Ryan Specialty Group Holdings, Inc. — FY2021 Form 10-K
Reporting period: Year ended December 31, 2021. The company is a specialty insurance distributor and underwriter serving brokers, agents and carriers, primarily in excess and surplus (E&S) lines. It operates through Wholesale Brokerage, Binding Authority and Underwriting Management. The company completed its IPO in July 2021; results include the All Risks acquisition, completed in September 2020.
Financial performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Total revenue | $1,432.8 million | $1,018.3 million |
| Operating income | $186.6 million | $158.5 million |
| Net income | $56.6 million | $70.5 million |
| Net income margin | 4.0% | 6.9% |
| Operating cash flow | $273.5 million | $135.4 million |
| Cash and cash equivalents | $387.0 million | $312.7 million |
| Total debt on balance sheet | $1,590.1 million | $1,585.4 million |
Revenue increased 40.7%; organic revenue growth, a non-GAAP measure, was 22.4%. By specialty, FY2021 net commissions and fees were $932.0 million in Wholesale Brokerage (65.1%), $209.6 million in Binding Authority (14.6%) and $290.6 million in Underwriting Management (20.3%). Adjusted EBITDAC was $460.2 million, with a 32.1% margin, versus $293.5 million and 28.8% in 2020; Adjusted Net Income was $290.1 million, with a 20.2% margin, versus $185.4 million and 18.2%. These are non-GAAP measures and exclude specified items; they should not be read as GAAP earnings.
Cash provided by operations was $273.5 million; investing activities used $457.9 million and financing activities provided $429.3 million. Fiduciary cash and receivables are held for others and are not available for general corporate purposes. At year-end, cash included $139.5 million held in fiduciary accounts that the company said was transferable to operating accounts.
Balance-sheet debt was $1.59 billion, including $1.629 billion of term-loan principal before unamortized discounts and issuance costs. The term loan had a floating LIBOR-based rate, with a 0.75% floor. The company reported $598.7 million of available revolving commitments at year-end. Separately, RSG LLC issued $400 million of 4.375% senior secured notes in February 2022; the filing gives pro forma total debt of approximately $2.029 billion after that issuance and use of proceeds.
Changes, transactions and unusual items
- Net income fell $13.9 million despite strong revenue growth. Higher compensation, amortization and interest expense, along with non-operating charges, contributed to the decline. Compensation and benefits rose 44.5% to $991.6 million; the expense ratio increased to 69.2% from 67.4%.
- FY2021 non-operating loss was $44.9 million, including a $36.9 million loss from the preferred-unit make-whole derivative and $8.6 million of debt issuance costs written off after a term-loan repricing. Compensation expense included $75.9 million of IPO-related costs, primarily equity award remeasurement and new IPO awards.
- FY2021 acquisitions included Crouse, for $110.6 million, and certain Keystone assets, for $59.8 million. The company also acquired the remaining interest in Ryan Re for $48.4 million.
- The restructuring plan is intended to produce $25 million in annual savings. The company incurred $14.4 million of costs in 2021 and $25.2 million cumulatively; it expects total one-time costs of $30–35 million. The plan was expected to be fully actioned by June 30, 2022, with full run-rate savings expected by June 30, 2023.
- The 2021 IPO generated $1.448 billion in net proceeds, used for organizational transactions, unit and equity repurchases, related payments and general corporate purposes. The filing reports $121.6 million remaining for general corporate purposes after specified uses.
Outlook, risks and contingencies
Management provided no specific revenue or earnings guidance. It said cash, operating cash flows and available credit were expected to meet liquidity needs, including debt service, for the next 12 months and beyond. Management expects continued investment in growth and acquisitions, and continued expense increases with business volume, revenue and headcount. It cited continued E&S market growth, organic expansion and acquisitions as opportunities, while emphasizing that future results are uncertain.
- Key risks include insurance-market cycles and reduced carrier capacity; dependence on carrier, broker and producer relationships; competition; program termination or changes to delegated underwriting authority; acquisition integration; talent retention and succession; and the ability to sustain growth and operating efficiencies.
- Debt, floating interest rates and LIBOR transition create refinancing, cost and covenant risks. The company reported compliance with its credit-agreement covenants at December 31, 2021 and no defaults during the year.
- The Tax Receivable Agreement requires payment of 85% of specified realized or deemed tax benefits to certain pre-IPO unitholders and Onex. The recorded liability was $272.1 million at year-end; payments may accelerate in specified circumstances.
- The company disclosed a 2021 phishing incident involving unauthorized access to five employees’ email accounts. It said fewer than 2,000 individuals’ personal information may have been accessible, that it notified affected individuals and regulators, and that it did not consider the event material. Potential regulatory or third-party claims remain a risk.
- COVID-19 had not materially adversely affected results to date, but further effects remained uncertain. Natural disasters, inflation, geopolitical developments, cyber incidents and regulatory changes could also affect operations or the insurance market.
- The company reported no litigation that it believed would have a material adverse effect. E&O coverage had a $100 million limit and a self-insured retention of up to $2.5 million per claim; recorded reserves for outstanding matters were $2.7 million.
Most important facts for investors to verify
- Reconcile reported GAAP net income of $56.6 million with $65.9 million attributable to Ryan Specialty Group Holdings and the reported post-IPO Class A loss per share of $0.07; the filing’s organizational changes and non-controlling interests affect comparability.
- Review the definition and adjustments behind non-GAAP organic growth, Adjusted EBITDAC and Adjusted Net Income, especially the IPO, acquisition, restructuring and equity-compensation exclusions.
- Confirm post-February 2022 debt, use of note proceeds, floating-rate exposure, maturities and covenant headroom; distinguish corporate cash from fiduciary funds.
- Track restructuring execution and realized savings, the $111.4 million expected 2022 payment for All Risks long-term incentive plans, and integration of Crouse and Keystone.
- Assess the $272.1 million TRA liability and potential payment acceleration, as well as the dual-class voting structure and controlling influence of the Ryan Parties.
- Review the cyber incident disclosures and any subsequent regulatory, legal or remediation developments.