Ryan Specialty Holdings, Inc. (NYSE:RYAN) Q3 2023 Earnings Call Transcript

Ryan Specialty Holdings, Inc. (NYSE:RYAN) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Good afternoon and thank you for joining us today for Ryan Specialty Holdings Third Quarter 2023 Earnings Conference Call. In addition to this call, the company filed a press release with the SEC earlier this afternoon, which has also been posted to its 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 statements. 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. Listeners are encouraged to review the more detailed discussion of these risk factors contained in the company’s filings with the SEC.

The company assumes 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 the 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.

Patrick Ryan: Good afternoon and thank you for joining us to discuss our third quarter results. With me on today’s call is our President, Tim Turner; our CFO, Jeremiah Bickham, our CEO of Underwriting Managers, Miles Wuller. Also with us is our Head of Investor Relations, Nick Mezick. Ryan Specialty had another strong quarter as we continued to successfully execute on our strategic, financial and operational objectives. We grew total revenue of 21.8% and by organic growth of 14.7%. We saw broad-based strength across our specialties and in various lines of business, as well as strong contributions from our recent acquisitions was notably Socius. This quarter is a great example of how strategic M&A contributes to total revenue growth and will contribute to organic growth in future years.

We also generated double-digit growth in both adjusted EBITDAC and adjusted net income on a year-over-year basis. I’m very pleased with our results as the entire Ryan Specialty team continues to perform at a high level and further validate our differentiated business model. Along with our excellent results, I’m excited to note that we continue to execute on our M&A strategy. Before diving into the details, I want to reiterate how we think about M&A. Our M&A strategy is aligned around the evolving and growing needs of our clients in order to create a dynamic value proposition. Our focus is on M&A opportunities with the highest quality specialty distributors, including wholesale, delegated authority and employee benefits. We are building out our alternative risk strategy by structuring solutions beyond traditional insurance placements to support our clients and the needs of the insurer fee for P&C or employee benefit strategies.

Through this M&A strategy that we are steadily expanding our total addressable market within specialty insurance and deepening our considerable moat, financing our scale, scope and intellectual capital. This we believe will help ensure our ability to sustainably grow our platform over the longer term and perform well over our economic cycles. Earlier this week, we announced an attractive and strategic acquisition, which will deliver immediate value to our clients. We continue to build out Ryan Specialty benefits with the signing of a definitive agreement to acquire AccuRisk, which is targeted to close later this quarter and will add $25 million of annual revenue. AccuRisk is in part of medical stop loss MGU, and also provides capabilities in group captives, supplemental health care management and occupational accidents.

We are excited to bring the highly regarded AccuRisk team on board. Our three recent acquisitions in the employee benefit space are now the cornerstone of our medical stop loss and employee benefits distribution and underwriting platform. As we are rapidly developing our product and services offering, to help our clients with integrated health solutions. We generally target firms that have a track record of both higher growth and greater long-term margin potential than the industry average. These employee benefits firms are perfectly aligned with those attributes. Further, we continue to believe there remains a long runway for both organic and inorganic growth and medical stop loss and more broadly, employee benefits. Building on a strong year in executing on M&A, our pipeline remains robust.

It speaks well to our ability to source a myriad of potential transactions both tuck-ins and larger acquisitions. We remain disciplined in our pursuit of acquisitions, particularly in the current environment as we will only move forward but all of our criteria are met. Each acquisition must be a strong cultural fit, strategic and accretive. We continue to make targeted investments in talent during the quarter, to further enhance our capabilities in both current and developing lines of business. These investments in talent offer the greatest returns for our shareholders and are part of a proven winning formula to maintain our long-term growth prospects. Now turning to ACCELERATE 2025. As we continue to execute on our restructuring actions, we’ve identified additional opportunities to drive continued growth and innovation, deliver sustainable productivity over the longer term and accelerate margin improvement.

We now expect to generate annual savings of approximately $50 million in 2025 with cumulative special charges of approximately $90 million through the end of 2024. Turning to the market. The E&S marketplace remained robust, providing solutions that are otherwise simply not available or hard to place risks. We expect this trend to support our growth and continue for the foreseeable future. As we have previously noted, we’ve invested significantly in those lines, and we see clear opportunities to grow. In addition to Goldstein the lines of the business or our clients need us the most. Looking forward, we recognize the more uncertain macroeconomic and geopolitical environment, and expect favorable specialty insurance market dynamics to persist, which we believe will provide us with robust opportunities for continued growth.

We are well positioned to further capture the broader E&S tailwinds through our flexible and differentiated business model, and capitalize on our specific lines of accelerated growth. Our exceptional team continues to consistently deliver adding value for our clients, trading partners and ultimately our shareholders. Now I’m pleased to turn it over to Tim. Tim?

Timothy Turner: Thank you very much, Pat. The third quarter saw a momentum from the first half of the year seamlessly carry forward as we generated double-digit growth across all our specialties. Turning to the market. Ongoing industry trends persist, notably an increasingly complex weather and legal environment, a sizable pullback in risk appetite from the admitted market and uncertainty regarding reserve adequacy. These trends are driving more risks into the E&S marketplace, which offers significantly more freedom of rate and form and is thus able to provide critical solutions for these risks. Given our specialized and industry-leading team’s ability to navigate the complexities of the market, we plan to continue delivering and exceeding expectations for our clients.

Diving into our specialties. Our wholesale brokerage specialty generated another quarter of strong growth. In property, elevated loss activity driven by severe convective storms, higher reinsurance costs, persistent inflation and ongoing focus on insurance to value and a reduction in available capacity make for an incredibly challenging market. These factors are continuing to drive flow of new business into the E&S market. The E&S market continues to respond well, providing solutions for insureds while surplus lines insurers are exhibiting more conservative appetites and tighter limit management especially around coastal property, severe convective storms, wildfire, flood and earthquake risk. Our teams of experts are assisting our clients in navigating the significant complexities of this market and devising tailored solutions that best fit the insurers’ needs.

Our casualty practice also had another strong quarter driven by higher flow into the E&S market in both primary and excess casualty, particularly for large venue risks, health care, habitational and real estate which are all experiencing higher loss trends driven by economic and social inflation and reserving issues. Our transportation practice continue to see significant flow in the quarter driven by social inflation, carrier need for continued rate increases, a pullback in underwriter appetite and market exits. We also received strong contributions in the quarter from our new team members that joined us through our acquisition of Socius, which officially came on board at the beginning of July. Overall, our wholesale brokerage specialty remains dedicated to executing on its game plan, which includes continued evolution of strategies and products to meet changing needs, and we expect to generate consistent and profitable growth for the foreseeable future.

Our binding authority specialty had an excellent quarter with the trends we saw in the first half of the year continuing in the third quarter despite ongoing capacity constraints in personal lines. There remains plenty of potential for panel consolidation as a steady, long-term growth opportunity, and we are well positioned to execute. Our Underwriting Management specialty also performed very well. Growth was driven by sustained broad-based rate increases, particularly in property, contributions from new growth initiatives such as excess casualty and alternative risk solutions, incremental capacity fueling growth in cat property, transportation and at our reinsurance MGU, Ryan Re; and Profit commissions, including many of the strong historical performance in the preceding soft market cycle.

We also announced the acquisition of AccuRisk, which adds breadth and depth to our growing benefits practice. As Pat mentioned in his remarks, our acquisition strategy continues to provide us with new avenues such as alternative risks and benefits to substantially expand our total addressable market. This will enable us to further grow alongside our clients’ evolving needs, ensure our ability to sustainably grow our platform over the longer term and perform over economic cycles. Turning to price. Through Q3, we remained in a prolonged stage of historically hard market conditions. Pricing in the E&S market largely held firm or accelerated in many lines of business with property continuing to see the strongest rate momentum, though in a seasonally smaller quarter, exceptions remain in public company D&O and Cyber.

As with all cycles, as certain lines are perceived to reach pricing adequacy, admitted markets tend to step back in on certain placements. That said, we still have yet to see this play out, and the standard market has not meaningfully impacted rate or flow in the aggregate. We continue to expect the flow of business into the non-admitted market 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 third quarter. Thank you.

Jeremiah Bickham: Thank you, Tim. In Q3, we grew total revenue 21.8% period-over-period to $502 million, fueled by another strong quarter of organic revenue growth coming in at 14.7%. And M&A, which added over four percentage points to our topline. Growth was driven by ongoing tailwinds in much of the E&S market, strong renewal retention and our ability to win substantial amounts of new business. Net income for Q3 2023 was $16 million. One of the acquisitions we made in Q3, Socius, was a C Corp at the time of acquisition. Right after closing, we executed a legal entity reorganization by converting Socius to an LLC, which, of course, made it a pass-through entity for tax purposes and then subsequently transferred the entity to our operating LLC which is where we typically buy and hold our acquisitions.

The result of these actions was a great outcome for shareholders, particularly with regards to tax efficiency. These actions did, however, create a onetime non-cash deferred tax expense at the public holding company, which created a loss of $0.04 per diluted share for the quarter. Since we have no plan to ever sell Socius, we do not expect this tax expense will ever be realized in cash. Going forward, we do not expect any change in the company’s annual effective tax rate related to these actions, and we will likely pursue a similar strategy with respect to any future acquisitions of C Corps. Adjusted net income for the quarter was $87 million or $0.32 per diluted share. Adjusted EBITDAC for the third quarter grew 25.8% period-over-period to $147 million, while adjusted EBITDAC margin improved 90 basis points to 29.3%, driven by strong organic revenue growth and higher fiduciary investment income and partially offset by continued investments in our business.

Turning to our ACCELERATE 2025 program. We had approximately $16 million of charges in the quarter. We identified additional opportunities to wisely invest, to drive more efficiencies and thus, greater savings and we remain well on pace to complete the program by the end of 2024. As Pat mentioned, we now expect to generate annual savings of approximately $50 million in 2025 with cumulative special charges of approximately $90 million through the end of 2024. We expect just over half the charges in calendar year 2023 than the remainder to flow throughout 2024. As Pat also mentioned, we will continue making targeted investments in the fourth quarter in talent and recruitment. These investments in talent, particularly recruiting new colleagues, historically have offered the highest returns for our shareholders, and are part of our proven approach to maintaining our long-term growth prospects.

Based on our current forecast, we expect to record GAAP interest expense, which is net of interest income on our operating funds of approximately $31 million in Q4, which incorporates the impact of the AccuRisk acquisition. Turning to guidance, we are now guiding our organic revenue growth rate for the full-year 2023 to be between 13.5% and 14.5%, which reflects an increase of 50 basis points to the floor compared to our previous guide range of 13.0% to 14.5%. In addition, we are raising the low end of our full-year adjusted EBITDAC margin guidance range and are now guiding to full-year adjusted EBITDAC margin of between 29.5% and 30.0%. In summary, we’re very pleased with our third quarter performance, and we remain very excited about our both near- and long-term prospects.

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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Q&A Session

Operator: Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed with your question.

Elyse Greenspan: Thanks. Good evening. My first question is on your organic growth guide. You guys raised the guidance for the full-year, but you’re at 14.7% year-to-date, 13.5% to 14.5% now for the full-year. And that would imply, right, that the fourth quarter could come in a range of 12% to 14%. So I’m just hoping to get more color. Are you expecting a decel in the Q4? Because I thought that other than the second quarter, the fourth quarter has higher property concentration and that should be a tailwind or maybe there’s just some conservatism built into the guide?

Jeremiah Bickham: Hi, there, Elyse. No, your recollection is correct. Q4 is seasonally our biggest quarter. It does have the second most amount of property business, second to Q2. But we did get some of the benefit of the acceleration in property last Q4. And so we’ve got some measured assumptions about that compounding on itself if there’s a very, very strong showing in Q4, there is some potential upside related to property for sure.

Elyse Greenspan: And then on the savings program, the incremental savings that you guys are announcing tonight, are those expected so – the $50 million versus $35 million so that incremental $15 million. Is that expected to come in 2025? Or will we now see more savings now filter through in 2024 as well?

Jeremiah Bickham: The full $50 million won’t show up until 2025 but relative to the prior estimate of $35 million of saves, there will be more flowing through next year, and that will be fully represented in our margin guide for 2024 that we released in Q1.

Elyse Greenspan: Okay. And then Pat, you were talking about a robust M&A pipeline. I believe you said tuck-ins as well as larger acquisitions. What do you guys define I guess, as larger deals? And have you seen any change just in multiples on potential transactions, either tuck-ins or larger deals over the course of the past year?

Patrick Ryan: I would say that tuck-ins are obvious. Larger deals would be of $400 million. You’ll recall all risks was quite a bit higher than that. That would be our largest deal to date. We work on these transactions particularly the larger ones over an extended period of time. And so it’s difficult to know if they do material – if they will materialize because of the length of time that it takes to bring these in. And so we just kind of time those in any accurate way. But in terms of valuations, Elyse, we, as you know, look to buy good to great companies. We’re not a bottom fisher, we’re not looking to buy projects. We, therefore, expect to pay a fair multiple. And so on good and great companies, multiples are still pretty consistent from what they’ve been.

There could be some tailing off if there’s a little lesser quality. But be assured that as we’re looking very selectively on who we will bring into the Ryan Specialty family. They’ve got to be a really good company, and they have to have the potential that we can make them better and we can make great companies even better. So that’s how we look at it.

Elyse Greenspan: Thank you.

Operator: Our next question comes from the line of Mike Zaremski with BMO Capital Markets. Please proceed with your question.