Ryan Specialty Holdings, Inc. — Q1 2023 Form 10-Q
Business context and period. Specialty insurance distribution and underwriting services provider, reporting the three months ended March 31, 2023, compared with Q1 2022. It operates in one segment and generally does not assume insurance underwriting risk. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless noted.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $457.6m | $386.9m | +18.3% |
| Net commissions and fees | $447.5m | $386.7m | +15.7% |
| Organic revenue growth (non-GAAP) | 12.9% | 20.1% | Lower by 7.2 points |
| Operating income | $70.1m | $43.4m | +61.5% |
| Net income | $36.5m | $18.1m | +101.7% |
| Net income attributable to Ryan Specialty Holdings | $13.2m | $6.9m | +90.4% |
| Class A diluted EPS | $0.11 | $0.06 | Up $0.05 |
| Adjusted EBITDAC (non-GAAP) | $125.0m | $107.3m | +16.5% |
- Margins: GAAP net income margin rose to 8.0% from 4.7%; operating margin was approximately 15.3%, versus 11.2%. Adjusted EBITDAC margin eased to 27.3% from 27.7%, while adjusted net income margin declined to 15.7% from 16.7%.
- Revenue mix: Wholesale Brokerage revenue grew 16.8% to $285.9m; Binding Authority grew 10.4% to $69.5m; Underwriting Management grew 16.8% to $92.1m. Supplemental and contingent commissions increased 31.0% to $26.3m.
- Expenses: Compensation and benefits increased 12.2% to $307.7m; its ratio to revenue improved to 67.2% from 70.9%. General and administrative expense increased 22.0% to $51.7m; its ratio rose to 11.3% from 10.9%.
- Cash flow: Operating cash flow was negative $159.2m, versus negative $65.5m. Investing cash flow was negative $104.9m, largely reflecting the Griffin acquisition; financing cash flow was negative $29.6m. Management attributed weaker operating cash flow mainly to working-capital movements, including accrued commissions and bonuses.
- Liquidity and debt: Cash and cash equivalents were $704.7m at quarter-end, down from $992.7m at December 31, 2022. Total debt was $1.973bn, including $1.609bn outstanding principal on the floating-rate term loan and approximately $396m carrying value of senior secured notes. The $600m revolving facility was essentially undrawn. Fiduciary cash and receivables of $2.475bn are matched by fiduciary liabilities and are not generally available for corporate use. The company reported compliance with credit covenants.
Material changes, outlook and risks
- Revenue growth was supported by 12.9% organic growth and 1.6% growth attributed to acquisitions. Total revenue growth slowed from 24.2% in Q1 2022; management noted stable aggregate commission rates and growth in E&S demand, while some construction and M&A-related insurance activity faced delays amid higher interest rates.
- Net income benefited from higher revenue and a prior-year $7.7m charge related to remeasurement of Tax Receivable Agreement liabilities. Interest expense increased 35.5% to $29.5m, reflecting the 2022 notes issuance and higher floating rates on the term loan.
- The January 2023 Griffin Underwriting Services acquisition had total consideration of $115.5m. The company also reported $102.1m of investing cash outflow for business combinations, net of cash acquired and fiduciary cash.
- ACCELERATE 2025: Initiated in February 2023, the program is expected to incur approximately $65m of costs through 2024 and generate annual savings of about $35m in 2025. Costs incurred in Q1 were $2.7m. Management cautioned that costs, savings, and timing may vary; achieving planned benefits is a stated risk.
- Contingencies: The company recorded $13.0m of loss contingencies for outstanding E&O matters. Separately, an unusual placement issue involving an unsatisfactory insurance carrier led to a $9.7m estimated replacement-coverage liability and a $22.6m related insurance recovery asset. Potential additional customer-related losses could not be estimated.
- Other key risks include interest-rate exposure, dependence on carrier and broker relationships, competition and shifts between E&S and admitted markets, acquisitions and integration, talent retention, cybersecurity, and the $303.6m estimated Tax Receivable Agreement liability. No material litigation was identified by management. No general financial guidance was provided in the filing.
Important facts for investors to verify
- Whether organic growth remains resilient and how much future growth comes from acquisitions, contingent commissions, or fiduciary investment income.
- Progress, cash costs, and realized savings under ACCELERATE 2025 versus the $65m cost and $35m annual-savings targets.
- Cash conversion and working-capital trends, particularly seasonal bonus and commission payments; fiduciary funds should not be treated as freely available liquidity.
- Debt-service sensitivity to floating rates, hedge coverage and receipts under the interest-rate cap, and continued covenant compliance.
- Updates to the replacement-coverage matter, E&O reserves and recoveries, and assumptions underlying contingent consideration and the TRA liability.
- Non-GAAP measures are supplemental: reconcile adjusted results to GAAP and note that diluted EPS reflects a substantially larger share count than basic EPS because of exchangeable LLC interests and awards.