Ryan Specialty Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Basis of Presentation

Basis of Presentation

12 Months Ended

Dec. 31, 2021

Nature of Operations

Ryan Specialty Group Holdings, Inc. and its subsidiaries (the “Company” or "Ryan Specialty") provides specialty products and solutions for insurance brokers, agents and carriers. This encompasses distribution, underwriting, product development, administration and risk management services by acting as a wholesale broker and a managing underwriter to a wide variety of personal, commercial, industrial, institutional, and governmental organizations through one operating segment, Ryan Specialty. With the exception of the Company’s equity method investment, the Company does not take on any underwriting risk.

The Company is headquartered in Chicago, Illinois, and has operations in the United States, Canada, the United Kingdom, and Europe.

IPO and Reorganization

The Company was formed as a Delaware corporation on March 5, 2021, for the purpose of completing a public offering and related transactions in order to carry on the business of RSG LLC. On July 26, 2021, the Company completed its IPO of 65,456,020 shares of Class A common stock, $0.001 par value per share, at an offering price of $23.50 per share. The Company received net proceeds of $1,448.1 million after deducting underwriting discounts, commissions and other offering costs. The Company used the proceeds to purchase LLC Common Units from our pre-IPO LLC Unitholders, purchase newly issued LLC Common Units from RSG LLC, acquire the outstanding 260,000,000 Redeemable Preferred Units held by Onex and repurchase shares of Class A common stock from Onex. The Company is now a publicly traded company whose Class A common stock is traded on the New York Stock Exchange under the ticker symbol “RYAN”.

In connection with the IPO, the Company completed the following Organizational Transactions which are presented in the “Effect of the Organizational Transactions” in the Consolidated Statements of Mezzanine Equity and Stockholders'/ Members' Equity:

•

RSG LLC adopted the Sixth Amended and Restated Limited Liability Company Agreement (the “Sixth LLC Operating Agreement”) to, among other things, appoint the Company as the sole managing member of RSG LLC.

•

We amended and restated the certificate of incorporation of the Company to, among other things, provide for Class A common stock, Class B common stock and Class X common stock.

•

All Class A common units of RSG LLC, including existing units with a participation threshold, were reclassified into an aggregate of 213,693,861 LLC Common Units, and all Class B common units of RSG LLC were reclassified into an aggregate of 20,680,420 LLC Common Units. Upon the completion of this reclassification, subject to certain limited exceptions, all existing holders of LLC Common Units (i) were required to sell 15.0% of their vested interest (inclusive of vested equity grants and purchased equity) in RSG LLC (the “Mandatory Participation”) and (ii) had the option to sell up to (x) an additional 10.0% of their vested interest received as an equity grant under compensatory plans or arrangements and (y) 100.0% of their remaining purchased interest, in each case, on a pro rata basis (the “Optional Participation”, and, together with the Mandatory Participation, the “Participation”).

•

The Company engaged in a series of transactions with the entity (the “Common Blocker Entity”) through which Onex held its Class B common unit interest in RSG LLC (collectively, the “Common Blocker Merger”) that resulted in Onex exchanging its equity interests in the Common Blocker Entity for 20,680,420 shares of Class A common stock and a right to participate in the TRA through the issuance, subsequent repurchase and cancellation of 640,784 shares of Class X common stock, each in a non-cash transaction.

•

Through a series of internal transactions and after giving effect to the Participation, certain pre-IPO LLC Unitholders, excluding Onex, had their purchased and granted LLC Common Units exchanged into an aggregate of 31,992,135 shares, respectively, of Class A common stock on a one-for-one basis in a non-cash transaction and received TRA alternative payments (“TRA Alternative Payments”). The TRA Alternative Payment amounts were intended to approximate what such LLC Unitholders would have received had their exchange been taxable and provided the Company with additional tax attributes, although these exchanges will not relate to actual tax benefits obtained or to be obtained by the Company.

•

The Company repurchased 8,224,708 shares of Class A common stock from Onex that were reissued as part of the IPO.

•

The Company purchased the LLC Common Units subject to the Participation for $799.3 million, inclusive of $72.9 million related to TRA Alternative Payments. Of the total TRA Alternative Payments, $37.6 million was attributed to the modification of equity grants discussed below in the exchange of LLC Common Units from pre-IPO LLC Unitholders for Class A common stock. The remaining $35.3 million was treated as a return of capital associated with purchased LLC Common Units.

•

Granted incentive LLC Common Units held by certain pre-IPO LLC Unitholders were exchanged for (i) an aggregate of 11,426,502 restricted shares of Class A common stock (“Restricted Stock”) of which 1,349,640 were granted to former employees, (ii) an aggregate of 4,592,319 options to purchase shares of Class A common stock with an exercise price equal to the IPO price of $23.50 (“Reload Options”), (iii) an aggregate of 27,493,192 restricted LLC Common Units (“Restricted Common Units”) and (iv) an aggregate of 3,911,490 Class C Incentive Units with a participation threshold equal to the IPO price of $23.50 (“Reload Class C Incentive Units”), collectively, the “Replacement Awards”. This exchange was considered a modification of the pre-IPO equity awards at the IPO date as a result of the change in terms and conditions of the existing awards and the issuance of new options and profits interests with different vesting schedules than the exchanged awards. This modification resulted in the remeasurement of the incentive grants in accordance with ASC 718, Compensation- Stock Compensation (“ASC 718”). The TRA Alternative Payments of $37.6 million attributed to employees who exchanged their granted units into Restricted Stock were treated as a cash settlement of a portion of the existing awards, and therefore, were included in the post-IPO value for determining the incremental expense in the modification. The equity impact of the modification, including cash settlement, was ($18.6) million and $12.3 million to Additional paid-in capital and Non-controlling interests, respectively. The remaining unamortized fair value of the awards will be recognized as equity-based compensation allocated on a relative fair value basis over the remaining service periods.

•

The Company issued an aggregate of 8,066,349 equity awards, including (i) an aggregate of 66,667 staking options to purchase Class A common stock with an exercise price equal to the IPO price of $23.50 (“Staking Options”), (ii) an aggregate of 4,339,738 restricted stock units of the Company which vest into shares of Class A common stock (“Restricted Stock Units” or “RSU”), (iii) an aggregate of 2,116,667 staking Class C Incentive Units with a participation threshold equal to the IPO price of $23.50 (“Staking Class C Incentive Units”), and (iv) an aggregate of 1,543,277 restricted LLC units (“Restricted LLC Units” or “RLU”) which vest into LLC Common Units, in each case, issued to certain employees in connection with the IPO as IPO awards and are subject to vesting.

•

The Company issued 149,162,107 shares of Class B common stock to the LLC Unitholders, on a one-to-one basis with the number of LLC Common Units each LLC Unitholder owned upon the consummation of the Organizational Transactions (after the Participation), for nominal consideration of $0.1 million in a non-cash transaction. Shares of Class B common stock were not issued to the LLC Unitholders with respect to the Class C Incentive Units.

•

The Company acquired the entity (the “Preferred Blocker Entity”) through which Onex held its preferred unit interest of 260,000,000 Redeemable Preferred Units in RSG LLC for $343.2 million, net of cash acquired.

•

The Company entered into a TRA with certain pre-IPO LLC Unitholders whereby the Company agreed to pay to such LLC Unitholders 85% of the benefits that the Company realizes (or is deemed to realize in certain circumstances) from (i) certain increases in the tax basis of the assets of RSG LLC resulting from purchases or exchanges of LLC Units, (ii) certain tax attributed of RSG LLC that existed prior to the IPO

or to which the Company succeed as a result of certain aspects of the Organizational Transactions, (iii) certain favorable "remedial" partnership tax allocations to which the Company becomes entitles (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. In addition, with respect to the holders of LLC Common Units who either sold 100% of their LLC Common Units in connection with the IPO or had their LLC Common Units (after giving effect to the Participation) exchanged for shares of Class A common stock on a one-for-one basis in the Organizational Transactions, such holders received a TRA Alternative Payment of $72.9 million.

•

The Company recorded a $329.0 million deferred tax asset which is comprised of $234.0 million related to benefits from future deductions attributable to the TRA and $95.0 million related to benefits from future deductions attributable to TRA Alternative Payments and purchase of LLC Units from certain holders that received TRA Alternative Payments.

•

The Company recorded Tax receivable agreement liabilities in the Consolidated Balance Sheets for the amount of $282.5 million associated with the payments to be made to pre-IPO LLC Unitholders subject to the TRA in a non-cash transaction.

•

Additionally, the Company has recorded a $61.1 million deferred tax asset related to temporary differences in the book basis as compared to the tax basis of its investment in RSG LLC.

New RSG Holdings was formed as a Delaware limited liability company on April 20, 2021, for the purpose of becoming, subsequent to our IPO, an intermediate holding company between Ryan Specialty Group Holdings, Inc., and Ryan Specialty Group, LLC. The Company is the sole managing member of New RSG Holdings. Pursuant to contribution agreements, on September 30, 2021, the Company, the non-controlling interest LLC Unitholders, and New RSG Holdings exchanged equity interests in Ryan Specialty Group, LLC for LLC Common Units in New RSG Holdings, with the intent that New RSG Holdings be the new holding company for Ryan Specialty Group, LLC interests. At that time Ryan Specialty Group, LLC adopted the LLC Operating Agreement and New RSG Holdings adopted the New RSG Holdings LLC Operating Agreement. As a result, the Company is a holding company, with its sole material asset being a controlling equity interest in New RSG Holdings, which became a holding company with its sole material asset being a controlling equity interest in Ryan Specialty Group, LLC. The Company operates and controls the business and affairs, and consolidates the financial results, of Ryan Specialty Group, LLC through New RSG Holdings, and through Ryan Specialty Group, LLC, conducts our business. Accordingly, the Company consolidates the financial results of New RSG Holdings, and therefore Ryan Specialty Group, LLC, and reports the non-controlling interests of New RSG Holdings' LLC Common Units on its consolidated financial statements. As of December 31, 2021, the Company owned 42.4% of the outstanding LLC Common Units of New RSG Holdings, and New RSG Holdings owned 99.9% of the outstanding LLC Common Units of Ryan Specialty Group, LLC. The remaining 0.1% of the outstanding LLC Common Units of Ryan Specialty Group, LLC were owned by a subsidiary of the Company. As Ryan Specialty Group, LLC is substantively the same as New RSG Holdings, for the purpose of this document, we will refer to both New RSG Holdings and Ryan Specialty Group, LLC as “RSG LLC”.

Basis of Presentation

The accompanying audited consolidated financial statements and notes thereto have been prepared in accordance with U.S. GAAP. The audited consolidated financial statements include the Company’s accounts and those of all controlled subsidiaries.

Intercompany accounts and transactions have been eliminated. In the opinion of management, the consolidated financial statements include all normal recurring adjustments necessary to present fairly the Company’s consolidated financial position, results of operations, and cash flows for all periods presented.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries that it controls due to ownership of a majority voting interest or pursuant to variable interest entity (“VIE”) accounting guidance. All intercompany transactions and balances have been eliminated in consolidation.

The Company, through our intermediate holding company New RSG Holdings, owns a minority economic interest in, and operates and controls the businesses and affairs of, RSG LLC. The Company has the obligation to absorb losses of, and receive benefits from, RSG LLC, that could be significant. We determined that, as a result of the Organizational Transactions described above, the Company is the primary beneficiary of RSG LLC and RSG LLC is a VIE. Further, the Company has no contractual requirement to provide financial support to RSG LLC. Accordingly, the Company has prepared these consolidated financial statements in accordance with Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”). ASC 810 requires that if an entity is the primary beneficiary of a VIE, the assets, liabilities, and results of operations of the VIE should be included in the consolidated financial statements of such entity.

The Organizational Transactions were considered to be transactions between entities under common control. The historical operations of RSG LLC are deemed to be those of the Company. Thus, the financial statements included in this report reflect (i) the historical operating results of RSG LLC prior to the IPO and Organizational Transactions; (ii) the consolidated results of the Company and RSG LLC following the IPO and Organizational Transactions; and (iii) the assets and liabilities of the Company and RSG LLC at their historical cost. No step-up basis of intangible assets or goodwill was recorded.

Use of Estimates

The preparation of the consolidated financial statements and notes thereto requires management to make estimates, judgements, and assumptions that affect the amounts reported in the consolidated financial statements and in the notes thereto. Such estimates and assumptions could change in the future as circumstances change or more information becomes available, which could affect the amounts reported and disclosed herein.

Impact of COVID-19

In March 2020, the World Health Organization declared a global pandemic related to the outbreak of a respiratory illness caused by the coronavirus, COVID-19. Related impacts and disruptions continue to be experienced in the geographical areas in which the Company operates, and the ultimate duration and intensity of this global health emergency continues to be unclear. There is still significant uncertainty related to the economic outcomes from the ongoing COVID-19 pandemic. Given the dynamic nature of the emergency and its global consequences, its ultimate impact on the Company’s operations, cash flows, and financial condition cannot be reasonably estimated at this time.

Revision of Previously Issued Financial Statements

During the fourth quarter of 2021, the Company revised the presentation of Cash held in a fiduciary capacity in the Consolidated Statements of Cash Flows. Historically, the Company did not present Cash held in a fiduciary capacity in the Consolidated Statements of Cash Flows, since these funds cannot be used for general purposes and were not considered a source of liquidity for the Company. The Company has since revised its presentation and includes Cash held in a fiduciary capacity as a component of Total cash, cash equivalents, and cash held in a fiduciary capacity in the Consolidated Statements of Cash Flows.

Based on an analysis of quantitative and qualitative factors in accordance with SEC Staff Accounting Bulletins (“SAB”) No. 99 Materiality and SAB No. 108 Considering the Effects of Prior Years Misstatements When Quantifying Misstatements in Current Year Financial Statements, the Company concluded the effect of the change was not material to any previously filed interim or annual financial statements. Accordingly, the Company revised the previously reported financial information in this Annual Report on Form 10-K in the Consolidated Statements of Cash Flows and related disclosures for the years ended December 31, 2020 and 2019, and for the unaudited interim periods ended March 31, 2021, June 30, 2021 and September 30, 2021. There was no impact to the Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Balance Sheets or Consolidated Statements of Mezzanine Equity and Shareholders’/Members’ Equity for any period presented.

The tables below reflect the impact to the Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 and the interim periods ended September 30, 2021, June 30, 2021, and March 31, 2021:


	Year Ended December 31, 2020									Year Ended December 31, 2019
	As Reported			Effect of Change			As Revised			As Reported			Effect of Change			As Revised
Total cash flows provided by operating activities	$	135,393			—		$	135,393		$	149,507			—		$	149,507
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions - net of cash acquired and cash held in fiduciary capacity		(814,870	)		96,909			(717,961	)		(146,433	)		25,536			(120,897	)
Other lines		(50,547	)		—			(50,547	)		(27,100	)					(27,100	)
Total cash flows used for investing activities	$	(865,417	)	$	96,909		$	(768,508	)	$	(173,533	)	$	25,536		$	(147,997	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in fiduciary liabilities		—			136,062			136,062			—			34,199			34,199
Other lines		989,242			—			989,242			28,075			—			28,075
Total cash flows provided by financing activities	$	989,242		$	136,062		$	1,125,304		$	28,075		$	34,199		$	62,274
Effect of changes in foreign exchange rates on cash, cash equivalents, and cash held in a fiduciary capacity		1,417			(64	)		1,353			392			(127	)		265
NET CHANGE IN CASH, CASH EQUIVALENTS, AND CASH HELD IN A FIDUCIARY CAPACITY	$	260,635		$	232,907		$	493,542		$	4,441		$	59,608		$	64,049
CASH, CASH EQUIVALENTS, AND CASH HELD IN A FIDUCIARY CAPACITY—Beginning balance		52,016			350,146			402,162			47,575			290,538			338,113
CASH, CASH EQUIVALENTS, AND CASH HELD IN A FIDUCIARY CAPACITY—Ending balance	$	312,651		$	583,053		$	895,704		$	52,016		$	350,146		$	402,162


	Nine Months Ended September 30, 2021								Six Months Ended June 30, 2021									Three Months Ended March 31, 2021
	As Reported			Effect of Change		As Revised			As Reported			Effect of Change			As Revised			As Reported			Effect of Change			As Revised
Total cash flows provided by (used for) operating activities	$	154,375			—	$	154,375		$	107,715			—		$	107,715		$	(74,805	)		—		$	(74,805	)
Total cash flows used for investing activities	$	(345,451	)		—	$	(345,451	)	$	(155	)		—		$	(155	)	$	(2,208	)		—		$	(2,208	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in fiduciary liabilities		—			52,422		52,422			—			93,671			93,671			—			(62,018	)		(62,018	)
Other lines		293,694			—		293,694			(113,092	)		—			(113,092	)		(76,148	)		—			(76,148	)
Total cash flows provided by (used for) financing activities	$	293,694		$	52,422	$	346,116		$	(113,092	)	$	93,671		$	(19,421	)	$	(76,148	)	$	(62,018	)	$	(138,166	)
Effect of changes in foreign exchange rates on cash, cash equivalents, and cash held in a fiduciary capacity		(1,574	)		88		(1,486	)		409			(946	)		(537	)		(314	)		(470	)		(784	)
NET CHANGE IN CASH, CASH EQUIVALENTS, AND CASH HELD IN A FIDUCIARY CAPACITY	$	101,044		$	52,510	$	153,554		$	(5,123	)	$	92,725		$	87,602		$	(153,475	)	$	(62,488	)	$	(215,963	)
CASH, CASH EQUIVALENTS, AND CASH HELD IN A FIDUCIARY CAPACITY—Beginning balance		312,651			583,053		895,704			312,651			583,053			895,704			312,651			583,053			895,704
CASH, CASH EQUIVALENTS, AND CASH HELD IN A FIDUCIARY CAPACITY—Ending balance	$	413,695		$	635,563	$	1,049,258		$	307,528		$	675,778		$	983,306		$	159,176		$	520,565		$	679,741