Ambac Financial Group, Inc.AMBCNYSE
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Operator: Ladies and gentlemen, good morning, and welcome to the Octave Specialty Group Fourth Quarter 2025 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.
Karen Beyer: Thank you. Good morning, and welcome to Octave Specialty Group's Fourth Quarter 2025 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 will take your questions. 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 website. On our call today includes forward-looking statements. The company cautions investors that any forward-looking statement involves risks and uncertainties and 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 under forward-looking statements in our earnings press release and in our most recent 10-K filed with the SEC. We do not undertake any obligation to update forward-looking statements. Also in our prepared remarks and 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 I'd like to turn the call over to Mr. Claude LeBlanc.
Claude LeBlanc: Thank you, Karen, and good morning, everyone. As we close out 2025, the fourth quarter marks the first full period in which Octave Specialty Group operated as a stand-alone specialty insurance platform, a milestone that reflects the culmination of a multiyear strategic transformation. Our insurance distribution platform, inclusive of Octave Partners and Octave Ventures is well established and uniquely positioned in the specialty program sector with aligned underwriting capacity, a scalable data and technology infrastructure and a clear path for sustained organic growth and meaningful margin expansion. Our model has allowed us to attract and partner with top underwriting talent, distribution partners and leading capital and capacity providers. The culture we have built is one of entrepreneurship, collaboration, specialization and partnership, supported by a centralized and scalable operating model. As we move forward in 2026 and beyond, we are starting from a position of strength. Despite an increasingly challenging market in 2025, Octave was able to grow its insurance distribution business revenue by 65% over 2024, fueled by 14% organic growth. This number excludes 8 months of Octave Ventures, formerly known as Beat, and does not include our recent acquisition, ArmadaCare. David will walk through the detailed financial results for the fourth quarter shortly. As we look ahead, our well-diversified, high-growth and rapidly scaling platform is supported by strong tailwinds, including the following: one, embedded growth. 9 of our total 22 MGAs were launched in 2024 and 2025. With over 40% of our total MGA portfolio in early growth stages and some already delivering strong top line and early bottom line growth, we believe this stable of MGAs will represent a significant portion of our future organic growth and earnings as they continue to scale over the next 2 to 4 years. Looking at Octave Ventures on a stand-alone basis, we saw organic revenue growth of approximately 18% in 2024, increasing to approximately 47% in 2025. The Ventures incubator platform has a strong pipeline of future MGA opportunities it's evaluating with particular focus on the U.S. E&S and SME segments. Two, geographic and product diversification. Our MGAs are geographically spread with 9 of our total MGAs based in London and Bermuda with the remaining 13 in the United States. This provides us with a competitive advantage, supporting growth and managing through market cycles. Our Lloyd's market MGAs tend to move to profitability faster than U.S. MGAs and also move faster through pricing cycles, which creates more frequent opportunities to deploy capital opportunistically. Our U.S. market MGAs by contrast offer greater rate stability and more predictable underwriting conditions, which supports consistent margin management. Our MGA portfolio is also diversified by line of business with approximately 28% in specialty A&H and the remaining 72% in several specialty P&C lines, split 30% casualty and 42% non-cat-exposed property. Outside of A&H, we cover approximately 9 segments of the P&C market. We believe the diversity of our platform is one of our core strengths and differentiators. Three, aligned and curated third-party capacity. In 2025, we continue to expand our aligned capacity through our Lloyd's syndicates as well as our rapidly broadening curated capital and capacity partners, which together with Everspan stands at over $2 billion entering 2026. And lastly, our minority interest buy-in. For certain MGAs, Octave has the ability to acquire material portions of minority interest over a predetermined schedule, which allows us to systematically expand earnings attributable to our shareholders aligned with the ongoing performance of the MGAs. This also represents a built-in source of earnings growth, which when combined with other growth drivers will enable us to rapidly scale both top and bottom line growth in the near to medium term. In total, when considering Octave's embedded growth, diversified product and geographic mix, access to align capacity and contractual rights to buy in minority interest, we believe we are well positioned for strong growth for years to come. I will now turn to our ArmadaCare acquisition. The acquisition of ArmadaCare in the fourth quarter fits our goal of increasing shareholder value and mark a defining step in our transformation. ArmadaCare enhances our product diversification, deepens our position in the specialty A&H market, adds meaningful scale and generates recurring revenue streams with attractive EBITDA margins of over 40% that are less correlated to the general P&C commercial cycle. It is precisely the kind of complementary durable business we want in our portfolio as we enter a softening P&C market cycle. While our fourth quarter results reflect only a 2-month contribution, the integration of ArmadaCare has progressed ahead of schedule, and the platform's early performance is exceeding our expectations. With the addition of ArmadaCare, we are actively progressing revenue synergies across broader accident and health MGAs. We expect A&H to account for roughly 1/4 of our distribution business in 2026 across 3 platforms and 7 lines of business. I'm also pleased with our fourth quarter launch of 1889 Specialty, a management liability and professional lines MGA focused on the SME financial institutions market, led by Blair Bartlett and backed by A+ rated capacity. This launch reflects our continued ability to identify top talent within the specialty market who have track records of delivering strong underwriting results and Octave Ventures ability to stand up businesses quickly. Over the past several years, we have purposely constructed a specialty platform designed to deliver innovative, differentiated solutions to brokers, agents and carriers across multiple specialty verticals. As our platform has grown, so has our operational sophistication. We are executing a focused initiative to unify our operating infrastructure onto a single integrated data and technology architecture, one that will further enhance scalability, improve data analytics and risk selection and accelerate our operational velocity, driving scale and revenue growth. Central to this effort is the integration of AI-driven tools across our MGA platform. These tools are designed to improve risk selection, elevate pricing sophistication and drive meaningful operational efficiency gains, ultimately translating into expanded margins. This is not future state thinking. It is already underway, and I will discuss one specific example in a moment. Turning to Everspan. We were happy with the steps we took to reposition the book in 2024. And after some reserve strengthening in the first 9 months of the year, we produced a loss ratio, including the impact of sliding scale of 62.9% in the fourth quarter 2025. We now believe Everspan is positioned for reasonable and controlled growth in 2026. Everspan's focus remains on the casualty markets, where we are continuing to see more pricing discipline than in the property markets. As for our 2026 outlook, we expect our EBITDA profile to follow a natural maturation curve. As our MGA scale and season, we expect contribution margins to improve and operating leverage to emerge with increasing clarity beginning in 2026 and accelerated beyond. We are already seeing signs of this in the first quarter. And while not yet complete, early Q1 results across most of our businesses are very encouraging and supportive of our guidance, which I will cover shortly. One notable example is our exchange platform, which is on track for record results in our ESL business following a couple of years of challenging results. One catalyst for this performance is the official launch of Hammurabi, our proprietary AI platform built specifically around the medical stop-loss business. Hammurabi replaces traditional labor-intensive processes with near-instant risk prediction and pricing accuracy, enabling our underwriters to move faster, price more precisely and scale more efficiently than ever before. We believe Hammurabi is a genuine competitive differentiator that has the potential to expand to other business lines over time, and we are just beginning to unlock this potential. We are also actively utilizing and developing data and AI tools across our platform, which we believe will help us to rapidly scale and differentiate our business model into the future. I will now turn the call over to David to review our fourth quarter results. David?
David Trick: Thank you, Claude, and good morning, everyone. For the fourth quarter of 2025, Octave reported a net loss to shareholders of $30 million or $0.84 per share compared to a net loss from continuing operations to shareholders of $22 million or $0.56 per share in the fourth quarter of 2024. The higher loss in the fourth quarter of 2025 was driven by costs associated with the ArmadaCare acquisition, exit from the financial guarantee business and associated expense reduction initiatives and an impairment of a legacy strategy minority investment. Significantly lower interest expense and to a lesser degree, the benefit of 2 months of ArmadaCare results helped to partially offset these transitional and transactional expenses. Adjusted EBITDA from continuing operations to stockholders, which excludes these transactional and transitional expenses, increased to $1.4 million compared to $0.5 million in the fourth quarter of 2024. Adjusted EBITDA improved as a result of growth in the Insurance Distribution segment and lower adjusted corporate expenses, partially offset by lower results at Everspan in connection with the strategic repositioning of that business. Everspan is now positioned for controlled and profitable growth into 2026. Despite some of the market dynamics that Claude mentioned, Octave's Insurance Distribution segment grew premium production 9%, commission revenue 13% and generated organic revenue growth of just over 8%. These results are a testament to the platform we continue to build and set a foundation for our 2026 expectations, which Claude will review momentarily. Total revenues were up 5% to just under $47 million in fourth quarter 2025 versus fourth quarter 2024 and were impacted by lower profit commissions and FX gains, which collectively declined by about $4 million. The reduction in profit commissions was not a result of any systemic shift, and we believe our underwriting results remain in line with expectations. The Insurance Distribution segment net loss to shareholders improved to $1.4 million in the quarter compared to a net loss of $6 million in the prior year quarter, benefiting mostly from a significant reduction in interest expense and growth in the business, including 2 months contribution from ArmadaCare. Adjusted EBITDA to shareholders grew to just over $7 million compared to just over $5 million in the fourth quarter of 2024, a 33% increase. During the fourth quarter, our investment in start-up MGAs created a drag on total adjusted EBITDA of just under $3 million or approximately $1.5 million to shareholders. This investment is about 3/4 of the impact of last year's fourth quarter. Notably, we had 6 entities that produced a negative EBITDA in the fourth quarter of 2025. All but 2 of these are anticipated to be breakeven or be profitable by the fourth quarter of 2026. This dynamic is characteristic of a component of our underlying growth engine and our ability to expand EBITDA margins over time. Insurance Distribution adjusted EBITDA margin in the fourth quarter of '25 was 15%, up from 12% last year at this time, trending favorably towards our longer-term goal of mid-20s plus margins. On an operating basis, that is before the impact of NCI, Insurance Distribution reported over $10 million of adjusted EBITDA at a 22.6% margin compared to just under $10 million and a 22.3% margin in the fourth quarter of 2024. As noted previously, our margins can be expected to flex a bit period-to-period depending on the relative performance of each MGA compared to our ownership level, but will converge over time with margins on an operating basis as we buy in certain NCI. Everspan's gross premium written and net premium written and earned in the quarter were $80 million, $23 million and $18 million, respectively. Gross premiums written were up 34%, while net premiums written were up from last year's negative $3 million and net earned premium was basically flat year-over-year. Production and total revenues were heavily influenced by the repositioning of our portfolio, which began in late 2024. We now believe Everspan is positioned for controlled and profitable growth. Our net loss and LAE ratio was 61.8% in the fourth quarter of '25, up from 51.9% in the fourth quarter of 2024. However, losses were meaningfully impacted by sliding scale commissions, which we have used as an effective tool to help moderate loss results. Including the impact of sliding scale commissions, our effective loss and LAE ratio was 62.9% in the fourth quarter of '25 compared to 66.8% in the fourth quarter of '24, a decrease of nearly 4 full percentage points. Moreover, our active programs as opposed to those in runoff, were operating a combined loss ratio in the low 60s as of year-end. At 99.4%, our combined ratio fell to below 100% for the first time this year, and our expectations are that this will remain the case in 2026. Our G&A ratio was 11.7% in the fourth quarter of '25, higher than we want. But as noted before, our expectations are that our G&A ratio will recede as we approach scale, which we generally consider at about $500 million of gross written premiums, which we believe can be achieved in 2028. For the fourth quarter of 2025, Everspan's pretax income was $1.3 million and adjusted EBITDA was $1.5 million, down from $2.6 million and $2.7 million, respectively, in the fourth quarter of 2024. The decline was mostly related to the $1.8 million reduction in revenue related to the factors I noted earlier as well as an increase in G&A. Corporate G&A expenses were $25 million in the quarter compared to $14.6 million in the fourth quarter of 2024. On an adjusted basis, G&A expenses were $7.5 million compared to $8.8 million in the fourth quarter of 2024. The difference between reported expenses and adjusted expenses in the current quarter was attributable to acquisition and integration costs of about $7.8 million, impairment of a legacy minority investment of $3.1 million and restructuring and expense reduction initiatives of $7.6 million. We previously outlined certain select corporate expense reduction initiatives. These select initiatives are estimated to generate approximately $17 million of reported expense savings compared to where we were presale of our legacy financial guarantee business and have over a $10 million impact on adjusted corporate EBITDA when fully complete. I will now turn the call back to Claude.
Claude LeBlanc: Thank you, David. As we look ahead, I believe we are uniquely positioned to grow both revenue and EBITDA as our newest MGAs build momentum and scale, our more established MGAs expand product lines, we continue to grow our distribution channels and all of our platforms work together to deliver synergies. The sum of these parts is expected to deliver improving margins and increasing operating leverage in 2026 and beyond. With that in mind, we are providing guidance regarding our expectations for 2026. For our Insurance Distribution segment, we are expecting organic revenue growth of at least 20% and adjusted EBITDA of approximately $40 million for the full year 2026. For our Specialty Insurance segment, which includes Everspan, we expect gross written premiums of around $410 million and adjusted EBITDA of approximately $7.5 million for the full year 2026. Corporate adjusted expenses are expected to be below $30 million for the year. And on a consolidated basis, we expect to generate adjusted net income of around $0.50 per share for 2026. We are proud of what we have built and excited about the opportunities that lie ahead of us to deliver meaningful value to our shareholders. We look forward to providing you updates on our progress in the coming quarters. Operator, please open the call for questions.
Operator: [Operator Instructions] The first question is from Mark Hughes from Truist Securities.
Mark Hughes: Claude, how do you see the -- you talked about a strong pipeline of de novo start-ups. What are you seeing for 2026?
Claude LeBlanc: Thanks, Mark. Yes, we're seeing a number of opportunities that are both in the Lloyd's market, but I'd say primarily in the U.S. market where we're focused principally for our growth initiatives. And we're currently looking to continue to diversify and broaden our writings in other lines and other areas, and we're seeing lots of opportunity for that and we still have a lot of white space. So I think we can certainly fit in a number of other businesses. But I would say that we're probably targeting a lesser number certainly than the last 2 years, maybe 2 or 3, just given the significant number that we were able to launch in '24 and '25 and really focusing on their growth over the next 2 to 3 years. But we're looking for, I'll say, 2 to 4 per year, I think, is what we indicated previously, and that's probably our continued cadence that we're targeting.
Mark Hughes: Very good. David, how do we think about the cash flow in 2026? And I'm thinking one thing in particular, the buy-in of noncontrolling interest, but how do you see cash from operations? And then any outlays, again, like the noncontrolling kind of netting out through the course of the year?
David Trick: Sure. So overall, cash flow is continuing to improve in terms of distributions, if you will, up to the holding company and at the operating level as well. Our expectations based on our current view is, and I think we gave a similar amount in last quarter is that NCI buy-in this year will be less than $50 million. And so funding for that will come from cash and our expectations at this point is some marginal additional borrowing as well.
Mark Hughes: Appreciate that. And then maybe a couple of specific items, equity-based comp and net investment income, again, for 2026, any early thoughts?
David Trick: Net investment income, I would say, be relatively flat to marginally higher in 2026 and equity comp will be relative to 2025 would be down a few million dollars from the prior year.
Mark Hughes: Very good. And then when you think about the earnings throughout the year, kind of seasonally, the $0.50, I think you've talked about the profitability of the new de novo start-up should be improving, hit breakeven or better by the fourth quarter. But when you take into account seasonality, any rough guidance on how the quarterly earnings spread should look?
David Trick: Yes. I mean while it's continuing to shift based on, as you know, some of the new MGAs that come into play, which we would expect to improve throughout the year for those start-ups that are currently losing money. And like I mentioned in my comments, most of which will be profitable by the end of the year. So that's a favorable dynamic through the course of the year in terms of weighting earnings towards the back end. But nonetheless, our A&H businesses, in particular, as well as a number of other businesses are very heavily weighted towards the first quarter. So overall, our seasonality continues as it has in the past, while it's mutating a little bit, continues to be heavily weighted towards the first quarter and the fourth quarter. And in particular, for example, some of our A&H businesses, including ArmadaCare, they're weighted about 60% of their earnings and EBITDA is weighted towards the first quarter. So overall, we continue with our seasonality profile that's both first quarter and fourth quarter, but certainly starting to moderate modestly as the new businesses start to reach breakeven and move towards profitability.
Mark Hughes: Then maybe one final question. How do you see the pricing environment in the kind of 3 main buckets: the accident and health, the casualty and non-cat property?
Claude LeBlanc: Yes. So on the non-cat property side, I think fairly consistent with some of the market commentary. I think we're seeing probably 5% to 10% rate reductions on some of the programs. Others have been more stable in non-cat property. On the casualty side, we've seen some rate increases and some programs that have been more on the stable side. So really a blend, but the more challenging areas, certainly the excess casualty lines that really have seen double-digit rate increases. And as far as A&H goes, very strong organic growth. And I'd say that's probably on average when we look at the balance of our portfolio, probably double-digit organic growth in our 3 businesses.
Mark Hughes: And is that double-digit pricing for...
Claude LeBlanc: It's a combination. The pricing is probably close to double digit, a little higher, 10% to 12%. And the volume is -- revenue growth is also very significant because of new products and just other growth initiatives that are being put in place.
Operator: This concludes the question-and-answer session as well as today's teleconference. You may disconnect your lines at this time. Thank you for your participation.