KKR & Co. Inc. — Q2 2023 Form 10-Q
Business context and period. KKR is a global alternative asset manager with capital markets operations and an insurance business operated by Global Atlantic. This unaudited report covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are with December 31, 2022. KKR reported $518.5 billion of AUM and $420.0 billion of fee-paying AUM at quarter-end. Global Atlantic is consolidated, so insurance balances and investment vehicles materially affect reported GAAP totals.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| GAAP revenue | $3.63B | $0.32B | $6.75B | $1.32B |
| Net income (loss) attributable to KKR common stockholders | $844M | $(735)M | $1.17B | $(744)M |
| Diluted GAAP EPS | $0.94 | $(1.08) | $1.32 | $(1.17) |
| Fee related earnings (non-GAAP) | $602M | $461M | $1.15B | $1.07B |
| Total segment operating earnings (non-GAAP) | $922M | $1.13B | $1.91B | $2.41B |
| After-tax distributable earnings (non-GAAP) | $653M | $851M | $1.37B | $1.83B |
GAAP revenue and earnings improved sharply from loss-making 2022 comparisons, principally reflecting a reversal in asset-management capital allocation-based results and less severe investment losses. These GAAP measures are affected by fair-value movements, fund consolidation and insurance accounting; they should not be read as recurring fee income or cash generation. Non-GAAP measures are company-defined and are not substitutes for GAAP results.
- Asset management: Q2 segment operating earnings were $752M, down from $953M; six-month earnings were $1.53B, down from $2.08B. Q2 fee related earnings rose 31% to $602M, while six-month fee related earnings rose 8% to $1.15B. Lower realized performance income and realized investment income weighed on segment earnings, especially year to date.
- Insurance: Global Atlantic segment operating earnings were $170M in Q2 versus $181M; six-month earnings rose to $375M from $325M. Higher investment income from asset growth and yields was partly offset by higher insurance costs and expenses.
- Cash flow: For the first six months, operating cash flow was a $4.57B use, investing cash flow a $3.62B use, and financing cash flow a $5.53B source. Cash, cash equivalents and restricted cash ended at $10.75B, down from $13.39B at year-end. Consolidated cash flows include funds and vehicles, and are not a direct measure of cash freely available to KKR.
- Debt and liquidity: Asset-management debt obligations were $43.69B, including substantial non-recourse fund and CLO borrowings; insurance debt was $2.36B. Total debt obligations were about $46.05B, versus $42.73B at year-end. KKR said it was in material compliance with debt covenants. Global Atlantic issued $650M of 7.95% senior notes due 2033, partly to repay revolving credit borrowings. Available revolving facilities included $1.5B corporate and $1.48B capital-markets facilities, with no borrowings shown on the stated asset-management facilities at quarter-end.
- Equity and dividends: KKR stockholders’ equity was $19.98B and total equity was $60.41B. Common stockholders’ equity per share was $21.99, up from $20.55 at year-end. KKR repurchased 5.09M shares for $272M in the first half; $208M remained under the repurchase program as of August 1. A $0.165-per-share common dividend was declared for payment in August.
Material changes and notable items
- Asset-management fees and other revenue rose 23% in Q2 to $754M, supported by management and transaction fees. Six-month fees and other were up modestly, as higher management fees were partly offset by lower capital-markets transaction fees.
- Capital allocation-based income was $697M in Q2 versus a $923M loss a year earlier; six-month income was $1.15B versus a $1.87B loss. KKR attributed the improvement mainly to investment appreciation in carry-earning funds. These amounts can reverse with subsequent valuation changes and do not necessarily represent realized cash carry.
- Global Atlantic’s net investment income increased to $1.31B in Q2 and $2.61B for the first half. Insurance net premiums were $626M for Q2 and $1.10B for the first half, reflecting assumed reinsurance business; associated policy benefits and reserves also increased.
- Global Atlantic’s AFS fixed-maturity portfolio had $10.6B of gross unrealized losses at June 30, primarily associated with interest-rate increases. Management said it neither intended to sell these securities nor believed it was more likely than not it would be required to sell before recovery. Credit allowances on insurance mortgage and other loans were $578M, up from $560M at year-end.
- KKR adopted long-duration insurance accounting (LDTI) retrospectively effective January 1, 2023, recasting prior periods and changing insurance segment reporting. The adoption increased year-end 2022 total equity by $1.71B; comparisons should take the revised accounting into account.
Outlook, risks and contingencies
- Management did not provide broad quantitative earnings guidance. KKR said it currently expected at least $350M of realized performance income from carried interest and realized investment income in the second half of 2023 from transactions entered into before filing. Some transactions remained incomplete and subject to closing conditions; actual results could be materially higher or lower.
- On May 25, 2023, Global Atlantic signed an agreement to reinsure $19.2B of legacy annuity and life policies, including $5.0B of separate-account liabilities. Closing was expected in the second half of 2023, subject to customary conditions and regulatory approvals.
- Management described persistent inflation, high interest rates, market volatility, tighter financing conditions, geopolitical and currency risks, and challenging U.S. office and Chinese property markets. Higher rates may support new investment yields and product demand, but can also increase policyholder surrenders, funding and hedging costs, and realized-loss risk if assets must be sold.
- Unfunded commitments included $9.2B to KKR funds and vehicles, $615.7M of capital-markets commitments, and $3.0B of Global Atlantic investment commitments. KKR reported about $525M of carried interest subject to clawback at quarter-end, based on fund fair values; an assumed zero-value liquidation scenario would produce an estimated $3.1B obligation.
- KKR disclosed ongoing civil investigations or inquiries by the U.S. Department of Justice regarding antitrust matters and by the SEC regarding business-related electronic communications; it said it was cooperating. The filing states that potential losses for the described legal matters could not be estimated and that an adverse outcome could materially affect results in a particular period.
- Series C preferred stock was scheduled to convert automatically on September 15, 2023, within a stated conversion range of 1.1662 to 1.4285 common shares per preferred share, subject to the applicable calculation and adjustments. The filing also announced a $0.75-per-share preferred dividend for that date.
Most important facts for investors to verify
- Whether the reported improvement in GAAP earnings and capital allocation-based income is supported by realized performance and sustained fee-related earnings, rather than reversible fair-value gains.
- How much reported cash and debt belongs to consolidated funds, CLOs or regulated insurance subsidiaries, and the amount of liquidity available to the parent and asset-management business.
- Global Atlantic’s portfolio credit quality, unrealized AFS losses, loan delinquencies and allowances, reinsurance counterparty exposures, and ability to meet policyholder obligations without selling assets at a loss.
- Whether the $19.2B reinsurance transaction closes on schedule and on the disclosed terms, and how it affects capital, earnings and risk.
- The realization timing and conditions behind the second-half $350M estimate, alongside carried-interest clawback exposure and remaining share-repurchase authorization.