Accelerant Holdings (ARX) Q2 2025 Earnings Call Transcript

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Overview

The earnings call summary presents a mixed picture. Financial performance shows strong adjusted EBITDA margins and a positive gross loss ratio trend, but lacks clarity on third-party insurer growth and hybrid front proportions. The pipeline for new members is strong, yet management's vague responses on key metrics and guidance create uncertainty. Overall, the sentiment is neutral, with positive elements balanced by areas of ambiguity.

Key Financial Performance

Exchange Written Premium (Q2 2025) $1.1 billion, a 42% increase year-over-year. This growth was driven by organic growth from existing members and the addition of 16 new members.

Trailing 12-Month Exchange Written Premium $3.8 billion, a 61% increase year-over-year. This growth was entirely organic.

Revenue (Q2 2025) $219 million, a 68% increase year-over-year. This was fueled by strong momentum in member growth and premium volumes.

Net Revenue Retention (Trailing 12 Months) 151%, indicating strong embedded growth from existing members.

Adjusted EBITDA (Q2 2025) $63.5 million, compared to $13 million in Q2 2024. This increase reflects expanding operating margins and scaling overhead costs.

Adjusted Net Income (Q2 2025) $29 million, compared to a net loss of $700,000 in Q2 2024. This improvement was driven by higher revenue and better cost management.

Pre-Tax Net Income (Q2 2025) $22.3 million, compared to a $4.3 million loss in Q2 2024. This was due to improved operating leverage and stable claims experience.

Exchange Services Revenue (Q2 2025) $86 million, a 60% increase year-over-year. This was driven by higher fee contracts with risk capital partners.

Exchange Services Adjusted EBITDA (Q2 2025) $56 million, a 38% increase year-over-year, reflecting strong fee generation and platform profitability.

MGA Operations Revenue (Q2 2025) $58 million, a 77% increase year-over-year. This growth was primarily driven by the scaling of the Mission strategy and owned members.

MGA Operations Adjusted EBITDA (Q2 2025) $24 million, compared to $6 million in Q2 2024. This was due to higher premium volumes and net commission margins.

Underwriting Segment Revenue (Q2 2025) $110 million, a 39% increase year-over-year. This was driven by earning through a small share of net retained premium.

Underwriting Segment Adjusted EBITDA (Q2 2025) $16 million, reflecting improved operating leverage and stable claims experience.

Gross Loss Ratio (Q2 2025) 50.5%, improved from 54.7% in Q2 2024. This improvement was due to stable claims experience and reserve strengthening in the prior year.

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Operating Highlights

Machine learning-led Accelerant risk indices: Launched for select members to improve portfolio profitability.

Large language models: Used on claims data to identify claim reimbursement opportunities, improving claims subrogation rates by over 200%.

New members and risk capital partners: Added 16 new members in Q2 2025, bringing the total to 248. QBE and Tokio Marine joined the platform earlier this year.

Flywheel reinsurance sidecar: Upsized capacity in June 2025, allowing institutional investors to participate as risk capital partners.

Exchange Written Premium: Grew 42% year-over-year to $1.1 billion in Q2 2025, with trailing 12-month premium at $3.8 billion.

Revenue growth: Increased 68% year-over-year to $219 million in Q2 2025.

Adjusted EBITDA: Improved to $63.5 million in Q2 2025 from $13 million in Q2 2024.

IPO milestone: Marked the company's first earnings call as a public company, emphasizing its durable business model.

Focus on technology investments: 150 employees dedicated to improving the technology platform, with plans to continue prioritizing these investments.

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Risk or Challenges

Regulatory and Compliance Risks: The company operates in a highly regulated industry, and any changes in regulations or failure to comply with existing regulations could adversely impact operations and financial performance.

Economic and Market Conditions: Economic uncertainties and market conditions could affect the company's growth trajectory and profitability, especially given its reliance on specialty insurance markets.

Execution Risks: The company is making significant investments and executing at a high velocity, which could lead to operational inefficiencies or missteps if not managed properly.

Dependence on Technology: The company's reliance on its data and analytics platform for competitive advantage means any technological failures or inability to keep up with advancements could harm its operations.

Reinsurance and Risk Capital Dependence: The company heavily depends on reinsurance transactions and risk capital partners. Any disruptions in these relationships or market conditions affecting reinsurance could impact financial stability.

Foreign Exchange Risks: The company faces foreign exchange risks, as highlighted by the negative FX impact on net income during the quarter.

Specialty Insurance Market Fragmentation: The increasing specialization and disaggregation in the specialty insurance market could pose challenges in maintaining market leadership and operational efficiency.

IPO-Related Stock-Based Compensation: The company expects elevated levels of noncash stock-based compensation expenses due to its IPO, which could impact financial results in the short term.

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Guidance & Outlook

Exchange Written Premium (Q3 2025): Expected to be in the range of $1.01 billion to $1.04 billion, representing growth of between 14% and 17% over the same quarterly period in 2024.

Adjusted EBITDA (Q3 2025): Estimated to be in the range of $41 million to $51 million from underlying business performance, excluding a minority interest sale. Including the sale, total adjusted EBITDA is expected to range from $66 million to $81 million, representing an increase of 154% to 210% over Q3 2024.

Net Retention Levels: Expected to trend toward historic norms of approximately 10% in future quarters.

Technology Investments: Continued focus on improving the technology platform to solidify Accelerant's position as the marketplace of the future, with expectations of future margin expansion.

Underwriting Segment Profitability: Expected to be breakeven to mildly profitable over the medium term.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:What is the premium contribution of Hadron to the business in 2Q '25 and the growth of other partners on the exchange?

A:Hadron contributed $170 million during the quarter to the Exchange Written Premium. They are a small but valuable partner. Over time, Hadron's percentage of total third-party insurer premium is expected to decrease as other third-party insurers take on a bigger share.

Q:What are the growth drivers for Hadron and the possibility of other companies like Altamont setting up similar operations?

A:Hadron's growth has been impressive due to attractive trading terms. The growth in portfolio premium is driven by onboarding high-quality underwriting members. If other companies like Altamont create similar operations, it would be beneficial, but growth is not constrained by the existence of Hadron or similar entities.

Q:Will the portion of third-party insurers mostly consist of fronting carriers like Hadron or a mix of other carriers?

A:There will be a mix of carriers over time. Hybrid fronts are fast movers, but diversity of risk capital types, including professional reinsurers and institutional investors, is important.

Q:What is the outlook for moving into larger account business and its impact on take rate and adjusted EBITDA margins?

A:The risk exchange is expected to move into larger and more complex accounts over time. Take rates in specialty markets will not change dramatically, but entering less specialty lines will result in lower take rates. Margins are not expected to differ significantly from current levels.

Q:Is there any difference in balance sheet exposure when Accelerant reassumes risk from Hadron?

A:There is no difference in the quality of the business assumed or the amount of underwriting risk retained when Accelerant reassumes risk from Hadron.

Q:What was the impact of reinsurance transactions in the quarter that reduced Accelerant's net retention to 6%?

A:The reduction in net retention was due to placing more business with third-party reinsurers. Over time, retention is expected to be closer to 10%, but it may vary depending on reinsurance demand.

Q:What was the gross loss ratio for the Underwriting segment in the quarter?

A:The gross loss ratio for the Underwriting segment was 51.8% year-to-date and 50.5% for the quarter.

Q:What is the growth of third-party premium excluding Hadron, and how are other capital partners growing?

A:The exact growth of non-Hadron third-party insurers is not known, but all third-party insurance companies are growing quickly. Hadron's percentage of the total is expected to decrease as additional third-party insurers are added.

Q:What is the updated pipeline for potential new members and the onboarding of QBE and Tokio Marine?

A:The pipeline for new members is the largest it has ever been, with significant premium being accepted by QBE and Tokio Marine. Both relationships are developing well in terms of size and profitability.

Q:What is the direction of underlying profitability of the collective premium written this quarter?

A:In the EU and U.K., the effective rate level is flat, while in the U.S., there is a 7% rate increase. The SME nature of the portfolio insulates it from extreme rate movements, and the portfolio remains adequately rated.

Q:What drove the sharp rise in adjusted EBITDA margin to 29% year-over-year, and what is the outlook for margins?

A:The rise in adjusted EBITDA margin was driven by strong performance in all segments, particularly Exchange Services and MGA operations. Margins are expected to continue benefiting from a shift towards Exchange Services and MGA operations as underwriting revenue moderates.

Q:How is the third-party direct written premium percentage expected to trend near and long term?

A:Long term, the goal is a well-balanced spread between the three sources of premium, with the risk exchange insurer potentially being slightly larger than the others. No significant changes are expected in the near term.

Q:What is the proportion of hybrid front companies like Hadron, and is there an ideal proportion?

A:The proportion of hybrid front companies is not specified, but the goal is to maintain a diversified mix. Hybrid fronts are used to access institutional investors efficiently.

Q:What was the impact of the sale on adjusted EBITDA and exchange premium, and are more such sales expected?

A:The sale had no impact on exchange premium. It included realized gains from a minority stake sale and revaluation. Such sales are considered one-off and not expected to recur frequently.

Q:What was the gross loss ratio trend and any reserve issues?

A:The gross loss ratio was 50.5% for the quarter, down from 54% a year ago. The prior year's higher ratio was due to additional reserving on the European back book.

Q:What are the key drivers for guidance and variables for 2026?

A:The key drivers are premium growth through new member additions and existing member growth. The focus is on being the preeminent specialty insurance risk exchange with a strong data and technology foundation.

Q:Is there any seasonality in the business?

A:There is no significant seasonality in the book of business.

Q:Review of Unclear Management Responses

A:Management avoided providing specific growth numbers for non-Hadron third-party insurers and did not quantify the capacity growth for QBE and Tokio Marine. Additionally, they did not specify the proportion of hybrid front companies or provide detailed guidance on the long-term trend of third-party direct written premiums.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

ARX Transcript

Accelerant Holdings (ARX) Q2 2025 Earnings Call Transcript

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