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APOLLO GLOBAL MANAGEMENT, INC. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction withApollo Global Management, Inc.'s consolidated financial statements and the related notes as ofDecember 31, 2022 and 2021 and for the years endedDecember 31, 2022 , 2021 and 2020. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those included in the section of this report entitled "Item 1A. Risk Factors." The highlights listed below have had significant effects on many items within our consolidated financial statements and affect the comparison of the current period's activity with those of prior periods. Target returns included in this report are presented gross and do not account for fees, expenses and taxes, which will reduce returns. Target returns are neither guarantees nor predictions or projections of future performance. There can be no assurance that target returns will be achieved or that Apollo will be successful in implementing the applicable strategy. Actual gross and net returns for funds managed by Apollo, and individual investors participating directly or indirectly in funds managed by Apollo, may vary significantly from the target returns set forth herein.
General
Our Businesses
Founded in 1990, Apollo is a high-growth, global alternative asset manager and a retirement services provider. Apollo conducts its business primarily inthe United States through the following three reportable segments: Asset Management, Retirement Services and Principal Investing. These business segments are differentiated based on the investment services they provide as well as varying investing strategies. As ofDecember 31, 2022 , Apollo had a team of 2,540 employees and Athene had 1,718 employees.
Asset Management
Our Asset Management segment focuses on three investing strategies: yield, hybrid and equity. We have a flexible mandate in many of the funds we manage which enables the funds to invest opportunistically across a company's capital structure. We raise, invest and manage funds, accounts and other vehicles on behalf of some of the world's most prominent pension, endowment and sovereign wealth funds and insurance companies, as well as other institutional and individual investors. As ofDecember 31, 2022 , we had total AUM of$547.6 billion . The yield, hybrid and equity investing strategies of our Asset Management segment reflect the range of investment capabilities across our platform based on relative risk and return. As an asset manager, we earn fees for providing investment management services and expertise to our client base. The amount of fees charged for managing these assets depends on the underlying investment strategy, liquidity profile, and, ultimately, our ability to generate returns for our clients. We also earn capital solutions fees as part of our growing capital solutions business and as part of monitoring and deployment activity alongside our sizeable private equity franchise. After expenses, we call the resulting earnings stream "Fee Related Earnings" or "FRE", which represents the primary performance measure for the Asset Management segment.
Yield
Yield is our largest asset management strategy with$392.5 billion of AUM as ofDecember 31, 2022 . Our yield strategy focuses on generating excess returns through high-quality credit underwriting and origination. Beyond participation in the traditional issuance and secondary credit markets, through our origination platforms and corporate solutions capabilities we seek to originate attractive and safe-yielding assets for the investors in the funds we manage. Within our yield strategy, we target 4% to 10% returns for our clients. Since inception, the total return yield fund has generated a 5% gross Return on Equity ("ROE") and 4% net ROE annualized throughDecember 31, 2022 .
Hybrid
Our hybrid strategy, with$56.4 billion of AUM as ofDecember 31, 2022 , brings together our capabilities across debt and equity to seek to offer a differentiated risk-adjusted return with an emphasis on structured downside protected opportunities across asset classes. We target 8% to 15% returns within our hybrid strategy by pursuing investments in all market environments, deploying capital during both periods of dislocation and market strength, and focusing on different investing 59
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strategies and asset classes. The flagship hybrid credit hedge fund we manage has generated an 11% gross ROE and a 7% net ROE annualized and the hybrid value funds we manage have generated a 21% gross IRR and a 16% net IRR from inception throughDecember 31, 2022 . Equity Our equity strategy manages$98.8 billion of AUM as ofDecember 31, 2022 . Our equity strategy emphasizes flexibility, complexity, and purchase price discipline to drive opportunistic-like returns for our clients throughout market cycles. Apollo's equity team has experience across sectors, industries, and geographies in both private equity and real estate equity. Our control equity transactions are principally buyouts, corporate carveouts and distressed investments, while the real estate funds we manage generally transact in single asset, portfolio and platform acquisitions. Within our equity strategy, we target upwards of 15% returns in the funds we manage. We have consistently produced attractive long-term investment returns in the traditional private equity funds we manage, generating a 39% gross IRR and a 24% net IRR on a compound annual basis from inception throughDecember 31, 2022 .
Retirement Services
Our retirement services business is conducted by Athene, a leading financial
services company that specializes in issuing, reinsuring and acquiring
retirement savings products designed for the increasing number of individuals
and institutions seeking to fund retirement needs. Athene's primary product line
is annuities, which include fixed, payout and group annuities issued in
conjunction with pension group annuity transactions, as well as a newly launched
variable annuity product without guarantees. Athene also offers funding
agreements, which are comprised of funding agreements issued under its FABN and
FABR programs, funding agreements issued to the FHLB and repurchase agreements
with an original maturity exceeding one year. Our asset management business
provides a full suite of services for Athene's investment portfolio, including
direct investment management, asset allocation, merger and acquisition asset
diligence and certain operational support services, including investment
compliance, tax, legal and risk management support.
Our retirement services business focuses on generating spread income by
combining the two core competencies of (1) sourcing long-term, persistent
liabilities and (2) using the global scale and reach of our asset management
business to actively source or originate assets with Athene's preferred risk and
return characteristics. Athene's investment philosophy is to invest a portion of
its assets in securities that earn an incremental yield by taking measured
liquidity and complexity risk and capitalizing on its long-dated funding profile
to prudently achieve higher net investment earned rates, rather than assuming
incremental credit risk. A cornerstone of Athene's investment philosophy is that
given the operating leverage inherent in its business, modest investment
outperformance can translate to outsized return performance. Because Athene
maintains discipline in underwriting attractively priced liabilities, it has the
ability to invest in a broad range of high-quality assets to generate attractive
earnings.
Principal Investing
Our Principal Investing segment is comprised of our realized performance fee
income, realized investment income from our balance sheet investments, and
certain allocable expenses related to corporate functions supporting the entire
company. The Principal Investing segment also includes our growth capital and
liquidity resources at AGM. We expect to deploy capital into strategic
investments over time that will help accelerate the growth of our Asset
Management segment, by broadening our investment management and/or product
distribution capabilities or increasing the efficiency of our operations. We
believe these investments will translate into greater compounded annual growth
of Fee Related Earnings.
Given the cyclical nature of performance fees, earnings from our Principal
Investing segment, or Principal Investing Income ("PII"), is inherently more
volatile in nature than earnings from the Asset Management and Retirement
Services segments. We earn fees based on the investment performance of the funds
we manage and compensate our employees, primarily investment professionals, with
a meaningful portion of these proceeds to align our team with the investors in
the funds we manage and incentivize them to deliver strong investment
performance over time. We expect to increase the proportion of performance fee
income we pay to our employees over time, and as such proportion increases, we
expect PII to represent a relatively smaller portion of our total company
earnings.
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The diagram below depicts our current organizational structure:
[[Image Removed: apo-20221231_g2.jpg]] Note: The organizational structure chart above depicts a simplified version of the Apollo structure. It does not include all legal entities in the structure. (1)Includes direct and indirect ownership by AGM.
Business Environment
Economic and Market Conditions
Our asset management and retirement services businesses are affected by the condition of global financial markets and the economy. Price fluctuations within equity, credit, commodity, foreign exchange markets, as well as interest rates and global inflation, which may be volatile and mixed across geographies, can significantly impact the performance of our business, including, but not limited to, the valuation of investments, including those of the funds we manage, and related income we may recognize. We carefully monitor economic and market conditions that could potentially give rise to global market volatility and affect our business operations, investment portfolios and derivatives, which includes global inflation. Adverse economic conditions may result from domestic and global economic and political developments, including plateauing or decreasing economic growth and business activity, civil unrest, geopolitical tensions or military action, such as the armed conflict betweenUkraine andRussia and corresponding sanctions imposed bythe United States and other countries, and new or evolving legal and regulatory requirements on business investment, hiring, migration, labor supply and global supply chains.U.S. inflation remained heightened during the fourth quarter of 2022, and theU.S. Federal Reserve continued its interest rate hiking cycle as a result. TheU.S. Bureau of Labor Statistics reported that the annualU.S. inflation rate decreased to 6.5% as ofDecember 31, 2022 , compared to 7.0% as ofDecember 31, 2021 , and 8.2% as ofSeptember 30, 2022 , as action from theU.S. Federal Reserve is beginning to temper inflation. While beginning to decline, the heightenedU.S. inflation rate remains persistent due to a combination of supply and demand factors. As a result, inDecember 2022 , theFederal Reserve raised the benchmark interest rate to a target range of 4.25% to 4.50%, up from a target range of 0% to 0.25% in 2021, which marked the seventh consecutive interest rate hike in 2022. In theU.S. , the S&P 500 Index decreased by 19.4% in 2022, following an increase of 26.9% in 2021. Global equity markets decreased similarly in 2022, with theMSCI All Country World exUSA Index decreasing 13.8%, following an increase of 13.2% in 2021. 61
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Conditions in the credit markets have a significant impact on our business.
Credit markets were negative in 2022, with the BofAML HY Master II Index
decreasing by 11.2%, while the S&P/LSTA Leveraged Loan Index decreased by 0.6%.
The
In terms of economic conditions in theU.S. , theBureau of Economic Analysis reported real GDP increased at an annual rate of 2.1% in 2022, following an increase of 5.9% in 2021. As ofJanuary 2023 , theInternational Monetary Fund estimated that theU.S. economy will expand by 1.4% in 2023 and 1.0% in 2024. TheU.S. Bureau of Labor Statistics reported that theU.S. unemployment rate decreased to 3.5% as ofDecember 31, 2022 . Foreign exchange rates can materially impact the valuations of our investments and those of the funds we manage as well as Athene's liabilities that are denominated in currencies other than theU.S. dollar. TheU.S. dollar weakened in the fourth quarter of 2022 compared to the euro and the British pound as global central banks worked to combat the increasing yield disparity. Relative to theU.S. dollar, the euro depreciated 5.9% during 2022, after depreciating 6.9% in 2021, while the British pound depreciated 10.7% during 2022, after depreciating 1.0% in 2021. Oil moves also moderated, ending 2022 up 6.7%, after appreciating by 55.0% during 2021, amid a volatile year which included recession fears that counteracted constrained supply and oil export disruptions driven by the ongoing conflict betweenUkraine andRussia . We are actively monitoring the developments inUkraine resulting from theRussia /Ukraine conflict and the economic sanctions and restrictions imposed againstRussia ,Belarus , and certain Russian and Belarussian entities and individuals. The Company continues to (i) identify and assess any exposure to designated persons or entities across the Company's business; (ii) ensure existing surveillance and controls are calibrated to the evolving sanctions; and (iii) ensure appropriate levels of communication across the Company, and with other relevant market participants, as appropriate. As ofDecember 31, 2022 , the funds we manage have no investments that would cause Apollo or any Apollo managed fund to be in violation of current international sanctions, and we believe the direct exposure of investment portfolios of the funds we manage toRussia andUkraine is insignificant. The Company and the funds we manage do not intend to make any new material investments inRussia , and have appropriate controls in place to ensure review of any new exposure. Institutional investors continue to allocate capital towards alternative investment managers for more attractive risk-adjusted returns in a low interest rate environment, and we believe the business environment remains generally accommodative to raise larger successor funds, launch new products, and pursue attractive strategic growth opportunities.
Interest Rate Environment
Rates moved meaningfully higher than most predictions for 2022, and this trend continued in the fourth quarter with theU.S. 10-yearTreasury reaching levels as high as 4.25% during the quarter. Given theFederal Reserve's continued focus on curbing inflation and recessionary concerns, it is difficult to predict the level of interest rates and the shape of the yield curve. With respect to Retirement Services, Athene's investment portfolio consists predominantly of fixed maturity investments. If prevailing interest rates were to rise, we believe the yield on Athene's new investment purchases may also rise and Athene's investment income from floating rate investments would increase, while the value of Athene's existing investments may decline. If prevailing interest rates were to decline significantly, the yield on Athene's new investment purchases may decline and Athene's investment income from floating rate investments would decrease, while the value of Athene's existing investments may increase. Athene addresses interest rate risk through managing the duration of the liabilities it sources with assets it acquires through asset liability management ("ALM") modeling. As part of its investment strategy, Athene purchases floating rate investments, which are expected to perform well in a rising interest rate environment, as was experienced in 2022, and are expected to underperform in a declining rate environment. As ofDecember 31, 2022 , Athene's net invested asset portfolio included$39.3 billion of floating rate investments, or 20% of its net invested assets and its net reserve liabilities included$14.2 billion of floating rate liabilities at notional, or 7% of its net invested assets, resulting in$25.1 billion of net floating rate assets, or 13% of its net invested assets. If prevailing interest rates were to rise, we believe Athene's products would be more attractive to consumers and its sales would likely increase. If prevailing interest rates were to decline, it is likely that Athene's products would be less attractive to consumers and Athene's sales would likely decrease. In periods of prolonged low interest rates, the net investment spread may be negatively impacted by reduced investment income to the extent that Athene is unable to adequately reduce policyholder 62
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crediting rates due to policyholder guarantees in the form of minimum crediting rates or otherwise due to market conditions. A significant majority of Athene's deferred annuity products have crediting rates that it may reset annually upon renewal following the expiration of the current guaranteed period. While Athene has the contractual ability to lower these crediting rates to the guaranteed minimum levels, its willingness to do so may be limited by competitive pressures.
See "Part II-Item 7A. Quantitative and Qualitative Disclosures About Market
Risk," which includes a discussion regarding interest rate and other significant
risks and Athene's strategies for managing these risks.
Overview of Results of Operations
Financial Measures under
The following discussion of financial measures under
Apollo's asset management business as of
Revenues
Management Fees
The significant growth of the assets we manage has had a positive effect on our revenues. Management fees are typically calculated based upon any of "net asset value," "gross assets," "adjusted par asset value," "adjusted costs of all unrealized portfolio investments," "capital commitments," "invested capital," "adjusted assets," "capital contributions," or "stockholders' equity," each as defined in the applicable limited partnership agreement and/or management agreement of the unconsolidated funds or accounts.
Advisory and Transaction Fees, Net
As a result of providing advisory services with respect to actual and potential
investments, we are entitled to receive fees for transactions related to the
acquisition and, in certain instances, disposition and financing of companies,
some of which are portfolio companies of the funds we manage, as well as fees
for ongoing monitoring of portfolio company operations and directors' fees. We
also receive advisory fees for advisory services provided to certain funds. In
addition, monitoring fees are generated on certain structured portfolio company
investments. Under the terms of the limited partnership agreements for certain
funds, the management fee payable by the funds may be subject to a reduction
based on a certain percentage (up to 100%) of such advisory and transaction
fees, net of applicable broken deal costs ("Management Fee Offset"). Such
amounts are presented as a reduction to advisory and transaction fees, net, in
the consolidated statements of operations (see note 2 to our consolidated
financial statements for more detail on advisory and transaction fees, net).
Performance Fees
The general partners of the funds we manage are entitled to an incentive return of normally up to 20% of the total returns of a fund's capital, depending upon performance of the underlying funds and subject to preferred returns and high water marks, as applicable. Performance fees, categorized as performance allocations, are accounted for as an equity method investment, and effectively, the performance fees for any period are based upon an assumed liquidation of the funds' assets at the reporting date, and distribution of the net proceeds in accordance with the funds' allocation provisions. Performance fees categorized as incentive fees, which are not accounted as an equity method investment, are deferred until fees are probable to not be significantly reversed. The majority of performance fees are comprised of performance allocations. As ofDecember 31, 2022 , approximately 45% of the value of the investments of the funds we manage, on a gross basis, was determined using market-based valuation methods (i.e., reliance on broker or listed exchange quotes) and the remaining 55% was determined primarily by comparable company and industry multiples or discounted cash flow models. See "Item 1A. Risk Factors-Risks Relating to Our Asset Management Business-The performance of the funds we manage, and our performance, may be adversely affected by the financial performance of portfolio companies of the funds we manage and the industries in which the funds we manage invest" for discussion regarding certain industry-specific risks that could affect the fair value of certain of the portfolio company investments of the funds we manage. In certain funds we manage, generally in our equity strategy, the Company does not earn performance fees until the investors have achieved cumulative investment returns on invested capital (including management fees and expenses) in excess of an 8% 63
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hurdle rate. Additionally, certain of the yield and hybrid funds we manage have various performance fee rates and hurdle rates. Certain of the yield and hybrid funds we manage allocate performance fees to the general partner in a similar manner as the equity funds. In certain funds we manage, as long as the investors achieve their priority returns, there is a catch-up formula whereby the Company earns a priority return for a portion of the return until the Company's performance fees equate to its incentive fee rate for that fund; thereafter, the Company participates in returns from the fund at the performance fee rate. Performance fees, categorized as performance allocations, are subject to reversal to the extent that the performance fees distributed exceed the amount due to the general partner based on a fund's cumulative investment returns. The Company recognizes potential repayment of previously received performance fees as a general partner obligation representing all amounts previously distributed to the general partner that would need to be repaid to the Apollo funds if these funds were to be liquidated based on the current fair value of the underlying funds' investments as of the reporting date. The actual general partner obligation, however, would not become payable or realized until the end of a fund's life or as otherwise set forth in the respective limited partnership agreement of the fund.
The table below presents an analysis of Apollo's (i) performance fees receivable
on an unconsolidated basis and (ii) realized and unrealized performance fees:
As of December 31 ,
Performance Fees for the Year Performance Fees for the Year Ended
2022 2021 Ended December 31, 2022 2021 Performance Fees for the Year Ended December 31, 2020
Performance Fees Receivable on an
(In millions) Unconsolidated Basis Unrealized Realized Total Unrealized Realized Total Unrealized Realized Total
AIOF I and II $ 10.7 $ 16.0 $ (5.3) $ 26.8 $ 21.5 $ 3.2 $ 16.1 $ 19.3 $ (5.4) $ 15.4 $ 10.0
ANRP I, II and III1 33.5 89.9 (66.0) 2.7 (63.3) 109.9 51.8 161.7 (21.4) 0.3 (21.1)
EPF Funds1 71.4 135.2 (79.0) 47.5 (31.5) 57.3 44.7 102.0 (148.8) 35.0 (113.8)
FCI Funds 138.1 139.3 (1.2) - (1.2) 66.6 - 66.6 (9.3) - (9.3)
Fund IX 1,261.8 768.2 493.6 200.3 693.9 614.4 389.1 1,003.5 153.8 - 153.8
Fund VIII 369.2 726.2 (357.0) 22.0 (335.0) (74.2) 671.6 597.4 84.8 - 84.8
Fund VII2 39.8 77.3 (37.7) 44.4 6.7 182.3 49.4 231.7 (7.4) 0.5 (6.9)
Fund VI 17.7 16.3 (1.3) 2.7 1.4 (1.6) - (1.6) - 0.7 0.7
Fund IV and Fund V1 - - 0.3 - 0.3 (0.5) - (0.5) (0.6) - (0.6)
HVF I 43.8 106.1 (62.2) 116.3 54.1 53.6 65.3 118.9 52.8 19.8 72.6
Real Estate Equity 62.8 42.1 22.0 18.1 40.1 27.5 0.7 28.2 (28.2) 12.4 (15.8)
Corporate Credit 19.4 18.3 3.6 19.4 23.0 4.4 15.8 20.2 1.4 8.8 10.2
Structured Finance and ABS 85.5 98.8 (3.9) 23.5 19.6 46.3 33.4 79.7 2.7 13.0 15.7
Direct Origination 145.5 108.8 36.2 34.9 71.1 50.0 23.5 73.5 (10.2) 11.0 0.8
Other1,3 382.9 432.6 55.6 108.1 163.7 175.0 433.2 608.2 (27.0) 173.9 146.9
Total $ 2,682.1 $ 2,775.1 $ (2.3) $ 666.7 $ 664.4 $ 1,314.2 $ 1,794.6 $ 3,108.8 $ 37.2 $ 290.8 $ 328.0
Total, net of profit sharing
payable4/expense $ 1,380.1 $ 1,431.0 $ (17.4) $ 129.7 $ 112.3 $ 811.5 $ 807.8 $ 1,619.3 $ 1.4 $ 96.8 $ 98.2
1 As of December 31, 2022 , certain funds had $106.5 million in general partner obligations to return previously distributed performance fees. The fair value gain on investments and income at the fund level
needed to reverse the general partner obligations was $1.7 billion as of December 31, 2022 .
2 As of December 31, 2022 , the remaining investments and escrow cash of Fund VII was valued at 112% of the fund's unreturned capital, which was below the required escrow ratio of 115%. As a result, the fund
is required to place in escrow current and future performance fee distributions to the general partner until the specified return ratio of 115% is met (at the time of a future distribution) or upon
liquidation. As of December 31, 2022 , Fund VII had $85.5 million of gross performance fees or $48.7 million net of profit sharing, in escrow. With respect to Fund VII, realized performance fees currently
distributed to the general partner are limited to potential tax distributions and interest on escrow balances per the fund's partnership agreements. Performance fees receivable as of December 31, 2022 and
realized performance fees for the year ended December 31, 2022 include interest earned on escrow balances that is not subject to contingent repayment.
3 Other includes certain SIAs.
4 There was a corresponding profit sharing payable of $1.3 billion as of December 31, 2022 , including profit sharing payable related to amounts in escrow and contingent consideration obligations of $55.0
million .
The general partners of certain of the funds we manage accrue performance fees,
categorized as performance allocations, when the fair value of investments
exceeds the cost basis of the individual investors' investments in the fund,
including any allocable share of expenses incurred in connection with such
investments, which we refer to as "high water marks." These high water marks are
applied on an individual investor basis. Certain of the funds we manage have
investors with various high water marks, the achievement of which is subject to
market conditions and investment performance.
Performance fees from certain funds we manage are subject to contingent
repayment by the general partner in the event of future losses to the extent
that the cumulative performance fees distributed from inception to date exceeds
the amount computed
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as due to the general partner at the final distribution. These general partner
obligations, if applicable, are included in due to related parties on the
consolidated statements of financial condition.
The following table summarizes our performance fees since inception through
Performance Fees Since Inception1
Total Undistributed Maximum Performance
Undistributed by Distributed by Fund and Distributed by General Partner Fees Subject to
Fund and Recognized and Recognized2 Fund and Recognized3 Obligation3 Potential Reversal4
(in millions)
AIOF I and II $ 10.7 $ 58.4 $ 69.1 $ - $ 38.3
ANRP I, II and III 33.5 159.1 192.6 21.5 48.6
EPF Funds 71.4 484.7 556.1 41.4 321.2
FCI Funds 138.1 24.2 162.3 - 138.1
Fund IX 1,261.8 589.5 1,851.3 - 1,640.6
Fund VIII 369.2 1,660.8 2,030.0 - 1,425.0
Fund VII 39.8 3,225.7 3,265.5 - 14.6
Fund VI 17.7 1,663.9 1,681.6 - -
Fund IV and Fund V - 2,053.1 2,053.1 31.4 -
HVF I 43.8 201.4 245.2 - 142.5
Real Estate Equity 62.8 75.3 138.1 - 77.5
Corporate Credit 19.4 926.2 945.6 - 10.0
Structured Finance and ABS 85.5 52.2 137.7 - 61.7
Direct Origination 145.5 73.3 218.8 - 134.2
Other5 382.9 1,692.6 2,075.5 12.2 563.6
Total $ 2,682.1 $ 12,940.4 $ 15,622.5 $ 106.5 $ 4,615.9
1 Certain funds are denominated in euros and historical figures are translated into U.S. dollars at an exchange rate of €1.00 to $1.07 as of December 31, 2022 .
Certain funds are denominated in pounds sterling and historical figures are translated into U.S. dollars at an exchange rate of £1.00 to $1.21 as of
December 31, 2022 .
2 Amounts in "Distributed by Fund and Recognized" for the Citi Property Investors ("CPI"), Gulf Stream Asset Management, LLC ("Gulf Stream"), Stone Tower
Capital LLC and its related companies ("Stone Tower") funds and SIAs are presented for activity subsequent to the respective acquisition dates. Amounts exclude
certain performance fees from business development companies and Redding Ridge Holdings LP ("Redding Ridge Holdings "), an affiliate of Redding Ridge.
3 Amounts were computed based on the fair value of fund investments on December 31, 2022 . Performance fees have been allocated to and recognized by the general
partner. Based on the amount allocated, a portion is subject to potential reversal or, to the extent applicable, has been reduced by the general partner
obligation to return previously distributed performance fees at December 31, 2022 . The actual determination and any required payment of any such general partner
obligation would not take place until the final disposition of the fund's investments based on contractual termination of the fund.
4 Represents the amount of performance fees that would be reversed if remaining fund investments became worthless on December 31, 2022 . Amounts subject to
potential reversal of performance fees include amounts undistributed by a fund (i.e., the performance fees receivable), as well as a portion of the amounts that
have been distributed by a fund, net of taxes and not subject to a general partner obligation to return previously distributed performance fees, except for
those funds that are gross of taxes as defined in the respective funds' governing documents.
5 Other includes certain SIAs.
Expenses
Compensation and Benefits
The most significant expense in our asset management business is compensation
and benefits expense. This consists of fixed salary, discretionary and
non-discretionary bonuses, profit sharing expense associated with the
performance fees earned and compensation expense associated with the vesting of
non-cash equity-based awards.
Our compensation arrangements with certain employees contain a significant
performance-based incentive component. Therefore, as our net revenues increase,
our compensation costs rise. Our compensation costs also reflect the increased
investment in people as we expand geographically and create new funds.
In addition, certain professionals and selected other individuals have a profit
sharing interest in the performance fees earned in order to better align their
interests with our own and with those of the investors in the funds we manage.
Profit sharing expense is part of our compensation and benefits expense and is
generally based upon a fixed percentage of performance fees. Certain of
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our performance-based incentive arrangements provide for compensation based on realized performance fees which includes fees earned by the general partners of the funds we manage under the applicable fund limited partnership agreements based upon transactions that have closed or other rights to incentive income cash that have become fixed in the applicable calendar year period. Profit sharing expense can reverse during periods when there is a decline in performance fees that were previously recognized. Profit sharing amounts are normally distributed to employees after the corresponding investment gains have been realized and generally before preferred returns are achieved for the investors. Therefore, changes in our unrealized performance fees have the same effect on our profit sharing expense. Profit sharing expense increases when unrealized performance fees increase. Realizations only impact profit sharing expense to the extent that the effects on investments have not been recognized previously. If losses on other investments within a fund are subsequently realized, the profit sharing amounts previously distributed are normally subject to a general partner obligation to return performance fees previously distributed back to the funds. This general partner obligation due to the funds would be realized only when the fund is liquidated, which generally occurs at the end of the fund's term. However, indemnification obligations also exist for realized gains with respect to Fund IV, Fund V and Fund VI, which, although ourFormer Managing Partners andContributing Partners would remain personally liable, may indemnify ourFormer Managing Partners andContributing Partners for 17.5% to 100% of the previously distributed profits regardless of the fund's future performance. See note 17 to our consolidated financial statements for further information regarding the Company's indemnification liability. The Company grants equity awards to certain employees, including RSUs and restricted shares of common stock, that generally vest and become exercisable in quarterly installments or annual installments depending on the award terms. In some instances, vesting of an RSU is also subject to the Company's receipt of performance fees, within prescribed periods, sufficient to cover the associated equity-based compensation expense. See note 14 to our consolidated financial statements for further discussion of equity-based compensation.
Other expenses
The balance of our other expenses includes interest, placement fees, and general, administrative and other operating expenses. Interest expense consists primarily of interest related to the 2024 Senior Notes, the 2026 Senior Notes, the 2029 Senior Notes, the 2030 Senior Notes, the 2048 Senior Notes and the 2050 Subordinated Notes as discussed in note 13 to our consolidated financial statements. Placement fees are incurred in connection with our capital raising activities. In cases where the limited partners of the funds are determined to be the customer in an arrangement, placement fees may be capitalized as a cost to acquire a customer contract, and amortized over the life of the customer contract. General, administrative and other expenses includes occupancy expense, depreciation and amortization, professional fees and costs related to travel, information technology and administration. Occupancy expense represents charges related to office leases and associated expenses, such as utilities and maintenance fees. Depreciation and amortization of fixed assets is normally calculated using the straight-line method over their estimated useful lives, ranging from two to sixteen years, taking into consideration any residual value. Leasehold improvements are amortized over the shorter of the useful life of the asset or the expected term of the lease. Intangible assets are amortized based on the future cash flows over the expected useful lives of the assets.
Other Income (Loss)
Net gains (losses) from investment activities include both realized gains and losses and the change in unrealized gains and losses in our investment portfolio between the opening reporting date and the closing reporting date. Net unrealized gains (losses) are a result of changes in the fair value of unrealized investments and reversal of unrealized gains (losses) due to dispositions of investments during the reporting period. Significant judgment and estimation goes into the assumptions that drive these models and the actual values realized with respect to investments could be materially different from values obtained based on the use of those models. The valuation methodologies applied impact the reported value of investment company holdings and their underlying portfolios in our consolidated financial statements.
Entities ("VIEs")
Changes in the fair value of the consolidated VIEs' assets and liabilities and
related interest, dividend and other income and expenses subsequent to
consolidation are presented within net gains (losses) from investment activities
of consolidated variable interest entities and are attributable to
non-controlling interests in the consolidated statements of operations.
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Other Income (Losses), Net
Other income (losses), net includes gains (losses) arising from the
remeasurement of foreign currency denominated assets and liabilities,
remeasurement of the tax receivable agreement liability and other miscellaneous
non-operating income and expenses.
Financial Measures under
The following discussion of financial measures under
Company's retirement services business which is operated by Athene as of
Revenues Premiums
Premiums for long-duration contracts, including products with fixed and
guaranteed premiums and benefits, are recognized as revenue when due from
policyholders. Insurance revenues are reported net of amounts ceded.
Product charges
Revenues for universal life-type policies and investment contracts, including
surrender and market value adjustments, costs of insurance, policy
administration, GMDB, GLWB and no-lapse guarantee charges, are earned when
assessed against policyholder account balances during the period.
Net investment income
Net investment income is a significant component of Athene's total revenues. Athene recognizes investment income as it accrues or is legally due, net of investment management and custody fees. Investment income on fixed maturity securities includes coupon interest, as well as the amortization of any premium and the accretion of any discount. Investment income on equity securities represents dividend income and preferred coupon interest.
Investment related gains (losses)
Investment related gains (losses) primarily consist of (i) realized gains and losses on sales of investments, (ii) unrealized gains or losses relating to identified risks within AFS securities in fair value hedging relationships, (iii) gains and losses on trading securities, (iv) gains and losses on equity securities, (v) change in the fair value of the embedded derivatives and derivatives not designated as a hedge, (vi) change in fair value of mortgage loan assets and (vii) allowance for expected credit losses recorded through the provision for credit losses. Expenses
Interest sensitive contract benefits
Universal life-type policies and investment contracts include fixed indexed and
traditional fixed annuities in the accumulation phase, funding agreements,
universal life insurance, fixed indexed universal life insurance and immediate
annuities without significant mortality risk (which includes pension group
annuities without life contingencies). Liabilities for traditional fixed
annuities, universal life insurance and funding agreements are carried at the
account balances without reduction for potential surrender or withdrawal
charges, except for a block of universal life business ceded to Global Atlantic
which is carried at fair value. Fixed indexed annuities and fixed indexed
universal life insurance contracts contain an embedded derivative. Benefits
reserves for fixed indexed annuities and fixed indexed universal life insurance
contracts are reported as the sum of the fair value of the embedded derivative
and the host (or guaranteed) component of the contracts. Liabilities for
immediate annuities without significant mortality risk are calculated as the
present value of future liability cash flows and policy maintenance expenses
discounted at contractual interest rates.
Changes in the interest sensitive contract liabilities, excluding deposits and
withdrawals, are recorded in interest sensitive contract benefits or product
charges on the consolidated statements of operations.
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Future policy and other policy benefits
Athene issues contracts classified as long-duration, which includes term and whole life, accident and health, disability, and deferred and immediate annuities with life contingencies (which includes pension group annuities with life contingencies). Liabilities for non-participating long-duration contracts are established using accepted actuarial valuation methods which require the use of assumptions related to expenses, investment yields, mortality, morbidity and persistency at the date of issue or acquisition. Changes in future policy benefits other than the adjustment for the OCI effects of unrealized investment gains and losses on AFS securities, are recorded in future policy and other policy benefits on the consolidated statements of operations.
Amortization of deferred acquisition costs, deferred sales inducements, and
value of business acquired
Costs related directly to the successful acquisition of new or renewal insurance or investment contracts are deferred to the extent they are recoverable from future premiums or gross profits. These costs consist of commissions and policy issuance costs, as well as sales inducements credited to policyholder account balances. Deferred costs related to investment contracts without significant revenue streams from sources other than investment of the policyholder funds are amortized using the effective interest method. Deferred costs related to universal life-type policies and investment contracts with significant revenue streams from sources other than investment of the policyholder funds are amortized over the lives of the policies, based upon the proportion of the present value of actual and expected deferred costs to the present value of actual and expected gross profits to be earned over the life of the policies. VOBA associated with acquired contracts is amortized in relation to applicable policyholder liabilities.
Policy and other operating expenses
Policy and other operating expenses includes normal operating expenses, policy acquisition expenses, interest expense, dividends to policyholders, integration, restructuring and other non-operating expenses, and stock compensation expenses.
Other Financial Measures under
Income Taxes
Significant judgment is required in determining the provision for income taxes and in evaluating income tax positions, including evaluating uncertainties. We recognize the income tax benefits of uncertain tax positions only where the position is "more likely than not" to be sustained upon examination, including resolution of any related appeals or litigation, based on the technical merits of the positions. The tax benefit is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. If a tax position is not considered more likely than not to be sustained, then no benefits of the position are recognized. The Company's income tax positions are reviewed and evaluated quarterly to determine whether or not we have uncertain tax positions that require financial statement recognition or de-recognition. Deferred tax assets and liabilities are recognized for the expected future tax consequences, using currently enacted tax rates, of differences between the carrying amount of assets and liabilities and their respective tax basis. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Non-Controlling Interests
For entities that are consolidated, but not 100% owned, a portion of the income or loss and corresponding equity is allocated to owners other than Apollo. The aggregate of the income or loss and corresponding equity that is not owned by the Company is included in non-controlling interests in the consolidated financial statements. Non-controlling interests primarily include limited partner interests in certain consolidated funds and VIEs. Prior to the Mergers onJanuary 1, 2022 , the non-controlling interests relating toApollo Global Management, Inc. also included the ownership interest in theApollo Operating Group held by theFormer Managing Partners andContributing Partners through their limited partner interests inAP Professional Holdings, L.P. and the non-controlling interest in theApollo Operating Group held by Athene. 68
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The authoritative guidance for non-controlling interests in the consolidated financial statements requires reporting entities to present non-controlling interest as equity and provides guidance on the accounting for transactions between an entity and non-controlling interests. According to the guidance, (1) non-controlling interests are presented as a separate component of stockholders' equity on the Company's consolidated statements of financial condition, (2) net income (loss) includes the net income (loss) attributable to the non-controlling interest holders on the Company's consolidated statements of operations, (3) the primary components of non-controlling interest are separately presented in the Company's consolidated statements of changes in stockholders' equity to clearly distinguish the interests in theApollo Operating Group and other ownership interests in the consolidated entities and (4) profits and losses are allocated to non-controlling interests in proportion to their ownership interests regardless of their basis.
Results of Operations
Below is a discussion of our consolidated results of operations for the years endedDecember 31, 2022 , 2021 and 2020. For additional analysis of the factors that affected our results at the segment level, see "-Segment Analysis" below: For the Years Ended December 31, Total Percentage For the Years Ended December 31, Total Percentage 2022 2021 Change Change 2021 2020 Change Change (In millions) (In millions) Revenues Asset Management Management fees$ 1,503 $ 1,921 $ (418) (21.8)%$ 1,921 $ 1,687 $ 234 13.9% Advisory and transaction fees, net 443 302 141 46.7 302 249 53 21.3 Investment income (loss) 796 3,699 (2,903) (78.5) 3,699 393 3,306 NM Incentive fees 27 29 (2) (6.9) 29 25 4 16.0 2,769 5,951 (3,182) (53.5) 5,951 2,354 3,597 152.8 Retirement Services Premiums 11,638 - 11,638 NM - - - NM Product charges 718 - 718 NM - - - NM Net investment income 8,148 - 8,148 NM - - - NM Investment related gains (losses) (12,717) - (12,717) NM - - - NM Revenues of consolidated variable interest entities 440 - 440 NM - - - NM Other revenues (28) - (28) NM - - - NM 8,199 - 8,199 NM - - - NM Total Revenues 10,968 5,951 5,017 84.3 5,951 2,354 3,597 152.8 Expenses Asset Management Compensation and benefits: Salary, bonus and benefits 927 778 149 19.2 778 628 150 23.9 Equity-based compensation 484 1,181 (697) (59.0) 1,181 213 968 454.5 Profit sharing expense 532 1,534 (1,002) (65.3) 1,534 248 1,286 NM Total compensation and benefits 1,943 3,493 (1,550) (44.4) 3,493 1,089 2,404 220.8 Interest expense 124 138 (14) (10.1) 138 133 5 3.8 General, administrative and other 682 482 200 41.5 482 357 125 35.0 2,749 4,113 (1,364) (33.2) 4,113 1,579 2,534 160.5 Retirement Services Interest sensitive contract benefits 541 - 541 NM - - - NM Future policy and other policy benefits 12,310 - 12,310 NM - - - NM Amortization of deferred acquisition costs, deferred sales inducements and value of business acquired 509 - 509 NM - - - NM Policy and other operating expenses 1,371 - 1,371 NM - - - NM 14,731 - 14,731 NM - - - NM Total Expenses 17,480 4,113 13,367 325.0 4,113 1,579 2,534 160.5 69
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For the Years Ended
December 31, Total Percentage For the Years Ended December 31, Total Percentage
2022 2021 Change Change 2021 2020 Change Change
(In millions) (In millions)
Other income (loss) - Asset
Management
Net gains (losses) from investment
activities 165 2,611 (2,446) (93.7) 2,611 (455) 3,066 NM
Net gains (losses) from investment
activities of consolidated variable
interest entities 494 557 (63) (11.3) 557 197 360 182.7
Other income (loss), net 38 (145) 183 NM (145) 36 (181) NM
Total Other income (loss) 697 3,023 (2,326) (76.9) 3,023 (222) 3,245 NM
Income (loss) before income tax
(provision) benefit (5,815) 4,861 (10,676) NM 4,861 553 4,308 NM
Income tax (provision) benefit 1,069 (594) 1,663 NM (594) (86) (508) NM
Net income (loss) (4,746) 4,267 (9,013) NM 4,267 467 3,800 NM
Net (income) loss attributable to
non-controlling interests 1,533 (2,428) 3,961 NM (2,428) (310) (2,118) NM
Net income (loss) attributable to
Apollo Global Management, Inc. (3,213) 1,839 (5,052) NM 1,839 157 1,682 NM
Preferred stock dividends - (37) 37 (100.0) (37) (37) - -
Net income (loss) available to
Apollo Global Management, Inc.
common stockholders $ (3,213) $ 1,802 $ (5,015) NM $ 1,802 $ 120 $ 1,682 NM
Note: "NM" denotes not meaningful. Changes from negative to positive amounts and positive to negative amounts are not considered meaningful.
Increases or decreases from zero and changes greater than 500% are also not considered meaningful.
A discussion of our consolidated results of operations for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 is included in the Company's Annual Report on Form 10-K filed with theSEC onFebruary 25, 2022 (the "2021 Annual Report").
Year Ended
In this section, references to 2022 refer to the year ended
and references to 2021 refer to the year ended
Asset Management
Revenues
Revenues were$2.8 billion in 2022, a decrease of$3.2 billion from$6.0 billion in 2021 primarily due to lower investment income (loss) and, to a lesser extent, a decrease in management fees. Investment income (loss) decreased$2.9 billion in 2022 to$796 million compared to$3.7 billion in 2021. The decrease in investment income (loss) of$2.9 billion in 2022 was primarily driven by decreases in performance allocations. Significant drivers for performance allocations in 2021 were performance allocations earned from Fund IX, Fund VIII and Fund VII of$1.2 billion ,$650 million and$232 million , respectively, primarily as a result of fund appreciation and realization activity. Significant drivers for performance allocations in 2022 were performance allocations primarily earned from Fund IX of$711 million , partially offset by performance allocation losses from Fund VIII of$349 million , as a result of continued equity market volatility in 2022.
See below for details on the respective funds' performance allocations in 2022.
The performance allocations earned from Fund IX in 2022 were primarily driven by appreciation and realization of the fund's investments in the consumer services, leisure and media, telecom and technology sectors. The performance allocation losses from Fund VIII in 2022 were primarily driven by depreciation in the value of the fund's investments in the consumer services, leisure and media, telecom and technology sectors. Management fees decreased by$418 million to$1.5 billion in 2022 from$1.9 billion in 2021. The decrease for 2022 was primarily driven by the elimination of management fees between AAM and Athene subsidiaries upon consolidation, as a result of the Mergers. The decrease was partially offset by increases in management fees earned fromApollo Diversified Real Estate 70
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Fund and Apollo Diversified Credit Fund (collectively "ADREF and ADCF") of
Capital
The decreases in investment income (loss) and management fees were offset, in part, by an increase in advisory and transaction fees. Advisory and transaction fees increased by$141 million to$443 million in 2022 from$302 million in 2021. Advisory and transaction fees earned during 2022 were primarily attributable to advisory and transaction fees earned from companies in the consumer services, financial services, healthcare, energy, leisure, manufacturing and consumer and retail sectors, as well as structuring fees earned from companies in the financial services, entertainment and real estate sectors. Expenses Expenses were$2.7 billion in 2022, a decrease of$1.4 billion from$4.1 billion in 2021 due to a decrease in profit sharing expense of$1.0 billion resulting from the corresponding lower investment income (loss) during 2022. In any period, the blended profit sharing percentage is impacted by the respective profit sharing ratios of the funds generating performance allocations in the period. Additionally, there was a decrease in equity-based compensation of$697 million as there were one-time equity-based awards granted in connection with the Company's compensation reset in 2021. This decrease was partially offset by an increase in salary, bonus and benefits of$149 million due to accelerated headcount growth in 2022, including for certain senior level roles, as the Company strategically invests in talent that will seek to capture its next phase of growth. Equity-based compensation expense in 2022 is comprised of: i) performance grants which are tied to the Company's receipt of performance fees, within prescribed periods and are typically recognized on an accelerated recognition method over the requisite service period to the extent the performance revenue metrics are met or deemed probable, and ii) the impact of the 2021 one-time grants awarded to the Co-Presidents, which vest on a cliff basis subject to continued employment over five years and the Company's achievement of FRE and SRE per share metrics. General, administrative and other expenses were$682 million in 2022, an increase of$200 million from$482 million in 2021. The increase in 2022 was primarily driven by increases in the depreciation and amortization expense associated with the Company's commitment asset and other depreciable assets, higher travel and entertainment expenses and the absorption of occupancy expense to support the Company's increased headcount, including from the acquisition ofGriffin Capital's U.S. asset management business.
Other Income (Loss)
Other income (loss) was$697 million in 2022, a decrease of$2.3 billion from$3.0 billion in 2021. This decrease was primarily driven by a decrease in net gains (losses) from investment activities, as a result of AAM no longer holding an interest in Athene Holding following the Mergers. Other income (loss) in 2022 was primarily attributable to net gains from investment activities of consolidated VIEs and income earned as a result of APSG I's deconsolidation event. Other income (loss) in 2021 was primarily due to net gains from investment activities from the Company's investment in Athene Holding during 2021. Retirement Services Revenues Retirement Services revenues were$8.2 billion in 2022. Revenues were primarily driven by pension group annuity premiums, net investment income and product charges, partially offset by the adverse impact from investment related losses. Investment related losses of$12.7 billion were primarily driven by unfavorable changes in the fair value of reinsurance assets, FIA hedging derivatives, mortgage loans, trading and equity securities, realized losses on AFS securities and an increase in the provision for credit losses, partially offset by foreign exchange derivative gains. The losses on Retirement Services' assets were primarily due to an increase inU.S. Treasury rates and credit spread widening in 2022. The change in fair value of FIA hedging derivatives decreased due to the unfavorable performance of the indices upon which Athene's call options are based as the largest percentage of call options are based on the S&P 500 index, which decreased 19.4% in 2022. The unfavorable change in the provision for credit losses was primarily driven by unfavorable economics. The foreign exchange derivative gains were primarily driven by the strengthening of theU.S. dollar in 2022 for assets denominated in foreign currencies. 71
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Expenses
Retirement Services expenses were$14.7 billion in 2022. Expenses were primarily driven by pension group annuity and payout annuity obligations, policy and other operating expenses, interest credited to policyholders, interest paid on funding agreements and the amortization of DAC and VOBA, partially offset by a decrease in the change in FIA fair value embedded derivatives and negative VOBA amortization. The change in FIA fair value embedded derivatives was primarily due to the performance of the equity indices to which Athene's FIA policies are linked, primarily the S&P 500 index, which decreased 19.4% in 2022, as well as the favorable change in discount rates and favorable unlocking, partially offset by unfavorable economics impacting policyholder projected benefits. The FIA fair value embedded derivatives unlocking in 2022 was$41 million favorable due to changes to projected interest crediting, partially offset by the impact of higher rates on future account values.
Income Tax (Provision) Benefit
The Company's income tax (provision) benefit totaled$1.1 billion and$(594) million in 2022 and 2021, respectively. The change to the provision was primarily related to the decrease in pre-tax income and a tax benefit from the derecognition of a deferred tax liability related to the Mergers. The provision for income taxes includes federal, state, local and foreign income taxes resulting in an effective income tax rate of 18.4% and 12.2% for 2022 and 2021, respectively. The most significant reconciling items between theU.S. federal statutory income tax rate and the effective income tax rate were due to the following: (i) a benefit realized from the derecognition of a deferred tax liability related to the Company's historical holdings in Athene, (ii) foreign, state and local income taxes, including NYC UBT, (iii) income attributable to non-controlling interests and (iv) equity-based compensation net of the limiting provisions for executive compensation under IRC Section 162(m) (see note 12 to the consolidated financial statements for further details regarding the Company's income tax provision).
Managing Business Performance - Key Segment and Non-
Measures
We believe that the presentation of Adjusted Segment Income supplements a
reader's understanding of the economic operating performance of each of our
segments.
Adjusted Segment Income and Adjusted Net Income
Adjusted Segment Income, or "ASI", is the key performance measure used by
management in evaluating the performance of the Asset Management, Retirement
Services, and Principal Investing segments. See note 20 to the consolidated
financial statements for more details regarding the components of ASI and
management's consideration of ASI.
We believe that ASI is helpful for an understanding of our business and that investors should review the same supplemental financial measure that management uses to analyze our segment performance. This measure supplements and should be considered in addition to and not in lieu of the results of operations discussed below in "-Overview of Results of Operations" that have been prepared in accordance withU.S. GAAP. Adjusted Net Income ("ANI") represents Adjusted Segment Income lessHoldCo interest and other financing costs and estimated income taxes. For purposes of calculating the Adjusted Net Income tax rate, Adjusted Segment Income is reduced byHoldCo interest and financing costs. Income taxes on FRE and PII represents the total current corporate, local, and non-U.S. taxes as well as the current payable under Apollo's tax receivable agreement. Income taxes on FRE and PII excludes the impacts of deferred taxes and the remeasurement of the tax receivable agreement, which arise from changes in estimated future tax rates. Certain assumptions and methodologies that impact the implied FRE and PII income tax provision are similar to those used underU.S. GAAP. Specifically, certain deductions considered in the income tax provision underU.S. GAAP relating to transaction related charges, equity-based compensation, and tax deductible interest expense are taken into account for the implied tax provision. Income Taxes on SRE represent the total current and deferred tax expense or benefit on income before taxes adjusted to eliminate the impact of the tax expense or benefit associated with the non-operating adjustments. Management believes the methodologies used to compute income taxes on FRE, SRE, and PII are meaningful to each segment and increases comparability of income taxes between periods.
Fee Related Earnings, Spread Related Earnings and Principal Investing Income
Fee Related Earnings, or "FRE", is a component of ASI that is used as a
supplemental performance measure to assess the performance of the Asset
Management segment.
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Spread Related Earnings, or "SRE", is a component of ASI that is used as a
supplemental performance measure to assess the performance of the Retirement
Services segment, excluding certain market volatility and certain expenses
related to integration, restructuring, equity-based compensation, and other
expenses.
Principal Investing Income, or "PII", is a component of ASI that is used as a
supplemental performance measure to assess the performance of the Principal
Investing segment.
See note 20 to the consolidated financial statements for more details regarding
the components of FRE, SRE, and PII.
We use ASI, ANI, FRE, SRE and PII as measures of operating performance, not as measures of liquidity. These measures should not be considered in isolation or as a substitute for net income or other income data prepared in accordance withU.S. GAAP. The use of these measures without consideration of their relatedU.S. GAAP measures is not adequate due to the adjustments described above.
Net Invested Assets
In managing its business, Athene analyzes net invested assets, which does not correspond to total Athene investments, including investments in related parties, as disclosed in the consolidated statements of financial condition and notes thereto. Net invested assets represent the investments that directly back its net reserve liabilities as well as surplus assets. Net invested assets is used in the computation of net investment earned rate, which is used to analyze the profitability of Athene's investment portfolio. Net invested assets includes (a) total investments on the consolidated statements of financial condition with AFS securities at cost or amortized cost, excluding derivatives, (b) cash and cash equivalents and restricted cash, (c) investments in related parties, (d) accrued investment income, (e) VIE and VOE assets, liabilities and non-controlling interest adjustments, (f) net investment payables and receivables, (g) policy loans ceded (which offset the direct policy loans in total investments) and (h) an adjustment for the allowance for credit losses. Net invested assets also excludes assets associated with funds withheld liabilities related to business exited through reinsurance agreements and derivative collateral (offsetting the related cash positions). Athene includes the underlying investments supporting its assumed funds withheld and modco agreements in its net invested assets calculation in order to match the assets with the income received. Athene believes the adjustments for reinsurance provide a view of the assets for which it has economic exposure. Net invested assets includes Athene's proportionate share of ACRA investments, based on its economic ownership, but does not include the proportionate share of investments associated with the non-controlling interest. Net invested assets are averaged over the number of quarters in the relevant period to compute a net investment earned rate for such period. While Athene believes net invested assets is a meaningful financial metric and enhances the understanding of the underlying drivers of its investment portfolio, it should not be used as a substitute for Athene's total investments, including related parties, presented underU.S. GAAP. 73
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Segment Analysis
Discussed below are our results of operations for each of our reportable
segments. They represent the segment information available and utilized by
management to assess performance and to allocate resources. See note 20 to our
consolidated financial statements for more information regarding our segment
reporting.
Asset Management
The following table presents Fee Related Earnings, the performance measure of
our Asset Management segment.
Years ended
December 31, Percentage Years ended December 31, Percentage
2022 2021 Total Change Change 2021 2020 Total Change Change
(In millions) (In millions)
Asset Management:
Management fees - Yield $ 1,416.0 $ 1,172.0 $ 244.0 20.8% $ 1,172.0 $ 957.3 $ 214.7 22.4%
Management fees - Hybrid 211.3 184.8 26.5 14.3 184.8 137.2 47.6 34.7
Management fees - Equity 507.2 521.4 (14.2) (2.7) 521.4 553.5 (32.1) (5.8)
Management fees 2,134.5 1,878.2 256.3 13.6 1,878.2 1,648.0 230.2 14.0
Capital solutions fees and
other, net 413.5 298.1 115.4 38.7 298.1 251.5 46.6 18.5
Fee-related performance fees 71.5 56.9 14.6 25.7 56.9 9.8 47.1 480.6
Fee-related compensation (753.5) (653.3) (100.2) 15.3 (653.3) (532.6) (120.7) (22.7)
Other operating expenses (456.0) (313.2) (142.8) 45.6 (313.2) (275.1) (38.1) (13.8)
Fee Related Earnings (FRE) $ 1,410.0 $ 1,266.7 $ 143.3 11.3% $ 1,266.7 $ 1,101.6 $ 165.1 15.0%
In this section, references to 2022 refer to the year ended December 31, 2022 ,
references to 2021 refer to the year ended December 31, 2021 , and references to
2020 refer to the year ended December 31, 2020 .
Year Ended
FRE was$1.4 billion in 2022, an increase of$143 million compared to$1.3 billion in 2021. This increase was primarily attributable to the continued growth in management fees, and record capital solutions fees and other, net. The increase in management fees was primarily attributable to management fees earned from Athene of$172 million and ADREF and ADCF of$66 million , as a result of higher fee-generating AUM and the management fee contribution from the Griffin CapitalU.S. asset management business acquisition, respectively. Capital solutions fees earned in 2022 were primarily attributable to fees earned from companies in the consumer services, financial services, healthcare, energy, leisure, manufacturing, consumer and retail, business services, entertainment and real estate sectors. The growth in revenues was offset, in part, by increases in fee-related compensation expense associated with the re-basing of cost structure to support the Company's next phase of growth, as well as costs associated withGriffin Capital's U.S. asset management business.
Year Ended
FRE was$1.3 billion in 2021, an increase of$165 million compared to$1.1 billion in 2020. This increase was primarily attributable to the growth in management fees of$230 million in 2022. The increase in management fees was primarily attributable to management fees earned from Athene andAthora of$160 million and$49 million , respectively. The growth in revenues was offset, in part, by higher fee-related compensation expense due to an increase in headcount and increases in depreciation and amortization expenses, occupancy costs and recruiting fees, as we continued to expand our global team in 2021.
Asset Management Operating Metrics
We monitor certain operating metrics that are common to the alternative asset
management industry and directly impact the performance of our Asset Management
segment. These operating metrics include Assets Under Management, gross capital
deployment and uncalled commitments.
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Table of Contents Assets Under Management The following presents Apollo's Total AUM and Fee-Generating AUM by investing strategy (in billions): [[Image Removed: apo-20221231_g3.jpg]] [[Image Removed: apo-20221231_g4.jpg]]Note: Totals may not add due to rounding
The following presents Apollo's AUM with Future Management Fee Potential by
investing strategy (in billions):
[[Image Removed: apo-20221231_g5.jpg]]
Note: Totals may not add due to rounding
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The following tables present the components of Performance Fee-Eligible AUM for
each of Apollo's three investing strategies within the Asset Management segment:
As of December 31, 2022
Yield Hybrid Equity Total
(In millions)
Performance Fee-Generating AUM 1 $ 40,169 $ 12,177
AUM Not Currently Generating Performance Fees 15,912 17,777
3,166 36,855
Uninvested Performance Fee-Eligible AUM 4,628 12,839
30,836 48,303
Total Performance Fee-Eligible AUM$ 60,709 $ 42,793 $ 76,128 $ 179,630 As of December 31, 2021 Yield Hybrid Equity Total (In millions) Performance Fee-Generating AUM 1$ 37,756 $ 17,663 $ 37,447 $ 92,866 AUM Not Currently Generating Performance Fees 2,355 4,971 3,614 10,940 Uninvested Performance Fee-Eligible AUM 2,644 16,478 21,075 40,197 Total Performance Fee-Eligible AUM$ 42,755 $
39,112
1 Performance Fee-Generating AUM of$3.9 billion and$5.2 billion as ofDecember 31, 2022 andDecember 31, 2021 , respectively, are above the hurdle rates or preferred returns and have been deferred to future periods when the fees are probable to not be significantly reversed. The components of Fee-Generating AUM by investing strategy are presented below: As of December 31, 2022 Yield Hybrid Equity Total (In millions) Fee-Generating AUM based on capital commitments $ -$ 2,531 $ 19,434 $ 21,965 Fee-Generating AUM based on invested capital 3,381 9,528 26,695 39,604 Fee-Generating AUM based on gross/adjusted assets 293,240 4,827 593 298,660 Fee-Generating AUM based on NAV 42,200 9,227 431 51,858 Total Fee-Generating AUM$ 338,821 $
26,113
1 The weighted average remaining life of the traditional private equity funds as of
As of December 31, 2021
Yield Hybrid Equity Total
(In millions)
Fee-Generating AUM based on capital commitments $ - $ 3,580 $ 27,277 $ 30,857
Fee-Generating AUM based on invested capital 2,321 6,826 12,075 21,222
Fee-Generating AUM based on gross/adjusted assets 273,695 4,293 406 278,394
Fee-Generating AUM based on NAV 31,290 7,146 192 38,628
Total Fee-Generating AUM $ 307,306 $
21,845
1 The weighted average remaining life of the traditional private equity funds as of
Apollo, through its consolidated subsidiary, ISG, provides asset management
services to Athene with respect to assets in the accounts owned by or related to
Athene ("Athene Accounts"), including asset allocation services, direct asset
management services, asset and liability matching management, mergers and
acquisitions, asset diligence, hedging and other asset management services and
receives management fees for providing these services. The Company, through ISG,
also provides sub-allocation services with respect to a portion of the assets in
the Athene Accounts. Apollo, through its asset management business, managed or
advised $236.0 billion and $212.6 billion of AUM on behalf of Athene as of
December 31, 2022 and 2021, respectively.
Apollo, through ISGI, provides investment advisory services with respect to
certain assets in certain portfolio companies of Apollo funds and sub-advises
the Athora Accounts and broadly refers to "Athora Sub-Advised" assets as those
assets in the Athora Accounts which the Company explicitly sub-advises as well
as those assets in the Athora Accounts which are invested
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directly in funds and investment vehicles Apollo manages. The Company refers to the portion of the Athora AUM that is not Athora Sub-Advised AUM as "Athora Non-Sub Advised" AUM. See note 17 to the consolidated financial statements for more details regarding the fee arrangements with respect to the assets in the Athora Accounts. Apollo managed or advised$52.6 billion and$59.0 billion of AUM on behalf ofAthora as ofDecember 31, 2022 and 2021, respectively.
The following tables summarize changes in total AUM for each of Apollo's three
investing strategies within the Asset Management segment:
For the Years Ended December 31,
2022 2021
Yield Hybrid Equity Total Yield Hybrid Equity Total
(in millions)
Change in Total AUM1: Beginning of Period$ 360,289 $ 52,772 $ 84,491 $ 497,552 $ 332,880 $ 42,317 $ 80,289 $ 455,486 Inflows 93,676 10,982 23,617 128,275 55,537 12,599 7,347 75,483 Outflows2 (38,132) (1,487) (859) (40,478) (22,470) (759) (1,664) (24,893) Net Flows 55,544 9,495 22,758 87,797 33,067 11,840 5,683 50,590 Realizations (8,625) (6,554) (11,447) (26,626) (2,911) (5,004) (17,811) (25,726) Market Activity3 (14,742) 697 2,969 (11,076) (2,747) 3,619 16,330 17,202 End of Period$ 392,466 $ 56,410 $ 98,771 $ 547,647 $ 360,289 $ 52,772 $ 84,491 $ 497,552 1 At the individual strategy level, inflows include new subscriptions, commitments, capital raised, other increases in available capital, purchases, acquisitions and portfolio company appreciation. Outflows represent redemptions, other decreases in available capital and portfolio company depreciation. Realizations represent fund distributions of realized proceeds. Market activity represents gains (losses), the impact of foreign exchange rate fluctuations and other income. 2 Outflows for Total AUM include redemptions of$4.4 billion and$2.7 billion during the years endedDecember 31, 2022 and 2021, respectively. 3 Includes foreign exchange impacts of$(6.2) billion and$(5.8) billion during the years endedDecember 31, 2022 and 2021, respectively.
Year Ended
Total AUM was$547.6 billion atDecember 31, 2022 , an increase of$50.1 billion , or 10.1%, compared to$497.6 billion atDecember 31, 2021 . The net increase was primarily due to growth of our retirement services assets, subscriptions across the platform, increased leverage, and the acquisition ofGriffin Capital's U.S. asset management business; partially offset by distributions driven by a one-time release of unfunded commitments, and market activity across our yield strategy due to foreign exchange depreciation and market related changes. More specifically, the net increase was due to: •Net flows of$87.8 billion primarily attributable to: •a$55.5 billion increase related to funds we manage in our yield strategy primarily consisting of (i)$21.3 billion related to the growth of our retirement services clients, (ii)$19.7 billion of subscriptions mostly related to the corporate credit funds we manage, (iii) a$14.9 billion increase in leverage, and (iv)$6.5 billion related to the acquisition ofGriffin Capital's U.S. asset management business; partially offsetting these increases were (i)$(4.3) billion of net transfers and (ii)$(3.0) billion of redemptions primarily in the corporate credit funds we manage; •a$9.5 billion increase related to funds we manage in our hybrid strategy due to (i)$7.5 billion of fundraising primarily across the hybrid credit and hybrid value funds we manage, and (ii)$1.3 billion of net transfers primarily from the yield strategy; and •a$22.8 billion increase related to funds we manage in our equity strategy primarily consisting of (i)$19.2 billion of fundraising primarily related to the traditional private equity funds we manage, and (ii)$3.0 billion of net transfers primarily from the yield strategy. •Realizations of$(26.6) billion primarily attributable to: •$(8.6) billion related to funds we manage in our yield strategy primarily consisting of a$5.8 billion one-time release of unfunded commitments; •$(6.6) billion related to funds we manage in our hybrid strategy primarily consisting of distributions from the hybrid credit and illiquid opportunistic funds we manage; and •$(11.4) billion related to funds we manage in our equity strategy primarily consisting of distributions across the traditional private equity funds we manage. 77
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•Market activity of$(11.1) billion primarily attributable to: •$(14.7) billion related to funds we manage in our yield strategy primarily consisting of$(14.0) billion driven byAthora and$(4.6) billion related to our corporate credit funds; partially offset by activity related to funds we manage in our equity strategy of$3.0 billion .
The following tables summarize changes in Fee-Generating AUM for each of
Apollo's three investing strategies within the Asset Management segment:
For the Years Ended
2022 2021
Yield Hybrid Equity Total Yield Hybrid Equity Total
(in millions)
Change in Fee-Generating AUM1:
Beginning of Period $ 307,306 $ 21,845 $ 39,950 $ 369,101 $ 285,830 $ 17,622 $ 45,222 $ 348,674
Inflows 81,797 9,497 19,757 111,051 49,767 7,575 2,282 59,624
Outflows2 (36,564) (3,563) (10,215) (50,342) (23,936) (3,414) (3,303) (30,653)
Net Flows 45,233 5,934 9,542 60,709 25,831 4,161 (1,021) 28,971
Realizations (1,300) (1,869) (2,211) (5,380) (1,958) (948) (3,967) (6,873)
Market Activity3 (12,418) 203 (128) (12,343) (2,397) 1,010 (284) (1,671)
End of Period $ 338,821 $ 26,113 $ 47,153 $ 412,087 $ 307,306 $ 21,845 $ 39,950 $ 369,101
1 At the individual strategy level, inflows include new subscriptions, commitments, capital raised, other increases in available capital, purchases, acquisitions
and portfolio company appreciation. Outflows represent redemptions, other decreases in available capital and portfolio company depreciation. Realizations
represent fund distributions of realized proceeds. Market activity represents gains (losses), the impact of foreign exchange rate fluctuations and other income.
2 Outflows for Fee-Generating AUM include redemptions of $3.5 billion and $2.5 billion during the years ended December 31, 2022 and 2021, respectively.
3 Includes foreign exchange impacts of $(4.4) billion and $(4.9) billion during the years ended December 31, 2022 and 2021, respectively.
Year Ended
Total Fee-Generating AUM was$412.1 billion atDecember 31, 2022 , an increase of$43.0 billion , or 11.6%, compared to$369.1 billion atDecember 31, 2021 . The net increase was primarily due to growth of our retirement services assets, deployment and fee commencement, fundraising, and the acquisition ofGriffin Capital's U.S. asset management business. This increase was partially offset by market activity across our yield strategy due to foreign exchange depreciation, market related changes and realizations. More specifically, the net increase was due to: •Net flows of$60.7 billion primarily attributable to: •a$45.2 billion increase related to funds we manage in our yield strategy primarily consisting of (i) a$21.3 billion increase in AUM related to the growth of our retirement services clients, (ii)$16.6 billion of fee-generating capital deployment primarily related to the corporate credit funds we manage andAthora , (iii)$6.5 billion related to the acquisition ofGriffin Capital's U.S. asset management business, and (iv)$6.2 billion of subscriptions primarily related to the corporate credit and corporate fixed income funds we manage; partially offset by$(3.0) billion of redemptions mostly related to the corporate credit funds we manage and$(1.2) billion of net transfers; •a$5.9 billion increase related to funds we manage in our hybrid strategy primarily due to (i)$6.7 billion of fee-generating capital deployment across the hybrid credit and hybrid value funds we manage, (ii)$1.7 billion of subscriptions primarily related to the hybrid credit funds we manage, and (iii)$1.0 billion of transfers primarily from the yield strategy; offset by($3.0) billion of fee-generating capital reductions related to the financial credit instruments strategy; and •a$9.5 billion increase related to funds we manage in our equity strategy primarily related to (i)$15.3 billion of fee-generating capital deployment driven by Fund X's fee commencement and (ii)$3.6 billion of fundraising; partially offset by$(10.2) billion of fee-generating capital reductions driven by the change in Fund IX's fee basis from committed capital to invested capital. 78
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•Net flows were partially offset by: •$(12.3) billion of market activity primarily related to funds we manage in our yield strategy, consisting of$(11.7) billion related toAthora and$(3.3) billion related to the corporate credit funds we manage; and •$(5.4) billion of realizations across the yield, hybrid and equity strategies.
Gross Capital Deployment and Uncalled Commitments
Gross capital deployment represents the gross capital that has been invested in investments by the funds and accounts we manage during the relevant period, but excludes certain investment activities primarily related to hedging and cash management functions at the Company. Gross Capital Deployment is not reduced or netted down by sales or refinancings, and takes into account leverage used by the funds and accounts we manage in gaining exposure to the various investments that they have made. Uncalled commitments, by contrast, represent unfunded capital commitments that certain of Apollo's funds have received from fund investors to fund future or current fund investments and expenses. Gross capital deployment and uncalled commitments are indicative of the pace and magnitude of fund capital that is deployed or will be deployed, and which therefore could result in future revenues that include management fees, transaction fees and performance fees to the extent they are fee-generating. Gross capital deployment and uncalled commitments can also give rise to future costs that are related to the hiring of additional resources to manage and account for the additional capital that is deployed or will be deployed. Management uses gross capital deployment and uncalled commitments as key operating metrics since we believe the results are measures of investment activities of the funds we manage.
The following presents gross capital deployment and uncalled commitments (in
billions):
[[Image Removed: apo-20221231_g6.jpg]] [[Image Removed: apo-20221231_g7.jpg]]
As ofDecember 31, 2022 andDecember 31, 2021 , Apollo had$51 billion and$47 billion of dry powder, respectively, which represents the amount of capital available for investment or reinvestment subject to the provisions of the applicable limited partnership agreements or other governing agreements of the funds, partnerships and accounts we manage. These amounts exclude uncalled commitments which can only be called for fund fees and expenses and commitments from perpetual capital vehicles. 79
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Retirement Services
The following table presents Spread Related Earnings, the performance measure of
our Retirement Services segment.
Year Ended December 31, 2022
(In millions)
Retirement Services:
Fixed income and other investment income, net $
5,705.8
Alternative investment income, net
1,205.6
Strategic capital management fees 53.0 Cost of funds (3,897.0) Net investment spread 3,067.4 Other operating expenses (461.7) Interest and other financing costs (278.9) Spread Related Earnings (SRE) $ 2,326.8 Year EndedDecember 31, 2022 Spread Related Earnings SRE was$2.3 billion for the year endedDecember 31, 2022 . SRE for the year endedDecember 31, 2022 was mainly attributed to fixed income and other investment income and strong alternative investment income, partially offset by cost of funds, other operating expenses and interest and other financing costs. Fixed income and other investment income benefited from strong growth in organic inflows as well as floating rate income driven by the increase in rates. As a result of purchase accounting, the book value of Athene's investment portfolio was marked up to fair value resulting in an adverse impact to fixed income and other investment income. Alternative investment income benefited from the deployment of inflows into alternative investments as well as strong performance on real estate funds, yield funds,Athora and MidCap, partially offset by unfavorable economics. Cost of funds was primarily driven by interest credited and option costs on annuity products, pension group annuity and payout annuity obligations, interest on funding agreement issuances, income rider reserve and DAC and VOBA amortization as well as other liability costs. As a result of purchase accounting, Athene marked its reserve liabilities to fair value resulting in a favorable impact to cost of funds. Additionally, cost of funds was favorably impacted by actuarial experience and unlocking. Unlocking, net of noncontrolling interests, was favorable$6 million primarily related to the impact of higher rates on future account values, partially offset by changes to projected interest crediting. Net Investment Spread Year Ended December 31, 2022 Fixed income and other net investment earned rate 3.22 % Alternative net investment earned rate 10.42 % Net investment earned rate 3.66 % Strategic capital management fees 0.03 % Cost of funds (2.06) % Net investment spread 1.63 % Net investment earned rate of 3.66% for the year endedDecember 31, 2022 is comprised of a fixed income and other net investment earned rate of 3.22% and alternative net investment earned rate of 10.42%. The fixed income earned rate was adversely impacted by unfavorable purchase accounting impacts, partially offset by floating rate income due to the increase in rates. The alternative investment earned rate was driven by strong performance on real estate funds, yield funds,Athora and MidCap, partially offset by unfavorable economics. Strategic capital management fees of 0.03% for the year endedDecember 31, 2022 consisted of the management fees received by Athene for business managed for others, primarily the non-controlling interest portion of Athene's business ceded to ACRA. 80
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Cost of funds of 2.06% for the year endedDecember 31, 2022 was primarily driven by interest credited and option costs on annuity products, pension group annuity and payout annuity obligations, interest on funding agreement issuances, income rider reserve and DAC and VOBA amortization as well as other liability costs. As a result of purchase accounting, Athene marked its reserve liabilities to fair value resulting in a favorable impact to cost of funds. Additionally, cost of funds was favorably impacted by actuarial experience and unlocking.
Investment Portfolio
Athene had investments, including related parties and VIEs, of$212.1 billion as ofDecember 31, 2022 . Athene's investment strategy seeks to achieve sustainable risk-adjusted returns through the disciplined management of its investment portfolio against its long-duration liabilities, coupled with the diversification of risk. The investment strategies focus primarily on a buy and hold asset allocation strategy that may be adjusted periodically in response to changing market conditions and the nature of Athene's liability profile. Athene takes advantage of its generally persistent liability profile by identifying investment opportunities with an emphasis on earning incremental yield by taking liquidity and complexity risk rather than assuming incremental credit risk. Athene has selected a diverse array of primarily high-grade fixed income assets, including corporate bonds, structured securities and commercial and residential real estate loans, among others. Athene also maintains holdings in floating rate and less rate-sensitive instruments, including CLOs, non-agency RMBS and various types of structured products. In addition to its fixed income portfolio, Athene opportunistically allocates approximately 5% to 6% of its portfolio to alternative investments where it primarily focuses on fixed income-like, cash flow-based investments.
The following table presents the carrying values of Athene's total investments,
including related parties and VIEs:
December 31, 2022
(In millions, except percentages) Carrying Value Percent of Total
AFS securities
U.S. government and agencies $ 2,577 1.2 %
U.S. state, municipal and political subdivisions 927 0.4 %
Foreign governments 907 0.4 %
Corporate 60,901 28.7 %
CLO 16,493 7.8 %
ABS 10,527 5.0 %
CMBS 4,158 2.0 %
RMBS 5,914 2.8 %
Total AFS securities, at fair value 102,404 48.3 %
Trading securities, at fair value 1,595 0.8 %
Equity securities 1,487 0.7 %
Mortgage loans, at fair value 27,454 12.9 %
Investment funds 79 - %
Policy loans 347 0.2 %
Funds withheld at interest 32,880 15.5 %
Derivative assets 3,309 1.6 %
Short-term investments 2,160 1.0 %
Other investments 773 0.4 %
Total investments 172,488 81.4 %
Investments in related parties
AFS securities
Corporate 982 0.5 %
CLO 3,079 1.4 %
ABS 5,760 2.7 %
Total AFS securities, at fair value 9,821 4.6 %
Trading securities, at fair value 878 0.4 %
Equity securities, at fair value 279 0.1 %
Mortgage loans, at fair value 1,302 0.6 %
Investment funds 1,569 0.7 %
Funds withheld at interest 9,808 4.6 %
Other investments 303 0.2 %
Total related party investments 23,960 11.2 %
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December 31, 2022
(In millions, except percentages) Carrying Value Percent of Total
Total investments, including related parties 196,448 92.6 %
Investments owned by consolidated VIEs
Trading securities, at fair value 1,063 0.5 %
Mortgage loans, at fair value 2,055 1.0 %
Investment funds, at fair value 12,480 5.9 %
Other investments, at fair value 101 - %
Total investments owned by consolidated VIEs 15,699 7.4 %
Total investments, including related parties and VIEs
100.0 % Athene's investment portfolio consists largely of high quality fixed maturity securities, loans and short-term investments, as well as additional opportunistic holdings in investment funds and other instruments, including equity holdings. Fixed maturity securities and loans include publicly issued corporate bonds, government and other sovereign bonds, privately placed corporate bonds and loans, mortgage loans, CMBS, RMBS, CLOs and ABS. A significant majority of Athene's AFS portfolio, 95.8% as ofDecember 31, 2022 , was invested in assets considered investment grade with a NAIC designation of 1 or 2. Athene invests a portion of its investment portfolio in mortgage loans, which are generally comprised of high quality commercial first lien and mezzanine real estate loans. Athene has acquired mortgage loans through acquisitions and reinsurance arrangements, as well as through an active program to invest in new mortgage loans. It invests in CMLs on income producing properties, including hotels, apartments, retail and office buildings, and other commercial and industrial properties. Athene's RML portfolio primarily consists of first lien RMLs collateralized by properties located in theU.S.
Funds withheld at interest represent a receivable for amounts contractually
withheld by ceding companies in accordance with modco and funds withheld
reinsurance agreements in which Athene acts as the reinsurer. Generally, assets
equal to statutory reserves are withheld and legally owned by the ceding
company.
While the substantial majority of Athene's investment portfolio has been
allocated to corporate bonds and structured credit products, a key component of
Athene's investment strategy is the opportunistic acquisition of investment
funds with attractive risk and return profiles. Athene's investment fund
portfolio consists of funds that employ various strategies, including equity,
hybrid and yield funds. Athene has a strong preference for assets that have some
or all of the following characteristics, among others: (1) investments that
constitute a direct investment or an investment in a fund with a high degree of
co-investment; (2) investments with credit- or debt-like characteristics (for
example, a stipulated maturity and par value), or alternatively, investments
with reduced volatility when compared to pure equity; or (3) investments that
Athene believes have less downside risk.
Athene holds derivatives for economic hedging purposes to reduce its exposure to
the cash flow variability of assets and liabilities, equity market risk,
interest rate risk, credit risk and foreign exchange risk. Athene's primary use
of derivative instruments relates to providing the income needed to fund the
annual indexed credits on its FIA products. Athene primarily uses fixed indexed
options to economically hedge indexed annuity products that guarantee the return
of principal to the policyholder and credit interest based on a percentage of
the gain in a specific market index.
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Net Invested Assets
The following summarizes Athene's net invested assets:
Net Invested Asset Percent of Total
(In millions, except percentages) Value1
Corporate $ 80,800 41.1 %
CLO 19,881 10.1 %
Credit 100,681 51.2 %
CML 23,750 12.1 %
RML 11,147 5.7 %
RMBS 7,363 3.7 %
CMBS 4,495 2.3 %
Real estate 46,755 23.8 %
ABS 20,680 10.5 %
Alternative investments 12,079 6.1 %
State, municipal, political subdivisions and foreign
government 2,715 1.4 %
Equity securities 1,737 0.9 %
Short-term investments 1,930 1.0 %
U.S. government and agencies 2,691 1.4 %
Other investments 41,832 21.3 %
Cash and equivalents 5,481 2.8 %
Policy loans and other 1,702 0.9 %
Net invested assets 196,451 100.0 %
1 See Managing Business Performance - Key Segment and Non-
of net invested assets.
Athene's net invested assets were$196.5 billion as ofDecember 31, 2022 . In managing its business, Athene utilizes net invested assets as presented in the above table. Net invested assets do not correspond to Athene's total investments, including related parties, on the consolidated statements of financial condition, as discussed previously in Managing Business Performance - Key Segment and Non-U.S. GAAP Performance Measures. Net invested assets represent Athene's investments that directly back the net reserve liabilities and surplus assets. Athene believes this view of its portfolio provides a view of the assets for which it has economic exposure. Athene adjusts the presentation for funds withheld and modco transactions to include or exclude the underlying investments based upon the contractual transfer of economic exposure to such underlying investments. Athene also adjusts for VIEs to show the net investment in the funds, which are included in the alternative investments line above, as well as adjusting for the allowance for credit losses. Net invested assets includes its proportionate share of ACRA investments, based on its economic ownership, but excludes the proportionate share of investments associated with the non-controlling interest. Net invested assets is utilized by management to evaluate Athene's investment portfolio. Net invested assets is used in the computation of net investment earned rate, which allows Athene to analyze the profitability of its investment portfolio. Net invested assets is also used in Athene's risk management processes for asset purchases, product design and underwriting, stress scenarios, liquidity, and ALM. 83
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Principal Investing
The following table presents Principal Investing Income, the performance measure
of our Principal Investing segment.
Years ended
December 31, Percentage Years ended December 31, Percentage
2022 2021 Total Change Change 2021 2020 Total Change Change
(In millions) (In millions)
Principal Investing:
Realized performance fees $ 595.3 $ 1,589.1 $ (993.8) (62.5)% $ 1,589.1 $ 280.9 $ 1,308.2 465.7%
Realized investment income 330.1 437.3 (107.2) (24.5) 437.3 29.3 408.0 NM
Principal investing
compensation (585.1) (876.4) 291.3 (33.2) (876.4) (222.4) (654.0) (294.1)
Other operating expenses (55.8) (42.4) (13.4) 31.6 (42.4) (52.6) 10.2 19.4
Principal Investing Income
(PII) $ 284.5 $ 1,107.6 $ (823.1) (74.3)% $ 1,107.6 $ 35.2 $ 1,072.4 NM
As described in "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations-General", earnings from our Principal
Investing segment are inherently more volatile in nature than earnings from our
Asset Management segment due to the intrinsic cyclical nature of performance
fees, one of the key drivers of PII performance.
In this section, references to 2022 refer to the year ended December 31, 2022 ,
references to 2021 refer to the year ended December 31, 2021 , and references to
2020 refer to the year ended December 31, 2020 .
Year Ended
PII was$285 million in 2022, a decrease of$823 million , as compared to$1.1 billion in 2021. This decrease was primarily attributable to reduced realized performance fees as market volatility delayed monetization activity in 2022, offset, in part, by a corresponding decrease in principal investing compensation. In any period, the blended profit sharing percentage is impacted by the respective profit sharing ratios of the funds generating performance allocations in the period. Additionally, included in principal investing compensation are expenses related to theIncentive Pool , a compensation program through which certain employees are allocated discretionary compensation based on realized performance fees in a given year.The Incentive Pool is separate from the fund related profit sharing expense and may result in greater variability in compensation and have a variable impact on the blended profit sharing percentage during a particular period.
Year Ended
PII was$1.1 billion in 2021, an increase of$1.1 billion , as compared to$35 million in 2020. This increase was primarily attributable to increases in realized performance fees and realized investment income, partially offset by an increase in principal investing compensation. Realized performance fees increased to$1.6 billion in 2021 from$281 million in 2020 driven by an increase in performance fees generated from Fund VIII and Fund IX of$700 million and$401 million , respectively. In 2020, the COVID-19 pandemic and the actions taken in response caused severe disruption to the global economy and financial markets. In line with public equity and credit indices, the Company experienced significant unrealized mark-to-market losses in underlying funds which significantly delayed monetization activity. The increase in realized investment income in 2021 was primarily attributable to an increase in realizations from the sale of a platform investment to certain funds we manage andAthora and an increase in realizations from Apollo's equity ownership in Fund VIII. Principal investing compensation increased as a result of a corresponding increase in realized performance fees as described above.
The Historical Investment Performance of Our Funds
Below we present information relating to the historical performance of the funds
we manage, including certain legacy Apollo funds that do not have a meaningful
amount of unrealized investments, and in respect of which the general partner
interest has not been contributed to us.
When considering the data presented below, you should note that the historical
results of funds we manage are not indicative of the future results that you
should expect from such funds, from any future funds we may raise or from your
investment in our common shares.
An investment in our common stock is not an investment in any of the Apollo
funds, and the assets and revenues of our funds are not directly available to
us. The historical and potential future returns of the funds we manage are not
directly linked to
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returns on our common stock. Therefore, you should not conclude that continued positive performance of the funds we manage will necessarily result in positive returns on an investment in our common stock. However, poor performance of the funds that we manage would cause a decline in our revenue from such funds, and would therefore have a negative effect on our performance and in all likelihood the value of our common stock. Moreover, the historical returns of funds we manage should not be considered indicative of the future results you should expect from such funds or from any future funds we may raise. There can be no assurance that any Apollo fund will continue to achieve the same results in the future. Finally, our private equity IRRs have historically varied greatly from fund to fund. For example, Fund VI generated a 12% gross IRR and a 9% net IRR since its inception throughDecember 31, 2022 , while Fund V generated a 61% gross IRR and a 44% net IRR since its inception throughDecember 31, 2022 . Accordingly, the IRR going forward for any current or future fund may vary considerably from the historical IRR generated by any particular fund, or for our private equity funds as a whole. Future returns will also be affected by the applicable risks, including risks of the industries and businesses in which a particular fund invests. See "Item 1A. Risk Factors-Risks Relating to Our Asset Management Business-Historical performance metrics are unreliable indicators of our current or future results of operations."
Investment Record
The following table summarizes the investment record by strategy of Apollo's significant commitment-based funds that have a defined maturity date in which investors make a commitment to provide capital at the formation of such funds and deliver capital when called as investment opportunities become available.
All amounts are as of
Total
Vintage Committed Invested Remaining Gross Net
(In millions, except IRR) Year Total AUM Capital Capital Realized Value Cost Unrealized Value Total Value IRR IRR
Equity:
Fund IX 2018 $ 32,524 $ 24,729 $ 19,462 $ 7,983 $ 15,165 $ 23,150 $ 31,133 38 % 25 %
Fund VIII 2013 10,864 18,377 16,437 21,020 5,322 7,792 28,812 15 11
Fund VII 2008 409 14,677 16,461 34,209 16 75 34,284 33 25
Fund VI 2006 365 10,136 12,457 21,136 405 - 21,136 12 9
Fund V 2001 62 3,742 5,192 12,724 120 - 12,724 61 44
Fund I, II, III, IV & MIA4 Various 11 7,320 8,753 17,400 - - 17,400 39 26
Traditional Private Equity
Funds5 $ 44,235 $ 78,981
31,017$ 145,489 39 24 EPF IV1 N/A 2,090 2,076 445 1 445 476 477 NM2 NM2 EPF III 2017 4,267 4,444 4,759 3,359 2,239 3,026 6,385 16 9 Total Equity$ 50,592 $ 85,501
34,519$ 152,351 Hybrid: AIOF II 2021$ 2,563 $ 2,542 $ 1,214 $ 296$ 1,074 $ 1,188$ 1,484 24 % 20 % AIOF I 2018 443 897 802 1,031 200 238 1,269 24 19 HVF II 2022 4,530 4,592 1,789 10 1,779 1,758 1,768 NM2 NM2 HVF I 2019 3,616 3,238 3,601 3,320 1,584 1,865 5,185 24 19 Accord V3 2022 1,975 1,922 1,423 577 846 811 1,388 NM2 NM2 Accord I, II, III, III B & IV3 Various - 6,070 4,765 5,137 - - 5,137 22 17 Accord+ 2021 2,866 2,370 2,775 945 1,872 1,845 2,790 NM2 NM2 Total Hybrid$ 15,993 $ 21,631 $ 16,369 $ 11,316 $ 7,355 $ 7,705$ 19,021 1 Vintage Year is not yet applicable as the fund has not had its final closing. 2 Data has not been presented as the fund's effective date is less than 24 months prior to the period indicated and such information was deemed not meaningful. 3 Accord funds have investment periods shorter than 24 months, therefore Gross and Net IRR are presented after 12 months of investing. 4 The general partners and managers of Funds I, II and MIA, as well as the general partner of Fund III, were excluded assets in connection with the reorganization of the Company that occurred in 2007. As a result, Apollo did not receive the economics associated with these entities. The investment performance of these funds, combined with Fund IV, is presented to illustrate fund performance associated with Apollo's investment professionals. 5 Total IRR is calculated based on total cash flows for all funds presented. 85
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Equity
The following table summarizes the investment record for distressed investments
made in our traditional private equity fund portfolios since the Company's
inception. All amounts are as of
Total Invested
(In millions, except percentages) Capital Total Value Gross IRR
Distressed for Control $ 7,795 $ 18,874 29 %
Non-Control Distressed 6,302 10,837 71
Total 14,097 29,711 49
Corporate Carve-outs, Opportunistic Buyouts and
Other Credit1 64,665 115,778 21
Total $ 78,762 $ 145,489 39 %
1 Other Credit is defined as investments in debt securities of issuers other than portfolio companies that are not
considered to be distressed.
The following tables provide additional detail on the composition of the Fund IX, Fund VIII and Fund VII private equity portfolios based on investment strategy. Amounts for Fund I, II, III, IV, V and VI are included in the table above but not presented below as their remaining value is less than$100 million or the fund has been liquidated and such information was deemed not meaningful. All amounts are as ofDecember 31, 2022 : Fund IX1 (In millions)Total Invested Capital Total Value Corporate Carve-outs $ 4,082$ 8,066 Opportunistic Buyouts 14,596 20,653 Distressed2 784 2,414 Total $ 19,462$ 31,133 Fund VIII1 (In millions)Total Invested Capital Total Value Corporate Carve-outs $ 2,704$ 6,935 Opportunistic Buyouts 13,166 21,123 Distressed2 567 754 Total $ 16,437$ 28,812 Fund VII1 (In millions)Total Invested Capital Total Value Corporate Carve-outs $ 2,539$ 4,848 Opportunistic Buyouts 4,338 10,799 Distressed/Other Credit2 9,584 18,637 Total $ 16,461$ 34,284 1Committed capital less unfunded capital commitments for Fund IX, Fund VIII and Fund VII were$16.9 billion ,$17.7 billion and$14.7 billion , respectively, which represents capital commitments from limited partners to invest in such funds less capital that is available for investment or reinvestment subject to the provisions of the applicable governing agreements. 2The distressed investment strategy includes distressed for control, non-control distressed and other credit. Other Credit is defined as investments in debt securities of issuers other than portfolio companies that are not considered to be distressed. Our average entry multiple for a private equity fund is the average of the total enterprise value over an applicable adjusted earnings before interest, taxes, depreciation and amortization, which may incorporate certain adjustments based on the investment team's estimates and we believe captures the true economics of our funds' investments in portfolio companies. The average entry multiple of actively investing funds may include committed investments not yet closed. 86
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Table of Contents Perpetual Capital The following table summarizes the investment record for the perpetual capital vehicles we manage, excluding Athene-related andAthora -related assets managed or advised by ISG and ISGI: Total Returns1 For the Year Ended For the Year Ended IPO Year2 Total AUM December 31, 2022 December 31, 2021 (In millions) MidCap3 N/A$ 12,216 19 % 20 % AIF 2013 343 (13) % 13 % AFT 2011 354 (17) % 19 % MFIC/Other4 2004 10,312 - % 34 % ARI 2009 9,660 (7) % 30 % Total$ 32,885 1 Total returns are based on the change in closing trading prices during the respective periods presented taking into account dividends and distributions, if any, as if they were reinvested without regard to commission. 2 An initial public offering ("IPO") year represents the year in which the vehicle commenced trading on a national securities exchange. 3 MidCap is not a publicly traded vehicle and therefore IPO year is not applicable. The returns presented are a gross return based on NAV. The net returns based on NAV were 15% and 15% for the years endedDecember 31, 2022 and 2021, respectively. 4 Included within total AUM of MFIC/Other, is$5.5 billion of AUM related to ADS, a non-traded business development company, and$1.9 billion of AUM related to a publicly traded business development company, as ofSeptember 2022 , from which Apollo earns investment-related service fees, but for which Apollo does not provide management or advisory services. Total returns exclude performance related to this AUM. 87
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Summary of Non-U.S. GAAP Measures The table below sets forth a reconciliation of net income attributable toApollo Global Management, Inc. common stockholders to Adjusted Segment Income and Adjusted Net Income: Years ended December 31, (In millions) 2022 2021 2020
GAAP Net Income (Loss) Attributable to
Management, Inc.
$ (3,213) $ 1,802 $ 120 Preferred dividends - 37 37 Net income (loss) attributable to non-controlling interests (1,533) 2,428 310 GAAP Net Income (Loss)$ (4,746) $ 4,267 $ 467 Income tax provision (benefit) (1,069) 594 86 GAAP Income (Loss) Before Income Tax Provision (Benefit)$ (5,815) $ 4,861 $ 553 Asset Management Adjustments: Equity-based profit sharing expense and other1 276 146 129 Equity-based compensation 185 80 68 Preferred dividends - (37) (37) Transaction-related charges2 (42) 35 39 Merger-related transaction and integration costs3 70 67 - Changes associated with corporate conversion - - 4
(Gains) losses from change in tax receivable agreement
liability
26 (10) (12) Net (income) loss attributable to non-controlling interests in consolidated entities 1,486 (418) (118) Unrealized performance fees (2) (1,465) (35) Unrealized profit sharing expense 20 649 33 One-time equity-based compensation and other charges5 - 949 - HoldCo interest and other financing costs4 122 170 154 Unrealized principal investment income (loss) 176 (222) (62) Unrealized net (gains) losses from investment activities and other (148) (2,431) 421 Retirement Services Adjustments: Investment (gains) losses, net of offsets 7,024 - - Non-operating change in insurance liabilities and related derivatives, net of offsets 454 - -
Integration, restructuring and other non-operating
expenses
133 - - Equity-based compensation expense 56 - - Adjusted Segment Income 4,021 2,374 1,137 HoldCo interest and other financing costs4 (122) (170) (154) Taxes and related payables (764) (172) (90) Adjusted Net Income$ 3,135 $ 2,032 $ 893 1 Equity-based profit sharing expense and other includes certain profit sharing arrangements in which a portion of performance fees distributed to the general partner are required to be used by employees of Apollo to purchase restricted shares of common stock or is delivered in the form of RSUs, which are granted under the Equity Plan. Equity-based profit sharing expense and other also includes performance grants which are tied to the Company's receipt of performance fees, within prescribed periods, sufficient to cover the associated equity-based compensation expense. 2 Transaction-related charges include contingent consideration, equity-based compensation charges and the amortization of intangible assets and certain other charges associated with acquisitions, and restructuring charges. 3 Merger-related transaction and integration costs includes advisory services, technology integration, equity-based compensation charges and other costs associated with the Mergers. 4 Represents interest and other financing costs related to AGM not attributable to any specific segment. 5 Includes one-time equity-based compensation expense and associated taxes related to the Company's compensation reset. 88
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The table below sets forth a reconciliation of common stock outstanding to our
Adjusted Net Income Shares Outstanding:
As of December 31, 2022 As of December 31, 2021
Total GAAP Common Stock Outstanding 570,276,188 248,896,649
Non-GAAP Adjustments:
Participating Apollo Operating Group Units - 184,787,638
Vested RSUs 15,656,775 17,700,688
Unvested RSUs Eligible for Dividend Equivalents 12,827,921 9,809,245
Adjusted Net Income Shares Outstanding 598,760,884 461,194,220
The table below sets forth a reconciliation of Athene's total investments,
including related parties, to net invested assets:
(In millions)
Total investments, including related parties $
196,448
Derivative assets
(3,309)
Cash and cash equivalents (including restricted cash)
8,407
Accrued investment income
1,328
Net receivable (payable) for collateral on derivatives
(1,486)
Reinsurance funds withheld and modified coinsurance
1,423
VIE and VOE assets, liabilities and noncontrolling interest 12,747 Unrealized (gains) losses 22,284 Ceded policy loans (179) Net investment receivables (payables) 186 Allowance for credit losses 471 Other investments (10) Total adjustments to arrive at gross invested assets 41,862 Gross invested assets 238,310 ACRA noncontrolling interest (41,859) Net invested assets $ 196,451
Liquidity and Capital Resources
Overview
The Company primarily derives revenues and cash flows from the assets it manages and the retirement savings products it issues, reinsures and acquires. Based on management's experience, we believe that the Company's current liquidity position, together with the cash generated from revenues will be sufficient to meet the Company's anticipated expenses and other working capital needs for at least the next 12 months. For the longer-term liquidity needs of the asset management business, we expect to continue to fund the asset management business' operations through management fees and performance fees received. The principal sources of liquidity for the retirement services business, in the ordinary course of business, are operating cash flows and holdings of cash, cash equivalents and other readily marketable assets. AGM is a holding company whose primary source of cash flow is distributions from its subsidiaries, which are expected to be sufficient to fund cash flow requirements based on current estimates of future obligations. AGM's primary liquidity needs include the cash-flow requirements relating to its corporate activities, including its day-to-day operations, common stock dividend payments and strategic transactions, such as acquisitions. AtDecember 31, 2022 , the Company had$9.0 billion of unrestricted cash and cash equivalents and$0.7 billion ofU.S. Treasury securities as well as$4.8 billion of available funds from the 2022 AMH credit facility, AHL credit facility, and AHL liquidity facility. 89
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Primary Uses of Cash
Over the next 12 months, we expect the Company's primary liquidity needs will be
to:
•support the future growth of Apollo's businesses through strategic corporate investments; •pay the Company's operating expenses, including, compensation, general, administrative, and other expense; •make payments to policyholders for surrenders, withdrawals and payout benefits; •make interest and principal payments on funding agreements; •make payments to satisfy pension group annuity obligations and policy acquisition costs; •pay taxes and tax related payments; •pay cash dividends; •make payments related to the AOG Unit Payment; •repurchase common stock; and •make payments under the tax receivable agreement. Over the long term, we believe we will be able to (i) grow Apollo's Assets Under Management and generate positive investment performance in the funds we manage, which we expect will allow us to grow the Company's management fees and performance fees and (ii) grow the investment portfolio of retirement services, in each case in amounts sufficient to cover our long-term liquidity requirements, which may include: •supporting the future growth of our businesses; •creating new or enhancing existing products and investment platforms; •making payments to policyholders; •pursuing new strategic corporate investment opportunities; •paying interest and principal on the Company's financing arrangements; •repurchasing common stock; •making payments under the tax receivable agreement; •making payments related to the AOG Unit Payment; and •paying cash dividends.
Cash Flow Analysis
The section below discusses in more detail the Company's primary sources and
uses of cash and the primary drivers of cash flows within the Company's
consolidated statements of cash flows:
Years ended December 31,
(In millions) 2022 2021 2020
Operating Activities $ 3,789 $ 1,064 $ (1,616)
Investing Activities (23,444) (1,552) (838)
Financing Activities 28,710 109 3,300
Effect of exchange rate changes on cash and cash
equivalents (15) - -
Net Increase (Decrease) in Cash and Cash Equivalents,
Restricted Cash and Cash Equivalents, and Cash and
Cash Equivalents Held at Consolidated Variable
Interest Entities
$ 9,040 $ (379) $ 846 The assets of our consolidated funds and VIEs, on a gross basis, could have a substantial effect on the accompanying statement of cash flows. Because our consolidated funds and VIEs are generally treated as investment companies for accounting purposes, their investing cash flow amounts are included in our cash flows from operating activities. The table below summarizes our consolidated statements of cash flow by activity attributable to the Company and to our consolidated funds and VIEs. 90
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Years ended December 31,
(In millions) 2022 2021 2020
Net cash provided by the Company's operating
activities $ 7,021 $ 2,165 $ 888
Net cash used in the Consolidated Funds and VIEs
operating activities (3,232) (1,101) (2,504)
Net cash provided by (used in) operating activities 3,789 1,064 (1,616)
Net cash used in the Company's investing activities (21,840) (1,229) (68)
Net cash used in the Consolidated Funds and VIEs
investing activities (1,604) (323) (770)
Net cash used in investing activities (23,444) (1,552) (838)
Net cash provided by (used in) the Company's
financing activities 23,786 (1,576) (822)
Net cash provided by the Consolidated Funds and
VIEs financing activities 4,924 1,685 4,122
Net cash provided by financing activities $ 28,710 $ 109 $ 3,300
Operating Activities
The Company's operating activities support its Asset Management, Retirement
Services and Principal Investing activities. The primary sources of cash within
operating activities include: (a) management fees, (b) advisory and transaction
fees, (c) realized performance revenues, (d) realized principal investment
income, (e) investment sales from our consolidated funds and VIEs, (f) net
investment income, (g) annuity considerations and (h) insurance premiums. The
primary uses of cash within operating activities include: (a) compensation and
non-compensation related expenses, (b) interest and taxes, (c) investment
purchases from our consolidated funds and VIEs, (d) benefit payments and (e)
other operating expenses.
•During the year ended December 31, 2022 , cash provided by operating activities
primarily includes net cash used in our consolidated funds and VIEs for
purchases of investments and proceeds from sale of VIEs investments. Net cash
provided by operating activities reflects cash inflows of management fees,
advisory and transaction fees, realized performance revenues, and realized
principal investment income, as well as cash received from pension group annuity
transactions net of outflows.
•During the year ended December 31, 2021 , cash provided by operating activities
primarily includes cash inflows from the receipt of management fees, advisory
and transaction fees, realized performance revenues, and realized principal
investment income, offset by cash outflows for compensation, general,
administrative, other expenses and activities of our consolidated funds and
VIEs. Net cash used in operating activities also reflects operating activities
of our consolidated funds and VIEs, which includes cash outflows for purchases
of investments, offset by cash inflows from consolidated funds.
•During the year ended December 31, 2020 , cash used by operating activities
primarily reflects the operating activities of our consolidated funds and VIEs,
which includes cash outflows for purchases of investments, offset by cash
inflows from consolidated funds. Net cash used in operating activities also
reflects cash outflows for compensation, general, administrative, and other
expenses, offset by cash inflows from the receipt of management fees, advisory
and transaction fees, realized performance revenues, and realized principal
investment income.
Investing Activities
The Company's investing activities support the growth of its business. The primary sources of cash within investing activities include: (a) distributions from investments and (b) sales, maturities and repayments of investments. The primary uses of cash within investing activities include: (a) capital expenditures, (b) purchases and acquisitions of new investments, including purchases ofU.S. Treasury securities and (c) equity method investments in the funds we manage.
•During the year ended
primarily reflects the purchase of investments due to the deployment of
significant cash inflows from Athene's organic growth, partially offset by
Athene cash acquired as a result of the Mergers and the sale, repayment and
maturity of investments.
•During the year endedDecember 31, 2021 , cash used in investing activities primarily reflects purchases of investments inMotive Partners and Challenger Ltd., net purchases ofU.S. Treasury securities, and net contributions to equity method investments. Net cash used in investing activities also reflects the investing activities of our consolidated funds and VIEs, which primarily includes net proceeds from maturities ofU.S. Treasury securities. 91
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•During the year endedDecember 31, 2020 , cash used in investing activities primarily reflects purchases ofU.S. Treasury securities and other investments and net contributions to equity method investments, partially offset by proceeds from maturities ofU.S. Treasury securities.
Financing Activities
The Company's financing activities reflect its capital market transactions and transactions with equity holders. The primary sources of cash within the financing activities section includes: (a) proceeds from debt and preferred equity issuances, (b) inflows on Athene's investment-type policies, (c) changes of cash collateral posted for derivative transactions, and (d) capital contributions and proceeds from other borrowing activities. The primary uses of cash within the financing activities section include: (a) dividends, (b) payments under the tax receivable agreement, (c) share repurchases, (d) cash paid to settle tax withholding obligations in connection with net share settlements of equity-based awards, (e) repayments of debt, (f) withdrawals on Athene's investment-type policies and (g) changes of cash collateral posted for derivative transactions. •During the year endedDecember 31, 2022 , cash provided by financing activities primarily reflects the strong organic inflows from retail and funding agreements, net of withdrawals, net capital contributions from non-controlling interests, and the issuance of debt and preferred stock by our subsidiary, partially offset by the payment of stock dividends. Cash provided by financing activities of our consolidated funds and VIEs primarily includes proceeds from the issuance of debt, including repurchase agreements. •During the year endedDecember 31, 2021 , cash provided by financing activities primarily reflects the financing activities of our consolidated funds and VIEs, which primarily includes cash inflows from the issuance of debt, net contributions from non-controlling interest in consolidated entities, proceeds from issuance of securities of SPACs sponsored by Apollo, partially offset by payment of underwriting discounts and cash outflows for the principal repayment of debt. Net cash used in financing activities also reflects dividends to common shareholders, distributions to non-controlling interest holders, and repurchases of common stock. •During the year endedDecember 31, 2020 , cash provided by financing activities primarily reflects the financing activity of our consolidated funds and VIEs, which primarily includes cash inflows from the issuance of debt, net contributions from non-controlling interest in consolidated entities, contributions from redeemable non-controlling interests, offset by cash outflows for the principal repayment of debt. Net cash provided by financing activities also reflects proceeds from the issuance of the 2030 Senior Notes, partially offset by dividends to common shareholders, distributions to non-controlling interest holders, and repurchases of common stock.
Contractual Obligations, Commitments and Contingencies
For a summary and a description of the nature of the Company's commitments,
contingencies and contractual obligations, see note 18 to the consolidated
financial statements and "-Contractual Obligations, Commitments and
Contingencies." The Company's commitments are primarily fulfilled through cash
flows from operations and financing activities.
Consolidated Funds and VIEs
The Company manages its liquidity needs by evaluating unconsolidated cash flows; however, the Company's financial statements reflect the financial position of Apollo as well as Apollo's consolidated funds and VIEs (including SPACs). The primary sources and uses of cash at Apollo's consolidated funds and VIEs include: (a) raising capital from their investors, which have been reflected historically as non-controlling interests of the consolidated subsidiaries in our financial statements, (b) using capital to make investments, (c) generating cash flows from operations through distributions, interest and the realization of investments, (d) distributing cash flow to investors, (e) issuing debt to finance investments (CLOs) and (f) raising capital through SPAC vehicles for future acquisition of targeted entities.
Dividends and Distributions
For information regarding the quarterly dividends and distributions that were made to common stockholders and non-controlling interest holders in theApollo Operating Group and participating securities, see note 15 to the consolidated financial statements. Although the Company currently expects to pay dividends, we may not pay dividends if, among other things, we do not have the cash necessary to pay the dividends. To the extent we do not have cash on hand sufficient to pay dividends, we 92
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may have to borrow funds to pay dividends, or we may determine not to pay
dividends. The declaration, payment and determination of the amount of our
dividends are at the sole discretion of our board of directors.
Because AGM is a holding company, the primary source of funds for AGM's dividends are distributions from its operating subsidiaries, AAM and AHL, which are expected to be adequate to fund AGM's dividends and other cash flow requirements based on current estimates of future obligations. The ability of these operating subsidiaries to make distributions to AGM will depend on satisfying applicable law with respect to such distributions, including surplus and minimum solvency requirements among others, as well as making prior distributions on the AAM and AHL outstanding preferred stock. Moreover, the ability of AAM and AHL to receive distributions from their own respective subsidiaries will continue to depend on applicable law with respect to such distributions.
On
common stock, which will be paid on
the close of business on
Repurchase of Securities
Share Repurchase Program
For information regarding the Company's share repurchase program, see note 15 to
the consolidated financial statements.
Repurchase of
We may from time to time seek to retire or purchase our other outstanding debt or equity securities through cash purchases and/or exchanges for other securities, purchases in the open market, privately negotiated transactions or otherwise. Any such repurchases will be dependent upon several factors, including our liquidity requirements, contractual restrictions, general market conditions and applicable regulatory, legal and accounting factors. Whether or not we repurchase any of our other securities and the size and timing of any such repurchases will be determined at our discretion.
Asset Management Liquidity
Our asset management business requires limited capital resources to support the working capital or operating needs of the business. For the asset management business' longer-term liquidity needs, we expect to continue to fund the asset management business' operations through management fees and performance fees received. Liquidity needs are also met (to a limited extent) through proceeds from borrowings and equity issuances as described in notes 13 and 15 to the consolidated financial statements, respectively. From time to time, if the Company determines that market conditions are favorable after taking into account our liquidity requirements, we may seek to raise proceeds through the issuance of additional debt or equity instruments.
At
unrestricted cash and cash equivalents and
securities as well as
facility.
Future Debt Obligations The asset management business had long-term debt of$2.8 billion atDecember 31, 2022 , which includes notes with maturities in 2024, 2026, 2029, 2030, 2048 and 2050. See note 13 to the consolidated financial statements for further information regarding the asset management business' debt arrangements.
Future Cash Flows
Our ability to execute our business strategy, particularly our ability to
increase our AUM, depends on our ability to establish new funds and to raise
additional investor capital within such funds. Our liquidity will depend on a
number of factors, such as our ability to project our financial performance,
which is highly dependent on the funds we manage and our ability to manage our
projected costs, fund performance, access to credit facilities, compliance with
existing credit agreements, as well as industry and market trends. Also during
economic downturns the funds we manage might experience cash flow issues or
liquidate entirely. In these situations we might be asked to reduce or eliminate
the management fee and performance fees we charge, which could adversely impact
our cash flow in the future.
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An increase in the fair value of the investments of the funds we manage, by contrast, could favorably impact our liquidity through higher management fees where the management fees are calculated based on the net asset value, gross assets or adjusted assets. Additionally, higher performance fees not yet realized would generally result when investments appreciate over their cost basis which would not have an impact on the asset management business' cash flow until realized.
Consideration of Financing Arrangements
As noted above, in limited circumstances, the asset management business may issue debt or equity to supplement its liquidity. The decision to enter into a particular financing arrangement is made after careful consideration of various factors, including the asset management business' cash flows from operations, future cash needs, current sources of liquidity, demand for the asset management business' debt or equity, and prevailing interest rates.
Revolver Facility
Under the 2022 AMH credit facility, AMH may borrow in an aggregate amount not to exceed$1.0 billion and may incur incremental facilities in an aggregate amount not to exceed$250 million plus additional amounts so long as AMH is in compliance with a net leverage ratio not to exceed 4.00 to 1.00. Borrowings under the 2022 AMH credit facility may be used for working capital and general corporate purposes, including without limitation, permitted acquisitions. The 2022 AMH credit facility has a final maturity date ofOctober 12, 2027 .
Tax Receivable Agreement
The tax receivable agreement provides for the payment to theFormer Managing Partners andContributing Partners of 85% of the amount of cash savings, if any, inU.S. federal, state, local and foreign income taxes that AGM and its subsidiaries realizes subject to the agreement. For more information regarding the tax receivable agreement, see note 17 to the consolidated financial statements.
AOG Unit Payment
OnDecember 31, 2021 , holders of AOG Units (other than Athene and Apollo) sold and transferred a portion of such AOG Units to a wholly-owned subsidiary of the Company, in exchange for an amount equal to$3.66 multiplied by the total number of AOG Units held by such holders immediately prior to such transaction (such payment, the "AOG Unit Payment"). The remainder of the AOG Units held by such holders were exchanged for shares of AGM common stock concurrently with the consummation of the Mergers onJanuary 1, 2022 .
As of
million
for more information.
Athora Athora is a strategic liabilities platform that acquires and reinsures traditional closed life insurance policies and provides capital and reinsurance solutions to insurers inEurope . In 2017, Apollo made a €125 million commitment toAthora , which was fully drawn as ofApril 2020 . Apollo committed an incremental €58 million in 2020 to purchase new equity interests. Additionally, in 2021, Apollo acquired approximately €21.9 million of new equity interests inAthora . InDecember 2021 , Apollo committed an additional €250 million to purchase new equity interests to supportAthora's ongoing growth initiatives, of which €180 million was drawn as ofDecember 31, 2022 .
long-term strategic relationship. Through its share ownership,
Management
Athene holds shares in
Apollo represent, in the aggregate, approximately 15.1% of the total voting
power in
Fund Escrow
As ofDecember 31, 2022 , the remaining investments and escrow cash of Fund VII was valued at 112% of the fund's unreturned capital which was below the required escrow ratio of 115%. As a result, the fund is required to place in escrow 94
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current and future performance fee distributions to the general partner until the specified return ratio of 115% is met (at the time of a future distribution) or upon liquidation. Realized performance fees currently distributed to the general partner are limited to potential tax distributions and interest on escrow balances per the fund's partnership agreement.
Clawback
Performance fees from certain of the funds we manage are subject to contingent repayment by the general partner in the event of future losses to the extent that the cumulative performance fees distributed from inception to date exceeds the amount computed as due to the general partner at the final distribution. See "-Overview of Results of Operations-Performance Fees" for the maximum performance fees subject to potential reversal by each fund.
Indemnification Liability
The asset management business recorded an indemnification liability in the event that theFormer Managing Partners ,Contributing Partners and certain investment professionals are required to pay amounts in connection with a general partner obligation to return previously distributed performance fees. See note 17 to the consolidated financial statements for further information regarding the asset management business' indemnification liability.
Retirement Services Liquidity
There are two forms of liquidity relevant to our retirement services business, funding liquidity and balance sheet liquidity. Funding liquidity relates to the ability to fund operations. Balance sheet liquidity relates to the ability to liquidate or rebalance Athene's balance sheet without incurring significant costs from fees, bid-offer spreads, or market impact. Athene manages its liquidity position by matching projected cash demands with adequate sources of cash and other liquid assets. The principal sources of liquidity for our retirement services business, in the ordinary course of business, are operating cash flows and holdings of cash, cash equivalents and other readily marketable assets. Athene's investment portfolio is structured to ensure a strong liquidity position over time in order to permit timely payment of policy and contract benefits without requiring asset sales at inopportune times or at depressed prices. In general, liquid assets include cash and cash equivalents, highly rated corporate bonds, unaffiliated preferred stock and public common stock, all of which generally have liquid markets with a large number of buyers. Assets included in modified coinsurance and funds withheld portfolios are available to fund the benefits for the associated obligations but are restricted from other uses. Although the investment portfolio of our retirement services business does contain assets that are generally considered illiquid for liquidity monitoring purposes (primarily mortgage loans, policy loans, real estate, investment funds, and affiliated common stock), there is some ability to raise cash from these assets if needed. Athene has access to additional liquidity through the$1.25 billion AHL credit facility, with potential increases up to$1.75 billion , the AHL liquidity facility with a borrowing capacity of$2.5 billion , with potential increases up to$3.0 billion , and$2.0 billion of committed repurchase facilities. The AHL credit facility was undrawn as ofDecember 31, 2022 . OnFebruary 7, 2023 , Athene borrowed$1.0 billion from the AHL liquidity facility for short-term cash flow needs. Athene also has a registration statement on Form S-3 to provide it with access to the capital markets, subject to market conditions and other factors. Athene is also the counterparty to repurchase agreements with several different financial institutions, pursuant to which it may obtain short-term liquidity, to the extent available. In addition, through Athene's membership in the FHLB, it is eligible to borrow under variable rate short-term federal funds arrangements to provide additional liquidity. Athene proactively manages its liquidity position to meet cash needs while minimizing adverse impacts on investment returns. Athene analyzes its cash-flow liquidity over the upcoming 12 months by modeling potential demands on liquidity under a variety of scenarios, taking into account the provisions of its policies and contracts in force, its cash flow position, and the volume of cash and readily marketable securities in its portfolio. Liquidity risk is monitored, managed and mitigated through a number of stress tests and analyses to assess Athene's ability to meet its cash flow requirements, as well as the ability of its reinsurance and insurance subsidiaries to meet their collateral obligations, under various stress scenarios. Athene further seeks to mitigate liquidity risk by maintaining access to alternative, external sources of liquidity. 95
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Insurance Subsidiaries' Operating Liquidity
The primary cash flow sources for Athene's insurance subsidiaries include retirement services product inflows (premiums and deposits), investment income, principal repayments on its investments, net transfers from separate accounts and financial product inflows. Uses of cash include investment purchases, payments to policyholders for surrenders, withdrawals and payout benefits, interest and principal payments on funding agreements, payments to satisfy pension group annuity obligations, policy acquisition costs and general operating costs. Athene's policyholder obligations are generally long-term in nature. However, policyholders may elect to withdraw some, or all, of their account value in amounts that exceed our estimates and assumptions over the life of an annuity contract. Athene includes provisions within its annuity policies, such as surrender charges and MVAs, which are intended to protect it from early withdrawals. As ofDecember 31, 2022 , approximately 76% of Athene's deferred annuity liabilities were subject to penalty upon surrender. In addition, as ofDecember 31, 2022 , approximately 60% of policies contained MVAs that may also have the effect of limiting early withdrawals if interest rates increase, but may encourage early withdrawals by effectively subsidizing a portion of surrender charges when interest rates decrease. As ofDecember 31, 2022 , approximately 29% of Athene's net reserve liabilities were generally non-surrenderable, including funding agreements, group annuities and payout annuities, while 53% were subject to penalty upon surrender.
Membership in
Through its membership in the FHLB, Athene is eligible to borrow under variable rate short-term federal funds arrangements to provide additional liquidity. The borrowings must be secured by eligible collateral such as mortgage loans, eligible CMBS or RMBS, government or agency securities and guaranteed loans. As ofDecember 31, 2022 , Athene had no outstanding borrowings under these arrangements. Athene has issued funding agreements to the FHLB. These funding agreements were issued in an investment spread strategy, consistent with other investment spread operations. As ofDecember 31, 2022 , Athene had funding agreements outstanding with the FHLB in the aggregate principal amount of$3.7 billion . The maximum FHLB indebtedness by a member is determined by the amount of collateral pledged and cannot exceed a specified percentage of the member's total statutory assets dependent on the internal credit rating assigned to the member by the FHLB. As ofDecember 31, 2022 , the total maximum borrowing capacity under the FHLB facilities was limited to$52.4 billion . However, Athene's ability to borrow under the facilities is constrained by the availability of assets that qualify as eligible collateral under the facilities and certain other limitations. Considering these limitations, as ofDecember 31, 2022 Athene had the ability to draw up to an estimated$5.8 billion , inclusive of borrowings then outstanding. This estimate is based on Athene's internal analysis and assumptions and may not accurately measure collateral which is ultimately acceptable to the FHLB.
Securities Repurchase Agreements
Athene engages in repurchase transactions whereby it sells fixed income securities to third parties, primarily major brokerage firms or commercial banks, with a concurrent agreement to repurchase such securities at a determined future date. Athene requires that, at all times during the term of the repurchase agreements, it maintains sufficient cash or other liquid assets sufficient to allow it to fund substantially all of the repurchase price. Proceeds received from the sale of securities pursuant to these arrangements are generally invested in short-term investments, with the offsetting obligation to repurchase the security included within payables for collateral on derivatives and securities to repurchase on the consolidated statements of financial condition. As per the terms of the repurchase agreements, Athene monitors the market value of the securities sold and may be required to deliver additional collateral (which may be in the form of cash or additional securities) to the extent that the value of the securities sold decreases prior to the repurchase date.
As of
billion
counterparties backing the repurchase agreements was
billion
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Dividends from Insurance Subsidiaries
AHL is a holding company whose primary liquidity needs include the cash-flow requirements relating to its corporate activities, including its day-to-day operations, debt servicing, preferred and common stock dividend payments and strategic transactions, such as acquisitions. The primary source of AHL's cash flow is dividends from its subsidiaries, which are expected to be adequate to fund cash flow requirements based on current estimates of future obligations. The ability of AHL's insurance subsidiaries to pay dividends is limited by applicable laws and regulations of the jurisdictions where the subsidiaries are domiciled, as well as agreements entered into with regulators. These laws and regulations require, among other things, the insurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay. Subject to these limitations and prior notification to the appropriate regulatory agency, Athene'sU.S. insurance subsidiaries are permitted to pay ordinary dividends based on calculations specified under insurance laws of the relevant state of domicile. Any distributions above the amount permitted by statute in any twelve month period are considered to be extraordinary dividends, and require the approval of the appropriate regulator prior to payment. AHL does not currently plan on having theU.S. subsidiaries pay any dividends to their parents. Dividends from AHL's subsidiaries are projected to be the primary source of AHL's liquidity. Under the Bermuda Insurance Act, each of Athene'sBermuda insurance subsidiaries is prohibited from paying a dividend in an amount exceeding 25% of the prior year's statutory capital and surplus, unless at least two members of the board of directors of theBermuda insurance subsidiary and its principal representative inBermuda sign and submit to theBermuda Monetary Authority ("BMA") an affidavit attesting that a dividend in excess of this amount would not cause theBermuda insurance subsidiary to fail to meet its relevant margins. In certain instances, theBermuda insurance subsidiary would also be required to provide prior notice to the BMA in advance of the payment of dividends. In the event that such an affidavit is submitted to the BMA in accordance with the Bermuda Insurance Act, and further subject to theBermuda insurance subsidiary meeting its relevant margins, theBermuda insurance subsidiary is permitted to distribute up to the sum of 100% of statutory surplus and an amount less than 15% of its total statutory capital. Distributions in excess of this amount require the approval of the BMA. The maximum distribution permitted by law or contract is not necessarily indicative of the insurance subsidiaries' actual ability to pay such distributions, which may be further restricted by business and other considerations, such as the impact of such distributions on surplus, which could affect Athene's ratings or competitive position and the amount of premiums that can be written. Specifically, the level of capital needed to maintain desired financial strength ratings from rating agencies, including S&P,A.M. Best , Fitch and Moody's, is of particular concern when determining the amount of capital available for distributions. AHL believes its insurance subsidiaries have sufficient statutory capital and surplus, combined with additional capital available to be provided by AHL, to meet their financial strength ratings objectives. Finally, state insurance laws and regulations require that the statutory surplus of Athene's insurance subsidiaries following any dividend or distribution must be reasonable in relation to their outstanding liabilities and adequate for the insurance subsidiaries' financial needs.
Other Sources of Funding
Athene may seek to secure additional funding at the AHL level by means other than dividends from subsidiaries, such as by drawing on the undrawn$1.25 billion AHL credit facility, drawing on the remaining$1.5 billion of the AHL liquidity facility or by pursuing future issuances of debt or preference shares to third-party investors. The AHL credit facility contains various standard covenants with which Athene must comply, including maintaining a Consolidated Debt to Capitalization Ratio (as such term is defined in the AHL credit facility) of not greater than 35% at the end of any quarter, maintaining a minimum ConsolidatedNet Worth (as such term is defined in the AHL credit facility) of no less than$7.3 billion , and restrictions on the ability to incur debt and liens, in each case with certain exceptions. The AHL liquidity facility also contains various standard covenants with which Athene must comply, including maintaining an ALRe minimum ConsolidatedNet Worth (as such term is defined in the AHL liquidity facility) of no less than$9.3 billion and restrictions on the ability to incur debt and liens, in each case with certain exceptions. 97
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Future Debt Obligations
Athene had long-term debt of
includes notes with maturities in 2028, 2030, 2031, 2033, 2051, and 2052. See
note 13 to the consolidated financial statements for further information
regarding Athene's debt arrangements.
Capital
Athene believes it has a strong capital position and that it is well positioned to meet policyholder and other obligations. Athene measures capital sufficiency using an internal capital model which reflects management's view on the various risks inherent to its business, the amount of capital required to support its core operating strategies and the amount of capital necessary to maintain its current ratings in a recessionary environment. The amount of capital required to support Athene's core operating strategies is determined based upon internal modeling and analysis of economic risk, as well as inputs from rating agency capital models and consideration of both NAIC RBC andBermuda capital requirements. Capital in excess of this required amount is considered excess equity capital, which is available to deploy. As ofDecember 31, 2022 , Athene'sU.S. RBC ratio was 387%, its Bermuda RBC ratio was 407% and its consolidated RBC ratio was 416%. The formulas for determining the amount of RBC specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk.
ACRA
ACRA provides Athene with access to on-demand capital to support its growth strategies and capital deployment opportunities. ACRA provides a capital source to fund both Athene's inorganic and organic channels, including pension group annuity, funding agreement and retail channels. This strategic capital solution allows Athene the flexibility to simultaneously deploy capital across multiple accretive avenues, while maintaining a strong financial position.
Critical Accounting Estimates and Policies
This Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon the consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of financial statements in accordance withU.S. GAAP requires the use of estimates and assumptions that could affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from these estimates. A summary of our significant accounting policies is presented in note 2 to our consolidated financial statements. The following is a summary of our accounting policies that are affected most by judgments, estimates and assumptions.
Critical Accounting Estimates and Policies - Overall
Consolidation
We consolidate entities on a variable interest or voting interest model or, if
applicable, apply specialized accounting guidance for investment companies.
Significant judgment may be required for the application of the VIE guidance and
to determine whether entities qualify as investment companies.
The assessment of whether an entity is a variable interest entity and the
determination of whether Apollo should consolidate requires judgment. Those
judgments include, but are not limited to: (i) determining whether the total
equity investment at risk is sufficient to permit the entity to finance its
activities without additional subordinated financial support, (ii) evaluating
whether the holders of equity investment at risk, as a group, can make decisions
that have a significant effect on the success of the entity, (iii) determining
whether the equity investors have proportionate voting rights to their
obligations to absorb losses or rights to receive the expected residual returns
from an entity and (iv) evaluating the nature of the relationship and activities
of those related parties with shared power or under common control for purposes
of determining which party within the related-party group is most closely
associated with the VIE. Judgments are also made in determining whether a member
in the equity group has a controlling financial interest, including power to
direct activities that most significantly impact the VIE's economic performance
and rights to receive benefits or obligations to absorb losses that could be
potentially significant to the VIE. This analysis considers all relevant
economic interests, including proportionate interests held through related
parties.
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Additionally, evaluating an entity to determine whether it meets the
characteristics of an investment company is qualitative in nature and may
involve significant judgment. The Company has retained this specialized
accounting for investment companies in consolidation.
Equity-Based Compensation
Equity-based compensation is generally measured based on the grant date fair value of the award. Certain RSUs granted by the Company vest subject to continued employment and the Company's receipt of performance fees, within prescribed periods, sufficient to cover the associated equity-based compensation expense. Equity-based compensation expense for such awards, if and when granted, will be recognized on an accelerated recognition method over the requisite service period to the extent the performance fee metrics are met or deemed probable. The addition of these performance measures helps to promote the interests of our shareholders and fund investors by making RSU vesting contingent on the realization and distribution of profits on our funds. For more information regarding Apollo's equity-based compensation awards, see note 14 to our consolidated financial statements. The Company's assumptions made to determine the fair value on grant date are embodied in the calculations of compensation expense. A significant part of our compensation expense is derived from amortization of RSUs. The fair value of all RSU grants afterMarch 29, 2011 is based on the grant date fair value, which considers the public share price of AGM. The Company has three types of RSU grants, which we refer to as Plan Grants, Bonus Grants, and Performance Grants. Plan Grants may or may not provide the right to receive dividend equivalents until the RSUs vest and, for grants made after 2011, the underlying shares are generally issued byMarch 15th after the year in which they vest. For Plan Grants, the grant date fair value is based on the public share price of the Company, and is discounted for transfer restrictions and lack of dividends until vested if applicable. Bonus Grants provide the right to receive dividend equivalents on both vested and unvested RSUs and Performance Grants provide the right to receive dividend equivalents on vested RSUs and may also provide the right to receive dividend equivalents on unvested RSUs. Both Bonus Grants and Performance Grants are generally issued byMarch 15th of the year following the year in which they vest. For Bonus Grants and Performance Grants, the grant date fair value for the periods presented is based on the public share price of AGM, and is discounted for transfer restrictions. We utilized the present value of a growing annuity formula to calculate a discount for the lack of pre-vesting dividends on certain Plan Grant and Performance Grant RSUs. The weighted average for the inputs utilized for the shares granted are presented in the table below for Plan Grants and Performance Grants:
For the Years Ended
2022 2021 2020 Plan Grants: Dividend Yield1 3.0% 3.0% 5.0% Cost of Equity Capital Rate3 12.3% 11.7% 11.6% Performance Grants: Dividend Yield2 2.9% 2.2% 5.1% Cost of Equity Capital Rate3 12.3% 12.0% 10.9% 1 Calculated based on the historical dividends paid during the year endedDecember 31, 2022 and the price of the Company's common stock as of the measurement date of the grant on a weighted average basis. 2 Calculated based on the historical dividends paid during the three months endedDecember 31, 2022 and the price of the Company's common stock as of the measurement date of the grant on a weighted average basis. 3 Assumes a discount rate that was equivalent to the opportunity cost of foregoing distributions on unvested Plan Grant and Performance Grant RSUs as of the valuation date, based on the Capital Asset Pricing Model ("CAPM"). CAPM is a commonly used mathematical model for developing expected returns. We utilize the Finnerty Model to calculate a marketability discount on the Plan Grant, Bonus Grant and Performance Grant RSUs to account for the lag between vesting and issuance. The Finnerty Model provides for a valuation discount reflecting the holding period restriction embedded in a restricted security preventing its sale over a certain period of time. The Finnerty Model proposes to estimate a discount for lack of marketability such as transfer restrictions by using an option pricing theory. This model has gained recognition through its ability to address the magnitude of the discount by considering the volatility of a company's stock price and the length of restriction. The concept underpinning the Finnerty Model is that a restricted security cannot be sold over a certain period of time. Further simplified, a restricted share of equity in a company can be viewed as having forfeited a put on the average price of the marketable equity over the restriction period (also known as an 99
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"Asian Put Option"). If we price an Asian Put Option and compare this value to that of the assumed fully marketable underlying security, we can effectively estimate the marketability discount. The inputs utilized in the Finnerty Model are (i) length of holding period, (ii) volatility and (iii) dividend yield.
The weighted average for the inputs utilized for the shares granted are
presented in the table below for Plan Grants, Bonus Grants and Performance
Grants:
For the Years Ended
2022 2021 2020
Plan Grants:
Holding Period Restriction (in years) 1.2 4.6 0.6
Volatility1 44.8% 32.8% 58.8%
Dividend Yield2 3.0% 3.0% 5.0%
Bonus Grants:
Holding Period Restriction (in years) 0.2 0.2 0.2
Volatility1 34.5% 34.9% 29.2%
Dividend Yield2 2.9% 3.9% 5.0%
Performance Grants:
Holding Period Restriction (in years) 0.9 0.6 1.0
Volatility1 37.4% 27.0% 47.6%
Dividend Yield2 2.9% 2.2% 5.1%
1 The Company determined the expected volatility based on the volatility of the Company's common stock price as of the grant
date with consideration to comparable companies.
2 Calculated based on the historical dividends paid during the twelve months ended December 31, 2022 , 2021 and 2020 and the
Company's common stock price as of the measurement date of the grant on a weighted average basis.
Income Taxes
Significant judgment is required in determining tax expense and in evaluating
certain and uncertain tax positions. The Company recognizes the tax benefit of
uncertain tax positions when the position is "more likely than not" to be
sustained upon examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. The tax
benefit is measured as the largest amount of benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement. If a tax position is not
considered more likely than not to be sustained, then no benefits of the
position are recognized. The Company's tax positions are reviewed and evaluated
quarterly to determine whether the Company has uncertain tax positions that
require financial statement recognition.
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of differences between the carrying amount of assets and
liabilities and their respective tax bases using currently enacted tax rates.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period during which the change is enacted. Deferred
tax assets are reduced by a valuation allowance when it is more likely than not
that all or a portion of the deferred tax assets will not be realized.
Critical Accounting Estimates and Policies - Asset Management
Investments, at Fair Value
On a quarterly basis, Apollo utilizes valuation committees consisting of members
from senior management, to review and approve the valuation results related to
the investments of the funds it manages. For certain publicly traded vehicles
managed by Apollo, a review is performed by an independent board of directors.
The Company also retains external valuation firms to provide third-party
valuation consulting services to Apollo, which consist of certain limited
procedures that management identifies and requests them to perform. The limited
procedures provided by the external valuation firms assist management with
validating their valuation results or determining fair value. The Company
performs various back-testing procedures to validate their valuation approaches,
including comparisons between expected and observed outcomes, forecast
evaluations and
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variance analyses. However, because of the inherent uncertainty of valuation, the estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material. The fair values of the investments in the funds we manage can be impacted by changes to the assumptions used in the underlying valuation models. For further discussion on the impact of changes to valuation assumptions see "Item 7A. Quantitative and Qualitative Disclosures About Market Risk-Sensitivity" in this report. There have been no material changes to the valuation approaches utilized during the periods that our financial results are presented in this report.
Fair Value of Financial Instruments
Except for the Company's debt obligations (each as defined in note 13 to our
consolidated financial statements), Apollo's financial instruments are recorded
at fair value or at amounts whose carrying values approximate fair value. See
"-Investments, at Fair Value" above. While Apollo's valuations of portfolio
investments are based on assumptions that Apollo believes are reasonable under
the circumstances, the actual realized gains or losses will depend on, among
other factors, future operating results, the value of the assets and market
conditions at the time of disposition, any related transaction costs and the
timing and manner of sale, all of which may ultimately differ significantly from
the assumptions on which the valuations were based. Financial instruments'
carrying values generally approximate fair value because of the short-term
nature of those instruments or variable interest rates related to the
borrowings.
Revenue Recognition
Performance Fees
Apollo earns performance fees from funds we manage as a result of such funds
achieving specified performance criteria. Such performance fees generally are
earned based upon a fixed percentage of realized and unrealized gains of various
funds after meeting any applicable hurdle rate or threshold minimum.
Performance allocations are performance fees that are generally structured from
a legal standpoint as an allocation of capital to the Company. Performance
allocations from certain of the funds that we manage are subject to contingent
repayment and are generally paid to us as particular investments made by the
funds are realized. If, however, upon liquidation of a fund, the aggregate
amount paid to us as performance fees exceeds the amount actually due to us
based upon the aggregate performance of the fund, the excess (in certain cases
net of taxes) is required to be returned by us to that fund. We account for
performance allocations as an equity method investment, and accordingly, we
accrue performance allocations quarterly based on fair value of the underlying
investments and separately assess if contingent repayment is necessary. The
determination of performance allocations and contingent repayment considers both
the terms of the respective partnership agreements and the current fair value of
the underlying investments within the funds. Estimates and assumptions are made
when determining the fair value of the underlying investments within the funds
and could vary depending on the valuation methodology that is used. See
"Investments, at Fair Value" below for further discussion related to significant
estimates and assumptions used for determining fair value of the underlying
investments in our credit, private equity and real assets funds.
Incentive fees are performance fees structured as a contractual fee arrangement
rather than a capital allocation. Incentive fees are generally received from the
management of CLOs, managed accounts and MFIC. For a majority of our incentive
fees, once the quarterly or annual incentive fees have been determined, there is
no look-back to prior periods for a potential contingent repayment, however,
certain other incentive fees can be subject to contingent repayment at the end
of the life of the entity. In accordance with the revenue recognition standard,
certain incentive fees are considered a form of variable consideration and
therefore are deferred until fees are probable to not be significantly reversed.
There is significant judgment involved in determining if the incentive fees are
probable to not be significantly reversed, but generally the Company will defer
the revenue until the fees are crystallized or are no longer subject to clawback
or reversal.
Management Fees
Management fees related to the yield funds we manage can be based on net asset
value, gross assets, adjusted cost of all unrealized portfolio investments,
capital commitments, adjusted assets, capital contributions, or stockholders'
equity, all as defined in the respective partnership agreements. The management
fee calculations for the yield funds we manage that consider net asset value,
gross assets, adjusted cost of all unrealized portfolio investments and adjusted
assets are normally based on the terms of the respective partnership agreements
and the current fair value of the underlying investments within the funds.
Estimates and assumptions are made when determining the fair value of the
underlying investments within the funds and could
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vary depending on the valuation methodology that is used. The management fees related to equity funds we manage, by contrast, are generally based on a fixed percentage of the committed capital or invested capital. The corresponding fee calculations that consider committed capital or invested capital are both objective in nature and therefore do not require the use of significant estimates or assumptions. The management fees related to the hybrid funds we manage are generally based on net asset value, gross assets, or committed or invested capital. See "Investments, at Fair Value" below for further discussion related to significant estimates and assumptions used for determining fair value of the underlying investments in the yield, hybrid and equity funds.
Profit Sharing Expense
Profit sharing expense is primarily a result of agreements with employees to compensate them based on the ownership interest they have in the general partners of the Apollo funds. Therefore, changes in the fair value of the underlying investments in the funds we manage and advise affect profit sharing expense. Employees are generally allocated approximately 30% to 61%, of the total performance fees which is driven primarily by changes in fair value of the underlying fund's investments and is treated as compensation expense. Additionally, profit sharing expenses paid may be subject to clawback from employees and former employees to the extent not indemnified. When applicable, the accrual for potential clawback of previously distributed profit sharing amounts, which is a component of due from related parties on the consolidated statements of financial condition, represents all amounts previously distributed to employees and former employees that would need to be returned to the general partner if the Apollo funds were to be liquidated based on the current fair value of the underlying funds' investments as of the reporting date. The actual general partner receivable, however, would not become realized until the end of a fund's life. Several of the Company's employee remuneration programs are dependent upon performance fee realizations, including theIncentive Pool , and dedicated performance fee rights and certain RSU awards for which vesting is contingent, in part, on the realization of performance fees in a specified period. The Company established these programs to attract and retain, and provide incentive to, partners and employees of the Company and to more closely align the overall compensation of partners and employees with the overall realized performance of the Company. Dedicated performance fee rights entitle their holders to payments arising from performance fee realizations.The Incentive Pool enables certain employees to earn discretionary compensation based on realized performance fees in a given year, which amounts are reflected in profit sharing expense in the Company's consolidated financial statements. Amounts earned by participants as a result of their performance fee rights (whether dedicated orIncentive Pool ) will vary year-to-year depending on the overall realized performance of the Company (and, in the case of theIncentive Pool , on their individual performance). There is no assurance that the Company will continue to compensate individuals through the same types of arrangements in the future and there may be periods when the Company determines that allocations of realized performance fees are not sufficient to compensate individuals, which may result in an increase in salary, bonus and benefits, the modification of existing programs or the use of new remuneration programs. Reductions in performance fee revenues could also make it harder to retain employees and cause employees to seek other employment opportunities.
Critical Accounting Estimates and Policies - Retirement Services
Investments
The Company is responsible for the fair value measurement of investments
presented in the consolidated financial statements. The Company performs regular
analysis and review of its valuation techniques, assumptions and inputs used in
determining fair value to evaluate if the valuation approaches are appropriate
and consistently applied, and the various assumptions are reasonable. The
Company also performs quantitative and qualitative analysis and review of the
information and prices received from commercial pricing services and
broker-dealers, to verify it represents a reasonable estimate of the fair value
of each investment. In addition, the Company uses both internally-developed and
commercially-available cash flow models to analyze the reasonableness of fair
values using credit spreads and other market assumptions, where appropriate. For
investment funds, the Company typically recognizes its investment, including
those for which it has elected the fair value option, based on net asset value
information provided by the general partner or related asset manager. For a
discussion of investment funds for which it has elected the fair value option,
see note 7 to the consolidated financial statements.
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Valuation of
The following table presents the fair value of fixed maturity securities, equity
securities and mortgage loans, including those with related parties and those
held by consolidated VIEs, by pricing source and fair value hierarchy:
December 31, 2022
(In millions) Total Level 1 Level 2 Level 3
Fixed maturity securities
AFS securities
Priced via commercial pricing services $ 78,335 $ 2,570 $ 75,758 $ 7
Priced via independent broker-dealer quotations 23,166 - 20,475 2,691
Priced via models or other methods 10,724 - - 10,724
Trading securities
Priced via commercial pricing services 1,087 21 1,066 -
Priced via independent broker-dealer quotations 506 2 453 51
Priced via models or other methods 880 - - 880
Trading securities of consolidated VIEs 1,063 5 436 622
Total fixed maturity securities, including related
parties and VIEs
115,761 2,598 98,188 14,975 Equity securities Priced via commercial pricing services 995 150 845 - Priced via independent broker-dealer quotations 15 - - 15 Priced via models or other methods 356 - - 356
Total equity securities, including related parties
and VIEs
1,366 150 845 371 Mortgage loans Priced via commercial pricing services 27,644 - - 27,644 Priced via models or other methods 1,112 - - 1,112 Mortgage loans of consolidated VIEs 2,055 - - 2,055
Total mortgage loans, including related parties and
VIEs
30,811 - - 30,811 Total fixed maturity securities, equity securities and mortgage loans, including related parties and consolidated VIEs$ 147,938 $ 2,748 $ 99,033 $ 46,157 Percent of total 100.0 % 1.9 % 66.9 % 31.2 % The Company measures the fair value of its securities based on assumptions used by market participants in pricing the assets, which may include inherent risk, restrictions on the sale or use of an asset, or nonperformance risk. The estimate of fair value is the price that would be received to sell a security in an orderly transaction between market participants in the principal market, or the most advantageous market in the absence of a principal market, for that security. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange while not under duress. The valuation of securities involves judgment, is subject to considerable variability and is revised as additional information becomes available. As such, changes in, or deviations from, the assumptions used in such valuations can significantly affect the Company's consolidated financial statements. Financial markets are susceptible to severe events evidenced by rapid depreciation in security values accompanied by a reduction in asset liquidity. The Company's ability to sell securities, or the price ultimately realized upon the sale of securities, depends upon the demand and liquidity in the market and increases the use of judgment in determining the estimated fair value of certain securities. Accordingly, estimates of fair value are not necessarily indicative of the amounts that could be realized in a current or future market exchange. For fixed maturity securities, the Company obtains the fair values, when available, based on quoted prices in active markets that are regularly and readily obtainable. Generally, these are liquid securities and the valuation does not require significant management judgment. When quoted prices in active markets are not available, fair value is based on market standard valuation techniques, giving priority to observable inputs. The Company obtains the fair value for most marketable bonds without an active market from several commercial pricing services. The pricing services incorporate a variety of market observable information in their valuation techniques, including benchmark yields, broker-dealer quotes, credit quality, issuer spreads, bids, offers, and other reference data. For certain fixed maturity securities without an active market, an internally-developed discounted cash flow or other approach is utilized to calculate the fair value. A discount rate is used, which adjusts a market 103
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comparable base rate for securities with similar characteristics for credit spread, market illiquidity or other adjustments. The fair value of privately placed fixed maturity securities are based on the credit quality and duration of comparable marketable securities, which may be securities of another issuer with similar characteristics. In some instances, the Company uses a matrix-based pricing model, which considers the current level of risk-free interest rates, corporate spreads, credit quality of the issuer, and cash flow characteristics of the security. The Company also considers additional factors, such as net worth of the borrower, value of collateral, capital structure of the borrower, presence of guarantees and its evaluation of the borrower's ability to compete in its relevant market. For equity securities, the Company obtains the fair value, when available, based on quoted market prices. Other equity securities, typically private equities or equity securities not traded on an exchange, are valued based on other sources, such as commercial pricing services or brokers. The Company has elected the fair value option on its mortgage loan portfolio. The Company uses independent commercial pricing services to value its mortgage loan portfolio. Discounted cash flow analysis is performed through which the loans' contractual cash flows are modeled and an appropriate discount rate is determined to discount the cash flows to arrive at a present value. Financial factors, credit factors, collateral characteristics and current market conditions are all taken into consideration when performing the discounted cash flow analysis. The Company performs vendor due diligence exercises annually to review vendor processes, models and assumptions. Additionally, the Company reviews price movements on a quarterly basis to ensure reasonableness.
Future Policy Benefits
The future policy benefit liabilities associated with long duration contracts include term and whole-life products, accident and health, disability, and deferred and immediate annuities with life contingencies. Liabilities for non-participating long duration contracts are established using accepted actuarial valuation methods which require Athene to make certain assumptions regarding expenses, investment yields, mortality, morbidity, and persistency, with a provision for adverse deviation, at the date of issue or acquisition. As ofDecember 31, 2022 , the reserve investment yield assumptions for non-participating contracts range from 2.3% to 6.6% and are specific to Athene's expected earned rate on the asset portfolio supporting the reserves. Athene bases other key assumptions, such as mortality and morbidity, on industry standard data adjusted to align with actual company experience, if necessary. Premium deficiency tests are performed periodically using current assumptions, without provisions for adverse deviation, to test the appropriateness of the established reserves. If the reserves using current assumptions are greater than the existing reserves, the excess is recorded and the initial assumptions are revised.
Liabilities for Guaranteed Living Withdrawal Benefits and Guaranteed Minimum
Death Benefits
Athene issues and reinsures deferred annuity contracts which contain GLWB and GMDB riders. It establishes future policy benefits for GLWB and GMDB by estimating the expected value of withdrawal and death benefits in excess of the projected account balance. Athene recognizes the excess proportionally over the accumulation period based on total actual and expected assessments. The methods used to estimate the liabilities have assumptions about policyholder behavior, which includes lapses, withdrawals and utilization of the benefit riders, mortality, and market conditions affecting the account balance. Projected policyholder lapse and withdrawal behavior assumptions are set in one of two ways. For certain blocks of business, this behavior is a function of Athene's predictive analytics model which considers various observable inputs. For the remaining blocks of business, these assumptions are set at the product level by grouping individual policies sharing similar features and guarantees and reviewed periodically against experience. Base lapse rates consider the level of surrender charges and are dynamically adjusted based on the level of current interest rates relative to the guaranteed rates and the amount by which any rider guarantees are in a net positive position. Rider utilization assumptions consider the number and timing of policyholders electing the riders. Athene tracks and updates this assumption as experience emerges. Mortality assumptions are set at the product level and generally based on standard industry tables, adjusted for historical experience and a provision for mortality improvement. Projected guaranteed benefit amounts in excess of the underlying account balances are considered over a range of scenarios in order to capture Athene's exposure to the guaranteed withdrawal and death benefits. The assessments used to accrue liabilities are based on interest margins, rider charges, surrender charges and realized gains (losses). As such, future reserve changes can be sensitive to changes in investment results and the impacts of shadow adjustments, which represent the impact of assuming unrealized gains (losses) are realized in future periods. As ofDecember 31, 2022 , the GLWB and GMDB liability balance, including the impacts of shadow adjustments, totaled$5.3 billion . The relative sensitivity of the GLWB and GMDB liability balance from changes to these assumptions, including the impacts of 104
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shadow adjustments from hypothetical changes in projected assessments, changes in the discount rate and annual equity growth, has decreased and are not significant following the business combination and purchase accounting election described in note 3. Derivatives
Valuation of Embedded Derivatives on Indexed Annuities
Athene issues and reinsures products, primarily indexed annuity products, or purchases investments that contain embedded derivatives. If Athene determines the embedded derivative has economic characteristics not clearly and closely related to the economic characteristics of the host contract, and a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host contract and accounted for separately, unless the fair value option is elected on the host contract. Indexed annuities and indexed universal life insurance contracts allow the policyholder to elect a fixed interest rate return or an equity market component for which interest credited is based on the performance of certain equity market indices. The equity market option is an embedded derivative, similar to a call option. The benefit reserve is equal to the sum of the fair value of the embedded derivative and the host (or guaranteed) component of the contracts. The fair value of the embedded derivatives represents the present value of cash flows attributable to the indexed strategies. The embedded derivative cash flows are based on assumptions for future policy growth, which include assumptions for expected index credits on the next policy anniversary date, future equity option costs, volatility, interest rates, and policyholder behavior. The embedded derivative cash flows are discounted using a rate that reflects Athene's credit rating. The host contract is established at contract inception as the initial account value less the initial fair value of the embedded derivative and accreted over the policy's life. Contracts acquired through a business combination which contain an embedded derivative are re-bifurcated as of the acquisition date. In general, the change in the fair value of the embedded derivatives will not directly correspond to the change in fair value of the hedging derivative assets. The derivatives are intended to hedge the index credits expected to be granted at the end of the current term. The options valued in the embedded derivatives represent the rights of the policyholder to receive index credits over the period indexed strategies are made available to the policyholder, which is typically longer than the current term of the options. From an economic basis, Athene believes it is suitable to hedge with options that align with index terms of our indexed annuity products because policyholder accounts are credited with index performance at the end of each index term. However, because the value of an embedded derivative in an indexed annuity contract is longer-dated, there is a duration mismatch which may lead to differences in the recognition of income and expense for accounting purposes. A significant assumption in determining policy liabilities for indexed annuities is the vector of rates used to discount indexed strategy cash flows. The change in risk free rates is expected to drive most of the movement in the discount rates between periods. Changes to credit spreads for a given credit rating as well as any change to Athene's credit rating requiring a revised level of nonperformance risk would also be factors in the changes to the discount rate. If the discount rates used to discount the indexed strategy cash flows were to fluctuate, there would be a resulting change in reserves for indexed annuities recorded through the consolidated statements of operations. As ofDecember 31, 2022 , Athene had embedded derivative liabilities classified as Level 3 in the fair value hierarchy of$5.8 billion . The increase (decrease) to the embedded derivatives on indexed annuity products from hypothetical changes in discount rates is summarized as follows: (In millions) December 31, 2022 +100 bps discount rate $ (299) -100 bps discount rate 331 However, these estimated effects do not take into account potential changes in other variables, such as equity price levels and market volatility, which can also contribute significantly to changes in carrying values. Therefore, the quantitative impact presented in the table above does not necessarily correspond to the ultimate impact on the consolidated financial statements. In determining the ranges, Athene has considered current market conditions, as well as the market level of discount rates that can reasonably be anticipated over the near-term. For additional information regarding sensitivities to interest rate risk and public equity risk, see "Item 7A. Quantitative and Qualitative Disclosures About Market Risk-Sensitivity". 105
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Deferred Acquisition Costs, Deferred Sales Inducements, and Value of Business
Acquired
Costs related directly to the successful acquisition of new or renewal insurance or investment contracts are deferred to the extent they are recoverable from future premiums or gross profits. These costs consist of commissions and policy issuance costs, as well as sales inducements credited to policyholder account balances. Athene performs periodic tests, including at issuance, to determine if the deferred costs are recoverable. If it is determined that the deferred costs are not recoverable, Athene records a cumulative charge to the current period. Deferred costs related to universal life-type policies and investment contracts with significant revenue streams from sources other than investment of the policyholder funds are amortized over the lives of the policies, based upon the proportion of the present value of actual and expected deferred costs to the present value of actual and expected gross profits to be earned over the life of the policies. Gross profits include investment spread margins, surrender charge income, policy administration, changes in the GLWB and GMDB reserves, and realized gains (losses) on investments. Current period gross profits for indexed annuities also include the change in fair value of both freestanding and embedded derivatives. The estimates of expected gross profits and margins are based on assumptions using accepted actuarial methods related to policyholder behavior, including lapses and the utilization of benefit riders, mortality, yields on investments supporting the liabilities, future interest credited amounts (including indexed related credited amounts on fixed indexed annuity products), and other policy changes as applicable, and the level of expenses necessary to maintain the policies over their expected lives. Each reporting period, Athene updates estimated gross profits with actual gross profits as part of the amortization process. Athene also periodically revises the key assumptions used in the amortization calculation which results in revisions to the estimated future gross profits. The effects of changes in assumptions are recorded as unlocking in the period in which the changes are made. Athene establishes VOBA for blocks of insurance contracts acquired through the acquisition of insurance entities. The fair value of the liabilities purchased is determined using market participant assumptions at the time of acquisition and represents the amount an acquirer would expect to be compensated to assume the contracts. Athene records the fair value of the liabilities assumed in two components: reserves and VOBA. Reserves are established using best estimate assumptions, plus a provision for adverse deviation where applicable, as of the business combination date. VOBA is the difference between the fair value of the liabilities and the reserves. VOBA can be either positive or negative. Any negative VOBA is recorded to the same financial statement line on the consolidated statements of financial condition as the associated reserves. Positive VOBA is recorded in DAC, DSI and VOBA on the consolidated statements of financial condition.
VOBA and negative VOBA are amortized in relation to applicable policyholder
liabilities. Significant assumptions which impact VOBA and negative VOBA
amortization are consistent with those which impact the measurement of
policyholder liabilities.
Estimated future gross profits vary based on a number of factors but are
typically most sensitive to changes in investment spread margins, which are the
most significant component of gross profits. If estimated gross profits for all
future years on business in force were to change, including the impacts of
shadow adjustments, there would be a resulting increase or decrease to the
balances of DAC and DSI recorded as an increase or decrease to amortization of
DAC and DSI on the consolidated statements of operations or AOCI.
Actual gross profits will depend on actual margins, including the changes in the
value of embedded derivatives. The most sensitive assumption in determining the
value of the embedded derivative is the vector of rates used to discount the
embedded derivative cash flows. If the discount rates used to discount the
embedded derivative cash flows were to change, there would be a resulting
increase or decrease to the balances of DAC and DSI recorded as an increase or
decrease in amortization of DAC and DSI on the consolidated statements of
operations.
Following the business combination and application of purchase accounting
described in note 3, DAC and DSI balances exhibit less sensitivity to
hypothetical changes in estimated future gross profits and changes in the
embedded derivative discount rate as they are relatively less material following
the business combination. VOBA balances do not amortize based on estimated gross
profits, and accordingly, are not sensitive to changes to actual or estimated
gross profits.
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Recent Accounting Pronouncements
A list of recent accounting pronouncements that are relevant to Apollo and its
industries is included in note 2 to our consolidated financial statements.
Contractual Obligations, Commitments and Contingencies
Fixed and determinable payments due in connection with the Company's material
contractual obligations are as follows as of
2028 and
2023 2024 - 2025 2026 - 2027 Thereafter Total
(In millions)
Asset Management
Operating lease obligations1 $ 70 $ 152 $ 147 $ 545 $ 914
Other long-term obligations2 14 1 - - 15
2022 AMH credit facility3 1 2 1 - 4
Debt obligations3 136 723 662 2,482 4,003
AOG Unit payment 4 175 175 - - 350
396 1,053 810 3,027 5,286
Retirement Services
Interest sensitive contract
liabilities 20,431 40,875 33,971 78,376 173,653
Future policy benefits 2,168 4,115 4,070 44,975 55,328
Other policy claims and benefits 129 - - - 129
Dividends payable to policyholders 5 9 9 73 96
Debt3 153 306 306 4,592 5,357
Securities to repurchase5 2,036 1,360 1,919 - 5,315
24,922 46,665 40,275 128,016 239,878
Obligations $ 25,318 $ 47,718 $ 41,085 $ 131,043 $ 245,164
1 Operating lease obligations excludes $225 million of other operating expenses associated with operating leases.
2 Includes (i) payments on management service agreements related to certain assets and (ii) payments with respect to certain
consulting agreements entered into by the Company. Note that a significant portion of these costs are reimbursable by funds.
3 The obligations for debt payments include contractual maturities of principal and estimated future interest payments based on the
terms of the debt agreements. See note 13 of the consolidated financial statements for further discussion of these debt
obligations.
4 On December 31, 2021 , each holder of AOG Units (other than those held by the Company and Athene) sold a portion of their limited
partnership interests to the Company in exchange for the AOG Unit Payment. See note 17 to the consolidated financial statements for
more information.
5 The obligations for securities for repurchase payments include contractual maturities of principal and estimated future interest
payments based on the terms of the agreements. Future interest payments on floating rate repurchase agreements were calculated
using the December 31, 2022 interest rate.
Note: Due to the fact that the timing of certain amounts to be paid cannot be
determined or for other reasons discussed below, the following contractual
commitments have not been presented in the table above.
(i)As noted previously, the tax receivable agreement requires us to pay to our
Former Managing Partners and Contributing Partners 85% of any tax savings
received by AGM and its subsidiaries from our step-up in tax basis. The tax
savings achieved may not ensure that we have sufficient cash available to pay
this liability and we might be required to incur additional debt to satisfy this
liability.
(ii)Debt amounts related to the consolidated VIEs are not presented in the table
above as the Company is not a guarantor of these non-recourse liabilities.
(iii)In connection with the Stone Tower acquisition, Apollo agreed to pay the
former owners of Stone Tower a specified percentage of any future performance
fees earned from certain of the Stone Tower funds, CLOs and strategic investment
accounts. In connection with the acquisition of Griffin Capital's U.S. asset
management business on May 3, 2022 , Apollo agreed to pay the former owners
certain share-based consideration contingent on specified AUM and capital
raising thresholds. These contingent consideration liabilities are remeasured to
fair value at each reporting period until the obligations are satisfied. See
note 18 to the consolidated financial statements for further information
regarding the contingent consideration liabilities.
(iv)Commitments from certain of our subsidiaries to contribute to the funds we
manage and certain related parties.
OnFebruary 8, 2023 , the Company and CS undertook the first close of their previously announced transaction whereby certain subsidiaries of Atlas acquired certain assets of theCS Securitized Products Group (the "Transaction"). A subsequent closing was held onFebruary 23, 2023 . Under the terms of the Transaction, Atlas has agreed to pay CS$3.3 billion ,$0.4 billion of which is deferred untilFebruary 8, 2026 , and$2.9 billion of which is deferred untilFebruary 8, 2028 . This deferred purchase price is an obligation first of Atlas, second ofAAA , third of AAM, fourth of AHL and fifth of AARe. Each of AARe and AHL has issued an assurance letter to CS for the full deferred purchase obligation amount of$3.3 billion . In exchange for the 107
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purchase price, Atlas expects to receive, by the Transaction's final close, approximately$0.4 billion in cash and a portfolio of senior secured warehouse assets, subject to debt, with approximately$1 billion of tangible equity value (to the extent that the warehouse assets received by Atlas constitute less than$1 billion of tangible equity value, the amount of cash is expected to increase by an offsetting amount). These warehouse assets are senior secured assets at industry standard loan-to-value ratios, structured to investment grade-equivalent criteria, and were approved by Atlas in connection with this Transaction. In addition, Atlas has received an investment management contract to manage certain unrelated assets on behalf of CS, providing for quarterly payments expected to total approximately$1.1 billion net to Atlas over 5 years. Finally, Atlas shall also benefit generally from the net spread earned on its assets in excess of its cost of financing. As a result, the fair value of the liability related to the Company's assurance letter is not material to the consolidated financial statements.
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