Ryan Specialty Holdings, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparison is with Q1 2023 unless otherwise noted. Ryan Specialty provides specialty insurance distribution, underwriting-management and related services, principally in the E&S market. It generally does not assume insurance underwriting risk. The company reports one operating segment.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Total revenue | $552.0 million | $457.6 million; up 20.6% |
| Net commissions and fees | $537.9 million | $447.5 million; up 20.2% |
| Organic revenue growth | 13.7% | 13.4% under the revised methodology |
| Operating income | $72.6 million | $70.1 million; up 3.7% |
| Net income | $40.7 million | $36.5 million; up 11.6% |
| Net income attributable to Ryan Specialty Holdings, Inc. | $16.5 million | $13.2 million |
| Class A EPS, basic / diluted | $0.14 / $0.13 | $0.12 / $0.11 |
| Adjusted EBITDAC and margin | $157.2 million; 28.5% | $125.0 million; 27.3% |
| Operating cash flow | $(116.5) million | $(159.2) million |
GAAP net income margin declined to 7.4% from 8.0%. Compensation and benefits were $373.5 million (67.7% of revenue, versus 67.2%); general and administrative expense was $75.9 million (13.7%, versus 11.3%). Adjusted compensation ratio improved to 59.8% from 62.5%, while adjusted G&A ratio rose to 11.7% from 10.2%. These adjusted measures are non-GAAP.
At March 31, cash and cash equivalents were $665.4 million, down from $838.8 million at year-end 2023. The company also reported $3.18 billion of fiduciary cash and receivables, matched by fiduciary liabilities; these funds are held for others and are not available for general corporate use. Total debt was $1.98 billion, including $1.94 billion of long-term debt. The $600 million revolving facility was essentially undrawn, with $599.6 million available. The company reported compliance with its credit covenants and said liquidity should be sufficient for the next 12 months and beyond.
Changes and business drivers
- Revenue growth reflected $58.6 million of organic growth and $28.5 million from recent acquisitions; fiduciary investment income also rose $4.1 million. The revised organic-growth measure excludes contingent commissions and fiduciary investment income.
- All three specialties grew: Wholesale Brokerage revenue rose 13.2%, Binding Authority 27.5%, and Underwriting Management 36.5%. Management cited demand for complex E&S risks, new business and client expansion; declines in public-company D&O and cyber premium rates partly offset growth.
- Operating expenses increased 23.7%, faster than revenue, primarily reflecting restructuring costs, headcount and business growth, acquisition-related costs, and higher professional services and travel. Headcount was 4,401, up from 4,051 a year earlier.
- Cash used in operations improved year over year, but remained negative. Management attributed the change largely to timing of accrued liabilities and payments. Investing cash use fell to $7.6 million from $104.9 million, when the prior-year period included acquisition spending.
Outlook, risks and unusual items
- ACCELERATE 2025: The expanded restructuring program is expected to incur approximately $110 million of cumulative charges through 2024 and generate about $60 million in annual savings in 2025. The company had incurred $77.4 million through March 31, 2024, including $29.0 million in Q1. Management said progress was in line with expectations but that savings and timing may change. Approximately 95% of future program charges are expected to require cash expenditures.
- Debt repricing: In January, the term-loan spread was reduced from Adjusted Term SOFR plus 3.00% to plus 2.75%; the credit spread adjustment was also removed. The company recorded $1.9 million of third-party repricing fees and wrote off $0.4 million of debt issuance costs.
- Acquisition after quarter-end: On May 1, 2024, the company completed its acquisition of Castel Underwriting Agencies for approximately $250 million cash plus $2.2 million in Class A shares. The filing reported a $5.4 million total loss on the related deal-contingent foreign-exchange forward upon closing; purchase accounting was not complete at filing.
- Capital returns: Q1 included a one-time $0.23-per-share special dividend and a $0.11 regular quarterly dividend; $40.0 million was paid. The board approved another $0.11 quarterly dividend for payment May 28, 2024. Future dividends remain subject to board approval.
- Tax Receivable Agreement: The reported liability was $361.0 million. The company expects to pay 85% of specified tax savings to current and certain former LLC unitholders; actual payments depend on future taxable income and other factors.
- Contingencies and risks: The company recorded $7.7 million of loss contingencies for outstanding matters, excluding recoveries, and disclosed a separate insurance-placement issue with possible additional losses that it cannot currently estimate. Management said no pending litigation was expected to have a material adverse effect and reported no material changes to the risk factors in its 2023 Form 10-K. Other risks include E&O claims, carrier and client relationships, acquisitions, market cycles, cyber and technology matters, interest rates, and leverage.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Reconcile GAAP profitability and expense ratios with the substantially stronger non-GAAP adjusted results, including the company’s adjustments and definitions.
- Monitor conversion of revenue and earnings into cash, working-capital timing, and the distinction between corporate cash and fiduciary funds.
- Track restructuring charges, cash costs and realized savings against the $110 million cost estimate and $60 million 2025 annual-savings target.
- Review post-close Castel consideration, integration, purchase-price allocation and the final impact of the foreign-exchange forward.
- Assess debt service and floating-rate exposure, available revolver capacity, and future TRA obligations and dividend funding.
- Follow E&O and replacement-coverage exposures, contingent consideration, and the performance of recent acquisitions.