Ryan Specialty Holdings, Inc. (NYSE:RYAN) Q4 2022 Earnings Call Transcript March 3, 2023
Operator: Greetings, and welcome to Ryan Specialty Group Fourth Quarter 2022 Earnings Call. At this time all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Noah Angeletti, Head of Investor Relations and Treasurer. Please go ahead.
Noah Angeletti: Good afternoon, and thank you for joining us today for Ryan Specialty Holdings Fourth Quarter and Full Year 2022 Earnings Conference Call. In addition to this call, we filed a press release with the SEC earlier this afternoon, which has also been posted to our website at ryanspecialty.com. On today’s call, management’s prepared remarks and answers to your questions may contain forward-looking statements. Investors should not place undue reliance on any forward-looking statement. These statements are based on management’s current expectations and beliefs and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. We encourage listeners to review the more detailed discussion of these risk factors contained in the Company’s filings with the SEC.
We assume no duty to update such forward-looking statements in the future, except as required by law. Additionally, certain non-GAAP financial measures will be discussed on this call and should not be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most closely comparable measures prepared in accordance with GAAP are included in our earnings release, which is filed with the SEC and available on the Company’s website. With that, I’d now like to turn the call over to the Founder, Chairman and Chief Executive Officer of Ryan Specialty, Pat Ryan.
Pat Ryan: Good afternoon. Thank you for joining us to discuss our fourth quarter results. Joining us on today’s call is our President, Tim Turner; our CFO, Jeremiah Bickham; and our CEO of Underwriting Managers, Miles Wuller. Before we discuss Ryan’s Specialty’s 2022 performance, I’d like to take a moment to reflect on the passing of Andrew J. McKenna. Andy was an invaluable member of our Board since its inception in 2012, serving on the Compensation and Governance Committee and as our Lead Director. Andy was a national voice on the topic of corporate governance, Chicago institution, business icon, humanitarian, philanthropist, husband, father, brother and the dear friend. He will be missed by all who knew him. 2022 was an outstanding year for Ryan Specialty.
The tireless efforts and dedication of our brokers, underwriters and the entire Ryan Specialty team is evident in our results. For the full year, we generated record revenue of over $1.7 billion, driven by organic growth of 16.4% on top of 22.4% in 2021, and produced a strong adjusted EBITDAC margin of 30%. I want to take a few minutes to highlight some noteworthy achievements in 2022, which were significant for our firm. We invested in an exceptional talent while onboarding the largest production class in our history. We enhanced our capabilities through new product offerings and integrated our 2021 acquisitions of Keystone and Crouse, both of which exceeded their growth goals for the first year as a part of the Ryan Specialty team. We were pleased to announce a highly strategic acquisition, Griffin Underwriting Services, which closed on January 3 of this year.
With approximately $23 million in revenue, Griffin deepens our offerings in the Pacific Northwest, broadening our geographic scope and our capabilities and binding authority and brokerage specialties. Importantly, Griffin’s consistent underwriting results, deep bench of talent and focus on training and development is a clear cultural match with Ryan Specialty. Further enhancing Ryan Specialty’s a central role as a trading partner to our retailers. Continuing our winning culture, I’m pleased to report another year of 97% retention of our producers, consistent with 2021. For the fourth quarter, total revenue grew 14.9%, led by 10.3% organic growth. We also grew our adjusted EBITDAC and generated another quarter of solid adjusted net income. In the fourth quarter, the specific headwinds, we noted on our prior call, were in line with our expectations.
We anticipate that these headwinds will persist into at least the first half of 2023. That said, we were very pleased to see the strength in property manifest itself late in Q4, which drove the modest outperformance versus our expectations for the quarter. As we progress through 2023, there are three things we believe you can expect from Ryan Specialty. First, we see continued solid growth in the business. Although there is heightened macro uncertainty, the complexity of risk continues to increase. And as a result, we believe the E&S market will continue to be a standout within the insurance industry. We expect our growth will be balanced across our diverse portfolio of products and solutions, enabling us to capture the broader E&S tailwinds while capitalizing on specific areas of accelerated growth.
We expect to grow our business through M&A. Our pipeline remains robust, both in tuck-ins and some larger platform opportunities. We continue to focus on M&A opportunities with the highest quality specialty distributors including wholesale, delegated authority and benefits. We will also look to grow our business through our alternative risk strategy, arranging alternative capital to support our clients, expanding our addressable market and building on our culture of innovation. Second, we will continue to invest in our business. We expect another year of targeted hiring, adding industry top talent in both underwriting and broking or the needed most as well as continuing to build our internship program at Ryan Specialty University. We will also make additional investment in our delegated authority specialties, including the systems and technology to further enhance our actuarial risk management and loss control teams.
And third, we will execute on strategic initiatives to increase the scalability of our operating platform. Today, we are announcing the launch of Accelerate 2025, a two-year restructuring program effective in Q1. Through this program, we’re making changes and investments that will enable continued growth, drive innovation and deliver sustainable productivity improvements over the long term. Accelerate 2025 is a natural progression of our strategy that brings together our people and assets in a way that allows us to continue to rapidly innovate and more efficiently provide new and improved solutions to the most complex challenges that our clients face. Jeremiah will provide more details in his remarks, but we anticipate a cumulative special charge of approximately $65 million through 2024.
We expect the program will deliver approximately $35 million of annual savings in 2025 and further enhance our ability to scale our platform in the years beyond. Accelerate 2025 is designed in concert with our growth strategy, and we will continue to make investment decisions including hiring and M&A based on a disciplined return on capital basis, both now and in the future. Looking forward, I’m confident that 2023 will be another strong year for our firm. We expect sustained growth and have a flexible business model that allows us to quickly adapt and pivot to changing market conditions. As we’ve noted previously, risks across industries are only becoming more complex, and the E&S market has continued to outpace the overall P&C insurance market.
Our products are larger compulsory and our clients and trading partners value the unparalleled expertise we bring as we anticipate our needs and work tirelessly to provide the right solutions for our insurers. This, along with our other secular growth drivers, should allow us to continue generating double-digit organic growth over the long term. In summary, I’m very proud of our entire team for delivering outstanding results for our clients, trading partners and shareholders in a challenging insurance market and macro environment. Through innovation and exceptional customer service, we have once again validated our differentiated business model and continue to be a trusted partner to substantially all of the top 100 retailers. Now, I’ll turn it over to Tim.
Tim Turner: Thank you very much, Pat. It was another solid quarter and year across our specialties. These results are a testament to the teamwork across the firm, from our producers to our underwriters and their teams. As Pat noted, the E&S market continued to grow in importance to the insurance industry, and we capitalized on these industry trends. Diving into our specialties. Our Wholesale Brokerage specialty achieved another quarter of solid growth spread across many lines of business. Property continues to experience a historically hard market as rates rose significantly and capacity tightened. We are seeing a large volume of new business flow into the non-admitted market, and we remain very encouraged by Property’s potential looking ahead.
As we’ve noted previously, major events such as Hurricane Ian, winter storms and other climate events as well as a tougher reinsurance renewal process have led to less capacity as well as even higher rates. This is producing increasing demand for insurance solutions and a recurring opportunity for our experience and expertise to fill that need. Cyber performed well in the fourth quarter and for the year. While we continue to see a moderation in rate increases, we believe there is ample runway for us to pursue regardless of short-term pricing trends. Our technical expertise in areas like cyber is playing a significant role in our ability to build large towers of capacity for our clients. Our transportation practice, particularly in trucking, continues to see substantial flow fueled by social inflation, and ensure a need for continued rate increases.
We continue to win new business and remain well positioned for 2023 to capitalize on additional growth opportunities. In our Binding Authority specialty, we saw another quarter of solid growth in traditional binding, which includes small commercial business that has historically been economically sensitive. This growth was partially offset by our personal lines Binding Authority, which was still experiencing capacity constraints prior to renewals. We continue to see the potential for panel consolidation as a long and steady growth opportunity, and we are well positioned to execute. Our underwriting management specialty posted another strong quarter led by property and casualty, healthcare and our reinsurance MGU, Ryan Re, despite headwinds in our transactional liability lines, driven by lower M&A volume.
As Pat noted, in the fourth quarter, the specific headwinds in certain lines we raised on our prior call are rapid rate decline in public company D&O, lower external M&A and IPO volumes and transactional liability and delayed project-based starts in construction were in line with our expectations. We anticipate that these headwinds will persist into at least the first half of 2023. We remain confident that we have the right teams in place to grow these lines over the long term. In terms of the E&S market, our observation is that pricing has remained firm in January and into February in most classes of business with public company D&O being the ongoing exception. In addition, the standard market carrier competition we observed on the periphery and which we flagged on prior earning calls, has yet to meaningfully impact rate or flow in the aggregate.
As we’ve said previously, we expect the flow of business into the non-admitted market to continue to be a significant driver of Ryan Specialty’s growth, more so than rate. With that, I will now turn the call over to our Chief Financial Officer, Jeremiah Bickham, who will give you more detail on the financial results of our fourth quarter. Thank you.
Jeremiah Bickham: Thank you, Tim. In Q4, we grew total revenue 14.9% period-over-period to $435 million, fueled by another solid quarter of organic revenue growth at 10.3%, reflecting ongoing tailwinds in much of the E&S market and continuing to win a substantial amount of new business. We were pleased to see the strength in property late in Q4, specifically in the last two weeks of December, which drove the modest outperformance versus our expectations for the quarter. Net income for Q4 ’22 was $46 million or $0.14 per diluted share. Adjusted net income for the quarter, which excludes IPO-related and other unusual items, was $74 million or $0.27 per diluted share. Adjusted EBITDAC for the fourth quarter grew 6% period-over-period, to $127 million, while adjusted EBITDAC margin declined 250 basis points to 29.3%.
Our adjusted EBITDAC margin was impacted by continued investments in the business and T&E continuing to return to normalized levels, which was partially offset by higher fiduciary investment income. As Pat noted, in 2023, we expect to continue bringing aboard top underwriting and broking talent wherever we see clear opportunities to grow lines of business. We also expect to recruit a significant class of new talent at Ryan Specialty in the months ahead. In addition, as we noted in our release earlier today and in Pat’s earlier remarks, we are embarking on our Accelerate 2025 program, which will strengthen how Ryan Specialty operates and further improves our efficiency and unlocks additional value for our clients and shareholders. Over the last four years alone, our revenue has more than doubled, head count is up 50%, and all while the U.S. E&S market has grown by over 80%.
We believe this is the right time to continue building on our success and have thoughtfully designed a program that will prepare Ryan Specialty for the next cycle of growth. Accelerate 2025 will result in approximately $65 million of cumulative charges through 2024. In turn, we expect it to generate annual savings of approximately $35 million in 2025 and facilitate even greater operating leverage thereafter. Based on our current forecast, we expect to record GAAP interest expense, which is net of interest income on our operating funds of approximately $120 million in 2023. As Pat and Tim mentioned, we remain very excited about our long-term growth opportunities and value proposition. As a result, we are guiding full year 2023 organic revenue growth to be between 10% to 13%.
We believe the first half of 2023 will see continued headwinds in certain areas, but we expect that pressure to ease in the back half of the year. In addition, we are guiding adjusted EBITDAC margin for the full year 2023 to be between 29.0% and 30.0%. We will continue investing in talent during the year, as well as the annualization of our 2022 head count growth, which from a margin perspective, will be partially offset by increases in fiduciary investment income during 2023. These investments, particularly in the recruitment of new colleagues, offer the highest returns for our shareholders, and we continue to aggressively recruit and build out our teams to meet the challenges, demands and opportunities of the marketplace. In summary, we were very pleased with our overall performance in 2022, and we remain very excited for the path ahead.
The current economic and insurance cycles present both challenges and opportunities, and our flexible and diversified business model positions us well to best serve our clients in a time where we are more relevant than ever before. With that, we thank you for your time, and we’d like to open up the call for Q&A. Operator?
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Operator: The first question today is from Elyse Greenspan of Wells Fargo.
Elyse Greenspan: My first question, the Q4 organic was 10.3%. And, like, you saw the headwinds that you guys spoke about last quarter, and it sounds like you expect them to persist in the first half, right, and then get better but property rates, right, it sounds like you only saw the benefit of that for two weeks, and perhaps you get the benefit, right, throughout ’23. So wouldn’t the baseline expectation be that all quarters of ’23, I guess, should show growth that’s a better level than the fourth quarter?
Jeremiah Bickham: Elyse, so we think that our guide range for the year, and again, we want to remind everyone, it is best to look at organic growth on an annual basis, not quarter-to-quarter because you often can’t infer a trend. You are correct. The headwinds we referenced that affected us in Q3 and Q4 played out just about as we expected. And then as Tim said in his prepared remarks, they’ll continue — it’s our belief they’ll continue through at least H1. We did get a pickup from property in late Q4, and we expect that to be a net benefit to us in all of 2023, but it’s still too early to tell how much of a lift it will provide on an annual basis, given that there’s just so many variables in play, along with general macro uncertainty.
And don’t forget, we’ve got extremely tough comps in Q1 — in Q2. I mean, Tim can provide more color on the property market specifically. But taking a step back, what we do know is that the net of all the headwinds and tailwinds should be positive for us and the E&S market overall. And that our value proposition to our clients is very much intact at the moment.
Elyse Greenspan: And then with your property book is do you have a greater concentration in one quarter versus another? Or would the revenue from property be even throughout the four quarters with some slight variation?
Tim Turner: We do. It’s well recorded that the second quarter is the strongest wind buying season, and we expect the flow of business that has increased month-to-month, quarter-to-quarter to continue to increase, and we’ll capitalize on that. We’re very well positioned on the broking and the underwriting side for that.
Elyse Greenspan: And then lastly, you guys pointed to an active — it sounds like an active M&A pipeline. Can you just provide a little bit of color just as it looks today, what types of deals you’re looking at? And just do you think we might see some deals sooner than later? Or do you have a sense of timing on transactions?
Pat Ryan: We did mention that there is — I mentioned there is a robust pipeline. And it is, and it’s an interesting pipeline, in that there are many companies coming to market. There are companies that we are trying — convinced to come to market. As you know, Elyse, we look for really good companies to make them better, to make them great companies. And we’ve had, I think, a successful track record at that. So there is pipeline that I’m referencing are people that we’ve been speaking with over the — at least the last 12 months in many cases. And they weren’t ready. Some are still not ready, but they’re getting closer. Others seem to be getting pretty close, and we’re having quite good discussions. To sum it up, I would say that we’re at a point in time here starting in 2023 where the prospects for bringing in really high-quality companies that fit our overall strategy in the broadest of ways that we have good confidence that we’ll be able to be closing these.
We can’t tell you when during the year, but we’re certainly in deep discussions with a few of them.
Operator: The next question is from Mike Zaremski of BMO Capital Markets.
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