Ladies and gentlemen, good morning and welcome to the Octave Specialty Group's third quarter 2026 earnings call. The simulcast systems are in 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, Phil Stefano, Head of Investor Relations. Please go ahead.
Thank you. Good morning, and welcome to Octave's third quarter 2026 call to discuss financial results. Speaking today will be Claude LeBlanc, President and Chief Executive Officer, and David Trick, Chief Financial Officer. They will discuss the financial results of our business and the current market environment. After the prepared remarks, we will 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 several slides from the earnings presentation, which can be located on our website. Our call today includes forward-looking statements. The company cautions investors that any forward-looking statements 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 the forward-looking statements in our earnings press release and in our most recent 10-K and 10-Q filed with the SEC. We do not undertake any obligation to update forward-looking statements. Also, in our prepared remarks or responses to questions, we may mention some non-GAAP financial measures. Reconciliation to those non-GAAP measures is included in our earnings press release, operating supplement, and other materials available in the investor relations section of our website, octavegroup.com. Now I would like to turn the call over to Claude.
Thank you, Phil, and good morning, everyone. Octave delivered a solid quarter, driven by strong organic growth in our Insurance Distribution business, product expansion, the addition of a bolt-on team, and continued expansion of our distribution and capacity relationships. Our core Insurance Distribution segment grew total revenue 35% in the third quarter to $58 million, driven by organic growth of 23% and the October 2025 acquisition of ArmadaCare. This organic growth, which we believe is well ahead of sector peers, was consistent with our seasonally adjusted third quarter plan. On a year-to-date basis, Insurance Distribution's adjusted EBITDA to shareholders has nearly tripled to $43.4 million, and margins have expanded almost 9 percentage points to 22.2%. These results reflect the strength of our purposely diversified portfolio and the embedded value of our scaling MGAs. Our Specialty P&C segment continued to benefit from the repositioning of its program business.
Everspan delivered adjusted EBITDA to shareholders of $2.2 million compared to less than $0.1 million in the prior year period, and net income of $1.3 million. Net premiums written and earned grew 44% and 52%, respectively. Everspan now supports 30 programs, up from 25 a year ago. David will provide more details on the financial results for the quarter in his commentary. Overall, I am very pleased that our strategy of building a leading diversified MGA platform, combining top underwriting teams with an AI-enhanced integrated technology and data architecture, continues to gain momentum and strengthen our underlying fundamentals as our platform scales. Before commenting further on our segments, I want to start with a market backdrop to provide some context for how we are managing the business today and how we are positioning Octave for 2027. Through 2026, abundant capacity has made the P&C market more competitive.
Global commercial rates declined for the ninth consecutive quarter, driven by, one, the depth of capacity from strong earnings, two, new entrants, including foreign carriers and ILS capital, and three, the significant movement of capital into the E&S market. Broadly, the rate dynamics we discussed last quarter persist, and the U.S. and global P&C insurance markets continue to soften. Property has continued to absorb most of the pressure as rates fell roughly 10% again in the third quarter, following low to mid-teens declines at mid-year, led by the wholesale and large property segments. Turning to the London markets, for the large casualty market, competition remains robust, but rates have held up better than in large property. Our alternative classes, meanwhile, are exhibiting a low correlation to the broader P&C markets, with rates holding firm. Energy remains one area we continue to view with caution.
Years of compounding rate reductions have coincided with elevated loss experience. That combination is not sustainable, and we are encouraged that the market is beginning to recognize it, and we are managing our exposures here accordingly. Casualty SME classes, including general liability and select specialty classes, continue to achieve rate increases ranging from mid-single to double digits. We see them as attractive opportunities for growth. As we consider the broader market trends, it is important to remember that current rate decreases follow several years of meaningful rate increases, so most classes are softening from a position of strength. Rate adequacy across most of our classes remains strong, and the portfolios we manage remain attractive for our capacity partners.
Furthermore, our diversification across property, casualty, specialty, and Accident & Health means no single pricing cycle defines our results, and A&H follows a different cycle entirely, which I'll come back to shortly. As we continue to scale our business, we remain focused on specialist niches where expertise matters most and where pricing remains adequate, and in many cases, strengthening. Turning to our insurance distribution segment. We believe our continued strong organic growth at over 35% year-to-date reflects the diversification and the success of our rapidly scaling MGA portfolio. Our expanding portfolio, led by the class of 2024 and 2025 MGAs, are more than offsetting the market headwinds. In addition to driving growth in established lines, future organic growth will be supported by, one, bolt-on team launches as an alternative to startup MGAs, and two, the launching of adjacent products in our existing platforms.
For example, in recent weeks, we announced three new programs. Year-to-date, we have launched seven product adjacencies in the U.S., leveraging existing infrastructure, distribution relationships, and underwriting talent. Another key area of growth is our A&H business, which makes up about a third of our portfolio and provides a buffer against current market headwinds. Our A&H businesses are growing through new revenue opportunities, supported by expanded distribution relationships, while at the same time maintaining strong retention and favorable pricing. Across our A&H businesses, we are seeing an increase in premiums together with solid organic growth, including for our most recent acquisition, ArmadaCare. Pricing in A&H continues to be a tailwind, with double-digit rate increases due to surging healthcare costs. A&H provides us a growing earnings base that is largely uncorrelated with P&C pricing and adds further diversification to our results, and we expect this trend will continue.
We are also seeing encouraging early momentum heading into the January 1 renewals, the most important renewal season for A&H. We continue to see a strong pipeline of startup MGA opportunities, particularly in the U.S., but also in Europe. Our aligned capacity partnership model, broad distribution, and a technology-enabled operating platform positions us well to attract top talent. At the same time, we remain highly selective, partnering only with proven teams with strong track records that we believe can build durable businesses over the long term. As we look forward, our 2027 capacity is largely lined up, and we expect to be oversubscribed, driven in large part by our track record of profitable and less volatile underwriting results. Turning to our specialty P&C segment. Everspan's results this quarter reflect our continued focus on disciplined underwriting, program oversight, and proactive portfolio management.
We've also begun to diversify Everspan's routine risk portfolio, selectively expanding into package and non-cat property business to complement our existing casualty book and create a more balanced underwriting portfolio over time. We believe the diversification of the book, combined with the continued scaling of the business, will position us well for profitable growth at an attractive combined ratio. Since the quarter end, we announced that Everspan entered into an agreement to sell its wholly owned subsidiary, Providence Washington Insurance Company. This transaction is expected to close by early next year and will simplify Everspan's operating structure, making it more efficient while further strengthening its rating agency capital and tangible book value. The announcement does not change Everspan's strategy, underwriting capabilities, or commitment to its trading partners. During the quarter, Everspan continued to support our insurance distribution business through the writing of two programs.
Finally, an update on our operations, technology, and AI. Starting with operations. As you may remember, during the fourth quarter last year, we implemented a new target operating model at corporate that materially reduced our run rate costs for 2026. We are actively exploring initiatives for further savings in 2027 as we continue the global integration of our business and plan to implement the initial phase of a target operating model for our international operations later in the year. During the third quarter, the market experienced another round of concern around AI disintermediating insurance distribution. Our view has not changed. The majority of lines we underwrite are complex specialty risks, and in that environment, we believe AI makes MGAs more productive, not less relevant. Over time, we believe it can be a competitive differentiator across specialty insurance.
We continue to execute on the data, AI, and technology initiatives we laid out earlier in the year, and all of our MGAs are now on their target technology platforms, with the rollout of our AI-driven intake across our U.S. MGAs largely complete. We are already seeing significant benefits in the form of accelerated submission vetting, leading to increased underwriting velocity, which will further improve our operating leverage in the future. The same diversification that carries us through the cycle also shapes how we build technology. Our enterprise underwriting platform is designed to use AI to create proprietary bespoke tools around each MGA's niche and expertise, all on one platform and one set of data, giving us consistent oversight while maintaining what makes each MGA uniquely competitive.
This model will help our teams to choose the right risks, grow where the returns are strong, and step back where pricing no longer makes sense, reinforcing the discipline that supports stable capacity and durable fee income. I will now turn the call over to David to review our third quarter results in more detail. David?
Thank you, Claude, and good morning, everyone. Our third quarter consolidated results improved year-over-year across every key consolidated measure. For the third quarter of 2026, Octave reported a net loss to shareholders of $13.8 million, or $0.31 per share. This compares with a net loss from continuing operations to shareholders of $31.7 million, or $0.65 per share, in the third quarter of 2025, an improvement of $17.9 million, or $0.34 per share. Consolidated EBITDA to shareholders was $-1.8 million, compared with $-20.1 million in the prior year quarter, an improvement of $18.3 million. Adjusted EBITDA to shareholders was $3.3 million, compared with a $-2.9 million a year ago, an improvement of $6.2 million.
Our consolidated adjusted net loss to shareholders narrowed to $1.3 million, or $0.03 per share, from $10 million, or $0.21 per share, in the third quarter of 2025, an improvement of $8.7 million, or $0.18 per share. Drivers of the improved performance were broad-based and included organic growth in our business segments, the acquisition of Armada, lower corporate expenses, and reduced interest expense. Insurance distribution delivered another quarter of what we believe is above-market total revenue and organic growth of 35% and 23%, respectively. Year-to-date, organic growth was just over 35%, and therefore, we are firmly on track to exceed our full-year organic growth guidance of 25%+. We continue to expect double-digit organic growth in the fourth quarter of 2026.
Revenue growth was fueled by the October 2025 acquisition of Armada and organically by MGAs launched in 2024 and 2025, as well as our ESL and A&E lines, which have been growing well after a few years of weakness. That growth more than made up for pockets of softness, such as energy, for example. Our top-line growth carried through to the bottom line. Insurance distribution's net loss to shareholders narrowed to $4.2 million from $5.4 million in the prior year quarter, an improvement of $1.2 million, or 22%. Insurance distribution adjusted net income to shareholders was $4 million, compared with an adjusted net loss of $0.8 million in the third quarter of 2025, an improvement of $4.8 million.
Insurance distribution adjusted EBITDA to shareholders rose nearly 40% to $8.3 million, compared with $6 million a year ago, and the related margin grew to 14.2%, up from 13.9% in the prior year quarter. Year-to-date, adjusted EBITDA to shareholders reached $43 million. We now expect to exceed our $45 million insurance distribution adjusted EBITDA guidance for the year. Beyond organic growth and the ArmadaCare contribution, other factors driving the year-over-year improvement included an increase in profit commissions, reflecting the underwriting performance of our portfolio, a higher ownership position of 10% in Octave Ventures, and a $3.5 million reduction in interest expense resulting from lower debt balances and financing rates. These results are after our continued investment in de novo MGAs, which reduced EBITDA to shareholders by approximately $1.2 million this quarter, or roughly 2.1 points of margin.
We expect these businesses to move from a drag to an EBITDA contributor as they hit scale in the coming quarters. Finally, a note for those updating fourth quarter models. Because the ArmadaCare acquisition closed on October 31st, 2025, the fourth quarter is when ArmadaCare will begin impacting our organic growth calculation. October 2026 will be the last month counted as acquired revenue. November and December 2026, which now have prior year comparisons, will be included in organic growth. At Everspan, gross premiums written were $99 million in the third quarter, up 2% from a year ago. Net premiums written and net premiums earned were each $26 million, up 44% and 52%, respectively. Gross premiums written year-to-date totaled $297 million.
Given some of the continued business mix shift and the timing of certain new program launches, our full-year gross premiums written may come in slightly under our $410 million guidance. Casualty remains the core of Everspan's book, but we have begun to selectively add specialty and non-catastrophe property programs to diversify the mix over time. As these programs build, we expect them to support premium growth and contribute to more consistent underwriting results. Everspan's combined ratio for the quarter was 100.6%, a significant improvement from 112.9% in the third quarter of 2025, driven by a lower loss ratio this quarter. Everspan's loss ratio was 57.1% in the third quarter, compared to 84.5% a year ago. Pro forma for sliding scales, the loss ratios were 56.8% and 77.6%, respectively.
Last year's third quarter included 23 points, 16 points net of sliding scale impact, of adverse prior year development from commercial auto programs in runoff and excess liability. On an accident year basis, our loss ratio improved 680 basis points from the third quarter of 2025 to 54.5% this quarter, reflecting the repositioning of our portfolio towards new programs with lower expected loss ratios. Everspan's expense ratio was 43.5% in the third quarter, up from 28.4% a year ago. Excluding the sliding scale impact in both periods, our expense ratio was 43.8% in the third quarter, compared to 35.3% a year ago, reflecting higher acquisition costs associated with the growing mix of high-retention programs and higher general administrative expenses.
G&A costs this quarter included half a million dollars of legal costs associated with the pending sale of PWIC and an additional half a million dollars of expenses due to timing differences, which together added to about 4 points of expense and combined ratios. On a pro forma basis, which we reconcile in our earnings presentation, the year-to-date combined ratio was 96.7%, a sequential improvement from 97.1% in the second quarter, and a further step towards our longer-term objective. In the third quarter, Everspan produced pre-tax income of $1.4 million and adjusted EBITDA of $2.2 million. Both of these metrics are improved from break-even results in the prior year quarter. Year-to-date, adjusted EBITDA was $5.6 million, more than double the first nine months of 2025.
We're pleased with the progress so far this year, and we believe Everspan is well-positioned to meet or beat our full-year adjusted EBITDA guidance of $6 million. Lastly, as Claude mentioned, Everspan agreed to sell its wholly owned subsidiary, PWIC. When the transaction closes, we expect to book consolidated net gain on the sale of close to $4 million and an increase to Everspan's tangible book value of approximately $11 million. Because PWIC wrote little business and its needs will be covered by our other Everspan carriers, the sale will release capital and eliminate the regulatory and administrative costs of maintaining a separate entity, reflecting our focus on streamlining our operations and redeploying capital and resources in a way that will improve results. In regards to corporate, the actions we have been taking to reduce costs continue to impact results.
Corporate expenses were $10 million in the third quarter, down from $27 million a year ago, while adjusted corporate expenses were $7.3 million, a reduction of over 20% from $9.5 million in the prior year quarter. Third quarter 2025 GAAP reported expenses included significant costs associated with the repositioning of the company in connection with the sale of the legacy business and costs associated with the purchase of Armada. Year-to-date, adjusted corporate expenses were $22.5 million, down roughly 20% from $28.4 million in the first nine months of 2025. That keeps us well-positioned relative to our full-year outlook of approximately $29.5 million. Turning to our outlook, we remain on track for 2026 to be the first year we expect to deliver positive adjusted net income per share, in line with or better than our guidance, since launching our P&C strategy in 2021.
That is a meaningful milestone reflecting the growing earnings power of the insurance distribution platform. Overall, we are pleased with our progress this year and confident in how we are positioned heading into 2027, including from a leverage standpoint. At September 30th, our net leverage ratio, calculated in compliance with the terms of our credit facilities, fell below 3x . We believe this provides us with greater flexibility for strategic initiatives, including the buy-in of minority interests, alongside other transactions such as non-core asset sales. With that, I will now turn the call back to Claude.
Thank you, David. While we are not updating our 2026 guidance, given the progress we have made through the first nine months of the year across all of our metrics, as David explained, we are well-positioned to meet or exceed our key guidance metrics for the year. With our capacity for 2027 largely in place and our AI underwriting platform providing support across our U.S. MGAs, we believe insurance distribution is poised to maintain sector-leading growth. The progress and growth of our two operating segments, combined with the expected corporate cost savings through integration and technology solutions, gives us continued confidence in achieving our target consolidated adjusted EBITDA to shareholders of $80 million in 2028. As we approach the end of 2026, I am encouraged by the progress we have made and increasingly confident in Octave's trajectory.
Our results demonstrate that we are executing against our strategy, strengthening our competitive position, and building a business whose fundamental value we believe is not yet fully reflected in our market valuation. Looking ahead, our priorities remain clear: execute with discipline, capitalize on the strengths of our platform, and deliver sustained profitable growth. Operator, I would now like to open the call for questions.
Thank you. We will now be conducting the question-and-answer session. If you would like to ask a question at this time, please press star one from your telephone keypad, and 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. Thank you. Our first question is from the line of Mark Hughes with Truist Securities. Please proceed with your questions.
Yeah, thank you. Good morning. David.
Morning, Mark.
Did I hear you correctly? Did you say you expect to exceed the $45 million in EBITDA guidance for the distribution segment?
That's correct.
Okay. Very good. Kind of a specific question. The servicing and other fees in the distribution business, you were at about $9.5 million in the first quarter, and it's been kind of mid $5 million, $6 million the last couple of quarters. Does that reflect some of the seasonality, kind of the strong first quarter related to ArmadaCare? When we think about the fourth quarter, what is kind of a reasonable level? Is it going to be more like Q2, Q3? Again, that's the servicing and other fees in the distribution.
Yeah, Mark, that's definitely a little bit of seasonality in the fees, as you pointed out. The biggest driver of those fees these days really is our managing agency business, Statera. You'll see those fees start to level out, and I would say they're probably more consistent going into the fourth quarter with regard to the third quarter as opposed to other prior quarters.
Okay, very good. How has the loss performance been in the accident and health? Sounds like the pipeline is strong, ArmadaCare is performing well. How are they doing from a loss perspective in those programs?
Hey, Mark, this is Nadine. With the strong rate environment that we've had in those portfolios, generally they've been performing in line with expectations of our carrier capacity partners, if not a little bit better than what the trend line has been. Because we've been able to achieve double-digit rates in those portfolios, we're seeing the benefit of that in the loss ratios as well.
Understood. On Everspan, I think you'd said $410 million, probably come in a little bit under that number. Is the growth in Q4 going to be more similar to Q3 perhaps, kind of up a bit, or is there some seasonality in Q4?
Yeah, it's not so much seasonality as it is mix of business and the timing and ramp of new programs. New programs can be a little tricky in terms of predicting how quickly they'll ramp up. We added three new programs in the third quarter, so some of the growth in the fourth quarter I would expect to be reliant on that. We should see is something in line to better than third quarter, but again, it's going to be somewhat dependent on how some of those new programs ramp up.
The earned within Everspan, you've been moving up a little bit faster there. Is this kind of $25 million, $26 million? Is that a reasonable run rate or that ratio of earned to written? You think that'll continue to be steady or increase?
Yeah, when I look at the year, we're pretty consistent on a year-to-date basis in terms of the level of earned premium to gross. So I would expect that to maintain into the fourth quarter in terms of the relationship between net and gross. Again, ultimately that's going to be somewhat dependent on the mix of business, but I think it's pretty reasonable to assume that relationship holds through the fourth quarter.
Yeah. Okay. I thought I might just squeeze in one more. The kind of the pipeline in the MGA business sounds like that is pretty healthy. Just curious at this point in the cycle, the dynamics around teams potentially leaving their existing spots and taking you up on your offer to give them a new home with a little more equity ownership. How are you finding the enthusiasm or willingness of the teams to move and kind of buy into the Octave approach?
Mark, I think we're seeing still a lot of enthusiasm. I'd say we're seeing probably more of it in the U.S. and growing in Europe at this point in time, as I mentioned earlier. I think there's always a year-end kind of timing issue with some teams who may want to stick around until the first part of the year. But we've been in dialogue with a number of teams. We have very high standards in evaluating what will be required to join us. But I think there are a number of highly qualified teams that we expect will get to the requirements that we need. But as we also said at the beginning of the year and in mid-year, that we are really focused on integration this year as well as bolt-on teams as priorities as we progress the integration of our platform.
But I think you should expect that we will be progressing that one or two this year and next year. I think that's probably the mix that we're targeting. So again, I think we can afford to be selective given what we're targeting, and we are seeing some really good teams that qualify for our platform.
Appreciate it. Thank you.
Thanks, Mark.
Thank you. As a reminder, to ask a question today, you may press star one. The next question is from the line of Tommy McJoynt with KBW. Please proceed with your question.
Hey, good morning. Thanks for taking our questions. To start off, as we think about ArmadaCare entering into the organic revenue growth calculation, am I right in assuming that the fourth quarter impact there should be pretty minor just because it's only two months' impact? But then as we start to think about 2027, it sounds like the first quarter, there's a lot of seasonal revenue that comes from that A&H business. So what can you tell us kind of about what's happening with ArmadaCare in terms of its own organic growth profile and how we think about that relative to what's been a very strong organic growth profile for the rest of the business this year?
Yeah. As you indirectly point out, ArmadaCare's business is definitely very seasonal. As we enter into the fourth quarter, it's only two months of impact. The fourth quarter is not necessarily a huge quarter for growth for a seasonal business like Armada. We'll certainly have an impact on our organic growth relative to some of our other businesses. It'll probably be a smaller impact from a size as well as the growth rate. But headed into first quarter of 2027, as Claude alluded to, we're seeing very positive signs for that business as well as other parts of our A&H business and would expect it to have a rather significant favorable impact on organic growth.
Okay. Got it. This was asked in the last question, but maybe asking it a slightly different way. As we think about factoring in some organic growth in our core and de novo models over the next couple years, it sounds like you would probably instruct us not to expect anything too meaningful, certainly nothing the size of ArmadaCare, just as right now the focus is on integration. Instead, maybe just think about those buy-ins of the non-controlling interests. Are there any other guardrails you would point us to to make sure when we think about the inorganic contribution to the size of the total business?
Yeah. I mean, we've, I think, said in the past, we don't really expect to have major acquisitions going forward. You're right, the buy-in at NCI is certainly the priority for us. That really affects ultimately the bottom line, not the top line. So I would not anticipate any significant acquisition activity. We may have opportunities for modest size, mid-size tuck-ins that would, on a relative basis, not have any outsized impact. Certainly nowhere near the size of the transaction we did with ArmadaCare. As Claude commented on, where we'll see organic growth is the de novo portfolio as well as tuck-ins of new teams, bolt-ons of new teams, adding adjacent products, and building out the business truly from an organic standpoint.
Yeah, Tommy, I will say that in the markets, we are seeing more opportunities on the inorganic side, I think, given the softening market cycle, which I think presents more opportunity. As David spelled out, I think our focus is on the organic side. But if we see a small, moderate-sized opportunity, it's something we could explore. I think there'll be more opportunities as we go into 2027.
Thanks. Just last one. Going on to the SPC side, when we look at the prior year development, it sounds like it was again attributed to the commercial auto business. When I look back, it's been about three years now since there's been really kind of any meaningful business written in that segment, so the exits have been underway for a few years now. Do you have any sort of line of sight as to when you might be able to finally put a cap on the development around that, or what is it with the incremental information that keeps coming in to require you to continue to add to the reserves around that commercial auto development? Thanks.
Well, let me first put it into context. I think our adverse development year-to-date, when you get rid of the impact of the first quarter litigation settlement that we had, is about 1% this year. 2025 was about 7%, and 2024 is about 5%. All right, so on a relative basis, you can see that the adverse development has, on an annualized basis, diminished significantly. And I think that's in part, in great part, driven by the rundown and decision to exit those commercial auto books of business. The development in commercial auto, which part of the adverse development certainly is related to the commercial auto, is really just driven by the same dynamics that others are experiencing.
That's maybe a little overused term, but true is the social inflation of commercial auto and some of the regulations, federal regulations in particular, that affect loss outcomes there. But we've been very proactive in aggressively remediating that book and trying to close out claims on an expedited basis. Given that, I think the real last full year that we were writing commercial auto was really 2024, right? Those policies kind of drag into 2025. So the earliest of those books was really written in 2021. So I'd say that the 2021 and 2022 books of business at this stage are pretty much closed out, even though you could have a little bit of tail there.
The 2023 and 2024 books, while a bit smaller, are obviously running down, and we're taking steps to run them down quicker in order to clip off the tail on those accident years.
Thanks.
Thank you. Ladies and gentlemen, this now concludes our question and answer session and will also conclude today's conference. You may now disconnect your lines at this time. We thank you for your participation. Have a wonderful day.