Mount Logan Capital - Q1 2024

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Mount Logan Capital's first 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 materially differ 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 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 disclosure record, particularly the company's MD&A and the annual information form for the year ended December 31st, 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.

Ted Goldthorpe (Chairman and CEO)

Thank you. Good morning, everyone. We appreciate you joining us for our first quarter 2024 results call. During the call, we will refer to information provided in the first quarter 2024 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, Nikita Klassen, 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 first quarter was another strong quarter for our business, and we are excited to review our performance with you today.

We are pleased to announce that we'll be paying our nineteenth consecutive quarterly dividend, which will consist of a CAD 0.02 share distribution for shareholders of record as of May 22nd, 2024. Before we provide a more detailed discussion of our first quarter financial results, I wanted to first highlight the strong momentum across our business. We saw strong organic growth across our two key business segments, primarily measured by FRE, or fee-related earnings, for the asset management segment and spread-related earnings, or SRE, for the insurance segment, both of which were up year-over-year. This quarter was our first quarter publishing SRE. Following several discussions with our shareholders, we incorporated an SRE metric, a performance measure for comparable public insurance platforms, to help investors better assess the performance of Mount Logan's insurance segment.

During the quarter, we also announced Mount Logan's strategic minority stake in Marret Asset Management, a multi-billion-dollar Canadian alternative asset manager based in Toronto. We've spent significant time with the Marret team and identified several ways to partner together in both the Canadian and U.S. markets, and look forward to providing updates on these initiatives in subsequent quarters. We also demonstrated our ability to access capital, closing an approximately $19 million senior unsecured note refinancing, which priced at a very attractive fixed rate of 8.85% over eight years. From a financial results perspective, both segments saw top-line growth during the quarter. Our asset management segment achieved a third consecutive quarter of record asset management fees, and in our insurance segment, asset growth and active deployment of capital into an attractive credit environment contributed to an increase in total insurance assets and net investment income.

Ability's total assets managed by Mount Logan increased to $617 million, up 31% from the prior year, demonstrating the organic growth engine we have built within Mount Logan and that we will expect to continue to support our growth across insurance and asset management verticals in the upcoming quarters. Our asset management segment, which encompasses our retail and institutional targeted businesses, generated $4 million in revenues during the first quarter, an increase of 109% year-over-year. We note this figure excludes $1.4 million of management fees generated under a management agreement with Ability, which increased 74% year-over-year.

On the retail side, our two interval funds, SofEx and AltSIF, continue to benefit from the incremental investments we made during 2023, which included our in-house sales force to support subscription activity and capitalize on the growing demand for private credit in the retail markets. SofEx, the opportunistic credit interval fund we manage, experienced another impressive quarter of growth, resulting in a 43% increase in net assets as compared to the prior quarter. Net assets for the quarter ended March thirty-first were approximately $100 million, and we continue to see impressive subscription activity post-quarter end. We expect SofEx's strong returns, approximately 38% cumulative inception to date and 2.5% year-to-date through May 8th, plus its 12% annualized dividend will sustain the fundraising tailwinds for this differentiated private credit product.

Our sales force remains focused on growing SofEx and AltSIF. AltSIF, our other created credit-oriented interval fund, had total net assets at quarter end of approximately $249 million. Mount Logan's specialty finance origination-oriented vehicle, the Alternative Income Fund, continues to perform well, generating a net return of 2.9% for the quarter and 9.2% return for the trailing twelve-month period. The fund finished the quarter with approximately $201 million in assets under management. On the institutional side, our BDC and CLO funds represented approximately $1.4 billion of assets as of the end of the quarter, and continued to provide predictability in Mount Logan's top line due to the stable nature of the fees generated on the permanent and semi-permanent capital base.

Logan Ridge achieved its seventh consecutive quarter of positive net investment income, which supported a 3% increase to Logan Ridge's quarterly dividend, the fifth consecutive increase to the company's dividend since it was reintroduced at the beginning of 2023. As of quarter end, Logan Ridge had a total asset base of approximately $213 million. 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 quarter with approximately $527 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 quarter was $605 million.

In the fourth quarter of 2023, the revenue share associated with our management of CLOs increased from 30% to 100%, which supported the increase in asset management revenues during the first quarter and will drive an estimated $1 million-$2 million increase in annualized asset management revenues relative to 2023. 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 are 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 a NAV growth of approximately 54% quarter-over-quarter.

We expect this trend of growth will remain over the next 12-18 months. On the insurance side, during the quarter, Ability reinsured an additional $39 million of MYGA flow. As of March 31st, Ability has 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. 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 our liability side, we believe our annuity reinsurance business is optimal in the credit current environment. The annuity policies we reinsure contain surrender charges, which protect Ability from earlier than expected policyholder withdrawals.

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. Before turning the call over to Nikita Klassen, I did want to take a moment to say how pleased we are with the strong momentum we are seeing across our business, which you can see in solid numbers for the quarter and trailing twelve months. Our business model, supported by permanent and semi-permanent fee-paying capital, is well-positioned to support earnings, while our organic initiatives help drive sustained growth, as demonstrated in the recent quarters. We also continue to evaluate strategic options to grow our business across key business verticals. With that, I will hand over the call to Nikita Klassen, who will review the financial results for the quarter.

Nikita Klassen (CFO)

Thanks, Ted. Good morning, everyone. I will now summarize our key highlights for the first quarter of 2024. As a reminder, all figures referenced on today's call will be in U.S. dollars, Mount Logan's functional and presentation currency. For our asset management segment in the first quarter of 2024, we generated $4 million of revenue. Breaking down our asset management revenue further, our CLOs generated approximately $672,000 in management fees for the quarter. The net earnings related to AltSIF comprised of interest income, net of servicing expense of approximately $285,000. With regards to our BDCs, Logan Ridge generated approximately $893,000 in management fees, and through our minority interest in Sierra Crest, the company recognized over $279,000 of attributable revenue for the quarter.

Our asset management revenue increased by 8.2% quarter-over-quarter, primarily due to the increased management and incentive fees attributable to the AIF Fund and SofEx and equity investment earnings from Sierra Crest. For the asset management segment, on the expense side for the quarter, we incurred approximately $7.4 million in operating expenses. Asset management operating expenses increased by 15% quarter-over-quarter, primarily due to the increased servicing expense related to the net economic loss on our service agreement with Sierra Crest.

For the quarter ended March thirty-first, Mount Logan incurred $1.7 million in interest and credit facility expenses, which primarily relate to our $34 million corporate credit facility and $18.8 million new debenture units, part of which of the proceeds were used to repay $13.6 million of existing debt at Lynbridge. Our interest expense decreased slightly quarter-over-quarter due to principal paydowns and a more favorable rate on our increased borrowings. Moving on to our insurance business, we had total revenue this quarter of $17.6 million, which was net of insurance service expenses and net expenses from reinsurance contract held. Revenue for the insurance business in the current quarter decreased by $13.3 million compared to prior quarter. The decrease is primarily attributable to unrealized losses on corporate bonds due to higher investment yields during the current quarter.

This decrease was partially offset by higher investment income due to growth in the investment base and higher interest rates. Further, there was a one-time gain in the prior quarter of $7.4 million due to the realization of past recoverables from reinsurers. Insurance service result was flat quarter-over-quarter. Our insurance business reported total expenses of $800,000 during the current quarter. The decrease in expenses was due to the effect of the increase in discount rates being applied to our insurance liabilities, which resulted in lower net insurance finance expense. In the current quarter, we have also introduced a new non-IFRS financial measure, spread-related earnings, or SRE. The intent of SRE is to reflect how management evaluates the performance of the insurance segment, excluding the impact of certain market volatility and other one-time non-core components of the insurance segment.

Spread-related earnings was $9.5 million for the trailing twelve months ended March 31st, 2024, an increase of $21.2 million compared to trailing 12 months ended March 31st, 2023. SRE increased year-over-year due to increased investment income, lower cost of funds, and other operating expenses. Additional information on SRE can be found in our MD&A on our website and SEDAR. For the quarter ended March 31st, 2024, Mount Logan reported basic earnings per share of $0.51 and diluted earnings per share of $0.50. This is compared to a basic and diluted loss per share of $0.09 for the three months ended December 31st, 2023, and basic and diluted loss per share of $1.33 for the three months ended March 31st, 2023.

The quarter-over-quarter increase reflects increases in net income, primarily driven by the insurance business. As of March 31st, 2024, Mount Logan's balance sheet reflects total assets of $1.69 billion, total liabilities of $1.63 billion, and shareholders' equity of $65 million. The significant increase in shareholders' equity from previously reported December 31st figures is due to the higher reported net income. Higher reported net income is a result of a decrease in net insurance finance expense during the quarter as a result of increase in risk-adjusted interest rates, efforts to reduce expenses across the business, and higher management fees in the asset management segment. On the asset management side of the balance sheet, we reported total assets of $64 million, which have increased 1.6% quarter-over-quarter due to an increase in cash.

Cash payments received for management and incentive fees and distributions increased this quarter, in addition to net proceeds from the issuance of the debenture units. The increase was slightly offset by the extinguishment of the notes at Lynbridge and expense reimbursements paid to BC Partners. Asset management total liabilities were $81.7 million, an increase of 5% quarter-over-quarter, primarily due to a $4.7 million increase in debt obligations. The increase is attributable again to the new debenture units and was partially offset by the extinguishment of the Lynbridge notes at their carrying value. Accrued expenses and other liabilities also increased by $500,000, primarily due to the year-end dividend payable outstanding, which was paid on April 2nd, 2024.

On the insurance side of the balance sheet, total assets were $1.6 billion, which represent an increase of $500,000 from December 31st, 2023. Cash and cash equivalents, including restricted cash posted as collateral, decreased by $11.7 million as the result of deployment of cash to purchase investments during the first quarter. Investments in financial assets increased by $34.4 million, reflecting growth in the insurance segment's total asset base. Cash posted as collateral this period represents the fixed and variable margin required to be posted for the interest rate swaps entered into this period. Reinsurance contract assets decreased by $16.8 million compared to December 31st, 2023, which relates to Front Street Re contracts and Vista Re agreements.

The decrease was primarily due to recoveries from reinsurers and due to updates from discount rates in the current quarter as relevant market rates have increased. Our insurance segment has total liabilities of $1.5 billion, representing a decrease of $15.6 million from December 31st, 2023. Insurance contract liabilities represent liabilities related to our legacy long-term care business and MYGA business. Insurance contract liabilities decreased by $20.9 million compared to December 31st, 2023, primarily driven by claim settlements and due to the impact of increased interest rates, which have resulted in a decrease in the present value of insurance contract liabilities. Investment contract liabilities increased by $34.3 million in the current quarter as compared to prior quarter, as a result of the underwriting of new MYGA policies....

Accrued expenses and other liabilities primarily include payables for investment purchase and other accrued expenses. This balance decreased by $26.7 million due to settlements of investments purchased and settlements of payables related to MYGA policies against the new MYGA policies assumed in current quarter. Overall, the company is pleased with its financial performance for the first quarter of 2024, as well as its capital position. I will now turn the call back to Ted Goldthorpe for some closing remarks.

Ted Goldthorpe (Chairman and CEO)

Thanks, Nikita. In closing, momentum has been building across our business. It's an exciting time for our industry, which is helping us accelerate our AUM growth and earnings for our business. Our two core pillars, asset management and insurance solutions, are well-positioned to drive growth throughout the remainder of the year. Our team is committed to sustaining the momentum as we continue executing on our business plan, which will set the stage for the next phase of our growth. This concludes the prepared remarks, and we'll now transition the call to a Q&A session, if the operator could please coordinate.

Operator (participant)

If you would like to ask a question, please press star one on your telephone keypad. You will be advised when to ask your question. As a reminder to ask a question, it's star one on your telephone keypad. Our first question comes from Chuck Burns from CIBC Wood Gundy.

Ted Goldthorpe (Chairman and CEO)

Hey, Chuck.

Operator (participant)

Chuck, your line is now open.

Ted Goldthorpe (Chairman and CEO)

Hi, Chuck.

Chuck Burns (Investment Advisor)

Hello, can you hear me now?

Operator (participant)

Chuck, could you ch-

Chuck Burns (Investment Advisor)

Oh!

Ted Goldthorpe (Chairman and CEO)

Yep.

Chuck Burns (Investment Advisor)

You can hear me now?

Ted Goldthorpe (Chairman and CEO)

Yeah, we can.

Chuck Burns (Investment Advisor)

Oh, oh, sorry about that.

Ted Goldthorpe (Chairman and CEO)

Yep, we can.

Chuck Burns (Investment Advisor)

Very good results and presentation, both you and Nikita. The only thing I'm... You know, we had addressed at the presentation you did a few months back, in terms of going forward, the variability from quarter to quarter. Do you see this new reporting kind of smoothing that out going forward?

Ted Goldthorpe (Chairman and CEO)

I mean, I think I wouldn't use the word smoothing. I would say it's a more accurate representation of the core earnings power of our business. And it should be a lot easier to understand and have less volatility in results.

Chuck Burns (Investment Advisor)

That's really what I'm getting at. Yeah. Okay.

Ted Goldthorpe (Chairman and CEO)

Yeah.

Chuck Burns (Investment Advisor)

So we should see that,

Ted Goldthorpe (Chairman and CEO)

Yeah, I'm actually. I agree with you. It should provide much more stable earnings going forward. And again, earnings that, you know, that are much easier to digest for investors.

Chuck Burns (Investment Advisor)

A-a-and maybe-

Ted Goldthorpe (Chairman and CEO)

We've seen this, by the way. This is not a novel concept. I mean, a lot of our big peers have adapted or adopted this exact way of doing things. So it's pretty consistent with some of what our peers are doing out there.

Chuck Burns (Investment Advisor)

Okay. So the reporting will be similar to other peers, so that analysts can do comparisons in terms of valuations?

Ted Goldthorpe (Chairman and CEO)

Correct.

Chuck Burns (Investment Advisor)

Okay. Okay, great. Thanks very much.

Ted Goldthorpe (Chairman and CEO)

Thanks, Chuck.

Operator (participant)

There are currently no questions in the queue. Please be reminded, if you would like to ask a question, press star followed by one on your telephone keypad. There are no further questions. I will hand back over to your host to conclude today's call.

Ted Goldthorpe (Chairman and CEO)

Great. Well, thank you everyone for your time today and attention this morning. As always, we are happy to make ourselves available for any questions you may have on the business, and we look forward to speaking to you all next quarter. Thank you very much.

Operator (participant)

That concludes today's conference call. Thank you for joining. Have a nice day.