Apollo Global Management, Inc. (APO) Earnings Call Transcript & Summary

Good morning. My name is Melissa, and I will be your conference operator today. I would like to welcome everyone to Athene's Fixed Income Investor Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the call over to Jeanne Hess, Vice President of External Relations at Athene. Please go ahead.

Thanks, Melissa, 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 and 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 our latest corporate structure deck which provides detailed disclosures on our Bermuda operations. Joining me today are Grant Kvalheim, CEO; Jim Belardi, Executive Chairman and CIO; and LJ Tanguy, Chief Financial Officer. During today's discussion, Grant will cover our organic growth engine, commitment to transparency and the opportunity ahead. Jim will take us through the asset side of the balance sheet, including year-to-date deployment, and LJ will then discuss financials and capital. With that, I will now turn the call over to Grant.

Thanks, Jeanne, and good morning, everyone. The second quarter of Athene was all about momentum. We generated $22 billion of total inflows, underwritten at target returns, while delivering record spread-related earnings. The $22 billion of organic volumes in the quarter were driven by activity across retail, flow reinsurance, funding agreements and new markets. In retail, inflows totaled more than $12 billion in the quarter, the second highest to date, reflecting strong demand for our retirement solutions across all product categories, fixed indexed annuities, MYGAs and RILA. We saw higher volumes quarter-over-quarter with RILA sales reaching a new high with nearly $1 billion in sales. On a year-to-date basis, RILA volumes totaled $1.5 billion, already exceeding total volumes written in 2025 as we continue to envision significant upside in this product category. In the funding agreement channel, we delivered almost $6 billion of volumes in the second quarter, reflecting issuances across our FABR and FABN programs. We did our first syndicated FABN issuance since last September, given the material improvement in our credit spreads. Inflows from flow reinsurance were the second highest on record at almost $4 billion, which were primarily driven by strong volumes from U.S. clients as well as a new product with the new APAC clients. Asia remains a target market for Athene given the favorable demographics and the need for retirement savings. Earlier this summer, we announced that Larik Hall joined the company as Head of Athene Japan. His strong track record of building retirement businesses and meaningful experience leading large-scale insurance platforms in the Japanese market makes him exceptionally well suited to expand Athene's footprint locally. Since our first transaction with Japanese cedents in 2020, we have reinsured more than $20 billion in assets across 8 transactions, helping insurers manage risk, operate with greater efficiency and innovate in service to policyholders. Overall, we are pleased with the strong momentum at midyear, and we're on pace to achieve 10% spread-related earnings growth, assuming the 11% Alt return and our full year new business volumes target of $85 billion. The new business we have written year-to-date reflects strong demand for guaranteed income products and our ability to help meet the needs of retirees and the institutions that serve them. As I have said before, we are in the trust business. When individuals invest their hard earned money with us, they make a long-term commitment. We take very seriously that our first obligation is to meet the promises that we've made to policyholders and to do so in a clear and transparent manner. This is why we lead in areas like disclosure, and we encourage the industry to do the same. This is also why we believe it is important for the industry to operate on a level playing field. Collectively, it is our job to maintain and preserve trust. For this reason, we are encouraged by the NAIC's recent proposal that takes meaningful steps to address offshore regulatory arbitrage. In this proposal, NAIC leadership has directed the Life RBC Working Group to develop a capital charge for reserves ceded outside of reciprocal jurisdictions and to modify the life formula to account for business ceded to reinsurers with lower financial strength ratings. We are also seeing and encouraged by the increased focus by governments, particularly the Caymans, to cleaning things up. We are unwavering in our desire to see the industry operate on a level playing field. Until then, we will continue to make the distinctions between what we do and how others in the industry operate, unmistakable. In addition to raising the bar for disclosure and calling for an end to regulatory and capital arbitrage, we remain committed to achieving a ratings upgrade to AA. As an industry, we have an opportunity to solve the societal need for guaranteed income in retirement. Populations are aging. Annuities offer the unique ability to provide guaranteed income for life, not for 10 years, not for 20 years, but for as long as you live. And the industry has not gotten its rightful share. Part of that is because these products can be overly complex and the benefit annuities provide, including principal protection and tax deferral are not broadly understood. When compared to CDs, for an example, annuities offer meaningfully better returns, better liquidity, principal protection and tax deferral. We believe there's a big opportunity to unlock demand across the industry by improving the customer experience for retirees and financial advisers by making the product set easier to understand and access. One way we are pursuing this is by modernizing the buying process to make it simpler. At Athene, nearly 90% of annuity applications are processed electronically, and the ones in good order are issued the same day, dramatically improving speed of issuance. We see a future where investments in technology will reduce the time between application and issue to a matter of minutes. With that, I'll hand it over to Jim.

Thanks, Grant, and hello, everyone. I'd like to offer a perspective on what we're seeing in terms of asset deployment opportunities across our portfolio. as well as how we think about affiliate assets. In the first half of the year, we invested nearly $70 billion. Within this activity, there was more than $40 billion of proprietary investment-grade credit directly originated by Apollo. These assets came with an attractive excess spread of approximately 180 basis points above comparably rated public corporate benchmarks, driving our ability to produce profitable growth. The most attractive opportunities for deployment year-to-date were in asset-backed securities, mortgage loans and corporates. First, asset-backed purchases accounted for 30% of the total and included $8.5 billion across 3 vintages of AMAP. In comparison to CLOs, the AMAP construction has a thicker equity tranche while still being approximately 85% investment-grade and while CLOs are almost entirely comprised of single B broadly syndicated loans, the underlying collateral and AMAP is significantly more diverse and approximately 50% investment grade. The most recent AMAP issuance came in the market with 4 public investment-grade ratings from Moody's, S&P, Fitch and KBRA. In addition, we converted the private letter ratings on 2 earlier issues to public. In its June 30 report on AMAP, Moody's highlighted diversification of the key credit strength. The report also noted the identified underlying portfolio's largest single obligor is expected to comprise less than 5% of total assets and the largest industry sector around 13%. According to Moody's, this broad diversification mitigates idiosyncratic risk. With each AMAP's vintage, we invest less and syndicate more. We expect our AMAP holdings to continue to increase over the coming months and replace what we would have otherwise invested in CLOs on the margin. CLOs have become commoditized and over the last 18 months, Athene has significantly reduced its allocation by nearly 40% on a gross basis. Mortgage loans represented 30% of year-to-date deployment with a higher allocation to CMLs that included $9 billion of loans purchased from Apollo Commercial Real Estate Finance, or ARI. As a reminder, this transaction was a unique opportunity to source commercial loans that we know very well with attractive yields and conservative LTVs. All in, these assets offer excess spread in size for many credits, we already own pieces of or no versus new issue CMLs today. Finally, in addition to mortgage loans and ABS, we also purchased corporates and treasuries, which represented 40% of our total consistent with our conservative posture. The origination pipeline for the remainder of the year is robust and reflects the wave of investment in the industrial renaissance that needs to be financed. Hyperscalers and tech issuers are accessing both the public and private investment grade credit markets in scale. And through our alignment with Apollo, we have access to the full spectrum. When evaluating opportunities in AI infrastructure financing, Athene invests primarily in secured investment-grade debt. The underlying credit exposure is predominantly to hyperscaler and semiconductor companies which are large investment-grade businesses with established track records of cash flow generation that predate the current AI cycle. Athene incorporates counterparty and other risk limits when evaluating debt used to finance AI infrastructure, recognizing that counterparties and investment structures across the sector present distinct risk profiles. This includes considerations for issuer concentration across the sector as well as construction and operational risk. As Grant mentioned earlier, industry-leading disclosure is 1 of the ways we differentiate ourselves in the marketplace. Our dedicated presentation on affiliate or related party assets was first published a year ago last August and updated in May. We remain the only company to disclose this level of detail on the topic, while the label will sound technical, the concept is simple. In most cases, the labels apply because Apollo manages a legal entity that issued investment-grade debt secured by unaffiliated assets. Apollo does not own the underlying business, it manages the structure, which is what makes these assets secured. Asset-backed financing, which is extended to investment-grade companies, provides us with additional control over the sourcing, selection, documentation and servicing. As of year-end, 13% or $49 billion of Athene's gross invested assets have the classification of related parties. 60% is secured debt issued by an entity managed by Apollo, but with unaffiliated underlying collateral or borrowers. These assets are primarily investment-grade, typically with significant third-party ownership that validates the attractiveness of the assets. An example of this is AMAP. 35% of equity in an affiliate or an Apollo Fund with significant third-party participation. The majority of this category is Apollo aligned alternatives, AAA, a pooled investment vehicle with 43% third-party ownership. Importantly, historical impairments on the themes related party assets have been de minimis at 2 basis points over the last 5 years compared to 10 basis points for all other assets. These are some of our favorite assets because we have deeper perspective on the underwriting and relative value. I'll now turn it over to LJ to cover our strong financial results and capital position.

Thank you, Jim, and good morning, everyone. We delivered another strong quarter of financial results that reflect the momentum in the business and our ability to originate new organic volumes in line with our long-term ROE targets and historical averages. Looking ahead to the second half, we expect to continue adding the good business we want and are maintaining our full year target of 10% SIA growth, assuming an 11% out return. Turning to our financial performance. Strong net organic growth drove trade-related earnings to $877 million in the second quarter, a new record. Second quarter net spread improved to 114 basis points from 97 basis points in the first quarter. I included a 9% return on Athene's portfolio, a sequential quarter improvement due to strong performance by the AAA along with appreciation at Athora. Going forward, we expect further gains in organic growth and returned to Athora as the peak integration progresses and the asset portfolio is optimized. When considering our 11% return expectation on the alternatives portfolio, second quarter net spread would have been 10 basis points higher. Adjusting for this, the net spread is in line with 120 to 125 basis points outlook that we provided for the year. On a core basis, the net spread improvement resulted from a rising fixed income yield as we continue to source attractive investment-grade assets, including the commercial mortgage portfolio we required from ARI, as Jim mentioned earlier, along with lower expenses and interest costs. Partially offsetting these positives was the lumpy asset roll-off from the previously announced Intel repayment, along with the normal cost rise in cost of funds as the portfolio continues seasoning into the prevailing rate environment. Importantly, we recognized a gross realized gain of almost $700 million within GAAP results or about $400 million net of NCI and taxes due to the Intel repayment, which also benefited capital. Our capital position remained robust as of June 30 with $37 million of gross regulatory capital. Total deployable capital was $6.1 billion which includes excess equity capital and tapped leverage capacity and available undrawn capital at ACRA. Our side cars are key to our business model, and we plan to continue to use this on-demand long-term equity capital provided by third-party investors as an efficient way to fund growth while maintaining balance sheet strength. Excess equity capital was $1.4 billion as of June 30 compared to $1.7 billion as of March 31. As Grant mentioned earlier, retail volumes of $12 billion represented the second highest quarter on record, and we allocated the capital required to support it. Last week, we enhanced our balance sheet by successfully raising $1 billion of 10-year senior debt at 155 basis points over treasuries to help fund future growth. We upsized from initial expectations given strong demand from a high-quality order book. We intend to continue accessing the capital markets to help fund our prefund growth while observing the upper limit of our adjusted leverage ratio. In addition to our strong capital position, we had nearly $80 billion of available liquidity as of June 30, which includes cash and equivalents, highly liquid assets, committed repo lines, the holding company credit facility as well as the liquidity facility plus an top capacity at the FHLB. We are 1 of the few companies that have amassed about $35 billion in cash, treasuries and agencies, positioning us flexibly to be opportunistic amid a tight market backdrop. As Jeanne mentioned earlier, we recently published the fourth annual update of our corporate structure deck, which provides detailed disclosures on where capital assets and liabilities received across our structure, including Bermuda. We are often asked why we operate in Bermuda. The answer is simple. It provides access to third-party capital that supports growth and long-term commitments to policyholders. Importantly, Bermuda is recognized as reciprocal or equivalent jurisdiction by U.S. and European regulators. That means capital adequacy is measured through established risk-based capital frameworks, regulatory standards and supervisory review by the Bermuda Monetary Authority. Reciprocity also means transparency with Athene's primary U.S. regulator in Iowa, maintaining full access to detailed reporting and oversight. Thanks in part to the invested capital we access in Bermuda, our policyholders benefit from $37 billion of regulatory capital across our business and ample excess capital and liquidity, supporting the promises we make to them. This policyholder-first mindset is embedded in Athene's culture of risk discipline where risk management is embedded into every core function of the business. In the near term, we intend to publish our eighth annual asset stress test, a continuation of our regular IR programming. I'll now hand the call back to the operator and open up for any questions. Thank you.

[Operator Instructions] Our first question comes from the line of Peter Troisi with Barclays.

You mentioned the large gains on the Intel fabs asset in the quarter. So just curious if that gain was captured in the $77 million of SRE this quarter? .

Right. Let me take that. This is LJ. So just a reminder, is a natural metric. In some way, it's recognizing the running accrual value of assets net of cost of funds. So SI in effect, is removing out of GAAP earnings, the volatility from unrealized assets carried at fair value into income and the estimatric accounting that we may have on the liability side. So SI doesn't account does not account for realized P&L and unrealized P&L. So in the case of Inter to your question, the prepayment generated $700 million of gross GAAP income, but that did not flow into SE. It, however, was accretive to capital. It was accretive to stat capital.

Yes. That makes sense, makes the 22% increase in SRE this quarter, even that stronger. My second question was just on ratings. I think that the management team has talked about getting second or third ratings on securities that only have, say, 1 or 2 ratings now. So can you talk a little bit about progress that you've made there?

It's a work in process. I mean I think Jim mentioned the evolution of going from private to public on AMAPs, and we're in process in some of the larger private transactions, but I couldn't give you percentages.

Our next question comes from the line of Ryan Krueger with KBW.

I had a question about the retail annuity market. You pulled back some in the first quarter. I think you and others slightly elevated competition, you definitely leaned in more in the second quarter. What -- how would you characterize what led to the change in the attractiveness of the market from going from the first to the second quarter? Was it more changes in the competitive environment or better asset opportunities or maybe some combination? .

Yes. Thanks, Ryan. I think it's the latter. It's some combination. We did launch some new products. We updated our RILA that launched in the quarter. That was helpful. We brought out a new FIA in the IMO channel aviator, and that's off to a good start. We did have better asset opportunities. As Jim mentioned, we're we think we're looking at a historic pipeline. So it was the case, and I think you need to be nuanced by channel, but we were much better positioned in the bank and the broker-dealer channel in the second quarter. still the case that in the IMO channel, particularly in MYGAs and the IMO channel, it's extremely competitive, but we felt very good about our positioning across channels in the second quarter.

And just a quick follow-up on RILA, I think it's taken a while to gain more shelf space in that market, but you seem to be making a lot more progress now. I guess what do you think is leading to that? Is it just the long kind of blocking and tackling of getting on the shelf? And do you see the momentum continuing from here? .

I think it's some of that, and we do see the momentum continuing. We still need access to some of the bigger distribution outlets and we've had a couple of big wins. They're not public yet, but we'll be going live in a couple of big distributors here in the next couple of months that we're very excited about. So it sells primarily in the BD channel and a lot of those relationships are relatively new for us. So you don't always start with your full product suite, but we got a lot of focus on RILA. We enhanced our wholesalers. We hired a number of new wholesalers at the beginning of the year to focus specifically on the BD channel, and I think all of those factors are paying off.

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

I think you sold my thunder a bit in your prepared remarks on this, but a prominent I think this week about the big announced NVIDIA financing joint venture and is picking on you at Athene -- Apollo Athene specifically and putting out a flow chart suggesting Athene and annuity holders will be financing all of that risk through AMAPs. I think AMAPs is only 3% of your portfolio. So that alone suggests this argument is probably up base, but I'd be curious to get your thoughts on how much exposure to a deal like NVIDIA AMAPs could have and then more broadly take that as an opportunity to expand and how you're managing the broader exposure to data centers and the AI build-out given Apollo is clearly planning to do a lot more there. .

Think -- look, we've been pretty vocal about AMAPs is a CLO replacement. It's a better version of CLO. We talked about the metrics during my script, thicker equity trans, 85% investment-grade compared to CLOs. So it's a better mousetrap. These other -- we're proud to partner with Apollo on a lot of noteworthy, highly profiled high-publicity transactions. I mean, Athene has anchored multiple of those with Apollo this year, just to name a few, Paramount, Broadcom. We mentioned the commercial real estate from earlier, Linde Val or midcap, there's 2 large deals with our warehouse financing entity, Apollo's Atlas. These are noteworthy transactions in the news and I mentioned the industrial renaissance. These are all consistent with being front and center and helping finance that. We're sticking to our metrics on a AMAPs and the high-quality collateral that it has. So I wouldn't be worried about any cross pollution on these, plus from what you just mentioned. Plus, we have guardrails in place for AMAPs. There's in working with our regulators, that's been a big issue for them as well. So there are guardrails in place that prohibit the creation of any direct or indirect circularity via the AMAP structure. For example, funds that have received investments from 1 AMAP are not allowed to invest in any AMAPs as well as against cross-pollination, meaning, 1 AMAP is not allowed to invest in equity debt of another AMAP, and we're partnered at the hip with the regulators on those safeguards.

I would just add, Patrick, I mean we have single name limits for all issuers. And when you think about some of these AI infrastructure deals, the ones that we've been most prominent in are relatively short-term deals. A lot of them are taken directly, not through AMAPs. So yes, I saw the chart you're referring to. I think it's a bit of hyperventilating and not really based in reality. .

[Operator Instructions] Our next question comes from the line of Wilma Burdis with Raymond James.

[Audio Gap] this quarter and what are the drivers there?

Is that a reference to new markets? Look, it's just a new business. These are relatively newer businesses at start-up in nature. I think you should expect that there'll be more volatility in volumes quarter-to-quarter as we kind of get those things up and running. But we said at the beginning of the year that we thought we'd generate $5 billion over the course of this year, and we still feel confident in that number. . Yes. We did a big deal in the first quarter, which was a new transaction type for us in the stable value area, and it didn't replicate in the second quarter again. So it's just kind of there'll be lumpiness as these things are getting up and running. We think things are going great. Really proud of how much progress we've made in the structured settlements area. I think we're sort of the second largest provider year-to-date there. So feeling good about the initiatives and thinking there's upside, but it will be lumpy quarter-to-quarter.

Okay. And then this is sort of a broad question, but maybe you can talk a little bit about saw that you published the more recent just consolidated capital numbers across the entities and there's been quite a few different short reports or whatever you want to call it, that just discussed this topic. So just kind of curious, we'd love to hear an overview.

So we've been very transparent with respect to our excess capital and our RBC, excess over 400 RBC. So I don't know if you make reference to the various tax that we published recently. I mean, we always lean towards more transparency and more focus into what we can provide publicly in terms of the asset type, the details of our asset landscape and where it's domiciled either on IRS balance sheet or Bermuda as it relates to our capital base, we have effectively a large excess capital base. We have capacity to redeploy. We tapped the market last week, as I said, to the tune of $1 billion, where initially the plan was considering $500 million. So there was an opportunistic move for us to prefund for growth for the remaining of the year and next year, I think we're in a very good place. Grant, do you want to add anything?

It covers it. Does that address your question, Wilma?

Yes. Thank you.

Our next question comes from the line of Tracy Benguigui with Wolfe Research.

I would like to touch on your current transfer appetite. You've already done deals where you keep the investment spread risk and retrocede the biometric risk. What is your appetite to apply that same approach to long-term care block?

I mean, we've looked at it. We haven't looked at anything recently. The economics just haven't made sense to us. But if we could convert a long-term care block to something like a kind of known spread for a known period of time, we'd be willing to look at it. But it just hasn't been anything that made sense to us. We've seen some transactions occur in the marketplace, and we've looked at them. But I would say it fits in the -- we look at everything inorganically, not just long-term care. We've looked at the Universal Life was secondary. We've looked at more exotic liability types, but it is the case as it has been for quite some time that we don't like the pricing at which inorganic deals are trading is below the price and the returns we can get on originating organic business. And that seems inverted to us. It seems like because there's always unknowns when you do inorganic business. They ought to be underwritten to higher returns to account for the unknowns that you learn about after you own it. And that is not the current case in the organic space, which is why you see us not doing anything there. We look at everything, but we're not transacting because others are willing to pay higher prices.

Okay. And I'm curious then, what is the universe of reinsurers that may be willing to do these retrocessions?

That's not for me to comment on.

Our next question comes from the line of Kayla Kremer with Aegon Asset Management.

My first question was on the residential mortgage loan portfolio. It looked like there was some deterioration in the delinquencies in nonaccruals. Just curious if you can comment on what's causing the increase how widespread those issues are? And maybe if you can give some color on the average LTV of the troubled loans, that would be helpful as well. .

On some of the specifics, we probably have to get back to you on, but yes, like we focus on it. We think we have a high-quality portfolio. It's almost all RMLs 1s and 2s. There have been some delinquencies, but in the scope of a $400-plus billion balance sheet, that's to be expected and a very small percentage of the total. So I don't think anything has changed on underwriting rigor has been. But there have been a couple of missteps, but nothing sizable that would give us worry but we can give you the precise LTVs of the problems offline.

Okay. That would be helpful. Next question was just on the office CRE exposure increasing again. Just curious, is this just driven by the RE transaction? Or are you guys also looking to grow your office CRE exposure organically again. And it's the latter, I'm just curious kind of what you're seeing that gives you comfort to kind of step back into the market. .

Well, we're paid to look across sectors and see what's cheap, weigh in on things that are cheap and pretty protected. No, we don't have a concerted strategy to increase our office exposure. If there are one-off opportunities that we think make sense, and we think that we're secured enough, then we'll be serious about it. But we're not trying to grow our office portfolio. And in fact, any time we've done a deep underwriting position by position of our CML portfolio. One conclusion that we come to every single time is happy we're not in the equity. That's still the case. But even in the debt of some of these office things we don't want. But when there is individual positions that can make sense for us given some downside protection, then we'll look at it.

I appreciate that. Makes sense. Last question is just on the desire to get to the AA rating. I guess what do you guys need to do to get there? Is it just simply about a matter of time? Or I mean, do you need to make an acquisition to diversify your liabilities or geographic risk profile to get there? I guess how do you think about kind of making that happen with an acquisition versus simply just kind of going about how you've been operating historically. .

Yes, Grant, I'll start with that one. look, we've been running the company to at least AA standards for several years. So our desire to have AA rating is just get what we deserve. If you run the company to a certain standard, you should have that. Look, not having a AA from the 3 major rating agencies. It does not stop us from doing anything we want to do. But everything we do would probably be cheaper and easier with a AA. We've consistently have AA or better capital levels the most important single factor in the rating agencies. The thing that's holding us back is diversification. The rating agencies want us to diversify in businesses that we don't want to go into. But the prospects to grow our non-U.S. business as we're doing in Japan, grow our exposure in Europe is a good thing for them and new markets. As that grows, those are all diversifiers that the rating agency is welcome and would see as a real positive. But yes, we're frustrated by not being AA when we think we should be right now, but we're going to keep at it because it's just want to get what we deserve.