Octave Specialty Group, Inc. (OSG) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to the Octave Specialty Group Second Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Karen Beyer, Head of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to Octave's Second Quarter 2026 Call to discuss financial results. Speaking today will be Claude LeBlanc, President and CEO; and David Trick, Chief Financial Officer. They will discuss the financial results of our business and the current market environment. After prepared remarks, we'll take your questions. Also available for Q&A today will be executives from our Insurance Distribution segment. For those of you following along on the webcast during the prepared remarks, we will be highlighting some slides from the investor presentation, which can be located on [ Octave's website ]. Our call today includes forward-looking statements. The company cautions investors that any forward-looking statement involves risks and uncertainties, and it is not a guarantee of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described in forward-looking statements in our earnings press release and in our most recent 10-Q and 10-K filed with the SEC. We do not undertake any obligation to update forward-looking statements. Also in our prepared remarks or responses to questions, we may mention some non-GAAP financial measures. Reconciliation to those non-GAAP measures are included in our recent earnings press release, operating supplement and other materials available in the Investors section on our website, octavegroup.com. Now we would like to turn the call over to Mr. Claude LeBlanc.

Thank you, Karen, and good morning, everyone. I am pleased to report that Octave Group delivered another strong quarter, reflecting continued momentum across our platform and disciplined execution against our strategic priorities. Our insurance distribution business continued to scale at an attractive pace, supported by strong organic growth and the benefits of recent strategic investments. At the same time, our Specialty Insurance segment showed continued operational progress and improving financial performance. Turning to our results for the quarter. Our core insurance distribution business remains firmly on track with strong momentum demonstrated by revenue growth of 77% for the second quarter, which included organic growth of 44% and the impact of the acquisition of ArmadaCare. Our second quarter insurance distribution adjusted EBITDA was $10 million, representing a near fourfold increase year-over-year, bringing our year-to-date adjusted EBITDA to $35 million. This reflects an adjusted EBITDA margin of approximately 26%, which expanded over 12 percentage points from 13% a year ago. Based on the continued and accelerated growth of our Insurance Distribution segment, we are adjusting our 2026 guidance for our 2 key metrics, organic growth and adjusted EBITDA. David Trick will provide more details on all of our guidance adjustments later in the presentation. Included in these results is strong performance from our class of 2024 and 2025 MGAs, which continued their growth trajectory this quarter. We remain confident that these MGAs, which remain in the early stages of scaling will drive material EBITDA expansion as they scale through 2028 and beyond. Our Specialty Property & Casualty segment continued to benefit from the early actions we have taken to reposition the platform, delivering adjusted EBITDA of $1.8 million for the quarter. We continue to strengthen the quality of Everspan's portfolio while positioning the company to generate increasingly attractive earnings as premium growth and underwriting improvements continue to compound. The business remains well positioned to support both third-party programs and select active sponsored opportunities while delivering sustainable long-term value for shareholders. In conjunction with this, we are investing in leadership and specialized capabilities needed to support Everspan's growth. As announced earlier this week, we have hired 3 new senior leaders at Everspan Group; David Kenyon, Head of Reinsurance, who recently joined the company; and Bevan Greibesland, Chief Underwriting Officer; and Clay Stewart, Chief Operating Officer, who will be joining us shortly. David, Bevan and Clay each bring deep expertise in their respective fields. Together, it will strengthen our ability to scale Everspan while maintaining our focus on underwriting discipline, strong partnerships and operational excellence. Turning to the market environment. Broadly, the U.S. and global P&C insurance markets continue to soften. Property markets are being shaped by abundant capacity. The wholesale large property segment is leading the pullback with rates down 10% to 20% year-on-year, while low cat-exposed SME property markets are experiencing more muted softening. Notably, this is happening after years of increases, which gave rise to a strong technical price foundation. As a result, notwithstanding these rate reductions, price adequacy remains intact for our well-underwritten portfolios. The London market large casualty products are operating against a backdrop of robust competitive pressures, although they are demonstrating better rate resilience than large property lines. By contrast, casualty SME classes, including general liability and certain commercial auto risks, as well as targeted specialty classes, continue to show mid-single to double-digit rate progression and represent an attractive opportunity for expansion. A&H continues to benefit from constructive positive rate trends and strong secular growth in certain markets. In this market environment, our portfolio strategy remains a key differentiator. We have intentionally built a diversified platform across A&H, Specialty P&C and select property lines, giving us multiple sources of growth and reducing our dependence on any single product class or market cycle. This diversification is especially important in the current environment where our A&H businesses continue to provide a growing earnings base that is largely uncorrelated with broader P&C pricing cycles. This breadth allows us to manage concentration risk, reposition where appropriate and continue pursuing profitable growth in areas where market fundamentals remain attractive. Equally important, our MGA model is built around experienced underwriting leaders who have managed through prior market cycles. Their expertise, combined with disciplined portfolio management and strong capacity relationships enables us to responsibly deploy underwriting capital on behalf of our partners while protecting margins and supporting sustained growth. Beyond our portfolio diversification and experienced underwriting leadership. Our growth is supported by the profile of our portfolio companies and our portfolio bias towards areas where growth opportunity remains strong. Since the start of 2024, Octave has launched 9 MGAs, representing 40% of our MGA portfolio. Following an MGA launch, there is an inherent strong growth trajectory, which typically continues for at least 5 years and in many cases, well beyond that window. MGA launches typically breakeven and start to deliver positive EBITDA after 18 to 24 months. In contrast, our mature MGAs are driving growth through a deliberate proactive strategy, expanding distribution, repositioning towards the strongest underwriting opportunities and broadening capacity access within core products. We are leveraging MGA and corporate leadership expertise alongside targeted talent recruitment to drive product growth. Bolt-on teams, a strategy we're executing across multiple platforms provides an efficient low-cost route to growth, rivaling smaller new MGA launches. Taken together, the diversity of our portfolio, the profile of our MGAs and the quality of our underwriting talent give Octave a differentiated ability to perform through market cycles. We believe that this positions us well to deliver above-market organic growth today while preserving meaningful upside as market conditions evolve. Finally, a brief update on our AI and data strategy. We view AI as both a growth enabler and an efficiency tool. Applied thoughtfully, it strengthens our underwriting capabilities, improves speed and consistency across our enterprise and helps our teams focus their time on high-value risk selection and client engagement. During the second quarter, we collaborated with Cytora to develop and launch our proprietary AI-driven underwriting platform, turning submissions into decision-ready risks, allowing us to review opportunities faster and with greater underwriting quality. It is currently active in a number of our U.S. MGAs that write management, financial and professional liability programs. To date, the results are very encouraging. In one clear example of underwriting efficiency and acceleration, we have reduced submit to quote time from several hours to approximately 7 minutes. Over time, we expect this capability to reduce manual effort, accelerate underwriting decisions, improve service levels and bring additional MGAs to market more quickly. We expect to complete the implementation across our remaining applicable U.S. MGAs in the second half of this year. I will now turn the call over to David to review our second quarter results. David?

Thank you, Claude, and good morning, everyone. For the second quarter of 2026, Octave reported a net loss to shareholders of $14.4 million or $0.33 per share, an improvement of over $6 million or $0.09 per share compared to the net loss to shareholders of $20.5 million or $0.42 per share reported in the second quarter of 2025. Consolidated EBITDA and adjusted EBITDA to shareholders improved to a negative $1.7 million and a positive $3.7 million compared to a negative $9.8 million and negative $4.6 million, respectively, in the second quarter of 2025, representing an $8.1 million and $8.3 million improvement, respectively. The consolidated adjusted net loss to shareholders was $1.8 million or $0.04 per share compared to a loss of $10.6 million or $0.22 per share in the second quarter of 2025, an improvement of $8.7 million or $0.18 per share. The results for the quarter led by insurance distribution also reflect improved results at Everspan as well as our corporate operations. Total revenue for the Insurance Distribution segment grew 77% to $58.4 million in the second quarter of 2026. Organic growth of 44% and the October 2025 acquisition of ArmadaCare were the drivers of the substantial increase in revenue. Organic growth was aided by the diversity of our business, including de novos launch over the last 2 years in certain specialty product lines, which more than offset some of the softness we experienced in certain markets such as energy and D&F property. The Insurance Distribution segment's net loss to shareholders decreased to $3.7 million in the quarter compared to a net loss of $7.7 million in the prior year quarter, an improvement of $4 million. Insurance Distribution's adjusted EBITDA to shareholders grew nearly fourfold to $9.8 million compared to $2.5 million in the prior year period, driving related margins to 16.8% from 7.6%, respectively. Adjusted net income to shareholders swung positive to $4.6 million compared to a net loss of $3 million in the second quarter of 2025. Our insurance distribution results for the quarter were driven by a number of factors, including the October 2025 acquisition of ArmadaCare, organic growth across our diverse group of MGAs, higher profit commissions, reflecting continued underwriting discipline, the acquisition of an additional 10% of Octave Ventures at the end of the first quarter and a near $3 million reduction in interest expense resulting from both the reduction of debt and lower financing costs. Our results for the quarter also reflect our continued investment in de novo MGAs, which suppressed EBITDA to shareholders by about $1.1 million in the quarter, accounting for about 2 points of EBITDA margin. Turning to Everspan. Gross and net premiums written and premiums earned in the quarter were $95 million, $23 million and $22 million, down 2% and up 52% and 34%, respectively. The actions we've been taking to reposition Everspan helped bring down our current quarter loss ratio to 61.4% with our active programs running at about a 59% loss ratio. This represents a 640 basis point improvement in our reported loss ratio compared to the second quarter of 2025. Our G&A expense ratio also declined year-over-year to 9.4% from 16%, driven by lower expenses and earned premium growth. Reduction in the loss and G&A expense ratios were partially offset by higher acquisition costs due to embedded sliding scales on certain programs that we believe will provide more stable underwriting results going forward. Together, these results led to a reduction in the combined ratio to 100.6% compared to 106.7% last year, above our long-term objectives, but progress towards our goal. For the second quarter of 2026, Everspan produced pretax income of $1.2 million and adjusted EBITDA was $1.8 million, double and nearly triple, respectively, the results from the prior year period. Continued expense reduction and containment initiatives at corporate also contributed positively to our improved second quarter results. Reported GAAP corporate expenses declined from $14 million in the second quarter of 2025 to $12 million this quarter, a 14% improvement. In addition, adjusted expenses declined to $7.9 million from $8.3 million in the prior year comparable period. The difference between reported expenses and adjusted expenses in the current quarter was mainly attributable to $1.1 million of acquisition, integration, severance and restructuring expenses and $2.7 million of equity compensation. We continue to evaluate all expenses in an effort to trend our adjusted expenses downward toward our longer-term goals. Turning to guidance. We are updating several key items that reflect the continued strength of our insurance distribution business and the ongoing evolution of our platform. Within our Insurance Distribution segment, we are raising guidance for both of our key operating metrics. We now expect organic growth of 25% plus, up from our prior expectation of 20% plus and are increasing adjusted EBITDA guidance to $45 million from $40 million. These increases reflect the diversity and continued momentum of our distribution platform. At Everspan, we are revising our adjusted EBITDA guidance to $6 million from $7.5 million. This change is primarily driven by higher-than-expected acquisition costs associated with the mix of newer programs we are onboarding. While these costs impact near-term profitability, we believe these programs will produce more attractive long-term economics through lower and more stable loss ratios, supporting a stronger and more durable earnings profile over time, particularly as we build scale. $6 million of adjusted EBITDA would represent a 58% increase over 2025's adjusted EBITDA of $3.8 million. We are also updating our adjusted net income per share guidance to a range of $0.15 to $0.20 per share compared with our prior expectation of $0.50 per share. This revision reflects updated estimates for interest expense, depreciation, taxes and a more refined allocation of noncontrolling interest across the business. Importantly, our outlook continues to represent a significant milestone for the company. We expect 2026 to be the first year we generate positive adjusted net income per share, excluding the legacy financial guarantee business since launching our P&C strategy in 2021. At the midpoint of our revised guidance, this represents approximately a $0.76 per share improvement from our 2025 adjusted loss of $0.58 per share, driven by the continued growth and increasing earnings power of our insurance distribution platform. All other guidance remains unchanged. I will now turn the call back to Claude.

As we move into the second half of 2026, I'm confident in the strength, scalability and resilience of our business model. While the market environment remains dynamic, we are executing with discipline, maintaining our focus on underwriting quality, portfolio management and responsible growth. These results reinforce our confidence in Octave Group's long-term opportunity. We believe the foundation we are building positions us well to deliver sustained profitable growth and advance our vision of becoming a leading specialty insurance distribution company. Operator, I would now like to open the call to questions.

[Operator Instructions] And our first question will come from Maxwell Fritscher with Truist Securities.

I'm calling in for Mark Hughes. How would you characterize the pipeline for start-up MGAs? And then how is the pipeline for the class of 2027 shaping up, if you have a line of sight there?

Max, Yes, so where we stand for '26, I think we indicated that we thought there would be a lower number of MGAs launched this year. We haven't launched any to date, although we still expect to, but we indicated 1 or 2 for '26. This came off the large number that we launched in the class of '24 and '25, where we launched 9, representing roughly 40% of our total MGA portfolio. So it was our expectation to keep that number lower this year as we focus on the large number of MGAs launched in that period. Roughly close to 75% of our organic growth this quarter was delivered by the class of '24 and '25. So those MGAs are just beginning at the early stages of scaling their platforms and really taking hold of the growth and also beginning to deliver EBITDA. Roughly half the MGAs of that class are delivering EBITDA at this point in time, and we expect more to start contributing and contributing much more meaningfully as we get through to the end of the year and into '27. So right now, as we kind of look at the trajectory in terms of our target EBITDA looking at '28 that we put out of $80 million, a significant percentage of that will come out of the class of '24, '25. But coming back to your specific question on '26 and '27, we're still targeting a relatively modest number of MGAs in '27. I think we're probably in the range of 2 to 4 in terms of launch. We do have a pipeline of start-ups that we continuously evaluate for launching. We're very selective, of course, in choosing the MGA portfolios that we're looking at. But we've also been refining our integrated operational platform that we believe will enhance our ability to launch MGAs even quicker than we've had in the past and get them to scale sooner, which has also been a major initiative that we've been focused on in '26 and have made tremendous progress in the last number of months. So again, the pipeline is deep, but we are -- the class of '24, '25 and the focus on those. And as I mentioned in my prepared remarks, the fact that we're adding teams to those MGAs as well, not just those, but others that we acquired has been an alternative way to grow and scale what I'll say, the small to midsized MGA launches. We're able to get them up and running much quicker by adding teams to existing MGA platforms. And that has been a key source of growth also for this year as well.

Great. That's helpful. And then in terms of capacity, what are your observations around your current partners and then the market in general's appetite around providing more capacity?

Maybe I'll let Naveen Anand, who's with us this morning, to answer that.

Good morning, Max. So overall, I think from a capacity standpoint, it really goes out to underwriting results and our underwriting results and performance has generally been good. And as a result, we see capacity being attractive and attractive to our portfolios and our platforms. And so we expect that we'll continue to see strong capacity support as we move forward into '26, remaining in '26 and certainly into '27 across both our start-up platforms and supporting our venture businesses as well as our more established MGAs in our portfolio.

And I'd just add that we are continuing to broaden and diversify our capacity. Again, our model is a curated capacity model, and we continue to add capacity partners. Most quarters, we're adding at least one or more. So that's part of our strategy and something that we will continue to progress as we scale the platform.

And then I guess turning to rates, I'll start with non-cat property. What sort of pricing are you getting there? And then when you look at where we are in the cycle, do you think we're anywhere near floor? Is -- what are your observations on that market?

Max, this is Naveen again. Generally, we're seeing rate declines in the sort of 10% to 20% range, as Claude has mentioned in that sort of property lines, both primarily in the large account property lines and more on the cat exposed property lines. I expect we're still in the relatively early innings, assuming -- obviously, things can change quickly if there are other large cat events and things change the market from that standpoint. But at this point, we expect that they'll continue to soften as we move forward into the remainder of '26 into '27, particularly the cat events that don't happen from that standpoint.

Yes. And as we mentioned, our portfolio is much more geared to the non-cat and non-large account more of the SME side of the business mix. So I think for us, when we kind of look at the average, it's probably closer to 5% or 10% or the lower end of that range, just given the business mix that we -- our portfolios are focused on. And we still are having strong growth in some of our property MGAs, again, the ones that are focused on the E&S SME space and again. So it is a mix for us, and I'd say that more muted in terms of the price impacts, although there are a few that, as Naveen mentioned, have been in the flow of the larger account D&F markets that have had some impact that are more in line with market, but that is a small percentage of our portfolio.

And at Everspan, I know excess liability is a decent part of the mix there. What are your observations pricing there? Is there any incremental competition you're seeing? If so, where do you see that coming from? And do you still think pricing is running ahead of loss trends?

Yes. Max, this is Naveen again. Generally, we're still seeing rate -- positive rate environment in the excess liability. It is moderating a bit in terms of -- as the quarter goes on, but still generally in line and better than loss costs from that standpoint. And obviously, it's dependent on portfolio by portfolio on that basis. But for the portfolio that we have and the targets that we have in Everspan, we're generally seeing positive rate environment that's exceeding loss cost.