Ryan Specialty Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise. Ryan Specialty distributes and administers specialty insurance products and generally does not assume underwriting risk.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $501.9 | $412.0 | $1,544.7 | $1,290.2 |
| Net commissions and fees | $487.3 | $407.6 | $1,507.9 | $1,284.5 |
| Operating income | $69.8 | $61.3 | $262.7 | $210.3 |
| Consolidated net income | $15.7 | $29.3 | $136.0 | $117.5 |
| Net income (loss) attributable to Ryan Specialty Holdings, Inc. | $(5.0) | $11.7 | $38.2 | $43.2 |
| GAAP diluted EPS | $(0.04) | $0.09 | $0.34 | $0.37 |
- Revenue growth: Total revenue increased 21.8% in Q3 and 19.7% year to date. Organic revenue growth, a non-GAAP measure, was 14.7% in both periods; the comparable 2022 rates were 13.7% for Q3 and 18.7% year to date.
- Drivers: Management cited property pricing and more risks moving into the E&S market, growth in most casualty lines, new business, and client relationship expansion. Q3 acquisitions contributed $17.8 million of commissions and fees; organic growth contributed $60.6 million.
- Profitability: Q3 operating margin was approximately 13.9%, versus 14.9% a year earlier. GAAP net income fell 46.4% in Q3 despite higher revenue and operating income, primarily because income tax expense rose to $24.8 million from $3.4 million. A non-cash $20.7 million deferred tax charge from the Socius common-control reorganization was the principal reason; management said it does not affect the annual effective tax rate. The Q3 effective tax rate was 61.26%.
- Non-GAAP results: Q3 Adjusted EBITDAC was $147.0 million, up 25.8%, with a 29.3% margin versus 28.4%. Adjusted net income was $86.6 million, up 30.2%, and adjusted diluted EPS was $0.32 versus $0.25. These measures are company-defined and are not substitutes for GAAP results.
- Expense trends: Q3 compensation and benefits increased 20.1% and general and administrative expense rose 41.4%. The company attributed increases to headcount and business growth, restructuring, acquisition costs, professional services, and normalized travel. Headcount was 4,294, up from 3,798 a year earlier.
- Cash flow: Nine-month operating cash flow was $250.3 million, versus $151.0 million. Investing cash outflow was $381.9 million, including $366.1 million for acquisitions; financing cash outflow was $32.0 million. Cash and cash equivalents were $754.4 million at September 30, 2023, compared with $992.7 million at year-end 2022.
- Debt and liquidity: Total debt carrying value was $2.0 billion, including $1.6 billion of floating-rate term loan principal and $396.1 million of 4.375% senior secured notes due 2030. The term loan matures in 2027. The $600 million revolving facility was essentially undrawn. The company reported covenant compliance and said cash, operating cash flow, and revolver capacity should meet needs for the next 12 months and beyond. The term loan rate is Adjusted Term SOFR plus 3.00%, subject to a 0.75% floor; a $1.0 billion interest-rate cap runs through December 2025.
Material changes and transactions
- Completed the Griffin acquisition in January and acquired ACE Benefit Partners, Point6 Healthcare, and Socius in July. Nine-month acquisition cash outflows were $366.1 million. Goodwill increased to $1.58 billion from $1.31 billion at year-end 2022.
- Increased economic ownership of the LLC to 45.4% from 43.3% at December 31, 2022; non-controlling interests therefore remain substantial. Class B shares have 10 votes each initially, compared with one vote per Class A share.
- Tax Receivable Agreement liabilities rose to $359.1 million from $295.3 million. The agreement generally requires payment to certain LLC unitholders of 85% of specified tax savings; further exchanges may increase future obligations.
- Fiduciary cash and receivables totaled $2.52 billion and are matched by fiduciary liabilities; these funds are not generally available for corporate purposes. The company disclosed $88.0 million of cash held in fiduciary accounts that represented collected revenue and was available for transfer to operating accounts.
Outlook, risks, and unusual items
- ACCELERATE 2025: The expanded program is expected to incur about $90 million of cumulative pre-tax charges through 2024 and generate approximately $50 million in annual savings in 2025. About 95% of charges are expected to result in future cash expenditures. The company had incurred $36.3 million through September 30; management said progress was in line with expectations but estimates and timing could change.
- Market commentary: Management noted slower IPO, public-company D&O, large construction-project, and M&A activity, partly offset by property and casualty growth. It cautioned that E&S market expansion may not be linear, as risks can shift between E&S and admitted markets.
- Acquisition outlook: The company signed an agreement on October 29 to acquire AccuRisk Holdings, a medical stop-loss MGU, expected to close in Q4 2023. No specific revenue or EPS guidance was provided in the filing.
- Contingencies: Ordinary-course E&O exposures are covered by insurance up to $100 million in aggregate above a $5 million per-claim retention, increased from $2.5 million in June 2023. Recorded loss contingencies for outstanding matters were $5.9 million. A separate unusual prior placement issue had a $0.2 million estimated loss contingency and a $22.6 million insurance recovery asset at September 30; further exposure could not be estimated.
- Other risks: The filing highlights competition, carrier and client relationships and capacity, talent retention, acquisition integration, cyber and data security, interest-rate and debt-service exposure, commission and premium trends, and the potential effects of economic conditions. Management reported no material change to previously disclosed risk factors and no litigation it believed would have a material adverse effect.
Important facts for investors to verify
- Whether organic growth, especially property-led growth, persists as pricing and E&S market conditions change, and whether slower D&O, construction, and M&A activity continues.
- How much of reported growth and future performance comes from acquisitions versus organic operations, and how effectively recent acquisitions are integrated.
- Progress, cash costs, and realized savings under ACCELERATE 2025 relative to the $90 million charge and $50 million 2025 savings estimates.
- The effect of floating interest rates on debt service, available cash, and covenant headroom, including the protection and limits of the interest-rate cap.
- Future TRA payments and tax savings, and developments in the prior insurance-placement matter, including the adequacy and collectability of recorded recoveries.
- GAAP earnings versus non-GAAP adjusted measures, particularly the Q3 tax charge, non-controlling interests, and potential dilution from LLC unit exchanges and equity awards.