Athene Holding Ltd. (APO) Earnings Call Transcript & Summary

Welcome to the Athene's Fixed Income Investor Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Jeanne Hess, Vice President of External Relations at Athene. Please go ahead.

Thanks, operator, and welcome, everyone. We must remind you that today's call may include forward-looking statements and projections, which do not guarantee future events or performance. We do not undertake any duty to revise or update such statements to reflect new information, subsequent events or changes in strategy. Please refer to Athene and Apollo's most recent quarterly and annual reports and other SEC filings for a discussion of the factors that could cause actual results to differ materially from those expressed or implied. We will be discussing certain non-GAAP measures on this call, which we believe are relevant in assessing the financial performance of the business, and you'll find reconciliations of these metrics within our materials available at ir.athene.com. Additional information on the business in this quarter's results are available in the latest fixed income investor presentation posted this morning to our IR site. There, you will also find Athene's financial supplements. Joining me this morning are Jim Belardi, Chairman and CEO; Grant Kvalheim, President; Marty Klein, Chief Financial Officer; Mike Downing, Chief Operating Officer; and Noah Gunn, Global Head of Investor Relations for Apollo. Since our last call in May, we published 2 presentations on Athene's IR website. The first is an update on Athene's corporate structure, which provides detailed disclosures on our Bermuda operations, use of normal course reinsurance to support growth and investment quality across geographies. The second presentation focuses on commercial real estate, including industry and asset class perspectives as well as helpful detail on Athene's portfolio. We've provided this material as part of our ongoing commitment to provide helpful transparency and disclosure. With that, I will now turn the call over to Jim.

Thanks, Jeanne, and good morning, everyone. At the midway point of the year, our business momentum and operating performance continue to be extremely strong. Athene generated record year-to-date organic inflows of $37 billion including $17 billion in the second quarter. New business was underwritten to our mid-teens return target, which was supported by record amounts of originated assets. We continue to grow very profitably due to our scale and operating leverage, which is driving ever greater efficiency and lower expense ratios. We have a fortress balance sheet with capitalization well in excess of AA levels set by the rating agencies. The quantum of outflows from runoff were in line with expectations. We are very much checking each box across all operating metrics and the business is performing very well. Our reward for managing a high-return business is attracting even more third-party capital to support our continued growth and capital efficiency. In May, Apollo successfully completed the fundraise for ADIP II raising $6 billion of equity capital from third-party investors, approximately double the amount raised for ADIP I. We have now raised nearly $10 billion of third-party equity capital, and the largest sidecar in the industry. How have we done that? It's very simple through the delivery of robust returns. ADIP's investment performance has delivered what we promised and then some with a high teens projected return for ADIP I, above the mid-teens target for this strategy. 85% of our ADIP I investor base recommitted for ADIP II. We view this fundraise as further validation of our strategy. Athene's superior financial strength was recently recognized with an upgrade to A+ from A.M Best, which is equivalent to a AA category rating from S&P, Fitch and Moody's. We are on a clear upward trend with the agencies as a result of our conservative balance sheet and managing the business to excess capital above our current rating. As mentioned, operationally, Athene continues to fire on all cylinders. However, on the financial side, profitability for the quarter was impacted by certain factors that I'll touch on in a moment. In view of that, we thought it would be helpful to discuss a few special topics including how we think about rate hedging and update on our alternatives portfolio and the spread dynamics of new business and the roll-off on existing business. We have a long track record of strong performance. Athene has produced a decade of profitable growth, growing SRE at an average rate of 15% per year and more than 25% in 2023 over periods of significant volatility. This is a tremendous track record in a sector where companies have materially scaled down operations, return capital to shareholders, and put up the white flag. This is a testament to our unique model. We manage Athene's balance sheet in a way that asymmetrically positions it around interest rate risk. In doing so, we use an approach that forgoes near-term profit maximization in favor of long-term value maximization. How do we manage our floating rate position? In practice, we hold an overweight position in floaters when rates are cyclically low and hold an underweight position when rates are cyclically high. When rates were low, we were able to earn more than acceptable returns without maximizing current period earnings and added floating rate exposure that provided upside as rates normalize. Before rates rose, we maintained this floater position, sacrificing short-term earnings along the way. We under-earned in these years, but we're still able to put on business at acceptable rates of return. Then as rates rose to cyclical highs, we reduced our floating rate position, locking in a significant earnings uplift and resetting our earnings at a higher base. We locked in these positions in the first quarter and opportunistically added more protection in the second quarter. When we put on protection, it costs SRE due to the negative carry associated with an inverted yield curve. We view this to be a good use of capital as it derisks our sensitivity to subsequent downward movements in rates. What does this all mean? It means we grew SRE 26% in 2023, paid up to materially derisk our rate position in 2024, and still expect to grow at mid-single digits in 2024. While we are not 100% immunized from a rate decline, should rates move down, we have the benefit of gains created in our in-force asset portfolio, which can opportunistically be redeployed to investment-grade spread assets in order to add dollars of income. This strategic flexibility together with the rate hedging we have locked in provides us with significant economic protection in the event that rates move down from here. Turning to alternatives. Athene invests in Alts for three main reasons: dollars of income, the creation of strategic platforms and partnerships, and to help mitigate [ tail reinvestment ] risk on long-dated liabilities. We hold dry powder in the form of excess capital to increase the position should an attractive market present itself. If the market is not there, we will reduce the position. Our Alts portfolio has returned 11% on average since 2013. The portfolio is generally comprised of two primary buckets. The Apollo aligned alternatives product or AAA, which encompasses $8 billion of assets as well as approximately $2 billion of investments in a handful of retirement services companies. Each of these segments has produced similar returns over time. AAA is a hybrid equity portfolio comprised of investments in a diverse array of Apollo funds and strategic origination platforms. Historical returns for AAA have been meaningfully less volatile than the broader equity market. Most recently, AAA delivered a net return of 9% in the second quarter and 10% over the last 12 months, which included a material allocation to cash. The retirement services companies, which include Athora, Catalina, Venerable, Challenger and FWD represent a collective set of investments that have achieved a return of 12% since inception in line with the total portfolio. Why are we in these investments, strategic partnerships, often in the form of equity investments, expand our business opportunities either by providing exposure to differentiated geographies, underwriting capabilities or other mandates. Each of the retirement services investments we have made has aligned with this philosophy. They have unlocked approximately $90 billion in opportunities for Apollo. Athora has delivered solid returns since inception and meaningful fee-related earnings to Apollo. We continue to believe Athora is positioned to become the leading provider of guaranteed yields in Europe, driving material long-term future value. For Catalina, we are transitioning the business to be balanced between life and P&C liabilities. Rather than deploying into a competitive P&C market, Catalina has started to reinsure annuity liabilities from Athene. Similar to the liabilities, we reinsured ACRA. Venerable has been a tremendous investment. We continue to believe it has long-term strategic value and accretive SRE benefits. Challenger and FWD were investments intended to provide exposure to Australia and Asia. The opportunity for both has evolved to an investment management partnership with Apollo. The partnership with both companies has been very productive so far and we view them as core asset management partners of Apollo. In summary, these investments have delivered a significant value over the longer term, and we expect them to continue to do so. The last topic I'd like to discuss relates to the spread dynamics around the profitability of new business and existing business, including observations from the roll-off of business in the second quarter. We have a choice to write business across a number of channels. Each of these channels has different spread and capital dynamics, which you can see in our presentation. We target writing business to [ high ] rates of return on capital. However, each line of business may have different levels of spread and therefore dollars of income will vary by channel. Similarly, we hold excess capital to take advantage of outsized capital deployment opportunities over different time periods. During COVID, for example, we wrote exceptionally profitable business. In the second quarter, we saw a cohort of that business roll off. We knew that business was expected to roll off, but we underestimated its profitability. Additional factors that contributed to spread compression in the quarter included a lower Alts return, incremental hedging costs, elevated asset prepayments and the back-end timing of asset deployment, leading to higher cash drag. As previously communicated, our expectation is that the effect of some of these items will continue through the third quarter and begin to normalize as we enter the fourth quarter as we resume our growth trajectory. Importantly, I'd like to reemphasize that we are managing our business to deliver profitable growth on the basis of return on capital. And we'll use our liability sourcing capabilities to find and capture those opportunities, all with an eye on delivering mid-teen RREs. This summer marks the 15th anniversary of Athene's founding. I am incredibly proud of the growth of our franchise, exceptionally strong returns, the expertise of our team and our leading position in the market. I'm proud of our approach to investing and our approach to risk. We continue to be fueled by the notion that we are here to help deliver investment certainty to investors preparing for and living in retirement. We are very energized about the opportunity to help solve the retirement savings crises. And I've never been more optimistic about our business than I am today. With that, let me turn it over to Grant.

Thanks, Jim, and good morning, everyone. In the second quarter, Athene once again generated strong organic growth, reflecting continued demand for our savings products among individuals and institutions. With organic inflows setting a new year-to-date record, we are confident in our ability to achieve $70 billion for the full year. Turning to the highlights from across our channels. Total inflows were $17 billion in the second quarter with underwritten returns meeting our profitability targets. In Retail, inflows totaled $9 billion in the quarter, demand for income products remained strong with fixed indexed annuity volumes of $3.4 billion and $7.5 billion year-to-date, an increase of 53% from the first half of 2023. RILA sales were up 36% on a year-to-date basis when compared to the prior year, MYGA sales were consistent quarter-over-quarter at approximately $5 billion. Athene's competitive positioning in the Retail channel remains stellar. Based on the latest LIMRA data, Athene holds 12% overall share of the fixed annuity market, leading all companies. We remain #1 in fixed indexed annuities and multiyear guaranteed annuity sales, with market shares of approximately 15% and 11%, respectively. And we're the #1 distributor in the independent channel and bank channel. 1 out of every 5 annuities sold in banks in the first quarter was an Athene annuity. It's important to emphasize the vast opportunity in the retail market as the #1 seller of fixed annuities, our overall share is just 12%. On the retail distribution front, financial institutions comprised approximately 80% of all retail sales in the second quarter. Our launch with Morgan Stanley at the end of the first quarter was the success. And in June, Athene was the largest annuity distributor by volume on their platform. Adding incremental products of this platform and others is a priority. We continue to plan for several additional institutional launches in the second half of 2024. Sales in the IMO channel were also strong and represented approximately 20% of the total. It's important to remember that the IMO channel sells fixed indexed annuities with longer average lives and higher surrender charges and that this channel accounts for over 50% of total fixed indexed annuity sales year-to-date. Its importance is more than just its percentage of total sales. Turning to Flow Reinsurance. Inflows in the quarter were $1.2 billion with balanced volume across our domestic and Asia Pacific clients. We continue to leverage the success of our U.S. business in the APAC region. In the first half of the year, we launched 2 Flow life reinsurance deals, 1 in Japan and 1 in Singapore, and we see additional life reinsurance opportunities in the region. Our pipeline is healthy, and our Flow business is well positioned for continued success. In our Pension Group Annuity business, we continue to compete in the market and remain disciplined in pricing new business opportunities to our return requirements. We executed a retiree lift-out transaction in the quarter that totaled almost $600 million. The counterparty behind this opportunity was a repeat client that experienced the great service and security we provide [ plan ] participants. We were pleased to close a smaller full plan termination for another client in July. Our recent upgrade from A.M Best is particularly beneficial in the pension channel. Fiduciaries recognize the agency's expertise in evaluating insurer creditworthiness and at A+, Athene has the same rating as the other scaled players in the Pension Group Annuity business. In late June, the DOL recommended no changes to IB 95-1 after a thorough review. We have remained consistent in our position that the existing principle-based guidance will ensure a well-functioning pension group annuity market and preserve planned fiduciaries flexibility to choose the safest and best partner for participants. The second quarter was an active one for our funding agreement channel, which generated $6 billion of inflows comprised of FHLB and funding agreement-backed note issuances. Funding agreement-backed notes totaled $1.7 billion. Among the FABN trades in the quarter where Japanese yen-denominated FABNs developed with a Japanese counterparty and distributed to Japanese pension funds. In the third quarter to date, we've executed a 2 tranche $1 billion FABN comprised of $500 million each of 3- and 7-year transaction maturities. And we also did an additional $100 million of a 5-year yen deal. Our focus has been to execute larger tranche sizes with fewer trips to the publicly syndicated market, and we are committed to ensuring strong secondary performance. With year-to-date FABN volumes of $7.8 billion, our spreads have outperformed the peer group since the beginning of January. We believe the efforts we have made to engage with our investors and other market participants have made a difference, and we intend to remain active in that effort. I'll now turn the call over to Marty for a detailed discussion of our financial results.

Thanks, Grant, and good morning, everybody. As you've heard so far today, the fundamentals of Athene's business remain strong with significant underlying momentum. I'll make some brief remarks about capital and our balance sheet as well as our earnings and outlook. At the midpoint of the year, we maintain a robust capital position with $10.1 billion of total deployable capital, comprised of $3 billion of excess equity capital, untapped leverage capacity of approximately $3.3 billion and $3.8 billion of available undrawn third-party sidecar capital. In addition to our strong capital position, we have approximately $65 billion of available liquidity, including cash and equivalents, liquid assets, committed repo lines, a traditional holding company credit facility as well as the liquidity facility plus untapped capacity at the FHLB. Running Athene with a fortress balance sheet is a core element of our strategy. This requires maintaining strong levels of excess capital and being disciplined in capital management decisions regardless of the market or economic environment. Turning to ADIP, we have multiple sources of capital to support growth, including earnings generation, capital release from runoff, capital markets issuances and the on-demand equity capital from our strategic sidecar program, ADIP. Integral to our long-term success, our sidecars invest alongside Athene in new business, enabling Athene to scale in a capital-efficient manner while providing an attractive risk-adjusted return to fund investors. In the second quarter, ADIP II contributed approximately $400 million of equity capital into our ACRA subsidiary. Turning to our financial results. We generated $712 million of spread-related earnings in the second quarter and $1.5 billion of spread-related earnings year-to-date. While these earnings were supported by strong organic growth, SRE net spread declined quarter-over-quarter for the reasons Jim mentioned earlier. Considering our long-term expected average annual return of 11% would have resulted in $154 million of additional alternative net investment income in the second quarter. Net spread would have been 27 basis points higher. In terms of the outlook, we expect our SRE growth rate for 2024 to be in the mid-single-digit percentage range, excluding any notable items and assuming 11% alternatives return as well as the forward curve as it stood last week. We anticipate our net spread to be approximately 150 basis points on the same basis. Along these lines, we expect third quarter SRE to be roughly in line with the second quarter before growth resumes in the fourth quarter at a more normalized rate. Heading into 2025, we expect to return to double-digit SRE growth based on where the curve was earlier this month, which included approximately 7 rate cuts by the end of 2025. While we still hold a net floating rate position, we've taken the prudent step of reducing our position by 40% in 2024. As of the end of June, our floating rate sensitivity remains at $30 million to $40 million of annualized SRE for every 25 basis point move in the short end of the curve, and that excludes the impact of cash, only reflects the impact of net floating rate assets. This sensitivity contemplates the offsetting dynamics of hedging activities we have executed to date. In closing, we continue to be very constructive about our growth potential. The fundamentals of our business as well as our outlook remain strong. Our fortress balance sheet and several sources of capital to support future growth provides us with the flexibility needed to execute on the significant opportunity in the retirement services market. Thanks for your time today, and we'd now like to turn the call back to the operator to address any of your questions.

[Operator Instructions] We'll now take our first question from Ryan Krueger with KBW.

My question was on the net spread trajectory from here. So I think thinking about your comment about returning to double-digit SRE growth in 2025. And based on your new business growth, it would seem to suggest a fairly consistent net spread in 2025 around that 150 basis points and you've taken a fair amount of hedging activities on short-term rates, but you do still have some sensitivity. So I guess what would be the -- I'm trying to think through what the offsets would be if there is still some further negative impact from the forward curve? What would be the positive offsets that would help keep the spread more stable next year?

Well, I think we mentioned, Ryan. Go ahead, Marty.

Listen, Ryan, I don't think we want to get too precise about 2025 until we get into Investor Day. I think we feel given where the curve was last week, we feel good about our prospects to getting to low double-digit SRE growth in dollar terms next year, year-over-year. The dynamics that impacted us in the second quarter, we suspect will also impact us again in the third quarter. And I think Mark said this, I think, pretty well. Quite simply, we kind of gave up a quarter of earnings growth in the second quarter and probably expect that to happen in the third quarter. So rather than having, call it, 10% or 11% this year, we're probably going to be mid-single digits because of those dynamics. And the dynamics in the quarter, the second quarter, we think will probably be similar in the third quarter, but I think they kind of fade away a bit over time. And some of those dynamics, Jim cited, there was a fairly big impact of a number of things that we generally predict pretty decently, but we're a little bit different and unfortunately, kind of bad guys versus predictions. We -- when we have deployment into attractive assets, you kind of assume if you have insight in the timing that you assume middle of the quarter or whenever it's going to be, that deployment has generally been a little bit longer than we have expected. It's been very attractive in the long term, and it's in our product pricing. But in the quarter, when you have delayed employment in things like [ Intel ] at the end of the quarter, that impacts the results in the quarter. We, as a result, also had more cash drag than we had anticipated because we're kind of waiting to invest in those types of assets. And then we also did have higher prepayments in certain asset classes than we had predicted. Capital markets environment has been fluid. So for example, in certain markets like CLOs, financing spreads in the last couple of quarters, pretty tight. So we saw a lot of those loans kind of prepay and get refinanced. So just a number of dynamics that meant we ended up sitting on more cash or having delayed deployment or had some assets which we're not going to have longer term, but they rolled off a bit more quickly than we had anticipated. So I think those are the dynamics that we saw. We also saw -- as you can see, we had a little bit higher decrement rate. I think we predicted that actually quite well. But some of those decrements and again, Mark said this last week and Jim said it as well, really represent a very attractive business. We had, for example, a couple of billion of fund agreements -- $2 billion of fund agreements that rolled off with really low average coupon like 1.5%. So we had some of those dynamics that created some pressure on the quarter. We think those dynamics are likely to be pretty similar in the third quarter. And then obviously, we had the hedging costs, which also impacted our cost of funds, which cost us about 5 basis points in the quarter and about 8 basis points year-to-date. But as we head into next year, those hedging costs actually become -- if the curve plays out the way the forward curve predicts, those hedging costs, which are a negative carry this year, which we knew at the time we put them on, those should be helpful next year to help offset some of the other net floating rate asset pressure that we have.

Ryan, I would just add to your question, rates dropping. As I mentioned in my comments, obviously, see when the rates drop, the existing portfolio has more gains in it. which makes it easy to redeploy into some higher-yielding assets, take the gains and redeploy, then what would be coming off the books. But -- and we've been doing a fair amount of that in this year, back book optimization. But we've been a little loss constrained to doing in bigger size. So in the case of a rate dropping scenario, as I mentioned, the asymmetrical benefit is we can redeploy the portfolio in bigger size.

Our next question comes from the line of Ben Budish with Barclays.

Just maybe kind of following up there and continuing to discuss sort of what you're expecting in the next couple of quarters. What are your expectations in terms of FABN issuance versus on the Retail side? It looks like the FANB (sic) [ FABN ] has been quite strong, whereas Retail still quite strong, but a little less in Q2 versus Q1. How much are you expecting to be funded from ADIP, which can also have sort of spread impacts despite kind of coming on at attractive ROE. So what else can you kind of see in the near-term pipeline in terms of expected inflows deployment that may also be weighing on near-term results that you think will normalize into next year?

Grant?

A couple of pieces in there. I wouldn't make a whole lot of the change in Retail quarter-over-quarter. There are ebbs and flows. At $9 billion annualized, that would be an all-time record for any company issuing annuities in a single year. So I certainly wouldn't characterize the second quarter as somehow moderating. It was incredibly strong. The other elements about how much is funded through FABNs is market driven, right? We issue FABNs when we think we can earn the net spread and the returns on equity that makes sense for us. We've been active year-to-date. I mentioned we've done $7.8 billion. I would expect that in the balance of the year, I wouldn't analyze that. I think we'll look to see where there are opportunities, but I wouldn't be surprised if we do somewhat less in the third and fourth quarter, just based on where we see the market today, but that can change. I'll turn it to Marty to answer the ADIP question funding.

Yes. I think I would just kind of echo what Grant said, and we still expect to get to $70 billion of volumes this year, although the product mix may be a bit skewed more to fund agreements unless pension space this year. On the ADIP side, just to give you a sense of what happened in the first quarter -- I'm sorry, the second quarter, which the dynamics of kind of business mix [ dependent ]. But in the second quarter, we did $17 billion of inflows. We at Athene on a gross basis used about $1.5 billion of capital to back that, but our net capital contribution was netted off by the fact that ADIP contributed $400 million. So we contribute on a gross basis $1.5 billion of capital, but we've got $400 million of capital from ADIP and probably another roughly $100 million from Catalina with that reinsurance relationship. So roughly third-party investors are financing roughly 1/3 of the business in the second quarter, and that would probably continue for the most part for the rest of the year.

Our next question comes from the line of Bill Katz with TD Cowen.

Thank you very much for the added disclosure and addressing exactly what seems to be going on. That's very helpful. I guess I'm going to violate the one question. I'm going to ask two questions. I apologize for that. First one is, I wonder if you could just give us -- these are the two questions, I think -- just some sense of sensitivity to interest rates as it relates to retail annuity sales and if rates were to go down, what kind of pressure might that create on volume, which would be the offset to the spread compression you've been talking about? And then the broader question I have is, and thank you for the added disclosure, can you talk a little bit about how you sort of see the evolution of the 5% allocation to the Alts business? It seems like this is a tail wagging the dog issue. And then even within that, when you look inside the retirement services platforms, even smaller percentage having a disproportionate impact on the returns. So I'm just wondering how you sort of see that 5% evolving, particularly given the very strong dynamics at AAA.

Yes, go ahead, sorry.

The short answer on sensitivity of Retail sales to interest rates is we don't know. We haven't lived through this. What we -- but let me go a level deeper and dig down. So fixed indexed annuities have just been cyclically growing regardless of the interest rate environment. I mean they are increasingly seen as the best private sector replacement to what people used to get defined benefit pension plans, right, guaranteed principal, tax deferral, opportunity for lifetime income. And so I don't think that FIA sales are particularly impacted by changes in interest rates. I would say the same about the RILA product, MYGAs are rate sensitive. And so at some step down in rates, will we sell less? Yes. Magnitude, don't know. But there is an element here where I think whatever the base level is of MYGAs will be significantly higher than in the low rate environment because people have now invested in a tax-deferred instrument. And as those policies mature, people that service those customers will be looking to either roll them into another MYGA or into a FIA product. So we'll be living in real time with you. But really, the -- our core strategic products, FIAs and RILAs, we don't see as particularly interest rate sensitive.

Yes. And Bill, on the question of Alternatives. Look from Athene's inception through today, we've maintained an Alternatives portfolio. It's not capital efficient because there's a hefty capital charge against it. But we do it for dollars of income. It needs to get double-digit returns, 11-plus percent and just generate that income. That portfolio in general for Athene has been much lower volatility than any public index while still maintaining double-digit returns. And we think that makes sense. It is varied between 5% of the portfolio, 6% of the portfolio, depending on what -- how attractive we think the Alternatives -- the other options are in fixed income. So we think fixed income is pretty attractive now. So we're about 5% in Alternatives. When it's less attractive, we'll maybe move it up to 6%. But it's in conjunction with the rest of our 95% of the portfolio and fixed income, that's essentially all investment grade. So we think it's a good balance. It makes sense and it's for dollars of income, and we're going to continue to do that.

The only point I'd add to Grant's response on lower rates and what does that -- how does that impact sales. It's also a function of what the rest of the market environment is like. I mean investors have to put money somewhere. So if there's a robust equity market, they may do less than MYGA and do more in equities if retail investors feel good about that. If the equity market looks pretty dire or scary or volatile, I think investors, especially in the market that we play in, don't really like to take that risk because for people that are close to or in retirement. And so they got to put money somewhere. If they want to avoid equities, I think annuities are a pretty attractive alternative versus bank CDs or other things. So I think it's also a function of the market environment if and when rates go down.

Our next question comes from the line of Patrick Davitt with Autonomous Research.

Digging in on Athora, I imagine the stagnant deal market in Europe has been a part of the headwind for that mark. And correct me if I'm wrong on that. But if that is the case, could you update us on the potential for that growth opportunity opening back up for Athora, which I then imagine could help drive more positive marks for that position?

Marty, you're on the Board there, right?

Yes, I could take that one, Jim, if you'd like. So listen, we think Athora has been a pretty good performing alt over time. It has been an underperformer in more recent times. And I think your observation on the deal environment in the near term is pretty good. I would say that there and Athora did have an opportunity to do a transaction, which ended up not happening because the economics of that deal no longer made sense. So it has been a little bit of time before Athora has done a deal. But I think they and we and Apollo feel actually very good about their longer-term prospects. There's a lot of inefficient businesses in Europe that -- and there's not a lot of buyers. In fact, I think actually Athora is probably better positioned now as a consolidator than it might have been a couple of years ago, as I think European regulators have a better appreciation for the discipline and strength that Athora has. So its near-term growth, and therefore, its near-term return on the investment we have is not much, but I think there's some opportunities that could come later in the year that we might close in the next year. And I think there's some other opportunities a little bit longer term. So we still think Athora is very well positioned in the medium to long term. But for the next couple of quarters, it may just kind of be relatively stagnant. It does -- I should also add, they have begun an organic strategy in a couple of different countries. That strategy is still in its early stages, but it is actually at least large enough now that it is kind of keeping the size of the balance sheet steady. So some of the runoff businesses that's acquired are starting to pay down or lapse in line with pricing. I think you're seeing the organic business they're doing kind of replace that. So the balance sheet is actually staying pretty stable. But I think further near-term growth opportunities will come with deals.

Our next question comes from the line of Bren Hawken with UBS.

Brennan Hawken here. So I wanted to double click on the 2024 and in the year-end SRE outlook. So totally appreciating that as of the curve last week, you were looking for mid-single-digit growth and a better 4Q exit rate. But the curve has moved pretty decently since then. So if we were going to mark-to-market more currently, what are the implications for the SRE outlook?

Well, I think we just kind of direct you to the guidance that I gave in my remarks and is in our disclosures for a 25 basis point move, we expect the impact of net floating rate assets to be $30 million to $40 million, and I don't want to get more precise than that. That's assuming no management actions. I think you heard Jim earlier on the call, talk about if it's an environment where rates are dropping, that may give us some opportunity to redeploy some assets out of corporates into things that might have a higher yield in spread to that. So there are some management actions that can be taken. But otherwise, with a lack of management actions, I direct you to that sensitivity. I would also say it's a fluid rate environment. Yes, rates have dropped, but is it an overreaction to the employment report of last week or not. I think the markets and pretty much everybody has done a pretty poor job of predicting recession, including ourselves among pretty much everybody else. So we'll have to see what happens with rates.

Our next question comes from the line of Michael Cyprys with Morgan Stanley.

Maybe just staying with the rate topic. If rates do start to come down, just maybe could you elaborate a bit on how you expect the pace of repricing of the cost of funds to move lower relative to repricing of assets? Or shall I say, cost of new business, how you expect that to trend? And then overall just on the spread for new investments. How do you expect that to compare relative to where you're underwriting today?

Marty?

Sure, I could take that. And Grant, you can chime in. Listen, we managed our business in a lot of different interest rate environments and spread environments. And we're very laser-focused on getting a net spread that gets us to a mid-teens return on capital. So if the investment opportunities are at a lower yield, our cost of funds drops commensurately. And given the breadth of our channels and the 4 different channels we have and then the diversity that we have within those channels, we're able to pivot and get the right cost of funds. But we've invariably been very good about getting mid-teens returns really in the 9 years I've been here and even longer from the case of Jim and Grant. Grant, do you want to add some more insight?

Yes. No, I would just -- there are some limitations. You can't -- this is a retail business. You can't -- it's not a trading business. So we're not marking to market the liabilities on a daily basis, but we have a fair amount of flexibility. We do monthly pricings in normal markets and more often than that, if we see sharp moves in treasuries. And as Marty has pointed out, we're able to manage the spread effectively across time. So not worried about our ability to do that, the declining rate environment. What makes it really tough... Go ahead Jim.

No, no, I was just going to add, Michael, look, on new business, we're completely in sync on both sides of the balance sheet. I mean we're typically a company that will adjust rates on new business pricing before anyone else because the process starts with what our net investment earned rate is on the asset side for every dollar that comes in, that gets factored into [ Grant and his ] liability team and then that determines their pricing, so we have mid-teens returns. So we don't really skip a beat irrespective of the interest rate environment on new business. And then we do have some optionality on the existing in-force book, as Grant may talk about.

Our next question comes from the line of Nicholas Annitto with Wells Fargo.

Just wanted to high-level touch on PRT and C, if your outlook for the market has changed since last quarter and maybe if you could provide outlook going forward given the Fed is in a rate-cutting cycle.

We see -- I don't -- I would say our view of the market is similar to what we said on the last quarter call. We see a significant calendar of transactions still coming to the market. But we think the pricing environment is, from our perspective, difficult. It's deals are transacting at tighter spreads than we experienced last year and expect that will probably continue to be the case.

I was just going to say, as I said in my comments, every day, we have a decision whether to bring on new business or not. We -- based on the size and scale of our enterprise, we don't need to reach for compromised returns. So whether it's PRT business, retail funding agreements. If we're not confident and expect mid-teens or better returns, we don't do the business. And we have the luxury to wait because our back book is extremely profitable. So it's a nice position to be in, but we don't lose that edge. It's an everyday decision as to what to price or not to price and how to bring in money.

Yes, I would just add one more thing. On the planned sponsor side, I would have said years ago, if interest rates drop, that's generally bad for the funding level -- had been bad for the funding level of pensions because they weren't very well asset liability matched. So dropping rates generally kind of hurt their funding position. But over the last few years, as pension planned sponsors are readying themselves to lay off that business to insurance companies. They've got much better about shifting away from equities and into fixed income and much more rigorous in the duration matching and so forth. So most of the big planned sponsors that are laying off risk are largely, not entirely, but largely immunize themselves against rising or dropping rates. It's kind of different than it was a few years ago. So we wouldn't really expect to see that issuance decline if rates were dropping or that risk transfer declining rates drop. The markets are extremely volatile, that's a different matter. They may want to sit tight for a quarter or two until volatile capital market situation has played out. But otherwise, just increase or decrease in rates, we don't really see much change.

We've reached our allotted time for questions. I'd like to turn it back over to Jeanne for closing remarks.

Thanks, operator, and thanks, everyone, for joining us for today's call. If you have any follow-up questions regarding anything we discussed, please don't hesitate to reach out.

This does conclude Athene's fixed income investor call. Please disconnect your lines at this time, and have a wonderful day.