““
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto
Commission File Number: 001-40645
RYAN SPECIALTY GROUP HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 86-2526344 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
Two Prudential Plaza | ||
180 N. Stetson Avenue, Suite 4600 | ||
Chicago, IL | 60601 | |
(Address of principal executive offices) | (Zip Code) |
(312) 784-6001 |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which registered | ||
Class A Common Stock, $0.001 par value per share | RYAN | The New York Stock Exchange (NYSE) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ ☒ No ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated | ☒ | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in
On September 1, 2021,August 10, 2022, the Registrant had
Ryan Specialty Group Holdings, Inc.
INDEX
1 | ||||||
Item 1. | 1 | |||||
1 | ||||||
2 | ||||||
3 | ||||||
4 | ||||||
5 | ||||||
7 | ||||||
Item 2. | 33 | |||||
Item 3. | 59 | |||||
Item 4. | 60 | |||||
60 | ||||||
Item 1. | 60 | |||||
Item 1A. | 60 | |||||
Item 2. | 60 | |||||
Item 3. | 60 | |||||
Item 4. | 61 | |||||
Item 5. | 61 | |||||
Item 6. | 62 |
Forward-Looking Statements
This Quarterly Report on Forms contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties. All statements, other than statements of historical fact included in this Quarterly Report on Form
i
We derive many of our forward-looking statements from our operating budgets and forecasts that are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form10-Q.
ii
All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this Quarterly Report on Form
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form
We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this Quarterly Report on Form
Commonly Used Defined Terms
As used in this Quarterly Report on Form
iii
•
iv
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Ryan Specialty Group Holdings, Inc.
June 30, 2021 | March 5, 2021 | |||||||
ASSETS | ||||||||
Cash | $ | 590 | $ | — | ||||
TOTAL ASSETS | $ | 590 | $ | — | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Payable due to affiliate | $ | 590 | $ | — | ||||
Total liabilities | $ | 590 | $ | — | ||||
STOCKHOLDERS’ EQUITY | ||||||||
Stock subscription receivable from Ryan Specialty Group, LLC | $ | (10 | ) | $ | (10 | ) | ||
Class A common stock, $0.001 par value per share; 500,000,000 shares authorized; 10,000 shares issued and outstanding | 10 | 10 | ||||||
Total Stockholders’ equity | $ | 0— | $ | — | ||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 590 | $ | — | ||||
Consolidated Statements of Income (Unaudited)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
REVENUE | ||||||||||||||||
Net commissions and fees | $ | 389,846 | $ | 246,065 | $ | 701,190 | $ | 453,150 | ||||||||
Fiduciary investment income | 166 | 259 | 280 | 1,366 | ||||||||||||
Total revenue | $ | 390,012 | $ | 246,324 | $ | 701,470 | $ | 454,516 | ||||||||
EXPENSES | ||||||||||||||||
Compensation and benefits | 236,801 | 156,811 | 451,287 | 298,113 | ||||||||||||
General and administrative | 30,685 | 21,868 | 58,230 | 50,385 | ||||||||||||
Amortization | 27,319 | 9,118 | 55,113 | 19,149 | ||||||||||||
Depreciation | 1,222 | 851 | 2,422 | 1,629 | ||||||||||||
Change in contingent consideration | 1,723 | — | 2,313 | 1,032 | ||||||||||||
Total operating expenses | $ | 297,750 | $ | 188,648 | $ | 569,365 | $ | 370,308 | ||||||||
OPERATING INCOME | $ | 92,262 | $ | 57,676 | $ | 132,105 | $ | 84,208 | ||||||||
Interest expense | 18,986 | 6,759 | 39,031 | 15,436 | ||||||||||||
Income from equity method investment in related party | 353 | — | 434 | 87 | ||||||||||||
Other non-operating income (loss) | (7,890 | ) | 555 | (29,336 | ) | (2,492 | ) | |||||||||
INCOME BEFORE INCOME TAXES | $ | 65,739 | $ | 51,472 | $ | 64,172 | $ | 66,367 | ||||||||
Income tax expense | 2,332 | 1,585 | 4,566 | 3,162 | ||||||||||||
NET INCOME | $ | 63,407 | $ | 49,887 | $ | 59,606 | $ | 63,205 | ||||||||
Net income (loss) attributable to non-controlling interests, net of tax | — | (54 | ) | 2,450 | 946 | |||||||||||
NET INCOME ATTRIBUTABLE TO MEMBERS | $ | 63,407 | $ | 49,941 | $ | 57,156 | $ | 62,259 | ||||||||
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
NET INCOME | $ | 63,407 | $ | 49,887 | $ | 59,606 | $ | 63,205 | ||||||||
Net income (loss) attributable to non-controlling interests, net of tax | — | (54 | ) | 2,450 | 946 | |||||||||||
NET INCOME ATTRIBUTABLE TO MEMBERS | $ | 63,407 | $ | 49,941 | $ | 57,156 | $ | 62,259 | ||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Foreign currency translation adjustments | 796 | 533 | 444 | 702 | ||||||||||||
Change in share of equity method investment in related party other comprehensive loss | — | — | (738 | ) | — | |||||||||||
Total other comprehensive income (loss), net of tax | $ | 796 | $ | 533 | $ | (294 | ) | $ | 702 | |||||||
COMPREHENSIVE INCOME ATTRIBUTABLE TO MEMBERS | $ | 64,203 | $ | 50,474 | $ | 56,862 | $ | 62,961 | ||||||||
All balances presented in thousands, except unitshare and par value data
June 30, 2021 | December 31, 2020 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 307,528 | $ | 312,651 | ||||
Commissions and fees receivable – net | 206,800 | 177,699 | ||||||
Fiduciary assets | 2,293,363 | 1,978,152 | ||||||
Prepaid incentives – net | 7,805 | 8,842 | ||||||
Other current assets | 25,556 | 16,006 | ||||||
Total current assets | $ | 2,841,052 | $ | 2,493,350 | ||||
NON-CURRENT ASSETS | ||||||||
Goodwill | 1,224,299 | 1,224,196 | ||||||
Other intangible assets | 552,904 | 604,764 | ||||||
Prepaid incentives – net | 28,924 | 36,199 | ||||||
Equity method investment in related party | 46,911 | 47,216 | ||||||
Property and equipment – net | 15,961 | 17,423 | ||||||
Lease right-of-use | 86,565 | 93,941 | ||||||
Other non-current assets | 10,531 | 12,293 | ||||||
Total non-current assets | $ | 1,966,095 | $ | 2,036,032 | ||||
TOTAL ASSETS | $ | 4,807,147 | $ | 4,529,382 | ||||
LIABILITIES, MEZZANINE EQUITY AND MEMBERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable and accrued liabilities | 131,948 | 115,573 | ||||||
Preferred units repurchase payable | 78,256 | — | ||||||
Accrued compensation | 314,510 | 349,558 | ||||||
Operating lease liabilities | 19,909 | 19,880 | ||||||
Short-term debt and current portion of long-term debt | 22,547 | 19,158 | ||||||
Fiduciary liabilities | 2,293,363 | 1,978,152 | ||||||
Total current liabilities | $ | 2,860,533 | $ | 2,482,321 | ||||
NON-CURRENT LIABILITIES | ||||||||
Accrued compensation | 73,577 | 69,121 | ||||||
Operating lease liabilities | 76,046 | 83,737 | ||||||
Long-term debt | 1,570,227 | 1,566,192 | ||||||
Net deferred tax liabilities | 537 | 577 | ||||||
Other non-current liabilities | 6,020 | 16,709 | ||||||
Total non-current liabilities | $ | 1,726,407 | $ | 1,736,336 | ||||
TOTAL LIABILITIES | $ | 4,586,940 | $ | 4,218,657 | ||||
MEZZANINE EQUITY | ||||||||
Preferred units (260,000,000 par value; 260,000,000 issued and outstanding at June 30, 2021 and December 31, 2020) | $ | 240,831 | $ | 239,635 | ||||
MEMBERS’ EQUITY | ||||||||
Preferred units (74,990,000 par value; 74,990,000 issued and outstanding at June 30, 2021 and December 31, 2020) | — | 74,270 | ||||||
Class A common units (692,753,835 par value; 692,753,835 issued and outstanding at June 30, 2021, 693,876,105 par value; 693,876,105 issued and outstanding at December 31, 2020) | 274,741 | 267,248 | ||||||
Class B common units (75,478,586 par value; 75,478,586 issued and outstanding at June 30, 2021 and December 31, 2020) | 71,874 | 71,874 | ||||||
Accumulated deficit | (369,647 | ) | (346,304 | ) | ||||
Accumulated other comprehensive income | 2,408 | 2,702 | ||||||
Total RSG members’ equity | $ | (20,624 | ) | $ | 69,790 | |||
Non-controlling interests | — | 1,300 | ||||||
Total members’ equity | (20,624 | ) | 71,090 | |||||
TOTAL LIABILITIES, MEZZANINE AND MEMBERS’ EQUITY | $ | 4,807,147 | $ | 4,529,382 | ||||
Six months ended June 30, | ||||||||
2021 | 2020 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 59,606 | $ | 63,205 | ||||
Adjustments to reconcile net income to cash flows from (used for) operating activities: | ||||||||
Loss (gain) from non-controlling equity interest | (434 | ) | (87 | ) | ||||
Amortization | 55,113 | 19,149 | ||||||
Depreciation | 2,422 | 1,629 | ||||||
Prepaid & deferred compensation expense | 23,035 | 7,297 | ||||||
Equity-based compensation expense | 7,595 | 4,136 | ||||||
Amortization of deferred debt issuance costs | 4,748 | 687 | ||||||
Deferred tax benefit (loss) | (40 | ) | 196 | |||||
Change (net of acquisitions and divestitures) in: | ||||||||
Commissions and fees receivable - net | (29,089 | ) | (24,434 | ) | ||||
Accrued interest | 333 | 129 | ||||||
Other current assets and accrued liabilities | (11,932 | ) | 12,282 | |||||
Other non-current assets and accrued liabilities | (3,642 | ) | (15,855 | ) | ||||
Total cash flows provided by operating activities | $ | 107,715 | $ | 68,334 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
— | (5,236 | ) | ||||||
3,786 | (4,279 | ) | ||||||
— | (23,500 | ) | ||||||
(3,941 | ) | (7,858 | ) | |||||
Total cash flows used for investing activities | $ | (155 | ) | $ | (40,873 | ) | ||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
non-controlling interest holders | (48,368 | ) | — | |||||
(3,880 | ) | (39,156 | ) | |||||
(8,250 | ) | (4,063 | ) | |||||
— | 150,000 | |||||||
— | (20,000 | ) | ||||||
— | 848 | |||||||
— | (44,000 | ) | ||||||
(4,191 | ) | — | ||||||
(75 | ) | (36 | ) | |||||
(1,289 | ) | — | ||||||
(47,039 | ) | (13,644 | ) | |||||
Total cash flows (used for) provided by financing activities | $ | (113,092 | ) | $ | 29,949 | |||
Effect of changes in foreign exchange rates on cash and cash equivalents | 409 | (2,130 | ) | |||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | $ | (5,123 | ) | $ | 55,280 | |||
CASH AND CASH EQUIVALENTS—Beginning balance | $ | 312,651 | $ | 52,016 | ||||
CASH AND CASH EQUIVALENTS—Ending balance | $ | 307,528 | $ | 107,296 | ||||
Supplemental cash flow information: | ||||||||
Interest and financing costs paid | $ | 32,518 | $ | 14,032 | ||||
Income taxes paid | $ | 5,897 | $ | 2,055 | ||||
Related party asset acquisition | $ | — | $ | (6,077 | ) | |||
Forgiveness of related party receivable | $ | — | $ | 6,077 | ||||
Accretion of premium on mezzanine equity | $ | 1,196 | $ | 615 | ||||
Accretion of premium on mezzanine equity in accumulated deficit | $ | (1,196 | ) | $ | (615 | ) | ||
Repurchase of vested common units | $ | (745 | ) | $ | — | |||
Issuance of unsecured promissory note | $ | 745 | $ | — |
Mezzanine Equity | Preferred Units | Common Units Class A | Common Units Class B | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | Non-controlling Interests | Total Members’ Equity (Deficit) | ||||||||||||||||||||||||||||
Balance at January 1, 2021 | $ | 239,635 | $ | 74,270 | $ | 267,248 | $ | 71,874 | $ | (346,304 | ) | $ | 2,702 | $ | 1,300 | $ | 71,090 | ||||||||||||||||||
Net income (loss) | — | — | — | — | (6,251 | ) | — | 2,450 | (3,801 | ) | |||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | (352 | ) | — | (352 | ) | |||||||||||||||||||||||||
Change in share of equity method investment in related party other comprehensive income | — | — | — | — | — | (738 | ) | — | (738 | ) | |||||||||||||||||||||||||
Accumulation of preferred dividends (% return), net of tax distributions | — | — | — | — | (6,736 | ) | — | — | (6,736 | ) | |||||||||||||||||||||||||
Accretion of premium on mezzanine equity | 598 | — | — | — | (598 | ) | — | — | (598 | ) | |||||||||||||||||||||||||
Related party acquisition | — | — | — | — | (44,517 | ) | — | (3,750 | ) | (48,267 | ) | ||||||||||||||||||||||||
Distributions declared—tax advances | — | — | — | — | (14,236 | ) | — | — | (14,236 | ) | |||||||||||||||||||||||||
Repurchases of Class A units | — | — | — | — | (227 | ) | — | — | (227 | ) | |||||||||||||||||||||||||
Equity-based compensation expense | — | — | 4,430 | — | — | — | — | 4,430 | |||||||||||||||||||||||||||
Balance at March 31, 2021 | $ | 240,233 | $ | 74,270 | $ | 271,678 | $ | 71,874 | $ | (418,869 | ) | $ | 1,612 | $ | 0 | $ | 565 | ||||||||||||||||||
Net income (loss) | — | — | — | — | 63,407 | — | — | 63,407 | |||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | 796 | — | 796 | |||||||||||||||||||||||||||
Accumulation of preferred dividends (% return), net of tax distributions | — | — | — | — | 1,073 | — | — | 1,073 | |||||||||||||||||||||||||||
Accretion of premium on mezzanine equity | 598 | — | — | — | (598 | ) | — | — | (598 | ) | |||||||||||||||||||||||||
Related party acquisition | — | — | — | — | (101 | ) | — | — | (101 | ) | |||||||||||||||||||||||||
Distributions declared—tax advances | — | — | — | — | (9,521 | ) | — | — | (9,521 | ) | |||||||||||||||||||||||||
Reclassification from preferred units to repurchase payable | — | (74,270 | ) | — | — | (742 | ) | — | — | (75,012 | ) | ||||||||||||||||||||||||
Repurchases of Class A units | — | — | (102 | ) | — | (4,296 | ) | — | — | (4,398 | ) | ||||||||||||||||||||||||
Equity-based compensation expense | — | — | 3,165 | — | — | — | — | 3,165 | |||||||||||||||||||||||||||
Balance at June 30, 2021 | $ | 240,831 | $ | 0 | $ | 274,741 | $ | 71,874 | $ | (369,647 | ) | $ | 2,408 | $ | 0 | $ | (20,624 | ) | |||||||||||||||||
Mezzanine Equity | Preferred Units | Common Units Class A | Common Units Class B | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | Non-controlling Interests | Total Members’ Equity (Deficit) | |||||||||||||||||||||||||||||
Balance at January 1, 2020 | $ | 139,644 | $ | 0 | $ | 138,540 | $ | 61,225 | $ | (276,009 | ) | $ | 864 | $ | (1,109 | ) | $ | (76,489 | ) | |||||||||||||||||
Net income (loss) | — | — | — | — | 12,318 | 1,000 | 13,318 | |||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | 169 | — | 169 | ||||||||||||||||||||||||||||
Accumulation of preferred dividends (% return), net of tax distributions | — | — | — | — | (2,992 | ) | — | — | (2,992 | ) | ||||||||||||||||||||||||||
Accretion of premium on mezzanine equity | 308 | — | — | — | (308 | ) | — | — | (308 | ) | ||||||||||||||||||||||||||
Related party asset acquisition | — | — | — | — | (3,039 | ) | — | — | (3,039 | ) | ||||||||||||||||||||||||||
Distributions declared—tax advances | — | — | — | — | (12,288 | ) | — | — | (12,288 | ) | ||||||||||||||||||||||||||
Repurchases of Class A units | — | — | (586 | ) | — | (33,918 | ) | — | — | (34,504 | ) | |||||||||||||||||||||||||
Equity issued to the Board of Directors | — | — | 640 | — | — | — | — | 640 | ||||||||||||||||||||||||||||
Equity-based compensation expense | — | — | 2,041 | — | — | — | — | 2,041 | ||||||||||||||||||||||||||||
Balance at March 31, 2020 | $ | 139,952 | $ | 0 | $ | 140,635 | $ | 61,225 | $ | (316,236 | ) | $ | 1,033 | $ | (109 | ) | $ | (113,452 | ) | |||||||||||||||||
Net income (loss) | — | — | — | — | 49,941 | — | (54 | ) | 49,887 | |||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | 533 | — | 533 | ||||||||||||||||||||||||||||
Accumulation of preferred dividends (% return), net of tax distributions | — | — | — | — | (3,176 | ) | — | — | (3,176 | ) | ||||||||||||||||||||||||||
Accretion of premium on mezzanine equity | 307 | — | — | — | (307 | ) | — | — | (307 | ) | ||||||||||||||||||||||||||
Distributions declared—tax advances | — | — | — | — | (8,087 | ) | — | — | (8,087 | ) | ||||||||||||||||||||||||||
Repurchases of Class A units | — | — | (13 | ) | — | (4,639 | ) | — | — | (4,652 | ) | |||||||||||||||||||||||||
Equity-based compensation expense | — | — | 1,456 | — | — | — | — | 1,456 | ||||||||||||||||||||||||||||
Balance at June 30, 2020 | $ | 140,259 | $ | 0 | $ | 142,078 | $ | 61,225 | $ | (282,504 | ) | $ | 1,566 | $ | (163 | ) | $ | (77,798 | ) | |||||||||||||||||
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
REVENUE |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net commissions and fees |
| $ | 490,227 |
|
| $ | 389,846 |
|
| $ | 876,908 |
|
| $ | 701,190 |
|
Fiduciary investment income |
|
| 1,065 |
|
|
| 166 |
|
|
| 1,274 |
|
|
| 280 |
|
Total revenue |
| $ | 491,292 |
|
| $ | 390,012 |
|
| $ | 878,182 |
|
| $ | 701,470 |
|
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Compensation and benefits |
|
| 310,058 |
|
|
| 236,801 |
|
|
| 584,331 |
|
|
| 451,287 |
|
General and administrative |
|
| 48,495 |
|
|
| 30,685 |
|
|
| 90,860 |
|
|
| 58,230 |
|
Amortization |
|
| 26,233 |
|
|
| 27,319 |
|
|
| 52,896 |
|
|
| 55,113 |
|
Depreciation |
|
| 1,229 |
|
|
| 1,222 |
|
|
| 2,440 |
|
|
| 2,422 |
|
Change in contingent consideration |
|
| (251 | ) |
|
| 1,723 |
|
|
| (1,260 | ) |
|
| 2,313 |
|
Total operating expenses |
| $ | 385,764 |
|
| $ | 297,750 |
|
| $ | 729,267 |
|
| $ | 569,365 |
|
OPERATING INCOME |
| $ | 105,528 |
|
| $ | 92,262 |
|
| $ | 148,915 |
|
| $ | 132,105 |
|
Interest expense, net |
|
| 24,846 |
|
|
| 18,986 |
|
|
| 46,598 |
|
|
| 39,031 |
|
Loss (income) from equity method investment in related party |
|
| 16 |
|
|
| (353 | ) |
|
| 558 |
|
|
| (434 | ) |
Other non-operating loss (income) |
|
| (622 | ) |
|
| 7,890 |
|
|
| 6,898 |
|
|
| 29,336 |
|
INCOME BEFORE INCOME TAXES |
| $ | 81,288 |
|
| $ | 65,739 |
|
| $ | 94,861 |
|
| $ | 64,172 |
|
Income tax expense |
|
| 11,168 |
|
|
| 2,332 |
|
|
| 6,665 |
|
|
| 4,566 |
|
NET INCOME |
| $ | 70,120 |
|
| $ | 63,407 |
|
| $ | 88,196 |
|
| $ | 59,606 |
|
Net income attributable to non-controlling |
|
| 45,619 |
|
|
| 0 |
|
|
| 56,784 |
|
|
| 2,450 |
|
NET INCOME ATTRIBUTABLE TO RYAN SPECIALTY HOLDINGS, INC. |
| $ | 24,501 |
|
| $ | 63,407 |
|
| $ | 31,412 |
|
| $ | 57,156 |
|
NET INCOME PER SHARE OF CLASS A COMMON STOCK: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | 0.23 |
|
|
| 0 |
|
| $ | 0.30 |
|
|
| 0 |
|
Diluted |
| $ | 0.22 |
|
|
| 0 |
|
| $ | 0.28 |
|
|
| 0 |
|
WEIGHTED-AVERAGE SHARES OF CLASS A COMMON STOCK OUTSTANDING: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
|
| 108,054,437 |
|
|
| 0 |
|
|
| 107,327,462 |
|
|
| 0 |
|
Diluted |
|
| 120,204,902 |
|
|
| 0 |
|
|
| 264,417,470 |
|
|
| 0 |
|
See accompanying Notes to the Consolidated Financial Statements (Unaudited)
1
Ryan Specialty Holdings, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
All balances presented in thousands
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
NET INCOME |
| $ | 70,120 |
|
| $ | 63,407 |
|
| $ | 88,196 |
|
| $ | 59,606 |
|
Net income attributable to non-controlling interests, |
|
| 45,619 |
|
|
| 0 |
|
|
| 56,784 |
|
|
| 2,450 |
|
NET INCOME ATTRIBUTABLE TO RYAN SPECIALTY HOLDINGS, INC. |
| $ | 24,501 |
|
| $ | 63,407 |
|
| $ | 31,412 |
|
| $ | 57,156 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Gain on interest rate cap, net |
|
| 127 |
|
|
| 0 |
|
|
| 127 |
|
|
| 0 |
|
Foreign currency translation adjustments |
|
| (1,186 | ) |
|
| 796 |
|
|
| (1,244 | ) |
|
| 444 |
|
Change in share of equity method investment in related |
|
| (554 | ) |
|
| 0 |
|
|
| (1,856 | ) |
|
| (738 | ) |
Total other comprehensive income (loss), net of tax |
| $ | (1,613 | ) |
| $ | 796 |
|
| $ | (2,973 | ) |
| $ | (294 | ) |
COMPREHENSIVE INCOME ATTRIBUTABLE TO RYAN SPECIALTY HOLDINGS, INC. |
| $ | 22,888 |
|
| $ | 64,203 |
|
| $ | 28,439 |
|
| $ | 56,862 |
|
See accompanying Notes to the Consolidated Financial Statements (Unaudited)
2
Ryan Specialty Group, LLC provides specialty productsHoldings, Inc.
Consolidated Balance Sheets (Unaudited)
All balances presented in thousands, except share and solutions for insurance brokers, agents and carriers. This encompasses distribution, underwriting, product development, administration and risk management services by acting as a wholesale broker and a managing underwriter serviceper share data
|
| June 30, 2022 |
|
| December 31, 2021 |
| ||
ASSETS |
|
|
|
|
|
| ||
CURRENT ASSETS |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 866,669 |
|
| $ | 386,962 |
|
Commissions and fees receivable – net |
|
| 244,753 |
|
|
| 210,252 |
|
Fiduciary cash and receivables |
|
| 2,817,798 |
|
|
| 2,390,185 |
|
Prepaid incentives – net |
|
| 7,914 |
|
|
| 7,726 |
|
Other current assets |
|
| 18,306 |
|
|
| 15,882 |
|
Total current assets |
| $ | 3,955,440 |
|
| $ | 3,011,007 |
|
NON-CURRENT ASSETS |
|
|
|
|
|
| ||
Goodwill |
|
| 1,313,366 |
|
|
| 1,309,267 |
|
Other intangible assets |
|
| 524,808 |
|
|
| 573,930 |
|
Prepaid incentives – net |
|
| 22,380 |
|
|
| 25,382 |
|
Equity method investment in related party |
|
| 40,522 |
|
|
| 45,417 |
|
Property and equipment – net |
|
| 16,039 |
|
|
| 15,290 |
|
Lease right-of-use assets |
|
| 132,003 |
|
|
| 84,874 |
|
Deferred tax assets |
|
| 404,235 |
|
|
| 382,753 |
|
Other non-current assets |
|
| 33,624 |
|
|
| 10,788 |
|
Total non-current assets |
| $ | 2,486,977 |
|
| $ | 2,447,701 |
|
TOTAL ASSETS |
| $ | 6,442,417 |
|
| $ | 5,458,708 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
| ||
CURRENT LIABILITIES |
|
|
|
|
|
| ||
Accounts payable and accrued liabilities |
|
| 79,456 |
|
|
| 99,403 |
|
Accrued compensation |
|
| 394,804 |
|
|
| 386,301 |
|
Operating lease liabilities |
|
| 18,355 |
|
|
| 18,783 |
|
Tax Receivable Agreement liabilities |
|
| 7,977 |
|
|
| 0 |
|
Short-term debt and current portion of long-term debt |
|
| 28,949 |
|
|
| 23,469 |
|
Fiduciary liabilities |
|
| 2,817,798 |
|
|
| 2,390,185 |
|
Total current liabilities |
| $ | 3,347,339 |
|
| $ | 2,918,141 |
|
NON-CURRENT LIABILITIES |
|
|
|
|
|
| ||
Accrued compensation |
|
| 6,619 |
|
|
| 4,371 |
|
Operating lease liabilities |
|
| 125,249 |
|
|
| 74,386 |
|
Long-term debt |
|
| 1,955,027 |
|
|
| 1,566,627 |
|
Deferred tax liabilities |
|
| 666 |
|
|
| 631 |
|
Tax Receivable Agreement liabilities |
|
| 285,787 |
|
|
| 272,100 |
|
Other non-current liabilities |
|
| 20,216 |
|
|
| 27,675 |
|
Total non-current liabilities |
| $ | 2,393,564 |
|
| $ | 1,945,790 |
|
TOTAL LIABILITIES |
| $ | 5,740,903 |
|
| $ | 4,863,931 |
|
STOCKHOLDERS' EQUITY |
|
|
|
|
|
| ||
Class A common stock ($0.001 par value; 1,000,000,000 shares authorized, 111,206,112 and 109,894,548 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively) |
|
| 111 |
|
|
| 110 |
|
Class B common stock ($0.001 par value; 1,000,000,000 shares authorized, 147,990,243 and 149,162,107 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively) |
|
| 148 |
|
|
| 149 |
|
Class X common stock ($0.001 par value; 10,000,000 shares authorized, 640,784 shares issued and 0 outstanding at June 30, 2022 and December 31, 2021) |
|
| 0 |
|
|
| 0 |
|
Preferred stock ($0.001 par value; 500,000,000 shares authorized, 0 shares issued and outstanding at June 30, 2022 and December 31, 2021) |
|
| 0 |
|
|
| 0 |
|
Additional paid-in capital |
|
| 385,908 |
|
|
| 348,865 |
|
Retained earnings (accumulated deficit) |
|
| 24,348 |
|
|
| (7,064 | ) |
Accumulated other comprehensive income (loss) |
|
| (1,259 | ) |
|
| 1,714 |
|
Total stockholders' equity attributable to Ryan Specialty Holdings, Inc. |
| $ | 409,256 |
|
| $ | 343,774 |
|
Non-controlling interests |
|
| 292,258 |
|
|
| 251,003 |
|
Total stockholders' equity |
|
| 701,514 |
|
|
| 594,777 |
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
| $ | 6,442,417 |
|
| $ | 5,458,708 |
|
See accompanying Notes to a wide variety of personal, commercial, industrial, institutional, and governmental organizations through one operating segment, Ryan Specialty. With the exception of the Company’s equity method investment, the Company does not take on any underwriting risk.
3
Ryan Specialty Group Holdings, Inc. was formed as a Delaware corporation on March 5, 2021 for
Consolidated Statements of Cash Flows (Unaudited)
All balances presented in thousands
|
| Six Months Ended June 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
| ||
Net income |
| $ | 88,196 |
|
| $ | 59,606 |
|
Adjustments to reconcile net income to cash flows provided by (used for) operating activities: |
|
|
|
|
|
| ||
Loss (gain) from equity method investment |
|
| 558 |
|
|
| (434 | ) |
Amortization |
|
| 52,896 |
|
|
| 55,113 |
|
Depreciation |
|
| 2,440 |
|
|
| 2,422 |
|
Prepaid and deferred compensation expense |
|
| 18,341 |
|
|
| 23,035 |
|
Non-cash equity-based compensation |
|
| 43,028 |
|
|
| 7,595 |
|
Amortization of deferred debt issuance costs |
|
| 5,984 |
|
|
| 4,748 |
|
Amortization of interest rate cap premium |
|
| 1,159 |
|
|
| 0 |
|
Deferred income tax benefit |
|
| (6,866 | ) |
|
| (40 | ) |
Loss on Tax Receivable Agreement |
|
| 7,173 |
|
|
| 0 |
|
Change (net of acquisitions) in: |
|
|
|
|
|
| ||
Commissions and fees receivable – net |
|
| (33,755 | ) |
|
| (29,089 | ) |
Accrued interest liability |
|
| 7,456 |
|
|
| 333 |
|
Other current assets and accrued liabilities |
|
| (5,565 | ) |
|
| (11,932 | ) |
Other non-current assets and accrued liabilities |
|
| (16,334 | ) |
|
| (3,642 | ) |
Total cash flows provided by operating activities |
| $ | 164,711 |
|
| $ | 107,715 |
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
| ||
Prepaid incentives – repayments |
|
| 7 |
|
|
| 3,786 |
|
Capital expenditures |
|
| (6,797 | ) |
|
| (3,941 | ) |
Total cash flows used for investing activities |
| $ | (6,790 | ) |
| $ | (155 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
| ||
Proceeds from senior secured notes |
|
| 394,000 |
|
|
| 0 |
|
Payment of interest rate cap premium |
|
| (25,500 | ) |
|
| 0 |
|
Repayment of term debt |
|
| (8,250 | ) |
|
| (8,250 | ) |
Deferred offering costs paid |
|
| 0 |
|
|
| (4,191 | ) |
Debt issuance costs paid |
|
| (2,369 | ) |
|
| (1,289 | ) |
Finance lease and other costs paid |
|
| (18 | ) |
|
| (75 | ) |
Payment of contingent consideration |
|
| (6,241 | ) |
|
| 0 |
|
Purchase of remaining interest in RyanRe |
|
| 0 |
|
|
| (48,368 | ) |
Equity repurchases from pre-IPO unitholders |
|
| 0 |
|
|
| (3,880 | ) |
Cash distribution to LLC unitholders |
|
| (26,222 | ) |
|
| (47,039 | ) |
Receipt of taxes related to net share settlement of equity awards |
|
| 1,062 |
|
|
| 0 |
|
Taxes paid related to net share settlement of equity awards |
|
| (1,062 | ) |
|
| 0 |
|
Net change in fiduciary liabilities |
|
| 54,357 |
|
|
| 93,671 |
|
Total cash flows provided by (used in) financing activities |
| $ | 379,757 |
|
| $ | (19,421 | ) |
Effect of changes in foreign exchange rates on cash, cash equivalents, and cash held in a fiduciary |
|
| 352 |
|
|
| (537 | ) |
NET CHANGE IN CASH, CASH EQUIVALENTS, AND CASH HELD IN A FIDUCIARY CAPACITY |
| $ | 538,030 |
|
| $ | 87,602 |
|
CASH, CASH EQUIVALENTS, AND CASH HELD IN A FIDUCIARY CAPACITY—Beginning balance |
| $ | 1,139,661 |
|
| $ | 895,704 |
|
CASH, CASH EQUIVALENTS, AND CASH HELD IN A FIDUCIARY CAPACITY—Ending balance |
| $ | 1,677,691 |
|
| $ | 983,306 |
|
Reconciliation of cash, cash equivalents, and cash held in a fiduciary capacity |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 866,669 |
|
| $ | 307,528 |
|
Cash held in a fiduciary capacity |
| $ | 811,022 |
|
| $ | 675,778 |
|
Total cash, cash equivalents, and cash held in a fiduciary capacity |
| $ | 1,677,691 |
|
| $ | 983,306 |
|
See accompanying Notes to the purpose of completing a public offering and related transactions in order to carry on the business of the Company. On July 26, 2021, Consolidated Financial Statements (Unaudited)
4
Ryan Specialty Group Holdings, Inc. completed its IPO
Consolidated Statements of
All balances presented in thousands, except share data
| Class A |
| Class B |
| Class X |
| Additional Paid-in |
| Retained Earnings (Accumulated |
| Accumulated Other Comprehensive |
| Non-controlling |
| Stockholders' |
| |||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit) |
| Income (Loss) |
| Interest |
| Equity |
| |||||||||||
Balance at January 1, 2022 |
| 109,894,548 |
| $ | 110 |
|
| 149,162,107 |
| $ | 149 |
|
| — |
| $ | — |
| $ | 348,865 |
| $ | (7,064 | ) | $ | 1,714 |
| $ | 251,003 |
| $ | 594,777 |
|
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 6,911 |
|
| — |
|
| 11,165 |
|
| 18,076 |
|
Issuance of common stock |
| 91,743 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Exchange of common units for common stock |
| 77,261 |
|
| — |
|
| (77,261 | ) |
| — |
|
| — |
|
| — |
|
| 47 |
|
| — |
|
| — |
|
| (47 | ) |
| — |
|
Tax receivable agreement liability and deferred taxes arising from LLC Interest ownership changes |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (704 | ) |
| — |
|
| — |
|
| — |
|
| (704 | ) |
Distributions declared – Members' tax |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (7,543 | ) |
| (7,543 | ) |
Change in share of equity method investment in related party other comprehensive income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1,302 | ) |
| (1,748 | ) |
| (3,050 | ) |
Foreign currency translation adjustments |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (58 | ) |
| (707 | ) |
| (765 | ) |
Equity-based compensation |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 23,225 |
|
| — |
|
| — |
|
| 23 |
|
| 23,248 |
|
Balance at March 31, 2022 |
| 110,063,552 |
| $ | 110 |
|
| 149,084,846 |
| $ | 149 |
|
| — |
|
| — |
| $ | 371,433 |
| $ | (153 | ) | $ | 354 |
| $ | 252,146 |
| $ | 624,039 |
|
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 24,501 |
|
| — |
|
| 45,619 |
|
| 70,120 |
|
Issuance of common stock |
| 60,511 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Exchange of common units for common stock |
| 1,094,603 |
|
| 1 |
|
| (1,094,603 | ) |
| (1 | ) |
| — |
|
| — |
|
| 1,998 |
|
| — |
|
| — |
|
| (1,998 | ) |
| — |
|
Forfeiture of common stock |
| (12,554 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Tax receivable agreement liability and deferred taxes arising from LLC Interest ownership changes |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (319 | ) |
| — |
|
| — |
|
| — |
|
| (319 | ) |
Distributions declared – Members' tax |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (7,610 | ) |
| (7,610 | ) |
Change in share of equity method investment in related party other comprehensive income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (554 | ) |
| (733 | ) |
| (1,287 | ) |
Gain on interest rate cap, net |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 127 |
|
| 169 |
|
| 296 |
|
Foreign currency translation adjustments |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1,186 | ) |
| (2,319 | ) |
| (3,505 | ) |
Equity-based compensation |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 12,796 |
|
| — |
|
| — |
|
| 6,984 |
|
| 19,780 |
|
Balance at June 30, 2022 |
| 111,206,112 |
| $ | 111 |
|
| 147,990,243 |
| $ | 148 |
|
| — |
| $ | — |
| $ | 385,908 |
| $ | 24,348 |
| $ | (1,259 | ) | $ | 292,258 |
| $ | 701,514 |
|
See accompanying Notes to the underwriters exercised their option in full
5
Ryan Specialty Group Holdings, Inc. received approximately
Consolidated Statements of net proceeds fromMezzanine Equity and Stockholders'/ Members’ Equity (Unaudited)
All balances presented in thousands, except share data
| Mezzanine |
| Members' |
| Class A |
| Class B |
| Class X |
| Additional Paid-in |
| Retained Earnings (Accumulated |
| Accumulated Other Comprehensive |
| Non-controlling |
| Stockholders' |
| |||||||||||||||||||
| Equity |
| Interest |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit) |
| Income (Loss) |
| Interest |
| Equity |
| |||||||||||||
Balance at January 1, 2021 | $ | 239,635 |
| $ | 67,088 |
|
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
| $ | — |
| $ | — |
| $ | 2,702 |
| $ | 1,300 |
| $ | 71,090 |
|
Net income (loss) |
| — |
|
| (6,251 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2,450 |
|
| (3,801 | ) |
Foreign currency translation adjustments |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (352 | ) |
| — |
|
| (352 | ) |
Change in share of equity method investment in related party other comprehensive income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (738 | ) |
| — |
|
| (738 | ) |
Accumulation of preferred dividends (% return), net of tax distributions |
| — |
|
| (6,736 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (6,736 | ) |
Accretion of premium on mezzanine equity |
| 598 |
|
| (598 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (598 | ) |
Related party acquisition |
| — |
|
| (44,517 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (3,750 | ) |
| (48,267 | ) |
Distributions declared – tax advances |
| — |
|
| (14,236 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (14,236 | ) |
Repurchases of Class A units |
| — |
|
| (227 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (227 | ) |
Equity-based compensation |
| — |
|
| 4,430 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 4,430 |
|
Balance at March 31, 2021 | $ | 240,233 |
| $ | (1,047 | ) |
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
| $ | — |
| $ | — |
| $ | 1,612 |
| $ | — |
| $ | 565 |
|
Net income (loss) |
| — |
|
| 63,407 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 63,407 |
|
Foreign currency translation adjustments |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 796 |
|
| — |
|
| 796 |
|
Accumulation of preferred dividends (% return), net of tax distributions |
| — |
|
| 1,073 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1,073 |
|
Accretion of premium on mezzanine equity |
| 598 |
|
| (598 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (598 | ) |
Related party acquisition |
| — |
|
| (101 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
|
|
| (101 | ) | |
Distributions declared – tax advances |
| — |
|
| (9,521 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (9,521 | ) |
Reclassification from preferred units to repurchase payable |
|
|
| (75,012 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (75,012 | ) | |
Repurchases of Class A units |
| — |
|
| (4,398 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (4,398 | ) |
Equity-based compensation |
| — |
|
| 3,165 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3,165 |
|
Balance at June 30, 2021 | $ | 240,831 |
| $ | (23,032 | ) |
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
| $ | — |
| $ | — |
| $ | 2,408 |
| $ | — |
| $ | (20,624 | ) |
See accompanying Notes to the IPO, approximately $
6
Ryan Specialty Group Holdings, Inc. operates
Notes to the Consolidated Financial Statements (Unaudited)
Tabular balances presented in thousands, except share and controls all of the business and affairs of the Company, and through the Company, conducts its business.
Nature of Operations
Ryan Specialty Holdings, Inc., (the “Company”) is a service provider of specialty products and solutions for insurance brokers, agents and carriers. These services encompass distribution, underwriting, product development, administration and risk management by acting as a wholesale broker and a managing underwriter or a program administrator with delegated authority from insurance carriers. The Company's offerings cover a wide variety of sectors including commercial, industrial, institutional, governmental, and personal through one operating segment, Ryan Specialty. With the exception of the Company’s equity method investment, the Company does not take on any underwriting risk.
The Company is headquartered in Chicago, Illinois, and has operations in the United States, Canada, the United Kingdom, and Europe.
IPO and Reorganization
The Company was formed as a Delaware corporation on March 5, 2021 for the purpose of completing an IPO and related transactions in order to carry on the business of the LLC. On July 26, 2021, the Company completed its IPO of 65,456,020 shares of Class A common stock, $0.001 par value per share, at an offering price of $23.50 per share. The Company received net proceeds of $1,448.1 million after deducting underwriting discounts, commissions, and other offering costs. The Company's Class A common stock is traded on the New York Stock Exchange under the ticker symbol “RYAN.”
New Ryan Specialty, LLC, or New LLC, was formed as a Delaware limited liability company on April 20, 2021 for the purpose of becoming, subsequent to our IPO, an intermediate holding company between Ryan Specialty Holdings, Inc., and the LLC. The Company is the sole managing member of New LLC. Pursuant to contribution agreements, on September 30, 2021, the Company, the non-controlling interest LLC Unitholders, and New LLC exchanged equity interests in the LLC for LLC Common Units in New LLC, with the intent that New LLC be the new holding company for the LLC interests. At that time the LLC adopted the LLC Operating Agreement and New LLC adopted the New LLC Operating Agreement. As a result, the Company is a holding company, with its sole material asset being a controlling equity interest in New LLC, which became a holding company with its sole material asset being a controlling equity interest in the LLC. The Company will operate and control the business and affairs, and consolidate the financial results, of the LLC through New LLC and, through the LLC, conduct our business. Accordingly, the Company consolidates the financial results of New LLC, and therefore the LLC, and reports the non-controlling interests of New LLC's LLC Common Units on its consolidated financial statements. As of June 30, 2022, the Company owned 42.9% of the outstanding LLC Common Units of New LLC, and New LLC owned 99.9% of the outstanding LLC Common Units of the LLC. The remaining 0.1% of the outstanding LLC Common Units of the LLC were owned by a subsidiary of the Company. As the LLC is substantively the same as New LLC, for the purpose of this document, we will refer to both New LLC and the LLC as the “LLC.”
Basis of Presentation
The accompanying Consolidated Financial Statementsunaudited consolidated interim financial statements and Notesnotes thereto have been prepared in accordance with U.S. GAAP. The Consolidated Financial Statementsunaudited consolidated financial statements include the Company’s accounts and those of all controlled subsidiaries. Certain information and disclosures normally included in the Financial Statementsfinancial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The Financial Statementsomitted pursuant to the rules and regulations of the SEC for interim financial information. These consolidated interim financial statements should be read in conjunction with the Consolidated Financial Statementsaudited consolidated financial statements and Notesnotes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2022. Interim results are not necessarily indicative of results for the full fiscal year ended December 31, 2020.
In the opinion of management, the Consolidated Financial Statementsconsolidated interim financial statements include all normal recurring adjustments necessary to present fairly the Company’s consolidated financial position, results of operations, and cash flows for all periods presented.
Principles of Consolidation
The consolidated interim financial statements include the accounts of the Company and its subsidiaries that it controls due to ownership of a majority voting interest or pursuant to variable interest entity (“VIE”) accounting guidance. All intercompany transactions and balances have been eliminated in consolidation.
7
The Company, through our intermediate holding company New LLC, owns a minority economic interest in, and operates and controls the businesses and affairs of the LLC. The Company has the obligation to absorb losses of, and receive benefits from, the LLC, which could be significant. We determined that the Company is the primary beneficiary of the LLC and the LLC is a VIE. Further, the Company has no contractual requirement to provide financial support to the LLC. Accordingly, the Company has prepared these consolidated financial statements as of and for the periods March 31, 2021 and December 31, 2020 did not reflect the correct value for the Class A common units issued. The identification of this classification error resulted in an increase of $102.3millionin Class A common units and an offsetting increase of $102.3million in Accumulated deficit for all periods presented. The Company evaluated the impact of the classification error in accordance with SecuritiesAccounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”). ASC 810 requires that if an entity is the primary beneficiary of a VIE, the assets, liabilities, and Exchange Commission Staff Accounting Bulletin No. 99 and No. 108 based upon quantitative and qualitative factors analyzed. The Company concludedresults of operations of the classification error was not material to the previously issued annual financial statements and disclosures, which were alsoVIE should be included in the confidential registration statements. The Company has revised its prior periodconsolidated financial statements of such entity.
The Organizational Transactions were considered to be transactions between entities under common control. The historical operations of the LLC are deemed to be those of the Company. Thus, the financial statements included in this report reflect this change.(i) the historical operating results of the LLC prior to the IPO and Organizational Transactions; (ii) the consolidated results of Ryan Specialty Holdings, Inc. and the LLC following the IPO and Organizational Transactions; and (iii) the assets and liabilities of Ryan Specialty Holdings, Inc. and the LLC at their historical cost. No step-up basis of intangible assets or goodwill was recorded.
Use of Estimates
The preparation of the Consolidated Financial Statementsconsolidated interim financial statements and Notesnotes thereto that conform to U.S. GAAP requires management to make estimates, judgements, and assumptions that affect the amounts reported in the Consolidated Financial Statementsconsolidated interim financial statements and in the Notesnotes thereto. Such estimates and assumptions could change in the future as circumstances change or more information becomes available, which could affect the amounts reported and disclosed herein.
Impact of
In March 2020, the World Health Organization declared a global pandemic related to the outbreak of a respiratory illness caused by the coronavirus,iscontinues to be unclear. There is still significant uncertainty related to the economic outcomes from the ongoing COVID-19 pandemic, including the response of the federal, state and local governments as well as regulators.pandemic. Given the dynamic nature of the emergency and its global consequences, its ultimate impact on the Company’s operations, cash flows, and financial condition cannot be reasonably estimated at this time.
Revision of Previously Issued Financial Statements
During the fourth quarter of 2021, the Company revised the presentation of Cash held in a fiduciary capacity in the Consolidated Statements of Cash Flows in accordance with ASU 2016-18 Statement of Cash Flows. Historically, the Company did not present Cash held in a fiduciary capacity in the Consolidated Statements of Cash Flows, since these funds cannot be used for general purposes and were not considered a source of liquidity for the Company. The Company qualifieshas since revised its presentation and includes Cash held in a fiduciary capacity as a component of total cash, cash equivalents, and cash held in a fiduciary capacity in the Consolidated Statements of Cash Flows.
Based on an emerging growth companyanalysis of quantitative and going forward has electedqualitative factors in accordance with SEC Staff Accounting Bulletins (“SAB”) No. 99 Materiality and SAB No. 108 Considering the Effects of Prior Years Misstatements When Quantifying Misstatements in Current Year Financial Statements, the Company concluded the effect of the change was not material to adoptany previously filed interim or annual financial statements. Accordingly, the Company revised the previously reported financial information in this report in the Consolidated Statements of Cash Flows and related disclosures for the unaudited interim period ended June 30, 2021. There was no
8
impact to the Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Balance Sheets or Consolidated Statements of Mezzanine Equity and Shareholders’/Members’ Equity for any period presented.
| Six Months Ended June 30, 2021 |
| |||||||||
| As Reported |
|
| Effect of Change |
|
| As Revised |
| |||
Total cash flows provided by (used for) operating activities | $ | 107,715 |
|
|
| 0 |
|
| $ | 107,715 |
|
Total cash flows used for investing activities | $ | (155 | ) |
|
| 0 |
|
| $ | (155 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
| |||
Net change in fiduciary liabilities |
| 0 |
|
|
| 93,671 |
|
|
| 93,671 |
|
Other lines |
| (113,092 | ) |
|
| 0 |
|
|
| (113,092 | ) |
Total cash flows provided by (used for) financing activities | $ | (113,092 | ) |
| $ | 93,671 |
|
| $ | (19,421 | ) |
Effect of changes in foreign exchange rates on cash, cash equivalents, and cash held in a fiduciary capacity |
| 409 |
|
|
| (946 | ) |
|
| (537 | ) |
NET CHANGE IN CASH, CASH EQUIVALENTS, AND CASH HELD IN A FIDUCIARY CAPACITY | $ | (5,123 | ) |
| $ | 92,725 |
|
| $ | 87,602 |
|
CASH, CASH EQUIVALENTS, AND CASH HELD IN A FIDUCIARY CAPACITY—Beginning balance | $ | 312,651 |
|
| $ | 583,053 |
|
| $ | 895,704 |
|
CASH, CASH EQUIVALENTS, AND CASH HELD IN A FIDUCIARY CAPACITY—Ending balance | $ | 307,528 |
|
| $ | 675,778 |
|
| $ | 983,306 |
|
There have been no material changes in the Company’s significant accounting pronouncements under public business entity adoption dates.
Derivative Instruments and Hedging Activities
The Company utilizes a derivative, namely an interest rate cap, for interest rate risk management purposes. The Company does not hold or issue derivative instruments for trading or speculative purposes. The Company assesses the effectiveness of qualifying cash flow hedges both at inception and on an on-going basis. For hedging derivatives that qualify as effective cash flow hedges, the Company records the cumulative changes in the fair value of the financial instrument in Other comprehensive income. Amounts recorded in Other comprehensive income will be reclassified into earnings in the periods in which earnings are affected by the hedged cash flow. The Company amortizes the premium paid for the interest rate cap on a straight-line basis over the life of the instrument. The premium amortization is recognized in Interest expense, net on the Consolidated Statements of Income. See Note 13, Derivatives, for further discussion of derivative financial instruments.
Recently Issued Accounting Pronouncements
In August 2020, the FASB issued ASU2020-10Codification Improvements. This 2020-06 Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU was issuedremoves certain settlement conditions that are required for equity contracts to address a wide variety of topicsqualify for the derivative scope exception and simplifies the diluted earnings per share calculation in the Accounting Standard Codification with the intent to make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications. Forcertain areas. ASU 2020-06 is effective for public business entities, the amendment is effectivecompanies for fiscal years beginning after December 15, 2020, and interim periods therein.2021, but early adoption is permitted. The Company adopted the new guidance as ofthis standard on January 1, 20212022 with no material impact to the consolidated financial statements or disclosures.
In March 2020, the FASB issued ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides practical expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 is effective through December 31, 2022. The Company adopted this standard during the second quarter of 2022. The adoption of ASU 2020-04 did not have a material impact on the consolidated financial statements or disclosures. See Note 9, Debt, for further information.
9
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers by specialty:Specialty:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Wholesale Brokerage |
| $ | 329,225 |
|
| $ | 255,959 |
|
| $ | 574,051 |
|
| $ | 447,083 |
|
Binding Authority |
|
| 59,751 |
|
|
| 53,596 |
|
|
| 122,744 |
|
|
| 108,641 |
|
Underwriting Management |
|
| 101,251 |
|
|
| 80,291 |
|
|
| 180,113 |
|
|
| 145,466 |
|
Total Net commissions and fees |
| $ | 490,227 |
|
| $ | 389,846 |
|
| $ | 876,908 |
|
| $ | 701,190 |
|
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Wholesale brokerage | $ | 255,959 | $ | 172,118 | $ | 447,083 | $ | 306,222 | ||||||||
Binding authorities | 53,596 | 31,561 | 108,641 | 65,707 | ||||||||||||
Underwriting management | 80,291 | 42,386 | 145,466 | 81,221 | ||||||||||||
Total Net commissions and fees | $ | 389,846 | $ | 246,065 | $ | 701,190 | $ | 453,150 | ||||||||
Contract Assets Balances
Contract assets, which arise from the Company’s volume-based commissions, are included within Commissions and fees receivable – net in the Consolidated Statements of Financial Position.Balance Sheets. The contract asset balance as of June 30, 20212022 and December 31, 20202021 was $5.6
The Company accounts for acquisitions as either business combinations or asset acquisitions depending on the remaining outstanding 53%facts and circumstances of the common units in Ryan Re, making Ryan Reeach acquisition. Transaction costs arising from a wholly owned subsidiary. Refer to Note 15,Related Parties.
There were no acquisitions made infor the previous twelvethree and six months may be provisional and thus subject to further adjustments until purchase accounting is finalized. The estimation of fair value requires numerous judgments, assumptions and estimates about future events and uncertainties, which could materially impact these values, and the related amortization, where applicable, in the Company’s Unaudited Consolidated Financial Statements. As ofended June 30, 2022, and 2021.
2021 Acquisitions
On December 1, 2021, the Company has 0t recognized any impairmentsacquired Crouse and Associates Insurance Brokers, Inc. (“Crouse”) for $110.6 million of total consideration. Crouse specializes in transportation, as well as excess and general liability and property and casualty risks, and is headquartered in San Francisco, California.
On December 31, 2021, the Company acquired goodwillcertain assets of Keystone Risk Partners, LLC (“Keystone”) for $59.8 million of total consideration. Keystone offers a suite of alternative risk insurance solutions, including customized captive insurance and other intangible assets.
The consideration allocationabove is based on estimates that are preliminary in nature and subject to adjustments, which could be material.adjustments. Any necessary adjustments must be finalized during the measurement period, which for a particular asset, liability, ornon-controllinginterest ends once the acquirer determines that either (i) the necessary information has been obtained or (ii) the information is not available. However, the measurement period for all items is limited to one year from the acquisition date. NoAny changes to provisional amounts identified during the measurement period are recognized in the reporting period in which the adjustment individuallyamounts are determined. During the six months ended June 30, 2022, the Company made measurement period adjustments related to the Crouse acquisition, including an increase of an assumed liability of $1.3 million and an increase in consideration of $3.8 million related to the working capital provisions of the purchase agreement. Collectively, these adjustments resulted in a $5.1 million increase to goodwill as of June 30, 2022.
Contingent Consideration
Total consideration for certain acquisitions includes contingent consideration, which is generally based on the EBITDA of the acquired business following a defined period after purchase. For business combinations, the Company recognizes contingent consideration at fair value as of the acquisition date. The fair value of contingent consideration is based on the present value of the expected future payments under the respective purchase agreements. In determining fair value, the Company estimates cash payments based on management’s estimate of the performance of each acquired business relative to the formula specified by each purchase agreement. Further information regarding fair value measurements is detailed in Note 16, Fair Value Measurements. For asset
10
acquisitions, the Company recognizes contingent consideration when the underlying contingency is resolved and the consideration is paid or in aggregate, has been material.
The Company recognizes gains or losses for changes in fair value of estimated contingent consideration within Change in contingent consideration on the Consolidated Statements of Income. The Company also recognizes interest expense for accretion of the discount on these liabilities, which is recognized within Interest expense, net on the Consolidated Statements of Income. The table below summarizes the change in contingent consideration and interest expense related to contingent consideration liabilities for the three and six months ended June 30, 2022 and 2021:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Change in contingent consideration |
| $ | (251 | ) |
| $ | 1,723 |
|
| $ | (1,260 | ) |
| $ | 2,313 |
|
Interest expense |
|
| 425 |
|
|
| 313 |
|
|
| 798 |
|
|
| 399 |
|
Total |
| $ | 174 |
|
| $ | 2,036 |
|
| $ | (462 | ) |
| $ | 2,712 |
|
The current portion of the fair value of contingent consideration was $6.2 million and $14.4 million as of June 30, 2022 and December 31, 2021, respectively, and 2020:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Change in contingent consideration | $ | 1,723 | $ | — | $ | 2,313 | $ | 1,032 | ||||||||
Interest expense | 313 | 296 | 399 | 587 | ||||||||||||
Total | $ | 2,036 | $ | 296 | $ | 2,712 | $ | 1,619 | ||||||||
During 2020, the Company initiated a restructuring plan afterin conjunction with the All Risks Acquisition, to reduce costs and increase efficiencies. The restructuring plan is expectedwas entered into expecting to generate annual savings of
The table below presents the restructuring expense incurred induring the three and six months ended June 30, 2022 and 2021:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||
|
| 2022 |
| 2021 |
|
| 2022 |
| 2021 |
| ||||
Compensation and benefits |
| $ | 546 |
| $ | 2,162 |
|
| $ | 704 |
| $ | 8,351 |
|
Occupancy and other costs(1) |
|
| 2,027 |
|
| 883 |
|
|
| 4,993 |
|
| 1,612 |
|
Total |
| $ | 2,573 |
| $ | 3,045 |
|
| $ | 5,697 |
| $ | 9,963 |
|
Three June 30, | Six June 30, | |||||||
2021 | 2021 | |||||||
Compensation and benefits | $ | 2,162 | $ | 8,351 | ||||
Occupancy and other costs (1) | 883 | 1,612 | ||||||
Total | $ | 3,045 | $ | 9,963 | ||||
The table below presents a summary of changes in the restructuring liability from December 31, 20202021 through June 30, 20212022:
|
| Compensation and |
|
| Occupancy and Other Costs |
|
| Total |
| |||
Balance as of December 31, 2021 |
| $ | 407 |
|
| $ | 0 |
|
| $ | 407 |
|
Accrued costs |
|
| 704 |
|
|
| 2,577 |
|
|
| 3,281 |
|
Payments |
|
| (794 | ) |
|
| (1,038 | ) |
|
| (1,832 | ) |
Balance as of June 30, 2022 |
| $ | 317 |
|
| $ | 1,539 |
|
| $ | 1,856 |
|
Compensation and benefits | Occupancy and other costs | Total | ||||||||||
Balance as of December 31, 2020 | $ | 7,049 | $ | 0 | $ | 7,049 | ||||||
Accrued cost s | 8,351 | 1,612 | 9,963 | |||||||||
Payments | (13,863 | ) | (1,612 | ) | (15,475 | ) | ||||||
Balance as of June 30, 2021 | $ | 1,537 | $ | 0 | $ | 1,537 | ||||||
Receivables
The Company had receivables of $206.8$177.720212022 and December 31, 2020,2021, respectively, which were recognized within Commissions and fees receivable—net in the Consolidated Statements of Financial Position.Balance Sheets. Commission and fees receivable is net of an allowance for credit losses.
11
Allowance for Credit Losses
The Company’s allowance for credit losses with respect to receivables is based on a combination of factors, including evaluation of historical write-offs, current economic conditions, aging of balances, and other qualitative and quantitative analyses.
The following table provides a rollforward of the Company’s allowance for expected credit losses:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Beginning of period |
| $ | 2,503 |
|
| $ | 2,921 |
|
| $ | 2,508 |
|
| $ | 2,916 |
|
Write-offs |
|
| (465 | ) |
|
| (1,224 | ) |
|
| (520 | ) |
|
| (1,553 | ) |
Increase in provision |
|
| 449 |
|
|
| 1,237 |
|
|
| 499 |
|
|
| 1,571 |
|
End of period |
| $ | 2,487 |
|
| $ | 2,934 |
|
| $ | 2,487 |
|
| $ | 2,934 |
|
2021 | 2020 | |||||||
Balance at January 1 | $ | 2,916 | $ | 1,555 | ||||
Write-offs | (329 | ) | 0 | |||||
Increase in provision | 334 | 204 | ||||||
Balance at March 31 | 2,921 | 1,759 | ||||||
Write-offs | (1,224 | ) | (472 | ) | ||||
Increase in provision | 1,237 | 284 | ||||||
Balance at June 30 | $ | 2,934 | $ | 1,571 | ||||
Other Current Assets
Major classes of other current assets consist of the following:
|
| June 30, 2022 |
|
| December 31, 2021 |
| ||
Prepaid expenses |
| $ | 14,047 |
|
| $ | 13,434 |
|
Service receivables(1) |
|
| 669 |
|
|
| 644 |
|
Other current receivables |
|
| 3,590 |
|
|
| 1,804 |
|
Total other current assets |
| $ | 18,306 |
|
| $ | 15,882 |
|
June 30, 2021 | December 31, 2020 | |||||||
Prepaid expenses | $ | 14,452 | $ | 11,973 | ||||
Service receivables (1) | 1,061 | 508 | ||||||
Deferred offering costs | 9,766 | 1,459 | ||||||
Other current receivables | 277 | 1,131 | ||||||
Total other current assets | $ | 25,556 | $ | 15,071 | ||||
The Company recognizes (i) fiduciary amounts duepayable to others as Fiduciary liabilities, and (ii) fiduciary amounts collectible and held on behalf of others, including insurance policyholders, clients, other insurance intermediaries, and insurance carriers, as Fiduciary assetscash and receivables in the Company’s Consolidated Statements of Financial Position.Balance Sheets. Cash and cash equivalents held in excess of the amount required to meet the Company’s fiduciary obligations are recognized as Cash and cash equivalents in the Consolidated Statements of Financial Position. The excess amounts are held with all other fiduciary assets in fiduciary bank accounts and segregated from operating bank accounts.Balance Sheets. The Company held or was owed fiduciary funds for premiumshad Fiduciary cash and claimsreceivables and Fiduciary liabilities of
12
The Company has variousJuly 2031April 2033 primarily for office space and office equipment. The Company has one lease with an inception date prior to June 30, 2021 that has not yet commenced, for a total future estimated lease liability to be recognized in 2021 of
The lease costs for the three and six months ended June 30, 2022 and 2021 and 2020 arewere as follows:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| |||||||||
|
| 2022 |
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Lease costs: |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating lease cost |
| $ | 9,283 |
| $ | 6,013 |
|
| $ | 15,610 |
|
| $ | 12,109 |
|
Finance lease costs: |
|
|
|
|
|
|
|
|
|
|
| ||||
Amortization of leased assets |
|
| 7 |
|
| 42 |
|
|
| 16 |
|
|
| 85 |
|
Interest on lease liabilities |
|
| 1 |
|
| 1 |
|
|
| 1 |
|
|
| 2 |
|
Short term lease costs: |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating lease cost |
|
| 83 |
|
| 118 |
|
|
| 279 |
|
|
| 238 |
|
Finance lease costs: |
|
|
|
|
|
|
|
|
|
|
| ||||
Amortization of leased assets |
|
| 2 |
|
| 2 |
|
|
| 4 |
|
|
| 4 |
|
Interest on lease liabilities |
|
| 1 |
|
| 1 |
|
|
| 1 |
|
|
| 1 |
|
Sublease income |
|
| (106 | ) |
| (118 | ) |
|
| (197 | ) |
|
| (179 | ) |
Lease cost – net |
| $ | 9,271 |
| $ | 6,059 |
|
| $ | 15,714 |
|
| $ | 12,260 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating cash flows from operating leases |
|
|
|
|
|
| $ | 12,495 |
|
| $ | 12,684 |
| ||
Operating cash flows from finance leases |
|
|
|
|
|
|
| 22 |
|
|
| 91 |
| ||
Non-cash related activities |
|
|
|
|
|
|
|
|
|
|
| ||||
Right-of-use assets obtained in exchange for new operating lease liabilities |
|
|
|
|
|
|
| 54,359 |
|
|
| 1,847 |
| ||
Right-of-use assets obtained in exchange for new finance lease liabilities |
|
|
|
|
|
|
| 0 |
|
|
| 0 |
| ||
Weighted average discount rate (percent) |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating leases |
|
|
|
|
|
|
| 4.50 | % |
|
| 3.73 | % | ||
Finance leases |
|
|
|
|
|
|
| 3.19 | % |
|
| 3.16 | % | ||
Weighted average remaining lease term (years) |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating leases |
|
|
|
|
|
|
| 7.4 |
|
|
| 6.1 |
| ||
Finance leases |
|
|
|
|
|
|
| 2.3 |
|
|
| 2.4 |
|
Six months ended June 30, | ||||||||
2021 | 2020 | |||||||
Lease cost: | ||||||||
Operating lease cost | $ | 12,109 | $ | 9,073 | ||||
Finance lease costs: | ||||||||
Amortization of leased assets | 85 | 32 | ||||||
Interest on lease liabilities | 2 | 1 | ||||||
Short term lease costs: | ||||||||
Operating lease cost | 238 | 346 | ||||||
Finance lease cost | ||||||||
Amortization of leased assets | 4 | 4 | ||||||
Interest on lease liabilities | 1 | 0 | ||||||
Sublease income | (179 | ) | (131 | ) | ||||
Lease cost – net | $ | 12,260 | $ | 9,325 | ||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||||
Operating cash flows from operating leases | $ | 12,684 | $ | 7,643 | ||||
Operating cash flows from finance leases | 91 | 37 | ||||||
Non-cash related activities | ||||||||
Right-of-use | 1,847 | 4,734 | ||||||
Right-of-use | 0 | 0 | ||||||
Weighted average discount rate (percent) | ||||||||
Operating leases | 3.73 | 3.83 | ||||||
Finance leases | 3.16 | 3.15 | ||||||
Weighted average remaining lease term (years) | ||||||||
Operating leases | 6.1 | 6.2 | ||||||
Finance leases | 2.4 | 2.9 |
Supplemental balance sheet information related to Lease
|
| June 30, 2022 |
|
| December 31, 2021 |
| ||
Right-of-use assets – operating leases – net |
| $ | 131,928 |
|
| $ | 84,778 |
|
Right-of-use assets – finance leases – net |
|
| 75 |
|
|
| 96 |
|
Total lease right-of-use assets – net |
| $ | 132,003 |
|
| $ | 84,874 |
|
December 31, 2020 | ||||||||
Right-of-use | $ | 86,412 | $ | 93,715 | ||||
Right-of-use | 153 | 226 | ||||||
Total lease right-of-use | $ | 86,565 | $ | 93,941 | ||||
Supplemental balance sheet information related to lease liabilities:
|
| June 30, 2022 |
|
| December 31, 2021 |
| ||
Current lease liabilities |
|
|
|
|
|
| ||
Operating |
| $ | 18,355 |
|
| $ | 18,783 |
|
Finance |
|
| 36 |
|
|
| 39 |
|
Non-current lease liabilities |
|
|
|
|
|
| ||
Operating |
|
| 125,249 |
|
|
| 74,386 |
|
Finance |
|
| 39 |
|
|
| 57 |
|
Total lease liabilities |
| $ | 143,679 |
|
| $ | 93,265 |
|
13
December 31, 2020 | ||||||||
Current lease liabilities | ||||||||
Operating | $ | 19,909 | $ | 19,880 | ||||
Finance | 72 | 147 | ||||||
Non-current lease liabilities | ||||||||
Operating | 76,046 | 83,737 | ||||||
Finance | 77 | 78 | ||||||
Total Lease Liabilities | $ | 96,104 | $ | 103,842 | ||||
The estimated future minimum payments of operating and financing leases as of June 30, 2021 are as follows:2022:
|
| Finance Leases |
|
| Operating Leases |
| ||
The remainder of 2022 |
| $ | 19 |
|
| $ | 10,124 |
|
2023 |
|
| 37 |
|
|
| 25,399 |
|
2024 |
|
| 18 |
|
|
| 23,716 |
|
2025 |
|
| 4 |
|
|
| 21,623 |
|
2026 |
|
| 0 |
|
|
| 20,317 |
|
Thereafter |
|
| 0 |
|
|
| 71,895 |
|
Total undiscounted future lease payments |
| $ | 78 |
|
| $ | 173,074 |
|
Less imputed interest |
|
| (3 | ) |
|
| (29,470 | ) |
Present value lease liabilities |
| $ | 75 |
|
| $ | 143,604 |
|
Finance Leases | Operating Leases | |||||||
The remainder of 2021 | $ | 61 | $ | 10,598 | ||||
2022 | 38 | 22,767 | ||||||
2023 | 34 | 17,826 | ||||||
2024 | 18 | 14,476 | ||||||
2025 | 4 | 10,951 | ||||||
Thereafter | 0 | 31,606 | ||||||
Total undiscounted future lease payments | $ | 155 | $ | 108,224 | ||||
Less imputed interest | (6 | ) | (12,269 | ) | ||||
Present value lease liabilities | $ | 149 | $ | 95,955 | ||||
Average annual sublease income for the next eightseven years is $0.3 million.
Substantially all of the Company’s debt is carried at outstanding principal balance, less debt issuance costs and any unamortized discount or premium. To the extent that the Company modifies the debt arrangements, all unamortized costs from borrowings are deferred and amortized over the term of the new arrangement, where applicable.
The following table is a summary of the Company’s outstanding debt:
|
| June 30, 2022 |
|
| December 31, 2021 |
| ||
Term debt |
|
|
|
|
|
| ||
7-year term loan facility, periodic interest and quarterly principal payments, Adjusted Term SOFR + 3.00% as of June 30, 2022, LIBOR + 3.00% as of December 31, 2021, matures September 1, 2027 |
| $ | 1,575,141 |
|
| $ | 1,578,972 |
|
Senior Secured Notes |
|
|
|
|
|
| ||
8-year senior secured notes, semi-annual interest payments, 4.38%, matures February 1, 2030 |
|
| 399,269 |
|
|
| 0 |
|
Revolving debt |
|
|
|
|
|
| ||
5-year revolving loan facility, periodic interest payments, Adjusted Term SOFR + up to 3.00% as of June 30, 2022, LIBOR + up to 3.00% as of December 31, 2021, plus commitment fees up to 0.50%, matures July 26, 2026 |
|
| 395 |
|
|
| 387 |
|
Premium financing notes |
|
|
|
|
|
| ||
Commercial notes, periodic interest and principal payments, 2.49%, expire June 1, 2023 |
|
| 4,614 |
|
|
| 0 |
|
Commercial notes, periodic interest and principal payments, 1.66%, expired June 1, 2022 |
|
| 0 |
|
|
| 1,656 |
|
Commercial notes, periodic interest and principal payments, 1.66%, expire July 15, 2022 |
|
| 0 |
|
|
| 745 |
|
Commercial notes, periodic interest and principal payments, 1.66%, expire July 21, 2022 |
|
| 0 |
|
|
| 3,973 |
|
Finance lease obligation |
|
| 75 |
|
|
| 96 |
|
Units subject to mandatory redemption |
|
| 4,482 |
|
|
| 4,267 |
|
Total debt |
| $ | 1,983,976 |
|
| $ | 1,590,096 |
|
Less current portion |
|
| (28,949 | ) |
|
| (23,469 | ) |
Long term debt |
| $ | 1,955,027 |
|
| $ | 1,566,627 |
|
June 30, 2021 | December 31, 2020 | |||||||
Term debt | ||||||||
7-year term loan facility, periodic interest and quarterly principal payments, LIBOR + 3% as of June 30, 2021, LIBOR + 3.25% as of December 31, 2020, expires September 1, 2027 | $ | 1,582,761 | $ | 1,578,930 | ||||
Revolving debt | ||||||||
5-year revolving loan facility, periodic interest payments, LIBOR + up to 3.25%, plus commitment fees up to 0.50%, expires September 1, 2025 | 162 | 15 | ||||||
Premium financing notes | ||||||||
Commercial notes, periodic interest and principal payments, 2.50%, expired June 1, 2021 | — | 1,951 | ||||||
Commercial notes, periodic interest and principal payments, 1.66%, expires June 1, 2022 | 4,530 | — | ||||||
Finance lease obligation | 149 | 225 | ||||||
Unsecured promissory notes | 1,112 | 363 | ||||||
Units subject to mandatory redemption | 4,060 | 3,866 | ||||||
Total debt | $ | 1,592,774 | $ | 1,585,350 | ||||
Less current portion | (22,547 | ) | (19,158 | ) | ||||
Long term debt | $ | 1,570,227 | $ | 1,566,192 | ||||
Term Loan
The original principal of the 2020 credit facility in order to obtain a better interest rate, while no other terms changed. Several lenders opted to not participate in the repricing. The debt related to the lenders that opted out of the repricingTerm Loan was considered extinguished and the fees related to those lenders were written off as of the end of the first quarter. The amount of fees written off was $8.6 million.
14
Revolving Credit Facility
As the effects of interest rate fluctuations for up to five years into the future. All outstanding interest rate swaps were settled during 2020 and the Company currently has 0 interest rate swaps outstandingRevolving Credit Facility had not been drawn on as of June 30, 2021.
Transition from LIBOR to SOFR
On April 29, 2022, the Company entered into a fourth amendment to the Credit Agreement on its Term Loan and Revolving Credit Facility to transition from using the Eurocurrency Rate (LIBOR) to a benchmark replacement of Adjusted Term SOFR plus a credit spread adjustment of 10 basis points, 15 basis points, or 25 basis points for the one-month, three-month, or six-month borrowing periods, respectively. As discussed in Note 2, Summary of Significant Accounting Policies, the Company adopted ASU 2020-04 in the second quarter of 2022. The Company has elected the expedient that allows for this contract modification to be treated as not substantial and to account for any related changes on a prospective basis from the modification date.
Senior Secured Notes
On February 3, 2022, the LLC issued $400.0 million of senior secured notes. The notes have a 4.38% interest rate and will mature on February 1, 2030. As of June 30, 2022, unamortized deferred issuance costs and discount were $7.9 million and the Company accrued $7.2 million of interest related to these notes.
The LLC Equity Structure
Prior to the Organizational Transactions and the IPO, the LLC had issued and outstanding Class A common units, Class B common units, preferred units, and Redeemable Preferred Embedded Derivatives
Redeemable Preferred Units
Prior to the Organizational Transactions and IPO, the Company had 260,000,000 Redeemable Preferred Units issued and sold on June 1, 2018 and September 1, 2020 as discussed in Note 10,Redeemable Preferred Units, there are various realization events,outstanding. As defined as a Qualified Public Offering or a Sale Transaction, that require a Mandatory Redemption. If a Mandatory Redemption is required prior to the five year anniversary of the issuance date, the redemption price would be subject to a make-whole provision set forth in the terms of the agreement. The preferred yield make-whole provisions represent embedded derivatives that are accounted for on a combined basis separately from the redeemable preferred units and reported at fair value.
Derivative Liabilities | |||||||||
Balance Sheet Location | June 30, 2021 | December 31, 2020 | |||||||
Class B embedded derivative s | Accounts payable and accrued liabilities | $ | (51,035) | $ | (30,423) | ||||
Total derivatives | $ | (51,035) | $ | (30,423) |
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Loss on interest rate contracts | $ | 0 | $ | 235 | $ | 0 | $ | 3,294 | ||||||||
Loss on Class B embedded derivatives | 8,007 | 0 | 20,612 | 0 | ||||||||||||
Total derivatives not designated as hedging instruments | $ | 8,007 | $ | 235 | $ | 20,612 | $ | 3,294 | ||||||||
As part of the Organizational Transactions, the Company acquired the entity (the “Preferred Blocker Entity”) through which Onex held its preferred unit interest in the LLC. The 260,000,000 Redeemable Preferred Units of the LLC owned by the Preferred Blocker Entity were converted through a series of transactions to LLC Common Units immediately after the acquisition. As the Company's IPO in July 2021 was a realization event triggering the payment of the make-whole provision to Onex, there were no amounts outstanding related to the Redeemable Preferred Units in the Consolidated Balance Sheets as of June 30, 2022 or December 31, 2021.
Ryan Specialty Holdings, Inc. Equity Structure
In connection with the Company’s IPO in July 2021, the Company’s Board of Directors approved an amended and restated certificate of incorporation and amended and restated bylaws. The amended and restated certificate of incorporation authorizes the issuance of up
15
to 1,000,000,000 shares of Class A common stock, 1,000,000,000 shares of Class B common stock, 10,000,000 shares of Class X common stock, and 500,000,000 shares of preferred stock, each having a par value of $0.001 per share.
The Company’s amended and restated certificate of incorporation and the New LLC Operating Agreement require that the Company and the LLC at all times maintain a one-to-one ratio between the number of shares of Class A common stock issued by the Company and the number of LLC Common Units owned by the Company, except as otherwise determined by the Company.
Class A and Class BCommon Stock
Each share of Class A common stock is entitled to one vote per share.Each share of Class B common stock is initially entitled to 10 votes per share and, upon the occurrence of certain events as set forth in the Company’s amended and restated certificate of incorporation, shall be entitled to one vote per share. All holders of Class A common stock and Class B common stock vote together as a single class except as otherwise required by applicable law or our amended and restated certificate of incorporation.
In accordance with the New LLC Operating Agreement, the LLC Unitholders will be entitled to exchange LLC Common Units for shares of Class A common stock, in accordance with the LLC Operating Agreement or, at the Company's election, for cash from a substantially concurrent public offering or private sale (based on the price of our Class A common stock in such public offering or private sale). The LLC Unitholders will also be required to deliver to us an equivalent number of shares of Class B common stock to effectuate such an exchange. Any shares of Class B common stock so delivered will be canceled.
Holders of Class B common stock do not have any right to receive dividends or distributions upon the liquidation or winding up of the Company.
Class X Common Stock
As part of the Organizational Transactions, the Company acquired the Common Blocker Entity (i.e. the entity through which Onex held its Class B common unit interest in the LLC). Through the acquisition, Onex exchanged its equity interests in the Common Blocker Entity for shares of Class A common stock and a right to participate in the TRA. The Company issued shares of Class X common stock to Onex, which were immediately repurchased and canceled, as a mechanism for Onex to participate in the TRA. The shares of Class X common stock have no economic or voting rights. There were 0 shares of Class X common stock outstanding as of June 30, 2022 or December 31, 2021.
Preferred Stock
There were 0 shares of preferred stock outstanding as of June 30, 2022 or December 31, 2021. Under the terms of the amended and restated certificate of incorporation, the Board is authorized to direct the Company to issue shares of preferred stock in one or more series without shareholder approval. The Board has the discretion to determine the rights, preferences, privileges, and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock.
Dividends
NaN dividends were declared or payable as of June 30, 2022 or December 31, 2021.
Non-controlling Interest
In connection with the IPO and the Organizational Transactions, the Company became the sole managing member of the LLC. As a result, the Company began consolidating the LLC in its consolidated financial statements, resulting in a non-controlling interest related to the LLC Common Units not held by the Company on the consolidated financial statements. The non-controlling interest previously recognized in the LLC's historical consolidated financial statements represented the LLC's equity interests in an underlying subsidiary.As of June 30, 2022 and December 31, 2021, the Company owned 42.9% of the economic interests of the LLC, while the non-controlling interest holders owned the remaining 57.1% of the economic interests in the LLC.
Weighted average ownership percentages for the applicable reporting periods are used to attribute net income (loss) and other comprehensive income (loss) to the Company and the non-controlling interest holders. The non-controlling interest holders' weighted average ownership percentage was 57.8% and 57.7% for the three and six months ended June 30, 2022, respectively.
16
Substantially concurrent with the put optionIPO, the Company's Board of Directors adopted the Ryan Specialty Holdings, Inc. 2021 Omnibus Incentive Plan (the “Omnibus Plan”). The Omnibus Plan provides for potential grants of the following awards: (i) stock options, (ii) stock appreciation rights, (iii) restricted stock awards, (iv) performance awards, (v) other stock-based awards, (vi) other cash-based awards, and (vii) analogous equity awards made in equity of the LLC.
IPO-related Awards
As a result of the Organizational Transactions, pre-IPO holders of the LLC Class A common units that were granted as incentive awards, which had historically been classified as equity and vested pro rata over five years, were required to exchange their units for one or more of the following: (i) Restricted Stock, (ii) Reload Options, (iii) Restricted Common Units, or (iv) Reload Class C Incentive Units, collectively, the “Replacement Awards.” The reload awards were issued to employees in order to protect against the dilution of their existing awards upon exchange to the new awards.
The Restricted Stock and Restricted Common Units are referred to as “restricted” due to the transfer restriction on all Restricted Stock and Restricted Common Units awarded to employees. The transfer restrictions apply on a non-linear schedule for the five year period following the IPO. As these restrictions lift based on the passage of time, Restricted Stock and Restricted Common Units will be referred to as Class A common stock and LLC Common Units, respectively.
Separately, certain employees were granted one or more of the following new awards: (i) Restricted Stock Units (“RSUs”), (ii) Staking Options, (iii) Restricted LLC Units (“RLUs”), or (iv) Staking Class C Incentive Units. The terms of these awards are described below. All awards granted as part of the Organizational Transactions and the IPO are subject to the transfer restrictions.
Equity-Based Awards Modification
As noted above, as a result of the Organizational Transactions and the IPO, pre-IPO holders of LLC Class A common units exchanged their units for the Replacement Awards. This exchange was considered a modification as of the IPO date as a result of the change in terms and conditions of the existing awards and the issuance of new options and profits interests that have different vesting schedules than the exchanged awards. This modification resulted in the re-measurement of the awards in accordance with ASC 718. Total compensation cost recognized for the modified awards equaled the grant date fair value from the pre-IPO grants, plus any incremental compensation cost measured at the modification date (i.e. the IPO date). The modification impacted approximately 380 employees.
The incremental compensation expense arising from the modification is primarily driven by the right to future TRA payments as a result of the Organizational Transactions, as well as the TRA Alternative Payments, offset by the existence of new transfer restrictions that extend beyond vesting dates. The TRA provides for the potential, future payment to certain LLC Unitholders of tax benefits realized by the Company. The right to these potential future payments is considered in the calculation of the fair value of the Restricted Common Units and Reload Class C Incentive Units granted to employees. Additionally, those employees who exchanged their granted units into Restricted Stock received a one-time lump sum TRA Alternative Payment in an aggregate amount of $37.6 million. These one-time cash payments were paid upon the closing of the IPO on July 26, 2021. The cash payments were treated as a cash settlement of a portion of the existing awards and, therefore, included in the post-IPO value for determining the incremental expense in the modification. The remaining unamortized fair value as of the modification date will be recognized as equity-based compensation allocated on a relative fair value basis of the awards over the remaining service periods.
Incentive Awards
As part of the Company's annual compensation process, the Company issues certain employees and directors equity-based compensation awards (“Incentive Awards”). Additionally, the Company offers Incentive Awards to certain new hires. These Incentive Awards typically take the form of (i) RSUs, (ii) RLUs, (iii) Class C Incentive Units, or (iv) Stock Options.
Restricted Stock
As part of the Organizational Transactions, certain existing employee unitholders were granted Restricted Stock in the Company in exchange for their LLC Units, which were first exchanged into LLC Common Units. The Restricted Stock follows the vesting
17
schedule of the LLC Units for which they were exchanged. LLC Units historically vested pro rata over 5 years. Restricted Stock activity for the period was as follows:
|
| Six Months Ended June 30, 2022 |
| |||||
|
| Restricted Stock |
|
| Weighted Average Grant Date Fair Value |
| ||
Unvested at beginning of period |
|
| 3,222,634 |
|
| $ | 21.15 |
|
Granted |
|
| — |
|
|
| — |
|
Vested |
|
| 617,160 |
|
|
| 21.15 |
|
Forfeited |
|
| 12,554 |
|
|
| 21.15 |
|
Unvested at end of period |
|
| 2,592,920 |
|
| $ | 21.15 |
|
The weighted-average grant date fair value of $21.15 reflects the fair value of the Restricted Stock at the time of the modification.
Restricted Stock Units (RSUs)
IPO RSUs
Related to the IPO, the Company granted RSUs to certain employees. The IPO RSUs vest either pro rata over 5 years from the grant date or over 10 years from the grant date, with 10% vesting in each of years 3 through 9 and 30% vesting in year 10. The grant date fair value considers the IPO price of $23.50 adjusted for a weighted average 2.4% discount for lack of marketability due to the transfer restrictions.Upon vesting, IPO RSUs automatically convert on a one-for-one basis into Class A common stock.
|
| Six Months Ended June 30, 2022 |
| |||||
|
| Restricted Stock Units |
|
| Weighted Average Grant Date Fair Value |
| ||
Unvested at beginning of period |
|
| 4,330,104 |
|
| $ | 22.95 |
|
Granted |
|
| — |
|
|
| — |
|
Vested |
|
| 52,023 |
|
|
| 22.42 |
|
Forfeited |
|
| 55,877 |
|
|
| 22.42 |
|
Unvested at end of period |
|
| 4,222,204 |
|
| $ | 22.94 |
|
Incentive RSUs
As part of the Company's annual compensation process, the Company issued Incentive RSUs to certain employees. The Incentive RSUs vest either 100% 3 or 5 years from the grant date, pro rata over 3 or 5 years from the grant date, or over 5 years from the grant date, with 33.3% vesting in each of years 3, 4 and 5. Upon vesting, Incentive RSUs automatically convert on a one-for-one basis into Class A common stock.
|
| Six Months Ended June 30, 2022 |
| |||||
|
| Restricted Stock Units |
|
| Weighted Average Grant Date Fair Value |
| ||
Unvested at beginning of period |
|
| — |
|
| $ | — |
|
Granted |
|
| 828,524 |
|
|
| 34.54 |
|
Vested |
|
| — |
|
|
| — |
|
Forfeited |
|
| 1,453 |
|
|
| 34.39 |
|
Unvested at end of period |
|
| 827,071 |
|
| $ | 34.54 |
|
Stock Options
Reload Options
As part of the Organizational Transactions and IPO, certain employees who exchanged their LLC Common Units for shares of the Company were also granted Reload Options that entitle the award holder to future purchases of Class A common stock, on a one-for-one basis, at the IPO price of $23.50. The Reload Options vest either 100% 3 years from the grant date or over 5 years from the grant
18
date, with 33.3% vesting in each of years 3, 4 and 5. Vested Reload Options are exercisable afterup to the tenth anniversary of the issuance is at the option of the holder, but is not mandatorily redeemable, the redeemable preferred units are classified as mezzanine equity and were initially recognized at relative fair value. grant date.
|
| Six Months Ended June 30, 2022 |
| |||||
|
| Options |
|
| Weighted Average Exercise Price |
| ||
Outstanding at beginning of period |
|
| 4,592,319 |
|
| $ | 23.50 |
|
Granted |
|
| — |
|
|
| — |
|
Exercised |
|
| — |
|
|
| — |
|
Forfeited |
|
| 25,999 |
|
|
| 23.50 |
|
Unvested at end of period |
|
| 4,566,320 |
|
| $ | 23.50 |
|
The fair value of Reload Options granted at the 2020 issuancetime of the IPO was recorded asdetermined using the proceedsBlack-Scholes option pricing model with the following assumption ranges:
Assumptions | |
Volatility | 25.0% |
Time to maturity (years) | 6.5-7.0 |
Risk-free rate | 0.94-1.02% |
Fair value per unit | $6.42-$6.72 |
Dividend yield | 0.0% |
Staking Options
In addition to Restricted Stock, certain employees were also granted Staking Options that entitle the award holder to future purchases of Class A common stock, on a one-for-one basis, at the IPO price of $23.50. The Staking Options vest over 10 years from the grant date, with 10% vesting in each of issuance, $110.0
|
| Six Months Ended June 30, 2022 |
| |||||
|
| Options |
|
| Weighted Average Exercise Price |
| ||
Outstanding at beginning of period |
|
| 66,667 |
|
| $ | 23.50 |
|
Granted |
|
| — |
|
|
| — |
|
Exercised |
|
| — |
|
|
| — |
|
Forfeited |
|
| — |
|
|
| — |
|
Unvested at end of period |
|
| 66,667 |
|
| $ | 23.50 |
|
The fair value of Staking Options granted at the 2018 issuancetime of the IPO was recorded asdetermined using the proceedsBlack-Scholes option pricing model with the following assumption ranges:
Assumptions | |
Volatility | 25.0% |
Time to maturity (years) | 9.1 |
Risk-free rate | 1.19% |
Fair value per unit | $7.82 |
Dividend yield | 0.0% |
19
Incentive Options
As part of the Company's annual compensation process, the Company issued Incentive Options to certain employees that entitle the award holder to future purchases of Class A common stock, on a one-for-one basis. The Incentive Options vest over 5 years from the grant date, with 33.3% vesting in each of years 3, 4 and 5.
|
| Six Months Ended June 30, 2022 |
| |||||
|
| Options |
|
| Weighted Average Exercise Price |
| ||
Outstanding at beginning of period |
|
| — |
|
| $ | — |
|
Granted |
|
| 175,222 |
|
|
| 34.39 |
|
Exercised |
|
| — |
|
|
| — |
|
Forfeited |
|
| — |
|
|
| — |
|
Unvested at end of period |
|
| 175,222 |
|
| $ | 34.39 |
|
The fair value of Incentive Options granted during the six months ended June 30, 2022 was determined using the Black-Scholes option pricing model with the following assumption ranges:
Assumptions | |
Volatility | 27.5% |
Time to maturity (years) | 7.0 |
Risk-free rate | 2.16% |
Fair value per unit | $11.68 |
Dividend yield | 0.0% |
The use of a valuation model for the Options requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on the date of issuance, $175.0 million, lessobserved volatility for comparable companies. The expected time to maturity was based on the relative fair value allocated to the Class B
The aggregate intrinsic value and the carrying value is being accreted over the period from the dateweighted average remaining contractual terms of issuance through September 1, 2030Stock Options outstanding and June 1, 2028 for the 2020 and 2018 issuances, respectively, using the effective interest method. The accretion is treatedStock Options exercisable were as a deemed dividend and is recorded as a charge to retained earnings. The cumulative accretionfollows as of June 30, 20212022:
June 30, 2022 | ||||
Aggregate intrinsic value ($ in thousands) | ||||
Reload Options outstanding | $ | 71,646 | ||
Reload Options exercisable | — | |||
Staking Options outstanding | $ | 1,046 | ||
Staking Options exercisable | — | |||
Incentive Options outstanding | $ | 841 | ||
Incentive Options exercisable | — | |||
Weighted-average remaining contractual term (in years) | ||||
Reload Options outstanding | 9.1 | |||
Reload Options exercisable | — | |||
Staking Options outstanding | 10.1 | |||
Staking Options exercisable | — | |||
Incentive Options outstanding | 9.7 | |||
Incentive Options exercisable | — |
20
Restricted Common Units
As part of the Organizational Transactions, certain existing employee unitholders were granted Restricted Common Units in exchange for their LLC Units. The Restricted Common Units follow the vesting schedule of the LLC Units for which they were exchanged. LLC Units historically vested pro rata over 5 years. Restricted Common Unit activity for the period was as follows:
|
| Six Months Ended June 30, 2022 |
| |||||
|
| Common Units |
|
| Weighted Average Grant Date Fair Value |
| ||
Unvested at beginning of period |
|
| 5,743,520 |
|
| $ | 23.84 |
|
Granted |
|
| — |
|
|
| — |
|
Vested |
|
| 1,943,249 |
|
|
| 23.84 |
|
Forfeited |
|
| — |
|
|
| — |
|
Unvested at end of period |
|
| 3,800,271 |
|
| $ | 23.84 |
|
The weighted average grant date fair value reflects the fair value of the Restricted Common Units at the time of the modification.
Restricted LLC Units (RLUs)
IPO RLUs
Related to the IPO, the Company granted RLUs to certain employees that vest either pro rata over 5 years from the grant date or over 10 years from the grant date, with 10% vesting in each of years 3 through 9 and December 31, 2020 was $4.830% vesting in year 10. Upon vesting, RLUs automatically convert on a one-for-one basis into LLC Common Units.
|
| Six Months Ended June 30, 2022 |
| |||||
|
| Restricted LLC Units |
|
| Weighted Average Grant Date Fair Value |
| ||
Unvested at beginning of period |
|
| 1,543,277 |
|
| $ | 25.05 |
|
Granted |
|
| — |
|
|
| — |
|
Vested |
|
| — |
|
|
| — |
|
Forfeited |
|
| — |
|
|
| — |
|
Unvested at end of period |
|
| 1,543,277 |
|
| $ | 25.05 |
|
Incentive RLUs
As part of the Company's annual compensation process, the Company issued Incentive RLUs to certain employees. The Incentive RLUs vest pro rata over 3 or 5 years from the grant date. Upon vesting, RLUs automatically convert on a one-for-one basis into LLC Common Units.
|
| Six Months Ended June 30, 2022 |
| |||||
|
| Restricted LLC Units |
|
| Weighted Average Grant Date Fair Value |
| ||
Unvested at beginning of period |
|
| — |
|
| $ | — |
|
Granted |
|
| 145,527 |
|
|
| 34.86 |
|
Vested |
|
| — |
|
|
| — |
|
Forfeited |
|
| — |
|
|
| — |
|
Unvested at end of period |
|
| 145,527 |
|
| $ | 34.86 |
|
Class C Incentive Units
Reload Class C Incentive Units
As part of the Organizational Transactions and $3.6 millionrespectively,any vested profits interests may be exchanged for LLC Common Units of equal value. On exchange, the LLC
21
Common Units may immediately be redeemed on a one-to-one basis for Class A common stock. The Reload Class C Incentive Units vest either 100% 3 years from the grant date or over 5 years from the grant date, with 33.3% vesting in each of years 3, 4 and 5.
|
| Six Months Ended June 30, 2022 |
| |||||
|
| Class C Incentive Units |
|
| Weighted Average Participation Threshold |
| ||
Unvested at beginning of period |
|
| 3,911,490 |
|
| $ | 23.50 |
|
Granted |
|
| — |
|
|
| — |
|
Vested |
|
| — |
|
|
| — |
|
Forfeited |
|
| — |
|
|
| — |
|
Unvested at end of period |
|
| 3,911,490 |
|
| $ | 23.50 |
|
Staking Class C Incentive Units
Related to the IPO, certain employees were granted Staking Class C Incentive Units, which are profits interests. When the value of the Class A common stock exceeds the IPO price of $23.50, any vested profits interests may be exchanged for LLC Common Units of equal value. On exchange, the LLC Common Units may immediately be redeemed on a one-to-one basis for Class A common stock. The Staking Class C Incentive Units vest either pro rata over 5 years from the grant date or over 10 years from the grant date, with 10% vesting in each of years 3 through 9 and 30% vesting in year 10.
|
| Six Months Ended June 30, 2022 |
| |||||
|
| Class C Incentive Units |
|
| Weighted Average Participation Threshold |
| ||
Unvested at beginning of period |
|
| 2,116,667 |
|
| $ | 23.50 |
|
Granted |
|
| — |
|
|
| — |
|
Vested |
|
| — |
|
|
| — |
|
Forfeited |
|
| — |
|
|
| — |
|
Unvested at end of period |
|
| 2,116,667 |
|
| $ | 23.50 |
|
Class C Incentive Units
As part of the Company's annual compensation process, the Company issued Class C Incentive Units to certain employees, which are profits interests. When the value of the Class A common stock exceeds the participation threshold, any vested profits interests may be exchanged for LLC Common Units of equal value. On exchange, the LLC Common Units may immediately be redeemed on a one-to-one basis for Class A common stock. The Class C Incentive Units vest over 8 years from the grant date, with 15% vesting in each of years 3 through 7 and 25% vesting in year 8.
|
| Six Months Ended June 30, 2022 |
| |||||
|
| Class C Incentive Units |
|
| Weighted Average Participation Threshold |
| ||
Unvested at beginning of period |
|
| — |
|
| $ | — |
|
Granted |
|
| 300,000 |
|
|
| 34.39 |
|
Vested |
|
| — |
|
|
| — |
|
Forfeited |
|
| — |
|
|
| — |
|
Unvested at end of period |
|
| 300,000 |
|
| $ | 34.39 |
|
Valuation Considerations
The Restricted Common Units and RLUs, once vested and after delivery of LLC Common Units,are exchangeable into shares of Class A common stock of the Company on a one-to-one basis, which entitles the unitholders to TRA payments resulting from 85% of the tax savings generated by the Company. The various Class C Incentive Units have the same terms as the LLC Common Units, with the exception of their respective participation thresholds. When the price of the Class A common stock exceeds the participation threshold, the Class C Incentive Units can be exchanged for Restricted Common Units of equal value and are entitled to the same TRA payments upon an exchange to Class A common stock. In order to value the Restricted Common Units, RLUs, and Class C Incentive Units, the Company is required to make certain assumptions with respect to selected model inputs.
Due to the nature of the underlying risks inherent in adjusted redeemable preferred unit carrying valuesTRA payments and the uncertainty as to when the participation threshold will be satisfied for the Class C Incentive Units, we use a Monte Carlo simulation to explicitly model the impact of $240.8millionand $239.6 million, respectively. Dividend paymentsfuture stock prices on the
22
size of the amortizable asset, as well as the impact of different levels of taxable income on the redeemable preferred units may be accrued and deferred at the optiontiming of the TRA payments, in a risk-neutral framework. The Monte Carlo simulation model uses the following assumptions: the simulated closing stock price, the simulated taxable income, the risk-free interest rate, the expected dividend yield, and the expected volatility and correlation of the Company's stock price and taxable income. The dividend yield was based on the Company’s expected dividend rate of 0.0%. The risk-free interest rate range of 1.9%-2.4% was based on U.S. Treasury rates commensurate with a term of 30 years. Due to the transfer restrictions on the IPO awards, a discount for lack of marketability was applied based on the term between when each Restricted Common Unit, IPO RLU, Staking Class C Incentive Unit, or Reload Class C Incentive Unit vests, and when it is released from the transfer restriction. The range of discounts from 6.0% to 19.1% were applied on the proportion of value associated with the receipt of Class A common stock upon the exchange of each Restricted Common Unit, IPO RLU, or Class C Incentive Unit.
Non-Employee Director Stock Grants
Starting in 2022, the Company grants RSUs (“Director Stock Grants”) to non-employee directors serving as members of the Company's Board of Directors. Unpaid preferred dividendsDirectors, with the exception of $14.5$9.5$1.6 million of expense related to the Director Stock Grants during the three and six months ended June 30, 2022, respectively.
Profit Sharing Contribution
In March 2022, the Company made a discretionary profit sharing contribution of 75,026 shares of Class A common stock, collectively, to certain employees' defined contribution retirement benefit plan accounts. The Company recognized $2.6 million of expense related to the profit sharing contribution during the six months ended June 30, 2022.
Equity-Based Compensation Expense
As of June 30, 2022, the unrecognized equity-based compensation costs related to each equity-based compensation award described above and the related weighted-average remaining expense period is as follows:
|
| Amount |
|
| Weighted Average Remaining Expense Period (years) |
| ||
Restricted Stock |
| $ | 12,920 |
|
|
| 1.5 |
|
IPO RSUs |
|
| 66,934 |
|
|
| 4.8 |
|
Incentive RSUs |
|
| 26,019 |
|
|
| 2.9 |
|
Reload Options |
|
| 5,758 |
|
|
| 2.3 |
|
Staking Options |
|
| 441 |
|
|
| 6.4 |
|
Incentive Options |
|
| 1,895 |
|
|
| 3.8 |
|
Restricted Common Units |
|
| 11,584 |
|
|
| 1.0 |
|
IPO RLUs |
|
| 31,787 |
|
|
| 6.2 |
|
Incentive RLUs |
|
| 4,293 |
|
|
| 1.9 |
|
Reload Class C Incentive Units |
|
| 7,553 |
|
|
| 2.8 |
|
Staking Class C Incentive Units |
|
| 19,637 |
|
|
| 5.5 |
|
Class C Incentive Units |
|
| 5,394 |
|
|
| 5.5 |
|
Total unrecognized equity-based compensation expense |
| $ | 194,215 |
|
|
|
|
The following table includes the equity-based compensation expense the Company realized in Accounts payablethe three and accrued liabilitiessix months ended June 30, 2022 by expense type from the view of expense related to pre- and post-IPO awards. The table also presents the unrecognized
23
equity-based compensation expense as of June 30, 2022 in the same view. A similar view has not been presented for the three and six months ended June 30, 2021 as all equity based-compensation expense was related to legacy LLC equity.
|
| Recognized |
|
| Unrecognized |
| ||||||
|
| Three Months Ended |
|
| Six Months Ended |
|
|
|
| |||
|
| June 30, 2022 |
|
| June 30, 2022 |
|
| As of June 30, 2022 |
| |||
IPO awards |
|
|
|
|
|
|
|
|
| |||
IPO RSUs and Staking Options |
| $ | 6,115 |
|
| $ | 13,007 |
|
| $ | 67,375 |
|
IPO RLUs and Staking Class C Incentive Units |
|
| 3,359 |
|
|
| 6,682 |
|
|
| 51,424 |
|
Incremental Restricted Stock and Reload Options |
|
| 1,841 |
|
|
| 3,926 |
|
|
| 12,218 |
|
Incremental Restricted Common Units and Reload Class C Incentive Units |
|
| 2,789 |
|
|
| 6,934 |
|
|
| 16,241 |
|
Pre-IPO incentive awards |
|
|
|
|
|
|
|
|
| |||
Restricted Stock |
|
| 1,383 |
|
|
| 2,802 |
|
|
| 6,460 |
|
Restricted Common Units |
|
| 861 |
|
|
| 1,738 |
|
|
| 2,896 |
|
Post-IPO incentive awards |
|
|
|
|
|
|
|
|
| |||
Incentive RSUs |
|
| 2,211 |
|
|
| 2,550 |
|
|
| 26,019 |
|
Incentive RLUs |
|
| 676 |
|
|
| 780 |
|
|
| 4,293 |
|
Incentive Options |
|
| 132 |
|
|
| 152 |
|
|
| 1,895 |
|
Class C Incentive Units |
|
| 275 |
|
|
| 317 |
|
|
| 5,394 |
|
Other expense |
|
|
|
|
|
|
|
|
| |||
Director Stock Grants |
|
| 138 |
|
|
| 1,560 |
|
| N/A |
| |
Profit Sharing Contribution |
|
| — |
|
|
| 2,580 |
|
| N/A |
| |
Total equity-based compensation expense |
| $ | 19,780 |
|
| $ | 43,028 |
|
| $ | 194,215 |
|
The Company recognized equity-based compensation expense of $19.8 million and December 31, 2020,$3.2 million for the three months ended June 30, 2022 and 2021, respectively. RSG paid $7.0$6.4$7.6 million for the six months ended June 30, 2022 and 2021, respectively
24
Basic earnings per share is computed by dividing net earnings attributable to Ryan Specialty Holdings, Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share is computed giving effect to all potentially dilutive shares. As shares of Class B common stock do not share in earnings and are not participating securities they are not included in the Company's calculation.
Prior to the IPO, the LLC equity structure included preferred dividends inclusiveunits, Class A common units, and Class B common units. The Company considered the calculation of state tax paymentsearnings per unit for periods prior to the IPO and distributionsdetermined that it would not be meaningful to Onexthe users of these consolidated financial statements. Therefore, earnings per share information has not been presented for the three and six months ended June 30, 2021.
A reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per share of Class A common stock is as follows:
|
| Three Months Ended |
|
| Six Months Ended |
| ||
Net income |
| $ | 70,120 |
|
| $ | 88,196 |
|
Net income attributable to non-controlling interests |
|
| 45,619 |
|
|
| 56,784 |
|
Net income attributable to Ryan Specialty Holdings, Inc. |
| $ | 24,501 |
|
| $ | 31,412 |
|
Numerator: |
|
|
|
|
|
| ||
Net income attributable to Class A common shareholders |
| $ | 24,501 |
|
| $ | 31,412 |
|
Add: Income attributed to substantively vested RSUs |
|
| 387 |
|
|
| 372 |
|
Net income attributable to Class A common shareholders- basic |
|
| 24,888 |
|
|
| 31,784 |
|
Add: Income attributed to dilutive shares |
|
| 1,544 |
|
|
| 41,942 |
|
Net income attributable to Class A common shareholders- diluted |
| $ | 26,432 |
|
| $ | 73,726 |
|
Denominator: |
|
|
|
|
|
| ||
Weighted-average shares of Class A common stock outstanding- basic |
|
| 108,054,437 |
|
|
| 107,327,462 |
|
Add: Dilutive shares |
|
| 12,150,465 |
|
|
| 157,090,008 |
|
Weighted-average shares of Class A common stock outstanding- diluted |
|
| 120,204,902 |
|
|
| 264,417,470 |
|
Earnings per Share: |
|
|
|
|
|
| ||
Earnings per share of Class A common stock- basic |
| $ | 0.23 |
|
| $ | 0.30 |
|
Earnings per share of Class A common stock- diluted |
| $ | 0.22 |
|
| $ | 0.28 |
|
The following number of shares were excluded from the calculation of diluted earnings per share because the effect of including such potentially dilutive shares would have been antidilutive:
|
| Three Months Ended |
|
| Six Months Ended |
| ||
Incentive Options |
|
| 175,222 |
|
|
| 175,222 |
|
Class C Incentive Units |
|
| 300,000 |
|
|
| 300,000 |
|
Conversion of non-controlling interest LLC Common Units (1) |
|
| 144,495,397 |
|
|
| 0 |
|
(1)Weighted average shares outstanding for the three months ended June 30, 2022.
Redeemable Preferred Units Embedded Derivatives
As discussed in Note 10, Stockholders' and Members' Equity, the Company's IPO in July 2021 was a realization event triggering the payment of the make-whole provision related to the Redeemable Preferred Units to Onex. Consequently, the embedded derivatives related to the make-whole provision were no longer outstandingas of June 30, 2022. The Company recognized $8.0 million and $20.6 million of loss related to the Redeemable Preferred Units embedded derivatives during the three and six months ended June 30, 2021. The losses were recognized in Other non-operating loss (income) within the Consolidated Statements of Income. The Company recognized the $20.6 million of loss related to the six months ended June 30, 2021 in Other current assets and the year ended December 31, 2020, respectively.
25
Interest Rate Cap
On April 7, 2022, the Company entered into an interest rate cap agreement to manage its exposure to interest rate fluctuations related to the Company's Term Loan in the amount of $25.5 million. The interest rate cap has a $1,000.0 million notional amount, 2.75% strike, and the Class B Preferred Units remained outstanding asterminates on December 31, 2025. As of June 30, 2021.
Common Equity | Preferred Equity | |||||||||||||||||||
Class A | Class B | Total | Class B | Total | ||||||||||||||||
December 31 , 2020 | 693,876 | 75,478 | 769,354 | 74,990 | 74,990 | |||||||||||||||
Forfeitures | (40 | ) | 0— | (40 | ) | 0— | 0— | |||||||||||||
Repurchases | (41 | ) | 0— | (41 | ) | 0— | 0— | |||||||||||||
March 31, 2021 | 693,795 | 75,478 | 769,273 | 74,990 | 74,990 | |||||||||||||||
Forfeitures | (375 | ) | 0— | (375 | ) | 0— | 0— | |||||||||||||
Repurchases | (666 | ) | 0— | (666 | ) | 0— | 0— | |||||||||||||
June 30, 2021 | 692,754 | 75,478 | 768,232 | 74,990 | 74,990 | |||||||||||||||
Common Equity | Preferred Equity | |||||||||||||||||||
Class A | Class B | Total | Class B | Total | ||||||||||||||||
December 31 , 2019 | 655,386 | 65,354 | 720,740 | — | ||||||||||||||||
Grants | 175 | 0— | 175 | — | — | |||||||||||||||
Forfeitures | (375 | ) | 0— | (375 | ) | — | — | |||||||||||||
Repurchases | (8,036 | ) | 0— | (8,036 | ) | — | — | |||||||||||||
March 31, 2020 | 647,150 | 65,354 | 712,504 | — | — | |||||||||||||||
Repurchases | (1,081 | ) | 0— | (1,081 | ) | — | — | |||||||||||||
June 30, 2020 | 646,069 | 65,354 | 711,423 | — | — | |||||||||||||||
Defined Contribution Plan
The Company offers a defined contribution retirement benefit plan, the Ryan Specialty Group Employee Savings Plan (the “Plan”), to all eligible U.S. employees, based on a minimum number of service hours in a year. Under the Plan, eligible employees may contribute a percentage of their compensation, subject to certain limitations. Further, the Plan authorizes the Company to make a discretionary matching contribution, which has historically equaled
Deferred Compensation Plan
The Company offers a non-qualified deferred compensation plan to certain senior employees and
Long-Term Incentive Compensation Agreements
The Company has entered into certain long-term incentive agreements whereby, at the end of a service period, employees are awarded cash according to specified formulas, following a period, typically associated with an acquisition. RSGThe Company recognizes expense within Compensation and benefits in the Consolidated Statements of Income over the service period of these awards based on the estimated expected payout. RSGThe Company recognized compensation expense of $0.5$1.0three and six months ended June 30, 2022 and 2021, respectively. RSG recognized compensation expense of $0.5millionand $1.0millionrelated to these awards for the three and six months ended June 30, 2020,
All Risks Long-Term Incentive Plans
ARL had established various long-term incentive plans (“LTIPs”) throughout its history to incentivize certain executives, producers and key employees. ARL additionally established sales bonuses, implemented by the management of ARL, as compensation for past services performed in connection with executing the sale. Followingsale of the acquisition by RSG, thebusiness to Ryan Specialty. The LTIP awards vest based on the achievement of various service conditions and are cash-settled. Cash settlement, including allSubsequent to the acquisition, cash payments due on close, will besettlements are made by RSG.
On August 10, 2021, the Company's Board of Directors elected to terminate the ARL long-term incentive plans. The decision to terminate the plans did not change the value of, or entitlements to, any benefits thereunder. The benefits accrued under these plans are
26
required to be paid within twelve months of the termination date, subject to participants meeting service conditions, thereby accelerating certain payments.
Of the expense related to post-combination services, after forfeitures $17.5was expensed in the Company recognized $14.7 million and $17.5 million related to these awards for the six months ended June 30, 2022 and 2021, respectively, with the remaining expense of$39.9over a 0.98 year weighted-average period.in the third quarter of 2022. $7.1 million and $8.6 million of expense was recognized during the three months ended June 30, 2022 and 2021, respectively. The related expense is recognized in Compensation and benefits in the Consolidated Statements of Income. The Company made cash payments of $4.1 million and $0.6 million for the six months ended June 30, 2022 and 2021, respectively, with the remaining cash balance of $106.7 million to be paid in the third quarter of 2022. The LTIP accrual was $101.6 million and $91.0 million as of June 30, 2022 and December 31, 2021, respectively. The liability for these awards is recognized in Current andNon-currentStatementsBalance Sheets.
Forgivable Notes
Historically the Company offered forgivable notes to certain employees as an incentive, whereby the principal amount of Financial Positionforgivable notes and accrued interest is forgiven by the Company over the term of the notes, so long as the employee continues employment with Ryan Specialty and complies with certain contractual requirements. These notes are structured as recourse loans and contain non-solicit clauses and have terms that are between three and ten years. In the event of an employee’s termination, whether voluntary or involuntary, the employee must repay the unpaid, unforgiven note balance at termination. The Company has a policy of enforcing the provisions of the unforgiven portion of the forgivable note agreements by pursuing collection through third-party collection agencies and taking legal action.
The aggregate balance of forgivable notes was $27.6 million and $31.2 million as of June 30, 2022 and December 31, 2021, respectively. This balance is included within Current and Non-current Prepaid incentives - net in the Company’s Consolidated Balance Sheets. The amortization expense associated with the forgiveness of the principal amount of the notes and accrued interest is recognized inrecorded within Compensation and Benefits inbenefits within the Consolidated Statements of Income ratably over the remainingrelated service periodperiods, which is consistent with the term of the participants while employed at RSG.notes. The Company recognized expense related to the forgivable notes of $1.8 million and $1.6 million during the three months ended June 30, 2022 and 2021, respectively, and $3.5 million and $3.7 million during the six months ended June 30, 2022 and 2021, respectively. As of the end of 2020, the Company no longer issues forgivable notes as employee incentives.
Ryan Specialty Holdings Inc. is a holding company and the sole managing member of the LLC. The Company's principal asset is a controlling equity interest in the LLC. The Company considers itself the primary beneficiary of the LLC as the Company has both the power to direct the activities that most significantly impact the LLC’s economic performance and is expected to receive benefits that are significant to the Company. As the primary beneficiary of the LLC, the Company consolidates the results and operations of the LLC for financial reporting purposes under the variable interest consolidation model guidance in ASC 810 Consolidations. The Company's relationship with the LLC results in no recourse to the general credit of the Company. Further, the Company has no contractual requirement to provide financial support to the LLC. The Company shares in the income and losses of the LLC in direct proportion to the Company's ownership percentage.
The Company’s financial position, financial performance and cash flows effectively represent those of the LLC as of and for the period ended June 30, 2022, with the exception of Cash and cash equivalents of $18.7 million, Accounts payable and accrued liabilities of $9.2 million, the entire balance of theTax Receivable Agreement liabilities of $293.8 million and Deferred tax assets of $404.3 million on the Consolidated Balance Sheets, which are attributable solely to the Company. As of December 31, 2021, the CurrentTax Receivable Agreement liabilities of $272.1 million andNon-currentportions $382.8 million of the ARL LTIP accrualDeferred tax assets on the Consolidated Balance Sheet were $97.5millionand $73.6 million, respectively.attributable solely to the Company.
Accounting standards establish a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair values as follows:
Level
Level
Level
The level in the fair value hierarchy within which the fair value measurement is classified is determined based on the lowest level of input that is significant to the fair value measure in its entirety.
27
The carrying amount of financial assets and liabilities reported in the Consolidated Statements of Financial PositionBalance Sheets for Cashcash and cash equivalents, Commissionscommissions and fees receivable—net, Otherother current assets, and Accountsaccounts payable, and other accrued liabilities atas of June 30, 20212022 and December 31, 2020,2021 approximate fair value because of the short-term duration of these instruments.
Derivative Instruments
Redeemable Preferred Units
In prior periods, the fair value of the combined embedded derivatives on the redeemable preferred units isRedeemable Preferred Units was based on the likelihood of a mandatorily redeemable triggering event, a Realization Event as defined by the Onex Purchase Agreement, and the present value of any remaining unpaid dividends between the reporting period and the fifth anniversary of the issuance date, which iswas a Level 3 fair value measurement. In determining the fair value, the Company will first estimatehistorically estimated the likelihood of a Realization Event based on discussions with management. The Companymanagement, then estimated the present value of any remaining dividends using a 10.5%10.5% discount rate derived from a review of comparable issuances and benchmarking. The present value of the remaining dividends was then combined with the estimated likelihood of a Realization Event to arrive at the estimated fair value. Changes in the timing and likelihood of a Realization Event and/or the discount rates used would resultresulted in a change in the fair value of recorded embedded derivative obligations. As the Company's IPO in July 2021 was a Realization Event triggering the payment to Onex of the make-whole provision, there are no further amounts outstanding.
Interest Rate Cap
The Company uses an interest rate cap agreement to manage its exposure to interest rate fluctuations related to the Company's Term Loan. The fair value of the make-whole provisions asinterest rate cap agreement is determined using the market standard methodology of June 30, 2021 was $51.0 million.
Contingent Consideration
The fair value of these contingent consideration obligations is based on the present value of the future expected payments to be made to the sellers of the acquired entitiesbusinesses in accordance with the provisions outlined in the respective purchase agreements, which is a Level 3 fair value measurement. In determining fair value, the Company estimates cash payments based on management’s financial projections of the performance of each acquired business relative to the formula specified by each purchase agreement. The Company utilizes Monte Carlo simulations to evaluate financial projections of each acquired business. The Monte Carlo models consider forecasted revenue and EBITDA and market risk adjusted revenue and EBITDA which are then run through a series of simulations. The risk-free rates, and expected volatility, and credit spread used in the models range from 0.05%1.73% to 0.10%2.92%, 15.0% to 47.5% and 15%6.0% to 35%6.2%, respectively, for the period ended June 30, 2022. As of December 31, 2021, the risk-free rates, expected volatility, and credit spread used in the models ranged from 0.06% to 0.85%, 15.0% to 35.0%, and 2.3% to 3.2%, respectively. The Company then discounts the expected payments created by the Monte Carlo model to present value using a risk-adjusted rate that takes into consideration the market-based rates of return that reflect the ability of the acquired entity to achieve its targets. These discount rates generally range from 5.5%5.3% to 12.1%14.8% for the acquisitions.
Each period, RSGthe Company revalues the contingent consideration obligations associated with certain prior acquisitions to their fair value and records subsequent changes to the fair value of these estimated obligations in Change in contingent consideration within Operating income when incurred.
28
The following fair value hierarchy table presents information about the Company’s liabilities measured at fair value on a recurring basis as of June 30, 20212022 and December 31, 2020.
June 30, 2021 | December 31, 2020 | |||||||||||||||||||||||
Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||
Debt (1) | $ | 1,641,719 | $ | — | $ | — | $ | 1,648,997 | $ | — | $ | — | ||||||||||||
Contingent purchase consideration (2) | — | — | 22,135 | — | — | 22,096 | ||||||||||||||||||
Make-whole provision on Class B Preferred Units (3) | — | — | 51,035 | — | — | 30,423 | ||||||||||||||||||
Total liabilities measured at fair value | $ | 1,641,719 | $ | — | $ | 73,170 | $ | 1,648,997 | $ | — | $ | 52,519 | ||||||||||||
|
| June 30, 2022 |
|
| December 31, 2021 |
| ||||||||||||||||||
|
| Quoted Prices in Active Markets for Identical Assets |
|
| Significant Other Observable Inputs |
|
| Significant Unobservable Inputs |
|
| Quoted Prices in Active Markets for Identical Assets |
|
| Significant Other Observable Inputs |
|
| Significant Unobservable Inputs |
| ||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest rate cap |
| $ | — |
|
| $ | 24,637 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Debt (1) |
| $ | 1,928,124 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,631,412 |
|
| $ | — |
|
| $ | — |
|
Contingent purchase consideration |
|
| — |
|
|
| — |
|
|
| 26,357 |
|
|
| — |
|
|
| — |
|
|
| 42,053 |
|
Total assets and liabilities measured at fair value |
| $ | 1,928,124 |
|
| $ | 24,637 |
|
| $ | 26,357 |
|
| $ | 1,631,412 |
|
| $ | — |
|
| $ | 42,053 |
|
(1) As of June 30, 2022, this represents the Term Loan and Senior Secured Notes. As of December 31, 2021, only the Term Loan was outstanding. See Note 9, Debt.
There were no assets or liabilities that were transferred between fair value hierarchy levels during the six months ended June 30, 2021 and2022 or the year ended December 31, 2020.
The following is a reconciliation of the beginning and ending balances for the Level 3 liabilities measured at fair value:
|
| June 30, 2022 |
|
| June 30, 2021 |
| ||||||||||
|
| Contingent Purchase Consideration |
|
| Make-Whole Provision on Redeemable Preferred Units |
|
| Contingent Purchase Consideration |
|
| Total |
| ||||
Balance at beginning of period |
| $ | 42,053 |
|
| $ | 30,423 |
|
| $ | 22,096 |
|
| $ | 52,519 |
|
Total (gains) losses included in earnings |
|
| (462 | ) |
|
| 20,612 |
|
|
| 2,712 |
|
|
| 23,324 |
|
Settlements |
|
| (15,234 | ) |
|
| — |
|
|
| (2,673 | ) |
|
| (2,673 | ) |
Balance at end of period |
| $ | 26,357 |
|
| $ | 51,035 |
|
| $ | 22,135 |
|
| $ | 73,170 |
|
June 30, 2021 | June 30, 2020 | |||||||||||||||||||||||
Make-Whole provision | Contingent consideration | Total | Make-Whole provision on class B units | Contingent consideration | Total | |||||||||||||||||||
Opening balance | $ | 30,423 | $ | 22,096 | $ | 52,519 | $ | 891 | $ | 23,527 | $ | 24,418 | ||||||||||||
Total gains/losses included in earnings | 20,612 | 2,712 | 23,324 | 0— | 1,619 | 1,619 | ||||||||||||||||||
Settlements | 0— | (2,673 | ) | (2,673 | ) | 0— | (497 | ) | (497 | ) | ||||||||||||||
Ending balance | $ | 51,035 | $ | 22,135 | $ | 73,170 | $ | 891 | $ | 24,649 | $ | 25,540 | ||||||||||||
During the six months ended June 30, 20212022 and 2020,2021, there were 0 purchases, issues, sales, or transfers related to fair value measurements. The Company settledDuring the six months ended June 30, 2022, the $9.0 million and $6.2 million settlements of contingent consideration are presented in the operating and financing sections, respectively, of $2.7and $0.5millionduring settlement of contingent consideration in the six months ended June 30, 2021 and June 30, 2020, respectively. Additionally, 0 unrealized gains or losses were recordedis presented in the operating section of the Consolidated Statements of Comprehensive Income for liabilities held during the period.Cash Flows.
Legal – E&O and Other Considerations
As an excess and surplus lines and admitted markets broker, RSGintermediary, and in addition to ordinary course of business E&O exposure, the Company has potential E&O risk if an insurance carrier with which RSGRyan Specialty placed coverage denies coverage for a claim or pays less than the insured believes is the full amount owed. As a result, RSGthe Company from time to time seeks to resolve early in the process, through a commercial accommodation, certain matters to limit the economic exposure and reputational risk, including potential legal fees, created by a disagreement between a carrier and the insured.
The Company purchases insurance to provide protection from E&O claimsliabilities that may arise during the ordinary course of business. Since June 1, 2019, RSG’sRyan Specialty’s E&O insurance provides aggregate coverage for E&O losses up to $100.0their retaineda $2.5 million retention amount of $2.5millionRSGThe Company has historically maintained self-insurance reserves for the Company’s retention portion of the E&O exposure that is not insured. RSGThe Company periodically determines a range of possible reserve levels using the best available information that rely heavily on projecting historical claim data into the future.
29
The reserve for these and other Enon-E&O claims and business accommodations in the Consolidated Statements of Financial PositionBalance Sheets is above the lower end of the most recently determined range. Reserves of $1.6$1.520212022 and December 31, 2020,2021, respectively. Relatedly, RSGThe Company recognized $0.7$1.1in General and administrative expense for the six months ended June 30, 2021 and 2020, respectively. RSG recognized $0.4millionand $0.1
The Company is predominantly owned directly or indirectly by its CEO and Chairman Patrick G. Ryan or his family trusts through the investments described in Note 11,Equity.
Ryan Re and Geneva Re
Ryan Re
Ryan Re previously a wholly owned subsidiary of RSGRI, was designed in 2018 to incubate a new reinsurance underwriting service offering. On June 13, 2019, Ryan Re was ultimately contributed to Geneva Ryan Holdings, LLC (“GRH”). GRH was formed as an investment holding company designed to aggregate investment funds of Patrick G. Ryan and other affiliated investors. One affiliated investor is an LLC Unitholder and a director of the Company, and another is both an LLC Unitholder and employee of the Company. RSGRyan Specialty does not consolidate GRH as RSGthe Company does not have a direct investment in or variable interest in this entity.
On March 31, 2021, GRH distributed a portion of its interest in Ryan Re to the two investors affiliated with RSG. RSGRyan Specialty. The Company subsequently acquired the remaining 53%53% of the common units in Ryan Re from GRH and the two affiliated investors with a $1$1 par value for total consideration of $48.4 million. As a result of the transaction, RSG derecognized the noncontrolling interest of $3.7millionand recognized a deemed distribution of $44.6 million, inclusive of a working capitaltrue-uppayment of $0.1millionin the second quarter of 2021.$48.4 million. The valuation of the outstanding interest in Ryan Re was determined by an unrelated third party. Upon RSGthe Company acquiring the remaining 53%53% of common units, Ryan Re became a wholly owned subsidiary of RSG. RSG will continue to include the financial resultsCompany. The non-controlling interest presented on the Consolidated Statements of Ryan Re inIncome for the Company’s Consolidated Financial Statements but will no longer present a noncontrolling interest relatedsix months ended June 30, 2021 relates to Ryan Re on the Statement of Financial Position after the first quarter of 2021.
Ryan Investment Holdings
Ryan Investment Holdings, LLC (“RIH”) was formed as an investment holding company designed to aggregate the funds of RSGRyan Specialty and GRH for investment in Geneva Re Partners, LLC (“GRP”). RSGThe Company holds a 47%47% interest in RIH and GRH holds a 53%53% interest in RIH. RIH has a 50%
The Company is not required to contribute any additional capital to RIH, and its maximum exposure to loss on the equity method investment is the total invested capitalof
Geneva Re
As discussed above, Geneva Re is a wholly owned subsidiary of GRP. GRP was formed as a joint venture between Nationwide and RIH, with each retaining a 50%50% ownership interest in GRP in exchange forSubscription Agreement,subscription agreement, has an agreement that outlines the terms of the Company’s investment in RIH, as well as the commitment of RIH’s unit holders to invest funds into GRP at the request of the GRP board, for a total investment of $47.0 million. On March 5, 2020, RSG contributed $23.5millionof capital in satisfaction of the remaining capital commitment to Geneva Re.
On January 1, 2021, RSGthe Company entered into a service agreement with Geneva Re to provide both administrative services to, as well as disburse payments for costs directly incurred by, Geneva Re. These direct costs include compensation expenses incurred by employees of Geneva Re. RSGThe Company had $0.6for a total outstanding balance of $1.0million2021.
30
Ryan Re Services Agreement with Geneva Re and Nationwide
Revenue earned from Geneva Re, net of applicable constraints, was $0.9
Company Leasing of Corporate Jets
In the ordinary course of its business, the Company charters executive jets for business purposes from a third-party service provider called Executive Jet Management (“EJM”). Mr. Ryan indirectly owns aircraft that he leases to EJM for EJM’s charter operations, which include EJM chartering to third parties, for which he receives remuneration from EJM. The Company pays market rates for chartering aircraft through EJM, unless the particular aircraft chartered is Mr. Ryan’s, in which case the Company receives a discount below market rates. Historically, the Company has usually been able to charter Mr. Ryan’s aircraft and make use of this discount. The Company recognized de minimis expensesexpense related to business usage of the aircraft of $0.3 million and $0.1 million for the three months ended June 30, 2022 and 2021, respectively, and 2020. The Company recognized an expense related to business usage of the aircraft
Consulting Arrangement with a Director
We have contracted with Michael O’Halleran, a director of the Company, to provide consulting services. Mr. O’Halleran receives less than $0.1 million on a quarterly basis. Mr. O’Halleran’s compensation under an agencythe consulting agreement with certain insurance companies thatof $0.2 million annually is based on external market practices of similar positions for consultants or employees who are affiliated with National Indemnity Company. The Company did not pay Mr. Ryan any consideration for this guarantee. Mr. Ryan’s guarantee may be replaced by the Company with a letter of credit at any time, subject to the prior approvalmembers of the insurance companies. Following the completionBoard of Directors.
Employment of an Immediate Family Member of a Director
Michael O’Halleran’s son is an employee of the IPO, Mr. Ryan will not personally guarantee any additional financial obligationsCompany. He has been an employee of the Company or anysince August 11, 2014. His total annual compensation for 2021 was $0.3 million, including production bonuses of its subsidiaries.
The Company is antaxed as a corporation for income tax purposes and is subject to federal, state, and local taxes with respect to its allocable share of any net taxable income from the LLC. The LLC treatedis a limited liability company taxed as a partnership for income tax reporting. As such,purposes, and its taxable income or loss is passed through to its members, are liable for federal,including the Company. The LLC is subject to income taxes on its taxable income in certain foreign countries, in certain state and local jurisdictions that impose income taxes based on their sharepartnerships, and on the taxable income of its U.S. corporate subsidiary. For the periods presented prior to the Organizational Transactions and IPO, the reported income taxes represent those of the LLC’s taxable income. The Company owns several operating subsidiaries which are consideredC-Corporationsfor U.S. federal, state and local income tax purposes. Taxable income or loss from these corporations is not passed through to the Company. Instead, it is taxed at the corporate level subject to the prevailing corporate tax rates.
The Company’s effective tax rate from continuing operations was 3.55%13.74% and 3.08%3.55% for the three months ended June 30, 2022 and 2021, respectively, and 2020, respectively. The Company’s effective tax rate from continuing operations was 7.12%7.03% and 4.77%7.12% for the six months ended June 30, 2022 and 2021, respectively. The effective tax rate for the three months ended June 30, 2022 is significantly different from the 21% statutory rate primarily as a result of income attributable to the non-controlling interest. The effective tax rate for the six months ended June 30, 2022 is significantly different from the 21% statutory rate primarily as a result of the changes in state tax rates and 2020, respectively.the income attributable to the non-controlling interest. The quarterly effective tax rates for the three and six months ended June 30, 2021 are significantly different from the 21%21% statutory tax rate primarily because the Company was taxed as an LLC pre-IPO.
The Company does not believe it has any significant uncertain tax positions and therefore has 0 unrecognized tax benefits as of June 30, 2022, that if recognized, would affect the annual effective tax rate. The Company does not anticipate material changes in unrecognized tax benefits within the next twelve-month period. The Company’s 2021 tax year filings are open to examination by taxing authorities for U.S. federal and state income tax purposes.
Deferred Taxes
The Company reported Deferred tax assets of $404.2 million and $382.8 million as of June 30, 2022 and December 31, 2021, respectively, and Deferred tax liabilities of $0.7 million and $0.6 million as of June 30, 2022 and December 31, 2021, respectively, on the Consolidated Balance Sheets. The increase in the Deferred tax assets during the six months ended June 30, 2022 was primarily related to an increase of $9.8 million for changes in the state tax rates, which resulted in a tax benefit on the Consolidated Statements of Income, and an increase of $15.4 million due to exchanges of LLC Common Units, which resulted in an increase to Additional paid-in capital on the Consolidated Statements of Mezzanine Equity and Stockholders’/Members’ Equity.
31
As of June 30, 2022, the Company concluded that, based on the weight of all available positive and negative evidence, the Deferred tax assets with respect to the Company’s basis difference in its investment in the LLC are more likely than not to be realized. As such, 0 valuation allowance has been recognized against that basis difference.
Tax Receivable Agreement (TRA)
In connection with the Organizational Transactions and IPO, the Company entered into a TRA with current and certain former LLC Unitholders. The TRA provides for the payment by the Company to the current and certain former LLC Unitholders of 85% of the net cash savings, if any, in U.S. federal, state, and local income taxes that the Company realizes (or is deemed to realize in certain circumstances) as a result of (i) certain increases in the tax basis of the assets of the LLC resulting from purchases or exchanges of LLC Common Units (“Exchange Tax Attributes”), (ii) certain tax attributes of the LLC that existed prior to the IPO (“Pre-IPO M&A Tax Attributes”), (iii) certain favorable “remedial” partnership tax allocations to which the Company becomes entitled (if any), and (iv) certain other tax benefits related to the Company beingentering into the TRA, including certain tax benefits attributable to payments that the Company makes under the TRA (“TRA Payment Tax Attributes”). The Company recognizes a partnershipliability on the Consolidated Balance Sheets based on the undiscounted estimated future payments under the TRA. The amounts payable under the TRA will vary depending upon a number of factors, including the amount, character, and timing of the taxable income of the Company in the future.
Based on current projections, the Company anticipates having sufficient taxable income to be able to realize the benefits and has recorded Tax Receivable Agreement liabilities of $293.8 million related to these benefits on the Consolidated Balance Sheets as of June 30, 2022. The following summarizes activity related to the Tax Receivable Agreement liabilities:
|
| Exchange Tax Attributes |
|
| Pre-IPO M&A Tax Attributes |
|
| TRA Payment Tax Attributes |
|
| TRA Liabilities |
| ||||
Balance at December 31, 2021 |
| $ | 136,704 |
|
| $ | 83,389 |
|
| $ | 52,007 |
|
| $ | 272,100 |
|
Exchange of LLC Common Units |
|
| 9,897 |
|
|
| 1,435 |
|
|
| 3,159 |
|
|
| 14,491 |
|
Remeasurement - change in state rate |
|
| 2,884 |
|
|
| 1,759 |
|
|
| 2,530 |
|
|
| 7,173 |
|
Balance at June 30, 2022 |
| $ | 149,485 |
|
| $ | 86,583 |
|
| $ | 57,696 |
|
| $ | 293,764 |
|
During the six months ended June 30, 2022, the TRA liabilities increased $14.5 million due to an exchange of LLC Common Units for incomeClass A common stock, which resulted in a decrease to Additional paid-in capital on the Consolidated Statements of Mezzanine Equity and Stockholders’/Members’ Equity. During the same period, the Company remeasured the TRA liabilities due to changes in state tax reporting.rates resulting in a $7.2 million expense as the Company increased its estimated cash tax savings rate from 25.12% to 25.65%. The change was recognized in Other non-operating loss on the Consolidated Statements of Income.
The following represents the supplemental cash flow information of the Company for the six months ended June 30, 2022 and 2021.
|
| Six Months Ended June 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Supplemental cash flow information: |
|
|
|
|
|
| ||
Cash paid for: |
|
|
|
|
|
| ||
Interest |
| $ | 32,050 |
|
| $ | 32,518 |
|
Income taxes |
|
| 5,179 |
|
|
| 5,897 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
| ||
Accretion of premium on mezzanine equity |
| $ | 0 |
|
| $ | 1,196 |
|
Accumulated deficit due to accretion of premium on mezzanine equity |
|
| 0 |
|
|
| (1,196 | ) |
Repurchase of LLC Units |
|
| 0 |
|
|
| (745 | ) |
Issuance of unsecured promissory note |
|
| 0 |
|
|
| 745 |
|
The Company has evaluated subsequent events through September 2, 2021August 12, 2022 and has concluded that no events have occurred that require disclosure other than the events listed below.disclosure.
32
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity, and cash flows of our companythe Company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our consolidated financial statementsConsolidated Financial Statements and the related notes included elsewhere in this Quarterly Report on Form our consolidated financial statements and the related notes in the IPO Prospectus.Annual Report on Form 10-K for the year ended December 31, 2021 and filed with the SEC on March 16, 2022. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and in the IPO Prospectus,our Annual Report on Form 10-K, particularly in the sections entitled “Risk Factors” and “Forward-Looking Statements”
The following discussion provides commentary on the financial results derived from our unaudited financial statements for the three months and six months ended June 30, 20212022 and 20202021 prepared in accordance with U.S. GAAP. In addition, we regularly review the followingRevenue Growth Rate,revenue growth rate, Adjusted Compensationcompensation and Benefits Expense,benefits expense, Adjusted Compensationcompensation and Benefits Expense Ratio,benefits expense ratio, Adjusted Generalgeneral and Administrative Expense,administrative expense, Adjusted Generalgeneral and Administrative Expense Ratio,administrative expense ratio, Adjusted EBITDAC, Adjusted EBITDAC Margin,margin, Adjusted Net Incomenet income, Adjusted net income margin and Adjusted Net Income Margin.diluted earnings per share. See “Non-GAAP Financial Measures and Key Performance Indicators” for further information.
Overview
Founded by Patrick G. Ryan in 2010, we are a rapidly growing service provider of specialty products and solutions for insurance brokers, agents, and carriers. We provide distribution, underwriting, product development, administration, and risk management services by acting as a wholesale broker and a managing underwriter.underwriter or a program administrator with delegated authority from insurance carriers. Our mission is to provide industry-leading innovative specialty insurance solutions for insurance brokers, agents, and carriers.
For retail insurance agents and brokers, we assist in the placement of complex or otherwiseLloyd’s.Lloyd’s of London. There is often significantly more flexibility in terms, conditions, and rates in the E&S market relative to the Admitted or “standard” insurance market. We believe that the additional freedom to craft bespoke terms and conditions in the E&S market allows us to best meet the needs of our trading partners, provide unique solutions, and drive innovation. We believe our success has been achieved by providing
Significant Events and Transactions
Effects of the Reorganization on Our Corporate Structure
We were incorporated in March 2021 and formed for the purpose of the IPO. We are a holding company and our sole material asset is the ownershipa controlling equity interest in HoldingsNew LLC, which is also a holding company and its sole material asset is a controlling equity interest in the LLC. AllThe Company operates and controls the business and affairs of, our business is conducted through Holdings LLC, and consolidates the financial results of, Holdingsthe LLC through New LLC. We conduct our business through the LLC. As the LLC is substantively the same as New LLC, for the purpose of this discussion, we will be included inrefer to both New LLC and the consolidated financial statements of Ryan Specialty Group Holdings, Inc.
The LLC is a limited liability company taxed as a pass-through entitypartnership for U.S. federal and state income tax purposes, and accordingly has not beenits taxable income or loss is passed through to its members, including the Company. The LLC is subject to income taxes on its taxable income in certain foreign countries, in certain state and local jurisdictions that impose income taxes on partnerships, and on the taxable income of its U.S. federal or state income tax.corporate subsidiary. After the IPO, Holdingsthe LLC continues to be treated as a pass-through entity for U.S. federal and state income tax purposes. As a result of our ownership of LLC Common Units, in Holdings LLC, we are subject to U.S. federal, state, and local income taxes with respect to our allocable share of any taxable income of Holdingsthe LLC and are taxed at the prevailing corporate tax rates. In addition to tax expenses, we also will incur expenses related to our operations and we will be required to make payments under the Tax Receivable Agreement. Due to the uncertainty of various factors, we cannot
33
Response to
An outbreak of a novel strain of the coronavirus,transition. We plantransition to continuea remote work environment. Due to largely work remotely through at least September 2021 in order to best protect our RSG family. This remains subject to change as the pandemic continues to evolve. As a result of the success of our remote work operations during the pandemic, we are exploring ways in which to incorporatehave implemented remote work flexibility into our post-pandemic operating model.
While the pandemic has had a significant detrimental effect on numerous segments of the global economy, it provided opportunities for many aspects of our Wholesale Brokerage, Binding Authority, and Underwriting Management Specialties. We believe the pandemic resulted in an increased flow of submissions into the E&S market and a further hardening of E&S insurance rates (which had already been happening since 2019), thereby yielding higher premiums. As a result, many of our specialties experienced, and continue to experience, an increase in the number of accounts handled and higher premium rates, on average, thereby increasing our commissions.
Highlighting the resilience of our business, the dedication of our workforce, and the E&S market opportunities created by the pandemic, in 2020 we completed the All Risks Acquisition (the largest in our history), made substantial progress on our integration of All Risks and the Restructuring Plan (as discussed below), and realized 20.4% organic revenue growth, all in the midst of the pandemic. We managed to sustain this resilience in 2021 and through the second quarter of 2022 through the continued advancement of the integration and Restructuring Plan andPlan. For the year ended December 31, 2021 we realized 23.9% organic40.7% revenue growth forand 22.4% Organic revenue growth. For the six months ended June 30, 2021.
While we believe our business and operations have thus far performed at a high level of efficiency and achieved historic results throughout the pandemic, there are no comparable recent events which may provide guidance as to the ultimate effect of the spread ofIPO ProspectusAnnual Report on Form 10-K for a discussion of the risks related to the
2020 Restructuring Plan
During the third quarter of 2020 and in conjunction with the All Risks Acquisition, we initiated the Restructuring Plan in an effort to reduce costs and increase efficiencies, streamline management reporting structures, and centralize functions across the Company to improve operating margin. The Restructuring Plan iswas initially expected to generate annual savings of $25.0 million as the plan isand be fully actioned by June 30, 2022. Initial savings began to materialize in 2020 with the fullrun-ratesavings expected to be realized by June 30, 2023. Of the $25.0 million of savings, approximately 90% relates to a reduction in workforce with the remaining 10% related to lease and contract terminations. The Restructuring Plan iswas initially expected to incur cumulativewillwere primarily be included in Compensation and Benefitsbenefits expense with the remaining costs in General and Administrativeadministrative expense. See "Note 4,Restructuring
We began recognizing costs associated with the Restructuring Plan in the third quarter of 2020. For the three and six months ended June 30, 20212022, we incurred restructuring costs of $3.0$2.6 million and $10.0$5.7 million, respectively, and cumulative restructuring costs of $20.8$30.9 million since the inception of the plan. These costs are offset by realized respective savings of approximately $5.6$7.3 million and $10.4$14.1 million for the three months and six months ended June 30, 2021.2022, respectively. Of the cumulative $20.8$30.9 million costs, $18.5$20.8 million was workforce-related with the remaining being general and administrative costs. While the current results of the Restructuring Plan are in line with expectations, changes to the total savings estimate and timing of the Restructuring Plan may evolve as we continue to progress through the plan and evaluate other potential restructuring opportunities. The actual amounts and timing may vary significantly based on various factors.
Key Factors Affecting Our Performance
Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to:
Pursue Strategic Acquisitions
We have successfully integrated businesses complementary to our own to increase both our distribution reach and our product and service capabilities. We continuously evaluate acquisitions and intend to further pursue targeted acquisitions that complement our product capabilities or provide us access to new markets. We have previously made, and intend to continue to make, acquisitions with
34
the objective of enhancing our human capital and product capabilities, entering natural adjacencies, and expanding our geographic footprint. Our ability to successfully pursue strategic acquisitions is dependent upon a number of factors, including sustained execution of a disciplined and selective acquisition strategy and our ability to effectively integrate targeted companies or assets and grow our business. We do not have agreements or commitments for any significant acquisitions at this time.
Deepen and Broaden our Relationships with Retail Broker Trading Partners
We have deep engagement with our retail broker trading partners. We believe we have the ability to transact in even greater volume with nearly all of our existing retail brokerage trading partners. For example, in 2020,2021, our revenue derived from the Top 100 firms (as ranked by Business Insurance) expanded faster than our overallOrganic revenue growth rate of 20%22.4%. Our ability to deepen and broaden relationships with our retail broker trading partners and increase sales is dependent upon a number of factors, including client satisfaction with our distribution reach and our product capabilities, competition, pricing, economic conditions, and spending on our product offerings.
Build our National Binding Authority Business
We believe there is substantial opportunity to continue to grow our binding authority business,Binding Authority Specialty, as we believe that both M&A consolidation and panel consolidation are in nascent stages in the binding authority market. Our ability to grow our binding authority businessBinding Authority Specialty is dependent upon a number of factors, including the quality of our services and product offerings, marketing and sales efforts to drive new business prospects and execution, new product offerings, the pricing and quality of our competitors’ offerings, and the growth in demand of the insurance products.
Invest in Operation and Growth
We have invested heavily invested in building a durable business that is able to adapt to the continuously evolving E&S market and intend to continue to do so. We are focused on enhancing the breadth of our product offerings as well as developing and launching new solutions to address the evolving needs of the specialty insurance industry. Our future success is dependent on our ability to successfully develop, market, and sell existing and new products to both new and existing trading partners.
Generate Commission Regardless of the State of the Specialty Insurance Market
We generateearn commissions, which are calculated as a percentage of the total insurance policy premium, and fees. A softening ofChanges in the insurance market or specialty lines that are our focus, characterized by a period of decliningincreasing (or declining) premium rates, could negativelypositively (or negatively) impact our profitability.
Leverage the Growth of the E&S Market
The growing relevance of the E&S market has been driven by the rapid emergence of large, complex, high-hazard, andhigh-hazardin 2020 and the first two quarters of 2021, with a record 3021 named storms during the 20202021 Atlantic hurricane season producing estimated damages of more than $70 billion, over 10.37.8 million acres burned through wildfires in the United States, escalating jury verdicts and social inflation, a proliferation of cyber threats, novel health risks, and the transformation of the economy to a “digital first” mode of doing business. We believe that as the complexity of the E&S market continues to escalate, wholesale brokers and managing underwriters that do not have sufficient scale, or the financial and intellectual capital to invest in the required specialty capabilities, will struggle to compete effectively. This will further the trend of market share consolidation among the wholesale firms who havewith these capabilities. We will continue to invest in our intellectual capital to innovate and offer custom solutions and products to better address changingthese evolving market fundamentals.
Address Costs of beingBeing a Public Company
As we begin to operateare in the early stages of our operation as a public company, we will be required to continue to implement changes in certain aspects of our business and develop, manage and train management level and other employees to comply with ongoing public company requirements. We will also incurhave incurred new expenses as a public company, including public reporting obligations, additional headcount, increased professional fees for accounting, proxy statements, shareholderstockholder meetings, stock exchange fees, transfer agent fees, SEC and FINRA filing fees, legal fees, franchise taxes and offeringinsurance expenses.
35
Summary of Financial Performance Highlights
|
| Three Months Ended June 30, |
|
| Change |
|
| Six Months Ended June 30, |
|
| Change |
| ||||||||||||||||||||
(in thousands, except percentages and per share data) |
| 2022 |
|
| 2021 |
|
| $ |
|
| % |
|
| 2022 |
|
| 2021 |
|
| $ |
|
| % |
| ||||||||
GAAP financial measures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total revenue |
| $ | 491,292 |
|
| $ | 390,012 |
|
| $ | 101,280 |
|
|
| 26.0 | % |
| $ | 878,182 |
|
| $ | 701,470 |
|
| $ | 176,712 |
|
|
| 25.2 | % |
Compensation and benefits |
|
| 310,058 |
|
|
| 236,801 |
|
|
| 73,257 |
|
|
| 30.9 |
|
|
| 584,331 |
|
|
| 451,287 |
|
|
| 133,044 |
|
|
| 29.5 |
|
General and administrative |
|
| 48,495 |
|
|
| 30,685 |
|
|
| 17,810 |
|
|
| 58.0 |
|
|
| 90,860 |
|
|
| 58,230 |
|
|
| 32,630 |
|
|
| 56.0 |
|
Total operating expenses |
|
| 385,764 |
|
|
| 297,750 |
|
|
| 88,014 |
|
|
| 29.6 |
|
|
| 729,267 |
|
|
| 569,365 |
|
|
| 159,902 |
|
|
| 28.1 |
|
Operating income |
|
| 105,528 |
|
|
| 92,262 |
|
|
| 13,266 |
|
|
| 14.4 |
|
|
| 148,915 |
|
|
| 132,105 |
|
|
| 16,810 |
|
|
| 12.7 |
|
Net income |
|
| 70,120 |
|
|
| 63,407 |
|
|
| 6,713 |
|
|
| 10.6 |
|
|
| 88,196 |
|
|
| 59,606 |
|
|
| 28,590 |
|
|
| 48.0 |
|
Net income attributable to Ryan Specialty Holdings, Inc. |
|
| 24,501 |
|
|
| 63,407 |
|
|
| (38,906 | ) |
|
| (61.4 | ) |
|
| 31,412 |
|
|
| 57,156 |
|
|
| (25,744 | ) |
|
| (45.0 | ) |
Compensation and benefits |
|
| 63.1 | % |
|
| 60.7 | % |
|
|
|
|
|
|
|
| 66.5 | % |
|
| 64.3 | % |
|
|
|
|
|
| ||||
General and administrative |
|
| 9.9 | % |
|
| 7.9 | % |
|
|
|
|
|
|
|
| 10.3 | % |
|
| 8.3 | % |
|
|
|
|
|
| ||||
Net income margin |
|
| 14.3 | % |
|
| 16.3 | % |
|
|
|
|
|
|
|
| 10.0 | % |
|
| 8.5 | % |
|
|
|
|
|
| ||||
Earnings per share (3) |
| $ | 0.23 |
|
|
|
|
|
|
|
|
|
|
| $ | 0.30 |
|
|
|
|
|
|
|
|
|
| ||||||
Diluted earnings per share (3) |
| $ | 0.22 |
|
|
|
|
|
|
|
|
|
|
| $ | 0.28 |
|
|
|
|
|
|
|
|
|
| ||||||
Non-GAAP financial measures* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Organic revenue growth rate |
|
| 22.3 | % |
|
| 28.5 | % |
|
|
|
|
|
|
|
| 21.3 | % |
|
| 23.9 | % |
|
|
|
|
|
| ||||
Adjusted compensation and benefits |
| $ | 280,827 |
|
| $ | 220,495 |
|
| $ | 60,332 |
|
|
| 27.4 | % |
| $ | 522,157 |
|
| $ | 412,862 |
|
| $ | 109,295 |
|
|
| 26.5 | % |
Adjusted compensation and |
|
| 57.2 | % |
|
| 56.5 | % |
|
|
|
|
|
|
|
| 59.5 | % |
|
| 58.9 | % |
|
|
|
|
|
| ||||
Adjusted general and |
| $ | 44,390 |
|
| $ | 29,030 |
|
| $ | 15,360 |
|
|
| 52.9 | % |
| $ | 82,690 |
|
| $ | 53,717 |
|
| $ | 28,973 |
|
|
| 53.9 | % |
Adjusted general and |
|
| 9.0 | % |
|
| 7.4 | % |
|
|
|
|
|
|
|
| 9.4 | % |
|
| 7.7 | % |
|
|
|
|
|
| ||||
Adjusted EBITDAC |
| $ | 166,075 |
|
| $ | 140,487 |
|
| $ | 25,588 |
|
|
| 18.2 | % |
| $ | 273,335 |
|
| $ | 234,891 |
|
| $ | 38,444 |
|
|
| 16.4 | % |
Adjusted EBITDAC margin |
|
| 33.8 | % |
|
| 36.0 | % |
|
|
|
|
|
|
|
| 31.1 | % |
|
| 33.5 | % |
|
|
|
|
|
| ||||
Adjusted net income |
| $ | 106,449 |
|
| $ | 92,275 |
|
| $ | 14,174 |
|
|
| 15.4 | % |
| $ | 171,214 |
|
| $ | 149,405 |
|
| $ | 21,809 |
|
|
| 14.6 | % |
Adjusted net income margin |
|
| 21.7 | % |
|
| 23.7 | % |
|
|
|
|
|
|
|
| 19.5 | % |
|
| 21.3 | % |
|
|
|
|
|
| ||||
Adjusted diluted earnings per share |
| $ | 0.39 |
|
|
|
|
|
|
|
|
|
|
| $ | 0.63 |
|
|
|
|
|
|
|
|
|
|
* For a definition and a reconciliation of Organic revenue growth rate, Adjusted compensation and benefits, Adjusted compensation and benefits expense ratio, Adjusted general and administrative expense, Adjusted general and administrative expense ratio, Adjusted EBITDAC, Adjusted EBITDAC margin, Adjusted net income, Adjusted net income margin, and Adjusted diluted earnings per share to the most directly comparable GAAP measure, see “Non-GAAP Financial Measures and Key Performance Indicators.”
36
Three months ended June 30, | Change | Six months ended June 30, | Change | |||||||||||||||||||||||||||||
(in thousands, except percentages) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||
GAAP financial measures | ||||||||||||||||||||||||||||||||
Total revenue | $ | 390,012 | $ | 246,324 | $ | 143,688 | 58.3 | % | $ | 701,470 | $ | 454,516 | $ | 246,954 | 54.3 | % | ||||||||||||||||
Compensation and benefits | 236,801 | 156,811 | 79,990 | 51.0 | 451,287 | 298,113 | 153,174 | 51.4 | ||||||||||||||||||||||||
General and administrative | 30,685 | 21,868 | 8,817 | 40.3 | 58,230 | 50,385 | 7,845 | 15.6 | ||||||||||||||||||||||||
Total operating expenses | 297,750 | 188,648 | 109,102 | 57.8 | 569,365 | 370,308 | 199,057 | 53.8 | ||||||||||||||||||||||||
Operating income | 92,262 | 57,676 | 34,586 | 60.0 | 132,105 | 84,208 | 47,897 | 56.9 | ||||||||||||||||||||||||
Net income | 63,407 | 49,887 | 13,520 | 27.1 | 59,606 | 63,205 | (3,599 | ) | (5.7 | ) | ||||||||||||||||||||||
Net income attributable to members | 63,407 | 49,941 | 13,466 | 27.0 | 57,156 | 62,259 | (5,103 | ) | (8.2 | ) | ||||||||||||||||||||||
Compensation and Benefits Expense Ratio | 60.7 | % | 63.7 | % | 64.3 | % | 65.6 | % | ||||||||||||||||||||||||
General and Administrative Expense Ratio | 7.9 | % | 8.9 | % | 8.3 | % | 11.1 | % | ||||||||||||||||||||||||
Net Income Margin | 16.3 | % | 20.3 | % | 8.5 | % | 13.9 | % | ||||||||||||||||||||||||
Non-GAAP financial measures* | ||||||||||||||||||||||||||||||||
Organic Revenue Growth Rate | 28.5 | % | 18.5 | % | 23.9 | % | 23.4 | % | ||||||||||||||||||||||||
Adjusted Compensation and Benefits Expense | $ | 220,495 | $ | 150,412 | $ | 70,083 | 46.6 | % | $ | 412,862 | $ | 285,151 | $ | 127,711 | 44.8 | % | ||||||||||||||||
Adjusted Compensation and Benefits Expense Ratio | 56.5 | % | 61.1 | % | 58.9 | % | 62.7 | % | ||||||||||||||||||||||||
Adjusted General and Administrative Expense | $ | 29,030 | $ | 17,581 | $ | 11,449 | 65.1 | % | $ | 53,717 | $ | 44,973 | $ | 8,744 | 19.4 | % | ||||||||||||||||
Adjusted General and Administrative Expense Ratio | 7.4 | % | 7.1 | % | 7.7 | % | 9.9 | % | ||||||||||||||||||||||||
Adjusted EBITDAC | $ | 140,487 | $ | 78,331 | $ | 62,156 | 79.4 | % | $ | 234,891 | $ | 124,392 | $ | 110,499 | 88.8 | % | ||||||||||||||||
Adjusted EBITDAC Margin | 36.0 | % | 31.8 | % | 33.5 | % | 27.4 | % | ||||||||||||||||||||||||
Adjusted Net Income | $ | 92,275 | $ | 53,181 | $ | 39,094 | 73.5 | % | $ | 149,405 | $ | 81,015 | $ | 68,390 | 84.4 | % | ||||||||||||||||
Adjusted Net Income Margin | 23.7 | % | 21.6 | % | 21.3 | % | 17.8 | % |
Comparison of the Three Months Ended June 30, 20212022 and 2020
Comparison of the Six Months Ended June 30, 20212022 and 2020
37
•
Components of Results of Operations
Revenue
Net Commissions and Fees
Net commissions and fees are derived primarily by commissions from our three Specialties whichand are calculated as a percentage of the total insurance policy premium. We are paid commissions for our role as an intermediary in facilitating the placement of coverage in the insurance distribution chain. In our Wholesale Brokerage and Binding Authority Specialties, we generally work with retail insurance brokers to secure insurance coverage for their clients, who are the ultimate insured party. In our Underwriting Management Specialty, we generally work with retail insurance brokers and often other wholesale brokers to secure insurance coverage for the ultimate insured party. OurNet commissions and fees are usuallygenerally calculated as a percentage of the total insurance policy premium paid by the insured and generally dependplaced, but we also receive supplemental commissions based on the typevolume placed or profitability of insurance, the carriers involved and the naturea book of the services we provide in a given transaction.business. We share a portion of these commissions with the retail insurance broker and recognize revenue on a net basis. Additionally, carriers may also pay us a contingent commission or volume-based commission, both of which represent forms of contingent or supplemental consideration associated with the placement of coverage and are based primarily on underwriting results, but may also contain considerations for only volume, growth and/or retention. Although we have compensation arrangements called contingent commissions in all three Specialties that are based in whole or in part on the underwriting performance, we do not take any direct insurance risk other than through our equity method investment in Geneva Re through Ryan Investment Holdings, LLC (“RIH”). We also receive loss mitigation and other fees, thatsome of which are not dependent on the placement of a risk.
In our Wholesale Brokerage and Binding Authority Specialties, we generally work with retail insurance brokers to secure insurance coverage for their clients, who are the ultimate insured party. Our Wholesale Brokerage and Binding Authority Specialties generate revenues through commissions and fees, as well as through supplemental commissions, which may be contingent commissions or volume-based commissions, from clients. Commission rates and fees vary depending upon several factors, which may include the amount of premium, the type of insurance coverage provided, the particular services provided to a client or carrier, and the capacity in which we act. Payment terms are consistent with current industry practice.
In our Underwriting Management Specialty, we generally work with retail insurance brokers and often other wholesale brokers to secure insurance coverage for the ultimate insured party. Our Underwriting Management Specialty generates revenues through commissions and fees and through contingent commissions from clients. Commission rates and fees vary depending upon several factors including the premium, the type of coverage, and additional services provided to the client. Payment terms are consistent with current industry practice.
Fiduciary Investment Income
38
Fiduciary investment income consists of interest earned on insurance premiums and surplus lines taxes that are held in a fiduciary capacity, in cash, and cash equivalents, until disbursed.
Expenses
Compensation and Benefits Expense
Compensation and benefits is our largest expense. It consists of (i) salary, incentives and benefits paid and payable to employees, and commissions paid and payable to our producers; and (ii) equity-based compensation associated with the grants of profits interest awards to employees executive officers and executives.directors. We operate in competitive markets for human capital and we need to maintain competitive compensation levels as we expand geographicallyin order to maintain and create new products and services.
General and Administrative Expense
General and administrative expense includes travel and entertainment expenses, office expenses, accounting, legal, insurance and other professional fees, and other costs associated with our operations. Our occupancy-related costs and professional services expenses, in particular, generally increase or decrease in relative proportion to the number of our employees and the overall size and scale of our business operations.
Amortization Expense
Amortization expense consists primarily of amortization related to intangible assets we acquired in connection with our acquisitions. Intangible assets consist of customer relationships, trade names, and internally developed software.
Interest Expense,
Interest expense, net consists of interest payable on indebtedness, amortization of the Company's interest rate cap, imputed interest on finance leases and contingent consideration, and amortization of deferred debt issuance costs.
Other(Loss) Income
In 2022, Other(loss) income loss (income) includes a change related to the TRA liability caused by an update in our blended state tax rates. In 2021, Other non-operating loss includes the change in fair value of the embedded derivatives on the redeemable Class BRedeemable Preferred Units. This change in fair value is due to the increased likelihoodoccurrence of a Realization Event in the third quarter of 2021, which iswas defined as a Qualified Public Offering or a Sale Transaction in the Onex Purchase Agreement. It also includes the change in fair value of interest rate swaps which were extinguished in 2020 and the expense associated with the extinguishment of a portion of our deferred debt issuance costs on the term debt in the first quarter of 2021.
Income Tax Expense
Income tax expense includes tax on the Company's allocable share of any net taxable income from the LLC, from certain state and local jurisdictions that impose taxes on partnerships, as well as earnings from our foreign subsidiaries andC-Corps
Non-Controlling
For the periods prior to March 31, 2021, our financial statements include the
39
Results of Operations
Below is a summary table of the financial results and
Three months ended June 30, | Change | Six months ended June 30, | Change | |||||||||||||||||||||||||||||
(in thousands, except percentages) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||
Net commissions and fees | $ | 389,846 | $ | 246,065 | $ | 143,781 | 58.4 | % | $ | 701,190 | $ | 453,150 | $ | 248,040 | 54.7 | % | ||||||||||||||||
Fiduciary investment income | 166 | 259 | (93 | ) | (35.9 | ) | 280 | 1,366 | (1,086 | ) | (79.5 | ) | ||||||||||||||||||||
Total revenue | $ | 390,012 | $ | 246,324 | $ | 143,688 | 58.3 | % | $ | 701,470 | $ | 454,516 | $ | 246,954 | 54.3 | % | ||||||||||||||||
Expenses | ||||||||||||||||||||||||||||||||
Compensation and benefits | 236,801 | 156,811 | 79,990 | 51.0 | 451,287 | 298,113 | 153,174 | 51.4 | ||||||||||||||||||||||||
General and administrative | 30,685 | 21,868 | 8,817 | 40.3 | 58,230 | 50,385 | 7,845 | 15.6 | ||||||||||||||||||||||||
Amortization | 27,319 | 9,118 | 18,201 | 199.6 | 55,113 | 19,149 | 35,964 | 187.8 | ||||||||||||||||||||||||
Depreciation | 1,222 | 851 | 371 | 43.6 | 2,422 | 1,629 | 793 | 48.7 | ||||||||||||||||||||||||
Change in contingent consideration | 1,723 | — | 1,723 | NM | 2,313 | 1,032 | 1,281 | 124.1 | ||||||||||||||||||||||||
Total operating expenses | $ | 297,750 | $ | 188,648 | $ | 109,102 | 57.8 | % | $ | 569,365 | $ | 370,308 | $ | 199,057 | 53.8 | % | ||||||||||||||||
Operating income | $ | 92,262 | $ | 57,676 | $ | 34,586 | 60.0 | % | $ | 132,105 | $ | 84,208 | $ | 47,897 | 56.9 | % | ||||||||||||||||
Interest expense | 18,986 | 6,759 | 12,227 | 180.9 | 39,031 | 15,436 | 23,595 | 152.9 | ||||||||||||||||||||||||
Income from equity method investment in related party | 353 | — | 353 | NM | 434 | 87 | 347 | NM | ||||||||||||||||||||||||
Other non-operating (loss) income | (7,890 | ) | 555 | (8,445 | ) | NM | (29,336 | ) | (2,492 | ) | (26,844 | ) | NM | |||||||||||||||||||
Income before income taxes | $ | 65,739 | $ | 51,472 | $ | 14,267 | 27.7 | % | $ | 64,172 | $ | 66,367 | $ | (2,195 | ) | (3.3 | )% | |||||||||||||||
Income tax expense | 2,332 | 1,585 | 747 | 41.7 | 4,566 | 3,162 | 1,404 | 44.4 | ||||||||||||||||||||||||
Net income | $ | 63,407 | $ | 49,887 | $ | 13,520 | 27.1 | % | $ | 59,606 | $ | 63,205 | $ | (3,599 | ) | (5.7 | )% | |||||||||||||||
Net income (loss) attributable to non-controlling interests, net of tax | — | (54 | ) | 54 | NM | 2,450 | 946 | 1,504 | 159.0 | |||||||||||||||||||||||
Net income attributable to members | $ | 63,407 | $ | 49,941 | $ | 13,466 | 27.0 | % | $ | 57,156 | $ | 62,259 | $ | (5,103 | ) | (8.2 | )% | |||||||||||||||
GAAP financial measures | ||||||||||||||||||||||||||||||||
Revenue | $ | 390,012 | $ | 246,324 | $ | 143,688 | 58.3 | % | $ | 701,470 | $ | 454,516 | $ | 246,954 | 54.3 | % | ||||||||||||||||
Compensation and benefits | 236,801 | 156,811 | 79,990 | 51.0 | 451,287 | 298,113 | 153,174 | 51.4 | ||||||||||||||||||||||||
General and administrative | 30,685 | 21,868 | 8,817 | 40.3 | 58,230 | 50,385 | 7,845 | 15.6 | ||||||||||||||||||||||||
Net Income | $ | 63,407 | $ | 49,887 | $ | 13,520 | 27.1 | % | $ | 59,606 | $ | 63,205 | $ | (3,599 | ) | (5.7 | )% | |||||||||||||||
Compensation and Benefits Expense Ratio | 60.7 | % | 63.7 | % | 64.3 | % | 65.6 | % | ||||||||||||||||||||||||
General and Administrative Expense Ratio | 7.9 | % | 8.9 | % | 8.3 | % | 11.1 | % | ||||||||||||||||||||||||
Net Income Margin | 16.3 | % | 20.3 | % | 8.5 | % | 13.9 | % | ||||||||||||||||||||||||
Non-GAAP financial measures* | ||||||||||||||||||||||||||||||||
Organic Revenue Growth Rate | 28.5 | % | 18.5 | % | 23.9 | % | 23.4 | % | ||||||||||||||||||||||||
Adjusted Compensation and Benefits Expense | $ | 220,495 | $ | 150,412 | $ | 70,083 | 46.6 | % | $ | 412,862 | $ | 285,151 | $ | 127,711 | 44.8 | % |
|
| Three Months Ended June 30, |
|
| Change |
|
| Six Months Ended June 30, |
|
| Change |
| ||||||||||||||||||||
(in thousands, except percentages and per share data) |
| 2022 |
|
| 2021 |
|
| $ |
|
| % |
|
| 2022 |
|
| 2021 |
|
| $ |
|
| % |
| ||||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net commissions and fees |
| $ | 490,227 |
|
| $ | 389,846 |
|
| $ | 100,381 |
|
|
| 25.7 | % |
| $ | 876,908 |
|
| $ | 701,190 |
|
| $ | 175,718 |
|
|
| 25.1 | % |
Fiduciary investment income |
|
| 1,065 |
|
|
| 166 |
|
|
| 899 |
|
|
| 541.6 |
|
|
| 1,274 |
|
|
| 280 |
|
|
| 994 |
|
|
| 355.0 |
|
Total revenue |
| $ | 491,292 |
|
| $ | 390,012 |
|
| $ | 101,280 |
|
|
| 26.0 | % |
| $ | 878,182 |
|
| $ | 701,470 |
|
| $ | 176,712 |
|
|
| 25.2 | % |
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Compensation and benefits |
|
| 310,058 |
|
|
| 236,801 |
|
|
| 73,257 |
|
|
| 30.9 |
|
|
| 584,331 |
|
|
| 451,287 |
|
|
| 133,044 |
|
|
| 29.5 |
|
General and administrative |
|
| 48,495 |
|
|
| 30,685 |
|
|
| 17,810 |
|
|
| 58.0 |
|
|
| 90,860 |
|
|
| 58,230 |
|
|
| 32,630 |
|
|
| 56.0 |
|
Amortization |
|
| 26,233 |
|
|
| 27,319 |
|
|
| (1,086 | ) |
|
| (4.0 | ) |
|
| 52,896 |
|
|
| 55,113 |
|
|
| (2,217 | ) |
|
| (4.0 | ) |
Depreciation |
|
| 1,229 |
|
|
| 1,222 |
|
|
| 7 |
|
|
| 0.6 |
|
|
| 2,440 |
|
|
| 2,422 |
|
|
| 18 |
|
|
| 0.7 |
|
Change in contingent consideration |
|
| (251 | ) |
|
| 1,723 |
|
|
| (1,974 | ) |
|
| (114.6 | ) |
|
| (1,260 | ) |
|
| 2,313 |
|
|
| (3,573 | ) |
| -154.5 |
| |
Total operating expenses |
| $ | 385,764 |
|
| $ | 297,750 |
|
| $ | 88,014 |
|
|
| 29.6 | % |
| $ | 729,267 |
|
| $ | 569,365 |
|
| $ | 159,902 |
|
|
| 28.1 | % |
Operating income |
| $ | 105,528 |
|
| $ | 92,262 |
|
| $ | 13,266 |
|
|
| 14.4 | % |
| $ | 148,915 |
|
| $ | 132,105 |
|
| $ | 16,810 |
|
|
| 12.7 | % |
Interest expense, net |
|
| 24,846 |
|
|
| 18,986 |
|
|
| 5,860 |
|
|
| 30.9 |
|
|
| 46,598 |
|
|
| 39,031 |
|
|
| 7,567 |
|
|
| 19.4 |
|
(Income) loss from equity method investment in related party |
|
| 16 |
|
|
| (353 | ) |
|
| 369 |
|
|
| (104.5 | ) |
|
| 558 |
|
|
| (434 | ) |
|
| 992 |
|
|
| (228.6 | ) |
Other non-operating loss (income) |
|
| (622 | ) |
|
| 7,890 |
|
|
| (8,512 | ) |
|
| (107.9 | ) |
|
| 6,898 |
|
|
| 29,336 |
|
|
| (22,438 | ) |
|
| (76.5 | ) |
Income before income taxes |
| $ | 81,288 |
|
| $ | 65,739 |
|
| $ | 15,549 |
|
|
| 23.7 | % |
| $ | 94,861 |
|
| $ | 64,172 |
|
| $ | 30,689 |
|
|
| 47.8 | % |
Income tax expense |
|
| 11,168 |
|
|
| 2,332 |
|
|
| 8,836 |
|
|
| 378.9 |
|
|
| 6,665 |
|
|
| 4,566 |
|
|
| 2,099 |
|
|
| 46.0 |
|
Net income |
| $ | 70,120 |
|
| $ | 63,407 |
|
| $ | 6,713 |
|
|
| 10.6 | % |
| $ | 88,196 |
|
| $ | 59,606 |
|
| $ | 28,590 |
|
|
| 48.0 | % |
GAAP financial measures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Revenue |
| $ | 491,292 |
|
| $ | 390,012 |
|
| $ | 101,280 |
|
|
| 26.0 | % |
| $ | 878,182 |
|
| $ | 701,470 |
|
| $ | 176,712 |
|
|
| 25.2 | % |
Compensation and benefits |
|
| 310,058 |
|
|
| 236,801 |
|
|
| 73,257 |
|
|
| 30.9 |
|
|
| 584,331 |
|
|
| 451,287 |
|
|
| 133,044 |
|
|
| 29.5 |
|
General and administrative |
|
| 48,495 |
|
|
| 30,685 |
|
|
| 17,810 |
|
|
| 58.0 |
|
|
| 90,860 |
|
|
| 58,230 |
|
|
| 32,630 |
|
|
| 56.0 |
|
Net income |
| $ | 70,120 |
|
| $ | 63,407 |
|
| $ | 6,713 |
|
|
| 10.6 | % |
| $ | 88,196 |
|
| $ | 59,606 |
|
| $ | 28,590 |
|
|
| 48.0 | % |
Compensation and benefits expense ratio |
|
| 63.1 | % |
|
| 60.7 | % |
|
|
|
|
|
|
|
| 66.5 | % |
|
| 64.3 | % |
|
|
|
|
|
| ||||
General and administrative expense ratio |
|
| 9.9 | % |
|
| 7.9 | % |
|
|
|
|
|
|
|
| 10.3 | % |
|
| 8.3 | % |
|
|
|
|
|
| ||||
Net income margin |
|
| 14.3 | % |
|
| 16.3 | % |
|
|
|
|
|
|
|
| 10.0 | % |
|
| 8.5 | % |
|
|
|
|
|
| ||||
Earnings per share |
| $ | 0.23 |
|
|
|
|
|
|
|
|
|
|
| $ | 0.30 |
|
|
|
|
|
|
|
|
|
| ||||||
Diluted earnings per share |
| $ | 0.22 |
|
|
|
|
|
|
|
|
|
|
| $ | 0.28 |
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, |
|
| Change |
|
| Six Months Ended June 30, |
|
| Change |
| ||||||||||||||||||||
(in thousands, except percentages and per share data) |
| 2022 |
|
| 2021 |
|
| $ |
|
| % |
|
| 2022 |
|
| 2021 |
|
| $ |
|
| % |
| ||||||||
Non-GAAP financial measures* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Organic revenue growth rate |
|
| 22.3 | % |
|
| 28.5 | % |
|
|
|
|
|
|
|
| 21.3 | % |
|
| 23.9 | % |
|
|
|
|
|
| ||||
Adjusted compensation and benefits expense |
| $ | 280,827 |
|
| $ | 220,495 |
|
| $ | 60,332 |
|
|
| 27.4 | % |
| $ | 522,157 |
|
| $ | 412,862 |
|
| $ | 109,295 |
|
|
| 26.5 | % |
Adjusted compensation and benefits expense ratio |
|
| 57.2 | % |
|
| 56.5 | % |
|
|
|
|
|
|
|
| 59.5 | % |
|
| 58.9 | % |
|
|
|
|
|
| ||||
Adjusted general and administrative expense |
| $ | 44,390 |
|
| $ | 29,030 |
|
| $ | 15,360 |
|
|
| 52.9 | % |
| $ | 82,690 |
|
| $ | 53,717 |
|
| $ | 28,973 |
|
|
| 53.9 | % |
Adjusted general and administrative expense ratio |
|
| 9.0 | % |
|
| 7.4 | % |
|
|
|
|
|
|
|
| 9.4 | % |
|
| 7.7 | % |
|
|
|
|
|
| ||||
Adjusted EBITDAC |
| $ | 166,075 |
|
| $ | 140,487 |
|
| $ | 25,588 |
|
|
| 18.2 | % |
| $ | 273,335 |
|
| $ | 234,891 |
|
| $ | 38,444 |
|
|
| 16.4 | % |
Adjusted EBITDAC margin |
|
| 33.8 | % |
|
| 36.0 | % |
|
|
|
|
|
|
|
| 31.1 | % |
|
| 33.5 | % |
|
|
|
|
|
| ||||
Adjusted net income |
| $ | 106,449 |
|
| $ | 92,275 |
|
| $ | 14,174 |
|
|
| 15.4 | % |
| $ | 171,214 |
|
| $ | 149,405 |
|
| $ | 21,809 |
|
|
| 14.6 | % |
Adjusted net income margin |
|
| 21.7 | % |
|
| 23.7 | % |
|
|
|
|
|
|
|
| 19.5 | % |
|
| 21.3 | % |
|
|
|
|
|
| ||||
Adjusted diluted earnings per share |
| $ | 0.39 |
|
|
|
|
|
|
|
|
|
|
| $ | 0.63 |
|
|
|
|
|
|
|
|
|
|
* These measures are Non-GAAP. Please refer to the section entitled “Non-GAAP Financial Measures and Key Performance Indicators” below for definitions and reconciliations to the most directly comparable GAAP measure.
40
Three months ended June 30, | Change | Six months ended June 30, | Change | |||||||||||||||||||||||||||||
(in thousands, except percentages) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||
Adjusted Compensation and Benefits Expense Ratio | 56.5 | % | 61.1 | % | 58.9 | % | 62.7 | % | ||||||||||||||||||||||||
Adjusted General and Administrative Expense | $ | 29,030 | $ | 17,581 | $ | 11,449 | 65.1 | % | $ | 53,717 | $ | 44,973 | $ | 8,744 | 19.4 | % | ||||||||||||||||
Adjusted General and Administrative Expense Ratio | 7.4 | % | 7.1 | % | 7.7 | % | 9.9 | % | ||||||||||||||||||||||||
Adjusted EBITDAC | $ | 140,487 | $ | 78,331 | $ | 62,156 | 79.4 | % | $ | 234,891 | $ | 124,392 | $ | 110,499 | 88.8 | % | ||||||||||||||||
Adjusted EBITDAC Margin | 36.0 | % | 31.8 | % | 33.5 | % | 27.4 | % | ||||||||||||||||||||||||
Adjusted Net Income | $ | 92,275 | $ | 53,181 | $ | 39,094 | 73.5 | % | $ | 149,405 | $ | 81,015 | $ | 68,390 | 84.4 | % | ||||||||||||||||
Adjusted Net Income Margin | 23.7 | % | 21.6 | % | 21.3 | % | 17.8 | % |
Comparison of the Three Months Ended June 30, 20212022 and 2020
Revenue
Net Commissions and Fees
Net commissions and fees increased by $143.8$100.4 million or 58.4%25.7% from $246.1$389.8 million to $389.8$490.2 million for the three months ended June 30, 20212022 as compared to the same period in the prior year. The two main drivers of the revenue increase are 30.3%22.3% of organic revenue growth and 2.8% growth from the All Risks AcquisitionKeystone and 28.5% of organic revenue growth.
Three months ended June 30, | ||||||||||||||||||||||||
(in thousands, except percentages) | 2021 | % of total | 2020 | % of total | Change | |||||||||||||||||||
Wholesale Brokerage | $ | 255,959 | 65.7 | % | $ | 172,118 | 70.0 | % | $ | 83,841 | 48.7 | % | ||||||||||||
Binding Authorities | 53,596 | 13.7 | 31,561 | 12.8 | 22,035 | 69.8 | ||||||||||||||||||
Underwriting Management | 80,291 | 20.6 | 42,386 | 17.2 | 37,905 | 89.4 | ||||||||||||||||||
Total Net commissions and fees | $ | 389,846 | $ | 246,065 | $ | 143,781 | 58.4 | % | ||||||||||||||||
|
| Three Months Ended June 30, |
|
|
|
|
|
|
| |||||||||||||||
(in thousands, except percentages) |
| 2022 |
|
| % of |
|
| 2021 |
|
| % of |
|
| Change |
| |||||||||
Wholesale Brokerage |
| $ | 329,225 |
|
|
| 67.2 | % |
| $ | 255,959 |
|
|
| 65.7 | % |
| $ | 73,266 |
|
|
| 28.6 | % |
Binding Authorities |
|
| 59,751 |
|
|
| 12.2 |
|
|
| 53,596 |
|
|
| 13.7 |
|
|
| 6,155 |
|
|
| 11.5 |
|
Underwriting Management |
|
| 101,251 |
|
|
| 20.6 |
|
|
| 80,291 |
|
|
| 20.6 |
|
|
| 20,960 |
|
|
| 26.1 |
|
Total net commissions and fees |
| $ | 490,227 |
|
|
|
|
| $ | 389,846 |
|
|
|
|
| $ | 100,381 |
|
|
| 25.7 | % |
Wholesale Brokerage net commissions and fees increased by $83.8$73.3 million or 48.7%28.6% period-over-period, primarily due to strong organic growth within this specialty for the quarter as well as contributions from the All Risks Acquisition.
Binding Authority net commissions and fees increased by $22.0$6.2 million or 69.8%11.5% period-over-period, primarily due to strong organic growth within the specialty andfor the quarter as well as contributions from the All Risks Acquisition.
Underwriting Management net commissions and fees increased by $37.9$21.0 million or 89.4%26.1% period-over-period, primarily due to strong organic growth within the specialty andfor the quarter as well as contributions from the All Risks Acquisition.
The following table sets forth our revenue by type of commission and fees:
Three months ended June 30, | ||||||||||||||||||||||||
(in thousands, except percentages) | 2021 | % of total | 2020 | % of total | Change | |||||||||||||||||||
Net commissions and policy fees | $ | 378,120 | 97.0 | % | $ | 236,184 | 96.0 | % | $ | 141,936 | 60.1 | % | ||||||||||||
Supplemental and contingent commissions | 6,146 | 1.6 | 6,937 | 2.8 | (791 | ) | (11.4 | ) | ||||||||||||||||
Loss mitigation and other fees | 5,580 | 1.4 | 2,944 | 1.2 | 2,636 | 89.5 | ||||||||||||||||||
Total Net commissions and fees | $ | 389,846 | $ | 246,065 | $ | 143,781 | 58.4 | % | ||||||||||||||||
|
| Three Months Ended June 30, |
|
|
|
|
|
|
| |||||||||||||||
(in thousands, except percentages) |
| 2022 |
|
| % of |
|
| 2021 |
|
| % of |
|
| Change |
| |||||||||
Net commissions and policy fees |
| $ | 468,413 |
|
|
| 95.6 | % |
| $ | 378,120 |
|
|
| 97.0 | % |
| $ | 90,293 |
|
|
| 23.9 | % |
Supplemental and contingent commissions |
|
| 13,953 |
|
|
| 2.8 |
|
|
| 6,146 |
|
|
| 1.6 |
|
|
| 7,807 |
|
|
| 127.0 |
|
Loss mitigation and other fees |
|
| 7,861 |
|
|
| 1.6 |
|
|
| 5,580 |
|
|
| 1.4 |
|
|
| 2,281 |
|
|
| 40.9 |
|
Total net commissions and fees |
| $ | 490,227 |
|
|
|
|
| $ | 389,846 |
|
|
|
|
| $ | 100,381 |
|
|
| 25.7 | % |
Net commissions and policy fees grew 60.1% just ahead of23.9%, slightly lower than the overall net commissions and fee revenue growth of 58.4%25.7% for the three months ended June 30, 20212022 as compared to the same period in the prior year. The main drivers of this growth continue to be the acquisition of new business and expansion of ongoing client relationships in response to the increasing demand for new, complex E&S products as well as the inflow of risks from the admitted market into the E&S market. In aggregate, we experienced marginal but not material increases instable commission rates. Net commissions and policy fees continue to represent more than 90% of total net commissions and fees period-over-period.
Supplemental and contingent commissions decreased 11.4%increased 127.0% period-over-period driven by the performance of risks placed on eligible business partially offset by the addition to the supplemental and contingent commissions contributed by the All Risks Acquisition. Supplemental and contingent commissions continue to represent less than 10% of total commissions and fees period-over-period.
Loss mitigation and other fees grew 89.5%40.9% period-over-period primarily due to increased capital markets activitycaptive management and other risk management service fees from the placement of alternative risk insurance solutions in 2021. These fees continue to represent less than 2% of total net commissions and fees period-over-period.
Expenses
Compensation and Benefits Expense
Compensation and benefits expense increased by $80.0$73.3 million or 51.0%30.9% from $156.8$236.8 million to $236.8$310.1 million for the three months ended June 30, 20212022 compared to the same period in 2020.2021. The following were the principal drivers of this increase:
41
The increase in total Net CommissionsCompensation and Fees discussed above; and
The net impact of revenue growth and the factors above resulted in a Compensation and Benefits Expense Ratio improvementbenefits expense ratio increase of 3.0%2.4% from 63.7%60.7% to 60.7%63.1% period-over-period.
We expect to continue to experience a general rise in commissions, salaries, incentives and benefits expense commensurate with our expected growth in business volume, revenue, and headcount.
General and Administrative Expense
General and administrative expense increased by $8.8$17.8 million or 40.3%58.0% from $21.9$30.7 million to $30.7$48.5 million for the three months ended June 30, 20212022 as compared to the same period in the prior year. A main driver of this increase was $2.9$7.8 million of increased travel and entertainment expense as travel restrictions associated with the pandemic began to lift compared to the same period in 2020.2021. Insurance expense contributed $2.4 million to the period-over-period increase due to increased costs associated with being a public company. Lastly, we recognized an additional $2.0 million of Restructuring costs within General and administrative expense for the three months ended June 30, 2022 compared to the same period in the prior year. The remaining increase of $5.6 million was driven by growth in the business. Such expenses incurred to accommodate both organic and inorganic revenue expansion and the All Risks Acquisition, such asgrowth include IT, professional services, occupancy, and insurance, partially offset by a $3.1 million decrease in acquisition-related expense.
Amortization Expense
Amortization expense increaseddecreased by $18.2$1.1 million or 199.6%(4.0)% from $9.1$27.3 million to $27.3$26.2 million for the three months ended June 30, 20212022 compared to the same period in the prior year. The main driver was approximately $19.2 million of amortization fromfor the decrease is certain previously acquired intangibles from the All Risks Acquisition.intangible assets became fully amortized. Our intangible assets increaseddecreased by $401.7$28.1 million when comparing the balance as of June 30, 20212022 to the balance as compared toof June 30, 2020.
Interest Expense,
Interest expense, net increased $12.2$5.9 million or 180.9%30.9% from $6.8$19.0 million to $19.0$24.8 million for the three months ended June 30, 20212022 compared to the same period in the prior year. The main driver of the change in interestInterest expense, net for the three months ended June 30, 20212022 was driven by the $890.2issuance of $400.0 million increase in total debt, which was undertaken in connectionof senior secured notes on February 3, 2022. On April 7, 2022 the Company entered into an interest rate cap agreement to manage its exposure to interest rate fluctuations related to the Company’s Term Loan for an upfront cost of $25.5 million. The interest rate cap has a $1,000.0 million notional amount, 2.75% strike, and terminates on December 31, 2025. For the twelve months ended December 31, 2022 we expect to incur approximately $4.0 million of interest expense associated with the All Risks Acquisition completed in September 2020.
Other(Loss) Income
Other(loss) income loss (income) decreased by $8.4$8.5 million to a lossincome of $7.9$0.6 million for the three months ended June 30, 20212022 as compared to incomea loss of $0.5$7.9 million in the same period in the prior year. The main driver ofFor the three months ended June 30, 2022 Other non-operating loss was(income) includes a $(0.5) million change in the TRA liability caused by an update in our blended state tax rates. For the three months ended June 30, 2021 Other non-operating loss includes a $8.0 million change in the fair value of the embedded derivatives of our redeemable Class BRedeemable Preferred Units. This embedded derivative is a make whole penalty payable if the redeemable Class B Preferred Units are redeemed in less than five years from the anniversary of the issuance date. We issued 150,000 of redeemable Class B Preferred Units containing this make whole penalty in 2018 and 110,000 of redeemable Class B Preferred Units containing this make whole penalty in 2020. The resulting loss recorded as of June 30, 2021 is primarily related to the recognition of a charge that represents the present value of a probability weighted expense for the make whole penalty of both issuances of redeemable Class B Preferred Units.
42
Income beforeBefore Income Taxes
Due to the factors above, Income (loss) before income taxes increased $14.3$15.5 million or 27.7% from a profit of $51.5$65.7 million to a profit of $65.7$81.3 million for the three months ended June 30, 20212022 compared to the same period in the prior year.
Income Tax Expense
Income tax expense increased $0.7$8.8 million or 41.7% from $1.6$2.3 million to $2.3$11.2 million for the three months ended June 30, 20212022 as compared to the same period in the prior year due to an increase in the Company’s allocable share of net taxable income from the LLC for the three months ended June 30, 2022. The Company did not have net taxable income from the LLC for the three months ended June 30, 2021 as a resultthe Company was formed for the purposes of increased earningsthe IPO, which occurred in our foreign subsidiaries subject to entity level taxation.
Net Income
Net income increased $13.5$6.7 million or 27.1% from a profit of $49.9$63.4 million to a profit of $63.4$70.1 million for the three months ended June 30, 20212022 compared to the same period in the prior year as a result of the factors described above.
Comparison of the Six Months Ended June 30, 20212022 and 2020
Revenue
Net Commissions and Fees
Net commissions and fees increased by $248.0$175.7 million or 54.7%25.1% from $453.2$701.2 million to $701.2$876.9 million for the six months ended June 30, 2022 as compared to the same period in 2021 period-over-period.the prior year. The two main drivers of the revenue increase are 30.8%21.3% of organic revenue growth and 3.1% growth from the All Risks AcquisitionKeystone and 23.9% of organic revenue growth.
Six months ended June 30, | ||||||||||||||||||||||||
(in thousands, except percentages) | 2021 | % of total | 2020 | % of total | Change | |||||||||||||||||||
Wholesale Brokerage | $ | 447,083 | 63.8 | % | $ | 306,222 | 67.6 | % | $ | 140,861 | 46.0 | % | ||||||||||||
Binding Authorities | 108,641 | 15.5 | 65,707 | 14.5 | 42,934 | 65.3 | ||||||||||||||||||
Underwriting Management | 145,466 | 20.7 | 81,221 | 17.9 | 64,245 | 79.1 | ||||||||||||||||||
�� | ||||||||||||||||||||||||
Total Net commissions and fees | $ | 701,190 | $ | 453,150 | $ | 248,040 | 54.7 | % | ||||||||||||||||
|
| Six Months Ended June 30, |
|
|
|
|
|
|
| |||||||||||||||
(in thousands, except percentages) |
| 2022 |
|
| % of |
|
| 2021 |
|
| % of |
|
| Change |
| |||||||||
Wholesale Brokerage |
| $ | 574,051 |
|
|
| 65.5 | % |
| $ | 447,083 |
|
|
| 63.8 | % |
| $ | 126,968 |
|
|
| 28.4 | % |
Binding Authorities |
|
| 122,744 |
|
|
| 14.0 |
|
|
| 108,641 |
|
|
| 15.5 |
|
|
| 14,103 |
|
|
| 13.0 |
|
Underwriting Management |
|
| 180,113 |
|
|
| 20.5 |
|
|
| 145,466 |
|
|
| 20.7 |
|
|
| 34,647 |
|
|
| 23.8 |
|
Total Net commissions and fees |
| $ | 876,908 |
|
|
|
|
| $ | 701,190 |
|
|
|
|
| $ | 175,718 |
|
|
| 25.1 | % |
Wholesale Brokerage net commissions and fees increased by $140.9$127.0 million or 46.0%28.4% period-over-period, primarily due to strong organic growth within this specialty for the quarter as well as contributions from the All Risks Acquisition.
Binding Authority net commissions and fees increased by $42.9$14.1 million or 65.3%13.0% period-over-period, primarily due to strong organic growth within this specialty as well as contributions from the All Risks Acquisition.
Underwriting Management net commissions and fees increased by $34.6 million or 23.8% period-over-period, primarily due to strong organic growth within the specialty for the quarter as well as contributions from the Keystone acquisition.
The following table sets forth our revenue by type of commission and fees:
Six months ended June 30, | ||||||||||||||||||||||||
(in thousands, except percentages) | 2021 | % of total | 2020 | % of total | Change | |||||||||||||||||||
Net commissions and policy fees | $ | 668,661 | 95.3 | % | $ | 426,447 | 94.1 | % | $ | 242,214 | 56.8 | % | ||||||||||||
Supplemental and contingent commissions | 21,536 | 3.1 | 20,502 | 4.5 | 1,034 | 5.0 | ||||||||||||||||||
Loss mitigation and other fees | 10,993 | 1.6 | 6,201 | 1.4 | 4,792 | 77.3 | ||||||||||||||||||
Total Net commissions and fees | $ | 701,190 | $ | 453,150 | $ | 248,040 | 54.7 | % | ||||||||||||||||
|
| Six Months Ended June 30, |
|
|
|
|
|
|
| |||||||||||||||
(in thousands, except percentages) |
| 2022 |
|
| % of |
|
| 2021 |
|
| % of |
|
| Change |
| |||||||||
Net commissions and policy fees |
| $ | 827,479 |
|
|
| 94.4 | % |
| $ | 668,661 |
|
|
| 95.3 | % |
| $ | 158,818 |
|
|
| 23.8 | % |
Supplemental and contingent commissions |
|
| 34,051 |
|
|
| 3.9 |
|
|
| 21,536 |
|
|
| 3.1 |
|
|
| 12,515 |
|
|
| 58.1 |
|
Loss mitigation and other fees |
|
| 15,379 |
|
|
| 1.8 |
|
|
| 10,993 |
|
|
| 1.6 |
|
|
| 4,386 |
|
|
| 39.9 |
|
Total net commissions and fees |
| $ | 876,908 |
|
|
|
|
| $ | 701,190 |
|
|
|
|
| $ | 175,718 |
|
|
| 25.1 | % |
43
Net commissions and policy fees increased 56.8% just ahead ofgrew 23.8%, slightly lower than the overall total net commissions and feesfee revenue growth of 54.7% period-over-period. This25.1% for the six months ended June 30, 2022 as compared to the same period in the prior year. The main drivers of this growth was driven by increased volume from bothcontinue to be the acquisition of new business and existing clientsexpansion of ongoing client relationships in response to the increasing demand for new, complex E&S products. Multiple classesproducts as well as the inflow of risk experienced year-over-year premium rate increases, which drives commission revenue growth that is typically calculated as a percentage of total insurance policy premium.risks from the admitted market into the E&S market. In aggregate, we experienced marginal but not material increases instable commission rates. Net commissions and policy fees continue to represent more than 90.0% of total net commissions and fees period-over-period.
Supplemental and contingent commissions increased 5.0%58.1% period-over-period driven by the performance of risks placed on eligible business and the additional supplemental and contingent commissions contributed by the All Risks Acquisition. Supplemental and contingent commissions continue to represent less than 10.0% of total commissions and fees period-over-period.
Loss mitigation and other fees grew 77.3%39.9% period-over-period primarily due to increased capital markets activitycaptive management and other risk management service fees from the placement of alternative risk insurance solutions in 2021. These fees continue to represent less than 2.0% of total net commissions and fees period-over-period.
Expenses
Compensation and Benefits Expense
Compensation and benefits expense increased by $153.2$133.0 million or 51.4%29.5% from $298.1$451.3 million to $451.3$584.3 million for the six months ended June 30, 2021 as2022 compared to the same period in 2020.2021. The following were the principal drivers of this increase:
The increase in total net commissionsCompensation and fees discussed above; and
The net impact of revenue growth and the factors above resulted in a Compensation and Benefits Expense Ratio improvementbenefits expense ratio increase of 1.3%2.2% from 65.6%64.3% to 64.3%66.5% period-over-period.
We expect to continue to experience a general rise in commissions, salaries, incentives and benefits expense commensurate with our expected growth in business volume, revenue, and headcount.
General and Administrative Expense
General and administrative expense increased by $7.8$32.6 million or 15.6% period-over-period56.0% from $50.4$58.2 million to $58.2$90.9 million for the six months ended June 30, 2022 as compared to the same period in the prior year. A main driver of this increase was $13.4 million of increased travel and entertainment expense as travel restrictions associated with the pandemic began to lift compared to the same period in 2021. Insurance expense contributed $4.6 million to the period-over-period increase due to increased costs associated with being a resultpublic company. Lastly, we recognized an additional $5.0 million of revenue expansionRestructuring costs within General and administrative expense for the All Risks Acquisition.six months ended June 30, 2022 compared to the same period in the prior year. The remaining increase of $9.6 million was driven by growth in the business. Such expenses incurred to accommodate both organic and inorganic revenue growth include IT, occupancy, insurance and professional services.
Amortization Expense
Amortization expense increaseddecreased by $36.0$2.2 million or 187.8%(4.0)% from $19.1$55.1 million to $55.1$52.9 million for the six months ended June 30, 2021 as2022 compared to the same period in 2020.the prior year. The main driver was approximately $38.4 million of amortization fromfor the decrease is certain previously acquired intangibles from the All Risks Acquisition.intangible assets became
44
fully amortized. Our intangible assets increaseddecreased by $401.7$28.1 million when comparing the balance as of June 30, 2021 as compared2022 to the balance as of June 30, 2020.
Interest Expense,
Interest expense, net increased $23.6$7.6 million or 152.9%19.4% from $15.4$39.0 million to $39.0 million period-over-period. The main driver of the change in interest expense for the six months ended June 30, 2021 was driven by the $890.2 million increase in total debt, which was undertaken in connection with the All Risks Acquisition completed in September 2020.
Other Non-Operating Loss (Income)
Other non-operating loss (income) decreased by $22.4 million to $6.9 million for the six months ended June 30, 2022 as compared to a loss of $29.3 million in the same period in the prior year. For the six months ended June 30, 2022 Other non-operating loss includes a $7.2 million charge related to the change in the TRA liability caused by a change in our blended state tax rates. For the six months ended June 30, 2021 Other non-operating loss includes a $20.6 million change in the fair value of the embedded derivatives of our redeemable Class BRedeemable Preferred Units of $20.6 million. This embedded derivative is a make whole penalty payable if the redeemable Class B Preferred Units are redeemed in less than five years. We issued 150,000 of redeemable Class B Preferred Units containing this make whole penalty in 2018 and 110,000 of redeemable Class B Preferred Units containing this make whole penalty in 2020. The second driver of this increase isas well as $8.6 million of debt issuance costs written off due to the extinguishment of a portion of the term debt due to the repricing in the first quarter of 2021 which is partially offset byconnection with a loss on the interest rates swaps for the six months ended June 30, 2020, which were settled during 2020.
Income beforeBefore Income Taxes
Due to the factors above, Income before income taxes decreased $2.2increased $30.7 million or 3.3% from $66.4$64.2 million to $64.2$94.9 million for the six months ended June 30, 2022 compared to the same period in the prior year.
Income Tax Expense
Income tax expense increased $2.1 million from $4.6 million to $6.7 million for the six months ended June 30, 2022 as compared to the same period in the prior year due to an increase in the Company’s allocable share of net taxable income from the LLC for the six months ended June 30, 2022, offset by an increase in the Company's state tax rate resulting in a tax benefit recognized related to the increase in our Deferred tax assets in the first quarter 2022. The Company did not have net taxable income from the LLC for the six months ended June 30, 2021 as the Company was formed for the purposes of the IPO, which occurred in the third quarter of 2021.
Net Income
Net income increased $28.6 million from $59.6 million to $88.2 million for the six months ended June 30, 2022 compared to the same period in 2020.
Non-GAAP
In assessing the performance of our business, we use non-GAAP financial measures that are derived from our consolidated financial information, but which are not presented in our consolidated financial statements prepared in accordance with GAAP. We consider these non-GAAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures, tax positions, depreciation, amortization and certain other items that we believe are not representative of our core business. We regularly reviewuse the followingNon-GAAPwhen assessing performance: Organic Revenue Growth Rate, Adjusted Compensationfor business planning purposes, in measuring our performance relative to that of our competitors, to help investors to understand the nature of our growth, and Benefits Expense, Adjusted Compensation and Benefits Expense Ratio, Adjusted General and Administrative Expense, Adjusted General and Administrative Expense Ratio, Adjusted EBITDAC, Adjusted EBITDAC Margin, Adjusted Net Income, and Adjusted Net Income Margin. Our useto enable investors to evaluate the run-rate performance ofNon-GAAPfinancial measures may vary from the use of similar terms by other companies in our industry and accordingly may not be comparable to similarly titled measures used by other companies. As a result, consolidated financial statements.
Organic Revenue Growth Rate
Organic Revenue Growth Rate is aNon-GAAPmeasure that we use to help management and investors understand and evaluate therevenue growth of our business without the impacts of acquisitions, which affects the comparability of results from period to period. The Organic Revenue Growth Raterate represents the percentage change in revenue, as compared to the same period for the year prior, adjusted for revenue attributable to recent acquisitions during the first 12 months of RSG’sRyan Specialty’s ownership, and other adjustments such as contingent commissions, fiduciary investment income, and the impact of changes in foreign exchange rates.
45
A reconciliation of Organic Revenue Growth Raterevenue growth rate to Total Revenue Growth Rate,revenue growth rate, the most directly comparable GAAP measure, for each of the periods indicated is as follows (in percentages):
|
| Three Months Ended June 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Total revenue growth rate (GAAP) (1) |
|
| 26.0 | % |
|
| 58.3 | % |
Less: Mergers and acquisitions (2) |
|
| (2.8 | ) |
|
| (30.3 | ) |
Change in other (3) |
|
| (0.9 | ) |
|
| 0.5 |
|
Organic revenue growth rate (Non-GAAP) |
|
| 22.3 | % |
|
| 28.5 | % |
Three months ended June 30, | ||||||||
2021 | 2020 | |||||||
Total Revenue Growth Rate (GAAP) (1) | 58.3 | % | 21.9 | % | ||||
Less: Mergers and Acquisitions (2) | (30.3 | )% | (4.1 | )% | ||||
Change in Other (3) | 0.5 | % | 0.7 | % | ||||
Organic Revenue Growth Rate (Non-GAAP) | 28.5 | % | 18.5 | % | ||||
Six months ended June 30, | ||||||||
2021 | 2020 | |||||||
Total Revenue Growth Rate (GAAP) (1) | 54.3 | % | 29.2 | % | ||||
Less: Mergers and Acquisitions (2) | (30.8 | )% | (6.2 | )% | ||||
Change in Other (3) | 0.4 | % | 0.4 | % | ||||
Organic Revenue Growth Rate (Non-GAAP) | 23.9 | % | 23.4 | % | ||||
|
| Six Months Ended June 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Total revenue growth rate (GAAP) (1) |
|
| 25.2 | % |
|
| 54.3 | % |
Less: Mergers and acquisitions (2) |
|
| (3.1 | ) |
|
| (30.8 | ) |
Change in other (3) |
|
| (0.8 | ) |
|
| 0.4 |
|
Organic revenue growth rate (Non-GAAP) |
|
| 21.3 | % |
|
| 23.9 | % |
Adjusted Compensation and Benefits Expense and Adjusted Compensation and Benefits Expense Ratio
We believedefine Adjusted Compensation and BenefitsExpense and Adjusted Compensation and Benefits Expense Ratio provide relevant and useful information, which is widely used by analysts, investors and competitors in our industry as well as by management because it provides a clear representation of our core compensation and benefits and general and administrative expenses as well as improves comparability between periods, and eliminates the impact of the items that do not relate to the ongoing operations of the business.
46
A reconciliation of Adjusted Compensationcompensation and Benefits Expensebenefits expense and Adjusted Compensationcompensation and Benefits Expense Ratiobenefits expense ratio to Compensation and Benefits Expensebenefits expense and Compensation and Benefits Expense Ratio,benefits expense ratio, the most directly comparable GAAP measures, for each of the periods indicated, is as follows:
|
| Three Months Ended June 30, |
| |||||
(in thousands, except percentages) |
| 2022 |
|
| 2021 |
| ||
Total revenue |
| $ | 491,292 |
|
| $ | 390,012 |
|
Compensation and benefits expense |
| $ | 310,058 |
|
| $ | 236,801 |
|
Acquisition-related expense |
|
| (43 | ) |
|
| — |
|
Acquisition related long-term incentive compensation |
|
| (7,101 | ) |
|
| (9,082 | ) |
Restructuring and related expense |
|
| (547 | ) |
|
| (2,162 | ) |
Amortization and expense related to discontinued prepaid incentives |
|
| (1,760 | ) |
|
| (1,604 | ) |
Equity-based compensation |
|
| (5,676 | ) |
|
| (3,458 | ) |
Initial public offering related expense |
|
| (14,104 | ) |
|
| — |
|
Adjusted compensation and benefits expense (1) |
| $ | 280,827 |
|
| $ | 220,495 |
|
Compensation and benefits expense ratio |
|
| 63.1 | % |
|
| 60.7 | % |
Adjusted compensation and benefits expense ratio |
|
| 57.2 | % |
|
| 56.5 | % |
|
| Six Months Ended June 30, |
| |||||
(in thousands, except percentages) |
| 2022 |
|
| 2021 |
| ||
Total revenue |
| $ | 878,182 |
|
| $ | 701,470 |
|
Compensation and benefits expense |
| $ | 584,331 |
|
| $ | 451,287 |
|
Acquisition-related expense |
|
| (101 | ) |
|
| — |
|
Acquisition related long-term incentive compensation |
|
| (14,798 | ) |
|
| (18,504 | ) |
Restructuring and related expense |
|
| (705 | ) |
|
| (8,351 | ) |
Amortization and expense related to discontinued prepaid incentives |
|
| (3,542 | ) |
|
| (3,682 | ) |
Equity-based compensation |
|
| (12,480 | ) |
|
| (7,888 | ) |
Initial public offering related expense |
|
| (30,548 | ) |
|
| — |
|
Adjusted compensation and benefits expense (1) |
| $ | 522,157 |
|
| $ | 412,862 |
|
Compensation and benefits expense ratio |
|
| 66.5 | % |
|
| 64.3 | % |
Adjusted compensation and benefits expense ratio |
|
| 59.5 | % |
|
| 58.9 | % |
Three months ended June 30, | ||||||||
(in thousands, except percentages) | 2021 | 2020 | ||||||
Total Revenue | $ | 390,012 | $ | 246,324 | ||||
Compensation and Benefits Expense | $ | 236,801 | $ | 156,811 | ||||
Acquisition-related expense | — | (1,270 | ) | |||||
Acquisition related long-term incentive compensation | (9,082 | ) | (532 | ) | ||||
Restructuring and related expense | (2,162 | ) | — | |||||
Amortization and expense related to discontinued prepaid incentives | (1,604 | ) | (2,481 | ) | ||||
Equity-based compensation | (3,458 | ) | (1,624 | ) | ||||
Discontinued programs expense | — | (492 | ) | |||||
Adjusted Compensation and Benefits Expense (1) | $ | 220,495 | $ | 150,412 | ||||
Compensation and Benefits Expense Ratio (2) | 60.7 | % | 63.7 | % | ||||
Adjusted Compensation and Benefits Expense Ratio (3) | 56.5 | % | 61.1 | % | ||||
Six months ended June 30, | ||||||||
(in thousands, except percentages) | 2021 | 2020 | ||||||
Total Revenue | $ | 701,470 | $ | 454,516 | ||||
Compensation and Benefits Expense | $ | 451,287 | $ | 298,113 | ||||
Acquisition-related expense | — | (1,612 | ) | |||||
Acquisition related long-term incentive compensation | (18,504 | ) | (1,064 | ) | ||||
Restructuring and related expense | (8,351 | ) | — | |||||
Amortization and expense related to discontinued prepaid incentives | (3,682 | ) | (5,063 | ) | ||||
Equity-based compensation | (7,888 | ) | (4,731 | ) | ||||
Discontinued programs expense | — | (492 | ) | |||||
Other non-recurring expense | — | — | ||||||
Adjusted Compensation and Benefits Expense (1) | $ | 412,862 | $ | 285,151 | ||||
Compensation and Benefits Expense Ratio (2) | 64.3 | % | 65.6 | % | ||||
Adjusted Compensation and Benefits Expense Ratio (3) | 58.9 | % | 62.7 | % |
Adjusted General and Administrative Expense and Adjusted General and Administrative Expense Ratio
We believedefine Adjusted General and Administrative Expense and Adjusted General and Administrative Expense Ratio provide relevant and useful information, which is widely used by analysts, investors and competitors in our industry as well as by management because it provides a clear representation of our core general and administrative expenses as well as improves comparability between periods, and eliminates the impact of the items that do not relate to the ongoing operations of the business.
47
A reconciliation of Adjusted Generalgeneral and Administrative Expenseadministrative expense and Adjusted Generalgeneral and Administrative Expense Ratioadministrative expense ratio to General and Administrative Expenseadministrative expense and General and Administrative Expense Ratio,administrative expense ratio, the most directly comparable GAAP measures, for each of the periods indicated is as follows:
|
| Three Months Ended June 30, |
| |||||
(in thousands, except percentages) |
| 2022 |
|
| 2021 |
| ||
Total revenue |
| $ | 491,292 |
|
| $ | 390,012 |
|
General and administrative expense |
| $ | 48,495 |
|
| $ | 30,685 |
|
Acquisition-related expense |
|
| (1,600 | ) |
|
| (308 | ) |
Restructuring and related expense |
|
| (2,027 | ) |
|
| (1,012 | ) |
Other non-recurring expense |
|
| — |
|
|
| (19 | ) |
Initial public offering related expense |
|
| (478 | ) |
|
| (316 | ) |
Adjusted general and administrative expense (1) |
| $ | 44,390 |
|
| $ | 29,030 |
|
General and administrative expense ratio |
|
| 9.9 | % |
|
| 7.9 | % |
Adjusted general and administrative expense ratio |
|
| 9.0 | % |
|
| 7.4 | % |
|
| Six Months Ended June 30, |
| |||||
(in thousands, except percentages) |
| 2022 |
|
| 2021 |
| ||
Total revenue |
| $ | 878,182 |
|
| $ | 701,470 |
|
General and administrative expense |
| $ | 90,860 |
|
| $ | 58,230 |
|
Acquisition-related expense |
|
| (2,051 | ) |
|
| (2,022 | ) |
Restructuring and related expense |
|
| (4,993 | ) |
|
| (1,821 | ) |
Other non-recurring expense |
|
| — |
|
|
| (354 | ) |
Initial public offering related expense |
|
| (1,126 | ) |
|
| (316 | ) |
Adjusted general and administrative expense (1) |
| $ | 82,690 |
|
| $ | 53,717 |
|
General and administrative expense ratio |
|
| 10.3 | % |
|
| 8.3 | % |
Adjusted general and administrative expense ratio |
|
| 9.4 | % |
|
| 7.7 | % |
Three months ended June 30, | ||||||||
(in thousands, except percentages) | 2021 | 2020 | ||||||
Total Revenue | $ | 390,012 | $ | 246,324 | ||||
General and Administrative Expense | $ | 30,685 | $ | 21,868 | ||||
Acquisition-related expense | (308 | ) | (3,448 | ) | ||||
Restructuring and related expense | (1,012 | ) | (936 | ) | ||||
Discontinued programs expense | — | 140 | ||||||
Other non-recurring expense | (19 | ) | (43 | ) | ||||
IPO related expenses | (316 | ) | — | |||||
Adjusted General and Administrative Expense (1) | $ | 29,030 | $ | 17,581 | ||||
General and Administrative Expense Ratio (2) | 7.9 | % | 8.9 | % | ||||
Adjusted General and Administrative Expense Ratio (3) | 7.4 | % | 7.1 | % |
Six months ended June 30, | ||||||||
(in thousands, except percentages) | 2021 | 2020 | ||||||
Total Revenue | $ | 701,470 | $ | 454,516 | ||||
General and Administrative Expense | $ | 58,230 | $ | 50,385 | ||||
Acquisition-related expense | (2,022 | ) | (3,991 | ) | ||||
Restructuring and related expense | (1,821 | ) | (1,425 | ) | ||||
Discontinued programs expense | — | 97 | ||||||
Other non-recurring expense | (354 | ) | (93 | ) | ||||
IPO related expenses | (316 | ) | — | |||||
Adjusted General and Administrative Expense (1) | $ | 53,717 | $ | 44,973 | ||||
General and Administrative Expense Ratio (2) | 8.3 | % | 11.1 | % | ||||
Adjusted General and Administrative Expense Ratio (3) | 7.7 | % | 9.9 | % |
Adjusted EBITDAC and Adjusted EBITDAC Margin
We define Adjusted EBITDAC as Net Incomeincome before interest expense, net, income tax expense, depreciation, amortization, and change in contingent consideration, adjusted to reflect items such as (i) equity-based compensation, (ii) acquisition and restructuring related expenses, and (iii) other exceptional orCompensationcompensation and Benefits Expensebenefits expense and Adjusted Generalgeneral and Administrative Expenseadministrative expense is equivalent to Adjusted EBITDAC. The most directly comparable GAAP financial metric is Net Income.income. Adjusted EBITDAC Marginmargin is defined as Adjusted EBITDAC as a percentage of totalTotal revenue. The most comparable GAAP financial metric is Net Income Margin.
48
A reconciliation of Adjusted EBITDAC and Adjusted EBITDAC Marginmargin to Net Incomeincome and Net Income Margin,income margin, the most directly comparable GAAP measures, for each of the periods indicated is as follows:
|
| Three Months Ended June 30, |
| |||||
(in thousands, except percentages) |
| 2022 |
|
| 2021 |
| ||
Total revenue |
| $ | 491,292 |
|
| $ | 390,012 |
|
Net income |
| $ | 70,120 |
|
| $ | 63,407 |
|
Interest expense, net |
|
| 24,846 |
|
|
| 18,986 |
|
Income tax expense |
|
| 11,168 |
|
|
| 2,332 |
|
Depreciation |
|
| 1,229 |
|
|
| 1,222 |
|
Amortization |
|
| 26,233 |
|
|
| 27,319 |
|
Change in contingent consideration |
|
| (251 | ) |
|
| 1,723 |
|
EBITDAC |
| $ | 133,345 |
|
| $ | 114,989 |
|
Acquisition-related expense (1) |
|
| 1,643 |
|
|
| 308 |
|
Acquisition related long-term incentive compensation (2) |
|
| 7,101 |
|
|
| 9,082 |
|
Restructuring and related expense (3) |
|
| 2,574 |
|
|
| 3,174 |
|
Amortization and expense related to discontinued prepaid incentives (4) |
|
| 1,760 |
|
|
| 1,604 |
|
Other non-operating loss (income) (5) |
|
| (622 | ) |
|
| 7,890 |
|
Equity-based compensation (6) |
|
| 5,676 |
|
|
| 3,458 |
|
Other non-recurring expense (7) |
|
| — |
|
|
| 19 |
|
IPO related expenses (8) |
|
| 14,582 |
|
|
| 316 |
|
(Income) from equity method investments in related party |
|
| 16 |
|
|
| (353 | ) |
Adjusted EBITDAC (9) |
| $ | 166,075 |
|
| $ | 140,487 |
|
Net income margin (10) |
|
| 14.3 | % |
|
| 16.3 | % |
Adjusted EBITDAC margin |
|
| 33.8 | % |
|
| 36.0 | % |
Three months ended June 30, | ||||||||
(in thousands, except percentages) | 2021 | 2020 | ||||||
Total Revenue | $ | 390,012 | $ | 246,324 | ||||
Net Income | $ | 63,407 | $ | 49,887 | ||||
Interest expense | 18,986 | 6,759 | ||||||
Income tax expense | 2,332 | 1,585 | ||||||
Depreciation | 1,222 | 851 | ||||||
Amortization | 27,319 | 9,118 | ||||||
Change in contingent consideration | 1,723 | — | ||||||
EBITDAC | $ | 114,989 | $ | 68,200 | ||||
Acquisition-related expense (1) | 308 | 4,718 | ||||||
Acquisition related long-term incentive compensation (2) | 9,082 | 532 | ||||||
Restructuring and related expense (3) | 3,174 | 936 | ||||||
Amortization and expense related to discontinued prepaid incentives (4) | 1,604 | 2,481 | ||||||
Other non-operating loss (income) (5) | 7,890 | (555 | ) | |||||
Equity-based compensation (6) | 3,458 | 1,624 | ||||||
Discontinued programs expense (7) | — | 352 | ||||||
Other non-recurring expense (8) | 19 | 43 | ||||||
IPO related expenses (9) | 316 | — | ||||||
(Income) from equity method investments in related party | (353 | ) | — | |||||
Adjusted EBITDAC (10) | $ | 140,487 | $ | 78,331 | ||||
Net Income Margin (11) | 16.3 | % | 20.3 | % | ||||
Adjusted EBITDAC Margin (12) | 36.0 | % | 31.8 | % |
(2) Acquisition related long-term incentive compensation arises from long-term incentive plans associated with acquisitions. |
Six months ended June 30, | ||||||||
(in thousands, except percentages) | 2021 | 2020 | ||||||
Total Revenue | $ | 701,470 | $ | 454,516 | ||||
Net Income | $ | 59,606 | $ | 63,205 | ||||
Interest expense | 39,031 | 15,436 | ||||||
Income tax expense | 4,566 | 3,162 | ||||||
Depreciation | 2,422 | 1,629 | ||||||
Amortization | 55,113 | 19,149 | ||||||
Change in contingent consideration | 2,313 | 1,032 | ||||||
EBITDAC | $ | 163,051 | $ | 103,613 | ||||
Acquisition-related expense (1) | 2,022 | 5,603 | ||||||
Acquisition related long-term incentive compensation (2) | 18,504 | 1,064 | ||||||
Restructuring and related expense (3) | 10,172 | 1,425 | ||||||
Amortization and expense related to discontinued prepaid incentives (4) | 3,682 | 5,063 | ||||||
Other non-operating loss (income) (5) | 29,336 | 2,492 | ||||||
Equity-based compensation (6) | 7,888 | 4,731 | ||||||
Discontinued programs expense (7) | — | 395 | ||||||
Other non-recurring expense (8) | 354 | 93 | ||||||
IPO related expenses (9) | 316 | — | ||||||
(Income) from equity method investments in related party | (434 | ) | (87 | ) | ||||
Adjusted EBITDAC (10) | $ | 234,891 | $ | 124,392 | ||||
Net Income Margin (11) | 8.5 | % | 13.9 | % | ||||
Adjusted EBITDAC Margin (12) | 33.5 | % | 27.4 | % |
49
|
| Six Months Ended June 30, |
| |||||
(in thousands, except percentages) |
| 2022 |
|
| 2021 |
| ||
Total revenue |
| $ | 878,182 |
|
| $ | 701,470 |
|
Net income |
| $ | 88,196 |
|
| $ | 59,606 |
|
Interest expense, net |
|
| 46,598 |
|
|
| 39,031 |
|
Income tax expense |
|
| 6,665 |
|
|
| 4,566 |
|
Depreciation |
|
| 2,440 |
|
|
| 2,422 |
|
Amortization |
|
| 52,896 |
|
|
| 55,113 |
|
Change in contingent consideration |
|
| (1,260 | ) |
|
| 2,313 |
|
EBITDAC |
| $ | 195,535 |
|
| $ | 163,051 |
|
Acquisition-related expense (1) |
|
| 2,152 |
|
|
| 2,022 |
|
Acquisition related long-term incentive compensation (2) |
|
| 14,798 |
|
|
| 18,504 |
|
Restructuring and related expense (3) |
|
| 5,698 |
|
|
| 10,172 |
|
Amortization and expense related to discontinued prepaid incentives (4) |
|
| 3,542 |
|
|
| 3,682 |
|
Other non-operating loss (income) (5) |
|
| 6,898 |
|
|
| 29,336 |
|
Equity-based compensation (6) |
|
| 12,480 |
|
|
| 7,888 |
|
Other non-recurring expense (7) |
|
| — |
|
|
| 354 |
|
IPO related expenses (8) |
|
| 31,674 |
|
|
| 316 |
|
(Income) from equity method investments in related party |
|
| 558 |
|
|
| (434 | ) |
Adjusted EBITDAC (9) |
| $ | 273,335 |
|
| $ | 234,891 |
|
Net income margin (10) |
|
| 10.0 | % |
|
| 8.5 | % |
Adjusted EBITDAC margin |
|
| 31.1 | % |
|
| 33.5 | % |
50
Adjusted Net Income and Adjusted Net Income Margin
We define Adjusted Net Incomenet income asIncome.income. Adjusted Net Income Marginnet income margin is calculated as Adjusted Net Incomenet income as a percentage of totalTotal revenue. The most comparable GAAP financial metric is Net Income Margin.
Following the IPO the Company will beis subject to United States federal income taxes, in addition to state, local, and foreign taxes, with respect to our allocable share of any net taxable income of Holdingsthe LLC. For comparability purposes, this calculation incorporates the impact of federal and state statutory tax rates on 100% of our adjustedHoldingsthe LLC.
A reconciliation of Adjusted Net Incomenet income and Adjusted Net Income Marginnet income margin to Net Incomeincome and Net Income Margin,income margin, the most directly comparable GAAP measures, for each of the periods indicated is as follows:
|
| Three Months Ended June 30, |
| |||||
(in thousands, except percentages) |
| 2022 |
|
| 2021 |
| ||
Total revenue |
| $ | 491,292 |
|
| $ | 390,012 |
|
Net income |
| $ | 70,120 |
|
| $ | 63,407 |
|
Income tax expense |
|
| 11,168 |
|
|
| 2,332 |
|
Amortization |
|
| 26,233 |
|
|
| 27,319 |
|
Amortization of deferred debt issuance costs (1) |
|
| 3,173 |
|
|
| 2,754 |
|
Change in contingent consideration |
|
| (251 | ) |
|
| 1,723 |
|
Acquisition-related expense (2) |
|
| 1,643 |
|
|
| 308 |
|
Acquisition related long-term incentive compensation (3) |
|
| 7,101 |
|
|
| 9,082 |
|
Restructuring and related expense (4) |
|
| 2,574 |
|
|
| 3,174 |
|
Amortization and expense related to discontinued prepaid incentives (5) |
|
| 1,760 |
|
|
| 1,604 |
|
Other non-operating loss (income) (6) |
|
| (622 | ) |
|
| 7,890 |
|
Equity-based compensation (7) |
|
| 5,676 |
|
|
| 3,458 |
|
Other non-recurring expense (8) |
|
| — |
|
|
| 19 |
|
IPO related expenses (9) |
|
| 14,582 |
|
|
| 316 |
|
(Income) / loss from equity method investments in related party |
|
| 16 |
|
|
| (353 | ) |
Adjusted income before income taxes |
| $ | 143,173 |
|
| $ | 123,033 |
|
Adjusted tax expense (10) |
|
| (36,724 | ) |
|
| (30,758 | ) |
Adjusted net income |
| $ | 106,449 |
|
| $ | 92,275 |
|
Net income margin (11) |
|
| 14.3 | % |
|
| 16.3 | % |
Adjusted net income margin |
|
| 21.7 | % |
|
| 23.7 | % |
51
Three months ended June 30, | ||||||||
(in thousands, except percentages) | 2021 | 2020 | ||||||
Total Revenue | $ | 390,012 | $ | 246,324 | ||||
Net Income | $ | 63,407 | $ | 49,887 | ||||
Income tax expense | 2,332 | 1,585 | ||||||
Amortization | 27,319 | 9,118 | ||||||
Amortization of deferred issuance costs (1) | 2,754 | 188 | ||||||
Change in contingent consideration | 1,723 | — | ||||||
Acquisition-related expense (2) | 308 | 4,718 | ||||||
Acquisition related long-term incentive compensation (3) | 9,082 | 532 | ||||||
Restructuring expense (4) | 3,174 | 936 | ||||||
Amortization and expense related to discontinued prepaid incentives (5) | 1,604 | 2,481 | ||||||
Other non-operating loss (income) (6) | 7,890 | (555 | ) | |||||
Equity-based compensation (7) | 3,458 | 1,624 | ||||||
Discontinued programs expense (8) | — | 352 | ||||||
Other non-recurring expense (9) | 19 | 43 | ||||||
IPO related expenses (10) | 316 | — | ||||||
(Income) / loss from equity method investments in related party | (353 | ) | — | |||||
Adjusted Income before Income Taxes | $ | 123,033 | $ | 70,909 | ||||
Adjusted tax expense (11) | (30,758 | ) | (17,728 | ) | ||||
Adjusted Net Income (12) | $ | 92,275 | $ | 53,181 | ||||
Net Income Margin (13) | 16.3 | % | 20.3 | % | ||||
Adjusted Net Income Margin (14) | 23.7 | % | 21.6 | % |
(3) Acquisition related long-term incentive compensation arises from long-term incentive plans associated with acquisitions. |
Six months ended June 30, | ||||||||
(in thousands, except percentages) | 2021 | 2020 | ||||||
Total Revenue | $ | 701,470 | $ | 454,516 | ||||
Net Income | $ | 59,606 | $ | 63,205 | ||||
Income tax expense | 4,566 | 3,162 | ||||||
Amortization | 55,113 | 19,149 | ||||||
Amortization of deferred issuance costs (1) | 5,769 | 693 | ||||||
Change in contingent consideration | 2,313 | 1,032 | ||||||
Acquisition-related expense (2) | 2,022 | 5,603 | ||||||
Acquisition related long-term incentive compensation (3) | 18,504 | 1,064 | ||||||
Restructuring expense (4) | 10,172 | 1,425 | ||||||
Amortization and expense related to discontinued prepaid incentives (5) | 3,682 | 5,063 | ||||||
Other non-operating loss (income) (6) | 29,336 | 2,492 | ||||||
Equity-based compensation (7) | 7,888 | 4,731 | ||||||
Discontinued programs expense (8) | — | 395 | ||||||
Other non-recurring items (9) | 354 | 93 | ||||||
IPO related expenses (10) | 316 | — | ||||||
(Income) / loss from equity method investments in related party | (434 | ) | (87 | ) | ||||
Adjusted Income before Income Taxes | $ | 199,207 | $ | 108,020 | ||||
Adjusted tax expense (11) | (49,802 | ) | (27,005 | ) | ||||
Adjusted Net Income (12) | $ | 149,405 | $ | 81,015 | ||||
Net Income Margin (13) | 8.5 | % | 13.9 | % | ||||
Adjusted Net Income Margin (14) | 21.3 | % | 17.8 | % |
52
|
| Six Months Ended June 30, |
| |||||
(in thousands, except percentages) |
| 2022 |
|
| 2021 |
| ||
Total revenue |
| $ | 878,182 |
|
| $ | 701,470 |
|
Net income |
| $ | 88,196 |
|
| $ | 59,606 |
|
Income tax expense |
|
| 6,665 |
|
|
| 4,566 |
|
Amortization |
|
| 52,896 |
|
|
| 55,113 |
|
Amortization of deferred debt issuance costs (1) |
|
| 5,984 |
|
|
| 5,769 |
|
Change in contingent consideration |
|
| (1,260 | ) |
|
| 2,313 |
|
Acquisition-related expense (2) |
|
| 2,152 |
|
|
| 2,022 |
|
Acquisition related long-term incentive compensation (3) |
|
| 14,798 |
|
|
| 18,504 |
|
Restructuring and related expense (4) |
|
| 5,698 |
|
|
| 10,172 |
|
Amortization and expense related to discontinued prepaid incentives (5) |
|
| 3,542 |
|
|
| 3,682 |
|
Other non-operating loss (income) (6) |
|
| 6,898 |
|
|
| 29,336 |
|
Equity-based compensation (7) |
|
| 12,480 |
|
|
| 7,888 |
|
Other non-recurring items (8) |
|
| — |
|
|
| 354 |
|
IPO related expenses (9) |
|
| 31,674 |
|
|
| 316 |
|
(Income) / loss from equity method investments in related party |
|
| 558 |
|
|
| (434 | ) |
Adjusted income before income taxes |
| $ | 230,281 |
|
| $ | 199,207 |
|
Adjusted tax expense (10) |
|
| (59,067 | ) |
|
| (49,802 | ) |
Adjusted net income |
| $ | 171,214 |
|
| $ | 149,405 |
|
Net income margin (11) |
|
| 10.0 | % |
|
| 8.5 | % |
Adjusted net income margin |
|
| 19.5 | % |
|
| 21.3 | % |
53
Adjusted Diluted Earnings per Share
We define Adjusted diluted earnings per share as Adjusted net income divided by diluted shares outstanding after adjusting for the effect of the exchange of 100% of the outstanding LLC Common Units (together with the shares of Class B common stock) into shares of Class A common stock and the effect of unvested equity awards. The most directly comparable GAAP financial metric is diluted earnings per share.
A reconciliation of Adjusted diluted earnings per share to Diluted earnings per share, the most directly comparable GAAP measure, for each of the periods indicated is as follows:
|
| Three Months Ended June 30, 2022 |
| |||||||||||||||||||||
|
|
|
| Adjustments |
|
|
|
| ||||||||||||||||
(in thousands, except per share data) |
| U.S. GAAP |
|
| Less: Net income attributed to dilutive awards and substantively vested shares (1) |
|
| Plus: Impact of all LLC Common Units exchanged for Class A shares |
|
| Plus: Adjustments to Adjusted net income |
|
| Plus: Dilutive impact of unvested equity awards |
|
| Adjusted diluted earnings per share |
| ||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income attributable |
| $ | 26,432 |
|
|
| (1,931 | ) |
|
| 45,619 |
|
| $ | 36,329 |
|
| $ | — |
|
| $ | 106,449 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Weighted-average shares |
|
| 120,205 |
|
|
| — |
|
|
| 144,495 |
|
|
| — |
|
|
| 5,090 |
|
|
| 269,791 |
|
Net income per |
| $ | 0.22 |
|
| $ | (0.02 | ) |
| $ | 0.06 |
|
| $ | 0.14 |
|
| $ | (0.01 | ) |
| $ | 0.39 |
|
54
|
| Six Months Ended June 30, 2022 |
| |||||||||||||||||||||
|
|
|
|
| Adjustments |
|
|
|
| |||||||||||||||
(in thousands, except per share data) |
| U.S. GAAP |
|
| Less: Net income attributed to dilutive awards and substantively vested shares (1) |
|
| Plus: Net income attributed to non-controlling interests |
|
| Plus: Adjustments to Adjusted net income |
|
| Plus: Dilutive impact of unvested equity awards |
|
| Adjusted diluted earnings per share |
| ||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income attributable |
| $ | 73,726 |
|
| $ | (42,314 | ) |
| $ | 56,784 |
|
| $ | 83,018 |
|
| $ | — |
|
| $ | 171,214 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Weighted-average shares |
|
| 264,417 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,386 |
|
|
| 269,804 |
|
Net income per |
| $ | 0.28 |
|
| $ | (0.16 | ) |
| $ | 0.21 |
|
| $ | 0.32 |
|
| $ | (0.02 | ) |
| $ | 0.63 |
|
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations. We believe that the balance sheet and strong cash flow profile of the business provides adequate liquidity. The primary sources of liquidity are cashCash and cash equivalents on the balance sheet,Consolidated Balance Sheets, cash flows provided by operations, and debt capacity available under our credit facilities.Revolving Credit Facility, Term Loan, and Senior Secured Notes (together “Credit Facility”). The primary uses of liquidity are operating expenses, seasonal working capital needs, business combinations, capital expenditures, obligations under the TRA, taxes, and distributions to members.LLC Unitholders. We believe that cash and cash equivalents, cash flows from operations, and amounts available credit facilitiesunder our Credit Facility will be sufficient to meet the liquidity needs, including principal and interest payments on debt obligations, capital expenditures, and anticipated working capital requirements, for the next 12 months and beyond.
We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations, this could reduce our ability to compete successfully and harm ourthe results of our operations.
Cash and cash equivalents on the Consolidated Balance Sheets includes funds available for general corporate purposes. Fiduciary cash and receivables cannot be used for general corporate purposes. Insurance premiums, claims funds, and surplus lines taxes are held in a fiduciary capacity and the obligation to remit these funds is recorded as Fiduciary liabilities in the Consolidated Balance Sheets. We will recognize fiduciary amounts due to others as fiduciary liabilities and fiduciary amounts collectible and held on behalf of others, including insurance carriers, other insurance intermediaries, surplus lines taxing authorities, clients, and insurance policy holders, as Fiduciary cash and receivables in the Consolidated Balance Sheets.
55
In our capacity as an insurance broker or agent, we collect premiums from insureds and, after deducting our commission, remit the premiums to the respective insurance markets and carriers. We also collect claims prefunding or refunds from carriers on behalf of insureds, which are then returned to the insureds, and surplus lines taxes, which are then remitted to surplus lines taxing authorities. Insurance premiums, claims funds, and surplus lines taxes are held in a fiduciary capacity. The levels of Fiduciary cash and receivables and Fiduciary liabilities can fluctuate significantly depending on when we collect the premiums, claims prefunding, and refunds, make payments to markets, carriers, surplus lines taxing authorities, and insureds, and collect funds from clients and make payments on their behalf, and upon the impact of foreign currency movements. Fiduciary cash, because of its nature, is generally held in very liquid securities with a focus on preservation of principal. To minimize investment risk, we and our subsidiaries maintain cash holdings pursuant to an investment policy which contemplates all relevant rules established by states with regard to fiduciary cash and is approved by our Board of Directors. The policy requires broad diversification of holdings across a variety of counterparties utilizing limits set by our Board of Directors, primarily based on credit rating and type of investment. Fiduciary cash and receivables included cash of $811.0 million and $675.8 million as of June 30, 2022 and 2021, respectively, and fiduciary receivables of $2,006.8 million and $1,617.6 million as of June 30, 2022 and 2021, respectively. While we may earn interest income on fiduciary cash held in cash and investments, the fiduciary cash may not be used for general corporate purposes. Of the $866.6 million of Cash and cash equivalents on the Consolidated Balance Sheets as of June 30, 2022, $153.7 million is held in fiduciary accounts representing collected revenue and is available to be transferred to operating accounts and used for general corporate purposes.
Credit Facilities
We expect to have sufficient financial resources to meet our business requirements infor the next 12 months. Although cash from operations is expected to be sufficient to service our activities, including servicing our debt and contractual obligations, and financefinancing capital expenditures, we have the ability to borrow under our credit facilitiesRevolving Credit Facility to accommodate any timing differences in cash flows. Additionally, under current market conditions, we believe that we could access capital markets to obtain debt financing for longer-term funding, if needed.
On September 1, 2020, we entered into the Credit Agreement with leading institutions, including JPMorgan Chase Bank, N.A., the Administrative Agent, for term loanTerm Loan borrowings totaling $1,650.0 million and a revolving credit facilityRevolving Credit Facility totaling $300.0 million, in connection with financing the All Risks Acquisition. Borrowings under our revolving credit facilityRevolving Credit Facility are permitted to be drawn for our working capital and other general corporate financing purposes and those of certain of our subsidiaries. Borrowings under our credit agreementCredit Agreement are unconditionally guaranteed by certain of ourvarious subsidiaries and are secured by a lien and security interest in substantially all of our assets. See “Note 8,
On July 26, 2021, we entered into an amendment to our Credit Agreement, which provided for an increase in the size of our Revolving Credit Facility from $300.0 million to $600.0 million. Interest on the upsized Revolving Credit Facility bore interest at the Eurocurrency Rate (LIBOR) plus a margin that ranged from 2.50% to 3.00%, based on the first lien net leverage ratio defined in our Credit Agreement. No other significant terms under our agreement governing the Revolving Credit Facility were changed in connection with such amendment.
On February 3, 2022, the LLC issued $400.0 million of senior secured notes. The notes have a 4.375% interest rate and will mature on February 1, 2030.
On April 29, 2022 the Company entered into the Fourth Amendment to the Credit Agreement on its Term Loan and Revolving Credit Facility to transition its LIBOR rate to a Benchmark Replacement of Adjusted Term SOFR plus a Credit Spread Adjustment of 10 basis points, 15 basis points, or 25 basis points for the one-month, three-month, or six-month borrowing periods, respectively.
As of June 30, 2022, the interest rate on the Term Loan was SOFR plus 3.00%, subject to a 75 basis point floor.
As of June 30, 2022, we were in compliance with all of the covenants under our Credit Agreement and there were no events of default for the six months ended June 30, 2022.
See “Note 9, Debt”in the notes to our unaudited quarterly consolidated financial statements for further information regarding our debt arrangements.
Tax Receivable Agreement
In connection with the Organizational Transactions and IPO, the Company entered into a TRA with current and certain former LLC Unitholders. The TRA provides for the payment by the Company to current and certain former LLC Unitholders, of December 31, 2020, the interest rate on our term loan was LIBOR, subject to a 75 basis point floor, plus 3.25%.
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LLC Common Units (“Exchange Tax Attributes”), (ii) certain tax attributes of the LLC that existed prior to the IPO (“Pre-IPO M&A Tax Attributes”), (iii) certain favorable “remedial” partnership tax allocations to which the Company becomes entitled to (if any), and is taxed at the prevailing corporate(iv) certain other tax rates. In addition to tax expenses, we also will incur expensesbenefits related to our operations and we will be requiredthe Company entering into the TRA, including tax benefits attributable to makepayments that the Company makes under the TRA (“TRA Payment Tax Attributes”). The Company recognizes a liability on the Consolidated Balance Sheets based on the undiscounted estimated future payments under the Tax Receivable Agreement. TRA.
Due to the uncertainty of various factors, we cannot precisely quantify the likely tax benefits we will realize as a result of the LLC Common Unit exchanges and the resulting amounts we are likely to pay out to current and certain former LLC Unitholders and Onex pursuant to the Tax Receivable Agreement;TRA; however, we estimate that such tax benefits and the related TRA payments may be substantial. AssumingAs set forth in the table below, and assuming no changes in the relevant tax law and that we earn sufficient taxable income to realize all cash tax savings that are subject to the Tax Receivable Agreement,TRA as a result of transaction, we expect future payments under the Tax Receivable Agreement relating to the purchase by Ryan Specialty Holdings, Inc.TRA as a result of LLC Units in connection with the IPOtransactions as of June 30, 2022 will be approximately $309.8$293.8 million over the next 15 years from approximately $15.0 million to $20.0 million per year and decline thereafter. As a result, we expect that aggregate payments under the Tax Receivable Agreement over this15-yearperiod will be approximately $300.0 million.in aggregate. Future payments in respect ofto subsequent exchanges or financings would be in addition to these amounts and are expected to be substantial. The foregoing numbersamounts are merely estimates and the actual payments could differ materially. In the event of a permissible early termination of the TRA the Company is required to pay to each holder of the TRA an early termination payment equal to the discounted present value of all unpaid TRA Payments. The Company has not made and is not likely to make an election for an early termination. We expect to fund thesefuture TRA payments usingwith tax distributions from the LLC that come from cash on hand and cash generated from operations.
(in thousands) |
| Exchange Tax Attributes (1) |
|
| Pre-IPO M&A Tax Attributes (2) |
|
| TRA Payment Tax Attributes (3) |
|
| TRA Liabilities |
| ||||
Balance at December 31, 2021 |
| $ | 136,704 |
|
| $ | 83,389 |
|
| $ | 52,007 |
|
| $ | 272,100 |
|
Exchange of LLC Common Units |
|
| 9,897 |
|
|
| 1,435 |
|
|
| 3,159 |
|
|
| 14,491 |
|
Remeasurement - change in state rate |
|
| 2,884 |
|
|
| 1,759 |
|
|
| 2,530 |
|
|
| 7,173 |
|
Payments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance at June 30, 2022 |
| $ | 149,485 |
|
| $ | 86,583 |
|
| $ | 57,696 |
|
| $ | 293,764 |
|
Total expected estimated tax savings from each of the tax attributes associated with the TRA are (1) Exchange Tax Attributes of $175.9 million, (2) Pre-IPO M&A Tax Attributes of $101.9 million, and (3) TRA Payment Tax Attributes of $67.9 million. The Company will retain the benefit of 15% of these cash savings.
Comparison of Cash Flows for the Six Months Ended June 30, 2022 and 2021
Cash and cash equivalents increased $559.1 million from $307.5 million at June 30, 2021 to $866.7 million at June 30, 2022. A summary of our cash flows provided by and used for continuing operations from operating, investing, and financing activities is as follows:
Cash Flows from Operating Activities
Net cash provided by operating activities during the six months ended June 30, 2022 increased $57.0 million from the six months ended June 30, 2021 to $164.7 million. This amount represents net income reported, as adjusted for amortization and depreciation, prepaid and deferred equity compensation expense, as well as the change in commission and fees receivable, accrued compensation and other current and noncurrent assets and liabilities. Net income increased $28.6 million and Non-cash equity-based compensation increased $35.4 million during the six months ended June 30, 2022.
Cash Flows from Investing Activities
Cash flows used for investing activities during the six months ended June 30, 2022 were $6.8 million, an increase of $6.6 million compared to the $0.2 million of cash flows used for investing activities during the six months ended June 30, 2021. The main driver of the cash flows used for investing activities in the six months ended June 30, 2022 was $6.8 million of capital expenditures, compared to $3.9 million of capital expenditures offset by $3.8 million of Prepaid incentive repayments the six months ended June 30, 2021.
Cash Flows from Financing Activities
Cash flows provided by financing activities during the six months ended June 30, 2022 were $379.8 million, an increase of $399.2 million compared to cash flows used by financing activities of $19.4 million during the six months ended June 30, 2021. The main drivers of cash flows provided by financing activities during the six months ended June 30, 2022 were the Bond issuance of $394.0 million and the net change in fiduciary liabilities of $54.4 million, offset by the cash distributions to LLC Unitholders of $26.2 million, payment of interest rate cap premium of $25.5 million, the repayment of term debt of $8.3 million, and the payment of contingent consideration of $6.2 million. The main drivers of cash flows used by financing activities during the six months ended June 30, 2021 were the purchase of the remaining interest in Ryan Re of $48.4 million, cash distributions to certain pre-IPO LLC
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Unitholders of $47.0 million, repayment of term debt of $8.3 million, deferred offering and debt issuance costs paid of $5.5 million, and equity repurchases from pre-IPO LLC Unitholders of $3.9 million, offset by $93.7 million of net change in fiduciary liabilities.
Contractual Obligations and Commitments
Our principal commitments consist of contractual obligations in connection with investing and operating activities. In “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included in our IPO Prospectus, we disclosed our total contractual obligations as of December 31, 2020. These obligations are further described within Note 7,Leasesand “Note 8,Debtstatements. See notes to our unaudited consolidated financial statements forand provide further description on provisions that create, increase, or accelerate obligations, or other pertinent data to the extent necessary for an understanding of the timing and amount of the specified contractual obligations. Outside of the above
Within “Note 14, Employee Benefit Plans, Prepaid and routine transactions madeLong-Term Incentives” in the ordinary course of business, therenotes to our unaudited consolidated financial statements we discuss various long-term incentive compensation agreements and their impact. These agreements are typically associated with an acquisition. Below we have been no material changes tooutlined the contractual obligationsliabilities accrued as disclosed in our IPO Prospectus.
Long-term Incentive Compensation Agreements |
| |||
(in thousands) |
| June 30, 2022 |
| |
Current accrued compensation |
| $ | — |
|
Non-current accrued compensation |
|
| 180 |
|
Total liability |
| $ | 180 |
|
Projected future expense |
|
| 625 |
|
Total projected future cash outflows |
| $ | 805 |
|
|
|
|
| |
Projected Future Cash Outflows |
| |||
(in thousands) |
|
|
| |
2022 |
| $ | — |
|
2023 |
|
| — |
|
2024 |
|
| — |
|
2025 |
|
|
| |
Thereafter |
| $ | 805 |
|
Within “Note 14, Employee Benefit Plans, Prepaid and Long-Term Incentives” in the notes to our unaudited consolidated financial statements we did notdiscuss the All Risks Long-Term Incentive Plans and their impact. Below we have anyoff-balancesheetoutlined the liabilities accrued as of June 30, 2022, the projected future expense, and the projected timing of future cash outflows associated with these arrangements.
All Risks Long-Term Incentive Plan |
| |||
(in thousands) |
| June 30, 2022 |
| |
Current accrued compensation |
| $ | 101,551 |
|
Non-current accrued compensation |
|
| — |
|
Total liability |
| $ | 101,551 |
|
Projected future expense |
|
| 5,067 |
|
Total projected future cash outflows |
| $ | 106,618 |
|
|
|
|
| |
Projected Future Cash Outflows |
| |||
(in thousands) |
|
|
| |
2022 |
| $ | 106,618 |
|
2023 |
|
| — |
|
2024 |
|
| — |
|
2025 |
|
| — |
|
Thereafter |
| $ | — |
|
Within “Note 4, Mergers and Acquisitions” in the notes to our unaudited consolidated financial statements we discuss various contingent consideration arrangements and their impact. Below we have outlined the liabilities accrued as defined in Item 303(a)(4)(ii) ofRegulation S-K.
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Contingent Consideration |
| |||
(in thousands) |
| June 30, 2022 |
| |
Current accounts payable and accrued liabilities |
| $ | 6,188 |
|
Other non-current liabilities |
|
| 20,169 |
|
Total liability |
| $ | 26,357 |
|
Projected future expense |
|
| 6,016 |
|
Total projected future cash outflows |
| $ | 32,373 |
|
|
|
|
| |
Projected Future Cash Outflows |
| |||
(in thousands) |
|
|
| |
2022 |
| $ | — |
|
2023 |
|
| 6,689 |
|
2024 |
|
| — |
|
2025 |
|
| 25,684 |
|
Thereafter |
| $ | — |
|
For further discussion, see “Note 4, Mergers and Acquisitions,” “Note 8, Leases,” “Note 9, Debt,” “Note 14, Employee Benefit Plans, Prepaid and Long-Term Incentives,” and “Note 17, Commitments and Contingencies” of the notes to our unaudited consolidated financial statements.
Critical Accounting Policies and Estimates
The methods, assumptions, and estimates that we use in applying the accounting policies may require us to apply judgments regarding matters that are inherently uncertain. We consider an accounting policy to be a critical estimate if: (i) the Company must make assumptions that were uncertain when the judgment was made, and (ii) changes in the estimate assumptions, or selection of a different estimate methodology, could have a significant impact on our financial position and the results that ourwe will report in the consolidated financial statements. While we believe that the estimates, assumptions, and judgments are reasonable, they are based on information available when the estimate was made. The accounting policies that we believe reflect our more significant estimates, judgments, and assumptions that are most critical to understanding and evaluating our reported financial results are: revenue recognition, fair value, and goodwill and intangibles.
Our critical accounting policies are described under the heading “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our IPO Prospectus. There have been no materialthe Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 16, 2022. Additionally, the changes, if any, to our critical accounting policies and estimates disclosed in our IPO Prospectus. For more information, refer to the Annual Report on Form 10-K for the year ended December 31, 2021 are included in “Note 1,Basis of Presentationin the notes2, Significant Accounting Policies,” to our unaudited consolidated financial statements.
Recent Accounting Pronouncements
For a description of our recently adopted accounting pronouncements and recently issued accounting standards not yet adopted, see “Note 1,Basis of Presentation
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to various market risks in the
Foreign Currency Risk
For the six months ended June 30, 2021,2022, approximately 3% of revenues were generated from activities in the United Kingdom, Europe, and Europe.Canada. We are exposed to currency risk from the potential changes between the exchange rates of the US Dollar, Canadian Dollar, British Pound, Euro, Swedish Krona, Danish Krone, and other European currencies. The exposure to foreign currency risk from the potential changes between the exchange rates between the USD and other currencies is immaterial.
Interest Rate Risk
Fiduciary investment income is affected by changes in international and domestic short-term interest rates.
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As of June 30, 2021,2022, we had $1,637.6$1,621.1 million of outstanding principal on our term loanTerm Loan borrowings, which bears interest on a floating rate, subject to a 0.75% floor. We are subject to LIBORAdjusted Term SOFR interest rate changes, and exposure in excess of the floor. The fair value of the term loanTerm Loan approximates the carrying amount as of June 30, 2021,2022, and December 31, 2020,2021, as determined based upon information available. Historically in 2020, in we used
On April 7, 2022 the Company entered into an interest rate derivatives, typically swaps with cancellation options,cap agreement to reducemanage its exposure to the effects of interest rate fluctuations related to the Company's Term Loan for up to five yearsan upfront cost of $25.5 million. The interest rate cap has a $1,000.0 million notional amount, 2.75% strike, and terminates on December 31, 2025.
On April 29, 2022 the Company entered into the future.
Other financial instruments consist of Cash and cash equivalents, Commissions and fees receivable—receivable – net, Other current assets, and Accounts payable and accrued liabilities. The carrying amounts of Cash and cash equivalents, Commissions and fees receivable -– net, and Accounts payable and accrued liabilities approximate fair value because of the short-term nature of the instruments.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rule 13a–15(e) and Rule 15d–15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of June 30, 2021,2022, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control
There have been no changes in internal control over financial reporting during the quarter ended June 30, 20212022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in various legal proceedings and subject to claims that arise in the ordinary course of business. Although the results of litigation and claims are inherently unpredictable and uncertain, we are not presently a party to any litigation the outcome of which, we believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows or financial condition.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed under the heading “Risk Factors” of our IPO Prospectus.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
60
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
On August 9, 2022, the Company might have beenamended and restated the victim of this event and thereafter confirmed through an investigation that unauthorized access was gained to the email accounts of five of our employees. In response to this event,Tax Receivable Agreement, dated July 26, 2021, among the Company took immediate actionand the persons named therein, to, secure the compromised email accounts and to prevent the unauthorized person(s) from continuing to have access, or gaining future access, toamong other items: (i) limit the Company’s accounts or related information. Additionally,ability to electively terminate such agreement in exchange for a fixed payment; and (ii) limit the Company implemented additional employee trainingreference property giving rise to more effectively identify phishing attacks and to better understand the Company’s security applications.
The foregoing description of the A&R TRA does not purport to be complete and third-party expertsis qualified in its entirety by reference to the full text of the A&R TRA, attached as Exhibit 10.1 to this Quarterly Report on Form 10-Q and the purchase of additional security infrastructure, and/or subject us to liability, resulting in increased costs and loss of revenue. In addition, any remediation efforts we undertake may not be successful. The perception that we do not adequately protect the privacy of information of our employees or clients could inhibit our growth and damage our reputation.
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Item 6. Exhibits
The following is a list of all exhibits filed or furnished as part of this report:
Exhibit Number | Description | |
3.1 | ||
3.2 | ||
3.3 | ||
4.1 | ||
4.2 | ||
4.3 | ||
10.1 | ||
10.2 | ||
10.3 | ||
10.4 | ||
10.5 | ||
10.6 | ||
10.7 | Ryan Specialty | |
10.8 | ||
10.9 | ||
10.10 | ||
10.11 | ||
10.12 | ||
10.13 | ||
10.14 | ||
10.15 | ||
62
10.16 | ||
10.17 | ||
10.18 | ||
10.19 | ||
10.20 | ||
31.1 | ||
31.2 | ||
32.1* | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, filed herewith. |
32.2* | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, filed herewith. | |
101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
* The certifications furnished in Exhibit 32.1 and Exhibit 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RYAN SPECIALTY HOLDINGS, INC. (Registrant) | ||||||
Date: | By: | /s/ Jeremiah R. Bickham | ||||
Jeremiah R. Bickham | ||||||
Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |