Business context and reporting period
Ryan Specialty Group Holdings, Inc. (NYSE: RYAN) filed this unaudited Form 10-Q for the three months ended March 31, 2022. The company distributes specialty insurance and provides underwriting-management services through Wholesale Brokerage, Binding Authority and Underwriting Management. It generally does not assume insurance underwriting risk. Results consolidate RSG LLC, of which the public company owned approximately 42.5% of LLC Common Units at quarter-end.
Key financial results
Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted.
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $386.9 | $311.5 | +24.2% |
| Operating income | $43.4 | $39.8 | +8.9% |
| Net income (loss) | $18.1 | $(3.8) | Improved $21.9 |
| Net income attributable to Ryan Specialty Group Holdings, Inc. | $6.9 | $(6.3) | Improved $13.2 |
| GAAP net income margin | 4.7% | (1.2)% | Improved |
| Operating cash flow | $(65.5) | $(74.8) | $9.3 less cash used |
| Capital expenditures | $2.2 | $2.2 | — |
- Revenue drivers: Organic revenue growth was 20.1%, versus 18.4% a year earlier; acquisitions contributed 3.4 percentage points. Revenue by specialty was Wholesale Brokerage $244.8 million (+28.1%), Binding Authority $63.0 million (+14.4%), and Underwriting Management $78.9 million (+21.0%). Management cited organic growth, acquisitions, increased demand for complex E&S coverage, and stable commission rates.
- Expenses and margins: Compensation and benefits rose 27.9% to $274.3 million, exceeding revenue growth; its ratio increased to 70.9% from 68.9%. General and administrative expense rose 53.8% to $42.4 million; its ratio increased to 10.9% from 8.8%. Operating income grew more slowly than revenue.
- Supplemental non-GAAP measures: Adjusted EBITDAC was $107.3 million (+13.6%), with a 27.7% margin versus 30.3%. Adjusted net income was $64.7 million (+13.3%), with a 16.7% margin versus 18.3%. Adjusted diluted EPS was $0.24 for Q1 2022; the filing does not provide a directly comparable 2021 adjusted diluted EPS figure. These company-defined measures exclude specified costs and should be considered alongside GAAP results.
- Balance sheet and debt at March 31: Cash and cash equivalents were $706.4 million, compared with $387.0 million at year-end 2021. Total debt was $1.979 billion, compared with $1.590 billion; long-term debt was $1.957 billion. The $600 million revolving facility was effectively undrawn. Current assets were $3.041 billion and current liabilities $2.505 billion, including fiduciary assets and matching fiduciary liabilities of $2.124 billion each.
- Cash availability: Fiduciary cash and receivables are held for others and cannot generally be used for corporate purposes. Management reported that $164.2 million of cash held in fiduciary accounts represented collected revenue available to transfer to operating accounts. The filing presents operating cash outflow despite positive net income.
Material changes, outlook and risks
- On February 3, 2022, RSG LLC issued $400 million of 4.375% senior secured notes due February 2030. The term loan carried a floating LIBOR-based rate plus 3.00%, subject to a 0.75% floor; interest expense rose 8.5% year over year to $21.8 million. The company reported compliance with debt covenants and no defaults.
- After quarter-end, the company entered a $1.0 billion notional interest-rate cap with a 2.75% strike through December 31, 2025, at an upfront cost of $25.5 million. It also amended its credit agreement to replace LIBOR with adjusted Term SOFR plus specified spreads.
- The restructuring plan is expected to produce $25 million in annual savings. The company had incurred $28.3 million of cumulative costs through March 31 and expects total 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. Management reported approximately $6.8 million of savings for the quarter.
- Management stated cash, operating cash flows and available credit should meet liquidity needs for the next 12 months and beyond. No formal revenue or earnings guidance is provided. The company said it had no significant acquisition agreements or commitments at the time of filing.
- Key exposures include insurance-market cyclicality and insurer capacity, competition, retention of clients and revenue producers, acquisition integration, E&O claims, collections, cyber and technology risks, and economic, geopolitical and pandemic-related uncertainty. Floating-rate debt exposes the company to interest-rate changes.
- The Tax Receivable Agreement (TRA) liability was $280.7 million at quarter-end; the company generally pays eligible former and current LLC unitholders 85% of specified realized tax savings. Management estimated future payments of $280.7 million based on current assumptions, with additional payments possible from future exchanges; actual amounts may differ materially.
- All Risks long-term incentive plan liabilities were $95.0 million, with approximately $107.7 million of projected cash outflows in 2022. E&O reserves were $3.4 million; coverage provides up to $100 million above a $2.5 million per-claim retention. The company reported no litigation it believed would have a material adverse effect and no material changes to previously disclosed risk factors.
- Other unusual or notable items include $23.2 million of equity-based compensation expense, versus $4.4 million a year earlier, and a $7.7 million non-operating charge from remeasuring TRA liabilities following state tax-rate changes. The 2021 comparison included a $12.6 million loss on preferred-unit embedded derivatives and $8.6 million of debt-issuance costs written off.
Important facts for investors to verify
- Whether strong organic growth continues and whether expense growth moderates, given the year-over-year increases in compensation and administrative costs and the decline in adjusted EBITDAC margin.
- Operating cash conversion and working-capital needs, distinguishing corporate cash from fiduciary funds and understanding the timing of premium and commission flows.
- Debt-service capacity and the cost and effectiveness of the new interest-rate cap and the LIBOR-to-SOFR transition.
- Actual restructuring savings, remaining charges, and the timing of realizing the stated run-rate benefits.
- Future TRA payments and cash requirements, including the sensitivity of estimates to taxable income, tax rates and LLC-unit exchanges.
- The treatment of adjusted results: confirm exclusions and compare company-defined non-GAAP measures with GAAP earnings and margins.