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 JuneSeptember 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,October 31, 2023, the Registrant had
Ryan Specialty Group Holdings, Inc.
INDEX
1 | ||||||
Item 1. | 1 | |||||
1 | ||||||
2 | ||||||
3 | ||||||
4 | ||||||
5 | ||||||
7 | ||||||
Item 2. | 25 | |||||
Item 3. | 45 | |||||
Item 4. | 46 | |||||
46 | ||||||
Item 1. | 46 | |||||
Item 1A. | 46 | |||||
Item 2. | 46 | |||||
Item 3. | 47 | |||||
Item 4. | 47 | |||||
Item 5. | 47 | |||||
Item 6. | 48 |
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 Formintended useanticipated amount and timing of proceeds, anticipated cost savings relating to the Restructuring Plan and the amount and timing of delivery of annual cost savings,ACCELERATE 2025 program, and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation, are forward-looking statements. All forward-looking statements are subject to risks and uncertainties (many of which may be amplified on account of theCOVID-19pandemic) that may cause actual results to differ materially from those that we expected, including:
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.otherfilings with the SEC filings and other 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
ii
not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
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 (Loss) (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 | ||||||||
(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 September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
REVENUE |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net commissions and fees |
| $ | 487,345 |
|
| $ | 407,551 |
|
| $ | 1,507,878 |
|
| $ | 1,284,459 |
|
Fiduciary investment income |
|
| 14,593 |
|
|
| 4,445 |
|
|
| 36,808 |
|
|
| 5,719 |
|
Total revenue |
| $ | 501,938 |
|
| $ | 411,996 |
|
| $ | 1,544,686 |
|
| $ | 1,290,178 |
|
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Compensation and benefits |
|
| 329,212 |
|
| 274,108 |
|
|
| 989,294 |
|
|
| 858,439 |
| |
General and administrative |
|
| 69,288 |
|
|
| 48,991 |
|
|
| 202,595 |
|
|
| 139,851 |
|
Amortization |
|
| 29,572 |
|
|
| 25,667 |
|
|
| 79,125 |
|
|
| 78,563 |
|
Depreciation |
|
| 2,201 |
|
|
| 1,463 |
|
|
| 6,570 |
|
|
| 3,903 |
|
Change in contingent consideration |
|
| 1,848 |
|
|
| 423 |
|
|
| 4,358 |
|
|
| (837 | ) |
Total operating expenses |
| $ | 432,121 |
|
| $ | 350,652 |
|
| $ | 1,281,942 |
|
| $ | 1,079,919 |
|
OPERATING INCOME |
| $ | 69,817 |
|
| $ | 61,344 |
|
| $ | 262,744 |
|
| $ | 210,259 |
|
Interest expense, net |
|
| 31,491 |
|
|
| 28,864 |
|
|
| 89,840 |
|
|
| 75,462 |
|
Loss (income) from equity method investment in related party |
|
| (2,271 | ) |
|
| (144 | ) |
|
| (5,882 | ) |
|
| 414 |
|
Other non-operating loss (income) |
|
| 67 |
|
|
| (66 | ) |
|
| 37 |
|
|
| 6,832 |
|
INCOME BEFORE INCOME TAXES |
| $ | 40,530 |
|
| $ | 32,690 |
|
| $ | 178,749 |
|
| $ | 127,551 |
|
Income tax expense |
|
| 24,827 |
|
|
| 3,411 |
|
|
| 42,772 |
|
|
| 10,076 |
|
NET INCOME |
| $ | 15,703 |
|
| $ | 29,279 |
|
| $ | 135,977 |
|
| $ | 117,475 |
|
Net income attributable to non-controlling interests, net of tax |
|
| 20,750 |
|
|
| 17,534 |
|
|
| 97,786 |
|
|
| 74,318 |
|
NET INCOME (LOSS) ATTRIBUTABLE TO RYAN SPECIALTY HOLDINGS, INC. |
| $ | (5,047 | ) |
| $ | 11,745 |
|
| $ | 38,191 |
|
| $ | 43,157 |
|
NET INCOME (LOSS) PER SHARE OF CLASS A COMMON STOCK: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | (0.04 | ) |
| $ | 0.11 |
|
| $ | 0.34 |
|
| $ | 0.40 |
|
Diluted |
| $ | (0.04 | ) |
| $ | 0.09 |
|
| $ | 0.34 |
|
| $ | 0.37 |
|
WEIGHTED-AVERAGE SHARES OF CLASS A COMMON STOCK OUTSTANDING: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
|
| 115,872,327 |
|
|
| 109,428,073 |
|
|
| 113,291,850 |
|
|
| 108,035,360 |
|
Diluted |
|
| 115,872,327 |
|
|
| 266,352,389 |
|
|
| 124,883,523 |
|
|
| 265,070,739 |
|
See accompanying Notes to the Consolidated Financial Statements (Unaudited)
1
Ryan Specialty Holdings, Inc.
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(In thousands)
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
NET INCOME |
| $ | 15,703 |
|
| $ | 29,279 |
|
| $ | 135,977 |
|
| $ | 117,475 |
|
Net income attributable to non-controlling interests, net of tax |
|
| 20,750 |
|
|
| 17,534 |
|
|
| 97,786 |
|
|
| 74,318 |
|
NET INCOME (LOSS) ATTRIBUTABLE TO RYAN SPECIALTY HOLDINGS, INC. |
| $ | (5,047 | ) |
| $ | 11,745 |
|
| $ | 38,191 |
|
| $ | 43,157 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Gain on interest rate cap |
|
| 2,760 |
|
|
| 7,596 |
|
|
| 7,628 |
|
|
| 7,723 |
|
(Gain) on interest rate cap reclassified to earnings |
|
| (2,215 | ) |
|
| — |
|
|
| (5,518 | ) |
|
| — |
|
Foreign currency translation adjustments |
|
| (567 | ) |
|
| (1,752 | ) |
|
| (179 | ) |
|
| (2,996 | ) |
Change in share of equity method investment in related party other comprehensive income (loss) |
|
| (267 | ) |
|
| (218 | ) |
|
| 270 |
|
|
| (2,074 | ) |
Total other comprehensive income (loss), net of tax |
| $ | (289 | ) |
| $ | 5,626 |
|
| $ | 2,201 |
|
| $ | 2,653 |
|
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO RYAN SPECIALTY HOLDINGS, INC. |
| $ | (5,336 | ) |
| $ | 17,371 |
|
| $ | 40,392 |
|
| $ | 45,810 |
|
See accompanying Notes to the Consolidated Financial Statements (Unaudited)
2
Ryan Specialty Holdings, Inc.
Consolidated Balance Sheets (Unaudited)
(In thousands, except share and per share data)
|
| September 30, 2023 |
|
| December 31, 2022 |
| ||
ASSETS |
|
|
|
|
|
| ||
CURRENT ASSETS |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 754,370 |
|
| $ | 992,723 |
|
Commissions and fees receivable – net |
|
| 238,827 |
|
|
| 231,423 |
|
Fiduciary cash and receivables |
|
| 2,521,021 |
|
|
| 2,611,647 |
|
Prepaid incentives – net |
|
| 9,577 |
|
|
| 8,584 |
|
Other current assets |
|
| 62,629 |
|
|
| 49,690 |
|
Total current assets |
| $ | 3,586,424 |
|
| $ | 3,894,067 |
|
NON-CURRENT ASSETS |
|
|
|
|
|
| ||
Goodwill |
|
| 1,581,759 |
|
|
| 1,314,984 |
|
Other intangible assets |
|
| 591,879 |
|
|
| 486,444 |
|
Prepaid incentives – net |
|
| 16,585 |
|
|
| 20,792 |
|
Equity method investment in related party |
|
| 45,272 |
|
|
| 38,514 |
|
Property and equipment – net |
|
| 32,208 |
|
|
| 31,271 |
|
Lease right-of-use assets |
|
| 131,833 |
|
|
| 143,870 |
|
Deferred tax assets |
|
| 383,094 |
|
|
| 396,814 |
|
Other non-current assets |
|
| 56,808 |
|
|
| 56,987 |
|
Total non-current assets |
| $ | 2,839,438 |
|
| $ | 2,489,676 |
|
TOTAL ASSETS |
| $ | 6,425,862 |
|
| $ | 6,383,743 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
| ||
CURRENT LIABILITIES |
|
|
|
|
|
| ||
Accounts payable and accrued liabilities |
|
| 114,952 |
|
|
| 119,022 |
|
Accrued compensation |
|
| 273,417 |
|
|
| 350,369 |
|
Operating lease liabilities |
|
| 19,922 |
|
|
| 22,744 |
|
Tax Receivable Agreement liabilities |
|
| 16,959 |
|
|
| — |
|
Short-term debt and current portion of long-term debt |
|
| 35,566 |
|
|
| 30,587 |
|
Fiduciary liabilities |
|
| 2,521,021 |
|
|
| 2,611,647 |
|
Total current liabilities |
| $ | 2,981,837 |
|
| $ | 3,134,369 |
|
NON-CURRENT LIABILITIES |
|
|
|
|
|
| ||
Accrued compensation |
|
| 21,999 |
|
|
| 10,048 |
|
Operating lease liabilities |
|
| 156,983 |
|
|
| 151,944 |
|
Long-term debt |
|
| 1,945,495 |
|
|
| 1,951,900 |
|
Deferred tax liabilities |
|
| 126 |
|
|
| 562 |
|
Tax Receivable Agreement liabilities |
|
| 342,115 |
|
|
| 295,347 |
|
Other non-current liabilities |
|
| 36,066 |
|
|
| 21,761 |
|
Total non-current liabilities |
| $ | 2,502,784 |
|
| $ | 2,431,562 |
|
TOTAL LIABILITIES |
| $ | 5,484,621 |
|
| $ | 5,565,931 |
|
STOCKHOLDERS' EQUITY |
|
|
|
|
|
| ||
Class A common stock ($0.001 par value; 1,000,000,000 shares authorized, 118,222,528 and 112,437,825 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively) |
|
| 118 |
|
|
| 112 |
|
Class B common stock ($0.001 par value; 1,000,000,000 shares authorized, 142,026,335 and 147,214,275 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively) |
|
| 141 |
|
|
| 147 |
|
Class X common stock ($0.001 par value; 10,000,000 shares authorized, 640,784 shares issued and 0 outstanding at September 30, 2023 and December 31, 2022) |
|
| — |
|
|
| — |
|
Preferred stock ($0.001 par value; 500,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2023 and December 31, 2022) |
|
| — |
|
|
| — |
|
Additional paid-in capital |
|
| 442,304 |
|
|
| 418,123 |
|
Retained earnings |
|
| 92,179 |
|
|
| 53,988 |
|
Accumulated other comprehensive income |
|
| 8,236 |
|
|
| 6,035 |
|
Total stockholders' equity attributable to Ryan Specialty Holdings, Inc. |
| $ | 542,978 |
|
| $ | 478,405 |
|
Non-controlling interests |
|
| 398,263 |
|
|
| 339,407 |
|
Total stockholders' equity |
| $ | 941,241 |
|
| $ | 817,812 |
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
| $ | 6,425,862 |
|
| $ | 6,383,743 |
|
See accompanying Notes to the Consolidated Financial Statements (Unaudited)
3
Ryan Specialty Holdings, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
|
| Nine Months Ended September 30, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
| ||
Net income |
| $ | 135,977 |
|
| $ | 117,475 |
|
Adjustments to reconcile net income to cash flows provided by operating activities: |
|
|
|
|
|
| ||
Loss (income) from equity method investment in related party |
|
| (5,882 | ) |
|
| 414 |
|
Amortization |
|
| 79,125 |
|
|
| 78,563 |
|
Depreciation |
|
| 6,570 |
|
|
| 3,903 |
|
Prepaid and deferred compensation expense |
|
| 8,882 |
|
|
| 27,256 |
|
Non-cash equity-based compensation |
|
| 54,136 |
|
|
| 61,084 |
|
Amortization of deferred debt issuance costs |
|
| 9,125 |
|
|
| 9,017 |
|
Amortization of interest rate cap premium |
|
| 5,216 |
|
|
| 2,898 |
|
Deferred income tax expense |
|
| 11,745 |
|
|
| 4,597 |
|
Deferred income tax expense from reorganization |
|
| 20,679 |
|
|
| — |
|
Loss on Tax Receivable Agreement |
|
| 478 |
|
|
| 7,173 |
|
Change (net of acquisitions) in: |
|
|
|
|
|
| ||
Commissions and fees receivable – net |
|
| 3,875 |
|
|
| 24,341 |
|
Accrued interest liability |
|
| (4,293 | ) |
|
| 3,016 |
|
Other current assets and accrued liabilities |
|
| (98,213 | ) |
|
| (192,752 | ) |
Other non-current assets and accrued liabilities |
|
| 22,915 |
|
|
| 3,999 |
|
Total cash flows provided by operating activities |
| $ | 250,335 |
|
| $ | 150,984 |
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
| ||
Capital expenditures |
|
| (16,013 | ) |
|
| (12,026 | ) |
Business combinations – net of cash acquired and cash held in a fiduciary capacity |
|
| (366,149 | ) |
|
| — |
|
Repayments of prepaid incentives |
|
| 228 |
|
|
| 337 |
|
Total cash flows used for investing activities |
| $ | (381,934 | ) |
| $ | (11,689 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
| ||
Proceeds from senior secured notes |
|
| — |
|
|
| 394,000 |
|
Payment of interest rate cap premium |
|
| — |
|
|
| (25,500 | ) |
Repayment of term debt |
|
| (12,375 | ) |
|
| (12,375 | ) |
Debt issuance costs paid |
|
| — |
|
|
| (2,369 | ) |
Finance lease and other costs paid |
|
| — |
|
|
| (27 | ) |
Payment of contingent consideration |
|
| (4,477 | ) |
|
| (6,241 | ) |
Tax distributions to LLC Unitholders |
|
| (52,633 | ) |
|
| (32,678 | ) |
Receipt of taxes related to net share settlement of equity awards |
|
| 7,786 |
|
|
| 7,132 |
|
Taxes paid related to net share settlement of equity awards |
|
| (7,091 | ) |
|
| (6,832 | ) |
Net change in fiduciary liabilities |
|
| 36,832 |
|
|
| (54,775 | ) |
Total cash flows (used for) provided by financing activities |
| $ | (31,958 | ) |
| $ | 260,335 |
|
Effect of changes in foreign exchange rates on cash, cash equivalents, and cash held in a fiduciary capacity |
|
| (828 | ) |
|
| (1,274 | ) |
NET CHANGE IN CASH, CASH EQUIVALENTS, AND CASH HELD IN A FIDUCIARY CAPACITY |
| $ | (164,385 | ) |
| $ | 398,356 |
|
CASH, CASH EQUIVALENTS, AND CASH HELD IN A FIDUCIARY CAPACITY—Beginning balance |
|
| 1,767,385 |
|
|
| 1,139,661 |
|
CASH, CASH EQUIVALENTS, AND CASH HELD IN A FIDUCIARY CAPACITY—Ending balance |
| $ | 1,603,000 |
|
| $ | 1,538,017 |
|
Reconciliation of cash, cash equivalents, and cash held in a fiduciary capacity |
|
|
|
|
|
| ||
Cash and cash equivalents |
|
| 754,370 |
|
|
| 833,135 |
|
Cash held in a fiduciary capacity |
|
| 848,630 |
|
|
| 704,882 |
|
Total cash, cash equivalents, and cash held in a fiduciary capacity |
| $ | 1,603,000 |
|
| $ | 1,538,017 |
|
See accompanying Notes to the Consolidated Financial Statements (Unaudited)
4
Ryan Specialty Holdings, Inc.
Consolidated Statements of Stockholders' Equity (Unaudited)
(In thousands, except share data)
| Class A |
| Class B |
| Additional |
| Retained |
| Accumulated Other Comprehensive |
| Non-controlling |
| Total |
| |||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Income (Loss) |
| Interests |
| Equity |
| |||||||||
Balance at January 1, 2023 |
| 112,437,825 |
| $ | 112 |
|
| 147,214,275 |
| $ | 147 |
| $ | 418,123 |
| $ | 53,988 |
| $ | 6,035 |
| $ | 339,407 |
| $ | 817,812 |
|
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 13,160 |
|
| — |
|
| 23,297 |
|
| 36,457 |
|
Issuance of common stock |
| 3,468 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Exchange of LLC equity for common stock |
| 792,358 |
|
| 1 |
|
| (792,358 | ) |
| (1 | ) |
| 1,430 |
|
| — |
|
| — |
|
| (1,430 | ) |
| — |
|
Tax Receivable Agreement liability and deferred taxes arising from LLC interest ownership changes |
| — |
|
| — |
|
| — |
|
| — |
|
| (395 | ) |
| — |
|
| — |
|
| — |
|
| (395 | ) |
Distributions declared – members' tax |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (15,382 | ) |
| (15,382 | ) |
Change in share of equity method investment in related party other comprehensive income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 214 |
|
| 370 |
|
| 584 |
|
Loss on interest rate cap, net |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (2,251 | ) |
| (3,889 | ) |
| (6,140 | ) |
Foreign currency translation adjustments |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 285 |
|
| 498 |
|
| 783 |
|
Equity-based compensation |
| — |
|
| — |
|
| — |
|
| — |
|
| 17,740 |
|
| — |
|
| — |
|
| 139 |
|
| 17,879 |
|
Balance at March 31, 2023 |
| 113,233,651 |
| $ | 113 |
|
| 146,421,917 |
| $ | 146 |
| $ | 436,898 |
| $ | 67,148 |
| $ | 4,283 |
| $ | 343,010 |
| $ | 851,598 |
|
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 30,078 |
|
| — |
|
| 53,739 |
|
| 83,817 |
|
Issuance of common stock |
| 104,196 |
|
| — |
|
| 21,006 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Exchange of LLC equity for common stock |
| 1,871,084 |
|
| 2 |
|
| (1,871,084 | ) |
| (2 | ) |
| 3,474 |
|
| — |
|
| — |
|
| (3,474 | ) |
| — |
|
Tax Receivable Agreement liability and deferred taxes arising from LLC interest ownership changes |
| — |
|
| — |
|
| — |
|
| — |
|
| 449 |
|
| — |
|
| — |
|
| — |
|
| 449 |
|
Distributions declared – members' tax |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (21,992 | ) |
| (21,992 | ) |
Change in share of equity method investment in related party other comprehensive income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 323 |
|
| 545 |
|
| 868 |
|
Gain on interest rate cap, net |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3,816 |
|
| 6,434 |
|
| 10,250 |
|
Foreign currency translation adjustments |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 103 |
|
| 176 |
|
| 279 |
|
Equity-based compensation |
| — |
|
| — |
|
| — |
|
| — |
|
| 12,104 |
|
| — |
|
| — |
|
| 6,545 |
|
| 18,649 |
|
Balance at June 30, 2023 |
| 115,208,931 |
| $ | 115 |
|
| 144,571,839 |
| $ | 144 |
| $ | 452,925 |
| $ | 97,226 |
| $ | 8,525 |
| $ | 384,983 |
| $ | 943,918 |
|
Net income (loss) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (5,047 | ) |
| — |
|
| 20,750 |
|
| 15,703 |
|
Issuance of common stock |
| 426,647 |
|
| — |
|
| 41,446 |
|
| — |
|
| 2,694 |
|
| — |
|
| — |
|
| — |
|
| 2,694 |
|
Exchange of LLC equity for common stock |
| 2,586,950 |
|
| 3 |
|
| (2,586,950 | ) |
| (3 | ) |
| 4,804 |
|
| — |
|
| — |
|
| (4,804 | ) |
| — |
|
Tax Receivable Agreement liability and deferred taxes arising from LLC interest ownership changes |
| — |
|
| — |
|
| — |
|
| — |
|
| (32,970 | ) |
| — |
|
| — |
|
| 13,136 |
|
| (19,834 | ) |
Distributions declared – members' tax |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (18,104 | ) |
| (18,104 | ) |
Change in share of equity method investment in related party other comprehensive loss |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (267 | ) |
| (405 | ) |
| (672 | ) |
Gain on interest rate cap, net |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 545 |
|
| 829 |
|
| 1,374 |
|
Foreign currency translation adjustments |
| — |
|
| — |
|
| — |
|
| — |
|
| (17 | ) |
| — |
|
| (567 | ) |
| (862 | ) |
| (1,446 | ) |
Equity-based compensation |
| — |
|
| — |
|
| — |
|
| — |
|
| 14,868 |
|
| — |
|
| — |
|
| 2,740 |
|
| 17,608 |
|
Balance at September 30, 2023 |
| 118,222,528 |
| $ | 118 |
|
| 142,026,335 |
| $ | 141 |
| $ | 442,304 |
| $ | 92,179 |
| $ | 8,236 |
| $ | 398,263 |
| $ | 941,241 |
|
See accompanying Notes to the Consolidated Financial Statements (Unaudited)
5
Ryan Specialty Holdings, Inc.
Consolidated Statements of Stockholders' Equity (Unaudited)
(In thousands, except share data)
| Class A |
| Class B |
| Additional Paid-in |
| Retained Earnings (Accumulated |
| Accumulated Other |
| Non-controlling |
| Total |
| |||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit) |
| Income (Loss) |
| Interests |
| 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 LLC equity 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 loss |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (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 LLC equity 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 loss |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (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 |
|
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 11,745 |
|
| — |
|
| 17,534 |
|
| 29,279 |
|
Issuance of common stock |
| 401,463 |
|
| — |
|
| 17,856 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Exchange of LLC equity for common stock |
| 617,599 |
|
| 1 |
|
| (617,599 | ) |
| (1 | ) |
| 3,171 |
|
| — |
|
| — |
|
| (3,171 | ) |
| — |
|
Forfeiture of common stock |
| (12,521 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Tax Receivable Agreement liability and deferred taxes arising from LLC interest ownership changes |
| — |
|
| — |
|
| — |
|
| — |
|
| (450 | ) |
| — |
|
| — |
|
| — |
|
| (450 | ) |
Distributions declared – members' tax |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (6,370 | ) |
| (6,370 | ) |
Change in share of equity method investment in related party other comprehensive loss |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (218 | ) |
| (1,218 | ) |
| (1,436 | ) |
Gain on interest rate cap, net |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 7,596 |
|
| 13,384 |
|
| 20,980 |
|
Foreign currency translation adjustments |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1,752 | ) |
| (2,297 | ) |
| (4,049 | ) |
Equity-based compensation |
| — |
|
| — |
|
| — |
|
| — |
|
| 13,397 |
|
| — |
|
| — |
|
| 4,659 |
|
| 18,056 |
|
Balance at September 30, 2022 |
| 112,212,653 |
| $ | 112 |
|
| 147,390,500 |
| $ | 147 |
| $ | 402,026 |
| $ | 36,093 |
| $ | 4,367 |
| $ | 314,779 |
| $ | 757,524 |
|
See accompanying Notes to the Consolidated Financial Statements (Unaudited)
6
Ryan Specialty Holdings, Inc.
Notes to the Consolidated Financial Statements (Unaudited)
(Tabular
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. The Company's Class A common stock is traded on the New York Stock Exchange under the ticker symbol “RYAN”.
Organization
Ryan Specialty Holdings, Inc., was formed as a Delaware corporation on March 5, 2021, for the purpose of completing an IPO and to carry on the business of the LLC. 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. New LLC is a holding company with its sole material asset being a controlling equity interest in the LLC. The Company operates and controls the business and affairs of the LLC through New LLC and, through the LLC, conducts its 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 Common Units on its consolidated financial statements. 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”. As of September 30, 2023, the Company owned 45.4% of the outstanding LLC Common Units.
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 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 1, 2023. 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 unaudited 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.
The Company, through its intermediate holding company New LLC, owns a minority economic interest in, and operates and controls the businesses and affairs of, the LLC. The LLC is a VIE of the Company and the Company is 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 has the obligation to absorb losses of, and receive benefits from, the LLC, which could be significant to the Company. 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 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.consolidated financial statements of such entity. The Company's relationship with the LLC results in no recourse to the general credit of the Company and the Company has no contractual requirement to provide financial support to the LLC. The Company has revised its prior period financial statementsshares in the income and losses of the LLC in direct proportion to reflect this change.the Company's ownership percentage.
7
Use of Estimates
The preparation of the Consolidated Financial Statementsunaudited consolidated interim financial statements and Notesnotes thereto that conform to U.S. GAAP requires management to make estimates, judgments, and assumptions that affect the amounts reported in the Consolidated Financial Statementsunaudited consolidated 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.
Significant Accounting Policies
There have been no material changes in the Company’s significant accounting policies from those that were disclosed for the year ended December 31, 2022 in the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2023.
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers by specialty:Specialty:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||
|
| 2023 |
| 2022 |
|
| 2023 |
| 2022 |
| ||||
Wholesale Brokerage |
| $ | 308,872 |
| $ | 267,222 |
|
| $ | 976,338 |
| $ | 841,273 |
|
Binding Authority |
|
| 69,245 |
|
| 55,607 |
|
|
| 208,547 |
|
| 178,351 |
|
Underwriting Management |
|
| 109,228 |
|
| 84,722 |
|
|
| 322,993 |
|
| 264,835 |
|
Total Net commissions and fees |
| $ | 487,345 |
| $ | 407,551 |
|
| $ | 1,507,878 |
| $ | 1,284,459 |
|
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 primarily from the Company’s volume-based commissions, are included within Commissions and fees receivable – net inon the Consolidated Statements of Financial Position.Balance Sheets. The contract assetassets balance was $7.9 million and $13.0 million as of JuneSeptember 30, 20212023 and December 31, 2020 was $5.6million and
2023 Acquisitions
On March 31, 2021, RSG acquiredJanuary 3, 2023, the remaining outstanding 53%Company completed the acquisition of certain assets of Griffin Underwriting Services (“Griffin”), a binding authority specialist and wholesale insurance broker headquartered in Bellevue, Washington, for cash consideration of $115.5 million.
On July 1, 2023, the Company completed the acquisitions of certain assets of ACE Benefit Partners, Inc. (“ACE”), a medical stop loss general agent headquartered in Eagle, Idaho, and Point6 Healthcare, LLC (“Point6”), a distributor of medical stop loss insurance on behalf of retail brokers and third-party administrators headquartered in Plano, Texas, for an aggregate $46.8 million of cash consideration and $2.3 million of contingent consideration.
On July 3, 2023, the Company completed the acquisition of Socius Insurance Services (“Socius”), a national wholesale insurance broker headquartered in Northern California, for $253.5 million of cash consideration, $5.8 million of contingent consideration, and $2.7 million of RYAN Class A common stock.
The $8.1 million of contingent consideration liabilities established for the acquisitions that occurred during the nine months ended September 30, 2023 were measured at the estimated acquisition date fair value and were non-cash investing transactions. These contingent consideration arrangements are based on the individual businesses’ revenue or EBITDA targets over the next one to two fiscal years.
8
The following table summarizes the estimated fair values of the common unitsaggregate assets and liabilities acquired through the nine months ended September 30, 2023, as of the date of each acquisition:
|
| Griffin |
| ACE and Point6 |
| Socius |
| Total |
| ||||
Cash and cash equivalents |
| $ | — |
| $ | — |
| $ | 12,858 |
| $ | 12,858 |
|
Commissions and fees receivable – net |
|
| 1,495 |
|
| 4,288 |
|
| 5,470 |
|
| 11,253 |
|
Fiduciary cash and receivables |
|
| 14,042 |
|
| 31,502 |
|
| 53,072 |
|
| 98,616 |
|
Goodwill |
|
| 63,898 |
|
| 25,782 |
|
| 177,057 |
|
| 266,737 |
|
Customer relationships1 |
|
| 51,400 |
|
| 21,900 |
|
| 99,200 |
|
| 172,500 |
|
Other current and non-current assets |
|
| 1,368 |
|
| — |
|
| 2,995 |
|
| 4,363 |
|
Total assets acquired |
| $ | 132,203 |
| $ | 83,472 |
| $ | 350,652 |
| $ | 566,327 |
|
Accounts payable and accrued liabilities |
|
| — |
|
| 2,358 |
|
| 2,330 |
|
| 4,688 |
|
Accrued compensation |
|
| 850 |
|
| 507 |
|
| 8,405 |
|
| 9,762 |
|
Fiduciary liabilities |
|
| 15,824 |
|
| 31,502 |
|
| 53,072 |
|
| 100,398 |
|
Deferred tax liabilities |
|
| — |
|
| — |
|
| 23,575 |
|
| 23,575 |
|
Other current and non-current liabilities |
|
| — |
|
| — |
|
| 1,226 |
|
| 1,226 |
|
Total liabilities assumed |
| $ | 16,674 |
| $ | 34,367 |
| $ | 88,608 |
| $ | 139,649 |
|
Net assets acquired |
| $ | 115,529 |
| $ | 49,105 |
| $ | 262,044 |
| $ | 426,678 |
|
1The acquired customer relationships have a weighted average amortization period of 13.2 years.
Estimates and assumptions used in Ryan Re, making Ryan Re a wholly owned subsidiary. Refer to Note 15,Related Parties.
The Company recognized an aggregate $17.4 million and $29.0 million of revenuerelated to the acquisitions above from their respective acquisition dates for the three and nine months ended September 30, 2023, respectively.Pro forma results of operations for these acquisitions have not been presented because the effects of these acquisitions were not material, either individually or in aggregate, has been material.
Contingent Consideration
Total consideration for certain acquisitions includes contingent consideration, which is generally based on the EBITDA or revenue of the acquired business following a defined period after purchase. Further information regarding fair value measurements of contingent consideration is detailed in Note 13, Fair Value Measurements. The Company recognizes lossesincome or loss for the changes in fair value of estimated contingent consideration within Change in contingent consideration, on the Consolidated Statements of Income. The Company alsoand recognizes interest expense for accretion of the discount on these liabilities which is recognized within Interest expense, net, on the Consolidated Statements of Income. Income (Loss). 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, 2021 and 2020:amounts recognized:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||
|
| 2023 |
| 2022 |
|
| 2023 |
| 2022 |
| ||||
Change in contingent consideration |
| $ | 1,848 |
| $ | 423 |
|
| $ | 4,358 |
| $ | (837 | ) |
Interest expense, net |
|
| 789 |
|
| 577 |
|
|
| 2,230 |
|
| 1,375 |
|
Total |
| $ | 2,637 |
| $ | 1,000 |
|
| $ | 6,588 |
| $ | 538 |
|
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 | ||||||||
The aggregate amount of maximum contingent consideration obligation related to acquisitions was $99.8millionand $102.4JuneSeptember 30, 2021 and December 31, 2020, respectively.
In February 2023, the Company initiated athe ACCELERATE 2025 program that will enable continued growth, drive innovation, and deliver sustainable productivity improvements over the long term. The restructuring plan after the All Risks Acquisition,aims to reduce costs and increase efficiencies. Theefficiencies through a focus on optimizing the Company's operations and technology. In its expanded form, the restructuring plan is expected to generate annual savings of
9
|
| Three Months Ended September 30, 2023 |
| Nine Months Ended September 30, 2023 |
| ||
Operations and technology optimization |
| $ | 10,824 |
| $ | 18,529 |
|
Compensation and benefits |
|
| 5,109 |
|
| 6,709 |
|
Asset impairment and other termination costs |
|
| 544 |
|
| 11,057 |
|
Total |
| $ | 16,477 |
| $ | 36,295 |
|
For the three and sixnine months ended JuneSeptember 30, 2021:
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:
|
| Operations and Technology Optimization |
| Compensation and Benefits |
| Asset Impairment |
| Total |
| ||||
Balance at January 1, 2023 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Accrued costs |
|
| 22,953 |
|
| 6,709 |
|
| 11,057 |
|
| 40,719 |
|
Payments |
|
| (11,390 | ) |
| (4,128 | ) |
| (8,220 | ) |
| (23,738 | ) |
Non-cash adjustments |
|
| — |
|
| — |
|
| (437 | ) |
| (437 | ) |
Balance at September 30, 2023 |
| $ | 11,563 |
| $ | 2,581 |
| $ | 2,400 |
| $ | 16,544 |
|
As of September 30, 2023, $11.2 million of the restructuring liability from December 31, 2020 through June 30, 2021was included in Accounts payable and accrued liabilities and $5.3 million was included in Current Accrued compensation on the Consolidated Balance Sheets.
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$177.7JuneSeptember 30, 20212023 and December 31, 2020,2022, respectively, which were recognized within Commissions and fees receivable—receivable – net inon the Consolidated Statements of Financial Position.Balance Sheets. Commission and fees receivable is net of an allowance for credit losses.
The following table provides a rollforwardsummary of changes in the Company’s allowance for expected credit losses:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||
|
| 2023 |
| 2022 |
|
| 2023 |
| 2022 |
| ||||
Beginning of period |
| $ | 2,089 |
| $ | 2,487 |
|
| $ | 1,980 |
| $ | 2,508 |
|
Write-offs |
|
| (441 | ) |
| (393 | ) |
|
| (1,342 | ) |
| (912 | ) |
Increase in provision |
|
| 869 |
|
| 375 |
|
|
| 1,879 |
|
| 873 |
|
End of period |
| $ | 2,517 |
| $ | 2,469 |
|
| $ | 2,517 |
| $ | 2,469 |
|
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:
|
| September 30, 2023 |
| December 31, 2022 |
| ||
Prepaid expenses |
| $ | 25,187 |
| $ | 21,062 |
|
Insurance recoverable |
|
| 22,562 |
|
| 20,562 |
|
Other current receivables |
|
| 14,880 |
|
| 8,066 |
|
Total Other current assets |
| $ | 62,629 |
| $ | 49,690 |
|
Other current receivables contain service receivables from Geneva Re, Ltd. See Note 15, Related Parties, for further information regarding related parties. See Note 14, Commitments and Contingencies, for further information on the insurance recoverable.
10
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 has variousJuly 2031September 2038, primarily for office space and office equipment. space. 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
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||
|
| 2023 |
| 2022 |
|
| 2023 |
| 2022 |
| ||||
Lease costs |
|
|
|
|
|
|
|
|
|
| ||||
Operating lease costs |
| $ | 8,687 |
| $ | 7,734 |
|
| $ | 26,339 |
| $ | 23,344 |
|
Finance lease costs |
|
| — |
|
| 7 |
|
|
| — |
|
| 24 |
|
Short-term lease costs |
|
|
|
|
|
|
|
|
|
| ||||
Operating lease costs |
|
| 234 |
|
| 152 |
|
|
| 635 |
|
| 431 |
|
Finance lease costs |
|
| — |
|
| 2 |
|
|
| — |
|
| 7 |
|
Sublease income |
|
| (193 | ) |
| (122 | ) |
|
| (439 | ) |
| (319 | ) |
Lease costs – net |
| $ | 8,728 |
| $ | 7,773 |
|
| $ | 26,535 |
| $ | 23,487 |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash paid for amounts included in the measurement of lease liabilities |
| |||||||||||||
Operating cash flows from operating leases |
|
|
|
|
|
| $ | 23,245 |
| $ | 18,419 |
| ||
Non-cash related activities |
|
|
|
|
|
|
|
|
|
| ||||
Right-of-use assets obtained in exchange for new operating lease liabilities |
|
|
|
|
|
|
| 9,948 |
|
| 63,882 |
| ||
Weighted average discount rate (percent) |
|
|
|
|
|
|
|
|
|
| ||||
Operating leases |
|
|
|
|
|
|
| 5.1 | % |
| 4.6 | % | ||
Finance leases |
|
|
|
|
|
|
| — |
|
| 3.2 | % | ||
Weighted average remaining lease term (years) |
|
|
|
|
|
|
|
|
|
| ||||
Operating leases |
|
|
|
|
|
|
| 8.3 |
|
| 7.6 |
| ||
Finance leases |
|
|
|
|
|
|
| — |
|
| 2.1 |
|
11
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 |
December 31, 2020 | ||||||||
Right-of-use | $ | 86,412 | $ | 93,715 | ||||
Right-of-use | 153 | 226 | ||||||
Total lease right-of-use | $ | 86,565 | $ | 93,941 | ||||
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 | ||||
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 | ||||
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.
|
| September 30, 2023 |
| December 31, 2022 |
| ||
Term debt |
|
|
|
|
| ||
7-year term loan facility, periodic interest and quarterly principal payments, Adjusted Term SOFR + 3.00%, matures September 1, 2027 |
| $ | 1,566,232 |
| $ | 1,571,818 |
|
Senior secured notes |
|
|
|
|
| ||
8-year senior secured notes, semi-annual interest payments, 4.38%, matures February 1, 2030 |
|
| 396,096 |
|
| 399,791 |
|
Revolving debt |
|
|
|
|
| ||
5-year revolving loan facility, periodic interest payments, Adjusted Term SOFR + up to 3.00%, plus commitment fees of 0.25%-0.50%, matures July 26, 2026 |
|
| 390 |
|
| 392 |
|
Premium financing notes |
|
|
|
|
| ||
Commercial notes, periodic interest and principal payments, 5.75%, expire May 1, 2024 |
|
| 3,909 |
|
| — |
|
Commercial notes, periodic interest and principal payments, 5.75%, expire June 1, 2024 |
|
| 989 |
|
| — |
|
Commercial notes, periodic interest and principal payments, 6.00%, expire June 19, 2024 |
|
| 4,121 |
|
| — |
|
Commercial notes, periodic interest and principal payments, 5.75%, expire June 21, 2024 |
|
| 4,252 |
|
| — |
|
Commercial notes, periodic interest and principal payments, 1.88%-2.49%, expired May 1, 2023 |
|
| — |
|
| 1,685 |
|
Commercial notes, periodic interest and principal payments, 2.49%, expired June 1, 2023 |
|
| — |
|
| 767 |
|
Commercial notes, periodic interest and principal payments, 2.74%, expired June 21, 2023 |
|
| — |
|
| 3,266 |
|
Finance lease obligation |
|
| — |
|
| 57 |
|
Units subject to mandatory redemption |
|
| 5,072 |
|
| 4,711 |
|
Total debt |
| $ | 1,981,061 |
| $ | 1,982,487 |
|
Less: Short-term debt and current portion of long-term debt |
|
| (35,566 | ) |
| (30,587 | ) |
Long-term debt |
| $ | 1,945,495 |
| $ | 1,951,900 |
|
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 obtainTerm Loan was $1,650.0 million. As of September 30, 2023, $1,600.5 million of the principal was outstanding, $0.7 million of interest was accrued, and the related unamortized deferred issuance costs were $35.0 million. As of December 31, 2022, $1,612.9 million of the principal was outstanding, $0.7 million of interest was accrued, and the related unamortized deferred issuance costs were $41.7 million.
Revolving Credit Facility
The Revolving Credit Facility had a better interest rate, while no other terms changed. Several lenders opted toborrowing capacity of $600.0 million as of September 30, 2023 and December 31, 2022. As the Revolving Credit Facility had not participate inbeen drawn on as of September 30, 2023 or December 31, 2022, the repricing. The debtdeferred issuance costs related to the lenders that opted outfacility of $4.7 million and $6.4 million, respectively, were included in Other non-current assets on the repricing was considered extinguishedConsolidated Balance Sheets. The Company pays a commitment fee on undrawn amounts under the facility of 0.25% - 0.50%. As of September 30, 2023 and December 31, 2022, the Company accrued $0.4 million of unpaid commitment fees related to those lenders were written off asthe Revolving Credit Facility in Short-term debt and current portion of long-term debt on the endConsolidated Balance Sheets.
Senior Secured Notes due 2030
On February 3, 2022, the LLC issued $400.0 million of the first quarter. The amount of fees written off was $8.6 million.
12
Ryan Specialty's amended and restated certificate of incorporation authorizes the issuance of up 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 New LLC Operating Agreement requires 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 but, upon the occurrence of certain events as set forth in the Company’s amended and restated certificate of incorporation, will be entitled to one vote per share in the future. 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. 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.
In accordance with the New LLC Operating Agreement, the LLC Unitholders are 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 term loan were
Class X Common Stock
There were no shares of Class X common stock outstanding as of September 30, 2023 or December 31, 2022. The Company issued shares of Class X common stock to Onex as part of the Organizational Transactions, which were immediately repurchased and canceled, as a Qualified Public Offeringmechanism for Onex to participate in the TRA. Shares of Class X common stock have no economic or a Sale Transaction, that require a Mandatory Redemption. If a Mandatory Redemption is required prior to the five year anniversaryvoting rights.
Preferred Stock
There were no shares of the issuance date, the redemption price would be subject to a make-whole provision set forth inpreferred stock outstanding as of September 30, 2023 or December 31, 2022. Under the terms of the agreement.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 stockholder 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 yield make-whole provisions represent embedded derivativesstock.
Non-controlling Interests
The Company is the sole managing member of the LLC. As a result, the Company consolidates the LLC in its consolidated financial statements, resulting in non-controlling interests related to the LLC Common Units not held by the Company. As of September 30, 2023 and December 31, 2022, the Company owned 45.4% and 43.3%, respectively, of the economic interests in the LLC, while the non-controlling interest holders owned the remaining 54.6% and 56.7%, respectively, 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 56.1% and 57.4% for the three months ended September 30, 2023 and 2022, respectively, and 56.5% and 57.7% for the nine months ended September 30, 2023 and 2022, respectively.
13
The Ryan Specialty Holdings, Inc., 2021 Omnibus Incentive Plan (the “Omnibus Plan”) governs, among other things, the types of awards the Company can grant to employees as equity-based compensation awards. 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 LLC 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 LLC Units for either Restricted Stock or Restricted Common Units. Additionally, Reload Options or Reload Class Incentive Units were issued to employees in order to protect against the dilution of their existing awards upon exchange to the new awards.
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 non-linear transfer restrictions for at least the five-year period following the IPO.
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, and (iv) Stock Options. The terms of these awards are described below.
Restricted Stock and Restricted Common Units
As part of the Organizational Transactions, certain existing employee unitholders were granted Restricted Stock or Restricted Common Units in exchange for their LLC Units. The Restricted Stock and 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.
|
| Nine Months Ended September 30, 2023 |
| |||||||||||||
|
| Restricted Stock |
|
| Weighted Average Grant Date |
|
| Restricted |
|
| Weighted Average Grant Date |
| ||||
Unvested at beginning of period |
|
| 1,984,939 |
|
| $ | 21.15 |
|
|
| 3,238,597 |
|
| $ | 23.84 |
|
Granted |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Vested |
|
| (969,178 | ) |
|
| 21.15 |
|
|
| (1,999,365 | ) |
|
| 23.84 |
|
Forfeited |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Unvested at end of period |
|
| 1,015,761 |
|
| $ | 21.15 |
|
|
| 1,239,232 |
|
| $ | 23.84 |
|
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.
Incentive RSUs
As part of the Company’s compensation process, the Company issues 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, over 5 years from the grant date, with one-third of the grant vesting in each of years 3, 4 and 5, or over 7 years from the grant date, with 20% vesting in each of years 3 through 7.
14
Upon vesting, RSUs automatically convert on a one-for-one basis into Class A common stock.
|
| Nine Months Ended September 30, 2023 |
| |||||||||||||
|
| IPO RSUs |
|
| Incentive RSUs |
| ||||||||||
|
| Restricted |
|
| Weighted Average Grant Date |
|
| Restricted |
|
| Weighted Average Grant Date |
| ||||
Unvested at beginning of period |
|
| 3,771,624 |
|
| $ | 23.00 |
|
|
| 984,439 |
|
| $ | 34.64 |
|
Granted |
|
| — |
|
|
| — |
|
|
| 871,823 |
|
|
| 41.19 |
|
Vested |
|
| (372,466 | ) |
|
| 22.43 |
|
|
| (68,325 | ) |
|
| 34.77 |
|
Forfeited |
|
| (31,287 | ) |
|
| 22.56 |
|
|
| (11,628 | ) |
|
| 34.39 |
|
Unvested at end of period |
|
| 3,367,871 |
|
| $ | 23.07 |
|
|
| 1,776,309 |
|
| $ | 37.85 |
|
Stock Options
Reload and Staking Options
As part of the Organizational Transactions and IPO, certain employees were granted Reload Options or 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 Reload Options vest either 100% 3 years from the grant date or over 5 years from the grant date, with one-third of the grant vesting in each of years 3, 4 and 5. In general, vested Reload Options are exercisable up to the tenth anniversary of the grant date. The Staking Options vest over 10 years from the grant date, with 10% vesting in each of years 3 through 9 and 30% vesting in year 10. In general, vested Staking Options are exercisable up to the eleventh anniversary of the grant date.
Incentive Options
As part of the Company’s compensation process, the Company may issue Incentive Options to certain employees that entitle the award holder to future purchases of Class A common stock, on a one-for-one basis, at the respective exercise prices. The Incentive Options vest over 5 years from the grant date, with one-third of the grant vesting in each of years 3, 4 and 5. In general, vested Incentive Options are exercisable up to the tenth anniversary of the grant date.
|
| Nine Months Ended September 30, 2023 |
| |||||||||||||
|
| Reload Options1 |
|
| Staking Options1 |
|
| Incentive Options |
|
| Incentive Options |
| ||||
Outstanding at beginning of period |
|
| 4,554,749 |
|
|
| 66,667 |
|
|
| 170,392 |
|
| $ | 34.39 |
|
Granted |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Exercised |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Forfeited |
|
| (6,555 | ) |
|
| — |
|
|
| (2,293 | ) |
|
| 34.39 |
|
Outstanding at end of period |
|
| 4,548,194 |
|
|
| 66,667 |
|
|
| 168,099 |
|
| $ | 34.39 |
|
1 As the Reload and Staking Options were one-time grants at the IPO, the weighted average exercise price for any movements in these awards will perpetually be $23.50. As such, the values are not presented in the table above.
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 30% vesting in year 10.
Incentive RLUs
As part of the Company’s compensation process, the Company issues Incentive RLUs to certain employees. The Incentive RLUs vest pro rata over 3 or 5 years from the grant date or over 7 years from the grant date, with 20% vesting in each of years 3 through 7.
15
Upon vesting, RLUs convert on a one-for-one basis into either LLC Common Units or Class A common stock at the election of the Company.
|
| Nine Months Ended September 30, 2023 |
| |||||||||||||
|
| IPO RLUs |
|
| Incentive RLUs |
| ||||||||||
|
| Restricted |
|
| Weighted Average Grant Date |
|
| Restricted |
|
| Weighted Average Grant Date |
| ||||
Unvested at beginning of period |
|
| 1,515,858 |
|
| $ | 25.06 |
|
|
| 145,527 |
|
| $ | 34.86 |
|
Granted |
|
| — |
|
|
| — |
|
|
| 379,148 |
|
|
| 41.14 |
|
Vested |
|
| (67,731 | ) |
|
| 24.41 |
|
|
| (42,045 | ) |
|
| 34.86 |
|
Forfeited |
|
| — |
|
|
| — |
|
|
| (301 | ) |
|
| 34.85 |
|
Unvested at end of period |
|
| 1,448,127 |
|
| $ | 25.09 |
|
|
| 482,329 |
|
| $ | 39.80 |
|
Class C Incentive Units
Reload and Staking Class C Incentive Units
As part of the Organizational Transactions and IPO, certain employees were granted Reload Class C Incentive Units or Staking Class C Incentive Units, which are profits interests. When the value of Class A common stock exceeds the IPO price of $23.50, vested profits interests may be exchanged for LLC Common Units of equal value. On exchange, the LLC Common Units are immediately 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 one-third of the grant vesting in each of years 3, 4 and 5.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.
Class C Incentive Units
As part of the Company’s compensation process, the Company issues Class C Incentive Units to certain employees, which are profits interests. When the value of the Class A common stock exceeds the participation threshold, vested profits interests may be exchanged for LLC Common Units of equal value. On exchange, the LLC Common Units are immediately 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, or over 7 years from the grant date, with 20% vesting in each of years 3 through 7.
|
| Nine Months Ended September 30, 2023 |
| |||||||||||||
|
| Reload Class C Incentive Units1 |
|
| Staking Class C Incentive Units1 |
|
| Class C |
|
| Class C Incentive Units Weighted Average Participation Threshold |
| ||||
Unvested at beginning of period |
|
| 3,911,490 |
|
|
| 1,996,668 |
|
|
| 300,000 |
|
| $ | 34.39 |
|
Granted |
|
| — |
|
|
| — |
|
|
| 195,822 |
|
|
| 40.90 |
|
Vested |
|
| — |
|
|
| (119,999 | ) |
|
| — |
|
|
| — |
|
Forfeited |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Unvested at end of period |
|
| 3,911,490 |
|
|
| 1,876,669 |
|
|
| 495,822 |
|
| $ | 36.96 |
|
1 As the Reload and Staking Class C Incentive Units were one-time grants at the IPO, the weighted average participation threshold for any movements in these awards will perpetually be $23.50. As such, the values are not presented in the table above.
Non-Employee Director Stock Grants
The Company grants RSUs (“Director Stock Grants”) to non-employee directors serving as members of the Company's Board of Directors, with the exception of the one director appointed by Onex in accordance with Onex’s nomination rights who has agreed to forgo any compensation for his service to the Board. The Director Stock Grants are fully vested upon grant. The Company recognized $0.2 million of expense related to the Director Stock Grants during the three months ended September 30, 2023 and 2022, and $0.8 million and $1.8 million during the nine months ended September 30, 2023 and 2022, respectively.
16
Equity-Based Compensation Expense
As of September 30, 2023, the unrecognized equity-based compensation costs related to each type of equity-based compensation award described above and the related weighted-average remaining expense period were as follows:
|
| Amount |
| Weighted Average |
| ||
Restricted Stock |
| $ | 4,496 |
|
| 0.9 |
|
IPO RSUs |
|
| 43,600 |
|
| 4.0 |
|
Incentive RSUs |
|
| 48,295 |
|
| 2.7 |
|
Reload Options |
|
| 3,092 |
|
| 1.4 |
|
Staking Options |
|
| 335 |
|
| 5.6 |
|
Incentive Options |
|
| 1,165 |
|
| 2.3 |
|
Restricted Common Units |
|
| 3,034 |
|
| 0.5 |
|
IPO RLUs |
|
| 23,079 |
|
| 5.1 |
|
Incentive RLUs |
|
| 15,186 |
|
| 2.3 |
|
Reload Class C Incentive Units |
|
| 3,492 |
|
| 1.5 |
|
Staking Class C Incentive Units |
|
| 13,698 |
|
| 4.7 |
|
Class C Incentive Units |
|
| 7,953 |
|
| 4.6 |
|
Total unrecognized equity-based compensation expense |
| $ | 167,425 |
|
|
|
The following table includes the equity-based compensation the Company recognized by award type from the view of expense related to pre-IPO and post-IPO awards. The table also presents the unrecognized equity-based compensation expense as of September 30, 2023 in the same view.
|
| Recognized |
| Unrecognized |
| |||||
|
| Three Months Ended |
| Nine Months Ended |
| As of |
| |||
|
| September 30, 2023 |
| September 30, 2023 |
| September 30, 2023 |
| |||
IPO awards |
|
|
|
|
|
|
| |||
IPO RSUs and Staking Options |
| $ | 3,654 |
| $ | 12,599 |
| $ | 43,935 |
|
IPO RLUs and Staking Class C Incentive Units |
|
| 2,738 |
|
| 8,866 |
|
| 36,777 |
|
Incremental Restricted Stock and Reload Options |
|
| 1,156 |
|
| 3,723 |
|
| 5,340 |
|
Incremental Restricted Common Units and Reload Class C Incentive Units |
|
| 1,779 |
|
| 5,779 |
|
| 5,616 |
|
Pre-IPO incentive awards |
|
|
|
|
|
|
| |||
Restricted Stock |
|
| 646 |
|
| 2,144 |
|
| 2,248 |
|
Restricted Common Units |
|
| 308 |
|
| 1,224 |
|
| 910 |
|
Post-IPO incentive awards |
|
|
|
|
|
|
| |||
Incentive RSUs |
|
| 5,237 |
|
| 13,896 |
|
| 48,295 |
|
Incentive RLUs |
|
| 1,214 |
|
| 3,329 |
|
| 15,186 |
|
Incentive Options |
|
| 125 |
|
| 368 |
|
| 1,165 |
|
Class C Incentive Units |
|
| 521 |
|
| 1,385 |
|
| 7,953 |
|
Other expense |
|
|
|
|
|
|
| |||
Director Stock Grants |
|
| 230 |
|
| 823 |
| N/A |
| |
Total equity-based compensation expense |
| $ | 17,608 |
| $ | 54,136 |
| $ | 167,425 |
|
The Company recognized equity-based compensation expense of $18.1 million and $61.1 million for the three and nine months ended September 30, 2022, respectively.
17
Basic earnings (loss) per share is computed by dividing net income (loss)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 potentially dilutive shares, including LLC equity awards and the non-controlling interests’ LLC Common Units that are accounted for on a combined basis separatelyexchangeable into Class A common stock. 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.A reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings (loss) per share of Class A common stock is as follows:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||
|
| 2023 |
| 2022 |
|
| 2023 |
| 2022 |
| ||||
Net income |
| $ | 15,703 |
| $ | 29,279 |
|
| $ | 135,977 |
| $ | 117,475 |
|
Less: Net income attributable to non-controlling interests |
|
| 20,750 |
|
| 17,534 |
|
|
| 97,786 |
|
| 74,318 |
|
Net income (loss) attributable to Ryan Specialty Holdings, Inc. |
| $ | (5,047 | ) | $ | 11,745 |
|
| $ | 38,191 |
| $ | 43,157 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) attributable to Class A common shareholders |
| $ | (5,047 | ) | $ | 11,745 |
|
| $ | 38,191 |
| $ | 43,157 |
|
Add: Income (loss) attributed to substantively vested RSUs |
|
| (100 | ) |
| 165 |
|
|
| 687 |
|
| 596 |
|
Net income (loss) attributable to Class A common shareholders – basic |
| $ | (5,147 | ) | $ | 11,910 |
|
| $ | 38,878 |
| $ | 43,753 |
|
Add: Income attributed to dilutive shares |
|
| — |
|
| 12,914 |
|
|
| 3,128 |
|
| 54,812 |
|
Net income (loss) attributable to Class A common shareholders – diluted |
| $ | (5,147 | ) | $ | 24,824 |
|
| $ | 42,006 |
| $ | 98,565 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
| ||||
Weighted-average shares of Class A common stock outstanding – basic |
|
| 115,872,327 |
|
| 109,428,073 |
|
|
| 113,291,850 |
|
| 108,035,360 |
|
Add: Dilutive shares |
|
| — |
|
| 156,924,316 |
|
|
| 11,591,673 |
|
| 157,035,379 |
|
Weighted-average shares of Class A common stock outstanding – diluted |
|
| 115,872,327 |
|
| 266,352,389 |
|
|
| 124,883,523 |
|
| 265,070,739 |
|
Earnings (loss) per Share: |
|
|
|
|
|
|
|
|
|
| ||||
Earnings (loss) per share of Class A common stock – basic |
| $ | (0.04 | ) | $ | 0.11 |
|
| $ | 0.34 |
| $ | 0.40 |
|
Earnings (loss) per share of Class A common stock – diluted |
| $ | (0.04 | ) | $ | 0.09 |
|
| $ | 0.34 |
| $ | 0.37 |
|
The following number of shares were excluded from the redeemable preferredcalculation of diluted earnings (loss) per share because the effect of including such potentially dilutive shares would have been antidilutive:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||
|
| 2023 |
| 2022 |
|
| 2023 |
| 2022 |
| ||||
Conversion of non-controlling interest LLC Common Units1 |
|
| 141,689,681 |
|
| — |
|
|
| 142,974,016 |
|
| — |
|
Conversion of vested Class C Incentive Units1 |
|
| 98,699 |
|
| — |
|
|
| 65,028 |
|
| — |
|
Restricted Stock |
|
| 1,015,761 |
|
| — |
|
|
| — |
|
| — |
|
IPO RSUs |
|
| 3,229,891 |
|
| — |
|
|
| — |
|
| — |
|
Incentive RSUs |
|
| 1,776,309 |
|
| — |
|
|
| — |
|
| — |
|
Reload Options |
|
| 4,548,194 |
|
| — |
|
|
| — |
|
| — |
|
Staking Options |
|
| 66,667 |
|
| — |
|
|
| — |
|
| — |
|
Incentive Options |
|
| 168,099 |
|
| 170,392 |
|
|
| 168,099 |
|
| 170,392 |
|
Restricted Common Units |
|
| 1,239,232 |
|
| — |
|
|
| — |
|
| — |
|
IPO RLUs |
|
| 1,448,127 |
|
| — |
|
|
| — |
|
| — |
|
Incentive RLUs |
|
| 482,329 |
|
| — |
|
|
| — |
|
| — |
|
Reload Class C Incentive Units |
|
| 3,911,490 |
|
| — |
|
|
| — |
|
| — |
|
Staking Class C Incentive Units |
|
| 1,876,669 |
|
| — |
|
|
| — |
|
| — |
|
Class C Incentive Units |
|
| 495,822 |
|
| 300,000 |
|
|
| 495,822 |
|
| 300,000 |
|
1Weighted average units outstanding during the period.
18
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 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) |
The gainsCompany elected to exclude the change in the time value of the interest rate cap from the assessment of hedge effectiveness and losses recognized in earnings for derivatives in Othernon-operatingincome withinwill amortize the initial value of the premium over the life of the instrument through Interest expense, net on the Consolidated Statements of Income are as follows:
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 | ||||||||
For the three months ended September 30, 2023 and 2022, the $(0.2) million and $21.9 million, respectively, from changes in current andnon-currentassets and liabilities within the operating section of the Consolidated Statements of Cash Flows.
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 | — | — | |||||||||||||||
As discussed in Note 1, Basis of each eligible employee’s contribution. The Company recognized expense related to discretionary matching contributions in the amount of $
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.
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, accounts payable, short-term debt, and Accounts payable andother accrued liabilities at Juneas of September 30, 20212023 and December 31, 2020,2022 approximate fair value because of the short-term duration of these instruments.
Derivative Instrument
The Company uses an interest rate cap 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 is determined using the market standard methodology of June 30, 2021 was $51.0 million.
19
that would occur if variable interest rates rise above the strike rate of the total considerationcap. The variable interest rates used in the calculation of that business combination atprojected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. The inputs used in determining the fair value with an offsetting liability inof the opening balance sheet under OtherNon-currentliabilities in the Statements of Financial Position.
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 thecertain 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 adjustedrisk-adjusted revenue and EBITDA, which are then run through a series of simulations. TheAs of September 30, 2023, the models used risk-free rates, and expected volatility, used inand a credit spread that ranged from 4.7% to 5.4%, 7.0% to 21.7%, and 3.6% to 4.2%, respectively. As of December 31, 2022, the models range from 0.05% to 0.10%used a risk-free rate, expected volatility, and 15% to 35%a credit spread of 4.6%, 22.5%, and 4.5%, 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. TheseThe discount rates generallyrate range from 5.5%used to 12.1% forpresent value the acquisitions.
Each period, RSGthe Company revalues the contingent consideration obligations associated with certain prior acquisitions to their fair value and records subsequentthe changes toof the fair value of these estimated obligations in Change in contingent consideration within Operating income when incurred.
Assets and $5.5Liabilities Measured at Fair Value on a Recurring Basis
The following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis by fair value hierarchy input level:
| September 30, 2023 |
|
| December 31, 2022 |
| ||||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
|
| Level 1 |
| Level 2 |
| Level 3 |
| ||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest rate cap | $ | — |
| $ | 46,845 |
| $ | — |
|
| $ | — |
| $ | 45,860 |
| $ | — |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Contingent consideration |
| — |
|
| — |
|
| 36,018 |
|
|
| — |
|
| — |
|
| 29,251 |
|
Total assets and liabilities | $ | — |
| $ | 46,845 |
| $ | 36,018 |
|
| $ | — |
| $ | 45,860 |
| $ | 29,251 |
|
Contingent consideration of $36.0 million and $21.8 million was recorded in Other non-current liabilities on the Consolidated Balance Sheets as of JuneSeptember 30, 20212023 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 | ||||||||||||
Level 3 Liabilities Measured at Fair Value
The following is a reconciliation of the beginning and ending balances for the Level 3 liabilities measured at fair value:value, which consist of contingent consideration for both periods:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||
|
| 2023 |
| 2022 |
|
| 2023 |
| 2022 |
| ||||
Balance at beginning of period |
| $ | 25,290 |
| $ | 26,357 |
|
| $ | 29,251 |
| $ | 42,053 |
|
Newly established liability due to acquisitions |
|
| 8,091 |
|
| — |
|
|
| 8,091 |
|
| — |
|
Total losses included in earnings |
|
| 2,637 |
|
| 1,000 |
|
|
| 6,588 |
|
| 538 |
|
Settlements |
|
| — |
|
| — |
|
|
| (7,912 | ) |
| (15,234 | ) |
Balance at end of period |
| $ | 36,018 |
| $ | 27,357 |
|
| $ | 36,018 |
| $ | 27,357 |
|
20
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 | ||||||||||||
For the sixnine months ended JuneSeptember 30, 20212023, $3.4 million and 2020, there were 0 purchases, issues, sales or transfers related to fair value measurements. The Company settled$4.5 million settlements of contingent consideration of $2.7million$0.5millionduring the six months ended June 30, 2021 and June 30, 2020, respectively. Additionally, 0 unrealized gains or losses were recorded infinancing sections, respectively, of the Consolidated Statements of Comprehensive Income for liabilities held duringCash Flows. For the period.
Legal – E&O and Other Considerations
As an excessE&S and surplus lines and admittedAdmitted markets broker, RSGintermediary, the Company faces ordinary course of business E&O exposure. The Company also 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, RSG from time to timeThe Company seeks to resolve, early in the process, through a commercial accommodation,accommodations, certain matters to limit the economic exposure, and reputational risk, including potential legal fees, and reputational risk created by a disagreement between a carrier and the insured.
The Company utilizes 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 per claim retention amount of $2.5millionclaim. RSG has historically maintained self-insurance reserves for the Company’s portionclaim retention amount increased from $2.5 million to $5.0 million as of the E&O exposure that is not insured. RSGJune 1, 2023. The Company periodically determines a range of possible reserve levelsoutcomes using the best available information that rely heavilyrelies, in part, on projecting historical claim data into the future.
During 2022, the Company placed certain insurance policies through a trading partner with the understanding that the policies were underwritten by highly rated insurance capital. The policies were instead underwritten by an insurance carrier that was not considered satisfactory by the Company or the insureds. The Company committed to securing replacement coverage, to the extent commercially available, from highly rated insurance companies on terms substantially similar to the insurance coverage originally agreed upon. As a result of this unusual circumstance, the Company has and may continue to incur losses (“Replacement Costs”) arising from the original placements. The Company has determined that it is probable that it will be exposed to the Replacement Costs on policies placed with this trading partner. The Company recognized an estimated loss contingency of $0.2 million and $23.1 million as of September 30, 2023 and December 31, 2022, respectively, within Accounts payable and accrued liabilities on the Consolidated Balance Sheets. Relatedly, the Company has obtained sufficient evidence from its E&O insurance carriers to conclude that a recovery of the claim for the Replacement Costs, in excess of the $2.5 million retention, is probable. A loss recovery of $22.6 million and $20.6 million was recorded as of September 30, 2023 and December 31, 2022, respectively, in Other current assets on the Consolidated Balance Sheets. In the aggregate, the loss contingency and related loss recovery resulted in a $2.5 million expense recognized in 2022. No further expense was recognized during the three or nine months ended September 30, 2023.
It is at least reasonably possible that the estimate of Replacement Costs will change in the near term as policies are adjusted. Further, exposure to additional losses may arise from policies that had expired prior to, or shortly after, the discovery of this unusual circumstance, adjustable premiums arising from the addition or deletion of properties over the policy term, unpaid covered claims, or other damages for losses incurred by our customers. An estimate of these potential losses cannot be made at this time but could change in the future as more information becomes known.
Ryan or his family trusts throughInvestment Holdings
Ryan Investment Holdings, LLC (“RIH”) was formed as an investment holding company designed to aggregate the investments described in Note 11,Equity.
The Company RSG recognized the assets and liabilities in Ryan Re upon initial consolidation at historical cost, inclusive of an accumulated deficit.
21
Re”), a Bermuda-regulated reinsurance company.company, and GR Bermuda SAC Ltd (the “Segregated Account Company”). The Segregated Account Company has one segregated account, which is beneficially owned by a third-party insurance company (the “Third-party Insurer”). RIH is considered a related party variable interest entity under common control with the Company. The Company is not most closely associated with the variable interest entity and therefore does not consolidate RIH. The assets of RIH are restricted to settling obligations of RIH, pursuant to Delaware limited liability company statutes.
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
The Company through its investment in RIH and in connection with the GRP 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.
Ryan and Diane M. Aigotti, former Executive Vice President and CFORe Services Agreements with Geneva Re
Ryan Re, a wholly owned subsidiary of the Company, were designatedis party to represent RSG’s interest on the board of GRP. In connection with the retirement of Diane M. Aigotti in the first quarter of 2021, Jeremiah R. Bickham, the current CFO of RSG, replaced Diane M. Aigotti on the board of GRP. One of the investors of GRH represents the interests of GRH, while another of its investors is on the Company’s Board of Directors, is Executive Chairman of Geneva Re, and acts in the capacity of Executive Director on the Board of GRP.
On April 2, 2023, Ryan Re entered into a services agreement with Geneva Re in accordance with which Ryan Re subcontracted certain services to Geneva Re that Ryan Re is required to provide to the segregated account of the Segregated Account Company on behalf of the Third-party Insurer. The Company incurred expense of $2.2 million and $5.4 million during the three and nine months ended September 30, 2023, respectively, and had prepaid expenses of $6.4 million as of September 30, 2023, related to this services agreement. The prepaid expenses are included in Other currents assets on the Consolidated Balance Sheets.
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”)., a third-party service provider. 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 expenses related to business usage of the aircraft for the three months ended June 30, 2021 and 2020. The Company recognized an expense related to business usage of the aircraft
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 subsidiaries.
Common Control Reorganization (“CCR”)
Subsequent to the acquisition of Socius, which was purchased by a wholly owned subsidiary of Ryan Specialty Holdings, Inc., the Company converted Socius to an LLC (“Socius LLC”) and transferred Socius LLC to the LLC. This legal entity reorganization was considered a transaction between entities under common control. The CCR resulted in deferred tax liabilities of $64.5 million and non-cash deferred income tax expense of $20.7 million. Additionally, the difference between the carrying value and the fair value 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 throughinvestment transferred under common control resulted in an increase of $13.1 million to Non-controlling interests on the Company. Instead, it is taxed atConsolidated Statements of Stockholders’ Equity during the corporate level subject to the prevailing corporate tax rates.
22
Effective Tax Rate
The Company’s effective tax rate from continuing operations was 3.55%61.26% and 3.08%10.44% for the three months ended JuneSeptember 30, 20212023 and 2020,2022, respectively, and 23.92% and 7.90% for the nine months ended September 30, 2023 and 2022, respectively. The Company’s effective tax rate from continuing operations was 7.12% and 4.77% for the sixthree and nine months ended JuneSeptember 30, 20212023 was higher than the 21% statutory rate primarily as a result of the $20.7 million non-cash deferred income tax expense from the CCR, which was recognized in Income tax expense in the Consolidated Statements of Income (Loss) for the three and 2020, respectively.nine months ended September 30, 2023. The quarterly effective tax rates are significantly differentrate for the three months ended September 30, 2022 was lower than the 21% statutory rate primarily as a result of the tax benefit from the 21% statutoryvesting of Staking RSUs and the income attributable to the non-controlling interests. The effective tax rate duefor the nine months ended September 30, 2022 was lower than the 21% statutory rate primarily as a result of the changes in state tax rates and the income attributable to the non-controlling interests.
The Company does not believe it has any significant uncertain tax positions and therefore has no unrecognized tax benefits as of September 30, 2023, 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, net of deferred tax liabilities where appropriate, of $383.1 million and $396.8 million as of September 30, 2023 and December 31, 2022, respectively, on the Consolidated Balance Sheets. The change in Deferred tax assets during the nine months ended September 30, 2023 was primarily a result of the deferred tax liabilities arising from the CCR offset by an increase in deferred tax assets related to exchanges of LLC Common Units.
As of September 30, 2023, 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, no valuation allowance has been recognized against that basis difference.
Tax Receivable Agreement (TRA)
The Company is party to 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 $359.1 million related to these benefits on the Consolidated Balance Sheets as of September 30, 2023. 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, 2022 |
| $ | 150,311 |
| $ | 85,016 |
| $ | 60,020 |
| $ | 295,347 |
|
Exchange of LLC Common Units |
|
| 43,443 |
|
| 6,002 |
|
| 13,804 |
|
| 63,249 |
|
Accrued interest |
|
| — |
|
| — |
|
| 478 |
|
| 478 |
|
Balance at September 30, 2023 |
| $ | 193,754 |
| $ | 91,018 |
| $ | 74,302 |
| $ | 359,074 |
|
During the nine months ended September 30, 2023 and 2022, the TRA liabilities increased $63.2 million and $23.1 million, respectively, due to exchanges of LLC Common Units for Class A common stock, which was recognized in Additional paid-in capital on the Consolidated Statements of Stockholders’ Equity. Additionally, during the nine months ended September 30, 2022, the Company remeasured the TRA liabilities due to changes in state tax 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 (income) on the Consolidated Statements of Income (Loss).
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Other Comprehensive Income (Loss)
The tax expense (benefit) on the components of Other comprehensive income (loss) for the three and nine months ended September 30, 2023 were $(0.2) million and $(0.1) million, respectively, for Foreign currency translation adjustments, $(0.1) million and $0.1 million, respectively, for Change in share of equity method investment in related party other comprehensive income (loss), $0.9 million and $2.6 million, respectively, for Gain on interest rate cap, and $(0.7) million and $(1.9) million, respectively, for the (Gain) on interest rate cap reclassified to earnings. The tax reporting.expense (benefit) on the components of Other comprehensive income (loss) for the three and nine months ended September 30, 2022 were $(0.5) million and $(1.0) million, respectively, for Foreign currency translation adjustments, and $(0.2) million and $(0.7) million, respectively, for Change in share of equity method investment in related party other comprehensive income (loss), and $2.6 million and $2.7 million, respectively, for Gain on interest rate cap.
The following represents the supplemental cash flow information of the Company:
|
| Nine Months Ended September 30, |
| ||||
|
| 2023 |
| 2022 |
| ||
Cash paid for: |
|
|
|
|
| ||
Interest |
| $ | 116,620 |
| $ | 62,796 |
|
Income taxes |
|
| 9,812 |
|
| 8,089 |
|
Non-cash investing and financing activities: |
|
|
|
|
| ||
Tax Receivable Agreement liabilities |
| $ | 63,249 |
| $ | 23,089 |
|
The Company has evaluated subsequent events through September 2, 2021November 3, 2023 and has concluded that no events have occurred that require disclosure other than the events listed below.
On July 26, 2021, Ryan Specialty Group Holdings, Inc. completed its IPO of
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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, 2022 which was filed with the SEC on March 1, 2023. 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 sixnine months ended JuneSeptember 30, 20212023 and 20202022 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
Corporate Structure
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. After the IPO, Holdings LLC continues to be treated as a pass-through entity for U.S. federal and state income tax purposes.corporate subsidiaries. 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
ACCELERATE 2025 Program
During the thirdfirst quarter of 2020 and in conjunction with the All Risks Acquisition,2023 we initiated the Restructuring PlanACCELERATE 2025 program that will enable continued growth, drive innovation, and deliver sustainable productivity improvements over the long term. The program 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 is expected to generate annual savings of $25.0 million as the plan is fully actioned by June 30, 2022. Initial savings began to materializeits expanded scope will now result in 2020 with the fullrun-ratesavings expected to be realized by June 30, 2023. Of the $25.0approximately $90.0 million of savings, approximately 90% relates to a reduction in workforce with the remaining 10% related to lease and contract terminations. The Restructuring Plan is expected to incur cumulativeof between $30.0 million and $35.0 million,through 2024, funded through operating cash flow. Restructuring costs will primarily be included in General and administrative expense, relating to third-party professional services, lease and contract
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terminations costs, and other expenses. The remaining costs will be incurred through Compensation and Benefitsbenefits expense, withpredominately relating to third-party contractor and other workforce-related costs. We expect the remaining costsprogram in General and Administrative expense.its expanded scope to now generate annual savings of approximately $50.0 million in 2025. See Note“Note 4,
We began recognizing costs associated with the Restructuring Planrestructuring plan in the thirdfirst quarter of 2020.2023. For the three and six months ended JuneSeptember 30, 20212023, we incurred restructuring costs of $3.0 million and $10.0 million, respectively, and cumulative$16.5 million. For the nine months ended September 30, 2023, we incurred restructuring costs of $20.8$36.3 million, which represent cumulative costs since the inception of the plan. These costs are offset by realized respective savings of approximately $5.6 million and $10.4 million for the three months and six months ended June 30, 2021. Of the cumulative $20.8$36.3 million in costs, $18.5$22.9 million was workforce-relatedgeneral and administrative with the remaining balance being general and administrative costs.workforce-related. While the current results of the Restructuring PlanACCELERATE 2025 program are in line with expectations, changes to the total savings estimate and timing of the Restructuring PlanACCELERATE 2025 program 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.
Acquisitions
On July 1, 2023, the Company completed the acquisitions of certain assets of ACE Benefit Partners, Inc. (“ACE”), a medical stop loss general agent headquartered in Eagle, Idaho, and Point6 Healthcare, LLC (“Point6”), a distributor of medical stop loss insurance on behalf of retail brokers and third-party administrators headquartered in Plano, Texas.
On July 3, 2023, the Company completed the acquisition of Socius Insurance Services (“Socius”), a national wholesale insurance broker headquartered in Northern California.
On October 29, 2023, the Company entered into a definitive agreement to acquire AccuRisk Holdings, LLC (“AccuRisk”), a medical stop loss MGU headquartered in Chicago, Illinois. This acquisition is expected to close during the fourth quarter of 2023.
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 and service capabilities or provide us access to new markets. We have previously made, and intend to continue to make, acquisitions with the objective of enhancing our human capital and product and service capabilities, entering natural adjacencies, and expanding our geographic footprint.presence. Our ability to successfully pursue strategic acquisitions is dependent upon a number of factors, including sustained execution of a disciplined and selective acquisition strategy which requires acquisition targets to have a cultural and strategic fit, competition for these assets, purchase price multiples that we deem appropriate, and our ability to effectively integrate targeted companies or assets and grow our business. We do not have agreements or commitments for any significantmaterial acquisitions at this time.
Deepen and Broaden our Relationships with Retail Broker Trading Partners
We have deep engagement with our retail broker trading partners. Wepartners, and we believe we have the ability to transact in even greater volume with nearly all of our existing retail brokerage trading partners.them. For example, in 2020,2022, our revenue derived from the Top 100 firms (as ranked by Business Insurance) expanded faster than our overallOrganic revenue growth rate of 20%16.4%. 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, retail brokers continuing to require or desire our services, competition, pricing, economic conditions, and spending on our product offerings.
Build ourOur 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 a continuing ability to secure sufficient capital support from insurers, 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 offor the insurance products.
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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 and service offerings as well as developing and launching new solutions to address the evolving needs of the specialty insurance industry.industry and markets. Our future success is dependent onupon a number of factors, including our ability to successfully develop, market, and sell existing and new products and services to both new and existing trading partners.
Generate Commission Regardless of the State of the Specialty InsuranceE&S 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.
Managing Changing Macroeconomic Conditions
Growth in certain lines of business, such as project-based construction and M&A transactional liability insurance, is partially dependent on a variety of macroeconomic factors inasmuch as binding the underlying insurance coverage is subject to the underlying activity occurring. In periods of economic growth and liquid credit markets, this underlying activity can accelerate and provide tailwinds to our growth. In periods of economic decline and tight credit markets, this underlying activity can slow or be delayed and provide headwinds to our growth. As interest rates have rapidly risen, leading to friction in debt markets, we have observed some delays to both construction projects and M&A activity which, in turn, pauses the binding of construction and M&A transactional liability insurance policies. We believe over time these lines of business will continue to grow as the economy steadies and again grows.
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-hazard2020 and the first two quarters of 2021,2022, with a record 3014 named storms – including Hurricane Ian with estimated losses of $50 to $65 billion during the 20202022 Atlantic hurricane season – following 21 named storms totaling over 10.3 million acres burned through wildfires$70 billion in estimated losses during the United States,2021 Atlantic hurricane season, 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 whothat do have 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.
Although we believe this growth will continue, we recognize that the growth of beingthe E&S market might not be linear as risks can and do shift between the E&S and non-E&S markets as market factors change and evolve. For example, we benefited from a Public Company
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 | % |
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 policy fees are usuallygenerally calculated as a percentage of the total insurance policy premium paid byplaced, although fees can often be a fixed amount irrespective of the insured and generally dependpremium, 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 net commissions and policy fees 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
27
insurance risk other than through our equity method investment in Geneva Re through Ryan Investment Holdings, LLC. 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 from clients, as well as through supplemental commissions, which may be contingent commissions or volume-based commissions from carriers. 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 from clients and through contingent commissions from carriers. 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
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;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 Non-Operating Loss (Income)
For the nine months ended September 30, 2023, Other non-operating loss (income) included sublease income offset by TRA contractual interest. For the nine months ended September 30, 2022, Other non-operating loss (income) included a charge related to the change in fair value of the embedded derivatives on the redeemable Class B Preferred Units. ThisTRA liability caused by a change in fair value is due to the increased likelihood of a Realization Event, which is 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
28
Non-Controlling
Net income and Other comprehensive income (loss) are attributed to the non-controlling interests based on the weighted average LLC Common Units outstanding during the period and is presented on the Consolidated Statements of Income (Loss). Refer to “Note 8, Stockholders' Equity” of the unaudited quarterly consolidated financial statements include thenon-controllinginterest related to the net income attributable to Ryan Re.
29
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 September 30, |
|
| Change |
|
| Nine Months Ended September 30, |
|
| Change |
| ||||||||||||||||||||
(in thousands, except percentages and per share data) |
| 2023 |
|
| 2022 |
|
| $ |
|
| % |
|
| 2023 |
|
| 2022 |
|
| $ |
|
| % |
| ||||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net commissions and fees |
| $ | 487,345 |
|
| $ | 407,551 |
|
| $ | 79,794 |
|
|
| 19.6 | % |
| $ | 1,507,878 |
|
| $ | 1,284,459 |
|
| $ | 223,419 |
|
|
| 17.4 | % |
Fiduciary investment income |
|
| 14,593 |
|
|
| 4,445 |
|
|
| 10,148 |
|
| NM |
|
|
| 36,808 |
|
|
| 5,719 |
|
|
| 31,089 |
|
| NM |
| ||
Total revenue |
| $ | 501,938 |
|
| $ | 411,996 |
|
| $ | 89,942 |
|
|
| 21.8 | % |
| $ | 1,544,686 |
|
| $ | 1,290,178 |
|
| $ | 254,508 |
|
|
| 19.7 | % |
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Compensation and benefits |
|
| 329,212 |
|
|
| 274,108 |
|
|
| 55,104 |
|
|
| 20.1 |
|
|
| 989,294 |
|
|
| 858,439 |
|
|
| 130,855 |
|
|
| 15.2 |
|
General and administrative |
|
| 69,288 |
|
|
| 48,991 |
|
|
| 20,297 |
|
|
| 41.4 |
|
|
| 202,595 |
|
|
| 139,851 |
|
|
| 62,744 |
|
|
| 44.9 |
|
Amortization |
|
| 29,572 |
|
|
| 25,667 |
|
|
| 3,905 |
|
|
| 15.2 |
|
|
| 79,125 |
|
|
| 78,563 |
|
|
| 562 |
|
|
| 0.7 |
|
Depreciation |
|
| 2,201 |
|
|
| 1,463 |
|
|
| 738 |
|
|
| 50.4 |
|
|
| 6,570 |
|
|
| 3,903 |
|
|
| 2,667 |
|
|
| 68.3 |
|
Change in contingent consideration |
|
| 1,848 |
|
|
| 423 |
|
|
| 1,425 |
|
| NM |
|
|
| 4,358 |
|
|
| (837 | ) |
|
| 5,195 |
|
| NM |
| ||
Total operating expenses |
| $ | 432,121 |
|
| $ | 350,652 |
|
| $ | 81,469 |
|
|
| 23.2 | % |
| $ | 1,281,942 |
|
| $ | 1,079,919 |
|
| $ | 202,023 |
|
|
| 18.7 | % |
Operating income |
| $ | 69,817 |
|
| $ | 61,344 |
|
| $ | 8,473 |
|
|
| 13.8 | % |
| $ | 262,744 |
|
| $ | 210,259 |
|
| $ | 52,485 |
|
|
| 25.0 | % |
Interest expense, net |
|
| 31,491 |
|
|
| 28,864 |
|
|
| 2,627 |
|
|
| 9.1 |
|
|
| 89,840 |
|
|
| 75,462 |
|
|
| 14,378 |
|
|
| 19.1 |
|
Loss (income) from equity method investment in related party |
|
| (2,271 | ) |
|
| (144 | ) |
|
| (2,127 | ) |
| NM |
|
|
| (5,882 | ) |
|
| 414 |
|
|
| (6,296 | ) |
| NM |
| ||
Other non-operating loss (income) |
|
| 67 |
|
|
| (66 | ) |
|
| 133 |
|
| NM |
|
|
| 37 |
|
|
| 6,832 |
|
|
| (6,795 | ) |
| NM |
| ||
Income before income taxes |
| $ | 40,530 |
|
| $ | 32,690 |
|
| $ | 7,840 |
|
|
| 24.0 | % |
| $ | 178,749 |
|
| $ | 127,551 |
|
| $ | 51,198 |
|
|
| 40.1 | % |
Income tax expense |
|
| 24,827 |
|
|
| 3,411 |
|
|
| 21,416 |
|
| NM |
|
|
| 42,772 |
|
|
| 10,076 |
|
|
| 32,696 |
|
| NM |
| ||
Net income |
| $ | 15,703 |
|
| $ | 29,279 |
|
| $ | (13,576 | ) |
|
| (46.4 | )% |
| $ | 135,977 |
|
| $ | 117,475 |
|
| $ | 18,502 |
|
|
| 15.7 | % |
GAAP financial measures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Revenue |
| $ | 501,938 |
|
| $ | 411,996 |
|
| $ | 89,942 |
|
|
| 21.8 | % |
| $ | 1,544,686 |
|
| $ | 1,290,178 |
|
| $ | 254,508 |
|
|
| 19.7 | % |
Compensation and benefits |
|
| 329,212 |
|
|
| 274,108 |
|
|
| 55,104 |
|
|
| 20.1 |
|
|
| 989,294 |
|
|
| 858,439 |
|
|
| 130,855 |
|
|
| 15.2 |
|
General and administrative |
|
| 69,288 |
|
|
| 48,991 |
|
|
| 20,297 |
|
|
| 41.4 |
|
|
| 202,595 |
|
|
| 139,851 |
|
|
| 62,744 |
|
|
| 44.9 |
|
Net income |
|
| 15,703 |
|
|
| 29,279 |
|
|
| (13,576 | ) |
|
| (46.4 | ) |
|
| 135,977 |
|
|
| 117,475 |
|
|
| 18,502 |
|
|
| 15.7 |
|
Compensation and benefits expense ratio (1) |
|
| 65.6 | % |
|
| 66.5 | % |
|
|
|
|
|
|
|
| 64.0 | % |
|
| 66.5 | % |
|
|
|
|
|
| ||||
General and administrative expense ratio (2) |
|
| 13.8 | % |
|
| 11.9 | % |
|
|
|
|
|
|
|
| 13.1 | % |
|
| 10.8 | % |
|
|
|
|
|
| ||||
Net income margin (3) |
|
| 3.1 | % |
|
| 7.1 | % |
|
|
|
|
|
|
|
| 8.8 | % |
|
| 9.1 | % |
|
|
|
|
|
| ||||
Earnings (loss) per share (4) |
| $ | (0.04 | ) |
| $ | 0.11 |
|
|
|
|
|
|
|
| $ | 0.34 |
|
| $ | 0.40 |
|
|
|
|
|
|
| ||||
Diluted earnings (loss) per share (4) |
| $ | (0.04 | ) |
| $ | 0.09 |
|
|
|
|
|
|
|
| $ | 0.34 |
|
| $ | 0.37 |
|
|
|
|
|
|
| ||||
Non-GAAP financial measures* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Organic revenue growth rate |
|
| 14.7 | % |
|
| 13.7 | % |
|
|
|
|
|
|
|
| 14.7 | % |
|
| 18.7 | % |
|
|
|
|
|
| ||||
Adjusted compensation and benefits expense |
| $ | 296,400 |
|
| $ | 247,095 |
|
| $ | 49,305 |
|
|
| 20.0 | % |
| $ | 911,925 |
|
| $ | 769,253 |
|
| $ | 142,672 |
|
|
| 18.5 | % |
Adjusted compensation and benefits expense ratio |
|
| 59.1 | % |
|
| 60.0 | % |
|
|
|
|
|
|
|
| 59.0 | % |
|
| 59.6 | % |
|
|
|
|
|
| ||||
Adjusted general and administrative expense |
| $ | 58,559 |
|
| $ | 48,084 |
|
| $ | 10,475 |
|
|
| 21.8 | % |
| $ | 166,606 |
|
| $ | 130,774 |
|
| $ | 35,832 |
|
|
| 27.4 | % |
Adjusted general and administrative expense ratio |
|
| 11.7 | % |
|
| 11.7 | % |
|
|
|
|
|
|
|
| 10.8 | % |
|
| 10.1 | % |
|
|
|
|
|
| ||||
Adjusted EBITDAC |
| $ | 146,979 |
|
| $ | 116,817 |
|
| $ | 30,162 |
|
|
| 25.8 | % |
| $ | 466,155 |
|
| $ | 390,151 |
|
| $ | 76,004 |
|
|
| 19.5 | % |
Adjusted EBITDAC margin |
|
| 29.3 | % |
|
| 28.4 | % |
|
|
|
|
|
|
|
| 30.2 | % |
|
| 30.2 | % |
|
|
|
|
|
| ||||
Adjusted net income |
| $ | 86,632 |
|
| $ | 66,560 |
|
| $ | 20,072 |
|
|
| 30.2 | % |
| $ | 282,144 |
|
| $ | 237,774 |
|
| $ | 44,370 |
|
|
| 18.7 | % |
Adjusted net income margin |
|
| 17.3 | % |
|
| 16.2 | % |
|
|
|
|
|
|
|
| 18.3 | % |
|
| 18.4 | % |
|
|
|
|
|
| ||||
Adjusted diluted earnings per share |
| $ | 0.32 |
|
| $ | 0.25 |
|
|
|
|
|
|
|
| $ | 1.04 |
|
| $ | 0.88 |
|
|
|
|
|
|
|
NM represents “Not Meaningful”.
(1) Compensation and benefits expense ratio is defined as Compensation and benefits expense divided by Total revenue.
(2) General and administrative expense ratio is defined as General and administrative expense divided by Total revenue.
(3) Net income margin is defined as Net income divided by Total revenue.
(4) See “Note 10, Earnings (Loss) Per Share” of the unaudited quarterly consolidated financial statements for further discussion of how these metrics are calculated.
* 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.
30
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 JuneSeptember 30, 20212023 and 2020
Revenue
Net Commissions and Fees
Net commissions and fees increased by $143.8$79.7 million, or 58.4%19.6%, from $246.1$407.6 million to $389.8$487.3 million for the three months ended JuneSeptember 30, 20212023 as compared to the same period in the prior year. The two mainfollowing were the principal drivers of the increase:
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 September 30, |
|
|
|
|
|
|
| |||||||||||||||
(in thousands, except percentages) |
| 2023 |
|
| % of |
|
| 2022 |
|
| % of |
|
| Change |
| |||||||||
Wholesale Brokerage |
| $ | 308,872 |
|
|
| 63.4 | % |
| $ | 267,222 |
|
|
| 65.6 | % |
| $ | 41,650 |
|
|
| 15.6 | % |
Binding Authorities |
|
| 69,245 |
|
|
| 14.2 |
|
|
| 55,607 |
|
|
| 13.6 |
|
|
| 13,638 |
|
|
| 24.5 |
|
Underwriting Management |
|
| 109,228 |
|
|
| 22.4 |
|
|
| 84,722 |
|
|
| 20.8 |
|
|
| 24,506 |
|
|
| 28.9 |
|
Total net commissions and fees |
| $ | 487,345 |
|
|
|
|
| $ | 407,551 |
|
|
|
|
| $ | 79,794 |
|
|
| 19.6 | % |
Wholesale Brokerage net commissions and fees increased by $83.8$41.7 million, or 48.7% period-over-period, primarily due to strong organic growth within this specialty as well as contributions from the All Risks Acquisition.
Binding Authority net commissions and fees increased by $37.9$13.6 million, or 89.4%24.5%, period-over-period, primarily due to strong organic growth within the specialty andSpecialty for the quarter as well as contributions from the All Risks Acquisition.
Underwriting Management net commissions and fees increased by $24.5 million, or 28.9%, period-over-period, primarily due to strong organic growth within the Specialty for the quarter as well as contributions from the ACE and Point6 acquisitions.
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 September 30, |
|
|
|
|
|
|
| |||||||||||||||
(in thousands, except percentages) |
| 2023 |
|
| % of |
|
| 2022 |
|
| % of |
|
| Change |
| |||||||||
Net commissions and policy fees |
| $ | 470,085 |
|
|
| 96.4 | % |
| $ | 394,934 |
|
|
| 96.9 | % |
| $ | 75,151 |
|
|
| 19.0 | % |
Supplemental and contingent commissions |
|
| 8,592 |
|
|
| 1.8 |
|
|
| 5,289 |
|
|
| 1.3 |
|
|
| 3,303 |
|
|
| 62.5 |
|
Loss mitigation and other fees |
|
| 8,668 |
|
|
| 1.8 |
|
|
| 7,328 |
|
|
| 1.8 |
|
|
| 1,340 |
|
|
| 18.3 |
|
Total net commissions and fees |
| $ | 487,345 |
|
|
|
|
| $ | 407,551 |
|
|
|
|
| $ | 79,794 |
|
|
| 19.6 | % |
31
Net commissions and policy fees grew 60.1% just ahead of19.0%, in line with the overall net commissions and fee revenue growth of 58.4%19.6%, for the three months ended JuneSeptember 30, 20212023 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 admittedAdmitted market into the E&S market.market and an increase in the premium rate for risks placed. 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 feesrates period-over-period.
Supplemental and contingent commissions decreased 11.4%increased 62.5% 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%increased 18.3% 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 as well as certain fees related to the ACE and Point6 acquisitions completed in 2021. These fees continue to represent less than 2%the third quarter of total net commissions and fees period-over-period.
Expenses
Compensation and Benefits Expense
Compensation and benefits expense increased by $80.0$55.1 million, or 51.0%20.1%, from $156.8$274.1 million to $236.8$329.2 million for the three months ended JuneSeptember 30, 20212023 compared to the same period in 2020.2022. The following were the principal drivers of this increase:
The net impact of revenue growth and the factors above resulted in a Compensation and Benefits Expense Ratio improvementbenefits expense ratio decrease of 3.0%0.9% from 63.7%66.5% to 60.7%65.6% period-over-period.
In general, we expect to continue to experienceexperiencing 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$20.3 million, or 40.3%41.4%, from $21.9$49.0 million to $30.7$69.3 million for the three months ended JuneSeptember 30, 20212023 as compared to the same period in the prior year. A main driverThe following were the principal drivers of this increase was $2.9increase:
32
The net impact of revenue growth and the factors listed above resulted in a General and Administrative Expense Ratio improvementadministrative expense ratio increase of 1.0%1.9% from 8.9%11.9% to 7.9%13.8% period-over-period.
Amortization Expense
Amortization expense increased by $18.2$3.9 million, or 199.6%15.2%, from $9.1$25.7 million to $27.3$29.6 million for the three months ended JuneSeptember 30, 20212023 compared to the same period in the prior year. The main driver for the increase was approximately $19.2 millionthe amortization of amortizationintangible assets from acquired intangibles from the All Risks Acquisition.recent acquisitions. Our intangible assets increased by $401.7$90.6 million when comparing the balance as of JuneSeptember 30, 20212023 to the balance as compared to Juneof September 30, 2020.
Interest Expense,
Interest expense, net increased $12.2$2.6 million, or 180.9%9.1%, from $6.8$28.9 million to $19.0$31.5 million for the three months ended JuneSeptember 30, 20212023 compared to the same period in the prior year. The main driver of the change in interestInterest expense, net for the three months ended JuneSeptember 30, 20212023 was driven by the $890.2 millionan increase in total debt, whichthe floating rate applied to our Term Loan on account of the rising interest rate environment. 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, 2023 we expect to incur approximately $7.0 million of interest expense related to the cap. For the three months ended September 30, 2023, the net reduction to Interest expense, net related to the cap was undertaken in connection with the All Risks Acquisition completed in September 2020.
Other(Loss) Income
Other(loss) income loss (income) decreased by $8.4$0.2 million to a loss of $7.9$0.1 million for the three months ended JuneSeptember 30, 20212023 as compared to income of $0.5$0.1 million in the same period in the prior year. The main driverFor the three months ended September 30, 2023, Other non-operating loss (income) consisted of $0.2 million of sublease income offset by $0.3 million of TRA contractual interest. For the loss was the $8.0three months ended September 30, 2022, Other non-operating income included $0.1 million change in the fair value of the embedded derivatives of our redeemable Class B 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.
Income beforeBefore Income Taxes
Income (loss) before income taxes increased $14.3$7.8 million or 27.7% from a profit of $51.5$32.7 million to a profit of $65.7$40.5 million for the three months ended JuneSeptember 30, 2021 compared to the same period in the prior year.
Income Tax Expense
Income tax expense increased $21.4 million from $3.4 million to $24.8 million for the three months ended September 30, 2023 compared to the same period in the prior year primarily due to $20.7 million of Deferred income tax expense recognized as a result of the Common Control Reorganization (“CCR”) subsequent to the Socius acquisition in the third quarter of 2023. This CCR was a discrete, non-cash expense incurred at Ryan Specialty Holdings, Inc. and the Company’s annual effective tax rate is unaffected.
Net Income
Net income decreased $13.6 million from $29.3 million to $15.7 million for the three months ended September 30, 2023 compared to the same period in the prior year as a result of the factors described above.
Comparison of the SixNine Months Ended JuneSeptember 30, 20212023 and 2020
Revenue
Net Commissions and Fees
Net commissions and fees increased by $248.0$223.4 million, or 54.7%17.4%, from $453.2$1,284.5 million to $701.2$1,507.9 million for the nine months ended September 30, 2023 as compared to the same period in 2021 period-over-period.the prior year. The two mainfollowing were the principal drivers of the increase:
33
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 | % | ||||||||||||||||
|
| Nine Months Ended September 30, |
|
|
|
|
|
|
| |||||||||||||||
(in thousands, except percentages) |
| 2023 |
|
| % of |
|
| 2022 |
|
| % of |
|
| Change |
| |||||||||
Wholesale Brokerage |
| $ | 976,338 |
|
|
| 64.7 | % |
| $ | 841,273 |
|
|
| 65.5 | % |
| $ | 135,065 |
|
|
| 16.1 | % |
Binding Authorities |
|
| 208,547 |
|
|
| 13.8 |
|
|
| 178,351 |
|
|
| 13.9 |
|
|
| 30,196 |
|
|
| 16.9 |
|
Underwriting Management |
|
| 322,993 |
|
|
| 21.5 |
|
|
| 264,835 |
|
|
| 20.6 |
|
|
| 58,158 |
|
|
| 22.0 |
|
Total Net commissions and fees |
| $ | 1,507,878 |
|
|
|
|
| $ | 1,284,459 |
|
|
|
|
| $ | 223,419 |
|
|
| 17.4 | % |
Wholesale Brokerage net commissions and fees increased by $140.9$135.1 million, or 46.0%16.1%, period-over-period, primarily due to strong organic growth within this specialtythe Specialty for the quarter as well as contributions from the All Risks Acquisition.
Binding Authority net commissions and fees increased by $42.9$30.2 million, or 65.3%16.9%, period-over-period, primarily due to strong organic growth within this specialtythe Specialty for the quarter as well as contributions from the All Risks Acquisition.
Underwriting Management net commissions and fees increased by $64.3$58.2 million, or 79.1% in 2021 as compared to 2020,22.0%, period-over-period, primarily due to strong organic growth within the specialty,Specialty for the quarter as well as the contributions from the All Risks Acquisition. ACE and Point6 acquisitions.
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 | % | ||||||||||||||||
|
| Nine Months Ended September 30, |
|
|
|
|
|
|
| |||||||||||||||
(in thousands, except percentages) |
| 2023 |
|
| % of |
|
| 2022 |
|
| % of |
|
| Change |
| |||||||||
Net commissions and policy fees |
| $ | 1,437,239 |
|
|
| 95.3 | % |
| $ | 1,226,396 |
|
|
| 95.5 | % |
| $ | 210,843 |
|
|
| 17.2 | % |
Supplemental and contingent commissions |
|
| 46,281 |
|
|
| 3.1 |
|
|
| 39,339 |
|
|
| 3.1 |
|
|
| 6,942 |
|
|
| 17.6 |
|
Loss mitigation and other fees |
|
| 24,358 |
|
|
| 1.6 |
|
|
| 18,723 |
|
|
| 1.4 |
|
|
| 5,635 |
|
|
| 30.1 |
|
Total net commissions and fees |
| $ | 1,507,878 |
|
|
|
|
| $ | 1,284,459 |
|
|
|
|
| $ | 223,419 |
|
|
| 17.4 | % |
Net commissions and policy fees increased 56.8% just ahead ofgrew 17.2%, in line with the overall total net commissions and feesfee revenue growth of 54.7% period-over-period. This17.4%, for the nine months ended September 30, 2023 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-yearrisks from the Admitted market into the E&S market and an increase in the premium rate increases, which drives commission revenue growth that is typically calculated as a percentage of total insurance policy premium.for risks placed. 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 feesrates period-over-period.
Supplemental and contingent commissions increased 5.0%17.6% 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%30.1% 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 as well as certain fees related to the ACE and Point6 acquisitions completed in 2021. These fees continue to represent less than 2.0%the third quarter of total net commissions and fees period-over-period.
Expenses
34
Compensation and Benefits Expense
Compensation and benefits expense increased by $153.2$130.9 million, or 51.4%15.2%, from $298.1$858.4 million to $451.3$989.3 million for the sixnine months ended JuneSeptember 30, 2021 as2023 compared to the same period in 2020.2022. The following were the principal drivers of this increase:
The net impact of revenue growth and the factors above resulted in a Compensation and Benefits Expense Ratio improvementbenefits expense ratio decrease of 1.3%2.5% from 65.6%66.5% to 64.3%64.0% period-over-period. We
In general, we expect to continue to experienceexperiencing 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$62.7 million, or 15.6% period-over-period44.9%, from $50.4$139.9 million to $58.2$202.6 million for the nine months ended September 30, 2023 as acompared to the same period in the prior year. The following were the principal drivers of this increase:
The net impact of revenue growth and the factors listed above resulted in a General and Administrative Expense Ratio improvementadministrative expense ratio increase of 2.8%2.3% from 11.1%10.8% to 8.3%13.1% period-over-period.
Amortization Expense
Amortization expense increased by $36.0$0.5 million, or 187.8%0.7%, from $19.1$78.6 million to $55.1$79.1 million for the sixnine months ended JuneSeptember 30, 2021 as2023 compared to the same period in 2020.the prior year. The main driver for the increase was approximately $38.4 millionthe amortization of amortizationintangible assets from acquired intangibles from the All Risks Acquisition.recent acquisitions. Our intangible assets increased by $401.7$90.6 million when comparing the balance as of JuneSeptember 30, 2021 as compared2023 to the balance as of JuneSeptember 30, 2020.
Interest Expense,
Interest expense, net increased $23.6$14.3 million, or 152.9%19.1%, from $15.4$75.5 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.
35
rate applied to our Term Loan on account of the rising interest rate environment. 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, 2023 we expect to incur approximately $7.0 million of interest expense related to the cap. For the nine months ended September 30, 2023, the net reduction to Interest expense, net related to the cap was $11.2 million.
Other Non-Operating Loss (Income)
Other non-operating loss was(income) decreased by $6.8 million to a de minimis loss for the nine months ended September 30, 2023 as compared to a loss of $6.8 million in the same period in the prior year. For the nine months ended September 30, 2023, Other non-operating loss (income) included $0.4 million of sublease income offset by $0.5 million of TRA contractual interest. For the nine months ended September 30, 2022, Other non-operating loss (income) included a $7.2 million charge related to the change in the fair value of the embedded derivatives of our redeemable Class B 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 is $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 offsetTRA liability caused by 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 $51.1 million or 3.3% from $66.4$127.6 million to $64.2$178.7 million for the sixnine months ended JuneSeptember 30, 2021 as2023 compared to the same period in 2020.
Income Tax Expense
Income tax expense increased $1.4$32.7 million or 44.4% from $3.2$10.1 million to $4.6$42.8 million period-over-periodfor the nine months ended September 30, 2023 compared to the same period in the prior year primarily due to $20.7 million of Deferred income tax expense recognized as a result of increased earnings from our foreign subsidiaries subjectthe Common Control Reorganization (“CCR”) subsequent to entity level taxation.
Net Income
Net income decreased $3.6increased $18.5 million or 5.7% from $63.2$117.5 million to $59.6$136.0 million period-over-periodfor the nine months ended September 30, 2023 compared to the same period in the prior year as a result of the factors described above.
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 Total 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.
36
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, | ||||||||
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 | % | ||||
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Total revenue growth rate (GAAP) (1) |
|
| 21.8 | % |
|
| 16.8 | % |
|
| 19.7 | % |
|
| 22.4 | % |
Less: Mergers and acquisitions (2) |
|
| (4.3 | ) |
|
| (2.8 | ) |
|
| (2.3 | ) |
|
| (3.0 | ) |
Change in other (3) |
|
| (2.8 | ) |
|
| (0.3 | ) |
|
| (2.7 | ) |
|
| (0.7 | ) |
Organic revenue growth rate (Non-GAAP) |
|
| 14.7 | % |
|
| 13.7 | % |
|
| 14.7 | % |
|
| 18.7 | % |
(1) For the three months ended September 30, 2023, September 30, 2023 revenue of $501.9 million less September 30, 2022 revenue of $412.0 million is a $89.9 million period-over-period change. The change, $89.9 million, divided by the September 30, 2022 revenue of $412.0 million, is a total revenue change of 21.8%. For the three months ended September 30, 2022, September 30, 2022 revenue of $412.0 million less September 30, 2021 revenue of $352.8 million is a $59.2 million period-over-period change. The change, $59.2 million, divided by the September 30, 2021 revenue of $352.8 million, is a total revenue change of 16.8%. For the nine months ended September 30, 2023, September 30, 2023 revenue of $1,544.7 million less September 30, 2022 revenue of $1,290.2 million is a $254.5 million period-over-period change. The change, $254.5 million, divided by the September 30, 2022 revenue of $1,290.2 million, is a total revenue change of 19.7%. For the nine months ended September 30, 2022, September 30, 2022 revenue of $1,290.2 million less September 30, 2021 revenue of $1,054.2 million is a $236.0 million period-over-period change. The change, $236.0 million, divided by the September 30, 2021 revenue of $1,054.2 million, is a total revenue change of 22.4%. See “Comparison of the Three Months Ended September 30, 2023 and 2022” and “Comparison of the Nine Months Ended September 30, 2023 and 2022” for further details.
(2) The acquisitions adjustment excludes net commission and fees revenue generated during the first 12 months following an acquisition. The total adjustment for the three months ended September 30, 2023 and 2022 was $17.8 million and $9.9 million, respectively. The total adjustment for the nine months ended September 30, 2023 and 2022 was $29.9 million and $31.5 million, respectively.
(3) The other adjustments exclude the period-over-period change in contingent commissions, fiduciary investment income, and foreign exchange rates. The total adjustment for the three months ended September 30, 2023 and 2022 was $11.6 million and $0.9 million, respectively. The total adjustment for the nine months ended September 30, 2023 and 2022 was $35.0 million and $7.0 million, respectively.
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.
37
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) | 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 | % |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
(in thousands, except percentages) |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Total revenue |
| $ | 501,938 |
|
| $ | 411,996 |
|
| $ | 1,544,686 |
|
| $ | 1,290,178 |
|
Compensation and benefits expense |
| $ | 329,212 |
|
| $ | 274,108 |
|
| $ | 989,294 |
|
| $ | 858,439 |
|
Acquisition-related expense |
|
| (1,546 | ) |
|
| (21 | ) |
|
| (3,331 | ) |
|
| (122 | ) |
Acquisition related long-term incentive compensation |
|
| (550 | ) |
|
| (7,383 | ) |
|
| (1,702 | ) |
|
| (22,181 | ) |
Restructuring and related expense |
|
| (11,538 | ) |
|
| (19 | ) |
|
| (13,407 | ) |
|
| (724 | ) |
Amortization and expense related to discontinued prepaid incentives |
|
| (1,570 | ) |
|
| (1,533 | ) |
|
| (4,793 | ) |
|
| (5,075 | ) |
Equity-based compensation |
|
| (8,281 | ) |
|
| (5,530 | ) |
|
| (23,107 | ) |
|
| (18,009 | ) |
Initial public offering related expense |
|
| (9,327 | ) |
|
| (12,527 | ) |
|
| (31,029 | ) |
|
| (43,075 | ) |
Adjusted compensation and benefits expense (1) |
| $ | 296,400 |
|
| $ | 247,095 |
|
| $ | 911,925 |
|
| $ | 769,253 |
|
Compensation and benefits expense ratio |
|
| 65.6 | % |
|
| 66.5 | % |
|
| 64.0 | % |
|
| 66.5 | % |
Adjusted compensation and benefits expense ratio |
|
| 59.1 | % |
|
| 60.0 | % |
|
| 59.0 | % |
|
| 59.6 | % |
(1) Adjustments to Compensation and benefits expense are described in the definition of Adjusted EBITDAC to Net income in “Adjusted EBITDAC and Adjusted EBITDAC Margin.”
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.
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) | 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 | % |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
(in thousands, except percentages) |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Total revenue |
| $ | 501,938 |
|
| $ | 411,996 |
|
| $ | 1,544,686 |
|
| $ | 1,290,178 |
|
General and administrative expense |
| $ | 69,288 |
|
| $ | 48,991 |
|
| $ | 202,595 |
|
| $ | 139,851 |
|
Acquisition-related expense |
|
| (5,790 | ) |
|
| (716 | ) |
|
| (12,196 | ) |
|
| (2,767 | ) |
Restructuring and related expense |
|
| (4,939 | ) |
|
| — |
|
|
| (23,793 | ) |
|
| (4,993 | ) |
Initial public offering related expense |
|
| — |
|
|
| (191 | ) |
|
| — |
|
|
| (1,317 | ) |
Adjusted general and administrative expense (1) |
| $ | 58,559 |
|
| $ | 48,084 |
|
| $ | 166,606 |
|
| $ | 130,774 |
|
General and administrative expense ratio |
|
| 13.8 | % |
|
| 11.9 | % |
|
| 13.1 | % |
|
| 10.8 | % |
Adjusted general and administrative expense ratio |
|
| 11.7 | % |
|
| 11.7 | % |
|
| 10.8 | % |
|
| 10.1 | % |
(1) Adjustments to General and administrative expense are described in the definition of Adjusted EBITDAC to Net income in “Adjusted EBITDAC and Adjusted EBITDAC Margin.”
Adjusted EBITDAC and Adjusted EBITDAC Margin
We define Adjusted EBITDAC as Net Incomeincome before interestInterest expense, incomenet, Income tax expense depreciation, amortization,(benefit), Depreciation, Amortization, and changeChange in contingent consideration, adjusted to reflect items such as (i) equity-based compensation, (ii) acquisition and restructuring related expenses, and (iii) other exceptional or
Acquisition-related expense includes one-time diligence, transaction-related, and integration costs. Acquisition-related long-term incentive compensation arises from long-term incentive plans associated with acquisitions. In 2023, Restructuring and related expense
38
consists of compensation and benefits, occupancy, contractors, professional services, and license fees related to the ACCELERATE 2025 program.The compensation and benefits expense included severance as well as employment costs related to services rendered between the notification and termination dates. See “Note 4, Restructuring” of the unaudited quarterly consolidated financial statements for further discussion of ACCELERATE 2025. The remaining costs that preceded the restructuring plan were associated with professional services costs related to program design and licensing costs. In 2022, Restructuring and related expense represented costs associated with the 2020 restructuring plan. Amortization and expense consists of charges related to discontinued prepaid incentive programs. For the three months ended September 30, 2023, Other non-operating loss (income) consisted of $0.2 million of sublease income offset by $0.3 million of TRA contractual interest. For the three months ended September 30, 2022, Other non-operating loss (income) included $0.1 million of sublease income. For the nine months ended September 30, 2023, Other non-operating loss (income) included $0.4 million of sublease income offset by $0.5 million of TRA contractual interest. For the nine months ended September 30, 2022, Other non-operating loss (income) included a $7.2 million charge related to the change in the TRA liability caused by a change in our blended state tax rates. Equity-based compensation reflects non-cash equity-based expense. IPO related expenses include general and administrative expense associated with the preparations for Sarbanes-Oxley compliance, tax, and accounting advisory services and compensation-related expense primarily related to the revaluation of existing equity awards at IPO as well as expense for new awards issued at IPO.
Total revenue less Adjusted Compensationcompensation and Benefits Expensebenefits expense and Adjusted Generalgeneral and Administrative Expenseadministrative expense is equivalent to Adjusted EBITDAC. For a breakout of compensation and general and administrative costs for each addback, refer to the Adjusted compensation and benefits expense and Adjusted general and administrative expense tables above. The most directly comparable GAAP financial metric to Adjusted EBITDAC 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.
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) | 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 | % |
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 | % |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
(in thousands, except percentages) |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Total revenue |
| $ | 501,938 |
|
| $ | 411,996 |
|
| $ | 1,544,686 |
|
| $ | 1,290,178 |
|
Net income |
| $ | 15,703 |
|
| $ | 29,279 |
|
| $ | 135,977 |
|
| $ | 117,475 |
|
Interest expense, net |
|
| 31,491 |
|
|
| 28,864 |
|
|
| 89,840 |
|
|
| 75,462 |
|
Income tax expense |
|
| 24,827 |
|
|
| 3,411 |
|
|
| 42,772 |
|
|
| 10,076 |
|
Depreciation |
|
| 2,201 |
|
|
| 1,463 |
|
|
| 6,570 |
|
|
| 3,903 |
|
Amortization |
|
| 29,572 |
|
|
| 25,667 |
|
|
| 79,125 |
|
|
| 78,563 |
|
Change in contingent consideration |
|
| 1,848 |
|
|
| 423 |
|
|
| 4,358 |
|
|
| (837 | ) |
EBITDAC |
| $ | 105,642 |
|
| $ | 89,107 |
|
| $ | 358,642 |
|
| $ | 284,642 |
|
Acquisition-related expense |
|
| 7,336 |
|
|
| 737 |
|
|
| 15,527 |
|
|
| 2,889 |
|
Acquisition related long-term incentive compensation |
|
| 550 |
|
|
| 7,383 |
|
|
| 1,702 |
|
|
| 22,181 |
|
Restructuring and related expense |
|
| 16,477 |
|
|
| 19 |
|
|
| 37,200 |
|
|
| 5,717 |
|
Amortization and expense related to discontinued prepaid incentives |
|
| 1,570 |
|
|
| 1,533 |
|
|
| 4,793 |
|
|
| 5,075 |
|
Other non-operating loss (income) |
|
| 67 |
|
|
| (66 | ) |
|
| 37 |
|
|
| 6,832 |
|
Equity-based compensation |
|
| 8,281 |
|
|
| 5,530 |
|
|
| 23,107 |
|
|
| 18,009 |
|
IPO related expenses |
|
| 9,327 |
|
|
| 12,718 |
|
|
| 31,029 |
|
|
| 44,392 |
|
(Income) / loss from equity method investments in related party |
|
| (2,271 | ) |
|
| (144 | ) |
|
| (5,882 | ) |
|
| 414 |
|
Adjusted EBITDAC |
| $ | 146,979 |
|
| $ | 116,817 |
|
| $ | 466,155 |
|
| $ | 390,151 |
|
Net income margin |
|
| 3.1 | % |
|
| 7.1 | % |
|
| 8.8 | % |
|
| 9.1 | % |
Adjusted EBITDAC margin |
|
| 29.3 | % |
|
| 28.4 | % |
|
| 30.2 | % |
|
| 30.2 | % |
Adjusted Net Income and Adjusted Net Income Margin
We define Adjusted Net Incomenet income asIncome. income.
39
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) | 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 | % |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(in thousands, except percentages) |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Total revenue |
| $ | 501,938 |
|
| $ | 411,996 |
|
| $ | 1,544,686 |
|
| $ | 1,290,178 |
|
Net income |
| $ | 15,703 |
|
| $ | 29,279 |
|
| $ | 135,977 |
|
| $ | 117,475 |
|
Income tax expense |
|
| 24,827 |
|
|
| 3,411 |
|
|
| 42,772 |
|
|
| 10,076 |
|
Amortization |
|
| 29,572 |
|
|
| 25,667 |
|
|
| 79,125 |
|
|
| 78,563 |
|
Amortization of deferred debt issuance costs (1) |
|
| 3,045 |
|
|
| 3,033 |
|
|
| 9,125 |
|
|
| 9,017 |
|
Change in contingent consideration |
|
| 1,848 |
|
|
| 423 |
|
|
| 4,358 |
|
|
| (837 | ) |
Acquisition-related expense |
|
| 7,336 |
|
|
| 737 |
|
|
| 15,527 |
|
|
| 2,889 |
|
Acquisition related long-term incentive compensation |
|
| 550 |
|
|
| 7,383 |
|
|
| 1,702 |
|
|
| 22,181 |
|
Restructuring and related expense |
|
| 16,477 |
|
|
| 19 |
|
|
| 37,200 |
|
|
| 5,717 |
|
Amortization and expense related to discontinued prepaid incentives |
|
| 1,570 |
|
|
| 1,533 |
|
|
| 4,793 |
|
|
| 5,075 |
|
Other non-operating loss (income) |
|
| 67 |
|
|
| (66 | ) |
|
| 37 |
|
|
| 6,832 |
|
Equity-based compensation |
|
| 8,281 |
|
|
| 5,530 |
|
|
| 23,107 |
|
|
| 18,009 |
|
IPO related expenses |
|
| 9,327 |
|
|
| 12,718 |
|
|
| 31,029 |
|
|
| 44,392 |
|
(Income) / loss from equity method investments in related party |
|
| (2,271 | ) |
|
| (144 | ) |
|
| (5,882 | ) |
|
| 414 |
|
Adjusted income before income taxes (2) |
| $ | 116,332 |
|
| $ | 89,523 |
|
| $ | 378,870 |
|
| $ | 319,803 |
|
Adjusted tax expense (3) |
|
| (29,700 | ) |
|
| (22,963 | ) |
|
| (96,726 | ) |
|
| (82,029 | ) |
Adjusted net income |
| $ | 86,632 |
|
| $ | 66,560 |
|
| $ | 282,144 |
|
| $ | 237,774 |
|
Net income margin |
|
| 3.1 | % |
|
| 7.1 | % |
|
| 8.8 | % |
|
| 9.1 | % |
Adjusted net income margin |
|
| 17.3 | % |
|
| 16.2 | % |
|
| 18.3 | % |
|
| 18.4 | % |
(1) Interest expense, net includes amortization of deferred debt issuance costs.
(2) Adjustments to Net income are described in the definition of Adjusted EBITDAC to Net income in “Adjusted EBITDAC and Adjusted EBITDAC Margin.”
(3) The Company is 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 the LLC. For the three and nine months ended September 30, 2023, this calculation of adjusted tax expense is based on a federal statutory rate of 21% and a combined state income tax rate net of federal benefits of 4.53% on 100% of our adjusted income before income taxes as if the Company owned 100% of the LLC. For the three and nine months ended September 30, 2022, this calculation of adjusted tax expense is based on a federal statutory rate of 21% and a combined state income tax rate net of federal benefits of 4.65% on 100% of our adjusted income before income taxes as if the Company owned 100% of the LLC.
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 if 100% of the outstanding LLC Common Units (together with the shares of Class B common stock) were exchanged into shares of Class A common stock and the effect of unvested equity awards. The most directly comparable GAAP financial metric is Diluted earnings (loss) per share.
40
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 | % |
A reconciliation of Adjusted diluted earnings per share to Diluted earnings (loss) per share, the most directly comparable GAAP measure, for each of the periods indicated is as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Earnings (loss) per share of Class A common stock – diluted |
| $ | (0.04 | ) |
| $ | 0.09 |
|
| $ | 0.34 |
|
| $ | 0.37 |
|
Less: Net income attributed to dilutive shares and substantively vested RSUs (1) |
|
| — |
|
|
| (0.05 | ) |
|
| (0.03 | ) |
|
| (0.21 | ) |
Plus: Impact of all LLC Common Units Exchanged for Class A shares (2) |
|
| 0.10 |
|
|
| 0.07 |
|
|
| 0.20 |
|
|
| 0.28 |
|
Plus: Adjustments to Adjusted net income (3) |
|
| 0.28 |
|
|
| 0.14 |
|
|
| 0.54 |
|
|
| 0.46 |
|
Plus: Dilutive impact of unvested equity awards (4) |
|
| (0.02 | ) |
|
| — |
|
|
| (0.01 | ) |
|
| (0.02 | ) |
Adjusted diluted earnings per share |
| $ | 0.32 |
|
| $ | 0.25 |
|
| $ | 1.04 |
|
| $ | 0.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
(Share count in '000) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted-average shares of Class A common stock outstanding – diluted |
|
| 115,872 |
|
|
| 266,352 |
|
|
| 124,884 |
|
|
| 265,071 |
|
Plus: Impact of all LLC Common Units Exchanged for Class A shares (2) |
|
| 141,690 |
|
|
| — |
|
|
| 142,974 |
|
|
| — |
|
Plus: Dilutive impact of unvested equity awards (4) |
|
| 15,115 |
|
|
| 4,153 |
|
|
| 4,390 |
|
|
| 5,011 |
|
Adjusted diluted earnings per share diluted share count |
|
| 272,677 |
|
|
| 270,505 |
|
|
| 272,248 |
|
|
| 270,082 |
|
(1) Adjustment removes the impact of Net income attributed to dilutive awards and substantively vested RSUs to arrive at Net income (loss) attributable to Ryan Specialty Holdings, Inc. For the three months ended September 30, 2023 and 2022, this removes $0.1 million and $13.1 million of Net income, respectively, on 115.9 million and 266.4 million Weighted-average shares of Class A common stock outstanding - diluted, respectively. For the nine months ended September 30, 2023 and 2022, this removes $3.8 million and $55.4 million of Net income, respectively, on 124.9 million and 265.1 million Weighted-average shares of Class A common stock outstanding - diluted, respectively. See “Note 10, Earnings (Loss) Per Share” of the unaudited quarterly consolidated financial statements.
(2) For comparability purposes, this calculation incorporates the Net income that would be outstanding if all LLC Common Units (together with shares of Class B common stock) were exchanged for shares of Class A common stock. For the three months ended September 30, 2023 and 2022, this includes $20.8 million and $17.5 million of Net income, respectively, on 257.6 million and 266.4 million Weighted-average shares of Class A common stock outstanding - diluted, respectively. For the nine months ended September 30, 2023 and 2022, this includes $97.8 million and $74.3 million of Net income, respectively, on 267.9 million and 265.1 million Weighted-average shares of Class A common stock outstanding - diluted, respectively. For the three months ended September 30, 2022, 144.1 million weighted average outstanding LLC Common Units were considered dilutive and included in the 266.4 million Weighted-average shares of Class A common stock outstanding - diluted within Diluted EPS. For the nine months ended September 30, 2022, 144.0 million weighted average outstanding LLC Common Units were considered dilutive and included in the 265.1 million Weighted-average shares of Class A common stock outstanding - diluted within Diluted EPS. See “Note 10, Earnings (Loss) Per Share” of the unaudited quarterly consolidated financial statements.
(3) Adjustments to Adjusted net income are described in the footnotes of the reconciliation of Adjusted net income to Net income (loss) in “Adjusted Net Income and Adjusted Net Income Margin” on 257.6 million and 266.4 million Weighted-average shares of Class A common stock outstanding - diluted for the three months ended September 30, 2023 and 2022, respectively, and on 267.9 million and 265.1 million shares of Weighted-average shares of Class A common stock outstanding - diluted for the nine months ended September 30, 2023 and 2022, respectively.
(4) For comparability purposes and to be consistent with the treatment of the adjustments to arrive at Adjusted net income, the dilutive effect of unvested equity awards is calculated using the treasury stock method as if the weighted average unrecognized cost associated with the awards was $0 over the period, less any unvested equity awards determined to be dilutive within the Diluted EPS calculation disclosed in “Note 10, Earnings (Loss) Per Share” of the unaudited quarterly consolidated financial statements. For the three months ended September 30, 2023 and 2022, 15.1 million and 4.2 million shares were added to the calculation, respectively, and for the nine months ended September 30, 2023 and 2022, 4.4 million and 5.0 million shares were added to the calculation, respectively.
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 theour 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
41
available under our credit facilities.Revolving Credit Facility, Term Loan, and Senior Secured Notes. 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 Revolving 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 include 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 are recorded as Fiduciary liabilities on the Consolidated Balance Sheets. We 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 on the Consolidated Balance Sheets.
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, claim 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 invested in very liquid securities with a focus on preservation of principal. To minimize investment risk, we 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 $848.6 million and $704.9 million as of September 30, 2023 and 2022, respectively, and fiduciary receivables of $1,672.4 million and $1,442.0 million as of September 30, 2023 and 2022, 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 $754.4 million of Cash and cash equivalents on the Consolidated Balance Sheet as of September 30, 2023, $88.0 million was held in fiduciary accounts representing collected revenue and was 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,Debtin the notes to our unaudited quarterly consolidated financial statements for further information regarding our debt arrangements.
On July 26, 2021, we entered into an amendment to our credit agreement,Credit Agreement, which provided for an increase in the size of our revolving credit facilityRevolving Credit Facility from $300$300.0 million to $600$600.0 million. Interest on the upsized revolving credit facility bearsRevolving Credit Facility bore interest at LIBORthe Eurocurrency Rate (LIBOR) plus a margin that rangesranged from 2.50% to 3.00%, based on the first lien net leverage ratio defined in our credit agreement.Credit Agreement. No other significant terms under our credit agreement governing the revolving credit facilityRevolving 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.
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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 September 30, 2023, the interest rate on the Term Loan was 3.00% plus Adjusted Term SOFR, subject to a 75 basis point floor.
As of September 30, 2023, we were in compliance with all of the covenants under our Credit Agreement and there were no events of default for the nine months ended September 30, 2023.
Tax Receivable Agreement
The Company is party to a result of its ownership ofTRA with current and certain former LLC Units in Holdings LLC,Unitholders. The TRA provides for the payment by the Company, is now subject to current and certain former LLC Unitholders, of 85% of the net cash savings, if any, in U.S. federal, state, and local income taxes with respectthat the Company realizes (or is deemed to its allocable sharerealize in certain circumstances) as a result of any taxable income(i) certain increases in the tax basis of Holdingsthe 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 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, 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 September 30, 2023 will be approximately $309.8$359.1 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 highly unlikely event of an early termination of the TRA (e.g., a default by the Company or a Change of Control) 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 |
|
| Pre-IPO M&A Tax Attributes |
|
| TRA Payment Tax Attributes |
|
| TRA Liabilities |
| ||||
Balance at December 31, 2022 |
| $ | 150,311 |
|
| $ | 85,016 |
|
| $ | 60,020 |
|
| $ | 295,347 |
|
Exchange of LLC Common Units |
|
| 43,443 |
|
|
| 6,002 |
|
|
| 13,804 |
|
|
| 63,249 |
|
Accrued interest |
|
| — |
|
|
| — |
|
|
| 478 |
|
|
| 478 |
|
Balance at September 30, 2023 |
| $ | 193,754 |
|
| $ | 91,018 |
|
| $ | 74,302 |
|
| $ | 359,074 |
|
Total expected estimated tax savings from each of the tax attributes associated with the TRA as of September 30, 2023 were $422.4 million consisting of (i) Exchange Tax Attributes of $227.9 million, (ii) Pre-IPO M&A Tax Attributes of $107.1 million, and (iii) TRA Payment Tax Attributes of $87.4 million. The Company will retain the benefit of 15% of these cash savings.
Comparison of Cash Flows for the Nine Months Ended September 30, 2023 and 2022
Cash and cash equivalents decreased $78.7 million from $833.1 million at September 30, 2022 to $754.4 million at September 30, 2023. A summary of the Company’s cash flows provided by and used for continuing operations from operating, investing, and financing activities is as follows:
Cash Flows From Operating Activities
Cash flows from operating activities for the nine months ended September 30, 2023 were $250.3 million, an increase of $99.4 million compared to the nine months ended September 30, 2022. This increase was driven by an increase in Net income of $18.5 million and the change in Other current assets and accrued liabilities together with Other non-current assets and accrued liabilities increase of $113.5 million. The change in Other current assets and accrued liabilities together with Other non-current assets and accrued liabilities was primarily driven by the final All Risks LTIP payments made in 2022. This increase in cash flows from operating activities was
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offset by the change in Commissions and fees receivable of $20.5 million. The increased change to Commissions and fees receivable was generated by revenue growth.
Cash Flows From Investing Activities
Cash flows used for investing activities during the nine months ended September 30, 2023 were $381.9 million, an increase of $370.2 million compared to the $11.7 million of cash flows used for investing activities during the nine months ended September 30, 2022. The main driver of the cash flows used for investing activities in the nine months ended September 30, 2023 was $366.1 million for Business combinations - net of cash acquired and cash held in a fiduciary capacity related to the Griffin, Socius, ACE, and Point6 acquisitions and $16.0 million of Capital expenditures, compared to $12.0 million of Capital expenditures for the nine months ended September 30, 2022.
Cash Flows From Financing Activities
Cash flows used for financing activities during the nine months ended September 30, 2023 were $32.0 million, a decrease of $292.3 million compared to cash flows provided by financing activities of $260.3 million during the nine months ended September 30, 2022. The main drivers of cash flows used for financing activities during the nine months ended September 30, 2023 were Tax distributions to LLC Unitholders of $52.6 million, Repayment of term debt of $12.4 million, and Payment of contingent consideration of $4.5 million offset by Net change in fiduciary liabilities of $36.8 million. The main drivers of cash flows provided by financing activities during the nine months ended September 30, 2022 were the Bond issuance of $394.0 million offset by Net change in fiduciary liabilities of $54.8 million, Tax distributions to LLC Unitholders of $32.7 million, Payment of interest rate cap premium of $25.5 million, Repayment of term debt of $12.4 million, Payment of contingent consideration of $6.2 million, and Debt issuance costs paid of $2.4 million.
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“Note 7Leasesand 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
Within Current accrued compensation and Non-current accrued compensation we have various long-term incentive compensation agreements accrued for. These agreements are typically associated with an acquisition. Below we have outlined the liabilities accrued as of September 30, 2023, the aboveprojected future expense, and routine transactions made the projected timing of future cash outflows associated with these arrangements.
Long-term Incentive Compensation Agreements |
| |||
(in thousands) |
| September 30, 2023 |
| |
Current accrued compensation |
| $ | — |
|
Non-current accrued compensation |
|
| 1,785 |
|
Total liability |
| $ | 1,785 |
|
Projected future expense |
|
| 5,144 |
|
Total projected future cash outflows |
| $ | 6,928 |
|
|
|
|
| |
Projected Future Cash Outflows |
| |||
(in thousands) |
|
|
| |
2023 |
| $ | — |
|
2024 |
|
| — |
|
2025 |
|
| — |
|
2026 |
|
| 6,666 |
|
Thereafter |
| $ | 263 |
|
Within “Note 3, Mergers and Acquisitions” in the ordinary coursenotes to our unaudited consolidated financial statements we discuss various contingent consideration arrangements and their impact. Below we have outlined the liabilities accrued as of business, there have been no material changes toSeptember 30, 2023, the contractual obligations as disclosed in our IPO Prospectus.
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Contingent Consideration |
| |||
(in thousands) |
| September 30, 2023 |
| |
Current accounts payable and accrued liabilities |
| $ | — |
|
Other non-current liabilities |
|
| 36,018 |
|
Total liability |
| $ | 36,018 |
|
Projected future expense |
|
| 5,432 |
|
Total projected future cash outflows |
| $ | 41,450 |
|
|
|
|
| |
Projected Future Cash Outflows |
| |||
(in thousands) |
|
|
| |
2023 |
| $ | — |
|
2024 |
|
| — |
|
2025 |
|
| 38,537 |
|
2026 |
|
| 2,913 |
|
Thereafter |
| $ | — |
|
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: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, andbusiness combinations, 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, 2022 filed with the SEC on March 1, 2023. Additionally, the changes, if any, to our critical accounting policies and estimates disclosed in our IPO Prospectus. For more information, refer to Notethe Annual Report on Form 10-K for the year ended December 31, 2022 are included in “Note 1in the notes” 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 (if any), see Note“Note 1,Presentation
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to various market risks in the
Foreign Currency Risk
For the sixnine months ended JuneSeptember 30, 2021,2023, approximately 3%2% 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.
As of JuneSeptember 30, 2021,2023, we had $1,637.6$1,600.5 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
45
floor. The fair value of the term loanTerm Loan approximates the carrying amount as of JuneSeptember 30, 2021,2023 and December 31, 2020,2022, 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 years 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 JuneSeptember 30, 2021,2023, 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 JuneSeptember 30, 20212023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations of Internal Control Over Financial Reporting
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all errors and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company have been detected.
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” ofin our IPO Prospectus.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, AND USE OF PROCEEDS,
Sale of Proceeds from Initial Public OfferingUnregistered Securities
46
In connection with the acquisition of Class A Common Stock
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Item 2.05 Costs Associated with Exit or Disposal Activities
On October 30, 2023, the board of directors of the Company approved an update to our disclosure concerning the mid-April 2021 cyber phishing event as set forth under the heading of “ - Risks Related to Our Intellectual Property and Cybersecurity – We rely on the efficient, uninterrupted, and secure operation of complex information technology systems and networks to operate our business. Any significant system or network disruption due to a breachCompany’s restructuring program (the “Program”), which commenced in the securityfirst quarter of 2023. The Program is designed to facilitate continued growth, drive innovation, and deliver sustainable productivity improvements over the long term. The updated Program is expected to generate approximately $50 million of annual cost savings in 2025. The Program includes (i) Operations and Technology Optimization, (ii) Compensation and Benefits, and (iii) Asset Impairment and Other Termination Costs. These actions are expected to be completed by the end of 2024.
The Company currently estimates that the updated Program will result in cumulative pre-tax charges to its GAAP financial results of approximately $90 million which are expected to be recorded as exit and disposal activities and are broken down as follows:
Program Activity | Charges | |
Operations and Technology Optimization | $ | 50 million |
Compensation and Benefits | 25 million | |
Asset Impairment and Other Termination Costs | 15 million | |
Total | $ | 90 million |
The Company currently estimates that approximately 95% of the cumulative pre-tax charges relating to the Program will result in future cash expenditures.
Program charges are recognized as the costs are incurred over time in accordance with GAAP. The Company treats charges related to the Program as special items impacting comparability of results in its earnings disclosures.
The amounts and timing of all estimates are subject to change until finalized. The actual amounts and timing may vary materially based on various factors. See “Cautionary Note Regarding Forward-Looking Statements” above.
Insider Trading Arrangements and Policies
During the quarter ended September 30, 2023, none of our information technology systems could have a negative impact on our reputation, regulatory compliance status, operations, sales and operating results,” we first became aware on April 17, 2021 that the Company might have been 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, the Company took immediate action to secure the compromised email accounts and to prevent the unauthorized person(s) from continuing to have access,directors or gaining future access, to the Company’s accounts or related information. Additionally, the Company implemented additional employee training to more effectively identify phishing attacks and to better understand the Company’s security applications.
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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 | ||
10.8 | ||
10.9 | ||
10.10 | ||
10.11 | ||
10.12 | ||
10.13 | ||
10.14 | ||
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10.15 | ||
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) |