Ryan Specialty Holdings, Inc. (NYSE:RYAN) Q2 2023 Earnings Call Transcript

Ryan Specialty Holdings, Inc. (NYSE:RYAN) Q2 2023 Earnings Call Transcript August 6, 2023

Operator: Good afternoon, and thank you for joining us today for Ryan Specialty Holdings’ Second 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 rryanspecialty.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. 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 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 second quarter results. With me on today’s call is our President, Tim Turner; our CFO, Jeremiah Bickham; our CEO of Underwriting Managers, Miles Wuller; and Nick Mezick from Investor Relations. Ryan Specialty had a great quarter with strong momentum continuing across all of our strategic financial and operational objectives. We grew total revenue of 19.1% led by organic growth of 16.1%, building on the 22.3% organic growth in the second quarter of 2022. We also achieved double-digit growth in adjusted EBITDAC and adjusted net income on a year-over-year basis. We saw broad-based strength across our specialties, particularly in property and in many individual lines of business.

The specific headwinds we noted on our prior calls were in line with our expectations and partially offset some of the very strong tailwinds we experienced in property. Overall, I’m very pleased with our performance in the quarter and throughout the first half of 2023. In addition to delivering great results, we continue to execute on our M&A strategy. In July, we completed 3 attractive and strategic acquisitions, which added scale and scope to our Wholesale specialty and lost our benefits practice. The first is Socius Insurance Services. Approximately $40 million of annual revenue Socius adds high-quality talent to our professional lines and cyber teams and deepens our scale and scope in key hubs like San Francisco, Tampa and Miami. We are confident in the outlook for this business, given our long-standing familiarity with the team and our proven ability to help firms grow on our platform through our relationships with the top 100 retail brokers access to our proprietary products and expand carrier relationships.

We also completed 2 employee benefits acquisitions. Point6 Healthcare and ACE benefit partners, adding just under $10 million of annual revenue. These firms provide exceptional talent and foundational capabilities for Ryan Specialty Benefits. We have diligently assessed opportunities in the benefits market, targeting firms that have a track record of both growth and long-term margin greater than the industry average. And these medical stop-loss focus firms are perfectly aligned with those attributes. Medical stop-loss insurance plays the vital role by smoothing the volatility in health care spend through reinsuring a self-funded benefits plan against high-cost claims. We expect medical stop-loss insurance to continue to play a crucial role in financing and risk mitigation strategies, particularly as health care innovation accelerate in high-cost drugs and gene therapies become more prevalent.

We are pleased to enter this niche that boasts over $25 billion in premium in the U.S. with a 12% compound annual growth rate since 2014. We believe there is a long runway for both organic and inorganic growth in benefits and are excited to have these capabilities to our specialties. Further on the M&A front, our pipeline remains robust. We remain disciplined in our pursuit of acquisitions, particularly in the current environment, as we will only move forward when all of our criteria are met. Each acquisition must be a strong cultural fit, strategic and accretive. We continue to make targeted investments during the quarter as we brought on additional talent to further enhance our current capabilities and develop areas where we anticipate our clients need us in the future.

These investments, particularly in the recruitment of new colleagues offer the greatest returns for our shareholders and are part of a proven winning formula to maintain our long-term growth prospects. That takes us to ACCELERATE 2025, our 2-year restructuring program announced earlier this year. We are making investments that will enable continued growth, drive innovation, deliver sustainable productivity increases over the long term and accelerate margin improvement. We have made solid progress in the second quarter, which Jeremiah will discuss further. We remain on track to generate a targeted annual savings of at least $35 million in 2025 with cumulative special charges expected to be at least $65 million through the end of 2024. Throughout the second quarter, the E&S marketplace remained robust.

E&S continues to provide solutions that are otherwise not available for hard-to-place risks. As we previously noted, we’ve invested significantly in those lines where we see clear opportunities to grow in addition to bolstering the lines of business our clients need us the most. We’ve also continued to expand our ability to serve brokers, agents and carriers through innovation and creating alternatives to traditional insurance placements in areas like cat property and transportation. Looking ahead, we expect favorable specialty insurance market dynamics to persist, and we remain confident that 2023 will continue to be another strong year for our firm. We are in a prime position to capture broader E&S tailwinds and also further capitalize on our specific lines of accelerated growth.

Our differentiated business model allows us to remain ahead of the competition, and our flexibility enables us to quickly adapt and pivot when market conditions shift. We continue to expand our total addressable market through innovation and strategic acquisitions and further deepen our moat with scale, scope of intellectual capital. We’re able to do all of this because of our exceptional team, who consistently deliver impressive results and value for our clients trading partners and ultimately, to our shareholders. Now I’m pleased to turn it over to Tim. Tim?

Timothy Turner: Thank you very much, Pat. As Pat noted, it was another strong quarter across our specialties as we continue to successfully execute on winning new business and producing innovative solutions for our clients. The effects of industry trends such as climate change and natural disasters, accelerating social inflation and broad-based economic inflation happening concurrently with reduced insurance capital, a pullback in underwriter appetite and market exits make for an incredibly challenging insurance market. Additionally, continuous change in the loss environment and growing uncertainty in reserve adequacy is driving more risks into the E&S marketplace, which offers significantly more freedom of rate and form. Given our specialized and industry-leading team’s ability to navigate the complexities of the market, we plan to continue delivering for our clients and expect to further expand our market share.

Diving into our specialties. Our Wholesale Brokerage specialty generated another quarter of strong growth. In property, elevated levels of attritional and secondary perils, including severe convective storms and persistent inflation from higher cost of materials and labor shortages are driving up loss costs. Additionally, market conditions, including higher reinsurance costs, reduction in available capacity and ongoing requirements for proper valuations are driving higher retentions of risk and ultimately more volatility into the U.S. direct property market. These factors are continuing to drive flow of new business into the E&S market. The E&S market is responding, yet it is also experiencing more conservative appetites, significant rate increases and tighter limit management, especially on coastal property, severe convective storms, wildfire, flood and earthquake risk.

We are well positioned to assist our clients in navigating the complexities of this market. Our A+ team of experts are working tirelessly to bring important and creative solutions to our retail brokers and trading partners in this challenging market. Our transportation practice continued to see substantial flow in the quarter fueled by social inflation, carrier need for continued rate increases and a pullback in underwriter appetite and market exits. We continue to win more than our fair share of new business and remain well positioned to capitalize on additional growth opportunities. Our casualty practice also performed very well in the quarter. We continue to see higher loss trends, inflation and reserving issues, drive more flow into the E&S channel across both primary and excess casualty, particularly in lines like health care, habitational and real estate.

And as Pat noted, we completed the acquisition of Socius at the beginning of July, and are excited about the addition of new teammates who have hit the ground running and are a clear cultural match with Ryan Specialty. Overall, our Wholesale Brokerage specialty continues to successfully execute its game plan, and we see a long runway of consistent growth ahead. In our Binding Authority specialty, we saw another quarter of solid growth in traditional binding, which includes small commercial business and growth in personal lines despite continued capacity constraints. We continue to see further potential for panel consolidation as a long and steady growth opportunity, and we are well positioned to execute. Our Underwriting Management specialty also generated strong results led by continued steady and profitable growth in property and casualty and our reinsurance MGU, Ryan Re. We also launched our benefits practice with the acquisitions of Point6 Healthcare and ACE Benefit Partners.

Our team was extremely thoughtful in determining where we could best add value in this large and important market and medical stop loss is where we see a clear opportunity for rapid expansion within this fast-growing specialty niche. John Zern and his team are hard at work expanding our sales force in this practice. We look forward to updating you on the progress of benefits in the quarters ahead. As we had mentioned on our prior call and as Pat just noted, the specific headwinds in certain lines in the second quarter, namely public company D&O, lower external M&A volumes and transactional liability and delayed starts in construction remained in line with our expectations. We expect any growth benefit in these 3 lines to be modest in the second half of the year.

Turning to price. Through Q2, we remained in the prolonged stages of a historically hard market. 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. Exceptions remain public company D&O and cyber where we saw further pressure as with all cycles. As pricing continues to increase and certain lines are perceived to reach pricing adequacy, we see admitted markets step back in on certain placements particularly within large towers. But overall, we still have yet to see the standard market meaningfully impact 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 Specialties 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 second quarter. Thank you.

Jeremiah Bickham: Thank you, Tim. In Q2, we grew total revenue 19.1% period-over-period to $585 million fueled by another strong quarter of organic revenue growth at 16.1% as we continue to benefit from the ongoing tailwinds in much of the E&S market, particularly property, broad-based strength in many of our individual lines and our ability to win substantial amounts of new business. Net income for Q2 ’23 was $84 million or $0.26 per diluted share. Adjusted net income for the quarter was $124 million or $0.45 per diluted share. Adjusted EBITDAC for the second quarter grew 16.9% period-over-period to $194 million, while adjusted EBITDAC margin declined 60 basis points to 33.2%. Our EBITDAC margin was impacted by continued investments in our business, including last year’s hiring and T&E continuing to return to normalized levels, both of which were partially offset by higher fiduciary investment income.

Turning to our ACCELERATE 2025 program. We had approximately $17 million of charges in the quarter as the program was able to move into full swing, slightly ahead of schedule. We remain well on track to generate annual savings of at least $35 million in 2025 with cumulative special charges projected to be at least $65 million through the end of 2024. As Pat noted, we also continued to make targeted investments in the quarter, adding underwriting and broking talent to our ranks and expect consistent recruitment efforts to continue in the back half of the year. The cost of these investments, along with the annualization of our 2022 headcount growth, will continue to impact margin but will be partially offset by increases in fiduciary investment income.

These investments in talent, particularly recruiting new colleagues, offer the highest returns for our shareholders and are part of a proven winning formula to maintain 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 Q3 and $29 million in Q4. As a quick reminder, we paid for our 3 most recently announced acquisitions at the beginning of Q3, which reduced our operating funds relative to the 6/30 balance sheet. We are now guiding organic revenue growth rate for the full year 2023 to be between 13.0% and 14.5%, up from our previous guide range of 10.5% to 13.0%. We are maintaining our full year adjusted EBITDAC margin guidance range of 29.0% to 30.0%.

In summary, it was an excellent second quarter and first half performance by Ryan Specialty. We remain very excited for both our 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: [Operator Instructions]. The first question we have is from Elyse Greenspan of Wells Fargo.

Elyse Greenspan: My first question is on the updated organic growth, right, 13% to 14.5%. You guys were 14.6% for the first half of the year. And it sounds like there will still be some impact of the headwinds in the second half, but we are annualizing them. So why wouldn’t organic growth be stronger in the back half, or is there just some level of conservatism built into the guidance update?

Jeremiah Bickham: Hi, Elyse, thanks for the question. So first off, I just want to acknowledge, we had a very good quarter that we’re quite proud of and really the end to a very solid first half of the year. As you noted in our prepared remarks, we got a big boost from property this quarter. And because seasonally, Q2 has the highest amount of property and property cat business in our portfolio, that’s why. And thus, we are expecting less of a lift from property in the second half of the year. But otherwise, we’re implying that H2 will play out very similarly to H1, which means strong growth across the board, including double-digit growth contribution from our very balanced casualty portfolio as well. So overall, we feel great about where we’re headed in H2, and we’re very confident we can land within our increased organic growth guide range, which we feel would represent another very solid year for Ryan Specialty.

Elyse Greenspan: And then so Q2 — Jeremiah, staying there for a second, Q2 I know you guys have said is the highest property concentration quarter. Of the other 3 quarters, are they all pretty close from a property perspective or would one stand out as having a higher concentration next to the second quarter?

Jeremiah Bickham: So Q2 is far and away the largest. And if you’re just looking at percentage attribution of business, it doesn’t even tell the whole story because not only does it have the highest overall property contribution but it’s the highest cat property quarter of the year by far. The next highest is Q4, but we did experience a benefit in the last couple of weeks of Q4 from property rates surging. So we’re not counting on the exact same growth in Q4 proportionately as we would a quarter like Q2 if that makes sense.

Elyse Greenspan: That does make sense. And then in terms of the M&A pipeline, you guys highlighted some of the activity during the quarter. How does the rest of the pipeline look, just in terms of other potential deals out there?

Patrick Ryan: Thank you, Elyse. The — it looks good. As I said, it’s a robust pipeline. We are in discussions on additional benefits opportunities that will help round out our offering to our clients, add some significant new management talent and production talent. There’s no way of knowing when, but it could be quite soon. We’re in serious discussions.

Operator: The next question is from Weston Bloomer of UBS.

Weston Bloomer: My first question is on the margin guidance. You raised the full year organic that left the margin unchanged. Can you just talk to the types of investments you’re making in the back half of the year and maybe what impact you’re expecting within your margin guidance around normalization of T&E or wage inflation or other investments?

Jeremiah Bickham: Yes. Thank you, Weston. So as we said for multiple quarters now, the biggest impact to our margin at the moment is our outsized hiring activity from last year, which we know is the right investment for our long-term growth prospects, and we’re really confident we’ll pay off in the long term. And with regard to the guidance, I mean, a quarter like Q2, 33.1% adjusted EBITDAC margin, it — more than anything it makes us confident in our guide range and increases the likelihood that we’ll end up at the high end of that range. And again, just to remind everyone, we had 25% margins in 2019. So our model definitely scales. And next year, we won’t have the same margin impact from our hiring this year, so we feel very good about margin improvement as time goes on.