Earnings Call Transcript - MLCI Q3 2025

Operator, Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Mount Logan Capital's Third Quarter 2025 Results Conference Call. Before we begin, I'd like to remind listeners that today's discussion will include forward-looking statements. These statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. These statements and other comments are not guarantees of future performance, but rather are subject to risk and uncertainty, some of which are beyond our control. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. For a description of the risks associated with Mount Logan Capital's business, please see our most recent filings with the SEC. In addition, we'll be referring to certain non-GAAP financial measures during this call. Additional details and reconciliations of GAAP to non-GAAP financial measures are in today's earnings release. This morning's conference call is hosted by Mount Logan's Chairman and Chief Executive Officer, Ted Goldthorpe; our Chief Financial Officer, Nikita Klassen; our President, Henry Wang; and the Head of Investor Relations, Scott Chan. As a reminder, all references to dollar amounts on this call are in U.S. dollars unless otherwise stated. I'll now turn the call over to Mr. Goldthorpe. You may begin.

Ted Goldthorpe, CEO

Thank you for joining us today. It has been an eventful year for our company, and I am eager to discuss Mount Logan Capital's third quarter with you. This quarter marks the success of years of preparation that allowed us to move from Canada to the U.S., transition our financials to GAAP, and list on the NASDAQ under the ticker MLCI. This year posed significant challenges for our team, and I am very thankful for everyone's hard work and dedication. I especially want to thank our shareholders and Board members for backing our vision at Mount Logan, as well as the shareholders of 180 Degree Capital for their overwhelming support of our business combination and our growth plans for 2026 and beyond. Today is an exciting milestone as we hold our first earnings call as a U.S.-listed alternative asset management and insurance solutions platform. While we will discuss our financial results today, I want to clarify that some numbers may be influenced by a recent transaction and related changes in our legacy term portfolio, so I will elaborate on our vision for the platform heading into 2026 and our goals for expanding assets under management and revenue in the coming years. I will also briefly outline our capital allocation expectations for the rest of the year before Nikita reviews our third quarter performance in detail. Currently, Mount Logan manages over $2 billion in assets across various investment vehicles and accounts, focusing on the appealing areas of private credit and insurance solutions. Since 2018, we have strategically developed the Mount Logan platform with three main objectives: to establish a foundation of recurring revenue and assets under management through permanent and semi-permanent capital, reinforced by support from institutional and retail investors; to implement a rigorous process for originating and underwriting the assets we manage; and to maintain a broad range of credit and product capabilities that fosters a varied origination pipeline, limiting reliance on any single product or market. Our experience has enabled us to scale our business through both organic and acquired means. With the merger with TURN Capital now complete, we are positioned to drive further investment into our business for accelerated growth in the upcoming years. We have already seen the advantages of integrating 180 Degree Capital's network into our operations, which has broadened the range of clients we can serve in private credit, especially with access to public companies. Having finished the initial integration phase, our focus now shifts to accelerating growth while keeping strict control over investments and costs. On the Insurance Solutions side, we plan to invest in Ability to expand its capital base and take on more reinsurance obligations. Our ongoing investment in the insurance solutions team puts us in a strong position to grow this segment significantly over the next few years, as managing our policyholder obligations and assets effectively is crucial to our business strategy. In asset management, Mount Logan is progressing as a key consolidator in the business development company landscape, focusing on establishing stability through permanent capital vehicles. The merger of Portman Ridge and Logan Ridge in July created BCP Investment Corporation, enhancing efficiency and synergy by merging portfolios and reducing expenses, which positively impacts earnings potential. As a result, Mount Logan stands to gain increased distributions from Sierra Crest Investment Management as it becomes the investment adviser for the larger BDC. Additionally, our minority stake in Runway Growth Finance allows us to support their merger with SWK Holdings, further enhancing our presence in health care and life sciences lending and highlighting ongoing consolidation in the BDC space. Collectively, these developments align with Mount Logan's long-term strategy to grow permanent capital vehicles and diversify our credit capabilities. While near-term financial benefits are limited, these transactions will ultimately enhance the value for Mount Logan and its shareholders as assets under management and revenue increase. We enter this next growth phase with great momentum, having fully positioned ourselves to seize opportunities across both asset management and insurance solutions, and we are already observing a surge in actionable prospects approaching year-end. Before I pass the call to Nikita for a detailed review of our quarterly results, I would like to briefly discuss our capital allocation strategy, which is strengthened by our current balance sheet. We plan to remain flexible in capital deployment, focusing on growth, reinvesting in our business, and returning capital to our shareholders. We anticipate asset under management growth largely from managing Ability, the Opportunistic Credit Interval Fund, and our stakes in BDC managers, which will support revenue expansion. We also have a pipeline of acquisition opportunities aimed at scaling our existing capital vehicles and enhancing our distribution capabilities. Finally, our capital allocation strategy includes providing liquidity opportunities for our shareholders, as highlighted in the 180 Degree Capital transaction, and establishing a sustainable dividend policy. We are committed to allocating up to $25 million for shareholder liquidity at or above the merger's closing value over the next 24 months and plan to launch a tender for up to $15 million soon, expected to be priced around $9.43 per share, reflecting a premium to our recent closing share price. This approach is designed to enhance trading liquidity as we pursue growth initiatives. For shareholder value, Mount Logan's management team and Board will not participate in any share repurchases related to these liquidity programs, affirming our confidence in the long-term outlook for the company. Lastly, I am proud to announce that we have paid a dividend for the 25th consecutive quarter while listed in Canada, and the Board has approved a dividend of $0.03 per share for this quarter. Our dividend policy reflects our belief that investors should benefit directly from our earnings model, and we hope that our commitment to returning capital to shareholders is evident through this announcement and our history. As we continue to grow, we aim to increase the dividend while retaining the flexibility to reinvest in future expansion.

Nikita Klassen, CFO

Thanks, Ted. Good morning, everyone. Before reviewing our third quarter results, we want to note that as part of the acquisition of 180 Degree Capital, Mount Logan has transitioned its financial reporting from IFRS to U.S. GAAP. All the financial results discussed on today's call are presented under U.S. GAAP, which, while required as a U.S. registrant, also enhances the transparency and comparability of our financial performance going forward and with our peers. Further, some results are not directly comparable year-over-year as the acquisition of 180 Degree Capital did not close until mid-September 2025. I'll now walk through our third quarter financial highlights. This quarter was an incredibly transitional quarter, one that reflected substantial integration costs and accounting reset and the investments being made to scale our platform. For the 3 months ended September 30, we reported a net loss of $13.4 million compared to a loss of $2.4 million last year, largely related to non-cash items. This loss was driven by a gross $19 million impairment charge tied to the Logan Ridge Investment Management contract as Logan Ridge completed its merger with Portman Ridge in July, with Portman Ridge being the surviving entity and renamed BC Partners Investment Corporation. As part of this transaction, Mount Logan recognized a profit sharing interest with an affiliate of Sierra Crest, the adviser of BCIC, which reduced the net impairment by $11.2 million. The company also recognized a $4.5 million gain on acquisition of 180 Degree Capital as consideration paid, i.e., the shares issued were less than the fair market value of the net assets acquired. We also recognized an incremental $3 million worth of transaction costs as the transaction was finalized. Total revenues for the quarter came in at $11.4 million, down 10% year-over-year, while 9 months ended revenues for 2025 rose 7% to $43.6 million. On a non-GAAP basis, segment income, which is equal to the sum of fee-related earnings and spread-related earnings, was $30.7 million for the quarter versus $4.7 million last year. Year-to-date, segment income was $8.1 million compared to $16.5 million in the prior period, largely due to lower cost of funds in comparison to 2024, primarily due to the one-time benefit of an in-force update to the long-term care business in the first quarter of 2024, which was not present in 2025. At quarter end, total assets were $1.64 billion, up 5% since year-end and shareholders' equity increased to $231 million, a 26% increase year-to-date. In our asset management business, fee-related earnings were $2.5 million for the quarter and $7 million year-to-date, roughly flat with the prior year. Management fees were $1.9 million, down from $2.8 million last year, mainly due to the Logan Ridge and Portman Ridge merger, which ended our prior advisory contract. We anticipate the profit sharing interest, which added $262,000 to FRE this period will continue to be accretive to FRE going forward. Additionally, the Ovation fund wind down, which began in the third quarter of 2024 has resulted in lower management fees going forward. These headwinds were partially offset by growing fee streams from our Vista Life & Casualty investment management mandate and growth in our integral fund, SOFIX. Incentive fees were $0.4 million, down year-over-year as the Ovation funds continue their wind down and due to voluntary fee waivers at SOFIX, while equity investment earnings rose to $0.5 million, benefiting from stronger results at Sierra Crest after the merger and elimination of expense waivers within this adviser. On the expenses side, we saw higher transaction and integration costs tied to the 180-degree merger and accelerated stock compensation expense as all historically issued stock comp vested upon close of the merger. These are both one-time items. FRE excludes these one-time items and also includes other corporate costs that are reported within the Asset Management segment, such as non-fee-related compensation, amortization and impairment of intangible assets and interest expense. Fee-generating expenses decreased due to lower professional fee spend from disciplined cost control. Overall, FRE margins held steady, supported by recurring management fees, disciplined cost control and new recurring income from our profit-sharing interest with Sierra Crest. Turning to Insurance Solutions. Spread-related earnings were $1.1 million for the quarter compared with $2.2 million a year ago. Our results reflected lower investment yields and higher cost of funds, partially offset by tighter expense management. Net investment income was $17 million, down 12% year-over-year as lower short-term rates and higher cash balances weighed on floating rate income. The long-term care block remains stable and our multiyear guaranteed annuity or MYGA reinsurance business continues to expand. We added National Security Group as a new treaty partner in the second quarter. Total assets grew to $1.55 billion within our Insurance Solutions segment with strong credit quality and ample liquidity. The net investment spread was 12 basis points this quarter or 48 basis points annualized. We expect to build towards a 75 to 100 basis point range on an annualized basis as capital is deployed into higher-yielding assets than our legacy investment portfolio. Mount Logan's balance sheet remains conservatively positioned. We ended the quarter with $162 million in cash and cash equivalents, up nearly 43% from a year ago. We continue to monetize the legacy 180 Degree Capital portfolio assets in an orderly fashion and look forward to deploying that capital to fuel growth in our Asset Management and Insurance Solutions segment. We closed the quarter with $22 million in cash and cash equivalents within the Asset Management and Corporate segment, we intend to deploy towards future growth, as Ted discussed previously. Total debt stood at $74 million in the Asset Management segment and $17 million in Insurance Solutions, with a 41% debt-to-capital ratio. Operating cash flow also improved during the quarter as integration costs rolled off. In closing, this quarter was about completing the transition, aligning our structure, simplifying our reporting and setting the foundation for growth. We have 2 complementary engines, a capital-light asset management platform and a liability-driven insurance solutions business, which is designed to generate durable recurring income. Our focus from here is straightforward: grow fee revenue, expand spreads and maintain disciplined capital management. We're well-capitalized and positioned to compound value for shareholders over time.

Ted Goldthorpe, CEO

Thank you, Nikita. Overall, we are incredibly excited for Mount Logan's next phase of growth as we scale our U.S. domiciled asset management and insurance solutions businesses. We have a fortified balance sheet that provides significant flexibility to invest for the future, and we are well positioned to capitalize on the opportunities we are seeing in the market. We believe the substantial time and resources invested in our business during 2025 set the stage for meaningful growth in 2026 and 2027, helping to drive long-term value creation for our shareholders. This concludes our prepared remarks. We would now like to transition the call to Q&A. If the operator could please go ahead.

Operator, Operator

Our first question for today comes from Adam Waldo of Lismore Partners. Our next question comes from Matthew Lee of Canaccord Genuity.

Matthew Lee, Analyst

Just want to talk about the trajectory for both SRE and FRE here. You now have the capital to invest to get the flywheel moving a bit. How should we be thinking about SRE and FRE growth in F '26? And what do you think is the run rate kind of going even further medium term, just given the capital position right now?

Nikita Klassen, CFO

Thank you, Matt. Let's begin with FRE. As mentioned, FRE has remained largely unchanged compared to the previous quarter. Looking ahead to 2026, that's when we expect to see significant growth, especially with the BC Investment Corporation coming on board, which will greatly enhance our platform's scale. We anticipate our management fees will rise to approximately $720,000 per quarter from what we reported last quarter. Under this new arrangement, incentive fees will also be paid, which could generate about $500,000 for us annually. This represents an upside we didn't have when we were managing Logan Ridge. Our priority remains on controlling costs while growing these fees; we have invested in this area over the past few years, and we expect positive growth moving forward. Additionally, SOFIX, another one of our growth drivers, has waived $415,000 in incentive fees so far as it scales, and we expect it to contribute significantly to FRE. Lastly, Ability, which is our primary growth driver, has generated $1.6 million in fees for the quarter and an annualized total of $6.4 million. As we manage a larger portion of those investments and the vehicle continues to grow, we foresee strong growth in that area as well. Regarding SRE, there are controllable and uncontrollable factors, primarily related to funding costs. We can manage our net interest income by monitoring interest rates and taking strategic actions. We have a hedge in place to mitigate some downside risks, and we are also assessing cash drag to identify investment opportunities, though it’s challenging in a tighter spread environment. Overall, things look promising. We aim for a 75 to 100 basis point margin in SRE as we head into next year, focusing on the aspects we can control.

Matthew Lee, Analyst

Okay. Maybe asked a different way. I mean, your FRE is kind of trending towards $10 million a year at the current run rate. Your SRE is kind of recovering off a low first half. I mean, should we be thinking about this as kind of like combined $15 million to $20 million for 2026? Or is it too early for guidance?

Nikita Klassen, CFO

I'd say on an organic basis, that's fair. And then it's really just how we look to deploy the capital from the current transaction and where we can see upside from there.

Ted Goldthorpe, CEO

Yes, we have a significant amount of cash, and we plan to utilize it in several ways. First, we will be conducting a tender offer at a substantial premium to the market. Additionally, we have a strong pipeline of mergers and acquisitions opportunities. Lastly, we will be investing capital into the insurance company. There is a delay in seeing the benefits from this capital deployment in the insurance company, so you can expect to see tangible benefits on SRE in the latter half of next year.

Matthew Lee, Analyst

Got it. And maybe I'll touch on that, you mentioned M&A opportunities. I mean, 180 is now kind of digested. What sort of opportunity are you seeing in the market?

Ted Goldthorpe, CEO

I believe this is an ideal situation for us. First, being listed on the NASDAQ provides us with a more appealing currency for shareholders. Second, we are gaining size and scale, which is beneficial. The importance of scale cannot be overstated. The M&A environment can fluctuate, but our pipeline has never been stronger. We have three or four very strategic and accretive projects in our pipeline that we anticipate announcing, hopefully by the first quarter, which should serve as significant growth catalysts for our business. This year has been about consolidation; we merged with TURN and combined our BDCs, and we've also reduced some costs. Next year, we expect to see growth from both organic and inorganic sources.

Operator, Operator

There are currently no further questions in the queue. We have a question from Chuck Burns of CIBC.

Charles Burns, Analyst

Congratulations on successfully completing the transaction this year. I have a couple of questions. How is the U.S. market transition progressing in terms of institutional interest and brokerage coverage?

Ted Goldthorpe, CEO

Yes, that's a great question. I would say we needed to get through this last quarter and make this announcement. I believe this tender will serve as a positive catalyst for us to interact with the investment community. We are taking significant steps to engage with institutional shareholders. The NASDAQ listing and our size provide us with an opportunity for more meaningful discussions than we had in the past. Now that the quarter has ended, the transaction is complete, and we are set to announce this tender, it has become a major focus for us.

Charles Burns, Analyst

Okay. And the second question is there's been a lot of noise in the markets regarding private credit and the media has been kind of all over that issue. How is that impacting Mount Logan?

Ted Goldthorpe, CEO

Very good question. People have been predicting a downturn in private credit for about 20 years. The recent major headlines share some commonalities, particularly with brands like First Brands. Notably, only 2% of the capital structure was in private credit, with most risk being syndicated or in other channels. Regarding the four specific situations, such as Tricolor, they were mainly due to fraud or misappropriation rather than linked to a broader macro trend. Additionally, our business, Mount Logan, is primarily focused on corporate credit, and we haven't yet observed significant deterioration in that area. I'm not suggesting it won't happen, but so far, we haven't seen it. The stress in those cases originated from the asset-based segment of their business, which we are not heavily involved in.

Operator, Operator

Our next question comes from Ben Brockhoff of Brockhoff Capital.

Unknown Analyst, Analyst

I wanted to ask about return on equity and whether you're seeing any changes on that because of spread compression or other reasons. I know you had guided to about, call it, 25% or 26% ROEs in one of the last presentations. I wanted to see if you had any commentary on that guidance, either short term or long term.

Ted Goldthorpe, CEO

Yes, I'll answer that. So I would say like if you just take a step back, right, like there's a couple of tailwinds for ROE. One is scale. So like we have public company costs that we are amortizing on a lower base. Number two is obviously our insurance company is expected to grow. So we have a little bit of a transition period because we're sitting a lot of cash post merger. But once we kind of fully integrate all of that, there should be some good tailwinds on our ROE. The 25% you're referring to is the incremental ROE we get from investing in our insurance company. It doesn't necessarily measure it overall. But we do expect to drive pretty robust ROEs on a go-forward basis.

Operator, Operator

At this time, we currently have no further questions. So I'll hand it back to the management team for any further remarks.

Ted Goldthorpe, CEO

Thank you, everyone, for your time today. Looking ahead, our focus remains on disciplined execution and delivering measurable milestones that will showcase the strength of the platform we've built. As always, we are happy to make ourselves available for any questions you may have. We look forward to speaking with you to recap the fourth quarter and full year 2025 results in March of 2026. I hope everyone has a good weekend and a good American Thanksgiving. Thank you.

Operator, Operator

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