KBW Insurance Conference 2022

Sep 8, 2022

We are going to move along just to ensure that we are staying on schedule. It is a unique honor to welcome Pat Ryan and Tim Turner, Jeremiah Bickham of Ryan Specialty. Pat, as anyone who is remotely familiar with the insurance industry knows, is a true legend. The team that he has assembled, led by Tim and led by Jeremiah, have done a phenomenal job since the company has become public. I am going to turn it over to Pat for introductory comments. Then, as usual, I will start off with some questions. If there are questions in the audience, please do not hesitate to let me know, because we want to make sure that we are answering as many questions that you have and giving you the information that you need. With that, Pat, thank you. Maybe I will just stand here. Absolutely. Okay. Good morning, everyone. I cannot really see how the light is flashing, not flashing, but shining in there. Nice to see some friends out there that I have known for a long time. Let me just give a few introductory remarks and we will get into Q&A. About a year ago that we were here, shortly after our IPO in July 2021. Since then, we have really been working on the execution of the plan that we talked about at that time, but also when we had our roadshow. We feel quite good about how things have gone. Obviously, we are in a market that is robust for the insurance industry, particularly brokers. Then, of course, being in the E&S market, this is a particularly robust time for the E&S market. I think it is important to just put on the table that the E&S market is something that I have been involved in for a long time during my Aon career, particularly the earlier part of my Aon career, especially lines. I always liked it as a market niche, for obvious reasons. Freedom of rate and form allows for a lot more innovation, a lot more creativity. The other thing I liked about the E&S market, which has even expanded its importance in the last several years, but particularly the last couple of years, and that is that many of the growth industries find their way into the E&S market. They need innovation because they have a lot of complex risks, tough risks. We call them high hazard risks. I really believe that we're making a strong social contribution in terms of helping the economy, but helping companies that are doing really important work, like in healthcare and energy and other fields, construction, that are really bringing value to society. When we help them solve their problems in partnership with the retail broker, that's the underlying operative word in partnership with the retail broker, because whoever that risk is their client, and they engage us, as you know. But we feel good and I feel good about this part of my career being just focused on this end of the business. There's not a new normal with the E&S market now because it's just hit historic highs. Everybody wants to know when it's going to settle back, and nobody really knows that. What we do know is that the world has always been risky, but it's getting far riskier. With greater risk generally comes the need to be able to deal specifically with that risk in terms of freedom of rate, freedom of form, and ability to innovate. That's really why I, after I retired from Aon, decided to start another company in this space, because I believed in the future of it, and that's certainly playing out. So training relationships with our top retail brokers, the top 100, I should say. 97 of the top 100. So we have a strong position in the market, but we have tough competition as well. Those are really, I'm just setting the table for the Q&A, so probably talked too long there. Not at all. I'm happy to just listen for the next 35 minutes. So let's start with organic growth and the Ryan team has been, I think, very prudent in terms of setting expectations, recognizing that we're in a very favorable spot right now, and this is still a cyclical industry. The number that you've used, I think, as a longer-term bogey is about 12%. I'm wondering in that context, there's a lot of semantic bickering about whether we were in a recession, whether we're heading into a recession. I'm not wishing this, but how would a severe U.S. recession impact organic growth at Ryan? Okay. Well, I'll start and then ask Jeremiah to not bail me out, but add to what he's got the expertise on. When we say 12%, we don't really look at that as a goal, obviously. What we said is that throughout the 12 years that we've been in business, nine of those have been in basically soft markets. We have been able to achieve double-digit organic growth. Core to our strategy is driving organic growth, and the minimum goal is double digits. Now, as the market changes, during parts of that period, we were able to get it in the low and mid-teens. Then as the market changed in 20 Early 2020, maybe starting late 2019. But 2020, because the two in front of it, and 2021 the same, and the first six months of 2022. Now we say that's not the new normal, but what we do believe is that there is double-digit rate of growth with proper execution. You can't quantify how bad a recession is going to be, we all know that. But because I've been around quite a while, I've gone through some tough recessions, '74 to '75, '80, '81 into '82. Those were longer recessions. Nobody can predict that in a recession we can handle it this way. It depends on the depth of it, the length of it, the severity, obviously. But in 2020, we actually did go into a recession, and we did really quite well. I think the key thing is that we are selling compulsory products. Almost the vast majority of our business are compulsory products, either state-regulated like auto and comp, but financially regulated in the sense of a lender demands insurance in so many parts of the coverage that it becomes compulsory. I think it's important to look at compulsory versus discretionary when you get into a recession because people pull back on their spend. Something else that they'll do in a recession is they'll take higher retentions, self-insured retentions. Inflation and a recession together like we had stagflation in '80, '81, there you've got a real painful combination because the economy's slowed down, people are pulling back on their spend, or they're spending the same, but they're taking more risk because inflation is driving up the exposures. Some people say inflation is a benefit for the broker, and that's true to a pretty good extent, but it's not across the board true because there are issues on inflation that actually drive exposure change, and it's up to the broker to make sure that they're covering that exposure change with the assets being inflated. Particularly then carriers having priced it with lower interest rate assumptions, and now they're having to pay an inflated claim. We feel good that we've been able to work our way through recessions in the past. We can't predict what it would be, but we've found a way throughout our history here to grow double digit, and we're saying that for the foreseeable future, that's what we view how we could deal with a recession. Just remind me what to pick up on. You hit all the right points. Nothing needed to add. I went too far then. No, you got it. Okay. I mentioned to Noah Angeletti this morning that Tim is quoted almost daily talking about the pace of submission flows to the specialty markets, and I was hoping you could comment on that both overall and maybe if we dig into it a little bit by line of business. Are there lines where the submission flows are accelerating, which lines are seeing maybe some deceleration as competition re-emerges? Just looking for another level of detail and possibly the drivers. Sure. Well, just yesterday, AM Best validated the non-admitted surplus lines P&C premiums for 2021. It takes that long to collect all 50 states and to validate the number at $81 billion, a record number. And we know through six months now with the top 15 states that WSIA collects the stamping results from that number, $81 billion is up 31%. So we know that the surge and the flow into the channel continues to break records. It continues to grow at a record pace, and we see no signs of that letting up. Inside that flow are all these specialty classes and practice group niches that ebb and flow through that channel. There's always some flattening, some rate deceleration going on in there. It's modest. Some of it's really hard to identify. The only one that we could see that looks to be happening and clear is in public D&O. We saw that rate deceleration first. Then we saw some of that business, especially in the large towers, the large commercial $100 million towers, where they're shared and layered. We saw some standard markets taking pieces of those placements back. We look at ProExec altogether, all professional liability. Cyber, all E&O, healthcare, all of that in the practice group. Many of those lines are continuing to firm, especially healthcare and cyber. You'll see our ProExec practice group continuing to grow and far outproduce that little bit of flattening in D&O. Other lines of business that are historically E&S classes of business, commercial construction being one of them. That's really a combination of infrastructure projects, bridges, tunnels, dams, high-rise construction. All of that pretty much pours into the E&S arena. They need our expertise and our capacity, A, during the course of construction, but more importantly, it's the latency on the construction defect that causes it to stay in the E&S market. For the 35 years I've been in the business, that's been a traditional flow into our channel. We have an industry-leading construction practice group. With that is the residential construction segment. They're together, but for different reasons. Residential construction, most of it frame, comes into our channel on the property side because of the fire risk during the course of construction. The 10-year completed ops exposure is difficult. Construction defect, again, very difficult to manage. You have places like New York where it's been a loss leader in the reinsurance world. Very heavy flow there. The healthcare industry heating up. COVID claims getting through the courts now, getting adjusted, lots of reserves being set up. That's hitting not just nursing homes and assisted living, it's hitting HPL. It's right in the heart of that healthcare sphere. The largest segment is hospitals. We're set up for that. Like most of these practice group verticals, we set up underwriting platforms, programs, proprietary products and facilities. Then try to make sure we have the most broker talent in the space so we can absorb these big surges and service the top 100 brokers, tier 2 and tier 3. Transportation, very much a loss leader in the reinsurance world. That's where it starts. They shrink their capacity in the standard market. They have to dump the business into our channel. We're set up for that. We've talked about the Crouse acquisition. That really cemented our 50-state platform in transportation, in underwriting, which you have to be in primary truck, livery, and shared economy, and the broking expertise. Crouse had a great West Coast broker team who's now leading the practice group for us. We're well-positioned there. Other lines that have been leaders really in this growth over the last 4 or 5 years in E&S, CAT property. Everyone knows global broking or global warming, I should say, has really affected the shift and the flow of business, not just in flood and wind. Wildfire is really coming on strong now, unfortunately affecting not just the western states, but other parts of the country. So things like single-family homes, high net worth that never came into the E&S market are flowing into the channel. Lots of businesses that you wouldn't even suspect would have a wildfire problem are pouring into our channel, and others. Lots of drivers into this new flow, and several of them, there's no end in sight that we can see. So we're continuing to hire like crazy and continuing to train and develop and broaden these teams so that we can have a high efficiency rate on handling the flow of the business. Great. Thank you. One of the specialties at Ryan is underwriting management. I was hoping we could talk about two aspects of that. One, performance of some of the recently formed MGUs and how that corresponds to expectations. Second, maybe a description of the process for determining when another de novo MGU is appropriate and necessary, and how you obtain the necessary underwriting talent to run that. Sure. It's a big part of Pat, mine, and Jeremiah's strategy all along is to be the leader in the broking expertise, but to bring top decile talent into the underwriting side of it. To have complementary MGUs, MGAs, binding authorities, and programs in each of these specialty niches. The timing of that, a lot of that is driven by M&A opportunities, but a lot of it is de novo opportunities, and that's probably the best illustration I can share with you. Pat and I talked at length about a casualty MGU. When do we do it, and when's the right timing to do that? Once we were able to secure the Nationwide arrangement, as you know, that gave us an unprecedented ability to lead in what we call speed to market. Getting a front, getting consortium capacity, reinsurance capacity, and deploying the product is really what holds everyone back in the business. It's a very difficult process to build those facilities. Once we secured the Nationwide paper, Harleysville, our speed to market is industry-leading. We can create facilities very quickly. We can front in a day, and oftentimes on individual risks. But we took that whole platform and ability, and we looked at the casualty world, and one of the phenomenons that you see today in this industry, while this heavy flow is pouring into the channel, there's a huge shortage of underwriters. Huge. Record-breaking problem for companies in efficiency executing. Basically, they can't get to the flow. They don't have enough underwriters. So our challenge is keeping up with the speed of executing marketing exercises and creating the best solution for the client. You really can't do that if you don't create product with the industry. To complement what you can get done in the open market, you have to have your own product. We saw that really coming to fruition in casualty, primary, and excess. We needed more product. We needed a proprietary product as well, and so we launched Emerald. Emerald had its first month in operation, big success in August, and September 1, same thing. That's what we try to do. We try to create product. If we do it in M&A, even better. Now we have these tools and these new abilities to create our own and move faster than the market allowed us to do previously. It's a great time for us to create complementary product in these high hazard niches. Okay. Again, I want to make sure that if you have questions that you let me know, and I can pass them along. One of Ryan Specialty's ambitions is building out 50 state binding authority capabilities. Two related questions there. First of all, where are you on that process? For those of us on the outside, what will that 50 state capability look like in terms of growth, in terms of margin potential? I'll take the first part of it, and then Pat and Jeremiah can add to it, certainly in terms of the margins and that part of it. From the production side of it and interfacing with the clients, we had to go to the markets who held up historically for most of my career, the insurance companies themselves held up national brokers and binding authorities from having a 50 state capability. They controlled it. They ended up being an impediment in that process because they would only give you the state of domicile and then maybe the contiguous states in like a transportation appointment for underwriting and P&C as well. What we ended up with after 40 or 50 years in the E&S world is hundreds of thousands of boutique binding authorities. Impossible for a national to RFP and go to the retail community to get them to consolidate their use of binding authority intermediaries. We've done it in brokerage. That's a process of winning in a practice group and getting BORs to move the business. In binding, you can't just take a BOR. There's a lot of proprietary product. There's these hurdles with how many states you were validated in. As a national wholesaler building a platform and binding us and a few others, first you have to have the talent. You have to have enough binding authority specialists around the country to handle a 50 state appointment. Then we had to go to the carriers and say, "We have it. Please give us 50 states." Well, they resisted for a long time, and over the last two, three years, almost every one of them went to a 50 state plan. We have the product now. We have enough binding authority underwriters to pitch RFPs to the same clients who realized all the efficiency gains in regulatory compliance and E&O in the brokerage consolidation moving into underwriting, which is 40% of the billion or so that comes into the channel. That is just starting right now because the companies gave us the 50 states. We have the underwriters. But it is a constant process, I want you to know. There is never enough underwriting talent. You just constantly have to be grooming it, recruiting it, acquiring it because the volume is so great. Once it starts moving, which it is starting to move, we have had two RFPs in the top 100. We have won them both. We have an electronic trading platform that is woven into that. We believe the buying patterns of retailers will be the same as they were in brokerage consolidation. We are really excited about that, but we have to continue to build product. The same strain in brokerage is in binding. Wind capacity, CAT capacity, all those things, the social inflation and casualty in bad venues is a problem. Again, you will see us make acquisitions of people, teams, underwriters, companies building that up. But we can launch a 50 state RFP today. On the margin side, Meyer. I want to just remind everyone, we report margins not at the specialty level, but at the consolidated Ryan Specialty level. It is true that binding authority has a higher commission than wholesale brokerage. The MGUs have an even higher commission rate than the binding authority. All things equal, if your business mix shifted to a higher percentage of that higher net retained business, there would be a margin impact. Despite the massive growth potential ahead of us in binding authority, we are not calling necessarily a business mix shift for us. One reason being the wholesale brokerage has higher inherent growth capabilities, and historically, they have been our highest growing specialty. More importantly, though, we do not think about business mix, and we do not target de novos or acquisitions looking for a margin profile in and of itself. Our goal, whether it is de novos hiring or M&A, is about completing that spectrum of distribution capabilities and products so that we are the most trusted, the most indispensable counterparty to retailers and to carriers. Great. Thank you. Again, if there are questions in the room, please let me know. Tim, you mentioned a couple of things with regard to talent. One is that you're hiring, I think you said a ton of talent. Second, that there's just not enough out there. I think both of those are true. Part of me suspects that they get worse as the baby boomers sort of move towards retirement age. Can you talk about recruitment philosophy and training philosophy at Ryan Specialty to ensure that you're adequately staffed? Sure. Be happy to. One of the many things Pat and I hit it off on in terms of principles was some of the obvious ones, always be closing, always be recruiting. It's just a daily part of our discussions. This morning, 6:00 this morning, we were interviewing someone here in New York. It's just part of what you do every day, as you don't have enough talent. There's no such thing as enough talent in a volume-based commodity business. The whole industry is suffering from that. I think we're out ahead of everyone. I think we're industry leading in terms of recruiting, acquiring, but maybe the most important one is manufacturing your own talent. Really recruiting, having a university, having an intern program, all that's coming together for us. We're able to really create a floor of talent coming into Ryan Specialty now that is unprecedented for us. But we have to continue to do it. There's areas where we just don't have enough depth and breadth, and so we're challenged with that. It's a healthy challenge. But it starts with Pat and the university, the commitment to insurance and risk management university programs, undergraduate programs, getting into their schools, sponsoring their events, and bringing those kids in to complement other areas where we're recruiting from. Just add that we recruit a class in a calendar year. That can be experienced people, that can be people from competitors, competitor brokers. It can be from carriers where they're going to leave anyhow, or we don't have a trading relationship with that carrier, and we feel free to recruit there. Then very importantly, from universities and colleges. Tim talks about commodity. He means that this huge volume, but it's not a commodity in terms of the value add that we bring to it. I want to make sure that when we win, we win it because we did a better job of helping that retail broker differentiate their ability to serve that client. Even small risk can be very complicated. But the volume that Tim is referencing has just grown so dramatically based on the metrics he gave earlier. We have to be able to treat it very quickly with quick response. It is almost like a commodity coming off a shelf, but it is not. It is a very well-thought out, well-designed product, and a serious attempt to differentiate that product. Great. Thank you. One of the points you made on the second quarter call was that the $25 million restructuring program was concluded, with better than expected ultimate savings. I was hoping you could talk us through really the expense control philosophy at Ryan Specialty. What other savings opportunities besides the actual 25 million were identified? Yep. Yeah. For those of you that do not know, Meyer is referencing two years ago, we committed to a two-year restructuring plan that concluded on 6/30 of this year. The target, the commitment was $25 million in savings. We found $29 million in run rate savings. The added savings, Meyer, came from headcount. The majority of the plan was headcount, and it was basically more of the same. When you put plans like that together, you have to make some assumptions, and as you flesh those out, you realize, oh, there is variability in those assumptions. But there are two important takeaways from the conclusion of this program. One is, it may seem like a stretch, but alignment, right? An effort like this that is so far reaching is truly a company-wide effort and everyone is rowing in the same direction. As we ask teams to participate and deliver, people are not just trying to do the bare minimum, right? When we go about an effort like this, it is not corporate coming from a pedestal and saying, "Deliver X heads or X dollars." We explain, "These are the high level ambitions here. This is what we are trying to streamline." They come back and give us 110% or 120%. The other takeaway is when it comes to anything that we commit to publicly, we want you all to be confident that we set targets that are achievable. We do not see ourselves being frequent restructurers, but if we do have another program like this in the future, please think back to the overachievement of this one. Right. I would point out, unprompted, that that's a bit of a recurring theme that we've seen so far at Ryan Specialty on a number of levels. I'm thinking of organic growth and margins in particular as I say that. I want to spend a little time on technology. We've gotten a really good sense, I think, of capabilities at Ryan Specialty in terms of the personnel and the underwriting talent and creativity that is inherent in that. Can you talk about your technological advantages and also current technology related investment priorities? We think that for any company in our space, there's a required investment just to get to Table stakes level security and compliance to keep your nose clean with the regulators to provide your clients what they need. We think that we are best in class in that regard, but we actually think that there's a huge amount of growth opportunity and, to a degree, untapped potential by making further investment in data and analytics. Pat Ryan referenced on the last call that we made personnel investments in that burgeoning program because there is quite a bit of premium and related data that flows through our system every year that if we're able to tap into even deeper and harness, there are more insights and more value add, particularly on the carrier side, that we can bring to the table in terms of product creation, maybe even some capital allocation discussions that we can go deeper on. I don't want to say that we've arrived in that regard, but we're thinking about it. We think that with a reasonable amount of investment and elbow grease, that's got a lot of potential for us going forward. Okay. Fantastic. One of the goals that you've talked about is building maybe a fourth specialty focused on employee benefits, and I was hoping for an update of where that specialty is right now. I know you've got Don Zurn heading it. What does it look like underneath it? It looks really good. The wholesale broker role and the managing underwriting role is something that you have to understand the total marketplace, what's happening with the trends. We hired this relatively young man from Aon who had retired from Aon, that had a great career there. We've been developing the strategy for our role. It's managing underwriting, and it's a wholesale product and service requirements that our retail brokers need. We have to segment the market. The very large retail brokers need us in P&C. Generally, not a lot of opportunity with them on the benefit side. We have thousands of brokers that range from being in the 95 excess of first 5 or 90 excess the first 10, in many cases, do need a lot of assistance to get themselves into a position where they can't afford to hire the talent, but we can effectively be an outsourced value proposition back to them, the things they couldn't do on their own. The larger brokers can do most of this on their own in the benefits business. We've been slicing, and we've concluded that we really need to make acquisitions and then build on top of that. We looked at de novo, which is building, and it's just too slow and too costly, really, even though there's a bigger capital investment that we can get better returns. We got a good pipeline. In these kinds of acquisitions, in fact, our entire acquisition strategy, we don't buy junk. We buy really good companies and believe we make them better. We're sorting through the really good companies, and some of them are not quite ready to sell yet. We've been dealing with that. I will tell you that the pipeline is robust, and we're getting much closer in terms of where we think we make that investment. Investments are highly likely to be larger than what we originally thought were as we did brokerage M&A. We bought smaller companies and bolted them on. Here, we're going to bring in a foundational set of competencies that we can bring a lot of value to what they're already doing. They're good companies that are very successful. Stay tuned on that one. Perfect. If I can follow up on that question with maybe getting some comments on the overall M&A strategy, the overall M&A environment whether we're seeing higher interest rates start to drag down multiples, level of competition from PE-backed firms, or anything else that we should know about the M&A outlook. When you're talking about private companies, there's a lag to the fundamentals that drive valuation changes in the public market. I think that's just normal. In a sector like ours, there is still so much more capital out there chasing these properties that we think that competition has really buoyed valuations, especially for the cream of the crop companies that we're interested in. Differentiated, the highest quality management teams, things like that. Those are always going to come at a premium, and we haven't seen that premium dissipate despite what's the volatility in the public markets. What we tell people is that it certainly raised the bar because you've heard Pat and myself talk about ad nauseam. One of the pillars for us to get past go on an acquisition is it has to be accretive. The bar for that check mark has certainly been raised, but it's absolutely doable. We're willing to participate. We anticipate participating and closing on acquisitions in an environment like this because if we are as rigorous as we have been historically in going through our strategic checklist, and we're buying quality businesses that can grow by themselves, our thesis is we can make those good businesses better. Through growth synergies, cost synergies, and just being differentiated enough to enhance our platform, there are deals to be done. As good stewards of capital, we're not going to just do it to do it, do it because it's been a period of time. As Pat said, we're incredibly excited about the opportunities we have ahead of us right now. I would add just one point, which is historically, and we look at All Risks that we did at the end of the third quarter of 2020. We didn't have to put any value in the price on revenue synergies. We did share some cost synergies with them, and we paid the top end of the market multiple, but there were other bidders who would've topped that. But we were the destination of choice. But we paid a full price. But the revenue synergies are so fantastic that we knew that they had the horsepower, the manpower, the person power, to lift their game. Talent. They didn't have the opportunity because they weren't appointed, they didn't get capital from some of the carriers that we get capital from. As we look at these acquisitions and they're priced on the posted valuation too high, we're not going to buy them unless we can see that we can buy that down through revenue synergies, sharing some of the cost in that multiple. That's how we're coping with these market changes in terms of premiums for that's a PE industry is driving into that. Understood. With that, we have come to the end of our session. I want to thank Pat and Tim and Jeremiah for a phenomenal 40 minutes. Thank you very much for coming. Thank you. Thanks, Sean.