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 Third Quarter 2024 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 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 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 afternoon, everyone. We appreciate you joining us for our third quarter 2024 results call. During the call, we will refer to information provided in the third quarter 2024 press release, MD&A and consolidated financial statements, all of which were released Thursday 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, Nikita Klassen; and our Co-Presidents, Matthias Ederer and Henry Wang and a new member of our team and Head of Investor Relations, Scott Chan. As a reminder, all references to dollar amounts on this call are in U.S. dollars unless otherwise stated. Overall, the third quarter was another strong quarter for our business, and we are excited to review our performance with you today. We're also pleased to announce that we'll be paying our 21st consecutive quarterly dividend, which consists of $0.02 per share distribution for shareholders of record as of November 22, 2024. Before we provide a more detailed discussion of our third quarter financial results, I wanted to first highlight the growth we continue to see across our business, as well as increased efficiency and effectiveness of the team. We saw organic growth across our 2 key business segments, primarily measured by Fee Related Earnings, FRE, the Asset Management segment and Spread-related Earnings or SRE, for the Insurance segment, which were both up significantly year-over-year. This quarter was our third quarter publishing SRE. Following discussions with key stakeholders, we implemented an SRE metric, performance measure for comparable public insurance platforms, to help investors better assess the performance of Mount Logan's Insurance segment and help arrive at a valuation for this key business segment. Management continues to believe that our current share price and year-to-date price performance does not reflect the substantial work the team has done to scale our business and grow our key profitability metrics. As such, Mount Logan insiders, including myself, recently made open market purchases underscoring our conviction in the Mount Logan story. We believe there is a significant disconnect between the growth experienced in our primary business segments over the last several years, relative to the market's implied valuation of Mount Logan. On the strategic front, after quarter end, Mount Logan alongside BC Partners Credit announced we entered into an agreement to acquire Runway Growth of $1.4 billion alternative asset manager focused on venture and non-venture-backed growth companies. Mount Logan is purchasing a minority stake in Runway through the issuance of MLC common shares, and the transaction is expected to close by year-end. Runway primarily manages assets through its externally managed and publicly traded BDC. Runway Growth Finance Corp, listed on NASDAQ under RWAY. This transaction would represent Mount Logan's third ownership stake in a manager of a publicly traded BDC. These types of management contracts underpin our focus in the Asset Management segment, managing long-term locked-up capital and a closed-end fund structure, which requires significant regulatory know-how and operations, systems and support, all of which the Mount Logan and BC Credit teams have a long track record in maintaining. Additionally, our management team's experience with BDC acquisitions and management of legacy -- portfolio positions -- positions our team and Runway well for the future. We're excited about the collaboration with the Runway team, as we look to leverage their capabilities to broaden our credit investment expertise, to find ways to create new products to further grow our business organically and one step closer to becoming a one-stop fully diversified private credit manager. On the human capital front, during the quarter, we hired Scott Chan, expanding our presence in Canada and providing support to Mount Logan's Capital Markets and Investor Relations efforts. Previously, Scott was a financial services equity analyst at Canaccord Genuity, covering Mount Logan, major banks, life insurance companies and asset managers. Scott is spearheading recent initiatives to broaden our investor outreach, to help disseminate the Mount Logan growth story. Sam Reinhart also entered into an agreement with Mount Logan to support key strategic initiatives across the Insurance Solutions and Asset Management segments, leveraging his deep knowledge in the financial institution space including most recently his role as Head of banks and diversified FIG solutions at UBS. From a financial results perspective, both segments saw top line growth year-over-year. Our Asset Management segment achieved another strong quarter from a top line and fee-related earnings perspective. And in our Insurance segment, asset growth and active deployment and management of capital contributed to an increase in total insurance assets. For all of these total assets managed by Mount Logan were $629 million, representing approximately 59% of Ability's total investment assets of $1.1 billion. Mount Logan will continue to support growth across our Insurance and Asset Management verticals. Our Asset Management segment, which encompasses our retail and institutional targeted businesses, generated $3.8 million in revenues during the third quarter an increase of 20% year-over-year. Note, this figure excludes $1.5 million of management fees generated under our management agreement with Ability, which increased 35% year-over-year. On the retail side, our 2 interval funds, SOFIX and Alt-CIF continue to benefit from investments made during 2023 and which included growing our in-house sales force to support subscription activity and capitalize on growing demand for private credit and retail markets. SOFIX the opportunistic credit interval fund we launched and manage, experienced another quarter of growth, resulting in a 6% increase in assets, as compared to the prior quarter and a 15% sequential increase in fees. Net assets for the quarter ended September 30 were approximately $145 million. We expect SOFIX's impressive track record of performance, [ approximately ] 43% cumulative inception to date and 6% year-to-date through November 5, plus its 9.5% annualized dividend will support fundraising momentum for this differentiated private credit products. Our sales force remains focused on growing SOFIX and Alt-CIF. Alt-CIF, our other credit-oriented interval fund and total net assets at quarter end of approximately $228 million. Mount Logan's specialty finance-rated vehicle, the alternative income fund finished the quarter with approximately $199 million in assets under management. During the third quarter, we elected to begin the process of an orderly liquidation that fund's assets and we'll continue our efforts to generate attractive returns for investors during this period. We believe in our specialty finance strategy and are actively evaluating new possible paths for leveraging our team to drive value for shareholders. On the institutional side, our BDC and CLO funds represented approximately $1.2 billion of assets as of the end of the quarter, and continue to provide predictability and Mount Logan's top line due to the stable nature of fees generated on the permanent and semipermanent capital base. Logan Ridge achieved its 9th consecutive quarter of positive NII and declared a quarterly dividend of $0.36 per share during the fourth quarter, up 9% quarter-over-quarter. As of quarter end, Logan Ridge had a total asset base of $187 million. Mount Logan maintains its 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 $464 million in total assets, the management contract continues to provide consistent quarterly cash distributions to Mount Logan. On the CLO side, AUM for the quarter was $587 million. The fourth quarter of 2023, the revenue share associated with our management of CLOs increased from 30% to 100%, which drove increased revenues -- in each quarter year-to-date and has supported increased Asset Management revenues during 2024 relative to 2023. Lastly, our key sub-advisory relationships saw NAV growth to $87 million during the quarter an approximately 6% increase quarter-over-quarter. Year-to-date, this relationship has been profitable for our team. On the Insurance side, during the quarter, Ability reinsured an additional $6 billion of binder flow. As of September 30, Ability is approximately $1.1 billion of invested assets, of which Mount Logan manages a significant portion. We anticipate the asset base will continue to grow, as we evaluate new potential partners for incremental MYGA business. 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. 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 the overall business. Lastly, before turning the call over to Nikita Klassen, I did want to spend a moment to reinforce our excitement around the prospects of the business. Shareholders are benefiting from the organic growth across each of our key business segments, which is evident in the FRE and SRE expansion during the trailing 12-month period ending September 30. Our team remains focused on streamlining our business, improving efficiencies and increasing assets under management through our retail and insurance distribution channels. Our M&A pipeline also remains strong, and we are actively evaluating opportunities to increase investments into our key business segments and expand our investment and distribution capabilities. With that, I'll hand the call over to Nikita who will review the financial results for the quarter.

Thanks, Ted. Good afternoon, everyone. I will now summarize our key highlights for the third quarter of 2024. As a reminder, all figures referenced on today's call will be in U.S. dollars. Mount Logan's functional and presentational currency. For our Asset Management segment, in the third quarter of 2024, we generated $3.8 million of revenue. Breaking down our Asset Management revenue further, the alternative income fund generated approximately $974,000 in management and incentive fees in the quarter. Our CLOs generated approximately $791,000 in management fees for the quarter, while SOFIX our interval fund generated $675,000 in management fees. The net loss related to Alt-CIF comprised of servicing expenses was approximately $116,000 for the quarter. With regards to our BDC Logan Ridge generated approximately $850,000 in management fees, and we recognized a $74,000 gain on our minority interest in Sierra Crest, which manages Portman Ridge. Our Asset Management business revenue increased by 13% quarter-over-quarter, primarily due to smaller unrealized losses on our equity investments and gain on our investment in Sierra Crest. For the Asset Management segment on the expense side for the quarter ended September 30, we incurred approximately $7.5 million in operating expenses, which is inclusive of corporate overhead expenses of $2.9 million. Asset Management operating expenses increased 12% quarter-over-quarter, primarily due to increased general and administrative expenses, which include incremental stock-based compensation costs for restricted shares granted to employees and service providers during the quarter. For the quarter ended September 30, Mount Logan incurred $1.7 million in interest and credit facility expenses, which relate to our corporate credit facility and debenture units. Our interest expense remained flat quarter-over-quarter due to principal pay downs on the corporate facility, offset by growing paid-in-kind interest on the debenture unit. Fee-related earnings was $7.5 million for the trailing 12 months ended September 30, 2024, an increase of $2 million compared to the same trailing 12 months ended September 30, 2023. [ SRE ] increased year-over-year due to growth in fees across managed vehicles, partially offset by higher expenses associated with the operations of Ovation over the past 12 months. Moving on to our Insurance business. We had total revenue this quarter of $31.5 million, of which net insurance service expenses and net expenses of reinsurance contracts held. Revenue for the Insurance business in the current quarter increased by $15.7 million compared to prior quarter. The increase in revenue was primarily attributable to unrealized gains on the corporate bond portfolio and interest rate swaps due to lower treasury yields in the current quarter. Additionally, there was a $1 million improvement in Insurance Service results due to higher loss recoveries for our long-term care business and lower losses on MYGA contracts -- following the pause of new MYGA business. These revenues were partially offset by higher Insurance Service expenses for the long-term care business. Moreover, net investment income increased modestly by only $200,000 due to write-offs of uncollectible accrued interest during the quarter. These increases were partially offset by a $7 million increase in unrealized and realized losses on embedded derivatives attributed to an unrealized gain on funds held balances. As there were lower treasury yields during the quarter. Our Insurance business reported total expenses of $45.2 million during the current quarter. The increase in expenses was primarily attributable to changes in the interest rate environment, which resulted in higher net insurance finance expense compared to the prior quarter. Spread Related Earnings was $10.7 million for the trailing 12 months ended September 30, 2024, an increase of $9.7 million compared to the trailing 12 months ended September 30, 2023. SRE has increased year-over-year due to increased investment income, lower cost of funds and lower other operating expenses. For the quarter ended September 30, 2024, Mount Logan reported basic and diluted loss per share of $0.68. This is compared to a basic and diluted earnings per share of $0.14 for the 3 months ended June 30, 2024. The quarter-over-quarter decrease primarily resulted from an increase in net insurance finance expenses, and an increase in realized and unrealized losses on the embedded derivative for funds withheld under the Insurance segment. Both line items are significantly impacted by quarterly mark-to-market accounting and are noncash in nature. This decrease in earnings per share was partially offset by net gains in investment activities in the Insurance segment and improved Insurance Service results. As of September 30, 2024, Mount Logan's balance sheet resulted -- reflected total assets of $1.77 billion, total liabilities of $1.72 billion and shareholders' equity of $50.9 million. The decrease in shareholders' equity from previously reported June 30, 2024 figures was due to net reported losses during the quarter. The net reported losses was primarily attributable to an increase in net insurance finance expense, as a result of the decrease in interest rates, partially offset by higher net investment gains. On the Asset Management side of the balance sheet, total assets decreased by 4.6% quarter-over-quarter to $59.4 million, primarily due to decreases in cash and investment balances. Investment balances declined as distributions relating to management fees earned on the Portman Ridge BDC outweighed attributable gains picked up by the company's equity investment in Sierra Crest, as well as the decrease in fair value on equity securities. The company also continued to redeem shares from its investment in SOFIX during the quarter. Asset Management total liabilities of $82.2 million remained relatively flat quarter-over-quarter, primarily due to timing of payment for interest expense on its credit facility and minor changes in accrued expenses. On the Insurance side of the balance sheet, total assets decreased -- increased quarter-over-quarter by $55.2 million or 3% to $1.7 billion. The increase in assets was primarily attributable to increases in cash and cash equivalents by $19.4 million as a result of paydowns on investments in debt securities during the third quarter of 2024. Reinsurance contract assets also increased due to the lower discount rate, a key input in determining the reinsurance contract asset value in the current quarter, as market rates have decreased. The increase in assets was partially offset by decreases in investments as a result of pay downs on debt securities and decreases in cash collateral due to the increase in value of the interest rate swap. Our Insurance segment has total liabilities of $1.6 billion, representing an increase of $70.2 million from June 30, 2024. The increase in liabilities was primarily attributable to increases in insurance contract liabilities by $64 million as a result of increase in the present value of liabilities due to the decline in interest rates. Investment contract liabilities also increased by $1.9 million as a result of interest accretion on MYGA deposit liabilities. Accrued expenses and other liabilities increased by $2.9 million, primarily due to an increase in payables for investments purchased that were not settled by quarter end. The funds held liability also increased by $3.9 million due to investment income on investments held. These increases were partially offset by a $2.5 million decrease in the interest rate swap derivative. Overall, the company is pleased with its financial performance for the third quarter of 2024, as evidenced by strong investment returns in Insurance Service results. I will now turn the call back to Ted for some closing remarks.

Thanks, Nikita. In closing, the foundation for our business's success has been built over the last several years, and focus remains squarely on how to increase investment into our business, enhancing return for our shareholders. Private markets orientation differentiates us in the market and deserves a higher multiple relative to the traditional asset managers. With continued private asset management consolidation in U.S. publicly traded alternative asset managers trading at a premium multiples. We believe Mount Logan shares were significantly discounted to the public marketplace. As mentioned earlier, recently, Mount Logan insiders, including myself, purchased Mount Logan shares to the open market and we'll continue to do so as we see significant upside in our share price versus where it trades today, and we'll continue to find ways to demonstrate our support and believe in the business and valuation. As discussed on prior calls, we've actively been working to improve liquidity in our shares with initiatives already in flight. We are beginning to see results of our efforts with Q3 average daily trading volume greatly increased compared to last quarter. We believe -- we continue to believe our core pillars of the business, Asset Management and Insurance Solutions provide stability and a clear path for growth. We also remain focused on identifying and executing on unique opportunities to grow our business as evidenced by the recent runway acquisition alongside BC Partners Credit. We believe we're in the early innings of Mount Logan's growth phase and our team is focused on executing our business plan. This concludes our prepared remarks, and we'll now transition the call to a Q&A session if the operator please coordinate.

[Operator Instructions] Our first question today comes from the line of Francis Lau with Lucinda Capital ahead.

You guys -- you mentioned that there are other deals in the pipeline. Can you expand on what the characteristics are from the target and will Mount Logan also be issuing here to sell to fund the deals?