Octave Specialty Group Inc (OSG) Q2 2026 Earnings Call Transcript

ladies and gentlemen good morning and welcome to the octave specialty group second quarter 2026 earnings call at 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 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 the board. 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 the forward-looking statements in our earnings press release and in our most recent 10Q and 10K 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 supplements 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 distribution's adjusted EBITDA was $10 million, representing a near four-fold increase year-over-year, bringing our year-to-date adjusted EBITDA to $35 million. 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 are 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 2028 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, and Bevan Grievesland, 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, 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 U.S. 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 10-20% 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 Beyond 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 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. Both 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 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 US 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. 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 debt 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 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 were 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 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 Armaticare, organic growth across our diverse group of MGAs, 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 interest expense resulting from both a reduction of debt, and lower financing costs. Our results for the quarter also reflect our continued investment in DeNovo MGAs, which suppressed EBITDA to shareholders by about $1.1 million in the quarter, counting 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% percent and up 52 percent and 34 percent, respectively. The actions we've been taking to reposition Everspin help bring down our current quarter loss ratio to 61.4 percent, with our active programs running at about a 59 percent 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 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 of 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 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 our 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 six million of adjusted EBITDA would represent a 58 percent increase over 2025 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 $0.50 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 launching our P&C strategy in 2021. At the midpoint of our revised guidance, this represents approximately a $0.76 per share improvement from a 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 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 2 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.

Yeah, 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. Yeah, 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 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 the class of 24 and 25. So those MGA's are just beginning at the early stages of scaling their platforms and really, you know, 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 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, you know, we're still targeting a relatively modest number of MGAs in 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 and have made tremendous progress in the last number of months. So, again, the pipeline is deep, but we are, you know, the class of 24-25 and to 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 mid-sized 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.

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. uh good morning max um so you know overall i think from a capacity standpoint this really goes out to underlying results and our underlying results and performance of general good and as a result we see that and so you know we expect that we'll continue to see a strong capacity and i just said that we are continuing to to broaden and diversify our capacity again our

model is a purity capacity model and uh we continue to add capacity partners uh you know 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 you know i'll start with um 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 do you think we're anywhere near a floor is, yeah, what are your observations on that market?

I'm asking from Naveen again. You know, 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 on the large-count property lines and more on the cap-exposed 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, as a big example.

But at this point, we expect that they'll continue to soften as we move forward into the remainder 26 into 27 particularly if the cat events yeah and and as we mentioned our portfolio is is much more year two than a non-cat and uh and non-large account more the sme side of the business uh mix so i think for us when we kind of look at the average is probably closer to five or ten or the lower end of that range just given the business mix that we uh um our portfolios are focused on and um we still are having uh strong growth in some of our property mgas again the ones that are focused on the ens sme space um and and uh again so it is a mix for us and i'd say that more muted in terms of the price impacts uh although there are a few that uh doesn't have been mentioned you know have been And, you know, in the flow of a larger account, DNF markets that have had some impact that are more aligned with market. But that is a small percentage of work 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 lost trends?

Yeah, that's Nadine again. You know, generally we're still seeing rate, you know, positive rate of rate environment in the exit slide. It is moderating a bit in terms of as the quarter goes on, but it's still generally in line with and better than loss costs from that standpoint. And, you know, obviously it's dependent on portfolio on that basis, but for the portfolio that we had and the targets that we had in that in Everspan, we're generally seeing a a positive rate for the environment to that as you can look forward to this point, receiving loss costs.

And I'd say another trend with Everspan is we are seeing a broadening of programs that we're seeing. I think also some of the times with the market conditions that we're seeing, again, certainly some casualty, but more specialty programs that are differentiated in the marketplace. So I think the selection and breadth of programs that we're seeing has improved. And also, you know, the pipeline has improved overall. So I think the Everspan platform, we do see some strong growth for the year. Again, we're not chasing growth, and we're being very selective there as well. But we are seeing a very much higher quality and deeper and broader breadth of opportunities in the program space for Everspan.

And then last one for me, and I'll hop back in the queue. But is there any associated investment or costs related to the rollout of the new AI tool to your remaining MGAs?

Yeah, so we are, as I mentioned on prior calls, the implementation, customization, and also the development of the AI tools that we have in our platform. We're in the low to mid single digit millions for the year targeted for that. When you add the additional costs that we're encountering in connection with technology upgrades and also the implementation of technologies across the platforms to support that, that is an additional amount that is also in the low to mid single digit millions. So those are going to be costs that are more one time in nature. Again, I always say that there could be obviously additional initiatives that we'll be looking at next year, certainly. But for this year, I think this will be one of the larger additions in terms of AI and technology that we have in our sort of forecast period. And we will see some of those costs begin to peel off early next year and by mid next year you know i think a meaningful percentage of the millions will be will be uh discontinued and we also expect to benefit from those investments obviously and and there'll be significant uh cost benefits as well as revenue benefits that will be coming out of that that will far offset any of the implementation costs that we we put in today great thank you for taking my questions thanks max and again that is star one to ask a question we'll go next to tommy mcjoint with KBW.

Hey, good morning. Thanks for taking our questions. The first one here, with Armada Care and some of your other MGAs, the accident in health is a major line of business for you guys. Market commentary tends to generalize pricing and conditions, talking about the property and casualty buckets, but A&H does have some of its own drivers. So can you spend a minute and just talk about the market conditions that you're seeing in A&H and as that relates to inputs to your future organic growth opportunity in that line.

Sure. This is Naveen. A couple of points. A&H is a pretty broad market segment, right, and our focus is – AmadaCare is focused on the excess benefits and the benefits area, and then our exchange benefits platform is primarily focused on the first stop loss. And then we've got some other focus and other answering lines within A&H. For our key areas, we're seeing strong secular growth, there are strong sort of underlying trends that are driving both the ESL market and the benefits markets. And those growth trends will continue to support organic growth as we move forward. In addition to that, we're seeing positive rates environment in those sectors as well, generally in the double-digit range, low double-digit range, low teams to high single digits. And again, we expect that to continue as we move forward into 26 to 27, based on the underlying trends within those segments. It's an important part of our portfolio. It's about a third of our portfolio today and an important contributor to our results and balance to some of those challenges in the broader PNC cycles.

Got it. Thanks for that, Keller. And then switching over, the Eversand book continues to charge ahead toward its mid-teams for ROE at scale. Can you just remind me what your definition of scale is in that business, and is there any chance that fronting economics could change for either better or worse over the coming years as you gain scale? And then just lastly, does that ROE that you're targeting equate to a specific combined ratio relative to the 97% adjusted combined that you did in the first half of the year?

So in terms of scale, I think the way we had modeled out the growth of the platform, given the way that we've staffed and implemented systems and technologies to support a business that was always intended to be a hybrid platform, not a pure funding platform, we do have a higher overhead cost associated with the business. So our target to scale was somewhere north of 500 million of premium, which we'll be approaching that this year, but not quite there. So I think and from there forward, I think we'll start seeing a lot less impact of that fixed cost drag on the combined ratio in earnings and even going forward. But I think once we get past that, I think we still probably this year will have a few points of drag associated with scale. But again, that will begin to ameliorate next year. I think this year we're targeting being in the mid-force and premium. 4.10 is what we're targeting. So again, I think we'll be in that range, possibly a little higher. But next year, I would expect us to be closer to that $500 million scale number. In terms of the second question, we'd better let David hit it in the combined.

On the combined ratio, what we've said in the past is that we're looking at, you know, sub-95 combined ratio, you know, as a casualty-focused business, you know, you expect our loss ratios to be a little higher than businesses that have heavy property books and but more cat-exposed. we've added some property exposure to the portfolio at this point which is you know we're certainly starting to see the benefit of uh in the loss ratio and expectancy uh that further uh in in the remainder of the year but uh you know let's say between 90 and 95 is you know what our target is which you know both a function of uh you know getting those losses down and more stable and what Qua did mention in terms of just continuing to scale the business from a expense ratio standpoint.

Thanks. And then just last question to switch topics one more time. A lot of brokers and MGAs are benefiting from strong profit commissions or contingents. You guys had a nice uptick in the first half of the year.

Was any of the change in guidance contemplating a higher level of profit commissions um and then do you guys have line of sight to what you you know think that that contingence could be in the second half of the year either on a you know absolute dollar basis or on a you know percentage of uh distribution revenue thanks yeah the um yeah we the way we account for our profit commissions we we scale into our uh numbers that we're seeing so you know we try to avoid um a lot of volatility so i think based on our calculations we had expected um in our original guidance included you know profit commissions you know close to the levels that we're uh we're seeing here today uh we baked in a little little bit additional profit commissions for one of our businesses but i wouldn't say it was uh material uh and and so you know we you know i think we'll have a good year on on pcs uh particularly for the you know lines of businesses that are driving it which you know and have more stable loss ratios.

And moving next to Mark Hughes with Truist Securities.

My flight hasn't left yet, so I thought I'd speak one in. On the Everspan, you described hiring some new executive talent. Sounds like your growth outlook for 2027 is pretty robust. I think you added a number of programs just this quarter. did you talk about the quality control on that underwriting um that's obviously a point of risk for anyone with uh programs and new programs how do we uh what are you doing to give yourself confidence that the underwriting there is going to be uh high quality yeah so again i think it the talent we're bringing in uh with bevin who has deep experience and been a chief underwriting officer.

And her breadth of experience was actually one of the things that attracted us to her. And she's, you know, that experience will be coming. You know, she's replacing, you know, Darwin, who was in that role as chief underwriting officer and chief reinsurance officer. Darwin also has, you know, extensive experience, years of experience. And, you know, the broadening of the team, you know, in the depth of the team, along with our claims team, which is also very important in terms of you know managing our loss ratios and then the underwriting i think has really expanded dramatically uh over the last year uh so i think we feel very confident of the you know the experience of brother team and to the extent there are programs that come in uh that we require uh additional uh diligence we also don't shy away from uh from reaching out and and bringing in additional resources and expertise to help us uh on the review and underwriting of the programs i think our our approach to the underwriting again we really are a gross line underwriters so we really focus on the uh on the full program uh again we're not a fronting uh pure front platform so i think from our perspective uh you know we we were robust i think we're we're now that much more robust and um the claims oversight that is done and managed uh you know throughout uh you know program monitoring and the audits that we do on programs right after 90 days from commencement and thereafter yearly if not more depending on the program i think gives us confidence that our selections will be good as well as our ongoing oversight and monitoring of exposures okay appreciate that thank you thanks mark and that concludes our question and answer

session ladies and gentlemen thank you for your participation this does conclude today's teleconference. You may disconnect your lines and have a wonderful day.