Q4 2024 The Baldwin Insurance Group Inc Earnings Call
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During the call today. The company May also discuss certain non-GAAP financial measures for a more detailed discussion of these non-GAAP financial 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 top Baldwin Dot com.
I will now turn the call over to Trevor Baldwin Chief Executive Officer of the Baldwin grip.
Good afternoon, and thank you for joining us to discuss our fourth 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 in.
In 2024, we witnessed an amalgamation of forces and events that shaped the risk and insurance environment for our clients insurance company partners communities and firm as we sit here today California's beginning the long road to recovering and rebuilding in the wake of what will likely be the most disk.
Trucked of wildfire in history. This comes on the heels of one of the more active hurricane seasons, we've experienced in some time with three major storms, making landfall in Florida, and causing meaningful damage across the east coast.
These recent events served as a Stark reminder of the critical role insurance plays as a vital backstop to help individuals and businesses recover financially from the impact of unforeseen events, while continuing to innovate invest and thoughtfully navigate risk to create jobs and support economic.
Growth all of which is essential to continued human progress.
Quite simply our work in combination with our industry partners safeguards commerce and protects the possible for our clients.
I extend my profound admiration and appreciation to our colleagues who worked tirelessly during 'twenty 'twenty four and are continuing to do so today offering their expertise advice and solutions to our clients as they navigate the aftermath of the California, wildfires and spearhead the recovery efforts.
Turning to our results for the fourth quarter and for the year for the fourth quarter organic revenue grew 19% with strong double digit organic growth across all three segments driven by record new business productivity and I S and continued momentum in both M I S and <unk>.
T S. Adjusted EBITDA margin expanded 310 basis points in the quarter to 19% for the year. Despite continued volatility within both the insurance industry and broader economy. We once again delivered industry, leading organic revenue growth of 17 per se.
<unk> supported by double digit organic revenue growth across all three of our segments.
As I mentioned on our third quarter call 'twenty 'twenty four marked the five year anniversary of our IPO.
This year with an intense focus on efficient execution and prudent expense management, we posted the most significant EBITDA margin expansion and adjusted free cash flow generation since our time as a public company adjusted EBITDA margin expanded 200 basis points to 22.5.
5% and adjusted free cash flow grew to $134 9 million net leverage declined to four one times down from four eight times at the beginning of the year. We are also pleased to announce that by the end of March the vast majority of our earn out obligations will be satisfied.
Marking a major milestone for the business and the beginning of the adjusted free cash flow inflection point, we've anticipated from there we expect an acceleration in our delevering in a step function increase in our capital position and capital allocation flexibility.
For I S segment overall organic revenue growth for the quarter was 16%, bringing the 2024 total the 10% organic core commissions and fees revenue was up 16% for the quarter and 11% for the year. We view this as particularly strong outcome in the face of it.
510 basis point headwind and underlying rate and exposure compared to the full year 2023.
The full year 2024 rate and exposure only contributed 40 basis points to our overall organic growth versus 550 basis points in the prior year offsetting those external market driven headwinds was our internally driven new business production, which set a new record at one.
125 million and resulted in sales velocity of 21, 5%, a 410 basis point improvement over the prior year.
Sales velocity for the quarter was 23% a 250 basis point improvement over the fourth quarter of last year I have long held that organic growth is the leading measure of health and momentum of an insurance distribution firm as a result of what it says about the client outcomes and resulting <unk>.
A main preference for firms requisite services and solutions that are being delivered.
Sales velocity.
The most meaningful of the four building blocks of organic growth speaks to the pure momentum and new client adoption relative to industry peers at 21, 5% sales velocity, we generated new client relationships and revenues at nearly double the rate of industry peers for which.
The median is roughly 11%.
A third more than the top 25% of our competitors are roughly 16% sales.
Sales velocity, unlike rate and exposure is entirely internally driven and create sustainability and consistency to our organic growth profile throughout both economic and insurance market cycles.
The growing momentum we have seen in our sales velocity across the ice platform is a testament to the depth and breadth of client capabilities. We have built over the past five years and how our integrated platform enables us to deliver the best of what Baldwin has to offer to our clients no matter where they.
Right.
Our use Etfs segment had a fantastic fourth quarter with organic revenue growth of 25% are multifamily and home portfolios continue to scale generating commissions and fees growth of 23% and 37% respectively for.
For the year, you see T S organic revenue growth was 27% and incredibly strong performance on the heels of 31% organic growth in 2023.
<unk> finished the year with over $1 1 billion in gross written premium.
Two months into 2025, we wanted to provide two updates related to our homeowners product suite.
While California property represents less than 10% of our overall premium base in the MGA or E&S homeowners portfolio has some exposure to the recent fires that will deliver losses to our reinsurance partners, while we do not directly bear any of the costs of those losses.
It remains to be seen what impact the event will have on reinsurance pricing for wildfire more broadly and what if any impact that will have on terms and conditions in our June one reinsurance renewals.
Second related to our builder sourced homeowners book with two B E. As anticipated. We are pleased to confirm <unk> intent to continue supporting the program past may one as we work to accelerate moving the book off of Tve's paper to other capacity providers to that end.
In January we received formal approval and a certificate of authority from the Texas Department of insurance to form and launch a Texas domiciled reciprocal insurance exchange focused on or build their book of business for which the M. G. A intends to serve as the attorney in fact.
We are in the process of finalizing a third party lead capitalization of the reciprocal ahead of beginning the rate business into the reciprocal two to three months thereafter.
The approval and forthcoming launch of our debut Baldwin sponsored reciprocal exchange represents a meaningful milestone in our continued journey to vertically integrate across the value chain and bring innovative third party risk capital platforms to market and support a more efficient risk.
Transfer outcomes for our clients.
Our <unk> segment delivered total organic revenue growth of 19% during the fourth quarter and 20% for the full year. These full year results are particularly impressive considering the 820 basis point headwind, we absorbed as a result of moderating rate and exposure tailwind compare.
The 2023.
Importantly, we made meaningful strides in growing our reputation as the leading purveyor of embedded home insurance solutions at point of new home sale and mortgage origination our Westwood franchise on boarded six new builders in 2024, and now powers the home insurance experience for 18 of the top.
Twenty-five homebuilders across the country. Additionally, after more than two years of technology build we launched our debuts digital embedded home insurance initiatives and the mortgage title and real estate brokerage channel going live with this embedded solution for the first time with a mortgage partner and the fourth.
Quarter.
Lastly, our Medicare business had a record annual enrollment period on the back of growth in contracted agents of over 20% and.
In addition to continued momentum and leading organic growth results adjusted EBITDA margin expanded 250 basis points as we continue to grow into the de novo investments across our mortgage and real estate channels.
In summary, we are pleased with the strong results for the year and in particular the recent quarter.
As we enter 2025 with growing momentum across our segments organic revenue growth of 17% adjusted EBITDA growth of 25%.
Adjusted earnings per share growth of 34% and adjusted free cash flow growth of nearly 100% in 'twenty 'twenty four are a testament to the quality of our colleagues and the strength of our client franchise with <unk>, which enables our ability to produce outsized organic growth.
With an even more meaningful flow through to earnings and cash flow, while the insurance marketplace remains dynamic and challenging for many of our clients the growing complexity of the risk and insurance landscape will continue to inure to the benefit of our vertically integrated franchise as it highlights the outside.
As value our teams continued to deliver the innovative products solutions and risk capital formations that uniquely inefficiently solve many of our clients risks and uncertainties. The strong validation, we see from clients in the marketplace day in and day out as evidenced by our.
Industry, leading sales velocity and organic growth further solidifies our confidence in the sustainability of our financial performance and continued ability to deliver outsized organic growth ongoing margin accretion and expanded adjusted free cash flow well into the future.
As we have finally reached the post earn out inflection point on cash flow. We now have expanded opportunities to invest in attracting and retaining talent developing products and solutions for our clients and ongoing optimization of our operations, which will further enhance the sustainability of our operating model.
And our ability to deliver top and bottom line growth with that I will turn it over to Brett who will detail our financial results.
Speaker Change: Trevor and good afternoon, everyone for the fourth quarter, we generated organic revenue growth of 19% and total revenue of $329 9 million.
Speaker Change: Looking at the segment level, we generated organic revenue growth of 16% at Ias, 25% at UC T S and 19% at Miss for the full year organic revenue growth was 17% and total revenue was $1 4 billion.
Speaker Change: We recorded GAAP net loss for the fourth quarter of $34 8 million or GAAP diluted loss per share of 31.
Speaker Change: GAAP net loss for the full year was $41 1 million or <unk> 39 per fully diluted share.
Speaker Change: Adjusted net income for the fourth quarter, which exclude share based compensation amortization and other one time expenses was $32 1 million or 27 per fully diluted share.
Speaker Change: For the full year adjusted net income was $176 9 million or $1 50 per fully diluted share.
Speaker Change: A table reconciling GAAP net income to adjusted net income can be found in our earnings release, and our 10-K filed with the SEC.
Speaker Change: Adjusted EBITDA for the fourth quarter rose, 38% to $63 2 million compared to $45 6 million in the prior year period.
Speaker Change: Adjusting to eliminate the impact of the sale of connected risk solutions in February of 2024, adjusted EBITDA grew 42%.
Speaker Change: Adjusted EBITDA margin expanded approximately 310 basis points year over year to 19, 1% for the quarter compared to 16% in the prior year period.
Speaker Change: Adjusted EBITDA for the full year grew 25% over the prior year to $312 5 million.
Speaker Change: Adjusted EBITDA margin for the full year was 22, 5% an expansion of 200 basis points year over year.
Speaker Change: Adjusted free cash flow for the fourth quarter was $16 9, million% to 328% increase year over year net.
Speaker Change: Net cash provided by operating activities in our statement of cash flows was $102 2 million for the full year 2024 compared to $44 $6 million in 2023.
Speaker Change: Adjusted free cash flow for the full year was $134 9 million an increase of 97% from the prior year when adjusting for onetime third party refinancing costs of $14 million incurred during 2024 adjusted free cash flow was $148 9 million.
Speaker Change: In the fourth quarter, we paid $42 2 million of earn outs and cash inclusive of amounts reclassified to colleague earn out incentives.
Speaker Change: In February we paid an additional $25 6 million, bringing our total cash earn out spend over the past 14 months to $163 3 million.
Speaker Change: As a result, our remaining estimated undisputed earn out obligations have been reduced to approximately $159 7 million as of today.
Speaker Change: By the end of the first quarter, we expect to have only approximately $10 million of outstanding earn out obligations as.
Speaker Change: As a reminder, several of our partnership agreements contain provisions that permit farmer selling shareholders to allocate portions of the earn out proceeds to colleagues who meaningfully contributed to the partnered firms achievement of the earn out when this determination is made we record compensation expense that is an offset to the chi.
Speaker Change: <unk> and contingent consideration and neutral to net income.
Speaker Change: As a result of this practice, we added back $31 $2 million of compensation expense in the fourth quarter associated with colleague earn out incentive payments.
Speaker Change: As we wind down the last of our earn out payments for our 2021 partnerships, we want to direct investors to the 2021 partnership scorecard, and our earning supplement which highlights the meaningful value created across the 16 partnerships we completed in 2021.
Speaker Change: In aggregate, we paid $14 six times, adjusted EBITDA or five times revenue upfront.
Speaker Change: Three years later after taking into account nearly $240 million of post closing contingent earn out payments are aggregate all in adjusted EBITDA and revenue multiples sit at eight nine times and three three times, respectively. As a result of outsized top and bottom line.
Speaker Change: <unk> growth across the cohort.
Speaker Change: We continue to believe we have a unique and compelling M&A thesis and as leverage permits we will look to strategically and thoughtfully allocate excess capital to this strategy in a manner that enhances the long term value to our stakeholders.
Speaker Change: In the first quarter of 2025, we will be transitioning to a fiduciary reporting model for cash accounts receivable and payables held our own in a fiduciary capacity. This changes to reflect the nature of the accounts more appropriately on our balance sheet and reduce volatility in the cash flow from.
Speaker Change: <unk>.
Speaker Change: On the balance sheet, we will label them fiduciary assets and fiduciary liabilities and the cash flow statement changes in fiduciary cast will be presented within financing activities.
Speaker Change: Starting in the first quarter of 2025, we will present the prior periods on the same basis.
Speaker Change: It is important to note that this will also change our definition of adjusted free cash flow from operations, which will no longer require the removal of the change in premiums commissions and fees receivable or the change in accounts payable accrued expenses and other liabilities.
Speaker Change: We expect this to introduced significant seasonality to our presentation of adjusted free cash flow from operations, resulting in minimal free cash flow in Q1, followed by a consistent stream of improved free cash flow in quarters two through four.
Speaker Change: At the end of the fourth quarter net leverage stood at four one times a further reduction from the third 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.
Speaker Change: We took advantage of favorable market conditions, increasing our term loan facility by $100 million in January to pre fund earn out obligations. While also tightening pricing on our term loan facility by 25 basis points to term sofa plus 3%.
Speaker Change: We maintained our 25 basis point step down feature and expect pricing on our term loan to dropped to term sofa plus 275% when net leverage falls below four times later this year.
Speaker Change: For the first quarter of 2025, we expect revenue of $410 million to $420 million and organic revenue growth towards the low end of our 10% to 15% long term range, which contemplates an anticipated mid single digit organic growth rate for Ias as a result of.
Speaker Change: Timing of net new business we.
Speaker Change: We expect Ias to deliver double digit commissions and fees growth for the full year.
Speaker Change: We anticipate adjusted EBITDA for the quarter between $110 million and $115 million.
Speaker Change: And adjusted diluted EPS of <unk> 62 to <unk> 66 per share.
Speaker Change: We expect net leverage to increase slightly in the first quarter, given the incremental $100 million, we added to our term loan b and they're roughly a $175 million of anticipated earn out payments to be made during the quarter.
Speaker Change: But by the third quarter, we expect net leverage to fall below four times for the first time since 2022.
Speaker Change: To further expand on the high level 2025 guidance, we provided on our last earnings call. We currently expect organic revenue growth in the lower half of our long term, 10% to 15% range, implying total revenue between 1.52 billion and 1.56 billion.
Speaker Change: And adjusted EBITDA margin expansion in the lower half of the 25 to 100 basis point range. We provided during the third quarter call, which would imply adjusted EBITDA between 345 million to $360 million, both of which incorporate some uncertainty around potential impacts from the California.
Speaker Change: Buyers on our six one reinsurance renewals in the MGA.
Speaker Change: This contemplates full year double digit commission and fees growth for Ias.
Speaker Change: Double digit organic growth and use Etfs and mid single digit organic growth for mis as a result of the one time impact of re platforming, our builder sourced homeowners book of business from TBE to new capacity providers, including our newly formed reciprocal exchange.
Speaker Change: We expect adjusted free cash flow from operations of $150 million to $175 million, a conversion rate between 40, and 50% versus approximately 45% in 2024 lastly.
Speaker Change: Lastly, we expect adjusted diluted earnings per share of $1 78 to $1 80.
Speaker Change: In closing we are pleased with our results for the quarter and for the full year, our ability to deliver on our stated goals of sustaining double digit organic growth improving margin and reducing net leverage position us well for continued success in 2025 and beyond.
Speaker Change: With substantially all of our earn out obligations behind us we have tremendous opportunity for accretive capital deployment that will benefit all of our stakeholders for the foreseeable future. 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 and then one on your telephone keypad.
Speaker Change: <unk> tone will indicate your line is in the question queue.
Speaker Change: You May press Star and then T. He would like to remove your question from the queue.
Speaker Change: Call participants using speaker equipment, it may be necessary to pick up your handset before pressing this talkies.
Speaker Change: The first question, we have is from Josh Shanker of Bank of America. Please go ahead.
Speaker Change: Yeah.
Josh Shanker: Thank you very much for taking my question.
Speaker Change: Good afternoon everybody.
Speaker Change: I wanted to talk about it.
Speaker Change: Contingent and and earn out opportunity. So the first one obviously you know to incentivize your producers around the.
Speaker Change: Since you've made over the past few years, you've not only paid contingence out two principals who joined you in your acquired but also their producers.
Speaker Change: I'm curious if you say as we reached the end of the Earth.
Speaker Change: Turn out of period or their sales inducements that you plan to include in call producer earn out contingent or whatnot going forward or was that a onetime thing associated with the acquisition and we're not going to see that going forward as well.
Speaker Change: Hey, Josh this is Trevor.
Speaker Change: So let me just make sure.
Speaker Change: Im understanding your question accurately you use language, we paid contingence to producers and I'm, assuming you don't mean like contingent income from insurance companies because that was not paid no no.
Speaker Change: Incentives essentially.
Speaker Change: Right, Yeah, so the colleague incentive pools.
Speaker Change: I'd say those were spread broadly across colleagues and certain partnership entities.
Speaker Change: And not necessarily specifically pointed at producers those were entirely at the discretion of the selling shareholders of the acquired businesses and so we actually were not involved and how those funds were directed or allocated.
Speaker Change: What I can tell you is that those will not reappear in the future and that is those.
Speaker Change: Colleague earn out incentive payments are just taking what was otherwise earn out payments due to selling shareholders and paying them to certain colleagues as designated by the selling shareholders rather than to the selling shareholders directly.
Speaker Change: Now if I am maybe inferring a little bit into your question.
Speaker Change: I would suppose is hey, it looks like you could've been incentivising some of this outsized sales performance.
Speaker Change: These colleague earn out incentive payments are and what does that mean relative to kind of the sales and new business performance in and the organization going forward.
Speaker Change: And I would just point you as an example to two of our regions and the Ais business our West region.
Speaker Change: In our southwest region.
Speaker Change: Both of which came out of earn out at the end of 2023.
Speaker Change: And so did not have any kind of earn out incentives in place. During 2024. Despite that 2024 was by a wide margin the past organic growth year for each of those regions since they've joined us.
Speaker Change: Helpful context.
Speaker Change: You're a bit of a mind reader there you know and that's the that's sort of what I'm getting at.
That's some good color there.
Speaker Change: And I just also wanted to catch up on the change in the fair value consideration, obviously be trying to reverse that out.
Speaker Change: It was largely yacht.
Speaker Change: Negative in this quarter, but I think some of the moving pieces involved.
Speaker Change: Contingent.
Speaker Change: Earn out incentives I think that the pool was taken out of the change.
Speaker Change: Change in fair value contingent consideration and move to the colleague around incentives in the quarters that how about that worked.
Josh Shanker: That's exactly how it works Josh as Trevor articulated these are not incremental payments.
To the earn out we have been calculating all along it's just redirecting of those payments from selling owners to non selling owners and when we do that it is a re class out of that change in fair value of contingent consideration to this colleague incentive lines. So the negative result, youre seeing.
Josh Shanker: Is directly the result of pulling.
Josh Shanker: Pulling that non selling shareholder amount into a separate line.
Josh Shanker: That's great and then finally.
Josh Shanker: You're right to point out that the story changes in 2025 as the earn outs are finished and the cash flow starts coming through I realize that you were very enterprising organization and you've been hoping for the smoked for awhile.
Josh Shanker: Were to engage in M&A, that's changed the story, a little bit and we may not get to see the cash flow as well I assume you have an appetite for things, but you also wanted to demonstrate the cash flow generating nature of the businesses. How do you weigh the signaling to show the cash flow generation versus your desire to find other things in the market that might suit you.
Speaker Change: Yeah, Hey, Great question, Josh So first what I would tell you is our number one priority is continuing to delever the balance sheet and strengthen our financial position over the near term into our long term range of three to four times.
Josh Shanker: Second I would tell you is.
Josh Shanker: As you can look at the results in the earnings supplement where we detail the performance of the businesses acquired during 2021, when you feel like we've done a really nice job of allocating capital and driven spectacular results for our shareholders through the deployment of that capital.
Josh Shanker: As evidenced by how much the multiple has been bought down over our three year ownership time period.
Josh Shanker: Looking forward, we believe M&A will be a lever that we will continue to opportunistically pull and we look forward to a time that is quickly approaching where we will have access capital to do that I would tell you you should continue to expect the same level of discernment and an incredible.
Josh Shanker: Really tight filter around the type of M&A, we're going to do both qualitatively and quantitatively to ensure that there is strong alignment great financial outcomes and real value add.
Josh Shanker: From a cash flow perspective, you know, we're very much looking for and expect to show and prove to our shareholders in the street broadly.
Josh Shanker: The significant free cash flow potential of our enterprise as evidenced by fleet free cash flow from operations that this business will begin and continue to spin off an ever growing quantum's, so <unk> to.
Josh Shanker: To wrap it up I'd say, we're in a great position, we have a business that's growing topline and an industry leading men are on an organic basis.
Josh Shanker: We have a really attractive margin accretion story for the foreseeable future and I'll provide some more context and color around that in our annual letter. This year. So if you haven't haven't seen that yet I would point you to that on our IR website.
Josh Shanker: And then we have growing capital positions and capital allocation flexibility as a result of that financial performance. The next five years for organization are going to be an exceptional five years and while the last five years since our IPO have been quite remarkable I am more excited for the next.
Josh Shanker: Thank you very much.
Josh Shanker: Okay.
Speaker Change: The next question we have is from Elyse Greenspan of Wells Fargo. Please go ahead.
Elyse Greenspan: Hi, Thanks.
Speaker Change: Good evening My first question.
Speaker Change: Is just on I guess.
Speaker Change: Yes, I guess I guess, it's multipart why growth was.
Speaker Change: To end the year and then you guys are pointing to lower growth in the Q1 due to the timing of new business. If you could just expand on that and then for the full year, you said double digit commission and fee growth for Ias given that there's no M&A would that be representative of the organic outlook or is there something.
Speaker Change: Some other adjustment we need to think about between the two.
Speaker Change: Yeah, Hey, Elyse this is Trevor.
Speaker Change: So to start the momentum in our Ais business is incredibly strong as evidenced by <unk>.
Speaker Change: Industry, leading sales velocity that I detailed earlier in the call.
And we don't anticipate that momentum ebbing.
Speaker Change: Call out to Q1 is just specific timing nuances just the nature of the business as you will see some variability in overall organic growth quarter to quarter, and we don't want people to be surprised or unnecessarily read into that and so we're just managing those expectations.
Speaker Change: Our expectation for double digit commission and fees growth for the year is a read through to organic growth I would just say.
Speaker Change: You would likely since a hint of cautiousness around growth and contingent as two weeks into the year. We saw what will likely end up being a top three catastrophe loss for the industry with the California wildfires and so as you think about the implications too.
Speaker Change: Overall loss costs over the course of the year there could be some impacts.
Speaker Change: But it's frankly, just too early to tell.
Speaker Change: And that you guys on your last call right. It said that there was a 10 to 15 million.
Speaker Change: Negative EBITDA impact right expected to hear from you know.
Speaker Change: The QB and just arranging the reinsurance cover it sounds like you know with.
Speaker Change: With the reciprocal there's more going on there and sell.
Speaker Change: Is that still the expected impact or is some uncertainty there right.
Speaker Change: That it might be more is that embedded in being at the low end of the margin guide for the year.
Yeah. So a few things and I'll just kind of trying to quickly run through them. We're pleased to have shared that as expected <unk> signaled its intent.
Speaker Change: And to a new agreement with us to continue supporting the builder source book of business beyond five one.
Speaker Change: Part of that agreement will result in us not needing to help them with arranging third party reinsurance in exchange for which we were taking a reduction in overall gross commissions consistent with that $10 million to $15 million impact that you heard from us on the Q3 call.
Speaker Change: But fixing that so no kind of variability.
Speaker Change:
Speaker Change: Beyond that of sorts, we're incredibly excited about the reciprocal exchange that we're in the process of starting up and how that will provide an innovative long term source of capacity for us to continue growing the builder book over time and over time, we also anticipate.
Speaker Change: With that that reciprocal will provide for overall gross economics.
Speaker Change: More consistent with the historical economics, we had for Q B importantly, it will take some time for that to earn in and so we wouldn't expect to be back to those levels fully until 2026 or 2027.
Speaker Change: So that is all contemplated in the guide that you heard Additionally to that as you also heard US reference we have built in some conservatism and cautiousness as a result of uncertainty related to the broader impacts of the California wildfires on reinsurance pricing for the upcoming <unk>.
Speaker Change: June one renewals to provide some context.
Speaker Change: Our MGA finished last year at about $1 1 billion of gross written premiums we had to E&S homeowners programs, who will be impacted by the fires that are just under 20% of that overall premium and of which about 15% of the 20%.
Speaker Change: Is associated with California business.
Speaker Change: As we think about the context of the loss here.
Speaker Change: And the headwinds that we're citing its predominantly market you know market driven event. So when you look at the current industry estimates of somewhere between 30 and 50 billion. If you take the upper range there.
Speaker Change: This is tracking to be a top three catastrophe loss event of all time that occurred in the first two weeks of the year.
Speaker Change: On what the reinsurance market has historically considered to be a secondary apparel.
Speaker Change: And for which a loss that will be much more heavily absorbed by the reinsurance market than say, a Florida hurricane wood.
Speaker Change: And so while our California exposure overall is in line with expectations for both programs.
Speaker Change: It remains to be seen how reinsurance pricing to the market more broadly shakes out and to the extent it goes up that could put pressure on our gross commission rates for those two programs on the June one renewal to be explicit.
Speaker Change: We do not have any specific sizing around what that impact could or couldn't be and you know, there's a world where you take adequate rate on a primary basis to fully absorb it and Theres also a world where there's cost increases that are pass through and have temporary impacts and so this is just.
Speaker Change: US wanting to be transparent and conservative and cautious around how we're managing the expectations going forward.
Speaker Change: I appreciate the color and then I guess, one last one just as I'm thinking about it correctly given that this is all geared towards the second half of the year with like the reinsurance and the QB within your guide are you expecting like greater margin improvement in the first half of the year and then less in the back half.
Speaker Change: Or am I missing something I, just like that kind of high level thoughts.
Speaker Change: Yes, they had a very high level that's accurate lease.
Speaker Change: Okay. Thank you.
Speaker Change: Thanks.
Speaker Change: Hmm.
Speaker Change: The next question is from Greg Peters of Raymond James. Please go ahead.
Speaker Change: Good afternoon, just following up on that last comment Trevor.
Speaker Change: With with more costs because of the reinsurance.
Speaker Change: Potential changes beginning with the renewal does that mean.
Speaker Change: There's going to be headwinds in the first half of next year up until the next renewal cycle.
Speaker Change: About 26.
Speaker Change: Yes, I mean these are all hypotheticals right now, Greg, but hypothetically, if we absorbed increased costs associated with the reinsurance in some of these programs.
Speaker Change: That pressure would be for a full 12 months.
Speaker Change: And and just.
Speaker Change: When you are.
Speaker Change: This is in the E&S market, so that's free of rate and form.
Speaker Change: Why would that cost be passed along to the policyholder.
Speaker Change: There's a world where it could.
Speaker Change: Right.
Speaker Change: Okay.
Speaker Change: In your.
Speaker Change: In your comments, there's two other things you talked about how you are going to be restating free cash flow.
Speaker Change: And moving some pieces around.
Speaker Change: And you gave us some guidance around what how the numbers are going to look on a quarterly basis and I'm wondering if you have that what the adjusted on this new format. The adjusted number was for the full year 2000 and for US. So we can use that is it.
Speaker Change: As a benchmark as we build out our numbers for 25 and 26.
Speaker Change: Yes, we are.
Speaker Change: We haven't disclosed that yet Greg.
Speaker Change: But I will say is obviously when we report each of the quarters it will be on a comparable basis.
And we will work that bridge as.
Speaker Change: As well in our earnings supplement.
Speaker Change: I just I just follow up.
Speaker Change: I mean from a big picture perspective does the adjusted adjustments how does that directionally.
Speaker Change: Directionally is that move free cash flow down for you guys for 24 versus what you've reported.
Speaker Change:
Speaker Change: Or you'd likely moves it down.
Speaker Change: To some extent and Greg because youre pulling out any increase in trust cash, which previously would have been mixed with your overall operating cash increase.
Speaker Change: So when you are pulling fiduciary you know as the business is scaling.
Speaker Change: In theory right your fiduciary assets are scaling as well.
Speaker Change: So it would I would expect that.
Speaker Change: <unk> for 24 to be lower than how we were previously calculating it.
Speaker Change: Under the old methodology.
Speaker Change: Okay.
Speaker Change: Finally.
Speaker Change: Going back to comments you made at the outset of the call and I know there was some previous comments on this and answered or some of the questions.
Speaker Change: You said, an acceleration and deleveraging.
Speaker Change: Post the last earn out.
Speaker Change: In.
Speaker Change: The last quarterly call I think you made a statement that you weren't expecting to do any M&A.
Speaker Change: 25.
Speaker Change: It seems like there might be a slight shift in that thinking but.
Speaker Change: I don't want I don't.
Speaker Change: I wanted to try and read into too much what you're saying, but I guess related to this topic is would you consider going above four times debt leverage again, if the right opportunity came along because he was talking about the three to four target range.
Speaker Change: Yeah, Hey, Hey, Greg. This is Trevor one we will not consider going above four times in the foreseeable future.
Speaker Change: Two.
Speaker Change: Uh huh.
Speaker Change: I would not model any M&A in 2025, our primary focus over the near term is continuing to strengthen our balance sheet.
Speaker Change: Thank you for your answers.
Greg: Thanks, Greg.
Speaker Change: Okay.
Speaker Change: The next question we have is from Pablo.
Speaker Change: Of Jpmorgan. Please go ahead.
Pablo: Hi, Good evening first question could you. Please bridge the gap between the EBITDA outlook you gave for 25 I believe it was $3 45 to $3 60 in the cash flow number right. So that's about.
Pablo: I think about 200 with a variance right and I guess half of it is about is interest expense.
Pablo: If you could speak to what the other half this thank you.
Pablo: Yes, I would say.
Pablo: A significant portion of that is interest expense I would say, even even larger than half.
Pablo: We do anticipate.
Pablo: While they've been declining meaningfully over the last year that we would still have some form of continued cash add backs.
Pablo: For one time items that pop up.
Pablo: And then the last is as the business scales.
Pablo:
Pablo: We're always facing some headwind in working capital, particularly with respect to receivables we book on direct Bill policies.
Pablo: For which the cash is typically received over a 12 month period as well as receivables on contingent income for which the cash is received typically in the subsequent year. So we build in some.
Pablo: Cushion per se for.
Pablo: The continued scaling of the business.
Pablo: It would present some of that working capital headwind.
Pablo: Gotcha.
Pablo: And then another cost question.
Pablo: I think your Capex. This year is running close to 40 or a little over 40 would that be a good run rate to think about for next year or were there certain investments that you made this year that might not recur.
Pablo: 25.
Pablo: No that would be a good run rate to think about in terms of next year. The primary driver of that is internal use software.
Pablo: As we continue to build out certain technological capabilities, particularly in the embedded channel.
Trevor Baldwin: As Trevor mentioned is where we're launching <unk>.
Pablo: Some of those relationships.
Pablo: And in real time.
Speaker Change: Gotcha and then last question maybe for Trevor Trevor is your broad expectation.
Pablo: The rate of exposure headwinds that you saw in I S. It will be.
Speaker Change: Fully lap in 'twenty five or do you think there is there is some.
Pablo: Pressure there coming out on the road. Thank you.
Speaker Change: I don't anticipate that.
Speaker Change: The same headwinds in 2025 from adding rate and exposure.
Speaker Change: The full year impact was relatively modest if anything I think there could be some tailwind there depending on what happens with the economy and how rate reacts and.
Speaker Change: And in the context of some of the large cat losses, we've seen over the past couple of months.
Speaker Change: Thank you.
Pablo: Thanks Pablo.
Speaker Change: The next question, we have is from Tony with joint of <unk>. Please go ahead.
Speaker Change: Hey, good evening guys.
Speaker Change: Question on the middle market landscape.
Speaker Change: It was a pretty active year of deals and consolidation in this space last year have you sense that the competition in that space is in any way reinvigorated under new ownership or or have those you know those deals led to maybe talent becoming available to hire what's your sense there.
Speaker Change: Yeah. So I'd say, we're seeing definitely a real evolution in the M&A marketplace, Tommy in the middle market space, where.
Speaker Change: Many of the kind of private equity backed consolidators that drove the preponderance of the M&A activity.
Speaker Change: <unk> for the past five to 10 years has largely slowed down as they've begun kind of to be more inwardly focused on catching up from an integration and operating tempo perspective.
Speaker Change: Many of the large publics, who have you know.
Speaker Change: Advantaged capital positions today and.
Speaker Change: I think certainly robust currencies.
Speaker Change: Have become more active I think we will continue to see more large deals get done whether it'd be with large public strategics or.
Speaker Change: More peer to peer style mergers of.
Speaker Change: You know opportunity.
Speaker Change: There's still some really high quality kind of.
Speaker Change: Tuck in in mid size opportunities and and that's really where we're going to spend the preponderance of our time as we began thinking about turning the M&A engine back on towards the end of this year heading into 2026.
Speaker Change: And so we look forward to being able to you know.
Speaker Change: Exercise that.
Speaker Change: Lever and really.
Speaker Change: <unk> returned to driving a ton of shareholder value creation as you have seen evidenced in.
Speaker Change: Both the 2020 in 2021 classes of M&A that we've done in and reported on.
Speaker Change: From a talent perspective, I would say we are in an incredibly privileged position, we are seeing significant upticks and proactive inbound activity relative to experienced insurance professionals, who are beginning to experience some disk.
Speaker Change: Eruption on many of these legacy M&A roll up sell platforms, who have begun the hard work of integrating those organizations in preparation for future capital markets activity and as such many of these professionals who are experiencing that disruption had taken the opportunity to ask the question of.
Speaker Change: <unk>.
Speaker Change: Im going to experience a ton of disruption in a bunch of change.
I should probably reevaluate whether or not this is the right platform for me to build the most rewarding and then impactful career that I can unfortunately, we've carved out a reputation for ourselves as a destination, where the very best industry professionals can come to deliver very strong.
Speaker Change: Long outcomes for their clients have a lot of fun and build a rewarding career. So I think that will be a growing source of opportunity for us and has already begun contributing as we think about the results in 2025.
Speaker Change: Great. Thanks, Kevin.
Tommy: Thanks Tommy.
Speaker Change: At this time there are no further questions and I would like to turn the floor back over to Trevor Baldwin for any closing remarks.
Trevor Baldwin: Thank you in closing I want to thank our colleagues for their hard work and dedication to delivering innovative solutions and exceptional results for our clients I also want to thank our clients for their continued trust and confidence in our teams.
Trevor Baldwin: Thank you all very much and we look forward to speaking to you again next quarter.
Trevor Baldwin: This concludes today's conference.
Trevor Baldwin: Thanks for joining US you may now disconnect your lines.
Trevor Baldwin: Oh.
Trevor Baldwin: [music].