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

Okay. Good morning, everybody, and welcome to Day 3 of TD Cowen's Inaugural Financial Services and FinTech Summit. My name is Bill Katz. I cover the asset managers, retail brokers and exchanges. And I'm thrilled today to be hosting the management team from Athene, which we think is a nice differentiated opportunity this morning. For those of you on the webcast that are able to do so and so inclined, we would certainly appreciate a 5-star vote in the current II polling for asset managers, retail brokers and exchanges. And also you should have an opportunity, if you'd like to ask questions, I am monitoring a panel as well and I see the questions come through, so I'll be happy to try and ask those as well. This morning, thrilled to have Grant Kvalheim, who's President of Athene. Athene manages about -- has invested about $227 billion of net investments. And when you include some of the side cars, that number approaches $300 billion and is owned by Apollo, and Apollo manages about $670 billion. So it is a very important driver to the Apollo story as many people know. Grant has served as the President of Athene since April of 2022. He also serves as the CEO of Athene USA and President of Athene Corp, as a partner at Apollo, a member of the firm's leadership team. And prior to assuming his current role at Athene, he served as President, CFO and on the Board of Directors, and works with Jim Belardi. Grant is responsible to the overall strategic direction and leads the operating company in the United States with a focus on growing the annuity business, flow insurance and funding agreements, and that's where we're going to be spending a lot of our time today. So Grant, first of all, thank you very much for attending today. I appreciate you participating. And I will say as a plug, as we've gotten to learn the Athene story, we do appreciate how robust your disclosure is getting and really best in class. So thank you for all of that.

Thanks. Pleasure to be here, Bill.

Maybe to kick off, I have a couple of big picture questions, and then we can maybe dig into some of the more detailed items. Just from a big picture perspective, as I've understand it, I think you've been with Athene almost from day 1. And I was sort of wondering, in your time there and your experience and drive to grow the business, can you talk a little bit about how the franchise has evolved over the last many years?

Yes. So I joined Athene in Bermuda at the start of 2011, so the firm was 18 months old. It had a gross balance sheet of about $1 billion. A couple of hundred million in capital, wasn't making any money because we were trying to scale up. So in that sense, from there now, the firm is radically different in so many ways. But I think in some very important ways, it's really not different at all. I think we still have the same hungry start-up mentality. I think the senior management team is every bit as focused on how do we continue to grow and execute. And no one is saying, "Hey, we've done it, and now we can kind of slow down and harvest dividend." So the same passion for the business that has allowed us to be successful continues to exist and the same focus, right? I think we know what we're good at. We try to -- when we're thinking about new things that we might do, we always pass it through the lens of why do we think that we could be successful if we go into the area, does it play to our capabilities, does it play to our strengths. And I think that's been a key to our success as well.

Great. Maybe related to that, we often hear from the Apollo management team how strategically important to have Athene in-house, and a key competitor has sort of gone through and replicated that same sort of dynamic. Just wondering if you could maybe touch on, from your perspective, the importance that you see as Athene being owned by Apollo and what benefits that brings across the platform as well.

They've been our strategic partner from day 1 before we were acquired. And I always sense that the end game had to be the companies coming together. And yet when they bid for us, I was totally surprised. But Athene would not have achieved all the success that it's had without that strategic partnership. And yet prior to the combination, as two separate public companies, I think from an equity story, the market looked at it and said, "Hey, the combined mouse trap is pretty good," but it seems to be a better deal for Apollo than Athene. So our stock price was kind of flat lining, while Apollo's was doing pretty well. And so that friction, if you will, went away on the day that we closed, and we all focused on just optimizing the bottom line of the combined company. I think there was -- when you look at from a fixed income universe and issuing funding agreements is important for Athene, there were a number of fixed income investors that were skeptical about, hey, what is Apollo putting on Athene's balance sheet. I think that went away the day that we were bought. Because they were, like, "Well, Apollo is buying that balance sheet, it must be pretty good." More from a higher level, just total alignment now between Athene and Apollo, whereas two separate companies, we were broadly aligned, but not completely so. And importantly, it was a credit positive for both Apollo and Athene. It led to the upgrades of both Apollo and Athene. So strong credit positive. And I think now, it's allowed us to figure out some of the white spaces that existed in between what Apollo does and what Athene does, and work together on solving that. A couple of examples would be the Altitude product that we've brought out, which is an insurance wrap of underlying Apollo funds. And it's still early days, but some of the work we're doing together in the defined contribution space. So I think the merger has been extremely powerful. Obviously, the stock price has responded. I think there's more that we should get out of the combination, and we're working hard to capture those opportunities.

Maybe some of those things will surface in some of the other questions I have, so curious from that. So maybe one more big picture question. An increasing number of asset managers, particularly on the traditional side, I think companies like BlackRock, T. Rowe Price, AllianceBernstein, are beginning to include guaranteed income in their retirement offerings. I'm sort of wondering, does this create or accelerate opportunities for Athene to maybe tap more deeply into that defined contribution side? And maybe to dig in a little bit deeper, how you sort of see the evolution to maybe the 401(k) and/or the target date fund segments within that?

Yes. We're working on it. Obviously, SECURE Act 2.0 kind of opened this door for people. There have been a number of announcements. I'm not yet convinced that the silver bullet has been created. There's a lot of parties that you need to satisfy in getting this done, the plan sponsor, the consultants, the fiduciaries, the record keepers. You have to solve some thorny issues around portability and liquidity. You have to deal with the fact that reality is 70% of DC participants set it and forget it, right? They make an investment election, and they never change it until -- from the time they make that election until they retire. So some of the products you've seen announced sort of require, at some future date, the plan participant to opt into an annuity. Personally, I think that's a tough putt. We'll have to see if that works out or not. We've worked with a nexus in creating a lifetime income builder product. It puts the annuity into a target date fund, doesn't require the plan participant to opt into the income solution into the annuity, and it is portable on retirement. So I think it's early days. I think it's a huge opportunity. That's why everybody is focused on it. But I think a lot of work still has to be done by everyone who desires to capitalize on it to make it real at this point.

Got you. We are getting a couple of questions from the audience, so I'm going to come back to those in just a little while. Just a few more from me. Just -- we focus a lot of time from our side on net spread, and that's usually the prism is either the yield that you're able to -- that Apollo is able to get against the annuities, which you're generating. But I'd like to spend a little time maybe on the operational side of things, where you have oversight on as well. And you've done a great job of managing those costs over time for everything we can see. What's been the key to that? And how do you think about that expense trajectory over time? Because I think there's sometimes a little bit of an overlooked net spread dynamic.

I think it's a huge point, Bill, and we think it's a significant competitive advantage for Athene. When you think about how you win, you can spend $1 on covering your overhead, your operating costs, right? You can spend money on distribution. You can put it into the product or you can bring it to the bottom line for shareholders. And if you're spending less on operations, and we do spend less than our peer group, and if you're spending less on distribution, and we do spend less than our peer group, then I think you can achieve something that's pretty magical. You can have a consumer value proposition that is strong, stronger -- as strong or stronger than peers, while simultaneously earning higher returns on equity. And that's what Athene has been able to do and sustain. So how do we do it? We've been laser-focused on expense management from day 1. Athene is the combination of 4 acquisitions. And oftentimes, in our industry, people just continue to run all the platforms and run various operating systems. We run off a single platform, a single admin platform in Iowa. We transferred all of the policies that we issue onto it. We shut down the old systems. We make sure our technology stack is modern and, I think, a competitive advantage. And then we're just kind of like savage in execution and making sure that we continue to maintain that expense discipline that has provided us one of the ways that we went. It's extremely important from a product standpoint, but I think it also delivers a better customer experience. If you go back, I don't know, 7, 8 years ago and our industry is not the most tech-forward industry, but we were getting on the retail annuity side everything in paper. And now about 85% of our applications come in electronically. Not only is it a better customer experience, there's no way we could have scaled the business to deal with paper applications. In 2014, we sold $2.5 billion of annuities. Last year, $30-plus billion. No way you could -- we could have done that without the investment in technology.

So maybe we can peel down that sort of a little bit deeper so -- and where we ended on technology. Can you describe maybe how you are using technology? I'd be curious how you're including artificial intelligence to potentially bend down the cost curve and to drive broader efficiencies. And then any use cases that -- where you're maybe even testing AI and how you're thinking about just the technology outlook.

Yes. look, I think a lot of what our forward calendar is on IT is still focused on automating processes that aren't yet automated. We still have years to go in that. I think AI, I think there will be applications. I think there will be things that we find that are productivity enhancers. I think the fever pitch of AI is really high. I'm not a cynical guy, but we started working on AI about a year ago at the beginning of last year and felt like, hey, we need some consultant help because it's kind of all new for us. I would say most of the AI consultants that we interviewed started thinking about it 5 minutes before we did. And 2 or 3 months prior to being AI consultants, we're in the bitcoin world. So it was kind of going from the old hotness to the new hotness. Now I do think there's going to be a lot of AI applications that help us from an efficiency perspective, but I think there's still room to grow before they're incorporated into our core technology. So we've set up a governance group. We've set up a sandlot, where, outside of production, people can run test cases on how it would improve their operating efficiency. It's not yet incorporated in what we do. It's not really incorporated in our forward plan because it's too new at this point. I would say we're doing some things in terms of helping a script marketing literature, helping us translate. I think some of the exciting test cases that we're working on are in the call center for operating -- for improving speed to answer in operating. I think it's kind of a crawl, walk, run mentality, where maybe the end game is you would allow someone to opt in to speaking to a chatbot that would be able to operate 247 because our call centers are only open at a certain amount of time, and/or so they'd have that possibility so it could expand the service window. But we're a long way away from that. We're still on the -- we're still indefinitely in the crawl phase of crawl-walk-run, but I think there will be some interesting applications throughout our business.

All right, who were to link insurance and AI together, right? Okay, let's move into growth. There's a lot of the questions coming in on the question bank for that. I'll get to those in just a moment. But big picture down, I was wondering if you could frame just the structure and scale of Athene's retail annuity distribution. I don't think we really get to hear from that very much. How has that been growing over the last couple of years? And then how do you -- how does the future look as you think through -- as you channel incremental growth?

Yes. Our retail business is really -- it's been amazing. So we started out, we were in IMOs only, right, and we didn't have the credit ratings really to allow us to be in banks and broker-dealers. So part of the Athene strategy from the word go has always been about improving our credit ratings, maintaining a fortress balance sheet, getting the ratings that would allow us to engage in the businesses we wanted to engage in. And as our ratings have improved, we've built out in the bank and broker-dealer space. So we've gone from being 100% distributing in IMOs, which is still a very important channel for us, but it's now down to 30% for the total and 70% is through banks and broker-dealers. And initially, when you're getting into banks and BDs, again, this has been a journey, you start out with smaller banks, regional banks, independent BDs and then more recently into the larger money center banks, Wells Fargo, JPMorgan, Morgan Stanley and the like. So I wouldn't say the journey is complete. We're certainly closer to the end than the beginning. And then once you get on to these platforms, you have to optimize them, right? We actually have to have a wholesaling group around these large institutions and educate more and more of the people working with clients within those institutions to want to sell Athene products and work with the product platform people to get more products on to the platform. So I think we're close to the end of all of the distribution channels we want to be on, but there should still be years of growth after that in terms of optimizing, being on those platforms. It wasn't that long ago that we didn't have a single distributor that sold as much as $1 billion a year for Athene. Last year, we had 6 distributors that sold $2 billion or more and 1 that sold over $4 billion. So just amazing growth in some of these larger channels. And you think about that, 6 distributors selling, I don't know, order of magnitude $15 billion for Athene. I think the team, Chris Grady, Rod Mims and the team that runs our retail business have done just a phenomenal job. And I think what distinguishes Athene in the retail annuity space is that you have these separate channels of distribution, and Athene is kind of neck and neck with Allianz. We go back and forth in the IMO channel year by year as being 1 or 2, but there's no one else that's terribly close to us. And then we're #1 in the bank channel, and we're in top 5 in the broker-dealer channel. Nobody that we compete against has that level of strength in each of those 3 distribution channels. So I think that's what makes our retail annuity distribution so powerful.

Just a sidebar question. This was coming to me here. One of the things that we're hearing in retail democratization and just retail in general, and we've certainly seen it on the institutional side, is a consolidation by the distributors to fewer and fewer manufacturers. Is that something that you're seeing playing out, too, Grant, just in terms of the annuity market and some of these larger players? Are they concentrating the market share to you and some of your larger peers?

Within the IMO space, there have been three roll-ups, if you will, private equity backed roll-ups of IMOs. So those IMO groups have become more important within the IMO sector. I don't know if that's what your question is getting to. In the bank and BD space, that's less of a phenomenon. I think -- I would say the roll-ups have not impacted our business in the IMO space. I think people, even within that larger platform of an IMO, they still want a couple of things. They want competitive commissions. They want great product, and they want great service. And so I think we're still able to compete very well, even in that rolled-up world, if you will.

Got you. All right. One more from me, then I'll take some of the ones from the panelists. On the most recent fixed income call, which I find to be terrific, you noted that you recently launched an annuity distribution platform with Morgan Stanley, and I think you highlighted them just in the last question about Wells Fargo and JPMorgan. Can you sort of speak to the early success you're having with them? And how should we be thinking about expectations for any of the new partnerships in this year? You mentioned you're sort of closer to the end, but are there other big platforms out there that you still have an opportunity to step on to?

Yes. So it's early days. We just launched at the end of the first quarter at Morgan Stanley. Very pleased with how it's going. And I spoke about expanding the product suite. We started with a pretty limited product suite there. It's the Altitude product, the QP product that we created jointly with Apollo, and it's a MYGA product. In both products, I think the rollout has been pretty strong initially. There's not a lot to say. So I would say it's meeting all of our expectations for that platform, and we'll see. I'm not -- really can't divulge a whole lot more than that at this point. In terms of other large platforms, several that we expect to onboard before the end of the year. But we don't announce names before we're going live. There's a couple that we're targeting in the third quarter, probably one in the fourth quarter as well. So we feel really good about it. I think one of the things that -- we spent 5 years trying to break into Wells Fargo, right, and it was more us trying to knock that door down. I think what's fundamentally changed for Athene as we become a clear market leader is that institutions are coming to us and saying, "We need you on our platform." And that's just a very different dynamic, right? So -- and because of that dynamic, couldn't be more positive on the -- on our ability to get on to the platforms that we want, right? We've -- for us, it's kind of like sequencing what we want to do and making sure it makes sense for us that we can onboard it, support it and that the opportunity is a scale opportunity for us. But it's just a very palpable sea change in the relationship that we have with some of these larger institutions that we're not on.

Great. Let me ask -- tie a couple of questions we've gotten from the audience to what we've already been chatting about. First question is, I was -- question is, can you comment on second quarter retail annuity flows? And is there any adjustment to your full year outlook?

No. So we've said $70 billion for total organic origination. That's not just retail. It's obviously all of our channels. Still very comfortable with that as a forecast. The biggest piece of that is our retail annuity business and still comfortable it will come through with its share of that total.

Okay. And a related question is, given a bit of more competitive environment or how the environment is evolving for fixed annuities, as traditional insurers are trying to write more business, how is this impacting either volume or spreads of incremental growth?

Yes. It's a more -- I would say it's a more competitive environment. Last year was incredible in the sense that not only were we able to do record volumes, but we were able to do it at near record spreads. So that's an environment that you shouldn't expect to have happen very often. So I would say this year is a bit more competitive, but the competition is rational, right? We're still writing business in excess of our mid-teens returns criteria. But I would have to say that it's a bit more competitive. It's certainly more competitive in the IMO space. There's a lot of capital that's been raised. Start-ups generally only have access in the IMO channel. They're selling some business. So I would say the competition is more intense in that space. Banks and broker-dealers have minimum rating requirements and scale, so it's harder for a start-up to get into those distribution channels. But overall, I'd say, still rational competition, but spreads are a little bit tighter than they were last year.

Okay. But you did say you're still writing north of your mid-teens ROE criteria, right?

Yes, still very good business and -- still very good business.

Okay. All right. We'll bucking up against time. I can't believe how fast this is going. Maybe moving over a little bit. Over the last year or so -- two different topics. Over last year, so you highlighted some new relationships that you've been curating in the Asia Pacific region. And it seems like the non-U.S. market, retirement market, is tremendous in terms of that opportunity set. I was just sort of wondering if you could speak a little bit around maybe the flow reinsurance and the funding agreements, and then how you've sort of viewed the opportunity to scale, either in the markets or across the product lines.

Yes. So in -- we do -- we are spending a reasonable amount of time in Asia. Japan, in particular, Japan is the second largest annuity market outside the United States. It has a lot of the same demographic issues that we have in the U.S. A lot of people at or near retirement age who don't feel adequately prepared for guaranteed income solutions in retirement. It's also interesting that some of the products that work very well in the U.S. to address that, right, the fixed indexed annuity, we feel comes closest to matching what people used to get out of a defined benefit pension plan, right, guaranteed principal and a guarantee that you can outlive your money. And the product didn't really exist in Japan. So the opportunity for us was to work with major Japanese insurers and export that technology, bring to them fixed indexed annuities and be the partner of choice. We can create a product for you, you sell it through your distribution channels, we'll participate in that through reinsurance. That's been a very successful formula. More than half of all of our flow reinsurance business is now these reinsurance relationships in Japan. We think there's more to come. In addition to that, you will have seen that we did our first block life reinsurance deal in Japan in the fourth quarter. We have signed a flow life reinsurance deal here in 2024 and also worked with -- and created an IUL product with Prudential plc in Singapore that we're now reinsuring. So we continue to think there's a lot of opportunities in Asia, principally Japan. Japan's priority 1, 2 and 3, and then after that, sort of Singapore and Hong Kong. Trying to stay focused on markets that we think have the potential to scale as you referenced. But in addition to that, we've now found -- we've done funding agreements in yen. We think the idea of funding agreements as providing safe yield in a lot of investment portfolios in Japan where they still have the phenomenon of institutions that are heavily overweighted to cash. It could be interesting for us. We've done funding agreements to institutions in Singapore as well. So we're still working on our product set in that region, but we've been gratified with the progress that we've made in the period. We always started in Japan and Asia in 2020. So we think we made a lot of progress in a relatively short period of time.

Great. And just one more from the audience here. Do you have any competitive advantage in the small and mid-cap PRT segment at this point?

We do not. And from our perspective, we've always targeted the larger space because the cost of doing a deal is kind of the same, whether you do $50 million or $5 billion. So really, our competitive advantage has been at the larger end of the PRT market.

Okay. Last question from me, we're bucking right against time. Overall, just turning to the gross outflows, they ticked up modestly quarter-over-quarter in the first quarter to about 12% annualized rate, but you've guided to improving trends throughout the remainder of the year. What gives you the confidence that the policy driven outflows, in particular, will remain low within that 12%?

Just our experience, and you mentioned the disclosure that we do. From my knowledge, we're the only ones that forecast outflows, and we do that because we're pretty comfortable with our ability to look at the experience that we've had and project it out. Variations of 1/10 or 2/10 relative to what we've posted or well within the range of being not material in our point of view, so we didn't think that the differences in the first quarter were material. A lot of the behaviors that led to elevated lapses last year, they've kind of run their course. So we're very benign outlook from our perspective, from a surrender perspective. I would also say, I think it's one of the things that helped us last year. We are a beneficiary of industry surrenders. Surrenders don't tend to leave the insurance world. They get recycled in the new policies. And as the market leader, that was part of our growth story last year, right? Industry surrenders, we captured more than our share. So not worried about it from an ability to manage cash flows, but also it has some very positive dynamics for us in terms of new business. The business that surrenders also tends to be not great business. Business that's out of surrender charge requires higher capital to be held against it from a statutory perspective. Since it's effectively liquid money, your asset opportunities are short term. There's a lot of things about the business that tends to leave in a higher rate environment that's beneficial from our perspective. So it's really kind of a nonissue. I know people have asked a lot about it. From our perspective, it's not -- it's a pure net positive to Athene.

Excellent. On that note, Grant, we're out of time. I know you have a very busy day with investors at our conference. I just want to say thank you very much to you and the team for coming today, and we look forward to continuing the dialogue at another point.

Thanks, Bill.