Ryan Specialty (RYAN) - 2023 Q4 - Annual Report

Financial Performance and Growth - Net income increased by $106.6 million, from$56.6 million in 2021 to $163.3 million in 2022[392] - Net income for 2023 was$194.48 million, with a net income margin of 9.4%[407] - Adjusted EBITDAC for 2023 was $624.74 million, with an adjusted EBITDAC margin of 30.1$375.58 million, with an adjusted net income margin of 18.1%[410] - Net income for 2023 increased to $194.48 million, up 19.1$163.26 million in 2022[500] - Net income for 2022 was $194.48 million, compared to$61.05 million in 2021, representing a significant increase[506] - Total revenue growth rate (GAAP) for 2023 was 20.4%, with organic revenue growth rate (Non-GAAP) at 15.0%[396] - Revenue from the Top 100 retail broker trading firms grew faster than the company's organic revenue growth rate of 15.0% in 2023[336] - Total cash flows from operating activities in 2023 were $477.20 million, a 42.2$335.51 million in 2022[500] - Cash flows used in investing activities for 2023 were $476.23 million, primarily due to business combinations of$446.68 million[500] - Cash flows from financing activities in 2023 were negative $12.61 million, compared to positive$314.76 million in 2022[500] - Ending cash balance for 2023 was $1.76 billion, slightly down from$1.77 billion in 2022[500] - Total assets increased to $7,247.2 million as of December 31, 2023, compared to$6,383.7 million in 2022, driven by growth in goodwill, customer relationships, and other intangible assets[497] - Goodwill increased to $1,646.5 million as of December 31, 2023, from$1,315.0 million in 2022, reflecting acquisitions and adjustments[497] - Customer relationships grew to $572.4 million as of December 31, 2023, up from$457.1 million in 2022, indicating expansion in customer base and related intangible assets[497] - Total liabilities increased to $6,267.6 million as of December 31, 2023, from$5,565.9 million in 2022, primarily due to higher fiduciary liabilities and long-term debt[497] - Stockholders' equity rose to $979.6 million as of December 31, 2023, compared to$817.8 million in 2022, driven by retained earnings and additional paid-in capital[497] - Retained earnings increased to $114.4 million as of December 31, 2023, from$54.0 million in 2022, reflecting improved profitability[497] - Non-controlling interests grew to $419.9 million as of December 31, 2023, from$339.4 million in 2022, indicating increased equity participation from minority stakeholders[497] - Total stockholders' equity increased to $979.64 million in 2022 from$817.81 million in 2021[506] Cost Management and Restructuring - The ACCELERATE 2025 program is expected to generate annual savings of approximately $50.0 million by 2025, with cumulative one-time charges of$90.0 million through 2024[326] - The company incurred restructuring expenses of $48.37 million in 2023, including$25.99 million for operations and technology optimization[581] - Restructuring and related expense for 2023 was $49.28 million, up from$5.72 million in 2022[407] - Acquisition-related expense for 2023 was $23.27 million, a significant increase from$4.6 million in 2022[407] - Non-cash equity-based compensation in 2023 was $69.74 million, down 10.0$77.48 million in 2022[500] - Depreciation expense increased to $9.04 million in 2023, up 58.8$5.69 million in 2022[500] - Amortization expense for 2023 was $106.80 million, a 3.1$103.60 million in 2022[500] - Operating lease costs for 2023 totaled $36.9 million, up from$32.8 million in 2022, reflecting increased leasing activity[590] - The present value of operating lease liabilities as of December 31, 2023, was $175.8 million, with total undiscounted future lease payments of$220.5 million[590] Revenue and Income Sources - The company's revenue is derived from net commissions and fees, which are calculated as a percentage of total insurance policy premiums, with additional contingent or volume-based commissions[345] - Fiduciary investment income is generated from interest earned on insurance premiums and surplus lines taxes held in fiduciary accounts[348] - Net commissions and policy fees revenue is recognized when an insurance policy is bound and issued, net of estimated policy cancellations[519] - Binding Authority revenue includes insurance commissions, supplemental commissions, and contingent commissions from carriers[524] - Approximately 3% of the company's revenues for the year ended December 31, 2023, were generated from activities in the United Kingdom, Europe, Canada, and Singapore[460] - Approximately 3% of the company's revenues for 2023 and 2022 were generated outside the United States, exposing it to foreign exchange rate fluctuations[200] Tax and Regulatory Matters - Income tax expense increased by $11.0 million, from$4.9 million in 2021 to $15.9 million in 2022, due to higher pre-tax book income[391] - Income tax expense for 2023 was$43.4 million, with an effective tax rate of 18.2%, compared to $15.9 million and 8.9$18.4 million due to Common Control Reorganizations (CCRs) in 2023[676] - The company recognizes a liability on the Consolidated Balance Sheets based on the undiscounted estimated future payments under the Tax Receivable Agreement (TRA)[428] - The company recognized $358.9 million and$295.3 million of liabilities relating to obligations under the Tax Receivable Agreement (TRA) as of December 31, 2023, and 2022, respectively, based on the assumption of sufficient future taxable income[454] - The company accounts for income taxes under the asset and liability method, recognizing deferred tax assets and liabilities for future tax consequences[555] - The company accounts for uncertain tax positions using a two-step approach, recognizing tax benefits when more likely than not to be sustainable upon examination[557] - The company has 2.9 million in foreign tax credit carryforwards that will begin to expire in 2031, with a full valuation allowance recorded against this deferred tax asset[672] - Changes in tax laws or regulations could materially increase corporate taxes and adversely affect the company's financial condition or results of operations[226] - The OECD/G-20 Inclusive Framework on BEPS may lead to a global minimum tax and changes in profit allocation rules, potentially increasing the company's effective tax rate and cash tax liabilities[228] - Unanticipated changes in effective tax rates or adverse outcomes from tax audits could adversely affect the company's operating results and financial condition[265] Legal and Regulatory Risks - The company is subject to various legal and regulatory oversight, including data privacy laws, cybersecurity regulations, and compliance with HIPAA, which could increase costs and limit growth[202][206][208] - The company faces potential liability from E&O claims and other legal proceedings, which could adversely affect its financial position and reputation[218] - The company holds client funds and surplus lines taxes, exposing it to complex fiduciary regulations and potential fines or penalties for mismanagement[220] - The company relies on common law trademark protection for key brand names like "Ryan Specialty" and "RT Specialty," which could be challenged or infringed upon, potentially harming its brand value[223] - Compliance with public company regulations has increased legal and financial compliance costs and may divert management's attention from revenue-generating activities[273] - The company's forum selection provisions in its certificate of incorporation may discourage lawsuits against it or its directors and officers[279] - The company's certificate of incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation, potentially limiting stockholders' ability to obtain a favorable judicial forum for disputes[279] Debt and Financing - The company had 1,596.4 million of outstanding principal on Term Loan borrowings as of December 31, 2023, with interest subject to a 0.75% floor and exposure to Adjusted Term SOFR interest rate changes[463] - The company's indebtedness is largely floating rate, and elevated or increasing interest rates could lead to higher interest expenses[233] - Inability to make scheduled payments on indebtedness could result in default, foreclosure, or bankruptcy[235] - The company may need to raise additional funds, and failure to do so could harm its competitive position and results of operations[242] - The Tax Receivable Agreement may require accelerated payments in certain circumstances, potentially exceeding actual tax benefits realized[257] - Cash flows used by financing activities in 2023 were $12.6 million, a decrease of$327.4 million compared to 2022[433] - Total projected future cash outflows for long-term incentive compensation agreements are $7.27 million, with$6.73 million expected in 2026[438] Market and Economic Risks - The E&S market saw $80 billion in insured catastrophe losses in 2023, driven by 21 severe convective storm events above$1 billion in losses, totaling $58 billion[341] - The company faces risks from potential decreases in insurance premiums or commission rates, which could lead to revenue reductions or expenses[163] - The company's inability to achieve the intended results of the ACCELERATE 2025 program could impact its business, financial condition, and results of operations[182] - The company's operating results and stock price may be impacted by changing economic conditions, including inflationary pressures and interest rate volatility[287] - The company's stock price may be influenced by investors' perception, events beyond its control (e.g., weather, war, health crises), and any default on its indebtedness[287] - The company's quarterly operating results and stock price may fluctuate due to market conditions, new product introductions, regulatory developments, and other factors[285] - Sales of a large number of Class A common stock shares in the public market could reduce the trading price of the stock[281] - The company has filed registration statements to register shares of Class A common stock and other equity securities issued under incentive plans, which may be freely sold in the public market[281] Corporate Governance and Stock Structure - The Director Nomination Agreement with the Ryan Parties grants them significant influence over board nominations, potentially resulting in disproportionate representation[270] - The company's dual-class common stock structure and other governance provisions could discourage proxy contests and affect stockholder influence over corporate actions[276] - The company may issue preferred stock in the future, which could delay or prevent a change in control and adversely affect the market price and rights of Class A common stock holders[283] - The company's preferred stock could be issued with voting, liquidation, dividend, and other rights superior to Class A common stock[283] - The company's operating results may be affected by the departure or addition of key personnel[285] Acquisitions and Investments - The company signed a definitive agreement to acquire Castel Underwriting Agencies Limited, with the transaction expected to close in the first half of 2024[331] - Internally developed software in development increased to$18.1 million in 2023, up from 11.2 million in 2022, indicating ongoing R&D investments[587] - The fair value of the interest rate cap as of December 31, 2023, was 29.7 million, down from $45.9 million in 2022, reflecting changes in market conditions[643] Compensation and Equity - Unvested Restricted Stock Units (RSUs) at the end of 2023 totaled 3,359,778, with a weighted average grant date fair value of$23.07[617] - Incentive RSUs granted in 2023 totaled 921,288, with a weighted average grant date fair value of $41.37[617] - Outstanding Incentive Options at the end of 2023 totaled 165,684, with a weighted average exercise price of$34.39[620] Receivables and Liabilities - The company's receivables are shown net of an allowance for credit losses, estimated based on historical write-offs and current economic conditions[529] - Receivables increased to $294.2 million as of December 31, 2023, up from$231.4 million in 2022, reflecting growth in commissions and fees receivable[584] - The company records liabilities for loss contingencies when probable and reasonably estimable, with significant management judgment required[552] - The company has an ownership interest in three entities holding segregated account protected cell captives, with only the activity of the regulated Core Companies recorded in consolidated financial statements[551] - Loss on Tax Receivable Agreement in 2023 was $11.17 million, more than double the$5.55 million in 2022[500] - Deferred income tax expense from common control reorganizations in 2023 was $18.36 million, a new expense item not present in 2022[500]