Apollo Global Management, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Apollo operates asset management and retirement services (Athene), with Principal Investing reported as a third segment. Comparisons below are with the corresponding 2022 periods; 2022 includes Athene from the January 1, 2022 merger date. Unless stated otherwise, dollar amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $2.595 billion | $2.979 billion | $21.598 billion | $6.127 billion |
| Net income (loss), consolidated | $640 million | $(849) million | $2.928 billion | $(4.514) billion |
| Net income (loss) attributable to common stockholders | $660 million | $(563) million | $2.269 billion | $(2.601) billion |
| Diluted EPS | $1.10 | $(0.98) | $3.75 | $(4.51) |
| Segment Income | $1.349 billion | $1.057 billion | $3.703 billion | $3.044 billion |
| Adjusted Net Income (ANI) | $1.045 billion | $850 million | $2.900 billion | $2.343 billion |
Segment Income and ANI are non-GAAP measures; management cautions they supplement, and do not replace, GAAP results. Q3 GAAP revenue fell 12.9%, while nine-month revenue rose substantially. These headline changes reflect volatile insurance investment gains and losses, policy premiums, and other items; revenue growth should not be read as equivalent to growth in recurring earnings.
Segments and operating metrics
- Asset Management: Fee Related Earnings (FRE) were $472 million in Q3, up 29%, and $1.311 billion for nine months, up 29%. Total AUM was $631.2 billion at quarter-end, up 15.2% from year-end 2022; Fee-Generating AUM was $468.4 billion, up 13.7%. Nine-month AUM net flows were $89.0 billion. Q3 GAAP asset-management revenue was $929 million, versus $477 million.
- Retirement Services: Spread Related Earnings (SRE) were $873 million in Q3, up 36%, and $2.360 billion for nine months, up 33%. Net investment spread was 2.13% in Q3 versus 1.73%, and 1.98% for nine months versus 1.65%. Higher investment earnings supported results, while higher liability costs and financing costs partly offset the benefit.
- Principal Investing: Principal Investing Income was $4 million in Q3 versus $50 million, and $32 million for nine months versus $257 million. Lower realized investment income was the main year-to-date driver; management said equity-market volatility continued to delay monetizations.
Cash flow, balance sheet and liquidity
- At September 30, total assets were $283.2 billion, total liabilities $265.3 billion, and total equity $17.7 billion. Cash and cash equivalents were $12.3 billion unrestricted; total cash, restricted cash and cash held by consolidated VIEs was $14.4 billion.
- Total debt was $7.0 billion: $3.4 billion in Asset Management and $3.6 billion in Retirement Services. Apollo issued $600 million of 7.625% junior subordinated notes due 2053 in August. The notes permit interest deferral for up to five years and reset their rate after December 2028.
- Management reported approximately $4.9 billion of available borrowing capacity across the AMH and Athene facilities; none was drawn at quarter-end. Apollo said current liquidity and expected cash generation should cover anticipated expenses and working-capital needs for at least 12 months. Facility availability is subject to terms, covenants and other conditions.
- For the nine months, operating cash flow was $4.3 billion, investing cash flow was $(27.7) billion, and financing cash flow was $26.8 billion. Financing inflows included $35.2 billion of deposits on investment-type policies and contracts, debt and preferred-stock issuance, and non-controlling-interest contributions. Consolidated insurance and fund cash flows make these totals different from cash generation at the holding-company level.
- Athene’s available-for-sale securities had $21.1 billion of gross unrealized losses at quarter-end, largely attributed to market interest-rate changes; accumulated other comprehensive loss was $8.1 billion. Athene reported that 96.6% of its AFS portfolio was investment grade by NAIC designation 1 or 2.
Material changes, outlook and risks
- Q3 retirement-services revenue declined 33.4% to $1.7 billion, mainly because pension group annuity premiums were $2.9 billion lower year over year. Net investment income increased 55.7% to $3.2 billion. A $555 million gain on settlement of the VIAC recapture agreement contributed to other revenue.
- For nine months, retirement-services investment-related losses narrowed to $1.2 billion from $12.8 billion in 2022, principally reflecting changes in fair values of reinsurance assets, derivatives and mortgage loans. Nine-month retirement-services expenses rose 52.7% to $15.7 billion, including higher interest-sensitive contract benefits, partly offset by lower future policy benefits.
- Market and valuation results remain sensitive to interest rates, credit spreads, equity markets, foreign exchange and commercial real estate. Apollo discussed banking-sector volatility and concerns about commercial real estate, particularly offices. It also noted that higher rates can raise investment yields and product demand but reduce values of existing assets and raise funding costs.
- Athene’s commitments to make investments were $20.6 billion, primarily capital contributions to investment funds; Apollo separately reported $663 million of unfunded commitments related to managed funds. Athene had $4.5 billion of repurchase-agreement payables and $6.7 billion of FHLB funding agreements outstanding.
- Apollo subsidiaries issued assurance letters supporting Atlas’s $3.3 billion deferred purchase obligation related to the Credit Suisse securitized-products transaction. The filing says the related guarantee liability’s fair value was not material; the commitment and the funding structure merit monitoring.
- Performance allocations are valuation-sensitive and may reverse. Apollo reported approximately $5.0 billion of cumulative performance-fee revenue potentially subject to reversal if existing investments became worthless; management considers that outcome remote. Certain Fund VII and Fund VIII distributions are subject to escrow conditions.
- Legal matters include an appealed dismissal of Harbinger claims, ongoing MPM shareholder litigation, a new derivative action challenging payments related to the former Up-C structure, and an SEC information request concerning record-retention requirements for electronic communications. Apollo said it could not reasonably estimate possible losses for the matters described where applicable.
- Management identified tax uncertainty, including implementation of the U.S. Inflation Reduction Act, international tax-rule changes and proposed Bermuda corporate tax provisions. Apollo also disclosed that tax authorities are examining returns in several jurisdictions.
- No quantitative company-wide earnings guidance is provided in the supplied filing text. Management’s stated liquidity outlook is that resources should meet anticipated needs for at least the next 12 months; longer-term performance depends on fundraising, investment results, realizations and access to financing.
Most important facts for investors to verify
- How much of earnings and AUM growth is recurring and fee-generating versus insurance marks, leverage, market activity and one-time items such as the VIAC recapture gain.
- Athene’s asset-liability spread, policyholder withdrawals and crediting costs as interest rates change; review the sensitivity disclosures and the concentration and valuation risks in mortgage loans, commercial real estate and Level 3 assets.
- The quality and realizability of performance-fee balances, fund escrow restrictions, potential clawbacks and the effects of the MidCap performance-allocation change.
- Actual holding-company liquidity and subsidiary dividend capacity, facility conditions, upcoming debt maturities, and funding commitments—including Atlas and Athene’s investment commitments.
- Developments in the legal proceedings, SEC record-retention inquiry, tax audits and evolving U.S., U.K. and Bermuda tax rules.
- Potential dilution and cash costs from the 6.75% mandatory convertible preferred stock, its dividends and conversion terms; also confirm subsequent common and preferred dividends declared after quarter-end.