RYAN SPECIALTY HOLDINGS, INC. The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our consolidated financial statements and the related notes in the IPO Prospectus. 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, particularly in the sections entitled "Risk Factors" and "Forward-Looking Statements" . The following discussion provides commentary on the financial results derived from our unaudited financial statements for the three months and six months endedJune 30, 2021 and 2020 prepared in accordance withU.S. GAAP. In addition, we regularly review the following Non-GAAP measures when assessing performance: Organic Revenue Growth Rate, Adjusted Compensation 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. See "Non-GAAP Financial Measures and Key Performance Indicators" for further information. Overview Founded byPatrick 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. Our mission is to provide industry-leading innovative specialty insurance solutions for insurance brokers, agents and carriers. For retail insurance brokers, we assist in the placement of complex or otherwise hard-to-place risks. For insurance carriers, we work with retail and wholesale insurance brokers to source, onboard, underwrite and service these same risks. A significant majority of the premiums we place are bound in the E&S market, which includes Lloyd's. 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 best-in-class intellectual capital, leveraging our trusted and long-standing relationships, and developing differentiated solutions at a scale unmatched by many of our competitors. Significant Events and Transactions Effects of the Reorganization on Our Corporate Structure We were incorporated inMarch 2021 and formed for the purpose of the IPO. We are a holding company and our sole material asset is the ownership interest inHoldings LLC . All of our business is conducted throughHoldings LLC , and the financial results ofHoldings LLC will be included in the consolidated financial statements ofRyan Specialty Group Holdings, Inc. Holdings LLC has been treated as a pass-through entity forU.S. federal and state income tax purposes and accordingly has not been subject toU.S. federal or state income tax. After the IPO,Holdings LLC continues to be treated as a pass-through entity forU.S. federal and state income tax purposes. As a result of our ownership of LLC Units inHoldings LLC , we are subject toU.S. federal, state and local income taxes with respect to our allocable share of any taxable income ofHoldings LLC and are taxed at the prevailing corporate tax rates. In addition to tax expenses, we also will incur expenses related to our operations and we will be required to make payments under the Tax Receivable Agreement. Due to the uncertainty of various factors, we cannot 33 -------------------------------------------------------------------------------- estimate the likely tax benefits we will realize as a result of LLC Unit exchanges, and the resulting amounts we are likely to pay out to LLC Unitholders and Onex pursuant to the Tax Receivable Agreement; however, we estimate that such tax benefits and the related TRA payments may be substantial. We intend to causeHoldings LLC to make distributions in an amount sufficient to allow us to pay our tax obligations and operating expenses, including distributions to fund any ordinary course payments due under the Tax Receivable Agreement. Response to COVID-19 An outbreak of a novel strain of the coronavirus, COVID-19, was recognized as a pandemic by theWorld Health Organization onMarch 11, 2020 . Our leadership took decisive, timely steps to protect the health, safety and wellbeing of our employees, their families and trading partners by closing nearly all in-office operations, restricting business travel and transitioning to a remote work environment. The investments we made in our culture, trading partner relationships, business, technology and IT team members allowed for a seamless transition. We plan to continue to largely work remotely through at leastSeptember 2021 in order to best protect our RSG family. This remains subject to change as the pandemic continues to evolve. As a result of the success of our remote work operations during the pandemic, we are exploring ways in which to incorporate remote work flexibility into our post-pandemic operating model. While the pandemic has had a significant detrimental effect on numerous segments of the global economy, it provided opportunities for many aspects of our Wholesale Brokerage, Binding Authority and Underwriting Management Specialties. We believe the pandemic resulted in an increased flow of submissions into the E&S market and a further hardening of E&S insurance rates (which had already been happening since 2019), thereby yielding higher premiums. As a result, many of our specialties experienced, and continue to experience, an increase in the number of accounts handled and higher premium rates, on average, thereby increasing our commissions. Highlighting the resilience of our business, the dedication of our workforce, and the E&S market opportunities created by the pandemic, in 2020 we completed the All Risks Acquisition (the largest in our history), made substantial progress on our integration and the Restructuring Plan and realized 20.4% organic revenue growth, all in the midst of the pandemic. We managed to sustain this resilience in 2021 through the continued advancement of the integration and Restructuring Plan and realized 23.9% organic revenue growth for the six months endedJune 30, 2021 . While we believe our business and operations have thus far performed at a high level of efficiency and achieved historic results throughout the pandemic, there are no comparable recent events which may provide guidance as to the ultimate effect of the spread of COVID-19 and a global pandemic. As a result, the final impact of the pandemic or a similar health epidemic remains uncertain, particularly if variants of the virus develop, vaccines are not distributed at a suitable pace or prove less effective than anticipated, and/or the pandemic otherwise continues beyond current expectations. The effects could yet have a material impact on our results of operations. See "Risk Factors-Risks Related to Our Business and Industry" in our IPO Prospectus for a discussion of the risks related to the COVID-19 pandemic. 2020 Restructuring Plan During the third quarter of 2020 and in conjunction with the All Risks Acquisition, we initiated the Restructuring Plan in an effort to reduce costs and increase efficiencies, streamline management reporting structures, and centralize functions across the Company to improve operating margin. The Restructuring Plan is expected to generate annual savings of$25.0 million as the plan is fully actioned byJune 30, 2022 . Initial savings began to materialize in 2020 with the full run-rate savings expected to be realized byJune 30, 2023 . Of the$25.0 million of savings, approximately 90% relates to a reduction in workforce with the remaining 10% related to lease and contract terminations. The Restructuring Plan is expected to incur cumulative one-time charges of between$30.0 million and$35.0 million , funded through operating cash flow. Restructuring costs will primarily be included in Compensation and Benefits expense with the remaining costs in General and Administrative expense. See Note 4, Restructuring of the unaudited quarterly consolidated financial statements for further discussion. 34 -------------------------------------------------------------------------------- We began recognizing costs associated with the Restructuring Plan in the third quarter of 2020. For the three and six months endedJune 30, 2021 we incurred restructuring costs of$3.0 million and$10.0 million , respectively, and cumulative restructuring costs of$20.8 million 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 endedJune 30, 2021 . Of the cumulative$20.8 million costs,$18.5 million was workforce-related with the remaining being general and administrative costs. While the current results of the Restructuring Plan are in line with expectations, changes to the total savings estimate and timing of the Restructuring Plan may evolve as we continue to progress through the plan and evaluate other potential restructuring opportunities. The actual amounts and timing may vary significantly based on various factors. Key Factors Affecting Our Performance Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to: Pursue Strategic Acquisitions We have successfully integrated businesses complementary to our own to increase both our distribution reach and our product capabilities. We continuously evaluate acquisitions and intend to further pursue targeted acquisitions that complement our product capabilities or provide us access to new markets. We have previously made and intend to continue to make acquisitions with the objective of enhancing our human capital and product capabilities, entering natural adjacencies and expanding our geographic footprint. Our ability to successfully pursue strategic acquisitions is dependent upon a number of factors, including sustained execution of a disciplined and selective acquisition strategy and our ability to effectively integrate targeted companies or assets and grow our business. We do not have agreements or commitments for any significant acquisitions at this time. Deepen and Broaden our Relationships withRetail Broker Partners We have deep engagement with our retail broker trading partners. We believe we have the ability to transact in even greater volume with nearly all of our existing retail brokerage trading partners. For example, in 2020, our revenue derived from the Top 100 firms (as ranked byBusiness Insurance ) expanded faster than our overall growth rate of 20%. Our ability to deepen and broaden relationships with our retail broker partners and increase sales is dependent upon a number of factors, including client satisfaction with our distribution reach and our product capabilities, competition, pricing, economic conditions and spending on our product offerings. Build our National Binding Authority Business We believe there is substantial opportunity to continue to grow our binding authority business, 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 business is dependent upon a number of factors, including the quality of our services and product offerings, marketing and sales efforts to drive new business prospects and execution, new product offerings, the pricing and quality of our competitors' offerings and the growth in demand of the insurance products. Invest in Operation and Growth We have heavily invested in building a durable business that is able to adapt to the continuously evolving E&S market and intend to continue to do so. We are focused on enhancing the breadth of our product offerings as well as developing and launching new solutions to address the evolving needs of the specialty insurance industry. Our future success is dependent on our ability to successfully develop, market and sell existing and new products to both new and existing trading partners. 35 -------------------------------------------------------------------------------- Generate Commission Regardless of the State of the Specialty Insurance Market We generate commissions, which are calculated as a percentage of the total insurance policy premium, and fees. A softening of the insurance market or specialty lines that are our focus, characterized by a period of declining premium rates, could negatively impact our profitability. Leverage the Growth of the E&S Market The growing relevance of the E&S market has been driven by the rapid emergence of large, complex and high-hazard risks across many lines of insurance. This trend continued in 2020 and the first two quarters of 2021, with a record 30 named storms during the 2020Atlantic hurricane season, over 10.3 million acres burned through wildfires inthe United States , escalating jury verdicts and social inflation, a proliferation of cyber threats, novel health risks, and the transformation of the economy to a "digital first" mode of doing business. We believe that as the complexity of the E&S market continues to escalate, wholesale brokers and managing underwriters that do not have sufficient scale or the financial and intellectual capital to invest in the required specialty capabilities will struggle to compete effectively. This will further the trend of market share consolidation among the wholesale firmswho have these capabilities. We will continue to invest in our intellectual capital to innovate and offer custom solutions and products to better address changing market fundamentals. Address Costs of being aPublic Company As we begin to operate as a public company, we will be required to continue to implement changes in certain aspects of our business and develop, manage and train management level and other employees to comply with ongoing public company requirements. We will also incur new expenses as a public company, including public reporting obligations, increased professional fees for accounting, proxy statements, shareholder meetings, stock exchange fees, transfer agent fees,SEC andFINRA filing fees, legal fees and offering expenses. Summary of Financial Performance Highlights Three months ended Six months ended June 30, Change June 30, Change (in thousands, except percentages) 2021 2020 $ % 2021 2020 $ % GAAP financial measures Total revenue$ 390,012 $ 246,324 $
143,688 58.3 %
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 %
36--------------------------------------------------------------------------------
* For a definition and a reconciliation of Organic Revenue Growth Rate,
Adjusted Compensation and Benefits, Adjusted Compensation and Benefits
Expense Ratio, Adjusted General and Administrative Expense, Adjusted General
and Administrative Expense Ratio, Adjusted EBITDAC, Adjusted EBITDAC Margin,
Adjusted Net Income, and Adjusted Net Income Margin, to the most comparable
GAAP measure, see
"Non-GAAP
Financial Measures and Key Performance Indicators."
Comparison of the Three Months Ended
• Revenue increased $143.7 million or 58.3% period-over-period to
$390.0 million .
• Compensation and benefits expense increased
the Compensation and Benefits Expense Ratio decreased 3.0% from 63.7% to
60.7% period-over-period.
• General and administrative expense increased
the General and Administrative Expense Ratio decreased 1.0% from 8.9% to
7.9% period-over-period.
• Operating expenses increased
to $297.8 million .
• Operating income increased 60.0% period-over-period to
• Net Income increased by 27.1% to
• Net Income Margin was 16.3% for the quarter, compared to 20.3% in the
same quarter last year.
• Organic Revenue Growth Rate for the quarter was 28.5%, compared to 18.5%
in the same quarter last year-see
"Non-GAAP
Financial Measures and Key Performance Indicators" for further
information.
• Adjusted Compensation and Benefits Expense increased
46.6%, and the Adjusted Compensation and Benefits Expense Ratio decreased
4.6% from 61.1% to 56.5% period-over-period - see "Non-GAAP Financial
Measures and Key Performance Indicators" for further information.
• Adjusted General and Administrative Expense increased
65.1%, and the Adjusted General and Administrative Expense Ratio
increased 0.3% from 7.1% to 7.4% period-over-period - see "Non-GAAP
Financial Measures and Key Performance Indicators" for further
information.
• Adjusted EBITDAC, increased 79.4% to $140.5 million -see
"Non-GAAPFinancial Measures and Key Performance Indicators" for further information.
• Adjusted EBITDAC Margin increased to 36.0% from 31.8% period-over-period-see
"Non-GAAP
Financial Measures and Key Performance Indicators" for further information.
• Adjusted Net Income and Adjusted Net Income Margin increased to
$92.3 million and 23.7%, respectively, from $53.2 million and 21.6%
period-over-period-see
"Non-GAAP
Financial Measures and Key Performance Indicators" for further
information.
37--------------------------------------------------------------------------------
Comparison of the Six Months Ended
• Revenue increased$247.0 million or 54.3% year-over-year to$701.5 million . • Compensation and benefits expense increased$153.2 million , or 51.4%, and
the Compensation and Benefits Expense Ratio decreased 1.3% from 65.6% to
64.3% period-over-period.
• General and administrative expense increased
the General and Administrative Expense Ratio decreased 2.8% from 11.1% to
8.3% period-over-period.
• Operating expenses increased
$569.4 million . • Operating income increased 56.9% year-over-year to$132.1 million .
• Net Income decreased by 5.7% to
ended June 30, 2020 .
• Net Income Margin was 8.5% for the six months, compared to 13.9% for the
same period in the prior year.
• Organic Revenue Growth Rate was 23.9% for the six months ended
2021, compared to 23.4% for the same period in the prior year-see
"Non-GAAP
Financial Measures and Key Performance Indicators" for further
information.
• Adjusted Compensation and Benefits Expense increased
44.8% and the adjusted Compensation and Benefits Expense Ratio decreased
3.8% from 62.7% to 58.9% period-over-period - see
"Non-GAAP
Financial Measures and Key Performance Indicators" for further
information.
• Adjusted General and Administrative Expense increased
19.4%, and the Adjusted General and Administrative Expense Ratio
decreased 2.2% from 9.9% to 7.7% period-over-period - see "Non-GAAP
Financial Measures and Key Performance Indicators" for further
information.
• Adjusted EBITDAC increased 88.8% year-over-year to
"Non-GAAP
Financial Measures and Key Performance Indicators" for further information.
• Adjusted EBITDAC Margin increased to 33.5% from 27.4% year-over-year-see
"Non-GAAP
Financial Measures and Key Performance Indicators" for further information.
• Adjusted Net Income and Adjusted Net Income Margin increased to
the six months ended June 30, 2021 compared to the same period in
2020-see
"Non-GAAP
Financial Measures and Key Performance Indicators" for further
information.
38
--------------------------------------------------------------------------------
Components of Results of OperationsRevenue
Net Commissions and Fees Net commissions and fees are derived primarily by commissions from our three Specialties, which 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. Our commissions and fees are usually a percentage of the premium paid by the insured and generally depend on the type of insurance, the carriers involved and the nature of the services we provide in a given transaction. We share a portion of these commissions with the retail insurance broker and recognize revenue on a net basis. Additionally, carriers may also pay us a contingent commission or volume-based commission, both of which represent forms of contingent or supplemental consideration associated with the placement of coverage and are based primarily on underwriting results, but may also contain considerations for only volume, growth and/or retention. We also receive loss mitigation and other fees that are not dependent on the placement of a risk. Fiduciary Investment Income Fiduciary investment income consists of interest earned on insurance premiums that are held in a fiduciary capacity, in cash and cash equivalents, until disbursed. Expenses Compensation and Benefits Expense Compensation and benefits is our largest expense. It consists of (i) salary, incentives and benefits paid and payable to employees, and commissions paid and payable to our producers; and (ii) equity-based compensation associated with the grants of profits interest awards to employees and executives. We operate in competitive markets for human capital and we need to maintain competitive compensation levels as we expand geographically and create new products and services. 39 -------------------------------------------------------------------------------- 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 consists of interest payable on indebtedness, imputed interest on finance leases and contingent consideration, and amortization of deferred debt issuance costs. Other Non-Operating (Loss) Income Other non-operating (loss) income includes the change in fair value of the embedded derivatives on the redeemable Class B Preferred Units. This 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 earnings from our foreign subsidiaries and C-Corps subject to entity level taxation. Non-Controlling Interest Our historical financial statements include the non-controlling interest related to the net income attributable to Ryan Re. 40 -------------------------------------------------------------------------------- Results of Operations
Below is a summary table of the financial results and Non-GAAP measures that we find relevant to our business operations:
Three months ended Six months ended
June 30, Change June 30, Change
(in thousands, except
percentages) 2021 2020 $ % 2021 2020 $ %
Revenue
Net commissions and fees$ 389,846 $ 246,065 $
143,781 58.4 %
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 %
GAAP financial measures Revenue$ 390,012 $ 246,324 $
143,688 58.3 %
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 %
41--------------------------------------------------------------------------------
Three months ended Six months ended
June 30, Change 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 %
23.7 % 21.6 % 21.3 % 17.8 %
* These measures are
Non-GAAP.
Please refer to the section entitled
"Non-GAAPFinancial Measures and Key Performance Indicators" below for definitions and
reconciliations to the nearest GAAP measure.
42
--------------------------------------------------------------------------------
Comparison of the Three Months Ended June 30, 2021 and 2020
Revenue
Net Commissions and Fees
Net commissions and fees increased by $143.8 million or 58.4% from
$246.1 million to $389.8 million for the three months ended June 30, 2021 as
compared to the same period in the prior year. The two main drivers of the
revenue increase are 30.3% growth from the All Risks Acquisition and 28.5% of
organic revenue growth.
Three months ended June 30 ,
% of % of
(in thousands, except percentages) 2021 total 2020
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 % Wholesale Brokerage net commissions and fees increased by$83.8 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$22.0 million or 69.8% period-over-period, primarily due to strong organic growth within the specialty and contributions from the All Risks Acquisition. Underwriting Management net commissions and fees increased by$37.9 million or 89.4% period-over-period, primarily due to strong organic growth within the specialty and contributions from the All Risks Acquisition. The following table sets forth our revenue by type of commission and fees: Three months ended June 30, % of % of (in thousands, except percentages) 2021 total 2020 total Change Net commissions and policy fees$ 378,120 97.0 % $
236,184 96.0 %
(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 %
Net commissions and policy fees grew 60.1% just ahead of the overall net
commissions and fee revenue growth of 58.4% for the three months ended June 30,
2021 as compared to the same period in the prior year. The main drivers of this
growth continue to be the acquisition of new business and expansion of ongoing
client relationships in response to the increasing demand for new, complex E&S
products as well as the inflow of risks from the admitted market into the E&S
market. In aggregate, we experienced marginal but not material increases in
commission rates. Net commissions and policy fees continue to represent more
than 90% of total net commissions and fees period-over-period.
Supplemental and contingent commissions decreased 11.4% 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% period-over-period primarily due to
increased capital markets activity in 2021. These fees continue to represent
less than 2% of total net commissions and fees period-over-period.
43--------------------------------------------------------------------------------
Expenses
Compensation and Benefits Expense Compensation and benefits expense increased by$80.0 million or 51.0% from$156.8 million to$236.8 million for the three months endedJune 30, 2021 compared to the same period in 2020. The following were the principal drivers of this increase:
• Headcount increased to 3,375 full-time employees as of
2,482 as of June 30, 2020 , or 36.0%, primarily as a result of the All
Risks Acquisition;
• Commissions increased
by the 58.4% increase in total Net Commissions and Fees discussed above;
and
• An
compensation, reflecting our assumption of obligations in the All Risks
Acquisition. All Risks had previously established various performance and
service based long-term incentive plans for executives, producers and key
employees which provided that upon a change of control event, the
aggregate amount payable under each plan would be calculated and fixed
upon close of the change of control event. We expect to recognize
acquisition related long-term incentive compensation expense of
approximately $33.0 million for the twelve months ended 2021 and an
aggregate of approximately $25.0 million thereafter.
This expense increase was partially offset by $3.2 million of net savings
related to the Restructuring Plan representing approximately $5.4 million of
work-force related savings less
one-time
work-force related expense of $2.2 million for the three months ended June 30,
2021 (see "Significant Events and Transactions-2020 Restructuring Plan" for
further information).
The net impact of revenue growth and the factors above resulted in a
Compensation and Benefits Expense Ratio improvement of 3.0% from 63.7% to 60.7%
period-over-period.
We expect to continue to experience a general rise in commissions, salaries,
incentives and benefits expense commensurate with our expected growth in
business volume, revenue and headcount.
General and Administrative Expense
General and administrative expense includes travel and entertainment expenses,
office expenses, accounting, legal 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.
General and administrative expense increased by $8.8 million or 40.3% from
$21.9 million to $30.7 million for the three months ended June 30, 2021 as
compared to the same period in the prior year. A main driver of this increase
was $2.9 million of increased travel and entertainment expense as travel
restrictions associated with the pandemic began to lift compared to the same
period in 2020. The remaining increase was driven by expenses incurred to
accommodate revenue expansion and the All Risks Acquisition, such as IT,
professional services, occupancy, and insurance, partially offset by a
$3.1 million decrease in acquisition-related expense.
The net impact of revenue growth and the factors above resulted in a General and
Administrative Expense Ratio improvement of 1.0% from 8.9% to 7.9%
period-over-period.
Amortization Expense
Amortization expense increased by $18.2 million or 199.6% from $9.1 million to
$27.3 million for the three months ended June 30, 2021 compared to the same
period in the prior year. The main driver was approximately $19.2 million of
amortization from acquired intangibles from the All Risks Acquisition. Our
intangible assets increased by $401.7 million as of June 30, 2021 as compared to
June 30, 2020 .
44
--------------------------------------------------------------------------------
Interest Expense
Interest expense increased $12.2 million or 180.9% from $6.8 million to $19.0
million for the three months ended June 30, 2021 compared to the same period in
the prior year. The main driver of the change in interest expense for the three
months ended June 30, 2021 was driven by the $890.2 million increase in total
debt, which was undertaken in connection with the All Risks Acquisition
completed in September 2020 .
Other
Non-Operating
(Loss) Income
Other
non-operating
(loss) income decreased by $8.4 million to a loss of $7.9 million for the three
months ended June 30, 2021 as compared to income of $0.5 million in the same
period in the prior year. The main driver of the loss was the $8.0 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 before Income Taxes
Due to the factors above, Income (loss) before income taxes increased
$14.3 million or 27.7% from a profit of $51.5 million to a profit of
$65.7 million for the three months ended June 30, 2021 compared to the same
period in the prior year.
Income Tax Expense
Income tax expense increased $0.7 million or 41.7% from $1.6 million to
$2.3 million for the three months ended June 30, 2021 as compared to the same
period in the prior year as a result of increased earnings in our foreign
subsidiaries subject to entity level taxation.
Net Income
Net income increased $13.5 million or 27.1% from a profit of $49.9 million to a
profit of $63.4 million for the three months ended June 30, 2021 compared to the
same period in the prior year as a result of the factors described above.
Comparison of the Six Months Ended June 30, 2021 and 2020Revenue
Net Commissions and Fees Net commissions and fees increased by$248.0 million or 54.7% from$453.2 million to$701.2 million in 2021 period-over-period. The two main drivers of the revenue increase are 30.8% growth from the All Risks Acquisition and 23.9% of organic revenue growth. 45 --------------------------------------------------------------------------------
Six months ended June 30 ,
% of % of
(in thousands, except percentages) 2021 total 2020
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 % Wholesale Brokerage net commissions and fees increased by$140.9 million or 46.0% 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$42.9 million or 65.3% period-over-period, primarily due to strong organic growth within this specialty as well as contributions from the All Risks Acquisition. Underwriting Management net commissions and fees increased by$64.3 million or 79.1% in 2021 as compared to 2020, primarily due to strong organic growth within the specialty, as well as the contributions from the All Risks Acquisition.
The
following table sets forth our revenue by type of commission and fees:
Six months ended June 30,
% of % of
(in thousands, except percentages) 2021 total 2020 total Change
Net commissions and policy fees $ 668,661 95.3 % $
426,447 94.1 %
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 %
Net commissions and policy fees increased 56.8% just ahead of the overall total
net commissions and fees growth of 54.7% period-over-period. This growth was
driven by increased volume from both new and existing clients in response to the
increasing demand for E&S products. Multiple classes of risk experienced
year-over-year premium rate increases, which drives commission revenue growth
that is typically calculated as a percentage of total insurance policy premium.
In aggregate, we experienced marginal but not material increases in commission
rates. Net commissions and policy fees continue to represent more than 90.0% of
total net commissions and fees period-over-period.
Supplemental and contingent commissions increased 5.0% 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% period-over-period primarily due to
increased capital markets activity in 2021. These fees continue to represent
less than 2.0% of total net commissions and fees period-over-period.
Expenses
Compensation and Benefits Expense
Compensation and benefits expense increased by $153.2 million or 51.4% from
$298.1 million to $451.3 million for the six months ended June 30, 2021 as
compared to the same period in 2020. The following were the principal drivers of
this increase:
• Headcount increased to 3,375 full-time employees as of
2,482 as of June 30, 2020 , or 36.0%, primarily as a result of the All
Risks Acquisition;
46--------------------------------------------------------------------------------
• Commissions increased
the 54.7% increase in total net commissions and fees discussed above; and
• $17.5 million impact from acquisition related long-term incentivecompensation, reflecting our assumption of obligations in the All Risks
Acquisition. All Risks had previously established various performance and
service based long-term incentive plans for executives, producers and key
employees which provided that upon a change of control event, the
aggregate amount payable under each plan would be calculated and fixed
upon close of the change of control event. We expect to recognize
acquisition related long-term incentive compensation expense of
approximately $33.0 million in 2021, of which $17.5 million has been
recognized for the six months ended
This expense increase was partially offset by a$1.7 million of net savings related to the Restructuring Plan representing approximately$10.1 million of work-force related savings less one-time work-force related expense of$8.4 million for the six months endedJune 30, 2021 (see "Significant Events and Transactions-2020 Restructuring Plan" for further information). The net impact of revenue growth and the factors above resulted in a Compensation and Benefits Expense Ratio improvement of 1.3% from 65.6% to 64.3% period-over-period. We expect to continue to experience a general rise in commissions, salaries, incentives and benefits expense commensurate with our expected growth in business volume, revenue and headcount. General and Administrative Expense General and administrative expense includes travel and entertainment expenses, office expenses, accounting, legal 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. General and administrative expense increased by$7.8 million or 15.6% period-over-period from$50.4 million to$58.2 million as a result of revenue expansion and the All Risks Acquisition. Such expenses incurred to accommodate both organic and inorganic revenue growth include IT, occupancy, insurance and professional services. While there is an overall increase in general and administrative expense, travel and entertainment expense decreased$2.1 million period-over-period due to travel restrictions from the COVID-19 pandemic. As travel restrictions are lifted we do not expect to maintain the same level of reduced travel and entertainment as discussed above in the results for the three months endedJune 30, 2021 compared to three months endedJune 30, 2020 . The net impact of revenue growth and the factors above resulted in a General and Administrative Expense Ratio improvement of 2.8% from 11.1% to 8.3% period-over-period. Amortization Expense Amortization expense increased by$36.0 million or 187.8% from$19.1 million to$55.1 million for the six months endedJune 30, 2021 as compared to the same period in 2020. The main driver was approximately$38.4 million of amortization from acquired intangibles from the All Risks Acquisition. Our intangible assets increased by$401.7 million as ofJune 30, 2021 as compared to as ofJune 30, 2020 . Interest Expense Interest expense increased$23.6 million or 152.9% from$15.4 million to$39.0 million period-over-period. The main driver of the change in interest expense for the six months endedJune 30, 2021 was driven by the$890.2 million increase in total debt, which was undertaken in connection with the All Risks Acquisition completed inSeptember 2020 . 47
--------------------------------------------------------------------------------
Other Non-Operating (Loss) Income Other non-operating (loss) income increased by$26.8 million to a loss of$29.3 million from a loss of$2.5 million for the six months endedJune 30, 2021 compared to the same period in 2020. The main driver of the loss was 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 offset by a loss on the interest rates swaps for the six months endedJune 30, 2020 , which were settled during 2020. Income before Income Taxes Due to the factors above, Income before income taxes decreased$2.2 million or 3.3% from$66.4 million to$64.2 million for the six months endedJune 30, 2021 as compared to the same period in 2020. Income Tax Expense Income tax expense increased$1.4 million or 44.4% from$3.2 million to$4.6 million period-over-period as a result of increased earnings from our foreign subsidiaries subject to entity level taxation. Net Income Net income decreased$3.6 million or 5.7% from$63.2 million to$59.6 million period-over-period as a result of the factors described above. Non-GAAP Financial Measures and Key Performance Indicators We consider a variety of financial measures in assessing the performance of our business. We regularly review the following Non-GAAP measures when assessing performance: Organic Revenue Growth Rate, Adjusted Compensation 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 use of Non-GAAP financial 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, Non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for the consolidated financial statements prepared and presented in accordance with GAAP. The footnotes to the reconciliation tables below should be read in conjunction with the unaudited quarterly consolidated financial statements. Organic Revenue Growth Rate Organic Revenue Growth Rate is a Non-GAAP measure that we use to help management and investors understand and evaluate the growth of our business without the impacts of acquisitions, which affects the comparability of results from period to period. The Organic Revenue Growth Rate represents the percentage change in revenue, as compared to the same period for the year prior, adjusted for revenue attributable to recent acquisitions during the first 12 months of RSG's ownership, and other adjustments such as contingent commissions, fiduciary investment income, and foreign exchange rates. This supplemental information related to the Organic Revenue Growth Rate represents a measure not in accordance withU.S. GAAP and should be viewed in addition to, not instead of, the consolidated financial statements. Industry peers provide similar supplemental information about their revenue performance, although they may not make identical adjustments. 48
--------------------------------------------------------------------------------
A reconciliation of Organic Revenue Growth Rate to Total Revenue Growth Rate,
the most comparable GAAP measure, for each of the periods indicated is as
follows (in percentages):
Three months ended
June 30,
2021 2020Total 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 %
(1)
total revenue change of 58.3%.
change. The change,
Discussion and Analysis of Financial Condition and Results of Operations" for
further details.
(2) The mergers and 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
ended
(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
ended June 30, 2020 was $1.3 million and $1.5 million , respectively.
Six months ended
June 30,
2021 2020Total 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 %
(1)
total revenue change of 54.3%.
change. The change,
Discussion and Analysis of Financial Condition and Results of Operations" for
further details.
(2) The mergers and acquisitions adjustment excludes net commission and fees
revenue generated during the first 12 months following an acquisition. The
total adjustment for the six months ended
(3) The other adjustments exclude the year-over-year change in contingent
commissions, fiduciary investment income, and foreign exchange rates. The
total adjustment for the six months ended June 30, 2021 and 2020 was
$1.6 million and $1.5 million , respectively.
49
--------------------------------------------------------------------------------
Adjusted Compensation and Benefits Expense and Adjusted Compensation and
Benefits Expense Ratio
We believe Adjusted Compensation and Benefits
Expense and Adjusted Compensation and Benefits Expense Ratio provide relevant
and useful information, which is widely used by analysts, investors and
competitors in our industry as well as by management because it provides a clear
representation of our core compensation and benefits and general and
administrative expenses as well as improves comparability between periods, and
eliminates the impact of the items that do not relate to the ongoing operations
of the business.
We define Adjusted Compensation and Benefits
Expense as Compensation and benefits adjusted to reflect items such as (i)
equity-based compensation, (ii) acquisition and restructuring related
compensation expense, and (iii) other exceptional or
non-recurring
items, as applicable. The most comparable GAAP financial metric is Compensation
and Benefits Expense.
Adjusted Compensation and Benefits Expense Ratio is defined as Adjusted
Compensation and Benefits Expense as a percentage of total revenue. The most
comparable GAAP financial metric is Compensation and Benefits Expense Ratio.
A reconciliation of Adjusted Compensation and Benefits Expense and Adjusted
Compensation and Benefits Expense Ratio to Compensation and Benefits Expense and
Compensation and Benefits Expense Ratio, the most comparable GAAP measures, for
each of the periods indicated, is as follows:
Three months ended
June 30 ,
(in thousands, except percentages) 2021 2020
Total Revenue$ 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
Compensation and Benefits Expense Ratio (2) 60.7 % 63.7 % Adjusted Compensation and Benefits Expense Ratio (3) 56.5 %
61.1 %
(1) Adjustments to Compensation and Benefits Expense are described in the
footnotes of the reconciliation of Adjusted EBITDAC to Net Income in
"Adjusted EBITDAC and Adjusted EBITDAC Margin".
(2) Compensation and Benefits Expense Ratio is Compensation and Benefits Expense
as a percentage of total revenue.
(3) Adjusted Compensation and Benefits Expense Ratio is Adjusted Compensation and
Benefits Expense as a percentage of total revenue.
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
Compensation and Benefits Expense Ratio (2) 64.3 % 65.6 % Adjusted Compensation and Benefits Expense Ratio (3) 58.9 %
62.7 %
(1) Adjustments to Compensation and Benefits Expense are described in the
footnotes of the reconciliation of Adjusted EBITDAC to Net Income in
"Adjusted EBITDAC and Adjusted EBITDAC Margin".
(2) Compensation and Benefits Expense Ratio is Compensation and Benefits Expense
as a percentage of total revenue.
(3) Adjusted Compensation and Benefits Expense Ratio is Adjusted Compensation and
Benefits Expense as a percentage of total revenue.
50
--------------------------------------------------------------------------------
Adjusted General and Administrative Expense and Adjusted General and
Administrative Expense Ratio
We believe 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.
We define Adjusted General and Administrative Expense as General and
Administrative expense adjusted to reflect items such as (i) acquisition and
restructuring general and administrative related expense, and (ii) other
exceptional or non-recurring items, as applicable. The most comparable GAAP
financial metric is General and Administrative Expense.
Adjusted General and Administrative Expense Ratio is defined as Adjusted General
and Administrative Expense as a percentage of total revenue. The most comparable
GAAP financial metric is General and Administrative Expense Ratio.
A reconciliation of Adjusted General and Administrative Expense and Adjusted
General and Administrative Expense Ratio to General and Administrative Expense
and General and Administrative Expense Ratio, the most 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)
General and Administrative Expense Ratio (2) 7.9 % 8.9 % Adjusted General and Administrative Expense Ratio (3) 7.4 %
7.1 %
(1) Adjustments to General and Administrative Expense are described in the
footnotes of the reconciliation of Adjusted EBITDAC to Net Income in
"Adjusted EBITDAC and Adjusted EBITDAC Margin".
(2) General and Administrative Expense Ratio is General and Administrative
Expense as a percentage of total revenue.
(3) Adjusted General and Administrative Expense Ratio is Adjusted General and
Administrative Expense as a percentage of total revenue.
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)
General and Administrative Expense Ratio (2) 8.3 % 11.1 % Adjusted General and Administrative Expense Ratio (3) 7.7 %
9.9 %
(1) Adjustments to General and Administrative Expense are described in the
footnotes of the reconciliation of Adjusted EBITDAC to Net Income in
"Adjusted EBITDAC and Adjusted EBITDAC Margin".
(2) General and Administrative Expense Ratio is General and Administrative
Expense as a percentage of total revenue.
(3) Adjusted General and Administrative Expense Ratio is Adjusted General and
Administrative Expense as a percentage of total revenue.
51-------------------------------------------------------------------------------- Adjusted EBITDAC and Adjusted EBITDAC Margin We believe that Adjusted EBITDAC and Adjusted EBITDAC Margin 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 operating performance and the profitability of our business on a run-rate basis, improves comparability between periods, and eliminates the impact of the items that do not relate to the ongoing operating performance of the business. We define Adjusted EBITDAC as Net Income before interest expense, income tax expense, depreciation, amortization, and change in contingent consideration, adjusted to reflect items such as (i) equity-based compensation, (ii) acquisition and restructuring related expenses, and (iii) other exceptional or non-recurring items, as applicable. Total revenue less Adjusted Compensation and Benefits Expense and Adjusted General and Administrative Expense is equivalent to Adjusted EBITDAC. The most comparable GAAP financial metric is Net Income. Adjusted EBITDAC Margin is defined as Adjusted EBITDAC as a percentage of total revenue. The most comparable GAAP financial metric is Net Income Margin. Adjusted EBITDAC and Adjusted EBITDAC Margin may be useful to an investor in evaluating our operating performance and efficiency because these measures are widely used by investors to measure a company's operating performance without regard to items excluded from the calculation of such measure, which can vary substantially from company to company depending upon acquisition activity and capital structure, These measures also eliminate the impact of expenses that do not relate to core business performance, among other factors. Further, these measures are used by our leadership and Board of Directors for assessing financial performance, strategic planning, and forecasting. Adjusted EBITDAC and Adjusted EBITDAC Margin have limitations as an analytical tool and should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP. These measures also do not deduct earnings related to the non-controlling interest in Ryan Re for the period of time prior toMarch 31, 2021 when we did not own 100% of the business. A reconciliation of Adjusted EBITDAC and Adjusted EBITDAC Margin to Net Income and Net Income Margin, the most 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 %
(1) Acquisition-related expense includes diligence, transaction-related, and
integration costs. Compensation and benefits expenses were
the three months ended
expenses contributed to
acquisition-related expense for the three months ended
2020, respectively.
(2) Acquisition related long-term incentive compensation arises from long-term
incentive plans associated with acquisitions.
52--------------------------------------------------------------------------------
(3) Restructuring and related expense consists of compensation and benefits of
administrative costs including occupancy and professional services fees of
2020, respectively, related to the Restructuring Plan. The compensation and
benefits expense includes 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. The remaining costs that preceded the Restructuring Plan were
associated with organizational design, other severance, and
non-recurring
lease costs.
(4) Amortization and expense related to discontinued prepaid incentive programs -
see Note 12.
Employee Benefit Plans, Prepaid and Long-Term Incentives
of the unaudited quarterly consolidated financial statements for further
discussion.
(5) Other
non-operating
loss (income) includes the change in fair value of the embedded derivatives
on the redeemable Class B Preferred Units. This 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. See Note 10,
Redeemable Preferred Unitsof the unaudited quarterly consolidated financial statements for further
discussion. For the three months ended
non-operating
loss (income) includes the change in fair value of interest rate swaps which
were discontinued in 2020.
(6) Equity-based compensation reflects
non-cash
equity-based expense.
(7) Discontinued programs expense includes
administrative expense for the three months ended
and benefits expense was
2020. These costs were associated with concluding specific programs that are
no longer core to our business. Revenue associated with these programs of
$(0.3) million is also reflected in this adjustment for the three months endedJune 30, 2020 . (8) Other non-recurring items include one-time professional services costs associated with term debt repricing, and one-time non-income tax charges and tax and accounting consultancy costs associated with potential structure changes.
(9) IPO related expenses includes
expense associated with the preparations for Sarbanes-Oxley compliance.
(10) Consolidated Adjusted EBITDAC does not reflect a deduction for the Adjusted
EBITDAC associated with the
non-controlling
interest in Ryan Re.
(11) Net Income Margin is Net Income as a percentage of total revenue.
(12) Adjusted EBITDAC margin is Adjusted EBITDAC as a percentage of total
revenue.
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 %
(1) Acquisition-related expense includes diligence, transaction-related, and
integration costs. Compensation and benefits expenses were
the six months ended
contributed to
expense for the six months ended
(2) Acquisition related long-term incentive compensation arises from long-term
incentive plans associated with acquisitions
(3) Restructuring and related expense consists of compensation and benefits of
administrative costs including occupancy and professional services fees of
2020, respectively, related to the Restructuring Plan. The compensation and
benefits expense includes 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. The remaining costs that preceded the Restructuring Plan were
associated with organizational design, other severance, and
non-recurring
lease costs.
53--------------------------------------------------------------------------------
(4) Amortization and expense related to discontinued prepaid incentive programs -
See Note 12,
Employee Benefit Plans, Prepaid and Long-Term Incentives
of the unaudited quarterly consolidated financial statements for further
discussion.
(5) Other
non-operating
loss (income) includes the change in fair value of the embedded derivatives
on the redeemable Class B Preferred Units. This 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. See Note 10,
Redeemable Preferred Unitsof the unaudited quarterly consolidated financial statements for further
discussion. For the six months ended
non-operating
loss (income) includes costs associated with the extinguishment of a portion
of our deferred debt issuance costs on the term debt. For the six months
ended
non-operating
loss (income) includes the change in fair value of interest rate swaps which
were discontinued in 2020.
(6) Equity-based compensation reflects
non-cash
equity-based expense.
(7) Discontinued programs expense includes
administrative expense for the six months ended
and benefits expense was
These costs were associated with concluding specific programs that are no
longer core to our business. Revenue associated with these programs of
million is also reflected in this adjustment for the six months ended
June 30, 2020 (8) Other non-recurring items include one-time professional services costs associated with term debt repricing, and one-time non-income tax charges and tax and accounting consultancy costs associated with potential structure changes.
(9) IPO related expenses includes
expense associated with the preparations for Sarbanes-Oxley compliance.
(10) Consolidated Adjusted EBITDAC does not reflect a deduction for the Adjusted
EBITDAC associated with the
non-controlling
interest in Ryan Re.
(11) Net Income Margin is Net Income as a percentage of total revenue.
(12) Adjusted EBITDAC margin is Adjusted EBITDAC as a percentage of total
revenue.
Adjusted Net Income and Adjusted Net Income Margin We define Adjusted Net Income as tax-effected earnings before amortization and certain items of income and expense, gains and losses, equity-based compensation, acquisition related long-term incentive compensation, acquisition-related expenses, costs associated with the IPO and certain exceptional or non-recurring items. The most comparable GAAP financial metric is Net Income. Adjusted Net Income Margin is calculated as Adjusted Net Income as a percentage of total revenue. The most comparable GAAP financial metric is Net Income Margin. Following the IPO the Company will be subject toUnited States federal income taxes, in addition to state, local, and foreign taxes, with respect to our allocable share of any net taxable income ofHoldings LLC . For comparability purposes, this calculation incorporates the impact of federal and state statutory tax rates on 100% of our adjusted pre-tax income as if the Company owned 100% ofHoldings LLC . Adjusted Net Income and Adjusted Net Income Margin, together with related margins may be useful to an investor in evaluating our operating performance, efficiency and liquidity because these measures are widely used by investors to measure a company's operating performance without regard to items excluded from the calculation of such measure, which can vary substantially from company to company depending upon acquisition activity and capital structure. These measures also eliminate the impact of expenses that do not relate to core business performance, among other factors. Further, these measures are used by our leadership and Board of Directors for assessing financial performance, strategic planning, and forecasting. These Non-GAAP measures have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP. These measures also do not deduct earnings related to the non-controlling interest in Ryan Re for the period of time prior toMarch 31, 2021 when we did not own 100% of the business. 54 -------------------------------------------------------------------------------- A reconciliation of Adjusted Net Income and Adjusted Net Income Margin to Net Income and Net Income Margin, the most 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 %
(1) Interest Expense includes amortization of deferred issuance costs.
(2) Acquisition-related expense includes diligence, transaction-related, and
integration costs. Compensation and benefits expenses were
the three months ended
expenses contributed to
acquisition-related expense for the three months ended
2020, respectively.
(3) Acquisition related long-term incentive compensation arises from long-term
incentive plans associated with acquisitions.
(4) Restructuring and related expense consists of compensation and benefits of
administrative costs including occupancy and professional services fees of
2020, respectively, related to the Restructuring Plan. The compensation and
benefits expense includes 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. The remaining costs that preceded the Restructuring Plan were
associated with organizational design, other severance, and
non-recurring
lease costs.
(5) Amortization and expense related to discontinued prepaid incentive
programs-See Note 12,
Employee Benefit Plans, Prepaid and Long-Term Incentives
of the unaudited quarterly consolidated financial statements for further
discussion.
(6) Other
non-operating
loss (income) includes the change in fair value of the embedded derivatives
on the redeemable Class B Preferred Units. This 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. See Note 10,
Redeemable Preferred Unitsof the unaudited quarterly consolidated financial statements for further
discussion. For the three months ended
non-operating
loss (income) includes the change in fair value of interest rate swaps which
were discontinued in 2020.
55--------------------------------------------------------------------------------
(7) Equity-based compensation reflects
non-cash
equity-based expense.
(8) Discontinued programs expense includes
administrative expense for the three months ended
and benefits expense was
2020. These costs were associated with concluding specific programs that are
no longer core to our business. Revenue associated with these programs of
$(0.3) million is also reflected in this adjustment for the three months endedJune 30, 2020 . (9) Other non-recurring items include one-time professional services costs associated with term debt repricing, and one-time non-income tax charges and tax and accounting consultancy costs associated with potential structure changes.
(10) IPO related expenses includes
expense associated with the preparations for Sarbanes Oxley compliance and
post-IPO
long-term incentive arrangements.
(11)
income taxes, in addition to state, local, and foreign taxes, with respect
to our allocable share of any net taxable income of
LLC. For comparability purposes, this calculation of adjusted tax expense
incorporates the impact of federal and state statutory tax rates on 100% of
our adjusted pre-tax income as if the Company owned 100% of Ryan Specialty
(12) Consolidated Adjusted Net Income does not reflect a deduction for the
Adjusted Net Income associated with the
non-controlling
interest in Ryan Re.
(13) Net Income Margin is Net Income as a percentage of total revenue.
(14) Adjusted Net Income Margin is Adjusted Net Income as a percentage of total
revenue.
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 %
(1) Interest Expense includes amortization of deferred issuance costs.
(2) Acquisition-related expense includes diligence, transaction-related, and
integration costs. Compensation and benefits expenses were
the six months ended
contributed to $2.0 million and $4.0 million of the acquisition-related
expense for the years ended June 30, 2021 and 2020, respectively.
56--------------------------------------------------------------------------------
(3) Acquisition related long-term incentive compensation arises from long-term
incentive plans associated with acquisitions.
(4) Restructuring and related expense consists of compensation and benefits of
administrative costs including occupancy and professional services fees of
2020, respectively, related to the Restructuring Plan. The compensation and
benefits expense includes 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. The remaining costs that preceded the Restructuring Plan were
associated with organizational design, other severance, and
non-recurring
lease costs.
(5) Amortization and expense related to discontinued prepaid incentive
programs-See Note 12,
Employee Benefit Plans, Prepaid and Long-Term Incentives
of the unaudited quarterly consolidated financial statements for further
discussion.
(6) Other
non-operating
loss (income) includes the change in fair value of the embedded derivatives
on the redeemable Class B Preferred Units. This 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. See Note 10,
Redeemable Preferred Unitsof the unaudited quarterly consolidated financial statements for further
discussion. Also, in the six months ended
non-operating
loss (income) includes costs associated with the extinguishment of a portion
of our deferred debt issuance costs on the term debt. This
non-operating
loss (income) for the six months ended
fair value of interest rate swaps which were discontinued in 2020.
(7) Equity-based compensation reflects
non-cash
equity-based expense.
(8) Discontinued programs expense includes
administrative expense for the six months ended
and benefits expense was
These costs were associated with concluding specific programs that are no
longer core to our business. Revenue associated with these programs of
million is also reflected in this adjustment for the six months ended
June 30, 2020 . (9) Other non-recurring items include one-time professional services costs associated with term debt repricing, and one-time non-income tax charges and tax and accounting consultancy costs associated with potential structure changes.
(10) IPO related expenses includes
expense for the six months ended June 30, 2021 associated with the
preparations for Sarbanes Oxley compliance and
post-IPO
long-term incentive arrangements.
(11)
income taxes, in addition to state, local, and foreign taxes, with respect
to our allocable share of any net taxable income of
LLC. For comparability purposes, this calculation of adjusted tax expense
incorporates the impact of federal and state statutory tax rates on 100% of
our adjusted pre-tax income as if the Company owned 100% of Ryan Specialty
(12) Consolidated Adjusted Net Income does not reflect a deduction for the
Adjusted Net Income associated with the
non-controlling
interest in Ryan Re.
(13) Net Income Margin is Net Income as a percentage of total revenue.
(14) Adjusted Net Income Margin is Adjusted Net Income as a percentage of total
revenue.
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash flows
to meet the cash requirements of its business operations. We believe that the
balance sheet and strong cash flow profile of the business provides adequate
liquidity. The primary sources of liquidity are cash and cash equivalents on the
balance sheet, cash flows provided by operations and debt capacity available
under our credit facilities. The primary uses of liquidity are operating
expenses, seasonal working capital needs, business combinations, and
distributions to members. We believe that cash flows from operations and
available credit facilities 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.
Cash on the balance sheet includes funds available for general corporate
purposes. We will recognize fiduciary amounts due to others as fiduciary
liabilities and fiduciary amounts collectible and held on behalf of others,
including insurance policyholders, clients, other insurance intermediaries, and
insurance carriers, as fiduciary assets in the Consolidated Statements of
Financial Position. Fiduciary assets cannot be used for general corporate
purposes. Insurance premiums and claims are held in a fiduciary capacity and the
obligation to remit these funds is recorded as Fiduciary liabilities in the
Consolidated Statements of Financial Position.
57
--------------------------------------------------------------------------------
In our capacity as an insurance broker or agent, we collect premiums from
insureds and, after deducting our commission, remits 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. Insurance premiums and claim funds are held in a fiduciary capacity.
The levels of fiduciary assets and liabilities can fluctuate significantly
depending on when we collect the premiums, claims prefunding, and refunds, make
payments to markets, carriers, and insureds, and collect funds from clients and
make payments on their behalf, and upon the impact of foreign currency
movements. Fiduciary assets, because of their nature, are generally invested in
very liquid securities with a focus on preservation of principal. To minimize
investment risk, we and our subsidiaries maintain cash holdings pursuant to an
investment policy 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 assets included cash of $675.8 million and $583.1 million
at June 30, 2021 and December 31, 2020 , respectively, and fiduciary receivables
of $1,617.6 million and $1,395.1 million at June 30, 2021 and December 31, 2020 ,
respectively. While we earn investment income on fiduciary assets held in cash
and investments, the cash and investments cannot be used for general corporate
purposes. Of the $307.5 million of Cash and cash equivalents on the Consolidated
Statements of Financial Position as of June 30, 2021 , $120.1 million is held in
fiduciary accounts and is available for general corporate purposes.
Comparison of Cash Flows for the Six Months Ended June 30, 2021 and 2020
Cash and cash equivalents increased $200.2 million from $107.3 million at
June 30, 2020 to $307.5 million at June 30, 2021 . A summary of our cash flows
provided by and used for continuing operations from operating, investing, and
financing activities is as follows:
Cash Flows from Operating Activities
Net cash provided by operating activities during the six months ended June 30,
2021 increased $39.4 million , or 57.6%, from the six months ended June 30, 2020
to $107.7 million . This amount represents net income reported, as adjusted for
amortization and depreciation, prepaid and deferred equity compensation expense,
as well as the change in commission and fees receivable, accrued compensation
and other current and noncurrent assets and liabilities. Strong organic revenue
growth and the All Risks Acquisition drove operating cash flow performance
period-over-period. While Net income decreased $3.6 million during the six
months ended June 30, 2021 , the increase in the
non-cash
adjustments for the amortization of intangibles and debt issuance costs, as well
as the timing of payments for long-term incentive plans associated with the All
Risks Acquisition which will occur in the third and fourth quarters of 2021,
increased operating cash flows.
Cash Flows from Investing Activities
Cash flows used for investing activities during the six months ended June 30,
2021 were $0.2 million , a decrease of $40.7 million compared to the six months
ended June 30, 2020 . The main driver of the cash flows used for investing
activities in the six months ended June 30, 2020 was the final remaining capital
commitment on the equity method investment in a Bermuda based reinsurance
company, Geneva Re, a joint venture between Nationwide Mutual Insurance Company
and Ryan Investment Holdings, LLC an entity under common control - See Note 15,
Related Parties
in the unaudited quarterly consolidated financial statements, in addition to
other smaller acquisitions and funding of prepaid incentives of $4.3 million as
compared to the repayment of prepaid incentives in the six months ended June 30,
2021 of $3.8 million .
Cash Flows from Financing Activities
Cash flows used in financing activities during the six months ended June 30,
2021 were $113.1 million , an increase of $143.0 million compared to cash flows
provided by financing activities of $29.9 million during the six months ended
June 30, 2020 . The main drivers of cash flows used in financing activities were
$48.4 million in cash paid for the remaining 53%
non-controlling
common equity interest in Ryan Re, $47.0 million of cash distributions paid to
members, $8.3 million repayment of term debt, $4.2 million of costs paid
associated with the prospective offering, and $3.9 million of equity
repurchases, which compares to $145.9 million of term loan borrowings net of
repayments, offset by repayments net of borrowings of $43.2 million on the
revolving credit facility, $20.0 million repayment of subordinated notes,
$39.2 million of equity repurchases and $13.6 million of cash distributions to
members for the six months ended June 30, 2020 .
58
--------------------------------------------------------------------------------
Other Liquidity Matters
General
In connection with the IPO but prior to June 30, 2021 , the Board approved the
repurchase of 74,990 of Class B Preferred Units from the Founder Group for $78.3
million , which reflects the par value of $75.0 million plus unpaid accrued
preferred dividends. As the repurchase did not occur until July 1, 2021 , a
liability for the full amount is included in Preferred units repurchase payable
on the Consolidated Statements of Financial Position, and the Class B Preferred
Units remained outstanding as of June 30, 2021 .
On July 26, 2021 , we closed our IPO through which we issued and
sold 65,456,020 shares of Class A common stock at a price per share of $23.50 .
We received approximately $1,449.7 million in net proceeds after deducting
underwriting discounts and commissions of $76.9 million and offering expenses of
$11.6 million . Upon closing of the IPO, we paid (i) $119.9 million to acquire
5,887,570 newly issued LLC Units in Holdings LLC , (ii) $343.5 million to acquire
the equity of an entity through which Onex held its preferred unit interest in
Holdings LLC (with the 260,000,000 Class B Preferred Units of Holdings LLC owned
by the entity converted through a series of transactions to 15,387,026 LLC Units
immediately thereafter), (iii) $795.7 million to acquire 35,641,682 outstanding
LLC Units from certain existing holders of LLC Units at a purchase price per LLC
Unit equal to $23.50 , the IPO price per share of Class A common stock in our
IPO, (iv) $76.2 million to purchase an additional 3,415,097 newly issued LLC
Units in Holdings LLC , and (v) $114.4 million to repurchase and retire 5,122,645
shares of Class A common stock held by Onex. In turn, Holdings LLC applied the
balance of the net proceeds it received on account of the newly issued LLC Units
to pay $72.9 million of TRA Alternative Payments arising from the Organizational
Transactions. The remaining $123.2 million of net proceeds are reserved for
general corporate purposes.
On August 10, 2021 , the Board of Ryan Specialty Group Holdings, Inc. elected to
terminate the All Risks long-term incentive plans. The decision to terminate the
plans will not change the value of, or entitlements to, any benefits thereunder.
The benefits accruing under these plans are required to be paid within twelve
months of the termination date (i.e., by August 10, 2022 ). These awards remain
subject to the achievement of service conditions. We expect to make payments
related to these long-term incentive plans of $97.8 million in 2021 and $113.2
million in 2022.
We believe our cash and cash equivalents (including proceeds from the IPO), our
Credit Facilities and cash from operations will be sufficient to meet our
working capital and capital expenditure needs for at least the next 12 months.
Our future capital requirements will depend on many factors including
continuance of historical working capital levels and capital expenditure needs,
investment in de novo offerings, and the flow of deals in our merger and
acquisition program.
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 our results of
operations.
Credit Facilities
We expect to have sufficient financial resources to meet our business
requirements in 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 finance capital expenditures, we have the ability
to borrow under our credit facilities 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 loan borrowings totaling $1,650.0 million and a revolving credit facility
totaling $300.0 million , in connection with financing the All Risks Acquisition.
Borrowings under our revolving 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 agreement are
unconditionally guaranteed by certain of our subsidiaries and are secured by a
lien and security interest in all of our assets. See Note 8,
Debt
in the notes to our unaudited quarterly consolidated financial statements for
further information regarding our debt arrangements.
59
--------------------------------------------------------------------------------
As of December 31, 2020 , the interest rate on our term loan was LIBOR, subject
to a 75 basis point floor, plus 3.25%.
As of December 31, 2020 , we were in compliance with all of the covenants under
our credit agreement and there were no events of default for the year ended
December 31, 2020 .
In March 2021 , we completed a repricing of our outstanding term loan borrowings.
As of March 31, 2021 , the interest rate on the term loan was LIBOR, plus 3.00%,
subject to a 75 basis point floor. All other terms remain substantially
unchanged.
As of June 30, 2021 , we were in compliance with all of the covenants under our
credit agreement and there were no events of default for the six months ended
June 30, 2021 .
On July 26, 2021 , we entered into an amendment to our credit agreement, which
provided for an increase in the size of our revolving credit facility from
$300 million to $600 million . Interest on the upsized revolving credit facility
bears interest at LIBOR plus a margin that ranges from 2.50% to 3.00%, based on
the first lien net leverage ratio defined in our credit agreement. No other
significant terms under our credit agreement governing the revolving credit
facility were changed in connection with such amendment.
Tax Receivable Agreement
As a result of its ownership of LLC Units in Holdings LLC , the Company is now
subject to U.S. federal, state and local income taxes with respect to its
allocable share of any taxable income of Holdings LLC and is 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 precisely quantify the likely tax benefits we will realize as a result
of LLC Unit exchanges and the resulting amounts we are likely to pay out to LLC
Unitholders and Onex pursuant to the Tax Receivable Agreement; however, we
estimate that such tax benefits and the related TRA payments may be substantial.
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, we expect future payments under the Tax Receivable Agreement relating
to the purchase by Ryan Specialty Holdings, Inc. of LLC Units in connection with
the IPO will be approximately $309.8 million over the next 15 years from
approximately $15.0 million to $20.0 million per year and decline thereafter. As
a result, we expect that aggregate payments under the Tax Receivable Agreement
over this
15-year
period will be approximately $300.0 million . Future payments in respect of
subsequent exchanges or financings would be in addition to these amounts and are
expected to be substantial. The foregoing numbers are merely estimates and the
actual payments could differ materially. We expect to fund these payments using
cash on hand and cash generated from operations.
Contractual Obligations and Commitments
Our principal commitments consist of contractual obligations in connection with
investing and operating activities. In "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" included in our IPO Prospectus,
we disclosed our total contractual obligations as of December 31, 2020 . These
obligations are further described within Note 7,
Leases
and Note 8,
Debt
in the notes to our unaudited consolidated financial statements. See notes to
our unaudited consolidated financial statements for further description on
provisions that create, increase or accelerate obligations, or other pertinent
data to the extent necessary for an understanding of the timing and amount of
the specified contractual obligations. Outside of the above and routine
transactions made in the ordinary course of business, there have been no
material changes to the contractual obligations as disclosed in our IPO
Prospectus.
60
--------------------------------------------------------------------------------
Off-Balance
Sheet Arrangements
As of June 30, 2021 , we did not have any
off-balance
sheet arrangements as defined in Item 303(a)(4)(ii) of
Regulation S-K.
Critical Accounting Policies and Estimates
The methods, assumptions, and estimates that we use in applying the accounting
policies may require us to apply judgments regarding matters that are inherently
uncertain. We consider an accounting policy to be a critical estimate if:
(i) the Company must make assumptions that were uncertain when the judgment was
made, and (ii) changes in the estimate assumptions or selection of a different
estimate methodology, could have a significant impact on our financial position
and the results that our will report in the consolidated financial statements.
While we believe that the estimates, assumptions, and judgments are reasonable,
they are based on information available when the estimate was made. The
accounting policies that we believe reflect our more significant estimates,
judgments and assumptions that are most critical to understanding and evaluating
our reported financial results are: revenue recognition, fair value, and
goodwill and intangibles.
Our critical accounting policies are described under the heading "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Critical Accounting Policies" in our IPO Prospectus. There have been
no material changes to our critical accounting policies and estimates disclosed
in our IPO Prospectus. For more information, refer to Note 1,
Basis of Presentation
in 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, see Note 1,
Basis of Presentation
in the notes to our unaudited consolidated financial statements.
Emerging Growth Company
We qualify as an "emerging growth company" pursuant to the provisions of the
Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). For as long as we
are an "emerging growth company," we may take advantage of certain exemptions
from various reporting requirements that are applicable to other public
companies that are not "emerging growth companies," including, but not limited
to, not being required to comply with the auditor attestation requirements of
Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations
regarding executive compensation in our periodic reports and proxy statements,
exemptions from the requirements of holding advisory
"say-on-pay"
votes on executive compensation and shareholder advisory votes on golden
parachute compensation.
The JOBS Act also permits an emerging growth company like us to take advantage
of an extended transition period to comply with new or revised accounting
standards applicable to public companies. We have elected to "opt out" of this
provision and, as a result, we will comply with new or revised accounting
standards on the relevant dates on which adoption of such standards is required
for public companies that are not emerging growth companies. The decision to opt
out of the extended transition period under the JOBS Act is irrevocable.
We will remain an emerging growth company until the earlier of (i) the last day
of the fiscal year following the fifth anniversary of the completion of our IPO,
(ii) the last day of the fiscal year in which we have total annual gross revenue
of at least $1.07 billion , (iii) the date on which we are deemed to be a large
accelerated filer (this means the market value of common stock that is held by
non-affiliates exceeds $700.0 million as of the end of the second quarter of
that fiscal year), or (iv) the date on which we have issued more than $1.0
billion in non-convertible debt securities during the prior three-year period.
We expect to cease to qualify as an "emerging growth company" after the
completion of our 2021 fiscal year.
61--------------------------------------------------------------------------------
© Edgar Online, source
