Q4 2021 Ryan Specialty Group Holdings Inc Earnings Call
Greetings and welcome to the Ryan Specialty group fourth 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 went out to the conference over to your host no Angela <unk> Treasurer and head of Investor Relations for Ryan Specialty group. Thank you you may begin.
Thank you operator, good afternoon, and welcome to Orion, especially group Holdings fourth quarter 2021 earnings call.
Afternoon. The company released its financial results for the quarter and year ended December 31 2021.
Earnings release is available on the investors section of the company's website at Ryan SG Dotcom.
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 forecast guidance outlook for us.
Other characterizations of future plans integration expectations events or circumstances, including 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 timing levels of activity performance or achieve.
Mints to differ materially from those expressed or implied in any forward looking statements made today.
Investors should not place undue reliance on any forward looking statements.
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, including organic revenue growth rate adjusted net income adjusted EBITDAX and adjusted diluted EPS.
Our 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 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 in the investors section of the company's website at Brian This G Dot com.
With that I'd now like to turn the call over to the founder Chairman and Chief Executive Officer, Brian Specialty Group Pat Ryan.
Good afternoon, everyone and thank you for joining us on our fourth quarter 2021 earnings conference call.
On today's call I will provide a brief overview of the quarter and the full year.
Strategy moving forward.
Our president and Tim Turner will give an update on dish.
Each of our three specialties.
<unk> events.
Last our CFO Jeremiah pick them well walk you through our financials.
I'll open it up for Q&A.
Our fourth quarter performance capped off an outstanding 2021 for Ryan specialty.
We continue to execute well across our business during the quarter generating another strong quarter.
With digit organic revenue growth.
I mean, the full year of 2020 , one organic revenue growth of 22, 4%.
Total revenue growth of 41%.
We continue to demonstrate every single day.
Clear and differentiated value.
Ryan specialty platform provides to its new and existing clients.
Along with our extraordinary topline growth.
We are proud of our numerous additional accomplishments in 'twenty one.
We grew our adjusted EBITDAX by.
By 57% from the prior year.
Driven by our strong organic growth.
And the inclusion of all risks for a full year.
Just as importantly.
The scalability of our platform was clearly validated in 'twenty, one as we improved our adjusted EBITDA margin by 330 basis points.
'twenty 710 basis points.
2019.
As Jerome I will discuss shortly.
Have navigated the pandemic well.
And I've taken the right steps to further build scale our platform.
It will generate operating leverage over the long term.
All risks and Ryan specialty are truly working as one company.
The transition of cultural fit.
Continue to exceed our expectations.
We successfully completed our initial public offering in July .
It's been wonderful to work with those of you on the phone today.
Ryan specialty story.
Lastly, our team is stronger than ever.
As we finish 2021.
We maintained our 97% producing our retention rate.
Which speaks to the winning culture we've developed.
Ryan specialty.
We have created a true destination of choice.
The top talent in the industry and we're just getting started.
During the fourth quarter.
We're pleased to complete two highly strategic acquisitions cross and associates at Keystone risk partners.
Combined these two acquisitions generated approximately 34 million.
Revenue for the trailing 12 months prior to the acquisition.
It also represents a leader in transportation and specialty wholesale brokerage.
So to kick it located on the West coast.
The broker's license in all 50 states.
Because of the breadth of our transportation offering.
And enhances our ability to compete for the most complex accounts.
Solutions, ranging from traditional open market wholesale brokerage.
Each binding authorities.
You saw represents our entrance into a natural adjacency.
Covering the alternative risk space.
Which you'll hear Tim touch on in his remarks.
If someone has an acquisition I'm, particularly excited about.
We will expand our ability to serve brokers.
Asia and carriers.
Leading with innovation.
Alternatives to more traditional insurance placement.
Almost all of 2021 on a high note.
As we progress through 202.
You should expect to see from Ryan specialty.
First we expect to keep growing.
Complexity of risks.
Use to increase that.
As a result.
This market continues to expand faster than the admitted market.
We believe puts the opportunity.
Sustainably grow our business firmly within reach.
In addition pricing in the E&S market remains firm.
But even with moderation in rates.
It was built to succeed.
Any pricing environment.
Along those lines and 22, we also expect to strengthen our business to position us to generate sustainable growth for years to come.
That means prudently investing more.
Each of our three specialties.
In particular that means both investing in.
And our existing talent base.
Constantly bringing in new talent.
We expect to onboard our largest broker class ever.
Two.
Currently see incredible opportunities in the marketplace.
Additional experienced talent.
Fortify our position as an industry leader.
Rather this rapidly evolving capital landscape.
<unk> has many unique opportunities.
Our innovative platforms like Ryan specialty.
Well enjoy broad capital support.
And our robust distribution network.
We plan to leverage one of our core strategies.
The global programs and M G H M to use.
That's we're well positioned to combine the underwriting expertise.
Distribution capabilities.
With carrier appetite for profitable growth and new lines of business.
The transition of admitted lines portfolios too.
E&S market.
Some of these opportunities are spurred by the dislocation of underwriting talent.
We are in a unique position to capitalize on this dislocation.
As we've created a destination of choice for <unk>.
Killed underwriters and brokers.
This core competency complements our M&A strategy.
And in environments, where available M&A targets.
Neither our selective criteria.
Being both strategic and accretive.
We believe we still have very exciting high growth opportunities to augment the organic growth of our existing business.
As you know a hard market leads to increased competition, particularly in Madison underwriting.
Our competition comes from EM to use as well as carriers looking to opportunistically enter or expand certain lines. Since we act as a delegate for insurers.
Really the novels, which comprise nearly half of our M. G you offerings.
Well as adding experienced talent.
Integral to our success.
Especially now as new entrants in man is underwriting.
Suffice the battle for specialty underwriters and market share.
To that point.
We are working on launching three de Novo M G use.
Supported by highly rated carriers.
We're in the process of finalizing.
Tenet of agreements necessary to start underwriting business.
I hope to be able to assure our detailed with you on it.
Next call.
Yeah.
These investments are among the highest return investments that we can make.
Finally, our deep M&A expertise.
Naval Us to act quickly and prudently.
What do we see an opportunity to add to a robust platform.
Which will help enhance our future organic growth capabilities.
We're looking for a plus players.
We can leverage our platform to enhance their own growth profile.
We maintain an active dialogue with a number of potential partners.
Several proprietary conversations.
As we've mentioned before.
We don't set dollar spend targets for M&A.
We will continue to be as disciplined now as a public company.
We're one private one.
Help ensure that each acquisition.
It was both accretive to our strategy.
Towards shareholder returns.
Equally important.
We will never compromise on our culture.
In summary.
121 was a banner year for Ryan specialty.
Which is a testament to our business model.
The entire team rowing in the same direction.
Executing day in day out.
Our clients and trading partners.
We have a winning culture.
And empowers the best team in the specialty insurance industry.
That is reflected in our performance for the year.
I remain excited for the future growth of our firm.
Our ability to continue to deliver long term value for our shareholders.
With that I would now like to turn the call over to our President Ted Turner.
Yeah.
Thank you very much Pat and as Pat highlighted it was another excellent quarter and a fantastic year at Ryan specialty.
And we are hard at work on making 20 to another successful year.
It's an incredibly challenging environment for many insureds and carriers.
We believe we're uniquely positioned to help our clients navigate a very dynamic risk landscape.
Our wholesale brokerage specialty continued to experience solid growth across all property and casualty lines of business, especially in our professional liability lines driven by our continued strong performance in this prolonged hard market and the increasing flow of business into the E&S channel.
We are also excited about the addition of our new teammates from Carlson Associates, who will integrate into our transportation practice group and National binding authority platform.
Our transportation team had been working diligently to create new products for our trading partners and the addition of cross team on the West Coast will be a significant complement to these efforts and further fill in our national.
Transportation footprint.
This allows us to be even more competitive.
The largest national transportation accounts.
To provide staying power for this critical lines of business.
At our binding authority specialty we continue to see strong growth within our small commercial lines of business.
Mentioned, we have a fantastic opportunity to participate in the consolidation.
Of the highly fragmented delegated authority market.
Well, we did with the Krausz acquisition on our path toward building. The first truly 50 state binding authority operation.
We believe we are attracting the best talent and positioning ourselves well, so that we're able to strike when the right opportunities arise.
Meanwhile, our underwriting management specialty completed a solid quarter and an exceptional year growing total revenue 46%.
From 2020.
It's important to remember for the specialty that carriers and trust their underwriting authority to us.
Must be balanced with delivering underwriting profit back to our trading partners and we are constantly reacting to market pricing and competitive dynamics.
Underwriting performance.
And carrier relationships are measured in years not in quarters.
As Lloyd's has pulled back in the market.
We've had the good fortune of replacing it with large U S Bermuda and European insurers and reinsurers to fill the gap.
We've been expanding our capacity with even better financed individual carrier units, putting our platform and even stronger position than prior years.
Underwriting management has been proactively investing in specific initiatives to drive sustainable long term growth and arranging incremental underwriting capital to further strengthen our operations. In addition, onboarding experience talent and market leaders is always critical to remaining an industry leader.
And even more so when a prolonged hard market attracts new entrance to that end, we have hired several industry leaders to launch an excess casualty Mg U.
And as Pat referenced are in the final stages of securing capital the rate environment remains full of opportunities within this product line. Finally, we're seeing solid progress with our UK based <unk>.
Specialists start point as they ramp up their U S branch with recent key hires the U S team is coming together well and we are securing capacity for its entry into the U S distribution system.
Along with the progress, we're making at our three specialties, our M&A pipeline remains robust.
Including potential opportunities for our new employee benefit specialty.
As we've noted before.
Today's acquisition is tomorrow's organic growth.
And we look forward to partnering with successful specialty firms that are aligned with our goals culture values and expectations for organic growth.
A great example of this is our recent acquisition of Keystone.
Which allows us to facilitate access to alternative capital.
This transaction is exciting for several reasons it enhances our mission to provide innovative solutions for brokers agents and carriers.
And it represents a significant growth opportunity as alternative risk capital is a natural home for some E&S risks.
Together with the talented team from Keystone, we will be able to develop entirely new insurance products, when and where we see a need in the market.
I'm pleased to report that we've already created one such product.
With more in the pipeline.
That's exactly what we're trying to do with our M&A strategy add talent and capabilities to our business that can use differentiated platform and trading partner relationships to immediately drive growth, while better serving our clients.
We also continue to aggressively recruit new talent.
As Pat mentioned, we are expecting our largest broker class ever and 2022 and in addition, we anticipate a record.
Matriculation Ryan specialty University later this year as well.
Because we have a university and formalized training program for new graduates.
As well as a sizable internship program.
We're able to recruit top level graduates from risk management programs from across the country.
Our ability to continue to add the best specialized talent to our already world class producer team will enable us to keep growing our business well into the future.
In terms of the E&S market, while we are seeing early signs of additional competition entering on the fringes as they become more comfortable with the environment and their balance sheets flow remained steady thus far in 2022.
As we've noted we expect that the increasing flow of business into the non admitted market will continue to be one of the most significant drivers of Ryan specialties growth.
Coupling this market segment growth.
With our industry, leading talent and culture position Bryan specialty.
It's very well positioned for the coming year.
We are excited for 2022, and we will continue to press our competitive advantages to grow our business.
With that I would now like to turn the call over to our Chief Financial Officer, Jeremy <unk>, who will give you more detail on the financial results of the fourth quarter.
Thank you, Tim let's get straight to the financial results in.
In Q4, we grew total revenue, 16% period over period to 379 million or.
Our top line increase was driven by continued strong organic revenue growth of 15, 4% for the quarter.
Attributable to a combination of new client wins and expanding relationships with existing clients. We are very pleased to have performed so well in Q4 2021, especially considering we were comping against 21, 8% organic revenue growth in the fourth quarter of 2020.
As we noted on our prior call. The Q4 2020 comp was challenging in part because of a large balance of pandemic deferred business like M&A and construction risks, which wasn't expected to repeat in Q4 of 2021.
Total operating expenses for the fourth quarter were 323 million, a 16% increase year over year.
Net income for the fourth quarter of 'twenty, one was $30 million or <unk> <unk> per diluted share adjusted net.
Income for the quarter, which excludes IPO related and other unusual expenses increased 24% period over period to $77 million.
Adjusted EBITDAX for the fourth quarter grew 18% period over period to $120 million, while adjusted EBIT margin Rose 70 basis points to 31, 8% for the quarter.
Primary drivers of these increases where our revenue growth leading to scale, an adjusted comp and benefits as well as the continued realization of cost savings from our restructuring plan, which we initiated in 2020.
This is partially offset by the realization of public company costs incurred in Q4.
Which will also generate a drag to adjusted EBIT margin when comparing quarterly margins year over year in Q1, and Q2 of 2022 as we did not yet have these costs included in the comparable periods in 'twenty one.
As we think about adjusted EBITDA margin for the full year of 2022 with Omicron receding. We welcome a return to a more normalized pre pandemic level of <unk> expense as we experienced a broader return to in person meetings and events.
We will also have a full year of public company costs in 2022, and most importantly, we will continue to invest in the long term growth of our business.
In particular, the current environment offers us a unique and very exciting opportunity to hire a plus level underwriters and brokers as patent and Tim have both highlighted and we expect to capitalize on this opportunity to pursue an onboard top talent to our platform.
With that said I do want to highlight a crucial takeaway and provide some important context for 2022 in terms of adjusted EBIT margin.
In 2019, which was the last full year prior to the pandemic, we generated adjusted EBITDAX margin of 25.0% as a private company.
Now in 2020 in 2021, we certainly benefited from reduced levels of TNF spend but even as that normalizes in 2022, and we recorded a full year of public company costs, we still expect to generate adjusted EBITDA margins well above what we recorded in 2019.
This is a clear testament to the scalability of the platform that we've built here at Ryan specialty and we are very proud of everything we've accomplished over the last several years.
And as I've noted over the long term, we expect that our growth will yield additional and sustainable operating leverage in the form of adjusted EBITDAX margin.
Finally, we reported adjusted diluted EPS of 29 cents for the quarter and believes that adjusted diluted EPS provides a more comparable period over period measure of our operating performance.
Please refer to the earnings release and 10-K for further discussion of the components of adjusted diluted EPS.
Also we are initiating our full 2022 outlook for organic revenue growth and adjusted EBITDA margin as follows.
We are guiding organic revenue growth rate for the full year 2022 to be between 13% and 15%.
As a reminder, with our exceptional growth in 2021, and now that all risks as part of the full year organic growth rate calculation, our organic growth comps are more challenging given the significantly higher revenue base.
We are in the prolonged stages of a very hard market and increased flow into the E&S market and as such we want to be prudent with our outlook given what Tim noted earlier regarding the additional competitors beginning to enter the market.
Our forecast assumes that current conditions, which Tim and Pat have both noted are still very conducive to growth at this moment do gradually soften and decelerate somewhat during 2022.
Adjusted EBIT margin for the full year, we are guiding to be between 28.0 and 30.0%.
We are investing heavily in talent and growth in 2022 to best serve our clients over the long term, which could impact margins in the near term.
That said if you compare this range to our 2021 result on a like for like basis in terms of <unk> spend and public company costs.
Our forecast actually represents a healthy amount of operating leverage, especially when you consider the current human capital environment and the large potential long term investment opportunities that we have in front of us.
As a reminder, as well Q1 and Q3 are our lightest quarters from an adjusted EBITDA margin perspective, and typically fall below our margin for the full year.
Q2, and Q4 are typically our highest adjusted EBITDAX margin quarters.
Q1 tends to generally be our lowest margin quarter overall.
As an example in 2020, we printed 22, 1% in Q1 and 28, 8% for the full year.
As Pat noted it was a truly banner year for Ryan specialty and we are very excited about another year of exceptional growth ahead of us.
With that we thank you for your time I would now like to open up the call for Q&A.
Operator.
Thank you at this time really be conducting a question and answer session.
To ask a question. Please press star one on your telephone keypad.
Permission tomo indicate your line is in the question queue.
You May press star two if you'd like to remove your question from the Q.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star Keith.
Our first question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed with your question.
Hi, Thanks. Good evening. My first question is on the organic revenue outlook. So as we think about the 13% to 15% for this coming year can you help us think about the seasonality there just given the Q2 into Q3 of 'twenty, one where your strongest quarters should we think about the Q.
Wanted to Q4.
Benefiting from easier comps just can you help us think about how you expect the organic to progress as we move through the year.
Yep.
So we will stop short of giving actual guidance revenue guidance for on a quarterly basis, but you are correct Q2, and Q4 are typically the largest.
Quarters from a seasonality perspective, Q1, and Q3 are typically the lightest and remember that margin typically follows those trends as well.
And then are you can you can you disclose how all west performed from an organic perspective in the fourth quarter of 'twenty one.
That would be below the level.
The materiality that we disclose.
But we can say as we said on our Q3 call we're really.
Excited about the integration progress about how our tea and the former all risk folks are working really as one company and we're really excited about having them in the organic revenue calculation because they are.
Contributing mightily.
Okay, and then one last one on the M&A side, you guys seem pretty bullish describing the pipeline is robust on any color you can give us on the size of deals in the pipeline.
As you think out over 2022 and even beyond.
Yes.
The size varies obviously.
There are some.
Moderate size.
A few smaller.
Very strategic.
At the moment.
Discussions of <unk>.
Spec to be.
With the Mega deals like all risks.
But we're staying pretty much within the average of the past without all risks.
And I think that will continue.
Yeah.
Okay. Thanks for the color.
Thank you. Our next question comes from the line of Tracy Bengie with Barclays. Please proceed with your question.
Thank you can you discuss your 400 million that raise in January I realize the use of proceeds is for general corporate purposes, but would it be fair to assume a good portion of those use of proceeds can be used for M&A.
Tracy Thats a correct assumption.
I mean as you have probably seen from looking at the earnings release, we have ample liquidity and.
And we actually didn't specifically need.
The cash from the bond raise in January but we saw an opportunity and we were proactive and we're really glad that we were proactive given where the market is now.
The plan is still for excess capital capital to be deployed to fund internal growth, but mostly M&A.
And we are still planning to generally operate in the three to four times leverage net leverage category.
Okay great.
Provide some really good color regarding your EBITDA margin guide I'm. Just wondering you also discuss your larger.
Broker class of 2022 also trying to think about.
Your latest acquisition so to what extent do you think the comp structure, maybe playing in tier EBITDA margin guide.
The comp structure of.
Legacy business of acquisitions or of the new hires.
Everything is just any color you could provide how the how it should all come together.
Well so.
That's an important.
Let's just talk about.
The labor market and wage inflation, because I think thats part of your question. So our margin range does contemplate the current labor market.
But keep in mind Tracy most of our comp is related to producers who are actually paid a commission, which is based on a percentage of revenue that they generate so wage inflation doesn't really affect them. The same way that it does salary employees.
And unfortunately, even in this environment, we offer not just competitive pay but also a unique culture and unique long term professional development opportunities. So we feel really good about our ability to remain a destination of choice in this environment.
You asked about.
All of the above.
And I'd like to add to Jerome eyes.
Appropriate comments.
We mentioned that we are looking for a plus players.
As underwriters and as brokers a.
Plus players.
Underwriters and brokers to.
To make a lot of money.
But business follows the them.
Quickly.
And.
We are we built our business on attracting and developing a plus players.
And there was a unique period of time right now.
But we feel that.
It's a very opportune.
Time to be looking for the kind of talent and we are doing that.
Thank you.
Our next question comes from the line of Mike Zaremski with Wolfe Research. Please proceed with your question.
Mr. <unk>. Please proceed with your question.
Sorry, I was on mute. Thanks, So maybe first question.
No.
In the prepared remarks and in the guide you mentioned a moderation in rates, which I think there is.
Different camps.
Sorry.
On the rate outlook, some kind of feel like theres stability, some feels like there could be an uplift.
The current macro backdrop.
I feel like there is.
Likely for likely deceleration clearly sounds like you are in the deceleration camp, but any maybe any color on what youre seeing so far year to date.
I was just kind of what's what's driving that outlook.
Okay.
Well, we certainly see some modest rate deceleration in certain product lines.
And some real early signs in stages of standard markets, writing some high excess layers of D&O and excess casualty placements taking them back.
But we continue to operate in a very hard market state the conditions in the market firm almost every month, we just received January surplus lines stay.
Stamping results from WSI, a and that flow is up.
Over 20% once again, so the flow into the channel as a better gauge for us in terms of the market share in the commercial P&C market thats available to us and again that continues to grow we continue to capture more of it.
There is no sign of the hard market.
Letting up.
So Mike.
It's a consistent consistent theme for us we like to forecast prudently and we're trying to draw on the five cycles that path lift through the three or three plus that Tim has lived through and it's subtle but I tried to touch on it in my prepared remarks, we are seeing the very early signs there.
Not detectable in the numbers right now and we're not saying, we know how far or how fast they will progress, but those early very early signs just reinforce our view that it is prudent to predict moderation during the year.
Another factor that needs to be considered.
And that's the work.
We can get into the broader discussion.
A little bit later, if you'd like but.
With the war.
Pardon me.
Introduces a lot more risk.
And to the world.
If you've watched what's going on.
In Russia.
The nationalization so on all.
All kinds of new risks coming in.
The insurance industry has to cope with.
Okay.
Maybe we can dig into that unpack that this unfortunate situation. I mean are are there cycles. We can look at where we can say.
This is.
The impact of the insurance cycle or demand post previous.
Walter <unk>.
Wars or is there any color how you guys are thinking about how this could could change.
The marketplace.
I was talking with.
Yeah.
Insurance carriers, but it is positioned three plus years.
He said I think kind of a jinx.
Climate started.
Really hard three plus years ago, social inflation hit.
Yeah.
Okay.
Now we got a pandemic.
Now we go to war.
There is no history, there is no precedent on that.
It's never occurred in the history of this country in terms of insurance.
Conferences.
Correct and Mike just to be clear too, we're not saying we have we actually have no direct revenue exposure to Russia or Ukraine.
It's more of a statement that we live in a global economy and the whole world is impacted by geopolitical events like this.
Markets.
Okay.
Understood maybe one follow up.
Separately so just.
On the leverage levels, we can see what your pro forma leverage level is now.
We know roughly what the cash generation of the company is should we be thinking.
That you.
You'll have runway to deploy.
The debt raise plus free cash flow kind of over the next year or so and also just is there when we think about the acquisitions you are.
Making is there should.
Should we be thinking, they're usually kind of margin neutral or or is it or no.
Is there no way to think about that is that they're all going to be different.
They are all going to be different but I would say that for modeling purposes, Mike just assume margin neutral as we start to actually.
Close on benefits businesses wholesale benefits businesses at some point those can those often do have a little bit of a different margin profile to our legacy wholesale businesses and we will we can give more color on that as time progresses.
But the answer to the first part of your question is yes, we think that given the robust market and our robust pipeline.
That's why I said earlier that the.
Excess liquidity, we have on our balance sheet is earmarked for M&A I don't want to put a timetable on that because I think that creates the wrong.
Incentives.
But we are hopeful that there are.
Ample opportunities out there that meet our highly selective criteria of being strategic and accretive and we're hoping we can talk to you about those very soon.
Okay. Thank you very much for the color.
Okay.
Our next question comes from the line of Alex Scott with Goldman Sachs. Please proceed with your question.
Hey, Good afternoon first one I had for you is just on the growth outlook for 2022 I was wondering if you could maybe even just qualitatively discuss sort of how wholesale brokerage binding authority and underwriting management play into the growth outlook you've provided.
So we won't give we gave guidance at the segment level. We're one segment so consolidated.
You will you may have noticed in some of <unk> prepared remarks, the current environment.
Is favorable overall for E&S specialists like us, but the competitive dynamics are a little bit different for example for a wholesale broker like our T vs and underwriting manager Theres also.
Differences that Im sure Youre aware of in terms of.
Delegated authority underwriter has to be mindful of the capital providers balance sheet. So growth has to be balanced with an underwriting profit and so that does.
Have an impact on the growth prospects, but we have said before that all of our all three specialties are robust contributors to the aggregate organic growth percentage and Theyre all currently.
In some way or another benefiting from the favorable market conditions that Tim said at this moment are still alive and well.
As you know.
And the wholesale distribution market there are far fewer competitors.
Then there is.
In the.
Underwriting business.
Most of these lines of.
2030 40.
Sometimes less sometimes 10.
Markets that are anxious to write the business.
And where we are.
A microcosm of that and that.
We represent those carriers.
If we're representing a carrier.
As an MCU.
We're going up against other carriers, who are dealing without an Mg U and.
And some carriers are dealing with in <unk>.
With the system.
I know you know this for them, maybe appreciate the quarter, but it's important to understand that.
The competitive.
Profile.
It is different.
So the delegated authority against the wholesale.
Broker.
<unk> responsibility.
The dual responsibility.
Care to <unk>.
Capital provider and the client client being retail broker or the wholesale brokers a duty of care to the retail broker.
Got it so very helpful.
Follow up question is sort of separate is just following up on the comments about the environment and just disruption from the conflict going on in Ukraine and Russia.
Are you are you starting to see that actually in pricing of specific lines. I mean is it is it more isolated to maybe ciber.
<unk> or anywhere else you are seeing that start to actually make its way in a tangible way to pricing.
Well, that's really a good question and the answer is.
There's all kinds of factors that are driving prices up and cyber.
Probably.
Yes.
Global issues on hacking.
And the accusations that go back and forth has been affecting cyber so theres, probably some cyber influence already.
The geopolitical issues.
Nationalization of.
Or or plain leases.
That's not one that I don't think that's in the marketplace at all but will be quicker.
Quickly.
The inflation.
That is becoming more and more apparent that the more people's minds.
Being driven by the war with supply chain issues and lots of other disruptions I think those are just beginning to come into the market.
So I think that the war only being a few weeks old.
Because.
Obviously front of mind to everybody.
Trying to sort out what it means.
So I don't think youll see much of it maybe the cyber product as you pointed out.
Nothing, but youre going to look at political risk.
Great.
You've got to look at.
D&O because corporations will get blamed corp.
Corporate leaders will get player.
For problems that come up.
And so post Marina cargo, but we don't have.
I think managing underwriting business.
Very modest and ocean marine cargo.
De Minimis.
Yes.
In terms of wholesale brokerage.
Yes, we have that.
That's not.
The same kind of risk.
We're representing the carrier we have to make sure that their appetite stays satisfied.
Gratified that we've got with a profitable business.
Thanks for the responses.
Thank you.
A reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Weston Bloomer with UBS. Please proceed with your question.
Hi, Thanks for taking my question. My first one is on the de Novo formation that you talked about in the prepared remarks, I know youre not going to get any specifics on how material the impact may be but is there any way you could quantify that.
A typical.
How that typically trends in a typical year or in 2021 or any additional color on the rationale and 2020 versus prior years.
So just to make I'm going to repeat the question just to make sure I understand it you are looking for any sort of color. We can provide on like maybe the ramp up to scale or to even just revenue for these some of these de Novo <unk>.
Exactly yes, and maybe.
What impact was there in 2021 or prior years from other de Novo formation, how should we think about that in a typical year.
Well the ramp up.
Is unpredictable.
Because we are assembling the capital.
In some cases, we've hired the talent.
In all cases each of the cases.
We have.
Pardon me talented about to be hired.
So that's the timing issue.
But Dennis the assembly of the capital and you need the front or the primary carrier.
The new data quota share.
Sure.
Participants on a on a subscription.
Scripts in basis or.
Our quota share reinsurance.
We're very experienced.
Professionally.
Strong.
In supplying all of that.
But it's a process.
Instantaneous by any means and so we just can't forecast what the near term.
Ramp up rate is but I would say this they are in lines of business that the market needs or we wouldn't be doing it.
And we're attracting talent.
We'll be differentiating.
Half of the market. So we're optimistic about.
About the.
Both the results.
The near term.
Slowly for the first two months.
And that accelerated.
We can't forecast the acceleration.
But in the past.
In the past being prologue.
<unk> had excellent returns on our de novo's.
And we built some very sizable businesses.
De Novo with just getting the right talent and then getting the right amount of capital support.
The good news now is that we have all of what it takes to set up a de Novo Mg U.
And that we have access to the primary paper or the fronting paper abaxis to support of reinsurance <unk>.
Subscription support a very strong carriers.
We have good infrastructure support.
As to the.
Does the retail brokers.
You just have to get the right talent and we're pretty good at that.
Got it thank you.
And then on free cash flow is there any way you could provide additional color on how we should think about free cash flow conversion in 2022, either as a percentage of revenue or earnings or can you talk to what initiatives you.
You are taking to improve your free cash flow overall.
So I just want to remind you of the way that we think is most instructive to calculate that and the formula is starting with adjusted EBITDAX than taking out interest expense take out adjusted income tax expense and then capex.
Under that formulation. If you track 19 2021 trending in the right direction, we expect 22 to be a continuation of that trend as well.
Got it thank you for the color.
Our next question comes from the line of Meyer Shields with <unk>. Please proceed with your question.
Thanks very much.
Both Pat and I want to say Tim mentioned that this is a very good opportunity for for our recruiting I was hoping you could dig into that a little bit.
And the reason I'm asking because we haven't seen to divestment analogy is really disruptive potential acquisitions that I thought would have been a great source of recruiting recruitment opportunity.
So youre looking for color from us on sort of maybe some of the underlying factors are conditions that lead to this opportunity for all of these new hires we're talking about.
Exactly sure I'll start and Tim could pick up.
<unk>.
With all the disruption in the.
In the marketplace.
Both of the disruption.
There has been an entrepreneurial spirit.
Stimulated.
And underwriters and brokers want to be a part of an organization.
That has a platform for broad growth opportunities.
Where our independence has been very important to us.
Bob.
And so we have that.
They're also looking for a culture, where they can have freedom.
A real bureaucratic nature.
They see that with us.
Frankly, they're looking for.
For reward for performance.
People are all paid on our performance even the underwriters.
Our paper performance just based on the.
The growth of the business.
And the profitability of the.
<unk>.
So there are performance driven there.
Shippers.
And then lastly.
Many of them are <unk> companies.
Don't have equity available.
And you've seen the phenomenon of the roll ups with P values that are stimulated.
People to think well, maybe it's time for me to get some equity.
Our going public.
Frankly has helped attract people.
Two our story that they read about US now much more of a visit when we were private so they know a lot more about us.
And they have seen that we have performed well so that our stock is.
Reflected that and so I think this is greater interest in.
Exploring things with us.
Okay. Thank you that was very helpful and if I can follow up with a quick question with regard to guidance, but when we talk about the initial signs.
Increasing competition.
Is that one of the specialties in other words wholesale versus binding authority or underwriting management, where that should manifest itself sooner.
Alright, maybe are you trying to figure out in terms of related to the prepared remarks.
Where were we were most.
Where the competition comments are most relevant among the three specialties of wholesale binding versus underwriting managers.
Yes, that's right.
Okay, well, it's definitely on the managing underwriting.
Because of the abundance of carriers Meyer.
As I know you know many of these lines of 20% to 30% to 40 carriers.
Maduro wholesale broker.
To get the order of the adult.
And we get the order.
A great deal of the time.
Managing underwriting.
Retail broker or wholesale broker might well be getting three four or five quote.
And.
So there's much more.
Competition.
Out there for that business and then.
And you've seen this virus.
With rates.
Escalating in certain lines.
And <unk>.
Terms tightening.
That's attractive.
Aggressive.
Pursuit by carriers.
But we're just.
We're just a mirror image of what happens with the carrier because we represent these carriers.
The good news is that we're all we're very discrete specialties.
Sure.
Differentiated talent.
It's allowed us to be quite successful, but it's competitive.
So competition demands that should keep hiring higher quality and more quantity because the volume is so high you have to have large teams underwriting teams to analysts, but you have to have the really.
Experts underwriters.
And that was the process I described earlier question.
Okay excellent. Thank you so much.
Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call back over to management for closing remarks.
Okay, well, thank you operator, and thank you ladies and gentlemen, thanks for your continued interest and support of Ryan specialty.
The value of that very highly we look forward to speaking with you again, when we discuss our first quarter of 'twenty two results. Thank you and.
Good evening.
This concludes today's conference and you may disconnect your lines at this time.
For your participation and have a wonderful day.
Okay.
Yes.
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