RYAN SPECIALTY HOLDINGS, INC. (RYAN) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 ended December 31, 2022, 2021, and 2020 prepared in accordance with U.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 by Patrick 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 or a program administrator 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 includes Lloyd’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

Corporate Structure

We are a holding company and our sole material asset is a controlling equity interest in New LLC, which is also a holding company and its sole material asset is a controlling equity interest in the LLC. The Company operates and controls the business and affairs of, and consolidates the financial results of, the LLC through New LLC. We conduct our business through the LLC. As the LLC is substantively the same as New LLC, for the purpose of this discussion, we will refer to both New LLC and the LLC as the “LLC.”

The 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. The 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 its U.S. corporate subsidiaries. As a result of our ownership of LLC Common Units, we are subject to U.S. federal, state, and local income taxes with respect to our allocable share of any taxable income of the LLC and are taxed at the prevailing corporate tax rates. We intend to cause the 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. See "Liquidity and Capital Resources - Tax Receivable Agreement" for additional information about the TRA.

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ACCELERATE 2025 Program

In the first quarter of 2023 we are initiating a two-year restructuring program that will enable continued growth, drive innovation, and deliver sustainable productivity improvements over the long term. The program will result in approximately $65 million of cumulative one-time charges through 2024, and we expect it to generate annual savings of approximately $35 million in 2025.

Acquisitions

During the fourth quarter of 2022 we completed one strategic acquisition and signed a definitive agreement for another. We believe these acquisitions complement our product capabilities, enhance our human capital, and provide us access to new markets in new geographies.

On November 1, 2022, we acquired Centurion Liability Insurance Services, LLC, (“Centurion”). Centurion is a professional lines wholesale insurance broker and has employees based in Florida and California. Prior to the acquisition, Centurion was partially owned by Insurance Office of America.

In December 2022 we announced the signing of a definitive agreement to acquire certain assets of Griffin Underwriting Services, a binding authority specialist and wholesale insurance broker headquartered in Bellevue, WA. This acquisition was completed in January 2023.

See "Note 4, Mergers and Acquisitions" and “Note 22, Subsequent Events” of the audited consolidated financial statements in this Annual Report for further discussion.

COVID-19

While we believe our business and operations have thus far performed at a high level of efficiency throughout the pandemic, the final impact of the pandemic remains uncertain, particularly if the pandemic persists beyond current expectations, new variants of the virus continue to develop, vaccines and boosters are either not widely embraced or prove to be less effective than anticipated, and/or the global economy does not recover as expected, especially in light of current inflationary trends and other challenging macroeconomic conditions. The effects could yet have a material impact on our results of operations.

Key Factors Affecting Our Performance

Our 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 and service capabilities. We continuously evaluate acquisitions and intend to further pursue targeted acquisitions that complement our product and service capabilities or provide us access to new markets. We have previously made, and intend to continue to make, acquisitions with the objective of enhancing our human capital and product and service capabilities, entering natural adjacencies, and expanding our geographic presence. Our ability to successfully pursue strategic acquisitions is dependent upon a number of factors, including sustained execution of a disciplined and selective acquisition strategy which requires acquisition targets to have a cultural and strategic fit, competition for these assets, purchase price multiples that we deem appropriate and our ability to effectively integrate targeted companies or assets and grow our business. We do not have agreements or commitments for any material acquisitions at this time.

Deepen and Broaden our Relationships with Retail Broker Trading Partners

We have deep engagement with our retail broker trading partners, and we believe we have the ability to transact in even greater volume with nearly all of them. For example, in 2022, our revenue derived from the Top 100 firms (as ranked by Business Insurance) expanded faster than our Organic revenue growth rate of 16.4%. Our ability to deepen and broaden relationships with our retail broker trading partners and increase sales is dependent upon a number of factors, including client satisfaction with our distribution reach and our product capabilities, retail brokers

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continuing to require or desire our services, 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 a continuing ability to secure sufficient capital support from insurers, 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 for the insurance products.

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 to do so. We are focused on enhancing the breadth of our product and service offerings as well as developing and launching new solutions to address the evolving needs of the specialty insurance industry and markets. Our future success is dependent upon a number of factors, including on our ability to successfully develop, market, and sell existing and new products and services 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. Changes in the insurance market or specialty lines that are our focus, characterized by a period of increasing (or declining) premium rates, could positively (or negatively) impact our profitability.

Managing Changing Macroeconomic Conditions

Growth in certain lines of business, such as project-based construction and M&A transactional liability insurance, is partially dependent on a variety of macroeconomic factors inasmuch as binding the underlying insurance coverage is subject to the underlying activity occurring. In periods of economic growth and liquid credit markets, this underlying activity can accelerate and provide tailwinds to our growth. In periods of economic decline and tight credit markets, this underlying activity can slow or be delayed and provide headwinds to our growth. As interest rates have rapidly risen, leading to friction in debt markets, we have started to observe some delays to both construction projects and M&A activity which, in turn, pauses the binding of construction and M&A transactional liability insurance policies. We believe over time these lines of business will continue to grow as the economy steadies and again grows.

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, high-hazard, and otherwise hard-to-place risks across many lines of insurance. This trend continued in 2022, with 14 named storms – including Hurricane Ian with estimated losses of $50 to $65 billion during the 2022 Atlantic hurricane season – following 21 named storms totaling over $70 billion in estimated losses during the 2021 Atlantic hurricane season, 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 firms that do 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.

Although we believe this growth will continue, we recognize that the growth of the E&S market might not be linear as risks can and do shift between the E&S and non-E&S markets as market factors change and evolve. For example, we benefited from a rapid increase in both the rate and flow of public company D&O policies into the wholesale channel in 2020 and 2021. Throughout 2022 as the public company D&O insurance markets stabilized,

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the number of IPOs slowed, and new insurance capital that previously entered the market impacted the public company D&O space, public company D&O rate decreases have accelerated. We believe these factors have also created opportunities for retailers to place some of that coverage directly.

Address Costs of Being a Public Company

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 best practices and/or requirements for public companies. We have incurred new expenses as a public company, including public reporting obligations, expenses for complying with securities laws and regulations, Sarbanes-Oxley Act compliance expenses, additional headcount, increased professional fees for accounting, proxy statements, stockholder meetings, stock exchange fees, transfer agent fees, SEC and FINRA filing fees, legal fees, franchise taxes, and insurance expenses.

Summary of Financial Performance Highlights

* 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)
Total revenue growth rate, defined as December 31, 2022 revenue of $1,725.2 million less December 31, 2021 revenue of $1,432.8 million is a $292.4 million year-over-year change. The change, $292.4 million, divided by the December 31, 2021 revenue of $1,432.8 million is a total revenue change of 20.4%. December 31, 2021 revenue of $1,432.8 million less December 31, 2020 revenue of $1,018.3 million is a $414.5 million year-over-year change. The change, $414.5 million divided by the December 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 less December 31, 2019

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revenue of $765.1 million is a $253.2 million year-over-year change. The change, $253.2 million divided by the December 31, 2019 revenue of $765.1 million, is a total revenue change of 33.1%.

(2)
Compensation and benefits expense ratio is defined as Compensation and benefits expense divided by Total revenue.

(3)
General and administrative expense ratio is defined as General and administrative expense divided by Total revenue.

(4)
See "Note 13, Earnings (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, 2022 and 2021

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Revenue increased $292.4 million, or 20.4% period-over-period, to $1,725.2 million.

•
Compensation and benefits expense increased $137.4 million, or 13.9% period-over-period, and the Compensation and benefits expense ratio decreased 3.8%, from 69.2% to 65.4%.

•
General and administrative expense increased $58.0 million, or 41.8% period-over-period, and the General and administrative expense ratio increased 1.7%, from 9.7% to 11.4%.

•
Total operating expenses increased $189.5 million, or 15.2% period-over-period, to $1,435.7 million.

•
Operating income increased $102.9 million period-over-period to $289.5 million.

•
Net income increased by $106.7 million period-over-period to $163.3 million.

•
Net income margin was 9.5% for the year ended December 31, 2022, compared to 4.0% in the same period in the prior year.

•
Earnings per share was $0.57 for the year ended December 31, 2022 compared to a Loss per share of $0.07 in the prior year.

•
Diluted earnings per share was $0.52 for the year ended December 31, 2022 compared to a Diluted loss per share of $0.07 in the prior year.

•
Organic revenue growth rate for the year ended December 31, 2022 was 16.4%, compared to 22.4% for the prior year – see “Non-GAAP Financial Measures and Key Performance Indicators” for further information.

•
Adjusted compensation and benefits expense increased $175.3 million, or 20.7%, and the Adjusted compensation and benefits expense ratio increased 0.1% from 59.1% to 59.2% period-over-period – see “Non-GAAP Financial Measures and Key Performance Indicators” for further information.

•
Adjusted general and administrative expense increased $60.0 million, or 47.6% period-over-period, and the Adjusted general and administrative expense ratio increased 2.0%, from 8.8% to 10.8% – see “Non-GAAP Financial Measures and Key Performance Indicators” for further information.

•
Adjusted EBITDAC increased $57.2 million period-over-period to $517.4 million – see “Non-GAAP Financial Measures and Key Performance Indicators” for further information.

•
Adjusted EBITDAC margin decreased 2.1% period-over-period from 32.1% to 30.0% – see “Non-GAAP Financial Measures and Key Performance Indicators” for further information.

•
Adjusted net income increased to $312.0 million from $290.1 million in the prior period and Adjusted net income margin declined 2.1% from 20.2% to 18.1%– see “Non-GAAP Financial Measures and Key Performance Indicators” for further information.

•
Adjusted diluted earnings per share was $1.15 for the year ended December 31, 2022 compared to $1.08 in the same period in the prior year – see “Non-GAAP Financial Measures and Key Performance Indicators” for further information.

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Comparison of the Year Ended December 31, 2021 and 2020

•
Revenue increased $414.5 million, or 40.7% period-over-period, to $1,432.8 million.

•
Compensation and benefits expense increased $305.4 million, or 44.5% period-over-period, and the Compensation and benefits expense ratio increased 1.8% from 67.4% to 69.2%.

•
General and administrative expense increased $31.6 million, or 29.4% period-over-period, and the General and administrative expense ratio decreased 0.8% from 10.5% to 9.7%.

•
Total operating expenses increased $386.4 million, or 44.9% period-over-period, to $1,246.1 million.

•
Operating income increased $28.1 million period-over-period to $186.6 million.

•
Net income decreased $13.9 million period-over-period to $56.6 million.

•
Net income margin was 4.0% for the year ended December 31, 2021 compared to 6.9% in the same period in the prior year.

•
Loss per share and Diluted loss per share was $0.07 for the year ended December 31, 2021.

•
Organic revenue growth rate for the year ended December 31, 2021 was 22.4%, compared to 20.4% in the prior year – see “Non-GAAP Financial Measures and Key Performance Indicators” for further information.

•
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%, and the Adjusted general and administrative expense ratio decreased 0.3% from 9.1% to 8.8% period-over-period – see “Non-GAAP Financial Measures and Key Performance Indicators” for further information.

•
Adjusted EBITDAC increased $166.7 million period-over-period to $460.2 million – see “Non-GAAP Financial Measures and Key Performance Indicators” for further information.

•
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 $1.08 for the year ended December 31, 2021 – 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 policy 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 net commissions and policy fees 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 in whole or in part on the underwriting performance, we do not take any direct insurance risk other than through our equity method investment in Geneva Re through Ryan Investment Holdings, LLC. We also receive loss mitigation and other fees, some of which are not dependent on the placement of a risk.

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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 from clients, as well as through supplemental commissions, which may be contingent commissions or volume-based commissions from carriers. 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 from clients and through contingent commissions from carriers. 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.

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 Expense, Net

Interest expense, net consists of interest payable on indebtedness, amortization of the Company's interest rate cap, imputed interest on finance leases and contingent consideration, and amortization of deferred debt issuance costs, offset by interest income on the Company's Cash and cash equivalents balances and payments received in relation to the interest rate cap.

Other Non-Operating Loss

In 2022, Other non-operating loss included a change related to the TRA liability caused by an update in our blended state tax rates. In 2021, Other non-operating loss included the change in fair value of the embedded derivatives on the Redeemable Preferred Units. This change in fair value was 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 expense associated with the extinguishment of a portion of our deferred debt issuance costs on the term debt in the first quarter of 2021.

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Income Tax Expense

Income tax expense includes tax on the Company's allocable share of any net taxable income from the LLC, from certain state and local jurisdictions that impose taxes on partnerships, as well as earnings from our foreign subsidiaries and C-Corporations subject to entity level taxation.

Non-Controlling Interest

For the periods presented prior to March 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 11, Stockholders' and Members' Equity” of the audited consolidated financial statements in this Annual Report for more information.

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Results of Operations

Below is a summary table of the financial results and Non-GAAP measures that we find relevant to our business operations:

* 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.

Comparison of the Year Ended December 31, 2022 and 2021

Revenue

Net Commissions and Fees

Net commissions and fees increased by $279.7 million, or 19.5%, from $1,432.2 million to $1,711.9 million for the year ended December 31, 2022 as compared to the same period in the prior year. The two main drivers of the

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revenue increase are 16.4% of organic revenue growth and 2.8% growth from the Keystone, Crouse, and Centurion acquisitions.

Wholesale Brokerage net commissions and fees increased by $197.3 million, or 21.2%, period-over-period, primarily due to strong organic growth within the Specialty as well as contributions from the Crouse and Centurion acquisitions. Crouse contributed to organic growth starting in December of 2022.

Binding Authority net commissions and fees increased by $21.4 million, or 10.2%, period-over-period, primarily due to strong organic growth within the Specialty as well as contributions from the Crouse acquisition. Crouse contributed to organic growth starting in December of 2022.

Underwriting Management net commissions and fees increased by $61.0 million, or 21.0%, period-over-period, primarily due to strong organic growth within the Specialty as well as contributions from the Keystone acquisition.

The following table sets forth our revenue by type of commission and fees:

Net commissions and policy fees grew 19.1%, slightly lower than the overall net commissions and fee revenue growth of 19.5% for the year ended December 31, 2022, period-over-period 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.

Supplemental and contingent commissions increased 36.1% period-over-period driven by the performance of risks placed on eligible business earning profit-based or volume-based commissions.

Loss mitigation and other fees grew 16.6% period-over-period primarily due to captive management and other risk management services fees from the placement of alternative risk insurance solutions in 2022.

Expenses

Compensation and Benefits

Compensation and benefits expense increased by $137.4 million, or 13.9%, from $991.6 million to $1,129.0 million for the year ended December 31, 2022 compared to the same period in 2021. The following were the principal drivers of this increase:

•
Commissions increased $95.2 million, or 22.0%, period-over-period, driven by the 19.5% increase in total Net Commissions and Fees discussed above;

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•
The remaining $42.2 million period-over-period increase was driven by a $80.3 million increase generated from (i) the addition of 304 employees compared to the same period prior year and (ii) growth in the business. This growth of $80.3 million was offset by a $21.8 million decrease to IPO- related expense and a $16.3 million decrease to Acquisition related long-term incentive compensation. Overall headcount increased to 3,850 full-time employees as of December 31, 2022 compared to 3,546 as of December 31, 2021.

The net impact of revenue growth and the factors above resulted in a Compensation and benefits expense ratio decrease of 3.8% from 69.2% to 65.4% period-over-period.

In general, we expect to continue experiencing a 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 $58.0 million, or 41.8%, from $139.0 million to $197.0 million for the year ended December 31, 2022 as compared to 2021. A main driver of this increase was $25.7 million of increased travel and entertainment expense as travel restrictions associated with the pandemic lessened compared to 2021. Insurance expense contributed $4.7 million to the period-over-period increase due to increased costs associated with being a public company. An increase in E&O claims and other commercial accommodations contributed $4.5 million to the period-over-period increase. The remaining increase of $23.1 million was driven by growth in the business. Such expenses incurred to accommodate both organic and inorganic revenue growth include IT, occupancy, and professional services. The net impact of revenue growth and the factors listed above resulted in a General and administrative expense ratio increase of 1.7% from 9.7% to 11.4% period-over-period.

Amortization

Amortization expense decreased by $4.3 million, or 4.0%, from $107.9 million to $103.6 million for the year ended December 31, 2022 compared to the prior year. The main driver for the decrease is certain previously acquired intangible assets became fully amortized. Our intangible assets decreased by $87.5 million when comparing the balance as of December 31, 2022 to the balance as of December 31, 2021.

Interest Expense, Net

Interest expense, net increased $25.4 million, or 32.0%, from $79.4 million to $104.8 million for the year ended December 31, 2022 compared to the prior year. The main drivers of the change in Interest expense, net for the year ended December 31, 2022 were the issuance of $400.0 million of Senior Secured Notes on February 3, 2022 and an increase in the floating rate applied to our Term Loan on account of the rising interest rate environment. On April 7, 2022, the Company entered into an interest rate cap agreement to manage its exposure to interest rate fluctuations related to the Company’s Term Loan for an upfront cost of $25.5 million. The interest rate cap has a $1,000.0 million notional amount, 2.75% strike, and terminates on December 31, 2025. For each of the twelve months ended December 31, 2023, 2024, and 2025 we expect to incur approximately $7.0 million of interest expense related to the cap.

Other Non-Operating Loss

Other non-operating loss decreased by $39.8 million from to a loss of $44.9 million for the year ended December 31, 2021 to a loss of $5.1 million in the current period. For the year ended December 31, 2022, Other non-operating loss included a $5.6 million change in the TRA liability caused by a change in our blended state tax rates. For the year ended December 31, 2021, Other non-operating loss included a $36.9 million change in the fair value of the embedded derivatives of our Redeemable Preferred Units as well as $8.6 million of debt issuance costs written off due to the extinguishment of a portion of the term debt in connection with a repricing.

Income Before Income Taxes

Due to the factors above, Income before income taxes increased $117.6 million from $61.6 million to $179.2 million for the year ended December 31, 2022 compared to the same period in the prior year.

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Income Tax Expense

Income tax expense increased $11.0 million from $4.9 million to $15.9 million for the year ended December 31, 2022 as compared to the same period in the prior year due to the Company being allocated pre-tax book loss for the post-IPO period ended December 31, 2021 compared to pre-tax book income for the year ended December 31, 2022. The increase in tax expense was offset by an increase in the Company's state tax rate during 2022 which resulted in a tax benefit recognized related to the increase in our Deferred tax assets and by a tax benefit recognized as a result of equity-based compensation vesting and resulting increase in the Company’s tax basis in excess of GAAP basis.

Net Income

Net income increased $106.7 million from $56.6 million to $163.3 million for the year ended December 31, 2022 compared to the same period in the prior year as a result of the factors described above.

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 ended December 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.

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 the Crouse acquisition in December. All Risks contributed to organic growth for the period September through December 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 the Crouse acquisition in December. All Risks contributed to organic growth for the period September through December 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 organic growth for the period September through December 2021.

In 2021, certain business previously transacted by Ryan 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:

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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 ended December 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.

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.

Loss mitigation and other fees grew 41.5% period-over-period primarily due to increased capital markets activity in 2021.

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 ended December 31, 2021 compared to the same period in 2020. The following were the principal drivers of this increase:

•
Commissions increased $138.5 million, or 47.0%, period-over-period, driven by the 40.9% increase in total Net Commissions and Fees discussed above;

•
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 $25.3 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; and

•
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 on September 1, 2020 and (ii) growth in the business. Overall headcount increased to 3,546 full-time employees as of December 31, 2021 from 3,313 as of December 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 ended December 31, 2021.

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

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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 ended December 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 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 ended December 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 of December 31, 2021 as compared to December 31, 2020.

Interest Expense, Net

Interest expense, net increased $32.2 million, or 68.2%, from $47.2 million to $79.4 million for the year ended December 31, 2021 compared to the prior year. The main driver of the change in Interest expense, net for the year ended December 31, 2021 was an increase in debt, which was undertaken in connection with the All Risks Acquisition completed in September 2020.

Other Non-Operating Loss

Other non-operating loss increased by $12.6 million to a loss of $44.9 million for the year ended December 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 ended December 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 $17.9 million from $79.5 million to $61.6 million for the year ended December 31, 2021 compared to the same period in the prior year.

Income Tax Expense

Income tax expense decreased $4.1 million from $9.0 million to $4.9 million for the year ended December 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 the same year.

Net Income

Net income decreased $13.9 million from $70.5 million to $56.6 million for the year ended December 31, 2021 compared to the same period in the prior year as a result of the factors described above.

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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 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 this 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 Total revenue, as compared to the same period for the year prior, adjusted for revenue attributable to recent acquisitions during the first 12 months of Ryan Specialty’s ownership, and other adjustments such as contingent commissions, fiduciary investment income, and the impact of changes in foreign exchange rates.

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):

(1)
December 31, 2022 revenue of $1,725.2 million less December 31, 2021 revenue of $1,432.8 million is a $292.4 million year-over-year change. The change, $292.4 million, divided by the December 31, 2021 revenue of $1,432.8 million is a total revenue change of 20.4%. December 31, 2021 revenue of $1,432.8 million less December 31, 2020 revenue of $1,018.3 million is a $414.5 million year-over-year change. The change, $414.5 million, divided by the December 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 less December 31, 2019 revenue of $765.1 million is a $253.2 million year-over-year change. The change, $253.2 million, divided by the December 31, 2019 revenue of $765.1 million is a total revenue change of 33.1%. See "Comparison of the Year Ended December 31, 2022 and 2021" and "Comparison of the Year Ended December 31, 2021 and 2020" 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 December 31, 2022, 2021, and 2020 was $40.0 million $186.4 million and $98.4 million, respectively.

(3)
The other adjustments exclude the year-over-year change in contingent commissions, fiduciary investment income, and foreign exchange rates. The total adjustment for the years ended December 31, 2022, 2021, and 2020 was $16.0 million $0.6 million and $1.6 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

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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.

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:

(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:

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(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” in this Annual Report.

Adjusted EBITDAC and Adjusted EBITDAC Margin

We define Adjusted EBITDAC as Net income (loss) before Interest expense, net, Income tax expense, 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 to March 31, 2021 when we did not own 100% of the business or the non-controlling interest attributed to the retained ownership of the LLC.

A reconciliation of Adjusted EBITDAC and Adjusted EBITDAC margin to Net income (loss) and Net income margin, the most directly comparable GAAP measures, for each of the periods indicated is as follows:

(1)
Acquisition-related expense includes diligence, transaction-related, and integration costs. Compensation and benefits expenses were $0.1 million, $0.0 million and $4.5 million for the years ended December 31, 2022, 2021, and 2020, respectively, while General and administrative expenses contributed to $4.5 million, $4.3 million, and $13.8 million of the acquisition-related expense for the years ended December 31, 2022, 2021, and 2020, respectively.

(2)
Acquisition related long-term incentive compensation arises from long-term incentive plans associated with acquisitions.

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(3)
Restructuring and related expense consists of compensation and benefits of $0.7 million, $9.9 million, and $10.5 million for the years ended December 31, 2022, 2021, and 2020, respectively, and General and administrative costs including occupancy and professional services fees of $5.0 million, $4.7 million, and $2.4 million for the years ended December 31, 2022, 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 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 15, Employee Benefit Plans, Prepaid and Long-Term Incentives” of the audited consolidated financial statements in this Annual Report for further discussion.

(5)
For the year ended December 31, 2022, Other non-operating loss includes a $5.6 million charge related to the change in the TRA liability caused by a change in our blended state tax rates. For the year ended December 31, 2021, Other non-operating loss includes the change in fair value of the embedded derivatives on the Redeemable Preferred Units. This change in fair value of $36.9 million was 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. The loss in 2021 also includes expense of $8.6 million associated with the extinguishment of a portion of our deferred debt issuance costs on the term debt. For the year ended December 31, 2020, Other non-operating loss includes the change in fair value of the embedded derivatives on the Redeemable Preferred Units of $28.7 million and the change in fair value of interest rate swaps which were discontinued in 2020.

(6)
Equity-based compensation reflects non-cash equity-based expense.

(7)
Discontinued programs expense includes $0.0 million, $0.0 million, and $(1.8) million of General and administrative expense for the years ended December 31, 2022, 2021, and 2020, respectively. Compensation and benefits expense was $0.0 million, $0.0 million, and $1.0 million for the years ended December 31, 2022, 2021, and 2020, respectively. These costs were associated with concluding specific programs that are no longer core to our business. This adjustment also includes $0.0 million, $0.0 million, and $(0.1) million of General and administrative expense related to additional cancellation activity associated with these programs for the years ended December 31, 2022, 2021, and 2020, 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 $0.0 million, $0.4 million, and $0.4 million for the years ended December 31, 2022, 2021, and 2020, respectively, and Compensation and benefits expense was $0.0 million, $0.0 million, and $(0.1) million for the years ended December 31, 2022, 2021, and 2020, 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 $1.5 million, $3.6 million, and $0.0 million for the years ended December 31, 2022, 2021, and 2020, respectively 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 $54.1 million, $75.9 million, and $0.0 million for the years ended December 31, 2022, 2021, and 2020, respectively, related primarily to the revaluation of existing equity awards at IPO as well as expense for new awards issued at IPO.

(10)
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

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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 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 the 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 the 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 the 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:

(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 $0.1 million, $0.0 million, and $4.5 million for the years ended December 31, 2022, 2021, and 2020, respectively, while General and administrative expenses contributed to $4.5 million, $4.3 million, and $13.8 million of the acquisition-related expense for the years ended December 31, 2022, 2021, and 2020, 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 $0.7 million, $9.9 million, and $10.5 million for the years ended December 31, 2022, 2021, and 2020, respectively, and General and administrative costs including occupancy and professional services fees of $5.0 million, $4.7 million, and $2.4 million for the years ended December 31, 2022, 2021, and 2020, respectively, related to the Restructuring

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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 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 15, Employee Benefit Plans, Prepaid and Long-Term Incentives” of the audited consolidated financial statements in this Annual Report for further discussion.

(6)
For the year ended December 31, 2022, Other non-operating loss includes a $5.6 million charge related to the change in the TRA liability caused by a change in our blended state tax rates. For the year ended December 31, 2021, Other non-operating loss includes the change in fair value of the embedded derivatives on the Redeemable Preferred Units. This change in fair value of $36.9 million was 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. The loss in 2021 also includes expense of $8.6 million associated with the extinguishment of a portion of our deferred debt issuance costs on the term debt. For the year ended December 31, 2020, Other non-operating loss includes the change in fair value of the embedded derivatives on the Redeemable Preferred Units of $28.7 million and the change in fair value of interest rate swaps which were discontinued in 2020.

(7)
Equity-based compensation reflects non-cash equity-based expense.

(8)
Discontinued programs expense includes $0.0 million, $0.0 million, and $(1.8) million of General and administrative expense for the years ended December 31, 2022, 2021, and 2020, respectively. Compensation and benefits expense was $0.0 million, $0.0 million, and $1.0 million for the years ended December 31, 2022, 2021, and 2020, respectively. These costs were associated with concluding specific programs that are no longer core to our business. This adjustment also includes $0.0 million, $0.0 million, and $(0.1) million of General and administrative expense related to additional cancellation activity associated with these programs for the years ended December 31, 2022, 2021, and 2020, 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 $0.0 million, $0.4 million, and $0.4 million for the years ended December 31, 2022, 2021, and 2020, respectively, and Compensation and benefits expense was $0.0 million, $0.0 million, and $(0.1) million for the years ended December 31, 2022, 2021, and 2020, 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 $1.5 million, $3.6 million, and $0.0 million for the years ended December 31, 2022, 2021, and 2020, respectively 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 $54.1 million, $75.9 million, and $0.0 million for the years ended December 31, 2022, 2021, and 2020, respectively, related primarily to the revaluation of existing equity awards at IPO as well as expense for new awards issued at IPO.

(11)
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 the LLC. For the year ended December 31, 2022 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 4.53% on 100% of our adjusted income before income taxes as if the Company owned 100% of the LLC. For the year ended December 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% of the LLC. For the year ended December 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% of the LLC.

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(12)
Net income margin is Net income as a percentage of Total revenue.

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:

(1)
Adjustment removes the impact of Net income attributed to dilutive awards and substantively vested RSUs to arrive at Net income attributable to Ryan Specialty Holdings, Inc. See “Note 13, Earnings (Loss) Per Share” of the audited consolidated financial statements in this Annual Report.

(2)
For comparability purposes, this calculation incorporates the Net income as if all LLC Common Units (together with shares of Class B common stock) were exchanged for shares of Class A common stock at the beginning of the period. 143,992 weighted average outstanding LLC Common Units were considered dilutive for the year ended December 31, 2022 and included in the 265,750 Weighted-average shares outstanding within Diluted EPS. See “Note 13, Earnings (Loss) Per Share” of the audited consolidated financial statements in this Annual Report.

(3)
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” in this Annual Report.

(4)
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 earnings per share calculation disclosed in “Note 13, Earnings (Loss) Per Share” of the audited consolidated financial statements in this Annual Report.

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(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 to March 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” in this Annual Report.

(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 13, Earnings (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 our 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 Revolving Credit Facility, Term Loan, and Senior Secured Notes. 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 Revolving Credit Facility will be sufficient to meet 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 raise additional capital or generate cash flows necessary to expand our operations, this could reduce our ability to compete successfully and harm the results of our operations.

Cash and cash equivalents 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 funds, 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 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.

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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 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 $744.7 million and $752.7 million as of December 31, 2022 and 2021, respectively, and fiduciary receivables of $1,837.0 million and $1,637.5 million as of December 31, 2022 and 2021, respectively. While we may earn interest income on fiduciary cash held in cash and investments, the fiduciary cash may not be used for general corporate purposes. Of the $992.6 million of Cash and cash equivalents on the Consolidated Balance Sheet as of December 31, 2022, $66.2 million was held in fiduciary accounts representing collected revenue and was available to be transferred to operating accounts and used for general corporate purposes.

Credit Facilities

We expect to have sufficient financial resources to meet our business requirements for 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 financing capital expenditures, we have the ability to borrow under our Revolving 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.

On September 1, 2020, we entered into the Credit Agreement with leading institutions, including JPMorgan 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 substantially all of our assets.

On July 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 bore interest at the Eurocurrency Rate (LIBOR) plus a margin that ranged 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 agreement governing the Revolving Credit Facility were changed in connection with such amendment.

On February 3, 2022, the LLC issued $400.0 million of Senior Secured Notes. The notes have a 4.375% interest rate and will mature on February 1, 2030.

On April 29, 2022, the Company entered into the Fourth Amendment to the Credit Agreement on its Term Loan and Revolving Credit Facility to transition its LIBOR rate to a Benchmark Replacement of Adjusted Term SOFR plus a Credit Spread Adjustment of 10 basis points, 15 basis points, or 25 basis points for the one-month, three-month, or six-month borrowing periods, respectively.

As of December 31, 2022, the interest rate on the Term Loan was 3.00% plus Adjusted Term SOFR, subject to a 75 basis point floor.

As of December 31, 2022, we were in compliance with all of the covenants under our Credit Agreement and there were no events of default for the year ended December 31, 2022.

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Tax Receivable Agreement

The Company is party to a TRA with current and certain former LLC Unitholders. The TRA provides for the payment by the Company, to current and certain former LLC Unitholders, of 85% of the net cash savings, if any, in U.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 of the LLC resulting from purchases or exchanges of LLC Common Units (“Exchange Tax Attributes”), (ii) certain tax attributes of the LLC that existed prior to the IPO (“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 current and certain former LLC Unitholders pursuant to the TRA; however, we estimate that such tax benefits and the related TRA payments may be substantial. As set forth in the table below, and 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 as a result of transaction, we expect future payments under the TRA as a result of transactions as of December 31, 2022 will be $295.3 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 highly unlikely event of an early termination of the TRA (e.g., a default by the Company or 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 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 from the LLC that come from cash on hand and cash generated from operations.

Total realized tax savings for the year ended December 31, 2021 from each of the tax attributes associated with the TRA were (i) Exchange Tax Attributes of $5.6 million, (ii) Pre-IPO M&A Tax Attributes of $4.0 million, and (iii) TRA Payment Tax Attributes of $0.0 million. 85% of the realized savings ($8.2 million, plus interest) were paid to the current and certain former LLC Unitholders and the remaining 15% of the realized tax savings ($1.4 million) were retained by the Company.

Total expected estimated tax savings from each of the tax attributes associated with the TRA as of December 31, 2022 are (i) Exchange Tax Attributes of $176.8 million, (ii) Pre-IPO M&A Tax Attributes of $100.0 million, and (iii) TRA Payment Tax Attributes of $70.6 million. The Company will retain the benefit of 15% of these cash savings.

Comparison of Cash Flows for the Year Ended December 31, 2022 and 2021

Cash and cash equivalents increased $605.7 million from $387.0 million at December 31, 2021 to $992.7 million at December 31, 2022. A summary of our cash flows provided by and used for ongoing operations from operating, investing, and financing activities is as follows:

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Cash Flows From Operating Activities

Net cash provided by operating activities during the year ended December 31, 2022 increased $62.0 million from the year ended December 31, 2021 to $335.5 million. Strong organic revenue growth along with the Keystone and Crouse acquisitions completed in the fourth quarter of 2021 drove operating cash flow period-over-period. Net income increased $106.7 million which was offset by a decline in accrued liabilities period-over-period related to long-term incentives within Accounts payable and accrued liabilities.

Cash Flows From Investing Activities

Cash flows used for investing activities during the year ended December 31, 2022 were $22.4 million, a decrease of $435.5 million compared to the $457.9 million of cash flows used for investing activities during the year ended December 31, 2021. The main driver of the cash flows used for investing activities in the year ended December 31, 2022 was $15.0 million of capital expenditures and $7.7 million related to the Centurion acquisition completed in November of 2022, compared to the $343.2 million acquisition of the entity through which Onex held its preferred and other interests, $9.8 million of capital expenditures, and $108.9 million of acquisition payments made for the Crouse and Keystone acquisitions for the year ended December 31, 2021.

Cash Flows From Financing Activities

Cash flows provided by financing activities during the year ended December 31, 2022 were $314.8 million, a decrease of $114.5 million compared to cash flows provided by financing activities of $429.3 million during the year ended December 31, 2021. The main drivers of cash flows provided by financing activities during the year ended December 31, 2022 were the issuance of the Senior Secured Notes generating $394.0 million in net proceeds and the net change in fiduciary liabilities of $17.4 million, offset by cash distributions to LLC Unitholders of $39.9 million, payment of interest rate cap premium of $25.5 million, the repayment of term debt of $16.5 million, and the payment of contingent consideration of $6.2 million. The main drivers of cash flows provided by financing activities during the year ended December 31, 2021 was the issuance of Class A common stock in the IPO of $1,448.1 million, offset by the 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.

Contractual Obligations and Commitments

Our principal commitments consist of contractual obligations in connection with investing and operating activities. These obligations are described within “Note 9, Leases” and “Note 10, 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 Current accrued compensation and Non-current accrued compensation we have various long-term incentive compensation agreements accrued for. These agreements are typically associated with an acquisition.

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Below we have outlined the liabilities accrued as of December 31, 2022, the projected future expense, and the projected timing of future cash outflows associated with these arrangements.

Within “Note 4, Mergers and Acquisitions” in the notes to our audited consolidated financial statements in this Annual Report we outline various contingent consideration arrangements and their impact. Below we have outlined the liabilities accrued as of December 31, 2022, the projected future expense, and the projected timing of future cash outflows associated with these contingent consideration agreements.

For further discussion, see “Note 4, Mergers and Acquisitions”, “Note 9, Leases”, “Note 10, Debt”, “Note 15, Employee Benefit Plans, Prepaid and Long-Term Incentives”, and “Note 18, 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: (i) the Company must make assumptions that were uncertain when the judgment was made and (ii) 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 we 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.

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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, Mergers and Acquisitions” in the consolidated financial statements in this Annual Report for further information on the critical accounting policies over business combinations and contingent consideration. Refer to “Note 12, 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 17, Fair Value Measurements” in the consolidated financial statements in this Annual Report for further information on pricing of contingent consideration, derivative instruments and liabilities for which only fair value is disclosed. Refer to “Note 20, 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 our 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 from the date of acquisition.

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 and Monte 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.

Goodwill and Other Intangible Assets

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.

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Such estimates and assumptions could change in the future as more information becomes available, which could impact the amounts reported and disclosed herein.

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 20, 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 current and certain former LLC Unitholders. The TRA provides for the payment by the Company, to current and certain former LLC Unitholders, of 85% of the net cash savings, if any, in U.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 of the LLC resulting from purchases or exchanges of LLC Common Units, (ii) certain tax attributes of the LLC that existed prior to the IPO, (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. 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 of December 31, 2022, we recognized $295.3 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.

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