Ryan Specialty (RYAN) - 2023 Q1 - Quarterly Report

General Information This section provides foundational details about the company's filing, forward-looking statements, and key defined terms Filing Information This section provides the basic filing details for the Quarterly Report on Form 10-Q for Ryan Specialty Holdings, Inc., for the period ended March 31, 2023, including its registration status and outstanding common stock - The registrant, Ryan Specialty Holdings, Inc., filed a Quarterly Report on Form 10-Q for the period ended March 31, 2023[2] Filing Details | Metric | Value | | :----- | :---- | | Commission File Number | 001-40645 | | Trading Symbol | RYAN | | Exchange | The New York Stock Exchange (NYSE) | | Filer Status | Large accelerated filer | | Class A Common Stock Outstanding (May 1, 2023) | 113,542,115 shares | | Class B Common Stock Outstanding (May 1, 2023) | 146,238,655 shares | Forward-Looking Statements This section outlines the company's forward-looking statements, emphasizing that they involve substantial risks and uncertainties that could cause actual results to differ materially from expectations - All statements in the report, other than historical facts, are forward-looking and subject to substantial risks and uncertainties[10] - Risks include failure to execute succession plans or retain revenue producers, security breaches, improper data disclosure, loss of relationships with insurance carriers or clients, and errors in underwriting models[11] - Other risks involve the cyclicality of markets, competitive pressures, decreases in premiums or commission rates, inability to collect receivables, and impacts of MGA/MGU program changes[13] - Financial risks include impairment of goodwill, inability to maintain rapid growth, and the impact of outstanding debt on financial flexibility[13] Commonly Used Defined Terms This section provides a glossary of commonly used terms within the Quarterly Report on Form 10-Q, defining key operational, financial, and structural terms relevant to Ryan Specialty Holdings, Inc.'s business and reporting - The report defines key terms such as 'Admitted' (regulated insurance market), 'E&S' (Excess and surplus lines, less regulated), 'LLC' (Ryan Specialty, LLC), 'MGA' (Managing general agent), 'MGU' (Managing general underwriter), 'Wholesale Brokerage', and 'Underwriting Management' to clarify the company's operational context[17][18] PART I. FINANCIAL INFORMATION This section presents the company's unaudited consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents the unaudited consolidated financial statements for Ryan Specialty Holdings, Inc., including statements of income, comprehensive income, balance sheets, cash flows, and stockholders' equity, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific financial line items Consolidated Statements of Income (Unaudited) This statement provides a detailed breakdown of the company's revenues, expenses, and net income for the three months ended March 31 Consolidated Statements of Income (Unaudited) - Three Months Ended March 31 | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (YoY) | | :----------------------------------- | :------------------ | :------------------ | :----------- | | Net commissions and fees | $447,513 | $386,681 | +15.7% | | Fiduciary investment income | $10,086 | $209 | +4725.8% | | Total revenue | $457,599 | $386,890 | +18.3% | | Compensation and benefits | $307,722 | $274,274 | +12.2% | | General and administrative | $51,699 | $42,361 | +22.0% | | Amortization | $25,185 | $26,663 | -5.5% | | Depreciation | $2,192 | $1,211 | +81.0% | | Change in contingent consideration | $714 | $(1,008) | -170.8% | | Total operating expenses | $387,512 | $343,501 | +12.8% | | Operating income | $70,087 | $43,389 | +61.5% | | Interest expense, net | $29,468 | $21,752 | +35.5% | | Income before income taxes | $42,752 | $13,573 | +215.0% | | Income tax expense (benefit) | $6,295 | $(4,503) | -239.8% | | NET INCOME | $36,457 | $18,076 | +101.7% | | Net income attributable to Ryan Specialty Holdings, Inc. | $13,160 | $6,911 | +90.4% | | Basic EPS | $0.12 | $0.07 | +71.4% | | Diluted EPS | $0.11 | $0.06 | +83.3% | Consolidated Statements of Comprehensive Income (Unaudited) This statement presents the company's net income and other comprehensive income components, leading to total comprehensive income Consolidated Statements of Comprehensive Income (Unaudited) - Three Months Ended March 31 | Metric | 2023 (in thousands) | 2022 (in thousands) | | :------------------------------------------------ | :------------------ | :------------------ | | NET INCOME | $36,457 | $18,076 | | Net income attributable to Ryan Specialty Holdings, Inc. | $13,160 | $6,911 | | Other comprehensive loss, net of tax | $(1,752) | $(1,360) | | COMPREHENSIVE INCOME ATTRIBUTABLE TO RYAN SPECIALTY HOLDINGS, INC. | $11,408 | $5,551 | - Other comprehensive loss, net of tax, increased from $(1,360) thousand in Q1 2022 to $(1,752) thousand in Q1 2023, primarily due to losses on interest rate caps[23] - Comprehensive income attributable to Ryan Specialty Holdings, Inc. increased by 105.5% YoY, from $5,551 thousand in Q1 2022 to $11,408 thousand in Q1 2023[23] Consolidated Balance Sheets (Unaudited) This statement provides a snapshot of the company's assets, liabilities, and equity as of March 31, 2023, and December 31, 2022 Consolidated Balance Sheets (Unaudited) - As of March 31, 2023 vs. December 31, 2022 | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | Change | | :----------------------------------- | :---------------------------- | :----------------------------- | :----- | | Cash and cash equivalents | $704,746 | $992,723 | $(287,977) | | Fiduciary cash and receivables | $2,475,185 | $2,611,647 | $(136,462) | | Total current assets | $3,468,922 | $3,894,067 | $(425,145) | | Goodwill | $1,379,202 | $1,314,984 | +$64,218 | | Other intangible assets | $514,568 | $486,444 | +$28,124 | | Total non-current assets | $2,578,038 | $2,489,676 | +$88,362 | | TOTAL ASSETS | $6,046,960 | $6,383,743 | $(336,783) | | Fiduciary liabilities | $2,475,185 | $2,611,647 | $(136,462) | | Total current liabilities | $2,766,600 | $3,134,369 | $(367,769) | | Long-term debt | $1,950,329 | $1,951,900 | $(1,571) | | Tax Receivable Agreement liabilities (non-current) | $287,113 | $295,347 | $(8,234) | | Total non-current liabilities | $2,428,762 | $2,431,562 | $(2,800) | | TOTAL LIABILITIES | $5,195,362 | $5,565,931 | $(370,569) | | Total stockholders' equity attributable to Ryan Specialty Holdings, Inc. | $508,588 | $478,405 | +$30,183 | | Non-controlling interests | $343,010 | $339,407 | +$3,603 | | TOTAL STOCKHOLDERS' EQUITY | $851,598 | $817,812 | +$33,786 | Consolidated Statements of Cash Flows (Unaudited) This statement details the cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31 Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31 | Cash Flow Activity | 2023 (in thousands) | 2022 (in thousands) | Change (YoY) | | :------------------------------------------------ | :------------------ | :------------------ | :----------- | | Net cash used for operating activities | $(159,211) | $(65,470) | $(93,741) | | Net cash used for investing activities | $(104,852) | $(2,721) | $(102,131) | | Net cash (used for) provided by financing activities | $(29,620) | $308,731 | $(338,351) | | Effect of changes in foreign exchange rates | $85 | $816 | $(731) | | NET CHANGE IN CASH, CASH EQUIVALENTS, AND FIDUCIARY CASH | $(293,598) | $241,356 | $(534,954) | | Ending balance of cash, cash equivalents, and fiduciary cash | $1,473,787 | $1,381,017 | +$92,770 | - Operating cash flows significantly decreased, moving from $(65.5) million used in Q1 2022 to $(159.2) million used in Q1 2023, primarily due to payment of accrued commissions and bonuses[28][222] - Investing cash flows increased substantially from $(2.7) million used in Q1 2022 to $(104.9) million used in Q1 2023, driven by the Griffin acquisition[28][223] - Financing cash flows shifted from $308.7 million provided in Q1 2022 to $(29.6) million used in Q1 2023, mainly due to the absence of a bond issuance seen in the prior year and net change in fiduciary liabilities[28][224][225] Consolidated Statements of Stockholders' Equity (Unaudited) This statement outlines changes in the company's equity components, including net income, additional paid-in capital, and non-controlling interests Consolidated Statements of Stockholders' Equity (Unaudited) - As of March 31, 2023 | Metric | December 31, 2022 (in thousands) | March 31, 2023 (in thousands) | | :------------------------------------------------ | :----------------------------- | :---------------------------- | | Total Stockholders' Equity | $817,812 | $851,598 | | Net income attributable to Ryan Specialty Holdings, Inc. | N/A | $13,160 | | Additional Paid-in Capital | $418,123 | $436,898 | | Retained Earnings | $53,988 | $67,148 | | Non-controlling Interests | $339,407 | $343,010 | - Total stockholders' equity increased by $33.8 million from December 31, 2022, to March 31, 2023, reaching $851.6 million[30] - Additional paid-in capital increased by $18.8 million, primarily due to equity-based compensation and exchange of LLC equity for common stock[30] - Retained earnings increased by $13.2 million, reflecting the net income attributable to Ryan Specialty Holdings, Inc. for the period[30] Notes to the Consolidated Financial Statements (Unaudited) This section provides detailed explanations and disclosures supporting the consolidated financial statements, covering accounting policies and specific financial line items Note 1. Basis of Presentation This note describes Ryan Specialty Holdings, Inc.'s nature of operations as a specialty insurance service provider, its corporate structure as a holding company consolidating Ryan Specialty, LLC, and the accounting principles used for its unaudited interim financial statements - Ryan Specialty Holdings, Inc. is a service provider of specialty products and solutions for insurance brokers, agents, and carriers, operating through one segment, Ryan Specialty, without taking on underwriting risk except for an equity method investment[32] - The Company is a holding company that consolidates the financial results of New LLC and Ryan Specialty, LLC (referred to as 'LLC'), where it holds a 43.6% economic interest as of March 31, 2023, and is considered the primary beneficiary of the LLC as a Variable Interest Entity (VIE)[34][38] - The unaudited consolidated interim financial statements are prepared in accordance with U.S. GAAP, and management's estimates and assumptions are used, with no material changes in significant accounting policies from the prior annual report[35][40][41] Note 2. Revenue from Contracts with Customers This note disaggregates the company's net commissions and fees revenue by its three Specialties: Wholesale Brokerage, Binding Authority, and Underwriting Management, and provides details on contract balances Revenue from Contracts with Customers by Specialty - Three Months Ended March 31 | Specialty | 2023 (in thousands) | 2022 (in thousands) | | :---------------------- | :------------------ | :------------------ | | Wholesale Brokerage | $285,850 | $244,827 | | Binding Authority | $69,526 | $62,993 | | Underwriting Management | $92,137 | $78,861 | | Total Net commissions and fees | $447,513 | $386,681 | - Contract assets, primarily from volume-based commissions, decreased from $13.0 million at December 31, 2022, to $9.6 million at March 31, 2023[43] - Contract liabilities related to deferred revenue remained stable at $1.3 million as of March 31, 2023, compared to $1.4 million at December 31, 2022[43] Note 3. Mergers and Acquisitions This note details the company's acquisition of Griffin Underwriting Services in January 2023 and provides an update on the fair value measurement and changes in contingent consideration liabilities related to past acquisitions - On January 3, 2023, Ryan Specialty acquired certain assets of Griffin Underwriting Services for $115.5 million, recognizing $51.4 million in customer relationships (intangible assets) and $64.0 million in goodwill[44] Changes in Contingent Consideration - Three Months Ended March 31 | Metric | 2023 (in thousands) | 2022 (in thousands) | | :-------------------------- | :------------------ | :------------------ | | Change in contingent consideration | $714 | $(1,008) | | Interest expense | $871 | $372 | | Total | $1,585 | $(636) | | Non-current portion of fair value (March 31, 2023) | $22,900 | | Maximum contingent consideration obligation (March 31, 2023) | $40,000 | Note 4. Restructuring This note outlines the ACCELERATE 2025 program initiated in February 2023, detailing its objectives, expected costs, and anticipated annual savings, along with the restructuring expenses incurred during the first quarter of 2023 - In February 2023, the company launched the ACCELERATE 2025 program to drive growth, innovation, and productivity, with expected cumulative costs of approximately $65.0 million through December 31, 2024, and annual savings of $35.0 million in 2025[48] Restructuring Expense Incurred - Three Months Ended March 31, 2023 | Category | Amount (in thousands) | | :-------------------------------- | :------------------ | | Operations and technology optimization | $1,434 | | Compensation and benefits | $659 | | Asset impairment and other termination costs | $586 | | Total | $2,679 | - The restructuring liability balance as of March 31, 2023, was $2.16 million, reflecting accrued costs of $2.68 million offset by payments and non-cash adjustments[50] Note 5. Receivables and Other Current Assets This note provides details on the company's commissions and fees receivable, including the allowance for credit losses, and a breakdown of other current assets Receivables and Allowance for Credit Losses | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :---------------------------- | :----------------------------- | | Commissions and fees receivable – net | $234,557 | $231,423 | | Allowance for expected credit losses (end of period) | $2,086 | $1,980 | Major Classes of Other Current Assets | Category | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :------------------- | :---------------------------- | :----------------------------- | | Prepaid expenses | $14,607 | $21,062 | | Service receivables | $275 | $414 | | Other current receivables | $31,204 | $28,214 | | Total Other current assets | $46,086 | $49,690 | Note 6. Leases This note provides information on the company's operating and finance leases, including lease costs, cash flows from operating leases, and key lease metrics such as weighted average discount rates and remaining lease terms Lease Costs - Three Months Ended March 31 | Lease Cost Category | 2023 (in thousands) | 2022 (in thousands) | | :-------------------------- | :------------------ | :------------------ | | Operating lease costs | $8,406 | $6,327 | | Finance lease costs | $0 | $9 | | Short-term lease costs (Operating) | $238 | $196 | | Sublease income | $(172) | $(91) | | Lease costs – net | $8,472 | $6,443 | - Cash paid for operating leases increased from $6.39 million in Q1 2022 to $7.16 million in Q1 2023[54] - Right-of-use assets obtained in exchange for new operating lease liabilities decreased significantly from $15.92 million in Q1 2022 to $3.40 million in Q1 2023[54] - The weighted average discount rate for operating leases increased from 3.99% in Q1 2022 to 4.83% in Q1 2023, and the weighted average remaining lease term for operating leases increased from 6.5 years to 8.4 years[54] Note 7. Debt This note summarizes the company's outstanding debt, including the Term Loan, Senior Secured Notes, and Revolving Credit Facility, detailing their terms, interest rates, and the transition from LIBOR to SOFR Summary of Outstanding Debt (in thousands) | Debt Type | March 31, 2023 | December 31, 2022 | | :----------------------------------- | :------------- | :---------------- | | Term debt (Term Loan) | $1,569,617 | $1,571,818 | | Senior secured notes (4.38% due 2030) | $395,592 | $399,791 | | Revolving debt | $384 | $392 | | Premium financing notes | $2,369 | $5,718 | | Units subject to mandatory redemption | $4,826 | $4,711 | | Total debt | $1,972,788 | $1,982,487 | | Less: Short-term debt and current portion of long-term debt | $(22,459) | $(30,587) | | Long-term debt | $1,950,329 | $1,951,900 | - The Term Loan principal outstanding was $1,608.8 million as of March 31, 2023, with an interest rate of Adjusted Term SOFR + 3.00% (subject to a 75 basis point floor)[56] - The Revolving Credit Facility has a borrowing capacity of $600.0 million, which was undrawn as of March 31, 2023[57] - The company transitioned its Term Loan and Revolving Credit Facility from LIBOR to Adjusted Term SOFR in Q2 2022 and was in compliance with all debt covenants as of March 31, 2023[58][59][217] Note 8. Stockholders' Equity This note details the company's authorized and outstanding common stock classes (Class A, Class B, Class X) and preferred stock, their voting rights, exchange mechanisms for LLC Common Units, and the composition of non-controlling interests - The company's certificate of incorporation authorizes 1,000,000,000 shares each of Class A and Class B common stock, 10,000,000 shares of Class X common stock, and 500,000,000 shares of preferred stock, all with a $0.001 par value[60] - Class A common stock has one vote per share, while Class B common stock initially has 10 votes per share, both voting as a single class[62] - LLC Unitholders can exchange LLC Common Units for Class A common stock, with an equivalent number of Class B shares canceled upon exchange[63] - As of March 31, 2023, Ryan Specialty Holdings, Inc. owned 43.6% of the economic interests in the LLC, with non-controlling interest holders owning the remaining 56.4%[68] Note 9. Equity-Based Compensation This note describes the company's equity-based compensation plans, including IPO-related awards and annual Incentive Awards (RSUs, Stock Options, RLUs, Class C Incentive Units), their vesting schedules, and the recognized and unrecognized compensation expenses - The Ryan Specialty Holdings, Inc. 2021 Omnibus Incentive Plan governs various equity awards, including stock options, RSUs, and Class C Incentive Units[70] - Awards include IPO-related grants (Restricted Stock, Reload/Staking Options, RSUs, RLUs, Class C Incentive Units) and annual Incentive Awards with diverse vesting schedules (e.g., pro rata over 3-10 years, cliff vesting)[71][72][73][74][76][77][80][81][84][85][87][88][91] - Non-employee directors receive fully vested Director Stock Grants[74] Equity-Based Compensation Expense - Three Months Ended March 31 | Category | 2023 (in thousands) | 2022 (in thousands) | | :------------------------------------------------ | :------------------ | :------------------ | | IPO awards | $11,178 | $26,445 | | Pre-IPO incentive awards | $1,302 | $2,296 | | Post-IPO incentive awards | $5,059 | $505 | | Other expense (Director Stock Grants, Profit Sharing) | $336 | $4,002 | | Total equity-based compensation expense | $17,879 | $23,248 | | Total unrecognized equity-based compensation expense (March 31, 2023) | $198,648 | N/A | Note 10. Earnings Per Share This note provides the calculation of basic and diluted earnings per share for Class A common stock, including a reconciliation of the numerator and denominator, and lists potentially dilutive shares excluded due to their antidilutive effect Earnings Per Share - Three Months Ended March 31 | Metric | 2023 | 2022 | | :------------------------------------------------ | :--- | :--- | | Net income attributable to Ryan Specialty Holdings, Inc. (in thousands) | $13,160 | $6,911 | | Weighted-average shares of Class A common stock outstanding – basic | 111,034,503 | 106,592,836 | | Weighted-average shares of Class A common stock outstanding – diluted | 266,978,224 | 264,121,066 | | Earnings per share of Class A common stock – basic | $0.12 | $0.07 | | Earnings per share of Class A common stock – diluted | $0.11 | $0.06 | - Basic EPS increased by 71.4% YoY, from $0.07 in Q1 2022 to $0.12 in Q1 2023[95] - Diluted EPS increased by 83.3% YoY, from $0.06 in Q1 2022 to $0.11 in Q1 2023[95] - Potentially dilutive shares excluded from diluted EPS calculation due to antidilutive effect in Q1 2023 included 5,405 Incentive RSUs, 495,822 Class C Incentive Units, and 168,282 Incentive Options[95] Note 11. Derivatives This note details the company's interest rate cap agreement, used to manage exposure to interest rate fluctuations on its Term Loan, including its fair value, hedge effectiveness, and the impact on comprehensive income and earnings - The company holds an interest rate cap agreement with a $1,000.0 million notional amount and a 2.75% strike, terminating on December 31, 2025, to hedge its Term Loan interest rate exposure[96] Interest Rate Cap Fair Value and Impact (in thousands) | Metric | March 31, 2023 | December 31, 2022 | | :------------------------------------------------ | :------------- | :---------------- | | Fair value of interest rate cap | $37,200 | $45,900 | | Balance of Accumulated other comprehensive income related to interest rate cap | $16,100 | $22,200 | | Decrease in fair value (Q1 2023) | $8,700 | N/A | | Premium amortization (Q1 2023) | $1,700 | N/A | | Payments reclassified to earnings (Q1 2023) | $4,400 | N/A | Note 12. Variable Interest Entities This note clarifies that Ryan Specialty Holdings, Inc. consolidates Ryan Specialty, LLC as a Variable Interest Entity (VIE), meaning the company's financial statements largely reflect the LLC's performance, with specific exceptions for certain assets and liabilities attributable solely to the holding company - Ryan Specialty Holdings, Inc. consolidates the LLC as a VIE because it is the primary beneficiary, having control over its activities and the obligation to absorb losses and receive benefits[38][98] - The company's financial position, performance, and cash flows effectively represent those of the LLC[98] - Exceptions attributable solely to Ryan Specialty Holdings, Inc. include specific amounts of Cash and cash equivalents, Accounts payable and accrued liabilities, Tax Receivable Agreement liabilities, and Deferred tax assets[98] Note 13. Fair Value Measurements This note describes the company's fair value measurements, categorizing assets and liabilities into a three-tier hierarchy (Level 1, 2, 3) and detailing the valuation methodologies for derivative instruments like interest rate caps and contingent consideration obligations - The company uses a three-tier fair value hierarchy: Level 1 for quoted prices in active markets, Level 2 for observable inputs other than quoted prices, and Level 3 for unobservable inputs requiring significant judgment[99][100] - The fair value of the interest rate cap is determined using Level 2 inputs, based on discounting future expected cash receipts derived from observable market interest rate curves and volatilities[102] - Contingent consideration obligations are classified as Level 3, valued using Monte Carlo simulations based on management's financial projections, risk-free rates, expected volatility, credit spread, and a risk-adjusted discount rate (9.87% as of March 31, 2023)[103] Assets and Liabilities Measured at Fair Value on a Recurring Basis (in thousands) | Metric | Level 1 | Level 2 | Level 3 | Total (March 31, 2023) | | :------------------------ | :------ | :------ | :------ | :--------------------- | | Interest rate cap (Assets) | $0 | $37,209 | $0 | $37,209 | | Contingent consideration (Liabilities) | $0 | $0 | $22,924 | $22,924 | Note 14. Commitments and Contingencies This note addresses the company's legal commitments and contingencies, primarily focusing on Errors and Omissions (E&O) exposure and a specific issue regarding insurance policies placed through an unsatisfactory trading partner, including related loss contingencies and recovery estimates - The company faces ordinary course E&O exposure, with insurance coverage up to $100.0 million in excess of a $2.5 million per claim retention[108][109] - Loss contingencies for outstanding E&O matters were $13.0 million as of March 31, 2023, down from $26.1 million at December 31, 2022[109] - A specific issue involved placing policies through an unsatisfactory trading partner, leading to an estimated loss contingency of $9.7 million as of March 31, 2023 (down from $23.1 million at Dec 31, 2022) for Replacement Costs[111] - A probable recovery of $22.6 million from E&O insurance carriers for this specific issue was recorded as of March 31, 2023, in excess of the $2.5 million retention[111] Note 15. Related Parties This note details the company's related party relationships, including its investment in Ryan Investment Holdings (RIH) and Geneva Re, service agreements with Geneva Re, and corporate jet leasing arrangements involving the Founder, Patrick G. Ryan - Ryan Specialty holds a 47% interest in Ryan Investment Holdings (RIH), which in turn has a 50% non-controlling interest in Geneva Re Partners, LLC (GRP), which wholly owns Geneva Re, Ltd[114] - The company has service agreements with Geneva Re, providing administrative and underwriting services, earning $0.4 million in revenue for Q1 2023[116] - The company charters executive jets from Executive Jet Management (EJM), with the Founder, Patrick G. Ryan, indirectly owning aircraft leased to EJM, resulting in a discount for the company[117][118] - Expense related to business usage of aircraft was $0.5 million for Q1 2023, up from $0.2 million in Q1 2022[119] Note 16. Income Taxes This note discusses the company's income tax expense, effective tax rate, deferred tax assets and liabilities, and the Tax Receivable Agreement (TRA) liabilities, including the estimated future payments under the TRA Income Tax Metrics - Three Months Ended March 31 | Metric | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Effective tax rate | 14.7% | (33.2)% | | Income tax expense (benefit) (in thousands) | $6,295 | $(4,503) | | Deferred tax assets (March 31, 2023) (in thousands) | $402,476 | N/A | | Deferred tax liabilities (March 31, 2023) (in thousands) | $618 | N/A | - The effective tax rate for Q1 2023 was 14.7%, differing from the 21% statutory rate primarily due to income attributable to non-controlling interests, while Q1 2022 had a (33.2)% benefit due to state tax rate changes and nondeductible expenses[121] - Deferred tax assets increased to $402.5 million as of March 31, 2023, mainly from LLC Common Unit exchanges[123] - Tax Receivable Agreement (TRA) liabilities increased by $8.3 million in Q1 2023 to $303.6 million, with estimated future payments of $303.6 million in aggregate based on current projections[125][126] Note 17. Supplemental Cash Flow Information This note provides supplemental cash flow information, including cash paid for interest and income taxes, and details on non-cash investing and financing activities such as members' tax distributions and Tax Receivable Agreement liabilities Supplemental Cash Flow Information - Three Months Ended March 31 | Metric | 2023 (in thousands) | 2022 (in thousands) | | :------------------------------------ | :------------------ | :------------------ | | Cash paid for interest | $40,136 | $15,668 | | Cash paid for income taxes | $1,244 | $2,206 | | Members' tax distributions declared but unpaid | $12,272 | $7,356 | | Tax Receivable Agreement liabilities (non-cash) | $8,282 | $880 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, results of operations, liquidity, and cash flows for the three months ended March 31, 2023, compared to the prior year Overview This section provides a high-level description of Ryan Specialty's business as a specialty insurance service provider and its focus on the Excess and Surplus market - Ryan Specialty is a service provider of specialty products and solutions for insurance brokers, agents, and carriers, offering distribution, underwriting, product development, administration, and risk management services[133] - The company primarily operates in the Excess and Surplus (E&S) market, which offers greater flexibility in terms, conditions, and rates compared to the Admitted market, enabling unique solutions for complex risks[134] Significant Events and Transactions This section highlights key corporate actions and strategic initiatives, including the ACCELERATE 2025 program and the Griffin Underwriting Services acquisition - The company initiated the ACCELERATE 2025 program in Q1 2023 to drive growth, innovation, and productivity, expecting $65.0 million in cumulative one-time charges through 2024 and $35.0 million in annual savings by 2025[137][138] - Restructuring costs of $2.7 million were incurred in Q1 2023, with $0.7 million workforce-related and the remainder in general and administrative costs[139] - On January 3, 2023, the company completed the acquisition of Griffin Underwriting Services, a binding authority specialist and wholesale insurance broker[140] Key Factors Affecting Our Performance This section identifies the primary internal and external drivers influencing the company's financial and operational results, including strategic initiatives and market conditions - The company's performance is driven by strategic acquisitions, deepening relationships with retail broker trading partners, and building its National Binding Authority Specialty[142][143][144] - Investments in operations and growth, along with the ability to generate commissions regardless of E&S market conditions, are crucial[145][146] - Macroeconomic conditions, such as rising interest rates impacting construction and M&A activity, and the growth of the E&S market due to complex risks (e.g., natural disasters, cyber threats), significantly affect performance[148][149][150] Components of Results of Operations This section breaks down the various revenue streams and expense categories that constitute the company's financial performance - Revenue primarily consists of Net Commissions and Fees from Wholesale Brokerage, Binding Authority, and Underwriting Management, including supplemental and contingent commissions, and Fiduciary Investment Income[152][153][154] - Expenses include Compensation and Benefits (salary, incentives, equity-based compensation), General and Administrative (office, professional fees), Amortization of intangible assets, Interest Expense (on debt, interest rate cap amortization), Other Non-Operating Loss (Income), Income Tax Expense, and Non-Controlling Interests[155][156][157][158][159][160][161][162] Results of Operations (Comparison of the Three Months Ended March 31, 2023 and 2022) This section provides a detailed comparative analysis of the company's financial performance, highlighting changes in revenue and expense categories year-over-year Revenue Performance - Three Months Ended March 31 | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (YoY) | | :-------------------------- | :------------------ | :------------------ | :----------- | | Net commissions and fees | $447,513 | $386,681 | +15.7% | | Fiduciary investment income | $10,086 | $209 | +4725.8% | | Total revenue | $457,599 | $386,890 | +18.3% | | Wholesale Brokerage | $285,850 | $244,827 | +16.8% | | Binding Authority | $69,526 | $62,993 | +10.4% | | Underwriting Management | $92,137 | $78,861 | +16.8% | | Supplemental and contingent commissions | $26,331 | $20,098 | +31.0% | Expense Performance - Three Months Ended March 31 | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (YoY) | | :----------------------------------- | :------------------ | :------------------ | :----------- | | Compensation and benefits | $307,722 | $274,274 | +12.2% | | General and administrative | $51,699 | $42,361 | +22.0% | | Amortization | $25,185 | $26,663 | -5.5% | | Interest expense, net | $29,468 | $21,752 | +35.5% | | Other non-operating loss (income) | $(138) | $7,521 | -101.8% | | Income tax expense (benefit) | $6,295 | $(4,503) | -239.8% | | Net income | $36,457 | $18,076 | +101.7% | - Compensation and benefits expense ratio decreased from 70.9% to 67.2% YoY, despite a 12.2% increase in absolute terms, driven by revenue growth and a decrease in acquisition-related long-term incentive and IPO-related compensation[172] - General and administrative expense ratio increased from 10.9% to 11.3% YoY, primarily due to a $4.6 million increase in travel and entertainment expenses returning to normalized levels[173] - Interest expense, net, increased by 35.5% due to the issuance of Senior Secured Notes in February 2022 and rising floating interest rates on the Term Loan[175] Non-GAAP Financial Measures and Key Performance Indicators This section presents and reconciles non-GAAP financial measures and key performance indicators, offering additional insights into the company's operational performance Non-GAAP Financial Measures - Three Months Ended March 31 | Metric | 2023 | 2022 | | :------------------------------------ | :----- | :----- | | Organic revenue growth rate | 12.9% | 20.1% | | Adjusted compensation and benefits expense (in thousands) | $285,885 | $241,331 | | Adjusted compensation and benefits expense ratio | 62.5% | 62.4% | | Adjusted general and administrative expense (in thousands) | $46,699 | $38,296 | | Adjusted general and administrative expense ratio | 10.2% | 9.9% | | Adjusted EBITDAC (in thousands) | $125,015 | $107,263 | | Adjusted EBITDAC margin | 27.3% | 27.7% | | Adjusted net income (in thousands) | $71,785 | $64,732 | | Adjusted net income margin | 15.7% | 16.7% | | Adjusted diluted earnings per share | $0.26 | $0.24 | - Organic revenue growth rate decreased from 20.1% in Q1 2022 to 12.9% in Q1 2023[164] - Adjusted EBITDAC increased by 16.5% YoY to $125.0 million, while Adjusted EBITDAC margin slightly decreased from 27.7% to 27.3%[164] - Adjusted net income increased by 10.9% YoY to $71.8 million, but Adjusted net income margin decreased from 16.7% to 15.7%[164] Liquidity and Capital Resources This section discusses the company's sources and uses of cash, its debt capacity, and its ability to meet short-term and long-term financial obligations - Primary liquidity sources include cash and cash equivalents, cash flows from operations, and debt capacity under the Revolving Credit Facility, Term Loan, and Senior Secured Notes[207] - Primary uses of liquidity are operating expenses, working capital, business combinations, capital expenditures, TRA obligations, taxes, and LLC Unitholder distributions[209] - Fiduciary cash and receivables, totaling $2.48 billion as of March 31, 2023, cannot be used for general corporate purposes, though $71.5 million of cash and cash equivalents was available from fiduciary accounts for corporate use[25][211] - The company expects sufficient financial resources for the next 12 months, with the ability to borrow under its $600.0 million Revolving Credit Facility and access capital markets for longer-term funding[212][214] - Future payments under the Tax Receivable Agreement (TRA) are estimated at $303.6 million in aggregate as of March 31, 2023, expected to be funded by tax distributions from the LLC[220][221] Contractual Obligations and Commitments This section details the company's future cash outflow obligations arising from long-term incentive compensation and contingent consideration agreements Projected Future Cash Outflows for Long-term Incentive Compensation Agreements (in thousands) | Year | Amount | | :--- | :----- | | 2023 | $0 | | 2024 | $0 | | 2025 | $0 | | 2026 | $6,666 | | Thereafter | $265 | | Total projected future cash outflows | $6,931 | Projected Future Cash Outflows for Contingent Consideration (in thousands) | Year | Amount | | :--- | :----- | | 2023 | $0 | | 2024 | $0 | | 2025 | $27,849 | | 2026 | $0 | | Thereafter | $0 | | Total projected future cash outflows | $27,849 | Critical Accounting Policies and Estimates This section identifies the accounting policies that require significant management judgment and assumptions, which could materially affect financial reporting - Critical accounting policies involve significant judgments and assumptions that could materially impact financial results[237] - Key critical accounting policies include revenue recognition, business combinations, goodwill and intangibles, income taxes, and tax receivable agreement liabilities[238] Recent Accounting Pronouncements This section confirms that there have been no material changes to the company's significant accounting policies since the prior annual report - There have been no material changes to the company's significant accounting policies from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[41][240] Item 3. Quantitative and Qualitative Disclosure About Market Risk This section discusses the company's exposure to market risks, specifically foreign currency risk and interest rate risk, and how these factors could impact its financial performance Foreign Currency Risk This section assesses the company's exposure to fluctuations in foreign exchange rates and its potential impact on financial results - Approximately 3% of revenues for the three months ended March 31, 2023, were generated from activities in the United Kingdom, Europe, and Canada[243] - The company is exposed to currency risk from exchange rate changes between the US Dollar and various foreign currencies, but this exposure is considered immaterial[243] Interest Rate Risk This section evaluates the company's sensitivity to changes in interest rates, particularly concerning fiduciary investment income and floating-rate debt - Fiduciary investment income is sensitive to changes in short-term interest rates[245] - The company has $1,608.8 million outstanding on its Term Loan, which bears a floating interest rate (Adjusted Term SOFR + 3.00%, subject to a 0.75% floor)[246] - An interest rate cap agreement with a $1,000.0 million notional amount and a 2.75% strike, terminating on December 31, 2025, is in place to manage interest rate fluctuations on the Term Loan[247] Item 4. Controls and Procedures This section addresses the effectiveness of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting, while also acknowledging the inherent limitations of any control system Evaluation of Disclosure Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as assessed by its principal executive and financial officers - As of March 31, 2023, the company's principal executive officer and principal financial officer concluded that its disclosure controls and procedures were effective at the reasonable assurance level[251] Changes in Internal Control This section reports on any material changes to the company's internal control over financial reporting during the reporting period - There have been no material changes in internal control over financial reporting during the quarter ended March 31, 2023[253] Inherent Limitations of Internal Control Over Financial Reporting This section acknowledges that internal controls provide reasonable assurance but cannot guarantee the prevention or detection of all errors or fraud - Management acknowledges that disclosure controls and procedures provide reasonable, not absolute, assurance and may not prevent or detect all errors and fraud[255] PART II. OTHER INFORMATION This section covers additional disclosures not included in the financial statements, such as legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings This section states that the company is involved in various legal proceedings in the ordinary course of business but does not currently anticipate any litigation outcomes that would have a material adverse effect on its business or financial condition - The company is not presently a party to any litigation that, if determined adversely, would individually or collectively have a material adverse effect on its business, operating results, cash flows, or financial condition[257] Item 1A. Risk Factors This section supplements the risk factors disclosed in the annual report, specifically highlighting the risk that the company may not achieve the intended results of its ACCELERATE 2025 restructuring program, which could negatively impact its business and financial performance - A key risk factor is the potential inability to achieve the intended cost savings, operating efficiencies, or other expected benefits from the ACCELERATE 2025 restructuring program[259] - Failure to successfully execute the ACCELERATE 2025 program could result from challenges in organizational change, economic conditions, changes in insurance markets, unanticipated costs, or loss of key personnel, potentially having a material adverse effect on the business[259] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section indicates that there were no unregistered sales of equity securities or use of proceeds to report for the period - There were no unregistered sales of equity securities or use of proceeds to report[260] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities to report for the period - There were no defaults upon senior securities to report[261] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to the registrant[262] Item 5. Other Information This section states that there is no other information to report for the period - There is no other information to report[263] Item 6. Exhibits This section provides a comprehensive list of all exhibits filed or furnished as part of the Quarterly Report on Form 10-Q, including corporate governance documents, debt instruments, incentive plans, and certifications - The report includes various exhibits such as the Amended and Restated Certificate of Incorporation, Registration Rights Agreement, Indenture for Senior Secured Notes, Tax Receivable Agreement, Omnibus Incentive Plan, and certifications from the CEO and CFO[264][265]