Ryan Specialty Holdings, Inc. (NYSE:RYAN) Q1 2024 Earnings Call Transcript May 3, 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 First Quarter 2024 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.

Pat Ryan: Good afternoon, and thank you for joining us to discuss our first 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. The first quarter represents a very strong start to the year. Our momentum throughout 2023 carried right into our excellent first quarter. We generated excellent top and bottom line results and made long-term sustainable investments in our business to fortify our competitive position. Revenue of $552 million, represents growth of 20.6% year-over-year, driven by organic growth of 13.7% on top of the strong growth we posted in the first quarter of 2023.

Growth was broad-based across our Specialties, a significant new business production and a meaningful contribution from our recent acquisitions. We grew adjusted EBITDAC 25.8% to $157 million. Adjusted EBITDAC margin expanded 120 basis points to 28.5% reflecting the benefits of our ACCELERATE 2025 program and underlying margin improvement. Adjusted diluted EPS grew 34.6% to $0.35 per share. Our results clearly reflect our formidable value proposition of differentiated talent and niche specialization. We continue to outperform the competition as reflected in our strong new business growth. We captured broader E&S tailwinds and capitalized on specific areas of accelerated growth. Property continued to be very strong even on top of a great prior year.

Casualty was also a significant contributor and we saw a strong acceleration in growth year-over-year. Overall, I'm very pleased with our performance in the quarter. Our industry-leading team's dedication to delivering better value and service for our clients is unmatched. Turning to the market, trends remain positive. We continue to believe the E&S market will consistently outpace growth in the admitted market, overshadowing any cyclical shifts in certain lines with respect to submission, flow and pricing. We continue to believe secular changes are driving most of the growth that we're seeing in the E&S market. Now turning to M&A. We have completed our acquisition of Castel Underwriting Agencies. Through this transaction we bolstered our delegated authority offering by adding top talent and differentiated intellectual capital.

We also significantly enhanced our UK and European footprint and set the stage to accelerate our international expansion. We're pleased to have the Castel team on board and we look forward to integrating this great business in the Ryan Specialty. Further on the M&A front our outlook remains ambitious. Our pipeline continues to be robust including both tuck-ins and large deals. As we previously noted, our overall strategy is aligned around the evolving and growing needs of our clients and our trading partners to continue providing a dynamic value proposition. We are committed to expanding our total addressable market within specialty insurance, particularly with targeted investments in delegated authority benefits and alternative risks as well as deepening our considerable moat by enhancing our scale, scope and intellectual capital.

We only move forward when all of our criteria for M&A are met. Each acquisition must be a strong cultural fit, strategic and accretive. Turning to talent. Our people remain our greatest asset. We successfully onboarded new colleagues adding to our world-class team through the first quarter. We believe that these important investments across our specialties will drive our firm's future prospects and will position us to grow for decades. We believe our commitment to constant innovation and ongoing investment in talent has enabled us to consistently achieve industry-leading organic growth. Now turning to ACCELERATE 2025. As we continue to execute on the program, we identified additional opportunities to drive continued growth and innovation, deliver sustainable productivity increases over the longer term and accelerate margin improvement.

We now expect to generate annual savings of approximately $60 million in 2025 with cumulative special charges of approximately $110 million through the end of 2024. These investments will both enhance and scale up our operating model enabling us to move faster resulting in lasting benefits to our clients. We are creating platforms and systems that are capable of handling significant future organic and inorganic growth. Looking ahead the second quarter is off to a strong start and we are encouraged by continued momentum across each of our specialties. I'm confident that 2024 will be an outstanding year for our firm. We believe our growth will continue to be driven by secular factors such as increasing risk and complexity. Retail brokers becoming larger through solid organic growth and M&A as well as panel consolidation, adding to this is our unique competitive position with strategies and high-growth businesses, our ability to innovate with new product development and the expansion of our total addressable market.

We remain confident these trends are sustainable and supportive of our growth for the foreseeable future. As always, I want to thank our entire team for their dedication in once again delivering excellent performance and adding value for our clients, trading partners and ultimately our shareholders. I'm pleased to turn it over to Tim. Tim?

Tim Turner: Thank you very much, Pat. We had a very strong start to 2024 across our specialties. Our entire team remains determined to sustain that momentum throughout the year. Diving into our specialties. Our Wholesale Brokerage specialty generated strong growth. Our property practice had a great quarter even on top of a great prior year. The property market continues to be impacted by elevated levels of attritional and secondary perils including severe convective storms, more retention of risk and moderating yet persistent inflation driving up loss costs. With expectations for a year of an above-average number of hurricanes and other named storms, we expect concerns for large loss events to be top of mind for the industry.

Add to this, growing property exposures in both high-value concentrations and areas of higher catastrophe risk like floodplains, coast and wildfire prone areas. We believe we will continue to see an increase in the frequency and severity of losses. And all of these factors are driving continued flow of new business into the E&S market and high retention as risks remain in our channel. At the same time, our deep bench of talented professionals is successfully navigating this dynamic environment through our laser focus on continuously providing value to our clients, we believe we continue to win market share from our competitors. We continue to believe property will be a strong driver of growth for Ryan Specialty in the quarters ahead. Even as we lap last year's excellent quarter, our casualty practice had a fantastic quarter.

More broadly, the market has seen an increasing number of casualty classes face higher loss costs. Notably an acceleration of social inflation, marked by increased frequency and more prolonged cases, higher settlements, judgments and nuclear verdicts amplified by litigation finance. A protracted impact from recent reserve charges on the 2015 to 2019 accident years, as well as rising uncertainty in reserve adequacy of more recent years and the continued pullback in risk appetite from the admitted market in certain E&S lines like construction. This unpredictability requires specific industry and product level knowledge, thanks to our world-class technical expertise and deep bench, we are perfectly positioned to execute and deliver value for our clients.

We are confident that casualty will be a strong contributor to our 2024 performance. Overall, our wholesale brokerage specialty team remains committed to delivering innovative strategies and products to meet the ever-changing needs of our clients. Now, turning to our delegated authority specialties, which include both binding and underwriting management. Our binding authority specialty had an excellent quarter. Through our high-caliber talent and new proprietary products, we offer a seamless experience for our clients who have small but tough to place commercial P&C risks. We continue to believe the consolidation of panels in binding authority remains a long-term growth opportunity and we are well-positioned to capitalize. Our underwriting management specialty also performed well in the quarter led by property and casualty and meaningful contributions from our recent acquisitions.

As Pat noted, we are excited to officially onboard Castel to the Ryan Specialty family, which adds to our top docile talent, expands our international footprint, makes us stronger in the UK and Europe and positions us well to accelerate our international expansion. Turning to price. While we continue to experience various micro cycles across insurance lines more broadly, we see two important trends; property is seeing a period of pricing stabilization after years of large increases, and casualty due to the trends mentioned earlier is seeing an acceleration in pricing across an increasing number of classes. Across both of these major industry classes, there remains heightened uncertainty in the loss environment. This is driving more risks into the E&S marketplace as it offers significantly more freedom of rate and form and the ability for insurers and underwriters to adjust pricing and the terms and conditions of coverage more quickly.

As we've noted consistently in any cycle as certain lines are perceived to reach pricing adequacy, admitted markets tend to step back in on certain placements. However, this is still not playing out and the standard market is not meaningfully impacted rate or flow in the aggregate. We are well-positioned to assist all our trading partners navigate an ever-changing insurance landscape. 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 first quarter. Thank you.

Jeremiah Bickham: Thank you, Tim. Before getting into our results for the quarter, I want to discuss the change highlighted in our press release. Beginning this quarter, the company is modifying its method of calculating organic revenue growth. This revised calculation methodology is an improved representation of our core business performance as it now completely removes fiduciary investment income and contingent commissions from the current and prior year period, whereas, before we only excluded the change in fiduciary income and contingent commissions between periods. Of course, the new calculation continues to exclude the impact of M&A and FX from the current year. This formulation is a more widely used calculation methodology and as a result, we are providing additional revenue disclosure that we believe investors will find very useful.

Now, turning to the quarter. In Q1, we grew total revenue 20.6% period-over-period to $552 million fueled by another very strong quarter of organic revenue growth at 13.7%. And contributions from M&A, which added nearly seven percentage point to our topline. Growth was once again driven by very strong renewal retention, ongoing tailwinds in much of the E&S market and our ability to win substantial amounts of new business. Adjusted EBITDAC for the first quarter grew 25.8% period-over-period to $157 million. Adjusted EBITDAC margin improved 120 basis points to 28.5%, driven by another strong quarter of revenue growth, partial savings from ACCELERATE 2025 and underlying margin improvement in the business. Adjusted diluted EPS grew 34.6% to $0.35 per share.

In the quarter, we returned capital to shareholders through our first dividend, including both a special and a regular quarterly dividend. Earlier today, our board declared a regular quarterly dividend of $0.11 payable later this month. Turning to our ACCELERATE 2025 program. We had approximately $29 million in charges for the quarter, bringing our total to date to $77 million. As Pat noted, we found additional opportunities to drive more efficiencies and greater savings. We now expect cumulative special charges for the program of approximately $110 million through the end of 2024 and expect annual savings of approximately $60 million in 2025. We expect approximately half of these savings will be realized in 2024 with the majority of those savings falling to our bottom line.

Those savings will be paired with an underlying margin expansion in our business that we expect in most years, including 2024. Based on our current forecast, we expect to record GAAP interest expense, which is net of interest income on our operating funds of approximately $32 million in Q2 and $123 million in 2024. Our adjusted effective tax rate was $0.261 [ph] for the quarter. Based on the current environment, we expect a similar tax rate for the remainder of 2024. Now, turning to guidance. Under the legacy method for calculating organic revenue growth, we are maintaining our full year 2024 guidance for organic revenue growth. Now, adjusting solely for the modified methodology, which we will be reporting under going forward, our revised guidance for the full year 2024, is now between 12.5% and 14.0%.

In addition, we are maintaining our adjusted EBITDAC margin guidance of 31.0% and 31.5%. In summary, we are pleased with our very strong first quarter performance, as we grew market share in several of our businesses, invested in talent, products and technology, all while expanding margin. Moving forward, we will continue to organically invest in our business to support sustainable and profitable growth. We will continue to execute on our disciplined M&A strategy with high-quality acquisitions and we will maintain our strong balance sheet while returning excess cash, all of which should create long-term sustainable value for shareholders. Our dynamic and differentiated business model continues to position us well to serve our clients and 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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