Mount Logan Capital Inc. (MLCI) Earnings Call Transcript

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Mount Logan Capital's Third Quarter 2026 Results Conference Call. Before we begin, I would 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 risks and uncertainties, 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 will 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. Today's conference call is hosted by Mount Logan's Chairman and Chief Executive Officer, Ted Goldthorpe; President, Henry Wang; Chief Financial Officer, Brandon Satoren; Executive Vice President and Chief Operating Officer, Jordan Mangum; and Head of Investor relations, Scott Chan. I will now turn the call over to Mr. Goldthorpe. You may begin.

Thank you, and good afternoon, everyone. At the start of the year, we said 2026 would be about execution. We did what we said we would do. Today, I want to walk through what we delivered, what has not reached our financials and why we expect Q4 and 2027 to look different. We expected to announce several strategic transactions by year-end. We have now announced three and two are complete. On August 25, Mount Logan Managed Opportunistic Credit Interval Funds or SOFIX, closed its transaction with Yieldstreet. September 29, we completed the merger of one of our noncore vehicles, the Alternative Credit Income Fund or ACIF, into a permanent capital vehicle, BC Partners Lending Corporation, BCPL. That merger provides new, higher-quality revenue on a permanent vehicle and strips out meaningful costs. The third, the proposed AFA Asset Based Lending Fund is expected to close in the first quarter of 2027, subject to approvals. It gives us a new core vehicle oriented on specialty finance, an area where we have deep expertise and a product tailored to that strategy that can actively distribute through retail channels. Alongside these transactions, we reached two significant milestones at Ability, our Nebraska regulated insurance subsidiary. July, Ability received its AM Best rating, which enabled the official launch of its direct origination of multi-year guaranteed annuities in August. We are already beginning to see positive signs of distribution momentum, and we view this as a core component of Mount Logan's organic growth story. We are also actively evaluating new adjacent products. Following these announcements on October 27, we announced that BC Partners, a long-standing shareholder and strategic partner of Mount Logan, has adopted a Rule 10b5-1 and 10b-18 trading plan to buy additional Mount Logan common stock over the next 12 months. BC Partners held approximately 2% as of that date and is actively working to increase its ownership position. We see that as a further expression of the alignment between our two organizations. On financial performance, Q3 was a transition quarter for the business. Each of our completed transactions and the launch of Ability's direct origination happened during the quarter. As a result, our results carry very little of their expected long-term benefit and we recognized onetime transaction-related costs upfront. Despite this, the year-to-date segment income, our non-GAAP measure that combines fee-related earnings, or FRE and spread-related earnings or SRE was $11.5 million, up from $9.5 million for the same period last year. Our net loss also continued to improve quarter-over-quarter, and we expect this quarter's results to converge more closely with the true earnings power of our business. Our Board also approved our 29th consecutive quarterly dividend of $0.03 per share. Future dividends remain at the Board's discretion of returning a portion of our cash fees to shareholders remains important to us. With our 2026 strategic priorities is complete, and while we continue to evaluate prudent opportunities for growth, our focus is squarely on improving operating cash flow and GAAP profitability. Let me step back to the broader private credit and alternative asset management market and why we are seeing it as an opening for a platform like ours. Across private credit this quarter, the message has been clear, transaction activity has been uneven, outcomes are diverging between managers, institutions are concentrating capital with fewer platforms that have proven underwriting across differentiated credit strategies. We really believe we have built that. And while alternative asset managers have faced challenges year-to-date, redemption requests at the largest semi-liquid funds are easing, wealth flows are recovering. Mount Logan benefits from a sticky, stable capital base, that allows disciplined deployment and let us hold the line on both risk and returns. We don't have to do big deals that dilute returns and we can remain diligent-heavy credit investors. The industry has also consolidated and Ares' agreement in late October to acquire MidCap Financial is the latest example. These transactions reinforce the value of permanent capital vehicles. Investors benefit from scale and diversification and managers earn recurring fees on a durable capital base. For Mount Logan, consolidation is opening -- is an opening to continue to grow. Subscale funds need a home through Yieldstreet, ACIF and now AFA, we've shown that we can bring them into our ecosystem, the benefit of those funds, their investors and our shareholders. Let me add detail on each, starting with Yieldstreet. SOFIX acquired approximately $130 million of assets effectively doubling the funds. On the larger base, we now expect the transaction to contribute more than $3 million of annualized FRE, up from $2.8 million we cited on our August call. We also have added internal retail sales resources and a third-party distribution partner to drive organic growth. On ACIF, the merger removes the cost of a stand-alone fund and together with a revenue sharing agreement with BCP and BCPL expected to add approximately $3.5 million of annualized net FRE with benefits beginning in the fourth quarter. Both transactions are immediately accretive to FRE and earnings per share. Together, we expect them to add approximately $6.5 million of annualized FRE with its first meaningful contribution in Q4. That is a significant step-up in our asset management earnings base and one, we do not believe the market is yet credited. With respect to the recently announced AFA transaction, it adds approximately $230 million of AUM and would double our interval fund platform to about $460 million of assets, making our second evergreen credit fund distributed through the retail channel. We expect it to be immediately accretive to FRE on closing, acquire, consolidate, distribute. We believe that's a repeatable model. At Ability, the goal is to move beyond managing a closed block and originate new business directly rather than relying on third-party insurers. While the AM Best rating in place and ReliAbility launched, we are now active in the marketplace. We are early in the production ramp and expect the benefit to build as we enter 2027. Looking ahead to 2027, there are four things to watch: step-up in FRE from this year's completed transactions, progress in retail distribution, Ability's production ramp and cost control. We are reviewing corporate overhead, professional expenses and fund-level infrastructure to improve operating leverage. Each of those ties back to the 3 pillars of our growth story, which is this year's execution and simplification have strengthened. First, Ability, with direct origination and a more diversified liability base, expand investable assets, generates spread earnings at Ability and management fees at Mount Logan management. That is the flywheel we always talk about. Second, our core investment platforms, including SOFIX, where we combine organic fundraising through expanded distribution and selective acquisitions of fund assets. Third, our BDC ecosystem, where we hold economic interest and cash fees from BCP Investment Corporation, BCPL, and where consolidation creates more efficient scaled vehicles and stronger fee economics. Common thread is that we use the capabilities and infrastructure we've already built to attract durable capital and improved operating leverage. With that, I will turn the call over to Brandon to walk through the results.

Thanks, Ted. Good afternoon, everyone. For the third quarter of 2026, the company reported total revenue of $12.9 million and a net loss of $3.7 million. This compares to total revenue of $8.7 million and a net loss of $4.2 million for the prior quarter. The sequential improvements in both consolidated total revenue as well as the company's net loss was largely driven by higher consolidated revenues from our Insurance Solutions business. partially offset by certain nonrecurring transaction-related items that impacted our asset management business. For our segments, Insurance Solutions, GAAP net income increased to $4.2 million more than doubling from $1.9 million in the second quarter. The increase was largely driven by the nonrecurring $1.9 million Sentinel Security Life or SSL reinsurance recapture fee, which I will discuss later. On the other hand, our asset management business generated a net loss of $7.9 million for the quarter, which represents a $1.8 million increase compared to the prior quarter net loss generated by our asset management business of $6.1 million. Importantly, the third quarter results were impacted by a number of nonrecurring transaction-related items, including almost $1 million of transaction-related charges as a result of the Yield Street transaction and merger of the alternative credit income fund into a private BDC. Before I move on to our segment results and KPIs, it's important to note that segment income and its components for prior periods have been recast for the revised definitions, which I will describe shortly. With that in mind, total segment income was $3.2 million for the third quarter of 2026 compared to $4.5 million in the prior quarter, or $4.3 million as originally reported under the legacy definitions. The $1.3 million decline in segment income was primarily attributable to lower FRE. Looking at our GAAP individual segment results. Asset Management revenue for the third quarter of 2026 was $2 million compared to $2.3 million in the second quarter. The decline was due to the absence of incentive fees from our interval funds in the third quarter, largely driven by SOFIX closing the Yield Street acquisition late in the quarter, which had a onetime impact to the quarterly incentive fee, as well as elevated expenses. Importantly, while the company has reported declining FRE throughout 2026 driven by the wind down of noncore legacy vehicles, including the Ovation Alternative Income Fund, our Mount Logan managed CLOs and the alternative credit income fund, we are beginning to replace these legacy revenues from noncore vehicles with new or more scalable and recurring revenue streams, as well as by growing our core revenue streams. We expect to begin to see these benefits flow through our financials during the fourth quarter and grow from there. More specifically, benefits to Q4 FRE are expected to include the addition of approximately $130 million of assets in SOFIX from its merger of the from its merger with the Yield Street Alternative Income Fund, which closed at the end of the third quarter, almost double its size. The merger of the noncore alternative credit income fund into a private BDC managed by the BC Partners credit platform which will drive significant cost savings in addition to incremental fee revenue from a 30% revenue share that we will receive from BCPL's management and incentive fees. Finally, the recently announced potential AFA transaction that is expected to close in the first quarter of 2027, subject to shareholder approval and is expected to increase AUM by approximately $230 million. Collectively, the two closed transactions are expected to add approximately $6.5 million in annualized FRE. Turning to our Insurance Solutions business. Net investment income, including net investment income from our consolidated variable interest entities, was $20.6 million for the third quarter of 2026, an increase of $2.1 million or 11% from the second quarter 2026. Excluding funds withheld and including intercompany elimination of management fees, net investment income for the third quarter of 2026 was $14.2 million an increase of $1.2 million or 9% compared to the second quarter of 2026. During the quarter, we continued to focus on optimizing and high-grading the insurance portfolio through disciplined portfolio rotation and deployments while maintaining a high level of invested assets to support spread earnings. The investment portfolio generated a 7.3% yield or 7.8%, excluding funds withheld, and our insurance AUM was approximately $900 million, a decrease of approximately $60 million from the third quarter of 2025. This decline reflects the SSL recapture transaction I mentioned earlier, where management agreed to allow SSL to recapture a $70 million block of MYGA liabilities and supporting assets that had previously been reinsured to Ability, in exchange for an upfront recapture fee of $1.9 million. This transaction is important to the segment as it allows the company to unlock additional capital that can be used to support direct origination as well as other strategic initiatives within the Insurance Solutions segments. Over time, direct origination has the potential to meaningfully increase the earnings power of our Insurance Solutions business while also supporting growth in asset management fees as the investment portfolio expands. Looking at our segment KPIs. I want to first explain two changes to how we calculate our non-GAAP segment metrics that I -- that were implemented during the third quarter of 2026. First, on the FRE side, we are now including our share of operating income from our minority interest in certain asset managers that are owned or managed by the BC Partners credit platform. This change was made to align the economics of these investments with management's strategic intent and thesis for making such investments. Second, spread-related earnings or SRE, will now exclude net realized gains and losses on the sale of investments. Previously, realized gains and losses were included in SRE. We believe removing realized gains and losses better reflects the operating performance of our insurance company as a spread-based business, in addition to conforming with our peers. Both changes have been applied to all periods presented in yesterday's press release and prior period amounts have been recast to conform to the current presentation. Notably, neither of these changes impacts the company's consolidated U.S. GAAP financial statements. Accordingly, FRE was $0.5 million for the third quarter of 2026 compared to $1.5 million in the second quarter of 2026. As I alluded to earlier, this decline was largely driven by approximately $0.6 million of lower fee revenue and $0.4 million of higher compensation administrative and general expenses. More specifically, FRE was impacted by two key items. First, we did not earn a SOFIX incentive fee in the third quarter. compared with $0.4 million in the second quarter. This was driven by a timing dynamic associated with SOFIX closing its acquisition of the Yield Street portfolio at the end of the quarter and nuances associated with its incentive calculation, which we do not expect to recur. Second, BCIC profit sharing income was approximately $0.3 million lower because of certain nonrecurring second quarter payments that do not repeat. As I mentioned earlier, we expect FRE to improve starting in the fourth quarter as the strategic initiatives we discussed today begin to contribute a full quarter's impact. Moving on to SRE. For the third quarter of 2026, our Insurance Solutions business generated $2.7 million of spread-related earnings for the third quarter of 2026 compared to $3 million for the second quarter of 2026. The slight decline was primarily due to lower but still favorable development in future policy benefit reserves partially offset by higher net investment income and lower general and administrative expenses as well as improved long-term care results. On a year-over-year basis, SRE was up 81%, reflecting the benefit from the actions we have taken to lower financing costs and improve the underlying economics of the insurance platform. Moving on to our balance sheet. Mount Logan's capital position remained strong with $79.6 million of cash restricted to cash and cash equivalents, including VIEs, with minimal near-term debt maturities. Finally, as Ted mentioned earlier, the Board approved a dividend of $0.03 per share for the quarter, continuing our 29th consecutive quarterly dividend and our fourth consecutive payment since the 2025 business combination with 180 Degree Capital. Looking ahead, our priorities remain focused on prudent and disciplined expense management. driving operational excellence, continued growth in recurring fee-related earnings and increasing the contribution from insurance solution. Several of the initiatives Ted discussed are just beginning to or haven't yet started flowing through our financials. As we continue to execute against our growth strategy, grow our fee earning AUM and continue to scale our new and core revenue streams, we expect their impact to become more visible in the fourth quarter of 2026 and into 2027. With that, I will turn the call back over to Ted.

Thank you, Brandon. To wrap up, Mount Logan has established -- has an established investing track record going back to 2018 diverse credit capabilities cash fees generated on permanent and semi permanent capital vehicles, and AM Best rated insurance business that is organically sourcing new liabilities and experienced management team with a proven ability to source and close complex M&A transactions. The support and services of BC Partners. We set of this year to grow our fee earning assets within our core vehicles, launched direct origination at our insurance company and simplify the Mount Logan platform and story. We've done each of those and look forward to the stock price and valuation catching up with the work we have completed. This concludes our prepared remarks. Operator, if you could please open the call for questions.

[Operator Instructions] And the first question comes from the line of Mr. Justin Marca with Lucid Capital Markets.

So I just want to start with insurance. You touched on the reliability with your prepared remarks and expanding distribution channels. I wonder if you can give any color on progress there and how long you might take some benefit to SRE? And also what additional product verticals you guys are evaluating?

Yes, great question. So obviously, we recapitalized our -- we put some of the money from our 180 Capital transactions to our insurance company, to strengthening its capital. We've started direct writing this summer and we're beginning to see it ramp. And so it allows us to get to control our own destiny a little bit, and write policies in line with our investment deployment. So -- really, it's a de minimis impact on SRE this quarter and probably for the fourth quarter, and we expect to see the benefit come through next year. So there's a lot of work being done in terms of education of agents, and we operate in many, many states. We sold our biggest policy ever quite recently. So from our perspective, it's something we're very, very excited about.

Okay. And then switching over to Asset Management. We've heard recently from other equipment finance and ABL lenders that they're seeing a lot of growing demand in that space versus traditional sponsor-backed loans. And obviously, the AFA transaction will add some diversification to your credit portfolio. Was that some of the primary drivers behind the decision to pursue the AFA transaction?

Yes. No, definitely. So 1/3 of our assets now are in specialty finance. So if you think about like the evolution of private credit, it started off as being middle market lending and now it's large-cap corporate lending. We begin to take market share now for the regional banks. So after Silicon Valley Bank failed, you've had higher rates, a lot of people are lending money at fixed returns. And compliance costs have gone up and credit quality has weakened for certain parts of the consumer. So it's created a big opportunity for us to step in. We've been doing this business for a very long time. AFA gets us -- like these loans that we do are typically illiquid. So you need to match it with your liabilities and AFA provides us with an ability to kind of directly originate things into AFA, which are really good risk return in this market. So it's an area that we've spent with real expertise in this acquisition gives us capabilities to execute on that.

Yes. And Justin, I would just add that with our commitment to the retail business, it's important for our salespeople to have more than one product to sell to increase their hit rate for each meeting with an RIA that they have. And now they'll have a second product to complement the opportunistic credit interval fund with a completely different strategy. But specialty finance also being a core strategy that our platform has generated differentiated performance.

Got it. That's good color there. And then maybe just last one for me, switching over to capital deployment between share repurchases and additional M&A you guys have closed the discount to book since 2Q a bit, but still an opportunity for buying back the stock. Curious on your thoughts there.

Yes. I mean we've given us a lot of thought. And we have a lot of good uses of our organic cash. The flip side is we should be buying stock. So obviously, we announced that we are going to be buying stock. And we're trying to buy as much as we can. And pro forma for that will be close to 30% insider ownership. So we're trying to basically clean up our capital structure a little bit -- and upon the advice of a lot of our shareholders, we just thought that was the right way to go. So hopefully, we're just going to keep buying our stock to discount close a bit more.

And the next question comes from the line of Mr. George Trapkov with BMO.

Let's -- first, you made some revisions on how you report the SRE and FRE portion of share of operating income and the net realized gains. Can you talk a little bit about what drove the change? Why is this current reporting better reflective of the underlying business?

Yes. I'm going to let Brandon answer this question. But I would say, the real objective is, over the last couple of years, we've really tried to clean up the way we report to investors to be -- give you guys a little bit more consistent view and more clear view of how the operating business is doing. But why don't I turn it over to Brandon to answer that question.

Yes. So I'll start with SRE. That's that was the bigger change, certainly more impactful to the financials. So first and foremost, the change aligns with the industry and all of our peers. Secondly, the economics of the insurance business are spread based, hence the name and including elements of return outside of spread and distort the metric and drive significant volatility period-to-period that don't reflect the core operations of the underlying business. So that's SRE. So on FRE, we are a highly acquisitive platform. And when we go out and we acquire a minority interest in an asset manager that is also controlled by the BC Partners credit platform. The thesis for those transactions is to drive fee-related earnings for Mount Logan Capital through its asset management business. So that change, while a small impact today to FRE, frankly, was negligible in Q3. it better aligns with the thesis for those transactions, and we will certainly look to do them as opportunities arise. Does that answer your question or?

Yes, yes. Now I'm going to follow up on FRE. I'm just looking quarter-over-quarter drop in earnings probably below expectations. How should investors think about -- what's the run rate in that division? You're running about -- you had $0.5 million. I know you are one-offs, but what's a real run rate how it's looking into 2027?

Yes. So if you just take the $4.5 million of FRE generated year-to-date and you layer in the $6.5 million of annualized benefit to FRE, we mentioned in our scripted remarks, that generates well in excess of $10 million of FRE for 2027, and that does not include the impact of the potential AFA transaction.

On the direct underwriting, what's the ramp-up looking like, what's the potential impact in terms of savings and what do you see this going in the next couple of years?

Well, I would say, we'll look to continue to scale this component of our business. It's incredibly strategic. Now we have the capability to organically grow it from Mount Logan Capital. Now I'll say in terms of progress ramping that initiative, it's going to take a couple of quarters for us to onboard agents through our distribution partners and get Ability product out there. But to date, we've got over 70 agents on board now actively selling our reliability products under the Ability insurance company today. So we're only focused on MYGA at the moment, but we are exploring other products that we are optimistic will bring to the market in 2027.

If I could sneak one more in on the -- just what are you seeing on the private credit side, do you see opportunity to pick up portfolios? And how do you see this business shaping up over the next few quarters?

Yes. I mean I think all the headwinds that were experienced by our sector earlier this year, every time there's something like that happens, there tends to be an increase in consolidation, I mean just size matters. So -- we right now have a number of transactions at our LOI that we expect to announce. And obviously, there was a big announcement this week in the BDC space of a merger. So I would say, I think you're going to see continued consolidation and we could do that in a very, very accretive way for our shareholders.