All right. We'll go ahead and get the session started here. First, thank you everybody for joining us, you know, both here in the room and virtually. I'd like to, you know, say thank you and welcome to, you know, Pat Ryan, Founder, Chairman, CEO, Tim Turner, you know, President of Ryan, and Jeremiah Bickham, EVP and CFO of Ryan. So thank you for all being here, very much appreciated. Maybe first I'll just kinda kick it off with a more high-level question. I mean, since you're a relatively new company to the public markets, I thought we could start with just the background of the company and, you know, what some of your key strategic priorities are.
Sure. Well, the background of the company is pretty straightforward. We started back in 2010 with an idea that the E&S market, excess and surplus lines market, was about to undergo some serious change, and we believe that that change is all gonna be positive for those in the E&S market that were prepared to deal with it. We set up a wholesaler, and I attracted Tim Turner to join me, and, with the idea to build a large wholesale broker specializing in high hazard risks. Concurrently, we believed that there was gonna be a growing phenomenon of delegated authority for underwriting, administration, and distribution, and that's happened.
We based all of that on the fact that the world was getting a lot riskier, and that more of that risk was gonna find its way into the E&S market. Secondly, that there was a phenomenon going on where retail brokers have been using far too many wholesalers, very cost ineffective. They didn't present their business to the market in an organized fashion to really optimize the value of that scale. We thought that would be changing, and sure enough, it did right after we started. Aon went from, well, 10-12 wholesalers down to three. Then Marsh followed, down from many more than that down to three, and then Willis went to four and on and on.
There was another logistical phenomenon of the consolidation of retail brokers by strategics, but principally by PEs. Some pension money, but PEs. That consolidation was starting to get quite serious and of course, over this past 11 years, it's really accelerated and in high gear right now. What that meant was that our clients were becoming a lot larger. That worked. We had these tailwinds, and we decided that we would build it like I had done in my past life around really exceptional talent. Getting Tim was the key. He attracted a lot of really high-quality people. We wanted to have a M&A strategy blended with that organic growth strategy, and that's worked well, where we kept building to bring more diverse and more impacting solutions to the retail brokerage community.
That's our mission today, and also to provide new innovation to carriers. To provide them with the opportunity to delegate that authority and get organic growth and get good control over the business. That's worked quite well. That's kind of how we're where we are 11 years later.
When you think about the excess and surplus lines market, and just the magnitude of volumes that we've seen coming in, I mean, how do you view the sustainability of that? You know, what are your views sort of longer term for that market?
Yeah. Tim, why don't you pick up on that?
Sure, be happy to. Thanks, Alex. You know, as Pat alluded to, the world was getting riskier, a lot more complicated, a lot more sophisticated in the distribution, and the demand for talent and expertise went up precipitously over the last decade. In that, as Pat said, the retail brokers on one end of it bought differently from our channel, but more importantly, were the capital providers distributed differently, and that all inured to our benefit. What we have today is continued growth in the space and being driven by some pretty big factors. On the property side, you know, global warming, you know, this constant challenge to predictability modeling, creating a lot of shedding and de-risking in the standard market, all that business pouring into our channel.
Then on the casualty side, as we've talked about many times, the social inflation and these nuclear verdicts that are popping up almost every week now. That's really driving a lot of these accounts to be fractured and to require this high degree of specialization and this shared layered concept, which top wholesalers like ourselves are so well known for. Lastly, bringing underwriting solutions and binding and programs and MGUs into those very same niches that are highly specialized, what we refer to as practice group verticals, that matches up with the buyers, the retail brokers very well, starting with the global, the nationals, and the regionals.
Could you talk about just the supply capital and how that's impacting, you know, standard lines? You know, there's definitely been some pullback from the standard lines in terms of what they're willing to write, and it's driven a lot into those markets. We've seen pretty strong pricing for a while now. Any view on, you know, sort of that aspect of the disruption there and, you know, will that continue? Or are you starting to see more supply capital kind of coming in to write some of that business?
Tim?
Sure. From every indication we can get, and we get some pretty great data much quicker today than we would 10 years ago, indicates that that flow is gonna continue to grow. You know, we're getting monthly as an example of that. We get monthly surplus lines stamping fees from the top five states in the country, very accurate every month through the WSIA, and October was up 2%. We know the dumping and the shutting from the standard markets continues. You see their poor results, not across the board, but in these higher hazard niches is what we follow. We're prepared to see a bigger influx of, you know, highly specialized business coming into the channel.
One of the other parts of that, to your question is that the large reinsurers and large direct insurers are focusing more capital in the space. That's a very positive factor for the industry and a very positive factor for us because I think it's generally agreed that macro insurance, commercial insurance market has excess capital. It doesn't have excess capital in these types of risks. There's a shortage of capital. That recognition of the opportunity to work with people like ourselves and some of our competitors is changing the dynamics, but in a very positive way.
I think, you know, today it seems like you guys have also benefited a lot from the consolidation that is happening within retail brokers. You know, I think more recently, you've expressed a lot of optimism around the delegated authority business and some of the opportunities to kind of, you know, move forward with growth there as well. I would love to hear about that and as we look forward, what delegated authority could mean for your business.
Okay. Well, why don't I take the delegated authority, you take the large brokers.
Sure.
Let's start with that.
Okay. Well, as we know, back in 2008, 2009, when data and analytics became readily available to lots of sectors in the financial part of the business, insurance brokers were starting to get data on their inefficiencies. As Pat mentioned, specific to their use of too many intermediaries. The auditioning of wholesalers and MGUs to RFP and be qualified seriously started back then, but it accelerated and was really part of why I joined Pat, and we started the company. We could see that the importance of being independent and not having channel conflict and distribution friction in your model was a really important part of the business. Being able to showcase top talent, depth and breadth in these 12 or 15 practice group verticals, and that's really the foundation of the company.
We set it up that way, and that's continued to this day. There's continuous consolidation of the use of intermediaries that's now, you know, cascading into the underwriting side. You've heard this before, but MGUs, MGAs, programs, and binding authorities, that's 40% of the flow that comes into that channel, and we're very well-positioned to respond to that. You know, that's really our future growth with these retailers, is they'll continue to consolidate, they'll continue to lean on us more and more on these higher hazard classes of business.
On the delegated authority, it's like religion, politics, beauty, people see it differently. There's a lot of new capital that came in with very experienced, successful executives leading that and attracting large amounts of capital or doing it the way they did it before. They wanna build their own infrastructure, they wanna build their own underwriting. They want to redo what they did in 1970s and 1980s and 1990s and early part of this century. Our approach is, obviously, we don't have the capital, and we're not in the capital-bearing business, but we felt that there is a growing phenomenon where capital providers have been burned by investing in infrastructure to distribute, infrastructure to underwrite, and then only be hurt by the mobility of underwriters.
One day you're in the cyber business, you got a great team of cyber underwriters and wake up, some carrier or MGA poaches the whole team. People started saying, "We're better off not sinking all that capital into infrastructure, but delegate it." Now, that started in London centuries ago, so the phenomenon is not new. What's new is the recognition that put your capital behind the risk. Don't build a huge infrastructure and have variable costs, so your ROEs improve significantly. That you've got the continuity. That underwriters who are looking for entrepreneurial opportunities, and today, as we all know, equity opportunities in lots of industries are attracting talent, and that's true in our space.
As a managing underwriter, we're able to attract exceptional talent, compensate them on a nice incentive plan in a culture that they can thrive in without bureaucracy, and also have equity. That formula has worked really well. People are delegating more and more. A large European company that we do business with, we had a meeting with them, and they said, "We're going to double our delegated authority in the next three to five years." They're large already, but they've decided that that's the most cost-effective way for them to grow. There's more of that happening. As startups come in, why reinvent the wheel? There's a lot of that. There's startups that are doing it the traditional way.
Yep. Just listening to you all talk, I mean, it feels like there are some serious tailwinds that remain with the business, even beyond some of the things that are driving the long-term organic growth, which is impressive in terms of the longer term, you know, goals and targets that you've put out there. I guess, you know, how should we think about, you know, growth while you still have some of these tailwinds at your back around, you know, pricing and, you know, the E&S markets and, you know, some larger building of delegated authority and so forth? You know, is it right to think that maybe some of these tailwinds can persist for a little while?
Well, I think the tailwinds will remain strong, but they'll vary. Right now, with the organic growth that we're getting and some of our pure wholesalers are getting and managing underwriters, that has to drop back. There'll be more competition as people correct their balance sheets, as people like the rating, like the pricing, and they say, "We gotta get some of that. We gotta get more of that." That'll happen just naturally. What we're saying is that we've always been a double-digit grower, and we'll be able to sustain that, we believe. Put our neck out on that. It's a matter of our executing properly and continuing to bring value add to our clients because if we stay static in that, we're gonna lose ground. We're constantly trying to innovate. Not trying to innovate.
We're constantly innovating to bring new solutions to them. There's that organic development that to what extent it mitigates these very strong forces now that, you know, we're getting 20s and a few others, you know, organic growth with a two in front of it. That's not sustainable over the long term.
Sure. Just maybe we could also touch on the margins. I mean, so far as a public company, the EBITDA margin's been, you know, quite strong. I think a lot of folks are looking at the growth that you're getting. You know, while it may not be sustainable over, you know, a very long period, it has been significant recently. I think we're always trying to understand, you know, the variable aspect of expenses versus the fixed aspect of expenses and what's reasonable to think about in terms of, you know, how much operating leverage you can get versus sort of the need to always be reinvesting in the business and around your people and so forth.
Sure. Jeremiah?
Great question. One of the many good things about our exceptional growth that we printed for Q2 and Q3 is that investors can see how clearly exceptional growth yields operating leverage. It's, as Pat said, truly exceptional growth. When you think about the guidance we gave for our margins at the end of this year relative to the long term, we've been really consistent about the fact that our margins for 2021 benefit from the fact that for more than half the year, we weren't a public company, and we're still not back to sort of normalized levels of travel and entertainment spend.
Really, when you look at Q4 and sort of the midpoint of the guidance we gave, the year-end guidance at the last quarter earnings call, that's really the most representative quarter in terms of margin that we've printed this year. You'll notice it's below guidance for the full year. We don't want investors to think that, you know, 32% call it is the new baseline and jumping off point for next year. You'll see some negative pressure next year as public company costs have a full year in the P&L, and hopefully, we get back to normal levels of T&E spend. The key takeaway is that we're not anywhere near a ceiling in terms of margin on our business.
We're a growthy business, and with growth comes operating leverage that we're committed to banking each year, at least somewhat as time goes on.
Got it. You all also recently announced an acquisition of a transportation wholesaler. I thought maybe you could touch on that, talk about the opportunity you see there. Tim.
Sure. Crouse & Associates, San Francisco-based West Coast transportation leader, probably the best transportation intermediary we'd seen in the country. Had our eye on them for quite some time. Several of us, including me, were friends with their owners, and that time came where they decided as a family to sell the business. They were suffering for what many regionals and some nationals were going through in this new era and really not qualifying for RFPs, constantly having to get exceptions for their transportation expertise. But a real rare breed and a gem of a platform in that they really perfected transportation broking and transportation underwriting, a real hybrid, and really had trained a lot of their own. We had a lot of the same cultural beliefs and successes together. We watched them around us do very, very well.
In our kind of 50-state mud map of excelling in these practice group verticals, transportation being one of them, and a lot of these nuclear verdicts are in long-haul trucking, they're in livery, they're in shared economy. We have a great team in the field. We're strong in the East, Northeast, Southeast, even in the Midwest, but we lacked the depth and the exceptional talent that they had to fill that out. Today, you know, with them being part of us, we feel we can win any RFP in transportation. We can roll out and pitch consolidations, specifically in transportation. We're very excited about it.
Good. Just sticking on the M&A topic. As you know, just listening to your last earnings call, it sounded like there's a pretty robust pipeline of opportunities that you all are looking at. Can you just talk a bit more about that and maybe remind us of how much cash and debt capacity you have available for those types of activities ?
Why don't you take the latter part, Jeremiah, then I'll take.
Alex, a great question. We view ourselves as 3-4x net leverage operators. We think that's a prudent level of leverage, especially for an acquisitive company. Obviously, these businesses can sustain much higher leverage. A lot of the private brokers do that, but we're 3-4x . As of 9:30, we were below 3x, closer to 2.75x. We look at that as a lot of dry powder for M&A. We can execute on a lot of the opportunities that are out there while still maintaining prudent leverage and long before we're forced to use any equity as consideration. Then on the opportunities, I'll pass it back to Pat.
Well, as we look at M&A opportunities, we hired a great talent to build a benefits broking and managing underwriting business. We've been developing the strategy, sub-strategies, and we've been led by this man, John Zern, developing opportunities. These are the kinds of opportunities you have to be very selective because we need a foundational acquisition and then build organic growth into that, and then bolt on additional benefits, wholesale and managing underwriting. That takes a lot of spade work. We're not in a hurry, but we've got a pretty good pipeline. That's the benefits. Over the years, Tim and his team and lots of our leaders cultivate potential opportunities like Crouse. Like All Risks, which we bought in 2020, which was the fourth largest wholesale broker. That took years of cultivation.
There's cultivation going on with family businesses or entrepreneurs who haven't been ready to sell, but they'll get there. We're not the kind of acquirer that buys large numbers of companies, small ones. I'm not diminishing the value of that. That's not our business. Our business is selecting really unique, talented, talent-laden, differentiating companies that bring greater solutions, new solutions or depth to our solutions for our clients. You know, we can have a very big one like All Risks, which was over $1 billion in purchase price, and then smaller like Crouse. We're not gonna have dozens of them a year. There's a robust market out there that we're farming, and they'll just emerge at different times, and some further along than others.
Can you maybe expand on the benefits broking in particular? I guess it's a market I'm a little less familiar with. I'd be interested in if you could just expand on, like, where you see the opportunity there. What do the growth rates look like? What are the drivers?
Well, the growth rates can be modest, or they can be quite robust. We have to pick the niche. A medical stop loss is an opportunity for robust growth.
Yep.
Small group captives, probably robust growth.
Mm-hmm.
Traditional general agent wholesale, modest growth. We'll only do something like that if we can build scale through that to get margins up, growth rates up. Well, that would be a tail end of that strategy. What it does is it brings breadth of our value to our clients. That's with the larger clients. Then the mid-size, what we call tier 2 or tier 3, which we got thousands through the Oliver's acquisition, they don't have the expertise to do it themselves. Just like in wholesale property casualty book, they delegate a lot of that to us cause they can't afford the talent or the technology, so they fundamentally outsource that to us. The more of that that number of tier 2 and tier 3 in the thousands of clients gives us a real nice balance in market segmentation.
The same thing applies to benefits, but they need us more. The larger brokers don't really need us that much, if at all, for the benefits. The mid-tier does.
Got it. Okay. Maybe next, can you talk about the property markets. You talked, I guess, in the last earnings call about some of the standard lines companies that are shedding. They continue to shed property risk and, you know, sounds like maybe a little disruption there going into the end of the year. Wondering if you could illuminate that a little more for us and help us think about that opportunity for your business.
Sure. Tim?
Sure. Well, we already know that we were in a pretty firm market, if not a hard market, in catastrophic property, whether it's wind, flood, wildfire, quake. But what happened was something that no one really expected, and that was a failure of some of the modeling and some of the forecasting and looking at, you know, the last, really the last season and a half hurricane season. In Ida, as an example, the second part of Ida that hit the Northeast very hard, that by most experts, you know, their position was the modeling failed, and they took on a lot more losses than they really expected. These are some giants in the business, very large global carriers that not only dominated the front end of cat property and distribution, but they were also big reinsurers as well.
That became pretty well known over the last six months. The whole wildfire thing really threw another wrench into it. The Texas freeze was really unmodeled for most catastrophic property carriers in the U.S. All of that together collectively has caused this new trend that I'm sure you've heard and read about in de-risking. This time it's not just your boutique players or your U.S. standard markets, its global markets, it's reinsurers de-risking. When they do that, they're basically cutting down, you know, their opportunities and they're scaling down how many treaties they can be on, how much capacity they can put up, how much direct transactional capacity can they put up. That's contracting. That's shrinking. When that happens, it's a hard market phenomenon.
An already challenged property market is getting harder by the day. Today, you know, you're reading a lot about reinsurance treaty renewals for one-one. In the small print, there's a lot of distressed treaty renewals, you know, revolving around the property. What we expect as we move into the wind buying season in the first quarter, halfway through the second quarter, lots more dumping and shedding of this shared and layered opportunities that we live in, i.e., bringing more capital in, having to layer it, using lots more carriers to build $100 million, you know, $1 billion towers of TIV. You know, that looks to be the trend. Again, our services will be needed that much more, and we're very well positioned in the cat property market to help.
Great. I can open it up to questions. If there's anyone that has a question, we'd be happy to run a mic over to you. Have anybody? I'll wait one more minute. There will be one over here.
Hello. Thank you. I think you made a comment about, you know, limit management from the carriers. I think it was really more in the context of property market disruption. It does feel like that's been a theme of, alongside rate, what carriers are pushing for as part of this hardening market. I'm wondering what impact, if any, that has on the wholesale market structure more generally, if that makes sense. Thank you.
Sure. Great question. It has a direct impact on the flow of business leaving the standard market into the E&S market where we have freedom of rate and form. A lot of these standard companies can't get their filed rates in quickly enough and approved by 50 different insurance departments. It's a game, and it's difficult to respond that quickly and get those adjustments, so they have no choice but to non-renew. When they do, that business dumps into our market where we have, again, freedom of rate and form. We could help get the right rate. We can set the right terms, conditions, attachment points, weave together the shared and layered towers that are needed. Again its looks like our services will be needed even more so in 2022.
All right. Maybe I'll ask one more just, you know, given the pandemic and the things going on with COVID-19. I mean, can you talk about how that impacts your business? I mean, certainly it's impacting some of the markets you're in, but, you know, what's the impact to your business directly and, you know, everything from T&E to just the way things are operating, if you could help us think through that.
Sure. Well, we've been very fortunate as a company in that we have a lot of leadership and training and developing that was already well on its way. Lots of young people who really needed to be interactive and be around clients and markets and be at breakfast, lunches, and dinners and conferences that obviously went away, as we all know. The virtual ability to keep that going was amazing. I think we've done an exemplary job of continuing to move these young people, especially through the system. Hundreds of young people we're training at a time, putting them through the RSG University. Part of that, you know, we're looking back on 18 months of it. I think it slowed a little bit of that down.
Because the market was so hard, and we had so many at-bats, so many opportunities, we were able to keep that acceleration going. Today, we're very happy to get these people back in the office. We just kicked off a campaign to come back in the office part-time, safely, of course, and prudently, but we're getting them engaged. On the business side of it's really created a lot more turmoil, a lot more defense costs, lot more kind of a lot of challenges in courts that we're following. As many of you know, you know, the courts have been siding with the insurance companies. There hasn't been any real big verdicts in the pandemic litigation.
now there's time to craft new coverages and to be an expert at bringing new innovative solutions in for future pandemic challenges, whatever they might be. It's a very dynamic time, but I would say the one takeaway would be that it may have slowed down the acceleration of training and developing people, so we're very anxious to get them back on the field and interacting every day.
Great. All right. Well, I will stop it there. We're at time. Thank you so much for being with us. It's very much appreciated, and, you know, thanks to everybody who's here.
Thank you.