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 in the Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSEC onMarch 16, 2022 . The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and our Annual Report on Form 10-K, particularly in the sections entitled "Risk Factors" and "Information Concerning Forward-Looking Statements". The following discussion provides commentary on the financial results derived from our unaudited financial statements for the three months endedMarch 31, 2022 and 2021 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, Adjusted net income margin and Adjusted diluted earnings per share. See "Non-GAAP Financial Measures and Key Performance Indicators" for further information. Overview Founded byPatrick G. Ryan in 2010, we are a 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 with delegated authority from insurance carriers. Our mission is to provide industry-leading innovative specialty insurance solutions for insurance brokers, agents and carriers. For retail insurance agents and brokers, we assist in the placement of complex or otherwise hard-to-place risks. For insurance carriers, we work with retail and wholesale insurance brokers to source, onboard, underwrite and service these same types of risks. A significant majority of the premiums we place are bound in the E&S market, which includesLloyd's of London . There is often significantly more flexibility in terms, conditions, and rates in the E&S market relative to the Admitted or "standard" insurance market. We believe that the additional freedom to craft bespoke terms and conditions in the E&S market allows us to best meet the needs of our trading partners, provide unique solutions and drive innovation. We believe our success has been achieved by providing 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 a controlling equity interest inNew RSG Holdings , which is also a holding company and its sole material asset is a controlling equity interest inRyan Specialty Group, LLC . The Company operates and controls the business and affairs, and consolidates the financial results ofRyan Specialty Group, LLC throughNew RSG Holdings . We conduct our business throughRyan Specialty Group, LLC . AsRyan Specialty Group, LLC is substantively the same asNew RSG Holdings , for the purpose of this discussion, we will refer to bothNew RSG Holdings andRyan Specialty Group, LLC asRSG LLC .RSG LLC is a limited liability company taxed as a partnership for income tax purposes, and its taxable income or loss is passed through to its members, including the Company.RSG LLC is subject to income taxes on its taxable income in certain foreign countries, in certain state and local jurisdictions that impose income taxes on partnerships, and on the taxable income of itsU.S. corporate subsidiary. After the IPO,RSG 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 Common Units, we are subject toU.S. federal, state and local income taxes with respect to our allocable share of any taxable income ofRSG 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 estimate the likely tax benefits we will realize as a result of future LLC Common Unit exchanges, and the resulting amounts we are likely to pay out to LLC Unitholders pursuant to the Tax Receivable Agreement; however, we estimate that such tax benefits and the related TRA payments may be substantial. We intend to causeRSG 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. 32 --------------------------------------------------------------------------------
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 to a remote work environment. Due to the success of our remote work operations during the pandemic, we will be implementing remote work flexibility into our operating model as we begin to reopen our offices. 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. Highlighting the resilience of our business, the dedication of our workforce, and the E&S market opportunities created by the pandemic, in 2020 we completed the All Risks Acquisition (the largest in our history), made substantial progress on our integration of All Risks and the Restructuring Plan (as discussed below) and realized 20.4% organic revenue growth, all in the midst of the pandemic. We managed to sustain this resilience in 2021 and through the first quarter of 2022 through the continued advancement of the integration and Restructuring Plan. For the year endedDecember 31, 2021 we realized 40.7% revenue growth and 22.4% Organic revenue growth. For the three months endedMarch 31, 2022 we realized 24.2% revenue growth and 20.1% Organic revenue growth. 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 new variants of the virus develop, vaccines are not distributed at a suitable pace or prove less effective than anticipated, the global economy does not recover as expected, especially in light of current inflationary trends 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 Annual Report on Form 10-K 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 once 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 expected annual savings, over 90% will relate to a reduction in workforce with the remaining 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 5, Restructuring" of the unaudited quarterly consolidated financial statements for further discussion. We began recognizing costs associated with the Restructuring Plan in the third quarter of 2020. For the three months endedMarch 31, 2022 , we incurred restructuring costs of$3.1 million and cumulative restructuring costs of$28.3 million since the inception of the plan. These costs are offset by realized respective savings of approximately$6.8 million for the three months endedMarch 31, 2022 . Of the cumulative$28.3 million costs,$20.2 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 future financial performance to be, driven by our ability to:
Pursue strategic acquisitions
We have successfully integrated businesses complementary to our own to increase
both our distribution reach and our product and service capabilities. We
continuously evaluate acquisitions and intend to further pursue targeted
acquisitions that complement our product capabilities or provide us access to
new markets. We have previously made and intend to continue to make acquisitions
with 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
33
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execution of a disciplined and selective acquisition strategy and our ability to
effectively integrate targeted companies or assets and grow our business. We do
not have agreements or commitments for any significant acquisitions at this
time.
Deepen and broaden our relationships with
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 2021, our revenue derived from the Top 100 firms (as ranked byBusiness Insurance ) expanded faster than our Organic revenue growth rate of 22.4%. Our ability to deepen and broaden relationships with our retail broker trading partners and increase sales is dependent upon a number of factors, including client satisfaction with our distribution reach and our product capabilities, competition, pricing, economic conditions and spending on our product offerings.
Building our national binding authority business
We believe there is substantial opportunity to continue to grow our Binding Authority Specialty, as we believe that both M&A consolidation and panel consolidation are in nascent stages in the binding authority market. Our ability to grow our Binding Authority Specialty is dependent upon a number of factors, including the quality of our services and product offerings, marketing and sales efforts to drive new business prospects and execution, new product offerings, the pricing and quality of our competitors' offerings and the growth in demand of the insurance products.
Invest in operations and growth
We have invested heavily in building a durable business that is able to adapt to the continuously evolving E&S market and intend to continue to do so. We are focused on enhancing the breadth of our product offerings as well as developing and launching new solutions to address the evolving needs of the specialty insurance industry. Our future success is dependent on our ability to successfully develop, market and sell existing and new products to both new and existing trading partners.
Generate commissions regardless of the state of the specialty insurance market
We earn commissions, which are calculated as a percentage of the total insurance policy premium, and fees. Changes in the insurance market or specialty lines that are our focus, characterized by a period of increasing (or declining) premium rates, could positively (or negatively) impact our profitability.
Leverage the growth of the E&S market
The growing relevance of the E&S market has been driven by the rapid emergence of large, complex and high-hazard risks across many lines of insurance. This trend continued with 21 named storms during the 2021Atlantic hurricane season producing estimated damages of more than$70 billion , over 7.8 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 these evolving market fundamentals.
Address the costs of being a
As we are in the early stages of our operation as a public company, we will 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 have incurred new expenses as a public company, including public reporting obligations, increased professional fees for accounting, proxy statements, stockholder meetings, stock exchange fees, transfer agent fees,SEC andFINRA filing fees, legal fees, franchise taxes and insurance expenses. 34 -------------------------------------------------------------------------------- Summary of Financial Performance Highlights Three Months Ended March 31, Change (in thousands, except percentages and per share data) 2022 2021 $ % GAAP financial measures Total revenue$ 386,890 $ 311,458 $ 75,432 24.2 % Compensation and benefits 274,274 214,486 59,788 27.9 General and administrative 42,361 27,545 14,816 53.8 Total operating expenses 343,501 271,615 71,886 26.5 Operating income 43,389 39,843 3,546 8.9 Net income (loss) 18,076 (3,801 ) 21,877 (575.6 ) Net income (loss) attributable to Ryan Specialty Group Holdings, Inc. 6,911 (6,251 ) 13,162 (210.6 ) Compensation and benefits expense ratio (1) 70.9 % 68.9 % General and administrative expense ratio (2) 10.9 % 8.8 % Net income (loss) margin 4.7 % (1.2 )% Earnings per share (3) $ 0.07 Diluted earnings per share (3) $ 0.06 Non-GAAP financial measures* Organic revenue growth rate 20.1 % 18.4 % Adjusted compensation and benefits expense$ 241,331 $ 192,367 $ 48,964 25.5 % Adjusted compensation and benefits expense ratio 62.4 % 61.8 % Adjusted general and administrative expense$ 38,296 $ 24,687 $ 13,609 55.1 % Adjusted general and administrative expense ratio 9.9 % 7.9 % Adjusted EBITDAC$ 107,263 $ 94,404 $ 12,859 13.6 % Adjusted EBITDAC margin 27.7 % 30.3 % Adjusted net income$ 64,732 $ 57,130 $ 7,602 13.3 % Adjusted net income margin 16.7 % 18.3 % Adjusted diluted earnings per share $ 0.24 * For a definition and a reconciliation of Organic revenue growth rate, Adjusted compensation and benefits, Adjusted compensation and benefits expense ratio, Adjusted general and administrative expense, Adjusted general and administrative expense ratio, Adjusted EBITDAC, Adjusted EBITDAC margin, Adjusted net income, Adjusted net income margin, and Adjusted diluted earnings per share to the most directly comparable GAAP measure, see "Non-GAAP Financial Measures and Key Performance Indicators."
(1)
Compensation and benefits ratio is defined as compensation and benefits expense divided by total revenue.
(2)
The general and administrative expense ratio is defined as general and administrative expenses divided by total revenue.
(3)
Refer to “Note 12, Earnings per share” to the unaudited quarterly consolidated financial statements for a more detailed discussion of how these parameters are calculated.
Comparison of the three months ended
•
Revenues have increased
•
Compensation and benefits expense increased
•
General and administrative expenses increased
•
Total operating expenses increased
•
Operating profit increased
•
Net income increased by
•
The net profit (loss) margin was 4.7% for the quarter, compared to (1.2)% in the same quarter last year.
35 --------------------------------------------------------------------------------
•
Earnings per share and diluted earnings per share were
•
Organic revenue growth rate for the quarter was 20.1%, compared to 18.4% in the same quarter last year – see “Non-GAAP Financial Measures and Key Performance Indicators” for more information .
•
Adjusted compensation and benefits expense increased$49.0 million , or 25.5% period-over-period, and the Adjusted compensation and benefits expense ratio increased 0.6% from 61.8% to 62.4% - see "Non-GAAP Financial Measures and Key Performance Indicators" for further information.
•
Adjusted general and administrative expense increased$13.6 million , or 55.1% period-over-period, and the Adjusted general and administrative expense ratio increased 2.0% from 7.9% to 9.9% - see "Non-GAAP Financial Measures and Key Performance Indicators" for further information.
•
Adjusted EBITDAC increased 13.6% period over period to reach
•
Adjusted EBITDAC margin decreased 2.6% period-over-period from 30.3% to 27.7% - see "Non-GAAP Financial Measures and Key Performance Indicators" for further information.
•
Adjusted net earnings increased 13.3% period over period to reach
•
Adjusted net income margin decreased 1.6% period-over-period from 18.3% to 16.7% - see "Non-GAAP Financial Measures and Key Performance Indicators" for further information.
•
Adjusted diluted earnings per share was$0.24 for the three months endedMarch 31 , 2021-see "Non-GAAP Financial Measures and Key Performance Indicators" for further information. Components of Results of Operations Revenue
Net commissions and fees
Net commissions and fees are derived primarily by commissions from our three Specialties and are paid for our role as an intermediary in facilitating the placement of coverage in the insurance distribution chain. Net commissions and fees are generally calculated as a percentage of the total insurance policy premium placed, but we also receive supplemental commissions based on the volume placed or profitability of a book of business. We share a portion of these commissions with the retail insurance broker and recognize revenue on a net basis. Additionally, carriers may also pay us a contingent commission or volume-based commission, both of which represent forms of contingent or supplemental consideration associated with the placement of coverage and are based primarily on underwriting results, but may also contain considerations for only volume, growth and/or retention. Although we have compensation arrangements called contingent commissions in all three Specialties that are based on the underwriting performance, we do not take any direct insurance risk other than through our equity method investment in Geneva Re throughRyan Investment Holdings, LLC ("RIH"). We also receive loss mitigation and other fees, some of which are not dependent on the placement of a risk. In our Wholesale Brokerage and Binding Authority Specialties, we generally work with retail insurance brokers to secure insurance coverage for their clients,who are the ultimate insured party. Our Wholesale Brokerage and Binding Authority Specialties generate revenues through commissions and fees, as well as through supplemental commissions, which may be contingent commissions or volume-based commissions, from clients. Commission rates and fees vary depending upon several factors, which may include the amount of premium, the type of insurance coverage provided, the particular services provided to a client or carrier, and the capacity in which we act. Payment terms are consistent with current industry practice. In our Underwriting Management Specialty, we generally work with retail insurance brokers and often other wholesale brokers to secure insurance coverage for the ultimate insured party. Our Underwriting Management Specialty generates revenues through commissions and fees and through contingent commissions from clients. Commission rates and fees vary depending upon several factors including the premium, the type of coverage, and additional services provided to the client. Payment terms are consistent with current industry practice.
Trust investment income
Fiduciary investment income consists of interest earned on insurance premiums
and surplus lines taxes that are held in a fiduciary capacity, in cash and cash
equivalents, until disbursed.
36
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Expenses Compensation and Benefits 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 awards to employees executive officers and directors. We operate in competitive markets for human capital and we need to maintain competitive compensation levels in order to maintain and grow our talent base.
General and administrative
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
Amortization expense consists primarily of amortization related to intangible assets that we have acquired through our acquisitions. Intangible assets include customer relationships, trade names and internally developed software.
Interest expense, net
Interest expense, net, includes interest payable on debt, notional interest on finance leases and contingent consideration, as well as amortization of deferred debt issue costs.
Other non-operating losses
In 2022 Other non-operating loss includes a charge related to the change in the TRA liability caused by a change in our blended state tax rates. In 2021 Other non-operating loss includes the change in fair value of the embedded derivatives on the Redeemable Preferred Units. This change in fair value is due to the occurrence of a Realization Event in the third quarter of 2021, which was defined as a Qualified Public Offering or a Sale Transaction in the Onex Purchase Agreement. It also includes 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 (benefit)
Income tax expense (benefit) includes tax on the Company's allocable share of any net taxable income fromRSG LLC , from certain state and local jurisdictions that impose taxes on partnerships, as well as earnings from our foreign subsidiaries and C-Corporations subject to entity level taxation.
Non-controlling interest
For the periods presented prior toMarch 31, 2021 , our financial statements include the non-controlling interest related to the net income attributable to Ryan Re. Post-IPO, we report a non-controlling interest based on the LLC Common Units not owned by the Company. Net income (loss) and Other comprehensive income (loss) is attributed to the non-controlling interests based on the weighted average LLC Common Units outstanding during the period and is presented on the Consolidated Statements of Income. Refer to Note 10, Stockholders' and Members' Equity of the unaudited quarterly consolidated financial statements for more information. 37 -------------------------------------------------------------------------------- Results of Operations
Below is a table summarizing the financial results and non-GAAP measures that we believe are relevant to our business operations:
Three Months Ended March 31, Change
(in thousands, except percentages
and per share data) 2022 2021 $ %
Revenue
Net commissions and fees $ 386,681 $ 311,344 $ 75,337 24.2 %
Fiduciary investment income 209 114 95 83.3
Total revenue $ 386,890 $ 311,458 $ 75,432 24.2 %
Expenses
Compensation and benefits 274,274 214,486 59,788 27.9
General and administrative 42,361 27,545 14,816 53.8
Amortization 26,663 27,794 (1,131 ) (4.1 )
Depreciation 1,211 1,200 11 0.9
Change in contingent consideration (1,008 ) 590 (1,598 ) (270.8 )
Total operating expenses $ 343,501 $ 271,615 $ 71,886 26.5 %
Operating income $ 43,389 $ 39,843 $ 3,546 8.9 %
Interest expense, net 21,752 20,045 1,707 8.5
(Income) loss from equity method
investment in related party 543 (81 ) 624 (770.4 )
Other non-operating loss 7,521 21,446 (13,925 ) (64.9 )
Income (loss) before income taxes $ 13,573 $ (1,567 ) $ 15,140 (966.2 )%
Income tax expense (benefit) (4,503 ) 2,234 (6,737 ) (301.6 )
Net income (loss) $ 18,076 $ (3,801 ) $ 21,877 (575.6 )%
GAAP financial measures
Revenue $ 386,890 $ 311,458 $ 75,432 24.2 %
Compensation and benefits 274,274 214,486 59,788 27.9
General and administrative 42,361 27,545 14,816 53.8
Net Income (loss) $ 18,076 $ (3,801 ) $ 21,877 (575.6 )%
Compensation and benefits expense
ratio 70.9 % 68.9 %
General and administrative expense
ratio 10.9 % 8.8 %
Net income (loss) margin 4.7 % (1.2 )%
Earnings per share $ 0.07
Diluted earnings per share $ 0.06
Three Months Ended March 31, Change
(in thousands, except percentages
and per share data) 2022 2021 $ %
Non-GAAP financial measures*
Organic revenue growth rate 20.1 % 18.4 %
Adjusted compensation and benefits
expense $ 241,331 $ 192,367 $ 48,964 25.5 %
Adjusted compensation and benefits
expense ratio 62.4 % 61.8 %
Adjusted general and administrative
expense $ 38,296 $ 24,687 $ 13,609 55.1 %
Adjusted general and administrative
expense ratio 9.9 % 7.9 %
Adjusted EBITDAC $ 107,263 $ 94,404 $ 12,859 13.6 %
Adjusted EBITDAC margin 27.7 % 30.3 %
Adjusted net income $ 64,732 $ 57,130 $ 7,602 13.3 %
Adjusted net income margin 16.7 % 18.3 %
Adjusted diluted earnings per share $0.24
* These measures are Non-GAAP. Please refer to the section entitled "Non-GAAP
Financial Measures and Key Performance Indicators" below for definitions and
reconciliations to the most directly comparable GAAP measure.
Comparison of the Three Months Ended March 31, 2022 and 2021
Revenue
Net commissions and fees
Net commissions and fees increased by$75.3 million or 24.2% from$311.3 million to$386.7 million for the three months endedMarch 31, 2022 as compared to the same period in the prior year. The two main drivers of the revenue increase are 3.4% growth from the Keystone and Crouse acquisitions and 20.1% of organic revenue growth. 38 -------------------------------------------------------------------------------- Three Months Ended March 31, % of % of (in thousands, except percentages) 2022 total 2021 total Change Wholesale Brokerage$ 244,827 63.3 %$ 191,124 61.4 %$ 53,703 28.1 % Binding Authorities 62,993 16.3 55,045 17.7 7,948 14.4 Underwriting Management 78,861 20.4 65,175 20.9 13,686 21.0 Total net commissions and fees$ 386,681 $ 311,344 $ 75,337 24.2 % Wholesale Brokerage net commissions and fees increased by$53.7 million or 28.1% period-over-period, primarily due to strong organic growth within this specialty for the quarter as well as contributions from the Crouse acquisition. Binding Authority net commissions and fees increased by$7.9 million or 14.4% period-over-period, primarily due to strong organic growth within the specialty for the quarter as well as contributions from the Crouse acquisition.
Net subscription management fees and expenses increased by
The following table presents our revenues by type of commissions and fees:
Three Months Ended March 31, (in thousands, except % of % of percentages) 2022 total 2021 total Change Net commissions and policy$ 359,602 93.0 %$ 290,808 93.4 %$ 68,794 23.7 % fees Supplemental and contingent 20,098 5.1 15,519 5.0 4,579 29.5 commissions Loss mitigation and other fees 6,981 1.8 5,017 1.6 1,964 39.1 Total net commissions and fees$ 386,681 $ 311,344
Net commissions and policy fees grew 23.7%, slightly lower than the overall net commissions and fee revenue growth of 24.2% for the three months endedMarch 31, 2022 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 stable commission rates period over period.
Additional and contingent commissions increased 29.5% period over period, due to the performance of the risks placed on eligible business.
Loss mitigation and other fees grew 39.1% period-over-period primarily due to captive management and other risk management service fees from the placement of alternative risk insurance solutions in 2022.
Expenses
Benefits and compensation
Compensation and benefits expense increased by
compared to the same period in 2021. The main drivers of this increase are:
•
Increased commissions
•
A$16.4 million increase from Initial public offering related compensation expense, which reflects charges associated with both the revaluation of existing equity grants at the time of our IPO as well as expense related to the new awards issued in connection with the IPO. The expense associated with both the revaluation of existing awards as well as the issuance of new equity awards both directly relate to the Organizational Transactions and IPO, however amounts related to each will continue to be expensed over future periods as the underlying awards vest;
•
The remaining$19.0 million period-over-period increase was driven by (i) the addition of 294 employees compared to the same period prior year and (ii) growth in the business. Overall headcount increased to 3,632 full-time employees as ofMarch 31, 2022 from 3,338 as ofMarch 31, 2021 . 39 -------------------------------------------------------------------------------- The increase in Compensation and benefits expense was partially offset by$6.2 million of net savings related to the Restructuring Plan, which represents approximately$6.4 million of work-force related savings less one-time work-force related expense of$0.2 million for the three months endedMarch 31, 2022 (see "Significant Events and Transactions-2020 Restructuring Plan" for further information).
The net impact of revenue growth and the above factors caused the compensation and benefits expense ratio to increase by 2.0% from 68.9% to 70.9% on a period to another.
We expect to continue to experience a general increase in commissions, salaries, incentives and benefits expenses commensurate with the expected growth in our business volume, revenue and workforce.
General and administrative
General and administrative expense increased by$14.8 million or 53.8% from$27.5 million to$42.4 million for the three months endedMarch 31, 2022 as compared to the same period in the prior year. A main driver of this increase was$5.6 million of increased travel and entertainment expense as travel restrictions associated with the pandemic began to lift compared to the same period in 2021. Insurance expense contributed$2.2 million to the period-over-period increase due to increased costs associated with being a public company. Lastly, we recognized an additional$2.2 million of Restructuring costs within General and administrative expense for the three months endedMarch 31, 2022 compared to the same period in the prior year. The remaining increase of$4.8 million was driven by growth in the business. Such expenses incurred to accommodate both organic and inorganic revenue growth include IT, occupancy, and professional services. The net impact of revenue growth and the factors listed above resulted in General and administrative expense ratio increase of 2.1% from 8.8% to 10.9% period-over-period.
Amortization
Amortization expense decreased by$1.1 million or (4.1)% from$27.8 million to$26.7 million for the three months endedMarch 31, 2022 compared to the same period in the prior year. The main driver for the decrease is certain previously acquired intangible assets became fully amortized. Our intangible assets decreased by$29.2 million when comparing the balance as ofMarch 31, 2022 to the balance as ofMarch 31, 2021 .
Interest expense, net
Interest expense, net increased$1.7 million or 8.5% from$20.0 million to$21.8 million for the three months endedMarch 31, 2022 compared to the same period in the prior year. The main driver of the change in Interest expense, net for the three months endedMarch 31, 2022 was the issuance of$400.0 million of senior secured notes onFebruary 3, 2022 . OnApril 7, 2022 the Company entered into an interest rate cap agreement to manage its exposure to interest rate fluctuations related to the Company's Term Loan for an upfront cost of$25.5 million . The interest rate cap has a$1,000.0 million notional amount, 2.75% strike, and terminates onDecember 31, 2025 . For the twelve months endedDecember 31, 2022 we expect to incur approximately$4.0 million of Interest expense associated with the upfront cost amortization of the cap. For the twelve months endedDecember 31, 2023 , 2024, and 2025 we expect to incur approximately$7.0 million of Interest expense related to the cap.
Other non-operating losses
Other non-operating loss decreased by$13.9 million to$7.5 million for the three months endedMarch 31, 2022 as compared to a loss of$21.4 million in the same period in the prior year. For the three months endedMarch 31, 2022 Other non-operating loss includes a$7.7 million charge related to the change in the TRA liability caused by a change in our blended state tax rates. For the three months endedMarch 31, 2021 Other non-operating loss includes a$12.6 million change in the fair value of the embedded derivatives of our Redeemable Preferred Units as well as$8.6 million of debt issuance costs written off due to the extinguishment of a portion of the term debt in connection with a repricing.
income before taxes
Due to the above factors, profit (loss) before income taxes increased
Income tax expense (benefit)
Income tax expense (benefit) decreased$6.7 million from$2.2 million to$(4.5) million for the three months endedMarch 31, 2022 as compared to the same period in the prior year. An increase in the Company's state tax rate resulted in a tax benefit recognized in the current period related to the increase in our Deferred tax assets. 40 --------------------------------------------------------------------------------
Net profit (net loss)
Net profit (loss) increased
Non-GAAP Financial Measures and Key Performance Indicators In assessing the performance of our business, we use non-GAAP financial measures that are derived from our consolidated financial information, but which are not presented in our consolidated financial statements prepared in accordance with GAAP. We consider these non-GAAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures, tax positions, depreciation, amortization and certain other items that we believe are not representative of our core business. We use the following non-GAAP measures for business planning purposes, in measuring our performance relative to that of our competitors, to help investors to understand the nature of our growth, and to enable investors to evaluate the run-rate performance of the Company. 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 consolidated quarterly financial statements. Industry peers may provide similar supplemental information but may not define similarly-named metrics in the same way we do and may not make identical adjustments.
Organic revenue growth rate
Organic revenue growth rate represents the percentage change in revenue, compared to the same period of the previous year, adjusted for revenue attributable to recent acquisitions during the first 12 months of
A reconciliation of Organic revenue growth rate to Total revenue growth rate,
the most directly comparable GAAP measure, for each of the periods indicated is
as follows (in percentages):
Three Months Ended March 31,
2022 2021
Total revenue growth rate (GAAP) (1) 24.2 % 49.6 %
Less: Mergers and acquisitions (2) (3.4 ) (31.3 )
Change in other (3) (0.7 )
0.1
Organic revenue growth rate (Non-GAAP) 20.1 %
18.4%
(1)
March 31, 2022 revenue of$386.9 million lessMarch 31, 2021 revenue of$311.5 million is a$75.4 million period-over-period change. The change,$75.4 million , divided by theMarch 31, 2021 revenue of$311.5 million is a total revenue change of 24.2%.March 31, 2021 revenue of$311.5 million lessMarch 31, 2020 revenue of$208.2 million is a$103.3 million period-over-period change. The change,$103.3 million , divided by theMarch 31, 2020 revenue of$208.2 million is a total revenue change of 49.6%. See "Comparison of the Three Months EndedMarch 31, 2022 and 2021" for further details.
(2)
The mergers and acquisitions adjustment excludes net commission and fee income generated during the first 12 months following an acquisition. The total adjustment for the three months ended
(3)
Other adjustments exclude period-to-period changes in contingent commissions, income from fiduciary investments and foreign exchange rates. The total adjustment for the three months ended
Adjusted compensation and benefits expense and adjusted compensation and benefits expense ratio
We define Adjusted compensation and benefits expense as Compensation and
benefits expense adjusted to reflect items such as (i) equity-based
compensation, (ii) acquisition and restructuring related compensation expense,
and (iii) other exceptional or non-recurring items, as applicable. The most
comparable GAAP financial metric is Compensation and benefits expense. Adjusted
compensation and benefits expense ratio is defined as Adjusted compensation and
benefits expense as a percentage of Total revenue. The most comparable GAAP
financial metric is Compensation and benefits expense ratio.
41
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A reconciliation of adjusted compensation and benefits expense and adjusted compensation and benefits expense ratio to adjusted compensation and benefits expense and compensation and benefits expense ratio, The most directly comparable GAAP measures, for each of the periods indicated, are as follows:
Three Months Ended March 31 ,
(in thousands, except percentages) 2022
2021
Total revenue$ 386,890 $ 311,458 Compensation and benefits expense$ 274,274 $ 214,486 Acquisition-related expense (58 ) - Acquisition related long-term incentive compensation (7,697 ) (9,422 ) Restructuring and related expense (158 ) (6,189 ) Amortization and expense related to discontinued (1,782 ) (2,078 ) prepaid incentives Equity-based compensation (6,804 ) (4,430 ) Initial public offering related expense (16,444 ) -
Adjusted compensation and benefits (1)
Compensation and benefits expense ratio
70.9 % 68.9 % Adjusted compensation and benefits expense ratio 62.4 %
61.8%
(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".
Adjusted general and administrative expenses and adjusted general and administrative expense ratio
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 directly comparable GAAP
measures, for each of the periods indicated is as follows:
Three Months Ended March 31 ,
(in thousands, except percentages) 2022
2021
Total revenue$ 386,890 $ 311,458 General and administrative expense$ 42,361 $ 27,545 Acquisition-related expense (451 ) (1,714 ) Restructuring and related expense (2,966 ) (809 ) Other non-recurring expense - (335 ) Initial public offering related expense (648 ) -
General and administrative expenses adjusted (1)
General and administrative expense ratio
10.9 % 8.8 % Adjusted general and administrative expense ratio 9.9 % 7.9 %
(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".
Adjusted EBITDAC and Adjusted EBITDAC margin
We define Adjusted EBITDAC as Net income before interest expense, net, income
tax expense (benefit), 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 directly 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. These measures start with
42
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consolidated Net income and do not deduct earnings related to the
non-controlling interest in Ryan Re for the period of time prior to March 31,
2021 when we did not own 100% of the business or the non-controlling interest
attributed to the retained ownership of RSG LLC .
A reconciliation of Adjusted EBITDAC and Adjusted EBITDAC margin to Net income
and Net income margin, the most directly comparable GAAP measures, for each of
the periods indicated is as follows:
Three Months Ended March 31,
(in thousands, except percentages) 2022 2021
Total revenue $ 386,890 $ 311,458
Net income (loss) $ 18,076 $ (3,801 )
Interest expense, net 21,752 20,045
Income tax expense (benefit) (4,503 ) 2,234
Depreciation 1,211 1,200
Amortization 26,663 27,794
Change in contingent consideration (1,008 ) 590
EBITDAC $ 62,191 $ 48,062
Acquisition-related expense (1) 509
1,714
Acquisition related long-term incentive compensation 7,697
9,422
(2)
Restructuring and related expense (3) 3,124
6,998
Amortization and expense related to discontinued 1,782
2,078
prepaid incentives (4) Other non-operating loss (income) (5) 7,521
21,446
Equity-based compensation (6) 6,804
4,430
Other non-recurring expense (7) - 335 IPO related expenses (8) 17,092 - (Income) from equity method investments in related 543 (81 ) party Adjusted EBITDAC (9)$ 107,263 $ 94,404 Net income (loss) margin (10) 4.7 % (1.2 )% Adjusted EBITDAC margin 27.7 % 30.3 % (1) Acquisition-related expense includes diligence, transaction-related and integration costs. Compensation and benefits expenses were$0.1 million for the three months endedMarch 31, 2022 , while General and administrative expenses contributed to$0.5 million and$1.7 million of the acquisition-related expense for the three months endedMarch 31, 2022 and 2021, respectively.
(2)
Acquisition-related long-term incentive compensation is derived from long-term incentive plans associated with acquisitions.
(3)
Restructuring and related expense consists of compensation and benefits of$0.2 million and$6.2 million for the three months endedMarch 31, 2022 and 2021, respectively, and General and administrative costs including occupancy and professional services fees of$3.0 million and$0.8 million for the three months endedMarch 31, 2022 and 2021, 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 5, 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 14. Employee Benefit Plans, Prepaid and Long-Term Incentives" of the unaudited quarterly consolidated financial statements for further discussion.
(5)
For the three months endedMarch 31, 2022 , Other non-operating loss includes a$7.7 million charge related to the change in the TRA liability caused by a change in our blended state tax rates. For the three months endedMarch 31, 2021 , Other non-operating loss (income) includes the change in fair value of the embedded derivatives on the Redeemable Preferred Units. This change in fair value of$12.6 million was due to the occurrence of a Realization Event in the third quarter of 2021, which is defined as a Qualified Public Offering or a Sale Transaction in the Onex Purchase Agreement. For the three months endedMarch 31, 2021 , Other non-operating loss (income) also includes expense of$8.6 million associated with the extinguishment of a portion of our deferred debt issuance costs on the term debt.
(6)
Stock-based compensation reflects non-cash stock-based expenses.
43 --------------------------------------------------------------------------------
(7)
Other non-recurring expense includes one-time impacts that do not reflect the core performance of the business, including General and administrative expenses of$0.3 million for the three months endedMarch 31, 2021 . 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.
(8)
Initial public offering related expenses includes$0.6 million of General and administrative expense associated with the preparations for Sarbanes-Oxley compliance, tax and accounting advisory services on IPO-related structure changes, and Compensation-related expense of$16.4 million for the three months endedMarch 31, 2022 primarily related to the revaluation of existing equity awards at IPO as well as expense for new awards issued at IPO.
(9)
Consolidated Adjusted EBITDAC does not reflect a deduction for Adjusted EBITDAC associated with the non-controlling interest in Ryan Re for the period prior to
(ten)
Net profit margin is net profit as a percentage of total revenue.
Adjusted net profit and adjusted net profit margin
We define Adjusted net income as tax-effected earnings before amortization and certain items of income and expense, gains and losses, equity-based compensation, acquisition related long-term incentive compensation, acquisition-related expenses, costs associated with the IPO and certain exceptional or non-recurring items. The most comparable GAAP financial metric is Net income. Adjusted net income margin is calculated as Adjusted net income as a percentage of Total revenue. The most comparable GAAP financial metric is Net income margin. These measures start with consolidated Net income and do not deduct earnings related to the non-controlling interest in Ryan Re for the period of time prior toMarch 31, 2021 when we did not own 100% of the business or the non-controlling interest attributed to the retained ownership ofRSG LLC . Following the IPO the Company is subject toUnited States federal income taxes, in addition to state, local, and foreign taxes, with respect to our allocable share of any net taxable income ofRSG LLC . For comparability purposes, this calculation incorporates the impact of federal and state statutory tax rates on 100% of our adjusted pre-tax income as if the Company owned 100% ofRSG LLC . A reconciliation of Adjusted net income and Adjusted net income margin to Net income and Net income margin, the most directly comparable GAAP measures, for each of the periods indicated is as follows: Three Months Ended March 31, (in thousands, except percentages) 2022 2021 Total revenue$ 386,890 $ 311,458 Net income (loss)$ 18,076 $ (3,801 ) Income tax expense (benefit) (4,503 ) 2,234 Amortization 26,663 27,794 Amortization of deferred issuance costs (1) 2,811
3,015
Change in contingent consideration (1,008 ) 590 Acquisition-related expense (2) 509
1,714
Acquisition related long-term incentive compensation 7,697
9,422
(3)
Restructuring and related expense (4) 3,124
6,998
Amortization and expense related to discontinued 1,782
2,078
prepaid incentives (5) Other non-operating loss (income) (6) 7,521
21,446
Equity-based compensation (7) 6,804
4,430
Other non-recurring expense (8) - 335 IPO related expenses (9) 17,092 - (Income) / loss from equity method investments in 543 (81 ) related party Adjusted income before income taxes$ 87,111 $ 76,174 Adjusted tax expense (10) (22,379 ) (19,044 ) Adjusted net income$ 64,732 $ 57,130 Net income (loss) margin (11) 4.7 % (1.2 )% Adjusted net income margin 16.7 % 18.3 % (1)
Interest expense, net, includes the amortization of deferred debt issuance costs.
44 --------------------------------------------------------------------------------
(2)
Acquisition-related expense includes diligence, transaction-related and integration costs. Compensation and benefits expenses were$0.1 million for the three months endedMarch 31, 2022 , while General and administrative expenses contributed to$0.5 million and$1.7 million of the acquisition-related expense for the three months endedMarch 31, 2022 and 2021, respectively.
(3)
Acquisition-related long-term incentive compensation is derived from long-term incentive plans associated with acquisitions.
(4)
Restructuring and related expense consists of compensation and benefits of$0.2 million and$6.2 million for the three months endedMarch 31, 2022 and 2021, respectively, and General and administrative costs including occupancy and professional services fees of$3.0 million and$0.8 million for the three months endedMarch 31, 2022 and 2021, 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 5, 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 14. Employee Benefit Plans, Prepaid and Long-Term Incentives" of the unaudited quarterly consolidated financial statements for further discussion.
(6)
For the three months endedMarch 31, 2022 , Other non-operating loss includes a$7.7 million charge related to the change in the TRA liability caused by a change in our blended state tax rates. For the three months endedMarch 31, 2021 Other non-operating loss (income) includes the change in fair value of the embedded derivatives on the Redeemable Preferred Units. This change in fair value of$12.6 million was due to the occurrence of a Realization Event in the third quarter of 2021, which is defined as a Qualified Public Offering or a Sale Transaction in the Onex Purchase Agreement. For the three months endedMarch 31, 2021 , Other non-operating loss (income) also includes expense of$8.6 million associated with the extinguishment of a portion of our deferred debt issuance costs on the term debt.
(7)
Stock-based compensation reflects non-cash stock-based expenses.
(8)
Other non-recurring expense includes one-time impacts that do not reflect the core performance of the business, including General and administrative expenses of$0.3 million for the three months endedMarch 31, 2021 . 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)
Initial public offering related expenses includes$0.6 million of General and administrative expense associated with the preparations for Sarbanes-Oxley compliance, tax and accounting advisory services on IPO-related structure changes, and Compensation-related expense of$16.4 million for the three months endedMarch 31, 2022 primarily related to the revaluation of existing equity awards at IPO as well as expense for new awards issued at IPO.
(ten)
The Company is 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 ofRSG, LLC . For the three months endedMarch 31, 2022 this calculation of adjusted tax expense is based on a federal statutory rate of 21% and a combined state income tax rate net of federal benefits of 4.69% on 100% of our adjusted income before income taxes as if the Company owned 100% ofRSG, LLC . For the three months endedMarch 31, 2021 this calculation of adjusted tax expense is based on a federal statutory rate of 21% and a combined state income tax rate net of federal benefits of 4.00% on 100% of our adjusted income before income taxes as if the Company owned 100% ofRSG, LLC .
(11)
Net profit margin is net profit as a percentage of total revenue.
Adjusted diluted earnings per share
We define Adjusted diluted earnings per share as Adjusted net income divided by
diluted shares outstanding after adjusting for the effect of the exchange of
100% of the outstanding LLC Common Units (together with the shares of Class B
common stock) into shares of Class A common stock and the effect of unvested
equity awards. The most directly comparable GAAP financial metric is diluted
earnings per share.
45
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A reconciliation of Adjusted diluted earnings per share to Diluted earnings per
share, the most directly comparable GAAP measure, for each of the periods
indicated is as follows:
Three Months Ended March 31, 2022
Less: Net
income
attributed to Plus:
dilutive awards Plus: Net income Dilutive
and attributed to Plus: Adjustments impact of Adjusted
(in thousands, substantively non-controlling to Adjusted net unvested diluted
except per share vested shares interests income equity awards earnings per
data) U.S. GAAP (1) (2) (3) (4) share
Numerator:
Net income
attributable
to Class A common
shareholders-
diluted $ 15,215 (8,304 )
11,165 $ 46,656 $ -$ 64,732 Denominator: Weighted-average shares of Class A common stock outstanding- diluted 264,121 - - - 5,632 269,753 Net income per share of Class A common stock- diluted$ 0.06 $ (0.03 ) $ 0.04 $ 0.18$ (0.01 ) $ 0.24
(1)
Adjustment removes the impact of Net income attributed to dilutive awards and substantively vested RSUs to arrive at Net income (loss) attributable to RSGHI. See "Note 12, Earnings Per Share" of the unaudited quarterly consolidated financial statements.
(2)
For comparability purposes, this calculation incorporates the net income (loss) that would be outstanding if all LLC Common Units (together with shares of Class B common stock) were exchanged for shares of Class A common stock. The 143,423 weighted average outstanding LLC Common Units were considered dilutive for the three months endedMarch 31, 2022 and included in the 264,121 of Weighted-average shares outstanding within Diluted EPS. See "Note 12, Earnings Per Share" of the unaudited quarterly consolidated financial statements.
(3)
The adjustments to adjusted net earnings are described in the footnotes to the reconciliation of adjusted net earnings and net earnings in “Adjusted net earnings and adjusted net earnings margin”.
(4)
For comparability purposes and to be consistent with the treatment of the adjustments to arrive at Adjusted net income, the dilutive effect of unvested equity awards is calculated using the treasury stock method as if the weighted average unrecognized cost associated with the awards was$0 over the period, less any unvested equity awards determined to be dilutive within the Diluted earnings per share calculation disclosed in "Note 12, Earnings Per Share" of the unaudited quarterly consolidated financial statements. 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 Consolidated Balance Sheets, cash flows provided by operations and debt capacity available under our Revolving Credit Facility, Term Loan, and Senior Secured Notes (together "Credit Facility"). The primary uses of liquidity are operating expenses, seasonal working capital needs, business combinations, capital expenditures, obligations under the TRA, taxes, and distributions to LLC Unitholders. We believe that cash and cash equivalents, cash flows from operations and amounts available under our Credit Facility will be sufficient to meet the liquidity needs, including principal and interest payments on debt obligations, capital expenditures, and anticipated working capital requirements, for the next 12 months and beyond. 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 the results of our operations. Cash on the Consolidated Balance Sheets includes funds available for general corporate purposes. Fiduciary cash and receivables cannot be used for general corporate purposes. Insurance premiums, claims, and surplus lines taxes are held in a fiduciary capacity and the obligation to remit these funds is recorded as Fiduciary liabilities in the Consolidated Balance Sheets. We will recognize fiduciary 46 -------------------------------------------------------------------------------- amounts due to others as fiduciary liabilities and fiduciary amounts collectible and held on behalf of others, including insurance carriers, other insurance intermediaries, surplus lines taxing authorities, clients, and insurance policy holders, as Fiduciary cash and receivables in the Consolidated Balance Sheets. In our capacity as an insurance broker or agent, we collect premiums from insureds and, after deducting our commission, remit the premiums to the respective insurance markets and carriers. We also collect claims prefunding or refunds from carriers on behalf of insureds, which are then returned to the insureds and surplus lines taxes, which are then remitted to surplus lines taxing authorities. Insurance premiums, claim funds, and surplus lines taxes are held in a fiduciary capacity. The levels of Fiduciary cash and receivables and Fiduciary liabilities can fluctuate significantly depending on when we collect the premiums, claims prefunding, and refunds, make payments to markets, carriers, surplus lines taxing authorities, and insureds, and collect funds from clients and make payments on their behalf, and upon the impact of foreign currency movements. Fiduciary cash, because of its nature, is generally invested in very liquid securities with a focus on preservation of principal. To minimize investment risk, we and our subsidiaries maintain cash holdings pursuant to an investment policy which contemplates all relevant rules established by states with regard to fiduciary cash and is approved by our Board of Directors. The policy requires broad diversification of holdings across a variety of counterparties utilizing limits set by our Board of Directors, primarily based on credit rating and type of investment. Fiduciary cash and receivables included cash of$674.6 million and$520.6 million as ofMarch 31, 2022 and 2021, respectively, and fiduciary receivables of$1,449.1 million and$1,285.5 million as ofMarch 31, 2022 and 2021, respectively. While we earn investment income on fiduciary cash held in cash and investments, the fiduciary cash may not be used for general corporate purposes. Of the$706.2 million of Cash and cash equivalents on the Consolidated Balance Sheets as ofMarch 31, 2022 ,$164.2 million is held in fiduciary accounts representing collected revenue and is available to be transferred to operating accounts and used for general corporate purposes. Credit Facilities We expect to have sufficient financial resources to meet our business requirements 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 Facility to accommodate any timing differences in cash flows. Additionally, under current market conditions, we believe that we could access capital markets to obtain debt financing for longer-term funding, if needed. OnSeptember 1, 2020 , we entered into the Credit Agreement with leading institutions, includingJPMorgan 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 various subsidiaries and are secured by a lien and security interest in all of our assets. See "Note 9, Debt" in the notes to our audited consolidated financial statements in this Annual Report for further information regarding our debt arrangements. OnJuly 26, 2021 , we entered into an amendment to our credit agreement, which provided for an increase in the size of our Revolving Credit Facility from$300.0 million to$600.0 million . Interest on the upsized Revolving Credit Facility 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.
On
OnApril 29, 2022 the Company entered into the Fourth Amendment to the Credit Agreement on its Term Loan and Revolving Credit Facility to transition its Eurocurrency Rate (LIBOR) to a Benchmark Replacement of Adjusted Term SOFR plus a Credit Spread Adjustment of 10 basis points, 15 basis points, or 25 basis points for the one-month, three-month, or six-month borrowing periods, respectively.
From
As ofMarch 31, 2022 , we were in compliance with all of the covenants under our credit agreement and there were no events of default for the three months endedMarch 31, 2022 .
See “Note 9, Debt” in the notes to our unaudited quarterly consolidated financial statements for further information regarding our debt arrangements.
47 --------------------------------------------------------------------------------
Agreement on tax claims
In connection with the Organizational Transactions and IPO, the Company entered into a TRA with the LLC Unitholders and Onex. The TRA provides for the payment by the Company to the current or former LLC Unitholders and Onex, collectively, of 85% of the net cash savings, if any, inU.S. federal, state and local income taxes that the Company realizes (or is deemed to realize in certain circumstances) as a result of (i) certain increases in the tax basis of the assets ofRSG LLC and its subsidiaries resulting from purchases or exchanges of LLC Common Units ("Exchange Tax Attributes"), (ii) certain tax attributes ofRSG LLC that primarily include amortizable tax attributes from asset acquisitions ("M&A Tax Attributes"), (iii) certain favorable "remedial" partnership tax allocations to which the Company becomes entitled to (if any), and (iv) certain other tax benefits related to the Company entering into the TRA, including tax benefits attributable to payments that the Company makes under the TRA ("TRA Payment Tax Attributes"). The Company recognizes a liability on the Consolidated Balance Sheets based on the undiscounted estimated future payments under the TRA. Due to the uncertainty of various factors, we cannot precisely quantify the likely tax benefits we will realize as a result of the LLC Common Unit exchanges and the resulting amounts we are likely to pay out to LLC Unitholders and Onex pursuant to the TRA; 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 TRA, we expect future payments under the TRA will be$280.7 million in aggregate. Future payments in respect to subsequent exchanges would be in addition to these amounts and are expected to be substantial. The foregoing amounts are merely estimates and the actual payments could differ materially. In the event of an early termination of the TRA, either at the Company's election or due to a change of control, the Company is required to pay to each holder of the TRA an early termination payment equal to the discounted present value of all unpaid TRA Payments. The Company has not made and is not likely to make an election for an early termination. We expect to fund future TRA payments with tax distributions fromRSG LLC that come from cash on hand and cash generated from operations. Exchange Tax M&A Tax TRA Payment Tax (in thousands) Attributes (1) Attributes (2) Attributes (3) TRA Liabilities Balance at December 31, 2021$ 136,704 $ 83,389 $ 52,007 $ 272,100 Exchange of LLC Common Units 592 96 192 880 Remeasurement - change in state rate 3,102 1,892 2,724 7,718 Payments - - - - Balance at March 31, 2022$ 140,398 $ 85,377 $ 54,923 $ 280,698
The total estimated tax savings expected from each of the tax attributes associated with the TRA is (1) the exchange tax attributes of
Comparison of cash flows for the three months ended
Cash and cash equivalents increased$547.2 million from$159.2 million atMarch 31, 2021 to$706.4 million atMarch 31, 2022 . A summary of our cash flows provided by and used for continuing operations from operating, investing, and financing activities is as follows:
Cash flow from operating activities
Net cash provided by operating activities during the three months endedMarch 31, 2022 increased$9.3 million from the three months endedMarch 31, 2021 to$(65.5) million . This amount represents net income reported, as adjusted for amortization and depreciation, prepaid and deferred equity compensation expense, as well as the change in commission and fees receivable, accrued compensation and other current and noncurrent assets and liabilities. Net income increased$21.9 million during the three months endedMarch 31, 2022 and was offset by a decrease in the change in Other current assets and accrued liabilities driven by increased commission payments to producers period-over-period.
Cash flow from investing activities
Cash flows used for investing activities during the three months endedMarch 31, 2022 were$2.7 million , a decrease of$0.5 million compared to the$2.2 million of cash flows used for investing activities during the three months endedMarch 31, 2021 . The main driver of the cash flows used for investing activities in the three months endedMarch 31, 2022 was$2.2 million of capital expenditures as well as$0.5 million of prepaid incentives, compared to$2.2 million of capital expenditures in the three months endedMarch 31, 2021 . 48 --------------------------------------------------------------------------------
Cash flow from financing activities
Cash flows provided by financing activities during the three months endedMarch 31, 2022 were$308.7 million , an increase of$446.9 million compared to cash flows used by financing activities of$138.2 million during the three months endedMarch 31, 2021 . The main drivers of cash flows provided by financing activities during the three months endedMarch 31, 2022 was the Bond issuance of$394.0 million , offset by the net change in fiduciary liabilities of$79.2 million , the repayment of term debt of$4.1 million , and debt issuance costs of$1.8 million . The main drivers of cash flows used by financing activities during the three months endedMarch 31, 2021 were$62.0 million of net change in fiduciary liabilities, the purchase of the remaining interest in Ryan Re of$47.5 million , cash distributions to certain pre-IPO unitholders of$23.2 million , and deferred offering costs and debt issuance costs paid of$5.3 million . Contractual Obligations and Commitments Our principal commitments consist of contractual obligations in connection with investing and operating activities. These obligations are described within "Note 8, Leases" and "Note 9, Debt" in the notes to our unaudited consolidated financial statements and provide further description on provisions that create, increase or accelerate obligations, or other pertinent data to the extent necessary for an understanding of the timing and amount of the specified contractual obligations. Within "Note 14, Employee Benefit Plans, Prepaid and Long-Term Incentives" in the notes to our unaudited consolidated financial statements we discuss various long-term incentive compensation agreements and their impact. These agreements are typically associated with an acquisition. Below we have outlined the liabilities accrued as ofMarch 31, 2022 , the projected future expense, and the projected timing of future cash outflows associated with these arrangements. Long-term Incentive Compensation Agreements (in thousands) March 31, 2022 Current accrued compensation $ 5,378 Non-current accrued compensation 146 Total liability $ 5,524 Projected future expense 596
Total projected future cash outflows $6,120
Projected Future Cash Outflows
(in thousands)
2022 $ 5,338
2023 -
2024 -
2025 -
Thereafter $ 782
Within "Note 14, Employee Benefit Plans, Prepaid and Long-Term Incentives" in
the notes to our unaudited consolidated financial statements we discuss the All
Risks Long-Term Incentive Plans and their impact. Below we have outlined the
liabilities accrued as of March 31, 2022 , the projected future expense, and the
projected timing of future cash outflows associated with these arrangements.
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All Risks Long-Term Incentive Plan
(in thousands) March 31, 2022
Current accrued compensation $ 94,997
Non-current accrued compensation -
Total liability $ 94,997
Projected future expense 12,717
Total projected future cash outflows
Projected Future Cash Outflows
(in thousands)
2022 $ 107,714
2023 -
2024 -
2025 -
Thereafter $ -
Within "Note 4, Merger and Acquisition Activity" in the notes to our unaudited
consolidated financial statements we discuss various contingent consideration
arrangements and their impact. Below we have outlined the liabilities accrued as
of March 31, 2022 , the projected future expense, and the projected timing of
future cash outflows associated with these contingent consideration agreements.
Contingent Consideration
(in thousands) March 31, 2022
Current accounts payable and accrued liabilities
Other non-current liabilities
26,262 Total liability$ 41,417 Projected future expense 4,058 Total projected future cash outflows$ 45,475 Projected Future Cash Outflows (in thousands) 2022$ 14,637 2023 6,067 2024 - 2025 24,771 Thereafter $ - For further discussion, see "Note 4, Merger and Acquisition Activity", "Note 8, Leases", "Note 9, Debt", "Note 14, Employee Benefit Plans, Prepaid and Long-Term Incentives", and "Note 17, Commitments and Contingencies" of the notes to our unaudited consolidated financial statements. Critical Accounting Policies and Estimates The methods, assumptions, and estimates that we use in applying the accounting policies may require us to apply judgments regarding matters that are inherently uncertain. We consider an accounting policy to be a critical estimate if: (i) the Company must make assumptions that were uncertain when the judgment was made, and (ii) changes in the estimate assumptions or selection of a different estimate methodology, could have a significant impact on our financial position and the results that 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 the Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSEC onMarch 16, 2022 . Additionally, the changes to our critical accounting policies and estimates disclosed in the Annual 50 -------------------------------------------------------------------------------- Report on Form 10-K for the year endedDecember 31, 2021 are included in "Note 2, Significant Accounting Policies", to our unaudited consolidated financial statements. Recent Accounting Pronouncements For a description of our recently adopted accounting pronouncements and recently issued accounting standards not yet adopted, see "Note 2, Significant Accounting Policies" in the notes to our unaudited consolidated financial statements.
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