Ryan Specialty Holdings, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Ryan Specialty is a specialty insurance brokerage, providing wholesale insurance solutions, with a focus on complex and hard-to-place risks.

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The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Ryan Specialty Holdings, Inc. (RYAN), operating within the insurance brokerage industry, specializes in wholesale insurance. Unlike retail brokers who directly serve clients, RYAN operates as a middleman, connecting retail brokers with insurance carriers, particularly for complex, specialty, and hard-to-place risks. They facilitate the insurance process for businesses in a wide range of sectors, including healthcare, construction, financial, transportation, energy, and environmental sectors. RYAN’s business is predominantly commission-based, they make money from fees paid by insurance carriers when retail brokers are able to place policies with the help of RYAN. The company’s revenue is derived from the following three segments:

Wholesale Brokerage: This core segment provides specialty insurance solutions by acting as an intermediary between insurance retailers and carriers to facilitate complex insurance placements.
Underwriting Management: Here, the company enters into underwriting agreements with insurance carriers to manage the underwriting and distribution of specialty insurance programs.
Binding Authority: This segment provides underwriting expertise to allow smaller retail brokers to bind policies on behalf of insurance carriers.

Industry and Competitive Landscape: The insurance brokerage industry is competitive, but is also highly fragmented. Several companies operate within the insurance space, but many of them are more regional or niche focused. In recent years, there has been increasing consolidation activity with companies seeking to achieve greater market share through acquisitions.

Key characteristics of the industry are:

The need for specialized expertise in underwriting and placement of specialty risks.
A dependence on relationships between retailers, wholesalers and underwriters.
Significant competition as the barriers to entry are reasonably low.
An increasingly complex regulatory environment.
Pricing power may vary considerably by segment and location.

RYAN differentiates itself through its deep and long established network and understanding of specialty risks. They have developed a broad platform for complex placements and this gives them unique insights into the industries they cover. Because they are a wholesale specialist, they have much larger resources allocated to their area of expertise.

Financial Performance: RYAN’s Q1 2024 financials highlight both strong growth and some interesting underlying dynamics. Revenue for the quarter was $1.09B, a 17.3% increase compared to Q1 2023. Growth is driven by the acquisition of All Risks and organic growth within their Wholesale Brokerage segment. This means that more growth is coming from acquisitions rather than organic growth.

Commissions and Fees: The bread and butter of the company, commissions and fees grew 18.4% year-on-year reaching $1.02B.
Operating Income: The operating income came in at $231M which is an increase of 10%, however, there was a 1.4% fall in operating margin year over year because of the increase in the cost of the benefit expenses.
Net Income: Net income attributable to RYAN was at $81.5M, an increase of 2.2% year-over-year. Net income margin is quite low, showing the expenses are a problem.
Adjusted EPS: Adjusted earnings per share (diluted) for Q1 was at $0.93, a 1.1% decrease year-over-year because of the decreased net income.

In 2023, revenue reached an all time high of $4.7B growing 28.9% year over year. This was mainly driven by revenue growth in Wholesale brokerage (+30.1%), followed by underwriting management (+25.5%), though Binding Authority also grew a solid +11.6%. Profitability and margin improved too. Adjusted EBITDA grew 26.2% to over $1B with adjusted EBITDA margin hitting 23%. Adjusted Net income hit a record of $513.1M growing 46.3% year-over-year. This also reflected on diluted earnings per share which hit $1.67, a growth of 40.8% YoY. Notably, they are expecting a 2024 organic revenue growth of 7%-9% which is quite a deceleration. Also, the M&A (Mergers and Acquisitions) market in insurance which was booming last few years is getting a bit shaky.

Moat Analysis: 2 / 5 RYAN’s economic moat is Narrow. While they have strong network effects, particularly with some of their smaller insurance carriers, they aren’t really a provider of any unique or difficult to copy products and services. These products or services are relatively easily replicated by well funded rivals. In the insurance industry, it comes down to who can build and maintain the best broker relationships, which means there are no true structural advantage.

Network effects: RYAN benefits from its extensive network of retail brokers and insurance carriers, which creates a network effect—the larger their network, the more appealing RYAN is. However, competitors can also replicate this network. It is not a structural advantage or moat as it is not difficult to replicate by well funded rivals.
Switching Costs: While switching costs for retail brokers may not be significant from a monetary perspective, it does take time to develop new relationships and build trust with new brokers. RYAN’s experience does give them somewhat of a boost here, but still not enough to truly hinder competition.
Scale Advantage: RYAN is significantly larger than its competitors and this does give it economies of scale and cost advantage. Still, this scale isn’t enough to make them difficult to compete with. Also, competitors are able to create their own processes and supply chain, making it not a robust competitive advantage.
Intangible Assets: While RYAN has a recognizable brand in its areas of specialty, and have a strong track record, these aren’t as difficult to overcome. The moat conferred by this intangible advantage is narrow.

Risks to the Moat and Business Resilience:

Competition: The insurance brokerage industry is competitive with low barriers to entry and established firms seeking to expand their presence and market share, all of which could threaten RYAN’s business.
Regulatory changes: The insurance industry is subject to complex regulatory requirements that could disrupt the way they operate. If a regulation was introduced that limits ability to take commissions, the business will suffer.
M&A risk: A significant part of RYAN’s strategy has included acquisitions, any problems with integrating the acquired businesses may affect profitability and growth.
Cybersecurity Risk: As a technology-driven company, a cybersecurity incident would have an adverse effect on their business. A breach or ransomware attack could damage client trust and significantly hamper profits.
Talent Retention: The company depends heavily on highly skilled and experienced brokers to drive its sales. Loss of key personnel or talent could hurt revenues.
Economic Downturn: In an economic downturn, revenue might fall as their customers’ ability to pay may be impaired. A lower volume of insurance sales and renewals will also hurt top line.
Declining insurance prices or volume: If prices of insurance are compressed due to competition or if volumes decrease, then RYAN’s ability to generate profit will be affected.
Loss of Broker/Partner Relationships: The company is dependent on their partnerships to generate revenue. Poor relationships with distributors and brokers can lower revenues and profitability.

Understandability: 3 / 5 The business of insurance brokerage is moderately easy to understand, but can quickly become complex and require a deep understanding of financial instruments. While the role of a wholesale broker is straightforward, the nature of specialized insurance and the interplay with multiple stakeholders can make it less clear to those unfamiliar with the industry.

Balance Sheet Health: 4 / 5 RYAN’s balance sheet is relatively healthy with good liquidity and manageable debt levels.

The current ratio (Current Assets / Current Liabilities) is 1.36. A solid ratio showing the company has a good position to pay short-term obligations.
Long term debt is at $2.82B, while book value is $4.13B. The debt appears high, although, they have a decent balance to mitigate this risk.
Operating cash flow for 2023 was at $477.2m, a strong increase year on year, showing the company has good cash flow generation capabilities.

While not perfect, it is a solid position which gives flexibility and security to the company.