Q3 2022 Ryan Specialty Holdings Inc Earnings Call
Greetings and welcome to the Ryan Specialty Holdings' third quarter 2022 earnings call.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
If anyone should they should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
At this time I'll now turn the conference over to Noah Angiolini head of Investor Relations and Treasurer of Ryan Specialty Holdings.
No you may now begin.
Good afternoon, and thank you for joining us today for Ryan Specialty Holdings' third quarter 2022 earnings Conference call. In addition to this call we filed a press release with the SEC earlier. This afternoon, which has been posted to our website at Ryan specialty Dot com on today's call management's prepared remarks and answers to your questions may contain forward.
Looking statements investors should not place undue reliance on any forward looking statements. These statements are based on management's current expectations and beliefs and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today.
We encourage listeners to review the more detailed discussion of these risk factors contained in the Companys filings with the SEC.
We assume no duty to update such forward looking statements in the future except as required by law.
Certain non-GAAP financial measures will be discussed on this call and should not 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 was filed with the SEC and avail.
Well on the company's website.
With that I'd now like to turn the call over to the founder Chairman and Chief Executive Officer of Ryan Specialty Pat Ryan.
Good afternoon, and thank you for joining us to discuss our third quarter results.
Joining us on today's call is our president Tim Turner, and our CFO Jeremy become also joining as miles ruler CEO of our underwriting managers specialty will be around for the Q&A.
It was a solid quarter for Ryan specialty and our differentiated platform total revenue grew 16, 8% led by 13, 7% organic growth.
In addition, we achieved double digit growth in adjusted EBITDAX and solid growth in adjusted net income specific to the third quarter, a hard market for rates largely continued.
We saw additional affirming and many of our lines of business.
As we noted last quarter. One notable exception was public company D&O, which saw rapid rate decline in the quarter beyond what we had in the market anticipated and.
And which Tim will touch upon shortly.
Importantly, our ability to generate another quarter of double digit organic growth. Despite this headwind and an exceptional third quarter 2021 comp speaks volumes about the strength of our team our diverse products and services offering.
The winning culture, we have built that Ryan specialty.
As we've noted previously.
Risks across industries are only becoming more complex our products are luxury compulsory.
Our clients value the expertise we bring.
Our producers continue to provide our clients and our trading partners with innovative solutions, we wanted to acknowledge it increasingly challenging insurance.
And macroeconomic environment, and specifically three areas, where we're seeing headwinds will likely carry into at least the first half of 'twenty three.
First while the.
The E&S marketplace remains a standout within the insurance industry, we began to see a deceleration in the growth rate of inbound flow towards the end of the quarter, which is backed by state staffing and reports.
Second a faster than anticipated economic deceleration.
Coupled with significantly higher interest rates are delaying certain project based construction policies, along with M&A transaction liability policies.
Ah rely on highly functioning debt markets.
Third.
Changing market conditions in the public D&O market have had an impact on our professional lines book.
After years of rate hardening, new capacity enter the market.
Leading to additional supply and a decrease in rate and a <unk>.
When IPO activity is down significantly.
This has also led to increased opportunities for retail brokers to place some of this business directly.
Our collective experience has allowed us to successfully manage through different economic cycles in the past.
And we are confident that our leadership team is well positioned to execute our game plan through the cycle as well.
We're also pleased to note.
Connectivity among our brokers continues to improve a testament to their tireless efforts to be laser focused on client centricity to.
To match market needs with industry, leading expertise.
We are also prudently continuing to onboard top decile talent to add to our industry, leading team and deep bench.
To take advantage of the resilient in a slow and continue gaining market share.
Our M&A pipeline remains robust as.
As we look for additional opportunities, both tuck ins and larger acquisitions to enhance and differentiate our platform and capabilities.
We remain disciplined in our pursuit of acquisitions, particularly in the current environment as we will only move forward all of our criteria are met.
Every acquisition must be a strong cultural fit strategic and accretive.
Our disciplined is bolstered by our core results, which have proven throughout this year, we do not require acquisitions to achieve robust growth in any given period.
As we begin to turn the page on 22, we believe we remain well positioned to succeed.
<unk> over the long term given our resilient and flexible operating model that enables us to quickly adapt and pivot to an increasingly challenging macroeconomic environment.
Nonetheless, we remain confident that the value we bring to our trading partners, particularly in times of uncertainty.
<unk> is extremely valuable as we anticipate their needs.
Worked tirelessly to provide the right solutions to protect their insurance risks.
As it has in the past.
We expect the E&S market will continue to grow as the world becomes riskier and more complex.
This along with other secular growth drivers.
Allowed us to generate annual double digit organic growth for years to come.
In summary, I remain proud of our entire team at <unk>.
Supposedly they are incredible effort led to another solid quarter and a 2022.
Surpass our expectations from when we started the year.
Now I'll turn it over to Tim Tim.
Thank you very much Pat as Pat highlighted it was another solid quarter across our specialties and the E&S market continues to serve a critical role in an increasingly challenging insurance landscape.
This is backed up by a M. Best recent report, which highlighted the sustained expansion and ryzen demand for E&S solutions, driven by constantly evolving risks and rapidly innovating technology.
We are in a prime position to continue to capitalize on these positive trends.
Diving into our specialties, our wholesale brokerage specialty achieved another quarter of strong growth across property and casualty lines of business.
Once again cap property was the strongest driver of new business into the non admitted market.
Since our last call hurricane in a devastating storm caused tens of billions of dollars of damage I would like to take a minute to send our best wishes to all of those that were impacted by this horrible disaster.
We believe these types of loss events, along with themes. We've previously discussed our leading to shrinking capacity as well as even higher rates.
Ultimately, we believe these factors will lead to more flow into the E&S market as reinsurers further derisk their portfolios during upcoming renewal cycles.
We also expect increased flow from other non cat markets.
There will be a significant need for E&S solutions in 2023, and our depth and breadth of experience and products will remain in high demand.
We will continue to develop innovative solutions in our brokerage and delegated underwriting authority businesses in these high hazard niches in order to take advantage of these incoming opportunities.
Ciber.
It was a strong performer in the quarter flow continued to be robust into the E&S channel as noted previously we complement our brokers with capacity from our delegated underwriting authorities as evidenced by our announcement of a new $15 million exclusive access cyber facility supported.
The highly rated carriers.
It's another example of our brokers innovating on behalf of their clients as well as the staying power.
Our delegated authority demonstrates and how it continues to be a top choice for carrier capital.
Our transportation practice, particularly in trucking continues to see sizable flows.
We continue to win business in this line and remain well positioned to capitalize on additional growth opportunities.
Our construction practice performed well in the quarter. We are encouraged by the submissions that were seeing in the current pipeline of projects.
However, we should note that we've begun to observe delayed project starts due to the rapid increase in interest rates and a slowdown in the economy.
As Pat noted our public company D&O practice experienced some headwinds in the quarter as well.
As we noted on our prior call we began to see rate decreases and public company D&O during the second quarter.
In the third quarter the pace of rate decreases in that line accelerated this and the market forces that Pat referenced are what we began to observe earlier this year and have referenced in prior calls these had a significant mitigating impact on the strong growth in our other lines.
We expect these trends in public company D&O to continue.
Into at least mid 2023. However, we are confident that we have the team and platform in place to continue to grow in this line over the long term.
In our binding authority specialty we saw solid growth in traditional binding which includes small commercial business that has historically been economically sensitive.
This growth was reduced by our personal lines binding authority, which has experienced capacity constraints and area of focus for our upcoming carrier renewals.
Additionally, the panel consolidation opportunity that we've mentioned for a number of quarters is just beginning to bear fruit, we see this as a long and steady growth opportunity and we are well positioned to execute.
Our underwriting management specialty posted another strong quarter, despite dislocated debt capital markets and less M&A activity, resulting in less transactional liability business being bound while continuing to deliver solid underwriting results for our carrier trading partners.
We are also seeing continued progress with our de novo's through our harleysville of New York arrangement with nationwide.
In terms of the E&S market pricing remains firm in many classes of business with the notable exception of public company D&O rates that Pat mentioned earlier, and cyber where we're seeing a flattening in rate.
As we said several times before we expect the flow of business into the non admitted market to continue to be a significant driver of Ryan specialties growth opportunity more so than rate.
With that I will now 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 16, 8% period over period to $412 million, which was fueled by another solid quarter of organic revenue growth at 13, 7%, reflecting the ongoing tailwind in most of the E&S market and continuing to win a substantial amount of new business.
Despite the nearly 29% year over year comp.
Net income for Q3, 2022 was $29 million or <unk> <unk> per diluted share adjusted net income for the quarter, which excludes IPO related and other unusual items increased 6% period over period to 67 million or <unk> 25 per diluted share.
Adjusted EBITDAX for the third quarter grew 11% period over period to $117 million, while adjusted EBITDA margin declined 140 basis points to 28, 4%.
Our adjusted EBITDA margin was impacted by continued investments in the business and <unk> continuing to return to normalized levels and also improved by higher fiduciary income.
It should be noted that relative to Q3 of 2019, which had a full run rate of <unk>. Our margin was up 450 basis points in the quarter again, showing the proven scalability of our model over the years.
Moving forward, we will prudently continue our hiring practice of finding the industry's top talent in both underwriting and broking, where there are clear opportunities to grow lines of business we.
We also fully intend to continue investing in our platform, which allows us to generate sustainable margins, while producing industry, leading organic revenue growth.
As we do so we will continue to closely monitor the macroeconomic environment and industry for additional signs of slowing to ensure that our investments in talent and infrastructure are accretive.
Furthermore, our balance sheet remains fortified with $833 million of cash and cash equivalents as of September 30. In addition to our $600 million of Undrawn revolving credit facilities.
To that end it has always been important to us to maintain a strong financial position I want to highlight our timely capital raise at the beginning of this year before the cycle of steep rate hikes began which diversified our funding sources.
We expect to record GAAP interest expense, which is net of interest income on our operating funds and includes amortization on our interest rate cap of approximately $31 million for Q4 2002 <unk>.
And for the first time, we are beginning to receive payments under our interest rate cap.
Again, it is important to be mindful that the impact of increased interest expense is mitigated by the natural hedge on our fiduciary balances, which benefit from the rising rate environment.
These fiduciary balances continued to generate fiduciary investment income at approximately one month term sofer less approximately 50 basis points.
This spread to sofa factors, an earnings yield that may lag the forward curve as well as some fiduciary balances, which are not permitted to earn yield or that earn soft yield that is instead, an offset to our bank fees and SG&A expense.
Additionally, it is important for us to note that given the timing of our M&A pipeline. It is unlikely that we will close the sizeable deal in Q4, but as Pat mentioned, our M&A pipeline remains robust and we remain disciplined in our approach.
Taking a step back through our first nine months, we generated exceptional organic growth and healthy adjusted EBITDA margin at.
As patent Tim mentioned, the long term Ryan story remains very much intact.
However, given current headwinds in public company, D&O and macroeconomic headwinds impacting construction starts and M&A transaction liability activity. We are lowering our full year 2022 guidance for organic revenue growth to $14, 5% to 16.0% from the previous <unk>.
<unk> range of $16, 5% to 18.0%.
This implies a mid single digit midpoint for organic revenue growth in Q4.
This guide range is ahead of where our expectations were for full year 2022 at the beginning of the year.
When it was difficult to predict the timing and degree of these market changes in macroeconomic impacts. In addition, we are now guiding our adjusted EBITDA margin for the full year 'twenty two to be between 29, five and 30.0%.
From the previous guided range of 29.0% to 30.0%.
In summary, we remain very pleased with our performance year to date and are focused on the path ahead as we navigate through the coming economic cycle with that we thank you for your time and we'd like to open up the call for Q&A operator.
Thank you.
Before we begin I'm aware that there may be an audio issue as participants dial into the conference line. If you are able to switch to the webcast. We understand that this is unaffected by the audio issues.
Thank you and at this time, we'll be conducting a question and answer session.
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One moment please poll for questions. Thank you.
Thank you.
First question is coming from the line of Elyse Greenspan with Wells Fargo.
And with your question.
Hi, Thanks, Good evening My first question.
Thank god that youre expecting a slowdown in organic growth.
For the fourth quarter is there any over concentration in public D&O.
And then on some of these.
The other lines that you call out a couple of headwinds in the fourth quarter.
Some comments it sounds like you guys are still looking for consistent double digit organic.
Yes, thanks to pick up to that level.
I'm just wondering.
Mix is impacting the fourth quarter alright. Thanks.
In 2023.
Hi, Alicia. Thank you for your question. So we are in fact still double digit growers on an annual basis, we are talking about Q4 and like we've said in the quarters of.
20% plus growth you can't look at any quarter up or down and extrapolate.
<unk>.
To your question about concentration I can say that no single product line, including public D&O is.
Even 10% of our overall book, we have a very overall well diversified portfolio of products and specialties.
Last year public D&O, specifically had an outsized growth.
Contribution in this quarter it actually shrank dramatically. So it went from being a contributor to a drag on our organic.
But we are confident that D&O and our entire professional lines practice is one that we're very strong in and that we can continue to grow long term.
And then in terms of the property exposure.
How big that is and I would think.
When we think about 'twenty three in the market hardening.
Ian is that could be a tailwind next year.
So in terms of.
The property exposure, well I want to say be careful and not use exposure and insinuate underwriting risk exposure the percentage of our book that is related to property is many many multiples of our D&O book, we don't disclose the exact person.
Manage but it's it's material and in terms of the impacts.
On our business overall, and what we're seeing in that market I think Tim is best positioned to speak to that.
Yes, I'd be happy to.
The forecast for catastrophic property, a very large part of our property practice group is much harder than we expect the market.
Into 'twenty, three to get extremely difficult and hard and the flow of business into our channel to increase substantially.
We're set up to absorb it and capture it and we're ready to take on the challenge, but it will be a very big driver of new business for us as we go into 'twenty three.
And then just maybe one last one you guys had mentioned that you saw a little bit of a slowdown in flower business.
I get that.
And when you expect that okay and.
And then I guess the ramifications on the property market could reverse that.
We've seen a very slight.
Indication of a slowdown in flow into the channel through the last month and the stamping offices very slight and the flow remains double digit very strong.
Flowing into our world So no no let up.
That we can see in general casualty and again property, we are already seeing signs of the effects of the storm and affirming and an increase in flow here in this quarter.
Thanks for the color.
Our next question comes from the line of Weston Bloomer with UBS. Please proceed with your questions.
Hi, Thank you for taking my questions. The first one.
Follow up on the organic growth commentary that should be slower in the first half of the year.
Or are you expecting have organics to come in below that double digit range in the first half or could we maybe see an offset from stronger property growth just trying to.
Figure out how we should think about the Mac Westin Hey, it's Jeremiah.
The same glitches that the operator mentioned at the beginning of Q&A, we're actually getting on this side too. So you broke up would you mind repeating the question.
Yep.
Wishing from the headset to is this better.
Yes, so far so good.
Great.
Was hoping you could comment on kind of the magnitude of the slowdown that you're expecting in the first half of the year I know you've historically.
The annual double digit organic growth, but could we potentially see single digit organic growth in the first half if the if these trends continue.
Or maybe would we see a partial offset from an accelerating property market.
Fair.
Fair question.
It is a little bit premature to talk about 2023 guidance like we'll obviously know a lot more when we come back to you in February western but a couple of points to keep in mind between now and then.
Most importantly, our strategy our thesis our competitive position our value add to our clients no change there all of those are very much intact and rate decline by the way, which we're going to talk a lot about we talked a lot about in our remarks.
Specifically in D&O.
Our kryptonite like it's part of life for our company, we've managed through it for years and.
<unk> produced double digit organic growth on an annual basis year in and year out through that so we actually think that this whipsaw in D&O is fairly unique.
And.
We've got this known public headwinds D&O, but we believe that we will cycle through by the beginning I'm sorry, the middle of next year and we also have macroeconomic factors that play.
And unknown role in terms of impact and duration and I think all companies are facing that right now, but as you mentioned not all the variables in play, especially when we're talking about next year are negative the property market as Tim said is expected to get very hard and we will be a benefit to us and as I said our property book is.
Many multiples of our D&O book and so we're not trying to convey concern as I said, we are still double digit organic growers on an annual basis. We're just trying to be transparent that there is a lot of uncertainty out there it's difficult to predict all the rates of change that are affecting our industry and so like always we have to be prudent.
With regards to setting expectations, but we're still very bullish about our long term growth prospects and the durability of the E&S market overall.
Great and a follow up to that I know <unk> organic outperformed and you'd called out in the past kind of some timing or lumpy timing with transactions how much of that was related to the D&O book and the transaction liability.
Is there a way to quantify how much of that outperformed in the first half of the year.
Western I hope that you can hear us better than we can hear you because we missed the first half of your question.
The question was really how much of maybe trends at the M&A transaction liability or D&O.
Led to the outperformance in the first half of this year.
Is there a way to quantify that.
I would say I'm going to start and then miles wooler who's on the call who manages our two transaction liability.
<unk> will speak to some of the trends there, but the bigger theme here is that the surge in D&O happened last year, and so we're facing an exceptionally difficult comp.
<unk>.
As it is much actually more than it was a contributor to our growth last year. It was a drag this year and it actually started modest modestly at the very very end of Q2, and we adjusted our expectations for H two as a result of that.
Got it accelerated even more than we anticipated.
On the M&A side.
We didn't have a outsized H one that's now reversing we had a fairly normal H one just because despite the fact that theres been no substantial IPO activity. This year in M&A activity I'm, sorry, M&A activity.
The impact of on closing those deals the timing of closing those deals didnt really start affecting us until Q3, and we have to assume because rates don't appear to be coming down or moderating anytime soon that that persists at least for the for the short term but.
Myles I don't know if theres any other color you want to add to that trend no absolutely I mean, we benefit from both the U S and international practice within our portfolio. So global M&A is drifting down this year compared to last year of as much as 20 or 30% depending on geography.
Year to date as a leader we've continued to grow and achieve rate, but I think we have rightly flagged here that submissions have started declined more in the last 90 days somewhat linked to the recessionary environment, either keeping sellers from bringing new deals to the market or not finding a market clearing price on deals.
As both patent and Tim have highlighted a reasonably functioning debt capital markets.
Is needed to keep our optimal.
Growth rates up.
Happy to say, we've recorded record levels of deals and inventory that are signed and the coverage is accepted however, the deals are waiting to close as they await financing.
Great and last one for me I know you don't give organic growth by underwriting practice I was hoping you could kind of help size.
The growth you saw across underwriting binding and <unk> in the quarter.
Kind of what your expectations are by each one.
In the <unk>.
I'll remind you ought to take that one.
You can pick up on the underwriting.
So in the queue.
And in the Q Western you can actually see revenue growth by specialty we break it out by binding brokerage and underwriting managers.
As we've said before all of these specialties have double digit growth capabilities.
And more often than not they do the headwinds we're talking about them are affecting each of them differently.
The SME market slowdown, that's mostly a binding.
A binding specialty effector, what's going on in public D&O, that's hitting brokerage more than the other two specialties and then transaction liability.
The majority of the impact there that miles just talked about that as an underwriting managers. So what we're assuming for Q4 is actually that all the headwinds that we're experiencing that we experienced in Q3, not only continue but get a little bit worse.
Great. Thanks for taking my questions.
Thank you.
Our next question comes from the line of Rob Cox with Goldman Sachs. Please proceed with your questions.
Hey, I just had a question on supplemental and contingent commissions I noticed in the 10-Q they declined.
36% year over year after growing pretty solidly in <unk> and I was just wondering what that was driven by and if it was related at all to.
Catastrophe activity in the quarter.
You broke up at the end did you ask if it was related to Ian.
Yes.
Hello.
Yes, yes it was.
Related to catastrophe activity yet.
The answer is no.
It's really a timing issue more than anything the effects of Ian won't show up until down the line like mostly next year and beyond although we do that we do expect that impact to be immaterial.
The quarter over quarter is as I said, a timing issue and sometimes we restructure too often improve our profit Commission, our contingent commission arrangements and we actually restructured a material one this year that.
Altered the timing of what we would normally receive so no.
No material and no material negative impact on the contingent Commission front.
Specifically related to <unk>.
Okay.
Although we're having a strong year for for profit commissions year to date and as Jeremy mentioned, that's reflective of recent years.
Our view on that forward bookings year over <unk>, we are extremely pleased with our loss results. So far we're actually.
Based on claims activity to date in model results were expecting to drop dramatically.
History Indians.
We're counting on that as a future benefit leading into next year.
And I would add our binding authorities within RT continue to perform exceptionally well.
Our contingency forecast remains very strong and we're on track so everything's working out very well in that unit.
Got it thank you and then.
Yes.
It was growth impacted it at all in the quarter by lower property placements in this quarter versus kind of the first half of the year.
I am sorry to ask you again.
It broke up for the first part of your question.
With growth impacted by lower property placements in <unk> versus the first half of the year.
No I don't believe so.
Got it thanks.
Our next question comes from the line of Meyer Shields with <unk>. Please proceed with your question.
Great. Thanks, good evening, and hopefully coming through clearly.
So far so good fingers crossed okay, alright is open.
Just to follow up on Rob's question did the year over year declining contingent did that impact organic growth in the quarter at all.
I only heard the backend of your question, but I think I picked up the essence.
Contingent commissions are stripped out of the organic growth calculation now so no impact to organic.
Okay Perfect I was hoping I guess this is for Tim for a little bit more color on the or maybe miles of the impact.
Personal lines capacity, because you had called that out as one of the issues that maybe also a bit of a headwind right now.
Yes, our personal lines division of much smaller division within <unk>.
Sure.
Short of some wind and flood capacity that affected their ability to write new business and the competitive landscape prior to Ian.
We've remedied that and we expect that to be.
Our capacity to be where it needs to be as we head into the fourth quarter.
<unk> geared up for 'twenty, three so we fixed that and we expect it to be back to normal capacity.
Okay perfect that is helpful.
And then last question just in terms of overall expectations do you see any connection between a weakening economic environment and the incremental competitiveness or.
Deal flow okay.
Are those connected at all or is that just a function of what's happening with in P&C.
Okay.
I am sorry, Mayor would you repeat it I heard is there a connection between <unk>.
The economic slowdown and the competitiveness and the pace of deal flow is that related to risks that need to be placed or like M&A.
So in terms of risk it needs to replace so we seeing let business go to the specialty channel as a consequence.
Potential economic slowdown or do you see that as separate and just coincides right now we really see that as separate and have not identified any impact on flow as we said the <unk>.
Top stamping office results that have come in in the last couple of months.
A very very slight deceleration hardly detectable still double digit very strong.
Flow coming into the non admitted space.
Alright, perfect. Thank you very much.
Our next question comes from the line of Tracy <unk> with Barclays. Please proceed with your question.
You took up the lower end of your EBITDA margin guide by 50 basis points.
With one of our top line growth what is driving that are you focusing more on expense savings now that you've seen is topline growth pressure.
Yes.
We're always focused on managing to the bottom line, Tracy and 50 basis points.
They seem tight but it represents.
A decent amount of variability given that we only have two months left in the year.
We are definitely making investment in hiring decisions in the context of top line expectations.
We haven't spent as much on new talent acquisition as we thought we potentially could in the beginning of the year and quite frankly investment income has been a little bit higher than we expected.
But we have a pretty good sense of where we're going to end the year given that.
It's already November 10th.
Got it and then on the D&O I'm. Just wondering are there any programs that may be you are no longer a cargo.
The pressures, we're seeing on pricing.
It may be.
Got something more specific to your business.
Oh I'll respond from the underwriting managers, we've kept all of our facilities intact, we've delivered great results.
Carriers, we actually grew our capacity last year and so no. There is nothing unique to us we have the capacity the capability. It's just.
And overall pullback in the marketplace and we're not going to chase.
Thank you.
Our next question is from the line of Jimmy <unk> with Jpmorgan. Please proceed with your question.
Hi.
So first on just your organic growth I think youre, implying that growth slowed as the quarter. As you went through the third quarter can you maybe quantify or just give us a better idea on what the actual growth was early in the quarter versus late in the quarter and so we get a better sense of how <unk> is looking.
Okay.
While we are definitely not going to break out growth by month, but given that it is November 10th already we're taking everything we've seen through today into account with our Q4 outlook for sure and as I said, Jimmy we are assuming that all of the things that slowed us down in Q3.
<unk> persist and actually accelerate it's really difficult to.
Predict.
Where our rate of change actually in flex, but.
We're we're sticking to our MAU of being as prudent and transparent as we can.
Okay, and then if you think about the overall E&S market and your business, obviously, it's grown a lot faster than the standard market and partly because the exposures that have been coming into the E&S market do you think at all if.
Pricing in the primary market sort of.
Slows down a little bit or flattens out would that affect the flow of business and Dewey and that's in the short term like with some of the business that's come into E&S.
Would that end up going back to standard lines, even if in the short term the long term growth outlook for the market is good.
I am not sure I fully understood. The question, but I think what Youre asking is would that have any impact on the flow into the non admitted business that exactly yes, yes.
Yeah, I don't believe so.
I believe that that the losses coming from social inflation.
And global warming continue to impact the balance sheets of the standard markets and they are continually derisking their portfolios directly affecting that heavy flow into our channel.
Jimmy with your request and I think it's appropriate.
This is Pat.
Miles talked about cyber.
Because.
Cyber needs to be explained in terms of.
So really good news.
For the industry.
And for Commerce in general some others want to explain the cyber yes, absolutely so.
Dovetailing your question, Jimmy I mean, using cyber as an example last year the U S cyber market actually doubled and E&S met that need by growing at 220% relative going 20% growth in the admitted market. So.
2022 might not be as dramatic, but E&S will continue to lead the way.
Is this even more Robyn this class will despite.
Doubling of growth in the market, we still believe that only 90% excuse me.
Much of 90% of the cyber market remains uninsured today, so there's a huge runway for us to pursue regardless of short term pricing trends.
As it relates to pricing exactly so we are monitoring closely there is some flattening underway again another class. So we benefited from the hard market dynamics.
Our our underwriting has enabled us to grow our facilities both in limit and total premium available to write on delegated basis, but within the market companies have invested in risk management and loss control, resulting in improving loss trends.
Risk premium related to the Ukraine War is slowly leaking out of the market is there hasnt been associated shock loss to date and so ultimately we are seeing a stabilizing environment where rate adequacy has improved and there is an increase in carrier competition.
But that doesn't that doesn't change our overall view that we are in the early stages of penetrating this addressable market.
Sure and lastly, just.
In terms of growth versus margins I think versus many of the retail brokers and some of the more mature companies.
You have had a preference for investing in the business.
While you were growing very fast so I think margins have expanded as much as they normally would have expanded given your significant growth, but it should be assumed change in focus in terms of growth spending.
If revenue growth slows down or.
Are you going to be consistent with how you've been in the past in terms of.
Sort of investing in the business.
Hi, Jimmy.
We're going to the short answer is we're going to stick to our game plan, which is balancing making necessary investments to continue outsized organic growth, while managing margin and growing it over time. It doesn't mean every quarter. It won't even mean every year necessarily but what we're on record.
For sure.
<unk> four here is that most years on a reported basis.
We are going to show scaling.
And margin and as I as I said in answering Tracy's question, just with our lower growth in Q3, and our expected lower growth in Q4, we're already beginning to adapt Unfortunately, we've got practice.
Adapting and being flexible and we're fortunate because for starters are a huge amount of our cost base is variable to begin with so.
We're going to stick to our plan.
Los Cabos by miles.
Jimmy just to be fulsome on cyber as an example.
The hardest to place commercial business a lot of that is the growth continues in E&S. However, in some of the small and medium business. There is increasing competition that the admitted lines Ken can solve for in some cases, there might start to be framed in that into the market.
And then cyber is understandable because it's.
There's way more demand than there is supply.
Of capital to cover the risks, but how big that sorry, but it's a pretty small market rates diapers like 2% of the market for the primary companies that a lot larger than that for you guys.
Hello.
Back to Jeremy.
Response, we we have the benefit of 23 Mg use in the family and in National programs unit with 17 niches. So we're not dependent on any particular product within the family.
We feel we have a material practice.
With a lot of upside is in addressing the market.
Thank you.
Thank you.
The next question is from the line of Mike <unk> with BMO. Please proceed with your questions.
Hey, good evening.
Yes.
Yes.
Questions on cash flows from operations I know there is there is noise in this that we need to back out.
But.
Curious if if there is anything new.
You want to call out on the call or should we should be thinking that cash flow from operations.
Grows.
On a full year basis.
Especially into 2023.
So thank you for bringing that up Mike. This quarter is the perfect example, why we guide people towards our adjusted view of cash flow operating cash flow. This quarter was impacted significantly by 109 figure payment to finish.
Finish out the all risk <unk> plan, which by the way our earn outs.
Essentially their purchase price reductions.
But because they are paid to employees non equity holders GAAP forces you to run that through the P&L is comp and we absolutely love that because it's sticky and it makes a lot of new family members happy. So this this concept is not going away, we're going to put these in as <unk>.
Many deals as we can but it is a great example of why a traditional view of operating cash flow.
It's going to have noise in us for quite some time.
Okay.
Very helpful.
And <unk>.
Just curious.
I know, it's early days in terms of higher interest rates, but do you see that impacting the.
M&A marketplace in terms of deals and competition for deals you guys are looking at or not really yet.
We have a very robust pipeline.
Pipeline.
Both in brokerage.
Managing underwriting.
<unk> benefits.
As we've said we've been very disciplined.
<unk>.
Reacting to.
So it's doing a deal.
So we've done a lot of.
Yes.
If I had a lot of discussions.
We have some paperwork.
Significant discussion with.
Quite strategic opportunities.
So we're bullish on our <unk>.
M&A activity, but.
We won't close anything.
Calendar year.
But we're.
A good position.
<unk>.
Bring institutes like opportunities next year.
<unk>.
The market has.
It's still been robust.
In terms of multiples.
And so we've avoided.
What we consider to be excess multiples.
In terms of valuation.
We as I said, when we look at.
Okay.
The culture and the strategy of the accretion.
But also we look at.
The impact we can have.
On our total enterprise by bringing these companies.
And so we will look at valuation.
I'd say, what kind of cost synergies.
Or the other.
Material.
We never.
And the value.
<unk>.
Revenue synergies.
But our revenue synergies.
<unk> been very.
Significant okay.
So if you take the all risks acquisition.
We have outperformed.
Alright.
In terms of the brokers productivity increases.
So.
Jay.
On revenue.
It's something that we look for.
We.
Value are.
Potential opportunity, but we don't pay for that.
And Mike to the part of your question related to.
Firepower, and how that positions us versus other competitors.
Competitors, we actually feel like we're in a great spot because we raised our bond in January and I'm sure. You saw we've got over $800 million of cash on the balance sheet. We have an undrawn 600 million Undrawn revolver, we're levered at less than two five times net so it's not as important for.
Tuck in deals, but if we're competing on a large property and our competition has to.
<unk> raised new capital.
That is going to be an advantage for us we're really fortunate that we could take down big targets right now without raising new capital as Pat said it Hasnt, we havent seen a huge impact in and multiples yet but for big deals we think it could edge.
I'd like to just say one.
One of my comments.
It's possible.
But we could close the deal before year end.
We are almost.
Forecasting output.
We have some attractive opportunities.
Thank you.
Thank you at this time there are no additional questions I will turn the call over to Pat Ryan for closing remarks.
Yes.
Sure.
Thank you.
All for your continued interest and support of Brian specially.
We look forward to speaking with many of you in the next.
Sure.
We particularly look forward to.
Discussing our fourth quarter.
Two results thanks for your support and your interest.
This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Yeah.