Q3 2023 BRP Group Inc Earnings Call

Greetings and welcome to the B R. P Group, Inc. Third quarter 2023 earnings call.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce Bonnie Bishop Executive Director Investor Relations. Thank you you may begin.

Operator, welcome to the ERP group's third quarter 2023 earnings call. Today's call is being recorded third quarter financial results supplemental information and Form 10-Q issued earlier. This afternoon and are available on the company's website at IR Dot Baldwin risk partners Dot Com. Please note that remarks made too.

Today may include forward looking statements subject to various assumptions risks and uncertainties. The company's actual results may differ materially from those contemplated by such statements.

For a more detailed discussion please refer to the note regarding forward looking statements in the company's earnings release and to our most recent Form 10-Q, both of which are available on the ERP website. During the call today. The company May also discuss certain non-GAAP financial measures for a more detailed discussion of these non-GAAP.

All measures and historical reconciliation to the most closely comparable GAAP measures. Please refer to the company's earnings release and supplemental information both of which have been posted on the company's website at IR Dot Baldwin risk partners Dot com.

I will now turn the call over to Trevor Baldwin CEO of ERP group.

Good afternoon, and thank you for joining our third quarter earnings call I'm joined this afternoon by Brad Hale, Our Chief Financial Officer, Chris <unk>, Our Chief strategy Officer, and Bonnie Bishop Executive director of Investor Relations.

The robust underlying health momentum and operating leverage in our business was evident in this quarter's results as we generated organic growth of 19% and approximately 480 basis points of margin accretion versus the third quarter of 2022 on the back of continued execute.

<unk> growing contribution from prior investments and ongoing efforts to drive greater free cash flow from the business <unk>.

Adjusted diluted earnings per share was 29.

Up 61% from the third quarter of 2022.

Adjusted EBIT grew 53% to $64 million, resulting in an adjusted EBITDA margin of 21% for the quarter and free cash flow from operations grew by 29% to $76 million for the year to date period, Despite a $36 million increase in cash paid for interest.

Year over year. Additionally, as a result of the growth in adjusted EBITDA during the quarter leverage now sits at approximately four eight times representing meaningful progress over the last 12 months towards our goal of rapidly reducing leverage.

From an operating segment perspective, and insurance advisory solutions, we generated organic growth of 11% in the quarter. We saw increased client sensitivity to the significant insurance rate increases they have faced over the last two years and we've experienced softer new business from project.

<unk> work and interest rate sensitive areas like construction and mergers and acquisitions and.

In other sectors, where we have a significant presence such as health care, we're seeing far less impact and overall solid new business trends continue to drive outsized organic growth for ice platform relative to our peers and.

In August we added a fourth center of excellence to our I S platform, our new International Center of Excellence Leverages, our deep expertise to provide risk advisory and insurance solutions to clients with international operations and those exploring international expansion. The addition of this important capability.

<unk> enhances our overall value proposition to multinational businesses and along with increased levels of specialization from the launch of other centers of excellence and industry practice groups meaningfully expands the aperture of opportunities our risk advisers can confidently pursue.

[laughter] underwriting capacity and technology solutions grew 25% organically during the quarter with strong performance from the MGA of the future platform, which grew 29% and achieved record new business for the renters product line in July typically the seasonally strongest month of the year.

Homeowners also continues to exceed expectations with premium from our E&S and non builder admitted products up over 200% from the third quarter of 2022.

We also launched two new products during the quarter high net worth home and commercial property, both of which are starting to gain momentum.

The significant investments we have made in use etfs over the past 24 months are continuing to drive further diversification and new revenue streams into the MGA, which we expect will drive durable and profitable growth long into the future.

Mainstream insurance solutions delivered organic growth of 29% driven by strong results in both the legacy Mainstreet business and Westwood.

Despite some pressure in the housing market due to mortgage rates new home sales have been resilient and we continue to see strong attachment and insurance rate pull through at Westwood. Additionally, the main street team has shown tremendous grit and navigating very challenging personal lines markets in large states.

Such as Florida, Texas, and California, where the personal lines insurance space continues to see significant rate increases.

We continue to be focused on delevering, our balance sheet and an expanding margin across the business to support those goals and enabled by the completion of our partnership integration work, we have begun executing on organizational alignment and cost savings initiatives aimed at rationalizing and simplifying our.

Growth services support structure to more fully align with our distinct go to market models and enable more nimble and effective client execution.

We expect that these initiatives will provide greater operational efficiency and accelerate margin expansion and free cash flow growth beginning in 2024 and more fully in the 2025.

On October 17th we announced the launch of Juniper re our new reinsurance broking platform Juniper re is a natural complement to our retail brokerage and MGA business and helps round out our capabilities as a full service broker.

Juniper re will be led by reinsurance broking veteran Jeff Irvin, who has more than 25 years of global reinsurance broking experience reinsurance brokerage is a capability. We have long had on our strategic roadmap because of its superior financial returns and integral position in the insurance ecosystem and we.

That the opportunity to launch this with a seasoned leader and team. We expect juniper re will begin contributing to revenue as early as the first quarter of 2024.

Lastly, we announced in our 10-Q that Chris <unk>, our Chief strategy Officer, and former Chief Financial Officer, and John Valentine, Our Chief partnership Officer will be retiring at the end of this year Chris.

Chris will step down from our board as part of his retirement.

Their retirements align with our strategic roadmap that has been in place for a long period of time and included achieving our first set of post IPO goals related to the scale and maturity of our business.

Chris and John have made enormous contributions to be ERP and have meant towards scores of colleagues who are now key contributors.

On behalf of <unk> I'd like to thank Chris and John for their tireless work through the years in building <unk> from a small Tampa based agency to the national firm that it is today.

In summary, and as this quarter's results. Once again proved out <unk> remains a diversified well balanced business that is built to perform and deliver industry, leading growth through the various economic and industry rate cycles.

As you saw this quarter, our business has meaningful operating leverage and as we continue to earn into the past investments and maintain our committed focus on targeted expense efficiency actions. We expect margins will continue to expand meaningfully over time.

I'd like to thank our colleagues for their tenacious efforts to deliver innovative solutions for our clients, helping them navigate a challenging insurance marketplace. I also want to thank our clients for their continued trust and confidence in us with that I will turn it over to Brad who will detail our financial results.

Thanks, Trevor and good afternoon, everyone for the third quarter, we generated organic revenue growth of 19% and $306 million of total revenue.

As Trevor mentioned, we generated organic growth in the quarter of 11% at Ias, 25% at U C T S and 29% at M. I S.

We recorded a GAAP net loss for the third quarter of 32 million or GAAP diluted loss per share of 29.

Adjusted net income for the third quarter, which excludes share based compensation amortization and other one time expenses was $33 8 million or <unk> 29 per fully diluted share a table reconciling GAAP net loss to adjusted net income can be found in our earnings release, and our 10-Q filed with the SEC.

Adjusted EBITDA for the third quarter rose, 53% to $64 million compared to $41 9 million in the prior year period adjust.

Adjusted EBITDA margin was 21% for the quarter compared to 16% in the prior year period.

This margin expansion highlights the significant operating leverage that exists in our business, which we've achieved through our continued organic growth against the backdrop of our ongoing absorption of prior year investments, which continue to earn in and perform as expected.

Additionally, as Trevor mentioned, we have begun executing on organizational alignment and cost savings initiatives aimed at the rationalization and simplification of our growth services support structure to more fully align with our go to market approach and drive enhanced client execution spin.

Specifically, we expect a $10 million in year benefit from these initiatives in 2024.

In the third quarter, we paid $36 million in earn outs and a remaining estimated undiscovered earn out obligations total approximately $332 million.

In September we Opportunistically executed a fungible add on to our term loan b with proceeds used to pay down our revolver, leaving us with approximately $270 million of capacity on our $600 million revolving credit facility.

After Q1 2025, when we have finished paying the vast majority of our earn outs, we expect significantly higher free cash flow generation and the potential for more rapid de levering.

As Trevor stated Delevering is a critical component to increasing free cash flow and we remain committed to doing so we.

We expect our net leverage will continue to decrease through the end of 2023 and our goal is to Delever to four times by the end of 2020 for a target which includes 2024 estimated earn out payments of approximately $135 million.

In addition, given the current interest rate environment, we are adjusting our target net leverage range to three to four times down from three and a half to four and a half times, which implies incremental deleveraging into 2025.

For the fourth quarter of 2023, we expect revenue of $275 million to $285 million.

Organic growth of 12% to 14% and adjusted EBITDA between 40, and $45 million and adjusted EPS of 10 to 12 per share bringing expectations for the full year of 2023 to revenue of one point to $1 billion to $1 two 2 billion.

Organic growth of high teens, and adjusted EBITDA of $245 million to $250 million.

The update to our prior full year guidance is primarily a result of startup costs related to the launch of Juniper re.

Conservative view towards loss ratio sensitive contingence.

And the continuation of lower project based insurance revenue and Ias, which began to manifest in Q3.

We expect Q4 to include compensation expense for portions of our maturing earn outs that the prior shareholders at their full discretion allocate to non shareholders of the previously sold businesses.

This is an accounting nuance whereby only prior owners can receive portions of the earn out it would be characterized as consideration for the business acquired this.

This expense if applicable will be a direct offset to the change in contingent consideration and neutral to the Q4 income statement.

We are highlighting the matter because any compensation charge related to this will be included in our reconciliation of net income to adjusted EBITDA. So that the impact on adjusted EBITDA is also net neutral.

For partners, whose arnott matures in Q4, the compensation expense as a maximum of $15 million subject to the full discretion of the former shareholders.

How the the balance sheets that are paired up against there against their own geography, right now just given what's happening on the personal line side right. Some states are.

You just don't have appetite to write but it does seem like an issue for you, but I'd be curious to hear what you're seeing on that side of the business.

Yeah, I mean, Pablo we have the good fortune of having broad based support from a large panel of Blue chip reinsurers that you would know very well.

<unk> finished our flood renewal on improved terms and.

And we feel really good about our capacity situation and that's a testament to the underwriting first approach that RMG 18 takes and terrific and consistent.

Consistently industry, leading loss ratios that are product lines are generating and so we understand in the in the MGA business.

<unk> got multiple stakeholders and we've got to deliver consistently profitable business to our capacity providers, while also providing competitive.

<unk> solutions and products that meet the unique and bespoke needs of our clients in the market.

And our MGA team is really striking that balance incredibly well.

Great. Thank you.

Thank you Pablo.

As a reminder, it is star one to ask a question.

Our next question comes from the line of Meyer Meyer cells with <unk>. Please proceed with your question.

Great. Thanks.

So a lot of obviously to Digest Tonight.

Covered in your comments you talked about.

Conservatism have you, it's Brad I apologize about conservatism conservative look at fourth quarter contingent commissions.

If you could.

I'll go a little bit deeper there in terms of which lines of business.

I guess less certain contingent.

Yeah, So hey, Nate this is Trevor what Youre seeing there is a conservative view of.

A few loss ratio sensitive contingent contracts on the personal line side.

Where we're taking a conservative viewpoint.

Over the past couple of years, we've been doing a ton of work to kind of create master contracts with our core trading partners and generally convert those contracts from contingent loss ratio based payouts to what we would consider to be GSE or guaranteed supplemental commissions and as you.

Looked at the.

<unk>.

Supplemental Commission in contingent commission growth, we've experienced over the past couple of years, it's largely on the back of that Theres still some loss ratio sensitive contracts and considering just kind of where.

Certain certain of those are performing largely tied to convective storm activity across the U S. We just felt it was prudent to take a conservative view.

Okay is there any way to ballpark, maybe ball parking I'm, sorry that issues impact like the change.

<unk> view on the fourth quarter adjusted EBITDA.

Yeah.

The attribute of a few million dollars to that.

Okay fantastic. Thank you so much.

Thanks, Matt.

There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.

Thank you all for joining us this evening and I want to thank our nearly 4000 colleagues for their hard work and dedication I also want to thank our clients for their continued trust and confidence in our teams. Thank you all very much and we look forward to speaking with you again next quarter.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.