This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
Good morning, ladies and gentlemen, and thanks for standing by. Welcome to Mount Logan Capital's third quarter 2023 results conference call. Before we begin, I would like to remind listeners that except for historical information, the matters discussed during this call may include forward-looking statements within the meaning of the applicable Canadian securities legislation. Forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause actual financial results, performance or achievements, to be materially different from estimated future results, performance or achievements expressed or implied by those forward-looking statements. All forward-looking statements reflect the company's current views with respect to future events and are subject to risks and uncertainties and assumptions we have made in drawing the conclusions 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 Lovin Capital's business, as well as information about the material factors and assumptions that could cause results that 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 the annual information form for the year ended December 31st, 2022, which are available on CDAR. And I'd like to introduce our host for today's conference, Mr. Ted Goldthorpe. Chairman and Chief Executive Officer of Mount Logan Castle. Mr. Goldthorpe, you may begin.
Ted Goldthorpe
Thank you, operator. Thank you and good afternoon, everyone. We appreciate you all joining us for our third quarter 2023 results call. During the call, we will refer to information provided in the third quarter 2023 press release, MD&A and consolidated financial statements, all of which were released Wednesday evening and are available on our website and CDAR. Joining me to discuss our results and outlook for the business is our Chief Financial Officer, Jason Ruse, our President, Henry Wang, and Jordan Mangum. As a reminder, all references to dollar amounts on this call are in U.S. dollars unless otherwise stated. Overall, the third quarter was an active quarter, and we are excited about the strong results we will discuss today across each segment. We are confident these results are leading indicators as we enter the fourth quarter and look ahead to 2024. We're pleased to announce that we'll be paying our 17th consecutive quarterly dividend, which would consist of a two Canadian cent per share distribution for shareholders of record as of November 20th, 2023. Before we provide a more detailed discussion of third quarter financial results, we wanted to highlight the progress across the business during the quarter. We officially closed the ovation transaction in July, and recognized a full quarter of fees from the alternative income platform. Our office in Austin now operates under the Mount Logan banner, and we are pleased with the integration into our team. Our Mount Logan managed vehicles now benefit from our expanded investment capabilities and specialty finance, a large, growing, and attractive area for our business, which further diversifies our expertise across the credit universe. We also raised $17 million of capital for the benefit of Ability Insurance Company, our wholly-owned insurance subsidiary, to increase surplus capital, enabling the completion of our $250 million existing reinsurance obligations and providing additional capacity for future prospective annuity volumes to drive growth across both our segments and grow our assets under management. From a financial results perspective, both segments had strong earnings, The asset management segment earned a record level of asset management fees during the quarter, and in insurance, strong revenue and net investment income drove a significant increase in Mt. Logan's earnings per share. Our asset management segment, which encompasses our retail and institutional targeted businesses, generated $3.2 million in revenue in the third quarter. We note that this figure excludes approximately $1.1 million of management fees generated under a management agreement with Ability. On the retail side, our two interval funds, Alt-CIF and Sofex, continue to benefit from our in-house sales force that helped drive new subscriptions. Sofex, the opportunistic credit interval fund we manage, experienced impressive growth during the quarter, resulting in a 264% increase in net assets as compared to the prior quarter. Net assets for the quarter ended September 30th were approximately $37 million. During the quarter, SOFX received approval for distribution on two large retail investment platforms, which drove approximately $11 million in subscriptions in the month of September. We expect the strong fund performance, approximately 30% inception to date and 12% year to date, to drive a significant number of new investor subscriptions over the coming quarters. Our sales force remains focused on growth of SOFX and ALTSIF, our other private credit-oriented interval fund, which had total net assets at quarter end of approximately $252 million. On the institutional side, our BDC and CLO funds represented approximately $1.4 billion in assets as of the end of the quarter and continue 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 fifth consecutive quarter of positive net investment income, which supported an increase to Logan Ridge's quarterly dividend, the second consecutive increase in the company's dividend since it was reintroduced at the beginning of the year. As of quarter end, Logan Ridge had a total asset base of approximately $197 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 $546 million in total assets, and the management contract continues to provide a consistent quarterly cash distribution to Mount Logan. On the CLO side, AUM for the third quarter was $658 million. In the fourth quarter, the revenue share associated with our management of the CLOs will increase from 30% to 100%, driving an estimated $1 to $2 million increase in annualized asset management revenues. We also received a full quarter of fees following the transaction with Ovation Partners from its alternative income fund. The fund contributed $1.3 million in management and incentive fees during the quarter and finished the quarter with approximately $220 million in assets. Lastly, on the asset management side, given the strong demand for private credit in the current environment and the diversity of credit strategies we manage, we are having ongoing conversations with third-party investors on dedicated funds tailored to their needs also known as separately managed accounts, which may provide additional sources of revenue to Mt. Logan with minimal additional costs. One of our key subadvisor relationships saw NAV growth of over 50% quarter-over-quarter. We expect this trend will continue over the next 18 to 24 months. On the insurance side, during the third quarter, Ability reached its cap for its two existing MIGA flow agreements of $250 million and intends to enter into new MIGA reinsurance agreements in the near future. As of September 30th, Ability has approximately $965 million of invested assets, of which Mt. Logan manages a significant portion. We anticipate the asset base will continue to grow as we increase our annuity exposure. For the quarter, management fees related to management of insurance assets increased approximately 15% quarter over quarter. The insurance business remains highly strategic to Mount Logan, and it's 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 remains attractive in the 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. On the strategic front, I wanted to quickly acknowledge the unfortunate dissolution of the transaction with Canaccord Genuity G Ventures Corp, or G Corp. As a growth acquisition corporation, G Corp was required to complete a permitted transaction with a prescribed timeline. While our team and advisors worked tirelessly to complete the transaction, it became clear that we'd face challenges meeting the qualifying transaction deadline. While a disappointing outcome, our team remains energized by other strategic opportunities we are seeing in the market to further grow Mount Logan Capital in the asset management and insurance markets. Before turning the call over to Jason Ruse, I did want to take a moment again to thank our team for their commitment to Mount Logan. While uncertainty in the markets is increasing, we believe our business, supported by permanent and semi-permanent fee-paying capital, is well positioned for strong performance in the face of volatility. With that, I will hand the call over to Jason, who will review the financial results for the quarter.
Jason
Thanks, Ted. Good afternoon, everyone. I will now summarize our key highlights for the three and nine months ended September 30th, 2023. As a reminder, all figures referenced on today's call will be in U.S. dollars. On July 5, 2023, we completed the second step of the Ovation acquisition for total consideration of $7.1 million, consisting of $340,000 of cash paid and $6.8 million in MLC shares. Of the $3.1 million asset management revenue generated during the quarter, we earned $2.5 million in management fees, which included $1.2 million in fees earned from Ovation-managed funds. The remaining sources of revenue remain largely flat quarter-over-quarter across our CLOs, BDCs, and minority interests in Sierra Crest. Excluding gains and losses from investment activities, our asset management revenue increased by 7% quarter-over-quarter. We incurred approximately $6.9 million in operating expenses in the asset management segment in the third quarter. Operating expenses remain fairly consistent quarter-over-quarter, with a slight increase in interest and other credit facility expenses as we raised an additional $5 million in debt through our LendBridge subsidiary. The proceeds were subsequently contributed to Ability to support growth in our insurance segment. Transaction costs declined slightly quarter-over-quarter by $406,000 due to less deal activity as ovations deal costs were incurred in prior quarters. General and administrative expenses increased by $800,000, attributable to increase compensation expenses with the closing of ovation in addition to increased legal expenses. Moving on to our insurance business, we had total revenue this quarter of $18.4 million, which is net of insurance services expenses and net expenses from reinsurance contracts held. Total revenue increased by 91% from the second quarter of 2023. Revenue increased this period due to the runoff of claims on our long-term care book and the impact of increased interest rates for the quarter. Net investment income and unrealized gains on the investment portfolio were significant drivers for positive performance this quarter as additional MIGA business was reinsured. Overall, given the current investment portfolio and liability structure at Ability, we expect that rising interest rates will continue to have a long-term benefit to Ability's capacity to generate investment yield in the form of net investment income. The continued increase to risk adjusted market interest rates has significantly increased the discount rates applied to our IFRS 17 results, resulting in our net insurance finance income being $12.1 million higher in the third quarter compared to the second quarter of 2023. Excluding net insurance finance income, our insurance business reported total expenses of $11.9 million during this quarter compared to $8.7 million in the second quarter of 2023. The increase of $3.2 million is due to additional investment contract liabilities as new MIGA was reinsured during the period and a decrease to our reinsurance assets, largely resulting from higher interest rates. For the quarter ended September 30, 2023, Mt. Logan reported a basic earnings per share of $0.62 and adjusted basic earnings per share of $0.68. EPS across basic and adjusted presentation resulted primarily from a change in net insurance finance expense driven by an increase in market interest rates in the quarter. As of September 30, 2023, Mt. Logan's balance sheet reflected total assets of $1.67 billion, total liabilities of $1.61 billion, and shareholders' equity of $54.6 million. Mt. Logan's asset management segment had nominal changes in total assets this quarter. with the most significant increase attributed to the $8.3 million investment management agreement entered as part of the Ovation acquisition, which will be amortized over 10 years. At quarter end, asset management segment liabilities increased by $5 million due to the additional Linbridge note issued during the period as discussed previously. Total insurance segment assets increased by $30.6 million to $1.6 billion, or 1.9% from June 30, 2023, With the most significant increases attributed to cash and cash equivalents of $6 million, as we met our MIGA reinsurance flow agreement cap during the quarter, and investments in finance assets of $45.2 million, driven by investment of premiums received within the investment portfolio. Reinsurance contract assets, which relate to our Front Street RE, Vista RE, and Medeco seated contracts, decreased by $30.9 million compared to June 30, 2023, due to the impact of finance income required to reflect the time value of reinsurance contract assets under IFRS 17. Total insurance segment liabilities increased nominally by $5.6 million, or 0.4% from June 30, 2023, to $1.53 billion. Insurance contract liabilities decreased by $33 million compared to June 30, 2023, due to the increase in discount rates and partially offset by new MIGA businesses. Accrued expenses and other liabilities increased by $19.8 million due to unsettled investment trades payable as of September 30, 2023. Overall, we have continued to see strong performance in both our asset management and insurance segments, benefiting significantly from the rising interest rate environment and the acquisition of Ovation. I will now turn the call back over to Ted Goldthorpe for some closing remarks.
Ted Goldthorpe
Thanks, Jason. In closing, I want to state again how pleased we are with the results we are seeing. We feel Mount Logan is well positioned in the current environment to capitalize on the secular growth tailwinds in the private markets and alternative asset management space. Our team is committed to sustaining momentum and will keep everyone updated as we work to deliver on our plan to accelerate Mount Logan's growth and unlock value for our shareholders. That concludes the prepared remarks. We will now transition the call to a Q&A session if the operator could please coordinate.
Operator
Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If you would like to withdraw your question, please press star followed by 2. When preparing to ask your question, please ensure your device is unmuted locally. As a reminder, that's star 1 on your telephone keypad. We have no questions, so this concludes our Q&A. I'm going to hand back to Ted Koltorp, Chairman and CEO, for closing remarks.
Ted Goldthorpe
Thank you again for your time and attention this morning. We are excited for the quarters ahead and look forward to updating everyone via press release and during our next earnings release in March. And as always, we are happy to make ourselves available for any questions you may have on our business. Have a great weekend, and thank you very much.
Operator
Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.
Disclaimer