Q4 2022 Ryan Specialty Holdings Inc Earnings Call
[music].
Greetings and welcome to Ryan Specialty group fourth quarter, 2022 earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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I would now like to turn the conference over to your host.
Sure Andrew <unk> head of Investor Relations and Treasurer. Please go ahead.
Good afternoon, and thank you for joining us today for Ryan specialty Holdings' fourth quarter and full year 2022 earnings Conference call. In addition to this call we filed a press release with the SEC earlier. This afternoon, which has also 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 company's filings with the SEC.
We assume no duty to update such forward looking statements in the future except as required by law.
Additionally, 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.
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 available on the Companys 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. Thank you for joining us to discuss our fourth quarter results.
Joining us on today's call is our president Tim Turner.
Oh Jeremiah pick them.
And our CEO of underwriting managers miles war.
Before we discuss Ryan supposedly it's 2022 performance.
I'd like to take a moment to reflect on the passing of Andrew J Mccann Lowe.
Andy was an invaluable member of our board.
Since its inception in 2012, serving on the compensation and governance Committee and as a lead director.
And he was the national voice on the topic of corporate governance.
Chicago institution.
This is an icon.
Terry and philanthropist husband father brother, and a dear friend.
He will be missed by all who knew him.
'twenty 'twenty tools, an outstanding year for iron specially.
Tireless efforts and dedication of our brokers underwriters in the entire Orion, especially team.
And our results.
For the full year, we generated record revenue of over $1 7 billion.
Driven by organic growth of 16.4%.
On top of 22.4% in 'twenty to 'twenty one.
Produced a strong adjusted EBITDA margin of 30%.
I wanted to take a few minutes to highlight some noteworthy achievements in 'twenty to 'twenty two.
Which were significant for our firm.
We invested in the exceptional tell onboarding the largest production class in our history.
We enhanced our capabilities through new product offerings and integrated our 2021 acquisitions of Keystone and Crouse, both of which exceeded our growth goals for the first year as a part of the Ryan especially team.
We were pleased to announce a highly strategic acquisition Griffin underwriting services, which closed on January 3rd of this year.
It was approximately 23 million in revenue Griffin deepens, our offerings in the Pacific Northwest broadening our geographic scope.
And our capabilities and binding authority and brokerage specialties.
Importantly, gryphons consistent underwriting result, deep bench of talent and focus on training and development is a clear cultural match with Ryan supposedly.
Further enhances Ryan specialty as a central role.
As a trading partners who are retailers.
Continuing our winning culture I'm pleased to report another year of 97% retention of our producers.
Assistant with 'twenty to 'twenty one.
For the fourth quarter total revenue grew 14.9% plus.
That's about 10, 3% organic growth.
We also grew our adjusted EBITDA <unk> and <unk>.
And another quarter of solid adjusted net income.
In the fourth quarter of a specific headwinds we noted on our prior call were in line with our expectations.
We anticipate that these headwinds will persist into at least the first half of 'twenty to 'twenty three.
That said, we were very pleased to see the strength of the property and manifest itself late in Q4, which drove the modest outperformance versus our expectations for the quarter.
As we progress through 2023, there are three things. We believe you can expect from Ryan specially.
First we.
We see continued solid growth in the business.
Although there was heightened macro uncertainty.
The complexity of risks continues to increase and as a result, we believe the U S market will continue to be a standout within the insurance industry.
We expect our growth will be balanced across our diverse portfolio of products and solutions and enabling us to capture the router in us tailwind.
While capitalizing on specific areas of accelerated growth.
We expect to grow our business through M&A.
Our pipeline remains robust.
If in tuck ins and some larger platform opportunities.
We continue to focus on M&A opportunities with the highest quality specialty distributors, including wholesale delegated authority and benefits.
We will also look to grow our business through our alternative risk strategy arranging alternative capital to support our clients expanding our addressable market.
Building on our culture of innovation.
Second we will continue to invest in our business.
We expect another year of targeted hiring adding industry top talent in both underwriting and broking or they'll need us most.
As well as continuing to build our internship program and Ryan specialty University.
It will also make additional investment in our delegated authority specialties, including the systems and technology.
Other in house actuarial risk management and loss control teams.
And third we will execute on strategic initiatives to increase the scalability of our operating platform.
They were announcing the lots accelerate 2025.
A two year restructuring program effective in Q1.
Through this program, we're making changes and investments.
It will enable continued growth drive innovation and deliver sustainable productivity improvements over the long term.
Accelerated 2025 is a natural progression of our strategy.
It brings together our people and assets in a way that a lot.
All of us to continue to rapidly innovate.
More efficiently provide new and improved solutions to the most complex challenges our clients face.
Sure I'm I will provide more details in his remarks, we anticipate accumulative special charge of approximately $65 million from 'twenty to 'twenty four.
The program will deliver approximately $35 million of annual savings in 2025.
And further enhance our ability to scale our platform and the years beyond.
Accelerated 20 to 25 is designed in concert with our growth strategy and we will continue to make investment decisions, including hiring and M&A based on a disciplined return on capital basis, both now and in the future.
Looking forward I'm confident of 2023 will be another strong year for our firm.
We expect sustained growth.
Our flexible business model allows us to quickly adapt and pivot to changing market conditions.
As we've noted previously risks across industries are only becoming more complex.
And the E&S market has continued to outpace the overall P&C insurance market our products are larger compulsory.
Clients and trading partners value the unparalleled expertise, we bring as we anticipate their needs and worked tirelessly to provide the right solutions for our insurers.
This along with our other secular growth drivers so that allow us to continue generating double digit organic growth over the long term.
In summary, I'm very proud of our entire team for delivering outstanding results for our clients trading partners and shareholders, a challenging insurance market and macro environment.
Through innovation and exceptional customer service, we have once again validated our differentiated business model.
Continue to be a trusted partner with substantially all of the top 100 retailers.
I'll turn it over to Tim Tim.
Thank you very much Pat it was another solid quarter and year across our specialties. These results are a testament to the teamwork across the firm from our producers to our underwriters and their teams.
As Pat noted the E&S market continued to grow in importance to the insurance industry and we capitalized on these industry trends.
Diving into our specialties.
Our wholesale brokerage specialty achieved another quarter of solid growth spread across many lines of business proper.
Property continues to experience a historically hard market as rates rose significantly and capacity tightened.
We are seeing a large volume of new business flow into the non admitted market and we remain very encouraged by properties potential looking ahead.
As we've noted previously major events such as hurricane in winter.
Winter storms and other climate events as well as a tougher reinsurance renewal process have led to less capacity as well as even higher rates.
This is producing increasing demand for insurance solutions, and a recurring opportunity for our experience and expertise to fill that need.
Cyber performed well in the fourth quarter and for the year.
While we continue to see a moderation in rate increases. We believe there is ample runway for us to pursue regardless of short term pricing trends.
Our technical expertise in areas like cyber is playing a significant role in our ability to build large towers of capacity for our clients.
Our transportation practice, particularly in trucking continues to see substantial flow fueled by social inflation and ensure a need for continued rate increases.
We continue to win new business and remain well positioned for 2023 to capitalize on additional growth opportunities.
In our binding authority specialty we saw another quarter of solid growth in traditional binding which includes small commercial business that has historically been economically sensitive.
This growth was partially offset by a personal lines binding authority, which was still experiencing capacity constraints prior to renewals.
We continue to see the potential for panel consolidation.
As a long and steady growth opportunity and we are well positioned to execute.
Our underwriting management specialty.
Posted another strong quarter led by property and casualty health care and our reinsurance M. G. You Ryan re despite headwinds in our transactional liability lines driven by lower M&A volume.
As Pat noted.
In the fourth quarter the specific headwinds in certain lines, we raised on our prior call a rapid rate decline and public company D&O.
Lower external M&A and IPO volumes in transactional liability and delayed project base starts and construction were in line with our expectations.
We anticipate that these headwinds will persist into at least the first half of 2023 we remain.
Confident that we have the right teams in place to grow these lines over the long term.
In terms of the E&S market.
Our observation is that pricing has remained firm in January and into February in most classes of business with public company D&O being the ongoing exception.
In addition, the standard market carrier competition, we observed on the periphery.
And which we flagged on prior earning calls has yet to meaningfully impact rate or flow in the aggregate.
As we've said previously we expect the flow of business into the non admitted market to continue to be a significant driver of Ryan specialties growth more so than rate.
With that I will now turn the call over to our Chief Financial Officer, Jeremiah become who will give you more detail on the financial results of our fourth quarter. Thank you.
Thank you Tim in Q4, we grew total revenue 14, 9% period over period to $435 million fueled by another solid quarter of organic revenue growth at 10, 3%, reflecting ongoing tailwind in much of the E&S market and continuing to win a substantial amount of new business.
We were pleased to see the strength in property late in Q4, specifically in the last two weeks of December which drove the modest outperformance versus our expectations for the quarter.
Net income for Q4, 22 was 46 million or <unk> 14 per diluted share.
Adjusted net income for the quarter, which excludes IPO related and other unusual items was $74 million or 27 cents per diluted share.
Adjusted EBITDAX for the fourth quarter grew 6% period over period to 127 million, while adjusted EBIT margin declined 250 basis points to 29, 3%.
Our adjusted EBITDAX margin was impacted by continued investments in the business and T. Any continuing to return to normalized levels, which was partially offset by higher fiduciary investment income.
As Pat noted in 2023, we expect to continue bringing aboard top underwriting and broking talent wherever we see clear opportunities to grow lines of business.
We also expect to recruit a significant class of new talent at Ryan specialty in the months ahead.
In addition, as we noted in our release earlier today and in Pat's earlier remarks, we are embarking on our accelerate 2025 program, which will strengthen how Ryan specialty operates and further improves our efficiency and unlock additional value for our clients and shareholders.
Over the last four years alone our revenue has more than doubled head count is up 50% and all while the U S. E&S market has grown by over 80%.
We believe this is the right time to continue building on our success and have thoughtfully designed a program that will prepare Ryan specialty for the next cycle of growth.
Accelerate 2025 will result in approximately $65 million of cumulative charges through 2024 in turn we expect it to generate annual savings of approximately 35 million in 2025 and facilitate even greater operating leverage thereafter.
Based on our current forecast, we expect to record GAAP interest expense, which is net of interest income on our operating funds of approximately $120 million in 2023.
As Pat and Tim mentioned, we remain very excited about our long term growth opportunities and value proposition.
As a result, we are guiding full year 2023 organic revenue growth to be between 10% to 13%.
We believe the first half of 2023 we will see continued headwinds in certain areas, but we expect that pressure to ease in the back half of the year. In addition, we are guiding adjusted EBITDA margin for the full year 2023 to be between 29.0 and 30.0%.
We will continue investing in talent during the year as well as the annulus nation of our 2022 head count growth, which from a margin perspective will be partially offset by increases in fiduciary investment income during 2023.
These investments, particularly in the recruitment of new colleagues offer the highest returns for our shareholders and we continue to aggressively recruit and build out our teams to meet the challenges demands and opportunities of the marketplace.
In summary, we were very pleased with our overall performance in 2022, and we remain very excited for the path ahead.
The current economic and insurance cycles present, both challenges and opportunities and our flexible and diversified business model positions us well to best serve our clients in a time, where we are more relevant than ever before.
With that we thank you for your time and we'd like to open up the call for Q&A operator.
Thank you.
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One moment, please while we poll for questions.
So the first question today is from Elyse Greenspan of Wells Fargo. Please proceed with your question.
Hi, Thanks. Good evening My first question on the Q4 organic plus 10 three.
And why you saw the headwinds that you guys spoke about last quarter and it sounds like you expect them to persist in the first half right and then get better but property rates buy it sounded like you only have the benefit of that for two weeks and perhaps you get the benefit right throughout 'twenty three so what is the baseline.
Expectation would be that all corners of 'twenty three I guess at shell growth, that's a better level than the fourth quarter.
Yeah.
Hi, Elyse.
So we think that our guide range for the year and again, we want to remind everyone. It is best to look at.
Organic growth on an annual basis not quarter to quarter because you.
Often can't infer a trend.
You are correct.
Headwinds, we referenced that affected us in Q3 and Q4 played out just about as we expected and then as Tim said in his prepared remarks, they'll continue its our belief they'll continue through at least H one.
We did get a pickup from property in late Q4, and we expect that to be a net benefit to us.
In all of 2023, but it's still too early to tell how much of a lift it will provide on an annual basis given that theres. Just so many variables in play along with general macro uncertainty and don't forget we've got extremely tough comps in Q1 and Q2.
I mean, Tim can provide more color on the property market, specifically, but taking a step back what we do know is that the net of all the headwinds and tailwind should be positive for us and the E&S market overall and that our value proposition to our clients is very much intact at the moment.
Okay.
And then with the with your property book is do you have a greater concentration in one quarter versus another or what the revenue from property be even throughout the four quarters with some slight variation.
We do it's well recorded that in the second quarter is the strongest when buying season, and we expect the flow of business that has increased.
Month to month quarter to quarter to continue to increase and we will capitalize on that we're very well positioned.
On the broking in the underwriting side for that.
And then lastly, you guys pointed to an active it sounded like an active M&A pipeline.
Just provide a little bit of color just as it looks today, what what types of deals you're looking at it just on you know do you think we.
Might see some deal sooner than later or do you have a sense of you know timing of transactions.
We did.
And that as I mentioned, a robust pipeline.
And it is and it's an interesting pipeline.
And that.
There are many.
I think companies coming to market.
There are companies that we are trying to convince to come to market.
As you know Elyse, we look for.
Really good companies to make them better and make them great companies and we've had a I think a successful track record of that so there's pipeline.
Sensing.
Our people that we've been speaking with over.
At least the last 12 months in many cases.
And they weren't ready some are still not ready.
We're getting closer.
Of those seem to be getting pretty close and we are having quite good discussions.
So to sum it up I would say that.
We're at a point in time here starting in 2023.
Are the prospects for.
Bringing them.
Really high quality companies.
Our overall strategy.
In the broadest of.
<unk>.
We are.
Good confidence that we'll be able to be closing.
We can't tell you when during the year.
But.
We're in deep discussions with a few of them.
Thank you.
The next question is from Mike Zaremski of BMO capital markets. Please proceed with your question.
Okay.
Hey, great good afternoon.
On the <unk>.
Cost.
Efficiency initiative.
Was hoping you can just give some more color whether the programs weighted towards distinct buckets. Some of your peers have talked about.
Lapsing back offices in outsourcing and less real estate is there anything.
You'd like to call out and just on the cost program as well just some clarification just the.
Margin guidance is that inclusive or exclusive of the charges over the coming.
Two years.
Well, thanks, Mike I'll, just start out and turn it over to Jeremy.
These are proactive strategic initiatives.
We're always challenging ourselves to improve improve our ability to serve our clients.
So we believe we're taking a great platform to the next level of operating excellence. So we can better serve those clients.
Frankly prepare for the next wave of <unk>.
We believe this is exceptional growth ahead of us.
On the pick up yes.
Thank you Pat So Mike I know it's.
It's hot off the press in the 8-K, we filed today, we do list out the buckets.
Of all the action areas and you'll see that the vast majority of the charge and the savings are going to come from ops and technology optimization, which we're really excited about we think that those actions those investments will lead to sustainable productivity improvements and savings over time and just to give you some examples of where.
We expect efficiencies to come from streamlining our mid and back office processes, consolidating and upgrading technology platforms that should drive automation consolidating vendors and then expanding our shared service model and I'll also note that the investments that we're accelerating and our data and analytics, we think will help.
US innovate faster serve clients with more distinction and help us further differentiate ourselves from our competitors. So we're very excited to kick this program off.
And just a clarification.
Margin guidance for next year is exclusive of that charges correct.
Correct.
Correct Okay.
And.
As a follow up in the prepared remarks, Tim and.
And I think you've touched on it and I'll ask this question.
I've mentioned property was very strong.
Our half.
As for our Q and just Kevin.
Is that continuing and see you.
Into 'twenty three and.
A very clear about some headwinds into the first half of the year, just curious if that strong better than expected.
Property tailwind.
Persisted a bit into the first part of the year.
It certainly has it continues to increase in submission flow rate.
Right.
Sure.
The entire channel is growing and expanding rapidly.
Where we're seeing the start of the conversion rates picking up and we expect that to continue reinsurance treaty renewals are expected to be very difficult for four one in seven one and we see more dumping and shedding of cat property business in the standard market flowing into our.
Channel.
But just.
Paul just to be clear youre, saying that youre not seeing much price acceleration.
And the E&S marketplace.
Yes.
Inclusive of property, which maybe.
Seeing some pricing hardening.
But we're definitely seeing the increases in cat property, but the the entire.
Bob.
So a business and property and casualty and E&S ebbs and flows. So we have some moderating some price deceleration, but we see prices going up in certain classes like transportation habitation all health care.
Sports and entertainment.
Higher education.
<unk> continued to climb and terms are continued to be difficult in those long tail casualty classes.
Okay. Thank you for the color.
The next question is from Rob Cox of Goldman Sachs. Please proceed with your question.
Hey, Thanks for taking my question. So it looks like you know just on the margin guide that the midpoint is lower.
Lower than than where you were at for 2022 and.
Double digit organic growth you have the tailwind of a fiduciary investment income.
So I'm just wondering you know what what the offset there as you talked about talent investments is is that the only thing that's really offsetting the margins here is there are there other investments youre, making.
Hey, Rob Great Great question, and just to set the table.
We've demonstrated that our platform can scale. So we're up 500 basis points since year end 2019.
And if you were to ask any of us in this room a couple of years ago.
We would tell you that where we are today, where we finished 2022 is actually a little bit ahead of schedule in terms of of a margin basis and what we said since then is that most years not all years, but most years. We can show you scaling on a reported basis and last year. One thing we were very upfront about and very happy to follow through on.
Is that we were targeting to onboard the biggest production class ever and we did that and with that comes a run rate impact in 2023. We're also as Tim said in his remarks going to continue making strategic production hires this year and these investments have the highest ROI.
Of any investment we can make so we know that it's the right decision for our long term growth prospects and so we feel really good about sticking to this game plan.
Further accelerate 2025 the program that patent I have both touched on now will bring a step change a step change to our margin by 2025 and it will also unlock enhance annual scaling thereafter, so taking another step back we feel really good about where we are today in terms of margin and we believe that we're making the right.
Estimates that will continue to enable top line growth and margin growth for the long term.
Yes.
I appreciate that thank you and.
And you just next.
Now on the.
The organic guide and the different businesses you have maybe you could talk about how you think the three businesses could perform relative to the consolidated guide and how you feel about the capital backing you have on the underwriting management side of the business.
I also want to take.
Yeah.
We've shared in past meetings.
<unk>.
Our growth is not constrained by capital.
We are well supported by our carrier partners.
We've got a great strength of delivering underwriting profit to the community.
That's allowing them to help support.
New products and critical incremental capacity to current lines.
And then maybe to the heart of your question what is going to.
Prompt some continued growth as we're pleased to share we're coming into the year with incremental property capacity and capability.
Again reflective of our great results across the platform.
So we believe that we continue to.
To build new facilities and add capacity to existing as a source of ongoing growth.
Take the first part of the question.
Following up on what Michael said.
We have experienced and we expect to continue to express.
Significant organic growth in delegated authority underwriting.
<unk> underwriting.
I have every reason to believe that.
Open market wholesale brokerage will have very strong growth.
As we've said.
Starting with our alternative risk.
Vertical.
They've had good.
Got it growth.
Look forward to significant organic growth there.
And as you know we've been working on.
Launching a <unk> strategy.
These numbers are not in the forecast because we.
Executed yet.
But when we execute on the.
The.
Benefit strategy.
It will be a higher growth rate.
The normal in the industry with higher margins than the norm.
Thank you.
Okay.
The next question is from Weston Bloomer of UBS. Please proceed with your question.
Hi, Thank you my first question on $35 million in saves in 2025 should we expect to end the saves to come.
In 2023, or 'twenty 'twenty, four or when should we start to see that ramp up is it after you.
I've taken the charges or how should we think about that.
Yeah, So I'll take you through that.
A high level path on the charges and the saves so youll see charges trickle in in Q1, and Q2 of this year, but they really ramp up in H. Two so by the end of this year or let's call. It end of Q1 'twenty four at the latest we'll be through more than half of the 65 million charge and then take the remainder through.
At the end of 'twenty four.
No savings in 'twenty three some savings in 'twenty, four which will report on as we go and then the full 35.
We will be realized in fiscal year 2025.
Yeah.
Great. Thank you and then my second question is a follow up around the uplift that you're seeing in property just.
Rough math it seems like it was around 200 to 300 basis point positive impact in the <unk> is it fair to say that that's roughly the uplift that you're expecting in 2023 as well.
I know youre not get youre, not it could be it could change or but I'm curious, how you're thinking about that or what's baked into your guidance.
There is.
As Tim said, the property markets quite hard right now it could get harder, we expect that to be a net benefit but in terms of basis points, how much that contributes to the 10% to 13% that this year, it's it's really difficult to calibrate.
Yes.
Great. Thank you and then.
On the on the cadence for organic growth throughout the year is there any way to quantify maybe first half for a second half as the first half of the year going to be in the <unk>.
Mid single digit range or upper single digit range or close to the low end of the guidance I know you said theres difficult comps in the first half and we should look at it on a full year basis, but any additional granularity for the <unk> it would be helpful.
You've you've got the key points the tougher comps are an H one and then we expect the the worst of our headwinds to manifest in H one so.
H, one theres going to be a lot of challenges on an annual basis, we think that we're going to.
Come through quite well, but there is a reason that we only guide on an annual basis the quarters can be.
The quarters can be difficult to predict or to read into so let's let's just stay focused on the 2023 number which we think will ultimately be a really solid year of organic growth.
Great. Thank you for taking my questions.
The next question is from Tracy Bengie of Barclays. Please proceed with your question.
Thank you a quick clarification question, you mentioned that third quarter call that no single product line, including public D&O represents 10% of the overall book and property is multiples ahead of P&L, but then when I think about the proportion of property to the overall E&S market, it's something like a corridor third.
Can you clarify the proportion of property placements more broadly to your overall book and if that's becoming a larger piece.
So we so Tracy.
We've actually said publicly that were representative of our portfolio is representative of the broader E&S market and 25% to 30% is is the right range.
Okay. So it was a more narrow view when you've previously discussed 10 per sign of that particular product.
When we were talking about product on the Q3 call Tracy we were giving public D&O as an example of a product and trying to compare that to an entire.
Category of our.
Our portfolio in the insurance World overall write property and casualty as since our portfolio is representative of the broader market. We were just drawing attention to the difference in scale between our exposure in property versus a single product line like public D&O.
So that's what I thought I just wanted to bridge those two comments together. Thank you for that and this one may be a bit of a wildcard question can you discuss your process of placing business on behalf of an M. T O. What due diligence can you do to ensure that the risk is backed by a rated insurer and also on the back of higher financial line rate.
I'm wondering as a corporate buyer of insurance, if you're expecting higher insurance costs and if that's meaningful in any way.
Hi, Tracy we've got industry standard procedures whenever we're onboarding, a new <unk>, we make sure that they are licensed we make sure that their the quality of their security meets our standards for Counterparties.
And things like that so very much in line with industry standards there.
What was the other part of your question.
Oh, I mean in the back of just higher financial lines rates in general I mean, a lot of brokers by and now insurance. So as a corporate buyer are you seeing higher costs and if that's meaningful in any way.
Our well certainly our D&O insurance.
Went up significantly when we went public it's been.
Pretty stable. Since then it's too early to talk about any of the renewals for our professional lines, which come up later in the year.
So right now.
Everything looks stable.
Got it thank you.
Yeah.
The next question is from Derek <unk> of K B W. Please proceed with your question.
Thank you. My first question is on fiduciary investment income it looks like it's stepped up $3 million quarter over quarter is that kind of kind of the sequential step up that we should think about <unk> 23.
Okay.
For modeling purposes, or what we would recommend what we always recommend us to take 30 day terms, so for minus 50 basis points.
And multiply that by our fiduciary income balance, which is broken out on the cash flow statement at year end. It was around $770 million, that's what we earn.
<unk> income on.
Got it. Thank you and then my second question is on the compensation costs for next year, it looks like your high and I'm pretty significantly.
Are you anticipating any upwards pressure on comp expenses.
This is just in context of one of your competitors sold the stake to a private equity firm.
To create equity incentives for their producers that I'm wondering if that has any impact on your <unk>.
<unk> costs.
So we are expecting increased comp costs like.
I think probably every other company now but fortunately.
The majority of our cost is <unk>.
Production related and so it's variable to revenue so wage inflation doesn't affect our wholesale broker for example, the same way it does a salaried employee so where we're dealing with it like everyone else, but it hasn't.
<unk> gotten out of control for us yet just because of the attribution of our comp that is production related and paid out as a percentage of revenue.
Okay, and just to follow up on that.
Do you anticipate that impacting your retention of producers and have Ryan obviously, great home for talent, but just kind of curious about the impact.
Maybe throughout 2023.
We expect to continue to have a very high industry, leading retention level for.
For brokers and underwriters sent in all of our staff.
No no change at all.
Okay. Thank you.
Yeah.
The next question is from Jimmy <unk> of J P. Morgan. Please proceed with your question.
Hi, So most of my questions were answered I just had one on margin.
Margins.
If we think about the midpoint of your guidance in 2023 it suggesting lower margin.
Then in 2022, despite the fact that your growth has been fairly healthy even with the slowdown and then on top of that you've got the restructuring charge, where the costs are going below the line. The benefit is going to go above the line. So I'm wondering if like is this because of a lot of your expenses being variable in nature, where there is less levered.
The business to growth and revenues or.
Any sort of fee pressure commission pressure or any of that sort of and I do recognize the comments about wanting to grow the business, but it is somewhat surprising that margins are not improving.
The strong growth that you've had a fairly strong growth that you're projecting.
Hi, Jimmy.
As I said.
The business model is proven to scale, we were at 25% margin at the end of 2019, we're at 30% at the end of 2022, what we've tried to be upfront and consistent about is making long term investments in talent is the right thing to do to keep up.
Our differentiated growth we saw a big opportunity last year, we made it there is a run rate impact for this year.
There is an opportunity this year that we want to capitalize on like that that's the right playbook and where we're planning to stick to it.
It won't be the case every year that we have an outsized opportunity like we saw in 2022 and so I'll go back to my prior statements. Many years not all but many years you will see scaling and what we're really excited one thing. We're excited about for accelerate 2025 is that we're going to get a step change.
In margin once the program is fully built out and the capabilities the efficiencies that we're going to gain are going to make our continual annual scaling.
That much more rapid.
The model the model scales, Jimmy it's just when we have the opportunity we think it makes sense to reinvest in our in our talent.
Okay.
And then on the uptick in sort of activity that you saw in your business in late December are you able to comment if that continued.
January and February as well recognizing that certain businesses booked more in a certain quarter and less than another quarter, but as that uptick and activity continues.
The first half of this quarter.
Sorry, Jimmy when you say uptick in activity what are you referring to.
Or are you just saying you saw stronger activity in the last two weeks of December which caused you to do better on growth than you had previously indicated.
Oh right, Okay, Yeah. The comments on the late surge in property that benefited.
The quarterly organic yes, Tim.
Tim touched on.
The ongoing state of play with regards to property, it's we're still seeing a benefit.
From that as we sit here today.
And despite that your assumption for growth in the first half being less than <unk> is that a function of just booking less property revenues in the first half of the or in the first quarter early on or is it something else that's gotten worse since.
We actually Havent made any statement about the growth of <unk> relative relative to Q4, just that we've got tough comps. There is headwinds we know about so we know that it's going to be a challenging each one but.
The important thing to do is to focus on the annual growth rate, which we think is going to be a very healthy 10% to 13%.
Okay. Thank you.
Yeah.
The next question is from Ryan Tunis of Autonomous Research. Please proceed with your question.
Hey, guys good evening.
Just thinking about the 2023 organic growth guide.
It sounds like.
What are you seeing explicitly contemplated or some some comp issues and project related business like D&O and construction and also.
That benefit from property, but I was just curious.
What are the assumptions you might be making on how market conditions might evolve through the year and coming up with a 10% to 13.
So in any given year, there's going to be pluses and minuses, Tim referenced ebbs and flows with.
With related to business that moves between the E&S market in the admitted market. There's lines that are still firming and theres lines that are going the other direction rapidly we've talked extensively about public D&O as an example of that so we're factoring all of that in <unk>.
And what we do on an annual basis as we person by person <unk> broker by broker do a bottom up build of their book and we we put that altogether we.
Improve it with any other market based intelligence, we have but it is what it is unfortunately, the sum of all the opportunities and challenges for 'twenty three is what.
What we anticipate to be a really positive result.
Got it.
And then I guess another question I had was.
I guess.
PNC brokers, we tend to think about a lot of the business as being recurring but I was curious is there any outside outside.
Outsized amount of your annual commissions that come from the project based world, whether it's construction or.
D&O tied to an M&A transaction like that type of thing I was wondering if maybe you could quantify alike.
How much usually of your book is project based.
So we don't disclose the specific percentage, but most of it is recurring type business in fact, nearly all of its commercial.
We have publicly disclosed that we're over 70% E&S and most importantly, the majority of the products that we.
Work, we place our underwrite on behalf of our clients is compulsory.
Yeah.
Got it and then sorry My last question is just.
You said property.
It performed well in the last couple of weeks of the year just from a timing standpoint in the fourth quarter are there an outsized percentage of property renewals that take place at the end of that quarter or are they pretty uniformly distributed through <unk>.
So they continue to increase as we go into the new year.
<unk>.
When the buying season is well known to to peak in the in the second quarter actually.
But as I said earlier.
The reinsurance treaty renewals of four one and seven one more we'll have a further hardening impact on the flow of cat property business into our channel. So we expect it to continue to grow and expand and we're set up perfectly to to absorb it and convert it so the <unk>.
Definitely going to get harder and property.
Sorry, let me clarify my question I wasn't sure if maybe there were some renewals in the fourth quarter that were.
Just standard property that got pushed till late in December just because.
The market was becoming more challenging I just didn't know.
There were an outsized percentage of renewals it ended up taking place in those last couple of weeks.
No nothing to measure, but definitely rate increases and premium increases.
Thank you.
Okay.
There are no additional questions at this time I'd like to turn the call back to Pat Ryan for closing remarks.
Okay.
Well. Thank you all for your.
And your interest in our company.
As I look to the year ahead.
Really filled with optimism.
Okay, great team impact in the marketplace. This trough.
Very strong.
Unwavering drive.
I think.
World class expertise deep commitment to serving our clients.
So we're confident that we'll continue to drive growth and success.
And this year 2023, so thanks for your participation and your very good questions.
Right.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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