Apollo Global Management, Inc. (APO) Earnings Call Transcript & Summary

Please welcome to the stage Noah Gunn.

Good morning, and welcome, everyone. It's great to see you all, of course, that extends to those here with us in the room and all of those tuning in via our webcast. Look, I'd say a consistent point of feedback we've gotten from the market over recent months has been an increasing desire to understand Athene's business. And so we're here today to provide you with a retirement services business update that will provide you with a concrete understanding of Athene's business and also reiterate why Athene is so strategic as part of Apollo. So on this first slide, you'll see a time line of our path over the past 15 months and a lot of great work has been done. Of course, we announced the merger between Athene and Apollo in March of last year, and we closed the transaction seamlessly and on schedule 9 months later. And then many of you were able to join us for the Milestone Investor Day we had in October, where we outlined the 5-year business plan for the combined business and the great prospects that we see. And during this time, Athene's earnings have been very strong, had a very strong 2021 and a very strong first quarter of 2022, and this strength has been recognized by the rating agencies with increasing positive moves. And so given all this, it's clear to us that the business hasn't missed a beat through the merger and the business continues to have tremendous momentum. So it won't surprise you to hear from us that we continue to be extremely bullish about the benefits for the merger. And so you're going to hear more about each of these areas from Athene today and we look forward to keeping you updated going forward. And I'd say, as of now, really just what's happened more recently is that all of this feels more clear and more tangible to us than it has. And that's just 6 months in post close. So when I mentioned a moment ago that the investment community desires to understand more about Athene, I'd say the questions tend to come into us and be centered around 4 key areas; that being credit, rates, funding and capital. And so we look forward to providing you over the course of today's presentation, with context on each of these areas. And we hope that your observations align with the realities we see about the business that Athene is a very well-capitalized all-weather spread-based business with a tremendous growth profile, increasing capital efficiency and is a net beneficiary of the rising rate environment. And so to unpack all of this for you, we have a great lineup of speakers, including management and investment team members that are on the front lines of the business, and we've structured the agenda today in 2 halves with a short break in the middle and we look forward to taking all of your questions at the end. And with that, I can't think of anyone who is more passionate about Athene's story and its capabilities than its founder and CEO, so please join me in welcoming Jim Belardi to the stage.

Thanks, Noah, and good morning, everybody. It's great to see the big turnout today, both in person and listening and watching remotely. We've been looking forward to this day for a while because, a, we love talking about Athene and, b, we want to convey how excited we are with the merger and complete alignment with Apollo and the growth and profitability prospects for Athene going forward. We started the company in July of 2009, right after the Lehman crisis. And we even -- we took advantage of that crisis then by locking in cheap assets and liabilities and a profit continuation that we benefited from for many, many years after that. Since then, we have a track record of taking advantage of crisis. And we have no doubt with our capital position and our opportunistic mindset that will take advantage of future crisis as well. Athene's had remarkable growth since its inception, spurred by strategic M&A and block reinsurance transactions, as well as significant organic growth. The highlight of our M&A activity was the October 2013, Aviva USA acquisition whereby Athene a $15 billion invested asset company became a $60 billion invested asset company as well as what came along with that was the infrastructure that allowed Athene to be a major player in the retail market. Ratings improvement as well have significantly helped our organic business. And as I stand here today, our growth prospects have never been better. We expect to double our invested assets over the next 5 years. We're in the right demographic. We're targeting people planning for the retirement or in retirement. Corporations no longer take care of retirees as evidenced by the shift away from defined benefit plans to defined contribution plans. People need yield. Athene offers retirement savings products that help individual retirees manage their retirement needs and corporations fund their retirement needs. In the '80s and '90s before Athene, I worked 20 years for SunAmerica, which advertise itself and labeled itself as the retirement savings specialist. The crisis of people not having enough savings for retirement was a crisis over 30 years ago, and it's even worse today. Over 50% of all Americans are worried about this. Again, we are targeting the right demographic. In the last 10 years, the life insurance industry has returned significant amounts of capital to shareholders. And because of that, the industry needs capital. You can see almost 90% of the industry's excess capital has been returned via buybacks. And I think the autonomous research quote is appropriate. Because of that, the industry is unprepared for future crises. Athene, however, has the capital that they need. And this deficit of excess capital continued to accelerate through the first quarter. You can see 10 of the 13 peer companies here reduced their estimated excess capital in the first quarter. As the slide said, private sources are providing the capital backstop for retirees. And Apollo and Athene have been leading the charge, providing 36% of all capital raised by the industry in the last 12 years. Just like Apollo does with Athene, alternative asset managers should view insurers as clients and invest in the equity of the companies for complete alignment. One of Athene's competitive advantage has always been and currently is and will be in the future capital. Aided by Apollo's unparalleled ability to raise capital, Athene is very well capitalized. We have A+ financial strength ratings across the board. We have $20 billion of regulatory capital, $3.3 billion of excess equity capital and combined with unutilized leverage -- debt operating -- sorry, financial leverage and our third-party capital that I'll talk about, we have $7.3 billion of capital to deploy. What is that, bias? Close to $100 billion of buying power. In the first few slides, I talked about the restructuring and the capital needs of the industry. We're going to put this to work at profitable transactions. As in the past, we're going to use this capital to provide solutions to the industry going forward. I've said it in the past, I continue to say, I think the company with the most capital and the appropriate opportunistic mindset in the long term is going to win, and we expect to be that company. By design, our business is very simple, boiled down, it's make more on your assets and you're paying your liabilities. We generate inflows by offering a suite of principal protected products, take the proceeds and add inception match the proceeds from the liabilities with a similar duration, similar weighted average life asset portfolio of almost all investment-grade fixed income assets, locking in a spread for the long term. And the result, when you apply appropriate levers to it is mid- to high-teens returns, followed by distancing others in the industry. Following along with our business model being very simple and straightforward is our balance sheet. You can see that some of those are about $230 billion on the asset side, $230 billion on the liabilities and equity side, Almost all our assets are fixed income, 94%, 6% in alternatives with some income generation additive there. And the liabilities are very predictable, persistent, low cost. I think Mike Downing will talk about a little later, and we can invest for certainty behind those liabilities. So we're in the spread-based business. again. And we underwrite to an attractive net spread. Ballpark here with current numbers, we invest in this fixed income portfolio that investment grade that generates about 4.3% yield. Cost of funds is about 3% ballpark, 20 basis points of operating expenses gives you a net spread of about 110 basis points. But you can see how much more efficient and outperforming we are on the right side versus others. And those numbers lead to an ROE of mid-teens or higher which is more than 300 basis points better than others in the industry. The key to success in this industry is asset yield targeting about 35 basis points of outperformance. In addition, so this is -- we're not trying to hit grand slams and home runs here. These are singles and doubles on a regular basis, be disciplined, stick to your knitting. You'll notice on the balance sheet page I talked about before. We only put on liabilities that we can invest with certainty behind. You're not going to see us in variable annuities and traditional life insurance unless we can get the returns we want or long-term care or property and casualty. We know what we do well, and we're going to keep doing it. We also treat all of our partners with a lot of transparency and disclosure. We pride ourselves on that. So whether the constituents are rating agencies, regulators, shareholders, policyholders, we treat them as partners, the more they know about us, the better for us and them. So I think the lawyers changed the title of the slide because I said Athene's team is the strongest in the industry, not one of the strongest. But I stick to that point. And so it's -- I don't know if it's the dream team at all, but it's close. And so it's really proud of the management team, they've done a fantastic job. People on the page there, they have a great combination of both industry-specific experience as well as overall general financial services experience, and the results speak for themselves. So Apollo has been the perfect partner for Athene. We've been closely aligned from the beginning of Athene. And over the time, the 13 years, Athene has been in business, Apollo has consistently increased its ownership stake in Athene. It was clear to me that the endgame is always going to be one company completely aligned and more convinced that with the right decision now than ever. We're a better credit combined, it's for a financial powerhouse combined. So now Athene, sorry, Apollo is 100% of Athene, every single asset and liability on its books. Complete alignment comes with a lot of benefits, including more efficient rollout of new products, which you're going to see and hear more about today. And I'm talking about state-of-the-art products that haven't been done before. Very excited about that. And full alignment allows for continued long-term outperformance. So for the first time in Athene's history, Apollo's asset sourcing machine is outpacing Athene's funding machine. And that's a credit to Apollo, building up their capabilities and it's a great thing for the combined entity. Because now Athene rightsizes its appetite for each one of Apollo's assets since we want this amount. The amount over and above Athene's appetite, Apollo then kicks in its syndication and third-party operations machine to find homes for those assets. All of which generate fees for the combined entity. And now the market is viewing Apollo and Athene as one company, completely aligned, and that's a very good thing. These 4 metrics that Athene outperforms on have been the case for quite some time from our beginning. We actually were profitable in the very first month we started in '09. But on the outperformance metrics, like starting with capital, regulatory capital to reserves, you can see significantly higher ratio than like rated companies and higher rated companies in the AA- category, lower financial leverage, lower credit losses and a far more efficient cost structure. As our ratings have improved to A+ over time, our organic premiums have soared growing from $3 billion when we started our operations in 2014 to $37 billion over 7 years. Importantly, it's one thing to be in these various channels that we participate in. It's another thing to be #1 in every channel that we're in, while producing stellar returns, which Athene does. Our philosophy is no volumes without appropriate returns. So we talked about our founding and the crisis, ability to take advantage of future crisis is -- but we continue to price our products with the same more or less target spread irrespective of the market backdrop. We target the same spread. We have regularly produced very profitable organic growth in different interest rate environments. And in fact, you can see at the bottom of the page on the normalized spread related earnings, the actual dollars of income have exceeded our underwritten targeted spreads. We perform much better in a higher rate environment because of the presence of our floating rate assets that Marty and Martin will talk more about and we perform better in a more volatile environment given our excess capital position and our opportunistic mindset. While we price business to predictable spreads, our growth in profit is enhanced by third-party capital. In 2019, we completed the first sidecar in the retirement services business. It was originally intended to only fund M&A activity. But with investor demand, it has been expanded to also fund organic premiums. Instead of raising capital when the capital markets are open, but you don't have a specific thing to spend the money on, thereby excess capital being on your balance sheet and reducing ROEs. This is committed capital, a committed capital vehicle that is drawn only when we know there's something we're going to spend the money on, thereby much more capital efficient. The performance of ADIP 1 has been great, exceeding what we told investors which sets us up very well once we finish up the deployment of ADIP 1 to have a successful ADIP 2 fundraise. Third-party capital, it just makes us more capital efficient, funds our growth diversifies. It's a good thing all the way around. So let me put all my Chief Investment Officer hat for a second and talk about assets, which is where most of the value proposition in this business comes from. Outperforming on asset yields, which we've done, while having lower impairments which we've done is a very powerful combination in our business. Our $220 billion invested asset portfolio is high quality, diversified and liquid. 94% of it is in fixed income. 6% in alternatives. And other 94% -- 95% of that is investment grade. It's resilient, high grade, stress tested. And we've outperformed our others on the asset side not because we've taken more credit risk. We don't do that. We've taken some structure, some liquidity risk. We've also outperformed based on asset allocation, are waiting to structure securities partly stems from how cheap they were when we started. We still find value in structured securities today, as Bret Leas will talk about a little later. So we outperform based on asset allocation, we also outperformed based on our underwriting standards as Scott Weiner will talk about in our commercial mortgage portfolio today. So manufacturing asset spread in the low spread world is the name of the game. The prices for liquid on the run CUSIP, fixed income have been bid up so much that there's very little alpha and yield left. To combat this, I know of no other company that have spent the time money and investment in people that Apollo has in private direct origination. And the results of these investments are compelling. Direct origination platforms consistently originate fixed income investment-grade assets at more than 150 basis points wider spreads than in the broadly syndicated markets with the same ratings. That's a big part of the value proposition here. Talked about the areas of differentiation within our asset portfolio. We're going to hear more about that today. Structured securities, our ratings there, commercial real estate, our underwriting processes there. And then 3, which we're going to talk about next is our investment in our alternative portfolio which is very downside protected, but still achieving more than double-digit returns. So Athene invest in alternatives that are strategic, downside protected, less volatile and have collateral with fixed income, cash flow and characteristics. We do not typically invest in funds with pure equity bets. More than half of our $11.5 billion alts portfolio is in Apollo fund investments. However, the fastest-growing part of our -- our alternative allocation, our strategic origination and retirement services platforms which are almost half the portfolio now and growing, all part of our direct origination projects with Apollo. We target double-digit returns in our alternatives portfolio with less volatility than the equity markets and have achieved that. A real clear example of that was the first quarter of this year when on an annualized basis, Athene's portfolio was up 17%, while the S&P was down 20%. That's significant outperformance. And that's been the history of this portfolio at Athene since we started. It will meet or slightly underperform when equity markets are doing very well, significantly outperform when the equity markets are struggling. So in conclusion, just to summarize key characteristics of Athene's business. We have a simple and scalable spread business model. We match assets against the liabilities at the time the funding comes in and lock in a spread for long term. We generate low-cost persistent funding and Athene is one of the few companies in the industry with no legacy issues based on when we started after the financial crisis, we have a clean balance sheet every business we're in, we want to be in. We have leading in each of our channels, organic growth capabilities. We're very well capitalized with a lot of excess capital to be opportunistic, a long history of very low credit defaults. And we're very well managed. Proud to say that and prepared to go and are going on offense as we speak to take advantage of additional market dislocations. Thank you very much for your attention. Now let me introduce Grant to talk about growth.

Thanks, Jim. Good morning, everyone. So Jim talked about the tremendous growth that we've had from being a start-up in mid-2009 to now a balance sheet north of $200 billion. And yet, he said rather casually. And I think it's a pretty extraordinary statement. We expect to roughly double in less than 5 years. So we think we have tremendous growth opportunities in order to be able to say that. And those growth opportunities come not only organically where we operate in the high-growth sectors. There was that slide up there from autonomous and the quote that they were giving back all their capital because they didn't have any growth opportunities. That's not what's in front of Athene. We operate in markets that are high growth. And we can turbocharge our organic growth by continuing to pursue inorganic opportunities -- the result, we think, is a compelling growth story and where everything is done underwritten in all of our channels organically and inorganically to mid-teens returns on an unlevered basis. And we operate in markets where there is vast opportunity. You look at the -- it's amazing for the growth that we've had and the success that we've had. We've got these little columns of what Athene has done and these large scale opportunity sets in retail annuities and flow reinsurance, $3.8 trillion where Athene has originated $71 billion. Pension group annuities, where we've had tremendous success originated $32 billion, but where we see an addressable market of $3 trillion. And then in the funding agreement space, where we've issued $26 billion in the market size in total, $665 billion. Large addressable markets for us to pursue. And because we have these multiple ways to grow, this diversity of channels, both organically and inorganically, we're not overly reliant on any one channel. And we think it sets us up to be able to grow regardless of the market environment. But what I would also point out here is part of the reason we're so optimistic about our ability to continue to grow is the combination of operating in spaces that are growing rapidly and they're fragmented markets. We don't have huge market share. We are the largest player in the fixed indexed annuity market. And yet in 2021, we had 12% market share. Jim mentioned we at were #1 in flow. That was in 2020. We were #2 in 2021. And so we think there's more market share to have there. There's relatively few players who compete in that space. I'm not sure we can say we think that we will expand market share in pension group annuities, given how successful we were last year. But we do think that market is continuing to accelerate, and we'll get significant growth there as well. You've heard Jim and now me talk about we only do things when it make sense. We price with discipline. I'd like to go through a couple of examples that I think should demonstrate that. Top half of this chart is the funding agreement backed note market, which we entered in 2015, but there's a slice of the time line here. You can see the first grade box goes from the fourth quarter of 2017 through the first quarter of 2019, we issued 0, 0 because we thought the market opportunity wasn't there, given where we would issue our liabilities, we could not earn the net spreads that it took to make sense for us. And then the grade box on the right-hand side, last year, a radically different market environment, where the opportunities to earn net spread were fantastic, and we leaned in and actually issued 11 -- more than $11 billion last year, $2 billion more than ever been issued by a company in a single year. I think a pretty good demonstration of pricing discipline. And on the bottom, MYGA stands for multiyear guaranteed annuity. Think of it as a tax-deferred CD. Pricing got pretty crazy in the first quarter of 2021 and into the second quarter. In fact, at one point, we were joking that competitors were offering such high rates that we should issue an FABN and buy competitors, MYGA as the asset portfolio behind them. But rather than compete with that, we just pulled back and you see our volumes went to near 0. And as pricing has gotten more rational we've reentered. And if there was a second quarter '22 box to the right, you'd see we're selling significantly more in that quarter as well. So a couple of examples of -- we are experiencing tremendous growth, but only when we can meet our returns, and we don't ever sell product just for the sake of getting volume, and there's no incentive to do so by management. Management is incented by returns on the business that we generate. So let's dig a little deeper into each of our channels. We started in this business actually in 2011 when we acquired Liberty Life. But as Jim mentioned, it got a real boost when we acquired Aviva USA and that deal closed on October 1, 2013. And our growth in this channel has been driven by 2 factors: product innovation, where we think we've demonstrated leadership in the market and it resonates with our agents and distributors but also through expanding distribution into banks and broker-dealers as our credit ratings have improved. You can see we had a phenomenal first quarter and that growth trajectory will continue this year. We're having -- I mentioned we had 12% market share for all of last year that expanded almost 2%. So our markets, fixed indexed annuities and RILA, both growing in the high teens, our market share and fee has expanded almost 14% in the first quarter. So why do people buy our products? Why do people buy a fixed indexed annuity? It is a risk-averse consumer who wants principal protection. If they buy our product, they can't lose money. They buy our products because they're no longer being covered by defined benefit pension plan. And if they take income, they cannot outlive their money and lastly, we offer an opportunity to participate in some equity upside in that protected product. And these are the 3 spaces, I mentioned MYGAs tax-deferred CD. We are now a participant in the registered index-linked market as well, very rapidly growing marketplace. Our sales there tripled last year from a small base, but we intend to continue growing that. And we have an illustrative return profile here. We've been asked a number of questions about do we have residual risk in what we offer to the consumer? And the answer is no, if we were in a fixed indexed annuity willing to pay 4% as a fixed crediting rate, we take that 4% and buy puts and calls that exactly hedge the equity upside that we're offering to the consumer in that product. So I talked about diversification of our distribution. When we started, in 2011 and 2014, we're still in the same place. We were selling exclusively through independent marketing organizations. What is an IMO. Think of when you see ads on TV about an independent insurance agent, they affiliate with an IMO for marketing and sales support and some administrative support. So it's independent insurance agents. It is still the largest channel for the products that we sell, but increasingly not only for Athene, but for the industry as a whole, distribution is shifting to banks and broker-dealers, critical to be able to make that move is the push that we've been making to have higher credit ratings. And as our ratings have improved and as we pushed, you can see that our distribution has gone from being 100% in the independent marketing channel to now roughly 50-50 and in fact, in the first quarter was 55 in financial institutions and 45 in IMOs. IMOs are still hugely important. The volume that we're selling in IMOs has gone from $2.5 billion in all of 2014 to $2.9 billion in -- sorry, annualizes to about $5 billion for the full year. So one of the aspects that's important when talking about financial institutions is we get multiple years of growth when we get on to new platforms because first, we get introduced. It's kind of like the good housekeeping seal of approval. We are approved for agents in those institutions to sell, but we then need to convert them. We need to market to them. We need to have them engage in product training. We need to make -- have them make a sale, get comfortable with Athene. So we see that as we get on to an institution, sales continue to ramp up in those institutions for years after we get on the platform. So we see a lot of growth. We are still being added to platforms, we got on to our first major money center bank earlier this year with Wells Fargo, but we see a lot of growth coming out of financial institutions, adding new partners, maturing those relationships for years to come. So pension group annuities. Jim mentioned defined benefit pension plans, no longer being offered by most companies. And yet, they still have to manage those liabilities. And so it's an -- what we offer companies is the opportunity to have us take over the liability to pay their pensioners, and they can get back to focusing on running their core business. We entered this business in late 2016 started bidding on deals, one of our first transaction in 2017, it's really a logical extension of what we do in the annuity space, right? The retiree in payout looks very much to us like an annuitant in the income phase and the payout phase of an annuity -- so a logical extension of our business. Extraordinary success story. I mean, from not in the business in 2016 going against entrenched incumbents, a relatively concentrated industry with just a few key players to where last year, we did almost $14 billion of business. And we've now become one of the key players in this industry. Just some data here on what we've achieved in this space in a relatively short period of time, the largest market share in each of the last 2 years, over $30 billion of transactions cumulatively since 2017, 35 separate transactions, over 440,000 retirees that we're now servicing and you can see some of the corporations that we've transacted with. Tremendous, tremendous opportunity. So one of the questions people ask us is like, yes, but sooner things to transact on, right? Well, the opportunity is if you look at the overall market growing to a record $38 billion last year against $1.5 trillion AUM of plans that haven't yet had pension risk transfer or pension group annuity deals transacted on them. In the U.S. alone, and then in the U.K., there's an even larger opportunity set. We did one transaction in 2019. We're looking to find ways to be a more regular player in that marketplace. So tremendous opportunity here for future growth. So this slide shows where pensions are in terms of how funded are they. And the importance of that is to the extent that you're fully funded as a plan sponsor, you can transfer the liability to us fairly seamlessly. It's -- it does take a bit of an administration. But you're not out of pocket, a lot of money, right? So the funding levels of corporate pension plans is a good indicator of what is the likely flow of deals to come. This ended at the end of last year. Current market conditions haven't really changed this very much. And so plans are in great shape to transact, give that liability to us or another insurance company and get on with running their core. Funding agreements. When we say funding agreements as a business channel, we have 3 flavors of what we do. The most visible is what we do in the public market funding agreement backed notes. We also participate in funding agreements with the Federal Home Loan Bank. And then lastly, Athene really created a third channel now that we've done some deals with banks, of course, they're out marketing it to some of our competitors, but where we've done structured deals place to banks in a $400 million, $500 million up to $1 billion in size. It's become an additional funding agreement channel for us and one that we've grown tremendously so far this year. It's pretty simple transaction. Funding agreement is the insurance company funding agreement vehicle. In Athene's case, it's called Athene Global Funding, Athene Global Funding then sells corporate bonds to institutional investors. We like this liability. It's obviously got certain cash flows, which we can invest with confidence behind and it's been a tremendous source of growth for us recently. We're now one of the largest [indiscernible] now Athene joins them as one of the 3 largest programs in the marketplace. There was a moment in time and someone send me an update on this slide, and we were actually the largest outstandings that lasted for about a week. But how do we achieve scale? We do it by investor demand, We meet investor demand by issuing across maturities 2 to 10 years in fixed and floating formats, seeking out every investor we can find. You can see on the pie chart of the right, we've issued as of the end of 2021. And in the second quarter, we issued in a seventh currency issuing a deal [indiscernible]. Nice diversifier, when we talk about our other organic channels, they're all sort of ultimately an individual policyholder. And in this case, it is an institutional channel with institutional investors. Flow reinsurance. Think of flow reinsurance as Athene effectively white [indiscernible] sometimes from some of our competitors in the -- but often through competitors who have access to distribution channels an insurance company that may be selling on the Fidelity platform. And so for us, it's an additional EBITDA to get origination for the counterparty, they do it for capital efficiency, and it also increases the returns that they get on the portion of that flow that they retain. I think what's exciting in terms of growth opportunities for flow reinsurance in the fairly recent past, we've now executed 2 flow reinsurance deals in Japan and I expect that for 2022, actually, more than half of our volume will come from these Japanese flow deals, the second largest annuity market, Japan is the second largest annuity market -- and that's really the opening for us in that market. We think there's tremendous opportunity for more there. So yes, I don't know -- maybe I can make the same comment, Jim did. I don't know if Lawyers got involved, but I failed to see this. This says the merger can strengthen Athene's distribution and product capabilities? I think it absolutely will. But it's early days, and we're sort of feeling our way and what it means and how we go about it. But the green shoots, if you will, are extraordinarily promising. We work -- I mentioned we got into Wells Fargo. It took us 5 years. That's not a forecast. I hope it doesn't take us that long to get into the other platforms that we want to get on certainly helped by increasing credit ratings, but now it's also helped by the tremendous relationships that Apollo has with these institutions and where they're saying it would be really great for us if you would make getting Athene onto your retail platforms, a priority, and that's helping those conversations. I think the area where there's just clear exciting things going on is in the pension group annuity space. We now jointly call with senior people at Apollo. And if you think of the horizontal access as maybe their plans still open, it's closed, it's frozen and on the vertical underfunded to fully funded. Between Apollo and Athene, we can offer solutions for every corporation in America. If they need investment products to include the inputs there's all the Apollo investment products. If they are fully funded and looking to transfer that obligation, there is the Athene pension group annuity. And those joint calls have received a tremendous reception. New product creation. We are working on an insurance wrapped product where the underlying investments will be existing Apollo funds with great track records, scale, we will have that in the market before the end of this year. And behind that, we've got a bunch of things on the whiteboard, which I think will be pretty exciting as well. Inorganically, we are a solutions provider, both for block and for whole companies. And it's got to meet a few things. It's got to fit our strategy. It's got to be the right risk profile. We got to be able to buy it at the right price. But we've certainly demonstrated an ability to get that done. It starts with credibility, both the counterparties and with regulators given all the deals that we've done. But counterparties know if they transact with Athene, we'll get it done. We have the structuring capability. We've got the capital to bear. We've got the asset expertise to enhance the price that we can pay. All of those things have led to some of the transactions you're all aware of. I think, show the tremendous creativity that we brought to bear and things like Voya, Jackson and Lincoln. A quick one on how does the macro backdrop affect Athene? Everything is better with higher rates, pretty much except for funding agreements, but it's swamped by these others. I've often commented in events like this that my coffee tastes better in the morning with higher rates. Everything is better about Athene with higher rates, particularly in the retail annuity business. Retail annuities sales are ramping up with offer higher consumer benefit. And yet when we do that on a lag basis, we're earning expanded spreads relative to a low rate environment. Flow reinsurance benefits from the same pension group annuities, I think, will be a record year. And to the extent that at lower rates, there's more pain to take on thinking of disposing of a block that now qualifies a bigger group of liabilities in the ongoing transformation of the industry. So higher rates, great for Athene. I'm sure my finance and risk colleagues will give you a more defined explanation of that, but higher rates, great for our business. So finally, I hope I've given you some elements of why we're so excited about the potential for growth at Athene and why we believe we can do in the next 5 years what took us almost 13 years to do to get to this point. We've been primarily focused for most of that time frame here in the United States, but our field of vision is now expanding, and we're looking at opportunities all over the world. We are an investor in Athora, and we also offer reinsurance to support transactions for Athora, which is consolidating the European market. So that's a source of growth for us. And we're really just figuring out the right-hand side of this slide. It's early days. We've made some strategic investments in Challenger, in FWD, we're putting people on the ground, and really exploring this vast Asian market. So not a lot tangibly that I can say other than pretty excited about what we've seen so far, more to come and maybe the next time when we get together for an event like this, we'll be able to tell you the results of our new initiatives. Thanks so much.

All right. Thanks, Grant. It's good to be here. Good to see you all. So I've been actually the -- so I'm dual headed right now. I've been the Chief Actuary since 2015. So it's been really exciting to be part of the underwriting process, and I'm here to talk to you today about liabilities. And if I do my job right, it will probably be the last time we talk about liabilities because our balance sheet is actually relatively boring on the liabilities front. Before I get into the actual slides, I think the backdrop that a lot of us are facing within the life insurance business, some of the missteps that have actually occurred with respect to liability underwriting and they're being very large and sometimes catastrophic. Some good examples are attaching income riders to variable annuities, which look great until markets collapsed in 2008. Another one, long-term care, where on paper, all the products look profitable until you realize actuaries are trying to make predictions and assumptions for the next 40 years, predicting simultaneously medical inflation, nursing home rates, life expectancy, medical advances and that's been a problem. There are insurance products that are -- whose profits are entirely dependent upon enough policyholders acting inefficiently. Athene is effectively the antithesis of that. And Athene has actually been able to capitalize that. So the reason we're boring is we stick to our retirement services biddings. Our liabilities are very straightforward, very predictable, very easy to model. And where there is optionality, we can hedge that or assume against that. And the way we can make money then is if you think about plain vanilla liabilities, one of the questions is, well, then how can that be profitable? And Grant and Jim talked about our market capabilities. So we have some of the best asset-generating capabilities in the market. We generate outsized returns per unit of risk. So we're superior there. And we have the best expense base in the industry. So you take that backdrop, all we really need is discipline on our liability side and it lets the assets do the work and keep our expense discipline and the profits will come in. So over time, how is that growth strategy that Grant has been -- and Jim have been a key architect for? How has that created a balance sheet for Athene? So today, we looked like a very -- we're a very large balance sheet, but we're also very sticky. Our average life is about 9 years, and most of that is protected. Furthermore, our cost of funds is exceedingly low and is low for 2 reasons; one is the recency of our business for all the business we've manufactured, we've manufactured it in a low rate environment; and then for the businesses we've acquired or parts of businesses we've acquired on the inorganic front, we've repriced it all. We've repriced it to current low rates, and we've strengthened reserves to be more prudent, which results in a very low cost of funds for Athene. But on the flip side, the policyholders are getting the benefits of those original richer guarantees. And the way that works is a lot of the inorganic business we bought for, in some cases, as much as $0.50 on the dollar, so substantial haircuts. And then further, the backdrop of both a manufactured base and an acquisition base, we have liabilities that have been issued over multiple decades, which creates a lot of resiliency in the balance sheet as well from a liability standpoint. So Jim talked about the asset success and how effective we are at managing some of the credit risk. On the liability side, we're really just looking at 2 risks. One is lapse risk, and in the industry, we'll use interchangeably lapse and surrender, that's the right of a policy holder to basically put their policy back to the insurance company, but it comes with some penalties. And that results in outflows for the business. And then longevity. But the longevity risk is actually limited to longevity only in excess of mortality improvements we already assume and bake into our liabilities. So we already assume people are going to live longer in the future even after we issue that business. And furthermore, across our lines, most lines are only exposed to none or one of those risks. So it's a very clean, simple book. So you couple that within our underwriting discipline in terms of pricing, it's an extremely simple model, more risk, we require more profit, just like you would on the assets, more risk in the asset, you acquire a higher yield. We do the exact same thing on the liability side. In fact, we do this within the retail space to the individual product. We'll even break out risk categories within a product. For pension group annuity deals, we underwrite each one individually. Assign specific profit targets based on the unique risks of each of those plans. And that discipline has proven to be very valuable. And the time that Athene has been gone from being public to merging with Apollo over that time frame. If you look at our liability track record, it's impactable. When we look at our financial reporting statements, the liability side is effectively next to zero on the liability front, which is a long-term effective underwriting and again, that allows the asset to shine and continue to generate strong profits because we have confidence in the integrity on the liability side of the balance sheet. So a question that comes up now a little bit, and Grant touched on this in one of his last slides is as rates rise, what does that mean for Athene? And as rates rise, because some of our policies can be lapsed or can be surrendered and can impact outflows, are we ready for that? And I would say, from an industry standpoint, in this case, the industry has been ready for rising rates for about 25 years. What the industry wasn't ready for was 25 years of low rates. And so there's a lot of protections that have been placed for a period of time. So one -- are structural protections, and there's 2 of them. One is explicit penalties for early withdrawal and that can be to the tune of a 5% to 10% haircut. So think of a $100,000 annuity, which is a typical annuity, a policyholder is going to immediately get a $5,000 or $10,000 haircut if they withdraw early depending on when that is. Secondly, for a majority of the business, there's a second penalty that's on top of it called a market value adjustment, and it's basically a second haircut to reflect sort of a theoretical asset loss you would get. So you could have 2 penalties perhaps $5,000 surrender charge penalty plus maybe another $8,000 market value adjustment that, by the way, with good asset management, you're managing most of that away. And those 2 structural elements create a lot of stickiness. And we've seen that play out through time. So the policyholders are very low to take hits on their principal. And so they'll keep their policies in force until those surrender charges expire. And then advisers are very restricted on how they can move that money, and that's created a lot of stability. And then the track record, albeit against a low rate has been very predictable. And we can see some of that in the next slide. So if you look at the industry over the last 20 years, again, albeit against a well rate environment, the withdrawal rates have been very stable, and that's a function of the structural parts -- the structural parts of the contract that are in place today. And even during periods of dislocation when we look at both the financial crisis as well as COVID, patterns really remained unchanged and still very stable. A second reason we see that is again going back to the purpose, of why these contracts are purchased. These are regular average everyday retirees with portfolios that maybe total of $1 million or $2 million. There's maybe $100,000 annuity. Their goal is principal protection and income. They're not bond traders. So as long as those first 2 goals are being met, they'll be happy with their product. Athene's experience, although shorter because we have a shorter track record is also very consistent in terms of its stability. The lapse rates we see or the outflows we see are consistent with our 9-year life. So this really matches the life that I showed on the first page. So let's go a step further because none of us have actually seen a rising rate environment. So let's start to talk about what could happen if rates rise. And let's say lapses do increase more than what we expect. What does that look like for the company? So we first have to go back to our entire balance sheet. And the reason we have to do that is 30% of our business can't lapse anyway. It's funding agreements, it's pension group annuities, those outflows are going to be fixed regardless of the rate environment. And the point of that is that creates then asset flexibility to the extent there are more outflows in other parts of the business because that's an anchor and that business can't move. Another 50% of the overall balance sheet has these restrictions in place. And even if that business moves, Athene gets compensated for that and in many cases will get overcompensated for that because of the level of the structural provisions that are in place. And the final group, the remaining approximately 20% that is technically free and clear, you can actually break that down into even smaller components because about half of it is old legacy business that we repriced, which means the policyholders have valuable benefits such as income benefits or high minimum guarantees. It's profitable for Athene because we repriced it. It's valuable to the customer, and that creates a lot of stickiness. The second piece, the remaining component of the last 20 is business we're already predicting to lapse anyway regardless of the environment. These are the financially efficient customers. And they're going to lapse and surrender based on the terms of the contract in a low rate environment or a high rate environment. So those are some of the just general structural protections that exist in the balance sheet. Now let's go a step further and look at some really draconian assumptions. And the science behind this is I ask my team to come up with their worst-case scenario and then I double it. So we took the -- in surrender lapse rates, which are about 2%. They've hovered around 2% for the last 10 years, and we put a 10x factor. So it's basically saying those structural provisions aren't going to work. And on the out of surrender, where the lapse rates tend to be higher, but there's a lot of anchor, we tripled those. In terms of the severity, this is like the state of California falling into the ocean. It's an extremely draconian scenario. And the punchline, and there's actually 2 punch lines. One is the impact is relatively small. And in fact, it would only materialize if there was zero active management. And second, the capital backing this business is released. So we will redeploy it. And not only will we redeploy it, we will redeploy it into more capital-efficient business. And that's all this really does because we're expecting that business to lapse anyway. So if it lapses a little bit earlier, we're just going to reinvest that capital a little bit earlier, and it's seamless. And we have these compensation protections in place, which make it a nonevent. So the last thing I'll cover is an accounting -- kind of accounting is it -- so it feels like a little bit of an add-on, but it's actually related, and it's fairly timely because of the timing of certain accounting changes that are coming into place and that's the LDTI, the acronym stands for long-dated targeted improvements. It's the biggest change of accounting rules in probably the last 20 to 30 years, hitting the insurance industry. And effectively, what it is, it's a mark-to-market standard for certain types of liabilities, really long-dated liabilities. And what it's going to be for a lot of insurance companies, is it will be a day of reckoning. So for companies that have old legacy blocks of business on their books, they're reserving those at high discount rates, and they're reserving those that at often outdated liability assumptions. Those assumptions are going to have to be refreshed and updated to the current rate environment. And even though it's off its [ 1/1/22 ] lows, it's still much lower than historical. So big headwinds. This would have impacted about 20% of Athene's book. But because of the merger, we effectively had to mark 100% of our book of business mark-to-market as of [ 1/1/22 ] an all-time low in the rate environment. So for that reason, we really expect LDTI to be a nonevent for Athene. But to go even a step further, even before the merger, we were expecting LDTI to be a relatively nonevent for Athene because of the fact that our liabilities were already reserved at very low rates, and we already had a lot of additional prudency in our liability assumptions. And so the opportunity that could potentially exist for Athene is this will create yet another catalyst for companies to consider further restructuring. So before I pass this on to Doug on the risk side, just to kind of sum up sort of our liability story, we write very straightforward liabilities. We've consistently maintained pricing discipline across all of our channels and also across organic and inorganic. We apply the same standards to all the business we originate and the business we acquire. And the third point is our track record demonstrates that. And we now have a 7-year track record of that, a $200 billion balance sheet, and that discipline will continue as we move forward. So with that, I'll turn it over to Doug, to cover risk.

Great. Thank you, Mike. It's a real pleasure to join an organization that shares my values and is engaged in such a noble profession. My job as Chief Risk Officer of the firm is really to provide comfort to our stakeholders, importantly, our customers and investors that their investments in us are sound. And I can say that confidently really for 3 reasons. The first is we have a best-in-class governance structure with a very experienced risk management team; second, the risk that the firm take are well aligned with its business model and in the type and amount that our stakeholders expect; and third, we maintain an incredibly sound investment in financial risk profile is managed by investment risk exposures as Jim articulated at the outset, our excess capital position as well as opportunistic liquidity. So picking up on Mike's comments, we really have a locked in embedded value. No matter what happens to rates in the future, our portfolio was resilient. And we really have a call option on the market that leaves us very well positioned to capture value relative to our peers, especially in times of market volatility. Risk management is really in the DNA of the founding of both Athene and Apollo. We follow a typical COSO framework with 3 lines of defense. That said, I really focus on 2 main items; first, our organizational setup, our Board of Directors has a dedicated risk committee with 3 independent directors, and I report to the chair; second, is our culture, what I like to call little R and little M. Everyone in the firm prides themselves on being an effective risk manager, and they apply those disciplines in their day-to-day activities. As an example, we apply our stress test to every asset before we put it on our balance sheet. The risk management team is well resourced with 40 professionals. It's in a very experienced leadership team from a variety of firms and backgrounds and we maintain a suite of policies, procedures and qualitative processes in addition to some of the numbers we're going to review today. Additionally, we run a very disciplined, conservative risk appetite process that supports our business. Most firms hold capital to survive a solvency event. Our risk appetite statement is actually a conditional probability statement and a commercial proposition is to hold more than enough capital such that when that event materializes, we can actually capitalize on that market dislocation and buy cheap cash flows. Importantly, our limits are established to support that appetite statement, and they are cascaded to the businesses through our policies and procedures. Importantly, when deploying that capital, we follow a multistep control process for investment risk. Our asset selection complies with investment guidelines and is subject to investment committee approval. We monitor our exposures constantly relative to our limits, managing the aggregate risks, and I meet with the portfolio managers on a regular basis, formerly monthly and quarterly going through our watch list from soup to nuts as well as the results of our stress test. Our investment committee approves all large and affiliate transactions, our ALM and allocation strategies as well as monitoring compliance with our policies. Additionally, I'm in frequent communication with our regulators and rating agencies and I think you heard about the positive news that we've had in our recent history with upgrades as well as the Board of Directors and now more recently, each of you. And thinking about the types of risks, that second component I mentioned, there's really 5 levers boiled down to maybe 3 things that any investment function can do in pursuit of returns. The first is really to take more interest rate risk, which is really a beta play on rates and on a risk-adjusted basis will not generate any excess returns and leaves your firm exposed to potential liquidity issues. The second is to simply invest in more risky assets. That's really about our markets, buying more equity or going down in credit quality. Again, as we heard from Jim, with BBB issuance and the amount of money coming into the public investment-grade space, really difficult to gather any alpha through bond selection and similarly leaves your balance sheet exposed to capital issues in a market downturn. That really leaves a third option, which is paying the tuition to invest in the people, process and systems to underwrite more private bespoke assets with cash flows consistent with our liability profile as we heard from Mike, capturing an illiquidity and complexity premium. It allows us to lock in a spread with contractual cash flows that also have the ability to participate in upside through economic growth and inflation. You can think of rents. By doing so, it gives us access to a much larger investment-grade universe with cash flows well suited to our funding profile that importantly have 3 key features: diversification, a wide variety of collateral pools and investment-grade counterparties across many industries and geographies; second, credit enhancement. Since the great financial crisis, there's been wholesale changes in the securitization market that afford much more structural subordination to the senior positions. And lastly, structural protections, performance and cash flow diversion triggers that further enhance the credit protection afforded these assets. You'll hear from Bret Leas a little bit later this morning, so I won't belabor it. But all of those features produce the results that you see here. BlackRock ran the U.S. life insurance portfolios through the Fed's CCAR stress test, and the numbers really speak for themselves. The 3 features that I mentioned together have a multiplicative effect on the credit protection afforded these assets under stress. The result is why our asset allocation looks the way it does with a focus on overweights in structured products as well as alternatives. It allows us to tailor our duration and convexity and cash flow profile consistent with our liabilities, again, locking in an embedded value. We have the ability to invest more in investment-grade securities with less credit risk while capturing the premium that I mentioned. And importantly, lastly, something that Jim mentioned at the outset, by accessing through our own direct origination platforms, we cut out the middleman, so to speak, and capture the original issue discount. From a risk perspective, importantly, it means we also control the credit box, i.e., we can take the keys if problems develop. And while we buy less risky assets, our investments and equities are becoming increasingly focused, as Jim mentioned, over half now, an alternative positions in our direct origination platforms that are downside protection. As an example, our investment in Wheels and Donlen. They provide fleet leasing of mission-critical vehicles to a wide variety of industries. You can think of pharmaceutical salespeople to claims adjusters. Credit losses only occur when there's a default in that counterparty and the residual value has a loss on the underlying vehicle, a very rare event. As example, peak charge-off rates for Wheels in the last 20 years or so were only 6 basis points. As a result, our asset allocation here provides a vastly better outcome relative to our peers. And in part, that's because we underwrite every asset to our stress scenarios as opposed to outsourcing that effort to any third-party proxy. And here are stress scenarios. They're conservative, consistent with or more severe than what has happened historically. They're applied at the asset class level through multiyear scenarios with full revaluations at the individual asset. It's a transparent building block approach. Can see the parameters for probability of default loss given default cap rates, vacancy rates, et cetera. And here are those parameters held up against a wide variety of historical scenarios. 1990 Iraq invasion of Kuwait, the Gulf War and the Bush era recession, the dot com bust in 9/11 in 2001, the great financial crisis, the Brexit vote and the ensuing market volatility. We also dynamically update the panel of scenarios such that when Russia invaded Ukraine, we took a look at what happened when they invaded Crimea, as well as the 1979 energy crisis and stagflation. Again, as mentioned, given our ALM position, our portfolio is essentially immunized. So no matter what happens to rates and spreads, we feel comfortable with how we're positioned. And as a result, we really focus a lot more on the credit drivers of our portfolios. And here are the results. It's an instant shock applied over a subsequent 12 months. It assumes no changes to our business and no management actions. If you simply focus on the 2 right-hand columns in the green box at the bottom, you can see that the total net impacts are less than our excess capital position, and they're less than 1/3 of our excess capital position if we do include management actions. Even if all of our assets were downgraded one notch with no offset from capital release and mark-to-market of our assets, the impact is only $600 million. And of course, we do have a suite of management levers and capital management actions we can engage in. If you focus only on the fully actionable items, active portfolio management and access to committed liquidity and capital sources, we maintain a minimum of $4 billion each of liquidity and capital, again, well positioned to capture value by cheap cash flows when markets dislocate, a call option on the market. The reality is, as measured through our tiered liquidity risk policy and framework, we actually have many more billions of dollars we can put to work in these types of environments. Additionally, as I mentioned earlier, I, we, as a management team, meet with our portfolio managers on a regular basis. And formally, as a leadership team, quarterly in the investment committee, where we monitor changes in secular trends at least 12 months out. We proactively on a premeditated basis, can rebalance the portfolio to optimize our position. In fact, you can see going into COVID how we reposition both the CLO and CML portfolios. Again, you're going to be hearing about those portfolios in just a few minutes from Bret and Scott, so I won't belabor it. And lastly, nothing speaks louder than results, especially through business cycles and market dislocations, consistently lower impairments than the industry. And as I said at the outset, that's really a function of our commitment to the 3 things that I mentioned, best-in-class governance with an experienced risk management team acting in partnership with our asset originators and portfolio managers, full transparency that the risk we're taking are in the type and amount aligned importantly with our skill sets, but as well all of your expectations. And lastly, that we have an incredibly strong investment in financial risk profile. No matter what rates are in the future, our portfolio is resilient and with our excess capital and opportunistic liquidity, well positioned to capture value relative to our competition. With that, I think we're going to be taking a short break.

Please enjoy a coffee break. We'll see you back in 5 minutes.

Please welcome to the stage, Bret Leas.

Wow. That's unbelievably impressive. Thanks, everybody, for the warm welcome. I'm Bret Leas, and I oversee Structured Credit at Apollo. Look, you're all caffeinated and sugared up, so we're going to get into like the really good stuff here. We're going to talk about structured credit, how it works, why it exists, and most importantly, why we do it for Athene. And you heard some from Jim Belardi. You heard some from Doug. But we'll really talk about why this is an attractive asset and more importantly, why it's a safe asset and why it has a place in the portfolio. So if you think about structured credit in general, it's a big piece of Athene's book, but it actually comprises a wide variety of assets. And the most important thing to remember, when we're talking about structured credit, it's all credit, right? It's just accessing credit in a different form. And credit is what Apollo does. It's what we do really, really well. These are transparent products. We can underwrite all of the underlying assets. We can look through them. They're transparent. They're tradable, and they're easy to access. So why don't we start by talking about the role that these products play in the U.S. economy? It plays a good global role as well, but let's focus for today on the U.S. And then we'll get into why they're safe and attractive. And so structured credit, really, I think, as Doug said, they give investors great diversification, great credit enhancement and great structural protections. And the fact is, over a long period of time, banks have been pulling back. They've been pulling back from lending the businesses and holding assets on their balance sheet. They've been pulling back from lending to consumers as well. And there are a lot of new, safe forms of securitization that provide the necessary financing, which make our economy go, whether that's from a corporate perspective or a consumer or commercial perspective. And so securitization really democratizes credit. It allows a very broad set of investors to access and participate in the financing of different parts of the economy, and they can do so in a very, very tailored risk-reward framework. And the key benefit of this is it allows people to have a wide pool of capital ready at a moment's notice to help them expand their business and ultimately drive consumer spending, drive innovation, drive products. And without securitization then, corporate balance sheets would be burdened by their existing assets. Just think for a moment if Ford had to hold all the loans it made to customers on its balance sheet. They would trade like a bank. There would be no money to invest in product development, no money to invest in EVs, and their credit quality would be totally different. There we go. I may have gone too far. But anyway, so the 2 biggest pieces of our book of Athene are CLOs and ABS. CLOs are a securitization of non-investment-grade bank debt. And in fact, they're the dominant holder. It's a [ $1.2 trillion ] market, believe it or not. It owns 65% of all bank loans, and it drives the creation of credit for companies. And this isn't just the creation of credit for companies that you never heard of. A lot of them are household names. They are well diversified. There's over 1,000 issuers in this market that CLOs are able to access, and they do so in a way that is very, very consistent. They are long-term stable holders. They're not hedge funds. They're not daily liquidity mutual funds. They buy loans. They hold them for many, many years. When the CLO market is disrupted, corporate credit is disrupted. The same exact thing is true in ABS. And here, it's even more transparent. 70% of our economy is consumer spending driven, right? So you ride an airplane. Thank the ABS market. You buy -- actually, most of you have phones, I can see, in here. Verizon finances all the handset devices through securitization. They don't make those loans to consumers. And so a lot of things you do every day, home loans; car loans; mortgages; buy now, pay later loans, all these things rely upon the securitization market. And all it's really doing is it's taking these assets, these discrete financial assets with predictable and dependable characteristics, and it's pulling them all together. It's then divorcing the risk of those assets from the entity that created them. So you're not exposed to management. You're not exposed to R&D, not exposed to weak documentation and leaking of proceeds. You have a very tight closed-loop system defined by rules where you're taking asset-level risk from predictable cash flows from a diverse set of borrowers or a diverse set of consumers. And what makes this really interesting is we're just coming out of an era of prolonged easy money. In an era of prolonged easy money, creditor terms get eroded. Documentation becomes poor. Leverage goes up. People get more aggressive. They make more aggressive assumptions. The securitization market has largely gone the other way, and we'll talk about in a moment. It's gotten more conservative. It's gotten tighter documentation. It's gotten tighter regulation and has better underlying credit than ever did before. In addition, as Doug had mentioned, it has a number of structural features and self-correcting mechanisms that protect it in case things go wrong with the underlying assets. And therefore, it's exceptionally difficult for securitization to get itself in trouble. It isn't subject to fraud the way an operating company is subject to fraud. It isn't subject to the bankruptcy process the way an operating company is subject to the bankruptcy process. There are no other creditors to come in, other outside liabilities to come in and upend your investment. And therefore, what we have is we have a match-funded, closed-loop system governed by a specific set of rules that is predictable. And so for Athene then, when we have all those things, we talk about why is it then attractive from an investment perspective. We know we want to access it. We know we want to do good about extending credit. Now why is the box, why is this the right way to access it? And as Doug said, we have this multiplier effect of diversification, hard credit enhancement and structural protections. Everybody in here knows something about asset portfolio theory, right? Diversification is a necessity when you build a portfolio. Jim spoke about it earlier. Athene has a very, very diverse portfolio. Every single one of these underlying securitizations is diverse in and of its own right, and then our book is diverse on top of that. We never take first-dollar loss when we buy investment-grade securitization debt. We always have hard credit enhancement. That means we have shock absorbers. If some of the assets are bad, there's -- nothing is going to happen to the tranches that we own. And we'll give you some examples of how this works mathematically. What's important to know that things can and do go wrong and that we have many, many layers of protection against that much like Mike said when we're underwriting annuities. We have all these layers of protection that give us additional ways to make sure that we get our money back. We don't impair principal. And in many cases, we don't impair a yield. And finally, if you think about it compared to a corporate, right, when the corporation suffers stress, in many cases, they have lots of options to continue to do things. When a securitization suffers stress, it is hard coded that it protects itself. It starts to divert excess cash flow. It stops the disposition of assets. It stops adding new assets to the box. It makes sure that it rights the ship first, and then goes back to doing business the way it needed to do business. And that is really a key difference from an operating entity and a securitization. One of the things that we run into a lot is many investors and, in fact, commentators, they don't appreciate the evolution of this market, the change we've seen over the past 14 years since 2008. They still operate on antiquated notion of what these were. Before 2008, the market was very, very different. It was a narrow set of assets. Many times, they were originated to securitize only. They were originated to distribute only. And there was a real break between the purpose of what this was being used for and the end creditor that they were looking to drive. And therefore, you had securitization being created simply as a financial machine to generate fees and you create a vicious cycle where there was ever a problem with the box, there was really no other investor that could step in and take the place. Today, it's much, much different. As you can see on the, I don't know, my left or my right, but on that side of the page that has -- well, it has last year. But if it were this year, it would look exactly the same, right? You have strong regulations. You have strong rating agency criteria. You have strong investor stipulations. It precludes securitizations from buying other securitizations. The investor base is extremely stable, real money, insurance, asset managers, no short-term funding against long-term liabilities. It is long term, and it is stable. And it helps survive several market dislocations. And finally, regulatory action means this is stronger, safe for credit. There is a good alignment of interest, and we have avoided the repeat of the past where we have innovation solely for the sake of innovation. This page really just illustrates a bunch of the things that have changed, and you can read at your leisure. But one of the things you will see is there are no triggers here that force unwind solely upon market value move. There is less leverage in the system. The market base is wider, broader and deeper and is very stable funding for it. And so if we apply this to a simple example, which is the CLOs, which is a very, very sizable chunk of our book, what you can see is, in a corporate capital structure, you have equity. You often have high-yield bonds, and you have senior secured bank debt. So now we're already at the top of the company capital structure. Then we take 200 loans from the top of the company capital structure. We underwrite each and every single one of them, and we package them together. So now we're diverse by issuer. We're diverse by industry, and we're diverse by type of business even within an industry, right? Not all health care companies are created equal. We then put those together in a box, and Athene invests largely in the investment-grade slices of that. And so top of the capital stack with diversification and now additional credit enhancement. You're building a house that is increasingly protected all the way through. And so when you look at our portfolio today, it's 99% investment grade. Our average credit enhancement for every tranche is higher than the market. We're focusing on additional protections, and we are diverse by underlying managers of the securitization, though we do have a particular bend for deals that we can create ourselves using the Apollo credit underwriting process. As I said before, we're diversified across industry in each of the CLOs. This is a snapshot of the whole book. Every deal is a little bit different, and this changes over time. And so we're going to be light some years on deals that have a lot of energy concentration. We're going to deemphasize retail when retail is underperforming. Thank you. And so when you look at this thing graphically, I can talk about credit enhancement a lot. What's easy to see here, though, is our average credit enhancement is 23% in each of the CLOs. The really hard to see gray bars at the bottom are losses. And you can see where peak losses are. We are many, many, many times removed from peak losses even from Lehman Brothers, which is the last time we had a real credit crisis. And so it would take something, as Doug mentioned, many times worse than the great financial crisis every single year for a decade to start to cause a problem with our book. This can happen for maybe 1 or 2 years. You can even see credit losses that the market doesn't expect. But to have it go on that consistently for that long, for that many years would imply a real unraveling of the U.S. economy, not just the breakdown in financial markets but a breakdown in credit generally for an extended period of time. And so this is something we've said before. In 2020, we said, "Don't worry. The book is well protected." We said, "Don't worry. Rating agency downgrades are temporary." We said, "Don't worry. The credit underlying these deals is sound." And all of those things have proven to be true. And since we are able to constantly re-underwrite our book since we can sell underperforming CLOs and underperforming ABS and invest in new ones, since we can change the asset allocation, all these things remain true today as they did when we said them. The same thing is true in our ABS portfolio. Here, we're diverse by asset type. And as you can see, there are a large number of assets on this page. But what's important to note about all of them is we change the allocation over time based upon what we are seeing from both a credit underwriting perspective but also where we are originating risk through our platform business. We are leaning into certain assets. Doug Niemann had mentioned fleet lease, 6 basis points of average loss. We have credit enhancement advice at 60x that before we have impairment. So there are lots of businesses out there where you have protection not only from the underlying lessor -- I'm sorry, the underlying lessee, not the lessor. We're the lessor. The underlying lessee, you have protection from the metal and you have protection from the structure. And so you continue to build that fortress-like house. Skip over the case study. And I'll leave you with this. which is, ultimately, we're doing this to make sure that the book is protected. And this page is a little bit busy, so we tried to simplify it for you, which is the big 0 in the middle. And normally, 0 is a bad thing when you're investing, but in this particular case, 0 is a really good thing. No investment-grade CLO or ABS debt has experienced a principal impairment in the past decade. Very difficult to find assets like that. And so when we have a place we want to invest that offers extra yield and outperforms and is still credit, there is a place for it in the portfolio. So thank you. And with that, I'll pass it over to Scott for Commercial Real Estate.

Thanks, Bret. It'll be a tough act to follow, but I think I can get through my whole presentation without using a single acronym. I'm Scott Weiner, a partner at Apollo and founder and creator of our global commercial real estate debt business. I've been actually involved with Athene since its inception back in 2009, and commercial mortgage loans have always been a core asset class for Athene. Today, I'm going to talk about why our business continues to be a key source of excess return for Athene. So we created -- as I mentioned, we created our commercial real estate debt platform back in 2009, coming out of the great financial crisis to fill a void in the lending markets, whereas Apollo and Athene saw a great opportunity to take advantage of the dislocation. Since then, we've actually invested over $61 billion in loans and securities. And today, the portfolio stands currently around $40 billion. We invest on behalf of Athene, our public mortgage REIT ARI and other pockets of Apollo capital. We have a reputation as an industry leader, where we're creative, flexible and also do what we say we're going to do, which I'll mention later. Reputation is key in our business, as this is really a direct lending business and people want to know who they're dealing with. We provide bespoke capital solutions to some of the largest borrowers and owners of real estate in the world. You can see here lots of logos you may be familiar that you would think as traditional competitors with Apollo, but in reality, we have great relationships with folks like Blackstone, Brookfield, Starwood, who we do a tremendous amount of business with. The business is Western Europe, United States focused, all types of lending, senior loans, mezzanine loans. We loan on stable assets as well as construction and transitional assets. Last year, 2021 was actually a record year for us, comprising $13 billion of lending. Over $8 billion of which was for Athene. And I think Athene that you've heard really throughout all the Investor Day presentations today and as well as other presentations is that by directly originating these loans, we're able to negotiate directly with the borrowers and create excess return for the investor, Athene, as well as making sure we're controlling the documents and structure. These are not assets that we're buying off of Bloomberg's screen. We're really doing everything ourselves. And then lastly, I would say, we're proactive asset management. For us, we're a balance sheet lender. So it's not just we're making a loan in what we'll call originated, distributed. We are living with that asset whether it's a 5-year loan or 10-year loan. So asset management is key, for us to maximize value, maximize return, but it's also a great competitive advantage for us because the borrowers have someone to talk to, and they know they can pick up a phone and always deal with us. It also allows us to stay on top of the assets and continue to learn for what's going on in those markets as we then do new lending. And lastly, something I think Doug referenced and something we're very proud of. Since the beginning of the pandemic in January 2020, we've only recorded 30 basis points of cumulative impairment against the entire $23 billion portfolio at Athene. Given that included the first quarter ends up being around 13 basis points per annum, which is a level that we're very proud of. So why are commercial mortgages an attractive asset class for Athene? I think, first and foremost, they're senior in the capital structure. As Bret mentioned, we are able to pick and choose what we do, and we go very high, high up in the capital structure, senior loans, low leverage. The actual weighted average loan to value of our portfolio is 57%, which means there's tremendous amount of subordinate equity junior to us. They're hard assets, similar to this building. They just don't vanish, which really provides us a lot of downside protection. While not the goal, we do have a lot of in-house capabilities. So if something goes wrong, we just don't walk away from the asset. We have the ability for asset management and create value. So if it's not the right time to sell an asset all in the middle of COVID or during the GFC, we can own, manage that asset, improve it and then sell it when the time is right. A topic, obviously, all close to everyone's talk today. Real estate is a hedge to inflation. Given the underlying rents and the way income is done on real estate, multifamily being a perfect example or hotels, one is able to raise its rents in line with what's going on in the markets. Inflation also serves to make our loans better in that it stops or limits new supply because the cost of construction goes way up, which, obviously, protects our investments. And then lastly, given where yields are today, we're able to generate attractive yields for Athene, well wide of investment-grade corporates is really the benchmark that we use. This is a pyramid that we like to use, kind of a funnel if you will. So what's the most important for us is really the transaction sourcing. As a direct lending business, we have a team of originators throughout the United States and Western Europe who are really dealing directly with the borrowers, brokers and others to source transactions. These are -- this is actual stats from last year. You can see 2,600 deals came into us. Obviously, the Internet and e-mail has made that a lot better. When I first started the business, used to get these huge packages in these big books. So obviously, with e-mail, they can go out to a lot more people. From there, we do an underwriting. What do we think of the deal? It's probably a little more preliminary. Does it make sense? How do we think of the sponsors. Is it someone we want to do business with? Is it a property type we like, a geography we like? And then if it kind of passes that initial sniff test, we'll do more of a deep-dive, bottoms-up underwriting. And from there, you can kind of continue to see that the funnel narrows to where we actually are issuing a nonbinding term sheet, laying out the types of terms that we need because for us, it's not just the economics. There's a lot of structural features that we'd wanted to deal, whether it be amortization, the ways that we're managing the cash, approvals that we have. And then from there, it's actually the closing of loans. For us, a loan can take anywhere from 1 to 2 months to close. We're negotiating documents. We're visiting the property. It's a very hands-on approach. Again, very bespoke, this is not something you can do off of Bloomberg. This is not something that one person can do. It really takes a team of people to do it. And then lastly is the closed loans where I mentioned asset management. So we will add the closed loans as well as other loans into it and make sure that we're continuing to have a dialogue with borrowers, we're monitoring the properties, and then we're using that information to also help us underwrite new deals more efficiently. With respect to also our platform process, similar to, I think, what Jim mentioned in terms of Athene's appetite, there are other pockets of Apollo capital that like commercial real estate debt, and by marrying up these different pockets of capital, we're actually able to speak for very large transactions, which borrowers prefer. Borrower would always prefer to deal with one lender as opposed to a syndicate, which is great for transaction sourcing. But what it also allows us to do is size the transaction appropriately for the pocket of capital based on whether the capital they have available at that moment in time, the existing portfolio they have. So we do a lot of deals where we will have pari passu lending amongst various Apollo vehicles, Athene included. We also have other Apollo capital that's looking for a higher return, higher risk. Maybe it's an equity vehicle that wants to play a little defense and want to do debt. So we're also able to senior, junior things. So that vehicle that's willing to take more risk can take a more junior piece, leaving Athene with a safer, more senior position. I will add, unlike some others in the business, we do not loan to ourselves. That's a sacred thing called third rail. So we will never loan money to ourselves in the real estate business. With respect to Athene's portfolio specifically, as I mentioned, predominantly first mortgage is 87%, a 1.8 debt service coverage ratio and then the earlier 57% weighted average loan to value. Actually, here is an acronym. In our world, we rate loans and this is kind of the insurance company standard with what's called a CM rating. That goes all the way from 1 through 6, and then it gets mapped back to a capital charge. As you can see, nearly 100% of our portfolio is CM-1 through 3, which maps back to the equivalent of investment-grade corporate bonds. So it's a very attractive capital charge. And also, you can indicate from the way the market looks at our loans, kind of confirming what we've said, which is kind of lower leverage and safe. On the chart on the right, you can see our annual originations, which, as I mentioned, spiked last year with the onset of COVID as we took advantage of the market. The $6.5 billion is actually what we funded. We do, do loans where we have future finding. So the $8.3 billion I mentioned was really included some future fundings. And then you can see a large part of our loans are floating rate, which, given the rising interest rate environment, are obviously a positive thing given where SOFR and SONIA are heading. In terms of diversification, you can see on the top left nearly 60% of the portfolio is fixed rate, which aligns well with Athene's long-dated liabilities. One other thing that we're able to do in our market is borrow long term from the Federal Home Loan Bank, which allows us to lock in a long-term attractive spread, and also the balance being floating rate, which allows us to take advantage of rising rates. On the top right, you'll see the geographic diversity. I would say we very much have a focus on institutional assets, gateway markets. But over the past few years, we've also been doing more in the gateway -- excuse me, the Sunbelt markets given migration trends, affordability and other trends. And I would say also, over the past few years, we found the U.K. and Western Europe to be very attractive, and that now represents approximately 11% of our portfolio. On the bottom, we break down the portfolio by property type. Again, very diverse with residential and office being our 2 largest asset classes. Residential, very defensive sector, similar to single-family homes, a real undersupply of housing, lots of household formation, lots of job growth. So we think it's a very defensive portfolio for us, especially at our basis, which is very low leverage. The second largest asset class is office. Clearly, a much debated asset class given the prevalence -- or I guess, increase in work from home. Hopefully, everyone here is going to the office afterwards as is Apollo. But clearly, that has had an impact. We do think we have a very defensive portfolio. Approximately 52% of the portfolio, you can see in the middle is Class A office. We continue to see a real flight to quality. In some instances in New York, for example, we're seeing office rents higher than we actually even underwrote a few years ago. Another 25% of the portfolio are long-term leased offices, usually headquarters locations. And on the bottom right, I think one of the competitive answers that we have as being part of Apollo is our other category at around 14%. This includes things like studios, caravan parks, parking garages and other asset classes where we're able to use the breadth of the Apollo platform to help us underwrite complex deals. We're able to get higher yield at lower leverage generally than more traditional property types just given not everyone can understand it and not everyone has the capabilities to do it. So how are we doing since the onset of the pandemic? While we didn't bat a thousand, I actually think we're doing pretty well. As I mentioned, only 30 basis points of cumulative impairment since then. We worked really a lot with our borrowers. As I mentioned, asset management is key. COVID was really no fault of anyone, and we really did view it as a temporary thing. So we worked with our borrowers who had issues on cash flow. We got them to put money into the deal. Maybe we gave them a little bit of a waiver on when they had to pay interest. But thankfully, everything has really come back. So even during COVID, under 1% of the portfolio was delinquent. We're now over 99% of our positions being paid. And while COVID is not over by any stretch, we think, again, the portfolio continues to be well positioned, and that is due in large part to our leverage being so low and our ability to really pick and choose which properties and borrowers we do business with. In terms of value today, clearly, not as much as the dislocation as COVID or the GFC, but we are seeing tremendous opportunities as the markets have repriced pretty dramatically, whether due to inflation, rates, Ukraine, lots of things going on in the market today. These are 2 recent deals we did, the bottom left being a self-storage portfolio, self-storage, very defensive property type. This portfolio is for U-Haul, a public company, low leverage, 10-year fixed rate deal. The portfolio is nearly 96% occupied, high debt yield, which is kind of the equivalent of a cap rate for us. And then also, we were able to structure with 25-year amort, which means over the course of the 10 years, approximately 1/3 of this loan is going to be repaid, enabling this to have a much safer balance at maturity. On the right is a Charlotte, North Carolina hotel, Charlotte, clearly, a Sunbelt market, benefiting from everything going on there. Charlotte is a great market, both from a leisure perspective as well as business. This is a repeat sponsor, low leverage, sub-50% LTV. The borrower wanted a little more leverage, so we partnered with a third party to provide even more debt behind us. So we kind of have a good sponsor and a good mezz lender behind us. And floating rates, we're able to take advantage of rising rates. And then before I turn the call over to Marty, who will talk about finance stuff given he's the CFO of Athene, a couple quick takeaways. Athene really benefits from Apollo's platform in that we are one of the largest lenders out there, nonbank lenders, I have to say, out there. The position is -- the portfolio is positioned defensively at 57% LTV. With 40% of our loans floating rate, we're very well positioned for the rising rate environment. And lastly, we think this current market volatility is creating attractive opportunities for us to continue to invest on behalf of Athene. Thank you. Marty?

Thanks, Scott. Well, as Bret said, most of you have been caffeinated and now you've all been securitized and collateralized. So we're going to wrap up our prepared remarks with not 1 but 2 CFO presentations, so get ready. We heard today from our speakers about how we manage our business, how we originate our liabilities, how we manage the assets behind it, how we think about and manage our risks. What I'm going to do here in our session is talk a little bit about what that means for our earnings profile and our growth, how we think about capital and how we manage capital. And then finally, I'm going to wrap up and talk a little bit about rating agencies and the importance of that on the retirement services model that we have. But just as a reminder, with the merger on January 1, Athene's earnings show up and financial results show up in Apollo's segment results as the retirement services segment, hence the name of this entire teach-in. The legacy Apollo businesses show up in the asset management segment and the principal investing segment. So the major component that we look at when we think about the retirement services segment is spread-related earnings, kind of the counterpart of fee-related earnings in the asset management segment. And spread-related earnings are essentially operating income pretax, before tax. And then as Jim's mentioned earlier, we have a very simple business model. What is SRE, spread-related earnings? It's pretty simple. It's what do we make on our assets? Or do we pay in our liabilities? And what kind of expenses do we incur to run the business? And that's SRE, pretty simple. It's a little harder to actually execute, but it's pretty simple as a strategy. Spread-related earnings are very predictable. They're recurring, and they're sustainable through the cycle. There's no lawyer to change that, and we're saying they are recurring, not they may be. And it's true. That's why we say it. If you think about our business model, which we'll talk about a little bit more later when we have fixed liabilities and essentially fixed rate assets, the spread that comes through is pretty predictable, and it doesn't change a whole lot. We show here a couple of different representations of spread-related earnings. The one on this side is really the kind of as-reported number. And there's a couple of elements of variability that have created some variability in the overall results. One, which is more minor and pretty predictable, is changes in interest rates. And even though we're very well matched, we do have some floating rate assets, and I'll talk about that in just a moment. But historically, that's been a bit of a headwind, but in the environment we're in today, in fact, this morning, the 10-year treasury touched 3.30%. We expect it to be a pretty significant tailwind. But the other aspect of our business that creates some variability quarter-to-quarter and potentially year-to-year is alternatives. We have a modest part of the portfolio in alternatives. And those are mark to market every quarter. And the returns on those, while over time they've been very sustainable, over the last 9 years, we've got, on average, 12% returns; over the last 3 years, we've got 13% returns, they do vary quarter-by-quarter and potentially year-by-year. So we think a reasonable and helpful representation of spread-related earnings is to normalize them and take alternatives and normalize them to assume an 11% return, which is actually somewhat below what we've been getting historically. And when you do that, spread-related earnings are even more stable and very highly correlated beyond that to fee-related earnings, which is the highest valued earnings stream that Apollo has. But if you look at the relationship really all the way back to 2014, it's very steady. And in fact, it's 95% correlated. One would note that the multiple between spread-related earnings and fee-related earnings is not nearly that close, the reasons that we're trying to clarify and go through today. So why are spread-related earnings so stable? Jim touched on this earlier. I'll touch on it in a slightly different way. For every dollar of funding -- and you heard Mike Downing talk this morning about our liability makeup, annuities, pension group annuities, fund agreements and payout annuities. For every dollar of those liabilities, we put up $1.08 of assets, $1 of assets against the liabilities, and then we have $0.08 or 8% that really represents capital to support the business. Now if you look at how we invest that $1.08, 6% or a little over $0.06 is an alternative. So those are mark to market every quarter. We think those have had and will have a very good attractive return, 11% normalized, maybe more than that over time. And the rest of it is really fixed assets that when we put them on, we pretty much know what the rate's going to be. Just like when we put the liabilities on, we know, by and large, what the cost of funds will be either exactly or within a few basis points. And that's what creates the sustainable, predictable spread model that we have. Now how do we grow spread-related earnings over time? I'm going to touch on some of the key themes here this morning. You can see the pretty stable net investment spread. We've had a little bit of headwinds because of lower rates in the floaters, which I'll speak to. But ultimately, the way we're going to grow spread-related earnings is in a few different ways. First and foremost, we're going to grow our business. We have tremendous opportunities in our businesses, and Grant touched on that. We're just a very small bar so far as successful as we've been in some very big bar opportunities. And that's a big part of how we're going to grow, and I will touch on our growth profile in just a bit and what that means for our assets over time. The other way we can grow SRE is by that net investment spread. And as I just said, with the rising rate environment, we'd expect some tailwinds for what happens given the floaters we have in our portfolio. And I'll touch on that as well in just a moment. The other thing that's a little bit newer for Athene, it's not new, but it's newer, is the establishment of ADIP a few years ago, and that now creates an opportunity for Athene to not just source additional business that Apollo can get fee-related earnings on but also some additional fees that Athene gets in spread-related earnings for managing that ADIP sidecar. And then as we grow, we're in businesses that are very well established. We made over $2 billion last year with 1,400 employees. It's an extremely efficient business model, and it's pretty well built out. The additional hiring and staffing and infrastructure we need to do pales in comparison to the growth opportunities. So we expect that our basis points of expenses would shrink over time. If you put all those factors together, which are pretty powerful, what that means is we think spread-related earnings have a low double-digit growth profile over the next several years. So I talked a bit about interest rates. This hopefully clarifies some of the mystery to the extent there's mystery. And again, the 10-year treasury has touched on 3.3%, so it's a notable backdrop to talk through this. But about 20% of our assets or about $37 billion currently is in floating rate assets. You heard Bret talk about CLOs. Some of our commercial mortgage loans are floating rate as well as a few other asset classes. And that's about $37 billion of our asset portfolio. But we do have some offsets on the liability side. About $11 billion of our liabilities, predominantly funding agreements, are floating rate. We either issued them directly floating or if we issue them in foreign currencies, we'll always swap them back to U.S. dollars, and sometimes, we leave those floating rate in U.S. dollars. So those liabilities of $11 billion created a bit of an offset on the floaters. So the net long exposure, if you will, to floaters, is about $26 billion. By the way, those floaters are, by and large, indexed to the short end of the curve, 3- and 6-month LIBOR and so forth, probably 75%, 80% of them. So you've heard us talk in the past few months about the kind of rule of thumb for every 25 basis point parallel shift. There's a change, upper change if it's a positive move, an SRE of $30 million to $40 million. If you translate that into where our rates had been actually at the end of April, which is some time ago, now it's actually even higher now, that translates to $180 million of additional SRE this year or $0.30 a share. So lots of upside from the rate environment that folks always think of when they think in terms of an alternative asset manager profile. So we've talked about floaters. Let me also talk about our growth profile. Grant set some context for that. You can see the gross inflows and outflows. We have very predictable outflows, as Mike Downing said, on average, we've had about 9% of liability outflows that are very predictable, either scheduled maturities or predictable lapses, and that's a bit of a negative against the big and growing organic inflows that were going as well as some of the inorganic inflows we get. And so when you put all that together, over the last 3 years, that's an 8% growth rate. It's actually higher over the last 2 years than over the first quarter. But it's an 8% growth rate over the last 3 years. That's about double what it is for some of our retirement services peers, and it's 8x what it is in the insurance asset management or traditional asset management space. So that's, we would argue, very much best-in-class growth profile in our business. If you think about what that means for our balance sheet, we kind of referenced that we expect it to double. We actually, in our plan, expected to get to $385 billion, which is not to say the management team or Athene doesn't expect it to be better than that. But let's use that as what we're talking about. At the end of 2026, $385 billion, which compares to $210 billion at the end of last year, which is about 3x what it was back in 2015. So we've had tremendous growth. We expect to continue to have it. And that's how we're going to grow earnings. You can see that, at the end of 2026, we expect to make $5 a share in spread-related earnings. Notably, with the success that we had in the first quarter and with the interest rate backdrop for this year 2022, we now expect spread-related earnings to come in at $4 a share given the strong returns that we had in the first quarter and the rising interest rate backdrop. So that's a $0.65 improvement over our prior guidance, so a nice big lift there so far. Let me shift now to talk a little bit about capital because as we grow our business and want to get ratings upgrades and want to do things for shareholders, how we manage our capital is one of the most important things we do at Athene. And the establishment of ADIP a few years ago was a game changer for Athene. Before we had ADIP, as we would manage our growth, every dollar of growth that we have would have to come from our own capital at Athene, which we would have to manage by constantly watching how much excess equity capital we had and forecasting it, how much debt capacity we had, and that was kind of it. And as a public company, you constantly are weighing. We want to make sure we have capital to grow, but we don't want to weigh down the balance sheet. The establishment of ADIP gave us the opportunity to tap on-demand capital when we needed it and also was very much helpful in us improving our credit ratings, why we were growing. We're able to grow, throw a lot of capital at new business but also maintain a lot of capital on our balance sheet. So it's been a game changer. And you can see before the establishment of ACRA, as I said, every dollar of capital that we had at Athene would go to fund our growth. When we first established ADIP, we would use it for inorganic deals, big, chunky, lumpy transactions like the Jackson National transaction a couple of years ago, which was $28 billion in size. And we also used it for a lot of pension guarantee annuity business. And that meant about 76% of our capital is coming from Athene and the rest was coming from ADIP. But going forward, we're contributing more of our organic businesses or part of our organic business flows into ADIP. Last year, we began to contribute some funding agreements into ADIP. This year, we're contributing some of our retail business into ADIP, and ADIP investors are very excited about that. So that means, going forward, when we're sourcing our business, only 55% to 60% of the capital is coming from Athene and the rest is coming from ADIP. So it makes us much more capital efficient. And to demonstrate that, we've got -- there's a lot of math on the slide. Don't worry. I'm not going to go through every number. But just simplistically, if you think about every $1 billion of capital that we had that we dedicate to organic business or inorganic business, that would basically allow us to put on about $12 billion of liabilities. Now with ADIP, every $1 billion of business that we put on, along with what ADIP contributes, allows us to put on $21 billion of liabilities. That's $9 billion more. That's a lot more. And so what that does is it does a couple of things for our earnings power. It's kind of a double whammy in a positive way. One is it creates $9 billion of additional assets for Apollo to manage for -- on behalf of ADIP and the sidecar and to create additional FRE. The other is it creates another component of spread-related earnings in Retirement Services for Athene because we're also getting a fee from ADIP on managing that sidecar. And so taken together, those 2 components, additional components add another 25% of earnings power. So it's been ACRA and ADIP has been a game changer not just from a capital standpoint and a growth standpoint but from an earnings efficiency standpoint. We talk a lot about capital. We have a lot of capital. We have over $7 billion of deployable capital as we speak, a little over $3.3 billion of excess equity capital and untapped debt capacity. What that is, just to highlight a little bit more, is most companies in our space that we compete against that have ratings like ours or better than ours operate at typically 25% or even close to 30% debt-to-capital ratios. We operate more like at 13% to 15%. So if we took our debt leverage up to just where others in the industry are that are comparably rated, that would allow us to use another $2.9 billion of debt. So that's what that untapped debt capacity has -- means. And then we also of course have untapped ADIP capital so far from the existing ADIP 1 that we can tap. That adds up to a massive amount of capital. But it's important to understand that Athene's in-force is also a very big generator of capital for the business. So our in-force business generates capital in a couple of different ways. One is it's making money. It's making very positive earnings. We expect this year the in-force business is going to get about $2.1 billion of earnings that will go to capital. And then on top of that, some of the business, as I said earlier, lapses, offer matures, about 9% or so of the balance sheet typically in a given year. When that business leaves Athene, that means we release the capital behind it, supporting it. So that frees up, in this case, for this year, we expect another $800 million of capital. So taken together, those 2 components on our in-force creates close to $3 billion of additional capital generation over the course of 2022. To give you a sense of what that means as we think about the sources of capital and how we spend it, again, on the in-force, $2.9 billion of capital being generated this year is our expectation. That's not the only way we source capital. We also tap the capital markets pretty much annually with senior debt or preferred but always in line with that mid-teens debt to capital goal, and we don't intend to exceed that in usual circumstances. So that's an additional source. So that would mean, this year, our expectation is to source $3.4 billion of capital. Now when you think about $37 billion of organic growth, which is a lot of organic growth, and we may well do better than that, we'll see, this year, net of what ADIP also contributes, Athene only ponies up $2.1 billion of capital. So it's a very capital generation type of business model that we have. So that means, this year, we'd expect to exceed the capital we spend organically by $1.3 billion. And that capital that's additionally generated can either go to additional strategic growth opportunities or capital return or both. One of the things that's very important to us as we manage our capital, manage our business is our ratings. And you might say why is that. I mean for those of you who follow, alternative asset managers in the old days of Apollo was A-. Martin Kelly and I've talked about this, A-, A, A+. It didn't really impact the operations or the outlook from a profit standpoint for Apollo. But it's a big deal in the retirement services space. And the difference between being A-, A and A+ is quite meaningful. And I'll just give you some context as to why that is. In the funding agreement-backed note space, which is basically issuing funding agreements in note form to a subset of the credit markets, obviously, the higher rated you are, the lower your cost of funds is and potentially the wider the universe of investors is. So as -- so credit upgrades have an immediate impact on our cost of funds versus if we didn't have those upgrades. But it's also very important in our retail business. You heard Grant talk today about the additional platforms that we've been able to get on. We wouldn't be able to be in Wells Fargo's platform, which is the largest fixed annuity platform out there if we were A- ratings like we were a few years ago. It's very important to get on these [ traditional ] platforms that you kind of meet the ratings criteria that they have. And the better the ratings we have, the more platforms we're on and the more business we can sell. The ratings are also very important. As successful as we've been in the pension guarantee annuity space and the flow reinsurance space, good ratings are a competitive advantage for us versus those that aren't as well rated. If you're facing off with a sophisticated plan sponsor or another insurance company or a retirement services company, having a better rating than the other companies that are trying to win that business is very helpful when those counterparties think about the counterparty risk that we face and phasing off any pension guarantee transaction or what have you. It also can create some pricing efficiencies as well. So ratings are very, very important from that lens and pretty much all of our channels. And we spent a lot of time and a lot of years improving our ratings over time. In the aftermath of the acquisition of Aviva US, Athene was able to achieve A- ratings at S&P and then did the same thing with Fitch year after that. But you fast forward to where we are today, we just got upgraded to A+ by Fitch. We got upgraded about a year ago by S&P to A+ and along the way, AM Best, which may not be a firm many of you are familiar with, but in the insurance space, it's one of the biggest, most important NRSROs that's out there. We've been able to achieve a lot of these upgrades. And interestingly, it doesn't mean we have to change anything in our business model. It doesn't change how much capital we hold or how we invest the money or how we manage the business. And in fact, in 2021, right after COVID, S&P was so impressed by how we performed during that year, 2021. They took us immediately to A+ from what was A stable without an interim outlook upgrade. That's very unusual. And finally, just a few excerpts from the rating agencies, some favorable excerpts obviously. One is from Fitch with comment on our asset management capabilities and how well matched our portfolio is. And then both S&P and AM Best have called out our strong capital levels. S&P notes the AA level of capital that we have, and AM Best talked about that as well as our financial performance. So rating agencies have been very important, and we want to give you some of that context as well. With that, I will turn it over to Martin, who will talk about Apollo's business model and how retirement services fits in.

So 2 CFOs, same initials, same first name, used to sit right next to each other, actually, on the Lehman fixed income floor. It was decades ago sadly. We do sound different though, so that's the way to tell us apart and some facial hair. So I'll take the time. We then will go to a Q&A session, which Marc will join us for. So you've heard from the entire senior management team, and we've really tried to focus the presentation today on feedback and focus points that we've heard from all of you in the last year, plus or minus. You've heard about the business model, asset and liability construction. You've heard about risk management and product development. And then Marty sort of finished it off with just what I think is the raw earnings power of the franchise that is Athene. So let me connect all of that to the merger and how the merger of the 2 companies creates incremental value for shareholders. So when we look at the merged company, we see 4 really important strategic benefits, and none of these existed before the merger was consummated. Firstly, alignment, alignment between Apollo and Athene, and alignment between the merged company and our client set. Secondly, the ability to create differentiated asset flow, which just produce more yield. That's attractive to a bunch of constituents, which we'll talk about. Much better coordination across the company to allow product development and innovation, which Grant started to touch on and a lot of good things ahead of us in that respect. And lastly, capital efficiency and capital flexibility, massive amounts of capital created and built into the system to pursue growth. And I'll touch on each of these right now. So Jim earlier teed up the benefits of alignment. He used this slide for the right-hand side of it. And the point here is origination is valuable because it has multiple homes, and those multiple homes can create multiple forms of earnings. And because we own the position on our balance sheet and that position is valuable and attractive from a risk-reward perspective, our clients also want to own that position. And so assets are originated and end up on the balance sheet of Athene, creating retirement -- creating spread-related earnings and/or they can end up on the balance sheets of managed accounts, creating management fees and FRE and/or they can be syndicated through our capital solutions business and create syndication fees and other form of FRE. So before the merger, we cooperated. Cooperation created growth. And as we sit here today, we can identify about $130 billion of assets that are in our system today of assets under management that were created by seed capital from Athene. And this includes our hybrid value business, it includes our infrastructure equity business, it includes MidCap, the middle market lending platform, Athora, the Retirement Services business in Europe and others. And that was a good result. We're happy with that, but we do really think that much better results lie ahead, and it's really driven by at least 4 different areas of cooperation and coordination here. Firstly, continued expansion of new platforms. This is a key part of our bet to get origination from $80 billion to $150 billion per year over the 5-year period. Acceleration of new product development. Grant touched on some of this earlier in the form of annuity products. But as we build out the platform broadly, life sciences, GPLP Solutions, climate financing and more, that growth can be seeded by Athene. New businesses, we created an enhanced capital solutions business with the benefit of capital from Athene at a strategic third-party LP. And we're penetrating Asia in a way that we haven't been able to do before. Challenger, FWD and then building out teams and capabilities across Asia broadly. So I think a recent example is really instructive here. We recently financed a $5 billion fund level loan to Vision Fund 2. SoftBank approached us, the loan started at $4 billion, it grew to $5 billion. And this loan has really attractive characteristics. It's backed by 150 portfolio companies in that portfolio. It has a very low LTV and a high attachment point. It creates about 300 basis points of outsized yield relative to comparable credit in the public markets. It's A-rated. And that asset ended up in 3 different places. About 1/3 of it went on to Athene's balance sheet, in what we call the fixed income replacement bucket, earning that 300 basis points of excess return. And the other 2/3 was both syndicated to third-party LPs, including insurance companies and allocated to managed accounts for which we earn management fees. So that transaction, there's very few firms that could take down a transaction of that size to start with. It had the financial benefit of creating SRE and then 2 different forms of FRE in management fees and syndication fees. So third-party investors look at that business and they want to participate in it. And so -- and that comes to us in 2 different forms, what we call managed accounts, and syndication through our capital solutions business. So I think a good example of that is this business that we call high-grade alpha. This business attaches to that type of business. It has -- it's capital that wants a risk-return profile similar to the transaction I just went through. We've taken this business from zero to $7 billion of managed account assets under management in the last 12 months. And at the same time, we've developed relationships with insurance companies who want to co-participate in that same risk. And so investors will decide if they want to take a piece of a transaction through syndication or whether they want to allocate money in the form of managed accounts to us. But they are just two other examples of FRE that we create as a direct benefit of that. That's an opportunity we didn't have before. So the second strategic benefit. A lot has been said about the importance of Athene's equity portfolio, which we also call the alternatives portfolio. It's the 6% of assets that are invested in equities. And that has, over time, created 3 benefits for us: one, origination platform development; two, seeding new funds; and three, building out our Retirement Services ecosystem, including Athora, Venerable and the like. As it relates to origination platforms, this is really important to us. It's our ability to create differentiated credit of high-quality, less liquid assets that just yield more. And again, a key part of our bet to get assets originated each year from $80 billion to $150 billion. And we expect this to continue to grow, as I'll describe it a bit more. We think owning the means of production and getting -- and just being able to create assets is a really important part of the Apollo ecosystem. These platforms today, many of which we've spoken about at the Investor Day, on earnings calls, are now run rating their annual production at about 2x the level they were 12 to 18 months ago, and we expect that to continue. These are high-quality businesses, high-quality management teams and we expect each of them to expand and scale over time. So what does proprietary origination provide for us? Financially, multiple earnings benefits. There's two forms of spread-related earnings and two forms of fee-related earnings that come from it. And so on the spread-related earnings side, investments in the platforms have an attractive risk-adjusted equity return of low to mid-teens returns. That comes through in SRE, which Marty described. The production from those platforms creates rated high-grade paper, which comes into the fixed income category, earning excess return in the investment-grade part of Athene's balance sheet. And then on Apollo's balance sheet, we earn management fees for the same assets, including if they're allocated to third-party accounts and/or in many cases, we earn syndication fees on assets that pass through and are syndicated to other syndicate partners. So the third strategic benefit. I think we are very early stage and Grant made the same comment earlier that there's an awful lot ahead of us here. Let me give you two examples of things that we're working on that are sort of early-stage innovation that are directly benefiting from the merged company. One is related to the alternatives portfolio, the equity portfolio on Athene's balance sheet. That has, as Marty went through, created low double-digit returns over a long period of time, high sharp ratio, low standard deviation of returns, very attractive risk return portfolio for many investors. So we see institutional demand for that product. We also see retail demand for that product. And so we plan to offer this as a product, which is attractive in bringing third-party capital in but also has the financial leverage impact of creating more capital to seed new businesses, new platforms and develop new products. Secondly, completely separately. For most of our existence, Athene has largely catered to tax-sensitive investors in the form of tax wraps product, our annuity wrap product. And Apollo has largely catered to tax intensive investors in the form of pension plans, sovereign wealth funds and the like. And again, this comment we sort of alluded to earlier, we are planning to create Apollo product and distribute that in a tax wrapper, an annuity-type product, which we think provides retail access to institutional quality products. I would expect the first of these to roll out in the second half and the second of these to be sort of later in the year into early next year. And the fourth, last, certainly not least, I think, is a benefit of the merger is capital. Capital efficiency and capital flexibility, I do think the benefits of this today are clearer than they were 9 months ago when we did our Investor Day and before that when we announced the merger. I think the platform has multiple sources of capital that are available within the structure, and there's multiple sort of forms of flexibility around how that's deployed. After the restructuring of the asset manager balance sheet that we did in the first quarter, I think that we have the lightest balance sheet -- the lightest asset management balance sheet in the industry. And then Athene itself has multiple forms of capital that Marty went through, excess capital, debt capacity, ADIP and also the benefit of the alternatives portfolio. And then if you recall, sitting above both the retirement services business and the asset manager is the holding company that we've indicated will create $15 billion of investment capacity over 5 years. So how is it so efficient? I think the reality is we just have -- we have a lot of capital in the system that can create earnings growth that's not dilutive to holding company capital. Athene today, these are the same numbers Marty just went through, Athene has $3 billion of excess capital. That will grow just as Athene's business creates earnings. ADIP has about $1 billion of capital today. We plan to raise a successor to that later this year. Athene has about $3 billion of debt capacity. That will grow at constant leverage just as the business grows. The alternatives portfolio today is pretty much fully invested, but we plan to grow that with institutional and retail demand over time. We have a strategic partnership. Mubadala was an important partner to us in setting up our capital solutions business with Athene. There are others that you should expect to hear about. And then we have the holding company, which over time, will have $15 billion. And I think really importantly, we have choices around how we spend this and allocate capital around the system. Each of those uses of capital create earnings. And I won't sort of go through the chart here, but it's -- in almost all cases, there's FRE and SRE that's created as a result of using the capital. So the coordination, the operational coordination, the financial coordination has multiple financial benefits around the structure. So connecting back to Marty's points on capital creation using a $2 billion after-tax number. This is the $4 a share that Marty indicated in his slides. We have a choice in how we allocate that $2 billion of capital. We've indicated $750 million a year of capital being upstreamed to the holding company, and that becomes part of the $15 billion. And that leaves $1.25 billion for growth. And when you staple that $1.25 billion quarter, to ADIP's capital, to increasing debt capacity, you can fund growth organically, inorganically. And the sort of virtuous circle of that is it then creates further alternatives capacity to invest in all the other benefits that, that brings. So if all we do is organic growth and no inorganic growth with expected runoff of the business, we create $1.5 billion of alternatives capacity every year from the organic growth that we're currently seeing. So -- and that then translates itself into the same FRE and SRE benefits that I talked through that you can see on the right here. So a busy slide, similar sort of to one that Marty used, I'm not going to go through every number, you can sort of take a look through it. I think what this does is reinforce the capital flexibility and the generative scale that is Athene today. And if you look at 2020 and 2021, I think it's pretty instructive. In 2020, $56 billion of asset growth was funded. It was pretty much 50-50 split organically and inorganically. It was entirely self-funding. There was no capital that needed to be raised, and that also included a year when there was $400 million of stock that was bought back -- that was sort of taken off as part of that. So massive growth of a scale of $50 billion plus. 2021 was a slightly different story. No inorganic growth but a record organic year with $37 billion of production. In that year, there was $1.3 billion of excess capital created, and that was after the first $750 million that was paid upstairs. So $2 billion of capital created in a record year of organic growth and then a lot more growth can be accommodated with the capital sources that are created. And then finally, the role of the holding company. This is just a redo from Investor Day, but just it's really important. This is the strategic use of capital. I haven't spoken about this at all as I've gone through my comments, but all of the other growth is funded by capital that's built into the system. We then have investing capacity of $15 billion up top. And we've indicated that $5 billion of that is to pay the fixed dividend. So there's $10 billion of -- left and that will be to fund growth, to fund strategic growth, FRE-accretive add-ons, increases in the dividend, buybacks and the like. So I think it's actually really instructive to look back at the last 15 months. And like what have we done with the capital sources, we've done a lot. We've bought a lot of origination platforms. We've invested in strategic assets. We've bought an FRE business in Griffin, which is also very strategic to us. And we've made investments in Asia to grow out the Retirement Services business there through FWD and Challenger. And you can see the sources of the capital and you can see the earnings profile that's created as a result of that. But it shows a nice diversification and I think, reinforces the flexibility we have within the system around how we invest our capital. So let me just cover off a few other points quickly. And I guess the question we all ask ourselves is why is $1 of SRE with 1/3 what $1 of FRE is worth. And I think Marty did a really nice job of sort of looking at the correlation between the 2 earnings streams and the recurring nature, the sticky nature, the high quality nature of the assets, the growth in that earnings stream. And it's being created with a really efficient capital source. So it seems to us that has all of the characteristics of a valuable, highly attractive earnings stream. And to underscore that, I would pick up the comparison to the non-traded BDC income stream. Both are attractive, both are valuable earnings streams. There's a really important distinction though, and that the retirement services earnings is driven by high-quality assets, investment grade. There's -- we earn in SRE 100% of the ops above the cost of funds on the annuity book. So everything above 2.5% is SRE. The assets are held at cost, so there's no cyclicality in that earnings stream to mark-to-market movements. And we provided 8% capital to create that growth and stability. so we think this is a very attractive earning stream, paired with the previous point, growth stability, durability, stickiness, et cetera, which deserves an appropriate valuation. Finally, the merger didn't really change anything around the amount or quality of management fees. The fee structure between the asset manager and the Retirement Services business is the same as it was premerger. It's market-based, which we've looked at many times over the years. It's paid in cash every quarter. And with that fee in place, Athene has achieved 17% ROE over its life and a yield out performance on the assets. The scope of services is broad. We do a lot for that fee, and you can see that in the middle column here. And I think it's important that the fees are mark-to-market in two pretty objective ways. One is the investors that come into ADIP pay the same fee structure and a funding fee to Athene. And so that's been a very successful structure for those investors. And as I said, we expect to roll into an extension of that structure later this year. And then investors who want high-grade alpha pay the same fee rate or higher as they come into that business, and that's the $7 billion of capital that we've accumulated in the last year. So I'll wrap up and we'll move to Q&A. We're focused on 4 issues. We've really tried to tailor this on what we've heard from you as the focus points. One is sensitivity to the credit cycle, which Doug hit and Jim hit. And looking at how we stress the book, the construction of the asset classes that we think are perceived to be more risky, structured credit and commercial real estate and looking at how those markets have evolved and how we play in those markets in terms of our seniority. Interest rate exposure, I think Grant made the point very forcibly. We win in a higher rate environment, and we're starting to see that come through in earnings. Liability flight risk, I'd encourage you to go back and relook at Mike Downing's, maybe 3 times. There's a lot of really good information in there that I think stratifies the book into the true parts of the book that actually have surrender risk and what the consequences of that are. And in the sort of the California falls in the Pacific Ocean scenario, there's a $500 million economic loss over a period of years. So what we think is a very contained risk profile to lapse risk. And then balance sheet heavy. We look at our business and say, there's multiple forms of capital, there's a lot of flexibility in how we use it. We've showed how we've started to employ that strategy in the last year. And that's -- you'll expect to see more of that in the years ahead. So with that, I'll open it up to Q&A. I ask Marc to come up, Jim, Grant and Marty.

Great. So as we set up here, we have Apollo's CEO, Marc Rowan, joining us, as well as some of the speakers you've heard from today, Jim, Grant, Marty and Martin. We'll take about 30 minutes for this Q&A session. We would ask that if you could just raise your hand to acknowledge interest in the question, and we'll have a microphone come to you. And if you could just start by stating your name and your firm affiliation, that would be helpful. Craig, we'll start with you.

Craig Siegenthaler, Bank of America. So in your aux bucket, you guys own stakes in your strategics. And my question is, how do you value them every quarter?

So almost all the stakes are valued at book value. And we look at book quarter after quarter. We also have, for a number of the vehicles, third-party investors who come in and out at that mark on a quarterly basis. So the largest of that is MidCap and we own about 35% of MidCap. And so we regularly accept redemptions and subscriptions at that book value. And we're about to do the same with the second largest of those investments, which is Wheels Donlen. Ultimately, all of the platforms are likely to be diversified with third-party capital, so you'll see third-party marks the same way. There's generally not a lot of variability around the book. So if I were to tell you what happened in the first quarter, tight lending market, tight lending conditions, wider spreads. So MidCap for the first quarter was north of a 16% ROE versus what we think is 12% to 13%. We did not mark up the book, but we just reflected the accretion of earnings for the quarter.

Alex?

Great. Thanks for the day. Alex Blostein, Goldman Sachs. So I wanted to get your thoughts on how you envision the split of all of the proprietary origination activity over time between Athene and third-party capital. And the reason I ask is, and I think the funding business is a really good example of that where you're providing attractive yield potentially to your competitors that are putting it into an investment product versus putting it into your own third-party vehicle that will arguably earn a higher multiple in public markets. So how do you think about that?

So I'm going to start and then Jim will get to some of the specifics. So here's the hierarchy of thought. There's no yield left, no alpha left in public markets. Therefore if you want alpha, you have to be an originator. To be a powerful originator, you have to speak for 100% of the trade. To be a well-diversified retirement services company on your way to AA, you need to be diversified. Therefore, we have this conundrum. We have to speak for 100% of the trade, but we want to be diversified. Athene and Athora go first, not with respect to the quality of the asset, but with respect to the size. Generally, Athene and Athora want $0.25 to $0.30 of the dollar of every trade. Some more, some less, but there is generally a range. And once we have a product type like high-grade alpha, and we have third parties, we obviously don't get to take more of a good trade and less of a bad trade. We set our percentage, and we do business with the market on a fixed basis. And then every once in a while, when we raise new funds, we go back and we reset the percentage in the context of the business. I don't know if you want to add.

The only thing I'd add is what I said during my presentation. For the first time in Athene's 13-year history, now Apollo's asset sourcing machine has outpaced Athene's funding machine. So the benefit to Athene is we get to rightsize our appetite, so how much of these investments should we want. Then Apollo syndication and third-party machine kicks in and finds other pockets for generating fees. So it's the way it's supposed to work.

But I'm going to take it one step further so you understand, and it's not just confined to your question, but it's a mindset that it's important to convey. Large U.K.-based alternatives competitor wants to start a broker-dealer competitive with Apollo, we provide the funding for it. Large U.S.-based sponsor wants to start a BDC competitive with our BDC, we warehouse the assets for them and help them launch it. CLO manager wants to compete with Bret, we agree to buy a portion of their debt and a portion of their equity. We are in an ecosystem where the value -- we cannot do 100% of everything. We take our skill set and we earn the maximum amount of excess spread we can in safe areas. And if that has the benefit of enabling on the margin, competitive behavior, so be it. Jim is getting $0.25 to $0.30 of $1 of interesting syndications, I think the largest share other than Jim is 5. That is not fundamentally going to change the competitive equilibrium. But the other way around, I meet and Jim meets with CEOs of competitive companies all the time. #1 question, why do you syndicate to us? Because you're the single best client, you know exactly -- we know exactly what you need, we know exactly how to put it onto a Solvency II or an NAIC RBC balance sheet, and you like the fact that you're aligned with us. You're going to find this asset somewhere, we're just the single best provider.

Glenn?

Glenn Schorr, Evercore ISI. So a question on stress testing and current environment. If you look at -- and I love the stress test that you do when you look at all these terrible points in the past. Unfortunately, none of them probably had this situation of high inflation and high energy costs going on. So if you look at the stress test you showed us today, I think it was like $2.5 billion in a stressed environment versus $2 billion just in October. So curious what you think made that change? And then more importantly, what are you doing to prepare? Because the markets are screaming that there's a credit cycle coming. So what are you doing to prepare? And how does that impact your ability to double SRE and put up $15 billion of capital generation?

I'd say a couple of things. One, our business policy is to be prepared for this. That's why we always run with excess capital and a lot of deployable capital. And then two, we further strengthened our liquidity position. So our -- we now have a minimum of $4 billion of on-balance sheet cash and another $4.5 billion of off-balance sheet capabilities at the drop of a hat, where -- so $8 billion to $10 billion at a moment's notice without even liquidating any of our investment-grade public corporate. So both capital and liquidity are huge strengths of ours and we're ready.

And I guess I would just -- every crisis different. But if you think about the stress testing we did, you're right, what could happen here down the road given the inflationary environment and the Russia war against Ukraine, it's going to look differently if there's a financial problem. And the markets are indicating that could be the situation. But one of the things that, in that scenario, would potentially happen is it's coming on the heels of an inflationary environment. So in the stress testing that Doug went through today, that's in kind of these recessionary environments and the Lehman's where our interest rates plummeted. And so in our stress testing, that's built into those results which means our earnings are going down because of floaters going down. In this environment, while we might have credit losses and it will have to remain to be seen what those look like, but we've given you an indication of potential magnitude, there'd be an offset to some extent by that higher rate environment and the very high-quality floating rate assets that we've got that we provide some lift.

So I'll add another perspective to it, it'll help you also compare to other companies. We are not a current period profit maximizing company. And there are lots of ways that you can reflect that and understand it, but I'll give you some examples. I'll start in Europe and then I'll bring it home. In Europe, in SRE, for Athora, you are 50% allocated to sovereigns to get ALM matching. You have a choice. Do you own Spain and Portugal and Greece and Italy? Or do you own Germany, Netherlands and France? We only own Northern European sovereigns. We own no Southern European sovereigns. We're not a current period profit maximizer even though they have the same capital charge. Also, if your 50% of your book is in sovereigns, a lot of companies take those sovereigns to the ECB. They borrow EUR 0.50 against that. So they have EUR 1.25 of assets working against 100% of liabilities. They show current period profitability. We set up the lines to do that, but we don't draw it at all. We wait for spreads to widen and then we put on spread because we get once a decade the opportunity to really maximize spread. And we can go through lots of nuances. Now you bring it back to the U.S. Every dollar of cash that we hold is a net ROE negative. The willingness to sit with $38 billion of floating rate meant that we were buying insurance, pardon the pun, and it probably cost me $20 to say the word.

That's right.

But we've not sought to maximize current period profitability. Because anytime we wanted to maximize current period profitability, we could have done a swap and picked up rate. We could have taken Scott's entire book to the FHLB and put leverage on to lever the portfolio. We could have engineered a massive amount of reinsurance with Hanover Re that doesn't show up as debt. These are not the things that we do. We leave liquidity in the balance sheet so that we can be a buyer and put on spread when spreads widen. And if you have capital in this market, you also get the ability to do new business. Our industry does not raise capital. there's been almost no capital raised by the publicly traded peers or even the private peers of Athene for a very long time. In fact, they have been net distributors of capital and most have pulled every ROE trick in the book and the screws are on really tight. This is a good market for us. It's why 2020 was such a good market for us. And we look at spread widening. And this is -- for those I've been meeting with and Jim's meeting, this is not a surprise. The magnitude -- it's always a surprise in exactly how it happens, but we've been building liquidity since January.

Gerry?

Thanks, Gerry O'Hara, Jefferies. Earlier in the presentation, you cited new product creation and insurance rep alternative product. Can you perhaps just explain maybe simply how that's going to work and perhaps who the kind of ideal client would be for this type of product?

Go ahead.

So the first version of the product will be available to QPs, qualified purchasers, $5 million threshold. So it fits in the desire to expand high net worth distribution for Apollo. The insurance aspect of it is a no guarantee VA wrapper, it's technically a VA product, but there's no guarantees underlying. And it allows -- and it's in an array of existing Apollo funds. So I think we're up to about 6. Choose large AUM, long track records, great performance. It allows you to invest in those existing Apollo funds and get the benefit of tax deferral that the insurance wrapper gives to you. Initially to qualified purchasers, we're already thinking about flavors and adaptations after that, which would let us target lower dollar investors, credit investors and hopefully, ultimately, retail, but we haven't quite cracked that code yet. But the first in what I think will be a series of products that utilize insurance for its tax deferral benefits along with Apollo's great investment products.

I'll give industry context to it. So on our quarterly calls and our meetings, many of you are interested in the retail marketplace. If you think about what we as an industry have done in the retail marketplace for investors, the answer is not much. What we're offering investors as an industry today is essentially product that's existed for 20 years. REITs, BDCs and private funds. What we're doing though is for the first time, we're offering them with institutional quality fee streams and they are technologically enhanced origination and distribution, meaning people don't have piles of documents that they have to fill out. But we have not created bespoke product for a high net worth marketplace. We will, as I suggested, beginning in July, but following up beginning of next year, fulfill what I see is the beginning of the promise of alternatives for this marketplace. Keeping in mind that we think of an alternative as nothing other than an alternative to publicly traded stocks and bonds, alternative does not mean risk for us. It means less liquid. So the ecosystem that Grant is referring to is we will offer an investor the opportunity to have stable value, think money market fund, investment grade only, total return, opportunistic, REIT, BDC, hedge and equity, all on a wrapper that they can buy for a nominal cost that is very flexible, very surrenderable, that works because we're on both sides of the trade. Athene generates fee income, we generate asset management revenue and the investor gets something they've never seen before in the marketplace. If you can buy a BDC and pay full taxes, why would you not buy a BDC in a wrapper? It's just -- at some point, there will be an adoption cycle, a familiarity cycle. But this is a way of actually taking product that goes the full spectrum of alternatives. It's a full ecosystem, ranging from investment grade to equity, where clients will be able to take advantage of the synergy that the two companies have together.

Chris?

Chris Kotowski from Oppenheimer. A question for Marty Klein, I guess. It's -- most of us in this room are familiar with why we look at non-GAAP earnings for asset managers, but less so for why we would look at non-GAAP earnings for insurance companies. And so just on a GAAP basis, Athene lost $1.5 billion. There are 2 big add-backs, one is on the reinsurance assets and the other is on the other. Can you just explain to us why we add these back? Do the GAAP earnings ever matter? And what do the rating agencies and the regulators look at? Do they look at GAAP or do they look at spread-related earnings?

Sure, excellent question. I'll give you a short answer and then a little bit longer answer. The short answer is GAAP accounting was just bad in this regard. That's the short answer. Let me elaborate a little bit. So the biggest market that we have, I could be a good guy or a bad guy, is when we originate business through reinsurance, which we do a lot of, they're either flow or block. And it's the same kind of business profile and asset profile that we have when we originate business directly. But the accounting, for reasons only the accountants can explain, but I'll try to explain it here a bit, is very different. When we originate business directly in our retail channel or pension guarantee business, those assets are mark-to-market through what's called other comprehensive income. It doesn't go through net income. When you originate the exact same kind of products or very similar products with the same kind of assets, those assets are mark-to-market in net income. Why is that? It's because the GAAP accountants, the FASB and the SEC have said, "Well, that's a reinsurance transaction, and now you've agreed with this counter-party to take that asset risk." That looks like a derivative. And because it looks like a derivative, although economically, it's just spread business like everything else, the accounts have determined that should be mark-to-market through net income. I would say that the rating agencies really never talk about it, they don't care. They look at statutory earnings and they look at our adjusted operating earnings because they understand the accounting very, very well. For many years, we, as an independent public company would present our book value, like everybody else in the industry, on an adjusted basis where you would exclude AOCI, which is those marks on assets, but we'd also exclude the marks on reinsurance. And investors at the time in our industry and the rating agencies always got it and was never an issue. So the most we talk about it is internally are in conferences with new investors. But in the spaces that we're in on the rating agencies, everybody gets that, it's just noneconomic accounting. And the reality, as you've heard, we're matched with assets versus liabilities. So if interest rates move around, maybe there was a negative mark. But if we hold on to those assets, obviously then we're going to have gains over time as those assets approach maturity. So it's all this timing that washes out in the long run.

But it's only a one-sided mark on the asset side?

It's the one thing that LDTI will do next year, it's a good point, which is why the insurance investors have always discounted is it's a one-sided mark. The assets are marked but not the liabilities. Why would you do that? I don't know. That's years ago, that was the way it was determined maybe because liabilities are harder to mark. With LDTI, that Mike talked about, long duration targeted improvements, there will now be a mark on the liabilities that kind of corresponds with the market and the assets that will also go through other comprehensive income. So the accountants are finally after, I don't know, 20, 30 years fixing that aspect of it.

It's one of the few places Europe is actually ahead of the U.S. In Solvency II, assets and liabilities get marked at roughly the same rate. Liabilities get marked at market-based interest rates. So each quarter, you have a pro rata adjustment on both sides of the balance sheet. In the U.S., it's just on the asset side for reinsurance assets. .

I would also just add in the absence of doubt, the regulators don't really focus on it either. In Bermuda, there's a little bit of a mark on both the asset and liability side, as Marc referenced, and the U.S. regulators understand that is just poor GAAP accounting.

Ryan?

Ryan Krueger, KBW. I had a question on your interest rate sensitivity. So if I apply 25 basis points to the $26 billion of net floating rate like assets, it's about double the sensitivity you provide. I believe that's due to the offset of DAC amortization. So I guess my question is, following LDTI, DAC amortization will be decoupled from income. So will your sensitivity to rates be quite a bit higher after LDTI?

A little bit. But what you see, Ryan, that's a very important dynamic. Good to see you again, by the way. But the other dynamic is that not all of our floaters reset immediately. Now 80% of them reset after 1 and 3-month LIBOR, 6-month LIBOR, but it's not instantaneous. So over the course of the 1-year time frame when rates go up right away, not everything is reset for that full year period. So in addition to the kind of deferred acquisition cost amortization for this audience that occurs, that offsets a little bit of that. The other dynamic is not everything resets immediately.

So let's think about what's cheap today, though. So Marty and Martin both emphasized on the upside, and we obviously have held this position for this market because we were able to earn adequate spread, as you saw, 17% ROEs holding floaters. If you can earn what you want to earn and not be a current period maximizer and buy a free option, it's kind of what we did. The cheapest thing today is actually protection the other way. So you can imagine that as we think about the business, when you think about the risk to the business, it's actually rates going the other way. And this is an opportunity for us to make sure we take care of the other side.

Peter?

Peter Dunn. Marc, you went exactly where I wanted to go. It's just about the philosophy of creating this really stable earnings stream, but you do have this floating rate exposure that isn't really matched and it's really beneficial right now, but at what point do you go the other way? And maybe you can talk about if there's capital implications from that.

Exactly, I would just say exactly. Go ahead.

A lot of it is timing. So when rates move around, we see it pretty quickly on the asset side with some of that liability offset on the floating liabilities I talked about. But the reality is, for example, when interest rates were going down as it did in the last few years, the reality is that our interest credit rates on our -- a lot of our business, those are against also come down over time. Grant and the team as business comes up for renewal, looks at the current rate environment. And invariably, in that environment, would manage rates down. We have yet, in my experience or probably any of our experience ever changed rates up. It's always leave them alone or bring them down. And so that creates an offset so that over time, you kind of get that back.

Yes. The business is naturally biased to want higher rates, but there are some products and some scenarios where we would be less well off if interest rates plummeted. And so this is a really good opportunity to costlessly or near costlessly do the other side of it. Remember, our business is different than almost everyone else's business in this industry broadly defined. Jim has massive inflows pretty much every year. He gets to redo his portfolio on the margin. Most other people are managing a relatively static portfolio, whereas Jim gets to make new money choices to alter the character of the portfolio without going back and rebalancing.

One additional point, I guess, I'd make is that from a regulatory standpoint and probably not that many of you are students of U.S. regulations in the industry. But there's an aspect called cash flow testing that insurance companies are supposed to do every year. And you look at your balance sheet, and your existing assets liabilities, you don't assume any new business, and you shock that for upward rates of 300, downward rates of 100 or 200, up and down, all kinds of things that are very draconian scenarios. And you have to demonstrate to the regulator that you've got sufficient assets versus liabilities, excluding capital. So $1 of assets versus $1 capital, you have to demonstrate to the regulators that, that balance sheet will look okay. So that's one way the regulators in the U.S. keep track of the risk. We do that for ourselves as a management tool every single quarter and every single balance sheet that we have. We do it for our Bermuda balance sheets, even though it's not required. We do it for the U.S. balance sheet, even though it's only required annually. And that's a great management tool. So every quarter in real time, we understand the duration risk that we have and make sure we're in good shape.

Tracy?

Tracy Benguigui, Barclays. Just wanted to get a sense of the direction of cost of funding. I was actually surprised that I didn't hear from you guys about your custom indices and your products. And I'm just wondering, just given the weak equity markets, how that may have an effect on the cost of hedging and also to be competitive where the crediting rates are as you're pricing new products today?

Yes, it makes -- this environment makes it more challenging to operate our retail business, and we're evaluating that monthly in terms of where we are relative to the competition, they're doing the same for us. So whereas in more benign interest rate environments, you might go months without changing rates, we're now doing it often more than once a month. We've been successful doing that given the market share growth that I referenced. But generally, as you think of rates rising, we're doing it -- they are retail products. So it's not like when I say we make changes, we don't make changes in the same products twice a month. You kind of have to let it flow through the system. You change rates, you advise your distributors, it gets to the agents. Whenever you make a product rate change, you need to leave it in place for some period of time. And that also adds to the challenge. But we're doing that on a lag basis. That's the point of bringing it up. As rates are going up, we're making changes, but then rates keep going up, that product change is in place for 4, 6, 8 weeks. Our spreads are expanding in this environment, so I made the comment that my coffee tastes better when rates are rising. It is great for the business. The product features are enhanced, we now have cap rates on annual S&P point-to-point of 8%. So the features are attractive. It's leading to high teens growth for the industry overall. We're able to take market share. With respect to the alternative indices, our costs have actually gone down on a lot of them. They're not strictly directional or volatility related. And so for a few of the indices, and it's a bit more complicated in the registered index-linked annuity products, which is why you haven't seen much price change there year-to-date. But overall, this environment and this volatility is not a hedging cost problem for us in our alternative indices. I would point out that for Athene, 87% of the fixed indexed annuities that we sold last year were with these alternative indices. It's a real differentiator for us in the marketplace.

All right. Maybe just real quick. You were saying earlier that the floating rates create some type of offset for credit risk. But when it do the opposite, would we be worried about higher default risk?

That's really on the asset side when you're talking about that.

I have to look, yes.

It's interesting, security -- I was at an industry forum the other night, and I know Bret spoke to this, but think about what's happened in the world since 2008. Securitized product today is radically different than securitized product was pre-2008. Corporate product, roughly the same for 2008 to today, very poorly understood by the marketplace. And you think about the risks we face today, they are technological -- quick technological shifts, quick commodity risks, inflation risks, ESG and climate risks, these are having idiosyncratic effects on companies. Meaning that single issuer point of credit rating is actually resulting in some, what I'll call, driveby accidents. You've had more defaults on single-issue corporates than you have on the structure at the same ratings point, meaning that we would believe that structures are better. What you're doing in a structure is you're generally taking complexity and getting subordination. Most of the risk you're talking about within any meaningful range is being borne by junior capital. And again, this is a mindset shift that I think is going to take place. It's already prevalent, not just with us but amongst the forward-leaning companies in our industry. The rating agencies are a little bit behind, but the data is out there for you to look at. BlackRock puts the data out, PIMCO puts the data out. We shortly will put the data out. Thank you, Doug. . But -- and the argument will be simple. Securitized product that broadly securitized product at the same ratings level is safer than individual corporates at the same rating level.

Sam?

Sam Martini with OCO. Just a recap of recent 8 months, let's say. At the Analyst Day, the stock traded to $80 on a $1.60 distribution, 2% yield looking forward to that day $5.50 earnings, call it 15x, we're trading today at 49%. Earnings have only gone up. The yield is flat. So our dividend yields up 60%, our multiple's down below where Athene traded cheap to our peers, to Athene's peers now. And we have these questions about are Athene's management fees no longer management fees? That's sale the alternatives book, which is 6% of the entire credit book, and this is how you guys are sadly spending your time. And I would have to believe that you're shocked that this is where we are, that the multiple has come down like this, it's a 45% derating. Earnings have only gone up. Today's presentation show that spread-related earnings are higher. And I'm interested in what the management team thinks the market is missing now because the earnings are being driven in the right direction. You've done everything you can possibly do to put out great numbers. Noah does a great job. You guys are always available. Marc, you're always doing presentations. And I think they're incredibly helpful and informative. But something is being lost in translation as the stock trades $49 and everything seems to be going in the right direction for us. We've been waiting, as Grant said, for rising rates to make his coffee taste better. I'm curious as a shareholder, what do you guys think we're missing? And at what point do we just start putting these presentations to bed, repurchasing our shares and going on with our lives?

Well, first, I will say we're -- there's rarely a day that I'm frustrated. By the way, every day is a good day. There are no bad days. There are just better and worse days. Look, I say this internally, but -- it's words to live by. We have the right plan. And I think we've picked scalable businesses, and we're executing on scalable businesses. We have the right plan with respect to having picked a big market. We've made the analogies versus -- we love BDCs, we love REITs, we love all of it. We just like what we're doing better. And in a risk-off world, we want to be top of the capital structure, not junior. So we're executing the plan. What have people done? Well, the senior executives of the firm have elected to be paid in stock rather than in cash. So that's what they're doing. With the amount of cash -- I think I said this on the first call, with free cash flow, we are buying our shares. That's what we should be doing. The bar is high to do expansion. I think there are 3 big things that we can do a better job of explaining, and that's part of what today is. One is the balance sheet risk and/or having people understand the risk we're taking, the risk we're not taking. Second is making the analogy to business models that people seem to have valued in one way or another BDC, REIT or otherwise. And three, just making the business less complicated for people to understand. It is not complicated internally. We don't spend a lot of time, "Boy, this is really hard" and everything else, we just put our head down and execute the plan. Our experience has been that in periods of stress, we tend to make more money. And we don't have to have people believe it. None of us are short-term holders of the stock. We recognize that all of you have an opportunity every day to make a choice. But we will execute the plan and keep doing what we're doing. And to the extent we have free cash flow, the yield in our own or the value creation from buying our own stock has gone up, and that's what we should do.

I think the market is missing, to answer your question directly, how much better Athene and Apollo perform in a higher rate environment. It's pretty simple, and they haven't got it yet. But as we produce the results and post the results, we think they will. And to Marc's point, not just higher rates. But when higher rates come with more volatility, more dislocation, then it's a multiple on top of that and doing better. That's been our history. That will continue to be the history. Marc is not there yet, but we're going to keep plugging away.

Seems like a great place to conclude. So I just want to take the opportunity to thank you all for joining us for a few hours today. We really appreciate your time and attention to the business. For those that are in person, we have some lunch refreshments as you exit. Take care. Thanks again.