RYAN SPECIALTY HOLDINGS, INC. quarterly report, Q2 FY2021

Ryan Specialty Group Holdings, Inc. — Q2 2021 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2021; financial statements are unaudited. The operating business is reported through Ryan Specialty Group, LLC. The public holding company was formed in March 2021 and had minimal activity at quarter-end; its IPO and related reorganization closed on July 26, 2021, after the reporting period.

Financial performance

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Total revenue	$390.0 million	$246.3 million	$701.5 million	$454.5 million
Operating income	$92.3 million	$57.7 million	$132.1 million	$84.2 million
Net income	$63.4 million	$49.9 million	$59.6 million	$63.2 million
Operating cash flow	Not separately presented	Not separately presented	$107.7 million	$68.3 million

Q2 revenue grew 58.3%, comprising 28.5% organic growth and 30.3% contribution from acquisitions, principally All Risks. For the first half, revenue grew 54.3%, including 23.9% organic growth and 30.8% acquisition contribution.
Wholesale Brokerage was the largest revenue channel. Q2 revenue was $256.0 million, versus $53.6 million for Binding Authorities and $80.3 million for Underwriting Management.
Q2 GAAP operating margin was approximately 23.7%; net income margin was 16.3%, down from 20.3%. First-half net income fell 5.7% and net income margin declined to 8.5% from 13.9%, despite higher operating income.
Management-reported non-GAAP Adjusted EBITDAC was $140.5 million for Q2, up 79.4%, with a 36.0% margin versus 31.8%. For the first half it was $234.9 million, up 88.8%, with a 33.5% margin versus 27.4%. These measures exclude specified costs and should be considered alongside GAAP results.
Q2 compensation and benefits were $236.8 million; the expense ratio improved to 60.7% from 63.7%. First-half compensation was $451.3 million, with the ratio improving to 64.3% from 65.6%. Amortization increased substantially, reflecting acquired intangibles.

Cash, debt and liquidity

At June 30, cash and cash equivalents were $307.5 million, versus $312.7 million at December 31, 2020. First-half operating cash flow was $107.7 million; investing activities used $0.2 million and financing activities used $113.1 million. Cash declined $5.1 million during the half.
Total debt was $1.593 billion, including $1.583 billion of term debt; long-term debt was $1.570 billion. The term loan bears floating-rate interest (LIBOR plus 3.00%, subject to a 0.75% floor). Interest expense rose to $19.0 million in Q2 and $39.0 million in the first half.
Fiduciary assets and matching liabilities were each $2.293 billion. These funds are held for policyholders, clients and carriers and generally cannot be used for corporate purposes. The filing also says $120.1 million of reported cash was held in fiduciary accounts and “available for general corporate purposes”; this wording appears inconsistent with its explanation of fiduciary restrictions and merits verification.
Management said operating cash flow and available credit facilities should meet liquidity needs for at least the next 12 months. The revolver commitment increased from $300 million to $600 million after the IPO. The company reported compliance with debt covenants at June 30, 2021.

Material changes, transactions and outlook

The July 26 IPO sold 65.46 million shares at $23.50 per share and generated approximately $1.45 billion of net proceeds. Proceeds were used primarily to acquire LLC units and Onex interests and repurchase Onex-held shares; $123.2 million was reserved for general corporate purposes. The company also acquired 100% ownership of Ryan Re in March 2021 for $48.4 million.
Q2 other non-operating expense was $7.9 million, chiefly from an $8.0 million loss on fair-value changes in preferred-unit embedded derivatives. First-half other non-operating expense was $29.3 million, including $20.6 million of such derivative losses and $8.6 million of debt issuance costs written off in connection with a term-loan repricing. These items contributed to first-half net income declining despite operating-income growth.
The restructuring plan targets $25 million in annual savings, with total one-time costs estimated at $30–$35 million. Cumulative costs were $20.8 million through June 30; management expected the plan to be fully actioned by June 30, 2022 and run-rate savings by June 30, 2023. Management reported $10.4 million of savings in the first half, partly offset by restructuring costs.
Following the IPO, the company expects to pay 85% of certain realized tax savings to LLC unitholders and Onex under a Tax Receivable Agreement. Management estimated approximately $300 million of payments over 15 years related to IPO transactions, subject to assumptions and potentially substantial additional payments from future exchanges or financings.
The All Risks long-term incentive plans were terminated in August 2021 without changing award entitlements; benefits are due within 12 months and remain subject to service conditions. The filing estimated payments of $97.8 million in 2021 and $113.2 million in 2022.
Management cited continued demand for specialty and excess-and-surplus insurance, higher premium rates in some lines, and acquisition-led growth. It provided no specific company-wide revenue or earnings guidance. It cautioned that COVID-19 effects remain uncertain and that softer insurance pricing, carrier capacity, competition, acquisitions, employee retention, debt and interest rates could affect results.

Risks, contingencies and unusual disclosures

A mid-April 2021 phishing incident involved unauthorized access to five employee email accounts. The company said potentially accessible personal information related to fewer than 2,000 individuals; it provided notice and credit monitoring and did not consider the event material, while acknowledging possible regulatory inquiries, penalties or claims.
The company reported no litigation expected to have a material adverse effect. It held $1.6 million of reserves for E&O and other matters. Maximum contingent acquisition consideration was $99.8 million at June 30.
COVID-19 impacts were not reasonably estimable. The company had no interest-rate swaps outstanding at June 30 and remained exposed to floating-rate debt costs.
The filing disclosed a prior-period classification error in Class A common units and accumulated deficit, revised in the presented statements; management concluded it was not material to previously issued statements.

Most important facts for investors to verify

How much of reported growth is sustainable organically versus acquisition-related, and whether E&S market conditions and premium rates persist.
Whether restructuring savings are realized on schedule and exceed recurring integration, incentive and public-company costs.
Post-IPO net debt, interest-rate sensitivity, use of remaining IPO proceeds, and cash actually available after fiduciary restrictions and planned incentive payments.
The cash-flow and valuation effects of the Tax Receivable Agreement, preferred-unit transactions and derivative liabilities.
The filing’s stated fiduciary-cash availability wording, and any subsequent consequences from the disclosed phishing incident.