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

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Mount Logan Capital's First Quarter 2022 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 and are subject to risks and uncertainties and assumptions we have made in drawing the conclusions included 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 within 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 actual (sic) [ annual ] information form for the year ended December 31, 2021, 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 first quarter 2022 results call. During the call, we'll be referring to information provided in the financial statements, the MD&A and the associated news release this quarter, all of which were released last week and are available on our website and on SEDAR. Joining me this morning is our Chief Financial Officer, Jason Roos; and our Co-Presidents, Matthias Ederer and Henry Wang. Overall, we are pleased to announce that Mount Logan had another successful quarter with continued growth in revenue and fee-related earnings for our Asset Management segment. Before we speak to our financial results for the quarter, I will provide an overview of the current breakdown of our business and notable highlights for the quarter. Across the different funds we manage and have exposure to, we believe there are 3 key pillars of Mount Logan: retail, institutional and insurance, which I will address each separately below. On the retail front, this encompasses our U.S. interval fund known as the Alternative Credit Income Fund or Alt-CIF and 2 other products we are launching this year. Alt-CIF finished the quarter with over $260 million of assets and the momentum with our sales force has continued, resulting in $16.7 million in new fund subscriptions in the first quarter of 2022, up 58% quarter-over-quarter. Outside of Alt-CIF, as we referenced last quarter, we have 2 retail products launching this year, one with our joint venture partner, Crown Private Credit Partners, focused on the Canadian market; and Opportunistic Credit Interval Funds or OCIF, a new interval fund focusing on the high net worth retail channel in the U.S. with an investment mandate focused on special situations and private capital. The continued growth of Alt-CIF, the launch of OCIF and the launch of Crown's retail funds should help drive organic growth for 2022. On our institutional side, which covers our BDCs and CLOs are permanent and longer-duration capital vehicles. For Logan Ridge, we earned $1 million of management fees in the quarter on an asset base of over $230 million. Year-to-date, we've continued to help Logan Ridge optimize its capital structure, having completed a $15 million convertible note issuance and a $50 million upsize of its senior secured revolver with KeyBanc. Both financing activities helped refinance debt with near-term maturities and materially lower Logan Ridge's cost of capital. Mount Logan also has exposure to the Portman Ridge BDC for a minority interest in its investment adviser Sierra Crest. Portman Ridge finished the quarter with over $660 million in total assets and the management contract continues to provide consistent quarterly cash distributions to Mount Logan. Between Mount Logan -- between Logan Ridge and Portman Ridge, Mount Logan has 2 separate BDC fee streams connected to sizable basis of fee-generating permanent capital. On the CLO side, this includes $645 million of AUM as of quarter end. The CLOs continue to perform well and produced a steady stream of management fee income. We continue to evaluate transactions in relation to our CLOs that will increase the amount and duration of the fee stream attributable to Mount Logan. Overall, our institutional pillar is divided across a number of CLO and BDC funds and represents over $1 billion of assets. Lastly comes our insurance vertical, which we've worked hard on continuing to integrate and optimize since we closed on our acquisition of Ability Insurance Company in the fourth quarter of last year. As a reminder, Ability is a Nebraska-based insurer and reinsurer of long-term care policies with approximately $850 million of invested assets as of the end of the quarter. Mount Logan Management, our wholly owned investment adviser subsidiary, manages a significant portion of Ability's assets, thus increasing our AUM and generating meaningful recurring management fees. Day-to-day, our current priorities for Ability are optimizing the portfolio, building a runway for growth and enhancing the existing insurance book. On the portfolio side, a notable achievement we completed in April was the creation of our on-balance sheet CLO structures that permit Ability to increase its allocation to private credit in a capital-efficient manner. This initiative will help us increase the overall portfolio yield for Ability while also increasing Ability's investment portfolio allocated to the private credit sleeve managed by Mount Logan Management. On the growth side, we received regulatory approval and are expecting to close this quarter on a $150 million annuity reinsurance deal. This deal will consist of an initial block of annuity policies and then ramp up over time to $150 million in premium. This will accelerate our transition from a legacy long-term care business, reduce volatility and help Ability to expand and transform into a broader insurance solution platform. Regarding enhancing our existing insurance book, we successfully achieved premium rate increase approvals across states, representing a majority by premium volumes. We expect these rate increases to begin flowing through our results beginning in the second quarter. Our insurance business can exhibit volatility on a quarterly basis amongst interest rate and general market fluctuations as it did this quarter, the fundamental long-term economic and strategic value is very much intact. We firmly believe continued execution on the above initiatives will position Ability for long-term growth and create a highly complementary business unit for Mount Logan. To reiterate the simplistic characterization of our strategy, when you look across our 3 pillars, our business works by collecting management fees from our retail and institutional funds and using those proceeds to fund the growth of our insurance business, which with the leverage inherent for the purchase of annuities produces incremental assets, investment income and management fees, resulting in a mid- to high-teens return on equity. Lastly, we are maintaining our dividend for the quarter [indiscernible] CAD 0.02 for shareholders as of record -- as of May 27, 2022. With that, I'll turn the call over to Jason Roos, who will review the financial results for the quarter.

Thanks, Ted. Good morning, everyone. Similar to our last set of annual filings, we segment our financial statements between our asset management business and our insurance business. I will now summarize our key highlights for the first quarter of 2022. As a reminder, all figures I reference today will be in U.S. dollars, Mount Logan's functional and presentation currency. For our Asset Management segment, we generated $2.6 million of revenue, an increase of 57% year-over-year and 6% quarter-over-quarter. Breaking down our asset management revenue further, our CLOs generated approximately [ $350,000 ] in collateral and management fees for the quarter. The net earnings related to Alt-CIF comprised of interest income and servicing fees, which was approximately $350,000. In regard to our BDCs, Logan Ridge generated $1 million in management fees. And with our minority interest in Sierra Crest, the company recognized $500,000 of attributable revenue for the quarter. In terms of non-IFRS measures, our fee-related earnings, or FRE, which deducts the attributable operating expenses from our asset management-related revenue was [indiscernible] million for the quarter, up over 160% year-over-year and 50% quarter-over-quarter as the assets under management related to Ability's investment portfolio has continued to grow since year-end and should continue to do so over the course of 2022. For the Asset Management segment, on the expense side for the quarter ended March 31, we incurred approximately $1.9 million in operating expenses, a decrease of 48% quarter-over-quarter as a result of a number of onetime transaction costs related to the acquisition and integration of Ability rolling on. For the quarter ended March 31, Mount Logan incurred $800,000 in interest and credit facility expenses, which mainly relates to our $24 million corporate credit facility and $15 million seller note related to Ability. Our interest expense declined 41% quarter-over-quarter as our $60 million revolving warehouse facility related to our CLO reset was terminated in mid-December 2021. We incurred $199,000 in noncash amortization expenses related to the management contract for our CLOs, which is treated as an intangible asset on our balance sheet. Broadly speaking for the quarter, our insurance results were softer than expected. We had total revenue of negative $12 million, primarily driven by mark-to-market losses on Ability's investment portfolio during the period as a result of increasing market interest rates. This was partially offset by net investment income generated on assets supporting insurance contract liabilities. This change in market interest rates impacted the valuation of our fixed rate investments, which makes up the vast majority of Ability's investment portfolio. Despite the mark-to-market loss during this quarter, we expect that rising interest rates will have a long-term benefit to Ability's capacity to generate investment yields in the form of net investment income. We are actively progressing on 2 key initiatives in our second quarter that will reduce volatility and improve performance, the launch of our annuities business and improving the yield on our underlying investment portfolio. On the annuity front, we were approved by the state regulator for our previously envisioned plan to reinsure $150 million of fixed annuities, of which we expect half of that aggregate amount will close in the second quarter. This will allow us to both decrease the cost of liabilities and diversify away from the legacy long-term care exposure. Secondly, as Ted referenced earlier, in April, we closed a new CLO structure under Mount Logan that enables Ability to pivot out of legacy investments and invest in private credit sourced by Mount Logan Management, thus allowing us to drive an increase in net yield. This increase in net yield is expected to be fully ramped over the next 6 to 8 months. For the quarter ended March 31, 2022, Mount Logan achieved a basic EPS of negative $0.74 per share and an adjusted basic EPS of negative $0.71 per share. [ Asset ] increased last quarter. The decrease in EPS this quarter primarily reflects the unrealized capital losses of the Insurance segment investment portfolio as a result of the significant increase in market interest rates during the quarter. As of March 31, 2022, Mount Logan's balance sheet reflected total assets of $1.33 billion, total liabilities of $1.26 billion and shareholders' equity of $68.6 million. On the asset management side of the balance sheet, there were minimal material changes quarter-over-quarter as transactions in this segment were largely ordinary course in nature. Our intangible assets of $21.9 million represents Mount Logan's interest associated with the management contract for the CLOs at Logan Ridge. At quarter end, the liabilities related to our Asset Management segment predominantly includes outstanding debt obligations of $24.4 million drawn under our corporate credit facility, a $15 million seller note issued in connection with our acquisition of Ability and a $4 million seller note issued in connection with our acquisition of the management of Logan Ridge shown net of deferred financing costs. 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 in [ 2019 ]. In the first quarter of 2022, we received a cash distribution, we made a second distribution to CVR holders in April. We will evaluate further distributions later this year in accordance with the receipt of for distributions from Cline. On the insurance side of the balance sheet, the largest asset is $848 million in investments. The $325 million of reinsurance assets reflects the estimate of the net claims recoverable viability from reinsurers based on the long-term care policies and prevailing actuarial assumptions. On the liability side, the insurance contract liabilities is the largest item at $933 million, which represents the estimated claims payable to Ability's policyholders before any reinsurance recoveries based on policy data and actuarial assumptions. As mentioned last quarter, based on mortality, morbidity, interest rate and investment yield assumptions, our insurance assets and liabilities can experience some volatility quarter-over-quarter. However, we do not view any short-term volatility and assumptions as fundamentally changing the way we operate and grow Ability. Our integration of Ability is going well, and we continue to refine our operations to support increased scale as we grow the platform. Furthermore, we will continue to explore incremental disclosure options such that we can present Ability's and Mount Logan's results in a more digestible format, something that is easier for shareholders to understand and helps isolate the volatility that can be caused by external inputs and assumptions. While we faced a decline in book value largely driven by unrealized mark-to-market losses this quarter, we expect to grow book value in our insurance segment over time. And as Mount Logan Management continues to grow its allocation of managing Ability's insurance assets, we expect the combined synergies between asset management and the insurance to [indiscernible]. I will now turn the call back to Ted Goldthorpe for some closing remarks.

Thank you, Jason. In closing, despite not closing any acquisitions or major transactions this quarter, we worked hard on further integrating Ability and position it for growth, expanding our asset management capabilities and optimizing the performance of our underlying vehicles in terms of financing facilities and portfolio allocation. We are pleased with our current momentum we are experiencing across the 3 pillars of retail, institutional and insurance and our focus will remain on organically growing each vertical and complementing that growth with further strategic transactions. Despite the broader volatility that is created in the markets driven by the conflict in Ukraine, supply chain disruptions, inflation and rising interest rates, we remain vigilant with the portfolios we manage and strongly believe that we are well positioned to weather volatile market conditions and that immense opportunity can arise during market dislocations. This concludes our prepared remarks. We will now transition the call to Q&A.

[Operator Instructions] Our first question comes from the line of Scott Chan with Canaccord Genuity.

Ted, you talked a bit on the insurance -- you talked on the insurance side about [indiscernible] increased private credit on managing it. You also talked about Mount Logan managing certain assets. Has anything changed in terms of like a target or asset mix within the facilities asset allocation there?

Yes. Good question. I mean, I think our focus is to retain as much of the asset management capability ourselves. So we had to go through a process of setting it up some vehicles that can warehouse or hold our private credit assets. So I don't think anything has changed some of our targets, but we expect to kind of ramp up our private credit origination in Ability over the next couple of months.

And when I go to the MD&A, you talked about Cornhusker's CLO transaction, how does that directly or directly benefit you? And maybe provide a description on this point on there.

Yes. Thank you, Scott. This is Matthias. Really, the main purpose of the CLOs is to make them much more capital efficient for Ability. In essence, the way to think about it is that we turn the capital inefficient assets of private credit into a much more capital efficient assets for the benefit of the insurance company. And this is a very popular structure that we think is the right fit the way we want to deploy capital in private [ credit ].