Onex Corporation ($ONEX)

Ladies and gentlemen, welcome to Onex Corporation First Quarter 2026 Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the conference over to Jill Homenuk, Managing Director, Shareholder Relations and Communications at Onex. Please go ahead.

Thank you. Good morning, everyone, and thanks for joining us. We're broadcasting this call on our website. Hosting the call today are Bobby Le Blanc, Onex' Chief Executive Officer; and Meg McClellan, our Chief Financial Officer. Also joining us today for our Q&A session is Paul Brand, Chief Executive Officer of Contact. Earlier this morning, we issued our first quarter 2026 press release, MD&A and consolidated financial statements, which are available on the Shareholders section of our website and have also been filed on SEDAR. Our supplemental information package is also available on our website. As a reminder, all references to dollar amounts on this call are in U.S., unless otherwise stated. I must also point everyone to our webcast presentation for our usual disclaimer and cautionary factors relating to any forward-looking statements contained in today's presentation and remarks. With that, I'll now turn the call over to Bobby.

Happy Friday, everyone. First, I'd like to welcome Megan Onex' new CFO; and Paul Brand, the CEO of Convex, to their first Onex earnings call. Thank you both for being here today. Onex delivered a solid first quarter despite a challenging market backdrop. We remain focused on executing our strategy to drive long-term value creation and earnings growth. . Our Convex private equity and credit platforms are performing well, and we are experiencing positive momentum across our investing and asset management activities. As I've indicated before, Convex will be the largest contributor to increasing shareholder value in the near term. In addition, the value of our strategic partnership with AIG should not be overlooked. As a reminder, AIG purchased 7.5 million shares of Onex for a 9.9% ownership stake and has committed to invest $2 billion in our asset management strategies. We expect AIG's capital commitment to be accretive to FRE and to shareholder value. We are actively working with AIG to determine how capital will be allocated across Onex's private equity and credit products, including Onex Partners VI and ASCO II. We also believe there could be additional opportunities that arise to collaborate with AIG as we continue to build our relationship. At yesterday's Annual General Meeting, we were pleased to welcome AIG's representative, Jay Cohen, to our Board of Directors. Jay has more than 30 years of experience across the insurance industry ecosystem. Most recently leading the insurance equity research team as Managing Director at Bank of America. We look forward to working with Jay and to the expertise and contributions he will bring to our Board discussions. Now let's turn to Convex performance. Convex delivered a strong quarter with underwriting performance, profitability and return on equity all improving versus the prior year period. Gross premiums written increased 5% year-over-year. However, this headline growth rate understates the underlying performance because Q1 of 2025 was an elevated comparison period, which included unusually high reinstatement premiums convex received following the California wildfires. Excluding these onetime premiums, which are paid by clients to restore coverage for a subsequent event following a major loss, gross premiums written grew 8%. As we forecasted prior to our acquisition, Insurance pricing has softened with year-to-date rate down 4%. The softness is concentrated in short-tail classes of risk such as property. In contrast, there has been rate increases in areas affected by the Middle East conflict and in casualty classes. Convex generated adjusted net income of $106 million in the quarter, which included a $50 million unrealized mark-to-market loss on Convex fixed income portfolio amid rising interest rates due to broader macroeconomic volatility. Excluding this nonoperational accounting loss, Convex generated adjusted net income of $156 million. First quarter earnings should also not be viewed as representative of a full year run rate. As historically, net income in the first quarter of the year is less than we see in other quarters. Convex currently recognizes unrealized changes in the value of its fixed income portfolio through earnings, our plans to transition to an available-for-sale classification during the second quarter. This revised treatment is in line with peers and will reduce income statement volatility in subsequent periods. Convex delivered a combined ratio of 87% in the quarter and underwriting earnings growth was largely driven by a significant reduction in the loss ratio as first quarter earnings last year were negatively impacted by incurred losses due to the California wildfires. . The Middle East conflict has resulted in estimated net losses of $23 million in Q1, which is relatively small compared to our overall earnings. Convex management is actively monitoring the evolving situation and expect rate increases on new policies written in the region to provide some offset against incurred losses. On a last 12-month basis, adjusted net income was $827 million, an increase from $401 million in the comparable prior year period and from 711 for the full year 2025. The last 12-month combined ratio improved to 83% and ROE increased to 24%. The Convex ROE has steadily increased since Onex's acquisition, reflecting both stronger earnings and a lower tangible book value denominator, following the repurchase of shares completed as part of the Convex transactions. It should be noted that Convex recorded modest major event losses over the last 12-month period, which has also helped improve Convex overall loss ratio. The value of Onex's investment in Convex increased to $4 billion at the end of the quarter representing an increase of 4% since the acquisition was closed earlier this year. This valuation is based upon a 2.0x price to tangible book value supported by Convex high return on equity, earnings growth and continued market share gains. At this valuation, the implied price to earning multiples are 8.1x and on the last 12 months adjusted net income basis and 10x on a full year 2025 actual net income basis. Looking ahead, we expect Convex's earnings to benefit from several structural levers, including continued market share gains, prudent growth in asset leverage, improvement in investment portfolio yields and operating leverage as the business continues to scale. We are pleased with Convex early results and continue to value our strong working partnership with Paul Brand and the entire Convex team. Now turning to Asset Management. Within private equity, our teams made significant progress returning capital to our limited partners last year. We returned more than $8 billion and this momentum has continued into 2026. Onex Partners recently closed its $1.6 billion multi-asset continuation fund, raising capital from some of the world's leading institutional and sovereign investors including several that are new to Onex. And just this past Monday, OP announced a full realization of Emerald, with expecting net proceeds to Onex of $230 million. Importantly, these efforts will bring DPI for Onex Partners V to 1.0, making it a positive outlier on this metric relative to other funds of this vintage. Moreover, OP has good visibility into additional realizations and expect CPI to increase by the time Onex Partners VI has its first close, which is expected later this year. The OP Opportunities Fund has now invested about 70% of its $1 billion in commitments with one investment in each of the 4 verticals and has attracted an additional $1 billion in co-investment. The fund has performed very well to date, particularly on the strength of its first 2 investments that we've held for over 12 months, [ Fish block and Firestone. ] Our credit platform continues to distinguish itself as a market leader and a relative safe haven amidst considerable industry noise. Across the platform, we have been underweight software and AI exposed credits, avoided exposure to aggressive PIK loans that have come to market in the past 2 years and importantly, have almost no direct lending retail exposure which has gotten a lot of attention to fleet. While the market for new CLO issuances in Q1 was more subdued given recent market volatility, the credit team has been actively resetting existing CLOs and opportunistically placing new offerings. Over the first 4 months of the year, the team raised or extended HCLOs, including 3 new issuances. Notably, the team recently priced their 50th U.S. CLO. It was just a little bit over 3 years ago that they issued their 25th USCLO. Proof of the team's ability to steadily scale the platform while maintaining their commitment to investment discipline and performance. And they've done so with far greater balance sheet efficiency, with Onex's 35% share of CLO equity today being half of what it was 3 years ago. Structured credit, which includes CLOs, ASCO and ONTAP, delivered $15 million in fee-related earnings in Q1 and remains positively positioned to grow earnings for the remainder of the year. As I mentioned, with direct lending being a source of concern in the market, it is worth noting that direct lending represents only 1% of Onex's credit AUM. Moreover, our offerings are focused on liquid, structured and multi-asset credit strategies, which benefit from a sophisticated institutional client base and a proven track record of performance across economic cycles. Consequently, we continue to benefit from the quality and strength of our credit platform, which is showing up in the form of both new and repeat investors. Finally, let me turn to our liquidity and capital allocation priorities. As I outlined in our last call, we intend to reorient realize proceeds from our legacy investments into 1 or 2 direct balance sheet investments and ideally have a good strategic fit with Convex and/or our asset management business. These investments will use lower leverage and have attracted risk-adjusted return profiles to drive earnings growth and enterprise value for Onex shareholders. And of course, as we get closer to fully paying down the NAV loan, Share buybacks will once again be considered as part of our future capital allocation decisions. I am confident that the combination of earnings growth from Convex future realizations from our PE portfolio and the reorientation of that capital and the growing profitability of our asset management business will drive substantial long-term value creation. I'll now turn the call over to Meg.

Thank you, Bobby, and good morning, everyone. Before I begin my prepared remarks, I'd like to thank my predecessor, Chris Govan, for his help during my transition to this role. I am grateful for his support and partnership. I'm thrilled to join Onex at such a pivotal time in the company's evolution. Convex is now a meaningful driver of shareholder value, our private equity team continues to compound shareholder capital and generate realizations and our credit platform continues to scale while maintaining discipline in challenging markets. . I'll focus my remarks today on how these themes show up in our first quarter financials. First, I would like to provide an update on our investing capital. investing capital, which includes context and other balance sheet activity at Onex ended the quarter at $9.4 billion, which equates to $122.45 per share or about CAD 170. The 2% decline in the quarter relative to the 2025 year-end was primarily driven by the dilutive impact of issuing shares to AIG and in connection with the Convex acquisition. Excluding this, investing capital per share would have increased 1% during the quarter and 8% over the last 12 months. We believe this dilutive impact will be more than offset by the incremental FRE and shareholder value generated through the $2 billion of AIG commitments in our asset management products. and we will also manage a portion of Convex investment portfolio, supporting long-term FRE growth. Convex accounts for 42% of Onex investing capital. And as Bobby emphasized, was a key driver of our results. The fair value of our investment in Convex was $4 billion at the end of the quarter or $51.87 per share equal to CAD 72.18 per share. This volume has increased by 4% since our acquisition and is based on a 2x tangible book value multiple. We believe this multiple is well supported by the factors Bobby mentioned, especially conduct strong return on equity and levers that can utilize to grow earnings. These levers are outlined in our supplemental information package. Our valuation is anchored on price to tangible book value. This avoids overweighting any single period of earnings, which can be affected by timing and severity of loss events. Instead, it reflects accumulated growth in tangible book value and equity value creation over time. This is consistent with how Onex Partners historically value conduct. We also reviewed Convex relative positioning versus property and casualty peers. We believe Convex's return on equity and key financial performance metrics support a modest premium to peer tangible book value multiples. Additionally, we referenced the valuation against Convex earnings. The valuation equates to 8.1x last 12 months adjusted net income and 10x 2025 net income which are well below Convex peer average. Finally, we compared our context valuation to input from an independent third-party valuation source, which provided additional support on the reasonableness of our estimate and our approach. Moving on to investments in treasury. This section consists of the non convex remainder of our investment holdings and activity, including our private equity and credit investing capital, cash and near cash and debt. Investments in treasury ended the quarter with $5.4 billion of investing capital or $70.58 per share equal to CAD 98.22 per share. Private equity generated an 8% return on Onex investing capital over the last 12 months and a 1% return in the quarter. Importantly, the private equity team continues to deliver strong realizations with $317 million of proceeds to Onex from the multi-asset continuation vehicle Bobby mentioned, approximately half of that was received in the quarter, and the balance is expected in Q1 2027. Subsequent to quarter end, we announced the sale of Emerald and expect to receive $230 million of proceeds to Onex in the second half of 2026. Credit generated a 2.1% return on Onex investing capital over the last 12 months. However, declined 3% in the quarter, primarily due to mark-to-market nonrealized losses in structured credit, particularly CLO equity. I would like to reinforce here Bobby's point that our direct lending exposure is minimal. With Onex investing capital in this strategy, only $16 million at quarter end, representing well under 1% of our total investing capital. Turning now to our Asset Management business. The asset management story this quarter is straightforward. The longer-term fee-based continues to grow, particularly for credit, while reported FRE continues to reflect private equity fees step-downs and market volatility. Fees underrating AUM was $42.8 billion at quarter end. Credit fee-generating AUM was $30.2 billion, up 1% from the end of last year. This was driven by net new CLO fee-generating AUM raised despite credit market headwinds. Private equity fee-generating AUM was $12.6 billion, down 10% due to OP V's realization of Convex excluding the impact of the conduct realization, private equity fee-generating AUM would have increased 3%, driven largely by the Onex Partners multi-asset continuation fund. Run rate management fees for asset management were $210 million. FRE for our asset management business was $5 million in the quarter and overall FRE was a loss of $3 million. The balance of the higher fee-related earnings will not be linear. Several revenue drivers, including an active fundraising pipeline are expected to have a greater impact in the second half of this year. Due to this, FRE will be back loaded and annualizing Q1 is not representative. Onex continues to prioritize building a more durable recurring management fee base maintaining expense discipline and improving the earnings profile of our asset management business over time to generate value for our shareholders. Finally, on liquidity, we ended the quarter with $398 million of cash and near cash. We drew $700 million on the NAV loan to support the Convex acquisition. In April, we repaid $200 million, reducing that balance to $500 million. Following this repayment, we retained strong liquidity with approximately $200 million of cash and near cash and $600 million available to be drawn on our revolving credit facility. Continued private equity realizations, including the sale of Emerald, will support further repayment, reduce interest expense and provide additional capital allocation flexibility. We also have significant flexibility with our private equity investing capital, which totaled $4.6 billion at quarter end. We only have $255 million of unfunded commitments to funds still in their active commitment period. Overall, we're comfortable that our liquidity position provides ample capacity to fund our capital commitment needs. In closing, Q1 was a positive quarter that reflects our strategy to reorient our balance sheet. Convex is now reported separately, reflecting its significance as a core investment for Onex shareholders. Investing in treasury continues to show the value and flexibility for the rest of our balance sheet. Asset Management should deliver growing run rate management fees as our investment teams execute against their fundraising targets. And our liquidity position remains solid and flexible. I'm excited to be part of Team Onex, and I'm committed to providing clear disciplined financial communication as we execute Onex priorities and create value for our shareholders. Thank you, and I look forward to spending time with each of you in the future. We will now open the line for questions.

Certainly. [Operator Instructions] Our first question comes from the line of Scott Fletcher from CIBC.

Wanted to ask a couple of questions on Convex maybe for Paul in particular. Just first, I want to -- just looking at the current accident year loss ratio. It did tick up quarter-over-quarter and year-on-year. Sounds like the Middle East conflict might have had some element at play there. So I wonder if you could just dig into that and how we should be thinking about that for the rest of the year.

Yes. So yes, you're quite right. As we sort of noted in the materials, there's about a $23 million add-on for the [indiscernible] rand and that just -- yes, and that moves the expansion loss ratio up a little bit.

Okay. Nothing that there's not much to call out there. And then on the net premiums retention, that number sort of came down again quarter-over-quarter year-on-year drove net premiums into sort of, I think it was 9% down year-on-year. Just wondering what you're seeing in the market that's sort of shifting the posture on premium retention and how we -- again, we should think about the approach there for the rest of 2026.

Yes. So I mean, context a reasonable amount of reinsurance and as we -- and we buy that sort of through the market as we see prices soften, we might expect to see sort of reinsurance purchasing going up a little bit. And we also have outcome quota share, which was slightly under placed in Q1 of 2025. And so that will be affecting that comparative state.

Okay. And then I'll just finish on one more. On the expense side, it looks like -- I'm just trying to get a sense of what the commission costs or the policy acquisition costs should look like. I think there's been -- the numbers have moved around. It's not a huge data set, but just wondering, to 25% in the quarter, 24.7%,s that a good number to look at going forward. And I'll pass the line after that.

Yes. No, we'll come back down much closer to the -- what you're seeing in the LTM sort of 2-ish my prediction on that. There's just some noise in Q1 in terms of how different parts of the based on sort of the outward premium and the inwards premium and driving that rate that effect.

And our next question comes from the line of Graham Ryding from TD Securities.

Paul, maybe I'll stick with you. Welcome to the call. Just maybe the outlook for gross written premium in 2026, just given your focus on specialty and there is some pricing pressure in the markets overall, maybe your outlook on what your expectations are for the year.

Yes. No, absolutely. as we think about rates are down about 4% year-on-year, and we still believe that, that leaves actually some reasonable margin in the business, particularly as we can alter the portfolio around between the lines of business that are showing against these business are showing greatest rate cuts towards the lines of business that are showing the best sort of rating environment. And I sort of think about an outlook for the year as we make comments, I think the 5% is a bit understated because of the state reinstatement premiums that we received in Q1 2025, normalizing to that, we're about 8%. I would expect us to get a maybe a bit higher than that as we get towards the end of the year. And more of the insurance versus reinsurance business to start to bounce in with reinsurance being having a very big Q1 and growing and predicted to grow at a slightly lower rate than we're seeing the insurance business in '26. Okay. So a few quarters to go before we'll be able to print that.

Okay. Understood. And the business delivered a 20% ROE last year. I think slightly higher than that on an LTM basis. Like do you feel like this is a business that should be able to sustain that 20%-plus ROE. Is that a reasonable target?

Yes. I mean I think you kind of have to see what happens to losses. You have to see what's obviously going to go on in the investment environment in an uncertain world. But yes, I still -- as I said, [indiscernible] plenty of margin in the business. And absolutely, we hope to put post another decent ROE in the entire to 2026. I mean I think as Bobby's comments mentioned. If you just look at the LTM and just so we're getting up to 24%, that is slightly flattered by having probably slightly fewer major events during that particular period in Q1 2025 to Q1 2026 that we might expect to a normal period. But it's the underlying sort of drivers in the business are looking good. As I said, we're seeing good gross premium growth. Our expenses are pretty much in line. Yes, so I don't have to get too optimistic to hope to see something like those types of ROVs that you're mentioning.

And it's important to remember like where Convex is positioned in its evolution, we can pretty much double the size of the current Convex business without adding much to our expense line. There'll be inflation and other things, but nothing meaningful. So we have a chassis that could grow a lot about incremental cost. Second, our asset leverage is well below industry norms. So we'll be able to grow into that. And that incremental float over time will create more investment income. As we've talked about, we'll -- it won't get a lot, right, but we'll manage some of our investment portfolio at Convex and alternative assets, which should give a bit of a pickup in yield. And importantly, just given the reaction to convex over last year in the marketplace. We're continuing to gain share given the customer service and data analytics that we're providing to our clients.

Okay. Helpful. Megan, maybe I could jump to you just on the asset management FRE you put a $35 million target for the end of 2026. So maybe I should interpret that as sort of a run rate in Q1 '27 and I think previously, you guys have talked about hitting a $17 million run rate by Q2 of this year. Does that still hold? And then just bigger picture, what are the key pieces here to sort of get moving into that positive territory that you're targeting?

Yes. So it's a very similar story, and thanks for the question. as to what Chris talked about in the fourth quarter earnings call. So we do expect to hit the year-end run rate. But again, it's back half loaded. We've got a lot of fundraising coming. You'll hear us talk about OP 6 quite a bit. That is a very big component of hitting that run rate. That, along with some credit products and some additional CLO issuance. . So you're going to have a bumpy path getting there, certainly, Q1 with the credit markets was somewhat bumpy not going to be a linear path. And so it's a little too early to confirm run rate for the full 2026 year.

Okay. And on the PE side, expenses seem to continue to sort of be elevated relative to management fees. Are you looking at the expense on the efficiency side? Or is this more about fundraising and driving the top line higher?

No, it's definitely the latter. As we continue to sell assets out of which, of course, generates DPI, which is very important to our LPs. The revenue goes away on those assets when you sell them. So that -- the expense line ought to be rightsized, if you will. And that team has done a very good job of rightsizing its expense structure relative to our fundraising expectations. But when we begin to have close at OP6, that will rectify itself.

Okay. Understood. And then sorry, I missed that part. Where are you with the fundraising? And what's the expected sort of what's the initial feedback and uptake for OP VI?

So we said we expect to have our first close later this year. Momentum seems good, but the DPI stat that we've delivered for OP V shouldn't be overlooked. We're at a 1.0 pro forma for Emerald. We think we'll be higher than that when we get to our first close. And the smaller the gap you have between realized MOIC versus unrealized monks the more confident LPs are in your ability to deliver the results that you promised. The vintage were put up against for that 1.0. We're probably top decile relative to similar vintages, and that's only going to get better given what we have in the pipeline. So that should give us pretty good momentum coming into the first close on an absolute and relative basis.

And our next question comes from the line of Bart Dziarski from RBC Capital Markets.

Great. Maybe sticking with the Asset Management business. I saw that IRR disclosure was dropped. Maybe give us a rationale why an update on net IRR performance on the flagship PE funds would be great.

Yes. Yes. So we've had a couple of instances where the press has gone in and used that sat that doesn't have the benefit or similarly to the way the rest of the industry calculates net IRR. So we have incremental disclosure, so you'll be able to see where we sit relative to carry and give you good comfort that the accrued carry is good, but people were scraping data off that exhibit and just implying quartiles and other things that simply weren't accurate given the way we communicate with LP. So it's actually putting the OP team at a bit of an unfair competitive disadvantage. So we decided to begin to disclose it in a different way. But we're not -- we -- you'll be able to get to the same place in what you're looking for, which is most likely are we going to collect that the carry that we've accrued and you'll see in the disclosure, we feel very good about that. But we just -- we didn't -- we wanted to stop these articles from coming out without the proper acclamation that we normally give to LPs.

Okay. Got it. And maybe, Megan, welcome to the call. Just wanted to ask around how we should think about when the buyback could resume. I think you had mentioned you want to pay down the NAV loan. So what should we be expecting on that front?

Yes, I'll take that one. Thanks. So I'm trying to actually make sure that Meg and I and the rest of the team do what we promised to do. And we promised to get that loan paid down as quickly as possible. I think we're doing quite a good job if you pro forma for Emerald. We'll have a bunch more of a pay down. And I'm already getting very close to the point where -- and I said it in my remarks, we're happily at these prices or share buybacks are going to become part of the capital allocation decision again. And that's obviously coupled with how to reorient the rest of the balance sheet. But we're getting much, much quicker about having that back in the conversation than I would have guessed even 3 months ago.

Okay. Got it. And then maybe last one just on Convex. So Paul, thanks for joining the call as well. Think the GWP has been decelerating from a growth perspective since '22. I recognize those are hard markets, and we're kind of running at, call it, high single digits now. It sounds like from your commentary. So maybe what comfort can you give investors that in a decelerating market where you're growing premiums looks like well above industry that you're maintaining your discipline on the underwriting and pricing side to generate that growth.

Yes, sure. I mean it's an entirely fair question. Yes. I mean, I probably spent more of my life in soft markets than hard markets. And we've absolutely have focused on a really strong analytical backbone that gives us good insight as to where both gross margin is in the business and also margins that we see after purchasing outwards reinsurance. And as I said, we're seeing a 4% rate reduction so far this year. And as you think about how rates went up in the period of time from -- really from Convening in 2019 all the way through to sort of mid through 2025. That note particularly rapid decline. And then against the backdrop of that, as I said, we also buy by reinsurance and the sort of improvement in terms that we're seeing there is in lots of ways, mitigating and offsetting the marginal reductions in prices that we're seeing sort of on the is business. Again, we don't -- I'm pleased that we're able to grow high single-digit rate even in this slightly more competitive marketplace. And I think that's a signal to the work that come has done on its relationships with its brokers and its clients over the pursuits coming to existence. No underwriter in convex as a top line goal or target, if you don't see margin in the business that is absolutely fine to step backwards bankers from it. And as you said, we were growing at faster rates in the super whole phases of the marketplace. And that's partly driven by market share and our ability to open utilize business up. I'm not surprised to see us more normalizing in the market that we're seeing today. But there's -- but I still sense that there's sort of plenty of room for complex to grow. But we will always put margins and bottom line ahead of [indiscernible] And that's just been a mantra that I've had pretty much all the way through my career.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Bobby Le Blanc for any further remarks.

Thanks, everyone, for being here with us today. And again, thanks, Paul and Meg for joining your first earnings call. Great to have you both here. I hope everybody has a great weekend. And again, if you have any questions at all, feel free to call Jill, [indiscernible] and we'll try to get back to you quickly. Have a great weekend. Bye-bye.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.