RYAN SPECIALTY HOLDINGS, INC. The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report on Form 10-K. 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 such forward-looking statements as a result of various factors, including those discussed below and in the sections entitled "Risk Factors" and "Information Concerning Forward-Looking Statements". The following discussion provides commentary on the financial results derived from our audited financial statements for the years endedDecember 31, 2021 , 2020 and 2019 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 58 -------------------------------------------------------------------------------- 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.
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 the 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 through the continued advancement of the integration and Restructuring Plan and realized 40.7% revenue growth and 22.4% organic revenue growth for the year endedDecember 31, 2021 . While we believe our business and operations have thus far performed at a high level of efficiency and achieved historic results throughout the pandemic, there are no comparable recent events which may provide guidance as to the ultimate effect of the spread of COVID-19 and a global pandemic. As a result, the final impact of the pandemic or a similar health epidemic remains uncertain, particularly if 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 this Annual Report 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 consolidated audited financial statements in this Annual Report for further discussion. We began recognizing costs associated with the Restructuring Plan in the third quarter of 2020. For the year endedDecember 31, 2021 , we incurred restructuring costs of$14.4 million and cumulative restructuring costs of 59 --------------------------------------------------------------------------------$25.2 million since the inception of the Restructuring Plan. These costs are offset by realized respective savings of approximately$23.3 million for the year endedDecember 31, 2021 . Of the cumulative$25.2 million costs,$20.1 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.
Acquisitions
During the fourth quarter of 2021 we completed two strategic acquisitions which we believe complement our product capabilities, enhance our human capital, and provide us access to new markets in new geographies. OnDecember 1, 2021 , we acquiredCrouse and Associates Insurance Brokers, Inc. ("Crouse"). Crouse providesWholesale Brokerage and Binding Authority capabilities specializing in transportation, as well as excess and general liability and other property and casualty risks, and is headquartered inSan Francisco, California . OnDecember 31, 2021 , we acquired certain assets ofKeystone Risk Partners, LLC ("Keystone"). Keystone offers a suite of alternative risk insurance solutions, including customized captive insurance and other risk management services, and is headquartered inMedia, Pennsylvania .
See "Note 4, Merger and Acquisition Activity" of the audited consolidated financial statements in this Annual Report for further discussion.
Key Factors Affecting Our PerformanceOur historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to:
Pursue Strategic Acquisitions
We have successfully integrated businesses complementary to our own to increase both our distribution reach and our product capabilities. We continuously evaluate acquisitions and intend to further pursue targeted acquisitions that complement our product capabilities or provide us access to new markets. We have previously made and intend to continue making acquisitions with the objective of enhancing our human capital and product capabilities, entering natural adjacencies and expanding our geographic footprint. Our ability to successfully pursue strategic acquisitions is dependent upon a number of factors, including sustained execution of a disciplined and selective acquisition strategy and our ability to effectively integrate targeted companies or assets and grow our business. We do not have agreements or commitments for any new 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 partners and increase sales is dependent upon a number of factors, including client satisfaction with our distribution reach and our product capabilities, competition, pricing, economic conditions and spending on our product offerings.
Build Our National Binding Authority Specialty
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.
60
--------------------------------------------------------------------------------Invest in Operation 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 doing 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 Commission Regardless of the State of the E&S Market
We earn commissions, which are calculated as a percentage of the total insurance policy premium, and fees. A softening of the insurance market or specialty lines that are our focus, characterized by a period of declining premium rates, could negatively impact our profitability.
Leverage the Growth of the E&S Market
The growing relevance of the E&S market has been driven by the rapid emergence of large, complex and high-hazard risks across many lines of insurance. This trend continued in 2021 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 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. 61 --------------------------------------------------------------------------------
Summary of Financial Performance Highlights
Year Ended December 31,
(in thousands, except percentages and per
share data) 2021 2020 2019
GAAP financial measures
Total revenue $ 1,432,771 $ 1,018,274 $ 765,111
Compensation and benefits 991,618 686,155 494,391
General and administrative 138,955 107,381 118,179
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
Group Holdings, Inc. 65,873 68,104 64,166
Compensation and Benefits Expense Ratio (1) 69.2 % 67.4 % 64.6 % General and Administrative Expense Ratio (2) 9.7 % 10.5 % 15.4 % Net Income Margin 4.0 % 6.9 % 8.2 % Loss per Share (3)$ (0.07 ) - - Diluted Loss per Share (3)$ (0.07 ) - - Non-GAAP financial measures* Organic Revenue Growth Rate 22.4 % 20.4 % 17.5 % Adjusted Compensation and Benefits Expense 846,563 632,241
471,948
Adjusted Compensation and Benefits Expense Ratio 59.1 % 62.1 % 61.7 % Adjusted General and Administrative Expense 125,977 92,525
101,736
Adjusted General and Administrative Expense Ratio 8.8 % 9.1 % 13.3 % Adjusted EBITDAC 460,231 293,508 191,427 Adjusted EBITDAC Margin 32.1 % 28.8 % 25.0 % Adjusted Net Income 290,117 185,426 114,642 Adjusted Net Income Margin 20.2 % 18.2 % 15.0 % Adjusted Diluted Earnings per Share$ 1.08 - - * 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 Expense Ratio is defined as Compensation and benefits expense divided by Total revenue.
(2)
General and Administrative Expense Ratio is defined as General and administrative expense divided by Total revenue.
(3)
See "Note 15, Loss Per Share" of the audited consolidated financial statements in this Annual Report for further discussion of how these metrics are calculated.
Comparison of the Year Ended December 31, 2021 and 2020•
Revenue increased
•
Compensation and benefits expense increased
•
General and administrative expense increased
•
Total operating expenses increased
•
Operating income increased
62
--------------------------------------------------------------------------------•
Net Income decreased by
•
Net Income Margin was 4.0% for the year ended
•
Loss per share and Diluted loss per share were
•
Organic Revenue Growth Rate for the year ended
•
Adjusted Compensation and Benefits Expense increased$214.3 million , or 33.9%, and the Adjusted Compensation and Benefits Expense Ratio decreased 3.0% from 62.1% to 59.1% period-over-period - see "Non-GAAP Financial Measures and Key Performance Indicators" for further information.
•
Adjusted General and Administrative Expense increased$33.5 million , or 36.2% period-over-period, and the Adjusted General and Administrative Expense Ratio decreased 0.3%, from 9.1% to 8.8% - see "Non-GAAP Financial Measures and Key Performance Indicators" for further information.
•
Adjusted EBITDAC, increased
•
Adjusted EBITDAC Margin increased 3.3% period-over-period from 28.8% to 32.1% -see "Non-GAAP Financial Measures and Key Performance Indicators" for further information.
•
Adjusted Net Income and Adjusted Net Income Margin increased to$290.1 million and 20.2%, respectively, from$185.4 million and 18.2% in the prior period-see "Non-GAAP Financial Measures and Key Performance Indicators" for further information.
•
Adjusted Diluted Earnings per Share was
Comparison of the Year Ended December 31, 2020 and 2019•
Revenue increased
•
Compensation and benefits expense increased
•
General and administrative expense decreased
•
Total operating expenses increased
•
Operating income increased
•
Net Income increased
•
Net Income Margin was 6.9% for the year ended
•
Organic Revenue Growth Rate for the year ended
•
Adjusted Compensation and Benefits Expense increased$160.3 million , or 34.0% and the Adjusted Compensation and Benefits Expense Ratio increased 0.4% from 61.7% to 62.1% period-over-period - see "Non-GAAP Financial Measures and Key Performance Indicators" for further information.
•
Adjusted General and Administrative Expense decreased$9.2 million , or 9.1%, and the Adjusted General and Administrative Expense Ratio decreased 4.2% from 13.3% to 9.1% period-over-period - see "Non-GAAP Financial Measures and Key Performance Indicators" for further information.
•
Adjusted EBITDAC increased
63
--------------------------------------------------------------------------------•
Adjusted EBITDAC Margin increased 3.8% period-over-period from 25.0% to 28.8% -see "Non-GAAP Financial Measures and Key Performance Indicators" for further information.
•
Adjusted Net Income and Adjusted Net Income Margin increased to$185.4 million and 18.2%, respectively, from$114.6 million and 15.0% in the prior period-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 that 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.
Fiduciary 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.
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.
64
--------------------------------------------------------------------------------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 we acquired in connection with our acquisitions. Intangible assets consist of customer relationships, trade names, and internally developed software.
Interest
Interest expense consists of interest payable on indebtedness, imputed interest on finance leases and contingent consideration, and amortization of deferred debt issuance costs.
Other Non-Operating Income (Loss)
Other non-operating income (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 change in fair value of interest rate swaps which were extinguished in 2020 and the expense associated with the extinguishment of a portion of our deferred debt issuance costs on the term debt in the first quarter of 2021.
Income Tax Expense
Income tax expense includes tax on the Company's allocable share of any net
taxable income from
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 12, Stockholders' and Members' Equity of the audited consolidated financial statements in this Annual Report for more information. 65 -------------------------------------------------------------------------------- Results of Operations
Below is a summary table of the financial results and Non-GAAP measures that we find relevant to our business operations:
Year Ended December 31,
(in thousands, except percentages and per share data) 2021 2020 2019 Revenue Net commissions and fees$ 1,432,179 $ 1,016,685 $ 758,448 Fiduciary investment income 592 1,589 6,663 Total revenue$ 1,432,771 $ 1,018,274 $ 765,111 Expenses Compensation and benefits 991,618 686,155 494,391 General and administrative 138,955 107,381 118,179 Amortization 107,877 63,567 48,301 Depreciation 4,806 3,934 4,797 Change in contingent consideration 2,891 (1,301 ) (1,595 ) Total operating expenses$ 1,246,147 $ 859,736 $ 664,073 Operating income$ 186,624 $ 158,538 $ 101,038 Interest expense 79,354 47,243 35,546 Income (loss) from equity method investment in related party (759 ) 440 (978 ) Other non-operating income (loss) (44,947 ) (32,270 ) 3,469 Income before income taxes$ 61,564 $ 79,465 $ 67,983 Income tax expense 4,932 8,952 4,926 Net income$ 56,632 $ 70,513 $ 63,057 GAAP financial measures Revenue$ 1,432,771 $ 1,018,274 $ 765,111 Compensation and benefits 991,618 686,155 494,391 General and administrative 138,955 107,381 118,179 Net Income 56,632 70,513 63,057 Compensation and Benefits Expense Ratio 69.2 % 67.4 % 64.6 % General and Administrative Expense Ratio 9.7 % 10.5 % 15.4 % Net Income Margin 4.0 % 6.9 % 8.2 % Loss per Share$ (0.07 ) - - Diluted Loss per Share$ (0.07 ) - - Non-GAAP financial measures* Organic Revenue Growth Rate 22.4 % 20.4 % 17.5 % Adjusted Compensation and Benefits Expense$ 846,563 $ 632,241 $ 471,948 Adjusted Compensation and Benefits Expense Ratio 59.1 % 62.1 % 61.7 % Adjusted General and Administrative Expense$ 125,977 $ 92,525 $ 101,736 Adjusted General and Administrative Expense Ratio 8.8 % 9.1 % 13.3 % Adjusted EBITDAC$ 460,231 $ 293,508 $ 191,427 Adjusted EBITDAC Margin 32.1 % 28.8 % 25.0 % Adjusted Net Income$ 290,117 $ 185,426 $ 114,642 Adjusted Net Income Margin 20.2 % 18.2 % 15.0 % Adjusted Diluted Earnings per Share$ 1.08 - - * 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. 66 --------------------------------------------------------------------------------
Comparison of the Year Ended December 31, 2021 and 2020
Revenue
Net Commissions and Fees
Net commissions and fees increased by$415.5 million or 40.9% from$1,016.7 million to$1,432.2 million for the year endedDecember 31, 2021 as compared to the same period in the prior year. The two main drivers of the revenue increase are 18.3% growth from the All Risks and Crouse acquisitions and 22.4% of organic revenue growth. Year Ended December 31, Period over Period (in thousands, except % of % of percentages) 2021 total 2020 total Change Wholesale Brokerage$ 931,979 65.1 %$ 673,090 66.2 %$ 258,889 38.5 % Binding Authority 209,622 14.6 144,837 14.2 64,785 44.7 Underwriting Management 290,578 20.3 198,758 19.6 91,820 46.2 Total Net commissions and fees$ 1,432,179 $ 1,016,685 $ 415,494 40.9 % Wholesale Brokerage net commissions and fees increased by$258.9 million or 38.5% period-over-period, primarily due to strong organic growth within the Specialty as well as contributions from the All Risks Acquisition through August and Crouse in December. All Risks contributed to the organic growth calculation for the period September throughDecember 2021 . Binding Authority net commissions and fees increased by$64.8 million or 44.7% period-over-period, primarily due to strong organic growth within the Specialty as well as contributions from the All Risks Acquisition through August and Crouse in December. All Risks contributed to the organic growth calculation for the period September throughDecember 2021 . Underwriting Management net commissions and fees increased by$91.8 million or 46.2% period-over-period, primarily due to strong organic growth within the Specialty as well as contributions from the All Risks Acquisition through August. All Risks contributed to the organic growth calculation for the period September throughDecember 2021 . In 2021, certain business previously transacted byRyan Specialty's underwriting managers was renegotiated to a wholesale binding authority contract. For comparability, revenues in Binding Authority increased by$13.0 million in 2020 with an offset to revenues in Underwriting Management.
The following table sets forth our revenue by type of commission and fees:
Year Ended December 31, Period over Period
(in thousands, except % of % of
percentages) 2021 total 2020 total Change Net commissions and policy fees$ 1,370,955 95.7 %$ 968,551 95.3 %$ 402,404 41.5 % Supplemental and contingent commissions 36,750 2.6 30,835 3.0 5,915 19.2 Loss mitigation and other fees 24,474 1.7 17,299 1.7 7,175 41.5 Total Net commissions and fees$ 1,432,179 $ 1,016,685 $ 415,494 40.9 % Net commissions and policy fees grew 41.5%, slightly greater than the overall net commissions and fee revenue growth of 40.9% for the year endedDecember 31, 2021 as compared to 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. Net commissions and policy fees continue to represent approximately 95% of total net commissions and fees period-over-period. 67 --------------------------------------------------------------------------------
Supplemental and contingent commissions increased 19.2% period-over-period driven by the performance of risks placed on eligible business and the addition to the supplemental and contingent commissions contributed by the All Risks Acquisition. Supplemental and contingent commissions continue to represent approximately 5% of total commissions and fees period-over-period.
Loss mitigation and other fees grew 41.5% period-over-period primarily due to increased capital markets activity in 2021. These fees continue to represent approximately 2% of total net commissions and fees period-over-period.
Expenses
Compensation and Benefits
Compensation and benefits expense increased by$305.4 million or 44.5% from$686.2 million to$991.6 million for the year endedDecember 31, 2021 compared to the same period in 2020. The following were the principal drivers of this increase:
•
Commissions increased
•
A$75.9 million increase from IPO 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;
•
A
•
The remaining$65.7 million period-over-period increase was driven by (i) the addition of 840 employees through the All Risks Acquisition, which closed onSeptember 1, 2020 and (ii) growth in the business. Overall headcount increased to 3,546 full-time employees as ofDecember 31, 2021 from 3,313 as ofDecember 31, 2020 . The increase in Compensation and benefits expense was partially offset by$12.3 million of net savings related to the Restructuring Plan, which represents approximately$22.2 million of work-force related savings less one-time work-force related expense of$9.9 million for the year endedDecember 31, 2021 (see "Significant Events and Transactions-2020 Restructuring Plan" for further information). The net impact of revenue growth and the factors above resulted in a Compensation and Benefits Expense Ratio increase of 1.8% from 67.4% to 69.2% period-over-period. We expect to continue experiencing a general rise in commissions, salaries, incentives and benefits expense commensurate with our expected growth in business volume, revenue and headcount.
General and Administrative
General and administrative expense increased by$31.6 million or 29.4% from$107.4 million to$139.0 million for the year endedDecember 31, 2021 as compared to 2020. Travel and entertainment contributed$5.8 million to the period-over-period increase, however the current period expense was limited due to travel restrictions from the COVID-19 pandemic. As travel restrictions are lifted we expect travel and entertainment expense to increase. Insurance expense contributed$5.1 million to the period-over-period increase as a result of revenue expansion, the All Risks Acquisition, and increased costs associated with being a public company. The remaining increase is a result of revenue expansion and the All Risks Acquisition. Such expenses incurred to accommodate both organic and inorganic revenue growth include IT, occupancy, and professional services. The net impact of revenue growth 68 --------------------------------------------------------------------------------
and the factors above resulted in a General and Administrative Expense Ratio decrease of 0.8% from 10.5% to 9.7% period-over-period.
Amortization
Amortization expense increased by$44.3 million or 69.7% from$63.6 million to$107.9 million for the year endedDecember 31, 2021 compared to the prior year. The main driver was approximately$48.4 million of additional amortization from acquired intangibles from the All Risks Acquisition in 2021 compared to 2020. Our intangible assets decreased by$30.8 million as ofDecember 31, 2021 as compared toDecember 31, 2020 .
Interest
Interest expense increased$32.2 million or 68.2% from$47.2 million to$79.4 million for the year endedDecember 31, 2021 compared to the prior year. The main driver of the change in interest expense for the year endedDecember 31, 2021 was an increase in debt, which was undertaken in connection with the All Risks Acquisition completed inSeptember 2020 .
Other Non-Operating Income (Loss)
Other non-operating loss increased by$12.6 million to a loss of$44.9 million for the year endedDecember 31, 2021 as compared to a loss of$32.3 million in the same period in the prior year. The main driver of the loss was a$36.9 million change in the fair value of the embedded derivatives of our Redeemable Preferred Units in 2021 compared to a$28.7 million change in 2020. The loss recorded in 2021 represents the recognition of the remaining make whole charge for the Redeemable Preferred Units, which were redeemed in connection with the Organizational Transactions and IPO. The second driver of this increase was$8.6 million of debt issuance costs written off due to the extinguishment of a portion of the term debt in connection with the repricing in the first quarter of 2021, which is partially offset by a loss on the interest rate swaps for the year endedDecember 31, 2020 . The outstanding interest rate swaps were settled during 2020. Income Before Income Taxes
Due to the factors above, Income before income taxes decreased
Income Tax Expense
Income tax expense decreased$4.1 million from$9.0 million to$4.9 million for the year endedDecember 31, 2021 as compared to the same period in the prior year as a result of the liquidation of one of our taxable C-Corporation subsidiaries in the fourth quarter of 2020 and an audit by a local taxing jurisdiction in 2020.
Net Income
Net income decreased$13.9 million from$70.5 million to$56.6 million for the year endedDecember 31, 2021 compared to the same period in the prior year as a result of the factors described above. 69 --------------------------------------------------------------------------------
Comparison of the Year Ended December 31, 2020 and 2019
Revenue
Net Commissions and Fees
Net commissions and fees increased by$258.2 million or 34% from$758.4 million to$1,016.7 million for the year endedDecember 31, 2020 as compared to the prior year. Our Organic Revenue Growth Rate was 20.4% on a consolidated basis for the year endedDecember 31, 2020 . Year Ended December 31, Period over Period (in thousands, except % of % of percentages) 2020 total 2019 total Change Wholesale Brokerage$ 673,090 66.2 %$ 508,503 67.0 %$ 164,587 32.4 % Binding Authority 144,837 14.2 103,853 13.7 40,984 39.5 Underwriting Management 198,758 19.6 146,092 19.3 52,666 36.0 Total Net commissions and fees$ 1,016,685 $ 758,448 $ 258,237 34.0 %
Wholesale Brokerage net commissions and fees increased by
Binding Authority net commissions and fees increased by$41.0 million or 39.5% for the year endedDecember 31, 2020 as compared to 2019. In addition to strong organic growth in this Specialty, an increase in revenue of$13.8 million was related to the All Risks Acquisition in 2020 and$13.4 million related to other acquisitions in 2019. Underwriting Management net commissions and fees increased by$52.7 million or 36.0% for the year endedDecember 31, 2020 as compared to 2019. In addition to strong organic growth in this Specialty, the All Risks Acquisition represented$22.0 million of growth in 2020 through four months of contribution. Ryan Re, our Reinsurance MGU, is presented on a fully consolidated basis in all periods and contributed organic revenue growth of$15.1 million in 2020. We initially owned 47% of Ryan Re when it began operations in 2019 and we purchased the remaining 53% non-controlling interest in Ryan Re during the first quarter of 2021. In 2021, certain business previously transacted byRyan Specialty's underwriting managers was renegotiated to a wholesale binding authority contract. For comparability, revenues in Binding Authority increased by$13.0 million and$8.9 million in 2020 and 2019, respectively, with an offset to revenues in Underwriting Management.
The following table sets forth our revenue by type of commission and fees:
Year Ended December 31, Period over Period
(in thousands, except % of % of
percentages) 2020 total 2019 total Change
Net commissions and
policy fees $ 968,551 95.3 % $ 719,288 94.9 % $ 249,263 34.7 %
Supplemental and
contingent
commissions 30,835 3.0 22,884 3.0 7,951 34.7
Loss mitigation and
other fees 17,299 1.7 16,276 2.1 1,023 6.3
Total Net commissions
and fees $ 1,016,685 $ 758,448 $ 258,237 34.0 %
Net commissions and policy fees as well as supplemental and contingent
commissions increased 34.7% just ahead of overall net commissions and fee
revenue growth of 34.0% for the year ended
The 34.7% increase in net commissions and policy fees was driven primarily by increased volume from winning business with new clients and expanding relationships with existing clients and an increase in the number of
70
--------------------------------------------------------------------------------risks flowing out of the Admitted market and into the E&S market. In aggregate, we experienced marginal but not material increases in commission rates.
Expenses
Compensation and Benefits
Compensation and benefits expense increased by
•
Headcount increased to 3,313 full-time employees as ofDecember 31, 2020 from 2,423 full-time employees as ofDecember 31, 2019 , primarily as a result of the All Risks Acquisition;
•
Commissions increased
•
The Restructuring Plan contributed$5.1 million to the period-over-period increase in Compensation and benefits expense, which represents total workforce-related expenses of$10.1 million less approximately$5 million in savings (see "Significant Events and Transactions-2020 Restructuring Plan" for further information);
•
$11.3 million impact from acquisition related long-term incentive compensation, reflecting our assumption of obligations in the All Risks Acquisition. All Risks had previously established various performance and service based long-term incentive plans for executives, producers and key employees which provided that upon a change of control event, the aggregate amount payable under each plan would be calculated and fixed upon close of the change of control event.
•
We expect to continue to experience a general rise in commissions, salaries, incentives and benefits expense commensurate with our expected growth in business volume, revenue and headcount.
General and Administrative
General and administrative expense decreased by$10.8 million or 9.1% from$118.2 million to$107.4 million for the year endedDecember 31, 2020 as compared to 2019. The main driver of the decrease was a reduction in overall travel and entertainment expense of$19.5 million due to travel restrictions from the pandemic. We do not expect to maintain the same level of reduced travel and entertainment but will explore ways to incorporate remote work flexibility into a post-pandemic operating model. This decrease in 2020 was partially offset by expenses incurred to accommodate revenue expansion, such as IT, insurance and occupancy, and an increase of$9.0 million of professional services and other costs associated with the acquisition of All Risks. In addition, we incurred$8.6 million in non-recurring costs in 2019 from the discontinuation of certain program business, which also contributed to the decrease between periods. Annual revenues of less than$10.0 million were associated with the discontinued insurance programs.
Amortization
Amortization expense increased by$15.3 million or 31.6% from$48.3 million to$63.6 million for the year endedDecember 31, 2020 as compared to 2019. The main driver was an increase of approximately$26.2 million of amortization from acquired intangibles from the All Risks Acquisition in the last four months of 2020, partially offset by the full year impact of declining rates of amortization from acquired intangibles in prior years. Our intangible assets increased$439.5 million atDecember 31, 2020 as compared toDecember 31, 2019 . 71 --------------------------------------------------------------------------------
Interest Expense
Interest expense increased$11.7 million or 32.9% from$35.5 million to$47.2 million for the year endedDecember 31, 2020 as compared to 2019. The main driver of the change in interest expense during 2020 was the$916.3 million increase in total debt, which was undertaken in connection with the All Risks Acquisition.
Other Non-Operating Income (Loss)
Other non-operating income (loss) decreased by$35.8 million to a loss of$32.3 million for the year endedDecember 31, 2020 as compared to income of$3.5 million in 2019. The main driver of the loss was the change in the fair value of the embedded derivatives of our Redeemable Preferred Units. This embedded derivative is a make whole penalty payable if the Redeemable Preferred Units are redeemed in less than five years. We issued 150,000 of Redeemable Preferred Units containing this make whole penalty in 2018 and 110,000 of Redeemable Preferred Units containing this make whole penalty in 2020. The resulting loss recorded in 2020 is primarily related to the recognition of a charge that represents the present value of a probability weighted expense for the make whole penalty of both of the above issuances of Redeemable Preferred Units.
Income Before Income Taxes
Due to the factors above, income before Income taxes increased
Income Tax Expense
Income tax expense increased$4.0 million from$4.9 million to$8.9 million for the year endedDecember 31, 2020 as compared to 2019 as a result of the liquidation of one of our C-Corporation subsidiaries in the fourth quarter of 2020 and increased earnings from our foreign subsidiaries subject to entity level taxation.
Net Income
Net income 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 use these non-GAAP financial measures when planning, monitoring and
evaluating our performance. 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 audited consolidated financial statements in our Annual
Report. 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, as
compared to the same period for the year prior, adjusted for revenue
attributable to recent acquisitions during the first 12 months of
72
--------------------------------------------------------------------------------
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):
Year Ended December 31,
2021 2020 2019Total Revenue Growth Rate (GAAP) (1) 40.7 % 33.1 % 25.3 % Less: Mergers and Acquisitions (2)
(18.3 ) (12.9 ) (7.9 )
Change in Other (3) 0.0 0.2 0.0
Organic Revenue Growth Rate (Non-GAAP) 22.4 % 20.4 % 17.5 %
(1)December 31, 2021 revenue of$1,432.8 million lessDecember 31, 2020 revenue of$1,018.3 million is a$414.5 million year-over-year change. The change,$414.5 million , divided by theDecember 31, 2020 revenue of$1,018.3 million is a total revenue change of 40.7%.December 31, 2020 revenue of$1,018.3 million lessDecember 31, 2019 revenue of$765.1 million is a$253.2 million year-over-year change. The change,$253.2 million , divided by theDecember 31, 2019 revenue of$765.1 million is a total revenue change of 33.1%.December 31, 2019 revenue of$765.1 million lessDecember 31, 2018 revenue of$610.6 million is a$154.5 million year-over-year change. The change,$154.5 million , divided by theDecember 31, 2018 revenue of$610.6 million is a total revenue change of 25.3%. See "Comparison of the Year EndedDecember 31, 2021 and 2020" and "Comparison of the Year EndedDecember 31, 2020 and 2019" for further discussion.
(2)
The mergers and acquisitions adjustment excludes net commission and fees revenue
generated during the first 12 months following an acquisition. The total
adjustment for the years ended
(3)
The other adjustments excludes the year-over-year change in contingent commissions, fiduciary investment income, and foreign exchange rates. The total adjustment for the years endedDecember 31, 2021 , 2020 and 2019 was$0.6 million $1.6 million and$0.3 million , respectively.
Adjusted Compensation and Benefits Expense and Adjusted Compensation and Benefits Expense Ratio
We define Adjusted Compensation and Benefits Expense as Compensation and
benefits expense adjusted to reflect items such as (i) equity-based
compensation, (ii) acquisition and restructuring related compensation expense,
and (iii) other exceptional or non-recurring items, as applicable. The most
comparable GAAP financial metric is Compensation and benefits expense. Adjusted
Compensation and Benefits Expense Ratio is defined as Adjusted Compensation and
Benefits Expense as a percentage of total revenue. The most comparable GAAP
financial metric is Compensation and Benefits Expense Ratio.
73
--------------------------------------------------------------------------------A reconciliation of Adjusted Compensation and Benefits Expense and Adjusted Compensation and Benefits Expense Ratio to Compensation and benefits expense and Compensation and Benefits Expense Ratio, the most directly comparable GAAP measures, for each of the periods indicated, is as follows:
Year Ended December 31,
(in thousands, except percentages) 2021 2020
2019
Total Revenue$ 1,432,771 $ 1,018,274 $ 765,111 Compensation and Benefits Expense$ 991,618 $ 686,155 $ 494,391 Acquisition-related expense - (4,479 ) (5,229 ) Acquisition related long-term incentive compensation (38,405 ) (13,064 ) (2,054 ) Restructuring and related expense (9,934 ) (10,465 )
-
Amortization and expense related to discontinued prepaid incentives (7,209 ) (14,173 ) (9,681 ) Equity-based compensation (13,639 ) (10,800 ) (7,848 ) Discontinued programs expense - (996 ) 2,369 Other non-recurring expense - 63 - Initial public offering related expense (75,868 ) -
-
Adjusted Compensation and Benefits Expense (1)$ 846,563 $ 632,241 $ 471,948 Compensation and Benefits Expense Ratio 69.2 % 67.4 % 64.6 % Adjusted Compensation and Benefits Expense Ratio 59.1 % 62.1 % 61.7 % (1)
Adjustments made 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 Expense 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:
Year Ended December 31,
(in thousands, except percentages) 2021 2020
2019
Total Revenue$ 1,432,771 $ 1,018,274 $ 765,111 General and Administrative Expense$ 138,955 $ 107,381 $ 118,179 Acquisition-related expense (4,275 ) (13,807 ) (4,767 ) Restructuring and related expense (4,727 ) (2,425 ) - Discontinued programs expense - 1,785 (10,964 ) Other non-recurring expense (351 ) (409 ) (712 ) Initial public offering related expense (3,625 ) -
-
Adjusted General and Administrative Expense (1)$ 125,977 $ 92,525 $ 101,736 General and Administrative Expense Ratio 9.7 % 10.5 % 15.4 % Adjusted General and Administrative Expense Ratio 8.8 % 9.1 % 13.3 % (1)
Adjustments made 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".
74
--------------------------------------------------------------------------------Adjusted EBITDAC and Adjusted EBITDAC Margin
We define Adjusted EBITDAC as Net Income before interest expense, 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 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 . 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: Year Ended December 31, (in thousands, except percentages) 2021 2020 2019 Total Revenue$ 1,432,771 $ 1,018,274 $ 765,111 Net Income$ 56,632 $ 70,513 $ 63,057 Interest expense 79,354 47,243 35,546 Income tax expense 4,932 8,952 4,926 Depreciation 4,806 3,934 4,797 Amortization 107,877 63,567 48,301 Change in contingent consideration 2,891 (1,301 ) (1,595 ) EBITDAC$ 256,492 $ 192,908 $
155,032
Acquisition-related expense (1) 4,275 18,286
9,996
Acquisition related long-term incentive compensation (2) 38,405 13,064
2,054
Restructuring and related expense (3) 14,661 12,890
-
Amortization and expense related to discontinued prepaid incentives (4) 7,209 14,173
9,681
Other non-operating loss (income) (5) 44,947 32,270
(3,469 )
Equity-based compensation (6) 13,639 10,800 7,848
Discontinued programs expense (7) - (789 )
8,595
Other non-recurring expense (8) 351 346
712
IPO related expenses (9) 79,493 -
-
(Income) from equity method investments in related party 759 (440 ) 978 Adjusted EBITDAC (10)$ 460,231 $ 293,508 $ 191,427 Net Income Margin (11) 4.0 % 6.9 % 8.2 % Adjusted EBITDAC Margin 32.1 % 28.8 % 25.0 % (1) Acquisition-related expense includes diligence, transaction-related, and integration costs. Compensation and benefits expenses were$0.0 million ,$4.5 million and$5.2 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively, while General and administrative expenses contributed to$4.3 million ,$13.8 million and$4.8 million of the acquisition-related expense for the years endedDecember 31, 2021 , 2020 and 2019, respectively.
(2)
Acquisition related long-term incentive compensation arises from long-term incentive plans associated with acquisitions.
(3)
Restructuring and related expense consists of compensation and benefits of$9.9 million ,$10.5 million and$0.0 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively, and General and administrative costs including occupancy and professional services fees of$4.7 million ,$2.4 million and$0.0 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively, related to the Restructuring Plan. 75 -------------------------------------------------------------------------------- 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 audited consolidated financial statements in this Annual Report 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 17, Employee Benefit Plans, Prepaid and Long-Term Incentives" of the audited consolidated financial statements in this Annual Report for further discussion.
(5)
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$36.9 million in 2021 and$28.7 million in 2020 is 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. See "Note 13, Redeemable Preferred Units" of the audited consolidated financial statements in this Annual Report for further discussion. For the year endedDecember 31, 2021 , non-operating loss (income) includes costs associated with the extinguishment of a portion of our deferred debt issuance costs on the term debt. For the year endedDecember 31, 2020 , non-operating loss (income) includes the change in fair value of interest rate swaps which were discontinued in 2020. For the year endedDecember 31, 2019 , non-operating loss (income) includes a one-time gain on sale of an asset.
(6)
Equity-based compensation reflects non-cash equity-based expense.
(7)
Discontinued programs expense includes$0.0 million ,$(1.8) million and$11.0 million of General and administrative expense for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Compensation and benefits expense was$0.0 million ,$1.0 million and$(2.4) million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. These costs were associated with concluding specific programs that are no longer core to our business. This adjustment also includes$0.0 million ,$(0.1) million and$0.0 million of General and administrative expense related to additional cancellation activity associated with these programs for the years endedDecember 31, 2021 , 2020 and 2019, respectively.
(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$0.4 million ,$0.4 million and$0.7 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively, and Compensation and benefits expense was$0.0 million ,$(0.1) million , and$0.0 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Other non-recurring items include one-time professional services costs associated with term debt repricing, and one-time non-income tax charges and tax and accounting consultancy costs associated with potential structure changes.
(9)
IPO related expenses includes$3.6 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$75.9 million for the year endedDecember 31, 2021 , related primarily to the revaluation of existing equity awards at IPO as well as expense for new awards issued at IPO.
(10)
Consolidated Adjusted EBITDAC does not reflect a deduction for the Adjusted
EBITDAC associated with the non-controlling interest in Ryan Re for the period
of time prior to
(11)
Net Income Margin is Net Income as a percentage of total revenue.
Adjusted Net Income and Adjusted Net Income Margin
We define Adjusted Net Income as tax-effected earnings before amortization and
certain items of income and expense, gains and losses, equity-based
compensation, acquisition related long-term incentive compensation,
acquisition-related expenses, costs associated with the IPO and certain
exceptional or non-recurring items. The most comparable GAAP financial metric is
Net Income. Adjusted Net Income Margin is calculated as Adjusted Net Income as a
percentage of total revenue. The most comparable GAAP financial metric is Net
Income Margin. These
76
--------------------------------------------------------------------------------
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 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 .
Following the IPO the Company is subject to United States federal income taxes,
in addition to state, local, and foreign taxes, with respect to our allocable
share of any net taxable income of RSG 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% of RSG 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:
Year Ended December 31,
(in thousands, except percentages) 2021 2020 2019
Total Revenue $ 1,432,771 $ 1,018,274 $ 765,111
Net Income $ 56,632 $ 70,513 $ 63,057
Income tax expense 4,932 8,952 4,926
Amortization 107,877 63,567 48,301
Amortization of deferred debt
issuance costs (1) 11,372 5,002 1,547
Change in contingent consideration 2,891 (1,301 ) (1,595 )
Acquisition-related expense (2) 4,275 18,286 9,996
Acquisition related long-term incentive compensation (3) 38,405 13,064
2,054
Restructuring and related expense (4) 14,661 12,890
-
Amortization and expense related to discontinued prepaid incentives (5) 7,209 14,173
9,681
Other non-operating loss (income) (6) 44,947 32,270
(3,469 ) Equity-based compensation (7) 13,639 10,800
7,848
Discontinued programs expense (8) - (789 )
8,595
Other non-recurring expense (9) 351 346
712
IPO related expenses (10) 79,493 -
-
(Income) / loss from equity method investments in related party 759 (440 )
978
Adjusted Income before Income Taxes
152,631 Adjusted tax expense (11) (97,326 ) (61,907 ) (37,989 ) Adjusted Net Income$ 290,117 $ 185,426 $ 114,642 Net Income Margin (12) 4.0 % 6.9 % 8.2 % Adjusted Net Income Margin 20.2 % 18.2 % 15.0 % (1)
Interest Expense includes amortization of deferred debt issuance costs.
(2)
Acquisition-related expense includes diligence, transaction-related, and integration costs. Compensation and benefits expenses were$0.0 million ,$4.5 million and$5.2 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively, while General and administrative expenses contributed to$4.3 million ,$13.8 million and$4.8 million of the acquisition-related expense for the years endedDecember 31, 2021 , 2020 and 2019, respectively.
(3)
Acquisition related long-term incentive compensation arises from long-term incentive plans associated with acquisitions.
(4)
Restructuring and related expense consists of compensation and benefits of$9.9 million and$10.5 million for the years endedDecember 31, 2021 and 2020, respectively, and General and administrative costs including occupancy and professional services fees of$4.7 million and$2.4 million and for the years endedDecember 31, 2021 and 2020, respectively, related to the Restructuring Plan. The compensation and benefits expense includes severance as well as employment costs related to services rendered between the notification and termination dates. See "Note 5, Restructuring" of the audited consolidated financial statements in this 77 --------------------------------------------------------------------------------
Annual Report 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 17, Employee Benefit Plans, Prepaid and Long-Term Incentives" of the audited consolidated financial statements in this Annual Report for further discussion.
(6)
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$36.9 million in 2021 and$28.7 million in 2020 is due to the occurrence of a Realization Event in the third quarter, which is defined as a Qualified Public Offering or a Sale Transaction in the Onex Purchase Agreement. See "Note 13, Redeemable Preferred Units" of the audited consolidated financial statements in this Annual Report for further discussion. For the year endedDecember 31, 2021 , non-operating loss (income) includes costs associated with the extinguishment of a portion of our deferred debt issuance costs on the term debt. For the year endedDecember 31, 2020 , non-operating loss (income) includes the change in fair value of interest rate swaps which were discontinued in 2020. For the year endedDecember 31, 2019 , non-operating loss (income) includes a one-time gain on sale of an asset.
(7)
Equity-based compensation reflects non-cash equity-based expense.
(8)
Discontinued programs expense includes$0.0 million ,$(1.8) million and$11.0 million of General and administrative expense for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Compensation and benefits expense was$0.0 million ,$1.0 million and$(2.4) million of General and administrative expense for the years endedDecember 31, 2021 , 2020 and 2019. These costs were associated with concluding specific programs that are no longer core to our business. This adjustment also includes$0.0 million ,$(0.1) million and$0.0 million of General and administrative expense related to additional cancellation activity associated with these programs for the years endedDecember 31, 2021 , 2020 and 2019, respectively.
(9)
Other non-recurring expense includes one-time impacts that do not reflect the core performance of the business, including General and administrative expenses of$0.4 million ,$0.4 million and$0.7 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively, and Compensation and benefits expense was$0.0 million ,$(0.1) million , and$0.0 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Other non-recurring items include one-time professional services costs associated with term debt repricing, and one-time non-income tax charges and tax and accounting consultancy costs associated with potential structure changes.
(10)
IPO related expenses includes$3.6 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$75.9 million for the year endedDecember 31, 2021 , primarily related to the revaluation of existing equity awards at IPO as well as expense for new awards issued at IPO.
(11)
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 year endedDecember 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 4.12% on 100% of our adjusted income before income taxes as if the Company owned 100% ofRSG, LLC . For the year endedDecember 31, 2020 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 4.03% on 100% of our adjusted income before income taxes as if the Company owned 100% ofRSG, LLC . For the year endedDecember 31, 2019 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 3.89% on 100% of our adjusted income before income taxes as if the Company owned 100% ofRSG, LLC .
(12)
Net Income Margin is Net Income as a percentage of total revenue.
78
--------------------------------------------------------------------------------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.
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:
Year Ended December 31, 2021
Adjustments
Plus:
Impact of
Plus: Net all LLC
income (loss) Common
attributable to Units Plus: Plus: Dilutive
RSG LLC before exchanged Adjustments to impact of Adjusted
the for Class Adjusted Net unvested equity Diluted (in thousands, except per
Organizational A shares Income awards Earnings per
share data) U.S. GAAP Transactions (1) (2) (3) Share
Numerator:
Net income (loss)
attributable to Class A
common shareholders-
diluted $ (7,064 ) $ 72,937 $ (9,241 ) $ 233,485 $ - $ 290,117 Denominator:
Weighted-average shares of Class A common stock outstanding- diluted 105,730 - 142,968 - 19,313 268,011 Net income (loss) per share of Class A
common stock- diluted
0.94 $ (0.08 ) $ 1.08 (1)
For comparability purposes, this calculation incorporates the Net income (loss) and weighted average shares of Class A common stock 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 and 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.
(2)
Adjustments to Adjusted Net Income are described in the footnotes of the reconciliation of Adjusted Net Income to Net Income in "Adjusted Net Income and Adjusted Net Income Margin".
(3)
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 Loss Per Share calculation disclosed in "Note 15, Loss Per Share" of the audited consolidated financial statements in this Annual Report. 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 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 79 --------------------------------------------------------------------------------
raise additional capital or generate cash flows necessary to expand our operations, this could reduce our ability to compete successfully and harm our results of operations.
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 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$752.7 million and$583.1 million as ofDecember 31, 2021 and 2020, respectively, and fiduciary receivables of$1,637.5 million and$1,395.1 million as ofDecember 31, 2021 and 2020, 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$387.0 million of Cash and cash equivalents on the Consolidated Balance Sheets as ofDecember 31, 2021 ,$139.5 million is held in fiduciary accounts representing collected revenue and is available to be transferred to operating accounts and used for general corporate purposes. General
On
OnJuly 26, 2021 , we closed our IPO through which we issued and sold 65,456,020 shares of Class A common stock at a price per share of$23.50 . We received approximately$1,448.1 million in net proceeds after deducting underwriting discounts and commissions of$76.9 million and final deferred offering expenses of$13.2 million . Upon closing of the IPO, we paid (i)$118.3 million to acquire 5,887,570 newly issued LLC Units inRSG LLC , (ii)$343.5 million to acquire the equity of an entity through which Onex held its preferred unit interest inRSG LLC (with the 260,000,000 Redeemable Preferred Units owned by the entity converted through a series of transactions to 15,387,026 LLC Units immediately thereafter), (iii)$795.7 million to acquire 35,641,682 outstanding LLC Units from certain existing holders of LLC Units at a purchase price per LLC Unit equal to$23.50 , the IPO price per share of Class A common stock in our IPO, (iv)$76.2 million to purchase an additional 3,415,097 newly issued LLC Units inRSG LLC , and (v)$114.4 million to repurchase and retire 5,122,645 shares of Class A common stock held by Onex. In turn,RSG LLC applied the balance of the net proceeds it received on account of the newly issued LLC Units to pay$72.9 million of TRA Alternative Payments arising from the Organizational Transactions. The remaining$121.6 million of net proceeds are reserved for general corporate purposes. OnAugust 10, 2021 , the Board elected to terminate the All Risks long-term incentive plans. The decision to terminate the plans did not and will not change the value of, or entitlements to, any benefits thereunder. The benefits accruing under these plans are required to be paid within twelve months of the termination date (i.e., byAugust 10, 2022 ). These awards remain subject to the achievement of service conditions. We expect to make payments related to these long-term incentive plans of$111.4 million in 2022. 80 --------------------------------------------------------------------------------
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 11, 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
As of
As of
Tax Receivable Agreement
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 and its subsidiaries that existed prior to the IPO or to which the Company succeed as a result of certain aspects of the Organizational Transactions ("Pre-IPO 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 relating to the purchase by the Company of LLC Common Units in connection with the IPO will be$272.1 million in aggregate. Future payments in respect to subsequent exchanges would be in addition to these amounts and are expected to be substantial. The foregoing amounts are merely estimates and the actual payments could differ materially. In the event of an early termination of the TRA, either at the Company's election or due to a change of control, the Company is required to pay to each holder of the TRA an early termination payment equal to the discounted present 81 -------------------------------------------------------------------------------- value of all unpaid TRA Payments. The Company has not made and is not likely to make an election for an early termination. We expect to fund future TRA payments with tax distributions fromRSG LLC that come from cash on hand and cash generated from operations. The following summarizes the activity related to the Tax receivable agreement liabilities: Exchange Tax Pre-IPO M&A Tax TRA Payment Tax (in thousands) Attributes (1) Attributes (2) Attributes (3) TRA Liabilities Balance at July 22, 2021$ 144,598 $ 83,555 $ 54,317 $ 282,470 Remeasurement - initial establishment of TRA liability (7,622 ) - (2,206 ) (9,828 ) Remeasurement - change in state rate (272 ) (166 ) (104 ) (542 )
Balance at
52,007 $ 272,100
Total expected estimated tax savings from each of the tax attributes associated with the TRA are (1) Exchange Tax Attributes of$160.8 million , (2) Pre-IPO M&A Tax Attributes of$98.1 million , and (3) TRA Payment Tax Attributes of$61.2 million . The Company will retain the benefit of 15% of these cash savings.
Comparison of Cash Flows for the Year Ended
Cash and cash equivalents increased$74.3 million from$312.7 million atDecember 31, 2020 to$387.0 million atDecember 31, 2021 . A summary of our cash flows provided by and used for continuing operations from operating, investing, and financing activities is as follows:
Cash Flows From Operating Activities
Net cash provided by operating activities during the year endedDecember 31, 2021 increased$138.1 million from the year endedDecember 31, 2020 to$273.5 million . This amount represents Net income reported, as adjusted for amortization and depreciation, prepaid and deferred compensation expense, and non-cash equity compensation expense, as well as the change in commission and fees receivable, accrued compensation and other current and noncurrent assets and liabilities. Strong organic revenue growth and the All Risks Acquisition drove operating cash flow performance period-over-period. While Net income decreased$13.9 million during the year endedDecember 31, 2021 , the increase in the non-cash adjustments for the amortization of intangibles and debt issuance costs, prepaid and deferred compensation expense, and non-cash equity compensation expense increased operating cash flows.
Cash Flows From Investing Activities
Cash flows used for investing activities during the year endedDecember 31, 2021 were$457.9 million , a decrease of$310.6 million compared to the$768.5 million of cash flows used for investing activities during the year endedDecember 31, 2020 . The main driver of the cash flows used for investing activities in the year endedDecember 31, 2021 was the acquisition of the Preferred Blocker Entity (defined below) from Onex for$343.2 million and the acquisitions of Crouse and Keystone for$108.9 million - See "Note 4, Merger and Acquisition Activity" in the audited consolidated financial statements in this Annual Report. The main driver of the cash flows used for investing activities in the year endedDecember 31, 2020 were the All Risks Acquisition and the final remaining capital commitment on the equity method investment in aBermuda based reinsurance company, Geneva Re, a joint venture betweenNationwide Mutual Insurance Company andRyan Investment Holdings, LLC an entity under common control - See "Note 19, Related Parties" in the audited consolidated financial statements in this Annual Report, in addition to other smaller acquisitions and funding of prepaid incentives of$9.3 million as compared to the repayment of prepaid incentives in the year endedDecember 31, 2021 of$3.9 million .
Cash Flows From Financing Activities
Cash flows provided by financing activities during the year endedDecember 31, 2021 were$429.3 million , a decrease of$696.0 million compared to cash flows provided by financing activities of$1,125.3 million during the year endedDecember 31, 2020 . The main drivers of cash flows provided by financing activities during the year endedDecember 31, 2021 was the issuance of Class A common stock in the IPO of$1,448.1 million , offset by the 82 -------------------------------------------------------------------------------- repurchase of pre-IPO LLC units and Alternative TRA payments of$780.4 million , the repurchase of Class A common stock in the IPO of$183.6 million , the repurchase of preferred equity for$78.3 million ,$48.4 million in cash paid for the remaining 53% non-controlling common equity interest in Ryan Re,$47.1 million of cash distributions paid to pre-IPO unitholders, and$16.5 million repayment of term debt. The main drivers of cash flows provided by financing activities during the year endedDecember 31, 2020 were$1,505.3 million of term loan borrowings net of repayments and a$118.9 million contribution of members' equity and mezzanine equity, offset by repayments net of borrowings of$428.7 million on the revolving credit facility,$78.8 million of debt issuance costs paid,$52.6 million of equity repurchases,$50.1 million of cash distributions to members, and$25.0 million repayment of subordinated notes for the year endedDecember 31, 2020 . Additionally, a$11.4 million dollar increase in Net change in fiduciary liabilities period-over-period helped offset the decrease in cash flows provided by financing activities when comparing the year endedDecember 31, 2021 to 2020. Contractual Obligations and Commitments Our principal commitments consist of contractual obligations in connection with investing and operating activities. These obligations are described within "Note 10, Leases" and "Note 11, Debt" in the notes to our audited consolidated financial statements in this Annual Report 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 17, Employee Benefit Plans, Prepaid and Long-Term Incentives" in the notes to our audited consolidated financial statements in this Annual Report 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 ofDecember 31, 2021 , the projected future expense, and the projected timing of future cash outflows associated with these arrangements.
Long-term Incentive Compensation Agreements (in thousands)
December 31, 2021
Current accrued compensation $ 5,219
Non-current accrued compensation 137
Total liability $ 5,356
Projected future expense 943
Total projected future cash outflows $ 6,299
Projected Future Cash Outflows
(in thousands)
2022 $ 5,378
2023 -
2024 -
2025 -
Thereafter $ 921
Within "Note 17, Employee Benefit Plans, Prepaid and Long-Term Incentives" in
the notes to our audited consolidated financial statements in this Annual Report
we discuss the All Risks Long-Term Incentive Plans and
83
--------------------------------------------------------------------------------
their impact. Below we have outlined the liabilities accrued as of
All Risks Long-Term Incentive Plan
(in thousands) December 31, 2021
Current accrued compensation $ 91,051
Non-current accrued compensation -
Total liability $ 91,051
Projected future expense 20,368
Total projected future cash outflows $ 111,419
Projected Future Cash Outflows
(in thousands)
2022 $ 111,419
2023 -
2024 -
2025 -
Thereafter $ -
Within "Note 4, Merger and Acquisition Activity" in the notes to our audited
consolidated financial statements in this Annual Report we discuss various
contingent consideration arrangements and their impact. Below we have outlined
the liabilities accrued as of December 31, 2021 , the projected future expense,
and the projected timing of future cash outflows associated with these
contingent consideration agreements.
Contingent Consideration
(in thousands) December 31, 2021
Current accounts payable and accrued
liabilities $ 14,419
Other non-current liabilities 27,634
Total liability $ 42,053
Projected future expense 3,511
Total projected future cash outflows $ 45,564
Projected Future Cash Outflows
(in thousands)
2022 $ 14,597
2023 5,865
2024 -
2025 25,102
Thereafter $ -
For further discussion, see "Note 4, Merger and Acquisition Activity", "Note 10,
Leases", "Note 11, Debt", "Note 17, Employee Benefit Plans, Prepaid and
Long-Term Incentives", and "Note 20, Commitments and Contingencies" of the notes
to the consolidated financial statements in this Annual Report.
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: (1)
the Company must make assumptions that were uncertain when the judgment was
made, and (2) 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.
84
--------------------------------------------------------------------------------
Refer to "Note 2, Summary of Significant Accounting Policies" in the
consolidated financial statements in this Annual Report for further information
on the critical accounting estimates and policies. Refer to "Note 4, Merger and
Acquisition Activity" in the consolidated financial statements in this Annual
Report for further information on the critical accounting policies over business
combinations and contingent considerations. Refer to "Note 14, Equity-Based
Compensation" in the consolidated financial statements in this Annual Report for
the critical accounting estimates and policies related to equity-based
compensation. Refer to "Note 19, Fair Value Measurements" in the consolidated
financial statements in this Annual Report for further information on pricing of
the contingent considerations, derivative instruments and liabilities for which
only fair value is disclosed. Refer to "Note 22, Income Taxes" in the
consolidated financial statements in this Annual Report for further information
on the estimates involved in income taxes and the TRA liability.
A summary of the critical accounting policies and corresponding judgments are as follows:
Revenue Recognition The timing of revenue recognition and constraints applied to both supplemental and contingent commissions is based on estimates and assumptions. These commissions are paid to the Company based on the achievement of volume and/or underwriting profitability targets on the eligible insurance contracts placed. Because of the limited visibility into the satisfaction of performance indicators outlined in the contracts, the Company constrains such revenues until such time that the carrier provides explicit confirmation of amounts owed to us to avoid a significant reversal of revenue in a future period. The uncertainty regarding the ultimate transaction price for contingent commissions is principally the profitability of the underlying insurance policies placed as determined by the development of loss ratios maintained by the carriers. The uncertainty is resolved over the contractual term. We evaluate the assumptions applied and make adjustments as experience changes.
Business Combinations
The Company accounts for transactions that represent business combinations under the acquisition method of accounting, which requires us to allocate the total consideration transferred for each acquisition to the assets we acquire and liabilities we assume based on their fair values as of the date of acquisition, including identifiable intangible assets. The allocation of the consideration utilizes significant estimates in determining the fair values of identifiable assets acquired, especially with respect to intangible assets. We may refine our estimates and make adjustments to the assets acquired and liabilities assumed over a measurement period, not to exceed one year. The Company has financial liabilities resulting from our business combinations, namely contingent consideration arrangements. We estimate the fair value of these contingent consideration arrangements using Level 3 inputs that require the use of numerous assumptions andMonte Carlo simulations, which may change based on the occurrence of future events and lead to increased or decreased operating income in future periods. Estimating the fair value at an acquisition date and in subsequent periods involves significant judgments, including projecting the future financial performance of the acquired businesses. The Company updates its assumptions each reporting period based on new developments and records such amounts at fair value based on the revised assumptions. Changes in the fair value of these contingent consideration arrangements are recorded in Change in contingent consideration within the Consolidated Statements of Income.
The Company reviews goodwill for impairment at least annually, and whenever events or changes in circumstances indicate that the carrying value of the reporting unit may not be recoverable. In the performance of the annual evaluation, the Company also considers qualitative and quantitative developments between the date of the goodwill impairment review and the fiscal year end to determine if an impairment should be recognized. The Company reviews goodwill for impairment at the reporting unit level, which coincides with the operating segment,Ryan Specialty . The determinations of impairment indicators and the fair value of the reporting unit are based on estimates and assumptions related to the amount and timing of future cash flows and future interest rates. Such estimates and assumptions could change in the future as more information becomes available, which could impact the amounts reported and disclosed herein. 85 --------------------------------------------------------------------------------
The other intangible assets balance is primarily made up of customer relationship intangible asset acquired from All Risks. We review intangible assets that are being amortized for impairment whenever events or changes in circumstance indicate that their carrying amount may not be recoverable.
We have not made any material changes in the accounting methodology used to evaluate the impairment of amortizable intangible assets during the last three fiscal years. We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to calculate impairments or useful lives of amortizable intangible assets. However, if actual results are not consistent with our estimates and assumptions, we may be exposed to impairment losses that could be material.
Income Taxes
We recognize deferred tax assets to the extent that it is believed that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, carryback potential if permitted under the tax law, and results of recent operations. A valuation allowance is provided if it is determined that it is more likely than not that the deferred tax asset will not be realized. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions. We expect to realize future tax benefits related to the utilization of these assets. If we determine in the future that we will not be able to fully utilize all or part of these deferred tax assets, we would record a valuation allowance through earnings in the period the determination was made, which would have an adverse effect on our results of operations and earnings in future periods. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future. Other than those potential impacts, we do not believe there is a reasonable likelihood there will be a material change in the tax related balances or valuation allowances. However, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities.
Tax Receivable Agreement Liabilities
As described in "Note 22, Income Taxes" in the notes to the consolidated financial statements in this Annual Report, in connection with the Organizational Transactions and IPO, the Company entered into a TRA with certain pre-IPO LLC Unitholders. The TRA provides for the payment by the Company to certain pre-IPO LLC Unitholders 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 certain increases in the tax basis of the assets ofRSG LLC resulting from purchases or exchanges of LLC Units, tax amortization deductions attributable to asset acquisitions that closed prior to the, and certain tax benefits attributable to payments that the Company is required to make under the TRA. Amounts payable under the TRA are contingent upon, among other things, (i) generation of future taxable income over the term of the TRA and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the TRA to utilize the tax benefits, then we would not be required to make the related TRA payments. Therefore, we only recognize a liability for TRA payments if we determine it is probable that we will generate sufficient future taxable income over the term of the TRA to utilize the related tax benefits. Estimating future taxable income is inherently uncertain and requires judgment. As ofDecember 31, 2021 , we recognized$272.1 million of liabilities relating to our obligations under the TRA, after concluding that it was probable that we would have sufficient future taxable income to utilize the related tax benefits. Recent Accounting Pronouncements
For a description of our recently adopted accounting pronouncements see "Note 2, Summary of Significant Accounting Policies" in the notes to our audited consolidated financial statements in this Annual Report.
86--------------------------------------------------------------------------------
© Edgar Online, source
