Q2 2025 The Baldwin Insurance Group Inc Earnings Call
Ladies and gentlemen, greetings and welcome to the Baldwin group second quarter 2025 earnings call.
At this time, all participants are in the listen only mode, a brief question and answer session will follow the formal presentation.
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It is now my pleasure to introduce your host Bonnie, Bishop executive director investor relations. Please go ahead.
Thank you, welcome to the bowline group. Second quarter, 2025 earnings call. Today's call is being recorded second quarter Financial results, supplemental information and form. 10 Q were issued earlier this afternoon and are available on the company's website at IR baldwin.com.
Please note that remarks made today may include forward-looking statements subject to various assumptions, risks, and uncertainties. The company's actual results may differ materially from those contemplated by such statements.
For a more detailed discussion. Please refer to the note regarding forward-looking statements and the company's earnings release and our most recent form 10q, both of which are available on the Baldwin website.
posted on the company's website at IR baldwin.com, I will now turn the call over to Trevor Baldwin Chief Executive Officer of the Baldwin group,
Good afternoon and thank you for joining us to discuss our second quarter results. Reported earlier today, I'm joined by Brad hail Chief Financial Officer and Bonnie Bishop executive director of investor relations.
We generated strong overall results in the second quarter with Organic Revenue growth of 11% adjusted ibida, growth of 14% adjusted ibida, margin expansion of 60 basis points and adjusted diluted earnings per share growth of 24%. We paid 57 million of earnouts in cash and have now fully extinguished all earnout, liabilities associated with the partnership's completed during our first 5 years, as a public company,
And insurance advisory Solutions. Overall, organic Revenue. Growth accelerated from the first quarter to 10% driven by strong new business generation.
Sales velocity increased from 14% in the first quarter to 22% in the second quarter. Bringing year-to-date sales philosophy to 18%. This represents top decile new business performance in our industry. With the latest data showing industry median sales velocity of 11.7%.
Percent and top cortile at 15.7%?
The impact of rate and exposure or renewal premium change was muted at 1.3%. Reflective of the dramatic reduction in large cat exposed, Coastal property, pricing and continued macro uncertainty, partially offset by ongoing rate action, and certain litigation exposed casualty lines of business from where we sit today. We don't anticipate this backdrop to change in the near term highlighting the importance of our industry-leading, new business generation capabilities to drive sustainable growth over time.
In our underwriting capacity and Technology Solutions. Segment organic Revenue growth came in at 21% on top of a very strong 37% in the second quarter of 2024.
Driven by continued strength and our multi-family portfolio, which grew commissions and fees at 14% strong results in certain segments of our homeowners portfolio, our Builder and real estate. Investor products grew commissions and fees by 25% and 35% respectively. In the quarter in Juniper Reef, which achieved year-over-year Revenue growth of over 100% in the quarter.
These more than offset, growing headwinds in our ens homeowners book, as we have maintained underwriting discipline, amidst, increased pricing, pressure and competition a dynamic. We do expect to persist over the remainder of the year.
In April, we announced the finalization of the third-party, Le capitalization of our Builder reciprocal Insurance Exchange named, Brie for short. And in July, we began the migration of the Builder book away from QBE.
Additionally, following the transaction. We announced with hippo, we have begun work with the hippo and Spiner teams on a second Builder program. Over time, we expect it will materially increase our capture of Westwood's Builder business into proprietary MSI, programs, which sits at around 30% today.
This should unlock a meaningful growth opportunity for our MGA and expand vital Insurance capacity for our Builder partners and their home buyer customers.
Also, in April, within the ucts segment, we completed a strategically important partnership with multi-strap of Bermuda based, reinsurance MGA platform focused on managing alternative reinsurance capacity.
This partnership adds an important capability to Source alternative reinsurance capital for our cedent, clients and MGA business on a commissions and fees basis.
While delivering, a track record of attractive uncorrelated returns to our Capital partners.
We are incredibly excited to welcome the multi-strat team and look forward to the Strategic contributions. They will make towards fulfilling our broker of the future strategy.
Build their business with QBE, which flows directly to Westwood and through our misp andl.
While this will be a headwind for the balance of 2025 and the first half of 2026 to both Mis revenue and margin. The year-over-year impact will normalize starting after the second quarter of 2026.
So what is a 1-time headwind for the next 12 months will then become a revenue and margin Tailwind for the following 24 months.
Second after a strong start to the year with record new business, in the first quarter from the 2024 annual enrollment period. Our Medicare business experienced headwinds in the second quarter as disruption across the Managed Care landscape, particularly amongst the number of large, Medicare Advantage, plan providers, resulted in elevated, turnover in our renewal book business,
We expect this pressure on our renewal book to persist for the balance of 2025, after which, we expect the market to stabilize heading into next year, based on announced increased government funding levels.
While our Medicare business is a relatively small part of our overall enterprise at $60 million of annual revenue, it remains well positioned to continue driving profitable growth in 2026 and beyond as we continue to grow our agent base, expand our offerings, and further bolster our technology resources to support agent success.
We remain very bullish on the growth. Prospects of our Mis business and are particularly excited about the increasing momentum. We are seeing across our strategic growth initiatives.
Through the second quarter, our mortgage and real estate embedded business has successfully implemented, 7, new embedded Partners, 6 of which were launched in the second quarter. Additionally, we're excited to announce that in the third quarter. We will officially go live as the exclusive embedded insurance provider with a top 20 National Mortgage originator. This marks a major milestone for the business and should become a Tailwind for Mis organic growth in 2026 and Beyond.
Our pipeline of new embedded Partners in the mortgage and real estate channel is as strong as we have seen yet with our implementation backlog, already into 2026.
Our growing momentum in the mortgage and real estate channels Market leading position in the Builder Channel, and access to purpose-built and proprietary Insurance products. Through our MGA increases our confidence, in our ability, over time to build, the leading personal lines, distribution platform in the 500 billion, dollar premium us personal lines Market, a truly massive opportunity,
On July 1st. We completed the acquisition of hippos. Homebuilder distribution Network, I'd highlight 3 benefits from this acquisition first Westwood acquired 8, new home, builder partners. And as a result now, Powers the home insurance experience for 20 of the top 25 homebuilders across the country.
Second, as I mentioned earlier, MSI entered into both a program administrator agreement in claims Administration agreement with hippo and its Affiliates and is now actively collaborating with those teams to develop a new home builder program that will complement our existing Bree offering and provide additional proprietary capacity for Westwood's Builder partners.
Lastly hippo and its Affiliates including Spiner, will provide incremental fronting and reinsurance capacity and support of msi's existing and future programs. We look forward to a continued and growing relationship with the entire hippo team.
In summary, we're pleased with our second quarter, despite the macro uncertainty and insurance market dynamics at Play.
While we expect, we will continue to face a challenging Insurance Marketplace throughout the balance of the year. We remain focused on prudently managing the business, to ensure we deliver on our margin expansion, goals for the year, and continue to position the business for profitable, double digit organic growth over time.
Financial results.
Thanks, Trevor and good afternoon everyone. For the second quarter, we generated organic Revenue growth of 11% and total revenue of 378.8 million.
Looking at the segment level, we generated organic Revenue growth of 10% at Ias and 21% at UCS
Organic Revenue growth for our Mis segment was flat for the quarter.
We recorded gaap. Net loss for the second quarter of 5.1 million or Gap, diluted loss per share of 5 cents.
Adjusted net income for the second quarter which excludes share-based compensation. Amortization and other 1-time expenses, was 49.5 million or 42 cents per fully, diluted. Share a table reconciling gaap. Net income to adjust. And net income can be found in our earnings release and our 10 Q filed with the SEC.
Adjusted IBA for the second quarter, Rose 14% to 85.5 million. Compared to 74.9%.
60 basis points year-over-year to 22.6% for the quarter compared to 22% in the prior year period.
Adjusted free cash flow for the second quarter was 9 million down from 29 million in Q2 2024.
The quarter was impacted by incremental cash interest payments on the senior secured notes for which payment is made semiannually and no corresponding payment was made in Q2 2024.
The decrease in free cash flow year to date is driven entirely by the timing of collection of accounts. Receivable the largest of, which is the timing of contingent receipts, which we expect will normalize in subsequent quarters.
Net, leverage increased slightly to 4.17 times in the quarter. As we paid 57 million in earnouts, in cash, inclusive of amounts, reclassified to colleague, earnout incentives.
Extinguishing the earnout liabilities associated with our 2021 and 2022 partnerships.
In addition to funding, 15 million of surplus, notes investment and our reciprocal Insurance Exchange. Our goal remains to get net leverage at or below 4 times by the end of the year.
As Trevor previewed in his opening remarks in the face of the current headwinds impacting, the insurance Marketplace. We are updating our full year guidance.
We now forecast, full year, revenue of 1.5 to 1.52 billion while maintaining the bottom end of our adjusted ebit, our range of 345 million supported by strong efficiency. Gains across our platform from the immense operating leverage that exists in our business.
For the year, we expect double-digit growth in free cash flow from operations, which was 90 million in 2024 after adjusting for our revised presentation.
Overall free cash. Flows. Should accelerate over time as growth in certain cache items, such as interest expense and capital expenditures slowed dramatically relative to expected growth in adjusted, evida
we are now expecting organic growth in the high single digits for the full year which reflects 4 unique drivers that I'll expand upon
1 an expectation for negative rate and exposure or renewal premium change in the retail business result. In a 15 to 20 million headwind, to organic Revenue growth and IIs from our prior assumptions of flat, to a modest Tailwind from RPC.
2 continued growth pressure on our ens home book and MSI from our steadfast commitment to underwriting. Discipline resulting in an approximately 5 million reduction to expected commission and fee Revenue at ucts.
3. The renewal headwinds, we cited in our Medicare book, reducing our Revenue, Expectations by 7 million in that business.
And 4, a procedural change to the timing of Revenue recognition and IAS, which is aligning us with best practices and will out efficiency to our teams. But will cause approximately 10 million dollars of Revenue in the second half of 25 to shift into 26.
It is important to note that this procedural shift is a headwind to revenue and margin over the next 12 months and a Tailwind beginning in Q3 of 26 for the following 12 months.
We expect that just to do with the DPS to be between a $162 and a $167 for the full year.
For the third quarter of 2025, we expect revenue of $355 million to $366 million and organic revenue growth in the mid-single digits.
As evidenced by our performance. In the quarter, we have a business that is uniquely durable and well, positioned to perform throughout the various economic and insurance Market environments.
This is on Full display today, with our confidence, in delivering top of our industry organic growth and double digit growth, and adjusted earnings this year, despite the shift in the insurance rate environment in the inocent. Headwinds we've highlighted
The underlying kpis of our business performance that we watch closely continue to Showcase internally controllable outperformance evidenced by our industry-leading sales, velocity premium growth and new product launches in the MGA growing momentum, and launching new embedded Partners in our mortgage. Real estate and Builder channels and overall increasing efficiency of our expense base
Our strengthening balance sheet and anticipated growth in free. Cash flow provides opportunities to capitalize on investments that are going to deliver long-term shareholder value like the recent hippo Builder, Network partnership.
We are thoughtfully managing our investments to adjust to this environment and remain committed to building. A differentiated business that outgrows, the peer set in a profitable way.
Importantly, we have growing confidence and remain focused on executing on our internal aspirational, goals of 3 billion of Revenue and 30% adjusted of margin by 2029, what we refer to as our 3B 30 plan, we will now take questions operator.
Thank you.
Ladies and gentlemen, we will now be conducting a question-and-answer session.
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Our first question comes from the line of Tommy MC. Join with KBW, please go ahead.
Hey, good afternoon guys, thanks for taking our questions. Um, wanted to to double check on the insurance advisory solution segment. In terms of the, the drivers of what happened in the in the second, quarter around organic growth seemed to have come in stronger than we were expecting and I thought perhaps you guys were expecting as well. So, could you walk through the drivers to, to get to that? 10% organic growth in that segment.
Yeah. Hey Tommy, this is Trevor, good afternoon. Um and and so we were super pleased with the results and I and Q2 and I said there's really 2 drivers uh that that ultimately um caused those results 1 was really strong new business, you know, you heard me mention the sales velocity at 22% in the quarter bringing year to date sales, velocity up to 18%, you know, top that's how I'll performance for our industry. And the second I would say is, uh, we saw rate and exposure come in slightly higher than we anticipated as a result of some pull through and accelerated renewal exposures for certain large energy clients.
That skewed that higher than we were originally anticipating. Um, you know, if you look at our overall property book, which was pretty heavy from a renewal perspective in the quarter, uh, renewal premium change was minus 5% for the quarter, but that doesn't really tell the whole story. Um, if you dig a really a layer deeper, there's a real bifurcation and pricing, where what I'd call kind of admitted non-cat exposed properties. Still seeing low, mid single digits rate Trend, um and then large complex property placements, generally more account exposed seeing pretty dramatic.
Attic, uh, rate, reductions, you know, 20 to upwards of 40% uh, on a on a rate perspective. Um, if we look at our real estate books specifically which is
Our view on that persisting through the balance of the year. And then just continued, really strong new business performance, which speaks to the value delivery. Our colleagues are, are bringing to the market, the share, we're taking, and our confidence, in continuing to be able to deliver outside's growth, through the cycle. Uh, because of controllable nature of of the new business engine. We have
Great. Thanks. Appreciate the details there and uh Brad when you when I walk through the the first driver of the the shift to the high single digit, um organic growth talking about expectations for for negative rate and exposure. Um, amounting to about 15 to 20 million dollars. Could you talk maybe just about what gives you guys conviction that? You know, that's, that's a pretty quick change. Just to to happen over 3 months. What gives you guys conviction? That it might not change. Um, again for the worst in the next 3 months.
Hey Tommy, this is Trevor. Let me let me take that that first and then Brad can can come in over top. So I'd say that is primarily informed by 2 factors, 1 is the rate of deceleration and property rate that we saw through the quarter. Uh, so June in particular saw a pretty meaningful deceleration uh, in rate and this assumes that persists through the balance of the year. The second
Dynamic is just, you know, we continue to see sluggishness and capital expenditures and construction starts and things of that nature. You know tied to uncertainty in the broader macro environment. Uh so if that improves that could that could be certainly be upside to that. Let me just give you an example in the quarter of what what we're talking about. So if you look at our construction business, which construction is, it was the second largest uh industry practice from a revenue perspective in Q2. But it's actually the largest when you look across all 4 quarters, it's about 18% of our commercial revenue and is
um, we saw rate and exposure in our construction practice compressed by 24% in the second quarter. Now, the read through on that is that's entirely exposure because it's not rate driven in that industry class. Uh, and that is a result of slowing project starts showing up in the form of lower Project based revenues.
Now, with that being said, we grew our construction practice 11% in the quarter. But I was driven entirely by new business generation which was really really strong from the team.
and so, what I would tell you is based on experience of when we've seen these Cycles in the past,
The jobs, don't go away. They get, they, they tend to slow down and defer as people are looking for clarity around input costs.
Around macro environment around financing costs and things of that nature and they become spring loaded. And then you layer in kind of that on, on top of that, queue of of deferred jobs. All the new business that we've been writing and a similar Dynamic there. And you've got the potential for Real Spring loading. As we come out of some of the, the broader macro uncertainty. That's been slowing down decision-making across our client base
Yeah, I would just add to that Tommy. As you know, in the past,
You know, insurance rate and exposure has never been a primary driver of our organic growth story.
so, you know, it gives us
Confidence in, um, you know, what the downside here may be that we're predicting, um, with respect to rate coming out of our book, if you will, um, because again it just hasn't been a material significant driver in the past of our story.
Got it. Thanks guys.
Thanks Tommy.
Thank you.
Our next question comes from the line of Greg Peters with Raymond James, please go ahead.
Hey, uh, good afternoon. Um, I guess, uh, what I'd like to pivot um...
And have you talked a little bit about the disclosure, the adjusted free? Cash flow.
Uh, disclosure in your press release, um, where you take out the contingent and payments of run outs.
And it was down on a year-over-year. Well, a year-over-year basis through the first 6 months. So I thought maybe you could spend a minute and talk to us about
Numbers for the first half of this year.
Yeah. As you know, Greg we revised that presentation this year. So now we are fully sort of absorbing any changes in working capital that occur quarter to quarter and you know, timing of free cash flow particularly around our and AP can fluctuate quarter to quarter so it's not an area of concern for us. Um, you know, for example, we've already collected a number of the contingents that were responsible for the elevated are since the quarter end. Um and and for example, anticipate paying down 20 million on our Revolver, by the end of this week. Um, so you know, we continue to believe our growth in free. Cash flow will be in line or better than our expected or double digit earnings growth for the foreseeable future.
Yeah. Okay, thanks for for um, the clarification there. Um, in your investor presentation, I noted
Um 1 of the footnotes in uh on the the debt structure that some interest rate caps expire in November of this year, is there any uh Financial consequence to that as we think about next year?
Uh, there is no Financial consequence to that those caps were at a 7% base rate. So I would consider them to have been more sort of jump Insurance in a worse case scenario. Um, but you know, we we outlaid the premium for that years ago, uh, and they've never been in the money. So there's no direct Financial consequence to that.
Perfect. And then, um, and then the last question, um, I'll just go back to um, the Main Street organic Revenue growth. Um, you know, I think you had previewed that, um, you know, the next couple quarters were going to be challenging because of the, this, the reciprocal startup, but it feels like it's up even coming in a little bit below expectations there. So, I know you spoke about it in your opening comments, but maybe we can go back and sort of unpack that because
You know, you're talking optimistically about some of the opportunities you have in that business at the same time we're seeing the numbers go in the opposite direction.
Yeah, hey Greg, this is Trevor.
So, uh, there's 2 drivers to the Mis OG print, uh, 1 is as we've talked about in the past, the commission, reduction on the QBE Builder portfolio that went into effect on May 1st.
And you know, that we've known about that's a 1 year, 1-time impact over the next 12 months, that then fully reverse his back and, uh, becomes a Tailwind over the following 24 months.
And that is the largest driver. And the second is the uh, the impact we saw from elevated churn in our Medicare business, tied to the broader Dynamics in the managed care and Medicare Advantage space. Uh, and I say that was less anticipated. Um, if you normalize for those 2 Dynamics, we would have seen organic growth in Main Street, consistent with what you saw from us in the first quarter. Um, while we expect that elevated churn in the Medicare business to continue to impact results. For the next 2 quarters, we feel good about how we're positioned for this upcoming AAP. We feel good about the increased funding rates into the Medicare Advantage plans that has already been announced uh from the government and CMS and uh the stability that should bring to the market next year. You know, this is
Is a business, we've consistently grown 10 to 20% a year, every single year we've owned it. Um, this year,
we now expect overall revenues to be flat as a result of this elevated churn. Um, and, you know, I would expect us to return back to that double digit organic growth. Next year, based on what we're seeing
I would also just point out, you know, the momentum, we have both in our builder in our mortgage businesses.
If you look at at Westwood as an example, if you normalize for the impact of the QBE commission reduction, organic growth for them in the quarter would have been 10%.
Transaction.
Um and and so we feel really, really good about the strength of our position in that channel.
And then, if you look at the mortgage and and the real estate space, I'd say we're we're very encouraged by the success. And the momentum we're seeing
It's been several years of building the tech and the platform to be able to effectively serve the mortgage and real estate channels. And the momentum we're seeing with new channel Partners is real. I mean, as I mentioned earlier, we're now live with 7 embedded Partners, 6 of those were implemented just in the second quarter, we planned Implement another 6 to 7 in the back half of this year including 1 which is a top 20 mortgage originator in the country.
And from a lead volume standpoint, these, call it 13 to 14 embedded partners, would have generated over 150,000 mortgage and real estate leads based on their 2024 volumes.
So I'd say just to level set important to know these, don't just turn on and start converting at high rates day 1. It's a crawl.
Walk run approach, we generally go state by state. You know, turning lead volume on sequentially to ensure, you know, really strong execution and our ability to appropriately resourced those things.
Our early data is showing right now, a win rate of approximately 25%. For those leads who are opting in the receiving, a quote through our platform
Uh, which is very encouraging. Um, but I'd emphasize again, it's still early, we're still working off relatively small data sets, uh and embedded distribution, it builds slowly at first as it turns on but then really begins to snowball after maturing on the platform and then our overall processes. So you know we're we're as excited as we've ever been about the momentum. We have here we have like the dominant position in the Builder space. I think we're positioned you know if we continue to execute to really break out here in the mortgage and real estate space and, you know, our our pipelines as strong as it's ever been there.
Got it. Uh, thank you for the additional detail; I appreciate it.
Yeah, thanks Greg.
Thank you. Our next question comes from Andrew Anderson with Jefferies LLC. Please go ahead.
And 1 of the the side decks from earlier in the year you were talking about a strong cohort of new advisors within IAS. Could you maybe just talk about the hiring through first half of this year? And maybe, what level of productivity those producers are operating at
Yeah, happy to Andrew. Um, so
We continue to focus on thoughtfully growing kind of the revenue generating side of our colleague base. If you look
a year to date headcounts up roughly 2%, while revenue is up call at 10 to 11%.
And uh I think you've got to dig a layer deeper to really see where on a revenue generating side, I guess uh sales head counts up about 9% year to date and it's up double digits year-over-year and based on planned continued investment to the back. Half of the year. We would expect overall advisor. Headcount to be up mid teens in the is business through the full year.
We continue to track productivity by cohort, uh, across all of our advisors. And, you know, we're continuing to see success rates, you know, in the high 50s and low 60s, which is consistent with our past experience,
Um, you know, the first 12 months, we don't expect a whole lot of Revenue generation out of most of these new hires. We, we expect that to begin ramping, you know really starting around month 9, uh, through month 18 and and then by the second and third year, those folks tend to be generating new business results. Well in excess of, of Industry benchmarks. And by, you know, year 3 and a half typically 2 and a half to 3 times what the industry average, uh, new business generation is so we continue to see really strong results there. And, you know, frankly that's why you're seeing the really strong sales, velocity results. Continue, uh, to pull through in the is business.
To some of the Medicare Brokers. So would you expect the quarterly impact to be more pronounced in 4 q? Or is it going to be kind of similar to what you experienced in in 2q?
No, we would expect it to be routable in Q2 through Q3 and Q4. Our revenue tends to be heavier in Q1 when we booked the full year expected revenue for the new members that have been enrolled during the prior year's annual enrollment period. But our renewal revenue is largely recognized either monthly or quarterly, based on the pattern of payment streams from the Medicare Advantage plans.
Thank you.
Yep.
Thank you.
Our next question comes from the line of Christine go with Wells Fargo. Please go ahead.
Hi. Good afternoon. Um, can you discuss what you're seeing in the M&A space? I feel like maybe multiples are starting to at least level and maybe come down a little bit. I understand the focus for this series is to continue to de-lever, but can you talk about what you're seeing in terms of multiples and any areas that are of particular focus? Once you get to your leverage target, what will you potentially look to expand in, in terms of inorganic opportunity?
Yeah, it is. And this is Trevor. Um,
I would say, you know, 1 we continue to see really healthy deal flow activity um which is encouraging 2. I would say we are seeing you know, really a Divergence in m&a pricing. Whereas you know, if you look back a few years ago and there was you know, a lot more active acquires uh when you know, frankly you had more private Equity, backed consolidators that were active than you have today. Uh, I I'd say there was um, maybe less discernment around pricing for m&a. And so the difference between, you know what we would view to be a really high quality business that has consistently delivered double digit, organic growth, has strong, margins, you know, uh recognizable incline industry sector expertise or product capabilities in the MGA side.
and then that of a business that may be, you know, mid-single.
organic growth. No real specialization you know in aged Workforce uh there wouldn't be a whole lot of pricing differential a few years ago and today I think you you will definitely see that. I think the very very good high quality businesses which is frankly you know all we really have an interest in in trading in
Continue to command, you know, top tier pricing. Um, you know because those continue to be sought after assets. Whereas I think some of those more average or, you know, even dare I say lower quality businesses, uh, are struggling. I think to command the type of pricing that they would have gotten a couple of years ago.
Gotcha, thank you. And then, for the full year, organic the high single digits, um, and I I appreciate you gave like the commission. Uh, headwinds you expect for each segment, but is, is it safe to say like you kind of expect IAS to be kind of in the mid to high single digits ucts, kind of in the 20 range and then Main Street around flat is that kind of like how you guys are thinking about it.
Hey progression. So we we, you know, we shy away from providing segment level guidance, around organic but did try to provide some of the building blocks uh with the specific disclosures around kind of what headwinds that we're seeing. Um you know, I I I'd say,
You know, we're we're expecting.
You know, mid single digit, organic growth overall for the platform, over the back half of the year as a result of those headwinds um you know of of which there are more pronounced in, you know, our Main Street businesses, we talked about and then NIS, as a result of, you know, the rate and exposure Trend. We're now anticipating and then, you know, the the 1 time uh shift in revenues out of uh the back half of 25 into 26.
All right. Thank you.
Thank you. Thank you.
Thank you. Our next question comes from, Josh chancre with Bank of America, please go ahead.
Does that include consideration that was earmarked for a payment to partner employees who will be paid internally?
Uh, yeah, Josh, it is 99% of it. I'd say we have um, 1 uh, looming deal that has uh, call it less than 5 million, um, potential, uh, earnout incentive for colleagues that remains on the balance sheet. Um, but that's that's the only 1 left.
All right. And, um, can you just give some guidance going forward? Um, it seems like now that's all passed. Um, that's the thing about tax rates, and I mean, I realize we know a little bit this year, but going forward to think about 2026, 2027, out years, should you be a normal taxpayer at the federal level?
Uh, I do not anticipate. We would be a cash taxpayer uh for a number of years yet. Um, we still sit with uh, some nols at the corporate level. Um, the 1 of the recent additions to the big beautiful, bill was restoring, um, some interest deductibility limitations that were previously, um, you know, quite harsh on us. So our ability to deduct more interest expense, uh, over the coming years, uh, is sort of going back.
Back to where it was in the in the 22 and uh previous periods, which is um only going to defer uh the period of time uh until which were uh, where a cash taxpayer. So I think will remain with a valuation allowance in our financials will continue to utilize. What is, uh, the best representation of an effective rate at that roughly, 10% and our adjusted earnings? Um, but I think we have a couple of years yet until we're, um, sort of in a normalized tax position and a cash tax there.
Okay, thank you for the answers.
Thank you.
Our next question comes from Pablo Singson with JP Morgan. Please go ahead.
Um, hi. So, first, 1 for Trevor. Uh, in the first quarter, you had called out softness in the employee benefits business, which at that time was a bit different from what other insurers or brokers were talking about. So, I was wondering if there's been any change in condition since then and, you know, I guess respectively, where you see the market evolving from here?
Yeah, I'd say you know on the employee benefits side, you know, we continue to see modest.
Uh, rate and exposure dynamics consistent with what you heard from us in the first quarter. Um, you know, with that being said, we continue to drive meaningful growth in that part of our business, winning new clients and taking share. I'd say, you know, elevated medical loss ratio trends as of lately are certainly creating opportunity for our advisors and consultants to come in and help clients explore, you know, unique and innovative solutions to really bend that cost curve.
Gotcha.
Look for the IES business, right? So I, I understand the
I guess sort of the buffer or the haircut they're putting in for R and exposure.
I I was wondering is, is that very different from what you saw in the second quarter, right? And therefore if it's the same, are you surface assuming that maybe some of the new business gains you saw and think you might not persist in the second half or, you know,
Maybe the mix of those two factors, right? But any sort of...
Help. You can provide thinking about that component of growth versus new business, especially comparing two key elements, which I think are better than what most were expecting, and the slowdown you're implying for the second half.
And so, like you heard me mention, you know, renewal premium change for property, broadly in the quarter was minus 5. Um, if you look at our real estate clients, you know, it was minus 11. Uh, if you look at our construction book, exposures were down, although revenues were up as a result of new business success. And so, you know, we're expecting negative rate and exposure in both cues 3 and Q4 as a result of, of those Dynamics, largely, um, Market driven, you know, but I would also then back up and just kind of, you know, remind everyone, you know, this is kind of a, i I'd say, what I would consider to be a somewhat 1-time, um, change in direction of travel, relative to the overall rate Dynamics, but I wouldn't expect that to persist over time.
If you think about the broader secular trends in our industry, well, risk and exposure is going up. If you think about, you know, physical values at risk, those are up dramatically, not only because of building and construction but also because of the increased cost of construction. The aggregation of those values at risk continues to be most heavily concentrated in those geographies in our country that are most exposed to natural catastrophe losses. Um, if you look at both the frequency and...
Verity of natcat risk gets up dramatically over the past decade. And if you turn to the casualties side, you know, loss cost Trend continues in the mid to high single digits for a number of reasons. But you know, uh, you know, just to call out a couple social inflation litigation Finance um, and and tort Dynamics at the state level. And so, if you put all that into a blender,
you know, the the relative rate of increase and and
you know, is going to continue at a mid single digit level or higher. And so while our industry certainly has and will continue to have pricing cycles and we're seeing 1 right now um I I would point out that you know property pricing Cycles in particular tend to be very short in nature before they flatten out 1 way or the other
And over time, we would expect Trend to be mid.
Single digits or higher relative to the cost of risk and then you overlay. On top of that, our ability to go out and take share on the market. When you look at sales philosophy, you know premium growth in new product, launches in the MGA, what we're doing on the embedded side and you've got a secular story here, you know that that is, you know, really outsized growth over a very long term period of time.
Yeah, that was helpful forever and just a quick follow up, just to sort of tie up everything we've said so far. Um, understand you in the rated exposure, on the, on the sales velocity side. I think you said 22% for the second quarter, I'm assuming or something. That's correct. You're expecting something similar for the second half of the year, right? Or are you see, assuming some major change in that trajectory?
We're not expecting a major change there, I'd say. You know, I'm never going to plan for, you know,
Really outsized sales velocity. I'm going to I'm going to, you know, expect it from our teams but not incorporated into how we set expectations, uh, with with, you know, folks such as you. Um, so I would, you know, we're we're incorporating an expectation for K continued, you know, top of Industry, uh, sales velocity consistent with what you've seen from us in the past. Um, you know? And and I'd say if I look back across the past 5 years, we've consistently been high teens and low 20s sales velocity uh in our business. That that's just that's what we know how to do.
Thank you.
Thanks Pablo.
Thank you. Uh, next question comes from Charlie Ledra with BMO Capital Markets. Please go ahead.
Hey, thanks. Um
Maybe just following up on those last comments. Um, do you have a view on how rate and exposure might look for 2026 and for property, and how dependent that is on the second half cat season?
It's certainly somewhat dependent upon the second half of the cat season. Um,
Rates to continue to decelerate at the pace that they are now. Um,
you know, property pricing Cycles tend to be pretty short, you know, a year or 2 at most. And most of that action tends to come very quickly and very fast. Frankly, you know, as we're seeing, uh, in real time right now.
So I I would expect some degree of stabilization next year in the property Market.
Thanks. Um, and I on the ens home pressure, um, can you unpack that a little bit, I guess how much of that related to the the reinsurance renewal. Um, and is that just commission changes or is it also, um,
Less capacity.
No, you know, we're we've got plenty of capacity. Um, I'd say the reinsurance renewals were as expected. That headwind was already incorporated into, um, our, our prior expectations. Uh, and so this is entirely Market competition driven. Um, we have seen new entrance,
Significant new capacity deployed by large multi-line, uh, and and broad-based carriers. Uh, we've seen increased capacity in in binders from London. Uh, and and frankly, you know, we're seeing pricing as well as terms and conditions.
Being deployed at a place where we don't feel it's prudent to chase the market to, um, and our ucts business. We're Underwriters first. And, you know, we're charged with safeguarding, you know, the returns of the capital that our risk Capital providers put behind our products and and so, you know, while we are remaining very disciplined from an underwriting standpoint and that should protect the Integrity of, you know, the Lost cost and lost lost experience of our our portfolio. It is having an impact. And you know the the new business that that we're able to generate compared to last year and compared to, you know, our expectations coming into the year this year. Um, but you know, if you step back and you look at our MJ broadly, we're not overly exposed to the NS Marketplace, you know, less than 25% of our premium across. The MJ portfolio is ens. Um, you know, you heard
From me earlier and all the various areas, we're driving growth. And this is just, you know,
Part of having a multi-product, multi-line MGA business is, you know, you've got to manage underwriting profitability closely. And sometimes that means pulling in the reins on any particular line of business to protect the underwriting integrity, and we're going to do that. But then, you know, separately we're going to capitalize on the growth opportunities that we see in other areas. And so, you know,
The balanced portfolio approach will lead to consistent growth over time, as you've seen, um, I just say that the impact on ens, you know, is is certainly more pronounced than we expected even 90 days ago.
Thanks, that's helpful. And is that concentrated anywhere, like geographically?
And all the places where E&S business is written, you know, it's on the coast. It's in places like Florida.
Texas, California as an example. Um, you know, as well as up the Eastern Seaboard and and throughout the Gulf of America.
Thanks.
Thank you. Thank you. Charlie ladies and gents. Thank you. Ladies and gentlemen, as there are no further questions, I would now like to end the conference over to Trevor Baldwin CEO for closing comments.
Thank you all for joining us in the call this evening. We remain excited about the underlying momentum we have in our business, as evidenced by continued outsized growth in new client wins, margin accretion, and the onset of a significant inflection in our financial profile from the settling of all our earn-out payments from the partnerships completed and our first five years as a public company. 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. Thank you all very much and we look forward to speaking to you again, next quarter.
Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.