Mount Logan Capital Inc (MLCI) 2024 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Mount Logan Capital's fourth quarter and full year 2024 results conference call. Before we begin, I'd 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 conclusion 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, 2024, 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 the fourth quarter and full year 2024 results call. During the call, we will refer to information provided in the fourth quarter and full year 2024 press release, MD&A, consolidated financial statements and annual information form, 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; our Co-Presidents, Matthias Ederer and Henry Wang; and our Head of Investor Relations, Scott Chan. As a reminder, all references to dollar amounts on this call are in US dollars, unless otherwise stated.

Overall, the fourth quarter and full year 2024 saw strong financial performance and growth across our key business segments, and we are excited to review our performance with you today. We're also pleased to announce that we will be paying our 22nd consecutive quarterly dividend, which will consist of CAD0.02 per share for shareholders of record as of April 3, 2025.

Our team has been hard at work through 2024, subsequently through today, executing on several key strategic initiatives. In December, we successfully expanded our corporate credit facility, enhancing our capacity to drive growth across our core asset management and insurance segments while introducing a pricing step-down mechanism.

During the first weeks of January, we announced a transformative all-stock combination with 180 Degree Capital. The announced combination, which remains subject to regulatory and shareholder approvals, and provides Mount Logan access to a team with a longstanding track record of investing in public companies, which will help expand our private credit investment capabilities into the public markets, which we believe is a high-growth area for our asset management business.

The combined pro forma balance sheet will also position Mount Logan to capitalize on a solid pipeline of organic and other M&A opportunities. Both shareholder bases are expected to benefit from a larger company and improved stock liquidity from an increased public float. Pro forma for the combination, the company will continue to operate under the Mount Logan banner as is expected to be listed on the Nasdaq transitioning from the Cboe Canada.

Upon expected close, we anticipate -- I anticipate continue to act as the Chief Executive Officer of the combined business. Subsequently, in January, we announced the completion of our previously announced minority investment in Runway growth capital alongside BC Partners Credit.

We aim to leverage Runway's capabilities to expand our credit investment expertise into growth and venture lending. We expect the partnership will unlock additional opportunities for Mount Logan to develop new products and drive additional organic growth.

Transactions with 180 Degree Capital and Runway bring us one step closer to our stated goal, becoming a fully diversified one-stop credit manager. Last quarter, we highlighted the initiatives to improve our liquidity in our shares.

These efforts are yielding positive results as fourth quarter average daily trading volumes in MLC shares increased meaningfully quarter-over-quarter. In early February, Canaccord Genuity initiated research coverage on Mount Logan capital, which serves benefits, including access to an institutional clientele as we continue to grow in the marketplace.

We continue to see strong consolidation trends among private credit asset managers at premium valuations. Management continues to believe that our current share price does not reflect the immense work our team has done to scale our business, particularly through our strategic transactions that support our key profitability metrics.

We believe the implied valuation of our stock trades at a significant discount to large cap asset management peers even before considering the incremental value attributable to a regulated insurance business ability.

Before we provide a more detailed discussion of our fourth quarter and full year financial results, I first want to highlight the strong growth we continue to see across our business as well as increased efficiency and effectiveness of our team.

We saw organic growth across two key business segments, primarily measured by fee-related earnings, or FRE for the Asset Management Segment and Spread-Related Earnings or SRE for the insurance segment, which both were up quarter-over-quarter and year over year.

2024, Mount Logan achieved an FRE of $7.5 million on the asset management business, I think consistent with the range we previously disclosed to the market, in January of 2025. In SRE demonstrated sustained growth relative to 2023 at $15.3 million, driven by an increase in net investment income and lower cost of funds and operating expenses. 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 our insurance segment asset growth and active deployment and management of capital contributed to an increase in total insurance assets.

Ability's total assets managed by Mount Logan were $620 million representing approximately 62%. 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 $4.4 million in revenues during the fourth quarter, an increase of 19% year over year.

We note this figure excludes $1.2 million of management fees generated under our management agreement with Ability. On the retail side, our two interval funds, SOFIX and Alt-CIF continue to capitalize on the growing demand for private credit in the retail markets. We remain committed to the retail distribution channel and are working hard to increase retail inflows into our credit enable funds.

SOFIX, the opportunity of credit enable fund we launched and managed experienced another quarter of growth, resulting in a 10% increase in net assets as compared to the prior quarter. Net assets for the quarter of December 31 or approximately $159 million.

We expect SOFIX an impressive track record of performance, approximately 46% cumulative inception to date and 2% year-to-date through March 6 plus its 9.2% annualized dividend will support the 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, had total assets at quarter end of approximately $217 million. Mount Logan's Management's specialty finance-oriented vehicle, the alternative income fund finished the year with approximately $201 million in assets under management.

During the third quarter, we elected to begin the process of an orderly liquidation of the fund's assets and we'll continue our efforts to generate attractive returns for investors during this period. In the fourth quarter, the alternative income fund net returns were approximately 3% and closed 2024 with strong performance of 9.4%. We believe our specialty finance strategy and are actively evaluating new 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 at the end of the quarter and continue to provide predictability in Mount Logan's top line due to the stable nature of fees generated on the permanent and semi-permanent capital days.

Logan Ridge achieved its tenth consecutive quarter of positive NII. As of quarter end, Logan Ridge had a total asset base of approximately $187 million.

Mount Logan maintains its exposure to its second BDC, Portman Ridge for its minority interest at Portman Ridge's Investment Advisor Sierra Crest. Portman Ridge finished the quarter with approximately $425 million in total assets and the management contract continues to provide consistent quarterly cash distributions to Mount Logan.

On January 30, we announced the Boards of both our listed BDCs, Portman Ridge and Logan Ridge unanimously approved the combination of the two vehicles. The combined company is expected to have total assets in excess of $600 million.

The merger is expected to provide several benefits, including lowering operating expenses and potentially greater access to more diverse sources of financing at a lower cost. Our management team's extensive experience with BDC acquisitions, the recent transaction with Runway position us well for the future.

On the CLO side, AUM for the quarter was approximately $572 million. In the fourth quarter of 2023, the revenue share associated with the management of the CLO's 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 relationship with $87 million in NAV. In 2024, this relationship has been a profitable venture for our team, and we continue to evaluate other sub-advisory relationships to increase AUM and management fees.

The insurance business remains highly strategic to Mount Logan and is a priority for our team. We're 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 the overall business. Before turning the call over to Nikita, 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 12-month period of 2024. Our team remains focused on streamlining our business, improving efficiencies and increasing AUM through our retail and insurance distribution channels.

While we are focused on the announced 180 Degree Capital transaction and a number of other internal initiatives, we continue to build an active M&A pipeline as we remain focused on increasing investment into our key business segments to expand our investment, distribution and insurance capabilities. With that, I will hand the call over to Nikita, who will review the financial results for the quarter.

Thanks, Ted. Good morning, everyone. I will now summarize our key highlights for the fourth quarter of 2024. As a reminder, all figures referenced on today's call will be in US dollars, Mount Logan's functional and presentation currency.

For our Asset Management segment in the fourth quarter 2024, we generated $4.4 million of revenue. Breaking down our asset management revenue further, the Alternative Income Fund generated approximately $1.3 million in management and incentive fees. Our CLOs generated approximately $779,000 in management fees for the quarter, while SOFIX, our interval fund, generated $947,000 in management and incentives.

The net loss related to Alt-CIF, which is recorded within administrative and servicing fees, was approximately $595,000 for the quarter. With regards to our BDCs, Logan Ridge generated approximately $834,000 in management fees, and we recognized a $439,000 gain on our minority interest in Sierra Crest, which manages Portman Ridge. These combined results contributed to revenues increasing by 16% quarter over quarter.

For the Asset Management segment on the expense side, for the quarter ended December 31, we incurred approximately $13.4 million in operating expenses. This includes $3.5 million of corporate overhead expenses. Asset management expenses increased 80% quarter over quarter, primarily due to increased onetime expenses for transaction costs incurred in advance of the Runway acquisition and TURN merger as well as the impairment on the Ovation investment management agreement and the corporate credit facility upside.

For the quarter ended December 31, Mount Logan incurred $3.9 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 as the paydowns on the corporate facility were offset by growing paid-in-kind interest on the debenture units. FRE earnings were $7.5 million for the 12 months ended December 31, '24, an increase of $2 million compared to the 12 months ended 2023.

FRE increased significantly year-over-year due to growth in fees across managed vehicles, partially offset by higher expenses associated with the operations of Ovation as 2024 incorporates a full year of Ovation operations versus 2023, which only includes six months of operation.

Moving on to our insurance business. Insurance service results were consistent quarter-over-quarter, while total revenue for the insurance business in the current quarter decreased by $32.1 million compared to the prior quarter as the investment portfolio declined due to higher treasury yields during the quarter.

The growth decrease was offset by $12.4 million relating to the collateral held under the Front Street Re contract, which is referred to as the realized and unrealized loss on embedded derivatives within the statement of comprehensive income.

Total expenses for the insurance business in the current quarter decreased by $61.3 million compared to prior quarter. The decrease in expenses was attributable to higher treasury yields this quarter, which resulted in lower insurance finance expenses of $59.2 million compared to prior quarter.

Additionally, expenses decreased by $1.6 million due to increased unrealized losses held by the company under the Modco agreement with Vista, which is recorded as a decrease in reinsurance assets. Furthermore, there was a $0.5 million reduction in G&A expenses due to lower recorded compensation costs, legal and consulting costs.

Some of these costs, we do expect to be temporary in nature. Overall, spread-related earnings was $15.3 million for the 12 months ended December 31, '24, an increase of $17 million compared to the 12 months ended December 31, '23.

SRE increased significantly year over year due to increased investment income, lower cost of funds, and lower operating expenses. Mount Logan reported basic and diluted earnings per share of $0.22 and $0.20, respectively, for the 2024 fiscal year.

This is compared to basic and diluted loss per share of $0.69 for the 2023 fiscal year. The increase in earnings per share in 2024 primarily resulted from an improvement in insurance service results, increased net investment income, decrease in net insurance finance expenses and decrease in general and admin and other expenses in the insurance segment.

The increase in EPS was partially offset by an increase in net losses from investment activities in the Insurance segment due to increases in bond yields, which resulted in higher unrealized losses in 2024 when compared to 2023. As of December 31, 2024, Mount Logan's balance sheet reflected total assets of $1.69 billion, total liabilities of $1.63 billion, and shareholders' equity of $57.2 million.

The increase in shareholders' equity from the third quarter was due to favorable net income. On the asset management side of the balance sheet, total assets increased by 7% quarter-over-quarter to $63.6 million. This is primarily due to increased cash from the corporate credit facility upsize. The increase in assets was partially offset by the $1.8 million impairment charge recorded in the fourth quarter for the Ovation IMA as the fund's finite life was reduced.

Investment balances also declined due to a continued redemption of shares in the company's investment in SOFIX during the quarter. Asset Management total liabilities increased 14.1% to $94.5 million, primarily driven by the $13 million upsize in the corporate credit facility and accrued transaction costs, which are included as part of accrued expenses.

On the insurance side of the balance sheet, total assets decreased quarter over quarter by $81.4 million or 4.8% to $1.63 billion. The decrease in assets was primarily attributable to the decrease in reinsurance contract assets due to a decrease in the present value of the recoverable as higher discount rates were applied in Q4 as a result of higher treasury yields.

Additionally, the investment balances also decreased as a result of mark-to-market unrealized losses on bonds due to the increase in treasury yields. Cash and cash equivalents also decreased due to purchase of new investments, while these decreases were partially offset by increases in other assets due to unsettled trades. Our insurance segment reported total liabilities of $1.54 billion, representing a decrease of $95.8 million from September 30, 2024.

The decrease in liabilities was attributable to decrease in insurance contract liabilities of $87.6 million as higher treasury yields led to lower present value of liabilities. Accrued expenses and other liabilities also decreased by $10.8 million due to the settlement of payables related to investments purchased in the prior quarter, while the funds withheld liability also decreased by $4.1 million due to unrealized losses on the investments held.

These decreases were partially offset by a $5.2 million increase in the interest rate swap derivative and an increase of $1.9 million in investment contract liabilities due to interest accretion on our MYGA deposits. Overall, the company is pleased with its financial performance for the fourth quarter of 2024 as evidenced by our strong SRE and FRE. I will now turn the call back to Ted for some closing remarks.

Thanks, Nikita. In closing, the foundation for our business' success has been built steadily over the last several years, and we are excited to enter our next phase of growth, the anticipating closing, our transformer of combination with 180 Degree Capital. Combined with the closing of our minority investment Runway growth, we are closer to our stated vision of becoming a fully diversified one-stop credit solutions provider.

We remain confident that our core pillars, asset management and insurance solutions provide a stable foundation and a clear pathway for sustained growth. Our group has been highly active since last quarter, strengthened our pro forma balance sheet and building a robust pipeline of organic growth and M&A opportunities to carry our momentum into 2025. That concludes the prepared remarks. We will now transition the call to a Q&A session if the operator could coordinate.

(Operator Instructions)

Betty Yang, Canaccord Genuity.

This is Betty on for Matt Lee. So my first question is on the recent acquisition that you guys announced -- could you provide more detail on the acquisition of a minority stake Runway Growth Capital? Will this be integrated into an existing fund? Or will this operate as a stand-alone entity? Additionally, what is the expected contribution to fee revenue from this acquisition?

Right. Okay. So I'll answer the first part of that, and I'll turn it over to Nikita for the second part of it. So Runway growth is a venture lending BDC and it brings us both financial accretion also strategic. It's very strategic for us.

So it's going to continue to operate as a stand-alone company. So it's a publicly traded company on the Nasdaq Tickers RWAY. And it will continue to operate as a stand-alone business, but obviously, very, very integrated with the BC and Mount Logan infrastructure. And I'll turn over to Nikita for the earnings accretion.

Sure. Thanks, Betty. For this investment, it will be traded similarly to our minority stake in SOFIX. So we'll record some losses in our stake through the P&L as a minority interest, but strong outlook for the company.

My other question is on the AUM growth fund. You mentioned several forms that you're seeing very strong AUM growth. Is it possible to provide like a more detailed breakdown? Are there any particular forms where you see the most potential for further inflows in 2025?

Yeah, I'm happy to answer. This is [Jordan Mangum] on the Mount Logan team. I think for 2025, as we really look out, I think two core areas of AUM growth will be the opportunistic credit interval fund, which, again, if you look at its growth year-over-year from 2023 to 2024, it was 100%-plus.

So I think that we still view that as a very high-growth fund for us on the retail distribution side. And then the other area of growth continues to be the insurance solutions side. We spent a lot of time last year working through the MYGA flow agreements that we had in place, and we're actively looking at new flow agreements to increase the AUM on the insurance solutions side.

So I think when you look at the AUM growth, those are really going to be our two high-growth verticals. And we'll certainly provide more detail to the market as we continue to realize that stated growth target.

(Operator Instructions)

Francis Lau, Lucida Capital.

I've got a question on some of the strategies out here. Given the public market valuation favors a lot more on the asset management FRE over the insurance SRE, is your strategy to allocate even more capital or like a bias towards FRE growth?

Yeah, it's a very good question. So as you know, we got a bit of a double benefit when we put capital into our insurance business. Because obviously, we can lever that capital to basically generate SRE at our insurance company, but also FRE at our asset management company.

So the asset management side, obviously, we get a double benefit from our insurance business, separate apart from this, we're obviously continue as Jordan just alluded to, we're obviously growing our retail distribution channel as well. And those all should be a direct beneficiary to our FRE as well. So we are investing in both businesses, but both businesses help FRE, which obviously, as you mentioned, our stock really trades off of.

Right. And you were talking about like in the prepared remarks, the Mount Logan stock is very heavily significantly discounted versus other alternative asset management companies and peers. Is there anything that you can sort of like highlight to investors so that people can better understand the story in the hopes of narrowing the gap versus the peer group here?

Yeah, that's a good question. I mean this is why we're super excited about this 180 Capital transaction. Get us on the Nasdaq, it'll give us a much larger market cap. We'll trade a little bit -- we should trade more volume and we think one of the main reasons we traded a discount is largely due to our size.

So once we move off of the Cboe in Canada into the Nasdaq and obviously get an increased size, I think all of those factors I mentioned earlier, including broadening of our investor base, a larger float and more research coverage will obviously make our stock trade better.

And is that move coming maybe in Q2 or Q3? Like do you have the timing for that? .

Yeah. I mean we expect the vote to happen probably sometime at the end of the second quarter. So it will be either very end of the second quarter or early.

But you'll keep both listings, right?

We are probably just going to list in the US, but that's still something that we're contemplating.

Ben Grossman, Grossman Capital.

I had one on the 180 acquisition. So I know there's a limited amount you can say because they haven't filed the proxy yet. But obviously, as you mentioned, there's a bit coming up. I think they need two-thirds there. I know there's an activist involved, and I think there's tentatively an offer on the table that's at a higher percentage of NAV.

Wanted to ask you guys what your view is on conviction you have that two-thirds vote will get there. And maybe from a probability basis, percentage chance you think that deal doesn't close and what your reaction would be in that scenario?

Yeah, I mean we still feel very confident. First of all, we think it's a really good deal for their shareholders. So let's just put that on the table. Number two is, obviously, we are aware that we are in discussions with a number of stakeholders around the transaction.

But obviously, we feel pretty confident we're going to get the deal closed. I don't want to give you probabilities because that's not really -- it would be like purely conjecture. But I would say that, again, we feel pretty good we're going to get the deal done. And obviously, we're very open-minded to having dialogue with all stakeholders.

(Operator Instructions)

Okay. At this time, there are no further questions. I'll hand back to your host to conclude today's conference.

Great. Well, thank you very much, everyone, for your time today. As always, the entire management team is happy to make ourselves available for any questions you may have on the business. And we'll provide interim updates on key initiatives we are working on. We look forward to speaking with you to recap the first quarter results in May. We hope you guys all have a great weekend. Thank you.

Thank you all for joining today's call. You may now disconnect your lines.