Ryan Specialty Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Ryan Specialty provides specialty insurance distribution, underwriting management and related services. It generally does not assume insurance underwriting risk. Results are consolidated with the LLC, in which the Company held a 42.9% economic interest at quarter-end; the remainder is reported as non-controlling interests.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $491.3 million | $390.0 million | $878.2 million | $701.5 million |
| Operating income | $105.5 million | $92.3 million | $148.9 million | $132.1 million |
| Net income, consolidated | $70.1 million | $63.4 million | $88.2 million | $59.6 million |
| Net income attributable to Ryan Specialty Holdings | $24.5 million | $63.4 million | $31.4 million | $57.2 million |
| GAAP diluted EPS | $0.22 | Not presented | $0.28 | Not presented |
| Adjusted EBITDAC (non-GAAP) | $166.1 million | $140.5 million | $273.3 million | $234.9 million |
| Adjusted EBITDAC margin (non-GAAP) | 33.8% | 36.0% | 31.1% | 33.5% |
Revenue increased 26.0% in Q2 and 25.2% year to date; organic revenue growth was 22.3% and 21.3%, respectively. Q2 net commissions and fees were $490.2 million, up 25.7%. By specialty, Q2 commissions and fees were $329.2 million in Wholesale Brokerage, $59.8 million in Binding Authority and $101.3 million in Underwriting Management. Management cited organic growth, acquisition contributions, continuing demand for complex excess-and-surplus (E&S) products and stable commission rates.
Consolidated net income rose in both comparisons, but net income attributable to the public company fell as substantial LLC earnings were allocated to non-controlling holders following the IPO-related structure. The prior-year periods also predated the public-company ownership structure, so attributable income and EPS are not directly comparable. GAAP net income margin was 14.3% in Q2 versus 16.3% a year earlier, and 10.0% for the first half versus 8.5%. Adjusted net income and adjusted diluted EPS, both non-GAAP, were $106.4 million and $0.39 for Q2, and $171.2 million and $0.63 for the first half.
Cash flow, debt and liquidity
- Operating cash flow for the first half was $164.7 million, compared with $107.7 million in 2021. Capital expenditures were $6.8 million. Financing cash flow was $379.8 million, principally reflecting the $394.0 million net proceeds from the senior secured notes and a $54.4 million net increase in fiduciary liabilities.
- Cash and cash equivalents were $866.7 million at June 30, 2022, up from $387.0 million at year-end. Of the June balance, management said $153.7 million held in fiduciary accounts represented collected revenue available to transfer to operating accounts. Fiduciary cash and receivables are otherwise not available for general corporate use; fiduciary assets and matching liabilities were each $2.818 billion.
- Total debt carrying value was $1.984 billion, including $1.575 billion of term debt and $399.3 million of senior secured notes. The term loan principal outstanding was $1.621 billion and bears floating-rate interest. The $400 million notes carry 4.375% interest and mature in 2030. The $600 million revolving facility was undrawn at quarter-end. The Company reported covenant compliance and no defaults.
- In April, the Company transitioned the term loan and revolver benchmark from LIBOR to Adjusted Term SOFR. It also purchased a $1.0 billion-notional interest-rate cap with a 2.75% strike through December 2025 for $25.5 million.
- Management believes cash, operating cash flow and available revolving capacity will meet liquidity needs for the next 12 months and beyond. This is management’s assessment, not a quantified forecast.
Changes, outlook and notable items
- Expenses grew faster than revenue: Q2 compensation and benefits rose 30.9% and general and administrative expense rose 58.0%. Their ratios increased to 63.1% and 9.9%, respectively. Management attributed expense growth to commissions, headcount, IPO-related equity compensation, higher travel as restrictions eased, public-company costs and business growth. Adjusted EBITDAC grew, but its margin declined.
- The Restructuring Plan was fully actioned by June 30, 2022. The Company reported $29.4 million of expected annual savings against cumulative charges of $30.9 million; it expects minimal remaining termination and retention costs by year-end. First-half 2022 restructuring costs were $5.7 million.
- The Company issued $400 million of secured notes in February and entered the interest-rate cap in April. Interest expense increased 30.9% in Q2 and 19.4% for the first half, with the notes issuance a principal driver.
- The Tax Receivable Agreement liability was $293.8 million at June 30, up from $272.1 million at year-end; it represents estimated future payments, not cash paid in the period. On August 9, 2022, after quarter-end, the Company amended and restated the agreement, including limits on elective termination and on reference property for certain common tax basis obligations.
- No formal revenue or earnings guidance is provided in the supplied filing text. Management describes growth opportunities in E&S and specialty lines, while identifying risks including insurer capacity and relationships, competition, recruiting and retention, acquisition integration, economic and interest-rate conditions, cyber and operational disruptions, litigation and debt obligations. COVID-19’s ultimate effects remained uncertain.
- The filing reports no litigation expected to have a material adverse effect and no material changes to the risk factors in the 2021 Form 10-K. E&O reserves were $3.7 million; the Company carries aggregate E&O coverage up to $100 million above a $2.5 million per-claim retention.
Important facts for investors to verify
- Assess organic growth and the sustainability of E&S market conditions, contingent commissions and acquisition contributions.
- Reconcile growing revenue and adjusted earnings with lower GAAP margins, higher compensation and administrative expense ratios, and the substantial non-controlling interest allocation.
- Review interest-rate exposure after the SOFR transition, the extent of protection provided by the cap, and the effect of debt service on cash generation.
- Separate unrestricted liquidity from fiduciary balances and monitor the timing and size of future Tax Receivable Agreement payments, including effects of the August amendment.
- Track whether the restructuring savings are realized, and verify the timing of the expected $106.6 million All Risks incentive-plan cash outflow in 2022.