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 Second Quarter 2023 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 these conclusions, including 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 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 the year ended 31st of December 2022, which are available on SEDAR. I would now like to introduce your host for today, Mr. Ted Goldthorpe, Chairman and Chief Executive Officer of Mount Logan Capital. Mr. Goldthorpe, you may begin.

Thank you, and good morning, everyone. We appreciate you joining us for our second quarter 2023 results call. During the call, we will refer to information provided in the second quarter 2023 press release, MD&A and consolidated financial statements, all of which were released Wednesday evening and are available on our website and SEDAR. Joining me this morning to discuss our results and outlook for the business is our Chief Financial Officer, Jason Roos; and our Co-Presidents, Matthias Ederer and Henry Wang. As a reminder, all references to dollar amounts on this call are in U.S. dollars unless otherwise stated. Overall, the second quarter of 2023 was a strong quarter for the business, and we are seeing tremendous momentum as we head into the second half of the year. Our team has worked tirelessly to put us in the position we find ourselves in today with a few notable highlights for the quarter, including closing on two strategic investments in the Asset Management space, completing the integration with the Ovation team, which included onboarding of 16 employees based in our Austin office. Strong performance across both, Asset Management and Insurance segments, outsized my guessed volumes on our insurance vertical and driving significant growth in assets and management fees and a further refinement to our financial reporting and disclosure to streamline and simplify your evaluation of the business and its financial performance. We're also pleased to announce, we will be maintaining our dividend for the quarter, which will pay CAD 0.02 per share distribution for shareholders of record as of August 22, which will mark our 16th consecutive quarter of distributing earnings to our shareholders. Before we speak to the financial results for the quarter, we wanted to highlight the year-to-date progress across the business. Our Asset Management segment, which encompasses our retail and institutional targeted businesses generated $3 million in revenues on our large and growing asset base, a significant increase quarter-over-quarter and year-over-year. We'd like to note that the figure reflects only 2 months of fees generated from the recently closed Ovation transaction and excludes $969,000 of management fees generated under our Asset Management agreement with Ability, our wholly owned insurance subsidiary. On the retail side, Alt-CIF and OCIF saw consistent fund subscriptions throughout the quarter as our sales force remains actively engaged with our distribution partners. OCIF, our recently launched opportunistic interval fund has performed exceptionally well since inception, returning over 30% through July 31, 2023, and recently received approval to be onboarded with two additional distribution partners. These approvals are expected to be finalized in the fall and will immediately unlock a large pipeline of subscriptions for OCIF, which comes at an opportune time as management fee waivers expire at the end of August. Additionally, through a sub-advisory relationship with the First Trust private credit fund, we saw our total assets grow by 82% quarter-over-quarter and expect it will continue to trend upwards over the next several quarters. On the institutional side, our BDC and CLO funds today represent approximately $1.4 billion of assets and provide predictability in Mount Logan's top line due to the stable nature of the fees generated on its permanent and semipermanent asset base. Logan Ridge achieved its fourth consecutive quarter of positive debt investment income, which supported an increase to Logan Ridge's quarterly dividend, the second consecutive increase in the company's dividend since it was reintroduced at the beginning of the year. As of quarter end, Logan Ridge is an asset base of $217 million. Now that we maintain this exposure to its second BDC, Portman Ridge through its minority interest in Portman Ridge's investment adviser, Sierra Crest. Portman Ridge finished the quarter with approximately $557 million in total assets, and the management contract continues to provide consistent quarterly cash distributions to Mount Logan. On the CLO side, AUM for the second quarter was $652 million. By the end of 2023, our revenue share on the CLOs will increase from 30% to 100%, which will increase Mount Logan's annual management fees by approximately $1 million on a run rate basis. Lastly, on the Asset Management side, following our recent transaction with Ovation Partners, we now manage its alternative income platform. During the quarter, we generated $876,000 in management fees and incentive fees, which includes only 2 months of fees due to the timing of the transaction close in relation to our quarter end. The alternative income platform finished the quarter with approximately $230 million in assets. On the insurance side, we continue to optimize Ability and benefit from the synergies with our Asset Management business as management fees grew 18% quarter-over-quarter. As a reminder, Ability is a Nebraska-based insurer and reinsurer of both, long-term care and annuity policies with approximately $920 million of invested assets as of the end of the quarter. Mount Logan manages a significant portion of Ability's assets. This asset base continues to grow as we increase our annuity exposure and originate floating rate private credit assets. These assets earn an excess spread and have attractive capital charge, enable us to meet our commitments to our policyholders. The insurance business remains highly strategic to Mount Logan and is a priority for our team. We are focused on fulfilling our current reinsurance obligations in deploying available capital into investments with attractive risk-adjusted returns for the benefit of our policyholders. On the liability side, we believe our annuity reinsurance business remains attractive in the current environment. The annuity policies, we reinsure contain surrender charges, which protect Ability from earlier-than-expected policyholder of [ trials. ] As we reinsure more annuities, we believe the overall risk profile of our liability base decreases. In regard to growth, we're nearing completion of the $250 million in MYGA premiums that we've agreed to reinsure. Our reinsurance activities accelerated our transition from our legacy long-term care business, increased predictability of our liabilities and will continue to help Ability transform into a larger insurance solutions platform. We continue to assess opportunities and partnerships to grow the insurance segment, both organically and inorganically. Before turning the call over to Jason Roos, I did want to take a moment to again thank our team for their commitment to Mount Logan. We are energized by all the opportunities in the market and are actively pursuing partnerships to accelerate growth in our business, consistent with our long-term objectives. With that, I'll hand the call over to Jason, who will review the financial results for the quarter.

Thanks, Ted. Good morning, everyone. I will now summarize our key highlights for the 3 and 6 months ended June 30, 2023. As another reminder, all figures referenced on today's call will be in U.S. dollars, Mount Logan's functional and presentation currency. During the second quarter, we made several presentation changes for the Asset Management segment, which have been reflected in the comparative figures. Our equity earnings on Portman and OCIF have been presented separate from management fees in their own mine equity investment earnings. And servicing fees have now been moved from management fees to be included as expenses within administration and servicing fees. We believe these presentational changes better reflect the distinct revenue streams within the Asset Management segment and provide additional information to our investors. For our Asset Management segment in the second quarter of 2023, we generated $3 million of revenue. Breaking down our Asset Management revenue further in the second quarter of 2023, we recognized $875,000 worth of management and incentive fees associated with the Ovation acquisition, of which Step 1 of the transaction closed on May 2, 2023. Our CLOs generated approximately $287,000 in collateral and management fees for the quarter. With regards to our BDCs, Logan Ridge generated approximately $946,000 in management fees and through our minority interest in Sierra Crest, the company recognized over $358,000 of attributable revenue for the quarter. Excluding gains and losses from investment activities, our Asset Management revenue increased by 47% quarter-over-quarter, primarily due to the acquisition of Ovation. For the Asset Management segment on the expense side for the quarter ended June 30, we incurred approximately $6.1 million in operating expenses. For the quarter ended June 30, 2023, Mount Logan incurred $1.4 million in interest and credit facility expenses, which primarily relates to the $15 million seller note related to Ability and our corporate credit facility. During the second quarter of 2023, we increased our corporate credit facility by $4.5 million to $31.6 million, in part to fund the acquisition of Ovation. Transaction costs also increased quarter-over-quarter by $1.1 million, attributed to the acquisition of Ovation and other M&A. General and administrative expenses decreased, attributable to reduced compensation and professional fees of $2.3 million, offset by increased expenses from Ovation. Moving on to our Insurance business. We had total revenue this quarter of $9.7 million, which is net of insurance service expenses and net expenses from reinsurance contracts held. Total revenue declined slightly by 5% from the first quarter of 2023. Post adoption of IFRS 17, we have observed our insurance revenue to fluctuate quarter-over-quarter due to the impact of estimates compared to actual premiums received. Net investment income and unrealized gains on the investment portfolio were significant drivers for positive performance this quarter as additional MYGA business was reinsured. Overall, given the current investment portfolio and liability structure at Ability, we expect that rising interest rates will continue to have a long-term benefit to Ability's capacity to generate investment yield in the form of net investment income. Net insurance finance income was $1.3 million during the quarter compared to net insurance finance expense of $24.5 million in the first quarter of 2023. Net insurance finance results significantly fluctuated quarter-over-quarter due to changes in discount rates, which impact the IFRS 17 reserves on our runoff book of OTC business. Excluding net insurance finance income, our insurance business reported total expenses of $8.7 million during the quarter compared to $11 million in the first quarter of 2023. The decrease of $2.3 million can be attributed to a decline in reinsurance assets in the second quarter and a decrease in general administrative and other expenses due to lower compensation costs. For the quarter ended June 30, 2023, Mount Logan reported a basic loss per share of $0.03 and an adjusted basic earnings per share of a positive $0.05 per share. The decrease in EPS resulted primarily from a change in net insurance finance expense, driven by a significant increase in risk-adjusted market interest rates. As of June 30, 2023, Mount Logan's balance sheet reflected total assets of $1.63 billion, total liabilities of $1.6 billion and shareholders' equity of $32.3 million. On the Asset Management side of the balance sheet, there were nominal changes quarter-over-quarter, largely attributed to an increase in cash due to the additional draw on the credit facility and an increase in other assets due to accrued management fees from novation. At quarter end, the liabilities related to our Asset Management segment predominantly included outstanding debt obligations of $31.6 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. On the interim side of the balance sheet, total assets of $1.6 billion represented an increase of $45.8 million or 3% from March 31, 2023. Cash and cash equivalents increased by $51.1 million as a result of an increase in net premiums received during the second quarter of 2023. Investments in finance assets increased by $14.9 million, reflecting the growth of the Insurance segment's total asset base, which was primarily driven by growth of the investment portfolio. Reinsurance contract assets decreased by $15.6 million compared to March 31, 2023 and relate to Front Street Re contracts and Vista Re co-insurance. The decrease was primarily due to the impact of finance income required to reflect the time value of reinsurance contract assets under IFRS 17. Our Insurance segment had total liabilities of $1.5 billion, representing an increase of $42.3 million or 2.85% from March 31, 2023. Insurance contract liabilities represent liabilities calculated under IFRS 17 related to long-term care insurance and MYGA business. Insurance contract liabilities decreased nominally by $2.8 million compared to March 31, 2023, primarily due to the addition of new MYGA business. Accrued expenses and other liabilities primarily includes payables for investments purchased and other accrued expenses. Accrued expenses and other liabilities decreased by $7.3 million, primarily due to settlement of investment trades payable as of March 31, 2023. Overall, we have a strong growth trajectory with the recent transactions related to our Asset Management segment and expect the compound book value in our Insurance segment over time as the business continues to grow, while leveraging synergies between Asset Management and Insurance to reap rewards. I will now turn the call back to Ted Goldthorpe for some closing remarks.

Thank you, Jason. In closing, I want to state again how pleased we are with the monumental progress we've made this year. We feel Mount Logan is well positioned in the current environment, and our team is committed to sustaining our momentum. We expect to update you in the near term as we deliver on our plan to accelerate Mount Logan's growth. This concludes our prepared remarks. We will now transition the call to a Q&A session if the operator could please coordinate. Thank you.

[Operator Instructions] We have our first question comes from Evan [ Soner ].