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

Thank you. and welcome to the Octave Specialty Group second quarter 2026 earnings call. This time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please signal the operator by pressing star and zero on your telephone keypad. 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 OCTAV'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 Our call today includes forward-looking statements. The company cautions investors that any forward-looking statement involves risks and uncertainty, and it is not a guarantee of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statement due to a variety of factors. These factors are described in forward-looking statements in our earnings press release and in our most recent 10Q and 10K, all 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 mentioned 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 investor 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 our Medicare. Our second quarter insurance distributions adjusted EBITDA was $10 million, representing a near four-fold increase year-over-year, bringing our year-to-date adjusted EBITDA to $35 billion. This reflects an adjusted EBITDA margin of approximately 26%, which expended over 12 percentage points from 13% a year ago. Based on the continued and accelerated growth of our insurance distribution segment, we for adjusting our 2026 guidance for our two 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 2022. and beyond. Our specialty property and 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 Octave-sponsored opportunities while delivering sustainable long-term value for shareholders. In conjunction with this, we are investing in their leadership and specialized capabilities needed to support Everspan's growth. As announced earlier this week, we have hired three new senior leaders at Everspan Group. David Kenyon, head of reinsurance, who recently joined the company, Bevan Grievesland, Chief Underwriting Officer, and Clay Stewart, Chief Operating Officer, who will be joining us shortly. David, Bevin, and Clay each bring deep expertise in their respective fields. Together, they 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 US and global PNC 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 nine MGAs, representing 40% of our MGA portfolio. Following an MGA launch, there is an inherent strong growth trajectory, which typically continues for at least five years, and in many cases, well beyond that window. MGA launches typically break even and start to deliver positive EBITDA after 18 to 24 months. In contrast, our mature MGEs 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. Built 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 this positions us well to deliver above-market organic growth today while preserving meaningful upside as market conditions improve. 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 US 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 seven 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 USMJs in the second half of this year. I will now turn the call over to David to review our second quarter results. David? David?.

Thank you, Claude. Good morning, everyone. For the second quarter of 2026, Octave reported a net loss to shareholders of $14.4 million, about 33 cents per share. 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 8.7 MILLION IN million improvement respectively. The consolidated adjusted debt loss to shareholders was 1.8 million or 4 cents per share compared to a loss of 10.6 million or 22 cents per share in the second quarter of 2025. An improvement of 8.7 million or 18 cents per share. The results of 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% in the October 2025 acquisition of ArmadaCare was the drivers of the substantial increase in revenue. Organic growth was aided by the diversity of our business, including DeNovo's launch over the last two years and certain specialty product lines, which more than offset some of the softness we experience in certain markets such as energy and DNF property. The insurance distribution segments 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 distributions 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 percent from 7.6 percent 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 MDAs, higher profit commissions reflecting continued underwriting discipline, the acquisition of an additional 10% of Okta Ventures at the end of the first quarter, and a near $3 million reduction in the 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, timing for about two 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 Everspin help 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 in G&A expense ratios are 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, our long-term objectives but progress towards our goal. For the second quarter of 2026, EverSpan produced pre-tax 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 gap 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 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. 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. Six million of adjusted EBITDA would represent a 58% increase over time. 2025's adjusted EBITDA of $3.8 million. We are also updating our adjusted net income per share guidance to a range of 15 cents to 20 cents per share, compared with our prior expectation of 50 cents per share. This revision reflects updated estimates for interest expense, depreciation, taxes, and a more refined allocation of non-controlling 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 since launching our P&C strategy in 2021. At the midpoint of our revised guidance, this represents approximately a 76 cents per share improvement from a 2025 adjusted loss of 58 cents 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 Clay. As we move into the second half of 2026, I am 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. Thank you.

We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. And our first question will come from Maxwell Fritcher with Truist Securities.

Yes, thank you. Good morning. I'm calling in for Mark Hughes. How would you characterize the pipeline for startup MGAs and then how is the pipeline for the class of 2027 shaping up if you have a line of sight there?.

Good morning, Max. Yes, so where we stand for 26, I think we indicated that we thought there would be a lower number of MGA's launched this year. We haven't launched any to date, although we still expect to, but we indicated one or two for 26. This came off the large number that we launched in the class of 24 and 25. We launched nine 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 MGA's launched in that period. Roughly close to 75% of our organic growth this quarter was delivered by MGA. the class of 24 and 25. So those MGA's are just beginning at the early stages of scaling their their platforms and really taking hold of the growth and also beginning to deliver EBITDA. Roughly half the MGA's of that class are delivering EBITDA at this point in time and we expect that more to start contributing and contributing more, 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 specific question on 26 and 27. You know, we're still targeting a relatively modest number of MTAs at 27. I think we probably in a range of two to four in terms of launch. We do have a pipeline of startups that we continuously evaluate for launching. We're very selective, of course. in choosing the EMJ 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 EMJs even quicker than we 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 have made tremendous progress in the last number of months. So again, the pipeline is deep, but we are, you know, the class of 2425 in a focus on those and I mentioned in my prepared remarks the fact that we're adding teams to those MGA's as well, not just those with others that we acquired, has been an alternative way to grow and scale what I'll say the small to size 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. Thank you. 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 Navin Anand, who's with us this morning, to answer that.

Good morning, Max. So, you know, overall, I think from a capacity standpoint, it really goes down to underlying results and our underlying results. that one was a good and as a result we see capacity being attractive and got to our portfolios on platforms and so we expect that we'll continue to see a strong capacity support has been forwarded to 26, or maybe 26, it's only to 27, across both our startup platforms today. SUPPORTING OUR VENTURE BUSINESSES AS WELL AS OUR BUSINESSES AS WELL AS OUR ESTABLISHED MTA'S AND OUR ARTS.

here. And I just said 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. Thank you. And then I guess turning to rates, I'll start with, when you look at where we are in the cycle, do you think we're anywhere near floor? Is, yes, what are your observations on that market?.

I'll ask this to Nadine again. Generally we're seeing rate declines in this sort of 10 to 20% range as Clodis mentioned.

with property lines, primarily large count properties lines and more on the cash those property lines. I expect we're still in the early, most of the early innings, assuming, you know, obviously things can change quickly if there are other large cat events and change the market 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 if the CAD events, you know,.

that don't happen from that standpoint. Yes, and as we mentioned, our portfolio is much more year two than a 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 five or 10 or the lower end of that range, just given the business mix that we are our portfolios are focused on. And we still are having strong growth in some of our property MGA's. 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 isn't to be mentioned, you know, have been, you know, in the flow of a larger account, DNF markets have had some impact that are more aligned with market, but that is a small percentage of work performance.

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 lost trends?.