Ryan Specialty Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Ryan Specialty provides specialty insurance distribution, underwriting, and related services through Wholesale Brokerage, Binding Authority, and Underwriting Management. It generally does not assume insurance underwriting risk.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Total revenue | $585.1 | $491.3 | $1,042.7 | $878.2 |
| Net commissions and fees | $573.0 | $490.2 | $1,020.5 | $876.9 |
| Operating income | $122.8 | $105.5 | $192.9 | $148.9 |
| Net income | $83.8 | $70.1 | $120.3 | $88.2 |
| Net income attributable to Ryan Specialty Holdings, Inc. | $30.1 | $24.5 | $43.2 | $31.4 |
| Diluted Class A EPS | $0.26 | $0.22 | $0.37 | $0.28 |
| Operating cash flow | Not separately presented | Not separately presented | $144.8 | $164.7 |
- Q2 revenue grew 19.1%; net commissions and fees increased 16.9%, including 16.1% organic growth. First-half revenue grew 18.7%, with 14.6% organic growth.
- Q2 net income increased 19.5%; first-half net income increased 36.4%. Growth in consolidated earnings does not equal growth in earnings attributable to the public company: non-controlling interests received $53.7 million of Q2 net income and $77.0 million for the first half.
- Q2 compensation and benefits were $352.4 million, or 60.2% of revenue, versus 63.1% a year earlier. General and administrative expense rose to $81.6 million from $48.5 million; its revenue ratio increased to 13.9% from 9.9%. First-half ratios were 63.3% and 12.8%, respectively, versus 66.5% and 10.3%.
- Non-GAAP adjusted EBITDAC was $194.2 million for Q2, with a 33.2% margin, versus $166.1 million and 33.8%. First-half adjusted EBITDAC was $319.2 million, with a 30.6% margin, versus $273.3 million and 31.1%. Adjusted diluted EPS was $0.45 for Q2 and $0.72 for the first half. These are company-defined non-GAAP measures.
Cash, debt and liquidity
- Cash and cash equivalents were $966.0 million at June 30, 2023, compared with $992.7 million at December 31, 2022. The company also held $3,327.7 million of fiduciary cash and receivables, matched by fiduciary liabilities; these funds are not available for general corporate use.
- First-half operating cash flow was $144.8 million, down from $164.7 million. Investing activities used $109.3 million, chiefly for the Griffin acquisition; financing activities provided $150.8 million, including a $198.1 million net increase in fiduciary liabilities.
- Total debt was $1,979.4 million, compared with $1,982.5 million at year-end. This included $1,604.6 million of Term Loan principal at a floating rate and $400.0 million of 4.375% senior secured notes due 2030. The $600 million revolving facility was undrawn. The company reported compliance with debt covenants and no defaults.
- Interest expense, net increased 16.2% in Q2 and 25.2% for the first half, primarily reflecting higher floating rates and, for the first half, the notes issued in 2022. An interest-rate cap covers $1.0 billion of exposure, has a 2.75% strike, and runs through December 2025.
- The Tax Receivable Agreement liability was $326.8 million. The agreement generally requires payment of 85% of specified tax savings; future payments depend on taxable income and other factors.
Changes, outlook and notable items
- Management attributed growth mainly to property business, including higher property premiums and risks moving into the E&S market, as well as growth across most casualty lines and client wins. Commission rates were generally stable.
- Growth was partly offset by lower public-company D&O placements amid slower IPO activity and premium-rate declines, and by weaker activity in large commercial construction and M&A-related insurance. Supplemental and contingent commissions fell 42.9% in Q2, although they were broadly flat for the first half.
- ACCELERATE 2025 is expected to incur at least $65 million of cumulative restructuring costs through 2024 and generate at least $35 million of annual savings in 2025. The company recorded $19.8 million of costs in the first half of 2023. Management said progress was in line with expectations but that savings and timing may change.
- In January, the company acquired Griffin Underwriting Services for $115.5 million. After quarter-end, it completed acquisitions of ACE Benefit Partners and Point6 Healthcare for aggregate cash consideration of $46.8 million, and Socius Insurance Services for $251.9 million cash plus $2.7 million in Class A stock. Contingent consideration and final purchase-price allocations remained under evaluation.
- Management expects cash, operating cash flow, and available revolver capacity to meet liquidity needs for the next 12 months and beyond. It cited rising interest rates and delays in construction and M&A activity as potential headwinds, while describing longer-term E&S market growth as an opportunity. No quantified revenue or earnings guidance was provided.
- Other items to monitor include the unusual 2022 placement of policies through a trading partner using an insurer the company and insureds considered unsatisfactory. At June 30, the company recorded a $4.4 million replacement-coverage loss contingency and a $22.6 million related insurance recovery; additional exposure is possible but not estimable. The E&O per-claim retention rose from $2.5 million to $5.0 million effective June 1, 2023.
- The company reported ordinary-course E&O and other legal exposures, but no pending litigation it believes would have a material adverse effect. It reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether organic growth and the strength of property and casualty lines persist as E&S pricing, insurer capacity, and market conditions change.
- Whether the $35 million 2025 annual savings target is achieved, and how restructuring charges affect reported and adjusted margins.
- The financing, integration, purchase-price allocations, and contingent payments for the three July acquisitions, and the resulting effect on leverage and cash flow.
- Floating-rate debt costs, interest-rate-cap protection, covenant headroom, and the company’s capacity to fund debt service and TRA payments.
- Realization of the replacement-coverage insurance recovery and whether the policy-placement matter creates further losses or claims.
- How non-controlling interests and equity exchanges affect Class A earnings, share count, and interpretation of consolidated net income and company-defined non-GAAP results.