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 2026 Earnings Results Conference Call. Speaking today are Justin Cohen, Chief Executive Officer; Chris Schenk, President and Chief Underwriting Officer; and Neil Adler, Chief Financial Officer. After Justin, Chris and Neil have made their formal remarks, we will open the call to questions. [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, our final prospectus and other filings filed with the SEC. We do not undertake any obligation to update the 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 which may be obtained by visiting the Investor Relations website at investors.ategrity.com. I will now turn the call over to Justin.

Good evening, and thank you all for joining Ategrity's second quarter earnings call. This is Justin Cohen, and I'm joined today by Chris Schenk, our President and Chief Underwriting Officer; and Neil Adler, our Chief Financial Officer. Ategrity delivered another quarter of record results, including our highest ever quarterly written premiums, underwriting income and net income. In a quarter in which the E&S industry contracted as a whole, we produced 23.4% growth in gross written premiums alongside an 85.9% combined ratio with both metrics well ahead of guidance. These results reflect the strength of our productionized underwriting platform and the disciplined execution of our strategy. Growth was broad-based across both casualty and property with more than 20% premium growth in each, driven by expanding distribution relationships, targeted regional strategies and new products launched over the past year. Importantly, our operating model demonstrated further scale this quarter. The combined ratio improved 3 points year-over-year, driven primarily by a reduction in our operating expense ratio to 9.5%. As premiums have grown, our centralized underwriting platform has processed higher volumes with expanding profitability. Turning to the market. While competitive pressure continued to intensify across portions of the E&S market, our differentiated positioning contributed to outperformance. We continue to identify attractive market segments in the small- and medium-sized space that have less competition and in which we offer unique solutions that are resonating with our growing network of distribution partners. The strengths we've built across the business are increasingly reinforcing one another, and Chris will explain how that played out this quarter later in the call. But first, I would like to turn it over to Neil Adler, our Chief Financial Officer, to review our financial results.

Thank you, Justin. We delivered another strong quarter with adjusted net income of $33.5 million, up from $17.9 million in the same quarter last year, driven by top line growth, improving margins and continued strength in investment income. Gross written premiums were up 23.4% with casualty premiums up 24.7% and property premiums up 21.3%. Net written premiums increased 30.8%, which reflects higher retention year-over-year, while net earned premiums were up 30.9%. Fee income was $3.4 million compared to $1.5 million a year ago, with growth coming from standard policy fees introduced over the course of 2025. Our underwriting income for the quarter was $16 million, up 66.9% year-over-year. That translated into a combined ratio of 85.9% compared to 88.9% last year, driven primarily by a reduction in our expense ratio. Our loss ratio came in at 58.5%, which was up 0.5 percentage point year-over-year, reflecting the continued shift in business towards our brokerage channel and lower catastrophe activity in prior year quarter. Catastrophe losses were 4.3% of net earned premiums, up from 4.1% last year. We also had favorable developments this quarter equal to 0.9% of net earned premium. On expenses, the overall expense ratio improved 3.5 points to 27.5%. Our operating expense ratio declined 2.9 points year-over-year to 9.5% of net earned premiums. The improvement reflected earned premiums growing faster than operating expenses together with higher fee income. Policy acquisition costs as a percentage of net earned premiums also declined in the second quarter to 17.9% from 18.5%. The continued shift in our business mix towards the brokerage channel also reduced policy acquisition costs, resulting in an overall economic benefit to our margins. Moving on to investment results. Net investment income was $12.7 million, up from $11.9 million last year, reflecting a larger investment portfolio, partially offset by lower short-term interest rates. Realized and unrealized gains were $18.6 million or $14.9 million net of noncontrolling interest, supported by strong results in our utility and infrastructure portfolio. Our effective tax rate was 20%, bringing net income to stockholders to $33.5 million. Adjusted net income was also $33.5 million or $0.67 per diluted share. Turning briefly to the balance sheet. Cash and investments increased by $62.3 million from the first quarter to $1.2 billion, reflecting strong operating cash flow. Book value increased by $33.4 million since the first quarter, driven by retained earnings and an increase in AOCI, offset by the impact of shares purchased in the quarter under our stock repurchase program. Our book value per share ended the quarter at $13.86 per share, up 31% since our IPO. With that, I'll turn it over to Chris to discuss underwriting and operating performance.

Thank you, Neil. When you consider this quarter's results, record direct premium and underwriting operating expense ratio that we believe is among the best in our peer group and continued underlying improvement in our loss performance, any one of those metrics would represent a strong quarter on its own, especially against the backdrop of an increasingly competitive market. Taken together, they speak to how the capabilities we have built are increasingly reinforcing one another and helping us overcome the usual trade-off between growth, cost and underwriting quality. This is why we believe these results are not only repeatable, but sustainable over the long term. Let me explain. Starting with revenues. Growth this quarter wasn't driven by a single initiative. First, we benefited from a larger renewal portfolio. Year-over-year, we have consistently acquired new business on our terms at the right technical rates. This compounded into our largest renewal portfolio ever entering this quarter. In addition, new business growth was broad-based. On our last earnings call, I talked about the record submission volumes we are seeing across the business. Those submissions reflected investments we have made in distribution, regional strategies and new products. Those submissions became premium this quarter. Existing distribution partners continued to place more business with us. Newer relationships became increasingly productive. Project Heartland continued to outperform. Our New England strategy launched in April, got off to an excellent start. Property growth accelerated and our newer professional liability and management liability products contributed meaningfully. Turning to operating expense. This quarter, we processed record premium volume while simultaneously launching new products and executing new growth initiatives. Yet our underwriting expense ratio improved to 9.5%. This isn't simply a function of scale. Technology and AI are a big part of the story. Our technology platform is built on a modular architecture. That means every capability we develop can be reused across products, channels and growth initiatives. In addition, we are increasingly benefiting from Agentic AI. This is now being used across functions ranging from marketing to governance. Notably, our architects and engineer product was brought to market earlier this month using what we estimate to be approximately 60% fewer resources because of AI. We have all but eliminated the fixed cost of launching a new product while accelerating speed to market. We believe our underwriting model, technology design and innovations help deliver one of the lowest underwriting operating expense ratio in our peer group. Finally, underwriting performance. Importantly, we did not need to compromise underwriting standards to achieve growth. A larger opportunity set simply allowed us to remain selective, maintain technical pricing and continue delivering fast response times to our partners. We continue to price the business using an 18-month forward view of expected loss costs rather than reacting to short-term pricing trends. That gives us confidence that our technical margins remain stable. Our prior year reserves continued to develop favorably during the quarter. supporting our view that our underwriting discipline continues to produce consistent outcomes over time. Taken together, these 3 metrics tell the story of a business that can grow faster than its peers without sacrificing underwriting quality or inflating expenses. We believe this is because our approach to the market and the way we build the business are self-reinforcing. Investments in distribution, products and technology expand our opportunity set. A larger opportunity set allows us to underwrite more selectively, selective underwriting generates stronger margins, stronger margins allows us to continue investing in technology, products and distributions, and those investments further expand our opportunity set. We have intentionally built Ategrity to become stronger as it grows, and we believe this quarter demonstrated exactly that. With that, I'll turn it back to Justin.

Thanks, Chris. This quarter demonstrated that the investments we've made over the past several years continue to translate into profitable growth. While we expect competitive pressure to continue in the E&S market, we believe our ability to identify differentiated growth opportunities and execute them through our scalable operating platform positions us to continue gaining profitable market share, which leads to our guidance for the third quarter. We expect to achieve further market share gains with gross written premiums growing more than 20 percentage points above the E&S market. From an underwriting margin perspective, we expect a combined ratio of approximately 87%, representing continued year-over-year improvement. With that, we thank you for your time. And operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Elyse Greenspan with Wells Fargo.

My first question, I just wanted to, I guess, flesh out, I guess, on the top line as you guys are thinking about growth from here. I think you said in the third quarter, more than 20%. How do you see that trending between property and casualty? And then can you just give us a sense of just the current pricing conditions you guys are seeing in both?

Yes. Thanks, Elyse. This was a good top line quarter for the company, and we did give that guidance, and we expect to see continued momentum in both property and casualty along the lines of what you've seen this quarter. Chris, do you want to talk about that?

Yes. We are seeing a lot of momentum in property that is unusual in this market, but it is somewhat explainable by primarily our strategies. So Project Heartland, the New England strategy, those are both product-centric strategies that are really unique to us, very differentiated. They take a lot of research, a lot of technology, a lot of capabilities. So they're not -- it's not easy to follow us in those specific regions. So that alone is contributing. When it comes to rates, we were effectively flat, low negative single digits on property, and that is because we chose to protect our renewal portfolio in some key regions where it made sense for us from a portfolio balance standpoint and also because of the fact that those were accounts that were performing well, worth preserving. On new business, the pricing levels on new business is up slightly year-over-year. That's not a metric we have disclosed, but directionally, it is something that we keep an eye on internally to tell us how we're pricing new business.

Okay. And then my second question, you guys called out some reserve releases this quarter. And I was just hoping to get a sense, I guess, I think it was just under 1 point. What was driving the reserve releases, just what years and lines?

Thanks, Elyse. So this is similar and a continuation of what we discussed last quarter, which was in the past few years, we have booked our property results with a degree of prudence, expecting reported losses to come in over the course of this year. They have not materialized to the degree that we expected, and that's what led to the reserve releases.

Your next question comes from Pablo Singzon from JPMorgan.

First question, are you able to quantify or provide more context on the new business submissions that you saw? Did the pace of growth accelerate from last quarter? And just in general, I want to get a sense of the magnitude of growth there.

We're not providing the number itself, but what we can say is that it was in excess of our premium.

Yes. It was in excess of our premium growth. We continue to remain selective. We are finding excellent opportunities on new business across all products, first of all. So there are some beyond property, which tends to be the headline when there's a discussion around soft market. It is -- there's also a soft market in management liability and to some extent, professional liability, but we continue to find unique opportunities there also. In casualty, some say there are softening parts of that market. And nevertheless, we are coming across great opportunities from not just the areas where we have a regional strategy, but across the country in some very low volatility jurisdictions. And that is a factor of our distribution network who very often are in those smaller markets.

And then second question, I was hoping you could discuss, I guess, the mix shift dynamics that are affecting the year-over-year compare in attritional. I think you guys are unique, right, where you tend to book property losses actually above casualty picks. But anyway, you sort of like talk through why that attritional went up year-over-year.

Yes. Thanks. This is really driven by mix shift and the mix shift into our brokerage channel. So we have 2 channels, brokerage and small business. The brokerage channel has a booked loss ratio that is above the small business. So as you've seen that mix come through, that's been what's driving that. At the same time, that's also driving our commission ratio lower. So that is an offsetting dynamic. So a couple of elements there. But from a loss ratio perspective, it is having written greater brokerage business with a higher -- that comes with a higher loss ratio. And there has been no change in our underlying loss picks by line of business and channel.

Your next question comes from Andrew Kligerman with TD Cowen.

So I want to touch on the growth initiatives. And the part A of it kind of revolves around your regional growth where I think over a year ago, it was Project Heartland in the Midwest and then it moved to New England. And I think last quarter, you talked a little bit about Texas and Florida. So the part A of it is, do you see a lot of geographic opportunity post these regions that I just touched on? And the part B is in the press release, I didn't hear it on the call, I don't think anyway that you see opportunities for middle market growth. I think last quarter, you talked about it in Texas, I think, mixed-use retail. But maybe it's the management and professional liability that you mentioned on this call. But I would like a little more clarity around your middle market segment growth.

Yes. What you're seeing in our numbers were the seeds that were planted, as you were saying, back many months ago. And those seeds continue to be planted, and that is what's fueling our growth. I'll pass it to Chris to talk about that.

Yes. So I think we can take a step -- if you take a step back and look at the regional strategies, they're not just a benefit to us, they are a benefit to our partners because we are stepping in to fill a market need that we typically identify very early on. And we also are very intentional about how we craft solutions for those markets. So there's the initial entry -- there's the initial strategy and then there is -- there are the residual benefits that we get from that. So I mentioned we are seeing attractive business and lower volatility jurisdictions. Those are -- so we are in the Midwest. We have a very specific set of states that we characterize under the Midwest strategy. But Wyoming is not on that list, but we're seeing business in Wyoming because we were in Nebraska. That's just an example of just how the regional strategies work. And what's beneath that is the fact that we are really solving a market problem. And by doing so, we're really becoming important to our distribution partners.

And from the middle market perspective, I think that's your question was about middle market. That goes back to that earlier question on brokerage versus small business. Small business is the more micro-type accounts and middle market are small accounts, but they're in the -- we call them in the midsize range. And so we have been growing in that brokerage channel in a meaningful way, and that's been part of these numbers that you're seeing here.