Ryan Specialty (RYAN) - 2021 Q4 - Annual Report

Part I Business Ryan Specialty Group is a leading specialty insurance service provider, primarily operating as a wholesale broker and managing underwriter in the E&S market, driving growth through organic expansion, M&A, and technology - Ryan Specialty is a service provider of specialty insurance products, focusing on distribution, underwriting, and risk management, primarily acting as a wholesale broker and managing underwriter[25] - A significant majority of premiums placed are in the Excess & Surplus (E&S) market, which offers greater flexibility in terms and rates. In 2021, 73% of total premiums placed were in the E&S market[26][29] Revenue Contribution by Specialty (FY 2021 & 2020) | Specialty | FY 2021 Net Commission & Fees (millions) | % of Total | FY 2020 Net Commission & Fees (millions) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Wholesale Brokerage | $932.0 | 65.1% | $673.1 | 66.2% | | Binding Authority | $209.6 | 14.6% | $144.8 | 14.2% | | Underwriting Management | $290.6 | 20.3% | $198.8 | 19.6% | - The company has a strong M&A track record, having acquired over 40 firms since inception. The largest acquisition was All Risks in September 2020, which was the fourth largest US wholesale distributor at the time[41][44] - The company utilizes a digital marketplace called 'The Connector' for retail clients and internal producers to receive quotes and bind policies online, enhancing efficiency for smaller-premium accounts[46] Risk Factors The company faces significant risks including leadership succession, market cyclicality, M&A integration, cybersecurity threats, substantial indebtedness, and concentrated voting control - The business is highly dependent on its senior management, particularly founder Patrick G. Ryan, and its ability to recruit and retain key revenue producers. Failure in succession planning or retention poses a a significant risk[126][128] - The company's revenues are subject to the cyclicality of the P&C insurance market. A "soft" market with declining premium rates could negatively impact commission revenues, which are typically a percentage of premiums[129] - The company faces risks from its M&A strategy, including the potential for not realizing anticipated benefits, challenges in integrating acquired businesses, and risks associated with unaudited historical financials of acquired entities[184][185] - Significant cybersecurity risks exist, including system disruptions from cyberattacks, ransomware, and security breaches. A cyber-phishing event in April 2021 resulted in unauthorized access to five employee email accounts, potentially exposing PII of fewer than 2,000 individuals[247][248][249] - The company has substantial indebtedness ($2.029 billion as of Dec 31, 2021, pro forma for a February 2022 notes issuance), which could restrict operational flexibility, require significant cash flow for debt service, and limit the ability to pursue business opportunities[260] - The dual-class stock structure concentrates approximately 71% of voting power with the Ryan Parties, limiting the influence of Class A stockholders on major corporate decisions and potentially creating conflicts of interest[304] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[334] Properties The company's corporate headquarters are in Chicago, with extensive leased office space across the U.S., Canada, and Europe, while exploring remote work flexibility - The corporate headquarters are in Chicago, Illinois, with a lease for 56,250 square feet expiring in 2028[335] - The company leases a total of approximately 1,115,000 square feet for its additional office locations across the U.S., Canada, and Europe[335] Legal Proceedings The company is involved in ordinary course legal proceedings, with management expecting no material adverse effect on its business or financial condition - The company is not currently a party to any litigation that is expected to have no material adverse effect on its business or financial condition[336] Mine Safety Disclosure This disclosure item is not applicable to the company's operations - Not applicable[337] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Ryan Specialty's Class A common stock trades on the NYSE, with no anticipated cash dividends, and its 2021 IPO generated $1.448 billion in net proceeds for corporate purposes - Class A common stock is traded on the NYSE under the symbol 'RYAN'. Class B common stock is not listed or traded[340] - The company does not anticipate paying cash dividends in the foreseeable future, prioritizing the use of funds for business growth and debt repayment[341] - The company closed its IPO on July 26, 2021, receiving net proceeds of approximately $1.448 billion, which have been used for general corporate purposes[345] Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2021, revenue grew 40.7% to $1.43 billion, driven by acquisitions and organic growth, while net income decreased, but Adjusted EBITDAC and its margin significantly improved, supported by strong liquidity and strategic initiatives FY 2021 Financial Performance Highlights | Metric | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $1,432.8M | $1,018.3M | +40.7% | | Organic Revenue Growth | 22.4% | 20.4% | +2.0 p.p. | | Operating Income | $186.6M | $158.5M | +17.7% | | Net Income | $56.6M | $70.5M | -19.7% | | Net Income Margin | 4.0% | 6.9% | -2.9 p.p. | | Adjusted EBITDAC | $460.2M | $293.5M | +56.8% | | Adjusted EBITDAC Margin | 32.1% | 28.8% | +3.3 p.p. | | Adjusted Net Income | $290.1M | $185.4M | +56.5% | - The 40.9% increase in Net commissions and fees in 2021 was driven by 18.3% growth from the All Risks and Crouse acquisitions and 22.4% organic revenue growth[401] - Compensation and benefits expense increased by 44.5% increase in 2021, driven by higher commissions from revenue growth, $75.9 million in IPO-related compensation expense, and costs associated with the All Risks acquisition[410][413] - The company initiated a Restructuring Plan in 2020, which is expected to generate $25.0 million in annual savings by June 30, 2023, with cumulative one-time charges of $30.0-$35.0 million[362] - The company entered into a Tax Receivable Agreement (TRA) in connection with its IPO, recording a liability of $272.1 million as of December 31, 2021, for expected future payments to pre-IPO unitholders[472][475] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks primarily from interest rate changes on its $1.63 billion floating-rate debt, while foreign currency risk is minimal - Foreign currency risk is minimal, with approximately 3% of 2021 revenues generated from operations in the UK, Europe, and Canada[509] - The company has significant interest rate risk due to $1.629 billion of outstanding floating-rate term loan borrowings as of December 31, 2021, which are subject to LIBOR changes above a 0.75% floor[512] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for Ryan Specialty Group Holdings, Inc., including income, balance sheets, cash flows, and equity, along with auditor's report and notes - The financial statements were audited by Deloitte & Touche LLP, which issued an unqualified opinion. Critical audit matters identified were related to the valuation of Equity-Based Compensation following the IPO modification and the realizability of Deferred Tax Assets[520][524][525][528] Consolidated Statements of Income (in thousands) | | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total revenue | $1,432,771 | $1,018,274 | $765,111 | | Total operating expenses | $1,246,147 | $859,736 | $664,073 | | Operating income | $186,624 | $158,538 | $101,038 | | Net income | $56,632 | $70,513 | $63,057 | | Net income attributable to Ryan Specialty | $65,873 | $68,104 | $64,166 | Consolidated Balance Sheets (in thousands) | | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total current assets | $3,011,007 | $2,493,350 | | Total non-current assets | $2,447,701 | $2,036,032 | | Total Assets | $5,458,708 | $4,529,382 | | Total current liabilities | $2,918,141 | $2,482,321 | | Total non-current liabilities | $1,945,790 | $1,736,336 | | Total Liabilities | $4,863,931 | $4,218,657 | | Total stockholders'/members' equity | $594,777 | $71,090 | Consolidated Statements of Cash Flow (in thousands) | | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $273,493 | $135,393 | $149,507 | | Net cash used for investing activities | ($457,937) | ($768,508) | ($147,997) | | Net cash provided by financing activities | $429,284 | $1,125,304 | $62,274 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles, financial disclosure, or auditing scope - None[802] Controls and Procedures Management concluded disclosure controls and procedures were effective as of December 31, 2021, with no material changes to internal controls during Q4 2021 - The company's principal executive and financial officers concluded that disclosure controls and procedures were effective as of December 31, 2021[803] - A management report on internal control over financial reporting is not included due to the transition period for newly public companies[804] - No material changes were made to internal control over financial reporting in Q4 2021[805] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Security Ownership This section incorporates information on directors, executive officers, corporate governance, compensation, and security ownership by reference from the 2022 Proxy Statement - Information required for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's 2022 Proxy Statement[809][811][813][814][815] Part IV Exhibits and Financial Statement Schedules This section lists financial statements from Item 8 and all exhibits filed with the Form 10-K, including corporate governance documents and material agreements - This section lists all exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and required certifications[820] - All financial statement schedules are omitted as the required information is either inapplicable or included within the consolidated financial statements and related notes[819] Form 10-K Summary The company indicates that no Form 10-K summary is provided - None[823]