Q3 2024 The Baldwin Insurance Group Inc Earnings Call
Greetings and welcome to the Baldwin Group 3rd Quarter 2020 for earnings content call.
Speaker Change: At the time, all participants are in a listen only mode.
Speaker Change: A brief question and answer session will follow the formal presentation. If anyone should require operate assistance during the conference, please press star 0 on a telephone keypad. As a reminder, this conference is being recorded.
Speaker Change: and...
Speaker Change: It is a normal pleasure to introduce you host, Miss Bonnie Bishop, Exheter Dr. in Mr. Relations. Thank you, Miss Bishop. You may begin.
Bonnie Bishop: Thank you. Welcome to the Baldwin Group's third quarter 2020 Four earnings call. Today's call is being recorded. Third quarter financial results, supplemental information, and form-term cue were issued earlier this afternoon, and are available on the company's website at IR. Baldwin.com.
Bonnie Bishop: Please note that remarks made today may include forward-looking statements subject to various assumptions, risks, and uncertainties.
Bonnie Bishop: The company's actual results may differ materially from those contemplated by such statements. For more detailed discussion, please refer to the note regarding forward-looking statements in the company's earning release and our most recent forum, TENQ, both of which are available on the Baldwin website.
Bonnie Bishop: During the call today, the company may also discuss certain non-gap financial measures.
Bonnie Bishop: for more key deal discussion of these non-gap financial measures.
Bonnie Bishop: and Historical Reconciliation to the most closely comparable gap 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.Valdewind.com.
Bonnie Bishop: I will now turn the call over to Trevor Baldwin, Chief Executive Officer of the Baldwin Group.
Trevor Baldwin: Good afternoon, and thank you for joining us to discuss our third quarter results reported earlier this afternoon. I'm joined this afternoon by Brad Hale, Chief Financial Officer, and Bonnie Bishop, Executive Director of Investor Relations.
Bonnie Bishop: The third quarter ended with Hurricane Helene and was quickly followed by Hurricane Milton, marking one of the more intense hurricane seasons in recent history, particularly for Florida's West Coast.
Bonnie Bishop: With over a thousand colleagues throughout the state of Florida, we witnessed firsthand in our communities the destruction and loss caused by these two major storms.
Bonnie Bishop: We worked quickly to assess the safety of our colleagues and Simultaneously focused on assisting with the recovery efforts of our clients throughout the affected areas
Bonnie Bishop: As we continue to work through the recovery process, I am reminded yet again of the critical role we in the insurance sector play during some of the most challenging moments of our clients' lives.
Bonnie Bishop: It is during these times when people and businesses have endured catastrophic loss and are dealing with displacement, financial uncertainty, property damage and overall disruption that our industry steps in to help make people financially whole and get back on their feet.
Bonnie Bishop: My sincere pride and gratitude extends to our colleagues who are working tirelessly for our clients to provide them with expertise, guidance, and solutions to navigate the aftermath, lead the recovery, and ultimately continue to protect the possible.
Bonnie Bishop: With that I'll go through our results for the third quarter where we saw steady momentum across the top line while also delivering margin improvement and adjusted free cash flow expansion.
Bonnie Bishop: Both organic revenue and core commissions and fees revenue grew 14%, a testament to the strong underlying performance we are seeing in the business and the overall resiliency of our business model in the face of increased headwinds from external market dynamics.
Bonnie Bishop: year-over-year, adjusted EBITDA grew 14%.
Bonnie Bishop: or 18% normalizing to the pro forma impact of the sale of connected risk earlier this year.
Bonnie Bishop: Adjusted EBITDA margin expanded approximately 60 basis points to 21%. And adjusted free cash flow grew 15% to $27.8 million.
Bonnie Bishop: Year-to-date, we've generated adjusted EBITDA margin accretion of approximately 160 basis points to 24%.
Bonnie Bishop: and adjusted free cash flow of $99.2 million, which is up 31% from the prior year period, or up 49% excluding the impact of one-time third-party refinancing costs incurred at the time of our debt refinancing in the second quarter.
Bonnie Bishop: We remain bullish on the long runway of operating leverage ahead as our business continues to scale.
Bonnie Bishop: We are now less than two quarters away from satisfying substantially all of our remaining earn out obligations, which will result in a step function improvement in our net leverage and adjusted free cash flow profile over the course of 2025 and beyond.
Bonnie Bishop: Turning to our segment results, in IES, overall organic revenue growth for the quarter was 7%, bringing the year-to-date total to 9%. Organic commissions and fees revenue was up 6% for the quarter and 10% year-to-date.
Bonnie Bishop: We absorbed increased headwinds from rate and exposure compression in the third quarter of 4.7 percent.
Bonnie Bishop: driven by timing-related softness in our construction practice as a result of certain new job starts from our existing clients pushing out which negatively impacted project-based revenues as well as flat exposure growth in our employee benefits business.
Bonnie Bishop: This compares to a 1.3% tailwind from rate and exposure in the prior year period. A 600 basis point differential year over year.
Bonnie Bishop: offsetting those external market-driven headwinds.
Bonnie Bishop: are internally driven new business production.
Bonnie Bishop: remains industry-leading.
Bonnie Bishop: a 400 basis point improvement over the third quarter of last year.
Bonnie Bishop: which brings our year-to-date sales velocity to 21 percent, a 430 basis point improvement over the prior year period.
Bonnie Bishop: Client retention was roughly flat year-over-year at approximately 90 percent.
Bonnie Bishop: Notably, after generating $30 million of new business in the quarter,
Bonnie Bishop: a 36% increase over Q3 of last year.
Bonnie Bishop: Our year-to-date new business production through the third quarter stands at $95 million, a 46% increase over the same period last year, and a 7% increase over total new business produced in the entire calendar year of 2023.
Bonnie Bishop: These outsize results in both sales velocity and absolute new business production.
Bonnie Bishop: Two key indicators of the underlying health of our IAS franchise give us conviction in our double-digit organic growth outlook for the full year and reinforce the resiliency of our business model to outperform through market cycles.
Bonnie Bishop: Lastly, in the wake of our rebranding this year, we have seen a broad-based acceleration in the recognition and awareness of our reputation among industry-leading talent.
Bonnie Bishop: evidenced by growing success on the advisor hiring front, which we believe will enable us to continue delivering organic growth in our IS business that out indexes that of our peers for the foreseeable future.
Bonnie Bishop: Our UCTS segment had a fantastic third quarter with organic revenue growth of 26% and commissions and fees growth of 31%.
Bonnie Bishop: Our multifamily and home portfolios continue to thrive, generating 26% and 39% organic
Bonnie Bishop: commissions and fees growth respectively.
Bonnie Bishop: Additionally, we continue to seek growing contribution from our 2023 new product cohort
Bonnie Bishop: and Juniper Reed, both of which individually added 2.5 points to the UCTS total organic growth rate.
Bonnie Bishop: Our MIS segment delivered total organic revenue growth of 14%.
Bonnie Bishop: and commissions and fees revenue growth of 11% in the face of a moderating personal lines rate and exposure environment and capacity challenges in some key markets such as California.
Bonnie Bishop: Additionally, Westwood added another major builder partner in the quarter, its seventh in the last 12 months, as our value proposition as the embedded insurance provider of choice to the builder channel continues to be validated in the marketplace.
Bonnie Bishop: Our national mortgage and real estate operation is making strong progress on the embedded front and remains on track to break even on a run rate basis in 2025, which should be a margin tailwind for us in 2026 and beyond.
Bonnie Bishop: In summary, we are pleased with the strength of our results for the third quarter amidst the evolving market backdrop we're seeing.
Bonnie Bishop: and I remain confident in our ability to continue to deliver outsized organic growth.
Bonnie Bishop: margin accretion, and expanding free cash flow well into the future.
Bonnie Bishop: The resiliency of our business model was on full display this quarter, reinforcing our ability to outperform and deliver outsized top and bottom line growth through market and economic cycles.
Speaker Change: With that I will turn it over to Brad who would detail our financial results
Speaker Change: For more information visit www.FEMA.gov
Brad Hale: Thanks Trevor and good afternoon everyone. For the third quarter we generated organic revenue growth of 14% and total revenue of $338.9 million.
Brad Hale: Looking at the segment level, we generated organic revenue growth of 7% at IAS, 26% at UCTS, and 14% at MIS.
Bonnie Bishop: We recorded gap net loss for the third quarter of $14.5 million or gap diluted loss per share of $0.13.
Bonnie Bishop: Adjusted net income for the third quarter, which excludes share-based compensation, amortization, and other one-time expenses, was $38.5 million or 33 cents per fully diluted share.
Bonnie Bishop: A table reconciling GAAP net income to adjusted net income can be found in our earnings release and our 10-Q filed with the SEC.
Bonnie Bishop: Adjusted EBITDA for the third quarter rose 14% to $72.8 million compared to $64 million in the prior year period. Normalizing for the pro forma impact of the sale of connected risk earlier this year, adjusted EBITDA grew 18%.
Bonnie Bishop: adjusted even a margin expanded approximately 60 basis points year over year to 21.5 percent for the quarter compared to 20.9 percent in the prior year period.
Bonnie Bishop: Adjusted free cash flow for the third quarter was $27.8 million, a 15% increase year-over-year, a direct reflection of our continued focus on expense discipline and operating leverage in the business.
Bonnie Bishop: In the third quarter, we paid $5.5 million of earnouts in cash, inclusive of amounts reclassified to colleague earnout incentives.
Bonnie Bishop: In October, we paid an additional $14 million, bringing our year-to-date total cash earn-out spend to $115 million.
Bonnie Bishop: Our remaining estimated undiscounted earn out obligations now stand at approximately $194 million.
Bonnie Bishop: As a reminder, several of our partnership agreements contain provisions that permit former selling shareholders to allocate portions of the earn-out proceeds to colleagues who meaningfully contributed to the partnered firm's achievement of the earn-out.
Bonnie Bishop: When this determination is made, we record compensation expense that is an offset to the change in contingent consideration and neutral to net income.
Bonnie Bishop: As a result of this practice, we have added back $4.3 million of compensation expense in the third quarter associated with colleague earn-out incentive payments.
Bonnie Bishop: And based on current estimates, expect to add back between $40 million and $50 million of additional colleague earn-out incentive payments in the fourth quarter associated with earn-outs that are coming due.
Bonnie Bishop: Given the outsized earn out obligations we expect to settle in the first quarter of 2025, the amount of the colleague earn out incentive payments will likely be larger than we've experienced in prior quarters, but will be added back consistent with our historical practice.
Bonnie Bishop: We also wanted to identify a tax-related add-back that may surface for the first time in Q4 2024 related to certain payments made in conjunction with our tax receivable agreement between the public company and owners of the LLC.
Bonnie Bishop: As a reminder, our upsea structure provides a tax benefit to our Class A common shareholders, a portion of which is shared with the owners of the operating LLC that sits below the public seacorp, who have redeemed their LLC units for Class A common stock.
Bonnie Bishop: This flows through our P&L as a cash operating expense, which could be $3 million to $8 million in the fourth quarter, and will be added back as a tax-related item.
Bonnie Bishop: At the end of the third quarter, net leverage stood at 4.2 times, a further reduction of nearly a quarter turn from the second quarter, as we continue to make progress towards our goal of bringing net leverage back within our stated long-term range of three to four times by year end.
Speaker Change: As Trevor alluded to in his opening remarks,
Bonnie Bishop: Given the near-term rate and exposure trends we're seeing in the business, and a cautious view of loss-ratio-sensitive contingents post the recent hurricane activity, we are taking a more conservative view on our fourth quarter and full year 2024 earnings results.
Bonnie Bishop: For the fourth quarter of 2024, we expect revenue of $325 million to $335 million and organic revenue growth toward the high end of our 10-15% long-term range.
Bonnie Bishop: We anticipate adjusted EBITDA between $61 million and $66 million, and adjusted diluted EPS of $0.25 to $0.29 per share.
Bonnie Bishop: For the full year 2024, this implies expected adjusted EBITDA of $310 million to $315 million, year-over-year margin accretion of approximately 200 basis points, and adjusted free cash flow of $140 million to $150 million.
Bonnie Bishop: Consistent with prior years, we are also sharing a broad initial view of 2025 financial expectations.
Bonnie Bishop: We preliminarily expect 2025 organic growth towards the midpoint of our 10-15% long-term target range, margin accretion of approximately 25 to 100 basis points, and continued improvement in adjusted free cash flow conversion.
Bonnie Bishop: Our initial view reflects expected continued strength in the underlying fundamentals of all three of our segments.
Bonnie Bishop: The potential for some commission erosion at the MGA and Westwood related to our obligation to help our carrier partner source reinsurance for our builder focused homeowners program
Bonnie Bishop: a degree of conservatism in our rate and exposure assumptions in both IAS and MIS, and an expectation for continued operating leverage and margin accretion from compensation and operating expenses as the business continues to scale.
Bonnie Bishop: expanding margins and maintaining overall double-digit organic growth.
Bonnie Bishop: and as we march steadily towards a real inflection point in our free cash flow profile starting in the second quarter of next year.
Speaker Change: We will now take questions. Operator?
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue.
Speaker Change: You may press star 2 if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.
Speaker Change: The first question comes from the line of Tommy McJoint with KBW. Please go ahead.
Tommy McJoint: Hey, good evening guys. Thanks for taking our questions. There's some headlines around Westwood, and it sounds like you touched on it there at the end, and potential, you know, we've seen headlines around potential issues around the underwriting profitability and capacity for Westwood. So what information can you guys share that would be helpful in terms of Westwood's carrier capacity mix, kind of how long that capacity is contracted for, and as well as the underwriting profitability of those programs?
Speaker Change: Yeah, hey Tommy, good evening, this is Trevor.
Trevor Baldwin: happy to cover all those areas and you know would just start out with saying we're aware of the report
Trevor Baldwin: and or misleading and let me start with a comment regarding our partner with the builder program which is QBE and they've been and continue to be a great partner for us so let's let's go through a few things here first
Trevor Baldwin: You know, the assertion that our relationship with QBE is definitively ending in May of 2025 is misleading. The initial term for the QBE Program Administrator Agreement, which we signed with QBE at the time that we acquired Westwood,
Trevor Baldwin: with our MGA, goes through May of 2025, but extends through May of 2027 with our support helping QBE arrange reinsurance that adequately covers the business to be written between May of 2025 and May of 2027.
Trevor Baldwin: which I would highlight brings the QBE program structure in line with how all of our non-QBE homeowners programs are structured today.
Trevor Baldwin: We're currently working to arrange the reinsurance program to support that QBE program through May of 27 and feel good about our execution based on the historical loss ratio performance of this book.
Trevor Baldwin: so specifically over the last 10 years.
Trevor Baldwin: The Builder Program loss ratio has outperformed a basket of the top 15 largest homeowners riders by an average of 800 basis points of loss ratio per year, and that trend has persisted since the inception of the Program Administrator Agreement when we took over.
Speaker Change: As Brad mentioned in our prepared remarks, we are preparing for some erosion in program economics in 2025 as a result of our obligation to help QBE arrange this reinsurance cover.
Speaker Change: While the outcome could vary as we're still six months out from the need for that reinsurance to go live,
Speaker Change: You know, our best estimate today of the potential impact is 10 to 15 million of adjusted EBITDA in 2025, which will likely show up both in UCTS and MIS top and bottom line results.
Speaker Change: but which is already fully contemplated in the initial 2025 financial expectations that Brad discussed in our prepared remarks.
Speaker Change: I think it's also important to just talk a little bit about the Westwood franchise and kind of how that business has grown and where capacity is coming from that's supporting it.
Speaker Change: When we closed on Westwood in April of 22, so as of May 1 of 22, the QBE program represented
Speaker Change: roughly 43% of premium and force.
Speaker Change: Today, that's 37% as of 930, as we've focused less on growing the QBE Builder Program and more on modernizing forms, increasing rate structures, and preparing that program to successfully enter the third-party reinsurance market.
Speaker Change: Alternatively from that...
Speaker Change: non-QBE capacity supporting Westwood.
Speaker Change: was 57% at the time of our acquisition.
Speaker Change: and today is 63% representing a 76% growth.
Speaker Change: And so when you look at what is supporting the growth of Westwood, it's broad-based capacity.
Trevor Baldwin: and we continue to feel really good and confident about QBE, our ability to source reinsurance.
Trevor Baldwin: to support QBE and continue managing that program through May of 27.
Trevor Baldwin: I think it's also, you know, considering the topic of the report, probably worth Brad just sharing a few thoughts on some of the allegations around some of the Medicare M&A that was completed. So, Brad, do you want to just jump in? Yeah, thanks, Trevor. So, in the Medicare business,
Brad Hale: We operate as a national distribution platform on behalf of our health plan partners in what is commonly referred to in the industry as a national field marketing organization or FMO for short
Brad Hale: That means our health plan partners delegate to us in part or all of the responsibility for contracting third-party agents and agencies
Brad Hale: providing them with ongoing compliance and training and oversight as well as sales and marketing training and oversight support.
Brad Hale: From time to time, we acquire these downline agencies in order to control more of the distribution value chain and increase our share of the economics.
Trevor Baldwin: You can think about this as us vertically integrating ourselves down into the value chain and acquiring agencies and their direct agents who are closest to the plan members we provide advice and enrollment support to.
Trevor Baldwin: The agents of these third-party Medicare distribution agencies are not employees of Baldwin, and the agencies are in no way controlled by us pre-acquisition. Therefore, we can confirm we've appropriately accounted for these acquisitions under US GAAP.
Trevor Baldwin: The $1.8 million of earnouts paid to the acquisitions mentioned in the report
Trevor Baldwin: In addition to all of our earn-out payments, are in no way a replacement for, or in lieu of compensation, they represent incentive-based, transaction-related payments that are the industry standard in insurance agency acquisitions.
Trevor Baldwin: Tommy, any follow-ups?
Speaker Change: Yeah, just one quick one, numbers. You mentioned the 10 to 15 million of EBITDA impact. Is it fair to think of that as only a path year or it's potentially eight months impact and there would be an additional impact in 26 over 25 similarly?
Trevor Baldwin: Yeah.
Speaker Change: Yeah, Tommy, that's the right way to think about it. I'd say you should think about it as kind of a one-time impact that, you know, that clearly we're able to absorb while still increasing margin and delivering industry-leading kind of
Trevor Baldwin: mid-teens or solid double-digit organic growth.
Trevor Baldwin: We feel really good about how we're positioned for next year.
Tommy McJoint: Got it. Thanks all. Back in the queue.
Tommy McJoint: Thanks, Tommy.
Speaker Change: Thank you. Next question comes on the line of Christine Getchoff with Wells Fargo. Please go ahead.
Christine Getchoff: Hi, how are you? So for the IAS, I know you reiterated that
Christine Getchoff: staying in the double digits for the full year. But I guess that kind of implies an acceleration in the Q4. So I guess what gives you kind of the confidence because
Christine Getchoff: You talked a lot about, you know, stuff kind of getting pushed back in terms of like construction and all that, but I feel like, you know, if it's getting pushed back, it will likely get pushed back even further than the Q4. So, I guess, have you seen something that maybe gives you a little bit more confidence going into the Q4 that you could see that kind of accelerate from here?
Trevor Baldwin: Yeah, hey Estrin, this is Trevor. I'd say three things. One, you know, our expectation assumes the rate and exposure headwinds persist into the Q4.
Christine Getchoff: With that being said, there's two dynamics that give us confidence around the acceleration in the quarter. One is our visibility into continued really strong new business results and the prior year comp being a relatively easy comp that we're growing off of.
Estrin: Got you.
Estrin: And then, in terms of like, if we get a potential like macro slowdown, let's say first half of next year, is that, have you guys like put some like thought into your 2025 guide? I know you guys talked about like rate and exposure kind of maybe continuing to...
Christine Getchoff: maybe not decelerate, maybe stabilize, but I guess like
Christine Getchoff: I'm trying to get a sense of, like, what percent of your business would you say is, like, macro-sensitive? I don't think you guys have ever quantified, like, what percent, like, construction is, which I would consider as macro-sensitive, but is there any other points of your business that might see a slowdown if, you know, let's say, like, a mild recession kind of materialized early next year?
Speaker Change: Yeah, so I'd say the two areas I'd point out would be construction and employee benefits, which is, you know, headcount centric. Construction across our business is, you know, you can think about it as about a hundred million dollar revenue business.
Trevor Baldwin: you know, employee benefits would be about 30% of the overall IAS business. And I think about, you know, frankly,
Trevor Baldwin: What we're seeing in the third quarter is being kind of the relative impact you could expect in that type of an environment. And it's certainly kind of conservatively contemplated that those headwinds persist into 2025 based on the expectations that we've set.
Trevor Baldwin: Importantly, what I just reinforced for you, Christian, is
Trevor Baldwin: our earnings growth opportunity and the margin accretion runway that we have ahead of us as a result of how much of our overall growth is driven by net new business.
Trevor Baldwin: which, as you saw in this quarter, enabled us to power through those, you know, market-driven headwinds. And so, you know, while there are some impacts, puts and takes, so to speak, around, you know, both, you know, insurance and economic cycles,
Trevor Baldwin: As a result of the consistent ability we have to deliver outsized new business, we're confident around our ability to grow in an outsized manner through those cycles.
Speaker Change: Gotcha, and one more if I can. I know previously you've kind of commented on like multiples in like the M&A world. I guess have you seen any shift and I know you guys are bringing your leverage down, but I guess with a lower rate environment let's say
Speaker Change: it turns even lower quicker than you guys expected. Would you guys return to M&A quicker than you originally expected or multiples a little bit too high and you'd want to see some contraction there as well?
Speaker Change: Yeah, I mean, I'd say, you know, from what we're seeing and hearing, multiples continue to be very high. Our M&A strategy, you know, is not going to be dictated.
Speaker Change: based on the rate environment that we're seeing, you know, it's a function of our financial profile and the strategic nature of the businesses that we'd be looking to acquire and the capabilities and resources that we bring, they bring to our platform.
Speaker Change: You know, we continue to remain focused on strengthening our financial profile, which should see
Speaker Change: meaningful inflection next year. We're really excited about
Speaker Change: the accelerating free cash flow and continuing path to delevering as we continue to post, you know, really industry-leading growth results.
Speaker Change: healthy margin accretion, and overall strong top and bottom line results.
Speaker Change: You know, we're not thinking about M&A being a meaningful driver to our results next year. And as I've said in the past, I would not model any actual M&A in the year next year.
Speaker Change: Thank you. Next question comes from the line of Gregory Peters with Raymond James. Please go ahead.
Gregory Peters: Well, good afternoon everyone. So, I want to get back to the margin guidance.
Gregory Peters: I just want to make sure we're picking up all the pieces.
Gregory Peters: in the change for the Outlook for 24.
Speaker Change: You know with with the substantial let's call it 10% plus sort of organic target
Gregory Peters: for the enterprise for next year, I would anticipate that I think the law under your guidance is a 20 basis point margin improvement. That seems kind of light in the context of the growth that you're expecting. So just help us reconcile those two things, please.
Speaker Change: Yeah, hey Greg. Good evening. So, let's take those one at a time. For Q4,
Speaker Change: There's really two drivers that are, you know, causing us to put forth some conservatism in our outlook. One is, you know, the the kind of rate and exposure headwinds we saw in Q3. You know, we were baking in an expectation for that to persist.
Speaker Change: across our IS and MIS businesses.
Gregory Peters: And the second is an expectation for a one-time, call it two to three million dollar, top and bottom line impact to contingent loss ratio based profit share contracts related to the recent storm activity.
Speaker Change: When we look to 2025,
Speaker Change: you're right, we are outlining an expectation for double-digit organic growth as we've kind of consistently said we believe our business is capable of and will deliver through market and economic cycles.
Speaker Change: You know when you look at the low end of that margin accretion guide at 25 basis points in a vacuum I would agree with you that is relatively low considering that growth path, however
Speaker Change: What that contemplates is a built-in kind of EBITDA headwind associated with
Speaker Change: you know, our obligation to help QBE source.
Speaker Change: re-insurance to support the builder program beginning in May of 25, which we've sized right now at 10 to 15 million dollars.
Speaker Change: and so you know if you normalize for that you can think about kind of a more kind of regular way kind of you know year-in year-out margin accretion expectation
Speaker Change: Fair enough. I know you said it in the comments, but I just I want to make sure I got it all. And then my follow-up question is just around organic revenue growth.
Speaker Change: I know you covered, you know, some of the headwinds in IAS. Maybe you could address, you know, if you look at the rate of change of organic
Speaker Change: slowing down, I should say. But by no means is it, you know, it's still a great result. But I'm just curious how you feel about
Speaker Change: that outlook is, you know, as we're modeling our projections going forward, you know, is it fair to assume that UCTS over time is going to gradually migrate to your 10 to 15 percent range or how are you thinking about it?
Speaker Change: Yeah, so there's a lot there, Greg. Let's maybe start high-level and then we can get into, you know, some more granular specifics.
Speaker Change: entirely driven by change in rate and exposure. And so I don't have an expectation that you're gonna continue to see a rate of change. If anything, I think it would move back up over time. I mean, take IAS as a specific example in the quarter.
Speaker Change: rate and exposure was a 600 basis point headwind to organic growth in the quarter. So normalizing back to the same 1.3 percent tailwind that we experienced in last Q3, IS's organic growth would have been 13 percent rather than 7 percent.
Speaker Change: which is kind of healthily, you know, right square in the middle of our long-term 10 to 15 percent target. And, you know, 1.3 percent rate and exposure trend is not something that I would characterize as kind of outsized.
Speaker Change: or kind of unique in nature. Like when you think about.
Speaker Change: and the fundamental ways in which rate and exposure building blocks build, you can think about kind of, you know, GDP, you know, for the economy largely as being a proxy for, you know, exposure, unit expansion or compression, plus, you know, or minus the impact of, you
Speaker Change: you know, of what's happening with...
Speaker Change: pricing in the economy.
Speaker Change: and then insurance rate and you know we've certainly over the past few years been in a constructive rate environment that has begun moderating over the past few quarters which is I think consistent with what you've probably seen
Speaker Change: across the industry.
Speaker Change: you know, but I would just point you back to
Speaker Change: our ability to consistently deliver net new business results that meaningfully kind of exceed industry norms which you know leads us to our confidence in our ability to continue to deliver meaningfully outsized organic growth relative to the industry over time. I'd say you know there's a I would take a similar viewpoint in MIS.
Speaker Change: We're innovating the way in which personal insurance is consumed and distributed via our embedded strategies We are the clear leader of embedded insurance solutions a point of new home sale
Speaker Change: via our Westwood franchise. New builder leads through that channel were up 13% in the third quarter and 12% year-to-date, which is a proxy for the type of growth we should expect on a unit basis over the next six to nine months.
Speaker Change: and in our, you know, relatively nascent mortgage and real estate focused business.
Speaker Change: We're seeing really encouraging trends. Monthly new business policies in the third quarter were up 48% compared to the prior year. Advisor or sales professional productivity was up 20%.
Speaker Change: Our average new business revenue on a monthly basis was up 54% in the quarter.
Speaker Change: and organic growth for that segment sequentially or year-over-year.
Speaker Change: It's really a rate and exposure story, and we are admittedly coming off historic highs from Persiline's rate standpoint, but I think, you know, we're all clear-eyed around the reality that, you know, the combination of evolving weather patterns...
Speaker Change: continued concentration of building and values being
Speaker Change: in our riskier coastal cap-prone areas.
Speaker Change: as well as, you know, pick your characterization, legal system abuse, social inflation, all leading to a need for, you know, ongoing outsized rate across those lines of business. So, we feel really good about the fundamentals.
Speaker Change: they're internally driven and that should position us to grow through the cycles.
Speaker Change: In UCTS, that business is taking advantage of secular trends around kind of premium moving out of the traditional insurance company format into delegated authority underwriting constructs.
Speaker Change: You know, we continue to be focused on launching three to five new products a year. You heard in my prepared remarks, you know, the 2023 slate of new products contributed two and a half points to OG in the quarter.
Speaker Change: and both are multifamily product line renters.
Speaker Change: which is our original, kind of oldest, most mature product, was up mid-twenties organically, and our home product suite was up nearly 40%, and I can tell you that's largely driven by non-QBE programs.
Speaker Change: as we continue to constrain the growth of QBE and focus more on product modernization there. So we feel really good about
Speaker Change: How the business is positioned, our ability to drive durable outsized growth and continue to harvest margin and kind of march down that very clear and long path of margin accretion well into the future.
Speaker Change: That's a full answer. I appreciate it. Just one minor last question, which is you mentioned customer retention. I think that related to the IAS channel. Can you talk about producer retention? That's another critical variable. How is your producer retention holding up?
Speaker Change: Yeah, we feel great about our producer retention. You know, we refer to our producers as risk advisors.
Speaker Change: We track colleague retention, Greg.
Speaker Change: on a monthly basis. And one of the key metrics I pay attention to is our retention of what we call our vanguard colleagues. That's the top third of our colleague population as they rank from a performance basis every year. And as of January of this year, we've had
Speaker Change: September, our retention of Vanguard colleagues was in excess of 95%.
Speaker Change: You can carry that statistic through to our advisor population and that is illustrative of kind of the strong retention we're seeing.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Thanks for the answers.
Speaker Change: Thanks, Greg.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Thank you. A reminder to all the participants that you may press star and 1 to ask a question.
Speaker Change: The last question comes from the line of Pablo Singham with J.P. Morgan. Please go ahead.
Pablo Singham: Hi, good evening.
Pablo Singham: So a couple for me, can you please explain how the change in QBs reintroduce...
Pablo Singham: I'm sure will result in lower EBIT.
Speaker Change: Doug for you.
Speaker Change: just talk to you on how that works.
Speaker Change: Yeah, hey Pablo, it's Trevor. So, you know, when you look at the way MGA programs are structured, particularly when it's
Speaker Change: with reinsurance purchased separate from the paper that you're writing the program on, you can think about there being three components of the overall cost structure. There's a fee that goes to the insurance company who's providing the regulated paper that you file and write the product on.
Speaker Change: They will typically take some risk on the program as well as part of the reinsurance panel. You can then think of kind of a percentage of the premium dollar that gets paid to the reinsurers.
Speaker Change: for taking the risk on that program, and so that would be effectively, you know, your expected losses plus some margin for those risk bearers.
Speaker Change: And then you can think about there being a fee for claims adjudication, which generally we are the TPA for our programs and adjudicate those claims, and so that fee goes to us.
Speaker Change: And then you can think about commission for providing the kind of program administrator services. So everything from product development and ongoing filings to underwriting to policy issuance and everything in between.
Speaker Change: And so, you know, specific to the QBE program, you know, QBE was writing that net all along.
Speaker Change: and what was communicated at the time.
Speaker Change: And so the plan has been all along for that to be kind of a gradual transition into the more traditional program market.
Speaker Change: whereas in May of 25, they would transition to being more of a paper provider and us bringing in a panel of third-party reinsurance providers to take the risk.
Speaker Change: As you've heard from me in the past, when we launch new programs, our economics are not optimized.
Speaker Change: and that's because you're bringing a new program to kind of that reinsurance marketer or risk capital provider community for the first time.
Speaker Change: And you can think about there being a similar dynamic here as we're bringing this program into the reinsurance market for the first time.
Speaker Change: you know people are going to look at expected losses and so long as we can continue to
Speaker Change: drive industry-leading results and improve overall loss costs over time, those economics, you know, have the opportunity to then grow once again over time, similar to the new programs that we launch.
Speaker Change: Second question maybe for Brad, I think your cash flow guide for the year used to be $160,000 to $195,000, right? And now you're saying $140,000?
Speaker Change: Can you bridge the gap there? How much of it was 3Q? How much is 4Q? How are you thinking about conversion and 25 versus 25?
Speaker Change: Thank you for watching.
Speaker Change: Yes, so it's a...
Speaker Change: it's a combination of 3q and 4q I'd say you could split it sort of half and half Pablo and it's really two drivers one
Speaker Change: the revised adjusted EBITDA guidance, which is the starting point for
Speaker Change: You know, how we calculate and communicate free cash flow.
Speaker Change: and the second being...
Speaker Change: the fact that we took out an additional $100 million opportunistically when the bond markets were quite favorable and we launched our inaugural bond in May.
Speaker Change: And so that has resulted in, you know, a higher cash interest expense burden for the year, which is, you know, those two are effectively getting you to our revised full year guidance.
Speaker Change: Yeah, and then just last for me, just a couple of clarifying questions and.
Speaker Change: for your comments.
Speaker Change: I guess first you talked about the construction book and some timing related softness there. Are you counting that against?
Speaker Change: You know the rate and exposure of headwinds?
Speaker Change: I think he said.
Speaker Change: 4.7. Right, so I wasn't sure if...
Speaker Change: you know, how you're sort of like thinking about that negative this quarter.
Speaker Change: Okay, and then...
Speaker Change: As we think about 25 and I think Trevor you mentioned that you're assuming, you know, I'm not sure if it's flat or some headwind from rain and exposure.
Speaker Change: What are you assuming in terms of the shape of that curve? So I think 4.7 is a pretty meaningful headwind. Does it get better through 25? Is it sort of the same? I'm not looking for specific numbers, but...
Speaker Change: How should we think about the shape of that curve as we go through quarters? And at some point, you know, presumably it should get easier and all that stuff. But yeah, if you talk through how, you know, that factor might swing results.
Speaker Change: you know, as we go through 4Q and 25.
Speaker Change: Yeah, hey Pablo, um...
Speaker Change: a couple of things. One, I'd say we're still a little far out to get into kind of specific shape of
Speaker Change: rate and exposure impacts quarter by quarter. We'll be prepared to talk more about that as you know we we get back out here on our year-end call.
Speaker Change: Overall, you can think about the glide path of that impact.
Speaker Change: being most prominent in the beginning of the year when these headwinds from 2024 were not as meaningful and kind of gliding off over the balance of the year.
Speaker Change: Got it. Thank you.
Speaker Change: Yeah, so thanks Pablo and now as we bring the call to a close I wanted to take a moment to reflect on our recent five-year anniversary as a listed company Which was a couple weeks ago and everything that has been accomplished over that time period
Speaker Change: I remember ringing the opening bell at NASDAQ's market site on October 24th, 2019, and it feels both like yesterday and a distant memory all at once.
Speaker Change: In 2019, our debut year in the public markets, we were the first commercial insurance broker to IPO in over 20 years.
Speaker Change: We have less than 500 colleagues
Speaker Change: Total revenue of $138 million, adjusted EBITDA of $29 million, and adjusted diluted earnings per share of $0.27. We had generated organic growth of 10%. We are very much a regional business.
Speaker Change: However, we had a clear vision of who we wanted to become and a strategy to get there. Today, I sit here with immense pride for our team and colleagues across the country as we have more than executed on the five-year vision we set forth at the time of our IPO.
Speaker Change: Across key business metrics, we have executed well, in many ways beyond our own expectations.
Speaker Change: Today, we have just over 4,000 colleagues, a roughly 8x increase from five years ago.
Speaker Change: We have LTM revenues of $1.34 billion, a 10x increase. We have LTM adjusted EBITDA of $295 million, a 10x increase.
Speaker Change: and we have LTM adjusted diluted earnings per share of $1.37, an increase of over 5 times, resulting in a compound average growth rate of over 40% in our adjusted earnings per share since the IPO.
Speaker Change: As proud and excited as I am for what we have accomplished over the last five years, I can easily say I am even more enthused for what lay ahead over the next five and the opportunity that is bound.
Speaker Change: When we listed in 2019, we in many ways had burned the boats.
Speaker Change: Scale, for us, became existential to validate our ability to thrive as a public company.
Speaker Change: We had to move quickly to acquire scale, build our client capabilities across new markets and specialties, build out the infrastructure to responsibly operate the national public company we were rapidly becoming.
Speaker Change: all while maintaining and enhancing our industry-leading culture and status as a destination for leading talent.
Speaker Change: In many ways, as a result of the foundation we have laid, scale we have built, and strength and momentum of our underlying business fundamentals, our most challenging years of execution should be behind us.
Speaker Change: Going forward, our focus remains on building the preeminent insurance and risk advisory solutions firm.
Speaker Change: What we refer to sometimes as the broker of the future and while the fundamentals of what got us here Namely industry leading talent and technology will continue to be critical to our future success Certain of the priorities will evolve
Speaker Change: For example, during the past five years, scale and achieving it was existential. Over the next five, operational rigor and efficient execution at scale is critical.
Speaker Change: Today, I am more excited and confident about the future than I have ever been during our time as a public company.
Speaker Change: We have a platform that is well built and established. Investments needed for our next phase of growth are incremental, rather than the transformational investments made over the last five years to build and establish our baseline infrastructure.
Speaker Change: We have a margin profile that is far from mature, with no structural differences impeding our ability to achieve peer-level margins or greater over time, providing a very clear and long runway of margin accretion ahead.
Speaker Change: We have a business at scale that knows how to grow organically at outsized rates, realized through internally driven net new business generation, which should result in durability to our outsized growth profile through insurance and economic cycles.
Speaker Change: and we are rapidly approaching a major milestone with less than two quarters until the vast majority of our remaining earn out liabilities will be settled.
Speaker Change: In the second quarter of 2025 and beyond, we expect a significant inflection in our pre-cash flow generation.
Speaker Change: continued reductions in our debt leverage and continued industry-leading growth in our top and bottom line, all leading to a rapidly strengthening financial profile. At the Baldwin Group, I can say with pride and confidence, our future is bright.
Speaker Change: With that context, I thought it would be helpful for me to share the intermediate objectives we are rallying around internally.
Speaker Change: We have recently rolled out internally our intermediate term strategic plan with a top level aspiration we refer to as 3B30 in 5.
Speaker Change: Specifically, our objective is to grow our business to $3 billion of revenue, achieve a 30% margin over the next five years.
Speaker Change: To be clear, this is not guidance.
Speaker Change: and we have always set internal goals for ourselves more aggressively than the expectations we set externally, and as a result, you should not expect symmetry between the two.
Speaker Change: But this is what our planning and priorities revolve around achieving internally. We are a competitive group. When we set goals for ourselves, we expect to achieve and exceed them.
Speaker Change: In closing, I want to take a moment to thank our key stakeholders who have made the last five years possible. We have an amazing team of colleagues and leaders whose passion, grit, and determination enable the amazing results and accomplishments we have discussed today.
Speaker Change: I want to thank our clients without whose continued adoption and loyalty our success would not be possible. The insurance company partners we trade with day in and day out, and the communities we live and work in and that have supported our success.
Speaker Change: I also want to thank our shareholders, many of whom have been with us since our ITO. Notably, among our public insurance broker peers, we rank at the high end of insider ownership with over 40% of our company owned by colleagues and partners.
Speaker Change: And while I recognize our journey has not been without twists and turns, trials and tribulations.
Speaker Change: I am incredibly proud of the results we have achieved thus far. Our story is far from over. Our future is bright, and I can say to you with confidence, our best days remain ahead. Thank you, and we look forward to talking with you again on our year-end call.
Speaker Change: Thank you. This concludes our today's teleconference. You may disconnect your lines at this time. Thank you for your participation.