Ryan Specialty Group Holdings, Inc. — Q3 2021 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2021; unaudited results compare with the third quarter and first nine months of 2020. Ryan Specialty distributes specialty insurance and provides underwriting-management services through Wholesale Brokerage, Binding Authority, and Underwriting Management. It generally does not assume insurance underwriting risk. The company completed its IPO in July 2021 and related reorganizations, materially changing its ownership, tax, and reporting structure; pre- and post-IPO per-share results are not directly comparable.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $352.8 million | $236.8 million | $1,054.2 million | $691.3 million |
| Operating income (loss) | $(0.7) million | $25.8 million | $131.4 million | $110.0 million |
| Consolidated net income (loss) | $(32.6) million | $10.8 million | $27.0 million | $74.0 million |
| Net income (loss) attributable to Ryan Specialty | $(1.3) million | $10.2 million | $55.8 million | $72.5 million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $154.4 million | $2.3 million |
- Revenue grew 49.0% in Q3 and 52.5% for the nine months. Organic revenue growth, a non-GAAP measure, was 28.9% and 25.6%, respectively. Nine-month growth included acquisition contribution, principally All Risks.
- GAAP Q3 net loss included $57.6 million of IPO-related compensation expense and a $16.3 million loss from remeasuring preferred-unit make-whole derivatives. Nine-month other non-operating loss was $45.5 million, including $36.9 million of preferred-unit derivative loss and $8.6 million of debt issuance costs written off.
- Q3 GAAP compensation expense ratio rose to 81.2% from 68.8%; adjusted compensation ratio improved to 60.3% from 62.9%. Adjusted EBITDAC was $105.0 million, with a 29.8% margin, versus $67.4 million and 28.4%. These are non-GAAP measures.
- For nine months, adjusted EBITDAC rose 77.3% to $339.9 million and adjusted net income rose 73.0% to $209.7 million. Management cautions that these non-GAAP measures supplement, and are not substitutes for, GAAP results.
- At September 30, cash and cash equivalents were $413.7 million; total debt was $1,595.2 million, including $1,568.4 million long-term debt. Term-loan principal was $1,633.5 million, floating at LIBOR plus 3.0% subject to a 0.75% floor. The revolving facility was expanded to $600 million and was substantially undrawn. The company reported covenant compliance and no defaults.
- Cash provided by operating activities was $154.4 million; investing used $345.5 million and financing provided $293.7 million for the nine months. Cash included $134.4 million held in fiduciary accounts that management said was available for transfer to operating accounts. Fiduciary assets and matching liabilities of $1,916.6 million are not available for general corporate use.
- Other notable balance-sheet items: $395.8 million deferred tax assets and $282.5 million tax receivable agreement liabilities. The company had no dividends declared or payable.
Material changes versus prior period
- Growth reflected both organic expansion and All Risks. Management cited demand for E&S coverage, risks moving from admitted markets, and generally stable commission rates.
- Operating expenses grew faster than revenue in Q3, driven chiefly by compensation, IPO-related equity awards, and acquisition-related incentive costs. Nine-month operating income nevertheless increased, while consolidated net income fell, reflecting higher interest, amortization, and unusual non-operating losses.
- The July IPO generated substantial proceeds and the company repurchased shares and LLC units, acquired preferred interests, and recorded tax assets and TRA obligations. At September 30, the public company owned 42.4% of New RSG Holdings’ LLC units; the consolidated results include non-controlling interests.
- Management reported $154.4 million of operating cash flow versus $2.3 million in the comparable nine months of 2020, citing growth, non-cash expenses, and timing of incentive payments.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance was provided. Management expects cash, operating cash flow, and available credit to cover liquidity needs for at least the next 12 months.
- The restructuring plan targets $25 million of annual savings, with $24 million of costs incurred through September 2021. Management expected the plan to be fully actioned by June 30, 2022, with full run-rate savings by June 30, 2023; estimated total costs are $30–$35 million.
- All Risks long-term incentive plans were terminated in August 2021, without reducing participant benefits. Expected cash payments were approximately $67.3 million in Q4 2021 and $113.0 million in 2022.
- The TRA requires payment of 85% of specified realized tax benefits. The company recorded $282.5 million of related liabilities; actual tax savings and payments may differ and depend on future taxable income and other factors.
- Principal risks include COVID-19 and economic uncertainty, insurance-market cycles and carrier capacity, competition, client and carrier retention, recruiting and retaining producers, acquisitions and integration, debt and floating interest rates, cyber and operational disruption, and E&O claims. Management reported no litigation expected to have a material adverse effect and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported revenue growth is recurring organic growth versus All Risks and other acquisition effects.
- The recurring earnings and cash-flow impact of IPO equity compensation, preferred-unit make-whole charges, acquisition incentives, and other items excluded from adjusted results.
- Debt principal, floating-rate exposure, covenant headroom, and capacity under the $600 million revolving facility.
- Timing and cash cost of the All Risks incentive-plan payments and restructuring savings, including the different plan-action and full run-rate dates.
- Whether projected taxable income supports realization of deferred tax assets and the timing and amount of TRA payments.