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Apollo Global has reported near-record profits from its Athene insurance operations after a surge in new loans made by the unit generated more than enough income to offset declining investment returns from private credit.
The better than expected results from the New York-based investment group may help alleviate investor fears about falling interest rates and tightening credit spreads crimping the profitability of one of the world’s largest lenders.
Apollo reported $871mn in spread profits from its Athene insurance unit in the third quarter, the highest quarterly figure in two years. Overall profits came in at $1.7bn.
Some investors and analysts had begun to question whether Apollo’s merger with Athene had made the investment group susceptible to falling returns from private credit investments.
Apollo chief executive Marc Rowan led the deal for Athene — an insurer the billionaire financier created in 2009 to match sleepy fixed annuities policies with higher octane private loans.
The manoeuvre has transformed the investment group, famed for striking bold corporate takeovers and relenting in bitter creditor fights, into one of Wall Street’s largest lenders.
However, it has meant that roughly half of Apollo’s earnings come from spreads it earns on Athene’s assets over the contractual payments it must make to policyholders, instead of solely from managing assets for pensions and sovereign wealth funds for a fee.
This year, Apollo’s stock has shed a quarter of its value, lagging rivals Blackstone and Ares that do not own insurers and have balance sheets largely insulated from interest rate fluctuations.
Some of the stock declines came after Apollo missed ambitious spread earnings targets it laid just a year ago.
In October last year, Apollo forecast its spread profits would generally increase 10 per cent annually, but this year those earnings have only risen about 5 per cent. It forced Apollo to warn shareholders to expect just 5 per cent spread earnings growth this year.
Apollo attributed much of that lowered outlook to the maturity of higher-yielding loans it made during the pandemic that are being repaid and replaced with lower-yielding debts.
However, Apollo has left its long-term spread earnings target unchanged and hedged $9bn of interest rate exposure in the late summer to further protect its balance sheet from falling yields.
While the net spread profits on Athene’s investments in the third quarter were less than what it expects to earn over the long run, Apollo has made up for that diminished profitability on the back of a torrent of new loan volumes largely funded by insurance premiums.
Apollo originated $75bn in new loans in the third quarter, meaning it has lent $273bn to corporate borrowers worldwide over the past 12 months. That was a 40 per cent increase from its annual lending pace a year ago, buoyed by multibillion-dollar loans to companies, including Intel and EDF.
Apollo’s lending volumes have put the group on track to exceed a five-year target set in October 2024 and in competition with banks such as Citigroup in overall corporate lending volumes. They underscore Apollo’s ambition to be a powerhouse financial intermediary operating outside the highly regulated banking system.
Apollo’s third-quarter earnings were bolstered by $82bn in new assets, including $23bn of net new money raised by Athene, which was split evenly between retail annuities sales and so-called funding agreement borrowings.
Those inflows helped Apollo’s fee-based earnings increase more than 22 per cent and its assets under management to eclipse $900bn, both exceeding analyst forecasts.
