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Operator
Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Mount Logan Capital's second 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 meeting of 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 risk 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 risk associated with Mt. Logan Capital's business, as well as information about the material factors and assumptions that could cause results to differ from any forward-looking statements and other relevant factors, please refer to the company's public disclosure record, particularly the company's MD&A and annual information form for the year ended December 31, 2023, which are available on SEDAR. I would now like to introduce your host for today's conference. Mr. Ted Goldthroat, Chairman and Chief Executive Officer of Mount Logan Capital. Mr. Goldthroat, please go ahead.
Goldthroat
Thank you. Good afternoon, everyone. We appreciate you joining us for our second quarter 2024 results call. During the call, we will refer to information provided in the second quarter 2024 press release, MD&A, and consolidated financial statements, all of which were released Thursday evening and are available on our website and CDAR. Joining me this morning to discuss our results and outlook for our business is our Chief Financial Officer, Nikita Klaassen, and my co-presidents, Matthias Ederer and Henry Wong. As a reminder, all references to dollar amounts on this call are in U.S. dollars, unless otherwise stated. Overall, the second quarter was another strong quarter for our business, and we are excited to review our performance with you today. We're also pleased to announce that we will be paying our 20th consecutive quarterly dividend, which will consist of a $0.02 Canadian per share distribution for shareholders of record as of August 22, 2024. Before we provide a more detailed discussion of our second quarter financial results, I want to first highlight the growth that we continue to see across our business, as well as increased efficiency and effectiveness of the teams. We saw 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 second quarter publishing SRE. Following discussions of key stakeholders, we implemented this SRE metric, a performance-based measure for comparable public insurance platforms, to help investors better assess the performance of Mount Logan's insurance segment. During the quarter, we, alongside BC partners, announced that our recently launched Opportunistic Credit Interval Fund has now surpassed $100 million in commitments and finished the quarter at approximately $135 million in net assets. Our team is incredibly proud of the growth realized in this fund, supported by its exceptional performance, inception-date capabilities, and our retail sales force. From a financial results perspective, both segments saw top-line growth year over year. Our asset management segment achieved a fourth consecutive quarter of record asset management incentive fees. And in our insurance segment, asset growth and active deployment of capital contributed to increase in total insurance assets and net investment income. Ability's total assets managed by Mt. Logan increased to $636 million, demonstrating the organic growth engine we've built within Mt. Logan and we expect we'll continue to support growth across our insurance and asset management verticals in the following quarters. Our asset management segment, which encompasses our retail and institutional targeted businesses, generated $3.4 million in revenues during the second quarter, an increase of 13% year-over-year. We note this figure excludes $1.5 million of management fees generated under a management agreement with Ability, which increased 58% year-over-year. On the retail side, our two interval funds, SoftX and AltSIF, continue to benefit from investments made during 2023, which included growing our in-house sales force to support subscription activity and capitalize on the growing demand for private credit in the retail markets. SoftX, the opportunistic credit interval fund we manage, experienced another impressive quarter of growth resulting in a 35% increase in net assets as compared to the prior quarter. Net assets for the quarter ended June 30th for approximately $135 million, and subscription activity has persisted post-quarter end. We expect SOFX's strong returns, approximately 39% cumulative exception of date, plus an 11% annualized dividend yield while sustaining fundraising tailwinds for this differentiated private credit product. Our sales force remains focused on growing Sophix and AltSIF. AltSIF, our other credit-oriented internal fund, had total net assets at quarter end of approximately $241 million. Mount Logan Management's specialty finance-oriented vehicle, the Alternative Income Fund, continues to perform well, generating a net return of 3.2% for the quarter and 10.9% for the trailing 12-month period, a significant pickup relative to the prior year period. The fund finished the quarter with approximately $202 million in assets under management, and despite the strong performance, fundraising remains a challenge for the fund. During the quarter, we elected to begin the process of an orderly liquidation of the fund's assets, and we will continue our efforts to generate attractive returns for investors during this period. Distributions will occur as a result of investments reaching contractual maturities, accelerated payoffs, or refinancing activities, and or the sale of the investment position. We believe in our specialty finance strategy and are actively evaluating new possible paths for budgeting our team to drive value for our shareholders. On the institutional side, our BDC and CLO funds represented approximately $1.3 billion of 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 fees generated on a permanent and semi-permanent capital base. Logan Ridge, achieved its eighth consecutive quarter of positive net investment income and declared another quarterly dividend of 33 cents per share. As of quarter end, Logan Ridge had a total asset base of approximately $204 million. Mount Logan maintains its exposure to its second BDC, Portman Ridge, for its minority interest in Portman Ridge's investment advisor, Sierra Crest. Portman Ridge finished the quarter with approximately $489 million in total assets and the management contract continues to provide stable quarterly cash distribution to Mount Logan. On our CLO business, AOM for the quarter was $599 million. In the fourth quarter of 2023, the revenue share associated with our management of the CLOs increased from 30% to 100%, which drove increased revenues during the first and second quarters and will drive an estimated $1 to $2 million increase and annualized asset management revenues relative to 2023. Lastly, our key sub-advisory relationship saw NAV grow to $82 million during the quarter, an approximately 67% increase quarter-over-quarter. This relationship remains a fast-growing and profitable venture for our team. Our insurance business, during the quarter, Ability reinsured an additional $28 million multi-year guaranteed annuity flow. As of June 30th, Ability has approximately $1.1 billion of invested assets, of which Mount Logan manages a significant portion. We anticipate the asset base will continue to grow as we increase our annuity exposure. The insurance business remains incredibly highly strategic to Mount Logan and is a priority for our team. We are actively deploying capital and managing investments with attractive risk-adjusted returns across the credit spectrum. On the liability side, we believe our annuity reinsurance business is optimal in the current environment. Annuity policies we reinsure contain surrender charges, which protect ability from earlier-than-expected policyholder 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 I turn the call over to Nikita Klassen, our CFO, 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 segments, which is evident in the FRE and SRE growth for the quarter and trailing 12-month periods. Our team remains focused on streamlining our business, improving efficiencies, and increasing asset center management through our insurance and retail distribution channels. We also continue to evaluate strategic M&A opportunities to grow our business and expand investment and distribution capabilities. With all that being said, I will hand over the call to my partner, Nikita, who will review the financial results for the quarter.
Nikita
Thanks, Ted. Good afternoon, everyone. I will now summarize our key guidelines for the second quarter of 2024. As a reminder, all figures referenced on today's call will be in U.S. dollars. Mount Logan's functional and presentations For our asset management segment in the second quarter of 2024, we generated $3.4 million of revenue. Breaking down our asset management revenue further, our CLOs generated approximately $818,000 in management fees for the quarter. The net loss related to AltSys comprised of servicing expenses, which was approximately $417,000. With regards to our BDCs, Logan Ridge generated approximately $909,000 in management fees, and through our minority interest in Sierra Crest, the company recognized $57,000 in attributable loss for the quarter. Our net asset management revenue declined by 15.8% quarter over quarter, primarily due to the aforementioned losses on the equity investment in Sierra Crest and unrealized losses on a small equity security. For the asset management segment, on the expense side for the quarter ended June 30th, we incurred approximately $6.7 million in operating expenses. Asset management operating expenses decreased by 13% quarter over quarter, primarily due to efforts to reduce general administrative and other expenses. For the quarter ended June 30th, Mount Logan incurred $1.7 million in interest and credit facility expenses, which relate to our $34 million corporate credit facility and $18.8 million in venture events. Our interest expense decreased slightly quarter over quarter due to principal paydowns and a more favorable rate on the debenture units. Moving on to our insurance business, we had total revenue this quarter of $15.7 million, which is net of insurance service expenses and net expenses from reinsurance contracts held. Revenue for the insurance business in the current quarter decreased by $1.8 million. The decrease in revenue was primarily attributable to unrealized losses on our interest rate swaps and our corporate bond portfolio due to higher net investment yield during the current quarter. This decrease was partially offset by higher net investment income as the investment portfolio continued to grow from additional MIGA business that was reinsured and higher interest rates. Further, there was a small improvement in the insurance service results as a result of lower insurance service expenses. Our insurance business reported total expenses of $8.6 million during the current quarter. The increase in expenses was primarily attributable to changes in the interest rate environment, which resulted in lower net insurance finance income compared to the prior quarter. Spread-related earnings with $11.6 million for the trailing 12 months ended June 30th, 2024, an increase of $17 million compared to the trailing 12 months for the previous year. increased year-over-year due to increased net investment income and lower other operating expenses, which was partially offset by increased cost of funds. For the quarter-ended June 30, 2024, Mount Logan reported basic earnings per share and diluted earnings per share of $0.14. This was compared to basic earnings per share of $0.51 and diluted earnings per share of $0.50 for the three-month-ended March 31, 2020. and basic earnings per share and diluted earnings per share of $0.03 for the three-month end of June 30, 2023. The quarter-over-quarter decrease resulted primarily from a decrease in the net insurance finance income and higher unrealized losses on interest rates, stocks, and corporate bonds. This decrease was partially offset by increases in management fees from the asset management segment, increase in net investment income under the insurance segment, and overall improved insurance service results. The year-to-date increase resulted primarily from an increase in net insurance finance income, improvement in insurance service results, and increases in management fees in the asset management segment, as well as decreases in general and administrative expenses in the insurance segment. As of June 30th, 2024, Mount Logan's balance sheet reflected total assets of $1.71 billion, total liabilities of $1.65 billion, and shareholders' equity of $68.2 million. The increase in shareholders' equity from previously reported Q1 March 31, 2024 figures is due to higher net income. The higher net income was due to revenue growth in both the asset management and insurance segments. Asset management revenue increased due to an increase in management fees and improvement in insurance segment revenue resulted from better insurance service results and higher net investment These improvements were partially offset by an increase in cost related to MIGA liability due to interest accretion on the new MIGA business assumed, which was further offset by lower administrative expenses, which are part of the company's efforts to reduce overall expenses across the platform. On the asset management side of the balance sheet, total assets were $62.2 million. They decreased $2.8 quarter over quarter, primarily due to the decrease in fair value of the investments. Economic losses picked up on the equity investment in Sierra Crest contributed to this decrease, as well as a slight decrease in the fair value of the equity securities. We also redeemed a portion of our investment in SOFX during the quarter. Asset management total liabilities were $82.9 million, an increase of $1.4 million quarter over quarter, primarily due to an increase in due to affiliates. The increase is due to a timing of repayment of operating expenses to third-party vendors. On the insurance side of the balance sheet, total assets were $1.6 billion, an increase of $26 million, quarter over quarter. The increase in assets was primarily due to an increase in cash and cash equivalents, including restricted cash, which is posted as collateral for our interest rates, of $20.6 million. This was from an increase in MIGA flows during the second quarter of 2024. Investments in financial assets also increased by 18.6 million, reflecting the growth of the insurance segment's total asset base. The increase in assets was partially offset by a decrease of 13.4 million in reinsurance contracts due to recoveries from reinsurers and updates to discount rates in the current quarter as relevant market rates have increased. Our insurance segment has total liabilities of $1.6 billion, representing an increase of $20 million from March 31st, 2024. The increase in liabilities was primarily attributable to an increase in investment contract liabilities of $20 million during the quarter as a result of underwriting new MIGA policies. Accrued expenses and other liabilities increased by $7.5 million, primarily due to a timing of increase in payables for investment purchase that were not settled during the quarter. Funds held liabilities also increased by $4.8 million due to investment income on the investments held. This increase was partially offset by a decrease of $14.1 million in insurance contract liabilities driven by claimed settlements and the impact of increased interest rates, which decreased the present value of insurance contract liabilities. This was partially offset by additional liabilities assumed related to the new micro-business. Overall, the company is pleased with its financial performance for the second quarter 2024, as well as its capital position. I will now turn the call back to Ted Goldthorpe for some closing remarks.
Goldthroat
Thanks, Nikita. In closing, the foundation for our business's success has now been built over the last several years, and focus remains squarely on how to enhance returns for our shareholders. As demonstrated through recent market volatility, our private market's orientation differentiates us from the market, commands a higher multiple relative to traditional asset managers. Each of the funds we manage are supported by permanent and semi-permanent capital bases, enabling Mount Logan to not only sustain itself through moments of variability, we can opportunistically deploy capital into these environments and capture outsized, risk-adjusted returns for the benefits of those invested in our managed funds. We continue to believe that our core pillars of the business, asset management and insurance solutions, provide stability, and a clear pathway to growth throughout the remainder of the year. Our team is committed to executing on our business plan. We believe we are in the early innings of Mount Logan's growth phase. This concludes our prepared remarks. We will now transition the call to a Q&A session if the operator could please coordinate.
Operator
If you would like to ask a question, please press star 1 on your telephone keypad. You will be advised when to ask your question. There are currently no questions in the queue. Please be reminded that if you would like to ask a question, please press star one on your keypad now. Our first question comes from Chuck Burns. Please go ahead with your question.
Chuck Burns
Hello, Ted. It's Chuck. How are you?
Goldthroat
Good.
Chuck Burns
Hi, Chuck.
Goldthroat
How are you?
Chuck Burns
Not too bad. Not too bad. So results continue to impress. I have to admit it's not the easiest company to understand But bottom line results and growth look very, very strong. And I guess I come back to the question, how can potential investors out there kind of realize, I'm not sure if this is a bold statement, the opportunity that they're missing in the companies?
Goldthroat
Yeah, I think it's a combination of things. You know, I think number one is, you know, you're really going to see continued growth in our business, both organically and inorganically. And I think that's been rewarded historically through higher multiples. And then number two is, you know, obviously we're laser focused as a management team on creating shareholder value. So there's a number of things that we can do to potentially unlock that. So that's something we're all discussing internally. And then the third thing is, you know, we have to get out there in front of shareholders. So we did a big investor day two months ago. If any shareholders want to engage with us, we're happy to do it, no matter how big or small. And, you know, we're really trying to, like, invest in people and additional ability for us to get out there and get the story out there.
Chuck Burns
Is it – are you looking to getting perhaps coverage out there from – brokerage houses? Is that a possibility?
Goldthroat
Yeah, I think it's a real possibility. We just made a new hire who is very plugged into that community and is focused on getting us some coverage. Historically, we were covered by two banks, and we are very focused on providing that coverage to get the message out there. I think it's really, really important for a company of our size.
Chuck Burns
Okay. Thanks very much.
Goldthroat
Thanks, Chuck.
Operator
There are no further questions, so I will hand the conference back to your host to conclude today's call.
Goldthroat
Great. Well, thank you, everyone, for your time today. And as always, we are happy to make ourselves available for any questions you may have on the business. Look forward to speaking with you again next quarter and enjoy the rest of your summer. And as always, the management team is always available to answer any questions or engage in any dialogue. Thank you so much.
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