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 Fourth Quarter Fiscal Year 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 the 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'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 the year end December 31, 2023, 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, and good morning, everyone. We appreciate you joining us for our fourth quarter and full year 2023 results call. During the call, we will refer to information provided in the fiscal year 2023 press release, MD&A and consolidated financial statements, all of which were released Thursday evening and are available on our website and on SEDAR. Joining me this morning to discuss our results and outlook for the business is our Chief Financial Officer, Jason Roos; and my 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 fourth quarter and fiscal 2023 demonstrated strong results across our business and we're excited to review our performance with you today. We are very confident these results are leading indicators as we enter 2024 following a very active 2023. We are also pleased to announce that we'll be paying our 18th consecutive quarterly dividend, which will consist of CAD 0.02 per share, distribution for shareholders of record as of March 25th. Before we provide a more detailed discussion of our fourth quarter and full year financial results, we wanted to highlight the progress across the business during the past year. During 2023, Mount Logan achieved several milestones. In our Asset Management division, our investments and growth helped drive record revenue supported by material increases in management fees generated across our managed vehicles. The Insurance segment completed its $250 million reinsurance obligation, contributing to an increase in total insurance investments -- investment assets in excess of $1 billion for 2023 from $885 million in fiscal 2022. During January 2024, we amended our reinsurance agreements, enabling ability to assume an additional 20% quota share on future multi-year guaranteed annuities, or MYGA, consistent with our stated growth ambitions. We remain active on the strategic front during 2023, evaluating several transactions and closing on a key transaction with Ovation Partners, which scaled our investment and operations capabilities. Our Mount Logan managed vehicles now benefit from our expanded investment expertise in specialty finance, a large and growing area of our asset management business and further diversifying our private credit investing skill set. From a financial perspective, both segments saw top line growth throughout the year. The Asset Management segment achieved a second record level of asset management fees during the quarter and insurance, asset growth and active deployment of capital contributed to an increase in total insurance assets and a 9.2% yield on investment assets for full year 2023, a significant increase from 6.2% the prior year. While expenses were higher year-over-year, a significant portion of this is attributable to onetime investments in the business, transaction-related costs and on the insurance side includes noncash mark-to-market attributable to movement in rates. Our Asset Management segment, which encompasses our retail and institutional targeted businesses generated $11.8 million in revenues in 2023, an increase of 27% year-over-year. We note this figure excludes $4.2 million of management fees generated under our management agreement with Ability, which increased 80% year-over-year. On the retail side, our 2 interval funds, Alt-CIF and SOFIX continue to benefit from the incremental investment made during the year growing our in-house sales force and helping drive new subscriptions to capitalize on the growing demand for private credit in the retail markets. SOFIX, the opportunistic credit interval fund we manage experienced another impressive quarter of growth resulting in an 86% increase in net assets compared to the prior quarter. Net assets for the year ended December 31, were approximately $70 million. SOFIX onboarding with several large retail distribution platforms helped drive the significant increase in subscriptions during the quarter and year. We expect the positive fund performance approximately 35% cumulative inception to date and 14% through December 31, will continue -- will support continued growth in subscriptions. Our sales force remains focused on growing SOFIX and Alt-CIF, our other private credit-oriented interval fund, which had total net assets at year-end of approximately $243 million. On the institutional side, our BDC and CLO funds represented approximately $1.3 billion of assets as of the end of the year and continues to provide predictability in Mount Logan's top line due to the stable nature of the fees generated on the permanent and semipermanent capital base. Logan Ridge released preliminary fourth quarter and full year earnings, which were consistent with prior quarters and concludes a strong year that included the reintroduction of a dividend and strong net investment income growth year-over-year. Mount Logan maintains its exposure to its second BDC, Portman Ridge through its minority interest in Portman Ridge's investment advisor, Sierra Crest. Portman Ridge finished the year with approximately $550 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 year-end was $578 million. In the fourth quarter, the revenue share associated with our management of the CLOs increased from 30% to 100% which supported the increase in asset management revenues during the fourth quarter and will drive an estimated $1 million to $2 million increase in annualized asset management revenues moving forward. Following the transaction with Ovation Partners, we saw material benefits from our management of its Alternative Income Fund. The fund contributed $3.5 million in management incentive fees during 2023 and finished the year with approximately $234 million in assets and continues to perform well, achieving an 8.4% annual return for 2023, which was up from 8.2% in 2022. Lastly, on the asset management side, given the strong demand for private credit in the current environment and diversity of credit investing expertise within our business we're having ongoing conversations with third-party investors on dedicated funds or incremental investments into existing funds tailored to their needs, also known as Separately Managed Accounts or SMAs, which may provide additional sources of revenue to Mount Logan with minimal additional costs. One of our key sub-advisory relationships saw MAT growth of approximately 50% quarter-over-quarter and we expect this trend of growth will continue over the next 12 to 18 months. On the insurance side, during the year, Ability reached its cap for its 2 existing MYGA flow agreements of $250 million and after year-end, executed an amendment to its MYGA reinsurance agreements providing for an additional 20% share of future flow from its 2 reinsurance partners. As of December 31, Ability is approximately $1 billion of invested assets, of which Mount Logan manages a significant portion. We anticipate the asset base will continue to grow as we increase our annuity exposure. For the year, management fees related to management of insurance assets was $4.2 million, an increase of 80% as compared to 2022's $2.3 million figure, a significant achievement, which will remain a large driver of growth. The insurance business remains highly strategic to Mount Logan and is a priority for our team. We are actively deploying capital and managing investments with attractive risk-adjusted returns across the credit spectrum. On the liability side, we believe our annuity reinsurance business is optimal in the current environment. The annuity policies we reinsure contain surrender charges, which protect ability from earlier-than-expected policyholder withdraws. As we look to reinsure more annuities, we believe the overall risk profile of our liability base decreases as our legacy insurance portfolio becomes a smaller piece of our overall business. And before I turn the call over to my partner, Jason Roos, I did want to take a moment to acknowledge our belief that our share price is and has remained undervalued throughout 2023 and into 2024. We believe our business matured in 2023 across new hires, acquisitions, asset growth and investment performance, and we feel our business model, which is supported by permanent and semipermanent fee-paying capital is well positioned for significant growth in 2024 as our investments in 2023 take hold and growth in assets across our platform drives meaningful uplift. With that, I'll hand the call over to Jason, who will review the financial results for the year.

Thanks, Ed. Good morning, everyone. I will now summarize our key highlights for the quarter ended December 31, 2023. As a reminder, all figures referenced on today's call will be in U.S. dollars. During the fourth quarter of 2023, the company reported total consolidated revenue from asset management of $3.7 million. This amount excludes the management fees the company earns on the insurance segment assets, which were $1.3 million for the fourth quarter. Consolidated management fees increased slightly quarter-over-quarter due to the expiration of fee sharing agreements for the CLOs, both in the Opportunistic Credit Interval Fund and other subadvisory activities of Mount Logan. We incurred approximately $7.8 million in operating expenses in the Asset Management segment in the fourth quarter, an increase of $1 million from the third quarter due to continued expenses associated with the integration of Ovation. Moving on to our insurance business. We had total revenue this quarter of $30.8 million, which is net of insurance service expenses and expenses from reinsurance contracts held. Total revenue increased by 67% from the third quarter of 2023. Revenue increased this period due to the favorable impact of greater-than-expected lapses and benefit downgrades as part of our rate increase process for the long-term care business. Net investment income and unrealized gains on the investment portfolio were significant drivers for positive performance this quarter. Overall, given the current investment portfolio and liability structure at Ability, we continue to be interest rate sensitive. The decrease to risk-adjusted market interest rates has significantly decreased the discount rates applied to our IFRS 17 results resulting in our net insurance finance expense being $43.5 million higher in the fourth quarter compared to the third quarter of 2023. Excluding net insurance finance income, our insurance business reported total expenses of $11.9 million during this quarter compared to $8.7 million in the second quarter of 2023. The increase of $3.2 million is due to additional investment contract liabilities as new MYGA was reinsured during the period and a decrease to reinsurance assets. Basic EPS was a loss of $0.69 per share for the 2023 fiscal year, a decrease of $2.87 from $2.18 per share for the 2022 fiscal year. The decrease in EPS resulted primarily from a decrease in the net insurance finance income in 2023 fiscal year compared to the 2022 fiscal year. The decrease in net insurance finance income in the 2023 fiscal year was attributable to changes in risk-adjusted market interest rates. Risk-adjusted interest rates decreased during fiscal year 2023 in comparison to the significant increase experienced during fiscal 2022. Reported net income available to holders of common shares for the 2023 fiscal year was down $64.8 million year-over-year. As of December 31, 2023, Mount Logan's balance sheet reflected total assets of $1.69 billion, total liabilities of $1.63 billion and shareholders' equity of $52 million. Mount Logan's Asset Management segment had a decrease in total assets of $3.9 million this quarter, with the most significant decrease attributed to the changes in fair value in the company's minority ownership stake in Sierra Crest and partial paydown of debt obligations. Asset Management segment liabilities remained relatively flat this quarter with short-term payables increasing slightly in spite of debt paydowns. Total insurance segment assets increased by $26.9 million to $1.63 billion or 1.7% from September 30, 2023, with the most significant increases coming from increases to investments in financial assets of $43.7 million, offset by a decrease in cash and cash equivalents due to purchases of investments. Reinsurance contract assets, which relate to our Front Street Re, Vista Re, and Medico ceded contracts increased by $11.7 million compared to September 30, 2023, due to the impact of finance income required to reflect the time value of reinsurance contract assets under IFRS 17. Total insurance segment liabilities increased by $25.5 million or 1.7% from September 30, 2023, to $1.56 billion. Insurance contract liabilities increased by $13.4 million compared to September 30, 2023 due to the decrease in discount rates. Investment contract liabilities increased by $1.2 million compared to September 30, 2023, due to the interest accrual on MYGA deposits. Funds sold under reinsurance contracts increased by $3.4 million compared to September 30, 2023, due to unrealized gain on investment assets related to Front Street Re. Accrued expenses and liabilities increased by $7.4 million due to an increase in payables as of December 31, 2023. With that, I believe the company has accomplished a lot over the past year and is well positioned to benefit from the synergies the Asset Management segment brings to the activities and growth experienced within the insurance segment. I will now turn the call back to Ted Goldthorpe for some closing remarks.

Thanks, Jason. In closing, I want to say it again how pleased we are with the results we are seeing. We feel Mount Logan is well positioned in the current environment to capitalize on the secular growth tailwinds in the private markets and insurance space. . Our team is committed to sustaining our momentum, and we will keep you updated as we work to deliver on our plan to accelerate Mount Logan's growth and unlock value for shareholders in 2024. This concludes our prepared remarks. We will now transition the call to a Q&A session if the operator could please coordinate.

[Operator Instructions] The first question comes from the line of Evan Sona, private investor.