All right, I think we'll get started. Well, it's our pleasure to have the Ryan Specialty team here with us today. We've got Tim Turner, President, Jeremiah Bickham, CFO, and Miles Wuller, President and CEO of Ryan Specialty Underwriting Managers. So I think to start it off, I'd like to first hand it over to Tim for some opening remarks about the business and key strategic priorities.
Thank you, Rob. Good morning, everyone, and welcome. Very nice to see everyone. The very first thing I wanted to share with you is that Pat Ryan couldn't be with us today. He got a real slight, mild case of COVID and couldn't travel, so he sends his regards. But, as most of you know from our earnings call a few weeks ago, we're having another outstanding year at Ryan Specialty. Everything you've been accustomed to seeing from us, double-digit organic growth, double-digit revenue growth, lots of momentum, lots of tailwinds, very few headwinds, which we'll talk about. Our strategy from M&A, to recruiting, to developing talent, to building out practice group verticals and high-hazard niches in property and casualty, continue to work very effectively for us.
Our benefits division is well on its way now, with the foundation laid, the leadership in place. We continue to see a very long runway and opportunity in the benefits side of the business. Very, very few deceleration points, which we can talk about. It's mostly super positive. As I'm sure you've heard in the industry, long-tail, high-hazard casualty business has reared its head. It's doing a lot of damage to the balance sheets of lots of P&C companies in North America from the 2016-2019 accident years. And that, of course, pushes more business into the E&S market, and we're ready for that. High-hazard casualty business is a very large part of our division, not just in broking, but in the underwriting side. So we have lots of proprietary product there.
We have lots of breadth and depth in broking and underwriting in those higher hazard casualty segments. The cat property world, as you read about, we had a kind of a quiet wind season, but that's really just a part of that whole challenge, if you will. We're yet to see the convective season, we're yet to see the flood, the impact of flood, and certainly quake has been quiet. But all of these perils really drive a lot of business into the E&S market, and we continue to see that push for our services and our products in cat property. We don't see a let-up. We'll get another look at the treaty renewal season on 1/1, but we don't think that is going to have a traumatic impact at all on capacity or the appetite of the standard market.
So we're geared up to see more flow in cat property as we go into 2024. But again, our strategies, our panel consolidation strategies, our ability to get clients to consolidate their use of intermediaries and use us more frequently, that's all working very well. With most retail brokers in North America, you know, we're seeing double-digit growth. So we're capitalizing on the new flow, but maybe equally important, we're capturing market share from our competitors, and we know that because our clients share that data with us. So it's our strategies are working well. Our delegated underwriting authority platform, led by Miles, is really working efficiently. Working in unison with the brokerage practice group verticals, some cases direct with retail brokers.
But those solutions, when you look at them, and those different MGUs, programs, and binding authorities, are all aligned and designed specifically for these practice group verticals. So we can bring brokerage solutions to our clients, but we can also add capacity, and we can bring in proprietary underwriting solutions right behind it. That's a big part of our design, and it's working very effectively. And then maybe lastly, a quick update on our alternative risk strategy. Real big part of our unique strategy. We have that joint venture with Nationwide, so we have our own paper. We can take a tiny little bit of risk. We can attract and build products much quicker. Our speed to market today is a lot faster than it was even a year ago.
And maybe, I could use Verdant, our high-net-worth, personal lines facility, as an illustration of that. That market obviously got very, very hard. Not just coastal wind, but wildfire drove a lot of personal lines business into the E&S market. You read about it all the time, the dumping and the shedding of auto and personal lines, but the high net worth is a, is a very special segment of that business, a very, very large part of personal lines, and that's a capacity play. You've got to be able to write wildfire. You have to be able to write coastal wind on those books. They need a lot of limits, and that capacity has shrunk. So we built a facility, it's up and running now, and we're quoting and binding in the month of December.
With that, love to open it up for any questions. Rob, thank you.
Yeah, awesome. So maybe just a broad question to begin on the E&S market. So we've passed the $100 billion in annual premium threshold. The market is on pace to grow double digits for the sixth consecutive year. Can you give us some perspective on the sustainability of this growth and the primary drivers of growth going forward?
Well, we believe that that E&S business, most of it is here to stay. You know, we've talked about these structural changes and secular changes and how non-admitted P&C solutions are distributed in North America, and they continue to play out to this day. It starts with the companies. 10, 15, 20 years ago, there were a handful of wholesale-only distribution companies in North America. Today, there's over 100. And that, those distribution lines that are dedicated to wholesale distribution and P&C are really the backbone of our ability to distribute more solutions and to solve more problems for our clients. But that's part of the story. The other part of it is the technical capabilities of the industry have changed dramatically. So there used to be one or two great medical malpractice brokers in a typical wholesale shop. Now there's 100, right?
The teams are bigger, they're stronger in all these technical, high-hazard property and casualty segments. So unless you're a big global broker, most of those retail brokers don't have the resources to handle a lot of these highly technical, specialized segments of business. And so we've built our practice group model around those needs and solutions, and the carriers have responded to that. So those distribution lines are very strong, they're very broad, and they're very deep, and we believe that most of it is here to stay. Of course, knowing that rate adequacy, when lines of business become more profitable, standard companies will take some of that business back. But that's really a very small part of the story. Most of that business is very technical.
They need our capacity, they need our skills and our horsepower behind these placements, and we see a continued double-digit growth opportunity.
And so I think you just touched on it a little bit, but, so, so on the flip side, you know, do you see any risk to sustained E&S market growth? And are there any lines in particular that you're seeing the admitted market start to ease back in?
We don't. I mean, we're very aware of the historical cycle, but we've, as I said, we believe that's changed dramatically, and most of it for good. But will there be classes of business that get rate adequacy and the losses continue to dissipate and the standard markets take some of them back? That, that'll happen. We, you saw that with public D&O, you saw that with cyber. You know, those are two claims-made classes of business. And so the tail on that, with retro dates, are a little easier for carriers to manage. They can come in and out of those lines a little faster. But that's an outlier. We don't see anything on the horizon right now that has that kind of volatility in its ability to migrate back into the admitted market.
Got it. And maybe switching to pricing, the latest data we've seen kind of shows relatively stable overall pricing, but with property accelerating and professional lines being a little bit weaker, casualty pricing seems like it could be re-accelerating and could be a benefit to Ryan Specialty in 2024. So I was hoping you guys could give us some color on the pricing trajectory going forward.
I'll certainly offer a few comments from the broking side of the house, and then maybe Miles could give you some commentary on the underwriting side of it. You know, rate is a very confusing thing in our industry, because filed rates and forms are how the standard market, you know, survives, and they thrive in that environment. They have to deal with 50 individual state regulatory bodies, and they can't do anything without approval. It slows the process down. They can't get adequate rate terms and conditions fast enough when a class of business gets very difficult. And so rate is a very significant part of their metrics and their modeling. E&S, it's the co- to the contrary. It's more about the structure of the deals. It's more about attachment points. It's more about terms, conditions.
A lot more handcrafting that goes on there because it's the freedom of rate and form. So it's really hard to apply a rate metric to that business. That's why flow and the opportunities that come into the channel become so important. And of course, you monitor that, we monitor that. That, that continues to grow. It's growing faster in certain high-hazard niches. There's some moderation in others, but overall, we continue to see tremendous growth coming into the E&S market, and maybe again, more so, our ability to capture that business and to compete head-to-head with our competitors to get market share. Miles?
Yeah. Well, look, specifically, Rob, of you know, part of our thesis of why E&S has been growing and so successful is you have continued real inflation, social inflation, climate change. Then you also have a less measured but understood phenomenon of geographic concentrations. People are moving to the coast, right? So, even though this year was a somewhat benign southeast wind year, it doesn't change the fact that the four or five years prior were under pressure for a lot of carriers. So we anticipate firmness in property. I think we're early doors of increasing awareness of the need for casualty strengthening across the industry.
So we're bullish that we see that firming in place, and as Tim said, we see increased at-bats still as business is coming into the channel. But as we build incremental solutions and products, and others are stepping back from certain classes, we're the beneficiary of those opportunities.
Got it. And, so for Ryan specifically, organic growth has directionally trended with the E&S market over the last several years, and the message has been that organic growth can be sustained in the double-digit range annually, for the foreseeable future, regardless of the market environment. So can, can you walk us through what gives you confidence in that floor, and maybe what could be the upside drivers to achieving more than that?
Yeah. Yeah, why don't I take a stab at that?
Sure.
So, what we've said all along is that our exceptional growth, and that means double digits plus, is not dependent on rate. We've had everyone's had a lot of benefit of rate in the last couple of years, and that's how you get from sort of a double digit, a low double-digit baseline up into the high teens or the 20s. We've been really upfront since we've been talking to you as a public company. The current market dynamics are not gonna last forever, but what we do expect next year and beyond is healthy growth in the E&S market. And what we've done historically is we've been able to out-index that market, take market share. And a couple of the ways we do that: so we are a destination of choice for the top talent in the industry, and so when we bring in...
You know, our organic growth is not just the same people year-over-year, it's new people that come into the organization. When they bring their books, when they build a practice, that counts as organic growth, too. We are really, really adept at winning in the war for talent. So that's one avenue. Our clients, the things, the strategies they pursue, are a benefit to us as well. We don't think that retail broker roll-up is going anywhere anytime soon, and as they bring smaller firms into their ecosystem, into the panel strategy ecosystem, they are accumulating clients for us in a way. So that's a sustained benefit for us. Panel consolidation, we've been talking about it for years. It's been in place for over a decade.
There's still we believe there's still a lot more work to do, even in the large retailers that have had strategies in place for a while, in pushing it down into the organization and really optimizing it. So that's gonna be a benefit for us for years to come as well. And then, you know, Pat talks about it all the time, too. We have a really we've been historically effective at anticipating market changes and then expanding our TAM through innovation and going places like alternative risk, that Tim touched on, and then wholesale employee benefits. Those are growth opportunities beyond just the traditional E&S market, which we think is gonna be healthy for years to come.
Looking ahead, as, you know, Tim touched on a lot of these elements in his opening remarks, we are really excited about top line and also profitability growth opportunities in 2024 and beyond.
On that, the benefits space, Ryan has made three acquisitions in the employee benefits space this year, and I think there's aspirations to build a higher-than-average quality business in that space. Can you talk about the near-term execution strategy for growing those businesses and give us some sense around the longer-term opportunity?
Yep. I'll take this one, too.
Sure.
So when we say higher than average, what we mean is long-term, higher-than-average margin for businesses in this area of the market. And like every acquisition and growth aspiration, it's double digits plus, so you are correct on that. Two things on benefits specifically. It is both an inorganic and an organic opportunity. Our foray into employee benefits has been all inorganic to date. There is still more opportunities to grow in that channel going forward. The other critical thing for everyone to understand, in the P&C world, there is a defined, a definitional wholesale space. Like in E&S, there is a wholesale channel. In employee benefits, there's not a definitionally wholesale or E&S space segment. It is wholesale when we do it because, like on the P&C side, everything we do is through a retailer.
Our clients are the retailers, not the insureds. What we've realized is that we have a large number of retail clients who are P&C specialists. For a number of different reasons, they don't have employee benefits in-house, and there's an opportunity there because we have existing relationships. If we can deliver to them a solution that gives them an outsourced employee benefit solution that they can deliver to the insured, like, that's a win for both of us. In the specific place we wanna play, there's been a trend over the last 10 years really towards increased self-funding of employee benefits insurance. Where it used to be the case that you'd have that conversation as an employer when you had a 1,000 live plans.
That became 500, and now people are looking at that and executing on that at as low as 100 live plans. So if we can take a self-insured funding mechanism, and so that could be self-insurance, it could be a captive, it could be a group captive strategy, bundle stop-loss on top of that, pharma solutions, cost containment, other, you know, comprehensive, integrated, like, health package solutions that the retailer then can white label and deliver for their client. We think that there's a we know that there's a huge need for that, and if we focus on the self-funded part of the market, it's gonna be a growing market, a double-digit growing market over the foreseeable future.
And then there's a huge need within our existing client base, that we just need the capabilities to deliver, but we're on our way.
All right, switching to the M&A market, can you give us an update on the M&A pipeline, and maybe in particular, some of the areas where you're seeing some of those larger deals that you guys have hinted at in the past?
Sure, I'll start it.
Okay.
As Pat likes to say, our M&A pipeline is always robust, and even more specifically, it's full. I mean, we have a tremendous amount of opportunities. They're just at various stages of cultivation. Sometimes, the larger ones, especially, take years for us to align and to time when they're ready to sell. But today, I can assure you that there's a tremendous amount of opportunity in M&A. And so we look at that, and as we've talked about many times, we believe we're a destination of choice. That we've established a culture, we've established an industry-leading reputation, and so we're getting a lot of really good, strong looks on the M&A side. And then along with that, we never stop recruiting talent. You've heard us talk about developing talent and training.
You know, that's a fundamental in this business to be successful, to grow your own, to hatch your own young, talented underwriters and brokers. But you have to go beyond that. Today, as an example, and probably a good illustration of that, binding authority inside a delegated underwriting authority, one of the three main segments in delegated underwriting authority, is small commercial, and that's a really big part, significant part of Miles division. We, we've hired 96 individually talented, delegated underwriting authority, underwriters that were competitors this year. And so that goes unheralded. You don't see about that. You don't read about that. That's fortifying and strengthening these offices, the hub and spoke concept.
It's building enough depth and breadth so that when we RFP, as we've done in brokerage and capitalized on it in a big way, we have the talent and the depth and breadth to absorb, you know, big movements of business that we expect to come our way. And building product. You know, there's never enough product in binding authority and having a deep enough bench there. So we're continuing to do that. We look at the M&A strategy, of course, like others do, but it's augmented and strengthened by this individual recruiting and attracting of talent, existing talent, and that looks very strong, real long runway as we go into 2024.
And Rob, what we're interested in, as Tim alluded to, it's primarily delegated authority business, but there's also still wholesale brokers out there that are specialized enough to be strategically accretive to our platform. And they can be; it could be $5 million revenue shop, and it can be $100+ million revenue shop. It's primarily North America, but Canada, Continental Europe, the U.K., those are all markets where opportunities exist. And what Pat's been consistently saying and alluded to about the pipeline, we have a target list, a wish list, that is enough to more than exhaust all of our cash and leverage capacity right now. We're in talks with a couple of those opportunities on the larger side that could be more material than anything we've done in a while.
History would indicate timing uncertain, and you're not gonna get everything you want, but that belief, that firsthand, up close knowledge of really exciting strategic opportunities, is why we have been consistent about M&A being our number one capital allocation priority. That being said, as many of you know, the broker model yields so much cash, you know, other opportunities, in addition to M&A, over time, will make sense, will become available to us. Like, at some point, we'll be looking at, like, dividends in addition to M&A. We would do that only at a scale that didn't compromise our ability to execute on all the strategic M&A. But, you know, we're excited about what we're working on and what we're looking at now because there's a lot of strategically accretive targets out there right now.
All right, pivoting to cyber insurance. It's increasingly underwritten in the E&S market, and I think we've estimated that it's contributing 2% or more to total E&S market growth over the past couple of years. Can you talk about Ryan's cyber practice and if you think the E&S market will continue to be the right place to underwrite these risks?
Yeah, well, I'll cover this one from the delegated authority side. This is one of our great hallmarks, and I think what makes our MGA group special. So we identified the opportunity set, the market need, and the shortfall of talent 14 years ago. This is one of our first acquisitions on the MGU side, was a U.S. practice. It'll be 14 years in a couple of months. A few years in, we saw the global approach and opportunity set.
... and hired as an established leader internationally. So this is a global practice group. By design, we are servicing the large and complex part of the marketplace. And that, and that's really where E&S lives best. We're not here to be a price solution. We're here to offer structured outcome, form advantage, wording, exclusions. And so that is why E&S thrives for that space. I think we opened with it in the beginning, there has been a little bit of a little bit of pricing pressure on cyber this year. And part of that is because there have not been any major headline losses in the last year to Home Depot or otherwise. The reality is, the risk remains extremely real.
So a lot of major corporations, the risk managers, have made great investments in systems and technology and security. That's been great. The reality is, this year is on track to be probably the high water mark for ransomware attacks. Those don't get the same headline advantage, but the attritional losses through the business interruption coverages are immense, right? Because increasingly, this data, if it is recovered, it's sometimes damaged, or even if a ransom is paid, the data is not returned. So there is the losses are out there, even though the headlines have not been as materially or so prevalent. Pardon me. And so from an overall investment thesis, we still believe only 20% of cyber risk is insured in the U.S.
So back to what my colleague said about total addressable market, we're looking to identify places where we see, like, a structural need for growth. So, irrespective of fluctuations in pricing over the next five years, we see the potential for 20% type uptake as the cyber need is met.
Somewhat related, you have all talked about these micro cycles going on in various business lines, whether it's D&O in transaction services from a headwind perspective or property business from a tailwind perspective. How do we think about the magnitude of a normalization in some of these trends? And do you expect that these micro cycles is something that's going to continue going forward?
I think, I think you'll continue to see some micro cycle activity, but the macro factors are really what's driving it, and we don't see any change, unfortunately, in global warming and its impact in cat property. We'll continue to see big challenges, especially on large limits. No one is putting up large limits on cat property. It's all de-risking, and that feeds more business into the E&S market. They need those 100+ E&S markets to fill out the needs and the lines that, you know, the compulsory market really has to have. And in casualty, you read about it every day, you know, the latency and the long tail aspects of high hazard casualty business in North America are tremendous.
We've seen headlines in the last 60 days of companies that had to really have a painful revisit of the 14 through 19 accident years. That's where the damage was done. Underpricing, bad terms and conditions, you know, too much market share, excessive limits being put up. It's we're just starting to see the beginning of an unraveling of those, you know, leading high hazard segments of business and casualty. So we're geared up for that. We see the impact of social and economic inflation, the nuclear verdicts. I mean, you hear it day in, day out. Transportation, you know, look at the loss leaders in the reinsurance world. Nothing has done more damage to the balance sheets of standard companies than transportation. You know, we built a multi-billion-dollar broking and underwriting platform in transportation.
Everything from long-haul trucking to livery to shared economy, you know, that's all pouring into the E&S market. So I see the macro factors really driving, much more volume into our channel.
Maybe a question on retail broker E&S penetration. There's some data that shows retail brokers have increased their market share in the E&S channel over the last few years. Could you help us unpack this trend, and is it something that you think has legs going forward?
Well, it's a frequently talked about subject today. There's kind of a dichotomy in terms of where captive wholesaling, as we call it, or retail-owned wholesale broking exists and how successful it is. It has a great history going back to 2005 with the Spitzer investigation. The Big Three sold their wholesalers, and ever since that incident, if you will, it's been very, very difficult for large retailers to have a real effective, industry-leading captive wholesale practice. And so there's been a movement away from that, frankly, with one exception. But retailers, there are several retailers that have a wholesale presence, but when you peel the onion back and you really look at what it is, it's mostly binding authorities. It's mostly small commercial, and they're getting business from Tier 2 and Tier 3 retailers.
They're not getting business from top, top 100 retailers.... they're competitors, right? So you have to really look at those strategies. It works. Small binding authorities that are owned by retailers are getting the business from Tier 2 and Tier 3 retailers, where the conflict doesn't exist. But when you get into the big leagues of E&S, the brokerage big leagues, it's very, very difficult for a retail-owned wholesale broker to thrive, and the talent has migrated to the independents. The best wholesale brokers want to be independent. They don't want channel conflict. They don't want distribution friction. It's hard enough to be successful there. You know, they want an independent channel. So ourselves and the other big leading wholesale broker are independent, and it's part of their culture, it's part of our strategy.
From day one, we made a commitment to being independent, and it's really paid a dividend. So again, when you see other retailers, maybe some PE-led retailers and, and some other top 100s in the wholesale business, take a closer look at it. It's mostly binding authority and programs that they're not, they're not operating optimally by any stretch in Tier 1, in the top 100 retail ranks.
Pivoting to margins, adjusted EBITDA margins are guided to be about flat this year at about 30%. So a few questions: Could you talk about the step change in margins expected in 2025 from the Accelerate restructuring program? And how do we think about the margins for the business over the long term?
I'm glad we had time for this one, Rob. There are only a few minutes left, so I want to make sure I hit two important points. One is, we're not done. We have a long way to go in terms of margin progression, so that's a great thing. The other is, as you're thinking about comps, please don't compare us to retailers. They've got a different compensation model. It's a different business mix. It's just. It requires a different amount of touch in many cases. For a margin comp, look to CRC, look to Amwins. And what we do know is that while, you know, 40% margins is not a natural place for a business like ours to ever be, the mid-30s, sure thing. You know, how we get there...
I guess, the speed at which we get there is gonna depend on a lot of things. Fortunately, double-digit, consistent double-digit organic growth is gonna lead to operating leverage on a very consistent annual reported basis. And Accelerate 2025, part of the reason we chose that name is because it's going to accelerate our progression towards that natural, call it, mid-30s terminal margin. You know, most of that $50 million in savings that we achieve in 2025 is gonna fall to the bottom line. And the good news is, is that $50 million, because of the nature of this program, will actually grow over time, and we can combine that step change with pretty reliable annual margin improvement. And then, because of, again, the nature of the program, that annual margin improvement actually gets amplified a little bit.
Like I said earlier, we're not only excited about our top-line growth prospects, but where we can go from a profitability standpoint in 2024 and beyond is really exciting to us as well.
Okay, and maybe we'll leave it with one last question on talent. It's one of the, you know, biggest messages you guys have consistently noted this year, is this significant investment in talent. So can you talk about the talent investments you've made and how you expect them to contribute to the business over the coming years?
I'll take a crack at it, maybe financially. As we've said many, many times, it's a cultural commitment within Ryan Specialty to constantly be training, developing, recruiting talent. And if you look around the industry, there's a huge shortage of underwriting talent, clearly, and broking talent, quite frankly, especially when you get into these highly technical niches. It takes years to train these talented professionals and to get them up to speed where they can compete at the highest level. And that's what we've been doing for years, from day one, recruiting hundreds and hundreds of kids, training them from ground up, integrating them into the system. But again, that's not enough. You have to train existing talent or recruit existing talent, I should say, and we've made a commitment to that.
I use that 96 individuals in the binding authority as just one small illustration of our ability to recruit existing talent. So the impact of that, year in, year out, of recruiting competitors, has been very successful for us.
Awesome. Well, with that, I think we're out of time. So thank you guys so much for being with us here today.