KKR & Co. Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. KKR operates alternative asset management, capital markets and insurance businesses; the insurance business is conducted through Global Atlantic. Consolidated GAAP statements include certain managed funds, CLOs and insurance entities, so consolidated assets, liabilities and cash flows do not all belong to KKR’s corporate operations. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $3.315B | $1.856B | $10.069B | $3.179B |
| Net income (loss) attributable to KKR common stockholders | $1.473B | $32.6M | $2.640B | $(711.8)M |
| Diluted EPS | $1.64 | $0.04 | $2.95 | $(1.00) |
| Fee related earnings (non-GAAP) | $557.5M | $541.8M | $1.708B | $1.608B |
| Asset Management segment operating earnings (non-GAAP) | $869.5M | $958.9M | $2.400B | $3.039B |
| Insurance segment operating earnings (non-GAAP, pre-tax) | $210.0M | $168.8M | $585.4M | $493.4M |
| After-tax distributable earnings (non-GAAP) | $779.7M | $835.2M | $2.152B | $2.660B |
GAAP earnings improved sharply year over year, mainly reflecting the swing to positive carried-interest/capital-allocation income and investment gains from losses in 2022. Q3 asset-management capital allocation-based income was $1.010B versus a $572.9M loss; nine-month income was $2.156B versus a $2.442B loss. Q3 asset-management investment gains were $1.468B, including $1.537B of unrealized gains. These valuation-sensitive items make reported earnings volatile. Nine-month segment operating earnings and distributable earnings declined, despite higher fee related earnings and insurance operating earnings, primarily because realized performance income and realized investment income were lower.
Asset management: Q3 fees and other revenue were $655.4M, down from $673.9M; higher management fees were offset mainly by lower transaction fees. Nine-month fees and other revenue rose slightly to $2.087B from $2.070B. Management cited lower transaction activity and smaller transaction sizes, although Q3 capital-markets transactions increased to 60 from 47 a year earlier.
Insurance: Q3 net investment income rose to $1.412B from $1.095B, while net premiums fell to $220.2M from $480.5M, primarily due to fewer assumed reinsurance transactions with life-contingent premiums. Nine-month net investment income rose to $4.024B from $2.839B, supported by business growth and higher yields. Insurance net policy benefits and claims rose to $4.010B for the nine months from $1.088B, reflecting business growth, higher funding costs and changes in policy and market-risk-benefit measurements.
Cash flow and liquidity: For the nine months, operating cash flow was $(2.601)B, investing cash flow $(4.696)B and financing cash flow $5.631B; cash, cash equivalents and restricted cash ended at $11.711B. KKR notes that consolidated fund and CLO investment activity materially affects these cash-flow totals. At September 30, total assets were $288.733B, total liabilities $227.135B and total equity $61.176B. Asset-management debt obligations were $43.676B and insurance debt $2.315B; much of asset-management debt is within consolidated funds/CLOs and is non-recourse beyond their assets. KKR reported compliance with material debt covenants.
Operating scale and capital: AUM was $527.7B, up from $503.9B at year-end 2022; fee-paying AUM was $423.6B, up from $411.9B. Uncalled commitments were $99.5B, down from $107.7B, and capital invested was $28.4B for the nine months versus $55.7B a year earlier. Common stockholders’ equity per outstanding share was $23.07; non-GAAP book value per adjusted share was $29.68. Global Atlantic’s policy liabilities were $141.0B.
Material changes versus comparable periods
- GAAP revenue and common-stockholder earnings increased substantially, driven principally by the reversal in carried-interest and investment valuation results; these are not equivalent to recurring fee income or cash realization.
- Nine-month fee related earnings increased 6%, but asset-management segment operating earnings fell 21% and after-tax distributable earnings fell 19%, reflecting lower realized performance and investment income.
- Insurance operating earnings increased, supported by higher investment income, but insurance funding costs and policy-benefit expenses also increased.
- KKR adopted long-duration insurance accounting guidance (LDTI) effective January 1, 2023, retrospectively applied to prior periods. It changed reported insurance balances and results; the filing presents revised comparative figures.
- On September 15, 2023, the Series C mandatory convertible preferred stock converted into common stock at 1.17 common shares per preferred share. The conversion increased common shares; the preferred stock was no longer outstanding at quarter-end.
Outlook, risks and unusual items
- KKR said it expected to realize at least $400M of realized performance income and realized investment income in Q4 2023 from transactions entered into before the filing date. Completion depended on closing conditions, including regulatory approvals; actual results could be materially higher or lower.
- A $19.2B Global Atlantic reinsurance transaction, including $5.0B of separate-account liabilities, was expected to close in Q4 2023, subject to customary conditions.
- KKR described ongoing exposure to higher interest rates, inflation, currency volatility, geopolitical tensions, weaker market liquidity, valuation changes, and potentially reduced fundraising, transaction activity or investment realizations. Higher rates may raise insurance investment yields and product demand, but can also increase policyholder surrenders, funding and hedging costs, and unrealized investment losses.
- Global Atlantic held $12.3B of gross unrealized losses on available-for-sale fixed-maturity securities at quarter-end, largely associated with higher interest rates. Management said it intended to hold these investments until recovery and did not expect substantially all such losses to be realized; deterioration in credit or other conditions could nevertheless lead to impairment or realized losses.
- KKR disclosed DOJ investigations concerning antitrust matters and SEC investigations concerning business-related electronic communications and preservation of messages. It is cooperating. The filing states that management could not estimate reasonably possible losses for pending legal and regulatory matters; adverse outcomes could affect results in a particular period.
- Carried interest is subject to reversals and potential clawbacks. Approximately $540M was subject to clawback assuming relevant funds were liquidated at quarter-end fair values; KKR estimated approximately $3.3B under a hypothetical zero-value liquidation scenario.
- A quarterly common-stock dividend of $0.165 per share was declared for payment December 1, 2023. The company stated its intended annual dividend policy was $0.66 per share, but future dividends remain subject to board discretion.
Important facts for investors to verify
- How much of reported earnings and book-value growth reflects unrealized marks or accrued carried interest versus realized, distributable cash.
- Whether the expected Q4 performance income and Global Atlantic reinsurance transaction closed, and their resulting cash, earnings and capital effects.
- Global Atlantic’s investment credit quality, unrealized-loss exposure, loan delinquencies and sensitivity to interest rates, surrenders and funding costs.
- The composition and recourse of reported debt, liquidity available at the parent level, and the scale and timing of unfunded commitments.
- Developments in the DOJ and SEC investigations, Kentucky litigation and any resulting financial exposure.
- Effects of LDTI retrospective presentation and the use of non-GAAP measures when comparing periods; the filing cautions that these measures are not substitutes for GAAP.