Earnings Call Transcript - ASIC Q4 2025

Operator, Operator

Good afternoon, everyone, and thank you for joining us today for Ategrity's Fourth 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. After Justin, Chris and Neelam have made their formal remarks, we will open the call to questions. 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. And with that, I will now turn the call over to Justin.

Justin Cohen, CEO

Good evening, and thank you all for joining Ategrity's fourth quarter earnings call. This is Justin Cohen, and I'm joined here today by Chris Schenk, our President and Chief Underwriting Officer; and Neelam Patel, our CFO. Ategrity once again delivered record results in Q4, demonstrating strength on both the top and bottom line. Gross written premiums grew 30% year-over-year, exceeding our guidance of outperforming E&S industry growth by 20 percentage points. Our 84.9% combined ratio in the quarter is a new record for the company. We continue to profitably grow our market share in the small and midsized E&S space because of three key factors. First, in our core specialty verticals, we have identified market gaps and built targeted products around them, producing structural growth while maintaining strict technical discipline. Second, we have grown our distribution network of nearly 600 partners. Through tight alignment of product and execution, we have driven strong submission volume, including nearly 90% year-over-year growth this quarter. Third, we have engineered our workflows and automation to deliver speed with precision, responding quickly to brokers while maintaining rigorous standards at scale. Together, these factors have driven both growth and margin expansion in a moderating E&S market. Turning to additional dynamics from the quarter. In property, we grew 18% year-over-year with strong sequential acceleration in stark contrast to the overall property market, which contracted as a whole. By focusing on small- and medium-sized attritional risks where we have an underwriting advantage, we positioned ourselves away from the more cyclical large account catastrophe-exposed market. Our 84.9% combined ratio reflects favorable loss experience, business mix and operating leverage. Net earned premiums grew 25 percentage points faster than operating expenses net of fees, driving a 6.1 percentage point improvement in our overall expense ratio even as we continue to invest in growth initiatives and technology. On technology, in recent weeks, the capital markets have focused on the risks of AI to the specialty insurance industry. At Ategrity, over two years ago, we developed a clear roadmap for integrating AI and made critical investments in that direction. Those investments have now been operationalized, and we will provide some additional context later in the call. Finally, stepping back to broader E&S market dynamics, while industry growth has decelerated, it is less the case in our small and midsized segment. Competitive intensity increased marginally again this quarter, but we continue to stand out through our business model and execution, driving growth in our market share. With that, I will turn it over to Neelam to discuss the financial results.

Neelam Patel, CFO

Thanks, Justin. We delivered another strong quarter with adjusted net income of $25.4 million, up from $22.7 million in the same quarter last year, driven by top line growth, improving margins and continued strength in our investment income. Our gross written premiums were up 30% in the quarter, and the growth was broad-based. Casualty premiums grew 38% and property premiums grew 18%. Net written premiums increased 44%, which reflects higher retention year-over-year. Net earned premiums were up 34%, which is less than net written premium growth because of the natural lagged recognition of our growth trajectory. Net earned premium growth accelerated sequentially due to our expanded premium base and the impact of the reduction in our quota share reinsurance in 2025. Our fee income was $2.3 million compared to $0.4 million a year ago, reflecting standard policy fees implemented in 2025. Our underwriting income for the quarter was $15.5 million, up 160% year-over-year. That translates into a combined ratio of 84.9% compared to 92.3% last year due to reductions in both our loss and expense ratios. The loss ratio came in at 57.1%, down 1.2 points year-over-year driven by strong underlying results in our property business. We again had no prior year development. Catastrophe losses were 3.2% of net earned premium, down from 3.7% last year due to very few catastrophe events in the fourth quarter. On expenses, the overall expense ratio improved 6.1 points to 27.8%. Operating expense was 10.5% of net earned premiums, down 2.4 points year-over-year and lower than Q2 and Q3 of 2025. That improvement was driven by earned premiums growing faster than operating expenses, along with the benefit of higher fee income. Policy acquisition costs as a percent of net earned premiums declined to 17.3% from 21%. The improvement was primarily mix driven as growth has been concentrated in lines of business carrying lower acquisition costs and higher ceding commissions. Moving on to investment results. Net investment income was $11.6 million, up from $6.3 million last year, reflecting a larger investment portfolio. Realized and unrealized gains were $6.7 million, supported by strong results in our utility and infrastructure portfolio. Our effective tax rate was 20.2%, bringing net income to $25.3 million. Adjusted net income was $25.4 million or $0.51 per diluted share. Turning to the balance sheet. Cash and investments increased by $45 million from the third quarter to $1.1 billion, reflecting strong operating cash flow. Book value increased by $26 million, driven by retained earnings. Our book value per share ended the quarter at $12.78, up 21% since the IPO. Overall, the quarter reflects strong growth, underwriting discipline and operating leverage. With that, I'll turn it over to Chris to discuss underwriting and operating performance.

Chris Schenk, President and Chief Underwriting Officer

Thanks, Neelam. With 30% growth and an 84.9% combined ratio, this was another record quarter for Ategrity. Core operating metrics, including retention, hit ratios, submissions and rate changes were in line with or above our plan. And our cost of product indicators, including frequency and severity signals, continue to track favorably. These results reflect the strength of our productionized underwriting model, which is built on vertical specialization, deep expertise and structured underwriting. I want to highlight three drivers behind our results. First, we have capitalized on growth opportunities that have been overlooked by peers. These are differentiated pathways for growth that we can uniquely identify because we specialize in specific verticals and micro segments. Approximately half of our growth this quarter came from strategic initiatives like Project Heartland, retail trade and our multifamily developer product. In property, we exited 2025 with premium growth and renewal rate increases. We grew 18%, while many peers contracted. This growth came from states that are often overlooked like North Dakota, Ohio, and Nebraska. In property, we also achieved full year rate change in the high single digits. Turning to casualty, we grew 38% and achieved low teens full year rate increases. Our management and professional liability lines were a strong contributor, with premium more than tripling despite broader softening conditions. Second, we achieved greater wallet share with our partners. Notably, our 2023 and 2024 distribution cohorts delivered over 100% same-store growth. These partners had strong renewals and increased new business placements with Ategrity. Meanwhile, our 2025 cohort added 25% more new partners to our distribution network, and we are seeing strong early signs of engagement. Our submissions increased roughly 90% year-over-year. We achieved premium growth by quoting more business from a larger opportunity set while maintaining pricing discipline. Third, our underwriting platform is driving speed and operating leverage. We are delivering fast, predictable, and market-ready quotes without diluting technical rigor. In our brokerage channel, policy count increased 3.5 times along record high transaction volumes. Our underwriting efficiency more than doubled. We produced record high quotes while reducing turnaround times. Process standardization and tech automation allowed us to absorb that growth while driving operating leverage. This contributed to a 2.4-point reduction in our operating expense ratio year-over-year. Looking ahead to 2026, we are executing on initiatives for the next wave of growth. This includes intensifying our regional strategies. In Florida, we launched a brokerage package product supported by a dedicated underwriting team. It is one of the few products of its kind in the market. In New England, we are stepping up to fill a market gap with a playbook for older buildings and dense mixed-use exposures. And in the Midwest, we are doubling down on Project Heartland with a comprehensive branded product. These growth pathways are unique and should allow us to continue to outpace the market. Finally, I want to build on Justin's earlier comments on AI. We have been executing on a distinct roadmap for over two years now. AI has already been deployed in our back office, improving risk qualification, data preparation and parameter optimization. In 2026, we are now embedding AI capabilities directly into underwriting workflows with solutions that were built by our in-house innovation lab. Our underwriting model is perfect for implementing AI because it is structured and built on technical pricing with clear risk selection criteria. And the way we select risk and deviate from technical rates is very prescriptive. As such, we can integrate AI with disciplined guardrails and extract real economic value. We see this as a step change for the company. Much of the heavy lifting has been done, but we are taking a responsible approach and we'll be testing and ramping deployment over the course of this year. We expect this to drive our expense ratio lower once it is fully deployed this year. With that, I'll turn it back to Justin for closing comments.

Justin Cohen, CEO

Thanks, Chris. This was a strong quarter by any measure. We grew top line, expanded margins and continued to deepen distribution relationships, all while maintaining underwriting discipline in a moderating market. Our performance reflects a purpose-built model that is being executed with rigor. With that context, let me turn to our outlook. Our guidance for Q1 '26, consistent with last quarter's guidance, is for a growth rate that is 20 percentage points above E&S market growth, reflecting more market share gains and the strength of our approach. Further, we are anticipating a combined ratio just below 90%. One last item to cover. Today, we filed an 8-K announcing a share repurchase program, and we are happy to address any questions on that in the Q&A. With that, we thank you for your time listening. And operator, can you please open it up for questions?

Operator, Operator

All right. It looks like our first question today comes from the line of Hristian Getsov with Wells Fargo.

Hristian Getsov, Analyst

My first question is, can you parse out the rate environment you're seeing, particularly in casualty and property separately relative to loss trends? And is it safe to assume just given the current rate environment, we should see your mix continue to shift towards casualty in 2026?

Justin Cohen, CEO

Chris?

Chris Schenk, President and Chief Underwriting Officer

Yes. I'll begin with casualty. The rating environment remains strong in our areas, with significant demand reflected in our submission flow, and we're maintaining our pricing. Our technical rates are based on prospective measures, allowing us to achieve rates above trend, and we anticipate this trend to continue in the near term. However, due to market dynamics and our competitive landscape, we are flexible in protecting our renewals should the market shift across all our lines. Any potential slowdown in rates may stem from these factors. Regarding property, we operate in a unique market in the Midwest, facing minimal competition for the type of business we are securing. This enables us to secure the necessary rates. We've factored in tariffs and other influences affecting severity, ensuring we are adequately priced in property as well. We have achieved rates that exceed the trend.

Justin Cohen, CEO

In response to your question about mix, our target range for casualty remains between 60% to 70%. This quarter, we were at 67%, and we expect to stay within that range. We do not anticipate any deviations from this. Therefore, our current position is aligned with our strong expectations for mix.

Hristian Getsov, Analyst

Got it. And then on Project Heartland, I guess, can you guys quantify how much runway there is in expanding distribution? And any quantification of how much this initiative has added to premium growth in the year?

Chris Schenk, President and Chief Underwriting Officer

Yes. There are two components to Project Heartland. One involves adding more partners, and we are approaching the end of that phase. The focus now is on increasing share from our partners. We are just starting to enhance that aspect. We believe our investments in the Midwest, not only in distribution but also in product development, are helping us stand out in our markets. We anticipate significant growth potential. As I noted earlier, we are introducing a Heartland product that will help us differentiate ourselves in the market. This is primarily a marketing strategy but also ensures that our services and offerings are easily recognizable. This will be the next step in our initiatives and provides us with a greater opportunity for long-term growth.

Operator, Operator

And our next question comes from the line of Pablo Singzon with JPMorgan.

Pablo Singzon, Analyst

So many other insurance companies, some of them are quite large with well-established platforms have shown a strong interest in small commercial E&S and have publicly disclosed growth metrics that are quite impressive. So the question is, do you see any evidence of them showing up in the markets where you compete in?

Justin Cohen, CEO

You're asking if there have been new players coming in?

Pablo Singzon, Analyst

Right. And I'm thinking specifically without naming names, like large companies that have an intense interest in small commercial E&S.

Justin Cohen, CEO

We have not experienced any pressure from that and have not seen that. You saw some of our metrics as they emerge from this quarter, and I think it demonstrates that we are gaining traction ourselves, and we have not experienced that type of competition.

Pablo Singzon, Analyst

Okay. And then for my second question, regarding the guidance. The last information I have indicates the E&S market is growing at a high single-digit rate. Your guidance of over 20 percent implies a growth rate in the high 20s for Q1, correct?

Justin Cohen, CEO

Yes. We've been very intentional about adjusting our projections to reflect a growth rate that exceeds the market. This is because we do not predict market trends; that’s not where we focus our efforts, and we believe it would not be beneficial for us to speculate on that. However, considering the insights we've gathered from the market, we believe a mid- to high single-digit growth rate would be a reasonable benchmark.

Operator, Operator

And our next question comes from the line of Andrew Kligerman with TD Securities.

Andrew Kligerman, Analyst

You mentioned your record combined ratio of 84.9% and that you've achieved strong numbers in recent years. I would like to understand your reserving methodology a bit better and how much conservatism, if any, you are incorporating into those figures. Could you elaborate on that?

Justin Cohen, CEO

Our reserves are in a very strong position overall, both in property and casualty. The early indicators for the recent years are coming in very strong, as mentioned by Chris. We are highly confident in our reserves. Additionally, we experienced a low quarter of losses in terms of frequency and severity in property, but we have booked reserves in anticipation of potential late reporting. We believe that both property and casualty are in a strong position.

Andrew Kligerman, Analyst

That's very helpful. I want to talk a little bit about the buyback authorization. Could you discuss the amount and how you plan to use it? Also, could you provide an overview of redeployable capital? I understand you have minimal leverage. Do you have enough capital on your balance sheet to support robust growth of 30% a quarter?

Justin Cohen, CEO

Yes. The size is $50 million. The reason behind this is that we have seen our book value per share increase by approximately 21% since the IPO. We trade at nine times the consensus forward estimate and have generated excess capital in the last three quarters we’ve been reporting. Therefore, we believe this is an ideal time to buy back stock. We are also committed to increasing our float over time, though it will be at a different price. Regarding excess capital, the amounts generated in the past three quarters are quite significant and put us in a strong position to deploy capital both for buybacks and for continued growth. Our capital outlook and growth trajectory for deploying capital remain unchanged.

Operator, Operator

And our next question comes from the line of Matthew Heimermann with Citi.

Matthew Heimermann, Analyst

I have a couple of questions. First, regarding the AI implemented in the back office, I'm curious about its impact on the claims organization, particularly in relation to LAE costs, whether they are allocated or unallocated.

Justin Cohen, CEO

With respect to AI, we have seen the opportunity set, first and foremost, for us on the underwriting side. So we have not deployed it in a meaningful way yet in the claims side, if you're referring to that. Did you have a follow-up there?

Matthew Heimermann, Analyst

Yes. I have two follow-up questions. First, what do you think are the use cases for your company regarding claims? I'm also curious about the distinction between back office and front-of-the-house functions. Could you clarify what you consider to be back office so we can establish a common understanding?

Justin Cohen, CEO

Just on claims, one of the things that's clear is there is a processing component to incoming claims. And so deploying it there as we do on our intake process in submissions is that will ultimately be an easy win. But we're not, on this call, going to describe how we're going to be deploying claims in AI. Chris, do you want to talk a little bit about where you're at?

Chris Schenk, President and Chief Underwriting Officer

Yes. Just on what's back office in the context of my comments, we consider that to be everything that happens before an account gets to an underwriter's desk. So intake to data prep to prequalification. So we have been using AI for prequalification. That allows us to screen out accounts that are not in appetite. The next phase is with risk assessment once the account is on the underwriter's desk. So there, there's a spectrum of utilization. It could range from everything from full automation for simple accounts to partial automation of the risk assessment. So this is an individual account level underwriting, where we assess for specific criteria. Because our model is structured, we are able to identify use cases that are very value-added in multiple ways, one, in making a clearer assessment, a more quantitative assessment; and two, in driving a better quality decision if it's not a purely quantitative automated assessment. If it goes to the underwriter's judgment, guiding that judgment is the second and third use case there.

Operator, Operator

All right. Thank you so much for the question, Matt. And that does conclude our Q&A session for today. So I will now turn the call back over to Justin for closing remarks. Justin?

Justin Cohen, CEO

Well, we thank you all very much for listening and for those questions, and we look forward to seeing you in the weeks and months ahead. Thank you very much.