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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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00:05 Greetings. Welcome to the Ryan Specialty Group Third Quarter twenty twenty one Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.
00:28 I will now turn the call over to your host, Noah Angeletti.
00:33 Thank you, operator. Good afternoon, and welcome to Ryan Specialty Group Holdings third quarter twenty twenty one earnings call. This afternoon, the company released its financial results for the quarter ended September thirty, twenty twenty one. The earnings release is available in the Investors section of the company's website at ryansg.com.
00:51 I would like to remind everyone that certain statements made during this call are not based on historical information and may constitute forward-looking statements. Any statements that refer to projections, forecasts or other characterization of future plans, events or circumstances, including any underlying assumptions are 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.
01:21 I refer you to the company's filings made with the SEC for a more detailed discussion of the risk factors that could cause actual results, levels of activity, performance or achievements to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that may be made during course of this call and except as required by law.
01:45 Additionally, certain non-GAAP financial measures will be discussed on this call. 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 ryansg.com.
02:08 With that, I'd now like to turn the call over to the Founder, Chairman and Chief Executive Officer of Ryan Specialty Group, Pat Ryan.
02:19 Good afternoon, everyone. Thank you for joining us on our third quarter twenty twenty one earnings conference call. At today's call, I will provide a brief overview of the quarter and our differentiated business model. Our President Tim Turner will give an update on each of our three specialties. And finally, our CFO, Jeremiah Bickham, will walk you through the details of the quarter and then we'll open it up for Q&A.
02:49 We had an excellent quarter, which was our first quarter as a public company and a testament to our great team. We executed well in all facets of our business and grew our top line by nearly fifty percent. The majority of that growth was accomplished organically. This type of organic growth rate, the seldom in the industry and is clear evidence of the differentiated value that the Ryan Specialty platform provides to its new and existing clients.
03:24 Our team continues to demonstrate its talent, and expertise to deliver clinical solutions to our trading partners and placing these complex risks, vital to be a subject matter expert and specialize in the product, the industry or both. And for us, at expertise is evident in our wholesale and our delegated underwriting authority specialties. We also continue to grow our bottom line, they need to another quarter of strong adjusted EBITDAC and expanding margins compared to the prior year period.
04:02 We have a firm handle on our business. We continue to be the destination of choice with the best talent in our industry. We're in a prime position to sustainably grow Ryan Specialty at an impressive pace for years to come. As we knew the end of twenty twenty one, we continue to see strong trends in our industry. Sixty five plus billion dollars E&S market continues to expand faster than the admitted market, as the complexity of risks continues to grow. This requires experience and knowledgeable producers and underwriter. The guide clients with innovative and customized solutions that's our power rally. Innovation is in our DNA and provides us with a long term opportunity to grow both sustainably and profitably.
05:04 Pricing in the E&S market remains firm and resilient. And as a reminder, our model is built to outperform in any pricing environment. Retail broker panels and delegated underwriting authority remains fragmented to a very large extent and a significant amount of consolidation as yet to occur. This will lead to a continued movement by retailers toward a singular solution where the E&S needs which we are well positioned to serve. And our pipeline for M&A remains robust, and we continue to have productive conversations with potential targets to add to our platform.
05:51 We will remain very active with disciplined with respect to M&A and we'll execute only when the opportunity is rights. Our independent whole service model, scale distribution platform and deep bench of experts gives us a clear balance compared to our competition. We believe we have the most comprehensive product access underwriting knowledge, an extensive distribution network for both retail insurance brokers and carriers. This has enabled us to become a preferred and trusted partner or ninety seven of the top one hundred retail insurance brokers in the country.
06:38 Notably, we continue to prioritize our recruitment, development and retention of the top talent in the industry. We constantly recruited the most talented individuals to join Ryan Specialty and power them to contribute to first perspectives and thought leadership and enable them to become an integral part of our winning culture. As a result, we have incredible opportunities to succeed and are very well rewarded for their contributions.
07:10 Looking ahead, our growth plans remain firmly intact and we're well positioned to execute on that. As I noted on our prior call, we will continue to methodically invest in our growth and ensure Ryan Specialty remains a destination of choice for industry's top tier talent. We will continue to lead with innovation, to meet the every changing needs of the market. We will continue to expand and deepen our relationships for the current clients as well to continue to win new clients. We will further announce our future organic growth capabilities by executing strategically prudently on M&A.
07:55 In summary, I'm very proud of our team's tremendous efforts in the third quarter. Our dedication empowered by our winning culture has clearly contributed to our positive performance results and continues to validate our business model and our value proposition to our trading partners. I remain very excited for the future growth of our company and our ability to continue to deliver long term value for our shareholders.
08:25 With that now I'm very pleased to turn the call over to our President, Tim turner. Tim?
08:32 Thank you very much, Pat. As Pat highlighted, we had an outstanding quarter and our success was broad-based across our three specialties. Our Wholesale Brokerage specialty is where we distribute a wide range and diversified mix of specialty insurance products, and solutions from insurance carriers to retail brokerage firms. We experienced solid growth across property and casualty lines and especially in professional liability lines of business. This growth was driven by our continued strong performance in this prolonged hard market combined with an increasing flow of business into the E&S channel.
09:14 At our Binding Authority specialty, we continue to see strong growth within our small commercial lines of business. In addition, on our prior call, we noted the tremendous opportunity to address the highly fragmented delegated authority market where both M&A and panel consolidation are in their very early stages. For decades, companies that delegated binding authority did so on a state by state or geographical basis, which created thousands of binding authorities all over the country. This is a very inefficient model for retail brokers, now that we can much more easily accumulate and analyze data that inefficiency has become more evident than ever and we view the consolidation of these fragmented binding authorities and intermediaries as inevitable.
10:09 With the addition of all risk last year, we now have a more robust infrastructure and an enhanced talent base for delegated underwriting authority firmly in place. Now, we just need to continue to execute just as we've done every day. If we do what we do best, recruit and empower talent, train young professionals and make prudent strategic acquisitions, we believe will be on pace to build the first truly fifty state binding authority operation. It's an exciting time in our industry, and we are well prepared for it.
10:47 Our Underwriting Management specialty also produced another excellent quarter, led by our property and casualty lines, as well as our transactional liability and national programs, all performing exceptionally well. I would also be remiss, if I did not congratulate Miles Wuller on his promotion to Chief Executive Officer, of our Underwriting Management Specialty. Miles has been with Ryan Specialty from the beginning and was the natural choice to succeed [indiscernible]. Miles was already the President of Underwriting Management, intimately familiar with the business and has hit the ground running in his expanded role leading the specialty.
11:31 As Pat mentioned, the environment for M&A remains highly competitive, particularly with respect to Underwriting Management. As we have always done, we will remain disciplined in our approach to M&A in each of these specialties. We're able to do this because of our tried and true positioning and strategy of successfully recruiting and retaining talent as evidenced by our industry leading, producer retention figures. This has enabled us to firewall the trends of talent, migration, we're seeing in the industry and allows us to continue adding new specialized talent to our managing underwriting specialty, along with developing our current roster in order to continue growing the business.
12:18 We also continue to make steady progress at developing our new employee benefits specialty, which we will be focusing on wholesale benefits brokerage and managing general underwriting capabilities to serve the needs of retail brokers. Pat and I are very pleased with the breadth of opportunities that are coming to market. Speaking of opportunities, our pipeline for M&A remains deep, as Pat noted, and we will continue to make disciplined investment decisions, where we see clear opportunities to partner with successful specialty firms that are aligned with our goals, culture, values, and expectations for organic growth.
13:02 We were all very focused on the IPO in H1 and with it behind us, our M&A program is back and full focus. To put a point on it, today's acquisition is tomorrow's organic growth. And we hope to be back to you soon with more updates. In terms of the E&S market, pricing remains robust. While we are seeing rate deceleration in a couple of lines such as excess casualty, we also see hardening and price acceleration in other lines, most notably cyber. But as we've noted, we see the increasing flow of business into the E&S channel and the continued expansion of the non-admitted market as the more significant driver of Ryan Specialties growth. With these tailwinds, we're going to press our competitive advantages to continue to grow our business.
13:57 With that, I would now like to turn the call over to our Chief Financial Officer, Jeremiah Bickham, who will give you more detail on the financial results of our third quarter. Thank you.
14:10 Thank you, Tim. In Q3, we grew total revenue nearly fifty percent year-over-year to three fifty three million dollars. Our strong topline increase was driven by organic revenue growth of twenty eight point nine percent for the quarter and contributions from the All Risk acquisition for the months of July and August. As a reminder, All Risk became part of our organic revenue growth calculation beginning in September of this year.
14:36 Our exceptional organic revenue growth is attributable to a combination of new client wins and expanding relationships with existing clients. Also picking up on Tim's comments from a moment ago, as more risks flow into the E&S channel, our total addressable market expands, which provides additional opportunities for organic growth. Our revenue growth was further enhanced by multiple classes of risks, realizing year-over-year premium rate increases, which drive increases in commission revenue since it's generally calculated as a percentage of total premium.
15:10 Total operating expenses for the third quarter were three hundred and fifty three million dollars, a sixty eight percent increase year-over-year. A large driver of this increase was compensation and benefits expense, which grew seventy six percent from the prior year period to two hundred and eighty seven million dollars in total. Now, we expected this large increase in compensation expense for several reasons. First, compensation and benefits expense are heavily correlated to revenue growth, as many of our producers are compensated based on a percentage of the revenue that they generate.
15:43 Second, we incurred IPO related compensation expense of fifty eight million dollars in Q3. Now this number reflects multiple IPO related events, including one-time payments made at the IPO, expense related to the revaluation of our pre-IPO equity awards, which includes additional expense recognized day one, plus the first quarter of new expense related to those pre IPO revalued awards. And it also includes the first period of expense related to new one time IPO equity awards. And all of these, of course, were discussed in detail in our filings with the SEC at the time of the IPO.
16:24 I should note also that the revaluation of the pre IPO equity grant is the function of the fact that technically, there was an exchange of the old awards for new awards as part of the IPO. And as a reminder, these awards along with all IPO related employee equity grants are included in our presentation of adjusted diluted earnings per share. We expect IPO related compensation expense will decline by over fifty percent in Q4 relative to Q3 and then we will continue to decline in future quarters as the equity awards are subject to a graded investing schedule within our financial statements.
17:02 And in the spirit of transparency, we've separated IPO related compensation from our normal course equity based compensation in the walk to adjusted EBITDAC. Finally, this quarter, we saw a large increase in acquisition related long term incentive comp, which is primarily due to the All Risk acquisition and as we've stated before, we think of these as earn-outs and that they are non-operating in nature.
17:28 Now, despite the overall increase in our compensation and benefits expense, our adjusted comp and benefits expense ratio improved two hundred and sixty basis points to sixty point three percent for the quarter, highlighting the scalability of our platform. Our G&A expense was up seven million dollars or twenty four percent period over period, due to an increase in travel and entertainment, cost to support revenue expansion and new costs related to being a public company as well as cost associated with the All Risk business. This increase was partially offset by a decrease in acquisition related expenses compared to the prior year period.
18:07 Now, we expect both T&E and public company costs will continue to rise over the next several quarters. As T&E normalizes to something closer to the pre-COVID levels as our end as our public company costs roll into our results over the next three quarters. We note that adjusted EBITDAC for the quarter grew fifty six percent year-over-year to one hundred and five million dollars and our adjusted EBITDAC margin rose one hundred and forty basis points to twenty nine point eight percent for the quarter.
18:39 Primary drivers of this margin increase include our revenue growth leading to scale in adjusted comp and benefits, as well as continued realization of cost savings from our restructuring plan, which we initiated in twenty twenty. As noted previously, when fully auctioned by June thirtieth of twenty twenty two, we expect to achieve twenty five million dollars in cumulative annualized savings from this plan.
19:04 As we think about adjusted EBTIDAC margin in Q4 and for twenty twenty two, it bears repeating that we still expect a more normalized pre-pandemic level of key P&E expense as the world returns to a broader level of in-person meetings and events. And we will also have a full year of public company cost in twenty twenty two and will as always continue to invest in the long term growth of our business, including the onboarding of additional talent. Over the medium and long term, we expect that our significant growth will yield sustainable operating leverage.
19:40 GAAP net loss for Q3 twenty twenty one was thirty three million dollars and was primarily attributable to the fifty eight million dollars of one time IPO related charges that I mentioned just moments ago. This quarter is our first quarter reporting EPS and both basic and diluted loss per share were negative zero point one six dollars for the period.
20:00 Adjusted net income for the quarter, which excludes IPO and other unusual expenses increased fifty one percent year-over-year to sixty two point nine million dollars. Adjusted net income margin was seventeen point eight percent, a twenty basis point year-over-year improvement, reflecting operating leverage as revenue growth outpaced our growth in operating expenses.
20:23 We reported adjusted diluted earnings per share of zero point two four dollars for the quarter and believe this metric provides a more comparable period over period measure for our operating performance. Please refer to the earnings release and our 10-Q where we further discussed the components of our adjusted diluted EPS.
20:43 Given our strong Q3 results, we are raising our full year twenty twenty one outlook for organic revenue growth and adjusted EBITDAC margin as follows. Our organic revenue growth rate for the full year twenty twenty one is now expected to be between twenty one point five percent and twenty two point five percent, which is above our previous guidance of eighteen percent to twenty percent. As a reminder, with All Risk now part of our organic growth calculation, our organic growth comps will be more challenging going forward given the higher revenue base.
21:18 Adjusted EBITDAC margin for the full year twenty twenty one is now forecasted to be between thirty one point five percent and thirty two point zero percent, and this is up from our prior guidance of thirty point zero percent to thirty point five percent.
21:32 With that, we thank you for your time and we'd now like to open up the call for Q&A. Operator?
21:38 Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] First question comes from Michael Zaremski with Wolfe Research.
22:14 Hey. Good evening. Thanks. I guess first question looks a good issue to have is organic just keeps being incredible honestly. And I know you gave us some color, a lot of color on the prepared remarks, but I guess, I'm trying to get at -- do you feel that there's certain drivers, we should be thinking through a little bit more or is the total E&S market just kind of expanding more than -- maybe we appreciate or maybe at cyber or certain property in certain states, we should be thinking about a little bit more because it feels like your win rate versus the industry or versus the E&S market is widening a little bit in recent quarters?
23:13 That is a great way to ask that question because we anticipated the question obviously, but I like the way you asked it, Mike there are a lot of nuances. So I'd like to ask Tim to answer the part about areas of focus that are really expanding more rapidly than originally expected and remaining very strong.
23:43 Happy too. Thanks, Mike. On the market, as we know continues to expand in the non-admitted P&C market North America. We get monthly stamping results from WSIA and all point to increase and non-admitted surplus lines business, more dumping and shedding from the standard companies here in the U.S. But inside that market, we have these niche firming phenomenon’s that we'd referred to several times. And some of those are really emerging today and driving a lot of this growth, where we're very well positioned. Healthcare would be an example of that. Construction, Cyber, very, very accelerated firming in the cyber market.
24:31 Transportation continues to be a challenge in the U.S. And we're very well positioned in each of these specialties. We’re deep talent and deep in broking talent and deep in underwriting talent, and very well prepared to absorb the new flow, but to try and get market share at the same time. So very dynamic marketplace that we're in, and we're battling the very best E&S brokers and underwriters every day for that market share.
25:02 And then I would add to that Mike that the way you ask the question I'll provides the opportunity for us to make sure we're focusing on the fact that we have these two specialties wholesale broking and delegated authority, underwriting, admin and distribution. And they're similar in many ways, but there is also for some differences. So the E&S market, I mean, I'm sorry, our wholesale market seventy one percent of that is in the E&S market. Part has not in the E&S market is workers comp and auto. And of course, those have to be in the middle market by law. When you get to our delegated authority managing underwriting or finding authority business is all in the E&S market, but for comp and auto. We don't do a lot of comp in the binding.
26:19 And then there's a part of the delegated authority that serves admitted products. It's just because of how those lines of business are distributed. So, for example, M&A reps and warranty, those are mostly admitted markets. As more growth in the E&S market now because of the market conditions, but traditionally, they've been very much admitted market. And their phenomenon in the delegated authority business because as you know in wholesale broking our duty of care is to our retail broker. The managing underwriting, our duty of care is two-fold.
27:22 Our first is primary duty of care is to the capital provider because they are giving us their pad and relying on us to produce operating a profits for them, underwriting profits I should say. We take that very seriously.
27:42 On the wholesale business, brokers worked hard to place that risk at whatever best terms they can get to serve our retail broker and their client. In the delegated authority or where we really doing very well, we have new leadership with Miles Wuller as the CEO and Cortezi as the Chair, [indiscernible] supported by Kieran Dempsey, our Chief Underwriting Officer and a great team. They have to be very conscious of producing profits for the capital providers and to sustain that business, which we are doing very well at you better producing profits for them or they’ll change their appetite or change their underwriter.
28:36 So, it's important to be looking at that because they're just out those nuances. Some other nuances that are really important is that when we got into the All Risks acquisition. We got a very strong position in program business. So we've had that legacy Ryan Specialty great managing general underwriters. And a growing timing authority business by very little program business as this is defined in the industry. But that’s change dramatically with that acquisition. Now what happens in the program business is that these are all very specialty lines and markets get different appetite, competition, comes in when prices are going up and you get more difficult competition or people pull out.
29:45 And we replace the capital with new capital to the program, but not new capital to us. So there's some nuance movement within the managing underwriting that I think is important to be aware of or keep aware of, I know you're all aware of. So what we've done and Tim has done this brilliantly is when we started we set up these practice group verticals. Where we specialize by line of business, by industry or by a combination of both and we chose areas that are going to grow at our growth industries construction, healthcare, energy, et cetera. Real estate and that's all paid off well. And a lot of those product lines have gotten quite difficult professional lines across the board. Tim talked about cyber.
30:47 But there's also a lot of economic influences in some of these lines. So you'll see in our numbers, that there was a rebound fourth quarter of last year and the economy. So a lot of deferred building construction, a lot of deferred M&A, so we had very strong quarters last year fourth quarter and M&A and in construction as well.
31:24 Now, our binding authorities suffered a bit during the lockdown because it was smaller businesses, a lot of hospitality. And there were bankruptcies, there were people pulling back shutting down for quite a while and so, all of that started to move again during the year. So there was some catch up not in terms of how it was a accounted for, but terms of how it came the market because there was a lot of deferred activity.
31:56 So, as you're looking at twenty one to recognize that there was that boost in the economy that really took hold in the fourth quarter. And that's obviously continuing, but the boost in the economy has adjusted itself as naturally would. So I'm glad you asked the question the way you did because it really is important for all of our investors to understand some of these nuances.
32:28 Appreciate the color, a lot for us to dig into. Maybe one quick follow-up if I may, probably for Jeremiah. I'm people will focus on in the [indiscernible] market, but if I were to look at free cash flow conversion, it looks like it didn't maybe I'm not thinking it, improve as much as a percentage of revenues. Is that something you guys were focusing on and also is 4Q still a seasonally weaker kind of a quarter for free cash flow?
33:09 Mike, when you say -- when you quote the cash flow wasn't quite up to expectation, what are you looking at cash flow from operation and taking out CapEx like the traditional method.
33:26 So, actually I’m looking at our model, I'm doing free cash flow before a couple of items divided by red. So I can follow-up after to give you the step. I guess and others no really consensus free cash flow numbers out there, but it could look out a little weaker than we than we thought. So I know there's nuances in the quarter. I guess maybe asking another way, do you guys feel free cash flow was a little light versus kind of what you guys were expecting? Or is it just kind of firing all cylinders and there's going to be nuances to that and there's nothing really changed since kind of what you guys told us during the IPO period in terms of how to think about things.
34:13 So when you, Mike, when you look at our adjusted free cash flow, so taking out things like the IPO and our normal non-recurring add backs, we're very much on track, nothing out of the ordinary. Where people sometimes get off track trying to just do like one of the conventional cash, free cash flow calculations, as they look at cash from ops take out CapEx. Remember that we inherited these basically earn-out payments as liabilities with the All Risk acquisition and as we pay those down and we paid down thirty million dollars -- thirty one million dollars of those LTIPs. But again, we think of as earn out in Q3 that comes out of operating cash flow and that's really more of an investing cash flow. So with that adjustment alone probably adds a lot of normalcy to your calculation. I would imagine.
35:21 Yes. Adjusting for that. Sorry go ahead.
35:28 I was going to say, as you know, those payments were brilliant plan by Nick Cortezi on retention of people and they were part of the purchase price. So in effect that's really repurchase price that's being with a differed purchase price to retain the team.
35:50 Okay. Understood all. I'll think our model. Thank you very much.
35:54 Thank you, Mike.
35:57 Next question Adam Klauber with William Blair.
36:02 Thanks. Good afternoon, guys. Clearly, there's a lot of dislocation continuing the property markets with all the weather and storms. Can you talk about particularly in the Underwriting Management section, how you're helping to meet demand there, and probably more obvious on the wholesale. If you could touch on that too, but in the underwriting management, how are you helping clients ramp up for that, that dislocation?
36:29 I'll start that answer and then turn it to Tim. But we've been working diligently vigorously all year to bring more capital into those facilities and we've having quite good success. You put your finger on it because a lot of people are pulling back, Adam, as you know, on the support of property CAT, but we've in anticipation of that, I think our team has done it well. We've been working to replace that. And Tim why don’t you pick up on that.
37:10 Sure, Pat. Adam, great question. There's no doubt about the property market continuing to firm. It was already very firm, but these storms like the Texas Freeze and Ida aspects of those storms were poorly modeled by many carriers. And so we see a construction in the marketplace more dumping and shutting from the standard markets and we're ready for it. We're geared up for it. We have lots of very top rated property brokers across the country. We’re loaded up in the hubs. We can take a huge influx of property business coming into the channel.
37:56 And as Pat mentioned, we've been building out our proprietary MGUs And underwriting platforms in CAT property. So, we're ready for it. We believe the first quarter heavy buying season will increase the flow into our channel exponentially. So we're excited about it. We think we can bring even more value to our retail customers.
38:25 Great. It seems like you're definitely at the right place at the right time. Any chance, you could give us a magnitude of the capacity even ballpark that you will find up. And do you think you'll be able to increase that capacity again there's foreseeable, you could have a lot more demand next year, so yeah, if you could just add any color on that, that would be great.
38:48 Well, I would just start and then I'd turn it to Tim. We've established a few years back, as London was pulling back and a lot of our business had been particularly in the delegated authority had been sourced in the London, replacing them with European, U.S. and Bermuda Capital, little bit of Asia but mostly European and U.S. and Bermuda. And that's a lengthy process, Adam, as you know, and so it's a two plus year project but we've spent a huge amount of time on it all of twenty one. And that's what Tim was referring to is that the buying season in the first quarter. We're confident that we're going to be able to help our clients even more so than we have in the past as these needs are growing and the capital available is shifting.
40:13 In addition to that, Adam, we have a myriad of platforms and facilities in CAT property so the largest MGU and GEM and TRUE doubled their capacity over the last twelve months. So very, very well prepared in a deep arsenal in our top MGU, but it's beyond that. We have multiple programs, property programs, CAT programs, embedded in the RT offices around the country. And of course, we have programs that we picked up from the All Risk acquisition that are very helpful as this market gets tougher in property. So, it's a combination of those efforts, all led by a top fleet of property brokers across the country that do the battling upfront and get control of these marketing exercises. So we're very, very excited and think we can be an industry leader in capturing this new flow that's anticipated in the channel.
41:20 Guys, well, thanks good perspective. It sounds like that's a very nice growth engine for time to come, so thank you guys.
41:29 Next question Tracy Benguigui with Barclays.
41:34 Thank you. Just a quick question or updated guidance on organic revenue, I know you don't provide quarter by quarter guidance, but we could all calculate the implied 4Q being sequentially down. And I understand on seasonality perspective, 1Q and 3Q are seasonally low on revenue, but 2Q and 4Q are seasonally higher. So maybe you could just help me understand what's behind the prudent of your implied 4Q, organic revenue do you see sound so upbeat about your business condition?
42:09 Definitely. So, your math is correct, Tracy. The guidance does imply organic revenue growth for Q4 that's lower than Q2 and Q3. You probably got to the same math mid-teens, which I'll explain in a minute, but I hope we all agree it in isolation that's still a fantastic quarter in terms of organic revenue growth, but I know the heart of your question is, it's different. And the answer is no. So our Q4 organic guidance does not represent a slowdown in flow or a significant change in market conditions as you probably picked up from Tim and Pat’s comments.
42:53 So just to help break it down where we're coming from, so our Q4 last year was enormous, partially because of pent up COVID demand and Pat touched on that a little bit. But a good example of what we experienced in Q4 twenty twenty was our two transaction and liability MGUs had record quarters in Q4 of last year. And looking at Q4 this year, I mean M&A is hard enough to forecast and they're definitely not forecasting back to back record breaking Q4s.
43:21 And also and this will be possibly symptomatic for us for a little while. The growth rate of two successive quarters doesn't necessarily imply a trend. So, for example, our organic growth rate in Q1 this year was only eighteen -- only eighteen percent but that was lower than our organic growth rate in Q4 of last year, which is twenty two. But clearly, it would have been a mistake to extrapolate that because we've been twenty plus for the last two quarters.
43:52 And in general, you mentioned prudent Tracy, look, clearly, our business is capable of growth rates much higher than mid-teens. And when the opportunity presents itself, we'll grab it. But those opportunities are often hard to predict and you're right. It wouldn't be prudent of us to put that in the forecast. And so because our business is seasonal because prior year comps are always a factor, we advise actually looking at growth trends on an annual basis, and that's why we give annual guidance versus quarterly guidance. And so to put it all together, we grew twenty percent organically on a full year basis in twenty twenty and we're on pace to exceed that exceptional annual growth rate in twenty twenty one by potentially several hundred basis points, and we're really excited about that.
44:40 Okay. Excellent Then, I also want to touch on delegated underwriting authority. You mentioned that you're constructive you could be the first fifty state player. Could you just remind us how many states you are in now to better assess how transformative that maybe be?
44:57 The binding authority is a wide range of products and appointments. So when we refer to a fifty state platform, it's multi-line. So there's auto appointments in there, there's property casualty appointments, there's package policy appointments, dozens and dozens of carriers who are in the binding authority space and delegate that authority to us do so in a more and more in a fifty state approach, which historically, as you know, was more of a state by state basis. So we've rolled that platform up and we continue to collect these fifty state appointments. So today, we're equipped we have enough product in fifty states where we can RFP with top one hundred retail clients in the hopes and anticipation of participating in the consolidation of the use of those fragmented intermediaries. So getting in position having enough product on the shelf so to speak, was all part of this fifty state phenomenon. And as history with Joe, carriers had to respond to this repositioning, if you will. So lead carriers like Scottsdale nationwide, AIG changed their platforms and went to these fifty state distribution models. So all of that has really come together nicely for us and to position ourselves in a very strong way to the client, so being licensed in fifty states becomes a really important issue and we have a lot of depth and breadth with the underwriters in every state now.
46:45 Got it. Thank you.
46:50 Thank you. Next question Elyse Greenspan with Wells Fargo.
46:55 Hi. Thanks. Good evening. My first question, you guys also seem pretty positive just on the M&A outlook. I think you use the words like you hope to be back soon with more updates. Can you just give us a sense of what the pipeline looks like in terms of just size of deals and words at your business is, you think you might be the most active when it comes to M&A.
47:19 Sure. As we said the pipeline is robust. We're in various stages of development with several great opportunities and they tend to be pretty consistent with what we've done in the past. There a few smaller ones but I mean, a couple, but they're very strategic because they involve one of our big regional clients that will enhance our overall relationship together. And then we of course have started the new vertical in terms of benefits and their discussions were optimistic. This is difficult to calibrate when they emerge into to a binding agreement and when we have a binding agreement generally, that's when we announced sometimes it might be earlier, but generally it's when we have a binding agreement.
48:48 And so those are being worked and there's no certainty some of those can be a little larger and then there especially wholesale opportunities that are stages of discussion. So just generally, we're quite optimistic that we can sustain our past. Record of M&A activity, but we actually feel because of all of our growth and success but also the IPO. But we've got enhanced brand and that more people are -- we're getting more calls from people themselves and then they hire a banker or we help them find the banker just to get the proper advice. But we're very comfortable with where we are at the M&A activity.
50:06 And Elyse just for the sake of clarity when Pat references a binding agreement, we are talking about a definitive purchase agreement, not an LOI, I know some people will report on LOIs. That’s not our plan.
50:21 Okay. That's helpful. And then my second question, you guys continue to show pretty robust margin improvement. I know Jeremiah, you mentioned some of that is COVID, which you don't expect to continue. But around in that, some of that is also just better leverage given stronger revenue growth. So as we think about twenty twenty two has the kind of margin base been lifted? I know you guys have kind of spoken about targeting a margin within the vicinity of thirty has the strong revenue growth, perhaps up margin somewhat?
51:00 So, you've got a good memory Elyse. So aside from our commitment to continually invest in our business, there will be two impactful themes for next year in terms of margin and that's returning to god willing a normal tea in the environment and the annualization of our public company costs. It's a correct observation that the outsized growth these quarters has yielded operating leverage and we think that we can retain some of that. But we're going to be as helpful and transparent as we can when we release guidance for twenty twenty two next spring when we put out our audit because you will see an impact of T&E coming back to normal and us having a full year of public company costs.
51:54 Okay. Thanks for the color.
51:57 Absolutely.
51:59 Next question Alex Scott with Goldman Sachs.
52:04 Hi. Good evening. First one I had to you is just infrastructure bill. I was just interested if you could help us think through the impact of that bill and potential opportunities for growth that you'll see out of that?
52:23 Sure. We hope a lot of that infrastructure bill get spent in terms of construction because we all know the country needs a lot of investment infrastructure. It's hard to predict the politicians will roll out that bill and where the money will get allocated early and then later. We hope that their alert to investing in you recall back in way that’s ready we hope we don't ever repeat itself already and that is really serious construction investment which is knows airports, lots of private investment. We expect that really, but there's no way of knowing. But because of the scale of it, that we material impact areas of business that we focusing on. A very strong construction practice and we have a lot of infrastructure capability. So saying that could invest in one of our sweet spot. We just hope that they do it quickly.
53:54 Thanks and I guess follow-up I had was on the All Risk transaction and just that starts to come into organic growth in a more full way, I guess started next quarter. And is there anything we should be thinking about it in terms of the way that business growing versus the existing business and sort of thinking through what that could look like over the next few quarters?
54:19 Yes, I would start and then turn it to Jeremiah. There's always a period of on an acquisition of some loss of business having priced into the purchase price, we factor in the purchase price I should say. And that's all basically taken place. The good news is that All Risks because of their great talent pool and wonderful franchises has not had a big digesting period in terms of acquisition adjustment. And no water pools to stand around. So that hasn't happened. But frankly, the people are just fantastic and joining the team. So, right now, as we're heard in the fourth quarter they're at full stride. And there's precious little difference between our key wholesale and legacy and All Risks. So exactly what we had hoped for as unfolded and frankly, the period of digestion was much shorter than most transactions. They joined the team quickly, emotionally, physically and so we're very pleased with the early results. And now we are in our second year as you know.
56:16 Thanks for the answers.
56:20 Thank you.
56:24 Next question, Meyer Shields with KBW.
56:28 Thanks so much. Two quick questions. First is I think a follow-up on Elyse. When you've got a quarter like this one, where it's almost impossible to maintain investments at the same pace as organic growth. Does that imply a catch up in investments that we should factor into future quarter's margins?
56:48 Well, I'd like to start with that and I'll to pick it up. Like one of the things that Tim has done really well and then influencing also managing underwriters is to anticipate the growth and higher ahead of it. So, you've heard us say in the past, this is not just the quality business. This is a quality and quantity business. You need the numbers of people to serve your clients. And Tim, in anticipation of the market revenue back in nineteen urge the teams to hire, hire, hire and they did. So that's ability will spike. It has been a gradual build up but sizable of adding staff. So we think we're well prepared. Tim you pick it up from there.
57:43 Sure. Thanks, Pat. Meyer, right from the get-go in twenty ten part of our culture was this commitments constantly be recruiting, constantly training and developing. So it's a part of our daily life. Not a day goes by that we're not trying to recruit a broker or an underwriting specialist. There's days where we bring half a dozen new people on at a time. So it's constant aggressively recruiting and developing talent. And that's worked real well for us. We've got great metrics. We've got a great management team that helps us manage and balance those expenses. But we do very well if I might say so myself in terms of anticipating this growth and these surges of flow into the channel.
58:44 And so as Pat mentioned, in the first and second quarter of twenty nineteen we saw the market firming, we saw the percentage in innovative business dumping into the channel, but more specifically, we saw it by class, we saw it by region, and we were able to accelerate and add people to capture as much of that business as you could. So we'll continue to do that. We have lots of opportunities as Pat mentioned, we're more attractive now to the talent in the industry. Going public as made us even more attractive and so aspects of that recruiting are getting it a little easier and we'll continue to bring in the most talented brokers and underwriters in the country.
59:31 Okay. That was very helpful. Thank you. Second question, same sort of concept when you've got organic growth coming in so significantly ahead of guidance. Are there any catch up incentive compensation expenses obviously, the overall ratio went down, but wondering whether there any timing issues related to a look back at the first or second quarter of this year?
60:00 Any compensation, we call it gearing. I know people call it different things, but when people sort of exceed their baseline bonus for outperformance and there's been some outperformance this year that's all factored in the guidance we're giving you for the full year.
60:18 Okay. Perfect. Got it. Thank you much.
60:21 Your final question comes from Weston Bloomer with UBS.
60:27 Good evening. My first question is a follow-up on Alex’s question on All Risk. If I run the math, it looks like that business grew kind of high-single digits. And that, but now is an organic issue, is there a level of organic that we can think about for that business longer term? Or am I thinking about it wrong and more think about how synergy, how it can provide synergies across different business lines because I do think it might be growing a little bit slower at this point.
60:56 Pat gave some good context on All Risk specifically and then just sort of what the first twelve months are often like for a new acquisition, but we're excited about welcoming them into our organic growth calculation. I mean, when you add several hundred million dollars of revenue to the base, it makes comps tougher. But remember, All Risk, one of the reasons they were the crown jewel of wholesale acquisitions is because they had a very, very strong organic growth engine of themselves, they were consistent double-digit growers before we bought them and generally when we buy companies, we enhanced their growth opportunities, not the opposite. So, we're not expecting all risk to be a drag at all, like. not drive right now at all. Exactly. Yes.
61:50 Got it. Thank you. Second question, just a follow-up on the new hires commentary. Is there a time period where the new producers or either from M&A or does you make new hires like are a positive benefits to margin? And how should we think about that over the next year or two?
62:09 Well, each hire is a little bit different from the next, but we pride ourselves and accelerating their ability to be accretive and we have models to look at that and analyze it but they come in different shapes and sizes, different state regulations that restrict us in terms of moving business. So, we look at each one of those separately, but the key is to accelerate the accretive impact of these producers and underwriters as quickly as possible. And we've done that consistently and we plan to continue to do that.
62:51 Got it. Thank you. Appreciate the color.
62:54 Thanks for your questions.
62:56 I would like to turn the floor over to Pat for closing remarks.
63:01 Okay. Well, thank you for the great questions. And we're very confident of our future. We feel pretty grateful for you following our business and their interested in joining us investing with us and look forward to speaking with you again, we'll be discussing our year end results for twenty twenty one. The year has gone very quickly. Thanks for your interest and your good questions. Have a good evening.
63:35 This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.