

The only thing I would add is, remember, Athora is not in the yields in Retirement Services, right? The investment income there is reported in Corporate and Other in case you were wondering if – why it doesn't show up there?.

Okay, that is useful.

And then as you're growing your nonretail business, obviously, retail is growing as well, but if there is now a higher percentage of income not subject to the BEAT versus Q4, does that mean the tax rate possibly could come in lower than the 14% to 15% in 2019 in your opinion?.

Yes, the 14% to 15% is kind of our expectation for the mix of income that we have in U.S. and taxable enterprises versus nontaxable. That does move around quite a lot quarter-to-quarter with the variability and volatility we have in respect of income in each of those jurisdictions.

So it could bounce around, could be above that in some quarters as we have more U.S. sourced income and it could be – go less, but it would kind of expect 14% to 15% this year. Over time, as we do more and more kind of offshore and direct reinsurance, that would serve to drive down the tax rate. .

Okay, thank you for your answers.

The next question will be from Jimmy Bhullar of JPMorgan. Please go ahead. Hearing no response, we'll move on to the next question from John Nadel of UBS. Please go ahead..

Hey, good morning everybody. So, just a one question to follow-up on Eric’s question about other liability costs. If we think about this quarter, 137 basis points and we make the adjustment for the $14 million you called out that – so the adjusted other liability cost is 130, you're looking at that increasing 5 to 15 basis points.

And I guess, that's a full year number, so probably a little bit more than that for the latter part of this year. I guess, two questions.

So will the onboarding of Voya have an impact on that range? And secondly, or is it more just about the idea that the institutional part of your channel tends to be more back half loaded in terms of growth?.

Yes, I think John, it's really the latter. I think that when we onboard the Voya thing, the transaction, the rider reserves and the DAC amortization aspects, which evolved or whatever you want to call it with respect to Voya, those things will be kind of comparable to our existing business.

So it's really the institutional stuff, which is really back loaded. We only did, in this quarter, a $300 million fund agreement. We were pleased to do a PRT deal. But in the PRT space, the pipeline is very back loaded. And so we'd expect to do more in really both those institutional channels in the back of the year. So it's really back loaded.

And you are right, that 135 to 140 is kind of an annual number for the year..

Yes, okay. That is helpful. And then just two more quick ones.

Can you just update us on the rating agency calendar, when you expect the agencies to go to committees? And related to that, is an upgrade from any or a couple of them part of your – or is your outlook for deposit growth, ex-Voya, dependent on any upgrades?.

It's not dependent on any upgrades. We think we certainly would like to get upgrade, we're driving hard to get upgrades. But our expectations on volume kind of assumes steady state with respect to rating.

So if we were to get ratings upgrades or outlook upgrades, that should ratings upgrades or outlook upgrades, that should only be beneficial to how we're thinking about the business. I think S&P and Fitch are both going to go to our committee later this year, S&P probably a little bit later than Fitch.

We stay in very close contact with them quarter-to-quarter and just had our annual reviews just a few months ago. But we're driving hard at where we can to get the outlook upgrades and rating upgrades, but that's not in our – baked into our expectations on volumes that we gave this year..

And last one just real quick on Athora. Can you just remind us where your ownership is currently and where it will end up when they do sort of a full drawdown of all of the capital commitments? And where in your results does that contribution come through? I assume it's in alternatives and corporate. .

Yes, it is a bit, our share now is a bit under 50%, and that will continue to shrink down to about 16% to 17% once that capital, which was EUR2.2 billion is fully drawn, so going to something that's in the 40s now, I believe, to down to 16% to 17% when it's fully drawn.

We now hold that as an alternative investment, and that alternative investment sits in our Corporate and Other segment. .

The next question will be from Tom Gallagher of Evercore. Please go ahead..

Good morning, just a few questions on the Voya accretion guidance, Marty.

The $20 million to $25 million per quarter uplift starting in 2018, does that subtract the debt cost out?.

No it does not. So that is the incremental because they're already reflecting the debt cost in our earnings. .

Yes, that was my question because you did the debt deal in 1Q.

Is that correct?.

Yes, that is right. So, much of that is already in our first quarter financial as we closed on that transaction like the second quarter of January. So it's basically almost.

Second week..

Second week of January. So we have almost a full quarter of debt cost in our current first quarter results..

So it is net of the debt..

So it is incremental, yes, it is incremental earnings..

So you had the drag at the debt caused and if we think about comparability of 1Q and then whenever the deal closes, whether it's 3Q or you get the full benefit in 4Q, you'll see – you've already had the drag of the debt cost. So we actually see more – we should see more than a $20 million to $25 million incremental earnings uplift versus 1Q run rate.

Is that the right way to think about it? And the difference would be the debt cost. .

No. If we have the debt cost now, so that's already baked in. So we did a debt deal, and that's lower 4% on $1 billion. That's in our results currently. It'll be in our results for the next 10 years. It's a 10-year debt deal. So that's already in.

So the $20 million to $25 million per quarter is when we close the transaction, at that point, earnings will incrementally go up by $20 million to $25 million..

I was just making sure that number was an earnings accretion number. And right now, you're taking the costs, but you're not gaining the benefit of the transaction yet.

So I think, if I'm understanding that correctly, for – least temporarily, we – you're least temporarily, we – you're getting hit with the expense side, but you're not yet getting any of the earnings uplift.

So in my – I think from a run rate standpoint, from 1Q, there'll be more than a $20 million to $25 million per quarter earnings uplift but adjusting -- if you follow my logic..

The two accretion from our deal, gross earnings from the deal, yes, they're obviously higher than $20 million to $25 million..

Gotcha, yes, that was my question. Okay..

Just so you understand too, and this is also in our numbers. Yes, we have the debt cost in our numbers. We're also – have that cash behind that invested, and that's basically offsetting most of the debt cost. So yes, we have that cost. It's in our financials.

We're earning on those assets that we've largely now invested close to where that debt costs are. So it's net-net not really costing us a lot..

Got it.

So it's a wash at this point?.

Well, still a wash at this point and a little bit of a drag in the first quarter because we had a cash drag we talked about. But at this point, it's basically close to a wash. We've invested close to where – maybe slightly above where that cost of funds is on that debt, and then we'll do the Voya transaction.

And when we do that, incremental to where we are now, we'll have that extra $20 million to $25 million of earnings per quarter. .

Got it and then my follow-up is the, so then it sounds like you're not expecting that to go up much. I mean, from the $20 million to $25 million, you're only saying $100 million to $110 million in 2019.

And then what is the absolute dollar of earnings accretion you expect in 2020? I know you've given out percentages, but can you give out the absolute dollar amount? And what is the difference? Like is there going to be a step-up versus this initial? And how much increment do you expect to get? And I presume it's all asset repositioning. .

By the time we get to the end of this year and early next, much of the redeployment will have happened. We think it's going to take a full 1.5 years to have that happen. So by the end of next year, we'll get to spread – the next spread up to kind of its maximum level.

But then what also happens is that business is running off, right? It's a close block, and it begins to run off. So we've got it up at kind of its maximum spread, kind of like mid to late year 2019. And then you got this situation where that business begins to just have a few percent laps each year, and so it begins to shrink modestly.

So I don't want to get too precise on 2020 other than we said before with like 7% to 9% and ROE lift of about a point. But that earnings isn't going to continue to lift when we get in 2020. I like that we have this dynamic of the business beginning to just kind of begin to slowly shrink. .

Okay, and sorry, just one last follow-up on that point. Is – but is it meaningfully higher than the $100 million or $110 million? Or is it in that vicinity, given the runoff..

When we close a transaction, later on this year, we'll give more of expectation, but I'm reticent to give a real precise guidance on things that happen out in 2020. So I'm trying to give you a sort of fair part, but it's in that ballpark of where we're going to be.

It will be at full spread, but then the business will be a little – so it's probably around $100 million, give or take a little bit in 2020, depending how the business rolls off. But we'll give more of a precise guidance on that down the road. .

The next question will be from Alex Scott of Goldman Sachs. Please go ahead..

Hi, thanks for taking the question. Yes, I guess, first question was just on the excess that you called out of $2 billion. Could you just talk about, like is that before the Voya transaction closing? Does that have any impact on it? And then any discussion around potential impact from tax reform? I know there are some in the slides.

But any kind of incremental information you could give us on like C1 or any other items that would impact that?.

Yes. On C1, the NAIC has yet to really conclude on that. It's been kind of rolling. It's going to be a next year type of thing. And that continues to be the case. My understanding is it's not going to effect until next year, probably it's the soonest, and it continues to get discussed and debated. We've done a fair amount of analysis on it.

As we've looked at it, we think the impact on us is probably relatively less than it is for most other – many of our other life insurance companies. So – and really, the way we manage our business, while we look at 400% RBC, we also look at it under the way the rating agencies look at things as well.

So we really don’t necessarily, at this point in time, expect a big impact on our – the way we look at excess capital, but we continue to monitor it. And certainly, in a relative basis, from what we see right now, we expect that impact us less than others.

On the $2 billion of excess capital, it’s kind of where we are now, and we’ll close the Voya transaction, as we’ve said before. We’d expect it to be around $1 billion of capital usage, might be a little bit more than that. Interest rates have gone up, so the asset’s coming over.

The fair value, those will be a little bit less so the capital we deploy might be a little bit higher than that. But also recall, we did the $1 billion debt transaction, which will contribute to the insurance companies.

So while we’re $2 billion now, with $1 billion or maybe a little bit more for Voya, but we’ve got the $1 billion of debt that we did that will replenish that. So we expect to be at around $2 billion after we close as well..

Okay, thanks. That’s helpful. And then the follow-up question, just on the cost of crediting and how that could drift up. One of your peers mentioned they may increase – or sorry, reduce cap rates to offset some of that. I mean, as – and you mentioned, I think, that, that wasn’t part of your 3 to 5 increase guide.

So is that something you guys are thinking about? I mean, could that be an offset?.

It absolutely could. We’ve had good success last year not only was volatility low, which helped with some cost of crediting. But the bigger factor was we took the opportunity to kind of lower our cost of crediting on – at least that’s where we could. And we continue to do that and we’ll continue to.

So I want to get that sensitivity if we did not do that but we may take that opportunity. We’re also mindful that we’re in a rising rate environment, so those opportunities may be a little bit less than they were at least, but certainly wouldn’t raise those rates. But we might take the opportunity to lower them, which would offset that.

But yes, we do see higher vol and that, I think, persists, along with higher short-term rates that cost of hedging that’s baked into our cost of crediting could go up by a few basis points that we had talked about..

And then may be….

More than offset as Jim has said many times, we like volatility and some – well, volatility may increase our cost of crediting by a few basis points. It also oftentimes, maybe most times, leads to higher credit spreads and other spreads, which is very good for our business..

And just a housekeeping item.

On SOP reserve rider – or sorry, the SOP reserve for the lifetime income benefit rider, can you remind us like how much that is, just magnitude wise, and what the interest rate assumptions are there?.

The – I don’t really have the slides with that. It’s several billion dollars, but I don’t have that number in front of me. We can kind of follow that up with you after this and dig that out.

The long-term investment rate we have for that is around 5.5%, as I recall, in our modeling, and it grades up to that from current levels over a period of many, many years. And that’s not the treasury rate, that’s the overall rate that we get kind of our near, if you will, with fixed income and alts.

It followed the forward curve a year ago and probably actually our expectations probably better than that now given the pretty decent uplift in rates..

Yes. Got it, thanks..

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

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

Ladies and gentlemen, the conference has concluded. Thank you for attending today’s presentation. You may now disconnect your lines..