KKR & Co. Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. Unless stated otherwise, financial figures below are consolidated GAAP results. KKR reports distinct Asset Management and Insurance businesses; consolidated totals also include investment funds and entities whose assets and liabilities may not be available to KKR.
Business context
KKR is a global alternative asset manager, capital-markets provider and owner of Global Atlantic, a retirement, life-insurance and reinsurance business. KKR reported $510.1 billion of AUM and $415.9 billion of fee-paying AUM at quarter-end. Global Atlantic served approximately three million policyholders; KKR held a 63.3% economic interest in it.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total GAAP revenue | $3.13 billion | $999 million |
| Income before taxes | $408 million | $1.29 billion |
| Net income attributable to KKR | $340 million | $7 million |
| Net income attributable to common stockholders | $323 million | $(10) million |
| Diluted EPS | $0.36 | $(0.02) |
| Fee Related Earnings (non-GAAP) | $549 million | $605 million |
| Asset Management Segment Operating Earnings (non-GAAP) | $778 million | $1.13 billion |
| Insurance Segment Operating Earnings (non-GAAP, pre-tax) | $205 million | $144 million |
| After-tax Distributable Earnings (non-GAAP) | $719 million | $974 million |
| Operating cash flow | $(1.93) billion | $917 million |
| Investing cash flow | $(3.82) billion | $(2.00) billion |
| Financing cash flow | $2.07 billion | $4.15 billion |
GAAP revenue rose sharply from the prior-year quarter, when KKR recorded a substantial capital allocation-based loss. In Q1 2023, capital allocation-based income was $449 million versus a $946 million loss in Q1 2022, largely reflecting appreciation in underlying fund investments. Despite the GAAP revenue increase, Asset Management Segment Operating Earnings and After-tax Distributable Earnings declined year over year.
Asset Management Fee Related Earnings fell 9% to $549 million, principally as lower capital-markets transaction fees and higher operating expenses outweighed higher management fees. Realized performance income fell to $175 million from $609 million, while realized investment income was $198 million versus $349 million.
Insurance net investment income increased to $1.30 billion from $813 million, helped by larger average invested assets and higher portfolio yields. Insurance Segment Operating Earnings increased to $205 million from $144 million, partly offset by increased insurance costs and expenses. GAAP insurance net policy benefits and claims were $1.53 billion, versus $513 million; the comparison includes market-risk-benefit valuation effects.
Financial position, liquidity and capital
- Total assets were $282.6 billion and total liabilities were $225.5 billion at March 31, 2023. KKR stockholders’ equity was $19.7 billion; total equity, including noncontrolling interests, was $57.0 billion.
- Cash and cash equivalents were $9.29 billion across Asset Management and Insurance; including restricted cash, cash totaled $9.73 billion, down from $13.39 billion at year-end 2022.
- Reported debt obligations were $42.52 billion in Asset Management and $2.16 billion in Insurance. Asset Management debt includes borrowings of consolidated funds and CLOs, many of which are non-recourse beyond the relevant vehicle’s assets. Management said debt covenants were met in all material respects.
- KKR’s non-GAAP book value was $24.63 billion, or $27.65 per adjusted share, up from $24.28 billion, or $27.27 per adjusted share, at year-end. GAAP stockholders’ equity per common share was $21.54, up from $20.55.
- Uncalled commitments were $106.3 billion; capital invested during the quarter was $9.8 billion, down from $21.4 billion a year earlier. KKR reported $9.7 billion of unfunded commitments to its investment funds and vehicles, plus $3.2 billion of Global Atlantic investment commitments.
Outlook, commentary and risks
- KKR estimated approximately $125 million of Q2 2023 realized performance income and realized investment income from completed or expected sales and other transactions after March 31. The estimate is conditional, excludes other income and expenses, and is not a forecast of total quarterly results.
- Management described economic and market uncertainty, including banking-sector stress, persistent inflation, higher interest rates, tighter credit conditions, geopolitical risks and market volatility. These conditions may affect valuations, fundraising, exits, transaction activity and portfolio-company financing.
- For Global Atlantic, higher rates may support yields and demand for some products, but may also increase surrenders, funding and hedging costs, and the risk of selling investments at a loss to meet cash needs. Insurance liabilities and derivative values are sensitive to interest rates, credit spreads, equity markets and policyholder behavior.
- KKR reported $10.4 billion of unrealized gross losses on available-for-sale fixed-maturity securities at quarter-end. It recognized $26.7 million of impairment losses on securities it intended, or believed it might be required, to sell before recovery. Management said it generally expects unrealized losses to remain unrealized as investments are held for recovery, subject to credit and market conditions.
- Carried interest is subject to valuation changes, fund-level netting and clawback provisions. Approximately $520 million of carry was subject to clawback assuming relevant funds were liquidated at quarter-end fair values; the hypothetical amount was approximately $2.9 billion if those investments were liquidated at zero value.
- KKR disclosed ongoing civil investigations or inquiries by the U.S. Department of Justice concerning antitrust matters and by the SEC concerning business-related electronic communications. It is cooperating; management could not estimate potential losses for the discussed legal matters, and said an adverse outcome could materially affect results in a particular period.
- KKR adopted long-duration insurance contract accounting guidance (LDTI) effective January 1, 2023, retrospectively applying it to the Global Atlantic acquisition date. The adoption changed reported insurance balances and results and prompted revised segment measures; prior-period figures shown here reflect the revised presentation.
- KKR declared a common-stock dividend of $0.165 per share for payment in June 2023 and a $0.75 per-share Series C preferred dividend. The board retains discretion over common dividends. The Series C preferred shares were expected to convert mandatorily on September 15, 2023, subject to the stated terms.
Most important facts for investors to verify
- Review non-GAAP reconciliations and distinguish recurring fee earnings from volatile realized and unrealized investment and carried-interest results.
- Assess the quality and liquidity of Global Atlantic’s investment portfolio, credit-loss allowances, unrealized losses, and exposure to surrenders and reinsurance counterparties.
- Separate KKR corporate debt from fund, CLO and insurance-company obligations, and confirm recourse, collateral and maturity details before interpreting consolidated debt totals.
- Track fundraising, fee-paying AUM, capital deployment, realization activity and the conditional Q2 estimate; the filing gives no full-year earnings guidance.
- Monitor the Kentucky litigation and regulatory investigations, the potential clawback exposure, and the completion of the Series C preferred conversion and governance changes scheduled for the Sunset Date.