Mount Logan Capital Inc. (MLCI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Mount Logan Capital's Third Quarter 2021 Results Conference Call. Before we begin, I would like to remind listeners that except for historical information, the matters discussed during this call may include forward-looking statements within the meaning of the applicable Canadian securities legislation. Forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause actual financial results, performance or achievements to be materially different from estimated future results, performance or achievements expressed or implied by those forward-looking statements. All forward-looking statements reflect the company's current views with respect to future events in such forward-looking statements. The company is not obligated to update or revise any forward-looking statements, and we do not assume any obligation to do so. For a description of the risks associated with Mount Logan Capital's business as well as information about the material factors and assumptions that could cause results to differ from any forward-looking statements and other relevant factors, please refer to the company's public disclosure record, particularly the company's MD&A and annual information form for year-end December 31, 2020, which are available on SEDAR. I would now like to introduce your host for today's conference, Mr. Ted Goldthorpe, Chairman and Chief Executive Officer of Mount Logan Capital. Mr. Goldthorpe, you may begin.

Thank you. Good morning, everyone, and thank you for joining us for our third quarter 2021 results call. During the call, we'll be referring to information provided in the financial statements, the MD&A and the associated news release for the quarter, all of which were released Tuesday evening and are available on our website and on SEDAR. Joining me this morning is our Chief Financial Officer, Jason Roos; and my Co-President, Henry Wang. Overall, we are pleased to announce that Mount Logan had another active and successful quarter, most notably with record revenue and continued growth in revenue attributable to our asset management activities. Before we speak to our financial results for the quarter, I will speak to the performance of Logan Ridge, our acquisition of Ability Insurance Company, our new financing facility, and highlight our year-to-date progress with our existing platforms. At the beginning of the third quarter, we closed our transaction with Capitala where our wholly owned U.S. subsidiary, Mount Logan Management, became the investment adviser of Capitala Finance Corp., which is renamed Logan Ridge Finance Corp. Logan Ridge is a U.S. publicly traded business development company, or BDC, which finished the third quarter with approximately $240 million of assets. As the investment adviser of Logan Ridge, Mount Logan management is entitled to 1.75% annual base management fee on gross assets as well as an incentive fee tied to performance. For the third quarter, Mount Logan received $1.1 million in management fees from Logan Ridge. Since July 1, as the new adviser, we have made significant progress on our key objectives of optimizing Logan Ridge's capital structure and repositioning the investment portfolio. On the capital structure, following the full repayment of $71 million in debt during the second quarter, Logan Ridge has since repaid $25 million outstanding on its credit facility during the third quarter. Accordingly, Logan Ridge is delevered to a total debt-to-equity ratio of 1.1x as of September 30, 2021, down from 1.3x at the end of last quarter. Furthermore, subsequent to quarter end, Logan Ridge announced that it raised $50 million of 5.25% senior unsecured notes due 2026, which received an investment-grade rating. The proceeds of the offering will be used to repay $50 million in aggregate principal of the 6% notes due 2022, which will be completed early next month. On the portfolio side, Logan Ridge made approximately $49 million of new investment commitments to 6 new portfolio companies in the quarter, and continues to skew the portfolio away from non-income-producing equity positions towards attractive first lien debt assets. Overall, we've already made significant headway since assuming management of Logan Ridge. We continue to refine the portfolio composition by redeploying the proceeds into high-quality debt investments while simultaneously improving the capital structure to create a more resilient BDC that will enhance value for stockholders and provide Mount Logan with a stable and recurring asset management fee stream underpinned by permanent capital. Logan Ridge is core to our overall strategy of investing out of our various vehicles and not using the balance sheet of Mount Logan. On October 29, Mount Logan closed its acquisition of 100% of the equity of Ability Insurance Company. As a reminder, Ability is a Nebraska-based insurer and reinsurer of long-term care policies with approximately $930 million of invested statutory assets as of the end of the third quarter. This is a highly transformative and accretive transaction for Mount Logan. Similar to acquisitions by other leading global asset management franchises, Ability will enable Mount Logan to leverage Ability's permanent capital base in exchange for complementary investment sourcing and management capabilities. Mount Logan Management, Mount Logan's wholly owned investment subsidiary, is now managing a meaningful portion of Ability's assets, thus increasing AUM and generating meaningful recurring management fees. We acquired Ability for $20 million through the issuance of $15 million of unsecured seller note and $5 million in common shares of Mount Logan Capital. At close, MLC has also invested $10 million of cash into Ability to strengthen Ability's balance sheet. And launch a platform for the reinsurance of annuities, which is expected to reinsure $150 million of fixed annuities over the next year. As a reminder, the acquisition was structured to largely derisk the legacy insurance book. Ability's existing claims risk has largely been reinsured and is effectively in runoff. And Ability is no longer active in ensuring or reinsuring long-term care risk. Furthermore, the seller of Ability is also providing protections that help backstop the performance of existing portfolio and limit the risks associated with the existing long-term care liabilities. As part of the acquisition, we also welcome Anna Elliott and David Charsky, current members of the Ability management team, who will continue to lead the business as President and Vice President of Finance and Treasurer, respectively. The completion of our transaction with Ability represents a monumental step in scaling Mount Logan, expanding the asset management side of our business and diversifying us into insurance solutions. We worked on the Ability transaction for nearly 2 years, and are excited to act in our business plan to create value for both Mount Logan shareholders and Ability's policyholders. A 3-pronged approach is: one, leverage MLC's private sourcing capabilities to increase Ability's portfolio yield; two, structurally mitigate any downside risk related to the existing portfolio and liabilities by reinsurance and backstop agreements; and three, a plan to pivot Ability from long-term care risk to annuities. We believe executing on the above will position Ability for long-term growth and create an attractive high ROE business unit for Mount Logan. Since closing, our investment in Crown Private Credit Partners in July, the performance of Crown's existing funds has been very strong with a number of realizations. Furthermore, Crown's management is successfully ramping up pipeline of opportunities as they scale their new platform. As a reminder, as a founding shareholder, Mount Logan partnered with Crown's management team and 2 chartered banks to effectuate the carve-out of the Private Credit business from Crown Capital Partners, the publicly traded specialty finance company. We are excited to evaluate new potential strategic fund products with our partners and add additional management fee streams to Mount Logan. In regard to our CLO platform, it continues to perform very well, and produced a steady stream of management fee income. In May, we entered into a warehouse facility of up to $60 million to ramp up portfolio of loans. Our portfolio ramp is in progress and expect to terminate our warehouse facility by year-end, resetting our 2018 CLO, which will increase the duration of our asset management fees tied to this vehicle. On to Sierra Crest. Through our minority interest, we received a portion of economics connectivity advisory contract for Portman Ridge, a publicly traded BDC with $627 million of assets as of September 30, 2021. Portman Ridge has continued its growth having increased NAV per share for the sixth straight quarter. Mount Logan now owns 24.99% of Sierra Crest. And based on current quarterly fee generation, this investment has provided a highly attractive unlevered cash yield exceeding 20%. As Portman Ridge has scaled, the BDC has increased profitability as expenses remain stable relative to the asset base, and we expect further operating leverage as it continues to grow. Between Logan Ridge and Portman Ridge, Mount Logan has 2 separate BDC fee streams connected to a sizable basis of fee-generating permanent capital. In relation to our interval fund, known as the alternative credit fund, or Alt-CIF, the fund has over $250 million of assets as of September 30, 2021. And performance has been strong with year-to-date returns through the end of October of over 12%. We strongly believe the retail channel and Alt-CIF's fund structure is highly attractive, and we continue to invest in Alt-CIF to support its growth, most notably continuing the build-out of the sales force, which has resulted in greater traction in new fund subscriptions. We continue to reposition the portfolio by leveraging our sourcing capabilities and are actively assessing investments to support its long-term growth. Based on the continued attractive risk-adjusted performance of Alt-CIF, we look forward to the growth of the fund in the coming years. On August 20, we entered into a credit agreement with a large U.S.-based asset manager for $25 million corporate credit facility with a 2027 maturity. This facility was used to refinance existing indebtedness and fund our transaction related to Logan Ridge and our capital commitment associated with the Ability acquisition. As Mount Logan's first long-term corporate credit facility, we are pleased with its size, flexibility, cost and believe our lender is the right partner who is aligned to support our future growth. As we've been active on the M&A front and financing front, having closed our largest acquisition to date, Mount Logan has faced elevated transaction expenses and professional fees. For our third quarter, after removing onetime transaction fees, professional fees and intangible amortization, we expect cash EPS is closer to $0.03 per share. Turning briefly to current market conditions. The third quarter continued to experience elevated transaction volume and activity, driving both origination and sales and repayments. Low interest rates, well above-average economic growth and continued post-pandemic activity are all contributing factors to current market conditions. While we remain vigilant as inflation's concerns and market volatility remain, we continue to opportunistically invest in the broadly syndicated market while simultaneously relying on our direct loan origination efforts to source attractive risk-adjusted returns for the various vehicles we manage under Mount Logan management. As of quarter end, Mount Logan held $33.9 million of first lien senior secured term loans on its balance sheet, of which nearly all are expected to be contributed to our CLOs as part of our ongoing reset transaction. Other investment holdings on our balance sheet totaling $33.6 million are related to our exposure to Alt-CIF, our minority stake in Sierra Crest and a few equity holdings. Lastly, we are maintaining our dividend for the quarter, and we'll be paying CAD 0.02 per share for shareholders as of record of November 22. With that, I'll turn it over to our Chief Financial Officer, Jason Roos, who will review the financial results for the quarter.

Thanks, Ted. Good morning, everyone. I'll now summarize our key highlights for the third quarter of 2021. As a reminder, all figures I reference today on this call will be in U.S. dollars, Mount Logan's functional and presentation currency. For the quarter ended September 30, 2021, we generated $2.7 million of total revenue, an increase of 179% year-over-year and 92% quarter-over-quarter. This quarter continues to illustrate the trend of our revenue profile being increasingly attributable to our asset management activities, which comprised 70% of total revenue for the quarter. As Logan Ridge closed on July 1, this was our first quarter to receive management fees from Logan Ridge, which was $1.1 million for the third quarter. Additionally, our CLOs generated approximately $302,000 in management fees for the quarter. For the net earnings attributable to alternative credit income fund, this is captured at $82,000 under management fees and as $255,000 in interest income. For Mount Logan's minority stake in Sierra Crest, the company recognized $421,000 of revenue for the quarter, and received $645,000 in cash dividends in the quarter due to the timing of payment. On the expense side, for the quarter ended September 30, we incurred approximately $1 million in transaction costs and professional fees, an increase quarter-over-quarter as a result of the elevated acquisition activity, inclusive of our transaction with Logan Ridge and the progression of our transaction to acquire Ability. Other operating costs, including directors fees, compensation, marketing, regulatory and shareholder relations, insurance and other general and administrative costs totaled $881,000 for the quarter. In the quarter ended September 30, Mount Logan paid $965,000 in interest, which mainly relates to our $5.3 million credit facility that was refinanced in August, our new $25 million corporate credit facility that Ted mentioned, and our short-term leverage facility we are using to ramp a portfolio in connection with the CLO reset transaction. We incurred $202,000 in noncash amortization expenses related to the management contract for our CLOs, which is treated as an intangible asset on our balance sheet. Our deferred tax asset increased in value quarter-over-quarter based on an increased assessment of income attributable to Canada. In the quarter, we faced a net realized gain on investments of $108,000 and a net unrealized appreciation on investments of $300,000. Our total and comprehensive income was $479,000 for the quarter or $0.03 per weighted average share. As of September 30, 2021, Mount Logan's balance sheet reflected total assets of $103.2 million, total liabilities of $54.7 million and shareholders' equity of $48.5 million. While shareholders' equity and net asset value per share remained relatively steady quarter-over-quarter, our assets and liabilities increased by $29.4 million, primarily related to investment activity connected to the ramp of a portfolio for our CLOs. The related draw on our warehouse leverage facility, our transaction related to Logan Ridge and private placement in July. Our asset balance at quarter end primarily consisted of $62.3 million in our investment portfolio. Our $4 million balance in cash and restricted cash are $9.3 million of investment in associates, which reflects our minority equity stake in Sierra Crest and our $22.3 million in intangible assets associated with the management contracts of our CLOs and Logan Ridge. At quarter end, our net liabilities predominantly included $35.6 million of debt, representing $20.5 million drawn on our $60 million short-term revolving warehouse facility, and $16.5 million drawn on our new $25 million corporate credit facility. Since quarter end, we funded an additional $8.5 million on our corporate credit facility to fund the Ability transaction, resulting in the facilities being fully drawn at $25 million. Separately, we have $5.8 million payable related to investments purchased during the quarter, and a $4 million seller note connected to our transaction with Capitala. Following quarter end with the closing of the Ability acquisition, there will be a number of changes to Mount Logan's financial reporting as an insurance company, with substantial assets to be consolidated into Mount Logan's financial statements. Going forward, we intend to segment our financial reporting so that investors can delineate between the performance of our asset management activities and our insurance solutions segment. Lastly, one notable liability is the client investment associated with the contingent value rights or CVRs. As a reminder, on Cline, this is an investment in equity and debt that remains from Marret Resource Corp. prior to the plan of arrangement. Following the sale of Cline's principal asset in the fourth quarter of last year, we received our first distribution in the first quarter of 2021. We made our first distribution of CAD 0.02 per CVR in June 2021, and we'll evaluate further distributions in accordance with the receipt of further distributions from client. I will now turn the call back to Ted Goldthorpe for some closing remarks.

Thank you, Jason. In closing, I want to reiterate the progress Mount Logan has made year-to-date. Between Logan Ridge, Ability, Crown Private Credit, our CLOs, our new corporate credit facility and our increased stake in Sierra Crest has been an eventful year, and the third quarter has been no exception. Our transition is nearly complete as our asset management activities comprised 70% of our revenue in the third quarter as Logan Ridge now provides a steady management fee stream to Mount Logan. The management fees connected with Ability will commence in the fourth quarter, and continue to ramp through 2022 as we continue to expand the business. The closing and integration of Ability is a major focus over the next few quarters as we fold a sizable insurance business into Mount Logan and begin to realize the synergies of melding 2 high complementary business lines together. We are well positioned for the future growth, and we continue to assess other strategic transactions to leverage our asset management capabilities. This concludes our prepared remarks. Operator, we'd like to transition the call to a Q&A session, if the operator could please coordinate.

[Operator Instructions] And the first question comes from Scott Chan with Canaccord Genuity.

Maybe just starting with the balance sheet. Ted, you talked about a increase quarter-over-quarter. And I think you said it mainly was due to positions probably ramping your CLO portfolio. And if that's the case, did the ramp-up start in Q2? And how do you think about the balance sheet outside of Ability as we transition into 2022?

Yes. So I'll let Jason get into the very specifics, but about half our assets are related to the CLO ramp, which we expect to price relatively imminently and be closed by year-end. And the other half mostly relates to our investment in Alt-CIF and some other investment management. But do you want to talk about that, Jason?

Yes, sure. So yes, I would say we had about $22 million in purchases for the quarter, all of which were predominantly related to positions that are in anticipation of the CLO issuance that we expect to finalize here in Q4. There were a few other additions to the portfolio related to, I would say, more -- the Crown investment that we made during the quarter that would remain on the balance sheet. And then as we think about 2022, the balance sheet is going to change dramatically. As Ted mentioned in his remarks, there will be upwards of $900 million of insurance-related investments being added to the balance sheet. And then a series of what would be considered more accounting-driven insurance-related assets and liabilities.

So Scott, I think that the plan is to remain asset-light at the holding company. But you'll see that we'll provide a lot of guidance next quarter around our deconsolidated balance sheet just because Ability is obviously a wholly owned subsidiary of Mount Logan. So the balance -- the asset side of our business, as we think about it, will still remain asset-light. But consolidation requires us to put our subsidiaries' assets on our balance sheet.

Okay. That's helpful. So because the fixing is preeminent in Q4, you will see some dramatic changes in 2022. I think that's what I got on it.

Yes.