Q3 2021 Ryan Specialty Group Holdings Inc Earnings Call
Greetings and welcome to the Ryan Specialty group third quarter 2021 earnings call. At this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please.
Press Star Zero on your telephone keypad. Please note. This conference is being recorded I will now turn the call over to your host Noah Angela.
Thank you operator, good afternoon, and welcome to Ryan Specialty Group Holdings third quarter 2021 earnings call.
This afternoon. The company released its financial results for the quarter ended September 32021.
The earnings release is available on the investors section of the company's website at Ryan as SEDAR Com.
I would like to remind everyone that certain statements made during this call are not based on historical information and may constitute forward looking statements.
Any statements that refer to projections forecasts or other characterizations of future plans events or circumstances.
Any underlying assumptions our forward looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward looking statements I refer you to the company's filings made with the SEC for a more detailed discussion of the risk factors.
That could cause actual results levels of activity performance or achievements to differ materially from those expressed or implied in any forward looking statements made today.
Company undertakes no duty to update any forward looking statements that may be made during the course of this call except as required by law.
Additionally, certain non-GAAP financial measures will be discussed on this call a presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP reconciliations.
Reconciliations of these non-GAAP financial measures to the most closely comparable measures prepared in accordance with GAAP are included in our earnings release, which is available on the investors section of the company's website at <unk> Dot com.
With that I'd now like to turn the call over to the founder Chairman and Chief Executive Officer of Ryan Specialty Group Pat Ryan.
Good afternoon, everyone.
Thank you for joining us on our third quarter 2021 earnings conference call.
On today's call I'll provide a brief overview of the quarter.
And our differentiated business model.
Our President Tim Turner will then give an update on each of our three specialties.
Finally, our CFO, Jeremy My book them, well walk you through the details of the quarter and then we'll open it up for Q&A.
We had an excellent quarter, which was our first quarter as a public company.
A testament to our great team.
We executed well in all facets of our business.
And grew our top line by nearly 50%.
The majority of that growth was.
It was accomplished organically.
Type of organic growth rate.
Seldom seen in the industry and is clear evidence of the differentiated value that the Ryan supposedly platform.
Provides to its new and existing clients.
Our team continues to demonstrate its talent.
And expertise to deliver critical solutions to our trading partners and placing these complex risks.
It's vital to be a subject matter expert.
In the specialized into product industry or both.
And for Us.
For Ts is evident in our wholesale and a delegated underwriting authority specialties.
We also continue to grow our bottom line they need to another quarter of strong adjusted EBIT dock.
And expanding margins compared to the prior year period.
We have a firm handle on our business.
We continue to be the destination of choice.
Best talent in our industry.
We're in a prime position.
This sustainably grow Ryan specialty.
That's an impressive pace.
For years to come.
As we near the end of 2021.
We continue to see strong trends.
Our industry.
65, plus billion dollar E&S market continues to expand faster than the admitted market.
As the complexity of risks continues to grow.
This requires experienced and knowledgeable producers and underwriters.
Clients with innovative and customized solutions, that's our power Alley.
Innovation is in our DNA.
It provides us with a long term opportunity.
The girl goes sustainably and profitably.
Pricing in the E&S market remains firm and resilient.
As a reminder, our model is built to outperform in any pricing environment.
Retail broker paddles delegated underwriting authority remain fragmented with a very large extent.
A significant amount of consolidation.
As yet to occur.
This will lead to a continued movement.
Retailers.
The singular solution.
S needs, which we are well positioned to serve.
And our pipeline for M&A remains robust.
We continue to have productive conversations with potential targets to add to our platform.
We will remain very active.
Disciplined with respect to M&A.
And we'll execute only when the opportunity is right.
Our independent <unk>.
The service model.
Scaled distribution platform.
Deep bench of experts gives us a clear advantage compared to our competition.
We believe we have the most comprehensive product access.
Underwriting knowledge.
An extensive distribution network for both retail insurance brokers and carriers.
This has enabled us to become a preferred and trusted partner.
Our 97 of the top 100 retail insurance brokers in the country.
Notably we continue to prioritize our recruitment development.
And retention of the top talent in the industry.
We constantly recruit the best talent.
<unk>.
John Ryan specialty.
Empower them to contribute diverse perspectives and thought leadership.
And enable them to become an integral part of our winning culture.
As a result.
We have incredible opportunities to succeed.
And our very well rewarded for their contributions.
Looking ahead, our growth plans remain firmly intact.
And we are well positioned to execute on that.
As I noted on our prior call.
We will continue to methodically invest in our growth and ensure Ryan specialty.
The destination of choice.
The industry's top tier talent.
We will continue to lead with innovation.
The ever changing needs of the market.
We will continue to expand and deepen our relationships.
Current clients as well as continue to win new clients.
We will further enhance our future organic growth capabilities.
Executing strategically and prudently on M&A.
Summary, I'm very proud of our team's tremendous efforts in the third quarter.
Dedication and powered by a winning culture is clearly contributed to our positive performance results.
That continues to validate our business model and our value proposition to our trading partners.
I remain very excited for the future growth of our company and our ability to continue to deliver long term value for our shareholders.
I am very pleased to turn the call over to our President Tim Turner Tim.
Thank you very much Pat.
As Pat highlighted we had an outstanding quarter and our success was broad based across our three specialties.
Our wholesale brokerage specialty is where we distributed a wide range and diversified mix of specialty insurance products and solutions from insurance carriers to retail brokerage firms, we experienced solid growth across property and casualty lines and especially in professional liability lines of business.
This growth was driven by our continued strong performance in this prolonged hard market combined with an increasing flow of business into the E&S channel.
At our binding authority specialty we continue to see strong growth within our small commercial lines of business.
In addition on our prior call. We noted the tremendous opportunity to address the highly fragmented delegated authority market, where both M&A and panel count consolidation are in their very early stages for.
For decades companies that delegated binding authority did so on a state by state or geographical basis, which created thousands of binding authorities all over the country.
This is a very inefficient model for retail brokers now that we can much more easily accumulate and analyze data.
Inefficiency has become more evident than ever and we view the consolidation of these fragmented binding authorities and intermediaries as inevitable.
With the addition of all risk last year, we now have a more robust infrastructure and an enhanced talent base for delegated underwriting authority firmly in place.
Now, we just need to continue to execute.
Just as we've done every day.
If we do what we do best recruit and empower talent.
Train young professionals and make prudent strategic acquisitions, we believe will be on pace to build the first truly 50 state binding authority operation.
It's an exciting time in our industry and we are well prepared for it.
Our underwriting management specialty also produced another excellent quarter led by our property and casualty lines as well as our transactional liability and national programs, all performing exceptionally well.
I would also be remiss, if I did not congratulate miles wooler on his promotion to Chief Executive officer of our underwriting management specialty.
<unk> has been with Ryan specialty from the beginning and was the natural choice to succeed Tom.
Myles was already the president of underwriting management intimately familiar with the business and has hit the ground running and his expanded role leading the specialty.
As Pat mentioned the environment for M&A remains highly competitive, particularly with respect to underwriting management.
As we have always done we will remain disciplined in our approach to M&A and each of these specialties.
We're able to do this because of our tried and true positioning and strategy of successfully recruiting and retaining talent.
As evidenced by our industry, leading producer retention figures.
This has enabled us to firewall the trends of talent migration, we're seeing in the industry and allows us to continue adding new specialized talent to our managing underwriting specialty along with developing our current roster in order to continue growing the business.
We also continued to make steady progress at developing our new employee benefits specialty, which we'll be focusing on wholesale benefits brokerage and managing general underwriting capabilities to serve the needs of retail brokers.
Pat and I are very pleased with the breadth of opportunities that are coming to market.
Speaking of opportunities our pipeline for M&A remains deep as Pat noted and we will continue to make disciplined investment decisions, where we see clear opportunities to partner with successful specialty firms that are aligned with our goals culture values and expectations.
For organic growth.
We were all very focused on the I P O H one.
And with it behind US our M&A program is back in full focus.
To put a point on it today's acquisition is tomorrow's organic growth and we hope to be back to you soon with more updates.
In terms of the E&S market pricing remains robust.
While we are seeing rate deceleration and a couple of lines such as excess casualty, we also see hardening and price acceleration in other lines, most notably cyber.
But as we've noted we see the increasing flow of business into the E&S channel and the continued expansion of the non admitted market as the more significant driver of Ryan specialties growth.
With these tailwind we're going to press, our competitive advantages to continue to grow our business.
With that I would now like to turn the call over to our Chief Financial Officer, Jeremiah Beckham, who will give you more detail on the financial results of our third quarter. Thank you.
Thank you Tim.
In Q3, we grew total revenue nearly 50% year over year to $353 million.
Our strong top line increase was driven by organic revenue growth of 28, 9% for the quarter and contributions from the all risk acquisition for the months of July and August as a reminder, all risk became part of our organic revenue growth calculation beginning in September of this year.
Our exceptional organic revenue growth is attributable to a combination of new client wins and expanding relationships with existing clients.
So picking up on tims comments from a moment ago as more risks flow into the E&S channel, our total addressable market expand which provides additional opportunities for organic growth.
Our revenue growth was further enhanced by multiple classes of risks realizing year over year premium rate increases, which drive increases in commission revenue since its generally calculated as a percentage of total premium.
Total operating expenses for the third quarter were 353 million, a 68% increase year over year, a large driver of this increase was compensation and benefits expense, which grew 76% from the prior year period to $287 million in total.
We expected this large increase in compensation expense for several reasons first compensation and benefits expense are heavily correlated to revenue growth as many of our producers are compensated based on a percentage of the revenue that they generate.
We incurred IPO related compensation expense of $58 million in Q3 now this number.
It reflects multiple IPO related events, including one time payments made at the IPO expense.
Related to the revaluation of our pre IPO equity awards, which includes additional expense recognized day, one plus the first quarter of new expense related to those pre IPO Revalued Awards.
And it also includes the first period of expense related to new one time IPO equity awards and all of these of course were discussed in detail in our filings with the SEC at the time of the IPO.
I should note also that the reevaluation of the pre IPO equity grant is a function of the fact that technically there was an exchange of the old Awards for New awards as part of the IPO and as a reminder, these awards along with all IPO related employee equity grants are included in our presentation of adjusted diluted earnings per share.
We expect IPO related compensation expense will decline by over 50% in Q4 relative to Q3, and then we will continue to decline in future quarters as the equity awards are subject to a graded vesting schedule within our financial statements.
And in the spirit of transparency, we've separated IPO related compensation from our normal course equity based compensation in the walk to adjusted EBITDAX.
Finally, this quarter, we saw a large increase in acquisition related long term incentive comp, which is primarily due to the all risk acquisition and as we've stated before we think of these as earn outs and that they are non operating in nature.
Now despite the overall increase in our compensation and benefits expense, our adjusted comp and benefits expense ratio improved 260 basis points to 63% for the quarter highlighting the scalability of our platform.
G&A expense was up $7 million or 24% period over period due to an increase in travel and entertainment costs to support revenue expansion and new costs related to being a public company as well as costs associated with the all risk business. This increase was partially offset by a decrease in.
<unk> related expenses compared to the prior year period.
Now, we expect both <unk> and public company cost will continue to rise over the next several quarters as G&A normalizes to something closer to the pre COVID-19 levels as our and as our public company costs roll into our results over the next three quarters.
We note that adjusted EBIT for the quarter grew 56% year over year to $105 million and our adjusted EBIT margin Rose 140 basis points to 29, 8% for the quarter.
Primary drivers of this margin increase include our revenue growth leading to scale, an adjusted comp and benefits as well as continued realization of cost savings from our restructuring plan, which we initiated in 2020.
As noted previously when fully actions by June 30th 2022, we expect to achieve $25 million in cumulative annualized savings from this plan.
As we think about adjusted EBITDA margin in Q4 and for 2022. It bears repeating that we still expect a more normalized pre pandemic level of <unk> expense as the world returns to a broader level of in person meetings and events.
And we will also have a full year of public company cost in 2022, and we will as always continue to invest in the long term growth of our business, including the onboarding of additional talent.
Over the medium and long term, we expect that our significant growth will yield sustainable operating leverage.
GAAP net loss for Q3, 2021 was $33 million and was primarily attributable to the $58 million of one time IPO related charges that I mentioned, just moments ago. This quarter as our first quarter reporting EPS and both basic and diluted loss per share were negative <unk> 16 for the period.
Adjusted net income for the quarter, which excludes IPO and other unusual expenses increased 51% year over year to $62 9 million.
Adjusted net income margin was 17, 8%, a 20 basis point year over year improvement, reflecting operating leverage as revenue growth outpaced our growth in operating expenses.
We reported adjusted diluted earnings per share of 24 cents for the quarter and believe this metric provides a more comparable period over period measure for our operating performance.
Please refer to the earnings release, and our 10-Q, where we further discuss the components of our adjusted diluted EPS.
Given our strong Q3 results, we are raising our full year 2021 outlook for organic revenue growth and adjusted EBIT margin as follows.
Our organic revenue growth rate for the full year 2021 is now expected to be between 21, 5% and 22, 5%, which is above our previous guidance of 18% to 20% as a reminder, with all risk now part of our organic growth calculation, our organic growth comps.
<unk> will be more challenging going forward given the higher revenue base.
Adjusted EBIT margin for the full year 2021 is now forecasted to be between 31, 5% and 32.0% and this is up from our prior guidance of 30.0% to 35%.
With that we thank you for your time and we'd now like to open up the call for Q&A operator.
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First question comes from Michael Zaremski with Wolfe Research.
Hey, good evening thanks.
I guess first question.
Which is a good a good a good issue to have as our organic just keeps being.
Incredible honestly.
And I know you gave us some color a lot of color on the prepared remarks, but I guess I'm trying to get at you know do you feel that there are certain drivers we should be.
Thinking through a little bit more or is it you know is.
Is the total E&S market, just kind of expanding more.
Then maybe we appreciate.
Or you know it may be at Ciber.
Sure.
Certain property in certain states, we should be thinking about a little bit more because that.
You also like Europe.
Your your your win rate versus the industry versus the E&S market is widening a little bit in recent quarters.
Uh huh.
Great way to ask the question.
Because we anticipated the question, obviously, but I like the way you asked it Mike because.
There are a lot of nuances.
And so I would like to us Tim.
To answer the part about.
Areas of focus are really.
Spending more rapidly.
Originally expected.
Remaining very strong.
Happy to thanks, Mike on the market as we know it continues to expand in the non admitted P&C market in North America.
Monthly stamping results from WSI, a and all point to.
Increase in non admitted surplus lines business more dumping and shedding from the standard companies here in the U S.
But inside that market, we have these niche firming phenomenon that we've referred to several times in some of those are really emerging today and driving a lot of this growth.
We're very well positioned health care would be an example of that construction.
Ciber.
Very very accelerated firming in the cyber market.
Transportation continues to be a challenge in the U S and we're very well positioned in each of these specialties were deep and broking talent and deep in underwriting talent and very well prepared to absorb the new flow, but to try and get market share at the same time so very.
Dynamic marketplace that we're in and we're battling the very best E&S brokers and underwriters every day for that market share.
I would add to that Mike.
The way you asked the question.
<unk> provides the opportunity for us to make sure we're focusing on.
The fact that we have these two specialties.
Wholesale broking delegated authority.
Underwriting.
Admin and distribution.
There are similar in many ways.
But there's also some differences.
In us market, I mean, I'm, sorry, our wholesale market.
71% of that is.
Mark.
Part of that is not in those markets.
This workers' comp.
Auto.
Of course.
Those have to be in the market by law.
When you go through our.
Our delegated authority managing underwriting.
Our.
Our binding authority business.
All of the E&S market, but for comp and auto.
Don't do a lot of comp.
And the.
The binding.
And then there's a part of the delegated authority.
<unk> admitted products.
Just because of how.
Those lines of business are distributed.
So for example.
M&A reps and warranty.
Yeah.
Those are mostly admitted markets.
It was more growth on the.
And us market now because of the market conditions, but traditionally they've been.
They have been very much.
Admitted market.
Uh huh.
Yeah.
Phenomenons in the.
And the delegated authority business, because as you know and wholesale broking our duty of care.
As to our retail broker.
Managing underwriting.
Our duty of care.
As.
Twofold.
Our first two primary duty of care.
As to the capital provider.
Because they are giving us their path.
And our.
Relying on us to produce operating.
Profits for the underwriting profits I should say.
Take that very seriously.
So the wholesale business.
They're brokers work hard to place that risk.
Whatever best terms that could get.
Our retail broker and their clients.
And the delegated authority.
We were really doing very well, we have new leadership of miles.
As CEO at Cortez he is the chair.
Hey, Billy.
Supported by Karen <unk>, our chief underwriting officer.
Great team.
They have to be very conscious of producing profits.
For.
Other capital providers.
And to sustain that business, which we are doing very well off.
You better producing profits for them are though.
I'll change their appetite or changes our underwriter.
So it's important to be looking at that because.
Those are just those nuances some other nuances that are really important.
When we got into the all risks acquisition.
We've got a very strong.
Position.
And.
Program business.
So we've had.
With legacy.
Ryan specialty.
Great managing general underwriters.
Growing.
Binding authority business, but very little programmers.
The fines in the industry.
But with us changed dramatically with that acquisition.
What happens in the program business.
These are all very specialty lines.
And.
<unk> got different appetites.
Competition comes in when prices are going up and you're good.
More difficult competition.
Or.
People pull out.
And we replace the capital.
With new.
New capital to the program, but not new capital to us.
So there is some nuance movement within the managing underwriting I think is important too.
Be aware of or keep aware of I know, you're all aware of them.
So.
What we've done and Tim has done this brilliantly.
We started we set up these practice group verticals.
Are we specialize by line of business.
By industry.
Or by a combination of both.
We chose areas.
We're going to grow.
But our growth industries construction health care energy et cetera.
Real estate.
And Thats all paid off well.
Out of those product lines.
Got quite difficult professional lines across the board.
Tim talked about cyber.
But there's also a lot of.
Economic influences and some of these lines.
Youll see in our numbers.
<unk>.
There was a rebound.
Fourth quarter of last year.
And the economy.
So a lot of deferred.
Building construction a lot of deferred M&A.
We had very strong quarters last year fourth quarter.
And M&A and construction as well.
Now our binding authorities suffered a bit.
During the lockdown, because there was a smaller businesses.
Hospital of it.
Other bankruptcies over people pulling back shutting down for quite a while.
So all of that started to move again.
During the year. So there was some catch up.
In terms of how it was accounted for in terms of how it.
The market because it was a lot of deferred activity.
So as Youre looking at 'twenty one <unk>.
So recognize that.
There was a boost to the economy.
It really took hold in the fourth quarter.
That's obviously continuing but.
The boost to the economy.
Adjusted itself, that's really what.
So I'm glad you asked the question the way you did because.
It really is important for all of our investors.
Understand.
These nuances.
I appreciate the color on you know a lot for us to dig into.
Maybe one quick follow up if I may.
Probably for Jeremy.
I'm sure people will focus on you know the and in the Q&A Ann on margin, but if I were to look at free cash flow.
Conversion.
It looks like it did and maybe I'm nitpicking.
Prove it.
As much as a percentage of revenues is that something you guys are focusing on and also.
Is <unk> still a seasonally weaker kind of a quarter for for free cash flow.
Mike when you say.
When you quote the cash flow wasn't quite up to expectation or what are you are you looking at cash flow from operation and taking out capex.
Traditional methods.
So actually I.
I'm looking at our model and I'm doing free cash flow before.
A couple of items divided by a Rad second follow up after.
To give you the stat, but I guess I know, there's no really consensus free cash flow numbers out there, but it did look a little bit weaker than.
And we thought so I know there's nuances in the quarter I guess, maybe asking another way do you guys feel free cash flow was a little light.
Versus kind of like where you guys were.
Were expecting or is it just kind of.
Firing on all cylinders, and there's gonna be nuances to that and there's nothing's really changed since kind of the.
What you guys told us during the IPO period in terms of how to think about things.
So when you when you Mike when you look at the our adjusted free cash flow, so taking out things like the IPO and our normal nonrecurring add backs, where we're very much on track nothing out of the ordinary where people sometimes.
Get off track trying to just do like one of the conventional cash free cash flow calculations as they look at cash from ops and take out.
Capex remember that we inherited these.
Basically earn out payments as liabilities with the all risk acquisition and and as we as we pay those down and we paid down $30 million $31 million.
<unk>.
Those L tips, but again, we think of as earn out in Q3 that comes out of operating cash flow and that's really more of an investing cash flow.
So with that adjustment alone probably adds a lot of normalcy to your calculation I would imagine.
Adjusting for that Okay go ahead.
Yes.
Sorry go ahead.
As you know.
Those payments were.
Brilliant plan by Chelsea on.
On retention of the people.
<unk>.
They were part of the purchase price.
So the effect is for the purchase price.
As a deferred purchase price.
<unk>.
Okay understood I'll tweak our model. Thank you very much.
Thank you Mike.
Next question, Adam Klauber with William Blair.
Thanks, Good afternoon guys.
Clearly theres a lot of dislocation continuing in the property markets with all the weather and storms.
Can you talk about particularly in the underwriting management section how you're.
Helping to be to meet demand, there and probably more obvious in the wholesale you could touch on that too, but particularly in our underwriting management. How are you helping clients ramp up for that that dislocation.
I'll start that answer and then turn it to Tim.
But we've been working.
Diligently and vigorously all year.
Two.
Bring more capital.
And through those facilities.
We're having quite good success.
You put your finger on it because a lot of people are pulling back.
As you know.
There.
They're supportive.
Property cat.
But.
In anticipation of that I think our team has done it well we've been working to replace that in too much of a pick up on that sure Pat Adam.
Great question.
No. There is no doubt about the property market continued to firm it was already very firm, but these storms.
Like the Texas freeze in Ida aspects of those storms were poorly model by many carriers and so we see.
A constriction in the marketplace.
More dumping and shutting from the standard market and we're ready for it we're geared up for it.
We have.
Lots of very top rated property brokers across the country, we're loaded up in the hubs.
We can take a huge influx of property business coming into the channel and as Pat mentioned, we have been built.
Building out our proprietary Mg use in underwriting platforms and cat property. So we're ready for it we believe the first quarter heavy buying season.
We will increase the flow into our channel.
Exponentially.
So we're excited about it we think we can bring even more value to our retail customers.
Great. It seems like you're definitely at the right place at the right time.
Any chance you could give us a magnitude of the capacity even ballpark that youll find up and do you think youll be able to increase that capacity began to others.
Receivable you could have a lot more demand next year or so.
Yes, if you could just any color on that that would be great.
Well I would just start and then I'll turn it to Tim.
We.
We have established.
A few years back.
As London was.
Pulling back.
A lot of our business.
Actually in the delegated authority.
I have been sourced in the London.
Sure.
Replacing them with.
European.
U S.
In Bermuda.
Capital.
Little bit evasive, but mostly European U S and Bermuda.
And Thats.
It's a lengthy process item as you know.
So.
Two plus year project.
But we've spent a huge amount of time.
All of 'twenty one.
That's what Tim was referring to.
Is that the.
The buying season in the first quarter.
We're confident.
We're going to be able to help our clients.
Even more so.
And we have in the past as these needs are.
Growing.
Capital.
Available is shifting.
In addition to that Adam.
A myriad of platforms and facilities in cat property, so the largest and view Jim and true.
Doubled their capacity over the last 12 months, so very very well prepared in a deep deep Arsenal in our top MDU, but it's beyond that we have multiple programs property programs cat programs embedded in the RT offices around the country and of course, we have.
Programs that we picked up from the all risk acquisition that are very helpful. As this market gets tougher in property. So it's a combination of those efforts all led by a top fleet of of property brokers across the country.
Do the battling upfront and get control of these marketing exercises so.
We're very very excited and think we can be an industry leader in capturing this new flow that's anticipated in the channel.
Great well thanks, good perspective, it sounds like that should be a very nice growth engine for four for time to come. So thank you guys.
Next question Tracy <unk> with Barclays.
Yeah.
Thank you just a quick question on your updated guidance on organic revenue I know you don't provide quarter by quarter guidance.
Calculate that implied for Q being sequentially down and I understand I had on it.
Seasonality perspective, one century Q are seasonally low on revenue that keeps you in for Q are seasonally higher so maybe you could just help me understand what's behind that.
Of your implied <unk> organic revenue.
What about you.
This telephone.
Definitely so your math is correct Tracy the guidance does imply.
Organic revenue growth for Q4, that's lower than Q2 and Q3.
You probably got to the same math mid teens.
Which I'll explain in a minute, but I hope we all agree that in isolation, that's still a fantastic quarter in terms of organic revenue growth but.
I know the heart of your question is.
Its different and the answer is no. So our Q4 organic guidance does not represent a slowdown in flow or a significant change in market conditions.
As you probably picked up from Tim and Pat's comments.
So just to help break it down where we're coming from so our Q4 last year was enormous partially because of pent up COVID-19 demand and Pat touched on that a little bit but a good example of what we experienced in Q4 of 2020 was our two transactional liability Mg use had record quarters in Q4 of last year.
And looking at Q4 this year I mean, M&A is hard enough to forecast and they're definitely not forecasting back to back record breaking Q4s.
And also this will be possibly thematic for us for a little while.
The growth rate of two successive quarters doesn't necessarily imply a trend. So for example, our organic growth rate in Q1. This year was only 18, only 18%, but that was lower than our organic growth rate in Q4 of last year, which is 22, but clearly it would have been a mistake to extra.
Oppilate that because we've been 20 plus for the last two quarters.
And in General you mentioned prudent Tracy look clearly our business is capable of growth rates much higher than mid teens and when the opportunity presents itself, we'll we'll grab it but those opportunities are often hard to predict and youre right. It wouldn't be prudent of us to put that in our forecast and so.
Because our business is seasonal because prior year comps are always a factor we advise actually looking at growth trends on an annual basis, and that's why we give annual guidance versus quarterly guidance and so to put it all together, we grew 20% organically on a full year basis in 2020, and we're on pace to exceed that exceptional annual grow.
Right in 2021 by potentially several hundred basis points, and we're really excited about that.
Yes.
Excellent.
I also want to touch on delegated underwriting authority you mentioned that your constructive it could be the first 50 state Claire can you just remind us how many states you're in now to better assess how transformative that may be.
The binding authority.
A wide range of products and appointments. So when we refer to a 50 state platform.
<unk>.
It's multi line so theres auto appointments in there there is property and casualty appointments, there's package policy appointments dozens and dozens of carriers, who are in the binding authority space and delegate that authority to us.
Do so.
More and more than a 50 state approach, which historically as you know it was more of a state by state basis. So we've we've rolled that platform up and we continue to collect these 50 state appointments. So today, we're equipped and we have enough product in 50 states, where we can RFP with top one.
Hundred retail clients.
In the hopes and anticipation of of participating in the consolidation of the use of of those fragmented intermediaries, so getting in position having enough product on the shelf so to speak with all part of this 50 state phenomenon.
It is.
History would show carriers had to respond to this.
Repositioning if you will so lead carriers like Scottsdale nationwide AIG changed their platforms and went to these 50 state distribution models. So all of that has really come together nicely for us and to position ourselves in a very strong way.
To the client.
So being licensed in 50 states.
<unk> becomes a really important issue and.
We have a lot of depth and breadth with the underwriters and every every state now.
Got it thank you.
Next question Elyse Greenspan with Wells Fargo.
Hi, Thanks. Good evening. My first question you guys also seem pretty positive.
M&A outlook.
I think you used the words that you hope to be back soon with my update can you just give us a sense of what the pipeline looks like in terms of just size of deals and whereas threaten your businesses. You think you might be the most active when it comes to M&A.
Sure.
As we said that.
The pipeline is robust.
We are in.
Various stages of development.
With several great opportunities.
And.
They tend to be pretty consistent with what we've done in the past.
There are a few smaller ones that book.
I mean, a couple but theyre very strategic because.
Evolve.
One of our big retail clients.
We will enhance our overall relationship.
Together.
And then.
We of course.
Sort of a new vertical.
In terms of.
Benefits.
There are discussions.
We are optimistic.
This is difficult to calibrate when the.
Emergent to bind.
Binding.
Agreement.
And when we have a binding agreement generally.
That's when we announced sometime like earlier, but generally that's when we have a plan to get rid of it.
And so.
Those are being worked.
And.
So certainty some of those can be a little larger.
And then.
Specialty wholesale opportunities.
But our stages of discussion.
So just generally we're quite optimistic.
But we can sustain our.
Our past.
Record of M&A activity.
But we actually feel.
Because of.
All of our growth and success.
Also the IPO.
But we've got to enhance brand.
And that more people are.
We're getting more calls from people.
I'm sorry.
And then they hire a banker.
We help them find the banker.
Just because.
Advice.
But.
No.
Right.
Comfortable with.
With where we are on the M&A activity.
And at least just to just for the sake of clarity when Pat references.
A binding agreement we are talking about a definitive purchase agreement not an LOI I know some people report on LOI, that's not our plan.
Okay. That's helpful. And then my second question on you guys.
Continue to show pretty robust margin improvement I know Jeremy you mentioned some of that is Colgate, which you don't expect it to continue but I imagine that some of that is LG.
Leverage given stronger revenue growth so as we think about 2022.
Has the kind of margin base and lifted I know you guys have kind of spoken about targeting a margin within the vicinity of 30.
The strong revenue growth perhaps up.
Margin.
What.
So you've got a good memory at least so.
Aside from our commitment to continually invest in our business there will be two <unk>.
Impactful themes for next year in terms of margin and Thats, returning to God willing a normal T&D environment and the annualized <unk> of our public company costs.
It's a correct observation that the outsized growth these quarters has yielded.
Operating leverage and we think that we can retain some of that but we're going to be as helpful and transparent as we can when we released guidance for.
For 2022 next spring when we put out our audit because you will see an impact of <unk> coming back to normal and us having a full year of public company costs.
Okay. Thanks for the color.
Absolutely.
Next question, Alex Scott with Goldman Sachs.
Hi, Good evening first one I had to do is just.
Infrastructure Bill I was just interested if you could help us think through the impact of that bill and potential opportunities for growth that you'll see out of that.
Sure.
We hope a lot of that infrastructure Bill.
Get spent.
In terms of construction, because we all know the country needs a lot of <unk>.
Investment in infrastructure.
Okay.
It's hard to predict.
The politicians will rollout.
The.
Bill and where the money will get allocated earlier than later.
We hope that there.
Alert.
Two.
Investing in.
Youll recall.
Back on the way.
Oh boy online shovel ready.
We hope we don't have a repeat of shovel ready and that Theres really.
Sure.
Construction of us.
Bridges tunnels airports.
Lots of.
Private investment.
We expect that really but there is no way of knowing.
But because of the scale of it.
Cause ought to be material impact.
As a business that we focus on.
Very strong construction practice.
We have a lot of infrastructure capability.
So.
So assuming they are going to invest in one of our sweet spot.
Hopefully.
Quickly.
Thanks, and I guess follow up I had was on the all risk.
Transaction and just as that starts to come into organic growth and a more full way I guess, starting next quarter and is there anything we should be thinking about in terms of the way that business is growing versus versus the existing business and sort of thinking through what that could look like over the next few quarters.
Yeah, I would start Jeff.
There's always a.
A period.
On an acquisition.
Of some loss of business.
Price into the purchase.
Price.
Factor in the purchase price I should say.
And Thats, all basically taken place.
The good news is.
Paul risks because of the great talent pool.
Wonderful franchises.
Has.
<unk> had a big digestion period.
In terms of.
That acquisition adjustment.
There are no water coolers, the Santa Rosa.
So that hasn't happened but.
Frankly, the people up is fantastic.
And joining the team.
So right now.
As we are here in the fourth quarter.
Alright full stride.
And there is <unk>.
Precious little difference between.
Our team also legacy.
Of all the risks.
So exactly what we had.
Hope for.
That's unfolded.
Frankly the.
There was a period of digestion.
It was much shorter than most.
Gotcha.
I joined the team.
Quickly emotionally.
Physically.
And so.
So we're very pleased with it.
Early results.
And now we are into our second year as you know.
Yes.
Thanks for the answers.
Thank you.
Next question Meyer Shields with K PW.
Thanks, So much two quick questions first is I think a follow up on leases when you've got a quarter like this one.
It's almost impossible to maintain investments at the same pace of organic growth does that imply a catch up in investments that we should factor into future quarters margins.
I'd like to start with that and I'll, let Tim pick it up.
But one of the things that Tim has done really well.
Influencing also over managing underwriters.
As to anticipate the growth in higher ahead of us.
So you've heard us say in the past.
This is not just a quality business. This is a quality and quantity of business needs.
You need the numbers of people to serve your clients.
Tim.
In anticipation of the market hugging me back in 19.
Urges the teams to higher higher higher and they did so there's ability.
Spike.
But a gradual.
Buildup, but sizeable of adding staff.
So we think we're well for productivity to pick it up from there.
Sure. Thanks Pat.
Sure.
Right from the get go in 2010 part of our culture was this commitment to constantly be recruiting.
Constantly training and developing.
It is a part of our daily life.
There's not a day goes by that we're not trying to recruit a broker.
Or an underwriting specialists.
Days, where we bring a half a dozen new people on at a time so.
It's constant.
<unk> recruiting and developing talent.
And Thats worked real well for US we've got great metrics, we've got a great management team that helps us manage and balance those expenses.
But we do very well.
Mike might say, so myself in terms of anticipating this growth and the surges of a flow into the channel and so as Pat mentioned.
In the first and second quarter of 19, we saw the market firming, we saw the percentage of non admitted business dumping into the channel, but more specifically we saw by class. We saw it by region and we were able to accelerate NAD people to capture as much of that business that you could so we'll continue.
To do that we have lots of opportunities as Pat mentioned.
We're more attractive now to the talent in the industry going public has made us even more attractive so aspects of that recruiting are getting a little easier.
We will continue to bring in.
The most talented brokers and underwriters in the country.
Okay that was very helpful. Thank you.
Second question.
Sort of concept when you've got organic growth coming in.
So significantly ahead of guidance are there any catch up incentives.
And patient expenses.
Obviously, the overall ratio went down but I'm wondering whether there are any timing issues related to.
A look back at the first or second quarter of this year.
Any.
Compensation, we call it gearing I know people call it different things, but when people sort of exceed their baseline bonus for outperformance and theres been some outperformance this year.
It's all factored in to the guidance, we're giving you for the full year.
Okay perfect got it thank you so much.
Your final question comes from Western Bloomer with UBS.
Hey, Good evening. My first question is a follow up on.
Alex's question on all risk if I run the math it looks like that business grew kind of high single digits.
And now that is inorganic is there is there a level of organic that we can think about for that business longer term or am I thinking about it wrong. It should more think about kind of how synergy how it can brad synergies across.
Different business lines, because I do think it might be growing a little bit slower at this point.
Pat gave some good context on all risks, specifically and then just sort of what.
The first 12 months are often like for a new acquisition, but we're we're excited about welcoming them into our organic growth calculation I mean, when you add several hundred million dollars of revenue to the base. It makes.
Comps tougher, but remember all risk one of the reasons. They were the crown jewel of wholesale acquisitions is because they had a very very strong.
Organic growth engine of themselves they were consistent double digit growers before we bought them and generally when we buy companies, we enhance their growth opportunities not not the opposite so we're not we're not expecting all risk to be a drag at all like how that drive right now at all exactly yes.
Got it. Thank you second question just a follow up on on the new hires commentary.
Is there a time period, where the new producers or either from M&A or just that you can make new hires like are a positive benefit to margin.
How should we think about that over over the next year or two.
Well each hire is a little bit different from the next but we pride ourselves and.
And accelerating their ability to be accretive and we have models to look at that and analyze it.
But they come in different shapes and sizes different.
<unk>.
Regulations.
Restrict us in terms of moving business. So we.
So we look at each one of those separately, but the key is to accelerate the accretive impact of these producers and underwriters is as quick as possible and we've done that consistently and we plan to continue to do that.
Got it. Thank you I appreciate the color.
Thanks for your questions I would like to turn the floor over to Pat for closing remarks.
Yeah.
Okay, well, thank you for the great questions.
And.
We're very confident of our future we feel pretty.
Okay.
Grateful for your following our.
Our business in their interest in joining us.
With us we look forward to speaking with you again when we.
We will be discussing <unk> results for 2021 than it was growing very quickly.
Thanks for your interest and your good questions have a good evening.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Yeah.
Yes.
Sure.
Yes.