Ryan Specialty Holdings, Inc. (NYSE:RYAN) Q4 2023 Earnings Call Transcript
Ryan Specialty Holdings, Inc. (NYSE:RYAN) Q4 2023 Earnings Call Transcript February 27, 2024
Ryan Specialty Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon and thank you for joining us today for Ryan Specialty Holdings Fourth Quarter and Full Year 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 at 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 of 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. Mr. Ryan, please go ahead sir.
Pat Ryan: Good afternoon, and thank you for joining us to discuss our fourth quarter results. With me on today's call is our President, Tim Turner; our CFO, Jeremiah Bickham; and our CEO of Underwriting Managers, Miles Wuller. Also with us is our Director of Investor Relations, Nick Mezick. 2023 was another outstanding year for Ryan Specialty. Our team continues to excel with the steadfast efforts to deliver top quality service to our clients. Through a combination of industry-leading talent and dedication to our clients, we generated another year of strong results while making long-term sustainable investments in our business to fortify our competitive position. For the full year, we surpassed revenues of $2 billion, up 20.4% year-over-year, driven by organic growth of 15% on top of the 16.4% in 2022.
We also had a meaningful contribution from recent M&A. We grew full year adjusted EBITDAC 20.7% to $625 million and expanded adjusted EBITDAC margins by 10 basis points to 30.1%. Adjusted earnings per share grew 20% to $1.38. We also successfully executed on our strategy to add to our total addressable market. Our overall strategy is aligned around serving the evolving and growing needs of our clients in order to provide a dynamic value proposition. For a double-digit organic growth engine, and our M&A strategy, we are steadily expanding our total addressable market within specialty insurance, particularly with targeted investments and dedicated authority, benefits, alternative risks as well as deepening our considerable moat by enhancing our scale, scope and intellectual capital.
2023 marked the second best year for M&A, only topped in 2020 when we acquired All Risks. We successfully completed and announced several acquisitions with annual historic revenue totaling in excess of $140 million, adding and integrating new capabilities to each of our three specialties. Griffin Underwriting Services broadened our geographic scope and capabilities and our binding authority in brokerage specialties. Our Socius Insurance Services deepened our scale in our key urban centers and added a high-quality talent to our Professional Lines, Cyber Liability and Property Teams. ACE, Point6 and AccuRisk, provided foundational capabilities for our employee benefits, distribution and underwriting platform and are rapidly developing new products and service offerings to help our clients with integrated health solutions.
In late December, we signed a definitive agreement to acquire Castel Underwriting Agencies, which is anticipated to close in the first half of this year. We expect the Castel team to add approximately $44 million of annual revenue. Castel adds top talent and differentiated intellectual capital through 13 unique MGUs and has an excellent track record of delivering strong underwriting profits to its capital providers. Our geographic focus in the UK and Europe will significantly expand our international footprint, and we expect our management team and operations to be a catalyst for new delegated underwriting authority start-ups and accelerated international expansion. Further, we've developed new proprietary products and capabilities and underwriting management with multiple transportation facilities, and [indiscernible] Verdant, our high net worth MGU, offering coastal wind and wildfire coverage to a highly dislocated homeowners insurance market.
In addition, several of our MGUs have expanded geographically in the UK, Canada and Singapore, growing our global footprint and expanding our total addressable market. In particular, we're excited about Perse International, our wind and solar property MGU with a recent launch in the UK. Stepping back, our delegated authority specialties are well positioned to execute on both organic and inorganic opportunities. Our offering to carriers is stronger than ever, built through investment in top talent and a heavily resourced platform, which includes actuarial and IT support as well as broad-based distribution. Our market position is further strengthened by our ability to retain our talent through our culture of empowerment, innovation and client centricity.
We share a like-minded view of risk and partnership with our carriers as demonstrated by our excellent track record of underwriting results. We are confident that our investment in people and the platform will help ensure our ability to sustainably grow our value proposition over the longer term and perform well through economic cycles. Turning to talent. We made strategic investments in talent in 2023 to further strengthen our capabilities in both current and developing lines of business on the back of onboarding our largest production class in history in 2022. Collectively, these investments in talent are well on track to meaningfully contribute to our future performance. As we've noted previously, they are a key part of our proven winning formula to maintain and strengthen our long-term growth prospects.
We were pleased to finish the year once again with industry-leading producer retention. While we have been successful at onboarding key talent, it's equally important to maintain a winning empowering culture that ensures our top producers remain at our firm. We continue to succeed on that front. It is both the exceptional quality and quantity of talent that distinguishes Ryan Specialty from the rest of the industry. We remain dedicated to recruiting, training and developing large teams of talent from college hires to experienced brokers and underwriters. As a result of our efforts, we accelerate the learning curve of these individuals, which helps them compete at the highest level. Our clients consistently emphasize that it's our differentiated talent that ensures they can trust us to solve their most challenging problems.
Our commitment to onboarding and retaining the best and most innovative talent and our emphasis on delivering value for our clients has been vital to our mission since our founding. This is why we continue to generate industry-leading organic growth and why we believe we can successfully sustain these levels of growth over the long-term. Turning to capital allocation, M&A remains our top priority, and we entered the year with significant momentum. We are cultivating a wealth of opportunities. And as market conditions are improving, we have an ambitious M&A outlook for 2024. We continue to see substantial M&A opportunities that we expect will bolster our organic growth engine. Our M&A pipeline remains robust and includes both tuck-ins and potential large deals.
As we've consistently noted, we will only move forward when all of our criteria for M&A are met. Each acquisition must be a strong cultural fit, strategic and accretive. Additionally, given our broad financial flexibility, we are pleased to initiate a quarterly dividend program to return capital and create additional value for our shareholders. But assisted by our Board to initiate the cash dividend program reflects confidence in our ability to continue to drive sustainable, profitable growth, generate strong cash flow over the long-term and execute on a robust M&A program. It is also a testament of our ability to be excellent stewards of capital for our investors as we believe we can both seamlessly execute on our robust M&A pipeline for years to come and distribute dividends to our shareholders.
We remain firmly committed to our successful long-term strategy. One, organically investing in our business to support sustainable and profitable growth; two, executing on our disciplined M&A strategy with high-quality acquisitions; and three, maintaining our strong balance sheet while returning excess cash, all of which create value for our shareholders. As we progress through 2024, there are four things you can continue to expect from Ryan Specialty. First, we expect to generate another year of double-digit organic growth, driven by secular growth factors and the strategies we are pursuing. Secular growth drivers like retail brokers becoming larger through solid organic growth and ongoing industry consolidation, retail brokers pursuing panel consolidation for both open market wholesale and delegated authority in order to have fewer more sophisticated counterparties who have the necessary scale to meet their needs.
We believe that we are one of very few specialty insurance firms that meet those criteria. The world is continuing to increase in risk and complexity. This is driving more risks and new exposures into the E&S marketplace, which offers significantly more freedom of rate and form and therefore, able to provide solutions that otherwise are not available. We believe the E&S market will keep growing and consistently outpace growth in the admitted market, overshadowing any cyclical shifts in certain lines with respect to submission flow and pricing. This is further aided by changes in distribution trends with a growing number of wholesale-only E&S carriers in the marketplace. Adding to these secular growth drivers is our unique competitive position in high-growth businesses, the expansion of our total addressable market and our ability to innovate with new product development, all of which serve to bolster our organic growth engine.
We remain confident that these ongoing trends are sustainable and will continue to support our growth for the foreseeable future. Second, we will continue to grow through M&A. As mentioned earlier, we are steadily expanding our total addressable market within specialty insurance, including in delegated authority, alternative risks, benefits and deepening our considerable moat by enhancing our scale, scope and intellectual capital. We will complete the integration of our 2023 acquisitions and onboard the great team from Castel. Further, we will help these firms grow on our platform through our broad distribution network, access to our proprietary products and our deep carrier relationships. Third, we will continue to thoughtfully invest in our business.
We expect another year of strategic hiring of top industry talent across our specialties. And we'll make additional investments in our systems and operations to ensure we remain at the forefront of the industry. Lastly, we will continue to execute on our efficiency initiatives. Notably, we will execute on our ACCELERATE 2025 program, driving continued growth and innovation, delivering sustainable productivity improvements over the long term and accelerating our margin improvement. As a reminder, we expect to generate annual savings of approximately $50 million in 2025 for some of the savings to be realized in 2024. With our flexible and differentiated business model, unparalleled expertise, innovation and work out that our clients and trading partners value, we are well positioned for another strong year in 2024.
In summary, I remain incredibly proud of our entire team who are delivering another year of outstanding results and adding value for our clients, trading partners and ultimately, our shareholders. Now I am pleased to turn it over to Tim. Tim?
Tim Turner: Thank you very much, Pat. The fourth quarter capped off an excellent 2023 for Ryan Specialty as we generated another quarter of double-digit growth across all our specialties. Turning to the market, ongoing industry trends persist or are accelerating, notably an increasingly complex climate and legal environment marked by nuclear verdicts, accelerating social inflation, rising uncertainty regarding reserve adequacy and a pullback in risk appetite from the admitted market. These trends are driving more risks into the E&S marketplace, which is better able to handle a more uncertain environment as it offers significantly more freedom of rate in form and the ability for insurers and underwriters to adjust more quickly.
As a result, the E&S market is seeing a consistent flow of risks as it is able to provide critical solutions that would otherwise not be available. This continues to create fantastic opportunities for our specialized and industry-leading teams to provide solutions on behalf of our clients. Diving into our specialties, our wholesale brokerage specialty generated another quarter of strong growth. In property, elevated loss activity, including $50 billion of insured losses from severe convective storms, higher reinsurance costs and retentions of risk, persistent inflation and ongoing focus on insurance to value make for a challenging market. These factors are continuing to drive flow of new business into the E&S market. We continue to see the E&S market respond well, yet with continued discipline and tighter limit management especially around coastal property, wildfire and flood, along with increased concern of earthquake risk.
Given heightened frequency and severity of property losses, particularly in coastal areas, and more recently in the Midwest, we believe risks will remain in the E&S market. This will drive recurring opportunities for talented experts to deliver critical solutions to our trading partners and placing these complex risks. We believe property should continue to be a strong driver of growth for Ryan Specialty in 2024, driven by sustained flow into the channel and continued yet more stabilizing rate increases. Our casualty practice had another strong quarter, driven by flow into the E&S market in both primary and excess casualty, particularly for habitational risks, health care, transportation, sports and entertainment and consumer products. Our transportation practice saw another quarter of strong flow difficult loss trends driven by both economic and severe social inflation are driving carrier need for continued rate increases, a pullback in underwriter appetite and market exits.
These casualty classes are experiencing higher loss trends driven by economic and social inflation reserving issues due to the long tail nature and latency in claims, plus higher reinsurance costs. With our world class technical expertise and deep bench, we are perfectly positioned to execute and deliver value for our clients, particularly in a more unpredictable market. We are optimistic that casualty will be a strong contributor to our 2024 performance. Overall, it was a great year for our wholesale brokerage specialty. The team remains committed to delivering innovative strategies and products to meet the ever changing needs of the marketplace for our clients and we are well positioned to generate consistent, profitable growth. Now, turning to our delegated authority specialties which include both binding and underwriting management.
Our binding authority specialty had another excellent quarter driven by key contributions from our high caliber talent and new proprietary products which make for a seamless experience for our clients on small but tough to place commercial P&C risks. We continue to see the consolidation of panels and binding authority as a long-term growth opportunity and we remain well positioned to capitalize on that opportunity. Our underwriting management specialty performed very well in the quarter led by property and casualty and our reinsurance MGU, Ryan Re. We are proud to deliver another year of increasing underwriting profitability for our carrier trading partners despite multiple adverse market events. We also look forward to the addition of Castel pending regulatory approval in the UK, which will add top decile talent, expand our international footprint, make us stronger in markets such as the UK and Europe, and position us well to accelerate our international expansion.
As Pat mentioned, we made significant progress with respect to our acquisition strategy in 2023. Focused execution on the right transactions will enable us to further grow alongside our clients evolving needs and ensure our ability to sustainably grow our platform over the long term and perform over economic cycles. Turning to price. The hard market conditions, including firm or accelerating pricing have continued into early 2024 in the majority of our business lines. Exceptions remain in public company D&O and cyber. As we've noted before, in any cycle, 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 fourth quarter. Thank you.
Jeremiah Bickham: Thank you, Tim. In Q4, we grew total revenue 22.5% period-over-period to $533 million, fueled by another strong quarter of organic growth at 16.0%, and contributions from M&A, which added over four percentage points to our top line. Growth was driven by the ongoing tailwinds in much of the E&S market, strong renewal, retention and our ability to win substantial amounts of new business. Adjusted EBITDA for the fourth quarter grew 24.6% period-over-period to $159 million and adjusted EBITDA margin improved 50 basis points to 29.8%, driven by another quarter of strong revenue growth and higher fiduciary investment income, which was partially offset by continued investments in our business. Adjusted EPS grew 29.6% to $0.35 per share.
Our full year 2023 results were excellent. For the year, we grew total revenue 20.4% to $2.1 billion, driven by organic growth of 15% and contributions from M&A, which added three percentage points to our top line. We grew full year adjusted EBITDA 20.7% to $625 million and expanded adjusted EBITDA margins by 10 basis points to 30.1%. Adjusted EPS grew 20% to $1.38 per share. Turning to our ACCELERATE 2025 program, we had approximately $12 million in charges for the quarter and $48 million in charges for the year. We continue to expect cumulative special charges of approximately $90 million under this program and expect annual savings of approximately $50 million in 2025. We expect approximately half of these savings will be realized in 2024.
As Pat noted in his remarks, M&A remains the top priority in terms of allocating capital. That said, as a result of the financial flexibility that our business model provides, the Board declared a one-time special cash dividend of $0.23 per share and initiated a regular quarterly dividend of $0.11 per share on our outstanding Class A common stock. Both the special and regular quarterly dividend will be payable on March 27, 2024 to stockholders of record as of the close of business on March 13, 2024. More information on the attribution of the dividend can be found in our earnings release and will also be presented in our Q1 10-Q. As we initiate our dividend and add this new facet of capital management to our arsenal, it is important to note that we will continue to execute on our robust M&A pipeline, maintain our strong balance sheet and stay within our stated leverage corridors.
We remain committed to being good stewards of capital both through our M&A strategy and our dividend policy in order to deliver long-term sustainable shareholder value. As Pat mentioned, we remain firmly committed to our successful long-term strategy. One, organically investing in our business to support sustainable and profitable growth. Two, executing on our disciplined M&A strategy with high quality acquisitions. And three, maintaining our strong balance sheet while returning excess cash, all of which create value for shareholders. Looking forward, we will continue making strategic investments 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 and includes the recent repricing of our term loan of approximately $120 million in 2024. As Pat and Tim mentioned, we continue to be excited about our long-term growth opportunities and value proposition. As a result, we are guiding full year 2024 organic revenue growth to be between 12.0% and 13.5%. We believe our broad-based growth will be driven by our exceptional talent, including our outsized investments in 2022 and the benefits of prior year M&A as we lap 12 months of ownership, exactly as Pat has signaled in many of our prior calls. In addition, we are guiding adjusted EBITDA margin for the full year 2024 to be between 31.0% and 31.5%.
We expect to recognize approximately half of the $50 million in annual run rate savings from ACCELERATE 2025 this year, with the majority of those savings falling to our bottom line. Those savings will be paired with a return to underlying annual margin expansion in our business. In summary, we are very pleased with our 2023 performance and remain excited for both our near- and long-term prospects. Our dynamic and differentiated business model continues to position us well to best serve our clients and to deliver the innovative solutions that our clients have come to expect as a hallmark of Ryan Specialty. With that, we thank you for your time and would like to open up the call for Q&A. Operator?
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