Ategrity Specialty Insurance Company Holdings (ASIC) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining us today for Ategrity's Second Quarter Fiscal Year 2025 Earnings Results Conference Call. Speaking today are Justin Cohen, Chief Executive Officer; Chris Schenk, President and Chief Underwriting Officer; and Neelam Patel, Chief Financial Officer. [Operator Instructions] Before we begin, I would like to mention that certain matters discussed in today's conference call are forward-looking statements relating to future events, management's plans and objectives for the business and the future financial performance of the company that are subject to risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are referred to in our press release issued today and our IPO prospectus filed with the SEC. We do not undertake any obligation to update these forward-looking statements made today. Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is also available in our press release issued today. A copy of today's press release may be obtained by visiting the Investor Relations page of the website at investors.ategrity.com. I'll now turn the call over to Justin Cohen.

Great. Thank you, and good afternoon, everyone. As we kick off our first earnings call as a public company, I want to thank our new investors for their trust and support. We take very seriously our responsibility as stewards of your capital, and we are committed to delivering world-class returns over time. We're excited today to share our results for the quarter and a view into where Ategrity is headed going forward. For those new to the story, let me give first a quick introduction. We are a specialty E&S company focused on insuring small- to medium-sized businesses across the U.S. We've built a proprietary underwriting platform to penetrate this high-volume market with consistency, speed, and rigor. We've developed a competitive edge in how we segment, price and process risk, and we deploy technology and analytics to stay ahead of the market. We call this approach productionized underwriting, and we believe it will enable us to grow profits and build market share in the E&S space. We saw evidence of that in this quarter as we produced adjusted net income of $17.9 million, a 365% increase over last year. Our gross written premiums outpaced the market, growing 32% year-over-year, and our focus on rigorous and efficient underwriting contributed to a record combined ratio of 88.9%. Our loss ratio was strong at 58%, supported by solid loss performance in property. And our expense ratio was 31%, down 2.3 points year-over-year, while we continue to drive efficiencies. These are balanced results that translated into a 14.5% adjusted ROE for the quarter. Now we are certainly paying attention to the competitive pressures in E&S, and we recognize that our reported growth this quarter bucks that trend. We are benefiting from our growth initiatives and distribution strength as well as some barriers to entry in the small and midsized market. With that said, we think we will continue to see competition over time, and we will also continue to win and gain market share. But you should know that we prioritize underwriting profits first and foremost. We will only grow the top line at a pace that allows us to deliver strong expected returns to our shareholders. So with that, I'll turn it over to Neelam Patel, Chief Financial Officer, to walk through our financial results. And then Chris Schenk, our President and Chief Underwriting Officer, will describe how we've generated these outcomes. Neelam?

Thank you, Justin. This was a strong quarter for Ategrity. Adjusted net income came in at $17.9 million, up from $4.9 million in the same quarter last year. These results were driven by solid top line growth, improving margins and higher investment income. I'll take you through the main line items, starting with premiums. As already mentioned, our gross written premiums grew by 32% in the quarter. Net written premiums grew 38%, driven by higher retention rate year-over-year. Net earned premiums grew at a 20% pace, reflecting the lagged recognition of quota share reinsurance we placed in 2024. As we move through the second quarter -- second half of 2025, that headwind should gradually abate. Fee income was $1.5 million versus $191,000 a year ago, reflecting increased policy fees. Historically, we hadn't implemented standard market fees, which we began doing this year. Turning to underwriting. Our underwriting income in 2Q '25 was $9.6 million, up 119% year-over-year. This translates into a combined ratio of 88.9%, down from 94% due to reductions in both our loss and expense ratio. The loss ratio declined 2.8 points to 58% with strong results in our property business. In 2Q '25, we had no prior year development compared to 3.5 points in 2Q '24 that were related to a change in how we reserve for legal expenses. CAT losses represented 4.1% of net earned premiums this quarter, down from 8.8% last year, which had a very active tornado season. Our expense ratio declined 2.2 points to 31%, mainly due to lower policy acquisition costs. Policy acquisition costs as a percentage of net earned premiums declined to 18.5% from 21.1%, thanks to higher ceding commissions and a more favorable business mix. On expenses, operating expenses as a percentage of net earned premiums was 12.4%, up marginally from last year, but roughly flat compared to first quarter of 2025. The year-over-year increase reflects the front-loaded investments we made in 2024 to support growth and transition to becoming a public company. Moving on to investment results. Net investment income was $11.9 million in the second quarter, driven primarily by increased assets from our recent IPO and higher yields on our fixed income portfolio. Meanwhile, realized and unrealized gains contributed another $1.4 million. Our effective tax rate for the quarter was 21.1%. That brings us to net income of $17.6 million. Adjusted net income, which adds back IPO-related compensation costs, was $17.9 million or $0.41 per diluted share. Turning briefly to the balance sheet. Our investments grew from year-end by $180 million to $955 million, which reflects $122 million of net IPO proceeds with the remainder coming in from operating cash flow. Book value increased by $161 million with $115 million being attributable to the IPO and that's driven by retained earnings and a modest move up in AOCI. The quarter ended with book value per share of $11.64. With that, I will hand it over to Chris to talk about our underwriting and operating performance.

Thanks, Neelam. The quarter -- This quarter, we executed our underwriting playbook with Fidelity. We delivered 32% gross written premium growth and a sub-90 combined ratio. Let me walk you through how we did that. To start, submission volume grew significantly, well in excess of our top line. The volume came from three sources: activation of new partners, launch of our new verticals and products, and increased penetration from our Midwest strategy. As submission volume grew, we maintain a conservative underwriting posture, and we deployed capacity with discipline. As a reminder, we operate within a technical and quantitative underwriting framework. And as such, we were able to achieve firm-wide renewal rate increases in the high single digits with new business rate levels well above technical targets. Our quote-to-bind ratio on middle market business was in the high single digits. This is in line with plan. It is deliberately set low because of our selective risk-taking approach. On the expense side, our service delivery center absorbed higher volumes with only marginal increases in headcount. We continue to deploy automation to reduce manual work, and there was more utilization of our pre-priced and auto quote solutions. This combination of factors lowered our unit cost. And as expected, our model is delivering economies of scale while enhancing underwriting quality. A big part of what's powering our submission growth is our expanding distribution network. Since mid-2022, we have invested towards market access for emerging growth opportunities. This has resulted in 150% increase in unique distribution relationships with submissions growing at a much faster pace. Our earlier cohorts are ramping up across multiple products now, and we are seeing faster and deeper engagement from our recent appointments. We believe our value proposition built around a clearly articulated appetite, fast quote delivery, and a hassle-free digital transaction process is resonating with all of our partners. In short, our growth was a function of an expanding distribution funnel. Our combined ratio results -- resulted from maintaining underwriting discipline and improving operational efficiency. These two pieces were mutually reinforcing. We are achieving lower cost at each step from submission to buying. This offsets the cost of lower -- this offsets the cost of a lower quote-to-bind ratio, which in turn empowers us to adhere to technical rates, maintain discipline, and avoid appetite creep. With that, I'd like you to take a look at -- I want to take a look at -- with that, let's take a look at our performance by casualty and property, which had very different growth dynamics this quarter. Starting with casualty, we produced 57% growth in gross written premium in casualty. Growth was driven by a combination of new initiatives as well as continued strength in our core segments. First, we expanded into new verticals in casualty, most notably retail trades launched in Q1 in our broker channel. This is now fully operational and scaling. We also saw strong momentum in our professional liability verticals. These new products launched in January and reached full operating potential in Q2. This line contributed to the growth and that is reflected in our professional services vertical. Second, we advanced our geographic expansion strategy through Project Heartland. As a reminder, Project Heartland is an initiative designed to win targeted business across 30 urban Midwest markets built on deeply research underwriting plans, local partnership, and tailored offering for the region. Project Heartland contributed meaningfully to Q2 growth. Altogether, retail, professional liability, Heartland and a handful of other initiatives accounted for nearly half of the total casualty growth this quarter. We also performed on track or better in our established verticals like hospitality, day care, and residential real estate. In casualty, renewal rate change was in line with our targets and well above trend, and we saw new business rates well above technical levels. It is critical for our investors to understand that we believe we hold a clear technical and strategic advantage. We are going deeper into each of our segments and finding insights that is allowing us to capitalize on emerging opportunities well before our peers see them. As a result, we are leaning in as our competitors are pulling back from key casualty classes. Moving on to property. Despite contraction in the E&S sector, we grew property gross premiums by 4%. While there is talk of a softening market in property, we are only seeing modest pressure in the small and midsized space. Competition is still rational and far less severe than the large ticket property. Our 4% growth reflected proactive rate actions implemented in Q3 last year. We held firm on substantive rate increases, pricing above technical levels, and we granted flat or down renewals only when justified by performance and exposure stability. We price prospectively with an 18-month view on frequency and severity trends. And accordingly, we have raised our severity assumptions to reflect the pending impact of tariffs on building material and labor costs. These factors influence overall replacement costs for property. Here again, we're doing something different, deep analysis, finding insights and taking early action to protect our economics. We believe we are leading proactively while rather than waiting to react to a bad outcome. We've made a deliberate trade -- accordingly, we've made a deliberate trade-off prioritizing price over volume in property, and this is consistent with our forward view of loss cost. We also managed our property footprint. We also took action to manage -- carefully manage our property footprint in CAT-prone geographies, raising rates to cover increasing CAT reinsurance costs. We expect these benefits -- we expect to see these benefits in lower-than-anticipated cost, even though in the short term, it has led to some -- it has led to growth -- stalled growth in some areas. Finally, Project Heartland meaningfully contributed to our results. In the Midwest, we achieved accelerated market penetration, writing profitable business, optimizing our geographic spread and reducing reliance on large E&S states. To wrap it up, this was a high-quality underwriting quarter marked by disciplined growth, strong pricing, and continued efficiency gains. We are scaling deliberately while maintaining technical standards and control. This is the impact of the productionized underwriting model we have built, and we believe it positions us for consistent results going forward. Thanks, Justin.

Thanks, Chris. This was a solid quarter for Ategrity, profitable growth, disciplined underwriting and clear progress on our strategic objectives. As we look ahead into the second half of '25, our expectations are consistent with what we shared with you during the IPO process, a mid-to-high 20s growth rate year-over-year in gross written premiums and a combined ratio in the low 90s. That outcome assumes competitive dynamics stay consistent with what we've experienced to date. But even if competition intensifies beyond our expectations, we expect to continue taking share in the market. Meanwhile, behind the scenes, we are advancing our next phase of productionized underwriting. We're developing automation and prepriced solutions that we believe will solidify our position in the market. We will share more with you on that as we move closer to deployment. For now, we thank you again for your support and for spending time with us today, and we look forward to updating you on our progress in the quarters ahead. And with that, Eric, you can please open it up for Q&A.

[Operator Instructions] your first question comes from the line of Alex Scott with Barclays.

First one I wanted to ask you is on the -- I guess, the mix shift towards casualty. If I look at the mix year-over-year, it is a pretty meaningful change. And so I just wanted to understand, is that changing at all like the duration of the liabilities and just the way you have to think about the tail on the loss reserves.

Yes. That -- these actions of having more casualty business is extending the tail of the liabilities. Just in terms of -- to make sure that we understand the drivers, the drivers is excellent performance in our casualty business. And as Chris was talking about, we did raise rates in the third quarter of last year, and that decelerated growth this year. So that's what's driving that mix shift, but we are very comfortable with it. And our overall targets of casualty within the 60% to 70% range is on a clear path now.

Got it. That's helpful. And then can you provide us a little more color on just the update on Project Heartland, how many distributors you're adding? How far along in that process? How much more growth is there to come from those initiatives?

Yes. And this project is really just getting going. And Chris, do you want to give some details?

It is -- we are just starting to see the dividends from the investment last year come through. We have activated more than 3 dozen partners and some -- most of them are just starting to come online in terms of production. So there's a -- it's just the beginning. There's a huge runway.

The next question comes from the line of Andrew Kligerman with TD.

I apologize if I go over something, I had a little technical difficulty. But just getting a sense on the property component growing 3.7%. Could you clarify how much pricing was down, if at all? And then how much of that kind of lower premium level was due to you more effectively managing your PMLs for catastrophe exposures?

Yes. We actually achieved meaningful rate increases in property. I'll pass it over to Chris to talk about that.

So our property rate increases were in the low teens. It is -- we stayed firm on rates. We were targeting a higher number, but we made concessions to protect our renewal base. That was prudent. And on new business, we have firm. We are seeing attractive rating opportunities, not just from the new Midwest business coming in, but elsewhere around the country. We -- generally, most of our peers are concentrating on the big E&S states. The opportunities elsewhere seems to be somewhat unaffected. Beyond just the geography, there is also the size element. Smaller business, it tends to be a lot more sticky. There's less of a desire to dislocate accounts. And part of our philosophy pricing the account right in year 1 so that we can maintain it for around -- lifetime around 3 years. Part of that involves pricing discipline upfront and making sure that we make the process simple downstream. So by making the process simple, it somewhat insulates you from the rate change dynamics.

If we hadn't taken our view on tariffs, which we did, we could have grown more meaningfully in that area. And then the -- there were certain geographic zones, coastal zones, coastal states, I should say, where we did reduce exposure and that will -- that did drive down policy count, but it will improve our CAT XOL costs.

And Justin, you just mentioned tariffs. How are you thinking about the impact now that it looks like we've gotten a little more clarity there?

Yes. We are anticipating that the inflationary environment still does come through on building costs, and we've done the analytics to do that. If we were to find out that we were ahead of the curve and the tariffs didn't have as much of a bite, that would be a bigger opportunity for us given that we've priced for it.

Yes. So we are anticipating around mid-single-digit increases due to tariff cost. That's a combination of building material as well as labor sort of dynamics. But purely just if you were to isolate building materials, that tends to be very sensitive to even the threat of tariffs. And majority of -- a lot of buildings in the E&S space tend to be frame half -- frame buildings, right? So we're talking about lumber prices and just even relations with Canada can affect that. It's very -- there's a reality of tariffs and then there's a threat of tariffs and what that does in the short term.

So maybe if I could sneak a last one in. Does 2Q kind of feel like kind of a snapshot of what we may see in the next quarter or 2 in terms of premium growth? I mean, I know casualty is super robust and you seem a bit more cautious on the property. But are these numbers that might be in the ballpark for the upcoming quarters?

Yes, Andrew, at the end of those prepared remarks, we gave a confirmation of what we had previously talked about, which was mid-to-high 20s growth for 2H. So that gives you a sense of what we're expecting. And we also said that, that assumes that we are -- we do not see a change in the competitive intensity in the environment that it remains what we are seeing today, which is modest. It's different in the small and medium-sized space, but that's the premise there. So that is the outlook that we confirmed.

That makes a lot of sense. I'm sorry, I had a little technical difficulty with the beginning.