Business context and reporting period
Ryan Specialty Holdings, Inc. (NYSE: RYAN) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. The company distributes specialty insurance products and provides underwriting, product development and administration services through Wholesale Brokerage, Binding Authority and Underwriting Management. It generally does not assume insurance underwriting risk. All financial figures below are in U.S. dollars; amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $412.0 | $352.8 | $1,290.2 | $1,054.2 |
| Operating income (loss) | $61.3 | ($0.7) | $210.3 | $131.4 |
| Net income (loss), consolidated | $29.3 | ($32.6) | $117.5 | $27.0 |
| Net income attributable to Ryan Specialty Holdings | $11.7 | ($1.3) | $43.2 | $55.8 |
| Diluted Class A EPS | $0.09 | ($0.16) | $0.37 | ($0.16) |
| Adjusted EBITDAC (non-GAAP) | $116.8 | $105.0 | $390.2 | $339.9 |
| Adjusted EBITDAC margin (non-GAAP) | 28.4% | 29.8% | 30.2% | 32.2% |
Q3 revenue rose 16.8%; organic revenue growth was 13.7%, compared with 28.9% a year earlier. Nine-month revenue increased 22.4%, including 18.7% organic growth. Q3 adjusted net income was $66.6 million and adjusted diluted EPS was $0.25; nine-month figures were $237.8 million and $0.88. These are non-GAAP measures and should be considered alongside GAAP results.
Q3 GAAP compensation and benefits expense ratio improved to 66.5% from 81.2%, while general and administrative expense ratio increased to 11.9% from 11.0%. Adjusted EBITDAC grew, but its margin declined. Nine-month adjusted net income margin also declined to 18.4% from 19.9%.
For the first nine months, operating cash flow was $151.0 million, versus $154.4 million in 2021. Capital expenditures were $12.0 million. Cash and cash equivalents were $833.1 million at September 30, 2022, compared with $387.0 million at December 31, 2021. Separately reported fiduciary cash and receivables are matched by fiduciary liabilities and are not generally available for corporate purposes; the company identified $130.2 million of cash in fiduciary accounts as collected revenue available to transfer to operating accounts.
Total debt carrying value was $1,982.6 million, including a $1,617.0 million term-loan principal balance and $400.0 million of senior secured notes issued in February 2022. The $600 million revolving facility was substantially undrawn. The term loan bears floating-rate interest at SOFR plus 3.00%, subject to a 0.75% floor. Interest expense rose 36.2% in Q3 and 25.3% year to date, primarily due to the notes issuance and higher floating rates. The company reported compliance with debt covenants and no defaults.
Material changes and unusual items
- Growth was led by net commissions and fees, up 15.6% in Q3 and 21.9% year to date. Q3 acquisition contributions were 2.8 percentage points of revenue growth; Crouse and Keystone were acquired in December 2021. Supplemental and contingent commissions fell 36.4% in Q3, though they rose 31.8% year to date.
- Q3 operating results benefited from lower IPO-related compensation expense versus the prior-year period. General and administrative expense increased, including higher travel costs as pandemic restrictions eased and costs associated with business growth.
- The company paid $106.7 million during the first nine months under the All Risks long-term incentive plans; the plan was fully paid in Q3. The restructuring plan was fully actioned by June 30, 2022. Cumulative costs were $30.9 million against an original annual savings target of $25.0 million; run-rate savings were expected by June 30, 2023.
- A $25.5 million interest-rate cap purchased in April covers $1.0 billion of term-loan exposure, has a 2.75% strike and expires in December 2025. Its fair value was $46.5 million at quarter-end.
- The Tax Receivable Agreement liability was $302.4 million at quarter-end. The company generally owes eligible holders 85% of certain realized tax savings; management estimates future payments for attributes existing at September 30, 2022 at $302.4 million, with additional payments possible from future exchanges.
Outlook, commentary and risks
The filing provides no formal revenue or earnings guidance. Management said cash, operating cash flows and available revolving capacity should cover liquidity needs, including debt service and working capital, for the next 12 months and beyond. It continues to pursue selective acquisitions but reported no material acquisition commitments.
Management cited continued demand for complex and hard-to-place risks and movement of risks into the excess and surplus lines market as growth drivers. It also noted that rising interest rates and tighter debt markets have delayed some construction projects and M&A activity, affecting related insurance placements. Public-company D&O pricing declines accelerated as that market stabilized and new capacity entered.
Key risks include competition, retention of producers and carrier/client relationships, changes in insurance capacity or commission rates, economic and interest-rate conditions, acquisition integration, collection risk, cyber and operational disruption, litigation and E&O claims, and debt and TRA obligations. The company reported no litigation it believed would have a material adverse effect, and no material changes to previously disclosed risk factors. It maintained $4.0 million in reserves for outstanding E&O and other matters; its E&O policy provides up to $100 million aggregate coverage above a $2.5 million per-claim retention. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether organic growth and specialty-market demand persist as growth rates moderate and D&O pricing weakens.
- Whether adjusted margin declines continue, and how much reported earnings depend on non-GAAP adjustments, IPO-related compensation and other excluded items.
- The cash cost of higher floating rates, the protection provided by the partial term-loan interest cap, and capacity under debt covenants and the revolving facility.
- The timing and actual amount of TRA payments, which depend on future taxable income and tax savings; distinguish corporate cash from fiduciary funds.
- Delivery of the restructuring plan’s targeted savings and the evolution of E&O reserves, contingent consideration and acquisition integration costs.